Posts filed under “Think Tank”
We still maintain that one should not over-think things right now. This is a summer rally on very light volume in a questionable, at best, economic environment. And we are in the peak of vacation season.
Yesterday, the usual late SPU gaming manufactured a rally. Sources said JPM bought 500 SPUs into the NYSE close. This is equivalent to 1.25m SPY shares.
The dollar continued its losing ways as Chinese officials appeared in DC to hector US officials about the rapidly diminishing value of their US government bonds, agencies and other dollar-denominated assets.
Historians will look back at Bernanke’s decision in Q4 2008 to give European nations about $500B via currency swaps as one of the biggest Fed follies of all time. The deflationary scare of October & November 2008 created panic buying in the dollar and US bonds.
Instead of taking advantage of the transitory condition, the Fed pumped even more Old Maid dollars into European hands. The inevitable flight from the Old Maids is not only pushing the dollar lower, it’s also harming US bonds and agencies. China is beyond irate and is expressing, once again, its concerns.
The dollar flight is a principal reason for the four-month equity rally. However, if or when the linear relationship, and linear thinking, abruptly ends, markets will stage a violent adjustment.
Bonds continued their descent on the dollar and the humongous Treasury auctions that will procure $235B via various instruments.
It will be interesting to see how bonds react after the two-day meeting of Chinese and US officials ends today. There could be the usual trading rally that appears at the end of auctions. But US bonds, like the dollar, is an even more odious Old Maid than the dollar – because the buck has no maturity.
For many years, even during the housing peak and rollover phase, New Home Sales have appeared jiggy and have been spun even more jiggy even though the metric represents contracts, not closings.
We remarked during the housing peak that New Home Sales were almost half of Housing Starts; and basic math dictated that there would be a huge inventory and housing bust in the near future.
Category: Think Tank
The July Conference Board Consumer Confidence # was 46.6, a touch weaker than the consensus of 49 and down from 49.3 in June. Both the Present Situation and Expectations fell. The answers to the labor market questions weighed down the # and reflects a still weakening environment. Those that said jobs were Plentiful fell almost…Read More
The May S&P/CaseShiller 20 city home price index fell 17.06% y/o/y, better than the forecasted drop of 17.9% and its the smallest fall since Aug ’08. The overall index had its first uptick since July ’06 (the month of its record high) m/o/m but is still down 32% from that record high. Y/o/Y declines continue…Read More
This week I offer something unusual for outside the Box, in that I agree on almost all points with my friend David Rosenberg, except he tells it so much better than your humble analyst. David was the former Chief Economist at the former Merrill Lynch (ah, Mother Merrill, we barely knew ye.) and is now Chief Economist at Gluskin Sheff + Associates Inc., which is one of Canada’s pre-eminent wealth management firms. Founded in 1984, they manage $4.4 billion. (For those who wonder, David left NYS to return home to Toronto. Much shorter commute time.) David looks at the recent stock market run-up, why he likes corporate bonds better than stocks, what is lagging with the consumer and a lot more. It is a very pithy read.
Have a good week, I am off to a beach in a few days, but there will be an e-letter this Friday. You are in good hands.
Your looking forward to reading with drinks with little umbrellas analyst,
John Mauldin, Editor
Outside the Box
Breakfast with Dave
by David A. Rosenberg
The Dow is coming off its best weekly performance since March 2000, and if memory serves us correctly, that month was marking the beginning of the end of the great bull market at that time. While the bear market rally has been of 1930 proportions, from our lens, that is what it remains and what is lacking in this extremely flashy runup in equity prices are: (i) leadership, (ii) quality, and (iii) volume. There were some very useful statistics in Barron’s (despite the fact that the headline in the ‘The Trader’ column is Why the Rally Should Keep Rolling … for Now):
- The 50 smallest stocks have rebounded 17.2% from their nearby July 10th lows, outperforming the largest 50 stocks by 750 basis points.
- The 50 most shorted stocks have rallied 17.6%, outperforming the 50 least shorted stocks by 880 basis points (over the same time frame).
- The 50 stocks with the lowest analyst ratings have outperformed the 50 with the highest ratings by 380 basis points.
- 85% of the market has already broken above their 50-day moving averages, which in some sense highlights an overbought market, but the other three factoids still attest to a low-quality rally, which is best left for traders and speculators. As tempting as it is to jump in, history is replete with examples of these sorts of short-covering rallies ending very quickly and with no advance notice from analysts, strategists or economists for that matter.
Let’s put aside the conventional wisdom that the stock market puts in its fundamental bottom 3-6 months ahead of the recession ending; it actually bottoms ahead of the economic recovery. That was the lesson of 2002 — recessions can end, but without a recovery there can be no sustainable bull market, though hopes can certainly bring on bouts of euphoric behaviour as we saw in the opening months of 2002 when the Nasdaq surged 45% and as we are seeing currently in the major averages. Japan is another great example. Its economy was out of recession 80% of the time in the 1990s and yet the lack of any sustainable recovery was largely behind its secular bear market. For a great reality check on the situation, have a read of Henry Kaufman’s piece on page 37 of Barron’s (A Long Road to Recovery). To wit:
“Some experts also expect the economy to get a boost from business inventory restocking. Maybe so, but most likely as a one-time event. Firms take on inventory if demand rises, if they expect higher prices and if they expect bottlenecks in the supply chain. But excess capacity is high, and there are no bottlenecks.”
We also believe that the current edition of BusinessWeek is a must-read — there were lots of good stuff in there this weekend, some of it following in Mr. Kaufman’s footsteps (page 14 — A Second Half Recovery Could be Fleeting). To wit:
“Will the upturn last? The question arises because the early stage of the recovery is going to be production-led, not demand-led … to keep the production rebound — and the recovery — going into 2010, overall spending will have to pick up, and that’s the big uncertainty given the headwinds facing consumers.”
There is no doubt that inventories have been pared back over the past four quarters at a record rate, and that the ISM customer inventory index is running at extremely tight levels. That said, the NFIB inventory plan index remains very weak, so what we have contributing to GDP in the third quarter is a mathematical boost to the economy from a lower rate of destocking; much of this in the auto sector. To actually move towards a sustainable inventory cycle, businesses will have to see final sales revive. What businesses have done is essentially recognize that the secular credit expansion has moved into reverse and the process of deleveraging in the consumer and financial sectors is ongoing. So, what companies have done in their re-assessments is to re-align their output schedules, order books and staffing requirements in the context that there will be a whole lot less credit to support any given level of production in the future.
What is very likely going to be missing going forward is the consumer because while it is the “back end” of the economy that helps bring recessions to an end as inventory withdrawal subsides, it is the “front end” that causes the expansion to endure — in normal cycles, that is. Historically, consumers end up adding 3.5 percentage points to real GDP growth in the first year of an economic renewal. As the economic editorial in BusinessWeek puts it, “this time, that’s most likely impossible.”
Category: Think Tank
It is again no coincidence that US administration officials are wooing the Chinese during a week when the Treasury needs to sell more than $200b of debt. Any sell side Wall Street firm would love to have these sales people. Making their thoughts heard, a Chinese official said “we are concerned about the security of…Read More
Good Evening: As they have so many times in recent weeks, U.S. stocks were able to overcome some early bumpiness to finish higher on the day. Some earnings disappointments were responsible for this morning’s profit taking, but stronger sales of new homes powered the home building and financial sectors enough to lift the averages into…Read More
The 20 year TIPS auction was mixed as the yield was almost 2 bps above where it was trading just prior but the bid to cover at 2.27 was the highest since this product was introduced in July ’04. The average has been around 1.80. The level of indirect bidders totaled 47.8% vs the average…Read More
Earlier this year, I had the privilege of participating in a discussion at American Institute for Economic Research on CDS with Martin Mayer, Walker Todd, David Michaels, Chief Financial Officer, AIER; Arthur Kimball-Stanley, a student at Boston College School of Law known for his research on CDS and insurance; Patricia McCoy of the University of Connecticut School of Law, and a number of other colleagues.
Below are Martin’s notes for the event where he makes some telling points about CDS, the nature of markets and life in general, which we published today with his permission. You may read our comment on CDS, “White Swans and Credit Default Swaps,” in today’s issue of The Institutional Risk Analyst by clicking here.
By Martin Mayer
Let me open with a large thought you can carry with you when you leave. Note how we are no longer being told that the chairman of the Federal Reserve is the second most powerful man in America. Why do you think that is true?
One of the truly awful moments of my time in this business was the early evening of December 9, 1982, an incident not in any of the histories but highly revelatory. What happened that evening was that Banco do Brasil failed at CHIPS (the Clearing House Interbank Payments System). Neither National City Bank nor Chemical, which represented Banco d Brasil in New York, was willing to pony up the $300-plus million the Brazilians couldn’t find. So they kept the window open until midnight, while the Fed worked its necromancy on its member banks and the money was found.
Subsequent examination revealed that after the Mexican collapse the previous summer, Banco do Brasil had found it increasingly difficult to roll over its loans, and had steadily switched a higher and higher share of its borrowings out of the conventional lending and borrowing market and into the overnight infrastructure market. For more than six months, the Brazilians had increased the size of its overnight position, until somebody at National City noticed and said, No more. Read More
June New Home sales, a measure of contract signings, totaled 384k annualized, 32k more than expected and up from a revised 346k in May. The federal $8,000 tax credit for 1st time buyers and the $10,000 California tax credit for new homes are certainly helping (sales in the West rose 23% m/o/m). Months supply fell…Read More