An interesting article from an analyst from Deutche Bank:
This morning, it looked like times were a changing. It was Monday and equities were rallying, despite pessimistic data, so much for Monday's get me down (see chart at bottom). The Barclay's news on earnings wasencouraging but more imprtant was major credit card player, Capital One , announcing smaller write downs. The equity rally was following the 1982's pattern nicely and yet the drum beats from market pundits keep saying this is a "sucker rally." There were some policy announcements which seemed supportive as well. The usd underperformed over the morning but the question was.. how much of this weakness was stemming from the IMF /equity hopes and how from expectations of aggressive action at the 18 March FOMC meeting. Those Fed hopes seem faint to me, but the usd continues to showsign of vulnerability. Afternoon trading brought a more negative tone, with financials shares giving back their gains and equities falling more than 2 pct off their highs to turn negative, ahh just like old times.
The day
Our credit team noted that Bear Sterns was taken over one year ago, which I am sure seems like ten years ago to Bernanke. We arrived to find the usd sharply lower and the euro hovering 1.3050. We noted that the euro had soared into the Dec FOMC meetings with 3 pct type daily moves , so we were reluctant to fade the euro rally. Yet if the market was worried about the
Fed buying Treasuries for QE, it was not showing it as Treasuries struggled over the day. The euro peaked early at 1.3072 (1.85 pct) and corrected back under 1.3000 as equities wobbled and we saw some profit taking.
In commodities, copper rallied again as inventories eased and have now fallen more than 50,000 tonnes since late February. Our commodity team argue this in not real demand. The Baltic freight dropped sharply today for the 4th straight decline. Yet growth hopes were rising and the early drop in oil prices on continued OPEC production reversed as oil prices snapped back higher. Gold prices eased back in face of the better news , despite lighter IMM positions.
On the economic front, Research noted empire manufacturing survey fell to a new record lows and Industrial production continues to fall at an amazingly fast pace: total February production was down 1.4% and down 11.2% over the last 12 months. However, February weakness was overstated in that utility output was down 7.7% due to warm weather. Over the last year, motor vehicle production has declined 39%. Troubling to us was the continued weakness in business equipment spending (-1.3% February vs. -4.2% January), a large portion of which includes hi-tech production. Moreover, capacity utilization declined from a revised 71.9% in January to 70.9% in February, matching its all-time record low set in December 1982.
The manufacturing sector in Canada also struggled with capacity utilisation falling to 74.7 , the lowest level in 22 years. Yet Canadian net household worth only dropped by a record 4.4 pct in the Q4. In comparison, household net worth in the United States fell by 9.0 pct. yet here was some good news . Canadian existing home sales rose for the first time since September, as buyers took advantage of lower mortgage rates and prices. The average resale price fell 9.2 pct from a year ago.
Equities slipped back in early trading but found some support . Some of the supportive stories include: The FASB proposed allowing companies to exercise more judgment in determining if a market for an asset is active and if a transaction is "distressed." Capital One, one of the largest
issuers of credit cards, reported a better-than-expected credit performance in February. They said the annualized net charge-off rate for U.S. credit cards rose to 8.06 pct in February from 7.82 pct in January. However with a sharp decline in auto loan losses, where the charge-off rate fell to 4.44 pct in February from 6.09 pct in January, and the delinquency rate declined
to 7.52 pct from 9.18 pct. Obama spoke again today on SBA and will appear tonight with comedian Jay Leno . The.Treasury said it will invest up to $15 billion in securities backed by Small Business Administration-guaranteed loans in order to jump-start credit markets for
small firms. They also will allow small business will be allow to carry forward tax losses for 5 years instead of two years .
The improved tone of the market took its toll on risk aversion trades. European CDS fell sharply, usdmxn collapsed to 14.00 and GE stock rallied back over 10 as well. TIPS gained some ground on the better outlook and potential for inflation. The BOE gilt auction was oversubscribed and gilts weakened after the auction. Krugman was again highlighting the lack of political structure to handle the crisis in Europe. Yet Both Trichet and Merkel had positive comments on the euro today which was surprising. UK's Darling suggested it was urgent to boost the resources of the IMF and he expects agreement on this at next month's G20 summit. The positive reaction
to the IMF plans, again shows how the market is underestimate the potential of cb reserves. Russia noted today they have $43.3 billion plans for spending on anti-crisis measures and social programs in the government’s revised 2009 budget.
Afternoon trading started quietly. NAHB data for March are steady to a bit soft, with the housing market index unchanged at 9. ECB's Stark suggested they still has some room to manoeuvre in lowering interest rates, but is getting close to a low point. Stark added it was not time to take such measures, as quantitative easing. Equities slide over the afternoon as the equity market hit some short term targets. Trade tensions also raised their head again, with Mexico saying it will increase tariffs on about 90 U.S. products in retaliation for last week's decision to cancel a pilot program that allowed some Mexican trucks to transport goods within
the United States.
Other news
The slumping global economy is slowing the amount of money sent home by migrant workers in the US. Remittances sent home in Q4 slipped to $17 billion -- 2 pct less than in the same period in 2007.
Db Economics offered some explanation for the apparent stability in retail demand. We note household tax refunds from January through February are running nearly 12% above their
year earlier level. Some of this reflects more households using electronic filing; we doubt this is captured in the retail sales seasonal factors. At the same time, non withheld tax payments—not to be confused with one of our favourite economic series, employee withheld tax receipts—are down almost 15% over the January- February period compared to the same time last year.
Non withheld payments are taxes that households owe above what has been withheld from their paychecks and includes such taxable items as dividend and rental income as well as any capital gains. In order to see how much spending should be lifted, we need to look at the total change in household cash balances and compare it to prior years. We define household cash balances as the difference between cumulative refunds less cumulative non withheld tax payments. Over January and February of 2009, household cash balances are up $52 billion, an all-time record amount, compared $29 billion over the same period last year—which was a record at the time.
Conclusion
The current rally reached about 17 pct from the lows and followed the pace of the 1982 rally in the Dow. Financials ended up failing on their sixth day of the rally. I think it is worth noting that the early rebound from the technology crash in 2002, was lead by this oversold sector, but over
the medium term it underperformed. Some temp agencies are noting a levelling of temp lay-off after a 29 pct drop in demand and ironically mortgage processing demand has been strong. The steepness of the US yield survey has been typically associated with rallies in financials stocks, so
there has been some fundamental support for interest rate margins.
We have seen 7 bear market rallies since 2008 and the average has been around 17 pct, which is just above the high for today. So many technical players have been calling for a failure around 780 on the S&P, and they are now excited as we close around 750. We shall see if this sucker rally can come back and bite the bears. VIX remains very steady about 44. We should keep buying euro dips overnight ahead of the FOMC meeting and we shall see what the Fed announces. It would seem strange for me for them to announce QE, given we have news coming from Treasury on the asset plans and the IMF details in April.
David Geisker 4.20 p.m eur at 1.2967 jpy at 98 25, equities down 0.4 pct.
No comments:
Post a Comment