Disappointing, but Not Terrible

Tuesday, July 10th, 2012

 
Disappointing, but Not Terrible

07/09/12

by Charles Lieberman, Advisors Asset Management

Job growth has slowed to a disappointing pace over the past three months, insufficient to bring down unemployment, but not so weak that recession is much of a threat. This mediocre performance also leaves the Fed in a quandary, neither making an obvious case to leave policy unchanged or a clear case to implement yet another form of policy accommodation.The economy added 80,000 net workers, the third consecutive month in which hiring remained so sluggish, following a first quarter in which hiring averaged 226,000 monthly. But other details in the report were more encouraging. The workweek rose by 0.1 hours, a seemingly small number, but equivalent to roughly 385,000 full time jobs. Hiring of temporary workers also advanced by 25,000, an important precursor to permanent hiring. A solid 0.3% increase was also reported for wage rates, which is important to finance household spending. With the housing sector beginning to gain some momentum, providing a new source of demand to support growth, a relapse into recession appears highly unlikely. So, the employment report was far from a disaster, but that’s hardly a ringing endorsement.

Fed officials are surely going to have quite a debate over the future direction for policy. Public statements suggests that they are quite divided over whether to implement more innovative initiatives to promote growth, although a number of them worry that reversing all of their efforts at the appropriate time may become more difficult. Certainly one possible new initiative may be to buy mortgage backed securities instead of U.S. Treasuries bonds. This would make reversing the Fed’s accommodative policies easier, since mortgage pay down principal every month. There is also concern that the Fed is running out of policy options. It is commonly accepted that the efficacy of policy is diminishing, although there is quite a bit of disagreement whether further initiatives would be worthwhile.

It is highly unlikely that any new fiscal policy initiatives can make it through Congress prior to the election, which is now less than four months away. So, the onus for any additional initiatives falls exclusively on the Fed. Even if there is no new policy implemented at the Fed’s upcoming meeting, it is likely they would feel obligated to do something if hiring remains disappointing. They may choose to act now to avoid complaints that they are acting out of political considerations as we get closer to the election.

Copyright © Advisors Asset Management

Tags: Clear Case, Disagreement, Efficacy, Employment Report, Fed Officials, Household Spending, Lieberman, Management Job, Mediocre Performance, Mortgage Backed Securities, Policy Options, Precursor, Public Statements, Quandary, Recession, Relapse, Time Jobs, Treasuries, Wage Rates, Workweek
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All You Had To Do Was Wait (Grant)

Tuesday, July 10th, 2012

From Mark Grant, author of Out of the Box

All You Had To Do Was Wait

“What makes people so impatient is what I can’t figure; all the guy had to do was wait.”

-Ken Kesey

It was approximately twelve months ago that I called for a U.S. ten year at 1.25%. The yield back then was around 2.25%. We are a scant 26 bps from my prediction now and we have seen a 75 bps drop in yield during this time period. This has been fueled by the continuing “moments” generated in Europe and the demand for anything having some sort of safe haven status. We now have a second driver which is the recession in Europe and the substantial slowdown in the economy of China which I predict will place America in recession by either the fourth quarter of this year or the first quarter of the next.

The American stock market, always myopic in its view, is about to be hit by what it does pay attention to which is earnings. Europe represents 25% of the global economy and the recession there is about to have a very substantial impact on the revenues and profits of many American corporations. It was inevitable, as hindsight will expose, and now as our earnings season gets underway it will get documented in the numbers. If you don’t delight in losing money you will find that the yields of many senior and subordinated corporate bonds far outpace the returns of dividends and certainly the depreciation in value will be far less. Further, in times of economic stress, it is far safer as has been proved time and time again to be towards the top of the capital structure in bonds rather than in the bottom of the capital structure which is equities.

I can report a wide array and a great diversification of viewpoints on just what will take place in Europe but what also can be said with certainty is that most institutional investors all agree that there is a lot of risk on the table now. As part of this process I also wish to congratulate the media. Many commentators in the Press or on television are no longer willing to take the official press releases as fact. There are more people who are not only questioning the headlines but who are looking past them in trying to decipher not only their accuracy but there meaning. I suppose this has occurred by one announcement after another coming from the Continent that was so shaded and so misleading that eventually people woke up to the fact that inaccurate data was being provided and being provided in a systemic fashion. Then there is the timeline issue where plans are tossed out, do not materialize and are being held to account as mollifying statements that somehow never seem to achieve their goals. Whether it was the statements of the IMF and the EU that the new structural plan for Greece would produce a debt to GDP ratio of 120% or the giant firewall that would prevent Spain or Italy from ever needing to be bailed out or the bailout for Spain which their Prime Minister called “A Great Victory for Europe;” the cries of “wolf” are falling on less and less accepting ears.

“The secret of being a top-notch con man is being able to know what the mark wants, and how to make him think he’s getting it.”

-Ken Kesey

It may work, for a moment, to rally equities after the next new piece of sliced white bread is announced but then the reaction flattens out and then the market declines as reality sneaks back in and finds its rightful place at the table. From the very beginning with the first European bank stress test which counted what Europe wanted to be counted and ignored what should have been counted to the second one which was falsified by its methodology; results begin to occur and calamities begin to happen, such as with Dexia, as the real data forced what the phony data reported tried to hide. Europe may cook the books and allow for risk-free assets or the Spanish central bank may allow for “smoothing” and carrying Real Estate at levels with no reflection of reality in them but when mortgages are not paid and commercial loans are delinquent; the lack of revenues and profits tell the accurate tale whatever was allowed to be ignored or not.

All of the time wasted on firewalls and great deceptions worked in the short term but the height of a fence does nothing to help a horse or a nation which is sick inside them. Europe has vastly overspent and tried their best to whitewash the financials of the countries and the European banks and now, and each quarter out for some time; we are going to see a worsening financial landscape for the European nations and their banks. This will not be Armageddon or the end of the world but it is going to be quite painful and have a decided impact on the United States and perhaps the scaring may be deep. In Europe that have mouthed so much nonsense for such a long period of time that they have come to believe in what they have manufactured. This is not uncommon historically but the depth and breadth of it is without comparison. Germany says one thing to placate France and Italy believes the drivel that is touted by the Netherlands and now Greece wants the ECB to forgive their $238 billion in Greek debts on the basis of a united Europe, which would bankrupt the ECB, and then it becomes clear that someone has to pay for all of this and countries start banging on the doors of the asylum to get out. Listen carefully; the banging has begun and will grow loader and more raucous during the balance of the year.

“The world news might not be therapeutic.”

-One Flew Over The Cuckoo’s Nest

Tags: American Corporations, American Stock Market, Bps, Capital Structure, Commentators, Corporate Bonds, Depreciation, Diversification, Earnings Season, Economic Stress, Economy Of China, Global Economy, Having Some Sort, Hindsight, Institutional Investors, Mark Grant, Recession, Safe Haven, Slowdown, Substantial Impact
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Global Lack of Growth versus Central Banks

Tuesday, July 10th, 2012

It’s been just over a week since the euphoria over Euro fix 19.0 came to light, but as we awake Spanish yields are back over 7% and Italian yields are over 6% – the same levels they were at before “the breakthrough” a week ago Thursday night.  Since zombies have become so popular in our culture, one can parallel the European mess to these creatures of the night – it just cannot be killed.  That said, the market recognizes each time push comes to shove, Germany relents – the main trick is figuring out which periods the market is calmed by this, and which periods the market forgets that.  Of course each “solution” thus far has been little more than papering over the structural issues, but at some point the end game comes.

Meanwhile, the drama in Europe has distracted some from the fact global growth is slowing dramatically.  China joined the central bank cutting party last Thursday, riding shotgun with the Bank of England and the ECB – signaling to some to expect some poor economic data out of the country this week.  Overnight Chinese inflation was released at a paltry 2.2% (the lowest in about 2.5 years) – of course you can believe what you wish about the real number, [Sep 13, 2010: BW - What's China's Real Inflation Rate? (What's China's Real Anything?)] [Nov 12, 2010: Even China Accuses China of Fibbing About Inflation] but the weakness in commodities through much of 2012 signals China has slowed significantly.  ”Reported” inflation was 5.5% as recently as November 2011.  Premier Wen Jiabao was reported as saying downward pressure on the economy is still “relatively large.”  Chinese stocks continue to suffer.

Meanwhile the U.S. economic data continues to stagnate as the ECRI predictions of recessions in latter 2011 look much more probable.  Of course the difference between a statistical recession and what it feels like to the common man can be two worlds.   U.S. markets were hit Friday by a weak labor report but a late day “The Fed is coming!” story out of the WSJ helped lift indexes well off their lows.  For those of bullish conviction this was an excuse to work off a short term overbought condition, and the S&P 500 dipped exactly to its gap up open post Euro summit announcement Friday, which also happened to be very near a 38.2% retracement of the move off the June 26th lows – funny how that works.

Long story short if you were not “in” the market Thursday night ahead of a binary outcome Friday (or no announcement at all out of Europe) there were no gains to be had by the end of day Friday.  The extent of the advance that remained was only that gap up Friday morning.   Go forward pulling back not much more than the 50% retracement (134.20 on SPY) or worse case the 61.8% retracement (133.40 on SPY) of this move off June 26th would be the base cases for bulls.  The latter would fill the entire European summit gap.

After a very heavy few weeks of news, and European headlines the news flow should slow down.  China releases GDP later this week along with other news, and the FOMC speculation should be quiet until next week when Bernanke speaks to Congress.   FOMC minutes are released Wednesday so that could move markets.  Most of the U.S. economic data this week is not market moving.  That said, we now transition to earnings season.  Despite all the hubbub across the globe the past few years, U.S. corporate profits have been able to rebound smartly off their dramatic lows of 2008/early 2009.  But that story is now potentially getting long in the tooth, so the tailwind this provided in 2010 and 2011 might be coming to an end.  More on this in a later post.

Tags: Bank Of England, Central Banks, Chinese Stocks, Common Man, Creatures Of The Night, Downward Pressure, ECB, End Game, Euphoria, Global Growth, Inflation Rate, Last Thursday, Poor Economic Data, Premier Wen Jiabao, Recession, Recessions, Riding Shotgun, Two Worlds, Wen Jiabao, Zombies
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Inside Job, Narrated by Matt Damon (Full Length HD)

Monday, July 9th, 2012

‘Inside Job’ provides a comprehensive analysis of the global financial crisis of 2008, which at a cost over $20 trillion, caused millions of people to lose their jobs and homes in the worst recession since the Great Depression, and nearly resulted in a global financial collapse. Through exhaustive research and extensive interviews with key financial insiders, politicians, journalists, and academics, the film traces the rise of a rogue industry which has corrupted politics, regulation, and academia. It was made on location in the United States, Iceland, England, France, Singapore, and China.

Inside Job, Narrated by Matt Damon (Full Length HD) from jwrock on Vimeo.

For up to date information for preparing for a financial collapse go to preppernews.net/

Tags: Academia, Academics, China Job, England, Financial Collapse, Full Length, Global Financial Crisis, Great Depression, Hd, Insiders, Jobs, Journalists, Matt Damon, Nbsp, Politicians, Recession, Singapore Job, Trillion, United States, Vimeo
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U.S. Rental Market Continues to Boom

Friday, July 6th, 2012

We’ve mentioned the past few years how one ‘high growth’ area in the economy is the renters market. [May 24, 2011: Troubled Home Market Creates Generation of Renters] [Apr 8, 2011:  Apartment Vacancies Drop to 3 Year Low, as Rents Rise]  With many former home “owners” (I use the term sparingly since many of the 2004-2007 ilk had 100-120%+ type loan to value!) locked out of the market, and many young people with not enough money in their pocket to create a down payment, renting has come back with much vigor.  Also keep in mind this recession caused a massive drag to household formation.  [Apr 8, 2008: Recession Causes Relatives to Move in Together & Sharp Drop Off in Divorces]  [Apr 9, 2010: 1.2 Million Households Lost in Great Recession - Through 2008]  One net positive in the next 4-8 quarters should be a “building boom” of sorts in apartments ….

This WSJ story takes a look at some recent data:

• Landlords boosted apartment rents to record levels in the second quarter as demand from tenants sitting out the home-buying market pushed vacancy rates to their lowest point in more than a decade, according to a report to be released Thursday.
• Despite the sluggish economy, average rents increased in all 82 markets tracked by Reis Inc. a real estate data firm. Average rents are now at record levels in 74 of those markets and now top $1,000 a month on average in 27 of them, including Miami, Seattle, San Diego, Chicago and Baltimore.  ”The market is in a very tight position,” Reis said in a research report. “There is a paucity of available units.”
• The nation’s vacancy rate fell during the quarter to 4.7%, its lowest level since the end of 2001, Reis said. That’s down from 4.9% in the first quarter of this year and from 8% in 2009, when millions of would-be renters were doubling up or living with family.  [Sep 16, 2011: 7.5M More Americans Living in "Double Up" Situations versus 2007]
• With the economy slowly recovering, more people are looking for their own places. But many are opting to rent rather than buy due to tighter lending standards—including higher down payments—and because of concerns about job security.
• Reis said that this is only the third quarter in over three decades that the vacancy rate has been below 5%.
• Values of apartment buildings are soaring, contrasting sharply with the single-family housing market. In some cities, investors are now surpassing peak prices for rental property buildings. Analysts point out that the apartment sector may lose steam if the economy weakens further and tenants begin doubling up again or put up more resistance to rent hikes.
• Demand for rental apartments also may fall if some builders succeed with appeals to move renters into the market for single family homes. Another risk: construction. Developers are racing to deliver new apartment supply, particularly in hot markets including Washington, D.C, and Seattle. Zelman & Associates expects 235,000 units to be started this year, followed by 285,000 in 2013and 320,000 in 2014.

Tags: Apartment Rents, Apartment Vacancies, Divorces, Enough Money, First Quarter, Home Buying, Household Formation, Households, Ilk, Landlords, May 24, Paucity, Recession, Reis Inc, Second Quarter, Sluggish Economy, Vacancy Rate, Vacancy Rates, Vigor, Wsj
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Recessions and Distorted Market Signals

Wednesday, June 13th, 2012

by Guy Lerner, The Technical Take

There is no question that the Federal Reserve’s market interventions have distorted market signals.  What used to be no longer applies.  The elephant in the room with the deep pockets has pushed bond yields down to historic lows, yet the desired effect – a growing economy — has been anything but that.  Despite the massive stimulus, the recovery is the weakest on record.  And now as the latest Fed incarnation of stimulus (i.e., Operation Twist) is about to end, the markets and economy are sputtering.  What will the Fed do next?  And this is the only thing that matters to a market hooked on the monetary morphine.

Figure 1 is a weekly chart of the SP500.  The red labeled bars are those times when the Economic Cycle Research Institute’s Leading Economic Indicator (ECRI) suggests that U.S. economy is in a recession.  The record of the indicator is not perfect in that it doesn’t always correlate with the National Bureau of Economic Research official recession calls, but the presence of a red labeled bar should alert one to look for other supporting factors that the economy may be sputtering.  (As an aside, the ECRI’s LEI is but one factor considered in my own Real Time Recession Indicator.)

Figure 1 SP500/ weekly

Now look at figure 1 and note the 2010 and 2011 time periods.  The ECRI’s LEI was suggesting that the economy was dipping into recession.  But rather than head lower in anticipation of a recession, the stock market bottomed and headed significantly higher.  So what gives?  Of course, thanks to QE2 (2010)and Operation Twist (2011), the Fed was able to avert the natural course of events and avoid the dreaded recession.  In other words, the ECRI’s LEI didn’t signal an oncoming recession; it signaled increasing liquidity and market intervention by the Federal Reserve.  What used to be no longer applies!  Fed intervention has distorted market signals.

Now comes 2012, which appears to be playing out like 2010 and 2011.  The market is selling off as another Fed program to stimulate the economy (and stock market) is ending.  The equity market is weak as the monetary morphine dissipates, and bond yields have hit new lows in anticipation of the economic weakness and a new round of bond purchases.  According to the ECRI’s LEI, the economy is weakening, and we should remember, this is just one tool to assess the health of the economy.  But if the Fed were going to intervene in the markets, now appears to be the time as economic growth is on the wane.

Of course the key questions remain: 1) Will doing more of the same avert the natural course of events — that is prevent another recessions?  and 2) How sustainable will the economic bounce be?  As I will show next time, the Fed appears to be losing the battle.

Copyright © The Technical Take

Tags: Bond Yields, Course Thanks, Deep Pockets, Desired Effect, Economic Cycle Research Institute, Ecri, Guy Lerner, Incarnation, Leading Economic Indicator, Market Intervention, Market Interventions, Morphine, National Bureau Of Economic Research, Qe2, Recession, Recessions, S Market, S&P500, Stimulus, Time Periods
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From RISK ON To REALITY ON (Grant)

Friday, June 8th, 2012

From Mark Grant, author of Out of the Box

Hope Springs Eternal – Then Reality Shows Up

“We need more Europe. We don’t only need monetary union, we also need a so-called fiscal union,” she said. “And most of all we need a political union — which means we need to gradually cede powers to Europe and give Europe control.”

-Chancellor Angela Merkel; June 7, 2012

This comment seems innocuous enough on its face, more political rhetoric; but maybe not. No one is kidding anybody. Europe is controlled by the country with the largest and most stable economy and that is Germany. As money has fled from the sovereigns in Europe; it has poured into Germany as being “best of class” so as everyone else falters on the Continent and has slipped into recession there is but one man standing and that is the Berliner Bear. If there is someone serious that thinks that Germany does not presently control Europe; I have yet to find him. So what is Germany really saying here; let me give you my translation:

We need more Germany. We don’t only need monetary union, we also need a so-called fiscal union,” she said. “And most of all we need a political union — which means we need to gradually cede powers to Germany and give Germany control.

You may ascribe what motives you like from the benign to the most worrisome but, to me, the implication is obvious and the case being made by Berlin is quite clear and requires no Wizard of Oz to look behind the curtain and see who pulling the levers. As I reflect back historically here is the manifestation of destiny; the “third time is the charm” in action. It was quite impolite prior to World War II to discuss what was going on in Germany as hadn’t they assured everyone of what they were not going to do, hadn’t they signed any number of treaties promising a world of peace and prosperity and why would anyone think anything else as that is what they told us and yet, as our forefathers so painfully learned, what was said was not exactly what then took place.

There are many, today, who will get riled and raise their backs that I even deign to bring up this issue but it must be brought up, it must be considered if, for no other reason, out of consideration for those that gave their lives to stand in defense and while a final conclusion does not need to be found it would be very wrong not to honestly look at what is going on and wonder and so I wonder.

Spain—Fogged In

“For what we regard as reality is conditioned by the theory to which we subscribe.”

-Stephen Hawking

Lately I have listened to many that seem somewhat confused about what Europe can and cannot do presently and so I thought I would take a moment this morning to set the table straight. First and foremost there is no ESM, it does not yet exist and so cannot be used to do anything. It may well come into existence somewhere between July-September but it is not yet in existence. The present stabilization fund, the EFSF, has depleted assets after the bailout of Greece, Ireland and Portugal and has nowhere near the capital that would be required to provide any real financial assistance to Spain. The EFSF also can only give money to sovereign nations and has no authority to give money to banks and while this could be changed it would have to go back to the national parliaments to get changed and it would take months to revise its charter which is something that has not even been started so the conjecture about using the EFSF to give money directly to the Spanish banks is just hopes and prayers based upon misinformation.

In fact, there is only one European institution that is already authorized to give money directly to banks and that is the European Central Bank but this is also a construct that is full of with difficulties. Yesterday Spain was downgraded three full notches by Fitch with a negative outlook which complicated matters. What is the ECB to do just hand some of the Spanish banks $125 billion which is more likely $350-400 billion in my estimation and to which banks; just some of the Spanish banks or all of the Spanish banks and who is to supervise the re-capitalization as the banks are supervised by the Spanish Central Bank and not the ECB and so the banking system in Spain would have to be totally re-organized and power ceded which would likely take months, if politically possible, and what would the other nations in Europe say if the ECB is to help the banks of just one country when they did nothing for Dexia (Belgium, France and Luxembourg) or the Irish banks and one could reasonably imagine screams all across the Continent.

Perhaps some novel solution is found but this is not the muddling along kind of thing at all. This is the changing of charters kind of thing, the changing of national banking regulations kind of thing; the ceding of power to Europe kind of thing and anyone who thinks that this can all be accomplished in a matter of days is out having tea with Cinderella’ fairy godmother. Yet equities have rallied and bond spreads stopped widening on just this kind of hope but I predict that this will all be short-lived because, on its face, it is irrational. There is nothing wrong with having hopes and prayers but to base investment decisions on irrational interventions of some Divine power where there is not even a door for the Divinity to enter is just poor judgment by this name or any other you may concoct. It is no longer a case of “Risk on/Risk off” but of “Reality on/Reality off” and I advise you to keep pressing the “Reality on” button!

“Reason is a choice. Wishes and whims are not facts, nor are they a means to discovering them. Reason is our only way of grasping reality; it is our basic tool of survival. We are free to evade the effort of thinking, to reject reason, but we are not free to avoid the penalty of the abyss we refuse to see.”

-Terry Goodkind, Faith of the Fallen

Tags: Angela Merkel, Berliner Bear, Chancellor Angela Merkel, Forefathers, Germany Control, Implication, Levers, Man Standing, Manifestation, Mark Grant, Monetary Union, Political Rhetoric, Recession, Sovereigns, Stable Economy, Third Time, Wizard Of Oz, Wizard Oz, World Of Peace, World War Ii
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Treasuries Currently Overbought: Relative Performance of Stocks vs. Bonds

Thursday, June 7th, 2012

by Tiho Brkan, The Short Side of Long

Topics Covered

• Global economic data worsening towards a recession
• Treasury Bond sentiment is extremely optimistic

Overview

The selling pressure has stopped. It seems that the S&P 500, Crude Oil and Gold are now recovering somewhat. Sentiment reached extreme negative levels on all of these asset classes over the last couple of weeks. 30 Yr Long Bond has paused its vertical rise on top of extreme bullish sentiment, while the US Dollar posted a reversal also due to extremely bullish sentiment. It seems we are entering a period of mean reversion but the bottom line still remains the same: investors have been selling risk due to possibility of a disorderly default in Eurozone, triggered by Greece as the first domino. At the same time, Asia and especially China is slowing down meaningfully. Nothing has been done, announced or hinted by authorities yet and risk off trades are very crowded.

Economic Data

Last week was one of the worst ever data release weeks for the US economy. Out of 21 releases throughout the week only 1 was better than expected, 2 came in at their estimates and a staggering 18 releases (including the important employment figures) all came in below economist expectations. I am pretty sure that the authorises, politicians and central bankers around the world are watching this with a magnifying lens right now. The question is what will they do next and will it even matter?

The overall Developed Markets Citigroup Economic Surprise Index has completely collapsed in recent weeks, so it should not be surprising at all that Bonds have outperformed Stocks again in the first half of 2012. While majority of analysts, economists and investors continue to put all of their faith towards the Federal Reserves ability to re-stimulate the economy through further QE, contrary to that I personally think it will not have too much of an effect, apart from a short to medium term sugar high rally without any new highs. In other words – a bear market rally!

Economic data is negatively surprising economists, not just in the US, but all over the world including the darling favourite of the investment world – Emerging Markets. As we can see in the chart above, the Emerging Market Citigroup Economic Surprise Index has completely collapsed for the first time since 2008 and with it GEM equities plus the global economic barometer – Dr Copper. This leads me to believe that not all is well in Asia and especially China.

While I believe all risk assets are currently oversold and due for a rebound, if the weakness continues again in repaid fashion, it will most likely lead me to a conclusion that we are entering a global recession. Chinese equity market, the Shanghai Composite, is still struggling to break upward. While this is a very bad sign, I am still willing to give it a bit more time to prove itself, as it struggles with a cluster of resistance points around 2,400 to 2,450 level. However, a proper breakdown will most likely signal a hard landing scenario for the Chinese economy. The crisis started in the US in 2007 and spread to the EU, but if we move towards a Chinese hard landing scenario, the final economic crash will most likely occur in Asia, where the boom has created over capacities in all economies from Indonesia to Korea and Australia.

Equity Markets
Nothing new to report.

Bond Markets
The second part of an article is a slight conundrum to the first part above. Here I focus on overbought Bond prices and extremely bullish sentiment that accompanies this assets. Therefore, one major problem when discussing a possibility of a recession, from a contrarian point of view, is that majority of market participants are already overweight Bonds as a fear trade. So the question is, if things get worse, will these safe havens go even higher?

Focusing on the current outlook, be it German Bunds or US Treasuries, prices have gone almost vertical in recent weeks and yields have dropped to 200 year plus record lows. While the uptrend is still intact for the 30 Yr Long Bond and the bull market is still posting new highs, currently the Daily Sentiment Index is showing readings of 97% bulls as of Friday last week. These types of readings usually do not offer too much further gains and most likely signal that we could at least suffer a correction / pullback from current levels.

This view is also confirmed by the Mark Hulbert service of tracking Bond newsletter exposure recommendations. Consider that at present, Bond newsletters are recommending 40% plus long exposure towards this asset class. This a very dramatic switch from March 2012, where these same “gurus” were recommending 40% net short exposure (and got it completely wrong). Historically, readings of 40% plus on each side have been very extreme and usually signalled that Bond prices reversed in some type of a counter trend rally.

Personally, I do not own any bonds in my fund, because I think they are a major major major major bubble! To led money to the US government at 1.5% over the next ten years is a total robbery when adjusted for true inflation figures, in my opinion. Therefore, I am waiting to short these assets, together with the Japanese Yen, at some time in the future.

Having said that, that does not mean prices cannot go higher from these levels, as overvalued bubbles can turn into manias and totally insane buying frenzies. Remember Nasdaq in 1999? Therefore, I am still reluctant to call a final top on the Treasury bull market, until the final EU crisis resolution and some type of a major default occurs to create a capitulation.
Currency Markets
Nothing new to report.

Commodity Markets
Nothing new to report.

Credit Markets
Nothing new to report.

Recommandations

• Summary: my further action depends on political and central bank intervention. During market panics, authorises also panic. It is not until they start to panic, that they actually do something about current problems, which usually take form of some type of reflation policy. However, weak action will make me reduce my longs substantially and rebalance my portfolio towards net short exposure. Italy and Spain are once again moving towards the edge of the cliff, which is a real worry while Asia is now in a meaningful slowdown.
• I still own SPY Calls purchased in middle of May, and today I purchased some more Calls on the SPY ETF. I do not own any other equity positions in my portfolio.
• I also still own SLV Calls purchased in middle of May, and I also added to that by buying some more SLV ETF positions today (only a small trade). I am also still holding onto that core Silver position from late December 2011 bottom at $26.
• I bought a very small position in Agricultural commodities through RJA ETF today. I’m expecting the Agricultural bull market to resume eventually (best fundamentals of any asset class right now). But, I haven’t done anything major just yet.
• Other assets on my watch list for some shorter term bullish rebound trades include Australian Dollar (FXA), Russian / Brazilian equities (RSX & EWZ) and Continuous Commodity Index (GCC).
• It is too early to talk about shorting anything yet, as I am waiting for a market rebound first.

Tags: agricultural, Asset Classes, Brazil, Bullish Sentiment, China, Citigroup, Crude Oil, Economic Data, Economists, Employment Figures, energy, ETF, ETFs, Eurozone, Federal Reserves, Gold, Magnifying Lens, Mean Reversion, New Highs, Qe, Recession, Relative Performance, Stocks Bonds, Tiho, Time Asia, Treasuries, Treasury Bond, Vertical Rise
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4 Reasons Europe is a Major Risk for the U.S. (Koesterich)

Monday, June 4th, 2012

Some investors have argued that events in Europe are having a disproportionate impact on US stocks. Their logic: the US is in the midst of a recovery, albeit a fairly anemic one, that is unlikely to be derailed by Europe’s travails.

It’s true that the US economy is doing much better than Europe’s, and especially southern Europe’s. But from my perspective, the trajectory of the US economy and the US stock market are very much tied to eurozone events. Here are four reasons why US investors should not underestimate the potential impact of events in Europe.

1.) Europe Makes Up a Significant Portion of US Exports. The US economy is much more consumption driven, and therefore more domestically focused, than other economies. That said, exports still count, and the United States still sends a significant portion of its exports to Europe. While exact data is spotty, in 2010 (the last year for which we have comprehensive data), Europe represented roughly 30% of foreign sales of companies in the S&P 500 index. Were a European recession to degenerate into a full-blown crisis, exports to European countries would plummet. At the margin, this would detract from US growth.

2.) A Rising Dollar Would Make US Exports Less Competitive. Since its 2012 peak, the euro has already depreciated roughly 8% against the dollar. To the extent fears of a European crisis continue to push the dollar higher, not just against the euro but against other currencies as well, US exports would become less attractive to other countries. To be sure, a stronger dollar is ultimately positive for US purchasing power and inflation, but in the near term, it would act as a further headwind for US exports.

3.) Recent US stock performance could negatively impact US consumer spending. As of Monday, US stocks were down 10% from their spring peak. Last Friday’s market drop can mostly be blamed on the United States’ own economic malaise. But the escalating crisis in Europe has also been a major catalyst for the recent US market correction, which has already erased roughly $1.5 trillion dollars from the US stock market since earlier this year. To the extent this drop hammers consumer confidence, it could have a modestly negative impact on consumer spending.

4.) The European banking system crisis could impact credit creation in the United States. While US banks are in a much stronger position than their European counterparts — US bank capital looks adequate and there is little risk of a run on banks here — banking stress in Europe is being felt in the United States thanks to the interconnectedness of the global financial system. On Friday, the Bank of America Merrill Lynch Global Financial Stress Index climbed to its highest level since the first days of 2012. At the very least, stress in the US financial system may harm the nascent recovery in US bank lending.

Looking forward, I believe a worsening eurozone crisis can still be avoided if European politicians get more aggressive in addressing their region’s, and particularly Spain’s, banking problems. However, until we see more clarity from European policy makers, equity investors may want to consider maintaining a defensive posture as Europe remains a major risk for US stocks as well as for the US and global economies.

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.

Tags: Consumer Spending, Cri, Disproportionate Impact, Economic Malaise, Europe 1, European Countries, Exact Data, Headwind, inflation, Last Friday, Midst, Purchasing Power, Recession, S Market, Southern Europe, Spring Peak, Stock Performance, Trajectory, Travails, Us Stock Market
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Deflation?

Monday, June 4th, 2012

From Mark Grant, author of Out of the Box

“The sources of deflation are not a mystery. Deflation is in almost all cases a side effect of a collapse of aggregate demand – a drop in spending so severe that producers must cut prices on an ongoing basis in order to find buyers. Likewise, the economic effects of a deflationary episode, for the most part, are similar to those of any other sharp decline in aggregate spending – namely, recession, rising unemployment, and financial stress.”

-Fed Chairman, Ben S. Bernanke

There was an argument, brought forth by several bright people; that the odds of Inflation or Deflation were about in balance for the remainder of this year. I think the needle has swung though and that Deflation, and perhaps serious Deflation, is just ahead of us. Every country in Europe is in a Recession with the exception of Germany but I predict that they are going to be dragged into the Club in the next quarter. The aggregate demand for goods and services is markedly declining all across Europe and the Target2 remedy to finance purchases is no longer providing the desired effect as financing only helps when demand is present and once demand has declined it makes very little difference as to the cost or availability of funding.

“Booms last longer because optimism is fed by slowly rising emotions involving hope and greed, which, because they are tempered by caution, can reach maximum intensity only over a long period of time and fulfillment only after prolonged effort. Busts are swifter because pessimism is fed by fast-flaming emotions such as fear and anger, which can be realized in a flash of destructive action.”
-Robert R. Pretcher

The banking system, not just in Spain, is in tatters and the lending in the domicile of the banks is eroding as signified by all kinds of data released recently. Lending outside of the domicile has declined even further so that growth is curtailed by the availability of funding and the further away from the national home of any European bank; the worse the problem. This is then why I am so negative on the Emerging Markets as a safe place to park money. The lack of available funds will dampen growth so that the European recession spreads worldwide as contaminated by the problems of the European banks which, in aggregate, are about five times the size of the American banks and much more active in global lending.

“The modern theory of the perpetuation of debt has drenched the earth with blood, and crushed its inhabitants under burdens ever accumulating.”

-Thomas Jefferson

We have recently witnessed a boom-and-bust cycle in Real Estate in Europe that overcame the banks of several nations including Ireland and Portugal. Now Spain is about to show up to be counted in my view. The issue all across Europe is that the sovereign does not have enough assets or capital to bailout their banks and many European banks are impaired; make no mistake. The first move was to lay off a lot of non-performing assets in securitizations at the ECB but the price always gets paid which will either be severe losses at the ECB requiring re-capitalization or the ECB handing back the collateral to the various banks which would probably bankrupt some of them especially in Spain, France and Italy. The ECB maneuver brought early success but now, as loans become due and as non-performance builds and losses must be recognized; the real truth forces itself upon balance sheets. There is a day when the auditors say, “Show me the money” and when it isn’t there the infamous “Oh My God” moment begins.

Now Bubba, when you use the screwdriver and release the air from the tires it causes all of those little lights on the dashboard to begin to flash and then if you try to drive the car it goes “bump-bump” down the road. No Bubba, get off of your knees and get your mouth off of the thingy; you cannot blow air back into the tires that way.

Mark J. Grant, is Managing Director of Corporate Syndicate and Structured Products for Southwest Securities, Inc.

Copyright © Mark Grant

Tags: Aggregate Demand, Banking System, Booms, Busts, Collapse, Deflation, Desired Effect, Destructive Action, Domicile, Economic Effects, Fed Chairman, Financial Stress, Greed, inflation, Mark Grant, Maximum Intensity, Optimism, Pessimism, Recession, Tatters
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