Economy and Bond Market Highlights

Sunday, February 28th, 2010

The Economy and Bond Market

Consumer confidence took a dive this month, highlighting the fragile nature of the economic recovery. Most of the economic news out this week from consumer confidence, to housing and concerns regarding European stability had a negative bias to it.

Strengths

• Fed Chairman Bernanke reiterated his view that record low interest rates would be maintained for some time while the economy recovers from the recession.
• Fourth-quarter GDP, fueled by business spending, was revised higher to 5.9 percent from 5.7 percent.
• The Congressional Budget Office (CBO) estimated the emergency fiscal stimulus created more than 2 million jobs and boosted the economy more than many had expected.

Weaknesses

• New home sales hit a new record low, falling to just 309,000 annualized units.
• Existing home sales were also weak, falling 7.2 percent in January.
• Weekly initial jobless claims rose to 496,000 and hit the highest level in three months. This is a sign the economic recovery remains uneven.

Opportunities

• If financial markets are a good mechanism for discounting the future, the future appears relatively robust. The markets have been able to shake off bad news relatively easily this week, probably a good sign for the economic recovery.

Threats

• If one of the eurozone countries were to seriously threaten default, the whole eurozone system comes into question and threatens global financial stability.

Tags: Bad News, Bond Market, Bonds, Congressional Budget Office, Consumer Confidence, Economic News, Economic Recovery, European Stability, Eurozone Countries, Existing Home Sales, Fed Chairman Bernanke, Financial Markets, Fiscal Stimulus, Fourth Quarter, Fragile Nature, Global Financial Stability, Initial Jobless Claims, Low Interest Rates, Negative Bias, Quarter Gdp, Recession
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The Key to Normalcy in World Markets?

Wednesday, January 13th, 2010

The yen must replace the dollar in carry trades to restore normalcy to the global economy and markets, including Canada’s.

For nine months we were trapped in the bizarre world of “bad news is good news.” To the puzzlement of investors, stock markets rallied despite deteriorating economic fundamentals, negative GDP growth, 10%-plus unemployment, and the erosion of the dollar’s value globally.

Here’s why…

Read the whole article here.

Pierre Daillie (AdvisorAnalyst.com) GlobeAdvisor.com, January 13, 2009

Tags: Bad News, Bizarre World, Canada, Dollar Value, Economic Fundamentals, Erosion, GDP, GDP Growth, Global Economy, Globeadvisor, Investors, Nine Months, Normalcy, Puzzlement, Stock Markets, Trades, Unemployment, World Markets, World News, Yen Dollar
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Carry Trades Make and Break Markets

Monday, December 21st, 2009

Financial markets have been swept up during the last nine months by the Fed’s easy money policies, particularly its zero-interest-rate policy, which fostered a carry-trade in the dollar. Now, as the dollar rallies, and the Japanese economy and yen falter, the short term appointment of the dollar as the primary funding currency may be ending. Some say that it will be dire for markets. Perhaps the best news right now for the US and Canada is the bad news from Japan, of record deflation, and the BoJ’s need to devalue the yen. There’s a good chance the yen will replace dollar, and resume its decade-plus-long position as the world’s primary funding currency, and that’s good news for the market in the longer term. In the near-term transition period, however, markets will be volatile, as one carry unwinds, and the other re-winds.

Read more here:  Carry Trades Make and Break Markets, GlobeAdvisor.com, December 21, 2009

Tags: Advertisement, Bad News, Best News, Boj, Canada, Canada News, Carry Trade, Currency, Decade, Deflation, Easy Money, Financial Markets, Good Chance, Interest Rate Policy, Japanese Economy, Japanese Yen, Nine Months, Rallies, Term Appointment, Trades, Transition Period, Yen, Zero Interest
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Bill King: Is Gold in a Bubble?

Friday, December 4th, 2009

This post is a guest contribution by Bill King, of The King Report.

A worse-than-expected ADP Employment Change for November (-169k vs. -150k exp) chilled traders’ appetite for stocks. But gold is a different animal, and it’s in a parabolic rise.

Bad news is really good news for gold because it means ‘more juice’.

Several weeks ago, we noted that gold was about 20% above its key 350-day moving average. We opined that gold wasn’t bubbling yet; gold would need to get 40% above the key moving average before it was bubbling. Gold is now (in overnight trading) 34% above its 350-day moving average ($916).

Gold got 40% above its 350-day moving average on May 15, 2006; it fell from 720 to 542 in one month. Gold also got 40% above its key moving average on 3/17/08; it declined from 1032 to 682 by 10/24/08.

Oil got about 60% above its 350-day moving average in 2008…Nasdaq got 75% above in 2000.

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Ambrose Evans-Pritchard: After quietly doubling reserves, China is wary of gold ‘bubble’
The Chinese authorities have given the clearest indication to date that they view the surge in gold to an all-time high of $1,217 (£730) an ounce as a speculative frenzy. Hu Xiaolian, the vice-governor of the central bank, said Beijing would not buy gold indiscriminately.

“We must keep in mind the long-term effects when considering what to use as our reserves,” she said. “We must watch out for bubbles forming on certain assets and be careful in those areas.”
News that the rising powers of Asia are shifting a chunk of their fast-growing reserves into gold in a flight from Western paper currencies has emboldened investors to take out large gold bets on the futures markets or through exchange traded funds, leading to the parabolic rise in price over recent weeks.

However, officials in Beijing are aware that China’s…central bank cannot buy much gold without
distorting the price, so they have adopted a de facto policy of buying in a calibrated fashion each time prices fall back to their rising trend line – “buying the dips” in trading parlance. Experts say that China is putting a floor under the gold price but does not chase rallies once they are under way.

Tags: 916 Gold, Ambrose, Bad News, Bill King, Bubbles, China, Chinese Authorities, Chunk, Clearest Indication, Different Animal, Emerging Markets, Employment Change, Evans Pritchard, Exchange Traded Funds, Fashi, Frenzy, Futures Markets, Gold, Moving Average, Nasdaq, oil, Ounce, Paper Currencies, S Central, Vice Governor
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Barry Ritholtz: “Buy and Hold” is a Disaster

Thursday, November 26th, 2009

Barry Ritholtz, writer of The Big Picture blog and author of Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy, last week addressed delegates at a CityWire event in Berlin.

According to CityWire, he argued that we were in a secular bear market that began in 2000 and has some years to run. “In secular bear markets, the buy-and-hold approach to investing is a ‘disaster’, he says, citing the experience of 1966-82 in which the Dow Jones Industrial Average went through five strong rallies and ended up back where it started. It’s not all bad news - the current cyclical rally has a few months yet to go with up to 20% upside, based on historical patterns - but will be tough going, Ritholtz warns,” reported the website.

In part two of the interview Ritholtz discusses the state of the US economy, why the US government should have let the banks collapse, and why inflationary fears are misplaced.

Source: Richard Lander, CityWire, November 24, 2009.

Tags: Bad News, Bailout, Barry Ritholtz, Bear Markets, Big Picture, Citywire, Collapse, Delegates, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Average, Easy Money, Event In Berlin, Greed, Rallies, Richard Lander, Secular Bear Market, Us Government, Wall Street, Website Advertisement, World Economy
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Doug Kass: Market Has Blinders On

Monday, November 16th, 2009

Doug Kass, of Seabreeze Partners, who called the generational low in the market in March 2009, says the market is complacent about bad news now.

I do believe with some certainty that the market’s vulnerability to disappointment and/or exogenous events has been elevated and that many apparent warning signs — for instance, a 17.5% underemployment rate, weak consumer and small business (National Federation of Independent Business) sentiment, the unrelenting increase in the price of gold, a steadily declining U.S. dollar, the specter of cost-push inflation from higher commodity prices and so forth — are too comfortably being ignored or are being rationalized away in a tide of rising world stock prices.

These days bad news is what is keeping interest rates at zero, and the stimulus flowing, so as long as bad news is good news, market ignorance is bliss.

Read the whole article here.

Tags: Bad News, Business Sentiment, Commodities, Commodity Prices, Disappointment, Doug Kass, Exogenous Events, Federation Of Independent Business, Gold, Ignorance Is Bliss, inflation, interest rates, National Federation Of Independent Business, Price Of Gold, Seabreeze Partners, Specter, Stimulus, Stock Prices, Tide, Vulnerability, Warning Signs, World Stock
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Post-Bubble: “Good” News is “Bad” News?

Thursday, November 5th, 2009

In a recent Barron’s article, Randall Forsyth shares Michael Kahn’s (Barron’s technical analyst) view that the market, on the basis of numerous indicators is showing signs of strain, of topping.

Michael Kahn, Barrons.com’s own technical guru, thinks the seven-month-long advance now is showing signs of topping out. In his latest column, (”Setting Free the Bears,” Nov. 2,) points to various technical signs that the market is topping out. Unlike in the summer, when the major indexes paused at several junctures, market internals such as breadth now suggest something more serious.

Albert Edwards argues that if bonds and equities are indeed decoupling, then the market is going to be very sensitive to changes in the economic cycle. Edwards notes that during the 1965 to 2000 period, “bad” news was “good” news. Now, post-bubble in the US, with Japan as its progenitor, or model,  Edwards is suggesting that “good news” that hurts the bond market, is “bad” news for stocks.

In post-bubble Japan, bonds and equities decoupled. In the U.S. from 1965 to 2000, lower bond yields would mean higher stock prices, so “bad news” would be treated as “good news” if it benefited the bond market and, in turn, price-earnings multiples. But in Japan, equities follow the economic and profits cycle.

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Edwards emphasizes that, even in Japan’s secular bear market since 1989 (during which the Nikkei is off by three-quarters), there have been numerous 50%-plus rallies coming off of cyclical low points. Bit investors should have always sold these rallies when cyclical leading indicators topped out.

Post-bubble Japan is the progenitor for the U.S. after the bursting of its credit bubble, Edwards long has hypothesized. If so, the equity market is tied more tightly to the economic cycle, in which case investors need to be keenly aware of cyclical turning points.

Read the whole article here.

Tags: Avw, Bad News, Barron, Barron's, Bond Market, Bond Yields, Credit Bubble, Economic Cycle, Img Src, Junctures, Leading Indicators, Michael Kahn, Openx, Price Earnings, Progenitor, Random Number, Secular Bear Market, Setting Free The Bears, Stock Prices, Stocks Bonds, Technical Analyst, Technical Guru, Technical Signs, Three Quarters
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Stephen Roach: Starting to Worry About China

Friday, July 31st, 2009

In an FT.com editorial, “I’ve been an optimist on China. But I’m starting to worry,” Stephen Roach, Chairman, Morgan Stanley Asia, opines that he is starting to worry about China, and its bank-led financing stimulus, and wonders if China has not learned from this era’s mistakes:

On the surface, China appears to be leading the world from recession to recovery. After coming to a virtual standstill in late 2008, at least as measured quarter-to-quarter, economic growth accelerated sharply in spring 2009.

A back-of-the envelope calculation suggests China may have accounted for as much as 2 percentage points of annualised growth in inflation-adjusted world output in the second quarter of 2009. With contractions moderating elsewhere, China’s rebound may have been enough in and of itself to allow global gross domestic product to eke out a small positive gain for the first time since last summer.

That’s the good news. The bad news is that China’s recent growth spurt comes at a steep price. Fearful that its recent economic short- fall would deepen, Chinese policymakers have opted for quantity over quality in setting macro-strategy, the centrepiece of which is an enormous surge in infrastructure spending funded by a burst of bank lending.

Source: Stephen Roach (Financial Times): I’ve been an optimist on China. But I’m starting to worry, July 29, 2009.

Tags: Back Of The Envelope, Bad News, Centrepiece, Contractions, Economic Growth, Envelope Calculation, Financial Times, Global Gross Domestic Product, Gross Domestic Product, Growth Spurt, Morgan Stanley, Optimist, Percentage Points, Policymakers, Rebound, Recession, Steep Price, Stephen Roach, Stimulus, Virtual Standstill
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David Rosenberg: Mother of Jobless Recoveries Lies Ahead

Wednesday, July 1st, 2009

David Rosenberg appeared on Fast Money yesterday at the end of the day to discuss the economy, employment data, and the stock market outlook. Here are the highlights:

• There have been 600,000 jobless claims consistently over the last 20 consecutive weeks.
• The pace should slow to 350,000 to 400,000 job losses for now.
• Companies have let go 8 million full time workers - 2 million of those were put on part-time.
• The work week at a record low of 33 hours.
• Therefore, even if the green shoots are real, what you’ll see is part-timers being upgraded back to full-time, and their hours raised by their employers and so the traditional 100-150,000 new jobseekers who come into the labour force each month - I got bad news for them - no jobs.
• We are going to have the mother of all jobless recoveries, and the unemployment rate will make new post WW2 highs throughout the process.
• The market has priced out a recession, and priced in a recovery for the 3rd quarter - its possible that we may show positive GDP by then, its possible to see some re-stocking eg. we know that the auto production schedule is picking up…
• But, we also know that restocking that is not coupled with an increase in consumer demand is not sustainable, so I think that its possible to have a factually positive 3rd quarter.
• My concern is the 4th quarter - I think we’re going to have a relapse in the 4th quarter of what we had in 2002 - we had a gargantuan rally in March of 2002, bonds sold off, it was all good, fiscal reflation, the Fed cut rates doing its job, inventory restocking, infrastructure - none of that happened.
• We had to wait a full year for that - and in the mean time we had a gargantuan credit cycle.
• The market will retest previous lows - that would be normal - but its going to be earnings - so far this market has been P/E multiple driven.
• Now, earnings have to come through.

Click play to watch:

Tags: 3rd Quarter, 4th Quarter, Auto Production, Bad News, Consecutive Weeks, David Rosenberg, Employment Data, Employment Outlook, Job Losses, Jobless Claims, Jobless Recovery, Jobseekers, Labour Force, Lows, Mean Time, Part Timers, Recession, Reflation, Relapse, Stock Market Outlook, Stocking, Time Workers, Unemployment Rate
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Corporate Spreads Still Have a Way To Go

Tuesday, June 23rd, 2009

Corporate spreads have declined considerably since the “panic peaks” of late last year. For example, the current Baa spread in the US is 374 basis points compared with 611 basis points in December as shown in the chart below.

The chart also shows corporate spreads during other periods of intense economic, financial and geopolitical strains. Strikingly, corporate spreads widened to 724 basis points in 1932 during the Great Depression.

David Rosenberg, chief economist and strategist at Gluskin Sheff & Associates, said: “To be sure, corporate spreads have come in a long way from their near crisis highs, but looking at prior peaks around major events and economic downturns, it does appear as though there is still a lot of very bad news priced into the sector.”

Most indications are that the credit market tide has turned on the back of the massive reflation efforts orchestrated by central banks worldwide and that the credit system has started thawing. However, although the convalescence process seems to be well on track, it still has a way to go before confidence in the world’s financial system returns to more “normal” levels, liquidity starts to flow freely again, and the economic recovery can commence.

Click here or on the image below for a larger chart.

Source: Gluskin Sheff & Associates, June 19, 2009.

Tags: Amp, Bad News, Basis Points, Cape Town, Central Banks, Chart Source, Chief Economist, Convalescence, David Rosenberg, Economic Downturns, Economic Recovery, Gluskin Sheff, Great Depression, liquidity, Periods, Postcards, Strains, Strategist, Target, Tide
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Technical talk: S&P 500 turning down from 950 again

Tuesday, June 16th, 2009

The comments below were provided by Kevin Lane of Fusion IQ.

The S&P 500 Index is stalling again and now turning down from the 950 area. Given the large run-up off the lows it should not be a surprise to anyone to see the market starting to stall, pause or retrace. However, just as the market bottomed and rallied in the face of bad news, we are now getting the exact opposite where the news flow is improving or good and the market is selling off. It is this action of selling off on good or less than bad news that troubles us more than anything.

Early warnings of the loss of momentum can be traced back to early May when the S&P 500 broke below two faster-accelerating trend lines and then subsequently failed to climb back above them. To keep things in context, Monday’s action looks like a small blip so far, but we have to be aware that the S&P 500 has now failed on numerous attempts to get back above 950 and is now testing a less accelerated trend line while its RSI momentum diverges from price. Any movement below that aforementioned trend-line level would suggest the market may want to test the next level of support near 875.

At this point the low-hanging fruit has been picked and easy money has been made and traders/investors need to be more selective while the market corrects the excesses of the run off the lows. It doesn’t mean money can’t be made on the long side or we that we have to have a full retest; it just means being patient, and buying the next corrective wave may make more sense than chasing. To get a renewed bullish outlook, 950 will need to be taken out on a solid upside breadth day (i.e. good ratios for advance/decline and up/down volume).

Source: Kevin Lane, Fusion IQ, June 16, 2009.

Tags: Bad News, Blip, Breadth, Bullish Outlook, Cape Town, Corrective Wave, Easy Money, Excesses, Iq, Low Hanging Fruit, Lows, Momentum, Next Level, Postcards, Ratios, Retest, Target, Trend Line, Trend Lines, Volume Source
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Technical Talk: Sell the news?

Tuesday, June 9th, 2009

The comments below were provided by Kevin Lane of Fusion IQ.

During the very early stages of this advance off the then lows we would watch how the markets reacted to negative news flow. We did this to gauge whether all the bad news was already discounted in prices. Like many other lows in the past when bad news was widespread, this tape also had its share of scary headline news. And similar to other previous lows this market also ignored the bad news every time it came out and managed to work higher.

Since markets are a discounting mechanism they try to look ahead. Hence a few months back the markets were probably anticipating the not-so-bad economic data we are now seeing. Thus Friday’s bullish non-farm payrolls actually led to a sell-off after the initial euphoria faded. This selling on good news was most likely due to the fact that the news had been anticipated. Now one day of selling into a rally on bullish news does not make for a raging sell signal; however, it should at the very least make one start watching more closely to see whether bullish news in the coming days and weeks will lead to more of the same activity(i.e. selling the good news) that we saw on Friday.

At some point we are likely to get a testing sequence and selling the good news could be an early signal to take some chips off the table after a near 50% run off the lows.

Source: Kevin Lane, Fusion IQ, June 8, 2009.

Tags: Bad News, Bullish News, Cape Town, Chips, Economic Data, Fusion, Gauge, Headline News, Initial Euphoria, Iq, Kevin Lane, Led, Lows, Market News, Negative News, Non Farm Payrolls, Postcards, Rally, Scary, Target
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