Archive - Oct 2009 - Story

Today's PMI data was very strong. There are experts in econometrics much more knowledgeable than I will ever be calling for further strength in production numbers that will lead to a turn in unemployment into Q1 2010. I don't dispute their models or the indicators they look at. However I can't come to terms with it. I think this is in great part because the business cycle which is supposed to lead us out of this recession is at odds with a much longer and bigger cycle: the debt cycle. I know this flies in the face of 50 years of econometrics that has made people a lot of money trading, but this is mainly due to the fact that the debt cycle is so long and stretched over time that we don't really have data to measure its impact on previous cycles. It coincides in a sense with the Kondratieff cycle, but transposed into today's financial markets, the burst of the debt bubble is a lot more pronounced. Basically modern technology and financial engineering has made it very easy to securitize credit and source funding or financing globally, so that the extent of the debt bubble has been allowed to grow far beyond what could have happened 50 years ago. There is also obviously the global aspect of it. Because financial markets are more and more global, so is the crisis.

The chart below present the change in reported and projected corporate Revenues and EPS (excluding financial companies), and highlights the dramatic improvement in the economy expected by analysts over the next 2-3 quarters. In the next quarter things for companies get dicey with both revenue and EPS expected to be flat with Q4 of 2008. Whether or not this is attainable will be seen shortly. Yet where it does get just a little amusing, is 2 and 3 quarters in the future, when EPS are projected to increase by 23% and 20% respectively, while everyone hopes sales can wave a magic wand, and with skeleton crews of employees and no growth capex investments, are assumed to grow by 11.2% and 9.5%. Additionally, analysts are now forced to actually really ramp up their expectations in order for stocks to grow incrementally from here. If readers believe that corporate revenues in Q1 of 2010 can grow sales by more than 10% from Q1 2009 (while continuing to fire people), then by all means, buy stocks.

Goldman takes a chunk of debt off the books, now Carl Ichan provides a billion-dollar line of credit... But despite all the saving, they'll still file for bankruptcy.

In what would could pass for Cohen & Steers' worst nightmare, Wilbur Ross today said that he anticipates essentially an Armageddon for US commercial real estate. What we fail to see is how this is news... What we fail to see even more is how the hell REITs are still trading where they are? It must be all those non-cash dividends, the staggering debt loads and the exploding cap rates which make them such an attractive proposition. As Ross points out: "All of the components of real estate value are going in the wrong direction simultaneously. Occupancy rates are going down. Rent rates are going down and the capitalization rate -- the return that investors are demanding to buy a property -- are going up." Which begs the question: just because everyone knows the potential fall out associated with CRE, yet no proactive steps are taken to moderate these adverse developments, save a hope that the Fed will inflate debt sufficiently before 2012 when the refi crunch hits in earnest, does this make REITs a strong buy as BAC/ML has been claiming for months on end?

The sense of market urgency can be seen when comparing yesterday's and today's market volume. All of yesterday's SPY volume was surpassed by 1:30pm. Today's key support level is 105.59 which is the September 31 closing price, and which has already been taken out: the next support is 104 (which was tested once already), with 102 next below it.

The implied correlation reading between all asset classes has hit a 6 month high at 65.50, a jump which mimics the surge in the VIX. High implied correlation readings are indicative of crash risk expectations.

The declining market volume as computers have taken over day trading, has been no surprise to anyone. What should come as a surprise is that October is the first month in which there is a volume pick up sequentially. With the end of the fiscal year for many market participants, is the time to look for greater fools finally here?

Pent up demand anyone? It may be time for Bernanke to do another POMO... oh wait...oops

This is better than Six Flags, and less bankrupt (for now). For the time being, all is good on the NYSE. Following that closely.

Among Dylan's musings on the sham regulatory overhaul proposal, and the behind the scenes political bickering, is this question "Why is it legal for the US banking system to take infinite risk in a financial gambling parlor in secret and use taxpayer assets." We hope readers can provide the answer because unfortunately nobody else seems to be able to.

About 200 people on NYSE update call and rising by the second.

UPDATE: NYSE claims it is now "functionally normal"

BREAKING: All NYSE symbol ranges going down for three minutes.

After several recent IPOs had seen a less than stellar reception by the equity market, banks have decided it is time to pull IPOs entirely and wait for a better window of opportunity. The most recent casualty: energy company AEI. Per the company: "We have decided not to proceed with an initial public offering of our shares at this time due to market conditions."

Ah, the fall. A perfect time to spend weekends looking at the fall foliage, going apple picking... Antique shopping in quaint, little towns... And attending a Philadelphia auction with what may just be a few tokens of Lehman's, um... Fall. It's art collection. Everyone loves a no-reserve sale.