December, Monday 12, 2011

DOW –162=12,021
SPX –18 = 1236
NAS –34 = 2612
10 YR YLD -.04= 2.01%
OIL –1.53 = 97.87
GOLD –46.00 = 1666.30
SILV -.94 = 31.39
PLAT – 27.00 = 15.06.00

You remember on Friday, the big Euro Summit in Brussels resulted in a feel good day for the markets, although I’m still not sure why. Twenty-six of the 27 European Union leaders on Friday agreed to pursue stricter budget rules for the single currency area and also to have euro zone states pay up to $267 billion in loans to the International Monetary Fund (IMF) to help tackle the crisis. England backed out of the deal.

Today, French President Nicolas Sarkozy said: "You have to understand this is the birth of a different Europe - the Europe of the euro zone, in which the watchwords will be the convergence of economies, budget rules and fiscal policy. A Europe where we are going to work together on reforms enabling all our countries to be more competitive without renouncing our social model."

Which is another way of saying they will try to make a Eurozone that is subject to sanctions by a board of economic technocrats who have the power to reject or accept national budgets even though they are not elected officials. And there is still the nagging little problem that this setup might not be legal. To which Sarkozy responded: "In the next fortnight, we will put together the legal content of our agreement. The aim is to have a treaty by March."

An EU diplomat said the first draft of the new treaty would be ready by early next week. Sarkozy said the aim was to have it ratified by all member states except Britain by June. So, they’ll write out an outline before Christmas, turn that into a treat in March, and vote on it next summer. What could go wrong in the meantime?

Sarkozy prepared French voters for a possible downgrade of the country's AAA credit rating but insisted he could cut the public deficit without cutting salaries and pensions.

Traders said the ECB intervened to buy short-term Italian debt after yields on Italian and Spanish debt spiked.

Italian 5-year bond yields shot up above 7 percent, widely seen as a danger level while 10-year yields spiked above 6.8 percent and Spanish 10-year yields topped 6 percent.

The chief European economist for S&P put it in perspective: "Let's not raise expectations too high, there will be more summits. There is probably yet another shock required before everyone in Europe reads from the same page, for instance a major German bank experiencing difficulties in the market.”

So, in other words, the Euro outlook is not quite as rosy as indicated last Friday.

Today, there were a couple of areas hit: Intel warned that they faced supply shortages of hard-disk drives because of flooding in Thailand. It was the first time in a long time that the market was moving on fundamental news.

The financial sector continued to show weakness. In fact, the financial sector has been one of the weakest sectors all year long. In the last six months, the assets under management in the U.S. financial/banking funds sector have dropped a net $8 billion, or nearly 40 percent. And there appears to be no rush to jump on low valuations – the reason? Nobody knows how low they can go. Nobody knows how toxic the assets might be. Nobody really knows how bad the European contagion might be. When will valuation matter again? Maybe when volatility declines and earnings reports from the banksters actually become transparent. In other words, don’t hold your breath.

Meanwhile, banks increased commercial and industrial loans by an average annual pace of almost 10 percent in the third quarter, the fastest pace of lending in 3 years, compared with a 1.7 percent decline in the past four years. The latest numbers show loan growth of 15 percent, seasonally adjusted, in October and 6.1 percent in November. Investment in equipment and software increased by more than 15 percent in the third quarter after an almost 15 percent rise in 2010. This investment -- for goods ranging from calculators to aircraft –contributed about a full percentage point to the quarter’s 2 percent growth. Of course, the businesses that have been doing well, and have a track record, and especially those that have lots of cash on their balance sheets are the firms being solicited by the banks. Everyone else is pretty much shut out. And of course, the lending has not been extended to the housing market, which remains in a five-year slump.

The holiday shopping season is drying up; 40% of shoppers are completely done with their holiday shopping at this point, compared with 28% who were finished at the same point last year.  That might translate into some big discounts over the next fortnight, with possible discounts of 70%. Retailers will announce a number of unplanned sales and discounts, hoping to surprise and delight customers into opening their wallets. The big question is how much is left in those wallets that isn't pledged to the light bill.

Another area hit today – the precious metals. Gold dropped. Broke down to the lowest levels in about one-and-a-half months. Next level of strong support seems to be around 1600. Today was a breakdown, so we might test those levels of support, still I think we are in a long-term uptrend. A ten year bull market doesn’t’ get wiped out in one day.

Sinclair,
        Dumb question, but I always thought the market was basically a zero-sum game.  For every trade there is a winner and a loser on each end of the trade.  That being the case how are these many gap-up/gap-down openings accounted for?  (Of which there seems to have been an increasing amount) Who wins/loses?  Or are they only on-sided trades with only a winner (gap-up) or loser (gap-down)?  I'm assuming the futures market and options market have nothing relevant to explain these gaps.  Maybe I'm wrong?

If the market was at X value and tomorrow it gapped up (whatever amount) the new value is X+.  But there were no losers.  So am I correct to think that that is instant equity creation?  There were no losers?  Just increased overall value...poof?  Same as gap-downs?  There is no one on the opposite side of those trade gaps?

I get it when there are buyers and sellers taking the trades.  But gaps confuse me as to where that instant value (or devalue) is to equate to a zero-sum game...?  Or is it really not a zero-sum game?

Thanks, I don't know who the hell else to ask and I can't find any adequate information although I have spent ample time googling around but coming up empty.

Your stumped and enthusiastic listener,

(Don’t get tripped up over-thinking gaps. The price changes from one trade to the next. It doesn’t matter if the next trade takes place in one second or in 17 hours; it doesn’t matter if the price change from one trade to the next is one penny or one dollar or ten dollars. IT’S JUST THE NEXT TRADE.

Is it all a zero sum game? Well the futures markets are definitely a zero sum game. The stock market is a slightly different beast and it may be argued that equity markets create wealth; conversely it may be argued that it is also a zero sum game, and at its heart it is nothing more than a market in search of a greater fool - but I’m not foolish enough for that debate at this moment. Is it a zero sum game? Over a long enough period – yes.)

Sinclair,

The last several months have seen more action in the overnight futures market than at any

point in history.  It is very difficult for a retail investor to participate in the stock market 
when most of the action (price movements) occur in this manner, which translates to major gap ups and downs at the market open.

Could you please describe this market, the players and why this is happening?  Thanks!

OK, a little more on gaps. Don’t freak out on gaps. Gaps can be your friend. For example: breakaway gaps, that occur at the beginning of a trend can be very profitable. Breakaway gaps can signal that a pattern has been completed and a boundary penetrated.

An opening gap, where the price is outside the range of the previous day can create quick profit opportunities – follow the first 3 –five minute bars and watch whether the gap breaks out of gets filled. You can get a good idea of whether or not the move will fade during the day.

Look for runaway gaps to help you measure the movement of a pattern; typically a runaway gap occurs in the middle of a price run.

And of course, exhaustion gaps can signal the end of a move and possibly a trend reversal.

As far as describing this market, the players, and why this is happening – we do that every day at 4PM – you just have to listen for the music…..

I am a long time listener and love your show.  What is the album/artist/song of the song you play at the start of your show - it is the swing jazz piece with nice piano - I know a lot of the music you play but not that one.  You are the best!  Thanks! 

No, no – you are the best. It is called Route 67 – a 60 second commercial jingle performed by unknown studio musicians and designed to be the music bed for a commercial.

Have you ever had an idea that was sort'a like an itch that bothers you until you can scratch it enough to make it clear, or go away?  Help me understand my peeve about this one.   Listening to the TV this weekend the politicos and the commentaters all seemed to dwell on the problems of the MIDDLE CLASS.

The more I thought about it, the more it seems to me that not only is such a designation a disparaging and discriminatory one, but insiduously un-American.  

A furor over European Class Distinctions was a major plank in the platform that the Revolutionary War  was fought over.  Didn't we do away with  titles; aristocratic rights and privileges? The real clincher to such a danger is that by so labeling groups of people we risk apermanent assignment without any basis for change.  The very dream of this country has always been America as a Classless Society that has its basis on hard work and opportunity that is wide open and available to one and all.    Only in the past half century has race and religious discrimination been able to begin to wipe out the "class" issue that was attached thereto.  Middle Class is now tied to a concept of Working Class as though the Upper Clasess and Lower Classes don't work....a dreadful connotation. 

That you have a "Middle Class" implies the existence of an UPPER AND A LOWER CLASS.  Who are the arbiters of these designations? 

Is someone "Low" Class because he is poor or  culturally deficient, lazy, or even dirty?   Is someone "Upper"  Class because he is wealthy?   Does wealth somehow  imply a better person -- or poor, a bad person...what qualities constitute  such a person.?  If one is Middle Class because he works does he rise out of that designation if he makes a lot of money ...if  he stops work is he moved into the Low Classes?

Think about it.

Hope you all are well and happy.

This is a dangerous slope and it needs must be derailed now.