Archive for August 9th, 2012
Market Surge is Amplified by Low Expectations…As Expected
Thursday, August 9th, 2012
by Matt Lloyd, Advisors Asset Management
European fears have subsided a bit as the European Central Bank’s (ECB) president continued to offer words of support for a more comprehensive solution…though he appeared to dampen the statements with concessions about the ECB’s ultimate subservient role to the governments. As we noted a couple of weeks ago, the German government’s resounding approval of $120 billion of support for Spain’s banks was significant. The more important number wasn’t the $120 billion, but the 5 to 1 in favor of it in light of the public’s concerns about troubling countries and their potential drain on German prosperity. We noted that the solution ultimately lies in Germany, and with their ultimate benefit from adopting the Euro, the only solution for the future prosperity of German exports is to maintain the Euro largely as is.
The other two options leave Germany extremely vulnerable to a significant drop off in the exports competitiveness.
This has had a large impact on equity markets and certain debt markets in Europe:
- The German DAX market is up 16.40% year to date with a nearly 4.00% gain in today’s trading alone. The EURO Stoxx is only up 2.42% for the year, but had a 4.83% move in today’s trading alone.
- Italy’s two-year sovereign debt issue has dropped to a 3.13% yield after hitting an intraday high of 5.26% just last week. A stronger indicator that fear has subsided is measured in Spain’s two-year debt. The yield hit an intraday high of 7.15% last week and now sits at 3.96%.
China looks to have bottomed to most analysts, but expectations remain very tepid for their recovery. We actually see a starker rebound in growth by the fourth quarter and through 2013. Consider the last two times China’s Central Bank embarked on substantive rate cuts to their Required Reserve Ratio (RRR) and you will notice some significant expansion in equities and housing. In June, after lowering the RRR, home sales jumped 41% in one month and home prices increased in 25 of the 70 largest cities. May only saw an increase in five of the 70 cities. Consider that the Shanghai Composite Stock index rose nearly 80% over the four years after their initial cut in 1997, and again when they cut rates in 2008 they saw an immediate bounce back of 73% in their equity markets. They have also begun to prime the pump for a varied form of stimulus as they have utilized state-owned companies to raise investment and accelerated the approval process for certain projects. We would expect a more consumption-focused stimulus, though as we have seen recently a stimulus package of nearly any kind appears to be the high tide that lifts all boats.
Another aspect to raising our bullishness on the China story is the fairly undervalued current state of the equities in China. The average PE (price/earnings) multiple in the Shanghai Composite index over the last 15 years has a median of 31.95; currently it stands at 11.50 times. This represents the dire expectations of profits going forward. When one looks at the previous two periods that the RRR was cut PE multiples expanded 30% and 39% respectively. The current multiple is near the 15-year low. We always note that when expectations are so heavily skewed in one direction, the antithesis usually transpires.
Last but not least, the jobs report in the United States was better than expected and caught the bearish predisposition off guard. The U.S. Treasuries have been getting whipsawed over the last week; however, the bias has been to selling. I guess an intraday 10-year yield of 1.38% isn’t attractive enough to hold until maturity. It may be hard to remember since it was so long ago, but the 10-year was yielding a 2.40% and the 30-year yielding a 3.49% back in late March.
Because we wrote about the trending jobs environment last week (read here), we won’t rehash the trend line and base line aspects we see in the marketplace. However, in looking at the earning reports, consider that expectations for the second quarter were greatly reduced throughout the last three months. And while we are seeing some of the concerns come across in the revenue numbers as 43% of the companies reporting earnings have beaten revenue estimates, 70% have come in above earnings estimates. We continue to see this as a confirmation that lack of hiring by American businesses of all sizes has actually assisted them in maintaining certain levels of profitability and cash flow margins. Though we can understand some of the hesitations about future expectations since a large amount of companies are offering lower guidance for the third quarter, it appears there are more dire expectations built in.
What we take note of is the relative outperformance of earnings over the last couple of years relative to the performance of the S&P 500.
Though it is always a bit presumptuous to take solitary trading days and extrapolating them into a future expectation, it may not be as fool hardy if these singular events are affirming trends. Markets and emotions are not linear, but over time they tend to become more efficient. As events continue to tell us that the economy is growing, if only slightly, it could also bode well for China. We continue to see opportunities abound in the domestic and global equity markets and would consider adding exposure to China as well as select European markets where appropriate.
This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the Disclosures webpage for additional risk information at www.aamlive.com/blog/about/disclosures. For additional commentary or financial resources, please visit www.aamlive.com
Copyright © Advisors Asset Management
Tags: Competitiveness, Comprehensive Solution, Concessions, Debt Issue, Debt Markets, Ecb President, Euro Stoxx, European Fears, German Dax, German Exports, German Government, Low Expectations, Market Surge, Reserve Ratio, Resounding Approval, Rrr, S Central, S Trading, Sovereign Debt, Subservient Role
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America’s Great 2012 Drought
Thursday, August 9th, 2012
by George Washington, Washington’s Blog
The progress of the drought has been horrific:
Unfortunately, the one certainty is higher food prices.
Much of the area hit during the Dust Bowl – and again today – is naturally prone to drought. As the Weather Channel notes:
The area is known as semi-arid and is naturally prone to drought and high winds. In fact, early settlers referred to it as the “Great American Desert.”
Interestingly, HowStuffWorks notes:
About 90 percent of the 450 million hectares of arid land in North America suffers from moderate to severe desertification [source: Center for International Earth Science Information Network]
But as Ezra Klein notes, there have been much bigger droughts in the distant past:
Scientists have looked at data from tree rings and found (pdf) that North America endured brutal “megadroughts” during the medieval period. These droughts were similar in intensity to today’s dry spells, but lasted 20 to 40 years and were possibly linked to massive La Niña ocean events:
Fortunately, we haven’t seen anything that bad in recent times.
Postscript: July was reportedly the warmest month recorded in the U.S. since records began in 1895. And AP reports:
The first seven months of 2012 were the warmest on record for the nation. And August 2011 through July this year was the warmest 12-month period on record, just beating out the July 2011-June 2012 time period.
Some say this proves global warming is a dire threat, while others say that it is dishonest to claim that short-term weather proves anything.
But we can all agree on the following:
- We should use benign technology – and not cures which are worse than the ailments (like sending nearly microscopic particles of specially made glass into the Earth’s upper atmosphere or cutting down trees and burying them) – to address climate
- Nuclear is not the answer … although the nuclear lobby would like you to think it is
- As Britain’s energy regulator and many others note, microgeneration is key
- Reducing soot is crucial … and economically feasible
- Imposing fascism is never justified
- Downsizing the military is vital
- Cap and trade is not the least bit helpful
Tags: Arid Land, Drought, Droughts, Dry Spells, Dust Bowl, Early Settlers, Earth Science Information, Earth Science Information Network, Ezra Klein, Farm States, Food prices, Great American Desert, High Winds, International Earth Science, Medieval Period, Ocean Events, oil, Science Information Network, Source Center, Tree Rings, Weather Channel
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Honesty Linked With Better Health, and other Weekend Reads
Thursday, August 9th, 2012
Here are this week’s reading diversions for your personal enlightenment. Have a super weekend!
Healthy Aging Tips: How to Feel Young and Live Life to the Fullest
Healthy aging is about much more than staying physically healthy—it’s about maintaining your sense of purpose and your zest for life. As we grow older, we experience an increasing number of major life changes, including retirement, the loss of loved ones, and physical changes. How we handle these changes, as well as regular day-to-day stresses, is the key to aging well. With these tips for healthy aging, you can live with meaning and joy throughout your senior years.
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How to Improve Your Memory: Tips and Exercises to Boost Brainpower
A strong memory depends on the health and vitality of your brain. Whether you’re a student studying for final exams, a working professional interested in doing all you can to stay mentally sharp, or a senior looking to preserve and enhance your grey matter as you age, there are lots of things you can do to improve your memory and mental performance.
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Honesty Linked With Better Health: Study
The researchers found that in the “no lies” group, the fewer lies the study participants told, the better their health. For example, telling fewer white lies was associated with fewer feelings of tension or melancholy, as well as fewer health problems like headaches and sore throats, the researchers found.
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Why Prodigies Fail | Psychology Today
In retrospect, it might not seem so impressive that music historian Charles Burney predicted an uncommonly bright future for the musical prodigy performing in front of him, a 9-year-old who possessed what Burney described as “almost supernatural talents.” After all, who could fail to recognize that Wolfgang Amadeus Mozart was destined for greatness?
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The Worst Things To Say To Someone Trying To Lose Weight
What’s the worst thing anyone ever said to you when you were trying to lose weight? That’s the question we put to Health’s Facebook audience, and boy, did we get an earful!
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Lion’s Mane – What You Need to Know
Lion’s mane (Hericium erinaceus) is a type of medicinal mushroom. Long used in traditional Chinese medicine, lion’s mane is widely available in supplement form. Scientific research shows that lion’s mane contains a number of health-promoting substances, including antioxidants and beta-glucan.
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The cause of Crohn’s disease is undetermined but there is considerable research evidence suggesting that interactions among environmental factors, intestinal microorganisms, immune dysregulation, and genetic predisposition are responsible.
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Caring for Aging Parents – The New Old Age Blog – NYTimes.com
It’s such a routine thing: A nurse wraps the cuff around your elderly relative’s arm, squeezes the bulb, listens with a stethoscope and says: “120 over 60. Very good.” Smiles all around (this was my 89-year-old father’s latest reading), because everyone knows that high blood pressure is a risky proposition.
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Diabetes and the Obesity Paradox – NYTimes.com
Type 2 diabetes, a condition widely thought of as a disease of the overweight and sedentary, also develops in people who aren’t overweight. And it may be deadlier in these normal-weight people, a new study shows.
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Job Networking Tips: How to Find a Job By Building Relationships
The vast majority of job openings are never advertised; they’re filled by word of mouth. That’s why networking is the best way to find a job. Unfortunately, many job seekers are hesitant to take advantage of networking because they’re afraid of being seen as pushy, annoying, or self-serving. But networking isn’t about using other people or aggressively promoting yourself—it’s about building relationships.
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Fighting Alzheimer’s With Functional Medicine | The Dr. Oz Show
Alzheimer’s disease, like coronary artery disease, arthritis and even cancer, is triggered by inflammation. While most of us can easily recognize the role of inflammation in a painful arthritic joint, it is the exact same process that has now been identified as playing a pivotal role in Alzheimer’s disease. In fact, the same laboratory markers used by doctors to measure the degree of inflammation in the body in an attempt to determine cardiac risk are just as effective in predicting risk for Alzheimer’s disease.
*****
Tags: Better Health, Charles Burney, Grey Matter, Health Study, How To Improve Your Memory, Life Changes, Memory Tips, Mental Performance, Music Historian, Musical Prodigy, Personal Enlightenment, Physical Changes, Prodigies, Psychology Today, Sense Of Purpose, Sore Throats, Study Participants, White Lies, Wolfgang Amadeus Mozart, Zest For Life
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Don Vialoux: Miners Recently Outperforming Bullion (August 9, 2012)
Thursday, August 9th, 2012
by Don Vialoux, EquityClock.com
Upcoming US Events for Today:
- Weekly Jobless Claims will be released at 8:30am. The market expects Initial Claims to show 375K versus 365K previous. Continuing Claims are expected to reveal 3290K versus 3272K previous.
- Trade Balance for June will be released at 8:30am. The market expects -$47.5B versus -$48.7B previous.
- Wholesale Inventories for June will be released at 10:00am. The market expects an increase of 0.3%, consistent with the increase reported previous.
Upcoming International Events for Today:
- The ECB Publishes the August Monthly Report at 4:00am EST.
- Great Britain Merchandise Trade for June will be released at 4:30am EST. The market expects –9.0B versus –8.4B previous.
- Canadian Housing Starts for July will be released at 8:15am EST. The market expects 210K versus 222.7K previous
- Canadian Trade Balance for June will be released at 8:30am EST. The market expects -$0.9B versus -$0.79B previous.
The Markets
Equity markets traded flat on Wednesday with little to move the tape one way or the other. Volume was once again light as conviction appeared lacking. The two consumer sectors bookended the days activity with Consumer Staples showing the best sector performance with a gain of seven-tenths of a percent, while Consumer Discretionary showed the worst performance, succumbing to a loss of half a percent.
Investors continue to remain hopeful for further monetary stimulus from any one of the major central banks, a fact which is clearly showing up in inflation expectations. The ratio of the Treasury Inflation Protected ETF (TIP) over the 7-10 Year Treasury ETF (IEF) continues to trend higher following an almost five month decline. Even the 5 Year Breakeven Rate has pushed higher since ECB President Mario Draghi hinted of further central bank intervention. Increased inflation expectations are bullish for stocks and commodities, both of which are at multi-month highs.
Inflation is particularly conducive to strength in the price of Gold, which has shown moderate improvement over recent weeks. Seasonal investors are well aware that we are within the period of seasonal strength for the yellow metal, but thus far the price action of bullion has been rather subdued, at least compared to years past. The metal is hinting of a breakout above a descending triangle pattern, a pattern that has bearish implications should the price of Gold fall below $1525. Further evidence is required to confirm the breakout. Hesitation from investors to believe in the stimulus hype is suspected to be culprit for the shallow returns.
The framework for a strong move higher in Gold has become established. In addition to increased inflation expectations, the US Dollar index has also come under pressure over the course of the past month and a minor head-and-shoulders top can be spotted on the charts. The target of this topping pattern points down to 81, also the point at which the price action would intersect with the rising intermediate trendline. The long-term trend for the US Dollar continues to look positive as the upside target derived from a head-and-shoulder bottoming pattern is fulfilled. The US Dollar Index seasonally declines, on average, between now and September, supporting commodity prices, such as Gold.
Another positive for the Gold trade is the fact that the miners have recently shown outperformance compared to bullion, a typical precursor to a positive move in the commodity. The relative performance chart for Gold Miners versus Gold bullion has shown a declining trend for over a year and a half, just recently charting the lowest level since the 2008 low. However, a double bottom has become apparent on the chart, hinting of positive things to come as investors become content with equity valuations at current gold prices. A positive trend still needs to be established, which may not be able to be confirmed until the ratio breaks above the 200-day moving average (0.29 on the chart below). The seasonal trade in gold currently looks appealing given the positive backdrop, but keep in mind that the trade could easily break if stimulus expectations are not confirmed.
Sentiment on Wednesday, as gauged by the put-call ratio, ended bullish at 0.80. The ratio continues to hold within a declining range as bullish expectations flourish.
S&P 500 Index
Chart Courtesy of StockCharts.com
TSE Composite
Chart Courtesy of StockCharts.com
Horizons Seasonal Rotation ETF (TSX:HAC)
- Closing Market Value: $12.40 (up 0.40%)
- Closing NAV/Unit: $12.36 (down 0.02%)
Click Here to learn more about the proprietary, seasonal rotation investment strategy developed by research analysts Don Vialoux, Brooke Thackray, and Jon Vialoux.
Tags: 10 Year Treasury, 9b, Bullion, Central Bank Intervention, Central Banks, Consumer Sectors, Consumer Staples, Don Vialoux, Ecb President, ETF, ETFs, Half A Percent, Inflation Expectations, Initial Claims, Merchandise Trade, Seasonality, Sector Performance, Seven Tenths, Stocks And Commodities, Trade Balance, Weekly Jobless Claims, Wholesale Inventories
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Keep an Eye on May Stock Market Peaks, says Richard Russell
Thursday, August 9th, 2012
Richard Russell, 88-year-old writer of the Dow Theory Letters, called a bear market for U.S. stocks a few months ago. An update on his latest thinking is reported below.
Question: Richard, everybody has emotions. So where are your emotions regarding this market? From an emotional standpoint, be honest, are you really bullish or bearish?
Answer: If the Averages confirm that this is truly a bear market, I’ll have mixed emotions. On the one hand I will have been proven right on my bear market call, and that will be a boost to my ego. But I can’t say I’d be happy we’re in a primary bear market.
But if the Averages close above their May peaks, and all my charts point to a bull market, I’ll have been proven wrong on my bear market call, and that will be a bruise to my ego.
Source: StockCharts.com
Nevertheless, I’d much rather be living through a bull market than a bear market – a bull market would be far better for me and my kids and for my business. So call it strange, but from an emotional standpoint I’d prefer to have been wrong on my bear market call, and I’d prefer that we’re in a re-confirmed bull market.
Therefore, instead of confusing my subscribers with a lot of ego-boosting baloney, I’m just going to call this market the way I see it, being as honest and unemotional as I can possibly be.
If we are truly in a primary bear market, I have an intuition that it could turn out to be the worst bear market in history – and that’s another reason why I secretly hope I have been wrong on my bear market call.
Another intuition – we will know the final answer as to whether we’re in a bull or bear market by October.
[PduP: Yesterday's closing levels of the benchmark U.S. indices were within reach of the May peaks: Dow Jones Industrial Average – 13,176 vs 13,279 and S&P 500 Index – 1,402 vs 1,419.]
Source: Dow Theory Letters, August 7, 2012.
Tags: Amp, August 7, Baloney, Bear Market, Bruise, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Average, Dow Theory Letters, Ego, Final Answer, Intuition, Mixed Emotions, Richard Russell, Standpoint, Stock Market, Stocks, Strange, Subscribers
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Herding Cats and Credit Market “Weakness” (Tchir)
Thursday, August 9th, 2012
by Peter Tchir, TF Market Advisors
Herding Cats and Obstinate Politicians
The mental image is so clear. Draghi, Hollande, and Obama, wiping the sweat from their brows with dust covered hands, having successfully corralled the Merkel. She’s still feisty and not happy about being in the pen, but they have managed it for now. Job well done, time for a well deserved refreshment after a long day.
It’s only then that they realize the Rajoy isn’t in the pen. They can’t believe their eyes. There is that damn Rajoy sitting on the other side of the river licking his paws preening himself. They cannot believe. They are stunned, flabbergasted, and about to go ballistic.
Seriously, after all the effort to cobble together something that they managed to convince the markets would turn into action is being derailed by the person who is most to benefit?
It is absolutely ridiculous, but it’s not as though they will just give up. They will corral Mr. Rajoy. It is inevitable and the real risk is whether Merkel is able to escape while their attention is focused on Rajoy.
So while it is concerning that Spain is not playing along, I think the pressure brought to bear will be great and Spain will accept something to keep the EU, ECB, and Obama happy.
Negativity Remains High
The markets have had a strong rally, and I am definitely seeing more bullish statements, and the media seems to be adopting a little more of a cheerleading stance than a week ago, but negativity remains high. As I wrote yesterday, I have continued to sell and am now by the smallest long position I have. I haven’t yet bought SPX 1,350 puts (I should have) but after yesterday’s sales, I have a small position. I think that is representative of many bulls. This is the underinvested bull rally, where very few, if any bulls have been aggressively positioned for the move from 1,380 to 1,400.
The perma-bears have grown angrier and louder. That makes perfect sense and doesn’t tell me much.
It is at the center that I still see a lot of bearishness. I read multiple reports today about how the ECB plan would create a problem for Spain and Italy because their average maturity would continue to decline. Serious analysts have taken the time to recommend selling the market because the average debt maturity will be too short. I saw this and had to think. I have been a proponent that the longer the better. Without a doubt getting Spain and Italy long dated, cheap money is far more beneficial than short dated money, but right now, let’s see them ACTUALLY GET SOME MONEY.
There is something about the need to write about the negative long term consequences of a plan that hasn’t been announced yet, that just makes me believe negativity remains too high.
Watch the financial news for a bit. How many people are getting set with an easy ball to spike down on the bull side (their normal tendency) yet refusing to take it? In some cases, they are going out of their way to find the bad side. In many ways that is an encouraging sign, as it is far more balanced than it has often been in the past, but it feels that the pendulum has swung and too much effort is being put into pointing out negatives. It isn’t as extreme as when the philosophy seemed to be to turn everything positive, but I think it is there.
So I remain convinced, that while the market has moved to a more balanced position, it is far from overly bullish.
Yesterday’s Credit Market Underperformance
IG18 actually finished ¼ bp wider yesterday. It had gotten down to 101.5 but finished the day 103 bid. This was in spite of equity strength and a reversal from the bidless market we had seen for several sessions. That is definitely something to watch, but the rally has been strong, and yesterday’s pause wasn’t met with much real pressure in single names as the basis is now only -2 bps. That is about the least rich that IG18 has been in awhile. This means that positioning here is becoming more balanced. It was getting hard to have a sustained rally while being 4 to 5 bps rich, but at a much more neutral valuation relative to fair value, it has room to tighten again, which remains my base case for CDS.
The high yield ETF’s both sold off a bit yesterday. HYG and JNK were both down about ¼%. That caught some attention. The first thing I look to for confirmation of weakness is HY18, the CDS index. That was higher by about 1/8. Not much, but not confirming weakness in the ETF’s. HY18 is a spread product, so that indicates spreads tightened. Then look at rates. Treasuries moved lower yesterday. That move was picked up by LQD and MUB which are very sensitive to treasury yields. High yield, as I’ve mentioned, now has a large segment of the market that is trading at such low yields, that it is more sensitive to treasuries than usual. Some of that will have impacted the market. Too many “high yield” bonds trade as low yield, so will track treasuries at least somewhat (why I have said repeatedly at these yields, individual credit, and individual bond selection is more important than the beta trade).
If High Yield was really weak, IRM wouldn’t have been about to issue $1 billion of 5.75% coupon bonds. Those bonds only traded up ½ point (so not as much free money as you usually get from a new issue allocation, but still better than a kick in the teeth). For those who care about ratings, these are B1/B+ bonds.
So, yes, there was some weakness, but mainly in the cheapest hedge (IG18) and mostly a function of treasuries rather than spread, and the real key, the new issue side, remains strong.
JP Morgan
I feel the need to point out that JPM closed at 37.01 yesterday, the highest close since the May 10th whale conference call. At one point, including the dividend paid since then, JPM hit 38. I am now virtually out of JPM. I will reload again, but above 37.50 just seemed far too good a selling opportunity to pass up. While the whale trade is out of the way (I remain convinced the residual is marked so conservatively and has so many reserves that even the worst summer intern could trade their way out of the residual and book a profit. There are signs that housing is stabilizing at these levels. Those are all good signs, but the risk of a nasty LIBOR headline concerns me at these levels. It has been a great trade for us, and we will continue to trade the name from the long end, and may add, but the main thesis is largely over now for me.
S&P 1,350 Puts, Could have, Should have, Would have, Won’t
All things considered, I will be looking to add back some risk here rather than continuing to sell. The amount of negativity still seems high. While it will be a pain to corral Rajoy, I find it hard to believe that after all the effort made, that Draghi, Hollande, and Obama will give up so easily. The credit market weakness that so many pointed out, seemed isolated to a couple things, relatively easy to explain and all part of a process that to me is as natural if it was preparing to break to new tights as much as it is a sign that it is about to turn around.
It still feels strange to be long, and feels even stranger to be looking to get longer as futures continue to drift lower, but the fact that so many people are happy to say how wrong I am, gives me comfort.
I am watching closely. It is possible that yesterday’s push through 1,400 and gap to 1,407 is all we get and I should have bought the puts, but for now I’m looking to replace what I sold and think we still push to a new high, largely because too many people are bearish and even the bulls are underweight.
Copyright © TF Market Advisors
Tags: Brows, Bull Rally, Bulls, Cheerleading, ECB, Herding Cats, Hollande, Market Weakness, Mental Image, Merkel, Negativity, Obama, Paws, Perfect Sense, Perma, Politicians, Refreshment, S Sales, Spx, Tf
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