Evidently life goes on after the end of economic stimulus, quantitative easing, and
other various selective banking accommodations.
US treasury bond yields are rising and bond prices are contracting/adjusting in an orderly manner so far. A move above 4% in the 10 year treasury yield could reverse a very long 30+ year downtrend in interest rate levels. A sharply higher interest environment would create significant economic challenges and head winds.
Attention is now turning to current debt ceiling limit discussions - minus much of the earlier fear mongering and emotional histrionics. A constructive reality may be finally setting in or it just might be getting harder to spook markets? Could Federal spending fatigue finally be setting in? Odds are now 80% that a debt ceiling agreement will happen before the cupboard is bare. However, the odds of getting out of the hole by digging deeper are much less!
The Greek debt drama also appears to be playing out without the doom, gloom, and anticipated middle class revolution to this point. EU periphery player Greece is quickly becoming an after thought on the world's financial stage. Sovereign issues are now perceived as banking challenges. Currently a third of the 91 Euro banks are undergoing public stress tests to determine the level and extent of external support necessary to balance their books. This year's 8% flight of Greek deposits from their banking system has not helped matters. Thankfully it does not appear like it will be a full fledged accelerated run on their financial system. All that really remains to be decided is the level and distribution of the pain and punishment. Could such austerity measures mean the end of Italian President Silvio Berlusconi's bunga bunga parties too!?
This week's stringent Moody's downgrade of Portugal by four levels to junk status has been met with a palpable disdain by Germany and Euro zone members. The EU called the downgrade a biased 'USA' based maneuver which only fuels speculation in the financial markets. The ECB quickly and stunningly announced that they are suspending rating requirements for Portuguese (and mostly likely Spanish and Italian) collateral in a preemptive move to lend against insolvent paper. Not great news for the Goldman Sachs messenger!
Major equity markets around the world hardly batted an eyelash while seemingly looking past most of these current nagging assorted sovereign credit/debt issues - if that is at all possible!
Chinese and the ECB Central Banks once again fractionally raised their interest rates to 3.5% and 1.5% respectively to either attract funds, cool housing speculation, or combat inflation threats. Benchmark rates are now 'almost' reflecting the 'real' rates of inflation in both of these jurisdictions. Nice to see the financial 'ying' being brought into line with the economic 'yang!'
The Bank of England preferred to maintain it's interest rate status quo of 0.5% despite having the worlds highest CPI (excluding food & energy) level of 4.0+% this year. I doubt that the Brits will be able to maintain that accomodative interest rate policy for very much longer.
In the US, rapidly improving internal economic stats led by a 6.5% increase in June same store retail sales and positive employment expectations have ignited a very impressive rally from very over sold conditions.
The seasonal '2 market days before June month end to 5 market days after Independence Day celebration rally' was triggered right on schedule.
This short term broad based 8% rally was not held back by Presidents BHO's golf club rattling town hall twittering threats corresponding to the failure of not reaching an increased debt ceiling level accord. Can you imagine what might have happened if he spoke about the problems associated with the failure of 'not' cutting spending?
Friday's disappointing employment numbers of only 18,000 nonfarm payrolls job created should inspire short term liquidation and position squaring before the weekend. The recent short term rally needs to be corrected and consolidated before a new up leg into new recovery highs are attempted.
The DJIA is only about 2% from a new 'recovery' high at just under 12,900. It will be very interesting to see if a 'run to get back into equity markets' ensues if new recovery highs are made. Trillions of freshly printed idle US dollars are on the side lines braced for various worse case financial scenarios.
Despite a significant 10% rebound in the price of crude oil the DJ Transports have registered an especially impressive new 'all time' high triggering another Dow Theory buy signal. I tip my cap to Warren Buffet for his $US44b purchase of Burlington Northern Santa Fe Corp railway almost two years ago and his 'all-in' wager on the economic future of the United States. The DJ Transport index is up almost 50% since then! That is what I call, 'pinning the tail on the donkey!'
Residential housing markets/prices may have finally 'flattened' (poor word choice) - with rapidly increasing reported sales gains and marginally higher prices in selected regions.
The June ISM manufacturing index increased almost 2% from a month earlier. Both the employment index and new factory orders increased almost 3% from the month of May. Corporate revenues, earnings, and their respective balance sheets have rarely been in better shape. US export business continues to fire on all cylinders.
The S&P looks to report over $90 earnings this year at a reasonable 15x's p/e ratio. The economically sensitive NASDAQ index is on the verge of new 10+ year high territory.
In commodities, the crude oil market easily handled the release of 60m bbls from the strategic petroleum reserves and is within a 'toonie' of the $US100/bbl mark. The 3 month 20% downtrend looks to have reversed with crude oil now above both it's 20 and 50 dma's. Goldman Sachs and Morgan Stanley expects oil to reach $US130/bbl within the year. The 'anticipated' decrease in world wide consumption appears unlikely any time soon.
Gold continues to assert itself as the world's #1 currency and is within a $US20 bill of major break out territory. Silver appears to have effectively consolidated much of the CME generated margin requirement liquidation. A move above $US38/oz would signal a potential break out back to mid $US40 level. World consumption of Silver bullion and coins continues at a consistently increasing record pace. Speculators continue to dominate the Silver markets trading over 800 million of ozs per day in April/May on the COMEX. The entire Silver industry will only produce 900 million ozs from mines and scrap this year! The current Gold-Silver ratio of 42x's suggest that Silver may outperform Gold on the next leg up. Gold & Silver Guru Eric Sprott recently stated prices would go 'bonkers' should a QE III be necessary. I suspect he does.
Copper has suddenly and effectively broken out from it's 5 month consolidating down trend in the face of rising interest rates and the threats of slowing economic growth. South American and African supply concerns are contributing to these higher price levels.
The Agra markets appear to be rebounding from short term very over sold conditions. June was a tough month for grains based on a USDA 'over planting' acreage usage report. The Agra markets can be very volatile and most likely will be for the next few months.
The Canadian dollar is trending bullishly and appears to consoldiating for a run at the $US1.06 high level registered in April. The relative strength of the Canadian dollar has been a considerable headwind for US-Can interlisted equities and many other resource issues.
The US treasury market appears vulnerable now that QEII has finally ended and with rising interest rates throughout the world. The US treasury will continue issuing approx. $US166b per month of bonds but the exact source of demand and price has yet to be determined. Noted commodity bull Jim Rogers is current short 30 year treasury issues and is considering selling 10 and 5 year issues also. The days of negative 'real' interest rate returns appear to be ending. Interest rate sensitive stocks such as financials and utilities could be casualties in a higher interest rate environment.
In Canada, the end of an era was marked by the ultimate multi-billion dollar yard sale of Nortel's remaining patent assets. Many remember when giant Nortel ruled the telecommunications market in the wild Internet 1990's accounting for almost 40% of the TSE 300 and a lusty total market capitalization of almost $US400b. Now the lawyers, accountants, and bond holders will wrestle for the remaining $US10b that will be divied up.
Post Canada Day fireworks will be on display next Tuesday when RIM hosts it's annual shareholder meeting. A call for 'reshuffled' management and new leadership will be made but I doubt that would help. The revolving door at the corporate suites of Nortel only made matters worse.
The Ontario Securities Commission has finally decieded it is time to look into the 50+ Chinese TSX and TSX Venture exchange 'back door' reverse takeover listings. Much of the Sinoforset fraud hysteria has subsided as investors wait for the detailed forensic accounting reports. Hedge fund Wellington Management of Boston now controls over 11% of Sinoforest from it's 4% position at the end of May. Averaging down is usually not a recommended or profitable strategy but WM obviously see value at current depressed levels. A move above $US5/sh would be an interesting short term trading speculation.
The TSX has dramatically lagged the major markets of the US this year and is currently 8% lower from the recovery highs in April. The resource sensitive TSX Venture exchange is down over 20% from the highs registered in early March. With pending potential break outs in many key commodities the TSX could very rapidly revalue many over sold sectors. A move above 13,500 for the TSX would be a very positive precursor for a return back to the 14,000+ levels registered in March and April.
In closing, despite the numerous well publicized economic threats and concerns key North American markets are now 'interestingly' positioned for it's continued 'non-seasonal' summer rally. Over the last 7 days the DJIA has rallied powerfully back to 'post credit crash' high territory. Despite the short term over bought condition considerable amounts of non-performing cash remains idle on the sidelines braced for worse case financial scenarios. Key DJ Transport and Nasdaq Tech leadership bodes well for potential new recovery highs and a longer term bullish outlook. Any near term improvements in US residential housing and banking would be the icing on the cake!
As difficult as it may be - we may have to get used to thinking positive about the economy and being optimistic about improving financial conditions for a change!
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