How to prop up a market

From Bloomberg:

June 29 (Bloomberg) -- Chinese new bank loans worth about an estimated 1.16 trillion yuan ($170 billion) were invested in the stock market in the first five months of this year, China Business News reported, citing a government economist.
That’s 20 percent of the 5.8 trillion yuan loans banks extended in the period, the Shanghai-based newspaper said, citing Wei Jianing, a deputy director at the macro-economics department of the Development and Research Center under China’s State Council.

That’s a lot of money that is funneled to the local stock markets. Another question we ask ourselves: can markets go down a lot with this kind of support? I doubt it.

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A long time...

Even Bernie Madoff was sentenced to 150 years in jail (and than some), it doesn’t mean his case is closed. So much money was in play that a lot of second rang players had their fair share in this scheme.
What about the fact that UK investiogators knocked at the door of Sonja Kohl , president of Bank Medici, an Austrian outlet. The allegation is that this small bank charged millions of pounds to an outpost of the Madoff empire for worthless research.
Why did I miss this opportunity?

Detail: Bank Medici, which invested most of its $3.2bn in the Madoff empire and ran investor “feeder” funds in Luxembourg and Ireland, is one of the most spectacular casualties of the disgraced tycoon’s scheme. It is now under the control of the Austrian authorities and is to wind down most of its operations.

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Christmas comes early this year

Last week we mentioned the ECB liquidity-operation where almost 440 bln EUR was handed out to European banks at 1% for the duration of 1 year. An early Christmas present.
Willem Buiter comments as follows:

You may think that this implies that the cost to the banks of borrowing from the Eurosystem for a year - 1.00% - does not imply a subsidy, as the banks’ borrowing from the Eurosystem is secured against collateral. You would be right if the collateral consisted of German government bonds. My guess (I don’t have hard information) is that this was not the case, and that instead the borrowing banks stuffed the Eurosystem with the worst quality collateral they could put their hands on, subject to the constraint that a rating agency had rated it at least BBB-. Given the well-established practice of Eurozone banks that are eligible counterparties of the Eurosystem in repos and at the discount window, to carefully structure collateral packages that just meet the letter of the ECB’s collateral eligibility requirements, I am happy that I am not responsible for vetting and verifying the credit risk present in the portfolio of that increasingly speculative, highly leveraged entity known as the Eurosystem.

Everything is quite simple these days: banks clean up their crapy balance sheets by transferring the risks to the ECB and receiving risk-free money instead at an absolute fire sale rate. It’s a kind of subsidy.

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About correlation

I found this morning this website http://www.etfconnect.com/.
A very comprehensive site that not only shows you around in the ETF-universe but also in the world of funds.
One function is the ‘fund sorter’ which let you sort out funds versus various criteria.
Now, there exist close-end funds and ETF investing in almost the same underlying. Only thing: an ETF is shadowing an index very closely while a closed end fund –as an example- can quote with a premium or a discount.
Now imagine you have an ETF and a closed-end fund investing in the same underlying. Normally they should move in the same direction at the same pace. Their ratio should be 1.
But this is not always the case.
As an example we take the Market Vectors Russia ETF and the Templeton Russia Fund (ticker: RSX and TRF).
They have almost the same underlying but they do not move in unison due to the fact that TRF can quote at a discount or a premium.
As is illustrated.

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No more energy...

Looking to the bullish percent index of the energy sector (as one of the sectors of the S&P500) we observe that all bullishness has evaporated in a week or so. Now, this sector was one of the strongholds of the rally and is now sinking form overbought to oversold.
Not time to buy, yet, but worthwhile to follow, this fellow.

Another observation: if we take a peek to the Russell 2000 than it becomes clear that the last 8 weeks where a waste of time for the big indices while individual names tanked already. A stealth correction is going on. This can result in a correction of the big indices later as the big names can not hold up the whole weight with just some happy few.

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Gassssss

We know that ETF’s have become a playing field for the Big Boys as they discovered you could use this stuff for arbitraging futures. The least we can say is that Exchange Traded Funds were not developed for that purpose. This, however, is causing some strange things from time to time.
If we look to the Natural Gas ETF and more in detail to the Open Interest than we see something strange:

While the price is barely moving:

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This must be Europe...

From Europe, with love:

ECB's 1-year money: The highlight was of course the huge 1-year provision of money at 1% by the ECB, which has set in motion a decline in money market rates that I suspect will broadly equate what would have happened if they had cut their policy rate to 0.5%. Bending to the evidence that the ECB prefers to provide the last bit of monetary easing via liquidity provisions rather than rate cuts, Goldman changed their forecast for policy rates to “unchanged” at 1% for the next 12 months.

On the policy side: The Spanish government approved a EUR 9bn fund to bail out needy banks, while the Germans are focusing on their fiscal exit strategy via a rule-bound fiscal consolidation that’ll limit the cyclically adjusted deficit to 0.35% from 2016.
Latvia help: In a stunning move, the European Commission announced last Friday that it'll disburse a EUR1.2bn loan tranche to Latvia in the next few weeks as the revised memorandum of understanding between the EC and Latvian government is finalised. This should be positive for CDS spreads for the Baltic states and Sweden, and also (at least temporarily) dampen a potential source of volatility in the CEE region.

Thanks Goldman….

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We're all brothers/sisters

Are the Russians different from the Americans? No, comrad. As long finance is concerned there is not that much difference if we observe the course of the S&P500 and the CEE ETF, which is investing in Eastern European and Russian stocks.

It’s summer. Fish are jumping in our harbor (literally). Time to close down the week and going for walk to my local (read: pub) for a good pint of Guinness and a jolly sing-along.
Adios to everybody and enjoy the weekend.

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Regulation

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Some caution...

It’s correction time. Still light, but stocks are retreating from the rally they enjoyed in this second quarter. The number of shares going lowers is exceeding the number of shares going higher as measured by the McClellan indicators.
We illustrate this by the summation index of the NASDAQ.

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Agriculture on the roll....

We profit from the retreat of stock indexes this week to take a closer look to the Ag commodities (Agriculture, that is). The supply and demand outlook for agricultural commodities is rather bearish – less supply, higher demand – and the global credit crunch is another reason to assume that global harvests may be curbed and the food crisis for developing countries can be worsened.
We look to the Federal Agricultural Mortgage Corp – the farmer equivalent of Fannie and Freddie (ticker: AGM) – Farmer Mac was rescued early October by its lenders. The damage though was already done to the supply chain.
However, as Ag will flourish in the coming years, these bank activities will boom.

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Too big to fail...

Is there something rotten in the Kingdom of the US ?
FED president had to testify before Congress on the mater of Bank of Amercia’s acquisition of Merrill Lynch and whether or not the Federal Reserve pressured BofA CEO Ken Lewis into going through with the deal once due diligence showed up much bigger than expected losses at Merrill.
If you want to read this testimony, you can find it here.
What really happened is that BofA wanted to dump the Merrill deal and was then told by the FED not to do it. Even if this would cause problems for the bank.
The emails relating to the specific intention to not tell the SEC what was going on by senior Fed officials was very damning. Bernanke's pathetic response that he didn't know what this senior Fed official was doing, and that he was operating on his own in his stated intention to keep the SEC in the dark is either an admission of a complete failure of leadership.

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Profit taking at quarter end

Profit taking is the ordre du jour. Even today European stock exchanges are exploring negative territory and it’s all coming down in hammering down profits after the most exiting quarter of the last five years. You remember the set up: long stocks, long corporate bonds, short dollar, short govvies – well it’s all reversed this week. So forget about the bad economic figures, North Korea, or whatever. Thos fund managers want their bonuses back. And taking profits at the right moment is the first step in that direction.

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Bubbles

Thanks Citi for some useful information. We’re interested in the next mania – an emerging markets bubble.

Over the last four months we have seen large outflows from traditional safe havens including money market funds. Much of this money has flowed into riskier credit and equity funds. Within equities the biggest flows are going into Emerging Markets. So far this year inflows to Emerging Market equity funds have returned more than half of the outflows we saw in 2008.
While flows have been strong we think that bubble talk is premature. However, the combination of sound macro fundamentals in Emerging Markets, a relatively attractive corporate earnings outlook and, most importantly, abundant easy money suggests we have the ingredients for a potential bubble.

We add: the bubble seems already to have popped.

An Asian market of recent interest is Malaysia where sweeping changes will be announced soon.

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Losing steam

Another graph illustrating market weakness, comes from Brett Steenbarger. New 20-days lows outpaced yesterday the new highs for NYSE, NASDAQ and ASE. This high low line is a moving average over 20 days.

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a bottom in gold in the maing?

Nobody seems to notice but last week has the Obama administration pushed a bill through the US House of Representatives approving 106 bln USD supplemental ‘security’ funding for Iraq and Afghanistan but attached to it was a 108 bln USD credit line to the IMF on condition that the American members of the IMF Board agreed with the proposed 400 tons of IMF gold. On a total of 3217 ton. On its balance sheet they are booked on the basis of the historical cost or 8.7 bln USD, while the market value amounts to 95 bln USD.

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has the Won won? Tibbids

South Korea issued a 50.000 won banknote. It took a while but the value of the 10.000 won note has shrunk to 7.80 USD. What with inflationary pressure?

The Banker published his top-1000 banks by Tier 1 standards.
Tier 1 is common stock, preferred stock and hybrid debt-equity instruments.
JP Morgan Chase ranks first and Bank of America second. Of course, with a little help a friendly government reaching the top is easy.

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Free money for all (banks)....

Is it possible for the Russians to stop the slide from rouble and equity markets?
Since the top on June 1 the rouble-based Micex went down with 24%.
All right then, it’s not the only sector losing height.
As we mentioned yesterday.

But help is coming. From the ECB auctioning 442.2 bln euro’s today for one year at 1%. Euro rates fell to record lows.
As is illustrated by the overnight rates.
A success in terms of driving down rates. In terms of excess reserves this bargain opportunity gave banks the opportunity to stock up euro cash to an excess of some 270 bln euro.
Thank you ECB.
Last week the ECB said that eurozone banks could face 283 bln EUR losses before 2011.
Well, this makes pretty up for it, not?
No wonder European banks are going higher.
Don’t forget: there is still a FOMC meeting going on.

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Behind the scenes

Folks, look out. Stocks are getting a beating in general. Look to the weekly chart of stocks in the S&P500 above their 50-day moving average. We are at 41.

Another view is offered by the bullish percent indices of the different sub segments of the S&P500. This index is based on the point and figure technique and you can see that energy stocks are really diving from a cliff. Also financials are moving lower.

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Travelling...

Something different. I try to hop over to mainland Europe and looking for a flight, I was amazed how cheap they are compared with a year ago.
As a professional commuter – once – I never forget to honor rules as: look and compare (priceline.com as a starter), look for connecting flights (sometimes they offer a good deal), take round trips, travel light. Consider to take a train in Europe. There are some cheap formulas and it goes fast and civilized. Something else than the 5-hour trip between Dublin and Cork in coaches almost 80 years old.
But I repeat: travel light.

And try to take a nap during travelling instead of beers. Well, the second is not excluding the first.

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Organize your own bear market

An arbitrage strategy which involves buying a convertible security while simultaneously selling short the same firm's common stock. This strategy involves identifying stocks that are mispriced by the market, shorting the stock and buying a convertible security issued by that firm. Having sold the stock short, the investor puts proceeds in an interest-bearing account. If the stock price stays the same, then the investor will earn interest on the short sale proceeds and interest on the convertible security, while paying fees to the lender of the stock. In most cases, this situation will lead to a positive net cash flow.
So, knowing this, we’ll have to pay attention to the bond market too, if we try to interpret the price action of certain stocks. Of course this kind of action is attracting other professional shorters and than suddenly you have stocks halving in price in a couple of sessions.

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Profit taking?

When will oil roll over?

Not yet.

In the mean time, elsewhere...

Coal is going down. Commodity stocks as a whole seem to be under pressure, but this sector suffers quite heavily the last sessions.
Aside: look to big names as BHP Billiton (ticker: BHP). Profit taking time is there. This trade became the last months so crowded, that it became harder and harder for all names here to make any headway. Now they seem to be rolling over.

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Please, give my bonds back

Did someone hear recently anything new about the 134 bln USD US bearer bonds which were carried by two Japanese at the Swiss Italian border?
If these bonds are real – though I doubt it – than Italy will keep a third as their statutory penalty for non-declaration at the border. Or 40 bln USD.
Please will the owner step forward? North Korea? The mafia? ECB?
Who printed 249 US Federal Reserve bonds worth 500 million USD each? The funny thing is that the US is not issuing bearer bonds. Or do they…?

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Rotation

Sector rotation is under way.
The new winner is healthcare. And the contract research organizations. Names in this particular sector are Parexel (ticker: PRXL), Icon (ticker/ ICLR), CRL (Charles River Laboratories) and Covance (ticker: CVD).
As the Obama government starts to give more and more details on their plans for Medicare , investors seems to be tempted to buy these names.

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Preferred shares less preferred?

Preferred stocks pay a dividend but do not participate in upside growth or extra profits. The advantage, historically speaking, is that they paid a nice dividend yield. An interesting aspect is to look to the hierarchy in the event of a company's bankruptcy. Bank debt is at the top of the structure. Then comes secured debt, unsecured debt, accounts payable, preferred stock, and then, last and least, common stock. Usually there is nothing left over by the time it gets to preferred and common.

The exchange-traded fund PGF owns preferred stocks from financial companies, both foreign and domestic, that all qualify for the 15% qualified tax rate.
What it does: PGF tracks the Wachovia Hybrid & Preferred Securities Financial Index. The underlying basket currently includes 40 holdings comprised of U.S. listed preferred stocks.
Who it's for: Investors looking for a high-yield option in the financial sector. Preferred shares have both debt and equity aspects, and PGF is likely to be more volatile than other regular equity financial ETFs. Preferred stock securities, like those found in PGF's portfolio, are taxed with the same 15% rate as common dividends. This 15% rate compares favorably to the rate that investors would pay on fixed income or bond interest payments, which are taxed as ordinary income at the maximum tax rate.
Top 10 holdings: (coupon rate, rating). Bank of America (BA, 8.20%, BB-/B3), Barclays(BCS Quote) (8.13%, BBB+/Baa2), JPMorgan Chase (8.63%, BBB+/A2), Wells Fargo (8%, NR/B2), Allianz (ALL.PA) (8.38%, A+/A3), HSBC Holdings(HBS Quote) (8.13%, A-/A1e), Metlife (6.50%, BBB-/Baa1), ING(ING Quote) (8.50%, BBB/A3), Bank of America (8.625% PD 8.63%, BB-/B3), Credit Suisse(CS Quote) (7.90%, NR/Aa3).

For one reason or another, the preferred stock of financials is a nice tracker of the market. In doing this, it’s flashing a warning: it seems to break down.
A correction – after the consolidation – seems not to far away for the coming days while we’re nearing the end of the first half-year.
The first line of defence – the 20 day moving average - seems to be in danger.

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Emerging markets take a dive

The retreat of the emerging markets is another aspect of the chilling of the equity action as could be observed lately. Have a look to the Indian Fund. First hurdle of the 20-day moving average is taken here.

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When the reversal comes...

How high will long term rates in the US go? Nobody knows. But look out if the prices of long term bonds start to stabilize. this is a crowded, highly leveraged trade. A reversal can be swift and violent. Much lower seems more and more unlikely

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Biotechnology

The NASDAQ index was the motor for the rally which started back in March. The biotechnology sector was underperforming versus the NASDAQ. But tech is losing his leadership role. Relatively speaking we can state that tech now underperforms versus biotechnology.

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We're going down

After a couple of sessions with losses, everything went fine again today. The major indices in the US all ended in the black. Attention. Looking to the different sector bullish percent indices we notice how more and more stocks are not longer in buy mode. Profit taking is under way. Especially in the energy sector.

This indicator is build on the point-and-figure technique adding up all stocks of a particular sector with a buy signal;

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The reflation trade in reverse?

Is the reflation trade coming to an end?
This trade started back in March and while we’re approaching the end of the second quarter aka first semester, everything is becoming heavy.
The trade was simple: sell dollars, sell govvies, buy every other asset class. .
But we observe that the hottest stuff is already rolling over. The major indexes still hold, but it seems to be just a matter of time.
Would this mean that what went down, will come up again?
As there are: a stronger dollar and higher prices for US Treasuries?
And also lower commodity prices and the emerging markets losing steam?
One thing is for sure: the economy seems to stabilize, but it’s only a rebuilding of inventory. With raising unemployment, the consumer is trapped and no way he’s able to obtain this is through savings. Or better: less consumption.

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Grin

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Credit cards vs employment: beware

As the unemployment rate surges (not only in the US but everywhere), we see in the US the continuing high correlation between credit cards delinquencies and unemployment. This is not boding well.
There appears to be universal agreement that the unemployment rate will remain very high well into 2010. Does this mean consumers and banks have tougher sledding ahead than the “green shoots” theorists are currently pricing in?

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A technical trade set-up

As some know, I like charting. There are a lot of reasons, but at least it gives an edge about where the price of security is. Trending, non-trending, etc.
And you are able to scroll through many names in a short period of time.
An example.
This is the daily renko chart of Carnival Corp (ticker: CCL).
Mention how the trend is becoming negative.

Now if you go to the traditional point and figure charting, the same phenomenon can observed.

So if one want to set up a scan for buy or sell candidates than this can be a good starting point, because there are a lot of automated programs scanning for this kind of P&F set-ups.

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Ponzi, hedge funds and the reflation trade

The Frankel International fund is a South African construction. Lately we hear a lot of rumors which are not positive at all. Seems to be a Ponzi scheme where well known UK business men and some Monaco-based Russians are involved.

In the mean time we learn that hedge funds are working on their come back. Liquidations fell by 50% in the first quarter from 2009 from the record levels we saw in 2008.

Do we see the reversal of the reflation trade?
If so, buy government bonds aka TLT.

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Europe's own shadow bank: the ECB

The ECB loves working in the shadow. While voices raise to audit the FED, nobody ever mentions the ECB. Well let’s tell you a story. Repo auctions with somewhat longer maturity dates than what is common (two weeks) are coming.
As there are: 1 year.
And one of such auctions is coming up the coming weeks.
We know already the rate 1%.
Meaning: banks can offload eligible paper and in exchange you receive money for one year at a fixed rate of 1%.
Nice.
We hear in the market that there is a huge interest from the banks. Amounts of 500/600 bln EUR are whispered.

Did you also mention that prices of long term govvies in Europe are holding up much better last couple of weeks than their American equivalent?
And did you also mention that the swap rates where lower than the yields on those government bonds?

So, what are banks doing? They go out to by government bonds, swap them to a shorter time frame and will finance them at 1% during one year. This is called: easy money in the bank.

Thank you ECB.

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Someone want to buy a house in Spain?

Can you stimulate an economy with a printing press?
Japan is trying it for almost 19 years now, so the answer is obviously: ‘no’.
Printing money is issuing debt. And printing more debt cannot reverse a debt bubble until market forces have run their course.
The trend for this very moment is deflationary. And almost all asset classes are down, because the economy is readjusting.
Not only in the States, but everywhere.

From Reuters:

MADRID, June 16 (Reuters) - The number of houses sold in Spain fell by 47.6 percent in April compared to a year earlier, marking the largest percentage fall in 16-straight months of decline, the National Statistics Institute said on Tuesday.The fall in April sales to 29,217 units compared with a decline of 24.3 percent in March versus the same month of 2008, which had been the smallest fall in 11 months.


Moody’s downgraded 25 Spanish banks last Friday.
The unemployment rate in Spain is now 17.4% and is expected to go higher. The non-performing loan rate is still going higher: from 3.3% in December 2008 to 4.27% at the end of March 2009.

The Ronaldo effect?

Now what about this ad, back in the UK:

DON’T MISS OUT ON THE OPPORTUNITY OF A LIFETIME

UK house builder Taylor Woodrow de España, the only major UK house builder in Spain, discusses why the time is now right to purchase a home in Spain as the current climate makes purchasing the home of your dreams possible.
Victor Sague, Marketing Director of Taylor Woodrow de España comments: “For many months consumer confidence in the property market has been dented and quite frankly who can blame house hunters becoming subdued when it comes to making possibly the biggest investment of their lifetime.
However, at this moment in time we are currently seeing a number of people returning to the market, anxious not to miss out of some of the excellent deals that are currently available both at home and abroad.
Victor continues: “With the market looking brighter, this will of course add inflationary pressure onto house prices, the moment confidence returns. Indeed, house hunters that are unable to move quickly will know doubt miss out on the chance, of possibly their lifetime, to buy at the bottom of the market.

Indeed :-), plenty of houses over there now. We're not in a hurry

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Back from where we came....

Do you remember the end of May?
Everything was pointing to the great reflation trade: commodities were soaring, stock markets sprang higher and real estate showed some signs of life. Commercial Mortgage Backed Securities (CMBS) and Assed Backed Securities (ABS) rallied.
But this blossoming has gone in the mean time and we’re back to square one.

For a moment we thought we could defy the laws of supply and demand, but the truth is already setting in: we can’t. Supply is too massive and demand too tepid to see a sustainable price recovery.
Weak bank assets gave us a weakening consumer leading us to even weaker assets. Consumers and real estate have still more way to go on the path of deleveraging.

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Themes

Theme 1.
China = commodities. All these shipping movements are caused by inventory building by the Chinese. But production is still going down compared with the figures from the same month last year.
Ship owners are now charging 58.000 USD a day for large bulk carrier freighters but just 24.000 USD for next year and 2011.

Theme 2.
Indices are moving at the start of a week. Not at he end. This week is an expiration week. And the opening gambit was down.
Technically we’re moving in a very narrow range for weeks now. The reflation trade is a very crowded trade as is the ‘dollar is weak, bonds are weak’ trade.

Theme 3
This week Research in Motion is reporting results. RIMM, AAPL, GOOG and the semiconductors ETF SMH are holding up the NASDAQ. If they go, the NASDAQ will go too.
Not to forget: there was a time you had to be invested in individual names but the market has transformed to ETF/sector dominance.

Theme 5
The inversion of short term LIBOR-rates and short term Treasuries. Normally LIBOR is yielding more than the ‘safest’ investment on this planet. However, this is not the case for the moment as everybody is dumping govvies.

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Time to be bearish on gold?

Also this time the gold price will not go through the magical barrier of 1000 USD/oz. Almost a classical retreat to the low 900’s is coming . Our renko-charts are not positive. Neither the metal nor the mining stocks are performing well from a short term perspective.

Seasonality is pointing to a subdued market action the coming weeks. It ‘s only later in the year that the gold price normally receives a boost.
In my archive I found this chart which is averaging the price of the gold spot future over 30 years (from 1974 to 2003 to be precise) from Moore Research.

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Expiration week

It is an expiration week. The fan club of the Max Pain theory (where pro’s try to let expire as many puts and call worthless) will be delighted to know that the inflection point for most indices in order to obtain this result is lower.
Will this result in a down week?

In the mean time we read a report from Ned Davis Research handling the question if stocks are cheap.
We report

“Ned Davis Research looked at market valuations after bear markets since 1929. The firm found that in the first three months after bear markets, the market’s P/E tends to climb by about 10 percent. And the multiple has traditionally expanded 22 percent in the first six months after a major market downturn.

But since March 9, when the recent rally began, the P/E of the S.& P. 500 has jumped nearly 40 percent. Such a surge in P/E ratios may be warranted if the recession ends soon and profits recover quickly. While there are some signs that the worst of the recession may be behind us, few analysts expect profits to stage a major rebound. And, of course, it’s still unclear whether the recession and the bear market have ended.”

What’s the problem here? Earnings.
Nobody has a clue what earnings will be for this quarter and the remaining of 2009.

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Clockwork?

It is good old Sean Corrigan, chief investment strategist at Diapason Securities thes days, who assembled following scheme – in his own well-known style to show us that the end is near. Maybe. Almost.

Then…
DOW ‘29: FELL 48% RALLIED 48% FELL 78%
NASDAQ ‘00: FELL 40% RALLIED 40% FELL 81%
TOPIX ‘89: FELL 48% RALLIED 37% FELL 65%
UST YIELDS ‘81: FELL 34% RALLIED 34% FELL 85%
US HOUSEBUILDERS ‘05: FELL 47% RALLIED 45% FELL 82%
Abu Dhabi ‘05: FELL 26% RALLIED 26% FELL 55%
GOLD ‘80: FELL 43% RALLIED 46% FELL 65%
SILVER ‘80: FELL 67% RALLIED 61% FELL 75%
CRUDE ‘90: FELL 32% RALLIED 29% FELL 51% (+)

Now…
SHANGHAI COMP ‘08:FELL 73% RALLIED 70% …….
NDX ‘08: FELL 50% RALLIED 48% …..
MSCI MACHINERY ‘08: FELL 64% RALLIED 60%…
JPYAUD ‘08: FELL 47% RALLIED 46%…
GSCI ENERGY ‘08: FELL 71% RALLIED 71%…
DCI METALS ‘08: FELL 55% RALLIED 55%…
DCI AGRI ‘08: FELL 50% RALLIED 46%….


Another fine article you can find here. Sphere: Related Content

Sector rotation: get out

We observe that the heroes from some weeks ago are rolling over: restaurant chains are on their way back. A classic example of sector rotation by the pro’s. Forget all the stories written a month ago about this topic. Too many folks around trying too fool us while obliged to make a living. Journalists, I mean.

And here are the heroes of one session. Auto parts shares are tumbling after the outburst on Wednesday.
Also the housing sector is rolling over. Not yet, but nearly

Folks, it's friday evening here. The pub is waiting for us and I want to enjoy the light breeze coming from sea to the shores and sun filtering through clouds. Let's sing till midnight. Take care.

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Hunting the FED

Earlier this week the House Committee on Oversight and Government Reform asked the FED to turn over documents including emails to and from Big Ben as well as some notes from meetings and conversations involving Bernanke; Hank Paulson and Ken Lewis, CEO de la Bank of America.
Congressional investigators are looking for details concerning the acquisition of BoA of Merrill Lynch.
But more is underway.
Ron Paul, member of Congress wants to propose bill HR1207 to audit the FED. For the moment ‘The Federal Reserve Transparancy Act’ has 206 co-sponers. Only 12 more are needed to introduce the bill in Congress.
For your info: the FED has 45 bln USD in capital and 2.1 trln USD in assets. And is not audited.

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Figures and more figures

From Bloomberg.
More than 150 companies raised 82.2 bln USD this second quarter in new equity. A faster pace of equity issuance than at the height of the bubble in 2000.
The biggest issuer is the financial sector.
All these new shares are diluting shareholdership, the value of the existing shareholders and the earnings per share.
If the S&P500 is taken as a benchmark then the new shares have diluted corporate earnings by 3%. Total shares in this index have grown with 3.4% since March 31.

More figures. After paying back 68 bln USD in exchange for bonuses, there is still a long way to go. Western governments own roughly an estimates 450 bln USD in banks. Central banks provide generous collateral rules for borrowing in an effort to provide banks with liquidity. But the system needs to refinance some 25.6 trln USD of wholesale finding by 2011. No matter what happens, they never gonna succeed if there is no government back stop.

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Bulls and bears

When we look to what happened with the major indices on Wall Street the last 5 days, than we see the uphill battle of bulls and bears. For this exercise we take the candlestick version of the S&P500. These candles have very long shadows and a very small body. Meaning that both – longs and shorts – try to win the day. But no party is winning in this game and everything remains very well balanced.

When will this change?
The answer, my friend, on that question is blowing in the wind.

Hat tip to Tim Knight

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Is the Baltic Dry Index deceptive?

Attention folks: while Chinese imports of iron ore have been up 25% since the start of this year, Chinese steel production is only up 3%. What’s happening? Inventory build-up for sure.
So be careful for those who think that the Baltic Dry Index is an indicator of economic activity. Maybe it is but also maybe not.

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Real -i- ty

The Hong Kong research house par excellence Gavekal is attributing the rise in yields as the key factor of the weakness of the S&P500 yesterday.
Rising rates are a sign that markets are normalizing after the sell-off of hedge funds last year and the subsequent fall out.
But if fixed income investors are wrong over the coming months and the economy is not recovering with inflation remaining absent, bonds could rally again.
For the moment the only inflation we note, are the prices of soccer players. These are not for Real, it seems. I am always curious which bank is giving here the line of credit.

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Bond yields

Long term interest rates are going higher. Not only in the States where a 30-year Treasury auction is waiting for buyers, but also elsewhere central banks have no control over their long term stuff.
However, this is a critical point in order to manage all the billions of money which is pumped in the financial system.
10 year GILTS went today over the 4%.

Yesterday the US auctioned 10-years Treasury which also went over the 4% in order to lure investors. This offering was one of the many and aimed to raise 65 bln USD this week.
Investors have become increasingly worried that an economic revival could be stalled if this trend continues.
That’s what we call the perfect excuse.
Unfortunately we cannot use it if we slip in from the pub after midnight. The lady of the house never believes us.

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It is not only the weakening dollar...

The crude oil futures are now over 71 USD/barrel. All papers are claiming following reasons: the weakening dollar, the buying panic of hedgers and airlines and the lower than expected inventories in the States.

Not only the dollar is here the culprit, as the price of crude is also in EUR rising. It's all part of the game where the unwinding of the contango is raking huge profits for all those players who bought oil a couple of monts ago in the spot market and sold it forward.

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The Latvian pressure cooker

The Latvian pressure cooker is still on the stove.
We know the story: Latvia, the former Eastern European tiger, pegged his currency to the euro in order to speed up growth a little. Than the financial crisis came and Latvia found itself badly caught out. Credit was needed but the attempt to issue 100 million LAT-denominated bonds resulted in no takers. In normal times and countires you devalue the currency. But that will cause trouble in Europe. For starters: Swedish banks lent heavily to Latvia and once the devaluation cascade starts, these banks will be forced to take big losses. Than there is the fact that nobody knows what will happen to neighbor countries and farther south once the currency peg will be broken up.
The Swedish Central Bank borrowed this morning 3 bln EUR from the ECB. The Riksbanken has already a swap agreement in place with the ECB of 10 bln EUR. Now why do they do this?

Now, let’s have a closer look to European banks. Total lending to emerging markets is now some 4.7 trln USD. 74% of that came from European banks. The Netherlands and Austria are the countries lending more than 50% of their GDP to these emerging countries.

We read this morning

IMF director Dominique Strauss-Khan said that Mexico, Colombia and Poland face challenging financing deficits that if not corrected soon, could put them at risk of defaulting. The external financing needs of Mexico and Colombia have been met for 2009. In this regard, the comments of Strauss- Khan seem strange and could add noise to the markets. . . .
The comments of IMF’s Strauss- Khan are particularly inopportune but should not be taken seriously. The IMF hasn’t published a formal press release confirming the fund’s view. Mexico is still investment grade and it is very unlikely that any of the three major rating agencies decide to lower it to junk.
Mauro Leos from Moodys said a couple of weeks ago that “it was far fetched to believe that Mexico would lose its invest grade category any time soon”. The view of the rating agencies has been that Mexico needs to pass structural reforms to avoid a downgrade. Shelly Shetty from Fitch commented recently that Mexico would need a plan “B” in case Congress fails to approve a fiscal reform after the July elections in order avoid a downgrade. This amounts to sort of running in order to stand still.
But the prospects for comprehensive fiscal reform are very slim. In fact, the two major political parties: the centre left PAN and centre-left PRI have both said that they are not at all interested in passing a fiscal reform package. While no party is expected to publicly say that it favors increasing taxes particularly before the congressional elections of July, the political climate does not support the passing of any reform.
Mexico will be downgraded by one notch on the back of deteriorating fiscal revenues as the economy contracts to between -5.5% and -7.5% this year. Still the comments of Strauss- Khan add noise to the market. . . .

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I am thrilled....

On Monday the Dow went up +1.36 point. On Tuesday the Dow lost – 1.43 points. Yes, exciting.
The McClellan Oscillator for the NYSE ($NYMO in Stockcharts.com) however is breaking down into negative territory. Now let’s see what’s happening in the coming days. While everybody is hunting solar, penny and Chinese stocks.

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I want my bonus back

Yesterday was another trading day that can serve as an example how ridiculous markets have become lately. Regulated, well observed, big markets.
The S&P500 was trading lower by 1% throughout the day on very low volume and suddenly some institutionals bought massive blocks of the SPY. It were the comments of Paul Krugman, some yelled. No, the Chrysler news did it, was written by others. It’s just old fashioned manipulation.

Today there is TARP news: an announcement will be made which banks are allowed to pay back the TARP money and are in to repay bonuses again.

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Don't cry for me, Latvia

We still look to the problems in Latvia. A lot of people assume that the crisis will be small and manageable. Nothing special.
We fear that – as what happened in 1998 – there is a lot of potential that this crsis can spread very quickly over Eastern Europe and that the EU will react too slow to prevent this. The financial version of the swine flu.
Here is an excerpt from an article of Anatole Kaletsky from last week. Anatole is writing for The Times.

Europe is now in the middle of a perfect storm - a confluence of three separate, but interconnected economic crises which threaten far greater devastation than Britain or America have suffered from the credit crunch: the collapse of German industry and employment, the impending bankruptcy of Central European homeowners and businesses; and the threat of government debt defaults from loss of monetary control by the Irish Republic, Greece and Portugal, for instance on the eurozone periphery.
Latvia, partly because it has followed an Argentine-style policy of “fixing” its exchange rate and encouraging its citizens to borrow in euros and Swiss francs, is now in the front line of the battle between governments and financial markets - and a humiliating devaluation looks increasingly likely. Last weekend a former Swedish finance ministry official brought in by the Government as an adviser admitted that devaluation was no longer a matter of “if” but of “when and how”. If Latvia does devalue, then the two other Baltic states will almost certainly be forced to follow and the panic will probably move to Romania and Hungary. Beyond that, the contagion is likely to spread to the weakest members of the eurozone - Ireland, Greece, Portugal and probably Austria.
If the crisis expands, other EU governments - and especially Germany’s - will face an existential question. Do they commit hundreds of billions of euros to guarantee the debts of fellow EU countries? Or do they allow government defaults and devaluations that may ultimately break up the single currency and further cripple German industry, as well as the country’s domestic banks?

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Overbought

It’s simple and still so difficult. Trying to nail down the ETF’s which are most overbought and short them.
As a measure the 50-day moving average is taken. And this is the observation:
The Russian stock market ETF is the most overbought, trading 36.17% above its 50-day. India ranks second at 35.72%, followed by the steel ETF (SLX), emerging market Europe (GUR), metals and mining (XME), and Singapore. The majority of the ETFs on this list track countries.

Thanks to Bespoke Invest:

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The oil-scam

Now, here is a nice one. It has to do with the contango situation in the oilmarkets. Due to the fact that there was such a huge difference in spot and forward prices some months ago, the ETF’s shadowing the futurecontracts were not picking up at the same pace as the futurecontract itself. The reason is that these ETF’s have to deal with volatility and other specific technical factors.
So the last couple of months the USO ETF could not perform in the same way as the underlying.

From Phil’s Stock World we have following comment – by the way guess who is handling all that USO cash flowing in? Right. Goldman Sachs. –

So here you are giving your money to an ETF that gives its money to the biggest shark in the ocean, who chews off your legs in transaction fees and contango spreads BEFORE they even bother to circle around for the kill by gaming the market. NOT ONLY THAT, but the idiotic rules of the fund lead them to PUBLISH THE DAYS THEY ARE ROLLING IN ADVANCE so every little shark in the sea knows exactly when and where to feast on your bloody, bobbing carcas this month - and the next and the next and the next. Don’t worry though, once you are chewed up and digested, there will be a fresh round of suckers herded back into commodities and the commodity pushing stocks and ETFs every time GS, MS or Cramer need another payday.

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The difference between new and old? None

People ask what’s the value of the shares of the old GM.
The answer is: nothing.
It’s a penny stock on his way to zero.
What will be the value of shares in the new GM?
Well, because the old GM’s US pension fund with almost 100.000 million USD in liabilities is transferred to the new GM, the shares of the new entity could be worth as much as the old shares in a couple of years.

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The rigibor

The Lat is the currency of Latvia, the tiny Baltic country in huge difficulties. The authorities try to defend the peg of the local currency. Against the rest of the speculating universe.
We heard of reports stating that the government will come up with another plan in order to secure the lat.
In the mean time are local interest rates – better known as the Rigibor – soaring. Overnight rates are around 20% now.

Defending a currency is costly, because you do this through intervention and it’s a very tricky thing to do once the hunting season is open.

Estonia and Bulgaria are other countries having their local currency pegged to the euro. But they are out the eurozone. Now, is it an advantage to be in the eurozone?
Ask the Irish: they were downgraded today because assets of banks are fast deteriorating. That’s the second time in less than 3 months.
Will the Irish government default on its debt? Prices of insurance against a default – the so called Credit Default Swaps (or CDS) – went up and up and up this morning. The will need the Irish luck...

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Technicals

Another picture. We are looking to the advance-decline volume of the NYSE, charted in a cumulative way. We observe how this indicator trended upward with the upward sloped market trend starting in March 2009. However, since May there is consolidation.
While equity market sentiment is getting more and more positive, other indicators are not following. This is one of them.

This consolidation is confirmed by the number of issues figuring above their 50-moving average. Still 88% have a positive trend. Of course this consolidation can continue a long time.

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Accumulation - something is goin' on

Investment wise we like natural gas more than crude oil. Some big things are happening there, right before our eyes. Who is accumulating at these levels? Strange.






TGIF - Time to go for a pint in the pub. Ireland had a wonderful week. Not only outside the countryside but everywhere. God bless Sphere: Related Content

The strange volume spike

The Goldman Sachs Commodity Index has nothing to do with Goldman anymore. The GSCI is index of 24 commodities weighted by world production. Goldman believed that each commodity could be weighted in proportion to the share of that commodity in the economy. How can you do this? No idea. But ok. Of the total index, 45% is weighted to crude oil. 73.5% is dedicated to energy commodities. Of the remaining 27% of the index, 10% is allocated to each of agricultural commodities and industrial metals. The final 7% is split between precious metals and livestock.
Now look what happened at the end of the beautiful month of May with the volume. Who was positioning himself there without any price reaction?
Strange.

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Asset inflation - the bull is out

It’s all about speculating with the tax payer money for the moment. The Fed is still thinking about an exit strategy, while it’s the first thing (financial) firefighters should be concerned off. A Firefighter's first rule of survival is “know your way out”. The same can be said of financial firefighting. Though it has no intention of exiting soon, the Federal Reserve is planning its path out from the extraordinary measures it has taken to free credit markets and boost demand.
Ok: buy stocks, buy commodities, sell Treasuries, buy high yield debt and buy gold. Crucial in all this will be the dollar.
If the buck strengthens, look out for a reversal.

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Goldamn Sachs

The results of the trading activity for the NYSE were just published. No surprises here as we remember some very strange movements during last week. More than 33% of all buy and sell transactions was generated by program trading. and the leader of the pack is once more Goldman Sachs.

No, sir, they don't manipulate.

No, sir, just a coïnidence they work for their own account.

What's wrong, sir, with this kind of trading activity? Joe, the man of Main Street, you mean? You're naive, sir, because Wall street is there to part Joe from his money.

That is our job...

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Oil, gasoline and the rest....

The WTIC oil future took a hit this morning after an unexpected build in the US crude inventories.

De market expected a drawdown of 1.4 mio barrels but there was a build in crude stocks of 2.9 mio barrels.
But if one look to distillate stocks, we see that they are just on growing, far above the average.
One of the main consumers of distillate products is the US industry. Not so good.

We know that one barrel of oil produces gasoline and other distillates. Gasoline is traditionally the product that is maximized.

From the FT:

But that dynamic began to change over the last few years leading to some expensive refinery adjustments for the purpose of producing more distillates.
Which brings us to today. Refineries have no doubt been switching back to their old gasoline-max settings, and yet there appears to be no slowdown in distillate overproduction. This is troubling because the greatest danger for the price of oil is the appearance of a massive mismatch in the distillate/gasoline demand picture. It skews the overall price scenario for crude. While a lot of the excess distillate can be exported out, a global industrial slowdown creates the risk that exports might not be a sustainable solution for long.

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