Financial Market Report For January 13, 2011
I … Gold stocks disconnected further from the price of gold and Basic Material stocks turned lower on falling base metal prices, as the Euro rose as the European Semester process commenced.
The Euro, FXE, rose today and closed at 132.96 on a “converge trade” as plans for fiscal federalism were set forth. The European Financials, EUFN, rose 1.4%. And Banco Santander, STD, blasted up 4.3%. The US Dollar, $USD, fell to 79.19
The age of deleveraging commenced December 13, 2010 when the European Leaders met in summit and failed to achieve a comprehensive solution to the European Sovereign Debt and Banking Debt crisis inducing the gold mining stocks to disconnect from the price of gold.
Gold, GLD, fell 1.0% and the gold mining stocks, GDX, fell 3.2% continuing to a process of deleveraging that began December 13, 2010, as is seen in the chart of GDX:GLD when the European Leaders met in summit on December 13, 2010, and failed to provide a comprehensive solution to the European sovereign debt crisis. As John Mauldin relates in Safehaven that they were kicking the can down the road.
The investment sea change that occurred on December 13, 2010 was that gold stocks stopped leveraging the 30 10 US sovereign debt yield curve as is seen in the chart of Gold, GLD, the gold mining stocks, GDX, the 30 Year US Treasuries, EDV, and the 10 to 20 Year US Government Bonds, TLT …. GLD, GDX, EDV and TLT. The sovereign debt carry trade ended as gold mining stocks fell 8% relative to gold over the last month, as the longer maturity bonds fell 3% relative to the medium term bonds. Gold stocks ceased to leverage up on the longer maturity US debt, the reason being that the bond vigilantes called US Treasuries lower as Ben Bernanke’s QE2 constitutes monetization of debt.
When using the 6 month ongoing Yahoo Finance Chart of GDX, together with EUFN, ZROZ, IYM, FLAT, XME, and BWX, one can see that the long term swing trade that existed in the HUI Precious Metal Stocks, ^HUI, began to intensify with the formal Announcement of QE 2 in early November 2010. And then the gold mining stocks sold off when the European Leaders, failed to come to a comprehensive resolution to the European Sovereign Debt Crisis on December 13, 2010.
Then more critically, on January 3, 2011, the gold mining stocks, GDX, entered an Elliott Wave 3 of 3 down. The 3rd Elliott Wave is the most sweeping of all economic waves it builds wealth on the way up and destroys wealth on the way down. Of note the US Treasuries, EDV, entered their Elliott Wave 3 Down on September 29, 2010 following Ben Bernanke’s announcement of QE2 from Jackson Hole.
The gold mining stocks rode the 30 10 US Sovereign Debt Yield Curve, $TYX:$TNX, higher over the years. A rising 30 10 yield curve gave seigniorage, that is moneyness, to the gold mining stocks. Now the greatest swing trade of all time is now done and over. This being documented in the chart of $HUI:$USB, that is the gold mining shares relative to the 30 Year bond, turning lower. Gold stocks will be falling lower and lower for quite some time as US Treasuries falls lower. Gold mining stocks are now deleveraging from US government debt.
II … Basic material stocks turned lower on falling base metal prices.
Basic material stocks, IYM, fell 0.7% as Base Metals, DBB, fell 1.4% on being overbought.
Junior Gold Mining, GDXJ, fell 3.9% as Gold, GLD, fell 1.0%.
Almaden Minerals, AAU, which has been relatively strong compared to other miners fell 6.5%.
Silver Miners, SIL, fell 4.1%, and exploratory silver miner, Silver Standard Resources Inc, SSRI, 5.1%, as Silver, SLV, fell 3.4%.
General Moly, GMO, fell 4.0%.
Alcoa Aluminum, AA, fell 3.0% as Aluminum, JJU, fell 1.8%.
Basic Materials Component of The Morgan Stanley Cyclical Index, Freeport McMoran Copper And Gold, FCX, fell 3.0% as Gold, GLD, fell 1.0%, and as Copper, JJC, fell 1.7%.
Teck Resources, TCK, fell 2.2%.
Horsehead Mining, ZINC, fell 1.8%
Southern Copper Corporation, SCCO, fell 1.8% as Copper, JJC, fell 1.7%
Steel, SLX, fell 1.5% as Base Metal Commodities, DBB, fell 1.4
Metal Manufacturing, XME, fell 1.3 as Base Metal Commodities, DBB, fell 1.4
Iron Ore Producer Cliff Natural Resources, CLF, fell 1.2%
Global Industrial Metal Producers, CRBI, fell 1.0% as Base Metal Commodities, DBB, fell 1.4
Brush Engineered Products, BW, fell 1.9%
Base Metals, DBB, fell 1.4%, Lead, LD, Tin, JJT, 1.5%, Nickel, JJN, 1.7% , Aluminum, JJU, 1.8%; all lower on having been over bought.
III … The BRICs turned lower on inflation, corruption and credit tightening concerns
BRICS, EBB, fell 1.3%
Brazil, EWZ, fell 1.6%, Brazil Small Caps, BRF, 1.0% on inflation concerns
Russia, RSX, fell 0.9%; it has had a strong gain; it has peaked; and it is now turning over.
India, INP, fell 2.0% and India Infrastructure, INXX, fell 0.9%, India Small Caps, SCIF, fell 1.7%, India Earnings, EPI, 2.1% on corruption concerns and on inflation concerns that the government will introduce measure disadvantageous to investors.
China, YAO, fell 0.9%, China Real Estate, TAO, fell 0.9% and China Minerals, CHIM, 1.4% and China Small Caps, HAO, 1.1% on credit tightening
IV … Falling commodity prices turned the emerging markets and the Morgan Stanley Cyclical Index lower.
Emerging Markets, EEM, fell 0.9% and Emerging Markets Consumer Staples, ECON, fell 0.9% as Commodities, DJP, fell 0.8%.
The Morgan Stanley Cyclical Index, $CYC, fell 0.9% as Commodities, DJP, fell 0.8% and the US Commodities Index, USCI, fell 0.6%, Gasoline Futures, UGA, fell 0.6% Oil, USO, fell 0.9% all commodities lower on having been overbought.
Automotive Component of The Morgan Stanley Cyclical Index, Goodyear Tire, GT, -5.5%
Automotive Component of The Morgan Stanley Cyclical Index:, Johnson Controls, JCI, -1.3%
Packaging Component of The Morgan Stanley Cyclical Index, Temple Inland, TIN, -1.3%
Transportation Component of The Morgan Stanley Cyclical Index, Ryder, R, -0.5%
V … Bank stocks turned lower
The Banking Component of the Morgan Stanley Cyclical Index, Citigroup, C, fell 0.8%
Bank of America, BAC, fell 1.5%
Banks, KBE, fell 0.6%
VI … Rising interest rates coming from QE 2 and also falling basic material commodity prices have introduced the Age of Deleveraging.
On January 13, 2010 stocks in recognition of the destructiveness of Quantative Easing 2, and in recognition of falling base metal commodities, DBB, pivoted from the Age of Leverage …. and into the Age of Deleveraging.
Higher US Government interest rates at the hands of the bond vigilantes, and falling base metal prices at the hands of the commodity traders have turned stocks lower are unwinding liquidity trades and carry trade investments globally. Soon liquidity will become a major concern as European Sovereign debt issues escalate and US Treasury auctions fail. This as Tyler Durden relates in article $13 Billion 30 Year Auction Closes At 4.515%, 2.67 Bid To Cover Today's $13 billion 30 year auction has priced on slightly worse terms than the last 30 year from December: the Bid To Cover came at 2.67, a decline from the prior 2.74, while the high yield printed at 4.515% (40.45% allotted at high), the highest since April 2010, compared to 4.41% in the last auction. The take down distribution was not notable, and unlike yesterday's 10 Year which saw that lowest PD take down on record, Primary Dealers bought just about half of the auction, or 49.9%, with 37.8% left for the Indirects, and 12.4% for the Directs.
Internet leader, Internet Capital Group, ICGE, fell 1.8%
Manufacturing housing company, Cavco Industries, CVCO, fell 3.3%
Latin America, LATM, fell 1.2%
Machine Tool Manufacturer, Timken Co, TKR, fell 2.0%
Paper Manufacturer, Buckeye Technologies, BKI, fell 3.0%
Automotive Parts Manufacturer, TRW, fell 3.2%
Automotive Parts Manufacturer, ALV, fell 1.7%
This as the New York Times reports Auto Work Force Gets Dividend From Industry's Rebound. The sweeping overhaul and surprising recovery of the American auto industry is about to pay off handsomely for the blue-collar workers at Ford, F, and General Motors, GM. (Hat Tip to Gary of Between The Hedges)
Life has biorhythms, stock markets have cycles. Higher interest rates and falling base metal prices have brought on Kondratieff Winter.
VII … A number of 200% ETFs fell lower today.
Proshares Basic Materials, UYM, fell 1.7%, Brazil, UBR, 2.7%, India, INDL, 3.8%, Mexico, UMX, 1.3%
Direxion BRICS, BRIL, 2.5%
VIII … Municipal bonds fell while other government bonds rose.
Municipal Bonds, MUB, fell 1.2%
California Municipal Bond, CMF, fell 1.1%
The downturn in Municipal Bonds is largely due to emergence of the need for municipal debt refinancing as Wall Street Journal reports: New Hit to Strapped Sates. Borrowing Costs Up as Bond Flops. Refinancing Crunch Nears. With the market for municipal bonds tumbling, cities, hospitals, schools and other public borrowers are scrambling to refinance tens of billions of dollars of debt this year, another sign that the once-safe market is under duress. The muni bond market was hit with the latest wave of bad news Thursday, prompting a sell off that sent the market to its lowest level since the financial crisis
David Mildenberg of Bloomberg Businessweek reports Texas Draft Budget Cuts 8,000 State Jobs Survivors May Face Furloughs, legislative.
Dan Conway of WSWS.org relates California governor begins term proposing massive austerity budget: Newly installed Democratic governor of California, Jerry Brown, released his proposal to resolve the state's $24.5 billion budget deficit, including measures that are far more draconian than those made by his Republican predecessor.
Philip Guelpa of WSWS.org relates New York governor unveils major attacks on education, health care, and public employees. With New York State facing a $1 billion budget deficit for the current fiscal year and a projected deficit of more than $9 billion for the coming year, newly inaugurated Governor Andrew Cuomo used his January 5 “State of the State” address to outline a program of draconian austerity.
Long maturity corporate bonds, BLV, rose 0.8%
Short duration corporation bonds, LQD, rose 0.4%
30 Year US Government Bond, EDV, rose 0.9%
10 to 20 Year US Gov Government Bond, TLT, rose 0.9%
World Government Bonds, BWX, rose 0.9%
International Corporate Bonds, PICB, rose 0.9%
IX … Junk bonds continued lower from their January 6, 2011 high.
Junk bonds, JNK, fell 0.1% to close at 40.05 which is below their January 6, 201a high of 40.20. The fall in Junk bonds means moneyness is flowing out of the financial system.
X … Europe launches a new eral of economic coordination.
Finance News relates Europe launches a new era of economic coordination: Europe opens a crucial chapter in its efforts to end the deficits and debts plaguing the euro, with national budgets in the future to come under EU scrutiny before coming into effect.
Drawing from the costly lessons of the eurozone debt crisis, now endangering Portugal and Spain, the European Union agreed on a series of steps in the past several months to reassure nervous markets.
Among them is the first ever "European semester," a programme kicking off Wednesday to coordinate economic and budgetary policy in the wake of fiscal disasters that led to bailout
is of Greece and Ireland last year.
The initiative brings the EU closer to the elusive goal of economic governance between 27 vastly different countries, ranging from export-driven Germany to farm-heavy France and formerly communist Poland.
"Last year's developments have confirmed that piecemeal solutions are not enough: we need a comprehensive response," said European Commission president Jose Manuel Barroso, who described the new system as a "revolution."
"Europe can only be strong if it is able to act in a coordinated manner, with strong institutions, with a common governance, with stronger economic coordination," he said last week.
After years of loose book-keeping, Greece shook the euro to its core last year when it revealed a larger public deficit than previously reported, sparking a crisis that led to a 110-billion-euro
Ireland followed suit last month with a 67-billion-euro financial lifeline after the government pumped billions into struggling banks, pushing the deficit to 32 percent of national output, 10 times over the limit set in EU rules.
In a signal to markets that it would shield the euro for the long run, the EU has agreed to change its core treaty in order to create a permanent financial safety net to help any country in trouble under tough conditions, replacing a temporary 750-billion-euro fund expiring in 2013.
But to avoid being forced into shelling out more cash for spendthrift member states, the EU decided to raise the threat of sanctions against countries that run excessive deficits and debts.
Under the Union's Stability and Growth Pact, countries must keep their public deficits under 3.0 percent of gross domestic product but most countries currently exceed the limit.
The EU will now get to review national budgets before they are adopted by legislatures.
The European semester's six-month cycle begins Wednesday when the European Commission unveils an "Annual Growth Survey" on the impact of the crisis on the economy, employment, public debt and growth prospects.
The report will be used in March by the European Council, the body representing the 27 EU states, to provide policy advice to individual countries.
National governments will then have to present their medium-term budgetary strategies in April. In June and July, the council and commission will issue recommendations before states finalise their budgets for the following year.
The reform was formally adopted in September after overcoming concerns from reluctant countries, including Britain, worried about keeping their fiscal sovereignty intact.
"To me, this exercise will lead to a colossal transfer of responsibilities," Italian Finance Minister Giulio Tremonti told French financial daily Les Echos.
"With a common currency, we no longer can lead 27 different budgetary policies," he said.
The Eurozone in implementing Fiscal Federalism is instituting the greater call for regional global governance made by the Club of Rome in 1974.
The Leaders Framework Agreement for fiscal federalism cannot offset the problems stemming from disparate people with dissimilar economies using a common currency. Historical evidence suggests that most currency unions don’t survive.
The Leaders in announcing their Framework Agreement waived national sovereignty and established the precedent for leaders to address continental issues. Confirmation of such comes from Donal Donovan, now a writer for Irish Times, who was a staff member of the IMF during 1977-2005 before retiring as a deputy director; he is currently adjunct professor at the University of Limerick and a visiting lecturer at Trinity College Dublin, writes Loss Of Fiscal Sovereignty Inevitable If Euro To Survive.
And Steven Erlanger in New York Times article Europe’s Odd Couple, sees a vision for a German led Eurozone stating: “John Kornblum, the former American ambassador in Berlin and still a resident there, sees a model for Germany in the United States and the way it helped keep Europe together after the war, mediating disputes and finding compromises. “The Germans don’t see it yet,” he says. “But they will have to take on the role of the United States in Europe, and have the same kind of balancing role we had for such a long time.” At that point, Germany’s marriage with France won’t matter so much anymore.”
The European Parliament Committee For Economic And Monetary Affairs reports: “Mario Monti on Thursday added his weight to Parliament's drive for an economic governance model significantly different to that attempted in the first ten years of economic and monetary union.
"The European Parliament can become a house for budgetary transparency and can serve to combat the cartel of nationalism which dominated the last years of economic and monetary union", he said.
At a brainstorming hearing on economic governance held by the Economic and Monetary Affairs Committee, Mr Monti, a former EU Commissioner and now President of Milan's Bocconi university, joined other leading academics in explaining their ideas on the best way forward for economic governance in the EU.
They were unanimous on at least one issue - Europe's interest in greater economic integration must take precedence over national and electoral concerns, as the only way to ensure greater long-term discipline, which in turn is the only way to growth. The plans currently on the table show a serious lack ambition, they added.
Participants also debated how to improve debt crisis burden sharing, notably through the possible design of Eurobonds.”
And David Korosi, shares his views on the superstructure of the “economic giant” relating in article The Spinelli Phenomenon: “Altiero Spinelli was the heavyweight of the European federalist movement, first as activist, then as a very hardworking MEP. What do classic federalism want? “Prominent MEPs launched on 15 September 2010 the Spinelli Group, a network aimed at overcoming nationalism and promoting federalism across Europe”- says EurActiv informing us of the newest action of the (neo)federalist group of intellectuals. “I am still optimistic however, that the crisis will lead Europe to establish an economic union. I see no alternative” - said Joschka Fischer, member of the Spinelli Group.”
The sovereign debt and bank debt imbroglio will only get worse, as central bankers have lost debt sovereignty to bond vigilantes who have taken command of sovereign debt interest rates. This has opened the door for currency traders to run currencies up and down at will. Today January 13, 2010, is an example of their power, as they called the Euro, FXE, higher for a second day at 132.96, manifesting a “converge trade” in the Euro which caused the European Financials, EUFN, to rise. The same traders executed a “dollar liquidity trade” that recently ran up the US Stocks, VTI, across the board, with everything from the mall cap stocks, such as the small cap discretionary shares, XLYS, small cap energy shares, XLES, and the small cap information technology shares, XLKS, to the trans-global companies like Exxon Mobil, XOM, receiving the currency traders moneyness. Soon, out of the European sovereign crisis, fierce European economic governance will arise, led by a Chancellor, that is a Sovereign, and a Banker, that is a Seignior.
Perhaps the Chancellor will be Herman Van Rompuy, as Open Europe in Press Summary for December 24, 2010 related that in NRC Handelsblad article: ‘Van Rompuy: Eurozone Wordt Politieke Unie’, EU President Herman Van Rompuy stated: “the eurozone will become a political union”. And in ForexLive Market News International article EU Van Rompuy: Political Will For Permanent EFSF Now Stronger he stated: “The general feeling among all the main-players, all the 27, is that they will take every necessary step to safeguard financial stability. This political will is now a lot more clear than a few weeks ago.” “You can be sure that, if needed, we will take any step to guarantee financial stability,” he said. Van Rompuy also said that weaker eurozone states must meet their fiscal targets in order to improve investor confidence.”
Perhaps the Banker will be the EU’s top monetary official who said the euro 440 billion ($570 billion) bailout fund for debt ridden countries should be increased and given more powers. Monetary Affairs Commissioner Olli Rehn said that discussions with the 17 eurozone governments on boosting the size of the fund were currently going on “and progress is being made.” Rehn says “we need to review all options of the size and scope of our financial backstops,” according to Raven Clabough in New American article EU Officials Want Larger Bailout Fund.
Does the idea of a Sovereign and a Seignior rising to power seem extreme to you? John Taylor, Jr.
Chief Investment Officer, FX Concepts. in Tyler Durden’s Zero Hedge Website, wrote We Need Real Leaders Now!
XI … The Federal Reserve announced today it will be monetizing $112 Billion worth of US debt in the next month. And Fed Chairman Ben Bernanke told CNBC that QE 2 boosted the stock market.
Tyler Durden in article Bernanke: "QE2 Contributed To A Stronger Stock Market" As TrimTabs Predicts More QEasing Ahead reports: MarketwatchFederal Reserve Board Chairman Ben Bernanke said Thursday that a controversial $600 billion bond buying plan has contributed to a stronger stock market. "Our policies have contributed to a stronger stock market just as they did in March 2009 when we did the first iteration of this program," Bernanke said at a Federal Deposit Insurance Corp. forum on small businesses. "A stronger economy helps small businesses more than larger businesses. Interest rates are higher but that's mostly because the news is better.”
I reject “Interest rates are higher but that’s mostly because the news is better”. Interest rates are higher because the US central bank has lost debt sovereignty and Treasury debt seigniorage to the bond vigilantes who have been calling the interest rate on the 30 Year US Government bond, $TYX, and the interest rate on the 10 Year US Government Note, $TYX, higher at their will.
In research notes, TrimTabs highlights a correlation between quantitative easing and equities. Under QE1 the Fed bought nearly $2 trillion in mortgage-backed securities, Treasuries, and agency debt between March 2009 and March 2010, a period in which the S&P 500 soared 67%. Stock prices then sank 13% in the following five months, and now they are up 20% since Fed Chairman Bernanke announced QE2 at the end of August 2010.
QE 2 has created an investment sea change. It sent US Treasuries lower. The 30 Year US Government Bonds, EDV, and the 10 to 20 Year US Treasuries, TLT, have fallen lower, and created a liquidity trade in small cap stocks, such as the small cap discretionary shares, XLYS, small cap energy shares, XLES, and the small cap information technology shares, XLKS, as well as for the components of the Morgan Stanley Cyclical Index, $CYC that began September 1 2010 and ran through January 12, 2010. The Ben Bernanke QE 2 stock rally is now over. Might we see speculative demand for inflation hedges in commodities such as gold, GLD, and food, FUD, and agricultural products, JJA, as investors flee paper money as investors have begun to panic. In as much as the Fed has admitted that it WANTS to create inflation, I encourage an investment in gold bullion. The concept is to buy on the dip as in a bull market investors buy dips and in a bear market investors sell rises. Physical gold will be going significantly higher.
Falling world stock prices, VT, -0.06%, and ACWI, -0.06%, and falling junk bond prices, JNK, means dwindling moneyness. Stocks, VT, and Bonds, BND, will both be falling lower. The two money good investments in a currency deflationary, DBV, and CEW, world, will be gold, GLD, and silver, SLV, bullion. While gold, GLD, may fall, gold in terms of currencies, such as the Australian Dollar, FXA, GLD:FXA, will maintain its value.
I relate there is no absolutely save sovereign as Wall Street Journal reports S&P, Moody's Warn On U.S. Credit Rating. Two leading rating firms have cautioned the U.S. on its credit rating, expressing concern over a deteriorating fiscal situation that they say needs correction.
Moody's Investors Service said in a report that the U.S. will need to reverse an upward trajectory in the debt ratios to support its triple-A rating. "We have become increasingly clear about the fact that if there are not offsetting measures to reverse the deterioration in negative fundamentals in the U.S., the likelihood of a negative outlook over the next two years will increase," said Sarah Carlson, senior analyst at Moody's. "The view of markets is that the U.S. will continue to benefit from the exorbitant privilege linked to the U.S. dollar" to fund its deficits, Carol Sirou, head of S&P France, said at a conference in Paris on Thursday. "But that may change. We can't rule out changing the outlook" on the U.S. sovereign debt rating in the future, she warned. She added the jobless nature of the U.S. recovery was one of the biggest threats to the U.S. economy. "No triple-A rating is forever," she said. (Hat Tip to Gary of Between The Hedges)
Stocks: UUP, FXE, FXA, GLD, EUFN, SAN, GDX, EDV, TLT, FLAT, IYM, BWX, PICB, AAU, SIL, SSRI, SLV, GMO, AA, JJU, FCX, JJC, TECK, ZINCQ, SCCO, SLX, DBB, CLF, CRBI, MTRN, LD, JJT, JJN, EEB, EWZ, BRF, INP, INXX, SCIF, EPI, YAO, CHIM, HAO, EEM, ECON, DJP, USCI, UGA, USO, GT, JCI, TIN, R, C, BAC, KBE, ACTA, CVCO, LATM, BKI, TRW, AL