Financial market report for December 21, 21010 by theyenguy
I … The Euro fell lower today.
The Euro, FXE, fell lower, today to close at 130.44.
Bloomberg reports French AAA credit rating at risk as downgrades sweep Europe
Gary of BetweenTheHedges reports: “The Greece sovereign cds is climbing +3.23% to 1,005.91 bps, the Russia sovereign cds is gaining +4.81% to 151.83 bps, the Portugal sovereign cds is climbing +3.44% to 483.97 bps and the Italy sovereign cds is rising +6.03% to 220.55 bps. The Euro Financial Sector CDS Index is jumping to the highest level since mid-June and the Western Europe Sovereign CDS Index remains very near its record high set last month.”
The Telegraph reports Pimco Says 'Untenable' Policies Will Lead to Eurozone Break-Up. “Pimco, the world's largest bond fund, has called on Greece, Ireland and Portugal to step outside the eurozone temporarily and restructure their debts unless the currency bloc agrees to a radical change of course. Andrew Bosomworth, head of Pimco's portfolio management in Europe, said current policies are untenable in the absence of fiscal union and will lead to a break-up of the euro. "Greece, Ireland and Portugal cannot get back on their feet without either their own currency or large transfer payments," he told German newspaper Die Welt.
Mr Bosomworth said EU leaders were too quick to congratulate themselves on saving the euro last week with a deal for a permanent bail-out fund from 2013. "The euro crisis is not over by a long shot. Market tensions will continue into 2011. The mechanism comes far too late," he said.
The bond fund argues that the EU strategy of forcing heavily indebted countries to undergo draconian fiscal austerity without offsetting stimulus is unworkable. The austerity policies are stifling the growth needed to stabilise debt levels. Pimco also gave warning that the bond vigilantes have lost faith in the policy and are trying to liquidate their holdings of peripheral EMU faster than the European Central Bank (ECB) can buy the debt, causing a relentless rise in yields, and a vicious circle. The withering comments from the world's top investor in EMU sovereign debt is a blow for Portugal and Spain. Both nations are hoping bond spreads will start to narrow before they face a funding crunch in the first quarter of next year.”
I relate that France and Germany have consistently maintained their debt sovereignty so as to preserve their fiscal sovereignty. Eurobonds are inconsistent with national sovereignty and would be an open door to participate liberally in the sovereign crisis.
Mike Mish Shedlock relates in article Current State Of The Sovereign Debt Crisis In Pictures: “Jean-Claude Juncker is President of the Euro Group and Prime Minister of Luxembourg (not to be confused with Jean-Claude Trichet, President of the ECB). Junker's plan, supported by the IMF is to combine the bonds of all the Eurozone countries into one entity, with a statement in FT.com that E-bonds would end the crisis. Mr Shedlock states: The plan has long been dead as France nixed the idea as well, and the charts show why: Germany and France do not want their borrowing costs to rise. Charts also show persistently high tension in the PIGS. Thanks to Chris Puplava at Financial Sense for the list of symbols for this post. The charts all courtesy of Bloomberg. Given that the crisis is not contained nor is there any chance of it being contained until there are haircuts, look for this crisis to come to a head in 2011.”
II … Chart patterns suggest that stocks topped out today.
The Yahoo Finance chart of SPY, IWM, XLF, RWJ, FXE, shows the ongoing financial
driven rally in the S&P as the Euro, FXE, falls lower.
The Russell 2000, IWM, shows three white soldiers, a trend reversal signal.
The ProShares Small Cap 600, SAA, shows three white soldiers.
World stocks, VT, shows three white soldiers and a likely Elliott Wave 2 topping out and readiness
to enter an Elliott Wave 3 down.
Asian Shares, EPP, fell lower as Australia, EWA, fell lower.
Shanghai Shares, CAF, were a strong riser. The S&P, SPY, rose 0.6% to close at 125.39
The New York Composite, NYC, manifested three white soldiers.
Real Estate, IYR, manifested three white soldiers.
Industrial REIT, First Industrial Realty Trust, FR, manifested three white soldiers, as did iShares Residential REIT, REZ, as did Shopping Center REIT, Simon Property Group, SPG, and as did Commercial Property REIT, Starwood Property Trust, STWD.
The Morgan Stanley Cyclical Index, $CYC, manifested three white soldiers to close at 1039. Three of its components manifested three while soldiers: copper and gold mining company Freeport McMoran, FCX, Alcoa Aluminum, AA, and transportation company Ryder, R. The Yahoo Finance chart of ^CYC compared to the Transports, IYT, and the Industrials, IYJ, shows how overvalued and overextended this measure of future growth has become. This suggests that these three components are going to fall fast and hard. The reason these have been rising strongly is NOT that they see growth ahead; it is that they have been seeking safe haven, if it be called that, from the European Sovereign Crisis.
A number of US transportation companies, being the antithesis of European Banks, have risen strongly: Genesee and Wyoming Railroad, GWR, and Air Transportation Services Group, ATSG are examples.
Metal manufacturing, XME, manifested three white soldiers; this as steel, SLX, rose strongly.
Technology firms, Active Power, ACPW, and Measurement Specialties, MEAS, rose manifesting a lollipop hanging man candlestick.
Energy service, OIH, manifested three white soldiers.
Global Industrial Metals, CRBI, rose strongly
The agriculture industry, MOO, rose, and entered into what is likely an Elliott Wave 2 top today.
US based Intuit, INTU, rose suggesting that software companies, SWH, are topping out.
Clean Harbor, CLH, rose suggesting that environmental services, EVX, are topping out.
Homebuilders, ITB, Lennar, LEN, and KBH Homes, KBH, manifested three white soldiers.
Networking stocks, PXQ, manifested three white soldiers.
III … Chart patterns also suggest commodities topped out today.
Commodities, DBC, rose manifesting the three white soldiers
Base Metals, DBB, rose very strongly manifesting the three white soldiers.
The chart of world shares relative to commodities, ACWI:DBC, has fallen significantly lower, suggesting that either commodities are overvalued or that investors believe commodities are going higher and stocks lower. I would not want to be long either of the two.
The chart of aluminum, JJA, shows a dark cloud covering candlestick at the top of an ascending wedge; prices usually fall from such patterns.
Copper, JJC, shows three white soldiers; I believe it is terrifically overvalued; and that it is one commodity that will fall hard. Tyler Durden relates: “ The Wall Street Journal has just reported that in the copper market "a single trader has reported it owns 80% to 90% of the copper sitting in London Metal Exchange warehouses, equal to about half of the world's exchange-registered copper stockpile and worth about $3 billion." I feel sorry for the individual or more likely the investment banker, and related hedge funds who own the physical product as physical demand will not be forth coming at the current price: the owners are going to take a loss as numerous report are coming in the press that China is turning away delivery.
Timber, CUT, blasted higher on today’s carry trade juice. It’s rise epitomizes Tulip Mania, that is irrational exuberance, seen at market tops; its rise today is an excellent short selling opportunity as it will be a fast faller given that with the European Sovereign Debt Crisis has gone unresolved with a comprehensive solution and thus pushing the world out of the age of leverage and into the age of deleveraging.
Oil, USO, rose to resistance at its recent December 3, 2010 high.
Bloomberg reports: Cotton Jumps Daily Limit to Record as Demand Outlook Improves. “Cotton, BAL, prices jumped the most allowed by ICE Futures U.S., rising to a record on speculation that demand will rise as the U.S. economy strengthens. “It appears everybody wants to own commodities, and cotton is involved in that,” said Sid Love, the president of Joe Kropf & Sid Love Consulting Services LLC in Overland Park, Kansas. Prices are up “on a combination of people trying to do business and speculative buying,” he said.”
The chart of cotton, BAL, shows bearish engulfing and reads terribly speculative; it represents a reasonable short selling opportunity.
Bloomberg reports Sugar Rises to 29-Year High on Shortfall; Cocoa Gains on Ivorian Dispute. “Raw sugar, SSG, rose to a 29-year high in New York on speculation that supplies from India and Brazil, the world’s largest growers, won’t be enough to meet demand for a third straight year. Arabica coffee may be set for a “straight up, vertical spike” to a record $4 by the end of the first quarter, Shawn Hackett, the president of Hackett Financial Advisors Inc. in Boynton Beach, Florida, said in a report dated Dec. 18. Coffee, JO, is no longer a “value commodity,” and roasters are facing a “panic-stricken, demand-rationing orgy,” Hackett said.”
IV … Carry trades rose higher, signally they are topping out and ready to unwind, releasing significant deleveraging in both stocks and commodities.
The Mexico Peso Yen Carry Trade, FXM:FXY, rose, Mexico, EWW, to rise.
The Emerging Market Currencies Carry Trade, CEW:FXY, rose, causing the emerging markets, EEM, to rise.
The Indian Rupe Yen Carry Trade, ICN:FXY, rose, causing India, INP, to rise.
The Swedish Krona Yen Carry Trade, FXS:FXY, rose, causing Sweden, EWD, to rise.
Shaun Richards reports: “Hungarian Forint the exchange rate against the Swiss Franc, FXF, is not at the highs for this year but at just under 217 it is up just under 16% over the past year and up nearly 35% over the past 3 years. So it is likely that for most borrowers the value of their debt will have risen over the past 3 years swamping any likely monthly repayments. Hungary … has raised its official interest-rate this week to 5.75% in response to its consumer price inflation rising to 4.2%.”
The iPath Optimized Carry ETN, ICI, rose to what is likely an Elliott Wave 2 high and ready to enter into an Elliott Wave 3 Down.
Indonesia, IDX, being currency trade sensitive, rose strongly to resistance on rising carry trades; for those into short selling, its rise, was a great entry point for going short.
Taiwan Small Caps, TWON, also being currency trade sensitive, rose strongly.
Rising carry trades caused international utilities, IPU, and shipping companies, such as SFL, to rise.
The reverse of the USD/JPY ETN, that is JYN, has been falling as the USDJPY has been rising.
The US Dollar, $USD, rose slightly to 80.59
V … The financial driven rally and small cap rally has likely topped out.
Financial Firms Relative To The S&P, XLF:SPY, rose to resistance, suggesting a down turn is coming.
Revenue small cap shares, RWJ, rose manifesting three white soldiers; as did Synnex, SNX, World Acceptance, WRLD,
Financial Firms, XLF, rose.
Nasdaq Community Banks, QABA, rose, with Signature Bank, SBNY, rising parabolically
Banks, KBE, rose.
Bank of America, BAC, manifested three white soldiers.
Mortgage Finance Company, iStar Financial, SFI, manifested three white soldiers.
Insurance Companies, KCE, rose.
Wall Street Financial Services, IYG, including Goldman Sachs, GS, rose.
The rise in Global Financial Firms, IXG, drew Ireland, EIRL, Spain, EWP, Italy, EWI, Vietnam, VNM, India Earnings, EPI, Brazil Financials, BRAF, Emerging Market Financials, EMFN, higher.
US based small cap industrial companies, such as American Axle, AXL, and Flow International, FLOW, are topping out.
Consumer Discretionary stocks such as Tempur-Pedic Intl, TPX, and Estee Lauder, EL, are topping out.
Casualty Insurers, such as Endurance Specialty Holdings, ENH, are topping out.
Health Care Firms, Almost A Family, AFAM, and Five Star Quality Care, FVE, are topping out.
Small Cap Health Shares, XLVS, and Small Cap Energy Shares, XLES, continued their parabolic rise. Small Cap Industrial Shares, XLIS, Small Cap Information Technology Shares, XLKS, and Small Cap Discretionary Shares, XLYS, rose. Small energy producer Kodiak Oil and Gas, KOG, shows three white soldiers. Industrial textile manufacturer, Unifi, UFI shows the three white soldiers.
The ratio of the Small Cap Value Shares Relative To Small Cap Growth Shares Daily, RZV:RZG , shows topped out, suggesting that the rise in small cap value shares is done and over.
Small cap pure value, RZV, rose, manifesting the three white soldiers suggesting that a top is in for the small cap value shares.
VI … Bonds
The Wall Street Journal reports Banks Look to Profit on Muni-Bond Fears: “Some of the world's biggest banks are lining up to profit from worries about the declining finances of U.S. cities and states. For the first time in two years, Switzerland's UBS AG(NYSE:UBS) has begun making markets in derivatives tied to municipal bonds and other securities. The credit-default swaps obligate swap sellers to compensate buyers if a municipal issuer misses an interest payment or restructures its debt. Separately, five large derivatives dealers—Bank of America Corp.'s Bank of America Merrill Lynch, Inc., Citigroup Goldman Sachs Group Inc., J.P. Morgan Chase & Co., and Morgan Stanley—met last month in New York to discuss standardizing the paperwork for "muni CDSs" in an effort to attract more buyers and sellers. The issue is politically explosive. States and cities are suspicious of CDSs, saying they encourage speculators to bet on, and at times worsen, states' financial distress.
Hedge funds, meanwhile, are muni CDS buyers. "In the spring, when we saw muni CDS costs start rising, we found out it was hedge funds trying to profit from a muni disaster," said Jeffrey Cleveland, senior economist at Los Angeles money manager Payden & Rygel. "They're looking for the next subprime." After 17 consecutive weeks of inflows into U.S. muni-bond funds, including exchange-traded funds, the last five weeks saw $9.1 billion of outflows, according to data from Lipper, a Thomson Reuters unit. Risk premiums on triple-A-rated corporate debt over risk-free government debt have declined by 1.22% over the past month, according to Bank of America Merrill Lynch index data, but risk premiums have climbed 14.3% in the case of triple-A muni debt. Likewise, insurance on a default from California and Illinois, two of the most commonly quoted CDS contracts, has become more expensive. As of Monday, the cost of protection against a California default was 295 basis points, or hundredths of a percentage point, equivalent to $295,000 a year for 10 years of insurance on $10 million of bonds, according to Markit. A year ago, the same protection was $253,000. The cost of protecting that much Illinois debt was around $318,000 a year, compared with $161,000 a year ago.”
The chart of Municipal Bonds, MUB, shows that they have risen to resistance and are thus prime for short selling. An observing mind reflects on the social dislocation to municipal finaance and operations as those with capital sell municipal bonds short.
Business Insider reports 16 US Cities Facing Bankruptcy if They Don't Make Deep Cuts in 2011.
VII … Gold, GLD, rose and gold mining stocks, GDX, fell.
Bloomberg reports Gold Climbs as European Sovereign-Debt Concerns Drive Record Fund Holdings: “Gold advanced for a third day as European sovereign-debt concerns increased demand for the precious metal as an investment haven, with holdings in exchange-traded products climbing to an all-time high. Immediate delivery bullion rose 0.2 percent to $1,387.28 an ounce at 1:12 p.m. in Melbourne. The price gained as much as 0.9 percent yesterday after dropping 0.8 percent last week. Gold assets in exchange traded products, or ETPs, reached a record 2,114.6 metric tons as of yesterday, according to data collected by Bloomberg from 10 providers. Holdings have gained 18 percent this year.
VIII … The reality is one of deflationary not growth.
The Baltic Dry Index, $BDI, come in for the second day under 2000.
IX … In the realm of excess and grossly distorted
CNBC reports Goldman Sachs O'Neill Sees 2011 as 'Year of USA'. Improving growth, falling unemployment and a sense that the U.S. is returning to "normal" could fuel a 20 percent stock market gain and make 2011 the "Year of the USA," according to Goldman Sachs economist Jim O'Neill
Wall Street Journal reports Blackstone Raises Fund of $15 Billion for Buyouts. Blackstone Group is finalizing a new $15 billion fund, the largest fund for buyout deals since the financial crisis erupted and one of the largest on record. The big sum is the latest sign of improving interest in private equity and of the power of some well-known firms to attract investors, despite some high-profile losses in the industry over the last few years. The fund will be the sixth largest on record, based on information from data tracker Preqin. Chart of Blackstone, BX shows a 3.8% rise today.
X … Summary
Tyler Durden in article, US To End 2010 With $13.9 Trillion In Debt, Total Debt Incurred Since Great Financial Crash: $4.4 Trillion, says “This is in essence the cost to US taxpayers to keep the financial system solvent, as the US has become the biggest marginal leveraging actor in the world.”
There is a limit on all things, such debt leverage cannot be maintained.
The stimulus given to the small cap US companies, that is the Russell 2000, traded by the ETF IWM, appears to have maxed out as it rose 1.1 % manifesting three white soldiers, a reversal signal, to close at 79.20.
The global investment bubble was likely pricked December 16, 2010, when the European Leaders, as John Mauldin said, kicked the can down the road, having failed to provide a comprehensive solution to the European Sovereign Debt and Bank Debt Crisis. It was at this time that world government bonds, BWX, fell from 57.40, and the world’s major currencies, DBV, and world’s emerging currencies, CEW, fell lower as both entered an Elliott Wave 3 down.
Debt deflation is the contraction and crisis that follows credit expansion. One of the most famous quotations of Austrian economist Ludwig von Mises is from page 572 of Human Action: “There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency involved.”
Global Debt Deflation commenced on April 26, 2010, when the value shares failed to outperform the growth shares with the onset of the European Sovereign Debt Crisis. Now with the European Leaders having failed to provide a comprehensive solution to the sovereign crisis, we have entered into the age of deleveraging. I expect debt deflation to get underway soon, with the small cap value shares, RZV, falling very rapidly in value, marking a new and dramatic bout of Global Debt Deflation.
Wealth is best preserved by investing in and taking possession of the premier currency, that is gold, $GOLD. It closed up at $1,381 with support seen at 1380 and 1340. Gold in terms of other currencies such as the Australian Dollar, GLD:FXA, has proven to be a good investment ever since the onset of the European Sovereign Debt Crisis in early May 2010.