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

Some interesting reads:

• Recovery Can Only Go So Far Without Jobs (Market Talk)

• Paul Farrell: Wall Street’s 2012 meltdown sweepstakes (Marketwatch)

• Lessons from the crisis: Re-educate the geeks (Reuters)   British quant seeks to reform financial risk-takers

• America’s Newest Land Baron: FDIC (WSJ)

• Not So Pretty Numbers And The New Bubble Logic (Market Talk)

• 6 REASONS RICHARD RUSSELL WANTS TO OWN GOLD (Pragmatic Capitalist)

• Why the Crisis Isn’t Going Away (Counterpunch)

• Inflation Faces an Uphill Climb (WSJ)

• About Half in U.S. Would Pay for Online News, Study Finds (NYT)

• 45% Now Rate Obama’s Economic Performance As Poor (Rasmussan)

• Take Me Back to Constantinople (FR): Advice for the US from the Byzantine Empire

• GE Goes for Backyard Wind Power: Making A Big Deal of Small Wind

• Oxford Word of the Year 2009: Unfriend

What are you reading?

While the US Treasury market is having another impressive day that is sending yields down to 3.32%, the lowest since Oct 8th on a closing basis, the 5 yr CDS in US government debt is rising today to 30 bps, the highest since July 29th when the 10 yr bond yield closed at 3.66%. It hasn’t fallen in two weeks and is now up 10 bps over the past month. It highlights the amazing performance of the US Treasury market in the face of it and in light of the well spoken about headwinds.

The Nat’l Assoc of Home Builders sentiment index for Nov was 17, 2 pts below expectations and flat with the Oct reading which was revised from 18. Present conditions remained unchanged but future expectations did rise 2 pts. Prospective Buyers Traffic remained punk at 13 for the 2nd straight month. The NAHB is clarifying that today’s release of the Nov sentiment figure did reflect the uncertainty of whether the home buying tax credit was going to be extended or not. NAHB Chairman said “When the HMI survey was conducted at the beginning of this month, home builders were facing the imminent expiration of the $8,000 first time home buyer tax credit at the end of Nov, with no guarantee that this valuable buyer incentive would be extended.” The NAHB Chief Economist said “today’s report confirms that home builders and buyers were in something of a holding pattern in early Nov as the anticipated expiration of the tax credit drew near and congressional action had not yet taken place to address this.” He did though also attribute the weakness to “the challenges that builders are facing in obtaining credit for new housing production and appropriate appraisal values for their homes continued to worsen.”

Nice infoporn  via Mint, showing the breakdown by income level. To put this into context, as of 2007, the median annual household income rose 1.3% to $50,233.00 according to the Census Bureau.

>
click for larger graphic

David Rosenberg asks the question: Is Gold a bubble?

>

Gold Prices Relative to the S&P 500 (ratio)

click for bigger chart

>

I am not sure the above chart is determinative, but it sure is interesting . . .

~~~

November 13, 2009

Special Update

Stocks

In a Special Update after the close on October 14, I made the following assessment. “The overall technical health of the market is in good shape. The advance/decline line is making new recovery highs along with market averages, and the number of stocks making new highs continues to expand, with today’s tally over 450. Last week almost 700 stocks made new 52 week highs. This suggests that the 1 to 3 month outlook remains constructive.

The next few weeks are a bit more problematic. As measured by the 21 day average of total volume, volume expanded 5.9% as the market declined between September 29 and October 2. (1.309B to 1.378B). This is the first time volume has expanded on a decline since the March low. Since October 2, the S&P has rallied from 1,019 to 1,092, but total volume has shrunk from 1.378B to 1.255B, or -8.9%. As noted last month, I thought the S&P could trade up to 1,095. Although 1,109 is possible, doing a little selling or hedging into strength is a good idea. A decline to 990-1,015 by the end of October, or early November is likely, given the technical back drop. The DJIA closing above 10,000 and Intel’s good news should help the market hold up a bit more, although trading is likely to be choppy.”

On October 15, the day after the Special Update, the S&P closed at 1096.56, and then traded down to 1029.38 on November 2. On Wednesday, November 11, the S&P closed at 1098.51, a new recovery high. The DJIA closed at 10,291.26, versus a close of 10,062.94. The DJIA was 2.27% above its October 15 close, while the S&P was only up .18%. More importantly, the broad market is acting far weaker. On October 15, the Russell 2000 closed at 623.34, but was -4.91% lower as it only reached 592.71 on November 11. In addition, on October 14, 462 stocks made new 52 week highs, but only 211 did so on November 11. As the market declined from October 14 to November 2, the 21 day average of total volume rose, but has declined -6.9% during the rally from November 2. The 10 day average of down volume rose 46.3% as the market fell into the low on October 2, but increased by 97.8% during the decline from October 14 to November 2. This is a clear indication that selling is increasing as the market falls.

In mid October, the overall health of the market was in good shape. That isn’t the case now, as the internal strength of the market has clearly weakened, especially when compared to the increase in the DJIA, which only measures 30 stocks. This means the market is vulnerable to the largest decline since the March lows, and will likely fall below the recent low of 1029.38 on the S&P. Selling into strength and taking a more defensive posture is more warranted now than in mid October.

Since the Russell is the weak sister, shorting the Russell 2000 by buying TWM makes the most sense. Establish a 50% short position now (TWM under $29.35), and add if the S&P climbs above 1105.37. The short term price pattern on the S&P and DJIA suggest that there could be one more move above the intra day highs established on November 11(DJIA 10,341.97, S&P 1,105.37). For those who prefer the S&P, go 50% short above 1,105.37, and add if the S&P reaches 1,115.00.

Gold and Gold Stocks

In a Special Update on gold and the gold stocks on November 5, 2009, I laid out the following analysis and trading strategy. “I would be surprised if gold doesn’t push above $1,100, at least temporarily. However, gold should not close above $1,115, so that will act as the stop for the following strategy, which is going to break the exposure into thirds.”

DZZ – Buy 33% now ($15.20), 33% below $14.95, and 33% if it trades down to $14.65 – $14.35.
GLD – Short 33% now ($106.82), 33% above $107.50, and 33% if it trades up to $108.50 to $110.50.

On November 11, December gold closed at $1,114.60. If I’m right about stocks having one more push to a higher high on the DJIA and S&P, gold will likely make a higher high. For now, cancel the stop at $1,115.00.

DOLLAR

Here are the comments from the October letter. “The dollar continues to grind lower. We are long the December futures from last month under 76.40, which was reached on October 6. The long dollar ETF UUP was simultaneously purchased on October 6 with UUP at $22.60. The stop on both positions remains 74.50 on the December futures. I am looking for the dollar to rally to near 81.00, which is just below the high in early June at 81.50.” Lower the stop on the December dollar futures to 74.00, and add to UUP if the futures trade below 74.85.

E. James Welsh

NYPost CARTOON

I send this to NOT make any political statement whatsoever because George Bush’s face can be superimposed on Obama’s and the cartoon will still have the same impact. I send it to highlight that relying on foreigners to finance half of our debts can last without consequence until it doesn’t. It also highlights the importance of growing the savings rate in the US as this pool of savings can be used for investment so we can rely less on the kindness of strangers.

Oct PPI rose .3%, .2% less than expected and unexpectedly fell by .6% ex food and fuel vs forecasts of a gain of .1%. A sharp drop in car and truck prices was the main culprit. Motor truck prices in particular fell 5.2% m/o/m. Car prices fell .5% but follows increases in the two prior months. Inflation in the pipeline is evident but mostly due to the rise in food and energy prices. Headline prices of intermediate goods (middle stage of production) rose .3% but fell .2% ex f&f m/o/m. At the first stage of production, prices rose 5.4% headline but .5% ex f&f m/o/m. With respect to market moving inflation data, tomorrow’s CPI will be more relevant.

Foreign purchases of longer term US assets totaled a net $40.7b in Sept, about $10b above forecasts. The main factor was $44.7b of net buying of Treasuries vs an increase of $28b in Aug. Foreigners were net sellers of govt agency bonds by $1.8b and corporate bonds by $2.9b (sellers of corporates for a 4th straight mo). They were net buyers of US stocks by $15.7b. US investors sent $15.5b into overseas stocks but sold $540mm of foreign bonds. Japan, the 2nd largest foreign holder of Treasuries, bought $20.3b more, mainland China, the biggest holder, bought a net $1.8b, Hong Kong bought $7.5b and the UK bought $22.4b (could be UK hedge funds or UK banks on the behalf of foreign central banks, etc…). Net-net, considering the continued weakness in the US$ in Sept, buyers still came out for Treasuries, the biggest asset class that sees foreign flows. The $64k question remains of course of when that money chooses other asset classes, if ever.

Oct IP rose .1%, .3% less than expected and is a slow down from the gains seen in the prior 3 months and the main reason is a 1.7% drop in motor/vehicle parts production which follows sharp gains seen in July thru Sept as auto plants ramped up again. There was also a .3% fall in computer/electronics production but that also follows gains in the prior 3 months. Mining production fell by .2%. Machinery production rose by .2% and utility output was up by 1.6%. Capacity Utilization was 70.7%, a .2% increase from Sept but .1% less than expected. It is at the highest level since Jan ’09 but remains well below the long term average of 80% and gives fuel to the output gap argument in keeping inflation pressures subdued. Bottom line, while inventory destocking continues, the inventory build over the past few months, outside of auto’s, remains lackluster but all we need is a slowdown in the rate of inventory declines in order to statistically boost GDP.

Roger Lowenstein, author of When Genius Failed and Origins of the Crash, is working on a new book on the bailouts and meltdown.

In his most recent Bloomberg column, Lowenstein looks at the current spate of flailing financial reforms. He notes that most of the proposed fixes are “incremental changes that don’t seem likely to prevent a future bubble.”

Here is his down and dirty overview of what caused the crisis; I cannot say his views differ from mine very much:

The crash exposed six serious problems:

No. 1: Mortgage regulation was too lax and in some cases nonexistent.

No. 2: Capital requirements for banks were too low.

No. 3: Trading in derivatives such as credit default swaps posed giant, unseen risks.

No. 4: Credit ratings on structured securities such as collateralized-debt obligations were deeply flawed.

No. 5: Bankers were moved to take on risk by excessive pay packages.

No. 6: The government’s response to the crash also created, or exacerbated, moral hazard. Markets now expect that big banks won’t be allowed to fail, weakening the incentives of investors to discipline big banks and keep them from piling up too many risky assets again. It’s time to end too big to fail by making it less palatable for banks to remain big.

Just about right . . .

>

Source:
Banking Fix Made Easy With Six Simple Steps
Roger Lowenstein
Bloomberg, Nov. 17 2009

http://www.bloomberg.com/apps/news?pid=20601039&sid=ag6XVCM_C.j4