Monday, September 24, 2012 - Counting Fingers

Counting Fingers

by Sinclair Noe

DOW – 20 = 13,558
SPX – 3 = 1456
NAS – 19 = 3160
10 YR YLD -.04 = 1.72%
OIL +.14 = 92.07
GOLD – 8.50 = 1765.50
SILV - .55 = 34.07
PLAT – 16.00 = 1626.00

Goldman Sachs is out with some research. I always feel more than a little skepticism when reading Goldman research. It's tough to believe a research report from a company you know would bet against you. You want to count your fingers after shaking hands. Goldman Sachs strategists expect the "fiscal cliff" to push the market lower in the fourth quarter, and they recommend investors sell the stocks that have lagged so far this year.

Goldman chief U.S. equity strategist David Kostin writes that the S&P 500 should fall sharply after the election when investors finally realize that there is a possibility that the fiscal cliff will not be resolved smoothly. He says the majority of investors expect to see the fiscal cliff avoided in the lame duck session of Congress, but Goldman sees a one-in-three chance that Congress will fail to address the issue.

Goldman says a catch-up strategy could be to sell stocks that have had the worst performance year-to-date. In the 23 years that the S&P was positive in the first nine months, a sector-neutral basket of underperforming stocks continued underperforming by an average 291 basis points during the fourth quarter, giving the strategy a 65 percent outperformance rate.

In a separate report, Goldman forecasts an 18.2 percent return on commodities in the next 12 months, with energy and industrial metals leading the way. Not 18.3%, but 18.2%.

The Standard & Poor's GSCI Enhanced Commodity Index gain of 18.2 percent will compare with 26.5 percent in energy ( or around $125 a barrel), 10 percent in industrial metals and 6 percent in precious metals. Agriculture will be down 5 percent over the same period and livestock up 4.5 percent. The Federal Reserve's third round of quantitative easing will help boost copper in the 2013 first half.

(Econombrowser had this analysis of ...Oil prices slipped below $92 a barrel, and finished just above. New efforts to revive growth from central banks in Europe, Japan and the U.S. have not been enough to overcome pessimism about the global economy's prospects. When economic growth slows, so does demand for fuel which typically results in lower oil prices. A stronger dollar makes crude more expensive and a less attractive investment for traders using other currencies. Can the wild swings in the price of oil over the last few weeks have anything to do with supply and demand? You remember last week, when the price of oil dropped $3 in a minute?The move sparked talk of an erroneous trade—called a "fat-finger" error in industry parlance—or a computer algorithm gone awry.

Fat finger or no, there was an even bigger drop on Wednesday, leaving the price of West Texas Intermediate well below where it had been prior to Fed Chair Bernnake's announcement of QE3, or even the price before the Jackson Hole Speech. Those who doubt that oil prices are determined solely by fundamentals would naturally ask, what aspect of the supply or demand for oil could have possibly changed in the course of less than a minute last Monday? The obvious and correct answer is, there was no change in either the supply or the demand for physical oil over the course of that minute. The minute-by-minute price of a NYMEX contract is determined by how many people are wanting to buy that financial contract and at what price, not by how much gasoline motorists burned in their cars that minute. But since changes in the price of crude oil are the key determinant of the price consumers pay for gasoline, doesn't that establish pretty clearly that the whims or fat fingers of financial traders are ultimately determining the price we all pay at the pump?

In one sense, the answer to that question is yes-- last week's decline in the price of crude oil will soon show up as a lower price Americans pay for gasoline. But here's the problem you run into if you try to carry that theory too far. There are at the end of this chain real people who burn real gasoline when they drive real cars. And how much gasoline they burn depends in part on the price they pay-- with a higher price, some people use a little bit less. Not a lot less-- the price of gasoline could change quite a lot and it would take some time before you could be sure you see a response in the data. That small (and often sluggish) response is why the price of oil can and does move quite a bit on a minute-by-minute basis, seemingly driven by forces having nothing to do with the final users of the product.

But if the price of oil that emerges from that process turns out to be one at which the quantity of the physical product that is consumed is a different amount from the physical quantity produced, something has to give. Indeed, the bigger price drops we saw on Wednesday followed news that U.S. inventories of crude were significantly higher than expected.

There are several channels by which QE3 may end up influencing the quantity of oil physically produced and consumed. A lower value for the U.S. dollar would mean a greater quantity demanded worldwide at a given dollar price of oil. A higher level of economic activity (the ultimate goal of QE3) would also boost demand for the physical product. And lower real interest rates may make it profitable to store more oil physically, leaving less available for the ultimate users of the product. So I would have expected QE3 overall to be one factor that could contribute to a higher dollar price for oil.

But any investors who have been assuming that QE3 will boost the price of oil for no reason other than the fact that other traders expect it to raise the price of oil may find themselves tripping painfully over the fat finger of reality.

We're just about to wrap up the third quarter; top performers so far include precious metals funds, which is another way of saying precious metals. A bounce back at bargain levels, weakness in the dollar and a play on QE3. Stocks erased Q2 losses in the third quarter. Commodity and European funds outperforms, with Euro-region funds up about 10% on the quarter. Maybe it's just bargain hunting. Large caps and value outperformed small cap and growth.

Federal Reserve Bank of San Francisco President John Williams says QE3 is essential and the Fed might do even more. Williams said the Fed “will continue buying mortgage-backed securities until the job market looks substantially healthier,” and they “might even expand our purchases to include other assets.” I don't know how you expand on unlimited Quantitative Easing, but we might find out.

The German edition of Der Spiegel is running a series of articles on the European situation, which make clear, as if that were still necessary, that Europe is still an absolute mess. You know, just in case you thought it was not; that Mario Draghi's latest unlimited whatever it takes has somehow chased away the demons.

First, Der Spiegel writes that the Greek deficit is twice as high as thought , at 20 billion-euro, according to a preliminary version of the long awaited troika report. The gap has to be closed for the next tranche of bailout money to be paid.

Second,euro-zone countries plan to let the bailout fund balloon up to $2.6 trillion. Remember that the German Constitutional Court limited Berlin's part to about $25 billion (billions compared to trillions). Creative accounting to infinity and beyond. 

Third, the latest German plan would split up investment and retail activities for Germany's banks (including Deutsche), think Glass Steagall. He wants to ban commodities speculation. And he wants a bank-ESM, a fund paid for by banks that can be used to bail them out, rather than taxpayer money.

There's lot more going on, and going wrong, in Europe, no matter what Draghi does, and no matter what plans José Manuel Barroso unveils. I'm really not expecting the Euro-situation to collapse real soon but here is the really scary part. The fate of the continent and its people is presently in the hands of a group of bankers, technocrats and delusional politicians.

More young adults are leaving their parents' homes to take a chance with college or a job. Across the nation, people are on the move again after putting their lives on hold and staying put. Once-sharp declines in births are leveling off, and poverty is slowing.

A new snapshot of census data provides sociological backup for what economic indicators were already suggesting: that the nation is in a tentative, fragile recovery; maybe, kinda, sorta.

The new 2011 census figures show progress in an economic recovery that technically began in mid-2009. The annual survey, supplemented with unpublished government figures as of March 2012, covers a year in which unemployment fell modestly from 9.6 percent to 8.9 percent. So, this data really is lagging.

The census figures show slowing growth in the foreign-born population, which increased to 40.4 million, or 13 percent of the US population. Last year's immigration increase of 400,000 people was the lowest in a decade.

The bulk of new immigrants are now higher-skilled workers from Asian countries such as China and India, contributing to increases in the foreign-born population in California, New York, Illinois and New Jersey.

Income inequality varied widely by region. The gap between rich and poor was most evident in the District of Columbia, New York, Connecticut, Louisiana and New Mexico, where immigrant or minority groups were more numerous. By county, Berkeley in West Virginia had the biggest jump in household income inequality over the past year, a result of fast suburban growth just outside the Washington-Baltimore region, where pockets of poor residents and newly arrived, affluent commuters live side by side.

As a whole, Americans were slowly finding ways to get back on the move. About 12 percent of the nation's population, or 36.5 million, moved to a new home, up from a record low of 11.6 percent in 2011.

Among young adults 25 to 29, the most mobile age group, moves also increased to 24.6 percent from a low of 24.1 percent in the previous year. Longer-distance moves, typically for those seeking new careers in other regions of the country, rose modestly from 3.4 percent to 3.8 percent.

Less willing to rely on parents, roughly 5.6 million Americans ages 25-34, or 13.6 percent, lived with Mom and Dad, a decrease from 14.2 percent in the previous year. Young men were less likely than before to live with parents, down from 18.6 percent to 16.9 percent; young women living with parents edged higher to 10.4 percent, up from 9.7 percent.

The increases in mobility coincide with modest improvements in the job market as well as increased school enrollment, especially in college and at advanced-degree levels.

Marriages dipped to a low of just 50.8 percent among adults 18 and over, compared with 57 percent in 2000. Among young adults 25-34, marriage was at 43.1 percent, also a new low, part of a longer-term cultural trend in which people are opting to marry at later ages and often cohabitate with a partner first.

Births, on the other hand, appeared to be coming back after years of steep declines. In 2011, the number of births dipped by 55,000, or 1 percent, to 4.1 million, the smallest drop since 2008.

Some 17 states showed statistically significant increases in the poverty rate, led by Louisiana, Oregon, Arizona, Georgia and Hawaii. Among large metropolitan areas, McAllen, Texas, led the nation in poverty, at 38 percent, followed by Fresno, Calif., El Paso, Texas, and Bakersfield, Calif. In contrast, the Washington, D.C., metro area had the lowest level of poverty, about 8 percent, followed by Bridgeport, Conn., and Ogden, Utah.

Government programs did much to stave off higher rates of poverty. While the official poverty rate for 2011 remained stuck at 15 percent, or a record 46.2 million people, the government formula did not take into account noncash aid such as food stamps, which the Census Bureau estimates would have lifted 3.9 million people above the poverty line. If counted, that safety net would have lowered the poverty rate to 13.7 percent. And without expanded unemployment benefits, which began expiring in 2011, roughly 2.3 million people would have fallen into poverty.