The much awaited official 'action plan' proclamation from 'ol reliable Uncle 'Ben' Bernake has hard core inflationists champing at the bit and foaming at the mouth. Ben B is our modern day Messiah navigating producer prices to the promised land.
No sooner were the magic words spoken; 'economic conditions will warrant exceptionally low levels for the federal funds rate for an extended period' then the price of gold and silver rocketed into new all time high territory. In his post-meeting statement - inflationary flames were further stoked with FOMC comments of regularly reviewing 'the size and composition of its securities holdings in light of incoming information and is prepared to adjust those holdings as needed to best foster maximum employment and price stability.' You can 'pencil me in' as expecting the exact opposite result.
Lower reported GDP figures of 1.8% and 429k jobless claims coincidentally dovetailed with the Fed's ultra accommodating interest rate policy of 0-.25% - for at least the 'next couple of meetings.' (Read: Post election.) Conditions continue to improve on a 'subdued' basis according to those who know.
Evidently the inflation threat (2.8% annual rate) is more 'transitory' than ever and 'well anchored' too boot. Ben's message to the corporate world is to pass any 'higher' costs along to the public. Looks like $5/gal unleaded and a $5 Big Mac is his idea of a good time.
And all of this and more in the face of earlier comments made by the dynamic duo of Geithner/Bernake of a 'stronger dollar being in the best interests for our country.' Looks like that pair needs a good 'snoot full' of damaging and debilatating inflation pressure before they get agitated. This from the pair who didn't expect any house price fallout from the troubles in the sub prime mortgage market? Once that dreaded inflation 'genie' leaves its bottle it is harder than heck getting it back in where it belongs. I guess you have to attend one of those fancy Ivy League schools to figure it all out correctly?
The DJIA/S&P also bullishly broke into new recovery high territory on the 'good news' - and looks to seriously challenge the 2007-08 crash highs (8% higher). The broad based Wilshire 5000 is on the verge of new record highs. The MSCI world Stock Market Index is less than 10% from the 2008 record high of 1,575. My earlier thoughts of more of a 'transitional range bound trading market' may require a little 'post Fed' tweaking - but I like Ben - will await further 'evidence.' Earnings do continue to to accelerate with almost 60% of companies exceeding expectations. The 'Street' doesn't seem to be doing a very good job at making earnings forecasts lately. The large multi-national - globally exposed companies are providing a solid and substantial amount of the momentum and leadership to date.
The broad commodity markets appear to be firmly entrenched with the expectation of increasing demand and higher prices. Gold and especially Silver appear to be a tad overextended in the short term but as we all know - nothing is more bullish than new record all time high levels. Most significant Gold and Silver stocks have negatively diverged from under lying commodity prices. These stocks appear to have 'attractively' discounted a 15-20% lower commodity price level. Base metals have been consolidating profitable prices for a few months and will be primarily influenced by 'real' world wide demand growth and 'real' inflation adjusted interest rates. Crude Oil refiners may be challenged to 'pass on' those higher gasoline prices in the longer term. OPEC has been anxiously trying to allay pricing fears and concerns - assuring all that the world is, and will be well supplied in the foreseeable future. My bottom picking favorite Natural Gas is on the threshold of breaking the important US$4.75 level in spite of being in 'over supplied' and 'under demanded' circumstances. My thoughts would be for a short Crude Oil and long Natural Gas spread to take advantage of the historic 25x ratio.
The TSX has underperformed in the short term in spite of all the rising resource price excitement. A US$1.05+ Cdn dollar will represent a significant drag on corporate profit and growth activity. Quarterly earnings continue to out perform expectations as the combination of increasing world wide demand and a very low interest rate structure provide a very positive profit environment. The TSX has been range bound since February in 500 point accumulation OR distribution pattern and is up less than 3% on the year. I continue to worry about the heavily weighted & fully priced financial sector particularly during these 'complicated' monetary conditions. Bank earnings are imminent and growth must be solid. Cash cow Barrick ruffled a few analysts feathers with an aggressive record C$7.3b move for Equinox and deeper into the base metal (copper) sector. It was interesting to see China's Minmetals retreat quietly without any resistance. I guess the Chinese don't get everything they want after all?
The normally sleepy Federal election has generated fresh interest and excitement with the rebirth of the socialist NDP party led by J Layton. They have strategically made many 'expensive' vote generating promises to younger and retired voters who may turn out and 'complicate' the political landscape to say the least. Every tree hugging global warming type has been uplifted and re energized by recent polling stats.
Bottom Line: The continuing highly accommodating Fed policy message has been sent loud and clear. At some point the effect of current outstanding corporate earnings will translate into expansion and meaningful broad based job hirings. Should the Fed not continue to pay interest on massive 'stimuative' banking reserves it would be reasonable to expect much needed increasingly aggressive lending and investment practices.
I continue to believe most major markets are fairly priced considering the inherent current fiscal and monetary challenges and risks. I'd be surprised to see a significant market move in either direction until the effects of a non QE I & II environment are fully realized.
Until then - perhaps a 'Waity Katey' stance is most prudent. It sure was most effective for the newly minted Princess! I had my money on Lay Gaga as Willy's new bride!
Thursday, April 28, 2011
Thursday, April 21, 2011
Week Ending April 22/2011 - Downgrade
Having one's credit card refused because of being 'maxed out' is never a fun situation. Having all of one's credit cards 'maxed out' at a romantic dinner is a downright 'date ending' event.
According to credit enablers Standard & Poor's - superpower US of A is on the verge of such an embarrassment. On Monday S&P 'finally' downgraded it's outlook for the US debt to 'negative' from 'stable' - meaning US Bonds have a 1-3 chance of also being downgraded. The top 5 holders of US debt are China, Japan, UK, OPEC, and Brazil. Almost .45 cents out of each tax dollar has to be currently borrowed to pay the annual tab. The complete lack of fiscal discipline in Washington appears to have caught up to our inspired visionaries. Discussions of the merits of a 'balanced budget' never passes the lips of our fearless leadership. A 73rd rise in the debt ceiling is all but a forgone conclusion. John Maynard Keynes would be a proud papa indeed!
Of the 18 financially elite countries that are rated 'AAA' - the US is the only sovereign which has the dubious distinction of a 'negative outlook.' The loss of the 'AAA' rating has long lasting and dire implications. Only Cramer of 'Mad Money' would know what the Sharpe Ratio generated 'risk free' (TBill) rate would be if that magic carpet gets pulled.
An immediate response (after a brief knee jerk rally) was a sharp sell off in the US Dollar DXY Index of 2% through important lows of last November and challenging all-time low territory. Remarkable weakness for a currency which is not facing an internal revolution, earthquake, or Royal Wedding! Looks like the US is hoping to be the first economy to 'reflate' it's way to prosperity. I wonder what the Vegas odds are for that?
All in all - a definite 'faith testing' situation for the fiat US greenback to say the least. Fed Chairman Uncle Ben Bernake has kept interest rates at less than zero on an inflation adjusted basis for almost 3 years - and is currently purchasing two thirds of treasury debt issuance. In the last 6 months the PPI has risen to an annual rate of 10%. During the inflation ravaged '70's and 80's inflation was only a meagre 4 % higher (at worst) - and long term bonds yielded a lusty 15+%. Not many companies 'weren't' on the verge of bankruptcy. Earnings were almost non existent. The Leaf's were awful. It was not a pretty scene!
The liquidity driven equity markets effectively ignored such 'trifle' potential monetary collapse banter and have sharply rallied to new recovery high territory. The DJIA and S&P continues it's relentless march fueled by a snappy earnings season and possibly short covering. The key levels of DJIA 12,000 and S&P 1,300 held true to form. To date 20% of companies have reported an overall 7% increase in earnings with about 40% beating street expectations. Multinational blue chips continue to report blowout gang buster earnings. US house prices have retreated a painful 50% from 1996 to 2009 high levels.
Mortgage applications are on the rise as people lock in low rates and very attractive low prices. Commercial and industrial bank lending are on the rise. The volatility sensitive VIX is at muted pre 2006-07 levels and 2 year swap spreads have actually returned to long term 'normal' levels. World Stock Market Capitalization has almost returned to the US$63 Trillion level in 2008-09. Overall a very healthy and productive environment.
The broad commodity market is being somewhat overshadowed by new explosive highs in Gold ($1,500) and Silver ($45) - both personally expected long term target levels. Gold has certainly established itself as the #1 currency in the world as investors attempt to hedge potential negative inflationary effects. Silver has returned to the Hunt brothers - market cornering - 1980 all time high territory. Looks like Nelson and William were right after all. A time when panic buying speculators were lined outside bullion banks and grandma's were melting down silver tea services. The silver-gold ratio has returned to a somewhat 'normal' 33 times. The real 'inflation adjusted' price of silver is closer to $100/oz since 1980.
Crude Oil challenges it's recent high of $114/bbl see sawing between reports of ample OPEC supplies and inventory contractions. Natural Gas appears to be mounting an assault at the very significant US$4.75/mcf as liquefied natural gas is becoming much more of a talking point. The oil-natural gas ratio has hit a stunning (and I believe unsustainable) 25 times and represents low risk - high return potential for natural gas investment. The entire commodity market has short term risk in the event of increasing margin requirements and is very 'over owned' by short term trading types.
UBS has jumped off the TSX band wagon along with Goldman Saks and has cashed in Canadian equity exposure. A short but sweet love affair. In spite of resource strength the TSX broke my key 14,000 level dropping to 13,600 on the downgrade news. It has subsequently rallied and current sits at 14,000 deciding which direction offers the least resistance. The heavily weighted and relatively expensive financial sector has recently corrected a normal 5% but could represent risk in an rising interest rate environment. Most producing senior gold, metal, and oil equities are very reasonably priced relative to resource prices. Look for increasing volatility and wild swings in the TSX-Venture issues over the summer.
We will soon discover if the Conservatives have mustered up enough support for a majority government within 2 weeks. I'll stick with my slight majority call - but a low voter turn out could easily swing results back to the hand holding coalition 'speed dating' days - although nothing like the upcoming romantic Prince William - Princess Katherine nuptials.
Bottom Line: In spite of relentless equity markets attempting to march higher and dire monetary conditions I will stay with my 'transitional' trading market thought. After all the intense geo-political machinations most equity markets have been contained within a 5% range for the year and more than likely will continue to do so. Much of the current positive earnings have been effectively discounted in stock prices
I expect a 10-15% trading range until serious QE II and debt ceiling issues are 'somewhat' resolved. Most markets are historically fairly priced but do not deserve substantial premiums based on underlying fiscal challenges. Any significant downside should be contained by new freshly minted US currency.
Happy Passover/Easter to all.
According to credit enablers Standard & Poor's - superpower US of A is on the verge of such an embarrassment. On Monday S&P 'finally' downgraded it's outlook for the US debt to 'negative' from 'stable' - meaning US Bonds have a 1-3 chance of also being downgraded. The top 5 holders of US debt are China, Japan, UK, OPEC, and Brazil. Almost .45 cents out of each tax dollar has to be currently borrowed to pay the annual tab. The complete lack of fiscal discipline in Washington appears to have caught up to our inspired visionaries. Discussions of the merits of a 'balanced budget' never passes the lips of our fearless leadership. A 73rd rise in the debt ceiling is all but a forgone conclusion. John Maynard Keynes would be a proud papa indeed!
Of the 18 financially elite countries that are rated 'AAA' - the US is the only sovereign which has the dubious distinction of a 'negative outlook.' The loss of the 'AAA' rating has long lasting and dire implications. Only Cramer of 'Mad Money' would know what the Sharpe Ratio generated 'risk free' (TBill) rate would be if that magic carpet gets pulled.
An immediate response (after a brief knee jerk rally) was a sharp sell off in the US Dollar DXY Index of 2% through important lows of last November and challenging all-time low territory. Remarkable weakness for a currency which is not facing an internal revolution, earthquake, or Royal Wedding! Looks like the US is hoping to be the first economy to 'reflate' it's way to prosperity. I wonder what the Vegas odds are for that?
All in all - a definite 'faith testing' situation for the fiat US greenback to say the least. Fed Chairman Uncle Ben Bernake has kept interest rates at less than zero on an inflation adjusted basis for almost 3 years - and is currently purchasing two thirds of treasury debt issuance. In the last 6 months the PPI has risen to an annual rate of 10%. During the inflation ravaged '70's and 80's inflation was only a meagre 4 % higher (at worst) - and long term bonds yielded a lusty 15+%. Not many companies 'weren't' on the verge of bankruptcy. Earnings were almost non existent. The Leaf's were awful. It was not a pretty scene!
The liquidity driven equity markets effectively ignored such 'trifle' potential monetary collapse banter and have sharply rallied to new recovery high territory. The DJIA and S&P continues it's relentless march fueled by a snappy earnings season and possibly short covering. The key levels of DJIA 12,000 and S&P 1,300 held true to form. To date 20% of companies have reported an overall 7% increase in earnings with about 40% beating street expectations. Multinational blue chips continue to report blowout gang buster earnings. US house prices have retreated a painful 50% from 1996 to 2009 high levels.
Mortgage applications are on the rise as people lock in low rates and very attractive low prices. Commercial and industrial bank lending are on the rise. The volatility sensitive VIX is at muted pre 2006-07 levels and 2 year swap spreads have actually returned to long term 'normal' levels. World Stock Market Capitalization has almost returned to the US$63 Trillion level in 2008-09. Overall a very healthy and productive environment.
The broad commodity market is being somewhat overshadowed by new explosive highs in Gold ($1,500) and Silver ($45) - both personally expected long term target levels. Gold has certainly established itself as the #1 currency in the world as investors attempt to hedge potential negative inflationary effects. Silver has returned to the Hunt brothers - market cornering - 1980 all time high territory. Looks like Nelson and William were right after all. A time when panic buying speculators were lined outside bullion banks and grandma's were melting down silver tea services. The silver-gold ratio has returned to a somewhat 'normal' 33 times. The real 'inflation adjusted' price of silver is closer to $100/oz since 1980.
Crude Oil challenges it's recent high of $114/bbl see sawing between reports of ample OPEC supplies and inventory contractions. Natural Gas appears to be mounting an assault at the very significant US$4.75/mcf as liquefied natural gas is becoming much more of a talking point. The oil-natural gas ratio has hit a stunning (and I believe unsustainable) 25 times and represents low risk - high return potential for natural gas investment. The entire commodity market has short term risk in the event of increasing margin requirements and is very 'over owned' by short term trading types.
UBS has jumped off the TSX band wagon along with Goldman Saks and has cashed in Canadian equity exposure. A short but sweet love affair. In spite of resource strength the TSX broke my key 14,000 level dropping to 13,600 on the downgrade news. It has subsequently rallied and current sits at 14,000 deciding which direction offers the least resistance. The heavily weighted and relatively expensive financial sector has recently corrected a normal 5% but could represent risk in an rising interest rate environment. Most producing senior gold, metal, and oil equities are very reasonably priced relative to resource prices. Look for increasing volatility and wild swings in the TSX-Venture issues over the summer.
We will soon discover if the Conservatives have mustered up enough support for a majority government within 2 weeks. I'll stick with my slight majority call - but a low voter turn out could easily swing results back to the hand holding coalition 'speed dating' days - although nothing like the upcoming romantic Prince William - Princess Katherine nuptials.
Bottom Line: In spite of relentless equity markets attempting to march higher and dire monetary conditions I will stay with my 'transitional' trading market thought. After all the intense geo-political machinations most equity markets have been contained within a 5% range for the year and more than likely will continue to do so. Much of the current positive earnings have been effectively discounted in stock prices
I expect a 10-15% trading range until serious QE II and debt ceiling issues are 'somewhat' resolved. Most markets are historically fairly priced but do not deserve substantial premiums based on underlying fiscal challenges. Any significant downside should be contained by new freshly minted US currency.
Happy Passover/Easter to all.
Thursday, April 14, 2011
Week Ending April 15/2011 - Transition
Capital markets appear to be adjusting astonishingly well to the weekly diet of various negative Black Swan scenarios so far this year.
This weeks cataclysm has featured our fearless political & federal authority types frenetically dealing with empty treasury coffers, expanding the 'alleged' US debt ceiling - which stands a shade over a cool US$14.2 Trillion, and effectively being in default.
World wide inflation concerns are now a part of the daily dialogue. And the end of the historic QE II is about to turn into a pumpkin at midnight (May 31st).
Obama has uncharacteristically 'transitioned' from the traditional 'Kenyan Keynesian' spending policy/model to a promise of US$4 Trillion in spending cuts some time this decade - or later.
Evidently the US Government is continuing to pay their bills at least until September - perhaps setting up the annual October blood letting. Raising the infamous US debt ceiling for the 73rd time since 1967 has yet to be 'debated' - but apparently there is no other reasonable alternative? This will be the 12th new 'line in the sand' ceiling since 2000.
World wide inflation is being taken very seriously by our Chinese friends who once again prudently jacked up their interest rates - while they raise their 'surplus' ceiling. The core Producer Price Index points to a serious 'indisputable' rising domestic inflationary threat which is currently being summarily dismissed as a 'transitional' episode. It be very interesting to see who purchases T Bills & Bonds in June once the QEII gets dry docked. Perhaps a few of the 'notable shorts' will be looking to cover?
I believe that current major equity markets are 'transitioning' from the single strategy yield and liquidity model to more of a range bound trading environment. Technical factors should supersede fundamentals until the clouds part and the sun shines. Short term momentum considerations will be the order of the day.
Further significant upside will be restrained by the numerous significant credit challenges that appear to have been 'kicked down the road!' The prospect of inevitable rising interest rates and high energy costs will also limit speculative buying enthusiasm.
Any significant downside will be muted by significant economic strength & recovery, deep liquidity pools, and very impressive corporate conditions. Euro-US swap spreads are now normalized reflecting low systemic risk. Bloated adjusted bank reserves indicate ample & excessive liquidity. Improving GDP performance will stimulate bargain hunting and continued takeover and merger activity.
Looking at a chart of the DJIA and S&P one would think that treasury budgets were in massive surplus rather than deficit. The two and half year major uptrend remain solidly intact along with up trending moving averages. Bell weather Alcoa reported excellent earnings to kick off the earnings season - but it appears much of the 'earnings upside' has been discounted in this record recovery across the board. Relative strength and MACD momentum divergence indicates potential intermediate term market weakness.
DJIA 12,000 and S&P 1,300 continue to be my stop loss trigger points. A correction back to DJIA 11,500 and S&P 1,200 represent solid support and accumulation entry levels. Currently both broad markets are fairly valued and appear to have been considerably 'normalized' during these turbulent geo-political times. US Dollar and Bond markets have discovered support at key levels in spite of considerable negative sediment.
Our good friends at Goldman Saks apparently have pulled the plug on their long Canada positions - or perhaps are looking to cover their shorts? The TSX has 'doubled topped' at a shade under 14,400 and recently broke my key 14,000 level as a result of the downgrade. I am concerned that key former leadership stocks (Rim, CP, Teck, Potash) continue to diverge significantly. The heavily weighted Financials also seem to be in distribution mode and could possibly represent a greater downside market threat.
Many resource issues have diverged significantly from the related commodity prices. It may be a reflection of the sector's challenge to digest the recent avalanche of corporate finance offerings. Current mid to large cap valuations range from moderate to compelling depending on the sector. The junior sector is flush with newly raised funds and frantic drilling schedules.
Visible sector rotation is muted to limited. The CD$ is consolidating the US$1+ level and will breakout out over US$1.05. The CD Dollar has underperformed most other major currencies relative to the US dollar this year. US$1.10+ effectively shuts down the Canadian manufacturing sector until further notice. It would be a bonanza for cross border US retailers according to my wife!
The possibility of a brand spankin' new National regulator rests in the capable hands of our Supreme Court - which means a political decision is pending. The upcoming TSX-LME merger verdict appears to be more clandestine in nature.
Gold and Silver have registered new 'fresh' all time highs and appear impervious to significant selling pressure in the short term. US$1,500+ gold and $45 silver appear to be in the bag. The threat of increasing margin 'squeeze' requirements and higher interest rates would certainly introduce wild and woolly volatility swings for the summer. Oil price volatility will also increase with the pending summer driving season. US$4+ per gallon unleaded may limit the length of the average trip. Agricultural markets are consolidating recent gains and appear to be solidly positioned for further upside. A major concern is that speculative commodity positions are now 4 times greater than the frenzied 2007/08 top - and we all know how that ended. It will be interesting to see where commodity markets find eventual long term sustainable supply and demand equilibrium levels.
Bottom Line: As the theme suggests I believe the equity markets are 'transitioning' from the singular 'buy and hold' model to a range bound momentum driven trading environment. Many key broad economic conditions are quickly improving but much of the positive 'upside' has already been built into many of the stocks and sectors. Most key markets are reasonably priced which I think is a major achievement considering the various soverign & geo/political circumstances world wide.
Assuming a fairly 'expected/anticipated' earnings season - the markets should spend the next quarter digesting the considerable challenges ahead in a clearly definable 10-15% trading range. For the non technical types - their time may be better spent analyzing the sudden and sharp swings at their favorite golf clubs!
This weeks cataclysm has featured our fearless political & federal authority types frenetically dealing with empty treasury coffers, expanding the 'alleged' US debt ceiling - which stands a shade over a cool US$14.2 Trillion, and effectively being in default.
World wide inflation concerns are now a part of the daily dialogue. And the end of the historic QE II is about to turn into a pumpkin at midnight (May 31st).
Obama has uncharacteristically 'transitioned' from the traditional 'Kenyan Keynesian' spending policy/model to a promise of US$4 Trillion in spending cuts some time this decade - or later.
Evidently the US Government is continuing to pay their bills at least until September - perhaps setting up the annual October blood letting. Raising the infamous US debt ceiling for the 73rd time since 1967 has yet to be 'debated' - but apparently there is no other reasonable alternative? This will be the 12th new 'line in the sand' ceiling since 2000.
World wide inflation is being taken very seriously by our Chinese friends who once again prudently jacked up their interest rates - while they raise their 'surplus' ceiling. The core Producer Price Index points to a serious 'indisputable' rising domestic inflationary threat which is currently being summarily dismissed as a 'transitional' episode. It be very interesting to see who purchases T Bills & Bonds in June once the QEII gets dry docked. Perhaps a few of the 'notable shorts' will be looking to cover?
I believe that current major equity markets are 'transitioning' from the single strategy yield and liquidity model to more of a range bound trading environment. Technical factors should supersede fundamentals until the clouds part and the sun shines. Short term momentum considerations will be the order of the day.
Further significant upside will be restrained by the numerous significant credit challenges that appear to have been 'kicked down the road!' The prospect of inevitable rising interest rates and high energy costs will also limit speculative buying enthusiasm.
Any significant downside will be muted by significant economic strength & recovery, deep liquidity pools, and very impressive corporate conditions. Euro-US swap spreads are now normalized reflecting low systemic risk. Bloated adjusted bank reserves indicate ample & excessive liquidity. Improving GDP performance will stimulate bargain hunting and continued takeover and merger activity.
Looking at a chart of the DJIA and S&P one would think that treasury budgets were in massive surplus rather than deficit. The two and half year major uptrend remain solidly intact along with up trending moving averages. Bell weather Alcoa reported excellent earnings to kick off the earnings season - but it appears much of the 'earnings upside' has been discounted in this record recovery across the board. Relative strength and MACD momentum divergence indicates potential intermediate term market weakness.
DJIA 12,000 and S&P 1,300 continue to be my stop loss trigger points. A correction back to DJIA 11,500 and S&P 1,200 represent solid support and accumulation entry levels. Currently both broad markets are fairly valued and appear to have been considerably 'normalized' during these turbulent geo-political times. US Dollar and Bond markets have discovered support at key levels in spite of considerable negative sediment.
Our good friends at Goldman Saks apparently have pulled the plug on their long Canada positions - or perhaps are looking to cover their shorts? The TSX has 'doubled topped' at a shade under 14,400 and recently broke my key 14,000 level as a result of the downgrade. I am concerned that key former leadership stocks (Rim, CP, Teck, Potash) continue to diverge significantly. The heavily weighted Financials also seem to be in distribution mode and could possibly represent a greater downside market threat.
Many resource issues have diverged significantly from the related commodity prices. It may be a reflection of the sector's challenge to digest the recent avalanche of corporate finance offerings. Current mid to large cap valuations range from moderate to compelling depending on the sector. The junior sector is flush with newly raised funds and frantic drilling schedules.
Visible sector rotation is muted to limited. The CD$ is consolidating the US$1+ level and will breakout out over US$1.05. The CD Dollar has underperformed most other major currencies relative to the US dollar this year. US$1.10+ effectively shuts down the Canadian manufacturing sector until further notice. It would be a bonanza for cross border US retailers according to my wife!
The possibility of a brand spankin' new National regulator rests in the capable hands of our Supreme Court - which means a political decision is pending. The upcoming TSX-LME merger verdict appears to be more clandestine in nature.
Gold and Silver have registered new 'fresh' all time highs and appear impervious to significant selling pressure in the short term. US$1,500+ gold and $45 silver appear to be in the bag. The threat of increasing margin 'squeeze' requirements and higher interest rates would certainly introduce wild and woolly volatility swings for the summer. Oil price volatility will also increase with the pending summer driving season. US$4+ per gallon unleaded may limit the length of the average trip. Agricultural markets are consolidating recent gains and appear to be solidly positioned for further upside. A major concern is that speculative commodity positions are now 4 times greater than the frenzied 2007/08 top - and we all know how that ended. It will be interesting to see where commodity markets find eventual long term sustainable supply and demand equilibrium levels.
Bottom Line: As the theme suggests I believe the equity markets are 'transitioning' from the singular 'buy and hold' model to a range bound momentum driven trading environment. Many key broad economic conditions are quickly improving but much of the positive 'upside' has already been built into many of the stocks and sectors. Most key markets are reasonably priced which I think is a major achievement considering the various soverign & geo/political circumstances world wide.
Assuming a fairly 'expected/anticipated' earnings season - the markets should spend the next quarter digesting the considerable challenges ahead in a clearly definable 10-15% trading range. For the non technical types - their time may be better spent analyzing the sudden and sharp swings at their favorite golf clubs!
Thursday, April 7, 2011
Week Ending April 8/2011 - Inflation Gyration
Inflation according to the dictionary : Economics, a persistent, substantial rise in the general level of prices related to an increase in the volume of money and resulting in the loss of value of currency, the act of inflating, the state of being inflated.
Three separate factors stimulate the dreaded inflation bogeyman. A change in the value of resource costs of a good. A change in the 'price of money' to it's intrinsic value. And a currency depreciation resulting from an increased supply.
There are three major types of inflation. 'Demand -pull' caused by increases in aggregate demand due to increased private and government spending. 'Cost-push' or 'supply shock inflation' caused by a drop in aggregate good supply or potential output. And 'Built-in' induced by adaptive expectations and linked to price/wage spiraling. We may get a taste of all three before long.
Many other theories of 'cause and effect' circulate - but the results are usually nasty. Social unrest, hoarding, lowered living standards, and hyperinflation to name a few. We may eventually experience the worst of all worlds - Stagflation. A period of low or no growth combined with high interest rates. Let's hope not!
Cause: In less than 8 weeks the second round of US Quantitative Easing that saw the the Fed sink US$600b of tax payers money into buying up unwanted treasuries to hold down bond yields will end - and the 'political' rationale for doing so will be hotly debated for decades. Following the great credit debacle the central bank (Dec '08) cut over night interest rates to almost zero and purchased almost US$2+ trillion in mortgage backed securities and government debt. The total gross monetary base (bank reserves) exploded over 300% in the next two years. Money stock surged. Exceptionally easy monetary conditions prevailed for those who were 'deemed' credit worthy. Cheap US dollars have now effectively funded the global carry trade. Freshly inflated currency washed over the financial shores like a Japanese Tsunami. Financial markets recovered almost all their catastrophic losses. World wide global equity markets doubled - adding almost $30 trillion in market value. And most importantly - economies recovered. So far so good.
Effect: The US Real Broad Dollar index (inflation adjusted and trade weighted) vs a basket of currencies as reported by the Federal Reserve Board has just broken into new all time low territory. The extreme weakness of the dollar reflects both weak demand for dollars and the Fed's concerted effort to liquefy the world and stimulate the economy. The bond markets have thankfully held recent low territory for now. All bets are definitely off if those levels are breached.
The US Government balance sheet now combines all the elements of a Hollywood nail biting thriller and slasher horror show - let's hope it doesn't turn into a tear jerker! Zero political will exists to rectify errors in fiscal judgement. Employment is improving slowly. Housing is hoping to bottom. The national debt clock is now turbo charged. A dynamic plan of remedial action is but a romantic notion. The Fed is now essentially the world's biggest hedge fund.
The possibility of another round of supportive QE III appears politically unlikely - but not impossible. If not, who will continue to buy low yielding long term unsecured treasuries from the US Government is even a greater mystery? The spectre of rising interest rates is now all but guaranteed. Most key 'unstimulating' countries have recognized the threat and have preemptively begun to raise the cost of borrowing. China is currently experiencing 3-4% inflation with Europe & England reporting 5-6% increased prices. The ECB is the first major central bank to blink with a 25 basis point move higher. Portugal has officially surrendered to the IMF. The 'don't worry be happy' US Fed officials reported a subdued 'transitory' 3% inflation number and are only mildly concerned. The US government officially runs out of funds tomorrow while leadership can't even agree on US$30B (3%) of budget cuts on a $1.6T structural annual deficit. A new and improved US$15 trillion debt ceiling is in the offing. And I was worried about the Leaf's making the playoffs?
Result: When too much money chases too few goods prices indeed go up. The price sensitive Commodity Research Bureau (CRB) spot commodity and raw industrials index has blasted through the previously extended 2006-7 level like a hot knife through butter. The 'real' inflation adjusted CRB is now approaching 1970 and early 80's levels - a very difficult era of double digit inflation and 20% interest rates. The three large canaries in the coal mine continue to squawk. Oil is challenging US$110, Gold US$1,500, and Silver US$40. It looks like US$4+ per gallon unleaded will be a summer time reality. Soft commodities and grains are spiking and farmers struggle to keep up with surging demand.. Food processors are already raising prices to offset significantly higher input costs. I suspect it will not be long before all goods will be reported in 'real' inflation adjusted dollars as opposed to nominal current levels. The threat of inflation rearing it's ugly head domestically has been raised to Def con 3. The inevitable and considerable rise in interest rates is not a nice thing to even think about.
Equity markets in the US continue to soldier on. A new post Middle East crisis and Asian earthquake high has been registered by the DJIA but not the S&P. Above expected earnings continue to roll out and corporate M & A activity continues at a frenetic pace. Texas Instruments offers an eye popping $7.7 b or 80% premium for former dot com darling National Semiconductor. Pimco announced a newly minted $600m REIT to scoop up discounted residential mortgages signalling a potential bottom in home prices. The broad markets remains fairly priced but many glamor growth stock P/E's are at rarefied & dangerous nose bleed levels. Major markets are fairly priced on an earnings basis. The DJIA is almost 800 points over it's rising 200 dma. Relative strength weakness is appearing on the charts and could be a represent potential problem. The Wilshire 5000 Index which includes small cap issues has led the recent charge recording new recovery highs and may portend a traditional distribution type scenario.
The inflation loving TSX has run back to February high levels but has appeared to have lost some short term momentum. The Canadian dollar has almost hit US$1.05. The cross border currency advantage had disappeared and will now represent a significant drag on the vulnerable industrial base. The Lundin/Inmet/Equinox/Minmetals chess game continues. The heavily weighted financials are no longer cheap and are due for a meaningful (inflation adjusted) correction. Senior gold and oil issues are significantly diverging from record bullion/commodity prices and look temptingly cheap on a relative basis. Gold stock capitalization is currently less than 1% on the NYSE with pension funds having little or no inflation protection. There is lots of room to rally. Few care about the pending TSX-LME merger and less about the May 2nd Federal election.
North American market consolidation continues to be the order of the day. Upside momentum could quickly return pending positive economic news. However, rising interest rates and a falling bond market may reveal current market action to be distributive in nature. Seasonal factors may also take effect if we have returned to more normalized conditions?
Bottom Line: It sure is hard not to get overwhelmed by current fiscal and monetary issues. Goldman Saks believes that Portugal is the end of meaningful European sovereign debt concerns and I sure hope they are right as usual. A sinking Spain and Italy would certainly overwhelm the monetary system. Japan is hardly out of the woods and 9,000 Nikkei must hold but I have my doubts. The threat of inflation is considerable and higher interest rates could easily upend economic growth and destabilize global conditions. I remain cautiously bullish due to excessive liquidity levels, strong income statements, and healthy balance sheets - but with tight firm stop loss levels in place.
Let's hope the Easter Bunny doesn't leave us rotten eggs!
Three separate factors stimulate the dreaded inflation bogeyman. A change in the value of resource costs of a good. A change in the 'price of money' to it's intrinsic value. And a currency depreciation resulting from an increased supply.
There are three major types of inflation. 'Demand -pull' caused by increases in aggregate demand due to increased private and government spending. 'Cost-push' or 'supply shock inflation' caused by a drop in aggregate good supply or potential output. And 'Built-in' induced by adaptive expectations and linked to price/wage spiraling. We may get a taste of all three before long.
Many other theories of 'cause and effect' circulate - but the results are usually nasty. Social unrest, hoarding, lowered living standards, and hyperinflation to name a few. We may eventually experience the worst of all worlds - Stagflation. A period of low or no growth combined with high interest rates. Let's hope not!
Cause: In less than 8 weeks the second round of US Quantitative Easing that saw the the Fed sink US$600b of tax payers money into buying up unwanted treasuries to hold down bond yields will end - and the 'political' rationale for doing so will be hotly debated for decades. Following the great credit debacle the central bank (Dec '08) cut over night interest rates to almost zero and purchased almost US$2+ trillion in mortgage backed securities and government debt. The total gross monetary base (bank reserves) exploded over 300% in the next two years. Money stock surged. Exceptionally easy monetary conditions prevailed for those who were 'deemed' credit worthy. Cheap US dollars have now effectively funded the global carry trade. Freshly inflated currency washed over the financial shores like a Japanese Tsunami. Financial markets recovered almost all their catastrophic losses. World wide global equity markets doubled - adding almost $30 trillion in market value. And most importantly - economies recovered. So far so good.
Effect: The US Real Broad Dollar index (inflation adjusted and trade weighted) vs a basket of currencies as reported by the Federal Reserve Board has just broken into new all time low territory. The extreme weakness of the dollar reflects both weak demand for dollars and the Fed's concerted effort to liquefy the world and stimulate the economy. The bond markets have thankfully held recent low territory for now. All bets are definitely off if those levels are breached.
The US Government balance sheet now combines all the elements of a Hollywood nail biting thriller and slasher horror show - let's hope it doesn't turn into a tear jerker! Zero political will exists to rectify errors in fiscal judgement. Employment is improving slowly. Housing is hoping to bottom. The national debt clock is now turbo charged. A dynamic plan of remedial action is but a romantic notion. The Fed is now essentially the world's biggest hedge fund.
The possibility of another round of supportive QE III appears politically unlikely - but not impossible. If not, who will continue to buy low yielding long term unsecured treasuries from the US Government is even a greater mystery? The spectre of rising interest rates is now all but guaranteed. Most key 'unstimulating' countries have recognized the threat and have preemptively begun to raise the cost of borrowing. China is currently experiencing 3-4% inflation with Europe & England reporting 5-6% increased prices. The ECB is the first major central bank to blink with a 25 basis point move higher. Portugal has officially surrendered to the IMF. The 'don't worry be happy' US Fed officials reported a subdued 'transitory' 3% inflation number and are only mildly concerned. The US government officially runs out of funds tomorrow while leadership can't even agree on US$30B (3%) of budget cuts on a $1.6T structural annual deficit. A new and improved US$15 trillion debt ceiling is in the offing. And I was worried about the Leaf's making the playoffs?
Result: When too much money chases too few goods prices indeed go up. The price sensitive Commodity Research Bureau (CRB) spot commodity and raw industrials index has blasted through the previously extended 2006-7 level like a hot knife through butter. The 'real' inflation adjusted CRB is now approaching 1970 and early 80's levels - a very difficult era of double digit inflation and 20% interest rates. The three large canaries in the coal mine continue to squawk. Oil is challenging US$110, Gold US$1,500, and Silver US$40. It looks like US$4+ per gallon unleaded will be a summer time reality. Soft commodities and grains are spiking and farmers struggle to keep up with surging demand.. Food processors are already raising prices to offset significantly higher input costs. I suspect it will not be long before all goods will be reported in 'real' inflation adjusted dollars as opposed to nominal current levels. The threat of inflation rearing it's ugly head domestically has been raised to Def con 3. The inevitable and considerable rise in interest rates is not a nice thing to even think about.
Equity markets in the US continue to soldier on. A new post Middle East crisis and Asian earthquake high has been registered by the DJIA but not the S&P. Above expected earnings continue to roll out and corporate M & A activity continues at a frenetic pace. Texas Instruments offers an eye popping $7.7 b or 80% premium for former dot com darling National Semiconductor. Pimco announced a newly minted $600m REIT to scoop up discounted residential mortgages signalling a potential bottom in home prices. The broad markets remains fairly priced but many glamor growth stock P/E's are at rarefied & dangerous nose bleed levels. Major markets are fairly priced on an earnings basis. The DJIA is almost 800 points over it's rising 200 dma. Relative strength weakness is appearing on the charts and could be a represent potential problem. The Wilshire 5000 Index which includes small cap issues has led the recent charge recording new recovery highs and may portend a traditional distribution type scenario.
The inflation loving TSX has run back to February high levels but has appeared to have lost some short term momentum. The Canadian dollar has almost hit US$1.05. The cross border currency advantage had disappeared and will now represent a significant drag on the vulnerable industrial base. The Lundin/Inmet/Equinox/Minmetals chess game continues. The heavily weighted financials are no longer cheap and are due for a meaningful (inflation adjusted) correction. Senior gold and oil issues are significantly diverging from record bullion/commodity prices and look temptingly cheap on a relative basis. Gold stock capitalization is currently less than 1% on the NYSE with pension funds having little or no inflation protection. There is lots of room to rally. Few care about the pending TSX-LME merger and less about the May 2nd Federal election.
North American market consolidation continues to be the order of the day. Upside momentum could quickly return pending positive economic news. However, rising interest rates and a falling bond market may reveal current market action to be distributive in nature. Seasonal factors may also take effect if we have returned to more normalized conditions?
Bottom Line: It sure is hard not to get overwhelmed by current fiscal and monetary issues. Goldman Saks believes that Portugal is the end of meaningful European sovereign debt concerns and I sure hope they are right as usual. A sinking Spain and Italy would certainly overwhelm the monetary system. Japan is hardly out of the woods and 9,000 Nikkei must hold but I have my doubts. The threat of inflation is considerable and higher interest rates could easily upend economic growth and destabilize global conditions. I remain cautiously bullish due to excessive liquidity levels, strong income statements, and healthy balance sheets - but with tight firm stop loss levels in place.
Let's hope the Easter Bunny doesn't leave us rotten eggs!
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