it's been a long time since I've posted one of Lance Lewis' missives. Tonight's is a good one.
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Print Version
March 10, 2008
The System Begins To Seize Again, Which May Bring Out The Fed
Asia was mostly lower overnight. Japan fell 2 percent. Hong Kong traded down to its intraday January low and then rallied back to end up a percent, while China’s Shanghai Comp rose fell nearly 4 percent.
Also last night in China, we got the February PPI, and it jumped 6.6 percent. Tomorrow, we’ll get the Chinese February CPI, which is expected to be an eye-popper. If you will recall, the last release of the Chinese CPI back on February 19th (which was highly inflationary and was the catalyst for the PBOC to allow the yuan to rally a quarter of a percent nearly every day for the next several days following the CPI), sparked a multiweek rally in both the precious metals and crude oil.
It’s becoming increasingly clear to me that the currency pegs of the Gulf oil producers, as well as the floating peg that China uses and other similar moving pegs simply aren’t going to be able to withstand another 75 to 100 bps of easing from the Fed. With inflation rates in these countries already literally through the roof, another round of easing by the Fed will make these pegs to the dollar virtually impossible to maintain, not to mention the rise in dollar-based inflation that more Fed easing will produce. We’re very quickly approaching the day when the dollar is going to have an accident vs. the currencies of these countries, and I have no doubt that this is precisely what the commodity, oil, and gold markets are sniffing out as well (more on that below).
Europe was off over a percent this morning, while the US equity futures were a touch higher on the back of a Goldman economist suggesting that the Fed might ease before the open today in the wake of last week’s horrific economic data. That easing never came though, and the S&P futures slipped back close to unchanged as we got closer to the open.
We gapped down on the open in the S&Ps and immediately began to saw our way lower but managed to remain above Friday’s lows. Around mid-morning, however, that would change as rumors began to swirl that BSC was having liquidity problems, which took BSC down about 15 percent at one point and opened a trap door beneath the S&Ps.
The S&Ps plunged below Friday’s lows and appeared to be set to test The January lows when BSC’s CEO denied the rumors of liquidity problems. That denial provided the excuse for a bounce in the S&Ps into the early afternoon that retraced most of the BSC-inspired plunge.
Another selloff appeared in the afternoon, however, that broke the S&Ps to another new low for the day. And we spent the remainder of the last hour basically flopping and chopping on the lows to go out on the very worst levels of the session.
Volume backed off a little from Friday’s heavier levels (1.6 bil on the NYSE and 2.1 bil on the NASDAQ). Breadth was over 5 to 1 negative on the NYSE and just under 4 to 1 negative on the NASDAQ. New lows swamped new highs on both exchanges (360 to 7 on the NYSE and 436 to 4 on the NASDAQ).
The chips were mixed and mostly up or down a percent or so. The equips were mostly lower by 2 to 4 percent. The SOX fell over a percent.
The Floppy Four were mostly lower. GOOG fell 5 percent to a new 52-week low after Barrons said some negative things about it this weekend. AAPL fell 2 percent. RIMM tanked 5 percent, and BIDU fell half a percent.
The rest of tech was mostly lower, with the NASDAQ falling 2 percent to another new 52-week low.
The financials were torched again. The BKX fell over 2 percent to a marginal new closing low and just shy of the January intraday low. The XBD fell 5 percent to a new multiyear low, and the XLF fell 3 percent to a new multiyear low.
BSC managed to close off its lows but still ended down over 11 percent to a new multiyear low on the back of the rumors about it having liquidity problems. All Wall Street firms are going to have liquidity problems before this is over, so whether the rumor is true or not doesn’t really matter. GS fell 3 percent to a new 52-week low, and MER fell over 5 percent to a new multiyear low.
The derivative king (JPM) fell 3 percent to a new multiyear low. C collapsed 6 percent to a new multiyear low and became a “teenager” again for the first time since 1998. BAC fell 4 percent to a new closing low but still has a ways to go before it takes out its January intraday low. GE fell 2 percent to a new 52-week low.
GM tanked 5 percent to a new 52-week low. AIG fell over 2 percent to a new 52-week low. ABK fell 23 percent and back to just shy of Friday’s intraday low but remains well above its January low (for now). MBI fell over 10 percent to a new one-month low but also still has a ways to go to get back to January lows.
The subprime consumer lenders were mostly lower. COF fell 5 percent and is slowly leaking back to its January lows. ACF fell 3 percent and also continues to slowly leak back to its January lows. CCRT fell 7 percent to just shy of new multiyear closing low.
The mortgage lenders were down across the board. CFC fell 14 percent to a new 13-year low after the company said it was being investigated by the FBI for possible securities fraud (whoops). DSL also fell 14 percent to a new multiyear low. TMA split two for one (the hard way) again to fall 60 percent to just 71 cents a share.
The mortgage insurers were down across the board too. RDN and MTG both fell 5 percent, and PMI fell over 3 percent. As for the GSEs, FRE collapsed 12 percent to a new multiyear low, and FNM tanked 13 percent to a new multiyear low after the cover story in Barrons proposed the question of whether FNM was “toast”.
The retailers were mostly lower but surprisingly not by much, as the RTH fell a percent. WMT fell 2 percent. BBY fell a touch, and TGT fell over a percent.
The homies spent most of the session higher, which I can only assume was shorts being careful and covering in case the Fed happened to drop a rate cut bomb this afternoon. By the close, however, the homies ended mostly lower by 2 to 3 percent. Nevertheless, they still have a long way to go to get back to their January lows.
Crude oil (Brent) jumped $1.78 to 104.16 and a new all-time high, while WTI crude rose $2.74 to $107.89 and a new all-time high. In the news, China’s oil imports hit a new record in February, and Qatar’s prime minster said today that the country is considering dropping its peg to the dollar and that he hoped the “GCC states [would] take a unified position in [the] matter.” In other words, Qatar is suggesting that all of the GCC nations (including Saudi Arabia) should drop their dollar pegs at once.
Perhaps oil is merely reacting to these news items, but it’s also very possible that the market is anticipating that the Chinese will let the yuan rally at a faster clip following the release of its February CPI tonight. In truth, these “reasons” are all the same in that dollar-based inflation is increasingly forcing various countries to abandon their dollar pegs, reflecting the continued breakdown in the dollar-based monetary system.
The oil and gas shares traded with the equity market again. The XOI fell a touch. The XNG fell over a percent, and the OSX fell nearly 3 percent.
The GSCI rose over a percent to a new all-time high, and the CCI-CRB fell a hair. The XLB Materials Index fell 4 percent to a new low for the month but still remains above its February lows, while the DBA Ag ETF bounced back from Friday’s losses and rose 2 percent.
The base metals were mostly lower, with the GSCI Industrial Metals Index falling 3 percent.
April gold opened down about $5 in the US this morning after the euro sold off in reaction to Trichet saying he was “concerned” about the recent moves in the euro. The yellow metal continued to tumble to as low as $961.90 (or back to just shy of last week’s wide trading range) and then rebounded as crude took off to end near the best levels of the session and down just $2.40 at $971.80.
Spot gold fell just 36 cents to $972.84. Spot silver fell over 2 percent to $19.67 and back to just inside its trading channel since August. Spot platinum was all over the map but closed up just a hair when all was said and done.
The GLD Gold ETF inhaled another 8 tonnes, bringing its holdings to 655 tonnes, which is a new all-time high, which makes it the #8 holder of gold in the world behind Japan’s 765 tonnes. Thus, even at these “lofty” levels, investment demand for the yellow metal continues to be strong.
The HUI and GDM both fell 3 percent, as the gold shares were once again dragged down by the selling in the equity market.
The South Africans were weak along with everything else despite the rand sliding a hair again. AU fell 3 percent. GFI fell over 5 percent, and HMY fell nearly 4 percent. ASA was off over 2 percent. Assuming the yen continues to rally, the rand is likely to accelerate its losses in the coming days, which should continue to propel the South African shares higher even with gold merely being flat.
The XAU/Gold ratio fell nearly 4 percent to 0.194, which once again triggers the “slamdunk buy signal” in the gold shares that we get anytime the XAU/Gold ratio has fallen below 0.20 over the last 25 years of the index’s history.
Our market cap weighted junior basket fell over 2 percent. BAA rose half a percent, and UXG rose over a percent. MRB, MFN, and GSS all fell 3 percent. CGR and NGD both fell a percent, and NSU fell over 6 percent.
Gold continues to drift sideways in a $30 trading range just below $1000, while the gold shares continue to be trapped within their “wedge” and waiting for gold to jump over that $1000 level. Who’s going to “break out” first? My guess is gold, and soon.
As I mentioned in today’s Intraday Comment, the spread between the 3M bill yield and the fed funds target rate hit a new all-time record today, indicating record stress on the financial system. Whether that will force the Fed to go ahead and ease intermeeting just a week away from next week’s FOMC (as occurred in January) remains to be seen, but it does tell us that the conditions are right for such an emergency move. The fed funds futures market is still indicating a 90 percent chance of a 75 bp cut by next week, although over the weekend I saw several people in print tossing around the possibility that the Fed might ease 100 bps.
Likewise, as I mentioned above, I don’t see how China and the Gulf oil producers can continue to peg to the dollar with the Fed easing another 75 bps soon and inflation already roaring in their domestic economies. That’s especially true since food inflation is historically what has triggered unrest in both China and in the Middle East, and the top priority for these governments is to simply remain in power.
In fact, anticipation of some sort of currency move in the coming days in the wake of China’s CPI tonight and GCC currency talks scheduled for the 23rd and 24th may have even been what put a bid under crude and brought gold back today?
If the Chinese allow the yuan to accelerate its appreciation in response to a hot CPI number, as the Chinese did back in February, we could see gold rally sharply tomorrow, as well as the gold shares. An emergency rate cut tomorrow on top of that would merely be sauce for the goose.
The US dollar index slipped a touch to just shy of a new all-time closing low. The trade-weighted dollar rose a freckle to 96.10 and continues to basically flop around just off its multiyear low, much like the dollar index. Of course, all of that may change following China’s CPI tonight.
The yen rose a percent and back to last week’s high, which leaves the yen just shy of a new 10-year high, and likely sets up a violent move to the upside in the coming days as the yen carry trade’s unwind likely accelerates. Speaking of which, the euro/yen cross broke down today and appears to be joining the S&Ps in a move to the downside.
The only way I can see Japan not intervening to stop the yen’s rise is if the Chinese allow the yuan to significantly appreciate as well. Thus, one can interpret the current rally in the yen as a sort of “invitation” for the Chinese to allow significant appreciation in the yuan. Will the Chinese accept that invitation? With the US economy clearly in recession, the Chinese certainly don’t have a lot to lose with respect to a stronger yuan hurting trade with the US.
The euro gave up its early gains to end off just a hair after Trichet said, “Excessive volatility and disorderly movements in the exchange rates are undesirable for economic growth,” in the wake of a meeting of central bankers from the Group of 10 industrialized nations in Basel, Switzerland today.
The AUD fell over a percent, and the CAD fell half a percent. The swissie rose a percent to a new multiyear closing high.
The PBOC allowed the dollar/yuan to fall a freckle to 7.106, as the dollar/yuan continues to move basically sideways ahead of tonight’s release of the February CPI.
Treasuries were higher, with the yield on the 10yr falling 8 bps to 3.44%. The TLT bond ETF rallied back up to just shy of last week’s highs and then backed off to end up a percent but well off its highs.
The 2/10 spread narrowed 4 bps to +197 bps, while the 3M/10yr spread widened 3 bps to +212 bps. The yield on the 3M bill plunged 9 bps to 1.347% and a new multiyear closing low.
The 10yr junk spread to treasuries widened 7 bps to 631 bps over treasuries and a new multiyear high.
We still appear to be on track to try and test the January lows in the equity market and probably take them out (at least marginally). However, such a slide would no doubt also trigger more emergency action from the Fed.
Tomorrow looks set up to be a wild day to say the least. We’ll get the Chinese CPI tonight, which will likely prompt the Chinese to allow the yuan to appreciate at a faster clip. The yen appears set to melt up to a new 10-year high and trigger more yen-carry unwinds. Likewise, the US credit markets are seizing up again, which increases the probability of emergency Fed action, and the US equity market is poised to test its January lows and likely take them out.
How is it all going to play out? I wish I knew, but with the Fed standing ready to ease aggressively again and continuing to feed inflation, I feel the most comfortable in gold and gold shares in this environment.
Granted, the gold shares tend to be dragged down on days the financial markets seizing up, as margin calls go out and we see general deleveraging. But the trend continues to be up in the shares. For one that is patient, the “sure bet” continues to be betting on more inflation and more upside in gold and gold shares in my view.
I am also increasingly becoming convinced that one day very soon, we are going to wake up to the dollar literally “snapping” against the yuan and the Gulf oil nations’ currencies after those nations finally decide that it is time to break their dollar pegs. With domestic inflation roaring and the US economy clearly in recession, there is increasingly little incentive for these nations to maintain their pegs to the dollar and more and more incentives for them to sever their pegs. And when that move eventually comes, it’s going to have enormous “overnight” implications for the dollar, oil, the US bond market, and gold.
While I cannot provide personalized investment advice or recommendations, I welcome feedback and observations by subscribers. You can email me at Lance Lewis.
Disclaimer: Lance Lewis periodically publishes columns expressing his personal views regarding particular securities, securities market conditions, and personal and institutional investing in general, as well as related subjects.
Mr. Lewis is the president of Lewis Capital, which is a registered investment advisory firm in Dallas, Texas. The firm regularly buys, sells, or holds securities that are the subject of Mr. Lewis’ columns, or options with respect to those securities, and regularly holds positions in such securities or options as of the date those columns are published. The views and opinions expressed in Mr. Lewis' columns are not intended to constitute a description of the securities bought, sold, or held by the firm in its capacity as an advisor. The views and opinions expressed in Mr. Lewis' columns are also not an indication of any intention to buy, sell, or hold any security on behalf of the advisor’s clients, and investment decisions made on behalf of clients may change at any time and for any reason. Mr. Lewis' columns are not intended to constitute investment advice or a recommendation to buy, sell, or hold any security. |
