Thursday, October 29, 2009

GLOBAL OUTLOOK 10/29 Full Version: Markets RETREAT, Will GDP Save Them?


- Stocks: Wednesday: Asia, Europe, US down Thursday morning Asia, Europe down

- FX: Lower equities, bias to safety currencies [JPY, USD, CHF in order of safety appeal] in favor of risk currencies [AUD, NZD, CAD, EUR, GBP in order of risk appetite appeal], USD gains against most majors(down against Yen, & GBP(?!))

- Main events today: USD: Advanced Q3 GDP, unemployment w/w, earnings: Thursday 10/28 Aetna (AET), Colgate-Palmolive (CL), France Telecom (FTE), Hertz Global (HTZ), Hitachi (HIT), MetLife MET), Moody’s Corp. (MCO), Motorola (MOT), Proctor & Gamble (PG), Taiwan Semiconductor (TSM), Waste Management (WM)

- Big Theme: FEAR, but risk assets attempting small rally early Thursday. Excessive valuations, oversold USD, uncertainty ahead of US Q3 GDP Thursday all combine to drive risk assets down, JPY, USD, CHF up (in that order) SEE: WHY CORRECTION COULD BECOME A COLLAPSE in the FULL VERSION'S for other underlying market weaknesses.


US: The S&P 500 fell for the 4th time in 5 days, closed below its 50-day moving average for the first time since mid-July as sellers moved en masse as fears that stocks are overvalued were fed by a much worse than expected existing home sales data and doubts that today's advance third quarter GDP reading will meet expectations of 3.3% annualized growth. For example, Goldman Sachs forecasts an annualized Q3 rate of 2.7%. Like GS, most do anticipate that the Q3 GDP will indeed show positive growth and signal an end to the worst decline since the Great Depression, one that has seen 4 straight quarters of contraction.

Stocks were mired in weakness for virtually the entire session as buyers stepped to the sidelines despite another batch of generally better-than-expected earnings. Stiff selling in overseas trade certainly didn't help the case for bulls, nor did disappointing new home sales data, which showed that new home sales for September fell 3.6% month-over-month to an annualized rate of 402,000 units. That was well below the rate of 440,000 units that was widely expected.

The disappointing report caused an immediate drop in stocks, though a premarket durable goods orders report that was largely dismissed. According to that report, durable goods orders were up 1.0% in September, in-line with expectations, while orders less transportation increased a stronger-than-expected 0.9%.

Partial to selling, participants pushed stocks to their worst loss since the start of the month and left the S&P 500 to trade below its 50-day moving average. The technical line initially provided some support, but persistent pressure took the stock market through the line and left it to finish near session lows.

Declines were steep and broad based as nine of the 10 major sectors posted losses.

Financials were among the worst performers this session. The sector dropped 3.2% amid ongoing weakness in bank stocks. Including this session's 3.2% decline, the KBW Banking Index has fallen more than 9% during the past four sessions.

Visa (V 76.57, +2.67) was one of the few financial issues to post a gain this session. The company garnered support after it posted last evening better-than-expected adjusted earnings of $0.74 per share.

Materials stocks were also wrought with weakness. The sector fell nearly 3.2% as the greenback gained 0.5% against a basket of major foreign currencies, causing weakness among basic materials stocks and commodities-related stocks.

Softer oil prices and broader market weakness took the energy sector to a 2.9% loss. Better-than-expected earnings from ConocoPhillips (COP 49.49, -1.41) did nothing for the sector.

Telecom stocks made up the only sector to advance. What's more, its 1.8% gain was the sector's best single-session advance in one month and came in the face of considerable weakness in the broader market. Its gain this session extended the previous session's advance. In the weeks preceding that point, telecom had been considerably underperforming the broader market.

Participation was strong this session. Specifically, nearly 1.7 billion shares exchanged hands on the NYSE. That's the highest level in more than one month and exceeds both the 50-day and 200-day moving average for trading volume.

Another round of Treasury auctions was met with solid turnout. An auction of 5-year Notes produced an above-average bid-to-cover ratio 2.6. Though Treasuries pulled back a bit following the announcement, weakness among equities helped Treasuries hold onto gains. In turn, the yield on the benchmark 10-year Note has fallen to roughly 3.4% from 3.5% in just two days.

Treasuries have performed well this week and stocks are now down more than 3% week-to-date, but both fixed income traders and equity market participants are turning their attention to the advance third quarter GDP report, which is a headline event for Thursday morning.

Advancing Sectors: Telecom (+1.8%)

Declining Sectors: Financials (-3.2%), Materials (-3.2%), Energy (-2.9%), Consumer Discretionary (-2.8%), Industrials (-2.2%), Tech (-1.8%), Health Care (-1.3%), Utilities (-1.0%), Consumer Staples (-0.4%)DJ30 -119.48 NASDAQ -56.48 NQ100 -2.4% R2K -3.5% SP400 -3.3% SP500 -20.78 NASDAQ Adv/Vol/Dec 411/2.75 bln/2290 NYSE Adv/Vol/Dec 322/1.68 bln/2779

Housing Trouble (from

The report on New Home Sales accelerated the pace of this week’s decline in currencies like the euro and Australian dollar. The number was so far below expectations that the shock single-handedly took all the life out of the markets. Sales of new homes, which account for only 10% of the housing market, slid by 3.6% compared with a consensus that the figure would actually rise by 2.6%. To top things off, median prices fell at an accelerating rate and inventories fell to the lowest levels in more than twenty-five years as construction has come to a grinding halt. The main fear factor that this report provides is that buyers have turned away knowing that first-time buyer rebates would soon come to an end. On that note, the theory that government efforts have been the only factors supporting housing are an unwelcomed thought in any investors mind. Government uncertainty on whether the program will be extended is only adding on to market stress. Nevertheless, this one report does not spell the end of the housing market or predicts another cataclysmic drop. Considering the fact that existing home sales, which represents a much larger portion of the housing market, was much better than expectations suggests that all is not lost in the troubled industry.

Signs of renewed housing distress completely overshadowed the slight improvement in Durable Goods Orders. The figure was in-line with expectations and increased to 1.0% from -2.4%, posting its fourth improvement in the last six months. However, durables were unable to excite markets because ex-defense capital goods, an important component in GDP calculations, actually shrunk by 0.2%.

Reasons Why this Correction Could Become a Collapse: Excerpt from Simon Maierhofer article on Yahoo! Finance

1. Financials, real estate, homebuilders led the collapse and March rally, but are fading now:

Throughout the financial meltdown financials, real estate, and homebuilders fell harder and faster than broad market indexes a la S&P 500 and Dow Jones Beginning with the miraculous March revival (more about that in a moment), the broad market rose while financials, real estate, and homebuilders soared.

Those three sectors led the decline and led the subsequent (mock) recovery. Since it is reasonable to assume that those sectors will continue to lead the market throughout this economic cycle, it behooves investors to watch such leading sectors closely.

The S&P 500 recorded a closing high on October 19th at 1,097. The Financial Select Sector SPDRs XLF reached their closing high a few days earlier on October 15th. Since their respective closing highs, the S&P 500 has dropped 2.82%, while XLF has already shed 5.64%.

A more pronounced performance slump is visible in the home builders sector. The SPDR S&P Homebuilders ETF (NYSEArca: XHB - News) peaked on September 16th and has fallen 9.97% since. Keep in mind that XHB's lackluster performance comes on the heels of the biggest monthly increase in total home sales in ten years.

Even though the inventory of existing homes fell 7.5% month-over month in September (to 3.6 million units), the shadow inventory of 3.5 million foreclosed homes is probably weighing heavily on home builders. Shadow inventory represents foreclosed homes that are vacant, still included on bank's balance sheets, but have not hit the market yet. 3.5 million homes equal about 1 - 2 years worth of supply.

2. Technology sector still hurting:

Apple over 10% to new all-time highs. Microsoft reported better than expected numbers and spiked 7.4%. Investors loved Amazon's outlook so much that they bid up the stock by over 33%. Combined, the three companies account for nearly 24% of the yet the Nasdaq is traded lower today than before earnings season on October 14th. The same is true for the Technology Select Sector SPDRs (XLK)

If 24% of the Nasdaq's components rallied between 7 and 33%, without lifting the index, a lot of tech companies must be hurting. In fact, the Nasdaq's (Nasdaq: QQQQ - News) performance is masking the decline IBM, Intel, and many other once high-flying tech companies have seen over the past 1-2 weeks.

3. Consumer Demand Gone

Manufacturing has shown improvement and increased production. However, this appears to be mostly due to restocking inventories that were slowly depleted as cash strapped businesses and consumers cut purchases. How do we know? Look at shipping volumes. Genuine demand should be reflected in increased activity in the shipping and packaging sector. However, the opposite is occurring:

• UPS reported falling shipping volume for the 7th straight quarter, and profits are down 43% over the past 12 months

• Burlington Northern, the largest component of the Dow Transportation Average reported a 27% decrease in freight revenue from Q3 of 08.

5. Demand Gone Until Employment & Personal Incomes Improve:

No one disputes that the US along with much of the developed world is continuing to lose jobs, with predictable downward pressure on wages, hours and incomes from those still working. Because 70% of US GDP is comprised of consumer spending, there can be no sustained meaningful improvement in US growth until the jobs and income picture improves so that US consumers can pick up spending.

6. Weak Consumer Spending Means Weak Banks, Housing: Until then, spending will be weak, which means commercial and residential real estate loan defaults will continue, which means the banks will continue to hold massive and growing debt portfolios, try as they may to hide them with regulator cooperation

7. Grossly Overpriced Stocks: We have repeatedly pointed out cases of stocks that have risen (because they beat lowball estimates) to levels at or higher than they were over a year ago, yet revenues and / or earnings are lower. Per available data from Standard &Poors & Robert Shiller, price to earnings ratios for the S&P are now at an astounding 143. Historically p/e ratios are around 15-20, and per Dr. Nuriel Roubini at market bottoms hit 10-12. Even at the recent March 2009 bottom, p/e ratios never got close to that low level.

In sum, the current rally is an irrational bubble to be shorted, or at least avoided on the long side. How far can it fall? Another 10-20% is a safe minimal guess, assuming Washington comes out with more stimulus to keep the markets from full fledged panic. Because markets often overreact, a test of March or November lows is also perfectly possible.

Asia: Asian stock markets fell for a third day Thursday after a Wall Street sell-off on signs of weakness in the U.S. housing market triggered fears about the health of the global recovery. Tokyo, Hong Kong, Shanghai and Seoul all lost about 2 percent or more after a U.S. government report showed new home sales fell unexpectedly in September for the first time since March. That fueled fears the housing rebound was driven solely by government policies that are being withdrawn before the private sector recovers. Adding to investor nervousness was Norway's decision Wednesday to become the first European country to raise interest rates since the crisis began, one analyst said said. That prompted worries governments might be withdrawing stimulus measures before private sector activity has fully recovered, he said.

"Concerns are that if this support wanes or is withdrawn and the private sector is unable to replace government monetary actions, there could be another economic slump,"

Europe: Oct. 28 (Bloomberg) -- European stock-indexes hit 3 week low fell and Asian shares declined as SAP AG cut its software sales forecast and Canon Inc. posted a seventh straight quarterly profit drop. U.S. futures were little changed.



ASIA- DOWN N225I -1.35% HS -1.84 % SSEC +0.33% FTSTI -1.38% AORD -1.42 %

EUROPE DOWN FTSE -2.32% DAX –2.46% CAC -2.14%

US- DOWN S&P -1.95% DJIA -1.21% NASDAQ -2.67%



N225I -1.83% HS -2.28 % SSEC -2.34% FTSTI -0.59% AORD -2.39 %


FTSE -0.26% DAX -0.37% CAC -0.14%

COMMODITIES: With the dollar gaining ground for the fifth straight session, the CRB Commodity Index fell 2.0% in its worst single-session loss in one month. Both metals prices and energy prices weighed heavily on the CRB. Unwinding of long trades accelerating

Oil: Late Wednesday crude oil prices dropped 2.8% to $77.44 per barrel following disappointing gasoline inventory data.

Oil prices slid to near $77 a barrel in Asia as an unexpected jump in U.S. gasoline supplies cast doubt on the strength of a recovery in crude demand.

Gold: In US trade Wednesday, Gold prices settled pit trade 0.5% lower at $1030.50 per ounce, below their 2008 high of $1033.90 per ounce. Although gold price has been in consolidation for 2 weeks, net speculation long positions remained close to all-time high level. It's likely for the correction to take place for some more time and gold may need to correct further to 1026 to remove the positioning risk.

CURRENCIES: Strong bias to safety currencies with falling stocks and weak new US home sales dent risk appetite. Heavy short positioning unwinding on the USD at the expense of the commodity fx and EUR. in the face of falling stocks and risk appetite, raising the USD's safe-haven appeal. Most USD and Yen crosses lost ground against them in more of a short squeeze sparked by the stock pullback than any shift in underlying fundamentals. Traders said short-term speculators had been pocketing gains, with hedge funds said to be booking profits ahead of their business year-end in November, and as the recent rebound in both the yen and the dollar saw bets on their weakness unwound.

USD: while the dollar index <.DXY> rose to its highest in two weeks, pulling further off a 14-month trough hit last week. Gaining against all majors except the JPY and surprisingly, the GBP.

Dollar performance was modestly positive versus most of the majors as US equities were relatively flat and Treasurys were in demand following a good 2y auction and some disappointing economic data. The S&P CaseShiller Home Price Index was slightly better than expectations at -11.32% but the Conference Board Consumer Confidence reading disappointed at 47.7 versus consensus 53.5. The weak consumer confidence figure likely attracted investors to the safety of Treasurys, especially with 2y yields above 1%. The 2y auction bid-cover was 3.63x, compared to an average cover of 2.69x, and indirect bidders took 44.5%, compared to a 10 auction average of 42.6%. There was also a very significant allocation to direct bidders in the auction at 26.1%, which dwarfed the previous high. 2y yields are 0.9260% at the time of writing and 10y and 30y yields also dropped during the session. Data ahead includes durable goods orders. The next Treasury auction is for the 5y note.

EUR- The euro rose to $1.4717 from $1.4714 in early Thursday trade, but remains near a 2 week low against the USD

Eurozone M3 data disappointed expectations at 1.8% y/y , down from 2.5% y/y in August and versus consensus 2.2% y/y. This is the lowest y/y rate of M3 growth ever for this series, which goes back to 1971. We expect German CPI to remain weak and Eurozone CPI, which will be released on Thursday, is also expected to remain in negative territory. We continue to target EURUSD back at 1.45 in 1m as sentiment is clearly showing signs of strain.

The weakness in the euro was caused more by cross selling in the EUR/GBP rather than any fundamental factors. The pair has skyrocketed on Friday after UK disastrous GDP data but has since traded steadily lower as demand for cable from the Middle East and profit taking continue to weigh on the euro leg.

Despite the very weak economic data, pound has managed to hold its ground relatively well with market still unclear whether the BoE will increase its QE measures at its next meeting in November. If MPC officials feel that the Q3 data was the nadir of economic activity in UK, they may remain stationary which will be viewed as bullish for sterling and may push the EUR/GBP cross below .9000 as further positional adjustments take place.

However, the EURUSD could drop to about 1.4600 and still have its uptrend intact.

JPY - the dollar yen to 90.29 yen from 90.64 yen, as falling stocks and yen purchases by Japanese exporters lent support to the JPY.

Large Japanese manufacturers expected the yen to average 94.50 per dollar in the 12 months to March 2010, according to the Bank of Japan’s quarterly Tankan survey released Oct. 1. The forecast in the previous report was for a rate of 94.85.

“There’s talk that exporters are buying the yen,” said Lee Wai Tuck, a currency strategist at Forecast Pte in Singapore. “This is causing the dollar-yen to dip.”

MoF Fujii said that competitive devaluations would ruin the world economy but cautioned that this comment should not be interpreted to mean that he favours a stronger JPY. He added that a weak JPY is helpful for exports, but that policy should not be steered by this consideration alone. On the USD, Fujii said that it is natural for Japan to hold the strongest currency in its FX reserves and that Japan's FX policy may actually be supporting the USD. We remain long USDJPY as a trade recommendation from 90.50.

GBP – Surprisingly continues to recover vs. the EUR and USD in the past 3 sessions and into Thursday in what appears to be a reaction bounce after last week's big drop on poor Q3 GDP fed by a EURGBP selloff and willingness to wait for a clearer picture of QE policy.

AUD: Down The Australian dollar fell almost 2 percent against the U.S. dollar on Wednesday, clocking up its biggest one-day fall in

nearly two months.

NZD: Continuing to fall against the USD as risk aversion driven profit taking continues, hitting 3 week lows against JPY, USD. Sold off after the Reserve Bank of New Zealand (RBNZ) dropped its easing bias, as expected, but faced downward market pressure after a promise to hold rates low for longer than the previously expected first quarter in 2010. The kiwi shed 3 percent, its steepest drop since June, and lost 4 percent on the yen, its biggest decline since February.

CAD: stabilizing with oil after days of decline

CHF: gaining slightly against the EUR and USD in early Wednesday trade after struggling for the past 2 days

NOK: Norges Bank (CB of Norway) becomes first EZ central bank to raise interest rates, doing so by 25 basis points in line w/ expectations. Norges Bank expects to raise rates to around 2.75% by the end of 2010, though others expect they could go as high as 4%.

CONCLUSIONS: New Trading Ideas: If stocks steady or falling, then continue to watch for USD rallies against the EUR and commodity currencies, also the GBP/USD for more pullbacks on a sustained break below 1.6300. Crude oil is dropping, no strong support level until about $74 (see daily chart below for details). We favor going short on crude because it has broken below $78 (fibonaccci 23.6% retracement which has held as support for the past week) as long as stocks continue to drop. Look to trade at either extreme long or short depending on stocks. NB If continued pullback in stocks, expect other risk assets and currencies to follow, with biggest move from the most oversold (USD) and overbought (crude, gold, commodity currencies, stocks, in that order). NB risk assets rising as of this writing.

Trading Opportunities: Near term favors higher yielding and commodity currencies, but that could change fast if equities pull back, no trend continues forever. Thus: 1. be prepared to play a pullback in risk assets and get ready to sell stock indexes, commodities, and risk currencies, buying USD, JPY. 2. Trade the near term horizontal trading ranges that should hold until major news causes a change in risk appetite. 3. Those continuing to take long positions in risk assets should consider tight sell stops, though gold and crude may be approaching new breakouts. Crude oil may be beginning pullback Always use sell stop orders.

Crude Oil

Made its first major move down Friday as it followed stocks lower, after it breached new annual highs around $82. Given the fast recent rise, no strong price support before around the $74 level, though at $77.81 there is a 23.6% Fibonacci retracement level that has held for the past week, and at about $75.50 there is a convergence of a 38.2% Fibonacci retracement and and a 1 standard deviation Bollinger Band. See chart.

Daily Chart Crude Oil Oct 29- No strong support until around $74,( but have minor support at $77.81 already broken, then at $75.51) where we get a convergence of an established support/resistance price level, Bollinger Band, and 50% Fibonacci retracement. Until then, nothing but air. However, oil is likely to continue following stocks, so if stocks can hold steady, oil may well do likewise, though it does tend to be more volatile and exaggerate equity market moves, so oil could make some further declines on its own.

02 oct 29


EUR/USD: Currency in Play for Next 24 Hours

EUR/USD will be the currency pair in play for Thursday. On its way from the Euro-zone include the German Unemployment at 4:55 am ET or 8:55 GMT and Consumer and Economic Confidence at 6:00 am ET or 10:00 GMT. The US, on the other hand, will be releasing Gross Domestic Product and Personal Consumption for 8:30 am ET or 12:30 GMT.

EUR/USD suffered a sharp fall today which kept the pair deeply within the Bollinger band range trading zone. The euro will encounter two major levels of support if the selloff continues to gain momentum. The first will be at the psychological level of 1.4600 followed by 1.4500, a low from earlier this month. Resistance stands at 1.4843 or the high from September 23 rd . If support is breached, the uptrend in EUR/USD may be invalidated in turn for a more severe correction. However, at this point, the trend is still intact.

03 oct 29


World Series Starts Tonight, Yankees go for 27th World Series, Victory to Lift Wall Street Sentiment


India Begins Exit From Monetary Stimulus With Order to Buy Government Debt

SAP Cuts Full-Year Sales Forecast as Customers Reduce Spending on Software

•European Stock-Index Futures Retreat; Asian Shares Decline on Canon Profit

•Nomura Resumes Dividend Payouts After Quarterly Net Profit Beats Estimates

•BG Group Third-Quarter Profit Declines 44% on Lower Gas Demand, LNG Prices

•Deutsche Bank Said Near Deal to Buy Wealth Manager Sal. Oppenheim Holding


How to Play the Gold / Silver Ratio

Sugar ETN Continues Its Wild Ride

Official Release

August Housing Numbers Across Various Indices Don't Yet Show Genuine Recovery

Parsing the S&P/Case-Shiller August 2009 Housing Report

Trying to Gauge Where Oil Is HeadedUnderstanding Energy: Professional Money Management and Peak Oil

by Gregor Macdonald

World Series of Crude Oil: Winner Decides Winter Gasoline Prices

by Bob van der Valk

World Recovery Is in the Hands of OPEC

by Andrew Butter

Crude Oil and Gold: Not Worth Worrying Overby Sold At The Top

August Case-Shiller Housing Numbers

by Bespoke Investment Group


Barrage of earnings, economic data to drive market- AP

Beating the Street is an easy feat for companies- AP

Earnings reports to give picture of job market- AP



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