Moody's Warns Of Potential US Debt Downgrade

The market is higher this morning, likely bouncing back from yesterday's little drubbing.  But there hasn't been a lot in the way of market moving corporate news or economic data.

The dollar index is lower after Moody's warned that it could downgrade the US debt rating if Congress doesn't pass some measures that "lead to specific policies that produce a stabilization and then downward trend in the ratio of federal debt to GDP over the medium term".  I just hope Congress heeds their warning.  We all know what a disaster it was last year when the debt ceiling expired with no action.

High end retail stocks like COH, RL, and TIF are lower today after Britain's Burberry cut its profit expectations.

Asian markets were mostly lower overnight. China's Commerce Minister reiterated his skepticism on meeting the 2012 target of 10% growth.

In Europe, attention is turning to the German court which is expected to rule on the constitutionality of the European Stability Mechanism on Wednesday.  German Finance Minister Wolfgang Schaeuble said that Germany remains opposed to Euro bonds and reiterated that shared liability or a printing press won't solve the crisis. 

Commodities are mostly higher.  Oil prices are up to $97 and gold prices are higher near $1738.  Silver prices are also up again, as are copper.

The 10-year yield is hovering around 1.69%.  And the VIX is slightly lower to 15.83 after a huge reversal yesterday.  In my opening post yesterday I noted that the VIX was lower and approaching August's lows, but it soon began to reverse higher and by the end of the day had rocketed 16% off of its lows.  We will see if there is any follow through to come, as the VIX remains below its 50-day average.

Trading comment: Yesterday's selloff was not accompanied by the rise in volume that would mark the sort of distribution that should worry investors.  As of now it appears to be a price dislocation.  As always, it is the follow through of the market that is meaningful.  If we don't see any further downside this week, traders will chalk the selloff up as a one-day wonder.  But we have some big announcements this week with the German ruling on the ESM Wednesday and the FOMC meeting Thursday.  So I think that we are likely to see some bigger moves in the market one way or another.  Tech really took it on the chin yesterday, led by AAPL which will announce the iPhone5 this week.  Some wonder whether it will be a buy the rumor-sell the news type of even.

KAM Advisors has long positions in AAPL and COH

Monday Morning Musings

The markets are slightly lower in early trading after a lackluster overnight session abroad.

Asian markets were mixed after a bevy of economic data was released in China.  Imports and exports both came in below expectations.  Industrial production was also lower than expected coming in at 8.9% yr/yr.  CPI was in line at 2.0% vs. a year ago.  The light data point to a continued slowdown  in economic growth, and lend themselves to the notion that the PBOC will keep its foot on the stimulus pedal.

Material stocks continue to lead after China's stimulus plans announced last week.  Tech stocks are lagging so far today after leading the action last week. 

European markets are fairly quiet, with financials continuining to rally after the ECB's announcement last week for Outright Monetary Transactions (OMT).  Italian Q2 GDP was revised lower to show a contraction of -2.6%.  France also lowered its forecast for GDP to 0.8% from prior expectations for 1.2%.  Spain's 10-year yield is hitting its lowest levels since April, near 5.64%.

There isn't a lot in the way of economic data or corporate news this morning in the U.S.  Investors are eagerly awaiting this Thursday's FOMC meeting, but I still think that the Fed will merely reiterate its recent statements and not announce any new QE initiatives at this point.  Oil and gas prices are up lately, and more QE at this point would likely just drive commodity prices higher.

The dollar is higher today, and commodities are flattish.  Oil prices are steady near $96.33 while gold prices are down a little to $1734.

The 10-year yield is up a little to 1.67%.  And the VIX is down -1.5% all the way down to 14.15 and getting close to its yearly lows seen in August.

Trading comments: The markets put in a very nice week last week.  Breadth in the market improved with over 300 new highs seen on the NYSE.  Moreover, more growth stocks are starting to lead the market vs. the defensive type of stocks we had seen leading previously.  It looks like dips will continue to be bought by portfolio managers until something comes along and really rattles the market and shakes the newly minted bulls' confidence.  We have seen bullish sentiment indicators rising lately.  If more of the indicators begin to hit extreme bullish levels, that could leave the market more vulnerable to a pullback.  But right now it still feels like folks are looking for spots to put money to work in stocks.

China Pumps Up The Stimulus

Markets are mixed in early trading after gains in overseas markets.  Markets soared yesterday after ECB President Draghi announced his new bond buying program, the Outright Monetary Transactions (OMT).  Asian markets soared overnight with Hong Kong up by 3.1% and Shanghai spiking 3.7%, its best single day in three years.

As speculated China announced some big stimulus plans yesterday and today.  Yesterday Beijing said that 18 cities in China would get subway systems.  Today the govt. laid out plans to build more than 1250 miles of road (more roads to nowhere).  Materials stocks shot higher on the news.  Copper prices are also spiking to 4-month highs (JJC) and stocks like FCX, JOY, and CLF are all rallying stongly today.

In economic news, the big bad payrolls report once again disappointed investors, but the damage in the market has been contained.  I said yesterday that the strong ADP report does not have a great history of predicting how strong the govt. payrolls report will come in.  Lo and behold today's jobs report showed just 96k jobs created in August vs. 130k consensus estimates.  On the plus side, the unemployment rate fell to 8.1% from 8.3%, but I presume that this is more from a continued decline in the labor force.

In corporate news, Intel (INTC) stock is lower after the company lowered revenue guidance due to weak demand.  On the flip side, retails stocks LULU and ULTA are both spiking higher today after reporting strong earnings and guidance.

In Europe, optimism is present today as peripheral bond yields continue to come down.  Spanish yields have fallen back to 5.64% and Italian yields are down to 5.08% on 10-year debt.

In the US, our 10-year yield is falling today on the weak jobs report, back down to 1.62%.

The VIX is also another 5.7% lower today back down to the 14.70 level.

Trading comment: The action in the market has been solid.  Yesterday's breakout held into the close with the market finishing right near its highs of the day.  Also, more growth stocks are starting to breakout and lead the market.  This is a change from the last couple of months when defensive stocks were leading the market.  If you look at utility stocks as an example you can see that the bloom has really come off the rose in that sector.  Today materials stocks are leading the rally by a wide margin.  And despite Intel, other tech stocks have been rallying nicely.  AAPL and GOOG are both at new highs.

KAM Advisors has long positions in AAPL, GOOG, ULTA

Draghi Lives Up To His "Whatever It Takes" Comment

Markets are sharply higher in early trading on the heels of some good economic data combined with comments out of the ECB that support Mario Draghi's recent statement that he will do "whatever it takes" to save the euro.

The ECB will commit to buying unlimited amounts of sterilized bonds, acting strictly within its mandate and focusing on bonds with maturities of less than three years.  Countries will still need to first make a formal request for aid first.  But global markets are pleased with this commitment, and markets from Asian to Europe are rallying.

The ECB held its benchmark rate at 0.75%, the Bank of England stayed at 0.5%, but in a surprise move Sweden's central bank cut their key interest rate by 25 basis points to 1.25%.  Separately, the Eurozone Q2 GDP report showed a contraction of -0.2%.  It remains unclear what the eurozone will be able to do to spur growth in the region in the face of much belt tightening and austerity measures.

In the US, the August ISM services index rose to 53.7 from 52.6 last month.  Also, the ADP employment report showed that private payrolls rose by 201k in August, well above expectations for 143k.  In addition last months figures were revised higher from 163k to 173k.  This comes ahead of tomorrow's govt. payrolls report, but the ADP report has not always been a good forecaster of that report.  Current consensus estimates for tomorrow's figures are for 130,000 new jobs.

The euro was lower in early trading after the ECB announcement but has since moved back into positive territory vs. the dollar.  Commodities are higher with gold trading up to $1710 and oil prices higher near $97.15.  Silver prices are also higher as well as copper prices.

The 10-year yield is getting a nice boost to 1.68%.  And the VIX is getting crushed, down -9.5% almost back to the 16.0 level.  Recall that a month ago the VIX got down to 13.45.

Trading comment: The other day I commented that I could easily see the markets breaking out in the near term before any sort of pullback.  That prediction is coming to fruition today as the S&P 500 breaks out to a new high for the year.  At current levels, the SPX is also at a 4 1/2 year high and back to levels we haven't seen since May 2008.  I still think a lot of this price action in the market comes from a combination of the world being awash in liquidity and looking for a home to invest with interest rates near 0%.  Also, I think a lot of portfolio managers continue to underperform their benchmarks and so they are forced to put money to work and scramble to keep up as the market continues to move higher and not offer a good pullback to allow them a better entry point.

More Signs Of China Slowing

The markets are slightly higher in early trading despite across the board weakness in overseas markets.  The markets got a boost from a Bloomberg TV report that said the ECB is considering a bond purchase program that will be unlimited in size as long as bonds are sterilized.  But don't expect Germany to go along with this so easily.  Already Germany's Christian Democratic Party leader said that excessive ECB bond buying could prove inflationary.

Elsewhere in Europe, Germany's PMI Services index was in-line while France's came in light at 49.2 vs. 50.2 expected.  A number under 50 marks contraction. 

In Asian, markets were lower overnight after China's Services PMI fell to a 1-year low of 52.0.  China's Finance Minister indicated he is not optimistic about the current export situation.  Also, Australia's GDP came in light at 0.6% vs. 0.8% expected.  And Australia's services index fell to 42.4 from 46.5 previously.  So those are all signs that point to slowing global growth. 

In the US, productivity figures were revised higher for Q2 to 2.2% from 1.6% and unit labor costs were revised lower to 1.5% from 1.7%.  So those are datapoints that are moving in the right direction.

In corporate news, Facebook (FB) shares are higher after CEO Zuckerberg said he has no intention to sell any shares for at least 12 months.  Jeffries initiated the stock with a 'Buy' and a price target of $30.

The dollar is weaker today as the euro bounces, and commodities are mixed.  Oil prices are lower to $94.65 while gold prices are flattish near $1695.  Copper prices are higher today.

The 10-year yield is at 1.57% and can't stay above its 50-day average.  The VIX has been down as much as 5% and is currently lower by 3.5% to 17.35.

Trading comment: I will post a chart later that highlights the growing bullish sentiment among investors.  When sentiment usually reaches these bullish levels, it isn't long before another market correction surfaces.  I would not be surprised to see this type of action in the near future.  It could also be that since the market likes to keep the majority of investors off balance, we could see a breakout to new highs first that is short-lived and sets the market up for a correction from that point--  just to keep everyone on their toes.  But the NAAIM investor survey is back to very high levels, and the Citibank panic/euphoria model is back near excessive optimism levels.

KAM Advisors has long positions in FB

Tuesday Tidings

Sorry this post is a little later than normal today.  I had to fulfill my parental duties and take my kids to school for their first day of the new year.  Markets are down in morning trade following weakness in overseas markets.

Asian markets were lower overnight after the HSBC PMI data for China over the weekend slumped to a 3-year low of 47.6.  China's stock index was lower overnight and fell to a 3 1/2 year low.  In Australia, the Reserve Bank held rates steady at 3.50% and reiterated its outlook for slowing China growth to weigh on natural resource prices.

In Europe, markets were also lower after PMI readings in Germany, France, and Italy came in below preliminary readings.  Also, Moody's cut its outlook on the EU region to 'negative' from 'stable', which brings into question how long countries like German, UK, France, and Netherlands can maintain their AAA ratings. 

Spanish bond yields were actually lower by 21 basis points earlier as speculation swirls that the ECB may be comfortable buying sovereign debt with maturities up to 3 years.  Global markets are all anxiously awaiting ECB's rate decision and comments on Thursday.

In the US, the August ISM index came in below estimates at 49.6 vs. July's reading of 49.8.

In corporate news, Netflix (NFLX) stocks is lower after Amazon (AMZN) announced a new instant video agreement with EPIX as Amazon takes aim at Netflix's core business.

The dollar has strengthened since the open this morning, and commodities are mixed.  Oil prices are lower, below $95.50, while gold prices remain higher near the $1700 level.  Silver continues to trade well also.

The 10-year yield has fallen back below its 50-day support and is currently near 1.59%.  And the VIX is 6% higher currently to the 18.50 level. 

Trading comment: The markets are struggling this morning to hang on to recent support levels.  It is still early, but the action in the SPX looks like it wants to pullback more.  We'll have to see how the market closes today and how volume levels come in.  I also think that markets could merely chop around until we hear from the ECB and then we could see a bigger move.  So we haven't really changed our recent asset allocations.  We are still underweight equities overall and fairly conservative in our portfolios.

KAM Advisors has long positions in AMZN

HAS QE3 ALREADY BEGUN? COMMODITIES AND GOLD MAY BE SAYING YES.

According to recent statements by Bernanke, the Fed stands ready to act with further easing of monetary policy (QE3) if economic conditions warrant it. But let's face it, because the Fed has never been audited we only receive the data they deem fit to publish. We know the government lies to us about inflation, unemployment, GDP, etc. Does anyone really believe the Fed is publishing true accounting numbers? I'm starting to suspect Bernanke has already begun the next round of quantitative easing. 

Politically QE is a hot potato, and impossible to publicly announce. But there have been enough hints (the last FOMC minutes maybe the loudest) that it is clear that Bernanke intends to print. Hey, we are in a currency war after all, and one can't win the war if you don't shoot your guns!

First case in point. The CRB exploded out of its three year cycle low in June just as I had predicted. Oil is already knocking on the door of $100 a barrel again. Grains in many cases have rallied 50% or more and show no signs of reversing. As a matter of fact, the CRB is showing no inclination to even retest the summer bottom. The complete failure up to this point of commodities to retest the three year cycle low is of itself a warning bell that something has changed. I think we can all agree that the global economy didn't all of a sudden ratchet into high gear, creating a surge in demand. Barring that, the only thing that would generate this kind of explosive move without even a hint of a correction would be another round of massive liquidity injections.

Another odd development is the action in bonds. A month and a half ago the bond market started to discount the inflationary surge as commodities launched out of their three year cycle low. Mysteriously, two weeks ago, interest rates started to tank. 

One has to ask themselves, who in their right mind would be buying bonds with a negative yield in a rapidly accelerating inflationary environment? 

This sudden reversal in interest rates is another warning bell, in my opinion, that QE3 may have already begun, and Bernanke is already buying bonds in the attempt to hold interest rates under 2%.

The next confirmation will come from the stock market. As we have seen in the past, the daily cycle in the stock market has tended to stretch far beyond its normal timing band (35-40 days) during periods of quantitative easing. The current cycle is due to bottom right around the next Fed meeting on September 13. If stocks are still rising with no clear decline into a cycle low by mid-September that would be a pretty clear sign in my opinion that Bernanke is lying to us and QE3 has already begun.

If I am correct then the penetration of the three year cycle trendline by the dollar index on Friday is going to be a harbinger of hard times ahead for the world's reserve currency.

As many of you may recall I've been expecting the three year cycle low in the CRB to correspond fairly closely to a top in the three year cycle on the dollar index. So far the rally out of the May 2011 three year cycle low has been very weak. The dollar still isn't close to moving above the 2008-2011 three year cycle high, and has now formed a monthly swing. 

The dollars three year cycle is now at risk of having topped in only 14 months in a left translated manner. If so, this greatly increases the odds that we will see the dollar index fall below 72 and probably below 70 by the time the next three year cycle bottoms in mid-2014.

If the dollar's current daily cycle continues to drop all the way into the FOMC meeting on September 13, then it will be unlikely we see any significant corrective action in commodities or stocks for the next two weeks, and at that point I am going to seriously entertain the idea that the Fed is lying to us and has already begun the next round of bond purchases.

The big question though, is how do we invest based on this possibility? 

First off one doesn't want to be short if there is even the slightest risk that the Fed has resumed bond purchases. Second, one has to ask themselves which sector stands to benefit the most from another massive increase in liquidity? 

The obvious answer is commodities. But most commodities have already rallied quite significantly as we've seen with the grains and energy. That doesn't mean there isn't more upside, I'm sure there is. But I think much larger percentage gains are going to be made in the precious metals as price and breadth are still quite depressed in this sector.

The metals are now set to "catch up" as traders take profits on some of their other commodity positions that have already generated large gains, and look to put that capital back to work in undervalued areas with more upside potential (precious metals, especially miners).

It's been my theory for several months now that we saw a B-Wave bottom for gold back in May.

With the recent breakout of the frustrating consolidation zone that always follows a B-Wave bottom, I think gold is now ready to begin the initial phase of the next C-wave advance.

Gold is now entering the high demand fall season. It has been my expectation that gold will generate its first test of the all time highs sometime this fall. If my intermediate cycle count is correct (explained in depth in the nightly premium newsletter) we should see a move above the A-wave top of $1800 and a rally close to $1900 by late October or early November. At that point the intermediate cycle will enter the timing band for the next corrective move, which should prevent gold breaking out to new highs

Following an intermediate degree decline in late November to mid December the breakout to new highs should occur during the next intermediate cycle this spring, followed by a retest of that breakout at the next intermediate bottom.

Yes I know these daily and intermediate cycle counts are some what complicated and beyond the scope of this short article. I do cover them extensively in my premium newsletter. Suffice it to say that cycle analysis lays a general guideline for when to expect major bottoms, and to a lesser extent tops. I like to think of it as a tool that signals when to step on the gas and when to start tapping on the brakes.  

While I don't think gold has much chance of moving above $1920 this year, conditions are definitely in place for a significant rally in the sector over the next couple of months. Miners, and silver in particular, have the potential to generate some pretty respectable gains over the next 2-3 months.

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