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DJ's Viewpoints 3/6/12

Close:

The market should have gone down last Friday on the news from Spain. It should have been hit harder on the Chinese growth slowdown story yesterday. It could have gone down several times on Greece and stayed there. Brazil had warned about slowing growth weeks ago. U.S. companies with large operations in Europe have been warning for the past month about weaker European results. But, traders resisted bowing to these pressures until today. There seems to be no explanation why today; maybe it was just time to step back. But the volume did jump today, which means there was some real liquidation—most likely by leveraged accounts.

The Dow closed down 204 points for the first triple-digit loss since December 28, 2011. The low was -225. The S&P dropped 1.5%, and the NASDAQ lost 1.4%. Oil dropped almost $2 and gold gave up $28.

One thing we know for sure is that just because the market sold off today doesn’t mean the selloff will continue tomorrow. We’ve had many one-hit wonders in the past. All eyes will be on the European markets first in the morning. If Europe stabilizes tomorrow, U.S. traders will likely focus on the ADP payroll report in the morning. That should help form expectations for Friday’s payroll report. The number Friday should certainly be good news. We’ll just have to hope that traders are willing to hear it. There will be one more “event” tomorrow. Apple will unveil the iPad3. I personally don’t care. In fact, I’m a little frightened about the weird fixations of you Apple disciples out there—yeah, you know who you are. Are you sure you aren’t receiving subliminal messages from Apple? Regardless, the introduction of this product might lift Apple and the rest of the market with it.

Bond prices closed higher. The 2-year ended at .28%, the 5-year .82%, and the 10-year gained 17/32s to yield 1.95%. The 30-year bond added 1&9/32s to yield 3.08%.

Update 11:45 a.m.:

If traders want the Dow to avoid its first triple digit loss of 2012, they have a lot of work to do over the next hour. The Dow is  down 225 points. The NASDAQ is down 1.7%, and the S&P is off by 1.8%. Gold seems to have bottomed down $40 and is now down $31 an ounce.

Bond prices remain higher but off the best levels of the day. The 2-year is .28%, the 5-year .82%, and the 10-year is up 18/32s to yield 1.94%. The 30-year bond is up 1&3/8ths to yield 3.08%.

I’ll be back with the close and a look ahead at tomorrow.

Update 10:00 a.m.:

In the update below I mentioned that the market usually bounces back after the European close, but that didn’t help today. The Dow fell to a low of-208 points long after Europe shut down for the day. The news today wasn’t that significant, and no one seems to know why today was the day selected for selling. The Dow is currently down 204 points. Gold is down $38 an ounce. For whatever reason or reasons, it’s clear that some of the leveraged crowd decided to bail out of positions in stocks and gold.

Bond prices remain near the highs of the day. The 2-year is .28%, the 5-year .82%, and the 10-year is higher by 21/32s to yield 1.93%. The 30-year bond is up 1&18/32s to yield 3.06%.

Update 8:25 a.m.:

Stocks are bouncing off the bottom a bit just ahead of the close of the European markets. The Dow hit a low of -177 points but is now down 146. The S&P is down 1.2%, and the NASDAQ is off by 1.3%. In the past when our markets have been lower strictly on Europe, stock prices have had a tendency to recover after Europe’s close. That’s likely today as well, but if it doesn’t, something else is going on.

Bond prices remain sharply higher. The 2-year is .28%, the 5-year .83%, and the 10-year is up 18/32s to yield 1.94%. The 30-year bond is up 1&14/32s to yield 3.07%.

Update 6:40 a.m.:

In pre-opening trading the stock market looked ugly (see Morning Comment), and the market got uglier once it opened. European stock indexes were down 1.5% and are now down 2.5%. The Dow opened lower by more than 150 points in the worst opening of 2012. The Dow is now down 145 points, the NASDAQ is down 1.0% and the S&P off by 1.1%. It looks bleak now, but as mentioned in the Morning Comment, don’t discount the possibility that high-frequency traders can turn this market around.

Bond prices are even higher since the early morning move. The 2-year is .28%, the 5-year .84%, and the 10-year is now higher by 19/32s to yield 1.93. The 30-year bond is up by 1&1/4 points to yield 3.08%.

This is definitely a speculative selloff as evidence by the plunge in gold. Gold is down $34 an ounce. This shouldn’t happen when safety worries are prevalent, but this tells us that speculators are simply liquidating a number of positions. Oil is also down $2 even with the worries about Iran.

Morning Comment:

Given that there are no economic reports today it’s not surprising to see traders turn to Europe for reasons to trade, and they found a few. The International Institute of Finance, the group that represents global banks in the bond swap negotiations, issued a report last night saying a disorderly Greek default would cost one trillion Euros. This group has already okayed the Greek bond deal, and this report is likely intended to nudge more private debt holders to sign off on the deal by the deadline on Thursday. But, the one trillion number has shock value regardless of the odds. The European Union finance office also issued a general recap of economic conditions in Europe in the last few months of 2011, and the report wasn’t pretty. The numbers certainly suggest the EU is in recession and the report suggested greater weakness this year as more austerity measures kick in.

In the early going the Euro is weaker, European stock indexes are down roughly 1.5%, and Dow futures are down 100 points ahead of the opening. The Dow has not closed down 100 points a single day this year. In all likelihood our friendly high-frequency traders will buy this dip, and the Dow will avoid scoring a “first” for this year. But, you can never tell. The market has been running on fumes since January 26. Maybe this is the day it runs completely out of gas before it reaches the gas station.

Bond prices are higher. The 2-year is .29%, the 5-year .85%, and the 10-year is up 11/32s to yield 1.97%. The 30-year bond is higher by 30/32s to yield 3.10%.

I scoured the news and reports overnight for some good news to go along with the bad news that you might care about, but I came up empty. So, it’s bad news Tuesday I suppose.

The first report was from the Federal Reserve Bank of New York regarding student loans. The balance of student loans has hit $870 billion, higher than either car loans or credit card balances. The NY Fed sliced and diced the numbers several ways, but every way they sliced it they came up with the fact that student loan debt delinquencies are surging and at least twice as bad as delinquencies on autos and cards. One method the Fed looked showed that the true delinquency rate (taking out the loans in the grace period and accounting for other temporary factors) is as high as 25%. Since the majority of these loans are government guaranteed this is more of a worry for the government (taxpayers), but private student loans are a source of concern as well. Overriding the delinquency worries is how the overwhelming burden of paying back college costs can constrain spending and financial well-being for graduates.

The last bad news is not a story yet, but this bears watching. It’s something I have thought about and looked into a bit recently. Early in 2009 Congress passed a measure to exclude the amount of mortgage debt consumers had to walk away from as taxable income. That measure expires at the end of this year. “Strategic defaults” has not been as big of a problem generally as feared. It’s hard to measure since no one says they can pay but are walking away. But recent data has shown that strategic defaults have risen sharply in the last year on the higher-end homes, especially in the $1 million and up category.

Those homeowners tend to have a better understanding of the pure dollars and sense of defaulting on deeply underwater properties. The risk is that as year-end approaches without improvement in the housing market and without a move by Congress to extend the exemption, the motivation to strategically default will be greater for those in the high-end homes. The numbers of homes in this category is small relative to the general market, but the losses to lenders could surpass expectations. Credit unions have very few mortgages on homes in this category, but if you do, you might want to think about some pre-emptive action steps.

There is one happy story today—at least for those living in ten states. It’s Super Tuesday. This is a great day for citizens in the states voting today. They can look forward to turning on their television sets without being barraged by obnoxious political ads.

I’ll be back with updates.


(DJ's longer-term commentaries are posted to the site monthly and are available only to subscribers.)

One Step Forward, Two Steps Back

January 9, 2012

In the January 2011 year-ahead commentary, I noted that “the only thing we had to fear was fearlessness itself.” I was referring to the overwhelming Wall Street consensus at the beginning of the year that 2011 would be a breakout year for several markets. Any risks identified for 2011 were dismissed as irrelevant. Surveys of professional money managers and individual investors were in agreement with Wall Street. As it happened, it was a breakout year for some markets, but most broke badly.

Looking ahead at 2012, the Wall Street crowd is still bullish, of course. That’s just what they do. They wouldn’t be very successful in selling us their products by telling us that the product was lousy. Looking away from Wall Street, most surveys of money managers reflect a positive outlook, but there is not the feeling of “no fear” that was the hallmark at the beginning of 2012. Ironically, after a tumultuous year, individual investor sentiment is back to very high readings of bullishness and extremely low readings of bearishness.

While there were drastic variances in results from expectations about several markets, the economy did not reflect the turmoil in the markets. The year 2011 can best be summed up by “the economy did okay.” It was by no means a banner year, but there was forward movement.

We’ll start this year’s outlook by grading Wall Street’s 2011 predictions, and what the geniuses in finance say about 2012. Then we’ll take a quick look back at 2011; what happened or didn’t happen in 2011 will impact 2012. Next we’ll move on to identifying the key issues for the economy in 2012. Finally, I will make a stab at guessing how this will play out in 2012. . .

Download the complete version here.


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