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.
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