Interdum stultus opportuna loquitur...

Tuesday, September 06, 2005

USRant: Let's Break MORE Windows...

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

It's a funny old world; there are corpses being eaten by rats in the streets of a major US city. The emergency response has been utterly abysmal, and has shown that the three-trillion dollar a year US government is utterly inadequate at performing any 'civil society' functions. The costs will be staggering... yet financial markets rise.

How come that?

Part of it is economic ignorance; the idea the reconstruction requirements constitute an increase in economic activity. That logical fallacy was rejected by Frederic Bastiat in his famous 1850 parable of the broken window - "That Which Is Seen, And That Which Is Not Seen". 

Disasters are a transfer of economic activity; they don't create net economic activity. In fact, a fortiori they reduce activity relative to what it otherwise would have been; resources are diverted from higher-value-added alternatives... but that sort of 'general equilibrium' thinking is too hard for those whose education stopped at a "two-asset" model.

In this case - as in Iraq - the transfer of economic activity will take a particularly noxious form - namely, the transfer of taxpayers' money to favoured construction corporations. I am sure that Halliburton will be the recipient of a fat no-bid contract for reconstruction work in the Big Easy. 

You can just hear Dick Cheney's heart saying "Dont' blame me - I've been trying to reject this parasitic slug for twenty years, but you arseholes keep resuscitating him." 

In short, the market response to Katrina has been as ludicrous as it was predictable - news-traders jump long on the oil 'breakout' and get slaughtered, news-traders jump short in equities and get slaughtered.

But back to the economic ignorance bit: it's the same idiotic theory that underlies Iraq - namely, that reconstruction work will be counted in Iraqi GDP and will therefore show up as a positive. That's because GDP accounting ignores the balance sheet; if the nation was a company there would be a line item in the P&L to reflect the destruction of assets (i.e., there would be an interaction between the income statement and the balance sheet). 

Since GDP accounting was set up by a politician in the first place, the balance sheet is completely ignored - there is no accounting for 'one time charges' (like having your water treatment plants bombed in the name of freedom, or having your country poisoned by depleted uranium... a genuine weapon of mass destruction).

So the massive damage - in terms of both human loss and damage to physical assets - is not measured as a cost in the GDP definition of income; same is true for the asset damage in Naowlins. Typical political accounting - only count the good stuff...

In the limiting case, those who are too ignorant to understand Bastiat's point will advocate turning the entire economy over to folks who break stuff rather than to folks who make stuff. First, measure activity with no regard for the balance-shet consequences, then advocate stuff that increases the income number at the expense of the balance sheet... all the while getting poorer by the day. If that paradigm worked, businesses would set their buildings and equipment on fire... ignore the asset destrcution in the P&L, and claim the insurance rebuilding as income.

The broken window fallacy helps explain why Empires fall over - without exception. The political class is too stupid to see that there are massive diseconomies of scale in pillage; each unit of resources extorted or taken by force, costs a little bit more that the previous one... the co-ordination difficulties of managing a far-flung military are "that which is not seen". 

Every additional Imperial endeavour actually impoverishes the Empire at a slightly faster rate, until all that's left are the slogans... and rats get to eat people in your streets because your Coke-addled Dear Leader is using taxpayers' funds for bombing foreign children instead of building domestic levees. The fact that he also appointed his crony's incompetent bumchums to be head of FEMA didn't help either.

Federal Reserve Open Market Operations

The Fed's Open Market Operations desk performed 1 repurchase operation - an $8billion, overnight repurchase with $4.294billion in T-backed collateral undertaken at a 0.2 basis point premium to the Fed Funds Rate (FFR). That's not the cause of the moonshot; today's little gambol was the joint result of 

  • it's a 'pseudo-Monday';
  • the technical setup was already favourable (deep oversold on Friday during a rebound from a daily divergence); and
  • the "Phew" effect post-Katrina (that's a 'relief' Phew, not a "can you smell the corpses' Phew).
With the propaganda arm of government (which under Bush, is pretty much the entire machine) in overdrive, and with da Boyz exploiting the dumbass news-traders in the oil market, there was also significant 'cross-market' news that gave equities even more momentum.

Major US Indices

To clarify what I said above about the daily-chart divergence, examine the chart below. Note that the second selling divergence - from early August - didn't hit overbought on the %R... but it had other characteristics (for example, it was a triple-top) and it was also simply a confirmation of the July 21st divergence anyhow.

Dow Daily Chart

The important thing to look at is the green arrow-set from mid-late August. Although I didn't mention it at the time, it was one of the 'ducks' that led me to believe that the oil market was set for a nuffie-massacre: the fact that oil and equities are now linked in the minds of the Mass 'Investor' means that potential turning points for equities are also potential turning points for the oil market - at least for the time being.

The Dow Jones Industrial Average rose 141.87 points (1.36%), closing out the day at 10589.24 points. The index hit an intraday high of 10593.06 (10600-ish), after opening at its low (10447.69 - 10450-ish). Friday's deep-oversold CCI at the close (see Friday's Rant for that... it's right there on the chart) was the usual 'heads up' for those who were prepared to have a crack without requiring a divergence: when you get a divergence telling you to change your bias on daily charts, shorter-term trades in the bias direction don't really need belt and braces.

Within the blue-chip index, 28 stocks rose, the biggest gainers being Home Depot (HD, +3.42% to $41.71) and American Express (AXP, +2.89% to $56.96), which accounted for 24 Dow points between them. The only two Dow losers were Hewlett Packard (HPQ, -1.27% to $27.25) and Microsoft (MSFT, -0.07% to $27.00), with these two stocks contributing -3 Dow points worth of downward pressure on the index. Volume traded was tilted in favour of the gainers by 292.5m shares to 63.6m.

The broader S&P500 posted a rise of 15.37 points (1.26%), ending the day at 1233.39. Within the index, gainers numbered 434, while 55 S&P500 stocks fell for the day. Volume was tilted 6.4:1 in favour of the winners with 1363.12 million units traded in the winners as compared with 211.63 million traded in the losers .

Over at Times Square, the Nasdaq Composite rose 25.79 points (1.2%), to close at 2166.86, while larger-cap technology issues fared better with the Nasdaq100 adding 24.15 points (1.54%), to end at 1597.27 points. Within the tech benchmark, gainers numbered 84, while 12 Nasdaq100 stocks fell for the day. Volume was tilted 6.1:1 in favour of the winners with 451.42 million traded in the winners compared to 73.92 million in the losers .

NYSE Volume was super-chunky, with 1.91 billion shares changing hands, while Nasdaq Volume was about average, with 1.4 billion shares traded.

Major Market Statistics
Dow Jones Industrial Average10589.24141.871.36%
Nasdaq Composite2166.8625.791.2%
NYSE Volume1.91bn--
Nasdaq Volume1.4bn--


My 9-stock "bellwethers" group rose by an average of 1.38%

  • General Electric (GE) +$0.61 (1.83%) to $33.94;
  • Citigroup (C) +$0.42 (0.96%) to $44.30;
  • Wal Mart (WMT) +$1.14 (2.56%) to $45.69;
  • I.B.M. (IBM) +$1.56 (1.96%) to $81.02;
  • Intel (INTC) +$0.42 (1.66%) to $25.70;
  • Cisco Systems (CSCO) +$0.48 (2.71%) to $18.20;
  • eBay (EBAY) +$0.48 (1.21%) to $40.17;
  • Fannie Mae (FNM) -$0.52 (1.05%) to $49.07; and
  • Freddie Mac (FRE) +$0.34 (0.59%) to $58.10.

Market Breadth & Internals

NYSE advancing Issues exceeded decliners by 2391 to 883 for a single-day A/D reading of 1508; Nasdaq gainers trumped losers by 2034 to 1032. The 10-day moving average of the A/D line rose to 446.1 on the NYSE, while the 10dma of the Nasdaq A/D rose to 117.5.

NYSE advancing volume exceeded volume in decliners by 1539.7 to 320.6 million shares; Nasdaq advancing volume was greater than volume in decliners by 1096.7 to 291.7 million shares.

241 NYSE-listed stocks rose to new 52-week highs, and 22 posted fresh 52-week lows, while on the Nasdaq there were 106 stocks that hit new 52-week highs, and 40 which fell to fresh 52-week lows.

Market Breadth Statistics

Advancing Volume (m)1539.711096.68
Declining Volume (m)320.59291.7
New Highs241106
New Lows2240

Market Sentiment Statistics
CBOE Volatility Index12.93-0.64-4.72%
CBOE Nasdaq Volatility Index15.04-0.63-4.02%
Equity Put-Call Ratio0.68-0.23-25.27%
10-day PCR0.6300%
SPX-VIX Ratio95.45.636.27%

Bond Market Analysis

Bonds got smacked pretty hard at the long end, with the yield on the benchmark 30-year Treasury bond rising 6.2 bps to 4.354%. The 30-year bond future fell 19/32 to close at 117-4/32; I would have preferred for the bond to have climbed a little higher into the 118s last week - might've missed a good short entry (but those who read this regularly will at least have been looking for shorts at the right time, even if I didn't advocate one explicitly).

The middle of the yield curve was broadly lower in price: five year yields rose to 3.889%, and ten-year yields rose to 4.085%.

Spreads between short-dated (2-yr) Treasuries and high-grade corporate bonds of similar maturity profiles were 12.0 bps tighter at -5.0 basis points; spreads between longer dated Treasuries and their corporate AAA counterparts fell to 52.0 bps for 10-year AAA, and 89.0 bps for 20-years.

Credit spreads (spreads between corporate bonds of the same maturity profile but different creditworthiness) were mixed with the AAA-A spread on 20-years 25.0 bps tighter at 43.0 basis points and the 10-year AAA-A spread 1.0 bps wider at10.0 bps.

Treasury Yields
UST 13wk (yld)3.4100%
UST 2Y (yld)3.770.041.07%
UST 5Y (yld)3.8890.051.3%
UST 10Y (yld)4.0850.0561.39%
UST 30Y (yld)4.3540.0621.44%

The Banks Index advanced 0.97 points (0.99%), ending the day at 99.36; within the index,

  • Mellon Financial (MEL) +$0.58 (1.79%) to $33.03;
  • Northern Trust (NTRS) +$0.85 (1.69%) to $51.03;
  • National City Corp (NCC) +$0.59 (1.63%) to $36.81;
  • Wells Fargo (WFC) +$0.95 (1.6%) to $60.24; and
  • State Street (STT) +$0.78 (1.59%) to $49.82.

The Broker-dealer Index gained 2.47 points (1.45%), closing at 172.81; the ticket clippers lined up as follows -

  • E*Trade (ET) +$0.39 (2.39%) to $16.73;
  • Morgan Stanley (MWD) +$1.10 (2.16%) to $51.93;
  • Charles Schwab (SCH) +$0.24 (1.79%) to $13.65;
  • Bear Stearns (BSC) +$1.79 (1.73%) to $105.00; and
  • Merrill Lynch (MER) +$0.91 (1.56%) to $59.23.

The Philadelphia SOX (Semiconductor) index posted a rise of 7.29 points (1.56%), closing at 474.71

  • Micron Technology (MU) +$0.53 (4.54%) to $12.20;
  • Broadcom (BRCM) +$1.76 (4.09%) to $44.80;
  • Infineon Tech (IFX) +$0.28 (2.99%) to $9.65;
  • Advanced Micro Devices (AMD) +$0.62 (2.97%) to $21.52; and
  • Xilinx (XLNX) +$0.72 (2.6%) to $28.37.

Gold & Silver Markets

Gold finished almost exactly mid-range, adding $0.10 (0.02%) to close at $445.50 per ounce; the trading range was $444 to $446.80.

The Gold Bugs Index slid 1.01 points (0.48%), to end the session at 211.46

  • Randgold Resources (GOLD) -$0.40 (2.86%) to $13.58;
  • Goldcorp (GG) -$0.28 (1.49%) to $18.54;
  • Glamis Gold (GLG) -$0.27 (1.35%) to $19.73;
  • Golden Star (GSS) -$0.04 (1.29%) to $3.06; and
  • Iamgold (IAG) -$0.08 (1.12%) to $7.08.

Silver rose $0.09 (1.28%) to close at $7.10 per ounce. Despite this, the Gold and Silver Index (XAU) lost 0.51 points (0.52%), to end the session at 98.5 points.

  • Goldcorp (GG) -$0.28 (1.49%) to $18.54;
  • Meridian Gold (MDG) -$0.18 (0.93%) to $19.15;
  • Newmont Mining (NEM) -$0.30 (0.74%) to $40.41; and
  • Placer Dome (PDG) -$0.10 (0.66%) to $15.09.
Precious Metals and Indices
PHLX Gold and Silver Index98.5-0.51-0.52%
AMEX Gold BUGS Index211.46-1.01-0.48%

Oil Market

Last week (and the week before) I gave the heads-up that the oil market was going to defy the news - and plummet.  Oil didn't disappoint - today it lost 2.4% or $1.61 per barrel, closing at $65.96 per barrel. At its low, it was $5 a barrel below last week's high of $70.85. All you needed to clean up in this market was a selling bias... starting the Friday before last.

The Oil and Gas Index (XOI) posted a rise of 6.08 points (0.58%), to 1046.47

  • Sunoco (SUN) +$2.17 (2.88%) to $77.42;
  • Repsol YPF (REP) +$0.63 (2.05%) to $31.32; and
  • Marathon Oil (MRO) +$0.63 (0.97%) to $65.70.

The Oil service stocks (OSX) Index posted a rise of 1.53 points (0.9%), to 171.7

  • Halliburton (HAL) +$2.51 (4.03%) to $64.82;
  • Baker Hughes (BHI) +$0.92 (1.59%) to $58.85; and
  • Schlumberger (SLB) +$1.28 (1.53%) to $85.11.
Energy Complex
Reuters CRB325.010.970.3%
Crude Oil Light Sweet65.96-1.61-2.38%
Heating Oil2.0543-0.04-1.76%
Natural Gas11.657-0.03-0.29%
Unleaded Gas2.055-0.13-5.89%
AMEX Oil Index1046.476.080.58%
Oil Service Index171.71.530.9%

Currency Markets

USD Exchange Rates
US Dollar Index86.620.370.43%
Australian Dollar0.76770.00260.34%
Swiss Franc1.23840.00780.63%
Canadian Dollar0.8411-0.0006-0.07%