Wednesday, 29 July 2009

This is a V Shaped recovery!

Well so says Tim Bond of Barclays. After twice rallying in the final moments of trading to pair losses in the DOW and another strong start to Europe today it looks like he has a case! Here are the key points:

Economies recover much faster than most people think. "The average forecast for third-quarter US gross domestic product growth is a weak 0.8 per cent, which would be by far the slowest first quarter of any recovery on record. Since 1945, the average annualised real US growth rate in the first two quarters of recovery is 7 per cent. History provides abundant evidence that the deeper the recession, the stronger the bounce. Even the recovery from the Great Depression conformed to this rule, real US GDP grew 10.8 per cent in 1934 and 8.9 per cent in 1935."

Asia is already seeing a v-shaped recovery. "[O]utput, employment and demand [are] all following V-shaped trajectories, and regional industrial production rapidly bouncing back above the previous peak. Yet this recovery is dismissed by western analysts, who appear unable or unwilling to believe the region is capable of endogenous growth."

10% unemployment will not derail the recovery. "The 9.5 per cent US unemployment rate is also viewed as an obstacle...This objection ignores the many contrary examples of high unemployment rates and subsequent recoveries, not least in the US. Thus in 1982, US unemployment hit 10.8 per cent, yet GDP soared at an average annual pace of 7.7 per cent over the next six quarters."

One reason unemployment is so high is that employers over-reacted, firing too many people. "[T]he large post-Lehman rise in US unemployment was a mistake on the part of panicky managements... Businesses, like markets, panicked after Lehman went under. Employment and output were both reduced far more than it turned out to be necessary, as businesses temporarily and understandably assumed a worst case scenario."

De-leveraging is irrelevant: Private borrowing never drives recovery. "[I]ncreases in private leverage never play a significant role in recoveries. Indeed, since 1950, US private sector borrowing ex-mortgages has declined an average 0.1 per cent of GDP in the first year of recovery, with non-financial business borrowing declining 0.6 per cent of GDP."

Consumers are now saving enough. "A regression of the household savings rate on the wealth-to-income ratio tells us the former has made the appropriate adjustment to declines in the latter. In fact, the rally in the stock market, the low level of interest rates and the stabilisation in house prices all tend to limit the risk of a further sizeable increase in the savings rate."

I wouldn't be surprised to see many opinions changing as the market continues to head upwards, natural human instinct really. No one wants to be the analyst who remained a bear in a bull market!

Unemployement still a snag

The show goes on, not wanting to miss the next move up, cash on the sidelines are now being moved into stocks. Yesterday with the DOW down 100 points could have been the perfect excuse to to start taking more money of the table, but instead it was a buying opportunity and we ended up being small down for the day. This morning Eurostoxx was down 18 points now up 35!
With good earnings and imrpoving data, looks like 10000 will come sooner rather then later, as I said yesterday, and then the bomb will drop and we will fall hard.
Unless unemployment improves, this is going to be one of the biggest snags on this recovery. It could mean the economy itself may not be on the road to recovery everyone is hoping for. As yesterdays WSJ points out, unemployment is seen as a lagging indicator, but lower payrolls have provided a revenue cushion for companies:

According to Deutsche Bank's calculations, 82% of the S&P 500 companies to report so far have beaten second-quarter earnings expectations. The snag is that only 50% have beaten sales targets.

For the moment, earnings are only being held up by costs shrinking fast alongside revenue. For a true recovery, sales need to start growing, too. Rising unemployment may make that harder to achieve.

Tuesday, 28 July 2009

Market continues higher as Bunds look to break 120

The incredible rally continues as better earnings and sentiment keep lifting these markets.
This in turn has lead to big drop in bonds as the long end yields rise. Bunds briefly dropped below 120 before staging a small rally as stocks stumble today on the back of weakness from Deutsche Bank after their results.
Euirbor spreads continue to rise at the front end as traders price in a rate rises, as SEP10 Dec10 spreads breaks 37 before coming down to settle at 36.5 currently. In short sterling spreads continue to make new highs at the front with Jun10-sep10 trading 56s!
Looking ahead, it looks like fear is reducing, the VIX is trading in the low 20s and analysts are stumbling over them selves to raise their projections on year end S&P 500 as well European market targets.
On the previous pullback there was still alot of expectation on some type of correction, but now we are approaching the terrirotry where there is a sense of complacency, and if we rally close to 10000 on the DOW and everyone is convinced the worst is over, that is when we will fall hard. That is my take as things are still far from what they need to be. We shall see how it pans out.

Friday, 24 July 2009

Dow breaks 9000, but MSFT and AMZN to break streak

Well who would have thought we would still have the legs to rally 2% across the indexes given the 10% rally we have had in a week, but guess what it happened. Buoyed by good earnbnings and good better then expected housing data we had a big global jump as the US market opened. However after hours a big miss on Microsoft earnings and a revenue miss by Amazon, are likely to halt a 12 day rally by the NASDAQ. But it wouldn't surprise me if we still rallied today such is the momentum in this market, and as I write futures are almost flat after being down over 0.5% earlier.
Bond wise Bunds are now trading mid 120s as risk appetite continues to grow.
Euribor spreads are selling off in the long end and rising in the short end as traders continue to bet on ECB rate increases. Its been tricky to play these spreads recently, but playing the middle of the curve, i.e dec10 to jun11 seems to be the most stable at the moment.
Short sterling spreads have traded new highs as strong retail sales numbers yesterday increased the odds of a rate rise soon by the BoE. Jun10 Sep10 Short sterling spreads have trade 55s, and sep10 Dec10 have trade 56s! Volume has been very strong this morning as traders adjust there positions ahead of the UK GDP report later today. For short sterling I continue to favour shorting new highs, as often there is a half tick available before it shoots higher.
Have a good weekend!

Thursday, 23 July 2009

Risk appetite continues to grow

Despite the probable collapse of CIT, and bad numbers for Morgan Stanley, which by the way is looking like a true state of a bank and not one which has been diluted with government incentives, we still rally as the dollar weakens, commodity prices rally and bonds fall.
This is the 11th consecutive day of rally for the Nasdaq and the 10th for some European indexes!
Many analysts believe the worst is behind us, but what will be very interesting is how the banks fair once all the government incentives are stopped, like the closing of the central bank discount windows, and TARP underwriting.
The economy is still very fragile and in my opinion the stock market is just basically a sentiment index, and isn't painting the true picture out there. There is still very little job creation and hence consumer expenditure will still be under pressure for time to come. Until this changes things will not improve.

Wednesday, 22 July 2009

Earnings lift global markets

With very good earnings from Catepillar as well as a host of other names have helped lift this market again, and make it 10 in a row for the Nasdaq.
Bunds have seemed to turn as it bounces of the 120.50 level and is in range to test 122.50 again, the top of the previous run up.

Euribor spreads have seen action later in the day as spreads flucatuated within the range and provided good trading opportunities. Sep10-Dec10 spread still hasn't breached 37 level hence I remain in favour of the downside. Further out months continue to feel a bit of pressure as the spreads have a downward bias.
Short sterling spreads popped on reports the UK would be the first to start raising rates. They have since come off and again have stayed in a range.
Data is still light, with earnings providing the catalyst as volumes are still down in this summer trading.

Tuesday, 21 July 2009

Goldman lifts end of year stocks target

On the back of the rally in stocks many big name banks are boosting there stock forecasts, and Goldman Sachs are one of them. Goldman Sachs Group Inc. boosted its forecast for the Standard & Poor 500 Index, saying improving earnings will spur the steepest second-half rally since 1982.

The benchmark index for U.S. stocks will advance 15 percent from its June 30 level to 1,060 on Dec. 31, an increase from David Kostin’s prior projection of 940. The chief U.S. investment strategist at New York-based Goldman Sachs also lifted his 2009 and 2010 earnings estimates for S&P 500 companies to $52 and $75 a share, which are 30 percent and 19 percent higher than prior estimates.

Profits that beat analysts’ forecasts at companies from New York-based JPMorgan Chase & Co. to Intel Corp. in Santa Clara, California, helped boost the S&P 500 by 7 percent last week, the biggest gain in four months. Since March 9, the gauge has rebounded 41 percent amid speculation the economy is recovering from the deepest recession in a half century.

“You saw company after company either raise guidance or at least guide to the higher-end of the previous range,” Kostin said in an interview today. “The early reporting companies are often interesting barometers for what’s likely to take place.”

JPMorgan, the second-largest U.S. bank, climbed 14 percent last week after saying earnings rose for the first time since 2007 on record investment banking fees. Intel, the biggest semiconductor company, added 17 percent last week after lifting its forecast for third-quarter revenue. The 43 companies in the S&P 500 that have posted results since July 8 have beaten analysts’ estimates by 15 percent, on average.

Now with pretty much all the power in their hands, and the power to move the market as they please, it wouldn't be surprising if this is true, although I still remain a bear and think we will come off again before year end.

Monday, 20 July 2009

9000 here we come

In the past week we have rallied pretty much everything we lost on the pullback, and investors were quick to snap up anything as good earnings have helped lift sentiment. This morning we are looking to gap up again as the dollar is getting smashed and commodities are rallying, and 9000 on the DOW is a real possibility by end of week.
Bunds have dripped below 121 again, and is trading 120.65 as I write, as 120.50 will be the next level to the downside followed by 120.08.
Data is light this week, so earnings will continue to stay the focus.
Euribor spreads are under some pressure as they retrace from highs. I would expect the front month to fall more relative to the back months as profit taking sets in. Butterflies are still the safest strategy but with very low volume, it is proving to hard to execute, and patience is the name of the game.

Thursday, 16 July 2009

Stocks rally on Roubini outlook change...a media screw up he says!

After ralling big over the past 3 days yesterday looked set to be a consolidation day, however comments by Roubini, an NYU professor sparked a rally, and put us up near 100 up for the day and almost entirely wipe out the pullback we had in pretty much a week. The Dax has rallied over 10% this week alone, which seems a tad overdone to me.
I find it strange how Roubini can have such an affect on the market, or was it just an excuse to buy since sentiment trumps all here. However Roubini did pull his comments, he wants you to know: The reporting has been wrong, ans he sees no growth this year. He even put out a press release:

“It has been widely reported today that I have stated that the recession will be over “this year” and that I have “improved” my economic outlook. Despite those reports - however – my views expressed today are no different than the views I have expressed previously. If anything my views were taken out of context.

Now it will be interesting to see if the market takes back what it rallied if it is not quoted correctly.

On an interesting note, we headed higher in Bonds for the first time since this rally at beginning of the week started, with bunds bouncing of 121, and trading over 70 points higher currently trading at 121.75. Is that telling us something, also Cable and EURUSD has dropped considerably this morning, this may put pressure on commodities hence pressure on commodity shares. After such a run up this week I would expect some retracement in stocks today, but with IBM reporting positive earnings yesterday, as well as Bank of America earnings later on today, sentiment can change.

Dow Jones index has best rally since april

It was a monster day for stocks yesterday, as continued good earnings gave a lift to the market. As expected Bonds dropped hard as appetite for risk increased, and in turn the dollar got smacked across all currency pairs, which in turn lead to a rise in crude.
Bunds hit the lower target yesterday of 121.30 and is now looking for a drop below 121. Results later today by Bank of America will set the tone for this session, and another big earnings will like propel the Dow to 9000 within the next few weeks.
However some still feel we will be heading much lower.
Gary Shilling who appeared on TechTicker had the following to say:

The economy won't start to recovery until 2010 (versus the current consensus of now). It will recover because the government will be forced into a second stimulus.

The US consumer rules the world...and the US consumer is cutting back fast
Consumer spending will drop from 70% of GDP to 60% as consumers pay down debt and go on a saving spree.

Most recessions have a positive quarter or two of GDP, so if we get one, it won't mean anything.

The S&P will plunge 35% to 600 by the end of the year.

Buy Treasuries

He is not alone in this view, but for now it looks like we are heading higher again.

Tuesday, 14 July 2009

Earnings start of on a good note

A blow out from Goldman Sachs, and a beatthe estimates from Johnson and Johnson, and Intel is carrying this market higher, as we edged up slightly higher yesterday in the US and all futures across the board are sharply higher on better then expected Intel numbers.
Bunds hit yesterdays projection of 121.50 before bouncing, but with the current strength in equities we could be looking for a further leg downwards with a Lower Potential at 121.44 & 30.
On the Euribor front, the curve is shifting again after being in a tight range of late. The front end of the curve is pushing higher, with front month spreads jumping more than 2 FAT ticks from Monday sigh Sep10-Dec10 spread trading 36.5 after trading 33.5s earlier in the week, where as the long end of the curve spreads are falling, with Jun11-Sep11 spread trading 24s after trading 25s earlier. I'm looking to short the front end today as we approach highs reached 2 weeks ago, but a break above the 37 level on Sep10 would prompt me to look at reversing. As of now its holding well.
Looking forward we have UK employment figures, US CPI and the FOMC minutes which will move around this market a bit.

Goldman Sachs upgrade boosts stocks

We had a fairly massive turnaround in stocks as an upgrade on Goldman by superwoman Meredith Whitney sparked the buying interest, and turned around stocks to finish strongly higher with bank stocks leading the way. With Goldman due to report earnings later today, and an expected blow out quarter, any dissapointment what so ever could see us head back down very quickly.
Bunds have reversed the ascent upwards with 122 broken to the downside. The upward trend in the bund has also been broken as can be seen below.

With the break of the trend, Bunds are likely to test 121.50 before making any further attempt at making a new leg upwards.
Euribor spreads continued there narrow range for much of the day as lack lustre volumes continue to make trading difficult. Opportunities are very thin but with a busy day scheduled today, hopefully it will present some good opportunities.

Sunday, 12 July 2009

Week ahead 13/07-17/07

After bad University of Michigan numbers on Friday, there not much optimism out there right now, and with crude oil now trading at 58$/barrel after trading at 70 not long ago, pressure is also being put on energy sector. This week however we have a slew of earnings from some big names, most notably Google, Goldman Sachs and IBM. These earning will dictate the mood for the week, as we see how corporate America is faring through the second quarter and its outlook ahead.
Data wise we have the ZEW survey from Germany on Tuesday, UK unemployement data and US FOMC minutes and retail sales to look forward to.
Futures are flat across the the Euribor strip, and Bonds. We are trading down slightly in stock markets across Europe and US.

Forex Autopilot (FAP turbo) first week test

After writing last week about the FAP turbo forex robot, I can now report what I have so far noted on this.
After having my account deposited and ready by last Wednesday, I programmed in the robot and then sat back and watched. After seeing the simulator results, I was quite excited at the prospect of what this could do, but as I went live, it wasn't really the same, the robot produced a large number of winners relative to losers, but one loser which turned out to be a very bad one pretty much wiped out everything made in its
other trades and a bit more. Below are the results as of now:

So far down 60 bucks, but I will keep you informed how the progress goes, and will post results next week.
For more information on this product click HERE

Thursday, 9 July 2009

Bank of England leaves rates on hold

As expected the BoE left rates at hold but the real market shocker was the discontinuation of its bond buying program, which lead to a 200 point reversal in the Gilts.
In fact this was welcome news for me as it brought about some very good trading opportunities in the short sterling contracts, with some much needed volatility and volume coming in to these contracts. Spreads ranged well, where as with the Euribor spreads we had a slight bias to the upside, as we come of the lows.
Looking forward Im expecting a quiet day today to finish of the week, as we approach august, and very light trading with earnings next week providing the only real stimulus for any real moves, which would be more directed to the stocks markets rather then the bond market.
Stocks continued to look weak yesterday, with the DOW unable to hold any gains. The futures are red this morning, and if we continue like this then it will be the 5th consecutive down week for the indices, a break of 8000 is key to see if we will test march lows.

A grim look at the US jobs picture

So people being made redundant, people accepting shorter work weeks, forgoing bonuses, taking unpaid holidays, the chart below (taken from Business insider) shows the grim reality as it shows how last years job losses has undone all those created over the previous 7 years! Not pretty reading at all.

As for the markets, a very quiet one on the Euribor one, with spreads trading in a very tight 1/2 ticks range.
bank of England will be announcing rates, with it widely expected to be on hold, any statements will be telling.

Wednesday, 8 July 2009

Dow jones index nearing 8000

We had a pullback on monday but not yesterday, as we sold off over 160 points in the Dow as we trade at 8163. In Europe the Eurostoxx 50 has broken the 2300 level. The drop was on light volume, but that has been the story lately. The drop in stocks have given rise to the bund with it trading over 122 as it makes its way higher again.
Euribors have been inching higher also, as we are reversing some of the earlier steepeners. Front month spreads are falling, with Sep10-Dec10 trading at 33.5 from 37s last week, where as further out spreads are inching higher, with the notable rise being the Jun11-Sep11 spread trading at 25 after trading 20.5 last week.
The lack of volatility is making it hard to get filled in these spreads I have found, and I have resorted to my Iphone for much needed entertainment for much of the day.
Hopefully things will pick up as earnings season begins with Alcoa kicking things off.

Monday, 6 July 2009

Quiet day for the markets

Was a quiet day for the Bond markets as it looks like the summer lull will be in full swing. Bunds broke 122 yesterday, as weakness in stocks continued lead by falls in energy shares as Oil dropped to $64/barrel. There is a two tailed story being told from both commodities and equities. The intra-day story has been the US equity market bouncing on the increasing strength of credit markets while the commodities market continues to decline on fears of slower economic growth than what is currently priced in. The near month contract for light/sweet closed down 4% to the lowest level in over a month at $64/barrel while the equity market has gained back against the losses from earlier in the day.

Of course this could mean everything... or it could mean nothing. It is easy to chalk up the price action in crude to a rationalization back to supply/demand reality but it is also important to think about the implied expectations for unemployment and the USD (especially in light of last week's news releases). As always, the reality is somewhere in the middle but we have to think there is some truth to be uncovered here (especially with the sluggishness of the equity market's reactions to news releases). This week (and possibly the next) will determine who's telling the truth but for now we stick to dollar strength until we get more insight into what's going on.

Sunday, 5 July 2009

Product review: Forex AutoPilot (FAP Turbo)

Ive been looking at finding automated systems for quit a while and came across FAPS Turbo, and automated forex robot. Sometimes looking at these sytems on those typical sales pages that is the standard for online marketing on various money making products, sometimes is off putting and puts doubt into the mind. But for some reason this one kept drawing me in. So I took the plunge, at a cost of 149 dollars and have been trading the demo account and have been very surpirsed by the outstandingly good results. From a 100k starting account the system made 5k almost in the week which is jus under 5% return. Not bad at all.
So here it goes, I have put 5k into a forex broker, and will test the results for real. I will post the results on a weekly basis.
For more information on this click HERE

Thursday, 2 July 2009

Stocks get beaten

Well it was pretty brutal on the initital opening in the dow as we dropped over 150 points initially, before the volume really began to fade away and traders started the long weekend in the US early.
So many seemed to be caught off guard with the bad employment data from the US but Richard Bernstein doesn't think we should be at all. He is CEO of Richard Bernstein Capital Management. He was previously the Chief Investment Strategist and Head of the Investment Strategy Group at Merrill Lynch and he is his thoughts(taken from business insider)

Today’s weaker-than-expected employment report sent the financial and commodities markets reeling. But why was this report such a significant surprise to anyone?

I’m not particularly bearish or bullish with respect to stocks right now, but I am a pragmatist. The fact is that the leading indicators of employment have been weakening, yet the consensus has been ready to reap the fruits of the so-called “green shoots.”

First, let’s set the record straight. Employment is NOT a lagging indicator. Some indicators of employment, like jobless claims and the length of the work week, are actually official leading indicators of the economy. Payroll employment is a coincident indicator.

It is actually somewhat odd that investors are currently paying so much attention to true lagging indicators related to inflation. Wage pressures, and not commodity prices, are the true catalysts for inflation. Wage increases, abnormal credit creation, and excess demand relative to supply come first, and inflation comes second. There are no wage pressures, there’s not a lot of credit being created, and output gaps abound, so why is everyone focused on lagging inflation indicators?

Second, the monthly payroll report, like the one issued today, is full of largely coincident data. However, it does have one piece of leading data: the length of the work week. This is generally considered a leading indicator because employers will tend to adjust the number of hours their employees work before hiring or firing them. For example, it would be normal for companies to begin to pay existing workers overtime before they hire additional workers because of the uncertainty related to the initial upturn in a production or service cycle.

However, commentators rarely highlight the length of the work week when discussing the monthly employment report.

What has been happening to the length of the work week? It has hit all-time lows the last two months. That’s right. The only official leading indicator in the employment report has hit all-time lows the last two months. Who has reported that? No one.

Weekly jobless claims are also an official leading indicator, and they remain above 600,000 (why is that the magic number anyhow?). Thus, two leading indicators relating to employment seem quite weak.
These data seem particularly bullish for Treasuries and bearish for Consumer Discretionary stocks. Historically, there is a very strong inverse relationship between jobless claims and the performance of consumer discretionary stocks. Supporting the basic economic principle that one doesn’t buy discretionary goods when one doesn’t have a job, the absolute performance of the S&P 500 Consumer Discretionary index decreases when jobless claims increase.

Treasuries should continue to be a part of any portfolio. Right now they are about the only uncorrelated major asset class available to investors. Investors continue to structure diversification based on the number of asset classes in a portfolio rather than on those asset classes’ correlations. Put simply, alternative investments are NOT diversifying asset classes right now. Treasuries are.

With that in mind, the whole world, excluding China perhaps, is underweight Treasuries. In addition, the Chinese would be quite foolish to sell their Treasury holdings. If the global economy accelerates, Treasuries will indeed sell off, but the Chinese economy will boom. However, if the global economy decelerates, the Chinese economy will likely slump, but the value of the Treasury holdings will probably appreciate. That’s what diversification is all about.

The key question, however, for any serious investor is why was today’s employment report a surprise? Leading employment data have been suggesting on-going weakness for some time.

Could it be that momentum, rather than fundamentals, remains the defining aspect to most investment strategies? Prudent investors should be watching sound leading indicators, and not the markets’ short-term momentum for clues as to whether the “green shoots” will sprout flowers or weeds.

Non farm payrolls come in weak!

Well there goes the upside case: 467k job cuts on 363k expected, 9.5% unemployment, 14.7 million officially unemployed and not just the US - Unemployment up to 9.5% in Eurozone as well.
Bunds hit target of 121.50 with next stop at 122.75 or retracement to 120.50 on the downside. As for stocks I still hold my DIA puts looking for this to be the catalyst for a real push lower, but happy to take profits if this sell off fails to materialise. With independence day in the US tomorrow, this is likely to be the last bit of main action for the week, hopefully we will see some volume back next week.

All eyes on Non Farm Pay rolls

Stocks benefited from optimism carried over to Europe from Asia and also after reports of better manufacturing giving hope that the global recession is easing. The positive sentiment was given a new impetus following a reading in line for the June ISM manufacturing data. However, the upward momentum was not sustained in the middle of the session on lower volumes as traders turned their attention to the NFP report today. Besides that, downbeat comments from GM in connection with the payment of creditors, as well as the news that California's governor has declared a state of "fiscal emergency", put more pressure on stocks later in the session. Finally, at the closing bell Dow closed down 0.68% at 8504.06, S & P 500 closed down 0.44% at 923.32 and NASDAQ100 closed 0.28% in 1481.34.

In fixed income
Bunds were lower during the early hours of trading after investors turned their attention to the threat of supply in the form of tips, notes 3.10 and the return 30y announcement tomorrow. However they later rallied as ADP raised concerns the next NFP report above analyst estimates.
Euribors had a very quiet day volume wise, as this week continues to be very light as traders are either away or treading less in this holiday shortened week for the US.
All eyes will be on the ECB and non farm payroll figures, after bad ADP numbers it wouldn't be surprising to see if we had a worse number, but I'm sure some government manipulations will ensure that won't happen!

Wednesday, 1 July 2009

Busy data schedule begins

After going back and forth in stocks and bonds on low volume and no real catalysts, the shokingly bad consumer along with todays and tomorrows data will really set the tone for where we go next. Today we had a strong retail sales number from germany, and this afternoon we have ADP Emplyment change, ISM Manufacturing, pending home sales, and tomorrow we have ECB rates followed by Trichets press conference and the biggie, Non farm payrolls. So alot to get through over the next two days.
First day of the month and we see stocks going up like a rocket, as traders start the new quarter with buying.
As for bonds short end continues to be in demand with the Schatz leading the way. Bunds are flat at the moment, but still above that 121 level.
Euribor spreads have stabilised for the last couple of sessions, with more downside pressure to the far end of the curve as the steepening continues. It has been a tough market to trade of late, due to lack of volume during most parts of the day but with the barrage of upcoming data, I'm confident we will get some good opportunities.

Short Sterling spreads nudge higher on hawkish Fed; Walmart blowout

As most must know trading Short Sterling is a bit of a bore, and has been for a while. Having managed to get out of my 2 month hold before,...