Interdum stultus opportuna loquitur...

Thursday, September 08, 2005

USRant: Repo Helps, But Take Care Here....

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

Pre-market data was reasonably 'iffy'. There was the usual madness in the housing market - the Mortgage Bankers' Association index of Purchase Applications rose 6% (and with all those displaced from Hurricane Katrina, this measure may well increase more sharply in coming weeks - Bastiat's "broken window"... that which is seen). Redbook and the ICSC-UBS - two measures of Chain Store Sales - were both soft, with both measures showing year-on-year chain store sales growth slower than real GDP. 

Labour market outcomes are of far greater importance to a growing economy than housing market numbers (I say this even though the US economy is not growing - don't let government statistics fool you). Today's Productivity and Costs data showed that growth in output per worker dipped to 1.8% (below the 2.1% expected, and still way overstated due to a 1.6% overstatement of output thanks to hedonics), and that Unit Labour Costs rose 2.5% (above consensus for 1.5% increase).

The lower-than expected Productivity number points to a couple of things - which have nothing to do with technical change (since the way this version of 'productivity' is calculated is the worst possible way to try and measure tech change). What it shows is a decrease in the capital-labour ratio - which in turn should not be a surprise given the abysmal recent growth in non-defence capex excluding aircraft. When you 'mix' labour with smaller amounts of capital (i.e., the capital/labour ratio declines), output per worker (and per worker-hour) declines; when the growth in the labour force is faster than the growth in business stock of plant and equipment, productivity growth slows - for the same reason.

Note that this still hasn't incorporated any discussion of the bad measurement of productivity: let's do that now.

I built a copy of the Commonwealth Treasury's TRYM model in 1995 (took me six weeks, working from scratch). One of the things that was critical to get right was a parameter called "CLAM" - the TRYM mnemonic for λ the Harrod-neutral rate of technological change from a CES production function. 

In short, it measures the increase in output per worker-hour that results from improvements in production efficiency - which includes using better capital, not using more capital. Any fool can increase the capital-labour ratio - productivity (properly measured) takes into account whether or not the K/L ratio has changed.

This notion of the rate of 'Harrod Neutral Tech Change' is the difference between economies which are genuinely growing, and those which are just "capital deepening". When used with a very basic production function (such as Cobb-Douglas - which is what American academics use for algebraic tractability), it is also known as the Solow Residual because it 'drops out' of the estimation process as a part of an ARIMA process in the equation residuals (in other words, the bloody estimation is badly defined - if they did things properly in the first place they would estimate λ directly!!).

This seemingly arcane point was what made Paul Krugman a superstar in economics; he discovered that when you looked at data on the 'Asian Tiger' economies, and estimated the Solow Residual, you got a series of negative numbers. In other words, the Asian 'Miracle' was purely a story of throwing more capital at each unit of labour (which was in turn caused by a movement of labour from low-capital agricultural deployment to high-capital urban-industrial deployment).

And (this is getting long, but it's important) I can tell you that if you do even better and use a CES production function, you find that the US estimate of CLAM is also negative. Which, dear Reader, is why I don't accept the whole "US high productivity" line of bullshit. (I honestly think that I don't ever hold a strong quantitative opinion without having some basis for it).

One thing I forgot to mention recently (the data came out last week) was that the median price of housing in the US dropped 7% last month; the median price is down over 14% since April. It begins - apparently there are an awful lot of 'negative equity' stories in the Sydney and Melbourne housing markets, particularly in the 'investment' property market. Serves them right. (Whenever I put quotes around the word investment, it means that the people doing the 'investment' are actually speculating, whether they know it or not... it is critical to know which one you're doing).

Federal Reserve Open Market Operations

The Fed's Open Market Operations desk performed 1 repurchase operation - a $10.5billion, overnight repurchase with $9.944billion in T-backed collateral undertaken at a 2.3 basis point discount to the Fed Funds Rate (FFR). And wouldn't you know it - the day's low happened just after 10 a.m., and the rise after that point was 75 Dow points.

Major US Indices

I haven't' had time to put together a chart - so the technical discussion will have to happen 'blind'.

The market has bounced from oversold (on daily charts) to overbought in a matter of 6 sessions. There's a better-than-60% chance that this leg will get past the 10720-ish swing high - that probability rises if the mindless momentum that's developed on hourly charts can carry over to the daily timeframe (with Oil continuing to decline, that's a possibility - albeit a moderately remote one).

There were a couple of divergences on the 15-minute chart today, which point to the likelihood that the Dow pulls back to 10550-ish before getting through 10700.

The Dow Jones Industrial Average advanced 44.26 points (0.42%), closing out the day at 10633.5 points. The index hit an intraday high of 10640.43, after dipping in the first half-hour to 10573.95 (10757-ish) before all that lovely repo-crack hit the market's system. 

Within the blue-chip index, 20 stocks rose, the biggest gainers being Mcdonalds (MCD, +3.18% to $33.70) and Pfizer (PFE, +1.66% to $26.30), which accounted for 12 Dow points between them. Losers in the Dow numbered 10 and were led by Alcoa (AA, -1.48% to $26.56) and Boeing (BA, -0.82% to $64.50), with these two stocks contributing -7 Dow points worth of downward pressure on the index. Volume traded was tilted in favour of the gainers by 217.4m shares to 128.7m.

The broader S&P500 added 2.97 points (0.24%), to 1236.36. Within the index, gainers numbered 291, while 192 S&P500 stocks fell for the day. Volume was tilted 1.6:1 in favour of the winners with 1041.89 million units traded in the winners as compared with 647.92 million traded in the losers .

Over at Times Square, the Nasdaq Composite posted a rise of 5.17 points (0.24%), to close at 2172.03, while larger-cap technology issues fared worse with the Nasdaq100 adding 2.59 points (0.16%), to end at 1599.86 points. Within the tech benchmark, gainers numbered 61, while 34 Nasdaq100 stocks fell for the day. Volume was tilted 1.3:1 in favour of the winners with 312.48 million traded in the winners compared to 244.45 million in the losers .

NYSE Volume was super-chunky, with 2.05 billion shares changing hands, while Nasdaq Volume was about average, with 1.52 billion shares traded.

Major Market Statistics
Dow Jones Industrial Average10633.544.260.42%
Nasdaq Composite2172.035.170.24%
NYSE Volume2.05bn--
Nasdaq Volume1.52bn--


My 9-stock "bellwethers" group rose by an average of 0.22%

  • General Electric (GE) +$0.07 (0.21%) to $34.01;
  • Citigroup (C) +$0.16 (0.36%) to $44.46;
  • Wal Mart (WMT) +$0.17 (0.37%) to $45.86;
  • I.B.M. (IBM) -$0.04 (0.05%) to $80.98;
  • Intel (INTC) -$0.04 (0.16%) to $25.66;
  • Cisco Systems (CSCO) +$0.20 (1.1%) to $18.40;
  • eBay (EBAY) +$0.29 (0.72%) to $40.46;
  • Fannie Mae (FNM) -$0.13 (0.26%) to $48.94; and
  • Freddie Mac (FRE) -$0.20 (0.34%) to $57.90.

Market Breadth & Internals

NYSE advancing Issues exceeded decliners by 1722 to 1536 for a single-day A/D reading of 186; Nasdaq gainers trumped losers by 1639 to 1370. The 10-day moving average of the A/D line fell to 399.2 on the NYSE, while the 10dma of the Nasdaq A/D rose to 144.8.

NYSE advancing volume exceeded volume in decliners by 1256.6 to 755 million shares; Nasdaq advancing volume was greater than volume in decliners by 905.4 to 548.5 million shares.

221 NYSE-listed stocks rose to new 52-week highs, and 18 posted fresh 52-week lows, while on the Nasdaq there were 137 stocks that hit new 52-week highs, and 30 which fell to fresh 52-week lows.

Market Breadth Statistics

Advancing Volume (m)1256.59905.38
Declining Volume (m)755548.45
New Highs221137
New Lows1830

Market Sentiment Statistics
CBOE Volatility Index12.52-0.41-3.17%
CBOE Nasdaq Volatility Index14.9-0.14-0.93%
Equity Put-Call Ratio0.6800%
10-day PCR0.6300%
SPX-VIX Ratio98.83.363.52%

Bond Market Analysis

Bonds fell again at the long end, with the yield on the benchmark 30-year Treasury bond rising another 6.5 bps to 4.419%. Boy am I wild at myself for not paying closer attention to the 30-year bond future last week; I was fully aware of its impending reversal, but failed to hone in the 'radar' during the highest probability window... here's what I said on August 31st...

the 30-year bond future rose to 118-12/32 and is now just begging to be shorted. Absolutely gagging for it, as your average London chancer might say; still, I'm not going to stand in front of the bond train just yet - I haven't even looked at a weekly T-bond chart since the bottom was in a couple of weeks back.

And guess what? I still haven't looked at the bond market closely enough. Stupid. September 1st - the day after that quote above - was the high in the bond futures to the day. Something in my waters told me that the bond was cooked... and yet I took no action (and advocated no action, which is even more worser).

The middle of the yield curve was broadly lower: five year yields rose to 3.936%, and ten-year yields rose to 4.138%.

Spreads between short-dated (2-yr) Treasuries and high-grade corporate bonds of similar maturity profiles were 3.0 bps tighter at -8.0 basis points; spreads between longer dated Treasuries and their corporate AAA counterparts fell to 49.0 bps for 10-year AAA, and 85.0 bps for 20-years.

Credit spreads (spreads between corporate bonds of the same maturity profile but different creditworthiness) were broadly tighter with the AAA-A spread on 20-years 4.0 bps tighter at 39.0 basis points and the 10-year AAA-A spread 1.0 bps tighter at 9.0 bps.

Treasury Yields
UST 13wk (yld)3.40500%
UST 2Y (yld)3.840.071.86%
UST 5Y (yld)3.9360.0471.21%
UST 10Y (yld)4.1380.0531.3%
UST 30Y (yld)4.4190.0651.49%

The Banks Index dipped 0.1 points (0.1%), to 99.26; within the index,

  • Northern Trust (NTRS) -$0.67 (1.32%) to $50.15;
  • North Fork Bancorp (NFB) -$0.34 (1.22%) to $27.42;
  • Golden West Financial (GDW) -$0.72 (1.15%) to $61.90;
  • Mellon Financial (MEL) -$0.32 (0.97%) to $32.71; and
  • Fifth Third Bancorp (FITB) -$0.31 (0.74%) to $41.33.

The Broker-dealer Index added 0.37 points (0.21%), ending the day at 173.18; the ticket clippers lined up as follows -

  • E*Trade (ET) +$0.23 (1.37%) to $16.96;
  • Lehman Brothers (LEH) +$0.91 (0.83%) to $110.39;
  • Raymond James (RJF) +$0.15 (0.49%) to $30.50;
  • Legg Mason (LM) +$0.44 (0.42%) to $106.44; and
  • A G Edwards (AGE) +$0.14 (0.31%) to $45.92.

The Philadelphia SOX (Semiconductor) index slid 1.31 points (0.28%), to 473.4

  • Altera (ALTR) -$1.69 (7.75%) to $20.11;
  • Taiwan Semiconductors (TSM) -$0.17 (2.06%) to $8.09;
  • National Semiconductors (NSM) -$0.47 (1.87%) to $24.61;
  • Teradyne (TER) -$0.20 (1.2%) to $16.53; and
  • Applied Materials (AMAT) -$0.17 (0.96%) to $17.61.

Gold & Silver Markets

Gold rose $0.50 (0.11%) to close at $446 per ounce; the session high was $447.

The Gold Bugs Index lost 0.44 points (0.21%), ending the day at 211.02

  • Golden Star (GSS) -$0.04 (1.31%) to $3.02;
  • Hecla Mining (HL) -$0.04 (1.11%) to $3.55;
  • Kinross Gold (KGC) -$0.05 (0.75%) to $6.61;
  • Iamgold (IAG) -$0.05 (0.71%) to $7.03; and
  • Freeport McMoran (FCX) -$0.29 (0.67%) to $42.69.

Silver rose $0.02 (0.28%) to close at $7.12 per ounce - a nice technical bounce that is probably now finished. 

The Gold and Silver Index (XAU) lost 0.14 points (0.14%), to end the session at 98.36 points.

  • Placer Dome (PDG) -$0.15 (0.99%) to $14.94;
  • Durban Rooderpoert Deep (DROOY) -$0.01 (0.88%) to $1.12;
  • Kinross Gold (KGC) -$0.05 (0.75%) to $6.61; and
  • Freeport McMoran (FCX) -$0.29 (0.67%) to $42.69.
Precious Metals and Indices
PHLX Gold and Silver Index98.36-0.14-0.14%
AMEX Gold BUGS Index211.02-0.44-0.21%

Oil Market

Oil lost still more ground (good for our covered-call/bought put strategy in Woodside), shedding $1.59 per barrel to close at $64.37 per barrel (the low was $64 exactly). You might be tempted to try to play a bounce in Crude (it's deeply oversold)  but I would caution against it. It will be another couple of sessions before the now-startled nuffies get swayed by the "oil capacity coming back online" news gets them twitterpated about the long side again. Once bitten, as the saying goes.

Also, if Crude manages a break below $62.75 on this first downmove, it will develop some real downward momentum - probably to below $60 before any meaningful bounce. Since Woodside is priced for $70 oil, covered calls should be expected to expire worthless (that's a good thing) and bought OLOOM puts from last Monday should end up doubling at least. Bear in mind that a lot of the speculative money in the Energy stocks still believes that this pullback is highly temporary (in other words, hedge fund managers think like journalists - which is why 60% of hedge funds will blow up).

The Oil and Gas Index (XOI) slid 0.73 points (0.07%), ending the day at 1045.74

  • Royal Dutch Shell (RD) -$1.18 (1.8%) to $64.42;
  • Repsol YPF (REP) -$0.43 (1.37%) to $30.89; and
  • TotalFinaElf S.A. (TOT) -$1.48 (1.09%) to $134.70.

The Oil service stocks (OSX) Index lost 0.19 points (0.11%), ending the day at 171.51

  • Smith International (SII) -$0.56 (1.65%) to $33.36;
  • Schlumberger (SLB) -$0.85 (1%) to $84.26; and
  • Halliburton (HAL) -$0.62 (0.96%) to $64.20.
Energy Complex
Reuters CRB321.61-3.4-1.05%
Crude Oil Light Sweet64.37-1.59-2.41%
Heating Oil1.9623-0.09-4.48%
Natural Gas11.201-0.46-3.91%
Unleaded Gas2.0222-0.03-1.6%
AMEX Oil Index1045.74-0.73-0.07%
Oil Service Index171.51-0.19-0.11%

Currency Markets

USD Exchange Rates
US Dollar Index86.940.320.37%
Australian Dollar0.7657-0.002-0.26%
Swiss Franc1.24330.00490.4%
Canadian Dollar0.84160.00050.06%