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. If the Eurozone waits any longer to structure the Greece default, they risk contagion since they continue to fight yesterday’s battle and time may run out. If they rush the Greece default thru, without properly allowing for Italy and Spain ahead of time, they risk contagion as well. A hefty bailout would cheer markets in a shot term move; euro higher=U.S. equities higher. Further deterioration in the Euro situation and euro down=U.S. equities down.
The China non-manufacturing PMI data tonight will shed more light on the global economic situation. The ISM Manufacturing Index at 10 AM provides a market pivot area, especially watch its effects on the energy sector. Construction Spending also occurs at 10 AM and this is an excellent gauge for employment. On Tuesday, Chairman Bernanke talks as Factory Orders hit the tape at 10 AM, this is another potential market pivot area since Bernanke’s notes should be available as well. AAPL's iPhone release will generate buzz. YUM earnings are key since they provide a proxy for China and hence the global economy.
On Wednesday, the jobs circus build-up begins with Challenger and ADP reports. COST earnings are important. MON will get everyone talking about ag commodities. The week builds towards a crescendo on Thursday and Friday. Thursday begins with the ECB rate meeting; Trichet’s last meeting, so even though Europe wants to lower rates, they will not, since they will not want to tarnish Trichet’s tenure. Trichet was a doofus for raising rates at peak times in commodities markets, like July 2008, and this year, both were errors. The hawkish stance on the euro only caused U.S. equities markets to float up to much higher levels than they should have. The ECB rate cuts should occur quick enough moving forward. Jobless Claims and Natty Inventories continue the Thursday fun as markets prepare for the jobs report on Friday morning. Perhaps traders will drown their troubles in some of STZ’s booze Thursday evening. The Friday jobs circus occurs before the open which will impact futures. Wholesale Trade finishes the data for the week at 10 AM.
The focus with earnings now is more on preannouncements ahead of the traditional kick-off of earnings season with AA on 10/11/11. IR cutting profit forecasts was a major blow to Friday trading and will add to market weakness moving forward. 40% of IR’s business is overseas so the global slowdown is verified. The other bomb shell so far with preannouncements was ACI late day Friday. Coal and railroads should get hit hard.
Gold is struggling along with the entire commodities sector. The CRB Commodities Index fell below 300 last week which is a significant signal that the global economy has stalled and we are moving towards disinflation, then deflation. The interesting aspect this new week concerning gold is the affects the redemptions will have on the hedge funds. Redemption deadlines are last week and early this week so the hedgies and other large institutions may have to start throwing gold overboard to cover equities losses. Many hedgies were fortunate to hold on thru the initial equities crash since gold held up. Now that gold is trailing lower as well, the pain the hedgies are feeling is increasing. If there was ever any time for an ETF event to occur, it would be now with GLD or SLV, so continue to watch these tickers closely.
Keystone’s Inflation Deflation Indicator shows that we have fallen into Disinflation. Keep watching the CRB since a move down to the low 290’s will send the country into Deflation and a drop under 290 will prompt Chairman Bernanke to consider acting with a QE3 plan. As commodities drop and the dollar rises, pushing us into deflation, Bernanke will step in.
Yen intervention by the BOJ remains highly likely. Swiss intervention in the franc will continue. Continue to watch for the dollar to rise as the weeks move along. A rise in the dollar will place further pressure on oil, gold, silver and other commodities.
Keystone’s ‘Short Term’ Key Dates and Market Movers Week of 10/3/11 and on:
· Monday, 10/3/11: Markets remain at the mercy of Europe news moving forward. China Non-Manufacturing PMI overnight. Motor Vehicle Sales in the morning. ISM Manufacturing Index and Construction Spending at 10 AM. 3-Month and 6-Month Bill Auctions 11:30 AM. Lacker (Richmond Fed) speaks 6 PM. Earnings: LFUS.
· Tuesday, 10/4/11: Chairman Bernanke speaks 10 AM. Factory Orders 10 AM. AAPL's iPhone release. 4-Week Bill Auction 11:30 AM. Earnings: YUM.
· Wednesday, 10/5/11: Mortgage Purchase Applications 7 AM. Challenger Job-Cut Report 7:30 AM. ADP Employment report 8:15 AM. ISM Non-Manufacturing Index 10:00 AM. Oil Inventories 10:30 AM. A Bradley turn window opens for the next two weeks for a potential market turn to occur although the strongest area of activity for a turn is Friday, 10/7/11 thru Friday 10/14/11. Earnings: COST, MON, MAR.
· Thursday, 10/6/11: ECB Rate Meeting Trichet’s final meeeting. Chain Store Sales in the morning. Jobless Claims 8:30 AM. Natty Inventories 10:30 AM. Fed Balance Sheet and Money Supply 4:30 PM. Earnings: STZ.
· Friday, 10/7/11: Monster Employment Index in the morning. Monthly Jobs Report 8:30 AM. Wholesale Trade 10 AM. Consumer Credit 3 PM. Now it is Yom Kippur’s turn from today on since, “Sell Rosh Hashanah and buy Yom Kippur (10/8/11),” although approach this ole Wall Street adage with skepticism, simply be aware.
· October: Congress in session with budget talks and the super committee front and center, a market negative.
· Next Couple Weeks: Pre-announcement season. Keep your ears open. IR and ACI announcing lower numbers ahead. Who else?
· Wednesday, 10/12/11: Bradley turn date, watch 10/5/11 thru 10/19/11 window for a market turn, especially 10/10/7/11 thru 10/17/11.
· Friday, 10/28/11: Bradley turn date, watch 10/21/11 thru 11/4/11 window for a market turn, especially 10/25/11 thru 11/2/11.
· Tuesday and Wednesday, 11/1/11 and 11/2/11: FOMC rate decision and meeting. Note how the meeting coincides with Keystone’s Eclipse Indicator.
· Thursday, 11/3/11: Keystone’s Eclipse Technique targets mid October thru mid November as a potential major market selloff area.
Keystone’s Short Term to ‘Intermediate Term’ Key Dates and Market Movers for October thru the End of the Year:
· Earnings: The new earnings season will kick off on 10/11/11 with AA. Two bad preannouncements last week were IR and ACI. Thus, IR weakness is proof of a slumping global economy and ACI weakness indicates that coal and railroads are not going to do as well as expected. Continue to listen for preannouncements up until the fun starts with AA.
· QE3: Quantitative easing two (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. Tentative projection for QE3 announcement is October-December. The Fed announced Operation Twist and that resulted in a market selloff. Deflation must raise its ugly face before Bernanke moves towards a more shock and awe type QE3. Keystone’s Inflation Deflation Indicator signals Disinflation now so we are moving towards Deflation but not there yet. Use the CRB as a guide. When Deflation appears in the weeks ahead, perhaps the first global quantitative easing program for planet Earth will commence, the Fed joining forces with other countries to coordinate their efforts in trying to save a banking system already lost. The key things to watch which will trigger Bernanke to act with QE3 will be the dollar rising (now occurring), commodities falling with CRB staying under 300 and heading lower (now occurring) and the Treasury prices moving up, yields down (now occurring). Bernanke is now having sleepless nights since the CRB lost the 300 level.
· FOMC Meetings and Rate Decisions: 11/1/11-11/2/11 (note this coincides with Keystone’s Eclipse Indicator); 12/13/11. Fed announced that the Zero Interest Rate Policy (ZIRP) will remain in place until mid-2013. Operation Twist is ongoing. QE3 announcement is anticipated for the October-November time frame. Deflation needs to occur first (we are now in Disinflation).
· 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 potentially 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 when they will reassess the U.S. S&P says there is a one in three chance of a further downgrade. 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. Moody’s and S&P now in progress of downgrading European banks; down euro=down equities. 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. Further budgets fights will continue in October-November. Each negative sound bite form the President and Congress continues to negatively impact the broad markets.
· Europe Debt Crisis Continues (Five little piggies; PIIGS): Portugal, Ireland, Italy, Greece and Spain. Greece on the verge of default with contagion now a major worry. Italy in major trouble as well. Moody’s to decide on potential Italy downgrade in October. 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. The Spain and U.K. high unemployment for young people is a major concern, leading to riots, the U.S. sees the preview of coming attractions. 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. Germany softening their negative stance. Rich Uncle China needs to save the day but they appear hesitant. Europe now running the risk that they are taking too long to decide how Greece defaults and the markets may end up deciding for them. If the Eurozone acts too quickly, they risk contagion without a proper plan to handle Italy and Spain debt. Weaker euro=stronger dollar=weaker commodities=weaker U.S. equities, and visa versa.
· ECB Rate Hikes: ECB announces next rate decisions 10/6/11, 11/3/11, 12/8/11, 1/12/12. Past decisions are no hike on 9/8/11, although the door is now cracked open for lower rates, no hike 8/4/11, 25 bip hike 7/7/11, no hike 6/9/11 or 5/5/11 and the 25 bip hike on 4/7/11 that began Trichet’s mistake, like July 2008, when he raised at the peak in the commodities market, exactly the wrong time. Trichet is now replaced with Draghi. No rate cut is expected on Thursday since the ECB will not want to embarrass Trichet on his last day but the cuts should be coming soon after. The euro buoyancy in 2011 was caused by Trichet’s hawkish talk, now that will reverse, thus, euro down=dollar up=equities down. Equities move in the same direction as the euro.
· Ongoing Wars: Libya, Iraq and Afghanistan. Libya oil production coming back on line as Colonel Gaddafi appears cornered, although the news flow is less than reliable. Wars and M.E. problems will always provide a bid underneath oil, gold and silver, thus as tensions escalate, so do the prices on these commodities, as tensions ease, the premium in price works itself out.
· Continuing Geopolitical Events other than Ongoing Wars: Egypt, Syria, Saudi Arabia, Bahrain, Yemen, N. Korea: Dollar bullish and equity bearish. Tensions provide a premium to oil, gold and silver prices. Bahrain is the big worry since unrest will impact oil supply. Yemen is important since it is a southern Saudi border. Al-Awlaki was killed last week so this further helps tensions in the long run. Syria news on unrest and riots keeps a fear premium built up for the Middle East. News wires impact commodities in real time. Any bad news=higher oil, gold and silver prices, or, visa versa.
· State and Muni Crisis; Union Busting: Muni’s should experience pain first. Muni’s rely on State funds. Many new State fiscal budgets are starting 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. MUB daily and weekly charts are in negative divergence now marking this as a significant price top for muni’s. A spank down and lower prices are ahead. Meredith Whitney should be vindicated moving forward.
· 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. Chinese factories are already gonig bankrupt. Last week was the first palpable realization by many traders that the China story is in serious jeopardy. There are signs of growth slowing, bad real estate loans and fraudulent accounting by companies. Copper was used as collateral for some construction loans and the collapse in copper price may provide the catalyst for the China real estate collapse. 65 million homes are unoccupied in China, a glut of capacity of epic proportions. Europe is China’s major customer so the Euro woes will only accelerate China’s problems. China has built uninhabited cities to fuel their explosive growth during this century. 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 has to decide if they want to play a larger role in the world and help prop up the global mess. China bubble pops=global markets down.
· PBOC; China Rate Hikes: We are now one year along from the first rate hike in China in October 2010. 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. Bank reserve requirements are now ratcheting up continuously to slow down inflation but these appear to have less of an effect now. China’s bubble is now popping.
· 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. Watch India closely moving forward since they are still raising rates in conflict with their Asian peers. Each emerging country lowering rates here forward will escalate trade wars. 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 now in the marriage and holiday seasons for India and China. The gold sales do not appear to be living up to prior years. The negatively diverged gold charts and CME margin hikes should also continue to push gold prices lower. Watch India as a proxy for gold price. China consumes 40% or more of the world’s copper production. Watch China as a proxy for copper price.
· Japan Disaster; Yen Currency Intervention: The negative affects to the auto industry and technology are subsiding substantially, and, perhaps, Japan’s renewed growth in the months ahead may actually aid the global economy. 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 moving forward. BOJ participated with other central banks on 8/15/11 to support Europe. Dollar/yen up=dollar up=euro down=commodities down=equities down.
· Oil; OPEC; Strategic Petroleum Reserve (SPR); Hurricane Season: SPR oil release talk is no longer an issue as oil price dropped under $80. The hurricane season remains in play but it is wrapping up now. 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 help keep oil price buoyant. Hurricane’s coming=lower oil supply=higher oil price=good for construction material companies like HD and LOW.
· 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. Keystone considers real estate to be a key investment over the next year or two but prices have much lower to fall first. Low rates do not help housing since folks do not have jobs, if they do have a job, they may not have a good credit score, if they do have a good credit score, then they cannot come up with the 25% and higher down payments. Perhaps the washout in housing will occur in 2012, the housing bottom is still ahead of us, not behind.
· Eclipse Selloff Target Areas: Allow plus or minus a week or two 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 mid to late October thru early to mid 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 (watch mid October thru mid November); then 1/3/12.
· Bradley Turn Dates: 10/12/11 (watch 10/5/11 thru 10/19/11 as a market turn area, especially 10/7/11 thru 10/14/11); 10/28/11 (this date matches up with the eclipse sell off projection); 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.
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