Weekly initial claims were slightly better than expected as they came in at 457K, but its still to high at this point of the economic recovery. This really should be below 400K, and the print that we saw this morning is a serious concern. What's worse is that initial claims have been stuck in neutral for the last 8 months or so and suggests continued economic weakness. I am sure that this figure will start to print near 500K in the future. Let me say this. This market is not pricing in claims above 500K. SP Futures rallied strongly after the claims figures came out printing all the way to 1112 in the pre-market. As soon as the market opened it looks like they are pairing back all of its gains as we are even for the day at 1102. Bond futures where the smart money resides are also higher as 10Y futures are up 14 ticks, pushing yields below 3% to 2.98%.
I have stated that yields are going lower as risk aversion will take hold going into the fall. Even with equities catching a risk bid, bond futures are stubbornly strong. In short, bonds are not falling for the global growth story. They are much more in love with the idea of much slower growth, deleveraging, and deflation. These three themes are kryptonite for equities. I expect both the 30Y and 10Y bond futures to hit new highs going into the fall. This will have a calamitous effect on the risk trade. Like I said earlier. When Bonds are rallying and the US Dollar is weak, you better run for the hills and out of equities. We have found out that the USD rally we saw starting in mid April was basically a weak Euro story. The USD was simply a less ugly currency than the Euro. The Euro and the USD are fundamentally weak currencies. Trichet and his ECB cohorts are not living in reality. They talk about austerity but somehow how been convinced that looming debt problems are easily taken care off by the printing press. Over on this side of the pond, it just seems to me that Geithner and Bernanke are hell bent on taking the country over the cliff at any cost. The Euro is fundamentally and structurally a weaker currency that the greenback, even though the USD has lost some 90% of its purchasing power since 1900.
Today was looking like a big day for equities. Claims figures were pumping futures higher ahead of the open, but I am thinking that the dual hydra of a weaker dollar and stronger bonds have taken a toll on risk. Its a big day but also a scary one because my view is crystal clear even though its at odds with conventional wisdom. I am putting myself on the edge. The Euro which has had a major run from 1.19 to 1.31, is about to get hit as continued funding problems in the inter market lending arena will make credit very scarce. I am sure we will see USD gains simply on the fact of Euro liquidation. There have been rumors that the Swiss National Bank has been selling Euro's. From this I see commodities like Crude and Copper to come under pressure, although I still like Crude because of geopolitical issues in North Korea and Iran.
I am looking for a medium turn reversal here in equities as well as credit going forward. During the last severe correction in the SPX towards 1010, we actually saw credit outperform equities. This emboldened the bulls to run up the SPX to 1121 this week. As I wrote yesterday, you have to respect credit and risk at the moment. Euribor and Euro Libor lending markets are getting no respect despite the Euro Stress Tests and equities are indiscriminately being bid up in Europe. This is simply lunatic behavior.
The major correction in this market I believe begins after labor day. There will be a return to dark times in September and October, with a sharp decline driven by liquidity and solvency issues likely to set the world back on a recessionary course. The widespread conviction that the 2008 recession is over and that the global growth story is back in gear is simply wrong. All the forecasts of the G-20 governments are completely off base, which means that the politicians are not prepared for another downturn. Can the US sustain another leg down? How about Europe? Do central bankers have enough bullets?
The financial underpinnings of the Euro zone do not look as though they can tolerate a recession in the coming year. The recent bogus Euro stress tests has shown that an economic decline would be disastrous for the banks. Even though the tests were easy to pass, only marking down the small fraction of sovereign debt held in the trading accounts, among other things, many of the banks still had low tier one capital ratios. If even one Euro zone government finds itself unable to roll over their debt, the whole system will come tumbling down. You have to be negative on the Euro based on this as there will be a structural restructuring of Euro Zone Debt across the board starting in 2011.
A recession in the US might imply a collapse in the municipal market as many states and lesser jurisdictions will find themselves forced into bankruptcy, but the banks and major corporations are more liquid in the US and therefore stronger, than their counterparts in Europe. Bad loan write-downs are a joke for both European and US Financial institutions, but US banks have at least admitted to bad loans. The recent stress tests in Europe highlight this.
The US will come out better than Europe when its all said and then. In either case, a severe downturn will hurt global economies. Deleveraging will be the primary theme going into 2011.
I shall leave you with a link about stock markets and astronomy/astrology.
http://seekingalpha.com/instablog/234091-hewitt-heiserman/61457-rare-cardinal-climax-planetary-alignment-this-summer-puts-stocks-at-risk-says-veteran-sky-watcher
The greatest trick the devil ever pulled was convincing the world he didn’t exist. Central Bankers like Bernanke and Trichet's trick is to convince us that the debt doesn't exist or worse doesn't matter.
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