Featured Trades: (BUY THE SUNHATS WHEN IT'S RAINING), (SPX)
1) Buy the Sun Hats When It's Raining. I don't think that we are going into recession immediately. I believe that we can eke out a few more quarters of 2% ish type growth before we put in the final top of the great bull market of 2009-2012. I think a real crash of the 50% variety will be a 2012 affair, not something that is on the plate in front of us staring back.
There are two big positive developments which the lagging economic indicators have yet to see. The Ford and GM earnings told us that a serious recovery is going on in the automobile industry. Total car production of 13.5 million units for the US market is looking like a sure thing this year. Also, economic data from Japan show the second half of the 'V' type recovery is starting earlier than expected. I think that the macro statistics may begin to reflect these turnarounds from September. This is what the July nonfarm payroll told us.
If we really were in recession we would already see it in hundreds of leading indicators, from rail car loadings, to FedEx deliveries, to sea container utilization rates. But the signs are just not there. Recessions don't pop up out of the blue; they are lumbering, slow, developing behemoths, like turning supertankers.
If that is the case, then stocks are a screaming 'BUY' here after a gut churning 17 point, 12.6% plunge in the (SPY) in a mere two weeks. I think that much of the decline can be attributed to program and high frequency trading, margin calls, forced liquidation, and other Wall Street fun and games. Investors also have a bitter aftertaste from our near miss with default and the bilious negotiations that increased the debt ceiling. Everyone is trading like a repeat of the 2008 debacle is imminent, and will probably continue to do so for the next 20 years. This is what people who were in the market from 1930-50 tell me.
Notice that today the low of the S&P 500 September futures was at 1,166. This was not just some random number. It exactly corresponds to a 61.8% retracement of the entire move from August, 2011 to the April 29, 2011 top. A ton of technical buying kicks in here.
Lift their heavy hand off the market, and it should bounce back up, like holding a basketball under water. If I am wrong, then you should at least expect an oversold technical bounce back up to the (SPY) 200 day moving average at $128, and then fail. If I am right, then the market will make it up to the last high at $135, and then double top, or make a new marginal high by year end. That leaves a potential 16% to the upside, something certainly worth taking a bite out of.
So it might be worth sticking your toe in the water here and start picking up some small, limited risk positions in equities, such as through the options. That way, if it gets bitten off by a shark, at least you still have nine left.
In the Marine Corp., after you crash a plane, the first thing they do is stick you back into another one, once you have been found to have acted responsibly. If they don't, the fear takes hold, and you stay grounded for life. The same is true for trading.
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It's the Second Mouse That Gets the Cheese
Featured Trades: (RIP FOR AMERICA'S TRIPPLE A RATING), (TLT), (TBT)
2) RIP for America's Triple A Rating. At long last, after months of warnings, leaks, hand wringing, and speculation, Standard and Poor's has at last downgraded US Treasury bonds a notch to AA+. The change was the most telegraphed ratings change in history.
You can bet this weekend saw a flurry of emergency board meetings across the country. Many institutions are only permitted to own AAA debt securities, and rules will need to be changed quickly to permit their continued residence in institutional portfolios.
I don't expect to see any major market impact, beyond a day or two. The fact is that America's financial health has been sliding down hill for the last 30 years. Standard & Poor's should have made the downgrade during 1980-82, when Ronald Reagans quadrupled the national debt, from $1 trillion to $4 trillion.
It should have downgraded Uncle Sam's debt a second time when George W. Bush doubled it again from $5 trillion to $10.5 trillion. It turns out that cutting taxes while starting two new wars is not a great budget balancing strategy. If any other country were issuing bonds with this balance sheet, I reckon they would catch a single 'A' rating at best.
I suspect that the timing of the downgrade now was more of a political than analytical decision. It's not that Standard & Poor's has any great credibility here. It totally missed the 2008 financial collapse. During the credit boom, it handed out triple 'A' ratings with reckless abandon to subprime securities that were clearly junk. To this day, I am amazed that the shoddy practices of the ratings agencies didn't get the principals sued out of existence or put in jail.
Sovereign debt downgrades from triple 'A' are not without precedent. In every case the change turned out to be a deep lagging indicator, a classic case of closing the barn door after the horses have bolted. One need look no further than Japan, whose downgrade was greeted with no more than a yawn.
Today, the Japanese government can borrow all it wants at 1.01% for ten years, and a pitiful 1.90% for 30 years, less than half of what the US government currently pays. The true irony here is that Standard & Poor's made its move the day after ten year Treasury bond yields matched a 40 year low at 2.35%.
It may turn out that America's long heralded debt downgrade is the first boring thing that happened this month.
Present Japanese Yield Curve
Debt Downgrade? No Problem Here
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An AA+ Rating? Really!
Featured Trades: (THE JULY NONFARM PAYROLL: ROCKETING BACK UP TO ZERO)
3) The July Nonfarm Payroll: Rocketing Back Up to Zero. The monthly nonfarm payroll report finally surprised to the upside, the much watched figure coming in at +117,000, well above a consensus of +90,000. The headline unemployment rate is back down 0.1% to 9.1%. May and June saw healthy revisions up of +56,000 jobs.
Private sector hiring soared to +159,000. That was partially offset by what has become a permanent drag from government cuts of -37,000. The end of the partial shutdown of the state government in Minnesota was a big factor. The strongest sectors were in health care, +31,000, retail, + 26,000, and manufacturing, +24,000.
Some 6.2 million hapless souls have been unemployed for six months or longer.
While a definite improvement over past months, we are anything but back in the pink. To accommodate population growth and an outflow of new college graduates, the economy needs to create at least 150,000 new jobs a month. Seasonal adjustment excludes 1.2 million school teachers who are fired at the end of the school year, only to be mostly rehired in the following year.
My view is that the nonfarm payroll report has become too politicized to be of any real value. It now has a market impact of only two days at most. The US is suffering from a long term structural unemployment issue that no one can do anything about.
If corporations had more cash, such as from a tax free offshore profit repatriation, they would simply invest it in China, India, and Brazil, as they have done. If wealthy individuals had more money through a tax cut, they would just buy more gold, or keep the cash. The economic growth rate in the US is just too low to attract new investment needed to create jobs. The new customers are in emerging markets, not here.
Featured Trades: (HERE'S WHERE TO WATCH FOR THE TURN),
(GLD), (FXF), (FXY), (TLT)
1) Here is Where to Watch for the Turn. What to say about Thursday's market? The 'RISK OFF' trade had its finest hour. The Dow average WAS down 512 points, NASDAQ (QQQ) cratered by 135 points, oil (USO) was off $6, and copper (CU) got smacked for 34 cents. Emerging markets (EEM) quickly morphed into submerging markets. Gold (GLD) provided no refuge today, dropping $45 in hours, and silver (SLV) gave back $4 in the blink of an eye.
Only Treasury securities provided a safe haven, with overnight paper briefly showing negative interest rates. The yield on ten year Treasury bonds plummeted to 2.42%, nearly matching its 30 year low set last year.
Global contagion was back on the table, with credit default swaps for France blasting through to all-time highs. The European Central Bank's folly of raising interest rates in the face of a weak economy is now bearing its bitter fruit.
The confirmation of the 'head and shoulders' formation on the charts has triggered a an entire new round of selling by technically driven programs, clearly putting the 1,160 target on the downside in play. Margin clerks on Wall Street and the futures markets in Chicago were having a field day.
US stocks have lost $1.3 trillion in market cap in two weeks. This is on the coattails of the government sucking $2.4 trillion out of the global economy in the debt ceiling compromise. Gee, do you think there is a connection?
Here is where to watch for the next major turn in the markets. The traditional safe havens of gold, the Swiss franc, the yen, and Treasury bonds, have all posted hyperbolic moves to the upside over the past two weeks.
Now gold is making topping noises, the yen has seen a major reversal, and the Swiss franc has stalled. The fact that this is all happening in August makes all of these big moves suspect.
We may be seeing the first cracks in this monolithic 'RISK OFF' trade in the Japanese yen today. The Bank of Japan finally awoke from its long slumber, moving into the foreign exchange markets with a major intervention, gapping the yen down three and a half handles against the dollar. The leveraged short yen ETF (YCS) soared.
Further hope was engendered by the weekly jobless claims, which showed a loss of only 1,000. This is the second week in a row at the 400,000 level. Talk about being stuck on the 50 yard line.
JP Morgan dramatically ratcheted down its forecast for Q3 from 2.50% to 1.50%. Q4 was chopped from 3% to 2.5%. It now believes that we can expect no more than 2% growth in the first half of next year. Unemployment will stay at 9% through the end of 2012. It expects no movement by the Federal Reserves on interest rates until 2013.
I can't tell you how many people tried to get me to buy today. The fact that I ignored them is the only reason I still have ten fingers, as catching a falling knife did not appeal. If you believe that this is just a correction in a bull market, then this is a fantastic place to buy, and the rout will be over in a few days.
If, in fact, the next recession has already begun, then we have just seen the first 12% of a 50% move down that will last three years. That is because there will be no safety net in the next crash in the form of TARP, supplementary budgets, or QE3. The Tea Party wouldn't hear of it. I thought this worst case scenario wouldn't start until next year, but I could be wrong.
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Featured Trades: (REPORT FROM EUROPE, PART V)
2) Report From Europe, Part V. My first morning in the Swiss mountain hamlet of Zermatt, home to the Matterhorn, I was awoken by an army platoon outside my door, fully armed with fixed bayonets.
No, I was not being arrested for past indiscretions in the idyllic Alpine paradise. My often inflammatory opinions had not even triggered an international incident worthy of military action. It was in fact, the traditional religious holiday of Corpus Christie, and the entire town was conducting a parade past my hotel, brass band and all, at 6:00 am.
Was It Something I Said?
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I was here to launch my annual assault on the Matterhorn, at 14,692 feet, one of the highest in Europe, and taller than any in the continental US. At 11,000 feet I was driven back by howling 50 mile an hour winds and snow. Some 30 climbers a year die in accidents in the Zermatt area every year, and I was not about to make it 31. Many tumble down the mountain's 3,000 foot sheer face and disappear into crevasses, never to be found again.
Back in town I stopped at the Chamber of Commerce to pick up my 40 year visitor's loyalty pin. I have been trying to summit the peak since the sixties. The pin entitles me to free concerts at the 18th century church and other such frills.
Maybe Next Year
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When I first arrived here, the town was overrun with American college students, backpacking around Europe on shoestring budgets, using their Eurail passes to sleep on overnight trains to save the cost of a Youth Hostel. Alas, the age has passed, and today they are gone.
The weak dollar means that the only young Americans you see are the children of hedge fund managers and Fortune 500 CEO's flaunting Rolex watches and daddy's American Express platinum card, acting as obnoxious as they can. The locals are relieved.
The Strong Swiss Franc Forced Some Economies
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Since the Matterhorn has some mystical hold over the Japanese as the world's most perfect mountain, tour groups are here en masse. At one traditional Swiss restaurant I saw one very loud, drunken fellow stagger from table to table, annoying every guest.
I knew from hard earned experience that this red faced guy was going to throw up any minute.? I asked the owner why he didn't throw him out. He said that the miscreant was the tour guide, if he left, his 20 big spending customers would depart with him, and he couldn't afford to lose the business.
Can I Make a Collect Call to the 16th Century?
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Zermatt has been a transit point for those traveling between Northern and Southern Europe for thousands of years. During WWII refugees fleeing fascist Italy were guided to the edge of the glacier never seen again. Hundreds are thought to be still entombed in the many crevasses.
On a previous trip, search and rescue was sent out to retrieve a newly discovered body. After sifting through his pockets and dating the coins, authorities realized that the unfortunate victim had been there for at least 400 years.
I always avoid the cheesy souvenir shops, as most of their offerings are now made in China, and I already have enough Swiss Army knives to last a lifetime. Instead, I do my shopping at the local hardware store and supermarket, loading up on my favorite mustard, chocolate bars, and a few cow bells.
After five days of climbing lesser, easier peaks, I boarded the vintage cog railway for a return to modern civilization. I'll be back next year for another Matterhorn attempt, more plates of bratwurst and r??sti potatoes, and those great Swiss lagers.
Featured Trades: (THE HEAD AND SHOULDERS IS IN), (SPX), (VIX),
1) The Head and Shoulders Is In. Much of the selling that took the Dow down 265 points on Tuesday was generated by a clear 'head and shoulders top' pattern setting up on the charts. This occurs when you see three consecutive peaks on a chart, with the middle 'head' higher than the two 'shoulders'. This formation often presages more substantial movement on the downside. The number most mentioned by technicians today is 1160 in the S&P 500.
This has been a stunning move, barely escaping the nine consecutive down days not seen since 1978. What amazed everyone was the way the selling drove the indexes through 200 day moving averages like a hot knife through butter. Usually you see a battle fought between bulls and bears around these levels that can last days or weeks. In (SPX)'s case, this happened at 1284. The McClellan oscillator became more oversold than it was at the March, 2009 lows.
The day was saved by a mishmash of data on the jobs front that was just positive enough to cause the selling to abate and permit a 28 point rally in the (SPX). Virtually all the buying was short covering.
The Challenger Report showed job cuts up 60% to 66,414, continuing 16 months of continuous rises. The pharmaceuticals shed the most workers (13,493), followed by retail (11,245), and government (9,389). The greatest losses were in the East. Cisco announced enormous cuts, followed by Merck, and Borders went out of business completely. But ADP private sector employment in July was up 114,000, with 56,000 job gains in small business.
The great mystery in all this is the volatility index (VIX). With a 120 point drop in nine days, you would expect it to rocket well into the $40's. Instead it struggled to top $25 and is now falling. This means that few are buying insurance for further downside moves. There are two possible explanations. The market bottomed today after a good capitulation sell off, sending (VIX) traders into profit taking mode. Or, the big down move is ahead of us, like the next 90 points down to 1160, and the insurance has yet to be bought. I'll let you know which one it is when I figure it out.
One thing I know for sure. Great fortunes are not made selling markets down eight days in a row. We may get the answer when the big enchilada- the July nonfarm payroll figure- comes out on Friday. The consensus now is for a gain of 90,000. Any better than that and the market could surprise to the upside.
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Featured Trades: (DO YOU REMEMBER WHEN'..?), (GLD), (INDU), (USO), (FXF)
3) Do You Remember When'?.? The stock market managed to eke out a modest 29 point gain today, the first time in nine trading days. If it had closed down a ninth day, it would have been the first time since 1978.
I remember those days well. The Dow average then was trading at 700. Gold (GLD) was at $180 an ounce. The Euro (FXE) would not be created for 20 years, but the Swiss franc (FXF) was floating around 32 cents. Today it is 75 cents. Crude (USO) was priced at $14 a barrel, and gasoline was a mere 65 cents a gallon.
The Chevette five door hatchback was the top selling car in the US. And we all had mutton chop sideburns.
Yes, I Remember Them Well
Featured Trades: (WHAT THE MARKETS ARE TELLING US), (SPX), (TLT), (TBT)
1) What the Markets Are Telling Us. I spent the morning doing a round robin with hedge fund trader friends of mine trying to figure how we all got this so horribly wrong. I did this as the (SPX) was ticking down to 1249 and bond yields cratered to a one year lows at 2.62%.
The uproar of the debt debacle distracted us from what was really driving the markets, the economy. While listening to the hostage drama, where the Tea Party threatened to put a bullet in the head of the world economy unless it got its way, the economic data began a rapid deterioration.
Q2 GDP was marked down to 1.3%, with an even worse revision for Q1 down to 0.9%. This is not a development friendly to asset prices anywhere, and delivered us a huge 'RISK OFF' trade.
Everyone to a man was positioned for a relief rally on the passage of the debt compromise. That's why when the rally came, up to 1,307, it lasted only 15 minutes. When too many crowd one side of the canoe, it flips over. This is why we are all swimming in red ink. Usually, I am watching this happening to other traders, not myself.
Instead of focusing on the postponement of a downgrade of US Treasury bonds, the markets instead are discounting the chopping of US growth by a third for the next decade that the congressional compromise assures. This is why bonds have soared by six points in a week. Good thing I covered my short call position on the (TLT) on July 22.
What the bond market is telling us is even more interesting. It is proof that the government is borrowing too little money, not too much. The Chinese are kicking themselves that they didn't buy 100% of our monthly bond issuance, instead of only the 50% they did, as prices are now rocketing to 30 year highs. This makes arguments that foreign investors will boycott American debt seem ridiculous. I challenge anyone to point to a market anywhere in the world that disagrees with this obvious conclusion.
The technical damage in the market is compelling, with the S&P 500 trading well below its 200 day moving average. US stocks are about to give up their year. What remains is to see whether the March low can hold here at 1249. If it doesn't, then look out below.
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Too Many Traders Got Into the Same Canoe
Featured Trades: (BE CAREFUL WHAT YOU WISH FOR)
1) Be Careful What You Wish For. Politicians are popping champagne bottles and celebrating the end of cantankerous negotiations over the debt ceiling. I say be careful what you wish for. Let me give you my quickie, back of the envelope analysis of the debt ceiling deal in Washington.
The compromise calls for $2.4 trillion in spending cuts over ten years. That amounts to 16.6% of GDP, or 1.6% per year. If the Federal Reserve's 3.0% forecast comes true, that means our economic growth rate is about to fall to 1.4% a year. If my prediction comes true, and we grow at a 2.5% rate, that plunges to 0.9%.
There is another country where GDP growth is measured in mere basis points: Japan. Congress has just voted for ten years of austerity. To do this at this stage of the economic cycle, when growth is feeble at best, and we have just seen two back to back quarters of growth at the 1% handle, is to guarantee us a second lost decade of zero stock market returns.
Sure, the spending cuts are back end loaded. But you know what? Investors will front end load the discounts in asset prices this slow growth scenario demands. This is not good news for long term holders of risk assets of any description, be they stocks, commodities, or homes.
This may be the riot act that financial markets are reading us today. Instead of getting the short covering rally that many of us expected, we were given a cascading series of flash crashes. The (SPX) cratered 35 points, oil cracked by $5, the Euro plunged 3 cents against the dollar, copper gave back 20 cents, and even gold pared $15. In the meantime, a flight to safety bid took bonds up two points to an incredibly low yield of 2.72%.
Armchair historians out there have to be recognizing the similarity of 2011to 1937. That is when a republican congress forced Franklin D. Roosevelt to throttle back government spending too soon, throwing the country back into round two of the Great Depression. That triggered a 49% plunge in the stock market. The downturn continued until WWII delivered the greatest stimulus package of all time and ignited a 25 year bull market.
To a large extent, there is not much anyone can do to repair the economy. Possibly as much as half of the economic growth of the past 30 years was borrowed from the future. This is because it was fueled by the $3 trillion that Ronald Reagan borrowed largely from the Japanese during 1980 to 1988, and the $5.5 trillion George W. Bush borrowed from the Chinese from 2000 to 2008.
The bill is now due, but the piggy bank is empty. Decades of minimal growth will be the consequence. I doubt that there is a single business out there that can point to a new customer coming to them as a result of the debt deal. There will be tens of thousands that will moan about lost business. The republicans now own the economy. That may be something they come to regret.
See Any Similarities?
Featured Trades: (GDP IS ANOTHER BUCKET OF COLD WATER)
1) GDP is Another Bucket of Cold Water. Another bucket of cold water was thrown on financial markets on Friday with the shocking release of Q2 GDP of 1.3%. The whisper number prior to the release was at 1.9%, and even this figure is far short of the Federal Reserve's GDP forecast for 2011 of 3.0%.
Keep in mind that these are backward looking numbers giving us data that is three months old. Some of the drag was caused by a Japanese tsunami slowed car industry, which the Ford earnings this week are telling us is already starting to snap back. That's why we had a sudden drop in weekly jobless claims this week be 28,000 to 398,000, the lowest since April 2, and the most important coincident indicator there.
I have been trading my own book all year based on a much more modest 2.0%-2.5% growth estimate, and it has served me well. I believed that most economists were vastly underestimating two crucial factors. State and local spending would continue to be a huge fiscal drag as local authorities enforce emergency measures the staunch bleeding deficits.
Remember, for every $3 the federal government shovels into the economy, the states are taking out $1. And now the feds are going to stop pouring money into the economy. I also thought that there would be no bounce back in real estate in a deleveraging world, a major component of past recoveries. This makes a hash of sell side predictions of economic growth this year that ranged as high as 4%.
Billions of dollars is being spent to make you believe that the slowing economy is the result of excessive regulation, burdensome taxes, excessive budget deficits, and 'uncertainty.'? The truth is that the drag is being caused by deleveraging, gun shy bankers afraid to lend, paranoid corporations nervous about hiring, the retirement of 80 million baby boomers, and the disappearance of a consuming idle class. Multinationals sitting on cash mountains are investing it in China and India, not here. These are all long term structural drivers that no one can do anything about.
My long term scenario assumes that financial markets peak sometimes next year, about six months before we go into the next recession. Then the next crash ensues. If these GDP figures continue to deteriorate, I may have to move those targets forward.
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Coming Sooner Than Expected?