GBR Market Wrap: June 10, 2011

Posted on June 10, 2011 by Clemens Kownatzki, MBA

In this Week’s Issue

Weekly Snapshot

• Dow sinks below 12,000; stocks had the sixth straight weekly loss (AP)
• China posted a smaller-than-expected trade surplus in May of $13.1bn (Reuters)
• The average U.S. homeowner now has 38% equity, down from 61% a decade ago (AP)
• Fed surpassed China as the largest holder of U.S. Treasuries (Reuters)
• ECB kept interest rates at 1.25% but signalled July rate hike (CNBC)
• Brazil increased interest rates by 25 basis points to 12.25% (Economy.com)
• Revised data showed Japan’s economy shrank 0.9% in the first quarter (Reuters)
• U.S. trade deficit narrowed by 6.7% in April to $43.7 billion (AP)
• Fitch warns: U.S. Treasuries could be rated junk in August (Reuters)
• Fed survey: Economy falters in several U.S. regions (AP)
• Euro area GDP rose 2.5% compared with the first quarter of 2010 (Eurostat)
• Bernanke signals that the Fed is not planning to ease monetary policy (FT)
• Industrial producer prices for April rose 6.7% y/y in Euro area (Eurostat)
• OPEC unexpectedly decides to keep oil production output unchanged (AP)

Market Barometers

Weekly Chart

QE2 (Quantitative Easing) is coming to an end this month. Sounds like a good time to assess some of the impacts of the Federal Reserve’s recent asset purchases. Please consider our weekly chart courtesy of Global Macro Monitor. In case you were wondering why interest rates are still at rock bottom, here is part of the answer. However, as many prominent names including PIMCO’s CEO Bill Gross have been asking: What happens when the Fed stops purchasing treasuries?

Lines In The Sand

Another week, another big sell-off and I can’t help thinking how much this market reflects the “June-Gloom” weather here in Southern California. We have been looking at the S&P 500 chart with a cautious approach for quite some time now and suggested that there is some considerable risk for a market correction. In one segment we referred to Barry Ritholtz who recommended drawing some lines in the sand. How much pain are you willing to take in terms of your portfolio?

There is some hope though in that the majority of traders seem to agree where that line in the sand is; 1250 on the S&P 500 has been the consensus for a major support. Most of the chartists seem to point to that level as a hard line in the sand. This also suggests a sort of self-fulfilling prophecy might be at play here—it is the main reason why technical analysis works in the first place. When enough people believe 1250 to be a strong support, it may actually come true.

The previous low earlier this year was 1249. This week, we came one step closer to that all-important support of 1250. Yet, the momentum is also slowing down, suggesting that the sellers have been reducing some of their positions recently.

What’s next for you? If your time horizon is short-term, you would have been stopped out of the market some time ago already. As for those who have a slightly longer investment horizon, you may want to draw your own line in the sand, perhaps not directly at 1250 but somewhere close enough below it. How much pain you are comfortable with determines your line in the sand.

Recommended Read

One month ago, we brought up the good old “Sell in May” rule which suggests to exit the stock market and wait until the end of summer to consider buying stocks again. So far it looks like the old saying is spot on and it shows that investors actually acted upon the rule. Please consider Michael Mackenzie & Michael Stothard’s FT article which notes that U.S. equity outflows are the largest in 10 months.

Good luck and good investing!

Clemens Kownatzki, MBA is an adjunct professor of financial risk management at the Graziadio School of Business and Management, as well as the founder and CEO of FX Investment Strategies, a Registered Investment Advisor. In addition to running his investment advisory firm, he is a contributing author at SeekingAlpha.com and BusinessInsider.com. He also authored the book, Money Music 101, available on Amazon and Kindle, in addition to publishing the popular investment blog www.fxinvestmentstrategies.com along with a weekly newsletter.

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Market Wrap: June 3, 2011

Posted on June 4, 2011 by Clemens Kownatzki, MBA

GBR Market Wrap, June 3, 2011

In this Week’s Issue

Weekly Snapshot

• Moody’s sounds alarm over U.S. debt limit and deficits (Reuters)
• U.S. Dollar at yet another record low against Swiss Franc on Friday
• U.S. economy ads just 54,000 jobs as unemployment rises to 9.1% (FT)
• Brazil’s economy reported annual growth of 4.2% in Q1 of 2011 (Economy.com)
• Moody’s cut Greece’s credit rating by three notches to Caa1 from B1 (FT)
• Euro area annual inflation is expected to be 2.7% in May 2011 (Eurostat)
• The yield on the 10-year Treasury sank below 3% for the first time this year (AP)
• The Euro area seasonally-adjusted unemployment rate was 9.9% in April (Eurostat)
• U.S. consumer confidence index fell to 60.8 from a revised 66 in April (AP)
• India’s economic growth rate slowed again to 7.8% in Q1 of 2011 (Economist)
• U.S. home prices declined by 4.2% Q1 of 2011; lowest point since 2006 bust (AP)

Market Barometers

Weekly Chart

Friday’s employment report was a bit sobering. The U.S. economy was only able to create 54,000 new jobs, much less than the roughly 150,000 expected by economists. This is aggravated by the fact that the U.S. economy needs to add at least 100,000 new jobs each month just to keep up with the demographic trends of a steadily growing population. In real terms then, the U.S. economy actually lost about 50,000 jobs last month and that is of course disconcerting for the financial markets as well as the viability of an economic recovery already standing on rater shaky legs.

The chart below compares the job losses during the most recent recession with those of prior periods. Technically, the economic recession has been over for quite some time now. However, the employment recession still lingers on. The possibility of double-dip recession is very much dependent on the outlook for jobs. Let us hope that the slow but steady trend in this chart continues to improve.

Recommended Read

Please consider John Drzik’s guest column in the Financial Times: Price volatility is here to stay.

Recommended Video:

Here we are again with a short technical outlook on the markets. One day before the all important U.S. jobs report, Jeff Macke made a very good call when he suggested: “Brace yourself and if you are nervous about the markets, sell until you can sleep! “

Indeed, you had to brace yourself when U.S. equities nose-dived after a less than favorable jobs report on Friday. As John Drzik’s article above suggested, price volatility is here to stay. This is true not just for commodities but also for equities. Trading of shares, particularly individual stocks, continues to show signs of commodity-like price behavior. Brace yourself or better yet, wear a seat-belt when navigating the financial markets.

Good luck and good investing!

Market Wrap: May 20, 2011

Posted on May 20, 2011 by Clemens Kownatzki, MBA

GBR Market Wrap, May 20, 2011

In this Week’s Issue

Weekly Snapshot

• China overtook India to become the largest market for gold bars and coins (FT)
• German producer prices rose by a stronger than expected 6.4% y/y in April (Reuters)
• Bank of Japan has kept its key interest rate unchanged at zero to 0.1% (NY Times)
• Greece is unlikely to trim budget deficit to 7.6% of GDP this year (Economist)
• Japan’s GDP fell 0.9% in Q1 of 2011, a 3.7% annualized decline (Reuters)
• Dominique Strauss-Kahn has resigned as managing director of the IMF (Bloomberg)
• U.S. existing-home sales eased 0.8% in April; 12.9% below April 2010 (NAR)
• U.S. industrial production was flat in April after having increased 0.7% in March (Fed)
• Euro area external trade surplus was €2.8 bn in March 2011 (Eurostat)
• Euro area annual inflation was 2.8% in April 2011, up from 2.7% in March (Eurostat)
• U.S. reached the legal limits of its $14.3 trillion debt ceiling on Monday (Reuters)
• U.S. housing starts were 523,000, 23.9% below the revised April 2010 rate (ESA)

Market Barometers

Weekly Chart(s)

The U.S. reached the legal limits of its $14.3 trillion debt ceiling on Monday and could go into a technical default in August if politicians won’t raise the debt ceiling (I think we can also discount that any serious budget cuts will be implemented in the near future). Considering this budgeting quagmire, one would have to view the impact on the U.S. Treasury market as fairly negative. Bill Gross, the head of one of the largest Bond managers PIMCO, took that view as PIMCO recently started shorting U.S. Treasuries in the hope of rising interest rates. Yet, the markets haven’t been budging so far. Although pressure on the U.S. administration to reduce their debt burden has been rising, Treasury yields show no signs of an end to the multi-decade trend towards lower rates. The end of the so-called “Debt-Super-Cycle” has been suggested to arrive this summer when the Fed’s QEII program (Quantitative Easing) ends. However, Treasury yields now look a whole lot more like QEIII is on the horizon. Is Bill Gross going to be smiling sometime soon or will we become more like Japan?

Recommended Read
Funding long-term liabilities with short-term debt has been the name of the game keeping some financial institutions as well as numerous governments financially above water. How long this will last and how much longer they are allowed to “float” without having to tread any water (in form of higher interest cost) is the million dollar question of course. In her article “Watch out for tail risks hanging over Treasuries” Gillian Tett discusses some additional issues that could make it more difficult for U.S. coffers to stay above water:

Those 10-year bond rates are still laughably low, meaning financing costs are cheap. But if sentiment ever swings violently, there could be a nasty wake-up call. That is a sobering thought at a time when Washington is also living with a form of political “rollover” risk, namely the danger that Congress keeps staving off any stable, long-term debt deal and resorting to short-term, temporary budget fixes, which like those bonds need to be continually renewed in a peculiarly hand-to-mouth way.

Recommended Video: The S&P at 400?
Last week, we discussed whether the good old “Sell in May” rule should be considered. Indeed, financial markets are sometimes experiencing a lack of investor interest during the summer months. Who can blame the punters if they prefer the surfboard over a trading screen…

More importantly, the argument can be made that stock prices may have run a bit ahead of what would normally be considered a healthy rate of appreciation. Having witnesses this week’s stellar IPO of LinkedIn, whose stock price more than doubled on the first day of public trading, it does indeed bring back memories of the roaring 90’s. No wonder then, that more critical voices are now being heard now. None could be more critical than that of stock market historian Russell Napier. In a recent interview with John Authers, he suggests:

“The real bear market in the S&P has yet to come and could push the US equities index down to 400.”

One might not agree with his target of 400 for the S&P but he does have some convincing arguments to be concerned about risky assets.

Click on the image to play in a new window

Good luck and good investing!

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Category Archives: FT

GBR Market Wrap: June 10, 2011

Market Wrap: June 3, 2011

GBR Market Wrap, June 3, 2011

Market Wrap: May 20, 2011

GBR Market Wrap, May 20, 2011