Central Banks Save the Day…….For Now

          

                Let’s start with the news of the day which was a worldwide coordinated central bank action to provide liquidity to European banks.  Yay, were saved right? Wrong.  What this actually signals is that European banks were basically not lending to each other.  This was the same thing that spurred the selloffs and consequent market crashes in ’08.  If anything we should take this as an early warning of bad things to come.  That being said, we continued the rally from Monday adding over 4% across the board.

                The economic data came in as follows:

                                MBA mortgage index -11.7% Vs. previous of -1.2%

                                Challenger Job Cuts -12.8% Vs. previous of 12.6%

                                ADP employment change 206k Vs. previous 130k (revised from 110k) beating                                                                     expectations by 81k

                                Productivity for Q3 2.3% Vs. previous 3.1% missing expectations by .3%

                                Unit labor cost -2.5% Vs. previous -2.4% missing expectations by .4%

                                Chicago PMI 62.6 Vs. previous of 58.4 exceeding expectations by 5.1

                                Pending Home Sales 10.4% Vs. previous of -4.6% exceeding expectations by 10.3%

                                Crude inventories of 3.932 m Vs. previous of -6.219 m

                I’ll let you decide what the numbers mean as they are mostly mixed with the exception of the mortgage index, job cuts and pending home sales, and can be interpreted in many ways.  What was probably more important was the Fed’s “beige book” which is a compilation of economic data that the Fed has been looking at to determine the general state of the economy.  The beige book pretty much said that the economy was growing at a “slow to moderate” pace.  Nothing we didn’t know already but points to things being, again, worse than the above numbers seem to indicate.  Two possible things are happening here.  One, things are actually getting better and we should be confident in the markets.  Or two, things are being skewed by some people taking advantage of the economic situation.  I am more inclined to believe the second.

                I should also mention that China eased its reserve requirements for its banks.  Is this good or bad?  I’m not really sure.  I seem to recall that until the European crisis became the main focus, we had our attention fixed on the Chinese economy and every time there was a hiccup in the data our markets would turn down on fears that China was slowing.  This is just evidence that, yes, they are slowing and they are trying to keep it going by any means necessary.  Their rate of inflation should be a very clear sign of that.  

Where to Start….Hmmm

               Let’s begin with U.S. economic data that was released this morning.  Biggest market mover was the consumer confidence number that came in at 56 versus 39.8 which beat expectations by 13.5.  An absolutely huge boost to confidence, right? Not really.  As it turns out, the consumer confidence number reported today is actually from October.  I seem to remember a large rally in October which was likely the reason for the boost.  Probably more telling was the Case Shiller number that came in at -3.6% versus -3.8% which shows a modest improvement but missed expectations by .6% on the downside.  That number was mirrored by the FHFA price index coming in at .9% versus -.1% prior, beating by 1%.  Over all, the U.S. market data remains overshadowed by Eurozone concerns.

                Out of Europe; a bond auction, more rumors, and red flags.  The Italian bond, auction which was expected to be abysmal, beat expectations in terms of demand.  Yeah, hooray, people will still buy Italian bonds, however at historically high and unsustainable yields.  The 3 year yield came in at 7.89% and the 10 year at 7.56%.  Later the rumors began to fly that the ECB and IMF were looking to leverage the EFSF by 2.5 times which on the upper end of the spectrum should bring about 625 billion euros.  Not only is this the 4^th time (I think) that this rumor has been floated, but it wouldn’t be nearly enough.  600 billion might, might be enough for one of the PIIGS but not for all of them.  And then, the OECD (Organization for Economic Co-operation and Development) came out and cut European forecasts and warned of a possible Eurozone breakup.

                So U.S. data, with exception of the lagging Case Shiller, was rather lackluster.  Italian bond auctions weren’t terrible but were still bad.  Rumors of a solution were being recirculated although they had already been refuted and would be ineffective even if true. And rate cuts, downgrades, and possibility of a breakup of the Eurozone.  Oh my.  Maybe we need us some ruby slippers, a tin man, a scare crow, and a cowardly lion.

Rumor Mill Mayhem

European rumors were flying this weekend and during the day today.  Most were unfounded like the Italian newspaper rumor that the IMF was about to bailout Italy.  This was later denied by the IMF.  You would think that markets would back off by the denial but they managed to stay at their peak.

CNBC spent all day trying to figure out the reason for the rally but never really settled on anything.  What it amounts to is that the rumor started the rally and most likely short covering kept it at these levels.  We had a modest gain in existing home sales but the modest gain came after downward revisions and was paired with falling prices.  So that wasn’t good enough to keep us here.  Then it was attributed to European leaders “adjust” euro funding rules.  I think the thought that Europe will get out of this without anything short of printing or a full on handout from another country has already been proven with the reaction to the IMF “news”.  Then there was holiday shopping weekend and I just don’t believe the numbers considering unemployment, savings rates, credit, and the like.

You decide if you want to buy in to this.  I honestly can’t tell you that this will continue or fizzle, at this moment.  We do have some pretty heavy resistance to get through coming in at the moving averages and the psychological level of 1200 (on s&p).  it should also be noted that we did stop the advance right at the 10 day EMA and have both the 20 and the 50 coming in around 1200 which is just about 1% above were we are right now. I don’t really see anything that could keep this rally going right now and hence will think of it as a contra trend.

In Response

A conversation in response an article on http://www.politicususa.com/en/the-new-american-crisis  titled “The New American Crisis”

Shiva on November 25, 2011 at 9:17 am

     The Constitution that we live under was signed under similar circumstances as we have today. It was a time when states were highly distrustful of each other and even the people who had fought together in the Revolutionary war did not trust each other. For example, Patrick Henry refused to attend the constitutional convention because he said he smelled a rat. It was a time when the 39 people who signed the Constitution had absolutely no regard for the rights of women nor the rights of slaves. Today’s Republican Party wants to take us back to that frame of time. Where women have no rights, and people are not cohesive enough to fight against tyranny.

     74 men were chosen to be sent to the constitutional Congress. 55 men actually went and only 39 of those signed the Constitution. This country was not born from what the people of the states wanted, but what 55 men themselves wanted. And the Constitution was born out of compromise. That compromise today that is so hugely important to the governing of this country is disappearing. And that will lead to the destruction of this country and the rights that the people have.

     This is a time for revolution, but I have news for those who think that revolution is carried out with three cornered hats and guns. The revolution has to be carried out at the voting booths and the people who are responsible for the destruction of compromise must be removed no matter what party. Revolution does not recognize partisanship, it only recognizes doing the right thing

Josh Smith on November 25, 2011 at 8:54 pm

     Truly. However, and this is not an advocation for violence, but sometimes the only thing people respond to is force whether that be force of will (i.e. voting) or force of stick. It is truly disparaging that our apparent system appears to be so broken that we can’t even change things through a voting booth as was clearly depicted in the bush elections. When a system exists that provides political power through money and said money comes from corporations, the system as intended (that is by the people, for the people) is no longer a representative system but a bought system.

Rumor Rules the Day

So rumor was the largest contributing factor to today’s market movements.  From the open we began to continue yesterday’s trend and then the rumors began to fly.  The rumor that the SNB (Swiss National Bank) was going to buy Italian bonds was the “major” market mover today.  As time passed the rumor was revealed to be unfounded and the markets hit the brakes.  After that we began to hear that Greece, yes Greece again, was in talks outside the IIF (the Institute of International Finance) to make a deal on their debt.  Things stayed pretty much flat on that until we found out that the actual meaning of that wasn’t really a good thing.  What it amounts to is that Greece was in talks to renegotiate their bailout to try and get a better deal and avoid a larger hit. 

Bottom line, nothing really happened.  We closed slightly down which isn’t terrible but it was widely reported that this week, the week of thanksgiving, was the worst week in the markets since the 1930’s.  From here I expect more downside to come as S&P and Fitch (even though Fitch retracted) downgraded Belgian bonds from AAA to AA+ (or was it AA+ to AA? Don’t remember) today ahead of bond auctions next week and that we ended up forming a gravestone doji (bearish signal).  Things really are not looking good for markets.

Dear Washington

                We are all getting very tired of the fighting, in-fighting, and partisan bickering.  There are solutions on both sides.  Is it really that hard to compromise?  Here’s an idea, pick one republican idea and one idea from a democrat, AND DO THEM BOTH!  We really just want you to get something done.  We understand that neither side’s constituents will be happy with the other sides portion but we would have be reassured by action on your part. 

Wishing you well,

America

Dear Washington,

                Happy Thanksgiving.  We all hope you have an enjoyable time with your families but we need you to get back to work.  Unfortunately we are facing really tough times right now and can’t afford to give you your extended vacation this year.  We are very sorry for the inconvenience and the stress that this will put on you and your families.  Unfortunately if you ignore our requests we will be forced to find a replacement. 

Sincerely,

America

No Safety in Europe

Biggest market mover of the day was the abysmal bund auction.  Essentially a buyers strike on the bund today as the Eurozone crisis continues/deepens.  This drove the euro lower, the dollar higher and pulled people out of equities.  This paired with underwhelming U.S. economic data equals selloffs and flights to “safety”.  We did close right at a support level of 1160 on the S&P but at the lows of the trading day.  I’m not sure what will happen on Fridays half day with no real data scheduled but I think that next week is going to start off pretty bad as people return from vacation and try and digest what has happened. Be afraid, be very afraid.

Where you at Bloomberg, CNBC?

                Last week the MBA mortgage index fell by 10%.  This week we find out that it is down another 1.2%.  Although not as bad as last week, the number overall is still pretty bad.  So, altogether over the past 2 weeks the MBA mortgage index is down a total of 11.2%.  Not the worst number in the world but what gets me is that this number was completely ignored by both Bloomberg TV and CNBC’s squawk box.  As this number has had the potential to move markets in the past due to it being an indication of how the economy is doing, it boggles the mind that it has been as underreported as it has been so far.

http://www.reuters.com/article/2011/11/23/us-usa-economy-mortgages-idUSTRE7AM0WX20111123

Good, Bad, it's all Ugly

                We started the day on some really bad numbers that were spun as “not that bad”.  Let’s put it in perspective. 3Qt GDP came in at 2%, that’s .5% below expectations.  Doesn’t sound that bad, right?  But when you look at it in percentage miss terms it was a miss of 20%.  That’s right, 3Qt GDP missed expectations by 20%!  No matter how you spin that it was a bad number.

                Then we hear news from the IMF (the international monetary fund) that it is preparing to assist in the bailout of the Eurozone.  Good news right? Not if you’re an American.  First, the IMF was a fund set up to aid emerging and third world economies not bail out a continent.  Second, the IMF is partially funded by the American tax payer.  Not to mention that any one of the PIIGS needs over a trillion euros and the IMF only has about $400 billion on its balance sheet.

                Further on, we got the FOMC minuets.  Not good, but not bad either.  The general spin on this was that economic conditions may warrant farther easing by the FED.  Yep, they seem to think that the mere mention of QE3 would be enough to cause a rally.  No such luck.  Markets moved more on the IMF news and that wasn’t even enough to push things higher.

                We also should take note that the 5yr U.S. Treasury bond auction finished out with record low yields.  For those who don’t know, bond prices and yield move in an inverse relationship.  That being said, I pose a question for anyone who remembers econ 101.  What factors might cause an increase in price?  Two answers right, either a decrease in supply or an increase in demand?  As supply is clearly not a consideration when you have a reserve bank that is willing to print at the drop of a hat we must consider an increase in demand.  As demand for treasury bonds increase we generally see a flight from equities (stocks) and into cash.  All this considered we could expect more downside in the markets to come.

                When it all comes down to it you have to ask yourself, “do I really want to go into a 3.5 day weekend in a long position?”  I sure as hell don’t.  Especially considering that the 10 period EMA had crossed the 20 yesterday and crossed the 50 today, a rather bearish sign considering that price, the 10EMA, 20EMA, and 50EMA are all below the 200EMA.