The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

A few things to note about this rally:

• The volume is absurdly light– even for August;

•Today is an expiration day, with the bias to the upside;

• Professionals are fully invested; Individuals are mostly under-invested;

• Markets are now 53% up from the March lows;

Yesterday, I did an interview with Yahoo Tech Ticker going over why I thought this is now a dangerous rally — but one that can continue for some time. (Video Here)

Light posting this weekend as I will be talking the big boat out for a cruise.

That 4300 gallon tank means you may be dropping $200k per fillup, but you probably don’t have to do it every week.

Source:
Cruise Missile: Pershing 90
Diane M. Byrne

http://www.powerandmotoryacht.com/megayachts/pershing-90/

Existing Home Sales scheduled to be released at 10am; look for the usual seasonal strength, and improving but weak year over year numbers.

In light of this data, the WSJ’s Ahead of the Tape column looks at the Housing Market. Their conclusion? Do not confuse the end of the tailspin for actual strength.

“A survey conducted in June of 1,500 real-estate agents sponsored by the trade publication Inside Mortgage Finance found that 36% of all sales involve “nondistressed” properties. Of the nondistressed sales, only 31% were what the survey described as “unforced or optional.” The rest were sales by homeowners in some kind of financial or personal crisis . . .

Meanwhile, the Mortgage Bankers Association said Thursday that the number of homeowners behind on their mortgage payments hit a new high during the second quarter, with more than one in eight homeowners delinquent or in the foreclosure process.

So it is likely that sales will stay mired on the low end of the housing barbell . . .”

Two other factors the article pointed out:

1) Two-thirds of home sales are either foreclosures or banks taking a loss on the mortgage. The remaining one-third (~10% of overall sales) is what you might call “normal.”  (That 2/3rds number seems rather high even to me)

2) In July 2008, sales of existing homes hit a five-month high, and the NAR called a “sustained upturn coming.”  Once agian, their forecasting prowess was proven to be non existent . . .

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Source:
Improving Home Sales Belie Market Reality
PAUL VIGNA
WSJ, 08/21/09

http://online.wsj.com/article/SB125081143925447971.html

My quote:

“This is a trading rally not a multi-year rally,” he says. Eventually something’s got to give: “We’ve never had six-month period before where we’ve lost two million jobs and the market’s gained 50%,” he says. “That’s simply unprecedented.”

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Source:
Professionals Are Buying The Stock Market Rally. Are You?
Peter Gorenstein
Yahoo Tech Ticker, August 21, 2009 08:00am EDT

http://bit.ly/4ak0hM

Grant’s Interest Rate Observer, usually $850/Year, goes partially free. Readers can download the free version at the Grant’s site.

Vacation delectation
Grant’s Interest Rate Observer (Summer Break 2009 Issue)
Click here for PDF

To the readers of Grant’s:  This compilation of recent articles, the first annual Grant’s Beachhead issue, is for you. And it’s for your friends, co-workers, clients, classmates, shipmates, brothers-in-law and maids-of-honor, too. Please pass it along, with our thanks, to any and all prospective members of the greater Grant’s family.

We return two weeks from today with Vol. 27, No. 17.

Makes for great weekend reading!

Federal Reserve Chairman Ben Bernanke speaks at the Kansas City Fed’s annual meeting in Jackson Hole, Wyo. WSJ’s Kelly Evans tells you what to listen for. She has your day ahead.

8/21/2009

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Is Bernanke purposely aiding & abetting the usual market manipulation that occurs during expiration
week? In July, Ben poured $80.2B into the system, mostly by monetizing MBS, during expiration week, igniting a huge rally. The Fed balance sheet contracted for most of June and July before Ben’s gambit.

For the week ended Wednesday, Ben increased the Fed balance sheet $46.157B. Ben monetized
$66.646B MBS this time.

Retailers report worse than expected sales. LEI, Jobless Claims, both Initial & Continuing Claims, are
worse than expected. But the Philly Fed, which is opinion not fact, is better than expected. So traders buy stocks…The last time the Philly Fed was positive was Sept 2008 – just before the collapse.

Only two non-price components increased: New Orders (4.2) & Shipments (0.2). The most important, the most telling components are employees, which declined 12.9 and workweek, which declined 6.3. BTW, if prices paid increased 10 and price received declined 1.5, your profits are being squeezed!

Why is the Philly Fed Index reading at 4.2 the same reading as New Orders (4.2) and all the negative readings (Unfilled Orders -9.3, Delivery Time -7.0, Employees -12.9 and Workweek -6.3) somehow are negated by a 0.6 increase in Shipments and a 0.3 increase in inventories?

The Philly Fed: Indexes for general activity, new orders, and shipments all registered slightly positive
readings this month. Although firms reported continued declines in employment and work hours this
month, losses were not as widespread. Most of the survey’s broad indicators of future activity continued to suggest that the region’s manufacturing executives expect business activity to increase over the next six months.

Furthermore, the Philly Fed Survey shows future expectations [6-month forecast] are soaring – just like consumer confidence did several months ago! Consumers are rescinding those expectations now…Please note that the six-month forecast jumped in both mid-2007 and mid-2008. How’d that work out?… How does the Philly Fed account for firms that can’t be surveyed because they have disappeared?

So once again we are given ‘statistical evidence’ of recovery but jobs, the key determinant of income, remain weak or deteriorate. And politicians are surprised at the populace’s anger!?!?

When either Initial or Continuing Jobless Claims fall, the usual suspects stridently proclaim recovery. When Claims increase or the previous week is revised lower, which occurred again, they are mum.

“Memories, like the corners of my mind. Misty water colored memories, of the Way We Were,” sang Barbra Streisand and I’ll be humming the song as Bernanke gives a speech today titled “Reflections on a Year of Crisis” at 10am from Jackson Hole. Unfortunately the trip down memory lane won’t begin in mid ’03 when Bernanke stood with Greenspan in cutting rates to 1% and didn’t change policy until mid ’04. We thus won’t get a full picture from Bernanke of what has unfolded. It’s ironic that the man who helped to spark the fire is now looking for accolades because he has temporarily put it out. I’m fully aware of the dire straits we faced in Oct/Nov but I just want full disclosure of the record. Oh well, sorry to whine about this, again. While most of Asia was lower, China bounced for the 3rd day in 4 even though there was talk of an upcoming hike in reserve requirements. Existing Home Sales, 85% of the housing market, are expected to total 5mm in July and would be the highest level since Sept ’08.

The Euro region manufacturing and services composite index rose to 50 from 47 and was 2 points higher than expected. It has reached the breakeven level of expansion and contraction for the first time since May ’08. The services component mostly led the way as it rose 3 points to 49.5 while manufacturing rose just .4 points to 47.9. I can’t explain why the headline index reached 50 while the two individual components did not other than to say that maybe it’s a separate measure of sentiment. In particular, manufacturing in France rose above 50 as did services in Germany. In response, the Euro is rising to a two week high vs the US$ and European stocks are up across the board. This bounce in turn is helping the S&P’s ahead of August expiration. However, the 10 yr bond yield at a 5 1/2 week low continues to send a different message on the US economy than stocks are.

Former Morgan Stanley Analyst Andy Xie explains why this will not be a regular cyclical recovery following the credit collapse and great Recession:

“In a normal economic cycle, an inventory-led recovery would be followed by corporate capital expenditure, leading to employment expansion. Rising employment leads to consumption growth, which expands profitability and more capex. Why won’t it work this time? The reason, as I have argued before, is that a big bubble distorted the global economic structure. Re-matching supply and demand will take a long time.

The process is called Schumpeterian creative destruction. Keynesian thinking ignores structural imbalance and focuses only on aggregate demand. In normal situations, Keynesian thinking is fine. However, when a recession is caused by the bursting of a big bubble, Keynesian thinking no longer works.

Many policymakers actually don’t think along the line of Keynes versus Schumpeter. They think in terms of creating another bubble to fight the recessionary impact of a bubble burst. This type of thinking is especially popular in China and on Wall Street. Central banks around the world, although they haven’t done so deliberately, have created another liquidity bubble. It manifested itself first in surging commodity prices, next in stock markets, and lately in some property markets. Will this strategy succeed? I don’t think so.”

Full article after the jump

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Source:
Andy Xie: New Bubble Threatens a V-Shaped Rebound
08-20 08:04
Caijing Magazine

http://english.caijing.com.cn/2009-08-20/110227359.html

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