Tuesday, August 31, 2010

Friday Appears to be 1 Day Wonder

Showing how even when markets are mostly in 1 direction they remain difficult to make money in, Friday's dead cat bounce in retrospect did little other than scald bears who were pressing.  As I review the news flow and time stamps Friday, it seemed very strange to see such a strong rally based on (a) a negative reaction to Ben Bernanke's comments initially [the market sold off post 10 AM] and (b) Intel's pre-announcement on earnings.  Being a cynic and knowing a lot of the "important people" in the capital market had representatives in Jackson Hole, the decision for the Japanese to leave early and talk of an emergency "action" was probably the real reason "those in the know" decided to cover shorts and get flat for the rest of the day, allowing bulls to take the baton.  Pure speculation on my part, I admit but since information is everything and a small select group of oligarchy have their ears in all the right places, I believe this could have been the driver Friday (aside from an oversold market!).

The emergency action did come, as Japan's central bank and government did a 1-2 combo to create stimulus # 21,925 in the 20 year battle against malaise (ever get the feeling we'll be talking about the U.S. in these terms in 2020?) but while it caused a knee jerk reaction of +1.8% in Japan (down from a 3% rally), speculators worldwide were not pleased with the scope of the stimulation.  Without a big enough pacifier in their mouth they threw a temper tantrum and away we went.  Effectively all of Friday's "good action" disappeared yesterday and we're right back to where we started, staring at S&P 1040, with some scalded bear hides (from Friday's action) to add to scalded bull hides (from Monday's action) as Mother Market is the main winner.

From yeterday morning:

  • The Japanese central bank unveiled a new six-month low-interest loan program to financial institutions. Combined with an existing three-month funds-supplying operation worth 20 trillion yen ($236 billion), banks will now have access to a total of 30 trillion yen ($355 billion).
  • The central bank's move, which disappointed investors and analysts hoping for bolder action, was followed several hours later by Prime Minister Naoto Kan's plans for a new economic stimulus package worth 920 billion yen ($10.9 billion). Those steps were also criticized as inadequate.
  • The new stimulus package includes more help for jobseekers, such as enhanced career counseling at universities and an internship program for new graduates. To bolster consumption, the government hopes to extend incentives including a popular "eco-point" program aimed at encouraging purchases of energy-efficient home appliances.
  • The Nikkei 225 stock average rose more than 3% following news of the emergency meeting but pared gains to finish up 1.8%.
  • Richard Jerram, head of Asian economics at Macquarie Securities, described the Bank of Japan's decision as a "helpless, hopeless policy." The government's modest stimulus appears similarly pointless, he said.  "There seems to be a sense of fatalism," Jerram said in a report Monday. "The BOJ continues to play the same old game of making incremental, but ultimately meaningless policy change, in response to political pressure."

This morning, after 24 hours to reflect, the Nikkei was hammered.

As for that bond market selloff?  It lasted 1 whole day.

Aside from the sideshow in Japan and the speculators full on dependence on the suckling of government/central bank teats worldwide, I am growing increasingly concerned about this week's data points.  As I said yesterday I do believe the potential exists for the first contraction in private payrolls (excluding the fantasy birth death model that the government tells us has created millions of small business jobs during the recession) in many months Friday, and the ISM figures in the U.S. and purchasing managers data in China also hold a great possibility of disappointing.  Last month a Chinese PMI figure near flatline was considered "cool" because it meant Goldilocks China had arrived; I don't think outright contraction (a distinct possibility) will be viewed as such - we'll know in 13 hours.

To that end I am considering a small insurance ploy in the portfolio - buying some longer dated SPY puts (perhaps October or December) with a very small portion of the portfolio - they would either expire at worthless or explode higher if this S&P 1040 level breaks and we revisit S&P 1010 (or lower) as the Ides of September approach.  Yesterday's volume was incredibly low and despite the 'pessimism' in the market, I think people are complacent as the high octane, beta generals refuse to sell off.  [Aug 27, 2010: Need to See Pain in These Names - the Generals]  Whatever the case, high levels of cash remain sensible from this set of eyes.

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