Monday, October 17, 2011

Blame the Germans for Today's Selloff? Too Easy of an Explanation

The popular comment today is the market is selling off due to German officials trying to ratchet down expectations ahead of this Sunday's "deadline" for a plan for a plan to be announced.  German Finance Minister Wolfgang Schaeuble said it was wrong to expect a miracle.   So the market is selling off 2%.  Just like it rose last week.... because of the same people were happy enough to let speculation rise to a fervor pitch about said miracle (under guise of a bazooka).
  • "We won't have a definitive solution this weekend," he said.  Schaeuble said the plan would have to include a reduction in Greece's debt mountain. He repeated at the weekend that private bondholders would have to accept steeper voluntary write-downs on their Greek holdings than the 21 percent agreed last July.
  • A lead negotiator for the banks said this could only happen if policymakers addressed the "full range" of sovereign debt issues in Europe. Charles Dallara of the Institute of International Finance (IIF) declined comment on reports that the private sector might have to take a 50 percent loss.

More likely, this was an extremely overbought market which had essentially jumped 13% in 7.25 sessions.  The shorts were squeezed one last time in the closing moments Friday to take the S&P 500 to resistance at 1225 - which was not only the late August highs, but also the 100 day moving average.  So we found a convenient excuse to sell 'em - blame the Germans..

Frankly I did not think it would be so 'clean' as running to 1225 and then reversing on a dime - appeared way too obvious to me, but this time obvious was the right choice.  Now we are back in that little range between roughly 1190 (1188 when we broke through, 1191 currently) and 1225.  We've only just given back a fraction of what was gained the previous two weeks, so nothing to worry about yet.  If there is a close below 1185 in the coming days then we appear back to this multi month whip saw between roughly 1120 and 1220.

Big picture remains over 1240, more constructive, below 1120 more damaging - everything in between just a trader's world.

IBM after the bell will be a good report to watch - they have been hitting home runs constantly the past few years as they've become one of those global multinational powerhouses in which the majority of revenues now come from overseas.  Will be curious what they have to say about the economy - engine maker Cummins finally admitted to slowdown after 2 months ago not seeing it.

  • The US and much of Europe may already be in recession while demand is dropping sharply in emerging markets, the head of one of the US’s biggest manufacturers has warned
  • In an interview with the Financial Times, Tom Linebarger, who will take over as chief executive of Cummins, one of the world’s biggest engine-makers, in January, said he expected the next six to nine months to be a highly uncertain time for the global economy, “Europe could drive another global recession pretty easily,” he said. “Some of the countries in Europe are already in a second recession or will be shortly. That could get a lot worse.”
  • The US is much in the same spot,” Mr Linebarger added. “We’ll find out in three or four months if we’re already in recession but it wouldn’t surprise me to find out that the US is already in negative growth, once all the figures are adjusted, or we’re very close to that. I’m very concerned about that.
  • “We’re seeing the effect in Europe on our business, though what worries me the most is the effect European problems will have on the rest of the world. The US is already weak. If Europe gets a bad cold, the US will get much sicker.”
  • The Cummins chief said he was also worried about emerging markets, whose growth has boosted the manufacturer’s bottom line and is expected to make up an increasingly important part of its revenues in coming years. Three-fifths of the company’s revenues come from outside the US.  “In China and India, their economies are doing well but inflation rates are high, so they’re cutting back on demand and raising interest rates to get inflation under control, which is hurting our markets,” he said. “All those things are near-term concerns of mine.”
  • Mr Linebarger’s comments contrast with recent data that suggest that the US might avoid economic contraction this year, as well as with Cummins’ own projections for its growth in the next four years. Mr Linebarger explained that those targets were longer term, and that the company did not assume growth would be steady.

No position

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