Keystone's Key Events and Market Movers Week of 10-10-11

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. If the Eurozone waits any longer to structure the Greece default, the markets may decide without them. If they rush the Greece default thru, without properly allowing for Italy and Spain contagion ahead of time, they risk disaster.  Each weekend we wait for the announcement on the Greece restructuring program. A hefty bailout would cheer markets in a shot term move; euro higher=U.S. equities higher.  But any stumble from Europe results in lower euro; euro down=U.S. equities down.

Monday, Columbus Day, starts off with no data or significant earnings releases.  However, this week we move into Keystone’s Eclipse window, now thru mid-November, where a large potential market selling event may occur, a la August. It is something not to bank on, but rather something to be aware of as an underlying background current in the markets. The other eclipse windows this year all resulted in large market sell offs.  Markets also remain in a Bradley turn window right now and the peak days for a turn are last Friday thru next Monday, 10/17. Sarkozy and Merkel are to meet on Monday but the Euro meeting schedules change faster than Lady GaGa so all you can do is take it as it comes. Watch for news from Moody’s concerning any potential downgrade of U.S. debt.

Tuesday, the NFIB will provide another month of gloomy forecasts by business owners. The 3-Year Note Auction will peak some interest but it is only the warm-up act for the 10-Year on Wednesday. The big event Tuesday is double A’s earnings after the bell, the unofficial official start of the earnings season.

Wednesday, diesel fuel data will provide insight into shipping, and thus, Fedex and UPS; further gauges on how business is these days. The FOMC minutes release is highly likely as a market pivot point at 2 PM-ish as pundits parse words. Fed heads will be out talking this week, Plosser, Pianalto and others, spinning the economic data, and trader’s heads. Note that the oil inventories move to Thursday due to the holiday. JOLT employment data will provide insight into the number of job openings.  Investors Intelligence Survey will be released and the new tallies for bull and bear sentiment will be scrutinized closely. PEP reports earnings and this is important to gauge the global economy since Pepsico is a multi-national.

Thursday, earnings kick off in full force with heavy hitters GOOG, JPM and SWY. Along with other companies a broad read on tech, banks, retail, food, drugs, trucking, semi’s, uranium, even recreational vehicles will give every trader something to consider today. International Trade and Jobless Claims will start the session off. Then natty and oil inventories mid-morning. The 30-Year Bond Auction is at 1 PM, a market pivot point. The interesting thing about Thursday is the steady drum beat of data or earnings all day long, each hour or so a new piece of news hits, thru Fed head Kocherlakota’s speech in the afternoon, making for an interesting day of trading.

Friday finishes the week with more steady action all morning long.  Retail sales numbers are huge since back-to-school numbers typically reflect upcoming holiday sales numbers. With gasoline prices finally inching south, retailers are keeping fingers crossed that shoppers will spend their extra dough in their stores. MAT provides earnings and perhaps guidance for the holiday season.  Expect a market pivot at 10 AM Friday on the sentiment and business inventories data.  G-20 Finance Ministers will dominate the news wires Thursday and Friday.  Note how the action heats up this week starting from the Wednesday 10-Year Note Auction at 1 PM thru the end of the week; lots of data, earnings, Fed talk, bond market action, sentiment, and G-20, so it looks like the back half of the week will require lots of attention.

Gold, copper and commodities had a relief rally last week. Note how gold is starting to trade more in line with the other commodities now, see if that relationship holds.  The overall asset relationship currently is euro down=dollar up=commodities down=gold down=treasury price up yield down, or, the visa versa, euro up=dollar down=commodities up=gold up=treasury price down yield up. This is why Europe is so key; each move of the euro will set off one of these asset relationships to run, any given day, or intraday. Continue to watch for a potential ETF event this year, GLD and SLV remain suspects. Copper and commodities are expected to resume their downtrend as the weeks continue along. This will move the economy deeper into deflation which will cause Chairman Bernanke to pull QE3 out of his hat, er, well, out of somewhere; it is probably not his hat.

Yen intervention by the BOJ remains highly likely as the 76.5 dollar/yen level is defended. 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 10/10/11 and on:

·         Monday, 10/10/11: Columbus Day holiday markets are open but banks are closed.  Markets remain at the mercy of Europe news moving forward.  Sarkozy and Merkel meeting but these schedules are highly flexible. Markets now move into Keystone’s Eclipse Indicator zone, where now thru mid November is targeted as a large potential market selling area. Watch for any news from Moody’s concerning a possible U.S. downgrade-they had targeted mid-October for an announcement a few weeks ago. Obviously, this would be a huge negative impact to markets.  Earnings: NVLS.

·         Tuesday, 10/11/11:   NFIB Small Biz Optimism 7:30 AM. 3-Month and 6-Month Bill Auctions 11:30 AM. 3-Year Note Auction 1 PM.  Earnings Season Kicks Off: AA.

·         Wednesday, 10/12/11: Mortgage Purchase Applications 7 AM. Ceridian-UCLA Diesel Fuel Indicator 9 AM. 4-Week Bill Auction 11:30 AM. 10-Year Note Auction 1 PM. Plosser (Philly Fed) speaks 1:30 PM. FOMC Minutes 2 PM. Pianalto (Cleveland Fed) speaks 2:15 PM. JOLT Employment data. Investors Intelligence Survey is released—watch bull bear sentiment. A Bradley turn date is today, thus, continue watching for a market turn especially in the 10/7 thru 10/17 area.  Earnings: PEP.

·         Thursday, 10/13/11: International Trade and Jobless Claims 8:30 AM.  Natty Inventories 10:30 AM. Oil Inventories 11 AM. 30-Year Bond Auction 1 PM.  Treasury Budget 2 PM. Kocherlakota (Minneapolis Fed) speaks 2:30 PM. Fed Balance Sheet and Money Supply 4:30 PM. Earnings: FCS, FAST, JBHT, GOOG, JPM, SWY, UEC, WGO.

·         Friday, 10/14/11:  Import and Export Prices and Retail Sales 8:30 AM. U of M Consumer Sentiment 9:55 AM. Business Inventories 10 AM. G-20 Finance Ministers meet in Paris. Earnings:  MAT.

·         October: Congress in session, budget talks, super committee, November deadline for solutions, a market negative.

·         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: ECB Rate decision, surely rates will be cut to reverse Trichet’s mistakes this year, if not already lowered in the interim.

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 after the closing bell.  Preannouncements were minimal with IR and ACI notably negative.  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.  Big hitters this week are AA, PEP, GOOG, JPM, SWY and MAT.

·         Options Expiration Calendar (OPEX): Third Friday each month. Upcoming dates 10/21/11, 11/18/11, 12/16/11. Typically an up market move occurs from Tuesday thru Wednesday of OPEX week if you get your timing correct. Markets typically are opposite on the following Monday morning from the direction they closed on OPEX Friday.

·         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 is moving from Neutral to Disinflation to Deflation, then back again, over the last couple weeks.  Use the CRB as a general guide, under 300 is disinflationary and under 290 deeper into deflation and under 270 will probably prompt Bernanke to announce QE3. 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 will have sleepless nights if the CRB is under 300, he will have no sleep under 270.

·         FOMC Meetings and Rate Decisions:  11/1/11-11/2/11 (note this coincides with Keystone’s Eclipse Indicator date); 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 a disinflationary environment).

·         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 and countries; 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 working towards the November deadline. 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 has downgraded Italy and Spain debt. 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 decision 11/3/11, cuts are coming, 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 who has to undo this year’s rate cuts. Rate cut will occur on the 11/3/11 meeting if not sooner.   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’s debt should add to stabilization in the area.  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.

·         Occupy Wall Street Protests: No impact to markets, yet, but it shows the underlying dissatisfaction the American people have for the last three years. The banksters created the housing bubble that popped with dire consequences, which will take many more years to play out.  As a result of the greed, lives are disrupted, jobs lost, income and families lost, a permanent class of unemployed and underemployed is now created, and many of them, as the movie says, are ‘fed up and just will not take it anymore’. The movement has no leaders or unified message so it will be interesting to see it develop over time.  

·         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 now going bankrupt. Traders that were positive of China’s continued growth are not so sure now.  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. With the deadlines for Greece extending forward each week it hints that China may be supporting Greece beind the scenes to help buy Europe some time. 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.  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 is in its final throes so any hurricane premium should work back out, creating subtle weakness in the oil price.  Hurricane’s coming=lower oil supply=higher oil price=good for construction material companies like HD and LOW, but this is trailing off now.

·         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.