Whether we get a slowdown or a recession, it is becoming increasingly clear that the stock market is headed for a fall in 2006. For now though, it looks like a sell off in oil could provide the catalyst for a strong 4th quarter rally.
Today, GM and Ford reported a big drop in vehicle sales despite the widely advertised "you pay what we pay" employee discount program. The executives at both companies still don't get it. Being from Detroit, I can tell you that they never have gotten it. The Japanese in contrast are eating their lunch. Toyota, Honda, and Nissan all reported double digit gains.
Even back in the 70's, the Little 3 was incredibly slow to wake up to the fact that fuel economy and reliability are what consumers want. The energy crisis of the 70's is much different than today. GM and F have to realize that the supply and demand issues they are facing are the real deal. In the 70's, the energy crisis was temporary; today they have to take China and India into consideration.
With all of these problems, why is billionaire investor Kirk Kerkorian so interested in GM? Could a merger with a Japanese automaker be in the works?
In other news, the Institute for Supply Management (ISM) released their numbers today. The overall ISM Index for September came in at 59.4 versus a 53.6 reading in August. The ISM is an Arizona based non-profit association that was founded in 1916. The ISM forecasts economic trends and data collected from various sources, and 180 affiliates. Today's readings confirm my opinion that the Fed will continue to raises rates until we see a meaningful slowdown in the economy.
October Market
The direction of the overall market is becoming increasingly difficult to predict. Many forecasters use patterns in the past to predict similar patterns in the future. The only problem with past performance is the market has been defying its past trends.
September is usually a terrible month for the market. This year, however, September inched out a gain of .83%. While not stellar, we need to keep in mind that the end of October will mark the beginning of the Dow's best 6 month period.
Given the resilience of the current market, and the possibility that oil prices are beginning to soften, a rally and a positive Q4 is probably a good bet. However, if we begin to get poor retail sales numbers in November, the market sell off we predicted for 2006 could get an early start.
Retail Sales:
We are still short the Consumer Discretionary Index (XLY). The action in retail is very much tied to the price of energy, so when oil prices begin to head toward the critical $62/bbl mark, we will look to cover our short position. If oil prices remain stubbornly high, we will maintain our shorts.
In addition to being a great company, we hedged our XLY short position with Best Buy (BBY) which has been heavily shorted. Stocks that are heavily shorted react violently on the upside when prospects for their sectors change. In addition, BBY is a company that takes advantage of consumers that are rabid spenders. I like the position we are in.
