Monday, December 5, 2011

Just about Every Country in Europe Downgraded

Probably would be simpler to name the ones S&P did not downgrade - it certainly wasn't just 6!  My twitter feed is naming countries I didn't know even existed ;)

Standard and Poor's (S&P) is reportedly set to put all 17 eurozone countries on "credit watch" due to fears over the impact of the debt crisis.

Slovak, Italy, Estonia, Germany, Belgium, Portugal, Finland, Malta, Germany, France, Holland (that's what I call 'em!) ... well you get the idea


We believe that these systemic stresses stem from five interrelated factors:
  1. Tightening credit conditions across the eurozone;
  2. Markedly higher risk premiums on a growing number of eurozone sovereigns, including some that are currently rated 'AAA';
  3. Continuing disagreements among European policy makers on how to tackle the immediate market confidence crisis and, longer term, how to ensure greater economic, financial, and fiscal convergence among eurozone members;
  4. High levels of government and household indebtedness across a large area of the eurozone; and
  5. The rising risk of economic recession in the eurozone as a whole in 2012. Currently, we expect output to decline next year in countries such as Spain, Portugal and Greece, but we now assign a 40% probability of a fall in output for the eurozone as a whole.

Austria (Republic of) Sovereign Credit Rating  AAA/Watch Neg/A-1+   AAA/Stable/A-1+
Belgium (Kingdom of) Sovereign Credit Rating   AA/Watch Neg/A-1+    AA/Negative/A-1+
Finland (Republic of) Sovereign Credit Rating   AAA/Watch Neg/A-1+   AAA/Stable/A-1+
France (Republic of) Sovereign Credit Rating   AAA/Watch Neg/A-1+   AAA/Stable/A-1+
Germany (Federal Republic of) Sovereign Credit Rating   AAA/Watch Neg/A-1+   AAA/Stable/A-1+
Luxembourg (Grand Duchy of) Sovereign Credit Rating   AAA/Watch Neg/A-1+   AAA/Stable/A-1+
Netherlands (The) (State of) Sovereign Credit Rating   AAA/Watch Neg/A-1+   AAA/Stable/A-1+
Long- and short-term ratings on CreditWatch negative
Estonia (Republic of) Sovereign Credit Rating   AA-/Watch Neg/A-1+   AA-/Stable/A-1+
Ireland (Republic of) Sovereign Credit Rating   BBB+/Watch Neg/A-2   BBB+/Stable/A-2
Italy (Republic of) Sovereign Credit Rating   A/Watch Neg/A-1      A/Negative/A-1 
Malta (Republic of) Sovereign Credit Rating   A/Watch Neg/A-1      A/Stable/A-1
Portugal (Republic of) Sovereign Credit Rating   BBB-/Watch Neg/A-3   BBB-/Negative/A-3
Slovak Republic Sovereign Credit Rating   A+/Watch Neg/A-1     A+/Positive/A-1
Slovenia (Republic of)  Sovereign Credit Rating   AA-/Watch Neg/A-1+   AA-/Stable/A-1+
Spain (Kingdom of)  Sovereign Credit Rating   AA-/Watch Neg/A-1+   AA-/Negative/A-1+
Short-term ratings on CreditWatch negative, long-term ratings still on
CreditWatch negative
Cyprus (Republic of) Sovereign Credit Rating   BBB/Watch Neg/A-3    BBB/Watch Neg/A-3

GMO's Jeremy Grantham's Q3 Letter: The Shortest Quarterly Letter Ever

I've been wondering when the latest Grantham letter would be out, and it has just hit the interwebs, titled: The Shortest Quarterly Letter Ever.  For Grantham it is indeed a fraction of his normal self - a mere 4 pages.

Some excerpts pulled out courtesy of ZeroHedge (without the terrorizing headline) ;)
  • Avoid lower quality U.S. stocks but otherwise have a near normal weight in global equities.
  • Tilt, where possible, to safety.
  • Try to avoid duration risk in bonds. For the long term they are desperately unattractive. Don’t be too proud (or short-term greedy) to have substantial cash reserves. Admittedly, this is the point where we at GMO try to be clever and do a little better than the minus 1% real from real cash – and, so far, with decent success.
  • I like (personally) resources in the ground on a 10-year horizon, but I am nibbling in very slowly because, as per my Quarterly Letter on resources in April 2011, I fear a major short-term decline in commodities based on a combination of less bad weather – which has been bad, but indeed less bad – and economic weakness, especially in China. Prices have declined, often quite substantially, since that letter. However, I believe chances for further price declines in resources are still better than 50/50 as China and the world slow down for a while, and the weather becomes a bit more stable.

Full read here - as always hit fullscreen for the easy read

Grantham Qtrly Letter

Some older letters:

[Jul 25, 2011: GMO's Jeremy Grantham's Q2 Letter: Separating the Dangerous from the Merely Serious]
[Jan 26, 2011: GMO's Jeremy Grantham Q4 Letter: Pavlov's Bulls]
[Nov 11, 2010: [Video] Jeremy Grantham Speaks]
[Oct 27, 2010: Jeremy Grantham GMO October 2010 Letter - Night of the Living Fed]
[Aug 3, 2010: Jeremy Grantham GMO July 2010 Letter - Summer Essays]
[Apr 26, 2010: Jeremy Grantham GMO April 2010 Letter]
[Jan 26, 2010: Jeremy Grantham GMO January 2010 Letter]
[Oct 27, 2009: Jeremy Grantham GMO October 2009 Letter] Report S&P to Put 6 Euro Nations on Credit Watch Negative Including Germany and France

Hmmm.... a bit of a dip in the market on this news but not truly "risk off" (that's when you buy the ETF: OFF)  But I am sure Germany is perturbed by this.  Maybe when they are threatened with their rating, that will be the step that allows for Full Bernanke at the ECB. :)

If you are a subscriber, go here.

For the rest of us mortals, see BusinessInsider:

  • The Financial Times is reporting that Standard & Poor's ratings service will put 6 euro area sovereigns on creditwatch negative later today.
  • The countries at risk are Germany, France, the Netherlands, Austria, Finland, and Luxembourg.
  • That means there's a 50% chance that each country could be downgraded by the agency from AAA to AA+ in the next 90 days.
  • This spells trouble for the success of plans to bail out struggling eurozone sovereigns, in particular the success of the European Financial Stability Facility.

EDIT 1:53 PM - more details on the German aspect

  • Markets have been braced for a potential downgrade of France but few expected Germany’s top rating to be called into question.
  • With regard to Germany, S&P said it was worried about “the potential impact (…) of what we view as deepening political, financial, and monetary problems with the European economic and monetary union.”

So in summary all these 'joint solutions' (ESFS, proposed Eurobonds) stand to sully Germany.  Which again goes back to my point above - does this closer fiscal integration idea, which will hurt Germany's credit rating as the "strong support the weak" cause them to say:  ok ECB do your thing.  Who knows.

Steve Liesman of CNBC Still Believes no ECB Bazooka Coming - at Least Anytime Soon

As we all wait for S&P 1265 to be broken (sitting right below it for hours), since everyone is now a technical trader.....some other subject to pass the time.

The ECB meeting this week is getting some serious hype.  Not only is a 25 basis point cut expected, some are calling for 50 basis points (easy money for all!), along with some other technical adjustments over and above the rate cut, to ease strains.  Of course the big bazooka is the ECB pulling a Bernanke (and Japan, and UK) and going full quantitative ease.  Although technically that has already begun as apparently not all the bond purchases of late have been steralized... but we're talking a big bazooka, not a rounding error.  Steve Liesman of CNBC, who in movies and stories since, had become quiet the media front man for government leaks (i.e. what Hank Paulson or Fed members wanted the market to know) says market expectations could be too high on this latter (bazooka) point, at least in the near term.

  • Markets appear to have high hopes for this week’s summit meeting in Europe to begin putting an end to the financial crisis.  Yet there’s ample reason to believe the market’s hopes will be dashed again.
  • Specifically, it seems unlikely that whatever is agreed to this week by leaders will be sufficient to prompt the European Central Bank  to wield the proverbial bazooka that markets await so desperately.
  • There are many complicated, legal and technical reasons why this is likely true, but there’s also a simple one: Germany is not going to allow the ECB to make an unlimited commitment to buy bonds of European governments.
  • This idea was repeated to me in meetings with German officials in Berlin and Frankfurt last week — the ECB is not the answer, however much markets say it’s the necessary and only solution.
  • The German strategy at this point is two-fold: First, put as much pressure on governments now to fix their deficit problems, so that markets see the troubled countries are clearly on improving fiscal paths. Letting the ECB backstop troubled sovereigns would take the pressure off governments, countering the German’s own strategy.  Second, work for long-term changes to the European Union treaties, for example, allowing deficit violators to be sued in the European Court of Justice in the hopes of avoiding such problems in the future.
  • These changes eventually — one day in the distant future — allow the ECB to backstop either individual sovereign issues or a Eurobond. But it's not going to happen this week or next month, maybe not even next year.
  • Several times I heard comments such as this one from an official: “The bazooka requires ignoring of the German constitution and the (EU) treaty.” Neither the Merkel government nor the Bundesbank, as far as I can tell, has any intention of ignoring either. The obvious implication: unlimited ECB purchases will require changes to both before they can happen.
  • Which is not to say that rules can’t be bent. Already the ECB has purchased $200 billion of bonds. There was speculation among German market participants I spoke with that the number could be quietly increased to $300 billion or $400 billion. But remember, even that first $200 billion was so controversial that it prompted the departure of two German officials from the ECB.
  • There's also talk of lending from individual central banks to a fund controlled by the International Monetary Fund  that could be used to lend to troubled countries. The idea itself is troubled in a variety of different ways, but what I heard is that the Bundesbank would not support such a fund if funded only by European central banks and meant only for European countries. It could, however, support a regular IMF program designed for all IMF members.

Continue here for the rest of the story.

Uncle Buffet Has to Be Pleased about the Bank of America (BAC) Investment the Past Week

Remember when Bank of America (BAC) was poised to break the all important $5 barrier five sessions ago (Tuesday).  Rumors are that the central bank swap line announcement Wednesday morning was to save the cake of a major European bank - one wonders if the timing was also (or solely) to benefit BAC.  The Fed apparently voted on this Monday morning - the stock would have been around $5.10s.  I will check with the black helicopters.

All I know is Mr. Buffet has made up a lot of unrealized losses in the past week - a cool 17% rally.

No position

ISM Non Manufacturing 52.0 vs Expectation of 53.9

As this report was released the S&P 500 was right below that 200 day simple moving average - as if technically oriented computers run this market. ;)  But like I said this morning, this report will carry much less weight than normal as we all sit around waiting to hear about Bazooka #128,972 to come out of Europe - by Friday!

In the first bit of disappointing news in a while, ISM Non Manufacturing (which covers a much broader piece of the U.S. economy than manufacturing) came in below expectation at 52.0 (v 53.9).  That said it is still expansionary (at >50) but continues to point to a "meh" muddle through economy... slightly expansionary, hooked on government steroids, but nothing to write home about.  Unfortunately, the lowest reading since January 2010.

Key subindexes (new orders better, employment and prices 'worse')

New orders down 0.9
Employment down 4.4
Prices up 5.5

Full report here.

Non-Manufacturing Business Survey Committee. "The NMI registered 52 percent in November, 0.9 percentage point lower than the 52.9 percent registered in October, and indicating continued growth at a slightly slower rate in the non-manufacturing sector. This is the lowest reading since January 2010, when the index registered 50.7 percent. The Non-Manufacturing Business Activity Index increased 2.4 percentage points to 56.2 percent, reflecting growth for the 28th consecutive month. The New Orders Index increased by 0.6 percentage point to 53 percent. The Employment Index decreased 4.4 percentage points to 48.9 percent, indicating contraction in employment after one month of growth. The Prices Index increased 5.4 percentage points to 62.5 percent, indicating prices increased at a faster rate in November when compared to October. According to the NMI, 12 non-manufacturing industries reported growth in November. Respondents' comments for the most part project continued slow, incremental growth. There still remains a strong concern about lagging employment."
  • "Business activity continues to swing back and forth. Customer traffic remains lower than expected, but discretionary spending is fluctuating, making it difficult to find the pulse of the consumer." (Arts, Entertainment & Recreation)
  • "Lending is getting a little better. Competition for good deals is fierce because there remains a very limited number of high-quality borrowers." (Finance & Insurance)
  • "Raw materials prices appear to be stabilizing, and in some cases are dropping. Diesel fuels remain elevated and have not dropped." (Mining)
  • "We currently see no signs of a turnaround. Customers are nervous about the future of their jobs and incomes. Due to this fact, our sales are down and our need to hire more employees is, too." (Accommodation & Food Services)
  • "Business is slowly improving. Outlook for the next few months is good." (Retail Trade)
  • "In the face of an extremely tight business climate, prices continue to be sticky. We are not seeing significant price moderation." (Management of Companies & Support Services)
Business Activity/Production56.253.8+2.4GrowingFaster2856.650.1+6.5
New Orders53.052.4+0.6GrowingFaster2856.752.4+4.3
Employment48.953.3-4.4ContractingFrom Growing151.853.5-1.7
Supplier Deliveries50.052.0-2.0UnchangedFrom Slowing149.951.3-1.4
Inventories52.545.5+7.0GrowingFrom Contracting148.346.7+1.6
Backlog of Orders48.047.0+1.0ContractingSlower245.047.5-2.5
New Export Orders55.554.0+1.5GrowingFaster452.050.0+2.0
Inventory Sentiment63.057.5+5.5Too HighFaster174N/AN/AN/A
Customers' InventoriesN/AN/AN/AN/AN/AN/A50.043.5+6.5
* Non-Manufacturing ISM Report On Business®

Back to (the New) Normal

After a quite poor showing Friday - selling off on perceived good news from the unemployment report - we're back to (the new) normal; that is responding to rumors, and actual intervention.... of the European kind for now, although it's now a global phenomena.  With a week long series of meetings in Europe, culminating in (yet another) bazooka announcement on the 9th, speculators are now placing wagers on the idea that somehow a central bank will get involved, perhaps via a funnel of IMF to avoid having to deal with legalities.  The thought process now is as countries get their fiscal house in order, the ECB will be kind and offer monetary largess.  Traders look for clues on that end when the ECB meets later this week.  Italian bonds are down sharply this morning to the low 6%s, and all is well in the world.

Technicals don't mean as much as they used to in the new intervention era as "risk on" or "risk off" are not just the dominating market ethos, but new ETFs.  This increased bipolar action in the 2nd half of the year (180 degree changes in sentiment in weeks, if not days time), along with a rise in correlations of almost all asset classes have created a very difficult environment - probably the most challenging since those 2 months post Lehman (fall 2008).  [Big Drop in Hedge Fund Exposure to Market in Q3]  To that end, hedge funds have suffered in 2011 ... no surprise as by the time you put on positions to adjust to the new sentiment/technical reality, the market is changing its mind.
  • The average hedge fund has fallen by around 9% this year; the S&P 500 has fallen by just 3.4%.
  • Managers have diligently researched undervalued stocks, only to see markets plunge after yet more bad news from Brussels. When funds instead position themselves more conservatively and short stocks, the markets promptly rally on the merest whiff of better news.
  • An unaccustomed timidity has seized many hedge funds. They have reduced their leverage, which enhances returns but aggravates losses, too. They are shrinking positions and trading less. There is a “conviction to do absolutely nothing” among hedge-fund managers today, says Andy Ash of Monument Securities, a brokerage.
  • Some fund managers privately confess that they wish they could move entirely into cash and sit out the market turmoil. But they feel pressure to continue trading to justify the steep fees they charge for managing investors’ assets.
  • The dilemma of whether to pile in or stay put is perplexing hedge funds. Many remember the sudden rally in 2009 and regret they were not in a position to ride it. “The whole hedge-fund industry is completely terrified of missing a rally now,” says the boss of a London-based fund. 

With that said, despite a massive rally last week (the best week since the ultimate bottom in March 2009 for the S&P 500 - which of course followed the worst Thanksgiving week on record - which of course followed the one of the best Octobers in history - which of course followed a bear market in August/September - which of course... well you get the picture) we are not yet overbought on short term indicators.  The S&P 500, after gapping up this morning, will be sniffing the 200 day simple moving average up at 1265.   Yes we're talking a 100 point gain in a week.

After the market broke out of its triangle to the downside, the intervention portion of the market began.  Last week we had the twin tower rallies of Mon (IMF intervention into Italy) and Wednesday (central bank coordination in swaps market).  And hence, the triangle breakdown is but a bad dream. 

[click to enlarge]

Economic news is slow this week - the only real market mover is today's ISM Non Manufacturing but with spirits giddy and Europe rumors the most important issue, I doubt it has much effect.  If/when 1265 breaks to the upside, the October highs around 1290 come into play.  When/if that happens it is likely the market would need a rest (especially if it happens in short order) as we should be overbought by that time.

Friday, December 2, 2011

No Posts Today

Working on 18 other things today - will get back to blog-ville this weekend.  Have a good one.

One note - the labor force participation rate dropped another 0.2% last month, from already record levels!  At the rate we're going half of America's working population is going to drop out of the labor force within 10 years.  Stunning data.  But "great news" for politicians since it helps the unemployment rate drop.

Thursday, December 1, 2011

Average Foreclosure Time Sets New Record of 631 Days - Again Very Bullish for Economy

Back in 2009 I was early on the theme that the waves of Americans living in homes they don't make a payment on was a boon to the economy (not so much for banks).  [Nov 25, 2009: America's Stealth Stimulus Plan; Allowing It's Home "Owners" to be Deadbeats]  Over the next year this became relatively mainstream in the financial blogosphere.  Even Mr. Cramer "got it" by early 2010.  [Feb 18, 2010: Jim Cramer has Lightbulb Moment - Not Paying Mortgages is Keeping Americans Spending]  While I talked about it for a year and a half, I haven't touched the topic this year because not much had to be said.  It's the 'quiet' stimulus.  But with this headline on CNBC I think it's worthwhile to take a quick look at the 'benefits' for the economy.

While the amount of money 'saved' that can be used for expenditures is up for debate a simple example says the average delinquency (now up to 21 months nationally and far higher in some states) leads to savings of approx $27,000 (assuming the average monthly note of $1300).  If you believe the average note is lower or higher feel free to reduce my takeaway by 5-10-15% whatever.  This assumes said folk continue to pay property taxes, which is highly questionable - so there is probably upside to my estimate on that front. This is now happening in at least 1 in 10 mortgages in this country - I havent looked at any housing statistics too deeply of late to see if its 1 in 9 or worse (better).  But let's say its 8M to 10M households employing this tactic - we're talking an annual 'stimuli' to the economy of $125 - $155B.  That's at or better than levels the 2% payroll tax holiday provides.  Boo yah!  And no, it doesn't matter if the default is strategic or not - that is all money not going to the banks (or investors) to pay off the mortgage; it is being used in the rest of the economy.

Back in 2009-2010 I took the view that it's actually going to be a net negative for the economy when we are done with the foreclosure mess, because then we'll be back to an era where everyone living in housing actually is paying for it.  But we are still years away from that.

  • Foreclosures are setting new records again, this time not in their overall numbers, but in the time it is taking for all of these properties to be processed through the legal system. The average loan in foreclosure has now been delinquent a record 631 days, according to a new report from Florida-based Lender Processing Services.
  • The after effects of the so-called "robo-signing" foreclosure paperwork scandal, now more than a year old, continue to plague states which require these cases to go before a judge.
  • The differences in processing times are blatant when you compare judicial versus non-judicial states. Non-judicial state foreclosures inventories are less than half those of judicial states, and foreclosure sale rates in non-judicial states are four to five times that of judicial states. Judges are starting to ramp up the process.
  • Bank repossessions actually surged in October in many judicial states, up 48 percent in New Jersey and up 73 percent in Indiana month-to-month, according to RealtyTrac. Still the backlog is still enormous. Overall foreclosure inventory is at an all-time high, 4.29 percent of all active loans, according to LPS.
  • "The discrepancy will go on in perpetuity, as there always has been a difference between judicial and non-judicial timelines," said Kyle Lundstedt, managing director of LPS Applied Analytics. "Even prior to the worst of the crisis, loans were 4-5 months more delinquent in judicial states at time of foreclosure sale. The number today is more like 8 months, but will return to the 4-5 month difference depending on when and how fast foreclosure sales occur.
  • While there is considerable investor demand for distressed properties, new foreclosures are still outnumbering foreclosure sales by over 3:1.
  • In addition to the "robo-signing" delays, we are now beginning to see the effects of ineffective loan modifications. 
AMAZING STATISTIC BELOW - shows you how much of the money spent on "saving homeowners" is just 'kick the can', while throwing taxpayer money down the drain.
  • Repeat foreclosures made up nearly 45 percent of new foreclosures in October
  • Of the 2.1 million modifications since the start of 2008 more than 10 percent were in foreclosure with another 27.4 percent delinquent 30 or more days, as of the end of the third quarter of this year, according to the Office of the Comptroller of the Currency.
  • Lundstedt said foreclosure moratoria, process/documentation reviews, evaluation for loss mitigation and bankruptcies make up the rest of the repeat foreclosures.

[Jun 2, 2010: (Even More) Anecdotal Benefits of Strategic Defaults]
[May 4, 2010: Strategic Defaults in Q1 2010 Rise to One Third of All Foreclosures v One Fifth a Year Ago]
[Apr 15, 2010: More on Anecdotal Benefits of Strategic Default]
[Apr 13, 2010: One out of Ten US Mortgages is Now Delinquent ... Which is Great for Consumer Spending]

Were Yesterday's Actions by Central Banks, a Way to get "Backdoor QE"? Tony Crescenzi Says Yes

The headline has a bit of a caveat ... if the dollar swap lines are utilized than Crescenzi says yes. (Obviously if the dollar swap lines are not utilized than there no expansion of the Fed balance sheet)  PIMCO's Crescenzi explains:

Keep in mind that any use of the Fed’s swap facility expands the Fed’s monetary base: all dollars, no matter where they are deposited, whether it be Kazakhstan, Japan, or Mexico, wind up back in an American bank. This means that any time a foreign central bank engages in a swap with the Federal Reserve, the Fed will create new money in order to make the swap. Use of the Fed’s liquidity swap line in late 2008 was the main cause of a surge in the Fed’s monetary base at that time. The peak for the swap line was about $600 billion in December 2008. Some observers will therefore say that the swap line is a backdoor way to engage in more quantitative easing.

Interesting, I had not thought of it that way.  

Big Drop in Hedge Fund Exposure to Market in Q3

I don't find this data at all surprising as I think about how I would be approaching the current market... with the short term gyrations and huge moves up and down, often on rumors or innuendos it's an incredibly difficult market to wrap your arms around if your time frame is longer than 1-3 hours days.  The fact that correlations are so extreme ("Lemmings on"!) does not help either.  Looks like the hedge fund industry is viewing it the same way, as net exposure to the market has dropped significantly between Q2 and Q3.


  • Frustrated by market volatility over the European debt crisis and uncertain U.S. economic outlook, the so-called smart money—hedge funds—has thrown in the towel for 2011 and pulled out of stocks, according to fund managers, SEC filings and exchange data.
  • Hedge funds have slashed their exposure to stocks—both on a long and short basis—to the lowest level since 2008, according to Bank of America Merrill Lynch analysis of SEC disclosures and NYSE and Nasdaq data.
  • Their net long exposure to stocks plummeted by more than a third, the biggest drop since 2009, stated the report by analyst Mary Ann Bartels entitled “Hold ‘em and Fold ‘em.”  Hedge funds are clearly as worn out by gyrating markets as everyone else.
  • "The uncertainty coming from the Eurozone has created an environment where almost all asset classes have traded in tandem and fundamental analysis has been almost irrelevant,” said Michael Murphy, CEO of hedge fund Rosecliff Capital. (amen brother) “The very analysis that hedge funds rely on has become secondary to the headlines coming out of Europe on a daily basis.”

“The rally in October was a worst case scenario,” added Murphy. “It brought
the S&P back to the black for 2011. A lot of funds were extremely hedged or net short due to the global uncertainty.”

This month, stocks have fallen back below breakeven for 2011 as uncertainty over the size of the European bailout grows and a failed bipartisan agreement to cut the U.S. deficit points to more political infighting next year.

Hedge funds have paid the price. The HFRX Global Hedge Fund Index—compiled by industry observer Hedge Fund Research—is down 9.9 percent for 2011 through the end of last week. The S&P 500 is still negative on the year—even with Wednesday's rally—and the majority of global markets are the same.

Bartels' research report also showed that hedge funds raised their cash levels to 6.8 percent. They cut their exposure to the financial and industrial sectors by half. These would be among the hardest hit if the Euro falls apart, sparking a financial crisis that grinds global growth to a halt.

Favorite positions among hedge funds were gold, Treasurys and sectors with inelastic earnings streams such as pharmaceuticals and staples , according to Bank of America Merrill Lynch. (i.e. very conservative)

Volatility plus correlation equals no liquidity,” said Alec Levine, an equity derivatives strategist with Newedge Group SA. “It is very hard to find an economically viable hedge—they become too expensive and eat up too much of your potential return. Welcome to the ‘live to fight another day’ market.

ISM Manufacturing 52.7 vs Expectations of 51.5

Europe's manufacturing data continued to weaken (no surprise as we had flash numbers last week that painted a weakening situation), following the path of what we saw in China.
  • The final euro zone manufacturing PMI was confirmed at 46.4, its weakest level in two years, with factory activity in both of its biggest economies, Germany and France, weakening. The German PMI Manufacturing fell to 47.9 points in November from 49.1.  The UK factory PMI fell to 47.6 in November, its lowest since June 2009.

In the U.S., ISM Manufacturing was just released and came in a bit better than expected (52.7 v 51.5) and still expansionary (over 50) - as always the U.S. is now predominantly a services economy so the ISM Services report is more reflective of what is happening in the country, but today's number seems to get more of the attention.   New orders 56.7 vs 52.4.  (good) Employment 51.8 vs 53.5 (bad), Prices back up some: 45.0 v 41.0.  This remains consistent with a muddle through "meh" economy - steady for the course the past year or so.

Full report here.

"The PMI registered 52.7 percent, an increase of 1.9 percentage points from October's reading of 50.8 percent, indicating expansion in the manufacturing sector for the 28th consecutive month. The New Orders Index increased 4.3 percentage points from October to 56.7 percent, reflecting the second month of growth after three months of contraction. While the Prices Index, at 45 percent, increased 4 percentage points from the October reading of 41 percent, prices of raw materials continued to decrease (registering below 50 percent) for the second consecutive month. Respondents cite continuing concerns about the general economic environment, government regulations and European financial conditions, but are cautiously more optimistic about the next few months based on lower raw materials pricing and favorable levels of new orders."

  • "Business still holding its own. Some growth in margin now that some of the raw materials prices have abated. Oil is pushing $100 so that has not been favorable." (Chemical Products)
  • "Orders for the remaining two months have increased after an extended 'summer dip' in sales overall. We expect to finish the year approximately 10 percent above 2010." (Electrical Equipment, Appliances & Components)
  • "Seeing a slight slowdown in orders; could be related to the holidays." (Primary Metals)
  • "Material lead times are getting longer. Seems like no one is hiring. Trying to do twice the output with the same amount of people." (Food, Beverage & Tobacco Products)
  • "Japanese auto production has returned to 100 percent, and domestic manufacturing continues to increase." (Fabricated Metal Products)
  • "Oil exploration seems to be really picking up. Government is permitting again, so business is the busiest we've ever seen." (Computer & Electronic Products)
  • "The EPS ruling about higher fees for coal-generated electricity can have a huge, negative impact on our business if implemented in January 2012. We are at the peak of our seasonal demand push." (Plastics & Rubber Products)
  • "Thailand flood impacting our business. Honda and Toyota cut production forecasts, and we are chasing some components made in Thailand." (Transportation Equipment)



New Orders56.752.4+4.3GrowingFaster2
Supplier Deliveries49.951.3-1.4FasterFrom Slowing1
Customers' Inventories50.043.5+6.5UnchangedFrom Too Low1
Backlog of Orders45.047.5-2.5ContractingFaster6
Exports52.050.0+2.0GrowingFrom Unchanged1
Manufacturing SectorGrowingFaster28
*Number of months moving in current direction.

Investing Philosophy

I've updated my investing philosophy in a more comprehensive manner (see here)

I like to call the fundamental strategy, core & edge. Keep core positions and trade around the edge.
  1. At heart I like solid fundamental stories showing excessive growth (bottom up analysis); which generally leads me to mid caps or larger small caps.
  2. Use macro economic views (top down) to focus on what groups to favor or disfavor
  3. I use simple (basic) technical analysis to hopefully provide entry / exit points
  4. I have both long and short positions; the weightings are based on viewpoints of the market at the time
  5. Cash is not evil; it is an effective tool in bear markets
  6. Time frame is dependent on the type of market - I tend to be a trend trader and like to focus on relative strength. Keep a close eye on all aspects in 2013.
I'd highly recommend subscribing to and reading the Daily Market Recaps on for daily insight and reviews. If you are looking for an online broker to open a new account, secondary trading account, or roll over your 401k to an IRA then has in-depth broker reviews and tools. You can find some of the bigger firms on there like the TD Ameritrade review, ETRADE review, Scottrade review, TradeKing review, OptionsHouse review, optionsXpress review, and tradeMONSTER review.

I wrote my original six item philosophy nearly 3 years ago and had never updated until now.  For those interested in something fleshed out better I'm bringing over a portion of the new website called 'Investment Process' which hopefully better explains the thinking behind the 40,000 foot strategy.  Those who have been reading FMMF day after day, month after month will be able to figure it out just by watching in real time but for those newer or who visit the site less often here is what I have.   It is a bit wonky, but it is difficult to describe something to an audience compromised of anyone from (a) very little exposure to markets to (b) sophisticated traders - and everyone in between, so hopefully it strikes a balance and is generally understandable to all audiences.


Unlike many mutual funds which hold 75-250 individual positions, the Fund will generally contain a portfolio of 25-35 positions.  In terms of size of company, the fund will usually focus on equities in the $250 million to $25 billion market capitalization range, although some exceptions will occur.   A portion of the portfolio will be reserved for 'long' positions (those that benefit from rising asset values); against this a portion of the portfolio will will either be held in cash and/or 'short' positions (those that benefit from dropping asset values).  Exchange traded funds (ETFs) that focus on commodities, currencies, broad baskets of stocks, or bonds also are utilized.  Through this mix the fund's intent is to be relatively uncorrelated with the general market on a day to day basis.

Decisions on what proportion of the portfolio should be invested in the market, and which specific securities are utilized, are based on a three pronged approach
  • (i) 'top down' macroeconomic analysis
  • (ii) 'bottom up' company and sector analysis, overlaid with
  • (iii) technical analysis.

Taken individually:
  1. Top down macroeconomic analysis entails an assessment on general economic trends.
  2. Bottom up company or sector analysis focuses on finding secular or cyclical themes both within a broad sector of the market, or specific companies.
  3. Technical analysis (also known as 'charting') is a discipline for forecasting the direction of prices through the study of past market data, primarily price and volume.

More specifically a framework of how to position the portfolio in terms of broad weightings is based on a combination of macroeconomic analysis and index technical analysis; the latter focusing on the S&P 500 and NASDAQ.  Individual stock selection for the long side of the portfolio is based on secular or cyclical growth opportunities, combined with relative strength characteristics within the technical analysis realm.  For the short side of the portfolio, vulnerable characteristics in either the fundamental story or technicals will be the focus.  Further, broad index positions in investment vehicles - via ETFs or options - that focus on either the long or short side of the market will be part of the portfolio, either as supplements to core positions held, or as hedges against core positions held.

In general, most positions will be incrementally built up or reduced, leading to higher than average turnover rates.   The average holding period of positions is completely market dependent.  Some positions may be held over a multi year time frame, others multi months, while some may be multi week.

And There Goes Another of the Former Teflon Stocks - lululemon (LULU) Down 11% in Premarket

We had an interesting discussion in the comments section of yesterday's post on the 'junk stocks are leading' about the damage so many of the leadership stocks of the last 12-24 months have taken the past month.  Among those stocks is lululemon athletic (LULU) which peaked this summer, and has made a series of 2 "lower highs" since (bearish).  This morning the company reported earnings and it seems high end yoga wear is not as impervious  to the economy as once thought.  While matching estimates on the bottom line, revenue was a miss... and guidance was just in line.  For the type of multiples afforded this type of stock that is not good enough.  While the numbers are still fine in an absolute sense (>30% revenue growth, mid teens same store sales) the trend is the thing, and the numbers are decelerating.  The stock is down 11% in premarket to $44.  We'll see if the dip buyers come in to save it before it tests those October lows of $42ish.

  • Lululemon Athletica Inc's profit rose but sales growth in existing stores slowed from the previous quarter, and its shares dropped after it said it saw no substantial pickup in the current quarter.  The company said sales at established stores rose 16 percent in the third quarter ended Oct. 30.
  • In the previous quarter, same-store sales rose 20 percent, and the company forecast a third-quarter slowdown in growth to the low to mid-teens in percentage terms.
  • Even as it slightly topped that outlook, on Thursday the company made the same forecast for the fourth quarter.
  • The Vancouver-based retailer said on Thursday its third quarter profit rose to $38.8 million, or 27 cents a share, from $25.7 million, or 18 cents, a year earlier. Revenue rose 31 percent to $230.2 million.
  • Analysts surveyed by FactSet Research were looking for earnings of 25 cents a share, on average, with sales of $235.7 million. For the fourth quarter, the Vancouver-based retailer predicts earnings in the range of 40 cents to 42 cents a share. Wall Street anticipates earnings of 42 cents a share.
One positive is gross margins expanded: 0.7% year over year.
  • Gross profit for the quarter increased 33% to $128.5 million, and as a percentage of net revenue gross profit increased to 55.8% for the quarter from 55.1% in the third quarter of fiscal 2010.
Full report here.

No position

Wednesday, November 30, 2011

Official Chinese PMI Figures Confirms Last Week's HSBC Flash Reading, as Contraction Hits for First Time in 32 Months

Lost in the happiness over the dollar swaps today was the news after the Chinese market close yesterday that the country's central bank was moving to its first easing stance in 3 years.   A small step but considering the country is still dealing with inflation, especially of the food kind, it's an interesting change of heart.  With China being the primary driver of the global bounce in economic activity in 2009-2010, it will be interesting to see how it plays out this time around as many of the loans the Chinese authorized in that era are going bad.  Will they be willing to repeat their old actions if there is a wider global recession in 2012?  Anyhow a question for another day - for now the official Chinese Purchasing Managers index confirms what we saw last Tuesday with the flash report from HSBC - the first contraction in 32 months.   It's not affecting the Chinese market today since Asian markets were closed before the 8 AM EST coordinated dollar swap plan was announced, hence the region has to 'catch up', but this push-pull is something we want to watch very close over the next 6-12 months.

  • China's manufacturing contracted for the first time since February 2009 as the property market cooled and Europe’s crisis cut export demand, a survey showed. The Purchasing Managers’ Index fell to 49.0 in November from 50.4 in October, the China Federation of Logistics and Purchasing said in a statement today. The median estimate in a Bloomberg News survey of 18 economists was 49.8. A level above 50 indicates expansion.
  • The central bank last night announced the first cut in banks’ reserve requirements since 2008, moving two hours before the U.S. Federal Reserve led a global effort to ease Europe’s sovereign-debt crisis. The move will add about 370 billion yuan ($58 billion) to the financial system and more reductions may follow as the government seeks to support growth, Citigroup Inc. said.
  • Today’s report “clearly adds to the urgency for easing,” said Yao Wei, a Hong Kong-based economist with Societe Generale SA. “The PMI is showing weakness across the board and this would seem to be the reason the government cut banks’ reserve requirements. If this trend continues we should see another cut pretty soon.”
  • The Shanghai Composite Index fell 3.3 percent yesterday, the biggest decline in almost four months. 
  • The manufacturing index compiled by the logistics federation and National Bureau of Statistics is based on a survey of purchasing managers in more than 820 companies in 20 industries.
  • A gauge of new orders contracted for the first time since January 2009 and the output index expanded at the slowest pace since the same month, today’s survey showed. New export orders fell below 50 for a second straight month.
  • “China’s growth will slow further over the next six months,” Li Wei, a Shanghai-based economist with Standard Chartered Plc said before the data. “If the deterioration in Europe and the U.S. accelerates in the first half of next year, the government will have to put maintaining growth as its top priority.”

Best Day Since March 2009

If only we could have interventions every week.

Of course, no one thinks to ask why we need (constant) intervention - that would be inconvenient.

On the day, as we broke to highs of the day late afternoon at S&P 1240, we spiked on an additional 7 points in short order.  It is incredibly clear how technicians are ruling this market.  No surprise when it's so headline driven.

This 'best day in years' follows the 'worst Thanksgiving week ever" which followed 'one of the best Octobers ever' which followed....

Well you get the point


EDIT 4:55 PM - the headline refers to the DJIA only ;)

Junk Stocks Leading, Not a Great Sign

This past weekend, I went through about 200 stock charts (yes, I live an exciting life) and was shocked at how bad the setups were.  Frankly I could only find about 4-6 charts I'd really consider from the long side.  Of course the market has bounced some 6% this week on intervention central (first the Sunday rumors of IMF to Italy and then this morning).  That doesn't mean we have good setups... a lot of the best movers are the junk stocks.  I say junk not as a discussion of their business, but on their performance this quarter, half year, year to date, etc.  You want leaders to lead... not the broken stocks.   The meek shall lead them works well in religious text, but not so good in stock markets.

Bespoke shows us this in a nice table.... the stocks that have had the most mojo this week have been the bottom feeders.   That doesn't mean its not fun to enjoy a big move up if your positioned long but frankly most except the most nimble who are enjoying this week's gains also 'enjoyed' last weeks "worst Thanksgiving ever."  Along with a lot of other things (i.e. European bond yields improving substantially for one), you want a crop of leadership stocks with the strongest relative strength to be your thoroughbreds for a sustained move.  Not these guys...

That said it is always fun when coal stocks trade like Commerce One or Lycos circa 1999.

"Risk On", "Risk Off" Has Officially Jumped the Shark as UBS Rolls Out Risk On and Risk Off ETNs

Presented with little comment but eyes rolled, via IndexUniverse.  While not surprising in this era of everything on Earth correlated, it is a jump the shark moment.

Personally I would have called it Lemmings On and Lemmings Off ETNs but these investment banks don't know the first thing about marketing.  Can you imagine how cool it would be to sit at the trading desk of hedge fund XYZ:  "Dude, I'm going all in Lemming Long, put me in for 18 million!!"  (34 minutes later)  "Lemming Short time - filler up!" (while popping some 5 Hour Energy)  That said, they did get some cool ticker symbols.

  • UBS, the Swiss bank known for its private-client investment services, today launched a pair of ETNs that serve up an easy way for investors to express a risk-on or risk-off trade, taking aim at the increasing correlation among assets in markets globally.
  • Up until now, investors looking to take on risk or eliminate it have had to individually buy and sell securities from various asset classes that move in tandem or in opposition to one another.  (but that's too much work!
  • But the ETRACS Fisher-Gartman Risk On ETN (NYSEArca: ONN) and the ETRACS Fisher-Gartman Risk Off ETN (NYSEArca: OFF) put in exchange-traded wrappers a basket of 35 securities including equities, commodities, currencies and fixed income that together amount to either risk-on or risk-off positions.
  • The two ETNs are essentially mirror images of each other. They are designed to mix assets that either rise or fall given a particular market outlook. For example, ONN features long positions in equities and short positions in bonds, while OFF shorts equities and goes long on bonds.
  • The funds target growing correlation among asset classes that has characterized the aftermath of the market collapse of 2008-2009. Indeed, the gnawing cycles of hope and anxiety surrounding the global economy has made outsized spikes and plunges the norm for almost three years. ONN and OFF mark the first time the asset management industry has designed products catered to the prevailing uncertainty.
  • The two ETNs bear the name of renowned macro traders Mark Fisher and Dennis Gartman, in part, because the two approached UBS with the risk-on/risk-off concept. The two are behind the Fisher-Gartman Risk Index.
  • ONN is a plain-vanilla long product, while OFF resets daily, an acknowledgment that markets historically fall a lot faster than they rise.
h/t AbnormalReturns for finding the original link

What the Heck Did this Morning's News Mean?

Sometimes you have to step back and remember not everyone in your audience lives, breathes, and dies the markets 24/7 so this morning's central bank news probably was a bit opaque for those who actually have lives. This piece on CNBC does a great job explaining it, so I thought I'd pass it along.  In essence the Fed is providing cheap(er) financing to the European banks.... using the ECB as a conduit.  Unlike the typical U.S. bank model where deposits are generally the source of (a good portion of) funds, it appears many of the European banks lean more on short term financing.

  • In essence, the US central bank, or Federal Reserve, agreed to provide cheaper dollar funding to the European Central Bank—which can then provide cheaper dollar loans to cash-strapped European banks.
  • The participation of the central banks of Canada, England, Japan and Switzerland is more of an effort to show that all the central bankers are working together than any expectation that there will be lots of dollar borrowings under their facility.
  • The goal is to ease the credit crunch in Europe. Lots of European banks make dollar denominated loans, in part because US interest rates are so low. The banks do not usually finance these loans in the way you might think—by lending out the deposits of their retail customers. Instead, the loans are financed by short-term borrowings from other financial institutions.
  • When European banks make a dollar loan or purchase a dollar denominated asset, they typically borrow the dollars on the what’s called “international wholesale deposit market”—which is a fancy word for borrowing from other banks that have dollars. Alternatively, they can borrow in their native currency and then use foreign exchange swaps to hedge the currency risk.
  • Now that Europe is in the throes of a debt crisis, it has become much more difficult if not impossible for many European banks to borrow dollars in the wholesale markets. To make dollar loans, then, they have to turn to the European Central Bank. What’s more, the cost of the foreign exchange swaps has increased, making it more expensive to make dollar loans based on euro assets.
  • Normally, central banks only make loans in their domestic currencies. But in times of international stress—the credit crisis of 2008, for instance—central banks around the world set up swap lines that allow them to borrow from each other, creating the ability for them to make loans in other currencies.
  • In short, European banks were finding it too expensive to make dollar loans, which hurt their ability to lend dollars and encouraged them to sell euros. This depressed the value of the euro and restricted credit in Europe. The ECB arranged to borrow dollars more cheaply from the Fed, so it could ease this market.
  • So was is this some giant giveaway to profligate Europeans of US taxpayer money?  Not quite. In the first place, European banks are major lenders to the US corporate market. When they cannot participate in dollar loans to US companies, US credit also contracts. What’s more, these are loans to the ECB, which is unlikely to default. Finally, the Fed isn’t lending out “taxpayer dollars” at all. Rather, it is lending out newly created dollars at very low interest rates.

For more on how the ECB borrows from the Fed, go here.

New Website Launch Pending Regulatory Review

Upon regulatory approval (a different agency outside the SEC), the new site will be unlocked and open for viewing.  If you visit now it's simply a locked splash page, until we get 'the word'.  I am hoping this review completes within a week or two but as I've learned the past year, don't have expectations on timetables.

How Will Congress Pay for 2012's Extensions of the Payroll Tax Holiday & Unemployment Benefits?

Not much to talk about in the market - just like Monday it's a day where just about everything is up.  Completely bipolar action continues - last week you couldn't find anyone to buy a stock, and this week selling is completely unfashionable.  Remember Monday when EVERY S&P 500 stock was up around 10 AM?  [Nov 28, 2011: An Amazing Moment]  Now we have another epic day - only 2 S&P 500 stocks down.  In retrospect Monday's action now leads us to ask "who was tipped off on this morning's news" - i.e. who got the "wnk" in 1 on 1 conversations....


So let's look at other topics.  We've been giving 'stimuli' in one form of another to the American consumer since 2008 (remember those Bush rebate checks?), as the organic economy seems dysfunctional without massive intervention.  It is nearing the point, 1 in every 5 dollars of income for the typical American is coming from government.  (last I checked it was about 5.3) [Jun 6, 2009: 1 in 6 Dollars of Income Now via Government - Highest Since 1929]  The latest iteration of this was last year's payroll tax reduction of 2% which gave between $1000-$2000 to the typical household in 2011.  Of course much of that went directly into Saudi hands as gas prices spiked (no relation to QE2) this year, but some seeped into the most important economic function in the country: shopping.  I wrote at the time that this 'temporary' measure would be extended again a year from then because the GOP would cry "how can you raise taxes in this environment!"  Well I was wrong, it is actually Obama using the GOP line.  Irony at it's best.  The bigger theme is when you give something away in this country, there is almost no way to take it back politically - almost everything 'temporary' becomes 'permanent'.  There is some scuttlebutt that this tax holiday may not get extended - I say nonsense.  It will get done (along with the 'emergency' unemployment benefits) - both costing just under $200B.  Because we need our annual stimuli.

So the question is will Congress try to find a way to offset the costs?  Or just throw it under the 'emergency spending' provision, in which no one has to account for a darn thing.  That, I don't know, but CNNMoney looks at some of the options.  Regular readers will know one of the options - which is using a new measure to undercount inflation even further.  [Nov 7, 2011: Congress Considering Moving to a New Measure of Inflation that Would Measure "Away" Even More Inflation]  This was supposed to be one of the main tools during the $1.2T deficit reduction negotiations but since that fell on its face, it can instead be used to 'fund' our annual 'temporary' stimuli.  The other one is the same phony "war savings" that also was going to be used as part of the $1.2T deficit negotiations.... when all else fails, funny accounting solves many ills.

  • At issue are several expiring provisions of law: a Social Security payroll tax cut; long-term federal unemployment benefits; a "doc fix" to ward off a scheduled cut in Medicare physician pay; and a bevy of temporary business tax breaks.
  • Whether they're extended or not, the measures could end up increasing the 2012 deficit. Two possible outcomes:
  • --Congress lets the payroll tax cut and unemployment benefits expire. Many economists worry economic growth will slow because Americans will spend less. Slower growth means tax revenue falls and demand for safety net programs grows. Deficit goes up.
  • --Lawmakers extend the payroll tax cut and jobless benefits in conjunction with a one-year doc fix and at least one key business tax break. Cost to federal coffers: About $180 billion. Deficit goes up.
  • Of course, Congress could choose to offset all or part of the cost. But it won't be easy.
  • Obama and Senate Democrats have proposed paying for the payroll tax relief with a surtax on millionaires. Republicans have said that won't fly.  Many Republicans are also likely to oppose any other tax increase proposals.
  • Democrats are said to be considering applying war savings from the drawdown of U.S. military efforts in Iraq and Afghanistan. But many budget experts consider such a pay-for a gimmick since those savings are going to be realized regardless.
  • As for other spending cuts? The low-hanging fruit has already been plucked or otherwise identified as necessary for deficit reduction.  "It's hard to see what the spending cuts would be that would be acceptable to everybody," said James Horney, vice president of federal fiscal policy at the Center on Budget and Policy Priorities.
  • Rudolph Penner, a former Congressional Budget Office director, said there may be one possibility for savings: a change in how annual inflation adjustments are calculated for government benefits and tax brackets. Such a change could raise an estimated $217 billion if left in place over a decade, according to the Congressional Budget Office. (of course another grand solution is to pass this inflation measure change in conjuction with the spending increases, then when older people complain they are getting ripped off, reverse it in a year or two - which of course meant you offset nothing. That would be typical D.C.)
  • And it has gotten some bipartisan support in various quarters. "That could be put in place for however long it took to pay for all or part of any deficit-increasing measures," Penner said.  But that policy proposal has drawn a lot of fire from the left, because it would reduce annual cost-of-living increases in Social Security. 
  • So that leaves one other option if lawmakers want to pass the payroll tax cut and unemployment benefits. They could deem the extensions to be emergency spending.  That way, the new costs would be exempt from any requirement to pay for them.  Both Horney and Penner said they wouldn't be surprised if Congress took that route.
  • If the payroll tax cut is allowed to expire, a person making $35,000 will pay an extra $700 in payroll tax next year and a person making $75,000 will pay another $1,500.

ADP Employment Over Expectation at 206,000 - Going to be a Happy Day for Bulls

While sometimes not anywhere near the Friday official data point, ADP for November just came in at 206,000 vs expectations of 130,000.  Previous month revised up from 110,000 to 130,000 as well.

ADP today reported that employment in the U.S. nonfarm private business sector increased by 206,000 from October to November on a seasonally adjusted basis. The estimated advance in employment from September to October was revised up to 130,000 from the initially reported 110,000. The increase in November was the largest monthly gain since last December and nearly twice the average monthly gain since May when employment decelerated sharply.

Employment in the private, service-providing sector rose 178,000 in November, which is up from an increase of 130,000 in October. Employment in the private, goods-producing sector increased 28,000 in November, while manufacturing employment increased 7,000.

Employment in the private, service-providing sector rose 178,000 in November, which is up from an increase of 130,000 in October. Employment in the private, goods-producing sector increased 28,000 in November, while manufacturing employment increased 7,000.

Employment on large payrolls—those with 500 or more workers—increased 12,000, and employment on medium payrolls—those with 50 to 499 workers—rose 84,000 in November. Employment on small payrolls—those with up to 49 workers—rose 110,000 that same period, up from the 67,000 jobs created among small businesses last month.

Full report here.

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