Traders,
The VIX has been dropping below 30 and is now close to 25, even intra-day statistical volatility is starting to contract. Volume is also down (maybe “Sell in May and Go Away” has returned). Congress in on break (again) and we have a holiday (short week) ahead. While it is unlikely we will see any volatility going into the holiday – don’t count it out either. Fear is leaving the market, consumer confidence is up, and risk appetite is expanding. I am still waiting for the kid at the coffee shop to give me a stock tip, then I know the last of the buyers are in. I hope we see a mild summer and low volatility to give the economy time for the green shoots to turn into flowering plants, but I think as volatility contracts and the fear subsides that coming into the end of the 3rd quarter and beginning of 4th quarter we are going to be injected with volatility once again. Luxury spending is going to be down and unless we can see the consumer gain in jobs, earned income, and access to credit it is going to be a weak holiday season this year and thus we could see volatility return. For now – enjoy the summer, but remain vigilant.
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AIG – the never ending losses.
The bailed out ($182 billion of U.S taxpayer money) insurer said that valuations on its CDS (credit default swaps) may create even MORE losses. The “HOPE” was for a recovery and that credit would materialize, but that is not happening. Right now we are still trying to find a bottom and while the stock market did rally, the economy has yet to. That has created a sharp increase of risk in almost the $200 billion in CDS that AIG sold. About half of the $200 billion is tied to corporate loans and the other half tied to mortgage back securities. The problem is a one-two punch – credit risk in corporations have not eased, but increased and foreclosures continue to mount.
It looks like the U.S. taxpayer may have to pony up some MORE money for this nationalized insurance company. Will banks receive more AIG money via this backdoor bailout company?
http://www.bloomberg.com/apps/news?pid=20601087&sid=a3c4Dhbj8JYM
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Dollar continues to weaken
Ironically as optimism as to a global recovery expands the weaker the dollar gets, as the appetite for risk expands – money is being put to work. The commodity sector is expanding, especially as China is converting its paper holdings (U.S. dollars) into tangible assets (hard commodities). It is no longer a supply and demand equation, but a conversion of paper to intrinsic value. That has spurred a investment run out of dollar holdings into everything but dollars. Typically you would think this would buoy an economy as investors rush to in, but we are seeing a diametrical relationship between the economy and the equity/commodities market. The markets are rallying (across the board) but the economy is continuing to weaken. Governments (not just the U.S.) are flushing the system with printed money to bail out their respective economies and those countries are falling into two camps. Countries that ARE seeing economic growth (and not just market growth) and countries that are not.
This morning on CNBC an analyst (forgot his name) made an interesting observation, he said that we mislabel the American people as consumers. He said they are consumers second and producers first. A consumer cannot consume until he produces something and creates earned income. This nation over the last couple of decades has relabeled the producer to a consumer because of the massive growth of credit availability which lead to massive luxury spending. He is right, as I have been making that observation by saying that we need to see jobs increase and earned income increase before we can see consumers begin to consumer, I was making his case for him. We need to see Americans become producers to HAVE earned income, at which point they CAN consume.
But what happens at the end of this optimism global recovery? I had previously said that countries fall into two camps; Debt and Non-Debt nations. Debt nations like our own is not seeing a growth in infrastructure or jobs, but rather the trillions we are spending is covering leveraged losses. The Non-debt nations, like China are actually expanding – build massive roads, cities, railways, seaports, etc. They are buying commodities as fast as they can, not just to build, but to stockpile for future building. Sometime in the near future we will SEE the difference resolve itself, as this nation continues to struggle and measure green shoots and wonders when we will get back to even 3% growth, the dollar will continue to weaken and inflation will increase (not just because of more dollars) because the Non-debt nations will be the “Haves” and this nation will be the “Have nots”.
http://www.bloomberg.com/apps/news?pid=20601087&sid=ap1UOGAQkews
Another story as to the hidden ramping of coming inflation. While we might not see it now, it is no doubt building.
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Futures Pre-market
The futures are pretty flat and volatility is contracting. Wait and see period.
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Support / Resistance
Are we ranged bound for the summer?
INDU 8250 (8500) 8750 (We are back up to that mid-resistance level that we broke down from last week. It could be considered the pivot point in the range)
NDX 1400 (1450) 1500 (Again – another range?)
SPX 900 / 950 (another range?)
RUT 500 / 540 (range?)
It could be range bound if volume is unable to drive the truck through support or resistance, but for now with a holiday upon us and light summer volume we might not see the drive either way to break out. VIX continues to drop and the skew is coming out as well.
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Conclusion
Consumer Confidence is reflecting confidence, but that does not translate into jobs, credit or spending. It does translate into a decline in fear and an increase in risk appetite. Remember the market is heavily perception driven and certainly not fundamentals. For if it were fundamentals, we certainly would not of seen the rally (nor sell off) to the extremes. Maybe it is a pause as we wait to see if those green shoots really have any roots, for now they are still just green shoots and lots of optimism.
Is this a quite period before the final quarter storm, will we see inflation this year or will it be pushed off until after a possible failure of consumer growth in the 4th quarter, will we see the BRIC nations take a more decisive action towards an alternative world reserve currency or debt product, will these nationalized companies return to the private sector, will government continue to take a deeper role in the private sector, will the dollar strengthen before it continues to fall? These and many other questions will (and should be) contemplated over this slow summer period. And while we take an active role to balance our portfolio we need to continue to consider longer term investments and hedges that take these possible risks into consideration.
Traders,
Last week saw a gap down, testing at some short-term support areas, and a rally to close the gap for a net week that was pretty much unchanged. The market seems to have absorbed the perception that the recession is coming to a close, but the uncertainty of growth is creating concern. Wilbur Ross (on CNBC this morning) was asked – Is the recession over? There has never been 3 consecutive months of consumer confidence heading higher in a recession. He responded, if we look at it as a whole (rather than growth) the overall number is not great. But what does consumer confidence really mean, housing market is still falling, car sales are off, and the job data still reflects negatively. He is right, what does it matter what the consumer confidence is if they are not spending money and housing prices continue to fall. Ross concluded with something I have been hammering on, the CONSUMER. It is ALL ABOUT THE CONSUMER. If the consumer is not rebounding, then the economy cannot rebound. It will be the consumer that determines when we see a recovery, not a poll of questions asking them if they are confident.
CNBC Video, Ross on the Economy: http://www.cnbc.com/id/15840232?video=1166978967&play=1
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Financial firms selling their own share?
We had seen some banks selling shares back when things were looking bleak to raise much needed capital, the perception lately is the banks are on firmer ground. But if that is the case why are they selling their own shares? Maybe they think this is a great opportunity after their stocks had rallied significantly or maybe they need capital. The big problem, which I don’t think has been addressed in this credit crisis, is the reduction of leverage at the financial institutions. While consumers are forced to deleverage, the banks had been bailed out by the government, had accounting rules changed to their advantage to maintain leverage positions, and have raised capital privately and publicly. Sure we are seeing a demand for new regulations and regulatory bodies – but the fundamental reason of leverage has not been addressed. There is additional questions about the banks profit and returns for the 1st quarter as well – since they changed from investment firms to banks and the addition of the account rules. Some have said that returns should be treated with a skeptical eye and now with JP Morgan selling their own shares is bringing some more criticism to the table. Sure the big three (Goldman, Morgan Stanley, and JP Morgan) repaid the TARP money, but their remains some issues – mainly leverage and accounting – that one should be wary about. Not that there is anything to be concerned about fundamentally – the concern is that it is so convoluted and complex to make heads or tails out of – from Fed Discount window access, accounting standards, leverage, back-door AIG payments, etc. Instead of becoming more clear, it has become more foggy.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aYlWNEyLQzPk
___________________________________________________ GE in government sights!
GE is now in the sights of the U.S. government. As legislation is being drafted to take more action over banks and financial firms, GE is could fall into the trap. The problem with GE is GE Capital, which also took bailout money. Analyst mentioned that GE was able to weather the storm better than most because of their international manufacturing business, which helped off-set losses in the financial division. But the government may want to breakup companies like GE that have a rather large financial operation as part of their conglomerate. All eyes are on Congress as to how this new legislation will pan out.
Just a few weeks ago everyone thought Cap-n-Trade and the energy bill would not pass the House, to everyone’s surprise it did pass and now we wait for the Senate. Cap-n-Trade could be the litmus test for more redefining and radical legislation. GE’s CEO Immelt sent a memo out too all employee’s saying that GE Capital is here to stay. GE will be putting forth a massive lobbying effort to halt legislation would could create a break-up.
http://www.economist.com/businessfinance/displaystory.cfm?story_id=13900176
http://www.bloomberg.com/apps/news?pid=20601087&sid=aWPfkE8OtwvM
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Futures Pre-market
The futures are slightly up and in-line with fair value. Expect a slightly higher to mix opening.
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Support / Resistance
INDU 8250 / 8500 (We pulled off a little from 8500, but still up near there. Will we get back over it?)
NDX 1400 / 1500 (There is some narrower support/resistance in the 1425 to 1475 range – but this index has more volatility than the others.)
SPX 900 / 925 (We are still below the 20-day moving average, but did get back up off that 900 support area.)
RUT 500 (Like the SPX we tested 500 – keep an eye on 500 in the RUT and 900 in the SPX – they are key areas.)
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Conclusion
Cap-n-Trade with a massive amount of amendments (earmarks and pork) passed the house. Additionally some trade/tariff/protectionism had been added as well, creating even more concern. Buffet, a big Obama supporter, even said this amounts to a tax and is more of a hindrance and step back, then a step forward. It “seems” good – new energy and green planet legislation, but is it really? The Energy Czar was on CNBC and Ross (the guest host) asked pointed questions, like why doesn’t the energy bill have more on using rail (that costs ¼ of trucking)? The Energy Czar was not that impressive, she avoided almost every question and was on the marketing/spin parade constantly repeating, this will create millions of green jobs and make the U.S. the leader in green energy. I also thought Obama was going to come down on all this earmarks and pork issues, this bill has ballooned to over 1300 pages. CNBC joked with here that it looked like “War and Peace” and asked if she read ALL of it. She of course skirted that question and said that she (and her staff) have been following it closely, when asked again about reading it – she went back into marketing mode. This energy bill could also be the sign of more legislation make its way through that could move to a more nationalistic, higher taxes, and protectionism. Now all eyes are on the Senate.
CNBC VIDEO with Energy Czar: http://www.cnbc.com/id/15840232?video=1166982716&play=1
Traders,
After a shaky start and concerned about the jobless claims the market began to rally and did so in quick fashion to fill the gap down from Monday. Bernanke came under flak and there seems to be more questions than answers resolved, it really comes down to - did Bernanke do what he thought was right vs. doing so within the scope of the law. Some argue that time was pressing and something needed to be done quickly, while others argue that it still needs to conform to regulation. While it might not seem like a big deal, the larger concern that looms is that the Fed’s role, power, and oversight is expected to be greatly enhanced and additionally it looks like Summers (who had Obama’s ear) is eyeing for Bernanke’s seat. There is certainly some agendas that are playing into the cards and in my opinion this is not the time to play politics as the economic recovery should take priority.
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Consumer Spending rises?
The Commerce Department said that consumer spending rose .3%, followed by no change in April, which came in line with economic forecasts. Some economist reflect that the increase was significantly impacted by the stimulus checks and are concerned about future growth. Chris Rupkey (chief financial economist for Bank of Tokyo) stated that while the recession is ending the purchases are likely to be modest until job losses ease and companies start hiring. He is right that is the key – a government injecting of capital “stimulus” will no doubt reduce consumer debt and increase purchases, but that is a onetime injection (unless we see more of them). The consumer needs to eventually stand on his own earnings and equity, not off of government stimulus. While consumer spending rose (as expected) the other side of the coin showed wages and salaries however dropped .1% in May, reflecting the effects of the job losses.
As I continue to mention it is the consumer that drives the economy and until jobs are created, job losses stop, consumer spending is based on EARNED income and not stimulus, and wages grow moderately vs. inflation. Until we see those stars align the future recovery is going to struggle.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aETQTTCxeUhw
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China renewing their call for a reserve currency
China’s central bank is gain making a strong request (or demand) for a new global currency to replace the dollar and suggested the International Monetary Fund should manage more of the members’ foreign-exchange services. “To avoid the inherent deficiencies of using sovereign currencies for reserves, there’s a need to create an international reserve currency that’s delinked from sovereign nations,” People’s Bank of China.
China has the world’s largest currency reserve of more than 1.95 TRILLION dollars and has taken the first steps to begin a large diversification project, including (along with Russia and Brazil) purchasing IMF debt rather than U.S. treasuries.
The truth, which maybe we Americans are too arrogant to realize, is that we NEED China to continue to purchase our government debt (U.S. Treasuries) to keep our spending alive. The counter argument is they NEED us more to sell their wares. True, but the U.S. (while a large consumer) is not the only consumer of Chinese products. Additionally the dependent on U.S. consumers purchasing Chinese products vs. the growth of their domestic and other foreign purchases was on the decline before the recession and after the recession we saw a huge slow down (almost a halt) as U.S. consumers quickly became tapped out (no money and no credit). China suffered, as their GDP shrank from double digits to single digits – but is still a massive growth rate. They saw they could survive and grow without the massive reliance being the focal point of trade, now it is time to cut the cord and they know that.
The reality is this is not going to happen overnight and their probably be huge struggle to move in this direction, however – we are seeing the BRIC (Brazil, Russia, India, China) moving on their own. It is quite possible they move in this direction without the blessing of the rest of the world. They hold all the cards, they could create their own new world currency with the IMF and then demand payment in that currency for any of their goods. That would FORCE the rest of the world to either move in that direction or face the currency exchange risk and possible massive inflation.
I think the cards are in the BRICs hand, they are the big stack at the table and they can pretty much call the shots.
Keep an eye on this story…. It is sending some volatility into the dollar as it continues to slip against foreign currencies. Expect MORE volatility not less.
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Futures Pre-market
The futures are off in the pre-market a little, we did close the Monday gap and close to those resistance levels so it might be hard to get some follow through to the upside.
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Support / Resistance
We are almost back to those resistance levels – we might see some resistance here.
INDU 8250 / 8500 (Right below the 8500 mark – we might struggle to get through that and see the market come off a little.)
NDX 1425 / 1475-1500 (The NDX is more volatile than most other indices – between 1475 and 1500 it is a resistance zone – we are right at the edge of that zone.)
SPX 900 / 950 (We are right in the middle and are looking to give up a little at the opening.)
RUT 500 (Made a good move up yesterday to get above 500, but we may revisit it this morning. Watch the close.)
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Gold 950 (We did have a pullback, but not down to 900 – now we are moving up as the dollar is questioned again by the Chinese.)
Silver 14+ (We are bouncing back up with gold)
Oil 70? (We fell off and now are back up – the dollar is playing a role in this.)
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Conclusion
Bernanke is getting grilled by Congress, Summer is rumored for the job, more power to the Fed is being considered, Congress STILL hasn’t been able to get a report (audit) on the Fed (suspected to have more than 9 trillion in debt), but the Fed continues to print money to buy treasuries and mortgage debt securities. This is absurd and while the rest of the world sees it, has commented on it, is concerned enough to call for a reserve currency – our Congress, Administration, and Media act as if “Green Shoots” are springing up everywhere. Are we really that blind to the circus that is going on.
I read an excellent essay on political policy as a measurement of GDP/Debt ratio and how we CAN recover or NOT. If you are interested in the essay, send me and email and I will forward it to you.
Stay Frosty – while the VIX is below 30, I think we could have a serious pop again in the future (sometime this year.)
Traders,
Yesterday seemed like we would of rallied and retraced some of Monday’s sell off, but the second half of the day saw weakness return and while the NDX and SPX remained higher, the INDU gave up ground. Just like at the resistance level the previous week, the market is trying to figure out our future. The Oracle news coupled with the Durable Goods order jumping initially gave the market some hope.
So we maybe at a push-pull area in these support levels as we were at the resistance levels. Really, it will be the perception, hope, and optimism that will get this market off the mat again and return back to its upward momentum. Bernanke’s testimony, bond auctions, and weekly government data will continue to inject short-term jolts up and down into the market place.
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Initial Jobless claims rise!
After what seemed to be “green shoots” in the jobs market as the jobless claims seem to be diminishing and actually seeing the month-over-month and those that remain on unemployment drop or flatten, today’s initial jobless claims sent a jolt into the market as it rose by 15,000 to 627,000 in the week ending June 20th and the number of people that remain on unemployment gained by 29,000 to 6.74 million. Economist average was 600,000 and that it would decline not rise.
On analyst mentioned this morning that some of that is additional fallout from the auto sector and not necessary reflective of the national average and this could be just a one week anomaly. We can only “hope.”
The news did snap the futures gain in the pre-market and showing a lower opening by a few points.
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Short Interest Rises for the first time since March
We heard last week about more companies selling their own shares to raise money, insiders selling their shares, and now short interest in the S&P 500 has risen the first time since March rally. The general sentiment from a measurement of short-interest is expecting some retracement. Short Interest in the S&P 500 rose to 9.8 billion shares as of June 15th (a gain of 1% from a week earlier). A sector that is seeing a rise in short-interest is Health Care – as the fight begins to heat up in Washington and everyone is wondering how the new National Health Care will be delivered. One item that I hear over and over is that margins for Health Care facilitators is going to be squeezed regardless of the outcome. Now investors are making that bet and taking more Bearish positions in that sector.
There is also a general concern after the market made a huge rally from March’s lows. It was certainly momentum rather than fundamental, but the “green shoot” talk is injecting hope that fundamentals will return to keep the momentum along.
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Treasury Auctions
I have never seen more traders and professionals who do NOT trade Treasury Bonds pay close attention to the auctions. The pay close attention to how much the Federal Reserve is buying and the price/rate. The market is watching as it is trying to determine future inflation risk and also credit risk. The secondary market is becoming very thin and thus the primary auction is getting all the attention. The auctions amounts are huge (with a total of 3.5 trillion needed to be sold), but in this global economy and concerned optimism is seeing the amount of bidders is thin and we watch in hope that their depth is big enough to take down 100s of billions. The 5 year and 10 year have sold off (yield rising) and sitting in the 2.70 and 3.70 areas respectively.
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Futures Pre-market
The futures are off after the initial jobless claims unexpectedly were up, erasing gains in the futures. Expect a drop in the opening.
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Support / Resistance
We saw some of the indices get up and above those key levels, do they hold?
INDU 8250 / 8500 (The INDU had rallied and then sold off into the close to finish at the 8300 area – futures are pointing to a 8250 opening.)
NDX 1425 / 1450 (We were above the 1450 area for most of the session to close just slightly below it.)
SPX 900 (We closed above 900, but are looking down at the opening at 895, watch the close.)
RUT 500 (We made a good run, but not enough – we closed just below at 495 and now looking at a 490 opening.)
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Conclusion
We are certainly in a limbo area and I think that hidden volatility is ramping, sure the VIX is below 30, but the statistical volatility could see a jump, but that doesn’t mean down, we could just as easily see a big rally. The signs are pointing to some market pressure (see rise in short-interest) – but perception and momentum has ruled the day for the last few months, all eyes will now be on Bernanke and the Fed bringing confidence back to the markets.
We might not be seeing inflation yet, but no doubt the variables that can increase it are building. Additionally the light volume is also creating some concern and injecting some intraday volatility.
Stay Frosty.
Traders,
After the big slippage on Monday, Tuesday saw another pause. The market is sure moving in fits and starts – between “green shoots” and the negative outlook of a very slow recovery. There was an interesting article in the Economist (an outside editorial) about the “double dip” recession in the 1930s. It seemed in 1933 that the government stimulus was working, unemployment had drop from the 20s into the low teens. They saw “green shoots”, but in a couple of years the Federal Reserve had switched from an easing to a contracting fiscal policy. The guest editorial (Christina Romer) goes on to explain that the government should continue the stimulus ( “print money”) until we reach full employment, so we don’t have a double dip recession. I am not totally buying that argument, simply because we can (if we have not already) crossed a point of no return. She (as many others) seem to overlook a huge difference between the 1930’s New Deal policies and those of today – we are now a GLOBAL economy using a FIAT currency. That means that protectionism, which worked exceedingly well in the 1930s as well as the building of infrastructure. We had our OWN energy, manufacturing, commodities, etc. We didn’t rely on imports and we were an EXPORT nation. That simple realization in my mind is why a return to New Deal policies can be our downfall. Additionally – the New Deal spending went right to the bottom line (roads, dams, bridges, buildings, etc.) – so far the nation has spent trillions of dollars on NOTHING (just paying off other companies losses). The money the government is spending is NOT going to any bottom line or building anything. It is just going to shore up GM, Chrysler, AIG, Freddie, Fannie, Banks. And it has saved nothing, we have poured money into a system and it didn’t keep these companies from shedding thousands of jobs, it didn’t keep them from going bankrupt, it did little other than restore confidence. We just spent trillions on a giant marketing “Confidence and Hope” campaign with nothing to show for it. At the end of the day we still rely on foreign nation for food, energy, and goods – that is a core component that our government has not calculated into their plans. http://www.economist.com/businessfinance/displaystory.cfm?story_id=13856176
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Durable Goods
We got a injection of good news – Durable Goods orders unexpectedly jumped in May – showing a signs of the recession easing. Again – another story of “green shoots”. It is certainly good news, but a 1.8% gain is paltry (really showing a stabilization) in the overall scheme of things. The excitement is that it is positive, as economist expected a drop of .9%. I am not trying to knock the news – but I think it shows that we are very close to a bottom, but it doesn’t change the longer term forecast of very slow growth.
GE’s Vice Chairman, John Rice, said “I am not particularly of the green shoots group yet, I have not seen it in our order patterns yet.” That is an interesting view, GE being a large conglomerate with global and domestic market share. Another economist on Bloomberg this morning pointed to the volatility in the numbers – that might not reflect a true reflection of growth or contraction. He pointed out that the bankruptcies of Chrysler and GM is injecting volatility into the numbers additionally some of the order for larger goods, such as aircrafts can push orders back-n-forth between months. Concluding that looking at a larger average, rather than a month-to-month, will smooth out the volatility and give better resolution as to whether we are growing or contracting. http://www.bloomberg.com/apps/news?pid=20601087&sid=apkAeuPJBaJw
The market unlike any time in recent history is really hanging on every number that comes out and then responds in a knee jerk reaction. Again, it’s good news (on a month over month basis) – looking at revisions and closer at the numbers reviles some volatile concerns.
Futures had a decent spike to the upside after the news came out.
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ORACLE driving higher
Oracle, like Microsoft, has a dominate market share in their sector of the market. Their acquisitions (which seems year after year) of competitors or companies that can expand market share or introduce new vertical markets has expanded the company into the forefront. Their reoccurring contractual obligations (licensing of software) is a brilliant business model, as it creates long-term commitments by clients to continue to update their user licenses. Managing data is crucial for every single business in the world and Oracle has put themselves in that sweet spot. They reported a fourth quarter profit that exceeded analyst expectations and the stock is now up $1 in the pre-market.
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Futures Pre-market
The futures are driving higher after Oracle news and Durable Goods showing the recession is coming to a close. The spread is in, expect a gap up at the opening.
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Support / Resistance
Is this a short-term support and buying opportunity?
INDU 8250 / 8500 (We were pretty flat yesterday – we a good sell off that rebounded into the close. The news today could drive us back up.)
NDX 1425 / 1450 (We are right at that 1425 number – which is short-term support.)
SPX 900 (We closed just below it, but up on the day. Watch the close to see if we close above it.)
RUT 500 (We are still looking below it in the pre-market, but closing above it would build confidence.)
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Conclusion
This week we are seeing a huge amount of treasuries being sold (over $100 billion) as we chip away at that $3 trillion deficit. All eyes will be on the Fed and how much they will take down – which could create concern and more volatility in the market. We saw the dollar drop yesterday against foreign currency and there is a story about the Swiss Franc being weak this morning http://www.bloomberg.com/apps/news?pid=20601110&sid=aY93d1pbmed8 , however we are already seeing more pressure on the dollar this morning – watch those auctions.
The Durable Goods number has the “Green Shoot” talk covering the financial airways this morning, the question is how much will that impact the market. The opening is looking higher on that news – but I think we could see some volatility depending on how those treasury auctions pan out.
Traders,
We certainly didn’t hold those support levels or see a rally going into the close. If we look at the S&P PE ratio it had been rather high, in spite of the economic circumstances. Combine that with news about companies selling shares to raise money and a huge increase of insider selling – the tipping point might have been reached or has it? There are those that think this is a little pressure release just like we had at the end of April, where the indices pulled off a little before ramping up again. However, it would be wise to remain cautious none the less.
The big question that is starting to make the financial news talk shows, can Bernanke stop the printing train? The Fed Governors have all said in recent weeks (including Bernanke himself) that they are working or have a plan to reverse course “take of the trade”, however the “strong dollar” talk garnered laughs in China when Geithner made his speech and so far the Fed is monetizing (printing money to buy) more of the Treasury debt. The simple fact is that the Administration has 3.5 TRILLION dollars to finance and there is just not enough U.S. savings or World savings to buy that much treasuries and the ONLY outlet is for the Fed to print more money to buy more treasuries. It would stand to reason that Bernanke, no matter how much he wants to, can’t raise interest rates. What is he going to do, charge Obama (and the American tax payer) more money for more debt? Of course not. Additionally, the ripple effect from raising interest rates would stifle consumers from mortgage rates to credit spending that would cause a massive contraction in GDP, which is certainly what this country cannot afford if it expects to make it out of the recession. Additionally, Obama’s whole plan of spending $3.5 Trillion is based on a GDP forecast of expansion that starts as early as the end of this year (a little optimistic I think). So as Bernanke speaks this week – expect the following, another warning about the government spending too much (but they will not listen), “strong dollar” talk (but he will continue to monetize the debt), and the economy remains fragile. I am not saying that Bernanke is doing a bad job, but he has his hands tied. Additionally, Summers has Obama’s ear and rumors are that he is gunning for Bernanke’s job (note all the new policies are for an expansion of the Fed – most of those ideas are NOT coming from Bernanke – I wonder who?). Time will tell – but my bet is Bernanke is on his way out, they will continue to keep rates low to monetize the massive government spending, and we will continue with the “Strong Dollar” marketing campaign in “Hope” that foreign central banks are buying it.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aUBTI6OxeEVA
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Fed Ex rally?
Fed Ex which has been having a dismal time with several gut busting blows – from higher fuel prices to a huge drop in shipments has also translated to volatile stock price. It came down from the 100 level last year all the way to the March low of 33, but with the whole market rallying (regardless of fundamentals) it got back to above 60 before slipping again (maybe people started looking at the actual business) – it just lost momentum.
This morning JP Morgan raised it to an “overweight” from “neutral” – based on “its strong operating leverage should drive performance for the stock when there is improvement in the economy”. I read that as BUY the stock if you think the economy is improving. Note they said “WHEN” there is improvement. Just like the weatherman on TV there is always a chance of sunshine.
I think Fed Ex’s recent rally was part of the momentum rather than fundamentally based. Sure it probably wasn’t a 30 dollar stock when it reached bottom in the March sell off, but it certainly wasn’t a 60 stock either. The Fed Ex business model swings in the wind of economic boom or bust and thus I would expect more volatility as well as momentum trading rather than fundamental valuation.
Stock is up $1.50 on JP Morgan’s recommendation in the pre-market.
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Commodity stocks got hit ….but…
The whole market took a hit yesterday, but just like a broad based rally, a broad base sell off reflects momentum rather than fundamental. If we are to believe that there is any measure of inflation risk in the near term – commodity prices based on the dollar will rise. While certainly supply and demand play a key roll the other component is fiat currency value. Meaning that it is quite possible for supply and demand to remain flat, but commodity prices to rise because the dollar becomes weak (another form of inflation).
CNBC had an interesting interview with shipping (ocean tanker) company CEO’s this morning, a very interesting industry that we really don’t hear much about. But a distinct point was made that 90% of the goods in the U.S. are shipped. They are (along with the trucks and trains) the rivers of products that drive the economy. The three CEO’s that were interviewed were all bullish on China, simply because shipping is going one way – Commodities INTO China. They remarked that China’s stimulus is going to the bottom line, they are building new roads, bridges, dams, buildings, housing, power plants, etc. They are going through their NEW DEAL right now. The amazing thing about China is that unlike OUR New Deal - theirs is funded by a massive trade surplus (U.S. Dollars). They don’t have to tax their people MORE nor are they seeing a negative GDP (while they have come down from double digit GDP growth, they are still at 6 to 7% and that is MASSIVE). Unlike the U.S. where are stimulus is paying for bailouts of Banks, Auto Companies, and Mortgages (we are paying down losses) – theirs is actually creating jobs and expansion.
The CEO’s pointed out that China is stock piling commodities – copper, iron ore, cement and every hard known commodity – rather than hording U.S. dollars they are spending them (converting the paper to hard assets ). You could say it is a massive inflation hedge.
That translates to Alcoa, Rio Tinto, and other mining and commodity companies into solid fundamentals going forward. The question remains how do the commodity companies hedge dollar and inflation risk? By asking to be paid in non-dollar currencies? Additionally that means that commodities, based on supply and demand – could also rise.
I think a long term bull market in commodities and commodity based companies is at hand based on these factors.
1. Demand: China (as well as other non-debt strapped countries growth) and demand for commodities.
2. Dollar Risk: When inflation comes that will also increase commodity prices.
Of course we have to watch out for the over shoot momentum trade like seeing oil go from $40 to $140, but that can be dealt with proper hedges.
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Futures Pre-market
We are seeing the futures up a few points in the pre-market after yesterday’s sell off – but will we see a bounce?
INDU 8250 / 8500 (We broke 8500 and are in a hanging area above 8250.)
NDX 1400 / 1450 (We could still see a pull back to 1400 which would be a significant test. Futures are pointing to a slightly higher opening.)
SPX 900 (We broke 900 yesterday – but we could get back above it. Watch 875 and 900!)
RUT 500 (We also broke the 500 level – so keep an eye on the broader market.)
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Oil still over 65 and seeing slight move higher this morning.
Gold in the 920s
Silver 13.80
VIX 30+
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Conclusion
The volatility pop and skew to the downside puts shows there is some concern rising that the recovery is going to be farther off and a double dip recession could be in the cards. Global recovery talk should be separated into debt nations vs. non debt nations. We are printing money (creating more debt) to take existing losses off the table and on to the tax payer, while other nations with a surplus are building. China is expanding fast and will become the economic super power before long, we just had too big of a debt mountain to climb and there is no way to win the trade war (they have already won that.)
The reality of this nation will seem to take a similar course as Japan and stagflation is becoming a more looming reality. Now we need the Fed, Congress, and the Administration to get on top of the dollar, debt, and inflation issue. Unfortunately that will not happen until we stop spending.
Once momentum leaves the market it will certainly be sector driven and I think commodity and internationally positioned companies (especially those with growth in China) will be the leaders.
Traders,
Expiration was mixed – like the previous week we flirted with resistance and last week we have flirted with support. We are seeing an big increase in companies selling their stocks to raise money and Bloomberg reported we are also seeing one of the largest insiders selling reports in some time http://www.bloomberg.com/apps/news?pid=20601087&sid=aflROe0Pe0QM . It is as if people are become impatient to see whether these green shoots will turn into flowers. As I mentioned, you can only talk up the green shoot talk for so long before results needs to be obtained. Obama has been instrumental in bringing confidence and optimism back to the market, but as NPR reported this morning he is the Chief Marketing Officer. He is selling a brand and has done a very good job of it from the campaign and right on through the economic stimulus and crisis. But as every Pitchman (including Billy Mays) will tell you, you can sell the product, but the product has to work.
The concern about inflation and seeing a recovery is beginning to trump the “finding the bottom” and “green shoot” talk. We need to see some results or a bottom soon. The perception will determine whether this support area holds or not.
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Volatility in the currency market.
We have seen huge swings in the currency markets and all of it surrounds the talk about the stability of the dollar. From China’s request for a new currency to Russia buying IMF debt, rather than U.S. – The volatility has been significant and seeing a few cent move in a day, rather than the traditional fraction of cent is sending jitters across the market. Central banks are scrambling to figure out a solution to maintain some principal stability and at the same time dealing with their U.S. dollar reserve holdings. One such problem is the very low yield on the U.S. dollar, which is not making up the offset in the U.S. dollar’s weakness. Several foreign central banks are also handcuffed into long-dated bonds – making it even more difficult to tap capital without penalties and larger dollar risk volatility exposure.
But there is a massive split between analyst forecasts. Some say that the dollar will strengthen and a flight to safety (regardless of interest return being flat to negative) will buoy the dollar. That has been the traditional line that most economist had believed in and there is still a serious camp in “Safe Haven” theory. However, the big split in views of those that believe the dollar is facing serious inflation risk and global weakness have several valid facts to back up their theory, from China and Russia moving money into non U.S. dollar backed securities and asking for a new reserve, commodity prices and volatility, and most importantly the massive amount of debt the U.S. is piling on (not to mention the off-balance sheet accounting at the Fed which is believed to be 9 trillion).
No doubt the dollar is at a critical juncture and massive fork in the road. We have moved beyond the math determination in dollar viability and into a new realm of faith. Sure there are those that will point to the math, but I bring up faith as a key component. Our currency, being a FIAT currency (it is backed by nothing other than the “good FAITH” of the U.S. government), means that everyone has to “BELIEVE” that it is worth something. If a country like China stops believing in it and moves out of the dollar and refuses to take dollars in trade (not saying that it will happen) – we could see a fast drop and possible collapse of the dollar. (Like Iceland last year). This is a very low probability, but a probability none the less.
At some point foreign central banks (in fact everyone) has to have “FAITH” in our government and its ability to reduce the deficit and pay down debt. Obviously printing money will not solve that problem and that is why foreign nations are crying FOUL and want the U.S. to get a solid grasp of its financials.
This is a very delicate time and as these two camps, one of FAITH “Safe Haven” and the other that is losing faith become more at odds – we should expect bigger swings in the currency markets and that means more volatility. And more volatility means that regardless which side is right – some might leave the party to avoid volatility. If enough of those smaller emerging markets look for quite places to avoid the swings that too means a loss of strength and faith in the dollar.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aLaIb.6J8xFc
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Apple and Jobs
Would Apple be where it is today without Steve Jobs, I would say not. He started the company with the “Woz” in a garage, built it up, and then was ousted from his own company. As the typical suits took over Apple lost momentum and started to fall. When Jobs came back, he brought back his vision and drive. iMac, iPhone, iTunes, iPod, and a whole new view and technology. He is certainly an American pioneer that has beat to his own drum and brought Apple back from the dust.
But he has been facing serious ailments, from cancer (which he beat) to recently being ill which lead to a rumor that he had a liver transplant. Apple in his absence continued to rally higher and up-sells of the iPhone, but since he has left it has really been living off its past product line’s next generations. The questions are numerous, is he coming back, is he ok, will he be the CEO, how long, and most importantly when he does eventually step down – who will be that inventive driving force that will roll out the new line of technologies?
If the past is any indication of the future, if a blue stuffy suit is to take over (like it had), we can expect to see Apple trade back down into the teens and nothing new on the horizon for decades. We can only hope that Apple has learned from its past and that another Jobs Jr. is in the wings being shown the way by one of world’s greatest technology wizards. May Steve Jobs have many long and prosperous days ahead.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aRYCnEpXRww0
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Futures Pre-market
Europe was down and it seems that it is also dragging down the futures in the pre-market. We are still at those support levels, but there seems to be some selling pressure. Expect a negative opening.
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Support / Resistance
We have been flirting at these levels and it seems that we might be visiting again this morning – do we hold or break?
INDU 8500 / 8750 (Futures are showing an opening just below the support.)
NDX 1450 / 1500 (Looks like we might opening right at 1450.)
SPX 900 / 950 (A 905 opening, do we hold?)
RUT 500 / 540 (At 505 based on the futures in the pre-market).
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Gold 900 (Gold has come off after making its run – expect to see volatility with the currencies.)
Silver 14 (We saw a pull back from the 15 level and are looking just below 14.)
Oil 65+ (We were up in the low 70s, but this morning’s action is showing Oil breaking 70 and trading in the 67-68 range.)
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Conclusion
People are very tired of hearing “green shoots”, it is almost mind numbing. It was catchy when someone first said it a couple of months ago, but I suspect that it is the most used word to describe the economic condition on any major network. Buzz words used properly, like “green shoots”, create hope and optimism. Marketing people KNOW what works and what doesn’t. The word “green shoots” implies hope and growth, it represents Spring and new life or new beginning. It is synonymous with Obama and his administration, out with the old and in with the new. However, it was Summer Solstice – the equinox has passed and it is summer. The flowers should be out, but they are not. Just like any farmer, the greet shoot talk is great after the snow has melted and the plants are breaking up through the soil, but they need to harvest those rewards. Once Summer is upon us, those plants better not be green shoots any longer, otherwise by fall there will be nothing to harvest. Investors want to see results, the economy wants to see results, and seeing companies and insiders selling their stocks is telling me that they think those green shoots might not be sprouting into flowers by fall.
Watch the dollar!
Traders,
A basing area? We got down to those supports and have been basing as if waiting for some vital information that will steer the market up or down. Obama’s financial reform fell slightly flat and Geithner wasn’t convincing either way in his testimony. It’s a big task and still too many questions. The recent government data – from unemployment, inflation, and housing starts continue to tell the same story – we are not at a bottom yet, but there looks to be green shoots. But even though the numbers are not looking worst and are slowing in decline – the fact is they are still declining. It was like the housing starts – they looked great, but then you turn the page and foreclosures were up again. Investors (and the market) optimism of green shoots needs to pay off soon and those green shoots need to turn into flowers soon. We can only have “not that bad news” for so long and continue to hope that it will get better.
The talk now is the “double dip” recession, that talk is gaining a little ground because on the low end of the curve (the consumer) is not improving. No new jobs, jobless claims continue, no credit availability, equity lines in their home have decline, inflation (gas and food) are up, and mortgages rates have increased 100bps in a month. Unless we can see actual improvement at the consumer end of the curve – optimism, hope, and confidence doesn’t pay the bills. Well that’s the meat of the argument for the double dip. The math for the double dip is simple – look at revenues at companies (they are continuing to show lower numbers and guide lower). Smart companies will plan for lower revenue and look at cutting costs to juice the margins to remain profitable. But you can only cut so far. The big talk now is taxes, which are a big cost to any company.
If taxes are raised on the wealthy and companies to make up for the government spending and debt, we will hear more people like Paul Allen who has threaten to move Microsoft overseas. In some cases were are already seeing it. This is a great article on how raising taxes on the rich may not pay off and in fact in this case raising taxes actually yield LOWER revenue for the state. http://online.wsj.com/article/SB124329282377252471.html (Millionaires go missing!)
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Global economic recovery…
News out of Europe have a few leaders talking about “green shoots” and seeing in some of the data some numbers improving. Unfortunately not the consumer – which is what everyone is forgetting about. However, an interesting point is an increase in manufacturing – which is great news. But let’s look at it in break down the details. First, when the recession hit manufacturing slowed down as inventories became backlogged. In order to clear inventories, which takes time, means flushing them out at huge discounts. We saw, what seemed, as a deflation environment. For a short time it was – goods were sold at step discount just to move them and clear out massive backlogs. As the inventories diminished the wheels of manufacturing started turning again. Now doubt that it has increased, but should we get excited that it is increasing even though the measure is very small. I say yes and no. Yes – because it means that they are pushing out product again. No – because the increase is very small and while measurable it shows that goods are moving at a snail’s pace. It is a good first sign – but we need to see it pick up.
Second, where IS the manufacturing picking up? That is another interesting question. Reports show a pickup in the BRIC nations and other manufacturing nations. The U.S. is really not showing anything to get excited about on the domestic front, but the international companies are seeing their foreign sites picking up. The question is where are the goods and services being deployed.
China had seen a slow down as well, but they also don’t have the national or consumer debt like this country. Their stimulus went to the bottom line as only a small percentage of consumers in that nation have access to credit and thus little debt. They are seeing a quick bounce – the question is how much of their domestic manufacturing is serving them domestically vs. foreign trade. The trade balance is widening, but we are also seeing them both decline.
I think it is not wise to look at a global recovery, but rather on a nation by nation recovery. Investors are also going to be taking a closer look at investing overseas as new ETFs, funds, and other products are giving them better access to foreign investments. That means competition in products – more products with a finite amount of dollars means diversification. It also means higher volatility as we see money chase the yield. We see that traditionally in the bonds vs. stocks as money pulls out of safe heavens into equities and back in again. As more foreign products are available we could see funds chase products overseas.
China is in a incredible ability to recover – little to no consumer debt, little national debt, positive trade balance (trade surplus), manufacturing, growth, and commodities. Compare that to the U.S., massive consumer debt, massive national debt, negative trade balance, shrinking manufacturing, and a reliance on foreign commodities. Jimmy Rogers is right – it will be only a matter of time before we see more investors chase better opportunities off-shore.
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Apple – Jobs who?
Steve Jobs has been out because of an illness, but that hasn’t stopped Apple from rocketing higher (up 50% from its lows). People are waiting in line again this morning, not for a new product – but for an updated Iphone. It looks the same, works, the same, is really the same – except it has a few new features. The power of Apple is amazing – marketing, design, etc. It certainly has it’s crazy fan boys that will wait in line and those in line probably already have Iphone 1, Iphone 3g, and now they are buying the new Iphone. It’s like a drug. Smart investors are riding the momentum of Apple’s ability to resell the same product 3 times in a row with just new features. The price difference is incredible – people are paying over $200 more for a couple of new features. So expect a pop in the stock today.
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Futures Pre-market
We are seeing a good pop in the futures – part from the Iphone hype (which we are seeing the NDX) and part from the positive spin out of Europe about Global economic growth. Expect a higher opening.
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Support / Resistance
INDU 8500 / 8750 (It looks like 8500 held as support are we to head back to 8750?)
NDX 1450 / 1500 (Again a hold at the 1450 level – looking about 15 points higher at the opening.)
SPX 900 / 950 (SPX also held.)
RUT 500 / 540 (Another hold.)
Watch the close – it is expiration this week. Volume also has been light after we got to the support.
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Conclusion
Currency markets and commodities have been quite this week, along with the market after it reached support areas. Today is “triple witching” as futures and options expire collectively. We may not see a big rally or sell off as hedging into expiration could create some pin risk on issues. Watch the action into the close and if this rally off support has any legs.
Watch you expiration risk and stock after the close. Get those exercise / do not exercise notices out – we might see some aftermarket money on the table.
Traders,
Seems like a holding pattern around the support area as the indices closed mixed. Obama introduced his new financial reform plan, including a new regulatory arm as well as increasing powers of the Federal Reserve. There are also some rumblings that Summers’ has his eye on Bernanke’s seat, much of that has come from the idea of giving the Federal Reserve more sweeping powers. Some say that Summers’ has Obama’s ear and that some of the suggestions about the expanding role of the Federal Reserve is not coming from Bernanke, but rather Summers’. Those crazy political games – who knows – but there will be some shake up.
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We wait for debate….
It is almost like the market is paused waiting to hear the back-to-back testimony of Geitner at the Senate banking committee and then latter in the afternoon at the House financial committee. We heard Obama’s plan and have a general idea – but there is many questions, but it seems to be a big reform. We certainly need reform – the question what is the right reform. We a new possible regulatory agency (or several), including a possible merger of one or two, add in flipping powers from one agency to another and finally bringing the Treasury and Fed into the mix – it is going to be a massive land grab for power. Who gets what power and what authority? Who reports to who? Who is going to run the new agencies? It is going to get messy and crazy.
It felt like Obama dropped the green flag yesterday, today is about getting information and figuring out who is on what side, and then the massive horse trading begins. Certainly election of 2010 is going to play into this as politicians need to be on the winning ticket and they need to figure out which side the winning ticket is.
Obama remains hugely popular, but ironically Congress’s popularity continues to fall. They are both the same party and one would think they would be more harmonious. Even among the democrats there is some blue dog vs. bigger government types are fighting it out.
Jack Welch today on CNBC said that everyone needs to take a breath. The new Congress and Administration has been in office not even 6 months and they have a trillion plus controversial Healthcare proposal on the table, Cap and Trade energy plan, and now a massive sweeping reform of the entire financial industry. If they don’t focus on one – everything could unravel. Top that off we are certainly not seeing a recovery any time soon and still have a very fragile market. Maybe taking a breath and tackling one at a time would be best.
Regardless – the debates begin today – tune into Geithner this morning and afternoon. It may give us an idea of who and what is in the mix in this horse trading extravaganza. I know the market will be listening and we could get some intraday knee jerks up or down based on the tone and if any clearer picture of this plan emerges.
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Initial Jobless Claims…
Initial weekly claims rose by 3,000 to 608,000 in-line with forecast. The net collecting unemployment insurance fell 148,000 to 6.69 million (the most since November). Economist on Bloomberg radio pointed out that it is hard to say how much of the 148,000 fell off because time ran out vs. how many actually found new jobs. He surmised that it was the “disgruntled” category, only because we continue to see the weekly claims continue to rise – indicating that people are continuing to be laid off.
The futures did get a little pop off the net number falling, but I think the market remains paused at the support and wait to hear more about this financial reform today.
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Futures Pre-market
The futures had been down all morning, but did get a little pop on the jobless numbers – small and it looks like we will see a flat to slightly mixed opening.
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Support / Resistance
The market was mixed yesterday and RIGHT at those support numbers. Today we may get some confidence or see it erode as Geithner testifies – expect a little volatility.
INDU 8500 / 8750 (We closed just below – the support, but I am still counting it at 8500)
NDX 1450 / 1500 (I think 1450 is more of a pivot point, rather than support – but call it short-term support for today.)
SPX 900 / 950 (10 points above the 900 support and futures look flat at the opening.)
RUT 500 / 540 (We are just above 500 at 507 – futures are showing a slightly lower opening, but still above 500.)
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Conclusion
I believe that Obama is well intention and sees many things that are broken and need fixing. He is right and both Republicans, Democrats, and Independents agree. The question is not if they are broken, but how to correctly fix it. The GOP has offered their own Healthcare plan, but Obama refuses to even look at it. The GOP just introduced their Financial Plan – but the Democrats criticize it without reviewing it. The Democrats are no different than the Republicans when they were in office. Obama might SAY he is willing to listen, but the reality (as we are witnessing it) is that he has an agenda and big plans and is pushing them forward. The problem is not Obama, as any president will have their ideas and plans, the problem is that one party controls Congress, Senate, and the Executive branch. That means they don’t have to listen, the Republicans might as well not even bother showing up, because any ideas or proposals will not even be considered. We saw the same thing in Bush’s first term – he never reached across the aisle, because he didn’t need to. Now Obama doesn’t need to either.
That should be alarming to anyone, regardless of party. We need some balance, regardless if you agree or disagree with one party or another. It is the purpose of why we have 3 branches and that power is divided. While this is not a political newsletter, it is now politics that are playing a crucial role in the markets. We need to pay attention what is happening in Wall Street – because it is becoming more involved with Wall Street.
Traders,
Mix signals in the data yesterday between inflation and housing starts – causing concern, not that we are coming to a bottom – but the ability for the nation to rebound quickly or get back on track as the more optimistic forecasts predict. Certainly we are seeing some selling pressure and the question on everyone’s lips is this a buying opportunity or has momentum lost steam. Certainly we have had a fantastic run, one to market down in the history books. The problem and ironically (as per the previous times we have seen a similar rally) is that the fundamentals look rather weak. It’s as if the market rallied without revenue’s in mind and now all of a sudden paused and said, oh yeah the consumers were not on board.
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CPI – no inflation?
The CPI (consumer price index), crept up less than expected. While some may point to it and say “See – we need not worry about inflation.” It is not the past (which is what CPI reports), nor the present, but rather the future that one must prepare for. A small creep up or no creep up – doesn’t mean that it will not happen. You may also know that I wrote a essay on the CPI and government data – so I give the data a more critical, if not skeptical eye. No doubt that commodity prices are rallying – look at oil, or just go to the gas station. Same is true with food.
But it is the dollar and U.S. treasuries that cause the biggest concern – it is the faith in the currency that can strike at the very heart of inflation. That is the most important gauge of all – we earn dollars and we spend dollars – all true. But this nation is not self reliant. We consume the world’s resources – not just our own and thus we must convert our money to buy those resources.
Bloomberg: CPI Report http://www.bloomberg.com/apps/news?pid=20601087&sid=a7monBTRDAdQ
My Essay: http://marketpreview.blogspot.com/2008/01/governments-modest-proposal.html
Shadow Statistics: http://www.shadowstats.com/
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Fed confused?
What is the Fed to do? They have are printing money to buy treasuries (debt), trying to keep rates low via “quantitative easing”, made speeches about being “strong dollar” people, and have pretty much used every tool in their tool box. The problem is that bonds continue to slide and the rates go up. The trickledown effect has seen the 30 year mortgage rates rocket 100 bps in a few weeks. The Fed’s off balance sheet liabilities are guestimated by Bloomberg to exceed $8 trillion and Bernanke had just warned Congress to stop spending and get this deficit under control (he can’t continue to print money).
The problem is not finding a bottom – we all pretty much agree (bulls, bears, Democrats, and Republicans) – that a bottom will be at hand soon (that is the simple math – there are only so many jobs and so many people – so you can only fire a finite amount of people). The data has shown that it is slowing down and a bottom is coming. But that is not the problem – the problem is WHEN DO WE GROW and HOW FAST?
But the Fed has a bigger problem – how do they reign in all the money they injected? When they figure that out the second two questions is How Much and How Fast? It’s a bigger problem than the Fed can handle alone, because the Fed has lent our government (treasury) billions of dollars – so there is a little concern about how fast the government can pay back the Fed.
If we look at this very simply, the Fed is the Bank and the Treasury is a business that has just taken a massive loan. The Bank is now concern, because it gave them this loan predicated on their ability to pay it back. But the company is spending MORE money than it has and needs to borrow even MORE money. See the company is basing their futures on two things – current revenue (from the tax payer) to help pay off the loan and future growth expectations (GDP growth) that is rather optimistic. Now the bank is saying you got to STOP spending and need to start thinking (seriously) about how to pay back what you have already borrowed.
Now the bank is concerned, not just about the company it lent money too, but they too have creditors they rely on (foreign central banks) – who are saying – you are over extended and you are continuing to loan money to a company that is losing revenue and their growth expectations are not realistic. If you don’t stop we will pull our credit!
Of course my simple view is not the whole picture – there is some serious incestuous relationships between the Fed and Treasury, the foreign central banks have their own problems but also don’t want to be married to this ongoing problem either – but I think you get the picture.
So – it’s back to repeating their FOMC mantra, “economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.” – meaning – they are going to continue to print money as the government continues to spend.
I guess it is really in the hands of China and their brethren – rather than are Fed. I guess Bernanke and Geithner need to do another road show to China and they must keep Obama from making any negative remarks towards China (like “China’s currency manipulation”).
What else is there to do.
http://www.bloomberg.com/apps/news?pid=20601087&sid=arWqPRMOr14A
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Futures Pre-market
The futures got off the mat a little with what seemed like inflation at bay – but gave that up quickly. Market looks flat to mix opening.
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Support / Resistance
As we fought for a week at Resistance we are very quickly back to short-term support.
INDU 8500 / 8750 (Is 8500 a buying area – today will be the day to see.)
NDX 1400 (1450) 1500 (I think 1450 is more of a pivot point – we could see action either way – it’s market perception today.)
SPX 900 / 950 (Just off the 900 level, is it a support buying opportunity ?)
RUT 500 / 540-550 (We are right there – a crack below 500 is not a good sign – watch the close.)
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Conclusion
There is some political volatility in the air and when mixed with economic concerns – spells big concerns. Iran’s vote and instability, North Korea weapons testing (and China’s relationship with them), Healthcare reform looking to top 1 trillion, new regulations and new government agencies to enforce new regulations. I would say we are not going to see the summer doldrums we usually expect to see – something is going to heat up and if we recover from something quickly and favorably that will be positive for the market, if we waver and things get messy that will be negative.
VIX shot about 30 – that’s a clue to get your hedge on if you don’t have it on.
Traders,
Yesterday we did not get that rebound up to those resistance levels and the trading day saw pressure throughout the session. It seems to no longer be about the recession slowing down, but more about the recovery. The concern is how fast the recovery will be, traditionally after a recession we see a 4 to 6% growth rate as credit and consumer spending picks up, drives an increase in revenue, that drives an increase in hiring, and at the end of the day profits for the company (and shareholders). But that is not what we are seeing and it really seems to boil down to the consumer level – when will they start spending - a lot of that has to do with credit and their propensity to spend when (and if) credit is available. There no doubt is some shell shock and while savings and paying down debt is a good thing, savings doesn’t grow an economy – which is what we need to see growth so the nation (our government) can start paying down their debt.
No doubt that the Fed and Treasury are concern and I have faith that they’ll have a plan to reel in the debt, but that plan is predicated on consumers, their spending, and jobs. So while the plan might be the best plan, we now need to wait to see if the consumer can get off the mat. The longer we wait for the recover – the more concern people will become.
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Housing (The good with the bad)
Some good news is that the housing starts and permits expanded in May by 17% to an annual rate of 532,000, up from 454,000 the prior month. Permits also rose to an annual pace of 485,000. But on the other hand builders continue to face a challenge from excess inventory and foreclosures and delinquencies are still rising. Additionally mortgage rates have been surging and is now up to 5.57 – matching the increasing rates in the treasury market.
The builders, while breaking new ground face lower revenue and higher margins (commodity prices). As they try to get off the mat – it is the competition in existing inventory and now higher rates that could make this a one-two month anomaly. One analyst on Bloomberg suggested the second quarter saw a rise in consumer confidence and possibly an early jump into picking a bottom in housing, but with the increase in rates and the excess inventory, those investors may not see the returns for some time. One real estate investor mentioned it was a hedge against inflation.
The good news about the starts being up – did send a small spike up into the futures in the pre-market
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BRIC looking into each other
The BRIC (Brazil, Russia, India, and China) had voiced their concerns, stepped into the IMF for bonds, and now are talking about buying each other’s debt to diversify out of the dollar. The question remains: 1. Do they continue to purchase dollars at the same amount, 2. How do they get out of U.S. bonds – let them expire or sell them. Those two questions will have a big impact on the interest rate, inflation curve, and dollar strength/weakness.
It is a story we much remain focused on: http://www.bloomberg.com/apps/news?pid=20601110&sid=a3VqQW.OiRqY
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Futures Pre-Market
We saw a small pop, up from flat, on the housing starts – but their remains questions. If the spread remains expect a positive opening.
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Support / Resistance
Last week was the fight at resistance and Monday the sellers won and we had a pull back. Is it a buying opportunity and a rally back, or a place to pause? Note all the indices are pretty much on that 20 day moving average.
INDU 8500 / 8750 (The opening doesn’t seem to be indicating either way – watch the close.)
NDX 1425 / 1500 (We almost filled the gap.)
SPX 900 / 950 (Right in the middle)
RUT 500 / 540 (Just off the bottom.)
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Conclusion
How long are we going to hear about “Green Shoots” – that can’t be “Green Shoots” forever – they need to grow into something – flowers or weeds? I wonder what the “green shoot” talk timeline is – when people become sick of hearing “Green Shoots” and want to know WHAT those plants are that are growing. It is rather silly – but there must be a psychological time line were we can only hear the talk so much before we need to see something. It’s like the “Strong dollar” talk – you hear it over and over, but then you just see the dollar continue to lose ground over time.
Perception and psychology is very important, no doubt. Obama has done a fantastic job selling hope and optimism, but that does need to turn into results. And all that recovery talk is not showing any results and not that it should. A recovery takes months if not years – we should expect to see it in weeks, but the market moves in a knee jerk fashion and expects results NOW. We live in an instantaneous society – and that creates short-term knee jerk reactions (both positive and negative). We are perception reactionary nation, rather than analytical.
Stay frosty.
Traders,
Last week was rather flat, but did see intra-day volatility. A push and pull around those resistance levels, one morning up only to fall off the next down only to rally back. It seem that the dollar strength, bonds, and national debt has become more focused talking points. More and more economists are coming to the table about the pending fork in the road, try to inflate our way out or default. Concern about the dollar began to blossom when S&P downgraded the UK debt as it reached 100% of GDP. While the U.S. assured us (and Geithner assured China) – the question still remained. A rating agency in Brazil put U.S. debt on warning and a possible credit downgrade, and other foreign rating agencies (none as prominent as Moody’s, Fitch, or S&P) and none that are U.S. based have echoed that concern, but how far are we to trust our own credit rating agencies? Didn’t they give AAA credit to GM, AIG, Freddie, Fannie, as well as 100s of billions in mortgage backed security products?
The dollar story will remain on the forefront as we recover, only to land us in another economic concern – inflation. There are two debates with National Healthcare, first is the political one – (privatization, nationalism, socialism, etc.) both sides have their merits and faults – but there is another debate equally, if not more important. Can we afford it? The truth is we can’t (even if we wanted to). National debt (including programs) is in the trillions, the deficit is in the trillions, bailouts and loans in the trillions, so much debt that the Fed is printing money just to buy government debt (bonds) and now even Bernanke has warned Congress to stop spending. Other nations are also concerned about the National Healthcare plan, not the policy but the funding of it. Giethner promised foreign central banks that the administration would be lowering the deficit to 3%, but the new healthcare plan adds by NPR’s figures (rather low from what others have indicated) over 1.5 trillion in additional spending.
There is nothing wrong with debt, if you can afford it, and nations have had debt throughout history. But as we approach rather quickly 100% of GDP (and looking to exceed it) we come to a tipping point. The straw that will break the back is when the nation needs to borrow money just to cover the interest rate. We all know how interest only loans worked out for those mortgages, our government is on a fast track of interest only debt – but worst – they will have to borrow MORE just to make the interest payments. That’s analogous to paying your interest only mortgage with credit cards.
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Russia’s Gambit
http://www.bloomberg.com/apps/news?pid=20601087&sid=awOCMo25zbYY
Russian officials had made some comments last week that put more negative pressure on the dollar, the openly purchased billions in IMF debt, rather than U.S. treasuries. Unofficial talk coming out of Russia was that they might sell out of their U.S. dollar backed debt and move elsewhere. The BRIC (Brazil, Russia, India, and China) started to follow suit, Brazil and China have taken the plunge as well. Concerns last week that Bernanke would not be able to control rates and would have to print more money to buy treasuries to make up for the short-fall of foreign central banks became a serious concern.
Russia however made official comments after last week’s move into the IMF debt and said “It’s too early to speak of an alternative” to the U.S. as a reserve currency. They are probably right, but on the other hand their previous comments had driven the bonds down (costing Russia and other debt holders 100s of millions if not billions). After the comment the bonds began to rally again. But is this just a political speech to buoy the dollar, enough so that Russia can get back on the selling train? It’s true that there is not enough liquidity in any other single asset to take the place of the dollar as a world reserve currency. However, we may see a move to a more diversified basket, which will still create weakness to the dollar.
For now the BRIC is holding all the cards and the U.S. is sending envoys to ease their concerns about our debt and spending habits. The U.S. needs them to buy MORE debt, not sell what they have. Talk is cheap and all eyes (from afar) are watching the net debt mount and now pressuring concerns about this trillion dollar plus health care bill. Could a passage of the Healthcare bill spark a selloff of U.S. treasuries by foreign central banks as they grow concern about our mounting debt and deficit? I don’t know but if CNBC Europe and Bloomberg Asia interviews with foreign analyst and economist seem to think that it sure doesn’t ADD confidence to the U.S.’s ability to pay down the debt and reduce their deficit.
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Futures Pre-market
The futures are down following Asia and Europe as the recession might be ending but growth seems to be long in coming. The spreads are end – expect negative pressure on the market at the opening.
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Support / Resistance
We all know the numbers by now – we should crack below them today – but like all last week – it’s about the close.
INDU 8750
NDX 1500
SPX 950
RUT 540-550
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Conclusion
The G-8 finance ministers are drawing up contingency plans for rolling back the budget deficits and banks bailouts as the economy shows signs of “green shoots” to help ease concerns of economist how have indicated that if we stay the course inflation will be worst that anticipated. While it is premature to do anything today or even in the near-term – having policies in place is finally showing some foresight as to try to avoid inflation while at the same time making sure we don’t slip back into a credit crisis.
One of the big issues, while people are pointing to “green shoots”, is that the consumer (that real driver of the economy) is not seeing ANY “green shoots”. And the banking data looking good – primarily because they are not lending. This is the see-saw as to any decision by the financial ministers of the top nations. Bank data is looking better, TARP repayments, LIBOR easing, but the consumer data (other than confidence) is showing no new jobs, lower consumer spending, and no credit availability. There are always “green shoots” if you look for them, the problem is they may not be growing where you NEED them to grow. We can only ignore the consumer for so long – it is the consumer that needs to recover before the economy can.
Traders,
Another push-pull at the resistance levels – the retail sales number and the weekly claims looked good on the surface, but didn’t show signs of a recover – but that the recession is slowing. A bottom has yet to be found. While the bond auctions had not done very well, the smaller 30 year auction actually did better than the 10 year that preceded it. While 11 billion is a lot – it was paltry compared to the other auctions. So while it did well – skeptics remain cautious.
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Dollar Cheerleading!!!
The big story right now is the dollar and U.S. debt.
1. We saw Geithner travel to China on a road show to ease concerns and get the Chinese to buy more.
2. We had the BRIC (Brazil, Russia, India, and China) – with Russia taking the lead – purchase IMF bonds and mention they will reducing dollar holdings.
3. Nouriel Roubini said the dollar will eventually diminish as a world reserve currency.
4. The Fed is buying (printing money) billions of Treasuries to make up for the short-fall and to keep interest rates low – but failing.
5. Bonds are getting hit and yields are rallying.
6. Dollar is slipping in value against foreign currencies
7. Commodities are rallying
I had never in the past seen equity and option traders pay so much attention to the bond auctions and watching the dollar. This is going to be the big story. As I mentioned the dollar bubble is inflating and it will either POP or deflate. A pop is not a good thing.
Keep an eye on the currency exchange rates, bond yields, auctions, and foreign central bank action.
We are seeing China and others moving into shorter-term maturity rather than buying 5, 10 or 30 year. This allows them to get out earlier and not fully committed.
Yesterday I forwarded an interesting story (which I have yet seen covered in the U.S media) – so far I don’t know if they are counterfeit or real. But even if they are counterfeit at $500 million denomination who are they going to sell them to and if they are real – they are only issued to foreign central banks.
http://www.asianews.it/index.php?l=en&art=15456&size=A
It is interesting that the Finance Minister of Japan came out the next day and said, “We have complete trust in the fact that the U.S. views its strong-dollar policy as fundamental.”
http://www.bloomberg.com/apps/news?pid=20601087&sid=apWVhFYArRhg
It would be interesting to find out something more about this story.
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Futures Pre-market
The futures are down and the spread is in. Expect some negative pressure on the market at the opening if the spreads remain.
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Support / Resistance
Each time we try to break out we come right back down. It has been a weak of push and pull at this level. Can’t go higher, but can’t go lower. Who wins?
There is nothing more to say – other than watch the close and these are the numbers.
INDU 8750
NDX 1500
SPX 950
RUT 540
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Conclusion
A follow-up to the dollar story is the Healthcare plan which according to an NPR report could cost over 1.5 TRILLION, the question is how are we going to pay? Whether you are for it or against it – the reality is that it is MORE national debt (a lot more). If foreign nations are already concerned, calling for a reserve currency, and we rely on them to extend us credit – what do you think there view is of this nation spending another trillion? Time to get out?
While the Healthcare program might sound good, it could be the international straw that breaks the dollar back.
Traders,
The market had looked to open up rather high, following Asia and Europe - but sold off throughout the day. Then, almost like clockwork, the market rallied into the close, but still down on the day and below those resistance levels - which continue to be tested. The action in the market was interesting and the beige book didn't reflect a recovery, but rather (as we know) the contraction in the economy is slowing down, good news - but not a bottom yet.
I had an interesting conversation yesterday - he indicated that we are seeing some lighter volume and larger trading momentum activity, rather that sector driven investment type paper. The traditional institutional contingency orders are few and far between, and the activity seems to toss short-term deltas into the market. His concern is that momentum markets (up or down) need to (eventually) have some fundamental foundation for them to be justified in the long-term. I mentioned that the banks "seem" to be fundamentally sound (regardless if we criticize the accounting and Fed borrowing) - since by the "NEW" measure it is getting better. True enough he said, but the market is rally as revenue is contracting - that can only last so long. If revenue is contracting that is negative growth no matter how you slice it. I think that it could create more efficient business models to keep margins hire - but he is right - as a measure of consumer consumption it is showing contraction.
At the end of the conversation - it is one thing - regardless of unemployment, we need to see revenue stabilize and start to grow (broadly) before a recovery is measureable. Unemployment is a gauge we can determine by reason if we expect to see revenue contract or expand, for now we haven't seen a bottom yet (but I think it will happen this year - or I hope).
CEO of Blackrock was on CNBC this morning and he made a similar comment, we are NOT going to see the growth that we are accustom to going forward and that also means "fundamentally" slower growth. He also thinks, while 1000 SPX target for 2009 is still their target, we have come up too much too fast and a revisit to 800 is in the cards in the short-term. He expects a choppy move to 1000 and slow growth in 2010 and 2011. He included that inflation is a very big worry for them going forward.
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Yields Rising…
The auctions of government treasuries is not seeing the kind of buying that is needed to absorb the debt the government is generating, we are continuing to see bonds fall, sending the yields higher. The 10-year is approaching 4%, a level we had not seen since last October. The problem is there is a lot more debt to be sold and the market has been barely able to absorb it, as the Fed is printing money to buy the balance and make up for the short fall.
The U.S. will auction $11 billion in the 30-year paper today and the traders are keeping an eye on the buying and the yield.
Yesterday, Russia announced that it is diminishing it’s positions in U.S. and now Brazil is taking a similar position. A story to keep our eyes on.
http://www.bloomberg.com/apps/news?pid=20601087&sid=a_8g_DLCl4vs
Now even Nouriel Roubini (Economics professor that predicted the economic crisis) – says that dollar’s favor of a reserve currency will deteriorate. While it will not happen overnight, the momentum (and faith) is moving in that direction. Geithner tried to reassure the Chinese, but the reality of the debt, deficit, and printing of 100s of billions is a clear sign that it will take more than a pep talk from Geithner to bring back confidence.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aRMZbES7DNFc
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Retail Sales and Weekly Jobless
Retail sales up rising .5% (excluding autos) – better than expected (.2%), but a mixed number when we look at it in more detail. Growth in food and beverage, but down in department stores. While number may look on the surface better than expected, the analyst are saying that once looking into the numbers – it seems the necessity purchases remain strong, but extracurricular purchases are suffering. Good news they ARE spending, but in a very frugal manner. Auto sales may also look better, but those sales are skeptical because GM and Chrysler are selling at steep discounts to empty inventory and generate cash in a bankruptcy.
Weekly jobless claims down 24,000 – showing that it is slowing, but still not enough.
However, those that remain on unemployment hit a new record of 6.8 million. While we might be slowing in layoffs, the net number rising of those on unemployment clearly shows that we are not seeing any growth yet.
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Futures Pre-market
The futures are starting to come off after the retail and job numbers – it had initially jolted up, but then came down after the numbers were being reviewed. Expect a flat to negative opening.
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Support / Resistance
Seemed like we were going to break out yesterday morning, but selling pressure pushed us back down below those resistance levels. A good fight at these levels – pretty even.
INDU 8750 (Way up, way down, back to unchanged. I call the fight a draw!)
NDX 1500 (Again – same play up, down, back to unchanged.)
SPX 950 (Same here)
RUT 540-550 (This was a little weaker than the narrow based indices)
Keep an eye on this fight – these are key for a break out or a sell off. It could go either way – momentum or fundamental. Momentum has seemed to slow.
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Conclusion
The data today looks like we are getting to a bottom, but the growth doesn’t seem to be coming any time soon. We did see bonds begin to rally after the numbers, right after they had touched 4% - a safe haven play? Not enough action yet to make that call.
To conclude – here is a very interesting story:
What are two dudes doing with $134 billion in bonds in a brief case?
http://www.japantoday.com/category/crime/view/2-japanese-carrying-134-bil-worth-of-us-bonds-detained-in-italy
