Monday, March 30, 2009

Saut: Kites Rise Highest Against The Wind ...

Jeff Saut, the respectful strategist at Raymond James has posted his weekly missive, see the latest version here. Last week Jeff suggested this.
His call for this week (but read the full missive) in very short:
Last week the DJIA and DJTA broke out above their respective 50-day moving averages (DMAs). They also now reside above their 10-DMAs and 30-DMAs. The 34% rally by the Transports since their March 9, 2009 low is particularly interesting given the Trannies’ economic sensitivity; and, amid cries that we are in a Great Depression environment. And don’t look now, but lumber has quietly gained nearly 30% since its February 2009 low. Again, that’s pretty impressive action given the current housing backdrop! Meanwhile, we are watching Personal Consumption Expenditures (PCE), for this is how recessions end. Indeed, if the “real” PCE has stabilized, the end of the recession is not far off. Manifestly, the stock market always turns-up before the economy bottoms. So if the January/February strength in the PCE is for real, it is an extremely positive event. However, if the PCE strength is just a reaction to the +5.8% COLA adjustment, as well as the 13.2% increase in IRS tax refunds year/year, then the upcoming month’s data will revert to a more subdued reading. Accordingly, we are watching the PCE closely. While we are watching, however, our investments in platinum broke out to new reaction “highs” last week, and indices playing to Brazil are attempting to break out to the upside. Still, it is day 16 in the “buying stampede” and we have turned cautious. And, isn’t it interesting how the markets follow the news, for following “Friday’s fall” (-148 DJIA) the Obama Administration warned that some banks will need more government aid and that bankruptcy might be the best option for GM (General Motors/$3.62) and Chrysler.

Consider as a probability!

Rosenberg: Seasonal Skew In February Data?

David Rosenberg, the departing economist at Merrill Lynch(ed), these days known as BofA (BAC; Shop of Barbie's Ken) pointed to some interesting observations last week:
To be sure, there have been several data releases in February that have lined up on the strong side of expectations. Caveat emptor on any February data point that is seasonally adjusted at a time of the year when winter weather typically forces most of the country into hibernation. This was no ordinary February. At an average of 37 degrees (F), the month was two degrees warmer than a year ago and four degrees balmier than two years ago. As we said, almost everyone likes to talk about how the latest data have all of a sudden signaled a turn in the economy, with retail sales, home sales, and this week’s durable goods report. Everyone was so excited about a 3.4% increase in February orders, and it seems as though the headline was taken completely at face value. But again, like so many indicators, the seasonal adjustment factor was extremely aggressive in providing a record boost (in this case) to the top-line figure. We calculate that if a typical February adjustment factor had been used, orders would have shown a 5% collapse last month. We are still in the process of trying to figure out why this happened – it could be due to the mild weather compared to the last two years. The YoY trend in the non-seasonally smoothed orders data shows that the pace is still testing unprecedented negative terrain (-29%); ditto for shipments (-20%). The durable goods inventory/shipments ratio at 1.88 is close to an all-time high. That spells more production cutbacks and deflation pressure as we move into the second quarter.
So, we do advise caution here because we have seen a very aggressive set of seasonal factors that made the raw data look extremely strong in February. The seasonal adjustment for new home sales, for example, was the strongest since 1982. For orders, it was the strongest since the data were first released in 1992. The retail sales number in February in non-seasonally adjusted terms was the worst, a 3% decline actually, on record, and yet again a strong seasonal adjustment factor made it look flat … or flattering, we should say. Beware of reading too much into the data in February when a 40,000 raw non-seasonally adjusted housing starts number suddenly becomes a headline seasonally adjusted figure of 583,000 at an annual rate.
Yves Smith at Naked Capitalism was elaborating more on related stuff ...

Bylov: Weekly Inter-Markets Trading View

Jan Bylov, chief analyst at Nordea Markets, is a "rare specie" among analysts, as he is looking himself at all asset classes and uses inter-market approach in analyzing the markets. He writes in the summary today:

Stocks – Global “visibility” appears to be clearing up

It appears that recent changes to the US TALF, the PPIP and the further softening of US mark-to-market rules have given investors confidence that the global “visibility” is clearing up. By now, Latin America is up +41%, Asia 39%, World 24%, USA 24% and Europe 16% from their respective bear market lows. This constructive development is not least observable through the recent stock sector rotation towards early cycle sectors advocating that the financial business cycle slowdown is close to the bottom. Still, with a terrible macro situation “bears” will be looking to fight back from these better levels! We believe that we have enough evidence to hold an optimistic view of the financial markets, but due to the terrible macro situation we will probably witness much more ranging activity until the real economy will show evidence of a recovery. LatAm and Asia should fall less and rally more and the technology sector appears very attractive. Chances are fast improving that we have witnessed important long-term lows, but still not conclusive!

Bonds – Trapped by two major themes

While ECB so far has been able to resist commencing quantitative easing all other major central banks like Fed, BoE, SNB and BoJ are involved in buying government bonds etc. with the purpose of “printing” new money and nursing the yield curve to stay appropriate for the housing market and high prices at which to sell enormous amounts of government bonds. It seems questionable that ECB shouldn’t join QE as the state of the European economy and the banking sector aren’t outperforming other regions! Overall, we maintain that long government bond prices are likely to keep oscillating between the current fashion of the two dominating investment themes: 1) global economic growth fear and dovish central banks i.e. bullish bonds and 2) enormous bond issuance with the fear of a major bond bubble i.e. bearish bonds. Combining these two investment themes with evidence that the financial business cycle apparently is close to its bottom paying up for bonds holds increasingly unattractive risk/reward relations!

Commodities – Short covering in copper continues

We remain impressed by the fact that commodities didn’t follow Western stock markets to new lows during early March! This could be a coincidence but a “pattern” is evident when combining it with the recent global stock sector rotation suggesting that the financial business cycle slowdown is very close to its bottom! While oil is generally stable we continue to expect pressure on those investors holding speculative short futures positions – not least still evident in copper; hence a further recovery in copper prices is very likely.

Currencies – Prolonged range trading likely

A lot of the speculative flow has disappeared during the financial turmoil and with all major currencies in an extremely low interest rate policy mode the carry trade is of little interest. How about momentum trades then? With the macro situation extremely challenging everywhere – not least among the major countries/currencies - then huge macro related bets appear to be less likely too, and policy makers would undoubtedly appreciate to focus on all the many other problems at hand. Consequently, odds appear attractive that all major currencies (USD, GBP, JPY and CHF) will be trapped is big price ranges… until macro differences and monetary policy divergences become likely. This could hurt implied currency volatility a lot!

Watch the credit markets for the "visibility" of mark-to-bankers-dream (click through all links!) ...

Sunday, March 29, 2009

John Mauldin Taken Down To Earth ...

A Dash of Insight takes down John Mauldin that was trying to fly under the radar recently. GaveKal boutique gets a hit too, but still chance to dig the grave for Anatole Kaletsky at TimesOnline ...

It looks like I have missed the post at Calculated Risk, also on Mauldin ...

Nasing Spesal: Watch New Orders For Bulldozers

Latvian politicians are looking at bulldozers. Watch the new orders at DE, CAT, KUB, CNH and others... Click to enlarge (in Latvian only)!

Friday, March 27, 2009

UPDATED: Barbie's Ken In Slipery Drift?

Ken Lewis at BofA (BAC) is starting to drift?
I simply noted for reference this. I do understand the forces of negative feedback loop, where the opposite is true now. But what is this?
Keep eyes wide ... shut?

UPDATE: Why prominent pension funds want Ken to pay one of his job titles?

ECRI: WLI Growth At 21-Week High

No comment, take it dry ... my emphasis!
Reported by Reuters on March 27, 2009

(Reuters) - NEW YORK, March 27 (Reuters) - A weekly measure of U.S. future economic growth climbed along with its annualized growth rate, indicating signs of a smoother economic recovery, a research group said on Friday.

The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index rose to 106.3 for the week ending March 20 from 105.8 in the previous week. The index rose to levels last seen in mid-February, and its annualized growth rate -- while still in negative territory -- reached a 21-week high at -23.2 percent, up from the prior week's rate of -23.9 percent. It was the index's highest growth rate reading since late October, when it was -22.5 percent.

"With WLI growth recovering to a 21-week high, the pace of contraction in the U.S. economy should begin to ease in coming months," said Lakshman Achuthan, managing director at ECRI. The weekly index rose due to stronger money supply and stock prices, partly offset by higher interest rates and jobless claims, Achuthan said.

Danske: Credit Update

I leave here the bank' s view without my take on that:

CDS indices are tighter due to indices having their biannual rolls and not because of any significant relief in the market. The ECB has indicated that it might start buying corporate bonds in the secondary market. If this proves to be the case, it could be very positive for cash bonds. Finally, primary market activity continues to be high.
Due to the iTraxx indices rolling last Friday, the price on the new on-the-run index cannot be compared to the old one as a number of names have been replaced. The average credit quality of the new index is stronger than the old one. The new iTraxx Europe index trades at 163bp while the Crossover index trades at 910bp. The old
indices trade at 184bp and 1133bp, respectively.

The cash market for subordinated bank capital has rebounded sharply during the week. We see this as a consequence of the rally in bank equity prices but also due to a number of banks (e.g. UBS, RBS, Lloyds) announcing tenders for some of their outstanding subordinated bank debt. The incentive for banks to tender their Tier 2 capital is that it will increase their Tier 1 ratio (but decrease their Tier 2 ratio) due to banks recording a capital gain. Going forward, it is likely that more banks will announce tenders of subordinated debt. Consequently, we believe that the pressure on subordinated bonds will ease considerably in the short term.


Click on chart to enlarge, courtesy of Danske Bank.
Full research note by Danske here, but be aware of risks!
I am adding here the link to daily CDS wrap at FT Alphaville.

Momentum Star Kass ...

Well, Doug Kass pushes the "pause" button, for now... He was one of those, who have marketed the market bottom idea heavily! There is a post at TheStreet.com, probably right one, with bullish forecasts ...


I just miss the credit story, or let' s say, the solution of credit story ... I have seen some high caliber style drifters recently, but who knows?

Drifters? Bill Miller, Buffett ...

Thursday, March 26, 2009

Dress Your Windows ...

End of month, end of quarter approaching! People are dressing up ...

Some interesting stats at Bespoke Investment Group:
  • S&P500 sector breadth assures with positive measures. This is in-line with what you see on the surface ...
  • One month treasury yield goes negative again... Why somebody is desperately buying short maturity treasuries when equity market implodes?
  • NYSE short interest rises ... Strong conviction?
Interesting world!

Wednesday, March 25, 2009

Cuomo Timeline: Obama Capital LLC Hedges With Geithner's Put To Lift The Second Derivative Of Economy

Amazing fairy tale! Pure phantasm. And they lived happily ever after ...

  • Obama Capital LLC, the admired hedge fund with incredibly excellent track record, advises its clientele to go long stocks on March 3rd, and it is kept very confidential ...
  • The admired Leuthold joins the Obama Capital LLC on March 4th ...
  • On March 6th, the astute Jon Najarian leaks fundamentally sound rumor of mark-to-bankers-dream finally coming true.
  • Based on advises by Obama Capital LLC and "deep value equity analyst" Najarian, ISEE Index prints fresh 52 week high on March 9th, pointing to extreme bullishness in equity options markets, whereby equity market itself marches in a clear downtrend, an unusual event ... Obviously, the main street plumbers Joe, John, Johnny et al. have massively went into option markets for a clear bargain trade ...
  • On the next day (March 10th) we suddenly have Citi' s spinning Tuesday ... whereby leaked internal memos become a mainstream public media, and focus on "operational profits only" becomes the mark-to-bankers-dream de facto and the only accepted solvency criteria, fully approved by capitalist markets ...Well, that was a real shocker and positive surprise to markets, as confidentially kept information on credit spreads was not available to market. This guy is either rich, or lucky, or knows his biz. But this was listening to advises of Obama Capital LLC?
  • Grantham urges investors to move from cash to stocks on March 10th.
  • On March 11th Jamie Dimon, "the worst bank manager"of the US Big 4 (but check the stock prices before believing in it!), speaks out, but fails to build a nice "follow-through" candle in the S&P500 chart ...
  • Banker of the Year 2008, the "Barbie's Ken", says BofA (BAC) may repay TARP Funds This Year on March 18th, before the FOMC decision looming ...
  • Of course, the Fed is not regulating the hedge fund industry, including the Obama Capital LLC, Citi' s Spinning Tuesdays, Banks etc. and has no minor knowledge of their activities. In a deep despair, Fed initiates Quantitative Easing on March 18th ...
  • Meanwhile, the Obama Capital LLC introduces the market with second derivative case of economy ... And even Mobius fears to miss the last chance of his life!
  • After mere 50% profit in bank equities from the March low and the initial trading call by Obama Capital LLC, Geithner Associates LLC introduces Geithner Put on March 23rd ... or "Weighs Further Steps for Citi"?
  • On the following day (March 24) "Barbie's Ken" announces the final move to break the "negative feedback loop" and Merrill's culture ...
  • Dark Musings are forcing even the pro-bank John Hampton to turn around ...

It does not matter, what is Plan B? It is Wall Street that matters! Me stupid, the Thai Banking Virus has infected the real economy, and credit crisis is gone ...

It looks like PIMROCK has been widely noticed, and watch closely from 4th minute ... these guys have extensively discussed, but to me it sounds - not only bonuses, and not the last 2 days ... and Bill Gross needed deep study (how many minutes after announcement?) of newly announced plan to publicly commit to it (whatever that means?) ... Thinking of PIMROCK, I somehow thought of those poor plumbers Joe, John ... being extremely bullish in option markets at the start of month? But pure phantasm! And they lived happily ever after ...

Why Cuomo is spending so much non-productive hours with AIG?

Well, fundamentals remain the same!

This is how economic recovery begins ...

BNP Paribas: US Bank Credit Disconnect?

Credit markets have it more difficult than equities. US banks may, probably, be able to improve their finances, but no credit so far... This is because credit is paid last in US, after shareholders have got their cake?

Here is an excerpt from "Credit Objective" by BNP Paribas today:
It was a day of consolidation for equity markets as US stocks capped the steepest two-week gain since 1938. The 23% equity rally for the S&P 500 off the recent lows has been impressive, but it is the fourth such rally of similar magnitude of the last six months, many of which have been centred around policy developments. Thus far, it has primarily been the equity markets that have shown enthusiasm over the past two weeks that began when Citigroup announced it made a profit in the first two months (ex write-downs) and continued on the back of the Geithner toxic asset plan. It is still early days, and the plan will be put to Congressional scrutiny, although the public portion of the unleveraged investment comes out of the existing TARP fund and thus Congress does not get another vote.
Despite the huge rally in equities on Monday, the volatility index (VIX) could not break the 40 level, suggesting that markets are greeting this rally with a degree of scepticism as buying put option protection is still outweighing. Credit has underperformed equity markets, as the magnitude of the tightening has been very modest in relation to the overall equity market bounce from its recent lows. Similarly, cash spreads have hardly tightened over the past week. Senior and subordinated iTraxx indices have outperformed on the back of the US Treasury news, but cash spreads have shown a muted reaction thus far and US senior bank paper continuing to trade at distressed levels.
Click on chart to enlarge, courtesy of BNP Paribas.

Headline: Japan Exports Drop Record 49% ...

At Bloomberg this morning:

March 25 (Bloomberg) -- Japan’s exports plunged a record 49.4 percent in February as deepening recessions in the U.S. and Europe sapped demand for the country’s cars and electronics.

Shipments to the U.S., the country’s biggest market, tumbled an unprecedented 58.4 percent from a year earlier, the Finance Ministry said today in Tokyo. Automobile exports tumbled 70.9 percent.

The collapse signals gross domestic product may shrink this quarter at a similar pace to the annualized 12.1 percent contraction posted in the previous three months, the sharpest since 1974.

It looks rather a lost quarter of century for Japan (or third?) ... One should be afraid of inflation (unless the financial system collapses), as second largest economy suffers the economic tragedy?

Bankers obviously are fearing their exposure to established corporate sector, as everyone is happy about strong operational start this year. The real estate nightmare will not end with housing. Show me a case where QE (Quantitative Easing) has succeeded!

The Malaysian Insider has a good summary of thoughts on Japanese tragedy by Nomura Research Institute's chief economist Richard C. Koo.

Tuesday, March 24, 2009

SocGen: Euro Credit Market Wrap Up

Watch out! By Suki Mann at Societe Generale tonight:

Highlights: .Euphoric. is the only way to describe the initial equity market response to the latest .toxic asset. plan, which may or may not succeed. To put it simply, nationalisation of US banks is staring us in the face if it doesn't. Our view is that we're still at an inflexion point for this financial crisis, and months away from evidence as to the effectiveness of QE and the latest plan. And credit has refused to be sucked in by it. Turning point or not, credit conditions are easing, but there's little evidence that corporates are investing and consumers borrowing, and it will be like this for a while yet. So it's not just about removing busted assets off bank balance sheets, finding a clearing level for them and improving liquidity and access to it - it's about injecting confidence that the fundamental outlook is a little rosier. Well, manufacturing is in the doldrums (although European PMIs were indicating a bottoming out of economic activity), jobless totals continue to rise; inventories are not being depleted fast enough and global consumption remains very weak - possibly bottoming out, at best. Adding significant risk now and getting it wrong could be a painful decision, as evidenced by credit's reaction to the 7% overnight rally in US stocks, which was muted to say the least. Admittedly, cash spreads were generally tighter as the Street bid up the market, but activity was very limited. The indices opened in better shape but drifted wider throughout the session. Either credit market participants are non-believers, or investors are keeping their powder dry in readiness for the supply onslaught. Risk addition-wise, we continue to prefer staying close to home - telecoms, utilities and solid corporates, with senior banks bringing up the rear. For those with greater risk tolerance, selected subordinated financials also offer some interesting opportunities.

Nasing Spesal: Net Worth

I got it sent in my email box and I do not know where it comes from originally... but the cartoon has wrongwaycomics.com by Chris Eaton on it. May be quite true? Click to enlarge!

For serious folks - Martin Wolf at FT.com offers some thoughts "Why a successful US bank rescue is still so far away".

Monday, March 23, 2009

My US Bank Bailout Enchanted ...

Finally back to my beloved banks. We have "The Big Day" for US banks, as the (toxic) legacy asset "removal" is announced ...

The full official-doom here.
And here are some thoughts, in random order:
  • Alea sees the final announcement as expected, and points out: " ...to reduce the likelihood that the government will overpay for these assets, private sector investors competing with one another will establish the price of the loans and securities purchased under the program".
  • Krugman comes down a bit, after initial anger, but identifies: "Another way to say this is that by financing a large part of the purchase with a non-recourse loan, the government is in effect giving investors a put option to sweeten the deal".
  • FT Alphaville says: "... it' s all about liquidity"
  • WSJ Real Time Economics compiles the initial reactions by economists ...
  • But the post by Felix Salmon has an excellent anonymous commenter:

"Isn't the big hurdle getting the banks to offer up their assets to the auction process by FDIC? Once they do that, whether they accept the bid or not, it seems hard to imagine they would be able to value the assets very much above the highest bid offered. For example, if the assets are valued on their books at 50% of face value, they offer them in the auction process and the highest bid is 30%, I would think it would require a little chutzpah to decline the bid and go back to valuing these assets significantly above what has been shown as a market price."

Stock market does not have many questions, as KBW Banks Index is up almost 13% on day one hour before cash market close. In contrast to the market, I am just wondering, while scrambling my ...I have a very simple observation here. Private capital participates with 7% equity in the "project", but takes 50% of profit after interest (and taxes)? I think the math is very simple here - if the bank holds the toxic legacy asset at a value in the books that is more than 7% above the realistic market price, any bank would participate in the private share of equity of "Bailout Enchanted", even without a bullish prediction of value of toxic legacy assets at maturity... even if they think that "bailout train" is going to crash. But bullish animal spirits, having a dream of recovery to nominal value at maturity, should be in euphoria!

There is even better sample of Geithner Put ...

This looks like true capitalism!

Well, guys, even if you assume 10% or 12% above market (including all fees), gimme more! More!

Saut: Something More?

Jeff Saut, the respectful strategist at Raymond James has posted his weekly missive, see the latest version here. Last week Jeff suggested this.
His call for this week (but read the full missive) in very short:
In recent weeks, copper, steel, and energy prices have crept higher. Additionally, building permits and housing starts have come in better than expected. Meanwhile, tax refunds are up 13.3% when compared to this time last year, which is probably why retail sales have stabilized despite rising unemployment. Only time will tell, but it feels like the economic deterioration is no longer accelerating? Could it be that the huge increase in money supply, negative real interest rates (inflation adjusted rates) and the reintermediation we have been speaking about are beginning to have a positive impact on the economy? The stock market might just be sensing that, having leaped off of a generational oversold condition into a 20%, ten-session, upside stampede that produced four 90% Upside Days (March 10th, 12th, 17th, and 18th) within a two week period. Such enthusiastic buying has tended to be associated with the start of new bull markets. Yet as the Lowry’s service notes, “Our 2002 study of 90% Days showed that the start of new bull markets are typically identified by a single 90% Upside Day, representing a rush of enthusiastic buyers which typically calms down after the first dramatic day. On rare occasions, two 90% Upside Days have been recorded in the first 30 days of a new bull market. However, until the Uptick Rule was eliminated, the past 60 years have not witnessed any cases of four 90% Upside Days within a period of just seven trading sessions.” To which we reply, “While we are cautious, we remain hopeful and continue to favor the upside until proven wrong, which is why we are still ‘long’ various indexes and have selectively been accumulating stocks.”

Be careful out there!

Bylov: Inter-Markets Trading View

Jan Bylov, chief analyst at Nordea Markets, is a "rare specie" among analysts, as he is looking himself at all asset classes and uses inter-market approach in analyzing the markets. He writes in the summary today:

Stocks – Just another recovery or…

Following recent new bear market lows in benchmark stock indices a recover has commenced. So how can we be sure that this isn’t just another suckers’ rally? We can’t! A certain amount of evidence still has to surface before we would dare stating that we have witnessed an important bear market low. While some constructive evidence are observable like the recent stock sector rotation towards early cycle sectors suggesting that the financial business cycle slowdown is very close to its bottom and the continuing efforts to provide cheap money, fiscal rescue packages and public intervention to reinstate credit creation we also accept that terrible macro statistics remain a deterrent on fund managers willingness to begin commit the enormous free cash ratios. Consequently, a much strong stock market recovery must occur (e.g. S&P500 above 843) before evidence really mounts that global investors have begun looking beyond the continuing global macro economic damage.

Bonds – No new yield lows regardless of QE

Major central banks like Fed, BoE, SNB and BoJ have all commenced quantitative easing including buying of long maturity bonds. This has been widely expected and hence discounted, but the general lack of clear new yield lows in long bonds remains a concern and probably finds its root in the many concerns related to the long-term implications of QE and the enormous issuance of government bonds. Meanwhile ECB is hesitating joining the others due to conservatism rather than a much better state of the European economy and the banking sector’s ability to create credit… and we’re wondering whether a late ECB decision to commence QE will actually mark a contrarian “sell” signal. Overall, we maintain that long government bond prices are likely to keep oscillating between the current fashion of the two dominating themes: 1) global economic growth fear and dovish central banks i.e. bullish bonds and 2) enormous bond issuance with the fear of a major bond bubble i.e. bearish bonds. Now, with the financial business cycle apparently close to its bottom paying up for bonds holds increasingly unattractive risk/reward relations!

Commodities – More short covering in copper remains

When Western stock markets recently traded at new bear market lows most commodities didn’t follow! Is this by coincidence or do we have a “pattern” when combining it with the global stock sector rotation suggesting that the financial business cycle slowdown is very close to its bottom? We are undecided but the observations definitely continue to put pressure on those investors holding speculative short futures positions! And this is still evident in copper where a very large short position remains apparent; hence a further recovery in copper prices is very likely.

Currencies – The post summer 2008 USD recovery is faltering

Aside from ECB no other reasonable central banker wants a strong currency when caught in a deflationary environment, and when looking at futures traders’ positions the latest Fed initiatives (QE) came to some surprise as most traders were caught stereotype long USD and short almost all other currencies. Still, the big question may be who wants a strong currency the least? Fed, BoE, SNB, BoJ or even the Riksbank? We believe that USD could be in a prolonged price range dominated by two themes 1)“old US dollar collapse theorists” and 2)“US business cycle well ahead of Europe’s first recession with a euro currency” (1.23 – 1. 47 to EUR)!

Consider as a probability!

Mobius Fears To Miss The Opportunity

According to Bloomberg, Mark Mobius, the influential fund manager at Templeton Asset Management, said today: "The next “bull-market” rally has begun and there are bargains in every emerging market following a record slump in stocks". Obviously, "you have to be careful not to miss the opportunity", as greed is higher than the fear ...

Ohhh, but READ THIS BEFORE YOU MADE A MOVE! Just for reference ...

Friday, March 20, 2009

SocGen: S&P500 Technical Analysis

Surprisingly, but the technical analysis I find at Societe Generale are very much in-line with my scenario currently. However, if the advance extends beyond Thursday, March 26th or 805 level, I should be scrambling... and, probably, giving up?
Fundamentally, 900 would be a fair value at normal earnings and PE, but none of them are justified at moment, in my view. So, I could not buy close to "expensive market" for current conditions. Well, I am very small and long now, but with defensive tilt, and may hedge at any time ...

Click on chart to enlarge, courtesy of Societe Generale.

Be very careful!

ECRI: Weekly Leading Index (WLI) Ticks Up

No comment, take it dry ... my emphasis!
Reported by Reuters on March 20, 2009

(Reuters) - A measure of future U.S. economic growth rose in the latest week while its annualized growth rate steadied, indicating that economic conditions are beginning to stabilize, a research group said on Friday. The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index climbed to 105.8 for the week ending March 13 from 105.2 in the previous week, which was revised up from 104.8.It was the highest reading since since February 20, when the index was 106.0.The index's annualized growth rate remained unchanged at negative 23.9 percent, with the previous week's figure revised higher from negative 24.1 percent. "WLI growth held steady in the latest week and is clearly holding above its December low, suggesting that U.S. economic growth will stabilize in coming months," said Lakshman Achuthan, managing director at ECRI. The weekly index edged up due to stronger housing activity and weaker jobless claims, partly offset by higher interest rates, Achuthan said.

Click on charts to enlarge.


Try to put this into the "second derivative case" ...

Second Derivative Case Of Economic Recovery ..

Just an update, till we get a clearer view. The second derivative spin is making "weaker hands" nervous about the already, probably, lost opportunity to buy equities at market bottom ... As for top and bottom chasing - I am happy to earn the 60% of the directional move in the middle, and I leave the top and bottom 20% for the smarter guys. Sorry!

BNP Paribas published a research note on current US manufacturing conditions, based on surveys from the New York and Philadelphia Feds. They calculate the "NEM index" - a purchasing manager index for the US North East Manufacturing sector. The key findings so far:
The NEM index – a purchasing manager index for the North East Manufacturing sector, based on surveys from the New York and Philadelphia Feds ... – dropped to 31.6 in March from 35.5 in February, thus reaching a new low and indicating a further weakening in manufacturing conditions.

By contrast with the national PMI index (calculated from the ISM survey), the NEM index has kept on deteriorating in most recent months. These regional surveys thus tend to indicate that the improvement in the ISM is fragile.
Chart courtesy of BNP Paribas, click to enlarge.

My favourite ECRI WLI (will be updated tonight!) kept deteriorating too ... But some may argue that markets will turn at least couple of months ahead of the real economy. Lucky deserves it!

If that is not enough to cool the boiling brain, then probably the acknowledgement that - others missed too - helps? There are some highly regarded market strategists that missed the rally from March 6th lows, like Albert Edwards from Societe Generale, or even strongly believe that lows are still ahead, like David Rosenberg from BAC/Merrill Lynch(ed) ... Even the astute Jeff Saut from Raymond James sounded a bit concerned lately ...

Keep your eyes and mind open ... We may see a big rally despite my concerns!

Thursday, March 19, 2009

European Credit Market Update

I have a short verdict here: spreads are very wide in the real cash market and not that attractive at the offer side for high quality defensive names, where high quality Telecoms/Utilities are actually expensive ...
I am not chasing the high yield yet, and that may be quite synchronized with approaching the equities ...

I put here the excerpt from the "market wrap-up" by Juan Esteban Valencia from Societe Generale, for a "big picture" and contextual insight:

The Fed took the markets by surprise as it announced its latest measure to combat the crisis. The quantitative easing by the central bank will add its weight to the numerous rate cuts, bail-outs, fiscal packages and liquidity programmes that governments, central banks and financial authorities worldwide have thrown at the crisis. So far, all the measures together have failed to trigger a recovery although undoubtedly, all such efforts will in time reap the benefits and we are seeing the first signs that the US has perhaps reached a bottom. We still remain a long way from the robust growth of two years ago but at least the slide seems to be coming to a halt. Yet, while the latest efforts will surely help corporates lower their borrowing costs, whether they will translate into an eventual recovery in consumption remains to be seen. The initial market response to the Fed's announcement was one of optimism that helped equities rise in the US. By this morning the announcement's impact was wearing off slightly but nevertheless the synthetic indices managed to gain back some of the ground lost in recent sessions. We closed with the iTraxx Main at 184/185bp (-7bp from last night's close), the HiVol at 389/394bp (-11bp) and the X-Over at 1103/1108bp (-27bp).
Historical perspective in charts by Nordea Markets (click to enlarge).


And indicative levels for various indices by Societe Generale (click to enlarge).



Wednesday, March 18, 2009

UPDATED: Credit And Equity Disconnect?

UPDATE 12:50 (10:50 GMT) on March 19th:
Obviously, the bank equity buyers are not considering the issues like the Willem Buiter does it by suggesting "slaughtering sacred cows". That would be a party! It is more convenient to hide under the skin of my favorite Ken Lewis.

I was reading the latest note by James Montier of Societe Generale today, that also touches upon the issues related to Citi's Spinning Tuesday, and he quotes John Hussman:
The excitement of investors last week about Citigroup posting an operating profit in the first two months of the year simply indicates that investors may not fully understand the term "operating profit". Citigroup could burst into flames while Vikram Pandit sells lemonade in the parking lot, and Citi would still post an operating profit. Operating profits exclude what happens on the balance sheet.

....................................
ORIGINAL MESSAGE FOLLOWS:

It is not new to the readers of this blog that I have been wondering about many ideas surrounding the banking industry. "Mark-to-bankers-dream" is my favourite, among others, and I am still mentally struggling to accept my inability to capture the magic rationale ...

I do not claim having the brain to understand the pervert option games, but analysts at BNP Paribas have a credit story that, I still believe, I understand:

As the chart below illustrates, senior benchmark bonds issued by US financial institutions on government life support have now broken through the lows reached in the aftermath of Lehman’s collapse. In our view, this means that investors do no see the implicit backing of these institutions by the Fed or the Treasury as a reason for comfort, as prices continued to fall relentlessly regardless of the significant fall in Treasury yields. With investors preferring to buy only FDIC-backed debt, the market is telling us that receivership and haircutting of senior bond holders is a distinct possibility; particularly for those financials that have received the most government help, where political pressure to start sharing the bailout pain across the entire capital structure – not only between shareholders and taxpayers – keeps
mounting.


I am putting the AIG (American Insatiable Group?) aside. The equity of Citigroup is an option, or second derivative of option? But I noted the BAC for reference. Stupid bondholders? Is it not clear that shareholders get paid first, and creditors only thereafter? Or what the stock market and the financial sector, especially, is trying to tell me? Stupid me!

Nirvana Arrives ...

Bits and pieces in random order:

  1. US Fed announced that it holds rates near zero, will buy $300 billion of US Treasuries (prints money) and increases the purchase of mortgage interest rate programs by another $750 billion ... So, the quantitative easing (QE) finally arrives! This is because the life is so nice, or is not?
  2. BAC (Bank of Lynched Countrywide America) may repay TARP funds this year according to Ken Lewis. Just writing it down for reference... Assuming the Fed is not far from buying everything, why not buy back the TARP funds?
  3. Smart guys are making their lives more interesting around Citigroup ...
  4. Gold (spot) jumps from $892, just before the announcement of Fed's desires, to some $942 at the end of New York trade, Brent Crude Oil (front month future) adds just 1.37% on the day ...
  5. The S&P500 Financial sector recorded a nice 42% recovery from March 6, 2009 lows still yesterday, today we added another 10% on day, so now we are just some 57% up from March lows ... Well, KBW Banks Index is up 11% on day, KBW Capital Markets 6.3%.
  6. S&P500 is up 19% (as of cash close today) from lows at 666 on March 6th. S&P500 Consumer Staples sector is up only 8.5% from those lows ...
  7. And some charts below for better feeling of the magnitude of events (if not wrong, then the bond move (10 year US Treasuries) and FX (EUR vs USD) move may be record daily moves ever) that are going on today!
  8. BTW, we are not so far from 805 for S&P500, so I should be considering what to scramble ...





Tuesday, March 17, 2009

BNP Paribas: Second Derivative Case ...

I am closely following the ECRI WLI, latest post here. Sell-side analysts have used the rebound in some leading indicators as a case for economic recovery, with a very early example here, and that should happen quite soon...

BNP Paribas analysts, while commenting the economic data from US on Monday, nailed it hard in their daily "Credit Objective" today:

On the real economy side, the Empire manufacturing index came in significantly weaker than expected, with new orders registering a spectacular collapse. With the equity rally as a backdrop, the bulls have started to make a case that the second derivative of leading indicators have started turning the corner and so a vigorous recovery will follow in a quarter or two. This is a fictitious argument because we have not yet seen any deceleration in house price declines, which would stabilise bank balance sheets and consumer net worth, key ingredients to get a recovery going. Secondly, just because the rate of decline of a variable may have slowed, it does not imply that expansion will follow; it simply implies that the rate of contraction has slowed but the contraction continues. The latest reading of capacity utilisation, at 70.9%, its lowest ever, only goes to show that the output gap continues to widen and deflationary forces remain fully entrenched.

And for more aggressive species, do not forget Nouriel Roubini, with his view on second derivatives ...

Consumer Recovery Experience at Goldman ...

Some pundits are arguing that fuel prices are helping to stabilise the consumer spending. Well, apparently there are other stabilisers too. Quite interesting experience at Goldman Sachs, as reported by The New York Times at CNBC.com today. Just in case, the story disappears due to whatever reason, the key message excerpted:
Goldman Sachs got its bailout. Now some of its bankers, those aristocrats of Wall Street, apparently need a bit of a bailout too.
Goldman, which accepted billions of taxpayer dollars last fall and, as learned Sunday, was also a big beneficiary of the rescue of the American International Group, is offering to lend money to more than 1,000 employees who have been squeezed by the financial crisis. The loans, offered via e-mail last week, could range from a few thousand dollars to hundreds of thousands.
Working at Goldman has long been regarded as a sure path to riches. But Goldman’s employees are losing money on their personal investments — particularly in Goldman’s own elite investment funds, which have been considered one of the perks of working at the bank.
Now these funds have stumbled, and some Goldman employees who financed their gilded lifestyles by borrowing in good times are suddenly short on cash needed to meet commitments to their personal investments in the funds. “It’s a problem with the culture of spending,” said Gustavo Dolfino, the president of Whiterock Group, a Wall Street recruitment firm. “No matter how much you have, you spend like you have a lot more.”
So, this is sustainable ...

Well, this leads me to the reminder of "Mother Of All Our Problems". The Lazard has a nice chart that also segregates the debtors, click to enlarge, courtesy of Lazard.


One should be wondering why someone is willing to force banks lend more money? More lending is going to solve the problem? The insatiable borrowing has led us to credit crisis. But there are still some credible borrowers.
Well, it may mitigate the impact and shift out further into the future the debt deflation ... Government with borrowing capacity may try to substitute the consumer spending, as long as they are paying off the debts and saving.

UPDATE: Felix Salmon focuses on the wealth aspects of the Goldman story: "Goldman Wealth Datapoint of the Day".

Monday, March 16, 2009

Saut: Being There?

Jeff Saut, the respectful strategist at Raymond James has posted his weekly missive, see the latest version here. Last week Jeff suggested this.

His call for this week (but read the full missive) in very short:

As for the overall stock market, while it's still too early to tell if this is a bear-market rally or something more, I agree with The Chart Store: “While our sense is that the rally has more to go on the upside in the weeks to come, we feel it is still too early to say the final bottom has been put in place".
As to me, if we go below 740 for S&P500, I would consider increasing probability of selling climax. Remember, that this current rally was started in bear market by unusually extreme bullishness in option market. The bear leg, unfortunately, would be confirmed below 700, and 666 ... However, we should see a decisive move below 740 first, and there are, obviously, people who know (and who paid?) much more than me! So far, I miss the fear and subsequent selling climax for "clean table", and the banking spin fundamentally is so dirty with new media approaches (via internal memos). Well, but financials are not my concern anyway, as majority of them are traded as long term options. My eyes are locked-in at technology, the safe heaven, among others? Among others rather weak crude oil (Brent, please) appears so suspect in the equity rally.
It is also not very smart be overly bearish here, as there is some value in longer term, and the macro background does not seem very "normal" either. But the wise Keynes was not relying very much on long term hopes?
Above 805 I should be scrambling my ...

Saturday, March 14, 2009

ECRI: WLI Level at 14-Year Low

No comment, take it dry ... my emphasis!

Reported by Reuters on March 13, 2009

(Reuters) - A measure of U.S. future economic growth fell to a fresh 14-year low in the latest week although its annualized growth rate inched higher, a research group said on Friday.

The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index slipped to 104.8 for the week ending March 6, from 105.1 in the previous week.

It was the WLI's lowest reading since March 10, 1995, when it was 104.7.

The index's annualized growth rate edged up to a six-week high of negative 24.1 percent from negative 24.2 percent, offering some light in a period of economic downturn.

"While the WLI slid to a new cycle low, indicating that a business cycle recovery is not yet in sight, the uptick in its growth rate to a six-week high suggests the pace of contraction will slow in coming months," said Lakshman Achuthan, managing director at ECRI.

The weekly index fell due to higher interest rates and jobless claims data, with the decline partly offset by higher commodity prices, Achuthan said.

Tuesday, March 10, 2009

Grantham: Remember That You Will Never Catch The Low

The admired value investor Jeremy Grantham in the recent note "Reinvesting When Terrified" is writing:

For the record, we now believe the S&P is worth 900 at fair value or 30% above today’s price. Global equities are even cheaper. (Our estimates of current value are based on the assumption of normal P/Es being applied to normal profit margins.) Our 7-year estimated returns for the various equity categories are in the +10 to +13% range after inflation based on an assumption of a 7-year move from today’s environment back to normal conditions. This compares to a year ago when they were all negative! Unfortunately it also compares to a +15% forecast at the 1974 low, and because of that our guess is that there is still a 50/50 chance of crossing 600 on the S&P 500.
I am probably psychologically sick (or my perception is distorted by domestic vortex of debility?), but crossing of 600 (we closed cash market at almost 720 today) still has a bit more of chance in my eyes ...

Well, it is not only about domestic issues, I somehow, probably totally wrong, feel that majority out there has got it wrong. As mentioned earlier, Samuel Brittan wrote that "Demand matters, not animal spirits", and that reinstated by Paul Krugman today once again... This simply means that manufacturing cycle will not lead recovery this time, but final consumer demand, if not substituted by government?

" ... normal P/Es being applied to normal profit margins"? If normal profit margins, then taxed away to cover government deficits for next 5 years? Sick ...

Technically the 724 (daily high of March 4) to 740 (daily low of November 21, 2008) area is a strong resistance level. I still consider the probability of selling climax (as assumed in the original message), starting in the Thursday/Monday window. If no climax then - prepare yourself for the rally bigger than you imagine now ...

And what Stephen Roach was trying to say?

I "felt" the top of the equity market in the 2007, but i do not feel the bottom yet ...

Citi's Spinning Tuesday

Although the market was at least short-term oversold technically, and it needed to breathe some fresh air ... the main message from media is clearly a spin.

Reuters, Bloomberg, CNBC report (in random order) today:

Reuters: Citigroup CEO says bank profitable
CNBC: Citigroup Stock Rebounds on Pandit's Upbeat Report and Citigroup Sparks Big Rally, But the Pros are Skeptical
Bloomberg: Stocks Post Best Rally of 2009 on Improving Citigroup Outlook , or Pandit Says Citigroup Having Best Quarter Since 2007


Any questions? Well, in the morning Wall Street Journal (WSJ) still reported:
U.S. Weighs Further Steps for Citi

Obviously, WSJ has no clue, and "fundamentalists" will find the value in Citigroup (C) at $1.05 anyway. Assuming that the price corresponds the value of a long term call option, as even I still hold the price of ca. $45 couple of years ago in my brain, and Citi was in my portfolio then... No wonder that John Hempton's radical view of banking is gaining popularity, and Options Trader sees the obvious ...

This is really incredible how much trust is attached to what Pandit really says. And, did Pandit really mean it?

Fascinating action ...
Major U.S. stock indexes up 5-6% for the day so far (it is still 1 hour before cash market closing)!

UPDATED Equities: Option Market Alert

UPDATE 2 @ 22:20 (20:20 GMT): S&P500 ends the the day at day' s high 6.37% up, S&P Financials sector leads and is up 15.58% on the day, the financial spin a la Citi rules ...

UPDATE @ 16:45 (14:45 GMT): Impressive move, supported by volume ...
SEC denies suspending "mark-to-market", according to CNBC. If S&P500 holds above 700, we may be for re-visiting the former support (now resistance) levels at 730-770 area. Thursday/next Monday is critical timing (if we hold above 700 level) to judge the sustainability of this rally, if any ...

.........................................................................
ORIGINAL MESSAGE FOLLOWS:

This option market alert of EXTREME BULLISHNESS occurred in a strange market environment, i.e., the market is short-term oversold and in a clear downward trend!

ISEE Index printed a new 52-week high (extreme bullishness) yesterday, and the CBOE Options Equity Put/Call Ratio is at bullish levels too.

Last time similar alert was issued on February 6, 2009, and before that on December 29, 2008 (i was not posting on this blog at that time). Interestingly, that the last alert, in fact, has quite similar background today, as markets are trying the upside with financials in lead (best sector in Europe today) and there was this "mark-to-bankers-myth" spin again ...

If the market fails in the cash market, and we usually have 2-3 trading days, there is a high risk of selling climax ...

Monday, March 09, 2009

Saut: Bear Market Rally?

Jeff Saut, the respectful strategist at Raymond James has posted his weekly missive, see the latest version here. Last week Jeff suggested this.

His call for this week (but read the full missive):
We are in Orlando at Raymond James’ 30th Annual Institutional Investors Conference. There are more than 600 portfolio managers here from around the world, as well as more than 300 companies presenting at our conference. Manifestly, there will be some good investment ideas gleaned from this conference. In the interim, it is day 19 in the “selling stampede” and such stampedes rarely go more than 25 sessions before exhausting themselves on the downside. Meanwhile, our oversold indicator is more oversold than it was at the October/November “lows.” Therefore, we begin this week as we began last week, suggesting that the only question is, “does this stampede end with a whimper (selling dry up), or a bang (selling climax). While only time will tell, we continue to think the nadir is near. Indeed, we have opined that the bottoming sequence should see corporate bonds bottom first. They did in November. Then copper should bottom. It did, as can be seen in the nearby chart from our friends at thechartstore.com. Next should be stocks. The real question will be, “Is it a bear market rally, or something more?”

Who knows?

Bylov: Weekly Inter-Markets Trading View

Jan Bylov, chief analyst at Nordea Markets, is a "rare specie" among analysts, as he is looking himself at all asset classes and uses inter-market approach in analyzing the markets. He writes in the summary today:

Stocks – Sector allocation provides some light

Hidden within plunging stocks we find it very interesting to observe that a sector rotation is taking place (relative breakout in Technology/continued strong performance in Discretionary) advocating that the financial business cycle slowdown is very close to its nadir, and thereby suggesting that investors do find some light at the end of the tunnel – not least encouraged by historic cheap money and unprecedented fiscal rescue packages and public intervention to reinstate credit creation. Still, with terrible macro statistics and the risk of nationalisation in some Western businesses the enormous free cash ratios held by fund managers remain closely protected. Now, with benchmark bourses falling relentlessly we are approaching the next selling climax which will give room for the next recovery. That next recovery must be “unusual” compared to the whole bear market if it is to confirm that a long-term low-point has been seen… as forewarned by the global stock sector rotation.

Bonds – BoE shows leadership

Fortunately, Bank of England is showing leadership by implementing quantitative easing and immediately starts buying Gilts to be paid for with new unsterilized money (6% of GDP or a relative equivalent of Fed buying $700 bn of Treasury bonds!). Fed is still hesitating while ECB continues to live in another dimension unobservable to outsiders… intensifying the immense pressure on a sinking European Titanic real economy. Ultimately, if ECB isn’t better informed than us about the resistance of the European economy something has to give in (ECB or the euro currency?). Overall, we maintain that long government bond prices are likely to oscillate between the current fashion of the two dominating themes: 1) global economic growth fear and dovish central banks i.e. bullish and 2) enormous bond issuance with the fear of a major bond bubble i.e. bearish. Therefore, with no firm confirmation that the global financial and economic business cycle passed its nadir and bonds overall in trading ranges the recent BoE initiative appears to support our perception that underlying bond buying pressure remains intact!

Commodities – Historic large short copper unwind

As is evident from our global stock sector rotation analysis recent investor allocations are now suggesting that the financial business cycle slowdown is very close to its nadir. Combining this with recent months’ general ranging activity in commodity prices those investors holding speculative short futures positions are under intensifying pressure due to non-performing investments. This is not least evident in copper where a historic large short position is apparent… while the copper price last week broke to new recovery highs; hence a further recovery in copper prices is very likely.

Currencies – ECB hesitates and USD broken to new highs

BoE will now print lots of new money (6% of GDP) while our conservative ECB is in a high-stake gamble with the European real economy and the USD index last week broke to new recovery highs. This could easily see an extension of the weakness in SEK and CEE currencies for yet another week. However, with the rotation in global stock sectors (see Stocks) suggesting that the nadir of the financial business cycle is getting closer it won’t take mush to ignite a risk appetite revival. Still, a tradeable signal will not occur unless e.g. EUR/SEK plunges below 11.3850, EUR/PLN below 4.5565 and not least EUR/USD breaking back above 1.2992. Keep close attention.


Bullish rotation by early cyclicals or market is selling also defensives?

SocGen: S&P500 Further Losses In Store?

Fabien Manach, the technical analyst at Societe Generale, had a nice technical analysis chart last week, click to enlarge!


Be careful and consider as a probability!