The Week in Review, August 20, 2010 Saturday, Aug 21 2010 

The week was filled with disappointing economic reports from the advanced figure for seasonally adjusted initial unemployment claims jumping up to 500k and the Philly Fed Survey showing negative growth. If the ISM Manufacturing PMI confirms the Philly Fed Survey we are looking at a contraction in the manufacturing sector as it appears the underlying economy is much weaker than expected and the idea of a V shaped recovery might be put to rest.

On Monday, an article appeared on Bloomberg where Yu Yongding, part of a foreign-policy advisory committee and former adviser to the People’s Bank of China, stated that China has been a buyer of European bonds. Japan’s Ministry of Finance also stated that China was a buyer of Japanese debt during the first half of 2010. The US Treasury announced that China’s holdings of US debt were cut by $100 billion from June of last year. There was no word if the cuts were sales or maturation of debt with the proceeds being reallocated to Japan and Europe. 1

HP’s drop also weighed on the Dow as traders and managers weighed the future of the company.

The VIX traded flat for the week and is pushing up against a resistance level around 27. A move above this level would signal a coming correction in the markets. The weekly charts have a bearish tilt with the possibility that the we may see a move up but this is a difficult chart to read and the VIX is often oversold here for long stretches of time.

North American markets acted accordingly with the S&P selling off after putting in a possible short-term top at 1100. The S&P 500 seems range bound between 1070 and 1100 after last weeks shock. The 50 day moving average is at 1089 and we seem so be yo-yoing around this area looking for a resolution.

Canadian markets showed a bit more strength closing above its 200 day moving average but traders are fearful of what weakness in the US would mean for its largest trading partner. The BHP offer for Potash has everyone excited over more large M&A transactions coming on the heels of the Kinross-Red Bank merger.

Over in Asia markets were mixed with Japan showing signs of a slowdown while Taiwan is steaming ahead. GDP from Taiwan grew 12.53% in the second quarter, beating estimates of 10.15%, and only slightly down from 13.71% during the first quarter.

Hong Kong government took further steps at tightening as they extended the 40% downpayment requirement to apartments costing HK$12 million in an attempt to stabilize price appreciation. The prefectures government is under pressure to cool the market as the Hong Kong Dollar is pegged to the US Dollar and the ZIRP policy in the US is causing a real estate boom. Mortgage rates in Hong Kong are as low as 70 basis points above the Hong Kong interbank offered rate (0.22%) or just under 1%.

The Baltic Dry Index has fallen by more than 50% during the June 1 to July 15th period signaling concerns that the global economy may be slowing down. One factor to consider is that China ended export tax subsidies in July which more than likely push a lot of export shipments into June.

Next week:

Monday: German Manufacturing PMI
Tuesday: Existing home sales in the US
Wednesday: Durable Goods in the US and Trade Balance in Japan
Friday: 2nd Quarter US GDP Estimate, U of Michigan Confidence, Household Spending in Japan
All Week: Speeches by Federal Reserve Governors

1.

Why I am Bearish on Financial Stocks Friday, Aug 28 2009 

After seeing quite a large rally from the March lows the market appears to be extended and indicators (stocks above 200 day moving average, market PE, bullish/bearish %’s) are signaling some rough seas ahead. While stock could conceivably move higher there are a few reasons why I am bearish at the present time.

Harkening back to 2007, I would like to give credit and thanks to Credit Suisse for the following graph.

As one can see the initial tsunami of bad loans has receded and financial stocks have been licking their wounds and repairing their balance sheets but we are at the beginning of the second wave. This second wave of option reset mortgages will do more damage because of the already weakened state of banks.

The relaxing of mark to market rules has helped repair balance sheets but there will continue to be problems throughout 2010 and into 2011 until the 2nd wave of resets recede.

As the resets continue, non-performing loans continue to rise, causing additional strain on an already weakened banking sector. It is unlikely that we will see a significant drop off in non-performing loans until the bulk of the option resets are completed.

Bank failures continue on a weekly basis with the problems being felt mainly by small and medium sized institutions. Some larger weakened institutions have succumbed to the pressure as well. Recent comments that the FDIC may need additional capital should sound a warning bell across the financial space.

While the housing data has been bullish due to buyers assistance programs, one needs to keep in mind that the reported figures are month-over-month data, not year-over-year. As we get into the fall and winter months the MoM figures will decrease as seasonal patterns take place.

Housing inventories continue at a high level, with many homes being taken off market and rented until the selling climate improves. As we continue through the resets, it is likely that inventories stay high until the potential overhang from option and agency ARM’s clears. Any spurt in new home construction will slow the housing inventories from being worked off in a timely manner.

Retail sales numbers continue to be disappointing, although we are entering a period where comparisons will be much easier. The year over year data shows a 9.4% decline in June and an 8.3% decline in July. Again the YoY data is more telling than the MoM data.

High levels of unemployment will constrain spending and GDP growth into 2010 and later. Government stimulus programs will provide the necessary counterbalance to weakness in consumer spending helping to guide the economy through this difficult period.

This is not an approval for the governments polices but one needs to note that a similar path is followed in every recession. The authors problem lies in the wasteful programs and high deficit levels that state and federal governments carried coming into the recession which only exacerbates the problem going forward. Spending that is targeted at areas to provide future growth is preferred over the construction of dog parks.

So while global economies are likely to come out of the recession without much problem (Japan will be an exception) GDP growth in the US is likely to be below normal levels.

Inventory restocking will give a bump to GDP growth in the coming quarter as will government stimulus programs. This combination will set the stage for renewed consumer and business confidence in the coming years but first we will need to get through the a possible double dip recession in 2010.

So while the market itself may move higher I see better value and higher upsides in the precious metals and agriculture sectors where there are some very interesting values globally. Quite often the best values are off the beaten path.

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