There are still buyers out there, but only for issuers who are willing to pay up.
Andrew Barber -Director
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With another summer weekend behind us, it’s back to the grind here this morning. All things considered, US futures look pretty good relative to what they could look like. I think there is still some gas left in the tank here on the bullish side of the pain “Trade”, which remains higher.
With the US Dollar finding its footing and commodity driven inflation coming in hot, it has been virtually impossible for the objective mind to remain ultra bearish in the immediate term. For the intermediate term “Trend” in the S&P 500 to turn positive however, I’ll need to see a close above the 1330 line.
As US earnings season winds down, we’re moving back to macro time, and I’ll do my best to proactively highlight where the masses might be focused. The two most important macro dates on your calendar for this week will be tomorrow (housing starts and PPI for July) and Friday, when Ben Bernanke will gather his politicized Fed for a powwow in Jackson Hole.
On the inflation front, it would be hard to see a more elevated headline PPI than we saw in last week’s CPI, and it would be even harder to explain why 2 year US Treasury yields have stopped going up despite as much. The most logical conclusion that I can surmise is that Bernanke is going to pander to the bailout populous on Friday, and continue with his dovish rhetoric. This, of course, keeps the easy money Fed card in play, and leaves room for levered long investors to continue to hope that the US stock market “bottom is in”.
In the end, Bernanke not tightening the screws on cost of capital is going to continue to equate to widening credit spreads and mounting systemic risk in the US Financial system. The longer he keeps undisciplined players on life support, the more protracted the American economic downturn will be. I am certainly not the only one with this view at this point. Bernanke’s recently “retired” Fed teammate, Charles Plosser, is on the record in a Bloomberg interview this morning saying, ``there is some hard thinking that needs to be done…the Fed has a terrific reputation as a credible institution. We have to be cautious not to undertake things that put that credibility at risk…''
From Russia to Jackson hole, credibility is what this brave new ‘You Tube’ world is looking for. Credibility, transparency, and accountability – people get that, particularly when you show it to them. People aren’t as dumb as Wall Street would like to think. The power of real time information transfer is shifting. The leverage is being put back into the hands of what has long been considered the feudal system of financial wherewithal – Main Street. If you want to predict how humans behave, follow where their money is.
In Asian trading this morning we are seeing the Chinese locals follow one another’s money out the door. China got hammered for another -5.3% down move overnight, taking the Shanghai Composite Index down to 2319 – that’s a -15% drop since the Olympics began. Find me a bird’s nest to crawl into.
Stocks in Hong Kong reacted negatively to this decline, closing down another -1.1%. Since July 23rd, the Hang Seng index has lost -10% of its value in the face of the S&P 500 moving +1% over the same duration. This is a major league negative divergence. It is telling you that global growth is slowing, big time. This certainly explains why commodities have corrected over -20% in a month, and probably explains why US Treasuries are breaking out as well.
As the US market “Trade” continues upward into the tail end of its latest run-up, I’ll likely be moving up to 90% cash.
Best of luck out there this week,
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