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 $US162b in three days!
US Debt /GDP 98.9%
Happy Thanksgiving to all Canadian turkey eaters!
so remember ...
'It's hard to soar with the Eagles when yur thinkin' like a turkey!'
Friday, October 7, 2011
Monday, October 3, 2011
Week Ending 9/30/11 - Capitulation
The third quarter has mercifully come to an abrupt end with major equity indexes posting their worse performance in three years.
Key indexes have peeled off between 10-15% in the past three painful months. Persistent Euro credit uncertainty and an accelerating campaign of 'solution misinformation' has intensified roiling volatile credit and equity markets with each passing 'unofficial' central banker sound byte.
The former whipping boy the 'US Dollar' and the inscrutably powerful US Treasury market have interestingly been the primary beneficiaries of plunging Euro credit fears and anticipated global contraction. Gold and silver markets began the week at an over extended 'potentially capitulated' low thanks to raising margin requirements by our good friends at the CME. Gold has dropped an extended 20% ($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 $US4 Trillion. In Greece, the conservative opposition New Democratic party said a shortage of ink had prevented the computerized tax center at the finance ministry from sending out claims to tax payers over the last 10 days.
Get long ink!
A word count response to the question, 'The Euro Crisis - IS Anyone in Charge?' :
Pythagorean theorem : 24 words
Lord's Prayer : 66 words
Archimedes' Principal : 67 words
EU regulations on the sale of cabbage : 26,911 words
Friday, September 23, 2011
Week Ending 9/23/11 - Twisting in the Wind
Immediately after Fed head 'Helicopter' B Bernake released his latest stimulative monetary tool of 'twisting' current minuscule treasury yields investors headed for the exits in droves. Uncle Ben's stunning pronouncement that 'there are significant downside risks to the economic outlook' smacks to me of a Fed which has lost control or understanding of financial market dynamics. I hope he is reasonably sure when he says stuff like that but I have my doubts! Once again the US government is threatening to shut down which might be one of their best cost savings measures ever!
The 50 year old failed 'twist strategy' of selling (or not buying) short term bonds ($US400B) and purchasing longer term bonds (until 2013) in order to flatten the yield curve further slicing razor thin interest rates appears to be nothing more than quazi-creative accounting stick handling or desperate financial engineering. This Treasury curve shift is the most abnormal (read: unpredictable) in the last 30 years. The Feds most implicit mandate of 'price stability' appears to be now more of an after thought. Three Fed officials (Plosser, Fisher, and Kocherlakota) dissented from this 'limited' strategy - a modern day rearranging of the deck chairs on the Titanic.
A immediate negative effect will be to the financial institutions who either depend on a normally slopped yield curve/spread or those who require 'reasonable' levels of interest rates to generate income. Negative interest rates are about to become much more negative. Pension funding needs will go from bad to worse. Insurance companies may find it impossible to match risks with returns. Bank earnings will drop because of disappearing margins.
The Fed has yet to learn that record low interest rates do not necessarily increase/stimulate the demand for credit. They should learn that excessive debt will definitely drain the demand for more credit. They will eventually learn not to over borrow!
The Fed should realize that consumers are desperately trying to pay down debt based on fears of job security, retirement, inflation, and the wildly expanding unsustainable Federal debt burdens. Nearly half of all US mortgage borrowers do not have the equity or credit rating necessary to refinance at lower 'engineered' interest rates. What little confidence cash flush businesses have (left) is hardly enough for them to invest or expand.
An equally concerning caveat is the announcement that US Government (taxpayers) are about to reenter the mortgage backed securities market which more or less melted the financial system down in the first place. The tax payers balance sheet is going to look like a dog's breakfast. It looks like a major risky double down and thus a very dangerous & historic bond market bubble to me! The 'risk free' status of US treasuries may disappear as quickly just as their 'AAA' rating did!
Moody's in a 'pre-emptive move lowered the credit rating of three of the big US Banks (Citi, BofA, and Wells Fargo) and will once again focus attention on systemic derivative 'counterparty risk'. Should credit lines be cut or reduced existing trade positions may need to be unwound or assigned. The cost of 'protection' may rise for those who try to 'hedge their hedge.' Banks may need to raise capital as positions are liquidated or to cover collateral agreements. This type of run on a bank is a replay of the historic and nasty Bear Sterns/Lehman experience.
Assets in various 'troubled' Euro banks are beginning to be moved to the relatively 'safer' confines of the ECB. A move by the Germans to reinstate the Bundesbank as the leading Central Bank of Europe would be catastrophic to say the least. The latest European PMI stats suggests that GDP figures may turn negative before long. Let's hope that a financial 'Black Plague' is not the end game of this very complex and inextricably linked international economic dilemma. It is beginning to look like the strategy of throwing stimulus money (read: debt) at institutionalized debt problems may be coming to a merciful end.
Newly minted IMF chief, Ms C Lagarde, has just discovered the 'massive risks to the banking system' and financial stability. An abrupt and immediate 10% IMF downgrade for growth for the entire planet was summarily dispatched with the usual mindless encouragement of 'more easing'(?) Paul Volker (former Fed Head and architect of 1980's inflation killing 20% interest rates) in a New York Times article reminds us that 'a little inflation (2%) can be a very dangerous thing!' Modern day Robin Hood, Prez B.H. Obama, is astonishingly spending his spare time selling his pre-election 'tax the rich' class warfare as the Fed burns! Brazil is beginning to erect trade barriers and increasing tariffs. And just to add to the fun & festivities the Bank of China announced they also foresee the possibility of an accelerated economic slowdown. All that may be left are the rating agencies to declare their (after-the-fact) last of the official post mortem downgrades.
In the US, the post 'twist' reaction was an immediate massive selling liquidation of anything which resembled a listed share of stock throughout all of the industrialized and emerging world. The orderly selling swoon has been powerful and widespread irrespective of earnings or valuations. Credit has been signalling and anticipating equity weakness for some time. North America appears to be finally catching up to the recent negative 'European 30+% decline experience.' The DJIA is now down just over 15+% ytd in a very over sold but negative technical environment. North American equity markets are much more leveraged (margined) than during the lows registered during the lows of the 2009 financial cataclysm. US equity markets are on the verge of dropping into 'bear market territory' of a 20% decline. Confirmed violation of the recent Aug 9th lows of 10,600 (DJIA) suggest a quick retracement back to the Aug/2010 support level of 10,000. The longer term measurement takes the DJIA back to the mid 2010 level of 9,500. Key lower support levels for the Nasdaq are 2,340 and then 2,100 based on weekly measurements. Significant lower support for the S&P comes in 5% lower at 1,050 then 1,000.
In commodities, the instant and powerful post 'twist' rally in the US dollar had an immediate negative effect for the entire commodity sector. 'Over' speculated sectors were crushed with the news that further QE stimulus was not part of the Fed's near term strategy. Gold broke the critical US$1,800/oz level early in the week and quickly violated $US1,700/oz by the end of the week. Significant 200 dma support comes in at $US1,595/oz. Gold dropped 10% on the week - a short term very over sold condition. Friday's $US100/oz drop for gold was rumored to be liquidation by hedge fund manager J. Paulson who is the largest shareholder of GLD - the massive physical gold fund. Silver broke the key $US40/oz level and quickly imploded to just over $US30/oz - a whopping 25% drop in 5 trading sessions. Silver is currently significantly over sold but could drop a further $US2/oz before the carnage is over. The red metal, Dr Copper, the metal with a Phd on the economy, got walloped with reports of contracting world wide economies. $US3.40/lb is a critical support area for Copper. The potential exists for Copper to drop as low as $US2.80/lb the mid 2010 support level. Crude Oil did not escape the selling hysteria dropping almost $US10/bl or 12% on the week to just below $US80/bl. A clean break of this support level suggests a price in the low $US70/bl area. Lower crude oil prices (combined with record low interest rates) is/would be very welcome news for almost all of the US economy.
The Agra grain markets continue to consolidate recent profit taking. Chronic underperforming Natural Gas has held up the best in the commodity complex just under $US4/mcf.
In Canada, the Canadian dollar was the first casualty based on economic slowdown fears and the limited anticipated effect of Fed 'twist' strategy. The Canuck buck broke $US1 for the first time this year. I would be very surprised if the Canadian dollar violates $US.95. The Canadian Dollar has dropped $US.10 from the July high. That is very welcome news for the manufacturing sector in Canada. The benchmark Canadian stock index briefly dropped into 'bear market' territory based on recessionary fears, Chinese economic downgrades, and the Euro banking mess. The heavily weighted financial sector broke 'critical' intermediate support of 166 on the S&P/TSX Capped Financials Index. This index can drop another 20 points before finding reasonable support. Positive relative strength divergence is appearing on the weekly charts. Many quality material, resource, and industrial stocks have been crushed in this wide spread liquidation and now represent compelling value at current levels. 10,500-11,000 'should' provide solid support for the TSX Index.
The S&P/TSX Venture index was mercilessly crushed almost 200 points (12%) from the 1,750 level. The Venture Exchange has unbelievably lost 1,000 points (or 40%) since March 2011. This astonishing 'bear market' may be vulnerable to further tax-loss selling pressure up to the end of December 2011. Great values and opportunities await those patient investors who take advantage of this outstanding opportunity.
Bottom Line, with European Index down 30+% and North American & Asian Indexes down 20+% from recent recovery high levels a significant amount of negative economic 'discounting' has already been baked into this worse case scenario souffle. North American markets appear to be catching up to recent European credit and equity weakness. It has been easy to lose sight of the fact that US weekly unemployment claims have been dropping for 2 years, leading economic indicators readings are improving, household balance sheets continue to improve, and manufacturing production & exports numbers are at very healthy record levels. US personal saving rates have improved considerably and most multinational corporations are flush with capital.
I am not trying to downplay the serious credit issues which exist - especially if the Euro crisis escalates significantly from current levels. However, significant proportion of all these problems are banking related. The G20 and BRIC nations have stated they are ready to assist those banks which may most negatively affected by the pending Greek default.
I do believe these very difficult problems can and will be solved. I do not believe that world wide growth and consumption levels will be as negatively affected as reported by the many hysterical market pundits and media outlets. The exasperating financial mess which central & corporate bankers and over levered governments created can and will be solved. Emerging markets will continue to grow and consume. Stimulus will be added where needed. It will important not to over react or panic in these difficult times as debt unwinds and positions are squared. Confidence will return. This crisis, like most others, will create many opportunities as they often do.
North American indexes can easily contract another 5-10% from current levels but I do not expect them to revisit the imploded levels of 2008-09. The age old lesson of the danger of over leveraging and excessive debt will be painfully relearned. With any luck voters will now learn to control and limit the powers and influence their elected fearless leadership and brave policy makers crave! The price paid will be well worth it! The swamp will require lots of draining!
Life will go on!
The nine scariest words of the English language : "I am from the government and I am here to help.'
- Ronald Reagan
The 50 year old failed 'twist strategy' of selling (or not buying) short term bonds ($US400B) and purchasing longer term bonds (until 2013) in order to flatten the yield curve further slicing razor thin interest rates appears to be nothing more than quazi-creative accounting stick handling or desperate financial engineering. This Treasury curve shift is the most abnormal (read: unpredictable) in the last 30 years. The Feds most implicit mandate of 'price stability' appears to be now more of an after thought. Three Fed officials (Plosser, Fisher, and Kocherlakota) dissented from this 'limited' strategy - a modern day rearranging of the deck chairs on the Titanic.
A immediate negative effect will be to the financial institutions who either depend on a normally slopped yield curve/spread or those who require 'reasonable' levels of interest rates to generate income. Negative interest rates are about to become much more negative. Pension funding needs will go from bad to worse. Insurance companies may find it impossible to match risks with returns. Bank earnings will drop because of disappearing margins.
The Fed has yet to learn that record low interest rates do not necessarily increase/stimulate the demand for credit. They should learn that excessive debt will definitely drain the demand for more credit. They will eventually learn not to over borrow!
The Fed should realize that consumers are desperately trying to pay down debt based on fears of job security, retirement, inflation, and the wildly expanding unsustainable Federal debt burdens. Nearly half of all US mortgage borrowers do not have the equity or credit rating necessary to refinance at lower 'engineered' interest rates. What little confidence cash flush businesses have (left) is hardly enough for them to invest or expand.
An equally concerning caveat is the announcement that US Government (taxpayers) are about to reenter the mortgage backed securities market which more or less melted the financial system down in the first place. The tax payers balance sheet is going to look like a dog's breakfast. It looks like a major risky double down and thus a very dangerous & historic bond market bubble to me! The 'risk free' status of US treasuries may disappear as quickly just as their 'AAA' rating did!
Moody's in a 'pre-emptive move lowered the credit rating of three of the big US Banks (Citi, BofA, and Wells Fargo) and will once again focus attention on systemic derivative 'counterparty risk'. Should credit lines be cut or reduced existing trade positions may need to be unwound or assigned. The cost of 'protection' may rise for those who try to 'hedge their hedge.' Banks may need to raise capital as positions are liquidated or to cover collateral agreements. This type of run on a bank is a replay of the historic and nasty Bear Sterns/Lehman experience.
Assets in various 'troubled' Euro banks are beginning to be moved to the relatively 'safer' confines of the ECB. A move by the Germans to reinstate the Bundesbank as the leading Central Bank of Europe would be catastrophic to say the least. The latest European PMI stats suggests that GDP figures may turn negative before long. Let's hope that a financial 'Black Plague' is not the end game of this very complex and inextricably linked international economic dilemma. It is beginning to look like the strategy of throwing stimulus money (read: debt) at institutionalized debt problems may be coming to a merciful end.
Newly minted IMF chief, Ms C Lagarde, has just discovered the 'massive risks to the banking system' and financial stability. An abrupt and immediate 10% IMF downgrade for growth for the entire planet was summarily dispatched with the usual mindless encouragement of 'more easing'(?) Paul Volker (former Fed Head and architect of 1980's inflation killing 20% interest rates) in a New York Times article reminds us that 'a little inflation (2%) can be a very dangerous thing!' Modern day Robin Hood, Prez B.H. Obama, is astonishingly spending his spare time selling his pre-election 'tax the rich' class warfare as the Fed burns! Brazil is beginning to erect trade barriers and increasing tariffs. And just to add to the fun & festivities the Bank of China announced they also foresee the possibility of an accelerated economic slowdown. All that may be left are the rating agencies to declare their (after-the-fact) last of the official post mortem downgrades.
In the US, the post 'twist' reaction was an immediate massive selling liquidation of anything which resembled a listed share of stock throughout all of the industrialized and emerging world. The orderly selling swoon has been powerful and widespread irrespective of earnings or valuations. Credit has been signalling and anticipating equity weakness for some time. North America appears to be finally catching up to the recent negative 'European 30+% decline experience.' The DJIA is now down just over 15+% ytd in a very over sold but negative technical environment. North American equity markets are much more leveraged (margined) than during the lows registered during the lows of the 2009 financial cataclysm. US equity markets are on the verge of dropping into 'bear market territory' of a 20% decline. Confirmed violation of the recent Aug 9th lows of 10,600 (DJIA) suggest a quick retracement back to the Aug/2010 support level of 10,000. The longer term measurement takes the DJIA back to the mid 2010 level of 9,500. Key lower support levels for the Nasdaq are 2,340 and then 2,100 based on weekly measurements. Significant lower support for the S&P comes in 5% lower at 1,050 then 1,000.
In commodities, the instant and powerful post 'twist' rally in the US dollar had an immediate negative effect for the entire commodity sector. 'Over' speculated sectors were crushed with the news that further QE stimulus was not part of the Fed's near term strategy. Gold broke the critical US$1,800/oz level early in the week and quickly violated $US1,700/oz by the end of the week. Significant 200 dma support comes in at $US1,595/oz. Gold dropped 10% on the week - a short term very over sold condition. Friday's $US100/oz drop for gold was rumored to be liquidation by hedge fund manager J. Paulson who is the largest shareholder of GLD - the massive physical gold fund. Silver broke the key $US40/oz level and quickly imploded to just over $US30/oz - a whopping 25% drop in 5 trading sessions. Silver is currently significantly over sold but could drop a further $US2/oz before the carnage is over. The red metal, Dr Copper, the metal with a Phd on the economy, got walloped with reports of contracting world wide economies. $US3.40/lb is a critical support area for Copper. The potential exists for Copper to drop as low as $US2.80/lb the mid 2010 support level. Crude Oil did not escape the selling hysteria dropping almost $US10/bl or 12% on the week to just below $US80/bl. A clean break of this support level suggests a price in the low $US70/bl area. Lower crude oil prices (combined with record low interest rates) is/would be very welcome news for almost all of the US economy.
The Agra grain markets continue to consolidate recent profit taking. Chronic underperforming Natural Gas has held up the best in the commodity complex just under $US4/mcf.
In Canada, the Canadian dollar was the first casualty based on economic slowdown fears and the limited anticipated effect of Fed 'twist' strategy. The Canuck buck broke $US1 for the first time this year. I would be very surprised if the Canadian dollar violates $US.95. The Canadian Dollar has dropped $US.10 from the July high. That is very welcome news for the manufacturing sector in Canada. The benchmark Canadian stock index briefly dropped into 'bear market' territory based on recessionary fears, Chinese economic downgrades, and the Euro banking mess. The heavily weighted financial sector broke 'critical' intermediate support of 166 on the S&P/TSX Capped Financials Index. This index can drop another 20 points before finding reasonable support. Positive relative strength divergence is appearing on the weekly charts. Many quality material, resource, and industrial stocks have been crushed in this wide spread liquidation and now represent compelling value at current levels. 10,500-11,000 'should' provide solid support for the TSX Index.
The S&P/TSX Venture index was mercilessly crushed almost 200 points (12%) from the 1,750 level. The Venture Exchange has unbelievably lost 1,000 points (or 40%) since March 2011. This astonishing 'bear market' may be vulnerable to further tax-loss selling pressure up to the end of December 2011. Great values and opportunities await those patient investors who take advantage of this outstanding opportunity.
Bottom Line, with European Index down 30+% and North American & Asian Indexes down 20+% from recent recovery high levels a significant amount of negative economic 'discounting' has already been baked into this worse case scenario souffle. North American markets appear to be catching up to recent European credit and equity weakness. It has been easy to lose sight of the fact that US weekly unemployment claims have been dropping for 2 years, leading economic indicators readings are improving, household balance sheets continue to improve, and manufacturing production & exports numbers are at very healthy record levels. US personal saving rates have improved considerably and most multinational corporations are flush with capital.
I am not trying to downplay the serious credit issues which exist - especially if the Euro crisis escalates significantly from current levels. However, significant proportion of all these problems are banking related. The G20 and BRIC nations have stated they are ready to assist those banks which may most negatively affected by the pending Greek default.
I do believe these very difficult problems can and will be solved. I do not believe that world wide growth and consumption levels will be as negatively affected as reported by the many hysterical market pundits and media outlets. The exasperating financial mess which central & corporate bankers and over levered governments created can and will be solved. Emerging markets will continue to grow and consume. Stimulus will be added where needed. It will important not to over react or panic in these difficult times as debt unwinds and positions are squared. Confidence will return. This crisis, like most others, will create many opportunities as they often do.
North American indexes can easily contract another 5-10% from current levels but I do not expect them to revisit the imploded levels of 2008-09. The age old lesson of the danger of over leveraging and excessive debt will be painfully relearned. With any luck voters will now learn to control and limit the powers and influence their elected fearless leadership and brave policy makers crave! The price paid will be well worth it! The swamp will require lots of draining!
Life will go on!
The nine scariest words of the English language : "I am from the government and I am here to help.'
- Ronald Reagan
Monday, September 19, 2011
Week Ending 9/16/11 - Going Rogue
The word origin and history of 'rogue' dates back to 1561 - an 'idle vagrant', thieves' slang for a begging vagabond who pretends to be a poor scholar from Oxford or Cambridge. This weeks version of a rogue is a neophyte 31 year old UBS trader who blows $US2B in unauthorized trading - enough to provide tuition for 60,000 'Oxforders' or 'Cantabs' at the $37.5k/yr tuition rate. Enough dough to pay for 10 years tuition for all freshmen for both esteemed colleges.The alternate term for a rouge trader who ignores internal control & risk limits and loses $US2.3b is Managing Director.
The fresh faced 31yo, junior trader, Kweku Adoboli, worked on the UBS proprietary desk which CEO Oswald Gruebel was 'convinced was one of the best in the business.' Few details have been released but it has been estimated the very embarrassing loss was the result of a $US20b 'notional' speculation. Some of this huge loss accumulated since the historic 2008 meltdown. From my perch it looks like he got caught very long in the Swiss Franc peg to the Euro ala Long Term Capital's failed currency bets in 1998. Another victim in the unraveling Euro credit and currency car crash. UBS joins the dubious ranks of a long list of similarly hyper aggressive & over extended 'rogue banks' such as Sumitomo, Barings (Nick Leeson), and Soc Gen (Jerome Kerviel). The BBC reported that UBS never discovered the losses. It was Kweku who told them about his debacle. Looks like his short trading career has come to an abrupt halt as opposed to what would have happened if he was a Chinese rogue trader. The normally vigilant regulators (FSA & FINMA) all have been noticeably silent on this issue but are launching a comprehensive 'after the fact' independent investigation. Good thing these regulators don't live in China too!
In other rogue news on Thursday the US Federal Reserve and other assorted central banks announced they would be providing smoke and mirror 'dollar liquidity' to other distressed Euro banks. The Euro rogue banks are loaded with toxic IOU's from various rogue sub prime sovereign governments. Rogue poster boy and US Secretary Treasurer T.Geithner is flying directly to Europe (Wroclaw Poland) to meet with 27 EU finance ministers at the Economic and Financial Affairs Council to urge for an accelerated 'decisive' Keynesian 'Tarp' wallpapering! Opa!
To this point Asia and other BRIC nations have wisely excluded themselves from the proceedings. I suppose China wonders who will bail them out if they (unwisely) bail out Europe? Premier Wen Jiabao said debt-laden economies (read: all) 'must first get their own houses in order' before they rescue anyone from this escalating crisis. I suggest that he refrains from holding his breath waiting for that to happen! The Premier further cheerfully stated that their is a limit to Chinese generosity (read: oxymoron) and it will come at a price (read: don't do the deal if at all possible).
The Euro mess is going from bad to worse with the effects spreading throughout the industrialized world. The EU's lack of desire/discipline/will to address key issues and enforce solutions are contributing to a wildly snowballing financial contagion. Britain is suing the ECB to prevent it from implementing a new policy that would drive London's financial services sector to the Continent. Official figures show that Britian's consumer inflation prices are up to 4.5% this year. Greece is having to come up with billions of Euros in interest payments on an weekly basis. Eurozone finance ministers have delayed a Greek loan 'rescue' payout until October - perhaps to coincide with 'trick or treat' festivities? Throwing more green or euro backs at fiscally hemorrhaging Greece is beyond foolish and only makes the problem worse. The ECB announced that its bond purchases dropped 30% from the previous two weeks. Polls suggest that Germany taxpayers patience officially ran out some time last week! German Chancellor Angela Merkel looks like a 'dead women walking' to me! It will be interesting to see who ditches the EU economic bloc first - Greece or Germany? Nothing about this process looks to be orderly or painless - more like a game of financial 'musical chairs' where all the chairs are taken when the music stops! Expect the Greece default/bankruptcy to go two ways. First gradually. Then quickly. The 'global cooling' countdown begins ...
Domestically, the dream tag-team of Obama and Geithner, will deliver a post-Sunday 'shared sacrifice' sermonette on the virtues and responsibilities of writing them more and fatter cheques which evidently are much more effective in their blessed cupped hands than the tax payers grovelling claws. Details of the new shiny 'super congressional committee' on deficit reduction which includes the W. Buffet (do as I say not as I do) tax on the rich will be unveiled. He conveniantly failed to mention that most of his 'real' income is derived from previously taxed corporate dividends. All of a sudden Warren is having tax payers remorse having only paid 17.4% of his 'sheltered' income last year, The fact that his company has spent the last decade appealing and negotiating with US Internal Revenue Service for 'under payment' of taxes I suppose is nothing more than a 'slight' inconvenient truth. Wizard Warren should keep his curtain closed.
In the US, confronted with an economy that has under preformed this year the lagging economist community are scaling back growth prognostications for this and next year. Forecasts now call a reduced 1.7% growth this year and 2.3% for 2012. High unemployment levels, record deficits, and the Euro credit crisis all contributed to the downgrades. US households continue to wallow in misery with consumer confidence dropping 2 points to a 30yr record 55.7% low. The expectations index which measures household behavior fell to a 31 year low of 47.0% from 47.4%. Americans are pumping money into bank accounts at a blistering pace this year with deposits at a record $US10T level. Household real estate assets have fallen a breath taking $US6.6T from the peak. 10.9 million US residential properties (22%) were in negative equity at the end of Q2 of 2011. Cash hoarding by US companies is hitting 50+ year highs - liquid assets to short term liabilities. The corporate dividend payout ratio is hitting 50+ year lows of just 27% of earnings.
Equity markets for the week were surprisingly positive through a combination of short covering and hope for a potential quick fix. The DJIA rallied 3.8% and the S&P rallied 4.41% in a fairly strong and positive week. The Nasdaq added 5.52% based on positive merger and takeover activity. The DJIA remains trading range bound between the 10,800 and 11,600 level. Macro issues will probably be the dominate investment theme until cranberry sauce is spread over the turkey. With any luck there will be plenty of stuffing to go around!
In commodities, trading activity remained fairly subdued and correlated to ebb and flow of ECB rumors and announcements. Gold has dropped 4% from recent all time high territory of last month. Gold dropped 2.7% on the week. A closing break below $1,800/oz could send Gold back to the $US1,590/oz (200 dma) level. Silver has dropped 10% from peak levels and could retrace to the $US38/oz (200 dma) level. Crude Oil remains range bound between $US83-89/bl level. Crude Oil closed up 1.93% on the week. A close below $US80/bl would imply a sell off as low as $USS65/bl. Natural Gas also appears to be vulnerable to a 3-5% retracement should current levels not hold. Copper appears challenged to hold its longstanding $US4/lb level. A move back to the $US3.40-50/lb appears likely and should represent considerable support strength. The Agra grain markets have settled back up to 10% from recent high levels as expected and are showing considerably over sold readings at current levels.
In Canada, it appears that tax loss season is taking effect sooner than usual with the S&P/TSX closing down .20% on the week. A poor top and bottom line earnings report from Canadian tech whipping boy RIM sent the stock down 20% on Friday. This was RIM's second earnings disappointment in a row. It would be in the best interest of RIM's management not to miss #3. The technical picture of the heavily weighted TSX financial sector is mixed to negative. A tandem move back to recent low levels for the big 5 banks would imply a potential retest of the late 2009 levels for the S&P/TSX. An agreement on the controversial Keystone Pipeline (1,700 mile artery from Alberta to the Gulf of Mexico -Texas) by the oil sands unfriendly Obama administration would be a major positive for employment and the S&P/TSX index. In the meantime expect a combination of tax loss selling and intensified merger and acquisition activity for the mid and junior cap Canadian issues. A break below $US1 for the Canadian Dollar would add much needed support to the senior producing resource issues.
In closing, the investment world has become somewhat paralyzed by the macro international government debt and deficit issues. Any reasonable deal/solution/strategy to most of these pressing issues do not to be in our future anytime soon. To this point reasonable and effective solutions appear to be only short term in nature at best. The pending Greek default will be a tremendous challenge to the banking sector and the future of the EU. Should a 'managed default' be reasonably successful it may represent a key opportunity which financial markets and world economies can build from. Sentiment has rarely been this negative and many key markets are tremendously oversold in both the short and intermediate terms. Currently financial markets appear to be in a 'holding pattern' subject to the whims of short term economic data and short term high frequency trading. It appears that financial markets are only preoccupied with the negative geopolitical issues of the day. Very little, if any, good news is priced into valuations. As we head toward year end many interesting tax loss trading opportunities should appear. A patient strategy awaiting an accelerated move to the downside could prove most lucrative for those looking for opportunities.
'The budget should be balanced, the treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed lest Rome become bankrupt. People must learn to work instead of living on public assistance.'
- Cicero, 55BC
The fresh faced 31yo, junior trader, Kweku Adoboli, worked on the UBS proprietary desk which CEO Oswald Gruebel was 'convinced was one of the best in the business.' Few details have been released but it has been estimated the very embarrassing loss was the result of a $US20b 'notional' speculation. Some of this huge loss accumulated since the historic 2008 meltdown. From my perch it looks like he got caught very long in the Swiss Franc peg to the Euro ala Long Term Capital's failed currency bets in 1998. Another victim in the unraveling Euro credit and currency car crash. UBS joins the dubious ranks of a long list of similarly hyper aggressive & over extended 'rogue banks' such as Sumitomo, Barings (Nick Leeson), and Soc Gen (Jerome Kerviel). The BBC reported that UBS never discovered the losses. It was Kweku who told them about his debacle. Looks like his short trading career has come to an abrupt halt as opposed to what would have happened if he was a Chinese rogue trader. The normally vigilant regulators (FSA & FINMA) all have been noticeably silent on this issue but are launching a comprehensive 'after the fact' independent investigation. Good thing these regulators don't live in China too!
In other rogue news on Thursday the US Federal Reserve and other assorted central banks announced they would be providing smoke and mirror 'dollar liquidity' to other distressed Euro banks. The Euro rogue banks are loaded with toxic IOU's from various rogue sub prime sovereign governments. Rogue poster boy and US Secretary Treasurer T.Geithner is flying directly to Europe (Wroclaw Poland) to meet with 27 EU finance ministers at the Economic and Financial Affairs Council to urge for an accelerated 'decisive' Keynesian 'Tarp' wallpapering! Opa!
To this point Asia and other BRIC nations have wisely excluded themselves from the proceedings. I suppose China wonders who will bail them out if they (unwisely) bail out Europe? Premier Wen Jiabao said debt-laden economies (read: all) 'must first get their own houses in order' before they rescue anyone from this escalating crisis. I suggest that he refrains from holding his breath waiting for that to happen! The Premier further cheerfully stated that their is a limit to Chinese generosity (read: oxymoron) and it will come at a price (read: don't do the deal if at all possible).
The Euro mess is going from bad to worse with the effects spreading throughout the industrialized world. The EU's lack of desire/discipline/will to address key issues and enforce solutions are contributing to a wildly snowballing financial contagion. Britain is suing the ECB to prevent it from implementing a new policy that would drive London's financial services sector to the Continent. Official figures show that Britian's consumer inflation prices are up to 4.5% this year. Greece is having to come up with billions of Euros in interest payments on an weekly basis. Eurozone finance ministers have delayed a Greek loan 'rescue' payout until October - perhaps to coincide with 'trick or treat' festivities? Throwing more green or euro backs at fiscally hemorrhaging Greece is beyond foolish and only makes the problem worse. The ECB announced that its bond purchases dropped 30% from the previous two weeks. Polls suggest that Germany taxpayers patience officially ran out some time last week! German Chancellor Angela Merkel looks like a 'dead women walking' to me! It will be interesting to see who ditches the EU economic bloc first - Greece or Germany? Nothing about this process looks to be orderly or painless - more like a game of financial 'musical chairs' where all the chairs are taken when the music stops! Expect the Greece default/bankruptcy to go two ways. First gradually. Then quickly. The 'global cooling' countdown begins ...
Domestically, the dream tag-team of Obama and Geithner, will deliver a post-Sunday 'shared sacrifice' sermonette on the virtues and responsibilities of writing them more and fatter cheques which evidently are much more effective in their blessed cupped hands than the tax payers grovelling claws. Details of the new shiny 'super congressional committee' on deficit reduction which includes the W. Buffet (do as I say not as I do) tax on the rich will be unveiled. He conveniantly failed to mention that most of his 'real' income is derived from previously taxed corporate dividends. All of a sudden Warren is having tax payers remorse having only paid 17.4% of his 'sheltered' income last year, The fact that his company has spent the last decade appealing and negotiating with US Internal Revenue Service for 'under payment' of taxes I suppose is nothing more than a 'slight' inconvenient truth. Wizard Warren should keep his curtain closed.
In the US, confronted with an economy that has under preformed this year the lagging economist community are scaling back growth prognostications for this and next year. Forecasts now call a reduced 1.7% growth this year and 2.3% for 2012. High unemployment levels, record deficits, and the Euro credit crisis all contributed to the downgrades. US households continue to wallow in misery with consumer confidence dropping 2 points to a 30yr record 55.7% low. The expectations index which measures household behavior fell to a 31 year low of 47.0% from 47.4%. Americans are pumping money into bank accounts at a blistering pace this year with deposits at a record $US10T level. Household real estate assets have fallen a breath taking $US6.6T from the peak. 10.9 million US residential properties (22%) were in negative equity at the end of Q2 of 2011. Cash hoarding by US companies is hitting 50+ year highs - liquid assets to short term liabilities. The corporate dividend payout ratio is hitting 50+ year lows of just 27% of earnings.
Equity markets for the week were surprisingly positive through a combination of short covering and hope for a potential quick fix. The DJIA rallied 3.8% and the S&P rallied 4.41% in a fairly strong and positive week. The Nasdaq added 5.52% based on positive merger and takeover activity. The DJIA remains trading range bound between the 10,800 and 11,600 level. Macro issues will probably be the dominate investment theme until cranberry sauce is spread over the turkey. With any luck there will be plenty of stuffing to go around!
In commodities, trading activity remained fairly subdued and correlated to ebb and flow of ECB rumors and announcements. Gold has dropped 4% from recent all time high territory of last month. Gold dropped 2.7% on the week. A closing break below $1,800/oz could send Gold back to the $US1,590/oz (200 dma) level. Silver has dropped 10% from peak levels and could retrace to the $US38/oz (200 dma) level. Crude Oil remains range bound between $US83-89/bl level. Crude Oil closed up 1.93% on the week. A close below $US80/bl would imply a sell off as low as $USS65/bl. Natural Gas also appears to be vulnerable to a 3-5% retracement should current levels not hold. Copper appears challenged to hold its longstanding $US4/lb level. A move back to the $US3.40-50/lb appears likely and should represent considerable support strength. The Agra grain markets have settled back up to 10% from recent high levels as expected and are showing considerably over sold readings at current levels.
In Canada, it appears that tax loss season is taking effect sooner than usual with the S&P/TSX closing down .20% on the week. A poor top and bottom line earnings report from Canadian tech whipping boy RIM sent the stock down 20% on Friday. This was RIM's second earnings disappointment in a row. It would be in the best interest of RIM's management not to miss #3. The technical picture of the heavily weighted TSX financial sector is mixed to negative. A tandem move back to recent low levels for the big 5 banks would imply a potential retest of the late 2009 levels for the S&P/TSX. An agreement on the controversial Keystone Pipeline (1,700 mile artery from Alberta to the Gulf of Mexico -Texas) by the oil sands unfriendly Obama administration would be a major positive for employment and the S&P/TSX index. In the meantime expect a combination of tax loss selling and intensified merger and acquisition activity for the mid and junior cap Canadian issues. A break below $US1 for the Canadian Dollar would add much needed support to the senior producing resource issues.
In closing, the investment world has become somewhat paralyzed by the macro international government debt and deficit issues. Any reasonable deal/solution/strategy to most of these pressing issues do not to be in our future anytime soon. To this point reasonable and effective solutions appear to be only short term in nature at best. The pending Greek default will be a tremendous challenge to the banking sector and the future of the EU. Should a 'managed default' be reasonably successful it may represent a key opportunity which financial markets and world economies can build from. Sentiment has rarely been this negative and many key markets are tremendously oversold in both the short and intermediate terms. Currently financial markets appear to be in a 'holding pattern' subject to the whims of short term economic data and short term high frequency trading. It appears that financial markets are only preoccupied with the negative geopolitical issues of the day. Very little, if any, good news is priced into valuations. As we head toward year end many interesting tax loss trading opportunities should appear. A patient strategy awaiting an accelerated move to the downside could prove most lucrative for those looking for opportunities.
'The budget should be balanced, the treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed lest Rome become bankrupt. People must learn to work instead of living on public assistance.'
- Cicero, 55BC
Friday, September 9, 2011
Week Ending 9/9/11 - Back to School
No sooner were the sandwiches wrapped and lunch boxes packed, then we were treated with two 'elevated' speeches from two of our favorite eco/political lecturers.
Prof Ben B led off in a relaxed 'welcome back to class' demeanor with an extremely prescient summary of the collective economic ailments as he sees/knows them. He further added that he has lots of monetary 'tools and strategies' left at his disposal without revealing a single critical specific. Despite red hot Gold prices he is not concerned about inflation threats while warning that US finances could 'spiral out of control!'
Next on the podium was the much awaited Potus job creation edict which took on a much more 'you better attend class and do your homework or else' tone. The new look intense finger wagging Keynesian sermon was as much pre-election campaign rhetoric as it was an appeal to the democratic base from the desperately low approval rated BH Obama. As expected Japanese style infrastructure (for roads and bridges that may or may not be needed) and extension of the GW Bush payroll tax cuts anchored his rehashed thesis. Many/most of these 'new' promises' were part of the first stimulus plan. He wasn't quite as clear about his strategy of the government paying someone to hire somebody else with their own borrowed money. I hope that's not on the final exams!
Democrats hearts were warmed with the thoughts of new and improved union reform and more intense redistributionist 'rich paying their fair share' hyperbole. Evidently we all need to do as Warren Buffet says but not as he does? Congressional types got the physical exercise component of 'back to school' through a series of animated and grueling standing ovations for anything which sounded remotely 'stimulative.' How Nancy Pelosi held back her tears of joy I'll never know?
Video game manufacturing hiring should improve with the promise of an additional year of unemployment benefits. Now XBoxers will be paid 'not to work' for three years! Based on the maximum weekly benefits non-workers get paid $10/hr to stay home as opposed to gainful employment at the $7.25/hr minimum wage level. Hopefully there will be a great future demand for the hoards of professional video game players?
Math skills must have eroded over the summer as last weeks 'pre-announced' $US300b job creation program finally totalled up to a whopping $US447b 'this will be paid' America Jobs Act! Of course no details about how, when, or who was going to 'pay' for this new boondoggle - or more importantly what effect this 'program' would be on the national debt having now exceeded the critical 100% of GDP level. On Sept 19th we will find out that you, er... I mean, who, will pay the tab? Even less clarity about the corporations who might be tempted by 'employment' tax credits despite the 'loopholes' that are about to close and the overall higher tax burden they will face.
Perhaps the next lecture with cover an explanation on how an extra $US500b will create meaningful employment when the last $US4T borrowed and spent did not create any? I guess that's why they are the teachers and we are the .....? Eight times the American Public was threatened to 'pass this bill or else' while being convinced that 'America has always been about sharing like this!' He further incredulously added that this is what has made America great! Expect official unemployment to approach 10% +/or the cost of any new job to exceed $250k per. Time to drain the swamp for good!
The European economic Pandora's Box is quickly becoming a nightmare of epic proportion. Top ECB economist Jurgen Stark suddenly quit Thursday because he has had enough (and personal reasons). Christine Lagarde appears to have already over stayed her European welcome with her persistent Keynesian calls for more capital, liquidity, and intervention. She craves an Obama style solution. Greece will be lucky to be a member of the EU through the weekend despite rampant denials. A default has been baked into the moussaka for weeks. As euro economies implode the existence of the Euro will be severely tested turning a credit problem into a currency crisis. Fitch has their eyes on a potential Asian/China debt downgrade in 12-24 months which adds yet another dimension to the complex international credit & currency dilemma. The Chinese central government has negligible total debt, but totals increases substantially when local government debt is added, and explodes when state owned enterprise debt is included.
Most of the 'developed' world has become paralyzed with gloom and fear except for the Toronto Maple Leafs who feel they have fielded their best crop in decades! Hope does spring eternal!
In the US, the bungee cord DJIA/S&P trading environment continues to consolidate at dangerously low (sub 11,000) levels. With very little expected from policy leadership new ytd year lows are only a mini-crisis away. Despite the negative hysteria US exports surged to new all time record highs in July led by new records for US manufactured goods. July job openings for July was the highest in three years. I wonder if Potus got the memo? Despite the rampant pessimism capital goods orders, industrial production, corporate layoffs, staffing levels, corporate profit levels, and leading economic indicators are quite positive. Key support levels for the DJIA are 11,000 and then 10,600. S&P support 1,150 and 1,100. Nasdaq critical support 2,340 recent low levels. Reports are rapidly declining 'short positions' may be a longer term concern for market strength. The DJIA looks to be down 2% this shortened week and down 5% ytd. The S&P looks to be down 1.5% this week and down 8% ytd. The Nasdaq looks to be unch this week and down almost 11% ytd.
On the eve of the the great tragedy of 9/11 my thoughts and heart goes out to all American who were directly and indirectly affected by America's darkest day.
In commodities, once again the margin gremlins of the LME threaten to weaken the resolve of gold investors. The CME hiked cleared OTC London Gold Forward Margin by 40% yesterday but to this point has hardly created a ripple in the $US1,8,60/oz price. Silver looks potentially explosive to me for a retest of last April's $US50/oz level. Crude oil is now being contained in a tighter $US85/90/bl range. A move above $US90/bl would be very constructive. Natural Gas and Copper prices are attempting to consolidate at slightly higher levels. $US4 for both commodities are critical support levels. Agra grain markets are pulling back into short term correction levels as expected. Despite the recent AA+ downgrade the powerful US treasury market continues to confound this writer as yields hit all time low territory. Nervous Euro investors appear to be using the US bond market as a haven for safety and liquidity which definitely speaks to the panic and concern.
In Canada, employment fell 5.5k in August which was much worse than consensus expectations of a 21k gain. Private sector construction led the negative contraction. Domestic demand remains well supported paving the way for an acceleration in GDP in the quarter. It has been a very difficult/frustrating year for the S&P/TSX which has become inextricably linked to all global credit and currency issues of the day. The TSX index looks to be down 1% this shortened week and down 7% ytd. Currently the market is a momentum stock/sector picking/trading environment. Despite the recent solid bank earnings it will be critical for the TSX that the recent lows made by the financials to hold. It will be a matter of only a few weeks before 'tax loss selling' swings into full gear. Key support levels for the TSX are 12,200 and then 11,700. A move above 12,800 would be short term positive.
In closing, it is very difficult not to be affected by the prevailing rampant gloom, doom, and despair. Intense pessimism appears to increase during each selling wave. Considerable 'technical' damage has been done to key indexes throughout the world in the anticipation of further deteriorating financial conditions. Normally I pride myself as a 'classic contrarian' however even I am 'challenged' in this weaker macro fundamental and technical environment. I do expect conditions to become grossly 'over sold' at some point and hopefully before the turkey hits the plate. Market psychology and sentiment appears to the most significant short term factors in this 'trading' environment. Waiting patiently for an opportunity to 'reload' at lower levels would probably the 'higher odds' probability for the next few weeks. A fetal positon induced close below the recent mid August lows will create significant excitement/despair to say the least.
Prof Ben B led off in a relaxed 'welcome back to class' demeanor with an extremely prescient summary of the collective economic ailments as he sees/knows them. He further added that he has lots of monetary 'tools and strategies' left at his disposal without revealing a single critical specific. Despite red hot Gold prices he is not concerned about inflation threats while warning that US finances could 'spiral out of control!'
Next on the podium was the much awaited Potus job creation edict which took on a much more 'you better attend class and do your homework or else' tone. The new look intense finger wagging Keynesian sermon was as much pre-election campaign rhetoric as it was an appeal to the democratic base from the desperately low approval rated BH Obama. As expected Japanese style infrastructure (for roads and bridges that may or may not be needed) and extension of the GW Bush payroll tax cuts anchored his rehashed thesis. Many/most of these 'new' promises' were part of the first stimulus plan. He wasn't quite as clear about his strategy of the government paying someone to hire somebody else with their own borrowed money. I hope that's not on the final exams!
Democrats hearts were warmed with the thoughts of new and improved union reform and more intense redistributionist 'rich paying their fair share' hyperbole. Evidently we all need to do as Warren Buffet says but not as he does? Congressional types got the physical exercise component of 'back to school' through a series of animated and grueling standing ovations for anything which sounded remotely 'stimulative.' How Nancy Pelosi held back her tears of joy I'll never know?
Video game manufacturing hiring should improve with the promise of an additional year of unemployment benefits. Now XBoxers will be paid 'not to work' for three years! Based on the maximum weekly benefits non-workers get paid $10/hr to stay home as opposed to gainful employment at the $7.25/hr minimum wage level. Hopefully there will be a great future demand for the hoards of professional video game players?
Math skills must have eroded over the summer as last weeks 'pre-announced' $US300b job creation program finally totalled up to a whopping $US447b 'this will be paid' America Jobs Act! Of course no details about how, when, or who was going to 'pay' for this new boondoggle - or more importantly what effect this 'program' would be on the national debt having now exceeded the critical 100% of GDP level. On Sept 19th we will find out that you, er... I mean, who, will pay the tab? Even less clarity about the corporations who might be tempted by 'employment' tax credits despite the 'loopholes' that are about to close and the overall higher tax burden they will face.
Perhaps the next lecture with cover an explanation on how an extra $US500b will create meaningful employment when the last $US4T borrowed and spent did not create any? I guess that's why they are the teachers and we are the .....? Eight times the American Public was threatened to 'pass this bill or else' while being convinced that 'America has always been about sharing like this!' He further incredulously added that this is what has made America great! Expect official unemployment to approach 10% +/or the cost of any new job to exceed $250k per. Time to drain the swamp for good!
The European economic Pandora's Box is quickly becoming a nightmare of epic proportion. Top ECB economist Jurgen Stark suddenly quit Thursday because he has had enough (and personal reasons). Christine Lagarde appears to have already over stayed her European welcome with her persistent Keynesian calls for more capital, liquidity, and intervention. She craves an Obama style solution. Greece will be lucky to be a member of the EU through the weekend despite rampant denials. A default has been baked into the moussaka for weeks. As euro economies implode the existence of the Euro will be severely tested turning a credit problem into a currency crisis. Fitch has their eyes on a potential Asian/China debt downgrade in 12-24 months which adds yet another dimension to the complex international credit & currency dilemma. The Chinese central government has negligible total debt, but totals increases substantially when local government debt is added, and explodes when state owned enterprise debt is included.
Most of the 'developed' world has become paralyzed with gloom and fear except for the Toronto Maple Leafs who feel they have fielded their best crop in decades! Hope does spring eternal!
In the US, the bungee cord DJIA/S&P trading environment continues to consolidate at dangerously low (sub 11,000) levels. With very little expected from policy leadership new ytd year lows are only a mini-crisis away. Despite the negative hysteria US exports surged to new all time record highs in July led by new records for US manufactured goods. July job openings for July was the highest in three years. I wonder if Potus got the memo? Despite the rampant pessimism capital goods orders, industrial production, corporate layoffs, staffing levels, corporate profit levels, and leading economic indicators are quite positive. Key support levels for the DJIA are 11,000 and then 10,600. S&P support 1,150 and 1,100. Nasdaq critical support 2,340 recent low levels. Reports are rapidly declining 'short positions' may be a longer term concern for market strength. The DJIA looks to be down 2% this shortened week and down 5% ytd. The S&P looks to be down 1.5% this week and down 8% ytd. The Nasdaq looks to be unch this week and down almost 11% ytd.
On the eve of the the great tragedy of 9/11 my thoughts and heart goes out to all American who were directly and indirectly affected by America's darkest day.
In commodities, once again the margin gremlins of the LME threaten to weaken the resolve of gold investors. The CME hiked cleared OTC London Gold Forward Margin by 40% yesterday but to this point has hardly created a ripple in the $US1,8,60/oz price. Silver looks potentially explosive to me for a retest of last April's $US50/oz level. Crude oil is now being contained in a tighter $US85/90/bl range. A move above $US90/bl would be very constructive. Natural Gas and Copper prices are attempting to consolidate at slightly higher levels. $US4 for both commodities are critical support levels. Agra grain markets are pulling back into short term correction levels as expected. Despite the recent AA+ downgrade the powerful US treasury market continues to confound this writer as yields hit all time low territory. Nervous Euro investors appear to be using the US bond market as a haven for safety and liquidity which definitely speaks to the panic and concern.
In Canada, employment fell 5.5k in August which was much worse than consensus expectations of a 21k gain. Private sector construction led the negative contraction. Domestic demand remains well supported paving the way for an acceleration in GDP in the quarter. It has been a very difficult/frustrating year for the S&P/TSX which has become inextricably linked to all global credit and currency issues of the day. The TSX index looks to be down 1% this shortened week and down 7% ytd. Currently the market is a momentum stock/sector picking/trading environment. Despite the recent solid bank earnings it will be critical for the TSX that the recent lows made by the financials to hold. It will be a matter of only a few weeks before 'tax loss selling' swings into full gear. Key support levels for the TSX are 12,200 and then 11,700. A move above 12,800 would be short term positive.
In closing, it is very difficult not to be affected by the prevailing rampant gloom, doom, and despair. Intense pessimism appears to increase during each selling wave. Considerable 'technical' damage has been done to key indexes throughout the world in the anticipation of further deteriorating financial conditions. Normally I pride myself as a 'classic contrarian' however even I am 'challenged' in this weaker macro fundamental and technical environment. I do expect conditions to become grossly 'over sold' at some point and hopefully before the turkey hits the plate. Market psychology and sentiment appears to the most significant short term factors in this 'trading' environment. Waiting patiently for an opportunity to 'reload' at lower levels would probably the 'higher odds' probability for the next few weeks. A fetal positon induced close below the recent mid August lows will create significant excitement/despair to say the least.
Tuesday, September 6, 2011
Week Ending Sept 2/11 - The Dog Days
With the 'dog days' of August having come to a merciful end we are reminded that it is not only the month of March which 'comes in like a lion and out like a lamb.' Early in the month more than a few traders felt like the proverbial lambs going to slaughter. August actually felt more like T.S. Eliot's cruelest month of April to me. September will no doubt be a show stopper. Stay tuned!
Hot off the heels of the Bernake 'non-action Jackson' low volume short covering rally North American equity markets have once again turned back down in earnest. Rapidly withering economic stats have contributed to this low confidence malaise. European markets couldn't even muster up a weak rally based primarily on a no confidence dire economic outlook.
As North American celebrated the Labor Day weekend Euro bankers, led by Deutsche Bank CEO Joesef Ackermann, terrified investors about the fragility of the Euro banking system. He said the it is an open secret that numerous European banks would not survive having to revalue sovereign debt held on the banking book at markets levels. He further stated that the current Euro situation reminds him of the credit crisis of a few years ago which absolutely paralyzed equity markets. Italy, Germany, France all quickly dropped 5+%. Greek 2yr yields blew past the ridiculous 50% level for the first (and probably last) time ever. The Euro banks got destroyed falling between 6-8%. The Italian treasury must redeem $US20.4 of debts this week and over $US100b by the end of September - the most ever in a single month. Despite the ECB desperately buying and supporting the Italian bond market yields are rising back into dangerous 'hot water' territory. The Italian 10 yr spread to Bunds was past 340 bps - far above the recent ECU invention levels and wider than Spain throughout August. Germany has 'null' patience with the Greek reluctance to bring its debts under control. It is hard to imagine that Greece will be a member of the EU for much longer. UBS quantifies the cost of a Euro break up of between 20 to 25% of GDP in the first year - and incidentially the end of UBS too!
The 'austerity'experiment/solution looks to be ending faster than it began. The complex and thorny issue of a stimulative monetary policy +/or quantitative easing to solve the broken Euro financial system appears to be a foregone conclusion. That which Europeans have traditionally feared is now what they crave the most. Goldman Saks speculates that Euro banks will need close to $US1T or 5 times the amount the IMF proposed. Goldman's latest 'State of the Markets - Long and Short risk Strategies' report effectively calls for a major global structural implosion. Gold galloped past any margin increase threats into all time high territory and it's destiny with $US2,000+/oz. The failure of an ill conceived EU and euro currency paves the way for an epic destructive currency war as 'fiat' systems implode. The Swiss National Bank 'blinked' having intervened with a 'full efforts' campaign to control the their galloping Swiss currency - perversely attacking their own currency while effectively defending the euro. The new minimum exchange rate setting is set at a target of 1.20 francs to the euro. The now vigilant S&P is itching to downgrade every and any blue suited pin stripped Euro banker it sees. To make matters worse the 'contagian' appears to be spreading into Asia as emerging market 'swap spreads' rise in anticipation of further financial fireworks! The new IMF managing director Christine Lagarde handsome white quaff is already getting whiter. This is beginning to look like a Dana White MMA/UFC 'no holds barred' financial throw down spectacle. I'm not sure news could get much worse - but I've been saying that for a while!'
The the US, the Prez and his VP incredulously and ironically spent the long 'labor day' weekend agitating what is left of the organized union movement - pitting the plight of the down beaten worker against greedy corporate cronies. This regurgitated 'blame game' party policy is no doubt a panic response to the demoralizing economic 'goose egg' they produced but did not expect. It should therefore come as no surprise that American employers are creating fewer jobs than they were at the onset of the Great Recession - clear evidence of a crisis of business confidence. US companies added zero new workers in August ending a 10 month job creation run. The deteriorating trend paves the way for more Federal Reserve masterminding. B.H. Obama is putting the final touches on his much awaited 'jobs plan.' Expect a blended reworked infrastructure/payroll tax rehash and a yawn. His new and improved upcoming stimulative 'housing policy/plan' should be much more interesting. Almost every 'blue chip' US bank now faces a new nuclear mega lawsuit by the US Federal Housing Financial Agency over faulty mortgage loans adding another straw to the beleaguered camels back. The amount of damages sought will dwarf the $US20b sought from mortgage servicers in a probe by state attorneys general. The FOMC minutes word count helps to reveal key leadership concerns: unemployment:15, volatility:3, 2011:6, 2012:3, debt:19, inflation:29, and deflation:1. On the week the DJIA closed at 11,240 down 50, S&P 1169 down 8, and NASDAQ even. The key downside levels are DJIA 10,750 closing basis, S&P 1,100 closing basis, and NASDAQ 2,340 closing basis. A meaningful high volume violation of these lower levels imply a further 10% minimum deterioration to longer term support levels.
In commodities, Gold has been the standout as a barometer of the numerous global financial banking challenges. Gold has quickly recovered the 'margin related' $US200/oz lost in mid August. Discussions are afoot calling for Gold as collateral from the needy dysfunctionl jurisdictions. Unfortunately Greece holds only 111 tonnes of Gold or $US6b. Italy holds a much more respectable 2400 tonnes or $US130b. The IMF quickly chimed in opposing any collateral package which only contributes to further delays and uncertainties. Silver continues to consolidate in the higher $US42-44 level. A move above $US44 would be very positive. Economic sensitive commodities Copper and Natural Gas continue to hold above $US4/lb and $US4/mcf respectively. Crude Oil continues to thrash in the $US80-90/bl level. A close below $US80/bl would imply considerable selling pressure/liquidation. A move above $US90/bl implies a retest of the $98/bl 200 dma level. The Agra grain market has recently moved into new short term recovery high levels and appears poised for a potential 3-5% pullback and consolidation of trend.
In Canada, the key S&P/TSE index now moves in lock step with both the DJIA and S&P. The key financials have reported mixed earnings and outlooks. Dividend hiking TD Bank temporarily moved past RY as the #1 market cap bank for the first time in memory. The Canadian current account moved deeper in the red in the second quarter primarily as a result of the strong loonie. The current account deficit ballooned to 3.4% of GDP in Q2. With a slowing and muted US economy and along with a slowing global economy any commodity price upside should be limited. Increases to the Canadian account deficit should be expected to continue. The Canadian economy also hit a pothole in Q2 registering -.04% negative GDP growth. House prices continues its unbridled growth up another 1.7% for the month of June. The S&P/TSX would turn short term positive above 12,800 and significantly negative below 11,700. The S&P/TSX Venture exchange at 1,810 lags far behind the underlying commodity prices to which they supposedly relate. Earnings for the metal and material sector should continue to be buoyant in this challenging environment. Agra/fertilizer stocks (POT/AGU) have shown considerable short term relative strength.
Bottom Line, global growth in the first half of the year was worse than many expected. The revision of US data suggests the possibility of slipping back into recession territory. The Euro sovereign/credit/banking mess shows the signs of further deterioration. The entire EU coalition appears to be teetering on the brink with many negative serious implications.
The ultimate concern is that should the fiscal intransigents like Greece prevail will the credit dominoes begin to fall collapsing the world economy along with it? Will emerging market strength be enough to offset any OECD damage or fallout? The $64k question being how much/many of these well advertised issues have been discounted in the market? Should the ultimate contrarian look to catch this falling knife? These are unprecedented and dangerous times to say the least with many frayed nerves and wild mood swings.
Our favorite bunga party animal Italian PM Silvio Berlusconi was recently recorded as saying, 'In a few months I'm going to go away and mind my own f****** business. I'm leaving this s***** country that makes me feel like puking!'
Not exactly positive words to engender confidence but thanks for showin' up!
Hot off the heels of the Bernake 'non-action Jackson' low volume short covering rally North American equity markets have once again turned back down in earnest. Rapidly withering economic stats have contributed to this low confidence malaise. European markets couldn't even muster up a weak rally based primarily on a no confidence dire economic outlook.
As North American celebrated the Labor Day weekend Euro bankers, led by Deutsche Bank CEO Joesef Ackermann, terrified investors about the fragility of the Euro banking system. He said the it is an open secret that numerous European banks would not survive having to revalue sovereign debt held on the banking book at markets levels. He further stated that the current Euro situation reminds him of the credit crisis of a few years ago which absolutely paralyzed equity markets. Italy, Germany, France all quickly dropped 5+%. Greek 2yr yields blew past the ridiculous 50% level for the first (and probably last) time ever. The Euro banks got destroyed falling between 6-8%. The Italian treasury must redeem $US20.4 of debts this week and over $US100b by the end of September - the most ever in a single month. Despite the ECB desperately buying and supporting the Italian bond market yields are rising back into dangerous 'hot water' territory. The Italian 10 yr spread to Bunds was past 340 bps - far above the recent ECU invention levels and wider than Spain throughout August. Germany has 'null' patience with the Greek reluctance to bring its debts under control. It is hard to imagine that Greece will be a member of the EU for much longer. UBS quantifies the cost of a Euro break up of between 20 to 25% of GDP in the first year - and incidentially the end of UBS too!
The 'austerity'experiment/solution looks to be ending faster than it began. The complex and thorny issue of a stimulative monetary policy +/or quantitative easing to solve the broken Euro financial system appears to be a foregone conclusion. That which Europeans have traditionally feared is now what they crave the most. Goldman Saks speculates that Euro banks will need close to $US1T or 5 times the amount the IMF proposed. Goldman's latest 'State of the Markets - Long and Short risk Strategies' report effectively calls for a major global structural implosion. Gold galloped past any margin increase threats into all time high territory and it's destiny with $US2,000+/oz. The failure of an ill conceived EU and euro currency paves the way for an epic destructive currency war as 'fiat' systems implode. The Swiss National Bank 'blinked' having intervened with a 'full efforts' campaign to control the their galloping Swiss currency - perversely attacking their own currency while effectively defending the euro. The new minimum exchange rate setting is set at a target of 1.20 francs to the euro. The now vigilant S&P is itching to downgrade every and any blue suited pin stripped Euro banker it sees. To make matters worse the 'contagian' appears to be spreading into Asia as emerging market 'swap spreads' rise in anticipation of further financial fireworks! The new IMF managing director Christine Lagarde handsome white quaff is already getting whiter. This is beginning to look like a Dana White MMA/UFC 'no holds barred' financial throw down spectacle. I'm not sure news could get much worse - but I've been saying that for a while!'
The the US, the Prez and his VP incredulously and ironically spent the long 'labor day' weekend agitating what is left of the organized union movement - pitting the plight of the down beaten worker against greedy corporate cronies. This regurgitated 'blame game' party policy is no doubt a panic response to the demoralizing economic 'goose egg' they produced but did not expect. It should therefore come as no surprise that American employers are creating fewer jobs than they were at the onset of the Great Recession - clear evidence of a crisis of business confidence. US companies added zero new workers in August ending a 10 month job creation run. The deteriorating trend paves the way for more Federal Reserve masterminding. B.H. Obama is putting the final touches on his much awaited 'jobs plan.' Expect a blended reworked infrastructure/payroll tax rehash and a yawn. His new and improved upcoming stimulative 'housing policy/plan' should be much more interesting. Almost every 'blue chip' US bank now faces a new nuclear mega lawsuit by the US Federal Housing Financial Agency over faulty mortgage loans adding another straw to the beleaguered camels back. The amount of damages sought will dwarf the $US20b sought from mortgage servicers in a probe by state attorneys general. The FOMC minutes word count helps to reveal key leadership concerns: unemployment:15, volatility:3, 2011:6, 2012:3, debt:19, inflation:29, and deflation:1. On the week the DJIA closed at 11,240 down 50, S&P 1169 down 8, and NASDAQ even. The key downside levels are DJIA 10,750 closing basis, S&P 1,100 closing basis, and NASDAQ 2,340 closing basis. A meaningful high volume violation of these lower levels imply a further 10% minimum deterioration to longer term support levels.
In commodities, Gold has been the standout as a barometer of the numerous global financial banking challenges. Gold has quickly recovered the 'margin related' $US200/oz lost in mid August. Discussions are afoot calling for Gold as collateral from the needy dysfunctionl jurisdictions. Unfortunately Greece holds only 111 tonnes of Gold or $US6b. Italy holds a much more respectable 2400 tonnes or $US130b. The IMF quickly chimed in opposing any collateral package which only contributes to further delays and uncertainties. Silver continues to consolidate in the higher $US42-44 level. A move above $US44 would be very positive. Economic sensitive commodities Copper and Natural Gas continue to hold above $US4/lb and $US4/mcf respectively. Crude Oil continues to thrash in the $US80-90/bl level. A close below $US80/bl would imply considerable selling pressure/liquidation. A move above $US90/bl implies a retest of the $98/bl 200 dma level. The Agra grain market has recently moved into new short term recovery high levels and appears poised for a potential 3-5% pullback and consolidation of trend.
In Canada, the key S&P/TSE index now moves in lock step with both the DJIA and S&P. The key financials have reported mixed earnings and outlooks. Dividend hiking TD Bank temporarily moved past RY as the #1 market cap bank for the first time in memory. The Canadian current account moved deeper in the red in the second quarter primarily as a result of the strong loonie. The current account deficit ballooned to 3.4% of GDP in Q2. With a slowing and muted US economy and along with a slowing global economy any commodity price upside should be limited. Increases to the Canadian account deficit should be expected to continue. The Canadian economy also hit a pothole in Q2 registering -.04% negative GDP growth. House prices continues its unbridled growth up another 1.7% for the month of June. The S&P/TSX would turn short term positive above 12,800 and significantly negative below 11,700. The S&P/TSX Venture exchange at 1,810 lags far behind the underlying commodity prices to which they supposedly relate. Earnings for the metal and material sector should continue to be buoyant in this challenging environment. Agra/fertilizer stocks (POT/AGU) have shown considerable short term relative strength.
Bottom Line, global growth in the first half of the year was worse than many expected. The revision of US data suggests the possibility of slipping back into recession territory. The Euro sovereign/credit/banking mess shows the signs of further deterioration. The entire EU coalition appears to be teetering on the brink with many negative serious implications.
The ultimate concern is that should the fiscal intransigents like Greece prevail will the credit dominoes begin to fall collapsing the world economy along with it? Will emerging market strength be enough to offset any OECD damage or fallout? The $64k question being how much/many of these well advertised issues have been discounted in the market? Should the ultimate contrarian look to catch this falling knife? These are unprecedented and dangerous times to say the least with many frayed nerves and wild mood swings.
Our favorite bunga party animal Italian PM Silvio Berlusconi was recently recorded as saying, 'In a few months I'm going to go away and mind my own f****** business. I'm leaving this s***** country that makes me feel like puking!'
Not exactly positive words to engender confidence but thanks for showin' up!
Monday, August 29, 2011
Week Ending August 26/11 - Non Action Jackson
All 'short term' attention was focused on the annual monetary eco-geek session in Jackson 'Black' Hole WY. The anticipation was for some kind of modified QE stimulative policy edict. The net result was a political non-event Bernake 'punt' into the hands of the ever present grid locked US Congress. Bernake surprisingly threw most of the strategy onus to the 'fiscal' side of the ledger in an interesting change of pace. The 'economic football' has now spiralled back into the capable hands of the fearless strident double speaking political leadership. The question now is has Helicopter Ben run out of monetary ammunition or has he just 'switched gears' and is in a 'wait and see' mode? His ultimate hope being that no news is good news. In either case it looks like we are going to hear a lot more about taxing and spending until the 'extended' Sept 20 FOMC pow wow.
Rep. Rick Perry's 'treason' allegations of last week did resonate in Wyoming. In Bernake's speech the 'I' word (inflation) occurred 7 times and the 'D' word (deflation) zero.
Lost somewhat in all the baited breath anticipation was a downgraded Q1 GDP figure quickly heading toward an ominous zero (or less) growth reality. It appears that the US economy is as weak as Hurricane Irene. Attention now has turned back to the Euro credit and banking car crash and flooded basements in NYC.
Morgan Stanley calculates that almost 60% of the 8,000b Euro funding that is in place for the largest 91 euro zone banks needs to be rolled over in the next 24 months. Matching short and long term funding will be a serious challenge. Collateral demands are the latest development for nations contributing to the PIIGS bailout. Tremendous political resistance prevails against using tax revenues to further bail out any free loaders.
Former Fed head A. Greenspan temporarily snapped out of his hazy coma with the proclamation that 'the euro is breaking down and the process of its breaking down is creating very considerable difficulties in the European banking system.' Hard to believe that that dude was in charge for almost 20 years.
Also hard to believe is the almost 30% which the key European German DAX index has dropped this month.The future of the EU hinges on a healthy growing German industrial base.
Equally as concerning is the 50+% of Emerging Countries Indexes which are down over 20% (bear market territory) for the year. Short selling curbs may have muted further downside deterioration but a significant amount of weakness has already been priced into key indexes.
In the US, despite negative media frenzy cold hearted bankers are beginning to lend part of their $US1.6T in excess reserves. Small to medium business lending is up almost 10% this quarter. The second quarter GDP revision revealed relentless outstanding corporate profitability. After-tax corporate profits (yes they are taxed) were up over 9% year-over-year and now stand at an all time record high of 10.1% as compared to the GDP. The cash registers are ringing in the sales. Record corporate efficiency stands at $US15,278 per worker in 2011 - up 22% since last year and 50% higher since 2001! Corporate profits are up almost 200% since 2000 while equity prices have dropped almost 20%. Record low interest rates and a weak dollar have been key contributing factors. Domestic equity markets remain largely unimpressed.
Dismal new home sales falling below 300k units are contributing to 2011 shaping up to be the worst year on record. 700k units is the annual rate needed for a healthy/normal market. Months of overhead inventory supply held steady at 6.6 months. On the plus side housing prices have stabilized with strong selected regional strength reported. CBS reported that Obama has spent as much in 3 short years as did GW Bush did in his full 8 year term. On average the national debt increased a whopping $US4.247b during EACH day Obama has been in office. That puts a whole new definition on the term unsustainable. Lots of dough spent with very little to show for it. US consumer confidence is mired at 2008 low levels with unemployment above 9% as housing gropes for a meaningful bottom. We have been treated to lots of rewritten policy, congressional grid lock, and tax turmoil analysis on 'fixing' the economy and repairing the public balance sheet. Perhaps the fearless leadership should now reflect on the departure of the great Steve (Apple) Jobs who's vision, determination, and persistence was the real driver for employment and economic growth. As a society our standard of living improves ONLY when we are surrounded by risk taking visionary entrepreneurs who create goods and services which we need and use. Taxes (or tax cuts) rarely make a difference. Banks and predatory hedge funds definitely do not! America is filled with creative vision and inspiration which desperately needs to be unleashed. Thank you Mr. Jobs for 35 years of excellence!
From the 'financial' engineering' department - no other than the bespeckled, ukele playing, bath tub soaking Oracle of Omaha octogenarian W. Buffet came to the 'psuedo' rescue of Bank of America's in a very lucrative and leveraged $US5b preferred stock investment. Attached with the rich 6% annual dividend are warrants for 700m at-the-money shares which expire in 10 long years. Grandpa Warren's financial 'hug' cost a lot and effectively makes Berkshire BofA's ($US2.2T assets) largest shareholder by a mile. Despite the call from the holidaying Prez from Martha's Vineyard he insists the loan was his 'non' crony capitalistic idea while bubble bathing with his rubber ducky! BofA went from 'not needing funding' to giving away the farm - all in one 'non' phone call. I guess all that guilt ridden 'non taxed' revenue isn't that great a burden for Warren after all? BofA then announced the sale for about half of it's stake in China Construction Bank Corp for $US8.3b and a $US3.3b gain.
On the week the DJIA and S&P rallied 4+% reversing a 4 week downtrend. The DJIA is down -2.58% and the S&P -6.62% YTD.. The Nasdaq rallied a respectful 5.41% but remains down almost 7% on the year. Back to school is in high gear and a serious and sober September is now upon us!
In commodities the margin gremlins attacked the parabolic Gold rise which resulted in a sharp and sudden $US200/oz contraction - the biggest drop since March 2008. Shanghai was the latest to increase Gold margin a very healthy 26%. At that time the Gold RSI registered a very over bot and over extended 85 reading. Gold closed at $US1,780/oz down $US-72.55 on the week and up +25% YTD. The drop comes just days after the GLD gold trust officially dethroned the SPY (S&P550) fund as the largest ETF by market value. Key levels for Gold are $1,800 (10 dma), $US1,725 (50dma), and $US1,525 (200dma). September to December represents a period of 'traditional' seasonal weakness for bullion. Silver has held the $US40 level representing a slowly improving gold-silver ratio of approximately 45x's. Key levels for Silver are $US38 (intermediate term up trend line), $US37 (200dma), and $US43.50 on the upside (the recent closing high). Crude Oil prices remain range bound in the $US80-88 consolidation area. A break and close below $US80 would represent significant weakness. A move above $US90 would be met with considerable resistance. Both Copper and Nat Gas are holding support levels above $4 per pound and MCF respectively The Agra sector continues to emerge with Corn well on it's way to $US8/bu and Soy Beans measuring to $US16/bu. Continued commodity inflation will more than likely rekindle political turmoil in dependant & vulnerable jurisdictions. With the US treasury sector having effectively destroyed the short end of the yield curve and creating 'no risk free' rates of return havoc the 10 & 20 year bonds look technically vulnerable and over-extended.
In Canada, an early 'October Fest' celebration was held at RIM offices in Waterloo Ontario marking the resignation of Apple steamroller CEO Steve Jobs. RIM held the $22Cd level and is with a loonie of $30Cd based on new product releases, patent repricing, and Android compatibility. Analysts are now jumping back on the RIM band wagon with revisions and upgrades. RIM has a long track record of being a great buy when things look the worst!
Stunning 'head rolling' demands from the OSC (Ontario Securities Commission) for embattled Chinese forestry firm Sino-Forest executives marks what looks to be the beginning of the end for the RTO former blue chipper. As far as Sino is concerned $$$ does not grow on trees and is a litigation lawyers dream come true.
Canadian corporate earnings are showing tangible deterioration as profits fell 4.9% on a sequential basis in Q2 - the weakest showing in the last 24 months.Profit margins remain resilient reflecting the improved performance of Canadian producers productivity. Operating profits are at pre-recession highs despite a 12% drop in revenue. Manufacturers are well positioned to benefit from a pick-up in growth should the Cd$ weaken and/or the US economy improves.
The Canadian major banks earnings reporting parade has been mixed the BMO surprising to the upside and RY showing slightly less than expected numbers.
My attention is fixed on the precious metals equities which now trade at a multi-decade low of 8x's cash flow on average. Aurico Gold announced a 60+% takeover premium for acquisitive Northgate Minerals - an indication how traditionally undervalued much of the mining and material sector is. Any further merger/takeover activity is expected to fetch similar premiums.
The S&P/TSX index closed up +278 points or 2.32% on the week but is down -8.61% YTD. The S&P/TSX Venture index turns short term positive above 1,800 with the possibility of returning to 2,000 resistance levels.
Bottom Line, breaking news of a 'new' banking deal in Greece may dispel a percentage of the pervasive extreme short term negativity. Nervous hedge funds may now be inspired to cover short positions and more importantly may suggest critical lower interest rate lending. The US equity market has priced in a fairly major earnings recession in 2012 - a normally positive election period. Earnings will need to fall significantly in order to return to historical PE ranges. Higher US interest rates and a strengthening US dollar represent significant upside headwinds. The late July equity swoon inflicted significant technical damage to major indexes. I suspect key longer term accounts are already braced for the downside and are relatively under-invested with significant cash positions. A contra-trend rally will more than likely be contained at levels of 5-8% higher - the significant distribution levels and psycological areas from which they recently broke down.
I remain firmly perched on the fence and I think it is fair NOT to rule out any possibility in this quickly changing financial landscape! The mix of fear, uncertaintly, and lots of 'non earning' idle cash on the sidelines can be an exhilarating and lethal combination!
Rep. Rick Perry's 'treason' allegations of last week did resonate in Wyoming. In Bernake's speech the 'I' word (inflation) occurred 7 times and the 'D' word (deflation) zero.
Lost somewhat in all the baited breath anticipation was a downgraded Q1 GDP figure quickly heading toward an ominous zero (or less) growth reality. It appears that the US economy is as weak as Hurricane Irene. Attention now has turned back to the Euro credit and banking car crash and flooded basements in NYC.
Morgan Stanley calculates that almost 60% of the 8,000b Euro funding that is in place for the largest 91 euro zone banks needs to be rolled over in the next 24 months. Matching short and long term funding will be a serious challenge. Collateral demands are the latest development for nations contributing to the PIIGS bailout. Tremendous political resistance prevails against using tax revenues to further bail out any free loaders.
Former Fed head A. Greenspan temporarily snapped out of his hazy coma with the proclamation that 'the euro is breaking down and the process of its breaking down is creating very considerable difficulties in the European banking system.' Hard to believe that that dude was in charge for almost 20 years.
Also hard to believe is the almost 30% which the key European German DAX index has dropped this month.The future of the EU hinges on a healthy growing German industrial base.
Equally as concerning is the 50+% of Emerging Countries Indexes which are down over 20% (bear market territory) for the year. Short selling curbs may have muted further downside deterioration but a significant amount of weakness has already been priced into key indexes.
In the US, despite negative media frenzy cold hearted bankers are beginning to lend part of their $US1.6T in excess reserves. Small to medium business lending is up almost 10% this quarter. The second quarter GDP revision revealed relentless outstanding corporate profitability. After-tax corporate profits (yes they are taxed) were up over 9% year-over-year and now stand at an all time record high of 10.1% as compared to the GDP. The cash registers are ringing in the sales. Record corporate efficiency stands at $US15,278 per worker in 2011 - up 22% since last year and 50% higher since 2001! Corporate profits are up almost 200% since 2000 while equity prices have dropped almost 20%. Record low interest rates and a weak dollar have been key contributing factors. Domestic equity markets remain largely unimpressed.
Dismal new home sales falling below 300k units are contributing to 2011 shaping up to be the worst year on record. 700k units is the annual rate needed for a healthy/normal market. Months of overhead inventory supply held steady at 6.6 months. On the plus side housing prices have stabilized with strong selected regional strength reported. CBS reported that Obama has spent as much in 3 short years as did GW Bush did in his full 8 year term. On average the national debt increased a whopping $US4.247b during EACH day Obama has been in office. That puts a whole new definition on the term unsustainable. Lots of dough spent with very little to show for it. US consumer confidence is mired at 2008 low levels with unemployment above 9% as housing gropes for a meaningful bottom. We have been treated to lots of rewritten policy, congressional grid lock, and tax turmoil analysis on 'fixing' the economy and repairing the public balance sheet. Perhaps the fearless leadership should now reflect on the departure of the great Steve (Apple) Jobs who's vision, determination, and persistence was the real driver for employment and economic growth. As a society our standard of living improves ONLY when we are surrounded by risk taking visionary entrepreneurs who create goods and services which we need and use. Taxes (or tax cuts) rarely make a difference. Banks and predatory hedge funds definitely do not! America is filled with creative vision and inspiration which desperately needs to be unleashed. Thank you Mr. Jobs for 35 years of excellence!
From the 'financial' engineering' department - no other than the bespeckled, ukele playing, bath tub soaking Oracle of Omaha octogenarian W. Buffet came to the 'psuedo' rescue of Bank of America's in a very lucrative and leveraged $US5b preferred stock investment. Attached with the rich 6% annual dividend are warrants for 700m at-the-money shares which expire in 10 long years. Grandpa Warren's financial 'hug' cost a lot and effectively makes Berkshire BofA's ($US2.2T assets) largest shareholder by a mile. Despite the call from the holidaying Prez from Martha's Vineyard he insists the loan was his 'non' crony capitalistic idea while bubble bathing with his rubber ducky! BofA went from 'not needing funding' to giving away the farm - all in one 'non' phone call. I guess all that guilt ridden 'non taxed' revenue isn't that great a burden for Warren after all? BofA then announced the sale for about half of it's stake in China Construction Bank Corp for $US8.3b and a $US3.3b gain.
On the week the DJIA and S&P rallied 4+% reversing a 4 week downtrend. The DJIA is down -2.58% and the S&P -6.62% YTD.. The Nasdaq rallied a respectful 5.41% but remains down almost 7% on the year. Back to school is in high gear and a serious and sober September is now upon us!
In commodities the margin gremlins attacked the parabolic Gold rise which resulted in a sharp and sudden $US200/oz contraction - the biggest drop since March 2008. Shanghai was the latest to increase Gold margin a very healthy 26%. At that time the Gold RSI registered a very over bot and over extended 85 reading. Gold closed at $US1,780/oz down $US-72.55 on the week and up +25% YTD. The drop comes just days after the GLD gold trust officially dethroned the SPY (S&P550) fund as the largest ETF by market value. Key levels for Gold are $1,800 (10 dma), $US1,725 (50dma), and $US1,525 (200dma). September to December represents a period of 'traditional' seasonal weakness for bullion. Silver has held the $US40 level representing a slowly improving gold-silver ratio of approximately 45x's. Key levels for Silver are $US38 (intermediate term up trend line), $US37 (200dma), and $US43.50 on the upside (the recent closing high). Crude Oil prices remain range bound in the $US80-88 consolidation area. A break and close below $US80 would represent significant weakness. A move above $US90 would be met with considerable resistance. Both Copper and Nat Gas are holding support levels above $4 per pound and MCF respectively The Agra sector continues to emerge with Corn well on it's way to $US8/bu and Soy Beans measuring to $US16/bu. Continued commodity inflation will more than likely rekindle political turmoil in dependant & vulnerable jurisdictions. With the US treasury sector having effectively destroyed the short end of the yield curve and creating 'no risk free' rates of return havoc the 10 & 20 year bonds look technically vulnerable and over-extended.
In Canada, an early 'October Fest' celebration was held at RIM offices in Waterloo Ontario marking the resignation of Apple steamroller CEO Steve Jobs. RIM held the $22Cd level and is with a loonie of $30Cd based on new product releases, patent repricing, and Android compatibility. Analysts are now jumping back on the RIM band wagon with revisions and upgrades. RIM has a long track record of being a great buy when things look the worst!
Stunning 'head rolling' demands from the OSC (Ontario Securities Commission) for embattled Chinese forestry firm Sino-Forest executives marks what looks to be the beginning of the end for the RTO former blue chipper. As far as Sino is concerned $$$ does not grow on trees and is a litigation lawyers dream come true.
Canadian corporate earnings are showing tangible deterioration as profits fell 4.9% on a sequential basis in Q2 - the weakest showing in the last 24 months.Profit margins remain resilient reflecting the improved performance of Canadian producers productivity. Operating profits are at pre-recession highs despite a 12% drop in revenue. Manufacturers are well positioned to benefit from a pick-up in growth should the Cd$ weaken and/or the US economy improves.
The Canadian major banks earnings reporting parade has been mixed the BMO surprising to the upside and RY showing slightly less than expected numbers.
My attention is fixed on the precious metals equities which now trade at a multi-decade low of 8x's cash flow on average. Aurico Gold announced a 60+% takeover premium for acquisitive Northgate Minerals - an indication how traditionally undervalued much of the mining and material sector is. Any further merger/takeover activity is expected to fetch similar premiums.
The S&P/TSX index closed up +278 points or 2.32% on the week but is down -8.61% YTD. The S&P/TSX Venture index turns short term positive above 1,800 with the possibility of returning to 2,000 resistance levels.
Bottom Line, breaking news of a 'new' banking deal in Greece may dispel a percentage of the pervasive extreme short term negativity. Nervous hedge funds may now be inspired to cover short positions and more importantly may suggest critical lower interest rate lending. The US equity market has priced in a fairly major earnings recession in 2012 - a normally positive election period. Earnings will need to fall significantly in order to return to historical PE ranges. Higher US interest rates and a strengthening US dollar represent significant upside headwinds. The late July equity swoon inflicted significant technical damage to major indexes. I suspect key longer term accounts are already braced for the downside and are relatively under-invested with significant cash positions. A contra-trend rally will more than likely be contained at levels of 5-8% higher - the significant distribution levels and psycological areas from which they recently broke down.
I remain firmly perched on the fence and I think it is fair NOT to rule out any possibility in this quickly changing financial landscape! The mix of fear, uncertaintly, and lots of 'non earning' idle cash on the sidelines can be an exhilarating and lethal combination!
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