North American markets have posted an impressive 5 day end-of quarter relief rally on the heels of the 'official' end of QEII, intense international economic negativity, and a rapidly deteriorating consumer confidence index.
This 5 day (4%) rally is the best since last July and should keep markets fractionally positive on the year.
Equity markets have swung from significantly over sold to now slightly over bot in the short term. At this point on a weekly basis the latest quarterly sell off looks 'technically' like a normal 'garden variety' 10% retrenchment from a significantly over bot 2 year bull market run. It has felt much worse. My Mark Twain analysis suggests that, 'the reports of the major equity markets death may have been greatly exaggerated.'
Relieved global equity markets cheered the passage of a 5 year austerity package as a first step to solve the 'Big Fat Greek' debt problem. Good news and celebration for everyone except the tax paying citizens of Greece. As part of the 'deal' massive multi trillion dollar cuts to health, military, and the social system are expected and hopefully delivered. A major test for state run socialism to say the least!
Brand spankin' new IMF chief, 55 year old Chicago trained lawyer & single mother of two, & former member of the French national synchronized swimming team, Christine Lagarde, will have her manicured hands full orchestrating economic peace, love, and happiness within the membership of the EU. Her economic 'synchro' skills will be immediately tested and hopefully she won't be in 'over her head' while in the 'deep end' of the pool! Good thing she has been well trained in holding her breath! She might need it!
Despite the numerous challenging 'continental issues' the US dollar remains 8% lower than the Euro so far this year. The Euro has held up very well against the intense and occasionally violent monetary and banking onslaught. The effect and the amount of bad news appears to be waning and priced into many key market valuations.
In the US the housing price indices are 'finally' showing signs of 'flattening' (and improving in certain areas) which is good news for both the mortgage markets and builders. The DJIA and S&P bounced off critical support and back through my stop levels of 12,000 and 1,300 respectively. The US markets have been led by a very impressive rally in the critical transportation sector. News of major financial institutions finally dealing with their 'toxic' housing mortgage issues appears to be a major catalyst for an rapidly improving US banking index. My only major concern is a 'rapidly' deteriorating US treasury bond and rising interest rate environment despite the deep pools of liquidity and credit.
Household debt has become much more manageable and good news continues to be announced from a very strong manufacturing sector. The historically low interest rate environment has played a critical role in the deleveraging process and improving household financial ratios.
Investor appetite remains upbeat in the social media space with a pending $US2b IPO for SF game creator Zynga putting market cap valuations as high as a whopping $US23b - in excess of Activision and Electronic Arts combined! Lots of bling bling for the Zyng Zyng! Recent issue LinkedIn remains solidly above issue price (100+%) and appears to have absorbed short term selling pressure. This very impressive market action reminds me of the tech market of 1995 as opposed to 1999.
Serial golfer, President BHO, unveiled his Marxist class warfare theme to an unimpressed corporate jet flying Congress in the hopes of winning critical debt ceiling votes and support. Evidently the US #1 CEO cannot find a single nickel of spending cuts within the $US3b+ a day deficit the US spends more than it takes in? The August 2nd deadline looks almost certain to be in jeopardy. Fed Chairman Ben B will have to have his 'A' game on for his next speech to the huddled masses. He will need to sound like he knows what is happening - even if he's not sure! But as Bill Freeza of Political Capital states, 'Asking unaccountable bureaucrats to steer a national economy without ever having contributed to it is like asking the Pope to train sex therapists.'
In the commodity sector, the $US90/bl level for crude oil was briefly tested as a result of the 'strategic' release of 60m bbls from the IEA 1600m bbl stockpile onto an already over served market. The current three month 20% sell off tested the $US88-90/bbl and would turn bullish above the $US100/bbl level. It appears all the IEA accomplished was to clean out short term trading accounts and 'evil' speculators. The spread between Brent and Dubai crude contracted 50% in just four days. Natural gas holds the key $US4.25/mcf level and appears to be building a very positive long term weekly accumulation base formation. The world's top 5 natural gas producing countries are: #1 Russia (47t cu m), #2 Iran (30t cu m), #3 Qatar (26t cu m), #4 Turkmenistan (7t cu m), and Saudi Arabia (7t cu m). The US is 6th ranked with over 6.9t cu meters of natural gas. The majority of the top ten producing countries are not exactly a who's who list of friendly and reliable suppliers. Gold persistently hovers above $US1,500/oz but could quite easily retest the mid $US1,400 level based on improving sovereign monetary issues. Silver holds the mid $US30 level and would take a a move above $US36 to turn positive and a possible expected move back to the mid $US40 level. The new edition 2011 American Eagle silver coins are being released at a 75% premium/oz at $US59.59 each. Looks like the US Mint is long term bullish too! Copper has been the star this week moving above $4.25/lb and it's 200 dma. Accelerating South American political and environment issues are significantly contributing to supply and delivery concerns. The agra/grain sector is continuing to consolidate recent pullbacks from recent high territory and rising inventory levels. Over exposed fund accounts have contributed to recent short term volatility.
In Canada, housing prices have relentlessly moved into new record high territory fanning inflationary flames. Current average Canadian housing valuations and consumer installement debt per person is making the reckless 2006-07 US levels look like a walk in the park! April stats indicated a lower & muted economic growth environment and an overall weaker 2nd quarter of activity. The TSX/LME merger was suddenly & unceremoniously halted when it appeared obvious it was unable to garner the two thirds necessary for victory. The Maple Group now licks it's salivating chops in advance of adding a central piece to it's formidable vertical financial silo. The TMX Group appears to be fully valued at current levels with other suitors or higher bids unlikely. The TSX is almost 400 points from it's falling 200 dma and is almost exactly at my 13,250 stop level. Financial issues remain mixed and are a critical factor in any sustainable market rally. The possibility of an increasing bank rate would be a considerable headwind in a low growth environment.
In closing, the month of June is going out a lot better than it came in. Key levels have been tested and held. Interesting twists and turns occur just prior to and after long week end breaks. A hyper negative and very over sold environment has bounced back into a more neutral and constructive mode. Huge wads of negative economic contagion concerns have been impressively digested by the equity markets. The lessening effect and reduced amount of negative issues may inspire the numerous 'under invested' funds, who are likely braced for worse case scenarios, to reenter equity markets sooner than expected. I can find very little evidence of froth or irrational exuberance in this fairly to under-valued equity environment. Very little positive news is expected +/or factored into the next few months. I am treating the recent 2 to 3 month sell off as a normal correction in a longer term liquidity led bull market. I reinstate my key stop levels of DJIA 12,000, S&P 1,300, & TSX 13,500. Stocks look to outperform bonds with dividend and interest rate spreads narrowing and normalizing significantly. A post QEII environment may be more productive and predictable than previously thought!
Thursday, June 30, 2011
Thursday, June 23, 2011
Wk Ending June 24th/11 - (Loss of ) Confidence
There appears to be a seasonal ' low-confidence correlation' in the month of June. The recent stream of uncertainty has finally led to a significant loss of confidence. June now appears to be the month of 'lowered hope and expectation.'
Perhaps it's because June is when the kids get out of school - and moods seem to swing around the house? Maybe only teachers and June brides are upbeat in this cruel month?
The last few weeks have been no exception! It's hard to pinpoint the exact news item that first turned feelings so sour - but the 28 year low in last week's Misery Index seemed to accelerate these palpable negative proceedings.
In these past few days Rim has been summarily and perhaps permanently dispatched to the Apple 'road kill bin' based on lower performance of $US5+/sh earnings and shrinking margins. The overall tech mood was so sour that investors even sold the shares of Apple too - just for good measure! Goldman Saks then got the liquidation merry-go-round fired up with a 1% reduction in economic GDP expectations for the balance of the year. Although GS's is on record for accurately being bearish for most of this year! Then the Royal Bank of Canada showed no USA love/faith whatsoever dumping their $US3.45b US retail banking assets to PNC. RBC took their lumps with their tails between their legs - and even got upgraded for doing so. Simultaneously J. Paulson announced he has bit the painful $US1b loss bullet dumping all of his Sinoforest shares based on recent 'uncertainty?' No word if JP also ejected his now 'fully trimmed' bond holdings. JP's move is a full 180 degree reversal from his previously 'faithful & trusting' comments of early last week! The 'former Dr. Death' - NYU's N. Roubini also appears to be jumping off the bull market bandwagon with his 'almost' double dip recession prognostications. I guess his two months of 'bullishness' was too much for him to bear (pun intended). His low expectations counterpart - Bearish Bill Gross - came out this week looking like the most 'frazzled' billionaire I've ever seen! He looked (and sounded) like he just got back from an Amy Winehouse concert! Not to be outdone Petro China walked away from it's $5.4b natural gas deal with Encana - also for no 'specified' good reason. So much for 'good faith' understandings and 'gentlemans agreements!' Almost all recent formerly 'hot' tech IPO"s became either now cool (as in slightly above water) or downright cold this week! Jeez - less than a week ago lead underwriter Deutsche Bank tanked it's own Renren (Chinese Facebook) issue 'initating coverage' with a hold rating and a price target 40% below their 'offering price' of just five weeks ago! RENN almost doubled to $US24 after issue and now languishes at sub $US7/sh in less than two months! It looks like the Chinese are too busy 'working' to spend much time on Renren! The Greek government, led by a very sullen G Papandreou, which had it's second bailout package recently rescinded 'barely' escaped a total 'non confidence' vote by just a couple votes or a very slim 2 percent margin! Aegean summer protestation and dissatisfaction is only beginning irrespective of any pending 'deal' being made! Let's hope that the US Congress is at least on speaking terms when they mastermind in a few weeks? I'm looking for a fairly decent punch up to say the least. On Wednesday Chief Ben Bernake's morose Fed economic statement was about as much fun as a LeBron James post final press conference! His 'uncertain,' glum, and ambiguous statements on the GDP & employment levels shook what little confidence was left on Wall Street. A Fed chief needs to speak with clarity and confidence - or not speak at all. Thursday the 28 members of the IEA released 60m bbls from it's strategic petroleum reserve in response to Libyan 'uncertainty' and a lack of confidence in the Saudi Arabian pipeline. And most significantly, ESPN actually had the nerve and temerity to lambaste the entire mighty 'unachieveing' Toronto pro sports scene as being 'maybe the worst ever on record' - led by our always lovable losers the Toronto Maple Leafs! Is nothing sacred I ask?
So far this very 'forgetable' low confidence month of June makes investors long for the frozen and frosty months of winter and all the strep throat that comes with it!
In the US, just when it looked like the DIIA and S&P had bounced off critical support and significant moving average levels B. Bernake's dour comments cratered a decent (low volume) 4 day rally. Both markets continue to violently thrash at fairly solid support and 50/200 day moving average territory. Based on freshly lowered GDP expectations analysts are busily reducing earnings growth targets and proforma profitability. Most significant earnings reports have been released and traders will have to wait for a few months for any meaningful guidance. Corporate balance sheets remain strong, treasuries flush with capital, and pending lower gasoline prices should help to support the economy this summer. Monetary policy looks to remain friendly until after the 2012 election despite the end of the FOMC's incremental quantitative easing efforts. The banking system is flush with over $US1.5 trillion in freshly printed reserves which should bolster any short term liquidity issues. US equity markets have effectively priced in lowered/negative expectations and look to be braced for a negative investment environment for the second half of the year.
In commodities, the suspicious release of 60m bbls (16 hours of daily world consumption) of crude from the strategic reserve shocked long positions triggering stop loss orders across the resource complex. Crude oil dropped almost 5% on Thursday and fell back into significant support in the $US88-92/bbl level. I'd be very surprised to see crude oil drop meaningfully below $US85/bbl based on record world consumption and Venezuelan supply uncertainties. Natural Gas has fallen back into a positive entry level of $US4.10/mcf. Gold looked to register new all time highs but fell back $US30+/oz on the sharply lower crude oil price. Gold can easily retrace to support at $US1,450-75/oz. Silver continues to impressively consolidate in the mid $US30's/oz and at the 40x's gold/silver ratio. Copper held $US4/lb for the time being but could easily retest the $US3.50-75/lb level. In the Agra sector grains took it on the chin falling back into strong support and entry levels. I expect further commodity downside to be muted and limited based on well balanced and relatively under levered markets. I have my doubts that world consumption levels will drop that far at all.
In Canada, the TMX-LME-MAPLE love triangle takeover appears to be heating up. The TSX-LME promised a special dividend to entice faithful shareholders. The ever expanding Maple Group added a 'Toonie' sweetener to seal it's deal. My bet is on the banks (Maple Group) and a return to the monopolized/mutualized old boys network. Oil & Gas and Metal equities across the board have been crushed in anticipation of lower commodity consumption levels and a deflationary credit environment. It is a lot cheaper to buy good quality senior producing equities on the TSX than it is to dig or drill. A significant headwind for the TSX is the rapidly weakening heavily weighted financial sector. The S&P/TSX Capped Financials must hold the 180-85 level. The TSX-Venture exchange should find support in the current inexpensively priced 1,850-900 level. A significant amount of bad news and down side has been priced into the small cap mining and resource shares. The TSX has built a formidable top in the 13,300-14,300 level. It needs to consolidate this recent sell off at current levels (12,500-13,000) over the summer months in order to challenge those recovery high levels.
Bottom Line: Equity markets are currently challenged to digest the plethora of reported negative macro issues. I believe conditions are no where near as dire as reported - and that major soverign budget issues will be resolved and settled in time. Continued liquidation will accelerate prevailing negativity and lower confidence levels. Positive confidence levels are critical in these credit fueled dependent days. With any luck central banking types recognize their key and integral role. Honest and concerted book balancing efforts would go a long way to settle much of the uncertainty and insecurity. Politically motivated grandstanding and brinkmanship days need to come to an immediate end in order to secure long term world growth and progress.
Perhaps it's because June is when the kids get out of school - and moods seem to swing around the house? Maybe only teachers and June brides are upbeat in this cruel month?
The last few weeks have been no exception! It's hard to pinpoint the exact news item that first turned feelings so sour - but the 28 year low in last week's Misery Index seemed to accelerate these palpable negative proceedings.
In these past few days Rim has been summarily and perhaps permanently dispatched to the Apple 'road kill bin' based on lower performance of $US5+/sh earnings and shrinking margins. The overall tech mood was so sour that investors even sold the shares of Apple too - just for good measure! Goldman Saks then got the liquidation merry-go-round fired up with a 1% reduction in economic GDP expectations for the balance of the year. Although GS's is on record for accurately being bearish for most of this year! Then the Royal Bank of Canada showed no USA love/faith whatsoever dumping their $US3.45b US retail banking assets to PNC. RBC took their lumps with their tails between their legs - and even got upgraded for doing so. Simultaneously J. Paulson announced he has bit the painful $US1b loss bullet dumping all of his Sinoforest shares based on recent 'uncertainty?' No word if JP also ejected his now 'fully trimmed' bond holdings. JP's move is a full 180 degree reversal from his previously 'faithful & trusting' comments of early last week! The 'former Dr. Death' - NYU's N. Roubini also appears to be jumping off the bull market bandwagon with his 'almost' double dip recession prognostications. I guess his two months of 'bullishness' was too much for him to bear (pun intended). His low expectations counterpart - Bearish Bill Gross - came out this week looking like the most 'frazzled' billionaire I've ever seen! He looked (and sounded) like he just got back from an Amy Winehouse concert! Not to be outdone Petro China walked away from it's $5.4b natural gas deal with Encana - also for no 'specified' good reason. So much for 'good faith' understandings and 'gentlemans agreements!' Almost all recent formerly 'hot' tech IPO"s became either now cool (as in slightly above water) or downright cold this week! Jeez - less than a week ago lead underwriter Deutsche Bank tanked it's own Renren (Chinese Facebook) issue 'initating coverage' with a hold rating and a price target 40% below their 'offering price' of just five weeks ago! RENN almost doubled to $US24 after issue and now languishes at sub $US7/sh in less than two months! It looks like the Chinese are too busy 'working' to spend much time on Renren! The Greek government, led by a very sullen G Papandreou, which had it's second bailout package recently rescinded 'barely' escaped a total 'non confidence' vote by just a couple votes or a very slim 2 percent margin! Aegean summer protestation and dissatisfaction is only beginning irrespective of any pending 'deal' being made! Let's hope that the US Congress is at least on speaking terms when they mastermind in a few weeks? I'm looking for a fairly decent punch up to say the least. On Wednesday Chief Ben Bernake's morose Fed economic statement was about as much fun as a LeBron James post final press conference! His 'uncertain,' glum, and ambiguous statements on the GDP & employment levels shook what little confidence was left on Wall Street. A Fed chief needs to speak with clarity and confidence - or not speak at all. Thursday the 28 members of the IEA released 60m bbls from it's strategic petroleum reserve in response to Libyan 'uncertainty' and a lack of confidence in the Saudi Arabian pipeline. And most significantly, ESPN actually had the nerve and temerity to lambaste the entire mighty 'unachieveing' Toronto pro sports scene as being 'maybe the worst ever on record' - led by our always lovable losers the Toronto Maple Leafs! Is nothing sacred I ask?
So far this very 'forgetable' low confidence month of June makes investors long for the frozen and frosty months of winter and all the strep throat that comes with it!
In the US, just when it looked like the DIIA and S&P had bounced off critical support and significant moving average levels B. Bernake's dour comments cratered a decent (low volume) 4 day rally. Both markets continue to violently thrash at fairly solid support and 50/200 day moving average territory. Based on freshly lowered GDP expectations analysts are busily reducing earnings growth targets and proforma profitability. Most significant earnings reports have been released and traders will have to wait for a few months for any meaningful guidance. Corporate balance sheets remain strong, treasuries flush with capital, and pending lower gasoline prices should help to support the economy this summer. Monetary policy looks to remain friendly until after the 2012 election despite the end of the FOMC's incremental quantitative easing efforts. The banking system is flush with over $US1.5 trillion in freshly printed reserves which should bolster any short term liquidity issues. US equity markets have effectively priced in lowered/negative expectations and look to be braced for a negative investment environment for the second half of the year.
In commodities, the suspicious release of 60m bbls (16 hours of daily world consumption) of crude from the strategic reserve shocked long positions triggering stop loss orders across the resource complex. Crude oil dropped almost 5% on Thursday and fell back into significant support in the $US88-92/bbl level. I'd be very surprised to see crude oil drop meaningfully below $US85/bbl based on record world consumption and Venezuelan supply uncertainties. Natural Gas has fallen back into a positive entry level of $US4.10/mcf. Gold looked to register new all time highs but fell back $US30+/oz on the sharply lower crude oil price. Gold can easily retrace to support at $US1,450-75/oz. Silver continues to impressively consolidate in the mid $US30's/oz and at the 40x's gold/silver ratio. Copper held $US4/lb for the time being but could easily retest the $US3.50-75/lb level. In the Agra sector grains took it on the chin falling back into strong support and entry levels. I expect further commodity downside to be muted and limited based on well balanced and relatively under levered markets. I have my doubts that world consumption levels will drop that far at all.
In Canada, the TMX-LME-MAPLE love triangle takeover appears to be heating up. The TSX-LME promised a special dividend to entice faithful shareholders. The ever expanding Maple Group added a 'Toonie' sweetener to seal it's deal. My bet is on the banks (Maple Group) and a return to the monopolized/mutualized old boys network. Oil & Gas and Metal equities across the board have been crushed in anticipation of lower commodity consumption levels and a deflationary credit environment. It is a lot cheaper to buy good quality senior producing equities on the TSX than it is to dig or drill. A significant headwind for the TSX is the rapidly weakening heavily weighted financial sector. The S&P/TSX Capped Financials must hold the 180-85 level. The TSX-Venture exchange should find support in the current inexpensively priced 1,850-900 level. A significant amount of bad news and down side has been priced into the small cap mining and resource shares. The TSX has built a formidable top in the 13,300-14,300 level. It needs to consolidate this recent sell off at current levels (12,500-13,000) over the summer months in order to challenge those recovery high levels.
Bottom Line: Equity markets are currently challenged to digest the plethora of reported negative macro issues. I believe conditions are no where near as dire as reported - and that major soverign budget issues will be resolved and settled in time. Continued liquidation will accelerate prevailing negativity and lower confidence levels. Positive confidence levels are critical in these credit fueled dependent days. With any luck central banking types recognize their key and integral role. Honest and concerted book balancing efforts would go a long way to settle much of the uncertainty and insecurity. Politically motivated grandstanding and brinkmanship days need to come to an immediate end in order to secure long term world growth and progress.
Friday, June 17, 2011
Week Ending June 17th/2011 - It's All Greek to Me!
Once again the ugly and terrifying European sovereign debt monster has reared it's ugly head. Combined with pending end of US QE II and related US debt ceiling woes - equities and commodities around the globe are pricing & bracing for worse case scenario possibilities.
For the past few months banking experts and financial pundits have been split over the 'contagion effect' of a Greek default and a bond market 'brush cut.' The dire situation in the Mediterranean is rapidly becoming obvious. 3 year Greek bonds trade with an effective yield of almost 30% and an explosive CDS derivative domino market just itching to be triggered. A full blown Greek default has already been effectively 'baked' into the Baklava cake! Greece is over 300 billion Euro in debt and it's budget deficit is more than 4 times the Euro zone 'limit' at 14+% of GDP. The Greek economy has only marginally delevered to this point. Credit to the Greek government has actually increased recently. Credit ratings have hit the rock bottom 'CCC' (avoid at all costs) level. Our happy-go-lucky friends at Moody's Investor Service's is 'warning' ALL lenders remotely connected to the Greek debacle. Three key French banks (Soc Gen, BNP Paribas, & Credit Agricol) with significant credit exposure are the latest candidates to get the Moody evil eye.
Since last May when IMF and Euro zone members reluctantly coughed up an additional 110 billion Euros in a bailout/rescue package along with associated hard core austerity programs social unrest and protest has been the order of the day. To this point Greece has not taken their 'belt tightening' as hard as losing the 7th game of a Stanley Cup final - but discontent and anger will certainly grow during the long hot summer months.
Since then unemployment in Greece has grown almost 5 % to the current 16.5% level. Under 24 year old unemployment exceeds a crushing 40+%! One in three Greek workers are 'currently' employed by the government. The 'reshuffling' Greek government continues to spend almost 50% of it's GDP - an obviously unsustainable pace which will ultimately result in accelerated job loss. To make matters worse another 60 billion Euro infusion is needed by the middle of next month. The big US banks have been generously supporting European banks having lent almost 30% from their 'books' over the past 2 years & with over $US40+ billion of total exposure.
The ECB currently holds 190 billion Euros of Greek IOU's against a total net equity capital base of 82 billion Euros. A 50% Greek bond market 'haircut' would therefore effectively wipe out the ECB and sink the central bank. The contagion effect would be catastrophic to say the least. The top 3 directly exposed countries to Greece are Germany (26b Euro), France (20b Euro) & UK (3.2b Euro). Adding basket cases Portugal & Spain and possibly heavy weight Italy to this toxic mess makes this 'structual' challenge more than 'transitory' in nature. It is the toughest test of the resolve and discipline of the Euro zone in it's short history. Should Euro financial heavy weights Germany and France fall out of love the resulting divorce would be messy indeed and make a world wide economic 'double dip drubbing' a certain reality.
In the US, fixed income Guru and newly minted Treasury bond bear, Bill Gross, who manages over $1.2 trillion in assets, told CNBC Monday that the US is 'actually' in worse shape financially than Greece after all entitlements are factored into the equation. Pimco has no intention of buying any treasury bonds after the Federal Reserve spends the last of the $US600 billion bailout bonanza. His tone and demeanor was dire to say the least. Definitely not a great way to start the week.
The aptly named 'Misery Index' which is the sum of unemployment and inflation (CPI) rates has hit a fresh 28 year high. Almost as miserable as a Vancouver hockey fan! The index has risen significantly since BHO took office from 7.8% to 12.7% Google searches for 'Double Dip Recession' have returned to bearish levels of this time last year! Fragile consumer confidence threatens consumption levels for the summer and back to school months. American households are quickly losing their sense of humor and patience.
On the plus side, total household financial burdens have eased considerably since Sept '07 reflecting businesses and individuals actively adjusting to changing circumstances. Housing starts are flat (which is better than negative) despite significant inventory supply. US Corporations are flush with capital and strong profits continue to roll out throughout much of this uncertainty. Retail cash registers are ringing for the time being and we are beginning to enjoy some of Al Gore's global warming at last!
The DJIA and S&P both sit 7% below recent recovery highs in early May. They are both consolidating in critical moving average territory and slightly above long term weekly up trend lines. They both 'feel' like they could quite easily retest the lower early March and Jan 1st levels of another 3-4% lower. Sharply lower recent crude oil prices should add significant support to those levels and fatter consumer's wallets.
In the commodity sector, Brent-Cushing spread levels have hit record levels of over $US20/bbl. Markets look to be well supplied in the short run despite rising world wide consumption levels. Crude oil has broken a recent short term congestion distribution range and will find significant support in the $US88-92 range. The break at the 'pumps' will be welcome news for American drivers this summer. Natural Gas looked all set to breach the $5/mcf level recently but has settled back into the $US4.50 range based on lower crude prices.
Gold refuses to correct below the $US1,500/oz level and looks to break out into new all time high territory should credit issues accelerate. The 'gold barometer' is clearly signalling anticipated increased inflation levels and possibly QE III expectations. Silver continues to compress in the mid $US34-6 range still feeling the ill effects of recent crushing CME margin pressure.
In the Agra sector the grains have corrected recent strength primarily based on current prevailing economic 'slow down' concerns and anticipated credit contraction. Growth and economy sensitive Copper futures has rallied into key over head resistance and potential break out territory of $US4.25/lb.
In Canada, the 'Forest Slump' misadventure fiasco appears to have spread throughout the entire TSX resource sector. Selling has accelerated recently with the TSX a full 10% + below recent recovery high territory. Beleaguered shares of SinoForest have broken $CD4/sh this week in a stunning fall from institutional grace. Lower than expected earnings were reported compounded by accelerated 'non-recurring' write downs based on new international accounting standards. It will be an additional 3 months before an 'independant' analysis is complete. At minimum, it will give a little more time for the trees to grow! Until that time 'CasinoForest' remains a highly uncertain unquantifiable speculation at best. Should the 'worst case' scenario emerge for TRE it could unfortunately tarnish current resource excitement and reduce upside for a whole chunk of related sectors.
In the misery loves company category, RIM has also disappointed investors and analysts with lower than expected earnings and sharply lower future guidance. This bad news has resulted in a stock price below 2007-08 end-of-world levels. RIM has been a key bell weather for the TSX for many years and it's negative effect could quite easily mute sector and index upside for the summer months. Based on current earnings, low single digit P/E, and cash flush treasury RIM will be an ideal candidate for potential merger or takeover activity for those hoping to do battle with the Apple communications behemoth.
Bottom Line: It is almost impossible for equity/commodity markets to deal with the steady flow of dire/tragic 'macro' related issues and events that we receive on almost a daily basis. Most major indexes have mapped out short term distribution type topping patterns primarily based on significant assorted economic head winds. Strong bottom up micro corporate fundamentals are in place for concerted upside once the major sovereign credit and debt issues are realistically and effectively addressed.
For those of the bullish ilk who may need reminding or to be cheered up a little;
the world is growing (3.2%); the US is growing (2%); floods/tornadoes/tsunamis are not permanent; debt is transitory; IPO conditions are vibrant; companies are loaded with cash ($US1.9 T); bargain Fed interest rate policy appears to be locked in until after the 2012 election; key blue chip companies are well into the black and attractively valued, and most importantly almost everybody is braced for the downside.
Look for major equity and resource markets to move from 'risk aversion' to 'liquidity conversion' before long!
For the past few months banking experts and financial pundits have been split over the 'contagion effect' of a Greek default and a bond market 'brush cut.' The dire situation in the Mediterranean is rapidly becoming obvious. 3 year Greek bonds trade with an effective yield of almost 30% and an explosive CDS derivative domino market just itching to be triggered. A full blown Greek default has already been effectively 'baked' into the Baklava cake! Greece is over 300 billion Euro in debt and it's budget deficit is more than 4 times the Euro zone 'limit' at 14+% of GDP. The Greek economy has only marginally delevered to this point. Credit to the Greek government has actually increased recently. Credit ratings have hit the rock bottom 'CCC' (avoid at all costs) level. Our happy-go-lucky friends at Moody's Investor Service's is 'warning' ALL lenders remotely connected to the Greek debacle. Three key French banks (Soc Gen, BNP Paribas, & Credit Agricol) with significant credit exposure are the latest candidates to get the Moody evil eye.
Since last May when IMF and Euro zone members reluctantly coughed up an additional 110 billion Euros in a bailout/rescue package along with associated hard core austerity programs social unrest and protest has been the order of the day. To this point Greece has not taken their 'belt tightening' as hard as losing the 7th game of a Stanley Cup final - but discontent and anger will certainly grow during the long hot summer months.
Since then unemployment in Greece has grown almost 5 % to the current 16.5% level. Under 24 year old unemployment exceeds a crushing 40+%! One in three Greek workers are 'currently' employed by the government. The 'reshuffling' Greek government continues to spend almost 50% of it's GDP - an obviously unsustainable pace which will ultimately result in accelerated job loss. To make matters worse another 60 billion Euro infusion is needed by the middle of next month. The big US banks have been generously supporting European banks having lent almost 30% from their 'books' over the past 2 years & with over $US40+ billion of total exposure.
The ECB currently holds 190 billion Euros of Greek IOU's against a total net equity capital base of 82 billion Euros. A 50% Greek bond market 'haircut' would therefore effectively wipe out the ECB and sink the central bank. The contagion effect would be catastrophic to say the least. The top 3 directly exposed countries to Greece are Germany (26b Euro), France (20b Euro) & UK (3.2b Euro). Adding basket cases Portugal & Spain and possibly heavy weight Italy to this toxic mess makes this 'structual' challenge more than 'transitory' in nature. It is the toughest test of the resolve and discipline of the Euro zone in it's short history. Should Euro financial heavy weights Germany and France fall out of love the resulting divorce would be messy indeed and make a world wide economic 'double dip drubbing' a certain reality.
In the US, fixed income Guru and newly minted Treasury bond bear, Bill Gross, who manages over $1.2 trillion in assets, told CNBC Monday that the US is 'actually' in worse shape financially than Greece after all entitlements are factored into the equation. Pimco has no intention of buying any treasury bonds after the Federal Reserve spends the last of the $US600 billion bailout bonanza. His tone and demeanor was dire to say the least. Definitely not a great way to start the week.
The aptly named 'Misery Index' which is the sum of unemployment and inflation (CPI) rates has hit a fresh 28 year high. Almost as miserable as a Vancouver hockey fan! The index has risen significantly since BHO took office from 7.8% to 12.7% Google searches for 'Double Dip Recession' have returned to bearish levels of this time last year! Fragile consumer confidence threatens consumption levels for the summer and back to school months. American households are quickly losing their sense of humor and patience.
On the plus side, total household financial burdens have eased considerably since Sept '07 reflecting businesses and individuals actively adjusting to changing circumstances. Housing starts are flat (which is better than negative) despite significant inventory supply. US Corporations are flush with capital and strong profits continue to roll out throughout much of this uncertainty. Retail cash registers are ringing for the time being and we are beginning to enjoy some of Al Gore's global warming at last!
The DJIA and S&P both sit 7% below recent recovery highs in early May. They are both consolidating in critical moving average territory and slightly above long term weekly up trend lines. They both 'feel' like they could quite easily retest the lower early March and Jan 1st levels of another 3-4% lower. Sharply lower recent crude oil prices should add significant support to those levels and fatter consumer's wallets.
In the commodity sector, Brent-Cushing spread levels have hit record levels of over $US20/bbl. Markets look to be well supplied in the short run despite rising world wide consumption levels. Crude oil has broken a recent short term congestion distribution range and will find significant support in the $US88-92 range. The break at the 'pumps' will be welcome news for American drivers this summer. Natural Gas looked all set to breach the $5/mcf level recently but has settled back into the $US4.50 range based on lower crude prices.
Gold refuses to correct below the $US1,500/oz level and looks to break out into new all time high territory should credit issues accelerate. The 'gold barometer' is clearly signalling anticipated increased inflation levels and possibly QE III expectations. Silver continues to compress in the mid $US34-6 range still feeling the ill effects of recent crushing CME margin pressure.
In the Agra sector the grains have corrected recent strength primarily based on current prevailing economic 'slow down' concerns and anticipated credit contraction. Growth and economy sensitive Copper futures has rallied into key over head resistance and potential break out territory of $US4.25/lb.
In Canada, the 'Forest Slump' misadventure fiasco appears to have spread throughout the entire TSX resource sector. Selling has accelerated recently with the TSX a full 10% + below recent recovery high territory. Beleaguered shares of SinoForest have broken $CD4/sh this week in a stunning fall from institutional grace. Lower than expected earnings were reported compounded by accelerated 'non-recurring' write downs based on new international accounting standards. It will be an additional 3 months before an 'independant' analysis is complete. At minimum, it will give a little more time for the trees to grow! Until that time 'CasinoForest' remains a highly uncertain unquantifiable speculation at best. Should the 'worst case' scenario emerge for TRE it could unfortunately tarnish current resource excitement and reduce upside for a whole chunk of related sectors.
In the misery loves company category, RIM has also disappointed investors and analysts with lower than expected earnings and sharply lower future guidance. This bad news has resulted in a stock price below 2007-08 end-of-world levels. RIM has been a key bell weather for the TSX for many years and it's negative effect could quite easily mute sector and index upside for the summer months. Based on current earnings, low single digit P/E, and cash flush treasury RIM will be an ideal candidate for potential merger or takeover activity for those hoping to do battle with the Apple communications behemoth.
Bottom Line: It is almost impossible for equity/commodity markets to deal with the steady flow of dire/tragic 'macro' related issues and events that we receive on almost a daily basis. Most major indexes have mapped out short term distribution type topping patterns primarily based on significant assorted economic head winds. Strong bottom up micro corporate fundamentals are in place for concerted upside once the major sovereign credit and debt issues are realistically and effectively addressed.
For those of the bullish ilk who may need reminding or to be cheered up a little;
the world is growing (3.2%); the US is growing (2%); floods/tornadoes/tsunamis are not permanent; debt is transitory; IPO conditions are vibrant; companies are loaded with cash ($US1.9 T); bargain Fed interest rate policy appears to be locked in until after the 2012 election; key blue chip companies are well into the black and attractively valued, and most importantly almost everybody is braced for the downside.
Look for major equity and resource markets to move from 'risk aversion' to 'liquidity conversion' before long!
Friday, June 10, 2011
Week Ending June 10th/2011 - Correction II
North American major markets are 'correcting' for the second time in 2011.
In normal circumstances major North American market indexes correct approximately 4 times a year. This year's first DJIA and S&P correction (mid Feb-mid March -6%) bounced perfectly off its 200 dma (11,700) before rallying into new post credit crisis high territory and a shade under 12,900. This most recent 6 week DJIA and S&P 8% capitulation feels much more intense having wiped out the lions share of the 2011 gains for the year. The DJIA is enduring it's worst weekly losing streak since 2002! And that's saying something when one considers what we've been through since then!
The TSX has dropped almost 9% since the early April double top level (14,300) led by the heavily weighted financials and having lost all of it's 2011 gains. Major moving averages and key uptrend lines have been violated this week which is often a red flag for long positions.
The TSX Venture Index has dropped a whopping 20+% from its early March high of 2,450. It currently sits under 1,950 and 300 points below the January 1st/2011 opening levels.
This most recent North American swoon accelerated primarily due to the uncharacteristically dour comments from Helicopter Ben and his steroid consuming band of financial quantitative easers. His depressing economic comments and projections sounded like a QE III rehearsal speech to me. Bernake's sour analysis was supported by the Fed's Beige Book reports of 'growing but slowing' US economic activity. Only Dallas Tx reported upbeat growing stats - a possible indication of a looming NBA Mav upset over the Terrific Trio of the Miami Heat. Gentle Ben will have his hands full convincing a surly Congress during looming debt limit 'roid rage' debates to provide financial markets with yet another 'quick fix' to stimulate beleaguered tax payers!
This week's critical major US bond auction went smoothly with the bell weather 10 year bond rate dropping below 3%. The November 2010 'Pre-QEII' 10 year bond yield low was 2.636%.
The level of investor bearish sediment has rapidly increased to almost 50% - the same level as just prior to the November start of the QEII. Let's hope this is not an indication that glass is only half full!
Nasty unemployment stats continue to be reported for most credit challenged Euro zone jurisdictions. It is beyond me how Greece with 16% and Spain with 21% unemployment (and each with a whopping 40+% unemployment for those under 24) will ever deal with their bloated debt balance sheets. The slight .06% drop in German industrial output is equally as concerning considering they effectively finance most of the dysfunctional Euro debt freeloaders. Moody's has become very moody lately with their 'downgrade-a-day' doomsday threats to any fiscally challenged jurisdiction. China suggests they may take their foot off the interest rate accelerator but seem to be more concerned about US financial budget challenges. Thankfully sweltering temperatures in the Middle East have temporarily halted significant internal political and social hostilities for the time being!
In the US the unemployment line has stretched back to a hair over 9% in spite of very positive record levels of exports, rapidly improving personal balance sheets, powerful corporate profit momentum, and a very friendly interest rate/spread environment. Household net worth has increased $US10T in the least 2 years!
Financial pundits are growing increasingly 'gloomy and doomy' in spite of our bikini friendly summer temperatures. Second quarter GDP growth does not appear likely to build significantly on the moribund 1.8% stats reported in the first quarter. 'Stimulative' interest rates cannot drop any lower unless lenders are prepared to start paying borrowers instead of collecting.
The key under valued housing sector is groping for a meaningful bottom like a New York Democratic Representative on Facebook. Merciless waves of fresh foreclosures are bloating already over supplied conditions. R.Shiller (Case-Shiller Index) suggests that residential values may drop yet another 10-25% before the ultimate bottom is hit. That reality would suggest conditions far worse than the devastating carnage of the 'Dirty 30's!' And this after the value of household real estate has already lost $US6.6T from the 2007 peak. I'm not sure a US bank will be left in business if residential house prices drop another 25% from current depressed levels. Currently US Banking balance sheets are being mercilessly 'capital tested' by the Fed while their associated equities try to deal with substantial liquidation and nose diving stock prices.
Prevailing powerful corporate earnings reports are being systematically revised downward reflecting an anticipated drop in world wide economic growth. I hope I'm not cheering you up too much?
Although I'm not planning to cut my personal consumption levels any time soon - the equity markets and economic experts are suggesting otherwise! My wife will not be pleased if they are right and I am wrong!
In the commodity sector widespread 'bubble' proclamations ring out but are not reflected in the current strong price levels so far. The Agra sector is showing renewed strength with Corn futures hitting life of the contract high levels based on reports of reduced planting, lower than expected yields, and weather issues. Soybeans are on the verge of following the lead of corn needing only marginal upside to significantly break out on the upside. Wheat has been the lovable laggard of the group and rests on solid support at $US7.50/bu.
The International Energy Agency released a report calling for a 'Golden Age' for Natural Gas - my personal favorite commodity. Although - I'm not looking forward to increased levels of personal natural gas in my golden age. (Sorry but I had to throw that one in). The thrust of the IEA report is based on Japan's tragic nuclear disaster with Nat Gas being a relatively cheap, pleantiful, and safe substitute. I'm not quite that positive but I think Nat Gas can easily rally to the mid $US6/mcf level - the average break even cost of production. Nat Gas currently is on the verge of a significant intermediate break out through the $US4.90/mcf level on a closing basis. Hot summer temperatures will go a long way to burn off Natural Gas inventory excesses.
Gold has impressively absorbed any significant selling to this point and is consolidating near the May 2nd all time high level of $US1,557. Despite recent short term US$ strength - Gold remains within a crisp freshly printed $US20 bill of new record high closing levels. Short term technical negative relative strength divergence is a mild concern for Gold at current levels and may suggest a pull back to $US1,475 support.
Silver continues to impressively absorb and consolidate the recent brutal CME margin increases in the
$US36-38 level. It appears that Silver maybe flowing into longer term strong hands from the short term speculative trading accounts. Gold and Silver have recently been reporting interestingly record low 'deliverable' levels of inventory on the CME. Expect increased volatility around key contract expiry dates throughout the summer.
Copper has held the very profitable $US4/lb level to this point and needs a $US4.25+ level on a closing basis to resume upside momentum. Rising interest rates and/or a slowing world economy would challenge Copper to remain significantly above the $US4/lb level. Downside support is at the $US3.60/lb level.
Oil impressively holds the $US95-105 level primarily based on various OPEC member quota differences, very volatile inventory reporting, and the astonishing news that China has already become the #1 consumer of energy in the world! I hope they got Al Gore's permission first! Significant strength in the US$ would pressure Crude Oil prices in the near term. The $US85-95/bbl level looks to offer significant longer term support with $US110-120 being substantial natural resistance. Intermediate and Senior producing oil equities have significantly discounted lower underlying crude oil price levels which I do not think we will see any time soon. Many quality junior TSX-Venture exchange oil exploration/producing/drilling issues have been hit particularly hard in recent days and look very compellingly priced at current levels.
In Canada, the TSX has also been hit particularly hard in recent weeks in no small part due to unsubstantiated accusations of significant irregularities by TSX 60 listed Chinese Timber company Sino Forest. According to the appropriately named short sellers - 'Muddy Waters' - See No Forest has been nothing more than your basic 'Tree Ex' swindle possessing little or no value. Based on very suspect and 'pre-marketed(?)' negative research, the 35 year old former lawyer & upstart Carson Block, alleges that Sino Forest has grossly over exaggerated stumpage reserves and possibly even title and ownership.
The silent response from the otherwise vigilant regulatory community has been deafening. In the process Ontario domiciled Sino Forest, with a significant 'who's who of finance' as shareholders, has been crushed having lost 80% of its recent $US5B market cap. It appears that the compliance community has little concern about loose cannon renegade short sellers who disparage, denigrate, and generally 'muddy the waters' against relatively helpless publicly listed issuers. Since the fireworks of last week almost every North American Chinese RTO completed over the past 10 years has come under intense scrutiny and pressure. The SEC has finally decided to fly into action! Many issues are no longer marginable at the major brokerage houses based simply on this self interest hearsay!
It is mind boggling in this day of the Dot Com 2002 Sarbanes Oxley Auditing Accountability Act and the most recent assorted Dodd-Frank Sub prime regulatory overkill - that anything even close to this kind of financial chicanery can occur! It sure looks like the regulators could use some regulating themselves!
The TSX closes the week a shade below 13,100 almost 1,200 points (9%) below the March and April recent recovery high levels. Key support, moving average, and longer term uptrend levels have been violated in this significant over sold 8 week sell off. The TSX will be limited on the upside without leadership from the Banking & Financial issues.
Bull market corrections can be as deep as 15% - which in this case would definitely surprise me if the price of gold, base metals, and crude oil continue to stay at current high levels. The TSX list of new 52 week lows has grown considerably in the past few weeks and is starting to feature more quality issues which is not a great sign. Breadth on the downside is another nagging negative.
Bottom Line: What initially looked to be a fairly subdued and contained sell off has morphed into a fairly nasty and powerful selling slump. Persistent sovereign debt teeth gnashing and related QE II debt ceiling stress appears to be accelerating. My personal DJIA/S&P/TSX index 'stop loss' levels have been triggered by the end of the week. As a result I am now more of a mild 'stopped out' bull/bison.
Interestingly a significant amount of this selling has occurred without the usual accompanying negative economic hard data points. The quality (volume, breadth, &leadership) of the next rebound rally will be key to determine if this selling leg is more intermediate in nature - and which could be as much as 15% from the recent post credit crisis high levels. 'If so', that would imply that both the DJIA and TSX could fall another 1,000 points back to their respective long term 200 week moving averages.
In today's terms nothing can be ruled out. Strong balance sheet companies with healthy earnings that appear very attractively priced may get cheaper in the short term. Huge pools of liquidity continue to search for growth and yield. Look for the DJIA 11,700 to offer significant support and a potential double bottom opportunity.
Bear market talk is beginning to circulate around momentum driven trading circles and respected financial commentators. Even worse - Bernake will be speaking before the end of the month! Look for entry points during near term extreme oversold conditions.
'Trading this market through the summer months may require healthy doses of sun screen, air conditioning, and the patience of Job.'
In normal circumstances major North American market indexes correct approximately 4 times a year. This year's first DJIA and S&P correction (mid Feb-mid March -6%) bounced perfectly off its 200 dma (11,700) before rallying into new post credit crisis high territory and a shade under 12,900. This most recent 6 week DJIA and S&P 8% capitulation feels much more intense having wiped out the lions share of the 2011 gains for the year. The DJIA is enduring it's worst weekly losing streak since 2002! And that's saying something when one considers what we've been through since then!
The TSX has dropped almost 9% since the early April double top level (14,300) led by the heavily weighted financials and having lost all of it's 2011 gains. Major moving averages and key uptrend lines have been violated this week which is often a red flag for long positions.
The TSX Venture Index has dropped a whopping 20+% from its early March high of 2,450. It currently sits under 1,950 and 300 points below the January 1st/2011 opening levels.
This most recent North American swoon accelerated primarily due to the uncharacteristically dour comments from Helicopter Ben and his steroid consuming band of financial quantitative easers. His depressing economic comments and projections sounded like a QE III rehearsal speech to me. Bernake's sour analysis was supported by the Fed's Beige Book reports of 'growing but slowing' US economic activity. Only Dallas Tx reported upbeat growing stats - a possible indication of a looming NBA Mav upset over the Terrific Trio of the Miami Heat. Gentle Ben will have his hands full convincing a surly Congress during looming debt limit 'roid rage' debates to provide financial markets with yet another 'quick fix' to stimulate beleaguered tax payers!
This week's critical major US bond auction went smoothly with the bell weather 10 year bond rate dropping below 3%. The November 2010 'Pre-QEII' 10 year bond yield low was 2.636%.
The level of investor bearish sediment has rapidly increased to almost 50% - the same level as just prior to the November start of the QEII. Let's hope this is not an indication that glass is only half full!
Nasty unemployment stats continue to be reported for most credit challenged Euro zone jurisdictions. It is beyond me how Greece with 16% and Spain with 21% unemployment (and each with a whopping 40+% unemployment for those under 24) will ever deal with their bloated debt balance sheets. The slight .06% drop in German industrial output is equally as concerning considering they effectively finance most of the dysfunctional Euro debt freeloaders. Moody's has become very moody lately with their 'downgrade-a-day' doomsday threats to any fiscally challenged jurisdiction. China suggests they may take their foot off the interest rate accelerator but seem to be more concerned about US financial budget challenges. Thankfully sweltering temperatures in the Middle East have temporarily halted significant internal political and social hostilities for the time being!
In the US the unemployment line has stretched back to a hair over 9% in spite of very positive record levels of exports, rapidly improving personal balance sheets, powerful corporate profit momentum, and a very friendly interest rate/spread environment. Household net worth has increased $US10T in the least 2 years!
Financial pundits are growing increasingly 'gloomy and doomy' in spite of our bikini friendly summer temperatures. Second quarter GDP growth does not appear likely to build significantly on the moribund 1.8% stats reported in the first quarter. 'Stimulative' interest rates cannot drop any lower unless lenders are prepared to start paying borrowers instead of collecting.
The key under valued housing sector is groping for a meaningful bottom like a New York Democratic Representative on Facebook. Merciless waves of fresh foreclosures are bloating already over supplied conditions. R.Shiller (Case-Shiller Index) suggests that residential values may drop yet another 10-25% before the ultimate bottom is hit. That reality would suggest conditions far worse than the devastating carnage of the 'Dirty 30's!' And this after the value of household real estate has already lost $US6.6T from the 2007 peak. I'm not sure a US bank will be left in business if residential house prices drop another 25% from current depressed levels. Currently US Banking balance sheets are being mercilessly 'capital tested' by the Fed while their associated equities try to deal with substantial liquidation and nose diving stock prices.
Prevailing powerful corporate earnings reports are being systematically revised downward reflecting an anticipated drop in world wide economic growth. I hope I'm not cheering you up too much?
Although I'm not planning to cut my personal consumption levels any time soon - the equity markets and economic experts are suggesting otherwise! My wife will not be pleased if they are right and I am wrong!
In the commodity sector widespread 'bubble' proclamations ring out but are not reflected in the current strong price levels so far. The Agra sector is showing renewed strength with Corn futures hitting life of the contract high levels based on reports of reduced planting, lower than expected yields, and weather issues. Soybeans are on the verge of following the lead of corn needing only marginal upside to significantly break out on the upside. Wheat has been the lovable laggard of the group and rests on solid support at $US7.50/bu.
The International Energy Agency released a report calling for a 'Golden Age' for Natural Gas - my personal favorite commodity. Although - I'm not looking forward to increased levels of personal natural gas in my golden age. (Sorry but I had to throw that one in). The thrust of the IEA report is based on Japan's tragic nuclear disaster with Nat Gas being a relatively cheap, pleantiful, and safe substitute. I'm not quite that positive but I think Nat Gas can easily rally to the mid $US6/mcf level - the average break even cost of production. Nat Gas currently is on the verge of a significant intermediate break out through the $US4.90/mcf level on a closing basis. Hot summer temperatures will go a long way to burn off Natural Gas inventory excesses.
Gold has impressively absorbed any significant selling to this point and is consolidating near the May 2nd all time high level of $US1,557. Despite recent short term US$ strength - Gold remains within a crisp freshly printed $US20 bill of new record high closing levels. Short term technical negative relative strength divergence is a mild concern for Gold at current levels and may suggest a pull back to $US1,475 support.
Silver continues to impressively absorb and consolidate the recent brutal CME margin increases in the
$US36-38 level. It appears that Silver maybe flowing into longer term strong hands from the short term speculative trading accounts. Gold and Silver have recently been reporting interestingly record low 'deliverable' levels of inventory on the CME. Expect increased volatility around key contract expiry dates throughout the summer.
Copper has held the very profitable $US4/lb level to this point and needs a $US4.25+ level on a closing basis to resume upside momentum. Rising interest rates and/or a slowing world economy would challenge Copper to remain significantly above the $US4/lb level. Downside support is at the $US3.60/lb level.
Oil impressively holds the $US95-105 level primarily based on various OPEC member quota differences, very volatile inventory reporting, and the astonishing news that China has already become the #1 consumer of energy in the world! I hope they got Al Gore's permission first! Significant strength in the US$ would pressure Crude Oil prices in the near term. The $US85-95/bbl level looks to offer significant longer term support with $US110-120 being substantial natural resistance. Intermediate and Senior producing oil equities have significantly discounted lower underlying crude oil price levels which I do not think we will see any time soon. Many quality junior TSX-Venture exchange oil exploration/producing/drilling issues have been hit particularly hard in recent days and look very compellingly priced at current levels.
In Canada, the TSX has also been hit particularly hard in recent weeks in no small part due to unsubstantiated accusations of significant irregularities by TSX 60 listed Chinese Timber company Sino Forest. According to the appropriately named short sellers - 'Muddy Waters' - See No Forest has been nothing more than your basic 'Tree Ex' swindle possessing little or no value. Based on very suspect and 'pre-marketed(?)' negative research, the 35 year old former lawyer & upstart Carson Block, alleges that Sino Forest has grossly over exaggerated stumpage reserves and possibly even title and ownership.
The silent response from the otherwise vigilant regulatory community has been deafening. In the process Ontario domiciled Sino Forest, with a significant 'who's who of finance' as shareholders, has been crushed having lost 80% of its recent $US5B market cap. It appears that the compliance community has little concern about loose cannon renegade short sellers who disparage, denigrate, and generally 'muddy the waters' against relatively helpless publicly listed issuers. Since the fireworks of last week almost every North American Chinese RTO completed over the past 10 years has come under intense scrutiny and pressure. The SEC has finally decided to fly into action! Many issues are no longer marginable at the major brokerage houses based simply on this self interest hearsay!
It is mind boggling in this day of the Dot Com 2002 Sarbanes Oxley Auditing Accountability Act and the most recent assorted Dodd-Frank Sub prime regulatory overkill - that anything even close to this kind of financial chicanery can occur! It sure looks like the regulators could use some regulating themselves!
The TSX closes the week a shade below 13,100 almost 1,200 points (9%) below the March and April recent recovery high levels. Key support, moving average, and longer term uptrend levels have been violated in this significant over sold 8 week sell off. The TSX will be limited on the upside without leadership from the Banking & Financial issues.
Bull market corrections can be as deep as 15% - which in this case would definitely surprise me if the price of gold, base metals, and crude oil continue to stay at current high levels. The TSX list of new 52 week lows has grown considerably in the past few weeks and is starting to feature more quality issues which is not a great sign. Breadth on the downside is another nagging negative.
Bottom Line: What initially looked to be a fairly subdued and contained sell off has morphed into a fairly nasty and powerful selling slump. Persistent sovereign debt teeth gnashing and related QE II debt ceiling stress appears to be accelerating. My personal DJIA/S&P/TSX index 'stop loss' levels have been triggered by the end of the week. As a result I am now more of a mild 'stopped out' bull/bison.
Interestingly a significant amount of this selling has occurred without the usual accompanying negative economic hard data points. The quality (volume, breadth, &leadership) of the next rebound rally will be key to determine if this selling leg is more intermediate in nature - and which could be as much as 15% from the recent post credit crisis high levels. 'If so', that would imply that both the DJIA and TSX could fall another 1,000 points back to their respective long term 200 week moving averages.
In today's terms nothing can be ruled out. Strong balance sheet companies with healthy earnings that appear very attractively priced may get cheaper in the short term. Huge pools of liquidity continue to search for growth and yield. Look for the DJIA 11,700 to offer significant support and a potential double bottom opportunity.
Bear market talk is beginning to circulate around momentum driven trading circles and respected financial commentators. Even worse - Bernake will be speaking before the end of the month! Look for entry points during near term extreme oversold conditions.
'Trading this market through the summer months may require healthy doses of sun screen, air conditioning, and the patience of Job.'
Thursday, June 2, 2011
Week Ending June 3rd/2011 - Brinkmanship
Brinkmanship is defined as the technique or practice of maneuvering a dangerous situation to the limits of tolerance or safety in order to secure the greatest advantage, especially by creating diplomatic crises. International politicians are famous for escalating military tensions primarily for political advantage and strategic concessions. The practice of international 'economic' brinkmanship is just as lethal but a considerably more dangerous practice. At minimum, it definitely creates an annoying and toxic investment atmosphere. It is not a wise or healthy 'game' for world economies and the business environment.
Widespread uncertainty, fear, and doubt is currently being generated throughout the world by dysfunctional Central Banking types who threaten contagion risks with looming financial Armageddon. Unfortunately many of the dudes who are trying to solve these complex debt issues are the sames culprits who created this mess.
Greece who entered the European Union (1981) based on a 'fudged' financial resume threatens the world with a return back to bankrupt independence. It is now clear that the EU 'merger of equals' was anything but! Greece with almost US$ one half trillion in debt obviously borrowed considerably more than they could afford. For the past 2 years they have demonstrated zero fiscal discipline or budgetary restraint. The thought of austerity, and the necessary 30% drop in living standard, has brought the masses back into the streets in aggressive protest. It has become clear they have little or no interest in repaying a single Drachma if they can help it. Credit ratings agencies have had no alternative but to lower ratings to default levels in the dismal Caa1 category.
And as the various sovereign sabres rattle, Central Euro Bankers are frantically attempting to engineer further irresponsible 'short term' lending which Greece will also never repay. Ultimately various banks will be on a very tenuous Greek hook for a combined US$100 billion - if not more! In for a penny ... in for a pound I guess?
It may be unfair to blame the problem on a small singular defenceless country which represents less than 1% of the world's GDP (#45 per capita). Iceland has recently disavowed any financial responsibility. Portugal is closely monitoring Greece's reaction to the latest blackmail package. Spain and Italy wait anxiously in the wings for similar largess. One wonders how much bailing Germany and France can or wants to do? Trying to hold 'unaccountable' jurisdictions accountable looks to be the ultimate challenge in this bizarre international financial Ponzi scheme.
In the US - the same dangerous game of brinkmanship is on daily display in Congress and the Fed in mindless debt ceiling rhetoric and irrational deficit financing masterminding. Public service unions use any opportunity to dip into an already massively over extended public trough. Learned & fearless leadership are fully convinced that it would be 'totally irresponsible' for the taxpayer NOT to get deeper 'into the glue!' Talk of perpetual bailouts, zero interest rate policies, and multi trillion dollar deficits roll of their lips far too easily.
The US Federal Government has spent US$5+ trillion of borrowed dough over the past four years to generate less than US$800 billion in GDP - and they think that's a good thing! They want to do more!
Minor currencies have become one of the few harbors of capital safety. Decades of shameless and reckless fiscal and monetary mismanagement has obviously come to a difficult and painful crossroad. It is time to pay the piper and for this nonsense to end! It is definitely time to regulate the regulators!
Finding leadership with the character to realistically address responsibilities will be another matter altogether. Knowing who to trust and/or believe may be more difficult.
Combining fresh negative US employment, housing, and manufacturing data this week it is hardly a wonder that equity markets have stumbled out of the gate this month. This past 2 year S&P/DJIA bull market has been difficult, unloved, and under owned. Outstanding export and earnings growth data gets little or no respect. It appears that market participants are searching for reasons not to own equities as opposed to searching for opportunities. Past negative news gets repetitively recycled and has effectively kept the major North American equity markets within 5% of the opening Jan 1st level - but also within 5% of their three-year high levels recorded at the end of April. Markets are keenly more sensitive and reactive to negative than positive reports.
Negative housing hysteria has hit a fevered pitch in spite of being 3 years old! Double dipping Case-Shiller stats indicate that home ownership and prices have returned to early 2000 levels - the beginning of the 'accelerated madness.' A veritable tsunami of foreclosed homes are about to hit a weak marketplace. More importantly - on an inflation and a gold adjusted basis (number of ounces of gold to buy an average home) US housing prices have returned to 1980 levels - a period of mid teen interest rates and very difficult economic circumstances. US homes have never been more affordable as compared to income - or cheaper on a square footage basis. Needless to say - it's a little late to get too negative on housing prices now even considering pending foreclosures and a major FNMA reorganization. With over US$1.5 trillion sitting in idle bank reserves my bet is that the worst is over.
In the commodity sector the negative effect of stressful currency and sovereignty issues have been much more muted. Gold persistently holds the US$1.535/oz level and is only $20/oz away from all time high closing levels. Silver continues to consolidate in the mid US$30/oz level and looks to be more of a range bound trading vehicle in the US$32-39/oz level. A break over US$40/oz would imply a retest of all time high levels of US$50/oz.
The grain complex looks very positive with Soy Beans and Corn on the verge of a major break to the upside and into new recovery high territory. Wheat prices are lagging based on recent fundamentals but will more than likely rally with the group.
My favorite Natural Gas is breaking out of a multi-week & multi-month long term consolidation pattern at US$4.75/mcf. Nat Gas crossed through the positive 'golden cross' of the 50 dman passing through the 200 dma on the upside. NG looks to possibly rally quickly to the long term cost of production of US$6+ /mcf. The long term Natural Gas chart looks very interesting with a positive risk to reward ratio. Most negative 'over supply' NG news appears to have been built into current consolidated price levels. With the prospect of a long hot summer air conditioners will be pressed to the limit and excess NG supplies will be reduced.
Crude Oil continues to hold the $100/bbl level and also looks to be more of a range bound trading vehicle in the US$95/bbl to 105/bbl range.
Copper looks a little more dicey - but continues to hold the US$4/lb level in spite of a well publicized 'potential' world wide economic slow down threat. A break of the US$4.25/lb level would imply a retest of the recent all time high levels.
It appears that the overall commodity complex is discounting the possibility of a modified QE III stimulus package looking past the current QEII program.
In Canada the TSX continues to consolidate in the frustrating 13,400 to 14,200 level. Canadian Banks have reported generally improved but lower than anticipated earnings. A few expected dividend increases were announced but it appears than much of the good news has been factored into current prices. The heavily weighted TSX Financial index rests on critical support levels and at it's 200 dma. It may be a tad early to suggest that the full effect of the North American 'low to neglibile' interest rate policy has been fully baked into Cdn bank equity prices - but any meaningful intermediate upside does appear to be limited.
RIM has broken into new multi year low territory breaking the $40 level after almost 6 months of selling. Negative Nokia research reports of pending low inventory turn over and tightening margins have contributed to the RIM malaise. It seems that no competing tech company has avoided the destructive 'Apple Effect!'
Many senior resource stocks and sectors appear to be very attractively priced based on their relatively strong commodity prices. Higher underlying prices would be the catalyst for resource sector leadership this summer.
Bottom Line: Hardly a day goes by without the major North American equity markets having to deal with a nasty economic or ugly political event.
Central Banking types have clearly demonstrated that they do not possess the determination or will to deal with key fiscal or difficult monetary issues. They seem to be a collective group of 'can kickers' who are happy to kick their problems 'down the road.' It appears their current low interest rate & easy monetary policies will continue to be the status quo for the foreseeable future. Let's just hope that all of their collective posturing and self serving idle Brinkmanship threats remain idle.
I do believe that the world wide economy is a lot stronger than is being advertised. I think that earnings will continue to grow and that employment conditions will improve faster than expected. Recent impressive IPO and M&A activity looks to accelerate considerably.
Most key stock prices are fairly to attractively priced on most key metrics. They appear to be considerably under owned and unwanted relative to liquidity and capital levels. It would be unusual to see a meaningful topping process with a majority braced and expecting significant downside liquidation.
Considerable external geo-economic risk does indeed exist - but I will not be surprised if markets are consolidating for a more positive summer investment season than has been announced & expected. I maintain long held stop levels of DJIA 12,000, S&P 1,300, and TSX 13,250 just in case push comes to shove! Or if the can doesn't kicked!
Widespread uncertainty, fear, and doubt is currently being generated throughout the world by dysfunctional Central Banking types who threaten contagion risks with looming financial Armageddon. Unfortunately many of the dudes who are trying to solve these complex debt issues are the sames culprits who created this mess.
Greece who entered the European Union (1981) based on a 'fudged' financial resume threatens the world with a return back to bankrupt independence. It is now clear that the EU 'merger of equals' was anything but! Greece with almost US$ one half trillion in debt obviously borrowed considerably more than they could afford. For the past 2 years they have demonstrated zero fiscal discipline or budgetary restraint. The thought of austerity, and the necessary 30% drop in living standard, has brought the masses back into the streets in aggressive protest. It has become clear they have little or no interest in repaying a single Drachma if they can help it. Credit ratings agencies have had no alternative but to lower ratings to default levels in the dismal Caa1 category.
And as the various sovereign sabres rattle, Central Euro Bankers are frantically attempting to engineer further irresponsible 'short term' lending which Greece will also never repay. Ultimately various banks will be on a very tenuous Greek hook for a combined US$100 billion - if not more! In for a penny ... in for a pound I guess?
It may be unfair to blame the problem on a small singular defenceless country which represents less than 1% of the world's GDP (#45 per capita). Iceland has recently disavowed any financial responsibility. Portugal is closely monitoring Greece's reaction to the latest blackmail package. Spain and Italy wait anxiously in the wings for similar largess. One wonders how much bailing Germany and France can or wants to do? Trying to hold 'unaccountable' jurisdictions accountable looks to be the ultimate challenge in this bizarre international financial Ponzi scheme.
In the US - the same dangerous game of brinkmanship is on daily display in Congress and the Fed in mindless debt ceiling rhetoric and irrational deficit financing masterminding. Public service unions use any opportunity to dip into an already massively over extended public trough. Learned & fearless leadership are fully convinced that it would be 'totally irresponsible' for the taxpayer NOT to get deeper 'into the glue!' Talk of perpetual bailouts, zero interest rate policies, and multi trillion dollar deficits roll of their lips far too easily.
The US Federal Government has spent US$5+ trillion of borrowed dough over the past four years to generate less than US$800 billion in GDP - and they think that's a good thing! They want to do more!
Minor currencies have become one of the few harbors of capital safety. Decades of shameless and reckless fiscal and monetary mismanagement has obviously come to a difficult and painful crossroad. It is time to pay the piper and for this nonsense to end! It is definitely time to regulate the regulators!
Finding leadership with the character to realistically address responsibilities will be another matter altogether. Knowing who to trust and/or believe may be more difficult.
Combining fresh negative US employment, housing, and manufacturing data this week it is hardly a wonder that equity markets have stumbled out of the gate this month. This past 2 year S&P/DJIA bull market has been difficult, unloved, and under owned. Outstanding export and earnings growth data gets little or no respect. It appears that market participants are searching for reasons not to own equities as opposed to searching for opportunities. Past negative news gets repetitively recycled and has effectively kept the major North American equity markets within 5% of the opening Jan 1st level - but also within 5% of their three-year high levels recorded at the end of April. Markets are keenly more sensitive and reactive to negative than positive reports.
Negative housing hysteria has hit a fevered pitch in spite of being 3 years old! Double dipping Case-Shiller stats indicate that home ownership and prices have returned to early 2000 levels - the beginning of the 'accelerated madness.' A veritable tsunami of foreclosed homes are about to hit a weak marketplace. More importantly - on an inflation and a gold adjusted basis (number of ounces of gold to buy an average home) US housing prices have returned to 1980 levels - a period of mid teen interest rates and very difficult economic circumstances. US homes have never been more affordable as compared to income - or cheaper on a square footage basis. Needless to say - it's a little late to get too negative on housing prices now even considering pending foreclosures and a major FNMA reorganization. With over US$1.5 trillion sitting in idle bank reserves my bet is that the worst is over.
In the commodity sector the negative effect of stressful currency and sovereignty issues have been much more muted. Gold persistently holds the US$1.535/oz level and is only $20/oz away from all time high closing levels. Silver continues to consolidate in the mid US$30/oz level and looks to be more of a range bound trading vehicle in the US$32-39/oz level. A break over US$40/oz would imply a retest of all time high levels of US$50/oz.
The grain complex looks very positive with Soy Beans and Corn on the verge of a major break to the upside and into new recovery high territory. Wheat prices are lagging based on recent fundamentals but will more than likely rally with the group.
My favorite Natural Gas is breaking out of a multi-week & multi-month long term consolidation pattern at US$4.75/mcf. Nat Gas crossed through the positive 'golden cross' of the 50 dman passing through the 200 dma on the upside. NG looks to possibly rally quickly to the long term cost of production of US$6+ /mcf. The long term Natural Gas chart looks very interesting with a positive risk to reward ratio. Most negative 'over supply' NG news appears to have been built into current consolidated price levels. With the prospect of a long hot summer air conditioners will be pressed to the limit and excess NG supplies will be reduced.
Crude Oil continues to hold the $100/bbl level and also looks to be more of a range bound trading vehicle in the US$95/bbl to 105/bbl range.
Copper looks a little more dicey - but continues to hold the US$4/lb level in spite of a well publicized 'potential' world wide economic slow down threat. A break of the US$4.25/lb level would imply a retest of the recent all time high levels.
It appears that the overall commodity complex is discounting the possibility of a modified QE III stimulus package looking past the current QEII program.
In Canada the TSX continues to consolidate in the frustrating 13,400 to 14,200 level. Canadian Banks have reported generally improved but lower than anticipated earnings. A few expected dividend increases were announced but it appears than much of the good news has been factored into current prices. The heavily weighted TSX Financial index rests on critical support levels and at it's 200 dma. It may be a tad early to suggest that the full effect of the North American 'low to neglibile' interest rate policy has been fully baked into Cdn bank equity prices - but any meaningful intermediate upside does appear to be limited.
RIM has broken into new multi year low territory breaking the $40 level after almost 6 months of selling. Negative Nokia research reports of pending low inventory turn over and tightening margins have contributed to the RIM malaise. It seems that no competing tech company has avoided the destructive 'Apple Effect!'
Many senior resource stocks and sectors appear to be very attractively priced based on their relatively strong commodity prices. Higher underlying prices would be the catalyst for resource sector leadership this summer.
Bottom Line: Hardly a day goes by without the major North American equity markets having to deal with a nasty economic or ugly political event.
Central Banking types have clearly demonstrated that they do not possess the determination or will to deal with key fiscal or difficult monetary issues. They seem to be a collective group of 'can kickers' who are happy to kick their problems 'down the road.' It appears their current low interest rate & easy monetary policies will continue to be the status quo for the foreseeable future. Let's just hope that all of their collective posturing and self serving idle Brinkmanship threats remain idle.
I do believe that the world wide economy is a lot stronger than is being advertised. I think that earnings will continue to grow and that employment conditions will improve faster than expected. Recent impressive IPO and M&A activity looks to accelerate considerably.
Most key stock prices are fairly to attractively priced on most key metrics. They appear to be considerably under owned and unwanted relative to liquidity and capital levels. It would be unusual to see a meaningful topping process with a majority braced and expecting significant downside liquidation.
Considerable external geo-economic risk does indeed exist - but I will not be surprised if markets are consolidating for a more positive summer investment season than has been announced & expected. I maintain long held stop levels of DJIA 12,000, S&P 1,300, and TSX 13,250 just in case push comes to shove! Or if the can doesn't kicked!
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