All 'short term' attention was focused on the annual monetary eco-geek session in Jackson 'Black' Hole WY. The anticipation was for some kind of modified QE stimulative policy edict. The net result was a political non-event Bernake 'punt' into the hands of the ever present grid locked US Congress. Bernake surprisingly threw most of the strategy onus to the 'fiscal' side of the ledger in an interesting change of pace. The 'economic football' has now spiralled back into the capable hands of the fearless strident double speaking political leadership. The question now is has Helicopter Ben run out of monetary ammunition or has he just 'switched gears' and is in a 'wait and see' mode? His ultimate hope being that no news is good news. In either case it looks like we are going to hear a lot more about taxing and spending until the 'extended' Sept 20 FOMC pow wow.
Rep. Rick Perry's 'treason' allegations of last week did resonate in Wyoming. In Bernake's speech the 'I' word (inflation) occurred 7 times and the 'D' word (deflation) zero.
Lost somewhat in all the baited breath anticipation was a downgraded Q1 GDP figure quickly heading toward an ominous zero (or less) growth reality. It appears that the US economy is as weak as Hurricane Irene. Attention now has turned back to the Euro credit and banking car crash and flooded basements in NYC.
Morgan Stanley calculates that almost 60% of the 8,000b Euro funding that is in place for the largest 91 euro zone banks needs to be rolled over in the next 24 months. Matching short and long term funding will be a serious challenge. Collateral demands are the latest development for nations contributing to the PIIGS bailout. Tremendous political resistance prevails against using tax revenues to further bail out any free loaders.
Former Fed head A. Greenspan temporarily snapped out of his hazy coma with the proclamation that 'the euro is breaking down and the process of its breaking down is creating very considerable difficulties in the European banking system.' Hard to believe that that dude was in charge for almost 20 years.
Also hard to believe is the almost 30% which the key European German DAX index has dropped this month.The future of the EU hinges on a healthy growing German industrial base.
Equally as concerning is the 50+% of Emerging Countries Indexes which are down over 20% (bear market territory) for the year. Short selling curbs may have muted further downside deterioration but a significant amount of weakness has already been priced into key indexes.
In the US, despite negative media frenzy cold hearted bankers are beginning to lend part of their $US1.6T in excess reserves. Small to medium business lending is up almost 10% this quarter. The second quarter GDP revision revealed relentless outstanding corporate profitability. After-tax corporate profits (yes they are taxed) were up over 9% year-over-year and now stand at an all time record high of 10.1% as compared to the GDP. The cash registers are ringing in the sales. Record corporate efficiency stands at $US15,278 per worker in 2011 - up 22% since last year and 50% higher since 2001! Corporate profits are up almost 200% since 2000 while equity prices have dropped almost 20%. Record low interest rates and a weak dollar have been key contributing factors. Domestic equity markets remain largely unimpressed.
Dismal new home sales falling below 300k units are contributing to 2011 shaping up to be the worst year on record. 700k units is the annual rate needed for a healthy/normal market. Months of overhead inventory supply held steady at 6.6 months. On the plus side housing prices have stabilized with strong selected regional strength reported. CBS reported that Obama has spent as much in 3 short years as did GW Bush did in his full 8 year term. On average the national debt increased a whopping $US4.247b during EACH day Obama has been in office. That puts a whole new definition on the term unsustainable. Lots of dough spent with very little to show for it. US consumer confidence is mired at 2008 low levels with unemployment above 9% as housing gropes for a meaningful bottom. We have been treated to lots of rewritten policy, congressional grid lock, and tax turmoil analysis on 'fixing' the economy and repairing the public balance sheet. Perhaps the fearless leadership should now reflect on the departure of the great Steve (Apple) Jobs who's vision, determination, and persistence was the real driver for employment and economic growth. As a society our standard of living improves ONLY when we are surrounded by risk taking visionary entrepreneurs who create goods and services which we need and use. Taxes (or tax cuts) rarely make a difference. Banks and predatory hedge funds definitely do not! America is filled with creative vision and inspiration which desperately needs to be unleashed. Thank you Mr. Jobs for 35 years of excellence!
From the 'financial' engineering' department - no other than the bespeckled, ukele playing, bath tub soaking Oracle of Omaha octogenarian W. Buffet came to the 'psuedo' rescue of Bank of America's in a very lucrative and leveraged $US5b preferred stock investment. Attached with the rich 6% annual dividend are warrants for 700m at-the-money shares which expire in 10 long years. Grandpa Warren's financial 'hug' cost a lot and effectively makes Berkshire BofA's ($US2.2T assets) largest shareholder by a mile. Despite the call from the holidaying Prez from Martha's Vineyard he insists the loan was his 'non' crony capitalistic idea while bubble bathing with his rubber ducky! BofA went from 'not needing funding' to giving away the farm - all in one 'non' phone call. I guess all that guilt ridden 'non taxed' revenue isn't that great a burden for Warren after all? BofA then announced the sale for about half of it's stake in China Construction Bank Corp for $US8.3b and a $US3.3b gain.
On the week the DJIA and S&P rallied 4+% reversing a 4 week downtrend. The DJIA is down -2.58% and the S&P -6.62% YTD.. The Nasdaq rallied a respectful 5.41% but remains down almost 7% on the year. Back to school is in high gear and a serious and sober September is now upon us!
In commodities the margin gremlins attacked the parabolic Gold rise which resulted in a sharp and sudden $US200/oz contraction - the biggest drop since March 2008. Shanghai was the latest to increase Gold margin a very healthy 26%. At that time the Gold RSI registered a very over bot and over extended 85 reading. Gold closed at $US1,780/oz down $US-72.55 on the week and up +25% YTD. The drop comes just days after the GLD gold trust officially dethroned the SPY (S&P550) fund as the largest ETF by market value. Key levels for Gold are $1,800 (10 dma), $US1,725 (50dma), and $US1,525 (200dma). September to December represents a period of 'traditional' seasonal weakness for bullion. Silver has held the $US40 level representing a slowly improving gold-silver ratio of approximately 45x's. Key levels for Silver are $US38 (intermediate term up trend line), $US37 (200dma), and $US43.50 on the upside (the recent closing high). Crude Oil prices remain range bound in the $US80-88 consolidation area. A break and close below $US80 would represent significant weakness. A move above $US90 would be met with considerable resistance. Both Copper and Nat Gas are holding support levels above $4 per pound and MCF respectively The Agra sector continues to emerge with Corn well on it's way to $US8/bu and Soy Beans measuring to $US16/bu. Continued commodity inflation will more than likely rekindle political turmoil in dependant & vulnerable jurisdictions. With the US treasury sector having effectively destroyed the short end of the yield curve and creating 'no risk free' rates of return havoc the 10 & 20 year bonds look technically vulnerable and over-extended.
In Canada, an early 'October Fest' celebration was held at RIM offices in Waterloo Ontario marking the resignation of Apple steamroller CEO Steve Jobs. RIM held the $22Cd level and is with a loonie of $30Cd based on new product releases, patent repricing, and Android compatibility. Analysts are now jumping back on the RIM band wagon with revisions and upgrades. RIM has a long track record of being a great buy when things look the worst!
Stunning 'head rolling' demands from the OSC (Ontario Securities Commission) for embattled Chinese forestry firm Sino-Forest executives marks what looks to be the beginning of the end for the RTO former blue chipper. As far as Sino is concerned $$$ does not grow on trees and is a litigation lawyers dream come true.
Canadian corporate earnings are showing tangible deterioration as profits fell 4.9% on a sequential basis in Q2 - the weakest showing in the last 24 months.Profit margins remain resilient reflecting the improved performance of Canadian producers productivity. Operating profits are at pre-recession highs despite a 12% drop in revenue. Manufacturers are well positioned to benefit from a pick-up in growth should the Cd$ weaken and/or the US economy improves.
The Canadian major banks earnings reporting parade has been mixed the BMO surprising to the upside and RY showing slightly less than expected numbers.
My attention is fixed on the precious metals equities which now trade at a multi-decade low of 8x's cash flow on average. Aurico Gold announced a 60+% takeover premium for acquisitive Northgate Minerals - an indication how traditionally undervalued much of the mining and material sector is. Any further merger/takeover activity is expected to fetch similar premiums.
The S&P/TSX index closed up +278 points or 2.32% on the week but is down -8.61% YTD. The S&P/TSX Venture index turns short term positive above 1,800 with the possibility of returning to 2,000 resistance levels.
Bottom Line, breaking news of a 'new' banking deal in Greece may dispel a percentage of the pervasive extreme short term negativity. Nervous hedge funds may now be inspired to cover short positions and more importantly may suggest critical lower interest rate lending. The US equity market has priced in a fairly major earnings recession in 2012 - a normally positive election period. Earnings will need to fall significantly in order to return to historical PE ranges. Higher US interest rates and a strengthening US dollar represent significant upside headwinds. The late July equity swoon inflicted significant technical damage to major indexes. I suspect key longer term accounts are already braced for the downside and are relatively under-invested with significant cash positions. A contra-trend rally will more than likely be contained at levels of 5-8% higher - the significant distribution levels and psycological areas from which they recently broke down.
I remain firmly perched on the fence and I think it is fair NOT to rule out any possibility in this quickly changing financial landscape! The mix of fear, uncertaintly, and lots of 'non earning' idle cash on the sidelines can be an exhilarating and lethal combination!
Monday, August 29, 2011
Friday, August 19, 2011
Week Ending Aug 19/11 - Re-Test
If you have had a restful and relaxing summer then you are probably not involved or following the global financial markets. Being at the beach with your head stuck in the sand was a much better alternative!
After a brief respite from a very over sold short term condition the selling bogeyman returned to equity markets with the intent of 're-testing' the recent lows hit last week.
Fresh 'almost' all time low 10 year treasury yields of 2% suggest a grim return of the Great Recession. The all-time low yield of 1.67% was registered in 1945! Economic conditions appear to be deteriorating quickly throughout much of the industrialized world. There doesn't seem to be a bank without a funding problem of some kind. Those evil doing 'downgraders' at S&P are licking their chops and Black Swans events are multiplying like rabbits at a carrot convention!
The clever Tyler Durden @ 'Zero Hedge' posted a fascinating data set from Bloomberg which clearly shows that 'rare economic events' are becoming increasingly less rare. It shows a clear unmistakable trend of increasing frequency of 4 sigma+ events in the S&P since 1951 - and the chart itself looking very much like a long necked swan to boot! This week the Philly Fed Index shockingly dropped to -30.7% from an expected +2.0% - an amazing 8 standard deviation differential! Any reading below zero is contraction. In his brief note Mr. Durden states, 'What is glaringly obvious is that all those claiming central planning under a monetary authority leads to market stability need to have their head examined: what the central bankers of the world do is merely push back ever more disastrous events into the future!' A simple, effective, and very difficult to argue presentation.
Deep pocketed Germany also reported a somewhat surprise industrial slowdown which may effectively restrain the EU investment environment enthusiasm for the time being. The DAX has been lambasted 22% this month and has lost almost 30% since spring. As the unofficial central banker of the EU Germany is quickly becoming less of a 'back stop' and support system to 'free loading' members.
A slowdown in earnings may be as much of a problem as the lack of liquidity for all the 8,000 EU banks. European banks are relying more on the foreign exchange market to obtain dollar funding as investors shy away from their US short-term debt paper due to falling financial domino contagion fears. This funding is financing longer term Euro assets thus increasing the possibility of an 'old fashioned' banking liquidity trap. By the end of the week the market cap of tech stock Apple unbelievably exceeded that of ALL of the Euro banks! That is not a good sign!
All eyes will now be focused on the Jackson 'Black' Hole meeting of the financial masterminds next Friday. The latest hurrah of a two year interest rate holiday and another gift to mortgage 'refinancers' has had a muted and tepid response. The low/cheap interest rate 'dividend' has been long priced into the market. It appears that Fed may have finally run out of ' Hail Mary TD Passes' and will now be relegated to a 'cheerleading' role! This sluggish stagflationary low growth, high unemployment, low wage, and rising inflationary environment will require more than a few mid air flips to be effective. Dealing with a 'new/additional' inflation problem will tax the abilities of the most self assured central banking types. We will soon discover how skilled they are!
In the US despite fetching 'trailing' valuations equity markets look to soon 're-test' last week's 10,700 DJIA and 1,100 S&P closing lows. The great earnings season is now a distant memory. The market is no longer currently moored to fundamentals. Trading volumes have fallen considerably this week perhaps as an indication of intensified fear levels and the absence of non day trading buyers. Earlier comments of 'the' recent major equity 'break-down' being 'transitory, contained, oversold, temporary, or simply high frequency related.' will be tested should these low water mark levels be significantly violated.
I was astonished to see the DJ Transports register 52 week closing lows at 4,200 just 3 short weeks after making ALL-TIME highs at 5,650 - while the price of oil dropped 20+%. Insider buying and share buy backs have become the 'flavor of the day' which could provide much needed support to the market. A tremendous amount of liquidity continues to exist on the side lines garnering the 'next to zero' return.
Tremendous technical damage had been inflicted to very nervous indexes and will require a long period of accumulation in order to stabilize and strengthen. On the week the DJIA finished -2.85%, S&P -3.38%, Nasdaq -4.97, and the DJ Euro Stoxx 50 -6.43%
In commodities all eyes has been on the relentless dizzying Gold rally - a mere $US135/oz away from the psychological $US2,000/oz mark. The most interesting news came from our good Venezuelan friend H. Chavez who not only nationalized the public 'mafia' gold exploration companies but also repatriated $US11B or 211 tons of it's 365 tons of gold reserves from various global bank store rooms. Venezuela produces 11 metric tons of gold per year. 99 tons of gold in the Bank of England has been called for delivery and one wonders if this will turn into a 'race to repatriate' by nervous central banks? Prez Chavez kindly offered the basement of his Miraflores palace as storage should there not be enough room in the central banks vault. What makes this news significant is that bullion such as this gets lend many times over as collateral for the paper gold ETF's. As a result this edict could represent hundreds of tons of gold 'delivery' issues for the banks. Mr Eric Sprott has written extensively about this very issue. We will soon discover it's effect. Silver looks like it has finally consolidated the 7 brutal CME margin increases during the spring. A retest of the $US50/oz recent high looks to be in the offing over the next few weeks. A move to my expected $US60/oz level looks possible by late October or early November. Crude oil is rattling between $US75-90 in 3-5% daily price swings. A major contraction in the economy would be necessary in order to achieve sub $US75/bl crude. Copper tenaciously hold $US4lb caught between a slowing economy and inflationary pressures. The Agra sector faces persistent reports of record low crop supplies. Corn continues to lead with life of the contract highs being registered. Hogs and Cattle are also performing very strongly in the commodity sector.
In Canada, both Finance Minister Jim Flaherty and BofC Governor Mark Carney testified that the global recovery was 'fragile' with modest expectations. Concern about 'off-shore' financial turmoil 'inevitably' hitting Canada caused the BofC to lower Q2 growth expectations 'slightly' from 1.5%. Mr. Carney also said that the BofC will be 'prudent' as it determines whether to withdrawal stimulus from the domestic economy in the face of a weak US recovery and the epic Euro banking concerns. The S&P/TSX lost 4.26% on the week lockstep with the major US indexes. 11,700 was the recent closing low registered 2 weeks ago. Significant overhead resistance exists between 12,700-13,300. The weakness in the heavily weighted financials were the standout having clearly broken down from their spring tops. The relative strength between the miner's index and the underlying prices of gold and silver prices has reached an all-time high divergence. A sub 1,800 TSX-Venture Index looks like an optimal and attractive entry level opportunity to me. A tremendous amount of risk has been 'wrung out' of the junior and mid cap energy and mining equities in my opinion. Goldman Saks is set to debut yet another 'stock exchange' (#11) in Canada with its SIGMA X 'dark pool' system. It will allow investors (mostly institutional) to anonymously buy and sell stocks on the Toronto Stock Exchange. I guess it won't be long before the ETF people start an Canadian Stock Exchange index?
Bottom Line, the $64k question is whether the major markets and indexes have 'broken -down' based on downgraded economic growth and financial turmoil - or if the 'correction' is over and markets are now bouncing around at intermediate low territory? Most Asian, Indian, and Euro bourses have already corrected over 20% and are currently in 'bear market mode' anticipating further turbulence and contraction.
Those hit hardest are Greece -45%, Italy -35%, Finland & Austria -30%, and Brazil, France, Denmark, Germany,Spain, Swedan, Switzerland, Argentina, Portugal and India down -20+%. Global bond, currency, and equity markets are now obviously inextricably linked to one another. It appears like the 'chain of global banking & finance' is now only as strong as it's weakest link. Political issues in the Middle East are now resufacing which adds yet another concern and dimension to current problems.
These are all deep and very serious credit issues to which we are all exposed. They are problems which will take a significant amount of time and restraint to repair and the potential exists for the environment to deteriorate from current levels.
The rising yields on Greek debt suggests an almost certainty of default and a 20-30% 'brushcut' on it's $US500b bond portfolio. Should that occur and trigger losses on Italy's $US2T of debt all eurozone banks -which own 'snootfuls' of those dubious bonds - would be significantly 'distressed' if not 'vaporized!' The value of Euro Stoxx Banks has fallen almost 80% from their 2011 highs! Bad debts has wiped out over 60% of Eurozone bank capital since 2007. Understandably these central bankers are as nervous as a cat in a room full of rocking chairs! Political solutions are more than unlikely!
Therefore, I'd prefer to let the markets to the talking in the short run and maintain a neutral stance until further notice. I doubt that markets will 'get away' on the upside. Slow and steady is the investment theme of the day. Tax loss selling season is almost upon us which will add more selling pressure.
Expect most major markets to be 'technically' momentum driven in the short term with intense periods of volatility. Markets will be driven and dominated by uncertainty and fear for the balance of the year. Even the most 'bullet proof' high frequency programmed algorithm will be tested to the max!
After a brief respite from a very over sold short term condition the selling bogeyman returned to equity markets with the intent of 're-testing' the recent lows hit last week.
Fresh 'almost' all time low 10 year treasury yields of 2% suggest a grim return of the Great Recession. The all-time low yield of 1.67% was registered in 1945! Economic conditions appear to be deteriorating quickly throughout much of the industrialized world. There doesn't seem to be a bank without a funding problem of some kind. Those evil doing 'downgraders' at S&P are licking their chops and Black Swans events are multiplying like rabbits at a carrot convention!
The clever Tyler Durden @ 'Zero Hedge' posted a fascinating data set from Bloomberg which clearly shows that 'rare economic events' are becoming increasingly less rare. It shows a clear unmistakable trend of increasing frequency of 4 sigma+ events in the S&P since 1951 - and the chart itself looking very much like a long necked swan to boot! This week the Philly Fed Index shockingly dropped to -30.7% from an expected +2.0% - an amazing 8 standard deviation differential! Any reading below zero is contraction. In his brief note Mr. Durden states, 'What is glaringly obvious is that all those claiming central planning under a monetary authority leads to market stability need to have their head examined: what the central bankers of the world do is merely push back ever more disastrous events into the future!' A simple, effective, and very difficult to argue presentation.
Deep pocketed Germany also reported a somewhat surprise industrial slowdown which may effectively restrain the EU investment environment enthusiasm for the time being. The DAX has been lambasted 22% this month and has lost almost 30% since spring. As the unofficial central banker of the EU Germany is quickly becoming less of a 'back stop' and support system to 'free loading' members.
A slowdown in earnings may be as much of a problem as the lack of liquidity for all the 8,000 EU banks. European banks are relying more on the foreign exchange market to obtain dollar funding as investors shy away from their US short-term debt paper due to falling financial domino contagion fears. This funding is financing longer term Euro assets thus increasing the possibility of an 'old fashioned' banking liquidity trap. By the end of the week the market cap of tech stock Apple unbelievably exceeded that of ALL of the Euro banks! That is not a good sign!
All eyes will now be focused on the Jackson 'Black' Hole meeting of the financial masterminds next Friday. The latest hurrah of a two year interest rate holiday and another gift to mortgage 'refinancers' has had a muted and tepid response. The low/cheap interest rate 'dividend' has been long priced into the market. It appears that Fed may have finally run out of ' Hail Mary TD Passes' and will now be relegated to a 'cheerleading' role! This sluggish stagflationary low growth, high unemployment, low wage, and rising inflationary environment will require more than a few mid air flips to be effective. Dealing with a 'new/additional' inflation problem will tax the abilities of the most self assured central banking types. We will soon discover how skilled they are!
In the US despite fetching 'trailing' valuations equity markets look to soon 're-test' last week's 10,700 DJIA and 1,100 S&P closing lows. The great earnings season is now a distant memory. The market is no longer currently moored to fundamentals. Trading volumes have fallen considerably this week perhaps as an indication of intensified fear levels and the absence of non day trading buyers. Earlier comments of 'the' recent major equity 'break-down' being 'transitory, contained, oversold, temporary, or simply high frequency related.' will be tested should these low water mark levels be significantly violated.
I was astonished to see the DJ Transports register 52 week closing lows at 4,200 just 3 short weeks after making ALL-TIME highs at 5,650 - while the price of oil dropped 20+%. Insider buying and share buy backs have become the 'flavor of the day' which could provide much needed support to the market. A tremendous amount of liquidity continues to exist on the side lines garnering the 'next to zero' return.
Tremendous technical damage had been inflicted to very nervous indexes and will require a long period of accumulation in order to stabilize and strengthen. On the week the DJIA finished -2.85%, S&P -3.38%, Nasdaq -4.97, and the DJ Euro Stoxx 50 -6.43%
In commodities all eyes has been on the relentless dizzying Gold rally - a mere $US135/oz away from the psychological $US2,000/oz mark. The most interesting news came from our good Venezuelan friend H. Chavez who not only nationalized the public 'mafia' gold exploration companies but also repatriated $US11B or 211 tons of it's 365 tons of gold reserves from various global bank store rooms. Venezuela produces 11 metric tons of gold per year. 99 tons of gold in the Bank of England has been called for delivery and one wonders if this will turn into a 'race to repatriate' by nervous central banks? Prez Chavez kindly offered the basement of his Miraflores palace as storage should there not be enough room in the central banks vault. What makes this news significant is that bullion such as this gets lend many times over as collateral for the paper gold ETF's. As a result this edict could represent hundreds of tons of gold 'delivery' issues for the banks. Mr Eric Sprott has written extensively about this very issue. We will soon discover it's effect. Silver looks like it has finally consolidated the 7 brutal CME margin increases during the spring. A retest of the $US50/oz recent high looks to be in the offing over the next few weeks. A move to my expected $US60/oz level looks possible by late October or early November. Crude oil is rattling between $US75-90 in 3-5% daily price swings. A major contraction in the economy would be necessary in order to achieve sub $US75/bl crude. Copper tenaciously hold $US4lb caught between a slowing economy and inflationary pressures. The Agra sector faces persistent reports of record low crop supplies. Corn continues to lead with life of the contract highs being registered. Hogs and Cattle are also performing very strongly in the commodity sector.
In Canada, both Finance Minister Jim Flaherty and BofC Governor Mark Carney testified that the global recovery was 'fragile' with modest expectations. Concern about 'off-shore' financial turmoil 'inevitably' hitting Canada caused the BofC to lower Q2 growth expectations 'slightly' from 1.5%. Mr. Carney also said that the BofC will be 'prudent' as it determines whether to withdrawal stimulus from the domestic economy in the face of a weak US recovery and the epic Euro banking concerns. The S&P/TSX lost 4.26% on the week lockstep with the major US indexes. 11,700 was the recent closing low registered 2 weeks ago. Significant overhead resistance exists between 12,700-13,300. The weakness in the heavily weighted financials were the standout having clearly broken down from their spring tops. The relative strength between the miner's index and the underlying prices of gold and silver prices has reached an all-time high divergence. A sub 1,800 TSX-Venture Index looks like an optimal and attractive entry level opportunity to me. A tremendous amount of risk has been 'wrung out' of the junior and mid cap energy and mining equities in my opinion. Goldman Saks is set to debut yet another 'stock exchange' (#11) in Canada with its SIGMA X 'dark pool' system. It will allow investors (mostly institutional) to anonymously buy and sell stocks on the Toronto Stock Exchange. I guess it won't be long before the ETF people start an Canadian Stock Exchange index?
Bottom Line, the $64k question is whether the major markets and indexes have 'broken -down' based on downgraded economic growth and financial turmoil - or if the 'correction' is over and markets are now bouncing around at intermediate low territory? Most Asian, Indian, and Euro bourses have already corrected over 20% and are currently in 'bear market mode' anticipating further turbulence and contraction.
Those hit hardest are Greece -45%, Italy -35%, Finland & Austria -30%, and Brazil, France, Denmark, Germany,Spain, Swedan, Switzerland, Argentina, Portugal and India down -20+%. Global bond, currency, and equity markets are now obviously inextricably linked to one another. It appears like the 'chain of global banking & finance' is now only as strong as it's weakest link. Political issues in the Middle East are now resufacing which adds yet another concern and dimension to current problems.
These are all deep and very serious credit issues to which we are all exposed. They are problems which will take a significant amount of time and restraint to repair and the potential exists for the environment to deteriorate from current levels.
The rising yields on Greek debt suggests an almost certainty of default and a 20-30% 'brushcut' on it's $US500b bond portfolio. Should that occur and trigger losses on Italy's $US2T of debt all eurozone banks -which own 'snootfuls' of those dubious bonds - would be significantly 'distressed' if not 'vaporized!' The value of Euro Stoxx Banks has fallen almost 80% from their 2011 highs! Bad debts has wiped out over 60% of Eurozone bank capital since 2007. Understandably these central bankers are as nervous as a cat in a room full of rocking chairs! Political solutions are more than unlikely!
Therefore, I'd prefer to let the markets to the talking in the short run and maintain a neutral stance until further notice. I doubt that markets will 'get away' on the upside. Slow and steady is the investment theme of the day. Tax loss selling season is almost upon us which will add more selling pressure.
Expect most major markets to be 'technically' momentum driven in the short term with intense periods of volatility. Markets will be driven and dominated by uncertainty and fear for the balance of the year. Even the most 'bullet proof' high frequency programmed algorithm will be tested to the max!
Friday, August 12, 2011
Week Ending Aug 12/2011 - VOL
That sure was some kind of volatile week!
Even an old grizzled and bullet riddled veteran of the trading trenches like myself was impressed with those/these incredible trading swings. I have been on record expecting a 'potential' summer breakout on the upside. The free falling 2,000 DJIA point market sell off/rout in only 10 trading days suggests that I might have been a 'tad' over exuberant and dead wrong. You sure didn't need to go to the beach to get sun burned this summer! And sun screen was no protection from the trading screens!
As the market rolled over I did not like seeing the DJIA breaking it's 200 dma (12,300) and was especially concerned once the 12,000 'oversold' support level (50-200dma death cross level) was violated like a hot knife through butter. Wild and wooly volatile trading whipsaws have ensued since the DJIA touched a 10,600 inter day low 4 days ago. VIX volatility (short term coincident sentiment indicator) has exploded (tripling) into panic readings which is never a great sign. Hopefully Washington 'gets' that a global financial system which is 'rigged' with $US700 trillion in derivative time bombs tends to get a bit jumpy in uncertain circumstances. Why and what leaders say is very important and potentially lethal! Hoping the political types both understand the problem(s) AND have an effective long term solution might be too much to ask for. It looks like any major policy direction will now be in the hands of a newly appointed yet-to-be-named super congressional committee sometime by the end of the year. Let's hope that the new divinely inspired 12 wise men/women have a workable plan that satisfies the needs of the economy first and foremost.
These wild global price swings were first ignited by last Friday's S&P US treasury downgrade - and then further exacerbated by the Fed FOMC unprecedented/desperate statement of a/the continued two year 'guaranteed' zero interest rate policy. Three Fed officials dissented their approval of this controversial strategy which has raised a few eyebrows. For those who need income (fixed incomers, insurance companies, pension funds etc) the return on a $US100,000 Tbill is now a paltry 0.11% or $110 per year - less taxes! Those that can do something about bloated consumer and government debt levels and serious structural domestic economic concerns are obviously unwilling to step up to the plate. Interest rates have been very accommodate (easy) for 56 months (below 2%) and effectively an unhealthy zero% (free) for the last 32 months. The 'free debt' message which has been sent and enjoyed contrary to Fed thinking is unsustainable and will be very difficult and exceedingly painful to reverse. Taking candy from this baby will not be easy. The sugar withdrawal will be palpable.
The latest multi-decade abysmally low U of Michigan consumer confidence stats for the month of August (54.9%) suggests that tax payers, consumers, Fed leadership, and various levels of government leadership are not on the same economic page - or perhaps the same planet!
As bad as the US public debt scene seems - European concerns are even worse. Cellphone carrying social media quasi-thugs are reigning pre-austerity economic terrorism on the streets of England. Rouge gangs of idle youth have collectively decided upon a strategy of smashing windows and stealing goods as an efficient way for those that 'have' to pay their 'fair share!' Evidently 'hot' Michael Kors watches are the street's response to quantitative statutory budget restraint. The Greeks have thumbed their collective crooked Mediterranean noses up at monetary restraint and fiscal discipline announcing yet further accelerating deficits. Germany is now the last solvent man standing and the ultimate back stop at what is a very fragile bond house of cards. Germany did not participate in the last decade orgy of leverage and reckless spending. They have the 'uncommon' developed economy DNA of industry, investment, hard work, and balanced books. Their thing is to innovate, improve, engineer, and pay their bills. Can you imagine? They are the only country to hold their original allotment of 3,400 tons of gold they received in the late 1940's. The only mistake they did make was to lend to the 'common' levered free spending and free loading spending jurisdictions of the EU and USA. Germany has also lent hundreds of billions of Euros to a variety of banks since the beginning of the financial crisis accepting such dubious collateral as Greek bonds in return. They made the fatal/incorrect assumption they were actually going to be paid back. They Deutschlanders believe in rules, regulation, and character. A move to default the conspicuous consuming nations essentially vaporizes most, if not all, continental banks worth mentioning. Chancellor Angela Merkel will have to pull an elephant out of her hat in order to persuade her constituents that further lending and support to EU welfare state members is in their best interest. The question now is how many holes can they plug and how much of Europe do they want to own? On the plus side Spanish and Italian yields have contracted to a more reasonable and manageable 5% level and France has maintained it's 'AAA' rating for the time being.
Stay tuned as key developments are unfolding on an hourly basis. Anything can and will probably will happen!
In the US, improving unemployment stats and a slowly improving economy is being systematically undermined by financial turmoil and ongoing uncertainty. Broad indexes have pretty well wiped out any of the positive effect/gain from the various quantitative easing's since 2009. The S&P imploded to the 1070 level in very dramatic programmed algorithmic driven liquidation. Despite the recent outstanding earnings season and fetching corporate valuations the concern of 'unstimulated' earnings contraction prevails. Bank of American has become the poster child for all the is 'unwell' in the residential mortgage and financial balance sheet world. Despite bloated cash levels BAC came within a toonie of it's March 2009 hysterical and historic low. Most broad major indexes have cleanly and clearly broken down from what is now a huge overhead distribution top. Major markets have peeled almost 20 percent off their exuberant April highs in 'pre-recessionary' selling. The prevailing view is that very attractively valued equities are getting risky and vulnerable in a contracting economic environment. The long term zero interest rate policy effect appears to have been fully discounted in stock prices. A concerted downside break below the magical and mystical DJIA 10,000 and S&P 1,000 levels would be a potentially paralytical event. At this point I'm not sure whether that will or will not happen. 12,000 on the DJIA and 1,250 on the S&P now represent considerable overhead resistance. Interestingly in this incredible volatile week US major market indexes will be closing down 1% or less - despite feeling much worse.
In commodities, the standout was the US treasury futures. Despite the 'downgrade' US treasuries rocketed into nose bleed territory with all time low yield levels. This counterintutive move may be as much of recessionary indictment as a safe heaven maneuver. Short term auctions continue to be well received but yesterday's 30 yield T Bond auction was met with stiff resistance. My opinion is that the US Treasury sector is anything but a safe heaven - and is very vulnerable to a dramatic longer term trend reversal despite the liquidity which it offers. The Euro vs US$ has been remarkably 'unvolatile' during this contractionary period. Resource sensitive Aussie and Canuck currencies bore the brunt of the widespread liquidation down to longer term support levels. The 'anticipated' CME Gold margin increase (22%) quickly reversed $1,800+/oz prices. Gold looks like it can easily correct to the $US1,650 level but remains hostage to the whims and political interference of the CME. Silver continues to consolidate the seven March 2011 CME margin increases in the $US38-42/oz range. Significant moving average convergence suggests a 15% move in the near term - which way I'm not sure. Copper has dropped 10% during the past 10 trading sessions consolidating slightly above $US4/lb. Slowing economies could see Copper selling into the $US3.50 level and longer term support. Crude Oil was walloped almost 25% from the $US100 level of two weeks ago. The $75-80 level represents substantial long term support levels despite slowing growth. Agra markets are mixed to positive based on bullish crop reports and growing demand. Corn has been the leader of the pack making life of the contract highs above $US7/bu.
In Canada, the S&P/TSX experienced heavy initial selling led by the energy, material, and financial sector. Surprisingly the TSX Index will close up about 3% this week only because of the heavy pre-downgrade selling which occurred over the past 10 days - and since the end of February. The top performing sectors were the defensive health care group (6.2%) and the oversold materials sector (5.7%). Tech (.94%) and consumer discretionary (.52%) sectors fared the worst. Housing starts are extending their July uptrend (as usual) although a disappointing trade deficit number was registered for the month of June primarily because of relatively currency strength. On the TSX 13,000 now represents substantial over head resistance and 11,000 substantial long term support. The under performing gold equity sector is finally showing considerable relative strength and a potential bottoming process. The junior resource index TSX-Venture hit an astonishing low of 1,700 in this selloff. The heavily oversold energy group is also looking interesting and a potential meaningful contra down trend rally.
Bottom Line, based on the significant technical damage inflicted on the major indexes I prefer a more neutral hands-in-the-pockets sideline stance. Despite the almost 'too many' compelling valuations and very attractive fundamentals I must defer to chart and market action which is confusing to say the least. An austere 'Fed-less' supported US economy will be challenged to maintain growth and profitability. The S&P downgrade is a warning shot that I prefer not to ignore. At minimum a substantial amount of price consolidation is necessary to repair the technical and psychological damage done. All attention will now be drawn to potential economic 'shock and awe' at the upcoming Jackson (Black) Hole meeting at the end of the month.
It will be interesting to see how the equity markets reacts to a series of sustained period of positive macro economic developments - if and when they occur!
Even an old grizzled and bullet riddled veteran of the trading trenches like myself was impressed with those/these incredible trading swings. I have been on record expecting a 'potential' summer breakout on the upside. The free falling 2,000 DJIA point market sell off/rout in only 10 trading days suggests that I might have been a 'tad' over exuberant and dead wrong. You sure didn't need to go to the beach to get sun burned this summer! And sun screen was no protection from the trading screens!
As the market rolled over I did not like seeing the DJIA breaking it's 200 dma (12,300) and was especially concerned once the 12,000 'oversold' support level (50-200dma death cross level) was violated like a hot knife through butter. Wild and wooly volatile trading whipsaws have ensued since the DJIA touched a 10,600 inter day low 4 days ago. VIX volatility (short term coincident sentiment indicator) has exploded (tripling) into panic readings which is never a great sign. Hopefully Washington 'gets' that a global financial system which is 'rigged' with $US700 trillion in derivative time bombs tends to get a bit jumpy in uncertain circumstances. Why and what leaders say is very important and potentially lethal! Hoping the political types both understand the problem(s) AND have an effective long term solution might be too much to ask for. It looks like any major policy direction will now be in the hands of a newly appointed yet-to-be-named super congressional committee sometime by the end of the year. Let's hope that the new divinely inspired 12 wise men/women have a workable plan that satisfies the needs of the economy first and foremost.
These wild global price swings were first ignited by last Friday's S&P US treasury downgrade - and then further exacerbated by the Fed FOMC unprecedented/desperate statement of a/the continued two year 'guaranteed' zero interest rate policy. Three Fed officials dissented their approval of this controversial strategy which has raised a few eyebrows. For those who need income (fixed incomers, insurance companies, pension funds etc) the return on a $US100,000 Tbill is now a paltry 0.11% or $110 per year - less taxes! Those that can do something about bloated consumer and government debt levels and serious structural domestic economic concerns are obviously unwilling to step up to the plate. Interest rates have been very accommodate (easy) for 56 months (below 2%) and effectively an unhealthy zero% (free) for the last 32 months. The 'free debt' message which has been sent and enjoyed contrary to Fed thinking is unsustainable and will be very difficult and exceedingly painful to reverse. Taking candy from this baby will not be easy. The sugar withdrawal will be palpable.
The latest multi-decade abysmally low U of Michigan consumer confidence stats for the month of August (54.9%) suggests that tax payers, consumers, Fed leadership, and various levels of government leadership are not on the same economic page - or perhaps the same planet!
As bad as the US public debt scene seems - European concerns are even worse. Cellphone carrying social media quasi-thugs are reigning pre-austerity economic terrorism on the streets of England. Rouge gangs of idle youth have collectively decided upon a strategy of smashing windows and stealing goods as an efficient way for those that 'have' to pay their 'fair share!' Evidently 'hot' Michael Kors watches are the street's response to quantitative statutory budget restraint. The Greeks have thumbed their collective crooked Mediterranean noses up at monetary restraint and fiscal discipline announcing yet further accelerating deficits. Germany is now the last solvent man standing and the ultimate back stop at what is a very fragile bond house of cards. Germany did not participate in the last decade orgy of leverage and reckless spending. They have the 'uncommon' developed economy DNA of industry, investment, hard work, and balanced books. Their thing is to innovate, improve, engineer, and pay their bills. Can you imagine? They are the only country to hold their original allotment of 3,400 tons of gold they received in the late 1940's. The only mistake they did make was to lend to the 'common' levered free spending and free loading spending jurisdictions of the EU and USA. Germany has also lent hundreds of billions of Euros to a variety of banks since the beginning of the financial crisis accepting such dubious collateral as Greek bonds in return. They made the fatal/incorrect assumption they were actually going to be paid back. They Deutschlanders believe in rules, regulation, and character. A move to default the conspicuous consuming nations essentially vaporizes most, if not all, continental banks worth mentioning. Chancellor Angela Merkel will have to pull an elephant out of her hat in order to persuade her constituents that further lending and support to EU welfare state members is in their best interest. The question now is how many holes can they plug and how much of Europe do they want to own? On the plus side Spanish and Italian yields have contracted to a more reasonable and manageable 5% level and France has maintained it's 'AAA' rating for the time being.
Stay tuned as key developments are unfolding on an hourly basis. Anything can and will probably will happen!
In the US, improving unemployment stats and a slowly improving economy is being systematically undermined by financial turmoil and ongoing uncertainty. Broad indexes have pretty well wiped out any of the positive effect/gain from the various quantitative easing's since 2009. The S&P imploded to the 1070 level in very dramatic programmed algorithmic driven liquidation. Despite the recent outstanding earnings season and fetching corporate valuations the concern of 'unstimulated' earnings contraction prevails. Bank of American has become the poster child for all the is 'unwell' in the residential mortgage and financial balance sheet world. Despite bloated cash levels BAC came within a toonie of it's March 2009 hysterical and historic low. Most broad major indexes have cleanly and clearly broken down from what is now a huge overhead distribution top. Major markets have peeled almost 20 percent off their exuberant April highs in 'pre-recessionary' selling. The prevailing view is that very attractively valued equities are getting risky and vulnerable in a contracting economic environment. The long term zero interest rate policy effect appears to have been fully discounted in stock prices. A concerted downside break below the magical and mystical DJIA 10,000 and S&P 1,000 levels would be a potentially paralytical event. At this point I'm not sure whether that will or will not happen. 12,000 on the DJIA and 1,250 on the S&P now represent considerable overhead resistance. Interestingly in this incredible volatile week US major market indexes will be closing down 1% or less - despite feeling much worse.
In commodities, the standout was the US treasury futures. Despite the 'downgrade' US treasuries rocketed into nose bleed territory with all time low yield levels. This counterintutive move may be as much of recessionary indictment as a safe heaven maneuver. Short term auctions continue to be well received but yesterday's 30 yield T Bond auction was met with stiff resistance. My opinion is that the US Treasury sector is anything but a safe heaven - and is very vulnerable to a dramatic longer term trend reversal despite the liquidity which it offers. The Euro vs US$ has been remarkably 'unvolatile' during this contractionary period. Resource sensitive Aussie and Canuck currencies bore the brunt of the widespread liquidation down to longer term support levels. The 'anticipated' CME Gold margin increase (22%) quickly reversed $1,800+/oz prices. Gold looks like it can easily correct to the $US1,650 level but remains hostage to the whims and political interference of the CME. Silver continues to consolidate the seven March 2011 CME margin increases in the $US38-42/oz range. Significant moving average convergence suggests a 15% move in the near term - which way I'm not sure. Copper has dropped 10% during the past 10 trading sessions consolidating slightly above $US4/lb. Slowing economies could see Copper selling into the $US3.50 level and longer term support. Crude Oil was walloped almost 25% from the $US100 level of two weeks ago. The $75-80 level represents substantial long term support levels despite slowing growth. Agra markets are mixed to positive based on bullish crop reports and growing demand. Corn has been the leader of the pack making life of the contract highs above $US7/bu.
In Canada, the S&P/TSX experienced heavy initial selling led by the energy, material, and financial sector. Surprisingly the TSX Index will close up about 3% this week only because of the heavy pre-downgrade selling which occurred over the past 10 days - and since the end of February. The top performing sectors were the defensive health care group (6.2%) and the oversold materials sector (5.7%). Tech (.94%) and consumer discretionary (.52%) sectors fared the worst. Housing starts are extending their July uptrend (as usual) although a disappointing trade deficit number was registered for the month of June primarily because of relatively currency strength. On the TSX 13,000 now represents substantial over head resistance and 11,000 substantial long term support. The under performing gold equity sector is finally showing considerable relative strength and a potential bottoming process. The junior resource index TSX-Venture hit an astonishing low of 1,700 in this selloff. The heavily oversold energy group is also looking interesting and a potential meaningful contra down trend rally.
Bottom Line, based on the significant technical damage inflicted on the major indexes I prefer a more neutral hands-in-the-pockets sideline stance. Despite the almost 'too many' compelling valuations and very attractive fundamentals I must defer to chart and market action which is confusing to say the least. An austere 'Fed-less' supported US economy will be challenged to maintain growth and profitability. The S&P downgrade is a warning shot that I prefer not to ignore. At minimum a substantial amount of price consolidation is necessary to repair the technical and psychological damage done. All attention will now be drawn to potential economic 'shock and awe' at the upcoming Jackson (Black) Hole meeting at the end of the month.
It will be interesting to see how the equity markets reacts to a series of sustained period of positive macro economic developments - if and when they occur!
Sunday, August 7, 2011
August 6th - Breaking News - AA+
After markets closed on Friday the US Federal Government received an embarrassing 'first time' margin call in the form of an unceremonious S&P downgrade of it's privileged 'AAA' rating to the sobering 'AA+' status on all of it's bond offerings. S&P has kept the outlook 'negative' with a potential downgrade to 'AA' over the next few months.
China and minor rating agency Eagan-Jones had previously reduced the US credit rating last month. Both Fitch and Moody's have yet to move and are waiting anxiously in the wings.
S&P sighted political gridlock, growing fiscal deficits, monetary budget issues, tax/revenue issues, internal growth concerns, and slowing macro world growth as the main culprits for the downgrade. S&P has now decided that with US debt to GDP now pushing 100+% and 40% of all fiscal borrowing financing expenditures has become unsustainable and untenable.
The S&P which dragged their feet through the 2007 sub-prime debacle has waited for the 74th debt ceiling increase and almost $US15T of accumulated debt to make this ill timed move. The leaderless White House has been curiously silent on this development so far. They are probably waiting for the reaction from the investment community and trading markets on Monday morning. I doubt that it will be positive.
US Treasury's have now been knocked out of the 'non' NCAA 'Sweet Sixteen' bracket of countries which have been granted the coveted 'AAA' risk free rating. Eight countries which have lost this ultimate credit status have been able to regain the 'AAA' rating - but it has taken between 8 and 18 long years to do so. It will not be an easy task and it will take a while.
The US now has the same credit rating as Belgium. 'AAA' France is now in the sights of the S&P Grim Reaper with it's massive chartered bank exposure to sovereign EU debt uncertainty. Carrying costs for the US Treasury are expected to increase between $US75-100B per year as a result from this fall from grace. Additional cost cutting or increased borrowing will now be necessary to cover this anticipated shortfall. Only 4 corporations in the US and 15 countries (of the 126 which S&P follows) are left with the pristine 'AAA' rating.
There are many severe consequences from this downgrade. They range from higher costs of borrowing in all sectors of the economy to debilitating currency volatility to the potential tragic loss of the US world's reserve currency status. As the reserve currency it has/had (?) the unique luxury to print and finance debt in it's own currency. This downgrade is essentially a forced downgrade of the US Dollar. 'Triggered' covenant selling of the now risk free 'non' investment grade bonds by mutual and pension funds will be an immediate and pressing concern. Critical currency, trade issues, and upcoming bond auctions will soon take center stage.
The bond and currency markets are many times larger than the equity markets. The confidence and flow of funds between these markets are critical to the investment community. The majority of all world wide debt is US related and short term wholesale liquidation of Treasury's is unlikely if not impossible.
The Israeli market opened down 6% on Sunday trade before being temporarily halted. It finally closed down 7%. Asian and European markets look to open between 3 and 5% lower Monday morning. Gold briefly touched $US1,700/oz (up $US50/oz) on this dramatic development. This is a very serious and difficult issue with many long term implications - none of which are positive.
The S&P ratings drop is an unprecedented reversal of fortune for the world's largest economy. I suspend any thoughts of trading range opinions or investment conditions until which time equity markets adequately digest this significant financial landmark development.
China and minor rating agency Eagan-Jones had previously reduced the US credit rating last month. Both Fitch and Moody's have yet to move and are waiting anxiously in the wings.
S&P sighted political gridlock, growing fiscal deficits, monetary budget issues, tax/revenue issues, internal growth concerns, and slowing macro world growth as the main culprits for the downgrade. S&P has now decided that with US debt to GDP now pushing 100+% and 40% of all fiscal borrowing financing expenditures has become unsustainable and untenable.
The S&P which dragged their feet through the 2007 sub-prime debacle has waited for the 74th debt ceiling increase and almost $US15T of accumulated debt to make this ill timed move. The leaderless White House has been curiously silent on this development so far. They are probably waiting for the reaction from the investment community and trading markets on Monday morning. I doubt that it will be positive.
US Treasury's have now been knocked out of the 'non' NCAA 'Sweet Sixteen' bracket of countries which have been granted the coveted 'AAA' risk free rating. Eight countries which have lost this ultimate credit status have been able to regain the 'AAA' rating - but it has taken between 8 and 18 long years to do so. It will not be an easy task and it will take a while.
The US now has the same credit rating as Belgium. 'AAA' France is now in the sights of the S&P Grim Reaper with it's massive chartered bank exposure to sovereign EU debt uncertainty. Carrying costs for the US Treasury are expected to increase between $US75-100B per year as a result from this fall from grace. Additional cost cutting or increased borrowing will now be necessary to cover this anticipated shortfall. Only 4 corporations in the US and 15 countries (of the 126 which S&P follows) are left with the pristine 'AAA' rating.
There are many severe consequences from this downgrade. They range from higher costs of borrowing in all sectors of the economy to debilitating currency volatility to the potential tragic loss of the US world's reserve currency status. As the reserve currency it has/had (?) the unique luxury to print and finance debt in it's own currency. This downgrade is essentially a forced downgrade of the US Dollar. 'Triggered' covenant selling of the now risk free 'non' investment grade bonds by mutual and pension funds will be an immediate and pressing concern. Critical currency, trade issues, and upcoming bond auctions will soon take center stage.
The bond and currency markets are many times larger than the equity markets. The confidence and flow of funds between these markets are critical to the investment community. The majority of all world wide debt is US related and short term wholesale liquidation of Treasury's is unlikely if not impossible.
The Israeli market opened down 6% on Sunday trade before being temporarily halted. It finally closed down 7%. Asian and European markets look to open between 3 and 5% lower Monday morning. Gold briefly touched $US1,700/oz (up $US50/oz) on this dramatic development. This is a very serious and difficult issue with many long term implications - none of which are positive.
The S&P ratings drop is an unprecedented reversal of fortune for the world's largest economy. I suspend any thoughts of trading range opinions or investment conditions until which time equity markets adequately digest this significant financial landmark development.
Friday, August 5, 2011
Week Ending Aug 5/11 - Correction #3
'If debt is the problem, how is more debt the solution?' R. Paul
Public policy weary investors throughout the world have voted with their feet this week in yet another paralyzing 10+% broad based equity sell off and quasi-panic liquidation. Intensifying this episode were the opportunistic computerized 'algo' mob setting off wild inter day volatility and short term 'flash crash' like turbulence. It is wise not to underestimate the power and influence these notorious market manipulators wield. This weekly index damage inflicted could wipe out .5% of US GDP and potentially tip the economy back into (?) a technical recession.
The European financial 'debt mess' looks like it has expanded well past the minor periphery EU membership. The 4th largest EU economy Italy is now the new whipping boy of the month. Both Spain and Italy have cancelled August bond auctions in a somewhat silent protest of crippling interest rate costs. More than likely it will be even more expensive for them to borrow once they return to the trough. It is now fairly obvious to all that way more money has been borrowed than will ever be repaid throughout the region. Rearranging the deck chairs on the Titanic will likely not help at this point - and look out for a big shipment of ice!
The childish Washington blame game finger pointing which took America and the world to the 'brink' may have vaporized what little 'confidence' was left in the global economic system. The brand spankin' 'new' US debt package of very questionable (back end loaded) spending cuts and hyper increased $US2.1T borrowing is more of an indictment of a broken monetary system of zero political will and even less leadership. With baseline budgeting expect the federal budget to soar by 6% this year and next. Expect an additional $US7 to 8T in debt over the next ten years - the so-called planning horizon of each year's budget. Expect even more if the so-called debt deal is yet another fabrication as in the past.
The Chinese reaction was swift and disparaging stating that the only way America has come up with to improve economic growth has been to take up new loans to pay off old ones. 'Eating May's grain in April' is not a permanent solution according to a government official on the Xinhau news agency. An indication that Beijing will further diversify away from from the US dollar ... and probably to a more protein vs grain diet!
Former Russian Prez. V. Putin's non bare chested comments that the US is living 'like a parasite' on the global economy and arguing that the dollar's dominance was a threat to financial markets did not exactly engender positive 'free market' feelings. That had to hurt even the most ardent delusional tree hugging tax collecting socialist!
The announcement that Apple has more cash on hand than the entire US government had to hurt the feelings of every Keynesian central banker this side of the London School of Economics.
The real question that remains is what both Moody's and S&P thinks of US debt levels and their perception of eventual repayment.
Each year equity markets 'generally' correct 4 times on average. The mid January to mid February correction took markets down 6%. The May to early June correction peeled 8% from the averages. The most recent 10% extravaganza/implosion is the result of increasing selling over the past 8 of 10 trading sessions. The emerging growth jurisdictions have not been spared. Selling has been sector broad based and throughout the globe. The investor fear and trepidation is accelerating. Precious confidence has been rattled - and rightfully/unfortunately so! Attracting committed buyers/investors will be a challenge during these hot and humid days!
In the US, as Obama's 50th chilled Chardonnay was swilled, cold recessionary winds slammed the S&P 500 with it's worst week in more than 2 years. Rumors of a 'modified' QE3 seemed to confuse markets with investors pulling out nearly $US66B from money market funds - the second largest weekly net outflow. The largest outflow was in Sept 2008. The equity rout wiped out $US2.5T in corporate capitalization. The VIX index reached almost 33 (traditional panic point) - the highest level since July 2010 and above the level set during Japan's tragic earthquake. A day after the 'relief' of the 2011 debt deal the US administration borrowed a mind boggling $US231B in one single day. A shocking move which did not sooth jagged nerves. Investors scrambled to raise cash and no asset class was spared. It was the worst two week slump since the hysterical month of March 2009. The conundrum of debt growing faster than anything else and the 'percieved' loss of the Fed 'put' prompted an emotional selling response and fearful buyers strike.
The DJIA ended down almost 7% on the week and nearly 2% on the year. The S&P and NASDAQ averages were both 15% weaker. Key weekly moving average support and longer term trend lines were violated faster than a female guest at an Italian Prime Ministerial bunga bunga party. With financial matters unwinding rather quickly in Europe the positive US multinational earnings momentum will also likely face similar head winds and downward pressure.
Assuming an S&P bond market ratings reprieve over the weekend - this very over sold liquidation should garner substantial support no more than 3-5% lower from this week's close of 1197 on the S&P. Very attractive relative dividend yields should encourage the massive pools of liquidity which are frantically looking for a safe and protected harbor. The substantial DJIA 12,000 to 12,500 distribution band now represents formidable resistance and a likely top for the remainder of the year.
On the potential plus side - the FOMC
In commodities, only the US treasury market avoided selling pressure with longer term yields re-compressing back to record low levels. Real yields on TIPS of all maturities reached a new record low reflecting the deep pessimism and 'relative' flight to safety(?). Long term inflation expectations remain anchored around 2.5% contrary to the new recent record highs recorded in the Gold market. Gold also avoided the selling carnage finishing up 1.5% on the week ($US1,651/oz) in the face of an almost 5% lower CRB index. Silver exhibited much more volatility falling a bit over 2% on the week to $US38.21/oz. Crude oil failed to hold my expected $US90/bl level falling as low as $US83/bl and finished at $US87/bl in wild trading. Natural Gas broke $US4/mcf and looks to potentially double bottom at the March 2011 low. The $US4.25-75 over head distribution band now represents formidable upside resistance. Copper has held $US4/lb to this point in a 10% sell off this week. The perception of a rapid cooling world economy will more than likely pressure prices for the balance of the summer. Copper has traditionally been the key economic bell weather and should be watched carefully as a proxy for future growth or weakness.
In Canada, the resource and financial laden S&P/TSX index bore the full wrath of world wide equity liquidation. Total employment increased modestly in July with private jobs at now above pre-recession peak levels. Small business confidence remains buoyant despite the glut of bad news from almost every other G20 jurisdiction. The Canadian dollar weakened almost 3% on the week primarily as a result of widespread indiscriminate liquidation and profit taking. The S&P/TSX index dropped a gut wrenching 7% on the week and now is down 10.4% on the year to date. The effect of Canada's largest trading partner's economic challenges has taken a significant toll on local equity valuations and expectations. Internal economic statistical conditions remain relatively strong and vibrant in Canada but we remain substantially reliant on financial conditions and fortunes south of the border. The individual sectors hit hardest this week on the S&P/TSX were Health Care -25%, Energy -9.5%, Consumer Discretionary -8.9%, Tech -6.9% and Industrials -6.8%. The S&P/TSX index should find intermediate support in the 11,750-12,000 level barring any further credit contractions. The S&P/TSX Venture Index was hammered 10% on the week and is now down a mind boggling 25% on the year. Much of the longer term risk has been painfully wrung out of the junior resource issues - but I have thought that for a while. The Venture index should find significant support no more than 5% below current levels - and I have said that for a while too!
Thankfully hockey training camps will open soon and that should cheer us up for a change!
In closing, accelerated world wide broad based equity liquidation effectively broke/smashed key support and technical patterns levels in a very tough week. The financial media sentiment can't get much more negative (I think?) and hopefully most/all of the negative debt news is now behind us (bad visual).
Any further panic would introduce an interesting strategic opportunity to purchase or add to the numerous 'mis-priced' under valued resource opportunities. With any luck cool heads will prevail in the critical bond and currency markets as the summer season winds down. The positive effect of continuing low interest rates and lower short term energy and material prices may provide the basis for a potential bottoming and consolidation of equity valuations.
My glass remains half full although investors will now demand certain concrete evidence of improving conditions and positive opportunities. I remain a somewhat bruised and battered inflation bull in this rapidly shifting and evolving economic environment.
Another intense negative week like this any time soon and I will look more like a bison than a bull!
Public policy weary investors throughout the world have voted with their feet this week in yet another paralyzing 10+% broad based equity sell off and quasi-panic liquidation. Intensifying this episode were the opportunistic computerized 'algo' mob setting off wild inter day volatility and short term 'flash crash' like turbulence. It is wise not to underestimate the power and influence these notorious market manipulators wield. This weekly index damage inflicted could wipe out .5% of US GDP and potentially tip the economy back into (?) a technical recession.
The European financial 'debt mess' looks like it has expanded well past the minor periphery EU membership. The 4th largest EU economy Italy is now the new whipping boy of the month. Both Spain and Italy have cancelled August bond auctions in a somewhat silent protest of crippling interest rate costs. More than likely it will be even more expensive for them to borrow once they return to the trough. It is now fairly obvious to all that way more money has been borrowed than will ever be repaid throughout the region. Rearranging the deck chairs on the Titanic will likely not help at this point - and look out for a big shipment of ice!
The childish Washington blame game finger pointing which took America and the world to the 'brink' may have vaporized what little 'confidence' was left in the global economic system. The brand spankin' 'new' US debt package of very questionable (back end loaded) spending cuts and hyper increased $US2.1T borrowing is more of an indictment of a broken monetary system of zero political will and even less leadership. With baseline budgeting expect the federal budget to soar by 6% this year and next. Expect an additional $US7 to 8T in debt over the next ten years - the so-called planning horizon of each year's budget. Expect even more if the so-called debt deal is yet another fabrication as in the past.
The Chinese reaction was swift and disparaging stating that the only way America has come up with to improve economic growth has been to take up new loans to pay off old ones. 'Eating May's grain in April' is not a permanent solution according to a government official on the Xinhau news agency. An indication that Beijing will further diversify away from from the US dollar ... and probably to a more protein vs grain diet!
Former Russian Prez. V. Putin's non bare chested comments that the US is living 'like a parasite' on the global economy and arguing that the dollar's dominance was a threat to financial markets did not exactly engender positive 'free market' feelings. That had to hurt even the most ardent delusional tree hugging tax collecting socialist!
The announcement that Apple has more cash on hand than the entire US government had to hurt the feelings of every Keynesian central banker this side of the London School of Economics.
The real question that remains is what both Moody's and S&P thinks of US debt levels and their perception of eventual repayment.
Each year equity markets 'generally' correct 4 times on average. The mid January to mid February correction took markets down 6%. The May to early June correction peeled 8% from the averages. The most recent 10% extravaganza/implosion is the result of increasing selling over the past 8 of 10 trading sessions. The emerging growth jurisdictions have not been spared. Selling has been sector broad based and throughout the globe. The investor fear and trepidation is accelerating. Precious confidence has been rattled - and rightfully/unfortunately so! Attracting committed buyers/investors will be a challenge during these hot and humid days!
In the US, as Obama's 50th chilled Chardonnay was swilled, cold recessionary winds slammed the S&P 500 with it's worst week in more than 2 years. Rumors of a 'modified' QE3 seemed to confuse markets with investors pulling out nearly $US66B from money market funds - the second largest weekly net outflow. The largest outflow was in Sept 2008. The equity rout wiped out $US2.5T in corporate capitalization. The VIX index reached almost 33 (traditional panic point) - the highest level since July 2010 and above the level set during Japan's tragic earthquake. A day after the 'relief' of the 2011 debt deal the US administration borrowed a mind boggling $US231B in one single day. A shocking move which did not sooth jagged nerves. Investors scrambled to raise cash and no asset class was spared. It was the worst two week slump since the hysterical month of March 2009. The conundrum of debt growing faster than anything else and the 'percieved' loss of the Fed 'put' prompted an emotional selling response and fearful buyers strike.
The DJIA ended down almost 7% on the week and nearly 2% on the year. The S&P and NASDAQ averages were both 15% weaker. Key weekly moving average support and longer term trend lines were violated faster than a female guest at an Italian Prime Ministerial bunga bunga party. With financial matters unwinding rather quickly in Europe the positive US multinational earnings momentum will also likely face similar head winds and downward pressure.
Assuming an S&P bond market ratings reprieve over the weekend - this very over sold liquidation should garner substantial support no more than 3-5% lower from this week's close of 1197 on the S&P. Very attractive relative dividend yields should encourage the massive pools of liquidity which are frantically looking for a safe and protected harbor. The substantial DJIA 12,000 to 12,500 distribution band now represents formidable resistance and a likely top for the remainder of the year.
On the potential plus side - the FOMC
In commodities, only the US treasury market avoided selling pressure with longer term yields re-compressing back to record low levels. Real yields on TIPS of all maturities reached a new record low reflecting the deep pessimism and 'relative' flight to safety(?). Long term inflation expectations remain anchored around 2.5% contrary to the new recent record highs recorded in the Gold market. Gold also avoided the selling carnage finishing up 1.5% on the week ($US1,651/oz) in the face of an almost 5% lower CRB index. Silver exhibited much more volatility falling a bit over 2% on the week to $US38.21/oz. Crude oil failed to hold my expected $US90/bl level falling as low as $US83/bl and finished at $US87/bl in wild trading. Natural Gas broke $US4/mcf and looks to potentially double bottom at the March 2011 low. The $US4.25-75 over head distribution band now represents formidable upside resistance. Copper has held $US4/lb to this point in a 10% sell off this week. The perception of a rapid cooling world economy will more than likely pressure prices for the balance of the summer. Copper has traditionally been the key economic bell weather and should be watched carefully as a proxy for future growth or weakness.
In Canada, the resource and financial laden S&P/TSX index bore the full wrath of world wide equity liquidation. Total employment increased modestly in July with private jobs at now above pre-recession peak levels. Small business confidence remains buoyant despite the glut of bad news from almost every other G20 jurisdiction. The Canadian dollar weakened almost 3% on the week primarily as a result of widespread indiscriminate liquidation and profit taking. The S&P/TSX index dropped a gut wrenching 7% on the week and now is down 10.4% on the year to date. The effect of Canada's largest trading partner's economic challenges has taken a significant toll on local equity valuations and expectations. Internal economic statistical conditions remain relatively strong and vibrant in Canada but we remain substantially reliant on financial conditions and fortunes south of the border. The individual sectors hit hardest this week on the S&P/TSX were Health Care -25%, Energy -9.5%, Consumer Discretionary -8.9%, Tech -6.9% and Industrials -6.8%. The S&P/TSX index should find intermediate support in the 11,750-12,000 level barring any further credit contractions. The S&P/TSX Venture Index was hammered 10% on the week and is now down a mind boggling 25% on the year. Much of the longer term risk has been painfully wrung out of the junior resource issues - but I have thought that for a while. The Venture index should find significant support no more than 5% below current levels - and I have said that for a while too!
Thankfully hockey training camps will open soon and that should cheer us up for a change!
In closing, accelerated world wide broad based equity liquidation effectively broke/smashed key support and technical patterns levels in a very tough week. The financial media sentiment can't get much more negative (I think?) and hopefully most/all of the negative debt news is now behind us (bad visual).
Any further panic would introduce an interesting strategic opportunity to purchase or add to the numerous 'mis-priced' under valued resource opportunities. With any luck cool heads will prevail in the critical bond and currency markets as the summer season winds down. The positive effect of continuing low interest rates and lower short term energy and material prices may provide the basis for a potential bottoming and consolidation of equity valuations.
My glass remains half full although investors will now demand certain concrete evidence of improving conditions and positive opportunities. I remain a somewhat bruised and battered inflation bull in this rapidly shifting and evolving economic environment.
Another intense negative week like this any time soon and I will look more like a bison than a bull!
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