(Last) May Day

It’s been a long old month...think of all the things the market has had to deal with in May:

-Swine Flu (was that really only a month ago?)
-Delays to Stress Test results
-The leak of Stress Test results
-Most companies under the Sun reporting...and beating (at net level anyway)
-And only slightly fewer placing stock
-The rejoicing reaction of the market to the fact BAC only had to raise $34bn
-Worries that things aren’t hunky dory just quite yet
-Chicago PMI has just come out, QED
-Correlation breakdown as $ stays unloved even on equity down days
-The inflation/deflation argument rages
- Which despite the data showing no real inflationary pressures, has led (arguably) to the big bond sell off we’ve seen.
-UK is put on negative watch by S&P
-Worries USA will be downgraded
-North Korean warmongering

So in short there’s been plenty to think about, be confused, confounded and indeed convinced by. However for all of that, equities have done, well not very much. Stoxx 600 and S&P are up c3%. Volatility has continued to fall with the VIX at 31 and volumes have been far from what any self respecting commission based broker could be happy with. Bigger moves and bigger questions asked in FX and Bonds. Is this the start of a new world order between the assets classes? Certainly the price action looks that way again today with the $ taking another beating. It will take time to pan out for sure but as long as the fear and volatility is absent in equities, it looks likely to continue. What happens if equities take another bigtime dirtnap? I dunno...with all the questions being raised about the US in the recent month, it will be hard to get back into the mode of buying US assets being a safe haven trade.

Mid Missive Market 180...Again

Loads of things have happened in the last two days. In the bond market, Treasuries and in particular MBS took a beating worthy of a red-headed stepchild. The longer dated really bearing the brunt with 2-10s breaking previous record wides and the idea of cheap refinances having serious dispersions cast upon it. Higher mortgage rates to stop the recovery before it’s even got started? Bonds have rallied somewhat in the last 30 mins or so and with that we’ve seen equities actually do something today, rally, because up until then, there was little sign of movement in either direction. I was surprised (no surprise there) to see the market in such relative rude health today given the bond moves, and other negative pieces of news. Let’s run through some of them:

-Jamie Dimon says credit card write offs at WaMu could hit 24% by year end. 24%!! This is huge, to put into context, AMEX and COF etc have had charge offs in the region of 8.5-9.5% with this escalating to the mid teens by year end.

-Visteon goes bust.

-Procter & Gamble in WSJ about a possible imminent and now recent, negative announcement and price cuts.

As an aside, I think this is really interesting…some banks have been lobbying the FDIC to let them participate in the PPIP and buy troubled assets using public money. So buying their own rubbish?? Well not quite, Sheila Bair was questioned on this in a press conference and while she did say banks could not bid on their own assets, the idea of bidding on other banks assets is being looked at. Now, I know we’re no longer allowed to call OPEC a cartel, but here’s a great opportunity for one. BAC overpays for Citi's assets and Citi in turn overpays for BAC’s assets. Genius.

Macro data been a bit better today, certainly at the headline level. Durables was blowout but not surprisingly…there was a downward revision to last month, and a pretty serious one at that. The main beat this month came from Transport (+5.4%) and the core number was a beat but not such a great one.

Equities really very range bound at the moment with paltry volumes, running around 70% today. You’ve got to think if this bond move continues, equities will have to wake up and follow suit. Whether the bond move continues remains to be seen…as does the read through for the equity market. I saw this somewhere today and thought it was great. Don’t be surprised to see this headline in a newspaper near you…"Asteroid hits earth, S&P up 25”

ps. Home sales data hadn't come out when writing this. It was nicht so good. It did at least inspire the title. I was struggling for one today.

Hello? Is there Anybody Out There?

Hello? Is there Anybody Out There?

Volumes are way light this am. They started off ok, so the street was saying anyway, although it didn’t feel like it. Since then however, everyone I speak to tells me they are dead. There’s been much made of the light volumes behind this rally; how that’s indicative of a bear market rally. I came across and interesting chart on the Pragmatic Capitalist which provides a bit more food for thought, noting a common bear market rally trait is that of declining volume as the rally exhausts.

I alluded yesterday to my surprise that the market had such an aggressive move on the back of a confidence number. The beat came from the Expectations Index (72.3 vs 51 previous) which given the stock market rally has continued through May, probably had quite a lot to do with it. Present situation Index had far more moderate gains (28.9 vs 25.5 previous). Anyway, I’m pretty sure if asset prices hadn’t continued their rise this month, the beat would have been far less, if anything. Bottom line, it’s a fickle indicator.

The Greenback’s attempt at a rally yesterday was short lived and concerns continue that this trend isn’t something that’s going to go away anytime soon. In light of this, I thought this work from the much listened to David Rosenberg was useful. He’s just run some basic historical correlations between industry performance and the $. The results are:

• Basic materials 87% inverse correlation
• Consumer staples 79% inverse correlation
• Industrials 62% inverse correlation
• Consumer discretionary 34% inverse correlation
• Utilities 28% inverse correlation
• Financials 22% inverse correlation
• Health care 18% inverse correlation
• Tech 5% positive correlation
•Telecom 13% positive correlation

The stuff priced in $ does well when it is low, so do those with big foreign exposure. So not mind blowing really, but a reminder of where to look if you think the $ is headed the way of the Dodo.

Sweep Those Homes & Missiles under the Carpet 'cos Confidence is HIIIGH

On April 5, North Korea launched a long range missile and what happened? Markets rallied, even the Kospi & KRW rallied! I thought that was odd at the time but did note that risk assets only wanted to rally at that point. Fast forward 7 weeks and North Korea launch a couple of short range missiles and conduct a nuclear underground explosion. What happens? The markets pay far more attention this time. Equities fall a couple of % and KRW sells off too. Maybe there is a specific reason market cared more this time than in April but I don’t think so. I think the real reason is that the market is far more jittery in the last 10 days or so. The data have missed estimates and less bad is no longer necessarily good enough. That said, some genuinely better numbers are waaay better; see the reaction to the Consumer Confidence. Personally, as I’ve said before I think people are becoming desensitized to the bad news and this helps to buoy confidence numbers. No matter, the market has just bounced 2.5%, doing its best, first, but by no means last, impression of a yo-yo for the week.

$ and treasuries rallied today, until the confidence number that is, when they smartly executed an about turn This suggests to me that it was a risk aversion related move or shorts just taking profits after a very poor week for the Greenback. When that holds up and when it doesn’t seems to be pretty random these days as the correlation there between the $ and risk tolerance wanes.

Still, volumes are at about 70-80% of average today in equities depending on whom you speak to, so hard to read too much into things. Feels like it’s going to be a quiet week though, in spite of the heavy macro schedule which lies ahead.

PS…which of these surveys would u pay more attention to? Consumer Confidence where the sample of 5000 households are asked 5 questions and their answers can be: positive, negative or neutral…or the Case-Shiller which compiles data from across 20 major metropolitan areas in the USA?

Dollar Dirtnap

I mentioned a few days ago that some of the old reliable correlations were perhaps breaking down. Yesterday’s market action provided further fuel to this idea. Although, to be sure, a couple of days price action does not mean a new trend has necessarily formed. Yesterday was simply a day of selling US assets. The $ has been on the fall for 2.5 months now and certainly the safe haven attraction is waning. Yesterday however, we saw the S&P, the Buck and Bonds all getting a bit of a spanking. Looking at the charts, we can see just how the relationships between the 3, having held up well since September, have started to breakdown over the last month. I’m not really sure what this means for the market, I would think there may be an element of non participation, which makes sense to me, certainly for a while as investors get their heads around the rejigging relationships within the market. Of course lower volumes could serve to exacerbate moves. Again, it is only speculation that this theme persists but there seems to be reasonable support and commentary in the market that it does.


Since Sep '08...
And then the last 10 days...
The cable move is interesting. While the possibly the UK not being AAA rated should not have been a shock to anyone, GBP did get hit on the announcement…only to come back with a vengeance and test 1.59. The $ really is unloved. Mind you, as I said, it shouldn’t have been a surprise, and anyway, does the market really care what S&P says? I mean, these are the guys who thought Toxic mortgage debt was AAA rated…so too was GE (for a long time) while its CDS was trading in the 600s, (as far back as Sep/Oct if I remember correctly) and it with a ton of debt maturing over the next couple of years. It finally lost AAA status in February.

Minute Detail

Yesterday’s equity rally was brought back to earth by the comments from the FOMC meeting. Talk of more QE and the Fed downgrading their estimate for economic growth conflicted with the previous rhetoric from Obama and Geithner about how the market is healing. Expectations are of unemployment peaking at around 9.5% (NB stresss test adverse scenario was 8.9%) and then taking a number of years to come back to the 5% level. The way equity markets have behaved lately seems to be pricing in a far rosier scenario. Greenspan also weighed in with his two-pence worth talking of a large unfunded capital requirement in the banks and questioning the stabilisation of house prices. Like the market, he is less upbeat than he was a week ago when he saw “seeds of a bottoming” in US Housing.

The $ sell off yesterday caught the attention of the market in a big way, and while it was a straight line move for sure, it was only a 60bps move in DXY. Given the $ has been sold against everything except the Yen over the last couple of months, why this move made such waves I’m not sure.

Jobless claims come in slightly worse with an upward revision to last weeks number, natch. That, along with S&P downgrading the UK AAA rating to negative and light volumes have conspired to to give the market a less than sanguine feel to it today. Note S&P said the UK’s debt/gdp ratio could go to 100%. It was 35% in 1997 and the US is expected to get to c70% by 2012. However, the UK has nationalised the banks, taken the hard decisions while the US have been opting for a band aid, buying time approach, so perhaps at least we have a better idea of the UK endgame.

Mark Haines on CNBC has just described the jobless claims number as “not too bad.” Whatever expectations may or may not be, these numbers are not good numbers. We’re getting better confidence numbers coming through too these days. I think people have become desensitised to the recession…but last time I tried anyway, burying your head in the sand and hoping it goes away…doesn’t work.

S&P @ 1700x P/E next Quarter. FACT

Going through the stats for Q1 earnings, things look pretty good. Of the 470 S&P 500 companies that have reported so far, 315 have beaten, that’s 67%, which if you were from the Administration, you would probably round up to 70%. Actually ¾ sounds better, let’s say 75%. See {BBEA9 } on Bloomberg and have a look around.

Anyway, whichever number you take, it is a high percentage of companies beating. I was chatting with someone yesterday who said they were reassured by the market’s reaction to a positive set of Q1 earnings. You could now see companies beat, and the stock would rise. A modicum of sanity had returned to the markets. These numbers were in general bad of course but less bad than estimates. In fact, DB’s credit strategy guru, Jim Reid, presented a great stat the other day…If Q2 US earnings come in as analysts expect then by mid-year, the trailing 12-month earnings for the S&P 500 will be a derisory 0.52c per share, the lowest on a nominal basis since the 12 months to December 1934 (0.49c/share). Back then, the S&P traded at 9.50 vs the say 910 it is trading at the moment. So if analysts’ estimates hold, come H2 09, the 12 month trailing P/E will be circa 1700x!! Much of this is due to a shocking Q4 with massive write downs etc (-$23.25) so it clearly isn’t something we can extrapolate.

Reid

Publish at Scribd or explore others: School Work Non-fiction marketing world

Nevertheless, it got me to penning a few thoughts about the Q1s we’ve just had. Firstly, I disagree with the above mentioned opinion that stocks are behaving the way they should post numbers. I think given the current market roar we’re experiencing, companies could drop a real stinker and still go up. Hell, I bet a company could've even come out and said they needed $34bn in extra capital when their market cap was only $65bn…and still go up.

Secondly, you can’t extrapolate these Q1 earnings. The banks have had a super quarter for sure, taking in fat lending spreads and seeing huge amounts of debt and equity issuance. However, and I’m going to generalise here, while companies have beaten at the net level, I just don’t think that’s an accurate reflection of business. Companies are cutting costs like it’s going out of fashion. This is by definition unsustainable. I’m interested in seeing what the actual stats are for revenue beats. I don’t have them off hand but I’d bet my bottom $ that they weren’t anything like the EPS beats. And, as is well known but oft ignored (these days at least), EPS beats aren’t a fair reflection of the operational business if the beat is coming from one offs. So the issue becomes whether or not the revenue line picks up enough in Q2 to compensate for the decreasing GAMMA of the cost cutting. If not, then things could get ugly.

God Made it That Way

Just when you thought the market had reclaimed some sense of normalcy…think again. We had started looking at the good AND the bad, not merely the former. The shorts began to play again and then yesterday, for whatever reason (India, GS et al repaying TARP…), the market took off on its 45 degree linear trajectory toward the heavens.
The volumes were light again though and this is something which is being talked about a lot as a sign of conviction lacking in the rally. Were this the start of a bull market, volumes would be a lot higher.

GBP continues to rally hard, making 5 month highs, as do other risk assets…that correlation is right back on track. Cracking the markets at the moment is all about getting the direction of the Spoos right, which is proving increasingly difficult…and that’s saying something. Sometimes, in explaining these moves, I can’t offer much more than this kid…

What Year is this Again??

US equities fall post the European close on Friday. The weekend press is now talking about double dip recession. Risk aversion is up. The market’s going down today…right?! Surely? Can the Indian market’s 17% catapulting be helping us here? Possibly although clearly it’s country specific. Whatever it is, risk is being put back on, with cable testing year highs. The $ is taking a good lick from everywhere really although GBP is putting in a strong performance against EUR too…for the third day in a row. I’ve been bearish EURGBP for a long time, and even without looking at a chart, you’ll know this has been a bad trade. Even if you live in a cave with no media access (but assuming you have travelled to Euroland at some stage in the last year), you’ll know this had been a really baaaad trade. No matter, my basic thesis has been that Europe is going to get a lot worse than people are expecting, Germany is a big exporter (we know how the export led economies have faired) and Ireland, Spain etc clearly in the cr@p and with the everlong hawk Trichet and co at the ECB sticking their head in the sand and not cutting rates quickly enough, these cuts would necessarily have to follow and the reality of the situation would ultimately hit the Euro hard. Whereas in the UK, everyone was so bearish anyway, and had been for a long time, how much worse could it really get? Anyway, I stand by this, despite being wrong for a long time, but I do think this is starting to play out now.

On Friday I posted a link to a Telegraph article calling the bailouts a sham. It was the opinion of Mark Patterson, Chairman of PE firm and TARP beneficiary Matlin Patterson. Cleary someone like that saying something like that doesn’t go down so well. I mentioned last month how it seemed like there was an Animal Farm -like treatment of leverage by the Administration. Leverage had been a taboo word, and the users of leverage, chastised by the powers that be. Then came the PPIP where one of the selling points to investors would be the 6-1 leverage they could get on their investments. Seemed odd to me at the time. Well, now we change book, but the theme is still very much Orwellian. On Friday, ZeroHedge pointed out that this article in the Telegraph had been removed. It’s true! Check it out… and today Macro Man draws attention to the fact the ONS in the UK admitted it has been exaggerating the retail sales figures since this crisis began! I’ve lost my calendar, what year is this again??

Correlation Breakdown?

And no I’m not talking about the relationship between markets and sanity. That has been at -1 for a long time. I mentioned yesterday that some predictability had returned to the markets. Equities had fallen, risk FX had sold off, as had commodities and bonds rallied. Now this morning Mr Market has turned that on its head somewhat. Equities are better, bonds had rallied to though and we’ve also seen a sell off in the risk currencies…and a big rally in JPY, all of these things counter-intuitive, although in the latter case you can put that down to the better Machinery Orders. Anyway, we’ll have to see which asset classes are leading and which are lagging or maybe this is the start of a breakdown in the old reliables. There certainly is an increasing feeling in the market of buying $ as not being a de-risking trade anymore, in fact it is a risky one as the market becomes increasingly concerned with the inflation outlook. Moving on, we saw an ugly German GDP, but of course, the market cares not. Asia rallied overnight but may reassess on Sunday post the stinky Hong Kong GDP, -4.3% QoQ vs -2.6% est. No GAMMA slowdown here. Looking through the breakdown, it was a bad quarter across the board but what really weighed on it was the trade element, with both imports and exports taking a dirtnap (although clearly only exports add to GDP).
I’ve seen a couple of interesting articles today…one talking about how the price of titanium dioxide, a key ingredient in paint (obviously!) can be a good barometer for future economic activity…and guess what, it’s down. I’d take this with a pinch of salt but it’s different anyway
Another is on rail traffic falling (both first and second derivatives) and the last is talking about the bailouts being a sham…and this is coming from someone who is not only well respected, but also benefitting directly from them.

So all in all, the usual hope and good tidings!

What next?

So what next? With equities having broken the support on their trend line
and Natixis and KBC in particular showing that there is still room for nasties to be disclosed…and to surprise. With recent earnings being not so good (see the above and add to that list TKA, ACA, BT to name a few) and some realistic comments coming out of Mervyn King in the Inflation Report, along with the poor MBA mortgage apps and Retail Sales numbers in the US yesterday, risk appetite has diminished quite significantly. The US data certainly caught many unaware and they provided fodder for the bears and took a first swing of the scythe to the Gr**n Sh**ts brigade (I just can’t bring myself to write that phrase).

The $ has rallied, as have bonds, commodities fallen (note oil fell despite a very big draw in the DOE data yesterday). Back to good old predictability again. Vols are still low although VIX did bounce 6% yesterday but the manner in which we are selling off is a lot more controlled than we’ve been used to over the past 18 months. I’ve said before I expect vols to remain low, certainly on a relative basis to what we’ve known throughout the crisis, and I continue to believe that. So basically, I think we drift and the sector rotation talked about yesterday follows.

The market did make an abortive effort at a bounce earlier on a report in NZZ (I’d post the link but it’s in German) that the Swiss government was considering exiting its position in UBS when the lock up ends on June 9. Now the first reaction was they would do this because UBS is in ok shape and doesn’t need the government investment, hence a big rally in the stock. I wonder though if that is the reason. I mean I doubt it can be. So perhaps it’s because of the massive rally we’ve seen and they want to look at exiting? I’m not sure about this either. What is for sure is that there has been a lot of social discontent in Switzerland regarding UBS, its losses and the Government’s role. It could well be something they’ve been looking to exit asap once they realised the public outcry. Also, bear in mind that with the Government stake, UBS have not been able to pay people and are losing key players to the competition. It could well be a solution that suits all involved…Ich weiß nicht.

LOTS AND LOTS OF STUFF

6 things today

1) Sector rotation
2) More credit card woes
3) Housing inventory
4) Precedent set for predatory lending?
5) FX
6) Volumes

A few brokers are pushing the sector rotation trade; out of beta, into defensives. Both CS and UBS have notes out to this effect. It’s a good time to push it I believe. With markets having failed at their 200 day MAV, and indeed failed to make higher highs, the water feels a lot calmer for those thinking of shorting. The foodies and in particular the tobaccos would be my favourites. BATS on 11x 2010 vs long term average of 12.5x. IMT with greater EMEA and discount US exposure (although higher gearing and some divi worries). But if this works, I’d wager it’ll be very much a sectoral trade rather than stock specific. I don’t really understand telco, well it just kinda bores me really, so I stay away.

I’ve said before that credit card charge offs are only going one way. Even Moodys (and we know how on the money the credit agencies have been through all this) think the Stress Test adverse case was anything but. “SCAP loss rates for credit card assets range from 12%-17% in the Baseline scenario, and 18%-20% in the More Adverse one. We currently expect industry charge-offs to peak at 12% in the second quarter of 2010, which translates, roughly, to 22% on a two-year cumulative basis.” Anyway this leads conveniently into the news that Advanta (provides business credit cards) is, as of mid June, ceasing all new lending due to 20% uncollectable debts. Advanta is not a big deal in the scheme of the credit card market, but it is exclusively a small business lender. This area is in trouble. AMEX shut down its small business credit card business in Dec/Jan.

Following on from yesterday’s piece, Pull That House Bid?, I came across this chart on Zero Hedge which speaks for itself in showing the amount of inventory still out there before we reach an average trend line.
GS have agreed to pay the State of Massecheusetts $60m to settle a dispute over “predatory lending.”Now this is small fry for GS but what does it mean for the big boys in this field. See the article for an interesting read.

The $ has been much maligned throughout this rally, as we would expect. With it having broken through several 200 day MAVs (EURUSD, NZD, CAD. Well, just see DXY!) there has been a lot of talk of how the $ bear trend will continue. I disagree, well I am a $ bear, but not in the near term. I believe if Equities fall from these levels, and the market gets edgy, I think the $ will be the hiding place of choice. Remember after the Shock and Awe fed meeting where they announced full on QE and the $ took a pasting? A few days later when the risk aversion came back, $ was being bought again. Ok, it’s since been sold against everything but you get my point.

Lastly, I was inundated with Bloomergs this morn talking of very high volumes across Europe. Talk of 130% or 170% of 20 day average volumes adorned my monitors. A caveat however, these are not really volumes. It feels quiet out there and it is. Italian dividend season is upon us and if you exclude the div washes, volumes are running at about 80%.

Pull That House Bid?

So markets fell yesterday and the futures drifted a little more overnight only to rally back this morning. I thought it was interesting, if not particularly instructive, to note that commodities rallied and the $ fell while the Spoos were fading. Risk being put on in other assets is not what you would expect as equities fall. Perhaps equities are this morning playing a bit of catch up then with the rest of risk spectrum. Who knows?

There are a couple of things which have caught my eye this morning.

Firstly, the Chinese data released last night saw exports -22.6 YoY vs the March (uptick) of -17%. I have aired my doubts about Chinese recovery before (see May 7) given the export driven nature of the economy. The Bulls will talk of Fixed Asset Investment being up, which it was, but this is due to the stimulus programme, which along with the significant YoY price falls in commodities, will have led to the big increase in commodity imports YoY. As mentioned before, it’s the government banks which are extending the credit for these stimulus package projects and outside of this, loan demand is still poor.
The other thing is not so time relevant but something I’ve been trying to work out for a long time and was just brought to my mind again in the last 24 hours. Namely, the inflation-deflation polemic, if that’s not too strong a word. I guess net net, I’ve been a buyer of the inflation argument and thinking property, commodities etc should be good longer term investments. The basic idea being that with all this money printing, the monetary base increases, which increases the money supply which will affect the price level. Throw in the simulative measures of the government, or even if they’re not so successful, the idea that we will recover naturally, then the increase in aggregate demand will exacerbate the increase in the price level. Bottom line, lock in a good rate and I’m pretty happy to look at buying a property which could be home for 10-15 years.

This is a pretty neat argument and an easy one to buy into. But I read a piece here which referenced another piece I’d previously read here and they brought back some of my old fears and poked a few holes in the convenient argument above. Going back to ECON 101 for a sec…so you increase the monetary base, this doesn’t necessarily increase the money supply (M2), you also need to factor in the money multiplier. So while total reserves have gone up a lot, so too have excess reserves, which means that the multiplier hasn’t…it’s gone down. There is an inverse relationship here which is pretty logical…as excess reserves increase, the amount you can lend out, spend etc decreases, so does the multiplier. Nevertheless, while the multiplier has fallen, M2 has still grown 14%+ in the past 6 months. But an increase in M2 doesn’t necessarily translate into an increase in GDP. For that to happen, the velocity of money has to remain constant (or it could go up). Now V has a historical direct relationship with financial innovation and leverage, neither of which are in abundance at the moment, or likely to be any time soon. Long term average of V is 1.67 and it usually falls below this in periods of deleveraging and unsuccessful financial innovation. So we’ll very likely see a decrease in V and this makes sense as people spend less, save more. So while the monetary base may have increased, you need credit expansion too for this to become inflationary, and this hasn’t happened. Similarly, while M2 may increase, it does not necessarily follow that it will be translated into a higher GDP as Velocity will likely fall.

Lastly is the issue of whether budget deficits are inflationary, history suggests no, as they weaken the private economy and this hinders investment and the following recovery. US government debt/GDP is predicted to jump to 70% odd over the next four years. Comparing this to the Japanese experience from 1988-2008 where debt/GDP surged from 50 to 170%, the prognosis is not good; Japan is still mired in a serious recession. The Japanese experience echoes that of the US from 1929-1941.

Lastly, and I’ve come across this stat quite a few times, during deflationary periods (if this is where we’re headed) the risk premium on equities has actually been negative. Between 1988-2008, the return on Japanese government bonds exceeded that on equities by 8.4%. I’ve nicked this table here from the Hoisington article, but they’ve taken it from BEA & BLS amongst others so I’m ok with doing that. There’s more detail in the articles which are a v good read.

I may hold off on that property for the time being…

Big Sensationalist Heading!!

I’ve noticed that the readership of this piece is higher when I post a “Big Sensationalist Heading!!” and given I couldn't really think of one today, I thought I'd give this a shot. Trouble is, I can only crack this gag once.

The earnings season is nearly over in the US. Whether you believe the numbers are not…here are the facts: 449 companies in the S&P have reported. 301 of which have beaten expectations. 116 of those have beaten by 0-10%, 73 by 10-20% and 31 by 20-30%. So earnings have been better for sure. The market however has not paid much attention to them. They have been, I feel, an accommodating adjunct to the better economic data, stress test shenanigans and MSM cheerleading that have conspired make near extinct all that is ursine. The previously ubiquitous Market Bear has been subject to a gross culling. Should this morning’s move continue however, we may see a remarkable resurgence in the Bear population.

I mentioned previously that I thought the Stress Tests would provide the market with direction, one way or the other. This hasn’t really borne out. The market, while it didn’t/couldn’t have (surely?) bought the results of the tests, it did seem to suspend disbelief for a while and had a stab at a rally. While equities are small off today, we’re seeing a reasonable rally in bonds and a sell off in the risk currencies and commodity spectrum. The $ took a post payroll pasting on Friday but has regained some ground today thanks to its safe haven status. I continue to think the market should be lower, and having respected the rally, it is now time for a pullback/reality check. Have we gone from hoping for a recovery to now expecting one? I think that could well be the case and if so, these expectations will need to be moderated. So, while the stress tests may have failed to provide direction, the lack of “event” on the horizon, I think will enable people to be more comfortable with the idea of putting on some new shorts.

Oh and look, another 5 stocks offerings today…anyone for some expensive stock??

Running Out of Steam

The markets waited with bated breath for the release of the NFPs. Or perhaps; post the anti-climactic stress test results, investors were simply looking forward to a number that hadn’t yet been leaked to the world, his wife and extended family. A better ADP on Wednesday had certainly taken the whisper number down from 600k consensus on Bloomberg. The folks on CNBC were talking about this being the last really bad jobs report. What about when the imminent auto sector job losses kick in I thought to myself? No matter, I guess the 539k number was probably in line with whispers and it would have been enough to lift us I believe, but the devil in the detail has weighed upon the market. 72k jobs were added in the government sector (census workers to be specific), having previously been -6k. There was also a -36k revision to the March report. Add them back in and the report was not “less bad” enough. The negative read has hit the $ post the report too, and has outweighed the buy $ safe haven trade.

I said on Wednesday I thought it was approaching the time to look at getting short of equities. We’ve got the event risk for the week out of the way now and I would now be starting to build a short. I feel we’ve had a period of exuberance, some better data to be sure and some clarity from the stress test (albeit in far from a doomsday scenario) and post a stellar Q1 for the banks, there’s hope they can earn their way out of trouble. The “buying time” policy of the Administration could actually work! Nevertheless, the market now seems to be questioning the economic data and not just blindly buying the good news. The secondary offers continue. Again, you don’t sell stuff when you think it’s cheap! DAX is right on its 200 day MAV and SPX not far from it. I believe, after a pretty impressive 2 month gallop that would’ve made Black Beauty proud, we’re running out of steam here.

I Wish I'd Finished Writing this Before the Mkt Fell

The Marché continued to rally hard yesterday and extended its middle finger one more time in the direction of the Bears. Exasperation is etched all over their furrowed brows. How can the news BAC needs $34bn be greeted with a 34% increase in its stock price? Don’t ask me but one thing is for sure, whatever your conviction may be, you have to respect the trend of this market.

Amazingly, the Jobless number estimate was yet again unerringly accurate in its prediction, with the actual coming in a bit ahead of consensus. The market actually greeted this with a small sell off. Caveat vendor however, we’ve had plenty of these of late only to see the market snap back up in a heartbeat. Still, perhaps we’re starting to expect better numbers (we should be, they’ve been one way for 2 months now) and we’re now going to need REALLY good/less bad numbers to push onwards.

A couple of things caught my eye today in relation to China. I mentioned the other day how I struggled to find how Asia was going to lead us out the doldrums given the export driven nature of the economies. Nevertheless, a lot has been made recently about the surge in Chinese bank loans. WSJ however, points out something which shouldn’t be that much of a surprise (using the PBOC’s latest monetary policy report as a source), that most of this new credit is coming from the state owned banks, and that much has been devoted to government stimulus projects. Ex the government projects, demand for credit is not actually very strong.

The second thing is a follow on from this. Power generation and consumption, a leading indicator, having bounced in Feb and the first half of March, dropped again in April. The detail is in the article linked here so no need to go into that but it makes interesting reading and certainly tempers my already muted enthusiasm for an Asian led recovery.

BAC to Return to Market...Interfrastically

I’m struggling a bit for inspiration today…as is the market by the looks of things. While volumes are high today, running around 140% of 20 day avg, direction is absent. BAC needs $34bn so they say, Citi less and JPM nothing. No one seems to care too much. It’s trading down c12% pre market but given the run it’s had, that’s hardly something to get too excited about. The market feels somewhat paralysed at the moment, fraught with fear of listening to any of the bad news and going against the tape, especially as we have a number of events coming up, namely ECB meeting and the NFPs. The economic data continues to ameliorate, or at least the gamma of the data does, and this has been the focus of the rampant market. Risk appetite has been returning, cable back up above 1.50 again today with the better PMI. I wonder though if things are at last too extended. The market retreated very slightly about 30 mins ago and cable very quickly took a straight line drop. Small admittedly but perhaps people are a bit more willing to hit the eject button on their risk positions. There was chat of a decent SPX call seller yesterday. From people I’ve spoken to in the options world, the talk is that directional players have been selling their long call positions. BMW couldn’t give any guidance today, Agrium cutting their Q2 outlook and the cement companies and homebuilders have provided cautionary commentary. And another thing…the number of secondary placings. Most evenings in the last month or so, when I check my blackberry, there’s a couple of messages about offerings in the US. Companies don’t sell their stock when they think it’s cheap! Given what’s coming up over the next couple of days it would be foolhardy to call a top now but I’d be watching with a keen eye and looking to dip a toe in the water on the short side over the next few days.

Anyway, back to the title. I was watching Blackadder’s Most Cunning Moments last night (who says G.O.L.D is not a worthwhile channel?) and I thought the Dr. Johnson sketch was a neat analogy for the banks…making claims that they’ve done it, everything is fine, only for someone to come along and all to easily point out that is far from the case. I’ve been chuckling about this all morning so maybe I’m just looking for a way to fit the clip in. Hearty confibularities to JPM on not needing any more capital! Enjoy!

Pain Trade Continues

Wow, what a rally yesterday. What brought it about? Well the Housing numbers certainly helped, as did the talk that when AIG report results on Thursday, they will not, repeat will not, need any more government money. $182.5bn is enough. This is coming from 3 people familiar with the situation…so it must be true. Nevertheless, the Pain Trade continues as we grind higher and the question “surely this market can’t go any higher, can it?” weighs heavily on the Bears’ minds, and even more so on their PnL.

There’s been quite a bit of chat recently about how Asia is going to lead us out of this crisis, and the Chinese data last week was encouraging and to be fair has been better over the last couple of months. I’m pretty upbeat on the whole BRICS idea in general, in as much as while things are slowing, they’re still growing and these emerging economies aren’t going away. I struggle to see how the East can lead the West out however. It all seems a little incongruous to me. Asian economies are heavily export led. Exports make up c40% of Chinese GDP. Surely the countries which buy those exports (largely USA) have to recover first in order for Asian economies to follow suit. Also, it is not uncommon to question the veracity of official Chinese data, and given the stimulus packages etc, it is certainly helpful/convenient to see the subsequent bamboo shoots of recovery.

I’ve been sceptical in the past about exercises such as the Stress Tests, where clearly they aren’t realistic assessments of the state of play. It’s embarrassing and insulting to have the powers that be present this methodology and data and expect people to take it at face value. I also think Obama acts like a headmaster and addresses and chastises his nation like they are little schoolchildren…which given most aren’t, is incredibly patronising. Especially since most of what Obama actually says, while wrapped up in Cicero like, silver tongued eloquence, is actually very light on substance. Anyway, I thought these were valid points. It turns out I’m wrong and that people in fact, want to pretend this isn’t happening, and look to their President and other officials to propagate the myth

Give Me Just a Little More Time

Delay to the Stress Test results! Who could have thought the 8 weeks they’ve had wasn’t enough time to work out how to disclose the results. To be fair, it seems like they’ve been making it up as they go along so maybe it was thought that would be the easy part. The worry is that the weaker ones will get a pasting…so I guess they’ll have to dress up the results somehow and try to buy a bit more time.
Maybe it was this story, or maybe just that we were almost flat on the year in the SPX and encountering resistance but the market gave back its gains after Europe went home. Understandable enough really as we have month end, a long weekend and the old ‘sell in May and go away” adage in peoples’ minds. Now while the folks on Bloomberg and CNBC (more the former) are surely government sponsored cheerleaders for the market, they’ve mentioned “sell in May and go away” so many times that even if only by investor osmosis, they may be conspiring to scupper their own plan.
Putting on my paranoid hat for a moment, there was an email posted on the web yesterday from a Dr. Marcus Gitterle, an emergency medicine physician based out of Texas, which caused a lot of consternation with officials. The topic: Swine Flu. The basic tenet: this thing is far more serious and prevalent than we’re being told.

Now, given that the markets have summarily dismissed all other bad news over the past 2 months, I thought it’s not too great a stretch of the imagination for them to do the same with Pig Flu. In reading a bit about this, and all the comparisons to SARS and how that didn’t cause a big an issue for the world economy I found an interesting article from the Telegraph.

SARS is/was a coronovirus. Don’t ask me what this is, but it's far less contagious than Swine Flu which is an Influenza Virus. Anyway, have a read of the article, essentially, pandemic or no pandemic; comparisons with SARS are apples and oranges. This is far harder to contain and could provide a further shock to the global economy.

See the rise in cases of Swine Flu on this chart…mind you if you look close enough, I’m pretty sure the rate of change of the slope seems to be slowing…gotta love that green shoot 2nd derivative!