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!
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