GOIH Capital Markets: Fed's FOMC Meeting

Today the Fed's FOMC meets to consider the stance on interest rates. Our models have been recalibrated and predict that the Fed will cut the rates by 25 basis points.
GS is on the rise opening at $241 and currently trading at $245.

Our models indicate the housing market will continue being a drag on the economy. Actually Target (TGT) and Wal-Mart (WMT) are new variable we have extrapolated and applied a Kalman filter to the data set and determined that BAC, TGT and WMT are accurate predictors of the consumer sentiment in the economy.

Our models show that California, Ohio are already in a recession with no relief in sight due to the slow down in the building market. Because of the multiplier effect housing has a disproportionate effect on the economy.

A recent article in the Atlanta Business Chronicle stated that 16 of the largest 50 businesses in Metro Atlanta were in the building trades. That is 32% of the businesses are associated with building and construction. Clearly if building slows in Atlanta, the economy will be severely affected.

Our models indicate that because building, residential and commercial, are so vital to the economy we have conducted a study where the results indicted that the building sector must go on regardless of the salability of the finished product.

Oil is up to $94.00 per barrel indicating that the dollars will weaken implying that the Fed will cut rates. As we have reported here in earlier posts, is that as the dollar weakens, import prices, i.e., oil, increases creating inflation in the U.S.

Because of the inflation threat, the Fed can lower interest rates only so far before inflation overtakes any benefits of the low interest rates.

Global Interest Rate Models:

We are developing a model where we will be able to accurately predict global interest rate policies and make accurate determination of the timing of the policies and take advantage of the policy forecasts.

GOIH Capital Markets: Market Update

Merrill Lynch is taking it on the chin today after the conference call where the CEO was interviewed. Merrill will write off $8.4 billion in bad securities. MER is down 4.13% in trading.

WMT is down again today trading at $43.50. WMT is down from $47.59 in the last 10 trading days.

ETFC is down again today trading at $10.47.

AMTD down $18.49.

BAC down to $46.72.

C down $41.53.




The Dow is down 202 points

GOIH Capital Markets: Economic Report

Our quantitative models are indicating a short fall in tax revenue due to the subprime credit crisis. We programmed our models to search for an anomaly in revenue to taxing authorities and the results are as follows. Because the consumer is under a full scale assault, consumer discretionaries, where sales taxes are charged are in decline. See (Wal-mart) WMT and (Target) TGT estimates for growth. The consumer is restricting their purchases to consumer essentials, i.e., groceries and staples, where sales taxes usually not collected; hence taxing authorities are seeing a decline in revenue and will have to go into the debt market to raise short term financing.

Also because of the large number of foreclosures, property tax revenue is in a decline causing further pressure on taxing authorities.

GOIH Capital Markets: Market Overview

The market opened lower today based on the bad news issued by Bank of America (BAC) a Dow component. BAC missed its earnings estimates indicating a drag on consumer portion of the economy. BAC is the largest of the money center banks whose business model is tied to the retail consumer. BAC's earnings miss suggest as the other indicators suggest that the consumer is facing hard times and if Domino's Pizza reports that consumers are eating less pizza, the outlook is not bright. BAC reported over $717 million in trading losses in their investment banking division. BAC also added to loan loss reserves indicating more losses in the future. The earnings miss was reflected in the stock of BAC opening down sharply currently trading at $48.26. Given BAC trades with low volatility, the downward price is a tremendous blow to a Dow component.

Our GOIH's Quantitative Finance Group (QFG) has developed a proprietary Monte Carlo model based on the stochastic variables of housing starts, interest rates, an index composed of BAC, WMT, TGT, GM, HD, Crude Oil price, Dollar/Euro translation, and Dollar/Yen translation, as a predictor of economic activity in the domestic economy.

Our Quant staff is calibrating the model after the BAC earnings miss and we will have a list of investment opportunities based on the output of the model on Monday of next week, which we will report here.

Etrade (ETFC) is down again today based on horrible earnings. The market is punishing ETFC for their business practices.

GOIH Capital Markets: Market Overview

Our models indicate the market will open higher today and trade in a narrow range. Volatility is dramatically down after the peak in late August. Because of the low volatility, economic data is the market catalyst and earning news drives trading. The Dollar-Yen carrying trade is gaining favor again with the Dollar strengthening to 112.42 to the Yen. However, the Dollar is still very weak relative to the Euro and other major currencies. Meaning higher import price, in essence we are importing inflation which caused by the Fed’s rate cuts, depresses the Dollar. As we have reported in earlier posts, the Fed is in a tight spot concerning interest rates: cut too much and built in inflation rises due to the falling Dollar, cut too little, the economy slows down causing recession. A tough choice, juggling many balls at once.

Republican Presidential Debate on Tuesday was covered by our economic analysis team. Our consensus view is that Romney was the clear winner with Giuliani a close second.

We rate the candidates as follows for the odds of winning the nomination:

1. Romney 4:1
2. Giuliani 6:1
3. McCain 10:1
4. Thompson 13:1

We feel if Romney is the candidate he would favor Wall Street, i.e., financial sector would rise. GS, MER, LEH, BAC, JPM, C

If Giuliani we feel defense stocks will rise strongly. Lockheed, Raytheon, etc.


We are constantly asked why does it matter where the Dollar trades relative to other currencies.

The answer is that because of the huge trade deficit the US has with Japan, i.e., the relative amount of imports to exports, Japan has a huge surplus of Dollars as reserve foreign exchange and has to invest the Dollars some place usually in treasury bills and the stock market. Tending to support the market with recycled dollars.

Dow stocks will rise today based on the retail news of WMT.

Wal-Mart (WMT) up however, same store sales flat, i.e., growth came from opening new stores.

Target (TGT) down on weak sales.

GOIH Capital Markets: Market Overview--10-02-07

GOIH Capital Markets’ market overview sees the market opening basically flat to slightly higher in the major market indices, Dow and NASDAQ. Monday’s Dow record closing is being commented on as an aberration in the market.
The flow of funds suggest that the money that went into the market on Monday was from foreign sources looking to boost their earning power with the weak US Dollar at an all time low against most major currencies.


Our market models and indicators suggest a sector rotation into large cap multinational exporters: MCD, KO, BA------technology: AAPL, INTC, CSCO and commodities.

High End Consumer Spending:

Reports are circulating that the high end consumer is starting to feel a little uneasy in their consumption patterns. The wealth of the high end consumer is composed of financial assets: stocks, bonds, equities and house equity.


The home equity refinance market is all but shut down and the financial market have exhibited volatility and the possibility of recession cramping their spending habits.

We see the major brokers GS, MER, LEH, MER, BSC being strong on another projected Fed rate cut at the next FOMC meeting in November.

McDonalds (MCD) and Coke (KO) Target (TGT) as market indicators.

Our models indicate that the above stocks are leading market indicators as food and basic consumer items for the household.

Both MDC and KO generate a majority of their earnings outside of the US and benefit from the weak dollar as well as being part of the consumer staples sector. Regardless of the economy the consumer has to eat and cloth themselves.


We see continued market trending based on economic data pending the next Fed meeting in November. The direction of the trend in the short term will depend on the money flow from external sources and reallocation into different sectors rather than a general market trend.


Market Forecast:

We see strength in the Dow components with exposure to the weak dollar and strength in technology with the capital expenditures of industrial companies exporting more and upgrading their infrastructure to produce more goods and services.

GOIH Capital Markets: Equities and Indices Positions.

We are looking at taking short positions in the consumer retailers on the open.

We are also reviewing taking short positions in GS, MS, BSC, LEH, CFC, WMT, BBY.


We think today's jobs report guarantees a Fed Funds rate cut maybe before Sept. 18, 2007 FOMC meeting.

We see technology and energy strong.

We see the Dollar weakening against most of the major currencies with the anticipated Fed Funds rate cut. Shorting the Dollar against most major currencies should be a profitable trade in the short term.

We see Gold rising against the Dollar index.

GOIH Capital Markets: Market Overview---Worst Jobs Report in 4 years

GOIH sees the market opening sharply lower on the jobs report. We see the major market indices trading lower with an increase in volatility.

A Report of the Job Market:

Fed officials said as recently as yesterday that they were not convinced the market turmoil had spread into the overall economy.
Some economists have speculated that the Fed might even cut rates before the next scheduled meeting.

The weakness in last month's nonfarm payroll growth was concentrated in the manufacturing and construction sectors.

Manufacturing jobs declined by 46,000, the biggest drop since July 2003.

Construction jobs fell by 22,000.

Jobs in the services increased 60,000, as retail jobs rose 13,000.
Government lost 28, 000 jobs in August. Economists had been expecting an increase.
The average hourly wage increased 5 cents or 0.3% in August to $17.50, in line with expectations. Hourly wages are up 3.9% in the past year.

The average workweek held steady at 33.8 hours. Total hours worked in the economy held steady. Average hours worked in manufacturing also held steady, while factory overtime fell six minutes to 4.1 hours.

GOIH Commentary:

With more people unemployed, i.e., consumers, spending will decrease easing the economy into a recession in the fourth quarter. Our market strategies will be to short consumer retailers and the financial services sector and any sector that has a positive statistical correlation to to each of these sectors.


We see weakness in the holiday shopping season in the consumer retailers. We see weakness in WMT, BBY, and other equities we will publish in a report this weekend with our forecast of our opinion of the market condition.

GOIH Capital Markets: Market Overview---09-04-07

Our indicators see the market opening flat to lower.

The market is recovering after the Fed's speech on Friday basically leaving the market with no new information pending the next scheduled FOMC meeting on Sept 18, 2007. Wall St. is howling for a rate cut in the Fed Funds rate. However, a cut in the Fed Funds rate will have a negligible effect on the current market intangibles. If a rate cut is announced, it will be primarily symbolic and psychological.

The consumer is facing major risks to its standing in the market. With wages flat and no new increase in home equity prices, the consumer is tapped out just before the major Christmas buying season.

We expect to see weakness in Best Buy, Target, Wal-mart, Sears, GM, F

We expect to see continued weakness in the consumer discretionaries as well as weakness in consumer financials.

We expect to see tech and energy leading the way until the end of the year.

We see Apple trading up to to a new high in anticipation of the release of the new Ipod. We are taking a speculative position for short term trading profits.

FAQ: GOIH Capital Markets: Market Analysis

What companies should be watched to determine the trend in the market?

Goldman Sachs (NYSE:GS)

Why?

GS is the bellwhether and preeminent investment bank in the world and the former CEO is the Sec. of the Tresury.

Bank of America (NYSE:BAC)

Why?

BAC is the largest consumer/retail bank and its activity is a monitor of the consumer activities in the economy

Wal-mart (NYSE:WMT)

The obvious reason is that WMT is the largest discount retailer in the world.

JP Morgan-Chase (NYSE:JPM)

JPM is the largest money center bank catering to a business client, i.e., Fortune 500 company. Compared to BAC, JPM is an entirely different bank making its fees from underwritings and corporate advisory. Where BAC makes most of its fees from ATMs and other retail banking operations. JPM is as different from BAC as Ameritrade is from Goldman Sachs.


There are other compnaies which we will list in a later post.

GOIH Economic Analysis: Credit Bubble

Our economics team has performed an analysis of the current events surrounding the crisis in the credit markets and has concluded the following:
1. The powers that be—Federal Reserve are not going to allow a deposit taking institution to fail, i.e., Countrywide Financial, Etrade, other large money center banks, JP Morgan, etc.
If the steps taken by the Fed over the last two weeks are analyzed for their effect and who are the beneficiaries, the obvious is clear. The financial sector which comprises 20% of the S&P 500 Index is the life blood of the economy. And the sector will be saved at all costs. Free market economics are not at play in this sector; otherwise Countrywide would have died a quick death last week.

Last week we reported on the changes in the bankruptcy laws two years ago before the home equity spending spree was called off by Wall St. The laws were changed to almost prevent a consumer from a “fresh start” chapter 7 filing. Who benefits from this change in the laws? The credit card companies benefit now that a debtor must repay a portion of their credit card debt rather than charging off the entire amount.

So why were the laws changed just before the biggest housing boom in history?

Because, the housing bubble was manufactured for the purpose of tapping out the consumer and transferring wealth. The bubble was designed to increase the supply of housing and the supply of money via the subprime mortgage market enabling a flood of demand for housing and an increase in property values creating the home equity spending spree.

Now that home equity is tapped out, the consumer is again returning to the credit card to finance the spending spree, but this time the consumer will not be able to go to the bankruptcy court and get relief. The creditors have that door blocked.

What effect will this have on the economy?

With the consumer tapped out in the home equity and credit card spending spree, consumer consumption will show a marked decrease. First in the low end, i.e., Wal-mart and work its way up the ladder until the medium income person is affected.

The consumer economy differs from the business economy now the laws have been changed to protect business profits via the bankruptcy code, and the foreclosure laws. In Georgia, a person can be foreclosed on in as little as 90 days from start to finish.

GOIH Economic Analysis: Unemployment Numbers are troubling?

GOIH Economic Analysis: Unemployment Numbers are troubling?

We are analyzing the current reported unemployment numbers and we have several questions regarding the publicly announced numbers that unemployment has not increased in the past two quarters.

Our analysis indicates that the unemployment numbers should have substantially increased due to the decrease in housing starts and the trickle down effect of the home building industry.

The home building industry is a mini economy in itself. A new home creates demand from the following industries:

Consumer electronics---TVs, DVDs, cds, plasma TVs, etc.
Durable goods---frigs, stoves, micro waves, etc.
Linens, towels, furniture
building supplies
landscaping
construction labor
real estate commissions
interest payments
permit fees

Wal-mart reported lower profits on increased sales, i.e., they lowered the price to move the goods.

Home Depot (HD) reported lower sales in their product lines, home improvement projects are not selling.

We see Wal-mart if sales continue to drop, starting layoffs.

We see a decrease in consumer consumption due to the lack of increase in home equity and the inability to refinance into a higher line of credit to support continued consumer purchases.

Home starts have decreased 500,000 per year from the peak of 2005. With an average home price of $250,000 the effect on GDP is tremendous and multiplying by the trickle down effect a factor of 4x from the effect on additional industries affected, demand has definitely decreased causing a decrease in demand from the consumer, causing consumer retail to decrease as evidenced by the numbers reported by Wal-mart and Home Depot.

GOIH Economic Analysis" Fed Funds Rate 200 Basis Points above T-Bills.

The Fed Funds Rate today is priced more than 200 basis points above the 90 day T-bill rate.

What does this tell us?

It tell us that large banks with excess reserves would rather invest the excess in cash rather than loan the money in the Fed Fund Market, i.e., interbank lending.

So why would a bank rather hold cash than loan money to another bank?

A bank would rather hold cash than lend, for the obvious reason, it feels the risk reward does not justify the lending. Fundamentally if a bank will not loan to another bank, then what chance does a consumer have in getting a loan from that bank, little if any.

What will be the effect on the economy if this continues?

The Fed can lower the Fed Funds rate which the market thinks it will to spur investment or do nothing and let the economy sink further into a hold.


Change in Bankruptcy Law.

About two years ago the consumer bankruptcy law was changed to almost prevent a consumer from changing off all of their debts. A consumer now must enter into chapter 13, repayment rather than a chapter 7 liquidation for consumer bills. This legislation foresaw the coming consumer crisis in foreclosures and the coming credit card crunch.

Now a consumer must hang on to their house even if they cannot afford to pay for it, where in the past they could walk away and start over.

Even if the Fed cuts the Fed Fund rate, what effect will this have on the consumer?

We see no effect on the consumer if the Fed cut the Fed Funds rate.

Why, because the consumer is tapped out of their main source of cash, their home equity and with wages increase flat, there is no new money to spend at the consumer level.


Case in point, see Wal-Mart, (NYSE:WMT), who has reported lower sales the last two quarters. Looking at a chart of WMT, on June 4, 2007 WMT closed at $51, on Aug. 20, 2007 WMT closed at $43, down more than 20% in two months, reflecting less spending by the low income sector of the economy.

The homebuilder sector was down graded today with loses in all of the publicly traded homebuilder stocks. This says there is no relieve in the short term for an increase in homebuilding.


GOIH's Economic Forecasting Unit is preparing an economic analysis of the effect of a slow down in homebuilding on the overall economy.

We feel we have identified a fundamental flaw in the mainstream economic analysis on where the economy is and where it is headed based on economic activity in the building sector.

GOIH Capital Markets prepared this article.