FMX | Connect – www.fmxconnect.com - (Reported 7/13/2010)
Excerpt from MARKET MUSINGS & DATA DECIPHERING
WHAT’S DRIVING THE MARKET?
We’ve been asked repeatedly how the stock market has managed to bounce off the nearby lows with such veracity. Especially with the ongoing weakness we have seen in the incoming U.S. economic data due to the fact that the retail investor still refuses to participate and is solely focused on income-generating strategies. The answer is that the market may have been on the receiving end of another few jolts of liquidity. M2 money supply has expanded $38.5 million in the past two weeks and the M1 money multiple has risen from 0.839 to 0.862.
When we go to the weekly data from the Fed, we see that “trading assets” on commercial bank balance sheets expanded to $325 billion in the past two weeks from $297 billion. And, when we go to the Commitment of Traders report, we see that there has been a big swing in the net speculation position on the S&P 500 “E-minis” on the Mercantile Exchange (futures and options) to a net long position of 28,172 contracts from 15,155 net shorts just two weeks ago. That’s a big part of the bounce-back — prop traders and short-coverings. Nothing fundamental here, as far as we can see.
JUST CALL IT A WHOLE LOT OF VOLATILITY
• Last week’s 5.4% increase was the best performance since mid-July 2009 (week of July 17th). But yet, prior to last week, the S&P 500 saw the largest decline (-% during the week of July 2nd) in eight weeks, and it was down two weeks to boot (July 2nd and June 25th weeks).
• Last week also saw three days of positive performance, a streak we last saw in mid-April of this year. However, prior to those three positive sessions, the S&P 500 was down five trading days in a row.
• Last week’s increase also comes in the heels of declines in June and May, which was the worst back-to-back decline since January and February 2009
• In Q2, we saw the worst quarter (-12%) since Q4 2008 and before that, Q3 2002. In fact, going back to 1946, a decline in the quarter of 12% or more is only a 1 in 20 event (we have only seen 12 quarters of 12%+ declines in the past 64 years).
• For the first half of the year, we have seen three up months (February, March, April) and three down months (January, May, June).
• The 80% increase in the stock market that we saw from March 2009 to April 2010 is the largest increase in such a short period of time since the period of May 1935 to April 1936.
BANK OF CANADA OUTLOOK SURVEYS: SLOWING GROWTH AND EASING CREDIT CONDITIONS
We had some fresh insight on the Canadian economy yesterday, with the release of the Bank of Canada’s Business Outlook Survey (this covers the period from May 19th to June 15th). The key takeaways include: slower expected sales over the next year, less spare capacity, more hiring but less capex and inflation expectations that remain well anchored.
The ‘headline’ figure, the number of net firms expecting sales to increase over the next 12 months, fell to 25% from 44% in Q1. Not only is this the weakest
reading since Q1 2009 but this is half the 50%+ readings we saw late last year and corroborates what the early Q2 data has been saying – that economic growth is clearly slowing from the super-charged rates we saw in the last two quarters (we are tracking sub-3% real GDP growth in Q2).
Future employment prospects rose to 40% from 38%, coming on the heels of the spectacular 93,000 June employment figure. However, while firms plan on adding bodies, they don’t plan on investing in machinery and equipment (M&E). Net investment in M&E fell to 12%, from 22%, implying slower capex going forward, which could disappoint the BoC (in the latest 1 June press statement, the Bank had stated that “[t]he anticipated pickup in business investment will be important for a more balanced recovery.”
There was more evidence that the slack in the economy had diminished with the percent of firms having some difficulty in meeting current demand rising to 35% from 26%, the highest level since Q3 2008 (not overly surprising given the 5%+ GDP figures in Q4 and Q1). Labour shortages remain low, unchanged at 12%, which are near record lows.
On inflation, 34% of companies reported higher input inflation (likely reflecting the fact that commodity prices outside of energy rose another 5% in Q2). However, output inflation remained steady at 28% — suggesting that firms may not be passing on input-price increases, rather absorbing the increase through profit margins.
Inflation expectations remained well anchored for the most part. Fifty percent of firms expect inflation to remain in the 1-2% range while 45% expect inflation to be in the 2-3% range (so 95% of firms expect inflation to remain within the Bank’s 1-3% target). In the two extreme categories — below 1% and above 3% inflation, there was little change — 2% expect inflation to come in below 1% (up from 0% in Q1) and 3% expect inflation above 3%, a decline from 6% in Q1 (and actually the lowest since Q4 2008 — this should provide some comfort to the BoC).
There was good news on credit conditions. Both this survey and another survey released by the BoC (the Senior Loan Officer Survey) showed that credit conditions eased, especially for large firms. The Senior Loan Officer Survey indicated the conditions were the easiest since Q2 2005.
David A. Rosenberg
Chief Economist & Strategist Economic Commentary
drosenberg@gluskinsheff.com
+ 1 416 681 8919
Source: Market Musings & Data Deciphering
http://www.fmxconnect.com/
-----
About FMX: FMX Connect is an information, data, and analytics portal for Commodities. The portal provides an all-in-one package including essential market data, independent third party research, industry news, and commodity trading tools. FMX Connect provides efficient, effective, and thorough data that bridges all aspects of commodities onto one screen. The Result; A user friendly application for hedge fund traders, OTC brokers, individual investors, and industry participants
-----
Note: The information presented, while from sources generally believed to be reliable, is not guaranteed and may not be complete. FMX | Connect makes no representations or warranties regarding the correctness of any opinions or information. Past results are not necessarily indicative of future results. Nothing in this report should be construed as a representation to buy or sell shares, futures or options, which contain considerable risks. For internal client distribution only. Any reproduction, re-transmission, or distribution of this report without permission is prohibited. Media correspondents or reporters may not quote any one page or section in its entirety and must attribute all quotes, ideas or concepts herein. Copyright FMX | Connect, ©2009-2010. All rights reserved.