Gene Inger's Daily Briefing . . . for Monday June 14, 2010:
Good weekend!
Pressure on governments . . . to narrow their budget deficits at an incredible time it seems like no other in history (because even in the 1930’s demographic shifts that for all practical purposes reduce numbers of contributors to entitlement programs while it is clear that many countries will have rising demand to fulfill those obligations) comes just when analysts and monetary officials are pained to be candid about restructuring, as will be necessary. At the same time the economic recovery is weak in the West, it is stronger in the East ‘superficially’; but even there similar issues are paramount. For now governments continue to increase debt rather than limi spending; a poor effort at sustainable solutions to a world changed more than most serious fiscal addressing.
An example would be China, where a failed Bill Auction reveals investor disinterest in an unrealistic return given their inflation (and failure to migrate their currency); or just this day in Japan, where the new Prime Minister came-to-grips with what we already of course know (but few talk about), and that’s the impossibility of fulfilling obligations without radical restructuring. Gigantic quantitative easing has already occurred in the U.S. in terms of stimulus packages (and we don’t dispute that TARP helped banks or that it prevented a financial fiasco; though believe the overall packages could have been better directed by protecting depositors and not much more… plus regardless of repayment, the funds that were not used to help small business and innovative or similar projects, are funds whose absence postponed ‘real’ recovery by some time); and repetitions of such stimulus packages are extremely unsavory in the near future.
Furthermore, there is some chatter about ‘earnings’ coming-in a bit shy of estimates; and that is not factored-into this market as of yet either. The absence of comment by companies with respect to guidance revisions suggests they may not actually know. At the same time this would dovetail with some of the Leading Economic Indicators slightly slowing (or stalling) and threatening to rollover, which we suspect they might.
Technically . . . none of this changes our defensive view or suspicion this past week that an upside move could indeed occur which ‘briefly’ ran-in shorts above resistance and then took the market down through the bottom of the ongoing trading range. The reticence to be too bearish in June (mentioned all along) after our forecast May crash of sorts, continues. However, the tendency to look for a rally into early mid July from a June low is tempered by (reserved for ingerletter.com members). Hence flexibility is the key and in that regard we suspect that as this not-unexpected rebound exhausts, we test lower levels again; which would leave the structure for (late June / early July) as previously outlined to members with respect to probabilities and technical factors.
Daily action . . . continues to believe that the stagnant behavior is a desperation try to hold the market above the triple-lateral supports, which exist primarily (as noted). As to the Friday rebound, it was almost entirely centered (as were the shuffles) in the oil stocks, or concurrent therewith, and almost nothing else. It’s simple: late on Friday when shorts found the market would not melt-down, they closed or ‘squared’ all their positions and got out of the way for the weekend. Nothing more nor less really as yet. (The weekend Presidential ‘push’ for another 50 billion to bailout states was again as per usual pitched as keeping essential services going; with no reference to trimming spending, or addressing how this left of debt will be constrained in the longer run.)
Keep in mind that we forewarned the pattern could shift with the ‘forward roll’ and for a short-period obviate the late weakness pattern that had often presented itself prior to the second half of the week just past. In the new week we have numerous factors to contend with, not the least of which is the Quarterly Expiration coming right up. In a video remark I’ll address technical prospects for the upcoming likely market action.
In the meantime, before the video, a summary of the prior week’s highlights only:
A complex indecision pattern . . . by no means is as unusual as many proclaim. As for the basics; consider that it’s not China, not Japan (after all lost in the excitement is a little detail such as U.S. Trade Deficits increasing; while Unemployment Claims are not a particular improvement); and not even the interim stabilization in the Euro. What then was it? First and foremost it was Oil stocks rallying and offsetting the prior day in splendid fashion; secondarily it was short-covering as everything followed Oil; plus it was completion of a forward-roll to September S&P futures. Next look for (outlined).
It was for the latter reason that during the (week) I described patterns as treacherous; and even last night noted that we had to see what happened ‘after’ the forward-roll. It should not be concluded that we don’t drive back-down again however, after a further effort at rebound, as this is not only a ‘probably bearish’ structure, but a trading range with a risk of merely temporary movement above the S&P’s daily-moving-average; and more significant if fought-against, penetration of lateral ‘supports’ I’ve repeatedly identified. For that matter, more than anything what’s going is (as we’ve outlined).
Finally there was the 30-year Auction. It went well (no great surprise). The bulls took that as a plus too; however, we’d take another perspective. If investors are optimistic, why would they tie money up in long-term paper for 30 years; when you can get just about the same yield on (noted paper). The answer: because for many it’s preferable to do anything other than heavily invest in equities, as I suppose the (elderly) seeking yield can still imagine just taking the income even if principle erodes, because if they never touch it, their heirs can eventually get full value at maturity in 30 years.
To us the most notable aspect is ‘proportions’ of refundings that are shorter-durations of paper, which (unlike challenging points in the 1970’s for-instance, where Treasury refunded the debt with long-term paper mostly, and thus was largely immune from a run-up to 18% interest rates) means that the ‘light’ nature of the long-term paper is a further warning that this Government is unprepared to cope with eventual higher rate levels (not that we expect anything particularly higher in the short-run, as we haven’t and as has been a correct perspective; because this remains Deflation, not inflation). (Yet another reason why those calling it a ‘sweet-spot’ for disinflation miss the point.)
(Macro) action . .continues to believe authorities whether here or in Europe have not as of yet taken the resolve to seriously solve the issues of derivatives or debt matters which are overriding superficial considerations like earnings (redacted), or for interest rates (prospect comment redacted). How will you know if they do?
When you get a passed-provision to spin-off ‘proprietary trading’ by institutions for a starter. Or an exchange-based derivatives market for transparency, as a chaser. Very frankly I don’t believe you have optimum free-market capitalism without transparency.
How tough implementation of the ‘Volker Rule’ will be, is part of what defines a future commitment of bank capitalization, net capital requirements, and better standards in so many ways. Add to that a requirement of higher capital standards for the largest of the bankers; as quite clearly the ‘leverage’ aspect is an incredible danger (equivalent to going into a casino with a hundred bucks and being loaned 40 times that to ‘play’).
If (the) rebound in-part was related to ideas of ‘watering down’ the ‘Volker Rule’ (and I don’t think it was, as it was mostly oil-led), then shame on the Street for celebrating a perception of a ‘free pass’ on their behavior, with a particular focus on leverage. More likely this (aside oil) remains a distinct effort to bring the Dow and S&P ‘back from the brink’, and actually emphasizes that ‘base’ as more significant whether it breaks or in-event it even holds (temporarily). Our bias is (reserved); albeit that doesn’t have to be immediately (as noted last week), as we do have a big Expiration coming-up as well.
One final word: the French carrier Charles de Gaulle completed exercises along with the RAF and the U.S. Navy’s Harry S. Truman ‘battle group’ off Toulon France today. The focus was the ability to land and even repair each other’s aircraft on either carrier in-event one is disabled in conflict. Reports suggest this was a rehearsal for potential raids (or support thereof) on Iran. Also reports suggest that the USS Truman will now transit the Suez Canal to deployment in the Indian Ocean positioned for supporting any missions either toward Iraq/Iran or Pakistan/Afghanistan, with 3 of its destroyers splitting-off for pirate-interdiction duties off Somalia, but able to rejoin the flotilla fairly quickly, should the need arise. With the U.S. having withdrawn ‘battlefield engineers’ from Egypt’s effort to wall-off the tunnels used to smuggle weapons into Gaza, there is increasing tension in a few ‘theaters’ if you will. None of this is generally reported to the American people, but probably should be aside the absurd new ‘blame the victim’ policy that has the Administration superficially ignoring the constant attacks not only on Israel but attempted against the Egyptian government and others on occasion. If the media were to be fair and unbiased, they would have reported the intercept of 4 terrorist ‘frogmen’ that the Israeli Navy caught trying to land on a Southern beach of their country, with intentions of planting explosives. But of course it wasn’t reported.
My criticism isn’t whether the news is pro or con anything; but show the real picture. One of those would include the miserable Taliban hanging a 7 year old as a spy now in Afghanistan. Excuse me? A 7 year old telling police of an explosive is a kid doing a good deed. But in Afghanistan it seems that no good deed goes unpunished now. In this case will this murderous atrocity on a child be reported by the media? We’ll see. All the media will focus on is the debate on whether the battle there is winnable at all.
Contagion spreading . . . rises to the forefront (of course after the reversal we called for as likely on a temporary basis); offsetting (soon enough) the bullish ‘rationales’ or even the carefully phrased Bernanke testimony. It should be noted that in many ways his assessment was much closer to our own view of the ‘non-sustainability’ of current debt structures; mixed in slightly with smoothing remarks about modest recovery, as he understandably had to take that type of tact. The confrontation between the White House and BP isn’t the issue of primary concern either here; nor the Beige Book, and certainly not China’s exports. (Do note where an included map projects the oil going. At the same time we said weeks ago this was not a ‘spill’ nor a ‘leak’ but SpindleTop if you will; and thus the biggest oil discovery in a hundred years; needs producing as there is nothing else you can do with the Gulf of Mexico as it’s already a ‘dead zone’; and not producing the field will merely increase the problems to regional residents. If the gusher were plugged today, the damages would take a decade or more recovery, and that isn’t referring to cleaning the shoreline, but to marine subsurface damages.
More notably; the Beige (or Tan if you prefer) Book report actually reflected a frail if in any meaningful way recovering economy; with some improvement (never denied with respect to our work; but always thought to be ‘little bang for the buck’ relative to what’s needed to offset multiplier effects from onerous debt-servicing years ahead).
‘The Dead Zone’ . . . at first blush might seem to refer to our warnings weeks ago as relate to the oil and chemically destroyed Gulf of Mexico; with incredible ramifications (such as being to the modern era what the ‘dustbowl’ was to the 1920’s and 1930’s; a condition that had wider-ranging financial impacts than anyone in the securities fields acknowledged at the time, or at least as has been recorded for posterity). However in this instance I’m alluding to the ‘financial dead zone’ that relates to a problem that so many ‘think’ relates primarily to certain European country’s debt-to-GDP rations, but it is evident to us (in topics previously discussed), that this remains a US problem too.
While the downside has been a bit crowded as every technician simply is assumed to be somewhat aware of the proximity to potential breakdown, our approach has been to ‘fade’ the rallies rather than get angina (balance reserved for ingerletter.com only).
Anyway; according to Treasury, the net public debt will rise to an estimated 14 trillion dollars, with a ratio-to-GDP of 73 percent, by 2015 (that’s 3-4 years from now actually if you think about it; and that means we’re already past the deadline to radically cut at least a lot of expenditures). Nearer-term total U.S. debt will top $13.6 trillion this year, and climb to an estimated $19.6 trillion by 2015, according to a Treasury Department report to Congress as well (neat how they soft-released that over the past weekend).
Yes, Treasury sent that report to lawmakers Friday night with no fanfare (certainly not U.S. TV networks which should have been all over this); and the U.S. Treasury said the ratio of debt to the gross domestic product would rise to 102 percent by 2015 from 93 percent this year. One politician says the President's own economic experts say a 1 percent increase in GDP can create almost 1 million jobs, and that 1 percent is what experts think we’re losing because of debt's massive drag on our economy.
The total U.S. debt includes obligations to the Social Security retirement program and other government trust funds (where are the complaints about withholding payments, as continues, going into the general Treasury accounts rather than being segregated to at least provide for a modicum of survivability for our masses of unprepared elderly as time evolves). The amount of debt held by outside investors, which include China and other countries as well as individuals and pension funds, will rise to an estimated $9.1 trillion this year from $7.5 trillion last year. (Again; these are ‘official’ numbers.) If the news media (not to mention market sobriety) were to digest these properly or just report them, it would be an awakening to offset the ‘spin’ Americans are subjected to.
I look at this (multiple paragraphs redacted for members only) to see the correlations between destruction of the Middle Class as devastating unintended effects that along with diminished pensions and ‘state budgets’ as you’ll see (many state / muni bond ratings will be cut and that’s hardly approached in the financial analysis out there; but will be after it’s late to reallocate calmly; with a little-noticed Connecticut downgrade foreshadowing future risks; plus Connecticut is a relatively wealthy state [more].)
Securitized derivatives largely have not been unwound; and what you got from G20 is largely a realization that de-risking is on the table increasingly (much more explored).
Now, adding taxes to the mix further burdens recovery of family units, while typically it gives governments breathing room, that they shouldn’t anticipate. This mean lots of sobering times remain ahead and that’s why we didn’t ‘bite’ to all these forecasts for better times in the year’s second half, especially for markets. Sure there will be some rallies, but for now they will be sold into; and fundamentals or large issues that many technicians think are not market-relevant, again prove how often they truly are.
Bottom-line: cutting deficits has become a global focus whether the US agrees or not. The ‘responsible growth-favorable fiscal policy G-20 remark’ means: most countries will do what they need to for themselves, and there really was agreement to disagree at G-20; though it’s not being reported that way. It also translates simple to: ‘no mo money’ for those who want to borrow; at least not in the incredible size they desire.
I thought (to simplify matters) that my forecast May plunge was a warning shot across the bow, and perhaps sufficient that orthodox time parameters for ensuing phases of declining market activity might be denied or minimized by virtue of overwhelming and serious considerations. This generation generally is unfamiliar with what precedes as well as characterizes a plunge; as even our 2000 crash and 2007-’08 failed to factor-in declining wage and salary growth; worsening economic conditions (and I am fairly sure about the reasons why; because this is not a normal recovery and remains the ‘controlled Depression’ we have discussed during the post-‘epic debacle’ initiation); or if push comes to shove, something else that followed lack of confidence in world leadership (ie: courage to confront demagogues) and hasten conflict in another era.
Look at net borrowings; look at toxic debt; look at mediocre recovery; and if one still doesn’t understand this (maybe they don’t want to) just look at the M3 Money Supply.
The bottom line: things remain tenuous at best, and potentially fairly dire at worst; in a sense. That doesn’t mean (redacted) multinationals remain overpriced given risks.
There are other issues too; not the least of which include muni bond default risk later this year and next; and the ‘expectation’ by some that the Federal Government will be at the beck-and-call of state and county governments to ‘bail-out’ such issues, just as they did the motors and bankers (presumptions which aren’t necessarily borne-out by history; when you look at defaults that have occurred in the past, like Alabama and in California). This remains a global and domestic minefield in so many ways. One may be tempted to say that the May decline we looked for discounted ‘all risks’, but we’re unable to state that, based on realistic technical and fundamental analysis of all this.
With that said, just keep in mind there are a number of market-impacting or potential issues of the sort, that we have to keep an eye on; and that the odds of problems in the near future exceed those of resolutions and a peaceful world. Unfortunately that’s what makes for a hot summertime; but a volatile market in which I look forward to lots of great trades; not because we want to see these miserable issues, but because these tend to cause more than seasonal concerns with reflect to market prospects.
Debt impairment . . . is the concern; not earnings and recovery optimism as prevails, at least among the delusions of those who see a sustainable economic recovery with no contractions to test the mettle of the turnaround efforts domestically or worldwide.
I have called this a controlled Depression since forecasting it over three years ago; that the Fed and Treasury would facilitate systemic stabilization, but not much more. I regret to inform you (as further outlined).
Conclusion: stabilization efforts notwithstanding; overall recovery and deleveraging conditions will prevail (not may prevail) through this year, and probably into next year as well. Intervening market rallies do occur (some fairly wild), but of limited duration, at this point. If other developments unfold that could change prospects we’ll evaluate.
Bottom line: continuing characteristics; include (consolidated) the following bullet points:
· Economic disequilibrium continues; especially for nations with fixed pegs; crisis expanding.
Further bullet points provided members; please visit ingerletter.com site for details.
MarketCast (intraday analysis & embedded Daily Briefing audio-video). . . remarks forecast substantive failures by markets; particularly as 2010 evolves (whether just as a correction of a worse case remains to be assessed). Remember back in early 2007 we denied the 'liquidity' momentum as a canard; believing housing only the first asset bubble to deflate. We then outlined structured investment vehicle failures; banking issues, the confluence of asset deflations, and more; continuing with interruptions per projecting long ago: 'a perfect storm'. New sets of storm clouds quietly are gathered.
As the debt bubbles continue to deflate, alternating tradable moves continue from a trading perspective. Against that backdrop retaining a macro (adjusted) Sept. S&P 1600 +/- short irrespective of interim oscillations. Technical analysis via video follows.
Daily Briefing Technical-Corner MarketCast Videos
Bits & Bytes . . . provide investors ideas in a few stocks, often special-situations, but also covers primary technology issues (needed for assessment of general factors in tech, or as compelling developments call for) that are key movers in the NDX, SOX or S&P, plus ideas ingerletter.com thinks might merit further reflection. (Individual stock comments generally are provided in video overviews only; occasionally I'll have some thoughts here; however increasingly most all analysis is via video, as it should be.)
Pure Bioscience (PURE) ‘conference call’ was quite satisfactory. Earnings much as expected (meaning nothing; still a $.05 / share loss; but with rising revenues of about 400% on a quarterly comparative basis). Post-report profit-taking is typical; we really are pleased with their tactical and strategic marketing and development initiatives for a small company, and will be reviewing what they’re doing in more detail when time allows (unfortunately it does not tonight, but simply know we think they’re doing fine).
The awarding of another patent (this time for an anhydrous formulation of their SDC additive) is welcomed; as is the potential of their first ‘treatment-IND’ filing with FDA for one or two of several applications which require more than the valuable existing EPA approval which covers ‘food processing and handling’ aside hard-surfaces too.
The expanded product line of Nivea using SDC (including not only deodorant but as of now after shave and so on in Europe) is a likely example of what is forthcoming to the U.S.A. in time too. We hope that either hand sanitizer, wound care, or even acne are included in the first filings for use in/on humans with respect to FDA approvals. In the meantime the sales expansion of Richmont seems to be going ‘per their plan’ as PURE indicated at the ‘conference call’, and as we’ve noted before, given that they are experienced at marketing based on the years at Mary Kay (the principle Richon did America’s largest LBO at the time) and indirectly with Avon (he was one of their largest shareholders we understand at one time) is a good hint of their intentions as regards ramping sales of Pure’s product line, as that expands over a period of time.
Our suspicion is that the shares will continue gradually improving and remain fairly stable irrespective of overall market action (as they actually have). Whenever a bit of a dip occurs related to someone selling due to the overall market, it seems there are a good number of buyers looking to accumulate on pullbacks. Over time we remain optimistic that sales and earnings will ‘ramp’ according to their tactical and strategic plans, and have no problem concurring with Pure’s CEO’s comment regarding their shares being relatively undervalued considering the potential. What they have to do is deliver the goods with respect to sales more so than areas of explorative interest, and one would hope the price progression becomes more apparent over time. While we believe their current marketing (through Richmont but also BASF and so on) can warrant a higher share price, the realization of new product lines will also open eyes as to the size of markets that are not merely ‘potential’, but eventually penetrated. In this regard we watch with interest to see if BASF (acquired the former CIBA) will be able to conclude a new exclusive for name-brand consumer products, as that sector remains an avenue of market penetration that will catch mass consumer attention in the fastest way possible (even without an exclusive that may occur anyway at BASF).
Patiently long this stock since the 1.85 level almost three years ago, we are pleased they are engaged in what appears to be a dynamic effort to expand recognition both of the company and of the merits of the additive; which after years of regulatory and other approval processes could well be able to reach a prime-time performance soon.
(P.S. next week I’ll discuss the new Clorox Patent filing to use SDC (Pure’s additive) in a potential variety of products for cleaning and antimicrobial purposes. This clearly is not an effort to circumvent but to incorporate Pure’s disruptive technology, and may be a result of the recent marketing efforts which increase awareness of Pure’s basic functionality. Combining Pure’s SDC with surfactants and/or alcohol is another way to accomplish multiple tasks in single mixtures which may well be what Clorox intends; as well as to protect their ability to do so before name brand competitors chime-in.)
In summary . . events continue reminding us of risks Allied fighting forces face, given continued attacks on free peoples, by elements including organized terrorist forces in various countries and the world’s oceans. Addressing terror threats continues, while domestic issues absorb us more while we must focus on U.S. economic stabilization.
Over 3 years ago I commenced projecting an 'accident waiting to happen'; affirmed historically after long-duration periods of free money (Gilded Age mentality). Now a market finished struggling with over-extended rebounds as our economy restructures.
Though enormous efforts have avoided systemic disaster on the banking front; there is no equivalent rescue of the overall economy besides perception; nor restoration of engines for sustainable growth. People are adjusting to lower expectations; which will never be a favored approach to American life. Actually we don’t see it as permanently alternating the future; but we still have major adjustments to work-through. That’s the reason I warned about chasing rallies; not to mention major ‘commercial’ adjustments as are ongoing. And as I’ve said; fairly visible new storm clouds were clustering.
Enjoy the weekend;
<h2 style="">Gene</h2>
Gene Inger,
Publisher
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