When Risk-Return Make No Sense: How To Deal With An Overvalued Market
by Zero Hedge - March 31st, 2010 10:50 am
Courtesy of Tyler Durden
As SocGen’s Dylan Grice points out, we have gotten to the point where the Shiller PE demonstrates S&P valuations are now back in the highest valuation quintile: in other words the market is now more expensive than during 80% of the time. The risk-return at this point makes little sense, because as Grice points out the 10 year return using this quintile as an entry point is just 1.7%, compared to 11% for the lowest quintile. So what should one do: “Go take a holiday if you can. Avoid the ?boredom trades?.” If those two are not an option, Dylan provides some trade ideas.
But before we get into it, some amusing observations by Dylan on the Fed’s track record of fixing the economy:
It seems central banks botch exit strategies more often than not. In 1994 Greenspan?’s cack-handed removal of the emergency stimulus implemented during the S&L crisis triggered a bond market collapse which severely dented that year?’s equity returns. In 1998, the tardy withdrawal of the emergency stimulus implemented during the Asian crisis created the tech bubble. And in 2004, a similarly delayed withdrawal of the emergency stimulus implemented to combat the tech bust spawned the housing/credit bubble.
Dylan is confident, as are we, that the QE end in less than 24 hour is just a temporary blip in an otherwise determined push to kill the US middle class and especially the savers among it.
Will the botched exit from this emergency stimulus resemble that of the 1994 vintage (bearish for risk) or those of 1998/2004 (bullish)? I suppose central banks might get lucky and smoothly engineer a ?normalisation? without any painful withdrawal symptoms ? but in the real world credit growth remains subdued, as it did in Japan. If the economy doubledips -? and Albert makes a convincing case it will – and fading stimulus leaves the economy in default-deleveraging mode, there won?t be any exit strategy. There will be more QE…
And here we get to the meat of the matter: the market is now way overbought.
If only my crystal ball was clearer … fortunately though, no crystal ball is needed to see that equity markets are expensive. According to Robert Shiller?s latest data,
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DiggChicago PMI Weaker Than Expected, Advance Release Spooks Market, Inventories Surge Boost Index
by Zero Hedge - March 31st, 2010 10:03 am
Courtesy of Tyler Durden
For those wondering what caused the market to take a beating at 9:42 AM Eastern, it was the 3 minute advance release of the Chicago PMI to subscribers (a topic we have discussed previously). The index came out for the general mort consumption at 9:45 AM, when the bulk of the loss had already taken place. As for the actual data, add the PMI to the latest set of double dip inflection indicative data. After declining sequential increases of 5.8%, 4.8%, and 1.8%, the March PMI recorded a substantial downward move of -6.1%, from 62.6 to 58.8. And as you can see on the chart below, if it had not been for the Inventories subcomponent, which surged by 24% from 42.4 to 52.4, the index would have likely posted a double digit drop. As for the credibility of an inventory build up so late in the stimulus cycle, we will leave that to the integrity of the actual data.
EUR At 1.3507: Goldman EURUSD Re-Stop Time
by Zero Hedge - March 31st, 2010 9:37 am
Courtesy of Tyler Durden
Deja vu all over again. Looks like Goldman is about to be stopped out once more on its most recent EURUSD call. Recall:
We have seen a rush of stops triggered with the push under 1.3400 and the price action would suggest that some more strikes came into play at 1.3350 . The better European data activity has again been swamped by renewed fears for the European periphery , with Fitch’s downgrade of Portugal particularly weighing on sentiment . The probable close today below 1.3430 should herald a fresh leg of weakness following 7 weeks of 1.3430/1.3840 action . Whilst positioning was light 24 hours ago we have seen it build sharply in the past few hours but this does not feel like a crowded trade . We are playing this from the short side and would look upon a rally back to 1.3420 as a selling opportunity. Stop can be placed above 1.3500 . Its hard to know how far this move can extend but a target of 1.3100 mentioned by John Noyce does not seem unreasonable.
The Euro is now over the 1.35 stop limit. And so Goldman makes a boatload yet again as clients lose. Keep an eye on the official close. We wonder if this means third time will be the charm for GS which should next go EUR bullish (once again, and less than a month after the first failed such call).
The Oxen Report: Oil’s Perfect Setup to Test New Highs or Pullback
by David Ristau - March 31st, 2010 9:18 am
Happy Wednesday to all! Yesterday, we got involved in an Overnight Trade of Dollar General Corp. (DG). I had set a high end of my range to enter at 25.20, and I know did not get involved because it did not hit it. Yet, for future reference and unlike my Buy and Short Sales of the Day, a few cents does not make too big of a difference on a well priced stock above $15 or $20. I did not specify that. If you did get involved around 25.25 – 25.30 though, you are sitting pretty right now. DG saw a nice 6.5% rise in profits and beat EPS estimates with a reported 0.51 vs. expected 0.43. The stock is at 26.50 currently in pre-market, which is a solid 5%+ gain for us on the trade. On our Long Play of the Week Mosaic Co. (MOS), it looks to be rebounding today. The stock is already up to 60.20 in pre-market where we bought into it. We will sell if we can get 3-5% today, otherwise continue to hold until tomorrow morning.
Now, I have a perfect play for you lined up for a 10 AM entry.
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Buy Pick of the Day: Proshares Ultra/Ultrashort Oil and Gas ETF (DIG/DUG)
Analysis: One of my favorite trades that lines up from time to time is a play surrounding the crude inventories. Currently, oil is trading around that lovely $83 level and has bounced back from a small decline over the past couple days. Oil is hitting prices, though, it has not been at in a couple years. I think it is in a crucial spot right now to really take off and test new highs up to $85 and set a new range or decline back down over the coming days. There are a lot of factors that go into that movement, but one of the main catalysts of oil prices is the weekly crude oil inventory reports.
Last week, crude oil inventories added 7.3 million barrels, which helped to bring the price down of oil throughout the rest of the week. Prices have bounced back, but another addition to that number this week would we assume have a similar effect. A decline, though, would probably be a catalyst to push things even higher. Since we know that oil does not really run on fundamentals, the inventories work as…
Frontrunning: March 31
by Zero Hedge - March 31st, 2010 9:03 am
Courtesy of Tyler Durden
- Former Bernanke colleage and co-author Vince Reinhart: “Geithner and Bernanke Are Wrong about Fed Power. Letting the Federal Reserve keep a hand in bank supervision and regulation is a mistake.“ (The American) Please read : Monetary Policy Alternatives at the Zero Bound: An Empirical Assessment Author(s): Ben S. Bernanke, Vincent R. Reinhart, Brian P. Sack Source: Brookings Papers on Economic Activity, Vol. 2004, No. 2 (2004), pp. 1-78, in which the authors (among whom is Brian Sack, head of the Fed’s trading desk) recall the golden days of Roosevelt’s dollar devaluation, and hint at what’s to come for the US currency
- The Greek ex-Goldman guy who just blew up the 12 Year fly by is now preparing to issue $16 billion in dollar denominated bonds by early May. Ah yes, nobody can see behind the ruse of issuing bonds in the world’s worst currency. Brilliant. Here’s the funny part - Tim Geithner plans to issue $16 trillion denominated in Greek Drachma (Bloomberg)
- Emerging market currencies show short-term cracks (Reuters)
- Gartmore may face withdrawals after investigation (Bloomberg, Telegraph)
- Steve Forbes: “President Obama and Speaker Nancy Pelosi rammed ObamaCare through the House by unprecedented parliamentary trickery, bribery and deceit.” (Forbes)
- Obama to permit oil exploration off Virigina coast (Reuters)
- Bill Clinton’s $20 million break up with Ron Burkle (Daily Beast)
- iPad sales anyone’s guess as analysts skip estimates (Bloomberg)
- Macarthur coal rejects Peabody’s $3 billion bid (Reuters)
- Fraud on the street: Where on earth has the SEC been (Robert Reich)
- Natural gas ETF flaming out versus oil (Fundmastery)
- Man plunges to death from 66th floor of Empire State Building (WSJ)
- The case for higher real rates (Morgan Stanley)
- Rahn: Learning from Switzerland (Washington Times)
Wednesday’s Worry – World Wide Cash Crunch
by Phil - March 31st, 2010 8:37 am
Hugo Chavez is running low on cash.
Should you care that he just had to withdraw $5Bn from reserves, sending them to a 10-month low and down 19% to $28.35Bn? Well it’s not just Venezuela but they are a good example of what’s happening around the World as even oil-rich nations can no longer prop up their economies and will have to begin competing with the US, Europe and Japan to borrow money on the international markets. Venezuela may have external debt financing needs this year of as much as $19 billion and as much as $22 billion in 2011 should authorities choose not to use non-reserve savings estimated at $41.1 billion, according to Morgan Stanley. “Short of some break in Venezuela’s current dynamic, the economy may be faced with a severe dollar crunch as early as this year,” Pardelli and Volberg said. “The dollar crunch may prompt the authorities to attempt to buy time by drawing down their hard currency savings, issuing debt or significantly ratcheting up policy heterodoxy.”
Greece needs $15.6Bn by the end of May and that much again in August and November. Seven-year notes sold by the government this week fell even after the European Union and the International Monetary Fund crafted an aid package that would be triggered should the nation be unable to raise sufficient cash from capital markets to cover its financing needs. Greece may pay about 13 billion Euros more in interest on the debt it sells this year than it would have to had yields stayed at their pre-crisis levels relative to Germany’s.
The UK will be spending 10% of their tax revenues just to pay the interest on their debt as debt itself soars to 90% of GDP with debt now costing the UK more than their Defence and Transportation budgets combined. Neighboring Ireland is looking at a $110Bn bill over the next 12 months to stabilize it’s bad banks – and that’s AFTER giving the banks a 47% haircut on the value of the assets the government will be picking up. This will not be counted as an addition to Ireland’s already $95Bn in debt for 2010 because, technically, they are buying an asset - even if the asset is toxic. It’s the same trick our Fed uses every month to pretend things are fine…
Fed President Richard Fisher says the U.S. can’t ignore the effect of the…
Disappointing ADP Comes In At -23K, Consensus Was For +40K
by Zero Hedge - March 31st, 2010 8:26 am
Courtesy of Tyler Durden
And just to make the miss a little more palatable, February was revised from -20K to -24K just to not show a double dip inflection point. Also, keep in mind the increasingly largest employer, the US Government, is not accounted for. Next up: Friday NFP and a +200,000 consensus, of which February snow counter-adjustments and census is about pretty much all of that.
Daily Highlights: 3.31.10
by Zero Hedge - March 31st, 2010 8:14 am
Courtesy of Tyler Durden
- Asian stocks decline on concern rally may overvalue earnings; Yen weakens.
- Australia gives in-principle approval for Nomura unit to set up 2nd Australian stock exchange.
- Australian retail sales and building approvals unexpectedly tumbled by 1.4% in February.
- Consumer confidence in US improves, Home Prices climb amid job optimism.
- Greece plans to sell a global bond in dollars to help raise 11.6 billion euros.
- Ireland’s banks will need $43B in capital after ‘appalling’ lending.
- Japanese business sentiment approaches pre-crisis levels, Tankan may show.
- Obama to announce proposals to allow oil and natural-gas drilling off US coastlines.
- Oil hovers above $82 in Asia after mixed supply report suggests US crude demand recovering.
- U.S. stock futures points to a solid first quarter; ahead ADP’s estimate.
- Yen declines toward eight-week low versus Euro amid global recovery signs.
- Taiwan’s Acer audited Q4 net up 25 percent.
- AT&T stepping up efforts to improve network quality as Apple plans new iPhone version.
- Athabasca Oil Sands Corp. raises $1.32B in biggest Canada IPO since 1999.
- BP awarded about $500M in contracts to drill wells in Iraq’s giant Rumaila oil field.
- Chiquita Brands Intl expects Q1 results will be “substantially lower” than a year earlier.
- EMI, Universal Music said to resume talks for catalog.
- H.B. Fuller beats by $0.10, posts Q1 EPS of $0.38. Revs up 11.1% at $309.4M. Guides FY10 revs above cons.
- Honeywell Intl ups Q1 EPS view to $0.45-0.49 (prev $0.40-0.45) on stronger orders.
- Hynix new CEO: 2010 memory chip market likely to be “good”.
- J&J gets an offer from PE firm GTCR Golder Rauner for its breast-care business. Terms undisclosed.
- Nissan to sell 4-door electric car in US for just over $25K; could force rivals to cut prices.
- Novell wins jury verdict that it owns the rights to Unix OS and not SCO Group.
- Panasonic rejects Google’s Android for its TVs because of cost.
- Peabody Energy makes unsolicited $3B cash offer for Macarthur Coal.
- SAIC Inc. reduced its full- year EPS f’cast after Q4 profit missed analysts’ estimates.
- Swiss Life’s full-year profit fell 21% as year-ago figures were boosted by big disposal gains.
Economic Calendar: Data on Chicago PMI, Factory Orders & Crude Inventories to be released.
Earnings Calendar: ANGO, AYI, BLUD, CASC, DG, MOS, MU, NEXM, RAD, RIMM, SHLM.
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RANsquawk 31st March Morning Briefing – Stocks, Bonds, FX
by Zero Hedge - March 31st, 2010 8:08 am
Courtesy of Tyler Durden
Ovebanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe, and Ireland in Particular!
by Zero Hedge - March 31st, 2010 6:38 am
Courtesy of Reggie Middleton
Ireland has finally admitted the horrendous condition of its banking system. I actually give the government kudos for this, and await the moment when the US, China and the UK come forth with such frankness. That being said, things are a mess, I have forewarned of this mess for some time now. First, the lastest from Bloomberg: Ireland’s Banks Will Need $43 Billion in Capital After `Appalling’ Lending
March 31 (Bloomberg) — Ireland’s banks need $43 billion in new capital after “appalling” lending decisions left the country’s financial system on the brink of collapse. The fund-raising requirement was announced after the National Asset Management Agency said it will apply an average discount of 47 percent on the first block of loans it is buying from lenders as part of a plan to revive the financial system. The central bank set new capital buffers for Allied Irish Banks Plc and Bank of Ireland Plc and gave them 30 days to say how they will raise the funds.
“Our worst fears have been surpassed,” Finance Minister Brian Lenihan said in the parliament in Dublin yesterday. “Irish banking made appalling lending decisions that will cost the taxpayer dearly for years to come.”
Dublin-based Allied Irish needs to raise 7.4 billion euros to meet the capital targets, while cross-town rival Bank of Ireland will need 2.66 billion euros.Anglo Irish Bank Corp., nationalized last year, may need as much 18.3 billion euros. Customer-owned lenders Irish Nationwide and EBS will need 2.6 billion euros and 875 million euros, respectively.
‘Truly Shocking’
The asset agency aims to cleanse banks of toxic loans, the legacy of plungingreal-estate prices and the country’s deepest recession. In all, it will buy loans with a book value of 80 billion euros ($107 billion), about half the size of the economy. Lenihan said the information from NAMA on the banks was “truly shocking.”
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Capital Target
Lenders must have an 8 percent core Tier 1 capital ratio, a key measure of financial strength, by the end of the year, according to the regulator. The equity core Tier 1 capital must increase to 7 percent.
AIB’s equity core tier 1 ratio stood at 5 percent at the end of 2009 and Bank of Ireland’s at 5.3 percent. Those ratios exclude a government investment of 3.5 billion euros in each bank, made
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
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