Cautious Bullish Stance Appropriate – Accumulate the Stronger Seasonal Sectors

Monday, August 20th, 2012

by Don Vialoux, TechTalk

Economic News This Week

FOMC minutes for the July 31st /August 1^st meeting are released at 2:00 PM EDT on Tuesday.

June Canadian Retail Sales to be released at 8:30 AM EDT on Wednesday are expected to increase 0.1% versus a gain of 0.3% in June.

July Existing Home Sales to be released at 10:00 AM EDT on Wednesday are expected to increase to 4.55 million units from 4.37 million units in June.

Weekly Initial Jobless Claims to be released at 8:30 AM EDT on Thursday are expected slip to 365,000 from 366,000 last week.

July New Home Sales to be released at 10:00 AM EDT on Thursday are expected to increase to 368,000 from 350,000 in June.

July Durable Goods Orders to be released at 8:30 AM EDT on Friday are expected to increase 2.5% versus a gain of 1.3% in June. Excluding transportation, Goods are expected to increase 0.5% versus a decline of 1.4% in June.

Earnings Reports This Week

Equity Trends

The S&P 500 Index added 12.29 points (0.87%) last week. Intermediate trend changed from down to neutral on a break above resistance at 1,415.23. Next resistance is at 1,422.38. The Index remains above its 20, 50 and 200 day moving averages. Short term momentum indicators are overbought, but have yet to show signs of peaking.

Percent of S&P 500 stocks trading above their 50 day moving average increased last week to 81.40% from 80.20%. Percent is intermediate overbought, but has yet to show signs of peaking. Percent has reached a level where an intermediate peak above the 80% level normally leads to at least a short term correction.

Percent of S&P 500 stocks trading above their 200 day moving average increased last week to 73.40% from 70.60%. Percent remains intermediate overbought, but has yet to show signs of peaking

The ratio of S&P 500 stocks in an uptrend to a downtrend (i.e. the Up/Down ratio) increased last week to (289/128=) 2.26 from 1.92. The ratio is intermediate overbought, but has yet to show signs of peaking.

Bullish Percent Index for S&P 500 stocks increased last week to 70.00% from 67.80% and remained above its 15 day moving average. The Index remains intermediate overbought, but has yet to show signs of peaking.

The Up/Down ratio for TSX Composite stocks increased last week to (139/81=) 1.72 from 1.46. The ratio is intermediate overbought, but has yet to show signs of peaking.

Bullish Percent Index for TSX Composite stocks increased last week to 60.57% from 56.91% and remained above its 15 day moving average. The Index remains intermediate overbought, but has yet to show signs of peaking.

The TSX Composite Index gained another 199.00 points (1.67%) last week. Intermediate trend changed from down to up on a break above resistance at 11,936.16. The Index remains above its 20, 50 and 200 day moving averages. Short term momentum indicators are overbought, but have yet to show signs of peaking. Strength relative to the S&P 500 Index remains negative.

Percent of TSX stocks trading above their 50 day moving average increased last week to 69.92% from 66.26%. Percent is intermediate overbought, but has yet to show signs of peaking. Peaks near the 70% level normally lead to at least a short term correction by the Index.

Percent of TSX stocks trading above their 200 day moving average increased last week to 48.37% from 40.65%. Percent continues to trend higher.

The Dow Jones Industrial Average gained another 67.25 points (0.51%) last week. Intermediate trend is up. Next resistance is at 13,338.66. The Average remains above its 20, 50 and 200 day moving averages. Short term momentum indicators are overbought, but have yet to show signs of peaking. Strength relative to the S&P 500 Index remains negative.

Bullish Percent Index for Dow Jones Industrial Average stocks increased last week to 86.67% from 83.33% and remained above its 15 day moving average. The Index remains intermediate overbought, but has yet to show signs of peaking.

Bullish Percent Index for NASDAQ Composite stocks increased last week to 53.69% from 52.42% and remained above its 15 day moving average. The Index continues to trend higher.

The NASDAQ Composite Index gained another 57.74 points (1.81%) last week. Intermediate trend is up. Next resistance is at 3,134.17. The Index remains above its 20, 50 and 200 day moving averages. Short term momentum indicators are overbought, but have yet to show signs of peaking. Strength relative to the S&P 500 Index has changed from negative to at least neutral.

The Russell 2000 Index added 18.34 points (2.29%) last week. Intermediate trend is down, but turns positive on a break above resistance at 820.44. The Index remains above its 20, 50 and 200 day moving averages. Short term momentum indicators are overbought, but have yet to show signs of peaking. Strength relative to the S&P 500 Index has changed from negative to at least neutral.

The Dow Jones Transportation Average gained 130.83 points (2.58%) last week. Intermediate trend is down. Resistance is at 5,290.06. The Average moved back above its 20, 50 and 200 day moving averages. Short term momentum indicators are overbought, but have yet to show signs of peaking. Strength relative to the S&P 500 Index remains negative.

The Australia All Ordinaries Composite Index added 91.02 points (2.12%) last week. Intermediate trend is down. Support is at 4,033.40 and resistance is at 4,515.00. The Index remains above its 20, 50 and 200 day moving averages. Short term momentum indicators are overbought, but have yet to show signs of peaking. Strength relative to the S&P 500 Index remains neutral.

The Nikkei Average gained another 271.06 points (3.05%) last week. Intermediate trend changed from down to up on a break above resistance at 9,136.02 on Friday. The Average remains above its 20 and 50 day moving averages and moved above its 200 day moving average last week. Short term momentum indicators are overbought, but have yet to show signs of peaking. Strength relative to the S&P 500 Index has changed from negative to at least neutral.

The Shanghai Composite Index slipped another 53.92 points (2.49%) last week. Intermediate trend is down. The Index remains below its 50 and 200 day moving averages and fell below its 20 day moving averages last week. Short term momentum indicators are trending down. Strength relative to the S&P 500 Index remains negative.

The London FT Index added 0.91 (0.02%), the Frankfurt DAX Index improved 75.89 points (1.09%) and the Paris CAC Index gained 31.67 points (0.92%) last week.

The Athens Index added 21.04 points (3.40%) last week. The Index remained above its 20 and 50 day moving averages. Short term momentum indicators are overbought, but have yet to show signs of peaking. Strength relative to the S&P 500 Index remains slightly negative.

Currencies

The U.S. Dollar Index added 0.05 (0.06%) last week. Intermediate trend is up. Support is at 81.16 and resistance is at 84.10. The Index remains just below its 20 and 50 day moving averages. Short term momentum indicators are trending down. Stochastics already are oversold.

The Euro added 0.42 (0.34%) last week. Intermediate trend is down. Support is at 120.42 and resistance is at 126.93. The Euro remains below its 50 and 200 averages, but remains above its 20 day moving average. Short term momentum indicators are trending higher. Stochastics already are overbought.

The Canadian Dollar added 0.18 U.S. cents (0.17%) last week. Intermediate trend is neutral. Support is at 95.76 and resistance is at 102.05. The Dollar remains above its 20, 50 and 200 day moving averages. Short term momentum indicators are overbought, but have yet to show signs of peaking.

The Japanese Yen fell 2.07 (1.62%) last week. Intermediate trend is down. Support is at 124.12 and resistance is at 128.77. The Yen fell below its 20, 50 and 200 day moving averages. Short term momentum indicators are trending down. Stochastics already are oversold.

Commodities

The CRB Index added 1.67 points (0.55%) last week. Intermediate trend is up. The Index remains above its 20, 50 and 200 day moving averages. Strength relative to the S&P 500 Index has turned neutral.

Gasoline dropped $0.11 (3.65%) when the futures contract rolled over. Gasoline remains above its 20, 50 and 200 day moving averages. Strength relative to the S&P 500 Index remains positive.

Crude oil gained another $2.39 per barrel (2.56%) last week. Intermediate trend is up. Crude remains above its 20 and 50 day moving averages and just below its 200 day moving average. Short term momentum indicators are overbought, but have yet to show signs of peaking. Strength relative to the S&P 500 Index remains positive.

Natural Gas fell another $0.06 per MBtu (2.15%) last week. Intermediate trend is up. Resistance has formed at $3.28. Gas remains below its 50 day moving average and fell below its 20 day moving average last week. Short term momentum indicators are trending down. Strength relative to the S&P 500 Index has changed from up to at least neutral.

The S&P Energy Index slipped 0.78 points (0.14%) last week. The Index is testing resistance at 544.25. The Index remains above its 20, 50 and 200 day moving averages. Short term momentum indicators are overbought, but have yet to show signs of peaking. Strength relative to the S&P 500 Index remains positive.

The Philadelphia Oil Services Index gained 0.97 (0.42%) last week. The move above a reverse head and shoulder pattern continues. The Index remains above its 20, 50 and 200 day moving averages. Strength relative to the S&P 500 Index remains positive.

Gold slipped $4.00 per ounce (0.25%) last week. Intermediate trend is down. Support is at $1,526.70 and resistance is at $1,642.40. Gold remains above its 20 and 50 day moving averages and below its 200 day moving averages. Short term momentum indicators are neutral. Strength relative to the S&P 500 Index remains neutral.

The AMEX Gold Bug Index added 4.88 points (1.13%) last week. Intermediate trend is down. Support is at 372.74 and resistance is at 464.76. The Index remains above its 20 and 50 day moving averages. Short term momentum indicators are trending higher. Strength relative to gold remains positive.

Silver added $0.01 per ounce (0.04%) last week. Intermediate trend is down. Support is at $26.10 and resistance is at $28.44. Silver remains below its 200 day moving average and above its 20 and 50 day moving averages. Short term momentum indicators are trending higher. Strength relative to gold remains neutral.

Platinum jumped $68.90 per ounce (4.92%) last week following labor strife at Lonvin, the world’s third largest platinum mine. Strength relative to gold turned from negative to positive. Platinum moved above its 20 and 50 day moving average.

Palladium jumped $23.75 (4.00%) last week. Nice breakout on Friday on a Leibovit Volume Reversal! Strength relative to the S&P 500 Index had turned from negative to positive.

Copper was unchanged last week. Intermediate trend is down. Support is at $3.24 and resistance is at $3.56. Copper moved back above its 20 and 50 day moving averages on Friday. Short term momentum indicators are neutral. Strength relative to the S&P 500 Index remains negative.

The TSX Global Metals and Mining Index eased 8.48 points (0.97%) last week. Intermediate trend is down. Support is at 781.13. The Index remains above its 20 and 50 day moving averages. Short term momentum indicators are trending higher. Stochastics already are overbought. Strength relative to the S&P 500 Index has been negative and showing early signs of change.

Lumber gained another 6.89 points (2.29%) last week. Lumber remains above its 20, 50 and 200 day moving averages. Strength relative to the S&P 500 Index remains positive.

The Grain ETN slipped $0.22 (0.35%) last week. Units remain above their 20, 50 and 200 day moving averages. Strength relative to the S&P 500 Index has turned negative.

The Agriculture ETF added $0.23 (0.46%) last week. Intermediate trend is up. Units remain above their 20, 50 and 200 day moving averages. Short term momentum indicators are overbought and showing early signs of peaking. Strength relative to the S&P 500 Index remains negative.

Interest Rates

The yield on 10 year Treasuries increase 16.7 basis points (1.01%) last week. Short term momentum indicators are overbought, but have yet to show signs of peaking.

Conversely, price of the long term Treasury ETF fell another $4.10 (3.26%) last week.

Other Issues

The VIX Index fell another 1.29 (8.75%) last week. It broke support at 13.66 to reach a five year low. Short term momentum indicators are oversold, but have yet to show signs of bottoming.

Earnings reports to be released this week are unlikely to have a significant impact on equity markets.

Economic reports this week are expected to be neutral/positive this week. Next major event is the Jackson Hole Economic conference where Benanke and Draghi are scheduled to speak.

Macro news heats up this week. China and the Eurozone release their PMI reports on Thursday. Mid-east tensions continue to ramp up.

Short and intermediate technical indicators for most equity markets and sectors are overbought, but have yet to show signs of peaking.

North American equity markets have a history of moving flat to lower in mid-August. September historically is the weakest month of the year. Seasonality turns positive after mid-October.

Cash on the sidelines on both sides of the border is substantial and growing. However, political uncertainties (including the Fiscal Cliff) preclude major commitments by investors and corporation. The selection of Paul Ryan as the Republican Vice President candidate has boosted Romney’s ratings on the polls, but the polls continue to show a tight race.

The Bottom Line

Equity markets on both sides of the border have had a good ride since their lows set on June 4^th. The Dow Jones Industrial Average is up 10.3%, the S&P 500 Index has gained 12.0% and the TSX Composite has increased 7.9%. Investing in equity markets has become less attractive. Accumulation of seasonal trades on weakness continues to make sense as long as the seasonal trades are outperforming the market. Sectors in this category include agriculture, energy, leisure & entertainment, software and gold. A cautious bullish stance appears appropriate.

Tom Rogers’ Weekly Elliott Wave Blog

Following is a link:

http://www.tomrogers.net/signpost.htm

Special Free Services available through www.equityclock.com

Equityclock.com is offering free access to a data base showing seasonal studies on individual stocks and sectors. The data base holds seasonality studies on over 1000 big and moderate cap securities and indices.

To login, simply go to http://www.equityclock.com/charts/

Following is an example:

ETF News

The latest weekly update on ETFs in Canada to August 17^th is available at

http://www.etfinsight.ca/

Leibovit Volume Reversal Signal on Palladium

More information on Mark’s services is available at http://www.vrtrader.com/login/index.asp

Disclaimer: Comments and opinions offered in this report at www.timingthemarket.ca are for information only. They should not be considered as advice to purchase or to sell mentioned securities. Data offered in this report is believed to be accurate, but is not guaranteed.

Don and Jon Vialoux are research analysts for Horizons Investment Management Inc. All of the views expressed herein are the personal views of the authors and are not necessarily the views of Horizons Investment Management Inc., although any of the recommendations found herein may be reflected in positions or transactions in the various client portfolios managed by Horizons Investment Management Inc

Horizons Seasonal Rotation ETF HAC August 17^th 2012

Copyright © TechTalk

Tags: Activity Index, Advance Decline Line, Amp, August 1, Bank Of Australia, Board Minutes, Bullish Percent Index, Bullish Trend, Canadian, Canadian Market, Cap Index, Chicago Fed, Consumer Sentiment, Consumer Survey, Decline, Don Vialoux, Durable Goods Orders, Earnings, Economic News, Existing Home Sales, Head And Shoulders, Industrials, Initial Jobless Claims, Intermediate Trend, July 31st, Market Benchmarks, Market Performance, Market Strength, Momentum Indicators, Months Of The Year, Moving Averages, Nbsp, New Home Sales, Reserve Bank Of Australia, Resistance, Retail Sales, Russell 2000, Sales Numbers, Seasonal, Seasonal Trades, Seasonality, Sectors, Signs, Stocks, Transportation Goods, Uptrend, Us Dollar Index, Weighted Index
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The “What if” Games Begin

Friday, August 10th, 2012

by Peter Tchir, TF Market Advisors

What if Europe is actually really going to get aggressive?

What if housing has bottomed and is starting to improve?

What if the Q2 jobs data was affected by adjustments as much as Q1 and the economy wasn’t as bad as some feared?

What if Chinese stimulus works?

What if earnings rebound in Q4?

“What if” is a close relative of “Green Shoots”. The market doesn’t need actual data to support it, just needs to think it might be coming. There are a lot of shorts who are nervous about this week’s price action. We didn’t get the typical Monday pullback. Here it is Thursday and we continue to push up against the highs. That is making people question their beliefs, and wonder “what if”. And it isn’t just the bears. Many bulls are underweight and are wondering “what if” this is the real thing.

For myself, I still think 1,425 is a good target, but above 1,410 I start selling again. I think the “what if” analysis is what will push us to those targets.

Copyright © TF Market Advisors

Tags: Bears, Bulls, Earnings, Economy, Europe, Games, Jobs, Nbsp, Price Action, Pullback, Q1, Rebound, Stimulus, Target, Targets, Tf
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Earnings, Revenue Beat Rates Remain the Same (Bespoke)

Sunday, August 5th, 2012

by Bespoke Investment Group

Since last Thursday, roughly 800 companies have reported earnings, which is nearly half of the total amount of reports we’ve seen since earnings season began on July 9th.  While we’ve seen a ton of reports over the last week, the overall percentage of companies that have beaten both earnings and revenue estimates has stayed the same.  As shown below, the earnings beat rate currently stands at 59.9%, which is just a tenth of a percent below where it was a week ago.  The revenue beat rate is currently at 48.2%, which is a tenth of a percent above where it was a week ago.

The earnings beat rate has been right around 60% for six consecutive quarters now.  The revenue beat rate, however, is well below its historical average this earnings season.
We’re now at the back end of the second quarter reporting period, so we don’t expect these readings to change much from here.

Copyright © Bespoke Investment Group

Tags: Consecutive Quarters, Copyright, Earnings Estimates, Earnings Season, Investment Group, Last Thursday, Nbsp, Revenue Estimates, Second Quarter
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The ‘Upside-Down World’ of Wall Street

Monday, July 30th, 2012

Tags: Nbsp, Upside Down World, Wall Street
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Can it Really Be That Easy?

Monday, July 30th, 2012

by Bespoke Investment Group

Throughout the year in reports to our Bespoke Premium clients, we have highlighted the similarities between this year and prior Presidential Election years numerous times.  Most recently, in early July we noted the fact that based on the historical pattern the S&P 500 could see a modest pullback in mid-July coinciding with the kick-off of earnings season.  Sure enough, the market saw some choppiness about a week and a half ago and subsequently rebounded in the middle of last week.  Holding to the historical pattern, that rebound came right at the same time that the market historically sees its summer low.

If the pattern continues, the S&P 500 could be set up for a nice rally to end the Summer.  Will it hold?  Only time will tell, but if the historical pattern has worked so far, what’s to stop it from continuing?

Tags: Amp, Choppiness, Earnings Season, Investment Group, Nbsp, Presidential Election, Pullback, Rally, Rebound
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Gold (GLD) is Sneaking Up

Thursday, July 26th, 2012

by Mark Hanna, Market Montage

Gold has been sidelined for many months as it has been in an intermediate term downtrend.  Since the Hilsenrath article it has shown some strength.  As you can see below it has made a series of lower highs throughout most of 2012, and it is now coming to touch the trend line.  If we see gold begin to blast off it would put credence into the idea that action from the Federal Reserve is imminent.

As for the general market, we have a rally in the Euro and weakness in the dollar.  With that this incredibly strong relationship continues to be rooted in the market and equity buyers step in.  S&P 1340 continues to be an incredibly strong magnet.  While this selloff has been sharp the S&P 500 did not actually create a new lower low.  So the potential remains for the range bound action we have seen for the past 2 months…

That said I mentioned housing related as a relatively immune sector, and true to form this is an area seeing a lot of selling today.  It continues to be impossible to buy almost any strength as these areas get attacked.   At this point the only theme I see working ok is perhaps agricultural stocks, due to the U.S. drought.  A few REITs also stand out but the way things are going, those will be the next area for selling to occur.  The lack of themes or groups working in concert showcases an underlying weakness in the tape.

Tags: agricultural, Amp, Blast, Credence, Drought, Federal Reserve, GLD, Gold, Magnet, Mark Hanna, Nbsp, Rally, Reits, Relationship, Selling Today, Selloff, Showcases, Stocks, Term Downtrend, Trend Line
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US Utilities: Don’t Overpay for Yield

Wednesday, July 25th, 2012

by Russ Koesterich, Chief Investment Strategist, iShares

As short-term interest rates remain at or close to zero, investors starved for income should be wary of overpaying for yield, particularly when it comes to US utilities.

As I write in my new Investment Directions monthly commentary, I continue to prefer dividend funds and the global telecommunications sector for investors searching for yield. But some segments of the market – such as US utilities — are looking expensive and should likely be avoided.

I continue to hold an underweight view of US utilities for two reasons:

1.) Valuation: Investors have pushed US utility stocks up too far as US utilities currently look even more expensive than they were back in January. US Utilities are currently trading at nearly 15x earnings, versus an average since 1995 of around 14.5x. And the stocks are even more expensive when you compare their valuation to the broader market. As a regulated industry, utilities typically trade at a discount to the broader market. Since 1995, US utilities have traded at an average discount of roughly 25% to the S&P 500. Today, however, US utilities are currently trading at a more than 8% premium, the largest since late 2007.

2.) Profitability: The premium can’t be justified by US utilities being more profitable than in the past. In fact, the US utilities industry is currently less profitable than its long-term average. Return on earnings for US large cap utility companies is currently 10.5%, the lowest level since 2004.

So why are investors paying a near 10% premium to invest in a sector whose profitability is close to an eight-year low? The answer: US utilities have benefited from investors’ flight to safety and flight to yield. To be sure, if the market experiences a major correction, US utilities would likely outperform given their low beta (a measure of the tendency of securities to move with the market at large). However, absent a major correction, I believe a combination of stretched valuations and lackluster profitability suggests that US utilities are likely to continue to trail the market, even in a slow growth environment.

As I wrote in a recent post, my preferred vehicles for seeking yield are dividend paying equities, such as the iShares High Dividend Equity Fund (NYSEARCA: HDV), given its low beta and quality screen; the iShares Dow Jones International Select Dividend Index Fund (NYSEARCA: IDV) and the iShares Emerging Markets Dividend Index Fund (NYSEARCA: DVYE). For investors willing to take the added risk of sector exposure, I like the iShares S&P Global Telecommunications Sector Index Fund (NYSEARCA: IXP).

And for investors still looking for exposure to utilities, I continue to hold a neutral view of global utilities, particularly international ones available through the iShares S&P Global Utilities Index Fund (NYSEARCA: JXI).

Source: Bloomberg

Russ Koesterich, CFA is the iShares Global Chief Investment Strategist and a regular contributor to the iShares Blog.  You can find more of his posts here.

The author is long HDV, IXP, IDV

Investing involves risk, including possible loss of principal. In addition to the normal risks associated with investing, narrowly focused investments typically exhibit higher volatility.  International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume.

There is no guarantee that dividends will be paid.

Tags: Amp, Beta, Cap, Chief Investment Strategist, Dividend Funds, Earnings, Global Telecommunications Sector, interest rates, Investment Directions, Investors, Ishares, Nbsp, Profitability, Russ, Segments, Tendency, Term Interest, Utilities Industry, Utility Stocks
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Lucy or Charlie Brown?

Monday, July 23rd, 2012

Since the May swoon the market has been in a violent pattern of indecision.  While the trend has had an upward bias since early June, there has been no consistency.  In fact since breaking out of a five session sideways pattern in mid June we’ve had a consistent pattern of 5-7 up sessions followed by 5-7 down sessions.  Each time Lucy sets down the football and Charlie Brown runs up to kick it (the 5-7 day upswings), it is snatched away (the 5-7 day downswings).  Obviously an exasperating situation for all involved – save for Lucy.

The technical condition of the market seems to be improving but of course everything is only obvious in retrospect.   Wednesday’s move broke the S&P 500 over a series of descending highs AND yesterday’s move pushed the index nominally over early July highs.  Those are both positives.  Of course, as has been the case all spring/summer just as things look promising Lucy shows up and we are looking at a significant gap down in the morning.  It is a perpetual April Fool’s joke of spring/summer 2012.

If we are to have a real change in character the next handful of days will be quite important.  The last few pullbacks (5-7 days in duration) have given back about 2/3rds of the previous rally.  If we can see a less chaotic pullback – lighter in degree and duration, the bull case is strengthened.  If this was just another devious headfake, the action in the past few sessions will have been nothing but another headfake of spring/summer 2012.

It appears that Intel and IBM used up the “not so great, but at least not a disaster” air in the room earlier this week – we had more of those type of reports from the Microsofts and Google’s of the world last night but it’s not leading to the same reaction.  Also there were some negative reactions in Chipotle and Intuitive Surgical.  The dollar also has hit a first level support after a multi day pullback and oil needs some rest after a huge push so nothing too dire here unless we have a complete lack of buyers in the next few sessions.

There were a trio of economic reports yesterday – none of them came in well, but at this point one does not know if the market is rooting for worse or better news as the former brings more calls for QE. Today the economic calendar is clear so we’ll see who shows up on a summer Friday to press the case.

Tags: April Fool, Bull Case, Charlie Brown, Consistency, Consistent Pattern, Duration, Gap, Google, Handful, Indecision, Joke, Lucy, Microsofts, Nbsp, Pullback, Pullbacks, Retrospect, Spring Summer, Swoon, Upward Bias
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LIBOR Liar, Pants on Fire. A Look at Barc, BAC, JPM, and Citi

Thursday, July 19th, 2012

by Peter Tchir, TF Market Advisors

July 2007 to January 2008

Stocks

These are the stock prices, “normalized” to 100 in July 2007. In the August swoon, JPM and C did the worst. Barclay’s eventually caught up in later August, while BAC did well. We briefly rallied on a Fed Rate cut in October, but then the swoon returned with C underperforming by far. It was down over 40% in that period. Barclay’s was in the middle, and JPM was actually the best performer, down only 11% by year end.

CDS

These are “normalized” CDS spreads. You can see that at first they moved in line, then Barclay’s underperformed, but returned to the fold by the time of the Fed rate cut, and then ultimately we saw a separation as JPM did the best (just like in stocks) and Citi did the worst (just like in stocks). But this overstates the divergence a bit. Looking at the outright spreads shows that Barclay’s actually started the period trading tight, and JPM was the widest, but by the end CDS markets viewed JPM, Barclays, and BAC as similar, but Citi was noticeably wider.

LIBOR Submissions

These are “normalized” LIBOR. All banks were submitting very similar rates. Then the stock market decline started and bank LIBOR increased. This was a function of credit spreads. Then as Fed programs kicked in (discount window) and then rate cuts were implemented, LIBOR moved down.

The outlier to me, is Citibank. Citi was the worst on CDS, the worst on stock, but actually did the best on LIBOR? Really? Was Citi really able to borrow from other banks at rates equal to or lower than BAC and JPM? Shouldn’t it have been closer to Barclays? There is the fact that Barclay’s was reliant on BoE rather than the Fed. That is one reason for Citi to more closely track JPM and BAC, but that close? CDS was relatively tame, so maybe the differential in 5 year CDS overstates the issue, but just doesn’t seem right.

August 2008 to January 2009

Stocks

All the banks moved more or less in line at first. Then Citi, Barclays, and BAC underperformed. For one brief moment, Citi actually bounced and got back to JPM levels, then a long slow decline started. Barclays was for awhile the worst performer, but Citi took over, being down 80% at one stage and finishing down 65%. Those are big numbers. Citi, BAC, and Barclays all saw their stock price decline by 55% to 65%. JP was “only” down 23%.

CDS

On a “normalized” basis, it’s surprising to see Barclay’s CDS do better than anyone else’s at any time during the period. What is clear, is that on a “normalized” basis, Citi consistently was the worst name. One spike up with JPM, one with Barclay’s, and one big spike all by itself. But maybe like in 2007, the levels were low enough that the differences might be immaterial?

No, these moves in LIBOR are real. Citi started the crisis as the highest spread name, and maintained that “distinction” throughout the entire period. Barclay’s never traded as wide in CDS as Citi. JPM was probably the best, but BAC wasn’t too far behind (though it widened as noise about hidden ML losses came out). Barclay’s was surprisingly not as bad as I would have guessed. Citi though is just clearly the worst.

LIBOR Submissions

This is “normalized” and Barclay’s is a clear underperformer. You can tell when they were allegedly “told to catch up”, but throughout, they remained the high submitter. They underperformed through the entire crisis. Not quite consistent with stocks or CDS and may explain why they complained that others weren’t submitting “true” rates. Citi was somehow consistently able to submit LIBOR that was lower than BAC but was even lower than JPM on some days. By the end of the year, once Barclay’s was presumably fully in liar mode, they were similar to BAC and C. Maybe it’s the normalization process screwing up the data?

I’ve added the 3 month yield so you can get a sense of the Ted Spread, but it is clear that Citi felt they funded in line with BAC and at times with JPM. It is only at the end when we see Citi, BAC, and Barclay’s submit similar rates.

If Barclay’s said others were lying, who could it be? There were days the separation between the U.S. banks and Barclay’s was as high as 100 bps. 50 bps difference wasn’t uncommon. I can justify JPM trading that much better. The stock market performance and CDS of JPM would all be good explanations of why JPM was better than Barclay’s at funding. That much lower, is a guess, but it actually doesn’t seem unreasonable.

Citi in particular looks bad. Especially since BAC’s spikes in LIBOR coincide at least somewhat to times when their stock and CDS underperformed.

Conclusions

This is only one point in one curve. I have focused so far on 3 month USD Libor. That is the most important one in my opinion in terms of number of contracts that reference it. The 1 month has such short duration that I didn’t focus on it yet. The 6 month is interesting because it would have more credit risk and should reflect more differentiation. The same analysis would have to be done for every bank, every currency, and every spot on the curve to get a true estimation of how much LIBOR LYING was done. Determining, or guessing how much each bank lied would be critical to any lawsuit. Lawsuits will ultimately have to be tied to how much a bank lied, and how much of that lie impacted the LIBOR setting. The complex mechanism by which LIBOR is calculated means that not all (or possibly any) of a lie would impact LIBOR’s setting. In spite of Barclay’s rush to catch up, they were still being excluded from the LIBOR calculation on most days for being too high.

From this data, there is no way to prove anyone lied, or to prove by how much if they did.

Gut Feel

I have spent more time focused on Barclay’s and their US issues. So far, it looks to me like they were submitting LIBOR more accurately than other and their claims that others were too low seem right. I have more work to do, but am getting to the point where the damage to Barclay’s stock price is worse than the risk.

Concerns over JPM’s exposure seem overdone as well. Yes, they were at the low end of submissions, but I think it would be hard to prove that is a lie without some real evidence. They had low submissions, but their CDS and stock performed the best. I do not think that they can be sued just because they have a large book of business if they didn’t have material amounts of “lying”. Again, I’m not concluding anything yet, but fears related to them seem overdone from all the work I’ve done.

For some reason I want to say something bad about BAC, and my gut tells me I’m right, but as of now, they seem reasonable. Their LIBOR moved with their stock and CDS. Maybe they were slow occasionally, but if anything they come out better so far than I would have guessed.

Citi. It is impossible to say they did anything wrong from the data I’ve looked at, but their submissions don’t pass an initial smell test. If Barclay’s is saying banks were submitting LIBOR that was too low, they strike me as a candidate for much deeper scrutiny. Their stock and CDS did the worst, yet consistently during those peak times, they submitted LIBOR closer to the better performers. Again, it could be a function that it is so short dated, and a function that Barclay’s was so high they were being excluded, but I would want to take a closer look at Citi’s submissions and would be nervous that their stock does not fully reflect the risk.

We are not lawyers, and have no access to actual interbank trades from the time, and this is not a recommendation to buy or to sell, but if the market is going to throw around lawsuit numbers in the $20 billion to $50 billion range and move prices based on that, figuring out how real those numbers are and who would bear the brunt of the burden is key. From all of our work so far, any “manipulation” prior to August 2007 would have had minimal impact as all the submitters were so close together and there really wasn’t a “credit” problem so the fluctuations of LIBOR seem reasonable, at least within a bp or two.

More banks to look at, more points on the curve, and more historical bond prices to dig up.

Tags: Barclay, Barclays, Boe, Citibank, Differential, Divergence, Fed Programs, Fed Rate, Jpm, Liar, Libor, Nbsp, Outlier, Pants On Fire, Stock Market Decline, Stock Prices, Stocks, Swoon, Tf, Year End
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Follow the ETP Flows: Corporates Rule

Wednesday, July 18th, 2012

by Dodd Kittsley, CFA, iShares

One of the advantages to working for the largest exchange traded product (ETP) provider in the world is that you have a lot of data at your disposal.  In my role as the Global Head of ETP Research for BlackRock, I deal in data every day, particularly as it relates to the in- and outflows of the 4500+ global ETPs currently in existence.  As you can imagine, examining flows can be a great way to spot investment trends, take the temperature of the market and reveal sentiment shifts.

Right now, for example, global ETPs just experienced their largest first half inflows ever.  ETPs attracted net new assets of $105 billion during the first half of 2012, representing a 16% increase on the $90.6 billion of flows posted during H1 2011.  Total industry assets now stand at nearly $1.7 trillion.

Not surprisingly, fixed income ETPs were a main driver of growth.  As global markets continue to be volatile, investors have increasingly been using these products to capture new and diversified sources of income.  Fixed income ETPs attracted 41% of all inflows with $42.0 billion on the year, or 114% above 2011’s comparable YTD figure of $19.6bn. In fact, June was the 18th consecutive month in which global fixed income ETPs have attracted net inflows.  Total assets invested in fixed income ETPs now exceed $300 billion and account for over 18% of total industry assets.

But here’s something you might not have guessed – within fixed income, investment grade corporate ETPs were the clear leader, bringing in $15.5 billion.  Throughout this year, investors have consistently committed new money to the category, with monthly flows ranging from $1.7bn to $3.2bn.  It appears that many investors may agree with Russ K’s feeling that investment grade debt is the place to look for relative safety (albeit less than Treasuries) with the opportunity for positive real yield.

So what do we think is in store for the second half of the year?  Well, if volatility remains an issue (and Russ K believes it will), we expect to see the flows into fixed income ETPs continue (see chart below).  In fact, if they continue to follow their current trajectory, FI ETPs could actually sextuple their assets over the next 10 years – from $300 billion to $2 trillion.  As my colleague and fellow blogger Matt Tucker has said many times, investors are starting to realize that fixed income ETPs are simply a better way to invest in bonds.

Fixed Income Cumulative Net New Asset Trends

Never one to keep a good story to myself, I’ll be sharing interesting ETP flow data and related insights on a regular basis here on the iShares blog.  And I’d love to hear from all of you – what questions do you have that our data might be able to answer?

Source: BlackRock Investment Institute

Tags: Assets, Blackrock, Cfa, Corporates, Diversified Sources, Dodd, Etps, Fixed Income Investment, Global Head, Global Markets, Investment Trends, Ishares, Nbsp, New Money, Relative Safety, Russ, Second Half, Sentiment, Treasuries, Trillion
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