Interdum stultus opportuna loquitur...

Tuesday, October 19, 2004

But Wasn't the News All GOOD?

Note - from June 24th 2009, this blog has migrated from Blogger to a self-hosted version. Click here to go straight there.

For those of you who don't already, take a look at Fred Reed's rants. They are fantastic - he has been around longer than me, and is a damned sight more cynical. ( His observations about the US education system can be applied here (as someone who tried valiantly to teach 3rd year Econometrics students, I can vouch for their semi-literacy).

Federal Reserve Open Market Operations

The Fed's Open Market Operations desk did a weensie $2 billion in repurchases, with an overnight term, and with a scant $1.436 billion in Treasury-backed "fragrant grease".

Perhaps they were hoping that the blathering by the Mr Magoo of monetary policy (he was speaking to some mortgage-market types) would do the trick. Yet again we hear Greenspasm "protest too much" about how there is no bubble in the US mortgage/housing market. When the bubble bursts we will hear more crap about how nobody could possibly have seen it coming.

Economic Statistics

The Consumer Price Index was pretty much in line with exectations. As I mentioned yesterday, consensus for both the headline and core was 0.2%; the actual outcome for the headline was 0.2%, and for the Core CPI 0.3%.

Year-over-year the core CPI is up 2% and the headline CPI is up 2.7%. As Bill Gross (who is now in the GT "government statistics are straight out of Orwell" camp) points out, the CPI deliberately understates actual inflation by at least 1% per year.

Housing Starts were well below expectations of 1.95 million units, falling 6% to 1.898 million units. The explanation offered by the talking heads was foul weather, however that's a little unsatisfactory. In the Northeast, home starts fell 27% - but in the hurricane-ravaged South, starts fell only 1%... so the "foul weather" hypothesis leaves me a little cold.

The other element of the Housing Starts report is the number of permits applied for; that rose to 2.005 million units. Thanks to the bounce in the bond market, mortgage rates are still low, and the mortgage market is apparently alive and kicking - but it's in its death throes, and when Greenspan is proved wrong yet again on this bubble I will find whatever nursing home he is in and send him such a tetchy e-mail.

Major US Indices

Before the numbers, something to ponder.

I have rambled before about how many large U.S. companies are now glorified finance companies that make their money by selling CDO's (collateralised debt obligations - packaged-up accounts receivable).

A good example is GE, whose Capital division makes about 40% of GE's earnings), but Ford takes the cake. Last night it reported its earnings, and it showed that there is still no money in making actual cars: the earnings of its automotive division were abysmal, with a loss of $675 million before taxes; that loss rose more than 10% year-on-year. However Ford showed a profit for the year thanks to its credit arm, which made $734 million, a rise of 45% year on year.

So let's get this straight: Ford makes massive losses by selling cars, but massive profits by selling the debts associated with the sale of cars. Something don't add up, Virginia - and what it tells me is that the bond market is massively mis-pricing the riskiness of Ford Credit's products.

The same is true for GM, GE, Fannie & Freddie, CSCO, MSFT... all of the crowds who do so much "vendor financing" and then package the receivables and sell them - whereupon they are put into the portfolios of bond managers on faith in the "default insurance" that is used to up-rate the bonds to investment grade. A load of people who think they are being conservative by being only in high-grade bond portfolios do not realise that a lot of toxic waste disguised a bonds, is sitting in those portfolios waiting to bite them on the ass.

After an early attempt to rally on the IBM and Texas Instruments news (which enabled the Dow to poke its head above 10,000 for a few minutes arund midnight our time), the little "opening orgasm" was over with and it was time to go bye-byes. By the close, the DJIA slid 58.7 points (0.59%), closing out the day at 9897.62 points (as near to its low of the day as makes no odds).

The broader S&P500 declined 10.79 points (0.97%), to end the session at 1103.23.

Over at Times Square, the Nasdaq Composite slid 13.62 points (0.7%), to close at 1922.9, while larger-cap technology issues fared worse with the Nasdaq100 losing 13.51 points (0.93%), to end at 1443.8 points.

Interestingly, the Semiconductor (SOX) index was up about a percent for the day, and at one stage during the session it was up 2.9%... absolute insanity. it shows that hope is still running in the heated breast of the average tech punter (let's stop calling them investors, shall we - they're idiot punters, pure and simple).

The SOX jumped because Texas Instruments (TXN) posted a 27% jump in earnings (compared to a year ago) t0 32c a share, handily beating the consensus estimate of 27c a share. They also guided down for next quarter, but nobody bothered to read that. Along with IBM's earnings report, the tech sector had plenty of good news to run with, and yet only the tech-land Fools Paradise (SOX) managed a gain for the day.

NYSE Volume was pretty chunky, with 1.74 billion shares traded, while Nasdaq Volume was above average, with 1.7 billion shares changing hands.

Nasdaq Composite1922.9-13.62-0.7%
NYSE Volume1.74bn--
Nasdaq Volume1.7bn--
US 30-yr yld4.82%-0.02%-0.37%

Market Breadth & Internals

On the NYSE declining Issues beat out advancers by 2123 to 1160, for a single-day A/D reading of -963 (quite pessimistic, but not really a "bounce" level of pessimism). Nasdaq losers exceeded gainers by 1845 to 1233.

Declining volume dominated trade on the NYSE, with 1210.56 million shares traded in losing stocks versus 485.79 million shares in gainers; on the Nasdaq declining volume exceeded volume in advancing issues by 514.56 to 379.09 million shares.

102 NYSE-listed stocks rose to new 52-week highs, and 51 posted fresh 52-week lows, while on the Nasdaq there were 83 stocks that hit new 52-week highs, and 62 which fell to fresh 52-week lows

Advancing Volume (m)485.79379.09
Declining Volume (m)1210.56514.56
New Highs10283
New Lows5162

Market Sentiment

I really don't like the way put volume spiked last night - maybe options buyers are becoming smarter... nope...that's not even a thought worth finishing. Option buyers are - on average - still the morons they have always been (although that does not mean that every option buyer is a moron - that would be making the "general to particular" error that a lot of people make).

Still, with the SPX very close to 1100 support, and the sentiment indicators starting to show signs of pessimism, it may soon be time to stick a toe in the water on the call side - the market is not yet oversold on a daily basis, but it is very close.

The only thing that's a concern for a little dip on the buy side, is the lack of any pessimism in the semiconductors - they have been beaten silly recently, and yet the nuffnuffs still dive back into the piranha-infested waters every time a tech-company CEO says "We managed to massage our earnings enough to beat the lowered expectations".

Equity Call Volume2.72m0.31m12.69%
Equity Put Volume2.27m0.54m31.31%
CBOE Volatility Index15.130.422.86%
CBOE Nasdaq Volatility Index20.840.120.58%
Equity Put-Call Ratio0.840.1216.52%
SPX-VIX Ratio72.92-2.8133-3.71%


UST 2Y (yld)2.5240.020.84%
UST 5Y (yld)3.2990.0060.18%
UST 10Y (yld)4.032-0.01-0.22%
UST 30Y (yld)4.821-0.014-0.29%
The Banks Index declined 1.48 points (1.5%), at 97.15; within the index,
  • the Derivative King - JPMorganChase lost $1.02 (2.62%) to end the session at $37.98; and
  • Citigroup slid $0.63 (1.42%) to $43.59

The Broker-dealer Index posted a rise of 1.22 points (0.97%), to 127.35; the ticket clippers lined up as follows -

  • Merrill Lynch shed $0.20 (0.38%) at $52.02
  • Morgan Stanley Dean Witter dipped $0.62 (1.27%) to $48.22
  • Goldman Sachs shed $1.19 (1.26%) to end the session at $93.06
  • Lehman Brothers shed $1.54 (1.92%) to $78.64

The Philadelphia SOX (Semiconductor) index rose 3.94 points (1.03%), at 388.29

  • Triquint lost $0.01 (0.26%) closing at $3.87
  • Micron Technology rose $0.14 (1.23%) ending the day at $11.51
  • Intel gained $0.01 (0.05%) at $20.80
  • Altera posted a rise of $0.07 (0.36%) to end the session at $19.78
  • JDS Uniphase declined $0.06 (1.79%) at $3.30

And the aforementioned Texas Instruments? It rose 6.92% for the day, having at one stage been up as much as 8.7% (almost exactly mid-session). It sports a PE above 25 and has shown that its earnings are cyclical - and highly volatile: do not be impressed by EPS growth of 27% year-on-year, because last year's earnings were an absolute disaster, and there will be other years just like it. It's a highly competitive industry that relies on not being "gazumped" by a competitor: it's a poker chip in an industry that makes the modern-day equivalent of refrigerator motors.

Gold & Silver

Gold strengthened by $3.90 (0.93%) to $421.10 per ounce. The Gold Bugs Index gained 0.1 points (0.05%), to 221.46 points.

Silver rose $0.22 (3.15%) to close at $7.20 per ounce. The Gold and Silver Index (XAU) gained 0.56 points (0.57%), closing at 98.95 points.

PHLX Gold and Silver Index98.950.560.57%
AMEX Gold BUGS Index221.460.10.05%


Oil rose $0.05 per barrel, closing at $53.25 per barrel. The Oil and Gas Index (XOI) slid 0.52 points (0.08%), closing at 690.78.

The Oil service stocks (OSX) Index dipped 0.1 points (0.09%) to 117.44.

Reuters CRB2862.10.74%
Crude Oil Light Sweet53.250.050.09%
AMEX Oil Index690.78-0.52-0.08%
Oil Service Index117.44-0.1-0.09%


The US dollar looks pretty soft; so long as important participants continue to play along with the massaged CPI numbers, the US central bank can convince index-linked pensioners and others that inflation is "tame" and there's no need to tighten money more aggressively. That in turn will enable the mortgage bubble to spasm a few more times, and so long as China doesn't revalue the yuan (or launch a 'pre-emptive economic strike' by starting to dump US Treasury bonds) the machine can keep spinning for a few more quarters.

Personally, I doubt it; the US dollar index is looking particularly vulnerable at the moment, and downside targets involve numbers like 80 and below with a minimum downside target of 82. That would put the USD below 100 Yen, which would severely test the resolve of the BoJ to prop up the US external imbalances.

Once China and Japan start to get coy about recycling massive USD trade surpluses into the US bond market, all hell could easily break loose. It's never been clear to me why they keep doing so, when the coupon payments they receive are being eaten away by currency depreciation - unless they stop the currency from depreciating!!

It has long been my view that China is accumulating large USD claims as a strategic (geopolitical) device; it can basically prevent the US from taking any action over Formosa, by simply threatening to liquidiate large USD bond positions - whereupon the US could not afford to run a war.

Think back to the Matsushita imbroglio in the 80s, when Matsushita sold US avionics secrets (to the Russians, I think). The US threatened a trade embargo on Matsushita's products, and Japanese banks promptly sat on their hands at the next US bond rollover. Since the Japaneses didn't snap up their usual quota, other buyers sat on their hands as well, the bid-to-cover ratio fell sharply and the eventual effective interest rate rose 25 basis points in 24 hours.

And guess who eventually bought the bonds? The Japanese, but at significantly lower prices... they showed the US who is boss (answer: the creditor). And the US felt suddenly less disposed to embargo Matsushita.

That's ancient history now, but wait until China lets loose. Unipolar world my ass; China is a superpower, pure and simple, and just because 80% of yanks can't find it on a map doesn't mean it ain't there. (11% of US students couldn't find the United States on a map... I kid you not).

US Dollar Index86.95-0.2-0.23%
Australian Dollar0.72750.00260.36%
Swiss Franc1.2286-0.0024-0.19%

European Markets

I've said this before - there's about 1 day a month when European markets don't just play a stupid "follow the leader" game with the US. TXN and IBM were good, so the Krauts, Poms and Frogs all jumped. Stupid sods.

It's almost as if it's deliberate - they consistently get fooled by the "pop & drop" (a.k.a. "pump & dump"), and last night was no different.

France's benchmark CAC-40 Index gained 40.75 points (1.11%), to 3700.56; the German DAX-30 Index rose 48.96 points (1.25%), ending the day at 3964.13; and in the UK, the FTSE-100 Index gained 28.6 points (0.62%), closing at 4655.2..