Market Outlook: Risk On Thursday

Wednesday, August 15th, 2012

by EconMatters.com

Cisco

Well, miracles do still happen, that dog of a stock for the last (too long to count) actually beat for the quarter, yes I am talking about Cisco. Cisco quarterly reports often send the market down 200 points; they have woefully underperformed the market by a large margin. Not only did Cisco have a good quarter in this environment, but they raised their dividend by 75%. Can you say short squeeze tomorrow? If all goes well in the conference call with reasonable guidance, and given the preview on CNBC, expect a big Risk On day tomorrow for equities.

Chart Source: Yahoo Finance, Aug. 15, 2012

In fact, because we are right up against resistance in several markets such as Oil, Bonds and the S&P, the volume should finally pick up and some key resistance levels could get blown through on Thursday. Cisco is one of those bellwether stocks that either lifts or plunges the rest of the market; expect a nice pop at the opening as shorts are pushed a little outside their comfort zones on Thursday.

The next question is whether tomorrow`s potential rally if it does play out as I anticipate will be a rally that can finish the day on the highs or is a prime candidate for the fade team to come in at the highs and sell into with gusto. But hey one miracle at a time, what`s next HP beating and having a good quarter as well? That`s probably too much to ask for but if they do the shorts could get a much higher entry point.

Oil Markets

Other things to watch out for on Thursday are if Crude Oil can take the next leg up after a bullish inventory report. If WTI breaks above $95 on Thursday then the $100 level is in play again with that range being from $92 to $99.70 yes remember that range. Gas prices have been going up, not sure who is buying all this gas, but inventories are starting to get stretched.

Chart Source: FT.com, August 15, 2012

My first impression is that the US is now exporting more gas than previously as an arbitrage play with cheaper WTI versus Brent being attractive for exports in the southern region of the US. But whatever the case, whether Iran Oil has really been off the grey market it cannot be denied that US refineries are running like crazy and we have lopped off 20 million barrels off the Oil inventory picture in short fashion.

So watch Crude Oil, as Brent is already moving towards pricing in an Iranian escalation of tensions and seems headed towards $120 a barrel relatively quick. Some trial balloons in the media seem to be taking hold coming out of Israel, stay tuned to this circus show as it could get quite scary and provide some interesting election fodder for the candidates.

Bonds

Well, the 10-year is bumping up against the 1.8% area, let`s watch tomorrow for some continuation of this move with traders getting pushed to some extent, and does a big move tomorrow push some safe haven capital into riskier assets on Thursday. The bond market could steal the show at the opening as that trade is so crowded I would hate to see even a glimpse of what that repositioning might look like with its derivative effect playing out for Risk Assets.

Chart Source: Yahoo Finance, August 15, 2012

All in all, we should expect much higher volumes on Thursday with some key levels tested in some pivotal markets, much better than the snooze fest of the past three days. When in doubt follow the price!

© EconMatters All Rights Reserved

Tags: Arbitrage, August 15, Chart Source, Cnbc, Conference Call, Crude Oil, First Impression, Gas Prices, Gusto, Inventories, Inventory Report, Market Outlook, Miracles, Oil Bonds, Oil Markets, Prime Candidate, Quarterly Reports, Resistance Levels, Short squeeze, Wti
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Why Market Moves Have Been Misguided

Thursday, July 19th, 2012

by GCGodfrey, The Investment Insight

As U.S. stocks and the European equity index ended last week in positive territory, against a backdrop of disappointing data, market moves seems misplaced. Instead, Central Bank action is cosmetic not medicinal, a tool for reassurance not economic change. Developments from the recent EU Summit are either temporary or limited and capital remains restricted. However, economic deterioration heats up the pressure for action. Therefore, Central Banks are damned if they act and damned if they don’t. For sentiment to turn, we need to see signs of stability, as well as support.

Watch this being hotly debated on CNBC, with an entertaining edge…

Central Bank Action is Cosmetic Not Medicinal

Central bank action is being met with scepticism, and initial market rallies used as selling opportunities for profit taking. This is because moves are cosmetic and not medicinal, as in the short term they may reassure markets that measures are being taken, but they are of limited effectiveness at significantly boosting growth. Even Draghi himself, the President of the European Central Bank, argued “price signals (have) relatively limited immediate effect”. They won’t stimulate demand and, by potentially hurting bank profitability, could reduce the incentive to lend – the opposite of the target outcome.

Nevertheless, for the first time, we have seen the ECB cut the benchmark interest rate below 1%. In the same week, the Bank of England announced it will be increasing asset purchases by £50m. With weak US data and Bernanke already cautious, the pressure will be on to turn ‘Operation Twist’ into a more traditional waltz. Investors will be hoping the Fed will pump more liquidity into the system instead of ‘twisting’ or neutralising purchases by selling elsewhere along the yield curve.

Summit Moves Are Limited

The outcome of extensive talks at the EU Summit likewise fuelled a ‘false rally’. Spanish government bonds have since returned to hover around the unsustainable 7% level again despite developments. Instead, the 3 key ‘achievements’ are temporary or limited, as explained below…

1.     Senior not guaranteed: Investors have been moved higher up the pecking order and will now be repaid for loans made to Spanish banks before the bailout fund. Being the ‘first’ in line to get money back is indeed an improvement but crucially the risk of loss is still there and may continue to worry the markets.

2.     Wishful thinking? The government has been removed from the equation with bailout funds now able to offer loans to struggling Spanish banks directly. Removing government involvement in bank bailouts to protects sovereign bond yields ignores the possibility investors will continue to view the health of the banks as a driver of economic health.

3.     Bond buying boost limited: Bailout funds may now buy debt directly from “solvent countries” (read: Italy). However, this is a limited source of demand and again short-sighted.

Capital Remains Restricted

The size of the problem remains a key concern and a crucial measure missing from the Summit was a substantial strengthening of the ‘firewalls’. At €500bn, the rescue fund is only 20% of the €2.4tn combined debt burden of Spain and Italy. The risk that a lack of funding will leave European leaders unable to stop the crisis spreading remains.

Economic Deterioration Heats up the Pressure for Action

With a backdrop of a deteriorating economic environment, Europe is far from able to ‘grow out of the problem’. German manufacturing deteriorated for 4^th consecutive month. Relied upon as a rare source of growth, the outlook is dimming. European unemployment has reached its highest level since the creation euro. This is unlikely to spur spending and instead put the pressure back on Central Banks to do something to kick-start economic growth.

Therefore, Central Banks are damned if they act and damned if they don’t. For sentiment to turn, we need to see signs of stability, as well as support.

Note some of this article has been published by the Financial Times

Copyright © The Investment Insight

Tags: Asset Purchases, Bank Of England, Bank Profitability, Benchmark Interest Rate, Central Banks, Cnbc, ECB, Economic Change, Economic Deterioration, Edge Central, Equity Index, European Equity, Governmen, Initial Market, Investment Insight, Market Moves, Price Signals, Scepticism, Target Outcome, Yield Curve
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James Grant: The Fed Manipulates Rates All the Time

Saturday, July 14th, 2012

The Federal Reserve and other central banks manipulate interest rates every day, James Grant of Grant’s Interest Rate Observer told CNBC’s “Closing Bell” on Thursday. “The Fed is in the business of trying to manipulate markets, the macro economy, interest rates, unemployment and inflation through various monetary means, including the twisting around of yield curves and interest rates,” Grant said. Grant added, “The Federal Reserve fixes rates on principle. They have ‘operation twist’ that manipulates the credit markets. They have quantitative easing that manipulates bond yields.”

Tags: Bond Yields, Central Banks, Closing Bell, Cnbc, Credit Markets, Federal Reserve, Grant Federal, inflation, Interest Rate Observer, Interest Rates Unemployment, James Grant, Macro Economy, Principle, Quantitative Easing, Yield Curves
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David Einhorn on Apple (AAPL), Green Mountain (GMCR), and Amazon (AMZN)

Wednesday, July 11th, 2012

David Einhorn shares his thoughts on Apple (AAPL), Green Mountain Coffee (GMCR), and Amazon (AMZN) in the following CNBC interview.

Tags: Aapl, Amazon Amzn, Apple, Cnbc, Cnbc Interview, David Einhorn, Gmcr, Green Coffee, Green Mountain Coffee, Shares
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Technical Take: In a Pickle

Tuesday, July 10th, 2012

by Guy Lerner, The Technical Take

Last week’s comments will certainly  suffice to explain how sentiment is impacting the current price action, so here they are: “From a sentiment perspective, the data remains consistent with a market top rather than the next launching pad to a new bull market or even a sustainable bull run. For several weeks, I have been of the opinion that whatever bounce develops would not carry too far because sentiment really wasn’t too bearish at the bottom. Large rallies usually start with real extremes in investor sentiment and consensus among the sentiment data, which we did not see despite the SP500 dropping about 10% over 8 weeks from the April highs. Although the “dumb money” was bearish (i.e., bull signal), corporate insiders were neutral. Throw in the fact that investors have been primed to front run anything that sounds like quantitative easing or bail out, you can understand why investors weren’t too concern. Don’t worry some central banker has your back.”

What I find fascinating is that investors know what is exactly driving this market.  It is bailouts,  quantitative easing, asset purchases or whatever you want to call it.  These plans can be real or just come from the mouths (i.e., jawboning) of central bankers.  I was listening to CNBC earlier in the week, and the disappointment of the hosts over the market’s response to the European Central Bank’s rate cut was palpable.  With the pre-market futures down about 0.5%, they immediately understood that some entity (i.e., Federal Reserve) would need to step in and do more.  Mind you this is pre-market action, and the SP500 is still only a couple of percent below the recent cyclical highs!  No reason to hope for a good jobs report or better earnings.  Maybe that is asking for too much.  Or maybe investors understand that positive data points takes more QE off the table.

The promises to fix the economies (i.e., equity markets) of the world with more debt are coming almost daily now.  The market’s response to each of these “fixes” seems to be getting less and less.  In addition, whether QE is the right policy still remains in doubt.  After all, it hasn’t turned the US economy around yet and some would argue, asset purchases and debt creation have put the US economy on a weaker foundation.  It would seem that investors are in a pickle.  More of the same is not working, and it just may require lower equity prices for investors to get what they really wish for.

The “Dumb Money” indicator (see figure 1) looks for extremes in the data from 4 different groups of investors who historically have been wrong on the market: 1) Investors Intelligence; 2) MarketVane; 3) American Association of Individual Investors; and 4) the put call ratio. This indicator is neutral.

Figure 1. “Dumb Money”/ weekly

Figure 2 is a weekly chart of the SP500 with the InsiderScore “entire market” value in the lower panel. From the InsiderScore weekly report: “Insider trading volume began a seasonal decline last week. Companies generally close trading windows for insiders 10-14 days prior to quarter’s end and reopen them following their subsequent earnings announcement. Volume will continue to dissipate over the next few weeks and getting a macro read will be difficult because of the limited number of insiders who are free to trade.”

Figure 2. InsiderScore “Entire Market” value/ weekly

Figure 3 is a weekly chart of the SP500. The indicator in the lower panel measures all the assets in the Rydex bullish oriented equity funds divided by the sum of assets in the bullish oriented equity funds plus the assets in the bearish oriented equity funds. When the indicator is green, the value is low and there is fear in the market; this is where market bottoms are forged. When the indicator is red, there is complacency in the market. There are too many bulls and this is when market advances stall. Currently, the value of the indicator is 63.72%. Values less than 50% are associated with market bottoms. Values greater than 58% are associated with market tops. It should be noted that the market topped out in 2011 with this indicator between 70% and 71%.

Figure 3. Rydex Total Bull v. Total Bear/ weekly

Tags: Asset Purchases, Cnbc, Corporate Insiders, Cyclical Highs, Disappointment, Dumb Money, Extremes, Federal Reserve, Guy Lerner, Investor Sentiment, Launching Pad, Market Futures, Mouths, Pickle, Pre Market, Qe, Quantitative Easing, Rallies, S&P500, Sentiment Data
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Bernanke Doesn’t Want Another Term?

Friday, June 8th, 2012

One of the popular theories on the internets (sic) is that Bernanke wants to goose the market to help get Obama re-elected since he wants to keep his job.  That due to the comments continuously heard during the GOP primaries about how every candidate wanted to replace Bernanke.  There is a piece in the WSJ overnight by Fed mole Jon Hilsenrath and while it is more dovish (by a degree) than his comments just 24 hours ago on CNBC (maybes someone at the Fed yelled at him), which has a very interesting blurb on this topic:

Mindful of his own legacy and the Fed’s independence, Chairman Ben Bernanke seems unlikely to allow the political calendar to sway his decisions. He appears especially immune from politics now, with just 18 months left in his term as chairman and little indication that he wants another.

Now if the U.S. is at a weak moment economically at the end of Bernanke’s term, and Obama is re-elected maybe Bernanke will be asked to carry on, but unlike a Treasury Secretary which might stay on an extra year while an economy is in a weak spot, once Ben commits he commits for many years.  So I found this paragraph very interesting in light of the commentary about Bernanke wanting to retain his job.  It would seen doubtful a President Romeny would come in and remove someone who at that time would only have 12 months left in his Fed chairman role.  Especially if that someone did not want a new term.

That said, if Romney wins it seems to kill the chances for the heir apparent Janet Yellen if indeed Ben wants out.  Yellen makes Bernanke look like a hawk.  Anyhow, thought I’d pass it along as it was news to me.

p.s. The last angle of course is someone who has no aspirations past 18 months certainly carries a lot more freedom in his/her actions than someone who does!

Tags: Aspirations, Ben Bernanke, Blurb, Cnbc, Fed Chairman, Gop, Gop Primaries, Hawk, Heir, Janet Yellen, Legacy, Mole, Nbsp, Paragraph, Political Calendar, Romeny, Treasury Secretary, Weak Spot, Wsj
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Jim Grant on Bernanke’s Continuing “Grand Manipulation”

Thursday, June 7th, 2012

In preparation for what we are about to receive from the Charmain of the Fed, may we be truly grateful, Jim Grant offered CNBC’s Maria B the forthright advice last night “prepare for platitudes but watch what they are doing not what they are saying”. The ever outspoken Grant notes that the Fed’s balance sheet has been contracting (unlike Maria’s mainstream perspective); for the past three months the Fed’s balance sheet has contracted at an annualized rate of 10% – even as Fed-head after Fed-head talk up QE and so on. So unless they continue buying securities – since the short-dated positions will continue to roll off – the Fed’s balance sheet will continue to contract and therefore the stimulative effect will fall. Grant does expect QE3 since it is the fun-drug that we have been using for 4 or 5 years and that Bernanke will need little pushing to continue the Grand Manipulation. He ends on a rather interesting note that the Wisconsin win and the potential for an Obama loss in November may be more of a positive driver for stocks since markets begin to revert to a free market once again – we suspect this is not the case given the donors/beneficiaries under Romney’s wing. But rest assured – the bespectacled bear ends on the chilling note that ‘the long-term implications are bad’ for the ongoing manipulation that is now the status quo.

and from Goldman, if there was any doubt of Grant’s comments on the implicit tightening – or inverse flow – as they present the embedded tightening opportunity cost for the Fed it does nothing.

The bottom line here is that if the Fed does nothing then there is an implicit 5-10bps of rate-hike tightening per quarter implicit in the balance sheet roll-down (50bps in next 3 years) – so when considering the Fed’s actions, discount the effect of this automatic tightening before buying the S&P at 2000…

Tags: 3 Years, Amp, Balance Sheet, Beneficiaries, Bernanke, Bottom Line, Charmain, Cnbc, Donors, ETF, ETFs, Fed Head, Gold, Goldman, Jim Grant, Mainstream, Manipulation, Opportunity Cost, Platitudes, Qe, Rate Hike, Term Implications, Three Months
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Cashin On Rumor Versus Reality

Wednesday, May 30th, 2012

The avuncular Art Cashin opines on the roller-coaster of unreality that has been the equity markets for the last few days as outcomes become increasingly binary and investors increasingly herded from one direction to another. His sage advice – as if spoken by the most-interesting-person-in-the-world – “Stay nimble”, my friends.

Via Art Cash of UBS,

Rumors Versus Reality With Rumors Resurgent At The Wire

Yesterday, there were rumors about that Chinese authorities were working on a new stimulus package. That cheered Asian markets and allowed European bourses to tiptoe around a deteriorating situation in Spanish banks.

Even before the U.S. markets opened, the semi-official Xinhua news agency of China began pooh-poohing the rumors. The rumormongers would have none of the denials.

A package would be announced after the markets closed (presumably in Europe – circa 11:30).

That backdrop allowed U.S. stocks to open better in a rather sharp, sigh of relief, oversold rebound.

They even shrugged off some lousy consumer confidence numbers at 10:00. Since the confidence data sharply countered Friday’s University of Michigan numbers, traders deemed them likely inconclusive.

The rebound rally held into the European close.

The rumors apparently morphed again. Simon Hobbs on CNBC said his sources suggested some announcement might come after the European close. The sense seemed to be that it would emanate out of Europe – not China.

After the 11:30 European close, U.S. stocks began to fade and rather rapidly at that.

The Euro fell through a trapdoor.

Was it just disappointment at no announcement? It looked a little too sudden and sharp for that.

Attention shifted to the cut in Spain’s rating by Egan-Jones. The timing was certainly coincidental, but did the somewhat small agency have that much clout?

Also contemporaneous with the Euro drop were analyses of an odd switch in a weekly ECB report.

There was a decline of over 25 billion Euros in collateral posted on the most recent LTRO. In another part of the ledger there was an increase of over 34 billion Euros in “other claims” (frequently smoke for emergency loans).

That raised speculation that the ECB may have “called” a loan, as the value of the posted collateral deteriorated. The bank, perhaps, could not find valid replacement collateral and shifted to emergency loan status.

While that seemed rather technical, if true, it raised fears that the banking situation in Spain, and elsewhere could even be worse than we knew.

The Euro-led selloff petered out around 1:30 EDT after cutting the morning gains in half.

As the day wore on, the China stimulus story began to resurface. That led to a bit of a flurry in the final half hour. Also, helping were media reports that election polls in Greece were shifting toward Euro-safe sentiments.

Overnight – EU Proposal Starts Roller-Coaster Ride – Pre-dawn this morning the situation in the Spanish banking community took several sharp turns.

The FT had reported that the ECB had vetoed the Bank of Spain’s plan to recapitalize its banks, particularly Bankia.

The Euro fell to a two year low before the ECB tweeted that there was no veto. European markets stabilized.

Then, the other shoe dropped.

Around 7:00 EDT, the EU commission issued a surprise plan to channel aid directly into European banks rather than through the treasury of their sovereign.

The announcement caught the European markets off-guard and sharp spike rallies erupted, erasing all, or most, of the earlier selloffs.

Then the doubts began to pop up. Would this clear the Merkel wing? Could it be set up within existing treaties?

The doubts stopped the rallies and prices faded but failed to go into freefall. That’s why I keep stressing staying nimble.

Tags: Art Cashin, Asian Markets, Chinese Authorities, Cnbc, Confidence Data, Confidence Numbers, Consumer Confidence, Denials, Egan Jones, European Bourses, Opines, Roller Coaster, S University, Sage Advice, Semi Official, Spanish Banks, Stimulus Package, Trapdoor, Unreality, Xinhua News Agency
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Jim Rogers: “Volume Is Not Going To Come Back. We’ve Had A Great 30 Years. That’s Finished!”

Tuesday, May 15th, 2012

 
Jim Rogers is hedging his gold (and silver) positions reflecting that this is normal, following such a tremendous run, and that this is good for the precious metal in the long-run. In his discussion with Maria Bartiromo this afternoon, he notes India’s anti-gold ‘protectionism’ (and its potential balance of payments issues) that are trying to force the hoarding into risky ‘productive’ assets (as others might say). The immutable commodity maven suggests JPMorgan (and its peers) could be behind the drops in the overall commodity complex as the uncertainty of their positions (and liquidation potential to raise cash as bank examiners begin their forensics) becomes more important. He holds the USD, which he hates; has a number of equity shorts; and is most fearful of banks – specifically admitting he is a serial seller of calls on JPMorgan.

His advice, and perhaps Maria should look into it given their ratings recently, is to become a farmer; own farmland; and speculate on agriculture. On the dismal ‘ethical’ state of our leaders and management, the thoughtful Rogers opines, “You can read world history for decades. There are always people doing things wrong. We have not changed our human nature and we will continue to have scandals and problems” and in a follow-up to CNBC’s standard ‘money-on-the-sidelines’ argument he crushes the money-honey’s dreams: “Finance had a great 30 years. That’s finished. Now to advance, we have too many people, too many MBAs, too much leverage and too many governments that don’t like us”. A must-see rebuttal to the ‘normal’ CNBC hopium with more on China’s slowdown, a US recession, Europe and a Greek exit, QE3, and ‘tractors’.

Tags: Balance Of Payments, Bank Examiners, Cnbc, Farmland, Forensics, Gold And Silver, Hoarding, Human Nature, Jim Rogers, Maria Bartiromo, Maven, Money Honey, Precious Metal, productive assets, Protectionism, Qe3, Rebuttal, Sidelines, Slowdown, World History
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Will ECRI’s Call for Recession Prove Accurate?

Sunday, May 13th, 2012

ECRI’s Lakshman Achuthan was making the rounds yesterday, with yet another defense of his firm’s recession call – the first claim which came early last fall.  I do think (from memory) he has pushed out the time frame a bit from when the initial call came, but since early this year has claimed we will see it by mid year.  Perhaps the very warm winter hurt the call as well – who knows with these black boxes.  Below we have a video with CNBC and there is one nugget in there I did not know.  Conventional wisdom is a recession is back to back quarters of negative GDP… but according to the NBER (and Achuthan) that is but one of a group of potential signals.

The Committee does not have a fixed definition of economic activity. It examines and compares the behavior of various measures of broad activity: real GDP measured on the product and income sides, economy-wide employment, and real income. The Committee also may consider indicators that do not cover the entire economy, such as real sales and the Federal Reserve’s index of industrial production (IP).

10 minute video – email readers will need to come to site to view

Tags: Black Boxes, Cnbc, Conventional Wisdom, Economic Activity, Economy, Federal Reserve, GDP, Lakshman, Lakshman Achuthan, Measures, Memory, Nber, Nugget, Quarters, Real Gdp, Recession, Signals, Time Frame, Video Email, Warm Winter
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