12 August 2010

SP 500 and NDX September Futures Daily Charts; Gold Daily Chart; Corporate Bonds

The stock market was hit by a double whammy with the miss in revenue by bellwether Cisco after the bell last night, and then the dreadful unemployment claims number this morning, with 484,000 more people unemployed versus 465,000 expected.

Stocks opened much lower as expected, but as the selling subsided they managed to climb back regaining much of the losses in a low volume trading day.

I think the Street, dominated as it is by the big TBTF banks, will rally around this pivot point of support on the major indices until the General Motors IPO comes out, which should be next week at the latest. CEO Ed Whitacre announced today that he will be stepping down to make way for someone that will stay with the company for a longer time horizon, to give investors confidence in the new share offering as GM becomes a public company again.

So while volumes remain light and 'nothing happens' to trigger hard selling, I would expect these down days to be met with the purchase of the SP futures in particular to give it support. While the SP futures may see unusually high volumes as a fellow blogger noted yesterday, this is indicative of organized Street support to prop the market keying in on the SP 500 futures in the style endorsed by Robert Rubin, and not legitimate investor interest in buying the dip.

There are not many investors in these markets at these prices; the market is primarily consists of speculation and momentum trading, and therefore prone to sharp sell offs like the recent flash crash. This is why I have put out the 'black diamond' sign even though I do not anticipate a serious downleg until the IPO of GM is priced and put out to market. If it is withdrawn that will be a deadly sign that the Street believes there is insufficient liquidity to get it out to market, even though the government wants it to happen, and badly.

By the way, I was just thinking today how fortunate that Bush Jr's proposal to 'privatize Social Security' by investing it in the stock market was turned down, even by Alan Greenspan who never met a pedigreed Wall Street scam he couldn't support.

SP 500

Nasdaq 100

Cisco's weak results (for them) and their weaker forecast sent tech into a tailspin last night. It managed to hold itself together today for the reasons cited above.

Gold appears to have recovered from its FOMC-inspired smackdown and has resumed its uptrend. Do not expect this to be straightforward or easy, and you will not be disappointed.

But anyone who says that gold is a bubble is either talking their book or operating on a badly mistaken theory of money and value. This undeniable bull market in gold and silver is a direct reflection of the well deserved and justified deterioration in the financial system and the currency, the perception that Wall Street is rife with fraud, cronyism and corruption, and hidden counterparty risks.

The way to fix the problem is not by engaging in further fraud and market manipulation, like trying to silence the smoke alarm to keep everyone calm and confident. It takes a particularly perverse Madoff-like view of the world to write that prescription. The way to repair confidence is to reform the markets and weed out the crime, and establish a more equitable and self-governing system of global trade, because the current dollar reserve regime is no longer sustainable.

Failure to reform is gold's best friend. And this is why the crooks hate it publicly, while stuffing their personal vaults with it privately.


A Sign of a Top in Corporate Bonds

US corporations are issuing large amounts of new debt to take advantage of the exceptionally low rates created by quantitative easing. IBM recently did a major issue of three year notes that went out at one percent. Johnson and Johnson came out today with ten and thirty year notes at record lows.

Johnson & Johnson sold $1.1 billion of debt at the lowest interest rates on record for 10-year and 30-year securities amid surging investor demand for corporate debt.

The drugmaker, in the first offering by a nonfinancial AAA rated company in 15 months, sold $550 million of 2.95 percent, 10-year notes and the same amount of 4.5 percent, 30-year bonds, according to data compiled by Bloomberg. That’s the lowest coupons for those maturities on record, according to Citigroup Inc. data going back to 1981.

Great deal, if you wish to have record low returns in a depreciating currency with counter party risk correlated to an economic recovery. No risk in corporates, right? Maybe less for J&J, but most of the others will be promises writ on water if a major Depression ensues. But perhaps the Fed can buy them.

I obviously cannot predict when and if it will happen with certainty. But if the economy turns down and a dollar currency crisis ensues these corporate bonds will suffer a meltdown between foreign selling and corporate defaults.

Nassim Taleb believes that government bonds will collapse and is betting on it. I think corporates are a better bet, because a business slump and corporate failures could do the trick, even while the dollar and the short end of the curve is viewed as a safe haven.

But if there is a fear of hyperinflation and a greater dollar crisis, even the relative safety of Treasuries will melt down, and the longer end of the curve will drop in value faster than you can say "Sell."