Keystone's Key Events and Market Movers Week of 8-22-11

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.  Germany continues to say ‘nein’ to Euro bonds increasing the tension day after day. Germany and France, the ‘Merkozy’ show, are calling the shots as the PIIGS (Portugal, Italy, Ireland, Greece and Spain) plead for sustenance. Gold maintains buoyancy as the mess is sorted out.  The euro and the dollar are in limbo like a deer in the head lights not knowing which direction to jump since the situation is very fluid.

We are in the heart of a Bradley turn window now so expect wild market action on Monday and Tuesday. The forces will either resolve with a recovery rally launch, or, a drastic meltdown in the indexes. A recovery rally is favored at this time.

Key economic data this week includes further readings on manufacturing. The Philly Fed data last week negatively affected the markets so extra emphasis is now placed on the Richmond Fed data on Tuesday and the Kansas City Fed data on Thursday.  Stay close to the computer at 10 AM Tuesday since the New Home Sales and Richmond Fed hit at the same time and, along with the Bradley effects, and any potential news out of Europe, can be a strong pivot point for the broad markets.

The 2-Year Note Auction on Tuesday at 1 PM will affect markets since it is one part of the 2-10 spread number, which in turn effects the yield curve slope providing a gauge on the banks.  Durable Goods on Wednesday morning before the open with oil inventories one hour after the bell.  Thursday is Claims data before the open and Kansas City Manufacturing data at 11 AM. Friday morning is GDP before the open followed by Consumer Sentiment at 9:55 AM, which has been falling off a cliff lately.  Sad consumers do not spend money, thus, companies need fewer workers to make less goods and a dangerous deflationary spiral may occur. As prices fall, a consumer says why buy now when next week it will be cheaper. This deflationary outcome is what keeps Chairman Bernanke up at night.

Speaking of the fearless Fed leader, the crescendo for the week is Bernanke’s speech from Jackson Hole, WY at 10 AM. Many traders already going thru withdrawal from the empty QE2 punchbowl—they want more booze and they want it now. But, traders will more than likely be disappointed. Keystone says watch the dollar move up, as well as the Keystone Inflation Deflation indicator to move down into deflation before the Chairman acts (this is reflected by a falling commodity index and rising ten year price--falling yields). Thus, Keystone sees no move towards QE3 until the 9/20/11 Fed meeting at the very earliest and more likely sometime in the September to November timeframe, but, only time will tell.

Earnings are an eclectic mix this week with a broad selection of industries reporting.  Ketchup (HNZ), home furnishings (WSM), housing (TOL), retail (AEO, BIG and TIF) and tech (AMAT and ARUN). Tiffany on Friday tells us if the rich folks are still spending dough, or not.

Continue to watch for raises in margin requirements for gold.  If the CME follows the plan they used for the silver slap down in April, several more margin raises are on tap for the days ahead, but, it was very surprising they had not announced a second move already.

Rebels are closing in on Gaddafi at Tripoli so a resolution to that mess should help gold, silver, PM’s, oil and commodities in general relax slightly across the board since at least one component of Middle East tension will subside.

Out of the gate Monday, or at least early week, yen intervention by the BOJ is highly likely.

Keystone’s ‘Short Term’ Key Dates and Market Movers Week of 8/22/11 and on:

·         Monday, 8/22/11: Markets remain at the mercy of Europe news. Dollar/Yen intervention likely. Chicago Fed National Activity Index 8:30 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 and Tuesday; either a recovery rally beginning or a strong melt-down collapse in the markets. A recovery rally is favored at this juncture. UTIL 414 and SPX 1101 are key.  Earnings: IMMU, MOBI, STP.

·         Tuesday, 8/23/11: New Home Sales and Richmond Fed Manufacturing Index 10 AM. 4-Week Bill and 52-Week Bill Auction 11:30 AM. 2-Year Note Auction 1 PM. Earnings: BMO.TO, COCO, HNZ, LZB, MDT, SEED, PSUN, HAIN, TSL, WSM.

·         Wednesday, 8/24/11: Mortgage Applications 7 AM.  Durable Goods Orders 8:30 AM. FHFA House Price Index 10 AM.  Oil Inventories 10:30 AM. 5-Year Note Auction 1 PM.   Earnings: AEO, AMAT, BDSI, SIGM, TIVO, TOL.

·         Thursday, 8/25/11: Claims 8:30 AM.   Natty Inventories 10:30 AM.  Kansas City Fed Manufacturing Index 11 AM. 7-Year Note Auction 1 PM. Fed Balance Sheet and Money Supply 4:30 PM. Earnings: ARUN, BEBE, BIG, CHNR, HRL, KKD, OSIS.

·         Friday, 8/26/11: GDP 8:30 AM. Corporate Profits 8:30 AM.  Consumer Sentiment 9:55 AM. Chairman Bernanke speech from Jackson Hole, WY at 10 AM.  Earnings: TIF.

·         Thursday, 9/1/11: Markets typically buoyant the two days in front of a three day holiday.

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

·         Wednesday, 9/7/11: The politicians return, September budget talks heat up.

·         Thursday, 9/8/11: ECB Rate decision, does Trichet balk?

·         Tuesday, 9/20/11: Fed Meeting, does Bernanke hint at QE3?

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; the September-November time frame.  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 announce QE3. 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, providing mini QE lights.

·         FOMC Meetings and Rate Decisions:  9/20/11; 11/1-2/11; 12/13/11. Fed announced that the Zero Interest Rate Policy (ZIRP) will remain in place until mid-2013. 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. Fitch announced last week 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 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. President is on vacation as well, who is minding the store? There are increasing calls for the law makers to return immediately due to the turmoil in the markets but they could not care less. Further budgets fights will continue in September.  Market bullish until Congress returns.

·         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’s high unemployment is an issue. The can was kicked down the road for Greece.  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 more 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. 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, 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.  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 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 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. 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.

·         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.

·         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, 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 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 had even touched a 70’s handle briefly last week.  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 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.

·         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. This is more deflationary stuff that is giving Chairman Bernanke 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; 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; NOW); 8/30/11 (turn window 8/23 thru 9/6/11); 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. Markets more than likely change their trends, if headed up, they reverse down, or if they have been moving down, they reverse up, but every now and then the markets will melt up or down in an accelerated move during the turn date window. Dates are courtesy of Donald Bradley, Peter Eliades and Arch Crawford; please reference their web sites for additional information.