Archive for August 31st, 2012
Friday, August 31st, 2012
By Scott Ronald, Steadyhand Investment Funds
Scotiabank announced yesterday that it has reached an agreement to buy ING Bank of Canada for $3.1 billion. ING (Canada) put itself up for sale earlier this summer because its parent, Dutch-based ING Groep NV, is looking for funds to repay government aid it received during the financial crisis.
The ING assets fetched top dollar, but a key question is how many clients will take their business elsewhere as a result of the sale. The Globe and Mail published an interesting article the other week on the topic – Fee Averse Clients Pose Hurdle to ING Sale.
ING has always been an alternative to the Big Banks, and it positioned and marketed itself well in this respect. It developed and fostered an “anti-bank” personality and was innovative and unique in a conservative industry. Its clients loved being part of something different. Now that it’s poised to be owned by a bank, it will be interesting to watch the transition.
There’s no denying that ING has a passionate client base. Many customers have already voiced displeasure with the transaction through comments posted to various online articles on the takeover, including the above-mentioned Globe article and a CBC piece published yesterday. Below are a few examples:
First thing I am doing next week is closing my ING account.
I will be one of the clients leaving if one of the big six take it over…
Dear Big Banks, The moment I hear you buy ING, I will be withdrawing my money and be gone…
Oftentimes when a takeover of this nature in the investment industry is announced, the initial reaction of clients tends to be heated and emotional. Fewer assets tend to leave the door, however, than the public’s reaction may suggest.
Time will tell how “sticky” ING’s assets are.
Copyright © Steadyhand Investment Funds
Friday, August 31st, 2012
Upcoming US Events for Today:
- Chicago PMI for August will be released at 9:45am. The market expects 53.0 versus 53.7 previous.
- Consumer Sentiment for August will be released at 9:55am. The market expects 73.5 versus 73.6 previous.
- Factory Orders for July will be released at 10:00am. The market expects an increase of 2.0% versus a decline of 0.5% previous.
- Ben Bernanke Speaks at 10:00am.
Upcoming International Events for Today:
- German Retail Sales for July will be released at 2:00am EST. The market expects a month-over-month increase of 0.3% versus a decline of 0.1% previous.
- Euro-Zone Consumer Price Index Flash will be released at 5:00am EST. The market expects 2.5% versus 2.4% previous.
- Canadian GDP for the Second Quarter will be released at 8:30am. The market expects 1.6% versus 1.9% previous.
- China Manufacturing PMI will be released at 9:00pm EST. The market expects 50.1, unchanged from the previous report.
Recap of Yesterday’s Economic Events:
|EUR German Unemployment Change||9K||7K||9K|
|EUR German Unemployment Rate s.a.||6.80%||6.80%||6.80%|
|EUR Euro-Zone Business Climate Indicator||-1.21||-1.3||-1.27|
|EUR Euro-Zone Consumer Confidence||-24.6||-24.6||-24.6|
|EUR Euro-Zone Economic Confidence||86.1||87.5||87.9|
|EUR Euro-Zone Industrial Confidence||-15.3||-15.5||-15.1|
|EUR Euro-Zone Services Confidence||-10.8||-9||-8.5|
|EUR Italian Business Confidence (AUG)||87.2||86.8||87.1|
|CAD Current Account (BoP) (Canadian dollar)||-$16.0B||-$15.0B||-$10.3B|
|USD Personal Income||0.30%||0.30%||0.30%|
|USD Personal Spending||0.40%||0.50%||0.00%|
|USD Personal Consumption Expenditure Deflator (MoM)||0.00%||0.10%||0.10%|
|USD Personal Consumption Expenditure Deflator (YoY)||1.60%||1.40%||1.50%|
|USD Personal Consumption Expenditure Core (MoM)||0.00%||0.10%||0.20%|
|USD Personal Consumption Expenditure Core (YoY)||1.60%||1.70%||1.80%|
|USD Continuing Claims||3316K||3307K||3321K|
|USD Initial Jobless Claims||374K||370K||374K|
|GBP GfK Consumer Confidence Survey||-29||-27||-29|
|JPY Nomura/JMMA Manufacturing Purchasing Manager Index||47.7||47.9|
|JPY Household Spending (YoY)||1.70%||1.20%||1.60%|
|JPY National Consumer Price Index Ex-Fresh Food (YoY)||-0.30%||-0.30%||-0.20%|
|JPY National Consumer Price Index Ex Food, Energy (YoY)||-0.60%||-0.60%||-0.60%|
|JPY Tokyo Consumer Price Index (YoY)||-0.70%||-0.70%||-0.80%|
|JPY Tokyo Consumer Price Index Ex-Fresh Food (YoY)||-0.50%||-0.60%||-0.60%|
|JPY Tokyo Consumer Price Index Ex Food, Energy (YoY)||-0.80%||-1.00%||-1.00%|
|JPY Jobless Rate||4.30%||4.30%||4.30%|
|JPY National Consumer Price Index (YoY)||-0.40%||-0.30%||-0.20%|
|JPY Industrial Production (MoM)||-1.20%||1.70%||0.40%|
|JPY Industrial Production (YoY)||-1.00%||1.80%||-1.50%|
Well the long awaited day is finally here. Today Ben Bernanke will make his speech at Jackson Hole, the spot where hints of past QE programs have been delivered. Equity investors trimmed some market exposure on Thursday prior to the event, pushing the S&P 500 and other major equity benchmarks below 20-day moving averages. This is the first close for the major averages below the 20-day moving average since the end of July, precisely when ECB President Mario Draghi talked up the Euro, fueling the rally in stocks over the past six weeks. The Dow Jones Industrial Average cracked the psychologically important 13,000 level while the S&P cracked and closed marginally below 1400. The waiting game is over with the Ben Bernanke speaking today and the ECB meeting next week, two key events that will either make or break this rally derived from speculation that central banks will inject further stimulus into the economy. Thoughts were offered in Wednesday’s report on whether or not these key market makers/manipulators will offer something in the days to come.
With 20-day moving averages now breached across many equity benchmarks, the implication is that the market has now fallen under short-term weakness. This weakness is also becoming evident in the sector activity as key cyclical sectors, such as energy, industrials, and materials, start to roll over and underperform market benchmarks, while defensives, mainly staples and healthcare, maintain positive trends and start to outperform once again. Although not definitive, a gradual shift from risk-on to risk-off appears to be underway. Keep in mind that this could shift abruptly depending on what is revealed at the upcoming central bank events as we enter the month of September. September into October is seasonally the key risk-off period for the market when Consumer Discretionary, Materials, and Industrials drive the market lower. Volatility typically flourishes over this period, which has been known to benefit Gold. Overall, however, few sectors/industries are immune from losses between now and October, from a seasonal perspective, implying that, in absence of any central bank market manipulation, equities are likely to correct lower in the near-term.
Turning to the average tendencies during election years, the negative trend during the month of September and into October typically concludes prior to the election when equities spike in anticipation of a favored outcome. November is then typically flat, followed by a strong month of December, which leads into the Post-Election year. The year following the election tends to be a bit sluggish during the first quarter as the new Presidential term begins. A number of analysts are speculating that equity markets may be fine up until the end of this year with trouble to be felt into 2013. In many ways, the seasonal tendencies for the four-year cycle support this argument with negative first quarter returns and below average results over the entire year typical during these post election periods. We may be in store for a roller coaster ride over the next six months.
Sentiment on Thursday, as gauged by the put-call ratio, ended bearish at 1.06. The ratio is moving definitively above its falling wedge pattern and the trend is now higher, typically a bearish trend for equity markets. One thing that is optimistic is the fact that previous signs of complacency have alleviated, which is a very good sign going into the upcoming uncertain events.
Chart Courtesy of StockCharts.com
Chart Courtesy of StockCharts.com
- Closing Market Value: $12.40 (unchanged)
- Closing NAV/Unit: $12.40 (down 0.18%)
|2012 Year-to-Date||Since Inception (Nov 19, 2009)|
* performance calculated on Closing NAV/Unit as provided by custodian
Click Here to learn more about the proprietary, seasonal rotation investment strategy developed by research analysts Don Vialoux, Brooke Thackray, and Jon Vialoux.
Friday, August 31st, 2012
by Mark Hanna, Market Montage
I wrote about a week ago that China was acting quite poorly relative to what was happening in European and U.S. markets. I guess yesterday a brokerage report hit that said the same thing and now a host of pundits are waving it around as a bearish signal. It shows how quickly group think is created on Wall Street as long as it originates from a major brokerage house. Whatever the case, while the U.S. is in some form of strange holding pattern with holiday type volume and an extremely narrow range post August 3rd spike up, some key overseas markets are weakening along with China. Now some of these are resource focused (Russia, Brazil, even Chile) so as a lot of commodity plays sell off after their early month reversion to mean spike, the sector rotation seems to be creating a big tailwind for those countries.
India has been relatively stronger among the BRICs, although it too has had a rough week.
If anything it seems the U.S. continues to benefit from the best house in a bad block syndrome. However without semiconductors, transports, or commodities it will be hard for the other parts of the market to continue to levitate on their own. A lot of the steel, coal, et al stocks that surged post Draghi comments in late July have given up most of their gains already, as has the transports index. Here is an example of what I speak of – a massive rally which in hindsight seems to be short covering, and now giving up the ghost.
As for Jackson Hole tomorrow there seems to be a concentrated effort this week to “talk down” expectations for Bernanke’s speech. If that is in the market or not at this point, who knows but the focus seems to be switching to Draghi at the end of next week instead. The first week of the month is also the one with a heavy data set (PMIs, ISMs, employment report) so one assumes the current zombie like state of the market should finally change. Futures are pressured some this morning but again since the August 3rd jump and ensuing Monday follow through rally, the S&P 500 has gone nowhere – there has been rotation under the surface from one group to another week to week but little change at all on the top line indexes.
Copyright © Market Montage
Friday, August 31st, 2012
Submitted by James E. Miller of the Ludwig von Mises Institute of Canada,
With a price hovering around $1,600 an ounce and the prospect of “additional monetary accommodation” hinted to in the latest meeting of the Federal Reserve’s Federal Open Market Committee, gold is once again becoming a hot topic of discussion.
George Soros made news recently when a filing with the Securities and Exchange Commission revealed that he had liquidated his position with major financial firms and had loaded up on gold; approximately 884,000 shares worth. Jim Cramer, the CNBC personality in constant search of growing business trends, recommends putting at least 20% of one’s assets in gold. Following the Republican National Convention, the party platform now proposes the establishment of a commission to study “the feasibility of a metallic basis for U.S. currency.”
Like the gold commission before it, this new interest in gold has brought out the critics who regard the precious metal as nothing short of, to borrow the infamous term coined by John M. Keynes, a “barbarous relic.” Wesleyan University economist Richard Grossman writes in the Los Angeles Times that the idea of a gold commission is a “waste of time and money” because the standard hasn’t “worked for 100 years.” In The Atlantic, fiat currency enthusiast Matthew O’Brien calls the gold standard a “terrible idea” and presents a few charts demonstrating that linking the dollar to gold failed to keep prices stable. Economist and New York Times columnist Paul Krugman has praised O’Brien’s article on his blog and makes sure to point out that the price of gold has been highly volatile since 1968 by showing the following chart:
There is a remarkably widespread view that at least gold has had stable purchasing power. But nothing could be further from the truth.
Krugman points out that when interest rates are low the price of gold typically rises. He claims that as interest rates tend to fall during recessions, gold’s rise in price would lead to “a fall in the general price level.” Lastly, Krugman ridicules the notion that a true gold standard would prevent asset bubbles and subsequent busts from occurring by calling attention to the fact that America suffered from financial panics “in 1873, 1884, 1890, 1893, 1907, 1930, 1931, 1932, and 1933.”
These criticisms, while containing empirical data, are grossly deceptive. The information provided doesn’t support Krugman’s assertions whatsoever. Instead of utilizing sound economic theory as an interpreter of the data, Krugman and his Keynesian colleagues use it to prove their claims. Their methodological positivism has lead them to fallacious conclusions which just so happen to support their favored policies of state domination over money. The reality is that not only has gold held its value over time, those panics which Krugman refers to occurred because of government intervention; not the gold standard.
Right off the bat, the Nobel Laureate makes the amateur mistake of conflating two different gold standards. There was not one set standard throughout the 19th century up to the Great Depression. Until the first World War, the United States and much of the West was under the classical gold standard. This meant that the dollar was just a name for a set amount of gold; generally 1/20 of an ounce. Following the massive inflation used to pay for World War I and the Genoa Conference of 1922, the gold exchange standard was adopted by many Western countries including Britain. Though the United States remained under an imperfect classical gold standard, other Western countries stopped redeeming gold coins for national currencies. Instead, they redeemed their currencies for dollars or pounds which allowed for expanded fiscal policies because the constraint of gold was not so prominent. At the same time, President of the New York Federal Reserve, Benjamin Strong, conspired with the head of the Bank of England, Montague Norman, to keep gold from flowing out of Britain by having the Fed adopt “easy money conditions in the United States” and “increase bank liquidity a great deal” according to economic historian Robert Higgs. This backroom deal was carried out as England readopted the gold standard in 1926 at the pre-World War 1 parity despite the pound being devalued during the war. Because trade unions and unemployment insurance made wage rates less flexible downwards, the ensuing deflation was detrimental and combated through further inflation aided and abetted by the Fed.
This new international agreement between central bankers may have appeared to be a maintaining of the classical gold standard but it was nothing of the sort. The inflationary boom in the later half of the 1920s was a product of the monetary scheming of the Fed and Bank of England. The final result was the stock market crash of 1929 which ushered in the Great Depression. Contrary to popular belief, the Depression was not caused by the classical gold standard but because of its rejection.
As for the other panics Krugman mentions, neither were caused by the gold standard but by government intervention in the money market. As economist Joseph Salerno explains, the pervasiveness of fractional reserve banking, or the expansion of credit unbacked by gold reserves, played a key role in creating financial instability. The panics were caused primarily by
..the establishment of a quasi-central banking cartel among seven privileged New York banks resulting in the almost complete centralization of U.S. gold reserves in their vaults by the National Bank acts of 1863-1864. This New York City banking cartel was able to expand willy nilly the monetary base and the overall money supply by expanding their own notes and deposits on top of gold reserves. Their notes and deposits were then used as reserves by lower tier banks (Reserve City Banks and Country Banks) on which to pyramid their own notes and deposits.
Moreover, banks, especially the larger ones, were encouraged in their inflationary credit creation by the firmly entrenched expectation that they would be freed from fulfilling their contractual obligations in times of difficulty by the legal suspensions of cash payments to their depositors and note-holders that recurred during panics throughout the 19th century.
In sum, an adherence to a real gold standard was not the main cause of all the financial panics Paul Krugman lists. It was his favorite institution, the state, and the incessant fiddling around with the economy by the political class that created an unstable monetary system. It is also worth pointing out that the late 19th century was a period of incredible economic growth for both the United States and the rest of the world in spite of the flawed gold standard. Though it is often alluded to as a time of robber barons, worker starvation, and terrible deflation, the U.S. economy experienced its highest rate of growth ever recorded as the 1800s drew to a close. As Murray Rothbard documents in The History of Money and Banking in the United States: The Colonial Era to World War II:
The record of 1879–1896 was very similar to the first stage of the alleged great depression from 1873 to 1879. Once again, we had a phenomenal expansion of American industry, production, and real output per head. Real reproducible, tangible wealth per capita rose at the decadal peak in American history in the 1880s, at 3.8 percent per annum. Real net national product rose at the rate of 3.7 percent per year from 1879 to 1897, while per-capita net national product increased by 1.5 percent per year…
Both consumer prices and nominal wages fell by about 30 percent during the last decade of greenbacks. But from 1879–1889, while prices kept falling, wages rose 23 percent. So real wages, after taking inflation—or the lack of it—into effect, soared.
No decade before or since produced such a sustainable rise in real wages.
From 1869 to 1879 the total number of business establishments barely rose, but the next decade saw a 39.4-percent increase. Nor surprisingly, a decade of falling prices, rising real income, and lucrative interest returns made for tremendous capital investment, ensuring future gains in productivity.
When the United States maintained a gold standard to a fairly significant degree, the economy blossomed. The relative absence of inflation ensured that the dollar acted as a store of value in addition to facilitating transactions. Without the threat of looming price increases, the public was more willing to put off consumption and add to the supply of capital availability by saving. The prudent technique of producing more than you consume allowed for a greater number of entrepreneurs to put capital to work. This set the foundation for mass production and giving consumers access to an abundance of goods never thought possible just a century before.
To the Keynesians’ befuddlement, the economic renaissance of the late 19th century occurred at a time where prices weren’t rising or stable but actually falling. The fall in the general price level occurred as the production capacity expanded at a faster rate than the money supply. Today, economists of the Keynesian and monetarist school remain convinced that a stable price level is good thing when common sense dictates otherwise. Falling prices are a godsend for consumers; not a catastrophe. As long as entrepreneurs are able to utilize the inherent feedback mechanism of an undistorted pricing system to forecast input costs, falling prices are only a minor problem. The focus on price stability is why many economists missed the Depression and the Fed-engineered boom of the 1920s. In a free market, the tendency is for prices to fall as production increases.
Krugman denies not only that sound money leads to economic stability and growth, he does so while attempting to show that gold has been incredibly volatile since Richard Nixon cuts the dollar’s tie to the precious metal in 1971. But Krugman puts the proverbial cart before the horse with his example as it hasn’t been the price of gold that has fluctuated to a high degree but rather the dollar’s value. As Forbes editor John Tamny pointed out in August of 2011
as Brookes calculated in his essential book The Economy In Mind, “In 1970 an ounce of gold ($35) would buy 15 barrels of OPEC oil ($2.30/bbl). In May 1981 an ounce of gold ($480) still bought 15 barrels of Saudi oil ($32/bbl).” Fast forward to the present, and an ounce of gold ($1750) buys roughly 20 barrels of oil ($85)
Krugman also asserts that when interest rates fall, the price of gold increases [ZH - we discussed the various regime changes between interest rates and gold here in great detail]. But again he makes the same mistake of not recognizing the role dollar manipulation plays in both measures. Interest rates haven’t been formed by market forces since the Federal Reserve was established. In a free market, interest rates are determined by the public’s collective time preference or the discounting of future goods against present goods. When more people are saving, and therefore putting off consumption, there is a higher supply of loanable funds. This higher supply translates to lower interest rates as the price of present capital lowers. Under a fiat regime like the Fed which oversees a system of fractional reserve banking, interests rates are manipulated by a few central bankers instead of the market. These central planners increase the supply of money in an effort to push down interest rates and induce consumers into borrowing. This also has the effect of pushing up the price of gold as investors lose confidence in the dollar’s value.
In his crusade to keep Keynesianism as a legitimate school of thought, Krugman has yet again attempted to mischaracterize gold and blame it for crises caused solely by government intervention. What Keynesianism amounts to is a theory of state worship and the virtue of hedonism. Its leading proponents declare there is such thing as a free lunch and that it is served directly by the printing of money. In other words, it is based on backwards logic and remains distant from reality.
The Keynesians admit there was a housing bubble then fret over an “output gap.” They blame market exuberance for recessions but then prescribe the exact same policies that lead to exuberance to begin with. This irrationality was best displayed with a remarkable quote by former Treasury Secretary and former director of President Obama’s National Economic Council Lawrence Summers who wrote in an editorial for the Washington Post:
The central irony of a financial crisis is that while it is caused by too much confidence, borrowing and lending, and spending, it can be resolved only with more confidence, borrowing and lending, and spending.
Keynesians have no pure economic theory; they are totally ad hoc in their approach. Any data point which fits their view is trumpeted. Any theory that presents a challenge to the idea that the economy can be finely tuned like a child’s trinket is dismissed as right-wing propaganda. Keynesians ultimately reject the golden rule of economics: savings represents deferred consumption and producing more than is consumed. Real savings in the form of capital goods (factories, equipment, machinery, etc.) are the backbone of any economy. Government only squanders these scarce resources through its constant pillaging of wealth.
Keynes himself was contemptuous of the middle class throughout his professional career. This is perhaps why he held such disdain for gold. Gold is the market’s choice for money; not the statist ruling class dependent on spending virtually unlimited sums of tax dollars. Because a true gold standard prevents runaway inflation and budget deficits from occurring in perpetuity, Keynesians will do all they can to discredit gold as a workable form of currency. Their allegiance lies with the state and paper money; not the natural choices of the common man.
Friday, August 31st, 2012
The following chart from Bank of America shows that with a few short hours ahead of the dangling strawman known as Bernanke’s J-Hole address (now that Mario Draghi has more pressing issues to deal with elsewhere), expectations for QE3, in the form of what is actually priced in, just hit an all time high. So is, by implication, the potential for disappointment and that the petulant market, no longer caring about such trivia as fundamentals, technicals, newsflow or frankly anything except what the Chairsatan ate or what side of the bed Bill Dudley woke up on, will not get what it demands. It then begs the question: if the S&P is at 1400 with virtually all of QE3 priced in, what is the “fair value” if there is, gasp, no QE3 announced either today, in two weeks when the FOMC delivers it periodic oracular address to the plebs, or until the post-election FOMC meeting, which will take place on December 12, and just days ahead of the Fiscal Cliff arrival (which will certainly not be resolved by then)?
Some comments from Bank of America:
We anticipate a relatively dovish speech that signals a high probability of additional easing at the September FOMC meeting. But “easing” and QE3 are not synonymous. In our view, a change in the Fed’s rate guidance is very likely, but Bernanke is probably not ready to preannounce QE3. Indeed, he is unlikely to front-run his Committee, so we would expect a speech that is long on historical defense of the Fed’s easing to-date but short on details of any future actions. Given that the markets have priced in a high probability of QE3 (Chart of the Day), in our view that could be a disappointment.
A hawkish dove
In our view, more unconventional policy is just a matter of time. Thus, we expect Bernanke to emphasize three key points, without actually signaling the Fed’s next steps. First, he is likely to underscore the bias statement in the minutes: if the economy does not improve substantively, the Fed will ease further. Second, he may discuss the Fed’s options in more detail, building on some of the discussion already noted in the minutes. Third, he is likely to argue vigorously that unconventional policy is both necessary and effective.
The Bernanke Fed has not been shy about introducing new ways to use language or its balance sheet to stimulate the markets. However, we do not expect an outright signal of QE3. Keep in mind that “easing” and QE are not synonymous. When Fed policymakers signal that they are ready to ease, they mean not only changes in their balance sheet but also changes in their forward rate guidance and other language changes. Further, Bernanke will likely remind everyone that monetary policy is not a panacea – without naming names, he will likely point to the pressing need to deal with the fiscal cliff. He is also likely to note that unconventional policy comes with costs as well as benefits.
Rates market implications
In our view, the rates market could be disappointed by Bernanke’s speech. Our model currently indicates that a greater than 85% chance of QE3 is priced into the market in the near term (3-4 months). This probability is at recent highs, indicating that the market is likely expecting some explicit signal of further QE by the Chairman at Jackson Hole – and the lack of one is likely to be taken as a disappointment by the market.
One could argue that selling nominal 10y Treasuries may be the way to position for a Bernanke disappointment trade. However, at 1.61%, we do not believe that nominal Treasury levels are extreme by any means. A return to risk aversion or disappointment on the economic data can lead 10y rates lower: just a month ago, 10-year Treasuries were at 1.39%. Selling 10y real rates, at close to all-time lows of -0.72%, offers more compelling risk-reward, in our opinion.
A significant portion of the rates market reaction will also depend on the reaction in risky assets. A risky asset sell-off triggered by the lack of a strong signal for QE could also mute the reaction of higher nominal rates, in our view. In this case, inflation expectations as priced in by TIPS breakevens should head lower. We recommend that investors tactically short 10y real rates and 10y TIPS breakevens to position for a disappointment from Chairman Bernanke.
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Friday, August 31st, 2012
After almost filing for bankruptcy 16 years ago, Apple is now the most valuable public company in history, worth nearly $637 billion.
(h/t: Barry Rithotlz, The Big Picture)
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