|
|
Gerald Loeb
was most of the most respected analysts on Wall Street, during the Great
Depression years and through the following decades. He wrote an epic book,
titled "The Battle for Investment Survival," last published in
1965. Many of his pearls of wisdom, concerning the financial markets and
rules of investing, have withstood the test of time. Yet one has to wonder
though, if Loeb's long held truths about the markets would stand up to the
erratic behavior of today's world of high frequency trading (HFT). There is
also the heavy hand of the world's top central banks that are actively
manipulating and distorting market values, and in turn, upbraiding many of
the traditional rules of the game of investing.
Still, one of
Loeb's axioms that still rings true today, says, "There is no such thing
as a final answer to security values. A dozen experts will arrive at 12
different conclusions. It often happens that a few moments later each would
alter his verdict if given a chance to reconsider because of a changed condition.
Even the price of a stock at a given moment is a potent influence in fixing
its subsequent market value. Thus, a low price might frighten holders into
selling, deter prospective buyers, or attract bargain seekers. A high figure
has equally varying effects on subsequent quotations," Loeb wrote.
Nowadays, it
seems as though the market is always teetering on the knife's edge. Depending
upon which way the wind is blowing on any given day, or what chatter is
coming across the newswires, markets around the globe are moving at lightning
fast speed. Sentiment can change instantly, with the release of unexpected
economic data, market movements, or surprising actions of central bankers.
The effect of high frequency trading (HFT) has turned the decades old profession
of investing into a high stakes gambling operation, and more characteristic
of commodity trading. Such erratic behavior on a daily basis makes it
difficult, if not impossible, for analysts to formulate a long-term view, and
for investors to maintain a long-term, "Buy and hold" position.
"As soon as you think you've got the key to the stock market, they
change the lock," said long-time market guru, Joe Granville.
It takes a
long time for the entrenched "conventional wisdom" to lose its
power of persuasion. "A trend in motion will stay in motion, until some
major outside force knocks it off its course." Along the way, there are
sudden and nasty shakeouts in the markets that cause many traders to quickly
lose their nerve and close their bets, fearing big losses. However, the true
skill of the Macro Trader is to distinguish between daily price swings, and
instead, to anticipate and correctly time, the major changes in market
sentiment, that can lead to violent price moves in the opposite direction and
quickly wipe-out the market's excesses.
For example,
even as Wall Street was celebrating the third anniversary of one of the most
powerful Bull markets in history on March 9th, - big trouble was brewing
across the other side of the Atlantic Ocean, in the sovereign bond market
located in Madrid, Spain. There, the mood is very different, - it's a market
filled with fear of default, and once again, beset by upward spiraling bond
yields and plunging equity values. Rising concerns over Spain's economy and
its ability to handle its €935-billion debts lifted its 10-year cost of
borrowing towards 6-percent, sparking fears that Europe's debt crisis is
flaring up again after a brief respite.
Uncertainty
over Election politics and Taxes in US, It's also an Election year in the United States,
that's adding an extra layer of volatility in the global marketplace. If
re-elected, President Obama might allow the Bush tax cuts to expire, and
therefore allow the long-term capital-gains tax rate to increase to 20%, plus
a 3.8% investment surtax to finance Obama-Care. That 23.8% rate amounts to a
nearly 60% increase from the 15% rate in effect since 2003. And that's
without his new "Buffett rule," which would take the rate to 30%
for many taxpayers.Taxes on short-term capital
gains would increase by 3% across the board,and dividends will once again be taxed as regular
income, plus a 3.8% tax on investment income as part of the health-care
overhaul passed in 2009. For the highest earners, tax rates on most
dividends, currently 15% is set to jump to a whopping 43.4% next year.
The great
irony is, the post October 4th stock market rally, that's lifted the Dow
Jones Industrials to above the 13,000-level, a four high year, has also boosted
Obama's odds of winning re-election. On-line bettors at Intrade.com, give Mr Obama a 60% chance of winning re-election today.
That's up from as low as 46% six months ago, when the Dow Industrials briefly
plunged below the 10,800-level. The stock market's recovery rally has created
the illusion among the gullible masses of the US-public that a sustainable
and healthy economic recovery is underway. That notion was dealt a blow
however, when US Labor apparatchiks reported that 164,000 discouraged Americans
gave-up looking for work in the month of March, - and more than the net
121,000-workers that found jobs.
During the
Obama administration there's been an huge widening
of the wealth divide between the rich and poor. That's because 80% of all the
stocks listed on the NYSE and Nasdaq, now reaching
four-year and 10-year highs respectively, are owned by the top-10% of the
richest Americans. Thus, the top-10% has reaped the lion's share of the
wealth creation on Wall Street since March 2009, while the remaining 90% of
Americans are stuck paying higher prices for gasoline, and are still saddled
with chronically weak home prices.
Traders on
Wall Street are convinced that the Federal Reserve would come to the rescue
of the stock market, with huge waves of money printing, whenever there is a
nasty decline that might threat Obama's polling numbers. According to the
latest Washington Post-ABC News poll, released April 10th, it finds that if
the election was held today, 51% of registered US-voters would pull the lever
for Obama, while only 44% favor ex-Massachusetts governor, Mitt Romney. This
is actually good news for the Romney camp, since the Republican is still
within a close striking distance of the incumbent, even after a brutal
primary campaign.
Furthermore,
the latest Washington Post-ABC News poll was published by news organizations
that are aligned the extreme far left of the political spectrum. As such, the
polling data was skewed for political propaganda purposes. The poll was
notably tilted to Democratic respondents - the breakdown in the poll was 34%
Democrat, 23% Republican, and 34% Independent. Thus, Democrats had an 11%
advantage in the poll, even though Democrats only hold a 3% advantage over
Republicans among nationally registered voters. The added 8% advantage is
what gives Obama his lead in the poll. Otherwise, if measured according to
the actual party affiliations, the race for the presidency is about dead
even.
History shows
that the underdog, Mr Romney can still pull-off an
upset victory in November. For instance, in March 1980, President Jimmy
Carter led Ronald Reagan by 18% and 25% in some polls. Reagan went onto win
the November election by wide 51% to 41% margin. In June 1992, Bill Clinton
was running third in opinion polls. Ross Perot had 39%, President George HW
Bush 31%, and Clinton just 25-percent. Clinton went onto win the November
election by 43% to Bush's 39-percent. All of these candidacies rode the waves
of historical events (Oil Shock in 1980, recession in 1992) that unfolded in
the months preceding the election, and had a notable impact on the final
tally for the presidency.
For Mr Obama, a 7% cushion in the far left skewed opinion
polls, might not be enough to ride out the upcoming storm of historical
events that could derail his re-election bid. Only a true prophet can predict
the future with certainty. However, gazing into our crystal ball, there are
renewed signs of extreme turmoil in the Italian and Spanish bond markets,
leading to sharply higher interest rates, and threatening to push the
Euro-zone's #3 and #4 economies into a deeper recession. Spain is widely
considered too big to bail out: It makes up about 11% of the economic output
of the Euro-zone economy. Greece makes up about 2-percent.
Despite the
best efforts of the European Central Bank (ECB) to calm the sovereign debt
crisis and drive bond yields lower, just the opposite has occurred since the
ECB's last €530-billion LTRO injection on February 29th. The yield on
Spain's 10-year note has turned upward, climbing +110-basis points higher, to
as high as 6% this week. Likewise, in a bout of contagion, the yield on
Italy's 10-year note jumped +80-bps higher since March 19th, to as high as
5.66%. That's important, because Italy's bond market is the third largest in
the world with roughly 2-trillion Euros of debt outstanding, double the size
of Spain's sovereign debts. Italy and Spain are too big to bail-out, and
would require a massive ECB rescue operation.
Since peaking
on March 19th, the exchange traded fund for the broader Euro-zone stock
market index, ticker symbol EZU.N, has declined by -12% to as low as $29
/share, and surrendering most of its gains from the first quarter. The sharp
slide of EZU, if sustained, could be the earliest warning signal of a deeper
recession that's unfolding in the Euro-zone. On April 4th, the ECB chief
Mario Draghi warned, "Downside risks to the
economic outlook prevail." He warned that the central bank has done as
much as it can to fight the bond crisis, and put the onus for stabilizing the
bond markets on the shoulders of the politicians that rule the Euro zone's
periphery. "Markets are asking these governments to deliver," their
austerity packages of spending cuts and tax increases," Draghi said.
The biggest
threat to the global economy has quickly shifted to Spain. The Madrid stock
market and Spanish banking stocks continue to tumble. The benchmark IBEX-35
index is down -10% so far this year, and is -30% lower from a year ago.Spain's biggest bank, Banco
Santander STD.N) has fallen -18% over the past four weeks, and has dropped
more than -45% over the past year. Credit Default Swaps, used to measure the
cost to insure the debt of Banco Santander's
subordinated debt, for a period of five years, jumped +220-bps higher in the
past two weeks to around 630-bps today, meaning it takes €630,000 to
insure €10-million of STD's debt against the risk of default.
Shares of Banco Santander skidded to $6.52 on April 10th - a 3-year
low. With a stated annual dividend of 92-cents, STD is yielding 13-percent.
Traders expect STD to cut its dividend by as much as half, in order to
preserve badly needed cash. Whenever a company is forced to cut its dividend
in half to conserve cash, there's usually a knee-jerk reaction to sell the
company's subordinated debt, sending its borrowing costs higher. The
viability of Spain's top-3 banks, Banco Santander,
#2 bank, BBVA and #3 bank, La Caixa,
is very important, since they collectively hold customer assets worth about
$2.7-trillion. That's nearly double the size of Spain's $1.4-trillion
economy. In other words: Spain's three biggest banks are too big to fail.
Spain's banks may need more capital if the economy deteriorates, Bank of
Spain chief Miguel Angel Fernandez Ordonez warned on April 10th, reflecting
fresh concerns that some might not survive a severe recession made worse by
the government's fiscal austerity drive.
The Deepening
Recession in Europe is Spilling over into the Asian sphere, and slowing down the world's economic locomotive -
China. Chinese exports ranged between $475-billion to $518-billion in the
last three quarters of 2011. However,in
the first quarter of 2012, China's exports fell to $430-billion. Factory
activity in China shrank for a fifth straight month in March, hit by
declining order books, disappointing exports, and new hiring hitting a
two-year low, according to the HSBC purchasing managers index. Most
worrisome, the new orders sub-index fell to a four-month low of 46.1, from
48.5 in February.
China
accounts for 16% of the world's gross domestic product, and is also the
world's largest trading nation. However, it remains highly dependent on its
export-oriented manufacturing sector, which provides most of the country's
jobs. Exports to Europe, its single largest trading partner, were -3.1% lower
in March compared with a year earlier, and this declining trend is of great
concern to Beijing, which is already trying to engineer a gradual slowdown to
+7.5% economic growth this year. Making matters worse, the Euro has lost a
third of its purchasing power of Chinese yuan
compared with four years ago, making China's exports to Europe more expensive
and in a vicious cycle, weakening China's economy further. Meanwhile, an
uptick in China's inflation rate to +3.6% in March might restrict Beijing's
ability to blunt a sharp slowdown by easing monetary policy in the months
ahead.
China's
benchmark stock index, the Shanghai Composite, ended March with a -6.8%
decline, continuing a long and brutal slide that began in the second quarter
of 2009. The National Bureau of Statistics reported that the profits of
China's large industrial companies dropped by -5.2% in the first two months
of 2012, compared with the same period a year earlier, and marking its first
decline in more than two years. The steady drip of negative news has also
generated talk of the prospect of a hard-landing for China's economy.
China's
voracious thirst for commodities raises the possibility that slumping Chinese
demand might exact a heavy toll on commodity exporter nations around the
world. Fears of a deeper-than-expected downturn have already knocked the
Australian dollar as much as -5.6% lower over the past five weeks, to as low
as $1.0225. Australia's currency is a symbol of global risk taking, and has
also emerged as a key barometer of Chinese growth trajectory. Because of renewed
worries about European debt risks, the Aussie dollar has also dropped by -5%
against the Euro since early February, partly reflecting ideas of further
rate cuts by the central bank of Australia, to cushion the Aussie economy
from a downturn in global trade.
Signs of
Economic Cracks in Australia, Australia's
economic integration with Asia began in earnest under the Hawke Government in
the mid-1980's, has positioned itself brilliantly to benefit from the
industrialization and urbanization that's underway in China, India, and other
Asian countries. In 2011, Australia's economy expanded +2.3%, andmarked its 20th straight year of expansion, -
testimony to its open economy and a flexible currency to absorb external
shocks, and to the skills of the Reserve Bank of Australia (RBA).
Much of
Australia's good fortune rests on the relentless Chinese demand for
commodities. Australia's exports to China increased 25-fold in real terms
since 1990. Exports to China climbed +24% to A$72-billion in 2011, from 2010,
taking it further ahead of Japan, South Korea and India as Australia's
biggest customer.About 26% of all of Australia's
exports are shipped to China, with bilateral trade worth
$105-billion.Australia's trade surplus for 2011 as a whole hit A$19.3-billion,
an increase of +27% on 2010 and the highest on record.
China's
demand for iron ore, coal and natural gas, drove Australia's terms of trade,
or export prices relative to import prices, to a record high last year. But
Australia unexpectedly posted back-to-back trade deficits in January and
February, the first consecutive shortfalls in two years, as coal and metal
prices slumped, sending the Aussie dollar lower and intensifying pressure on
the Reserve Bank of Australia (RBA) to resume cutting interest rates, at the
May 1 policy meeting, because overseas shipments account for about a quarter
of gross domestic product. Exports fell in February to A$24.4-billion, the
lowest level in a year. The value of coal exports, the nation's
second-biggest commodity export after iron ore, plunged -21% to
A$3.4-billion, the least since March 2011. Overseas sales of goods and
services to India, Japan and Korea, which buy about 25% of Australian
exports, all declined, it showed.
Australia's
metal miners are still stuck in a year long Bear
market, with the ASX's natural resource index tumbling towards the
3,800-level, or -27% below its 2011 high. Australia's parliament passed laws
for a 30% tax on the profits of iron ore and coal miners on March 14th, after
a bruising two-year battle with mining companies, in a major victory for
Prime Minister Julia Gillard and her struggling minority government. The tax
will affect about 30 miners, including global miners BHP Billiton BHP.N, Rio
Tinto RIO.N, and Xstrata XTA.L. The tax aims to raise
about A$10.6-billion in government revenue in its first three years.
Traders are
pricing in an 87% chance the RBA will lower the cash rate by -25-bps at the
next policy meeting. The RBA lowered the overnight cash rate target -50-bps
last year to 4.25%, but paused for three straight meetings, while signaling
it might resume cutting rates as soon as May, if weaker-than-expected growth
slows inflation.
Latin
America's Top Economy Stalls at Zero growth, Since 2003, Brazil has steadily improved its
macro-economic prowess, building up foreign currency reserves, and reducing
its debt profile by shifting toward real denominated debentures. In 2008,
Brazil became a net external creditor and two ratings agencies awarded
investment grade status to its debt. Large capital inflows over the past year
have contributed to the rapid appreciation of its currency, the Real,
attracted to Brazil's strong growth and high interest rates.
Brazil has
been enjoying an economic boom based on soaring prices for its natural
resources including crude oil, agricultural products, such as soybeans, corn,
and cattle, and metals such as iron ore and bauxite-aluminum. Brazil now
accounts for approximately two-thirds of the output of all of Latin America.
Last year Brazil overtook Britain as the world's sixth biggest economy.But while the rest of the world is trying to deal
with so many other problems, Brazil's first and foremost issue is the high
level of exchange rate of its currency, - the Real, which is hurting its
manufacturers, at a time when a slowdown in China and weaker job growth in
the US has fueled speculation that global growth is stalling.
Brazil's
economy stalled out in the past two quarters, showing near zero growth in Q'3
of 2011 and Q'4 of 2012. Factory output in February was -3.9% lower than a
year ago. Yet slower growth was necessary in order to quell the inflation
rate, which was quite high, north of +7% in August 2011. For all of 2011,
Brazil's economy grew +2.7%, after expanding at a record +7.5% in 2010.
"One of our economic difficulties with competing is the exchange
rate," said Finance chide Guido Mantega on
April 10th. "If needed, we'll take measures so there's not an
appreciation of the currency," he warned.
Brazil's
President Dilma Rousseff
slammed the European Central Bank, the Bank of Japan, the Bank of England,
and the Federal Reserve, for unleashing a "tsunami of cheap money that
threatened to cannibalize emerging countries," such as Brazil, and
forcing them to act to protect struggling local industries.
"Quantitative easing" (QE) has damaged Emerging-market nations such
as Brazil by unleashing a wave of capital inflows, that has made our
currencies overvalued and exports more expensive. We have a currency war that
is based on an expansionary monetary policy that creates unequal conditions
for competition," said Rousseff.
Brazil's Bovespa stock index has fallen -12% since March 14th,
when Beijing said it would lower its growth target to +7.5% for 2012, down
from a target of +8% annually over the past seven years. Brazil's stock
market was the fourth-worst performer over the past four weeks, as foreign
investors sought to avoid losses from adverse currency depreciation. Brazil's
central bank chief Alexandre Tombini
repeated on April 10th, that he would lower the benchmark Selic
rate reaches about 9%, in order to help weaken the Real. The Bank of Brazil
has already slashed the Selic rate -275-bps since
August, bringing it to 9.75-percent.
"Gasoline
Shock" Threatens Stock market Rally, The tsunami of global liquidity, injected in recent
months by the ECB, the BoJ, and the Bank of
England, combined with the Fed's Zero Interest Rate Policy (ZIRP), has proven
to be a very powerful cocktail that helped to fuel the spectacular surge in
the price of crude oil, and its derivative product, - unleaded gasoline. In
the US, motorists are now faced with a price of $4 per gallon, on average,
and according to opinions polls. In Europe, the price of North Sea Brent hit
€96 /barrel last month, nearly +10% above last year's high of
€88-barrel. That's significant, because US-oil companies are closing
some refineries this summer, and will import the more expensive Brent crude
from Europe, in order to produce gasoline for motorists on the East Coast.
For global
macro-traders, the question is whether record high oil prices would weaken
the world economy, like previous "Oil Shocks" that tipped global
economies into recession and triggered Bear markets in equities. Most
Americans say higher gasoline prices are already taking a toll on family
finances, and nearly half say they think that prices will continue to rise,
and stay high. Nearly 2/3's of Americans say they disapprove of the way the
president Obama is handling the spike in gasoline prices, according to a left
leaning Washington Post-ABC News poll. Sharply higher petrol prices increases
the cost of transportation, and are usually passed along by the middleman to
the final consumer, thus leading to inflation shock.
Adding to the
list of worries, Labor apparatchiks said the US-job market slowed in March as
companies hit the brakes on hiring amid uncertainty about the economy's
growth prospects. Employers added 120,000-jobs in March, down from more than
200,000 in each of the previous three months. Factoring in those discouraged
adults and others working part time for lack of full time opportunities, the jobless
rate is 14.5 percent. However, 70% of all job gains in the past six months
were concentrated in lower wage sectors, such as restaurants and hotels,
retail trade, and temporary employment agencies. Among the economy's
better-paying sectors, the jobless rate is closer to 17-percent.
The Dow Jones
Industrials dropped than 500-points, for a cumulative loss of -3.8%, from its
April 2nd high. The CBOE Volatility Index jumped +8.4% to 20.39, and was up
for the eighth straight day, its longest streak of consecutive gains in
nearly nine years.Still stock market pullbacks of
-5% are as common as the common cold, occurring about four times a year. But
price dips still fray nerves of traders because of the fear that small
declines will morph into bigger corrections of -10% or more. That's already
happened in emerging markets, such as Brazil's Bovespa
and European stock markets in Italy and Spain. The Toronto stock index is
unchanged from the beginning of the year. Stock markets in Australia and
China remain chronically weak, and haven't recovered much from their 2008
meltdowns.
In today's
world of lightning fast - high frequency trading, perhaps, the strategy of
"Sell in May and Go Away," that worked so well in the past two
years has already begun in April, in order to beat the crowd. As always, the
key focus is on Wall Street, where 57% of the world's trading in equities
happens, and where monies from offshore find a speculative haven. Weak
earnings growth, weak jobs growth, recession in Europe, a slowdown in China,
the global gasoline shock, higher capital gains taxes in 2013, and bubbles in
G-7 government bond markets, are just a few of the risks that investors must
consider in the months ahead.
What could prevent
a normal pullback from morphing into a larger S&P-500 index correction?
Traders haven't given up hope that Fed chief Bernanke would ride to the
rescue with another big juicy blast of QE, in order to keep the stock market
addicts sedated at artificial highs. Yet Bernanke's dilemma is, another big
round of QE could also catapult Brent crude oil to $150 /barrel, and topple
the world economy into a synchronized recession. "Oh what a tangled web
we weave when first we practice to deceive," -- Sir Walter Scott.
Gary Dorsch
Editor, Global Money Trends
www.sirchartsalot.com
This article is just the Tip of the Iceberg of
what’s available in the Global
Money Trends newsletter. Subscribe to the Global Money Trends
newsletter, for insightful analysis and future predictions about the (1) top
stock markets around the world, (2) Commodities such as crude oil, Gold,
copper and base metals, (3) Foreign currencies, such as the Australian and
Canadian dollars, Brazil real, the Euro and Japanese yen, (4) Central bank
interest rates and global bond markets, (5) Central bank Intervention
techniques (6) and hard to get charts of key Credit Default Swap markets.
GMT filters important news and information into (1) bullet-point, easy to
understand reports, (2) featuring “Inter-Market
Technical Analysis,” with lots of charts displaying the
dynamic inter-relationships between foreign currencies, commodities, interest
rates, and the stock markets from a dozen key countries around the world, (3)
charts of key economic statistics of foreign countries that move markets.
Subscribers
can also listen to bi-weekly Audio Broadcasts, posted Monday
and Wednesday evenings, with the latest news and analysis on global markets.
To order a subscription to Global Money Trends, click on the
hyperlink below,
http://www.sirchartsalot.com/newsletters.php
or call toll free to order, Sunday thru Thursday, 8-am to
9-pm EST, and on Friday 8-am to 5-pm, at 888-808-7978. Outside the
US call 561-391-8008. This article may be re-printed on other
internet sites for public viewing, with links required to: http://www.sirchartsalot.com/newsletters.php
|
|
