Global financial participants, like characters in Samuel Beckett's 'absurdist' play Godot, waited almost endlessly and painfully in vain for the arrival of a coordinated, workable, and practical Euro debt agreement.
Godot the two act tragicomedy originally written in French in 1948 (En attendant Godot) features two principal characters, Vladimir (Germany) and Estragon (France) who divert themselves while they wait expectantly and in vain for someone named Godot (Good Dough) to arrive. They claim him as an acquaintance but in fact hardly know him - admitting that they would not recognize him were they to see him. The pair discuss repentance, particularly in relation to the two thieves crucified alongside Jesus - and that only one of the Four Evangelists mentions that one of them was saved. This is the first of many biblical references linking the central theme of reconciliation with God as well as salvation. They often cry 'We're Saved!' when they feel Godot may be near. Vladimir (Didi) often expresses his frustration with Estragon's (Gogo) limited conversational skills. Vladimir is often hostile towards his companion. Estragon comments on the bleakness of his surroundings. He wants to depart but is told they cannot because they must wait for Godot. The pair cannot agree, however, on whether or not they are in the right place or if this is the arranged day for the meeting with Godot or are not even sure what day it is. As they wait Vladimir asks Estragon what they might do to pass the time. Estragon suggests hanging themselves. They abandon the idea should both not die which would leave one alone - an intolerable notion. They decide to do nothing: 'It's safer' explains Estragon just prior to ask what Godot is going to do for them when he eventually arrives. Vladimir struggles to remember. 'Oh ... nothing very definite,' is the best he can manage.
Their waiting is interrupted by two other forlorn characters, Pozzo and his heavily laden slave Lucky. Lucky is dragged onto stage by a noose around his neck by his master. Pozzo barks orders and often calls him a 'pig! (one 'i' only)' The pair are off the the 'market' for slave Lucky to be sold. Pozzo tells Vladimir and Estragon that they are on his land but acknowledges that 'the road is free to all.' Before they leave Pozzo asks if he can do anything for the pair in exchange for providing company and rest. Estragon tries to ask for money but is cut short by Vladimir who explains they are not beggars. After Pozzo and Lucky leave Vladimir and Estragon play at imitating them. They fire insults at each other and then makeup up. The play ends when a boy informs the pair not to expect Godot today but promises he will arrive the next day. They reconsider suicide but their rope (belt) breaks as they tug on it. Estragon's trousers fall down but does not notice until Vladimir tells him to pull them up. They resolve to bring a more suitable rope and hang themselves the next day should Godot not arrive. They finally agree to leave but neither of them makes any move to go.
The parallels between the classic absurd tragicomedy Godot - and the exasperating lack of 'Piigs at the Trough' Euro debt leadership - is painfully obvious and stunningly ironic.
In a recent article by the outstanding Financial Post columnist Peter Foster, he succinctly elucidates the complex issues and solutions only as he can. 'That governments can't see their way through the crisis is a reflection not of the situation's inherent hopelessness, but of their own debt addiction and flawed vision of competent macro management.' 'At every level there is to be avoidance of responsibility, investment in failure, and continued commitment to the notion that problems can always be passed "upstairs," that is, socialized. In other words - moral hazard on stilts.''None of this has anything to do with globalization or Anglo-Saxon capitalist greed, although European leaders are still weakly attempting to pin their problems on those wicked financial speculators.'
Mr. Foster furhter states that the EU will never find a long term solution until they acknowledge their problem: systematic irresponsibility. Italian head Capo Mr. 'Bunga Bunga' Berlusconi hopes to avoid a total collapse of his government by passing pension reform raising age eligibility by 2 years to 67 by the year 2026! On the bright side 67 is the new 57. Unfortunately most of Berlusconi's mistresses will now have to wait for at least another 45 years before they retire. Italian agreement has also been made to raise a paltry 5 billion Euros a year from divestment and improved returns from state property. These minimalist moves fall far short of the new definition of Austerity: living within your means! The EU's reckless ways of taxing (or not) and spending to buy votes perpetuating the unsustainable debt cycle has come to a painful end. The bill for decades-long financial orgy is massive and private lenders have no confidence in government's ability to promise or repay. Excessive debt has created widespread global instability. The world is being asked to de-lever while the EFSF craves to leverage (5x's) into trillions of Euros of new debt. Taxation, spending, over regulation, entitlement promises, and anti-competitive legislation has cooked their proverbial golden goose! None of these 'causes' will solve any part of the problem! Addicts using more drugs does not help to kick their habit! With drawl is never pretty picture!
Peter Foster's precise ultimate solution (opposite to the current version of Prez. B. Obama) is: 'not less market but more, and not more government (Godo) but less!' 'Waiting' expectantly for government (Godo) to solve these problems and NOT make them significantly worse will be in vain!
In the US, a very positive earnings season is well under way with the majority of companies surprising to the upside. A growing number (1.8 to 1.0) of these companies are cautious in respect to future guidance and extraordinary adjustments. The latest GDP data showed a healthy expected +2.5% growth - almost doubling the last reporting quarter. Jobless figures remain unchanged but expect the number to improve based on improving economic conditions and pre-election jiggery-pokery and fancy stick handling.
The downside pressure on the US housing market continues to abate with reports of 313,000 new home sales in September. Relators report shrinking inventories and cash buyers. September's 3.48 million homes marks the lowest inventory of homes for sale in the month of September since September 2005! The Standard and Poor's Case-Shiller Index showed that home prices rose in half of major cities reporting in the month of August. The President's new open ended 'Refi' financing program for distressed mortgages, HARP, looks only to further support the ailing housing sector. US home building stocks have rallied 30% from their lows.
The tech sector lost momentum this week following last week's Apple downside surprise. This week both Netflix (NFLX) and Amazon (AMZN) disappointed and offered negative guidance based on rising costs and shrinking margins. Next week's Groupon IPO looks to be somewhat of a Groupoff affair based on questionable marketing data. Less than 4% of the 1500 S&P companies have PE ratios greater than 50 times. If any of these rapid growth companies report disappointing (even slightly) earnings their stocks can quickly and mercilessly drop up to 30% before the red ink dries. Consumer confidence (39.8 vs 46 est) through Oct 13th., remains at an all time non-recessionary morbid level despite very upbeat retail sales stats. Consumer confidence averaged 69.3 during the last 5 recessionary periods. A major concern is data showing that the Savings Rate has dropped back to December 2007 levels at 4% from as high as 8% in late 2008.
The brisk and bullish month of October rally temporarily ran head on into significant resistance at just under 12,000 mid week - its 200dma - in a combination of short covering and improving domestic economic conditions. Tuesday's 5 year Treasury auction was priced at 1.055%, just above the record low of 1.015% in September. Most notably about this auction is that it may mark the last time (in the foreseeable future) in which the US debt/GDP ratio will be under 100%. The new cumulative official US debt total after this auction is $US15.010 trillion vs GDP of $US15.013 trillion resulting in a debt/GDP ratio of 99.99%. Wednesday's historic $US29b in 7 year bonds floats America into uncharted negative triple digit 'shark infested (under)water.' After the complex EU debt accord/plan was announced late Wednesday global markets rocketed through resistance areas on renewed confidence, short covering, and 'hopeful/wishful thinking.' The DJIA very bullishly 'gapped' through its downward sloping 200 dma trading as high as 12,300 - up a whopping 20% in 4 weeks. The DJIA closed up 3.4% on the week and 5.4% YTD. The broader S&P 500 also snapped through its 200 dma closing at 1,280 - up 3.5% on the week and 1.86% YTD. The NASDAQ closed up 3.47% on the week and 2.87% YTD despite recent negative earnings reports. With only one trading day left October looks to go down as one of the best months ever - up the most on a percentage basis since the ultra gloomy recessionary year of 1974.
In the commodity market, Dr. Copper smashed all previous records for the largest rise in a week - (over 6 standard deviations) - up over 20% in 6 trading sessions the biggest move ever to $US3.72/lb. Gold also joined the (inflationary) party adding $US140/oz (+8.75%) in 6 trading sessions to close at $US1,745/oz on Friday. Gold added at healthy 5.9% on the week and is up 22.42% YTD. Gold should have trouble breaching $US1,790/oz on the upside in the near term. Silver also participated on the upside adding $US5/oz (+17%) on the week closing at just over $US35/oz. Silver looks to add another $US5/oz before this short term rally ends. Crude oil has also had a stellar run of almost $US10/bl (12%) in the last 6 trading sessions to close at just under $US94/bl resistance. The Agra-grain market (Corn, Soy Beans, and Wheat) consolidated recent gains and look to add another 5-10% upside in the short run.
In Canada, retail sales rebounded in August increasing 0.5% following a decline of 0.5% in July. Canadian consumers are much less pessimistic than their US counterparts showing a slight improvement in September. The latest consumer confidence reading was registered at 70 for the month of September. Overall there has been a deterioration in the Canadian economic outlook over the last few months primarily due to persistent negative US morale. The B of C projects that the economy will expand by 2.1% in 2011, 1.9% in 2012, and 2.9% in 2013. Sensational earnings were reported by most material and energy issuers this week with many raising their outlooks and dividend payouts. Many senior producing resource stocks have been driven lower on 'ultra recessionary low expectations' over the past few months. Expect merger, acquisition, and takeover activity to increase significantly as we move into 2012.
The S&P/TSX Composite index added 4.5% this week closing at 12,519 - still 300 points away from its 200 dma. The TSX Index is down -7.07% YTD based on very low expectations and hedge fund liquidation. Recently the dividend yield on the TSX 60 rose above that provided from 30 year Canadian Treasury Bonds for the second time ever. The last time it occurred was at the market lows of 2009. The battered S&P/TSX Venture Composite has finally emerged out of its nasty down trend closing up almost 130 points (9%) in the last 6 trading sessions to close at 1,629. The Venture Index needs to rally 20% from current levels to return to its 200 dma. Similarly to 2007, the TSX Venture Exchange has been crushed by almost 50% (top to bottom) from it's 2011 high level of over 2,400. Expect this under performing (to say the least) sector to provide leadership in early 2012.
Bottom Line, 'some kind' of EU deal was hammered out in Brussels much to the relief of global financial markets. Most of the usual who, what, why, where, and when questions remain: as to who is going to finance this package, what are the important credit details, why are Greece's debts being (voluntarily?) written off by 50% and why do they get to immediately borrower more, and where will future leadership/control in the EU originate from?
Bad cop Germany will continue to be front and center in this tenuous balancing act. Deep pocketed China has yet to chime in with their various demands but expect them to be onerous. France, Italy, and Spain wait in the wings with substantially greater needs. The 'can' is getting progressively larger and substantially heavier to kick down the 'one way' road!
The European Banking system is massive with over $US46 Trillion in assets - equal to 82% of global GDP. Greece's debt to GDP falls from 160% to 120% - a still unsustainable level. Very little room has been left for future 'toe stubs' and 'eye pokes!' Critical moral hazard concerns now appear to be more of a romantic notion. This weeks 'plan' is a doubtful 'solution' but rather more creative financial foot work and further time gaining balance sheet 'expansion.' The real question is how much more burden are tax payers going to have to 'involentarily' take and how much more (if any) can they handle? This 'slippery slope' leads to nowhere good!
Another huge concern for me is the Mal treatment given to the Greek CDS holders and the negative effect this may/will have on bond markets and interest rates worldwide. Breaking the faith and trust of these derivative contracts is a serious error in judgement. It looks to me to be a significant 'unreported' Black Swan event which may/will have many serious unintended consequences. CDS coverage doubtful = no insurance = dump CDS's = dump doubtful bonds is my simplified analysis. High Interest Rates = Death. I realize that Government is firmly in the 'pockets' of the banking industry and obediently carry out their 'sorted' bidding - but this is a move they may live to deeply regret!
In the 'Real Bad Timing Department' the Italian Defense Ministry just received their shipment of 19 Maserati armoured supercars - an outrageous indulgence at a time when the defense ministry is supposed to be reducing its budget by 2.5bn Euros over the next 3 years. Today's Italian bond issue put borrowing costs at historically high levels breaking over 6% on the Maginot line.
Global equity markets will probably take a break from this recent break neck rally. Expect upside revisions to economic models and corporate earnings expectations. Many managed portfolios were braced for pending financial 'Armageddon' and are woefully under represented. Trillions of non-yielding assets remain on the anxious sidelines. I do not rule out a new recovery high for the year of over 12,900 for the DJIA once markets consolidate recent gains - and possibly before Santa slides down our chimneys.
Ultimately, I believe that new inflation driven all-time highs above the 14,000 level (2006/07) for the DJIA are not out of the question. All time highs for both the DJIA and S&P would be possible in my opinion prior to the upcoming US Presidential election in late 2012. Look to accumulate good quality material, energy, & industrial equities on deeper pull backs. Avoid the interest rate sensitive issues. Keep stops tight.
This absurd debt drama is only the first act!
'A liberal is someone who feels a great debt to his fellowman, which debt he purposes to pay off with your money.'
G. Gordon Liddy (1930-)
Friday, October 28, 2011
Monday, October 24, 2011
Week Ending 10/21/11 - Trick or Treat
We are in the final week before the annual October 31st 'Trick or Treat' Halloween festivities - the last day of the Celtic Calender.
The Celts believed that Halloween was the night the souls of the dead roamed the streets and villages. Since not all spirits were thought to be friendly, gifts and treats were left out to pacify the evil ones and ensure next year's crop would be plentiful. Trick or treating traces its origins back to the highly organized Celtic, Roman, and Germanic European traditions in which a celebratory night in which normal order and structure were abolished and chaos would reign. The original EU horror show!
This is also the week in which the world's financial markets hope to celebrate a return to EU fiscal order and structure. The ultimate 'treat' would be a coordinated workable long term agreement and a return to orderly and calm 'non-chaotic' markets. Any further misleading comments from the double speaking ghoulish central banking spirits would invoke a 'trick' in which financial markets would have trouble recovering from and would ensure a very 'poor crop' next year indeed!
In the next few days a comprehensive financial plan needs to be reached between the two key 'solvent' Euro players. The cash flush Germans want to write off more (than 50%) of Greek debt immediately but prefer not to lend anymore to anyone. Beleaguered German leader Angela Merkel is also having to deal with imploding domestic support and 'calorie challenged' barbs from various EU team members. The normally 'non-compliant' French who don't have the dough but prefer to open the 'stimulative' and inflationary monetary floodgates anyway possible. This weeks Moody's warning about a possible French downgrade caused French-German spreads to explode further complicating delicate financial matters. Italian 10 year yields also suddenly broke above 6% this week adding fuel to scary events perhaps to come. The heavily indebted Italians ($2T) have their work cut out for themselves to meet recently imposed financial conditions and limitations.
At some point the 'trick or treating' Greek government will need to organize a tax collecting 'trick' to finance whatever plan emerges in the new fiscal union. Early in the week it was rumored that the EFSB was 'only' going to receive a paltry 110 billion Euro to finance and liquefy the EU banking system - a tad short of the 2 to 3 trillion 'levered' Euro needed/desired to placate all member imbalances. In my last letter I stated that the EU banks needed at least a 137 billion Euro injection - far short of the immediate 370 billion Euro needed should Greece default on 60% of its debt through a 'managed restructuring.' One way or another the ECB will need to buy hundreds of billions of government bonds to 'refinance' this veritable house of cards. The ECB already has huge exposure of approximately 590 billion Euro to the PIIGS up from 444 billion Euro just a few months ago. Ominous stagflation comments from the Bank of England this week is a precursor to rising domestic financial stress in the UK. The UK has made significant progress in meeting term debt issuance targets for the year. The question is how long will they be able to handle the elevated funding costs before lending to the domestic economy becomes affected. In an interesting article from HSBC the Bank of England base rates were listed the in periods when Britons experienced 5% inflation. They are : 1984 (9.7%), 1988 (10%), 1991 (11.6%), and 2011 (0.5%).
China continues to slow with GDP growth falling to 9.1% from 9.5% (YOY) along with an eye popping 17.7% surge in retail sales - hardly a threat or problem to the more urgent and pressing EU banking concerns. I'm not sure that the Chinese are into dressing up and scaring people as a tradition which may be a good thing? The Chinese have been trying to responsibly cool domestic inflationary economic conditions for months and it appears to be working.
European central bankers are taking this weekends 'fresh proposals' back to their respective governments to conger up a 'treat' which will unlikely appease all participants but hopefully will satisfy capital markets. In order to be successful full and precise details of the inevitable Greek bond haircut, large(r) European bank recapitalisations, and an external plan to support the EFSF bailout mechanism must be clear and workable.
We may be facing the scariest European Halloween ever!
In the US, fresh off a 'dreadful' Q3 September performance, and in the face of the horrifying international macro 'web' of unsustainable debt, the seasonally weak month of October for the DJIA/S&P is set to record it's best performance for an October since 1982. Since Oct 1st the DJIA and S&P has tacked on a very impressive 15% despite rampant negativity and despair. On the week the DJIA rallied 150 points (+1.2%) and the S&P added 8 points (+.66%). The NASDAQ fell 50 points (-1.5%) as a result of a rare Apple earnings report disappointment (revenue and earnings +50% from the year-ago quarter). Of the 25% of total companies which reported earnings this week over 60% have surprised to the upside.
As I have consistently reported US internal economic conditions have been steadily improving throughout recent international trails and tribulations. Gallup's survey-based measure of US unemployment dropped sharply to 8.3% in mid-October from 9.2% at the end of August and 10% a year ago. This decrease suggests that the BLS could report an October jobless rate below 9%. Leading economic indicators and auto sales continue to be very robust. The Philadelphia Reserves Business Outlook Survey increased from -17.5 in September to +8.7 - the first positive reading in 3 months. The Philly Fed data came in 6 standard deviations above expectations -the biggest jump since October 1980 - along with the biggest jump in shipments ever! Housing starts smashed expectations with a 15% jump - albeit from very modest levels. Most areas of the country reported slight economic improvement in September and early October according to the Federal Reserves Beige Book survey of its 12 banking regions. US Q3 earnings are expected to easily surpass record highs levels with many analysts now adjusting future expectations to the upside.
On the downside Producer Prices reported a hot 0.8% from an expected 0.2%. Rumors circulate that the US credit rating may be dropped yet another notch. Debt and wage issues continue to draw intense scrutiny.
The relatively strong Consumer Discretionary Sector enters into a period of positive seasonality from late October to early January. A move above the current DJIA 200dma resistance at 11,900 measures to an upside rally of 600 points back to the recent high level of 12,600. An upside break for the S&P measures to 1,340 and 2,840 for the NASDAQ. A tremendous pile of 'inactive' low yield cash remains on the sidelines ($US4+ Trillion) which could easily add significant upside to capital markets should sovereign debt issues settle in a satisfactory manor. Most significantly to me the US markets are now trading above the Aug 5th levels when the S&P ratings agency downgraded the US 'AAA' credit rating.
In commodities, gold settled at $1,636/oz in sideways weekly trading primarily reacting to fluctuations in the volatile currency markets. Bullion is in the 11th year of a bull market reaching as high as $US1,923 on September 6/11. The metal has advanced 15% this year and needs to clear $US1,695/oz resistance to regain upside momentum A move below $US1,600 would imply a sharp move back to the $US1,490-1,520/oz support level. Silver also continues to consolidate in the low $US30/oz level significantly below it's 200 dma. A move above $US33/oz would imply a sharp rally back to the low $US40/oz level. Copper jumped the most in two years on speculation that European governments will end a deadlock on reining in their debt crisis. Lead and aluminum also rose sending a gauge of industrial metals up the most since 2009. Crude Oil continues to consolidate positively in the mid $US80/bl level based on potential increasing consumption data and supply concerns. A move above $US90/bl for crude oil implies a short term bounce back to the mid $US90/bl resistance levels.
In Canada, capital market performance was weaker with the S&P/TSX registering a 130 point loss (-1.2%) for the week. The S&P/TSX needs to rally another 6% before it reaches it's 200 dma and formidable resistance. The mauled and much maligned S&P/TSX Venture exchange is over 20% away from it's 200dma but appears to be in the early stages of formulating the potential for a significant rally. Canadian Core CPI (+3.2%) reached the highest level in 33 months as inflation slowly creeps into the economic landscape. Canadian September leading indicators fell for the first time (0.1%) in 12 months. Foreign investment in Canadian securities slowed to $7.9b in August - with most of the investment in the Canadian bond market. The Bank of Canada Business Survey showed less sales optimism falling to 39% from 49% in the last survey. Despite this mildly negative data the S&P/TSX index appears to be breaking out of major downtrend resistance with a short term target of 12,900 it's 200dma and 8% higher.
Bottom Line, in the face of end of a very 'scarey' October, equity markets appear to be now focused on improving economic conditions and what looks to be a sensational earnings season. Some kind of Euro debt resolution appears to be fully baked in the souffle. The DJIA and S&P now appears set to climb a formidable wall of worry and concern as an 'ocean of liquidity' is put to work. Funds which are under exposed to equities may now have to scramble to assemble and beef up portfolio positions as 2011 draws to a conclusion. It appears that much of the analyst community have underestimated the positive effect which the current low and compressed interest rates structure has provided. A rotation from bond to equity sector would be a 'treat' which long term investors deserve!
'I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around (the banks) will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.'
Thomas Jefferson (1743-1826)
The Celts believed that Halloween was the night the souls of the dead roamed the streets and villages. Since not all spirits were thought to be friendly, gifts and treats were left out to pacify the evil ones and ensure next year's crop would be plentiful. Trick or treating traces its origins back to the highly organized Celtic, Roman, and Germanic European traditions in which a celebratory night in which normal order and structure were abolished and chaos would reign. The original EU horror show!
This is also the week in which the world's financial markets hope to celebrate a return to EU fiscal order and structure. The ultimate 'treat' would be a coordinated workable long term agreement and a return to orderly and calm 'non-chaotic' markets. Any further misleading comments from the double speaking ghoulish central banking spirits would invoke a 'trick' in which financial markets would have trouble recovering from and would ensure a very 'poor crop' next year indeed!
In the next few days a comprehensive financial plan needs to be reached between the two key 'solvent' Euro players. The cash flush Germans want to write off more (than 50%) of Greek debt immediately but prefer not to lend anymore to anyone. Beleaguered German leader Angela Merkel is also having to deal with imploding domestic support and 'calorie challenged' barbs from various EU team members. The normally 'non-compliant' French who don't have the dough but prefer to open the 'stimulative' and inflationary monetary floodgates anyway possible. This weeks Moody's warning about a possible French downgrade caused French-German spreads to explode further complicating delicate financial matters. Italian 10 year yields also suddenly broke above 6% this week adding fuel to scary events perhaps to come. The heavily indebted Italians ($2T) have their work cut out for themselves to meet recently imposed financial conditions and limitations.
At some point the 'trick or treating' Greek government will need to organize a tax collecting 'trick' to finance whatever plan emerges in the new fiscal union. Early in the week it was rumored that the EFSB was 'only' going to receive a paltry 110 billion Euro to finance and liquefy the EU banking system - a tad short of the 2 to 3 trillion 'levered' Euro needed/desired to placate all member imbalances. In my last letter I stated that the EU banks needed at least a 137 billion Euro injection - far short of the immediate 370 billion Euro needed should Greece default on 60% of its debt through a 'managed restructuring.' One way or another the ECB will need to buy hundreds of billions of government bonds to 'refinance' this veritable house of cards. The ECB already has huge exposure of approximately 590 billion Euro to the PIIGS up from 444 billion Euro just a few months ago. Ominous stagflation comments from the Bank of England this week is a precursor to rising domestic financial stress in the UK. The UK has made significant progress in meeting term debt issuance targets for the year. The question is how long will they be able to handle the elevated funding costs before lending to the domestic economy becomes affected. In an interesting article from HSBC the Bank of England base rates were listed the in periods when Britons experienced 5% inflation. They are : 1984 (9.7%), 1988 (10%), 1991 (11.6%), and 2011 (0.5%).
China continues to slow with GDP growth falling to 9.1% from 9.5% (YOY) along with an eye popping 17.7% surge in retail sales - hardly a threat or problem to the more urgent and pressing EU banking concerns. I'm not sure that the Chinese are into dressing up and scaring people as a tradition which may be a good thing? The Chinese have been trying to responsibly cool domestic inflationary economic conditions for months and it appears to be working.
European central bankers are taking this weekends 'fresh proposals' back to their respective governments to conger up a 'treat' which will unlikely appease all participants but hopefully will satisfy capital markets. In order to be successful full and precise details of the inevitable Greek bond haircut, large(r) European bank recapitalisations, and an external plan to support the EFSF bailout mechanism must be clear and workable.
We may be facing the scariest European Halloween ever!
In the US, fresh off a 'dreadful' Q3 September performance, and in the face of the horrifying international macro 'web' of unsustainable debt, the seasonally weak month of October for the DJIA/S&P is set to record it's best performance for an October since 1982. Since Oct 1st the DJIA and S&P has tacked on a very impressive 15% despite rampant negativity and despair. On the week the DJIA rallied 150 points (+1.2%) and the S&P added 8 points (+.66%). The NASDAQ fell 50 points (-1.5%) as a result of a rare Apple earnings report disappointment (revenue and earnings +50% from the year-ago quarter). Of the 25% of total companies which reported earnings this week over 60% have surprised to the upside.
As I have consistently reported US internal economic conditions have been steadily improving throughout recent international trails and tribulations. Gallup's survey-based measure of US unemployment dropped sharply to 8.3% in mid-October from 9.2% at the end of August and 10% a year ago. This decrease suggests that the BLS could report an October jobless rate below 9%. Leading economic indicators and auto sales continue to be very robust. The Philadelphia Reserves Business Outlook Survey increased from -17.5 in September to +8.7 - the first positive reading in 3 months. The Philly Fed data came in 6 standard deviations above expectations -the biggest jump since October 1980 - along with the biggest jump in shipments ever! Housing starts smashed expectations with a 15% jump - albeit from very modest levels. Most areas of the country reported slight economic improvement in September and early October according to the Federal Reserves Beige Book survey of its 12 banking regions. US Q3 earnings are expected to easily surpass record highs levels with many analysts now adjusting future expectations to the upside.
On the downside Producer Prices reported a hot 0.8% from an expected 0.2%. Rumors circulate that the US credit rating may be dropped yet another notch. Debt and wage issues continue to draw intense scrutiny.
The relatively strong Consumer Discretionary Sector enters into a period of positive seasonality from late October to early January. A move above the current DJIA 200dma resistance at 11,900 measures to an upside rally of 600 points back to the recent high level of 12,600. An upside break for the S&P measures to 1,340 and 2,840 for the NASDAQ. A tremendous pile of 'inactive' low yield cash remains on the sidelines ($US4+ Trillion) which could easily add significant upside to capital markets should sovereign debt issues settle in a satisfactory manor. Most significantly to me the US markets are now trading above the Aug 5th levels when the S&P ratings agency downgraded the US 'AAA' credit rating.
In commodities, gold settled at $1,636/oz in sideways weekly trading primarily reacting to fluctuations in the volatile currency markets. Bullion is in the 11th year of a bull market reaching as high as $US1,923 on September 6/11. The metal has advanced 15% this year and needs to clear $US1,695/oz resistance to regain upside momentum A move below $US1,600 would imply a sharp move back to the $US1,490-1,520/oz support level. Silver also continues to consolidate in the low $US30/oz level significantly below it's 200 dma. A move above $US33/oz would imply a sharp rally back to the low $US40/oz level. Copper jumped the most in two years on speculation that European governments will end a deadlock on reining in their debt crisis. Lead and aluminum also rose sending a gauge of industrial metals up the most since 2009. Crude Oil continues to consolidate positively in the mid $US80/bl level based on potential increasing consumption data and supply concerns. A move above $US90/bl for crude oil implies a short term bounce back to the mid $US90/bl resistance levels.
In Canada, capital market performance was weaker with the S&P/TSX registering a 130 point loss (-1.2%) for the week. The S&P/TSX needs to rally another 6% before it reaches it's 200 dma and formidable resistance. The mauled and much maligned S&P/TSX Venture exchange is over 20% away from it's 200dma but appears to be in the early stages of formulating the potential for a significant rally. Canadian Core CPI (+3.2%) reached the highest level in 33 months as inflation slowly creeps into the economic landscape. Canadian September leading indicators fell for the first time (0.1%) in 12 months. Foreign investment in Canadian securities slowed to $7.9b in August - with most of the investment in the Canadian bond market. The Bank of Canada Business Survey showed less sales optimism falling to 39% from 49% in the last survey. Despite this mildly negative data the S&P/TSX index appears to be breaking out of major downtrend resistance with a short term target of 12,900 it's 200dma and 8% higher.
Bottom Line, in the face of end of a very 'scarey' October, equity markets appear to be now focused on improving economic conditions and what looks to be a sensational earnings season. Some kind of Euro debt resolution appears to be fully baked in the souffle. The DJIA and S&P now appears set to climb a formidable wall of worry and concern as an 'ocean of liquidity' is put to work. Funds which are under exposed to equities may now have to scramble to assemble and beef up portfolio positions as 2011 draws to a conclusion. It appears that much of the analyst community have underestimated the positive effect which the current low and compressed interest rates structure has provided. A rotation from bond to equity sector would be a 'treat' which long term investors deserve!
'I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around (the banks) will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.'
Thomas Jefferson (1743-1826)
Monday, October 17, 2011
Week Ending 10/14/11 - 99% Protestations
From a disorganized beginning over a month ago the 'Occupy Wall Street' movement has grown into an international phenomena of the 99% of tax payers that have been demoralized, disenfranchised, and 'un-stimulated!' I cannot speak to the 47% of Americans who pay no tax and will not likely do so.
Initially the talking heads of the financial media mocked and downplayed the message and resolve of these random protesters. Now it has been discovered that a substantial percentage of this frustrated group is very intelligent, articulate, and determined. Their message is crystal clear. Their hatred/disgust is palpable!
Over two decades of flat earnings, declining purchasing power, and job loss appears to have come to an unruly head. A tremendous amount of angst has been directed at the 'over levered/reckless' financial institutions who were made 'whole' by their good friends in powerful political positions. This 'largess' has simply been added to the 'public balance' sheet effectively doubling the national debt. The protesting tax payers have had more than enough of that bad act. It is a long overdue wake up call to the financial parasites throughout the world who have endangered and threatened the entire global economic system.
It is my hope that these protests mature into a focus towards the policy makers and our fearless/delusional elected leadership who are front and center as originators and enablers of much/most of this turmoil. For 30 years the economy has had to endure endless/mindless government spending/deficits, failed policy/regulation, self interest/vote buying, and various levels of incompetence/corruption. We are left with a bloated unproductive bureaucracy and trillions of dollars in debt. The more that is 'spent/borrowed' the worse conditions get. Government interference and meddling is the problem. Leadership who agitate and create a 'class warfare' atmosphere pitting employees against business desperately need to be replaced. Governments who do not guarantee to live within their means should never be elected - ever! US Federal spending is running at an unsustainable 25% of GDP. 2011 has the potential to record a setting deficit in excess of the $US1.4T in fiscal '09. It is becoming apparent that money supply 'genie' is out of the bottle and out of control. It is time for 'real' leadership to 'occupy' the Whitehouse. With any luck the 'social experiment' has/will come to an end before any more irreversible damage is inflicted on a vulnerable and fragile economic system.
All will be worth it if we move toward to coherent and realistic restructuring and restriction of the rules and responsibilities of the political process. The message needs to be sent that no one is 'too big too fail' and you cannot do 'whatever it takes' in order to rescue or support 'selected' interests. Currently the Euro political types are calling for a 'big bazooka' or 'quantum leap' approach in policy (read: more debt) to solve the problems which too much debt created. That mindless 'solution' will guarantee tragic results!
This is not a failure of capitalism/free markets but rather an obvious failure of the political machinery on ALL levels. The beginning of the end was in 1992 when the government insanely required Fannie Mae and Freddie Mac to direct a substantial portion of their mortgage financing to 'sub prime' borrowing. By 2007 the mind boggling 55% of 'junk' lending quota was reached and the rest is a sad history. A true free market/capitalistic system works best when it is allowed to cleanse excesses (read: moral hazard) to ensure that critical fear/greed (read: risk reward) balances exist. That means - no more stimulus, government job creation, or deficit financing solutions. After all the wasted 'blank check' trillions solution Obama has now altered his political message/sound byte from jobs 'saved or created' to now jobs 'supported!' Job 'saved or created' has come with a cost of $US250k/per vs the job 'supported' at an $80k/per price tag. I guess they figure that is a major cost saving measure? It is prime time to harness the power and influence which many dysfunctional politicians wield. It is time to respect those who foot the bill and who directly contribute to the health of the economic system. It would be an ironic tragedy if these very real protests ultimately increase the power, influence, and the importance of political and policy mandates/madness.
In the meantime, Fitch is not waiting for 'structural change' and is down grading any 'too big to fail' financial institution which has 'indulged' in Ponzi balance sheet master minding - and with 'negative outlooks.' S&P downgrades Spain by a notch to AA- also with a negative outlook. High unemployment levels, tighter financial conditions, and persistent levels of public and private sector debt were cited has major headwinds. UK jobless has reached 15 year unemployment highs to 2.57 million or 8%. Credit Suisse sees 66 European banks failing the latest stress tests. It is expected that Euro banks will need as much as $137b to make them 'whole' and solvent. The Chinese trade juggernaut lost some momentum as it's surplus shrivelled for the second straight month - it's slowest pace in 7 months. The G20 finance ministers and central bankers will spend the weekend in Paris in the 'hope' of pulling this debt & credit nose dive out of it's dangerous spiral. Expect an historic can kicking 'wall papering' job and conditions to worsen before they improve.
In the US, consumer confidence continues to deteriorate despite encouraging retail sales and record exports levels. Retail sales are 5% higher than 2008 levels which is impressive considering that 7 million less people are working. 5% fewer people are working yet spending has increased 5%. Recent auto sales doubled expectations. Exports have also registered record recovery growth nearing almost $US200b/month.
Earnings season is now in full swing with companies beating at a 70% rate in early reports. All eyes will be fixed on the expected 'miserable' earnings of the badly beaten down banking sector. I suspect much of the stock price downside has been factored into expectations. The critical ailing housing market shows signs of recovery with increased sales and declining inventories.
On the week the DJIA was up 4+%, S&P 5+%, and Nasdaq improved almost +7%. The major markets have quickly reversed the July to September free fall to a slightly positively year to year increase. Technology and energy stocks led the gain supported by positive corporate news. S&P short interest as a percentage of float has recently jumped to an over sold 4.4% reading. A significant proportion of this week's rally was probably the result of nervous short covering. Significant resistance levels for the DJIA is at the 11,800-11,900 area, S&P 1,250, and Nasdaq 2,660.
In commodities, despite bearish USDA World Agricultural Supply and Demand estimates the Agra Grain complex posted an impressive 5-15% rally from very over sold, well supported levels. It was the 4th consecutive monthly upward projection by WASDE for global stocks-to-use data. Prices remain very attractive at current levels. A retest of current low levels would be attractive entry points. The crude oil price has rallied to intermediate resistance at $US88/bl despite revised IEA data calling for less 2011 and 2012 demand. A close above $US90/bl would break crude above a 6 month downtrend and imply a retest of the $US94/bl (200dma) level. Gold is consolidating at the $US1,675-90/oz level and a probable retest of $1,620/oz critical support. Silver which is currently above $US32/oz appears vulnerable to a retest of the $US28-30/oz level. Copper is well supported in the $US3/lb level.
In Canada, a persistently strong housing market is supporting fairly strong economic data. Employment conditions continue to improve despite a slightly widening August trade deficit. Canada factory sales are at the highest level in 3 years.
Sinopec China agrees to buy 100% of the assets of Daylight Energy for $US2.1b for oil and shale gas reserves. It is a significant move for a Chinese entity to buy more than a minority interest for a Canadian corporation.
In an interesting report based on current valuations Canadian Banks are reported to be among the most levered at an average of 22:1 (worse than US and China, better than Europe) with the lowest cash-to-deposit ratios of 3% (better than Europe) in the world.
A 'system outage' misstep by tech whipping boy RIM generated a tremendous negative outpouring and a major public relations fiasco. Within a few days the system was restored, the CEO apologized, and an 'inconveniance settlement' was promised. RIM appears to be on a very short leash and desperately needs a few technological break through to reassert their reputation and limit market share loss.
The S&P/TSX closed fractionally above 12,000 and at significant residences. A move above 12,200 would imply a rally to near 13,000 the 200dma. The TSX/Venture has rallied 15% to 1,550 resistance. Continued commodity strength would imply another 15% rally from current levels. Tax loss selling pressure should limit any strength until the beginning of 2012 for junior resource stocks.
Bottom Line, the G20 has told the Euro Zone that they have a week to get their house in order which may be beyond wishful 'Leaf's winning the Stanley Cup' thinking. The extent of the private sector 'haircut' on Greek debt holdings are to be determined along with a 'credible' plan to recapitalize of Europe Banks and the installation of a 'firewall' protecting other countries from Greece's woes. I suspect that the G20 will be substantially disappointed on October 23rd. The US is expected to record at least the second largest budget worst deficit on record. The gap between spending and income will remain above $US1T for the third straight year. Just as concerning the US Senate has passed a bill that would punish countries which manipulate their currencies (unlike themselves) like China. Within moments China fired off a warning retaliatory short by weakening the Yuan. These fearless elected officials need to be reminded not to pick fights that they cannot win! Fortunately economic data has remained resilient to positive. However, until government spending and influence is dramatically reigned in and controlled any economic upside will be limited at best. At some point people (protesters included) will come to the realization that the more a government spends the worse conditions get. Any subsequent moves that are made to support the Keynesian spending madness will take conditions from worse to fatal. I have no faith that the policy makers will come to that conclusion anytime soon!
In the meantime seat belts and crash helmets are in order should the politicians continue to step on the gas while ignoring the speed & spending limits!
'Everyone wants to live at the expense of the state. They forget that the state lives at the expense of them!'
Frederic Bastiat
Initially the talking heads of the financial media mocked and downplayed the message and resolve of these random protesters. Now it has been discovered that a substantial percentage of this frustrated group is very intelligent, articulate, and determined. Their message is crystal clear. Their hatred/disgust is palpable!
Over two decades of flat earnings, declining purchasing power, and job loss appears to have come to an unruly head. A tremendous amount of angst has been directed at the 'over levered/reckless' financial institutions who were made 'whole' by their good friends in powerful political positions. This 'largess' has simply been added to the 'public balance' sheet effectively doubling the national debt. The protesting tax payers have had more than enough of that bad act. It is a long overdue wake up call to the financial parasites throughout the world who have endangered and threatened the entire global economic system.
It is my hope that these protests mature into a focus towards the policy makers and our fearless/delusional elected leadership who are front and center as originators and enablers of much/most of this turmoil. For 30 years the economy has had to endure endless/mindless government spending/deficits, failed policy/regulation, self interest/vote buying, and various levels of incompetence/corruption. We are left with a bloated unproductive bureaucracy and trillions of dollars in debt. The more that is 'spent/borrowed' the worse conditions get. Government interference and meddling is the problem. Leadership who agitate and create a 'class warfare' atmosphere pitting employees against business desperately need to be replaced. Governments who do not guarantee to live within their means should never be elected - ever! US Federal spending is running at an unsustainable 25% of GDP. 2011 has the potential to record a setting deficit in excess of the $US1.4T in fiscal '09. It is becoming apparent that money supply 'genie' is out of the bottle and out of control. It is time for 'real' leadership to 'occupy' the Whitehouse. With any luck the 'social experiment' has/will come to an end before any more irreversible damage is inflicted on a vulnerable and fragile economic system.
All will be worth it if we move toward to coherent and realistic restructuring and restriction of the rules and responsibilities of the political process. The message needs to be sent that no one is 'too big too fail' and you cannot do 'whatever it takes' in order to rescue or support 'selected' interests. Currently the Euro political types are calling for a 'big bazooka' or 'quantum leap' approach in policy (read: more debt) to solve the problems which too much debt created. That mindless 'solution' will guarantee tragic results!
This is not a failure of capitalism/free markets but rather an obvious failure of the political machinery on ALL levels. The beginning of the end was in 1992 when the government insanely required Fannie Mae and Freddie Mac to direct a substantial portion of their mortgage financing to 'sub prime' borrowing. By 2007 the mind boggling 55% of 'junk' lending quota was reached and the rest is a sad history. A true free market/capitalistic system works best when it is allowed to cleanse excesses (read: moral hazard) to ensure that critical fear/greed (read: risk reward) balances exist. That means - no more stimulus, government job creation, or deficit financing solutions. After all the wasted 'blank check' trillions solution Obama has now altered his political message/sound byte from jobs 'saved or created' to now jobs 'supported!' Job 'saved or created' has come with a cost of $US250k/per vs the job 'supported' at an $80k/per price tag. I guess they figure that is a major cost saving measure? It is prime time to harness the power and influence which many dysfunctional politicians wield. It is time to respect those who foot the bill and who directly contribute to the health of the economic system. It would be an ironic tragedy if these very real protests ultimately increase the power, influence, and the importance of political and policy mandates/madness.
In the meantime, Fitch is not waiting for 'structural change' and is down grading any 'too big to fail' financial institution which has 'indulged' in Ponzi balance sheet master minding - and with 'negative outlooks.' S&P downgrades Spain by a notch to AA- also with a negative outlook. High unemployment levels, tighter financial conditions, and persistent levels of public and private sector debt were cited has major headwinds. UK jobless has reached 15 year unemployment highs to 2.57 million or 8%. Credit Suisse sees 66 European banks failing the latest stress tests. It is expected that Euro banks will need as much as $137b to make them 'whole' and solvent. The Chinese trade juggernaut lost some momentum as it's surplus shrivelled for the second straight month - it's slowest pace in 7 months. The G20 finance ministers and central bankers will spend the weekend in Paris in the 'hope' of pulling this debt & credit nose dive out of it's dangerous spiral. Expect an historic can kicking 'wall papering' job and conditions to worsen before they improve.
In the US, consumer confidence continues to deteriorate despite encouraging retail sales and record exports levels. Retail sales are 5% higher than 2008 levels which is impressive considering that 7 million less people are working. 5% fewer people are working yet spending has increased 5%. Recent auto sales doubled expectations. Exports have also registered record recovery growth nearing almost $US200b/month.
Earnings season is now in full swing with companies beating at a 70% rate in early reports. All eyes will be fixed on the expected 'miserable' earnings of the badly beaten down banking sector. I suspect much of the stock price downside has been factored into expectations. The critical ailing housing market shows signs of recovery with increased sales and declining inventories.
On the week the DJIA was up 4+%, S&P 5+%, and Nasdaq improved almost +7%. The major markets have quickly reversed the July to September free fall to a slightly positively year to year increase. Technology and energy stocks led the gain supported by positive corporate news. S&P short interest as a percentage of float has recently jumped to an over sold 4.4% reading. A significant proportion of this week's rally was probably the result of nervous short covering. Significant resistance levels for the DJIA is at the 11,800-11,900 area, S&P 1,250, and Nasdaq 2,660.
In commodities, despite bearish USDA World Agricultural Supply and Demand estimates the Agra Grain complex posted an impressive 5-15% rally from very over sold, well supported levels. It was the 4th consecutive monthly upward projection by WASDE for global stocks-to-use data. Prices remain very attractive at current levels. A retest of current low levels would be attractive entry points. The crude oil price has rallied to intermediate resistance at $US88/bl despite revised IEA data calling for less 2011 and 2012 demand. A close above $US90/bl would break crude above a 6 month downtrend and imply a retest of the $US94/bl (200dma) level. Gold is consolidating at the $US1,675-90/oz level and a probable retest of $1,620/oz critical support. Silver which is currently above $US32/oz appears vulnerable to a retest of the $US28-30/oz level. Copper is well supported in the $US3/lb level.
In Canada, a persistently strong housing market is supporting fairly strong economic data. Employment conditions continue to improve despite a slightly widening August trade deficit. Canada factory sales are at the highest level in 3 years.
Sinopec China agrees to buy 100% of the assets of Daylight Energy for $US2.1b for oil and shale gas reserves. It is a significant move for a Chinese entity to buy more than a minority interest for a Canadian corporation.
In an interesting report based on current valuations Canadian Banks are reported to be among the most levered at an average of 22:1 (worse than US and China, better than Europe) with the lowest cash-to-deposit ratios of 3% (better than Europe) in the world.
A 'system outage' misstep by tech whipping boy RIM generated a tremendous negative outpouring and a major public relations fiasco. Within a few days the system was restored, the CEO apologized, and an 'inconveniance settlement' was promised. RIM appears to be on a very short leash and desperately needs a few technological break through to reassert their reputation and limit market share loss.
The S&P/TSX closed fractionally above 12,000 and at significant residences. A move above 12,200 would imply a rally to near 13,000 the 200dma. The TSX/Venture has rallied 15% to 1,550 resistance. Continued commodity strength would imply another 15% rally from current levels. Tax loss selling pressure should limit any strength until the beginning of 2012 for junior resource stocks.
Bottom Line, the G20 has told the Euro Zone that they have a week to get their house in order which may be beyond wishful 'Leaf's winning the Stanley Cup' thinking. The extent of the private sector 'haircut' on Greek debt holdings are to be determined along with a 'credible' plan to recapitalize of Europe Banks and the installation of a 'firewall' protecting other countries from Greece's woes. I suspect that the G20 will be substantially disappointed on October 23rd. The US is expected to record at least the second largest budget worst deficit on record. The gap between spending and income will remain above $US1T for the third straight year. Just as concerning the US Senate has passed a bill that would punish countries which manipulate their currencies (unlike themselves) like China. Within moments China fired off a warning retaliatory short by weakening the Yuan. These fearless elected officials need to be reminded not to pick fights that they cannot win! Fortunately economic data has remained resilient to positive. However, until government spending and influence is dramatically reigned in and controlled any economic upside will be limited at best. At some point people (protesters included) will come to the realization that the more a government spends the worse conditions get. Any subsequent moves that are made to support the Keynesian spending madness will take conditions from worse to fatal. I have no faith that the policy makers will come to that conclusion anytime soon!
In the meantime seat belts and crash helmets are in order should the politicians continue to step on the gas while ignoring the speed & spending limits!
'Everyone wants to live at the expense of the state. They forget that the state lives at the expense of them!'
Frederic Bastiat
Friday, October 7, 2011
Week Ending 10/7/11 - The Bounce
As September 'tapped out' and as the brutal Q3 'window smashing' subsided - world equity markets staged a sharp 'very over sold' short covering bounce based on the hope that the 17 Euro nations of the EU were finally going to face their grim reality. Major North American indexes dipped their squashed toes into 'bear market' territory registering a stomach churning 20% loss from recent high territory.
Relentless liquidation forced the DJIA as low as 10,400 early Tuesday but recovered smartly in major reversal form to close 200 points higher at 10,800 by the end of the day. The critical DJIA 10,600 level has held so far. The S&P has put in a textbook RSI confirmed double bottom at 1,070 to this point despite intense negativity and doomsday proclamations.
Most interestingly if you calculate the S&P 500 PE Ratio using the 1 year forward consensus earnings estimates - the market today is slightly less negative (10.2x's) about future prospects than it was at the end of the very dark year of 2008. If you have forgotten, at that time many 'babies' were mercilessly thrown with the bathwater. According to the prevailing hysterical wisdom at that time from the 'experts' 2011 wasn't supposed to even happen!
Major head winds and serious significant challenges remain. Slowing economic growth and the never ending EU debt travails persist threatening a potential end-of-the-world global Ebola type financial contagion. The ECB just announced that it is buying 40b euros of 'covered bonds' in primary and secondary markets. This is because they need to provide liquidity to the euro zone markets as spreads go higher (276 bps per Markit). Covered bonds are the equivalent of CDO's or debt secured by pools of mortgages. Ailing Euro banks are having liquidity problems (aren't we all?) because of these spreads. As a result various banks will be getting effectively 'bailed out' by the ECB. The banks current unsecured credit does not cut the mustard for investors. This will help the EU banks which face liquidity issues to finance their onerous debt. Today credit watchdog Moodys lowered the credit rating on 12 UK banks and 9 Portuguese banks. Moody's slightly positive proviso/silver lining was the downgrade did not 'reflect a deterioration in the financial strength of the financial system but rather that the UK government was less likely to support some banking firms if they got into trouble.' (Ed. Note: At Last!) Fitch downgrades Spain and Italy on Friday. All of this affirmative action is way over due and will go a long way toward solving this intricate financial puzzle. We may be getting close to an opportunity to look for quality over sold/liquidated Euro equity investments as the EU begins the process of recovery. Evidence is beginning to suggest that the numerous much heralded 'Perma Bear' panic end-of-world proclamations may have been a tad premature.
Debt hysteria and widening CDS spreads aside - major North American equity markets remain range bound since the early to mid August selling rout. This trading band period of consolidation/distribution has now lasted over two months and will contribute significantly to the next major move for equity markets. Most major Euro markets and especially many of their financials stocks appear have discounted the very worst case scenarios and then some!
In the US, recent persistent brutal liquidation and the subsequent relief rally took a major backseat to the sad news of the passing of S Jobs. He was a captain who made all the players better when he stepped onto the field. Never before (or after) will we see the adulation and associated remorse from the passing of such a major industrialist and corporate icon. Apple has lost it's core! The world has become a better place because of him and his team which is the ultimate tribute for anyone in any field of endeavor!
The 'expected' rise in unemployment claims failed to materialize last week. Employers added 103,000 jobs in September - a modest burst after a sluggish summer. Job growth remains too weak to lower the unemployment rate currently fixed at 9.1%. US labor market remain resilient in September with a majority of industries (55.4%) in hiring mode. The number of claimants receiving unemployment continues to decline significantly from the Jan 2010 peak. The ISM Service Sector Business Activity Index & Service Sector Prices Paid have recently picked up - both signs that the economy is growing. ADP Private Employment Change continues to register very positive readings since the 2009 bottom. Private employment increased 91,000 in September. Recent negative corporate layoff stats was the combination of recent government cutbacks (amazing) and bank payroll consolidation. A mind numbing 3+ million skilled jobs offered by corporate America are unfilled.
Auto sales are booming which is a significant tailwind for economic growth. Once construction spending improves real long term economic growth gains will be experienced. The deterioration in the construction sector appears to have abated. 30 year fixed mortgage rates have unbelievably fallen below 4% for the first time in history. 15 year FRM's average a tad over 3%. Reis reported that the apartment rate in 82 markets fell to 5.6% in Q3 down from 6% in Q2. The vacancy rate was 7.1% in Q2 2010 and the peak was 8% at the end of 2009. The 5.6% vacancy rate is the lowest since 2006. The key take-away is that vacancy rates are falling fast and happening just about everywhere. A record 'low' number of multi-family units will be completed this year (2011). A 're-start' in multi family construction will/would be a major shot in the arm for GDP growth and positive employment.
The DJIA will turn short term positive with a closing reading above the monthly downtrend line at 11,200. A move above this line would imply bargain hunting buying to intermediate resistance between 11,700 and 11,900. A DJIA close below 10,600 would infer a quick/nasty liquidation to the psychological 10,000 long term support level. The short term upside S&P parameters is 1170 and 1080 on the downside. A 'Steve Jobless' NASDAQ turns short term positive above 2520 and intermediate term negative below 2340.
The USA is in the third year of the Presidential cycle. Almost everyone of those is an up year. This would be the first 'down' 3rd year in the Prez cycle since 1939.
In commodities, Gold held it's 200 dma $1,595/oz level despite ETF liquidation and margin increases. Earlier in the week the CME validated gold by 150% when it announced that the amount of gold bullion that customers can post as collateral is increasing from $US200m to $US500m. Significant upside residence for Gold is in the neckline level of $US1,775/oz level.. Silver held $US30/oz as expected and has bounced over 20% from it's recent bottom @ $US26/oz . A move back to the mid $US20/oz level would be an excellent accumulation opportunity for all the under-invested 'inflationtionists' out there. If that should occur I suspect it would only be temporary rather than long term liquidation. Dr. Copper rallied 10% from the $US3/lb level based on the expiration of delivery warrants bullishly signifying that major buyers are using these lower prices to take delivery of the contracts. A very positive move based on the higher CME margin increases. In the Agra/grain sector prices have consolidated back to 2008/09 levels falling a brutal 20+% from recent highs. Current levels in the grain complex offer long term support and interesting accumulation opportunities. Crude Oil temporarily dropped below $80/bl and should be constrained by $US90/bl overhead resistance. Oil was up for the first week in the past three.
In Canada, positive employment data primarily reflected growth in the service sector. Better-than-expected employment of 60,900 newly added job in September sends a signal that while the economy is cooling it may not be a significant long term slowdown. Job growth has averaged 28,300 per month this year. The jobless rate in September sits at 7.1%. Private sector job growth is running at a healthy 2.2% year over year.
A positive message was sent to the Canadian international mining community with the Mongolian government recanting 'premature' demands to increase ownership of the Oya Tolgoi copper deposit currently owned and controlled by Ivanhoe Mines and Rio Tinto. The Mongolian government currently owns 34% of this rich deposit and wanted to increase their stake to 50% - 28 years earlier than agreed upon. As usual it was the upcoming local Mongolian political elections which inspired this reckless overture. I suspect a significant amount of the recent price implosion of many TSX exploration equities was a result of this uncertainty. The S&P/TSX Venture Composite has dropped a mind boggling 40% this year despite historically high commodity prices and healthy margin and profit levels. The S&P-TSX will be contrained by 11,800 on the upside and supported by longer term support at 10,800. An upside move above 12,200 would be a very positive intermediate term breakout. A clean downside break of 10,800 would imply a quick/painful move back to longer term support at the psycological 10,000 level. Like all market 'bounces' from heavily over sold levels they must be judged in context to volume, valuations, and context to near term support and resistence areas. Key leadership and relative strength indicators also need to be factored to the equation.
Bottom Line, while many serious monetary issues continue to exist and that we are hardly out of the 'debt & credit' woods - improving economic statistics are beginning to appear on the horizon. The effect of recent historically low interest rates and credit availability will continue to add positive momentum and opportunity for economic growth. I am beginning to think that all the world now needs is positive and intelligent leadership, discipline, and vision. In the mantra of Steve Jobs, 'Create solutions to impossible roadblocks!' Urgent 'collective' intellegent understanding and the offering of effective 'viable' solutions to EU debt issues will finally help to tackle a very thorny and complex 'roadblock' issue. There will be pain and suffering to be sure. Remember that the Chinese spent almost 100 years living in dire poverty in a communist nightmare of epic proportion. They were neither allowed to own land nor assets. They could not own nor run businesses. In a very short period of time, with the will and vision, they are now in a position of owning, controlling, and managing a great proportion of the world! They now cosume luxury goods like those totalitarian classes which controlled and abused them! It sure can be done!
Equity markets move very quickly nowadays. Some argue 'too' fast! I think that much of the 'downside' has been well and quickly discounted into current valuations. A monumental wall of liquidity (cash) sits idle reaping negligible to negative returns. I am not inclined to be as negative as most conventional wisdom suggests. The 'ultra bear camp' is a little too crowded for my liking. I do not believe that markets are set for a near term upside explosion nor a major downside implosion. I do suspect however, that returns for good quality industrial and resource equities will be higher than expected and that are currently priced into markets. A final year end liquidation to longer term support levels would be an excellent/ideal accumulation opportunity for those with patient longer term investment horizons. That fact that Americans are fed up and protesting the Wall Street Investment Banker types is a positive sign and an important indication that we may be closer to the 'bottom' than we suspect!
For those who still keep track:
Current Record US total debt as @ 10/5/11 - $US14,856.859,498,405.73
A $US20b overnight increase, $US67b in two days, and $US162b in three days!
US Debt /GDP 98.9%
Happy Thanksgiving to all Canadian turkey eaters!
so remember ...
'It's hard to soar with the Eagles when yur thinkin' like a turkey!'
Relentless liquidation forced the DJIA as low as 10,400 early Tuesday but recovered smartly in major reversal form to close 200 points higher at 10,800 by the end of the day. The critical DJIA 10,600 level has held so far. The S&P has put in a textbook RSI confirmed double bottom at 1,070 to this point despite intense negativity and doomsday proclamations.
Most interestingly if you calculate the S&P 500 PE Ratio using the 1 year forward consensus earnings estimates - the market today is slightly less negative (10.2x's) about future prospects than it was at the end of the very dark year of 2008. If you have forgotten, at that time many 'babies' were mercilessly thrown with the bathwater. According to the prevailing hysterical wisdom at that time from the 'experts' 2011 wasn't supposed to even happen!
Major head winds and serious significant challenges remain. Slowing economic growth and the never ending EU debt travails persist threatening a potential end-of-the-world global Ebola type financial contagion. The ECB just announced that it is buying 40b euros of 'covered bonds' in primary and secondary markets. This is because they need to provide liquidity to the euro zone markets as spreads go higher (276 bps per Markit). Covered bonds are the equivalent of CDO's or debt secured by pools of mortgages. Ailing Euro banks are having liquidity problems (aren't we all?) because of these spreads. As a result various banks will be getting effectively 'bailed out' by the ECB. The banks current unsecured credit does not cut the mustard for investors. This will help the EU banks which face liquidity issues to finance their onerous debt. Today credit watchdog Moodys lowered the credit rating on 12 UK banks and 9 Portuguese banks. Moody's slightly positive proviso/silver lining was the downgrade did not 'reflect a deterioration in the financial strength of the financial system but rather that the UK government was less likely to support some banking firms if they got into trouble.' (Ed. Note: At Last!) Fitch downgrades Spain and Italy on Friday. All of this affirmative action is way over due and will go a long way toward solving this intricate financial puzzle. We may be getting close to an opportunity to look for quality over sold/liquidated Euro equity investments as the EU begins the process of recovery. Evidence is beginning to suggest that the numerous much heralded 'Perma Bear' panic end-of-world proclamations may have been a tad premature.
Debt hysteria and widening CDS spreads aside - major North American equity markets remain range bound since the early to mid August selling rout. This trading band period of consolidation/distribution has now lasted over two months and will contribute significantly to the next major move for equity markets. Most major Euro markets and especially many of their financials stocks appear have discounted the very worst case scenarios and then some!
In the US, recent persistent brutal liquidation and the subsequent relief rally took a major backseat to the sad news of the passing of S Jobs. He was a captain who made all the players better when he stepped onto the field. Never before (or after) will we see the adulation and associated remorse from the passing of such a major industrialist and corporate icon. Apple has lost it's core! The world has become a better place because of him and his team which is the ultimate tribute for anyone in any field of endeavor!
The 'expected' rise in unemployment claims failed to materialize last week. Employers added 103,000 jobs in September - a modest burst after a sluggish summer. Job growth remains too weak to lower the unemployment rate currently fixed at 9.1%. US labor market remain resilient in September with a majority of industries (55.4%) in hiring mode. The number of claimants receiving unemployment continues to decline significantly from the Jan 2010 peak. The ISM Service Sector Business Activity Index & Service Sector Prices Paid have recently picked up - both signs that the economy is growing. ADP Private Employment Change continues to register very positive readings since the 2009 bottom. Private employment increased 91,000 in September. Recent negative corporate layoff stats was the combination of recent government cutbacks (amazing) and bank payroll consolidation. A mind numbing 3+ million skilled jobs offered by corporate America are unfilled.
Auto sales are booming which is a significant tailwind for economic growth. Once construction spending improves real long term economic growth gains will be experienced. The deterioration in the construction sector appears to have abated. 30 year fixed mortgage rates have unbelievably fallen below 4% for the first time in history. 15 year FRM's average a tad over 3%. Reis reported that the apartment rate in 82 markets fell to 5.6% in Q3 down from 6% in Q2. The vacancy rate was 7.1% in Q2 2010 and the peak was 8% at the end of 2009. The 5.6% vacancy rate is the lowest since 2006. The key take-away is that vacancy rates are falling fast and happening just about everywhere. A record 'low' number of multi-family units will be completed this year (2011). A 're-start' in multi family construction will/would be a major shot in the arm for GDP growth and positive employment.
The DJIA will turn short term positive with a closing reading above the monthly downtrend line at 11,200. A move above this line would imply bargain hunting buying to intermediate resistance between 11,700 and 11,900. A DJIA close below 10,600 would infer a quick/nasty liquidation to the psychological 10,000 long term support level. The short term upside S&P parameters is 1170 and 1080 on the downside. A 'Steve Jobless' NASDAQ turns short term positive above 2520 and intermediate term negative below 2340.
The USA is in the third year of the Presidential cycle. Almost everyone of those is an up year. This would be the first 'down' 3rd year in the Prez cycle since 1939.
In commodities, Gold held it's 200 dma $1,595/oz level despite ETF liquidation and margin increases. Earlier in the week the CME validated gold by 150% when it announced that the amount of gold bullion that customers can post as collateral is increasing from $US200m to $US500m. Significant upside residence for Gold is in the neckline level of $US1,775/oz level.. Silver held $US30/oz as expected and has bounced over 20% from it's recent bottom @ $US26/oz . A move back to the mid $US20/oz level would be an excellent accumulation opportunity for all the under-invested 'inflationtionists' out there. If that should occur I suspect it would only be temporary rather than long term liquidation. Dr. Copper rallied 10% from the $US3/lb level based on the expiration of delivery warrants bullishly signifying that major buyers are using these lower prices to take delivery of the contracts. A very positive move based on the higher CME margin increases. In the Agra/grain sector prices have consolidated back to 2008/09 levels falling a brutal 20+% from recent highs. Current levels in the grain complex offer long term support and interesting accumulation opportunities. Crude Oil temporarily dropped below $80/bl and should be constrained by $US90/bl overhead resistance. Oil was up for the first week in the past three.
In Canada, positive employment data primarily reflected growth in the service sector. Better-than-expected employment of 60,900 newly added job in September sends a signal that while the economy is cooling it may not be a significant long term slowdown. Job growth has averaged 28,300 per month this year. The jobless rate in September sits at 7.1%. Private sector job growth is running at a healthy 2.2% year over year.
A positive message was sent to the Canadian international mining community with the Mongolian government recanting 'premature' demands to increase ownership of the Oya Tolgoi copper deposit currently owned and controlled by Ivanhoe Mines and Rio Tinto. The Mongolian government currently owns 34% of this rich deposit and wanted to increase their stake to 50% - 28 years earlier than agreed upon. As usual it was the upcoming local Mongolian political elections which inspired this reckless overture. I suspect a significant amount of the recent price implosion of many TSX exploration equities was a result of this uncertainty. The S&P/TSX Venture Composite has dropped a mind boggling 40% this year despite historically high commodity prices and healthy margin and profit levels. The S&P-TSX will be contrained by 11,800 on the upside and supported by longer term support at 10,800. An upside move above 12,200 would be a very positive intermediate term breakout. A clean downside break of 10,800 would imply a quick/painful move back to longer term support at the psycological 10,000 level. Like all market 'bounces' from heavily over sold levels they must be judged in context to volume, valuations, and context to near term support and resistence areas. Key leadership and relative strength indicators also need to be factored to the equation.
Bottom Line, while many serious monetary issues continue to exist and that we are hardly out of the 'debt & credit' woods - improving economic statistics are beginning to appear on the horizon. The effect of recent historically low interest rates and credit availability will continue to add positive momentum and opportunity for economic growth. I am beginning to think that all the world now needs is positive and intelligent leadership, discipline, and vision. In the mantra of Steve Jobs, 'Create solutions to impossible roadblocks!' Urgent 'collective' intellegent understanding and the offering of effective 'viable' solutions to EU debt issues will finally help to tackle a very thorny and complex 'roadblock' issue. There will be pain and suffering to be sure. Remember that the Chinese spent almost 100 years living in dire poverty in a communist nightmare of epic proportion. They were neither allowed to own land nor assets. They could not own nor run businesses. In a very short period of time, with the will and vision, they are now in a position of owning, controlling, and managing a great proportion of the world! They now cosume luxury goods like those totalitarian classes which controlled and abused them! It sure can be done!
Equity markets move very quickly nowadays. Some argue 'too' fast! I think that much of the 'downside' has been well and quickly discounted into current valuations. A monumental wall of liquidity (cash) sits idle reaping negligible to negative returns. I am not inclined to be as negative as most conventional wisdom suggests. The 'ultra bear camp' is a little too crowded for my liking. I do not believe that markets are set for a near term upside explosion nor a major downside implosion. I do suspect however, that returns for good quality industrial and resource equities will be higher than expected and that are currently priced into markets. A final year end liquidation to longer term support levels would be an excellent/ideal accumulation opportunity for those with patient longer term investment horizons. That fact that Americans are fed up and protesting the Wall Street Investment Banker types is a positive sign and an important indication that we may be closer to the 'bottom' than we suspect!
For those who still keep track:
Current Record US total debt as @ 10/5/11 - $US14,856.859,498,405.73
A $US20b overnight increase, $US67b in two days, and $US162b in three days!
US Debt /GDP 98.9%
Happy Thanksgiving to all Canadian turkey eaters!
so remember ...
'It's hard to soar with the Eagles when yur thinkin' like a turkey!'
Monday, October 3, 2011
Week Ending 9/30/11 - Capitulation
The third quarter has mercifully come to an abrupt end with major equity indexes posting their worse performance in three years.
Key indexes have peeled off between 10-15% in the past three painful months. Persistent Euro credit uncertainty and an accelerating campaign of 'solution misinformation' has intensified roiling volatile credit and equity markets with each passing 'unofficial' central banker sound byte.
The former whipping boy the 'US Dollar' and the inscrutably powerful US Treasury market have interestingly been the primary beneficiaries of plunging Euro credit fears and anticipated global contraction. Gold and silver markets began the week at an over extended 'potentially capitulated' low thanks to raising margin requirements by our good friends at the CME. Gold has dropped an extended 20% ($US400/oz) and Silver fell 40% ($US18/oz) in the past brutal month in what looks like to me as a fully 'capitulated' downside plunge.
There are new statistically driven fears that China's slowing economy is on the threshold of 'capitulating' into a nasty hard landing or worse!. Both the IMF and EFSF (European Financial Stability Facility) are about to 'capitulate' into new substantially higher multi trillion dollar/euro 'stimulative' rounds of borrowing and credit expansion potential. Euro zone inflation appears to be accelerating /'capitulating' into substantially higher inflation levels based on the unexpected rise in September data.
The most interesting recent 'capitulation' will be the upcoming decision by Prez BH Obama involving the contentious $US13b (1,661mi) Keystone XL (36 inch diameter) pipeline stretching from Hardisty, Alberta to the refineries in the Port Arthur, Texas - Gulf of Mexico. Approval of this mega project will create an instant and desperately needed 'non government (read: tax payer) supported' 100,000 direct jobs and eventually up to 250,000 total employment opportunities. Keystone would be a huge boost towards securing a long term safe supply of crude oil from a friendly jurisdiction. The US would clearly win most of the advantage from this major revenue generating project. I am anxious to see if Potus will 'capitulate' with his Democratic tree hugging (Friends of the Earth?) 'solar disaster' voting base and either delays (probable) or rejects (boggles my mind) this proposal based on exaggerated 'junk science' and hysterical disinformation. Insignificant unemployed thesbians and various irrelevant past Nobel prize winners are doing their best to stop what would be a major shot into the anemic economic arm of the United States. This will be Obama's defining moment for me!
The ultimate question remaining is whether the DJIA and S&P will 'capitulate' with another 10-15% drop from current levels based on the conventional wisdom that economic conditions are about to go from bad to worse. Such a drop would put North American indexes in line with the 25+% drop experienced in various parts of Asia and Europe.
The recent suggestion/threat by no other than Jose Manuel Barroso (Prez. European Commission) of a 'financial transaction tax' (FTT), better know as the 'Tobin Tax' (the 1970's economist who first suggested such 'Robbin' Hood' lunacy), would quickly swamp investment markets to those levels and then some. Leave it to the self important and inflated bureaucrats to push the global into the dark abyss.
Such a drop would be one of the most anticipated and heralded 'capitulations' since I've been following stock market activity!
In the US, the DJIA bounced 3% from a potential double bottom (critical) area of 10,600 last week in the face of dire apocalyptic credit warnings from various cash starved free loading EU/banking members. US markets have been contained by persistent issues from the domestic financial banking sector. Equities ended the week on a very weak note resulting in the worst quarter since Q4 2008 for the S&P. Stocks dropped 2 standards deviations from a long term mean while treasuries rallied 3.5 standard deviations - the 2nd largest percentage shift in yields ever (Q4 2008 was better). 2 year Treasury Bills were 375% over subscribed selling $US35b to insatiable demand at a paltry 0.249% The rotation from stocks (which may weaken from a slowing economy) to theoretically safe very low (risk averse?) yielding Treasury bonds looks to continue into the seasonally challenging month of October. 30 year US Treasuries are now trading higher than at the absolute nadir of the 2008-09 crash! Financials and Industrials dropped 19% with Utilities the standout outperforming group in Q3.
The US was the best performer among global equity markets with only Mexico and Switzerland ahead in local currency terms. The S&P dropped -14.33% and DJIA -12.09 QTD. On the week the S&P was up +1.5%, DJIA +3%, and Nasdaq -1.0%.
US economic stats are mixed with pockets of strength as reported by the +7% Chicago Manufacturing Survey. The US consumer appears to getting stretched as Personal Savings Rate stats dropped to the lowest level (+4.5%) since December 2009. Jobless claims dropped below the 400k mark with more than 100k jobs created exceeding actual expectations of 53k new jobs. US weekly rail traffic remained robust up 1.1% vs this week last year. Last weeks inter modal volumes was the highest since week 39 of 2007. 30 year mortgage rates fell to new record lows of 4.1%. Business investment has been strong with August new orders for capital goods reporting much stronger than expected 1.1% vs .4%. The ASA staffing index measure of temporary and contract employment rose 2.2% in the week ending Sept 18th. Q2 GDP was revised upward to 1.3% from 1.2%. Housing prices have stabilized since the 2007-09 rout with prices in major metropolitan markets lower by 30% from their highs. Recent resale stats have been robust despite reports of increasing defaults and foreclosures. The decline in real housing prices combined with the decline of mortgage carrying costs have reduced the effective cost of buying a house by approx. 50% in the past 5 years. Existing home inventory continues to decline year over year since last September. Based on cost per square foot, total replacement cost, and rental income metrics it is hard to imagine that house prices have much further to drop. A resurgence of residential housing values and prices would be a welcome and unexpected bonus to potential strength in the US economy.
Should the recent lows recorded in mid August be violated for the DJIA and S&P a further 5% sell off may ensue back down to significant support levels of 10,000 and 1,000 respectively.
In commodities, reports of bumper crops and excess supply pressured the Agra grains lower. Corn, wheat , and Soy Beans continued their 4 week over sold 20% slide to significant support levels. Dr. Copper also dropped -25+% to significant support in the $US3/lb range. Despite huge draw downs of crude oil of 12m bls oil has checked back below $US80/bl and is vulnerable to further consolidation in the high $US60 to low 70 level as the summer driving season winds up. Crude oil was up almost 1% on the week. Gold held it's 200 mva of $US1,595/oz despite nasty 'margin' pressure. Over head resistance now comes in at the $US1,750 range. Gold was down 2% on the week falling $US33/oz to $US1,620/oz Silver is consolidating slightly over $US30/oz level. A retest of the recent $US26/oz is possible but not expected. Silver closed up fractionally on the week.
In Canada, the S&P/TSX was up 150 points on the week (1.75%) on mixed low volume trading. The much maligned TSX-Venture dropped a further 50 points in persistent liquidation. House prices in Canada were up 1.3% in July in relentless interest rate stimulated strength. Home prices in Canada are UP 12% from pre-recession peak levels! Canadian GDP increased .3% in July its fastest pace in 7 months and in line with consensus expectations. Canada GDP is on track for growth of 2% in Q3. China's Minmetals is making a friendly $US1.3b (+30%) for Anvil Mining of Montreal the African copper producer. News that activist investor Carl Icahn may be making a move on RIM the struggling Blackberry maker had shares rising 7% to $US23.26 before settling back toward the end of the week. The management will have their hands full should Icahn secure a seat on its board. Mr. Ichan has a colorful and very successful history of intense agitation in favor of strategies that unlock value for the shareholders such as selling off assets, breaking up business divisions, or an outright company sale. RIM is trading at multi year low levels last seen in 2005. The S&P/TSX has dropped 12% in Q3 and is trading at 52 week low levels. Significant support levels are 600 points lower at 11,000.
Bottom Line, as the 'mishandled' Euro credit issue discord continues to dominate business headlines, and with Greek default imminent, the Q3 'derisking' liquidation will most likely continue well into October. Leading indicators do not yet point to a decline in global activity. The global benchmark, the MSCI all-country index is at its lowest levels since July 2010. Early indications suggest that the US economy remained 'above water' in Q3 but there are significant risks to growth. Concerns as to whether the US can avoid a double dip car crash and a potential Chinese swan dive will temper investor enthusiasm despite fairly positive recent economic stats and incredibly attractive interest rates. Uncle Ben Bernake is suggesting that the Fed may be out of monetary ammo reversing thoughts he had lots of 'tools' left (maybe he meant the Congress?). The current challenge is looking beyond the swirling market trends. Euro GDP growth looks to be tepid at best but emerging country economic growth could get a significant boost as Asian central banks loosen interest rates and move to a more expansionary monetary policy.
As the 'born again' short sellers and 'perma' bears dance in the street I suggest that investors take this opportunity to acquire good quality undervalued industrial and resource issues. Any drop in consumption (should it occur) will be temporary in duration. The only solutions which the political types understand and accept are highly inflationary in construct. Newly minted IMF mandarin C. Lagarde only wants to tenfold the EFSF (Euro Financial Stability Fund) to $US4 Trillion. In Greece, the conservative opposition New Democratic party said a shortage of ink had prevented the computerized tax center at the finance ministry from sending out claims to tax payers over the last 10 days.
Get long ink!
A word count response to the question, 'The Euro Crisis - IS Anyone in Charge?' :
Pythagorean theorem : 24 words
Lord's Prayer : 66 words
Archimedes' Principal : 67 words
EU regulations on the sale of cabbage : 26,911 words
Key indexes have peeled off between 10-15% in the past three painful months. Persistent Euro credit uncertainty and an accelerating campaign of 'solution misinformation' has intensified roiling volatile credit and equity markets with each passing 'unofficial' central banker sound byte.
The former whipping boy the 'US Dollar' and the inscrutably powerful US Treasury market have interestingly been the primary beneficiaries of plunging Euro credit fears and anticipated global contraction. Gold and silver markets began the week at an over extended 'potentially capitulated' low thanks to raising margin requirements by our good friends at the CME. Gold has dropped an extended 20% ($US400/oz) and Silver fell 40% ($US18/oz) in the past brutal month in what looks like to me as a fully 'capitulated' downside plunge.
There are new statistically driven fears that China's slowing economy is on the threshold of 'capitulating' into a nasty hard landing or worse!. Both the IMF and EFSF (European Financial Stability Facility) are about to 'capitulate' into new substantially higher multi trillion dollar/euro 'stimulative' rounds of borrowing and credit expansion potential. Euro zone inflation appears to be accelerating /'capitulating' into substantially higher inflation levels based on the unexpected rise in September data.
The most interesting recent 'capitulation' will be the upcoming decision by Prez BH Obama involving the contentious $US13b (1,661mi) Keystone XL (36 inch diameter) pipeline stretching from Hardisty, Alberta to the refineries in the Port Arthur, Texas - Gulf of Mexico. Approval of this mega project will create an instant and desperately needed 'non government (read: tax payer) supported' 100,000 direct jobs and eventually up to 250,000 total employment opportunities. Keystone would be a huge boost towards securing a long term safe supply of crude oil from a friendly jurisdiction. The US would clearly win most of the advantage from this major revenue generating project. I am anxious to see if Potus will 'capitulate' with his Democratic tree hugging (Friends of the Earth?) 'solar disaster' voting base and either delays (probable) or rejects (boggles my mind) this proposal based on exaggerated 'junk science' and hysterical disinformation. Insignificant unemployed thesbians and various irrelevant past Nobel prize winners are doing their best to stop what would be a major shot into the anemic economic arm of the United States. This will be Obama's defining moment for me!
The ultimate question remaining is whether the DJIA and S&P will 'capitulate' with another 10-15% drop from current levels based on the conventional wisdom that economic conditions are about to go from bad to worse. Such a drop would put North American indexes in line with the 25+% drop experienced in various parts of Asia and Europe.
The recent suggestion/threat by no other than Jose Manuel Barroso (Prez. European Commission) of a 'financial transaction tax' (FTT), better know as the 'Tobin Tax' (the 1970's economist who first suggested such 'Robbin' Hood' lunacy), would quickly swamp investment markets to those levels and then some. Leave it to the self important and inflated bureaucrats to push the global into the dark abyss.
Such a drop would be one of the most anticipated and heralded 'capitulations' since I've been following stock market activity!
In the US, the DJIA bounced 3% from a potential double bottom (critical) area of 10,600 last week in the face of dire apocalyptic credit warnings from various cash starved free loading EU/banking members. US markets have been contained by persistent issues from the domestic financial banking sector. Equities ended the week on a very weak note resulting in the worst quarter since Q4 2008 for the S&P. Stocks dropped 2 standards deviations from a long term mean while treasuries rallied 3.5 standard deviations - the 2nd largest percentage shift in yields ever (Q4 2008 was better). 2 year Treasury Bills were 375% over subscribed selling $US35b to insatiable demand at a paltry 0.249% The rotation from stocks (which may weaken from a slowing economy) to theoretically safe very low (risk averse?) yielding Treasury bonds looks to continue into the seasonally challenging month of October. 30 year US Treasuries are now trading higher than at the absolute nadir of the 2008-09 crash! Financials and Industrials dropped 19% with Utilities the standout outperforming group in Q3.
The US was the best performer among global equity markets with only Mexico and Switzerland ahead in local currency terms. The S&P dropped -14.33% and DJIA -12.09 QTD. On the week the S&P was up +1.5%, DJIA +3%, and Nasdaq -1.0%.
US economic stats are mixed with pockets of strength as reported by the +7% Chicago Manufacturing Survey. The US consumer appears to getting stretched as Personal Savings Rate stats dropped to the lowest level (+4.5%) since December 2009. Jobless claims dropped below the 400k mark with more than 100k jobs created exceeding actual expectations of 53k new jobs. US weekly rail traffic remained robust up 1.1% vs this week last year. Last weeks inter modal volumes was the highest since week 39 of 2007. 30 year mortgage rates fell to new record lows of 4.1%. Business investment has been strong with August new orders for capital goods reporting much stronger than expected 1.1% vs .4%. The ASA staffing index measure of temporary and contract employment rose 2.2% in the week ending Sept 18th. Q2 GDP was revised upward to 1.3% from 1.2%. Housing prices have stabilized since the 2007-09 rout with prices in major metropolitan markets lower by 30% from their highs. Recent resale stats have been robust despite reports of increasing defaults and foreclosures. The decline in real housing prices combined with the decline of mortgage carrying costs have reduced the effective cost of buying a house by approx. 50% in the past 5 years. Existing home inventory continues to decline year over year since last September. Based on cost per square foot, total replacement cost, and rental income metrics it is hard to imagine that house prices have much further to drop. A resurgence of residential housing values and prices would be a welcome and unexpected bonus to potential strength in the US economy.
Should the recent lows recorded in mid August be violated for the DJIA and S&P a further 5% sell off may ensue back down to significant support levels of 10,000 and 1,000 respectively.
In commodities, reports of bumper crops and excess supply pressured the Agra grains lower. Corn, wheat , and Soy Beans continued their 4 week over sold 20% slide to significant support levels. Dr. Copper also dropped -25+% to significant support in the $US3/lb range. Despite huge draw downs of crude oil of 12m bls oil has checked back below $US80/bl and is vulnerable to further consolidation in the high $US60 to low 70 level as the summer driving season winds up. Crude oil was up almost 1% on the week. Gold held it's 200 mva of $US1,595/oz despite nasty 'margin' pressure. Over head resistance now comes in at the $US1,750 range. Gold was down 2% on the week falling $US33/oz to $US1,620/oz Silver is consolidating slightly over $US30/oz level. A retest of the recent $US26/oz is possible but not expected. Silver closed up fractionally on the week.
In Canada, the S&P/TSX was up 150 points on the week (1.75%) on mixed low volume trading. The much maligned TSX-Venture dropped a further 50 points in persistent liquidation. House prices in Canada were up 1.3% in July in relentless interest rate stimulated strength. Home prices in Canada are UP 12% from pre-recession peak levels! Canadian GDP increased .3% in July its fastest pace in 7 months and in line with consensus expectations. Canada GDP is on track for growth of 2% in Q3. China's Minmetals is making a friendly $US1.3b (+30%) for Anvil Mining of Montreal the African copper producer. News that activist investor Carl Icahn may be making a move on RIM the struggling Blackberry maker had shares rising 7% to $US23.26 before settling back toward the end of the week. The management will have their hands full should Icahn secure a seat on its board. Mr. Ichan has a colorful and very successful history of intense agitation in favor of strategies that unlock value for the shareholders such as selling off assets, breaking up business divisions, or an outright company sale. RIM is trading at multi year low levels last seen in 2005. The S&P/TSX has dropped 12% in Q3 and is trading at 52 week low levels. Significant support levels are 600 points lower at 11,000.
Bottom Line, as the 'mishandled' Euro credit issue discord continues to dominate business headlines, and with Greek default imminent, the Q3 'derisking' liquidation will most likely continue well into October. Leading indicators do not yet point to a decline in global activity. The global benchmark, the MSCI all-country index is at its lowest levels since July 2010. Early indications suggest that the US economy remained 'above water' in Q3 but there are significant risks to growth. Concerns as to whether the US can avoid a double dip car crash and a potential Chinese swan dive will temper investor enthusiasm despite fairly positive recent economic stats and incredibly attractive interest rates. Uncle Ben Bernake is suggesting that the Fed may be out of monetary ammo reversing thoughts he had lots of 'tools' left (maybe he meant the Congress?). The current challenge is looking beyond the swirling market trends. Euro GDP growth looks to be tepid at best but emerging country economic growth could get a significant boost as Asian central banks loosen interest rates and move to a more expansionary monetary policy.
As the 'born again' short sellers and 'perma' bears dance in the street I suggest that investors take this opportunity to acquire good quality undervalued industrial and resource issues. Any drop in consumption (should it occur) will be temporary in duration. The only solutions which the political types understand and accept are highly inflationary in construct. Newly minted IMF mandarin C. Lagarde only wants to tenfold the EFSF (Euro Financial Stability Fund) to $US4 Trillion. In Greece, the conservative opposition New Democratic party said a shortage of ink had prevented the computerized tax center at the finance ministry from sending out claims to tax payers over the last 10 days.
Get long ink!
A word count response to the question, 'The Euro Crisis - IS Anyone in Charge?' :
Pythagorean theorem : 24 words
Lord's Prayer : 66 words
Archimedes' Principal : 67 words
EU regulations on the sale of cabbage : 26,911 words
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