The markets are down sharply this morning, seemingly in reaction to the news that S&P has downgraded the US debt rating to AA+ from its longstanding AAA rating.
I say seemingly because the selloff is not affecting US Treasuries one bit. There is furious buying in long-term Treasuries, such that the yield on the 10-year Note has plummeted to 2.35%. So sentiment for the safety of US bonds has not been impaired.
The ECB came out and said it would be a buyer of Spanish and Italian bonds, but the markets seem disappointed that they didn't do more. I think they could have cut interest rates in a surprise move if they really wanted to elicit a market response.
I think the bigger concerns this morning are for the potential of a global recession, or at least recession-like growth. This is what the plunge in yields is really signaling. The flight to safety is also on in a big way today with respect to gold prices. Gold has spiked more than 2.5% higher today to top the $1700 level.
The opposite is occurring in the energy markets, with oil prices slumping down near $83.50.
Asian markets were also down sharply overnight, led by China's 3.8% drop.
Trading comment: Doesn't seem like anything has changed much from last week. The VIX is screaming higher today, up 25% to the 40 level. So the panic selling is palpable, and history tells us no one ever makes a dime selling into panics. It's not like Lehman Bros. declared bankruptcy over the weekend. But I think the fears of 2008 are still haunting investors. I still think the best course of action here is to remain calm, and wait for the oversold bounce to do any repositioning.
8 Ağustos 2011 Pazartesi
7 Ağustos 2011 Pazar
6 Ağustos 2011 Cumartesi
More Obama Spending Won't Do It
There he goes again. Out on the campaign trail, President Obama is proposing more federal spending as his answer to sluggish growth and jobs. That won’t do it, Mr. President.
He wants more infrastructure spending, undoubtedly in the form of an infrastructure bank. That’s a terrible idea. It’s borrowed from Latin America, where bloated and corrupt bureaucratic construction agencies have helped bankrupt any number of countries in the past.
He wants to lengthen 99-week unemployment insurance, although numerous studies have shown that continuous unemployment benefits are associated with higher unemployment.
And he wants to extend the temporary payroll tax credit, which is not a permanent reduction in marginal tax rates, has no incentive effect, has not worked so far, and is really a form of federal spending -- not real tax relief.
Earlier this week, when he signed the debt-ceiling bill, the president ranted on about the need to raise tax rates on successful earners, investors, and small businesses. He’s trying to bring back tax hikes as part of the phase-two special committee seeking additional deficit reduction, even though his own party rebuffed him on this in the late stages of the debt talks. All this is a prescription to grow government, not the economy.
What the economy needs, Mr. President, is a strong dose of new incentives, with pro-growth tax reform that flattens marginal rates and broadens the base for individuals and businesses. This includes moving to territorial taxation that ends the double tax on foreign earnings of U.S. companies. Plus, we desperately need a complete moratorium on federal regulations. As Sen. Barrasso recently noted, the government put out 379 new rules on business in July alone, amounting to $9.5 billion in additional costs.
None of these pro-growth reforms are in sight. So the stock market is going through a nasty 10 percent correction over fears of another recession (and European debt default).
But at least we got some good news on jobs. The July jobs report came in stronger than expected. It’s not great. But at least nonfarm payrolls increased 117,000 -- as the prior two months were revised upward by 56,000 -- while private payrolls gained 154,000.
That’s definitely not a recession reading. But neither is it a strong performance. If the economy were really rebounding, we would be creating 300,000 new jobs a month.
In the report, the unemployment rate slipped to 9.1 percent from 9.2 percent. But that’s mostly because nearly 200,000 workers left the civilian labor force. Another negative is the household employment survey, which fell 38,000 in July after dropping nearly half a million in June. That survey measures job creation among small owner-operated businesses or the lack thereof.
Yet when looking at the new jobs report, along with reasonable gains in chain-store sales and car sales, plus the ISM Purchasing Managers reports (which stayed above the 50 percent line), I repeat my thought that we are not headed for a double-dip recession.
Over two years of so-called economic recovery, growth has averaged about 2.5 percent. It fell to less than 1 percent in the first half of this year, largely from a commodity-price shock that included oil-, gasoline-, and food-price spikes. That price shock resulted mainly from the Fed’s QE2 depreciation of the dollar -- a big mistake. It eroded real consumer incomes and spending.
Lately, the dollar has stabilized and energy prices have come down quite a bit. That will reduce inflation and support better consumer spending. Businesses are already highly profitable and cash-rich. They are investing some of that, but not nearly enough to create sufficient new jobs. Who would, with all these Washington policies?
Finally, the Fed remains ultra-easy with excess liquidity and a zero interest rate.
So it looks to me like we will return to the sub-par 2.5 percent growth trend rather than dip back into recession. However, at this pace, unemployment may hover around 9 percent right up to election time next year.
More spending won’t do it Mr. President. Tax and regulatory incentives will.
He wants more infrastructure spending, undoubtedly in the form of an infrastructure bank. That’s a terrible idea. It’s borrowed from Latin America, where bloated and corrupt bureaucratic construction agencies have helped bankrupt any number of countries in the past.
He wants to lengthen 99-week unemployment insurance, although numerous studies have shown that continuous unemployment benefits are associated with higher unemployment.
And he wants to extend the temporary payroll tax credit, which is not a permanent reduction in marginal tax rates, has no incentive effect, has not worked so far, and is really a form of federal spending -- not real tax relief.
Earlier this week, when he signed the debt-ceiling bill, the president ranted on about the need to raise tax rates on successful earners, investors, and small businesses. He’s trying to bring back tax hikes as part of the phase-two special committee seeking additional deficit reduction, even though his own party rebuffed him on this in the late stages of the debt talks. All this is a prescription to grow government, not the economy.
What the economy needs, Mr. President, is a strong dose of new incentives, with pro-growth tax reform that flattens marginal rates and broadens the base for individuals and businesses. This includes moving to territorial taxation that ends the double tax on foreign earnings of U.S. companies. Plus, we desperately need a complete moratorium on federal regulations. As Sen. Barrasso recently noted, the government put out 379 new rules on business in July alone, amounting to $9.5 billion in additional costs.
None of these pro-growth reforms are in sight. So the stock market is going through a nasty 10 percent correction over fears of another recession (and European debt default).
But at least we got some good news on jobs. The July jobs report came in stronger than expected. It’s not great. But at least nonfarm payrolls increased 117,000 -- as the prior two months were revised upward by 56,000 -- while private payrolls gained 154,000.
That’s definitely not a recession reading. But neither is it a strong performance. If the economy were really rebounding, we would be creating 300,000 new jobs a month.
In the report, the unemployment rate slipped to 9.1 percent from 9.2 percent. But that’s mostly because nearly 200,000 workers left the civilian labor force. Another negative is the household employment survey, which fell 38,000 in July after dropping nearly half a million in June. That survey measures job creation among small owner-operated businesses or the lack thereof.
Yet when looking at the new jobs report, along with reasonable gains in chain-store sales and car sales, plus the ISM Purchasing Managers reports (which stayed above the 50 percent line), I repeat my thought that we are not headed for a double-dip recession.
Over two years of so-called economic recovery, growth has averaged about 2.5 percent. It fell to less than 1 percent in the first half of this year, largely from a commodity-price shock that included oil-, gasoline-, and food-price spikes. That price shock resulted mainly from the Fed’s QE2 depreciation of the dollar -- a big mistake. It eroded real consumer incomes and spending.
Lately, the dollar has stabilized and energy prices have come down quite a bit. That will reduce inflation and support better consumer spending. Businesses are already highly profitable and cash-rich. They are investing some of that, but not nearly enough to create sufficient new jobs. Who would, with all these Washington policies?
Finally, the Fed remains ultra-easy with excess liquidity and a zero interest rate.
So it looks to me like we will return to the sub-par 2.5 percent growth trend rather than dip back into recession. However, at this pace, unemployment may hover around 9 percent right up to election time next year.
More spending won’t do it Mr. President. Tax and regulatory incentives will.
5 Ağustos 2011 Cuma
BEANIE, I TOLD YOU SO!
I apologize for the title, but I think we will all agree Beanie deserved that one. Now that I've gotten that out of my system, down to business.
I said in the Thursday night premium report that we would see manufactured economic data as this bear market progressed, but I had no idea it would start so quickly. Does anyone really believe we created 117,000 jobs last month and that unemployment decreased? I suppose with the markets in free fall it probably wouldn't do to publish the true number, which was almost certainly negative. I suppose it was irrelevant though, it took the market less than 5 min. to figure out the numbers were a sham and sell off.
However, I think the decline is probably done at this point. In my last post I took a guess of 1200 to 1225 as a possible bottoming level. It looks like the government's pathetic attempt at deception drove the market down a little further to 1175. We should now see a violent, and very convincing, bear market rally.
On average the S&P will rally about 90 to 110 points in the first 8 to 15 days out of an intermediate cycle bottom. And those are the statistics for intermediate bottoms in a bull market. Bear market rallies are much more violent.This one could be exceptionally so as I expect the powers that be will try to manufacture another rally similar to what happened at the end of June. This time though there will be true demand behind the rally. If the Fed turbochargers the move we could see 125 to 150 point rally over the next 2 to 4 weeks.
I'm positive after that kind of rally our friend Beanie will return with more talk of Dow 36,000. However he will be wrong again. We are, and have been, in a secular bear market since March of 2000 and in a cyclical bear market since May. Until stocks reach insane levels of undervaluation they are going to remain in a secular bear market. It's possible that we may reach that bottom in the fall of 2012. That is when the next four year cycle low is due.
I said in the Thursday night premium report that we would see manufactured economic data as this bear market progressed, but I had no idea it would start so quickly. Does anyone really believe we created 117,000 jobs last month and that unemployment decreased? I suppose with the markets in free fall it probably wouldn't do to publish the true number, which was almost certainly negative. I suppose it was irrelevant though, it took the market less than 5 min. to figure out the numbers were a sham and sell off.
However, I think the decline is probably done at this point. In my last post I took a guess of 1200 to 1225 as a possible bottoming level. It looks like the government's pathetic attempt at deception drove the market down a little further to 1175. We should now see a violent, and very convincing, bear market rally.
On average the S&P will rally about 90 to 110 points in the first 8 to 15 days out of an intermediate cycle bottom. And those are the statistics for intermediate bottoms in a bull market. Bear market rallies are much more violent.This one could be exceptionally so as I expect the powers that be will try to manufacture another rally similar to what happened at the end of June. This time though there will be true demand behind the rally. If the Fed turbochargers the move we could see 125 to 150 point rally over the next 2 to 4 weeks.
I'm positive after that kind of rally our friend Beanie will return with more talk of Dow 36,000. However he will be wrong again. We are, and have been, in a secular bear market since March of 2000 and in a cyclical bear market since May. Until stocks reach insane levels of undervaluation they are going to remain in a secular bear market. It's possible that we may reach that bottom in the fall of 2012. That is when the next four year cycle low is due.
Volatility Remains High Following Stock Plunge
The market had a positive response to this morning's jobs report, but the enthusiasm was short-lived as investors remain skittish following yesterday's stock plunge, and there may be some hesitancy about buying stocks ahead of the weekend.
This morning's jobs report was much better than expected, and should at least take the recession talk off the table for a bit. Nonfarm payrolls grew by 117,000 in July (vs. 84,000 consensus), which is far better that some of the whisper numbers. Moreover, the prior month's payrolls were revised higher. And private payrolls spiked by 154,000. This helped push the unemployment rate down to 9.1%.
Outside of the jobs report, there hasn't been much in the way of news. All eyes are still focused on Europe, where leaders are said to be holding a conference call over the weekend to discuss solutions. Those markets remain lower this morning, and Asian markets were lower overnight also.
The dollar is lower again today, which is surprising. Gold prices are higher today to $1665, while oil prices continue to fall below the $86 level. Hopefully prices at the pump will also work their way lower in coming weeks.
The 10-yr yield is higher today near 2.49%, following a big multi-day plunge from 2.90% at the end of July. As for the VIX, it was lower at the open, but has since spiked another +10% higher to nearly 35. That is a huge move, and it has only been this high one other time in the last 2 years.
Trading comment: Long-time readers know that I usually don't trust strong market opens. They are just too easy for traders to sell into and knock back down. Especially when the market has been weak, as it has been lately. So I wasn't too excited about this morning's open. The most positive action we could see would be this move lower that we are seeing now, but then a reversal later today that finishes back above the SPX 1200 level.
Remember, markets don't usually make "V" bottoms. So you don't have to try to buy this dip. The normal course of action is for the markets to bounce, and then come back down for some sort of retest. If that retest is successful, it will offer a much lower risk entry point for short-term investors. I think it is too early to be talking about making long-term investments until the market downtrend has run its course.
This morning's jobs report was much better than expected, and should at least take the recession talk off the table for a bit. Nonfarm payrolls grew by 117,000 in July (vs. 84,000 consensus), which is far better that some of the whisper numbers. Moreover, the prior month's payrolls were revised higher. And private payrolls spiked by 154,000. This helped push the unemployment rate down to 9.1%.
Outside of the jobs report, there hasn't been much in the way of news. All eyes are still focused on Europe, where leaders are said to be holding a conference call over the weekend to discuss solutions. Those markets remain lower this morning, and Asian markets were lower overnight also.
The dollar is lower again today, which is surprising. Gold prices are higher today to $1665, while oil prices continue to fall below the $86 level. Hopefully prices at the pump will also work their way lower in coming weeks.
The 10-yr yield is higher today near 2.49%, following a big multi-day plunge from 2.90% at the end of July. As for the VIX, it was lower at the open, but has since spiked another +10% higher to nearly 35. That is a huge move, and it has only been this high one other time in the last 2 years.
Trading comment: Long-time readers know that I usually don't trust strong market opens. They are just too easy for traders to sell into and knock back down. Especially when the market has been weak, as it has been lately. So I wasn't too excited about this morning's open. The most positive action we could see would be this move lower that we are seeing now, but then a reversal later today that finishes back above the SPX 1200 level.
Remember, markets don't usually make "V" bottoms. So you don't have to try to buy this dip. The normal course of action is for the markets to bounce, and then come back down for some sort of retest. If that retest is successful, it will offer a much lower risk entry point for short-term investors. I think it is too early to be talking about making long-term investments until the market downtrend has run its course.
4 Ağustos 2011 Perşembe
ECB Extends Liquidity To Troubled Europe
The market is sharply lower again this morning, despite yesterday afternoon's reversal higher. The concern continues to wash up on our shores from Europe, where conditions don't appear to be improving any. There has also been intervention by some central banks on the part of their currencies.
The Bank of Japan intervened to knock the rising Yen down, which had been hampering exports there. The Swiss National Bank also made moves to try to halt the rise in the swiss franc. This has served to boost the dollar.
In economic news, monthly same-store sales reports were mixed for the most part, which hasn't spurred any enthusiasm in retail stocks. All the sectors are sharply lower so far this morning. The only securities I see that are in the green are the flight-to-safety ones like gold, which is hitting new highs near $1678, and Treasuries as the 10-year yield drops down to 2.48%. Interestingly, the 10-year yield was lower than this last October.
Trading comment: Today feels like capitulation, as many stocks are down 5-7% and volume is very heavy. The market is very oversold, and the conditions for a sharp bounce are falling into place. I have been watching the investor sentiment indicators to see when they get jumpy, and we are starting to see it now. The volatility index (VIX) is up 22% today to 28.50, an extreme jump. The put/call ratio has been above 1.0 all week, and hit 1.45 earlier today. The bears in the AAII poll surged to 50% this week. And today the 1-month T-bill fell into negative territory! That means people were actually paying our Treasury dept. to keep their money safe. Trading bottoms are never pretty, and sometimes scary, but if you're looking to lighten up I think we are closer to that bounce we have been looking for.
The Bank of Japan intervened to knock the rising Yen down, which had been hampering exports there. The Swiss National Bank also made moves to try to halt the rise in the swiss franc. This has served to boost the dollar.
In economic news, monthly same-store sales reports were mixed for the most part, which hasn't spurred any enthusiasm in retail stocks. All the sectors are sharply lower so far this morning. The only securities I see that are in the green are the flight-to-safety ones like gold, which is hitting new highs near $1678, and Treasuries as the 10-year yield drops down to 2.48%. Interestingly, the 10-year yield was lower than this last October.
Trading comment: Today feels like capitulation, as many stocks are down 5-7% and volume is very heavy. The market is very oversold, and the conditions for a sharp bounce are falling into place. I have been watching the investor sentiment indicators to see when they get jumpy, and we are starting to see it now. The volatility index (VIX) is up 22% today to 28.50, an extreme jump. The put/call ratio has been above 1.0 all week, and hit 1.45 earlier today. The bears in the AAII poll surged to 50% this week. And today the 1-month T-bill fell into negative territory! That means people were actually paying our Treasury dept. to keep their money safe. Trading bottoms are never pretty, and sometimes scary, but if you're looking to lighten up I think we are closer to that bounce we have been looking for.
No Recession
Stocks and bond yields are sinking as Wall Street disses the debt deal and instead focuses on a likely double-dip recession.
Everyone is gloomy. But is this pessimism getting a little overbaked?
Granted, the economy is sputtering, with less than 1 percent growth in the first half of the year. But if there is a recession in the cards, it will be the first time one occurs when the yield curve is steeply positive (an ultra-easy Fed) and corporate profits are strong.
And since we do have ultra-easy money and strong profits, I don’t believe we’re heading into a recession. Nor do I believe stocks will continue to swoon.
The principal reason for the sub-par first-half economy is the rise of inflation, which severely damaged real incomes and consumer spending. We experienced a mini oil shock, which has dampened the whole economy. Actually, it’s worth remembering that oil shocks and inverted yield curves, along with falling profits, are the most important leading indicators of recessions. We don’t have this right now.
Fortunately, oil and gasoline prices have come down well below their highs. That’s going to take pressure off the economy.
Of course, QE2 backfired as the dollar sank and the inflation rate temporarily jumped 5 or 6 percent. However, as energy prices have eased back down, the inflation rate as measured by the consumer deflator has fallen, and is up only 1.3 percent annually for the past three months. If the dollar can hold its current level and energy prices remain quiescent, the economy will be okay.
Not great. The second-half economy could grow by 2.5 to 3 percent. There are so many tax-and-regulatory threats out there that it’s hard to expect much more growth. But at least it’s not recession.
Recent reports from the ISM purchasing managers for manufacturing and services are not signaling recession. Car sales have actually bumped up. And at least employment is rising, although slowly.
It’s all sub-optimal, but it’s not recession.
Meanwhile, profits are at record highs as a share of GDP. Second-quarter earnings are coming in much stronger than expected. For some reason investors have chosen to ignore profits. But they’re still the mother’s milk of stocks and the economy. Stocks may well be undervalued right now.
At roughly $95 a share profits for 2011, stocks are running near a 13-times price-earnings multiple, which calculates to a near 8 percent forward-earnings yield. Compare that to a 2.6 percent 10-year Treasury bond or a 5.5 percent Baa investment-grade corporate bond, and you can see that stocks have good value. The equity-risk premium is very high.
At the same time, corporate credit-risk spreads are relatively narrow while financial conditions in general are vastly less stressful than they were a couple of years ago. This is not the stuff of recessions.
Regarding the debt-ceiling deal, no one is thrilled about it. But it is a step in the right direction: no tax hikes and at least some spending cuts. The level of discretionary spending will come down $72 billion over the next two years. Even if the budget caps don’t hold beyond that, it’s still a budget cut without a tax increase.
Some of the Paul Krugman left-wing Keynesian types think small budget cuts will throw us into recession. Not a chance. The GDP is roughly $14 trillion, and total budget spending is moving toward $4 trillion. So these are relatively modest cuts. Plus, if government spending more works to grow the economy, why hasn’t massive government spending already worked to grow the economy? Here’s the dirty secret: Smaller government is good for growth.
We will see what phase two of the debt deal brings. It will be an uphill climb. But at least the strong possibility exists that another $1.5 trillion will be taken out of the spending baseline. That’s not nothing.
And of course, Treasury-debt default was avoided.
Slowly but surely the Tea Party Republican coalition is turning the tide on spending. Too bad President Obama was out once again this week attacking millionaires, billionaires, businesses, and oil and gas with his usual soak-the-rich class-warfare redistributionism. This kind of politics has helped generate a capital strike by profitable and cash-rich businesses. It’s pure folly, and it’s holding back the animal spirits. Stocks dropped 100 points after Obama’s press conference on Tuesday, when he once again blasted free-enterprise incentives.
Which brings me to a final point: What’s missing from the whole budget debate is a true pro-growth tax reform that would flatten rates and broaden the base for individuals and companies. A fresh round of incentives would do wonders for our ailing economy.
Unfortunately, we’re going to have to wait until the 2012 election before we see any of that. In the meantime, despite an anti-growth administration, the free-market economy will continue to muddle through.
Everyone is gloomy. But is this pessimism getting a little overbaked?
Granted, the economy is sputtering, with less than 1 percent growth in the first half of the year. But if there is a recession in the cards, it will be the first time one occurs when the yield curve is steeply positive (an ultra-easy Fed) and corporate profits are strong.
And since we do have ultra-easy money and strong profits, I don’t believe we’re heading into a recession. Nor do I believe stocks will continue to swoon.
The principal reason for the sub-par first-half economy is the rise of inflation, which severely damaged real incomes and consumer spending. We experienced a mini oil shock, which has dampened the whole economy. Actually, it’s worth remembering that oil shocks and inverted yield curves, along with falling profits, are the most important leading indicators of recessions. We don’t have this right now.
Fortunately, oil and gasoline prices have come down well below their highs. That’s going to take pressure off the economy.
Of course, QE2 backfired as the dollar sank and the inflation rate temporarily jumped 5 or 6 percent. However, as energy prices have eased back down, the inflation rate as measured by the consumer deflator has fallen, and is up only 1.3 percent annually for the past three months. If the dollar can hold its current level and energy prices remain quiescent, the economy will be okay.
Not great. The second-half economy could grow by 2.5 to 3 percent. There are so many tax-and-regulatory threats out there that it’s hard to expect much more growth. But at least it’s not recession.
Recent reports from the ISM purchasing managers for manufacturing and services are not signaling recession. Car sales have actually bumped up. And at least employment is rising, although slowly.
It’s all sub-optimal, but it’s not recession.
Meanwhile, profits are at record highs as a share of GDP. Second-quarter earnings are coming in much stronger than expected. For some reason investors have chosen to ignore profits. But they’re still the mother’s milk of stocks and the economy. Stocks may well be undervalued right now.
At roughly $95 a share profits for 2011, stocks are running near a 13-times price-earnings multiple, which calculates to a near 8 percent forward-earnings yield. Compare that to a 2.6 percent 10-year Treasury bond or a 5.5 percent Baa investment-grade corporate bond, and you can see that stocks have good value. The equity-risk premium is very high.
At the same time, corporate credit-risk spreads are relatively narrow while financial conditions in general are vastly less stressful than they were a couple of years ago. This is not the stuff of recessions.
Regarding the debt-ceiling deal, no one is thrilled about it. But it is a step in the right direction: no tax hikes and at least some spending cuts. The level of discretionary spending will come down $72 billion over the next two years. Even if the budget caps don’t hold beyond that, it’s still a budget cut without a tax increase.
Some of the Paul Krugman left-wing Keynesian types think small budget cuts will throw us into recession. Not a chance. The GDP is roughly $14 trillion, and total budget spending is moving toward $4 trillion. So these are relatively modest cuts. Plus, if government spending more works to grow the economy, why hasn’t massive government spending already worked to grow the economy? Here’s the dirty secret: Smaller government is good for growth.
We will see what phase two of the debt deal brings. It will be an uphill climb. But at least the strong possibility exists that another $1.5 trillion will be taken out of the spending baseline. That’s not nothing.
And of course, Treasury-debt default was avoided.
Slowly but surely the Tea Party Republican coalition is turning the tide on spending. Too bad President Obama was out once again this week attacking millionaires, billionaires, businesses, and oil and gas with his usual soak-the-rich class-warfare redistributionism. This kind of politics has helped generate a capital strike by profitable and cash-rich businesses. It’s pure folly, and it’s holding back the animal spirits. Stocks dropped 100 points after Obama’s press conference on Tuesday, when he once again blasted free-enterprise incentives.
Which brings me to a final point: What’s missing from the whole budget debate is a true pro-growth tax reform that would flatten rates and broaden the base for individuals and companies. A fresh round of incentives would do wonders for our ailing economy.
Unfortunately, we’re going to have to wait until the 2012 election before we see any of that. In the meantime, despite an anti-growth administration, the free-market economy will continue to muddle through.
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