And... IMF Official Denies Rumor

And in breaking news the stock market has not turned into a computerized headline driven casino....

Per Mr. Liesman of CNBC on twitter:

@steveliesman IMF official denies 600b aid rumor.

-------------------

Well that was short lived...

How pathetic... S&P dropped like a rock in the closing minute or two.  

Need a Rumor to End the Day Right? Got One

G-20 CONSIDERING IMF LENDING PROGRAM FOR EUROPE: NIKKEI; G-20 CONSIDERING $600B IMF LENDING PROGRAM FOR EUROPE: NIKKEI

(link here but it requires subscription)

S&P 500 spikes to... where else... 1265.  I tweeted this morning when the market was actually down asking what time the rumor would be released - it's about an hour or two later versus normal.

Are We Making Too Much of the Drop in Labor Force Participation Rate? Is It Mostly Due to Boomers Hitting the Links? Evidence Says No

A good analysis from Tim Duy's Fed Watch on the issues with the labor force participation rate, that many (hands raised) have cited as a significant reason the unemployment rate has been so "good" the past few years (i.e. not as bad as it could have been).  With a more normal labor force participation rate, the unemployment rate would be ~2 to 3% higher.  We'll skip all the other reasons the unemployment rate is under counting the unemployed - we went through that ad nauseum in 2008-2010.   [Apr 2, 2008: The Underemployment Rate is Rising]

His analysis starts with a Bloomberg article which takes the easy way out and says its the boomers retiring that is creating the structural shift.

• At play is a decline in the share of the working-age population, known as the participation rate, meaning that the economy needs to create fewer jobs to bring down unemployment. While some of the decrease has been caused by discouraged workers dropping out of the labor force, another driver is that the baby-boom generation is starting to move into retirement, according to economist Dean Maki.
• “Demographic forces are the single biggest factor pushing the participation rate down,” said Maki, chief U.S. economist at Barclays Capital Inc. in New York and a former economist at the Federal Reserve. “This is a bit of a slow-moving drama but it’s likely to become more important in coming years.”

Is it Mr. Maki??

A deeper look beneath the surface says something perhaps more ominous - most of the degradation is happening in the 16-24 and 25-54 age ranges.  Clearly some of this (in the former group) is young adults staying in college (longer), and perhaps more of the population going to college (I don't have the data) but it surely doesn't explain the cliff drop.  My thought is older workers now are doing the work that once was left for the young - a "crowding out" if you will.  [May 9, 2009: The Curse of the Class of 2009 - Lower Wages for Up to a Decade]

[click to enlarge]

As for the 25-54s - we've simply lost a lot of those jobs "away" to technological effeciences [Mar 28, 2011: Productivity - Wo(man) vs Machine] , outsourcing, and lack of bubbles (i.e. construction boom, realtors & mortgage processors needed at far lower levels).  I recall a story I read (perhaps posted) in 07-08 time frame where 1 in 7 people in California had a real estate license... not quite so needed nowadays.  This one is probably the most disconcerting simply because its the middle of the bell curve for working Americans - even a 1% drop can have dramatic effects.

As for those more mature folk?  Indeed the 65+ crowd is working MORE, not LESS (more are in the job market) as the twin stock bubbles, housing bubble, and war on savers the past 3-4 years has wrecked retirement plans for many.  [Dec 15, 2010: USA Today - American Workforce Graying as the Young Increasingly Locked Out]

Can't blame the drop in labor force participation rate on near retirees either.   [Sep 1, 2008: AP - Laboring Longer is Growing Trend for Americans]

Good stuff !!  Read the entire post here.

[Feb 7, 2011: BW - The Youth Unemployment Bomb] [Oct 4, 2010: WSJ - Americans Souring on Free Trade as Losing Their Jobs Overpowers Lower Prices]

A Lot of People are Living the "College Lifestyle"

Some pretty fascinating stats in this Marketwatch piece on how so many more people are living life as if they are in their early 20s.  We've talked about this in the past few years - how even divorced couples are still living under the same roof, as they can't afford to physically separate, [Apr 8, 2009: Recession Causes Relatives to Move in Together & Sharp Drop Off in Divorces. Housing Bubble 2.0? (Not)] and the influx of adult children (I'm not talking those in their 20s but those in their 30s and 40s) moving back in with their parents.

The bearish take here is that many of the former middle class no longer have the capacity to be out on their own.  (also one imagines some of these are college grads the past few years who never made it into their career path and are enjoying the 'barista' lifestyle).  The bullish take will be that provides a lot of latent demand coming for the next housing boom.  Surely the truth is somewhere in the middle, but nearly 8M Americans have moved into these 'doubled up' situations since 2007 - that is a staggering figure.  Keep in mind household ownership is now back down to levels not seen since 1996.

• In today’s economy many are finding it necessary to share living space.  These aren’t just friends turned roommates. Couples, multigenerational families and people with no relationship to each other are joining the growing ranks of those who are in “doubled-up” households. Technically, these are households with at least one additional adult who is not in school, and not the householder’s spouse or partner. 
• This year about 30% of adults, 69.2 million people, are living in doubled-up households, compared with 27.7%, or 61.7 million, in 2007, according to a September report on income, poverty and health insurance from the Census Bureau. 
• In spring 2011, there were 21.8 million doubled-up households, or 18.3% of all households, up from 19.7 million, or 17%, in spring 2007.
• While the benefits of house-sharing are clear — splitting expenses and pooling resources — running such a household can be tricky. Even within a single-family household, the daily morning chaos of getting everyone out the door on time, clean and happy, is no low bar. Now double that.

[Video] Bob Prechter is Back... and Shockingly, Still Bearish ;)

It's been almost a year since I posted a Bob Prechter video, and (sit down for this) ... he is bearish, comparing this current period to the late 1930s.  Other than a few short massively oversold periods in 2008 and 2009 I can't recall Prechter really being bullish - but I don't watch him that closely.  For the Elliot Wave crowd however, please see below

Don't get too comfortable with the relatively flat markets of 2011, there's a big storm coming our way. This is the view of Robert Prechter, founder and president of Elliott Wave International. In the attached video Prechter compares the current phase of the market to the late stages of the 1929 - 1933 period in U.S. history; a time marked by extreme volatility eventually ending in tears.

"One of the things that happened in 1929 was that a consortium of the biggest banks in the country tried to stop the market from going down," notes Prechter. Those banks failed of course, just as Prechter says they did when the Central Banks tried to prevent the coming financial meltdown in 2008 by offering essentially free credit.

The timing is only different, he says, because "banks these days are much bigger than they were in 1929." In the 20's institutions were reliant on client money to lead their bailout attempts. Today Central Banks have the ability to call on future, often overstated, tax revenues and are unencumbered by anything such as a gold standard when attempting to ward off the human desire to hide under the covers, financially speaking.

Prechter also draws parallels to April of 1930, 1937, and other periods in which relatively brief recoveries dissolved. Pick a tool, any tool, and Prechter says it suggests a stock market going lower. "Patterns, sentiment indicators, or momentum are all saying the same thing: This is a bear market rally."

According to Prechter, not all the Central Banks in the world trump international trends towards a cautious, negative mood already impacting all things financial. This trend, the inverse of those giddy days of the 1990's when all things seemed possible (even Internet stocks and the Euro!), causes predictable behaviors in the masses. They tend to sell stocks, stop spending, and start revolting against current leadership; all of which should sound familiar to those who read the newspaper.

It's an environment confounding to bulls and bears alike. At the beginning of 2011, Prechter notes, the bulls were betting on a sharp recovery in stocks and "got hurt quite a bit." Commodities were a bad bet, hurting "hyper-inflationist" bears.

"Both camps didn't want bonds and bonds are the only things that had a great year, 18% plus total return on the year so far," Prechter notes. He thinks bonds fit the "deflationary scenario" that will hit us "in the next four or five years." At that point, he says we'll wipe the slate clean, get rid of the bad debt, and start all over again.

In other words, if you don't identify with the anger being expressed around the world, check back in with us half-a-decade from now when we're on the other side of a complete and utter meltdown. Prechter is willing to bet you'll be part of those identifying with the disenfranchised by then.

The Journey to Nowhere Has Been a Wild Trip Since August 1

Futures are being pushed around by the normal push-pull of the rumor mill out of Europe - it has reached the point of jump the shark.  Late yesterday the market rallied for about an hour on news of a second bailout fund to run along the already mocked ESFS.  Then the question of how it would be funded came to be asked, and the market sold off.  It's just trial balloon after trial balloon.  Tomorrow (morning for Americans) we hear what the ECB is doing with interest rates - a cut is expected, but will it be 25 or 50 basis points and most important are there any 'additional cookies' to be handed out to the class of unruly 2nd graders demanding Oreos by the dozens.  Then Friday everyone awaits a new bazooka.

Anyhow, Bespoke has charted the action since August 1, and it shows the extreme volatility we've been experiencing.... and why this sort of period is nearly impossible to outperform an index (gone haywire).  It is stunning, especially the August and September movements - we have seen EIGHT moves to the upside of at least 5% and EIGHT moves to the downside of at least 5% since August 1.  Bespoke points out there were entire years in the 1990s we did not have ONE 5% move.  Now we've just had 16 in just over 4 months?  Are you kidding me....

As a trend trader if these moves were spread out over 10-12-16 weeks it would be quite possibly the best environment possible for those who have the ability to flip the switch from unhedged to hedged, but the fact almost all these moves happened in 5-7 market SESSIONS is simply jaw dropping.  (also recall much of the action is Europe driven so many of these moves were mostly made in premarket)  You can't even begin to get into positions before you'd be stopping out... and then two weeks later trying to chase back in.... and then be stopped out again.  The only winner is the broker collection the commissions.  Which is why sometimes you just have to stand on the side of the road.... be boring... and wait for a more sensible period.

In the end the market has gone nowhere since Aug 1.... but the journey to nowhere has been neck snapping.

S&P 1265 Again

After a day long slumber, the market woke up and finally made a move.  Where did we move to?  1265 yet again.

Cannot imagine how anyone looks at this market and does not use technicals - all these computers obviously are going off the same markers.  Two days in a row touching the same resistance.

Who Wants Action?

Got beta?  Bespoke Invest lists the S&P 1500 stocks above $10 with the largest intraday spreads.  With a market that changes its mind seemingly every 3 weeks on the prospects for the coming quarter, half year, or generation, sometimes the only way to make some bucks is to be quick and fast.  So these are the type of names you'd be focusing on.

[click to enlarge]

Some Days....

A reader who happened to own this book, actually sent it to me, maybe 3 years ago.

I would like to write the follow up edition titled "How Almost Nothing Goes Right the First Time Around, and You Want to Bang Your Head into the Wall Repeatedly When Starting a Mutual Fund."

Gosh darn, nothing comes easy.  After dealing with all the background firms needed, I now remember the frustration of working in large firms where one hand never speaks to the other.

/Vent off

If the S&P 500 Was Equal Weighted Rather than Market Cap Weighted, the Past Decade Would Have Been Quite Fine in Performance

A pretty interesting analysis in this story by Bloomberg.  As many know by now we've experienced a 'lost decade' (actually a bit longer now) in U.S. stocks as measured by the most popular of indexes, such as the S&P 500.  However, that index is market weighted meaning the impact of an ExxonMobil (XOM) is far greater than the companies in slots 490-500.  But, if you had equal weighted all 500 stocks, returns would have been solid, if not spectacular, at +66%.  Leading to the question of why someone has not created an equal weight S&P 500 ETF - reader says there is such a product - symbol: RSP.

Of course this makes sense from the aspect that over the long run, there are limits to growth prospectus - outside of extreme examples like Apple (AAPL), it simply is harder to grow once you hit massive scale.  Hence gains in small or mid caps "should" outperform large caps in the "very long run".  Specific to the 00's, after a huge run in stock prices in the latter 90s - especially in the tech space - many large cap company stocks have been especially stagnant as they gave back/digested the big moves a decade+ ago.

• Even with the Standard & Poor’s 500 Index down 19 percent since the bursting of the technology bubble in 2000, it’s been no lost decade for stocks.
• The benchmark gauge for American common equity climbed 66 percent from March 24, 2000, through Dec. 2, after stripping out adjustments for market value, which gives equal credit to Exxon Mobil Corp. (XOM), whose shares are worth $382.5 billion, and Monster Worldwide Inc. (MWW), at $945.6 million. 
• That’s little help for most investors, whose returns reflect the capitalization-weighted index, says Cliff Asness at AQR Capital Management LLC.   Gains in the equal-weighted index reflect appreciation in its smaller companies and stocks with lower valuations over the past decade, according to Asness, who helps oversee $38.8 billion as founder and president of the AQR hedge fund in Greenwich, Connecticut. 
• Gains in the S&P 500 Equal Weighted Index through the dot- com tumble, the Sept. 11 attacks, the real-estate collapse and the worst financial crisis since the Great Depression show the resilience of U.S. companies that are forecast to report record earnings this year even as Europe’s debt crisis threatens growth again.
• “Corporate America repaired itself,” Chris Hyzy, the New York-based chief investment officer at U.S. Trust Co., which oversees about $360 billion, said in a phone interview on Dec. 1. “On an equal-weighted basis, it hasn’t been a lost decade.”
• Owners of stocks in the S&P 100 suffered the most since March 24, 2000. The index fell 33 percent, driven by declines of 70 percent or more in Cisco Systems Inc. and General Electric Co., the second- and third-largest companies behind Microsoft Corp. (MSFT) at the peak of the technology bubble.
• Equities suffered two bear markets lasting longer than a year in the previous decade. The first began after the S&P 500’s price-earnings ratio reached 31.2 following the 1990s rally led by computer and software makers. The second started in 2007 as global bank losses from subprime mortgages spiraled toward $2 trillion. The gauge doubled in five years starting in October 2002 as energy companies rallied 242 percent as a group and raw- material producers jumped 162 percent.
• Energy producers climbed 149 percent in the past decade.
• Companies in the S&P 500 are poised to report record earnings of $99.05 a share for 2011.
• Smaller companies lifted the S&P 500 Equal Weighted Index to a record on May 10, almost four years after the capitalization-based gauge reached its all-time high of 1,565.15 in October 2007.
• The Russell 2000 Index (RTY), a gauge of small-cap shares with an average market value of $667.8 million, peaked on April 29 and is up 28 percent since March 24, 2000.  The relative performance of smaller stocks doesn’t help the majority of investors. More than $5.58 trillion is benchmarked to the S&P 500 and about $1.31 trillion is directly linked to its value, according to an estimate by New York-based S&P. 
• The biggest 100 companies make up 63 percent of the value of the S&P 500 and almost half of the entire American market.

[Video] Tom DeMark Says S&P 1330+ by Christmas, with Strongest Buy Signal He's Seen in 40 Years Thanksgiving Week

While I've known of DeMark for quite a few years, I've never studied his system - so his talk is all Greek to me (and to the Bloomberg folk who tend to interview him).  That said, there is some institutional money that pays a lot for his advice, and his recent track record seems to be quite good.  If that is any indication Santa Claus will be very good to the bulls, as DeMark says his system signaled the strongest buy signal in 40 years Thanksgiving week, and investors should be long until the 21st when the S&P 500 will get to 1330.  But he says this is all within the context of a bear market - so back to bearishness after.

7 minute video - email readers will need to come to site to view



Via Bloomberg:

• The Standard & Poor’s 500 Index (SPX) may advance to between 1,330 and 1,345 this month before the rally reverses, according to Tom DeMark, the creator of indicators to show turning points in securities.
• That would represent a rise of at least 5.9 percent for the benchmark gauge for American equities after the worst Thanksgiving-week drop since 1932 depleted sellers, said DeMark, whose prediction in September that the S&P 500’s decline would stop at 1,076 proved prescient when the index bottomed at 1,074.77 on Oct. 4. 
• This month’s rally will end when the S&P 500 closes higher on four successive days, DeMark said.
• “I had the strongest short-term buy signal I’ve recorded in 40 years” during the week of Thanksgiving, which fell Nov. 24, said DeMark, the founder of Market Studies LLC, in a phone interview. “It’d be an explosive move to the upside.”
• DeMark, who has spent more than 40 years developing indicators with names like “sequential” and “countdown,” said on Oct. 25 that a rally by the S&P 500 above 1,254 would “trap” bulls. The index peaked three days later, then dropped 9.8 percent through Nov. 25.
• “The market should top out around Dec. 21,” DeMark said today. “The market rhythm and market balance equilibrium all require the market rally. Once that’s completed, the market will have a vacuum on the downside and we should have a sharp decline.”
• DeMark, an adviser to Steven A. Cohen’s SAC Capital Advisors LP, provided consulting to hedge funds including George Soros’s Soros Fund Management LLC and Leon Cooperman’s Omega Advisors Inc. Advisors Inc.

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

Why?

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]

FT.com 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 FT.com 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."

WHAT RESPONDENTS ARE SAYING...

• "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)

ISM NON-MANUFACTURING SURVEY RESULTS AT A GLANCE COMPARISON OF ISM NON-MANUFACTURING AND ISM MANUFACTURING SURVEYS* NOVEMBER 2011
	Non-Manufacturing						Manufacturing
Index	Series Index Nov	Series Index Oct	Percent Point Change	Direction	Rate of Change	Trend** (Months)	Series Index Nov	Series Index Oct	Percent Point Change
NMI/PMI	52.0	52.9	-0.9	Growing	Slower	24	52.7	50.8	+1.9
Business Activity/Production	56.2	53.8	+2.4	Growing	Faster	28	56.6	50.1	+6.5
New Orders	53.0	52.4	+0.6	Growing	Faster	28	56.7	52.4	+4.3
Employment	48.9	53.3	-4.4	Contracting	From Growing	1	51.8	53.5	-1.7
Supplier Deliveries	50.0	52.0	-2.0	Unchanged	From Slowing	1	49.9	51.3	-1.4
Inventories	52.5	45.5	+7.0	Growing	From Contracting	1	48.3	46.7	+1.6
Prices	62.5	57.1	+5.4	Increasing	Faster	28	45.0	41.0	+4.0
Backlog of Orders	48.0	47.0	+1.0	Contracting	Slower	2	45.0	47.5	-2.5
New Export Orders	55.5	54.0	+1.5	Growing	Faster	4	52.0	50.0	+2.0
Imports	48.5	48.0	+0.5	Contracting	Slower	3	49.0	49.5	-0.5
Inventory Sentiment	63.0	57.5	+5.5	Too High	Faster	174	N/A	N/A	N/A
Customers' Inventories	N/A	N/A	N/A	N/A	N/A	N/A	50.0	43.5	+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.

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.

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.


Per CNBC:

• 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.

Via CNBC:

• 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)

MANUFACTURING AT A GLANCE NOVEMBER 2011
Index	Series Index Nov	Series Index Oct	Percentage Point Change	Direction	Rate of Change	Trend* (Months)
PMI	52.7	50.8	+1.9	Growing	Faster	28
New Orders	56.7	52.4	+4.3	Growing	Faster	2
Production	56.6	50.1	+6.5	Growing	Faster	3
Employment	51.8	53.5	-1.7	Growing	Slower	26
Supplier Deliveries	49.9	51.3	-1.4	Faster	From Slowing	1
Inventories	48.3	46.7	+1.6	Contracting	Slower	2
Customers' Inventories	50.0	43.5	+6.5	Unchanged	From Too Low	1
Prices	45.0	41.0	+4.0	Decreasing	Slower	2
Backlog of Orders	45.0	47.5	-2.5	Contracting	Faster	6
Exports	52.0	50.0	+2.0	Growing	From Unchanged	1
Imports	49.0	49.5	-0.5	Contracting	Faster	2
OVERALL ECONOMY				Growing	Faster	30
Manufacturing Sector				Growing	Faster	28

*Number of months moving in current direction.

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