Markets Sell on Good News, Again

[Excerpted from Bill Cara's Daily Report]

On Tuesday, traders once again sold good news, a disturbing development for Bulls, and an indication equity prices have priced in economic recovery. The focus now is squarely on the real health of the US banks, and whether some of the larger ones will have the regulatory capital needed to survive the financial system deleveraging cycle that has been underway now for over 24 months.

As time moves on, and the banks struggle to restructure and recapitalize, the pendulum has been swinging from system deleveraging to reflation. A month ago, the monetary authorities in China decided to push deleveraging faster than their counterparts in the G-8 wanted. Volatility in capital markets, particularly in currency and precious metal trading in the past few days has picked up.

Tuesday, despite the very positive economic data regarding US manufacturing, there was a tremendous burst of selling of Financials (XLF -5.4%). Despite an extremely low T-bill yield of just 0.13%, credit is not available to meet the demand. Sensing trouble in the financial sector, traders sold off the Banks ($BKX -5.8%), Broker-Dealers ($XBD -5.4%) and REITs ($DJR -5.3%). There were no sectors that lifted on the day. Even the high dividend paying Utilities (XLU -0.8%) lost almost -1%.

By the closing bell in New York, the S&P 500 (998.04 -22.58 -2.21%), DJIA (9,310.60 -185.68 -1.96%) and NASDAQ Composite (1,968.89 -40.17 -2.00%) were down two full percentage points or more. The S&P 500 index, which is the performance standard used by international investment professionals is now down -3% in two days, and is perhaps 1% above a level that technical analysts would generally concede could open the floodgates to much more selling and prices that could quickly fall possibly another -10%.

In Canada, which disliked the lower $WTIC Crude Oil (68.20 -1.76 -2.52%) prices, the Toronto Exchange Composite (10,689.78 -178.43 -1.64%) sold down as well. The Toronto Venture Board (1,163.24 -12.00 -1.02%) saw a tad less selling as traders were enthused that $Gold (955.90 +4.70 +0.49%) managed to lift a bit on the day. However, in a downdraft day even the goldminer stocks sold off, and so the Canadian Loonie flew south (90.62 -0.77 -0.84%) against the USD.

The US Dollar ($USD 78.74 +0.59 +0.75%) enjoyed Tuesday’s deleveraging action and the flight to safety. As to the other major currencies, the Euro (142.18 -1.17 -0.82%) and British Pound (161.63 -1.21 -0.74%) sold off against the USD, but the Yen (107.67 +0.22 +0.20%) was stronger for the second day in a row.

Noteworthy Tuesday was the crash in commodities ($CRB 248.98 -4.70 -1.85%), right across the board except for precious metals.

Earlier Wednesday, the Austral-Asian markets were all lower except for China (2,715.0 +1.16%), but even a second day of gains does not make up for the -2.9% loss on Monday. As for the others, they were all losers today as Japan’s Nikkei 225 (10,280.5 -2.37%), Hong Kong (19,522.0 -1.76%), Australia (4,436.6 -1.66%), and India (15,503.1 -0.31%) followed NY.

As for the European stocks early Wednesday morning, France (3,560.1 5:23AM ET -0.65%), Germany (5,294.5 5:23AM ET -0.62%) and the UK (4,806.6 5:23AM ET -0.27%) were all pulling back, led south again by the banks as fears of tighter credit conditions and slower economic recovery were obvious. An hour earlier, Reuters reported: “the FTSEurofirst 300 .FTEU3 index of top European shares was down 1.1 percent at 944.05 points. The benchmark index, which shed 1.8 percent on Tuesday, is up 46 percent since reaching a floor in March… The DJ STOXX European banking index (.SX7P) was down 2.1 percent on Wednesday, with Banco Santander (SAN.MC) down 3 percent, UniCredit (CRDI.MI) down 2 percent and Barclays (BARC.L) down 2.8 percent.”

The leaders of the few winning Cara 100 company stocks Tuesday were Tata Motors and Research In Motion (TTM +2.0% RIMM +0.7%). Today in a Phoenix bankruptcy court, RIM co-CEO Jim Balsillie will be testifying in support of his clearly outstanding bid to purchase the local pro sports hockey team and move it to Hamilton Canada despite the unanimous dissent from 30 team owners and the league management. This court’s decision will have repercussions on whether club owners have rights that supersede those of business creditors.

The Cara 100 company stock losers were led by Brunswick Corp, Silver Wheaton and Deutsche Bank (BC -6.4% SLW -5.5% DB -5.0%), all of which have credit market related issues.

The US Treasury long bond ($USB 120.00 -0.94 -0.78%) sold off, but the shorter term maturities did not. Treasury yields gained for the 30-year (4.198 +0.17 +0.41%), but dropped again for the 10-year (3.375 -0.26 -0.76%) and 5-year (2.328 -0.62 -2.59%) instruments. The Treasury bill yield remained unchanged at 0.130, which is a dangerously low level.

Precious metal prices were quiet earlier Wednesday morning: the spot (cash) market was as follows for gold (954.48 +0.78 +0.08% 05:40am ET); palladium (282 -4 -1.40% 05:40am ET); platinum (1210 -13 -1.06% 05:39am ET); and silver (14.8700 -0.0175 -0.12% 05:40am ET), respectively. Prices are undergoing sharp spikes in both directions, indicative of a more substantial move to come one way or another.

At the start of the day, futures prices were as follows for the Euro [1.4223 +0.0009 +0.06% 05:27am ET], and DJIA [9291 -12 -0.13% 05:27am ET], and for Crude Oil [68.53 +0.48 +0.70% 05:27am ET].

It’s early yet, but prices in the various markets are in a confused state. Tuesday seemed to be one of the first where neither the Interventionist Fed nor positive economic data could stop the selling. The marketplace is now beginning to speak up.

Comments

[LKofEnglish:]

first off George Bush proved you don't need banks to have a rip-roaring economy. Needless to say they don't this which in my view goes a long way towards explaining why Greenspan "freaked out" and raised interest rates when oil prices were shooting up to $200 a barrel. In other words, "only I have been annointed economic destroyer in chief." Needless to say the inevitible occurred insofar as Wall Street is concerned. How did the rest of the economy do? Well no matter how often all the urban cow-chippers like the WSJ keep screaming "farmers are takin' it on the chin, farmers are takin' it on the chin!" that's just not born out by the facts. Sure if your livin' in NYC your dead. GOOD RIDDANCE. There's been a boom i've watched brewing in North Dakota for over 10 years. Go figure. Should have gone on that house with brother for $3,000. In the meantime just 300 miles down the road they're selling montana real estate for $50,000 and acre AND ITS SELLING. Surprised?

Sep 02 05:02 PM