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HomeSeptember 2009 Market Review
Posted by Larry Doyle on October 1st, 2009 9:31 AM |
I could wax poetic about the ebbs and flows of the various segments of the markets along with a variety of developments on and off Wall Street; however, in doing so I may detract from purely reading what the numbers are telling us. What do the numbers say? Much like last month, with the exception of the U.S. Dollar Index, every market segment once again increased in value. Wow!!
The dollar is clearly the ‘juice’ which is being used to drive an inordinate number of positive carry trades.
Are we merely supposed to enjoy the positive returns and assume they are a precursor to a brighter tomorrow? Not in my opinion. As I have been referencing, I believe we are not even a third of the way into running our ‘economic marathon,’ and thus prudence dictates we maintain our discipline and pace. Why do I feel this way? Our global banking system remains under pressure and has unrealized losses of $1.8 trillion. To this point, I wrote yesterday “When Is a $3.4 Trillion Loss Supposed to Be Good News?”:
A $3.4 trillion loss may be perceived as good news when it was previously projected to be $4 trillion. That said, when losses of this magnitude are buried in a mix of financial chicanery and accounting charades, the impact is not lessened but only extended.
How did the Financial Times characterize this IMF report and the state of global banking? The FT writes this morning:
The International Monetary Fund’s financial stability reports are losing their capacity to shock. This is a shame. . . . The shock factor may be gone, but sustaining a recovery will be no cakewalk.
Active traders may be excessively ebullient or despondent, depending on the daily swings in their profits or losses. I will enjoy the higher values in my monthly statements as they come in, but I am not changing my approach to increased discipline across all parts of my personal balance sheet. A balanced and well diversified portfolio with excess liquidity still strikes me as the best approach at this time.
Now, take a look at the numbers. Comments, questions always appreciated.
LD
Will Deflationary Forces Overwhelm Global Fiscal Stimulus?
Posted by Larry Doyle on September 28th, 2009 3:12 PM |
While Uncle Sam and his international brethren are doing everything they can to reflate the global economy, will the deflationary forces deeply embedded in the deleveraging process carry the day and the future? In doing so, will these deflationary forces usher in an economic dynamic not seen since the 1930s?
The analysis and review by market savants, media mavens, and government pundits is ultimately mere noise relative to the denouement of the question proffered above. Jeff Gundlach, of Trust Company of the West, has spoken his mind and believes deflation will ultimately weigh upon our economy and markets. Today I share with you Deflation Rising: Making the Case for a Lasting Deflationary Environment recently produced by Black Swan Trading. High five to loyal Sense on Cents reader Ben for sharing this report.
The professionals at Black Swan produce a thoroughly superb and comprehensive review of this critically important topic. I strongly encourage you to put this post in your “Save” box for further review as we navigate the economic landscape. The report is launched as follows:
“If Americans ever allow banks to control the issue of their currency, first by inflation and then by deflation, the banks will deprive the people of all property until their children will wake up homeless”
Thomas JeffersonUncle Sam, whom we’ve dubbed the “stimulator of last resort”, is doing all it can to create some inflation. Inflation creation, through the debasement of money, is one thing governments have proven historically they do quite well.
Inflation bails out creditors because it allows them to repay debt more cheaply in the future, paying back the nominal value of debt with currency that loses a substantial amount of real value.
There is no bigger creditor than government.
But that said, at the moment it seems governments are losing the battle of inflation, to deflation, despite pumping money into the market around the clock.
This report makes the case for deflation. In it we examine the powerful deflationary headwinds that could lock the US and global economy into years of deflationary pressures that are reminiscent of the lost years in Japan when they became locked in a deflationary bear hug.
The report puts forth a wealth of compelling evidence for the deflationary case. The evidence covers the following topics, complete with numerous graphs and analytics:
1. Relationship between gold and the U.S. Dollar
2. Growth in money supply
3. Review of decline in the Consumer Price Index
4. Lack of Velocity of Money
5. Increase in bank reserves
6. Decline in outstanding consumer credit
7. Decline in nonfinancial corporate business credit
8. Discretionary spending reaches 50-year low >>>the writers posit that consumption will be much more dependent on income than credit
9. Decline in personal income
10. Structural headwinds in global economy including:
— U.S. economic policies
— likelihood of asset bubble in China
— dynamics in the oil and food markets
After an exhaustive, but not exhausting, 22-page review, the writers make a compelling case that the lessons of The Lost Decade in Japan will now very likely be played out here in the United States. What plagued Japan during that decade and to a great extent even today….deflation.
Additionally, the buildup of leverage within our economy took place over a 20 year time frame with a few significant hiccups. To think that our economy will be able to delever and recover within a year or two is beyond naive. I would project this delevering, adaptation, and recovery process will take at least five years if not longer.
Whether you place yourself in the deflationary camp, the hyperinflationary camp, or somewhere in between, do yourself the favor of reviewing this report. In the process, you will be more educated and qualified to navigate the global economic landscape.
LD
September 26, 2009: Month-to-Date Review of the Markets
Posted by Larry Doyle on September 26th, 2009 9:49 AM |
Did the market put in a top this week? Is the Federal Reserve sending signs of taking its foot off the accelerator? Is the economy displaying an inability to gain traction? Will the G-20 communique make any real impact on our global financial system? Let’s review the market performance for the week and provide our month-to-date statistics while addressing the above questions. In the process, we can collectively ‘navigate the economic landscape,’ the mission of Sense on Cents. Let’s start our brisk Saturday morning hike with a quick review of the economic data which I deem most important and impactful on the markets:
Economic Data
>Leading economic indicators rose .6 with July’s reading revised upward from .6 to .9 . . . we put this in the net plus category . . .
>Durable Goods Orders posted a -2.4% reading vs. a consensus expectation of a 1% gain. The bulk of the decline was in transportation which is further indication that the Cash for Clunkers program pulled demand forward only to be followed by a big dropoff . . . a real negative
>New Home Sales also disappointed. The WSJ highlights,
Momentum in the housing market has slowed, indicated by yesterday’s dip in existing home sales and by today’s weaker-than-expected report on new home sales. New home sales edged 0.7 percent higher in August to a 429,000 annual rate that compares unfavorably with expectations for 445,000. August’s level would have been below July’s level were it not for a downward revision with July now reading 426,000 vs. an initial 433,000.
How did the markets handle the Fed, the data, and technical flows? Let’s continue navigating. The figures I provide are the weekly close and the month-to-date returns on a percentage basis.
Equities
DJIA: 9665, +1.8%
Nasdaq: 2091, +4.1%
S&P 500: 1044, +2.3%
MSCI Emerging Mkt Index: 908, +6.6%
DJ Global ex U.S.: 193.0, +3.9%
Commentary: equities on average declined by 2% on the week. This decline largely retraces the prior week’s advancement. In the process, have we put in a top in the market, at least for the short term? I believe we have and believe that top occurred on Wednesday after the Federal Reserve released its policy statement. I highlighted the price action of Wednesday in my commentary, “Equity Market Key Reversal on 9/23/09.”
What did the market see in reading through the Fed’s statement? Hints that the Fed knows it needs to lessen the flow of liquidity into the markets. Also, recall that the market price action for September had been a virtual straight line higher. I highlighted that fact a week ago. If, in fact, we just put in a short term top in the market, I would project that target support levels for the DJIA would initially be 9000-9100 (a 24% retracement of the March to September move of 6500 to 9900) and then 8600 (a 38% retracement). We shall see, but those levels represent key Fibonacci Retracement levels.
Bonds/Interest Rates
2yr Treasury: .99%, an increase of 1 basis point or .01%
10yr Treasury: 3.32%, a decrease of 9 basis points
This flattening of the yield curve is typically an indication that the market believes the Fed is preparing some sort of tightening. While the Fed is nowhere close to actually raising its Fed Funds Rate, we know its quantitative easing program and certain other liquidity measures have wound down and will continue to wind down over the next 1-6 months.
COY (High Yield ETF): 6.42, +6.1%
FMY (Mortgage ETF): 17.62, +1.3%
ITE (Government ETF): 57.86, +.1%
NXR (Municipal ETF): 14.27, +1.3%
Commentary: the market continues to easily absorb any and all government bond supply. I assess that development as a growing concern of deflationary pressures building in the market. Additionally, an overwhelming percentage of investor funds are going into bonds. I would be very careful about adding exposure to lower credit rated parts of the market given the outperformance of those funds to date (for example, high yield bond funds are up approximately 50% on the year). If, in fact, the economy is battling deflationary pressures (and it is) and the Fed is unable to keep ‘the pedal to the metal,’ then equities and other risk assets should retrace while Treasury bonds will appreciate.
U.S. Dollar
$/Yen: 89.85 vs. 93.11 at August month end
Euro/Dollar: 1.4670 vs. 1.4338 at August month end
U.S. Dollar Index: 76.81 vs. 78.14
Commentary: the overall U.S. Dollar Index increased by approximately .45% on the week. I do think there is a high negative correlation between the dollar index and our equity markets (dollar improves, equities weaken) as a large number of hedge funds and market speculators have sold dollars to buy global equities, a form of a ‘positive carry‘ trade. I would encourage people to track the U.S. Dollar Index closely as a good sign as to the near term direction of the equity markets.
I should highlight that the dollar did continue to weaken vs. the Japanese yen. MarketWatch reports:
The dollar remained down more than 1% versus the Japanese yen after Japan’s Finance Minister Hirohisa Fujii said he opposes intervening in the currency markets to curb the rise in the yen, according to media reports.
I feel compelled to repeat my statement of the last few weeks:
This ‘positive carry’ trade is nothing more than implementing leverage. Do not confuse leverage with brains when a market is rising because as I said the other day, leverage is death when that bull becomes a bear. As I think of market developments, I am convinced that this ultimate unwind of leverage trades currently being implemented is Jeff Gundlach’s reasoning for being bullish on the dollar. How will this work? Investors will look to exit their risk based investments (emerging market stocks and the like) and buy back the dollars which they have borrowed. In the process, the dollar may rally significantly. The timing of this unwind is the critical question.
Commodities
Oil: $66.09/barrel vs. $69.93 at August month end
Gold: $992.4/oz. vs. $952.4 at August month end
DJ-UBS Commodity Index: 123.37 vs. 125.73 at August month end
Commentary: I view this segment of the market to be the STRONGEST indicator of the global economic pulse. Additionally, the price action in commodities is likely a strong indication of the ‘positive carry’ trade put on by hedge funds and other traders.
The overall commodity index is DOWN 2% on the month. What are equity markets, especially emerging markets, doing up in the face of this price action? Great question.
Additionally, the Baltic Dry Index moved lower this week by approximately 4%. I view that movement as reason for concern. Can global equities in general and commodities specifically increase in value if the major indicator of global trade, that being the BDI (Baltic Dry Index), is in a downtrend? I think not.
Summary/Conclusion
With September almost in the rear view mirror and a number of market participants having salvaged very respectable returns on a year-to-date basis, I believe many fund managers and other market participants will look to lock in profits and returns and mitigate risk positions. What does that mean? I think cash will exit some of the riskier parts of the market and look for a safe harbor.
While the global government wizards meeting in Pittsburgh at the G-20 may have ‘smiled for the cameras,’ the released communique has ZERO enforcement capabilities and thus, I continue to maintain:
The overriding fact remains that the ‘Uncle Sam economy’ is continuing to adapt to the very changed nature of our underlying market and economic dynamics. That dynamic in which the securitization of assets remains a distant memory will force credit to remain tight. Consumers need to adapt accordingly.
Thanks for your support. If you like what you see here, please subscribe via e-mail, Twitter, Facebook, or an RSS feed.
Thoughts, comments, questions always appreciated.
Have a great day and weekend.
LD
Equity Market Key Reversal on 9/23/09
Posted by Larry Doyle on September 23rd, 2009 9:16 PM |
I believe Wednesday’s equity price action was very significant. Many market participants believe the market is trading much more on technical analysis than fundamental valuations. I put myself in that camp. So, why was Wednesday’s price action so significant? We experienced a very rare occurrence, technically known as a key reversal, an outside day, or outside reversal. Each of those terms means the same thing.
In layman’s terms, these key reversals are indicators of a change in the trendline of the market. In an attempt to simplify how a key reversal works, one needs to analyze the trading range of an index or security relative to the prior day’s trading range. If the current day’s trading range incorporates a “higher high” than the previous day, a “lower low” than the previous day, and a “lower close” than the previous day, then the market will have experienced a key reversal. We witnessed that very price action on Wednesday. Allow me to display this price action for a few major market equity indices:
DJIA
on 9/22 High 9843 Low 9772 Close 9830
on 9/23 High 9918 Low 9741 Close 9748
S&P 500
on 9/22 High 1074 Low 1066 Close 1072
on 9/23 High 1080 Low 1060 Close 1061
Nasdaq
on 9/22 High 2151 Low 2137 Close 2146
on 9/23 High 2168 Low 2130 Close 2131
This key reversal is not a guarantee of a continued decline in prices (a key reversal could also be bullish if it made a lower low, a higher high, and a higher close), but it is a strong indicator of such. I am not currently a day trader, but I have fond memories of my trading days on Wall Street using this technical indicator.
Let’s monitor the price action and see if it proves to hold true once again.
Thoughts, comments, questions always appreciated. Don’t be bashful.
LD
September 19, 2009: Month to Date Review of the Markets
Posted by Larry Doyle on September 19th, 2009 6:46 AM |
The market trends remain very much in place. Assets across virtually every market segment continue to rise in value. Are we supposed to merely “close our eyes” and be thankful? Never. Market participants and investors should always want to know what is driving the markets and, more importantly, the economy. On that note, let’s read the market ‘tea leaves’ in terms of the month to date performance. I will offer commentary as I see it and together we can continue to ‘navigate the economic landscape.’
Equities
DJIA: 9820, +3.4%
Nasdaq: 2133, +6.2%
S&P 500: 1068, +4.7%
MSCI Emerging Mkt Index: 919, +7.8%
DJ Global ex U.S.: 196.5, +5.8%
Commentary: equities on average added another 2% positive returns to their monthly performance. Markets had nary a pullback during the week. While positive price action is nice to see for investors, the fact that there is not a ‘backing and filling’ process in the price action is troubling. The backing and filling process is an indication of good two-way flow in which new buyers are replacing sellers exiting the market. Additionally, that price action serves as a foundation for the market. A market in which prices move higher in a virtual straight line has not developed the support base. This chart highlights the price action for the last two months. One can see that the September price action has been a straight line, adding 500 points to the DJIA. Markets typically do not track in that fashion. That said, the market is the market.
Bonds/Interest Rates
2yr Treasury: 1.00%, an increase of 2 basis points or .02%
10yr Treasury: 3.47%, an increase of 6 basis points
COY (High Yield ETF): 6.35, +4.9%
FMY (Mortgage ETF): 17.53, +.69%
ITE (Government ETF): 57.38, -.7%
NXR (Municipal ETF): 14.74, +4.6%
Commentary: government bonds gave a little bit of ground this week, but still maintain an overall firm tone. We do have large monthly auctions (2yr, 5yr, 7yr) next week so Wall Street would like to back the market off in an attempt to buy the auctions a little cheaper. The price action in the U.S. Treasury market still strikes me that there is a growing camp that believes we will experience asset deflation. That phenomena would support bonds, but I do not see how it could possibly support equities. This debate is not receiving as much attention as 6 months ago . . . but it should!
The riskier parts of the bond market generally treaded water this week. That fact is a positive, in light of the positive trends in equities. Typically, if equities are trending higher, then bonds would head lower due to concerns of higher inflation. The fact that bonds in general are firm plays into the point I highlighted above.
The conundrum between the equity markets and bond markets continues.
U.S. Dollar
$/Yen: 91.38 vs 93.11 at August month end
Euro/Dollar: 1.4702 vs 1.4338 at August month end
U.S. Dollar Index: 76.45 vs 78.14
Commentary: the dollar strengthened by approximately 1% vs the Japanese yen this week, but overall continued its decline vs the Euro and other major currencies. The greenback closed lower by approximately .5% on the week and is now down 2.2% for the month.
The silence from Washington on the dollar weakness remains deafening. The Fed’s charge is ‘price stability’ and to ‘grow the economy.’ The Fed has clearly failed to achieve its goals and is now faced with pursuing a weak dollar policy to promote inflation. This seeming necessity is a very dangerous game. Why? Other countries may similarly look to devalue their currency in order to support their exports. I am hearing this concern coming from Japan and we see that as the Yen weakened vs. the greenback this week.
If we do get some dollar strength, look for a selloff in our equity markets as clearly a large number of funds have entered into the dollar carry trade in which they have sold dollars and used the proceeds to buy global equities.
I feel compelled to repeat my statement from last week. This ‘positive carry’ trade is nothing more than implementing leverage. Do not confuse leverage with brains when a market is rising because as I said the other day, leverage is death when that bull becomes a bear. As I think of market developments, I am convinced that this ultimate unwind of leverage trades currently being implemented is Jeff Gundlach’s reasoning for being bullish on the dollar. How will this work? Investors will look to exit their risk based investments (emerging market stocks and the like) and buy back the dollars which they have borrowed. In the process, the dollar may rally significantly. The timing of this unwind is the critical question.
Commodities
Oil: $71.85/barrel vs $69.93 at August month end
Gold: $1008.5/oz. vs $952.4 at August month end
DJ-UBS Commodity Index: 127.5 vs 125.73 at August month end
Commentary: gold largely marched in place this week. There was an announcement that the IMF may look to sell upwards of $13 billion of its gold reserves. The fact that the gold market took that news without selling off is fairly impressive. It is likely an indication that global central banks would like the gold as they look to diversify away from the U.S. dollar.
Commodities overall did have a decent week and the Commodity Index is now up approximately 1.5% on the month. Given the strength in equities, commodities have actually been a recent laggard. The Baltic Dry Index continues to run in place. I view that as reason for concern. How can global equities in general and commodities specifically continue to increase in value if the major indicator of global trade, that being the BDI (Baltic Dry Index), is not trending higher?
Summary/Conclusion
Economic data seem to indicate hints of strength, but the data comes with major qualifications. For example, the perceived strength in retail sales was largely driven by the ‘pull demand forward’ benefit of the Cash for Clunkers program. Housing starts were positive, but it was focused on multi-family units while the much larger component within this data — that being single family units — actually declined. Unemployment claims declined, but unemployment actually increased in 27 states.
The overriding fact remains that the ‘Uncle Sam economy’ is continuing to adapt to the very changed nature of our underlying market and economic dynamics. That dynamic in which the securitization of assets remains a distant memory will force credit to remain tight. Consumers need to adapt accordingly.
The markets are discounting a more robust economic recovery than I see on our horizon. That said, ‘the market is the market.’
Thanks for your support. If you like what you see here, please subscribe via e-mail, Twitter, Facebook, or an RSS feed.
Thoughts, comments, questions always appreciated.
Have a great day and weekend.
LD
September 12, 2009: Month to Date Review of Markets
Posted by Larry Doyle on September 12th, 2009 8:17 AM |
Investors continue to race to put cash to work. Across virtually every market segment, asset values continued to increase. This is great. Or is it? Do the markets reflect a recovering economy or merely excess liquidity? Do the markets foresee a recovery in employment, housing, and personal consumption? The wizards in Washington, in true political fashion, are declaring victory in terms of rescuing the economy. Is that premature? Let’s read the market’s tea leaves for September’s month-to-date returns…
Equities
DJIA: 9605, +1.1%
Nasdaq: 2081, +3.6%
S&P 500: 1043, +2.2%
MSCI Emerging Mkt Index: 894, 4.9% !!!
DJ Global ex U.S.: 193.8, +4.4% !!!
Commentary: Clearly, the real action is overseas. The U.S. markets are merely riding the coattails of the emerging markets and other developed international markets. Is the rally overseas sustainable? Are these markets forecasting a global economic recovery? Why hasn’t the Baltic Dry Index rebounded?
Bonds/Interest Rates
2yr Treasury: .91%, a decline of 7 basis points (1 basis point is .01%) Remember, lower rates implies higher bond prices.
10yr Treasury: 3.35%, a decline of 6 basis points
COY (High Yield ETF): 6.35, +4.9% !!!
FMY (Mortgage ETF): 17.52, .69%
ITE (Government ETF): 57.85, .12%
NXR (Municipal ETF): 14.07, 0.0%
Commentary: The fact that U.S. Treasury rates continued to decline this week even in the face of $70 billion of 3yr, 10yr, and 30yr issuance indicates to me:
>> investors view the U.S. economy as weak
>> investors do not see inflation on the horizon. In fact, could the market be fearful of disinflation if not outright deflation? I am starting to think so. If that is the case, can we have disinflation domestically in the context of a global economic rebound? The cross currents and price action between the bond markets and equity markets presents a real conundrum.
The eye popping returns within the high yield space are highly correlated with those in the emerging market space. I would caution people before adding exposure in those segments.
U.S. Dollar
$/Yen: 90.65 vs 93.11 at August month end
Euro/Dollar: 1.4582 vs 1.4338 at August month end
U.S. Dollar Index: 76.72 vs 78.14
Commentary: The decline in the value of the U.S. greenback by approximately 2% reminds me of the overused Wall Street phrase, ‘squeal like a pig…’
The fact is Big Ben Bernanke is not only funding the domestic economy with the Fed Funds rate at 0-.25%, he is also funding the spike in a number of markets around the world. How so? Investors around the world have entered and, given this week’s price action, continue to enter into the ‘positive carry‘ trade in which they borrow U.S. dollars to purchase higher risk assets.
This ‘positive carry’ trade was fed by the Japanese yen throughout the ’90s given the exceptionally low rates in that country.
Make no mistake, though, this ‘positive carry’ trade is nothing more than implementing leverage. Do not confuse leverage with brains when a market is rising because as I said the other day, leverage is death when that bull becomes a bear. As I think of market developments, I am convinced that this ultimate unwind of leverage trades currently being implemented is Jeff Gundlach’s reasoning for being bullish on the dollar. How will this work? Investors will look to exit their risk based investments (emerging market stocks and the like) and buy back the dollars which they have borrowed. In the process, the dollar may rally significantly. The timing of this unwind is the critical question.
Commodities
Oil: $69.12/barrel vs $69.93 at August month end
Gold: $1007.6/oz. vs $952.4 at August month end
DJ-UBS Commodity Index: 123.792 vs 125.73 at month end
Commentary: How can we experience a global economic recovery without further improvement in commodity prices? The move in gold is a safe harbor trade against the weak dollar. Please see my comments above regarding the Baltic Dry Index.
Summary/Conclusion
While there are a few indications of economic improvement, overall I view the disconnect between the markets and the economy to remain significant. I am more in the camp that market returns are more reflective of ‘fast’ or ‘hot’ money chasing further price appreciation with an eye to exit. This price action can and will force participants into the casino, but please be aware ‘the road to hell is paved with positive carry.’
Thoughts, comments, questions always appreciated.
LD
Give Me a Hard Eight on AIG, Freddie, Fannie, and Citi
Posted by Larry Doyle on September 1st, 2009 3:35 PM |
Want to play craps? How about a little roulette? Black jack? Or should we merely play the slots?
On the topic of casinos and gambling, I hope traders, investors, and the general public fully appreciate the extent to which our wards of the state (AIG, Freddie, Fannie, and Citi) have dominated equity trading volumes over the last few weeks. On many days, these stocks have represented upwards of 25% of the overall volume.
I addressed this point in my August 2009 Market Review and wrote:
A large percentage of market volume has centered on those stocks in which Uncle Sam is heavily involved (Citi, AIG, BofA, Freddie, Fannie). I view these particular stocks as very speculative in nature. That said, there are large short bases in these stocks. The shorts were punished during the month. The stocks did trade off significantly on the last day of the month.
Are we supposed to make assessments of our future economic health and overall market performance based upon stocks in which Uncle Sam holds anywhere from a 40-80% equity stake? I think not. I view trading these stocks as pure gambling, not investing. I challenge any analyst who would say otherwise.
What sector of the market is leading the overall market lower today? Financials!! Which companies in particular? Our friendly Market Data page from The Wall Street Journal highlights the following:
So there you have it, 6 of the top 8 most active stocks being traded today are wards of the state, or a close cousin, that being CIT. Ford is a fully independent entity. Many view General Electric as an extension of the government politically, while the company itself has clearly benefited from government-backed financing.
Don’t take my word for the speculative nature of AIG, Citi, Freddie, and Fannie. The Wall Street Journal highlights the same in writing, Financials Lead Broad Selloff. Specifically the WSJ asserts:
>>Among the weakest was American International Group, which sank 17%. Sanford C. Bernstein & Co. downgraded AIG to underperform from market perform, estimating that if the government’s support and other goodwill were discounted, AIG would have a negative book value of $6.4 billion.
>>Mortgage lenders Fannie Mae and Freddie Mac also traded lower, falling more than 15% after FBR Capital Markets analyst Paul Miller wrote to clients that “[t]here is no fundamental value remaining” in the companies.
I ask you how much money you want to invest on a long term basis in companies which have negative book value or no fundamental value?
The first rule of gambling is ‘only play with money you can afford to lose.’ The same is to be said for money put into these companies which just so happen to be dominating the overall market volume.
Come on, brother, give me a hard eight!!
LD
Buy the Rumor, Sell the News
Posted by Larry Doyle on September 1st, 2009 11:48 AM |
Why does a market seem to improve prior to the actual reporting of positive economic news only to fade when the news is reported? Welcome to the world of trading and investing in which market participants will often ‘buy the rumor’ and ‘sell the news.’
This phenomena is, in fact, the perfect description for today’s price action.
Prior to the market open this morning, equity futures were indicating a slightly weaker opening. In fact, the equity markets did open in slightly positive territory. At 10am, we received economic data which collectively would be viewed in a VERY POSITIVE light. This data includes:
1. Institute of Supply Management Manufacturing Index rose to 52.9 versus last month’s reading of 48.9 and an expectation of 50.5. This month’s reading of above 50 is the first indication of growth in manufacturing in a year and a half. Manufacturing represents approximately 12% of our economy. All other things being equal, this report is an indication that our recession is ending or actually has ended.
In the spirit of full disclosure, the employment component of the ISM Index showed only marginal improvement. This release continues to highlight that an economic recovery will not be robust in terms of improved job prospects and overall employment.
Another somewhat disturbing component of the ISM Index entails Prices Paid. In a big surprise, this release details that Prices Paid rose to a 65 level from 55 last month and against an expectation of 57.8. The increase in prices paid will further pressure profit margins and may be an indication that an increase in inflation is closer than we may think.
Despite, the employment and price components, a return to growth in manufacturing is a critical development in bringing a semblance of stability to our economy.
2. Pending Home Sales also generated a surprisingly strong 3.2% increase versus an expectation of a 1.5% increase. Be mindful, though, that this report had generated a 3.6% increase in July. While analysts will portray this report as a positive development overall, I continue to believe that the housing sector of our economy needs to be viewed primarily through the prism of delinquencies and defaults. Unless and until those statistics start to decline, housing will not be a strong indication of our overall economic health.
3. Construction spending shows little improvement. Against an expectation of a flat reading, the report came in at -.2%. Additionally, the prior month’s report was revised down from a .3% reading to only .1%.
4. Deal activity today is focused on eBay’s sales of its Skype internet phone unit for $2.75 billion. That figure is a very strong valuation for this business.
Despite this generally very positive news, in the last 45 minutes while I have been writing this commentary, the equity markets have had a major selloff and are now down more than 1.5%!! WHY??
Well, let’s be mindful that the economic fundamentals have been totally disconnected from market price action and overall valuations for a protracted period.
Please check my commentary from the August 2009 Market Review in which I wrote:
While it has been foolhardy and painful to fight the Fed and the massive liquidity pumped into the system, I see some real signals in a variety of sectors that this rally is running out of steam. The markets have not truly had a meaningful correction in the last 6 months. Are we due for one? I personally think it would be very beneficial. Why? The disconnect between Wall Street and Main Street has never been greater. I do not view that gap as healthy.
Call me crazy, but I project September will have a 5-7% retraction across the major equity market averages based on reading the tea leaves as highlighted in this review.
What do you think?
One day nor merely a few hours does not a market call make, but I do think the signs we are seeing in the emerging markets and commodity markets are real warning signals that we ignore at our peril.
LD
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September Month to Date Review of Markets
Posted by Larry Doyle on September 5th, 2009 7:32 AM |
In this spirit, I plan on providing a month-to-date review of market stats along with appropriate commentary on news of note from the prior week. I hope readers find this review beneficial. Feedback always welcome.
Equities (Friday 9/04/09 close, month-to-date return)
DJIA: 9441, -.6%
Nasdaq: 2019, +.5%
S&P 500: 1016, -.4%
MSCI Emerging Mkt Index: 844, 0.0%
DJ Global ex U.S.: 184, +3.3%
>> Commentary: after an initial selloff early in the week, the markets rallied on Thursday and Friday, primarily after the employment report. I place a heavy discount on this week’s trading activity given the very heavy vacation calendar and long holiday weekend. I remain in the camp that the equity markets will correct 5 to 7% from current levels.
Bonds/Interest Rates
2yr Treasury: .93%, down 5 basis points (1 basis point is .01%)
10yr Treasury: 3.44%, up 3 basis points
COY (High Yield ETF): 6.14, +1.5%
FMY (Mortgage ETF): 17.31, -.5%
ITE (Government ETF): 57.18, -1.0%
NXR (Municipal ETF): 14.09, 0.0%
>> Commentary: while interest rates gyrated during the week, the biggest development was the yield curve steepening. Why? What is going on? Two things. There is definitely an increased nervousness about the economic recovery. This anxiety is causing more investors to seek the safety of short maturity U.S. Treasuries. Additionally, the market has its regular 3yr, 10yr, and 30yr auctions next week. In the face of that supply, the street is trying to back up rates on the longer maturity paper (10yr and 30yr) to take it down at a more attractive rate.
U.S. Dollar
$/Yen: 93.02 vs 93.11 at August month end
Euro/Dollar: 1.4304 vs 1.4338 at August month end
U.S. Dollar Index: 78.20 vs 78.14
>> Commentary: minor moves up and down
Commodities
Oil: $67.79/barrel vs $69.93 at August month end
Gold: $996.1/oz. vs $952.4 at August month end
DJ-UBS Commodity Index: 122.93 vs 125.73 at month end
>> Commentary: in my opinion, the moves in commodities represent the strongest indication of global economic activity. The continued downtrend in oil specifically and commodities in general signifies to me a slowing in the global economy. Where is the money going? Gold. Why? Investors are getting nervous and gold is a safe haven.
I hope readers enjoy these insights as much as I enjoy providing them. Please share your thoughts and comments, especially those who may share differing opinions. Honest debate is good for all.
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LD
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