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.

Why the About Turn?

The market was full steam ahead first thing this am but has reversed course somewhat. Why so? I think it’s to do with a few things…

First and foremost, and as we’ve noted for a while, fixed income just really isn’t paying attention to equities and this is holding us back. Coming in this morning and the 10yr yield had fallen back through the 3.50 level. This in spite of equities having had broad gains and the fact there hasn’t exactly been a dearth of govvie supply; $20bn of 10yrs yesterday and $12bn of 30yrs today.

The dollar has started to rally back a bit, particularly against the commodity currencies. We saw poor data from Australia yesterday and overnight, comments from the minutes of RBNZ noted that rates were likely to remain unch and that the strength of the currency was an issue. Both AUD and NZD are falling today as is CAD. So essentially, this looks like a bit of a risk off trade.

Thirdly, Zhu Min from the Bank of China has come out talking of asset bubbles forming. Ok, Wen Jiaboa has also said that the country will not pull away from its stimulus plan. This could easily be construed as a positive, albeit an artificial one but it doesn’t seem to have had much effect today.

On top of all this, we’ve had another raft of secondaries overnight and this morning as the insider buying:selling ratio remains extremely high so perhaps the market is just taking stock of this before deciding whether or not it wants to push on, especially as we’re at levels at which we’ve encountered resistance before.

(Still) All About the Benjamins

After a lacklustre start to the day, equities have managed a useful about turn. This is in spite of c$6bn of stock coming to market last night in the US; a really stinky consumer credit number (-21.6b vs-4b est); Alibaba, CSK and Metro Pac sales in Asia; the GEA and Petroplus deals in Europe and talk of Conti following suit in the not too distant future. There should be no rush to buy this market with all this stock coming our way, right? Well, no, wrong it seems and pain trades are dotted around the market place by the look of it, Commerzbank and Renewable Energy sticking out like sore thumbs.

The $ remains the focus today, ironically it is in everyone’s minds precisely because it is so unloved. And with that, bloombergs abound, notifying us of DXY breaking the 77 level. Anyway, as a result of the dollar’s demise, oil continues up (but not as much as you’d expect), the resources are now positive on the day and the commodity currencies are rallying. Even AUD, which given the poor Australian retail sales, home loans and lending sales released today, wudda, cudda shudda put pressure on the currency as rate hike calls are quelled somewhat.

Yet again however, bonds haven’t sold off a huge amount, flirting with the 3.5% level. Now while I said yesterday I’m sceptical about buying into the reflation trade (given the still rising unemployment and wage deflation etc). Still we don’t just need reflation thoughts for bonds to sell off. With the rally we’ve had, you would ordinarily expect to see more funds directed away from bonds and into equities. This really isn’t happening and shows us that the fixed income massif are not so enamoured with the stock market’s ebullience. So something’s got to give, which it is remains to be seen…I’ve got to believe it’s stocks.

All About the Benjamins

Well the market melt up continues. Between the employment data, the return of M&A (Kradbury to be (?) and the DTE/FTE UK tie up) and China maintaining its monetary and fiscal policies, it’s a feel good day for equities.

Not so for the dollar though, it has taken a serious dirtnap today as, not only is the risk trade back on, but China is talking about looking for alternatives to US bonds due to inflation worries, and the UN are in on the dollar hater play too, calling for a new global currency. It is not; it turns out, all about the Benjamins.

Now with all this going on and with gold trading through $1000, it looks like the reflation trade is back on again in earnest. But if it was, surely bonds would have sold off more, no? They’ve actually been pretty well bid so far today. If inflation’s on its way, rates have got to be going up again soon for sure? And the Fed funds futures will reflect this right? Well, looking at them, and there’s not much change there either, showing a 3.8% chance of a hike to 50bps by the year end… now while this is up from the 1.6% on Friday, its actually down from 5.3% at the start of the month, 26.2% at the start of August and 42% at the start of June, you get the picture (see attached). Anyway, it all makes me sceptical as to the veracity of the reflation trade argument and I’d be wary of the jumping on into the resources names, currencies and commodities as a result.

Ominous Background Music

The market is really starting to feel very heavy. Yet again yesterday we failed to move up on a stronger piece of macro data. The old adage that “bull markets don’t end with bad news, they end with good news” springs to mind as the marginal buyer seems to have packed his bags and headed off on holiday, just as other participants begin to make their way back. In a piece of Shakespearean symbolism, it is a cloudy day outside with rain showers breaking through (cue ominous background music). Of course the market isn’t quite as scripted as Shakespeare (despite best governmental efforts) so we don’t know for sure that bad things lie ahead but it kinda looks like that way.

It’s the low quality stuff which is really got smoked yesterday in the US and that looks set to continue today. The ADP numbers were worse and have taken the sheen off a better productivity figure, not that the latter would necessarily have had any impact given the markets disregard for all things positive of late. We’ve got the defensive names again outperforming in Europe as risk is sold, even NZD is seeing some follow through from yesterday’s move. Asia was far more mixed as China ended up on Jiabao monetary policy comments. Tighter, looser, tighter, looser; the usual palaver. The Kospi, of course is still within spitting distance of its highs because it is immune to the rest of the world and Japan took a tumble on the stronger Yen.

It’s tough to find a reason to buy the market here, especially when you hear comments like this from Lou Jiwei, head of China’s $298bn sovereign fund…

“It will not be too bad this year. Both China and America are addressing bubbles by creating more bubbles and we're just taking advantage of that. So we can't lose,"

And I would think fingers are on the trigger ready to put the shorts on should this downward momentum continue. Certainly some have already discharged some opening salvos as volumes were far better yesterday. Given one of the arguments against the bull market thesis has been the lack of volume, it is perhaps instructive to see Eminis print 3.2m yesterday vs an average of c1.75. And looking at where the volume went through, it was heaviest at the lows…(cue more ominous background music).

September Shakes

I know September is historically the worst month for equities and people have been wary of an Autumnal market fall, but we probably didn’t expect the selling to start right from the off on day 1. Is it just futures selling? Euro and China PMIs were better; the market should be up no? Well, the UK PMI was light and there is a whisper of a below consensus ISM from across the Atlantic, so perhaps these are the culprits. We also had the explanation of a big Estoxx options print with the resulting hedge being 35k futures to sell. But 600k futures have traded so far today and 130k traded in the 9-9.30 period when the markets fell, so I question if this could be the cause, although admittedly I'm not a Estoxx trader. Or maybe, it’s a bit of catch up being played by Europe after the ravages wrought on China during the month of August.

Tempting as it is to see this as the start of the rollover, especially given the market’s inability to push forward post better macro last week; it behooves us to remain cognizant of the fact that volumes will remain light this week, ahead of the Labour day weekend. Only into and after next week can we expect to see market participants donning their trading hats once more and approaching markets with a bit more zeal.

The bid for bonds has been maintained today as investors become ever more wary and in CDS world, XOver has traded through the 600 level again. While the reason(s) behind today’s equity move has been much questioned, it is interesting to note a bit a risk off yesterday afternoon. Equities were not much changed all day but bonds went better and we saw a big sell off in oil, this in spite of a dollar fall. Much of that dollar move has reversed today however as equities stumble. So perhaps this sell off was in the cards from yesterday afternoon. There certainly is a defensive bent to equities today with tobaccos, pharma, food & bev and telcos outperforming and the usual suspects on the cyclical front leading us down. Utils however, are not showing their usual resilience as E.ON drags the sector lower on a GS downgrade.

All that said, we’re only off 1%. Perhaps the song and dance made of this move is a sign of just how nervous the market is. Cue massive market rally no doubt…

TGIF

TGIF, one of the more annoying buzzwords/phrases out there. The CNBC crew have been banging on all day about wanting to hear viewers' opinions on which are the most annoying buzzwords. This surely must be one of the more ironic requests, given their penchant for green shoots, sugar highs and second derivatives. Perhaps they're just running out of ammo and looking for inspiration. Anyway, TGIF is one of my bugbears.

Well, as expected, yesterday’s market stumble proved to be short lived. After spending most of the session in the red, US stocks edged into the blue by the close. China was not so lucky however and posted another down day on worries of lower August lending. Fear not however, a government official has recently assured us that the Chinese market is over reacting and everything will be ok. Phew.

Despite China faltering, one asset which shows no sign of retracement is copper, making a new high today. Now we’ve heard that Chinese stockpiling is coming to an end, and industry overcapacity is being cut, you would think that would affect the copper price. Copper is seen very much as a leading indicator and China has certainly proved not too shabby a soothsayer either in recent years so it’s a bit confusing to see the two at odds with each other. Especially when you look at their performance this year…
You wonder, if it is speculative “loose” investors who are buying this stuff, what will happen when sentiment turns? Although, to be fair you would think a 17% fall in the index would already have tested sentiment’s resolve.

The negative news in the fertilizer sector continues this morning as ABB Grain in Australia cut its forecast on lower fertilizer prices. K+S, Yara and the usual suspects are proving resilient however and are up in this up market.

Currencies are fairly boring as the $ once again takes to it’s well trodden southward path, crude has been bid since last night when the $ move began and bonds are actually being sold today, something which you would ordinarily expect in a strong equity market but which hadn’t really been the case of late. Still, yields are well below previous levels of mid June when the equity market was c10% lower…and with yields at these levels, despite a trio of issuances this week and a better equity market, they certainly seems to be holding stocks back. We’ve had quite a few better data sets this week, today’s PI and PCE no exception as wages rose for the first time since Oct 08 and the savings rate decreased (surely a boon for Inflationistas, no?). We’ve also had strong releases from Tiffany and Intel, yet we’ve struggled all week to push on and aren’t exactly ripping the tape up today either. If bonds do manage to sell off in the coming days, this could well open the way to take equities higher; if not then I think we’ll continue to struggle on the upside.

Hope

Some more “better than expected” data has befallen the market today, and yet again, we have failed to break on through to the other side. Risk assets across the spectrum have gone south since the numbers were released as the bears manage to climb their way out of market’s trap and look to surround the increasingly weary looking bulls.

The news that problem banks rose to 416 in the second quarter came in ahead of the expected 377 and this has served to spook the market somewhat. So for the Nth time, we have a mid afternoon wobble which will no doubt stabilize and rebound straight in the face of anyone who tries to sell it here.

If you think this week was slow, next week promises to be tortoise like. The second quietest week of the year after Christmas week lies ahead for market participants as the UK bank holiday on Monday and the ensuing US Labour day weekend, conspire to make the week only marginally more interesting than watching paint dry.

Still, we live in hope, hope has propelled the market 55% from the lows and if it can do that, then surely it can bring some more activity than usual next week. Hopefully anyway.

Another Day, Another Flatline

Another day treading water as we wait for month end. Volumes are actually pretty reasonable today, trending from 100% down c85% but most across the street report of being quiet. Bonds have rallied again today, this in spite of today’s $39bn 5 year auction and the $ has taken a rare foray north.

Equities just can’t seem to make much progress in any direction however. Not even better mortgage apps, home sales and durables could really push us. Ok, the durables number wasn’t so great and the core came in light, but there was a big revision to last month from 1.1% to 2.5%. On another day, at another time, I’m sure it would’ve taken us higher.

So in the interest of something to talk about, I draw attention to two things. One is an article in the Guardian today informing that Toyota, the world’s largest automaker, is to suspend one of its production lines in Japan (220k vehicles). Now while it only last week announced an increase in its 2009 target by 150k to c6m, Reuters reported yesterday that Toyota are also due to cut global capacity by 1m. This is from 10m to 9m. So whether production is going up by 150k or down by 70k net is pretty paltry in the scheme of things…and demand of 6m, when it was more like 8m last year and you have capacity for 10m gives shows that why things may be stabilising in the economy, it’s far from back to the good times.

Secondly, and from the musings of Mr. Rosenberg, noting that while consumer confidence number in the US yesterday was better than expectations at 54.1. The average index level during recessions is actually 73 and post a 55% rally, you would expect it to be 100. So maybe consumers aren’t confident enough? Or maybe the market is getting ahead of itself. Food for thought on a quiet day.

Draining...

China lurched again today. The Baltic Dry is down c45% from its June peak. Bonds have rallied and are close to their 3 month highs. Yet US and European equity markets are close to their loftiest levels. Go figure! I can rationalize the bond move over recent months. Previously, we would have expected bonds to sell off with the equity rally. However, given the dovishness of Merv and Ben, it makes sense that they haven’t been sold even though equities have been parabolic (buzzword). The lack of attention to China though? Less so. China is up, rally, rally, rally. It’s the growth story. China is down, ah don’t worry about it, it’s not such a big deal, and look, the rest of Asia hung in ok. And anyway, China rallied to the close so no big deal.

It all leads to a confusing old Marché…as demonstrated today. Europe opens down, and then rallies. Bernanke’s going to stay in. That’s a positive, showing faith in the incumbents. Equally, getting rid of him probably would’ve been seen as a positive too, injecting some fresh blood into the hot seat, full of potential for what could be. Remember the Geithner appointment inspired rally back in November last year.

Amidst all the confusion (or perhaps it’s just mine?), some things stand out to me. Among them, the fertilizer names look like they continue to be good shorts and the utilities on the long side in the pursuit of yield. Barrons ran an article yesterday talking of how expensive potash is based on the historical relationship with corn and soyabean prices. In India, you have lack of monsoons leading to lower sugar production and fertilizer demand is down there as a result. According the a release from USDA last week, corn prices are expected to fall next year as supplies hit new highs. It doesn’t take a great leap of faith to believe this will lead to less being planted and hence lower fertilizer demand.

Utilities stand out to me for their yield, in what continues to look like a lower for longer environment as far as rates are concerned, and they should provide a defensive haven in the event of a market fall. Telcos too could be attractive on the yield side and indeed JPM are pushing an out of miners, into telcos trade today.

Whether it’s the market which is draining or simply late summer sloth, who knows, but things aren’t looking much easier to get a proper grip on. Here’s hoping September brings some more direction and volume.

Risk On Redux

Isn't it odd that talk of China tightening capital requirements (again) spooks everywhere except China? But that's what happened today. While we were busy scratching our heads about that one, the German and Eurozone PMIs came out well ahead, and this proved enough to stop the market questioning, and instead just jump on board the rally train. I think there may also have been some reasonable attention paid to a UBS strategy piece today which upped its Euro growth estimates and is upbeat on H2 revenue growth. We have seen a large "risk on" this morning as Europe rallies 2.5% from the lows. Volumes are strong today; c125% and I assume that is due to expiry later today because it's certainly not a result of news flow. The oil price starts with a 73 now and the dollar has taken another fall after recently failing to break out of its downtrend.

UBS has continued to rally like a bank possessed (or maybe exorcised is more apt) as the allocations/demand ratio was paltry. Whether its people scrambling to cover shorts or add to longs I don't know. It never looked a wise option to be short of this one given how well it held up in spite of an extremely well telegraphed placing.

While the market, as mentioned yesterday, has been range bound of late for sure, much to the chagrin of trend followers, I think it's interesting to note individual stories have caught traction and strong themes have developed. It's almost like it was back in the halcyon pre Crunch days. For example, the sugar names have continued to climb on the lack of monsoons in India. Along similar lines, the fertilizers have continued to underperform. We're starting to see the utils gain traction, one which makes sense to me as the central banks continue to be very dovish, Merv in particular of late and the yield plays become attractive, especially if you believe September & October could be tricky months for the markets. UBS is another one, I didn't speak to many yesterday who were going to flip their stock, the vast majority were holding on.

Before we get too carried away with the return of the Prodigal Bull Market, let's sign off with some perspective giving thoughts from David Rosenberg…

WHAT THE MACRO LANDSCAPE LOOKS LIKE AT THE MAGICAL 49% RALLY IN THE S&P 500?Historically, let’s examine what the macro landscape usually looks like at that magical +49% point in the equity market rally:

• Real GDP had expanded on average by 4.5%
• Employment had rebounded an average of 850k
• The ISM had firmed to an average of 56.2 (the lowest print by this juncture was 53.9)
• Corporate profits had recovered 12%
• Bank lending rose an average of 5%

Compared to today, the market is way ahead of itself because as of the latest data points during this 49% rally:

• Real GDP is trying to make a cycle low
• Employment is trying to make a cycle low
• The ISM is off the low but still sub-50 at 48.9
• Corporate profits are still trying to make a cycle low
• Bank lending is still trying to make a cycle low
• The equity market right now is priced for 40% profit growth and 4.0% real GDP growth in the coming year

What Was All the Fuss About?

China rebounds 4.5% and reminds the market that everything is just fine. Denials from CBRC and PBOC that any meeting was called on Tuesday to tighten policy buoyed the markets. HK saw a BNP upgrade and Korea was up a couple of percent on the creation of a bad bank for all the smelly stuff.

Predictably the Spoos followed suit as has Europe and it’s all proved a very good day for the Swiss government to offload their stake. The chat was that hedgies had been actively buying in the last week or so as they were fearful they wouldn’t get enough in the deal and this seems to have panned out with the book multiple times covered in a matter of hours.

Sterling is sharply unch today despite a deficit number coming in way ahead of expectations at 8bn vs estimates of 0.6bn. The better retail sales data however offset the negative borrowing figures and have ensured that GBP didn’t move much.

And so yet again, just as a trend looks as if it’s developing,it quickly reverses and smacks you in the face with a wet fish. It’s becoming slightly tedious and if each time didn’t look like “the one” then perhaps it wouldn’t elicit such a groan of “here we go again.” Trend following is not the way to profit in this range bound market, that’s for sure. It may not cost you too much if you run tight stops but it will cost you pretty much every time, until the trend breaks, which of course, if Mistress Market has anything to do with it, will be the one time you decide not to put the trade on.

(More) Sino Led Sliding

Well the US didn’t do much of note, a 1% cyclical led rallyette on very light volume which the futures reversed once China rolled over 4+%. As mentioned yesterday, it really does look like China is leading the market at the moment. You can point to the credit indices and sure, they did start to widen last week and have continued to do so today, but China started falling first and it is the China moves which are the catalyst for rest.

This all makes things fairly uninteresting in Europe and the US, and this reticence to trade is understandable as you’re effectively placing bets and waiting to see what whim takes China overnight. You may have a long term view, but there's still something unnerving about not being awake for the events that move your names.

Not to be undone by lack of equity action, we’ll find something else to talk about. With this recent move downwards, we started to see the re-emergence of charts showing us where we are in the cycle versus previous bubbles. Check this chart on PragCap, lifted from DShort:
While not predictive, it is instructive, and just as we priced in the worst case back in March, I think we’ve been pricing in the best case during this recent rally. The latter seems very unlikely to materialise given the lack of sound underlyings, such as continued weakness in the consumer, revenues and inflation, and the former, well there’s still plenty of unknowns out there; what happens when all the ARMs reset etc. So we don’t know if the lows will continue to hold that dubious honour although it does seem unlikely anyway that quite the same level of fear will re-enter the market. Anyway, as the market reflects and the number of these charts being passed around increases, it only serves to make investors more cautious.

Speaking of caution, one person who definitely seems cautious in his outlook is the MPC’s Mervyn King. With the release of the minutes today, we were served quite the surprise. Now the decision to extend QE to gbp50bn caught the market off guard, so the news that 3 of the 9 members (Merv included) actually wanted to bump it up to 75bn, was even more of a shock. He’s made it known the UK really can’t support a strong pound at the moment and he’s definitely worried about doing too little rather than too much. Given the news from the release today, I’m a bit surprised not to see GBP a touch weaker. Perhaps it wasn’t such a shock to some or perhaps we'll just have to wait and see what China made of it?

Missing: Market Mojo

A flaccid performance in the US has fed through to a fairly uninspiring day today in Europe. Although, it looks to me like it is Asia, and in particular China that is calling the tune at the moment. And a 1.5% bounce out East today, having been down a percent at one point has not been enough to provide Europe with much impetus. This, in spite of the ZEW providing a good excuse for a rally. The US really did very little yesterday, flatlining the whole session with the cyclicals down between 3-4% and the defensives between flat and -1%.

The Senior Loan Officer survey was largely ignored. Although it could have been perceived as positive in that the net percentage of banks tightening credit declined versus that of April, the demand for loans deteriorated across all major categories except prime residential mortgages. On a different day, that would have been fuel for a rally, especially that last part, but the market was in little mood for assuming risk yesterday. And looking at the outlook, the banks expect to maintain strict criteria on lending until at least H2 2010. For full details of the report, see here.

So equities aren’t doing much. Volumes are c65% say UBS. Others I’ve asked have described them as LOW (the capitals are key here). If stocks aren’t moving, is anything else? Well oil has rallied back 3% or so as the $ has weakened somewhat. Commodities and all things commodity related are better in general today. And GBP has rallied on the back of the CPI number. Although still below the BoE’s target rate of 2%, 1.8% was flat MoM and well ahead of expectations of a fall back to the 1.5% level. The main cause for the rise came from recreation and culture. Essentially it was toys, computer games and DVDs which held up the number as summer sale discounts were not as deep as expected. This is all interesting and especially so in light of Mervyn King’s comments last week in the inflation report which certainly suggested rates would be lower for longer as he saw the inflation risks to the downside.

We’ve got PPI data, Housing Starts and Building Permits from the US a bit later. Failing excitement in that, it looks like we may have to wait for more Chinese leadership for this market to rediscover its mojo, one way or the other.

Cruel Mistress Market

It seems to be that Mistress Market, in her infinite wisdom conspires to lose as many people as possible, as much money as possible…before ultimately turning around and saying “you know what? You were right, if only you’d held on…”

A case in point is Volkswagen, now the spread has been creeping in since the mid 90s wides of late October. Everyman and his dog had the trade on, and it was so compelling, but when, last Friday, VOW was down 15% (27% at one point) and the Prefs were only down 6%. Was anyone left in the trade to benefit? I doubt it. Perhaps there is a moral victory and a healthy dose of schadenfreude in the form of Porsche’s marked turn of fortunes but any such victory is surely hollow and has ultimately proved pyrrhic to many.
With this in mind, is there anyone left on the short side to benefit from this risk off we’ve seen? We noted the pick up in wariness across risk indicators over the last couple of weeks and in particular the fall in China (now down 17% in 2 weeks) and the Baltic Dry and at last this has followed through to developed markets. The VIX is up 15% today, we’re running out of earnings beats and cost cuts to keep us buoyed and there is a bearish element lurking in the market. Even Matt Nesto on CNBC declared “It would take a cure for cancer to get this market up today.” Abbey Joseph Cohen has called the end of the recession, the manufacturing report came in better (although it’s only c100 manufacturers in NY State) and neither could move the Marché.

Now we’ve been here before, remember mid July? But maybe this time is different. I don’t know. It would make sense to me that a multiple expansion based rally without sound underlying economics comes back to earth. It’s not that I’m a perma-bear I just don’t think you can extrapolate a couple of quarters of earnings beats into a rosy future, especially when the beats aren’t coming organically and the estimates have been hacked down so low to be knee high to a grasshopper. I’m more of the new normal, slower for longer frame of thought and in that regard, I can more easily rationalise the move downwards. So is this time different? Who knows but given the moves from our leading indicator, China, it gives me more conviction that this down move could be more prolonged. China did not move like this during the July headfake. However, Mistress Market is unyielding (no means yes to her) so this could all turn around in the blink of a macro number. How would I play it? MacroMan recommends puts and I’d have to agree, ok the VIX has rallied hard but it’s off a low base and you know your downside. And for sure, if you’re wrong, it will be far less painful that 40 lashes from Mistress Market for being short, especially if naked.

Catching Up and Looking Forward

As the week draws to an end, indices are not much moved from their starting levels. We’ve had the excitement of a potential sell off post China weakness and others risk indicators looking shaky. As has so often been the case during this rally, any sell off is fleeting and so it was again. The Fed’s somewhat sanguine outlook, Paulson’s bank purchases and better Euro GDP figures all combined to send the bears fleeing (to LA it seems) and produce an impressive rally.

Lest anyone get complacent however, yesterday’s jobless claims and retail sales threw a spanner in the works and despite the rest of Asia being in the blue, China was heavily in the red overnght. Rumours have abounded recently in China; between reining in lending and insurance companies selling equities in the face of redemptions. Few markets are as prone to big moves on rumours/press articles etc as China and recent weeks’ moves have showed just that. Given the leading indicator nature of the Chinese market, if this continues, is it only a matter of time before Western markets follow suit?

A couple of weeks ago Pimco’s El-Arian coined the phrase “sugar high” in relation to the equity market. In a piece of writing so contrived as to be worthy of the Daily Sport at best, I’m going to link this in to the fact that the sugar market itself has recently seen a new high. This has been garnering much interest of late amidst talk of lower Indian cane output as a result of not enough rain. Meanwhile, across the globe in Brazil, too much rainfall is disrupting things out there. UBS placed c$500m of the erstwhile little known Tongaat Hulett the other day and that was well received. Meanwhile US food producers have been calling for an increase in the amount of tariff free sugar they can import. The WSJ ran the story yesterday. Looking at the chart for sugar and you think, I’ve missed this one for sure…

but then if you had a dollar for everytime you thought something couldn’t go up or down anymore in the last couple of years…and it did just that, you’d probably be on a beach somewhere, sipping margaritas and putting extra cubes of really expensive sugar in your tea…just because you can.

Away from all that, we got some good news from NZ where Q2 retail sales rose for the first time since Q4 2007 and the house price index rose in annual terms for the first time since March 08. The RBA Governor Stevens continued to fan the fire of a rate hike being the next move but would not be drawn to comment on a timeframe. As to be expected both currencies are better today.

The excitement later this afternoon comes in the form of the CPI which is expected to show further deflationary pressures, the Cap utilization rate and Industrial production numbers. The latter of which is expected to be positive for the first time since Oct 08. We could probably do with a bit of excitement too as volumes are light today at 75%. Until 13.30 anyway, and very possibly after, it feels like we'll be drifting sideways.

Storm A-Brewing?

If you came in this morning and felt like you hadn’t missed much. That is the case, well in price action terms anyway. So far this week, the market has traded in a 1% range with the vast majority of the time being spent flatlining around the 1005 level. Volumes are tracking c60% of average and in general, equities are not where the excitement is at this week…so far anyway. This surprises me a little. While earnings may not be quite so plentiful as the last two weeks, there is hardly a dearth (although the big names haven’t been reporting to be fair). This aside however, there’s plenty of other news out there: Chinese CPI, industrial production and new bank lending all came in light. PPI was slightly better than expectations but down on last month, ditto the trade data (despite stimulus). In Japan, we had the monetary policy statement and an earthquake while Taiwan is suffering from a Typhoon. So all this happened yet Asia couldn’t muster much excitement at all.

And what about Europe? Well, we had a better RICS survey, the best since April 2007. The property names are taking a dirtnap however. The German wholesale price index exhibited further deflationary trends although the CPI came in slightly better but still at -0.5. Lithuania was placed on negative creditwatch by S&P following on from the downgrade of Estonia and Latvia yesterday. So lots of news but not much movement yet in the market.

That said, things are starting to lurch downward as I type…so I better hurry! The BDIY prints down another 2% and is now down 9 days in a row. Govvies have had a bid today with the 10yr now back at pre NFP levels and this is in spite of $37bn of 3 years coming today and $23bn of 10yrs and $15bn of 30yrs later in the week. Is this a flight to quality in aniticipation of a market correction? The VIX has been trading up too and risk currencies are finally moving down. All these things have been making these moves during the day and my point was going to be that this could well precipitate a sell off in equities. The market’s beaten me too it however, which is a bit frustrating. Who knows if this continues today and if it does, for how long, but the risk indicators are looking a bit more wary.

Dazed and Confused

Well it’s a quiet old Monday today. Volumes sub 60% of average and paltry number of companies reporting in Europe; I counted 3 but only actually saw figures come out from one, Gagfah. If you care about Gagfah figures, a) they were worse and b) you’re in the minority. Perhaps some investors are observing a day’s trading inactivity to mark the 2nd anniversary of BNP suspending 3 funds due to subprime exposure. Or perhaps not.

In any case, there’s a slightly muddled feeling to the market today as we emerge from last week’s earnings induced stupor, the euphoria of the jobless figure settles down and the market looks beyond its glossy veneer. For sure, the number was better, but it was flattered by seasonally adjusting for the auto industry which is redundant this year, and also a bump from the federal census workers. Together this added about 100k to the jobs number which puts the “real” number at about -350k, which is still worse than the nadir of the 01/02 recession when the low print came in at -325k. And while the unemployment rate came in lower on Friday, that’s because the participation rate fell.

In Asia, while HK and Japan were up, the Shanghai composite fell for the 4th session and the Baltic Dry, was down 17% last week, its worse fall since October. On top of that, some of the old favourite correlations have not gone to plan over the last couple of days. The market rallied and the $ rallied. Even if you forget about what the equity market did, the $ rallied!! It’s feels like a long time since we’ve seen that. I can see the rational but it’s not what we’re used to. Commodities are down and yet AUD and NZD are still up. Do these things ever go down? So perhaps, putting all this seemingly conflicting price action together it’s no surprise that markets are a little dazed and confused today. I know I am.

When Inspiration for a Title Deserts Me...

...I have to do something like this.

Another week draws to a close. More earnings beats and of late some macro misses. It’s all been leading up to 13.30 today when the Non Farms are released. The ADP, while it came in slightly worse on Wednesday, did show a marked improvement on the previous month. As a result, we’ve seen economists revise their forecasts down for the number of job losses today and I’ve heard whisper numbers around the -250k level.

Ahead of this, things are relatively muted in the market place. Volumes are tracking at c85% and yet again the cricket is providing most of the excitement. Sterling continues to struggle post yesterdays QE extension and today’s mixed PPI has done little to aid it.

The market began to move sharply lower yesterday afternoon although I’m not really sure what catalyzed that. There was the speculation that Whitney was recommending taking profits in the banks but the market had started moving before this. Also, if she was going to make a call like that, surely she would be afforded the time on CNBC et al to put forth her views…just as she was when calling the buy on GS. Right?? The sell off stabilised somewhat although Asia in general was weaker and this has followed on to Europe today. Asia was in general weaker, China down for the third day in a row. Korea however steadfastly refuses to go down. To be fair the data have been better of late, GDP printing higher at 2.3% a couple of weeks ago, business surveys ticking up, exports better than expected and industrial production far better. Still, the Kospi 200 is up 17 in the last 19 sessions! And the two down days have been to the tune of 15 and 45bps. Now that is parabolic! Or in normal speak, geez that’s a big move!

Another asset exhibiting outstanding resilience is the NZD. The resources are selling off today but the Kiwi is maintaining its recent flight (for recent, read 5 months, which is pretty impressive for a supposedly flightless bird). The Aussie is off despite RBA comments about potentially raising rates and CAD was falling this morn and has lurched further post a very poor unemployment number, -44.5k vs expectations of -15k. The Kiwi however remains firm and is up about 40bps. Ok it’s a consensus short, but for a reason! And with the Land of the Long White Cloud’s unemployment situation not getting any better, clocking in at 6% earlier in the week vs estimates of 5.7%, one wonders if or when, the Kiwi and it’s 35% appreciation, comes back to earth.

The market has had quite a few moves to the downside to deal with this week. Certainly it has proved pretty resilient, with stubbornness akin to that of the Black Night . Just when you think it’s about to roll over, “I’m not quite dead yet” it bleats and up we go again. Today looks more interesting on this front with the market taking a dose of reality from RBS and Hester’s less than sanguine comments and of course the imminent main event, the NFPs. While the market seems to be prepared for a good number, I’m not sure it’s fully priced for it and if we do come in with a -250k, it would be hard to see us going any other direction than upward. That said, in line to low and I would think we fade so it’s going to have to be a big beat to move us up. We’ll find out inside the hour. Eager trigger fingers await.

Punxsutawney Phil

Just when it looked like Punxsutawney Phil was about to forecast another day in the blue for equity markets, out comes the ISM. In quite a turn up for the books, a bad number has not been spun into a good one by the market. Well not yet anyway. Only a handful of hours after being published, the Hitchhiker’s Guide to the Market may be consigned to the dustbin of history. But let’s hold off for the time being on such rash statements, we’ve been here before only to witness a miraculous 180 turn.

Looking at the ISM and it wasn’t good. With the exception of supplier deliveries and inventory change, everything was down on the June number. And weren't we hoping for inventory drawdowns to kickstart GDP growth in H2? In particular, the prices paid took a particular fall, coming in at 41.3 vs 53.7 previously. Perhaps exhibiting prescience ahead of the NFPs on Friday, the employment component fell too. All of this has conspired to send the erstwhile parabolic (new buzzword du jour) market lower and asks the question of whether all this has been one big sugar high (another new buzzword. Still, at least green shoots seems to have disappeared from the market vernacular).

Speaking of parabolic trajectories, I saw a chart yesterday showing how the S&P was testing the recent uptrend range. It was about 8 points off its highs at the time! It seems crazy but it does show how quickly we have risen over the last few weeks.
We have now broken that line for whatever that is worth.

For the Risk Off we’ve seen in equities since the ISM, it has only really followed through in bonds. Ok oil is off but there was a big build in crude. DXY, while up is far from rallying hard and commodity currencies have only given a little back of their recent gains. China is going to maintain moderately loose monetary policy the PBOC reaffirmed again today, just in case you didn’t catch it last week and there is talk of Australia being the first to look at raising rates. Nothing new but it seems to be stemming a puke in the resource sector.

We’ll have to wait and see if this is another market headfake or is Groundhogday finally coming to an end? If the latter, wintry days in the market lie ahead.

The Hitchhiker's Guide to the Market

In keeping with Monday’s “Risk On, Risk Off” piece (still only risk on), I found this guide, which may help navigate these tricky markets. It comes from the most cynical of the Cynics, Zerohedge and makes for funny if slightly (but only slightly) facetious reading…

The New Wall Street Reality
· GM chapter 11 = PRICED IN
· 125K+ jobs lost from GM chapter 11 = PRICED IN
· unemployment @ 9% = BETTER THAN EXPECTED
· unemployment @ 10% = DOW SOARS
· unemployment @ 11% = GREEN SHOOT RALLY
· unemployment @ 12% = ALREADY FACTORED IN
· unemployment = 35% = DOW DROPS 100 POINTS
· housing price =1% = RECESSION ENDING
· housing collapses = GREEN SHOOT
· Housing falls 20% = STABILIZATION
· Government spends 1 trillion of OUR dollars = STIMULUS
· North Korea fires nuke = RALLY
· Israel bombs Iran = 30 MINUTE END OF DAY RALLY
· world explodes = ASIA RALLIES
· PMI crashes = HUGE RALLY
· No jobs are created = RECESSION ALMOST OVER
· U.S. debt overwhelming = TOO BUSY RALLYING TO CARE
· Consumer stops spending = RETAIL RALLY
· Banks are insolvent = SIGNS OF STABILIZATION
· American auto industry BK = GOOD THING
· Banks pass scam stress tests = HUUUUUUUUGE RALLY
· Banks "only need 75 billion = OUT OF THE WOODS
· Banks pass a real stress test = NEVER WOULD HAPPEN
· Banks pay back tarp = LATE DAY SURGE
· Banks can't pay back TARP = EARLY MORNING SURGE
· 12% mortgage delinquency = GOOD FOR STOCKS
· Hundreds of thousands of mortgages underwater = HOUSING BOTTOMED
· Dollar rises = RALLY
· Dollar crashes = RALLY
· Inflation = BULL MARKET
· Deflation = BULL MARKET CONTINUES
· REFLATION = MASSIVE SHORT COVERING RALLY
· Gold rises = STOCKS RALLY
· Gold falls STOCKS RALLY BIG
· Banks' fake earnings = SIGNS OF STABILIZATION
· CRE stabilizing= 1000 POINT RALLY
· CRE CRASHING = STOCKS SHAKE IT OFF TO RALLY
· CONSUMER INSOVENT = CONSUMER IS SPENDING
· OIL @ 50 = BULL RALLY
· OIL @ 60 = GREEN SHOOT
· OIL @ 100 = IMPORTANT RECOVERY SIGN
· OIL @ 20 = TAX BREAK

And the one we should all interpret correctly:
· NO ONE IS BUYING STOCKS = BILLIONS ON THE SIDELINES

Risk On, Risk Off

If Mr Miyagi, in his self appointed role as pedagogue, moved on from karate and instead guided Daniel Son through the wiles of investing, Risk on, Risk off would surely be a lesson it would behoove the young Larusso to absorb. Ordinarily anyway. In this market, however, he could ace the exam falling asleep half way through. It’s all about Risk On these days, Risk Off leads only to exasperation, disbelief and a P&L hit.

And in that vein, markets bounded from their starting blocks this morning. Ok, there was an initial false start with an opening dip but on the second offing, they did not hold back. Asia was higher on the back of the stronger Chinese PMI and The Sage of Stern, Nouriel Roubini, added his two pence and predicted we will see further rises in commodity prices as the recession abates. All this has seen the resource currencies hit multi month (in the teens) highs. And remember crude, that thing which was heading back to $55 a few weeks ago and to $60 just last Thursday? Well it’s over $70 now. And resource stocks? Just buy them, they keep going up.

Barclays numbers came in light of expectations but Bob Diamond, in the way only he can, assured investors that the underlying business is strong. Listening to him on CNBC, it went something like this…well credit books are always going to fluctuate quite a lot and ours has too and we expect it to continue to do so but if you strip that out, things really are very strong. Anyone remember that (bad) joke from Econ101 about 3 men stranded on a desert island with only tinned food to eat? Alas they have no tin opener. “Never fear…” says one of the men, an economist by trade, “I have the answer. It is easy. Now, assuming a tin opener…”

HSBC numbers were stronger however and markets have liked that. No doubt this will buoy Asian markets too when they open up.

We had some very poor German retail sales numbers, -1.8 MoM vs +0.5% expected and a worse revision too. The YoY numbers were equally ugly. The UK on the other hand has clocked in with a better than expected PMI manufacturing number…50.8 vs 47.8 expected. 50.8! That is above 50, and hence…expansionary. Ok not much, but still, it’s the first time we’ve seen an expansionary number in these data since April 2008. As a result, Cable is rallying hard, hitting levels last seen in Oct 08. EURGBP is being hit too, as the weakness of the German data and strength of the UK double team the cross and with the exception of the mid June fall, we haven’t seen this level since early December 08.

So there certainly has been a flurry of info, activity and price action this morning. Risk On, is on again it seems (having taken a momentary lapse into the US close on Friday). Who knows how long it lasts but who dares stand in its way?

Howzat for a Month!

The afternoon session has been far more eventful today than the morning one. When a cricket match is faster paced than the market, you know things are slow, but that is what we had for the first few hours today. Now that sort of stuff just isn’t becoming of a market which is up c8.5% this month and c17% from the Mon 13th lows! Volumes themselves were pretty healthy mind you, tracking around 100% of the 20 day average but interest levels were not as the focus was always going to be on the afternoon’s GDP number.

And this wasn’t an ordinary GDP number either, as it was going to include a benchmark revision of the national income and product accounts. So basically, they were changing some of the definitions and methods etc. As was expected, these led to revisions down in previous numbers. The savings rate advanced and in general, it complicated the market’s reading of a headline good print on the Q2 number. Inventories printed -$140bn and should provide scope for the H2 growth pickup as the pace of inventory decline lessens and then restocking occurs.

Deflation though seems to be the theme of the data with Eurozone CPI coming in lower, as did the US GDP price index, core PCE and personal consumption with savings increasing. All this has led to the $ selling off in spite of equities having a mini waver. Bonds have caught a bid too on the back of this with the short end in particular rallying hard.
It’s left everything feeling a bit muddled and correlations breaking down and after what’s been an impressive and exhausting month for markets and participants respectively, it wouldn’t surprise me if people want to prolong making their decisions until after the weekend, instead maybe just engaging in a bit of book tidying this afternoon.

Next week sees another glut of earnings and promises to be no less punishing on the info intake front…and if yesterday’s little stat is anything to go by, we could see the end of the rally. Or if you want something with a bit more track record, Bob Janjuah of RBS has a cautionary piece out, reiterating that the next month or so will be where the wheels could fall off. He’s called things well, to say the least. Now that would really shake things up a bit. In the meantime, back to the cricket…

Ps for anyone in the US, England are playing Australia in cricket today (and until the end of time, it seems)

Can Lightning Strike Twice?

The market continues to grind higher, and why not? The Beige Book talked of a slowing pace of decline being reported by most of the 12 regional Feds, although there were no real nuggets to get too excited about. Nevertheless, that set the tone and then China came out and reassured the market of its monetary looseness. Odd that world markets don’t care when China goes down, but when it goes up, they take a fillip from it. Earnings on balance have been better today, German unemployment came in ahead, UK house prices are up 3 months in a row and the US jobless number was at least benign relative to expectations.

It’s the commodity complex that is leading the way with oil back up towards the 65 level and the resource stocks up the best part of 6%. The reaction from the resource currencies is more muted however. The Aussie and Loonie are a bit firmer but the Kiwi is suffering on the back of commentary from RBNZ Governor. Rates were unchanged as expected but he did say that “forecast recovery is based on further easing in financial conditions.” The money supply also came in considerably less than the previous month at 2.7% vs 5.6%.

So 1000 on the S&P looks like a sure thing right? I wouldn’t bet against it. Before it is cast in stone however, I did hear a little pearler of a stat earlier on. Now I haven’t verified it but it came from my better half, so it must be true or at a minimum, it certainly isn’t worth my while or welfare to cast doubt...so this is it: the 1929-1930 equity rally lasted 147 days and was 46% trough to peak. The rally off the March 6th low this year has been…wait for it…145 days and is 46% trough to peak. Freaky eh? So are the final days of this rally upon us? Unlikely? Probably, although contrary to popular belief, lightning does often strike twice...

Caveat Emptor...Not

Just buy it. Close your eyes and buy it. Not an investment strategy that would hold up under much scrutiny admittedly, but then when you’re bringing in the $$$$$$$$, no one asks questions. The Bears and Sino-sceptics were surely getting very excited as China took a dirtnap on talk of CCB and ICBC lassoing the rampant bull that is lending and reining it in. Admonishing utterances of “I told you so” and “I knew it,” were fleeting however as the rest of the world paid attention for all of about 5 minutes before the market realised it had been sliding for far too long (1 day) and decided to about turn.

To be fair, we’ve had some better figures today in the form of Bayer, Peugeot, Nissan, Santander, Assa Abloy and now Daimler. There’s talk Natixis may have better numbers too, and also that they may have some side fund to place their toxic assets, which will of course, solve everything for them. We did also see UK mortgage approvals up although the deflationistas claimed another notch as M4 fell in June and German CPI came in lower. Nevertheless, the China move should have been big news to the market, right?? The China story has been the wind (gale force in nature) beneath the wings of the market, and within that the pickup in domestic lending has played a crucial role (even if most is going to government sponsored projects). So when this thesis is questioned, surely markets should have reacted more punishingly? I refer you to Line 1 above.

One group that still isn’t buying is that of company insiders. PragCap today highlights that recent weeks have seen just $26m of insider buying, and actually, given one buyer accounted for $16.5m, the clean number is a paltry $9.5m. The sell side tells another story however, with $300m on sales. That’s one serious buy: sell ratio on a “clean” basis…and given that how anything that can be stripped out, is stripped out these days, that’s probably an appropriate way to look at things.

But then all that’s been going on for a long time now and the market keeps going up, and I hear instos are buying today…and on decent volume. There’s a big wall of money to come remember, so just buy it, close your eyes and buy it…

Caveat Vendor

The market has been heading lower most of today. Perhaps after so many up days in a row, there was just a touch too much negative news today for even this grinding Bull to sustain. Questions over the quality of DBK earnings, the Ubisoft warning, profit taking in BP, negative chat about BG’s Corcovado well being dry (subsequently denied by the co.), light numbers from US Steel and further ruminations surrounding a Latvian devaluation have conspired to push us lower.

On top of that, we’re teetering on the edge the two week uptrend in the market breaking down (although remember the recent head and shoulders that wasn’t)

and, although only anecdotal, from those I’ve spoken to on the sell side, their flow has been net for sale. While this is not hugely interesting, what is interesting is that their order flow has been heavily skewed towards institutions as opposed to hedgies. The long guys have been taking profits on some of their winners. Who knows how long this lasts and we’ve certainly seen the market snap back pretty sharpish from what looks to be the start of a sell off. Still, it all feels a bit soggy, so much so that the “good news” that house prices had only fallen 17.06% YoY (instead of the expected 17.90), has failed to buoy us.

Meanwhile the Aussie and Kiwi have continued their recent rally with both hitting 09 highs thanks to comments from RBA Gov Stevens about Australia’s relative health, sparked speculation of a rate hike. They’ve given back a bit however as the risk off trade takes a tentative, Mr. Burns like grip on the market this afternoon. Speaking of risk off, it certainly is the defensive names which are performing today; pharma, telco, utils and the food & bevs in the blue. Even DXY is up today, so far anyway.

In spite of all this, I’ve still got to think there is a decent call of caveat vendor. There’s been a lot of negative news today yet we’re still essentially flat. I can’t help thinking if a similar amount of positive news came out, we’d be a lot higher. Heck, we’ve had a couple of weeks of pretty average underlying earnings manipulated to beat undercooked analyst expectations and that’s been treated as positive. And we’ve got consumer confidence coming up now, all important in telling us where the stock market was at the time of the survey, so I can’t imagine it’ll be a negative number.

The Lesser Spotted…

Just when you thought negative bank earnings had gone the way of the Dodo (for this quarter anyway), they have arisen like a Phoenix from the ashes, courtesy of Morgan Stanley. On top of this, and confounding cynics and conspiracy theorists alike, MS have published a “Sell the Rally” strategy piece. The Chinese wall seems to be working well at 1585 Broadway.

Another resurrection, Phoenix like in form, comes in the shape of some 2007 CMBS. Last week, S&P had downgraded the rating on these bonds from AAA to BBB-, the bottom of the IG heap. Yesterday however, they backtracked on that and decided they actually are worthy of AAA status, for whatever that is worth, which probably isn’t much these days.

Volumes have been reasonably healthy today, at around 80% but the market is feeling a bit deflated. This, despite China hitting new 13 month highs and Japan, well, 2 week highs. The MS and WFC figures are overshadowing these events and indeed, the beats and guidance increases coming from the likes of Altria, Pfizer, Lilly and Boeing. Perhaps last week’s Chinese retail investor stock account opening spree has also served to caution institutional investors or maybe it’s just some profit taking.

In any event, and on the topic of things lesser spotted, it looks like we may see, shock, horror, a down day?!

Lucky No. 7

All eyes today will be on Bernanke although how much we will get remains to be seen. His WSJ piece has given a pretty clear outline of tools available, and that it will, in all probability, be a long time before they actually have to wheel them out. It wouldn’t surprise me if the lion’s share of the detail has already been released. It looks fairly benign and if we get anything tangible extra, maybe it will be from the Q&A.

The earnings beats continue and even those that don’t beat, well strip out a few exceptionals and hey presto, they’re actually better and they go up. NB better than expected doesn’t equal good but that’s another matter.

The Solars are having a very strong day today. No matter the recent Q-Cells warning, China is throwing some cash at solar projects. According to a Reuters article, they’re going to finance 50% of the cost of projects which connect to the grid and 70% of independent projects in remote and powerless regions. Interesting to note for all the talk about Chinese information being leaked and manipulated, (and I’ve certainly been sceptical in the past), this little nugget seemed to stay well under wraps as the biggest local solar player, Shenzhen TopraySolar traded down 4.8%. Just as an fyi, it is trading on 65x 2010 ests at the moment (130x 09 actual acc to bberg).

Volumes are healthy at around 90% of the 20 day average and the market feels strong, although interestingly, other risk assets are not rallying with equities and bonds have only been modestly sold. Nevertheless, who would bet against a 7th straight day of gains for the Eurostoxx? Only Bernanke can stop us now surely and given the recent market performance and the tri -mandate of the fed; price stability, full employment and making the equity market go up (the latter is the most important), I can’t imagine him saying anything that will jeopardise that.