4/19/13…watch the ‘margins’

From the Friars Club Encyclopedia of Jokes: “I don’t want to make the wrong mistake.” – Yogi Berra

Bloomberg Quote of the Day: “You can’t fake listening. It shows.”-Raquel Welch

Bloomberg Top Stories:

*Blackstone Pulls Out of Bidding for Dell on Worsening Outlook for PC Sales – !!!

*BofA-Morgan Stanley Brokerages Bets Pay Off while Investors Yawn at Profits – ha!

*Weidmann Says ECB Would Only Reduce Interest Rates If Economic Data Warrants – ?

*European Fund Managers Seen Doubling Base Salaries on Proposed Bonus Caps – is this good for investors when their reward is locked in? Gimme a break! TB

*IBM Shares Decline After Hardware Slump Drags Down First-Quarter Earnings – !

*Deutsche Bank Opens Door for Bonds Backed by U.S. Rental Homes – is this the next bubble? Who is buying up the homes? Wealthy investors FOR RENTALS…get it???

*California Power Grid Faces Biggest Challenge Since Enron – infrastructure!!! Hello!

Four straight sessions – down, up, down, down – the only positive yesterday was Dow Utilities which rose 0.3% – what you would expect in a selloff! How many times have you seen that? Never? Again: you cannot beat the high frequency traders at their own game PERIOD!!! They take the market up, they take it down…often in the same day…and when you add in today’s options expiry and sharp swings in volatility, they are in heaven! Furthermore, that second day is now proven to have been simply a dead cat bounce! Was it all due to Gold or was that just the catalyst? Paulson, the ‘mortgage-backed’ one-trick pony has lost at least $700 million personally, gold producers over $160 BILLION, central banks, a combined loss of over $599 BILLION of reserves!!! Only a fool could remain bullish on stocks!…or TB could be wrong? You decide.

Today we will focus only on the activity of the past four days…a lifetime.

Total NYSE Volume slipped slightly to 3.9B shares vs 4.21B vs 3.63B vs 4.64B from a series of mid to low 3B shares sessions. A/D’s and Breadth were both negative, especially Nasdaq. The VIX surged for a third straight session: 17.56 (intraday high of 18.20! highest since 2/26) vs 16.51 (17.27). Incredible moves!!!

*Dow Transports -0.3% vs -1.5% vs +2.2% vs -3.8%!!!. Russell 2000 -0.6% vs -2%!!! vs +1.8% vs -3.8%; Dow Utilities UP 0.3% vs -0.6% vs +1.2% vs -1.3% – safest bet! The S&P 500 -0.7%! vs -1.4% vs +1.4% vs -2.3%. Nasdaq Composite -1.2% vs -1.4% vs +1.5% vs -2.4% while the Nasdaq 100 -1.4% vs -1.8% vs +1.5% vs -2%. Dow 30  -0.6% vs -0.9% vs  +1.1% vs -1.8%. NYSE Financials fell 0.8% vs -1.8% (Brokers -1.4% vs -1.6%. KBW Banks -0.9% vs -2%!, Nasdaq Banks -0.3% vs -1.5%. BofA most active -2.2% closing at $11.44 lowest close since 3/5/13, with a low of 11.23. C -1.4% vs -2%; WFC -0.8% vs -1.3%; USB -0.3% vs -1%; GS -1.4% vs -2.4%; MS -5.4%!!! vs -1.7%; UBS -2.6% vs -1%! A bloodbath and a warning!

*NYSE Volume dipped slightly to 3.9B shares vs 4.21B vs 3.63B vs 4.64B (bested only by the 4.93B 12-month high on the last options expiry on 3/15!). REAL Volume also slipped to 798M shares vs 866M vs 723M vs 976M – note that the weakest day was the ‘bounce’ and the average for the week is 846M vs the average of the past 12 months of just 755M shares and ytd 716M shares. The range since 2/11 is 558M to 1.825B on 3/15’s options expiry and a near 12 month high, second only to 12/21’s 1.88B shares. Note that 3/15’s (options expiry) was the only day since 2/28 to register over 1B shares! There have been just thirteen 800+M shares in 2013 – almost exclusively on DOWN days!

  1. new 52 week highs which had ranged from 121-709, up slightly at a weak 106 vs 100 vs 155 vs 154. New lows fell sharply but are still high at 159 vs 237 vs 120 vs 197. Note that with stocks near record highs it is very hard to get a new low!!! …but getting easier!
  2. Advance/Declines were negative again: -1.2x vs -3.5x vs +4.4x vs -7.1x on NYSE and -1.6x vs -4.2x vs +3.5x vs -8.1x on Nasdaq. Breadth was similar, note FOUR days: -1.3x vs -10.5x!!! vs +6.4x vs -7.2x vs -2.2x on NYSE and -3x! vs -5.2x vs +6.2x vs -12.8x!!! vs -1.4x vs -1.2x on Nasdaq…weak for SEVEN days!
  3. The Dow was -0.6% vs -0.9% vs +1.1% vs -1.8%. Dow Transports -0.1% vs -1.5% vs +2.2% vs 3.8%!!! and never confirmed the rally!  Dow Utilities UP 0.3% vs +1.2% vs -1.3%…best of the lot as they should be! The Nasdaq Composite fell 1.2% vs -1.4% vs +1.5% vs -2.3%, and the NDQ 100 was -1.4% vs –1.8% vs +1.5% vs -2%. The 100 performed worse due to AAPL which fell 2.7% vs -4.5% for the lowest close since 12/20/11!!! and subtracted 8.2 points of the 40 point loss, 31 total in two days (9 others lost 1-4 points, while just one, INTC gained 1 point…15 up, 84 down – what Apple gaveth it has now taken away from index performance! The Russell 2000 -0.6% vs -2%! vs +1.8% vs -3.8%!!! NYSE Financials fell by 0.8% vs -1.8% vs +1.8% vs -2.5%. All down big led by BAC -2.2% (for lowest close since 3/5/13) vs -4.7% vs +2.8% vs -1.6% Citi  fell 1.4% vs -2% vs -4% vs +0.2%. GS -1.4% vs -2.4%; MS -5.4%!!! vs -1.7%; UBS -2.6% vs -4.5%!; WFC -0.8% vs -1.3%; USB -0.3% vs -1%.
  4. Volatility (S&P VIX), continues to be…well…volatile…almost beyond comprehension rising to 17.56 for highest close since 12/28, with a new intraday high of 18.20, vs 16.51 (high 18) vs 13.96 vs 17.28(high and close). The range is 12.06 (multi year low) to 18.20, and is way above the 40/50 day (13.53/13.49) and the 200 day at 15.48…ytd,  with a range of 19.28 (2/25!) to 11.05 (3/14) – 12 mo. ave 16.45!!! Today could be one very exciting options expiration!!!

European equities stronger for the 4th time in 9 sessions, Asia stronger too: UK +0.3% vs +0.4% vs +0.7% vs -0.2% vs -1.1%!!!; France +0.9% vs +0.8% vs -1.6% vs flat vs -1%!; Germany -0.1% vs +0.4% vs -1.8% vs flat vs -1%!; Japan +0.7% vs -1.2% vs +1.2% vs -0.4% vs -1.6%!; Hang Seng +2.3% vs -0.3% vs -0.5% vs -0.5% vs -1.4%!;  Korea +0.4% vs -1.2% vs +0.1% vs +0.1% vs -0.2% vs -1.3%!!!; India closed vs +1.5% vs -0.1% vs +2.1%!!! vs +0.6% vs -1.6%. U.S. stock futures up but trading off their session highs: DOW +33; SPX +6.30; NDQ +10.75.

Bonds closed modestly higher yesterday EXCEPT TIPS which were slammed; slighyly lower overnight: 10 yr Treasury 1.69% -1/16 (recent range now 2.06% to 1.68%), and the 30 yr’s 3.26% to 2.86%, 2.87% -3/16. The long TIP also weak – after setting a new (record?) low of 0.36% on 4/5, before backing off to 0.52%, CLOSED 0.50% DOWN 1-1/8!!!, now 0.48% +3/8 – out of sync??? The high yield was 0.67%! NOTE: I have never seen in my 40 years FOUR consecutive days of trading in stocks, bonds, and commodities…a trifecta. The volatility in bonds normally doesn’t occur except over a minimum six month timeframe! This is a major warning!

Libor update: 0.240% 3 mos., 0.433%!!! 6 mos. Foreign bond yields mixed but little changed: Germany 1.24% +2; UK 1.66% +1; France 1.78% +1, Italy 4.23% -2; Spain 4.62% -3; Portugal 5.98% -4; Greece 11.16% +1 vs 11.18% vs 11.08% vs 11.10% vs 11.05% vs 11.05% vs 11.06% vs 11.25% vs 11.43% vs 11.53% vs 11.94% vs 11.20% vs 11.94% vs 12.09% (recent range 10.58%-12.57%!).  

Gold managed a slight rally but created a ‘double top’ at $1402 as its worst decline since 1980 – coming off a record high then – continues. Tuesday’s intraday low of $1321.50 – was lowest since Sept. ’10. It closed at $1392.50 +$9.80 The loss over the last four days is now back to $96 while Monday’s $149 loss to a 52 week low of $1361.10 was the most disastrous. Where is resistance? Dunno…a moving target. Look at the 40 day/50 day to see how bad this is: $1564-1580! Overnight it is $1404.20 +$11.60, with a session high of $1424.70 – high since 4/15, taking out the double top from Monday! Crude finally rallied yesterday closing at $87.73 +$1.05, BUT  resistance lies at the 40 day ($92.75) and the 50 day ($93.48)….but first the 200 day at $91.64 – stabilized now.. The high of $97.80 on 4/1 was highest since 2/15! Overnight it is $87.87 +.24. Yesterday’s session low of $85.61 obliterated Tuesday’s $86.20!. The range is now $85.61-$97.80 since June 29, 2012!!!!

 

Some random thoughts:

Apple’s sharp fall from grace…it had a record high of $705 on 9/21 then went down, almost straightline, since with yesterday’s low being $389.74 – a 45% decline with no letup in just seven months! It is now trading at the lowest price since 12/30/11.

Note that much of the S&P performance was due to Apple in 2012, and it has now taken all that back. Worse is the Nasdaq 100 which along with its sister Composite, have suffered with the Russell 2000 joining them  – all in this month! We may have seen the highs for the year…but not the lows? Should have sold in March it would appear…or early April if you maxed it.

But the question that TB continues to pose is in what kind of hell was the world or the U.S. with its slow growth and lack of governance, do stocks hit record highs? Beats the hell out of TB! Sure earnings have been good  – but. The intrinsic value of stocks is not based on last quarters earnings but the sustainability of those earnings which, given the high levels of unemployment, wage increases over the past 20 years that have not kept pace with inflation (CEO’s of the major corporations excepted), and the contempt the bankers have held for Main Street…why not? They own your Congressman and Senator, don’t they? Why else have they not been prosecuted for their sins or has any meaningful financial reform transpired? Meanwhile the only group that tried to sound an alarm, Occupy Wall Street, was condemned from the beginning (before they got out of control).

Back in 1999, TB began looking at margin borrowing while the stock market roared and gained momentum. New issues doubled their IPO prices the first day of trading…why?

By searching Federal Reserve Bulletins he found that quietly the Greenspan Fed had made all Nasdaq stocks ‘marginable’ effective 1/1/99. Not only that, it was effective on their first day of trading…now do you get it? Then when the stock market tanked, margin borrowing fell off sharply. This was insane and explains WHY we had a rally in stocks (note  that while all Nasdaq stocks were marginable, major firms would only lend against recognized Nasdaq companies…not so for the internet firms who worked for scant commissions and made their money off: margin borrowing! The worst way to invest! Well, not invest as it is highly speculative…especially if you are shorting stock.

JPMorgan Asset Management  just released a report (April 15) and look what they said:

“With the S&P 500 surpassing record highs, many investors are looking for signs of a pullback. One much-talked-about contrarian indicator is pointing to just that, namely margin debt used to purchase equities on the NYSE. As shown in this weeks, chart, margin levels stood at $366 billion through the end of February (latest available – TB), passing their 2000 and 2007 highs and causing some investors to call for an imminent selloff.”

Note those two years combined for the two biggest selloffs of all time following an incredible run from 1985-2000, 2002-2007, and since January 2009 to April 11. Also form their chart look at the peak margin borrowing in each of these periods: $130B to $270B in 2000; the back to $130 billion before rising to a record $380 billion in 2007 before falling back to about $140 billion and then back up to about $370 billion in February. You don’t have to be a genius to figure this out. They conclude (matching TB’s comments):

“Although previous margin peaks coincided with market downturns, other measures of investor exuberance, such as strong flows into equity mutual funds, are not present today. Moe importantly, valuations are less stressed today than in 2007, and especially in 2000, and it is those valuations that are the most important drivers for returns in the long run.”

Valuations are less stressed??? What does that mean…the models are wrong…is this a reversion to the Efficient Markets Hypothesis which has been disproved twice (three times) since 2000?

Strong flows into equity mutual funds (presumably includes ETF’s?). Indeed when you look at shares traded on the floor of the NYSE they are WEAK by any historical measure since the 1980’s, while the visible volume is dominated by high frequency traders with a holding period of minutes. Whereas pension funds used to hold stocks an average of five years, that period is now down to one year and for the market as a whole six months! In that environment who cares about sustainability of earnings? A buy and hold investor has been made a fool as returns on stocks since 3/31/08 show annualized returns of about 1.1% (Dow Transports) to 6.9% (Nasdaq 100), the latter falling sharply since the market began its swoon this month.

Thus the liquidity provided by the high frequency traders is all that keeps up afloat…and that liquidity is not there – when the market needs it. How many times do we have to see this before we get it?

It is a sad commentary when a rag-tag group is the only one acting (acting out?) and were immediately condemned by the GOP as hippies. They lacked leadership…unlike the Tea Party which had the backing of the Koch Brothers – don’t believe for a moment that it was those $5 and $10 contributions that made it work. Meanwhile, they got their inane fools with good intentions (hopefully) elected, and neutralized the ability of Congress to do the people’s work.

TB would have preferred a proactive group like RCA – Reform Corporate America – and Congress, but sadly that never caught on. Financial sector friends railed at TB’s attempts to get them to admit their companies created the crisis…pity them…pity us.

Meanwhile they seized on the work of Reinhart and Rogoff to create panic. They created a crisis which resulted in the U.S. losing its ‘AAA’ rating and now a slowdown of the government at a time when it should be expansionary…does a loss of 10,000 government jobs a month make sense to you? They criticize the USPS and force them to fully fund their pension funds – something that has been required of no other public or private entity, and THEN hamstring them for trying to cut mail service to homes to five days a week… all in defense of the Constitution…or at least their interpretation of it which also goes to abortion rights, gay rights, and gun rights. Instant insanity!

…you decide…and enjoy your weekend…meanwhile Minnesota is snowed in…in mid-April??? Not much fun that!

TB

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