Feelin' Blue (as Stocks Go Red)

Well it sure feels pretty ugly doesn’t it. We may only be down 1.7% but it feels like more…and when you look at some of the downside moves we’ve had today (Autos, Miners, TomTom, SAP), you’ve be forgiven for thinking we’d be down more. Earnings were poor today and we’ve also had Bill Gross calling the end of the rally. “Out, out, brief candle” he says, quoting the Bard of Avon.

But that’s not all we’ve had contributing to today’s poor price action. The durables number was ok but had negative revisions to last month's. New home sales were bad too and Goldman guru, Jan Hatzius has also tweaked tomorrow’s GDP forecast from 3% down to 2.7%. Conspiracy theorists would contend Pimco and GS share a bed with the Government; now whether you believe this or not, when they come out with calls, markets tend to move.

With the lurch down in markets over the past few days we’ve seen some of the old correlations start to kick in again, bonds have rallied, the $ has too although not as much as it would have back in the days of Q1. The commodity stocks and currencies have taken a beating (in spite of a higher Aussie CPI, I might add) and oil has moved down too, again though, not like it would’ve in the darker days.

Anecdotally I’m hearing of funds that were looking for new investment ideas only a couple of weeks ago having shelved that plan and are now just gonna take the money and run. When you look at names that were huge beta beneficiaries of the rally, which had no right making the gains they did, like say, Fannie and Freddie, the Irish banks, oh and how about this one, Lehman Bros, they’ve given up about 50% of their gains. Yes, Lehman still trades, I don’t know how or why, but it does, LEHMQ US on bloomberg. Are these names showing us the way down as they did the way up?
This all leaves equities finely perched on the 50 day MAV in the SPX, a level it previously bounced off at the beginning of the month. Whether this level proves supportive or insignificant remains to be seen but market participants do seem to be more worried this time than previously.

Yesterday Never Happened

In case you’re wondering, yesterday never happened. That anxious feeling you felt early in the morning as the market stumbled wearily? ‘Twas a figment of your imagination. And if you thought Ericsson numbers were disappointing, this too has been erased from the annals as GS upgrades the name and we’re back at Wednesday’s levels. This is nothing new, for as we all know, 2008 did not happen either. So the trick is to just buy the dips, or failing that, just buy the peaks…risk is where it’s at. Fact…and if you need some proof of that, look no futher than here. Sure, you may be playing the game of the greater fool, but if it does all head south, we’ll be out by then, right??

Anyway, caution on playing the short side yesterday proved prescient as the market threw another dummy, which this time, not many bought. Selling the news is SO two days ago. I think the Ericsson example gives a great idea of how this market is trading. The focus is on finding the good and overlooking the bad, often with Panglossian abandon. As I write, the market is in the process of clearing Peugeot’s poor figures on Wednesday from its hard drive as the company ups auto market forecasts. It is now…you guessed it, back at Tuesday’s levels!

















To be fair, there was probably more substance behind yesterday’s up move than the previous days’ down moves as we saw some strong corporate numbers being reported. Lifting the stats from DB’s Jim Reid, of the 56 companies in the S&P 500 which reported yday, 46 beat at EPS and of the 54 which had a consensus revenue estimate, 36 beat. But bellweather UPS noted a poor outlook and the jobless numbers were worse. The focus,in any case, was on the beats.

The FX market, at least today anyway, is less forgiving to the negative news and the big miss on UK GDP is seeing GBP on the receiving end of one big, fat tattoo. Within the figures, mining and quarrying was the main culprit for the fall, -3.5% vs -0.6% previously. We could well discover a few days down the line however, that this never actually happened either.

Mid Fall Fall

Markets fell like autumnal leaves late yesterday. Why so? Well Dick Bove downgraded WFC but I can’t believe that was the reason. A contributing factor for sure but Bove doesn’t have the may west record (you may remember a certain Lehman upgrade to buy a few weeks before bankruptcy). He also appeared pretty upbeat on WFC in his CNBC interview yesterday…which is odd. Maybe he didn’t have time to go through the whole report but then he probably shouldn’t be on TV making comments without the full information.

Anyway, what else contributed? Well Walmart warned of a tough holiday season ahead and the Fed’s the Beige Book was released. Although reports of gains in economic activity generally outnumbered falls, the references to improvement were generally qualified and small. Worry for the market too was that reports on consumer spending were mixed with the weakest sector being CRE.

There was big volume in the S&P futures yesterday with ESZ9 trading 600k contracts in the last 45 mins. That’s a quarter of a yesterday’s volume, c1/3 of an average day’s and about $33bn. vs on average...The sell off continued as Ebay lowered Q4 forecasts despite beating at EPS and in Asia as Chinese GDP came in slightly below ests (8.9 vs 9% cons) and the previously “leaked” IP number, while it beat, at 13.9 vs consensus of 13.2, was below the 14.3 whisper.

The dollar broke 75 on the DXY and crude raced away, clearly worrying the market about the continuing oil price ascent putting the brakes on a recovery.

What does seem to be happening in the last few days is a selling of the news. Now this suggests a lack of buying momentum, the question is, how long does this last as we have been here before. But with companies beating (80% have beaten at EPS, we’ve even had some revs beats too), we’d expect to see the markets push on. It hasn’t really been the case, and this isn’t being helped by some of the downgrades to Q4s that we’ve seen, eg Manpower, Ebay. In Europe, we’ve had CS report strong figures today and fall. DBK were strong although poor quality and fell badly yesterday…and again today. With the weaker PPI and housing starts on Tuesday, lower ABC consumer confidence yesterday and China’s strong numbers not quite being strong enough, we’ve seen investors left with the profit taking option looking quite attractive. If you’re going to play momentum on the short side here however, tight stops are a must, unless you’re willing to dismiss the 15 other market headfakes (remember the old “this is it we’re definitely going lower”) and believe this time it really is different.

What a Difference a Week Makes

Well in FX land anyway...equities are sharply unch over the past week. Check out cable though. Monday of last week, GBP was the friendless kid standing in the corner of the playground. The CEBR had published a report saying rates would stay at 0.5% until at least 2011 and cable was flirting with 1.57. Then we had a slightly lighter CPI in the US, some better jobs numbers in the UK, Fed mins which seemed supportive of more rather than less QE, chat in the UK of halting the QE programme and GBP was off to the races. Not even Posen’s comments over the weekend could derail it for longer than a couple of hours. Yesterday, the US PPI came in light and now the BOE mins show that they voted 9-0 to keep the QE programme (fears were some would push for expansion) with the comments sounding if anything, slightly more hawkish. Cue another rally; it's now at 1.655!

It’s not the only one either, CAD was heading for parity, no doubt about it. Then Bank of Canada went and left rates unchanged at 25bps, which to be fair was expected but they added some cautionary comments about the Loonie’s strength compromising its competitiveness…just in case you missed that in Econ101. Anyway the old CAD has fallen about 3% since. I wonder though how long this lasts. These FX trends have been very strong with great momentum, particularly in the resource currency space…and the Kiwi and AUD have been strong this morning and we saw how quickly Cable once again became the cool kid. And this is not just a risk proxy trade anymore, we've seen these currencies hold up well in the (admittedly) brief sell offs we've seen in this, the mother of rallies. A caveat would be that CAD of late hasn’t been as strong the Antipodean currencies, as rate hikes started to become priced into the latter.
The result has been a c7% increase in currency vol over the last week, which in this low vol world, especially in FX, is actually quite a lot and has broken out of its recent range.

The VIX itself continues to make new 12m lows with this month seeing it break below its support level for the previous 3 months…which makes sense of course given equities seem largely incapable of going down and people talk of big sell offs when the market falls 50bps yet 2% up days fail to really register. It even went down yesterday, when the market was down! You'd think at least you'd be able to hedge against volatility with volatility but it seems not!

Rightmove/Wrongmove?

On a slow day, we’ve had quite a bit of interest generated by the opposite calls in monetary policy either side of the Atlantic. The Barron’s cover story calling for rate hikes while over here, Adam Posen is clamouring for more QE in the Sunday Times. Neither really have had much more than a fleeting influence on markets so far today but there’s a bit of chat about it nevertheless.

The more interesting thing I thought was the Rightmove house price survey. Up 2.8% on the month and in London, up a whopping 6.5%, making new all time highs. Yes, that is higher than the Nov 2007 peak. Does that seem wrong to anyone? Now I get that there is a dearth of sellers, and this makes sense to me given the pocket change mortgage payments those on trackers are faced with…but that property is making new all time highs, that just seems plain wrong. Bear in mind, on average, it takes about 6 years for property prices to go from peak to trough through a recession. We’re now two years in, oh and this recession has been worse than your average one. To be fair, the weak pound has made the UK market more attractive to foreign buyers but I wonder what happens when the tracker rates end and people have to go out and remortgage. While the BoE rate may be 50bps, you’re looking at about 2.5% above that for a tracker and about 5% for anything fixed for 5 years. Interestingly enough this survey comes on the day the FSA has unveiled a number of measures to make the mortgage market more sustainable, including self cert mortgages. I for one am going to be adding another property to the "for sale" list and looking to feed the ducks while they are quacking.

As an interesting addendum; leafing through the Rightmove report, I noticed an interesting statistic. Most buyers, shock, horror, expected house prices to keep going up with only 1 in 10 expecting prices to fall. Typically, people don't buy (investment) stuff when they expect it to go down in value, so before hopping on the house price bandwagon, the above stat should probably be taken in context of the sampling bias it surely is tainted with.

Back...

I’ve been a bit lax with the old posting what with the old marriage and honeymoon thing. Also, it's tough to see the wood from the trees when nothing really seems to matter as the market, in its unstoppable mass, continues the grind to infinity and beyond. Anyway, I’m looking forward to getting back into it, having dipped a toe with the admittedly rather empty, Europe in 4 lines piece, something I usually just send to clients as a midday wrap.

In typical fashion, just when everything seems to be going one way, a swift about turn comes and bites you when (and where ) you least expect it. Take the case of the previously friendless GBP for instance, you couldn’t sell it on Wednesday, then the talk of possibly ceasing QE comes up and with the if anything, opposite coming from the Fed minutes, you won’t see too many offers around.

Ditto equities, GS beat by a buck, just the old $5bn in a quarter, Google are better but the march is halted for the time being anyway by the worse figures by BAC. Worrying too, more worrying I think is the GE figures, with revenues coming in light. Given it’s a bellweather for the US economy, the lower top line doesn’t augur well. As every man, his dog and extended family will attest, we need these revenues to start picking up, because costs can't be cut forever.

Industrial production came in ahead with a nice revision too and it served to stall the slide for a while until the Michigan confidence number came in light. It always amazes me how much attention the market pays to these confidence numbers, especially one like Michigan which has such a small sample, but it is what it is I guess.

Something interesting I saw today came from Comstock funds noting the forthcoming downward revisions to BLS numbers. So we all know that seasonally adjusting numbers can massage things a little. Far be it from me to suggest the numbers we see are bent as a fiddlers elbow but well, they are malleable to say the least. In this case, the birth/death model is at fault for overestimating the jobs data. See it is based on the previous 5 years actual business birth/deaths, which clearly in a recessionary period is more weighted to the deaths than births and so flatters to deceive. Not such good news. On the positive side, the revisions won’t take place till next October by which time, the administration, with all their fingers and toes crossed, will be hoping they’ve bought enough time for stats like that not to matter.

Europe in 4 Lines...OK they're paragraphs really

We’re up 2% today as the positive news just keeps on coming. Intel with better figures, kicked things off. Followed by the old Chinese headfake, prep the market for a poor number and then come out and beat it (bank lending in this case). Rumours abound too now about China GDP coming in ahead and JPM figs too.

Everything is blue today, well almost, utils and bevs are small down, a mix of disdain for defensives and the poor figures from DGE. Exane downgraded pernod to boot. Btw, how much did Nomura have to pay CNBC to air their day long ad?

Good figs from Posco last night, RIOs nos were better too, as were ASML. Punch taverns disappoint and cut the divi though.

$ continues to fall with DXY at 75.50, almost the same level as oil! OPEC raises Global demand forecasts by 700k brls per day. GBP has found some long lost friends today as jobs numbers come in better and is making its way back to 1.60. If sustained next resistance is 1.6040 and 1.6100...however hearing of interest to buy dips in eurgbp 0.9290 area which may temper further cable enthusiasm. Another day, another new high for gold, plus ca change.

When Governments Say No More...

What happens then?

Yesterday’s price action was interesting I thought. The market tried and failed to rally. The consensus was that the home sales number took us lower and that’s a pretty convenient explanation. I felt then, and sent out a piece accordingly that the real reason for the sell off was the cutting of the size of the TAF and TSLF. Existing homesales is a volatile number and while it certainly didn’t help the market, I struggle to believe it was the driving force. It could however be just that over the coming months if the Pragmatic Capitalist is right.
Anyway, I was a little surprised not to see anyone really talk about the cuts to the Fed programmes. Jim Reid of DB mentions it this am and so does Macro Man but that’s about it. I guess there is a pretty easy argument that these programmes were far from heavily used so cutting them back shouldn’t make a difference…or that the Fed are winding things up because they think things are looking up, and to be fair there were some statements in the FOMC statement to that effect. However, I think the market is starting to wonder about what happens if/when the massive government intervention is no more. Where to from then? It’s not hard to argue that we are priced at the moment for a sustained recovery and anything short of that will lead to a rude awakening. Nor is it hard to argue that a sustained recovery is unlikely in a bailout free world, given the lack of pick up in the consumer.

As I type the headline durables number is very poor with the largest drop since Jan 09. Ex transport is flat but ex defense is -2.4% with a slow down in orders of non defense aircraft -42.2% vs +98.2% previously.

Sterling continues to get beaten from all angles while DXY is making hay. Predictably bonds are rallying and oil is being hit, as are the resource currencies. This is two days in a row now that risk off has been en vogue.

While it feels very much like this could be it, the end of the bull run or bear market rally or whatever you want to call it, we’ve said that many times before and been stung many times before. Also, bear in mind, we only sold off 1% on SPX yesterday and 1.7% on Estoxx and today’s moves aren’t exactly massive either. We wouldn’t bat an eyelid to those sorts of moves on the upside, so perhaps there’s an element of confirmation bias in our focus as the market moves south? It could be the beginning of the end of the bull (in every sense of the word), but I think it will take a few more down days and lower prices to really get the sellers to pull the trigger as trading downside momentum has been a treacherous business of late.

Any Given Friday c2007

Well it may be a quiet day here in Europe, indices little changed and little intraday movement to boot; but the rumour mill is working overtime, bid spec in Man grp from BarCap, Telefonica for KPN, Eni for Tullow, Chinese stakebuilding in IPR and cap raising in Pru. It’s like the old days, a Friday in 2007! And why not, for as we know, the last two years never happened and everything is perfectly rosey again.

The UK CPI and RPI came in ahead of expectations and the RICS survey even showed an rise in house prices for the first time since May 20007. In spite of this, sterling has seen some selling as Merv says cutting rates the BOE pays on deposits could be a "useful supplement" to monetary policy. And the friendless pound can’t even get some lovin’ from the Euro today as EURGBP rallies in the face of the negative ZEW survey. 1.6455 is the next level in cable where stops will be triggered, I am told by those on FX desks.

Equity markets are not wholly voluminous today, running sub 100% of the 20day MAV, which sounds healthy enough but if you strip out the Italian divi washes that number will be lower. Some of the steels are strong today, up a couple of percent perhaps post the Citi note today and JPM note yday. Tech is outperforming too, up 1%. Mind you, if you constructed a rights issue sector, that would certainly be the leader today, in percentage terms anyway, if not weighting Heidelberger Cement up 10%, Petroplus up 7%, Wienerberger up 4%.

This afternoon’s excitement comes in the form of retail sales which could be a decent number. Certainly the auto side will get a big boost from the cash for clunkers programme but how the clean number comes in will be a different question especially if CFC has seen money channelled in its direction which could have been put into other areas.

Monday Musings

With the markets threatening resistance levels on Friday, President Obama came out and bumped some pretty hefty import tariffs on Chinese tyres. China responded in a tit for tat fashion and have started an investigation into chicken and auto part imports.

A couple of things came to my mind when I read this: ok, so Chinese tyre imports are up and have apparently caused the layoff of 7,000 workers. While it’s bad news for these workers, for sure, 7k is a rounding error (on the Nth decimal place) when it comes to the unemployment figures. Is it worth potentially starting a trade war over 7k jobs? I know you can extrapolate it etc but given the tender state of affairs at the moment, it seems like quite a big risk to take to me. If you recall back at the start of Obama’s presidency there were real worries about protectionism from the administration as trade volumes worldwide plunged. Admittedly the world worried a lot more back then than now but that was an issue which really got people talking. And given many believe China is going to lead the world out of this, it probably isn’t the best idea to enter a game of, erm, well, chicken, with them. And also, of the “disruption” caused to the US domestic tyre market the 3-4 years which is under scrutiny here, how much can be attributed to/blamed on Chinese imports and how much due to the most serious recession since WWII?

Anyway, this, along with more equity issuance in the form of Swedbank, Heidelberger Cement and Wienerberger, has weighed on markets today. Interestingly, or oddly, everywhere is down except China.

As equities give back some ground, DXY rallies, oil sells off and the same goes for the commodity currencies. Bonds continue their oddly positive correlation with equities and have sold off to the 3.36 level. It seems we must wait a bit longer for the back to school effect to kick in an volumes to pick up. They are running c80-90% today although futures are tracking higher ahead of expiry on Friday.