We disseminated the following letter in October. Due to the events of this week and subsequent market behavior I feel a reprint is in order.  

The Gold price approaches $1,400/oz and the Silver price is poised to breach $27/oz. A paradigmatic shift is occuring in the precious metals arena. Understanding and awareness will be required for those wishing to enjoy the parabolic price moves higher in the coming months…..

Dear,

September was a rewarding month for our investment philosophy. Gold crossed $1,300/oz and Silver $21.50/oz as the global currency debasement theme shifted into high gear. Our commitment to precious metals, emerging markets and selective domestic high growth companies made for an exciting month in our quest for Fortune’s Favor.

Attached please find an article titled, “Why QE2 + QE Lite Mean the Fed Will Purchase Almost $3 Trillion In Treasuries And Set The Stage For The Monetary Endgame”. This article expresses many of our own beliefs and can be viewed as a roadmap to $5000/ounce gold and $100/ounce silver.

Bret and I struggle every day trying to balance the opposing forces of government market support intervention and deteriorating economic fundamentals in structuring our investment philosophy. Until and/or unless we see evidence to the contrary, we believe Bernanke will press forward with aggressive monetization with the goal of inflating all asset classes.

In addition, we believe that U.S monetization will force all other central banks to follow suit or face the prospect of a rapidly deteriorating trade position (which would be unacceptable). In a world of inflating money supply and close to zero interest rates (an impossible scenario in the textbooks of my generation), one of the best usages of free corporate cash flow would be to stockpile inflating industrial raw materials and/or acquire other companies.

The Chinese have cornered the market on rare earths (critical industrial and military raw materials) and have already announced their plans to favor domestic usage. As you know, silver is also a critical industrial/military raw material and, while larger than rare earths, its total market size is quite small relative to its strategic importance. The entire above ground world silver supply (in deliverable condition) is estimated to be less than one billion ounces (there is evidence that naked shorting of silver may exceed above ground supplies several times) and would be inelastic to a sharp change in demand for several years. Therefore a move toward industrial stockpiling may easily lead to a run on silver and a material change in price.    

For the last few years we have worked diligently to protect capital and position ourselves for what we believe will be the “end game”. It is now more important than ever to access our website (www.rosenthalcapital.com) and read Bret’s blog (http://blog.rosenthalcapital.com) as world events that affect our markets are likely to unfold at an accelerating pace.

Warmest Personal Regards,

Gary Rosenthal

Tags: Emerging Markets, gold, precious metals, Precious Metals Outlook, QE2, silver, stock market strategy

Comments feed (RSS 2.0), comment or trackback from your site.

Precious Metals Outlook: A look at seasonality suggests the best of 2010 is in the offing…

My last post, A Trifecta of PBOC Announcements Gives Owners of Gold a Winning Ticket, focused on the compelling fundamental developments emerging in the precious metals arena. We have witnessed a 3.5%+ increase in Gold prices since that post on August 4th.  Today, I’d like to add the proverbial fuel to the fire by examining the seasonality of Gold. Spend some time studying the chart below and meet me on the other side…

The monthly chart of GLD clearly illustrates the seasonal strength of Gold prices from September to January. As the yellow highlights indicate, often aggressive moves higher in gold prices begin in September. Furthermore, by studying 2008 we can see even during a difficult year, one fraught with mass financial disaster, Gold prices were higher at the end of the Sept.-Jan. time period.

The key take away from this post: Please hold on to the bar!

Tags: gold, gold prices, precious metals

Comments feed (RSS 2.0), comment or trackback from your site.

Precious Metals Outlook: Bloomberg TV Headline: Goodby Gold

Bloomberg TV ran the above story yesterday morning, interviews were conducted and a consensus was formed. Based on this simple indicator I would say that Gold Prices bottomed yesterday at around $1159.  We will call this indicator the ‘Fin. TV’ indicator. You may recall how unbelievably accurate the Fin. TV indicator was in early July when identifying the equity market low.  I explained this phenomenon in the post titled , Stock Market Strategy: The More Things Change the More They Stay the Same . The bottom line of the explanation reads: “Rosenthal Investing Axiom: When CNBC et all call for imminent market demise expect instantaneous market rally.”

So, by applying the Fin. TV rule to Gold prices we should not be surprised to see Gold trading at $1175 as I write this note. Yesterday’s cacophony of calamitous Gold comments leads to the current $15+ comeback; categorically classic!

Stock Market Strategy: Data and Comments Continue to Point Towards Q.E.2

This morning’s disappointing GDP news dovetails nicely with voting Fed member Bullard’s comments yesterday.  The Zero Hedge story, “GDP Misses Expectations, Comes At 2.4%, Plunges From Revised Q1 GDP Of 3.7%” Offers a good breakdown of the details. I would, however, caution readers who believe this news is negative for the equity markets. Please remember the all important equation: Liquidity Expands + Credit Markets Improve = Equity Market Rally . News such as disappointing GDP numbers leads Fed members to speak out openly about the need for more liquidity…            

Bullard comments on deflation: St. Louis Fed President Bullard issued a paper arguing that the Federal Open Market Committee’s extended period language may be increasing the probability of a Japanese-style deflationary outcome for the U.S. within the next several years. Bullard concludes that an appropriate quantitative easing policy offers the best hope for avoiding a low nominal interest rate, deflationary outcome. Bullard frames his discussion in the context of theoretical analysis by Benhabib et. al. 1 that emphasizes two possible long-run outcomes for the economy: one which is consistent with monetary policy as it has typically been implemented in the U.S. in recent years, and one which is consistent with the low nominal interest rate, deflationary regime observed in Japan during the same period… See report here

…And comments about more liquidity are being backed up by actual growth in worldwide liquidity as seen in the chart below. While this cycle persists expect higher equity prices at best and consolidation of gains at worst….

Tags: Fed, Fin. TV, GDP, gold, precious metals, Q.E.2, Rosenthal Investing Axiom, stock market strategy, Worldwide liquidity, Zero Hedge

Comments feed (RSS 2.0), comment or trackback from your site.

Stock Market Strategy: All signs point to a continuation of the current rally. We will continue to use the direction of liquidity and the behavior of the credit markets as our fundamental guides to equity investing.

The primary news story making the rounds today involves the European bank stress test results. I have included the official results and accompanying statement below for your perusal. If you would rather the cliff notes I will summarize: Completely worthless nonevent.

CBES releases results of the EU Stress Test — 7 banks fail test

The exercise includes a sample of 91 European banks, representing 65% of the European market in terms of total assets, in coordination with 20 national supervisory authorities. It has been conducted over a 2 years horizon, until the end of 2011, under severe assumptions. In total, aggregate impairment and trading losses under the adverse scenario and additional sovereign shock would amount to 566bn € over the years 2010-2010. The aggregate Tier 1 ratio, used as a common measure of banks’ resilience to shocks, under the adverse scenario would decrease from 10.3% in 2009 to 9.2% by the end of 2011 (compared to the regulatory minimum of 4% and to the threshold of 6% set up for this exercise). The aggregate results depend partly on the continued reliance on government support for currently 38 institutions in the exercise. The aggregate Tier 1 ratio incorporates approximately 197bn € of government capital support provided until 1 July 2010, which represents 1.2 percentage point of the aggregate Tier 1 ratio. As a result of the adverse scenario after a sovereign shock, 7 banks would see their Tier 1 capital ratios fall below 6%… See release here.

Once again traditional financial news outlets fail to focus on issues that actually move the markets and instead waste time and energy on government sponsored propaganda. The typical word on the street from this story is as follows: ‘Street expected 10-11 banks to fail test and only 7 failed so things are better than expected.’

Enough said about the theater of the absurd a.k.a. European banking stability. Please follow me into the realm of reality as I focus on events that are actually having a tangible impact on the equity markets. Committed RCM blog readers will recall this quote from my July 14th post, “The above chart also suggests a change in trend may be in the offing”. At week’s end, it would appear suggestion has turned into sage advice as the rally that began July 7th makes new highs.

Tangible event number one:

Quantitative Easing round #2 is currently underway. How do we know this you ask? The Fed made no comment in the FOMC minutes release and Ben Bernanke said nothing of note to Congress. So how do we know Q.E.2 has begun? The answer lies in the chart below. As you will see, worldwide liquidity is once again on the upswing. This rise and fall of liquidity has been and should continue to be the single biggest factor determining market direction. Close scrutiny of the graph will reveal the selloff of assets in 2008 was led by liquidity contraction, the rally of 2009 occurred on the heels of liquidity expansion and the first 6 months of 2010 suffered from another reduction of liquidity. However, in the last three weeks worldwide liquidity has expanded progressively, hence a rally in asset prices should not surprise. We can expect further asset gains, equity, commodity or otherwise, as long as this liquidity trend continues….

Tangible event number two:

The credit markets are the first to be effected by the liquidity situation. Our credit guru, Mike Johnson, spotted the positive behavior of the credit markets at the end of June. The liquidity expansion began, credit markets immediately stabilized and true to form equities followed. Another review of MJ’s thinking seems appropriate…  

…intraday credit market volatility continues to decline and this indicates that equity volatility is biased to continue to decline. This is clearly a positive for the broader equity indices.  

One of the reasons we became bullish at the end of June was because of the improvement in bank CDS spreads, the normalizing of GS’ CDX credit curve, improvements in consumer credit losses, and improving CDX IG spreads. COMPARING THE PERFORMANCE OF THE CREDIT MARKETS TO THE EQUITY MARKETS (SPX) would indicate that SPX has the potential to rise to the 1150-1175 range QUICKLY. The steepening of CDX IG credit curve further indicates that this 1150-1175 range is even more likely to be reached relatively soon.

Tags: ben bernanke, CDX index, commodities, Credit, credit markets, equity markets, EU Stress Test, FOMC, liquidity, Q.E.2, Quantitative Easing, stock market strategy

Comments feed (RSS 2.0), comment or trackback from your site.

I must begin today’s missive with an ebullient congratulations to my good friend Blaine Bell! The wedding in Napa Valley this past weekend was beautiful, the bride radiant and the party atmosphere prodigious.

While my computer did make the trip to Napa, it was used for portfolio management only. Any free time this past week was spent in the lovely company of Rebecca, my girlfriend and the grape vines of Napa. Needless to say I had a tremendous amount of reading to catch up on upon my return to RCM headquarters.

If I could condense this past week’s worth of erudition into a single thought I’d say ‘the more things change the more they stay the same.’ Certainly we have witnessed a significant amount of volatility in 2010.  The ‘change’ component of the above phrase can best be described as nauseating. If you wish to see a graphical interpretation of this 2010 phenomenon feel free to subscribe to our ‘Market Moving Chart of the Day’ located in the top right corner of this page.

As for the ’staying the same’ part of the equation I will simply direct your attention to the following three headlines. In fact, I could have chosen at random any three headlines from the past week and they all sound similar. The basic gist is as follows:

First, a piece of economic news is released that disappoints. However, Wall St. and the powers that be, do their best to put the proverbial lipstick on the ever distending pig… Retail Sales Dip, but It Could Have Been Worse – Briefing. Next, some Fed member chosen to be that week’s puppet (are straws used or is Dictator Ben punishing those who wish to stray?) makes a supposed market soothing comment… Fed’s Hoenig on CNBC says the economy continues to recover modestly, and he still sees 3% economic growth in 2010.  Almost immediately following the sock’s elucidation, a contradicting, real and market troubling story hits the wire…

FOMC minutes from from Jun 22-23 meeting:

The pace of the expansion over the next year and a half was expected to be somewhat slower than previously predicted…

The participants generally made modest downward revisions to their projections for real GDP growth for the years 2010 to 2012, as well as modest upward revisions to their projections for the unemployment rate for the same period…

We are stuck between intense volatility and an insipid news cycle. At times like this I find the best tonic is a revisit with our trusty steed, technical analysis. Below please scrutinize the daily price chart of our favorite index the NYSE Comp..

As you can see, the major uptrend remains intact. Moreover, three attempts have been made to breach this trend in May, June and July to no avail. You may however, remember that everyone and their proverbial brother on CNBC and the like were calling for an epic Head and Shoulders breakdown at the beginning of this month (labeled 3 & highlighted yellow). Naturally you will not be able to find this obvious prediction on the RCM blog site. Rule number one: When CNBC et all call for imminent market demise expect instantaneous market rally. You may recall that when these jokers were calling for new highs on the market we were ‘Stalking the Bear’.

The above chart also suggests a change in trend may be in the offing. The market price has been locked in a downtrend since the April highs moving from the top of the channel to the bottom. However, as the blue, yellow and red Fibonacci Fan lines illustrate, a change in trend has been signaled.  For your convenience I have highlighted with a green box an initial target area for the current rally.  

Allow me to conclude by writing that fundamentally I can see no reason for the markets to rally. We are firmly of the mind that economic growth will not be able to continue without massive government support. Financial regulation will continue to be a hot button right up to the November elections at the very least. Regulation of the GSEs will continue to cause consternation. I will warn that a fourth breach of the uptrend line will be deadly.

However, our credit guru Michael Johnson continues to write, “ Bank CDS & CDX Index spreads point to continued equity market gains. Being short equities as credit improves is dangerous…”  So, until such time as a fourth breach has commenced, the technical picture of the market remains encouraging.

Tags: CDS, CDX index, Credit, economy, Fed, FOMC, GDP, NYSE Comp., retail sales, Stalking the Bear, stock market strategy

Comments feed (RSS 2.0), comment or trackback from your site.

Guest Post by Don Coxe (courtesy of Zero Hedge)

Don Coxe Dissects Gold, As “The Oldest-Established Store Of Value Moves To Center Stage”

…We think that future historians may well report that the moment when gold once again became a store of value was when the dollar began soaring in response to the stench of seared Greece—and gold climbed right along with it. The asset classes that have been inversely correlated since Keynes’s time suddenly united….

… So why didn’t inflation come roaring back when Bernanke doubled the Monetary Base and M-2 was climbing at double-digit rates?

And why didn’t inflation come back when central banks across the OECD were growing their monetary bases and money supplies were climbing? And why did gold take off to record levels when money supply growth began to dwindle and actually turn negative?

… What we believe is unfolding is a rush into gold by individual investors who look at the astronomic growth in financial derivatives—particularly collateralized debt swaps—and government deficits at a time when the effects of demographic collapse are finally being understood. According to some guesstimates we have heard, the supply of outstanding financial derivatives may be in the $70 trillion range, dwarfing the combined value of money supplies and debts. The total value of gold is so minuscule in comparison to the supply of these software-spawned instruments that it cannot be any real help in stabilizing global finances—but it can be a haven for investors seeking to protect themselves against an implosion of majestic proportions.

… So…as a store of value for future generations,

If you can no longer believe in residential real estate,
and you can no longer believe in bank deposits,
and you can no longer believe in the dollar,
and you can no longer believe in the yen,
and you can no longer believe in the euro…
What can you believe in?
How about gold?

It’s so old, it’s new again.

… Among the arguments routinely adduced against it is that it pays no interest—but with interest rates in the zero range, the opportunity cost is minimal.

Read More…

Stock Market Strategy: Follow Up – Credit Check

Michael Johnson (a.k.a Credit Guru) weighs in on recent credit market performance and shifts his stance:

Last Wednesday we turned from tactically bearish to neutral. We went completely bullish Friday morning. The equity market’s ability to ignore the recent improvements in bank and non-financial CDS profiles appears to be faltering…. and this could lead to a sustained equity rally… …Credit market performance so far this morning indicates that the SPX should be trading in the +25pt range….that would match the note we sent out Friday morning

Bears About to be Gored

Summary:

We now believe investors should be Tactically Bullish as well as fundamentally bullish

Bears should be getting nervous…credit market is improving

GS Credit curve has steepened

New Issue Market reopened

Bank CDS Spreads tightening

Credit market volatility decreasing

How many times do you think credit will tighten before the equity markets jump on the bullish bandwagon? It’s probably sooner rather than later…

Gored… As our readers know, during the recent sell-off we have remained fundamentally positive while turning tactically bearish. We have written numerous pieces highlighting the differences between the feared “sovereign credit crisis that will never be” and the onset of the 2007-2009 credit crisis. The fear of Greece and of Euro viability concerns short-circuiting the global economic recovery is wishful thinking by the bears. This is like the bank nationalization argument….politicians will allow the Euro to fail because they know it will cause global havoc….politicians will nationalize the banks because they know it will cause global havoc…investing based on the hope that politicians will make stupid mistakes does not seem appropriate.

However, the ability of FINREG to destabilize the bank’s access to the credit markets is a truly scary, and much more likely to happen, in our opinion. The inversion of the GS credit curve and the widening of larger US bank credit spreads began a week before the overall equity and credit markets began to sell off. In our opinion, the weakness in the money center bank’s credit profiles made it a lot easier for sovereign risk concerns to find a willing audience.

The combination of the sovereign credit crisis headlines along with money center bank credit fears caused the correlation between banks CDS spreads and CDX IG Index spreads to increase. Credit market volatility materially increased and appeared to spill over into the equity markets. Many of the equity market’s worst sell-offs immediately followed large credit market sell-offs.

However, the reason we are becoming tactically bullish at this point is the reduced likelihood that FINREG will be passed with its most destructive portions. This opinion is working its way through many of the money center banks CDS credit curve profiles and credit spread volatility is decreasing. Additionally, continued improvements in nearly every consumer loan asset class will likely force even the most bearish bank analysts to reduce their loss estimates….

Conclusion:

Being fundamentally bullish and tactically bearish has been a relatively solid approach to the recent sell-off in our opinion. However, the recent decrease in credit market spread volatility and the stabilizing of money center bank CDS profiles makes it difficult to remain tactically bearish when we remain bullish fundamentally. We are now fundamentally and tactically bullish. The recent trend in which the equity markets ignore credit market strength is not likely to last.

Tags: CDS, Credit, credit market volatility, credit markets, euro, finreg., gold, GS, Michael Johnson, precious metals, stock market strategy, Zero Hedge

Comments feed (RSS 2.0), comment or trackback from your site.

On Friday of last week I outlined a case for impending equity market strength. Please refer to this post titled, Stock Market Strategy: Reduce Shorts Expect Equity Market Rally , for complete details. Today, I would like to review recent news events and the market’s subsequent reaction to see if our bullish call has horns.

To begin, I’m going to share a family secret with you. Gary Rosenthal considers this axiom one of the most important precepts to investing and has drilled the concept into my thinking over the years.

Gary, (father, mentor, principal) has developed a remarkable reputation during his 44 year professional involvement with equity investing. He began his career as an equity analyst writing 50 plus page in-depth research reports. To my Dad, breaking down balance sheets, income/cash flow statements and dissecting management teams is a joy not a job.  Because of this devotion to the uncovering of truth Gary has succeeded at every level of the investment community from advising institutions to counseling private investors to the building of family wealth.  

Rosenthal Investing Axiom: One must constantly test one’s investment thesis as complacency can quickly turn into calamity. We must with vigilance watch for signposts along the investing highway that either confirm or deny our vision.

So, without further ado a test of our nascent bullish vision shall commence:

The obvious tends to offer the best starting point. Since our call on Friday the NYSE Comp.(Our favorite index) has rallied 3.3% and is up 7.4% since the low on 6/8. Moreover, during the last three trading days a couple of our forecasts have become fact.

1) We contended that the market would respond well to positive developments regarding imminent financial regulation (FINREG.). The story below illustrates the onset of positive news flow gathering about FINREG. and in this case the apparent lack of imminence….

Lincoln Considers Compromise on Swaps-Desk Provision

June 14 (Bloomberg) — Senator Blanche Lincoln may modify her proposed rules on derivatives by giving commercial banks two years to push out their swaps trading desks into subsidiaries. The compromise proposal also would allow the Federal Reserve to provide system-wide emergency assistance to swaps dealers, according to a draft obtained by Bloomberg News and confirmed by Lincoln’s office today.

Read More…

2) We believe negative economic news will no longer drive the equity markets to new lows. On the contrary, we believe negative news is the new positive. Every disappointing economic development now drives politicians closer to another stimulus package as the pressure of the midterm election process grows near.  Threat of a double dip recession will give impetus for the Fed to resume quantitative easing the main fuel for equity market fire. Case in point, the Payroll data released on June 4th was terrible and yet markets held ground and set up a double bottom…

Payrolls in U.S. Increase 431,000 in May, Jobless Rate at 9.7%               

June 4 (Bloomberg) — Employers in the U.S. hired fewer workers in May than forecast, showing a lack of confidence in the recovery that may lead to slower economic growth.

Read More…

…The following two stories only strengthen our resolve as equity markets are higher by 2% today in the face of economic hardship…

Empire Employment – Strike 3? PMI’s Suggest NFP Growth Rolling

Last weeks weak retail sales already suggested that next months NFP may underwhelm with a headline of sub 300k including the census jobs next month. That would naturally suggest poor private sector employment and with the Empire Employment data out this morning that indeed appears to be increasingly the risk. Indeed, that relationship supports the roll we have already seen in the Chicago and Philly data…..Strike 3?

Read More…

Builder Sentiment Tumbles As Tax Credit Expires

The NAHB Home Builder Survey reported a massive 5 point drop, reaching 17, on expectations of 21. The reason for the plunge – concerns about the end of the tax credit. Not even Goldman could spin this news favorably: “Housing market index 17 in June vs. median forecast 21. The National Association of Home Builders reported a 5-point drop in its housing market index for June, pushing it back below the 20 level that had been the low prior to the latest housing market recession.

Read More…

We will continue our vigilance and report our findings on this blog. So far the signposts all point to a confirmation of our beliefs. Further equity market upside would not be surprising.

Tags: Blanche Lincoln, bullish, equity markets, Financial regulation, finreg., Investment, NFP, NYSE Comp., payrolls, Short, stock market strategy

Comments feed (RSS 2.0), comment or trackback from your site.

The Bear is Full Right Now & May Need Time to Digest

The Grizzly we stalked in April and found in May has been devouring pathetic bulls for the last six weeks. The time may have arrived for this satiated animal to take a break.

Please refer to the chart of the NYSE Composite below for a clear picture of the six week mauling. Note the time frame of this chart is longer than previously posted NYSE Comp. charts. I’ve chosen the daily chart as opposed to the 60 min. chart because I’d like to draw your attention to the longer term trend.  Notice the black trend lines bracketing the uptrend in place since last year.  I’ve also highlighted in yellow the recent double bottom reached in the last 2 weeks. This chart clearly illustrates the easy money made on the short side is over for now. Support has been reached at the bottom of the channel and a natural bounce to work off some serious oversold conditions would not be surprising.

I have spent a disproportionate although necessary amount of time over the last 2 1/2 months emphasizing the dangers of holding a long equity portfolio.  However, now that the market trades near the bottom of the long term channel, I feel comfortable discussing issues that may lead to higher equity prices. We are monitoring the following list of developments. Should the developments unfold favorably a market rally worthy of participation may occur:

1) As the November midterm elections draw near, a flurry of government handouts (like the story below) to spur economic growth should be expected. These handouts will be viewed favorably by the markets.

WASHINGTON (Dow Jones)–People hoping to take advantage of the first-time home buyer tax credit would have an extra three months to close their home purchases and still qualify, under a measure introduced in the U.S. Senate Thursday.

To be eligible for the tax credit, home buyers must have a valid contract by April 30, 2010 and close the transaction by June 30, 2010. The Senate measure would allow home buyers until the end of September to complete their transactions.

Senate Majority Leader Harry Reid (D.-Nev.) and Sens. Chris Dodd (D., Conn.) and Johnny Isakson (R.-Ga.) intend to offer the measure as an amendment to the jobs legislation pending in the Senate.

2) I’ll take the thought above a step further and say bad economic news may cease to drive stocks lower. Instead the market may view bad economic news as positive because the threat of a double dip recession will surely drive politicians to create new stimulus. Case in point, today’s bad economic news,  “May Retail Sales -1.2% vs +0.2% Briefing.com consensus” failed to send the markets lower by the close. As I write this missive the NASD Comp. trades over 1% higher on the day.

3) Credit leads equity. This relationship continues to dominate the market place. Michael Johnson of MS Howells & Co. understands this relationship better than most. I affectionately refer to MJ as the credit Guru and his modified list of issues below demands our attention:

 Almost Time to Be Bullish

 We have provided a list of reasons as to why we are in the process of changing:

 1. If GS’s CDS credit curve steepens of so that its 1- to 5 year and 3-5 year CDS credit curves are positively sloped.

2. The re-steepening of money center bank CDS curves should begin to cause both equity and credit market volatility to decrease. Although we have only begun to see a decrease in credit market spread volatility, we expect this trend is likely to grow in the next two weeks.

3. Moody’s announcement, along with an S&P note last week, that they will not downgrade the banks and force them to confront a structural market inefficiency that could stress their business model is a huge positive.  

4. The recovery in Bank Pfd prices indicates that equity prices are likely to stabilize and begin rising again.

5. New issue market appears able to bring deals during periods of market stability

4) Financial regulation (FINREG.) by congress represents a major road block for the equity markets. Fears run high that politicians will make a bad situation worse. While I don’t disagree with these concerns, I do believe that fear often creates opportunity. Equity market participants frequently overreact. Once FINREG. is completed a major uncertainly will be lifted and uncertainty tends to be worse than reality. As time draws closer to the July 4th FINREG. deadline watch for positive market action to FINREG. developments.

Disclosure: Short GS Less than .25% of fund

Tags: bear market, CDS, Credit, equity markets, Financial regulation, finreg., GS, NYSE Comp., retail sales

Comments feed (RSS 2.0), comment or trackback from your site.

The news moving markets today centers around fears about renewed economic weakness and continued credit market deterioration. I have included a number of stories below offering a good cross-section of the situation.

Meanwhile, traditional technical analysis helps tone down the noise and offers a pure indication of who is in control: the buyers or the sellers.  To that end, the chart below of the NYSE composite (60 min. bar chart) will help put this week’s trading into prospective.  As you can see, the market is in a well defined downtrend. This week’s rally was simply a move to the top of the channel helping to alleviate a serious oversold condition. The index will need to break above the down trend line and the 20 day moving average, both around the 6905-6910 area, before this selloff can be declared over.  We remain bearish and will look to book profits on the short side as the market nears the bottom of the channel.  

Banks’ Overnight Deposits With ECB Increase to Record

June 3 (Bloomberg) — Overnight deposits with the European Central Bank rose to a record yesterday as the sovereign debt crisis made banks wary of lending to each other.

Banks lodged 320.4 billion euros ($394 billion) in the ECB’s overnight deposit facility at 0.25 percent, compared with 316.4 billion euros the previous day, the Frankfurt-based central bank said in a market notice today. That’s the most since the start of the euro currency in 1999. Deposits have exceeded 300 billion euros for the past five days.

Banks are parking cash with the ECB amid investor concern that a 750 billion-euro European rescue package may not be enough to stop the crisis from spreading and spilling into the banking industry. The ECB said on May 31 that banks will have to write off more loans this year than in 2009 and their ability to sell bonds may be hampered as governments seek to finance fiscal deficits.

Read More…

Goldman Sachs weighs in on economic woes…

Nonfarm labor productivity grew a downward-revised 2.8% (annualized) in the first quarter, below the first release of 3.6% and a bit less than expected, as output was revised down and hours worked were revised up. However, with compensation per hour also revised down, unit labor costs still fell 1.3%, only a bit less quickly than the first release of 1.6%. On a year-on-year basis, unit labor costs are still down 4.2%, the most rapid pace of decline in the history of the series (since 1947) except for the 2009Q4 drop of 5.1%. Thus, labor cost trends remain a strongly disinflationary force.

Next up, Briefing offers a good explanation of the employment numbers announces today…

Employment Report a Major Disappointment

The latest payrolls data confirmed the stagnate labor market that was implied from yesterday’s weak ADP report and the lackluster jobless figures over the past four weeks. Nonfarm payrolls increased by 431,000 in May, a disappointment from the 500,000 increase expected.

The details of the payroll numbers were even worse. The consensus estimate expected government hires would increase by roughly 275,000: temporary Census hiring would push up employment by approximately 300,000 while other government employment would decline by 25,000. This leaves the more stable private payroll growth at 225,000 for the month. However, government hires exceeded expectations by 115,000. The private sector produced only 41,000 jobs in May, 184,000 less than the consensus estimate.

Further, out of the 41,000 new hires, 31,000 new jobs were deemed temporary. If consumer demand suddenly decelerates, these hires will lose their jobs quickly. The only good take away from the payrolls data was that manufacturing payrolls increased by 29,000, its fifth consecutive monthly increase. The data confirm that the expansion in the manufacturing sector has not been impeded. The unemployment rate ticked back down to 9.7% in May after temporarily increasing to 9.9%, and it beat the median estimate of 9.8%.

However, like the payrolls data, the details of the move were a major disappointment. Economists were expecting that the move down in unemployment would be due to healthy gains in private payrolls. Unfortunately, the number of people employed actually declined by 35,000 in May. The reason for the drop in the unemployment rate was due to workers again leaving the labor market in droves. The labor forced declined by 322,000 for the month, its first monthly decline since December 2009. If the labor force remained at April’s level, the unemployment rate would have remained at 9.9%. On a positive note, personal incomes looked stronger in May. Average hourly earnings increased 0.3%, well above the consensus estimate of 0.1% growth. Weekly hours increased from 34.1 to 34.2. In all, average weekly earnings climbed an impressive 0.6%.

Tags: ECB, employment report, euro, europe, Goldman Sachs, NFP, Nonfarm payrolls, NYSE, NYSE Comp., productivity

Comments feed (RSS 2.0), comment or trackback from your site.

No need to stalk anymore, the Grizzly is now in plain sight and gorging itself on hapless bulls.  I started the ‘Stalking’ series on March 30th with the intention of raising the awareness of readers to the dangers lurking in the financial forest. From the April highs to the recent May low, the S&P500 dropped 14.6%, NASD Comp. 15.6% and the Dow 13.2%.  I trust you used the knowledge imparted to protect and profit during the month of May.

For a picture of what a grizzly looks like please see the chart below. I emphasized the importance of the NYSE Composite in Part 4 of this series. We believe the NYSE Comp. experiences less interference (manipulation) from futures and ETF derivatives than does the big three (DOW, S&P500, NASD Comp), hence offering better insight into true direction. True to form, the NYSE Comp. (depicted below/each bar = 60 minutes) led on the downside dropping 16.2% and remains weaker than the big three trading firmly below the 200-day moving average…. 

The debate now rages about whether this selloff is simply a correction in a Bull market or the return of the Bear. I have made my opinion abundantly clear over the last 2 months. However, I will offer up the following two charts as an exclamation point.

Both charts focus our attention on the credit markets. For some time now, credit markets have been leading equity. I dedicated Part1 of the ‘Stalking’ series to this basic credit leads equity theory. To place a finer point on it, if credit markets are relatively stable then equity selloffs can be viewed as merely necessary pullbacks in ongoing Bull markets. However, if credit market volatility explodes, CDS spreads widen dramatically, interbank lending rates skyrocket, etc., then something more sinister is afoot. And no doubt that foot is covered in fur and has claws.  

So, what is credit telling us now? Well, on May 24th our favorite credit Guru, Michael Johnson of M.S. Howells, had this to say, “CDS spreads are today as bad as they were in Sept. ‘08.” That’s certainly not a good sign. How about the interbank lending market? LIBOR rates in ‘08 spike higher offering an early warning sign of big trouble to come. The chart of today’s LIBOR rate (shown below) offers a classic example of the proverbial picture that is worth…

In conclusion, I am posting a chart of  high yield bond spreads. This chart is indicative of the destruction occurring across the spectrum of corporate and sovereign credit…

Bottomline: Rates are rising at an aggressive pace and unless or until this trend dissipates equity will have a hard time sustaining a rally. Expect volatility to remain elevated. Remember, the biggest up days on record occurred during Bear markets. Please don’t allow the cheerleaders in the financial media to confuse you on these up days. Instead, view them as you would the little guy in the Lotto commercials. He grabs the microphone and screams about the possibilities. Do you really want to be the type that runs with the mob to buy a ticket?

Tags: credit markets, DOW, High Yield bonds, libor, NASD Composite, NYSE Composite, sove, sp500, Stalking the Bear

Comments feed (RSS 2.0), comment or trackback from your site.