April Fool's Day is celebrated in different countries on April 1st every year. In France and Italy, children and adults traditionally tack paper fish on each other's back as a trick and shout 'April Fish' in their local language. The earliest recorded association between April 1 and foolishness can be found in Chaucer's Canterbury Tales (1392). Sometimes referred to as ALL FOOL'S DAY, April 1 is not a holiday, but is widely recognized and celebrated as a day when people play practical jokes and hoaxes on each other.
The first quarter ended on Friday March 30th - two days before All Fool's Day. The robust first quarter of 2012 registered the strongest return since 1998. The Dow Jones Industrial average rallied over 1,000 points (9%) in a persistent and orderly manner - without even an average correction. The DJIA was led by very strong moves in the industrial, financial, and retail sectors. The Nasdaq led by heavily weighted Apple (19%) powered up over 21%. The S&P tacked on almost 150 points (12%) in relentless orderly & calm trading.
Going into Jan 1st 2012 it is fair to say that at best the consensus of brokerage analysts and collective street wisdom was cautiously bearish. The very few and most optimistic upside prognostications called for marginal gains of not more than 10% for the entire year! It is also fair to say the vast majority of investors were 'all fooled' for most of the first quarter preferring to stay 'on the sidelines' and 'in cash or bonds' to ensure their return of capital. As a result most missed very attractive quarterly returns in what was a significant rally on somewhat lighter volume. It appears that caution is still the watchword as investors now are fearful of being 'fooled' into buying a market after it has rallied! The rather large 'end of the world' bearish community remain resolute and steadfast in their grim convictions. The DJIA is now just a scant 7% from registering all time record highs.
The first quarter focused primarily on the European credit conditions, or the lack thereof, and an expected 'hard landing' in Asia. The jury is still deliberating on sub 8% Chinese growth. European bankers have politically and methodically had their coffers 'refilled' courtesy of EU taxpayers.
Greece appears to have been effectively 'papered over' for at least another year or so despite being on track to default on 'Foreign-Law Bonds' as early as May 15. However, as we have seen, key bond maturity dates and covenants are now nothing more than a negotiating points. Debts are 'creatively' being 'rolled over' but are unlikely to ever be totally repaid barring an inflationary realignment. The early European bankruptcy hysteria of Q1 has been replaced by an eerie sense of calm & complacency.
The spot light now shines on the other over levered southern European countries of Portugal, Spain, and Italy. The price of poker now becomes substantially higher. Debt to GDP ratios remain at alarmingly dangerous levels. Rates of economic growth are beginning to plunge.
The Spanish housing market continues to implode and the economy is mercilessly contracting. The IMF notes that it may take another 4 years to clear the inventory of unsold units. Only one in four Spanish home owners have positive equity in their homes. Heavily front loaded maturing Spanish debt will need to be refinanced within the next two years. Unemployment is at a painful 23% with youth joblessness of over 50%. Spanish private sector debt is very high and their banks are extremely vulnerable to any future financial dislocation. Bond yields have 'normalized' somewhat but remain high relative to northern Europe and North America. Portugal, Italy, and even France are all exposed to similar internal weaknesses -and to make matters worse they are all exposed to each other having lent and borrowed from one another.
Total European unemployment has just surpassed 10% - a 14 year high. It is likely we will be hearing alot more about Euro credit issues during 2012. Since 1800 Portugal has defaulted on its national debt 5 times, Greece 5 times, and Spain no less than 7 times. Union strikes and austerity protestations have begun in most of these 'have not' jurisdictions with the expectation of a volatile hot summer season. It might be 'foolish' to expect that these protests will remain 'peaceful' for very long!
In the US, the economy has been buoyed and responded positively to various forms of financial quantitative stimulation - most recently being the controversial operation twist strategy which recently ended. Multiple trillions of dollars remain stubbornly on the 'side lines' absorbing negative rates of return and zero upside potential. Taxable bond funds continue to receive $5-6 billion in new inflows every week. M2 is growing above its long term average annual rate of 6%. The largest source of growth of M2 is savings deposits. They have increased by over $2T since late 2008 and have growth at a blistering 15% annualized pace in Q1. Corporate profitability and manufacturing did almost everything one could hope for in the Q1. After tax corporate profits have returned to the record 2007 levels. Corporate profitability as a percentage of GDP has surged into multi-decade highs of over 10%. The US housing market appears to have bottomed but new construction spending continues to remain tepid. New auto sales have been very strong based on substantial pent up demand, great new models, and attractive financing rates. The S&P 500 price to earnings ratio remains in the average level of 15-16x's. Consumer confidence and employment levels are beginning to slowly recover from the financial Armageddon of 2008-09. Seasonally adjusted unemployment claims continue to precipitously decline from the hyper extended levels of 2009. Optimism remains in the cautious to negative levels of 2009. From my perch this ' US bull market' rally appears to remain largely intact fueled by historic liquidity levels and despite the threats Europe, rising bond yields, and persistently high energy prices.
In Commodities, the expectations of a Chinese hard landing has muted the excitement in the hard asset sector. Gold and silver continues to consolidate 10% percent below the record levels of mid 2011. Sort term movements are now being held captive to the weekly comments from Fed head Ben Bernake. Crude Oil prices are consolidating solidly at levels only 5% below levels of 2011 - and despite advertised levels of ample inventory. Natural Gas has imploded to just above the US$2.00/mmbtu level on chronic over supply levels and limited storage capacity. The Agra complex has consolidated during Q1 with the exception of record recovery highs in the blistering Soybean market.
In Canada, the S&P/TSX Composite Index lagged behind its US counterpart in Q1 registering a muted 3% gain. Correcting Financial and Energy sectors in March limited Q1 TSX gains. Material and Metal issues were mixed to significantly lower on the expectation of slowing world economies. The 'frothy' Canadian housing market is showing signs of price increase deceleration to 6.5% in the latest Jan reading. Warmer than normal temperatures and special mortgage rate offers continue to contribute to price gains. Canadian GDP growth remains muted with slight increases of 0.1% in Jan as manufacturing struggles to gain significant momentum. Canadian economic growth is tracking at a modest 1.8% annualized rate. The 2012 Canadian Budget offered modest relief for tax payers and limited job creation proposals. The 2011-12 deficit is estimated at $24.9b - $6b less than November's update. OAS/GIS pension eligibility was raised from 65 to 67 starting in 2023 and will have limited impact on retirees for the next 10 years. Canadian inflation is set to increases in the 2.4% range for 2012.
In closing, the first quarter in 2012 has scaled a formidable wall of doubt and scepticism. Tremendous pools of liquidity remain unemployed on the sidelines garnering negative rates of return. As markets move higher the intensity of negativity and concern appears to accelerate. Persistently record high gasoline costs and a vulnerable treasury market provides tow primary concerns for investors. A normal 5 -8% correction would be healthy for continued upside but it is quite possible that it may have to wait for higher levels for that to occur. An extremely 'accommodating' FED awaits on the sidelines to provide the necessary support to fuel markets upward for the balance of 2012. Very few upside 'surprises' have been factored into the value of most major markets. I continue to believe that fear and caution remains embedded in investor psychology. It may take new record highs in major indexes to bring those investors back into the market!
Impossible is a word only to be found in the dictionary of fools. - Napoleon
Tuesday, April 3, 2012
Monday, March 19, 2012
Mid March - Back In The Saddle
It has been four months since I last penned my random thoughts about the assorted machinations in this wacky investment world. My blog will now become a twice-a-month presentation for all those readers who suffer from trading withdrawl.
I had started my last letter on November 18/11 which was entitled the 'Pain in Spain.' The thrust of the note centered on the bond bully vigilante types who were systematically attacking vulnerable credit jurisdictions forcing interest rates to nose bleed levels. At that memorable time, over indebted socialist Euro regimes were being taken behind the woodshed one 'quasi' default after another. Credit calmness currently reigns supreme as one Euro bank is bailed out after another by the unknowing socialist Euro tax payer (oxymoron note). Since mid 2011 the ECB's balance sheet has exploded to US$4T almost 33% larger than the FED's largess - and with an economy which is 15% smaller! However, I did not get to finish that well crafted note ...
Just after my last complete letter (Week Ending Nov 11/11,) and on the day of my unfinished Nov 18/11 message, I recieved the parental nightmare phone call that my son was involved in a very serious sensational car accident while on his way back home from university. A very graphic experience which turns one life upside down. Thankfully and very gratefully to us he survived intact and is on the 'slower road' to recovery. He sure is the toughest hombre I've ever met! Such milestone events certainly refocus key priorities in one's life very quickly!
Since that eventful mid November 2011 period, a lot of economic and political water has passed under the proverbial bridge loan. Equity markets throughout the world finished the year on a flat and rather negative note. Professional fund managers were very happy to see the 2011 year come to an end with returns (if lucky) that left much to be desired.
A fairly robust domestic Christmas retail performance was over shadowed by the seemingly never ending Euro credit concerns. The frighteningly levered European picture appears to have been sufficiently 'papered over' by recent ECB credit largess in order to avoid the much anticipated global economic cooling prognostications.
With the exception of the much maligned Greek Financial Tragedy bond yields in the southern European jurisdictions appear to be normalizing back to much more reasonable/realistic levels. The sooner Greece wraps it's head around the drawbacks and deficiencies of it's failing socialist model/system the better! Until then Greece can expect to remain financial 'personna non gratas' for a very long time. This is the 11th time in Greece's history that they have defaulted. In modern economic times Greece has been in some form of insolvency/austerity for more time than not!
Creatively and coherently stimulating positive economic growth, employment, and collecting the subsequent tax revenue will be key challenges for ALL the PIGS this year. Hopefully the pride and excitement of the 2012 London Olympic Games will be the catalyst needed to inspire all of the weaker and winded back sliding Euro economies to train, compete, and win!
In the US, positive economic growth has accelerated impressively since mid November 2011 and major market indexes have scaled a formidable wall of worry. Our good friends at the US Treasury announced that private employers have added 3.7 million jobs over the last 23 months. The have also calculated that the US economy has grown for 10 straight quarters from the low of -8.9% in Q4 of 2008 to a moderate +3.0% in Q4 of 2011. Overall business investment has grown to a +29% from the 2009 lows. Corporate profits are up a lusty record +76% since Q1 of 2009. Critical exports have risen 23% since Q1 of 2009. Unemployment has fallen but remains high with a record low participation rate combined with declining medium household income over the past decade. Housing appears to have finally risen from the canvas after almost being knocked out permanently. The controversial TARP funding program has generated positive returns especially for the formerly tapped out banking sector. The auto industry has risen like the proverbial Phoenix from the bankruptcy ashes. Miraculously the auto industry had added almost 210,000 jobs since the post-restructuring of GM & Chrysler. The threat of insolvency has generated an entire host of hot and desirable rides!
Alas, every silver cloud has a grey lining as public indebtedness has stretched into the stratospheric proportion. Helicopter Ben will have his hands more than full should interest rates decide to normalize back to average historic levels. Significant tremors are currently being experienced in the 'twisted' Treasury market suggesting that the days of negative return bonds may be over!
Since Nov 18th the DJIA has rallied almost 2,000 points (17%) in a very persistent and orderly manner based primarily on vastly improving broad based economic data. The S&P has tacked on over 200 points (17%) to mutli year highs a shade over 1,400 and only a few whiskers away from the record all-time highs of the go-go year of 2007! The NASDAQ has very impressively penetrated 3,000 for the first time since the Tech Ultra-Bubble of 2000. All it took was for Apple to exceed US$600/share and US$US600b in market cap - ahem - more than the entire US retail sector COMBINED (no typo)! I was told when I was very young that money does not grow on trees - but it sure looks like it grows on Apples! Apple currently is generating US$16b of net free cash per quarter - now that's a lot of turnovers!
A veritable potential tsunami of cash continues to reside on the sidelines and in the Treasury market. A number of shell shocked investors left over from the credit debacle point to low VIX levels and low stock volume levels during this impressive rally as a potential bubble precursor. I am not sure what they will be saying when major indexes reach into all-time high record territory? This controlled bull market seems to be supported by fairly strong legs as far as I can see. The possible threat of a 'vaporizing' bond and 'frozen' credit market are the only major threats that keep me up at night.
Widespread fear and systemic hysteria appears to have been overcome. Solid confidence and attitude is still lacking! I have been around long enough to know that a market top has not been 'officially' reached until most of the money comes off the safety of the sidelines and the bull begins to swagger! That may take some time! In the meantime - enjoy the ride!
In commodities, a cooling China, subdued inflation data, and recent bond market profit taking has contracted the valuations of the majority of metals and material shares. The standout exception has been the powerful energy rally and the associated Iranian attack dividend being paid. The IEA reports that OPEC crude oil production has risen for 5 straight months to the highest level in 3 years. Crude Oil has been consolidating very impressively in the US$105-110/bl level for the past two months. An improving economy and an early driving season could press prices toward US120/bl before long. My previous and now former 'favorite' Natural Gas has been crushed to a snick over US$2.25/mmbtu on a combination of balmy North American temperatures and bulging inventory levels. Gold is up a paltry 5% since Jan 1st. I would not be surprised to see Gold retest the US$1,525/oz support level before the Leaf's raise ticket prices! Precious metals with an industrial use have outperformed Gold with Silver, Platinum, and Palladium leading the charge and may be the place to be. Increasing demand and falling supply have been the main contributing factors. Doctor Copper continues to consolidate just under US$4/lb based on steadily increasing consumption levels. A strong move above US$4/lb would imply a retest of the all-time record high level of just over US$4.50/lb. The Agra/Grain sector has been mixed led by Soybeans as the stalwart standout on the upside. Wheat supplies and inventories have remained high with prices remaining near recent low territory.
In Canada, markets have been primarily led by the financials and other interest sensitive issues. The bifurcated S&P/TSX index is up +5% since Jan 1st. Overall valuations remain attractive with the expectation of a robust M&A season this spring for the junior and mid cap resource producing issues. Currently the wagons have circled Viterra (VT) ,the former Saskatchewan Wheat Pool, tacking on a 40+% premium to fortunate shareholders.
President Obama kicked the decision on the contentious Keystone Pipeline purposal safely past the upcoming November battle for the Whitehouse. In the meantime, the Warren Buffet owned railways are being kept very busy shipping the excess crude at a much higher cost and over the aquifers to the Gulf of Mexico.
The TSX appears to be heading through a period of relative under performance to the NYSE and other industrial based jurisdictions. This period looks to last until at least until the beginning of summer - a period of reaccelerating resource demand. The threat of a higher interest rate structure appears to having a greater short term negative effect for the TSX than for both the European and US markets. The combination of a weaker national economic rebound, huge Provincial deficits, and record high personal household indebtedness levels may be the main issues resulting in a sub performing S&P/TSX index during the next few months.
Bottom Line, equity markets continue consolidate and climb the wall of worry. Impressive improvements in US economic data, a very accommodating dovish FED policy, reasonable/fair valuations, and an astonishingly resilient consumer has fueled this advance. Euro zone swap spreads have narrowed which is a excellent indication of improved liquidity and reduced systemic risk. The main head wind risks are sharply rising interest rates and the unlikely release of 'surprising' inflationary data. Consumer price inflation remains moderate but US$5+/gal unleaded gasoline for a sustained period could change that equation very quickly.Very strong US Manufacturing stats have been aided by low Natural Gas prices and significant pent up consumer auto demand.
I remain positively disposed to the US equity market which is well supported by very excessive liquidity levels and the pending November Presidential free-for-all! I expect an orderly move (to begin with) from the low yielding interest and dividend paying issues into the more levered industrial, auto, housing, and consumer issues. The powerful DJIA and S&P rally is a tad over bought in the near term and maybe vulnerable to a 'normal' profit taking correction.
After the last 3 wild and wooly years, I, for one, will indeed be astonished when the DJIA and the S&P registers new record all time high territory sometime this year - even though I have been expecting it for a while!
'To accomplish our destiny it is not enough to merely guard prudently against road accidents. We must also cover before nightfall the distance assigned to each of us.'
Alexis Carrel (1873-1944)
I had started my last letter on November 18/11 which was entitled the 'Pain in Spain.' The thrust of the note centered on the bond bully vigilante types who were systematically attacking vulnerable credit jurisdictions forcing interest rates to nose bleed levels. At that memorable time, over indebted socialist Euro regimes were being taken behind the woodshed one 'quasi' default after another. Credit calmness currently reigns supreme as one Euro bank is bailed out after another by the unknowing socialist Euro tax payer (oxymoron note). Since mid 2011 the ECB's balance sheet has exploded to US$4T almost 33% larger than the FED's largess - and with an economy which is 15% smaller! However, I did not get to finish that well crafted note ...
Just after my last complete letter (Week Ending Nov 11/11,) and on the day of my unfinished Nov 18/11 message, I recieved the parental nightmare phone call that my son was involved in a very serious sensational car accident while on his way back home from university. A very graphic experience which turns one life upside down. Thankfully and very gratefully to us he survived intact and is on the 'slower road' to recovery. He sure is the toughest hombre I've ever met! Such milestone events certainly refocus key priorities in one's life very quickly!
Since that eventful mid November 2011 period, a lot of economic and political water has passed under the proverbial bridge loan. Equity markets throughout the world finished the year on a flat and rather negative note. Professional fund managers were very happy to see the 2011 year come to an end with returns (if lucky) that left much to be desired.
A fairly robust domestic Christmas retail performance was over shadowed by the seemingly never ending Euro credit concerns. The frighteningly levered European picture appears to have been sufficiently 'papered over' by recent ECB credit largess in order to avoid the much anticipated global economic cooling prognostications.
With the exception of the much maligned Greek Financial Tragedy bond yields in the southern European jurisdictions appear to be normalizing back to much more reasonable/realistic levels. The sooner Greece wraps it's head around the drawbacks and deficiencies of it's failing socialist model/system the better! Until then Greece can expect to remain financial 'personna non gratas' for a very long time. This is the 11th time in Greece's history that they have defaulted. In modern economic times Greece has been in some form of insolvency/austerity for more time than not!
Creatively and coherently stimulating positive economic growth, employment, and collecting the subsequent tax revenue will be key challenges for ALL the PIGS this year. Hopefully the pride and excitement of the 2012 London Olympic Games will be the catalyst needed to inspire all of the weaker and winded back sliding Euro economies to train, compete, and win!
In the US, positive economic growth has accelerated impressively since mid November 2011 and major market indexes have scaled a formidable wall of worry. Our good friends at the US Treasury announced that private employers have added 3.7 million jobs over the last 23 months. The have also calculated that the US economy has grown for 10 straight quarters from the low of -8.9% in Q4 of 2008 to a moderate +3.0% in Q4 of 2011. Overall business investment has grown to a +29% from the 2009 lows. Corporate profits are up a lusty record +76% since Q1 of 2009. Critical exports have risen 23% since Q1 of 2009. Unemployment has fallen but remains high with a record low participation rate combined with declining medium household income over the past decade. Housing appears to have finally risen from the canvas after almost being knocked out permanently. The controversial TARP funding program has generated positive returns especially for the formerly tapped out banking sector. The auto industry has risen like the proverbial Phoenix from the bankruptcy ashes. Miraculously the auto industry had added almost 210,000 jobs since the post-restructuring of GM & Chrysler. The threat of insolvency has generated an entire host of hot and desirable rides!
Alas, every silver cloud has a grey lining as public indebtedness has stretched into the stratospheric proportion. Helicopter Ben will have his hands more than full should interest rates decide to normalize back to average historic levels. Significant tremors are currently being experienced in the 'twisted' Treasury market suggesting that the days of negative return bonds may be over!
Since Nov 18th the DJIA has rallied almost 2,000 points (17%) in a very persistent and orderly manner based primarily on vastly improving broad based economic data. The S&P has tacked on over 200 points (17%) to mutli year highs a shade over 1,400 and only a few whiskers away from the record all-time highs of the go-go year of 2007! The NASDAQ has very impressively penetrated 3,000 for the first time since the Tech Ultra-Bubble of 2000. All it took was for Apple to exceed US$600/share and US$US600b in market cap - ahem - more than the entire US retail sector COMBINED (no typo)! I was told when I was very young that money does not grow on trees - but it sure looks like it grows on Apples! Apple currently is generating US$16b of net free cash per quarter - now that's a lot of turnovers!
A veritable potential tsunami of cash continues to reside on the sidelines and in the Treasury market. A number of shell shocked investors left over from the credit debacle point to low VIX levels and low stock volume levels during this impressive rally as a potential bubble precursor. I am not sure what they will be saying when major indexes reach into all-time high record territory? This controlled bull market seems to be supported by fairly strong legs as far as I can see. The possible threat of a 'vaporizing' bond and 'frozen' credit market are the only major threats that keep me up at night.
Widespread fear and systemic hysteria appears to have been overcome. Solid confidence and attitude is still lacking! I have been around long enough to know that a market top has not been 'officially' reached until most of the money comes off the safety of the sidelines and the bull begins to swagger! That may take some time! In the meantime - enjoy the ride!
In commodities, a cooling China, subdued inflation data, and recent bond market profit taking has contracted the valuations of the majority of metals and material shares. The standout exception has been the powerful energy rally and the associated Iranian attack dividend being paid. The IEA reports that OPEC crude oil production has risen for 5 straight months to the highest level in 3 years. Crude Oil has been consolidating very impressively in the US$105-110/bl level for the past two months. An improving economy and an early driving season could press prices toward US120/bl before long. My previous and now former 'favorite' Natural Gas has been crushed to a snick over US$2.25/mmbtu on a combination of balmy North American temperatures and bulging inventory levels. Gold is up a paltry 5% since Jan 1st. I would not be surprised to see Gold retest the US$1,525/oz support level before the Leaf's raise ticket prices! Precious metals with an industrial use have outperformed Gold with Silver, Platinum, and Palladium leading the charge and may be the place to be. Increasing demand and falling supply have been the main contributing factors. Doctor Copper continues to consolidate just under US$4/lb based on steadily increasing consumption levels. A strong move above US$4/lb would imply a retest of the all-time record high level of just over US$4.50/lb. The Agra/Grain sector has been mixed led by Soybeans as the stalwart standout on the upside. Wheat supplies and inventories have remained high with prices remaining near recent low territory.
In Canada, markets have been primarily led by the financials and other interest sensitive issues. The bifurcated S&P/TSX index is up +5% since Jan 1st. Overall valuations remain attractive with the expectation of a robust M&A season this spring for the junior and mid cap resource producing issues. Currently the wagons have circled Viterra (VT) ,the former Saskatchewan Wheat Pool, tacking on a 40+% premium to fortunate shareholders.
President Obama kicked the decision on the contentious Keystone Pipeline purposal safely past the upcoming November battle for the Whitehouse. In the meantime, the Warren Buffet owned railways are being kept very busy shipping the excess crude at a much higher cost and over the aquifers to the Gulf of Mexico.
The TSX appears to be heading through a period of relative under performance to the NYSE and other industrial based jurisdictions. This period looks to last until at least until the beginning of summer - a period of reaccelerating resource demand. The threat of a higher interest rate structure appears to having a greater short term negative effect for the TSX than for both the European and US markets. The combination of a weaker national economic rebound, huge Provincial deficits, and record high personal household indebtedness levels may be the main issues resulting in a sub performing S&P/TSX index during the next few months.
Bottom Line, equity markets continue consolidate and climb the wall of worry. Impressive improvements in US economic data, a very accommodating dovish FED policy, reasonable/fair valuations, and an astonishingly resilient consumer has fueled this advance. Euro zone swap spreads have narrowed which is a excellent indication of improved liquidity and reduced systemic risk. The main head wind risks are sharply rising interest rates and the unlikely release of 'surprising' inflationary data. Consumer price inflation remains moderate but US$5+/gal unleaded gasoline for a sustained period could change that equation very quickly.Very strong US Manufacturing stats have been aided by low Natural Gas prices and significant pent up consumer auto demand.
I remain positively disposed to the US equity market which is well supported by very excessive liquidity levels and the pending November Presidential free-for-all! I expect an orderly move (to begin with) from the low yielding interest and dividend paying issues into the more levered industrial, auto, housing, and consumer issues. The powerful DJIA and S&P rally is a tad over bought in the near term and maybe vulnerable to a 'normal' profit taking correction.
After the last 3 wild and wooly years, I, for one, will indeed be astonished when the DJIA and the S&P registers new record all time high territory sometime this year - even though I have been expecting it for a while!
'To accomplish our destiny it is not enough to merely guard prudently against road accidents. We must also cover before nightfall the distance assigned to each of us.'
Alexis Carrel (1873-1944)
Sunday, November 13, 2011
Week Ending 11/10/11 - The Italian Job
Hot off the heels of former Greek president G Papandreou turning tail and jumping ship, the financial crisis spotlight focused directly on the amorous EU nation of Italy. The world is wrapping its head around the sobering reality that nations, like individuals and corporations, can and do go bust.
Greece has become a bad debt 'fait du compli' afterthought thanks to reckless sub-standard leadership(sic). It has become very apparent that the socialist visionaries never had long term solutions to obligations they eagerly and fearlessly assumed. No 'worst case scenario strategy' or 'book balancing exit plans' were considered - other than being whisked away in comfort of their bullet proof limousines with a cordial 'good luck' wave and smile to their shell shocked citizenry - and leaving their disastrous 'socially consciencious' creation far behind!
With Italy, the stakes and risks have increased exponentially. Italy accounts for 25% of Euro bonds outstanding, 17% of Euro GDP, and 7% of German exports. Italy debts total $US2.6T or 120% of its GDP. The rule of thumb for most economists is that a debt to GDP ratio of 90+% in a low/slow/no growth economy is 'pericoloso' (perilous). Italy is the 8th largest economy in the world at more than $US2T in annual output. Italy has the 3rd largest bond market in the world. Italy's debt exceeds that of Greece, Spain, Portugal, and Ireland combined. Italy is too big to bail or fail! PM Berlusconi's offer to (de)part company (Il Bunga Bunga festa e finita) has further complicated the possibility of key 'promised' austerity. Next week Italy welcomes academic technocrat Mario 'Let's Make a Deal' Monte - pay rolled International Advisor to the 'Masters of the Universe' Goldman Sachs - to be the new 'Primo Prez.' The Berlusconi media tabbed the move as 'bringing in the arsonist to put out the fire!' This weeks 5B euro 1&2yr Italian Bond issue went better than expected (read: ECB presence) but the yield was over 6% the highest rate since 1997.
On the plus side, Italy has a budget surplus of 1% of GDP, it has lower total leverage, its average maturity of it's public debt is 7.3 years, it has very little foreign debt (21% GDP), its bank sector loan to deposit ratio is lower than the rest of Europe, and it has high private wealth to government debt. If Italy's debt problems can be solved in a workable and practical manor a big chunk of the PIIG problem will be solved. It looks like make or break to me!
The German influenced ECB has raised their 'no mas' white flag dashing hopes that they might ramp up bond purchases to lower Italy's borrowing costs. To date the ECB has extended $970b euros to Euro banks and governments through sovereign covered bond purchases and repos. Germany has warned that the ECB is risking losing credibility by buying bonds of heavily-indebted countries blurring both monetary and fiscal policy. (read: monetizing sovereign indebtedness) Buying 'troubled' bonds on 'behalf' of tax payers effectively sticks them with the bill for the widespread 'excessive/reckless' bank lending. It also appears that most friendly deep pockets are now empty. Bond yields in Italy, the 3rd largest economy in the 17 nation EEU, have surged above the unsustainable 7% level (7.4% high) that led Greece, Portugal, and Ireland to seek bailouts from the EU and IMF.
Despite the thinly veiled threats expect the ECB to become much more aggressive. There are no practical alternatives. Italian ECB chief Mario Draghi will likely do 'everything necessary' to 'stabilize markets.' The ECB has over half a trillion Euros invested to 'peripheral' Europe and more than likely would like to see the return 'of' their investment.
We are reminded of the prescient words of 'Comando Supremo' Il Duce Benito Mussolino who said, 'Italy isn't hard to manage ... it's impossible!' He also (incredibly) said, 'Fascism should rightly be called 'Corporatism' because it is the merger of state and corporate power.'
I'll be looking for an eventual 'offer that the bond holders can't refuse!'
In the US, attention will soon be drawn to the almost forgotten 'Supercommittee' - the 'appointed' sub-branch of the legislative body which hopes to find over $US1T in budget cuts necessary to enact the Obama debt ceiling hike and subsequent 'spend-a-thon!' The 12 member (6Dem-6Rep) bipartisan supercommittee faces a Nov 23 deadline for agreeing on a plan to carve $1.5T (over 10 years) of fat out of the monsterous US federal budget. One wonders how big the supercommittee would need to be to cut out $US1.5T of 'borrowed' largesse per YEAR? If the panel doesn't agree on these modest reductions, or if Congress stonewalls, $US1.2T would automatically be deducted from defense and non-defense programs beginning in 2013. At last check, they were at least $US1T apart. It might be a good chance to pick up a General Dynamics F-16 Fighting Falcon on the cheap at the garage sale! Ever vigilant Zero Hedge notes that since this supercommittee was formed the US Government has issued $US700b in debt bringing the new grand total to just under $US15.1T offsetting any benefit which the expected 'cuts' were to bring. So much for the 'hope' and 'change' we can believe in!
The blistering S&P earnings season bonanza has come to an end registering the best quarterly results EVER! Warren Buffett's Berkshire Hathaway Inc. invested almost $US24b in the third quarter, the most in the last 15 years. BH accelerated stock purchases and broadened their portfolio beyond consumer and financial-company holdings. The Oracle of Omaha is expecting big things and let's hope he is right ... as usual.
The US returned to the Pre-Crisis levels of job postings of 3.4 million in September - the most since August 2008. This high is still below thepre-recession level of 4.4 million jobs in December 2007 - but ain't bad at all! Getting the 'demoralized' unemployed fired (no pun) back up again may take some time. I expect that US economy will shave off at least 2 unemployment percentage points before the November 2012 Presidential election. Weekly unemployment claims came in below expectations with 390k vs 400k. The Monster Employment Indices for October showed 'improved overall online job availability compared to October 2010' with the index up 11% over the past year. The University of Michigan survey of Consumer Confidence Sentiment rose to 64.2 from 60.9 and beating expectations of 61.5 - the most since June 2009. This number is still 25% below the average of the last 33 years.
Our friends at Fannie Mae tapped another $US7.8b from the Treasury as losses widen. A Fitch mortgage reports suggests that the prevailing 28% of reported mortgages which are underwater may be too low. The long and difficult real estate fiasco is slowly and painfully unwinding. A wholesale mortgage liquidation by giant Fannie Mae would indicate rock bottom to me.
Despite the Euro debt hysteria recent data out of the US and China has been encouraging. Both countries saw their respective manufacturing PMI new orders rise above the key threshold of 50 in the month of October. The US and China account for 35% of global GDP. Assuming a 'non collapse' in Europe any time soon the global economy is set to continue to expand in Q4. This week the DJIA finished up 1.5% and is now +5.01% YTD. The S&P closed up almost 1% but is virtually unchanged YTD. The NASDAQ finished almost unchanged and is up about 1% YTD.
In Commodities, Crude Oil was the standout rallying almost $US4/bl to $US98.18 or +4.16% on the week. Crude oil is up 7.44% YTD. Continued upside technical pressure could see Crude Oil adding 5-10% before the end of 2011. Gold had a positive but volatile week closing up $US20.90/oz or 1.2% and up almost 25% YTD. Gold has retraced over 60% of its September swing from high to low - a rally of almost 12% from the September low. Gold and Silver equities are very historically inexpensive to the prices of the underlying bullion. Gold and Silver equities have lagged bullion prices since 2008 based on historical price-to-cash flow multiples. The group is trading at a 40% discount to the 10 year average price to cash flow data. The precious metal equities are currently discounting a gold price of $US1,100/oz for Gold and $US20/oz for Silver. Natural Gas and Copper continue to consolidate recent gains. The Agra/Grain complex remains moribund despite bullish crop reports and rising demand. The US is reaping its smallest corn harvest in 3 years after a drought damaged what looked to be a record crop. Most key grains have been consolidating in a very tight range perhaps as a prelude to a strong year end move. Early in the week, ICE and CME lowered the initial margin rate for all speculative accounts due to the ongoing MF Global unwind. No word was given how long this change may be in effect.
In Canada, Canadian housing starts remained high with an annual rate of 207k units. Canadian housing starts over the last 6 months have averaged over 200k - a first since the recession. Critical Canadian trade returned to the black in September with a $CD1.25b surplus as exports rebounded. The TMX officially agreed to be taken over by the Maple Group in a $CD3.73b friendly deal. The TSX Markets Group announced that as of September 30 the TSX and TSXV together had more new listings in 2011 than any other exchange in the world. With 318 new listings the TMX ranked ahead of Shenzhen Stock Exchange with (201) and the Deutsche Borse with (176). It was the 3rd straight year that the TMX has led global exchanges in the number of listing. The TMX ranks 2nd in the world in the number of listings, 7th by market capitalization, and 7th by equity capital raised.
The Bank of Canada left inflation target unchanged at between 1 and 3 percent - with 2 percent remaining the optimal target. The consumer stocks earnings reports garnered much of the attention with blowout numbers recorded by Tim Hortons, Canadian Tire, and Cineplex.
An effect of the Euro debt crisis hit home when Finance Minister Jim Flaherty cut the projection for government revenue and moved the target for balancing the budget. $CD53b was slashed from the revenue estimates between 2011-2016 due to slowing global growth and rising financial risks. The plan to shrink the deficit from $CD32.3b this year to a surplus of $CD3.7b looks to be unlikely.
TransCanada Pipeline Ltd was disappointed to discover that B. Obama kicked the Keystone XL pipe further down the road in true Presidential vote saving fashion until 2013. The poll watching Potus bowed to pressure from Californian environmentalist lobby types who opposed the so-called dirty oil we send them. The major issues of energy supply security and creation of tens of thousands of new 'unfunded' long term jobs were non starters. This decision brings into question the administration's view of trade and development with Canada. The 'Carbon Cossacks' have deluded themselves into a no win economic fantasy of higher long term energy prices and substantially lower revenues which feed all their 'green' planet saving nonsense.
On the week the TSX dropped 1% closing at 12,300. The key 'under-performing' financial sector will need an upside burst for the TSX to breach key upside resistance.
Bottom line, despite socialist EU leaders that are dropping like flies, and hysterical threats of pending credit and currency doom, North American equity markets continue to outperform admirably. It is my opinion that many of the Euro banking issues will be solved probably by an actively printing leveraged ECB.
Should the dark debt clouds begin to part and the economic sun begin to shine, trillions of dollars which have been parked on the sidelines or in no-return bonds will quickly move back into attractively valued equities and other hard assets. I would not be surprised to see a move for the major indexes back to all-time high territory sooner rather than later. The 'half full glass' will fill faster than Leaf Fans jumping off the bandwagon!
A heartfelt thank you and prayers to the brave fighting men and women who have made the ultimate sacrifice on this special day of Remembrance 11/11/11.
'It is well enough that people of our nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before morning'
Henry Ford - 1930
Greece has become a bad debt 'fait du compli' afterthought thanks to reckless sub-standard leadership(sic). It has become very apparent that the socialist visionaries never had long term solutions to obligations they eagerly and fearlessly assumed. No 'worst case scenario strategy' or 'book balancing exit plans' were considered - other than being whisked away in comfort of their bullet proof limousines with a cordial 'good luck' wave and smile to their shell shocked citizenry - and leaving their disastrous 'socially consciencious' creation far behind!
With Italy, the stakes and risks have increased exponentially. Italy accounts for 25% of Euro bonds outstanding, 17% of Euro GDP, and 7% of German exports. Italy debts total $US2.6T or 120% of its GDP. The rule of thumb for most economists is that a debt to GDP ratio of 90+% in a low/slow/no growth economy is 'pericoloso' (perilous). Italy is the 8th largest economy in the world at more than $US2T in annual output. Italy has the 3rd largest bond market in the world. Italy's debt exceeds that of Greece, Spain, Portugal, and Ireland combined. Italy is too big to bail or fail! PM Berlusconi's offer to (de)part company (Il Bunga Bunga festa e finita) has further complicated the possibility of key 'promised' austerity. Next week Italy welcomes academic technocrat Mario 'Let's Make a Deal' Monte - pay rolled International Advisor to the 'Masters of the Universe' Goldman Sachs - to be the new 'Primo Prez.' The Berlusconi media tabbed the move as 'bringing in the arsonist to put out the fire!' This weeks 5B euro 1&2yr Italian Bond issue went better than expected (read: ECB presence) but the yield was over 6% the highest rate since 1997.
On the plus side, Italy has a budget surplus of 1% of GDP, it has lower total leverage, its average maturity of it's public debt is 7.3 years, it has very little foreign debt (21% GDP), its bank sector loan to deposit ratio is lower than the rest of Europe, and it has high private wealth to government debt. If Italy's debt problems can be solved in a workable and practical manor a big chunk of the PIIG problem will be solved. It looks like make or break to me!
The German influenced ECB has raised their 'no mas' white flag dashing hopes that they might ramp up bond purchases to lower Italy's borrowing costs. To date the ECB has extended $970b euros to Euro banks and governments through sovereign covered bond purchases and repos. Germany has warned that the ECB is risking losing credibility by buying bonds of heavily-indebted countries blurring both monetary and fiscal policy. (read: monetizing sovereign indebtedness) Buying 'troubled' bonds on 'behalf' of tax payers effectively sticks them with the bill for the widespread 'excessive/reckless' bank lending. It also appears that most friendly deep pockets are now empty. Bond yields in Italy, the 3rd largest economy in the 17 nation EEU, have surged above the unsustainable 7% level (7.4% high) that led Greece, Portugal, and Ireland to seek bailouts from the EU and IMF.
Despite the thinly veiled threats expect the ECB to become much more aggressive. There are no practical alternatives. Italian ECB chief Mario Draghi will likely do 'everything necessary' to 'stabilize markets.' The ECB has over half a trillion Euros invested to 'peripheral' Europe and more than likely would like to see the return 'of' their investment.
We are reminded of the prescient words of 'Comando Supremo' Il Duce Benito Mussolino who said, 'Italy isn't hard to manage ... it's impossible!' He also (incredibly) said, 'Fascism should rightly be called 'Corporatism' because it is the merger of state and corporate power.'
I'll be looking for an eventual 'offer that the bond holders can't refuse!'
In the US, attention will soon be drawn to the almost forgotten 'Supercommittee' - the 'appointed' sub-branch of the legislative body which hopes to find over $US1T in budget cuts necessary to enact the Obama debt ceiling hike and subsequent 'spend-a-thon!' The 12 member (6Dem-6Rep) bipartisan supercommittee faces a Nov 23 deadline for agreeing on a plan to carve $1.5T (over 10 years) of fat out of the monsterous US federal budget. One wonders how big the supercommittee would need to be to cut out $US1.5T of 'borrowed' largesse per YEAR? If the panel doesn't agree on these modest reductions, or if Congress stonewalls, $US1.2T would automatically be deducted from defense and non-defense programs beginning in 2013. At last check, they were at least $US1T apart. It might be a good chance to pick up a General Dynamics F-16 Fighting Falcon on the cheap at the garage sale! Ever vigilant Zero Hedge notes that since this supercommittee was formed the US Government has issued $US700b in debt bringing the new grand total to just under $US15.1T offsetting any benefit which the expected 'cuts' were to bring. So much for the 'hope' and 'change' we can believe in!
The blistering S&P earnings season bonanza has come to an end registering the best quarterly results EVER! Warren Buffett's Berkshire Hathaway Inc. invested almost $US24b in the third quarter, the most in the last 15 years. BH accelerated stock purchases and broadened their portfolio beyond consumer and financial-company holdings. The Oracle of Omaha is expecting big things and let's hope he is right ... as usual.
The US returned to the Pre-Crisis levels of job postings of 3.4 million in September - the most since August 2008. This high is still below thepre-recession level of 4.4 million jobs in December 2007 - but ain't bad at all! Getting the 'demoralized' unemployed fired (no pun) back up again may take some time. I expect that US economy will shave off at least 2 unemployment percentage points before the November 2012 Presidential election. Weekly unemployment claims came in below expectations with 390k vs 400k. The Monster Employment Indices for October showed 'improved overall online job availability compared to October 2010' with the index up 11% over the past year. The University of Michigan survey of Consumer Confidence Sentiment rose to 64.2 from 60.9 and beating expectations of 61.5 - the most since June 2009. This number is still 25% below the average of the last 33 years.
Our friends at Fannie Mae tapped another $US7.8b from the Treasury as losses widen. A Fitch mortgage reports suggests that the prevailing 28% of reported mortgages which are underwater may be too low. The long and difficult real estate fiasco is slowly and painfully unwinding. A wholesale mortgage liquidation by giant Fannie Mae would indicate rock bottom to me.
Despite the Euro debt hysteria recent data out of the US and China has been encouraging. Both countries saw their respective manufacturing PMI new orders rise above the key threshold of 50 in the month of October. The US and China account for 35% of global GDP. Assuming a 'non collapse' in Europe any time soon the global economy is set to continue to expand in Q4. This week the DJIA finished up 1.5% and is now +5.01% YTD. The S&P closed up almost 1% but is virtually unchanged YTD. The NASDAQ finished almost unchanged and is up about 1% YTD.
In Commodities, Crude Oil was the standout rallying almost $US4/bl to $US98.18 or +4.16% on the week. Crude oil is up 7.44% YTD. Continued upside technical pressure could see Crude Oil adding 5-10% before the end of 2011. Gold had a positive but volatile week closing up $US20.90/oz or 1.2% and up almost 25% YTD. Gold has retraced over 60% of its September swing from high to low - a rally of almost 12% from the September low. Gold and Silver equities are very historically inexpensive to the prices of the underlying bullion. Gold and Silver equities have lagged bullion prices since 2008 based on historical price-to-cash flow multiples. The group is trading at a 40% discount to the 10 year average price to cash flow data. The precious metal equities are currently discounting a gold price of $US1,100/oz for Gold and $US20/oz for Silver. Natural Gas and Copper continue to consolidate recent gains. The Agra/Grain complex remains moribund despite bullish crop reports and rising demand. The US is reaping its smallest corn harvest in 3 years after a drought damaged what looked to be a record crop. Most key grains have been consolidating in a very tight range perhaps as a prelude to a strong year end move. Early in the week, ICE and CME lowered the initial margin rate for all speculative accounts due to the ongoing MF Global unwind. No word was given how long this change may be in effect.
In Canada, Canadian housing starts remained high with an annual rate of 207k units. Canadian housing starts over the last 6 months have averaged over 200k - a first since the recession. Critical Canadian trade returned to the black in September with a $CD1.25b surplus as exports rebounded. The TMX officially agreed to be taken over by the Maple Group in a $CD3.73b friendly deal. The TSX Markets Group announced that as of September 30 the TSX and TSXV together had more new listings in 2011 than any other exchange in the world. With 318 new listings the TMX ranked ahead of Shenzhen Stock Exchange with (201) and the Deutsche Borse with (176). It was the 3rd straight year that the TMX has led global exchanges in the number of listing. The TMX ranks 2nd in the world in the number of listings, 7th by market capitalization, and 7th by equity capital raised.
The Bank of Canada left inflation target unchanged at between 1 and 3 percent - with 2 percent remaining the optimal target. The consumer stocks earnings reports garnered much of the attention with blowout numbers recorded by Tim Hortons, Canadian Tire, and Cineplex.
An effect of the Euro debt crisis hit home when Finance Minister Jim Flaherty cut the projection for government revenue and moved the target for balancing the budget. $CD53b was slashed from the revenue estimates between 2011-2016 due to slowing global growth and rising financial risks. The plan to shrink the deficit from $CD32.3b this year to a surplus of $CD3.7b looks to be unlikely.
TransCanada Pipeline Ltd was disappointed to discover that B. Obama kicked the Keystone XL pipe further down the road in true Presidential vote saving fashion until 2013. The poll watching Potus bowed to pressure from Californian environmentalist lobby types who opposed the so-called dirty oil we send them. The major issues of energy supply security and creation of tens of thousands of new 'unfunded' long term jobs were non starters. This decision brings into question the administration's view of trade and development with Canada. The 'Carbon Cossacks' have deluded themselves into a no win economic fantasy of higher long term energy prices and substantially lower revenues which feed all their 'green' planet saving nonsense.
On the week the TSX dropped 1% closing at 12,300. The key 'under-performing' financial sector will need an upside burst for the TSX to breach key upside resistance.
Bottom line, despite socialist EU leaders that are dropping like flies, and hysterical threats of pending credit and currency doom, North American equity markets continue to outperform admirably. It is my opinion that many of the Euro banking issues will be solved probably by an actively printing leveraged ECB.
Should the dark debt clouds begin to part and the economic sun begin to shine, trillions of dollars which have been parked on the sidelines or in no-return bonds will quickly move back into attractively valued equities and other hard assets. I would not be surprised to see a move for the major indexes back to all-time high territory sooner rather than later. The 'half full glass' will fill faster than Leaf Fans jumping off the bandwagon!
A heartfelt thank you and prayers to the brave fighting men and women who have made the ultimate sacrifice on this special day of Remembrance 11/11/11.
'It is well enough that people of our nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before morning'
Henry Ford - 1930
Friday, November 4, 2011
Week Ending 4/11/11 - Debtocracy
All attention is riveted on the birthplace of democracy and the cradle of Civilization for the pending 'Big Fat Greek Referendum' - or not! Leadership in Athens are changing their minds about a historic vote faster than wedding invitations to a Kim Kardashian wedding.
The epic motion would be a vote to either partially or entirely 'welch' on their collective responsibilities. It is a long overdue great question in which an enormous cast of self interested business and government leadership should be held to account!
A vote that would be a final watershed moment which highlights reckless and irrational public policy as it gasps for its last & final few precious breaths of subsidized life. The painful moral of this sad tale will be when the lenders (of last or final resort) hold their own referendums on, if and when, they remove terminal debt nations from life support systems.
I am all for the good old town hall referendum process which clearly and democratically decides significant matters. It should be standard fare for all financial matters over and above the net worth of any elected Potus. 'Referendi' removes the burden of responsibility/temptation from 'motivationally challenged' elected officialdom! Most importantly it returns the power of rule to the people and away from self interested fascist leadership. Unfortunately political types of all spots & stripes are exceedingly reluctant to cede power and return to any form of pure democracy such as the referendum process.
Faced with unpalatable debt solutions and unsavory repayment alternatives Greek President G Papandreou unilaterally decided to lay his complex fiscal nightmare at the feet of his (non) tax paying citizens. A vote which clearly defines the moral character and fortitude of socialist leadership an its quasi Marxist citizenry!
It might have been handy though if the Greek kleptocracy decided to hold a referendum 'prior' to recklessly borrowing billions of euros and spending themselves into oblivion. A simple 'pre-borrowing' question asking the people if they had any interest in repaying the leveraged banking system who fatefully financed the free for all.
It sure would be interesting if the referendum included a vote on reducing or ending an obviously failed socialist welfare state experiment in order to allow free and open 'unstimulated' markets to repair excesses and mend the ugly debt chasm left behind. A clear rational motion on significantly reducing the bloated size of a seriously flawed governmental model of mindless spending, irrational irresponsibility, and criminal unaccountability. I won't hold my breath in anticipation for that to happen!
It is demoralizing to see how various infected abusive political systems have distorted the first principals of freedom, business, and enterprise. All credit cards should have limits. Creditor nations should have demanded this referendum long ago! They sure will next time!
As I dream about what should be, the fearless G20 types gather in plush quarters in Cannes mapping out possible 'ring fenced' exit scenarios for the free loaders from the Aegean. Evidently the EU 'can get over and live without' their Greek brothers? Reports from Cannes (not) suggests that an IMF financing agreement was DOA and nada uno member had any interest in participating in the 'leveraged' EFSF bank rescue scheme. Newly minted ECB chief Super Mario Draghi, (former vice chairman and managing director Goldman Sachs), in a major change of Euro inflation fighting direction, cut its key lending rate by 25 basis points to 1.25% in the hopes to offset G20 inaction.The 'behind closed doors' meeting of the Terrific Twenty hopefully will call out the dithering Greek PM to make an example of those who think only in 'political' terms! Portugal and Spain would not be as likely to be as indecisive. Italy is likely to do almost anything - and likely will! PM Bunga Bunga has even halted the release of his latest Love Serenade CD! He will need all the sweet lyrics he has got to improve Italy's rapidly falling GDP/capita and refinance the 310b+ euros of debt maturing in 2012. Germany has totally lost its infectious sense of humor and joie de vive! The French stand at the ready by their ATM's should the debt 'merde' hit the fan! China will do exactly what it wants to do without the emotion or drama & minus the referendum solution. G20 members (China) have no interest bailing out any other countries banker's IOU's. And the first place Leaf's (9-3-1) aren't sure aren't sure what to do or say! Can life get anymore interesting?
We get to celebrate with the fine 95+ million Filipino people for creating our 7 billionth world citizen - Danica May Camacho. Her joyous parents were presented with a chocolate cake and a gift certificate for free shoes for their fine efforts. There is beauty in simplicity!
In the US, a fragile and shaken financial sector was rocked with the shocking news of how the 200 year old MF Global Holdings Ltd. was destroyed with yet more spectacular recklessness. MF Global (was) a global powerhouse commodities brokerage run by (former Goldman Sachs CEO) J. Corzine. He was appointed in March 2010 and decided to transform the derivatives agency broker into more of an investment banking Goldman Saks type clone. A $US6.3 bet on European Bonds based on '2007 like' 40x's leverage vaporized all of MF's capital before you could say 'au revoir.' MF Global was recently selected to be in the elite group of US Treasury dealers. Billionaire Mr. Corzine (Dem) gave a sermon last year to the Princeton faithful about the compensation sins of Wall Street. He stands to collect $12.1m for 19 months of stellar duty and stewardship with the now former MF Global. It is reported that he may decline such largess and is well 'lawyered' up. Lots of money is 'missing' and it looks like he will need all of his 'political relationships' to circle their protective wagons. Once again, the compliance and regulatory world is conspicuously absent from the proceedings.
After two sharply lower profit taking days early in the week US equity markets rallied back challenging the October recovery highs registered last week. Recent economic stats have been mixed to positive. Non farm payrolls for October increase less than expected at +80k with the unemployment rate little changed at 9.0%. The US needs to generate over 250k jobs per month until the end of Obama's 'second' term in order to return to pre-recession/depression employment. Sounds like lots of 'hope and change' to me!
SM non-manufacturing data was 52.9 for October with a median forecast of 53.5. Factory orders rose slightly 0.3% for September with a median forecast of -0.2%. Levels of production and new orders fell slightly over the month while new export orders declined at the quickest pace for almost two-and-a-half years. The employment index encouragingly jumped from 48.7 to 53.3%.
Fed head B. Bernake solemnly declared that he was 'also' an unhappy camper about the sluggish US employment growth while reiterating his 'significant downside risks' to economic outlook mantra. The Fed is looking for 2011 GDP of between 1.6-.7% and 2.5-.9% for 2012. They expect 2011 unemployment to drop marginally from between 9.0-.1% to 8.6-.9% in 2012. Bernake skirted both the MF Global meltdown and Greek referendum issues in typical political fashion. No change in FOMC policy was the order of the day and continuation of the very business friendly interest rate structure until 2013.
On the week the DJIA closed down -2.8% but up +2.6% YTD. The S&P 500 closed down -3.1% and down -1.1% YTD. The NASDAQ closed down -2.4% on the week and almost unchanged on the YTD.
In commodities, Gold has resurrected it role as the #1 'non printable' currency amidst the Euro financial non-action. Gold has rallied (+.50%) into significant resistance in the $US1,770/oz to $US1,810 area. Central Banks have quietly been buying gold at a frenetic pace having purchased over 200 tonnes this year. The various money printing stimulus programs, zero interest rate mandates, and assorted 'twist' schemes has created a potentially (probable) high risk inflationary environment. Silver continues to consolidate in the mid $US30/oz range. $US37-39/oz represents significant over head resistance for Silver. $US30-32/oz represents considerable intermediate support. After last weeks' power rally for Copper the red metal has consolidated in the $US3.50-.65/lb range. I favor Copper to rally back into the low $US4/lb range in this positive hard asset environment. Crude oil remains range bound in the low $US90/bl level as relentless demand challenges the growth of supplies. A move above $US95/bl for Crude Oil could be explosive on the upside. The Agra/Grain sector trading has become much more subdued and is quietly consolidating in tight trading ranges. Seasonal factors should provide evidence of long term trading trends before long.
In Canada, major props go out to no other than our BofC chief Mark Carney, (former investment banker Goldman Sachs), for being named as head of the global banking regulator FSB. Conservative Canadian banking principals may have arrived a tad late now that most Euro regimes are deeply on the dole and are inextricably linked to each other. Carney will remain as BofC head and only part time his FSB role. His skills & patience will be well tested.
The Canadian economy shed an unexpected 54,000 jobs last month. The expectation was for a gain of 15,000 new workers. The unemployment rate now stands at 7.3% from 7.1%. Hopefully this is nothing more than a seasonal one-off report and not the beginning of a long term trend. Canadian GDP grew 0.3% in August better than consensus expectations of 0.2%
It looks like the $3.8b marriage of the TMX and banker/broker led Maple Group is about to be consummated. It will be interesting to see how the regulators deal with the obvious vertically integrated monopoly implications of this cozy deal. Resource earnings for miners and oil & gas companies were outstanding this week as expected. AGU, CNQ, TLM, ECA, K all blew away expectations and in some cases raised dividend payouts. Grande Cashe Coal is lifted from the exchange in a $1b (60+% premium) all cash deal from a partnership of Chinese and Japanese companies. The takeover and merger environment in the resource sector is expected to remain robust through 2012. CP has a new 'activist' shareholder (Pershing Square Capital) on board to deal with which should make board meetings much more animated. Beleaguered smart phone manufacturer RIM reported that their share of the US handset market share dropped to 9% from a high of almost 40%.
The S&P/TSX closed down -1.0% on the week and almost -8% YTD. The S&P/TSX Venture exchange of small cap resource stocks closed up fractionally on the week and a walloping 600 points or -30% lower YTD.
Bottom Line, 'Trim Tabs' reports that since the beginning of 2010 corporations have been buying back $US2b/day of their own stock while fund holders have been redeeming $US800m/day of their holdings. 'Trim Tabs' has calculated that since 2009 corporations have sold $US3T of their bonds and $US800b of equity to the public. Corporations have been using this extraordinary period of record low interest rates to borrow and repurchase what they think to be is undervalued equity. The pool of quality investment is rapidly shrinking as outstanding equity is purchased from the public. As economic conditions improve corporate repurchase programs will continue to be a significant driver for higher stock prices and valuations.
The Euro debt mess, as muddled and complex as it appears, is heading toward an inevitable (Goldman Sachs inspired) resolution/conclusion. To this point it appears that some kind of 'controlled' inflationary plan is the desired course of action. I doubt that any tabs will be covered!
It is suggested that the Federal Reserve Board should target a 'nominal gross-domestic-product growth rate' of 4.5% to decide how much money to inject into the economy. Concerns of real vs inflationary growth and associated price stability become a low priority immaterial consideration. The newly 'acronymed' NGDP scheme of 'creating' money in a 'variety' of methods smacks to me as nothing more than the same concerted Keynsian plan of unbridled inflationary 2-ply paper printing. The US plans to issue $US846b in Treasury's in the next 6 months : +35% more than the previous 'stimulated' year. It looks like the Fed is walking through its open stimulus door once again. We may be closer to dealing with inflationary challenges than we think.
I continue to favor hard asset and inflation sensitive sectors in this monetizing environment. Interest rate dependant sectors will be challenged to perform as financial markets demand more real return 'on' capital - and ultimately the return 'of' capital.
'Creditors have better memories than debtors.'
Benjamin Franklin (1706-1790)
The epic motion would be a vote to either partially or entirely 'welch' on their collective responsibilities. It is a long overdue great question in which an enormous cast of self interested business and government leadership should be held to account!
A vote that would be a final watershed moment which highlights reckless and irrational public policy as it gasps for its last & final few precious breaths of subsidized life. The painful moral of this sad tale will be when the lenders (of last or final resort) hold their own referendums on, if and when, they remove terminal debt nations from life support systems.
I am all for the good old town hall referendum process which clearly and democratically decides significant matters. It should be standard fare for all financial matters over and above the net worth of any elected Potus. 'Referendi' removes the burden of responsibility/temptation from 'motivationally challenged' elected officialdom! Most importantly it returns the power of rule to the people and away from self interested fascist leadership. Unfortunately political types of all spots & stripes are exceedingly reluctant to cede power and return to any form of pure democracy such as the referendum process.
Faced with unpalatable debt solutions and unsavory repayment alternatives Greek President G Papandreou unilaterally decided to lay his complex fiscal nightmare at the feet of his (non) tax paying citizens. A vote which clearly defines the moral character and fortitude of socialist leadership an its quasi Marxist citizenry!
It might have been handy though if the Greek kleptocracy decided to hold a referendum 'prior' to recklessly borrowing billions of euros and spending themselves into oblivion. A simple 'pre-borrowing' question asking the people if they had any interest in repaying the leveraged banking system who fatefully financed the free for all.
It sure would be interesting if the referendum included a vote on reducing or ending an obviously failed socialist welfare state experiment in order to allow free and open 'unstimulated' markets to repair excesses and mend the ugly debt chasm left behind. A clear rational motion on significantly reducing the bloated size of a seriously flawed governmental model of mindless spending, irrational irresponsibility, and criminal unaccountability. I won't hold my breath in anticipation for that to happen!
It is demoralizing to see how various infected abusive political systems have distorted the first principals of freedom, business, and enterprise. All credit cards should have limits. Creditor nations should have demanded this referendum long ago! They sure will next time!
As I dream about what should be, the fearless G20 types gather in plush quarters in Cannes mapping out possible 'ring fenced' exit scenarios for the free loaders from the Aegean. Evidently the EU 'can get over and live without' their Greek brothers? Reports from Cannes (not) suggests that an IMF financing agreement was DOA and nada uno member had any interest in participating in the 'leveraged' EFSF bank rescue scheme. Newly minted ECB chief Super Mario Draghi, (former vice chairman and managing director Goldman Sachs), in a major change of Euro inflation fighting direction, cut its key lending rate by 25 basis points to 1.25% in the hopes to offset G20 inaction.The 'behind closed doors' meeting of the Terrific Twenty hopefully will call out the dithering Greek PM to make an example of those who think only in 'political' terms! Portugal and Spain would not be as likely to be as indecisive. Italy is likely to do almost anything - and likely will! PM Bunga Bunga has even halted the release of his latest Love Serenade CD! He will need all the sweet lyrics he has got to improve Italy's rapidly falling GDP/capita and refinance the 310b+ euros of debt maturing in 2012. Germany has totally lost its infectious sense of humor and joie de vive! The French stand at the ready by their ATM's should the debt 'merde' hit the fan! China will do exactly what it wants to do without the emotion or drama & minus the referendum solution. G20 members (China) have no interest bailing out any other countries banker's IOU's. And the first place Leaf's (9-3-1) aren't sure aren't sure what to do or say! Can life get anymore interesting?
We get to celebrate with the fine 95+ million Filipino people for creating our 7 billionth world citizen - Danica May Camacho. Her joyous parents were presented with a chocolate cake and a gift certificate for free shoes for their fine efforts. There is beauty in simplicity!
In the US, a fragile and shaken financial sector was rocked with the shocking news of how the 200 year old MF Global Holdings Ltd. was destroyed with yet more spectacular recklessness. MF Global (was) a global powerhouse commodities brokerage run by (former Goldman Sachs CEO) J. Corzine. He was appointed in March 2010 and decided to transform the derivatives agency broker into more of an investment banking Goldman Saks type clone. A $US6.3 bet on European Bonds based on '2007 like' 40x's leverage vaporized all of MF's capital before you could say 'au revoir.' MF Global was recently selected to be in the elite group of US Treasury dealers. Billionaire Mr. Corzine (Dem) gave a sermon last year to the Princeton faithful about the compensation sins of Wall Street. He stands to collect $12.1m for 19 months of stellar duty and stewardship with the now former MF Global. It is reported that he may decline such largess and is well 'lawyered' up. Lots of money is 'missing' and it looks like he will need all of his 'political relationships' to circle their protective wagons. Once again, the compliance and regulatory world is conspicuously absent from the proceedings.
After two sharply lower profit taking days early in the week US equity markets rallied back challenging the October recovery highs registered last week. Recent economic stats have been mixed to positive. Non farm payrolls for October increase less than expected at +80k with the unemployment rate little changed at 9.0%. The US needs to generate over 250k jobs per month until the end of Obama's 'second' term in order to return to pre-recession/depression employment. Sounds like lots of 'hope and change' to me!
SM non-manufacturing data was 52.9 for October with a median forecast of 53.5. Factory orders rose slightly 0.3% for September with a median forecast of -0.2%. Levels of production and new orders fell slightly over the month while new export orders declined at the quickest pace for almost two-and-a-half years. The employment index encouragingly jumped from 48.7 to 53.3%.
Fed head B. Bernake solemnly declared that he was 'also' an unhappy camper about the sluggish US employment growth while reiterating his 'significant downside risks' to economic outlook mantra. The Fed is looking for 2011 GDP of between 1.6-.7% and 2.5-.9% for 2012. They expect 2011 unemployment to drop marginally from between 9.0-.1% to 8.6-.9% in 2012. Bernake skirted both the MF Global meltdown and Greek referendum issues in typical political fashion. No change in FOMC policy was the order of the day and continuation of the very business friendly interest rate structure until 2013.
On the week the DJIA closed down -2.8% but up +2.6% YTD. The S&P 500 closed down -3.1% and down -1.1% YTD. The NASDAQ closed down -2.4% on the week and almost unchanged on the YTD.
In commodities, Gold has resurrected it role as the #1 'non printable' currency amidst the Euro financial non-action. Gold has rallied (+.50%) into significant resistance in the $US1,770/oz to $US1,810 area. Central Banks have quietly been buying gold at a frenetic pace having purchased over 200 tonnes this year. The various money printing stimulus programs, zero interest rate mandates, and assorted 'twist' schemes has created a potentially (probable) high risk inflationary environment. Silver continues to consolidate in the mid $US30/oz range. $US37-39/oz represents significant over head resistance for Silver. $US30-32/oz represents considerable intermediate support. After last weeks' power rally for Copper the red metal has consolidated in the $US3.50-.65/lb range. I favor Copper to rally back into the low $US4/lb range in this positive hard asset environment. Crude oil remains range bound in the low $US90/bl level as relentless demand challenges the growth of supplies. A move above $US95/bl for Crude Oil could be explosive on the upside. The Agra/Grain sector trading has become much more subdued and is quietly consolidating in tight trading ranges. Seasonal factors should provide evidence of long term trading trends before long.
In Canada, major props go out to no other than our BofC chief Mark Carney, (former investment banker Goldman Sachs), for being named as head of the global banking regulator FSB. Conservative Canadian banking principals may have arrived a tad late now that most Euro regimes are deeply on the dole and are inextricably linked to each other. Carney will remain as BofC head and only part time his FSB role. His skills & patience will be well tested.
The Canadian economy shed an unexpected 54,000 jobs last month. The expectation was for a gain of 15,000 new workers. The unemployment rate now stands at 7.3% from 7.1%. Hopefully this is nothing more than a seasonal one-off report and not the beginning of a long term trend. Canadian GDP grew 0.3% in August better than consensus expectations of 0.2%
It looks like the $3.8b marriage of the TMX and banker/broker led Maple Group is about to be consummated. It will be interesting to see how the regulators deal with the obvious vertically integrated monopoly implications of this cozy deal. Resource earnings for miners and oil & gas companies were outstanding this week as expected. AGU, CNQ, TLM, ECA, K all blew away expectations and in some cases raised dividend payouts. Grande Cashe Coal is lifted from the exchange in a $1b (60+% premium) all cash deal from a partnership of Chinese and Japanese companies. The takeover and merger environment in the resource sector is expected to remain robust through 2012. CP has a new 'activist' shareholder (Pershing Square Capital) on board to deal with which should make board meetings much more animated. Beleaguered smart phone manufacturer RIM reported that their share of the US handset market share dropped to 9% from a high of almost 40%.
The S&P/TSX closed down -1.0% on the week and almost -8% YTD. The S&P/TSX Venture exchange of small cap resource stocks closed up fractionally on the week and a walloping 600 points or -30% lower YTD.
Bottom Line, 'Trim Tabs' reports that since the beginning of 2010 corporations have been buying back $US2b/day of their own stock while fund holders have been redeeming $US800m/day of their holdings. 'Trim Tabs' has calculated that since 2009 corporations have sold $US3T of their bonds and $US800b of equity to the public. Corporations have been using this extraordinary period of record low interest rates to borrow and repurchase what they think to be is undervalued equity. The pool of quality investment is rapidly shrinking as outstanding equity is purchased from the public. As economic conditions improve corporate repurchase programs will continue to be a significant driver for higher stock prices and valuations.
The Euro debt mess, as muddled and complex as it appears, is heading toward an inevitable (Goldman Sachs inspired) resolution/conclusion. To this point it appears that some kind of 'controlled' inflationary plan is the desired course of action. I doubt that any tabs will be covered!
It is suggested that the Federal Reserve Board should target a 'nominal gross-domestic-product growth rate' of 4.5% to decide how much money to inject into the economy. Concerns of real vs inflationary growth and associated price stability become a low priority immaterial consideration. The newly 'acronymed' NGDP scheme of 'creating' money in a 'variety' of methods smacks to me as nothing more than the same concerted Keynsian plan of unbridled inflationary 2-ply paper printing. The US plans to issue $US846b in Treasury's in the next 6 months : +35% more than the previous 'stimulated' year. It looks like the Fed is walking through its open stimulus door once again. We may be closer to dealing with inflationary challenges than we think.
I continue to favor hard asset and inflation sensitive sectors in this monetizing environment. Interest rate dependant sectors will be challenged to perform as financial markets demand more real return 'on' capital - and ultimately the return 'of' capital.
'Creditors have better memories than debtors.'
Benjamin Franklin (1706-1790)
Friday, October 28, 2011
Week Ending 28/11/11 - Waiting for Good Dough
Global financial participants, like characters in Samuel Beckett's 'absurdist' play Godot, waited almost endlessly and painfully in vain for the arrival of a coordinated, workable, and practical Euro debt agreement.
Godot the two act tragicomedy originally written in French in 1948 (En attendant Godot) features two principal characters, Vladimir (Germany) and Estragon (France) who divert themselves while they wait expectantly and in vain for someone named Godot (Good Dough) to arrive. They claim him as an acquaintance but in fact hardly know him - admitting that they would not recognize him were they to see him. The pair discuss repentance, particularly in relation to the two thieves crucified alongside Jesus - and that only one of the Four Evangelists mentions that one of them was saved. This is the first of many biblical references linking the central theme of reconciliation with God as well as salvation. They often cry 'We're Saved!' when they feel Godot may be near. Vladimir (Didi) often expresses his frustration with Estragon's (Gogo) limited conversational skills. Vladimir is often hostile towards his companion. Estragon comments on the bleakness of his surroundings. He wants to depart but is told they cannot because they must wait for Godot. The pair cannot agree, however, on whether or not they are in the right place or if this is the arranged day for the meeting with Godot or are not even sure what day it is. As they wait Vladimir asks Estragon what they might do to pass the time. Estragon suggests hanging themselves. They abandon the idea should both not die which would leave one alone - an intolerable notion. They decide to do nothing: 'It's safer' explains Estragon just prior to ask what Godot is going to do for them when he eventually arrives. Vladimir struggles to remember. 'Oh ... nothing very definite,' is the best he can manage.
Their waiting is interrupted by two other forlorn characters, Pozzo and his heavily laden slave Lucky. Lucky is dragged onto stage by a noose around his neck by his master. Pozzo barks orders and often calls him a 'pig! (one 'i' only)' The pair are off the the 'market' for slave Lucky to be sold. Pozzo tells Vladimir and Estragon that they are on his land but acknowledges that 'the road is free to all.' Before they leave Pozzo asks if he can do anything for the pair in exchange for providing company and rest. Estragon tries to ask for money but is cut short by Vladimir who explains they are not beggars. After Pozzo and Lucky leave Vladimir and Estragon play at imitating them. They fire insults at each other and then makeup up. The play ends when a boy informs the pair not to expect Godot today but promises he will arrive the next day. They reconsider suicide but their rope (belt) breaks as they tug on it. Estragon's trousers fall down but does not notice until Vladimir tells him to pull them up. They resolve to bring a more suitable rope and hang themselves the next day should Godot not arrive. They finally agree to leave but neither of them makes any move to go.
The parallels between the classic absurd tragicomedy Godot - and the exasperating lack of 'Piigs at the Trough' Euro debt leadership - is painfully obvious and stunningly ironic.
In a recent article by the outstanding Financial Post columnist Peter Foster, he succinctly elucidates the complex issues and solutions only as he can. 'That governments can't see their way through the crisis is a reflection not of the situation's inherent hopelessness, but of their own debt addiction and flawed vision of competent macro management.' 'At every level there is to be avoidance of responsibility, investment in failure, and continued commitment to the notion that problems can always be passed "upstairs," that is, socialized. In other words - moral hazard on stilts.''None of this has anything to do with globalization or Anglo-Saxon capitalist greed, although European leaders are still weakly attempting to pin their problems on those wicked financial speculators.'
Mr. Foster furhter states that the EU will never find a long term solution until they acknowledge their problem: systematic irresponsibility. Italian head Capo Mr. 'Bunga Bunga' Berlusconi hopes to avoid a total collapse of his government by passing pension reform raising age eligibility by 2 years to 67 by the year 2026! On the bright side 67 is the new 57. Unfortunately most of Berlusconi's mistresses will now have to wait for at least another 45 years before they retire. Italian agreement has also been made to raise a paltry 5 billion Euros a year from divestment and improved returns from state property. These minimalist moves fall far short of the new definition of Austerity: living within your means! The EU's reckless ways of taxing (or not) and spending to buy votes perpetuating the unsustainable debt cycle has come to a painful end. The bill for decades-long financial orgy is massive and private lenders have no confidence in government's ability to promise or repay. Excessive debt has created widespread global instability. The world is being asked to de-lever while the EFSF craves to leverage (5x's) into trillions of Euros of new debt. Taxation, spending, over regulation, entitlement promises, and anti-competitive legislation has cooked their proverbial golden goose! None of these 'causes' will solve any part of the problem! Addicts using more drugs does not help to kick their habit! With drawl is never pretty picture!
Peter Foster's precise ultimate solution (opposite to the current version of Prez. B. Obama) is: 'not less market but more, and not more government (Godo) but less!' 'Waiting' expectantly for government (Godo) to solve these problems and NOT make them significantly worse will be in vain!
In the US, a very positive earnings season is well under way with the majority of companies surprising to the upside. A growing number (1.8 to 1.0) of these companies are cautious in respect to future guidance and extraordinary adjustments. The latest GDP data showed a healthy expected +2.5% growth - almost doubling the last reporting quarter. Jobless figures remain unchanged but expect the number to improve based on improving economic conditions and pre-election jiggery-pokery and fancy stick handling.
The downside pressure on the US housing market continues to abate with reports of 313,000 new home sales in September. Relators report shrinking inventories and cash buyers. September's 3.48 million homes marks the lowest inventory of homes for sale in the month of September since September 2005! The Standard and Poor's Case-Shiller Index showed that home prices rose in half of major cities reporting in the month of August. The President's new open ended 'Refi' financing program for distressed mortgages, HARP, looks only to further support the ailing housing sector. US home building stocks have rallied 30% from their lows.
The tech sector lost momentum this week following last week's Apple downside surprise. This week both Netflix (NFLX) and Amazon (AMZN) disappointed and offered negative guidance based on rising costs and shrinking margins. Next week's Groupon IPO looks to be somewhat of a Groupoff affair based on questionable marketing data. Less than 4% of the 1500 S&P companies have PE ratios greater than 50 times. If any of these rapid growth companies report disappointing (even slightly) earnings their stocks can quickly and mercilessly drop up to 30% before the red ink dries. Consumer confidence (39.8 vs 46 est) through Oct 13th., remains at an all time non-recessionary morbid level despite very upbeat retail sales stats. Consumer confidence averaged 69.3 during the last 5 recessionary periods. A major concern is data showing that the Savings Rate has dropped back to December 2007 levels at 4% from as high as 8% in late 2008.
The brisk and bullish month of October rally temporarily ran head on into significant resistance at just under 12,000 mid week - its 200dma - in a combination of short covering and improving domestic economic conditions. Tuesday's 5 year Treasury auction was priced at 1.055%, just above the record low of 1.015% in September. Most notably about this auction is that it may mark the last time (in the foreseeable future) in which the US debt/GDP ratio will be under 100%. The new cumulative official US debt total after this auction is $US15.010 trillion vs GDP of $US15.013 trillion resulting in a debt/GDP ratio of 99.99%. Wednesday's historic $US29b in 7 year bonds floats America into uncharted negative triple digit 'shark infested (under)water.' After the complex EU debt accord/plan was announced late Wednesday global markets rocketed through resistance areas on renewed confidence, short covering, and 'hopeful/wishful thinking.' The DJIA very bullishly 'gapped' through its downward sloping 200 dma trading as high as 12,300 - up a whopping 20% in 4 weeks. The DJIA closed up 3.4% on the week and 5.4% YTD. The broader S&P 500 also snapped through its 200 dma closing at 1,280 - up 3.5% on the week and 1.86% YTD. The NASDAQ closed up 3.47% on the week and 2.87% YTD despite recent negative earnings reports. With only one trading day left October looks to go down as one of the best months ever - up the most on a percentage basis since the ultra gloomy recessionary year of 1974.
In the commodity market, Dr. Copper smashed all previous records for the largest rise in a week - (over 6 standard deviations) - up over 20% in 6 trading sessions the biggest move ever to $US3.72/lb. Gold also joined the (inflationary) party adding $US140/oz (+8.75%) in 6 trading sessions to close at $US1,745/oz on Friday. Gold added at healthy 5.9% on the week and is up 22.42% YTD. Gold should have trouble breaching $US1,790/oz on the upside in the near term. Silver also participated on the upside adding $US5/oz (+17%) on the week closing at just over $US35/oz. Silver looks to add another $US5/oz before this short term rally ends. Crude oil has also had a stellar run of almost $US10/bl (12%) in the last 6 trading sessions to close at just under $US94/bl resistance. The Agra-grain market (Corn, Soy Beans, and Wheat) consolidated recent gains and look to add another 5-10% upside in the short run.
In Canada, retail sales rebounded in August increasing 0.5% following a decline of 0.5% in July. Canadian consumers are much less pessimistic than their US counterparts showing a slight improvement in September. The latest consumer confidence reading was registered at 70 for the month of September. Overall there has been a deterioration in the Canadian economic outlook over the last few months primarily due to persistent negative US morale. The B of C projects that the economy will expand by 2.1% in 2011, 1.9% in 2012, and 2.9% in 2013. Sensational earnings were reported by most material and energy issuers this week with many raising their outlooks and dividend payouts. Many senior producing resource stocks have been driven lower on 'ultra recessionary low expectations' over the past few months. Expect merger, acquisition, and takeover activity to increase significantly as we move into 2012.
The S&P/TSX Composite index added 4.5% this week closing at 12,519 - still 300 points away from its 200 dma. The TSX Index is down -7.07% YTD based on very low expectations and hedge fund liquidation. Recently the dividend yield on the TSX 60 rose above that provided from 30 year Canadian Treasury Bonds for the second time ever. The last time it occurred was at the market lows of 2009. The battered S&P/TSX Venture Composite has finally emerged out of its nasty down trend closing up almost 130 points (9%) in the last 6 trading sessions to close at 1,629. The Venture Index needs to rally 20% from current levels to return to its 200 dma. Similarly to 2007, the TSX Venture Exchange has been crushed by almost 50% (top to bottom) from it's 2011 high level of over 2,400. Expect this under performing (to say the least) sector to provide leadership in early 2012.
Bottom Line, 'some kind' of EU deal was hammered out in Brussels much to the relief of global financial markets. Most of the usual who, what, why, where, and when questions remain: as to who is going to finance this package, what are the important credit details, why are Greece's debts being (voluntarily?) written off by 50% and why do they get to immediately borrower more, and where will future leadership/control in the EU originate from?
Bad cop Germany will continue to be front and center in this tenuous balancing act. Deep pocketed China has yet to chime in with their various demands but expect them to be onerous. France, Italy, and Spain wait in the wings with substantially greater needs. The 'can' is getting progressively larger and substantially heavier to kick down the 'one way' road!
The European Banking system is massive with over $US46 Trillion in assets - equal to 82% of global GDP. Greece's debt to GDP falls from 160% to 120% - a still unsustainable level. Very little room has been left for future 'toe stubs' and 'eye pokes!' Critical moral hazard concerns now appear to be more of a romantic notion. This weeks 'plan' is a doubtful 'solution' but rather more creative financial foot work and further time gaining balance sheet 'expansion.' The real question is how much more burden are tax payers going to have to 'involentarily' take and how much more (if any) can they handle? This 'slippery slope' leads to nowhere good!
Another huge concern for me is the Mal treatment given to the Greek CDS holders and the negative effect this may/will have on bond markets and interest rates worldwide. Breaking the faith and trust of these derivative contracts is a serious error in judgement. It looks to me to be a significant 'unreported' Black Swan event which may/will have many serious unintended consequences. CDS coverage doubtful = no insurance = dump CDS's = dump doubtful bonds is my simplified analysis. High Interest Rates = Death. I realize that Government is firmly in the 'pockets' of the banking industry and obediently carry out their 'sorted' bidding - but this is a move they may live to deeply regret!
In the 'Real Bad Timing Department' the Italian Defense Ministry just received their shipment of 19 Maserati armoured supercars - an outrageous indulgence at a time when the defense ministry is supposed to be reducing its budget by 2.5bn Euros over the next 3 years. Today's Italian bond issue put borrowing costs at historically high levels breaking over 6% on the Maginot line.
Global equity markets will probably take a break from this recent break neck rally. Expect upside revisions to economic models and corporate earnings expectations. Many managed portfolios were braced for pending financial 'Armageddon' and are woefully under represented. Trillions of non-yielding assets remain on the anxious sidelines. I do not rule out a new recovery high for the year of over 12,900 for the DJIA once markets consolidate recent gains - and possibly before Santa slides down our chimneys.
Ultimately, I believe that new inflation driven all-time highs above the 14,000 level (2006/07) for the DJIA are not out of the question. All time highs for both the DJIA and S&P would be possible in my opinion prior to the upcoming US Presidential election in late 2012. Look to accumulate good quality material, energy, & industrial equities on deeper pull backs. Avoid the interest rate sensitive issues. Keep stops tight.
This absurd debt drama is only the first act!
'A liberal is someone who feels a great debt to his fellowman, which debt he purposes to pay off with your money.'
G. Gordon Liddy (1930-)
Godot the two act tragicomedy originally written in French in 1948 (En attendant Godot) features two principal characters, Vladimir (Germany) and Estragon (France) who divert themselves while they wait expectantly and in vain for someone named Godot (Good Dough) to arrive. They claim him as an acquaintance but in fact hardly know him - admitting that they would not recognize him were they to see him. The pair discuss repentance, particularly in relation to the two thieves crucified alongside Jesus - and that only one of the Four Evangelists mentions that one of them was saved. This is the first of many biblical references linking the central theme of reconciliation with God as well as salvation. They often cry 'We're Saved!' when they feel Godot may be near. Vladimir (Didi) often expresses his frustration with Estragon's (Gogo) limited conversational skills. Vladimir is often hostile towards his companion. Estragon comments on the bleakness of his surroundings. He wants to depart but is told they cannot because they must wait for Godot. The pair cannot agree, however, on whether or not they are in the right place or if this is the arranged day for the meeting with Godot or are not even sure what day it is. As they wait Vladimir asks Estragon what they might do to pass the time. Estragon suggests hanging themselves. They abandon the idea should both not die which would leave one alone - an intolerable notion. They decide to do nothing: 'It's safer' explains Estragon just prior to ask what Godot is going to do for them when he eventually arrives. Vladimir struggles to remember. 'Oh ... nothing very definite,' is the best he can manage.
Their waiting is interrupted by two other forlorn characters, Pozzo and his heavily laden slave Lucky. Lucky is dragged onto stage by a noose around his neck by his master. Pozzo barks orders and often calls him a 'pig! (one 'i' only)' The pair are off the the 'market' for slave Lucky to be sold. Pozzo tells Vladimir and Estragon that they are on his land but acknowledges that 'the road is free to all.' Before they leave Pozzo asks if he can do anything for the pair in exchange for providing company and rest. Estragon tries to ask for money but is cut short by Vladimir who explains they are not beggars. After Pozzo and Lucky leave Vladimir and Estragon play at imitating them. They fire insults at each other and then makeup up. The play ends when a boy informs the pair not to expect Godot today but promises he will arrive the next day. They reconsider suicide but their rope (belt) breaks as they tug on it. Estragon's trousers fall down but does not notice until Vladimir tells him to pull them up. They resolve to bring a more suitable rope and hang themselves the next day should Godot not arrive. They finally agree to leave but neither of them makes any move to go.
The parallels between the classic absurd tragicomedy Godot - and the exasperating lack of 'Piigs at the Trough' Euro debt leadership - is painfully obvious and stunningly ironic.
In a recent article by the outstanding Financial Post columnist Peter Foster, he succinctly elucidates the complex issues and solutions only as he can. 'That governments can't see their way through the crisis is a reflection not of the situation's inherent hopelessness, but of their own debt addiction and flawed vision of competent macro management.' 'At every level there is to be avoidance of responsibility, investment in failure, and continued commitment to the notion that problems can always be passed "upstairs," that is, socialized. In other words - moral hazard on stilts.''None of this has anything to do with globalization or Anglo-Saxon capitalist greed, although European leaders are still weakly attempting to pin their problems on those wicked financial speculators.'
Mr. Foster furhter states that the EU will never find a long term solution until they acknowledge their problem: systematic irresponsibility. Italian head Capo Mr. 'Bunga Bunga' Berlusconi hopes to avoid a total collapse of his government by passing pension reform raising age eligibility by 2 years to 67 by the year 2026! On the bright side 67 is the new 57. Unfortunately most of Berlusconi's mistresses will now have to wait for at least another 45 years before they retire. Italian agreement has also been made to raise a paltry 5 billion Euros a year from divestment and improved returns from state property. These minimalist moves fall far short of the new definition of Austerity: living within your means! The EU's reckless ways of taxing (or not) and spending to buy votes perpetuating the unsustainable debt cycle has come to a painful end. The bill for decades-long financial orgy is massive and private lenders have no confidence in government's ability to promise or repay. Excessive debt has created widespread global instability. The world is being asked to de-lever while the EFSF craves to leverage (5x's) into trillions of Euros of new debt. Taxation, spending, over regulation, entitlement promises, and anti-competitive legislation has cooked their proverbial golden goose! None of these 'causes' will solve any part of the problem! Addicts using more drugs does not help to kick their habit! With drawl is never pretty picture!
Peter Foster's precise ultimate solution (opposite to the current version of Prez. B. Obama) is: 'not less market but more, and not more government (Godo) but less!' 'Waiting' expectantly for government (Godo) to solve these problems and NOT make them significantly worse will be in vain!
In the US, a very positive earnings season is well under way with the majority of companies surprising to the upside. A growing number (1.8 to 1.0) of these companies are cautious in respect to future guidance and extraordinary adjustments. The latest GDP data showed a healthy expected +2.5% growth - almost doubling the last reporting quarter. Jobless figures remain unchanged but expect the number to improve based on improving economic conditions and pre-election jiggery-pokery and fancy stick handling.
The downside pressure on the US housing market continues to abate with reports of 313,000 new home sales in September. Relators report shrinking inventories and cash buyers. September's 3.48 million homes marks the lowest inventory of homes for sale in the month of September since September 2005! The Standard and Poor's Case-Shiller Index showed that home prices rose in half of major cities reporting in the month of August. The President's new open ended 'Refi' financing program for distressed mortgages, HARP, looks only to further support the ailing housing sector. US home building stocks have rallied 30% from their lows.
The tech sector lost momentum this week following last week's Apple downside surprise. This week both Netflix (NFLX) and Amazon (AMZN) disappointed and offered negative guidance based on rising costs and shrinking margins. Next week's Groupon IPO looks to be somewhat of a Groupoff affair based on questionable marketing data. Less than 4% of the 1500 S&P companies have PE ratios greater than 50 times. If any of these rapid growth companies report disappointing (even slightly) earnings their stocks can quickly and mercilessly drop up to 30% before the red ink dries. Consumer confidence (39.8 vs 46 est) through Oct 13th., remains at an all time non-recessionary morbid level despite very upbeat retail sales stats. Consumer confidence averaged 69.3 during the last 5 recessionary periods. A major concern is data showing that the Savings Rate has dropped back to December 2007 levels at 4% from as high as 8% in late 2008.
The brisk and bullish month of October rally temporarily ran head on into significant resistance at just under 12,000 mid week - its 200dma - in a combination of short covering and improving domestic economic conditions. Tuesday's 5 year Treasury auction was priced at 1.055%, just above the record low of 1.015% in September. Most notably about this auction is that it may mark the last time (in the foreseeable future) in which the US debt/GDP ratio will be under 100%. The new cumulative official US debt total after this auction is $US15.010 trillion vs GDP of $US15.013 trillion resulting in a debt/GDP ratio of 99.99%. Wednesday's historic $US29b in 7 year bonds floats America into uncharted negative triple digit 'shark infested (under)water.' After the complex EU debt accord/plan was announced late Wednesday global markets rocketed through resistance areas on renewed confidence, short covering, and 'hopeful/wishful thinking.' The DJIA very bullishly 'gapped' through its downward sloping 200 dma trading as high as 12,300 - up a whopping 20% in 4 weeks. The DJIA closed up 3.4% on the week and 5.4% YTD. The broader S&P 500 also snapped through its 200 dma closing at 1,280 - up 3.5% on the week and 1.86% YTD. The NASDAQ closed up 3.47% on the week and 2.87% YTD despite recent negative earnings reports. With only one trading day left October looks to go down as one of the best months ever - up the most on a percentage basis since the ultra gloomy recessionary year of 1974.
In the commodity market, Dr. Copper smashed all previous records for the largest rise in a week - (over 6 standard deviations) - up over 20% in 6 trading sessions the biggest move ever to $US3.72/lb. Gold also joined the (inflationary) party adding $US140/oz (+8.75%) in 6 trading sessions to close at $US1,745/oz on Friday. Gold added at healthy 5.9% on the week and is up 22.42% YTD. Gold should have trouble breaching $US1,790/oz on the upside in the near term. Silver also participated on the upside adding $US5/oz (+17%) on the week closing at just over $US35/oz. Silver looks to add another $US5/oz before this short term rally ends. Crude oil has also had a stellar run of almost $US10/bl (12%) in the last 6 trading sessions to close at just under $US94/bl resistance. The Agra-grain market (Corn, Soy Beans, and Wheat) consolidated recent gains and look to add another 5-10% upside in the short run.
In Canada, retail sales rebounded in August increasing 0.5% following a decline of 0.5% in July. Canadian consumers are much less pessimistic than their US counterparts showing a slight improvement in September. The latest consumer confidence reading was registered at 70 for the month of September. Overall there has been a deterioration in the Canadian economic outlook over the last few months primarily due to persistent negative US morale. The B of C projects that the economy will expand by 2.1% in 2011, 1.9% in 2012, and 2.9% in 2013. Sensational earnings were reported by most material and energy issuers this week with many raising their outlooks and dividend payouts. Many senior producing resource stocks have been driven lower on 'ultra recessionary low expectations' over the past few months. Expect merger, acquisition, and takeover activity to increase significantly as we move into 2012.
The S&P/TSX Composite index added 4.5% this week closing at 12,519 - still 300 points away from its 200 dma. The TSX Index is down -7.07% YTD based on very low expectations and hedge fund liquidation. Recently the dividend yield on the TSX 60 rose above that provided from 30 year Canadian Treasury Bonds for the second time ever. The last time it occurred was at the market lows of 2009. The battered S&P/TSX Venture Composite has finally emerged out of its nasty down trend closing up almost 130 points (9%) in the last 6 trading sessions to close at 1,629. The Venture Index needs to rally 20% from current levels to return to its 200 dma. Similarly to 2007, the TSX Venture Exchange has been crushed by almost 50% (top to bottom) from it's 2011 high level of over 2,400. Expect this under performing (to say the least) sector to provide leadership in early 2012.
Bottom Line, 'some kind' of EU deal was hammered out in Brussels much to the relief of global financial markets. Most of the usual who, what, why, where, and when questions remain: as to who is going to finance this package, what are the important credit details, why are Greece's debts being (voluntarily?) written off by 50% and why do they get to immediately borrower more, and where will future leadership/control in the EU originate from?
Bad cop Germany will continue to be front and center in this tenuous balancing act. Deep pocketed China has yet to chime in with their various demands but expect them to be onerous. France, Italy, and Spain wait in the wings with substantially greater needs. The 'can' is getting progressively larger and substantially heavier to kick down the 'one way' road!
The European Banking system is massive with over $US46 Trillion in assets - equal to 82% of global GDP. Greece's debt to GDP falls from 160% to 120% - a still unsustainable level. Very little room has been left for future 'toe stubs' and 'eye pokes!' Critical moral hazard concerns now appear to be more of a romantic notion. This weeks 'plan' is a doubtful 'solution' but rather more creative financial foot work and further time gaining balance sheet 'expansion.' The real question is how much more burden are tax payers going to have to 'involentarily' take and how much more (if any) can they handle? This 'slippery slope' leads to nowhere good!
Another huge concern for me is the Mal treatment given to the Greek CDS holders and the negative effect this may/will have on bond markets and interest rates worldwide. Breaking the faith and trust of these derivative contracts is a serious error in judgement. It looks to me to be a significant 'unreported' Black Swan event which may/will have many serious unintended consequences. CDS coverage doubtful = no insurance = dump CDS's = dump doubtful bonds is my simplified analysis. High Interest Rates = Death. I realize that Government is firmly in the 'pockets' of the banking industry and obediently carry out their 'sorted' bidding - but this is a move they may live to deeply regret!
In the 'Real Bad Timing Department' the Italian Defense Ministry just received their shipment of 19 Maserati armoured supercars - an outrageous indulgence at a time when the defense ministry is supposed to be reducing its budget by 2.5bn Euros over the next 3 years. Today's Italian bond issue put borrowing costs at historically high levels breaking over 6% on the Maginot line.
Global equity markets will probably take a break from this recent break neck rally. Expect upside revisions to economic models and corporate earnings expectations. Many managed portfolios were braced for pending financial 'Armageddon' and are woefully under represented. Trillions of non-yielding assets remain on the anxious sidelines. I do not rule out a new recovery high for the year of over 12,900 for the DJIA once markets consolidate recent gains - and possibly before Santa slides down our chimneys.
Ultimately, I believe that new inflation driven all-time highs above the 14,000 level (2006/07) for the DJIA are not out of the question. All time highs for both the DJIA and S&P would be possible in my opinion prior to the upcoming US Presidential election in late 2012. Look to accumulate good quality material, energy, & industrial equities on deeper pull backs. Avoid the interest rate sensitive issues. Keep stops tight.
This absurd debt drama is only the first act!
'A liberal is someone who feels a great debt to his fellowman, which debt he purposes to pay off with your money.'
G. Gordon Liddy (1930-)
Monday, October 24, 2011
Week Ending 10/21/11 - Trick or Treat
We are in the final week before the annual October 31st 'Trick or Treat' Halloween festivities - the last day of the Celtic Calender.
The Celts believed that Halloween was the night the souls of the dead roamed the streets and villages. Since not all spirits were thought to be friendly, gifts and treats were left out to pacify the evil ones and ensure next year's crop would be plentiful. Trick or treating traces its origins back to the highly organized Celtic, Roman, and Germanic European traditions in which a celebratory night in which normal order and structure were abolished and chaos would reign. The original EU horror show!
This is also the week in which the world's financial markets hope to celebrate a return to EU fiscal order and structure. The ultimate 'treat' would be a coordinated workable long term agreement and a return to orderly and calm 'non-chaotic' markets. Any further misleading comments from the double speaking ghoulish central banking spirits would invoke a 'trick' in which financial markets would have trouble recovering from and would ensure a very 'poor crop' next year indeed!
In the next few days a comprehensive financial plan needs to be reached between the two key 'solvent' Euro players. The cash flush Germans want to write off more (than 50%) of Greek debt immediately but prefer not to lend anymore to anyone. Beleaguered German leader Angela Merkel is also having to deal with imploding domestic support and 'calorie challenged' barbs from various EU team members. The normally 'non-compliant' French who don't have the dough but prefer to open the 'stimulative' and inflationary monetary floodgates anyway possible. This weeks Moody's warning about a possible French downgrade caused French-German spreads to explode further complicating delicate financial matters. Italian 10 year yields also suddenly broke above 6% this week adding fuel to scary events perhaps to come. The heavily indebted Italians ($2T) have their work cut out for themselves to meet recently imposed financial conditions and limitations.
At some point the 'trick or treating' Greek government will need to organize a tax collecting 'trick' to finance whatever plan emerges in the new fiscal union. Early in the week it was rumored that the EFSB was 'only' going to receive a paltry 110 billion Euro to finance and liquefy the EU banking system - a tad short of the 2 to 3 trillion 'levered' Euro needed/desired to placate all member imbalances. In my last letter I stated that the EU banks needed at least a 137 billion Euro injection - far short of the immediate 370 billion Euro needed should Greece default on 60% of its debt through a 'managed restructuring.' One way or another the ECB will need to buy hundreds of billions of government bonds to 'refinance' this veritable house of cards. The ECB already has huge exposure of approximately 590 billion Euro to the PIIGS up from 444 billion Euro just a few months ago. Ominous stagflation comments from the Bank of England this week is a precursor to rising domestic financial stress in the UK. The UK has made significant progress in meeting term debt issuance targets for the year. The question is how long will they be able to handle the elevated funding costs before lending to the domestic economy becomes affected. In an interesting article from HSBC the Bank of England base rates were listed the in periods when Britons experienced 5% inflation. They are : 1984 (9.7%), 1988 (10%), 1991 (11.6%), and 2011 (0.5%).
China continues to slow with GDP growth falling to 9.1% from 9.5% (YOY) along with an eye popping 17.7% surge in retail sales - hardly a threat or problem to the more urgent and pressing EU banking concerns. I'm not sure that the Chinese are into dressing up and scaring people as a tradition which may be a good thing? The Chinese have been trying to responsibly cool domestic inflationary economic conditions for months and it appears to be working.
European central bankers are taking this weekends 'fresh proposals' back to their respective governments to conger up a 'treat' which will unlikely appease all participants but hopefully will satisfy capital markets. In order to be successful full and precise details of the inevitable Greek bond haircut, large(r) European bank recapitalisations, and an external plan to support the EFSF bailout mechanism must be clear and workable.
We may be facing the scariest European Halloween ever!
In the US, fresh off a 'dreadful' Q3 September performance, and in the face of the horrifying international macro 'web' of unsustainable debt, the seasonally weak month of October for the DJIA/S&P is set to record it's best performance for an October since 1982. Since Oct 1st the DJIA and S&P has tacked on a very impressive 15% despite rampant negativity and despair. On the week the DJIA rallied 150 points (+1.2%) and the S&P added 8 points (+.66%). The NASDAQ fell 50 points (-1.5%) as a result of a rare Apple earnings report disappointment (revenue and earnings +50% from the year-ago quarter). Of the 25% of total companies which reported earnings this week over 60% have surprised to the upside.
As I have consistently reported US internal economic conditions have been steadily improving throughout recent international trails and tribulations. Gallup's survey-based measure of US unemployment dropped sharply to 8.3% in mid-October from 9.2% at the end of August and 10% a year ago. This decrease suggests that the BLS could report an October jobless rate below 9%. Leading economic indicators and auto sales continue to be very robust. The Philadelphia Reserves Business Outlook Survey increased from -17.5 in September to +8.7 - the first positive reading in 3 months. The Philly Fed data came in 6 standard deviations above expectations -the biggest jump since October 1980 - along with the biggest jump in shipments ever! Housing starts smashed expectations with a 15% jump - albeit from very modest levels. Most areas of the country reported slight economic improvement in September and early October according to the Federal Reserves Beige Book survey of its 12 banking regions. US Q3 earnings are expected to easily surpass record highs levels with many analysts now adjusting future expectations to the upside.
On the downside Producer Prices reported a hot 0.8% from an expected 0.2%. Rumors circulate that the US credit rating may be dropped yet another notch. Debt and wage issues continue to draw intense scrutiny.
The relatively strong Consumer Discretionary Sector enters into a period of positive seasonality from late October to early January. A move above the current DJIA 200dma resistance at 11,900 measures to an upside rally of 600 points back to the recent high level of 12,600. An upside break for the S&P measures to 1,340 and 2,840 for the NASDAQ. A tremendous pile of 'inactive' low yield cash remains on the sidelines ($US4+ Trillion) which could easily add significant upside to capital markets should sovereign debt issues settle in a satisfactory manor. Most significantly to me the US markets are now trading above the Aug 5th levels when the S&P ratings agency downgraded the US 'AAA' credit rating.
In commodities, gold settled at $1,636/oz in sideways weekly trading primarily reacting to fluctuations in the volatile currency markets. Bullion is in the 11th year of a bull market reaching as high as $US1,923 on September 6/11. The metal has advanced 15% this year and needs to clear $US1,695/oz resistance to regain upside momentum A move below $US1,600 would imply a sharp move back to the $US1,490-1,520/oz support level. Silver also continues to consolidate in the low $US30/oz level significantly below it's 200 dma. A move above $US33/oz would imply a sharp rally back to the low $US40/oz level. Copper jumped the most in two years on speculation that European governments will end a deadlock on reining in their debt crisis. Lead and aluminum also rose sending a gauge of industrial metals up the most since 2009. Crude Oil continues to consolidate positively in the mid $US80/bl level based on potential increasing consumption data and supply concerns. A move above $US90/bl for crude oil implies a short term bounce back to the mid $US90/bl resistance levels.
In Canada, capital market performance was weaker with the S&P/TSX registering a 130 point loss (-1.2%) for the week. The S&P/TSX needs to rally another 6% before it reaches it's 200 dma and formidable resistance. The mauled and much maligned S&P/TSX Venture exchange is over 20% away from it's 200dma but appears to be in the early stages of formulating the potential for a significant rally. Canadian Core CPI (+3.2%) reached the highest level in 33 months as inflation slowly creeps into the economic landscape. Canadian September leading indicators fell for the first time (0.1%) in 12 months. Foreign investment in Canadian securities slowed to $7.9b in August - with most of the investment in the Canadian bond market. The Bank of Canada Business Survey showed less sales optimism falling to 39% from 49% in the last survey. Despite this mildly negative data the S&P/TSX index appears to be breaking out of major downtrend resistance with a short term target of 12,900 it's 200dma and 8% higher.
Bottom Line, in the face of end of a very 'scarey' October, equity markets appear to be now focused on improving economic conditions and what looks to be a sensational earnings season. Some kind of Euro debt resolution appears to be fully baked in the souffle. The DJIA and S&P now appears set to climb a formidable wall of worry and concern as an 'ocean of liquidity' is put to work. Funds which are under exposed to equities may now have to scramble to assemble and beef up portfolio positions as 2011 draws to a conclusion. It appears that much of the analyst community have underestimated the positive effect which the current low and compressed interest rates structure has provided. A rotation from bond to equity sector would be a 'treat' which long term investors deserve!
'I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around (the banks) will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.'
Thomas Jefferson (1743-1826)
The Celts believed that Halloween was the night the souls of the dead roamed the streets and villages. Since not all spirits were thought to be friendly, gifts and treats were left out to pacify the evil ones and ensure next year's crop would be plentiful. Trick or treating traces its origins back to the highly organized Celtic, Roman, and Germanic European traditions in which a celebratory night in which normal order and structure were abolished and chaos would reign. The original EU horror show!
This is also the week in which the world's financial markets hope to celebrate a return to EU fiscal order and structure. The ultimate 'treat' would be a coordinated workable long term agreement and a return to orderly and calm 'non-chaotic' markets. Any further misleading comments from the double speaking ghoulish central banking spirits would invoke a 'trick' in which financial markets would have trouble recovering from and would ensure a very 'poor crop' next year indeed!
In the next few days a comprehensive financial plan needs to be reached between the two key 'solvent' Euro players. The cash flush Germans want to write off more (than 50%) of Greek debt immediately but prefer not to lend anymore to anyone. Beleaguered German leader Angela Merkel is also having to deal with imploding domestic support and 'calorie challenged' barbs from various EU team members. The normally 'non-compliant' French who don't have the dough but prefer to open the 'stimulative' and inflationary monetary floodgates anyway possible. This weeks Moody's warning about a possible French downgrade caused French-German spreads to explode further complicating delicate financial matters. Italian 10 year yields also suddenly broke above 6% this week adding fuel to scary events perhaps to come. The heavily indebted Italians ($2T) have their work cut out for themselves to meet recently imposed financial conditions and limitations.
At some point the 'trick or treating' Greek government will need to organize a tax collecting 'trick' to finance whatever plan emerges in the new fiscal union. Early in the week it was rumored that the EFSB was 'only' going to receive a paltry 110 billion Euro to finance and liquefy the EU banking system - a tad short of the 2 to 3 trillion 'levered' Euro needed/desired to placate all member imbalances. In my last letter I stated that the EU banks needed at least a 137 billion Euro injection - far short of the immediate 370 billion Euro needed should Greece default on 60% of its debt through a 'managed restructuring.' One way or another the ECB will need to buy hundreds of billions of government bonds to 'refinance' this veritable house of cards. The ECB already has huge exposure of approximately 590 billion Euro to the PIIGS up from 444 billion Euro just a few months ago. Ominous stagflation comments from the Bank of England this week is a precursor to rising domestic financial stress in the UK. The UK has made significant progress in meeting term debt issuance targets for the year. The question is how long will they be able to handle the elevated funding costs before lending to the domestic economy becomes affected. In an interesting article from HSBC the Bank of England base rates were listed the in periods when Britons experienced 5% inflation. They are : 1984 (9.7%), 1988 (10%), 1991 (11.6%), and 2011 (0.5%).
China continues to slow with GDP growth falling to 9.1% from 9.5% (YOY) along with an eye popping 17.7% surge in retail sales - hardly a threat or problem to the more urgent and pressing EU banking concerns. I'm not sure that the Chinese are into dressing up and scaring people as a tradition which may be a good thing? The Chinese have been trying to responsibly cool domestic inflationary economic conditions for months and it appears to be working.
European central bankers are taking this weekends 'fresh proposals' back to their respective governments to conger up a 'treat' which will unlikely appease all participants but hopefully will satisfy capital markets. In order to be successful full and precise details of the inevitable Greek bond haircut, large(r) European bank recapitalisations, and an external plan to support the EFSF bailout mechanism must be clear and workable.
We may be facing the scariest European Halloween ever!
In the US, fresh off a 'dreadful' Q3 September performance, and in the face of the horrifying international macro 'web' of unsustainable debt, the seasonally weak month of October for the DJIA/S&P is set to record it's best performance for an October since 1982. Since Oct 1st the DJIA and S&P has tacked on a very impressive 15% despite rampant negativity and despair. On the week the DJIA rallied 150 points (+1.2%) and the S&P added 8 points (+.66%). The NASDAQ fell 50 points (-1.5%) as a result of a rare Apple earnings report disappointment (revenue and earnings +50% from the year-ago quarter). Of the 25% of total companies which reported earnings this week over 60% have surprised to the upside.
As I have consistently reported US internal economic conditions have been steadily improving throughout recent international trails and tribulations. Gallup's survey-based measure of US unemployment dropped sharply to 8.3% in mid-October from 9.2% at the end of August and 10% a year ago. This decrease suggests that the BLS could report an October jobless rate below 9%. Leading economic indicators and auto sales continue to be very robust. The Philadelphia Reserves Business Outlook Survey increased from -17.5 in September to +8.7 - the first positive reading in 3 months. The Philly Fed data came in 6 standard deviations above expectations -the biggest jump since October 1980 - along with the biggest jump in shipments ever! Housing starts smashed expectations with a 15% jump - albeit from very modest levels. Most areas of the country reported slight economic improvement in September and early October according to the Federal Reserves Beige Book survey of its 12 banking regions. US Q3 earnings are expected to easily surpass record highs levels with many analysts now adjusting future expectations to the upside.
On the downside Producer Prices reported a hot 0.8% from an expected 0.2%. Rumors circulate that the US credit rating may be dropped yet another notch. Debt and wage issues continue to draw intense scrutiny.
The relatively strong Consumer Discretionary Sector enters into a period of positive seasonality from late October to early January. A move above the current DJIA 200dma resistance at 11,900 measures to an upside rally of 600 points back to the recent high level of 12,600. An upside break for the S&P measures to 1,340 and 2,840 for the NASDAQ. A tremendous pile of 'inactive' low yield cash remains on the sidelines ($US4+ Trillion) which could easily add significant upside to capital markets should sovereign debt issues settle in a satisfactory manor. Most significantly to me the US markets are now trading above the Aug 5th levels when the S&P ratings agency downgraded the US 'AAA' credit rating.
In commodities, gold settled at $1,636/oz in sideways weekly trading primarily reacting to fluctuations in the volatile currency markets. Bullion is in the 11th year of a bull market reaching as high as $US1,923 on September 6/11. The metal has advanced 15% this year and needs to clear $US1,695/oz resistance to regain upside momentum A move below $US1,600 would imply a sharp move back to the $US1,490-1,520/oz support level. Silver also continues to consolidate in the low $US30/oz level significantly below it's 200 dma. A move above $US33/oz would imply a sharp rally back to the low $US40/oz level. Copper jumped the most in two years on speculation that European governments will end a deadlock on reining in their debt crisis. Lead and aluminum also rose sending a gauge of industrial metals up the most since 2009. Crude Oil continues to consolidate positively in the mid $US80/bl level based on potential increasing consumption data and supply concerns. A move above $US90/bl for crude oil implies a short term bounce back to the mid $US90/bl resistance levels.
In Canada, capital market performance was weaker with the S&P/TSX registering a 130 point loss (-1.2%) for the week. The S&P/TSX needs to rally another 6% before it reaches it's 200 dma and formidable resistance. The mauled and much maligned S&P/TSX Venture exchange is over 20% away from it's 200dma but appears to be in the early stages of formulating the potential for a significant rally. Canadian Core CPI (+3.2%) reached the highest level in 33 months as inflation slowly creeps into the economic landscape. Canadian September leading indicators fell for the first time (0.1%) in 12 months. Foreign investment in Canadian securities slowed to $7.9b in August - with most of the investment in the Canadian bond market. The Bank of Canada Business Survey showed less sales optimism falling to 39% from 49% in the last survey. Despite this mildly negative data the S&P/TSX index appears to be breaking out of major downtrend resistance with a short term target of 12,900 it's 200dma and 8% higher.
Bottom Line, in the face of end of a very 'scarey' October, equity markets appear to be now focused on improving economic conditions and what looks to be a sensational earnings season. Some kind of Euro debt resolution appears to be fully baked in the souffle. The DJIA and S&P now appears set to climb a formidable wall of worry and concern as an 'ocean of liquidity' is put to work. Funds which are under exposed to equities may now have to scramble to assemble and beef up portfolio positions as 2011 draws to a conclusion. It appears that much of the analyst community have underestimated the positive effect which the current low and compressed interest rates structure has provided. A rotation from bond to equity sector would be a 'treat' which long term investors deserve!
'I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around (the banks) will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.'
Thomas Jefferson (1743-1826)
Monday, October 17, 2011
Week Ending 10/14/11 - 99% Protestations
From a disorganized beginning over a month ago the 'Occupy Wall Street' movement has grown into an international phenomena of the 99% of tax payers that have been demoralized, disenfranchised, and 'un-stimulated!' I cannot speak to the 47% of Americans who pay no tax and will not likely do so.
Initially the talking heads of the financial media mocked and downplayed the message and resolve of these random protesters. Now it has been discovered that a substantial percentage of this frustrated group is very intelligent, articulate, and determined. Their message is crystal clear. Their hatred/disgust is palpable!
Over two decades of flat earnings, declining purchasing power, and job loss appears to have come to an unruly head. A tremendous amount of angst has been directed at the 'over levered/reckless' financial institutions who were made 'whole' by their good friends in powerful political positions. This 'largess' has simply been added to the 'public balance' sheet effectively doubling the national debt. The protesting tax payers have had more than enough of that bad act. It is a long overdue wake up call to the financial parasites throughout the world who have endangered and threatened the entire global economic system.
It is my hope that these protests mature into a focus towards the policy makers and our fearless/delusional elected leadership who are front and center as originators and enablers of much/most of this turmoil. For 30 years the economy has had to endure endless/mindless government spending/deficits, failed policy/regulation, self interest/vote buying, and various levels of incompetence/corruption. We are left with a bloated unproductive bureaucracy and trillions of dollars in debt. The more that is 'spent/borrowed' the worse conditions get. Government interference and meddling is the problem. Leadership who agitate and create a 'class warfare' atmosphere pitting employees against business desperately need to be replaced. Governments who do not guarantee to live within their means should never be elected - ever! US Federal spending is running at an unsustainable 25% of GDP. 2011 has the potential to record a setting deficit in excess of the $US1.4T in fiscal '09. It is becoming apparent that money supply 'genie' is out of the bottle and out of control. It is time for 'real' leadership to 'occupy' the Whitehouse. With any luck the 'social experiment' has/will come to an end before any more irreversible damage is inflicted on a vulnerable and fragile economic system.
All will be worth it if we move toward to coherent and realistic restructuring and restriction of the rules and responsibilities of the political process. The message needs to be sent that no one is 'too big too fail' and you cannot do 'whatever it takes' in order to rescue or support 'selected' interests. Currently the Euro political types are calling for a 'big bazooka' or 'quantum leap' approach in policy (read: more debt) to solve the problems which too much debt created. That mindless 'solution' will guarantee tragic results!
This is not a failure of capitalism/free markets but rather an obvious failure of the political machinery on ALL levels. The beginning of the end was in 1992 when the government insanely required Fannie Mae and Freddie Mac to direct a substantial portion of their mortgage financing to 'sub prime' borrowing. By 2007 the mind boggling 55% of 'junk' lending quota was reached and the rest is a sad history. A true free market/capitalistic system works best when it is allowed to cleanse excesses (read: moral hazard) to ensure that critical fear/greed (read: risk reward) balances exist. That means - no more stimulus, government job creation, or deficit financing solutions. After all the wasted 'blank check' trillions solution Obama has now altered his political message/sound byte from jobs 'saved or created' to now jobs 'supported!' Job 'saved or created' has come with a cost of $US250k/per vs the job 'supported' at an $80k/per price tag. I guess they figure that is a major cost saving measure? It is prime time to harness the power and influence which many dysfunctional politicians wield. It is time to respect those who foot the bill and who directly contribute to the health of the economic system. It would be an ironic tragedy if these very real protests ultimately increase the power, influence, and the importance of political and policy mandates/madness.
In the meantime, Fitch is not waiting for 'structural change' and is down grading any 'too big to fail' financial institution which has 'indulged' in Ponzi balance sheet master minding - and with 'negative outlooks.' S&P downgrades Spain by a notch to AA- also with a negative outlook. High unemployment levels, tighter financial conditions, and persistent levels of public and private sector debt were cited has major headwinds. UK jobless has reached 15 year unemployment highs to 2.57 million or 8%. Credit Suisse sees 66 European banks failing the latest stress tests. It is expected that Euro banks will need as much as $137b to make them 'whole' and solvent. The Chinese trade juggernaut lost some momentum as it's surplus shrivelled for the second straight month - it's slowest pace in 7 months. The G20 finance ministers and central bankers will spend the weekend in Paris in the 'hope' of pulling this debt & credit nose dive out of it's dangerous spiral. Expect an historic can kicking 'wall papering' job and conditions to worsen before they improve.
In the US, consumer confidence continues to deteriorate despite encouraging retail sales and record exports levels. Retail sales are 5% higher than 2008 levels which is impressive considering that 7 million less people are working. 5% fewer people are working yet spending has increased 5%. Recent auto sales doubled expectations. Exports have also registered record recovery growth nearing almost $US200b/month.
Earnings season is now in full swing with companies beating at a 70% rate in early reports. All eyes will be fixed on the expected 'miserable' earnings of the badly beaten down banking sector. I suspect much of the stock price downside has been factored into expectations. The critical ailing housing market shows signs of recovery with increased sales and declining inventories.
On the week the DJIA was up 4+%, S&P 5+%, and Nasdaq improved almost +7%. The major markets have quickly reversed the July to September free fall to a slightly positively year to year increase. Technology and energy stocks led the gain supported by positive corporate news. S&P short interest as a percentage of float has recently jumped to an over sold 4.4% reading. A significant proportion of this week's rally was probably the result of nervous short covering. Significant resistance levels for the DJIA is at the 11,800-11,900 area, S&P 1,250, and Nasdaq 2,660.
In commodities, despite bearish USDA World Agricultural Supply and Demand estimates the Agra Grain complex posted an impressive 5-15% rally from very over sold, well supported levels. It was the 4th consecutive monthly upward projection by WASDE for global stocks-to-use data. Prices remain very attractive at current levels. A retest of current low levels would be attractive entry points. The crude oil price has rallied to intermediate resistance at $US88/bl despite revised IEA data calling for less 2011 and 2012 demand. A close above $US90/bl would break crude above a 6 month downtrend and imply a retest of the $US94/bl (200dma) level. Gold is consolidating at the $US1,675-90/oz level and a probable retest of $1,620/oz critical support. Silver which is currently above $US32/oz appears vulnerable to a retest of the $US28-30/oz level. Copper is well supported in the $US3/lb level.
In Canada, a persistently strong housing market is supporting fairly strong economic data. Employment conditions continue to improve despite a slightly widening August trade deficit. Canada factory sales are at the highest level in 3 years.
Sinopec China agrees to buy 100% of the assets of Daylight Energy for $US2.1b for oil and shale gas reserves. It is a significant move for a Chinese entity to buy more than a minority interest for a Canadian corporation.
In an interesting report based on current valuations Canadian Banks are reported to be among the most levered at an average of 22:1 (worse than US and China, better than Europe) with the lowest cash-to-deposit ratios of 3% (better than Europe) in the world.
A 'system outage' misstep by tech whipping boy RIM generated a tremendous negative outpouring and a major public relations fiasco. Within a few days the system was restored, the CEO apologized, and an 'inconveniance settlement' was promised. RIM appears to be on a very short leash and desperately needs a few technological break through to reassert their reputation and limit market share loss.
The S&P/TSX closed fractionally above 12,000 and at significant residences. A move above 12,200 would imply a rally to near 13,000 the 200dma. The TSX/Venture has rallied 15% to 1,550 resistance. Continued commodity strength would imply another 15% rally from current levels. Tax loss selling pressure should limit any strength until the beginning of 2012 for junior resource stocks.
Bottom Line, the G20 has told the Euro Zone that they have a week to get their house in order which may be beyond wishful 'Leaf's winning the Stanley Cup' thinking. The extent of the private sector 'haircut' on Greek debt holdings are to be determined along with a 'credible' plan to recapitalize of Europe Banks and the installation of a 'firewall' protecting other countries from Greece's woes. I suspect that the G20 will be substantially disappointed on October 23rd. The US is expected to record at least the second largest budget worst deficit on record. The gap between spending and income will remain above $US1T for the third straight year. Just as concerning the US Senate has passed a bill that would punish countries which manipulate their currencies (unlike themselves) like China. Within moments China fired off a warning retaliatory short by weakening the Yuan. These fearless elected officials need to be reminded not to pick fights that they cannot win! Fortunately economic data has remained resilient to positive. However, until government spending and influence is dramatically reigned in and controlled any economic upside will be limited at best. At some point people (protesters included) will come to the realization that the more a government spends the worse conditions get. Any subsequent moves that are made to support the Keynesian spending madness will take conditions from worse to fatal. I have no faith that the policy makers will come to that conclusion anytime soon!
In the meantime seat belts and crash helmets are in order should the politicians continue to step on the gas while ignoring the speed & spending limits!
'Everyone wants to live at the expense of the state. They forget that the state lives at the expense of them!'
Frederic Bastiat
Initially the talking heads of the financial media mocked and downplayed the message and resolve of these random protesters. Now it has been discovered that a substantial percentage of this frustrated group is very intelligent, articulate, and determined. Their message is crystal clear. Their hatred/disgust is palpable!
Over two decades of flat earnings, declining purchasing power, and job loss appears to have come to an unruly head. A tremendous amount of angst has been directed at the 'over levered/reckless' financial institutions who were made 'whole' by their good friends in powerful political positions. This 'largess' has simply been added to the 'public balance' sheet effectively doubling the national debt. The protesting tax payers have had more than enough of that bad act. It is a long overdue wake up call to the financial parasites throughout the world who have endangered and threatened the entire global economic system.
It is my hope that these protests mature into a focus towards the policy makers and our fearless/delusional elected leadership who are front and center as originators and enablers of much/most of this turmoil. For 30 years the economy has had to endure endless/mindless government spending/deficits, failed policy/regulation, self interest/vote buying, and various levels of incompetence/corruption. We are left with a bloated unproductive bureaucracy and trillions of dollars in debt. The more that is 'spent/borrowed' the worse conditions get. Government interference and meddling is the problem. Leadership who agitate and create a 'class warfare' atmosphere pitting employees against business desperately need to be replaced. Governments who do not guarantee to live within their means should never be elected - ever! US Federal spending is running at an unsustainable 25% of GDP. 2011 has the potential to record a setting deficit in excess of the $US1.4T in fiscal '09. It is becoming apparent that money supply 'genie' is out of the bottle and out of control. It is time for 'real' leadership to 'occupy' the Whitehouse. With any luck the 'social experiment' has/will come to an end before any more irreversible damage is inflicted on a vulnerable and fragile economic system.
All will be worth it if we move toward to coherent and realistic restructuring and restriction of the rules and responsibilities of the political process. The message needs to be sent that no one is 'too big too fail' and you cannot do 'whatever it takes' in order to rescue or support 'selected' interests. Currently the Euro political types are calling for a 'big bazooka' or 'quantum leap' approach in policy (read: more debt) to solve the problems which too much debt created. That mindless 'solution' will guarantee tragic results!
This is not a failure of capitalism/free markets but rather an obvious failure of the political machinery on ALL levels. The beginning of the end was in 1992 when the government insanely required Fannie Mae and Freddie Mac to direct a substantial portion of their mortgage financing to 'sub prime' borrowing. By 2007 the mind boggling 55% of 'junk' lending quota was reached and the rest is a sad history. A true free market/capitalistic system works best when it is allowed to cleanse excesses (read: moral hazard) to ensure that critical fear/greed (read: risk reward) balances exist. That means - no more stimulus, government job creation, or deficit financing solutions. After all the wasted 'blank check' trillions solution Obama has now altered his political message/sound byte from jobs 'saved or created' to now jobs 'supported!' Job 'saved or created' has come with a cost of $US250k/per vs the job 'supported' at an $80k/per price tag. I guess they figure that is a major cost saving measure? It is prime time to harness the power and influence which many dysfunctional politicians wield. It is time to respect those who foot the bill and who directly contribute to the health of the economic system. It would be an ironic tragedy if these very real protests ultimately increase the power, influence, and the importance of political and policy mandates/madness.
In the meantime, Fitch is not waiting for 'structural change' and is down grading any 'too big to fail' financial institution which has 'indulged' in Ponzi balance sheet master minding - and with 'negative outlooks.' S&P downgrades Spain by a notch to AA- also with a negative outlook. High unemployment levels, tighter financial conditions, and persistent levels of public and private sector debt were cited has major headwinds. UK jobless has reached 15 year unemployment highs to 2.57 million or 8%. Credit Suisse sees 66 European banks failing the latest stress tests. It is expected that Euro banks will need as much as $137b to make them 'whole' and solvent. The Chinese trade juggernaut lost some momentum as it's surplus shrivelled for the second straight month - it's slowest pace in 7 months. The G20 finance ministers and central bankers will spend the weekend in Paris in the 'hope' of pulling this debt & credit nose dive out of it's dangerous spiral. Expect an historic can kicking 'wall papering' job and conditions to worsen before they improve.
In the US, consumer confidence continues to deteriorate despite encouraging retail sales and record exports levels. Retail sales are 5% higher than 2008 levels which is impressive considering that 7 million less people are working. 5% fewer people are working yet spending has increased 5%. Recent auto sales doubled expectations. Exports have also registered record recovery growth nearing almost $US200b/month.
Earnings season is now in full swing with companies beating at a 70% rate in early reports. All eyes will be fixed on the expected 'miserable' earnings of the badly beaten down banking sector. I suspect much of the stock price downside has been factored into expectations. The critical ailing housing market shows signs of recovery with increased sales and declining inventories.
On the week the DJIA was up 4+%, S&P 5+%, and Nasdaq improved almost +7%. The major markets have quickly reversed the July to September free fall to a slightly positively year to year increase. Technology and energy stocks led the gain supported by positive corporate news. S&P short interest as a percentage of float has recently jumped to an over sold 4.4% reading. A significant proportion of this week's rally was probably the result of nervous short covering. Significant resistance levels for the DJIA is at the 11,800-11,900 area, S&P 1,250, and Nasdaq 2,660.
In commodities, despite bearish USDA World Agricultural Supply and Demand estimates the Agra Grain complex posted an impressive 5-15% rally from very over sold, well supported levels. It was the 4th consecutive monthly upward projection by WASDE for global stocks-to-use data. Prices remain very attractive at current levels. A retest of current low levels would be attractive entry points. The crude oil price has rallied to intermediate resistance at $US88/bl despite revised IEA data calling for less 2011 and 2012 demand. A close above $US90/bl would break crude above a 6 month downtrend and imply a retest of the $US94/bl (200dma) level. Gold is consolidating at the $US1,675-90/oz level and a probable retest of $1,620/oz critical support. Silver which is currently above $US32/oz appears vulnerable to a retest of the $US28-30/oz level. Copper is well supported in the $US3/lb level.
In Canada, a persistently strong housing market is supporting fairly strong economic data. Employment conditions continue to improve despite a slightly widening August trade deficit. Canada factory sales are at the highest level in 3 years.
Sinopec China agrees to buy 100% of the assets of Daylight Energy for $US2.1b for oil and shale gas reserves. It is a significant move for a Chinese entity to buy more than a minority interest for a Canadian corporation.
In an interesting report based on current valuations Canadian Banks are reported to be among the most levered at an average of 22:1 (worse than US and China, better than Europe) with the lowest cash-to-deposit ratios of 3% (better than Europe) in the world.
A 'system outage' misstep by tech whipping boy RIM generated a tremendous negative outpouring and a major public relations fiasco. Within a few days the system was restored, the CEO apologized, and an 'inconveniance settlement' was promised. RIM appears to be on a very short leash and desperately needs a few technological break through to reassert their reputation and limit market share loss.
The S&P/TSX closed fractionally above 12,000 and at significant residences. A move above 12,200 would imply a rally to near 13,000 the 200dma. The TSX/Venture has rallied 15% to 1,550 resistance. Continued commodity strength would imply another 15% rally from current levels. Tax loss selling pressure should limit any strength until the beginning of 2012 for junior resource stocks.
Bottom Line, the G20 has told the Euro Zone that they have a week to get their house in order which may be beyond wishful 'Leaf's winning the Stanley Cup' thinking. The extent of the private sector 'haircut' on Greek debt holdings are to be determined along with a 'credible' plan to recapitalize of Europe Banks and the installation of a 'firewall' protecting other countries from Greece's woes. I suspect that the G20 will be substantially disappointed on October 23rd. The US is expected to record at least the second largest budget worst deficit on record. The gap between spending and income will remain above $US1T for the third straight year. Just as concerning the US Senate has passed a bill that would punish countries which manipulate their currencies (unlike themselves) like China. Within moments China fired off a warning retaliatory short by weakening the Yuan. These fearless elected officials need to be reminded not to pick fights that they cannot win! Fortunately economic data has remained resilient to positive. However, until government spending and influence is dramatically reigned in and controlled any economic upside will be limited at best. At some point people (protesters included) will come to the realization that the more a government spends the worse conditions get. Any subsequent moves that are made to support the Keynesian spending madness will take conditions from worse to fatal. I have no faith that the policy makers will come to that conclusion anytime soon!
In the meantime seat belts and crash helmets are in order should the politicians continue to step on the gas while ignoring the speed & spending limits!
'Everyone wants to live at the expense of the state. They forget that the state lives at the expense of them!'
Frederic Bastiat
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