I was wondering what it was going to take to derail over bought world markets as they headed relentlessly in tandem towards new record high territory? And who would have thought it was possible to add yet another mind numbing geo-political head wind variable to the slew of potential land mines that already existed? Surely the gut wrenching Japanese tragedy trilogy has to be the high water mark - no pun intended! There has been a couple 'after-shocks' already that were bigger than Haiti! The Middle East conflict has temporarily taken a back seat but continues to roil. A number of pre-earthquake back-to-back outside volatility days was the precursor of a major move. Talk about March Madness!
The DJIA sat at a shade over 12,000 and a snick under a 'rolling over' 5-20 dma before the wrath of Mother Nature unleashed her fury on a vulnerable and relatively unprepared Japanese sea coast. As if a 9.0 earthquake was not nearly enough - minutes later a 10-20 meter Tsunami traveling at approximately the speed of an airliner traveled up to 6.5 kms inland and effectively wiped the slate clean. Kobe was a walk in the park compared to this monster.
Without a functioning electrical grid the multi-reactor nuclear facility was instantly brought to it's knees. And of course just to compound the fracture freezing temperatures and snow soon followed. Currently the world is holding it's collective breath hoping that it's not a sign of an early nuclear winter!
That is an impossible act to follow. Japan which accounts for almost 6% of the world economy has to be in a collective state of shock. The very impressive strength, character, and resolve that the Japanese people have shown is equally as astonishing.
However, that did not prevent the Nikkei from quickly peeling off 17% before finding support. The BOJ in the interim quickly added $350b to it's monetary system which is only about 20% of the US annual fiscal deficit. Commodity markets contracted 5-7% quickly and the price of oil submerged under triple digits for the first time in months.
Most key markets have also given up impressive gains for the year and currently hover around the Dec 31/10 level. Current major indexes are down only 3-8% from recent pre-earthquake highs. Sadly Japan and the Nikkei was building decent gains since Jan 1st and on the verge of breaking out through the key 11,400 level before life completely changed. Currently the Nikkei 225 stands at the critical 9,000 level and must hold - as must their reactors hold! My heart goes out to all those fine folks!
I wish I was sharp enough to know what all this means to the big picture of world wide growth, expansion, and emerging market momentum.
What I do know is that the Yen is at multi-decade highs against the US$ because of obvious short term repatriation requirements. The dollar is less than one yen away from the historic trough of 79.75 yen reached in 1995. An improving Japanese export sector is delivered yet another body blow.
Japan the world's current #3 economy will now be a substantial net borrower to fund the massive rebuilding process - and put yet another upward pressure on interest rates. Japan holds about 10% of the total amount of US Treasuries (currently equal to China) and is a major purchasing factor for weekly Fed issues. More than likely the BOJ will be sellers of treasuries and not critical buyers in the foreseeable future. Japan is also still a major banking factor for the world wide speculative 'carry trade' financing market.
The afflicted north east coast region makes up about 8-12% of the total Japanese GDP. From the stunning pictures nothing is 'temporary' about what happened and more than likely the cleanup and restoration will take decades - assuming we are not looking at worst case meltdown scenario. Currently heroic exposed workers are feverishly trying to prevent that reality. Tremendous hard ship does indeed bring the very best out in people.
Domestically negative gloomy numbers are being reported for US housing starts (down 23% in Feb - just above the Apr 2009 low) combined with very positive all-time high housing affordability statistics. Falling housing prices (40% nationwide) combined the medium income of $62k allows a family to have almost twice the income needed to qualify for a 30yr fixed rate mortgage to purchase a median priced single family dwelling of $160k assuming 20% down. Never has housing been this inexpensive. Sounds like housing bottoming stats to me in spite of the relatively high inventory numbers.
Very positive corporate earnings continue to roll out in almost all sectors. Help wanted signs for welders, carpenters, plumbers, and the like are starting to sprout up like the first bloom of spring. The most recent Philly Fed Survey reading is the highest since Jan 1984. In the week ending March 12 unemployment claims are down 4% from the previous week and the start of what will be a long term trend. The DJIA cracked the important 12,000 support/resistance level down 5% from recent high territory. Intermediate support comes in around 11,400 (200 dma) and longer term strength in the 10,750 to 11,000 level.
In Canada the spring election drums are beginning to beat. I'm calling for a small PC majority and carte blanche for major positive structural monetary and fiscal change. We definately deserve a major tax holiday in Canada. Sensational earnings continue to be released in most sectors. Yoga wear favorite Lululemon Athletica shattered upside expectations registering an almost 100% increase quarter over quarter from .40 to .72 cents - a very encouraging sign for curvy figures come the summer beach season. RIM is on the verge of unveiling what hopefully will be a geek's dream come true with Playbook and a frontal assault on Apple's/Google's market share. The TSX-LSE merger saga continues to be played out by those who have the most self interest. Japanese Armageddon has temporarily cooled down the blizzard of resource deal making and financings. Housing re-sales dropped fractionally but prices rose once again higher into nose bleed territory.
Key commodity markets are reluctantly giving up gains and are registering only fractional losses from recent high territory. Gold and metals stocks make up less than 1% of the NYSE and a clear indication that the sector has a long way to go on the upside. Silver has dropped $2 from the $36 level and would find significant support at the $30 level. Key rebuilding components copper, lead, lumber, and zinc look to quickly register new highs before long. The US Bond market has been a beneficiary of the recent Japanese tragedy being the destination for panic funds - a safe harbor. Upcoming housing mortgage rollovers, end of QEII, debt ceiling negotiations, and the unwinding of Freddy and Fanny Mac all have the potential of reversing that trend quickly. Soft commodities quickly sold off up to 7% (wheat and sugar) without a rising US$ - and have stabilized and are consolidating for further spring time gains.
Bottom Line: Talk about geo-political statistical over load. In times like these one is best served by technical analysis and interpretation. Psychology has taken over markets to say the least. VIX numbers quickly spiked but at figures well below the recent soverign debt crisis and sub-prime fiasco numbers of a few years back. I am sticking to a neutral position for the DJIA sub 12,000 and TSX sub 14,000. Gold must hold $1,400 and has done such to this point. Oil is gyrating at the $100 bbl level and would be a low risk entry point in the high $80 - low $90 level.
The fundamentals and economics of rising world wide consumption levels will probable not change and will continue to put pressure on supply. Uranium generated electricity and energy is here to stay. This time next year world wide crude oil consumption will be another 3% higher into record territory again. Liquidity levels are exceedingly friendly and corporate balance sheets are in the best condition since I've been in the business - just a few short years ago!
Keep your powder dry looking for tradable entry points on the downside. I normally don't like 'averaging' a trading position but this may be a good time. A quick rebound & return through recent highs would indeed take my breath away. I am braced for anything.
Pray for the people of Japan!
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