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.