Interdum stultus opportuna loquitur...

Monday, September 20, 2004

Rotation Before Tailspin

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Federal Reserve Open Market Operations

The Fed's OMO desk performed an $8.5billion, overnight repurchase with $6.698billion in Treasury-backed collateral. Since that easily passes the $5billion T-backed hurdle that is near-certain to provide a "Midnight Moonshot", it paid to be long at midnight. At midnight the S&P futures were at 1021.75; by 12:46 a.m. they had just hit 1027.75; money for jam for anybody who can be bothered to watch a newswire.

Economic Statistics

There was no economic number of consequence released last night - most eyes are waiting tomorrow to see if the Federal Reserve's Federal Open Markets Committee will again raise interest rates.

I don't care either way - the US has problems far deeper than those for which monetary policy can help. But since Yanks run to messianic fervour pretty easily, the Anointed One (Greenstain) will be heeded when he runs his failed yapper tomorrow night.

If the guy was so smart, Townsend Greenspan would not have failed so dismally. Today I will try and dig up my favourite chart, which has Greenspan pick the top and bottom of a market over a period of nearly 20 years... and be on the wrong side of the market both times.

Besides, if central banks could genuinely manage the economy, Argentina would still be #2 in the world in per capita income (that's where it was at the turn of the 20th century), and Japan would not have endured a 14-year soft depression. And of course if central banking actually worked, France would be the world power, since John Law's banking scheme was the first genuine hyperinflation (and the first monetary system which loosed a nation's money from any tangible mooring).

It's funny how the Masses can be sold such crap - from shampoo (dishwashing liquid plus perfume), to central banking and democracy. So long as the masses are simply told, over and over and over, that the crap on offer will make them better off. Note - there is no need for them to actually become better off; they will still eat dog food when they end their days on the pension... and will even shed tears of reminiscence for the wars in which the youth of their generation died.

Pile upon pile of useless shit running in torrents through our history, and it is left to a miniscule proportion of the population to make sure that the barbarians don't keep their hands on the keys for too long at once.

The folks trying to keep it together are people you've never heard of, and never will... call them The Good Guys and sleep easier knowing they're there. They've been saving the masses' asses since Isaiah's day - and have never asked for thanks or recognition (nor would they ever take out a "public awareness' campaign... that is what the Bad Guys do).

They (the Good Guys) helped undermine the hegemony that had forced humanity (the European bit, anyway) into its Dark Ages, and even made chums with Islam in the 11th century: the fruits of that cultural exchange were the Renaissance and the Enlightenment... but more on that later.

Market Indices

Apart from the Repo Pump, it was a mildly dispiriting session for the bulls.

The stupid, politically-driven decision of some politician in the US to set the Department of Justice against Big Tobacco, sent a shiver down the spine of stocks like Philip Morris (I will not use the name "Altria" because it is too stupid) and RJ Reynolds. Philip Morris is in the Dow.

Sure, tobacco companies lied to consumers; it's called advertising. I have no doubt that they knew that their product caused premature death and lingering illness - after all, I knew that when I was 12.

If they look deep into their teensy little nicotine-addict brains, all cigarette users knew that too; even kids whose parents smoked, tried to stop their kids from doing so. And the kids (grown up now) still thought that it would be "cool" to smoke - and now claim that theiy believed the advertising more than they believed anyone else. PLEASE.

I have never used cigarettes, and I hate the habit; I don't even like being called a "non-smoker" because that implies that "smoker" is an attribute, when it isn't. I hate that people who use cigarettes have absolutely no regard for others - dropping their refuse wherever they feel like, and making everybody around them stink.

However I object more strongly to the Nanny State attacking legitimate business just so that some dickwad who got hooked as a teenager - and is now dying a slow and painful death - can be absolved of the healthcare consequences of his idiocy. If cigarettes are so bad, make people use cigarettes only in their own homes, and forbid the addicts from the public health system (particularly near the end of their lives, when the healthcare resources they consume are particularly expensive).

Easy peasy; liberty will reign, and idiots will still tend to have shorter lives, which is as it should be.

Some brokerage upgraded semiconductors - which is actually funny-sad in a way that Hollywood producers would love to replicate. Pavlov's Dogs slavered away when the bell rang, and the semiconductor index actually made it through 400 briefly (it will be below 300 fairly shortly, so don't get too excited).

After the Repo Pump, it was floppity-flop and choppity-chop, with a downward bias in everything except technology stocks. Mark Holden is a washed up clot (I just thought I would mention that).

The DJIA lost 79.57 points (0.77%), closing out the day at 10204.89 points; the broader S&P500 lost 6.35 points (0.56%), finishing the session at 1122.2.

Over at Times Square, the Nasdaq Composite lost 2.02 points (0.11%), to close at 1908.07, while the larger-cap Nasdaq100 shed 1.58 points (0.11%), to end at 1424.72 points.

The broader stock market fell: NYSE Composite Index lost 38.1 points (0.58%), closing at 6565.9, while the broadest measure of US equities, the Wilshire 5000, dropped 56.51 points (0.51%) to close at 10937.09

NYSE Volume was about average, with 1.2 billion shares traded for the session. The same is true for Nasdaq Volume, with 1.57 billion shares changing hands.

Nasdaq Composite1908.07-2.02-0.11%
NYSE Composite6565.9-38.1-0.58%
Wilshire 500010937.09-56.51-0.51%
NYSE Volume1.2bn--
Nasdaq Volume1.57bn--
US 30-yr yld4.87%-0.05%-1.06%

Market Breadth & Internals

On the NYSE declining Issues outpaced advancers by 1950 to 1329, for a single-day A/D reading of -621; Nasdaq losers outpaced gainers by 1798 to 1278.

On the NYSE declining volume was higher than volume in advancing issues by 719.29 to 464.93 million shares; On the Nasdaq declining volume outpaced volume in advancing issues by 408.69 to 394.63 million shares. Both the advance-decline and advance-decline volume numebrs for the Nasdaq show that the apparent relative strength in tech stocks, is nothing but a distribution.

111 NYSE-listed stocks rose to new 52-week highs, and 19 posted fresh 52-week lows, while on the Nasdaq there were 71 stocks that hit new 52-week highs, and 34 which fell to fresh 52-week lows

Advancing Volume (m)464.93394.63
Declining Volume (m)719.29408.69
New Highs11171
New Lows1934

Market Sentiment

The VIX continues to languish at levels which are indicative of very ebullient sentiment - although the pickup in put buying is a concern for contrarians (like me).

The Equity Put-Call Ratio rose to 0.87, which means that lots of people are buying puts - that in turn indicates that the market could easily squeeze higher in the short term. I wonder how much of the put buying is genuinely smart money (i.e., hedging activity by large portfolio holders) and how much is dumb speculator money? It's impossible to guess at the moment - after all last Friday was expiration, so there might be a "blip" in the put-call numbers. There were a few large lots bought/sold in the options market last night, but I haven't really examined the numbers because the Put-call ratio is not in an "interesting" zone from a sentiment perspective.

One ratio which is often referred to be some folks whose work I respect, is the ratio between the VIX and the S&P500. At present that ratio sits at 77.7 (it was above 80 on Friday) and readings of 80 or higher are actually precursors of declines of up to 20% in the S&P.

As an econometrician I have my doubts about the ratio of a non-stationary quantity and a stationary one. The S&P index should be I(1) at least, and possibly even I(2) due to both inflation and earnings growth. Volatility should be I(0) theoretically, although there is some evidence (curve-fitting bullshit, mostly) that claims that it's I(1) but with a constant mean... i.e., it's like a random-ish walk. As such the ratio S&P/VIX is probably "fractionally integrated" which makes sensible econometric inference very difficult indeed.

Still, who cares? It corresponds nicely to my Bayesian Informed Prior (that we are seeing the beginning of a synchronous market decline) so let's just leave it at that. And let's keep using Informed Prior when I actually mean "prejudice".

(I don't really think I carry a prejudice about the markets - I try not to ignore facts that support the bullish case. I'm not an idiot perma-bear: in a few years I will be bullish again and every now and then it's easy to spot a rally... search for Bounce Targets in the CNBC SquawkBox forum).

Equity Call Volume2.19m0.29m15.1%
Equity Put Volume1.91m0.54m39.02%
CBOE Volatility Index14.430.42.85%
CBOE Nasdaq Volatility Index20.560.432.14%


Bonds rose at the long end, with the benchmark US 30-yr yld shedding 0.052 points to 4.865%. I am in a bit of mental disarray about the bond market; the economic underpinnings of the US credit market are absolutely shot, which means that monetary policy has to be more accommodative than we might expect. However the US budgetary position is so dire - with no return to fiscal sense on the horizon - that there is a genuine risk of US government default in our lifetimes. (I know... "it can't happen to the US"... but Argentina had the best economy in the world in 1901 and we all know how that has gone).

It's funny when you can't feel comfortable being long the US bond because of the unattractive medium term supply fundamentals, but you don't feel comfortable shorting them either because of the poor economic fundamentals of the US. Usually the short side will win in that battle, because central bankers will try and protect the currency... because they are idiots.

UST 2Y (yld)2.416-0.06-2.34%
UST 5Y (yld)3.262-0.063-1.89%
UST 10Y (yld)4.056-0.05-1.27%
UST 30Y (yld)4.866-0.04-0.82%
The Banks Index lost 1.28 points (1.28%), finishing the session at 98.49; within the index,
  • the Derivative King - JPMorganChase lost $0.27 (0.68%) to close at $39.38; and
  • Citigroup lost $1.55 (3.3%) to close at $45.40

The Broker-dealer Index lost 1.22 points (0.96%), finishing the session at 126.32; the ticket clippers lined up as follows -

  • Merrill Lynch lost $0.35 (0.68%) to $51.10
  • Morgan Stanley Dean Witter lost $0.49 (0.95%) to close at $50.96
  • Goldman Sachs lost $0.37 (0.4%) ending at $91.68
  • Lehman Brothers lost $0.36 (0.47%) closing at $76.02

The Philadelphia SOX (Semiconductor) index gained 11.4 points (2.93%), finishing the session at 399.9

  • Triquint gained $0.05 (1.27%) to $3.99
  • Micron Technology lost $0.03 (0.24%) ending at $12.73
  • Intel gained $0.33 (1.6%) closing at $20.92
  • Altera gained $0.59 (2.97%) to finish at $20.47
  • JDS Uniphase lost $0.02 (0.57%) to $3.47

Gold & Silver

Gold weakened by $0.80 (0.2%) an ounce to $405.20 an ounce. The Gold Bugs Index added 1.2 points (0.59%), closing at 206.17 points. Silver fell by $0.01 to close at $6.26 per ounce. The Gold and Silver Index (XAU) gained 0.82 points (0.89%), finishing the session at 93.13.

PHLX Gold and Silver Index93.130.820.89%
AMEX Gold BUGS Index206.171.20.59%


Perhaps that nincompoop who called for oil to fall 30% must have been expecting it to do so from the mid-$50's level. Admittedly there is a bit of Hurricane Premium in the short-term price, but YUKOS isn't helping either (they suspended some shipments to China recently).

Oil ended firmer, rising by $0.67 per barrel, closing at $46.29 per barrel. The Oil and Gas Index (XOI) gained 2.41 points (0.36%), closing at 675.85 while the Oil service stocks (OSX) Index lost 0.62 points (0.53%) to close at 116.6

Reuters CRB275-0.75-0.27%
Crude Oil Light Sweet46.290.671.47%
AMEX Oil Index675.852.410.36%
Oil Service Index116.6-0.62-0.53%


The Australian dollar stuck its head above the US0.7000 mark and actually managed to hold that leve lat the close. I am reminded of a conversation I had with a young Colin Capon about the Aussie when it was hovering at the 0.5000 level - basically I thought you could just buy it with as wide a stop as you could afford (I didn't though, preferring to get my USS-short position through the euro).

US Dollar Index89.170.060.07%
Australian Dollar0.700900.46%
Swiss Franc1.2710.00360.28%

European Indices

France's benchmark CAC-40 Index lost 22.53 points (0.6%), finishing the session at 3703.69; the German DAX-30 Index lost 10.39 points (0.26%), closing at 3977.68; and the FTSE-100 Index lost 11.5 points (0.25%), ending the session at 4579.5.