FMX | Connect – www.fmxconnect.com - (Reported 7/7/2010)
Excerpt from MARKET MUSINGS & DATA DECIPHERING
WHILE YOU WERE SLEEPING
Stock markets are in a see-saw pattern with Europe and Asia in the red column today after posting the best session in a month yesterday. In the U.S., the equity markets ended up sputtering after an initial triple-digit bounce in the Dow, which broke a seven-day losing streak; however, a late-day round of short covering helped salvage the day.
Bonds are generally well bid; the yen and the U.S. dollar are up, which is a sign from the FX market to the equity market to take some cover (Asian currencies are in retreat today, normally an anti-cyclical signpost). Ditto for the commodity complex with copper, oil (one-month low) and even gold (six-week low) all softer to kick off the day (but the “softs” such as corn and soybeans are firmer). Technicals have taken over the gold complex but the charts are still so firm that the price could correct another $50/oz from here and it still would not violate any of the bullish long-term trend lines. Nothing moves in a straight line — whether it is in a secular bull market or not (and gold is). One of the current hurtles for gold is that central banks are monetizing their holdings through sales to the BIS (see page C14 of the WSJ on these latest “bank swap” arrangements).
The problem for the commodity complex in general is that the Baltic Dry Index, a usually reliable leading indicator, has plummeted by half since the end of May, is down now for 29 consecutive sessions and is at its lowest level in more than a year. Not to mention the fact that this is on nobody’s radar screen (page 21 news in the FT)!
Quote of the day undoubtedly goes to Paul Krugman who said that “We are looking at what could be a very long siege here,” in terms of the U.S. economic outlook (in a Bloomberg interview). With regards to his debate in BusinessWeek with hedge fund manager John Paulson, our leanings are towards Krugman’s view that we are in the early stages of a classic debt deleveraging phase where recoveries are short and snappy and recessions take place with greater frequency than many are able or willing to realize. But Krugman’s solutions that the government engage in a “kitchen sink strategy” assumes that the government is really the answer.
The question he has to answer on behalf of the Administration is why their forecast of an 8% unemployment rate, given all the stimulus it was going to provide, never did materialize, and what exactly is the long-term benefit to the economy of paying people to be out of work for two years. That’s our jobs strategy?
On the economic data front, German factory orders pulled a downside surprise in May, dropping 0.5% — first decline in five months (economists were so “fearful” that they were predicting a 0.3% gain). The U.S. real estate sector is still in massive excess supply — we mentioned the runup in the office vacancy rate yesterday and today we cite another survey from Reis showing that in the shopping center space, the vacancy rate edged up to 10.9% in Q2 from 10.8% in Q1 and 10.0% a year ago — a 20-year high. Net effective rents dipped 0.5% QoQ and by 2.8% on a YoY basis. Moreover, residential property prices, especially in Florida, are still deflating against the backdrop of a lingering glut of supply (see page C6 of the WSJ — ‘Bulk Sales’ of Condos Clear Supply, at a Cost. So, those who only see inflation because stamp prices are going to rise two cents are missing a big story across wide swaths of the economy.
In addition, those who don’t like the CPI, don’t worry, shopping centre rents don’t go into the index, but if they did, the core measure (which excludes food and energy) would already be deflating instead of being 90 basis points away. The inflation-phobes may also want to have a look at Sony Cuts Price of e-Readers on page B6 of today’s WSJ — the question is whether the “hedonics” are actually also taking into account the quality improvements in digital reading devices.
We discuss this a little more below, but the non-manufacturing ISM for June contained a few interesting nuggets. Not just the headline down to a four-month low of 53.8 from 55.4 in May (the consensus was looking for 55.0) but the pricing component sank like a stone — now at a nine-month low of 53.8 from 60.6 in May and 64.7 in April, when both equity prices and bond yields were hitting their highs for the year. What really caught our eye were the trade components — export orders fell to 48.0 from 53.5 while imports plunged to 48.0 as well from 56.5, both at the lowest level since the turn of the year. Bid farewell to the global trade boom.
In addition to the slide in the ISM prices-paid survey(s), lumber prices fell sizably yesterday — off 5% and are now down 40% from the nearby peak three-months ago. Not just lumber, but U.S. steel prices fell 4.5% in June and there are several in the industry that see more than 10% downside from here (see “Industry Cuts Back As Steel Prices Fall” on the front page of today’s WSJ). Maybe this is why the Treasury market managed to stage a rally even in the face of the (mostly uneven) recovery in equities.
“Uneven” is probably a fair representation because what gets little attention as we gaze at the Dow, S&P 500 and the Nasdaq are the small-cap indices. The Russell 2000 actually dropped 1.5% yesterday even as the Dow bounced 57 points and is now down 20.5% from its April high. In other words, the small caps are now in bear-market terrain. Remember what they say about the generals once the troops retreat, and also recall that it was the small cap stocks that led the 2009 bear market rally.
In terms of keeping score, the Dow, thus far, is down 13% from the nearby peak and the S&P 500 is off 15.5%. We should add that along with the small caps, the S&P Financials index is also down 20.3% from the nearby high, again, fractionally in bear market territory, and was also the leader through most of last year’s recovery. Remember, this group led the 2007 top and turned in the 2009 bottom for the entire market is now woefully underperforming; not a constructive sign.
Moreover, despite the gains in the major averages, winning stocks barely outnumbered losers, and not only that, declining stocks outnumbered advancing stocks by more than a two-to-one ratio yesterday. So call it a case of bad breadth.
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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