Traders,
We had a pull-back across the board after the one day Consumer Confidence rally. Volatility (VIX) has been in a tighter range around the 30 level, but the skew in the OTM puts is getting higher – reflecting that there is some down side concern.
I did receive several emails about the hyperinflation talk by Faber and the 79% of Debt vs. GDP and the possible downgrade of U.S. credit. Most of the emails were in the vein of we will not see inflation, FED will manage it, I am overly skeptical, or overly pessimistic. I think those all would be fair arguments if we fail to see what this economy is going through. Need I remind that AIG, Freddie, Fannie, Lehman, and Bear are gone (or taken over by the government), Chrysler is gone, GM is about to file bankruptcy, Countrywide and Merrill were taken over last minute before failing, the FED’s balance sheet while unknown is expected to have on/off balance sheet liabilities that exceed 5 trillion and the government has also spent a couple of trillion. This is only to serve as a reminder of the recent economic events and while I agree that we will find a bottom sooner rather than latter, that doesn’t or should not elevate concerns of the value of our currency or the national debt.
We had a pull-back across the board after the one day Consumer Confidence rally. Volatility (VIX) has been in a tighter range around the 30 level, but the skew in the OTM puts is getting higher – reflecting that there is some down side concern.
I did receive several emails about the hyperinflation talk by Faber and the 79% of Debt vs. GDP and the possible downgrade of U.S. credit. Most of the emails were in the vein of we will not see inflation, FED will manage it, I am overly skeptical, or overly pessimistic. I think those all would be fair arguments if we fail to see what this economy is going through. Need I remind that AIG, Freddie, Fannie, Lehman, and Bear are gone (or taken over by the government), Chrysler is gone, GM is about to file bankruptcy, Countrywide and Merrill were taken over last minute before failing, the FED’s balance sheet while unknown is expected to have on/off balance sheet liabilities that exceed 5 trillion and the government has also spent a couple of trillion. This is only to serve as a reminder of the recent economic events and while I agree that we will find a bottom sooner rather than latter, that doesn’t or should not elevate concerns of the value of our currency or the national debt.
Wouldn’t it be wiser to hedge against such risk than to argue that those like Rogers, Faber, Schiff and others are wrong (who we must agree have been right so far). Having a 5 year son, I am seriously concerned about his future. I certainly don’t want inflation or as Faber suggested hyper-inflation to reach our shores. Nor do I want the dollar to fail or the credit rating of this nation to be downgraded. It would be foolish for anyone to wish that. On the other hand to ignore those possibilities is equally foolish. Hope and optimism is important. We hope that we don’t get sick, but we still buy health insurance. We hope we don’t get in a car accident, but we still buy auto insurance. We should hope that inflation (or hyper inflation) doesn’t reach our shore, so shouldn’t we hedge against that possibility.
The problem with looking at economic data that reflects negative impacts to the economy and pointing those out – you are quickly labeled a pessimist. How about a realist that HOPES that it doesn’t happen and looks to hedge against those risks?
Please don’t view everything with Eyes Wide Shut. Optimism and Hope have their place and are important, but more is needed to secure our future.
________________________________
Government Data
Durable goods orders rose 1.9%, which initially seemed better than forecast, but the revision for last month was a shocking revision lower of -2.1%. If we don’t combine the numbers the April numbers look great, but the revision in March look bad. If we combine them they come in line with expectations.
Jobless claims were down 13,000 to 620,000. While showing signs that the layoffs are slowing, we are not seeing new job creation to take those that lost their jobs to get back into the job market. We continue at record levels over 6.8 million remain on unemployment. The big question on the horizon is GM’s pending bankruptcy and the domino affect (from closing of the plants, dealers, and supply makers) is expected to drive unemployment higher.
We must view the numbers from to vantage points. First is the contraction and the recession worsening, slowing, or hit bottom. I would say it is slowing (a good sign). On the other hand we have to look at it from a recovery perspective, but that can only happen after we hit bottom. We are certainly not seeing any recovery yet.
The jobless claims down is a good sign, but the millions that remain on unemployment is showing that a recovery has not yet happened. Additionally the revision lower in the Durable Goods Orders from last month is not a good sign even with this month’s increase – it is too conflictive (either they didn’t get an accurate reading or failed in math) – it is not very good resolution and hard to make any reasonable conclusion as to what they really are (because April could be revised down or up next month as well).
The problem with looking at economic data that reflects negative impacts to the economy and pointing those out – you are quickly labeled a pessimist. How about a realist that HOPES that it doesn’t happen and looks to hedge against those risks?
Please don’t view everything with Eyes Wide Shut. Optimism and Hope have their place and are important, but more is needed to secure our future.
________________________________
Government Data
Durable goods orders rose 1.9%, which initially seemed better than forecast, but the revision for last month was a shocking revision lower of -2.1%. If we don’t combine the numbers the April numbers look great, but the revision in March look bad. If we combine them they come in line with expectations.
Jobless claims were down 13,000 to 620,000. While showing signs that the layoffs are slowing, we are not seeing new job creation to take those that lost their jobs to get back into the job market. We continue at record levels over 6.8 million remain on unemployment. The big question on the horizon is GM’s pending bankruptcy and the domino affect (from closing of the plants, dealers, and supply makers) is expected to drive unemployment higher.
We must view the numbers from to vantage points. First is the contraction and the recession worsening, slowing, or hit bottom. I would say it is slowing (a good sign). On the other hand we have to look at it from a recovery perspective, but that can only happen after we hit bottom. We are certainly not seeing any recovery yet.
The jobless claims down is a good sign, but the millions that remain on unemployment is showing that a recovery has not yet happened. Additionally the revision lower in the Durable Goods Orders from last month is not a good sign even with this month’s increase – it is too conflictive (either they didn’t get an accurate reading or failed in math) – it is not very good resolution and hard to make any reasonable conclusion as to what they really are (because April could be revised down or up next month as well).
http://www.bloomberg.com/apps/news?pid=20601087&sid=acxRhu6PF8V8&refer=home
__________________________________
Government Bonds
The talk on Bloomberg and CNBC is the concern with the long-term government paper yields on the rise. The Fed has been purchasing more and more of the treasuries (for two reasons – first there is not enough money to buy the treasuries being sold and second to keep rates in check). However, the 10 year yield has popped in the last couple weeks from 3% to 3.68%.
Why and what does this mean.
The why: I think China has articulated their position that gives clear resolution as to why we are seeing the spread between the 2-year and 10-year expand, it is simple. They are concerned about the dollar and inflation. They have made a request for an international reserve currency instead of the dollar, they have publicly made concerns about the bailouts and printing of money in the United States, and they are concerned about the future as it seems to be more uncertain. They have not stopped purchasing U.S. debt, but they have changed their positions into short-term paper and have significantly reduced all their long-term maturities. China is not the only one – several other sovereign funds and large firms are taking a similar position. If future inflation is an unknown (while many agree that it is coming – they don’t know by how much), then why lock in capital on long-term paper at very low rates. Ironically that means the Fed has to print more money to make up for the slack of foreign buyers (thus creating more debt) – a silly circle.
What does that mean: It means that long-term paper yield rates are going up and that trickles down to companies and consumers. We are seeing mortgage rates go up – in fact they made a significant jump recently. That means that housing prices have to come down to off-set higher rates. As per companies and small businesses – it becomes more expensive to borrow money – when they need it the most. Additional consumer credit lines will see higher rates.
For the government’s economic plan to work it needs low rates, very low rates. Obama’s deficit is based on low rates and Bernanke’s policy is to keep them low. However, the bond market and the money we are talking about may be too big.
Keep an eye on these rates as it could mean larger concern for the economic recovery. As well as creating some problems for companies that are relying on debt financing.
_____________________________________
Futures Pre-market
The futures are pretty flat in the pre-market. Expect a mixed opening.
______________________________________
Support / Resistance
We were at support, then resistance, and now back in the middle – where next?
INDU 8250 / 8500
NDX 1350 / 1425-1450
SPX 881 / 925
RUT 470 / 515
_____________________________________
Conclusion
It seems that we are in a unknown period and everyone is holding their breath with GM and how that unfolds. The economic data still shows a recession, but that it is slowing down. Previously less bad news was good news, but now investors need to see some actual good news (not just less bad news).
Remain skeptical and hedge against risk now, not when you have too.
1 comment:
Agree with your entire perspective. One point I would expand on is that of revisions. The larger the revisions the less people will trust the numbers going forward but it keeps the media spinning it positively for the next month or so.
Rotag
Post a Comment