Archive - Jul 14, 2010 - Story

Earnings season has arrived and the eyes of the world are on corporate America as they share their fare on the state of affairs. After a tenuous second quarter stretch -- one that could have been entirely worse given the sovereign situation -- the market slapped on a brave face for reporting season, rallying 7% since the third quarter began and inching within a kitten’s whisker of the flat line. As analysts sharpen their #2’s and investors wait with bated breath, the other side of the world stirred this week when China’s leading credit agency stripped America, Britain, Germany, and France of their AAA ratings, accusing Anglo-Saxon competitors of ideological bias in favor of the west, according to the Telegraph UK. So what, you say? Could this be a one-off rant? Au contraire Mon frére, Dominique Strauss-Kahn, chief of the IMF, validated the view by offering, “Asia’s time has come.” - Todd Harrison

One can almost smell the LBMA panic at the highs of the day. The resultant paper gold assault is a sight to behold. Either that, or HFTs have decided to extend the Hurst Exponent to 100 as yet another market gets "fractalized."

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 14/07/10

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 14/07/10

Looking at broad market volume during most recent Central Bank facilitated ramp, did someone just send out a memo for everyone to stop trading as JPM's buying wave takes everything higher on no volume? Yet with volume non-existant, VWAP has barely moved from the lows as not even VWAP reversion algos work in this market.

RanSquawk notes market talk that JPM is behind the latest uptick in EU equities, and reports talk of a EUR currency buying program in place ahead of cash close. As everyone knows JPM is merely the proxy for the FRBNY. So once again, it is not surprising that global central banks refuse to permit stocks to even consider having a downtick on a day that was supposed to be a blowout courtesy of Intel (which in turn is seeing record selling into earnings strength, which has pushed the stock from being up 8% after hours to just 3% higher now).

To all those fewer and fewer optimists who believe the economy may avoid a double dip (or alternatively suffer the realization it never really got out of the depression in the first place), David Rosenberg provides a glimpse just how tenuous the so-called recovery has been, even despite the unprecedented attempts by everyone at the top to shepherd the economy into growth at any cost, and the daily reminder from Ben Bernanke that risk is dead and the Fed will never let capital markets drop again. As for the future, Rosie asks the logical question: how is it that earnings are expected to grow by 20% in 2011, when it is becoming increasingly obvious that GDP growth next year will be negative?

For all those celebrating that Spain and Greece can peddle a few billion in short-term Bills to the ECB and a few Chinese investors (did SAFE recover yet from the massive drubbing it suffered in its US stock holdings earlier this year when it was begging for more capital?) it may be prudent to consider that, as Bloomberg reports, Spanish banks borrowed a record 126.3 billion euros ($161 billion) from the European Central Bank in June. This represents a 48 percent increase from the €85.6
billion borrowed in May. Which is why we hope that anyone claiming liquidity conditions in Europe are anywhere even close to normal, will be brave enough to lend even one dollar to Spain's Cajas or appropriately tickered bank Santander (NYSE: STD), because nobody else has done so for over two months!

A few days ago we discussed that the market no longer responds to any fundamentals but merely gravitates toward various chaotic "strange attractors" now that HFT-driven stock trading patterns are merely Mandelbrotian fractals, with no rhyme or reason behind self-similar trading patterns and unprecedented record daily volatility. Today, David Rosenberg provides the following chart best capturing the minimum RDA of dramamine required to trade stocks: with 6% average swings in 12 distinct periods in 2010 alone, even with the market virtually flat for the year, it is no wonder retail investors have decided to say goodbye to stocks for ever. This is not a market in which anyone, including retail and institutional investors, with the possible exception a few momentum inducing algos, can generate any alpha. Period. And leveraged beta trades are a recipe for suicide for anyone except those with discount window access. Which is why very soon the only ones trading stocks will be the primary dealers and those who pay multimillion monthly collocation fees to the NYSE in hopes they can frontrun a trade here or there (oh and SEC, your inability to halt flashing a year after saying you would do so, continue to inspire confidence that you are on top of your corruption game).

According to the latest broad poll conducted by Bloomberg, Americans, except for those on Wall Street of course, have never been more pessimistic on the economy, despite the administration's efforts to push stocks to 36,000 by Halloween. In a nutshell, 63% of respondents confirmed things in the nation are headed in the wrong direction, 71% disbelieve Kool Aid pushers and say it still feels like the economy is in a recession, with 13% convinced a double dip is coming, and just 14% who see the economy as being on solid ground. And the result that should be very troubling to the Keynesian fanatics out there, while 70% say reducing the unemployment rate is a key priority, 28% say that reducing the budget deficit should be first and foremost for Washington.

I have often said we can never eliminate risk, only manage it based on what the market is telling us. Our tactical asset allocation is directed towards the active management of risk versus reward in defining how we approach the financial markets. Our focus is to preserve wealth by controlling our exposure to risk assets, based on a number of quantitative and qualitative data points. In my opinion, a buy and hold allocation is a dead decision during markets such as we have now. Asset allocation, in my opinion, is an art involving quantitative analysis of financial markets combined with common sense. One critical factor in our process is finding the “sleeping point,” which I define as that level of risk exposure that allows you to sleep at night. Or, as one of my clients stated recently, “Cliff, I do not want to go back to eating spam.” We are here to make sure your investment process protects against the spam effect. We have had the worst May in stocks since 1940. No credit still equals no jobs. China is destined for turmoil as its real estate market unwinds. The Consumer Confidence Index is down to 52.9 in June from 62.7 in May. Fair value on the S&P for me is 950, which would indicate another 7% decline in stock prices from here. - Cliff Draughn, Excelsia Investment Advisors

The record slaughter of shippers continues as the BDIY posts the largest overnight drop of 4.5% in the most recent 34-consecutive day trounce in dry bulk shipping rates. Short term Capsize and Panamax charters for Pacific delivery have hit $29k and $19k, respectively, both approximately 30% lower than comparable Atlantic delivery rates as the Chinese transit corridor is now massively oversupplied. At this point it is not a question of if but when the bulk of shipping companies, especially levered ones, start going bankrupt and flood the seas with yet more anchored rusting dry bulk hulls.

The deflation threat continues as the drop in total retail sales persists, with the latest number coming in at -0.5%, once again worse than expectations of -0.3%, compared to a prior revised number of -1.1%. Ex autos come in at -0.1%, in line with expectations. The biggest plunge was in "Motor vehicle & parts dealers" which plunged 2.3% in June. From the release: "The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for June, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $360.2 billion, a decrease of 0.5 percent (±0.5%) from the previous month, but 4.8 percent (±0.7%) above June 2009. Total sales for the April through June 2010 period were up 6.8 percent (±0.3%) from the same period a year ago. The April to May 2010 percent change was revised from -1.2 percent (±0.5%) to -1.1 percent (±0.2%)."

The attempt to reflate housing seems to be officially dead. The Mortgage Brokers' Association reported that demand for loans to purchase U.S. homes sunk to a 13-year low last week, and refinancing demand also slid despite near record-low mortgage rates. As Reuters noted, "requests for loans to buy homes dropped 3.1 percent in the week ended July 9, after adjusting for the Independence Day holiday, to the lowest level since December 1996, the industry group said....Rock-bottom borrowing costs are helping borrowers with pristine credit to buy and those who still have equity in their homes to refinance." Also, from the MBA release, "the average contract interest rate for 30-year fixed-rate mortgages increased to 4.69 percent from 4.68 percent, with points increasing to 0.96 from 0.86 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans. The effective rate increased from last week." If even at sub-5% rates potential homeowners are not interested, it will take a whole lot of Intel CPU purchases to reverse the double dip in the economy as consumers refuse to purchase that primary bank balance sheet "asset."

• Asian stocks advance; Samsung climbs on Intel's record revenue.
• Americans in 70% majority see more jobless as deficit widens: Bloomberg Survey.
• Asian stocks advance; Samsung climbs on Intel's record revenue.
• BOJ may hold policy stance on Japan rebound forecast endangered by Europe.
• Fed divided on how aggressively the central bank should act if the economy slows further.
• U.K. consumers became more pessimistic, according to a monthly survey.
• AAR Corp misses by $0.02, reports Q4 EPS of $0.29. Revs rose 0.2% to $372.3M.