U.S. markets finished higher today with the Dow gaining 145.77 points to close at 10,753.62 and the S&P 500 closed at 1,142.71, up 17.12.
The market worked higher ahead of tomorrow's FOMC announcement. Many traders who have gotten overly extended on the long side may be in for a surprise should the Fed fail to announce the start of more quantitative easing. The NBER today announced that the official end of the Recession was June 2009. Kind of makes it difficult for the Fed to launch additional measures, right?
But I digress. Homebuilder sentiment came in at 13 for September, tied with last month for the lowest reading since May '09. Below 50 means sentiment is negative. At the same time, Miami based homebuilder, Lennar (LEN) posted an earnings beat today on lower costs and more completed home sales. The catch though was that new home orders fell 15% from the same quarter last year as tax credits have expired.
The biggest mover of the market today was likely the record $5.2B of POMO injected into the market this morning. Whether the Fed openly admits it or not, QE2 is already essentially underway. POMO and HFT seem to be the only buyers in the market (aside from some short covering) as retail equity outflows have continued unabated for the past 19 consecutive weeks and in the week ended September 17th, insiders sold $441M worth of stock in 98 companies vs. purchases of $1.4M in 7 companies. (Sourced from Bloomberg).
In other news, Bank of America is expected to lay off 5% of its capital markets staff (400 employees globally) due to light trading volumes, according to CNBC's Charlie Gasparino. I would expect that this will be a theme this fall and that we'll be hearing from other brokerage houses re: layoffs during 3Q earnings releases in October. I've also heard of some second tier shops going from commission to salary plus bonus. It also bears repeating the rumor/(idea?) that BAC is cutting its employees at the end of this year to avoid paying them their year-end bonuses...Nice, huh?
With the Daily Sentiment Index at 80% bullish and AAII at 50% bullish, one must wonder if tomorrow could be the day that the sharp start-of-September rally will come to an end. I would imagine the algo traders will be in sell-mode baring any QE announcement from the Fed. But given the planned POMO operations for the rest of the week, the Fed's official dispatches may prove to be nothing more than a distraction from the seldom covered generational theft experiment (or should I say debt monetization) currently being carried out by the Fed.
The end of the week brings additional data regarding durable goods and housing. Given the data we've seen from the past few weeks, I'd expect this data to continue its slide for the worse. Should no QE be announced tomorrow, I'd advise taking the gains from any short term longs, and begin to build positions on the short side. The failure of the Fed to act in August resulted in a disappointed herd that left the market in droves for several weeks afterwards. Tomorrow's announcement could bring about a similar correction.
Monday, September 20, 2010
Ireland Update and El-Erian writes,"...bailout is not working."
Mohamed El-Erian wrote today, "The failure to reduce risk spreads means that the public sector bailout is not working. Rather tahn provide assurances of better times ahead and, thus, encourage new investments, ECB/EU/IMF support funding is being used by existing investors to exit their exposures to the most vulnerable peripheral European countries. This situation cannot be sustained forever. It undermines any chance that the most vulnerable countries (e.g., Greece) have of limiting the collapse in their GDP and maintaining social cohesion; it contaminates the balance sheet of the ECB; it exposes the revolving nature of IMF resources to considerable risk; and it raises the risk of renewed contagion."
Irish government debt CDS climbed to 444.5 bps from 420.5 bps on Friday.
Portugal government debt CDS climbed to 374.3 bps from 365.3 bps on Friday.
Ireland will auction off 1.5B euros tomorrow. This auction will almost without a doubt go well, especially as it is so small.
Irish government debt CDS climbed to 444.5 bps from 420.5 bps on Friday.
Portugal government debt CDS climbed to 374.3 bps from 365.3 bps on Friday.
Ireland will auction off 1.5B euros tomorrow. This auction will almost without a doubt go well, especially as it is so small.
Friday, September 17, 2010
QE2
Michigan Consumer sentiment gave its weakest reading this morning since August 2009, coming in at 66.6 vs. expectations for 70 and prior of 68.9. The market is nonetheless in positive territory (including consumer discretionary stocks). This is nothing unusual however, as we've seen the market be mildly higher for the past 11 days or so on essentially discouraging economic reports. One can only assume that this is due to the expectation for the Fed to announce QE2 on Tuesday next week. Good data = market up ('recovery intact, yippee!'). Bad data = market up ('here comes the Fed, whoppeee!').
I do not think the Fed will announce QE2 next week. The POMO unleashed this week seemed to be sufficient to drive the market higher and was also able to do so with surprisingly little fanfare. To continue to appear apolitical (and to maintain some level of credibility), I would expect that QE2 will most likely be unleashed in Dec/Jan.
The question now remains: If the market has only been working higher on the expectation of QE2, will we sell off (as we did in August) without a favorable announcement on Tues?
Stay nimble!
I do not think the Fed will announce QE2 next week. The POMO unleashed this week seemed to be sufficient to drive the market higher and was also able to do so with surprisingly little fanfare. To continue to appear apolitical (and to maintain some level of credibility), I would expect that QE2 will most likely be unleashed in Dec/Jan.
The question now remains: If the market has only been working higher on the expectation of QE2, will we sell off (as we did in August) without a favorable announcement on Tues?
Stay nimble!
Portugal & Ireland
The Irish Independent newspaper warned that Ireland is close to calling in the IMF for a bailout. This report has been denied by Finance Minister Brian Lenihan who said last night, "The Government's strategy for dealing with the economic and financial challenges has been commended by the EU Commission, the ECB, and many other international experts."
Regardless of the official denials, Irish CDS hit a record high at 425 and the Irish/German 10-year spread ripped higher to 410 bps, leaving the Irish 10-year yield at around 6.5%.
Ireland is funded through 2Q11, which has eased some immediate concerns. However, Ireland is scheduled to auction 1.5B euros in bonds on Tuesday (same day that we likely disappoint a lot of folks here in the US when QE2 fails to arrive...). Demand and pricing of this auction ought to be quite telling re: investors risk appetite.
The largest concern however remains the unveiling of the cost of dealing with Anglo Irish bank which is supposed announced from Dublin sometime in early October. Estimates provided so far suggest approx 25B euros (15% of GDP).
Also of interest was PM Brian Cowen stating today that he would socialize more cautiously after appearing intoxicated on air following a party with colleagues at an annual conference. Good to know that the powers that be are maintaining clear heads!
Portugal CDS is also surging this morning as Diario de Noticias writes, "Portugal may be required to seek assistance from the IMF to address the problems of external financing."
It would seem that while nothing is imminent, the European Sovereign Debt Crisis is re-heating. Stay tuned. Euro holds above 1.30 EUR/USD.
I continue to hold various call options on the EUO (ultra short Euro).
Regardless of the official denials, Irish CDS hit a record high at 425 and the Irish/German 10-year spread ripped higher to 410 bps, leaving the Irish 10-year yield at around 6.5%.
Ireland is funded through 2Q11, which has eased some immediate concerns. However, Ireland is scheduled to auction 1.5B euros in bonds on Tuesday (same day that we likely disappoint a lot of folks here in the US when QE2 fails to arrive...). Demand and pricing of this auction ought to be quite telling re: investors risk appetite.
The largest concern however remains the unveiling of the cost of dealing with Anglo Irish bank which is supposed announced from Dublin sometime in early October. Estimates provided so far suggest approx 25B euros (15% of GDP).
Also of interest was PM Brian Cowen stating today that he would socialize more cautiously after appearing intoxicated on air following a party with colleagues at an annual conference. Good to know that the powers that be are maintaining clear heads!
Portugal CDS is also surging this morning as Diario de Noticias writes, "Portugal may be required to seek assistance from the IMF to address the problems of external financing."
It would seem that while nothing is imminent, the European Sovereign Debt Crisis is re-heating. Stay tuned. Euro holds above 1.30 EUR/USD.
I continue to hold various call options on the EUO (ultra short Euro).
Thursday, September 16, 2010
Investor Sentiment
The AAII reports that this week's sentiment survey showed 50.89% are bullish. This is the second highest reading in two years!
Bearish sentiment is only around 24%. And yet the VIX is at 22.62.
For all those who claim it is a contrarian indicator every time the majority is bearish - Take Heed.
Bearish sentiment is only around 24%. And yet the VIX is at 22.62.
For all those who claim it is a contrarian indicator every time the majority is bearish - Take Heed.
Philly Fed, HFT, Outflows
Wow! Philly Fed came in at -0.7, missed expectations of 0.5, prior at -7.7. Market sold off for about 30 seconds, and then bounced. That move seems to be perfect evidence that this low volume bs-rally we've had since late August is dominated by algo-traders and hedge funds who are chasing beta with the understanding that the Fed is 100% prepared to throw taxpayer dollars at the market should the top 10% face any haircuts. Market is again almost entirely dismissing bad economic reports and geopolitical events roiling just below the surface. The lack of correlation to reality and recurring flash crash type market irregularities have lead many people to leave the equity markets for the safety of negative real return bonds.
ICI's latest data reports that in the week of September 8th, domestic funds saw outflows of $2.2B, following the prior week's $7.7B. The tally now stands at $65B for the year. Amazing that the indexes could rally almost 7% in September while people rush for the exits. This is the 19th sequential outflow for stocks. I am becoming increasingly concerned that the HFT and quote-stuffing criminals are going to ruin one of the strongest things about the US Economy: Well functioning, liquid equity capital markets that attract both foreign and domestic interest in droves because of the rule of law and assurance of fairness and equality among participants regardless of size or pedigree. The market as we now it is being destroyed. Where are the lawmakers? The HFT lobby must be incredible (oh yeah, and wealthy...)
ICI's latest data reports that in the week of September 8th, domestic funds saw outflows of $2.2B, following the prior week's $7.7B. The tally now stands at $65B for the year. Amazing that the indexes could rally almost 7% in September while people rush for the exits. This is the 19th sequential outflow for stocks. I am becoming increasingly concerned that the HFT and quote-stuffing criminals are going to ruin one of the strongest things about the US Economy: Well functioning, liquid equity capital markets that attract both foreign and domestic interest in droves because of the rule of law and assurance of fairness and equality among participants regardless of size or pedigree. The market as we now it is being destroyed. Where are the lawmakers? The HFT lobby must be incredible (oh yeah, and wealthy...)
Market Update
Another busy day in the markets today.
FedEx is down 3% pre-market as it missed expectations and provided downside guidance. The bellwether also reported that it will be laying off 1,700 workers as it consolidates its trucking operations to cut costs.
Realty Trac announced that there were 95,364 foreclosures in August, which is a +3% increase from July, and a 25% increase from August 2009. This is the 9th month in a row that foreclosures have increased on an annual basis. 2.3M homes have been repossesed since the recession began in December 2007. Another 1M homes are expected to be foreclosed on this year. The top 10 states with the highest foreclosure rates in August were: NV, FL, AZ, CA, ID, UT, GA, MI, IL, HW.
On to the much more interesting developments in the Forex markets...
Yesterday, Japanese PM Naoto Kan intervened in the currency market to stop the Yen from appreciating against the dollar. In an ironic twist, Kan ran for re-election on the basis that he would not intervene in the currency market. Once elected, the Yen started to run higher, and he was forced to intervene (on his FIRST DAY back in office! So much for those campaign promises!)
Then the NY Fed purchased a single day record $3.9B of 2014-2015 range bonds in the open market yesterday morning. Blogger Tyler Durden of Zero Hedge fame speculated that these may have even been 5 Year bonds that were only auctioned a month or so earlier, implying that the Fed's promise to never monetize our debt has been broken.
Following these two episodes, the US decides to file WTO complaints against China yesterday afternoon. The first one relating to payment processing companies (Visa/Mastercard/etc), and the other regarding steel duties. (Interesting timing here as AK Steel (AKS) yesterday reversed their guidance for 3Q from a $15 per ton operating profit to a loss of approx $20 per ton. While much is this is due to an 11day maintenance outage, the Ohio steelmaker noted higher raw material and ops costs. Perhaps related to China...?)
The WTO filings followed Congressional demands that China accelerate their Yuan reform. Geithner will testify today on China's trade and currency, and is expected to say that the U.S. isn't satisfied with the pace of yuan gains. The Yuan was pegged at 6.83 since July 08, until China dropped the peg in June of this year to much fanfare here in the US. Not surprisingly however, Geithner has now said publicly that 'Heavy intervention' has kept the Yuan undervalued. The Yen has moved a mere 1% since the June announcement, and the growing trade deficit that China has with the US suggests the need for futher action (as do currency interventions in Japan and Singapore, and distrust/frustration from smaller Asian nations who are being boxed out by China as they compete for exports.) The China/US deficit was $119B in 1H10. The total deficit in 2009, was $227B, so we are well on pace to surpass last year's figure.
Paul Krugman has said that China's currency policy has been to blame for the Yen's rise to a 15-year high against the dollar this week. His op-ed in the NY Times this past weekend also was shocking in its suggestion that the U.S. impose trade restrictions on China even if this results in their selling some of the $843.7B of U.S. Treasuries they held as of June 2010. One would think that Krugman would undertand the ramifications of the Smoot-Hawley protectionism of the 1930s and its role in worsening the Great Depression (and helping create the geopolitical atmosphere that led to WWII), but I suppose he does not.
The co-sponser of legislation letting companies seek duties on Chinese imports, OHIO Democrat (see mention of AK Steel above...Also, note that its long been said that if a CEO doesn't know his Senators on a first name basis, then he's not looking out for shareholders...) Tim Ryan said in testimony to the House Ways and Means Committee, "It's now time for our country to have the guts to stand up and take a strong stand against China's currency manipulation."
Prior to the U.S. hearings, China fixed the yuan's reference rate at a record high which allowed the Yuan to rise to its highest level since 1993 yesterday.
The Japanese are also still holding a Chinese boat that collided with two Japanese coast guard ships in disupted seas last week.
The weakened dollar has made for a stronger EUR/USD at 1.3060 this morning, which should actually hamper Europe's growth in 3Q if these conditions prove sustainable.
Meanwhile gold continues its record run with the shiny metal at $1,272 an ounce, or +5.80. This should not be surprising to anyone, for while I do not consider gold to be a proper 'investment' as one cannot accurately determine 'fair value' based on any earnings stream, people do tend to want to own the physical when the world's leading economies are in a race to devalue their currencies.
FedEx is down 3% pre-market as it missed expectations and provided downside guidance. The bellwether also reported that it will be laying off 1,700 workers as it consolidates its trucking operations to cut costs.
Realty Trac announced that there were 95,364 foreclosures in August, which is a +3% increase from July, and a 25% increase from August 2009. This is the 9th month in a row that foreclosures have increased on an annual basis. 2.3M homes have been repossesed since the recession began in December 2007. Another 1M homes are expected to be foreclosed on this year. The top 10 states with the highest foreclosure rates in August were: NV, FL, AZ, CA, ID, UT, GA, MI, IL, HW.
On to the much more interesting developments in the Forex markets...
Yesterday, Japanese PM Naoto Kan intervened in the currency market to stop the Yen from appreciating against the dollar. In an ironic twist, Kan ran for re-election on the basis that he would not intervene in the currency market. Once elected, the Yen started to run higher, and he was forced to intervene (on his FIRST DAY back in office! So much for those campaign promises!)
Then the NY Fed purchased a single day record $3.9B of 2014-2015 range bonds in the open market yesterday morning. Blogger Tyler Durden of Zero Hedge fame speculated that these may have even been 5 Year bonds that were only auctioned a month or so earlier, implying that the Fed's promise to never monetize our debt has been broken.
Following these two episodes, the US decides to file WTO complaints against China yesterday afternoon. The first one relating to payment processing companies (Visa/Mastercard/etc), and the other regarding steel duties. (Interesting timing here as AK Steel (AKS) yesterday reversed their guidance for 3Q from a $15 per ton operating profit to a loss of approx $20 per ton. While much is this is due to an 11day maintenance outage, the Ohio steelmaker noted higher raw material and ops costs. Perhaps related to China...?)
The WTO filings followed Congressional demands that China accelerate their Yuan reform. Geithner will testify today on China's trade and currency, and is expected to say that the U.S. isn't satisfied with the pace of yuan gains. The Yuan was pegged at 6.83 since July 08, until China dropped the peg in June of this year to much fanfare here in the US. Not surprisingly however, Geithner has now said publicly that 'Heavy intervention' has kept the Yuan undervalued. The Yen has moved a mere 1% since the June announcement, and the growing trade deficit that China has with the US suggests the need for futher action (as do currency interventions in Japan and Singapore, and distrust/frustration from smaller Asian nations who are being boxed out by China as they compete for exports.) The China/US deficit was $119B in 1H10. The total deficit in 2009, was $227B, so we are well on pace to surpass last year's figure.
Paul Krugman has said that China's currency policy has been to blame for the Yen's rise to a 15-year high against the dollar this week. His op-ed in the NY Times this past weekend also was shocking in its suggestion that the U.S. impose trade restrictions on China even if this results in their selling some of the $843.7B of U.S. Treasuries they held as of June 2010. One would think that Krugman would undertand the ramifications of the Smoot-Hawley protectionism of the 1930s and its role in worsening the Great Depression (and helping create the geopolitical atmosphere that led to WWII), but I suppose he does not.
The co-sponser of legislation letting companies seek duties on Chinese imports, OHIO Democrat (see mention of AK Steel above...Also, note that its long been said that if a CEO doesn't know his Senators on a first name basis, then he's not looking out for shareholders...) Tim Ryan said in testimony to the House Ways and Means Committee, "It's now time for our country to have the guts to stand up and take a strong stand against China's currency manipulation."
Prior to the U.S. hearings, China fixed the yuan's reference rate at a record high which allowed the Yuan to rise to its highest level since 1993 yesterday.
The Japanese are also still holding a Chinese boat that collided with two Japanese coast guard ships in disupted seas last week.
The weakened dollar has made for a stronger EUR/USD at 1.3060 this morning, which should actually hamper Europe's growth in 3Q if these conditions prove sustainable.
Meanwhile gold continues its record run with the shiny metal at $1,272 an ounce, or +5.80. This should not be surprising to anyone, for while I do not consider gold to be a proper 'investment' as one cannot accurately determine 'fair value' based on any earnings stream, people do tend to want to own the physical when the world's leading economies are in a race to devalue their currencies.
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