Stocks Spike on Lower-Than-Expected Inflation in China

Stocks Lose Their Nerve, Close Almost Flat

The Dow closed up only 1 point.

Go Figure! Euro Strengthens on Greek Debt Downgrade

Big Bounce

Wall Street traders seem to be eager for an opportunity to buy, unless more morose market conditions and negative economic data overwhelm that desire. Strong buying prevails for the moment. Here comes the Pollyanna Party! It's easy to rally the drunken troops on a day when there is no news, especially following so much excessive spending and stimulus over the past 3 years.

Economy Summarized

Excellent economic assessment and summary courtesy of David Rosenberg and Zero Hedge:

David Rosenberg provides the key bulletized market observations that have marked the broad capital markets over the past few months.

• $950 billion of paper equity wealth has been wiped off the map in the past six weeks.
• The Dow is below 12,000 for the first time since March 18th.
• The Transports are down more than 8% from the nearby highs and are down for the year as well
• The Transports/Utilities ratio has broken down to its lowest level since November 9th of last year.
• The Nasdaq is now down for the year (-0.3%)
• The Russell 2000 index is also down for the year (-0.5%).
• The S&P 500 is just 1.1% away from seeing the same fate.
• The S&P 500 has declined in each of the past six weeks, the longest losing streak since June-July 2008.
• The S&P 500 has fallen below its 150-day moving average after breaking below the 50-day and 100-day trendlines earlier in this corrective phase; the 200-day is the next level of support.
• For the Dow, this is the longest string of weekly declines since the Fall of 2002.
• The total six-week decline in the broad market is nearly 7% ... a slow bleed.
• Junk bond spreads widened 25 basis points last week, more evidence of risk re-rating.
• Investment-grade bond spreads widened out 14bps and new issue activity ($0.63 billion) was the lowest of the year.
• Bank of America is back to being a $10 stock after a two week 8% slide — how do the bulls dismiss this out of hand? It's the biggest consumer bank in the country.
• In the past six weeks, Energy, Industrials, Materials, Financials and Consumer Discretionary have all rolled over significantly. The defensives have outperformed dramatically — Healthcare, Utilities, Telecom, and Consumer Staples.

The last bullet point is precisely in line with our May 16 proposed QE Unwind compression trade.
And here is what Rosie believes is ailing the market. Nothing really new here:

• The economy is cooling off and there is no policy stimulus in the pipeline. Ben Bernanke did give a sombre assessment of the economy last August in Jackson Hole but at the same time threw Mr. Market a bone by hinting at a new round of liquidity expansion. Last week, the Fed Chairman delivered an even more sobering outlook and did not offer any olive branch this time around.
• So here we have it economic deceleration but with no policy response. NY Fed President Bill Dudley also gave a speech that was very similar in tone to Bernanke — maybe even more cautious, and while repeating the refrain about second-half recovery prospects he listed an array of downside risks to that forecast. He, Bernanke and Yellen ('The Big Three') would love to do another round of QE (Yellen also gave a speech on Friday on housing) but the bottom line is that they are gun-shy after receiving so many complaints from foreign governments, Congress, Wall Street and Fed Bank Presidents that they just do not have the political capital to engage in more stimulus (though it will come at some point but maybe at a similar strike price as last August; dare we say, 1,040 on the S&P 500).
• While the economists have cut their numbers, the equity analysts have yet to do that with their earnings numbers. That comes next.
• Leading indicators are suggesting that we are in more than just a "soft patch" — the jargon of Wall Street economists. The ECRI leading economic index has fallen now for four weeks in a row!
• Global cooling. The Chinese economy is also slowing down with auto sales declining now for two months in a row and the PM! perilously close to the 50 level. Retail sales in Brazil fell 0.2% in April, the first decline in a year and the news came on top of a sudden sharp slowing in industrial output. U.K. factory output fell 1.7% in April as well and France posted a surprising 0.3% drop in industrial production.
• Tightening monetary policies to combat rising inflation pressure across the emerging market world.
• The situation in Europe is untenable — Germany's finance minister is drawing a line in the sand and calling for some sort of Greek restructuring in which bond holders will also have to take a haircut. This has caused the ECB's Trichet to almost go apoplectic. Of course, the ECB is holding onto hundreds of billions of dollars of P.I.G.S. debt on its balance sheet so any haircut would render the central bank insolvent in its own right.
• Threatening not to repo restructured debt is like saying to the Greek banking industry to kiss itself goodbye (a likely prelude to Greece exiting the eurozone, by the way). But Trichet is not elected, the likes of Angela Merkel and Wolfgang Schauble (the finance minister in question here who came right out and said a Greek restructuring is "inevitable") just happen to be, and it looks like the German taxpayer-funded bailouts are coming to an end. See Rift Over Greece Deepens in Europe on page B1 of the weekend WSJ. Some markets are starting to price in the inevitability of sovereign debt defaults in Europe, with 5-year credit default swaps soaring to record highs in Greece, Ireland and Portugal.
• One can't help but think that the ECB rate hike (and the threat to do more!) will go down as a colossal mistake the same central bank made in the summer of 2008. Considering that most of Spain's mortgage market is variable-term and the housing market is beset with tremendous excess supply and downward price potential, the ECB rate hike is like a stake in the heart — to combat perceived inflationary pressures in Germany.
• The slide in U.S. bond yields is telling you that an economic slowdown is here and here to stay beyond Q2, despite consensus views to the contrary. The fact that copper was down in the same week that oil was up says two things here — the former reflects the falloff in Chinese imports; the latter tells you a thing or two about just how thinly balanced the global demand-supply for crude is given that the move back to $120/bbl was all due to discord within OPEC in terms of whether or not to bump production up (looks like the Saudis will be going it alone).
• Actually, it is all about discord here — within OPEC, Congress and the White House (see the editorial piece The Economy and Washington on page 8 of the Sunday NYT 'Week in Review' section), the confines of the Fed, the ECB and Germany, etc. Discord, instead of decision-making, in the current environment is not a good thing— leaving the financial markets in a heightened state of uncertainty.

"B" Is For Bounce

Stocks Collapse In Sell-Off

After being up 65 points, stocks have collapsed again and are decidedly in the negative today. I'm surprised, because I expected a bounce at Friday's close.

S&P 500 Turns Red

Stocks Back to Flat on Slow News Day

Choppy, Sloppy Stocks

Volume is low, too. Market has just turned bearish for the first time today.

Another Bad Day for Equities

Six consecutive weeks of stocks closing lower.

Dow Drops Nearly 1000 Points Since May 1st

Dow Plunges 155 Points

Highest Price for Corn in Three Years

Not since the commodity bubble of 2008 has corn cost this much, and not in 15 years have supplies been this tight. Meanwhile, China is increasing its purchases of corn. And lest we forget, the EPA mandated a 50% increase in ethanol use just a few months ago. Higher prices, coming soon to an America near you!

Bad News for Anyone Who Eats

from Zero Hedge regarding this morning's USDA update:

So much for transitory inflation as corn prices are again pennies of a fresh all time high. Earlier today an update by the USDA showed that corn stocks will come in much lower than expected at the end of the 2011/12 marketing year at just 695 million bushels: this is far lower than the analysts consensus of 771 million bushels. The spring weather was blamed for the drop: "cold, rainy spring and flooding cut U.S. corn plantings by 1.6 percent, will reduce the harvest by 2 percent and will keep U.S. corn supplies at their tightest level in 15 years through the fall of 2012, the government said on Thursday." Another factor for the record price: surging China demand: "USDA also forecast a hefty increase in corn use by China -- up 8 million tonnes, or 5 percent, this year and up 13 million tonnes, or 8 percent, in 2011/12. China will draw down its stocks rather than import corn, USDA said." Just like in China where record droughts have been replaced with deadly floods, the weather continues to be unusually volatile, not just in the US: "Besides plaguing the eastern Corn Belt, rains and floods have slashed the rice crop by 5.5 percent since May, USDA said. Drought in the Southwest would reduce the cotton crop by 1 million bales, or nearly 6 percent, to 17 million bales, and the rice crop, at 199.5 million hundredweight, would be the smallest in four years." This is probably the latest data the market needed to completely ignore today's worse than expected initial claims data, and go into full "Inflation: ON" mode. In other news, expect Obama to announce the launch of an Adverse Weather Task Force investigating speculative movements in air masses momentarily.

Jim Rogers: Worse Crisis Coming Because of Debt

Legendary investor Jim Rogers, CEO of Rogers Holdings, offered a very glum outlook on the U.S. economy yesterday. According to him, we’re headed for a crisis worse than 2008, the Chinese Yuan will soon be safer than the dollar, and Fed Chairman Ben Bernanke will probably institute another round of money-printing, or QE3.
“The debts that are in this country are skyrocketing,” he told CNBC. “In the last three years the government has spent staggering amounts of money and the Federal Reserve is taking on staggering amounts of debt.
“When the problems arise  next time…what are they going to do? They can’t quadruple the debt again. They cannot print that much more money. It’s gonna be worse the next time around.”
He later added, “The U.S. is the largest debtor nation in the history of the world. The debts are going through the roof. Would you keep lending money to somebody who’s spending money and not doing anything about it? No you wouldn’t.”
Because of that, he said the Chinese Yuan will be a safer currency bet than the dollar. And what may even better is gold and silver: he’s hoping the price goes down on both so he can “pick up the phone and buy more.”
He’s also convinced Ben Bernanke, who he calls a “disaster,” will institute another round of quantitative easing, essentially printing money, later this year.
“They’re gonna bring it back because [Bernanke will] be terrified and Washington will be terrified,” he said. “There’s an election coming in November 2012. Washington’s gonna print more money.”
According to him “draconian” cuts will be needed to control U.S. debt:

Rogers comments come as a new poll reveals nearly half of Americans expect another Great Depression in the next 12 months.

Stocks Go Negative In Closing Minutes of Session

Bernanke's speech failed to reassure markets, and stocks went negative in the final moments. Amazing volte-face, after being higher throughout the entire day. Absolutely stunning reversal!

from WSJ:
NEW YORK—A gloomy economic assessment from Federal Reserve Chairman Ben Bernanke erased an earlier stock rally, sending major indexes in the final minutes of Tuesday's session to their fifth consecutive drop...
The sharp reversal came after Bernanke offered downbeat comments on the U.S. economy. He said economic growth has been "somewhat slower" than expected, although he added that the recovery should pick back up in the second half of 2011 despite recent signs of weakness.
Mr. Bernanke also said the recovery two years after the end of the recession remains "uneven" and that conditions—particularly in the labor market—remain troubled.
"The market is not buying what Bernanke is selling," said Keith Bliss, senior vice president at Cuttone & Co., a brokerage on the New York Stock Exchange floor. "He's not wowing the crowd."
Mr. Bernanke's comments follow a drumbeat of weak economic data and worries that the recovery is running out of steam. The government's disappointing jobs report last week came on the heels of several weak regional manufacturing reports and consumer-confidence data that have fueled anxiety on Wall Street.
"[Bernanke] certainly seemed to be a little more dour on the economy," said Jay Suskind, senior vice president at Duncan-Williams. "If you had to classify it, it's more glass half empty than glass half full."
The disappointing data, combined with the looming end of the Fed's bond-buying program, or "quantitative easing," has weighed on investor sentiment. Chatter on a third round of quantitative easing, or "QE3," has intensified in recent weeks as more investors are discussing whether the Fed may have to enact some new form of monetary support.

Stocks Lose All Gains

I haven't yet heard about Bernanke's speech this afternoon, but it appears that it has sent stocks tumbling. After being up 60-70 points the entire day, stocks have lost all gains and are back to flat for the day.

Chronic Unemployment Now Worse Than Great Depression

(CBS News)  There is an unfortunate adage for the unemployed: The longer folks are out of a job, the longer it takes them to find a new one.
CBS News correspondent Ben Tracy reports that the chronically unemployed face the hardest road back to recovery, and that while the jobs picture may be improving statistically on a national level, it is not for them...
About 6.2 million Americans, 45.1 percent of all unemployed workers in this country, have been jobless for more than six months - a higher percentage than during the Great Depression.

Hussman: Deterioration of Economic Fundamentals

In recent weeks, and particularly in last week's ISM, employment claims and unemployment reports, we've observed a substantial weakening in measures of economic growth. At present, the evidence of economic deterioration is not severe - as I noted in 2000, 2007 and last summer, recession evidence is best obtained from a syndrome of conditions, including the behavior of the yield curve, credit spreads, stock prices, production, and employment growth. While all of these components have weakened, they have not deteriorated to the extent that has (always) accompanied the onset of recessions.

To a large extent, the current softening of economic conditions is really nothing more than the recrudescence of the deterioration we saw last summer. Basically, we're coming up on the can that the Fed kicked down the road when it initiated QE2. While the Fed was successful in releasing a modest amount of pent-up demand, and was certainly successful in provoking speculative activity, there was never a realistic prospect of creating a beneficial "wealth effect" for the economy as a whole. The historical evidence is emphatic that people consume off of perceived "permanent income" - not off of volatile dollars. Wealth is driven by the creation of long-term cash flows through productive investment, not by boosting the valuation of existing cash flows by encouraging speculation. There was no reason for people to take much of a permanent signal from fluctuations in a stock market that has lost more than half of its value twice in a decade (and is likely to lose a good chunk of its value again if history is of any indication).

So while the Fed has been successful in fostering speculation, further impoverishing the world's poor through commodity price increases, and subsidizing banks by driving funding costs to zero (at the expense of the risk averse and the elderly), QE2 has clearly failed from an economic standpoint. This failure is not because we haven't given it enough time, or because monetary policy works with a lag. Rather, the policy has failed because it focused on easing constraints (bank reserves, short-term interest rates) that weren't binding in the first place. Very simply, neither the Fed's policy, nor the fiscal policy initiatives to date, address the central challenge that the U.S. economy faces, which is the debt burden on households. 

How much scope for intervention does the Fed have left? As of June 1, according to the Fed's consolidated balance sheet, the Fed is now leveraged 53-to-1 ($2.79 trillion in assets / $52.6 billion in total capital). This is more extended than Bear Stearns and Lehman were just prior to their failure. The principal difference being that the U.S. Treasury, and by extension, the U.S. public, is on the hook for any losses incurred by the Fed.