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Cliff Wachtel
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Cliff Wachtel, CPA, is currently the Director of Market Research, New Media and Training for Caesartrade.com, a fast growing forex and CFD broker. He covers a variety of topics including global market drivers, forex, currency hedged and diversified income investing, and is currently working on a... More
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  • COMING WEEK: 9 REASONS THE 1% ARE BEARISH

    Part 2: Coming Week Market Movers

    The following is Part 2 of our weekly review and preview strategy guide for traders and investors of all major asset classes and global markets - see Part 1 for prior week market review

    1. Fiscal Cliff: Weekly Bias - Neutral To Negative

    Fiscal cliff news remains the most likely market driver this week, assuming no major surprises related to the EU debt crisis. That's because the fiscal cliff is 'only' a recession threat. The EU crisis is an economic and market collapse threat.

    Given that there is still time before yearend, the likelihood is for more of the same brinksmanship and haggling that has characterized past deficit and budget negotiations, just like last week. Last week's tight trading ranges and low volatility suggest that markets anticipate a deal that does not radically deviate from the current situation; most of the pain is expected to be deferred yet again with only minor headwinds to growth from new taxes or spending cuts. In sum, that mean US economic prospects don't change much except that the uncertainty of the outcome is removed.

    That's likely good for a short term relief rally, no more. The uncertainty is gone, but the reality is not markedly improved. Instead, it's likely to bring, to some degree, higher taxes and spending cuts.

    That said, unless there's conclusive news good or bad (a deal is all but done or lost), this is likely to be a less prominent driver this week because there will be a lot more competition for attention this week, see below for details.

    2-3. EU: Weekly Bias - Neutral To Negative

    There are two kinds of EU data to watch this week and beyond

    Default Threat Related News

    While there is plenty of scheduled event risk (see EU calendar events below) from the EU, the only really potent market moving events from the EU would be those that change sentiment about near term default and contagion threats, most likely involving Greece or Spain. The related near term risks for next week and beyond from Greece and Spain include:

    • Greece: The EZ's bond buyback scheme fails, which would cause the IMF, Finland, and Holland to withdraw their share of the 44 bln EUR transfer to Greece (or more accurately, banks holding maturing Greek bonds). The buyback is supposed to be completed by December 13, when EU finance ministers plan to release their share of the cash. Any news related to the bond buyback could thus move markets up or down.
    • Spain: Spain has a 10 year bond auction this week. Thus far the mere potential of unlimited ECB purchases of Spain bonds has kept Spain's borrowing costs falling. However as we noted in a few weeks ago in CRASH ALERT: A TOXIC MIX OF EVENTS HEADING INTO 2013, Spain needs to sell over 20 bln EUR before the end of January. Anything that spikes risk aversion, and thus Spain bond yields, could force Spain into needing the OMT activated fast. However that may not be possible because conditions for receiving this aid have yet to be settled. That means there's a danger of a sudden crisis and need for a last minute deal. Given the stakes, such a deal is likely, but not before markets get a good scare.

    In the EU, as in the US, there's little upside from the good news except for a brief pop higher in risk appetite, and lots of downside potential from the eventual, still looming defaults and contagion risks.

    EU Calendar Events: Bias Neutral To Negative

    These include:

    • Spanish and Italian manufacturing and services PMIs
    • Spanish and French 10 year bond auctions
    • ECB and BOE monthly rate statements and press conferences
    • German factory orders and industrial production

    Most expect data to continue to show contraction in the EU, and last week ECB President Draghi's relatively bullish view conceded there was no upturn in sight before the second half of 2013. So beware of any hyped about reports beating expectations. Remember, PMIs below 50 still indicate contraction.

    Here too, the best case result is "not as bad as feared."

    4-5. US Events Monthly Jobs Reports (NFP and Unemployment) & Related Reports

    Consensus is for about 91k jobs versus the 171k new jobs added last time. While anything over 110k would be heralded as a major victory, keep perspective.

    The US needs 200k new jobs just to keep up with new entrants each month, before it can even begin to reduce the real number of unemployed

    The consensus figure that would meet expectations represents a 47% drop from last month's 171k, which was still less than what's needed. How markets will react will likely depend greatly on how much the result is seen as a one-time Hurricane Sandy aberration and thus not indicative of future reports.

    Thus we assign no positive or negative bias at this time as the outcome and market reaction is too unclear.

    As always market will be watching the following reports for hints of the Friday results:

    • Monday: ISM manufacturing PMI
    • Wednesday: ADP Non farm report. ADP claims to have improved its accuracy in predicting the BLS figure in recent months. This same day also brings the ISM non-manufacturing report (especially its jobs component, the most accurate single predictor of the final BLS NFP figure)
    • Thursday: Challenger-Grey job cuts

    Also on Friday there are reports on hourly earnings that shed additional light on what US consumers are earning, and so what they might spend, which comprises ~70% of US GDP.

    UoM Consumer Sentiment

    For the world's largest economy, consumer spending is the largest component of GDP. This report takes on added weight because the US is now in the middle of its peak consumer spending period, and it will influence sentiment about spending and, and everything related to it, including GDP.

    6. Central Bank Monthly Rate Statements and Press Conferences: Bias Neutral

    This week from Tuesday to Thursday we've got them for from Australia, Canada, New Zealand, the UK, and ECB. The rate statements themselves rarely surprise, but the press conferences are potential sources for changing market outlook on the size and pace of interest rate changes (if anything, mostly rate cuts as central banks seek to soften the effects of the global slowdown).

    7. Other Calendar Events

    Monday: Australian retail sales, South Korea manufacturing PMI (considered a bellwether PMI for Asian manufacturing), UK manufacturing PMI.

    Wednesday: Australian GDP, UK services PMI, Spain 10 year bond sale

    Thursday: Australian monthly jobs reports

    Friday: Australia trade balance (like much of Aussie data, is significant also because it's a gauge of China business activity), UK manufacturing production.

    8. Technical Picture: Uptrend Hitting Strong Resistance

    Using the S&P 500 as our barometer for risk assets, we see that the multi week and multi-month trend remains firmly upward, despite the negative fundamentals noted above.

    ScreenHunter_01 Dec. 01 22.01

    S&P 500 WEEKLY CHART

    Source: MetaQuotes Software Corp, thesensibleguidetoforex.com

    01dec 012201

    We also note that the index is currently butting up against three layers of resistance:

    • The psychologically important 1400 level
    • Both its 50 and 100 day moving averages
    • Its 38.2% Fibonacci retracement level at ~1430 of the June - August 2012 rally

    In sum, the chart tells us we've an established uptrend, but it has yet to break through the current 1400 -1430 major resistance level.

    Conclusions

    Overall, the market movers for the coming week, and those that continue to exert influence beyond this week, have potential for sparking at best a limited short term rally, and at worst a nasty correction that at some point risks outright contagion. I refer in particular to:

    • Fiscal Cliff: The most pro-market outcome possible would be more kick-the-can, extend/pretend - that there are no changes from our current status. All tax breaks remain in effect, all planned spending cuts are deferred. This outcome would at best generate a brief relief rally, but soon all realize that the only improvement is the removal of short term uncertainty. The worst case scenario is that all tax hikes and spending cuts hit and the US takes a ~4% GDP hit, with predictable knock-on effects for the global economy, etc.
    • EU: The same goes for the EU - the most pro market response hoped for is defer the pain, prevent inevitable defaults.

    These two big issues both ultimately mean continued unprecedented money printing and ultimate currency debasement as governments make desperate attempts to stave off disaster.

    It's debatable whether these policies serve the greater good.

    What is clear is that they will sabotage wealth building for anyone based in the USD, EUR, JPY, or other currencies subject to financial repression regimes. So it's critical for all to increase exposure to the better managed currencies. For guidance on simpler, safer ways to do that than generally practiced in forex trading or international investing, just enter "The Sensible Guide To Forex" into your browser. It's the only forex book extant designed for conservative, risk averse investors or traders.

    9. Guess Who Else Feels Pessimistic? The True 1%

    The ones who control $5.6 trillion aren't feeling optimistic. They've parked that money in low yield, limited access savings accounts at commercial banks. As zerohedge reports,

    As the chart below shows, rapid, dramatic shifts, characterized by massive inflows of cash into such savings accounts usually coincide with times of great monetary stress: the three biggest episodes in history to date have been the 2008 Lehman failure, the August 2011 Debt Ceiling Crisis and associated US downgrade, and the May 2009 First Greek failure and bailout.

    ScreenHunter_02 Dec. 02 04.20
    Source: zerohedge.com

    02 dec 02 0420

    The largest ever weekly inflow, ~ $132 billion, occurred just 2 weeks ago.

    Do these insiders know something we don't?

    DISCLOSURE /DISCLAIMER: THE ABOVE IS FOR INFORMATIONAL PURPOSES ONLY, RESPONSIBILITY FOR ALL TRADING OR INVESTING DECISIONS LIES SOLELY WITH THE READER.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Dec 02 12:36 AM | Link | Comment!
  • OCTOBER 21-6 MARKET MOVERS & LESSONS: BEWARE DECEPTIVE QUIET & BOND MARKET SIGNALS

    Is Economic Reality Overcoming Central Bank Manipulations?

    Part 1 of Weekly Review/Preview: A Strategy Guide For All Markets For the Coming Week

    Markets didn't move much over the past week, so technically speaking there were no major market movers. However if we look beyond a superficial look at the weekly moves of major indexes, currencies, or commodities, the apparent quiet belies a potentially far more significant development.

    In the overall scheme of things, last week was another chapter in ongoing story of the past 18 months - of markets being caught in the middle of a tug-of-war between the bullish central banks' market manipulation via stimulus versus the bearish reality of slowing global growth.

    For most of the past year, central bank liquidity has won out and pushed most risk assets higher.

    Downbeat Q3 Earnings The Top Market Mover

    Over the past three weeks however, the reality of the global slowdown has forced its way back into market consciousness because it is now showing up in Q3 earnings reports. As the chart below shows, the bellwether S&P 500 has been pulling back since the start of Q3 2012 earnings season.

    (click to enlarge)

    S&P 500 WEEKLY CHART 15 MAY 2011 TO PRESENT

    Source: MetaQuotes Software Corp, thesensibleguidetoforex.com, globalmarkets.anyoption.com

    04 OCT 27 2344

    Why? After three weeks, Q3 2012 earnings season has been characterized by:

    1. More companies missing already lowered "bottom line" earnings estimates
    2. Even more companies missing "top line" sales revenue estimates. This is a greater concern because most firms have already exhausted their cost cutting options. To grow earnings going forward, they need to actually improve sales and bring in more gross revenue with that already trimmed-to-the-bone cost structure.
    3. More companies are lowering guidance for the future.

    Still, to keep things in perspective, the bellwether S&P 500's roughly 50 point pullback from the 1460 area since the start of earnings season has been mild, and is only down about 3.5% from its mid-September high.

    Actually the dour earnings picture is worse than it looks, because it's based on forecasts that have recently been revised lower in order to raise the percentages of earnings reports beating expectations.

    Were the headline numbers less manipulated, markets would likely being showing a more pronounced negative reaction.

    See here for details.

    Other Market Drivers

    Other lesser market drivers included:

    • Hopes for more BoJ stimulus have lifted Japan and to some extent Asian markets because that stimulus helps the region (at least in the short term by adding liquidity) and helps exporters by weakening the JPY, thus lifting the USD and USD index and thus aiding Japan and other Asian exporters.
    • The usual EU worries on Spain and Greece. The EU has complied with Washington's request for quiet until after the US elections, though on Tuesday Germany's Finance minister warned that "Europe's debt crisis seems to have entered a calm phase, but that's only an illusion…the worst has yet to come." That's disconcerting, considering that the past three years have been nearly fatal for the EU as whole and sent much of the GIIPS into deep recession or outright depression.
    • A few bits of random data had short term influence, like China's beating forecasts for the HSBC flash manufacturing report, showing less contraction than expected.
    Lessons, Ramifications

    By far the biggest question coming out of the past week is, essentially, are central bank stimulus actions losing their effectiveness, or will markets resume their march higher once the unpleasant reminder of this earnings season recedes from the collective memory? In particular:

    1. Will the past three weeks' unpleasant reminder will soon be forgotten and the combined weight of central banks stimulus/money printing can continue to drive risk assets higher or prevent a material pullback?
    1. Or are the effects of unlimited liquidity and low rates that have forced cash into risk assets now starting to reach their limit?
    1. Are investors losing confidence in the credo of "don't fight the Fed?" If so, we could see the kind pullback from near-decade highs that the global slowdown and EU contagion risk suggest should happen if markets were moving with the risks posed by the deteriorating global economic situation.

    Typically earnings season loses its influence after its third week, which has now passed, because the overall tone has been set. So we should have our answer to the above question in a week or two.

    Bond Markets Flashing Warning

    Note that while the price action in most markets was relatively quiet, there was at least one notable, potentially significant exception. As shown in the chart below, Barclays (via zerohedge.com, see here for details) notes that the spread between high yield (and thus higher risk) bonds and investment grade bonds is at its highest in three years.

    (click to enlarge)

    (via zerohedge.com)

    02 oct 27 2322

    In other words, riskier bonds are pricing in far more pain than investment grade bonds.

    The potentially significant implication is that market risk is higher than generally acknowledged by markets in general, as credit markets have bid up the price of investment grade bonds due to hordes of investors willing to pay a premium for safety in a market they see as riskier than generally believed.

    In my new book, The Sensible Guide To Forex, I discuss the basics of how to use inter-market analysis to improve your performance. I note that bond markets tend to anticipate events better than equity markets. Hence the old saying "credit anticipates, and equity confirms," (again, hat tip to zerohedge.com for the reminder) so it pays to watch bond markets closely.

    Beware The Most Common Investor Mistake & How To Avoid It

    We continue to repeat the warning, because no one else is doing it.

    The one thing that is clear at this time is that the major central banks are, if anything, stepping up their money printing campaigns. While the Fed has gotten the most attention for its QE 3, in fact since 2008, the ECB and BoJ have applied stimulus (as a percentage of GDP) far more aggressively. See here for details.

    This past week the BoJ became the latest major central bank to increase its stimulus plans, and more is expected from it in the coming months. The EU hasn't even begun unlimited GIIPS bond purchasing under its new OMT program because Spain has yet to provided the needed request for this aid and agree to the conditions that come with it. Japan is expected to introduce yet more stimuli. China and the UK are also more likely than not to do the same.

    Agree or disagree with this approach as proper public policy, it's terrible for those trying to preserve and grow wealth for future needs.

    Everyone needs to diversify out of the USD, EUR, JPY, and other overprinted currencies, and into more responsibly managed currencies or assets denominated in them. The only question is which methods of doing so best suit your needs?

    Most guides to forex trading advocate methods that are considered too risky and demanding for mainstream investors, and take time to master. Most guides on foreign investing fail to consider the currency, which can turn a winner into a loser and vice versa.

    To find an entire book on a variety of ways to do this, some of them never before covered in any book, readThe Sensible Guide To Forex: Safer, Smarter Ways To Survive and Prosper From The Start (Wiley 2012).

    Visit the book's amazon.com page, or the book's companion site, thesensibleguidetoforex.com for further details.

    DISCLOSURE /DISCLAIMER: THE ABOVE IS FOR INFORMATIONAL PURPOSES ONLY, RESPONSIBILITY FOR ALL TRADING DECISIONS LIES SOLELY WITH THE READER.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Oct 27 10:40 PM | Link | Comment!
  • TOP 7 COMING WEEK MARKET MOVERS TO WATCH: OCTOBER 28TH – NOVEMBER 2ND

    he following is Part 2 of our weekly review and preview strategy guide for traders and investors of all major asset classes

    See Part 1 for prior week market movers and their lessons for the coming week

    1. Reaction To Q3 Earnings: Will Reality of Global Slowdown Again Overcome Central Bank Manipulations?

    As we noted in OCTOBER 21-6 MARKET MOVERS & LESSONS: BEWARE DECEPTIVE QUIET & BOND MARKET SIGNALS, for most of the prior year, markets have rallied impressively due mostly to central banks stimulus and the expectation of more to come. "Over the past three weeks however, the reality of the global slowdown has forced its way back into market consciousness because it is now showing up in Q3 earnings reports."

    We've just completed the third week of earnings season, after which it typically loses its influence on markets because the tone is already set and is theoretically already priced in.

    If however, earnings and revenues reported continue to miss forecasts at higher rates than seen in years, and markets continue to retreat on that news, we may have a the start of a change in perceptions that drives markets lower. If markets continue to sell off on bad earnings news, that would likely mean that that investors no longer believe that central bank stimulus and money printing alone can continue to drive asset prices higher while the global slowdown hits corporate performance in earnings and revenues.

    The coming week or two should clarify whether unlimited monetary easing has reached the end of its effectiveness.

    We also note in the above post that in fact the earnings picture is even gloomier than it appears when one considers that the higher rate of missed forecasts is coming despite these forecasts having been repeatedly lowered, and there are signs that Q4 earnings season could be even worse. See here for details. Zerohedge.com also notes here that there are signs we'll see further downward revisions for Q4 earnings season.

    Finally, although earnings season is past its third week, there are still some marquee names that might influence market sentiment. See any good earnings calendar for details.

    2. US Monthly Jobs & Related Reports For September

    Monthly US NFP, unemployment, and related reports that hint at the Friday result together form what is, taken together, potentially the most market moving group of reports for the month. Pay particular attention to the ADP version of the NFP report (Thursday), because its preparation process has been revised to more accurately predict the actual official BLS report that's released on Friday. This purported greater accuracy could make any surprises from the ADP version more influential. The consensus for the ADP version is for ~140k new jobs, so variation of over 10% either way could be market moving.

    Given that this is the last jobs report before the US presidential elections on November 6th, it takes on added significance, because if it's positive it raises the odds of an Obama re-election, and if negative, makes a Romney victory more likely. Granted, interpreting which result is more market friendly is not simple. Generally, Republicans like Romney are believed more market friendly, though some fear he'll pull away the stimulus punch-bowl faster. While that's better for the US in the long run because it reduces debt and the deficit, in the short run that would hurt risk assets.

    3. Watch The Spread Between High Yield And Investment Grade Bonds

    We also noted in the concluding section (Lessons, Ramifications) of the above mentioned article that

    bond markets are flashing a warning that equity and other risk asset markets have not priced in enough risk of pullback and so remain too high (still near 2007 highs in the case of stocks).

    Pay attention to the spread between high-yield and investment grade bonds, which per Barclays (via zerohedge.com) are now at three year highs. In other words, bond buyers are paying more than they have since late 2009 for safety.

    4. Technical Indicators Overall Bearish-May Be Self-Fulfilling

    As I mention repeatedly in The Sensible Guide To Forex, even most of those who aren't true believers in technical analysis will readily concede its importance, simply because so most investors do use it and hence negative indicators on price charts can create their own self-fulfilling prophecy.

    Here are just a few technical indicators to consider.

    Bearish Weekly S&P 500 Chart

    First, consider the chart below.

    (click to enlarge)

    S&P 500 WEEKLY CHART 15 MAY 2011 TO PRESENT

    Source: MetaQuotes Software Corp, thesensibleguidetoforex.com, globalmarkets.anyoption.com

    04 OCT 27 2344

    1. We've an established 3 week downtrend confirmed by a series of lower highs and lower lows

    2. The bellwether index has dropped below and out of its Double Bollinger Band Buy Zone (bounded by the upper orange and green Bollinger Bands). This suggests a critical loss of upward momentum. See here for details.

    3. The weekly chart shows that the index may be forming a bearish Head and Shoulders pattern.

    4. The index is still holding above 1400, a mere 160 points below decade-plus highs around 1560, even though global growth and earnings are falling apart and virtually unlimited stimulus is already priced in. That means we've very limited room to climb before hitting 12 year old resistance (that's strong) with little fundamental 'fuel' to power past that level.

    In sum, while markets could remain within their trading ranges, the longer term bias is to the downside.

    Deteriorating Growth Rate of Core Capital Goods Orders

    A number of prominent analysts have noted this. See here for details on their findings. The short answer: not good.

    5. EU: Maybe Some Market Moving Noise But Little Risk Until After US Elections

    Greece will vote this week to approve measures that the Trioka demands in exchange for more loans that Greece cannot repay. Not worry, the motions will likely be passed. Why not? Greece has little to risk given that the EU has forgiven past failures to comply in order to avoid contagion risk from a Greek default.

    Yes, markets may get spooked by the usual German talk about getting tough with Greece or Spain, but there's little need to take it seriously until after the US Presidential elections of November 6th. Germany has in the past backed down anyway on fear of contagion from a Greek default. That fear, along with Washington's request for quiet, should mean the EU remains a lesser market mover this week.

    However we completely agree with German Finance Minister's warning that "the worst is yet to come." Why not? Nothing has been solved, and the temporary solutions being used to buy time involve yet more debt and money printing, making the ultimate defaults and their collateral damage that much bigger.

    The current consensus is that Europe continues to "muddle through" for the coming years. That's a glorified way of saying "we don't know what will happen," the EU's primary survival tools have been buying time via:

    1. Additional lending to those who can't repay their current debt load, using cash created out of thin air
    2. Meetings that typically do little besides arrive at plans to make future plans, or actually do make plans involving temporary unsustainable solutions that are variations on #1 above.

    Obviously that's not a sustainable solution, though the timing of the point at which confidence in the EUR and EU collapses remains impossible.

    6. Other Calendar Events

    Beyond the above mentioned events, here are a few others that might be market moving. See any good economic calendar for further details.

    Tuesday

    Japan: Bank of Japan monthly rate statement and press conference- suddenly significant because the BoJ just announced new stimulus and probably needs yet more, so the press conference might yield clues about when that might be coming. That in turn would move the USDJPY and USD index.

    EU: ECB President Draghi speaks, Italian 10 year bond auction

    US: CB consumer confidence

    7. US Election Related News

    As noted above, it's not clear which candidate is really perceived by markets as more pro-market, even though Romney is obviously the more sympathetic of the two to the market participants and others who are net tax payers rather than net consumers of government cash. Those who prefer the short term benefits of QE 3, currency debasement, and minimal progress on deficit reduction are likely to see Obama as more likely to continue that along the "extend and pretend" path.

    So while the latest polls may influence markets, it's not completely clear how, though we still suspect Romney is seen as the more pro-market, at least in the US. I recognize there are those who disagree and that I may catch some firm disagreement in reader comments. That's fine with me.

    Longtime followers of mine know I try hard to keep these articles objective.

    From the perspective of those for whom it's a priority that the US dollar retaining its purchasing power and reserve currency status over the long term, the evidence suggests Romney would be the better candidate, though it's not clear that either candidate will have that much freedom to do what he'd prefer. For the sake of brevity, I'll leave it at that, though I'm curious to hear what readers think on this point.

    Whoever wins, we expect the long term debasement of the USD, EUR, JPY, and other currencies subject to similar central bank policies, to continue. For those lacking a clear plan for how to protect their assets and diversify out of these currencies and assets denominated in them, strongly consider reading The Sensible Guide to Forex (Wiley, 2012)

    DISCLOSURE /DISCLAIMER: THE ABOVE IS FOR INFORMATIONAL PURPOSES ONLY, RESPONSIBILITY FOR ALL TRADING DECISIONS LIES SOLELY WITH THE READER.

    ADDITIONAL FULL DISCLOSURE: IN CASE YOU WERE WONDERING, I DON'T THINK THE INTERESTS OF INVESTORS OR OTHERS WHO PAY TAXES, SAVE, OR LEND, ARE A PRIORITY FOR OBAMA. IF THERE'S A BIAS I'M TRYING TO KEEP OUT OF THE ABOVE ARTICLE, THAT'S IT.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Oct 27 10:37 PM | Link | Comment!
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