Keystone's Key Events and Market Movers Week of 8-29-11

Keystone presents the following underlying market currents, sometimes subtle sometimes turbulent, that move global markets in real time.  The key dates and times below typically correspond to market pivot points.

Markets remain at the mercy of the European crisis. The Euro leaders continue their reactionary course instead of a proactive out-in-front approach to the dilemma.  Rumors last week concerning a downgrade of Germany’s debt hit the DAX hard; traders selling despite the rating agencies releasing statements that a downgrade is not planned. Finland requiring collateral from Greece is not helping the Euro situation and in fact is fueling discontent. Germany continues to say ‘nein’ to Euro bonds although they have softened that position for perhaps a deal in the future.  The euro and the dollar continue to duke it out each day, both traveling sideways until a big break occurs; they move inverse to each other and the way the euro goes will match the way equities markets move.

The Bradley turn window last week, where we targeted Monday and Tuesday as a major move area with a recovery rally likely did not disappoint, with equities bouncing out of the gate last week. Interestingly, we moved straight into a new Bradley window now that runs thru 9/6/11, based on the 8/30/11 actual turn date. Thus, focus on Monday thru Thursday this week as a potential market trend change area, either a melt-up acceleration in this up move from last week, or, markets will reverse last week’s gains and move down again. Not to be wishy washy, the move would be expected to be down for the indexes starting sometime between Monday and Thursday based on the Bradley.

Interestingly, indexes are typically buoyant the two days in front of a three day holiday weekend, thus, market bulls would be favored as we approach the Labor Day weekend. Thus, taking only the Bradley and seasonality into consideration, and attempting a prognostication to determine the subtle move of the underlying currents of the markets, would hint at a move down in the indexes early in the week, followed by buoyancy later in the week. Of course the news cycle, especially Europe trumps all.

The new week is jam-packed with key economic data. Monday starts off with the Fed favorite Personal Income and Outlays data. Housing and manufacturing data hit within the first hour of trading also.  On Tuesday, Case-Shiller provides a gauge on the housing market and the news has not been good the last few months. One of Keystone’s most important monthly numbers, Consumer Confidence is released at 10 AM so look to that to be a market pivot point. FOMC meeting minutes are released in the afternoon.  Wednesday kicks off the jobs carnival with Challenger and ADP. Monster and the Jobless Claims hit Thursday morning and the circus comes to town Friday morning with the monthly Jobs Report.

Watch the first hour of trading closely on Wednesday morning since Chicago PMI, Factory Orders and Oil Inventories are all released and will provide a great indication of the status of the recovery, or lack thereof. The 10 AM time frame is important for four days in a row culminating with Thursday’s ISM Manufacturing Index and Construction Spending data. Watch the energy sector, XLE and individual energy names, in reference to the ISM data while Construction Spending is a very good gauge for future employment, or lack thereof.

Earnings are dropping off this week as many companies have already reported for Q2.  Highlights are solar and retail on Monday, books and dollar stores on Tuesday (many large players have moved into the dollar stores over the last two months), and shipping on Wednesday. The Baltic Dry Index jumped last week so DRYS will provide flavor as to whether the bounce is an indication of further economic strength ahead, or simply a dead cat bounce. Manufacturing and tax preparation insight is provided on Thursday. The week ends with some hot soup to soothe your soul. Campbells is a comfort food so those earnings can provide clues as to how folks feel these days. VIP earnings finish the week and anyone investing, or rather wasting, so much as a dime in Russia will deserve everything that is handed to them.

Further CME raises of the gold margins remains highly likely. Following the orchestrated silver slap down play book from April, more margin raises are expected for gold resulting in at least a couple hundred or more dollar move south expected.

Yen intervention by the BOJ remains highly likely.

The search for Gaddafi continues and the last stand is occurring in his home town of Sirte, thus, resolution to the Libyan conflict should provide overall market buoyancy, with further premium coming out of oil, commodities, gold and silver.

Keystone’s ‘Short Term’ Key Dates and Market Movers Week of 8/29/11 and on:

·         Monday, 8/29/11: Markets remain at the mercy of Europe news. Personal Income and Outlays 8:30 AM. Pending Home Sales Index 10 AM. Dallas Fed Mfg Survey 10:30 AM.  3 and 6-Month Bill Auctions 11:30 AM. We are now in the heart of a Bradley turn window so look for one of two opposite outcomes playing out Monday thru Thursday, either a huge melt-up for the recovery rally, or, a trend reversal where markets sell off early in the week. The market selloff scenario would be favored for the first half of the week at this juncture. Earnings: LDK, XING, WINN.

·         Tuesday, 8/30/11: Case-Shiller Housing Index 9 AM. Consumer Confidence 10 AM. 4-Week Bill Auction 11:30 AM. Fed’s Kocherlakota speaks at 12:15 PM. FOMC Minutes 2 PM.  Earnings: FLWS, BKS, DG, SEED, VRA.

·         Wednesday, 8/31/11: Mortgage Applications 7 AM. Challenger Job Report 7:30 AM. ADP Job Report 8:15 AM. Chicago PMI 9:45 AM. Factory Orders 10 AM. Oil Inventories 10:30 AM. Farm Prices 3 PM. EOM today at the close--September begins tomorrow. Earnings: BDSI, CWTR, DRYS, SAI, COO, ZLC.

·         Thursday, 9/1/11: Anecdotal chain store sales and motor vehicle sales data released during the morning. Monster Job Report 6 AM. Jobless Claims and Productivity and Costs 8:30 AM. ISM Mfg Index and Construction Spending 10 AM.  Natty Inventories 10:30 AM.   Fed Balance Sheet and Money Supply 4:30 PM. Be aware that markets are typically buoyant the two days in front of a three-day holiday weekend. Earnings: CIEN, FLOW, HRB.

·         Friday, 9/2/11: Jobs Report 8:30 AM.  Markets are typically buoyant the two days in front of a three-day holiday weekend. Earnings: CPB, TBAC, TEA, VIP.

·         Monday, 9/5/11: Markets closed for Labor Day holiday.

·         Wednesday, 9/7/11: President Obama releases his Jobs Package. The politicians return from summer vacation.  September budget talks heat up creating market negativity.

·         Thursday, 9/8/11: ECB Rate decision, a hold on rate rises is expected and in fact, the ECB may lower rates moving forward.

·         Tuesday, 9/20/11 and 9/21/11: Fed Meeting now expanded to two days. Chairman Bernanke will provide QE3 strategies moving forward.

Keystone’s Short Term to ‘Intermediate Term’ Key Dates and Market Movers for August  and on:

·         Earnings:  Earnings are meeting expectations for the most part; however, many are providing poorer guidance moving forward.  The confessional season, pre-announcements, will affect markets in September, early October. Earnings affects are likely negative on the markets moving forward.

·         QE3:  Quantitative easing (QE2), ended 6/30/11.  Chairman Bernanke took away the punch bowl that elevated equities markets like clockwork with POMO pumps between 10:00 and 11:30 AM each session. Traders already want a new fix with QE3.  Tentative projection for QE3 announcement remains at 9/20/11 or later, and the Fed has now expanded the September meeting to two days to facilitate QE3 strategy discussions. Keystone projects the September-November time frame for QE3; deflation must raise its ugly face first.  Watch as the dollar index, $USD, moves up in the weeks ahead and commodities, $CRB, move lower. This, along with lower treasury yields, will verify a move towards disinflation and deflation, and signal Bernanke to announce QE3.

·         FOMC Meetings and Rate Decisions:  9/20/11-9/21/11; 11/1/11-11/2/11; 12/13/11. Fed announced that the Zero Interest Rate Policy (ZIRP) will remain in place until mid-2013. QE3 strategies will be discussed during the September meeting with a QE3 announcement anticipated for the September-November time frame. Disinflation and deflation needs to appear first.

·         U.S. Downgrades: S&P announces a downgrade of U.S. debt from AAA to AA+. Moody’s and Fitch have not downgraded as yet.  Therefore, 2 of 3 rating agencies have not downgraded so the affects of the S&P downgrade should be muted. A downgrade from either Moody’s or Fitch will seriously impact equity markets to the negative side, which Keystone projects to occur before 10/15/11. Fitch announced that it will retain its AAA on the U.S. S&P is on hold until the end of the year, stating they will reassess the U.S. in a 6 to 24 month time frame.  S&P says there is a one in three chance of a further downgrade.  The U.S. should have been downgraded already, why is everyone wringing their hands? Perhaps the politico’s will downgrade other AAA countries as a way to bring them down to the U.S.’s new level rather than expecting the U.S. to move back up. Downgrade talk is a market negative and if any additional downgrade occurs from any of the three rating agencies, the equities markets will sell off large.

·         Congress In or Out of Session:  Market bullish when not in session, market bearish when in session. House is adjourned until 9/7/11 at 6:30 PM.  Senate went on vacation as well for the remainder of August. Further budgets fights will continue in September.  Market bullish until Congress returns. Thus, Congress squabbles in September will negatively impact markets.

·         Europe Debt Crisis Continues (PIIGS):  Portugal, Ireland, Italy, Greece and Spain. The five little piggies.  Italy in major trouble. Italy is the third largest debtor nation in the World, only trailing the U.S. and Japan.  Greece paper probably worth 30 cents on the dollar, Ireland 50 cents, Portugal 85 cents but no one knows for sure. Spain and U.K. high unemployment for young people is a major concern. The can was kicked down the road for Greece; Greece will default in the future.  Italy and Spain are too big to fail, too big to bail. Solutions are limited. Europe may consolidate all member debt into a single Eurobond issue but Germany says ‘nein’. Perhaps rich Uncle China will step in? Weaker euro=stronger dollar=weaker commodities=weaker U.S. equities. Gold is buoyant on any negative Euro news but the gold margin hikes will have a stronger negative impact on gold price moving forward.

·         ECB Rate Hikes:  Trichet announces next rate decisions 9/8/11, 10/6/11, 11/3/11, 12/8/11, 1/12/12.  Past decisions are no hike on 8/4/11 followed by a confusing press conference where Trichet spoke gibberish-he must realize the rate hikes from April were a mistake.  25 bip hike 7/7/11. No change occurred 6/9/11 or 5/5/11. 25 bip hike on 4/7/11.  Trichet called another top in the commodities market just like July 2008 when he raised rates at the exact wrong time.  Look for him to back pedal as Europe growth prospects falter. Trichet is finishing up his tenure and will be known as a good fade. Euro was propped up by Trichet’s hawk talk this year, but, Trichet wants to start flying with the doves now which means euro weakness ahead.  Euro down=dollar up=commodities down=equities down. As a side note, the Chinese are now supporting the euro helping maintain equity buoyancy, and euro strength, to some extent.

·         Ongoing Wars: Libya, Iraq and Afghanistan. Libya oil production loss not a major issue. Any positive resolution to the Colonel Gaddafi situation will place further pressure on the oil price falling, and it looks like the final chapter is now being written as the rebels attach Sirte.  Rational price of oil is low to mid 80’s. Considering a global recession ahead, oil price is capable of falling much further.  Wars and M.E. problems continue=bullish for commodities, gold, silver and oil, or, visa versa. Resolution to the Middle East conflicts will remove the premium in commodities.

·         Continuing Geopolitical Events other than Ongoing Wars: Egypt, Syria, Saudi Arabia, Bahrain, Yemen, N. Korea:  Dollar bullish and equity bearish.  Gold, silver and oil bullish.  Bahrain is the big worry since unrest will impact oil supply.  Yemen is important since it is a southern Saudi border. Syria news on unrest and riots keeps a fear premium built up for the Middle East.  Ramadan may increase evening demonstrations. News wires impact commodities in real time.  Any bad news=higher gold, silver and oil prices, or, visa versa, although gold moves will be tempered due to the CME now raising margin requirements.

·         State and Muni Crisis; Union Busting:  Muni’s should experience pain first.  Muni’s rely on State funds.  Many State fiscal budgets turn over NOW.  State funding of local municipality projects will be impacted.  Muni and State layoffs increasing. Colleges relied on State funds and tuition increases are already hitting cash-strapped students. Lingering unemployment lessens government tax inflows. U.S. will probably see an increase in the cash society since folks will find ways to avoid higher taxes, hurting government coffers rather than helping.  Multiple U.S. cities now experiencing budget fights and protests.  Governments trying to reduce burden of high union costs.  Watch to see if California financial decisions spook the country. State and Muni problems are an H2-2011 and 2012 story. Prices on MUB chart appear to be topping and ready to roll over now like Fall 2010, thus, Meredith Whitney should be vindicated in the months ahead.

·         College Debt Bubble: Students continue to take on mountains of debt and cannot get a job after education. One poll cited 80% of college graduates moving back home to live with parents.  No effect near term but in the months forward the loan defaults will develop into a big problem. Now that State funding is being lost to colleges, tuition hikes are occurring, students now have to pay more for an education that no longer leads to a well-paying job.

·         China Property Bubble and China Contagion:  When it pops, anytime now, it will be extremely negative on global markets causing contagion in Asia and elsewhere. Europe is China’s major customer so the Euro woes will only accelerate the problems.  China has built uninhabited cities to fuel their explosive growth during this century. Some evidence of Chinese now using hoarded copper supplies as collateral to continue the building.  Additionally, China is now targeting margin regulations to slow down the commodities and PM bubbles. China growth rates are trailing off, there are only so many empty cities that you can build.  This is going to end very badly. Keystone agrees with Jim Chanos’ view on China. Watch the copper price to gauge China moving forward.  China bubble pops=global markets down.

·         PBOC; China Rate Hikes:  First hike 25 bps on 10/19/10; second hike 25 bps Christmas 12/25/10; third hike 25 bps China New Years on 2/8/11; fourth hike 25 bps on 4/5/11; fifth hike 25 bips 7/7/11.  China said in 2010 that it will project about five hikes into June 2011.  Hikes have occurred October, December, February, April and now July, so China should hold steady for the weeks and months ahead; there is a hint that one hike will occur by the end of the year, however. Bank reserve requirements are now ratcheting up continuously to slow down inflation but these appear to have less of an effect now.  Rate hikes cause commodities, gold, silver, PM’s and copper to sell off.   Typically, rising rates reflect a countries currency, economic and market strength, but, China’s growth is slowing now, not increasing, which creates an odd rate raising environment. Gold was unaffected by China’s latest hike and actually increased in price; this is due to the Euro news dominating the China rate hike moves with respect to commodities. The CME hikes in gold margins will trump all moving forward.

·         China New Premier:  Chosen in 2012, will it be a smooth transition?

·         India, Brazil, Taiwan, South Korea and other Emerging Market Rate Hikes:  Same effects as China rate hikes; commodities will sell off.  China, India and Brazil hikes are most important to global markets. Some emerging countries now choosing to stay on hold reinforcing the belief that inflation is transitory in nature. Chairman Bernanke’s hot easy QE2 money pumped up emerging markets and commodities from August 2010 thru May 2011 creating new asset bubbles. India is now experiencing civil unrest as citizens demonstrate against corruption at all levels of government.  India directly supports one-third of the global gold market and we are entering the marriage season now where gold buoyancy typically occurs. This year has been far from normal, however, and the CME margin hikes should trump all. Moving forward, watch India as a proxy for gold price.

·         Japan Disaster; Yen Currency Intervention:  The global markets are treating the quake/tsunami/nuclear disaster as a Japan problem with limited global impact.  The negative affects to the auto industry and technology are subsiding substantially. This disaster had a greater negative impact on markets over the last few months than traders give it credit.  Japan is performing policy manipulation and coordinated currency intervention to target the 85-86 dollar/yen area.  This could not be maintained so far, or 83, or 81, or 80, and now dollar/yen has fallen well into the 70’s. The 76.5 current level will more than likely be defended so expect currency intervention now, even tonight, Sunday night, or any day forward, would not be a surprise. Currency intervention occurred 8/4/11, expect further coordinated intervention in the coming days and weeks.  Dollar/yen up=dollar up=euro down=commodities down=equities down.

·         Oil; OPEC; Strategic Petroleum Reserve (SPR); Hurricane Season:  SPR oil release had little effect.  SPR hinted at no additional releases but the picture has again become cloudy so another release cannot be ruled out. This has become a non-issue as oil price has fallen.  OPEC meeting 6/8/11 ended in mass confusion with lack of unified agreement on production, the producers will do whatever they want as they always have.  Hurricane season now so that may keep oil price buoyant.  Higher oil supply=lower oil price. Hurricane Irene coming=lower oil supply=higher oil price=good for construction material companies like HD and LOW. Rational oil price is 80-85 but markets are never rational, and considering a global slowdown coming, much lower oil prices are anticipated.

·         GSE (Government-Secured Enterprises): A decision will need to be made on extending the GSE limit of 730K; is it time to end this or will the limit be extended over and over again?  This should hurt the market since the GSE’s back 9 of every 10 mortgages. Now folks will have to go elsewhere to seek financing where the down payments are 25 to 30% down.  In essence, the demand will be reduced, thus, the market will tighten and house prices will continue lower moving forward. Keystone’s proprietary algorithm shows that housing has already fallen back into a double dip as of mid-May 2011. This is deflationary behavior giving Chairman Bernanke many sleepless nights.

·         Eclipse Selloff Target Areas: Allow a week or so plus or minus on each side of the following dates as potential areas of major market selloffs. Note how the May and July targets were spot on.  This technique next targets the late October early November area as a potential large market selloff area.  Targets this year; 5/15/11 (large sell off occurred May-June); 7/15/11 (large sell off occurred 7/8 thru 7/18 then the crash the week of 8/1/11); 11/3/11 area is next; then 1/3/12.

·         Bradley Turn Dates: 8/30/11 (turn window 8/23/11 thru 9/6/11, more specifically 8/26/11 thru 9/1/11, NOW); 9/26/11 (turn window 9/19 thru 10/3/11, more specifically 9/22/11 thru 9/28/11); 10/12/11; 10/28/11; 11/22/11-11/23/11; 12/28/11 (major turn area); 1/11/12. Typically allow a +/- 7 day window with actual turns usually occurring in closer to the actual date, say +/- 3 day window. Markets more than likely change their trends, if headed up, they reverse down, or if they have been moving down, they reverse up.  Every now and then, however, the markets will melt up or down in an acceleration move of the current trend. Dates are courtesy of Donald Bradley, Peter Eliades and Arch Crawford; reference their web sites for additional information.