Today Warren Buffett said, "We're still in a recession. And, and we're not gonna be out of it for awhile..." His opinion is based on "any common sense definition" of a recession. This is largely at the core of why I am bearish on equities in the medium-term. Allow me to explain.
For most Americans, the level of unemployment is a much more convincing measure of the health of the economy than is the level of the stock market. While the Fed, Treasury, and Federal Government view the stock market as the nation's economic thermometer, the average American citizen views his or her income, job security, future direction of inflation for food, energy and other basic , and quality of life as the most important indicators of present and future personal financial health.
This is why so many citizens are growing increasingly angry. The Tea Party may in fact have accidentally capitalized on the 'taxation without representation' theme of the original Tea Party in Boston Harbor. Though I take it that the Tea Party's focus is more on re-instituting Christian, Conservative government with a fetish for Libertarianism, their frustration should be understood from the perspective of class struggle. I believe Tea Party activists can sense that the economic stimulus programs, 'bailouts', and interventions were if not by design, then at least in effect, bailouts for the wealthy corporate elite using tax dollars collected from the average working class American.
The competitive global currency devaluation, aka the 'race to the bottom', may keep capital goods and real estate from ever facing legitimate price discovery, but these efforts by the Fed aimed at debt monetization (see POMO), are done using taxpayer dollars. The increase in the money supply will increase the cost of basic necessities such as food and energy, which of course will most significantly impact the lower classes.
It doesn't take a conspiracy theorist to see the bigger picture. The top 20% in this country (the voters, campaign contributors, focus group leaders, lobbyists, corporate chiefs, etc) are primarily concerned with protecting themselves against wealth destruction. This is understandable, and why should anyone expect otherwise? The trouble comes though, when a private entity, the Fed, is able to buy a recovery in stock prices with taxpayer dollars. Of course the voting class will cheer, and the system may continue to splurge on debt, driving liquidty into stocks, and providing exit opportunities for corporate insiders who were, as a reminder, net sellers of their own holdings by a ratio of 260-to-1 last week.
The amazing thing about those who make bullish arguments for corporate profit growth is that they still maintain the irrational belief that top-line revenue can grow without a healthy middle class. In no industry can you actively destroy your own customer base and at the same time increase revenues. It is nonsensical. When one considers that 2/3 of US GDP is domestic consumer spending, it becomes obvious that we are still in a recession with 16% underemployment. As noted in previous posts, households continue to deleverage, and are doing so at the fastest pace yet. Consumers have undergone a paradigm shift. The thought of increasing personal debt for irrelevant goods has almost become akin to a social taboo. Even those who have excess savings aren't spending because not only is the outlook uncertain, but we've become a society of low-ballers. Why buy a house now when rates aren't going anywhere and the Fed is considering using the final arrows in their quiver to try their best to protect against deflation? People understand that this is a high stakes game with a very uncertain outcome. If the Fed fails to be successful, people don't want to be left holding the bag. Common sense dictates that home prices are still over-valued. The average American citizen in in his late 20's/early 30's does not have the capital or the confidence in the future required to purchase a home. The housing bubble priced many people out of the market. The American Dream has gotten that much further away, and much like the experience in Japan over the last two decades, I would anticipate that the rites of passage into adulthood such as childbirth, purchasing a home, etc will be put off until such time that job security, clarity over inflation, and home prices all adjust to levels at which a reasonable optimist would begin to move forward.
The cover of the most recent issue of Newsweek features an article on rethinking masculinity with the message "Man Up!" The article goes on to discuss men losing identity due to the loss of manufacturing and manual labor jobs, how men into their late twenties still live with their parents, etc. I couldn't get through the whole article as these anthropological battle-of-the-sexes fluff pieces never fail to disappoint in their efforts at serious journalism and tend to be written by some gender obsessed person who inadvertantly clings to anecdotal cliches rather than a grasp of fact based cause-and-effect sociological developments. What the article was failing to address (and why I gave up reading it) is that in a nation where the aging baby boomers are leveraging their children's future and defending the price of their homes, level of their 401(k)s, and their jobs, they remarkably, but inadvertently ensure lives that are worse off for their children. I believe that all people are at least partially the product of their environment (which is not to say I don't believe people can, and should, pull themselves up by their bootstraps.) The current environment is one that keeps our youth under-employed, over-stimulated, under-educated, and increasingly cynical.
To allow price discovery in hard asset markets, would be to allow discovery in the power of our nation's youth to innovate, grow, produce, thrive. Why do we still lag behind certain developing nations in terms of green tech? Your views on the global warming debate aside, why not launch a massive all-out effort to be the world leader in the electric car revolution (as one example.) This would bring back jobs, re-inspire our students to pursue fields in math and the sciences, and allow for a shift in the character and magnitude of the aspirations of our nation's citizens. This however, has not happened because entrenched interests continue to protect the value of their acquired possessions at all costs.
Price discovery in commercial real estate (CRE) would likely have tremendous positive benefits for future industry and job growth in the United States. If CRE pricing came down to a more rational, market-clearing level, jobs could be added back without doing as much damage to corporate profit margins. This would also allow fledgling entrepreneures to undertake projects without worrying about possibly being faced with the need to hire under-the-table employees, etc., just to cover the costs of doing business.
Where are our leaders? Why have we failed to learn the lessons of history? When Krugman writes of his desire to see increased protectionism against China, is he avoiding the truth about the Depression-worsening impacts of Smoot-Hawley for the sake of making his point, or is the influential Keynsian simply forgetting the one of the central tenaments of macro economics and the history of WWII? Perhaps Wen Jiabao was correct today when he suggested that it was America's preference to outsource all of our manufacturing jobs over the past few decades that is to blame for our trade deficit, and not the also undervalued Remnimbi. But don't tell that to the House Ways and Means Committee, because they have their hearts set on joining the trade war that China started today when they stopped shipping rare earth metals to Japan.
Meanwhile, the official story we are supposed to believe is that the investment landscape is far more benign (and more attractive) than it was in September 2008 when the stock market started really falling off the cliff. Maybe in the near-term this is true considering the Fed's promise to monetize U.S. debt, but then our issues were in the sphere of governments bailing out business. Now we are faced with governments bailing out governments. Which of these seems more malignant to you?
Thursday, September 23, 2010
Sovereign Default Probabilities
1. Venezuela 56.52 %
2. Greece 50.58%
3. Argentina 41.07%
4. Pakistan 35.04%
5. Ireland 34.12%
6. Ukraine 23.72%
7. Portugal 29.83%
8. Iraq 28.05%
9. Dubai 26.01%
10. Romania 22.53%
I was surprised to see that buyers of CDS believe the probability for a Greek default is greater than half.
Others..
Spain 18.11%, Italy 15.92%
2. Greece 50.58%
3. Argentina 41.07%
4. Pakistan 35.04%
5. Ireland 34.12%
6. Ukraine 23.72%
7. Portugal 29.83%
8. Iraq 28.05%
9. Dubai 26.01%
10. Romania 22.53%
I was surprised to see that buyers of CDS believe the probability for a Greek default is greater than half.
Others..
Spain 18.11%, Italy 15.92%
Markets Defy Gravity
Stocks have just turned positive this morning after a slew of terrible economic data and in the face of mounting geopolitical concerns.
Reasons to be bearish this morning include:
1. Bloomberg reports that China has blocked rare earth element shipments to Japan. The rare earth elements are used in hybrid cars, other green tech, and most importantly weapons systems. Let the trade wars begin.
2. Ireland GDP turned negative (-1.5%) vs. expectation of +0.05%. Welcome to the double dip.
3. Eurozone PMI Composite came in at 53.8 vs. 55.7 consensus and previous of 56.2
4. Germany PMI Manufacturing came in at 55.3 vs. consensus of 57.6 and previous of 58.2
5. U.S. Jobless Claims @ 465,000 vs. 440K consensus, 453K prior (revised from 450K)
6. Continuing claims 4489K vs. 4450K consensus, 4537K prior (huge revision higher from 4485K).
Since the BLS continues to revise higher ever single claims report, should we assume that jobless claims were actually something closer to 475,000 last week? What a joke.
7. Existing home sales were 4.13M in August, 19% less than the 5.10M pace in August 2009. This is the second lowest reading on record, but comes in line with the 4.1M consensus expectation. This is not bullish.
8. Wen Jiabao, in a sign that China will not be revaluing the Yuan stated that a 20% gain in the Remnimbi would lead to social upheaval. "We cannot imagine how many Chinese factories will go bankrupt, how many Chinese workers will lose their jobs, and how many migrant workers will return to the countryside...China would suffer major social upheaval." Wen also pointed out that the issue was not China's weak currency, but rather the decisions over the last three decades by U.S. corporations to outsource all manufacturing jobs to China and other overseas locations. We will be net importers regardless of whether we source our goods from China or somewhere else. Brilliant job. Glad the rich were able to rake some extra profit on the margin for the destruction of the middle class, the American Dream, etc. Gotta also thank our political leaders for allowing a vast number of the U.S. population to become structurally unemployed. Articles abound on whether stock investors should even worry about unemployment as margins have never been higher. Great, no end market. No US consumer to drive their 2/3 portion of GDP. This situation cannot last forever.
Consumers continue to deleverage, with Z1 Flow of Funds reporting that the household sector has now deleveraged for 9 consecutive quarters, the most recent at the fastest pace yet. How much longer can the market rise on higher expected earnings while aggregate demand continues to fall at an accelerating pace???
9. Durable goods report tomorrow has a very slim chance of being positive.
10. New homes sales tomorrow are set to post a record low.
Reasons to be bearish this morning include:
1. Bloomberg reports that China has blocked rare earth element shipments to Japan. The rare earth elements are used in hybrid cars, other green tech, and most importantly weapons systems. Let the trade wars begin.
2. Ireland GDP turned negative (-1.5%) vs. expectation of +0.05%. Welcome to the double dip.
3. Eurozone PMI Composite came in at 53.8 vs. 55.7 consensus and previous of 56.2
4. Germany PMI Manufacturing came in at 55.3 vs. consensus of 57.6 and previous of 58.2
5. U.S. Jobless Claims @ 465,000 vs. 440K consensus, 453K prior (revised from 450K)
6. Continuing claims 4489K vs. 4450K consensus, 4537K prior (huge revision higher from 4485K).
Since the BLS continues to revise higher ever single claims report, should we assume that jobless claims were actually something closer to 475,000 last week? What a joke.
7. Existing home sales were 4.13M in August, 19% less than the 5.10M pace in August 2009. This is the second lowest reading on record, but comes in line with the 4.1M consensus expectation. This is not bullish.
8. Wen Jiabao, in a sign that China will not be revaluing the Yuan stated that a 20% gain in the Remnimbi would lead to social upheaval. "We cannot imagine how many Chinese factories will go bankrupt, how many Chinese workers will lose their jobs, and how many migrant workers will return to the countryside...China would suffer major social upheaval." Wen also pointed out that the issue was not China's weak currency, but rather the decisions over the last three decades by U.S. corporations to outsource all manufacturing jobs to China and other overseas locations. We will be net importers regardless of whether we source our goods from China or somewhere else. Brilliant job. Glad the rich were able to rake some extra profit on the margin for the destruction of the middle class, the American Dream, etc. Gotta also thank our political leaders for allowing a vast number of the U.S. population to become structurally unemployed. Articles abound on whether stock investors should even worry about unemployment as margins have never been higher. Great, no end market. No US consumer to drive their 2/3 portion of GDP. This situation cannot last forever.
Consumers continue to deleverage, with Z1 Flow of Funds reporting that the household sector has now deleveraged for 9 consecutive quarters, the most recent at the fastest pace yet. How much longer can the market rise on higher expected earnings while aggregate demand continues to fall at an accelerating pace???
9. Durable goods report tomorrow has a very slim chance of being positive.
10. New homes sales tomorrow are set to post a record low.
Wednesday, September 22, 2010
Market Update
Markets are down this morning after yesterday's FOMC announcement failed to provide any significant changes to current monetary policy. Bernanke did suggest increasing concern over deflation, which suggests increased dovishness (hence the temporary pop in the markets yesterday following the statement).
Also driving the markets lower this morning was weak guidance from ADBE (Down ~20% this morning) yesterday after the close and a tremendously poor earnings report from Jefferies Group that showed principal trading revenues of $74.3M down from $338.6M in 3Q09. Trading volumes were terrible all summer, and it follows that the investment banks will post very weak revenue in 3Q. With GS still trading near $150, one must wonder if there is a case to be made for going short the banks into earnings season.
Portugal's bond offering this morning closely mimicked that of Ireland's yesterday in that risk premium increased 100 bps on both the 4 yr and 10 yr bonds.
0.45B Euro of 4 Year bonds at a 4.695% yield vs. previous at 3.621%
0.3B Euro of 10 Year bonds at a 6.242% yield vs. previous at 5.312%
Today's POMO had little effect on the markets. The Fed purchased $2.07B 3 year bonds.
Interestingly, some of the high beta tech names (AMZN, AAPL) are going up despite the Nasdaq being down approx 1%, lending some credence to the blogosphere belief that POMO is providing primary dealers with levered funds to purchase high-beta equities in the hope that tech can lead us higher.
The probability of a trade war in Asia increased this morning as China Premier Wen Jiabao threatened more retaliatory action unless Japan "immediately and unconditionally" releases the fishing captain detained by the Japanese two weeks ago. As Japan is China's #2 trading partner after the U.S., and China is Japan's #1 export market, it bears watching this development as increased trade sanctions could lead to a gigantic selloff in global markets. China has also been seen increasing its Naval presence in Myanmar ahead of elections there, and we don't have any resolution in the continuing conflict on the Korean Peninsula.
The Euro is flying this morning to 1.3368 vs. the dollar. This is the high end of its summer range. I don't believe that the Eurozone is recovering, and think a long position in the EUO should be built at these levels. (Zapatero's announcement that Spain's troubles are over doesn't impress me...). Youth unemployment in Spain still hovers around 40%. Social unrest is not altogether unlikely. Also this morning, Eurozone Industrial orders posted the sharpest montly drop in 19 months, led by a drop in orders for capital goods. German GDP will begin to drop off if the ECB doesn't intervene to stop the strengthening Euro. Action on this front is all but certain as the race to competitive devaluation continues.
On that front, Tyler Durden at Zero Hedge provides an excerpt from perma-bear Albert Edwards' latest report in which Edwards asks, "What do devaluation, high unemployment, inequality and food prices spell? C-H-A-O-S." Edwards also goes back to a speech given by Bernanke in November of 2002. This is truly terrifying in its implications for the future intentions of the Fed.
"...A striking example from U.S. history is Franklin Roosevelt's 40% devaluation of the dollar against gold in 1933-1934, enforced by a program of gold purchases and domestic money creation. The devaluation and rapid increase in the money supply it permitted ended the U.S. deflation remarkably quickly...and by the way, 1934 was one of the best years of the Century for the stock market." WOW. No wonder gold continues its march higher.
Another interesting observation this morning comes from Philip Davis. He notes that after the past two Fed meetings, the stock market proceeded to lose 5% in the 10 day following the announcement.
With bullish sentiment much too high and mutual funds holding just 3.4% cash (lowest level in the 60 year history of this measure) there isn't a lot of plain vanilla institutional firepower left to lead us higher. Lists of the most overvalued stocks are being sent around this morning, and it appears that the shorts will be able to finally get back to work. I personally think that names that gapped 25% higher on no news over the past two weeks provide a nice entry point on the short side (especially some consumer discretionary names such as ANN and BC, both of which I hold short positions in at these levels.)
Finally, we must look ahead to earnings. Consensus expectations are still much too high and we will likely begin to see downward revisions. Consensus for 2011 stands at $95 and consensus for 2012 is still $108 despite falling GDP estimates. As we see more guidance disappoint, expect these numbers to be revised lower, thus making the bull case that the market is historically cheap based on forward earnings a little less robust. Analysts tend to be overly optimistic at the top (and overly pessimistic at the bottom). A reversion to the mean (if rational/truthful estimates are possible in a world in which the banks and brokerages must fight to keep outflows and low volumes from destroying their business by being as bullish as possible ('Occupationally bullish') would quickly show that this market is overvalued.
Also driving the markets lower this morning was weak guidance from ADBE (Down ~20% this morning) yesterday after the close and a tremendously poor earnings report from Jefferies Group that showed principal trading revenues of $74.3M down from $338.6M in 3Q09. Trading volumes were terrible all summer, and it follows that the investment banks will post very weak revenue in 3Q. With GS still trading near $150, one must wonder if there is a case to be made for going short the banks into earnings season.
Portugal's bond offering this morning closely mimicked that of Ireland's yesterday in that risk premium increased 100 bps on both the 4 yr and 10 yr bonds.
0.45B Euro of 4 Year bonds at a 4.695% yield vs. previous at 3.621%
0.3B Euro of 10 Year bonds at a 6.242% yield vs. previous at 5.312%
Today's POMO had little effect on the markets. The Fed purchased $2.07B 3 year bonds.
Interestingly, some of the high beta tech names (AMZN, AAPL) are going up despite the Nasdaq being down approx 1%, lending some credence to the blogosphere belief that POMO is providing primary dealers with levered funds to purchase high-beta equities in the hope that tech can lead us higher.
The probability of a trade war in Asia increased this morning as China Premier Wen Jiabao threatened more retaliatory action unless Japan "immediately and unconditionally" releases the fishing captain detained by the Japanese two weeks ago. As Japan is China's #2 trading partner after the U.S., and China is Japan's #1 export market, it bears watching this development as increased trade sanctions could lead to a gigantic selloff in global markets. China has also been seen increasing its Naval presence in Myanmar ahead of elections there, and we don't have any resolution in the continuing conflict on the Korean Peninsula.
The Euro is flying this morning to 1.3368 vs. the dollar. This is the high end of its summer range. I don't believe that the Eurozone is recovering, and think a long position in the EUO should be built at these levels. (Zapatero's announcement that Spain's troubles are over doesn't impress me...). Youth unemployment in Spain still hovers around 40%. Social unrest is not altogether unlikely. Also this morning, Eurozone Industrial orders posted the sharpest montly drop in 19 months, led by a drop in orders for capital goods. German GDP will begin to drop off if the ECB doesn't intervene to stop the strengthening Euro. Action on this front is all but certain as the race to competitive devaluation continues.
On that front, Tyler Durden at Zero Hedge provides an excerpt from perma-bear Albert Edwards' latest report in which Edwards asks, "What do devaluation, high unemployment, inequality and food prices spell? C-H-A-O-S." Edwards also goes back to a speech given by Bernanke in November of 2002. This is truly terrifying in its implications for the future intentions of the Fed.
"...A striking example from U.S. history is Franklin Roosevelt's 40% devaluation of the dollar against gold in 1933-1934, enforced by a program of gold purchases and domestic money creation. The devaluation and rapid increase in the money supply it permitted ended the U.S. deflation remarkably quickly...and by the way, 1934 was one of the best years of the Century for the stock market." WOW. No wonder gold continues its march higher.
Another interesting observation this morning comes from Philip Davis. He notes that after the past two Fed meetings, the stock market proceeded to lose 5% in the 10 day following the announcement.
With bullish sentiment much too high and mutual funds holding just 3.4% cash (lowest level in the 60 year history of this measure) there isn't a lot of plain vanilla institutional firepower left to lead us higher. Lists of the most overvalued stocks are being sent around this morning, and it appears that the shorts will be able to finally get back to work. I personally think that names that gapped 25% higher on no news over the past two weeks provide a nice entry point on the short side (especially some consumer discretionary names such as ANN and BC, both of which I hold short positions in at these levels.)
Finally, we must look ahead to earnings. Consensus expectations are still much too high and we will likely begin to see downward revisions. Consensus for 2011 stands at $95 and consensus for 2012 is still $108 despite falling GDP estimates. As we see more guidance disappoint, expect these numbers to be revised lower, thus making the bull case that the market is historically cheap based on forward earnings a little less robust. Analysts tend to be overly optimistic at the top (and overly pessimistic at the bottom). A reversion to the mean (if rational/truthful estimates are possible in a world in which the banks and brokerages must fight to keep outflows and low volumes from destroying their business by being as bullish as possible ('Occupationally bullish') would quickly show that this market is overvalued.
POT Update - POT sues BHP in U.S. District Court
Potash has filed suit in U.S. Distrct Court in Northern Illinois against BHP this morning, alleging that BHP's offer violates U.S. securities law by making misleading statements including BHP's stated plans for POT should it be successful. The suit also alleges that BHP's hostile bid is 'unsually coercive' given that it is structured to only require 50% of shareholders to approve the deal rather than the 2/3 normally required by Canadian law. Further, POT argues that BHP's widely publicized entrance into the potash market by developing mines in Saskatchewan and suggesting that they would run the mines at full capacity was an attempt to drive down potash prices and thus the price of POT stock to a level where it would be an attractive acquisition target. These are some pretty serious allegations...
Full filing available below.
http://sec.gov/Archives/edgar/data/855931/000095012310087970/o65249exv99wxaywx18y.htm
Does anyone still believe this deal will get done???
Finally, an addendum to yesterday's trade idea...If more time is preferred b/c you believe the offer could be extended into 2011, you could wait until October to purchase 2011 puts, allowing some of the Theta to bleed off in the meantime...
Full filing available below.
http://sec.gov/Archives/edgar/data/855931/000095012310087970/o65249exv99wxaywx18y.htm
Does anyone still believe this deal will get done???
Finally, an addendum to yesterday's trade idea...If more time is preferred b/c you believe the offer could be extended into 2011, you could wait until October to purchase 2011 puts, allowing some of the Theta to bleed off in the meantime...
Tuesday, September 21, 2010
Potash - Trade Idea
BHP Billiton has extended its $130/share offer for POT by a month to November 18th.
Marius Kloppers, CEO of BHP, said, "We have no plans to change what is currently the only offer on the table. I've seen a lot of speculation and rumors but the reality is there is only one cash bid on the table and that's ours at the moment."
Brad Wall, Premier of Saskatchewan, said, "As of today, I don't see how Saskatchewan is better with this deal, or frankly a subsequent deal."
With Canada showing signs of protectionism re: a takeover by an Australian firm, I believe it will be even less likely that we will see a rival bid by a Chinese consortium. If Brad Wall is resisting Aussie encroachment, then he would certainly do the same (if not with stronger language) should a Chinese consortium bid for POT.
Meanwhile, Chinese trade officials have suggested that they would move to block BHP's takeover of POT based on competitive concerns. All-in-all, BHP's bid doesn't look like it will be successful in convincing shareholders, management, or the Canadian government to sell.
While the work of handicapping M&A situations is always fraught with peril, I've gone long December $135 puts below $5 (last trade at 4.90).
Should the $130 deal be accepted on or before 11/18/10, then the downside is zero.
If the $130 deal is not accepted, then POT trades based on fundamentals (no M&A premium) which suggest a level that is likely to be considerably below $130 (was approx $110 prior to deal announcement, although overall market was lower then than it is today.)
Only chance for a loss is if the offer is extended further in 2011 or a rival bidder emerges. I do not believe either of these will occur. If an extension is your concern, I'd look to longer dated options (although this increases your loss potential if the $130 bid is accepted.) Because there are several unknowns here, this is a speculative position and should not constitute more than a percentage point or two of your overall portfolio (in my humble opinion.)
This is not a recommendation to buy or sell any security. Just something that may be worth taking a long look at...
Quotes and update provided by Reuters. (http://www.reuters.com/article/idUSTRE68J4VG20100921)
Marius Kloppers, CEO of BHP, said, "We have no plans to change what is currently the only offer on the table. I've seen a lot of speculation and rumors but the reality is there is only one cash bid on the table and that's ours at the moment."
Brad Wall, Premier of Saskatchewan, said, "As of today, I don't see how Saskatchewan is better with this deal, or frankly a subsequent deal."
With Canada showing signs of protectionism re: a takeover by an Australian firm, I believe it will be even less likely that we will see a rival bid by a Chinese consortium. If Brad Wall is resisting Aussie encroachment, then he would certainly do the same (if not with stronger language) should a Chinese consortium bid for POT.
Meanwhile, Chinese trade officials have suggested that they would move to block BHP's takeover of POT based on competitive concerns. All-in-all, BHP's bid doesn't look like it will be successful in convincing shareholders, management, or the Canadian government to sell.
While the work of handicapping M&A situations is always fraught with peril, I've gone long December $135 puts below $5 (last trade at 4.90).
Should the $130 deal be accepted on or before 11/18/10, then the downside is zero.
If the $130 deal is not accepted, then POT trades based on fundamentals (no M&A premium) which suggest a level that is likely to be considerably below $130 (was approx $110 prior to deal announcement, although overall market was lower then than it is today.)
Only chance for a loss is if the offer is extended further in 2011 or a rival bidder emerges. I do not believe either of these will occur. If an extension is your concern, I'd look to longer dated options (although this increases your loss potential if the $130 bid is accepted.) Because there are several unknowns here, this is a speculative position and should not constitute more than a percentage point or two of your overall portfolio (in my humble opinion.)
This is not a recommendation to buy or sell any security. Just something that may be worth taking a long look at...
Quotes and update provided by Reuters. (http://www.reuters.com/article/idUSTRE68J4VG20100921)
Market Update - FOMC Meetings & Irish Debt Auction
As predicted, Ireland's debt auction went 'well' this morning.
Results:
1B Euros of 8 year bonds at 6.023% vs. prior of 5.089% (increase of almost 100 bps)
0.5B Euros of 4 year bonds at 4.767% vs. prior of 3.627% (increase of > 100 bps)
As a result, Irish CDS fell by 15 points and the Euro is up again this morning at approx 1.3128.
While Yahoo Finance touts this as a 'success', it goes without saying that an increase of 100 bps suggests further uncertainty. It must also be understood that the ECB has been backstopping much of these debt issuances. Since May in fact, the ECB has purchased 61.5B Euros worth of sovereign debt, including 323M Euros worth last week.
In re: to the FOMC meeting today, I would like to reiterate my view that the Fed will not announce any major new expansion of its balance sheet. The macro data, while suggestive of a considerable slowdown, does not seem to have been weak enough to prompt immediate action by the Fed, and I believe Bernanke will do his best to stay out of what could be construed as partisanship ahead of the November elections.
It also is not inconsequential that there is a massive amount of POMO planned for tomorrow and Friday. The market may sell-off following an FOMC announcement of non-action this afternoon, but not to fear, the Fed will be out buying like mad tomorrow morning to make sure the September rally doesn't fade.
It would seem that the goal of this rally is to halt the 5 straight months of equity outflows by finishing the third quarter on a high note.
Then we move into October, which has a strong history of bringing tail risk to the forefront. There is no FOMC meeting in October to keep the market up (ignoring POMO for the moment.) I also am concerned that when Ireland finally reports the cost of Allied Irish in early October, many may be shocked. The campaign rhetoric over taxes, stimulus, etc is bound to heat up, and the market could be in for a drubbing.
The Fed will meet again on Nov 2nd. I view any action by the Fed on election day as incredibly unlikely.
Which brings us to December 14th, at which point the Fed probably will unleash QEII.
If I am correct, then we could see this low volume, HFT and Fed driven rally come to a close, prompting a mass exodus from equities in October which may or may not be made worse by any number of tail risks (Sovereign debt crisis, report on Allied Irish, rising CDS rates, Japanese currency intervention, U.S.-China currency spat, Japan-China fight over Chinese sailors being held, Korean Peninsula troubles, strikes in Greece (next one planned for Oct. 7th), any surprise misses in Unemployment, 3Q GDP report on last day of October could actually come in negative, etc, etc, etc).
Then the bulls had better hope that a Republican win in November does not bring gridlock to Congress, as it is obvious to anyone breathing that additional fiscal stimulus will be necessary if we are to avoid a double dip. GDP is trending lower as stimulus fades (1Q10 = 3.7%; 2Q10 = 1.6%, 3Q10 = negative?). Without fiscal stimulus, it is very unlikely in my mind that the inventory rebalance can continue to drive the stock market in the face of falling aggregate demand.
The remaining arrows in the Fed's quiver may not be enough without something on the policy side. David Greenlaw at Morgan Stanley estimates that a $2T addition to the Fed's balance sheet would only result in:
10 Year down 50 bps to 2.2%
GDP growth increased by 0.3% in 2011 and 0.4% in 2012
Unemployment goes down by 0.3% in 2011 and 0.5% in 2012, or 9.6% goes to 9.1%
This hardly seems like enough of a return for the risks the Fed will take by increasing the balance sheet with never before tried programs, which supports my conclusion that without further fiscal stimulus, we are destined for a massive slowdown in the economy (and possibly the market).
Also of note, Bloomberg confirmed my suspision this morning that, "The U.S. has fallen behind emerging markets in Brazil, China, and India as the preferred place to invest." As long as the SEC allows HFTs to control/manipulate the market, and government intervention muddies the ability to properly assess risk based on fundamentals, foreign investors will seek to do business elsewhere. One of the greatest drivers of our relative economic success in the United States has been extremely efficient and liquid equity capital markets that allow companies to access capital for growth. With the sudden disdain for fairness and the rule of law, our policy makers and the Fed run the risk of permanently damaging investors' perspective that the U.S. markets provide equality for all participants under strictly enforced laws. With never ending POMO, currency interventions, rate manipulation, allowing HFTs to continue to steal from ordinary investors, and questionable economic reports that as a rule are always revised downward, its no wonder that people are leaving the 'casino' in droves...
Results:
1B Euros of 8 year bonds at 6.023% vs. prior of 5.089% (increase of almost 100 bps)
0.5B Euros of 4 year bonds at 4.767% vs. prior of 3.627% (increase of > 100 bps)
As a result, Irish CDS fell by 15 points and the Euro is up again this morning at approx 1.3128.
While Yahoo Finance touts this as a 'success', it goes without saying that an increase of 100 bps suggests further uncertainty. It must also be understood that the ECB has been backstopping much of these debt issuances. Since May in fact, the ECB has purchased 61.5B Euros worth of sovereign debt, including 323M Euros worth last week.
In re: to the FOMC meeting today, I would like to reiterate my view that the Fed will not announce any major new expansion of its balance sheet. The macro data, while suggestive of a considerable slowdown, does not seem to have been weak enough to prompt immediate action by the Fed, and I believe Bernanke will do his best to stay out of what could be construed as partisanship ahead of the November elections.
It also is not inconsequential that there is a massive amount of POMO planned for tomorrow and Friday. The market may sell-off following an FOMC announcement of non-action this afternoon, but not to fear, the Fed will be out buying like mad tomorrow morning to make sure the September rally doesn't fade.
It would seem that the goal of this rally is to halt the 5 straight months of equity outflows by finishing the third quarter on a high note.
Then we move into October, which has a strong history of bringing tail risk to the forefront. There is no FOMC meeting in October to keep the market up (ignoring POMO for the moment.) I also am concerned that when Ireland finally reports the cost of Allied Irish in early October, many may be shocked. The campaign rhetoric over taxes, stimulus, etc is bound to heat up, and the market could be in for a drubbing.
The Fed will meet again on Nov 2nd. I view any action by the Fed on election day as incredibly unlikely.
Which brings us to December 14th, at which point the Fed probably will unleash QEII.
If I am correct, then we could see this low volume, HFT and Fed driven rally come to a close, prompting a mass exodus from equities in October which may or may not be made worse by any number of tail risks (Sovereign debt crisis, report on Allied Irish, rising CDS rates, Japanese currency intervention, U.S.-China currency spat, Japan-China fight over Chinese sailors being held, Korean Peninsula troubles, strikes in Greece (next one planned for Oct. 7th), any surprise misses in Unemployment, 3Q GDP report on last day of October could actually come in negative, etc, etc, etc).
Then the bulls had better hope that a Republican win in November does not bring gridlock to Congress, as it is obvious to anyone breathing that additional fiscal stimulus will be necessary if we are to avoid a double dip. GDP is trending lower as stimulus fades (1Q10 = 3.7%; 2Q10 = 1.6%, 3Q10 = negative?). Without fiscal stimulus, it is very unlikely in my mind that the inventory rebalance can continue to drive the stock market in the face of falling aggregate demand.
The remaining arrows in the Fed's quiver may not be enough without something on the policy side. David Greenlaw at Morgan Stanley estimates that a $2T addition to the Fed's balance sheet would only result in:
10 Year down 50 bps to 2.2%
GDP growth increased by 0.3% in 2011 and 0.4% in 2012
Unemployment goes down by 0.3% in 2011 and 0.5% in 2012, or 9.6% goes to 9.1%
This hardly seems like enough of a return for the risks the Fed will take by increasing the balance sheet with never before tried programs, which supports my conclusion that without further fiscal stimulus, we are destined for a massive slowdown in the economy (and possibly the market).
Also of note, Bloomberg confirmed my suspision this morning that, "The U.S. has fallen behind emerging markets in Brazil, China, and India as the preferred place to invest." As long as the SEC allows HFTs to control/manipulate the market, and government intervention muddies the ability to properly assess risk based on fundamentals, foreign investors will seek to do business elsewhere. One of the greatest drivers of our relative economic success in the United States has been extremely efficient and liquid equity capital markets that allow companies to access capital for growth. With the sudden disdain for fairness and the rule of law, our policy makers and the Fed run the risk of permanently damaging investors' perspective that the U.S. markets provide equality for all participants under strictly enforced laws. With never ending POMO, currency interventions, rate manipulation, allowing HFTs to continue to steal from ordinary investors, and questionable economic reports that as a rule are always revised downward, its no wonder that people are leaving the 'casino' in droves...
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