FMX | Connect – www.fmxconnect.com - (Reported 5/21/2010)
Excerpts from MARKET MUSINGS & DATA DECIPHERING
WHILE YOU WERE SLEEPING
The latest news is that Tim Geithner intends to meet with European officials next Wednesday to discuss the European debt crisis, and if he knows anything, he knows bailouts (Mexico in 1995, LTCM in 1998, banks in 2009). There is always the risk of a coordinated FX intervention and there will be plenty of time for European policymakers to meet over the long weekend to come up with another plan to burn those evil speculators (they are benevolent, however, when they are buying the debt) — see EU Chiefs Can’t Live With Markets, or Without on page A8 of the WSJ. Meanwhile, the first trillion bazooka, which just got approved by the German lower house of parliament, has done little to ease concerns of a Greek debt restructuring because CDS spreads imply a 47% chance of default.
The must read of the day, if there is one, is the Paul Krugman’s column on page A23 of the NYT — Lost Decade Looming? He starts off with “despite a chorus of voices claiming otherwise, we aren’t Greece. We are, however, looking more and more like Japan.” We have been saying this since late 2008 when the Fed dropped the funds rate to zero and that still couldn’t put a floor under either the economy or the equity and debt markets. What did put in a bottom was an experimental toolkit that involved an unprecedented expansion of the central bank’s balance sheet, which is now concentrated more in residential mortgages than in government securities. One other thing — it is not one lost decade in Japan, it is two.
MARKET THOUGHTS
The equity market is technically oversold right now and is due for a near-term bounce, but that would be a rally that I would fade if we see it. There has been too much of a rupture to ignore with the S&P 500, Dow and Nasdaq all closing below their 200-day moving averages (fist time in almost a year for the Nasdaq). There were only 11 new highs yesterday and 212 new lows, so this ratio is still quite bleak. Decliners/advancers were also 11-to-1 on the major exchanges. This is what I mean by rupture.
On average, corrections that take place after such a massive move up from a depressed low is 20%, which would mean that we could expect to see the S&P 500 still test the 970 level; with a prospect of a second-order Fibonacci retracement implying a move below 950. Remember that before the last big leg up in the market last summer, the S&P 500 was hovering around the 920 level, which is my target to begin getting interested again.
A 10% correction, even in a bull market, is pretty normal, and historically has occurred about every 12 months — and tends to occur more in the second year of a rebound, or bull market, than in year-one. So the European debt crisis is certainly the catalyst for this renewed round of risk aversion, but is not out of line with market patterns over the past century.
CLAIMS DATA CONSISTENT WITH JOB LOSSES, NOT GAINS
U.S. initial jobless claims jumped 25k to 471k during the week of May 15 – just in time for the nonfarm payroll survey week. This is the highest print in five weeks and adds confirmation to the view that claims have stopped falling after a huge decline in the second half of last year.
We went back into 50 years worth of data and found that when claims were this high: (i) 75% of the time employment is declining; and, (ii) the average monthly falloff is 150k … so, put that in your pipe and smoke it!
THE LEADERS BEGIN TO LAG
The U.S. leading economic indicator (LEI) dropped 0.1% MoM in April, which came as a surprise to a consensus view of +0.2% MoM and was the first monthly decline since March 2009, at the market lows. Not only that, but the diffusion index dropped to 40% in May and this too was the poorest reading since last March. Seeing the LEI decline this soon after a recession supposedly ended is definitely not normal – it didn’t decline for four years after the last recession ended in November 2001 (and that included the 2002 relapse).
DEFLATION REMAINS THE PRIMARY TREND ... AND THE FED KNOWS IT TOO
The Cleveland Fed just published a report on inflation concluding that: (i) the decline in recent months has transcended the housing effect; and, (ii) the principal risk is for a further slowing. Treasury yields are likely headed even lower. The title of the report is Are Some Prices in the CPI More Forward Looking Than Others? We Think So, by Michael F. Bryan and Brent Meyer and well worth a read.
PHILLY — MORE SWISS CHEESE THAN STEAK
The Philly Fed manufacturing index edged up in May, to 21.4 from 20.2 in April but the good news ended there as the components were soft across the board.
GREEN SHOOTS!
The number of insured commercial banks and savings institutions on the FDIC’s “Problem List” increased from 702 to 775 during the quarter, and total assets of “problem” institutions increased from $403 billion to $431 billion.
REVERSION TO THE MEAN
We went back to 1946 and never found a time when the stock market (S&P 500) corrected this much in the so-called “sweet spot” of the cycle (the time between the end of the recession and the first Fed rate hike). The most it has ever gone down in this positive part of the “investment clock” was 3%. Then again, you have to go back to 1930 to have seen such a massive rebound from any low. In other words, a 10% correction feels severe, but must be viewed in the context of an abnormal cycle involving a credit collapse of historic proportions to have been only briefly papered over by an unprecedented expansion of government balance sheets globally. In the same being, this correction must be viewed in the context of an 80% surge from the March lows.
David A. Rosenberg
Chief Economist & Strategist Economic Commentary
drosenberg@gluskinsheff.com
+ 1 416 681 8919
Source: Market Musings & Data Deciphering
http://www.fmxconnect.com/
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