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.
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