We received the latest Bubble Bulletin newsletter from the Society of Actuaries (SOA) last week and it was, to say the least, “hair raising.” According to the report,
Actuary Shaun Wang, a leader in enterprise risk management, and founder and Chairman of Risk Lighthouse LLC, warns of a “perfect storm,” a combination of natural disasters on a scale even larger than the Japan earthquake coupled with a second-dip market meltdown greater than the 2008 financial crisis.
Wang cautions businesses, particularly insurers, and governments to take heed and prepare for the systemic threat that a natural disaster-triggered market meltdown presents to the U.S. economy.
As if the markets aren’t dealing with enough macro swans already, the report goes on,
Warnings of the Impending Storm are Visible: • Four of the five costliest earthquakes and tsunamis of the last 30 years have occurred in the last 13 months. Conditional probability of an earthquake in the northwest U.S. has increased significantly due to changing pressures on crustal plates. • The world is on the brink of a severe shortage of food and water. Thanks to a new peak population of nearly seven billion, demand is outpacing supply. Severe drought and water scarcity would affect food availability and cause spikes in food prices. • Warnings of solar flares from a “huge space storm” came to fruition on June 7, when NASA reported a potent blast from the Sun causing a firestorm of radiation on a level not seen since 2006. Flares such as this have the potential to disrupt satellite communications and power on Earth
Scary stuff and to think this is what analysts at insurance companies are looking it? Gulp!
The perception of such a scenario is not even close to the market radar. Alarmist? Six sigma event? We don’t know, but do suggest you have a look at the bulletin, think about it, and closely monitor the data for yourself.
After another testy week for the global markets the major U.S. equity indices currently sit right at support around their 200-day moving averages. The NASDAQ pulled down by weakness in Apple and Google closed the week below its 200-day for the first time since last September. The S&P500 bounced off its 200-day on Thursday to close up on the week, though just barely, for the first time since the end of April. Bespoke has done some good work on the relevancy of the 200-day moving average.
The German DAX was the best performing equity index, up 1.33 percent for week, and, along with Mexico’s Bolsa, was the only major market to make a higher low and higher high from the previous week. Germany now seems to be the safe haven and destination of global equity flows. Conversely, the Hang Seng and Shanghai Composite have broken major weekly support as the credit driven asset bubbles in Asia begin burst and the Chinese economy slows.
This, coupled with the end of QE2, is also weighing on the commodity markets with CRB Index (see chart below) now flat for the year and sitting at a key support level. Energy was very weak, with crude down over 6 percent and natural gas 10 percent. Oddly copper rallied over 6 percent, recapturing both its 50-and 200-day moving averages. Monday’s close of $4.03 in cash copper is now a key level of support.
The next week could prove to be a volatile one. The Greek government faces a vote of confidence and the European Debt Crisis is far from over. Excluding the collapse of the Greek government, however, Euro vol is largely priced into equities and a nice little narrative for a short-term rally could develop if Asian markets stabilize, there is news of progress on a U.S. debt deal, and crude oil continues to sell off.
It’s tough to see a sustained rally with techs, financials, and energy selling off so we believe the NASDAQ is going to have lead the rebound. Lots of ifs in the wall of worry and may just be wishful thinking, but an oversold market pricing lots of perceived risk is the ingredients for a nice little short covering rally. And then QE2 goes into dry dock. Stay tuned!
Golf Digest estimates Mr. Obama’s handicap — perhaps generously, in the view of some golfers — at 17, meaning, theoretically, that the president would typically play 18 holes in the high 80s to low 90s. The magazine put Mr. Biden’s handicap at 6.3 and Mr. Boehner’s at 7.9.
Golf has long been considered a window into character, or at least personality. Both President Bushes would speed-golf through 18 holes as if they had to beat the clock, not the course, leaving little time for introspection. President Bill Clinton had a reputation for being somewhat loose with the rules.
Mr. Obama’s golf game is characterized by long, slow rounds, with a lot of time hunting for balls in the woods. The president, say people who have golfed with him, is meticulous, studied and determined to improve his game through practice, practice and more practice. – NY Times
Ernest Hemingway “kicking the can down the road”
Bonds
Plunge in Junk-Bond ETFs: Canary in the Risk Coal Mine? – Barron’s
China
China’s government at last owns up to problems at its monster dam – Economist
How China could yet fail like Japan – Martin Wolf
Scepticism about the accounts of Chinese companies spreads – Economist
S&P lowers outlook on China property – FT
Unrest spreads among China’s migrant masses – FT
Commodities
Crude Oil Hits Four-Month Low – WSJ
Dennis Gartman: Gold Could Reach $1650 by Year’s End – CNBC
High-frequency trade sparks flash fires in commodities – Reuters
Will A Bailout Deal For Greece Spell Tougher Times For Gold? – Barron’s
Companies
Apple’s Product Pipeline (Video) – CNET
Capital One to Buy ING’s Online Bank for $9 Billion – NY Times
Honda tests fast-charging e-scooters in Spain – CNET
Currencies
Goldman: Get Out of Bullish Yuan Bet – WSJ
Economics
California employers drop 29,200 jobs in May – LA Times
Fragile Greek relief rally under threat – FT
Global economy menaced by return of living dead – FT
How to avoid our own lost decade – Larry Summers
IMF Cuts Growth Forecast for Global Economy – WSJ
Philly Fed: Worst Three Month Decline Ever – Bespoke
The US economy flirts with its stall speed – Gavyn Davis
US inflation rise ties Fed’s hands on further easing – FT
What Google Searches Can Tell Us About a Double Dip Recession – WSJ
Emerging Markets
Venezuela’s Chavez: Maintaining Power From a Distance – Stratfor
Equities
Apple (AAPL) Closes Below Its 200-DMA for the First Time in 551 Days – Bespoke
Europe
Cautious welcome for Merkel move – FT
Greek banks and the leaked options paper – FT, Brussels blog
Merkel’s Hard Line Annoys European Partners – Der Spiegel
Merkel Shifts on Greek Aid – WSJ
Markets
America’s Most-Shorted Stocks – WSJ
Are ETFs the New CDOs? – II
Echoes Of Lehman: World Awaits Another High-Stakes Weekend – WSJ
ETFs Most Favored by Hedge Funds – II
How Low Can the Market Go? – Barron’s
Oaktree Capital Files to Go Public – NYT DealBook
Managing Norway’s Sovereign Wealth (Video) – FT
Stocks’ Next Best Hope Are Corporate Earnings (Video) – MarketWatch
Why the big money isn’t always the smart money – MarketWatch
Monetary/Fiscal Policy
AARP Is Open to Cuts for Social Security Benefits – NY Times
Fed set to cut growth forecast during meeting –MarketWatch
Soft Patch 2 Is Main Influence on U.S. Rates: Caroline Baum – Bloomberg
Sovereign Debt
IMF: Debt-ridden eurozone countries ‘playing with fire’ – Telegraph
Sovereign Debt and the Five Stages of Grieving – Todd Harrison
Technology/Science
Does Addictive Internet Use Restructure the Brain? – Scientific American
Drunk enough yet? Check your breathalizer watch – CNET
Elder care goes high tech – LA Times
Scientists Turn Memories Off and On With Flip of Switch – Science Daily
Smartphone data usage up 89%, cost per MB down 46% in U.S., study says – LA Times
Ultra-Bright Burst of Light Marks the Death Throes of a Star Being Eaten Alive – PopSci
Video: Where’s Rory?
“Golf Boys” . . . Ben Crane, Bubba Watson, Rickie Fowler, & Hunter Mahan have formed the PGA’s exclusive boy band .
After gyrating much of the day, the S&P500 bounced off the the 200-day moving average (which also coincided with the December 2010 close) just like a page out of a technical analysis textbook. The bounce helped rescue Apple from some very ugly price action, which pierced its 200-day moving average for the first time since September 2008, x/ the flash crash, trading down to $318.33 before recouping most of its loss with a strong close.
If the “new economy” lead by Apple rolls over, the global markets are in for world of hurt. The tech sector is becoming impatient and in need of a new burst of innovation in order to get lathered up and spark a new rally. The upcoming earnings season will also be a key test to see if the strength of the corporate sector can chase away the flock swans currently weighing on the markets. The perception of “good micro/bad macro” is one of the reasons why markets aren’t down even more, in our opinion.
A test of a market in distress is the health of the first bounce. We’re going to give this one some room while keeping one hand firmly on the rip cord. The flock of high impact McSwans currently converging on risk markets is a scary proposition and those who should have sold or got short probably already have. Furthermore, the U.S. equity market does feel a bit, at least to us, sold out.
As the markets obsess over Greece, which has clearly priced a default, we’re more focused on the “blind side” as the Hang Seng and the Shanghai break support and continue in their death spiral. A fairly bumpy or hard landing in China is not priced, in our opinion, and if equity premiums continue to blow out in both of these markets, it would signal a higher probability that the negative case is going to be realized.
Markets price perception before reality and the trick is not only to determine the probability of the perception becoming reality, but also to assess if a potential state of reality is perceived and priced into the markets. Cheerleaders will always maintain the negatives are priced and have a stronger case for their argument if there is only one major issue weighing on the market.
But the current environment is much more difficult to navigate, where a flock of macro swans — including European Debt, China hard landing, the QE2 endgame, Japan supply chain issues, global economic slowdown, natural disasters, and commodity price inflation — are batting the market around like a piñata. This, therefore, warrants more caution and greater risk mitigation.
Anyone who maintains with certainty where we’re headed should be willing to lend you their yacht for a nice Caribbean vacation/cruise. And don’t those doom and gloom talking heads sound like annoying fax machines? We have to shut them off even if they may have some valid points. Stay tuned and remember the 11th Commandment: those who remain flexible shall not be broke(n).
Governor Jerry Brown just vetoed California’s budget, which was put together in haste last night so legislators would still receive their pay. A ballot measure passed by voters last year meant that if lawmakers didn’t meet Wednesday’s deadline, their salaries would be suspended until a budget was passed.
This was only the second time in 25 years that California legislators met the legal deadline for passing a budget. Private incentives work in the public sector? You’re kidding! The budget also included a controversial online sales tax. Are you listening Jeff Bezos?
The table below illustrates that the 2011 “Sell in May and Go Away” trade has generated the highest return of the past 35 years. That is, if you sold or shorted the S&P500 at the close of the last trading day of April, you’d be sitting on a 7.2 percent return as of today’s close (June 15). Note also the S&P500 has traded lower 19 of the 32 trading days during this period.
Lots of records, near records, and streaks this year. Makes you kind of think we’re in the midst of some sort of market climate change, no?
George Soros was on the tape warning China is losing its grip on inflation. Bloomberg reports,
China has missed its opportunity to stem inflation and may now risk a hard landing, billionaire investor George Soros said.
The world’s second-largest economy is in a “bit of a bubble,” Soros, 80, said today at a conference in Oslo. There are some signs that China is “losing control,” he said.
China today ordered lenders to set aside more cash as reserves after inflation last month accelerated at the fastest pace in almost three years. Consumer prices rose an annual 5.5 percent in May, even after the central bank raised interest rates four times since September. Inflation has exceeded the government’s 4 percent target every month this year.
China’s formula for steering its economy is “running out of steam,” Soros said, adding the country is seeing the beginnings of wage-price inflation.
The recent pressure on commodities has more to do with China than today’s worries on Greece, which is causing the Euro to implode, in our opinion. Today’s dollar strength has caused a flash crash in crude oil as specs blow out their positions. Be sure to keep the Hang Seng and Shanghai support levels on your radar.
The markets were finally able to generate the bounce that everyone was waiting for, but on relatively low volume, however. Most of the move took place overnight on the release of China’s economic data. Apple had a nice move, up 1.79 percent, but also on low volume.
In fact, the table below shows that in 2011 Apple has had 10 daily moves greater than 1.75 percent with an average volume on those moves of 17.5 million shares. Today’s move was on the lowest volume for a 1.75 percent or greater move in the three calendar years we analyzed. Similarly, the S&P500 ETF (SPY) was up 1.27 percent on about 60 percent of volume of big day moves in 2010.
Nevertheless, it’s a start and the shorts, who really never had a chance to cover today, are licking their wounds. We now need to see some follow through with decent volume to bust out of the short-term downtrend. We’re not so sure this is a risk-on moment, but remain flexible. A clear high volume test and bounce off the 200-day moving averages will give us more confidence. Stay tuned.
