Immediately after Fed head 'Helicopter' B Bernake released his latest stimulative monetary tool of 'twisting' current minuscule treasury yields investors headed for the exits in droves. Uncle Ben's stunning pronouncement that 'there are significant downside risks to the economic outlook' smacks to me of a Fed which has lost control or understanding of financial market dynamics. I hope he is reasonably sure when he says stuff like that but I have my doubts! Once again the US government is threatening to shut down which might be one of their best cost savings measures ever!
The 50 year old failed 'twist strategy' of selling (or not buying) short term bonds ($US400B) and purchasing longer term bonds (until 2013) in order to flatten the yield curve further slicing razor thin interest rates appears to be nothing more than quazi-creative accounting stick handling or desperate financial engineering. This Treasury curve shift is the most abnormal (read: unpredictable) in the last 30 years. The Feds most implicit mandate of 'price stability' appears to be now more of an after thought. Three Fed officials (Plosser, Fisher, and Kocherlakota) dissented from this 'limited' strategy - a modern day rearranging of the deck chairs on the Titanic.
A immediate negative effect will be to the financial institutions who either depend on a normally slopped yield curve/spread or those who require 'reasonable' levels of interest rates to generate income. Negative interest rates are about to become much more negative. Pension funding needs will go from bad to worse. Insurance companies may find it impossible to match risks with returns. Bank earnings will drop because of disappearing margins.
The Fed has yet to learn that record low interest rates do not necessarily increase/stimulate the demand for credit. They should learn that excessive debt will definitely drain the demand for more credit. They will eventually learn not to over borrow!
The Fed should realize that consumers are desperately trying to pay down debt based on fears of job security, retirement, inflation, and the wildly expanding unsustainable Federal debt burdens. Nearly half of all US mortgage borrowers do not have the equity or credit rating necessary to refinance at lower 'engineered' interest rates. What little confidence cash flush businesses have (left) is hardly enough for them to invest or expand.
An equally concerning caveat is the announcement that US Government (taxpayers) are about to reenter the mortgage backed securities market which more or less melted the financial system down in the first place. The tax payers balance sheet is going to look like a dog's breakfast. It looks like a major risky double down and thus a very dangerous & historic bond market bubble to me! The 'risk free' status of US treasuries may disappear as quickly just as their 'AAA' rating did!
Moody's in a 'pre-emptive move lowered the credit rating of three of the big US Banks (Citi, BofA, and Wells Fargo) and will once again focus attention on systemic derivative 'counterparty risk'. Should credit lines be cut or reduced existing trade positions may need to be unwound or assigned. The cost of 'protection' may rise for those who try to 'hedge their hedge.' Banks may need to raise capital as positions are liquidated or to cover collateral agreements. This type of run on a bank is a replay of the historic and nasty Bear Sterns/Lehman experience.
Assets in various 'troubled' Euro banks are beginning to be moved to the relatively 'safer' confines of the ECB. A move by the Germans to reinstate the Bundesbank as the leading Central Bank of Europe would be catastrophic to say the least. The latest European PMI stats suggests that GDP figures may turn negative before long. Let's hope that a financial 'Black Plague' is not the end game of this very complex and inextricably linked international economic dilemma. It is beginning to look like the strategy of throwing stimulus money (read: debt) at institutionalized debt problems may be coming to a merciful end.
Newly minted IMF chief, Ms C Lagarde, has just discovered the 'massive risks to the banking system' and financial stability. An abrupt and immediate 10% IMF downgrade for growth for the entire planet was summarily dispatched with the usual mindless encouragement of 'more easing'(?) Paul Volker (former Fed Head and architect of 1980's inflation killing 20% interest rates) in a New York Times article reminds us that 'a little inflation (2%) can be a very dangerous thing!' Modern day Robin Hood, Prez B.H. Obama, is astonishingly spending his spare time selling his pre-election 'tax the rich' class warfare as the Fed burns! Brazil is beginning to erect trade barriers and increasing tariffs. And just to add to the fun & festivities the Bank of China announced they also foresee the possibility of an accelerated economic slowdown. All that may be left are the rating agencies to declare their (after-the-fact) last of the official post mortem downgrades.
In the US, the post 'twist' reaction was an immediate massive selling liquidation of anything which resembled a listed share of stock throughout all of the industrialized and emerging world. The orderly selling swoon has been powerful and widespread irrespective of earnings or valuations. Credit has been signalling and anticipating equity weakness for some time. North America appears to be finally catching up to the recent negative 'European 30+% decline experience.' The DJIA is now down just over 15+% ytd in a very over sold but negative technical environment. North American equity markets are much more leveraged (margined) than during the lows registered during the lows of the 2009 financial cataclysm. US equity markets are on the verge of dropping into 'bear market territory' of a 20% decline. Confirmed violation of the recent Aug 9th lows of 10,600 (DJIA) suggest a quick retracement back to the Aug/2010 support level of 10,000. The longer term measurement takes the DJIA back to the mid 2010 level of 9,500. Key lower support levels for the Nasdaq are 2,340 and then 2,100 based on weekly measurements. Significant lower support for the S&P comes in 5% lower at 1,050 then 1,000.
In commodities, the instant and powerful post 'twist' rally in the US dollar had an immediate negative effect for the entire commodity sector. 'Over' speculated sectors were crushed with the news that further QE stimulus was not part of the Fed's near term strategy. Gold broke the critical US$1,800/oz level early in the week and quickly violated $US1,700/oz by the end of the week. Significant 200 dma support comes in at $US1,595/oz. Gold dropped 10% on the week - a short term very over sold condition. Friday's $US100/oz drop for gold was rumored to be liquidation by hedge fund manager J. Paulson who is the largest shareholder of GLD - the massive physical gold fund. Silver broke the key $US40/oz level and quickly imploded to just over $US30/oz - a whopping 25% drop in 5 trading sessions. Silver is currently significantly over sold but could drop a further $US2/oz before the carnage is over. The red metal, Dr Copper, the metal with a Phd on the economy, got walloped with reports of contracting world wide economies. $US3.40/lb is a critical support area for Copper. The potential exists for Copper to drop as low as $US2.80/lb the mid 2010 support level. Crude Oil did not escape the selling hysteria dropping almost $US10/bl or 12% on the week to just below $US80/bl. A clean break of this support level suggests a price in the low $US70/bl area. Lower crude oil prices (combined with record low interest rates) is/would be very welcome news for almost all of the US economy.
The Agra grain markets continue to consolidate recent profit taking. Chronic underperforming Natural Gas has held up the best in the commodity complex just under $US4/mcf.
In Canada, the Canadian dollar was the first casualty based on economic slowdown fears and the limited anticipated effect of Fed 'twist' strategy. The Canuck buck broke $US1 for the first time this year. I would be very surprised if the Canadian dollar violates $US.95. The Canadian Dollar has dropped $US.10 from the July high. That is very welcome news for the manufacturing sector in Canada. The benchmark Canadian stock index briefly dropped into 'bear market' territory based on recessionary fears, Chinese economic downgrades, and the Euro banking mess. The heavily weighted financial sector broke 'critical' intermediate support of 166 on the S&P/TSX Capped Financials Index. This index can drop another 20 points before finding reasonable support. Positive relative strength divergence is appearing on the weekly charts. Many quality material, resource, and industrial stocks have been crushed in this wide spread liquidation and now represent compelling value at current levels. 10,500-11,000 'should' provide solid support for the TSX Index.
The S&P/TSX Venture index was mercilessly crushed almost 200 points (12%) from the 1,750 level. The Venture Exchange has unbelievably lost 1,000 points (or 40%) since March 2011. This astonishing 'bear market' may be vulnerable to further tax-loss selling pressure up to the end of December 2011. Great values and opportunities await those patient investors who take advantage of this outstanding opportunity.
Bottom Line, with European Index down 30+% and North American & Asian Indexes down 20+% from recent recovery high levels a significant amount of negative economic 'discounting' has already been baked into this worse case scenario souffle. North American markets appear to be catching up to recent European credit and equity weakness. It has been easy to lose sight of the fact that US weekly unemployment claims have been dropping for 2 years, leading economic indicators readings are improving, household balance sheets continue to improve, and manufacturing production & exports numbers are at very healthy record levels. US personal saving rates have improved considerably and most multinational corporations are flush with capital.
I am not trying to downplay the serious credit issues which exist - especially if the Euro crisis escalates significantly from current levels. However, significant proportion of all these problems are banking related. The G20 and BRIC nations have stated they are ready to assist those banks which may most negatively affected by the pending Greek default.
I do believe these very difficult problems can and will be solved. I do not believe that world wide growth and consumption levels will be as negatively affected as reported by the many hysterical market pundits and media outlets. The exasperating financial mess which central & corporate bankers and over levered governments created can and will be solved. Emerging markets will continue to grow and consume. Stimulus will be added where needed. It will important not to over react or panic in these difficult times as debt unwinds and positions are squared. Confidence will return. This crisis, like most others, will create many opportunities as they often do.
North American indexes can easily contract another 5-10% from current levels but I do not expect them to revisit the imploded levels of 2008-09. The age old lesson of the danger of over leveraging and excessive debt will be painfully relearned. With any luck voters will now learn to control and limit the powers and influence their elected fearless leadership and brave policy makers crave! The price paid will be well worth it! The swamp will require lots of draining!
Life will go on!
The nine scariest words of the English language : "I am from the government and I am here to help.'
- Ronald Reagan
Friday, September 23, 2011
Monday, September 19, 2011
Week Ending 9/16/11 - Going Rogue
The word origin and history of 'rogue' dates back to 1561 - an 'idle vagrant', thieves' slang for a begging vagabond who pretends to be a poor scholar from Oxford or Cambridge. This weeks version of a rogue is a neophyte 31 year old UBS trader who blows $US2B in unauthorized trading - enough to provide tuition for 60,000 'Oxforders' or 'Cantabs' at the $37.5k/yr tuition rate. Enough dough to pay for 10 years tuition for all freshmen for both esteemed colleges.The alternate term for a rouge trader who ignores internal control & risk limits and loses $US2.3b is Managing Director.
The fresh faced 31yo, junior trader, Kweku Adoboli, worked on the UBS proprietary desk which CEO Oswald Gruebel was 'convinced was one of the best in the business.' Few details have been released but it has been estimated the very embarrassing loss was the result of a $US20b 'notional' speculation. Some of this huge loss accumulated since the historic 2008 meltdown. From my perch it looks like he got caught very long in the Swiss Franc peg to the Euro ala Long Term Capital's failed currency bets in 1998. Another victim in the unraveling Euro credit and currency car crash. UBS joins the dubious ranks of a long list of similarly hyper aggressive & over extended 'rogue banks' such as Sumitomo, Barings (Nick Leeson), and Soc Gen (Jerome Kerviel). The BBC reported that UBS never discovered the losses. It was Kweku who told them about his debacle. Looks like his short trading career has come to an abrupt halt as opposed to what would have happened if he was a Chinese rogue trader. The normally vigilant regulators (FSA & FINMA) all have been noticeably silent on this issue but are launching a comprehensive 'after the fact' independent investigation. Good thing these regulators don't live in China too!
In other rogue news on Thursday the US Federal Reserve and other assorted central banks announced they would be providing smoke and mirror 'dollar liquidity' to other distressed Euro banks. The Euro rogue banks are loaded with toxic IOU's from various rogue sub prime sovereign governments. Rogue poster boy and US Secretary Treasurer T.Geithner is flying directly to Europe (Wroclaw Poland) to meet with 27 EU finance ministers at the Economic and Financial Affairs Council to urge for an accelerated 'decisive' Keynesian 'Tarp' wallpapering! Opa!
To this point Asia and other BRIC nations have wisely excluded themselves from the proceedings. I suppose China wonders who will bail them out if they (unwisely) bail out Europe? Premier Wen Jiabao said debt-laden economies (read: all) 'must first get their own houses in order' before they rescue anyone from this escalating crisis. I suggest that he refrains from holding his breath waiting for that to happen! The Premier further cheerfully stated that their is a limit to Chinese generosity (read: oxymoron) and it will come at a price (read: don't do the deal if at all possible).
The Euro mess is going from bad to worse with the effects spreading throughout the industrialized world. The EU's lack of desire/discipline/will to address key issues and enforce solutions are contributing to a wildly snowballing financial contagion. Britain is suing the ECB to prevent it from implementing a new policy that would drive London's financial services sector to the Continent. Official figures show that Britian's consumer inflation prices are up to 4.5% this year. Greece is having to come up with billions of Euros in interest payments on an weekly basis. Eurozone finance ministers have delayed a Greek loan 'rescue' payout until October - perhaps to coincide with 'trick or treat' festivities? Throwing more green or euro backs at fiscally hemorrhaging Greece is beyond foolish and only makes the problem worse. The ECB announced that its bond purchases dropped 30% from the previous two weeks. Polls suggest that Germany taxpayers patience officially ran out some time last week! German Chancellor Angela Merkel looks like a 'dead women walking' to me! It will be interesting to see who ditches the EU economic bloc first - Greece or Germany? Nothing about this process looks to be orderly or painless - more like a game of financial 'musical chairs' where all the chairs are taken when the music stops! Expect the Greece default/bankruptcy to go two ways. First gradually. Then quickly. The 'global cooling' countdown begins ...
Domestically, the dream tag-team of Obama and Geithner, will deliver a post-Sunday 'shared sacrifice' sermonette on the virtues and responsibilities of writing them more and fatter cheques which evidently are much more effective in their blessed cupped hands than the tax payers grovelling claws. Details of the new shiny 'super congressional committee' on deficit reduction which includes the W. Buffet (do as I say not as I do) tax on the rich will be unveiled. He conveniantly failed to mention that most of his 'real' income is derived from previously taxed corporate dividends. All of a sudden Warren is having tax payers remorse having only paid 17.4% of his 'sheltered' income last year, The fact that his company has spent the last decade appealing and negotiating with US Internal Revenue Service for 'under payment' of taxes I suppose is nothing more than a 'slight' inconvenient truth. Wizard Warren should keep his curtain closed.
In the US, confronted with an economy that has under preformed this year the lagging economist community are scaling back growth prognostications for this and next year. Forecasts now call a reduced 1.7% growth this year and 2.3% for 2012. High unemployment levels, record deficits, and the Euro credit crisis all contributed to the downgrades. US households continue to wallow in misery with consumer confidence dropping 2 points to a 30yr record 55.7% low. The expectations index which measures household behavior fell to a 31 year low of 47.0% from 47.4%. Americans are pumping money into bank accounts at a blistering pace this year with deposits at a record $US10T level. Household real estate assets have fallen a breath taking $US6.6T from the peak. 10.9 million US residential properties (22%) were in negative equity at the end of Q2 of 2011. Cash hoarding by US companies is hitting 50+ year highs - liquid assets to short term liabilities. The corporate dividend payout ratio is hitting 50+ year lows of just 27% of earnings.
Equity markets for the week were surprisingly positive through a combination of short covering and hope for a potential quick fix. The DJIA rallied 3.8% and the S&P rallied 4.41% in a fairly strong and positive week. The Nasdaq added 5.52% based on positive merger and takeover activity. The DJIA remains trading range bound between the 10,800 and 11,600 level. Macro issues will probably be the dominate investment theme until cranberry sauce is spread over the turkey. With any luck there will be plenty of stuffing to go around!
In commodities, trading activity remained fairly subdued and correlated to ebb and flow of ECB rumors and announcements. Gold has dropped 4% from recent all time high territory of last month. Gold dropped 2.7% on the week. A closing break below $1,800/oz could send Gold back to the $US1,590/oz (200 dma) level. Silver has dropped 10% from peak levels and could retrace to the $US38/oz (200 dma) level. Crude Oil remains range bound between $US83-89/bl level. Crude Oil closed up 1.93% on the week. A close below $US80/bl would imply a sell off as low as $USS65/bl. Natural Gas also appears to be vulnerable to a 3-5% retracement should current levels not hold. Copper appears challenged to hold its longstanding $US4/lb level. A move back to the $US3.40-50/lb appears likely and should represent considerable support strength. The Agra grain markets have settled back up to 10% from recent high levels as expected and are showing considerably over sold readings at current levels.
In Canada, it appears that tax loss season is taking effect sooner than usual with the S&P/TSX closing down .20% on the week. A poor top and bottom line earnings report from Canadian tech whipping boy RIM sent the stock down 20% on Friday. This was RIM's second earnings disappointment in a row. It would be in the best interest of RIM's management not to miss #3. The technical picture of the heavily weighted TSX financial sector is mixed to negative. A tandem move back to recent low levels for the big 5 banks would imply a potential retest of the late 2009 levels for the S&P/TSX. An agreement on the controversial Keystone Pipeline (1,700 mile artery from Alberta to the Gulf of Mexico -Texas) by the oil sands unfriendly Obama administration would be a major positive for employment and the S&P/TSX index. In the meantime expect a combination of tax loss selling and intensified merger and acquisition activity for the mid and junior cap Canadian issues. A break below $US1 for the Canadian Dollar would add much needed support to the senior producing resource issues.
In closing, the investment world has become somewhat paralyzed by the macro international government debt and deficit issues. Any reasonable deal/solution/strategy to most of these pressing issues do not to be in our future anytime soon. To this point reasonable and effective solutions appear to be only short term in nature at best. The pending Greek default will be a tremendous challenge to the banking sector and the future of the EU. Should a 'managed default' be reasonably successful it may represent a key opportunity which financial markets and world economies can build from. Sentiment has rarely been this negative and many key markets are tremendously oversold in both the short and intermediate terms. Currently financial markets appear to be in a 'holding pattern' subject to the whims of short term economic data and short term high frequency trading. It appears that financial markets are only preoccupied with the negative geopolitical issues of the day. Very little, if any, good news is priced into valuations. As we head toward year end many interesting tax loss trading opportunities should appear. A patient strategy awaiting an accelerated move to the downside could prove most lucrative for those looking for opportunities.
'The budget should be balanced, the treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed lest Rome become bankrupt. People must learn to work instead of living on public assistance.'
- Cicero, 55BC
The fresh faced 31yo, junior trader, Kweku Adoboli, worked on the UBS proprietary desk which CEO Oswald Gruebel was 'convinced was one of the best in the business.' Few details have been released but it has been estimated the very embarrassing loss was the result of a $US20b 'notional' speculation. Some of this huge loss accumulated since the historic 2008 meltdown. From my perch it looks like he got caught very long in the Swiss Franc peg to the Euro ala Long Term Capital's failed currency bets in 1998. Another victim in the unraveling Euro credit and currency car crash. UBS joins the dubious ranks of a long list of similarly hyper aggressive & over extended 'rogue banks' such as Sumitomo, Barings (Nick Leeson), and Soc Gen (Jerome Kerviel). The BBC reported that UBS never discovered the losses. It was Kweku who told them about his debacle. Looks like his short trading career has come to an abrupt halt as opposed to what would have happened if he was a Chinese rogue trader. The normally vigilant regulators (FSA & FINMA) all have been noticeably silent on this issue but are launching a comprehensive 'after the fact' independent investigation. Good thing these regulators don't live in China too!
In other rogue news on Thursday the US Federal Reserve and other assorted central banks announced they would be providing smoke and mirror 'dollar liquidity' to other distressed Euro banks. The Euro rogue banks are loaded with toxic IOU's from various rogue sub prime sovereign governments. Rogue poster boy and US Secretary Treasurer T.Geithner is flying directly to Europe (Wroclaw Poland) to meet with 27 EU finance ministers at the Economic and Financial Affairs Council to urge for an accelerated 'decisive' Keynesian 'Tarp' wallpapering! Opa!
To this point Asia and other BRIC nations have wisely excluded themselves from the proceedings. I suppose China wonders who will bail them out if they (unwisely) bail out Europe? Premier Wen Jiabao said debt-laden economies (read: all) 'must first get their own houses in order' before they rescue anyone from this escalating crisis. I suggest that he refrains from holding his breath waiting for that to happen! The Premier further cheerfully stated that their is a limit to Chinese generosity (read: oxymoron) and it will come at a price (read: don't do the deal if at all possible).
The Euro mess is going from bad to worse with the effects spreading throughout the industrialized world. The EU's lack of desire/discipline/will to address key issues and enforce solutions are contributing to a wildly snowballing financial contagion. Britain is suing the ECB to prevent it from implementing a new policy that would drive London's financial services sector to the Continent. Official figures show that Britian's consumer inflation prices are up to 4.5% this year. Greece is having to come up with billions of Euros in interest payments on an weekly basis. Eurozone finance ministers have delayed a Greek loan 'rescue' payout until October - perhaps to coincide with 'trick or treat' festivities? Throwing more green or euro backs at fiscally hemorrhaging Greece is beyond foolish and only makes the problem worse. The ECB announced that its bond purchases dropped 30% from the previous two weeks. Polls suggest that Germany taxpayers patience officially ran out some time last week! German Chancellor Angela Merkel looks like a 'dead women walking' to me! It will be interesting to see who ditches the EU economic bloc first - Greece or Germany? Nothing about this process looks to be orderly or painless - more like a game of financial 'musical chairs' where all the chairs are taken when the music stops! Expect the Greece default/bankruptcy to go two ways. First gradually. Then quickly. The 'global cooling' countdown begins ...
Domestically, the dream tag-team of Obama and Geithner, will deliver a post-Sunday 'shared sacrifice' sermonette on the virtues and responsibilities of writing them more and fatter cheques which evidently are much more effective in their blessed cupped hands than the tax payers grovelling claws. Details of the new shiny 'super congressional committee' on deficit reduction which includes the W. Buffet (do as I say not as I do) tax on the rich will be unveiled. He conveniantly failed to mention that most of his 'real' income is derived from previously taxed corporate dividends. All of a sudden Warren is having tax payers remorse having only paid 17.4% of his 'sheltered' income last year, The fact that his company has spent the last decade appealing and negotiating with US Internal Revenue Service for 'under payment' of taxes I suppose is nothing more than a 'slight' inconvenient truth. Wizard Warren should keep his curtain closed.
In the US, confronted with an economy that has under preformed this year the lagging economist community are scaling back growth prognostications for this and next year. Forecasts now call a reduced 1.7% growth this year and 2.3% for 2012. High unemployment levels, record deficits, and the Euro credit crisis all contributed to the downgrades. US households continue to wallow in misery with consumer confidence dropping 2 points to a 30yr record 55.7% low. The expectations index which measures household behavior fell to a 31 year low of 47.0% from 47.4%. Americans are pumping money into bank accounts at a blistering pace this year with deposits at a record $US10T level. Household real estate assets have fallen a breath taking $US6.6T from the peak. 10.9 million US residential properties (22%) were in negative equity at the end of Q2 of 2011. Cash hoarding by US companies is hitting 50+ year highs - liquid assets to short term liabilities. The corporate dividend payout ratio is hitting 50+ year lows of just 27% of earnings.
Equity markets for the week were surprisingly positive through a combination of short covering and hope for a potential quick fix. The DJIA rallied 3.8% and the S&P rallied 4.41% in a fairly strong and positive week. The Nasdaq added 5.52% based on positive merger and takeover activity. The DJIA remains trading range bound between the 10,800 and 11,600 level. Macro issues will probably be the dominate investment theme until cranberry sauce is spread over the turkey. With any luck there will be plenty of stuffing to go around!
In commodities, trading activity remained fairly subdued and correlated to ebb and flow of ECB rumors and announcements. Gold has dropped 4% from recent all time high territory of last month. Gold dropped 2.7% on the week. A closing break below $1,800/oz could send Gold back to the $US1,590/oz (200 dma) level. Silver has dropped 10% from peak levels and could retrace to the $US38/oz (200 dma) level. Crude Oil remains range bound between $US83-89/bl level. Crude Oil closed up 1.93% on the week. A close below $US80/bl would imply a sell off as low as $USS65/bl. Natural Gas also appears to be vulnerable to a 3-5% retracement should current levels not hold. Copper appears challenged to hold its longstanding $US4/lb level. A move back to the $US3.40-50/lb appears likely and should represent considerable support strength. The Agra grain markets have settled back up to 10% from recent high levels as expected and are showing considerably over sold readings at current levels.
In Canada, it appears that tax loss season is taking effect sooner than usual with the S&P/TSX closing down .20% on the week. A poor top and bottom line earnings report from Canadian tech whipping boy RIM sent the stock down 20% on Friday. This was RIM's second earnings disappointment in a row. It would be in the best interest of RIM's management not to miss #3. The technical picture of the heavily weighted TSX financial sector is mixed to negative. A tandem move back to recent low levels for the big 5 banks would imply a potential retest of the late 2009 levels for the S&P/TSX. An agreement on the controversial Keystone Pipeline (1,700 mile artery from Alberta to the Gulf of Mexico -Texas) by the oil sands unfriendly Obama administration would be a major positive for employment and the S&P/TSX index. In the meantime expect a combination of tax loss selling and intensified merger and acquisition activity for the mid and junior cap Canadian issues. A break below $US1 for the Canadian Dollar would add much needed support to the senior producing resource issues.
In closing, the investment world has become somewhat paralyzed by the macro international government debt and deficit issues. Any reasonable deal/solution/strategy to most of these pressing issues do not to be in our future anytime soon. To this point reasonable and effective solutions appear to be only short term in nature at best. The pending Greek default will be a tremendous challenge to the banking sector and the future of the EU. Should a 'managed default' be reasonably successful it may represent a key opportunity which financial markets and world economies can build from. Sentiment has rarely been this negative and many key markets are tremendously oversold in both the short and intermediate terms. Currently financial markets appear to be in a 'holding pattern' subject to the whims of short term economic data and short term high frequency trading. It appears that financial markets are only preoccupied with the negative geopolitical issues of the day. Very little, if any, good news is priced into valuations. As we head toward year end many interesting tax loss trading opportunities should appear. A patient strategy awaiting an accelerated move to the downside could prove most lucrative for those looking for opportunities.
'The budget should be balanced, the treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed lest Rome become bankrupt. People must learn to work instead of living on public assistance.'
- Cicero, 55BC
Friday, September 9, 2011
Week Ending 9/9/11 - Back to School
No sooner were the sandwiches wrapped and lunch boxes packed, then we were treated with two 'elevated' speeches from two of our favorite eco/political lecturers.
Prof Ben B led off in a relaxed 'welcome back to class' demeanor with an extremely prescient summary of the collective economic ailments as he sees/knows them. He further added that he has lots of monetary 'tools and strategies' left at his disposal without revealing a single critical specific. Despite red hot Gold prices he is not concerned about inflation threats while warning that US finances could 'spiral out of control!'
Next on the podium was the much awaited Potus job creation edict which took on a much more 'you better attend class and do your homework or else' tone. The new look intense finger wagging Keynesian sermon was as much pre-election campaign rhetoric as it was an appeal to the democratic base from the desperately low approval rated BH Obama. As expected Japanese style infrastructure (for roads and bridges that may or may not be needed) and extension of the GW Bush payroll tax cuts anchored his rehashed thesis. Many/most of these 'new' promises' were part of the first stimulus plan. He wasn't quite as clear about his strategy of the government paying someone to hire somebody else with their own borrowed money. I hope that's not on the final exams!
Democrats hearts were warmed with the thoughts of new and improved union reform and more intense redistributionist 'rich paying their fair share' hyperbole. Evidently we all need to do as Warren Buffet says but not as he does? Congressional types got the physical exercise component of 'back to school' through a series of animated and grueling standing ovations for anything which sounded remotely 'stimulative.' How Nancy Pelosi held back her tears of joy I'll never know?
Video game manufacturing hiring should improve with the promise of an additional year of unemployment benefits. Now XBoxers will be paid 'not to work' for three years! Based on the maximum weekly benefits non-workers get paid $10/hr to stay home as opposed to gainful employment at the $7.25/hr minimum wage level. Hopefully there will be a great future demand for the hoards of professional video game players?
Math skills must have eroded over the summer as last weeks 'pre-announced' $US300b job creation program finally totalled up to a whopping $US447b 'this will be paid' America Jobs Act! Of course no details about how, when, or who was going to 'pay' for this new boondoggle - or more importantly what effect this 'program' would be on the national debt having now exceeded the critical 100% of GDP level. On Sept 19th we will find out that you, er... I mean, who, will pay the tab? Even less clarity about the corporations who might be tempted by 'employment' tax credits despite the 'loopholes' that are about to close and the overall higher tax burden they will face.
Perhaps the next lecture with cover an explanation on how an extra $US500b will create meaningful employment when the last $US4T borrowed and spent did not create any? I guess that's why they are the teachers and we are the .....? Eight times the American Public was threatened to 'pass this bill or else' while being convinced that 'America has always been about sharing like this!' He further incredulously added that this is what has made America great! Expect official unemployment to approach 10% +/or the cost of any new job to exceed $250k per. Time to drain the swamp for good!
The European economic Pandora's Box is quickly becoming a nightmare of epic proportion. Top ECB economist Jurgen Stark suddenly quit Thursday because he has had enough (and personal reasons). Christine Lagarde appears to have already over stayed her European welcome with her persistent Keynesian calls for more capital, liquidity, and intervention. She craves an Obama style solution. Greece will be lucky to be a member of the EU through the weekend despite rampant denials. A default has been baked into the moussaka for weeks. As euro economies implode the existence of the Euro will be severely tested turning a credit problem into a currency crisis. Fitch has their eyes on a potential Asian/China debt downgrade in 12-24 months which adds yet another dimension to the complex international credit & currency dilemma. The Chinese central government has negligible total debt, but totals increases substantially when local government debt is added, and explodes when state owned enterprise debt is included.
Most of the 'developed' world has become paralyzed with gloom and fear except for the Toronto Maple Leafs who feel they have fielded their best crop in decades! Hope does spring eternal!
In the US, the bungee cord DJIA/S&P trading environment continues to consolidate at dangerously low (sub 11,000) levels. With very little expected from policy leadership new ytd year lows are only a mini-crisis away. Despite the negative hysteria US exports surged to new all time record highs in July led by new records for US manufactured goods. July job openings for July was the highest in three years. I wonder if Potus got the memo? Despite the rampant pessimism capital goods orders, industrial production, corporate layoffs, staffing levels, corporate profit levels, and leading economic indicators are quite positive. Key support levels for the DJIA are 11,000 and then 10,600. S&P support 1,150 and 1,100. Nasdaq critical support 2,340 recent low levels. Reports are rapidly declining 'short positions' may be a longer term concern for market strength. The DJIA looks to be down 2% this shortened week and down 5% ytd. The S&P looks to be down 1.5% this week and down 8% ytd. The Nasdaq looks to be unch this week and down almost 11% ytd.
On the eve of the the great tragedy of 9/11 my thoughts and heart goes out to all American who were directly and indirectly affected by America's darkest day.
In commodities, once again the margin gremlins of the LME threaten to weaken the resolve of gold investors. The CME hiked cleared OTC London Gold Forward Margin by 40% yesterday but to this point has hardly created a ripple in the $US1,8,60/oz price. Silver looks potentially explosive to me for a retest of last April's $US50/oz level. Crude oil is now being contained in a tighter $US85/90/bl range. A move above $US90/bl would be very constructive. Natural Gas and Copper prices are attempting to consolidate at slightly higher levels. $US4 for both commodities are critical support levels. Agra grain markets are pulling back into short term correction levels as expected. Despite the recent AA+ downgrade the powerful US treasury market continues to confound this writer as yields hit all time low territory. Nervous Euro investors appear to be using the US bond market as a haven for safety and liquidity which definitely speaks to the panic and concern.
In Canada, employment fell 5.5k in August which was much worse than consensus expectations of a 21k gain. Private sector construction led the negative contraction. Domestic demand remains well supported paving the way for an acceleration in GDP in the quarter. It has been a very difficult/frustrating year for the S&P/TSX which has become inextricably linked to all global credit and currency issues of the day. The TSX index looks to be down 1% this shortened week and down 7% ytd. Currently the market is a momentum stock/sector picking/trading environment. Despite the recent solid bank earnings it will be critical for the TSX that the recent lows made by the financials to hold. It will be a matter of only a few weeks before 'tax loss selling' swings into full gear. Key support levels for the TSX are 12,200 and then 11,700. A move above 12,800 would be short term positive.
In closing, it is very difficult not to be affected by the prevailing rampant gloom, doom, and despair. Intense pessimism appears to increase during each selling wave. Considerable 'technical' damage has been done to key indexes throughout the world in the anticipation of further deteriorating financial conditions. Normally I pride myself as a 'classic contrarian' however even I am 'challenged' in this weaker macro fundamental and technical environment. I do expect conditions to become grossly 'over sold' at some point and hopefully before the turkey hits the plate. Market psychology and sentiment appears to the most significant short term factors in this 'trading' environment. Waiting patiently for an opportunity to 'reload' at lower levels would probably the 'higher odds' probability for the next few weeks. A fetal positon induced close below the recent mid August lows will create significant excitement/despair to say the least.
Prof Ben B led off in a relaxed 'welcome back to class' demeanor with an extremely prescient summary of the collective economic ailments as he sees/knows them. He further added that he has lots of monetary 'tools and strategies' left at his disposal without revealing a single critical specific. Despite red hot Gold prices he is not concerned about inflation threats while warning that US finances could 'spiral out of control!'
Next on the podium was the much awaited Potus job creation edict which took on a much more 'you better attend class and do your homework or else' tone. The new look intense finger wagging Keynesian sermon was as much pre-election campaign rhetoric as it was an appeal to the democratic base from the desperately low approval rated BH Obama. As expected Japanese style infrastructure (for roads and bridges that may or may not be needed) and extension of the GW Bush payroll tax cuts anchored his rehashed thesis. Many/most of these 'new' promises' were part of the first stimulus plan. He wasn't quite as clear about his strategy of the government paying someone to hire somebody else with their own borrowed money. I hope that's not on the final exams!
Democrats hearts were warmed with the thoughts of new and improved union reform and more intense redistributionist 'rich paying their fair share' hyperbole. Evidently we all need to do as Warren Buffet says but not as he does? Congressional types got the physical exercise component of 'back to school' through a series of animated and grueling standing ovations for anything which sounded remotely 'stimulative.' How Nancy Pelosi held back her tears of joy I'll never know?
Video game manufacturing hiring should improve with the promise of an additional year of unemployment benefits. Now XBoxers will be paid 'not to work' for three years! Based on the maximum weekly benefits non-workers get paid $10/hr to stay home as opposed to gainful employment at the $7.25/hr minimum wage level. Hopefully there will be a great future demand for the hoards of professional video game players?
Math skills must have eroded over the summer as last weeks 'pre-announced' $US300b job creation program finally totalled up to a whopping $US447b 'this will be paid' America Jobs Act! Of course no details about how, when, or who was going to 'pay' for this new boondoggle - or more importantly what effect this 'program' would be on the national debt having now exceeded the critical 100% of GDP level. On Sept 19th we will find out that you, er... I mean, who, will pay the tab? Even less clarity about the corporations who might be tempted by 'employment' tax credits despite the 'loopholes' that are about to close and the overall higher tax burden they will face.
Perhaps the next lecture with cover an explanation on how an extra $US500b will create meaningful employment when the last $US4T borrowed and spent did not create any? I guess that's why they are the teachers and we are the .....? Eight times the American Public was threatened to 'pass this bill or else' while being convinced that 'America has always been about sharing like this!' He further incredulously added that this is what has made America great! Expect official unemployment to approach 10% +/or the cost of any new job to exceed $250k per. Time to drain the swamp for good!
The European economic Pandora's Box is quickly becoming a nightmare of epic proportion. Top ECB economist Jurgen Stark suddenly quit Thursday because he has had enough (and personal reasons). Christine Lagarde appears to have already over stayed her European welcome with her persistent Keynesian calls for more capital, liquidity, and intervention. She craves an Obama style solution. Greece will be lucky to be a member of the EU through the weekend despite rampant denials. A default has been baked into the moussaka for weeks. As euro economies implode the existence of the Euro will be severely tested turning a credit problem into a currency crisis. Fitch has their eyes on a potential Asian/China debt downgrade in 12-24 months which adds yet another dimension to the complex international credit & currency dilemma. The Chinese central government has negligible total debt, but totals increases substantially when local government debt is added, and explodes when state owned enterprise debt is included.
Most of the 'developed' world has become paralyzed with gloom and fear except for the Toronto Maple Leafs who feel they have fielded their best crop in decades! Hope does spring eternal!
In the US, the bungee cord DJIA/S&P trading environment continues to consolidate at dangerously low (sub 11,000) levels. With very little expected from policy leadership new ytd year lows are only a mini-crisis away. Despite the negative hysteria US exports surged to new all time record highs in July led by new records for US manufactured goods. July job openings for July was the highest in three years. I wonder if Potus got the memo? Despite the rampant pessimism capital goods orders, industrial production, corporate layoffs, staffing levels, corporate profit levels, and leading economic indicators are quite positive. Key support levels for the DJIA are 11,000 and then 10,600. S&P support 1,150 and 1,100. Nasdaq critical support 2,340 recent low levels. Reports are rapidly declining 'short positions' may be a longer term concern for market strength. The DJIA looks to be down 2% this shortened week and down 5% ytd. The S&P looks to be down 1.5% this week and down 8% ytd. The Nasdaq looks to be unch this week and down almost 11% ytd.
On the eve of the the great tragedy of 9/11 my thoughts and heart goes out to all American who were directly and indirectly affected by America's darkest day.
In commodities, once again the margin gremlins of the LME threaten to weaken the resolve of gold investors. The CME hiked cleared OTC London Gold Forward Margin by 40% yesterday but to this point has hardly created a ripple in the $US1,8,60/oz price. Silver looks potentially explosive to me for a retest of last April's $US50/oz level. Crude oil is now being contained in a tighter $US85/90/bl range. A move above $US90/bl would be very constructive. Natural Gas and Copper prices are attempting to consolidate at slightly higher levels. $US4 for both commodities are critical support levels. Agra grain markets are pulling back into short term correction levels as expected. Despite the recent AA+ downgrade the powerful US treasury market continues to confound this writer as yields hit all time low territory. Nervous Euro investors appear to be using the US bond market as a haven for safety and liquidity which definitely speaks to the panic and concern.
In Canada, employment fell 5.5k in August which was much worse than consensus expectations of a 21k gain. Private sector construction led the negative contraction. Domestic demand remains well supported paving the way for an acceleration in GDP in the quarter. It has been a very difficult/frustrating year for the S&P/TSX which has become inextricably linked to all global credit and currency issues of the day. The TSX index looks to be down 1% this shortened week and down 7% ytd. Currently the market is a momentum stock/sector picking/trading environment. Despite the recent solid bank earnings it will be critical for the TSX that the recent lows made by the financials to hold. It will be a matter of only a few weeks before 'tax loss selling' swings into full gear. Key support levels for the TSX are 12,200 and then 11,700. A move above 12,800 would be short term positive.
In closing, it is very difficult not to be affected by the prevailing rampant gloom, doom, and despair. Intense pessimism appears to increase during each selling wave. Considerable 'technical' damage has been done to key indexes throughout the world in the anticipation of further deteriorating financial conditions. Normally I pride myself as a 'classic contrarian' however even I am 'challenged' in this weaker macro fundamental and technical environment. I do expect conditions to become grossly 'over sold' at some point and hopefully before the turkey hits the plate. Market psychology and sentiment appears to the most significant short term factors in this 'trading' environment. Waiting patiently for an opportunity to 'reload' at lower levels would probably the 'higher odds' probability for the next few weeks. A fetal positon induced close below the recent mid August lows will create significant excitement/despair to say the least.
Tuesday, September 6, 2011
Week Ending Sept 2/11 - The Dog Days
With the 'dog days' of August having come to a merciful end we are reminded that it is not only the month of March which 'comes in like a lion and out like a lamb.' Early in the month more than a few traders felt like the proverbial lambs going to slaughter. August actually felt more like T.S. Eliot's cruelest month of April to me. September will no doubt be a show stopper. Stay tuned!
Hot off the heels of the Bernake 'non-action Jackson' low volume short covering rally North American equity markets have once again turned back down in earnest. Rapidly withering economic stats have contributed to this low confidence malaise. European markets couldn't even muster up a weak rally based primarily on a no confidence dire economic outlook.
As North American celebrated the Labor Day weekend Euro bankers, led by Deutsche Bank CEO Joesef Ackermann, terrified investors about the fragility of the Euro banking system. He said the it is an open secret that numerous European banks would not survive having to revalue sovereign debt held on the banking book at markets levels. He further stated that the current Euro situation reminds him of the credit crisis of a few years ago which absolutely paralyzed equity markets. Italy, Germany, France all quickly dropped 5+%. Greek 2yr yields blew past the ridiculous 50% level for the first (and probably last) time ever. The Euro banks got destroyed falling between 6-8%. The Italian treasury must redeem $US20.4 of debts this week and over $US100b by the end of September - the most ever in a single month. Despite the ECB desperately buying and supporting the Italian bond market yields are rising back into dangerous 'hot water' territory. The Italian 10 yr spread to Bunds was past 340 bps - far above the recent ECU invention levels and wider than Spain throughout August. Germany has 'null' patience with the Greek reluctance to bring its debts under control. It is hard to imagine that Greece will be a member of the EU for much longer. UBS quantifies the cost of a Euro break up of between 20 to 25% of GDP in the first year - and incidentially the end of UBS too!
The 'austerity'experiment/solution looks to be ending faster than it began. The complex and thorny issue of a stimulative monetary policy +/or quantitative easing to solve the broken Euro financial system appears to be a foregone conclusion. That which Europeans have traditionally feared is now what they crave the most. Goldman Saks speculates that Euro banks will need close to $US1T or 5 times the amount the IMF proposed. Goldman's latest 'State of the Markets - Long and Short risk Strategies' report effectively calls for a major global structural implosion. Gold galloped past any margin increase threats into all time high territory and it's destiny with $US2,000+/oz. The failure of an ill conceived EU and euro currency paves the way for an epic destructive currency war as 'fiat' systems implode. The Swiss National Bank 'blinked' having intervened with a 'full efforts' campaign to control the their galloping Swiss currency - perversely attacking their own currency while effectively defending the euro. The new minimum exchange rate setting is set at a target of 1.20 francs to the euro. The now vigilant S&P is itching to downgrade every and any blue suited pin stripped Euro banker it sees. To make matters worse the 'contagian' appears to be spreading into Asia as emerging market 'swap spreads' rise in anticipation of further financial fireworks! The new IMF managing director Christine Lagarde handsome white quaff is already getting whiter. This is beginning to look like a Dana White MMA/UFC 'no holds barred' financial throw down spectacle. I'm not sure news could get much worse - but I've been saying that for a while!'
The the US, the Prez and his VP incredulously and ironically spent the long 'labor day' weekend agitating what is left of the organized union movement - pitting the plight of the down beaten worker against greedy corporate cronies. This regurgitated 'blame game' party policy is no doubt a panic response to the demoralizing economic 'goose egg' they produced but did not expect. It should therefore come as no surprise that American employers are creating fewer jobs than they were at the onset of the Great Recession - clear evidence of a crisis of business confidence. US companies added zero new workers in August ending a 10 month job creation run. The deteriorating trend paves the way for more Federal Reserve masterminding. B.H. Obama is putting the final touches on his much awaited 'jobs plan.' Expect a blended reworked infrastructure/payroll tax rehash and a yawn. His new and improved upcoming stimulative 'housing policy/plan' should be much more interesting. Almost every 'blue chip' US bank now faces a new nuclear mega lawsuit by the US Federal Housing Financial Agency over faulty mortgage loans adding another straw to the beleaguered camels back. The amount of damages sought will dwarf the $US20b sought from mortgage servicers in a probe by state attorneys general. The FOMC minutes word count helps to reveal key leadership concerns: unemployment:15, volatility:3, 2011:6, 2012:3, debt:19, inflation:29, and deflation:1. On the week the DJIA closed at 11,240 down 50, S&P 1169 down 8, and NASDAQ even. The key downside levels are DJIA 10,750 closing basis, S&P 1,100 closing basis, and NASDAQ 2,340 closing basis. A meaningful high volume violation of these lower levels imply a further 10% minimum deterioration to longer term support levels.
In commodities, Gold has been the standout as a barometer of the numerous global financial banking challenges. Gold has quickly recovered the 'margin related' $US200/oz lost in mid August. Discussions are afoot calling for Gold as collateral from the needy dysfunctionl jurisdictions. Unfortunately Greece holds only 111 tonnes of Gold or $US6b. Italy holds a much more respectable 2400 tonnes or $US130b. The IMF quickly chimed in opposing any collateral package which only contributes to further delays and uncertainties. Silver continues to consolidate in the higher $US42-44 level. A move above $US44 would be very positive. Economic sensitive commodities Copper and Natural Gas continue to hold above $US4/lb and $US4/mcf respectively. Crude Oil continues to thrash in the $US80-90/bl level. A close below $US80/bl would imply considerable selling pressure/liquidation. A move above $US90/bl implies a retest of the $98/bl 200 dma level. The Agra grain market has recently moved into new short term recovery high levels and appears poised for a potential 3-5% pullback and consolidation of trend.
In Canada, the key S&P/TSE index now moves in lock step with both the DJIA and S&P. The key financials have reported mixed earnings and outlooks. Dividend hiking TD Bank temporarily moved past RY as the #1 market cap bank for the first time in memory. The Canadian current account moved deeper in the red in the second quarter primarily as a result of the strong loonie. The current account deficit ballooned to 3.4% of GDP in Q2. With a slowing and muted US economy and along with a slowing global economy any commodity price upside should be limited. Increases to the Canadian account deficit should be expected to continue. The Canadian economy also hit a pothole in Q2 registering -.04% negative GDP growth. House prices continues its unbridled growth up another 1.7% for the month of June. The S&P/TSX would turn short term positive above 12,800 and significantly negative below 11,700. The S&P/TSX Venture exchange at 1,810 lags far behind the underlying commodity prices to which they supposedly relate. Earnings for the metal and material sector should continue to be buoyant in this challenging environment. Agra/fertilizer stocks (POT/AGU) have shown considerable short term relative strength.
Bottom Line, global growth in the first half of the year was worse than many expected. The revision of US data suggests the possibility of slipping back into recession territory. The Euro sovereign/credit/banking mess shows the signs of further deterioration. The entire EU coalition appears to be teetering on the brink with many negative serious implications.
The ultimate concern is that should the fiscal intransigents like Greece prevail will the credit dominoes begin to fall collapsing the world economy along with it? Will emerging market strength be enough to offset any OECD damage or fallout? The $64k question being how much/many of these well advertised issues have been discounted in the market? Should the ultimate contrarian look to catch this falling knife? These are unprecedented and dangerous times to say the least with many frayed nerves and wild mood swings.
Our favorite bunga party animal Italian PM Silvio Berlusconi was recently recorded as saying, 'In a few months I'm going to go away and mind my own f****** business. I'm leaving this s***** country that makes me feel like puking!'
Not exactly positive words to engender confidence but thanks for showin' up!
Hot off the heels of the Bernake 'non-action Jackson' low volume short covering rally North American equity markets have once again turned back down in earnest. Rapidly withering economic stats have contributed to this low confidence malaise. European markets couldn't even muster up a weak rally based primarily on a no confidence dire economic outlook.
As North American celebrated the Labor Day weekend Euro bankers, led by Deutsche Bank CEO Joesef Ackermann, terrified investors about the fragility of the Euro banking system. He said the it is an open secret that numerous European banks would not survive having to revalue sovereign debt held on the banking book at markets levels. He further stated that the current Euro situation reminds him of the credit crisis of a few years ago which absolutely paralyzed equity markets. Italy, Germany, France all quickly dropped 5+%. Greek 2yr yields blew past the ridiculous 50% level for the first (and probably last) time ever. The Euro banks got destroyed falling between 6-8%. The Italian treasury must redeem $US20.4 of debts this week and over $US100b by the end of September - the most ever in a single month. Despite the ECB desperately buying and supporting the Italian bond market yields are rising back into dangerous 'hot water' territory. The Italian 10 yr spread to Bunds was past 340 bps - far above the recent ECU invention levels and wider than Spain throughout August. Germany has 'null' patience with the Greek reluctance to bring its debts under control. It is hard to imagine that Greece will be a member of the EU for much longer. UBS quantifies the cost of a Euro break up of between 20 to 25% of GDP in the first year - and incidentially the end of UBS too!
The 'austerity'experiment/solution looks to be ending faster than it began. The complex and thorny issue of a stimulative monetary policy +/or quantitative easing to solve the broken Euro financial system appears to be a foregone conclusion. That which Europeans have traditionally feared is now what they crave the most. Goldman Saks speculates that Euro banks will need close to $US1T or 5 times the amount the IMF proposed. Goldman's latest 'State of the Markets - Long and Short risk Strategies' report effectively calls for a major global structural implosion. Gold galloped past any margin increase threats into all time high territory and it's destiny with $US2,000+/oz. The failure of an ill conceived EU and euro currency paves the way for an epic destructive currency war as 'fiat' systems implode. The Swiss National Bank 'blinked' having intervened with a 'full efforts' campaign to control the their galloping Swiss currency - perversely attacking their own currency while effectively defending the euro. The new minimum exchange rate setting is set at a target of 1.20 francs to the euro. The now vigilant S&P is itching to downgrade every and any blue suited pin stripped Euro banker it sees. To make matters worse the 'contagian' appears to be spreading into Asia as emerging market 'swap spreads' rise in anticipation of further financial fireworks! The new IMF managing director Christine Lagarde handsome white quaff is already getting whiter. This is beginning to look like a Dana White MMA/UFC 'no holds barred' financial throw down spectacle. I'm not sure news could get much worse - but I've been saying that for a while!'
The the US, the Prez and his VP incredulously and ironically spent the long 'labor day' weekend agitating what is left of the organized union movement - pitting the plight of the down beaten worker against greedy corporate cronies. This regurgitated 'blame game' party policy is no doubt a panic response to the demoralizing economic 'goose egg' they produced but did not expect. It should therefore come as no surprise that American employers are creating fewer jobs than they were at the onset of the Great Recession - clear evidence of a crisis of business confidence. US companies added zero new workers in August ending a 10 month job creation run. The deteriorating trend paves the way for more Federal Reserve masterminding. B.H. Obama is putting the final touches on his much awaited 'jobs plan.' Expect a blended reworked infrastructure/payroll tax rehash and a yawn. His new and improved upcoming stimulative 'housing policy/plan' should be much more interesting. Almost every 'blue chip' US bank now faces a new nuclear mega lawsuit by the US Federal Housing Financial Agency over faulty mortgage loans adding another straw to the beleaguered camels back. The amount of damages sought will dwarf the $US20b sought from mortgage servicers in a probe by state attorneys general. The FOMC minutes word count helps to reveal key leadership concerns: unemployment:15, volatility:3, 2011:6, 2012:3, debt:19, inflation:29, and deflation:1. On the week the DJIA closed at 11,240 down 50, S&P 1169 down 8, and NASDAQ even. The key downside levels are DJIA 10,750 closing basis, S&P 1,100 closing basis, and NASDAQ 2,340 closing basis. A meaningful high volume violation of these lower levels imply a further 10% minimum deterioration to longer term support levels.
In commodities, Gold has been the standout as a barometer of the numerous global financial banking challenges. Gold has quickly recovered the 'margin related' $US200/oz lost in mid August. Discussions are afoot calling for Gold as collateral from the needy dysfunctionl jurisdictions. Unfortunately Greece holds only 111 tonnes of Gold or $US6b. Italy holds a much more respectable 2400 tonnes or $US130b. The IMF quickly chimed in opposing any collateral package which only contributes to further delays and uncertainties. Silver continues to consolidate in the higher $US42-44 level. A move above $US44 would be very positive. Economic sensitive commodities Copper and Natural Gas continue to hold above $US4/lb and $US4/mcf respectively. Crude Oil continues to thrash in the $US80-90/bl level. A close below $US80/bl would imply considerable selling pressure/liquidation. A move above $US90/bl implies a retest of the $98/bl 200 dma level. The Agra grain market has recently moved into new short term recovery high levels and appears poised for a potential 3-5% pullback and consolidation of trend.
In Canada, the key S&P/TSE index now moves in lock step with both the DJIA and S&P. The key financials have reported mixed earnings and outlooks. Dividend hiking TD Bank temporarily moved past RY as the #1 market cap bank for the first time in memory. The Canadian current account moved deeper in the red in the second quarter primarily as a result of the strong loonie. The current account deficit ballooned to 3.4% of GDP in Q2. With a slowing and muted US economy and along with a slowing global economy any commodity price upside should be limited. Increases to the Canadian account deficit should be expected to continue. The Canadian economy also hit a pothole in Q2 registering -.04% negative GDP growth. House prices continues its unbridled growth up another 1.7% for the month of June. The S&P/TSX would turn short term positive above 12,800 and significantly negative below 11,700. The S&P/TSX Venture exchange at 1,810 lags far behind the underlying commodity prices to which they supposedly relate. Earnings for the metal and material sector should continue to be buoyant in this challenging environment. Agra/fertilizer stocks (POT/AGU) have shown considerable short term relative strength.
Bottom Line, global growth in the first half of the year was worse than many expected. The revision of US data suggests the possibility of slipping back into recession territory. The Euro sovereign/credit/banking mess shows the signs of further deterioration. The entire EU coalition appears to be teetering on the brink with many negative serious implications.
The ultimate concern is that should the fiscal intransigents like Greece prevail will the credit dominoes begin to fall collapsing the world economy along with it? Will emerging market strength be enough to offset any OECD damage or fallout? The $64k question being how much/many of these well advertised issues have been discounted in the market? Should the ultimate contrarian look to catch this falling knife? These are unprecedented and dangerous times to say the least with many frayed nerves and wild mood swings.
Our favorite bunga party animal Italian PM Silvio Berlusconi was recently recorded as saying, 'In a few months I'm going to go away and mind my own f****** business. I'm leaving this s***** country that makes me feel like puking!'
Not exactly positive words to engender confidence but thanks for showin' up!
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