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Seeking Alpha

Thursday, November 29, 2007

Morning Report: Much to Digest

(Stocks in this article: Nasdaq: SHLD, Nasdaq: ETFC, NYSE: HNZ, Nasdaq: DELL, NYSE: SFD, NYSE: VSE, Nasdaq: USBE, NYSE: WMG, NYSE: TM, NYSE: SPY, NYSE: DIA, Nasdaq: QQQQ)

Stocks are retracing today on much news to digest, including a pipeline explosion, economic concerns and bad news from Sears.

  1. GDP - Third quarter real GDP growth was revised higher to a 4.9% rate, up from the advance reporting of 3.9% and second quarter growth of 3.8%. While many will focus on the strength in this number, smart money will look to the forecast slowing rate of growth for Q4 (brilliant money looks to the Fed and '08). The result was just a tenth of a percentage point ahead of expectations, so the number should not have a discernable impact. The price index for gross domestic purchases was unchanged at 1.6% growth, while prices measured up 1.7% excluding food and energy, up from a 1.5% increase in Q2. CNBC's Rick Santelli, my favorite TV analyst, called this number comforting (paraphrasing), but I'm concerned with the quarter-to-quarter trend. The strong GDP rise was powered by 2.7% growth in personal consumption expenditures, nonresidential fixed investment and structure growth, 18.9% increased exports, partly offset by a 19.7% decline in residential fixed investment. Defense spending rose 10.1%. Change in inventories nearly added a full percentage point. Remember now, it's the future that matters to the market, not the pundits who will come out today proclaiming that Goldilocks is alive and kicking. The market worries about her tomorrow.

  2. Critical Pipeline Explosion - An oil pipeline connecting Canada and the U.S., through which some 20% of our country's oil is sourced (the 4 line system), exploded. The operator immediately closed down four pipelines, before reopening two. 2 million barrels a day flow through that channel, and oil has appropriately reacted today, as NYMEX crude futures opened $2 higher. The explosion reportedly occurred while the affected line was shut for maintenance, so I venture to guess that this maintenance might have played a role. Otherwise, this explosion, following by a day the arrest of several terrorists in Saudi Arabia who were reportedly planning this kind of attack, is very suspect. Maybe the FBI should be attuned to America's energy resources now. Terrorism on energy infrastructure hurts the U.S. while driving prices higher, benefiting the pockets of our Iranian enemy. There's a logic behind this type of attack, should it be found to be terrorism. Regarding crude pricing and despite any future implications, I suspect this hit will give those longs left behind another opportunity to reduce their positions and keep crude from rocketing much higher.

  3. Sears - It's one thing to take blame and accept fault, but this is ridiculous! Eddie Lampert's Sears (Nasdaq: SHLD) is down 14% this morning on a depressing press release and commentary (and poor results by the way). While it may help to limit shareholder lawsuits (actually no, it doesn't), it also offers very little hope. The headline is that SHLD experienced a 99% decline in quarterly profit on troubled sales at Kmart and Sears and other investment losses. On the bright side, sales only slipped 3%. I think this result is greatly due to housing and consumer confidence, and the saturated retail environment I've discussed so often.

  4. Jobless Claims - Weekly Initial Jobless Claims spiked higher last week to 352K, well ahead of the consensus 330K view. More disturbing is that the four-week moving average rose 5,750 to 335,250. It's time for unemployment to pick up at a faster pace and the anecdotal evidence is littering the street these days. The wires are carrying more and more news of layoffs. Remember, my call for the kicker in this punch is that post the holiday season, retailers will cut employment sharply, and as the year progresses, a saturated retail/restaurant environment will be exposed, leading to consolidation and commercial construction recession as well. You heard this here first months ago, and when it plays out, please tell your friends about the Greek's calls in '07. Otherwise, they are lost in the mix with the news reporters of current events. In the beginning of this year, when I was warning of a second leg lower for housing and dangerous repercussions for the financial sector, I was actually labeled an "Armageddon Analyst." Well, for those who labeled me, I now say, welcome to Armageddon.

  5. Corporate Profits - Corporate profits declined, as weakness in domestic profits for both financial and non-financial firms outweighed profit growth from international sources. Nothing new here, exports and international sales continue to do well while the domestic economy softens. Remember my call, that it is the American consumer who butters the bread of American companies, multinational or not, and in the end they will influence global economic stability as well.

  6. Foreclosures - Foreclosures ran at a 94% rate of increase in October, year to year. What's important to note about this data is that the level of foreclosures has leveled off since peaking in August. As we lap this past year's ugly results, growth rates as stunning as these recent monthly reports should moderate some. Foreclosures should still increase though in my view, as more mortgages reset and unemployment increases.

  7. October New Home Sales - New home sales came in well short of consensus, though the news was initially misreported by financial media due to a revision lower of prior month results. At a 728,000 annual pace of sales, the news is far from good.

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