The Economy and Bond Market Radar (August 20, 2012)

Sunday, August 19th, 2012

The Economy and Bond Market Radar (August 20, 2012)

Treasury yields rose for a fourth week in a row.  Additionally, the benchmark 10-year yield is on the verge of breaking above the technically significant 200-day moving average.

Strengths

• The Thomson Reuters/University of Michigan preliminary August index of consumer sentiment increased to 73.6, the highest level since May, from 72.3 the prior month.
• The four-week average for initial jobless claims remains at its lowest level since March.
• According to the Conference Board’s gauge of Leading Economic Indicators, the economic outlook for the next three to six months increased 0.4 percent last month after a revised 0.4 percent drop in June. Economists projected the gauge would rise by 0.2 percent.

Weaknesses

• Initial jobless claims rose slightly to 366,000 this week, somewhat muddling the picture for the job market.
• Manufacturing in the Philadelphia region contracted in August for a fourth consecutive month as orders and employment declined.
• China July foreign direct investment fell 8.7 percent year-over-year to $7.58 billion, its lowest level in two years, which fuels concern that a slowdown in confidence in China’s growth prospects may restrain any economic rebound.

Opportunity

• The ECB appears ready to implement some form of QE in the very near future.
• With further weak economic data out of China, the odds of additional easing measures continue to move higher.
• Interest rates are likely to remain very low for the foreseeable future.

Threat

• Europe remains a wildcard with the markets shifting focus on a weekly basis.
• China also remains somewhat of a wildcard as the economy has slowed and officials appear in no hurry to take decisive action.

Tags: Bond Market, Decisive Action, ECB, Economic Data, Economic Outlook, Economic Rebound, Foreign Direct Investment, Growth Prospects, Index Of Consumer Sentiment, Initial Jobless Claims, Leading Economic Indicators, Market Radar, Philadelphia Region, Qe, Reuters, S Gauge, Shifting Focus, Slowdown, Treasury Yields, Wildcard
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Energy and Natural Resources Market Radar (August 6, 2012)

Sunday, August 5th, 2012

Energy and Natural Resources Market Radar (August 6, 2012)

Strengths

• Crude oil prices gained again this week to reach nearly $109 per barrel (Brent) on supply concerns in the North Sea and rising geopolitical premiums as the conflict in Syria intensifies.
• Copper slipped 7 cents this week to $3.35 per pound but it has been one of the better-performing commodities in 2012, despite global growth slowing. The price has been supported by a combination of global inventory draw down, now back to 2009 levels and global producers struggling to meet near-term expectations.  Analysts at Nomura note that in the short term, prices appear fundamentally supported and are likely to be range bound. On average, current producers are generating cash margins of about 50 percent, yet cost inflation sees new projects have a hurdle rate closer to $3 per pound.

Weaknesses

• U.S. natural gas prices fell back under $3 per mmbtu after the Department of Energy reported that weekly inventories of natural gas built larger than expected.
• Rio Tinto PLC is cutting some jobs at its regional headquarters in Melbourne and will close an office in Sydney as the Anglo-Australian mining giant moves to contain costs amid falling prices for key commodities such as iron ore, two people familiar with the matter said Tuesday.
• The latest round of PMI data released on Wednesday paints a weak picture for global growth, and suggests that Asian economies are starting to feel stronger headwinds from the eurozone crisis. China and India also recorded slower manufacturing growth for July, while Japan’s PMI fell to the weakest level since last year’s tsunami.

Opportunities

• Reuters reported that the Ecuador government is preparing mining reforms to attract investments, according to a top mining official. The proposed new bill would delay a windfall tax until miners recover their investments and set a ceiling on mining royalties, bringing more certainty.
• The Indonesian Coal Mining Association (ICMA) estimates the country’s coal production is now likely to be flat in 2012, compared with a 10-12 percent increase previously. Coal analysts with Macquarie Capital think this highlights that the falling thermal coal price has put pressure on producers, particularly at the smaller, low-energy end of the spectrum which should ultimately tighten seaborne coal supply and provide price support for falling coal prices.
• The Wall Street Journal reported that China has quietly increased its budget for railway investment this year by 16 percent, data from the Ministry of Railways showed. In its latest bond prospectus published on Chinabond, an official website for debt issues, the railway ministry said Monday it plans to spend 470 billion yuan ($73 billion) on infrastructure investment this year, up from the 406 billion yuan stated in a prospectus earlier this month. Spending on railway infrastructure in the second quarter slipped to 7.6 percent year-on-year, down from 8.1 percent in the first quarter, for its slowest pace in more than three years. Data from the railway ministry showed that it spent 148.7 billion yuan on infrastructure investment in the first half of 2012, down 39 percent from a year earlier.

Threats

• Reuters reported that Indian coal markets are seeing scattered defaults among end users and trade buyers in part because of a 20 percent slide in coal prices this year, though a vast majority are still honoring contracts.
• The Argentine government is moving to exercise further control over the country’s oil sector with a new initiative that will require companies to submit annual investment plans for approval. Dow Jones Newswires reported that the government is making it mandatory for oil companies to submit their yearly investment plans to Deputy Minister of Economy Axel Kicillof by September 30 of each year, according to new rules published July 27 in the Official Bulletin. The new rules are likely to further exacerbate the tension between the Argentine government and the private companies operating in the country’s hydrocarbon sector.

Tags: Asian Economies, Coal Mining, Crude Oil Prices, Ecuador Government, Global Growth, Global Inventory, Global Producers, Headwinds, Hurdle Rate, Indonesian Coal, Iron Ore, Market Radar, Mmbtu, Natural Gas Prices, New Projects, Nomura, Regional Headquarters, Reuters, Rio Tinto Plc, Supply Concerns, Windfall Tax
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Are Weak Earnings Already “Baked In”?

Tuesday, July 10th, 2012

I’ve been speaking quite a while about the difficult this earnings period could be. I’ve actually been more concerned about future guidance – Q3 and Q4 seem wildly optimistic in the context of a global slowdown, but as we get closer to the actual reporting period I’ve become concerned with the Q2 data as well. We’ve already had a flurry of high profile warnings and with both an European and Chinese slowdown, a lot of the multinational revenue growth could be in question. The stronger dollar also does not help these firms.

But the stock market is all about expectations. Many times we see a company lowball guidance or reduce expectations over the course of a quarter only to “beat” them on the day of earnings and see the stock surge. That’s just part and parcel with the Wall Street game. And I’m starting to see a lot of stories in the past 2 weeks about the potential for a bad earnings season. So has this become “baked in” at the macro level? That could be the main question to answer over the next 4 weeks.

Story 1: Reuters - Investors Brace for Shaky U.S. Earnings Season

Earnings season begins on Monday with U.S. companies facing a litany of issues that could make second-quarter reports look dismal.

Corporate outlooks are at their most negative in nearly four years and companies that have already reported have shown lackluster growth. Nearly two dozen S&P firms have already cited Europe’s woes – which seem to be worsening – as a concern.

In addition, more than 85 members of the Standard & Poor’s 500 lowered expectations in the last several weeks and the quarter’s expected earnings growth of 5.8 percent is entirely due to Apple Inc and a big earnings gain for Bank of America Corp due to a mortgage settlement last year.

Earnings growth is estimated to decline 0.4 percent without the benefit of Apple and Bank of America.

Revenue is seen up just 1.7 percent, down from 5 percent growth in the first quarter, the data showed.

Corporate outlooks are the most negative they’ve been in years. Negative-to-positive earnings guidance is now at 3.3 to 1, the worst since the fourth quarter of 2008.

Story 2: AP – Get Ready for the End of Record Corporate Profits

For almost three years, no matter what has rattled the financial markets — a debt crisis in Europe, high gasoline prices, a slower economy — investors have been soothed by rising corporate profits.

The storyline became as predictable as a soap opera’s. But when the latest round of corporate earnings starts rolling in this week, look for a twist: Profits are expected to fall.

Stock analysts expect earnings for companies in the Standard & Poor’s 500 index to decline 1 percent for April through June compared with the year before, according to S&P Capital IQ, the research arm of S&P.

That would break a streak of 10 quarters of gains that started in the final quarter of 2009.

Copyright © Market Montage

Tags: Bank Of America, Bank Of America Corp, Earnings Gain, Earnings Growth, Earnings Season, Global Slowdown, Litany, Macro Level, Outlo, Outlooks, Q3, Quarter Reports, Reuters, S 500, Season Earnings, Second Quarter, Stock Market, Stock Surge, Story 1, Street Game, Woes
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Eric Sprott: The Real Banking Crisis, Part II

Friday, June 1st, 2012

by Eric Sprott and David Baker, Sprott Asset Management

Here we go again. Back in July 2011 we wrote an article entitled “The Real Banking Crisis” where we discussed the increasing instability of the Eurozone banks suffering from depositor bank runs. Since that time (and two LTRO infusions and numerous bailouts later), Eurozone banks, as represented by the Euro Stoxx Banks Index, have fallen more than 50% from their July 2011 levels and are now in the midst of yet another breakdown led by the abysmal situation currently unfolding in Greece and Spain.

EURO STOXX BANKS INDEX

Source: Bloomberg

On Wednesday, May 16th, it was reported that Greek depositors withdrew as much as €1.2 billion from their local Greek banks on the preceding Monday and Tuesday alone, representing 0.75% of total deposits.¹ Reports suggest that as much as €700 million was withdrawn the week before. Greek depositors have now withdrawn €3 billion from their banking system since the country’s elections on May 6th, seemingly emptying what was left of the liquidity remaining within the Greek banking system.² According to Reuters, the Greek banks had already collectively borrowed €73.4 billion from the ECB and €54 billion from the Bank of Greece as of the end of January 2012 – which is equivalent to approximately 77% of the Greek banking system’s €165 billion in household and business deposits held at the end of March.³ The recent escalation in withdrawals has forced the Greek banks to draw on an €18 billion emergency fund (released on May 28th), which if depleted, will leave the country with a cushion of a mere €3 billion.⁴ It’s now down to the wire. Greece is essentially €21 billion away from a complete banking collapse, or alternatively, another large-scale bailout from the European Central Bank (ECB).

The way this is unfolding probably doesn’t surprise anyone, but the time it has taken for the remaining Greek depositors to withdraw their money is certainly perplexing to us. Official records suggest that the Greek banks only lost a third of their deposits between January 2010 and March 2012, which begs the question of why the Greek banks have had to borrow so much capital from the ECB in the meantime.⁵ Nonetheless, we are finally past the tipping point where Greek depositors have had enough, and the past two weeks have perfectly illustrated how quickly a determined bank run can propel a country back into crisis mode. The numbers above suggest there really isn’t much of a banking system left in Greece at all, and at this point no sane person or corporation would willingly continue to hold deposits within a Greek bank unless they had no other choice.

The fact remains that here we are, in May 2012, and Greece is right back in the exact same predicament it was in before its March 2012 bailout. Before the bailout, Greece had approximately €368 billion of debt outstanding, and its government bond yields were trading above 35%.⁶ On March 9th, the authorities arranged for private investors to forgive more than €100 billion of that debt, and launched a €130 billion rescue package that prompted Nicolas Sarkozy to exclaim that the Greek debt crisis had finally been solved.⁷ Today, a mere two months later, Greece is back up to almost €400 billion in total debt outstanding (more than it had pre-bailout), and its sovereign bond yields are back above 29%. It’s as if the March bailout never happened… and if you remember, that lauded Greek bailout back in March represented the largest sovereign restructuring in history. It is now safe to assume that that record will be surpassed in short order. It’s either that, or Greece is out of the Eurozone and back on the drachma – hence the renewed bank run among Greek depositors.

Meanwhile, in Spain, bank depositors have been pulling money out of the recently nationalized Bankia bank, which is the fourth largest bank in the country. Depositors reportedly withdrew €1 billion during the week of May 7th alone, prompting shares of Bankia to fall 29% in one day.⁸ The Bankia run coincided with Moody’s issuance of a sweeping downgrade of 16 Spanish banks, a move that was prompted over concerns related to the Spanish banks’ €300+ billion exposure to domestic real estate loans, half of which are believed to be delinquent.⁹ The Spanish authorities were quick to deny the Bankia run, with Fernando Jiménez Latorre, secretary of state for the economy stating, “It is not true that there has been an exit of deposits at this time from Bankia… there is no concern about a possible flight of deposits, as there is no reason for it.”¹⁰ Funny then that the Spanish government had to promptly launch a €9 billion bailout for Bankia the following Wednesday, May 24th, an amount which has since increased to a total of €19 billion to fund the ailing bank.¹¹ Deny, deny some more… panic, inject capital – this is the typical government approach to bank runs, but the bailouts are happening faster now, and the numbers are getting larger.

The recent bank runs in Greece and Spain are part of a broader trend that has been building for months now. Foreign depositors in the peripheral EU countries are understandably nervous and have been steadily lowering their exposure to Eurozone sovereign debt. According to JPMorgan analysts, approximately €200 billion of Italian government bonds and €80 billion of Spanish bonds have been sold by foreign investors over the past nine months, representing more than 10% of each market.¹² The same can be said for foreign deposits in those countries. Citi’s credit strategist Matt King recently reported that, “in Greece, Ireland, and Portugal, foreign deposits have fallen by an average of 52%, and foreign government bond holdings by an average of 33%, from their peaks.”¹³ Spain and Italy are not immune either, with Spain having suffered €100 billion in outflows since the middle of last year (certainly more now), and Italy having lost €230 billion, representing roughly 15% of its GDP.¹⁴

Tags: Bailout, Bank Of Greece, Banking Crisis, Banking System, Bloomberg, Business Deposits, Collapse, David Baker, Depositors, ECB, Emergency Fund, Eric Sprott, Escalation, Euro Stoxx, Greek Banks, Infusions, liquidity, Reuters, S 165, Sprott, Withdrawals
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Chinese Buyers Defaulting On Commodity Shipments As Prices Plunge

Monday, May 21st, 2012

One can come up with massively complicated explanations for why the Chinese commodity bubble is popping including inventory of various colors, repos, etc, but when all is said and done, the explanation is quite simple, and is reminiscent of what happened in the US with housing back in 2007: everyone was convinced prices would only go up, and underlying assets was pledged as debt collateral at > 100 LTV… and then everything blew up. Precisely the same thing is happening in China right now, where buyers of commodities thought prices could only go up, up, up and instead got a nasty surprise: prices went down. Big. As a result, many are not even waiting for their orders to come in, but are defaulting on orders with shipments en route.

From Reuters: “Chinese buyers are deferring delivery or have defaulted on coal and iron ore deliveries following a drop in prices, traders said, providing more evidence that a slowdown in the world’s second-largest economy is hitting its appetite for commodities. China is the world’s biggest consumer of iron ore, coal and other base metals, but recent data has shown the economy cooling more quickly than expected, with industrial output growth slowing sharply in April and fixed asset investment, a key driver of the economy, hitting its lowest in nearly a decade. “There are a few distressed cargoes but no one is gung-ho enough to take them. Chinese utilities aren’t buying because they have a lot of coal and traders are also afraid of getting burnt. It’s very bearish now,” said a trader. The defaults in thermal coal over the past week has come after a fall in prices over the past 1 1/2 months, with key coal prices indices in Australia, South Africa and Europe all having fallen around $10 a tonne since early April.” And this is the country that over the weekend was rumored to be bailing out the world again? We wonder: will China also bail out FaceBook longs, or will it merely focus on preventing a collapse in its own various commodity bubbles which are starting to pop one after another?

More from Reuters:

At least six defaulted thermal coal cargoes were being re-offered at a discount, traders said, including contracts for shipments from the United States, Colombia and South Africa.

 

“Many of them signed for the spot cargoes in early April and prices have fallen around $10 a tonne since then. Say if the Chinese traders were buying a cape-sized shipment, they’d be suffering a loss of nearly $1.5 million alone,” said a trader at an international firm who has been offered defaulted cargoes.

 

“That doesn’t even take into account the losses on freight rates. So rather than being bankrupted by these deals, they would rather dishonour the contract to survive.”

 

China’s premier called for additional efforts to support growth on Sunday, signalling Beijing’s willingness to take action to bolster its sagging economy.

And if the Chinese commodity appetite is over, that means very bad news for commodity exporters the world over:

Reflecting greater caution, BHP Billiton, the world’s biggest miner, has put the brakes on an $80 billion plan to grow the company’s iron ore, copper and energy operations.

 

Slumping commodity prices and escalating costs have squeezed cash flows, pushing BHP to join rival Rio Tinto reconsidering the pace of their long-term expansion in countries such as Australia and Canada.

For another perspective of just how stuffed to the gills with commodity inventory is we again go to Reuters, which gives us the following scary summary:

When metals warehouses in top consumer China are so full that workers start stockpiling iron ore in granaries and copper in car parks, you know the global economy could be in trouble.

 

At Qingdao Port, home to one of China’s largest iron ore terminals, hundreds of mounds of iron ore, each as tall as a three-storey building, spill over into an area signposted “grains storage” and almost to the street.

 

Further south, some bonded warehouses in Shanghai are using carparks to store swollen copper stockpiles – another unusual phenomenon that bodes ill for global metal prices and raises questions about China’s ability to sustain its economic growth as the rest of the world falters.

 

Commodity markets are used to seeing China’s inventories swell in the first quarter, when manufacturing slows down due to the Lunar New Year holidays, and then gradually decline during the second quarter when industrial activity picks up.

 

This year, however, is different.

 

Copper stocks in Shanghai’s bonded storage, the biggest in China, are now double the 300,000 metric tons (330,693 tons) average of the past four years and iron ore stocks are about a third more than their 74 million metric tons average.

This time may be differernt indeed:

Four years ago, however, the global financial crisis triggered by the collapse of Lehman Brothers broadsided the economy: factories shut down suddenly, millions of workers got laid off, ports ground to a halt. The situation only perked up after the government introduced a $600 billion stimulus scheme.

Probably the biggest difference is that back then Europe wasn’t broke and the US debt/GDP was well below 100%. Both of those are no longer the case.

And to think we were wondering just last week if the biggest construction bubble in history was sustainable.

Tags: Appetite, Asset Investment, Base Metals, Cargoes, Coal Prices, Collateral, Commodities Prices, Commodity Prices, Commodity Shipments, Deliveries, Explanations, Iron Ore, Longs, Nasty Surprise, Plunge, Reuters, Slowdown, Thermal Coal, Tonne
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FaceBook: The Complete Forensic Post-Mortem

Saturday, May 19th, 2012

While much has already been written on the topic of peak valuation, social bubbles popping, and the ethical social utility of yesterday’s historically overhyped IPO, nobody has done an analysis of the actual stock trading dynamics as in-depth as the following complete forensic post-mortem by Nanex. Because more than anything, those tense 30 minutes between the scheduled open and the actual one (which just happened to coincide with the European close), showed just how reliant any form of public capital raising is on technology and electronic trading. And to think there was a time when an IPO simply allowed a company to raise cash: sadly it has devolved to the point where a public offering is a policy statement in support of a broken capital market, which however is fully in the hands of SkyNet, as yesterday’s chain of events, so very humiliating for the Nasdaq, showed.

From a delayed opening, to 2 hour trade confirmation delays, virtually everyone was in the dark about what was really happening behind the scenes! As the analysis below shows, what happened was at times sheer chaos, where everything was hanging by a thread, because if FB had gotten the BATS treatment, it was lights out for the stock market. Well, the D-Day was avoided for now, but at what cost? And how much over the greenshoe FaceBook stock overallotment did MS have to buy to prevent it from tumbling below $30 because as Reuters reminds us, “had Morgan Stanley bought all of the shares traded around $38 in the final 20 minutes of the day, it would have spent nearly $2 billion.” What about the first defense of $38?  In other words: in order to make some $67 million for its Investment Banking unit, was MS forced to eat a several hundred million loss in its sales and trading division just to avoid looking like the world’s worst underwriter ever? We won’t know for a while, but in the meantime, here is a visual summary of the key events during yesterday’s far less than historic IPO.

May 18 – The Facebook IPO

The first warning sign, was the delay in trading. Here’s the status messages from Nasdaq for that day.

The first 4 charts are 5 second interval charts of Facebook showing the first hour and 15 minutes of quotes and trades.

Chart 1. NBBO (National Best Bid or Offer) Spread. Black: bid < ask (normal), Yellow: bid = ask (locked), Red: bid > ask (crossed)all bids and offers color coded by exchange.

Chart 2. Best bids and offers (NBBO) color coded by exchange.

Chart 3. All bids and offers color coded by exchange.

Chart 4. All trades color coded by exchange.

The next 4 images are tick charts showing quotes and trades. How to read these charts

Chart 5. The first seconds of trading.

Chart 6. The first seconds of trading, continued.

Chart 7. Suddenly, a vacuum appears and produces a record 12,285 trades in 1 second.

Chart 8. Same as above, showing just Nasdaq.

The next 2 charts (10 second interval) show how Nasdaq’s quote stopped, but trades from Nasdaq did not (direct feeds must have been fine, but not the consolidated).

Chart 9. Nasdaq Bids and Offers along with NBBO.

Chart 10. Nasdaq Trades

The next 2 charts (20 millisecond interval) show the effect when Nasdaq’s quote returned. There were two significant gaps in quotes (for all exchanges) and 1 significant gap in trades.
Note how the gap in trades is not at the same time as the gaps in quotes.

Chart 11. All bids and offers color coded by exchange.

Chart 12. All trades color coded by exchange.

The next chart (5 millisecond interval) shows the result of the blast in trades and quotes when Nasdaq’s quote returned. Trades printed at least 900 milliseconds before quotes, an impossibility if orders are being routed according to regulations. We have jokingly referred to this anomaly as fantaseconds.

Chart 13. Nasdaq bids and offers (triangles), Nasdaq trades (circles) and NBBO (gray/yellow/red shading).

The next 2 charts (500 millisecond interval) detail the HFT Tractor Beam area where coincidentally or not, Nasdaq quotes began “sputtering” right before stopping for about 2 hours.

Chart 14. NBBO Spread and quote rate from all exchanges.
Note the flat lines at the bottom. Also note how the quote rate (lower panel) surges when prices rise above the flat line, which is what we would expect. However, on Nasdaq (next chart)..

Chart 15. NBBO Spread and quote rate from just Nasdaq.
When prices rise above the flat line, quotes from Nasdaq stop, exactly opposite of expected behavior and what we see from other exchanges at that time (see chart above).

And finally, Nanex on the fallout:

During the FaceBook’s failed IPO opening period (11 – 11:30)  and shortly after the trading began, bad prices (spikes) began appearing in other stocks, including symbols APPL, INTU, NFLX, PDCO, QCOM, QLD, UST and ZNGA. They also occurred in Facebook during the first 15 minutes of trading (see Chart 4 on this page). There are likely other stocks that were affected. In nearly all of these cases the price spikes were executing against quotes that were far outside the NBBO. Most of these executions occurred on the CBOE, and a few on Chicago and AMEX. Fortunately, by chance, the prices were not wide enough to trigger circuit breakers in these stocks.

We think these bad price executions are related to whatever issues Nasdaq was having in facebook and probably are from errors in routing software. A similar thing happened during BATS failed IPO in AAPL and other stocks.

Chart 1. AAPL

Chart 2. NFLX

Chart 3. QCOM

Chart 4. QLD

Chart 5. UST

Tags: Bats, Bubbles, D Day, Electronic Trading, Greenshoe, Hanging By A Thread, Hundred Million, Investment Banking, Ipo, Morgan Stanley, Nasdaq, Post Mortem, Public Offering, Reuters, S Chain, Skynet, Stock Market, Stock Trading, Trade Confirmation, Underwriter
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Facebook IPO May Break the Market and Initiate a Free Fall Crash

Friday, May 18th, 2012

by Steven Vincent,  Bull Bear Trading

Let me start by clarifying something.  I am not saying that the market could crash spectacularly in the next few days and that in that event the Facebook IPO would be a major contributing factor.  I am not saying that.  The market is saying it.

Facebook boosts IPO size by 25 percent, could top $16 billion

NEW YORK/SAN FRANCISCO (Reuters) -
Facebook Inc increased the size of its initial public offering by almost 25 percent, and could raise as much as $16 billion as strong investor demand for a share of the No.1 social network trumps debate about its long-term potential to make money.
Facebook, founded eight years ago by
Mark Zuckerberg in a Harvard dorm room, said on Wednesday it will add about 84 million shares to its IPO, floating about 421 million shares in an offering expected to be priced on Thursday.
http://finance.yahoo.com/news/facebook-expands-ipo-size-aims-011714…

This mammoth dumping of shares onto the market is coming at the exact moment that global financial markets are teetering on the brink of disaster.  Technically and psychologically this market is as weak and poorly positioned to absorb a new float of this size as it could possibly be.  As every market across all asset classes breaks major bearish technical levels, as the fundamental news flow accelerates and worsens by the hour, Wall Street if fixated upon “the biggest IPO ever”.  Few ask why Facebook owners are rushing for the exits now.  Few observe that the markets began their current crash on the day of the Carlyle IPO.  Even fewer wonder what the potential effect will be of sucking the remaining air out of the room even as the markets gasp for breath.

Bulls will presently argue that the market is very oversold and positioned to rally.  Under conditions of a healthy bull market, they would be correct.  Every indicator you could think of is positioned for a rally in the context of a real bull.  The trouble is that the last bull phase ended in February of 2011 and the market has been falling apart internally for over a year.  In fact, technical deterioration has run far ahead of price declines in much the same way in 2011.  The result then, as now, is that market price sprints to catch up to the technicals and the result is a crash.

Here’s just one example of many.  Prior to the 2011 crash, the ratio between Down Volume and Up Volume began to expand dramatically even as the market made new highs, creating a divergence between market price and the indicator:


Take note that if this pattern repeats itself for a fourth time (and there are many compelling reasons to think it will as we will see later in this posting), then we are yet very early in the process.  This suggests that although we could be considered “oversold” at this time, a market crash is pending.  And it is important to further note that serious market crashes come from deeply oversold, deteriorated technical conditions such as those prevailing right now.  When comparing 2011 and 2012 levels, the indicator also made a higher low while the market made a higher high which is a divergence.

The ratio between Advancing and Declining issues is set up very similarly and is also highly suggestive of a pending crash with a breakout move just beginning:


This indicator also created a divergence at the 2011 and 2012 price highs.  Keep in mind that both of these indicators are just now beginning their big moves.

One of the hallmarks of a crash is a rapid expansion of New 52 Week Lows:

Note the huge divergence between 2011 and 2012 as more New Lows were being registered at a higher price level in 2012.  Also notice the rapid expansion of New Lows as price breaks the neckline of Head and Shoulders tops in both 2011 and 2012.

Many will argue that the price of the 30 Year Treasury Bond is “too high” and that the recent flight of capital to the perceived safety of that market is “irrational” or even “stupid” and that it “must reverse”.  Right now, the long bond is blasting through the upper resistance band that has contained it for several decades:

Note that this very long term breakout move is coming after a six month long consolidation.  Also note that this is the first time ever that this market did not return to support after visiting its upper resistance band.  Traders should respect the intelligence of the market.  Clearly it is saying that there is a real need for safety and that the need is so urgent that a multi-decade technical level needs to be completely taken out.  Also note that this breakout move is only just beginning.

The ratio of SPX to the 30 Year Treasury Bond has very recently plunged through its multi decade uptrend while simultaneously violating its 20, 50 and 200 month exponential moving averages:


Clearly this is a move that is only just beginning.  When such long term technical events occur is far more likely to mark the onset of something rather than the end of something.  The presence of a clear Head and Shoulders formation suggests an immediate crash to the neckline and beyond.

The Dollar ETF, UUP, is rapidly approaching the neckline of a clear reverse Head and Shoulders formation:

This is coincident with a triple bull moving average cross.  The bull cross together with a breakout from the formation neckline would be the beginning of a very strong move.

Volatility Index has broken out from a six month long inverse Head and Shoulders pattern and has closed four consecutive sessions above its 200 EMA:

This is the beginning of a very large move for VIX, which can only correlate with a significant bearish event for stocks.

I could post many more charts which show that the market is far nearer to the beginning of a major event than to a sort of end.  Oversold is likely to become much more oversold as panic selling takes hold.

While we could argue that RSI is now well below 30 and therefore oversold, historical precedent shows that it can go much lower:
The incidents when RSI started at 70 and went below 20 led to an average bottom for the indiator of 16.  My take is we will see that reading on this decline and it will reflect a serious bearish market event.

In this context, Wall Street will be dumping an enormous new float of a new “darling” stock into the market on Friday.  Market participants still largely regard the recent price decline as a buying opportunity and the expectation is that the FB shares will be “snapped up” by eager investors.  Recent dip buying behavior has only served to expend what little available cash there is in the market.  The Facebook IPO will suck the remaining air out of the room, leaving a vacuum.  While the effect may not be immediate, it could take only a few sessions for the real selling to begin.  The setup for a Black Monday is there.  And I do not mean that metaphorically.

I will leave you with the following chart study comparing the period immediately prior to the Friday before Black Monday 1987 and the period leading up to today, Friday, May 18, 2012:


Day by day, tick by tick, technical event by technical event, the two charts are nearly perfect replicas.  Will the fractal echo complete on Friday and Monday?

Any long position under these circumstances is sheer folly.  And I’m not saying that.  The market is saying it.

There’s an elephant in the room and no one wants to acknowledge it.

Copyright © http://www.thebullbear.com

Tags: Asset Classes, Brink Of Disaster, Bull Bear, Bulls, Carlyle, Crash, Dorm Room, Exact Moment, Facebook, Finance Yahoo, Global Financial Markets, Harvard, Initial Public Offering, Investor Demand, Ipo, Mark Zuckerberg, Reuters, Steven Vincent, Trumps, Wall Street
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Asset Class Performance (April 2012): Another Good Month for Bonds

Friday, May 4th, 2012

The bar chart below, courtesy of Scott Barber of Reuters, shows the monthly performances of the principal asset classes.

“The “risk on/risk off” barometer moved back in the direction of “risk off” during April, as U.S. 10-year Treasury securities turned in the best investment gains (in U.S. dollar terms) during the month,” said Barber. “The 2.8% jump in the value of the Treasury securities came despite the almost universal perspective on the part of professional investors that the 30-year bull market for bonds is finally sputtering to a halt and that eventually interest rates will begin to climb. Investors displayed a clear bias in favor of assets that not only generated income but also offered them security – in other words, bonds of various kinds were the only major asset classes to end the month in the black.”

Source: Scott Barber, Reuters, May 2, 2012.

Tags: 10 Year Treasury, April, asset class, Asset Classes, Assets, Barometer, Bias, Bonds, Class Performance, Dollar Terms, interest rates, Investment Gains, Principal, Professional Investors, Reuters, risk, Scott Barber, Treasury Securities, Universal Perspective
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News Digest: April 24, 2012

Tuesday, April 24th, 2012

* China’s Biggest Banks Are Squeezed for Capital (NYT)
* Greeks detect hypocrisy as Dutch coalition stumbles (Reuters)
* Hollande Blames Europe’s Austerity Plan for Le Pen’s Rise (Bloomberg)
* In a Change, Mexico Reins In Its Oil Monopoly (NYT)
* China Tire Demand Slows as Economy Decelerates, Bridgestone Says (Bloomberg)
* Social Security’s financial forecast gets darker; Medicare’s outlook unchanged (WaPo)
* Fed’s 17 Rate Forecasts May Confuse More Than Clarify (Bloomberg)
* Senate to vote on array of Postal Service overhaul proposals (WaPo)
* Weidmann Says Bundesbank Is Preserving Euro Stability (Bloomberg)
* Hungary Pledges Cuts Aimed at EU Demands (WSJ)
* Immigration from Mexico to US at standstill (FT)
* Orbán stands firm in central bank dispute (FT)

Overnight Media Digest via Reuters

WSJ

* In what is likely to be the last snapshot of its financial condition before an expected May IPO, Facebook disclosed that its first-quarter profit and revenue declined from the final quarter of 2011.

* Government trustees are projecting Social Security will exhaust its trust fund three years sooner than previously thought.

* New York law firm Dewey & LeBoeuf is more deeply in debt than previously thought. It owes about $75 million to a syndicate of bank lenders.

* Unilever is negotiating to build a $100 million palm-oil processing plant in Indonesia, an attempt to accelerate its commitment to sourcing the oil in ways that don’t destroy the environment.

* Planetary Resources will outline a plan to send an unmanned spacecraft to an asteroid and mine it for valuable metals and water that could be used in further space exploration or returned to earth.

* The union representing American Airlines’ mechanics agreed to send the airline’s latest contract proposal to members for a vote.

* A U.S. trade panel Monday voted against imposing retaliatory duties on galvanized steel wire from China and Mexico, determining that U.S. producers aren’t being hurt by the rise in imports.

* Spain’s economy contracted 0.4 percent in the first quarter from the fourth, the country’s central bank said Monday, the latest evidence that Spain’s efforts to rein in government spending could be feeding a downward economic spiral.

FT

MEXICO BRIBERY CLAIMS HIT WALMART SHARES

Walmart shares tumbled nearly 5 percent and shares in its Mexican business dropped even further as allegations of bribery and a cover-up shook the U.S. retailer.

FACEBOOK GROWTH SLOWS AHEAD OF IPO

Facebook’s revenue and profit growth are slowing, marking a turning point for the high-growth social networking company just weeks before its initial public offering.

CABLE AND WIRELESS NAME TO DISAPPEAR IN UK

The Cable & Wireless name is set to disappear from the UK telecoms market after almost 80 years following Vodafone’s agreement of a 1 billion pound ($1.61 billion) cash acquisition of the group.

INVESTORS LAUNCH DEUTSCHE BANK PROTEST

Deutsche Bank’s non-executive board is facing a protest from an influential activist investor over its pay policies and turbulent succession planning in another sign of how global investors are challenging bank directors.

COBHAM HIRES AMERICAN CHIEF

Cobham, the UK defence and aerospace group, has completed its five-month-long search for a chief executive by hiring Robert Murphy from the U.S. subsidiary of BAE Systems .

EX-CALPERS CHIEF ACCUSED OF FRAUD

The former head of the California Public Employees’ Retirement System, the largest U.S. pension fund, has been slapped with civil charges accusing him of defrauding Apollo Global, the private equity group.

VENTURE CAPITAL FIRM DEFENDS INSTAGRAM HOLDING

Andreessen Horowitz has been forced to defend its early stake in Instagram, the photo-sharing app acquired by Facebook this month for about $1 billion, despite the venture capital firm receiving a more than 300-fold return in two years.

VOLVO TO EXPAND OFFERING IN CHINA

Volvo Cars will launch 10 models in China over the next five years as it seeks to make up for lost time in the world’s largest car market, its chief executive said.

NYT

* A commission of energy specialists formed by Mexico’s Congress has begun to question where and how Pemex, Mexico’s state-owned oil monopoly, drills for oil.

* Wal-Mart’s stock slipped as investors reacted to a bribery scandal at the retailer’s Mexican subsidiary and a report that an internal investigation was quashed at corporate headquarters.

* MetLife on Monday became the third big life insurer to settle regulatory accusations of failing to keep track of policyholder deaths, trapping money that should have gone promptly to the beneficiaries.

* A euro zone strategy to cut deficits has come under increasing strain from slowing economies, gyrating financial markets and electoral setbacks.

* Mainland Chinese banks are turning to markets to raise funds, even as they report strong profits and say their balance sheets are solid.

Canada

THE GLOBE AND MAIL

* Less than a year after he asked Canadian voters to make him prime minister, ex-Liberal leader and academic Michael Ignatieff warned that the country is drifting towards a breakup.

r.reuters.com/jav77s

* One of Canada’s leading polling firms says it has found strong evidence of a targeted program of voter suppression aimed at non-Conservative voters during last May’s federal-election campaign.

r.reuters.com/nav77s

Reports in the business section:

* Swapping out engines is costly, but natural gas has grown so much cheaper than diesel that, according to a new analysis conducted by the Conference Board of Canada, a long-distance trucker could save nearly $160,000 over a decade by making the change.

r.reuters.com/tav77s

* Shoppers Drug Mart Corp has been hit with yet another round of Ontario cuts in generic prescription drug prices while still grappling with earlier profit-pinching drug reforms.

r.reuters.com/cev77s

NATIONAL POST

* Defying the odds of pollsters and naysayers, Alberta’s long-ruling Progressive Conservatives won their 12th straight majority government Monday night.

r.reuters.com/dev77s

Reports in the business section:

* Ontario’s minority Liberal government is set to survive a budget vote after Premier Dalton McGuinty said he will introduce a 2 percent tax on people with incomes greater than $500,000, meeting a key demand from the New Democrat Party.

r.reuters.com/kev77s

* Three weeks after Baja Mining Corp narrowly won a proxy fight with its largest shareholder, the company revealed on Monday that three directors have resigned and that it is facing a big funding shortfall at its flagship copper project.

r.reuters.com/hev77s

European economic highlights:

* Finland PPI for March 0.40% m/m 1.4% y/y – lower than expected. Consensus 0.80% m/m 1.80% y/y. Previous 1.20% m/m 2.20% y/y.
* Finland Unemployment Rate for March 8.50% * higher than expected. Consensus 8.20%. Previous 7.70%.
* Switzerland Trade Balance for March 1.69B – lower than expected. Consensus 3.00B. Previous 2.68B. Revised 2.61B.
* Switzerland Exports real s.a. for March -2.50% m/m – lower than expected. Consensus 1.00%. Previous 9.20%. Revised 12.00%.
* Switzerland Imports real s.a. for March 4.60% m/m. Previous -12.30% m/m. Revised -12.20% m/m.
* Switzerland UBS Consumption Indicator for March 1.22. Previous 0.87. Revised 0.9.
* Sweden Unemployment Rate for March 7.70% * lower than expected. Consensus 8.00%. Previous 7.80%.
* France Consumer Confidence Indicator for April 88 – higher than expected. Consensus 87. Previous 87.
* France Business Survey Overall Demand for April 3 – higher than expected. Previous -12. Revised -8.
* Spain Mortgages-capital loaned for February -49.60% y/y. Previous -34.00% y/y.
* Spain Mortgages on Houses for February -47.10% y/y. Previous -41.30% y/y.
* Italy Hourly Wages for March 1.20% y/y. Previous 1.40% y/y.
* UK Public Finances (PSNCR) for March 16.5B – higher than expected. Consensus 13.0B. Previous -7.8B. Revised -8.2B.
* UK PSNB ex Interventions for March 18.2B – higher than expected. Consensus 16.0B. Previous 15.2B. Revised 12.2B.
* UK Public Sector Net Borrowing for March 15.9B – higher than expected. Consensus 14.2B. Previous 12.9B. Revised 9.9B

Tags: American Airlines, Austerity, Bank Lenders, Biggest Banks, Bloomberg, Bundesbank, Contract Proposal, Financial Forecast, Galvanized Steel, Galvanized Steel Wire, Leboeuf, Nyt, Oil Monopoly, Palm Oil, Planetary Resources, Quarter Profit, Reuters, Unmanned Spacecraft, Weidmann, Wsj
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Spain is A Mess, No Matter How You Slice It

Wednesday, April 11th, 2012

Spain’s spreads breaking away from other risk indicators

Guest contribution by Sober Look

As the sell-off in Spanish government bonds continued today, Spain’s spreads broke away from other global macro risk indicators. Typically Spain’s bond and CDS spreads move in tandem with risk measures such as VIX or SovX WE (MarkIT Western European index of sovereign CDS), etc. But this time around, the widening has outpaced these other measures. As an example consider the relationship between Spain’s 10yr bond spread (to Germany) and SovX WE (chart below). The red asterisk indicates the current levels.

Spain to Germany 10y Gov. spread vs. SovX WE spread (last 2 years; source: Bloomberg)

One can run the same comparison against VIX or swap spreads and get a similar result. Using Spain’s CDS spreads rather than bond spreads also shows that we are in an uncharted territory with respect to this widening. Consider for example that the last time Spain’s 10-year spread was at current levels (4.3%), VIX was around 30 (it’s 21 today) and the USD 2-year swap spread was over 50bp (31bp today) – see chart below.

Spain to Germany 10y Gov. spread vs. USD 2 year swap spread

Clearly there is plenty of room for the other risk indicators to “catch up” with Spain. But for now it stands on its own with respect to the relative amount of risk that is being priced in. More Spanish and Italian debt auctions loom and it is uncertain just how much more room the periphery banks still have to absorb the extra debt. In the mean time foreigners continue to sell.

Reuters: Spain has found itself the focal point of those concerns after relaxing budget targets earlier this year and with subsequent budget-cutting plans winning little investor support – culminating in weak demand at an auction last week.

Spanish 10-year yields jumped 22 bps on the day to a four-month high of 5.99 percent before finding resistance at the psychological 6 percent barrier – though few in the market believed that level would halt the selling.

“We’re going to see Spain develop as the story this week as hedge funds look to short it,” a London-based trader at an investment bank said.

Copyright © SoberLook.com

Tags: Bps, Budget Targets, European Index, Focal Point, Global Macro, Government Bonds, Investor Support, Mean Time, Periphery, Plenty Of Room, Reuters, Risk Indicators, Risk Measures, Spanish Government, Swap Spread, Swap Spreads, Time Spain, Uncharted Territory, Vix
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