"We don't see the focus on poverty as about charity, but rather about investment in future growth."
World Bank President Jim Yong Kim outlined his vision of what the multilateral lender should do, focusing sharply on cases of significant poverty. Dr. Kim said economic-growth expectations were being scaled back everywhere but that he was determined to prevent the substantial gains made by emerging economies over the past decade from being wiped out. "Every country has to look at its public spending and see what works," he said.
The World Bank had its annual meeting in conjunction with the IMF in Tokyo this week and Dr. Yong's message is no longer the opposite of Christine Lagarde's, who has essentially come around to thinking that austerity is no longer the answer - pushing for debt write-downs for Greece, Portugal and Spain as well as backing Greece's request for two more years to meet its fiscal targets. "We will spare no time, no effort to actually do as much as we can in order to help Greece," Lagarde said. The fund's purpose is "to make sure that Greece is back on its feet, that it can one day return to markets, that it doesn't have the need for constant support."
Meanwhile, Spain was downgraded to one notch over junk (BBB-) with a negative credit watch by S&P last night, but it was more of a "buy on the news" event this morning as it's certainly not a shocker that Spain's paper is worthless without the ESM backing. Yields on 10-year Spanish bonds shot up 9bps to 5.89% but stopping short of 6% was considered a positive. Spain is the poster child for the idiocy of using austerity to combat debt (i.e. the Romney plan) as squeezing the economy by cutting government spending has actually worsened the country's fiscal position, which has led to calls for greater austerity, but these calls come from bankers and bondholders - who just want to get paid, no matter the long-term damage done to the borrowers.
"There is no chance that Spain will hit its targets," said Megan Greene, director of European economics at Roubini Global Economics LLC, "The deficit targets are economic suicide.' "Even as you cut, the gap between spending and revenue collection keeps getting larger," said Jonathan Tepper, a partner at research firm Variant Perception. "We're on a completely unsustainable trend," said Dario Perkins, director of global economics at Lombard Street Research. "The domestic economy has completely imploded."
Our own domestic economy is generally growing at a modest pace, according to the Fed's Beige Book, which was released yesterday. In our Special Alert to Members reviewing the report, I noted that you could see the evidence of the slowdown in manufacturing, which was giving us those weak PMI and regional Fed reports, but those headlines masked a lot of underlying improvements compared to past reports.
That led us to take a more bullish stance into close, including grabbing a lot of QQQ Oct $70 calls at .05 and flipping our DIA Oct $132 puts at .65 (up 53% from our Morning Alert to Members) to DIA Oct $135 calls at .38. As we expected in the morning post, once the S&P failed 1,440 (about 11:15), the Dow had no support and quickly dropped 100 points from 13,430 to 13,340, where we took the money and ran.
As you can see from Dave Fry's Dow chart, so far, so good as to holding our 50 dmas. The Dow's is at 13,302 and, as I noted yesterday, our Big Chart is not showing any real technical damage yet and we fully expect at least a bounce this morning after everyone but the AAPLdaq held their lines and, since we're also bullish on Apple (AAPL), we didn't let that one spot of weakness change our mind.
In more bad news for the GOP, the unemployment picture continues to improve with Initial Jobless Claims dropping almost 10% from last week to 339,000 - miles below the consensus estimate of 370,000. That's the lowest level since early 2008. If this trend continues, the October Unemployment Report, that will be released on Friday, Nov. 2nd, just 4 days before the election, could be even lower than the 7.8% posted last Friday.
In other positive economic news, U.S. foreclosure activity dropped to a 5-year low of 180,400 filings in September - down 7% from August and down 13% year/year. Most importantly, the declines are coming from non-judicial states, like California, where there are no pipeline issues backlogging the process so we're making real progress clearing our housing inventory this year.
U.S. equities get upgraded this morning to Overweight at Citigroup thanks to "the combination of strong EPS momentum and a very aggressive central bank." The S&P 500 will score a 12% gain by year's end, predicts Tobias Levkovich. The "most-favored" 20 global stocks includes these from the U.S.: AES, CSX, GS, GOOG, QCOM, SBUX, and GOOG is gapping up $10 into the open already.
This will be interesting as only 30.6% of the people surveyed in the AAII Investor Sentiment Survey were bullish for the week ending October 10th - down 3.3% from last month with bears climbing to 38.8% up 5.6 points, up 17% from last month. That's a lot of sideline money that may have to flip-flop if we get the bounce we're expecting.
So we're bullish but cautious and we REALLY do not want to see another test of yesterday's lows - once is enough in this case and, now that we've sold all our long bonds into the panic this week, it's time to let the bulls run again.
Additional disclosure: Positions as indicated but subject to change (fairly bullish mix of bull and bear positions - see previous posts).