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!
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