Keystone's Key Events and Market Movers Week of 12-5-11

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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:

Europe is a mess and markets wince on any news bite.  Watch the Italy, Spain and France 10-year yields to gauge the creeping contagion. Italy and Spain dropped under 7% due to the global liquidity intervention.  Interestingly, the France yields did not come down as much, relatively, so watch France closely this week and moving forward.

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

For the new trading week, earnings releases are minimal since most major companies have reported.  DG will report on Monday to kick off some retail earnings again this week.  TOL is important on Tuesday to gauge the housing market. Also Autozone provides information on the automobile sector.  December will usher in the pre-announcement confessional season for Q4 numbers. Tech and biotech sectors are higher thus far for Q4, which would be expected due to seasonality.

Economic data is lean this week with Factory Orders on Monday morning, then a lull in the action until Thursday and Friday.  Jobless Claims, Wholesale Trade and Natty Inventories hit on Thursday morning.   International Trade and Consumer Sentiment hits on Friday morning so look for a market pivot point at 10 AM when sentiment data is released.

The ECB rate decision is Thursday morning where a quarter point rate cut would be expected.  Treasury Secretary Geithner will begin European meetings on Tuesday running thru Thursday ahead of the E.U. Summit on Friday. Traders have high expectations for the Summit so positive news is required. Interestingly, market buoyancy tends to occur around the full moon which is Saturday.

Key Dates and Times for the Week Ahead:

·         Monday, 12/5/11: Markets remain at the mercy of Europe news moving forward.  Watch Italy, Spain, France and German 10-year yields to gauge contagion. Factory Orders and ISM Non-Mfg 10 AM. Evams (Chicago Fed) Sepaks 12:10 PM.  Earnings: DG, PBY, QTWW, TOPS, UEC.

·         Tuesday, 12/6/11: Treasury Secretary Geithner begins meetings in Europe thru Thursday. Earnings: AZO, CMVT, DMND, MW, TOL, VRA.

·         Wednesday, 12/7/11:  Mortgage Purchase Applications 7 AM. Quarterly Services Survey (Census) 10 AM. Oil Inventories 10:30 AM.  Consumer Credidt 3 PM. Earnings: BQI, PSUN, MTN, VRNT.

·         Thursday, 12/8/11: ECB Rate Decision and Draghi’s Press Conference-should cut by a quarter point. Jobless Claims 8:30 AM.  Wholesale Trade 10 AM.  Natty Inventories 10:30 AM. Fed Balance Sheet and Money Supply 4:30 PM. Earnings: CIEN, COST, FLOW, LAYN, PLL, SFD, SWHC.

·         Friday, 12/9/11: E.U. Summit-the World is expecting positive news on the debt crisis.  Markets tend to be buoyant around the full moon. International Trade 8:30 AM.  Consumer Sentiment 9:55 AM.  Earnings: FGP, TITN.

·         Saturday, 12/10/11:  Full Moon.

Key Dates and Times for the Month Ahead:

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

·         Wednesday, 12/14/11: Vienna OPEC Oil Meeting.

·         Mid-December thru Mid-January: Keystone’s Eclipse Indicator identifies this area for a potential large market sell off.

·         Wednesday, 12/21/11: Bradley turn window opens for a major turn.

·         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:  Q3 earnings in line with lowered expectations more positive than most traders expected but much of the guidance is weak. Pre-announcement confessional season occurs in December ahead of Q4 earnings season starting in January.

·         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.  There is no demand for products and services.  The deleveraging must continue and it will result in many companies going belly-up. 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 (12/13/11 to 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 December-February. 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.  M2 money supply is increasing. Deflation must raise its ugly face before Bernanke is forced to announce QE3. Keystone’s Inflation Deflation Indicator remains a smidge away from Disinflation in Neutral territory for the last couple months. Use the CRB as a general guide; under 300 is disinflationary; under 290 we are falling deeper into deflation; under 270 will probably prompt Bernanke to announce QE3.  A global quantitative easing program was initiated on 11/30/11, as Keystone had expected and wrote about here over the last three months, by the six largest central bankers; Fed, ECB, BOJ, BOE, SNB and Bank of Canada, but view the action as only a temporary liquidity bump to buy a short amount of time. Quantitative easing will bounce markets but any rally should peter out like QE1 and QE2; QE1 lasted 13 months and QE2 lasted 8 months.  QE3 future rally projection is 3 to 5 months but let’s see if WE3 occurs first.

·         FOMC (Federal Open Market Committee) Rate Decisions and Policy:  Next Meeting 12/13/11. Fed announced that the Zero Interest Rate Policy (ZIRP) will remain in place until mid-2013. Operation Twist is ongoing. Global intervention from 11/30/11 in progress.  QE3 announcement is anticipated for the December-February time frame. Deflation needs to occur first (watch CRB sell off).

·         Rating Agency Downgrades: S&P downgraded U.S. debt from AAA to AA+ that accelerated the August 2011 crash.  Downgrade talk is a market negative and if any additional downgrade occurs for the U.S. from any of the three rating agencies, the equities markets will sell off large. The super committee failed at producing $1.2 trillion in cuts, so a U.S. downgrade has potential since the rating agencies actually wanted to see 3 to 4 trillion in cuts. S&P announced early December that they would not downgrade the U.S. again as yet. Continue to watch for European downgrades.  Portugal and Hungary two recent downgrades and France was warned as well.  A France downgrade would send global markets spiraling downwards. Watch France 10-year yields since they did not fall as much as the Italy and Spain issues did once the global liquidity intervention occurred last week.

·         U.S. Presidential Election: Third year of the Presidential Cycle should be strong for markets. Thus, some traders are looking for a strong finish for the year, but, stay cautious, since all the stimulus over the last couple years may have diminished the effect of this seasonal indicator. The market affects directly due to the party expected to win are a 2012 story as the November election date grows near. Keystone will comment on the Presidential cycle with charts as time moves along so stay tuned. Perhaps a perfect storm exists for the rise of the independent candidate next year?

·         Congress In or Out of Session:  Market bullish when not in session, market bearish when in session. Further he said-she said baby bickering on the budget hurts the markets. Automatic budget cuts should occur in the future since the super committee could not agree. If Congress tries to walk back any cuts, this should result in a downgrade of debt and hurt equities markets.  Entitlement programs and tax reform must be modified to handle the debt problem but neither political party has the spine.  The American people complain, but none of them wants their existing entitlements decreased in any way, such as the 45 million Americans (1 in 8 citizens) that receive food stamps or the folks receiving lucrative corporate or union pensions while at the same time collecting Social Security benefits—to which they are entitled. Obviously, there is no easy solution—everyone needs to feel pain.

·         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. Rating agencies have downgraded Italy, Spain, Portugal and Hungary’s debt.  Italy is the third largest debtor nation in the World, only trailing the U.S. and Japan.  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.  Italy and Spain are too big to fail, too big to bail. Rich Uncle China needs to save the day but they appear hesitant. France downgrade is a major worry now since that could start a cascading event.  French 10-year yields did not drop as much as the Italy and Spain yields after the 11/30/11 global liquidity intervention. Traders are expecting positive news from the E.U. Summit on 12/9/11.   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 meeting 12/8/11, further cuts are coming. Next meeting 1/12/12.  Past decisions are 25 bip cut on 11/3/11 (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 is reversing with Draghi as Europe falls into recession.  Euro down=dollar up=equities down.

·         Ongoing Wars: Libya, Iraq and Afghanistan. Oil flow is returning to normal in Libya.  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. The Iran nuclear issue escalates each day.  Bahrain is a worry since unrest will impact oil supply.  Yemen is important since it is a southern Saudi border and more stable after Al-Awlaki’s death. Yemen protestors are killed with live ammunition on 10/15/11. Syria is receiving pressure from countries in the area since over 3,000 citizens have been killed in the riots thus far.  Iran, Syria and Yemen are the major concerns. 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 three weeks ago so the movement appears in disarray for now.  Protestor numbers are dwindling as the winter winds blow and the warm indoors are far too tempting.

·         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.  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. Judge Mary France just ruled that Harrisburg is not allowed to seek bankruptcy protection, more than likely setting the table for taxpayers to pick up the tab once again in communities all across America as government overspending collapses a shaky system. Watch to see if California financial decisions spook the country. California is the same as Greece already. State and Muni problems are a 2012 story. MUB daily and weekly charts were in negative divergence marking September 2011 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 have no productive outlet for their youthful energy so riots, even Black Friday holiday shopping mayhem, increase as frustration grows. 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.  On 12/1/11, China PMI is under 50% indicating ongoing economic contraction. 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. Interestingly, however, the global liquidity intervention will want to bounce commodities such as copper. 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, such as Ordos, 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’ so watch this number closely as the months play out. 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 for the fifth and final raise.  China raised reserve requirements on 11/30/11, in concert with the global liquidity intervention, so this is the first firm acknowledgement of an easing direction now in place for China.  The question is when does the first rate cut occur?

·         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 should 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. 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.  The intervention bounced the dollar/yen (weaker yen) from 76 to 79 with price around 78 now.  Effects from the Japan tsunami and nuclear disaster are subsiding.  In December, 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 2012-2014, which should provide the ideal time to buy property, a generational-type low.

·         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 moderated due to lower global demand. Hurricane season is over until June 2012.  Brent Oil and WTIC (West Texas) oil prices are important. With global demand for goods and services slowing, the intermediate and longer term view leans towards lower oil prices. Vienna OPEC Oil Meeting 12/14/11. Oil price moves with the equities markets; up oil=up markets and visa versa, oil down=equities down.

·         Mother Nature/Crop Reports/Commodity Wars/Energy Wars/Water Wars: Droughts (in Texas and the Southern States), storms, floods (in the Midwest and Thailand), 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 (SPX dropped from 1278 to 1158, 9.4%, from 11/8/11 to 11/25/11); 1/3/12 (watch mid December thru mid January). Note how the May, July and November targets were all spot on.  This technique targets the next potential large market selloff area to occur from mid-December thru mid-January which also coincides with a major Bradley turn area.

·         Bradley Turn Dates: 12/28/11 (major turn area; window is from 12/21/11 thru 1/4/12); 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 new moon 11/25/11 shows selling before and into 11/25/11.  The next full moon is 12/10/11. The next new moon is 12/24/11.