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HomeAugust 2009 Market Review
Posted by Larry Doyle on August 31st, 2009 9:28 PM |
August represents the sixth month in a row in which the equity markets have posted positive returns. Has the rally been built upon a solid economic foundation? Does the rally have even further to run? Is it too late to get in? Should investors be more cautious at these levels?
What do the numbers on Wall Street mean for people on Main Street? How are the powers that be in Washington responding to the markets? What do we learn from international and emerging markets?
Let’s review the monthly performance, look beyond the numbers, and project what may lie ahead.
Equities
Unlike the explosive performance in July (equities up 8-10%), the market had a much more subdued performance in August. Be mindful that August is the heaviest vacation month for market participants. Over and above that, total volume in the equity markets has been rather light. 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.
I am concerned about the equity markets going forward. Why? What sector has led the equity markets overall? Emerging markets, specifically China. What is happening in those market segments? China sold off close to 6% on the last day of the month and is down over 20% from its high. That decline is technically termed a ‘bear market.’ Analysts I respect view China’s market as an asset bubble. Emerging markets overall have had an unbelievable run but appear to be losing momentum as both the U.S. markets and developed markets outperformed the emerging markets this month. What drives the emerging markets? Primarily the exporting of commodities. Let’s review that segment.
Commodities
The DJ-UBS Commodity Index is also showing signs of losing momentum. In fact, the index was down -.6% for the month while it is off a full 4-5% from the highs seen in July. While oil is approximately 7% off its highs, natural gas had a significant decline this month (down approximately 30%) and corn also sold off hard early in the month (down approximately 10%) before stabilizing.
The Baltic Dry Index is a good indicator of activity in the commodity space and as a link to activity in the emerging markets, especially China. What does the trend line on the BDI look like? Not very good. The BDI closed today at 2686, down approximately 20% from the highs seen in July.
Interest Rates/Bonds
Ben Bernanke announced in August that the Fed will leave the Fed Funds rate unchanged at a range of 0-.25% for an extended period. There is little doubt that Ben knows there remain major hurdles on the economic landscape. Clearly, both Bernanke and Geithner view improved financial markets and an improved financial industry as a pre-condition to a healthy economic recovery. Against this backdrop, U.S. Treasury debt rallied while other sectors of the bond market added marginally positive returns.
Does it make sense that both equities and bonds would rally in sync? No, but equity and bond markets both continue to trade more on technicals (that is, excess liquidity provided by Big Ben and his friend Uncle Sam) than pure fundamental value.
U.S. Dollar
The U.S. dollar continues to gradually erode in value. Is this any surprise? Many major trading partners of the U.S., from China to Japan to France, are calling for lessened dependence on the greenback as the international reserve currency.
Economy
While the industrial segment of our economy appears to be stabilizing, from my perspective the consumer (remember 70% of our economy is tied to the consumer) remains severely stressed. Delinquencies and defaults continue to run at a record pace across almost every form of debt (mortgages, credit cards).
The next shoe to drop is in the commercial real estate space.
I particularly like Sense on Cents‘ Economic All-Star Bob Rodriguez’s characterization of our economy. Bob views our economic landscape not as a “V,” or a “U”, or a “W” but rather as a caterpillar. What does he mean? He believes the economy will slowly move up and down for the foreseeable future. I concur.
Summary
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?
LD
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July 2009 Market Review
Posted by Larry Doyle on August 1st, 2009 12:20 PM |
In the process of reviewing price action across the entire spectrum of global equity, bond, and commodity markets, I am struck by one simple fact: virtually every market segment went up in value in July. That sort of price action in a challenged economy is uncommon, if not irrational.
Is this price action a sign of an incipient turn in the economy? Will we continue to rally? Are we going to have a V-shaped recovery? Come on back in, the water’s fine? What recession? Hardly.
I continually see the battle royale between the bulls and the bears in the markets. I truly believe we are entering into a new global economic norm and, as such, before we are able to thrive we need to survive. Thus, in my opinion, while others may consider themselves bulls or bears in terms of the markets and economy, I would classify myself as an animal which wants to aggressively survey the landscape, strengthen my reserve, increase my store of value (savings), and judiciously put some small stakes (investments) to work knowing that there remain real risks on the horizon. For lack of a better term, call me a friendly fox.
Without further delay, let’s assess the July 2009 Market Review:
I have added a few indices to take a more comprehensive view of the markets. These indices include: DJ-Global ex U.S., an emerging market index (MSCI), a commodity index, and a U.S. dollar index. I hope readers find these helpful.
Let’s grade my calls from last month, at which point I wrote: (more…)
Obama’s Lessened Popularity Is Helping the Market
Posted by Larry Doyle on July 30th, 2009 5:12 PM |
What is driving the equity markets higher?
1. an end to the recession?
2. green shoots?
3. better than expected earnings?
4. excess liquidity?
5. all of the above?
How about President Obama’s decline in popularity? In a perverse way, is a lessened approval rating for President Obama, in fact, supporting our markets?
Has the decline been statistically significant? What has caused the decline? Given that we are living in the Sense on Cents designated Uncle Sam Economy, we would be foolhardy to neglect what political polls are saying.
Gallup reports, Obama Approval Slips Three Points in Past Week:
Amidst President Obama’s push in July to revamp the nation’s healthcare system, Gallup finds his average job approval rating registering 56% for the seven-day period ending Sunday, down from 59% the previous week. This three percentage point drop is the largest week-to-week decline seen in Obama’s job approval thus far in his presidency, and punctuates a gradual descent from his 66% rating in early May.
The current week is starting off no better for Obama than the previous one. His job approval score in Gallup Poll Daily tracking, conducted July 25-27, is 54%; this is his lowest individual reading to date. Thirty-seven percent of Americans currently disapprove of the job he is doing and 9% have no opinion. (more…)
Wall Street 2009: Too Smart for Our Own Good?
Posted by Larry Doyle on July 28th, 2009 8:03 AM |
Did the world’s candlemakers openly rail against Thomas Edison and his development of the light bulb? I have to imagine those candlemakers weren’t all that happy at the time. Edison embodied the American spirit. Capitalism thrives on the entrepreneurial spirit. That spirit promotes competition and has propelled our economy, our country, and our world over the years.
Capitalism also thrives on honest, open, and fair markets. Major financial and economic scandals over the years have often centered on self-dealing, abuse of insider information, and some semblance of unfair trade. These practices often capture enormous profits for a period of time but ultimately they kill trade. Why? Profits are a function of increased productivity, increased margins, and increased market share. To the extent that questionable, if not unethical or illegal, business practices initially promote greater profitability at the expense of future business flows, the foundation of that business has serious flaws.
Welcome to the world of finance 2009. In one way, shape or form, we have seen increasingly abusive business practices coarse through our markets and economy over the last few decades. From questionable asset securitizations to various forms of electronic trading, the practitioners have often reaped initial windfall profits while enacting real long term damage. How and why does this happen?
Highly intelligent people who are not properly regulated will drive profits to levels which are initially euphoric but if not properly monitored and managed are ultimately fatal. How so? When market participants feel that playing fields are not open, level, free, and fair, they will take their bat, ball, and capital and go play elsewhere. In so many words, the best and the brightest who implement trade strategies and computer programs are often simply ‘too smart for their own good.’ This scenario repeats itself regularly! (more…)
Bernanke Promises to Keep ‘Punch Bowl’ Filled
Posted by Larry Doyle on July 21st, 2009 1:59 PM |
Everybody back in the pool!!! Turn that music up and let’s rock!!
Why so ebullient and energized to ‘party?’ Well, our host, Ben Bernanke, has promised to keep the ‘punch bowl’ filled. As the Wall Street Journal highlights in writing Bernanke Sheds Light on Exit Strategy:
Mr. Bernanke reiterated that despite recent improvements in the economy and financial markets, the federal-funds rate will likely remain near zero for an extended period of time.
That statement by the ‘grand and wonderful wizard’ Ben Bernanke is the equivalent of turning up the volume to some music by the J. Geils Band. How are the partygoers reacting? Filling up their cups, that being, buying bonds like there is no tomorrow.
On the day, the Treasury market has rallied by 10 to 15 basis points (recall lower rates means higher bond prices) as all the partygoers (market participants) reenter into a variety of ‘positive carry’ trades. In layman’s terms, positive carry trades very simply are a vehicle to use cheap dollars (i.e Fed Funds borrowed between 0 and .25) to purchase higher yielding assets. Another commonly used term for this form of investing is utilizing increased ‘leverage.’ Yes, we have previously partied with increased leverage. That did not end well…
Why would traders or others utilize this approach in the midst of such economic uncertainty? Very simply, when the host tells you that the ‘punch bowl’ is going to remain filled for an extended period, he is compelling you to get involved. In fact, he is effectively forcing you into the pool. How so? The returns on the safest, shortest, and most liquid assets (T-bills, CDs, money markets) will also be kept low for an extended period.
As an investor, the Fed chair is literally forcing you to take greater risks in your investments. Those funds will be utilized by financial institutions to generate increased earnings and thus write off the loans on their books which are defaulting at an ever increasing rate.
What are the risks of keeping the ‘punch bowl’ filled too long?
> inflation, as too much “liquid”ity enters the system
> asset bubbles, as too many cheap dollars chase returns
> mispricing of risk, as market participants focus on the technical rally rather than fundamental analysis
The challenge for Bernanke is knowing when and how to pull that punch bowl away.
The last wizard, Alan Greenspan, badly miscalculated in his assessment which led to our current economic turmoil.
While it is nice to see positive returns in 401K statements and other monthly investment statements, be mindful of another tried and true piece of Wall Street wisdom . . . ‘the road to hell is paved with positive carry.’
In the meantime, as long as we understand the parameters of this situation, let’s enjoy Ain’t Nothing Like a House Party by the J. Geils Band!!
LD
Wall Street Plays Washington
Posted by Larry Doyle on July 7th, 2009 5:15 PM |
Is the charade played out on Wall Street and in Washington anything more than the equivalent of a dinnertime show at a casino complex?
Politicians and bankers work the stage while the media maitre’d pretends to care how you really feel. Ultimately, the curtain goes down, the lights go on and you’re stuck with a bill that leaves you aghast.
Welcome to the Brave New World of the Uncle Sam economy 2009.
Today Bloomberg releases news that Delinquencies on U.S. Home-Equity Loans Reach Record:
Late payments on home-equity loans rose to a record in the first quarter as 18 straight months of job losses and a slumping economy left more borrowers unable to pay their debts, the American Bankers Association reported.
The ABA is not exactly timely with this news in regard to home equity lines of credit; Sense on Cents shared similar color on May 20th in “Bank Stress Tests: Vigorous or Sham? Let’s Review HELOC Losses”:
For those not aware, Turbo-Tim Geithner’s Bank Stress Test utilized an assumed cumulative loss on this product of 6-8% in the base case. The most adverse scenario assumed cumulative losses on HELOCs of 8-11%.
What did our 12th Street Capital friends learn in their analysis? KD writes:
What I find very interesting here is comparing the Cumulative Loss numbers on these deals versus the Government’s assumption of losses in the stress test. As a reminder, our friends in D.C. assumed in a More Adverse Scenario that Helocs on bank balance sheets would generate losses of 8% to 11%. Now I know their numbers represent the projections going forward for the next two years, but when you take a look at numerous ‘06 and ‘07 deals already ringing up losses north of 20% I find it hard to reconcile. I think the Treasury has a very rosy picture of the loss curve going forward.
This brings us to the topic of losses within the banking system and the integrity of the Bank Stress Tests. The Wall Street banks were more than happy to “put on a show” with Secretary Geithner leading the orchestra and the FASB in a supporting role given their relaxation of the mark-to-market. Now we get to revisit the fact that banks are still sitting on hundreds of billions in embedded losses. (more…)
Is Uncle Sam Manipulating the Equity Markets?
Part II
Posted by Larry Doyle on July 6th, 2009 7:47 AM |
Who does not like a good summer read? Well, combine money with espionage and we have all the makings of a fascinating story.
The other day I wrote a post, “Is Uncle Sam Manipulating the Equity Markets?”, highlighting allegations by Joe Saluzzi of Themis Trading of highly suspect trading activities on the NYSE. Another chapter in this fast moving intrigue unfolded over the weekend. Thanks to kbdabear for sharing a Reuters news release, “A Goldman Trading Scandal?”, which adds significant fuel to the fire. Let’s review in a rational fashion. Reuters reports:
Did someone try to steal Goldman Sachs’ secret sauce?
While most in the US were celebrating the 4th of July, a Russian immigrant living in New Jersey was being held on federal charges of stealing top-secret computer trading codes from a major New York-based financial institution—that sources say is none other than Goldman Sachs.
The allegations, if true, are big news because the codes the accused man, Sergey Aleynikov, tried to steal is the secret code to unlocking Goldman’s automated stocks and commodities trading businesses. Federal authorities allege the computer codes and related-trading files that Aleynikov uploaded to a German-based website help this major “financial institution” generate millions of dollars in profits each year.
Who is this individual, Aleynikov? (more…)
Is Uncle Sam Manipulating the Equity Markets?
Posted by Larry Doyle on July 1st, 2009 8:41 PM |
I have been increasingly suspicious of the price action in our equity markets over the last few months. I have highlighted how the markets are dominated by technical flows rather than fundamental analysis.
I have tried to highlight these themes in posts including “The Greater Fool Theory” and “What’s Driving the Market?”
My jaw dropped upon watching a Bloomberg interview yesterday in which Joe Saluzzi of Themis Trading left nothing to the imagination. Please take the time to watch this clip and ponder exactly what Mr. Saluzzi is sharing. The entire video is outstanding but it gets very interesting at the 4:20 mark. Compare his assertions with the points I have raised in my aforementioned posts. (Hat tip to Zero Hedge for locating the video.)
The risks of playing in these markets remain extraordinarily high.
LD
June 2009 Market Review
Posted by Larry Doyle on July 1st, 2009 8:52 AM |
A cursory review of market returns for June indicates no dramatic shifts, so let’s go to the sports pages, right? No, don’t do that! In the Brave New World of the Uncle Sam economy, every day, week, and month provides historic developments both above and below the surface. How does one possibly navigate the hills and valleys of the markets and economic landscape? Welcome to Sense on Cents!
I had forecasted in the Sense on Cents May 2009 Market Review:
Add it all up and I think the following will occur:
– equity markets will now move sideways in range bound fashion;
– the bond market will move lower in price, higher in rates;
– the dollar will gradually decline;
– our economy will be filled with more stops than starts.
Let’s review the stat sheet, assess our May calls, and forecast what we see on the horizon. As we move along, let’s continually remember the largest player in our markets – both literally and figuratively – is none other than Uncle Sam himself.
Pimco’s Bill Gross said a few month’s back, “you should keep the big uncle in clear sight and without back turned.” The Wall Street Journal reported just yesterday in Inflation Fears Seem to Be, Well, Inflated:
Given the Fed’s heavy and unpredictable hand in the market lately…
Yes, Uncle Sam is casting an ever larger shadow across our economy and markets. Let’s navigate . . .
Market Returns:
Equities: the major market averages (the DJIA and S&P 500 especially) ended the month largely unchanged. In fact, the S&P 500 ended the month exactly unchanged. That said, the markets had an overall range of approximately 6%-7%. Why so volatile? Primarily a continuation of technical flows of funds, while the economic fundamentals remain decidedly mixed.
The tech heavy Nasdaq continued to outperform given some positive earnings developments (e.g Oracle) and lessened debt burdens. Given the Nasdaq’s dramatic outperformance, I would be reluctant to add exposure to this sector.
Sense on Cents’ self-assessment of May call: very solid
Bonds: while the 10yr Treasury ended largely unchanged on the month, it experienced a major selloff and actually broke above the 4% level for a short stretch mid-month. The upward pressure in rates, about which Sense on Cents wrote extensively, raised major concerns about potential inflation, economic recovery, and the equity markets.
Rates came back down over the last week. Cooler heads prevailed, right? Or did that “heavy and unpredictable hand of the Fed” go to work? Sense on Cents feels strongly that the Fed managed to move rates lower via quantitative easing and working with Treasury which had redefined indirect buying in Treasury auctions (“Turbo-Tim Takes ‘Indirect’ to a Whole New Level”).
While the government bond sector did post slightly negative returns for the month, the credit sensitive sectors of the bond market (corporates, high yield, municipals, and mortgages) did post low single digit returns. What is driving cash into these sectors? The fact that the Fed and banking system at large are holding short term rates (including savings rates and CDs) at near zero or marginally above is literally compelling both consumers and investors to seek some degree of return elsewhere. That money is flowing into these bond funds as investors remain extremely concerned about the economy and equity markets.
Are investors being lured into a potential trap by investing in bonds? I believe they are. I do not see the pressure of global government deficits along with refinancing pressures throughout the economy abating anytime soon.
Sense on Cents’ self-assessment of May call: fair (more…)
Economic and Market Commentary July 14, 2009
Posted by Larry Doyle on July 14th, 2009 11:47 AM |
We have had a cross current of market moving news and developments this morning. Let’s navigate while bringing our own independent set of tools to cut through any excessive salesmanship or pandering on the part of market experts. Using Bloomberg as a conduit, they report Treasuries Fall as Rally in Global Stocks Damp Demand:
Bloomberg is better than this reporting. The reporters should more specifically highlight that across virtually every sector aside from gasoline and autos, retail sales declined. A rise in gasoline sales is simply a function of higher gasoline costs. That bit of news is not exactly a positive. Automobile sales are a long way from robust and are measured against prior month’s sales which had plunged.
I am not trying to be overly pessimistic, but merely looking for a full and honest analysis of the data. Moving right along, I strongly believe that Treasury rates increased (and thus Treasury prices declined) because of concerns about rising producer prices. As Bloomberg reports:
I also believe Treasury rates increased today on news that our annual federal deficit just crossed the $1 TRILLION level and is likely headed toward $2.0 TRILLION. No surprise why Secretary Geithner is in the Middle East for what amounts to a Wall Street roadshow in hopes that some of our largest creditors continue to finance our country.
On the earnings front, Bloomberg offers:
With all due respect to Mr. Di Galoma, America cares MUCH more about earnings in the heartland than merely the casino-style earnings generated by the inhabitants of 85 Broad Street in lower Manahttan, that being the home of Goldman Sachs. Earnings from Johnson and Johnson, CSX, Dell, Philips, Heartland, and Posco are decidedly mixed, and honestly generally weak.
Against those numbers, the fact that the equity market is merely unchanged on the day is a good performance.
In regard to upcoming earnings reports from our financial firms, please refer to my report this morning “How Will Banks ‘Manage’ Earnings?”
Bloomberg offers:
Put that $1.47 trillion figure in the context that the IMF projects TOTAL writedowns and credit losses at banks will be $4 trillion with $2.8 trillion of those here in the United States. To date, our banks have not taken half those writedowns and losses.
What do I see looking through all of this data and material? An increasing likelihood of a very sluggish economy with a whiff of inflation, otherwise known as stagflation!!
Remain defensive.
LD
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