Financial market report for the week ending February 18, 2011
1) … Introduction
Exhaustion of quantitative easing has started the mother of all bear markets, and a failure of traditional carry trade investing, the US Federal Deficit, a soon coming municipal bond funding crisis, and a worsening of the European sovereign debt and banking crisis, will be the dynamos that will propel the world from the Age of Leverage and into the Age of Deleveraging.
The world is passing from The Age of Leverage characterised by sovereign debt expansion, currency inflation, credit liquidity, stability, stock and junk bond inflation, economic growth and expansion and prosperity … and passing into The Age of Deleveraging characterised by failure of sovereign debt, currency deflation, credit ill-liquidity, instability, stock and junk bond deflation, economic contraction and austerity.
The primary money good investment will be ownership and physical possession of gold and silver.
2) … Quantitative Easing is an asset swap that gave seigniorage to stocks and bonds globally.
QE 1 traded out money good US Treasuries for distressed investments, that is toxic debt, like the assets held by Fidelity FAGIX mutual fund.
The banks for the most part placed their new assets with the Federal Reserve where they remain classified as Excess Reserves. The value of the distressed investments, coupled with the assets in Excess Reserve, gave seigniorage, that is moneyness, to stock, and bond investments globally, with the hottest flow going into the emerging markets, and real estate, as well as other sectors such as the Russell 2000 Growth, and Basic Materials, as is seen in the Yahoo Finance chart of EEM, IYR, IWO, XLB and SPY
And QE 2 is a printing of US Dollars, by the US Federal Reserve out of thin air, to buy US Treasuries. It was first announced in August 2010 at Jackson Hole, and then formally announced in November 2, 2010. Ashley P. Lau of MarketWatch wrote in November 19, 2010 article Investing In Canada While Commodities Are Hot: “The booming commodities market rings loudly in Canada, which sits on vast expanses of mineral deposits, abundant oil reserves and sizeable metal mines. Toronto's benchmark index last week hit a two-year high not long after gold futures, $GOLD, soared above $1,400 an ounce, crude oil, $WTIC, settled at its two-year best, and corn, CORN, saw its tightest supply-and-demand balance in 14 years.”
“But the resource rally is both a gift and a curse for the North American giant, which is susceptible to the swift pricing shifts that can affect commodities. That sensitivity was highlighted this week after China’s decision to raise its banks’ reserve requirements dragged gold and oil futures down. The rate hike suggests that China is reigning in its fast-growing economy, which could hinder emerging-market demand for commodities. “Canada’s value proposition to foreign investment is very, very high,” the minister said. “I think the highest in the world quite frankly.” The global appeal of Potash Corp, POT, the world’s largest fertilizer company and one of Canada’s crown jewels, is a prime example. Three international forces are most at play in the Canadian market right now, Action Economics’ Fergal said: The scale and impact of the Fed’s quantitative-easing campaign; increased risk aversion in the wake of Ireland’s debt woes; and any movement from China’s economic policymakers. Demand from China, the world’s leading emerging market, has also been a driving force behind advancing oil and metal prices. Canada’s resource-heavy stock market would likely take a battering from any slowing in the Chinese economy.”
Chart shows the World Excluding US Small Cap Shares, VSS, started their final rise, with the formal announcement of QE 2 in November 2010. The chart shows rising wedge reversal pattern of which Stockcharts.com relates: “The rising wedge is a bearish pattern that begins wide at the bottom and contracts as prices move higher and the trading range narrows. In contrast to symmetrical triangles, which have no definitive slope and no bullish or bearish bias, rising wedges definitely slope up and have a bearish bias. The rising wedge can be one of the most difficult chart patterns to accurately recognize and trade. While it is a consolidation formation, the loss of upside momentum on each successive high gives the pattern its bearish bias. However, the series of higher highs and higher lows keeps the trend inherently bullish. The final break of support indicates that the forces of supply have finally won out and lower prices are likely. There are no measuring techniques to estimate the decline.”
3) … Quantitative Easing leveraged up investments world wide; that leverage effectively ended today February 18, 2011
The Flattner ETF, FLAT, is the inverse of a rising yield curve, reflects deleveraging caused by exhausting quantitative easing.
The delveraging caused of exhausting quantitative easing is seen in the hot money countries of the Philippines, Indonesia, Turkey, Thailand, Brazil, India, and China … EPHE, IDX, TUR, THD, EWZ, INP, and YAO.
South Korea, EWY, and Taiwan, EWT, came under the sway of quantitative easing exhaustion in early February 2011.
Taiwan Semiconductor, TSM, has seen quantitative easing deleveraging since mid January, 2011 where as Semiconductors, XSD, has not yet starting to be deleveraged by QE2.
Monetization of debt began debasing the US Currency, $USD, in early January 2011, and caused deleveraging out of emerging market bonds, EMB, in November 2010, and emerging markets stocks, EEM, in early January 2011, and emerging market currencies, CEW, in early January 2011, as inflation has exploded like a landmine in these countries, causing political turmoil and disinvestment as countries such as Brazil, EWZ, have announced intentions to impose investment penalties, India, INP, has announced interest rate hikes, and has announced China, YAO, credit tightening,
And the deleveraging of quantitative easing is seen in the automobile parts manufacturing sector and coal production especially the coal companies, Alpha Natural Resources, ANR, and, Arch Coal, ACI … ALV, AXL, DAN, MGA, TEN, TRW, WBC, and KOL
Deleveraging of the shipping industry, SEA, like emerging market bonds, EMB, commenced upon formal announcement of QE 2 in November, 2010.
Deleveraging of Las Vegas Sands, LVS, commenced upon the announcement of QE 2; and MGM Resorts commenced in mid January, 2011 MGM.
Deleveraging of copper mining, COPX, commenced on February 8, 2011; copper lost 1.6% today. One can contrast COPX with VSS above; copper mining is more volatile and dramatic in its moves, making it more difficult to trade on a weekly basis than the small caps. Note how in the last week of January, it moved up from 16.5 to 21. Also note how the 3 up wave is close to the 5 up wave, rewarding those who invested back in November. Copper mining is very much the canary in the stock market coal mine warning investors to take profits, as it has fallen in a Elliott Wave 3 Down to the middle of a broadening top pattern, of which Street Authority relates …. when you see the broadening top the market will eventually drop.
And also the deleveraging of quantitative easing is seen in the automobile retail sector in the chart of FLAT, AAP and ORLY which commenced in early December 2010.
The deleveraging of the Optimized Carry ETN, ICI, commenced with the announcement of QE 2, communicating that the quantitative easing has literally terminated yen carry trade as well as other carry trade investing. Carry trade investing, by borrowing from the bank of Japan at 0.25% interest, or from a Bank in Switzerland or Austria, at low rates, coupled with the lowering of rates by the US Federal Reserve for years upon years, have been the two “spigots” of investment liquidity. These have now dried up and have turned toxic. The global financial bubble that began in the late1940s has burst. and the world entered into Kondratieff Winter February 18, 2011.
The deleveraging of the Emerging Market Small Cap Stocks, EWX, commenced with the announcement of QE 2. Note the dark filled harami in the chart suggesting that the Emerging Market Small Caps are going to turn lower once again in an Elliott Wave 3 of 3 Down; these are the most aggressive of all waves, they act to destroy virtually all accumulated wealth. The Philippines, EPHE, and Egypt, want a growing share of the worlds wealth; they want more distributive justice, that is more redistributive justice. But the wave communicates no such fortune awaits. More austerity and hardship is coming; and that immediately.
Deleveraging of Banks, KBE, commenced February 17, 2010 as is seen in the charts of
HBAN …. STI …. FITB …. RF …. WFC and BAC.
Small Cap Revenue Firm, and Automobile Lender Credit Acceptance, CACC, manifested three white soldiers and rose 7.8% for the week. At the end of the Age of Leverage, debt gets leveraged up in a most dramatic way. This stands in stark contrast to the emerging market small cap stocks.
The announcement of QE 2 inflated Leveraged Buyouts, PSP, helping it rise its final 10.4% in just two and one half months. Leveraged buyout companies got a steady stream of cool aid stimulus from December through mid February. Sapna Maheshwari of Bloomberg reports: “Bain Capital LLC and Apollo Global Management LLC are taking advantage of the lowest borrowing costs in six years to extract money from companies they’ve acquired and shift potential losses to creditors. Borrowers have raised $6.7 billion through bonds and loans this month to pay dividends, accounting for 16% of sales, from $4.6 billion, or 7%, in January, according to Standard & Poor’s Leveraged Commentary and Data. They sold $47 billion of debt last year, or 9% of offerings, to pay owners, compared with $11.7 billion in 2008 and 2009.”
The black filled candlestick in Solar Stocks, KWT, likely means an end to quantitative easing. Please note the harami in the middle of the 5 up wave, and at the end of the five wave. And also note the harami cross in the middle of the wave 3 up; this is quite common in strong wave 5s. Solar stocks will be a very fast faller in the Age of Deleveraging, as people will have little interest in long term energy conservation projects.
The chart of World Stocks relative to world government bonds, VT:BWX, communicates that stocks have expanded as far as they can on the seigniorage afforded by the world government central banks. Those owning and having possession of gold and silver will come to know the definition of money good.
The chart of World Stocks relative to the Yen, VT:FXY, communicates that world stocks have achieved maximum leverage on the Yen carry trade; borrowing from the Bank of Japan at 0.25%, and going long stocks is no longer a winning proposition. The leverage of carry trade investing has reached its maximum efficiency.
The chart of World Stocks relative to World Financial Stocks, VT:IXG, communicates that the world financial institutions can no longer effectively help investors achieve investment gains: layoffs are coming to those on Wall Street, the London Financial District and other global financial and trading centers.
The chart of US Stocks relative to the 10 Year US Government Bonds, VTI:TLT, reflects that US stocks have reached maximum expansion on US Goverment Debt, and that investors can no longer use the seigniorage of the US Federal Reserve for investment gain. Look for investments like Annaly Capital Management, NLY, to fall quickly in value.
Chart of the Brazil Financial, BRAF, have risen to strong resistance.
The European Financials, EUFN, have risen from 18 to 24.5. The rally that came with the announcement of the EFSF monetary authority is likely over. And bringing an end to the rally in Siemens, SI, as well as Germany, EWG. David Jolly of the New York Times reports UBS, Swiss banking giant, said Tuesday that its business had turned around in 2010 as it posted its first annual profit since before the financial crisis. Chart of UBS shows a rise from 12.5 in June to 20. And the chart of HSBC, HBC, shows a rise from 44 to 59; its success has been in developing and retaining clients in Asia Owain Bennallack of TMF relates.
China All Caps, YAO, manifested a bearish harami at the top of an ascending wedge suggesting a fall lower is coming in the Chinese Stocks. Chinese small caps, HAO, and Chinese Financials, CHIX, Chinese Energy, CHIE, and Chinese Materials, CHIM, all manifested bearishly as did the . Shanghai shares, CAF. Chinese Real Estate, TAO, fell in advance of the credit tightening announcement. And Focus Media Holding, FMCN, completed what is likely a rally high, matching its November high when QE 2 was announced. Exhaustion of QE and China credit tightening are the agents of deleveraging, just as before November 2010, yen carry trade investing and the 10 30 US Sovereign Debt Yield Curve, gave seigniorage to investment world wide.
A flattening 30 10 US Sovereign Debt Leverage Curve, $TYX:$TNX, which is the inverse of the 10 30 Yield Curve, graphically shows how deleveraging has come via the US Central Bank Chairman’s monetary policies.
Gold stock investors recently lost money on quantitative easing exhaustion, as is seen in the chart of the gold stocks relative to gold, GDX:GLD, and they are about to once again very soon, as the price of gold soars and the gold mining stocks eventually fall lower with other stocks.
The chart of the HUI Precious Metals relative to the 30 Year US Government Bond, $HUI:$USB, shows that the gold mining stocks get delveraged at market turns, when the Treasuries fall lower.
Gold stock owners should be ready to transfer out of the stocks and into the real thing very soon.
The precious metal mining stocks, GDX, have ridden the leverage curve, $TYX:$TNX, up for the best of an investment ride. The HUI Precious Metal Mining Stocks, ^HUI, and the junior gold mining stocks, GDXJ, have been the great swing trade of the last ten years.
Now the pendulum is going the other way. The bond vigilantes have seized control of the Interest Rate on the 30 Year US Government Bond, $TYX, as well as the Interest Rate on the 10 Year US Government Note, $TNX. Sovereign crisis is about to unfold as the world central bankers have lost their debt sovereignty and debt seigniorage as evidenced by the Financial Times report ECB Buys Portuguese Debt as Yields Soar. All stocks, including the gold mining stocks are going lower in a quantitative easing deflationary and debt deflationary vortex; down the drain so as to speak. Gold and gold alone will arisen as sovereign wealth.
In stark contrast to gold mining stocks, Small Cap Energy Shares, XLES, became the swing trade of QE 2 investing. Yes QE 2 deleveraged the precious metal mining stocks but leveraged the Small Cap Energy Shares.
The charts of the Refiners Holly Corp, HOC, and Western Refining, WNR, show parabolic rises and significant losses today.
The chart of debt burdened, CWEI, chart shows three white soldiers communicating an end to its rally. Ben Bernanke ordered inflation and the QE 2 cool aid invigorated investment in Clayton Williams Energy, because of its debt! Having debt was not a problem during the final phase of the QE 2 liquidity trade, as debt increased in value with Clayton Williams Energy, Leveraged Buyouts, PSP, and Junk Debt, JNK, being prime examples. Please note the parabolic rise in this stock that began with the announcement of QE 2. And please note the three white soldiers pattern suggesting an immediate reversal.
Greg Robb in MarketWatch article Bernanke Defends QE2 on Global Stage reports the Fed Chairman as saying that the US Federal Reserve is not the cause of destabilizing capital flows.
Daniel Bases in Reuters article Developed Market Equities Shine Again - EPFR reports: “Investors pushed further into developed market equities in the week ended Feb. 16, focusing on the brightening prospects for economic growth and robust corporate earnings, data-trader EPFR Global said on Friday. "Investors are, for the first time since 2007, seeing more opportunity in developed market equities than in emerging markets," Brad Durham, EPFR Global managing director said in a statement. Overall, equity funds posted collective inflows of $8.39 billion compared with $1.16 billion for bond funds. Money market funds recorded outflows of $3.73 billion for the week, EPFR said. Emerging market equity funds had net outflows of $5.45 billion in the latest week for the fourth consecutive reporting period, while emerging-market debt funds had their worst week since late in the fourth quarter of 2008. According to EPFR's data, investors have put a net $47 billion, year-to-date, into developed market equity funds. That contrasts with the net redemptions in the same periods of $28 billion in 2009 and $17 billion in 2010. U.S. equity funds have inflows so far in 2011 above $29 billion, "with retail investors committing fresh money for the seventh week in a row."
And Jack Jordan of Bloomberg reports: “Money managers are more bullish on global stocks this month than at any time in the past decade, according to a BofA Merrill Lynch Global Research survey. A net 67% of respondents, who together manage $569 billion, had an ‘overweight’ position on global equities, the highest level since the survey first asked the question in April 2001. That compares with 55% in January and 40% in December. Meanwhile, a net 9% is ‘underweight’ cash, the lowest allocation since January 2002.”
My comment is that investment came out of Bonds, BND, and also out of Emerging Markets, EEM, with the announcement of QE 2, and flowed into the developed market equities, such as the US Shares, VTI, and Europe, VGK, and Japan, EWJ. This stimulated a rise in Developed Market Currencies, DBV, and a fall in Emerging Market Currencies, CEW. This is seen in the chart of DBV relative to CEW, DBV:CEW, which has risen to an Elliott Wave 2 of 2 of 2 high, and is ready to commence into a terrific Elliott Wave 3 Down.
The major world currencies, such as the Euro, FXE, which rose to close at 136.32, and especially the Canadian Dollar, FXC, seen in this Finviz Screener of currencies, will now be falling more rapidly in value than the emerging market currencies, CEW, because the debt burden of the developed world countries is greater than that of the emerging markets.
Higher world government interest rates, reflected in falling world government bonds, BWX, will enable the FX Currency traders to unleash a global currency war of competitive currency devaluation, that is competitive currency deflation, on the world central bankers. And as stated above out of this melee, the Soveign and the Seignior, will establish a new global order. Their word, will and way will replace constitutional law and traditional rule of law.
Airline stocks, FAA, came under strong QE exhaustion as the price of Oil, USO, rose.
Falling airline stock value, will cause airline rehabilitation and new airline interior company, BE Aerospace, BEAV, to fall lower.
Notice how Oil, USO, manifested a massive harami and wave 5 completion at the first of the year, delveraging investment in both the airline stocks, FAA, and airline supply company BEAV, which is now in an Elliott Wave 3 Down Sell off.
There are websites, which I will not mention in respect to their authors, who are now and who have been continually bullish since the first of the year. Given the fall in oil, their bullishness has been most unwarranted.
The BRics, EEB, are cresting up into an Elliott Wave 2 High.
Brazil, EWZ, has risen to strong resistance, as has Brazil Financial, BRAF, and the Brazil Small Caps, BRF. Deflation in the Brazil Financials is taking Brazil down! Quantitative Easing gave strong moneyness to investing in Brazil, but that inflation, and threat of capital controls has deleveraged investment out of Brazil and into US Financials, IYF, World Financials, IXG, and even the European Financials, EUFN, as is seen in the chart of Itau Unibanco Banco, ITUB, and the other financials, …. ITUB, IYF, IXG, and EUFN.
The seigniorage of the Apple ecosystem is finished as a number of semiconductor, XSD, stocks, such as Cypress Semiconductor, CY, fell lower.
End of a credit cycle is reflected in the fall of communication service provider, AMT, whose chart shows three black crows, and the peaking out of automobile lender Credit Acceptance Corp, CACC.
Peak Credit, has been achieved. Said another way the end of credit as it has been known has commenced; this being communicated by the topping out and/or falling lower of mortgage and investment securitization company Annaly Capital Management, NLY, as well as credit providers, WRLD, DLLR, NNI, AXP, DFS, as well as in the fall on Bonds, BND, LQD, BLV, PICB, and MINT.
Investors in the longer out, that is the greater duration corporate bonds, BLV, were deleveraged when the bond vigilantes seized control of the Interest Rate on the 30 Year US Government Bond, $TYX beginning in Septemeber, that is, just after Ben Bernanke suggested QE 2 in Jackson Hole.
World Stocks, ACWI, manifested three white soldiers, a reversal pattern. Thus World Stocks Weekly, ACWI Weekly, shows a crest up into an Elliott Wave 2 High and ready to enter into an Elliott Wave 3 Down at the price of 49.24.
The end of an investment cycle is reflected in the topping out of the Morgan Stanley Cyclical Index, $CYC, and its Paper Manufacturing Component, International Paper, IP, which manifested massively bearish engulfing.
QE Exhaustion caused disinvestment from agriculture commodities, JJA, the week ending February 18, 2011, resulting in disinvestment from agricultural industry stocks, MOO. Chart action gave investment advisors, plenty of time this week to call their clients and warn of the impending decline that is coming in stocks.
We are witnessing the end of the age of Internet Retailing, HHH, with the topping out and fall lowe of AMZN, Google, GOOG, International Capital Group, ICGE, and Priceline, PCLN.
The end of a rally has come to Mid Cap Growth, JHK, and the Russell 2000 Growth, IWO,
Not many of the 500 stocks on my Stockcharts.com ChartLIst and Dashboard rose; but solar stock, SunPower Corp, SPWRA, manifested a massive dark cloud covering evening star candlestick.
4) … As the FX currency traders embark on a campaign of competitive currency devaluations will be marked by a fall lower in the ratio of the Pure Small Cap Value, RZV, relative to Pure Small Cap Growth, RZG, ... RZV:RZG.
This ratio, reflects the currency yield curve, rose up out of its downward channel as the US Dollar, $USD, fell lower, and the ratio of the Major Currencies, DBV, relative to the emerging currencies, CEW, …. DBV:CEW, rose.
Expect to see a flattening currency yield curve marked by falling small cap value shares relative to small cap pure growth shares.
I expect the US Dollar, $USD, to rise for a while, most likely to 79.25..
5) … Peak wealth was achieved Friday February 18, 2011.
Dow Theory holds the transportation stocks and the industrial stocks make market turns together. now that the transports, IYT, have soared to a rally high, they are now ready to fall lower with the industrials, IYJ.
Peak stocks wealth was achieved Friday February 18, 2011 as commodities, DJP, maxed out relative to the Japanese Yen, FXY, …. DJP:FXY …. and as world stocks, VT, maxed out relative to the Japanese Yen …. VT:FXY These chart show that the commodity markets and the stocks markets have been under maximum leverage. The tide has turned, now deleveraging will get underway as QE exhausts.
Yahoo Finance reports that Volatility, VXX and VXZ, turned up today suggesting that a market turn lower at hand.
Stocks up today included
With the seigniorage of QE ending, stocks down today included
SLX , -1.2
Commodities down today included
USO -0.0% Oil, USO, sold off at the beginning of 2011; and now is an Elliott Wave 3 Down.
Thus, Fiat Peak Wealth has been achieved; those owning and possession gold will go on to see their wealth increase.
Michael Aneiro in WSJ article Junk Yields Hit New Low writes: “The rally in junk bonds has notched a new milestone: yields on the low-rated securities are now at their lowest levels on record. The average junk bond yield has fallen to 6.837%, according to Merrill Lynch's high yield index, slipping under the previous low of 6.863% in December 2004.
Yields fall as prices rise. And prices of junk bonds have been soaring for the past two years, a reflection of demand from investors seeking securities that yield more than U.S. Treasurys. Investors have poured billions of dollars into the market for speculative-grade debt.
Through the first seven weeks of 2011, as the Federal Reserve has held short-term interest rates near zero, investors have increased stakes in mutual funds focused on junk bonds by a net $5 billion, according to Lipper FMI, a unit of Thomson Reuters.
The average junk bond now trades at 103.89 cents for every dollar of face value, according to the Merrill Lynch High Yield Master II index. The bonds now yield 4.54 percentage points more than comparable Treasury bonds, down from 6.22 percentage points in early December, according to the Merrill index.
"You've got to understand: what's your alternative?" said Carl Kaufman, high-yield portfolio manager at Osterweis Capital Management in San Francisco.
The falling yields have translated into markedly lower borrowing costs for companies.
Ford Motor Co.'s Ford Motor Credit, for example, sold $1.25 billion of 10-year notes earlier this month with a yield of 5.75%. Less than a year ago, it paid 7.125% for five-year debt.
Similarly, Chesapeake Energy Corp. sold $1 billion of 10-year notes last week with a yield of 6.125%. Two years ago, the company sold $425 million of six-year notes with a yield of 10%.
The high-yield rally has also benefited buy-and-hold investors.
Junk bonds have enjoyed a remarkable two-year bull run, returning 15.2% in 2010 and 57.5% in 2009, according to the Merrill index; they have already gained 3.1% so far this year. As recently as December 2008, the average junk bond traded for 55.4 cents per dollar of face value and yielded 22.1%.
Investors buying into the market at current levels, however, are getting paid less than ever before.
Market participants are divided over whether the market is poised for a fall. Many note that risk premiums are near their historic average of roughly 5 percentage points above Treasurys and far from their low of 2.41 percentage points reached in May 2007. When yields hit their low point in 2004, risk premiums measured 3.1 percentage points.
Similarly, the risk premium, or spread, to Treasurys now accounts for roughly two-thirds of total junk-bond yield. That compares with its historic median of 57%, suggesting spreads could narrow further, said Adrian Miller, strategist at Miller Tabak Roberts Securities.
Martin Fridson, global credit strategist at BNP Paribas Investment Partners, said the current average risk premium is only slightly tighter than would be expected given the current low default rate, ample credit availability and the level of economic output.
"In valuing corporate bonds, it does not really matter how spreads have changed over the past month or quarter, or how they compare with some historical average," Mr. Fridson wrote this week. "Spreads are risk premiums, so if risk is below average, a comparably below-average spread does not indicate that the bonds are rich."
Investors see continued downward pressure on yields as long as the Federal Reserve continues to suppress short-term interest rates, particularly through its current, second round of quantitative easing, known as QE2.
"There has to be a natural end obviously, I just don't know when," Mr. Kaufman said. "It's probably going to coincide with the end of QE2." (.... I agree, when junk bond yield rise, that is when Junk Bond, JNK, prices fall, quantitative easing, will have lost any and all investment inflation capability).
6) … The seigniorage that came via the of Quantitative Easing of distressed investments is history; a new investment age is at hand.
My article toay is one’s Cliff Notes warning one that Cliff Risk is dead ahead. This at a time when John Detrixhe and Jody Shenn of Bloomberg write: “Investors are ramping up their use of borrowed money to boost returns in credit markets … A Federal Reserve measure tracking lending against bonds not tied to the U.S. government rose 42% in the past two years to $127.4 billion. That’s within $500 million of a level last seen at the end of September 2008 … A Fed survey of Wall Street’s biggest bond dealers published last month shows hedge funds demanding more credit and banks loosening terms. Goldman Sachs … says signs are emerging of a ‘gradual recovery’ in borrowing to buy safer, lower-yielding debt”
An Elliott Wave 3 Down commenced on Friday February 18, 2011 in the S&P, SPY at a price of 134.53, as seen in the chart of SPY Weekly.
Part of the fall in the S&P will come from a fall in banks, KBE. as Karey Wulkowski of Reuters U.S. Close To Punishing Banks Over Foreclosures.
Of note Kathleen M. Howley of Bloomberg in article U.S. Loans in Foreclosure Tie Record as Lenders Delay Seizures reports: “About 4.63 percent of loans were in foreclosure in the fourth quarter, up from 4.39 percent in the previous three months, the Mortgage Bankers Association said in a report. The combined share of foreclosures and loans with overdue payments was 14 percent, or about one in every seven mortgages.” Thus, roughly 10 percent of those with mortgages, are squatting and are living payment free in homes owned by financial institutions.
Prior to QE exhaustion, investors either had been seeking and rewarding companies having investment acceleration. Companies having sustainable and superior acceleration characteristics received the most investment.
Revenue and earnings acceleration appeared in a broad spectrum of companies.
Pure growth companies: Acceleration in customer base is seen in Sirius XM Radio, SIRI, the satellite radio company, broadcasting more than 135 channels of commercial-free music, and premier sports, news, talk, entertainment, traffic, weather, and data services to more than 20 million subscribers in cars, trucks, boats, and aircraft, and through a wide range of mobile devices with a customer base, which expanded by 8% as reported by MicroStockProfit.
Defensive companies: Acceleration in business fundamentals is seen in BE Aerospace, BEAV, the world's leading manufacturer of aircraft cabin interior products and the world's leading distributor of aerospace fasteners and consumables. It supplies aircraft main cabin seating platforms for both new-buy aircraft and retrofit seating for existing aircraft. The platforms offer low cost of ownership, weight savings, and exceptional reliability, Airlines’ new-buy aircraft decisions are driving contemporaneous decisions to retrofit the coach class cabins of their existing aircraft fleets. The company expects this trend to continue as the airframe manufacturers continue to increase their delivery rates for both narrow and wide-body aircraft over the next several years as reported by company press release.
Cyclical companies: Acceleration in customer buying characteristics in a slowly improving economy is seen in Advanced Auto Parts, AAP. Zacks Equity Research, reported a 40% rise in profit for the fourth quarter fiscal 2010 ended January 1, 2011. The profit even exceeded the Zacks Consensus Estimate by 2 cents per share. The increase in profit was driven by the company’s aggressive store expansion strategy, enabling better availability of parts to its customers, thereby leading to higher comparable store sales.
Satoshi Kawano and Akiko Ikeda of Bloomberg report: “Japan’s Nikkei 225 Stock Average, ^N225, fell for the first time in four days, as machine makers slid after China’s central bank increased interest rates. “Concerns about China’s interest hike slows the momentum of Japanese stocks,” said Naoki Fujiwara, who helps oversee $6 billion in Tokyo at Shinkin Asset Management Co.”
“Komatsu Ltd. slid 1.7 percent to 2,498 yen, and Kubota Corp., Asia’s largest tractor maker, sank 1.8 percent to 882 yen. Toshiba Machine Co., a machine-tool maker which gets about 35 percent of its revenue from Asia, dropped 4.5 percent. TDK Corp., an electronics maker that counts China as its largest market, fell 0.9 percent to 5,860 yen.”
“The People’s Bank of China yesterday raised the one-year lending rate by a quarter point to 6.06 percent and the one-year deposit rate an equivalent amount to 3 percent. China’s Shanghai Composite Index fell as much as 1.2 percent.”
“China’s interest rate increase gave investors a rationale to take profits,” said Koji Toda, Tokyo-based chief fund manager at Resona Bank Ltd.”
“Real estate stocks had the biggest decline among the Topix index’s 33 industry groups after Miki Shoji Co., a privately held office brokerage company, said Tokyo’s office vacancy rate rose to 9.04 percent in January from 8.91 percent a month earlier.”
“Mitsubishi Estate lost 1.8 percent to 1,609 yen. Mitsui Fudosan Co. declined 2.5 percent to 1,663 yen. Sumitomo Realty & Development Co., Japan’s third-largest developer by market value, sank 2.8 percent to 2,013 yen. the company yesterday said net income fell 6 percent to 44.4 billion yen for the nine months ended Dec. 31.”
“Zero Hedge Blog Graham Summers of Phoenix Capital Research How Higher Interest Rates Could Trigger Another 2008-Type Event writes: “ In 2008, the entire financial system nearly went under due to the Credit Default Swap market which was $50-60 Trillion in size. In contrast, the interest-rate based derivatives market is $196 Trillion in size: more than three times larger than the credit default swap market at hits peak. At this size you only need a very small percentage of these derivatives to be “at risk” (meaning real money is bet on them), say 5% to get $10 trillion in potential losses. To put that number into perspective, the entire World Stock Market is only $36 trillion in size.”
“See the potential risk here? To say that the US financial system is in danger would be a huge understatement. It is the derivatives market, not the housing market that has the Fed concerned.
There is no way any human being could claim that QE is about helping housing prices. It is aimed entirely at funneling trillions of Dollars to the Wall Street banks. Why?”
“Because these are the banks with the greatest derivatives exposure.”
“Trust me, Ben Bernanke is well aware of this situation. Even his predecessor, Alan Greenspan, knew about it as far back as 1999. At that time he told Brooksley Borne that attempting to rein in the derivatives market and forcing it to pass through a public clearinghouse would “implode” the market. Remember, QE is all about the Fed buying Treasuries from the Wall Street banks. In this sense it’s nothing more than an effort to remove assets from their balance sheets in exchange for cash. And that’s exactly what it’s supposed to be: an attempt to shore up the Wall Street banks massive derivative exposure.”
“This is why the Fed keeps launching more and more QE programs despite the clear fact that it has failed to accomplish any of its publicly stated goals: boosting employment, lowering interest rates, etc. Bernanke knows if he doesn’t keep the billions in weekly capital infusions to the Wall Street banks that the entire system will come crashing down. Be aware, the issues that caused 2008 are still in play. If Bernanke loses control of interest rates on the short and long end its game set match for the US Financial System.”
I say that the US Fed Reserve already has lost control of interest rates, and that out of Gotterdammerung, that is an investment meltdown and flame out, ten regions of governance will arise, as called for the Club of Rome in 1974. The North American Continent was announced as a region of global governance at Baylor Baptist University by the leaders, Vincent Fox, Paul Martin and George Bush, with the Security and Prosperity Partnership of North America on March 23, 2005, with documentation as follows: ..…. Baylor TV Coverage Of The Trilateral Summit News Conference …... President Meets With President Fox and Prime Minister MartinAt Baylor University Waco, Texas …... Baylor Has a Proven Record of Hosting White House Events. Baylor served as host for President Bush’s historic “Security and Prosperity Partnership for North America” meeting with Mexican President Vicente Fox and Canadian Prime Minister Paul Martin. The Armstrong Browning Library was the venue for the leaders’ meeting, which was followed by a news conference in the Bill Daniel Student Center’s Barfield Drawing Room.
Now, Keith Jones in WSWS.org article Canada And US Launch Continental Security Perimeter Talks documents how Canada’s Prime Minister and the United States’ President have further waived national sovereignty of their respective nations, by announcement of a Framework Agreement, at the North American Security Perimeter talks in early February 2011; and they have appointed two bodies of stakeholders, that is task groups, to effect their integration plans, the Beyond the Border Working Group, and the United States Canada Regulatory Cooperation Council.
“Canadian Prime Minister Stephen Harper and US President Barack Obama announced, at the conclusion of a White House meeting earlier this month, the launching of bilateral North American Security Perimeter talks.”
“The stated aim of the negotiations is to greatly enhance the integration of Canadian and US border security and the harmonization of the two countries’ national security, immigration, refugee and regulatory regimes, so as to strengthen continental security, facilitate the cross-border movement of goods and people, and promote “economic competitiveness.”
“The negotiations are to be based on a joint declaration Harper and Obama issued following their February 4 meeting. “Beyond the Border: a shared vision for perimeter security and economic competitiveness” calls for the longstanding across-the-board security cooperation between the Canadian and US militaries, police forces, and border protection agencies, including through NATO and the North American Aerospace Defence Command (NORAD), o be taken to a new level. “We intend,” states the joint declaration, “to pursue a perimeter approach to security, working together within, at, and away from the borders of our two countries to enhance our security and the legitimate flow of people, goods and services.”
“The statement pledges the two countries will work together “to develop, implement, manage and monitor security initiatives, standards and practices” in the air, land, sea, space, and cyberspace and otherwise “enhance the security of our integrated transportation and communications networks.” This will include “improved intelligence and information sharing” and other forms of enhanced cooperation with the aim of identifying, preventing, and countering “violent extremism” and verifying the identity of travelers. The two countries will develop common standards for the collection and transmission of travelers’ biometrics and a common system for tracking persons entering and leaving Canada and the US. The statement also says that the two countries will “build on existing bilateral law enforcement programs to develop the next generation of integrated cross-border law enforcement operations.”
“Harper and Obama have established a bilateral Beyond the Border Working Group to develop a “joint Plan of Action” to realize the goals outlined in their declaration. They have also established a United States Canada Regulatory Cooperation Council with a two-year mandate to harmonize and streamline public health and safety and environmental regulations to improve “economic competitiveness”—that is, corporate profits. Harper, in a separate statement, emphasized the Canadian elite’s commitment to its strategic-military partnership with Washington and Wall Street, declaring “a threat to the Unites States is a threat to Canada, to our trade, to our interests, to our values, and to our common civilization. “Canada,” continued Harper, “has no friends among America’s enemies. And America has no better friend than Canada.”
“Powerful sections of the Canadian ruling elite have long been pressing for the creation of a North American security perimeter so as to underpin and deepen the economic partnership and continental economic integration fostered by the 1989 Canada-US Free Trade Agreement and its successor NAFTA. Represented by such organizations as the Canadian Council of Chief Executives and the Canadian Manufacturers’ Association, these sections of the ruling class view closer economic and security integration with the US as an essential element in their response to the emergence of new powers in Asia, the division of the world market into regional trading blocs, the growth of geopolitical tensions among the great powers, and the ever-diminishing share of global trade and investment that falls to Canadian capital. They also view closer integration with the US as providing them with a lever to press for regressive changes in socioeconomic and national security policy that have hitherto been resisted by the populace.”
I believe that eventually global economic governance will come out of Europe, specifically out of Germany. And that the a world Chancellor, The Sovereign, and that a world Banker, The Seignior, will establish their base of power for world leadership in a Euro German empire. And that their world leadership will be equivalent to that of Charlemagne in the former Roman world empire. The EU will very much be an extension of the ancient Roman Empire.
Christopher Emsden and William Horobin of the Dow Jones Newswires in WSJ article Draghi Urges Tighter Fiscal Rules, Monetary Policy report: “The expectation of low interest rates for a prolonged period could encourage excessive risk-taking in financial markets," Mario Draghi said. "Hence the need for central banks to put in place a timely and determined monetary policy correction once macro economic conditions permit." His comments are particularly significant since Draghi is now widely viewed as the front-runner for the European Central Bank presidency, after Axel Weber effectively withdrew from the race by announcing he will resign as president of Germany's central bank.”
“They also come as members of the euro zone negotiate a package to build economic competitiveness and coordination, as well as changes to bolster current bailout packages.”
“A Franco-German proposal on measures to boost competitiveness hasn't gone down well with some members of the euro zone who fear it would cut across their sovereignty on issues like pensions and wage negotiations. Meanwhile, German is unwilling to put more money on the table without further political commitments to coordinate economic and especially fiscal policy.”
"In Europe, more effective economic governance is needed to proceed on the route towards greater economic integration and to fortify the euro, including tighter rules on fiscal policies, a broader surveillance over macro economics imbalances and an effective mechanism for crisis management," the abstract of Draghi's paper reads.”
“As it was collapsing confidence in the banking system that stoked large increases in public debt and large contractions in global trade and employment, Draghi focused more on financial than on fiscal matters. In words likely to go down well in Germany, he suggested central banks stick to their knitting even as they take on new "macro prudential supervision" tasks.”
"The crisis has reinforced the case for monetary policy to remain firmly focused on maintaining price stability," he says, adding that it was well-anchored inflation expectations that gave monetary authorities the flexibility to react with unconventional measures during the downturn.”
“He also says that "monetary policy should .. be better prepared to counter developments in money and credit that can fuel the buildup of financial disequilibria, even in the absence of immediate inflationary dangers," a strong advocacy of the so-called "monetary pillar" that the Bundesbank has long championed as a way to divine threats to price stability.”
“And, in an oblique jab at his home country, Italy, Draghi dubbed "clearly welcome" the view that public debt reduction rules should be strengthened and made effective.”
“Italian Finance Minister Giulio Tremonti has argued that automatic debt-reduction criteria be mitigated by other factors, especially when - as in Italy--low levels of private debt offset higher levels of public debt.”
Ambrose Evans Pritchard of the Telegraph writes Germany Must Choose EMU Fusion Or Fission
“For the sake of peripheral nations, Mrs Merkel has to stop paying lip-service to monetary union.”
Bernard Condon of the Associated Press reports: “Euronext, New York Stock Exchange’s parent company, said it will be acquired by Germany's Deutsche Boerse to form the world's largest stock exchange operator. The deal would create a powerhouse in options and futures trading, which is more profitable than bringing buyers and sellers of stocks together.”
7) … Recommended Reading
MSN Money Emerging Markets' Inflation Trap
American Century Investments Blog Responding to the Responding To The Stubbornly Steep U.S. Treasury Yield Curve discusses the magnitude and persistence of the 2 30 US sovereign debt yield curve and asks “Why did the Treasury yield gap recently exceed 4.0 percentage points for the first time and stay stubbornly above 3.5 percentage points?”
Economist.com Repent At Leisure
Economist.com How To Grow
Elaine Meinel Supkis The History Of Seigniorage Wealth
Der Kosmonaut Canada and US Have Merged
Dana Gabriel Statismwatch A North American Security Perimeter Threatens National Sovereignty
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