12/29/11…returns, inflation, and liquidity

Bloomberg Top Stories:

*U.S. Initial Jobless Claims Rose 15k Last Week to 381k, But at 3 year Low in Past Month

*Euro Drops to 10-Year Low Versus Yen After Italian Debt Sale; Futures Rise

*Gold Bubble Seen by Soros Ends Bull Year on Bear Market Brink

*Libor Gap Hints at Debt Crisis Money-Market Freeze for Banks

*Banker Who Fled Kim Jong Il Says New Leader May Open North Korean Economy

*One-Week Options Contracts Help Push 2011 Volume to Ninth-Straight Record – T+3 effect?

*Global Takeovers Slump to Lowest in Year as Debt Crisis Weakens Confidence

*Romney Sets Sights to Win in Iowa Caucuses After Stealth Campaign in State

*Iowa’s Weather Looms as Possible Obstacle to Paul’s Quest for Caucus Win


Volume rose modestly to 2.33B shares from 2B shares, very weak, in a session blew away every index, major or minor, where the best performer was Dow Utilities -0.7% and the worst was Nasdaq Telecom -2.2%, and every major index down by more than 1%. This can only be attributed to algorithm alignment of high frequency traders and is exactly why you cannot play this market. Meanwhile, NYSE stocks executed on the Big Board rose slightly to a still weak 542M shares from 495m shares! 30 of the last 33 sessions have been less than 1B! Advance/Declines were very negative: -4:1 vs +1.1:1 vs +2.2:1 vs +3:1 vs  +1.7:1 vs +7.5:1 vs -4:1 vs +1.7:1 on NYSE and -4:1 vs -1.1:1 vs +1.1:1 vs +2:1 vs 1:1 vs +4.7:1 vs -4:1 vs +1.3:1 on Nasdaq. Breadth was horrible: -22x vs -1.5x vs +3.4x vs +4.5x vs +1.4x vs +35x!!! vs -3.1x vs +1.9x on NYSE and -9x vs +1.2x vs +2.2x vs +3.6x vs -1.6x vs +11x!!! vs -5x vs +1.4x on Nasdaq. New 52 week highs sagged to 163 from 299 while new lows rose to 143 from 91.The ratio dropped from 6x positive to 1.1x positive! The S&P VIX ROSE for a second straight day, this time by 7.4% to 23.52 +1.61,  wiping out four straight declines ad rising to highest level since 12/19. CAUTION!!!

Here are the results of the past EIGHT sessions: Dow -1.1% vs flat vs +1% vs +0.5% vs flat vs +2.9% vs -0.8% vs flat; Transports -1.6% vs flat vs +0.5% vs +0.9% vs +0.6% vs +3.4% vs -2.3% vs +1.5%; S&P 500 -1.3% vs flat vs +0.9% vs +0.8% vs +0.2% vs +3% vs -0.8% vs +0.3%; Nasdaq Composite -1.3% vs +0.3% vs +0.7% vs +0.8% vs -1% vs +3.2% vs -1.2% vs +0.6%; Nasdaq 100 -1.1% vs +0.2% vs +0.9% vs +0.8% vs -1% vs +1.4% vs +3% vs -1% vs +0.5%; Russell 2000 -2.1% vs +0.5% vs +0.3% vs +0.7% vs +0.3% vs +4.2% vs -1.9% vs +0.8%; NYSE Financials -1.7% vs -0.6% vs +0.7% vs +1.8%!!! vs +0.3% vs +3.7% vs -1.9% vs +0.4%  Leaders: BAC 3.6% vs -2.1%; C -2.9% vs -2%; GE -1.1% vs -1.2%.


European equity markets up, Asia weaker for a second straight session: FTSE +0.2% vs +0.8% vs closed vs +1% vs +1.1% vs -0.4% vs -0.3% vs -0.1%; CAC40 +0.1% vs +0.5% vs +0.2% vs +0.6% vs +1.5% vs -0.4% vs +0.8% vs +1%; DAX +0.3$ vs flat vs flat vs +0.3% vs +1.2% vs -0.1% vs +0.8% vs +0.8%; -0.5% vs Nikkei -0.3% vs -0.2% vs closed vs -0.8% vs +1.5% vs +0.5% vs -1.3%; Hang Seng -0.7% vs -0.6% vs closed vs +1.4% vs -0.2% vs +1.9% vs +0.1% vs -1.2%; Korean KOSPI FLAT vs -0.9% vs -0.8% vs +1.1% vs -0.1% vs +3.1% vs +0.9% vs -3.4%; Indian Sensex -1.2%!!! vs -0.9% vs +0.6% vs -0.5% vs +0.8% vs +3.4% vs -1.3% vs -0.7%. U.S. stock futures modestly higher: DOW +26; SPX +3; NDQ +5. Bonds off slightly but with 10’s and 30’s back below 2% and 3% respectively. 10 yr 1.92% -3/32. RECORD low 9/23 of 1.6855%; 30 yr 2.92% -3/32; Long TIP 0.74% -3/8. 0.57% at high four weeks ago. The 5 yr TIP yields MINUS 0.83%; 10 yr -0.11%. 3 mo. Libor 0.58%, and 0.81%. Bills -0.02% one month. 3 months 0.00%. 6 months 0.05%.

Gold plunged on Wednesday for second close below $1600 and the 200 day since 12/19. It closed at $1564.10 -$31.40!!! and is worse now at $1533.10. -$31.40!!! The record high is $1923.70, a buying climax on 9/6. RES is 1706, the 40 day and $1702, the 50 day m/a and $1624, the 200 day. Has the bubble burst? Crude closed weak and below $100 reversing Tuesday’s  surge to $101.34 but is still well above the 200/50 day ($95.70) closing $9.36 -$1.98. Tuesday was the first close above $100 since 12/13 and highest since 11/16! It is now $99.75 +.39. High had been above $100 for four straight days.  Major sup is the 40/50 day m/a at $97.63-96.03. Res at $100.



…with T+3 settlement for hedge funds gone, the high frequency boys and perhaps some hedge funds took advantage and clobbered the complacent market just as TB warned. Here are year to date returns as of yesterday. Only the Dow and Nasdaq 100 are positive for the year but that does not compensate for the high volatility, double the 50 year average for the year but now too low for the problems facing us.


DOW                +5.0%

Transports         -2.6%

S&P 500           -0.6%

Nasdaq Comp    -2.4%

Nasdaq 100       +2.2%

Russell 2000     -6.2%

NYSE Finance -19.1%


Given the risk and massive swings in performance, money market yields don’t look all bad.


Now for bonds…muni’s have been the best performer of anything yet the outlook for 2012 isn’t strong and if credit problems continue to rise the rotation for returns could continue. As for treasuries…and this is where inflation comes in…consider the low level of inflation then consider buying a 5 year TIP at MINUS 0.83%? This is insane! A 10 year will get you -0.12% less than the CPI. Observers have noticed that every time we have inflation scares they are caused by surges in food and energy or raw materials prices at the input level but have not been able to be passed on to the retail level for years. That means that buying inflation protection here could be a very costly mistake.


Speaking of costly mistakes, how about the recent volatility in gold and oil? Gold is off $62 between yesterday and overnight to the lowest level since July 6th…does this mean the we have become complacent about the global debt crisis? …or simply that there was excess speculation as George Soros believes? $1500 is a key level to hold and if it breaks next support is $1400, the March low and then $1321, the January 28th low. Meanwhile Oil surged by $1.66 Tuesday to close at $101.34, only to plunge $1.98 yesterday to $99.36, negating the short-lived rally.


Now for liquidity…there is no liquidity except that provided by the high frequency traders and that is fleeting and one-directional…call it faux liquidity. In a market like that you sell, not what you want to sell, but what you CAN sell. It is not a bull signal.


If you wish to not hold cash and go heavily into stocks…at this point income or growth…be TB’s guest as they are all too high and at risk. Unless of course, you have very good premonitions. TB does not place himself in that camp and thus continues to hold high levels of cash in portfolios.


. . .   – – –  . . . note that the same old SOS applies…perhaps more so!

It is horrible to see a train wreck approaching and not be able to do anything about it…but that is where we are…caught in a vacuum…January and the rest of 2012 could be very treacherous and painful.


Consider that not one GOP has not crossed themselves up, made at least one economically unsound statement, while the president’s approval rating is climbing…relatively…due to incompetence of the challengers….better the devil you know?…and at least for only four years. TB isn’t happy about this as he would like a choice…but that implies at least one true leader! As Lee Iacocca wrote, “where are the leaders?” Instead we have children with egos…very sad.


Have a great day!




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