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)
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