Teh Emerald Isle

We do not understand.
While legislation is putting forward in Ireland to mop up the mess in the commercial property loan department, we learn that bas assets will be bought up to 90 bln euro worth of property loans. In Ireland? That is huge. Well, an estimated 25 bln EUR is lent by Irish bank on commercial property projects in south-east England.
Wrong sector. Wrong island.

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To liquidate

Everything seems to be under attack these days. Now it is the ETF department where regulators are asking questions about leveraged ETFs and commodity ETFs. These have become so big that they start to dominate the underlying markets. What do we read?
From Reuters:

It was the second day in a row in which holdings had fallen. [GOL/SPDR] SPDR has shed about 53 tonnes over the past month, the largest drop ever for the fund.
"The rise in SPDR holdings has been a major factor driving the market higher and if the fund is now turning around to be a seller, that would be a major bear factor,

But there is more.

A US legislative plan to regulate the near-$600,000bn market in OTC derivatives suggests that lawmakers debate the idea of banning so-called “naked credit default swaps”, which allow investors to speculate on the creditworthiness of companies. The proposal by key congressional committees would push most derivatives on to an exchange or clearing house but leaves open the issue of whether to outlaw CDSs, in which the buyer does not own the underlying asset.

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Attack

Away with the leveraged ETFs.
On Wednesday, Dow Jones reported Morgan Stanley Smith Barney had also placed under review the sales of its leveraged and inverse exchange-traded funds “that regulators said might not be suitable for individual investors”.
This, obviously, has big implications for an industry which until recently appeared confident of further growth, largely via the ETF-isation of ever more exotic underlying assets.
The key point the current blowup demonstrates is that an important distinction should now be made within the industry which currently tends to use the ETF name as an umbrella term for all its offshoots – plain vanilla index-focused ETFs, exchange-traded-commodities (ETCs), exchanged-traded-notes (ETNs) and exchange-traded-products (ETPs).
The latter, of course, being more suited to institutional rather than retail investors.
Meanwhile, if you want to see how things can really go wrong in an ETF structure, note the following SEC filing from the United States Natural Gas Fund (UNG) released late on Wednesday, in which the fund — already forced into the bilateral market by position limits — admits it could now be forced into buying completely unrelated assets with a poorer correlation to natural gas futures.

As Olivier Jakob, an energy market analyst at Petromatrix sums up the story:
We have in the past called the ETFs on single-commodity Futures a cancer for the Futures market. From the current CFTC hearings on position limits it does seem that the main commodity investment banks are now in the process of trying to manage rather than fight the process of setting position limits in the energy markets. In order to preserve some of their core business we would think that investment banks will have to sacrifice the concept of open-ended commodity ETFs.

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Flu

The US government has failed rather miserably in coaxing parents to get vaccinated against illnesses. Only about 15 percent of kids get all their recommended shots, one of the main reasons why worries that there will not be enough swine flu vaccine to go around this fall likely are overblown.
It’s one of the reasons why companies not named AstraZeneca plc (NYSE: AZN), GlaxoSmithKline plc (NYSE: GSK), Novartis AG (Nasdaq: NOVN), Sanofi-Aventis SA (NYSE: SNY) and Australia’s CSL Ltd. might not see any business from providing swine flu vaccines this season.
But then there is Wal-Mart. About 140 million people shop at Wal-Mart each week. A deal with the retailer could certainly help the government reach its goal of getting about 159 million people the vaccination this fall, especially young children that CDC officials also want to see get a regular flu shot.
There’s been no talk of pricing yet, but count on Wal-Mart to make price a fixture of any outreach. Don’t be surprised if there are 2-for-1 specials for families, and special deals for kids that also get a regular flu shot.

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Atlanta Pipeline Partners

I know, it's already some time we showed a chart that's interesting us. But what about this one?

We’re looking to Atlas Pipeline Partners (ticker: APL). The normal chart shows two averages crossing each other. Nice.

The renkochart is already showing the breakout.

Unfortunately, people and friends, this PC is not allowing me to paste the charts.... :-(

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Flooding the markets

Rates in the US are going up again.
The 2-year auction of Treasury paper was a disappointment. Again.
42 bln USD were auctioned. Who bought?

And it’s not over. Also today 27 bln 1 year were auctioned, tomorrow we have 39 bln 5-years and on Thursday there is 28 bln USD 7-year paper;
Good luck. Well the Chinese are in Washington (150 people) so they have something to discuss, I suppose.

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This seems to be impossible

Chinese non-export economy grew 23% in June! Before you start googling for that number, let me warn you. You won’t find it. I’ve computed it using fifth grade math.
Here is what we know: exports constitute about 35% of the Chinese economy and they dropped over 20% in June, while the Chinese economy (GDP) grew 8%. So the “X” is the growth rate of 65% of Chinese non-export economy.
0.35 x (-20%) + 0.65 x (X%) = 8%. If you were to solve for X you get 23%.Now that seems impossible to us…

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Nothing new... but still disturbing

Fitch has released a comprehensive study on derivatives held by various corporations and has come out with some disturbing results: the bulk of the derivative risk is concentrated not merely in the "financial company" category (99.7%) but in a subset of just five companies, which account for an "overwhelming majority" of derivative assets and liabilities.
The companies in question (Total Notional Derivatives: Assets & Liabilities, $ in Trillions)
· JP Morgan:$81.7;
· Bank of America:$80.0;
· Citigroup:$31.5;
· Morgan Stanley:$39.3, and of course
· Goldman Sachs: $47.8 (this is an OCC estimate: Goldman has not disclosed notional amounts in their derivative book, only # of contracts);
If you want a preview of what the Basel III definition of "Too Big To Fail" will look like, the above five companies is a great place to start.

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Overbought

We have an interesting chart from Bespoke Invest where the current levels of the different sectors of the S&P500 are highlighted. OS and OB stands for overbought levels and oversold levels. The only sector not overbought, following the monster rally of july 10th is the energy sector. Even more: 6 out of 10 sectors are currently trading at or near extreme overbought levels.

So this cannot go on for a long time.

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Builders: they're back... well, not all

The builder’s index was up more than 10% this week (July 20-24, 2009), one of the leading groups in the market. How long it is going to take before this sector will recover is difficult to say. But it will recover. Eventually. Now the group’s leader is still NVR. It’s the only builder stock able to be in positive territory compared with 2 years back.

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Many voices... one tune

Now consider this: most physical intermediaries are focused on hedging via the energy markets. They’re not in the business of trading oil equities and interest-rate products. That’s not necessarily the case for hedge funds and investment banks active in the commodities space. With clever algorithms at their disposal there’s no reason why they can’t outwit the physical intermediaries with what they know more about, especially with a latency advantage. Areas they know more about, that is, like equities and bonds.
This becomes increasingly tempting with so many commodity ETFs trading on “high frequency” friendly platforms like the NYSE Arca. The key here is detecting the arbs between the underlying price of the commodities and the actual trading price of the units. Then there’s the arbitrage with the interest-rate and Treasury markets. In the days of floor trading, simultaneously buying oil and selling Treasuries if a mis-pricing in inflation expectations opened up would be possible but not half as fluid. Algorithms can completely automate that process.
Is it any surprise then that oil is showing such an increased correlation with the dollar and equities?

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Almost weekend

While all European countries are selling gold within the boundaries of the Washington Agreement, there is one country which didn’t sell one ounce and still sits on 2451 Tonnes gold That’s Italy.

And than this one:

From The Telegraph

Events have already forced Premier Brian Cowen to carry out the harshest assault yet seen on the public services of a modern Western state. He has passed two emergency budgets to stop the deficit soaring to 15pc of GDP. They have not been enough. The expert An Bord Snip report said last week that Dublin must cut deeper, or risk a disastrous debt compound trap.
"A further 17,000 state jobs must go (equal to 1.25m in the US), though unemployment is already 12pc and heading for 16pc next year.

"No doubt Ireland has been the victim of a savagely tight monetary policy - given its specific needs. But the deeper truth is that Britain, Spain, France, Germany, Italy, the US, and Japan are in varying states of fiscal ruin, and those tipping into demographic decline (unlike young Ireland) have an underlying cancer that is even more deadly. The West cannot support its gold-plated state structures from an aging workforce and depleted tax base.

Oh dear. Can I stand this?

Time to turn off this thing and running to the local pub.

Friends and tourists all together: lets sing and have a pint

And you, dear reader, a good weekend and take care.

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Bulls versus Bears

Long before there were leveraged ETFs, the only leveraged play in town were the mutual funds of Rydex. Now here’s something strange: these funds seem to have become the perfect contra-indicator for the markets; if the bears are active (the red line) than the indices are climbing and if the bulls (the green one) are on top than the trend is down.
How come?
Stupid investors who systematically take the wrong side of the fence?
Or something else – as there are: these fund are used as a hedge. What makes sense.

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Boo-boo

High frequency trading has official gone mainstream. From the New York Times:

"It is the hot new thing on Wall Street, a way for a handful of traders to master the stock market, peek at investors’ orders and, critics say, even subtly manipulate share prices.
It is called high-frequency trading — and it is suddenly one of the most talked-about and mysterious forces in the markets.

Nearly everyone on Wall Street is wondering how hedge funds and large banks like Goldman Sachs are making so much money so soon after the financial system nearly collapsed. High-frequency trading is one answer."

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Bullish Percent Index

The bullish percent index is a momentum-based indicator that generates buy and sell signals based on oversold and overbought conditions. A sector is overbought when the BPI rallies above 70 and then turns lower. The oil sector is oversold whenever BPENER drops below 20. It generates a buy signal when it turns higher from oversold levels what exactly happened last week.
Once again...

Look to the red line which is the BPENER(GY).

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Moody's

Buffett dumps Moody’s (ticker: MCO).
The sales listed in the latest filing are:
7/20/09… 1,817,000 at $28.7269 average in open market sale.7/21/09… 3,915,100 at $26.9188 average in open market sale.7/22/09… 2,254,200 at $26.6425 average in open market sale

Also other insiders are dumping the stock: National Idemnity, OBH and GEICO. This is not boding well for the future of this rating agency in particular, but people seem to know that something is brewing.

Buffett reduced his stake from 20,2% to 16.98% over the last days.

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Iron ore

Spot iron ore prices are fast approaching $100 a tonne, well above the levels at which miners and steelmakers in Japan, South Korea and Europe have struck supply deals, as demand outside China recovers.
The surge in spot prices has spurred several banks to forecast that benchmark - annually negotiated - prices will rise next year, reversing their previous expectations of a fall in prices. "The market is going up, up and up," said one London-based iron ore broker.
Spot ore prices in China rose this week to $93 a tonne - including freight - and industry observers said the market could hit a year high above $100 a tonne in the near term. The surge is a remarkable rebound from April's low of $58 a tonne.

The producers of ore are Vale do Brazil, Rio Tinto and BHP Billiton.

Now is this the effect of restocking or of a pick-up of demand?
China announced that in June 49.42 million tonnes of steel were produced – an all-time monthly high. We hope this figure is reliable.

The current spot price is almost 15 per cent above the level at which annual benchmark deals have been struck between global miners and big steelmakers outside China. Those agreements cut benchmark prices for the 2009-10 year by about 33 per cent from the 2008-09 level.
Chinese steelmakers and miners remain deadlocked about a benchmark deal for 2009-10.

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Exhausted

We have a chart depicting the diverging index of the NASDAQ. This index indicates the most exhausted uptrend for years. The formula is:

(Day Momentum * 40 Day Momentum)/Variance 40 Day Price Changes

Of course: everyone wants to buy for the projected year end by Goldman Sachs (S&P500 + 15%).

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A small loss is only normal, isn't it?

In the Chinese Business News of June 29 there was an article stating that government aid was funneled into the stock market and in real estate speculation.

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, 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. “Where did it go? It’s undeniable that a portion of the lending may have flowed into stock and real estate markets and triggered the rebound in these two markets,” the former official said at a financial forum in Ningbo city in eastern China.

Now of course, none of such thing happen in Europe or in the States, right?

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Oh dear, my local pub...

From Bloomberg:

"The U.S. recession may not be coming to an end and there is a risk the economy may experience a “double-dip” contraction, said Martin Feldstein, a professor of economics at Harvard University. “There is a real danger this is going to be a double dip and that after six months or so we’ll have some more bad news,” Feldstein, the former head of the National Bureau of Economic Research and Reagan administration adviser, said today in an interview on Bloomberg Television. “We could slide down again in the fourth quarter.” The economy could “flatten out” or “even be positive” in the third quarter, and then it’s likely to contract again in the last three months of the year as the effects of the federal stimulus program wear off and companies finish rebuilding inventories, he said."


Oh dear… reading this, hurts:
From the UK Times:

"The rate of pub closures is accelerating, with 52 going out of business every week at a cost of 24,000 jobs over the past year, figures show. Almost 2,400 pubs and bars have vanished from villages and towns in the past 12 months, according to research for the British Beer & Pub Association (BBPA). Local pubs serving small communities have been the worst hit, the association said. The number of closures represents the steepest rate of decline since records began in 1990 and has risen by a third compared with the same period last year, when 36 pubs were closing every week."


Let’s have a quick look if the pub in the harbor is still there…

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High Frequency Trades

It is called the Enhanced Liquidity Provider Program and its actors are computers. OR High Frequency Traders as they are called. Yesterday the three darlings were C, BAC and CIT: more than 860 million shares were traded in these names in a universe of 5000 stocks. Or 10% of the total trading volume.
How to recognize these HFT targets? It starts with an early morning move followed by a flat tradingday around a very tight range. There was a constant bid to these stocks yet anytime they wanted to lift higher, there seemed to be a constant offer just a few pennies higher. The HFT’s made a killing: in addition of the 0.1-0.2 spread they collected a 0.005/share in liquidity rebates. Sphere: Related Content

Dr Copper

The copper future contract closed at 5350 yesterday. The candlestick formation formed a ‘shooting star’ or ‘nagareboshi’ . In the candlestick theory this is a bearish reversal pattern suggesting that a financial instrument may be reaching a top and the possibility of a correction is high. The copper price is currently trading at the very upper-end of the Bollinger Band, so the odds are even higher

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Who's gonna pay?

The total exposure of the US government to the financial crisis could hit $23.7 trillion, according to a watchdog report. Neil Barofsky, overseeing the Troubled Asset Relief Programme (Tarp), made the estimate in prepared remarks to a House of Representatives committee. The worst-case estimate represents the maximum exposure if all parties offered support requested maximum assistance. The figure includes all government and Federal Reserve initiatives.
That’s a huge amount of assets the US government is now involved in.

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What happened?

Now, this was a quicky. From AAA to –BBB to AAA in one week.
From Bloomberg:

Standard & Poor’s backtracked on ratings cuts issued last week and raised the ranking on commercial mortgage-backed debt from three bonds sold in 2007.
The securities, restored to top-ranked status, had been downgraded as recently as last week, making them ineligible for the Federal Reserve’s Term Asset-Backed Securities Loan Facility to jumpstart lending.
S&P lowered the ratings on a class of a commercial mortgage-backed bond offering from AAA to BBB-, the lowest investment-grade ranking, on July 14. The New York-based rating company reversed the cut today, S&P said in a statement. In a related report, S&P said it adjusted assumptions on the timing of projected losses on the mortgages.
“It is a stunning reversal and certainly raises questions concerning the robustness of their revised model,” said Christopher Sullivan, chief investment officer at United Nations Federal Credit Union in New York. “It may engender further uncertainty with respect to ratings outlooks.”
Debt rated below AAA isn’t eligible for the Federal Reserve’s TALF. Investors sought $668.9 million in loans from the Fed to purchase so-called legacy commercial mortgage-backed bonds on July 16, the first monthly deadline to finance the purchase of the securities.

Throw the ratings agencies out of the window

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Crucell

Drug groups to reap swine-flu billions: that’s a header in the dailies today.
Some 740 people have died from the H1N1 virus following the latest estimates. Analysts expect to see a boost in sales from GlaxoSmithKline, Roche and Sanofi-Aventis when the companies report first-half earnings lifted by government contracts for flu vaccines and antiviral medicines.
The fresh sales – on top of strong results from Novartis of Switzerland and Baxter of the US, which both also produce vaccines –
GlaxoSmithKline of the UK confirmed it had sold 150m doses of a pandemic flu vaccine – equivalent to its normal sales of seasonal flu vaccine – to countries including the UK, the US, France and Belgium, and was gearing up to boost production.
GSK also produces Relenza, an antiviral medicine that reduces the length and severity of the infection, and is preparing to increase manufacturing towards 60m annual doses. The UK placed an order for 10m treatments this year.
One beneficiary of the fears about the pandemic has been Roche of Switzerland, which sells Tamiflu, the leading antiviral drug, and has seen a sharp rise in orders from private companies as well as governments.
This story is well-known.
Less known however is that big drug companies do no develop these drugs themselves anymore. They produce. The development is done by small boutiques receiving a royalty on the sold volume. One such outlet is the Dutch company: Crucell.

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Latvia

There’s a lot of bickering going on about Latvia.
The IMF is playing hard ball versus the ECB.
From Den Danske Bank we learn:

While Mr. Kampars might be right on his assessment of the IMF staff, it is certainly unhelpful for further negotiations (if there are to be any) to bad mouth the institution that is supposed to give Latvia a loan. In our view it increasingly looks like the IMF will not pay out the next instalment on Latvia’s loan. This not only has ramifications for Latvia, but should also be a reminder to investors that the IMF is not just a “money machine” that automatically.

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IBM

One of the more remarkable movements in stocks last week came from IBM. Huge volume went through on Friday – expiration day. One could ask himself what happened here…
We don’t know, honestly. But some fund managers do, that’s for sure.

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Latvia - again

In May something strange happened but it went by barely unnoticed by the rest of this planet. Regional leaders in Asia agreed on a 120 billion USD emergency fund to counter the crisis. This fund was set up by the Asian Development Bank with his 67-members, in fact bypassing the IMF. Don’t forget that the IMF is de facto an United States driven institution, but that the US is also an important member of the ADB.
In the mean time we hear that the talks between Latvia and the IMF are not progressing at all. The IMF tries to play hardball.
While the EU is much more cooperative in finding solutions for the Latvian problem.
From the FT:

Although the Latvian Parliament did approve the announced budget cuts on Tuesday this week, the IMF response posted on its official website was rather lukewarm, suggesting that the measures were still not enough for the IMF to feel comfortable enough to continue the support of the Latvian peg with its own money.
Typically, the EU disbursements have followed those of the IMF in the sense that the EU left the IMF in charge of “managing” the programmes (ie, undertaking the economic assessments) and then would disburse its funds following the completion of IMF reviews. For example, this has been the practice in Romania and Hungary. Now it seems that in Latvia this IMF-EU cooperation could break down, with the IMF declining to conclude its review even though the EU wants to make its own disbursement.

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A weaker dollar - another view

More about the relative value of currencies. The Economist released its Big Max Index past weekend. The index looks at the relative cost of Big Mac in various countries to gauge how over- or undervalued the currencies in those places are.
“The Economist” has developed the Big Mac Index as a way to determine if currencies are overvalued or undervalued. The thought is that a McDonald’s Big Mac being pretty much the same everywhere around the world, one should expect the cost to be the same as well.
Last year the most overvalued currency right was the Norwegian Krona, with the Big Mac +121% more expensive in Oslo than in the US. Hong Kong and Malaysia have the most undervalued currencies, a Big Mac costing 52% less there than in the US.
Now look to this:



The numbers marked in red are the areas I would like to highlight. They are representative of massive currency overvaluation in Europe (+72% in Norway, +55% in Denmark, +29% in the Eurozone) and absurd levels of undervaluation in Asia (-49% in China, –52% in Hong Kong, –47% in Malaysia and –42% in the Philippines).

So what does this mean for the U.S. Dollar going forward? The U.S. currency depreciation against major free-floating developed economy currencies is over. The Euro is 50% overvalued, Sterling is 28%. There is not a lot of upside to that trade from here. On the other hand, the Asian and Middle East currency pegs are at some risk of busting wide open. The Asians and Middle East have held their currencies way too low for way too long. Inflation is rife in these countries as a result. It is only a matter of time before new pegs are found or a currency basket is used to replace the dollar peg. For China, the timing will be critical as their currency is significantly undervalued and protectionist sentiment in the U.S. is sure to mount as the slowdown takes hold.
On the whole, the U.S. Dollar should continue to be weak. But, weakness should come at the expense of Asia and the Middle East more than Europe.

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A weaker dollar?

If we look to the States it’s amazing to see how the shape of the financial landscape has changed since August 2007. Rates plunged from 5.25% to zero, the fiscal deficit went up from 2% to 13%, mortgage rates went down to 4.50% from 6.5%, the FED balance expanded from 850 billion USD to 2 trillion USD and we can go on.
David Rosenberg, chief economist and strategist of Gluskin Sheff & Associates, points out that there is one policy tool that is practically unchanged since two years ago … the US dollar. “It is the only policy tool that has not budged one iota since the crisis erupted two years ago. But we are sure that as the unemployment rate makes new highs and increasingly poses a political hurdle in a mid-term election year, it would make perfect sense for a country that always operates in its best interest - even if it may not be in everyone’s best interest - to sanction a US dollar devaluation as a means to stimulate the domestic economy,” he said.
Why is there no devaluation?
It ‘s called deflation. The D-word is a bad thing for owners of debts. They have to run for the hills and in doing so they’re looking for dollars to pay off everything which is dollar denominated. Another support is coming from the fact that different entities are still forced to show appetite for dollar assets. If they let the buck slip, the value of their dollar assets will be hurt.

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Canada

Yesterday we showed the correlation between a currency and its stock exchange. More of the same today. This time we have Canada.
Question is: who leads…
I guess it’s the currency

That’s all folks. Although the monsoon is pouring for the last couple of days, we know the pub is open. Just lean back and enjoy. It’s summer after all, now isn’t it…

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Is a new trend emerging?

Some people say that the natural gas ETF (ticker: UNG) account for one-third to one-half of all gas contracts traded on the futures markets. And maybe this size is influencing the price of the futures.
Anyway, UNG was seeking regulatory approval to issue new shares and this request was rejected.
Since March the fund has grown sixfold.
This restriction could be set up an arbitrage opportunity.. Because if demand for UNG-shares remain high, this ETF can trade with a premium vis-à-vis the underlying asset.

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Unforgetable: the week in pictures

A failed shoulder-head-shoulder set-up was the most important event for Technical Analysis aficionados this week.
This failure is opening the door to a rally, they tell us now.

In he mean time we will not forget the following pictures.
The ramping up of Goldman Sachs on Wednesday.

After a reversed split FAS and FAZ are the darlings of the pro’s again: just look what happened in the last minute of the session on Wednesday….

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Summer Song

It ‘s Friday. Let’s have a smile.
This one comes from Andy Borowitz

In what some on Wall Street are calling the biggest blockbuster deal in the history of the financial sector, Goldman Sachs confirmed today that it was in talks to acquire the U.S. Department of the Treasury.
According to Goldman spokesperson Jonathan Hestron, the merger between Goldman and the Treasury Department is “a good fit” because “they’re in the business of printing money and so are we.”…
Mr. Hestron said the only challenge facing Goldman in completing the merger “is trying to figure out which parts of the Treasury Dept. we don’t already own.”

The future for Bernie Madoff is less bright than everybody expects. ‘He will leave prison in a bag or in a coffin’ comments one man, owner of http://www.wallstreetprisonconsultants.com/.
His intake is original and – I believe – true: not his former clients, but the banks where he is hiding al his billions have an interest to silence him.

Diamonds are forever. That’s what we all believe. Hmmm, learn everything about this story on http://www.theatlantic.com/doc/198202/diamond.
And than there is this.

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South Africa

No renko charts today. The reason? I don’t trust this rally. Too classic. In an expiration week and then on Tuesday and Wednesday. An evil set-up.
We're not going there.
So we show something else.
The correlation between a currency and its stock index.
South-Africa to be precise.
First a weekly chart of the iShares South Africa and the ZAR:

And this is a daily picture of this situation.

What is the trend of the ZAR? Renko style :-)

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The new scapegoat

The next smoking gun. Calpers is attacking the rating agencies in order to divert the attention of Goldman Sachs, recently a lot in the news. Now, this is another important hurdle to get rid with for the regulators. If you can axe the inluence of the rating agencies everybody is a big winner. Imagine the fact that the US will not loose his AAA rating is already a big plus.

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The sky is no limit... for Goldman

Lately Goldman Sachs moves more and more in the spotlights. Record earnings… sure.
But at whose expense?
A transfer from the average American into the pockets of the thiefs of Wall Street?
Less and less people are buying this success.
It is Felix Salmon, the blogicon of Reuters, reminding us of the promises of GS back in September.

It had become increasingly clear to Fed officials in recent days that the investment-banking model couldn’t function in these markets…
Goldman — and to a lesser extent, Morgan Stanley — has maneuvered through the credit crisis better than other investment banks. But its business model, which relies on short-term funding, is under attack. Some stockholders worry that its strategy of making big investments with borrowed money will go wrong someday, which would make it more difficult for the firm to get favorable borrowing terms…
The most fundamental problem is how to generate profit growth in a world that no longer tolerates high leverage.

Since Goldman has to report as a commercial bank to the FED concerning their derivatives positions, we learn that the leverage is 1000 times their capitalbase.
In term of VaR (value at risk) this enormous leverage is showing up as follows:

Now, it’s too easy to blame Goldman for this and their bonuses. The first to blame in this story is the American Government. They took the risk that money would be used by healthy firms to make more money. They bailed out AIG without restrictions and/or control. In return, the feds did approve that AIG bailed out GS almost instantly.
The same FED granted GS an exception on the common VaR model applied by all other commercial banks.
How come?

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McClellan indicator(s): still bearish

The McClellan Oscillator is a market breadth indicator used by financial analysts of the New York Stock Exchange to evaluate the rate of money entering or leaving the market and interpretively indicate overbought or oversold conditions of the market. Developed by Sherman and Marian McClellan in 1969, the Oscillator is computed using the exponential moving average (EMA) of the daily ordinal difference of advancing issues (stocks which gained in value) from declining issues (stocks which fell in value) over 39 trading day and 19 trading day periods. The simplified formula for determining the Oscillator is:

Oscillator = (19-day EMA of Advances minus Declines) - (39-day EMA of Advances minus Declines)

The McClellan Summation Index is calculated by adding each day's McClellan Oscillator to the previous day's Summation Index. By using the Summation Index of the Mcclellan Oscillator, you can judge the markets overall bullishness or bearishness. Above zero the MSI is bullish; below zero it is bearish. The Summation Index is oversold at -1000 to -1250 or overbought at 1000 to 1250.

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US govvies

US government bonds are not popular these days. Their price is sliding since the start of this year and although last weeks a reversal could be observed, we can see on the charts that another wave of selling is underway.
The P&F chart of the iShares Treasury Bond 20 years and + ETF (ticker: TLT) shows that prices are slipping lower.

And the 60 minutes renko chart is confirming this negative development

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We repeat: the US is not Japan... or is it?

I still remember those days that Greenspan assured us that never ever the US would be submitted to a Japan-like slump. No way would a deflation à la Japan hit the States. Moreover, the United States couldn’t afford to wait deflation out the way the Japanese did/do: too many people who owe too much money to too many creditors. But hey, there we are: falling prices, big output gap, rising unemployment and credit losses that surpass the monetary and fiscal stimulus in a huge way.

And the government is trying to prop up the creditors. Just like they did in Japan. The banks have gotten trillions in loans and guarantees. Is this stimulating the economy?

Hehe...

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Consume and be confident

How much confidence has the American consumer.
Here you go?

Aonther green shoot turning brown.

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Another blow for banks

Moody’s Investor Service announced that they are going to modify the rating methodology applied to structured finance securities insured by financial guarantors aka monolines. From the FT

New York, July 14, 2009 — Moody’s Investors Service is modifying the rating methodology it applies to structured finance securities insured by financial guarantors. Specifically, starting September 1, 2009, Moody’s will withdraw the ratings on those structured finance securities insured by guarantors that have financial strength ratings below Baa3 (that is non-investment grade) if either of two conditions are met: Moody’s is unable to determine an underlying rating (i.e., absent consideration of the guaranty) on the security or the issuer has requested that theguaranty constitute the sole credit consideration.

Below is a list of securities impacted by the new policy whereby their ratings will be withdrawn on September 1, 2009 unless prior to that date Moody’s is a) provided sufficient information to determine the underlying rating or b) informed by the issuer in the case of GMAC Certificados Bursatiles UDIS MXMACFW 07-5U to no longer rate the security solely based on the guaranty.

The aforementioned list is deals mostly insured by monolines like MBIA and Ambac.
We remember that these structured products got a credit enhancement in the form of a guarantee of payment of principle and interest to bond issuers.

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PowerShares Wilderhill Clean Energy ETF

Another failed breakout. That’s what the PowerShares Wilderhill Clean Energy ETF (ticker: PBW) is showing. In the point and figure chart we recognize a quadruple top now, which failed.

The daily renko chart is confirming this failure. Where are the Obama-bucks?

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Oil markets

It is Jeff Korznik writing about the study economist Robert McCullough performed concerning the volatility in the crude oil market and the spike of July 3, 2008 and subsequent fall afterwards.

We cite:

In his final report McCullough examined the many events and announcements that had the potential to impact oil prices over this period. He found that fundamental factors of supply and demand were not statistically significant, but found (on page 13 of the pdf):

The proxy for the short-lived Commodity Markets Transparency and Accountability Act of 2008 was highly significant. Interestingly, this was the only variable that would have affected excess speculation as opposed to supply and demand fundamentals…. One conclusion to be drawn from these statistics is that the news stories cited by pundits to explain the dramatic spike in oil prices have little or no explanatory power.

In other words, the prospect of regulation of the futures markets had a statistically significant impact on prices. Let’s fast forward to the steep drop in crude this month. While there’s certainly been negative news on the economy, we had some negative news at various points while oil doubled from February. It is at least worth noting that the recent drop in oil coincided with a period in which Washington is seriously considering constraints on excess speculation in the energy markets.

What really interest us, is this:

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Goldman Sachs delivers ... of course: bonus time

Expiration week and results of Goldman Sachs (let us all act surprised) were delivering an explosive positive Monday after another down week. Europe is still enjoying some upward momentum this morning. We’ll have to wait how far this will reach.

For the moment this doesn’t alter our views:
°the stabilizing economic figures are nothing else than the reaction on the abrupt production stop some months ago. These inventories are worked off now resulting in a modest reprise of production. But nothing more so far…
° the correction we’re observing in stocks, can last a little longer and is not over (yet), but will give way eventually to another rally. As far as we can time these things, we think we will enjoy this rally in August.

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Facts

Who was there? The 20th June 2009, that Saturday at the Dublin Spire (the ‘spike’ it’s called) in O’Connell Street at 3 pm when the freeze event was set up. Was a good one. Here is the facebook page if you want more details. And if you wanna see more: this is a YouTube video showing the amazing effect this has.
Time to do something similar in Wall Street.
Ha.

I love the quants. Especially if you know some in person. Although it‘s the French Bastille Day, here is a line from a report from some BNP quants. About China. The end is near.

"By the very nature of the model, this result gives us two conclusions. Firstly, there exists a bubble in the Shanghai Composite Index. Secondly, it will reach a critical level around July 17-27, 2009. This will lead to a change in regime which may be a crash or a more gently bubble deflation. An extended version of this note, with a careful assessment of the confidence intervals and comparisons with the previous Chinese bubble ending in Oct. 2007, will be released soon."
Ha.

The (American) budget deficit tops 1000 billion USD for the first time ever, set to hit 2000 billion USD this fall.
This line comes from the Wall Street Journal.
Ha.

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AIG

AIG is a scam. At least its stock price. They did a 20-1 reverse split lately and if we look to the chart of the last 18 months one can measure what the damage is. Even better: it’s already heading back down. Now the reason behind is selling is compelling: people feel better about selling at 9 USD than at 0.40 USD. Even though the value might be the same. And shorters love this move.

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the bullish percent index

The bullish percent index is one of our favorite instruments in order to gauge the trend. This indicator is based on the point and figure technique.
Point & Figure chart analysis has been popular for a very long time. Part of its original appeal was that it was very simple for someone to maintain a large collection of P&F charts back in the days before computers. In less than an hour, using just a pencil, a newspaper and some graph paper, P&F chartists were able to update and analyze 50 or more charts every day. When computers arrived, they made it much easier to create bar charts and P&F charts started to fade in popularity.
The NYSE Bullish Percent Index is calculated by reading either a buy or a sell signal from the point and figure chart of each of the 2800+ stocks on the NYSE each evening. The value of the index represents the percentage of stocks listed on the NYSE that signal a buy.

One can look to the bullish percent index of the index. As an example we take the S&P500.

But we can learn a lot more if we look to the different sectors making up an index. As is showed below:

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Illiquidity

Stocks seem still to be in a correction. We think this can go on a little longer, before the tide turns. We agree with what Dennis Gartman is writing:

…we should also remember, however, that in the course of the past several decades, the most violent market movements have tended to come in late July and early August just precisely because the dealing rooms are emptier. Illiquidity during times of political duress can create its own problems, and we remember the Russian problems of August of a decade ago, and the problems attendant to LTCM that evolved out of that earlier crisis. These were “summer” crises, and there have been others, so just because the doldrums have set in does not mean that they are permanent, and that they cannot develop into something far more unstable. They can; they have and they will… we simply know not when.

But where a lot of people thing that we are looking into the abyss, I wouldn’t bet against a kind of sharp rally.
Be careful out there…

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Irish banks are losing ground... once more

In Dublin fair city, where girls are so pretty, the Irish banking sector is slipping away. Anglo Irish Bank, nationalized, announced they probably would halt payment of interests on part of their bonds. They cite the European Commission as source of this action in order to get the 3 bln EUR investment approved which was done earlier this year by the government.
Allied Irish and Bank of Ireland are trading substantially lower on this news.

I like the comments of Brett Steenbarger, intelligent as always:

Commodities have become a pretty good proxy for sentiment regarding the prospects for global economic recovery, as growth can be expected to generate increased demand for oil, industrial metals, and food stuffs. After breaking out of the base extending from December through April, commodities (DBC, above) have pulled back into that base, as investors have renewed questions regarding growth prospects. With that, inflation themes have taken a back seat to deflationary concerns, strengthening the U.S. dollar and sending Treasury prices higher (and yields lower).
For investors, nothing is more important than scoping out the prospects for inflation vs. deflation. The movements of the various asset classes are a kind of voting mechanism regarding those prospects and, thus far, are voting for continued economic weakness.

And then there is this: http://invislib.blogspot.com/ . The invisible library. If you want to look to something different this weekend than this is it. The Invisible Library is a collection of books that don’t exist, except in the pages of other books. It is physically manifesting at the Tenderpixel Library in London, but will resume invisibility after 12 July.

Time’s up folks. We close the laptop and stroll to the local pub for having a good Guinness. Take care and everyone a jolly good weekend. Sphere: Related Content

The financial sector

If you look to this chart of the banking stocks, you would thing everything is ok.

However it isn’t.
The bullish percent indices make clear that everything is not quite well.

Let’s have a peek to another ETF breaking down. July 8th the P&F chart of the Financial iShares (ticker IYF) broke through a triple bottom.

Looking to the renko charts we got confirmation:

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Euro-zone exports and Hewlett Packard

The Euro-zone has been hit hard by the collapse in global trade, with exports declining by almost 30% from their peak last year signs are that exports may be picking up again, especially to China and India.

We thank Goldman Sachs for this news.
They also report that:

New jobless claims dropped to 565,000 in the week ending July 3, after 22 weeks above the 600,000 mark. Along with some stabilization in the total number of jobless claimants in recent weeks and a sharp decline in layoff announcements over the past few months, this news offers hope that the worst period of job loss is finally coming to an end.

Now, I disagree.
The new jobless claims are dropping because less people are entitled to receive money from the government. So don’t get fooled…

And this one came from Sillvio Berlusconi himself:
"Everyone was of the opinion that the G-8 isn’t any longer the most ideal structure for dealing with the governance of the world economy,"

Now something else.
Last week I made a mistake. I mentioned Hewlett Packard, but put on the wrong graph. I apologize for this and take another look to this stock.
The point-and-figure chart of HP (ticker: HPQ) was showing a break out. However, one week later the price is going down. One other bad day and this break out will fail.

Our renko chart nails the real nature of the activity of this stock. And the technical story is negative. As we can see here.

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S&P500

While people marking ‘yes, we camp’ on the hills, the G-8 summit started in L’Aquila, Italy. Young Berlusconi choose the ruins of an earthquake as a glossy scenery, as this was Hollywood while people are camping since April in tents and other temporary shelters and the Italian population is getting mad because nothing is done so far. No insurance payments, no reconstruction, etc.
Discussing climate change seems a little obscene these days…

Our quadruple point-and-figure bottom candidate is no one else than the S&P500 SPDR (ticker: SPY) himself

The 60-minute renko chart is already down some sessions, however the daily chart is on the verge of breaking down too.

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Painting the tape

I feel good.
Especially when I see this kind of action in the S&P500 future. This picture is from yesterday and depicts the last 90 minutes of the sessions, when all the shorts had to cover their positions once the Big Boys step in and the index goes up, up and away.

But of course, this is tape painting, the real action remains bearish. Look the stock price of the Inter Continental Exchange (ticker: ICE). Why an exchange? They were the canary in the coalmine last autumn.
But of course, more is going on.
Reuters says:
· The top regulator of U.S. futures markets is considering a clampdown on excessive speculation in energy and commodity trading by restricting holdings of big players, part of a broader move by the Obama administration to stabilize the financial markets.
· William Blair and Co said in a research note that the stocks sank on fears of CFTC imposing restrictions on futures trading, noting that energy futures comprised up to a quarter of revenue for each of the exchanges.

And then this: the CFTC also eyes ETFs such as the Unites States Oil Fund (ticker: USO) and the United States Natural Gas Fund (ticker: UNG) as these ETFs have become so big that at one point USO held more than 20% of NYMEX front-month oil futures contracts. Sphere: Related Content

The DJ Transport index

Lewis: “Machines are gonna fail. And the system’s gonna fail. And then…”
Ed: “And then what?”
Lewis: “Then survival – who has the ability to survive. That’s the game.”
– Exchange between Lewis (Burt Reynolds)and Ed (Jon Voight) in 1972’s Deliverance

Another important index is on the verge for a downward break on a technical basis. We’re talking about the Dow Jones Transportation Index.
Look to the support line where yesterdays close right on the mark.

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Do banks ever learn their lesson

If someone thought that the game changed, think again.
This comes from Max Keiser and Stacy Herbert:

Morgan Stanley plans to repackage a downgraded collateralized debt obligation backed by leveraged loans into new securities with AAA ratings in the first transaction of its kind, said two people familiar with the sale.
Morgan Stanley is selling $87.1 million of securities that it expects to receive top AAA ratings and $42.9 million of notes graded Baa2, the second-lowest investment grade by Moody’s Investors Service, according to marketing documents obtained by Bloomberg News. The bonds were created from Greywolf CLO I Ltd., a CDO arranged in January 2007 by Goldman Sachs Group Inc. and managed by Greywolf Capital Management LP, an investment firm based in Purchase, New York.


Now, Moodys downgraded the Aaa tranche of this CDO with six notches to A3 because its default rate for loans in the Aaa tranche soared to 7 percent. No problem for Morgan Stanley. They managed to repackage this paper throwing in some credit enhancement, collateral, reducing the poorly performing assets, make the equity tranche a little larger and throw in a CDS and hop… the same loan pool gets another Aaa rating.
Everybody is repackaging again. Goldman plans to sell 200 mln USD of repackaged commercial mortgage-backed paper soon.
And attention folks: this is all approved by your local regulators.

On the other hand: somewhere there is still demand for this kind of paper. Maybe it’s your own pension fund buying...

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US Steel

Time for another quadruple bottom stock. This time it is USX-US Steel Group breaking through its bottom on the point-and-figure chart.

Of course we look for confirmation on the renko charts. While the 60-minutes chart broke down already some days ago, we observe that the daily renko chart can follow suit. The Commodity Channel Index turned already and the stop-and-reverse indicator can flip sides any moment.

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After slamming the brakes...

Stock markets are not longer a proxy for the ‘real’ economy neither is the price action in some other asset classes.
However, we are convinced that the ‘green shoots’ of last months are nothing more than the logical reaction of the economy after we hit the brakes last September with the Lehman and AIG-drama.
Economic activity came abruptly to a halt. The following months, inventories were depleted and the economic activity we experience now is nothing more than an effort to replenish these inventories.
There is economic activity but on a low level.
The global economy is recovering very slowly and it’s not coming to an end soon.
So the recession is here to stay, people will spend less and no way there is inflation in the pipeline.
That means that after the shake-out of dollar and bonds, they will come back in vogue and that is not good news for other markets.
Although we thing that after this correction in stocks another sharp rally can follow.

And there is Europe: 15% of the British economy is linked to the financial industry (in the States only 5%). This oversized sector is still in a downturn and this can hurt the pound. Spain, Portugal, Ireland and Italy can not cut rates in order to deal with the local economic weakness. As a result they must take on more debt, increasing the probability of more rating downgrades. The risk they will leave the EU and go back to their own currencies is growing. Fast.

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Gold and Euro

Most of the times the price of gold is function of the strength/weakness of the dollar. A good proxy to measure this relationship is the EUR/USD.
The last few weeks however we observe a divergence between the Gold ETF (ticker: GLD) and the Euro ETF (ticker: FXE)

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Retail is breaking down

What is breaking today?

The consumer is.

We take the Retail Holders ETF (ticker: RTH). On the point and figure chart this ETF breaks through a quadruple bottom.

And also on the renko's the break is clear.

The chart of the 60-minutes renko is showing the way and broke already down

But also the daily chart is now following.

Yes, the consumer is giving up. Green shoots become yellow weed if not watered.

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Going down.

NASDAQ had yesterday the most daily new lows since March 20. The cumulative advance/decline line recently made a lower high. This just confirming that the break down of the indices is shaping further up.
Also metals and mining were slammed yesterday with a loss of more than 5%. The Natural Gas ETD reached a 52-week low.
Oil prices are down 9% in one week.
And several regional banks hit new lows while the sector lost 25% form the peak in May.

Oil lost yesterday another -2.59 USD/barrel at 64.14 USD. Which trade is unwinding here? Now Solar stocks are trading lower again. They seem no differently than a leveraged bet on oil prices. The biggies in solar land First Solar, Suntech Power Holdings and SunPower Corporation, all traded lower. Even the Claymore/Mac Global Solar energy ETF (ticker: TAN) was hit.

Now, if this correlation is working to the downside, what about the upside?

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When the music stops...

If you want to see the fall out of the real estate bust in the US, click here.
Edgar Martins, a Portuguese photographer, made this pictures for the NY Times. Be quick, before this paper also halts its activities.

An absolute fabulous novel is out: Hedge Fund Wives. You find the six first chapters here.

There was a time when the European Securitisation Forum was held in Barcelona. Brilliant time, that June 2007, when we drunk champagne and danced to a rock band called D’Leverage.
How different for the ex-colleagues who attended this year in Edgware Road, rather a cheapish venue in London, where coffee had replaced the bubbles.
The reason is obvious: the industry of repackaging mortgages, consumer credit or auto loans has ceased to exist

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No job today... what about tomorrow

What about this message:

If you are 35 years old, have only ever worked in the City and have lost your job, then the chief executive of Britain’s biggest listed recruitment company has a grim message for you on the prospect of a recovery in financial sector employment: “Those jobs have gone and they’re not coming back any time soon.”

These are the words of Alistair Cox from Hays Recruitment.
And I think the guy is right. Especially with what the ECB has in mind, things never will come back as they were. A draft report is expected today from the EU and this report states that there us a strong case for curbing existing rules on banks’ funding needs, accounting reforms and other policy changes in order to prohibit banks to lever themselves again to the tune of 30-1.

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I am a train...

Exploring the universe of point-and-figure charts linked to renko pictures, we halt today at Burlington Northern Santa Fe Corp (ticker: BNI), a railway stock acting as an icon for everything that is around moving in the American economy. After the rally from March, it looks as if clouds are packing together at the horizon.
The daily renko chart is still upbeat: the daily trend is positive though a little overextended as the CCI-indicator is showing us.

On a 60-minutes base, however, things are looking different. It seems a short term correction is under way.

This thought is confirmed by the P&F chart where a triple bottom seems to be taken out soon.

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