Archive for May, 2011

Japan Is Back In A Recession

Wednesday, May 18th, 2011

After Japan’s devastating earthquake in March of 2011, one has to believe 1st quarter GDP to contract, but by how much? Two consecutive contraction quarters results in an official recession. Japan’s economy shrank by almost double the margin economists had expected, as the country returned to recession with a second consecutive quarter of contraction.

The gross domestic product contracted by 0.9% during the January-March quarter, marking a 3.7% year-on-year drop. The result showed a far greater drop than a median forecast for a 0.5% quarter-on-quarter contraction in separate surveys of economists. The GDP reading was the first to include the catastrophic March 11 earthquake.

The second straight quarter of contraction puts Japan effectively into recession with analysts projecting the economy to shrink again in April-June as supply constraints triggered by the March catastrophe continue to weigh on output and exports. Japan’s economy is expected to recover later this year, helped by reconstruction efforts and government spending, though risks remain as electricity shortages in the summer could delay a recovery in factory output, analysts say. Private consumption, which accounts for about 60 percent of the economy, was down 0.6 percent against the median forecast of a 0.5 percent decline, marking the second straight quarter of decrease. Corporate capital spending fell 0.9 percent against the market forecast of a 1.2 percent decline. Japan is facing its worst crisis since World War Two after the 9.0 magnitude earthquake and a deadly tsunami battered its northeast coast on March 11, leaving more than 24,000 dead or missing and crippling a nuclear plant. The Bank of Japan is expected to keep monetary policy steady on Friday but stress its readiness to ease further if the quake’s damage to the economy proves bigger than expected.

The central bank has said that once supply constraints ease, the economy will recover moderately because demand for goods has not evaporated. Unless this view comes under threat or a renewed yen spike hurts business sentiment, it is expected to hold off on easing policy further.

Japanese shares saw their opening gains Thursday evaporate in the late morning as the yen recovered from an earlier drop, sending tech-exporter shares lower. A worse-than-expected contraction in the Japanese economy last quarter sent the yen briefly lower against its rivals, helping boost some exporters’ stocks, but the currency later recovered.

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Political Impasse On Debt Ceiling

Wednesday, May 18th, 2011

The Fed has done their work to prop up the economy, now it comes to political action to continue the trend. And just when you think the politicians can put aside their differences, just once…..maybe…or rather hoping they will; they Republicans and Democrats alike continue their rhetoric. Theirs apparently a Group of Six politicians that are spear heading the discussions. The group is one of two trying to agree on a plan to rein in deficits. One of them is Oklahoma Republican Tom Coburn, who just dropped out of the “Gang of Six” group of senators. 

Geithner, meanwhile, said Congress must raise the U.S. debt ceiling before Aug. 2 even if lawmakers can’t reach an agreement on a long-term plan to reduce deficits. On Monday, the Treasury suspended new investments in federal retirement and disability funds, the latest steps aimed at heading off a possible default by the government this summer. Yesterday, we reached the debt limit, and because Congress has not acted, we were forced to deploy a series of extraordinary measures to prevent default. Without the suspension of new investments on Monday the government would have hit the debt ceiling late on Monday or early on Tuesday morning. The accounting maneuvers give the government $147 billion of headroom under the debt ceiling, according to Treasury.

Members of Congress and the White House are still deep in negotiations about raising the limit. Vice President Joe Biden and a bipartisan group of lawmakers will resume after the House returns from a recess next week. Can you believe that during these pressing times, the government is entitled to a recess when the job isn’t complete. Ridiculous…

House Majority Leader Eric Cantor, a Virginia Republican, reiterated on Tuesday that Republicans won’t back an increase in the debt limit unless it’s accompanied by spending cuts. House Speaker John Boehner said recently that those cuts should be larger than any increase in the debt limit.

The Treasury hasn’t said how big of an increase it wants in the debt ceiling. But it would take an increase of about $2 trillion to last beyond the next presidential election in November 2012. The government borrows about $125 billion each month. That’s $4billion a day. Oh and did you notice the statement above…$2 trillion to last through 2012 election. That’s a lot of money to support the economy. How are we ever going to repay this?

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Was Today’s Action Beginning Of A Bounce

Tuesday, May 17th, 2011

Was Today’s Action Beginning Of A Bounce?

The DJIA 12,479.58 trimmed its triple-digit deficit in afternoon trading, but still ended on a loss of 68.8 points, or 0.6%, to settle south of 12,500 for the first time since April 25. We have been down trending pattern since May 2nd. The SPX 1,328.98 also chipped away at its intraday deficit in late-session trading, giving up just 0.5 point, or 0.04%, by the close. Helping the broad-market barometer climb out of the doldrums was its 10-week moving average, which hasn’t been compromised on a weekly closing basis since mid-March. The SPDR S&P 500 ETF  (SPY) cut through an uptrend line and its 50-day moving average, before reversing above it. This type of bounce usually lasts a few days as we were very oversold.

With no early economic reports in sight, U.S. markets Wednesday will keep their focus on Europe and the interplay between stocks, commodities and currencies. Stocks could also continue the bounce that began Tuesday afternoon. We’re oversold and got a bounce off the 50 day moving average. Now I think we have resistance overhead in the 12,600, 12,700 area on the Dow. I don’t think this bounce is going to take us to new highs. We may have an up day. If I was going to draw anything from this, currencies are suggesting that the dollar has possibly topped and the euro may be in the process of bottoming. It looks like the Europeans are proceeding along with the “re-profiling” or a mini restructuring of Greek debt. The Fed’s 2:15 p.m. release of its last FOMC minutes will also be an important factor, as investors look to see what type of discussion the Fed had about its strategy to exit its extraordinary policies and also how it discussed the economy and inflation. Oil inventory data is scheduled for release at 10:30 a.m. ET by the U.S. Energy Information Administration.

S&P 500 Technicals

The S&P 500 are testing the 50-day moving average, and a break lower would raise the flag to a potential trend shift.  The S&P’s 50-day moving average, currently 1,323, is the level to track.All told, the S&P has dropped to a significant technical test against the backdrop of lackluster sector leadership. The bull case gets the benefit of the doubt barely but it’s ultimately the S&P’s response to the 50-day moving average that should set the intermediate-term technical tone. We just may get this bounce off the 50!

Next levels to watch are the following:

Firm Break above 1355 continues Bull Trend

50 day Moving Average  - 1323

100 day Moving Average – 1310

Level 3 danger “Trend Line” – 1260

200 Day Moving Average “Buy on the Dip Level”- 1234

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Rumor Is True About Greek Debt Restructuring Talks

Tuesday, May 17th, 2011

A European Union official left the door open to allowing Greece to discuss extending its debt-repayment plans, as the nation faces ongoing doubts about its solvency despite last year’s bailout. Greece could see a “soft” restructuring of its debt if it quickly presses ahead with its plan to privatize 50 billion euros ($70.8 billion) in assets and embark on other needed reforms. Greece must make the effort because its medium- and long-term debt at the moment is unsustainable with unfavorable terms from the the IMF & ECB.

The remarks marked the first formal admission that Greece’s debt burden is unsustainable. If this is true this may prove to be minor signifcant impact of proceeds on the agreement made by Germany, ECB, IMF, and international banks that have provided the funding. European leaders still appear undecided on how to approach Greece even as economists increasingly see the nation unable to get its finances under control without some form of restructuring of its existing debt. There is no way Greece on its own can go through the required level of fiscal restraint without a decade of negative growth.

Getting Greek debt back on a sustainable track will likely require bondholders taking around a 50% haircut on their holdings, a level that is “big, but not unprecedented. Again, banks and countries sucha as Germany with international presence will take the brunt of loss proceeds.

Re-profiling is a term used to describe extending the maturity of Greece’s debt obligations, effectively stretching repayment over a longer period without forcing bondholders to take a haircut. But his view didn’t appear unanimous. News reports said French Finance Minister Christine Lagarde dismissed any rescheduling of Greek debt. “Restructuring, rescheduling — off the table,” she said at a news conference Monday night.

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California Making Headway On 2012 Budget

Tuesday, May 17th, 2011

Since January, when Democratic Governor Brown laid out his initial plans to close the state’s $26 billion budget shortfall. State officials have made some headway in resolving California’s massive fiscal problems. In March, the legislature approved a portion of the governor’s plan, reducing the budget deficit by $14 billion through spending cuts and fund transfers. The package whacked $1.7 billion from Medi-Cal, the state’s Medicaid program, and $1.1 billion from the state’s university systems. On Friday, the state announced it would close up to 70 of the state’s 278 parks to save $33 million over the next two years, as called for in the March plan. But those moves still left a big hole in the state budget, leaving many in the Golden State to speculate which public services would be whacked. The governor and lawmakers got an unexpected gift earlier this month when tax revenues came in higher than expected- $2.5 billion windfall.

California Governor Jerry Brown unveiled a revised budget Monday that calls for a $9.3 billion tax extension, coupled with a $2.6 billion cut in spending. Brown is holding firm to his belief that the state’s budget crisis should be addressed with a mix of tax hikes and spending cuts. The governor did not unveil the draconian spending cuts that some observers had thought he would. Instead, he continued to press for an extension of tax hikes currently set to expire. And he still wants voters to have a say on the extension of the levies.

Brown has outlined his proposal to close the state’s remaining $10.8 billion deficit to the press. The governor was able to minimize the size of the tax extension, originally more than $12 billion, thanks to an unexpected jump in tax collection. The updated forecast calls for an additional $6.6 billion in revenues over the next two years. Under the new tax plan, the quarter-percentage point increase in income tax rates would be revived in 2012. It expired at the end of last year. The proposal also calls for maintaining a 1 percentage point bump in the sales tax, which lapses at the end of June. The higher rates would remain in effect through 2015.

State spending would be scaled back to 1972-73 levels, when Ronald Reagan was governor, Brown said. His plan calls for eliminating 43 boards and commissions, as well as 5,500 state employee positions. It also reiterates Brown’s proposal to eliminate redevelopment agencies, which he called for in January. The state’s school system, however, would be see additional funding. Some $3 billion in education spending would be restored, although this is still $4 billion below 2007-08 levels, Brown noted. Brown also wants to start paying down the “wall of debt,” totaling $35 billion, that the state has accumulated. And he wants to put $1.2 billion in a reserve fund. The governor also is throwing a bone to businesses. He would increase the size of a hiring tax credit and expand the number of firms eligible to claim it. And he is backing off of his call to eliminate enterprise zones.

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US Debt Ceiling To Be Hit End Of Today

Monday, May 16th, 2011

The United States is expected to reach the legal limit on its debt later Monday and will start dipping into federal retirement funds to give the country more room to borrow, a Treasury official said. The U.S. Treasury will issue $72 billion in bonds and notes on Monday, which will push the country right up against its $14.294 trillion borrowing cap, the official said. As a result, Treasury Secretary Timothy Geithner announced he is taking further steps Monday to create headroom under the ceiling by suspending investments in certain federal pension plans. Treasury has estimated that these, and a few other emergency measures, will last until about Aug. 2. After that, a default could occur if Congress has not voted to raise the ceiling.

U.S. President Barack Obama said Sunday that the country could face another financial crisis if the White House and Republicans can’t agree on raising the U.S. legal debt ceiling, according to reports. The White House and the Republicans have been at loggerheads, with Republicans reportedly calling for major spending cuts from the Federal budget before a deal can be reached. Republican House Speaker John Boehner said Sunday that he believes an increase in the debt ceiling will be necessary but reiterated he’s committed to cuts in spending and changes in the budget.

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Friday Trading To Be Mute After Inflation Data

Friday, May 13th, 2011

Stock futures were modestly higher after a fresh report showed gains in inflation on the consumer level were inline with Wall Street’s expectations. Consumer prices were up 0.4% in April, and climbed 0.2% excluding volatile food and energy prices, according to the Labor Department. Both the headline and core reading were inline with analysts expectations. Gains in the headline number were led by a a 3.3% increase in gasoline prices and a 2.2% increase in energy prices. 

The markets have been keeping a close eye on inflation data as energy prices remain at high levels, notwithstanding the recent selloff in the futures market. In addition, many market-watchers are concerned that the Federal Reserve’s highly-expansionary monetary policy, including low short-term interest rates and its controversial long-term treasury buying program, might lead to high levels inflation. 

Light, sweet crude recently climbed 80 cents, or 0.81%, to $99.77.  Wholesale RBOB gasoline was higher by 3 cents, or 0.85%, to $3.09 a gallon. Gasoline prices on the consumer level remain within 13 cents of all time highs despite the selloff in the futures market. A gallon of regular gas costs $3.98 a gallon on average, up from $3.81 last month and $2.89 last year, according to the AAA Fuel Gauge Report. 

In metals, gold was recently unchanged at $1,506 a troy ounce.  Silver jumped 80 cents, or 2.3%, to $35.60 a troy ounce. The euro gained 0.29% against the U.S. dollar and the greenback fell 0.17% against a basket of world currencies.

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Markets Strong Reverse Afternoon Trading

Thursday, May 12th, 2011

Markets today made an about-face in afternoon trading, as strength in U.S. retail sales and some buying on the dips overcame a warning from Cisco Systems Inc. (NASDAQ:CSCO) and monetary tightening in China to help support equities and commodities and flatten the U.S. dollar. The S&P 500 Index (SPX – 1,348.65) also clawed its way out of the red by midday, settling on a gain of 6.6 points, or 0.5%. Like the Dow, the SPX ran into a speed bump in the 1,350 region, which houses its own 10-day trendline. It was a rough start on the Street today, as stocks once again followed commodities lower right out of the gate. In addition, a less-than-stellar outlook from Cisco Systems (CSCO) got the bearish ball rolling, sending the Dow Jones Industrial Average (DJIA) more than 80 points lower within the first hour of trading. However, the bulls displayed their resilience around midday.

China lifted bank reserve requirements by 50 basis points on Thursday, signaling that containing inflation and soaking up excess cash remained its top priority even after signs the economy was slowing down. The announcement of more tightening came as a surprise to some analysts who had expected the People’s Bank of China to tap the monetary brakes more gently after a host of data from industrial output to imports were weaker than expected in April. To many of them, China’s latest directive to lock up more of the deposits that banks would otherwise have lent was simply an attempt to drain inflationary capital inflows rather than opt for a rate rise, ostensibly a heavier monetary tool.

The increase, the eighth since October, will raise the reserve requirement ratio to a record 21 percent for China’s biggest banks. The world’s fastest-growing economy expanded more than 10 percent last year as it emerged strongly from the global financial crisis. Policymakers, targeting 4 percent average inflation for 2011, have declared inflation-fighting their top priority this year after high food prices raised fears of broader inflation that could destabilize the economy or even spark social unrest. The central bank sold 40 billion yuan ($6.2 billion) of three-year bills in regular open market operations on Thursday as apart of its efforts to mop up excessive cash in the economy.

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US Economic Data Drags Market Down

Thursday, May 12th, 2011

The DJIA fell more than 70 points after dropping about 1 percent on Wednesday as commodity prices tumbled after news that demand for oil and gasoline has slacked amid soaring prices. Global markets continued the sell-off after U.S. markets closed. The S&P 500 and the Nasdaq also fell.

Retail sales rose 0.5 percent in April from an upwardly revised 0.9 percent gain in March, the smallest gain in nine months, the Commerce Department reported Thursday. Economists surveyed by Reuters had forecasted retail sales to rise 0.6 percent.

Jobless claims fell by 44,000 to 434,000 in the week ended May 7, according to the Labor Department. The number of claims remains  above the critical 400,000 level considered the top level of a healthy job market. Economists forecasted claims would drop to 430,000.

The producer price index rose to 0.8 percent in April, from 0.7 percent gain in March, the Labor Department said. Core producer prices, stripping out food and energy costs, rose 0.3 percent in April, the same gain seen in March. Economists surveyed by Retuers forecasted core producer prices to rise 0.2 percent.

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Commodities Fall Craters Markets

Wednesday, May 11th, 2011

Commodities cratered Wednesday, as the the euro skidded and stocks sank on worries about global growth and the European sovereign debt crisis. Those fears combined to slam risk assets, and selling accelerated after government oil and gas inventory data showed signs of softening demand. By the end of Wednesday, oil was down more than 5 percent after an unexpected gain in gasoline supply sent RBOB gasoline futures tumbling.Gasoline was down 7.6 percent to $3.1228, its biggest loss since September, 2008. Oil on the NYMEXwas at $98.21, down $5.67 per barrel.  After the market close, the CME announced a 21 percent hike in gasoline margins. A similar move in the silver market sent the metal reeling last week.

For reformulated gasoline blendstock futures, CME is raising initial margin requirements, or the deposit required to purchase a contract, for speculators to $11,475 per contract, from $9,450. Maintenance margin requirements, or the deposit that must be maintained to keep a contract overnight, increase to $8,500 per contract from $7,000. For hedgers and exchange members, both the initial and maintenance margin requirement is rising to $8,500 per contract from $7,000.

The demand for higher collateral comes after front-month RBOB futures plunged 25.69 cents, or 7.6%, to settle at $3.1228 a barrel Wednesday, the biggest one-day decline since February 2009. The slide pulled the broader commodities market lower and triggered a rare five-minute trading halt shortly after noon EDT. The trading halt occurred after RBOB fell by more than its daily movement limit of 25 cents a gallon. Margin increases can often send a commodity falling further, as smaller traders who cannot afford the higher costs sell their positions.

The plays against Oil, Silver, & the Euro are the following:

NYSE:SCO – Ultrashort UBS Crude Oil ETF

NYSE:ZSL – Ultrashort Silver ETF

NYSE:EUO – Ultrashort Euro ETF

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