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!
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