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
No comments:
Post a Comment