Financial market report for November 24, 2010 (posted on Thanksgiving Day November 25, 2010)
I … Most Currencies Rose While The Euro Fell And The Yen Fell Lower.
FXE -0.3% The Euro is at the epicenter of the sovereign crisis.
The US Dollar, $USD, rose to 79.85.
II … Commodities Rose To Resistance.
The chart of Base Metals, DBB, is terrifically bearish on concerns over China vowing to curb inflation.
The rise to resistance in oil and the failure of base metals is an ominous sign for basic material stocks.
The Stock To Commodity Ratio Fell Some.
The ratio, ACWI:DBV, fell, suggesting that stocks have peaked out. And that risk aversion is commencing in stocks on fears of sovereign crisis spreading to stocks, on diminished growth opportunities, and on competitive currency devaluation.
III … The “Stock Yield Curve” Steepened As Risk Appetite Moved Stocks Higher.
The ratio of small cap pure value shares relative to small cap growth shares, RZV:RZG, steepened on risk appetite … It has now moved up to strong resistance.
IV … Five investment groups: the Growth Shares, the US Small Caps Shares, Mexico, Japan, And Basic Material, have remained strong since November 5, 2010.
A … US Growth Shares Rose.
Today saw a continued flight to US Dollar growth stocks.
Large Caps, BXUB, 4.2%
Large Caps, NLR, 4.4%
Airlines, FAA, 3.5%
Semiconductors, XSD, 2.8%
Internet, HHH, 3.5%
Internet, FDN, 2.7%
Internet, PNQI, 2.4%
Disk Drive, WDC, 2.8%
Disk Drive, QTM, 2.7%
Disk Drive, STX, 1.8%
B … US Small Cap Shares Rose; these small cap US shares have been doing relatively well on a strong dollar, even though US banks, KBE, and US community banks, QABA, have fallen lower.
C … Mexico Shares Rose. The Mexico shares have done well lately on competitive currency strength.
D …. Japanese Shares Rose On Competitive Currency Strength. Japanese shares are experiencing a significantly less rate of debt deflation than other countries, as carry trades, such as the AUD/JPY, that is the Australian Dollar Yen carry trade, FXE:FXY, is rapidly unwinding investment in bank and mining shares in Australia. It’s ironic, that finally, a greater deflation is now coming to the king of currencies, that is the Australian Dollar.
E … Basic Material Stocks Rose; this have been relatively strong due to good dividend payment.
Uranium mining, URA, 5.1%
Copper Mining, COPX, 2.4
BHP Billiton, BHP, 2.1%
Energy Services, OIH, 1.9%
Agriculture Industry, MOO, 2.2%
Steel Manufacturing, SLX, 1.7%
Metal Manufacturing, XME, 1.4%
Basic Material, DBN, 1.6%
V … Stocks Suffering From Debt Deflation, That Is Currency Deflation, Rose To Resistance.
Housing Stocks Rose.
Housing, XHB, 2.0%
Financial and Value Stocks Rose; the Bases III accords for capital requirements has been a factor in turning these down, as well as contagion from the European “sovereign crisis.”
Brazil Financials, BRAF, 3.1%
Emerging Markets Financials, EMFN, 2.1%
Capital Market Provider, KCE, 2.1%
Global Financial Firms, IXG, 1.7%
Asia High Yielding stocks, DNH, 2.8%
Small Cap Value, RZV, 2.2%
Utility CenterPoint Energies, CNP, 1.0%
Country Stocks Rose; these have suffered from terrific debt deflation, that is, currency deflation since November 5, 2010.
Australia, EWA, 2.5% The Australian shares have fallen lately on competitive currency weakness,.
Australia Small Caps, KROO 3.3%
South Korea,EWY, 3.6%,
South Korea Small Caps, SKOR, 2.1%
Europe, VGK, 1.2%
Brazil Small Caps, BRF, 3.7%
Brazil, EWZ, 2.5%
Russia, RSX, 2.5%
India, INP, 0.4%
Turkey, TUR, 2.4%
Emerging Markets, EEM 2.35
Asia Excluding Japan, EPP, 2.2%
Sweden, EWD, 1.7%
South Africa, EZA, 1.7%
Real Estate Rose To Resistance; these shares have fallen on fears of mortgage buybacks on the part of banks. The stock market in calling real estate stocks lower effectively terminates the FASB 157 entitlement to mark property to the manager’s best estimate, and assures continued deflation in stock and real estate prices.
Apartment Investent And Management, AIV, 3.2%
Residential Real Estate, REZ, 1.6%
Blackrock, BLK 1.8%
Industrial Office REIT, FIO, 1.8%
Office REIT, VNO, 1.9%
Active Real Estate PSR 1.9%
Real Estate, IYR, 1.9%
VI … Proshares 200% ETFs Rose.
Chart SAA, UMX, USD, RETL, EZJ, UCC, UYM, have retained their value on currency strength; that is the relative strength of the US Dollar, the Mexico Peso and the Yen; as well as an unwillingness of the market participants to sell the basic material stocks as they carry a dividend.
Small Caps, SAA … 5%
Semiconductors, USD, 4% ...
Retail Bull, RETL, 4% ….
Japan, EZJ, 4% ….
Consumer Service, UCC, 4% ...
Mexico, UMX, 7% …
Basic Materials, UYM, 4% …
Chart shows UYG, URE, UBR, UXJ, UPV, BRIL, INDL, have lost value since November 5, 2010 on “sovereign crisis” concerns and currency deflation of the Australian Dollar, the Brazilian Real, the Indian Rupe, and the Euro.
Financials, UYG, 3% ….
Real Estate, URE, 4% …
Brazil, UBR, 5%, …
Asia Excluding Japan, UXJ, …. 5%
Europe, UPV, 0% ….
Brics, BRIL, 5% …
India, INDL, 2% ….
VII … Bonds, BND, fell on numerous risk aversion factors, which can best be described as fears of sovereign crisis, to the edge of a head and shoulders pattern, suggesting that a major fall in bonds, is coming soon.
The 30 10 US Sovereign Debt Yield Curve, $TYX:$TNX, flattened, to 1.474, as investors, sold out of risk that was formerly purchased under QE 1, as well as the anticipation of QE 2.
Investors heavily sold the longer out debt, that is the high yielding 30 Year US government Bonds, EDV, more than they sold the shorter duration 10 to 20 Year US Government bonds, TLT. The former fell 2.7% and the latter fell 1.8%
World Government Bonds, BWX, fell, 0.3, while International Corporate Bonds, PICB, broke down, and fell 1.0%, on announcement of China to curb inflation, on awareness of curtailed economic growth world wide, on junior bondholders having had to taken a loss on the failure of Anglo Irish Bank, and on accumulated loss in global currency values since November 5, 2010.
The Emerging Market Bonds, EMB, fell 0.3%; and they look like they are on the verge of a major breakdown, similar to that which happened in early May 2010, when the European Sovereign Debt Crisis over Greek debt grew to a head.
The shorter duration corporate bonds, LQD, fell 0.8%, while the longer out corporate bonds, BLV, broke down and fell 1.4%. According to ETFdb, BLV, The Barclays Capital Long Government Credit Index, measures the investment return of all medium and larger public issues of U.S. Treasury, agency, investment-grade corporate, and investment-grade international dollar-denominated bonds with maturities longer than 10 years. The average maturity is approximately 20 years. The terrific fall in BLV comes on fears of having to take Irish subordinate bond type hair cuts and on Mrs Merkel’s call for Mr. Herman van Rompuy to develop a crisis mechanism to handle soveign debt default.
Build America Bonds, BAB, fell 0.6%. Steven Malanga of the Wall Street Journal reports on The 'Build America' Debt Bomb
Given the reports below, if one has any money in any bond fund, I suggest that one withdraw it immediately, as these reports communicate that decimating sovereign debt shocks are on the way from the sovereign crisis.
Ambrose Evans Pritchard of the Telegraph reports Germany Fuels EMU Debt Crisis With Haircut Demands German plans to push for bondholder haircuts in Europe as soon as next year have triggered a surge in default risk on European bank debt and set off further flight from Spanish, Portuguese and Irish bonds.
Pragmatic Capitalism reports Spanish & Portuguese Yields Hit Fresh Highs
The FT notes that Ireland's banks could receive €12bn immediately, under the EU-IMF bailout. The move would see Ireland's two biggest banks effectively nationalised, as plans suggest full public ownership of Allied Irish Banks and the purchase of 85% of Bank of Ireland's shares. EU Economic and Monetary Affairs Commissioner Olli Rehn yesterday announced that bailout talks will likely be concluded by the start of next month.
The Telegraph reports Ireland Unveils Austere €15bn Budget To Cut Deficit
Ireland’s Prime Minister Brian Cowen, in accepting seigniorage aid from the UK, the IMF, and the EU, waived Ireland’s national sovereignty. The aid package melds the UK, the IMF, and the EU into a new sovereign Supra Government with David Cameron, Dominique Strauss Kahn and Olli Rehn as Ireland’s Sovereigns and Seigniors, the latter is an Old English word meaning top dog banker who takes a cut. The sovereign crisis has not be abated, it is only held in abeyance. Open Europe in November 25, 2010 Press Summary reports: “Meanwhile, the Irish government released a new budget yesterday which sets out plans to cut public spending by 20%. The plan aims to reduce public spending by €10bn and to raise an extra €5bn in taxes by 2014, reports the Irish Times. Welfare spending will be hardest hit, pensions will lose tax exemption, university fees will rise and taxation will increase, leading to up to 25,000 public sector job cuts. The Irish Department of Finance confirmed that the IMF and the European Commission will have the authority to recommend changes or alterations to the four-year plan during negotiations.”
EuroIntelligence reports “Ireland has extended its blanket guarantee for the banking sector and that Mohamed El Erian says in FT that the eurozone is facing a colossal crisis.”
EuroIntelligence continues: “Merkel vows to push ahead with plan. With every statement she makes about this crisis, Angela Merkel shows that she lacks an understanding of what is happening. Yesterday, she continued to portray the eurozone crisis as the result of an attack by the bond markets that needed to be counter-attacked by politicians. “Have politicians got the courage to make those who earn money share in the risk as well? Or is dealing in government debt the only business in the world economy that involves no risk? This is about the primacy of politics, this is about the limits of the markets." What she and her illiterate economic advisers fail to understand is that the bail-in mechanism she proposed for 2013 already affects prices, as the markets rightly concluded that member states will apply the collection action clauses on existing bonds (which they are legally entitled to). And that implies a repricing of existing bonds to take account of some probability of a haircut. There is no speculative attack. But the new bond prices are not consistent with long-term solvency of a number of member states, including Ireland.”
Wolfgang Münchau and Raphael Cottin in EuroIntelligence ask: Is Ireland solvent?
The European Investment Bank, EIB, is the European Union’s Bank whose shareholders are the 27 Eurozone Member States. Its website states that it borrows on the capital markets to develop large infrastructure networks of transport, energy and telecommunications underpinning the developmental and integration goals of the European Union. (I add that one of its goals is to replace high cost coal mined in Spain and other countries, used to generate electricity in utility plants, with low cost natural gas obtained from a number of sources.) Reuters reports from Brussels: “The European Investment Bank, EIB, will provide a 500 million euro loan for the Medgaz gas pipeline between Algeria and Spain, the bank said on Tuesday. The loan -- the EIB's biggest for a Mediterranean energy project -- amounts to roughly half the total cost of Medgaz, which will pump about 8 billion cubic meters (283 billion cu ft) of gas from Algeria under the Mediterranean to Spain each year. Medgaz is scheduled to come on stream in early 2011, having been delayed several times. The EIB said in a statement the project would help meet growing gas demand in Spain and increase the diversity of natural gas supplies to the European Union. The project will allow Spain to substitute pipeline gas for some of its substantial liquefied natural gas imports. The Medgaz consortium comprises Algeria's state oil and gas firm Sonatrach, Spanish utility Iberdrola and oil firm Cepsa, as well as Italian utility Enel's Spanish unit Endesa and France's GDF Suez.”
Disclosure: I am invested in gold bullion
Stocks: UUP, FXC, FXE, FXA, FXM, ICN, SZR, BZF, CEW, FXY, DBC, USO, UCO, DBB, ACWI, RZV, BND, EDV, TLT, BWX, PICB, EMB, BAB, BXUB, NLR, FAA, XSD, HHH, FDN, PNQI, WDC, QTM, STX, KBE, QABA, IWM, PXN, PSCD, RTH, EWW, DXJ, JSC, EWJ, URA, BHP, OIH, MOO, SLX, XME, CCXE, XHB, BRAF, EMFN, KCE, IXG, AUSE, CNP, EWA, KROO, EWY, SKOR