Capitalsynthesis

Markets have closed. Its been volatile but no significant spikes down after the morning’s fireworks. We are at 12128 on the ym or exactly 100 ticks higher than the lows of the day and 1293 es or sp500 futures as i type i.e. no key levels have been broken. So we await our political masters decision. Depending on their decisions and or indecision’s expect plenty of volatility and spikes to the south side to threaten the cyclical bull market. Nothing today made the price action look anything other than theater but lets see if (and how) more significant participants join the action. DX, oil, pms wise as was. Jpy is an emerging story. She offers the safety of a fire from the USD frying pan is a good analogy, imo.

I’m flying tomorrow to Mallorca for  a few days but will try and check in early next week.

Luck to all and have a great weekend guys. Rich

Below the UOB Q3 2011 view for Japan. Japan continues to be an interesting market opportunity. We have several events that can occur at any moment inc inflation targeting for the BOJ, the replacement of her chairman and for much more monetization.  The political stalemate continues in japan re the budget wranglings. The long awaited monetary expansion has not occurred yet. The clock is ticking however. Here the UOB q3 view on Japan:

UOB-Economic-Japan

Incidently the UOB chairman today named Singapore’s richest man. Congratulation to Wee Cho Yawon on accumulating all those billions. Looking at the USDSGD chart its easy to see why so many USD billionaires are so common place nowadays. All the best Rich

Asia overnight calm. All moved lower but between .2% and .5% or so.. Asia does not believe the US default is remotely possible.

US indexes wise we came to 5 ticks to my near term target of 12150 on the ym (dow futures). We hit 12155 in hours session.  I’ve let all my remaining shorts go end of session yesterday (was around 25% of the total account inc remaining ym sept futures sp500 and ym option puts for sept and dec11, qqqs on nasdaq and a couple of es futures short) for a profit i add.

I am 100% naked long again as of close of play yesterday – you pay your money you take your chances. I don’t see supporting sell price action.. yet. I will join if i see a battle and the shorters look to have an edge. But i want evidence first. I want to see genuine sellers.

On the  out of hours we have spiked below down to 12061. This was money from a baby for those awake out of hours – i was asleep, you have to at some point.

Note, we are also at a key support of 1295 sp500 – remember the UBS call on the end of the cyclical bull level i posted up last week.. 1295.

SP500 stocks over 50dma looks ok here:

Of more concern are the recent 52wkhs of sp500 stocks. Here:

The 2nd top of the 21st of July was narrower still than the 7th of july top. This ‘narrowing’ demonstrates some increasing weakness in the rally. (There are parallels with the economic recovery here with main street worsening and upper street booming). I don’t think this is enough of a reason in itself to stop the cyclical bull as yet. And the price action is not confirming the narrowing, yet.

These levels are very unlikely to get blown over in a meaningful sustained way. Spikes could move indexes 1 or 2% downward at high speed and then an equally high speed retrace would very likely occur. I’m saying this from the price action over the last month or two. There are no serious sellers yet. Now this can change. Of course no one can know what comes out of the wood work as price levels are hit. The weight of the market is still to the long side even as price spikes lower. Indeed the moves lower simply have supported the cyclical bull being alive and well.  The test will be when the longs come forward and push price back northward. Will any serious shorters come forward in large pattern breaking waves against the longs? Its unlikely but you never know who got out of bed on the wrong side. If Carlos Slim and perhaps a few of his buddies want the market lower and is ready for a fight then the leveraged longs could be over come but there would be a big fight and this is what we need to watch.  The price action will show the direction, no question. Here the cash dow with volume. If this was meaninful you would expect the dow cash to be much higher. (Just one indicator of course).

 

Remember, i agree the data is weakening here. Fundamentally the data continues to worsen, no question. European data is worsening more quickly than US data but both are weakening. Earning season has been, on average, good and meeting or at expectations. Having said this the variance across the earnings is getting wider. Ie good cos are making above average earnings whereas weaker cos are significantly under achieving. This demonstrates the squeeze is starting, imo. Without the consumer adding debt more monetization will most certainly be needed from all the developed economies.

The picture for pms remains as was. We have some spiky price action but no levels broken note. They are very strong trends. Short term spikes vs trend are generally to be seen as entry points, not exit points. I’ve done some research on pms and miners in the last few days. I will write a piece soon. Its secular bullish of course but i will outline a few issues i see on the horizon. Short term bullish, Medium term range, long term to the moon. Ill save the longer analysis for the specialist piece.

Industrial metals remain so strong. Their price action disputes the spiky wider market. Oil remains fairly strong. I’m looking for 89 now.. up from 88..  It could occur.. I’m waiting. When/if she  shows the correlations will be all important. Ie dx, copper, equities, etc. Here the reason for the target and my patience. This is still part of the reaction to the failure at 114, imo.

Why is the copx so strong given shanghi and the concerns in Europe and US?

On a specific issue.. Congratulations to the young billionaire David Einhorn of Greenlight Capital. He stuck with his call on VOD. He increased his position as price moved lower he was so sure the value was there. Today the news finally broke for him that Verizon are to pay a divi to vod of £2.8bn. This radically changes things for VOD’s valuation both in terms of income and capital valuation of Verizon. Everyone and their dog have come out this am and upped their targets for vod. I fully expect £2 to be achieved very soon. The pe, even at £2, will not be challenging at all. As i posted on ‘allocations’ board i entered a large position on vod (cash and leverage) but well done to David who really prompted me to do the research on them.It was his largest single position i believe.

Much more to come on markets in the markets section of the forum. All the best Rich

 

 

 

A couple of very good reports, imo.

UBS called the end of the cyclical bull market last week calling (SP500) 1370 or thereabouts as the near term likely top, probably in August 2011 but there house longer term view is for a secular bull market in equity given ‘undervaluation’ at current levels.

UBS-“The-Decade-Ahead”

This report is a bit of a chart blitz. It needs more words to explain their points especially as regards to monetary drivers of prices. They hint at this as the gdp growth nos are not high whereas earnings growth is projected to be strong. Of course earnings growth are nominally stated not relatively stated. Ie they are not inflation adjusted. If you expect high inflation and low adjusted gdp growth then this explains high, inflation unadjusted, earnings growth. I agree with this perspective though do not expect much of an inflation adjusted return in the two sectors of the three sectors they pinpoint, namely, tech, industrial cos and consumer staples.  These sectors will hedge some of the inflation for sure and will, almost certainly, be far better than cash and fixed income, imo. (UBS doesn’t mention commodities which is somewhat odd?)

Here the GS house view on relative GDP growth projections for the decade. (Imo commodities but also consumer staples in these ‘EM’ economies is the way to play this).

Next up, Jim O’Neill’s current mid July view of the world. He asks a couple of excellent questions inc:

Why do people persist in calling these fiscally sound drivers of world growth “emerging markets?”
Why do we all derive the risk-free rate from the G7 world’s bond markets?

Here Jim’s entire comments:Goldman-Sachs-JON

Hahaha, i do believe Jim raises some excellent questions indeed. He hits a few nails on the head here.

All the best Rich

Asia relatively strong over night with minor falls on the key Hangseng and Shanghi indexes. Nikkei weaker but other indexes not breaking. Calm prevails at present in spite of the market watch headlines of ‘big falls’ in asia overnight.

US indexes.. I forecast 12150 early yesterday as a likely near term target for the ym (dow). We got close but the price action is still very sedate. I still suspect we might still see this within the next week or so. Imo the deadline will likely pass and a deal won’ t be agreed in time, there will be firework ‘spikes’ downward on this event, possibly the fed will be ‘forced’ to provide liquidity to the banks to stem concern in the markets (a y2k liquidity injection). The ceiling will be agreed a few days after these spikes, imo. I think this will be the ‘theater’ the political elite will need to do a deal and it will show some bargains through this process and overall liquidity and monetary easing will be increased not diminished. The price action continues to point to the cyclical bull still being well in control of events for the moment. The spikes to the south may be frightening around these debt issues but imo they will be buying points. Calling the individual gyrations of price is not worth getting into around these news events, imo. Spikes to the down side but the cyclical trend to remaining intact is the evidence thus far. The price action will show ‘genuine’ actions. We cannot pre judge this. At present there are no genuine sellers. They may come forward but the evidence suggests not thus far.

Precious metals remain very strong with yet another all time historic high for gold yesterday. Commodities in general moving down in concert with the equities. Trends intact. The dollar index off her floor but only just. Very very weak. Participants are unclear whether the debt issues and equity sell off should drive them away from the usd or toward it? Confusion reigns in fx markets at present. The AUD is a star and has broken out to new historic highs. As an aside with gold and the aud breaking out together as equity and the usd index strengthens this should be noted and be a good indicator of where this is all heading.Onwards we march.. Rich

 

 

 

http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2011/7/26_Dr._Marc_Faber.html

Rich

Since the 2007 mortgage collapse the FHA has become single guarantor of  mortgages in the States. Her capital reserves has sunk from 20bn to 3.6bn in the last few years as mortgage defaults have triggered pay outs. The FHA’s defaults are high as they accept low deposits. As low as 3% in fact. This with government programs to assist home purchases (Inc Federal housing tax credits and many incentives from HUD or the Housing and Urban Development unit of government) has resulted in positive incentives to purchase housing. Ie you are paid to buy. HUD has been working directly with the FHA to offer houses for $100 down payment.

http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/salesincentives

The FHA is now guaranteeing more than $1trn of highly leveraged mortgages, replacing Freddie and Fannie in this high risk role with tax payer once again on the hook when the house of cards tumbles again. Here Bloomberg on the issue.

http://www.bloomberg.com/news/2011-07-26/fha-may-be-next-in-line-for-bailout-commentary-by-delisle-and-papagianis.html

From April the FHA increased premiums raising around 3bn a year however this will barely dent the sort of capital she needs and is likely to need looking ahead. Default issues are highly unlikely as she is a department of government. I.e. it is hard to see how the FHA can wriggle out of her guarantees to the mortgage REIT providers.  Another bailout is needed then but to quote Chairman Ben on the matter:

“The U.S. government has a technology, called a printing press that allows it to produce as many U.S. dollars as it wishes at no cost.” 2002 B.Bernake

More, much more monetization of debts will come forth from the fed in the coming years as the various issues come home. This is extremely bullish for asset prices but particularly precious metals.

Rich

As was.. Asia steady overnight. Shanghi up 14 points or so. The US debt issues are not affecting sentiment in the markets. No one is pricing in any US default or even slightly hedging against such an event.

US indexes got that near term weakness but rebounded into the close. Some sort of breakout rally on the extension of the debt ceiling looks likely. Pre this expect volatility with spikes to the downside to catch the unprepared and weak hands. Technology issues are generally doing very well but with a strong bias to the largest tech players.

Dollar index has pushed downward as suspected. She wants to test the lows. The disasterous ugly trio of the ugly quadruplet rise vs the usd. The jpy,gbp,euro looking to push on vs the usd with the jpy threatening all time highs vs the usd.  The USD is in serious trouble here and Yuan peg must be under enormous pressure.

Oil failing pegged at 100 usds for the moment. Call put ratio is strongly positive at present with a large group betting on 120 usds by end of year. Fundamentally its easy to see why participants would take this bet. For the moment i’m waiting and watching. Copper remaining red gold, equity prices assisting her miners that are tracking the underlying metal. Copper miners very strong and looking to potentially breakout even as China struggles. Here the copx etf which shows the world’s copper miner’s performance (USDs).

As the copper miners are a few percent away from breaking out from there prior early 2011 highs. The underlying copper has not broken out beyond her early 2011 highs. The miners are therefore correlating very well to the underlying price of copper which is what you might expect.

Here a chart of the gdx(un-hedged gold miners)

The gold miners are 5% or so from there early 2011 highs much like the copper miners. But gold is 11% higher than her early 2011 highs. A relative over performance vs copper on the underlying of 16%. Whereas the gold miners have performed less strongly than their copper peers over this period since early 2011. Whats more the earnings per share ratios for gold and silver miners are higher than for copper miners. On absolute and relative models the pm miners are cheap and getting cheaper. Where and when this market madness ends we cannot know. I cost average from any excess cash generated by trading etc. Option calls to march 2013 on these miners is a very interesting market bet, imo.

Precious metals, the underlying metals, remain the strongest charts in the markets. The breakout continues in gold with new all time record highs yesterday again. (Precisely no gold miners, not a single one world wide, made a new high, for note). Silver looking to join the party. Silver looks to be building for the next push onward. Imo, this next wave should take silver to 46. An entry around 39.4 has a good risk reward therefore. Upside 46 downside stop at 38.5 or so.. ratio 6 to 1..

On to the precious metal miners.. What is true for iron ore, copper, tin etc is not true for gold and silver miners: Ie as the price of silver and gold push ever on the price of the pm miners lags? Some participants blame rising energy and labor costs. I find it odd that copper miners etc should not experience the same issues as pm miners. The only logical conclusion is that the gold and silver miners are hugely undervalued at present. Several are on 2012 single digit pes on underlying metal prices that add 25% or more yoy. Either other metal miners are over valued or pm miners are hugely undervalued. The ratio of miner to metal suggests a significant undervaluation. There is certainly no bubble in the pm miners. No fizz at all and not much interest in the sector. As above cost average in and use option calls to gain the beta for the ‘pop’ when she comes.

Summary.. remains as was.. dx lower, equities higher, pms higher, industrials strong and threatening breakouts in some areas. Large can tech a market outperformer.

The paradoxical market continues. The worse it gets the more money is printed and the higher asset prices rise.

Lets remind ourselves of what Mr Munyukwi from the Zimbabwe stock exchange said on this paradox.

‘Negative interest rates and inflation had caused a stampede for assets, which had driven share prices to record highs, even in real terms. It’s quite embarrassing because the exchange is supposed to mirror the reality of the economy. We have benefited from the distortion of the market.”

CEO Zimbabwe stock exchange – E Munyuki

Luck to all Rich

 

 

Asia overnight weak but most sub 1% falls. However, the big story was the Shanghi that collapsed over night by over 3% and making a very bearish chart now. Amazingly many industrial metal issues have not collapsed this am inc Rio, Anglo etc. I have sold down on the few copper related issues i held. China’s copper demand has been stronger of late given some restocking having depleted reserves prior to this. The reaction in China was more significant than other Asian markets inc HK as China is already very weak with her data worsening. Many analysts fear a recession and hard landing in China. On this basis i would reduce exposure to industrial related stocks ex oil as oil has a rather special dynamic related to peak oil  e.g. PetroChina – even as the Chinese index falls 3% PTR unchanged). The Aud fx implications are trickier. If Chinese demand falls over for industrial metals then there could be a significant impact to the Australian housing market that may demand rates fall not rise. This would be disasterous for the AUD from these elevated levels. The Shanghi is confirming the worst so on this basis i have to listen to this signal and dilute a little in the coming months – no fast moves yet as this will take a while to feed through but watching and ready to act on losing some Auds.  Near term on Shanghi there  is a support at 2656. I don’t believe it will break due to the support from the western markets as below hence no fast moves on the yielding AUD however i do expect her to under perform as growth stalls or slows in China. (Of course if the western markets do fall through their supports then we will be off to races and this would be very bearish for the Shanghi and Aud alike. For the moment the western indexes are technically strong).

http://www.stocktiming.com/Shanghai_Daily_Stock_Market_Updates/shanghai-index-update-friday.htm

Down grade aside, the Euro story looks to be resolved, short to medium term, for the moment by the core adding much more debt through the EFSF and fiscal union now being agreed by Europe. The French love the deal of course (the last communist state in Europe) with Sarkozy calling it the formation of a ‘european monetary fund and Europe ‘preparing for economic
integration”. He is correct that this is the implication of what has been agreed. Whether the rest of Europe agrees to this is yet to be seen.

The baton moves to the US debt deal now. As an aside the markets are dominated by government and central bank news flow. Only this is important now it seems. This makes for very choppy and difficult trading markets. Imo the US will do a deal on raising her debts. In spite of the headline ‘cuts’ they will be delayed and be relative cuts to rising inflation rather than real nominal cuts.  Much like the ‘austerity’ budget of the UK’s. Her nominal budgets have risen considerably. Her deficits for 2011/12 (in her austerity year) are over 10% of gdp. This is the type of fiscal austerity we will also get from the US on a sustained basis, imo. I.e. year on year eye watering deficits and as far as the eye can see.  Who will buy the debt? The western banking system who are in this game now with the governments for good.

Indexes wise. Some near term weakness due to the concerns on US debt extension and then a rally would be the path of least resistance. China should benefit from this and not break her lows but remain relatively weak, imo with a knock on effect on the industrial stocks. Earnings have been strong again and even forward lookings have been ok. European earninsg weaker than US.

FX wise, dollar index remains very weak and technically is wanting to score new lows. The eurusd is very tricky as so many cross currents of news flow at present. I maintain a fairly asset neutral position at present. Generally the news flow is all very supportive of pms and im super bullish precious metals and their miners which show relative value, imo.

Oil, given the actions in the market re increasing supply i find oil relatively very strong. This is partly monetary and partly peak oil related imo.An excellent detailed look from Reuters last week inc the IEA stores news:

IEA-OIL

The Chinese continue to build stores. They are happy to play with the copper stores but i don’t believe they will ‘play’ with their oil storage facilities. They increase these yoy just as the western oil stores decline.The same can be seen in western agri stores vs chinese agri stores. The same can also clearly be seen in western fiscal positions vs chinese fiscal postion. Chinese reserves continue to grow month on month, yoy and are currently 3.2trn USDs and remember this does not include the hard asset reserves like oil, copper, iron ore etc that China builds yoy.

http://english.peopledaily.com.cn/90001/90778/90859/7437338.html

Summary for equities etc is path of least resistance to the upside post the US ‘debt ceiling’ deal being done. Near term chop and possible downside moves to test a few levels but aside from this higher rather than lower. DX supporting this. Pms much higher, energy hard to call a 5 usd range around 100usds most likely for the next few weeks and then a test of the channel support, as per prior charts. This is subject to Saudis and no negative surprises from Opec. Driving season ending within weeks which should provide some downward pressure pre the gulf storm season towards that 88 level – nymex. In the longer term, IEA projecting $150 usd oil for 2012 as of last week subject to economic growth issues. US and Euro land suspending the releases from their strategic stores. 60mb did precisely zero to reduce oil prices. IEA report and Reuters comment here:

 

Much more to say but out of time. Rich

 

Eurozone-statement-on-Greece-s-2nd-bailout

Kicking the can just extended the EFSF entity to providing 30 yr loans to Greece. The EFSF was intended to be a temporary ‘crisis’ entity. It has become the, effective, backdoor issuer of euro area bonds. Something the original creators of the euro fought hard to prevent.  Complete fiscal union is close at hand, imo. European people are walking blindly into the gradual accumulation of structures consistent with the creation of a euro super state with massive cross boarder financial commitments.

The EFSF has become a monetary and regulatory monster. She is now able to lend directly to governments, lend and inject capital to banks and even directly (buy) ‘assets’ (or junk) in the secondary debt markets.  The EFSF has no democratically elected managers. (Euro ministers, who are elected, are ‘appointed’ to the board of the Luxembourg registered EFSF company at present). With such a growing list of activities how long will it be before this becomes a multi asset & loan business that will need commercial management and staff. Its rapidly becoming a ‘quango’ organisation, another imf or world bank type residence for retired political leaders. She is a monster in terms of scope but she must must grow larger and more powerful still to meet her systemic obligations. As an aside, it will be interesting to see what the ‘guarantees’  do to government balance sheets when the EFSF is called upon over the next few years. Core government debt obligations should mushroom due to the EFSF as well as domestic issuance of debt. I should add that the hope, at present, is (still) that the mere approval of this ‘monster’ will be enough to stabilize capital markets but, imo, for sure the capital markets will want to test her and see the color of her new money.

Q&A on EFSF

efsf

FT on the ‘Incredible increasing EFSF’ from march 2011. But note as of yesterday the EFSF’s powers have grown considerably. Its size must also be increased again soon.

http://ftalphaville.ft.com/blog/2011/03/21/519676/the-incredible-increasing-efsf/

zero hedge on the issue..

http://www.zerohedge.com/article/goldmans-complete-summary-european-council-decisions

Rich

We have Asian markets much stronger over night bouncing on the ‘good’ news of Euro increases in money supply to both banks and greece through the effective creation of euro bonds through the EFSF. This is very good for asset markets as more loans equals more money which makes each existing unit worth less so prices rise in response. Given negative interest rates market participants always make plenty of money on money supply increases. Its easy money and easy to explain.The US issues re the debt ceiling continue. It is 99.99% certain the ceiling will get raised and some long term debt reductions agreed or rather the pace of debt increases is slowed over  a ten year period starting from 2015 etc. This sort of deal will be done eventually. The deal will simply be an official sanctioning of more money supply expansion.

So, less easy to explain from yesterday are a few issues.

Firstly why the euro rose against most assets inc gold, usd, cad, even the chf. Why would more money supply cause the euro to rise is counter intuitive indeed. We can only rationalize this as Asian buyers happy with that the euro will continue to be around in her current form and she will continue, therefore to act as a mirror to the reserve currency ie the usd. A higher euro helps asian exporters so for now the charade continues.

Secondly, why did gold fall on the news? Technically she had bounced up in the prior weeks and she was a little over bought but nonetheless to fall on a day of more money supply seems the opposite of what you would expect. Perhaps the market had expected the EFSF fund to be increased in size and therefore gold had already discounted the response. Possibly some element of both are true. Currently both fundamentals and technicals point to a higher gold price.

The dollar index looking very sick, indeed. Aud looking wonderful and yielding. The gbp adding weight vs the usd and looks to have rolled over the forward party attacking sterling vs the usd. One analyst explained sterling as having more lives than a cat. This is my view too. She steps away from the edge again and again it seems. Patience, not problem.

Oil broken out, in theory and is an add on small pull back now. US equity indexes ditto.. we have overbought levels now and a mixed fundamental picture for sure. I’ve personally been lightening and am now at 30% hedge or so. I made some profits on the way down and now see a loss on the way back north on my hedges. A hedge is an insurance policy so this is fine. The long portfolio remains almost unchanged but once again lite copper and tech. We are in the summer months now, i find it unlikely we really push on here and now but i do want to get paid to wait so the high yielders run as they were. Precious metals, technically and fundamentally, imo (as above), look excellent and ready for breakouts.

We are in the generally slower and more choppy summer so we should follow the market lead and not get too carried away by current moves on an intraday basis.

All the best

Rich