Preview from Europe: Another 'Glass Half Full' Day

A real pick and mix day US data wise yesterday with initial jobless claims unexpectedly rising again, the Philadelphia Fed manufacturing index breaking into positive territory, leading indicators rising for the fourth consecutive month and mortgage delinquencies reaching record highs in Q2. 9.24% of all loans are now delinquent. 23% of the mortgages in Florida are now either late on payment or in some part of the foreclosure process.

Still, despite poor results from Sears (SHLD) and Gamestop (GME), financials propelled markets higher with Citibank (C) up 8.5% (to its best close since Jan 14th) on some wild talk from analyst Richard Bove of Rochdale Securities that it will triple over the next three years. Also AIG soared another 22% on comments by incoming CEO Benmosche (who will have to get by on $7m a year) that it may be able to repay some TARP monies (yeh maybe this century). Over on the Nasdaq, Google (GOOG) was perky after being added to Goldman Sachs' conviction buy list.

Sentiment appears to be oscillating between risk aversion and relief on a session-by-session basis. However, the past month has been characterised by declining volumes typical of the summer holiday season. History suggests that trends established during periods of low trading volumes have swiftly petered out once volumes picked up.

Today’s Market Moving Stories

• The Nikkei average fell 1.3% overnight as automakers were weaker ahead of the end of the US “cash for clunkers” programme on Monday. Shares in the world’s biggest automaker, Toyota Motor (TM) shed 2.7%. A stronger Yen also hurt exporters.
• The overnight price action provides further confirmation, if any were needed, of the market’s current fetish with all things Chinese. At this stage, though, the suggestion that policy makers want to rein in the banks is insufficiently concrete to drive a major reappraisal of global growth or stock markets.
• Watch out for Bernanke’s speech at 15.00 BST from the Jackson Hole Conference. It’s a session closed to reporters but no doubt his comments will surprise and on a thin Friday may make for some volatility if he hints at any change in the time table for rate hikes.
• China said to plan tightening of capital requirements. The China Banking Regulatory Commission sent a draft of rule changes to banks on August 19 requiring them to deduct all existing holdings of subordinated and hybrid debt sold by other lenders from supplementary capital. Banks have until August 25 to give feedback. As a result, banks may need to rein in lending or sell shares to lift capital adequacy ratios to the 12% mandated by the regulator. “This move will cut one of the most important funding sources for banks,” said Sheng Nan, an analyst at UOB Kayhian Investment. Banks will “have to either raise more equity capital or slow down lending and other capital consuming businesses to stay afloat.”
• Separately a government think-tank, the Orwellian sounding State Information Centre, said China’s gross domestic product would grow about 8.5% in the third quarter from a year earlier, picking up pace from the second quarter’s 7.9%.
• Japanese retail investors have become considerably less bearish on domestic stocks with sentiment at its highest in nearly two years, a Reuters poll showed, reflecting hopes the economy has bottomed out. The monthly survey also showed a majority of retail investors favour the campaign platform of the main opposition Democratic Party, which has a good chance of ousting the ruling Liberal Democratic Party in an election on August 30. The poll’s investor sentiment index hit minus 10, an improvement of 24 points on July. This marked the first rise in three months and was the highest level since September 2007 when it was at zero.
• The next phase of the credit crisis looms, warns the Wall Street Journal. After all the losses racked up from their own loans gone wrong, the banks now face all the losses from the debt they bought. The Journal picked up on the woes of Guaranty Financial (GFG), which is on the brink of failure (and sale to Spain’s Banco Bilbao (BBVA)) as a result of its bought investments gone wrong. Guaranty is based in Texas yet it owns $3.5bn worth of ARM mortgages of which two-thirds originated in California and Arizona.
• As it's Friday, play the great flu game.

Mortgage Modifications
Missed this Thursday (you can look such a prat with a Kindle on the Underground) but a Manhattan judge made an extremely important ruling Wednesday – that Countrywide could not modify the terms of many of its mortgages. The reason was that the mortgages had been spun off into MBS product and hence they didn’t belong to Countrywide for it to modify. Remember that the US government has been pushing hard for loan modifications in order to alleviate the worst of the housing pressures (as well as foreclosure moratoriums). MBS holders sued Countrywide for the simple fact that modifications to the underlying mortgages would completely alter the terms of their MBS – in short they wouldn’t be the bonds they thought they held. The story is widely reported in the US press, though the NY Times’ write up is thorough.

More Ryanair Routes This Winter
Ryanair (RYAAY) announced that it will operate eight new Edinburgh routes this winter while also extending its summer routes to/from Malta and Rome. The company also announced expansion at its Dusseldorf and Madrid bases, with two new routes at Dusseldorf and four new Madrid routes. This on top of the recent announcement of 14 new routes from Leeds Bradford, Ryanair has announced 22 new UK routes in August. The development of Edinburgh and Madrid demonstrates Ryanair’s appetite and ability to grow at big city bases previously underserved by low-cost carriers and suffering from declining offerings from the legacy incumbents. It is also worth noting that the new routes include four Spanish destinations, all of which will offer zero airport charges for the winter period. This a real hobby horse of Michael O’ Leary.

Another Great Video From Paddy Hirsch
There has been an awful lot of talk about the new bogey man of High Frequency Trading and the long arm of Goldman Sachs causing late in the day pops in prices into what was looking like being a soggy close. But what exactly is it? Well I’ll let the other Paddy explain.

And Finally… A Tip On Negotiating Your Salary – “The Flinch” Technique

Disclosures: None

Comments

[Roger Knights]

"The story is widely reported in the US press, though the NY Times’ write up is thorough."

Didn't you mean "isn't widely reported"?

2009 Aug 21 05:52 AM

[SeeTheLight]

The video links were excellent. Thanks.

I know I am in the minority, but I am beginning to feel like this market is a major Bull trap. The low volumes you mention, plus the end of day buying are dangerous portents. As well I am seeing indications of high insider selling, the first hints of selling pressure in China (and the first thoughts that perhaps it was experiencing its own Bubble).

It just seems to me that once everyone is Bullish, the only way to go is Bearish. And I've been hearing that analysts are over 90% bullish. A number scares the heck out of me and made me imagine the following scenario:

If I were a cartoonist I would probably draw the following cartoon to describe the market situation right now:

It would be a huge banquet party filled with Bulls wining and dining under a massive "Green Shoots Market Rally 2009 Celebration". And at the front entrance would be a few sheep donning Bull costumes and one would say to the other "Hey guys, we made it!" and at the other end of the room at a small door marked "Fire Escape", would be a few wolves shedding their Bull costumes and at the bottom of the alley underneath the fire escape would be a few Goldman Sachs limos waiting.

Of course there would be a drunk Bear near the entrance proclaiming the end of the world is coming but with no one listening to him and at the front banquet table would be a bunch of Bulls that look suspiciously like Cramer and the rest of the CNBC talking heads.

Hopefully I'll be close enough to that exit if it comes to pass.

Good Luck all.

2009 Aug 21 06:44 AM

[thelastangryclown]

LOL @ SeeTheLight... you're seeing the first hints of selling pressure in China, are you? The Shanghai index was down over 20% in 11 trading days. Let us know when your hints are confirmed, would you?

2009 Aug 21 08:01 AM

[Carey Rowland]

Thanks, Mole, for your perspective. Especially helpful is Paddy Hirsch's lively instruction.

Carey Rowland, author of Glass half-Full

2009 Aug 21 08:36 AM

[SeeTheLight]

@thelastangryclown - Yes, I guess the way I worded that didn't quite capture what I meant. I meant there is heavy selling pressure although it has had a number of bounce back days, i.e. today. The way the media spins it is that it is a mild correction in the face of an overwhelming Bull market. But you are correct that my "hints" should be actually "neon flashing warning" sign.

Good Luck all

On Aug 21 08:01 AM thelastangryclown wrote:

> LOL @ SeeTheLight... you're seeing the first hints of selling pressure
> in China, are you? The Shanghai index was down over 20% in 11 trading
> days. Let us know when your hints are confirmed, would you?

2009 Aug 21 09:05 AM

[rick12345]

All the shit data in the world this week and the market still didn't crash. When are some of you going to admit that economies around the world are finally moving forward, albeit at a slow pace.
We saw some more than expected volatility on the Asian markets which then reverberated overseaes, the result of speculation that the Chinese government was planning to tighten its monetery policy. China has to rein in borrowing so as to avoid the inflationary pressures associated with expanding the money supply; It's the responsible thing to do when you have 8% growth and virtually no debt.
When people finally understand that unemployment is a lagging indicator that doesn't immediately repair itself overnight, we will then be able to move forward and once again start consuming. At the root of the problem is a lack confidence, and until this improves we will experience a very slow recovery. The good thing however is that people are like a herd of animals - they will quickly follow anothers actions' without thinking of the likely consequences and hopefully this time it won't be off the edge of a cliff.

2009 Aug 21 10:43 AM