it has been almost two months since I've posted one of Lance Lewis' missives. Tonight's is a good one.
dailymarketsummary.com
The Birth/Death Model Serves Up A Gift To Stock Bulls But They Can’t Do Much With It
Asia came back from yesterday’s vacation and was mostly higher overnight. Japan rose over 2 percent. Hong Kong rose just shy of 2 percent, and China’s Shanghai Comp rose 5 percent.
Europe played catch-up after being on holiday yesterday too and was up nearly 2 percent this morning. Over in the US the equity futures slightly higher ahead of the release of the April unemployment report.
About 15 minutes before the release of the employment report though, the Fed popped out of its box, and because things are so great in the credit markets, it felt the need to increase the size of its TAF auctions by 50 percent to $75 bil every couple weeks as well as increase the size of its swap agreements with foreign central banks.
In addition, the Fed said it would expand the type of collateral accepted under its TSLF to include AAA/Aaa-rated asset-backed securities (i.e. - credit card and auto loans, etc) in addition to already eligible residential and commercial mortgage backs and agency CMOs. In case anyone has forgotten, the TSLF is the “laundering facility” where primary dealers can exchange garbage that is incorrectly rated as AAA for treasuries. It’s sort of like a modern version of alchemy.
The details of these alphabet soup Fed facilities are honestly becoming irrelevant in my opinion. All we need to really know is that the Fed is going to monetize whatever needs to be monetized. And just because it’s called a “loan”, it’s still basically a monetization because we all know that it will be rolled over forever and ever. And the end result is more inflation.
The Fed news had people wondering if maybe the Fed was trying to move in front of a really ugly jobs number, but when we got the jobs data 15 minutes later, the headlines weren’t so bad.
According to the Labor Department, the unemployment rate fell to 5 percent, and only 20,000 nonfarm payrolls were lost in April, which was well below the consensus at -70,000. I failed to remember yesterday that the April birth/death model adjustment is particularly large in April, and this time it accounted for a huge +267,000 jobs. So once again the Labor Department successfully used its crayons to come up with a data point that was almost laughable.
In the particularly humorous department, the birth/death model added 45,000 jobs from construction and 8,000 jobs from financial services. I guess we’re to believe all the homebuilders suddenly made a mad dash to hire framers and banks and brokers were out rehiring all of BSC’s people as well as additional staff?
For once, people actually seemed to call “a spade a spade” and question the accuracy of the data from what I saw in the press. As for the market’s reaction, the S&Ps exploded. The dollar initially rallied but would later fade. Gold gave up its early gains and then rebounded to rally. The bond market slumped, and crude rallied about a dollar.
We gapped up huge in the S&Ps on the open to a new high for the move since the March low and immediately printed the high for the day. The remainder of the morning and early afternoon was spent slowly sliding lower, and we eventually slipped into slightly negative territory.
With about an hour to go, we hit our low for the day and began a last hour bounce that eventually took us all the way back up to the middle of the day’s trading range and into slightly positive territory for the close.
Volume backed off a little from yesterday’s pace (1.3 bil on the NYSE and 2.2 bil on the NASDAQ). Breadth was slightly positive on the NYSE and slightly negative on the NASDAQ. New highs swamped new lows on the NYSE (57 to 15), while new lows just barely beat new highs on the NASDAQ 64 to 60.
Sun Micro (JAVA) coughed up an unexpected calendar Q1 loss and said it would amputate 2,500 jobs. JAVA cited "significant challenges" in the U.S. market for the loss. JAVA tanked 23 percent on that to a new multiyear low.
The chips were mixed and mostly up or down a percent or so. The equips were mostly lower by a percent or two. The SOX fell a hair.
The “Fab Four” were also mixed. BIDU and GOOG both fell 2 percent, while RIMM rose over 3 percent. AAPL crept up a mere half a percent.
The rest of tech was a mixed bag, with the NASDAQ sliding just a hair. I’m no expert technician, but we all obviously look at the charts. And what’s been popping out at me recently is that the NASDAQ COMP (like nearly every other major US index) is sporting a “rising wedge” on the charts, which is very much like the rising wedge that the euro broke down out of recently and many gold shares broke down out of in March.
If seen these setups go both ways, but there’s no denying that the trend of the various markets of late has been to break to the downside from this setup, and the NASDAQ has no shortage of gaps that need be filled back in April. So, this may be something to keep an eye on next week, especially given all the sentiment bells and whistles that are currently giving warning signs in stocks. The AAII poll, for example, is at 53 percent bulls this week, which is the highest level of bulls since the October peak.
The financials were mixed. The BKX fell a hair, while the XBD rose a third of a percent. The XLF rose just over half a percent.
LEH rose a hair. BSC fell over 2 percent to back below $11. It still boggles my mind that this stock is trading so far about JPM’s bid? I guess that’s par for the course in a market that seems to believe in the disinflationary Tooth Fairy. GS rose half a percent, and MER rose just over half a percent.
The derivative king (JPM) fell over a percent. C and BAC both rose over a percent. BAC also incidentally said it didn’t have any plans to assume CFC’s debt (recall there is an arranged marriage planned between BAC and CFC), and S&P promptly cut CFC’s debt to junk today as a result. Speaking of junk, GE rose over half a percent.
GM was up a freckle. AIG rose 2 percent. ABK rose 7 percent, while MBI fell 3 percent. The subprime consumer lenders were mostly higher. CCRT rose 5 percent, and ACF rose 3 percent. COF fell just over a percent. Is it possible that I am going to be so lucky as to still get my “bankruptcy put buying opportunity” in these little pigs that I’ve been hoping for as the bulls gun them higher over the next several months in expectation of the glorious second half economic recovery??? I sure hope so.
The mortgage lenders were mostly lower. CFC fell a percent. TMA slumped 9 percent, and TMA rose a percent. The mortgage insurers were mixed. RDN fell over a percent. PMI fell a touch, and MTG rose over a percent. As for the GSEs, FRE rose over a percent, and FNM fell a percent.
The retailers were mostly lower, with the RTH falling half a percent. Maybe people noticed crude up $4 today? WMT fell a percent and appears to have topped out to me. BBY rose a hair, and TGT fell over half a percent.
How fast are US retail sales falling off? The following chart of state sales taxes in Q1 reveals that 21 states saw a decline in sales tax, and remember, that’s not excluding inflation!
The homies were mixed and mostly up or down a percent or so.
Crude oil (Brent) jumped $4.06 to $114.56 and back to within $3 of a new all-time high. I wonder if the lunatics trying to claim that the Fed’s “sorta-pause” on Wednesday killed inflation noticed this tiny little fact today? Also, note the increasing chatter about $200 oil now.
The XOI rose over a percent. The XNG rose over 2 percent, and the OSX rose nearly 2.5 percent. SU also rose over 2 percent. If you don’t own an oil stock, buy some SU. That’s all I am going to say on the matter.
The GSCI rose 3 percent and back to just shy of a new all-time high, and the CCI-CRB bounced sharply off the uptrend we identified yesterday and rose over a percent. The DBA Ag ETF also rose over a percent.
The base metals were mostly higher, with the GSCI Industrial Metals Index picking up a percent. Copper rose nearly 4 percent as miner strikes in Chile and Mexico continue. The XLB rose over a percent, and the Baltic Dry Index rose over a percent to a new high for the year, as it continues to close in on a new all-time high.
June gold opened up $4 this morning in the US and initially knifed through $850 for a nanosecond in reaction to the jobs data and the ensuing selloff in the euro. But as quickly as the metal had plunged, it rebounded back up into positive territory despite the continued decline in the euro. From there, the metal spent the rest of the session slowly struggling higher to end up $7.10 to $858.
Spot gold rose $3.75 to $856.45. The bears tried pretty hard, but gold still hung on to its positive YTD gain of nearly 3 percent. That’s more than the major equity averages can say, as they all continue to be well in the red for the year.
Spot silver rose over a percent to $16.41 and is up nearly 11 percent YTD incidentally. Spot platinum rose 2 percent.
The GLD gold ETF’s holdings were unchanged.
The GDM rose over a percent and finished just off the very best levels of the session.
The South Africans were higher. GFI and ASA both rose just a hair, while HMY and AU rose a percent.
Among the seniors, I still like GFI, but I also think NEM’s stock performance could surprise quite a few people this year just as its earnings did last week. I’d also note that NEM’s 3 percent gain today puts it back at just shy of its high for the week, and it’s been noticeably holding up better than the rest of the seniors since it released its earnings.
The XAU/Gold ratio rose a percent to 0.197, while the GDX/GLD ratio rose just half a percent.
Our market cap weighted junior basket was flat. MFN, CGR, and UXG all rose a percent. NGD rose 2 percent, while MRB fell a hair, which brings its discount to the merger deal to 4.5 percent. GSS was flat, while BAA and NSU both lost over a percent.
It’s been two weeks of hell for gold bulls, but we saw signs today that the fever may have finally broken with respect to this disinflationary nirvana nonsense that so many equity bulls keep trying to promote.
Gold managed to finish the week above $850 today and also managed to rally in the face of another new low for the week in the euro. The gold shares have likewise begun to “act” better relative to gold over the last three days too.
There is no question in my mind that we saw a major low put in for the gold complex this week. The only question I have now is how fast will we recover back to the old highs and even make new highs? The market’s response to next week’s earnings news from most of the miners may give us some clues.
If I’m right about inflation accelerating dramatically this summer, those looking for the usual seasonal patterns in gold and its shares are going to be left behind. This leg up in the gold complex since the August low has already broken all the prior “rules” (i.e. - the XAU/Gold ratio’s strange performance, the underperformance of the juniors, and the underperformance of most of the miners in general for that matter, etc).
I suspect the reason for this is not only the specific liquidity-based reasons that we’ve identified before, but also a function of the larger size and scale of this bull move, which is likely going to be much bigger than any of the prior legs up that we’ve seen over the past 7 years of the secular bull market in gold and the gold shares.
After all, normally after 3 or 4 quarters of rallying sharply, gold and its shares would typically enter a long consolidation that could last up to 2 years, based on the prior pattern of the last 7 years. This rally hasn’t unfolded in the typical fashion though, and thus I don’t expect it to follow any of the other usual “rules” either, including seasonality. And there’s a fundamental reason for that too. This leg up in gold’s bull market is being driven mostly by investment demand, not seasonal jeweler and Indian festival demand.
The Fed’s inevitable attempt to inflate away of the housing bubble is going to create the biggest inflation in the history of the world (and that’s without even tossing “peak oil” into the mix). We’ve known this all along. And the biggest inflation ever demands the biggest and longest cyclical gold bull market too in my mind. And what else would we expect with gold and its shares breaking out to all-time highs for the first time in 30 years?
The way I see it, the first leg up in gold and the gold shares since August ended in March, and that was basically the “anticipatory phase,” where the market was mostly just anticipating a sharp rise in inflation and an eventual slide into stagflation as a result of the Fed’s printathon in response to the housing bust.
The painful correction that we’ve had since the March peak should mark the transition from that anticipatory phase to a new “recognition phase,” where liquidity has now returned to the financial markets. Inflation accelerates and becomes more and more obvious.
However, because of the still-fragile nature of the financial system and the economy though (evidenced by the Fed’s increase in size of its various monetization facilities today), the Fed isn’t going to be able to lift a finger against the process other than to maybe raise the volume level of its rhetoric.
Money and credit growth are simply exploding as a result of the Fed’s actions, and the only way the Fed can keep the system functioning is to have that trend continue. The result is going to be a massive rise in inflation globally.
This recognition phase is not only the longest phase of any bull move, but it should also be the phase where the shares dramatically outperform the metal. And my bet is that we’re going to begin that stage next week too as the miners begin to report and gold starts to recover from this retest of the old 1980 peak even as the euro potentially corrects further.
The US dollar index initially rallied about half a percent but then gave up a good chunk of its gains to end up just a quarter of a percent. The trade-weighted dollar rose a hair to 96.22.
The yen fell a percent to a new low for the move since its March peak, and the euro fell a third of a percent to a new low for the move since its late April peak. The AUD rose a hair, and the CAD was flat. The PBOC pegged the dollar/yuan at 6.9875, which was unchanged.
I want to make a quick comment on the following Bloomberg column: Asia Is Fed Up With Bernanke's Rate Cuts. My response is simply: Well, if you’re “fed up”, then DO something about it. Dump some dollars and drop your pegs. It’s so simple? Good grief. I am getting sick and tired of these foreign CBs whining about the dollar’s collapse and the inflation that is being generated all over the planet but then not doing anything about it?
As Kurt Russell (playing Wyatt Earp in the movie Tombstone) said: “You gonna do somethin, or just stand there and bleed?” Stop whining and take some action, because keeping these pegs is only going to stoke even more inflation across the entire planet. The longer this nonsense is allowed to go on the worse it is going to be for everybody. Ok, there… now I’ve vented.
Treasuries were lower, but more so in the short end than the long end. In essence, it appeared as if treasuries were lower more because of stocks rallying and people relaxing more about the health of the financial system than because of any sort of inflation problem. The yield on the 10yr rose 9 bps to 3.855%.
The TLT bond ETF fell over a percent and back to its 200 dma on the charts. Obviously by reducing my short yesterday, I satisfied the “gods” and was allowed to profit on my remaining position. If we take out the April lows next week, I’ll consider adding to the position again.
The 2/10 spread widened 1 bp to +140 bps, and the 3M/10yr spread widened 2 bps to +239 bps. The yield on the 3M bill ended the week at 1.5%, which is still 50 bps below the fed funds target rate. So the market continues to signal that the financial system is by no means “healed” yet even though there is an obvious return of liquidity.
The 10yr junk spread to treasuries narrowed 7 bps to 640 bps over treasuries.
Today’s action in the market is a classic example of why it’s only the reaction to these jobs numbers that ever really matters. Despite the headline of “only” 20,000 jobs being lost, stocks couldn’t really get a rally going and basically treaded water despite being “T’d” up to accelerate to the upside on the charts. And while the dollar rallied slightly today, commodities still roared back to life, especially crude oil.
The S&Ps have now been up three straight weeks in a row, and like most of the major indices, the S&Ps are sporting a “rising wedge” on the charts. As we noted above, those “rising wedges” have tended to break to the downside of late in most other markets rather than accelerate to the upside. In all likelihood, next week could bring a breakdown from that wedge in the S&Ps too, especially given the high levels of bullish sentiment and a VIX that has now fallen back to just 18.18, which is the lowest level since October of 2007.
As for a catalyst, perhaps an oil spike next week to new highs crushes the disinflationary “day-timer” that so many equity bulls were clinging to this week, and that’s what triggers a breakdown? We’ll see? I still doubt such a selloff will end the bear market rally, but “sell in May and go away” may still be the thing to do next week as far as the broader equity market goes.
The stocks that benefit from inflation, however, should roar this summer, led primarily by the oil and gold shares. Or at least, that’s the way things seem to be shaping up to me at the moment. |
