After spending most of the day on the plus side U.S. stocks failed to hold positive territory, falling below the cut line in the final 40 minutes of trading. You can’t say it was a mirror image of Tuesday’s session, when stocks erased a 3% plunge to close mildly positive, but it was close. At its intraday peak, the S&P 500 was higher by 1.54%, but momentum began to fade at about 1:00 CDT and completely fell apart as we headed for the close.
There was a report from the Financial Times, out about the time that stocks went negative, stating that China may begin reducing their positions in European government bonds. Obviously, and it shows just how skittish this market is for it to react this way, the Chinese are not going to announce such a strategy to the world; they hold $630 billion in euro-zone bonds, they’re not going to want to see those positions summarily crushed. But from a wider perspective, such action would put immense pressure on the European banking system since they have significant exposure to these bonds. Actually, the exposure is more likely massive, but I don’t have the number in front of me so I’ll call it significant for now.
The EU banking system is in trouble anyway you look at it. The central bank and various euro-zone governments can delay the damage, but they can’t ultimately erase what only good policy and time can cure.
The day’s economic reports were mixed with the April durable goods report beating expectations on the headline number, but missed via the more reliable ex-transportation reading. New home sales for April jumped, destroying the consensus estimate, but as the prior three weeks of mortgage apps have shown, the tax credit simply stole sales from the future…more on these data below.
Nine of the 10 major industry groups closed down for the session, industrials being the only survivor – the S&P 500 index that tracks these shares was up as much as 2.5%, but ended just 0.25% higher . Telecom and tech led to the downside, both were also positive earlier in the session.
Click here to read the full Daily Insight.
Brent Vondera, Senior Analyst
www.acrinv.com
Thursday, May 27, 2010
Wednesday, May 26, 2010
Market Minute: Putting The Correction Into Perspective
We officially had a market correction, which is defined as a 10% decline from a market’s peak, but a period of market consolidation was inevitable after the straight-up rally from the March 2009 nadir.
As the market climbed higher, shares moved from being slightly cheap (using a cyclically-adjusted P/E ratio) to expensive. Meanwhile spreads on high-yield bonds (the extra yield investors demand to hold company debt rather than government securities) fell from more than 16 percentage points at the start of 2009 to less than six points.
So we were due for a correction, but that is no reason for investors to fall into the fetal position. Corrections are pretty normal. According to David Rosenberg of Gluskin Sheff, corrections historically have occurred about every 12 months and tend to occur more in the second year of a rebound than in year one.
Market contractions like the last 30 days feel severe, but it must be viewed in the context of an 80% surge from the March lows. It would have been surprising if the markets had not paused to catch its breath. I laid out a plethora of market risks in my April 22 blog post and made it abundantly clear that this recovery will be bumpy and market pullbacks should not come as a surprise.
Before markets turn bullish again, we need to see LIBOR (London Interbank Offered Rate) spreads begin to narrow. LIBOR is the interest rate one bank charges another for a loan and serves as the benchmark for $360 trillion of financial products worldwide, ranging from mortgages to small business loans to credit cards. This key benchmark of interbank lending continues to rise, suggesting that there is rising caution even among banks about lending to each other. Banks’ reluctance to lend to each other stems from concerns about (1) the deteriorating quality of each other’s collateral as a result of the Eurozone’s financial problems, and (2) the U.S. financial reform bill that could adversely affect the credit ratings and profitability of major U.S. banks.
Of course, LIBOR is nowhere near the levels reached at the worst of the financial crisis back in October of 2008 – 3-month LIBOR is currently 0.537% compared to 4.81% in October 2008. Still, I’d expect investors want to see LIBOR come down before they start plowing money back into riskier assets.
Peter Lazaroff, Investment Analyst
http://www.acrinv.com/
As the market climbed higher, shares moved from being slightly cheap (using a cyclically-adjusted P/E ratio) to expensive. Meanwhile spreads on high-yield bonds (the extra yield investors demand to hold company debt rather than government securities) fell from more than 16 percentage points at the start of 2009 to less than six points.
So we were due for a correction, but that is no reason for investors to fall into the fetal position. Corrections are pretty normal. According to David Rosenberg of Gluskin Sheff, corrections historically have occurred about every 12 months and tend to occur more in the second year of a rebound than in year one.
Market contractions like the last 30 days feel severe, but it must be viewed in the context of an 80% surge from the March lows. It would have been surprising if the markets had not paused to catch its breath. I laid out a plethora of market risks in my April 22 blog post and made it abundantly clear that this recovery will be bumpy and market pullbacks should not come as a surprise.
Before markets turn bullish again, we need to see LIBOR (London Interbank Offered Rate) spreads begin to narrow. LIBOR is the interest rate one bank charges another for a loan and serves as the benchmark for $360 trillion of financial products worldwide, ranging from mortgages to small business loans to credit cards. This key benchmark of interbank lending continues to rise, suggesting that there is rising caution even among banks about lending to each other. Banks’ reluctance to lend to each other stems from concerns about (1) the deteriorating quality of each other’s collateral as a result of the Eurozone’s financial problems, and (2) the U.S. financial reform bill that could adversely affect the credit ratings and profitability of major U.S. banks.
Of course, LIBOR is nowhere near the levels reached at the worst of the financial crisis back in October of 2008 – 3-month LIBOR is currently 0.537% compared to 4.81% in October 2008. Still, I’d expect investors want to see LIBOR come down before they start plowing money back into riskier assets.
Peter Lazaroff, Investment Analyst
http://www.acrinv.com/
Daily Insight: CaseShiller, Consumer Confidence, and What Rout?
U.S. stocks began the session deeply lower, following another ugly session in overseas trading – European and Asian bourses down 2.0%-3.0% -- as a couple of risks jumped out to drive the safety trade. But as the day progressed U.S. stock traders got the nerve to look the debt and geopolitical risks in the eye to say: You’re not so scary. Now, whether that confidence is due to naiveté or just a willingness to look past what is right in front of our faces right now doesn’t matter, the reversal was extraordinary.
Here’s a quick commentary on some of the news stories that appeared to move the market during the very volatile session – a 3% decline at the open for the S&P 500 that was completely erased by the close.
Stocks bounced from an opening plunge, fueled at least partially by the latest reading on consumer confidence (there are a few different measures but yesterday’s look from the Conference Board is the most-watched), but then dipped back below what technicians are calling the key 1050 level on the S&P 500.
The market then staged another move higher after Federal Reserve Bank of St. Louis President Bullard gave a speech stating that the European debt crisis probably won’t lead the world back into recession, but then fizzled again to remain 2.0% below the opening price.
The third time proved the charm, a rally that made it to the close, helped by news that House Financial Services Committee Chairman Frank believes the Senate’s FinReg language on swaps-trading operations “goes too far.” This boosted the view that one of the most harmful aspects of FinReg, with regard to future credit availability, would be struck from the bill.
Basic material, consumer discretionary, financial and telecom shares closed higher for the session. It was a 5% intraday swing for basic material shares, ending higher by 1.6% after an opening 3.3% slide – even as underlying commodity prices were down yesterday; figure that one out. Consumer staples led the six of the major 10 industry groups that closed down on the session.
Click here to read the full Daily Insight.
Brent Vondera, Senior Analyst
www.acrinv.com
Here’s a quick commentary on some of the news stories that appeared to move the market during the very volatile session – a 3% decline at the open for the S&P 500 that was completely erased by the close.
Stocks bounced from an opening plunge, fueled at least partially by the latest reading on consumer confidence (there are a few different measures but yesterday’s look from the Conference Board is the most-watched), but then dipped back below what technicians are calling the key 1050 level on the S&P 500.
The market then staged another move higher after Federal Reserve Bank of St. Louis President Bullard gave a speech stating that the European debt crisis probably won’t lead the world back into recession, but then fizzled again to remain 2.0% below the opening price.
The third time proved the charm, a rally that made it to the close, helped by news that House Financial Services Committee Chairman Frank believes the Senate’s FinReg language on swaps-trading operations “goes too far.” This boosted the view that one of the most harmful aspects of FinReg, with regard to future credit availability, would be struck from the bill.
Basic material, consumer discretionary, financial and telecom shares closed higher for the session. It was a 5% intraday swing for basic material shares, ending higher by 1.6% after an opening 3.3% slide – even as underlying commodity prices were down yesterday; figure that one out. Consumer staples led the six of the major 10 industry groups that closed down on the session.
Click here to read the full Daily Insight.
Brent Vondera, Senior Analyst
www.acrinv.com
Tuesday, May 25, 2010
Daily Insight: Existing Home Sales and More European sPain
U.S. stocks bounced around the cut line for most of Monday’s session in a show of either remarkable or unbelievable resilience -- considering the developments out of Spain over the weekend could be seen as a harbinger of European banking problems soon to come and mounting tensions in Korea. But the major indices did succumb to weakness late in the day, erasing almost all of Friday’s gain in the final 90 minutes of trading.
Financials, energy and basic material shares led the market lower. Health-care and tech were the best performing groups, but even these were down as all 10 major industry groups declined on Monday. Tech actually spent most of the session in positive territory, up as much as 0.85% even as the broad market struggled to peek above the cut line, but sold off by 1.38% in the afternoon.
Four Spanish savings banks are set to merge in a coordinated effort by the Bank of Spain in an attempt to strengthen their solvency. The four banks hold more than $168 billion in assets, which is kind of a big deal for a $1.6 trillion economy. These banks went on a lending binge during the Southern European real-estate boom and as Spanish unemployment has leapt to 20% from 8% in less than two years the banking troubles are clearly widespread.
On the Korean peninsula, the South has begun to respond, although tepidly, to the March 26 sinking of their warship. The North has reportedly ordered their military to ready for combat. One can hardly take anything news that comes out of the North at face value, but conditions are ripe for trouble.
We’ve mentioned a couple of times now that risk lurks around many corners, just waiting to jump out and scare the complacency out of everyone. A couple of these risks have begun to do so.
Click here to read the full Daily Insight
Brent Vondera, Senior Analyst
www.acrinv.com
Financials, energy and basic material shares led the market lower. Health-care and tech were the best performing groups, but even these were down as all 10 major industry groups declined on Monday. Tech actually spent most of the session in positive territory, up as much as 0.85% even as the broad market struggled to peek above the cut line, but sold off by 1.38% in the afternoon.
Four Spanish savings banks are set to merge in a coordinated effort by the Bank of Spain in an attempt to strengthen their solvency. The four banks hold more than $168 billion in assets, which is kind of a big deal for a $1.6 trillion economy. These banks went on a lending binge during the Southern European real-estate boom and as Spanish unemployment has leapt to 20% from 8% in less than two years the banking troubles are clearly widespread.
On the Korean peninsula, the South has begun to respond, although tepidly, to the March 26 sinking of their warship. The North has reportedly ordered their military to ready for combat. One can hardly take anything news that comes out of the North at face value, but conditions are ripe for trouble.
We’ve mentioned a couple of times now that risk lurks around many corners, just waiting to jump out and scare the complacency out of everyone. A couple of these risks have begun to do so.
Click here to read the full Daily Insight
Brent Vondera, Senior Analyst
www.acrinv.com
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