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

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.

The S&P downgrade news has everyone in a tizzy all weekend long. The rumor was out Friday so some of this is priced into the broad markets already.  The Eurozone news today will set the tone for Monday’s session, especially in the absence of economic data.

Potential market pivots are in play for Tuesday afternoon with the FOMC, Wednesday morning at the oil inventories, Wednesday at 1 PM due to the 10-year auction, Thursday with the 30-year auction, and Friday morning consumer sentiment at 10 AM. NFIB Index has been very negative in recent months and since it has proven to be correct, it has additional street cred.  The diesel fuel numbers are also important on Wednesday morning to see if trucks are moving goods, or, if they are simply sitting idle.

On the earnings front, shippers, uranium producers, gold miners, biotechs, pharma and retail are prominent.  NDN provides input on the low end consumer to start the week.  TSN tells us if the poultry earnings are paltry. DIS tells us if the discretionary spending continues.  CSCO reports on Wednesday.  Chambers getting beaten since last quarter, he was simply telling you the state of the economy as he saw it, which turned out to be correct as usual. Chambers comments will be studied closely on Wednesday.  M will provide a gauge on retail. Thursday provides the high end consumer with JWN, miners, the SODA hype and we find out if nobody likes SLE. JCP will keep the retail parade gong on Friday. Three concepts; retail, gasoline prices, and sentiment, move together, so late week this confluence will provide valuable insight into the overall economy.

Continue to watch for margin requirements to be raised in the oil and commodities sector. The behavior in the PM’s is most affected by Europe these days.

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

·         Monday, 8/8/11: Markets will weigh S&P downgrade and Europe news. 3 and 6-month bill auctions 11:30 AM. Earnings: NDN, ALXA, ANDS, AIS, BDSI, CLNE, ENOC, ESLR, FTEK, IDIX, KERX, LDK, LGND, LMNX, MWE, MRX, MR, NAT, PRGN, KWK, SMG, TTWO, TELK, BWC, TSN, PANL, URZ, USEG.

·         Tuesday, 8/9/11: NFIB Small Business Optimism Index 7:30 AM.  Productivity and Costs 8:30 AM. 4-week bill auction 11:30 AM. 3-year note auction 1 PM. Fed FOMC Rate Decision and Announcement 2:15 PM.  Earnings: AOB, BZH, CPST, CLRO, COKE, CREE, HL, LORL, MOTR, MYRG, MYGN, OREX, PGNX, RAH, SATC, SRE, SYNM, DIS.

·         Wednesday, 8/10/11: Mortgage Applications 7 AM.  Ceridian-UCLA PCI (diesel fuel consumption) 9 AM.  Wholesale Trade 10 AM.  Oil Inventories 10:30 AM.  10-year note auction 1 PM. Treasury Budget 2 PM. Earnings: ACAD, CSCO, FTK, JAG, M, NWSA, PAR, RL, UPL.

·         Thursday, 8/11/11: International Trade and Jobless Claims 8:30 AM.  Natty Inventories 10:30 AM.  30-year bond auction 1 PM. Fed Balance Sheet and Money Supply 4:30 PM. Earnings: CHNR, ELX, MCP, JWN, KSS, PGR, RENN, RGLD, SLE, SODA, SFUN, TK, TGP, TGX, URRE.

·         Friday, 8/12/11: Retail Sales 8:30 AM. Consumer Sentiment 9:55 AM. Business Inventories 10 AM. Earnings: TINY, JCP, TR.

·         Saturday, 8/20/11: Bradley turn date 8/20 so a window opens for a market trend change between 8/12 and 8/26, especially the 8/17 thru 8/23 area.

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, some are showing weak guidance moving forward. Call it a mixed bag since some companies are providing opposite guidance-within the same sector!  Market neutral.

·         QE3:  Quantitative easing (QE2), ended 6/30/11.  Chairman Bernanke took away the punch bowl that elevated equities markets like clockwork between 10:00 and 11:30 AM each session. Now that the markets have fallen, many are talking of QE3.  These are all the same folks that said a month ago that QE3 would never occur. Tentative projection for QE3 remains at 9/20/11 or later.  Watch as the dollar index moves up in the weeks ahead, this, along with a continued move towards disinflation and deflation, will be the signal that Chairman Bernanke will come back into the markets with more quantitative easing. In the mean time, another SPR release, or seeing margin requirements raised on oil, commodities and PM’s, may serve as a means to attempt market stabilization.

·         FOMC Meetings and Rate Decisions:  8/9/11; 9/20/11; 11/1-2/11; 12/13/11. Fed should keep the Zero Interest Rate Policy (ZIRP) in place for the foreseeable future. Look for talk of QE3 on 8/9/11 which will impact markets. Of interest is the 9/20/11 meeting which is a potential target date for a QE3 announcement.

·         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. S&P is on hold until the end of the year since they stated they will reassess the U.S. in a 6 to 24 month time frame.  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 Moody’s or Fitch downgrades, the markets will sell off.

·         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.  Market bullish until Congress returns.

·         Europe Debt Crisis Continues:  Portugal, Ireland, Italy, Greece and Spain (PIIGS). The five little piggies.  Italy showing signs of strain.  Greece paper probably worth 30 cents on the dollar, Ireland 50 cents, Portugal 85 cents but no one knows for sure. Greece, Ireland and Portugal are currently in stabilization programs and continuing to experience difficulties. Spain’s high unemployment is an issue. The can was kicked down the road for Greece.  Italy, Portugal and Spain all looking ugly.  Weaker euro=stronger dollar=weaker commodities=weaker U.S. equities. Gold continues to bounce on any negative Euro news.

·         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 turns dovish-he must realize the rate hikes from April on 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 may have unwittingly called another top in the commodities markets just like he mistakenly did by raising rates at the wrong time in July 2008.  Trend had been euro up=dollar down=commodities up=equities up.  Euro was propped up by Trichet’s hawk talk, but, as of 8/4/11, Trichet wants to start flying with the doves 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 to some extent.

·         Ongoing Wars: Libya, Iraq and Afghanistan. Libya oil production loss not a major issue. Any positive resolution to the Colonel Qaddafi situation will cause oil price to fall.  Rational price of oil is low to mid 80’s.  Wars and M.E. problems continue=bullish for commodities, gold, silver and oil, or, visa versa.

·         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, unlike Libya, further 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 begins so demonstrations may increase in the evenings. News wires impact commodities in real time.  Any bad news=higher gold, silver and oil prices, or, visa versa.

·         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 again 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. Further, months ago the analysts said a hard landing was out of the question, now those same voices are not so sure.  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. 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 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.

·         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.

·         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.  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, now at the 80 and lower level.  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.  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 but the season is very quiet thus far.  Higher oil supply=lower oil price. Hurricane=lower oil supply=higher oil price=good for construction material companies. Rational oil price is 80-85 but oil price will probably move across the low to mid 90’s as the year progresses, or lower. Watch for an announcement on raising margin requirements which will further lower oil prices.

·         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.

·         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.  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; 1/3/12.

·         Bradley Turn Dates: 8/20/11 (turn window 8/12 thru 8/26, especially watch 8/17 thru 8/23 for a market trend change); 8/30/11; 9/26/11; 10/12/11; 10/28/11; 11/22-23/11; 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. Dates are courtesy of Donald Bradley, Peter Eliades and Arch Crawford; please reference their web sites for additional information.