Interdum stultus opportuna loquitur...

Friday, July 22, 2005

USRant: It's China, Not (Non-)Bombs...

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Remember the old Peter Allen song? "Don't wish too hard for what you're wantin': then you might get it. And then when you get it, you might just wish you never got it at all." Well, I'm betting that over the next little while the US government wishes it had kept its idiot trap shut about the Chinese currency peg.

It seems that the 'Ginesi" have decided to rebase their peg - diversifying it to a basket of currencies. Because of the trade-weighted nature of the basket, that still gives it a large USD weight - but think a bit harder.

The way a government keeps an external ForEx peg, is by intervening in ForEx markets and selling their currency against the target (e.g. the USD up until now). That means - in the case of China - that they have been big buyers of USD.

What did they then do with the accumulating USD reserves? They reinvested them - primarily in the US Treasury market.

So what happens with a Chinese re-weighting on the target basket? Less institutional/government support for the USD in ForEx markets, and less foreign-government purchase activity in the US Treasury market. And let me tell you yet another thing for free: that ain't good. the 'Carribbean Financial Centres' that the US government uses to 'offshore' their currency and bond market interventions can not bear the additional burden. Particularly not when every hedge fund that is long USD will be unwinding their long positions in both USD and T-bonds, starting yesterday if possible.

All that was required to screw the US bond and USD markets was a slowing of the rate of growth of Chinese (and other-Asian) purchases; an outright decline in that source of demand will cripple the markets. See what the Yen has done in the past couple of days against the USD? That's because nobody in their right mind thinks that the Japanese will step up and replace China - if anything, they will reassess their own currency intervention (and USD-recycling) policies.

Federal Reserve Open Market Operations

The Fed's Open Market Operations desk performed 2 repurchase operations.

  • a $13.5billion, overnight repurchase with $13billion in T-backed collateral undertaken at a 2.2 basis point discount to the Fed Funds Rate (FFR); and
  • a $6billion, 14-day repurchase entirely in T-backed collateral, undertaken at a 2.2 basis point discount to the FFR.

Major US Indices

The Dow Jones Industrial Average slid 61.38 points (0.57%), closing out the day at 10627.77 points. Blame the London non-bombings if you like, but I think it's the Yuan rebasing.

The index hit an intraday high of 10700.06 (10700-ish... very 'ish') at almost precisely 1 p.m. after falling to a low at 10608.43 (10600-ish) at just after 10:30 a.m.; another intraday rally of almost 100 points - but unlike yesterday this one was followed by a decline of 75 points.

Actually it's not really fair to say that yesterday's afternoon moonshot wasn't followed by a decline; it didn't happen in the same session, to be sure, but it was flagged by my favourite chart technique (overbought %R coupled with a CCI divergence). Check out the chart itself (for the Dow) - sorry that the time axis sucks:

Dow 15-minute chart

Notice several things: the CCI registered a massive oversold reading yesterday morning (below -350) but then improved as the Dow made a new session low and as the %R hit oversold. The extreme oversold itself was justification enough for long positions (it's an uptrend), but if that wasn't strong enough the oversold/divergence combination was a must... and it tagged yesterday's low to within ten Dow points (the leftmost green balloon on the CCI).

From there, the CCI rose as the Dow rose, until the CCI itself hit my 'excessively stringent' overbought benchmark (above 200) ... the first red balloon on the CCI line); then, as the Dow continued to rise the CCI again diverged - giving a short signal in the last ten minutes of the session that held until another strongly-oversold (<-200) CCI reading this morning. This tagged the Dow high to within ten points.

This morning there was no divergence - just a strongly oversold CCI. At -229 it was solid enough to provide justification for a long position, particularly as it came after an opening over-reaction to the latest booga-booga in London.

Then an annoying thing happened: neither the %R nor the CCI gave any indication that the Dow was going to reverse from 10700. Nobody claimed that the overbought/divergence approach was perfect; you needed to be watching intraday breadth as well (and I can't be bothered going into that here) ...

Within the blue-chip index, 6 stocks rose, the biggest gainers being Coca Cola (KO, +1.43% to $43.95) and Microsoft (MSFT, +0.95% to $26.44), which accounted for 7 Dow points between them. Losers in the Dow numbered 24 and were led by Exxon Mobil (XOM, -1.88% to $57.89) and Hewlett Packard (HPQ, -1.78% to $24.29), with these two stocks contributing -12 Dow points worth of downward pressure on the index. Volume traded was tilted in favour of the losers by 283m shares to 152.9m.

The broader S&P500 shed 8.16 points (0.66%), closing at 1227.04. Within the index, gainers numbered 79, while 412 S&P500 stocks fell for the day. Volume was tilted 2.3:1 in favour of the losers with 1454.05 million units traded in the losers as compared with 624.08 million traded in the winners .

Over at Times Square, the Nasdaq Composite dipped 9.97 points (0.46%), to close at 2178.6, while larger-cap technology issues fared better with the Nasdaq100 losing 0.86 points (0.05%), to end at 1601.89 points. Within the tech benchmark, gainers numbered 16, while 83 Nasdaq100 stocks fell for the day. Volume was tilted 1.3:1 in favour of the losers with 582.62 million traded in the losers compared to 435.12 million in the winners .

NYSE Volume was super-chunky, with 2.13 billion shares changing hands, while Nasdaq Volume was also super-chunky (over 2 bill), with 2.08 billion shares traded.

Major Market Statistics
Dow Jones Industrial Average10627.77-61.38-0.57%
Nasdaq Composite2178.6-9.97-0.46%
NYSE Volume2.13bn--
Nasdaq Volume2.08bn--


My 9-stock "bellwethers" group rose by an average of 1.22% - that number was biased massively due to eBay's 20%+ pop. That is going to really hurt some of these idiots who buy 'news'.It's a screaming short, but maybe buying one-level-down August puts is the best go for now. The August $40's (code: XBATH) closed at $65 ask; they ought  to open weaker tomorrow... should be like taking candy from a drooling idiot.

  • General Electric (GE) -$0.30 (0.85%) to $35.00;
  • Citigroup (C) -$0.06 (0.14%) to $44.15;
  • Wal Mart (WMT) -$0.61 (1.22%) to $49.39;
  • I.B.M. (IBM) -$0.20 (0.24%) to $84.40;
  • Intel (INTC) -$0.41 (1.49%) to $27.03;
  • Cisco Systems (CSCO) -$0.56 (2.78%) to $19.56;
  • eBay (EBAY) +$7.23 (20.73%) to $42.10;
  • Fannie Mae (FNM) -$0.74 (1.25%) to $58.52; and
  • Freddie Mac (FRE) -$1.20 (1.8%) to $65.53.

Market Breadth & Internals

NYSE declining Issues beat out advancers by 2248 to 1035, for a single-day A/D reading of -1213; and Nasdaq losers exceeded gainers by 1905 to 1123. The 10-day moving average of the A/D line fell to 182.0 on the NYSE, while the 10dma of the Nasdaq A/D fell to 133.3.

On the NYSE declining volume was greater than volume in advancing issues by 1590.7 to 499.9 million shares; On the Nasdaq declining volume exceeded volume in advancing issues by 1109.2 to 951 million shares.

246 NYSE-listed stocks rose to new 52-week highs, and 21 posted fresh 52-week lows, while on the Nasdaq there were 159 stocks that hit new 52-week highs, and 13 which fell to fresh 52-week lows.

After popping up to above the entry price, those blasted VIX futures we're dabbling in reversed and set another new low - leaving the position almost $300 underwater at present. It doesn't matter too much, to be frank; even if the contango (the spread between the 'cash' VIX and the rebased futures) evaporates completely, the odds of a VIX spike in the coming month is very high indeed.

Market Breadth Statistics

Advancing Volume (m)499.93951.03
Declining Volume (m)1590.671109.21
New Highs246159
New Lows2113

Market Sentiment Statistics
CBOE Volatility Index10.970.747.23%
CBOE Nasdaq Volatility Index13.470.584.5%
Equity Put-Call Ratio0.700%
10-day PCR0.5300%
SPX-VIX Ratio111.9-8.89-7.36%

Bond Market Analysis

Bonds fell at the long end, with the yield on the benchmark 30-year Treasury bond rising 10.6 bps to 4.498%. The  30-year bond future fell as low as 114-29/32 before settling at 115-5/32. You might recall that I am still moaning about how those London bombs 2 weeks ago stopped out my beautiful "short-the-bonds-above-119 call" (stopped out at a profit, I hasten to add), but I've reiterated a dozen times since, that selling overbought bounces continues to be the go in the 30-year.

The weakness is being exacerbated now by the move by the Chinese to rebased the Yuan on a trade-weighted basket of currencies. I can't believe that the US administration is so stupid that it didn't realise beforehand, what a Chinese revaluation would mean for the USD. If they think it will improve their bilateral trade balance, they are kidding themselves - where are the import-substitutes going to come from, given that the US has no manufacturing base left?

And of course if China ceases amassing vast quantities of USD (which it had to do in order to hold the USD-Yuan peg), there is no source of inflows into US Treasuries (which is where most of the offshore USD-accumulation is recycled). Yet again - where is the US government getting its financial advice? From the same dickheads who give foreign policy advice, it seems.

The middle of the yield curve was broadly lower: five year yields rose to 4.082%, and ten-year yields rose to 4.282%.

Spreads between short-dated (2-yr) Treasuries and high-grade corporate bonds of similar maturity profiles were 396.0 bps tighter at -17.0 basis points; spreads between longer dated Treasuries and their corporate AAA counterparts fell to 24.0 bps for 10-year AAA, and 68.0 bps for 20-years. Expect these spreads to explode when the bureaucrats finally cotton on to what the Yuan realignment means...

Credit spreads (spreads between corporate bonds of the same maturity profile but different creditworthiness) were mixed with the AAA-A spread on 20-years unchanged at 37.0 basis points and the 10-year AAA-A spread unchanged at 17.0 bps. I'm concerned about my data for these spreads - they have not moved for three days.

Treasury Yields
UST 13wk (yld)3.26800%
UST 2Y (yld)3.960.061.54%
UST 5Y (yld)4.0820.0982.46%
UST 10Y (yld)4.2820.1052.51%
UST 30Y (yld)4.4980.1062.41%

The Banks Index shed 0.35 points (0.35%), to 100.89; within the index,

  • North Fork Bancorp (NFB) -$0.83 (2.88%) to $28.00;
  • Golden West Financial (GDW) -$1.70 (2.48%) to $66.90;
  • M&T Bank Corp (MTB) -$1.85 (1.65%) to $110.43;
  • PNC Financial Services (PNC) -$0.91 (1.61%) to $55.46; and
  • BB&T Corp (BBT) -$0.48 (1.12%) to $42.43.

The Broker-dealer Index lost 1.65 points (0.96%), to 170.84; the ticket clippers lined up as follows -

  • Bear Stearns (BSC) -$2.47 (2.32%) to $103.87;
  • Legg Mason (LM) -$2.23 (1.93%) to $113.34;
  • Lehman Brothers (LEH) -$1.97 (1.84%) to $105.13;
  • A G Edwards (AGE) -$0.67 (1.44%) to $45.83; and
  • Raymond James (RJF) -$0.41 (1.35%) to $29.89.

The Philadelphia SOX (Semiconductor) index slid 7.79 points (1.63%), at 468.94

  • Xilinx (XLNX) -$1.10 (3.91%) to $27.00;
  • National Semiconductors (NSM) -$0.75 (3%) to $24.25;
  • Broadcom (BRCM) -$1.13 (2.84%) to $38.61;
  • ST Microelectronic (STM) -$0.48 (2.62%) to $17.81; and
  • Maxim Integrated (MXIM) -$0.97 (2.25%) to $42.09.

Gold & Silver Markets

Gold rose $2.30 (0.54%) to close at $425.70 per ounce; the Chinese realignment is the news here, as it is in the forex market.

Gold Bugs Index posted a rise of 5.18 points (2.64%), to 201.28

  • Meridian Gold (MDG) +$1.16 (6.76%) to $18.32;
  • Eldorado Gold (EGO) +$0.16 (6.15%) to $2.76;
  • Glamis Gold (GLG) +$1.00 (6.1%) to $17.39;
  • Golden Star (GSS) +$0.11 (3.67%) to $3.11; and
  • Kinross Gold (KGC) +$0.20 (3.29%) to $6.28.

Silver rose $0.15 (2.16%) to close at $7.11 per ounce. The Gold and Silver Index (XAU) gained 2.08 points (2.29%), to end the session at 93.03 points.

  • Meridian Gold (MDG) +$1.16 (6.76%) to $18.32;
  • Kinross Gold (KGC) +$0.20 (3.29%) to $6.28;
  • Placer Dome (PDG) +$0.47 (3.16%) to $15.33; and
  • Harmony Gold (HMY) +$0.23 (2.81%) to $8.42.
Precious Metals and Indices
PHLX Gold and Silver Index93.032.082.29%
AMEX Gold BUGS Index201.285.182.64%

Oil Market

Oil was firmer, rising by $0.41 per barrel, closing at $57.13 per barrel. The Oil and Gas Index (XOI) declined 9.38 points (1.01%), to end the session at 915.79

  • TotalFinaElf S.A. (TOT) -$2.86 (2.29%) to $122.29;
  • Sunoco (SUN) -$2.38 (1.97%) to $118.27; and
  • Exxon Mobil (XOM) -$1.11 (1.88%) to $57.89.

The Oil service stocks (OSX) Index dipped 0.3 points (0.2%), ending the day at 151.52

  • Nabors Industries (NBR) -$1.18 (1.87%) to $62.00;
  • Transocean (RIG) -$1.02 (1.81%) to $55.32; and
  • Global Industries (GLBL) -$0.16 (1.68%) to $9.34.
Energy Complex
Reuters CRB306.2-0.81-0.26%
Crude Oil Light Sweet57.130.410.72%
Heating Oil1.5725-0.03-1.69%
Natural Gas7.295-0.27-3.51%
Unleaded Gas1.6740-0.24%
AMEX Oil Index915.79-9.38-1.01%
Oil Service Index151.52-0.3-0.2%

Currency Markets

USD Exchange Rates
US Dollar Index88.87-0.56-0.63%
Australian Dollar0.76560.01021.35%
Swiss Franc1.2852-0.0022-0.17%
Canadian Dollar0.82110.00220.27%