FX Update: New Year Hangover?

The EUR, GBP and USD remain the weak triad as risk appetite remains robust despite no real news flow save for ugly confidence numbers out of the US. Is this market wildly complacent ahead of the New Year?

US Confidence vs. Market Confidence
Yesterday’s US Conference Board Consumer Confidence number for December was a real disappointment considering the recent positive momentum in equities and some of the other confidence surveys. Both the University of Michigan and weekly ABC Consumer Confidence surveys were recently out at close to post Lehman-bankruptcy highs, but the Conference Board number dipped again rather than seeing the expected rise. The weekly ABC number out last night also dipped sharply back into the old range and the two surveys suggest that the “Average Joe” is far from feeling the kind of wild optimism that is evident in the market’s extreme levels of complacency. The only hope is that the average consumer’s confidence level remains tied to the employment picture and that both are lagging indicators.  On the market confidence side of the picture, we have surveys suggesting extreme complacency in equity markets – certainly a contrarian signal that we should be very cautious for at least the short term as we head into the New Year. The AAII surveys show the largest differential in Bulls vs. Bears since the very month of the market’s all time peak in October 2007. The contrarian trade here, therefore is short the likes of AUDUSD and NZDUSD, though considering the ranges and volatility during times of rather thin liquidity, many will likely seek to look at trading this through the options market.

US Treasury auction
The US treasury’s auction of five-year debt yesterday was very weak, which touched off a sell-off in bonds and only put a slight bid on the USD on the positive yield implications for the currency. While the Fed will continue to purchase treasuries through next June, there is plenty to worry about if other parties show increasing reluctance to buy US debt. It’s interesting to see such weak results at the very part of the curve where the Fed has promised to carry out the bulk of its purchases. Today sees a slightly smaller $29 billion auction of 7-year notes. Still, it’s hard to draw too many conclusions from this auction, considering the liquidity conditions and the fact that many participants in the market have likely closed their books for 2010. The first key test for US treasury demand in the New Year comes on January 11-13, with three auctions of 3-, 10- and 30-year debt, respectively.

Curiously, the weak action in the US treasury market has done little to keep a lid on the JPY, which has rallied sharply against the weak trio of the USD, GBP and EUR over the last couple of days. The Swiss franc has also been a curious destination in time of surging risk appetite and higher yields, even if it makes sense to see it stronger from a Euro-crisis point of view. It’s hard to draw a bead on the market’s logic in general when we look at the stronger CHF and strong JPY. If the worry is about sovereign debt credibility as interest rates rise, for example, why should the market bid up the yen?  Perhaps we’re simply seeing a squeeze in thin markets – let’s see where these currencies are trading by the close of next Friday before we try to extract too much meaning from the current market moves.

Chart: USDJPY
USDJPY dove lower yesterday, but bounced in an attempt to maintain the supports at the 55-day moving average (red line) and the bottom of the daily Ichimoku cloud, but the evidence today is that this attempt to maintain support has failed and the break lower could open up for a try at the 15-year low from November 1 at 80.23.  It will be very interesting to see the next round of policy response from the Bank of Japan if USDJPY trades back below 80 in the coming weeks.

Looking ahead
The market moves this week look like a contrarian’s dream – certainly if we look along the axis of risk appetite. On the other hand, we would be reluctant to look at Europe from a contrarian angle, as the worries there are still very valid and we’ve yet to see the sovereign debt crisis credibly addressed by EU/ECB leadership.

Looking at the calendar for the final days of the year here, we’ve got a Japanese Manufacturing PMI out tonight (note the dip below 50 in November), US weekly jobless claims, US Dec. Chicago PMI, and US Nov. Pending Home Sales tomorrow. Friday sees an Australian Nov. RP Data-Rismark Home Price survey and the UK Nationwide Home Price data (strong evidence of gathering negative momentum there after a bump in prices in early 2009 to early 2010).

tecEconomic Data Highlights

• US Weekly ABC Consumer Confidence out at -44 vs. -41 last week
• Sweden Nov. Trade Balance out at +10B vs. +3B expected and +6.2B in Oct.
• Switzerland Dec. KOF Swiss Leading Indicator out at 2.1 as expected and vs. 2.13 in Nov.

Upcoming Economic Calendar Highlights (all times GMT)

• Canada Oct. Teranet/National Bank Home Price Index (1400)
• US Weekly API Crude Oil and Product Inventories (2130)
• Japan Dec. Nomura/JMMA Manufacturing PMI (2315)
• China Dec. HSBC Manufacturing PMI (0230)

Commodities and Commodity Stocks Show Continuing Strength

Commodities and commodity stocks show continuing strength.
Energy stock sector absolute price rose further above 2-year highs and remains bullish.

Materials stock sector Relative Strength Ratio (XLB/SPY) rose above 11-month highs and remains bullish. Absolute price rose above 2-year highs and remains bullish.

Dow-Jones Composite and Industrial Averages and the S&P 100 Large Cap Index rose above 2-year highs, again reconfirming major uptrends.

Emerging Markets Stocks ETF (EEM) Relative Strength Ratio (EEM/SPY) fell further below 4-month lows and remains neutral.

Junk/Investment-Grade Corporate Bonds Relative Strength Ratio (JNK/LQD) rose above 8-month highs and remains bullish. JNK absolute price also remains bullish.

Silver/Gold Ratio rose above 3-year highs, again confirming a bullish trend. Silver has outperformed Gold substantially since 8/20/10.

Silver and Gold futures both rose above 3-week highs, signaling short-term uptrends.

Gold Mining Stocks ETF (GDX) Relative Strength Ratio (relative to the Gold bullion ETF, GDX/GLD) rebounded back above its 50-day SMA on 12/28/10, thereby turning bullish again.

CRB Index of commodity prices rose above 2-year highs, again reconfirming a major uptrend.

The U.S. dollar price fell below 5-day lows, confirming a short-term downtrend.
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Spotlight on event stocks: Here is a stock screen I designed to pick out potential event stocks, both Bullish and Bearish. Sometimes, stocks with large changes in price and volume are revealed to be deal stocks, sooner or later, or are the subject of some other extraordinary events, positive or negative.

Bullish Stocks: Rising Price and Rising Volume
Ranked by Price Change * Volume Change
% Price Change, Symbol, Name
0.24% , UTH , Utilities H, UTH
3.29% , SLV , Silver Trust iS, SLV
0.62% , DGT , Global Titans, DGT
2.01% , PST , 200% Short Bond 7-10 Yr T, PST
1.63% , GLD , Gold Shares S.T., GLD
3.80% , TBT , 200% Short US T Bond, TBT
5.16% , SIRI , Sirius Satellite
1.56% , BSX , BOSTON SCIENT
3.63% , KEY , KEYCORP
2.23% , WPO , Washington Post
1.44% , BDX , BECTON DICKINSON
2.43% , NEM , NEWMONT MINING
1.31% , WAG , WALGREEN
0.75% , PDCO , Patterson Dental Company
1.63% , IAU , Gold COMEX iS, IAU
0.80% , LBTYA , Liberty Global Inc. (LBTYA)
0.57% , AZO , AUTOZONE
0.37% , DDM , Ultra Dow30 Double, DDM
0.15% , PSQ , Short 100% QQQ, PSQ
1.00% , PPG , PPG INDUSTRIES
2.34% , SHLD , SEARS HOLDINGS
0.72% , NCR , NCR
0.31% , IOO , Global 100, IOO
1.19% , CVX , CHEVRONTEXACO
0.18% , NYC , LargeCap Blend NYSE Composite iS, NYC
0.73% , IGE , Natural Resource iS GS, IGE
0.46% , CL , COLGATE
0.98% , URBN , Urban Outfitters Inc.
0.87% , COST , COSTCO WHOLESAL
1.03% , HPQ , HEWLETT PACKARD
2.04% , FITB , FIFTH THIRD BANC
0.25% , IXJ , Healthcare Global, IXJ
0.88% , NBR , NABORS

Bearish Stocks: Falling Price and Rising Volume
Ranked by Price Change * Volume Change
% Price Change, Symbol, Name
-0.06% , PIC , Insurance, PIC
-3.05% , LXK , LEXMARK INTL STK A
-0.61% , XBI , Biotech SPDR, XBI
-1.98% , KWT , Solar Energy MV, KWT
-0.83% , EWD , Sweden Index, EWD
-2.29% , TLT , Bond, 20+ Years Treasury, TLT
-0.77% , PSTL , Steel Global PS ETF, PSTL
-2.33% , KBH , KB HOME
-1.69% , TLH , Bond 10-20 Year US Treas, TLH
-0.39% , IGN , Networking, IGN
-1.31% , IEF , Bond, 10 Year Treasury, IEF
-0.95% , CMS , CMS ENERGY
-1.24% , CBS , CBS CORP.
-1.37% , HANS , Hansen Natural, HANS
-2.86% , MBI , MBIA
-1.64% , S , SPRINT NEXTEL
-1.51% , LTD , LIMITED BRANDS
-2.96% , DHI , D.R. HORTON, DHI
-0.96% , DDS , DILLARD STK A
-0.33% , IGV , Software, IGV
-0.28% , IWP , Growth MidCap Russell, IWP
-0.78% , IIH , Internet Infrastructure H, IIH
-0.65% , ECH , Chile MSCI iS, ECH
-0.12% , IGM , Technology GS, IGM
-1.29% , ATI , ALLEGHENY TECH
-1.13% , TMO , THERMO ELECTRON
-0.77% , PETM , PETsMART Inc
-0.61% , SHW , SHERWIN WILLIAMS
-1.03% , ADM , ARCHER DANIELS
-1.38% , LVLT , LEVEL 3 COMMUNICATIONS
-0.72% , GRMN , GARMIN LTD
-1.17% , EFX , EQUIFAX
-0.98% , KSU , Kansas City Southern, KSU

9 major U.S. stock sectors ranked in order of long-term relative strength:

Energy (XLE) Bullish, Over Weight. The Relative Strength Ratio (XLE/SPY) rose further above 12-month highs on 12/6/10 and remains bullish. Absolute price rose further above 2-year highs on 12/28/10 and remains bullish. Support 65.03, 60.96, 60.21, 57.70, 55.68, 53.22, 50.33, 48.56, 46.16, and 43.66. Resistance 69.95 and 78.10.

Materials (XLB) Bullish, Over Weight. The Relative Strength Ratio (XLB/SPY) rose above 11-month highs on 12/28/10 and remains bullish. Absolute price rose above 2-year highs on 12/28/10 and remains bullish. Support 34.20, 33.70, 32.36, 29.88, 29.43, and 27.67. Resistance 39.00, 40.15, and 41.06.

Consumer Discretionary (XLY) Neutral, Market Weight. The Relative Strength Ratio (XLY/SPY) crossed below its 50-day SMA on 12/27/10, thereby turning neutral. Absolute price rose above 3-year highs on 12/7/10 and remains bullish. Support 37.15, 36.61, 36.13, 35.32, 35.02, 34.78, 33.94, 33.11, 32.66, 31.70, 29.80, 28.64, 28.21, and 26.62. Resistance 37.88, 39.09, 40.13, and 40.70.

Industrial (XLI) Bullish, Over Weight. The Relative Strength Ratio (XLI/SPY) rose above 2-year highs on 12/16/10 and remains bullish. Absolute price rose above 2-year highs on 12/22/10 and remains bullish. Support 31.82, 31.58, 30.79, 30.51, 30.32, 29.77, and 27.67. Resistance 35.00 and 36.16.

Technology (XLK) Neutral, Market Weight. The Relative Strength Ratio (XLK/SPY) fell below 8-week lows on 12/16/10 and turned neutral for the secondary trend. This RS ratio rose above 8-year highs on 11/3/10, which was a bullish confirmation of the primary uptrend. Absolute price of XLK rose above 2-year highs on 11/4/10 and remains bullish. Support 23.87, 23.74, 23.64, 23.56, 22.68, 22.53, 21.60, 20.01, and 19.51. Resistance 25.32 and 25.69.

Financial (XLF) Neutral, Market Weight. The Relative Strength Ratio (XLF/SPY) rose above its 50-day SMA on 12/8/10, thereby turning neutral. Absolute price turned bullish as of 12/22/10 when the rising 50-day SMA crossed above the rising 200-day SMA. Support 15.39, 15.08, 14.36, 14.25, 14.20, 13.29, and 13.08. Resistance 16.13, 16.90, 17.12, 17.16, and 17.87.

Consumer Staples (XLP) Bearish, Under Weight. The Relative Strength Ratio (XLP/SPY) fell further below 7-month lows on 12/27/10 and remains bearish. Absolute price rose above 2-year highs on 12/16/10 and remains bullish. Support 29.23, 29.10, 28.22, 28.04, 27.76, 27.63, 27.46, 26.34, 25.30, and 24.95. Resistance 30.29.

Health Care (XLV) Bearish, Under Weight. The Relative Strength Ratio (XLV/SPY) fell below 2-year lows on 12/9/10 and remains bearish, as it has been most of the time since peaking on 2/23/09. Thanks to a bounce over the past 3-days, absolute price of XLV is technically bullish. Support 30.14, 30.11, 29.87, 28.00, 27.49. Resistance 31.79, 32.05, 32.18, 32.42, 32.69, 33.16, 33.37 and 33.74.

Utilities (XLU) Bearish, Under Weight. The Relative Strength Ratio (XLU/SPY) fell below 7-month lows on 12/21/10 and remains bearish. Absolute price of XLU fell below 4-year lows on 12/21/10. Support 30.51, 29.66, 27.91, 27.44, and 25.76. Resistance 32.11 and 32.40.
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Emerging Markets Stocks ETF (EEM) Relative Strength Ratio (EEM/SPY) fell further below 4-month lows on 12/28/10 and remains neutral.

Foreign Stocks ETF (EFA) Relative Strength Ratio (EFA/SPY) broke down below 5-month lows on 11/30/10 and remains neutral.

NASDAQ Composite/S&P 500 Relative Strength Ratio rose above 9-year highs on 11/26/10 and remains bullish for the long term. This RS Ratio has been in an uptrend for nearly 2 years, since 12/2/08.

The Largest Cap S&P 100/S&P 500 Relative Strength Ratio (OEX/SPX) fell below 28-year lows on 12/3/10. This RS Ratio has been trending lower since 8/3/10. Longer term, big caps have been relatively out of favor for more than 10 years, since 3/29/2000.

The Small Cap Russell 2000 Index/Large Cap Relative Strength Ratio (IWM/SPY) rose above 20-year highs on 12/21/10 and remains bullish. Absolute price closed above 2-year closing price highs on 12/27/10 and remains bullish.

The S&P MidCap 400/Large Cap Relative Strength Ratio (MDY/SPY) rose above 15-year highs on 12/17/10 and remains bullish. Absolute price closed above 2-year closing price highs on 12/22/10 and remains bullish.

CRB Index of commodity prices rose above 2-year highs on 12/23/20, thereby reconfirming its preexisting bullish major trend.

Crude Oil nearest futures contract price rose above 2-year highs on 12/27/20 reconfirming its preexisting bullish major trend. Support 87.43, 86.83, 83.55, 80.28, 80.06, 79.84, 79.25, 78.86, 72.63, 70.76, 70.35, 69.51, 68.59, 67.15, 65.05, and 64.24. Resistance 98.65 and 102.84.

Gold nearest futures contract price rose above 3-week highs on 12/28/10, signaling a short-term uptrend. Gold rose above previous all-time highs and confirmed a bullish major trend on 12/7/10. Support 1361.6, 1352.6, 1329.0, 1325.5, 1317.5, 1297.0, 1274.8, 1270.5, 1232.4, 1210.9, 1191.5, and 1155.6. Resistance: 1432.5.

Gold Mining Stocks ETF (GDX) Relative Strength Ratio (relative to the Gold bullion ETF, GDX/GLD) rebounded back above its 50-day SMA on 12/28/10, thereby turning bullish again.

Silver nearest futures contract price has been rising again in recent days. Silver rose above previous 30-year highs on 12/7/10, thereby confirming its preexisting bullish major trend.

Silver/Gold Ratio rose above 3-year highs on 12/28/10, again confirming a bullish trend. Silver has outperformed Gold substantially since 8/20/10.

Copper nearest futures contract price rose above multi-year highs on 12/21/10, thereby reconfirming its preexisting bullish major trend. Strength in Copper suggests confidence about prospects for the world economy, while weakness in Copper suggests doubts. Support 3.9795, 3.6065, 3.3930, 3.1775, 2.9285, 2.8555, 2.8445, and 2.72. Resistance: none.

U.S. Treasury Bond nearest futures contract price fell below 6-day lows on 12/28/10, signaling a short-term downtrend. The bond contract fell below the lows of the previous 7 months on 12/15/10, confirming a bearish major trend. Support 118.21, 118.12, 115.15, 114.06, 113.04, and 112.15. Resistance 129.14, 129.27, 132.26, 133.00, 135.12, 135.19, 136.31, 137.31, and 142.31.

Junk/Investment-Grade Corporate Bonds Relative Strength Ratio (JNK/LQD) rose above 8-month highs on 12/28/10 and remains bullish. JNK absolute price rose above 6-week highs on 12/27/10, which is bullish for the short term. Price rose above 2-year highs on 11/4/10 and remains bullish for the longer term.

U.S. Treasury Inflation Protected / U.S. Treasury 7-10 Year Relative Strength Ratio (TIP/IEF) has firmed up moderately since making a low on 8/24/10, even as absolute price of TIP has declined. A rising RS ratio implies that fixed-income investors have been selling inflation protected Notes at a relatively more subdued pace compared to the U.S. Treasury 7-10 Year Note (IEF) over the past 4 months.

The U.S. dollar nearest futures contract price fell below 5-day lows on 12/28/10, confirming a short-term downtrend. USD may have found resistance near its 200-day SMA, which stands near chart resistance at 81.525 to 82.02. Longer term, USD fell below 11-month lows on 11/3/10, thereby confirming a bearish long-term price trend. Support 78.01, 75.23, 74.27, and 70.80. Resistance 81.525, 82.02, 83.64, 84.73, 85.36, 86.71, 88.80, 89.22, 89.71, and 92.53.

Advisory Service Sentiment: There were 58.8% Bulls versus 20.6% Bears as of 12/22/10, according to the weekly Investors Intelligence survey of stock market newsletter advisors. The Bull/Bear ratio stands at 2.85, which is nearly two standard deviations above the long-term, 20-year mean. This is not overly excessive bullish sentiment in the second year of a bull market. Bullish Sentiment tends to rise in November and December every year. The ratio was as high as it is now or higher in Decembers of each year 2003, 2004, 2005, and 2006, and none of these “high” readings led to bear markets. The 20-year range is 0.41 to 3.74, the median is 1.54, and the mean is 1.61.

VIX Fear Index fell below 8-month lows to 15.40 on 12/23/10, reflecting diminishing fear among options players. VIX is near its 3-year low of 15.23 set on 4/12/10. Before we take the current level of VIX as a sell signal, however, we might consider that VIX was as low as 9.89 on 1/24/07, nearly 10 months before the final tops in the price indexes. VIX is a market estimate of expected constant 30-day volatility, calculated by weighting S&P 500 Index CBOE option bid/ask quotes spanning a wide range of strike prices for the two nearest expiration dates.

The Dow Theory reconfirmed a Primary Tide Bull Market as of 12/14/10, when the Dow-Jones Industrial Average closed above 2-year closing price highs, thereby confirming the new high in the Dow-Jones Transportation Average set on 12/10/10. The Dow Theory originally signaled the current Primary Tide Bull Market on 7/23/09, when both the Dow-Jones Industrial Average and the Dow-Jones Transportation Average closed above their closing price highs of the previous 6 months. Many other analysts were fooled into calling “Bear Market” by the big downside Secondary Reaction in May and June 2010, but my interpretation has been steadily Bullish on the Primary Trend.

S&P 500 Composite (SPX, 1,258.51) rose above 2-year intraday highs on 12/28/10 and remains bullish. SPX closed above 2-year closing price highs on Wednesday 12/22/10, reconfirming its preexisting major uptrend.

S&P 500 Cash Index Potential Resistance
1576.09, high of 10/11/2007
1552.76, high of 10/31/2007
1523.57, high of 12/11/2007
1498.85, high of 12/26/2007
1440.24, high of 5/19/2008
1406.32, high of 5/29/2008
1381.50, Fibonacci 78.6% of 2007-2009 range
1366.59, high of 6/17/2008
1335.63, high of 6/25/2008
1313.15, high of 8/11/2008
1274.42, high of 9/8/2008

S&P 500 Cash Index Potential Support
1251.48, low of 12/27/10
1238.81, Fibonacci 78.6% of 1,576.09 high
1235.05, high of 12/7/10
1232.85, low of 12/16/10
1228.74, Fibonacci 61.8% of 2007-2009 range
1173.00, low of 11/16/10
1171.70, low of 10/27/10
1166.74, low of 10/20/10
1159.71, low of 10/19/10
1,151.41, low of 10/7/10
1,131.87, low of 10/4/10
1122.79, low of 9/23/2010
1114.63, low of 9/15/2010
1110.88, low of 9/10/2010
1091.15, low of 9/7/2010
1039.70, low of 8/27/10
1039.31, Fibonacci 23.6% of June-Aug. 2010 range
1010.91, low of 7/1/2010
1008.55, Fibonacci 38.2% of 2009-2010 range
991.97, low of 9/2/2009
978.51, low of 8/17/2009
956.23, high of 6/11/2009
943.29, Gann 50.0% of 2009-2010 range
878.04, Fibonacci 61.8% of 2009-2010 range
874.17, Gann 62.5% of 2009-2010 range
869.32, low of 7/8/2009
805.17, Gann 75.0% of 2009-2010 range
785.13, Fibonacci 78.6% of 2009-2010 range
666.79, intraday low of 3/6/2009

One-Day Ranking of Major ETFs, Ranked from Strongest to Weakest of the Day:
% Price Change, ETF Name, Symbol

3.29% Silver Trust iS, SLV
1.63% Gold Shares S.T., GLD
1.52% Indonesia MV, IDX
1.07% Commodity Tracking, DBC
0.84% South Korea Index, EWY
0.80% South Africa Index, EZA
0.74% Singapore Index, EWS
0.74% Japan Index, EWJ
0.73% Natural Resource iS GS, IGE
0.73% Thailand MSCI iS, THD
0.69% Canada Index, EWC
0.69% Agriculture DB PS, DBA
0.65% Switzerland Index, EWL
0.62% Metals & Mining SPDR, XME
0.60% Pacific VIPERs, VPL
0.52% Oil, Crude, U.S. Oil Fund, USO
0.49% Energy Global, IXC
0.44% Energy DJ, IYE
0.42% Austria Index, EWO
0.40% REIT VIPERs, VNQ
0.40% Real Estate US DJ, IYR
0.37% Energy SPDR, XLE
0.37% Energy VIPERs, VDE
0.35% Utilities SPDR, XLU
0.34% Realty Cohen & Steers, ICF
0.32% Pacific ex-Japan, EPP
0.31% REIT Wilshire, RWR
0.31% Global 100, IOO
0.28% Australia Index, EWA
0.27% Consumer Staples SPDR, XLP
0.25% Dividend International, PID
0.23% Financial Preferred, PGF
0.22% Utilities VIPERs, VPU
0.22% Basic Materials DJ US, IYM
0.22% DIAMONDS (DJIA), DIA
0.22% Value LargeCap Dynamic PS, PWV
0.21% LargeCap Blend S&P 100, OEF
0.21% Materials SPDR, XLB
0.20% Value S&P 500 B, IVE
0.19% Value VIPERs, VTV
0.19% Russia MV, RSX
0.14% S&P 500 SPDRs LargeCap Blend, SPY
0.12% Dividend SPDR, SDY
0.11% Dividend Appreciation Vipers, VIG
0.11% S&P 500 iS LargeCap Blend, IVV
0.11% Brazil Index, EWZ
0.10% LargeCap 1000 R, IWB
0.10% Dividend DJ Select, DVY
0.09% Blend Total Market VIPERs, VTI
0.09% LargeCap VIPERs, VV
0.09% Bond Ex-US Treas, BWX
0.09% EAFE Index, EFA
0.09% Financial Services DJ, IYG
0.09% Emerging Markets, EEM
0.09% Emerging VIPERs, VWO
0.07% Financial DJ US, IYF
0.06% Health Care SPDR, XLV
0.06% Value 1000 Russell, IWD
0.06% Financials VIPERs, VFH
0.05% LargeCap Blend Russell 3000, IWV
0.05% Netherlands Index, EWN
0.04% Emerging 50 BLDRS, ADRE
0.04% Value EAFE MSCI, EFV
0.04% Bond Treasury Short-Term iS, SHV
0.02% Growth EAFE MSCI, EFG
0.02% Technology DJ US, IYW
0.01% Financial SPDR, XLF
0.00% Dividend High Yield Equity PS, PEY
0.00% Growth S&P 500/BARRA, IVW
0.00% LargeCap Blend S&P=Weight R, RSP
0.00% Malaysia Index, EWM
0.00% Taiwan Index, EWT
-0.02% Growth 1000 Russell, IWF
-0.04% Value SmallCap Russell 2000, IWN
-0.04% Transportation Av DJ, IYT
-0.05% Value MidCap S&P 400 B, IJJ
-0.06% Industrial SPDR, XLI
-0.07% Growth VIPERs, VUG
-0.07% Value MidCap Russell, IWS
-0.07% Value SmallCap S&P 600, RZV
-0.08% Capital Markets KWB ST, KCE
-0.11% Info Tech VIPERs, VGT
-0.12% Global ex US ACWI iS, ACWX
-0.12% United Kingdom Index, EWU
-0.12% Technology SPDR, XLK
-0.12% Value SmallCap VIPERS, VBR
-0.13% Europe 350 S&P Index, IEV
-0.13% Mexico Index, EWW
-0.17% Small Cap EAFE MSCI iS, SCZ
-0.17% Latin Am 40, ILF
-0.18% Growth LargeCap NASDAQ 100, QQQQ
-0.19% European VIPERs, VGK
-0.19% Value SmallCap S&P 600 B, IJS
-0.20% SmallCap S&P 600, IJR
-0.20% India PS, PIN
-0.21% MidCap Russell, IWR
-0.21% MidCap S&P 400 SPDRs, MDY
-0.21% Consumer Discretionary SPDR, XLY
-0.21% Bond, 1-3 Year Treasury, SHY
-0.24% Growth MidCap 400 B, IJK
-0.24% Microcap Russell, IWC
-0.24% MidCap S&P 400 iS, IJH
-0.27% Small Cap VIPERs, VB
-0.28% SmallCap Russell 2000, IWM
-0.28% Growth MidCap Russell, IWP
-0.29% EMU Europe Index, EZU
-0.30% Growth BARRA Small Cap 600, IJT
-0.30% Telecom DJ US, IYZ
-0.31% Belgium Index, EWK
-0.34% Germany Index, EWG
-0.35% Bond, High-Yield Junk, JNK
-0.35% India Earnings WTree, EPI
-0.37% Italy Index, EWI
-0.38% WilderHill Clean Energy PS, PBW
-0.39% Networking, IGN
-0.41% Growth SmallCap VIPERs, VBK
-0.41% Semiconductor iS IGW, SOXX
-0.44% Semiconductor SPDR, XSD
-0.44% Spain Index, EWP
-0.45% France Index, EWQ
-0.46% Growth SmallCap R 2000, IWO
-0.48% Hong Kong Index, EWH
-0.52% Preferred Stock iS, PFF
-0.53% China LargeCap Growth G D H USX PS, PGJ
-0.56% Bond EmrgMkt JPM iS, EMB
-0.58% Bond, High-Yield Corporate, HYG
-0.60% Bond Muni ATM-Free S&P iS, MUB
-0.61% Biotech SPDR, XBI
-0.63% Water Resources, PHO
-0.65% Chile MSCI iS, ECH
-0.79% Turkey MSCI iS, TUR
-0.83% Sweden Index, EWD
-0.84% China 25 iS, FXI
-0.91% Bond, Aggregate, AGG
-0.99% Bond, TIPS, TIP
-1.02% Homebuilders SPDR, XHB
-1.19% Bond, Corp, LQD
-1.31% Bond, 10 Year Treasury, IEF
-2.29% Bond, 20+ Years Treasury, TLT

How America Became a Communist Nation

The Greeks may be the most notorious of the world's profligate nations… but they are not the real problem.

The real problem is much larger and more complex.

The root of the problem the world is facing right now isn't really governments… or banks. The real problem is simply a very bad idea – the idea that the State ought to sit in the center of society. Let me explain…

The last 100 years (since 1914) saw not only the end of the classic gold standard, but also the fantastic ascendancy of the nation-state.

These two trends are inherently and dangerously related.

Until World War I, the central government of the United States, for example, played a small role in the lives of its citizens. Its powers were strictly limited, as were its revenues. It was specifically barred from taxing citizens directly. It was a humble government that interacted with the individual states in the union, but didn't interact much with individual citizens.

The first signs of change came after the Civil War. "Progressive" ideas began to emerge. Most of these ideas came from Germany, from philosophers like Karl Marx and Friedrich Engels. The core of these ideas was that the State itself was superior to its citizens. Therefore, the argument went, society ought to be organized to better accomplish the goals of the State.

Today, most Americans have no idea that the foundations of our modern State are based – nearly verbatim – on the demands of Karl Marx's Communist Manifesto.

In 1848, Marx threatened to organize a worker's revolution unless European governments:

1. Abolished property rights and applied all rents towards public purposes.

[Modern corollary: Don't pay your property taxes, lose your house. So who really owns your house?]

2. Levied a heavy, progressive income tax to equalize wages.

[Modern corollary: Combined federal and state marginal income and payroll taxes approach (or surpass) 50% in many U.S. states.]

3. Abolished all rights of inheritance.

[Modern corollary: The estate tax.]

4. Confiscated the property of all emigrants.

[Modern corollary: The 2008 "Hero's Act," which forces people leaving the U.S. to pay the equivalent of their estate taxes on the global assets before they turn in their passports.]

5. Centralized access to credit in the hands of the State by means of a national bank and an exclusive monopoly.

[Modern corollary: Fannie Mae and Freddie Mac, which make more than 90% of all of the mortgages in the U.S. and have dominated the market for mortgages for decades.]

6. Centralized the means of communication and transport in the hands of the State.

[Modern corollary: AT&T was a legal monopoly for decades. Amtrak is a ward of the states. The government owns all the roads. And the State controls all air traffic.]

7. Provided free education for all children in public schools.

[Note the emphasis on public schools. Paying for education isn't enough. What counts is indoctrinating the kids in glorifying the State.]

8. Produced a common agricultural policy to maximize the productivity of the land.

[Modern corollary: Massive ethanol and agricultural subsidies.]

Most people in democracies like these ideas for one simple reason: They hold the allure of getting something for nothing. They are the siren song of living at the expense of your neighbor.

These ideas became extremely popular over the last 100 years, all around the world. As a result, as democracy spread, so did these ideas. Politicians of each party and persuasion throughout the Western world quickly adopted them as their own (and never mentioned Marx).

As these ideas took hold, one big problem developed… How do you pay for them?

Progressive politicians believed they had the answer. They just took Marx's big innovation: A progressive income tax. Let the rich pay!

It's a popular idea – but it never works because decisions to add more benefits don't take into account the expense of paying for them. It doesn't take long for the budget to get out of control. Or said another way, everyone can't live at the expensive of his neighbor. His neighbor can't afford it… and he moves.

More serious, the flaw in communism is obvious. Communism doesn't account for the fact that people expect to control the fruits of their labor. People don't like their assets being stolen and their wages being heavily taxed by a government that regulates their businesses and sends their children off to war. Incrementally, people stop working. Wealthy people flee… or hide their incomes.

Tax revenues fail to meet projections. Deficits grow. Deficit spending soars. And debts mount.

That's where paper money comes in. Paper money isn't only good for financing a war. It's also perfect for closing the gap between what an economy ought to produce and its paltry real production when it has been beaten into submission by communist ideas. I like to explain it this way…

The central truth of economics is scarcity. There can never be enough of anything to satisfy everyone. The central truth of politics is patronage: promising to give everything to everyone. Paper money is the bridge between economics and politic s.

The unpaid debts of an entire generation of people in Western countries are coming due. The so-called "baby boomers" grew up in a world dominated by Marxism and Keynesian economics. These are bad ideas. They are destined to collapse.

And the collapse is here.

Regards,

Porter Stansberry 

Euro Will Be Vulnerable to Further Selling Pressure

EUR/USD

The Euro pushed to a high just above 1.3350 against the dollar in Europe on Friday and was then subjected to the same pattern as in previous days with sharp losses during the New York session.

The German economic data remained favourable with an increase in the IFO business confidence index to 109.9 for December from 109.3, the highest reading since 1991. The positive elements for the Euro were again overshadowed by structural vulnerabilities. Rating Agency Moody’s cut Ireland’s credit rating by a very substantial 5 notches to Baa1 from Aa2, maintaining a severe lack of confidence in the Irish economy and increasing fears over the regional contagion risk. Markets will remain convinced that Portugal will need a support package from the EU early in 2011 which would then put the focus on Spain.

There was also evidence that the European banks were facing an increased cost of securing dollar funding in the inter-bank market and the Euro will be vulnerable to further selling pressure if these pressures intensify over the next few days.

There were no major US economic data releases on Friday and data over the forthcoming week may have a limited impact with markets focussing on year-end liquidity and technical issues. The Euro retreated to lows just below 1.3150 on Friday and remained firmly on the defensive in Asian trading on Monday.

Yen

The dollar was unable to move back above 84.20 against the yen on Friday and was confined to relatively narrow ranges with support emerging below 83.80. The US currency continued to gain some degree of support on yield ground even though there was a rally in US Treasury bond prices during the day.

There were fresh tensions surrounding Korea on Monday with South Korea confirming that military drills including live firing would go ahead as planned despite warnings from North Korea that this could lead to a declaration of war. The tensions had some impact in curbing yen demand, although this was limited by the fact that underlying risk appetite also deteriorated as Asian equity markets declined.

There will be some unease over potential capital repatriation from Euro-zone countries which could magnify year-end yen volatility, especially with low liquidity.

Sterling

Sterling was unable to move back above 1.5650 against the dollar on Friday and dipped sharply in US trading with lows below 1.5480. Although the US currency was generally strong, there was also independent Sterling vulnerability as domestic doubts had a negative impact. 

There was a warning from Lloyds banking group that it would need to increase its bad-loan provisions related to Irish banks  for 2011. These comments revised fears that the UK banking sector as a whole would be damaged by weaknesses within the Euro-zone and also maintained fears over a negative contagion impact on the UK.

There were also persistent fears over an economic slowdown within the UK early in 2011 and there will also be fears that adverse weather conditions will dampen retail spending in the crucial pre-Christmas period. Policy uncertainty remains a key factor with doubts that the Bank of England will be in a position to tighten policy in order to contain inflation expectations. Sterling edged back above 1.55 on Monday, but the performance remained unconvincing

Swiss franc

The dollar found support below 0.96 against the franc on Friday and advanced to highs around 0.9720, primarily due to the wider advance against European currencies. The franc retained a firm grip against the Euro and tested record highs near 1.2720.

There has been no major change in sentiment towards the Euro-zone and the Swiss currency is continuing to gain defensive support from an underlying lack of confidence in the Euro. Markets will be on alert for National Bank action as any intervention would have a magnified impact when liquidity is lower over the next two weeks.

Australian dollar

The Australian dollar was unable to move back above 0.9920 against the US currency on Friday and retreated to lows just below 0.9850, but did prove to be broadly resilient. There was a general shift towards risk aversion, especially given tensions in Korea and this did have a negative impact on the Australian dollar. There were also further analyst reports pointing to the currency’s over-valuation from a medium-term perspective.

There are only limited domestic economic indicators due in the near term and the currency is likely to be buffeted by international moves, especially with liquidity declining over the next few days. 

FX Update: EUR – not much new on the table

EuroZone leaders are not bringing much to the table in their renewed efforts to get ahead of the sovereign debt crisis. Also, despite continued bullishness in US equities, risk appetite is crumbling around the edges in FX land.

EU Summit – much ado about not much
European leaders tried to come up with new measures to get ahead of the curve in dealing with the sovereign debt crisis at their summit of the last two days, but little of substance has been agreed on and we should all be relatively underwhelmed by their progress on the issue. There were attempts to establish some means of establishing a rescue package that extends beyond the 2013 expiry of the current EFSF vehicle as well as loosening up the rules on how funds are to be paid out of the current vehicle (running amounts rather than lump-sum packages like that designed for Ireland). The only clarity we seem to have after today is that we will have to wait another few weeks to see if the leaders can make a decision amenable to all factions even if there is an agreement in principle. Moody’s was out downgrading Ireland several notches today, adding to the other downgrades, threatened and otherwise, from earlier this week. A Globe and Mail called it “end of year house cleaning” on Moody’s part.

It is clear from this summit that Germany’s Chancellor Merkel remains dead set against expanding the current rescue fund or signing off on the creation of Euro-bonds. Peripheral PIGS debt spreads reacted little to the news and remain at elevated levels and EUR, after a brief squeeze higher today, quickly ran out of oxygen and fell back sharply lower.  It is becoming alarming how slow European’s leaders have been in crafting a response to the crisis – and while the consensus may be that market participants are unwilling to put on much risk at this time of year – the volatility potential here is perhaps higher than the market generally recognizes. EURUSD could see 500-700 pips of movement in the next few weeks if something more significant does not emerge from the EU/ECB leadership. Meanwhile, the German IFO has marched to a new all time high? Go figure.

Weak pound
The pound remains weak after the UK Financial Stability Report bemoaned the potential risks to British banks from the EuroZone debt crisis and the recommendation that banks try to limit the distribution of profits to shareholders and employees. A stunning drop in consumer confidence in November also pressured the currency as the market frets the implementation of the next round of austerity measures starting in the New Year.   Remarkably, according to this poll, confidence is at the lowest level in the UK since the darkest days of the financial crisis in early 2009. 1.5485 is the next important support level for GBPUSD and the 200-day moving average looms just below 1.5400.

Chart: AUDCAD
Bank of Montreal Bank announced today its intent to purchase Marshall and Ilsley, a US bank, for $4.1 billion in stock today. This may be some of the reason behind the strong uptick in USDCAD today in addition to general USD strength. It also gives traders a better entry level while considering whether an AUDCAD short is an idea for the new 2011. 

Looking ahead
The environment here across global market is very interesting. If we look at the likes of the Hang Seng Index, we have just broken down through a head and shoulders pattern. Meanwhile, emerging markets in general have rallied quite a bit, but are still well off the early November highs, while US equities are pushing the top of the envelope once more. Elsewhere, precious metals look nervous and bonds have rallied very sharply around the world while some of our risk measures have come off a bit. What does this all add up to? We’re certainly not sure just yet, but the divergences are noteworthy and suggest either that we simply have some end of the year profit taking on risk/commodity longs and thin liquidity making for random noise or that something more interesting Is afoot.  We’re always hoping for the latter, especially with complacency at such high levels.

Be on the lookout for volatility. Next week’s liquidity will be thinner than this weeks, so stay careful out there as always.

Economic Data Highlights

• UK Nov. Nationwide Consumer Confidence fell to 45 vs. 52 expected and 52 in Oct.
• Norway Dec. Unemployment Rate steady at 2.7% vs. 2.8% expected.
• EuroZone Oct. Construction Output rose 0.0% MoM and fell-6.8% YoY vs. -7.7% YoY in Sep.
• EuroZone Oct. Trade Balance out at 5.2B vs. 2.5B expected and 2.6B in Sep.

Upcoming Economic Calendar Highlights

• US Nov. Leading Indicators (1500)
• New Zealand Nov. Performance of Services Index (2130)
• Japan BoJ Monetary Policy Meeting (0400)
• Japan Nov. Nationwide Department Store Sales (0530)

FedEx follows Best Buy: missing estimates

Yesterday we had Best Buy missing estimates and issued a profit warning. Today we have FedEx out with second quarter results reporting EPS excluding certain items of USD 1.16 a share compared to USD 1.32 per share expected and revenue of USD 9.63 billion compared to USD 9.77 billion expected. The stock is trading 2 percent lower in early trading.

The company is experiencing its second quarter in a row with falling annualized revenue growth rate driven primarily by lower growth in international freight volumes. Annualized net income growth rate is also coming down driven primarily by higher fuel and maintenance costs for its jet fleet. With current estimated forward P/E ratio at 17.8, we don’t think, given the current trend in revenue growth and beginning pressure on margins, the stock has attractive upside compared to other stocks on risk-reward basis.

Today’s earnings report from FedEx leaves two questions on the table. Is this confirming our view that sell-side analysts have too high earnings expectations for 2011? Where does the sharp decrease in annualized revenue growth rate leave the economic prospects for 2011?

FX Update: A mashed pound with USD on top

The USD is following up on its reversal yesterday with additional strength in today’s session – particularly against a struggling British pound. Also, liquidity conditions in these final trading days of the trading year are looking treacherous.

Pound gets pounded
The pound is down as the October unemployment level came in higher than expected and jobless claims fell less than hoped for. The Dec. CBI survey of retailers looked very strong for this Christmas season, but the expectations component dropped to a new five-month low. An increase in the VAT will kick in come January, so let’s see how strong the environment is this time next month. Also possibly to blame for the GBP sell-off are rather thin markets combined with a squeeze on stale EURGBP shorts as that pair squirts back above the 200-day moving average today. The next couple of days tell us whether this is simply a squeeze on weak positioning ahead of the key Euro-related event risks to close this week or if something else is afoot. Note that GBPCHF just broke below 1.50 for the first time ever.

Scandie Central Bank Two-fer
The Riksbank and Norges Bank were both out with interest rate decisions. The Riksbank’s move was widely expected, though the currency managed to notch further gains as Ingves was out with relatively hawkish guidance – expecting further hikes due to a very strong economy, though tempered with caution due to the situation in Europe. The official outlook for the repo rate was relatively unchanged since the October meeting and there were two governors who dissented from the decision who hoped to keep rates at 1.00%. SEK has a history as a pro-cyclical currency, so it would be interesting to see how it performs if we get a correction in risk appetite as EURSEK nears the 9.0 level.

Norges Bank left its deposit rate unchanged as expected, but the outlook was perhaps more hawkish than expected, as the outgoing Gjedrem warned against keeping the rate too low for long due to risks of household debt growth. This probably should be seen as a parting statement by Gjedrem on the long run risks of a low rate rather than any indication of imminent rate hikes. His replacement, Oystein Olsen, has suggested that NOK’s relative strength will be a key in determining monetary policy. On that account, against the Euro, the NOK looks relatively firm so no imminent threat of a rate hike as long as Europe is struggling with its sovereign debt demons. Longer term, NOK looks woefully undervalued in places (like versus AUD and NZD in particular)

US Data
The Empire Manufacturing Survey mean reverted and then some as the last two months of wild swings makes it tough for anyone to draw any conclusions from the survey. The survey wasn’t as strong as it looks on the surface if we have a look at the internals, as New Orders only rose to 2.6 from -24.4 in Nov. and +12.9 in Oct. The worst indicator was in the employment-related sub-indices, as the Number of Employees index fell to -3.4 vs. 9.1 in Nov. and the Average Workweek drooped to -14.8 vs. -13 in Nov. On the margin side, we’ve still got a squeeze as Prices Paid registered a nasty 28.4 while Prices Received was out at 3.4.
The CPI was relatively in-line and not noteworthy, except as a reminder of the index’s worthlessness except in indicating that the Fed thinks real world inflation might be as opposed to what real world inflation actually is. And food and gas prices have risen dramatically in November. So it is clear that oil prices and food prices need to remain capped here very soon if we are to expect any continued risk of deflation in the US economy.

Looking ahead
Liquidity is already looking fairly treacherous judging from some of the action overnight and ahead of the US open today, so traders should position themselves accordingly.

Keep an eye on the news flow on the Ireland vote on the bailout deal and on the EU summit on Thu/Fri. EURGBP and EURCHF are telling two wildly divergent stories at the moment. Beware the SNB’s Libor Target setting meeting tomorrow.

Also keep an eye on bonds, which are not following up yet on the strange post-FOMC sell-off yesterday. Remember that there is a new FOMC in town come the first of January and ahead of the next FOMC decision on January 26.

Economic Data Highlights

• Australia Dec. Consumer Confidence rose to 111.0 vs. 110.7 in Nov.
• Japan Q4 Tankan Large Manufacturer’s Survey out at 5 vs. 3 expected and 8 in Q3
• Japan Q4 Tankan Non-manufacturing Survey out at 1 vs. 0 expected and 2 in Q3
• Japan Q4 Large Manufacturing/Non-manufacturing Surveys out at -2 and -1 vs. 0/-3 expected, respectively and vs. -1/-2 in Q3
• Australia Nov. New Motor Vehicle Sales out at +0.2% MoM and -0.9% YoY vs. +3.4% YoY in Oct.
• China Oct. Leading Index rose +0.9% MoM vs. +0.6% in Sep.
• Sweden Riksbank raised interest rates 25 bps to 1.25% as expected
• Norway Nov. Trade Balance out at +31.1B vs. +23.6B in Oct.
• UK Nov. Jobless Claims Change out at -1.2k vs. -3.0k expected and -5.2k in Oct.
• UK Oct. Average Weekly Earnings ex Bonus rose 2.3% 3M/YoY vs. 2.4% expected and 2.2% in Sep.
• Switzerland Dec. Credit Suisse ZEW Survey out at -12.5 vs. -30.9 in Nov.
• UK Dec. CBI Reported Sales rose to 56 vs. 38 expected and 43 in Nov.
• Norway Norges Bank left rate unchanged at 2.00% as expected
• Canada Oct. Manufacturing Sales rose +1.7% MoM vs. +1.0% expected
• US Nov. Consumer CPI out at +0.1% MoM and 1.1% YoY vs. +0.2%/+1.1% expected, respectively and vs. +1.2% YoY in Oct.
• US Nov. Consumer CPI ex Food and Energy out at +0.1% MoM and +0.8% YoY, vs. +0.1%/+0.6% expected, respectively and vs. +0.6% YoY in Oct.
• US Dec. Empire Manufacturing out at 10.57 vs. 5.0 expected and -11.1 in Nov.
• US Oct. Total Net TIC Flows out at +$7.5B in Oct. vs. +$51.0B expected and +$80.1B in Sep.
• US Oct. Net Long-term TIC Flows out at +$27.6B vs. +$77.2B in Sep.
• US Nov. Industrial Production out at +0.4% MoM vs. +0.3% expected
• US Nov. Capacity Utilization rose to 75.2% vs. 75.0% expected and 74.9% in Oct.

Upcoming Economic Calendar Highlights (all times GMT)

• US Dec. NAHB Housing Market Index (1500)
• US Weekly DOE Crude Oil and Product Inventories (1530)
• New Zealand Q4 Westpac NZ Consumer Confidence (2100)
• New Zealand Nov. Business PMI (2130)
• Australia Dec. RBA Q4 Bulletin (0030)
• New Zealand Dec. NBNZ Business Confidence (0200)

A special "End of America" message from Dr. Steve Sjuggerud

Dear reader,

My friend and colleague Porter Stansberry is at the center of a big controversy right now...

It's a controversy Porter has nicknamed the "End of America."

You might remember how Porter predicted the collapse of GM, Fannie Mae, Freddie Mac, and America's biggest mall owner (General Growth Properties), a few years ago.

Well... Porter recently released a presentation on his biggest and most important prediction yet. (You can watch it here.)

In short, he says there will be a day over the next 12 months that will change nearly everything about the way we do business in America... the way we travel... shop... educate our children... and invest.

Please keep in mind: Porter is probably the smartest person I know... and he says he's never been as sure about anything in his entire life as he is about this.

Porter has put together a video to get his word out. You've likely seen it by now... and you might be intrigued by his ideas. They're generating a huge amount of interest across the country... especially in Washington D.C.

That's why I invited Porter and his colleague Braden Copeland to put together a special DailyWealth series about these ideas... and how they could affect you and your family.

Starting today, you'll receive the first in a four-part series of special daily essays from Porter and Braden that lay out the case for the "End of America." You may not agree with everything they say... you might even think their ideas are crazy. But I guarantee you'll come away with a lot to think about... like several unusual steps to safeguard your wealth that you've never considered (I know one idea particularly hit home with me).

I hope you enjoy this special series.

Good investing,

Steve
Editor, DailyWealth

http://www.stansberryresearch.com/

Shale Gas Initiative Brings Morocco to My Doorstep

Shale Gas Initiative Brings
Morocco to My Doorstep
by Dr. Kent Moors

Dear Oil & Energy Investor,

On Friday morning, I met with a delegation from Morocco. The five officials were from ONHYM (Office National des Hydrocarbures et des Mines), the national agency overseeing oil, gas, and mining. They're here in the U.S. under the provisions of a Department of State (DOS) initiative on the major new energy source - shale.

And they gathered in my conference room in Pittsburgh to discuss how to best manage this significant new source of fuel.

The DOS project is the Global Shale Gas Initiative (GSGI), launched in April to help make the U.S.' extensive experience in shale production available to countries around the world. The emphasis so far has been on the shale gas side - although North Africa in general, and Morocco in particular, may also have significant deposits of oil shale.

GSGI recognizes two very important developments.

First, shale is going to change the energy sourcing mix significantly. (As game-changers go, this one is huge.) Second, it may just be the most significant opportunity for the export of American hydrocarbon technology and knowhow to come along in generations.

Both of these developments are going to provide major advantages for rest of the world... and major profits for us.

Read on to see why Morocco needs the U.S. to help tap its 37-billion-barrel potential...
 

FX Closing Note: All clear to the New Year?

It's tempting to believe that we're in the all clear until the New Year, but a couple of niggling divergences and other factors make us not so sure. Certainly, Asia is the focus as we head into the weekend.

House Democrats to stand in Obama's way on tax deal?
House Democrats are hopping made at Obama for turning his back on them and giving the Republicans a victory with the across the board tax cut extension and appear ready to make a big enough stand that the deal will not come to the floor as it is, to paraphrase a quote from a politico.com article. This may be the key news item today that has spooked risk.

US T-bond auction
The US T-bond auction was relatively healthy, and showed further improvement from yesterday's 10-year auction results. The id to cover raio was higher than at the last three 30-year auctions and the indirect bidding, which includes foreign central banks, represented some 49.5% of demand, the highest percentage since the treasury restarted 30-year auctions in 2006. The bid-to-cover ratio at today's auction was better than at any of the last three auctions at 2.74. Somewhat surprisingly, the market didn't react at all to the auction results, which either represents apathy or the risk of a further sell-off. USDJPY found support on the day in the wake of the auction.

Irish bailout vote
The Irish parliamentary vote on the IMF/EU bailout is set for next week, with debate starting on Tuesday. We were confused by the recent schedule announcement of the vote and thought it had already taken place, but this is not yet the case. The latest news is relatively unchanged on the expected thin majority in favor of passage. The EUR swooned briefly today after the Irish Labour opposition said it would vote against the bailout, but this was largely know in advance. 

Looking ahead
The market still looks uncertain here as the push to new highs in the US equity markets failed once again to hold. The market may be awaiting the PBOC news tomorrow or over the weekend. To hike or not to hike is the question. And on that note - below we offer a chart that shows the curious divergence in the performance of the world's equity markets, with the S&P500 fiddling with new highs for the cycle, while the EM markets are making what looks like the right shoulder of a head and shoulders formation (unless they also catches the rally impulse) and the Hang Seng looking even more dour lately. We find it very interesting that the Hang Seng led the S&P500 at the last two major market turns - in April from bull to mini-bear market and in July - when the US market was plunging to new lows for the cycle while the Hang Seng was still well off its May low. Interesting stuff. Let's see if this underperformance is just temporary fear related to the Chinese crackdown on inflation or whether Asia has the world lead at the moment on the direction in risk.

Chart: S&P500 vs. EM and Hang Seng
We put the S&P500 on another axis to simply bring out the fact that it is at a new index high for the cycle, even if overall it has slightly underperformed the other two indices since August 1. Data source is Bloomberg.

 Chart: AUDUSD
AUDUSD continues its struggle with the whether it wants to stay below the 55-day moving average, coming in around the day's close at 0.9830 today. This has been an interesting moving average for the pair for months.

The latest interesting thing we've heard about this crazy rally in copper (historically AUD follows copper very closely) is that JP Morgan might be hoarding the metal in anticipation of the launch of a copper ETF. One thing is for sure: the price of copper probably doesn't have a lot to do with demand for the metal at this point in time - it has become a speculative instrument. Another point - commodities make extremely awkward financial instruments. What good does it do the world to have physical copper in warehouses rather than being bought and. See this article for more on the copper story and the "financialization of commodities" . This is a story worth following in the months to come. So when do we get the first Corn ETF and when will governments ban it on humanitarian grounds? The kind of response this could eventually provoke - not just for food items but for all commodities - from the authorities is certainly worth consideration.

Be careful out there.

Stocks in the week ahead: Riding the wave

With the European debt crisis somewhat taking the backstage over the past week, the most important event in our view was the agreement reached by the Obama administration and the Republicans over the extension of the George W. Bush tax breaks.

At a cost of USD 700 billion (to be added to the national debt, of course!), the agreement cleared a major hurdle for the stock rally to find renewed impetus. Another market that took notice of the political deal was the bond market, with the yield on 10-year treasuries rising sharply above the 3% key level on the news:

 

We have no doubt that the recent increase in long yields will soon be used by the perma-bears as a major justification to their on-going argument that stock markets are about to collapse.

Call us naive, but we believe that the rise in yields may well be a sign that the tide is turning against deflation. Hence we see this development as part of the process of recovery and potentially very positive for 2011.

Obama tax breaks, Christmas rally, Central Banks Puts… whatever the reason behind it, the S&P500 is still in rally mode and our long advertised 5-wave cycle is still playing out nicely. As we suspected, we are now in the fifth-wave of a 5-wave move and the question now is (as always ), where are we headed?

Following the logic of the cycle and knowing how 50s and 100s attract trading activity on the S&P500 and its components, we expect the index to close in on 1250 by next week and hover around the level for a bit.

We also note how 1220 provided good support after the dynamic break of the previous week, despite the printing of a very bearish shooting star mid-week:

Ultimately, a wave of equal length to the “July 2010” move would bring the S&P500 towards 1291. We therefore look for the 1300 round number to be reached in the coming few weeks.

A level of 1300 points would mean that the S&P500 trades at a 15.2 forward Price Earnings ratio (2011) versus the current level of 14.4, nothing too taxing. From the 1300 level, we would then prepare for some kind of correction.

In Europe, we warned traders last week not to try and fight the ECB by shorting stock indices . Instead, we were preparing for the Euro Stoxx 50, the European benchmark for large caps, to recover towards the middle of its recent uptrend:

 Euro Stoxx 50 cash index (Daily chart), source Bloomberg

Europe was therefore a strong relative performer versus the US.

Looking forward to next week, we expect the Christmas rally to continue and the index to settle closer towards the 2900 level, with 2800 the obvious support zone of this V-shaped index recovery.

Have a safe trading week!

FX Update: USD in no-man’s land ahead of key event risks

The technicals for the USD remain wishy washy for both bears and bulls as the market awaits House debates on the Obama/Republican tax deal and whether the Chi. What are the implications as we approach the last real trading week of the year?

Australia Employment Report
A recent rash of shaky data out of Australia was swept overboard by a ridiculously strong employment report from Down Under. Australia added more than 55k new jobs in the month of November, the per capita equivalent of a half million or so payroll additions in the US. And the October number, already positive, was revised 8k higher. This puts a significant focus on any signs of wage pressures as the economy effectively nears full employment. Q3 GDP was disappointing – the weakest in over two years – and a number of surveys suggest a weak trajectory outside of the mining sector, but that is a very important sector, especially with materials prices arching to record highs recently (copper and PM’s), so the data puts the market back on watch for another rate hike to 5.0% at one of the coming RBA meeting. The December 2011 STIR future has seen the market price in about 20 more bps of tightening than was predicted late last week. As an aside, the longer the mining boom continues, the more it risks distorting Australia’s already very imbalanced economy.

Down with the Fed!
A survey conducted by Bloomberg suggests a rising popular awareness of the Fed and dissatisfaction with its dirty deeds. An absolute majority now believes that Fed powers should be curtailed (39 percent) or that it should be abolished entirely (16 percent). So much for Bernanke's charm offensive! See the results of the survey here. While we can’t imagine that the average person has any deep understanding of the Fed’s role in the economy, the rising profile of the Fed among the population will mean that politicians will smell plenty of opportunity for a scapegoat once things turn sour again as the US grapples with its debt demons. On a similar note, Ron Paul, the famed libertarian Republican congressman from Texas and author of a book entitled End the Fed confirmed . 2011 is going to be a very interesting year for the Fed as Bernanke’s seat is getting unbearably hot. All of this points to a declining room for maneuver for the Fed, which is unlikely to be able to launch any new form of QE under the new Congress unless a full blown crisis is underway.

Chart: USDCAD
USDCAD remains below its 21-day moving average, which has been an interesting swing indicator in recent months. While interest rates have rebounded sufficiently in the US to argue that the pair should be pushing higher at the critical 200-day moving average again, the focus seems to be equally on equity prices and crude oil, both of which have been on the up and up lately. If new highs in the US equity market hold here and crude arches back above 90 dollars a barrel, it’s hard to imagine that the pair won’t at least see an attempt below parity, the recent dovish BoC guidance notwithstanding. Tomorrow we get Oct. trade numbers from both the US and Canada.

Looking ahead
Watch the debates today in Congress over the tax deal hammered out between Obama and the Republicans. Many Democrats in the House are furious that Obama has turned his back on some of the promises made in his campaign and many embittered liberal Dems who are on their way out (as well as Blue Dog Democrats who are considered budget hawks) may vote against the bill. The market is certainly not prepared for this, though we’re not sure whether this protesting faction and the minority of Republicans against the deal because it didn’t go far enough are enough of a majority to threaten passage of the new deal. Any failure to pass the deal would be very supportive of the USD, as this deal represents a disturbing sign that the US is unwilling to change its policy of total fiscal irresponsibility until forced to by a crisis.

Another pressing issue at the moment is the inflation pressure rocking China and whether the authorities there are willing to go the route of actually hiking interest rates rather than sticking with their current plan of ratcheting up pressure on banks’ capital reserve ratios. They are obviously scared that this risks increasing hot money inflows because of higher interest rates relative to the US while it desperately clings to its currency peg. A Chinese rate hike and any rhetoric that hints at further hikes to come would be risk negative globally. In the press, a Reuters indicates that the PBOC is unlikely to go the rate hike route while the Wall Street Journal suggests significant fears of a hike.

30-year US T-Bond auction
The final auction of this week is on tap for today and it’s an interesting one as the bad Tuesday 3-year auction yielded to a so-so Wednesday 10-year auction. Is this a trend? One of the interesting things going on lately – and this has been extensively covered by ZeroHedge – is that a steepening front end of the curve has been accompanied by a rapid flattening of the 10- to 30-year portion of the curve, frustrating bets that the Fed might be able to hold down yields close to the middle of the curve while not able to control the longest end. Relative strength for 30-year bonds also makes little sense if we are all to believe that the market is increasing its bets that US public sector profligacy will doom the US to high inflation eventually.  The markets are always an enigma.

Also, we’re at a massive pivot point at the short end of the curve as the US 2-year rate is at 60 bps, which was the previous low for the cycle in 2008 and 2009 and acts as resistance. Acceleration higher or reversal in yields? This will profoundly affect the JPY crosses and the outlook for risk as well.

Economic Data Highlights

• Australia Nov. Employment Change out at +54.6k vs. +20k expected and 36.9k in Oct.
• Australia Nov. Unemployment Rate fell to 5.2% as expected and vs. 5.4% in Oct.
• Japan Nov. Machine Tool Orders rose 104.2% YoY vs. 71.0% in Oct.
• UK Nov. Halifax House Price fell -0.7% 3M/YoY and -0.1% MoM vs. -0.7%/-0.3% expected, respectively
• Sweden Nov. Headline CPI out at +0.3% MoM and +1.8% YoY vs. +0.2%/+1.7% expected, respectively and vs. +1.5% YoY in Oct.
• Sweden Nov. Core Inflation out at +0.2% MoM and +1.9% YoY vs. 0.0%/+1.8% expected and vs. +1.8% YoY in Oct.
• UK Oct. Visible Trade Balance out at -£8529 vs. -£8100 expected and -£8392 in Sep.
• UK BoE left Rate and Asset Purchase Target unchanged as expected
• Canada Oct. New House Price Index rose +0.1% MoM as expected
• US Weekly Initial Jobless Claims out at 421k vs. 425k expected and 438k last week
• US Weekly Continuing Claims out at 4086k vs. 4237k expected and 4277k last week

Upcoming Economic Calendar Highlights

• US Oct. Wholesale Inventories (1500)
• Japan Nov. Domestic CGPI (2350)
• Japan Nov. Consumer Confidence (0500)
• Japan BoJ Deputy Governor Yamaguchi (0620)

USD resurgence to persist?

The greenback is fighting back once again on resurgence in US yields across the curve after Obama tax deal and renewed growth hopes. Does this jibe with action in other markets and will the renewed USD strength persist?

Higher US yields and the USD
The sharply higher yields at the long end of the US yield curve are pushing the USD stronger – a relatively rare phenomenon if we look at the post-global financial crisis environment. Generally since 2008, we’ve been trained to look for USD strength when interest rate spreads improve in favor of the US via non-US yields falling more rapidly than the already very low us yields. This time is very different, as we are seeing US yields sharply higher all along the curve on renewed hopes that US growth will surprise in the coming year. This view is supported by the new round of “stimulus” by the Obama administration in its unemployment benefits/tax cut extension move this week. Although this program only adds new outlays via the unemployment benefits, the combination of these benefits in addition to the Bush era tax cut extensions and the payroll tax cut are north of 5% of GDP relative to what would have been the case had no action been taken. This virtually guarantees that there will be no real double dip in 2011 for the US. Of course, this comes at a huge cost to the already dire fiscal picture, but for the moment, the market continues to express no worry on that front, perhaps hoping that the economy will make a strong enough comeback to keep the Fed sidelined and grow tax revenues. This is an impossibly sanguine view on the fiscal side, but the market seems very content to live in the now these days and as long as US yields outperform, we should see a continuation of the USD strength – particularly against the low-yielding JPY.

EuroZone periphery
The Irish budget passed as expected, with no strong reaction in the FX markets, save for continue weakness. The sovereign debt noise is now shifting to Italy, where Berlusconi’s hold on the reins of power seems to be slipping and he faces a confidence vote on December 14. If one dials back to the past of Italian politics, one can easily find grounds for further worry that fractious politics could hinder any timely solution to Italy’s deficit and debt challenges. See this Bloomberg article for coverage of Italy’s 2011 budget proposal and Berlusconi’s confidence vote. 

UK manufacturing data
The UK CBI manufacturing orders data surged to its strongest level in years and well above expectations. This together with Euro-area nervousness has EURGBP trading to a new low for the week as last week’s low around 0.8335 is rapidly coming into view. The current yield spread picture at the front of the curve suggests that GBPUSD is fairly priced in the 1.5800-1.6000 area. UK vs. Japanese yield spreads suggest that GBPJPY should be breaking to new highs for the cycle.

Chart: GBPJPY
Yield spreads suggest GBPJPY should be trading at a new high for the recent cycle. While the pair has rallied sharply on the last couple of days of bonds selling off, it is still below the previous highs. Also looming soon is the 200-day moving average above 134.00. We’ll likely need to see a continued pummeling of the bond market to get the pair to achieve further altitude. Otherwise, this is just one more false hope rally for the JPY funded carry trades. 

Looking ahead

 Reversal to see follow through?
Yesterday was a key technical event across markets, as the break to new highs in equities failed to close at new highs and as we saw an almost climactic reversal in some of the most volatile markets like precious metals. Silver, for example, posted a strong new high above 30.50, but then closed the day below 29 dollars and therefore below the previous high.  As well, US treasuries resumed a sell-off and USDJPY reversed sharply back to the upside. Today and the rest of the week will be about determining whether this move continues or whether it was just a headfake.  The next key triggers are the 1.2970 lows in EURUSD and perhaps the 0.9700 area in AUDUSD (which is struggling today to figure out whether it wants to break down through the 55-day moving average just above the 0.9800 level.

Key US 10-year auction
Today’s US 10-year auction is one of the more important auctions in recent memory now that bond yields have punched through critical levels.  At some point, rather than serving as a reflection that risk appetite is improving, higher bond yields might generate worries for growth rates. Certainly, sharply higher rates from current levels mean that we need to see strong fundamental improvement in economies and corporate earnings again, since the higher rates go, the more they pressure the fragile mentality of the liquidity punchbowl and rising asset prices as a response to Fed priming.

RBNZ on tap
Don’t forget that the RBNZ is on tap with its rate decision (no change expected – we’re sure that the RBNZ is not particularly happy with the strong kiwi – even if it is resigned to it. On the economic data front, there is little to suggest that the RBNZ needs to pull the level here and now with housing sales collapsing and prices easing lower while there are few signs of inflation and the major activity surveys have decelerated a bit recently. Still, guidance will be worth watching.

Economic Data Highlights

• US Weekly ABC Consumer Confidence out unchanged at -45
• Japan Oct. Adjusted Current Account Total out at ¥1463B vs. ¥1556B expected and ¥1661B in Sep.
• Japan Oct. Machine Orders fell -1.4% YoY and rose +7.0% YoY vs. -0.1%/+8.3% expected, and +4.2% YoY in Sep.
• UK Nov. BRC Shop Price Index rose +2.0% YoY vs. +2.2% in Oct.
• Australia Oct. Home Loans rose 1.9% MoM vs. 0% expected
• Germany Oct. Current Account out at +11.7B vs. +14.3B expected and +14.5B in Sep.
• Germany Oct. Trade Balance out at +14.2B vs. +15.1B expected and +16.8B in Sep.
• Germany Oct. Industrial Production rose +2.9% MoM and +11.7% YoY vs. +1.0%/+10.0% expected, respectively and vs. +7.7% YoY in Sep.
• UK Dec. CBI Total Orders Trend rises to -3 vs. -13 expected and -15 in Nov.
• Canada Nov. Housing Starts out at 187.2k vs. 173k expected and 167.8k in Oct.

Upcoming Economic Calendar Highlights

• US Weekly DoE Crude Oil and Product Inventories (1530)
• New Zealand RBNZ to announce Cash Target (2000)
• New Zealand Nov. Credit Card Spending (2145)
• Australia Q4 Westpac ACCI Industrial Survey (2330)
• Australia Nov. Employment Change and Unemployment Rate (0030)
• Japan BoJ’s Morimoto to Speak (0130)
• Japan Nov. Machine Tool Orders (0600)

Sizing up EuroZone debt and risk spreads

Today we have a look at EuroZone debt spreads and spreads versus US interest rates and try to divine what the market is telling us. The key question here: is the reduction in PIGS spreads what it seems?

(Note all data for this article sourced from Bloomberg). A lot of attention has been showered on the three little PIGs at the EuroZone periphery and their sharply improving fortunes of recent days – at least as measured by their debt spreads versus Germany. We chart this below:

Chart: The Three Little PIGs

Fortunes have improved sharply for the three peripheral EuroZone countries where the situation is considered most dire at the moment: Portugal, Ireland and Greece.

Chart: Italy and Spain vs. Germany Spread
And even the largest countries closer to the core have seen their fortunes improve if we are simply to measure this with the spread of the 10-year yields.

However, if we look at the relative movement in German vs. US yield spreads, we see that yields are converging quickly . This can be interpreted two ways: US just had a couple of bad data points, so its yields are underperforming. OR, we can say that German yields are going higher because some of the fear is spreading to the very core of the EuroZone. After all, Germany can never entirely decouple from the continent and economies that surround it - and which its banks are very large creditors.

Chart: EURUSD vs. German/US 10-year rate spread

What could help us prove that this might be the case? We created a basket of a few US banks CDS prices (Bank of America, Citigroup, Morgan Stanley) and compared those prices with a basket of bank CDS in Europe (including Dexia, BNP Paribas, Credit Agricole, Banco Esprito Santo, IKB Deutsche Industriebank,  Commerzbank) to show us the relative stress levels on default risk among large banks. This gave us the following chart:

Chart: CDS price spreads on European vs. US banks.

Note that we do not have today's closing prices for the CDS', though we doubt they have improved any considering the moves in risk markets elsewhere today. To us, the chart above is rather worrisome for the EuroZone and we wonder if the market is a bit too enamored of tracking EURUSD as a simple function of 2-year rate spreads. We would be happy to see a day, in fact, when currencies entirely stop following yield spreads so slavishly – a relationship that it would make sense to see fade away in an environment of sovereign default worries (sovereign risk should mean higher yields, which should mean weaker currencies, not stronger ones – one way to track this is via CDS prices, though these also have troublesome aspects.)

Chart: EURUSD and 2-year yield spread

In any case, the EURUSD is back higher apparently on the unemployment surprise that seemed to get the market exciting about bidding up the shorter term US treasuries again, which sent US yields lower.

Looking ahead
Tomorrow we have one very key event for the EuroZone sovereign debt situation: the Irish parliament is set to vote on the new budget. This is an interesting test of how many politicians are willing to commit political suicide ahead of the next round of elections – which will apparently come almost immediately if the budget is not passed, but could also be on the way sooner rather than later if . The new budget is so austere and such a shock to the system in Ireland that it is hard to imagine anyone signing off on it, but the politicians apparently fear chaos rather than pretending – pretending that modest growth of the Irish economy will be possible in the coming few years as the government chops the minimum wage, raises taxes by 9% of GDP and cuts deeply into public outlays, all while paying close to 5.8% on a rescue package agreed on with the EU/IMF.

Good luck, Ireland – it’s admirable to try the austerity route, but this plan looks like deflation-in-a-can as long as Ireland is linked to the Euro and virtually guarantees that the Irish economy shrinks faster than it can raise tax revenues to pay for its past debt sins. Neither is it fair to Irish tax payers, who must now foot the bill for bad decisions made by bondholders who were also participants in the country’s housing bubble. How are they going to feel pain? This will not stand – everything . While the budget is expected to squeak through now, a rejection would cause some measure of chaos in the short term as it raises the odds of an Irish default now (low odds) rather than later (definite odds, uncertain timing).

Another interesting event tomorrow is the planned run on European banks – a run urged on by Eric Cantona, the former French footballer, with unknown level of participation. This is clearly only a symbolic threat to Europe’s creaking banking system, but interesting nonetheless as a measure of popular outrage on the situation across Europe.

Be careful out there.