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Utilities And Small Cap Shares Rise As European Leaders Meet In Summit

Financial Market Report for December 16, 2010 by theuenguy

I … Analysts relate that the Eurozone is a zombie currency union.  
Calculated Risk relates of Spain the slow motion train wreck continues in Europe.

EuroIntelligence relates the crisis, meanwhile, is getting much worse: Another bad day on the markets, as Moody’s yesterday threatened a downgrade of Spain, EWP, a decision that had a significant impact on bond and stock markets, and the euro. El Pais called the decision a new blog to the credibility of Spain. The article says this is about trust, and whom you believe. It is clear that Moody’s does not believe the banks, nor the Bank of Spain, when it speaks of a recapitalisation requirement of 8% of GDP, some €80bn. The Spanish government, and the regions, will next year have to raise a total of €300bn. The rating agency, which downgraded Spain from a AAA status earlier this year to AA1, has now put Spain on a watch for a further downgrade. Moody’s made it clear that it regards Spain as solvent. The downgrade is the result of concerns over funding.

Strikes against austerity turned violent in Greece. Greek police have clashed with protesters in the capital Athens yesterday as unions stage a general strike against government austerity measures, BBC reports. Some protesters threw fire-bombs at officers deployed outside parliament and at the Finance Ministry. Police responded with tear gas and flash grenades.  About 15000 people participated in the day long strike which grounded flights, disrupted public transport, the news and closed schools across the country. Trade unions dispute a new legislation, which will cap the salaries of workers in state-run and allow employers in the private sector to set their own wages. These strikes are part of a European action day against economic reforms. Other protests, less violent, took place in other countries such as Spain and Belgium, ahead of a summit of EU leaders.

European Financial Shares, EUFN, fell lower as “debt gridlock” was seen amongst the European leadership; and he Euro, FXE, barely hung on at the edge of the cliff of abandon. Cliff risk exists for any invested  in the stock or bond markets.

James G. Neuger of Bloomberg reports Debt Contagion Threat Splits EU Leaders Seeking Rules to Stem Euro Crisis. European Union divisions widened over how to contain the debt contagion that threatens the euro, limiting a summit that began today to an agreement on a crisis- management mechanism that takes effect in 2013. German Chancellor Angela Merkel balked at boosting or making more flexible use of the EU’s 750 billion-euro ($1 trillion) emergency fund, as leaders neared an accord on the tool to contain future debt shocks and the European Central Bank armed itself with more capital. Strife among Merkel, the ECB, Luxembourg Prime Minister Jean-Claude Juncker, and the German domestic opposition intensified on the eve of the Brussels summit, marring confidence in Europe’s handling of the fiscal woes that forced Greece and Ireland to fall back on financial handouts. “There is a situation of European gridlock again with Germany blocking actions to make progress,” said Nick Kounis, chief euro-region economist at ABN Amro NV in Amsterdam and a former U.K. Treasury official. “There is a high risk of the crisis re-escalating and maybe now it’s the quiet before the storm in markets.”

II … Stocks rising today mostly included the small cap shares
Small Caps, SAA,
Networking, PXQ,
Gaming, BJK
Leisure and Entertainment, PEJ,
India Small Caps, SCIF
Taiwan Small Caps, TWON,
House Building, ITB
Retail, XRT
Retail, RTH
Steel, SLX
Global Industrial Metals, CRBI
Wind Energy, FAN
Water Stocks, CGW,
Small Cap Consumer Discretionary, XLYS
Small Cap Industrial, XLIS,
Small Cap Revenue Shares, RWJ
Small Cap Health Care, XLVS,
Small Cap Pure Value, RZV
Korea Small Cap, SKOR
Israel, EIS
Semiconductor, XSD
Australia Small Caps, KROO
Agriculture, MOO
Nasdaq 100, QTEC
Small Cap Information Technology, XLKS,
Japan Small Caps, JSC,
Small Cap Energy, XLES,
Software, SWH,
Small Cap Pure Value, RZV
Biotechnology, PBE, Biotechnology has gone parabolically higher.
Health Care Small Cap, XLVS, Health care has gone parabolically higher.

III …  Representative stocks from sectors which rose include the following;
Computer Media: SanDisk, SNDK,
Industrial: Active Power,  ACPW
Technology: Measurement Specialties, MEAS
Small Cap Revenue Firms: First Cash Financial Services, FCFS,
Consumer Discretionary:, STMP
Office Supplies, United Stationers, USTR
Business Services: Cintas, CTAS, Chart shows three white soldiers, a reversal pattern
Internet: Travelzoo, TZOO,
Gaming: Las Vegas Sands, LVS,
Industrial: Insteel Industries, IIIN,
Industrial: Franklin Electric, FELE,
Business Services: United Rentals, URI,
Business Services: Shipping: SFL
Consumer Discretionary: Tractor Supply, TSCO,
Consumer Discretionary: Royal Cruise Lines, RCL,
Consumer Discretionary: Hasbro, HAS
Consumer Discretionary: Rent A Center, RCII,
Transportation: Airlines: Air Transport Services Group, ATSG,
Restaurant: Ruths, RUTH,
Staples: AutoZone, AZO,
Retail: Abercrombie & Fitch, ANF,
Consumer Discretionary: Zumies, ZUMZ
Discretionary Services: Hotels: Starwood Hotels, HOT,
Semiconductors: Taiwan Semiconductor, TSM
Internet: Internet Capital Group, ICGE
Asset Management: Blackrock,  BLK,
Real Estate: Office REIT: Caplease, LSE,
Small Cap Revenue Firms : Annaly Capital Management, NLY,
Small Cap Revenue Firms: NewStar Financial, NEW,
Small Cap Revenue Firms: Options Express, OXPS,
Small Cap Revenue Firms: Nicholas Financial, NICK,
Industrial: Complete Production Services, CPX,

IV … Commodities rising today included:
Commodities: Tin, JJT, rose to resistance.

V … Currencies rising today included the emerging market currencies, CEW.
Emerging market currencies, CEW, rose 04; but did not surpass its recent high.

Emerging Market Financial Institutions, EMFN, have fallen lower on falling emerging market currencies, CEW.

VI. It is likely that an Elliott Wave 5 top in the S&P, SPY, is coming in today December 16,  2010 at 124.82
The daily chart of the S&P, SPY, suggests an Elliot Wave 5 top 124.82 came in today.  

The weekly chart of the S&P, SPY, is provided for one’s consideration; if this indeed a market top; then we are entering into an Elliott Wave 3 Down.

New York Composite, NYC, suggests that a top came in on December 13, 2010 at 72.19.       

VII … A top in the world shares, VT, likely came in on Tuesday December 14, 2010 at 48.10; world shares closed today at 47.91

VIII … Carry trades are likely topping out as the US Dollar is likely headed higher for a while.
Yahoo Finance reports the USD/JPY closed down at  84.34; I expect the US Dollar, $USD, to rise from today’s 80 and the Yen, FXY, to fall from today’s 117.7, thereby causing the USDJPY to rise from its closing value of 84.3.

The iPath Optimized Carry ETN, ICI, closed up. An Elliott Wave 3 Down commenced on December 13, 2010 at 46.81.

IX … Interest Rates closed lower today
The Interest Rate on the 30 Year US Government Bond, $TYX, closed lower today.
The Interest Rate on the US Ten Year Note, $TNX, closed lower today.

The chart of the Invesco US Small Cap Value Mutual Fund, MPSCX, compared to BWX, BLV, TLT and VGK shows that investors sought a safe haven from the European Sovereign Debt Crisis and rising interest rates beginning in October 2010; and how Mrs Merkel’s call for a sovereign debt crisis mechanism and a haircut on bondholders destroyed the value of world government debt, BWX, and the European shares, VGK, beginning in early November.  

X … Utilities, XLU, rose.
Utilities, XLU, rose.

Utilities NextEra Energy, NEE, rose to 200 day moving average.

Small Cap Utilities, XLUS, rose to an all time high. The contrast in the rise in the Small Cap Utility Shares with the rise in NextEra Energy, shows the dollar carry trade monetization of small cap shares seeking a safe have from the European Sovereign Debt Crisis even if the stock is a utility. And the rally in the Small Cap Utility Shares and other US based small caps beginning in December reflects the market place seigniorage, that is moneyness, coming from risk avoidance of the European Sovereign Debt Crisis.

CenterPoint Industries,
CNP, rose; but chart shows that an Elliott Wave 3 down commenced December 14, 2010. The Interest Rate on the US Ten Year Note, $TYX, a benchmark interest rate, broke out above 3.3% on December 14, 2010. The monetization by the US Federal Reserve through QE 2 and President Obama’s announced deficit spending has sent interest rates soaring and has sent the Utility stocks plummeting and has likely made today, December 16, 2010, a high in the S&P, SPY, at 124.82.

Higher interest rates destroy moneyness. High interest rates have pushed the world market places through an inflection point: the world has passed from the age of leverage and currency inflation …. and into the age of deleveraging and debt deflation.

An Elliott Wave 3 Down also commenced in Utility Stocks, XLU, on October 19, 2010, this is shortly after the interest rate on the 10 Year US Government Bond, $TNX, started to rise. And an Elliott Wave 3 of 3 Down commenced in the utility shares on November 4, 2010, when the bond vigilantes sustained the interest rate on the 30 Year US Government bonds, $TYX, above 4%, which has utterly decimated the 30 Year US Government Bonds, EDV.

Edward S Oneal communicates that higher interest rates hurt utilities as they tend to be debt heavy. Yahoo Finance Industry Center relates that NextEra Energy, formerly Florida Power and Light, NEE, has a terrific amount of debt; and Yahoo Finance chart of NEE compared with XLU, shows that NextEra Energy has had a great upward rally that came with the moneyness juice of low-interest rates and anticipation of QE 2, but now has been experiencing a downdraft with rising interest rates.  

Rising interest rates and falling currency values are destroying moneyness.  

Rising interest rates are really going to hurt the construction companies which design and build the power plants; these being FWLT, URS, JEC, FLR, unless they find a king and his project somewhere to help sustain them such as the King Abdullah City for Nuclear and Renewable Energy in Riyadh.
Foster Wheeler, FWLT, rose 1.4%.
URS Corp, URS, rose 1.2%
Jacobs Engineering, JEC, rose 1.0%
Fluor, FLR, rose 3.0%

The Design and Build ETF, PKB, rose 1.0%

The falling  30-10 US Debt Curve, $TYX:$TNX, and a falling currency yield curve, RZV:RZG, will be responsible for turning growth prospects lower; which will be seen in the Morgan Stanley Cyclical Index, $CYC , falling lower. It surged higher today; this happens at market tops; just as in market bottoms it plunges lower.    

XI. Volatility fell
S&P Mid Term Futures Volatility, VXZ, fell.
Volatility, VXX, fell.
Inverse Volatility, XXV, rose
Inverse Volatility, XIV, rose

XII … Commodities, DBC, likely peaked out on December 13, 2010
Commodities, DBC, peaked out on December 13, 2010; Debt Deflation, that is currency deflation has come to commodities; carry trade investment in commodities is now starting to unwind.   

Natural Gas, UNG, fell strong lower today.

XIII. Entering into the age of deleveraging, means the end of credit.
The end of credit commenced December 16, 2010 as credit firms fell sharply lower.
Discover Financial Services, DFS, fell 3.1%
MasterCard, MA, fell 10.3%  
Small Cap Revenue Firms: Nicholas Financial, NICK, A sub-prime automobile finance company traded lower
Brazil Financial, BRAF, traded lower.

XIV. China shares, FXI, fell lower today.
Deflation has come to the Shanghai shares; these are traded by CAF which fell sharply lower.
Unlike most all of the world small cap shares, the Chinese Small Cap shares, HAO, traded sharply lower.
Chinese Real Estate, TAO, is now rapidly falling lower
China Financial, CHIX, fell sharply lower.
In tandem with China, the copper miners, COPX, fell lower.
Philippines, EPHE, fell lower.
Vietnam, VNM, fell lower.

XV … The precious metal mining shares continue to fall lower and disconnect from the price of the underlying asset.
All of the precious metal mining stocks GDX, GDXJ, SIL, SSRI, disconnected from Gold, GLD, and Silver, SLV, and fell lower.

Only an investment in Gold Bullion, $GOLD, or Silver Bullion, will preserve wealth in a debt deflationary environment.

XVI … Dollar Carry trade and Yen based carry trades are unwinding from the Nasdaq Clean Energy, QCLN, faster than from the S&P Clean Energy, ICLN.
Nasdaq Clean Energy, QCLN, is falling faster than the S&P Clean Energy, ICLN.

XVII …  The Morgan Stanley Cyclical Index, $CYC, rose in what is likely to be a rally high to close at 1027 suggesting that peak growth and peak risk appetite has been achieved.  
The  30-10 US Debt Curve, $TYX:$TNX, rose today. And the currency yield curve, RZV:RZG, rose to 0.803 (which is just below the 0.804 level when currency fell lower),  enabling the Morgan Stanley Cyclical Index, $CYC , to rise higher 1.3% higher today, which is more than the S&P, SPY, Dow, DIA, the Russell 2000, IWM, the Nasdaq, QQQQ and Nasdaq 100, QTEC; this is a contrarian indication. And reflects irrational exuberance at a market top.

The sugre in Morgan Stanley Cyclical Index Relative To Industrials… $CYC:$INDU, suggests that a stock market top came in today. One should be derisking from both stocks, VT, and junk bonds. JNK. The junk bonds closed up to hit 39.95, at the edge of a massive head and shoulders pattern. All I can say is “look out below”.

John Detrixhe and Bryan Keogh of Bloomberg in article Junk Spreads Narrow to 2007 Level on Fed’s QE2 report: The extra yield investors demand to own high-risk debt rather than government bonds has dropped 82 basis points this month to 540 basis points, or 5.4 percentage points, the lowest since Nov. 16, 2007, according to Bank of America Merrill Lynch’s U.S. High-Yield Master II index.

Goldman Sachs Group Inc. and JPMorgan Chase & Co. are advising clients to buy speculative-grade debt in 2011, even after gains of 14 percent this year and a record 57.5 percent in 2009. “We’re going to start taking more risk as we go into next year because the economic fundamentals are better,” said Thomas O’Reilly, a managing director in Chicago at Neuberger Berman Fixed Income LLC, which oversees $11 billion in junk bonds.

I say Goldman Sachs, JPMorgan Chase, and Neuberger Berman Fixed Income are going the wrong way.

XVIII … A terrific downturn in stocks and bonds is likely to flow out of an unresolved sovereign debt and bank debt crisis is Europe.

Ian Traynor of the Telegraph in article Year Of Bullying, Bluff And Bailouts Leaves The Euro Fighting For Its Life:  Only 12 years after it was launched to great fanfare and after early success, the euro is fighting for its short life. Two of the 16 countries using the currency have had to be bailed out, despite the ban on such rescues in 1992's Maastricht treaty that created Europe's monetary union.

I ask will a third bail out be coming, or even a fourth bail out? I believe that out of a soon coming investment flameout, a Seignior, that is a top dog investment banker, will arise to provide moneyness in a new economic infrastructure.  And while Germany very much is declaring its debt sovereignty today, some day soon Germany will be melded together with all the other countries of the Eurozone, into a debt union by the Seignior, an old English word meaning top banker who takes a cut.