Keystone's Key Events and Market Movers Week of 11-21-11

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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.

Summary for the New Trading Week Ahead:

The markets are experiencing a quickening pace of concern starting last week.  Markets remain at the mercy of European news. Italy and Spain, now France, remain the big contagion worries. Tension mounts as Greece may balk at austerity. Egypt is erupting, Syria killing citizens. Spain elections are occurring.  The U.S. debt discussions appear to be a train wreck in progress. Watch for any murmurs of unhappiness from the rating agencies. Watch the Italy, Spain and France 10-year yields to gauge the creeping contagion. Spain moving over 7% is trouble. Italy staying over 7% is trouble. As if all this high drama was not enough, low volume trading is anticipated this week due to the holiday, thus, the market moves will be all that much more violent.

Continue to watch the asset relationship; euro higher=dollar lower=commodities higher=gold higher=U.S. equities higher=treasuries price lower yields higher, and, the visa versa, euro down=dollar up=commodities down=gold down=U.S. equities down=treasuries price higher yields lower. 

Last week, the higher volatility, along with the collapse of financials and semiconductors fueled the bear move. The utilities and retail sectors are the only two sectors supporting the bull case currently and any weakness will signal coming trouble.

The economic data schedule is a bit juxtaposed this week due to the holiday.  For Monday, a market pivot point occurs at 10 AM when Existing Home Sales is released. This data is important since it provides insight into employment moving forward. Watch the 2-year note auction as well at 1 PM.  HPQ will probably disappoint due to recent turmoil in the company and Meg Whitman wanting to set up easy future comps.  Fed manufacturing data occurs this week so that will help gauge the employment situation.  The super committee needs to provide its plan to the Budget Office for scoring of the proposal ahead of Wednesday’s deadline.

Tuesday morning GDP hits; FOMC Minutes in the afternoon.  We see if CPB earnings are mmm, mmm, good, or not.  HRL may hurl on spam sales. A Pandora’s, P, box opens. DSW and CHS provide more retail sector input. Solar companies will have the sunlight shined on their books this week. On Wednesday, Thanksgiving eve, the super committee deadline hits. Economic data is moved forward as well packing the day with Durable Goods, Fed’s favorite Personal Income and Outlays, Jobless Claims, Consumer Sentiment, Fed Manufacturing data and Natty and Oil Inventories. Also, we find out if ‘nothing runs like a deer’ with DE results.  Lots of wealthy folks are buying farmland these days so DE earnings are interesting. Traders will need a day off after Wednesday. On Friday, U.S. markets close shortly after the Europe close.  Typically this day is the most bullish day of the entire year, but with the turmoil this year, and a new moon in play coincidentally, this joyousness is suspect.

At the same time, we remain in a Bradley turn window, especially prime for a market turn over the coming days thru Monday, 11/28/11. Keep in mind that if the markets move further down earlier in the week, the turn may actually be a turn upwards that would appear perhaps on Friday or next Monday.  Conversely again, the markets remain susceptible to a large sell off as per Keystone’ Eclipse window. The move from SPX 1260 to 1210, a notable 50 point drop, 4%, occurred late last week.  Looking at the entire eclipse window from late October’s high at 1300, to the drop to 1210, is a 7% down move satisfying the concept already. A new moon occurs on Friday as well so this would hint at weaker markets leading into Friday.

Yen intervention by the BOJ occurred on 10/30/11 bouncing the dollar/yen from 76 to 79 but about half the move was retraced.  Look for further intervention overnight Sunday or early in the week.   Dollar/yen buoyancy should relate to dollar buoyancy, which ushers in lower commodities and equities prices like 10/31/11 and 11/1/11.  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. Oil and the equities markets are moving together. Gold lost about $66 last week, or 4%. Continue to watch the asset relationships listed above with the euro leading the parade.

Key Dates and Times for the Week Ahead:

·         Monday, 11/21/11: Markets remain at the mercy of Europe news moving forward.  Watch Italy, Spain and France 10-year yields to gauge contagion creep.  Spain election results. Markets are now in Keystone’s Eclipse Indicator zone where the markets are susceptible to a large selloff.  A Bradley turn window is opened now thru 11/30/11 so watch for a market turn especially between now and next Monday, 11/28/11 (this turn can actually be up since the recent action is down). Chicago Fed Index 8:30 AM.  Existing Home Sales 10 AM. 3-Month and 6-Month Bill and 2-Year Note Auctions 11:30 AM.  Lockhart talks 2:30 PM. Earnings: BRCD, HPQ, TECD, TSL, TSN, ZLC.

·         Tuesday, 11/22/11: GDP 8:30 AM. Richmond Fed Mfg Index 10 AM. 4-Week Bill Auctions 11:30 AM. 5-Year Note Auction 1 PM. FOMC Minutes 2 PM.  Earnings: CPB, CHS, DSW, HRL, LDK, MDT, P, STP, TIVO.

·         Wednesday, 11/23/11:  Debt Commission Super Committee deadline today. Mortgage Purchase Applications 7 AM.  Durable Goods, Personal Income and Outlays, Jobless Claims 8:30 AM. Consumer Sentiment 9:55 AM. Natty Inventories 10:30 AM. Oil Inventories 11 AM.  Kansas City Mfg Index 11 AM. 7-Year Note Auction 1 PM.  Earnings: DE, DSX, PSUN, YGE.

·         Thursday, 11/24/11: Thanksgiving Day holiday. Markets Closed.

·         Friday, 11/25/11: Shortened session; markets close 1 PM, shortly after the European close. Fed Balance Sheet and Money Supply 4:30 PM.  Earnings: ABAT, FTWR.

Key Dates and Times for the Month Ahead:

·         Thursday, 12/8/11: ECB Meeting and rate decision.

·         Tuesday, 12/13/11: FOMC Meeting and rate decision.

·         Friday, 12/23/11: Congress debt vote.

Major Market Movers for the Weeks, Months and Years Ahead:

·         Earnings

·         Corporate Bankruptcies

·         Options Expiration (OpEx)

·         Quantitative Easing (QE3)

·         FOMC (Federal Open Market Committee) Rate Decisions and Policy

·         Rating Agency Downgrades

·         U.S. Presidential Election

·         Congress In or Out of Session

·         Europe Debt Crisis

·         ECB (European Central Bank) Rate Decisions and Policy

·         Ongoing Wars

·         Continuing Geopolitical Events

·         Occupy Wall Street Global Protests

·         State and Muni Crisis; Union Busting

·         College/Student Debt Bubble

·         China Property Bubble and China Contagion

·         PBOC (Peoples Bank of China) Rate Decisions and Policy

·         China New Premier Selection

·         Emerging Market Rate Decisions and Policy/Trade Wars

·         BOJ (Bank of Japan) Rate Decisions and Policy

·         Government Secured Enterprises (GSE’s) Impact

·         Oil Economic Impact

·         Mother Nature/Crop Reports/Energy Wars/Water Wars

·         World Population

·         Keystone’s Eclipse Selloff Areas

·         Bradley Turn Dates

·         Solar Flares, Sunspots, New and Full Moons

Details for the Major Market Movers:

·         Earnings:  Earnings season is far along now and light this holiday-shortened week. Numbers are in line with lower estimates and the weak predictions two months ago were overstated.  Thus, neither the bulls or bears are winning the earnings battle but a slight edge goes to the bulls.

·         Corporate Bankruptcies: Keystone looks for a high number of company bankruptcies in 2012 and 2013. The politicians cannot make a difference; they will only create deeper harm.  In a nutshell, there is no demand for products and services.  The deleveraging must continue and it will result in many companies going belly-up over the next couple years. Market negative over the intermediate and longer term.

·         Options Expiration (OpEx): Third Friday each month. Next is 12/16/11. Typically an up market move occurs from Tuesday thru Wednesday of OpEx week if you get your timing correct so consider this for 12/13/11 and 12/14/11. Markets typically move opposite on the following Monday morning from the direction they closed on OpEx Friday.

·         Quantitative Easing (QE3):  Quantitative easing two (QE2) ended 6/30/11.  Tentative projection for QE3 announcement is November-January. Fed said that more quantitative easing is on the table on 10/20/11 and 10/21/11 which spiked the markets skyward. The Fed announced Operation Twist and that resulted in a market selloff initially but the month of October rocked higher.  Deflation must raise its ugly face before Bernanke is forced to announce QE3. Keystone’s Inflation Deflation Indicator is moving from Neutral to Disinflation to Deflation, then back again, over the last few weeks, currently a smidge above disinflation. 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. CRB has rebounded recently providing breathing room for Chairman Bernanke and perhaps pushing QE3 towards December-January.  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.  Quantitative easing will bounce markets but it is only a matter of time before the rally peters out, just as QE1 did in April 2010 after 13 months and QE2 did in April 2011 after 8 months.  QE3 future rally will last 3 to 5 months?

·         FOMC (Federal Open Market Committee) Rate Decisions and Policy:  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 November-January time frame. Deflation needs to occur first.

·         Rating Agency Downgrades: S&P announced a downgrade of U.S. debt from AAA to AA+ which accelerated the market selloff.  Moody’s should be making a statement concerning U.S. debt in the days/weeks ahead.  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. Downgrades of any banks or countries are a market negative. Continue to watch for European downgrades. The Supercommittee debt deadline for Congress is iWednesday, 11/23/11 so look for the rating agencies to come into play strongly again. If Congress cannot agree on $1.2 trillion cuts, a downgrade is likely. Even if the $1.2 trillion in cuts are achieved, the rating agencies want to see over $3.0 trillion so downgrades may occur anyway. This will affect markets now thru the end of the year.

·         U.S. Presidential Election: Markets will ebb and flow as the politicians fight it out, one side is just as bad as the other; demopublicans and republocrats. The market affects are more of a 2012 story. Keystone will comment on the Presidential cycle with charts as time moves along so stay tuned.

·         Congress In or Out of Session:  Market bullish when not in session, market bearish when in session. Further budgets fights continue ahead of the 11/23/11 deadline. Congress debt vote is 12/23/11. Each negative sound bite from the President and Congress will negatively impact the broad markets. The super committee has to cut $1.2 trillion or automatic budget cuts will occur. Even if this goal is attained, the rating agencies are looking for $3.0 to $3.5 trillion, thus entitlement programs and tax reform must be placed on the table.  So even an agreement with $1.2 trillion in cuts may result in further downgrades by the rating agencies and trouble for equities.

·         Europe Debt Crisis:  The Europe news flow is the main driver of the markets now.  The five little piggies (PIIGS) are Portugal, Ireland, Italy, Greece and Spain. Merkel and Sarkozy, Merkozy, promised a solution by 11/3/11, which came and went.  New governments now forming for Greece and Italy.  Details on the Greece bailout plan must be provided still yet and Greece must vote on the plan after the new government is formed.  Italy, Spain and now France are the major worries. Watch the 10-year yields closely to gauge contagion. 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, and Italy’s debts are now piling up quickly posing a major risk to the global economy. Italy faces more than $300 billion in refinancing in 2012. Greece paper probably worth 30 cents (the Merkozy plan targets a 50% haircut) 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, and now the Occupy Wall Street protests have gone global.  Italy and Spain are too big to fail, too big to bail. Rich Uncle China needs to save the day but they appear hesitant.   Watch the asset relationship; weaker euro=stronger dollar=weaker commodities=weaker U.S. equities, and visa versa.

·         ECB European Central Bank) Rate Decisions and Policy:  ECB announces next rate decision 12/8/11, further cuts are coming, 1/12/12.  Past decisions are 25 bip cut on 11/3/11 as Keystone projected (Draghi’s first meeting reversing Trichet’s previous actions); no hike 10/6/11; no hike 8/4/11; 25 bip hike 7/7/11; no hike 6/9/11; no hike 5/5/11; 25 bip hike on 4/7/11 that began Trichet’s mistake this year, just like July 2008 when he raised at the peak in the commodities market, exactly the wrong time.  The euro buoyancy in 2011 was caused by Trichet’s hawkish talk, now that will reverse, thus, euro down=dollar up=equities down.

·         Ongoing Wars: Libya, Iraq and Afghanistan. Colonel Gaddafi is dead, the oil flow has been coming back anyways. Wars and M.E. problems will always provide a bid underneath oil, gold and silver.  As tensions ease, the premium in price works itself out, as tensions escalate, premiums increase.

·         Continuing Geopolitical Events: Iran, Egypt, Syria, Saudi Arabia, Bahrain, Yemen, N. Korea:  Dollar bullish and equity bearish.  Tensions provide a premium to oil, gold and silver prices with news flow immediately impacting prices. News reports, if they can be trusted, or not, suggest Iran is very close to producing a nuclear bomb so Israel may strike Iran in the coming days, weeks, or months. Iran is testing missiles to flex their muscles.  Bahrain is a worry since unrest will impact oil supply.  Yemen is important since it is a southern Saudi border. Al-Awlaki’s death should add to stabilization in the area in the long term. Yemen protestors are killed with live ammunition on 10/15/11.  Iran, Syria and Yemen are the major current concerns. News flow impacts commodities in real time.  Any bad news=higher oil, gold and silver prices, or, visa versa.

·         Occupy Wall Street Global Protests: The protests began in New York on 9/17/11 and have had no impact on markets.  New York police evicted protestors from Zucotti Park last week so the movement appears in disarray for now. 

·         State and Muni Crisis; Union Busting:  Muni’s should experience pain first.  Muni’s rely on State funds.  The new State fiscal budgets are underway 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.  Interestingly, Kenneth Langone, cofounder of HD, commented on 11/3/11 that the trucking industry cannot find drivers to fill jobs since, despite the current high unemployment; many are producing more income using government assistance in combination with working ‘under-the-table’ just as Keystone has been writing about the last few months. Multiple U.S. cities now experiencing budget fights and protests.  Harrisburg, Pennsylvania, went bankrupt recently.  Now add Jefferson County, Alabama, home of Birmingham to the bankruptcy list.  Governments are trying to reduce the burden of high union costs. On 11/8/11, Ohio voted in favor of the unions (teachers, firefighters, police, etc…) and against the Republicans trying to reduce costs. This decision places a feather in the union caps all across America. Watch to see if California financial decisions spook the country; California is basically the same as Greece already. State and Muni problems are a 2012 story. MUB daily and weekly charts were in negative divergence marking September as a significant price top for muni’s. Meredith Whitney should be vindicated moving forward.

·         College/Student Debt Bubble: Students graduate with large debt and no job. Law students accumulate nearly 100K in loans and many remain jobless. Universities build lavish facilities that are unnecessary for education. One poll cited 80% of college graduates moving back home to live with parents.  Student loan defaults have doubled since 2005. Two-thirds of students have $24K or more debt.  No effect near term but in the months forward the loan defaults will develop into a big problem. Young folks without jobs are joining the ranks of the Occupy Wall Street movement since they have no productive outlet for their youthful energy. Now that State funding is being lost to colleges, tuition hikes are occurring, students now have to pay even more for an education that no longer leads to a well-paying job. The high college debt coupled with no jobs is a double whammy for the young folks. On 11/4/11 in Keystone’s home city of Pittsburgh, Pennsylvania, Vice President Biden touted the Obama Administration’s plan to reduce the maximum annual payment on federal student loans from 15% to 10% of discretionary income.

·         China Property Bubble and China Contagion:  As of 11/18/11, China property prices in 70 cities dropped for the first time this year—the bubble is popping.  This is extremely negative on global markets causing contagion in Asia and elsewhere. Chinese factories are now going bankrupt. 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 serves as a proxy for China.  A drop 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.  China officials admit that 8% growth is needed to simply maintain ‘social cohesion’. 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 may be supporting Greece behind the scenes to help buy Europe some time. China bubble pops=global markets down.

·         PBOC (Peoples Bank of China) Rate Decisions and Policy:  We are now one year along from the first rate hike in China in October 2010. First hike 25 bps 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 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. Currency decisions will probably be delayed until the new premier is selected in the back half of 2012.

·         China New Premier Selection:  The new 5-year leader is chosen in 2012 (at the same time as the U.S. president) so major currency decisions will be avoided until then.  Will it be a smooth transition?

·         Emerging Market Rate Decisions and Policy/Trade Wars:  India, Brazil, Taiwan, South Korea most important. Same effects as China rate hikes; commodities will sell off.  China, India and Brazil are most important to global markets. Watch India closely moving forward since they were last to raise rates in conflict with their Asian peers. Each emerging country lowering rates here forward will escalate trade wars. Brazil is lowering rates.  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.  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.

·         BOJ (Bank of Japan) Rate Decisions and Policy:  BOJ initiated a new round of currency intervention 10/31/11 as Keystone projected.  The intervention bounced the dollar/yen (weaker yen) from 76 to 79 and now the move has retraced.  Look for some further intervention possibly Sunday night or early in the trading week.  Effects from the Japan tsunami and nuclear disaster are subsiding.  Japan lowered growth projections moving forward. Japan is defending the 76.5 dollar/yen level.  In March 2011, the BOJ and G7 performed a coordinated intervention to weaken the yen, moving dollar/yen from 76 to over 85 in less than three weeks.  In August 2011, BOJ acted alone which bounced the dollar/yen from 76 to over 80 in three days, but price retreated quickly.  BOJ participated with other central banks on 8/15/11 to support Europe. Dollar/yen up=dollar up=euro down=commodities down=equities down.

·         Government-Secured Enterprises (GSE’s) Impact: 10/1/11 was a deadline to extend the GSE limit of $730K, which came and went, so the limits have reverted back down to $625.5K, with a possible review to raise the limit again in the weeks ahead.  This action hurts folks dancing on the fine line in that price range.  The GSE’s back 9 of every 10 mortgages. In general, for all folks, down payments of 25% to 30% are now required.  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 the housing recovery 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 and 2013, which should provide the ideal time to buy property.

·         Oil Economic Impact:   Oil effects gasoline price which in turn affects retail sales. OPEC, the SPR (Strategic Oil reserve) and hurricane season effect oil price. SPR oil release is no longer an issue as oil price has fallen due to lower global demand. Hurricane season is in its final throes so any oil price premium is working itself back out.  Brent Oil price is now more important than WTIC (West Texas). Oil price moves with the equities markets; up oil=up markets and visa versa.

·         Mother Nature/Crop Reports/Commodity Wars/Energy Wars/Water Wars: Droughts (in Texas and the Southern States), storms, floods (in the Midwest), earthquakes, tsunami’s (Japan), volcanic ash (northern Europe), hurricane’s (Gulf) and the like. Mother Nature had a huge impact on food inflation over the last year. Food and oil are the most affected. As the crop reports improve, the premium to price comes back out. The global need for fresh water supplies, and the potential “water wars” in the future, will affect markets in the long term.

·         World Population:  World population crossed 7 billion on 10/31/11. The obvious affect on the markets is the need for food to feed these 7 billion mouths. Ag commodities show promise in a long term time frame.

·         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; 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 now (watch mid October thru mid November); then 1/3/12 (watch mid December thru mid January). Note how the May and July targets were spot on.  This technique targets a potential large market selloff area over now, 11/9/11 experienced a 3% market selloff.

·         Bradley Turn Dates: 11/22/11-11/23/11 so the Bradley turn window is 11/15/11 thru 11/30/11 especially watch 11/17/11 thru 11/29/11, NOW; 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 in the previous days, 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.

·         Solar Flares, Sunspots, Full and New Moons: Definitely not something to trade off of but you must be aware of their influence. An M9.3-class solar flare at sunspot 1261 occurred on 8/4/11—at the same time the stock market waterfall crash commenced. Projections are for the flares to increase in the years ahead. Solar flare activity tends to coincide with market selling events.  There are studies on full moon and new moon effects that will tout both sides of the coin. In Keystone’s non-scientific studies, full moons tend to be in line with buying and new moons tend to be in line with selling, but only about a 60% to 65% correlation; a slight advantage over a coin flip. Full moon on 10/11/11 resulted in a buoyant week for the markets. New moon was 10/26/11 and 10/25/11 was a large down day although two large up days occurred directly after.  Full moon on 11/10/11 resulted in large up move 11/10/11 and 11/11/11 although 11/9/11 was a large down day. The next new moon is 11/25/11 (day after Thanksgiving). The next full moon is 12/10/11.