by ilene - July 28th, 2015 5:05 am
As I have noted for the last two weeks, this earnings season carries a special significance. It provides an alternative to the official data on the economy. After a bad week for stocks, the punditry will be asking:
What is the message of the market?
Prior Theme Recap
In my last WTWA [Weighing the Week Ahead], I predicted that attention to earnings reports would once again dominate the news. This was an accurate call. Earnings stories, both good and bad, were daily highlights. Our featured chart on dollar weakness as more important than geopolitics was especially accurate. More on earnings in the account of the week below.
We would all like to know the direction of the market in advance. Good luck with that! Second best is planning what to look for and how to react. That is the purpose of considering possible themes for the week ahead. You can try it at home.
This Week’s Theme
Earnings season has developed a bipolar theme: Strength in some popular momentum names and weakness in stocks sensitive to the dollar. The market has provided a daily verdict on earnings reports. For many there is also an important economic message. Observers are asking:
What is the message of the market?
…and for some… Will the Fed be listening?
The earnings message draws several different viewpoints, including some noted last week.
- A weak economy has finally taken a toll on corporate profits, especially in some sectors.
- Stock market leadership has narrowed dramatically. Frank Zorilla illustrates with the chart below. He is open-minded about how this divergence could resolve, including a possible broad rally.
Stockbee has a very similar take on this important theme, including the potential for a rally.
- The strong dollar has hurt exports and profit margins of many large companies. It is showing up dramatically in energy stocks.
- Commodity price declines have accompanied the earnings
by ilene - July 27th, 2015 6:35 pm
By John Mauldin
“I am sure the euro will oblige us to introduce a new set of economic policy instruments. It is politically impossible to propose that now. But some day there will be a crisis and new instruments will be created.”
– Romano Prodi, EU Commission president, December 2001
Prodi and the other leaders who forged the euro knew what they were doing. They knew a crisis would develop, as Milton Friedman and many others had predicted. It is not conceivable that these very astute men didn’t realize that creating a monetary union without a fiscal union would bring about an existential crisis. They accepted that eventuality as the price of European unity. But now the payment is coming due, and it is far larger than they probably anticipated.
Time, as the old saying goes, is money. There are lots of ways that equation can work out. We had an interesting example last week. Europe and the eurozone pulled back from the brink by once again figuring out how to postpone the inevitable moment when all and sundry will have to recognize that Greece cannot pay the debt that it owes. In essence they have borrowed time by allowing Greece to borrow more money. Money, I should add, that, like all the other Greek debt, will not be repaid.
I’ve probably got some 40 articles and 100 pages of commentary on Greece and the eurozone from all sides of the political spectrum in my research stack, and it would be very easy to make this a long letter. But it’s a pleasant summer weekend, and I’m in the mood to write a shorter letter, for which many of my readers may be grateful. Rather than wander deep into the weeds looking at financial indications, however, we are going to explore what I think is a very significant nonfinancial factor that will impact the future of Europe. If it was just money, then Prodi would be right – they could just create new economic policy instruments, whatever the heck those might be. But what we’ve been seeing…
by ilene - July 27th, 2015 4:23 am
Bloomberg video: Herald Van Der Linde, head of equity strategy at HSBC, discusses Chinese equities and the Shanghai Composite's 8.5% smackdown. Other Asian and European markets are down in sympathy. (Source: Bloomberg)
Courtesy of Mish.
The crash in Chinese stocks continued today following a respite last week.
Shares on the Shanghai index plunged 8.48%, the Biggest One-Day Plunge Since February 2007.
The CSI300 index of the largest listed companies in Shanghai and Shenzhen fell 8.6 percent, to 3,818.73, while the Shanghai Composite Index SSEC lost 8.5 percent, to 3,725.56 points.
The drops were the biggest since Feb. 27, 2007.
It wasn't immediately clear what caused such a sharp tumble in the afternoon session. At midday, the two indexes were down about 2.5 percent.
"The recent rebound had been swift and strong, so there's need for a technical correction," said Yang Hai, strategist at Kaiiyuan Securities.
It should be immediately clear stocks are in a bubble, so there is no need to search for a "reason" for the plunge.
If anything, one might wonder why the stocks rose to such absurd valuations in the first place.
$SSEC Shanghai Index
Stock rose from about 2300 in November to 5178 in June. That was an advance of 125% or so in about seven months. Today's decline is shown by the second blue arrow.
Since the plunge in June, China stepped in to directly buy stocks, prohibit short selling, halted trading on half the companies, and prohibited large shareholders from selling any shares for six months.
Expectation of such moral-hazard maneuvers coupled with cheap money is exactly what fuels bubble activity in the first place.
Amusingly, margin buying is still at or near record levels.
Mike "Mish" Shedlock
by ilene - July 26th, 2015 9:59 am
Courtesy of Marc To Market
Surveys suggest that a little more than 80% of the economists expect the Federal Reserve to hike rates in September. The September Fed funds futures, the most direct market instrument, has only about a 50% chance discounted. This week's FOMC meeting is the last one before September. The economy is performing largely in line with the Fed's expectations. Investors may be looking in vain if they expect some hint from the FOMC that it will in fact hike rates in September. It is more reasonable to expect a non-committal statement on the timing of the liftoff, as Yellen was in her recent Congressional testimony.
The Fed diligently worked to shift the focus of the outlook of policy from a date-specific commitment to a data-dependent path. A signal of a September rate hike would bring investors back to thinking about the date and unwind the Fed's efforts. This is unlikely. There are still much economic data to be released, including two employment reports. Also in the coming weeks, there will be a greater sense of the economic performance for the first couple of months of Q3.
The day after the FOMC meets, the US will publish its first estimate of Q2 GDP. The Atlanta Fed says it is tracking about a 2.4% annualized pace. We suspect the risk is on the upside. Economists may take advantage of the June durable goods orders report to tweak their forecast.
We know that Boeing orders jumped to 161 in June from 11 in May. This bodes well for headline orders, which may rise 3.2%-3.5% after a 1.8% decline in May. The details, especially the orders and shipments for nondefense and non-aircraft durable goods, should point improving business investment, and better overall growth.
Annual benchmark GDP revisions will also be announced. With new seasonal adjustments, the biggest impact is likely not to be so much on growth itself, but how it is distributed between the quarters. There is some risk that the first quarter may be revised up, but this may…
by ilene - July 24th, 2015 4:25 pm
Courtesy of Lance Roberts via STA Wealth Management
Is it just me? Last week while on vacation, the markets surged back to all-time highs as the Greek and China problems were solved. Unfortunately, as I left the white, sandy beaches and clear ocean waters behind me to return to reality – so did the markets. Either it is purely coincidental or I should head back to Mexico.
As I discussed earlier this week (chart updated through Thursday's close):
"While the prices did manage to break out of the downtrend that has contained the market since mid-May, so far that rally has failed to attain new highs. Furthermore, the previous oversold condition that acted as the "fuel" for the recent rally has been exhausted with the markets are now back to an extreme overbought condition. This suggests that there is likely very little upside currently and that investors should consider using this opportunity to engage in prudent portfolio management practices such as taking profits, reducing laggards, and rebalancing allocations."
That advice has played out well as the markets have continued to deteriorate, along with a vast majority of internal measures. The question is now, and is the subject of this weekend's reading list, is the correction over? Or, is this just the beginning of something bigger?
1) The Thinnest New High In Stock Market History? by Dana Lyons via Dana Lyons' Tumbler
"When we posted yesterday's piece on the stock market's weak internals (If Beauty's On The Inside, This Market Wins The Ugly Contest), we weren't sure if things could get any worse – and by how much – with the major averages still able to hold near 52-week highs. Well, the answers were 'yes' and 'a lot'."
Read Also: What Do 1987, 2003, 2009 And 2015 Have In Common by Chris Ciovacco via Ciovacco Capital
2) Doubling Down On A Summer Correction by Michael Gayed via MarketWatch
"This is not about opinion, and this is not a call. The odds simply favor some kind of heightened volatility, and volatility tends to coincide with corrections in stocks. Much like in July 2011 when stocks rallied and all seemed well
by ilene - July 23rd, 2015 12:50 am
Courtesy of Joshua M Brown
Jeff Gundlach thinks junk bonds could be the next big blowup. Carl Icahn agrees. Others are pointing to the burst in non-traditional bond fund inflows and the proliferation of exchange traded products that traffic in some of the less liquid and more esoteric fixed income asset classes – like bank loans and such.
Advisors have been stuffing their clients to the gills with instruments that a) they don’t understand and b) have never seen a down-cycle. Surprises will be legion, whether interest rates rise or defaults rise or some other event comes long to shake confidence and drive outflows. There’s no possible way this ends quietly. The In door is always easier to squeeze through than the Out door.
I’m seeing ETF bloggers and “liquid alt” industry experts (totally captured) opine on how Icahn “doesn’t understand” ETFs and I’m laughing to myself. The guy has five f***ing decades of trading and investing excellence under his belt, having started his career as one of the foremost authorities on options trading in New York City prior to making money in a Skittles rainbow of different investment strategies. Don’t confuse the heavy Queens accent and the off-the-cuff rhetoric for ignorance about the creation/redemption process in the ETF market.
Besides, since when has the mechanism of a product been the critical factor that either prevented or caused a blowout? It’s never the mechanics, it’s always the fate of the underlying. If everyone wants to buy or sell something at the same time, the asset is going to spike or plunge, regardless of the mousetrap through which they’re attempting to participate.
The Wall Street Journal has a piece today about how hedge funds are gearing up to take advantage of the next blowup:
Wall Street is preparing for panic on Main Street.
Hedge funds are lining up to profit from potential trouble at some “alternative” mutual funds and bond exchange-traded funds that have boomed in popularity among retirees and other individual investors.
Financial advisers have pushed ordinary investors into those funds in search of higher returns, a strategy that has come into favor as
by ilene - July 19th, 2015 11:00 am
Courtesy of Marc To Market
IMF Rips Pandora’s Box To Shreds, Demands Greek Debt Relief “Far Beyond What Europe Has Been Willing To Consider”
by ilene - July 14th, 2015 7:05 pm
Earlier today, Reuters first leaked that just two weeks after the IMF released its first revised Greek debt sustainability report, one which the Eurogroup desperately tried to squash as it urged for a 30% debt haircut and came hours before the Greek referendum vote giving the Oxi camp hope and crushing Tsipras' carefully laid plan to lose the vote and capitulate with integrity instead of having to capitulate a week later after 17 hours of "mental waterboarding" and have his reputation torn to shreds, the IMF would release a follow up report updating its view on the Greek economy which in just two short weeks of capital controls has utterly imploded.
Just like the first IMF report, which we correctly compared to the opening of a Pandora's box, and with which the IMF also obliterated the careful plans of the Troika, so with this follow up the IMF effectively crushes the glideslope of the latest Greek bailout process barely scraped together on Monday morning and has torn Pandora's box to shreds with the following summary assessment: "Greece’s debt can now only be made sustainable through debt relief measures that go far beyond what Europe has been willing to consider so far."
Yes, debt relief… just the others' debt: not the IMF's, please.
So what just happened?
As of this moment the IMF is telling Greece that if nothing changes, it will die of cancer with 100% certainty; on the other hand the Eurogroup is telling Greece it will die of a heart attack also wih 100% certainty if anything changes.
Good luck with the choice.
Here are the report punchlines:
- Greece’s public debt has become highly unsustainable. This is due to the easing of policies during the last year, with the recent deterioration in the domestic macroeconomic and financial environment because of the closure of the banking system adding significantly to the adverse dynamics. The financing need through end-2018 is now estimated at Euro 85 billion and debt is expected to peak at close to 200 percent of GDP in the next two years, provided that there is an early agreement on a program. Greece’s debt can now only be made
by ilene - July 11th, 2015 4:29 am
Courtesy of Joshua Brown, The Reformed Broker
The Great Fire of London began at a bakery in Pudding Lane on September 2nd, 1666. A few hundred houses caught flame in the vicinity and then the wind took the fire east, burning everything in its path. The first thing Londoners did was try pouring buckets of water on the burning buildings. This didn’t work so the next thing they attempted was escape, a crush of humanity piling up along the Thames waiting for boats to get them clear of the inferno.
By September 4th, it became clear that escape for everyone would be impossible. The fire had to be brought under control immediately to save lives, not just property. The king ordered a firebreak, which involved pulling down all of the houses in the fire’s path using hooked poles. When that process proved not to be fast enough, the king ordered a massive gunpowder explosion – akin to blowing up a neighborhood with a bomb – so as to save the rest of the city.
After four days of fighting the blaze, they had finally succeeded. Only one-fifth of the city’s buildings were still standing, with an estimated 13,000 private dwellings either burned to the ground or deliberately destroyed. Miraculously, historical records indicate that only six people died.
200 years later, the residents of Chicago would not be so lucky after Mrs. O’Leary’s cow kicked over a kerosene lamp. We’re told by Harper’s that the Great Chicago Fire of October, 1871, “burned for 29 hours, cutting a destructive swath through 17,450 buildings on 73 miles of streets, leaving an estimated 300 people dead, 100,000 homeless, and $192 million worth of property destroyed.” Temperatures reportedly reached levels “high enough to disintegrate stone into powder and granite into lime, melt iron (2000º F) and steel (2500º F), and explode trees from their own heated resin.”
The windy conditions for which the city is famous made the fire nearly impossible to contain. The only reason the South Side was saved was that the order finally came down to make a firebreak. City officials commanded that buildings be blasted with dynamite to create some space in which the fire could peter out rather than spread further.
by Market Shadows - July 5th, 2015 6:56 pm
The Greeks said 'NO.' 61% voted against accepting the latest bailout package offered to them by their European creditors. Here's a tour of the many thoughts about what's next for Greece.
[Picture Source: Drudge Report Headline]
Greece Says 'NO'; Thousands Celebrate; Emergency Summit Called (Business Insider)
The landslide victory for the "No" campaign is a major surprise. Athens exploded in celebration over the result, with thousands streaming into Syntagma Square, waving Greek flags, chanting, and setting off fireworks.
But the party could be short-lived. A "No" (Oxi) vote will mean that Greece will likely default on almost all its remaining debt, maybe exit the EU, abandon the euro and re-adopt its old currency, the drachma. That would plunge Greece into even more economic turmoil as it would become an international pariah, largely cut off from the credit markets countries need to finance themselves.
Ending Greece's Bleeding (Paul Krugman, NY Times)
Europe dodged a bullet on Sunday. Confounding many predictions, Greek voters strongly supported their government’s rejection of creditor demands. And even the most ardent supporters of European union should be breathing a sigh of relief.
Of course, that’s not the way the creditors would have you see it. Their story, echoed by many in the business press, is that the failure of their attempt to bully Greece into acquiescence was a triumph of irrationality and irresponsibility over sound technocratic advice.
Greece votes No — now what? (FT.com)
Sugar, flour, rice: panicked Greeks stock up on essentials (Yahoo Finance)