Aug 4, 2011

Happy Birthday Mr. President!

August 5, 2011

"A government which lays taxes on the people not required by urgent pubic necessity and sound public policy is not a protector of liberty, but an instrument of tyranny. It condemns the citizen to servitude."--Calvin Coolidge

So much for whistling past the graveyard. The stock market, after cruising along since March 2009 despite evidence that much of the economy is yet to recover, fell nearly 5% yesterday, with the Dow tumbling over 500 points. From a technical standpoint the market has broken through most levels of support, and the S&P 500 has formed a very bearish head and shoulders pattern (see left hand panel below, courtesy Kimble Charting Solutions). Inside that index, the cyclical groups were it the hardest, however, nearly all stocks were down yesterday as 497 out of the 500 declined. Sell orders at the end of the day swamped buy orders by 100 to 1. Happy 50th Mr. Obama!

The sell off started in the European exchanges after the ECB decided to step up its bond purchases in an effort to insulate banks and “healthy” countries from the fallout of the debt crisis amongst the peripheral countries. In addition to Greece, Portugal, and Ireland, it now appears that Italy is facing issues. Italy is the third largest economy in the EU and 8th in the world. The catcalls for ECB President Trichet’s head are beginning as confidence in his leadership is waning given his constant flip flopping between a bullish and bearish outlook.

This morning markets are opening with a bid after the monthly payroll report came in better than expected, with an increase of 117K vs. expectations of 85K, and an increase in private payrolls of 154K vs. expectations of 113K. Manufacturing payrolls are up 24K, and the unemployment rate fell from 9.2% to 9.1%.

The news yesterday wasn’t all bad as rates fell, with the 10-year now under 2.5%. Conforming 30-year mortgage rates fell to 4.375%, energy prices fell with oil breaking under $90 and natural gas falling under $4, and food prices falling. The CRB is now almost 12% off its late April high.

Japanese Finance Minster Yoshihiko Noda announced that the government had intervened in the foreign exchange market to halt the rise in the Yen. They join the Swiss as recent central banks intervening in the currency markets in an effort to offset recent weakness vs. the dollar.

A survey by ADP showed that businesses with fewer than 50 employees added 58K positions in July while companies in the 50-500 employee range added 47K workers. Large companies hired 9K.

I’m not sure if this is relevant, but I always find these comparisons interesting. At the market bottom in March 2009, gold was $965 an ounce, meaning one unit of the S&P 500 could buy .69 ounces of gold. Today the ratio is similar, with one unit of the S&P able to purchase .72 ounces of gold. Some would argue that in real terms the index is back to the 2009 low even though it sits nearly 500 nominal points higher.

A recent survey by Investment News found that 41% of financial advisers believe the US is likely to slip back into a recession. I’m looking for the details of the survey to see what percent believe we are in a recession already.

In spite of the negative macro news, earnings have still been robust, although the past week seems to have been somewhat weaker as measured by the number of companies beating estimates. As of last Friday 85% of companies had beaten estimates, but now that number is closer to 76% as only 69% of companies beat estimates this week. About 80% of the S&P 500 has reported so far this quarter.

The Onion reported yesterday that a very inebriated Ben Bernanke was spotted in a DC pub Wednesday afternoon, saying how the US economy was toast and the American people had now idea. Someone with a cellphone snapped the picture below, showing Bernanke lecturing another patron.

A big weekend in baseball is coming up as the AL East leading Red Sox host the red hot Yankees, owners of a seven game winning streak. The Sox have won eight of the past nine meetings between the teams.

Have a great weekend


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