The Little Engine Keeps Chugging Along

[Excerpted from Bill Cara's Daily Report]

While the threat of a potential trade war with China momentarily pushed equities lower Monday morning, a wave of bargain hunting propelled stocks off their lows, causing nervous shorts to cover, and under-invested money managers to lift offers into the close.

After last week’s sharply higher performance, many traders concluded the broad market was due for a rest, while clearly extended and lacking momentum; however, erstwhile Bears were sadly mistaken as the little engine that could kept chugging along on Monday.

At the close in New York, the S&P 500 (1,049.23 +6.50 +0.62%), DJIA (9,626.80 +21.39 +0.22%) and NASDAQ Composite (2,091.78 +10.88 +0.52%) all had a positive session, and shortly after markets gapped lower, the strength was apparent until the closing bell.

The Toronto Exchange Composite (11,332.04 +78.81 +0.70%) and Venture market (1,253.83 -8.06 -0.64%) were also reflective of the reaction against the early sellers.

Turmoil, however, was apparent in the various asset classes. The US Dollar ($USD 76.61 -0.07 -0.08%), for instance, dropped lower again, for its 6th straight daily loss, but the Yen (109.87 -0.38 -0.34%), Pound (165.72 -0.93 -0.56%), and Canadian Dollar (92.37 -0.52 -0.56%) closed even lower against the lower USD! So all the action was in the Euro (146.20 +0.51 +0.35%), as money flowed there, which was a surprise. Even more surprising, then, was the fact that in the face of the soaring Euro and loss in the $USD, the $GOLD contracts were getting hammered (998.50 -7.70 -0.77%). Crude Oil ($WTIC 69.40 -0.32 -0.46%) also sold off despite the lower $USD.

These anomalous moves are not sustainable as money flows in forex and gold contracts are lumped into the category of “hot money” moved to and fro around the world by proprietary desk traders at Humungous Bank & Broker (HB&B).

The US treasury market was another asset market in turmoil as the US long treasury bond plunged in price ($USB 119.84 -2.03 -1.67%). Yields soared on the 30-year (4.215 +0.40 +0.96%), on the 10 year (3.406 +0.63 +1.88%), and on the 5 year paper (2.350 +0.62 +2.71%). The T-bill yield also dropped (0.130 -0.05 -3.70%), indicating a worsening operating environment for the banks.

Experienced capital markets traders know that such volatility within the various assets markets is usually a precursor to change in the equity market, and so closer attention is paid is paid to sector rotation, but in NY Monday even the sectors were not performing with any degree of synchronization. The winners were Utilities (XLU +1.5%), Financials (XLF +1.3%) and Basic Materials (XLB +1.3%), while the losers were Technology (XLK -0.3%) and Consumer Staples (XLP -0.2%). That mix is something traders have not seen for a long time, and is typical of uncertainty.

Among the industry group performers yesterday, the Goldminers ($XAU -1.2%) and Computer Networks ($NWX -0.4%) were the losers while the unlikely duo of Airlines and Hospitals ($XAL +3.2% $RXH +3.2%) led the winners.

Even for the Cara 100 company stocks on Monday there was confusion. The winners were Dow Chemical, Votorantim pulp and paper and SanDisk disk storage technology (DOW +6.9% VCP +5.9% SNDK +3.2%), while the losers were led by First Solar and Silver Wheaton ([[FSLR] -2.7% SLW -2.6%).

In international equity markets earlier Tuesday, prices were mixed and close to flat everywhere. Could this be calm before the storm? In the Austral-Asian markets: the Nikkei 225 of Japan (10,217.6 +0.15%), China (3,033.7 +0.23%), Hong Kong (20,866.4 -0.31%), and Australia (4,547.2 +0.24%) were listless, while India (16,264.3 +0.29%) made a solid gain.

As for the European stocks, the mood was also uncertain. France (3,736.6 7:32AM ET +0.16%), Germany (5,609.1 7:31AM ET -0.20%) and the UK (5,029.1 7:31AM ET +0.20%) were, like most of Asia-Pacific, mixed and trading in a narrow range, probably awaiting the release of important US economic data this morning.

Perhaps thoughts of a possible impending trade war caused the concern and uncertainty in markets?

The precious metals market bids have pulled back a tad this morning: spot (cash) market prices as follows for gold (997.89 -0.66 -0.07% 07:51am ET), silver (16.49 -0.11 -0.66% 07:51am ET), platinum (1302 -5 -0.38% 07:42am ET) and palladium (289 -1 -0.34% 07:31am ET). There has been over five hours of waffling on the forex markets, so traders are nervous here. The Euro is down a tad (1.4598 -0.0015 -0.10% 07:35am ET),

In the other futures market Tuesday morning, Sept Crude Oil (69.175 +0.315 +0.46% 07:35) is up, and the DJIA futures down a tad (9600 -11 -0.11% 07:34).

Traders have got their eye on a lot of US economic data to be released Tuesday morning:

US Producer Price Index for August. Ahead of the data on 9/15 at 8:30am ET, Econoday reported, “The producer price index in July fell sharply on both declines in food and energy, dropping 0.9 percent after spiking 1.8 percent in June. Meanwhile the core PPI rate eased sharply to 0.1 percent dip, following a 0.5 percent surge in June. The core rate in July eased largely on a 0.7 percent drop in prices for light trucks. Looking ahead, a seasonally strong gain in oil prices (West Texas Intermediate, up about 14 percent seasonally adjusted) is likely to boost the headline PPI in August.”

US Retail Sales for August. Econoday opined before the 9/15 8:30am ET data release, “Retail sales slipped 0.1 percent in July, following a revised 0.8 percent boost the month before. Excluding motor vehicles, retail sales dropped 0.6 percent, following a revised 0.5 percent rise in June. Weakness was led by gasoline and sales excluding motor vehicles and gasoline, retail sales fell 0.4 percent. Looking ahead, sales should get a boost from autos and gasoline. Already, we have seen a 25.4 percent monthly surge in unit new motor vehicle sales for August and gasoline prices also firmed for the month.”

US NY State Manufacturing Survey for Sept. Prior to the 9/15 8:30am ET data release, Econoday reported, “The Empire State manufacturing index returned to positive growth territory in August, jumping to 12.08 from July's minus 0.55 for its best reading since the start of the U.S. recession. Odds are the index will stay positive in September as August's new orders index showed a second month of actual month-to-month growth at 13.43-up sharply from July's 5.89.”

US Business Inventories for July. Ahead of the 9/15 10:00am ET data release, Econoday reported, “Business inventories fell 1.1 percent in June to extend a long string of declines and reflecting businesses adjusting stocks to match the drop in demand over the recession. For July, early numbers on manufacturing inventories showed a 0.9 percent drop while wholesale inventories declined 1.4 percent. Both will be tugging down on total business inventories for the month with retail inventories being the missing piece of the puzzle.”

Comments

[Mark Bern:]

I expect the August & September economic numbers to reflect the gains made in the auto industry from the CARS program. If those numbers are not as strong as expected, the market could very well react negatively. If the numbers come in as strong or stronger than expected, we can expect the market to surge higher in response.

But, after that I expect the numbers to be horrible running up to and through the holiday season this year. October, November, and December could spell disaster for the bulls as retail sales should disappoint and inventory build-ups begin to overhang the supply chains requiring output reductions and possibly another round of layoffs from big businesses.

Small businesses are already getting hammered, so if big businesses take another hit the employment picture could get really ugly for the next few months.

On the other hand, the stimulus funds should start being released in larger quantities as planned by the Administration and Democratic leaders in Congress as government spending ramps up toward the 2010 elections. The 1st big question will be: is it going to be enough and in time to revive a stalled recovery? The 2nd big question will be: will Congress have to divert even more of the Stimulus spending to the states and further extensions of unemployment benefits? Another big question is: will Congress and the Administration risk passing another huge stimulus package before Christmas to fill the holes missed by the first two stimulus bills?

The states revenues are still down as much as 20% or more and cuts are inadequate to stem the tsunami of red ink in state budgets. Unemployment is not just lingering but may jump higher than imagined, putting additional strain on the government bailout plans. Will Congress let more people go homeless or pass another stimulus bill? My guess is that they will spend more money because that seems to be their modus operandi.

How will investors react? Initially, the markets will probably be relieved and head upward. But, once the sheer magnitude of the debt piling up is measured and new calculations of the future indebtedness are made public, the shock may be too much for a market that is teetering with uncertainty. Stocks usually climb the wall of worry that they understand, but fall in the face of uncertainty. We are about to reenter another time of uncertainty.

Sep 15 09:42 AM

[CautiousInv...:]

I think the divide between those who "believe" and those who "disbelieve" is filled with varying expectations for global growth, US economic growth and growth in corporate profits. Confounding this is that there are probably many implicit assumptions about the dollar and the continued ability of government to borrow at the pace it has.

At this point in the cycle it is hard to prove anything, with sharply diverging views on inflation/deflation, growth, sustainability and most other matters. There is no way to “granularize” the data in sufficient detail so as to say stimulus is accounting for X and organic activity is accounting for Y. For some it is hope and others it's doubt.

In this climate the market is likely to remain within a slightly ascending trading channel until one of three outcomes plays out. An external shock, whether the collapse of a foreign bank, a run on the dollar, a debt auction failure, a spike in commodities, a horrible piece of news or something else, could easily spark a sell-off. The current climate is very fragile and tentative, making it vulnerable to shocks.

Barring an external shock, I don't think this weird rally will give in until the believers are proven wrong by something fairly conclusive; something that puts a big lasting dent in the growth argument, like a big disappointment in earnings or a drastic overhaul of the financial services industry, which is quite remote from my perch.

The last scenario, which is longer term in nature and probably the most likely, is for investors simply to loose interest and become apathetic because of persisting long term unemployment and less than spectacular increases in earnings. I guess we could call this scenario an adjustment to the new normal, a gradual capitulation.

Sep 15 11:54 AM

[CycleMaster:]

As one who follows markets closely and geo-cosmic cycles even more closely, I can tell you that your prediction about a potential shock to the financial services industry may turn out to be more prophetic than you can imagine, particularly in the area of our "benevolent partners" and the central banking system...which are both very deeply connected.

The cycle will be very visible between Nov.-Feb, '10, and appear chaotic in terms that we can hardly conceive of by mid-summer of 2010. The "Powers That Be" are not visible (nor have they been since the beginning) in our current American system, but they are about to be and the resultant and angry disillusionment will not be swallowed easily nor go away without a fight. And what a fight it will be.
"CycleMaster"


On Sep 15 11:54 AM CautiousInvestor wrote:

> I think the divide between those who "believe" and those who "disbelieve"
> is filled with varying expectations for global growth, US economic
> growth and growth in corporate profits. Confounding this is that
> there are probably many implicit assumptions about the dollar and
> the continued ability of government to borrow at the pace it has.
>
>
> At this point in the cycle it is hard to prove anything, with sharply
> diverging views on inflation/deflation, growth, sustainability and
> most other matters. There is no way to “granularize” the data in
> sufficient detail so as to say stimulus is accounting for X and organic
> activity is accounting for Y. For some it is hope and others it's
> doubt.
>
> In this climate the market is likely to remain within a slightly
> ascending trading channel until one of three outcomes plays out.
> An external shock, whether the collapse of a foreign bank, a run
> on the dollar, a debt auction failure, a spike in commodities, a
> horrible piece of news or something else, could easily spark a sell-off.
> The current climate is very fragile and tentative, making it vulnerable
> to shocks.
>
> Barring an external shock, I don't think this weird rally will give
> in until the believers are proven wrong by something fairly conclusive;
> something that puts a big lasting dent in the growth argument, like
> a big disappointment in earnings or a drastic overhaul of the financial
> services industry, which is quite remote from my perch.
>
> The last scenario, which is longer term in nature and probably the
> most likely, is for investors simply to loose interest and become
> apathetic because of persisting long term unemployment and less than
> spectacular increases in earnings. I guess we could call this scenario
> an adjustment to the new normal, a gradual capitulation.

Sep 15 01:01 PM

[einstein p ...:]

"I want to believe" ---- X Files.

Sep 17 06:18 PM