Financial Market Report for October 6, 2011
Stocks rose today as the ECB offered emergency support for the Eurozone banks. The chart of the day is the S&P, SPY, from Heikin-Ashi, Trends Made Simple, which shows a breakout from a head and shoulders pattern caused by the ECB providing liquidity support for banks for 18 months.
Tyler Durden reported yesterday that the NYSE Short Interest Back To March 2009 Levels, so the market was at a pivot point. Any bad news it would have collapsed. Any good news and it would rally. And it found the best of news in the ECB announcement; it likely would have risen anyway from an oversold position, as a number of options expire tomorrow.
An inquiring mind asks, might the credit rating agencies write down French banks, or might rising interest rates cause the money market funds to break the buck and stimulate a credit collapse and a failure of money? And might the sovereign debt crisis escalate and a United States of Europe form by Leaders’ Announcement, and might a President of the EU, and a Banker rise to power and provide a new moneyness based upon diktat?
1) … Will the debt of the investment bankers be their downfall?
Morgan Stanley and Goldman Sachs have debt. An inquiring mind asks Will the debt of the investment bankers be a millstone around their necks? One reason these banks have debt is to securitize investment deals, whether they be stocks or bonds. But in a deleveraging, disinvesting and risk avoidant market, the bankers may have debt they cannot repay. Doug Noland has written that credit was a major cause of the first great depression.Tyler Durden writes Stocks added to their rally today when Gasparino leaked news that MS was going to have a "solid" quarter and they were going to beat GS. Morgan Stanley, MS, has $187 billion of public debt according to Bloomberg. Just eyeballing it, the average maturity looks close to 4 years, but let's be conservative and assume it is 3 years. So MS 3 year bonds widened by over 300 bps during the quarter. 3 year MS CDS widened by 380 bps (from 113 to 493), so the move in bonds actually outperformed the move in CDS. Is MS planning on taking a massive gain on marking their own bonds? There were stories of MS buying back their own bonds - a great move if they though they were cheap, but a critical move if they were planning on taking a gain and didn't want to have to give it back in the future if their credit spreads tightened. Goldman has slightly less debt at $178 billion, but the spread widened far less. Is this why the MS CEO is so confident they will have a good quarter and beat GS? I honestly hope not. If the CEO of MS is playing accounting games (totally legal, but stupid) on their own spreads and thinks the markets will respect that, than I am very nervous about what is going on there.
2) … PMI activity decreases in the Eurozone signaling a recession is coming.
Not only is the world in a credit deflation bear market, and a currency deflation bear market, quantitative easing has been exhausting stocks, and now QE exhaustion and credit contraction is seen in decreasing Eurozone manufacturing activity, as Cullen Roche relates in Pragmatic Capital article The Eurozone Officially Contracts for the first time in 2 years. Manufacturing production fell for the second month running, albeit at only a very modest rate. Meanwhile, services activity fell to a greater extent than signalled by the preliminary estimate, contracting at the fastest rate since July 2009. By country, PMI activity at the composite level fell in both Spain and Italy for the fourth successive month, dropping at the fastest rates since July 2009 and August 2009 respectively. However, weakness was not confined to these nations. Activity rose only very marginally in both France and Germany, signalling that these recoveries, which both commenced in August 2009, have almost ground to a halt. No matter what is done in the coming weeks or months will not likely fix the fact that we have a recession building in Europe.
The exhaustion of quantitative easing is seen in the Bloomberg report Policy Uncertainty Is Choking Recovery: Baker, Bloom and Davis. The recovery from the recession of 2008-09 remains anemic. Job growth has stalled, unemployment stands above 9 percent, and there are renewed fears of another output drop. A major factor behind the weak recovery and gloomy outlook is a climate of policy-induced economic uncertainty. An index we devised (see attached chart) shows U.S. policy uncertainty at historically high levels.
3) … US service sector growth slows signaling a recession is coming.
Reuters reports US service sector growth slows, employment mixed
4) … A credit evaporation is materializing.
Bloomberg reports Bond Traders Left Adrift as Dealers Reduce Risk: Credit Markets. Europe’s crisis of confidence is crippling credit-market trading as banks shrink bond inventories to the least since the depths of the last recession. Federal Reserve data show U.S. primary dealers cut their holdings of corporate debt by 33 percent to $63.5 billion since May, bringing stockpiles to within $4 billion of the five-year low reached in April 2009. Trading in investment-grade company bonds has dropped 27 percent since February, according to Trace data compiled by Barclays Capital, and a measure of the cost to buy and sell debt is at the highest in more than two years. Evaporating liquidity is contributing to the biggest junk- bond losses since the failure of Lehman Brothers Holdings Inc. three years ago as Europe’s leaders seek to prevent the region’s fiscal imbalances from infecting the global banking system and the U.S. economic recovery struggles to gain footing. Sales of new high-yield securities have all but disappeared and prices in debt markets are swinging by the most since 2008. “Everything is moving very quickly,” said Tom Farina, a managing director in New York at Deutsche Insurance Asset Management, which oversees more than $200 billion
Junk-Bond Spreads Widen to Levels Reached When Lehman Collapsed. Relative yields on junk bonds have soared to the level reached the day Lehman Brothers Holdings Inc. collapsed after systemic risks escalated in both Europe and the U.S., according to Bank of America Corp. analysts. The extra yield investors demand to hold speculative-grade debt has soared 436 basis points to 910 basis points, or 9.1 percentage points, since May, according to Bank of America Merrill Lynch index data. The percentage of corporate bonds considered in distress has surged to 28 percent from 8 percent two months ago, an indicator that is "flashing red," analysts led by Oleg Melentyev wrote in a report yesterday. Bond spreads are signaling another recession as Europe's leaders seek to prevent Greece from defaulting, the U.S. unemployment rate holds above 9 percent and the cost to protect the debt of financial institutions surges. Investors need to be wary of disruptions in the banking system that may lead to mass selling and declining high-yield values, the Bank of America analysts said. "Once the level of distress in a financial system reaches a certain level, it can become an uncontrollable force, with the potential to push market participants into deleveraging as counterparty exposures are being cut," the New York-based analysts said. "This, in turn, would push asset values lower, which, of course, would create further need for deleveraging."
5) … REITS clawed their way back up from sharp downturn.
Financial Times reports Eurozone Funding Worries Hit US REITS. FT reported yesterday, Over the past five sessions the Bloomberg Mortgage Reit index has fallen 8.2 per cent, against a 2.7 per cent drop for the S&P 500 index. This represents the biggest weekly drop since March 2009. “The risk is that, whether it’s concerns about European banks or any bank whose credit default swaps have been widening, there might be a move to cut risk and stop lending into the repo market,” said Douglas Harter, a Credit Suisse analyst.
Ongoing Google Finance chart of REITS, WREI, and the S&P, SPY, shows these clawing their way back up after their recent sharp drop.
I present the following REIT analysis based upon the Forbes REIT List which shows the following REITS
Industrial REITS, BMR, DCT, PLD, PSB, STAG, PCC, TRNO, AMB
Office REITS, ARE, BPO, LRY, SLG, CUZ, DRE, HIW,CLI, MPG, VNO, LRE, PDM, CLI, HIW,
Retail REITS, SPG
Residential REITS, EQR, AIV, HME, UDR, BRE ,CPT ,CLP ,ESS ,PPS, UDR ,AGNC ,ESS
Hotel REITS, HST, SHO, AHT, FCH, LHO, SPPR, CLDT, FCH, CHSP
Health Care REITS, HCN, HCP, NHI, VTR, LTC
Self Storage REITS, EXR, PSA, CUBE, YSI
Strip Malls, FRT, AKR, NNN, KIM, REG, WRI
University REITS, ACC, EDR,
6) … Stocks rose as the ECB offers emergency support for banks
World Stocks, ACWI, and World Small Caps Stocks, VSS, rose after the Associate Press reports ECB Offers New Emergency Support to Banks. And Associated Press reports ECB Opens Cash Taps To Avoid New Credit Crunch.
The Financial ETFS, EUFN, EMFN, and XLF rose today, with the Banks, KRE, rising to 200 day moving average, causing the Russell 2000, IWM, to rise strongly as well. Morgan Stanley, MS, rose strongly. When the next down leg occurs, it may be the Banks, KRE, that are first to go. All eyes should be on French Bank BNP, traded by BNPQY.
Stock ETFs rising today included COPX, TAN, BJK, SIL, ALUM, SLX, ABCS, SOIL, BIK, IEZ, OIH, GEX, CRBA, XHB, WREI,
Country ETFs rising today included BRF, EWZ, EWA, KROO, LATM, CNDA, EWG, EWQ, EWO, EPP, EWD,EWN, BICK, VGK, RSX, THD, EWS, EWH, EEM,
The US Dollar, $USD, and UUP, traded lower. Most currencies traded higher; these included FXA, FXE, FXM, ICN, FXS, FXF, BZF, XRU, BNZ, CEW,
Associated Press reports Oil above $82 on positive news for Europe banks.
Metrics one can follow are IWM:KRE, IYM:USCI, XLB:DBC, OIH:USO, ACWI:CCX, WREI:IYF,
Dexia DEXB.EU traded sharply lower today; trading in its shares was suspended.
7) … This week saw the final agreement on the new EU Economic Governance package.
Philip Lane of Irish Economy relates this week saw the final agreement on the new EU Economic Governance package The overview is here. The details are here.
8) … The potential for a global trade war increased, as the Federal Reserve Chairman says Yuan Undervalued by a significant amount.
Mike Mish Shedlock writes Ben Bernanke Fans Fires of Protectionist Legislation to Senate Joint Economic Committee; Expect Global Depression if Obama Signs On
9) … Might the sovereign debt crisis as well as rising US interest rates lead to a banking and money market failure and produce a European economic government and a continental North American government?
Moody’s relates More Sovereign Downgrades Likely As Euro Area Credit Pressures Yet To Peak and The WSJ reports France's AAA Rating Is A Fragile Linchpin In Euro Zone Crisis Plan
Moneyness in the new regime, that is the Beast Regime, of regional economic government is coming like a Terminator to put an end to Greek Socialism where state workers have a constitutional right to not be dismissed from their state job, and put an end to national wage contracts that abound in European Socialism. National wage contracts and unions are a defining characteristic of socialism in Europe as is seen in the May 21, 2011 Ice News report Iceland’s new national wage contract signed. The advent and use of the Euro as a common currency in the Eurozone, benefited not only the average person in the Eurozone proper, but the average person in countries outside of the Eurozone, such as Iceland, Denmark, Sweden and Norway. The greatest beneficiary of national wage contracts has been workers in Greek unions. As the Drachma was left behind, and the value of Greek Treasury Debt soared, the standard of living of the Greek people soared more than anywhere else in Europe. Economist Magazine relates patronage and pork characterise the Greek culture.
Reuters reports For banks, recovery is fading. A failure in lending and decapitalization of the banks introduces systemic risk and the potential of a global economic collapse. The dislocations that are coming from derisking, deleveraging and disinvestment, coupled with a likely banking failure, and run on money market funds, has terminated the Milton Friedman Free To Choose Floating Currency Regime, and is giving birth to the Ten Toed Kingdom of regional economic government as called for by the Club of Rome. An authoritarian tsunami is on the way.
Moneyness under Neoliberalism came from the securitization of credit and stocks, as well as 1% lending from the Bank of Japan. This created the Global Debt Bubble.
Beginning in May 2011 and running through September 2011, the world pivoted from Neoliberalism to Neoauthoritarianism as the global investment, political and economic tectonic plates shifted, as world stocks turned down in May, as investors fled the market in July, and as they fled the markets when they became aware that a debt union has formed in Europe, and as manufacturing activity slowed in September.
Moneyness under Neoauthoritarianism will come via diktat of sovereign leaders and will establish austerity measures and require debt servitude as the debt of Neoliberalism will be applied to every man, woman and child on planet earth. Leaders will announce regional framework agreements such as seen in the Reuters report that EU finance ministers reached political agreement on the so-called six-pack of economic governance rules. Another example of regional framework to establish authoritarian rule is the WSWS report that Just a week ago the troika overseeing the dispensing of bailout funds to Greece, the European Commission, the IMF and the European Central Bank, made the implementation of unprecedented job cuts in the civil service a prerequisite for another tranche of money, without which Greece will quickly default on its obligations. The government of Prime Minister George Papandreou duly announced it would dismiss 30,000 workers.The European Union finance ministers still refused to release the funds and the troika piled on new demands, including the scrapping of the country’s national wage contract, a cut in the minimum wage, and fast track action to privatize state assets.
The Associate Press reports ECB Offers New Emergency Support to Banks. The bank will offer an unlimited amount of 12-month and 13-month loans to banks.That will provide banks financing for a longer period, into 2013 in the case of the 13-month offering and shield them from turbulence in borrowing markets.The ECB will also keep offering unlimited amounts of credit at its shorter-term lending operations of up to 3 months through the first half of next year. Many European banks are exposed to losses on Greek debt. That has made borrowing between banks, crucial for their daily functioning, increasingly difficult because of fears the money might not be repaid. Trichet said the ECB would also buy up to euro40 billion ($53 billion) in covered bonds, a type of security used by banks to raise funding. The ECB's presence will help free up that credit market and make borrowing easier for banks.The bank has maintained throughout the crisis that its unconventional measures such as extra credits are kept in a separate track from interest rate policy, and Thursday's decisions continued that stance.
Reuters reports Paper Talks of Contingency Planning for French Banks. A French government agency has drawn up contingency plans in case it has to take a stake in one or more French banks on behalf of the French state, the French newspaper Le Figaro said on its website. In a brief article, Le Figaro said the agency that manages government share holdings had been working for a few days on how it would act if it had to move to bolster one or more banks. Quoting what it described as a source close to the matter, Le Figaro said the planning had involved a scenario where intervention was limited to two or three banks, unlike a broader support plan drawn up in 2008, when the global banking system was rattled by the demise of Lehman. "It's just in case," Le Figaro reported its source as having said. As the euro zone's debt crisis grinds on, Franco-Belgian lender Dexia has got into difficulty and the governments of both countries are hoping to come up with a rescue plan, possibly as early as Thursday. A Dexia bailout, the second in three years, has heightened speculation that President Nicolas Sarkozy and his government may need to support other financial institutions. The government has refused to confirm whether any such plans are being considered. I believe the bank and sovereign debt crisis is going to get critical very soon and banks will be nationalized.
Patrick Henningsen, is non-partisan and tends to lean towards the Libertarian position, writes The Deutsche Mark Is Coming, And Germany Will Still Lead The European Super State. Ever since the dawn of the European Union, it was clear that there was a power of three- France, Belelux and West Germany. Within these three continental economies is where you did find Europe’s power houses in innovation, manufacturing, agriculture and finance. rumors have been rife for weeks that the Germans are intending to walk away, having already ordered printing plates to resume the printing… of their Marks. This was confirmed this week by former White House economic advisor and Deutsche Bank board member Philippa Malmgren. “The German announce they are re-introducing the Deutschmark. They have already ordered the new currency and are asking the printers to hurry up”, said Malmgren. Here’s the bit that’s difficult to figure out: is it that Germany no longer wishes to be captain of a sinking ship, or is it more likely that was their plan all along?
Karl Denninger, Editor of Market Ticker, noted: “The sell-off in the equity markets is bad, but the implied forward view looking at high yield credit is far worse, and that looking at credit-default spreads is even worse than that. The latter on a number of institutions are showing the sorts of numbers that immediately preceded Lehman’s failure, implying the potential for a “no-notice” liquidity seizure. If it happens, and if it does it is likely to come almost without warning if not literally without warning, Germany would find it very expedient to leave the Euro. The treaties that formed the Euro left no means to expel a misbehaving “member.” But there’s no way to restrain a nation from deciding to quit as opposed to being expelled.”
Another boom and bust cycle. In the face of sovereign defaults, those bankers need their cash. Some banks could raise the funds privately, while other hope to be recapitalised by the state or by the European Financial Stability Facility (EFSF). Only problem is that the EFSF is not fully funded yet, and if EU forgive 50% of Greek debt it would increase the ESFS bailout fund to whopping 2 trillion Euros. And trust me when I say, those bankers really want to get that 2 trillion Euros (even if they never really had it in the first place). A Greek default might also trigger, among other things, Greece’s return to the Drachma, an escape route from their economic chains in the eurozone. Certainly, there is enough political pressure in Greece to prompt such a move, but it is more likely that Christine Lagarde and the IMF will be dangling a very large carrot in front of Athens, an irresistible short term fix that their debt-addicted government cannot refuse.
If this chain of events does come to pass, the effects will be many and far-reaching. Euro default ripple effects are not just confined to Europe, as Malmgren states here: “Apparently, the Europeans are warning the US to come up with a plan to nationalize Bank of America given that it is already in a precarious position, despite the injection of capital from Warren Buffet. The multiple lawsuits against BofA and other banks alone will render the US banking system vulnerable to any dramatic announcement out of Europe. But, no doubt US banks have immense exposures to European institutions and some may even have sovereign credit risk directly on their balance sheets.”
As bad as the financial picture looks for it today, make no mistake- Germany still has a lot invested in this European project, even though the bailout game will have certainly taken its toll politically at home. If Germany does indeed dump its Euro currency to resurrect its Deutschmark, the smart money still says that it will still want to support- if not retain a leading role in the European Union, and will also probably be a driving force in strengthening the Community’s legal structures and treaties. Germany is still ready and willing to lead.
Despite all of these realities, the European bailout season has already begun, with the French-Belgian banking giant Dexia first in the queue for their Christmas bonuses. By now we should all know the answer to those questions. If we could just get rid of that lot, we might just be able to get back to the business of running our lives, our economies, our countries.
Open Europe reports today that Stern reports that a new Forsa poll has found that 54% of German citizens want to return to the D-Mark. In Eastern Germany, the figure was 67% and the poll suggested that a party supporting the reintroduction of the D-Mark would have a potential national vote of 18%. TAZ quotes Hans-Olaf Henkel, the former head of German employers’ federation BDI, saying, "if the FDP doesn't manage to do it, we need a new party, and I am standing ready to join it.” Stern Welt Le Point TAZ Handelsblatt: Henkel
I relate that when the credit collapse, and thus the money, banking, and money market collapse comes, and the leaders impose diktat, the people will be amazed and actually embrace the new moneyness that comes from sovereign rule. The Libertarian view of sovereign individuals, will be rejected as the people embrace sovereign leaders. The Austrian economist belief that sovereign nations will emerge from the coming global credit breakdown, in particular, that Germany will go its own way, will prove not to be the case. The Socialist answer for the world’s people of a fundamental restructuring of economic life on the basis of genuine global collaboration, social equality, and the development of man’s resources to meet social needs, not private profit will not emerge.
Stefan Steinberg and Barry Grey WSWS go on to relate there is a growing perception among millions that the capitalist system has failed and must be replaced. Sorry, no way never is this going to happen. Fate is working, great leaders would arise as history unfolds. These have included Nebuchadnezzar ruling Babylon; Cyrus and Cyrus and Darius ruling Merdo Persia; Charlemagne ruling Rome; Tony Blair ruling Great Britain, and George Bush, The Decider, ruling America with Unilateral Authority. Soon ten kings will come to rule, each in his own regional power base. The coming President of the EU will be one knowledgeable with the scheme of framework agreements. A leading individual for this position is Herman Van Rompuy, as he orchestrated the original Greek bailout, and as who the Daily Mail reports as saying, the age of the nation state is over and the idea that countries can stand alone is an ‘illusion’ and a ‘lie’
10) … Brookings Institution calls for a global central bank
The Brookings Institution in its white paper Rethinking Central Banking: It's Time for an Alternative Framework, is calling for the foundation of a world central bank. Monetary Law Blog reports.
11) … I have concern for readers of traditional investment services.
I am very concerned for readers of traditional investment services, as they are often bullish when one should view rises in the stock market as an opening for short selling opportunities.
I believe the authors of the newsletters as well as daily news magazines and newspapers simply don't known how and when to short sell, and it’s doubtful that they have a real bear on staff who is a gold bug and recommends that one take possession of gold bullion.
In my recent article Basic Material Stocks Rise From Being Oversold In A Credit Deflation And Currency Deflation Bear Market, I communicate that having been technically oversold China, Brazil, Australia, Austria, Germany, and Basic Material Shares, took World Stock higher. And I encourage the investment in gold bullion to preserve one's wealth.
Polaris Industries is an example of disinvesting in a risk adverse deflation bear market. Investors Business Daily reports Polaris Makes Vehicles For Work And Play. Polaris Industries was favored as a risk trade in the Age of Leverage. But the world has entered into the Age of Deleveraging, and wise traders sold it short. The chart of PII, shows that it manifests today as a short selling opportunity as it trades at the edge of a massive head and shoulders pattern, in the middle of a broadening top pattern. It is a short selling opportunity at today’s price of 53.40; stock could easily rise to 57.
The three white soldiers in IBM suggests it should be watched for short selling.Terra Nitrogen, TNH, rose strongly and should be placed on a watch list as when the next downturn comes this will be a fast faller.
Other short selling candidates can be culled from the REITS in this article; once the market falls, these will fall; and it is possible that the REITS might be one of the canaries in the stock market coal mine giving the final warning to get out before the great collapse.
Whereas many investment services encourage fiat asset investing, or investing in Treasuries, or Money Mark Funds, MMF, I have continually encouraged investment in gold bullion.
12) One of the most excellent charting services is JC’s Buy And Sell Signals; he publishes some of his analysis on Stockscharts.com public chart lists.
The dark cloud covering candlestick in volatility, $VIX, suggests that the market is going to settle down and rally.
Resistance for silver is at 32.50, 34 and 36.
Investors became aware that a debt union has formed in the Eurozone, and sold out of stock mutual funds and bought bonds; but these are now falling lower.
The parabolic turn lower in the US Dollar suggests that the stocks are going to rally.
Homebuilders was one of the sectors that rose sharply yesterday and today.
Mr Chan went long energy shares today.