Weekly Recap & Outlook – 05.21.10

Tower Private Advisors

Prior posts

My next interview will be with Steve and Dana, co-managers of the Federated Market Opportunities fund, but you’ll want to put away all sharp objects before reading that one.

Capital Markets Recap

Overbought and 0versold are two words bandied about pretty carelessly, and that’s okay, because they’re sort of like Ed Meese, then Attorney General, described pornography:  I know it when I see it.  Still, there are a hundred ways that folks measure overboughtness and oversoldness.  All are technical analysis measures, and they range from price studies, such as RSI, Williams %, to the percentage of stocks over an X-day moving average, to put-call ratios, and the like. 

Here are a sampling of such measures, with no attempt made to show one particular view.  Instead, they suggest widespread agreement that stocks are oversold. 

Here’s the put/call ratio on all equities

Here’s a look at new highs as a % of total highs + lows

And here’s the percentage of stocks above their 200-day moving averages

All Europe, huh?

Please note two things, first, the ill-timedness of our super secret advisor’s small-cap call, and second, the absence of safe havens; even goldwas kicked in the teeth.  Treasuries were the only places to hide.

All Europe, huh?

Famous economist John Kenneth Galbraith (deceased) coined the phrase Conventional Wisdom (aka CW).  He also suggested the need to question it.  The CW this week was the downdraft (like the semantics?) was the result of Europe.  The table immediately above reinforces the need to question the CW.

In fact, Germany looks like a good long-term buy.  Either the Euro is dispensed with and each country can manage its own monetary policy, or the Euro stays intact and depressed.  In the former case, Germany–arguably one of the stronger countries in Europe (nice savings rate, high exports, low indebtedness) flourishes; in the latter case, German goods remain relatively cheap on a global purchasing-power-parity basis.  Admittedly, they’re on the hook for a big chunk of the bailout as described below, but the German ETF is comprised of companies, not the government.

Speaking of the Euro, ‘want proof that it’s headed up?  Look no further than Newsweek, which had this cover story on its international edition.  If you can’t make it out, it’s “The End of the Euro.”  What it should translate to is, “the end of the Euro’s decline.  Remember, currencies can only be discussed in relative terms.   There is no such thing as “the value of the Euro.”  That’s sort of like talking about the color seven or the sound of black.  The only relevant discussion is value of the Euro in terms of Yen or the U.S. dollar, and in those contexts the Euro can only decline so far before one is forced to say something like, “hey, the U.S. doesn’t look that much different from Portugal.”  In other words, there is a reasoned end to the decline.

Top Stories

RomeEurope is burning.  Jean Claude Trichet is looking for his fiddle.  The world is ending, yet here are the top searches on Google.  Look for substance in this list.

  • Berkshire Hathaway cut it’s Kraft Foods stake after disagreeing with KFT’s decision to pursue a Cadbury bid and to sell its pizza brands.  In his characteristic style, the Oracle said, “both deals were dumb,” and that, “the pizza deal was particularly dumb.”
  • In an example of headlines gone bad, the Bloomberg terminal reported that “Builders in U.S. Turn Less Pessimistic as Sales Rise.”  No, they grew more optimistic.  Apparently, the zeitgeist (what’s bad is bad; what’s good is bad) has stricken the interns that make headlines, too.  See This Week, below.
  • Somehow, the news of Fordlaunching its Fiesta ads made the list of Bloomberg’s Top Stories, but after looking at the before and after of the originally-Japanese-import-fighter, you might understand how it received top billing.

  • Germanyannounced a ban on naked short-selling the shares of ten, select financial institutions that have, presumably, been under unfair assault by those nasty speculators.  It also announced a ban on naked short selling of credit default swaps on European government bonds.  Naked shorting, as steamy as the name sounds, is simply selling short a security that can’t be delivered by the proscribed settlement date.  It’s illegal at present, but is variously enforced.  It gets a little stickier with Credit Default Swaps, since nothing is exchange–no security is delivered.  Presumably, it means you can’t buy credit default insurance unless one owns the underlying  instrument, which is, in this case European government bonds.  I have yet to see a compelling explanation of why that prompted a sell off in equities as Bloomberg’s headline, “Euro, U.S. Stocks, Oil Tumble as Germany Bans Naked Short Sales” insisted.  The ban announcement might suggest that the problems in Europe are larger than imagined.  More likely, market participants are shedding risky-assets, in a process some describe as de-risking, which is sort of like one of the annoying business buzzwords, like “planful.”
  • Our Strategas service thinks that one of the biggest risks this year is a policy error by a government body, somewhere, and I think that’s most likely to emanate from Europe.  (You can check out my interview with Strategas by clicking here for more on the subject.)  They estimate the risk of European-sourced policy error to presently be 10%, increasing by 5% per week that passes without a viable solution.  But they don’t attribute all of the market’s gyrations to be a reflection of that risk, alone.  The other uncertainty they think is bearing on the markets is the financial institution reform bill making its way through the halls of the American Grandstand, passage of which in the Senate was celebrated by a few key figures at right.
  • Germany‘s Parliament, both the lower and upper chambers, approved its portion of the $1 trillion European bailout package.  According to the deal, it will contribute $200 billion to the package of loan guarantees.  This is as concrete as the aid package has yet become.  As you know, the package itself does not address the root issue of serious fiscal imbalances in the Olive-Belt countries.  It’s more akin to handing an alcoholic a drink.  Moreover, when Spain gets to deal with its issues, rioters there can be assured of a hard-line stance to be sure.  “Now just put down the Molatov cocktail like a good looter.  Here’s some emergency spending money.”
  • Global Stock Rout Halts as U.S. Banks, Euro Climb on View Selloff Overdone.”  Not so, says the JPMorgan trading desk.  More likely it’s a case of exuberant short sellers protecting their huge gains.
  • Did you see that Los Angeles‘ City Council voted to boycott Arizona stuff in response to the illegal immigrant steps taken in the latter state?  Did you see what Gary Pierce, “one of the commissioners chosen in state-wide elections to the utility regulation panel” shot back with?  Boycott our stuff, we turn off your energy spigot.  You can read the letter that Mr. Pierce sent to L.A. Mayor Villaraigosa by clicking here.

This Week

There was little to cheer about in U.S. economics this week. 

The week started off with the thud of the Empire State Manufacturing survey.  While it had been rising nicely, it fell by more than a third, which took out a recent low, turning the short-term trend negative.  I’ve highlighted a lower low to watch to signify that the intermediate-term trend is in jeopardy.  We’re simple folks here, but this is a pretty good way to call trends higher highs/lows and lower highs/lows.  Check out the chart at right for some specifics.  Just to balance things out, manufacturing activity in the Philadelphia Federal Reserve district, via the Philly Fed Index, rose modestly, from 20.2 to 21.4, which was also slightly above the expectation of 21.3.

Deflation remains the threat du jour, something that shouldn’t be a surprise to readers–all seven of them–of this blog.  That was reinforced this week to the Producer Price Index, which rose, on a year-over-year, Core (i.e. net of food and energy) basis by just 5.5%, which was lower than expected (5.6%) and the March reading (6.0%).  The Consumer Price Index rose by just 2.2% on a headline (i.e. all items) basis, and by a mere 0.9% on a Core  basis.  Click here for a look at the distinction between headline and core inflation.

We saw five housing data points this week.  Two were good; three, bad.  The National Association of Home Builders was one of the formers.  Its Housing Market Index rose from 19 to 22, above the consensus guess of 20.  That exceeds the high from earlier in the year and takes this gauge of builder sentiment back to August 2007, levels.  Using the same thinking as the Empire survey, above, the short- and intermediate-term trends are up.  The long-term trend, however, is overshadowed by the June 2005, high of 72.  Housing Starts rose from 626,000 to 672,000, exceeding the forecast of 650,000.  Thus endeth the housing happiness.

Now for the housing grousing.  In the spirit of the times (what’s bad is bad; what’s good is bad), the housing starts figure is troubling when considered in light of Building Permits.  Please note on the chart on display at right that building permits have fallen below starts for the first time in a while.  That’s important as permits are the backlog that supports starts.  In similar badness, Mortgage Delinquencies rose from 9.47% to 10.06% in the Q1 2010 and Mortgage Foreclosures rose from 4.58% to 4.63%, also in Q1.  These are, admittedly smallish-seeming moves,but they’re in the wrong direction.

Claims for unemployment benefits, Initial Jobless Claims, are going the wrong direction, too.  The chart below also reveals a flattening in the decline, a very untoward development.  Two recent highs are noted as points to watch for signs that any of the trends are up.  What’s more, the downtrend has been broken.  Yeah, simplistic, but worrisome.  Next in the parade of pessimism is Leading Economic Indicators, which fell for the first time since the massive rally in stocks kicked off.  ‘Too bad this couldn’t have come out in March, as a casual review of the chart at right reveals.  That’s just a bit too neat.  Click to enlarge.



Next Week

See what you think of this format

Key indicators to watch

  • Initial Jobless Claims – Thursday:  economists look for a big drop–to new lows for this downtrend
  • Personal Income, Spending, & Savings - Friday:  a weaker-than expected (economists expect a drop in the growth rate) spending figure will threaten the retailers. 
  • Chicago Purchasing Manager survey – Friday:  important because it will foreshadow the following week’s national ISM Purchasing Managers survey
  • University of Michigan Consumer Confidence – Friday:  important because, well, duh

Housing indicators

  • Existing Home Sales – Monday
  • S&P/Case-Shiller Home Price index – Tuesday:  a biggie, but with a two-month lag
  • MBA Mortgage Applications – Wednesday
  • New Home Sales – Wednesday

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