The Great Reflation Continues

[Excerpted from Bill Cara's Daily Report]

The Great Reflation play continued to unfold on Friday. At the closing bell, the S&P 500 (987.48 +0.73 +0.07%), the DJIA (9,171.61 +17.15 +0.19%) and the NASDAQ Composite (1,978.50 -5.80 -0.29%) were all higher. As with the Thursday rebound, the market leaders were Basic Materials and financial sectors (XLB +1.0%, XLF +1.0%). Utilities (XLU -1.3%) was a loser..

Among industry groups, the strongest were the Goldminers ($XAU +4.0%) and Banks ($BKX +1.1%). The Goldminers also gained +2.9% on Thursday, after losing almost -7% over the previous two days.

For Cara 100 company stocks, two of the top three gainers were Brunswick Corp (BC +9.5%) and Teck Corp (TCK +5.1%), which were the two leading gainers on Thursday, up +27.1% and +7.3% then as well.

Is it not amazing that every time the Fed prints money and $GOLD soars ($24.10/oz over the past two days), some of that money finds its way into BC stock? Just Friday I remarked that the stock was soaring “despite a (that day’s report of) -77% plunge in boat sales, a -43% quarterly plunge in sales at their important Mercury Marine division, and plunges of -33% and -30% in the company’s fitness and bowling/billiards businesses, respectively. The Q2 loss was -$163.7 million vs just $6 mil a year ago in that quarter. The consensus loss was -$1.36/share and the actual loss was -$1.85/share. Through restructuring, however, there was an increase in cash, which was trumpeted by Wall Street as the shares were pumped +27.1% higher on the day.”

This is proof of concept that fresh money in the hands of select (read elite) players, moves stocks, regardless of the reported fundamentals. This price action is not investing; it’s not even speculation. It is front-running hyped media..

As for Teck Corp, I noted that the stock would do well after the Chinese bought a significant equity stake, announced July 3. TCK closed July 2 at $16.09 and Friday Jul 31 at 26.29, which is a gain of +63.4% in four weeks.

The $USD (78.29 -1.04 -1.31%) sunk to a new cycle low, reaching back to 2Q2008 levels. The Yen (105.64 +0.96 +0.92%) as well as the Euro (142.57 +1.81 +1.29%), Pound (167.18 +2.16 +1.31%) and Canadian Loonie (92.77 +0.43 +0.47%) were all winners against the Dollar.

$GOLD on Friday, like Crude Oil, made solid gains as the USD sunk, ($GOLD 954.10 +19.80 +2.12%). All this started early Wednesday as the $USD began to weaken. But $GOLD is back to slightly below Monday’s closing price ($953.70), when the $USD closed higher at 78.64. So, it appears the Fed is trying to hold the line on gold as the US Dollar weakens.

Just like that +19.80/oz pop in the price of gold, Crude Oil (69.45 +2.51 +3.75%) was up solidly in Friday trading, following a gain of +$3.59/bbl on Thursday. Clearly traders are putting on a gold-oil vs $USD paired trade.

In the commodity price affected Canadian equity markets on Friday, the Toronto Composite (10,787.15 +110.43 +1.03%) and Toronto Venture bourse (1,179.57 +32.53 +2.84%) were up sharply a second day in a row.

The US long bond ($USB 119.00 +1.95 +1.67%) was stronger for the fourth straight day. Treasury yields for the 30-year (4.311 -1.39 -3.12%), 10-year (3.501 -1.40 -3.85%) and the 5-year (2.533 -1.37 -5.13%) instruments were lower again, and much lower than a week ago as US Treasuries have been pumped up. The Treasury bill yield was unchanged (0.175) a second day in a row.

Earlier Friday, Austral-Asian markets all closed sharply higher as the flood of money printed by governments earlier this year is seeking to find a home, despite the increased risks involved: Japan’s Nikkei 225 (10,356.8 +1.89%), Shanghai (3,412.1 +2.72%), Hong Kong (20,573.3 +1.68%), Australia (4,249.5 +1.28%) and India (15,670.3 +1.83%) all soared.

The European bourses did close lower on Friday, however, after major European oil companies Total and ENI reported sharply lower earnings: the French CAC (3,426.27 Jul 31 -0.27%), German DAX (5,332.14 Jul 31 -0.53%) and FTSE 100 (4,608.36 Jul 31 -0.50%) were all down on the session.

The spot (cash) market, with the Euro much stronger during the day, saw the price of gold, palladium, platinum and silver gap higher at one point in the morning and then continue to move higher during the session: (954.35 +17.06 +1.82%); (261 +4 +1.56%); (1209.0 +14.0 +1.17%); and (13.90 +0.29 +2.13%), respectively.

The US equity market futures closed higher on the day, but had been stronger earlier (DJIA 9126 +16 +0.18%). The Euro firmed up during the day (1.4254 +0.0171 +1.20%).

Comments

[Mad Hedge F...:]

Don't bet the ranch. My favorite coincident economic indicator, the “Boot Index,” is showing that we may be entering a very modest economic recovery. That is the price at which you can buy Asolo’s top line mountaineering boot at the REI member sales. I bought this hiker’s dream for $5 last March (click here to see report) , and yesterday the price had climbed back up to $27. Of course, this is not the full retail price it should be selling for of $280, with tax. Similarly, we should be equally cautious about Friday’s report of Q2 GPD growth of minus 1%, and the downward revision of Q1 from minus 5.5% to minus 6.4%. To say this is an improvement is like taking money out of one pocket and putting it in the other, then booking a profit on the transaction. The hard truth is that consumer spending, business investment, housing, and inventories are still in terrible shape. Consumers are broke and getting broker, a big problem when they account for 71% of GDP. Only massive federal government spending is supporting the economy, and what happens when that runs out? The next $2 trillion in stimulus is going to be a lot more expensive than the first. Sorry, but I remain a skeptic. I’d rather go hiking in the Sierras than put money in the market here.

Aug 02 03:28 PM

[Prudent Man...:]

Instead "clunkers for cars" we should have given Treasury securities for GM bonds so that the retirement funds holding them could deliver the promises made to retirees.

It is amoral to reward people for doing nothing while those who produced during their lifetime get stiffed. As these rebates, like all U.S. Government debt are not collateralized they are backed by workers earnings that may never happen.

Aug 02 08:06 PM

[Michael Clark:]

We've lost our understanding of the importance of the 'amoral', the 'immoral' and the 'unethical'. That's what this Great Depression is all about: to teach us the moral lesson of modesty and decency again.

We have a lesson to learn from all of this. And the lesson is NOT: "Greed is Good!"


On Aug 02 08:06 PM Prudent Man CFA wrote:

> Instead "clunkers for cars" we should have given Treasury securities
> for GM bonds so that the retirement funds holding them could deliver
> the promises made to retirees.
>
> It is amoral to reward people for doing nothing while those who produced
> during their lifetime get stiffed. As these rebates, like all U.S.
> Government debt are not collateralized they are backed by workers
> earnings that may never happen.

Aug 02 10:18 PM

[verygreen:]

How can we fnd out when fed pritn money?
Could you explain more about that "This is proof of concept that fresh money in the hands of select (read elite) players, moves stocks, regardless of the reported fundamentals. This price action is not investing; it’s not even speculation. It is front-running hyped media.."
Does that mean that govement is buying to stablize the stock marlet?
Thanks.

Aug 03 02:58 PM