Monday, April 09, 2012

DOW – 130 = 12, 929

SPX – 15 = 1382
NAS – 33 = 3047
10 YR YLD - .14 = 2.04%
OIL - .15 = 102.31
GOLD + 10.20 = 1642.30
SILV +.05 = 31.86
PLAT + 17.00 = 1619.00

Remember Friday? Remember the disappointing jobs report? The economy added 120,000 jobs in March. The unemployment rate dropped from 8.3% to 8.2% but that was just because people dropped out of the labor pool, they just quit looking for a job. While the economy undeniably continues to grow, the rate of that growth continues to disappoint. The stock market was closed on Friday; today, we saw the response and it was ugly.

Alcoa kicks off the earnings reporting season tomorrow afternoon. Alcoa is forecast to post a $0.05 loss versus a $0.28 gain a year ago. Even if Alcoa beats expectations, it would be disappointing.

A bad first quarter is expected; earnings will almost certainly be lower than last quarter and absolutely down on a year over year basis. And while earnings might be disappointing, big U.S. companies are flush with cash, they're more productive, more profitable, and less burdened by debt. An analysis by The Murdoch Street Journal of corporate financial reports finds that cumulative sales, profits and employment last year among members of the Standard & Poor's 500-stock index exceeded the totals of 2007, before the financial crisis. Deep cost cutting during the downturn and caution during the recovery put the companies on firmer financial footing, helping them to outperform the rest of the economy.

Will earnings season be seen as good news or bad news? That will tell us something about the psychology of the market. Markets rarely move in a straight line. We expect zigs and zags and corrections since fundamentals rarely support such rapid changes. The result is that as a move gets more extended, even traders who have played the trend are poised to react. I mean, we don't really need an excuse to sell.

Of course there is more to market psychology than earnings. The number of new highs have declined, the volume has been poor, insider sales just hit a record. Over in the bond market, prices jumped and yields dropped back around 2%. Only a couple weeks ago, on March 19, the yield on the 10-year note closed at 2.37%. It seems unlikely that yields are set to go all the way back down to 1.72% where they closed on Sept. 22. Still, it's a little tough to claim the bond market bull is dead.

Federal Reserve officials will be pumping out propaganda; nine of the 17 members of the Federal Open Market Committee will speak this week (some of them multiple times), including a couple of speeches by Chairman Bernanke. Both of the chairman’s speeches will be related to the financial crisis and not monetary policy or the economy, but he’ll answer questions from the audience that could broach either topic. 

We know Bernanke was already concerned that the December-February strength in jobs wouldn’t last. His labor market speech a week ago sided with the explanation that the recent improvements represented “a catch-up from outsized job losses during and just after the recession” and that an increase in hiring — as opposed to just a decline in firing — and strong economic growth were needed to keep the momentum going.

Don't expect any clear indication the Fed will move to another round of Quantitative Easing. It will take more than one month of bad jobs numbers to force the Fed to commit to more free money. And besides, the March report can still be revised, and there is a good chance the next report – the April jobs figures will move back to the 200,000 range. Of course, you could make the argument that with unemployment at 8.2%, the Fed doesn't need an excuse to do everything humanly possible to improve the jobs picture.

What else is driving the economy? Gas prices; but you knew that and in fact, you expected prices would go back above $4.00 a gallon; you are not surprised because we've been there before.

The latest data confirm that sales of domestically manufactured light trucks (a category that includes SUVs) in March were still lower than they were in 2008, the first time we saw gasoline prices moving up to the values that now seem pretty normal. In 2008, sales at those levels came as a shock to Detroit. Today, they're about the best anybody was expecting. On the other hand, sales of the lighter cars manufactured in North America were at the highest level of any March over the last decade. Last month, consumers' thirst for small and fuel-efficient cars was a prime factor in driving light car and truck sales nearly 13% higher than a year ago. GM said it sold more than 100,000 cars that get 30 or more miles on a gallon, its highest ever and nearly half of the 231,052 vehicles it sold.

New light vehicles achieved record fuel-efficiency for the third month in a row in March, an average of 24.1 miles per gallon. So, high gas prices have actually helped Detroit sell more cars, but they are still a drag on household budgets. However, improved fuel economy, low natural gas prices, and a mild U.S. winter have all helped cushion the effects of that, with spending on energy goods and services still only 5.8% of total consumer spending for February, lower than the values we saw this time last year.

One of the biggest reasons cited for the high price of gasoline is the political tension with Iran. If an embargo is successful in preventing Iran from selling a significant amount of oil on the world market, what would replace it? The White House says, there currently appears to be sufficient supply of non-Iranian oil to permit foreign countries to significantly reduce their import of Iranian oil, taking into account current estimates of demand, increased production by some countries, private inventories of crude oil and petroleum products, and available strategic petroleum reserves and in fact, many purchasers of Iranian crude oil have already reduced their purchases or announced they are in productive discussions with alternative suppliers. The main reason there should be enough oil is Saudi Arabia announced it's prepared to increase oil output by 1.3 million barrels per day to deal with world demand. This is good. Saudi Arabia has done this before, but if history is any guide, the price of oil will move significantly higher. A helping hand from the Saudis comes at a high price.

Are households really cutting debt? Credit card borrowing has slowed down a bit. There was a run up in the past few months related to the holidays, and we’ve since then we've seen a pretty meaningful slowdown. The process of repairing consumers’ balance sheets probably still has farther to go. The Federal Reserve reported revolving debt, which includes credit cards, fell $2.2 billion in February after a $3 billion drop a month earlier. Non-revolving debt, which includes student loans and automobile loans, climbed by $10.9 billion in February, the smallest gain in four months. Student loan debt is really the only segment that is showing growth. Some people think we need to see a “recovery” in the amount of debt people are willing to carry; that more debt is indicative of more confidence. I think less debt is pretty good, especially if it means we are learning out lesson about being bogged down by consumer debt.

The Department of Agriculture is scheduled to deliver a crop report tomorrow, and they're expected to say corn inventories on Aug. 31 will be 37 percent lower than a year earlier at 715 million bushels. That compares with a projection of 801 million bushels last month. Soybean stockpiles will be 242 million bushels, down from a March prediction of 275 million. The government is already predicting food inflation of 2.5 percent to 3.5 percent in 2012. While that’s down from 3.7 percent in 2011, it's still higher than typical. Cattle futures in Chicago reached a record $1.315 a pound on Feb. 22, partly because high corn-feed costs prompted farmers to shrink herds. Retail prices of pork chops and beef were close to all-time highs in February. Supplies are going to be tight and that means we need good weather this year to improve inventories.

More than 15,000 temperature records were broken in the U.S. last month and the country had its first $1 billion weather disaster of 2012. The average temperature in the continental US was 51.1 degrees Fahrenheit or 8.6 degrees above the 20th century average. Every state set a daily record and 25 states east of the Rockies had their all-time hottest March. The warm weather also contributed to 223 reported tornadoes or nearly 3 times the norm.

Did you happen to catch the 60 Minutes piece on the European Debt Crisis? They seemed content to blame the problem on laziness among the Greeks and Spaniards, and Italians – which is wrong. Greeks typically have longer work weeks than the French or the Germans – at least the Greeks that still have jobs. Also, there was no mention of the complicity of Goldman Sachs in the Greek debt problems.

A quick recap: part of the requirements for entry into the Euro-zone was keeping the deficit and the debt ceiling low. The Greeks have never managed to stick to the 60 percent debt limit, and they only adhered to the three percent deficit ceiling with the help of blatant balance sheet cosmetics. One time, gigantic military expenditures were left out, and another time billions in hospital debt. Around 2002, various investment banks offered complex financial products with which governments could push part of their liabilities into the future.

Greece's debt managers agreed to a huge deal with Goldman Sachs in 2001. The Goldman Sachs transaction swapped debt issued by Greece in dollars and yen for euros using an historical exchange rate a mechanism that implied a reduction in debt. It was really nothing more than smoke and mirrors to hide the debt, but behind the illusion, the debt grew faster than ever. When it became apparent that the deal was sour, the Greeks went back to Goldman and Goldman asked them to make a change that actually made things even worse. Goldman protected their own interests by shorting, or betting against Greek debt.

Last night's report by 60 Minutes did not lay any blame on the financial institutions in Europe which helped to create an environment in which countries would look to investment banks such as Goldman Sachs to hide, or swap, their debts.

And investment banks, like Goldman Sachs, were all too eager to take advantage of countries, such as Greece, by using fictitious instruments that were being ignored and certainly allowed (if not promoted) by the E.U. And so this fake anger with Greece, and calling the Greeks lazy is nothing but pure hypocrisy. But hypocrisy is a concept. An idea. What's real? Austerity. The lines that form at the soup kitchens, the elderly scavenging through the trash for a scrap of food, and the waves upon waves of young people without a job.