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!'
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