3-year chart of 2-year GGB Yield (courtesy of Bloomberg.com)
Intraday chart of 10-year UST Yield (Courtesy of Bloomberg)
"Historically, the typical bull-bear market cycle has produced a range of 10-year prospective returns in a band between about 7.5% and 13%. That band presently corresponds to a range for the S&P 500 index between 600 and 1000. A 10% prospective return is right in the middle, at about 800 on the S&P. Once you recognize that profit margins are in fact cyclical, that range is about right, as uncomfortable as it may be to contemplate. Jeremy Grantham of GMO estimates that fair value is "no higher than 950." A tighter norm for prospective return between 9-11% maps to an S&P 500 between 750 and 850.
Finally, while I certainly would not expect it in the absence of extreme macroeconomic upheaval, major secular undervaluation as we observed in 1950, 1974 and 1982 would presently map to about 400 on the S&P 500. When you think of "once in a generation" valuations and "secular bear market lows" - that number, not anything near present levels, should be what crosses your mind. I am well aware that even discussing numbers like these, given the present mindset of investors, is likely to be dismissed as utterly ridiculous. Frankly, I would rather risk the ridicule of those who pay lip-service to research, cash flows, fundamentals, and value than to pretend these outcomes are impossible, when the historical record (and even the experience of the past decade) strongly indicates otherwise." (continue reading at HussmanFunds.com)
|LaSalle Street Chicago (Flickr)|
"August data pointed to another marginal expansion of Chinese private sector activity, with the headline seasonally adjusted HSBC Composite Output Index recording 50.4. The index was unchanged on July’s 28-month low, and much lower than the long-run trend for the series"
"the agency is so low on cash that it will not be able to make a $5.5 billion payment due this month and may have to shut down entirely this winter unless Congress takes emergency action to stabilize its finances."
"Ally Financial Inc. f/k/a GMAC, LLC, Bank of America Corporation, Barclays Bank PLC, Citigroup, Inc., Countrywide Financial Corporation, Credit Suisse Holdings (USA), Inc., Deutsche Bank AG, First Horizon National Corporation, General Electric Company, Goldman Sachs & Co., HSBC North America Holdings, Inc., JPMorgan Chase & Co., Merrill Lynch & Co. / First Franklin Financial Corp., Morgan Stanley, Nomura Holding America Inc., The Royal Bank of Scotland Group PLC, Société Général.."
"Nonfarm payroll employment was unchanged (0) in August, and the unemployment rate held at 9.1 percent. Employment in most major industries changed little. Health care continued to add jobs; a decline in information employment reflected a strike. Government employment continued to trend down."
"International Monetary Fund staff have provoked a fierce dispute with eurozone authorities by circulating estimates showing serious damage to European banks’ balance sheets from their holdings of troubled eurozone sovereign debt.""Peeling the Onion on the Accounting for Greek Bonds" - (Accounting Onion Blog) *similar article, hat tip Zero Hedge
|Illinois Corn (courtesy of Randy Wick on Flickr)|
"U.S. feed grain supplies for 2011/12 are projected lower this month with sharp drops in forecast corn and sorghum production. Corn production for 2011/12 is forecast 556 million bushels lower with a reduction in harvested area and lower expected yields. The national average yield is forecast at 153.0 bushels per acre, down 5.7 bushels from last month’s projection as unusually high temperatures and below average precipitation during July across much of the Corn Belt sharply reduced yield prospects." (click here for the latest report at USDA)
USDA Corn Projections (8/11)
"Pro Farmer pegs 2011 U.S. corn crop at 12.484 billion bushels; average yield 147.9 bu. per acre +/- 1% = 146.45 bu. to 149.4 bu. per acre; 12.36 billion to 12.61 billion bushels."
"NOTE: Pro Farmer editors believe USDA will eventually lower harvested acres for both corn and soybeans, but USDA’s Aug. 1 harvested acreages were used in making these estimates...." (continue reading at Agweb.com/profarmer)
"Chairman Ben S. Bernanke
At the Federal Reserve Bank of Kansas City Economic Symposium, Jackson Hole, Wyoming
August 26, 2011
The Near- and Longer-Term Prospects for the U.S. Economy
Good morning. As always, thanks are due to the Federal Reserve Bank of Kansas City for organizing this conference. This year's topic, long-term economic growth, is indeed pertinent--as has so often been the case at this symposium in past years. In particular, the financial crisis and the subsequent slow recovery have caused some to question whether the United States, notwithstanding its long-term record of vigorous economic growth, might not now be facing a prolonged period of stagnation, regardless of its public policy choices. Might not the very slow pace of economic expansion of the past few years, not only in the United States but also in a number of other advanced economies, morph into something far more long-lasting?
I can certainly appreciate these concerns and am fully aware of the challenges that we face in restoring economic and financial conditions conducive to healthy growth, some of which I will comment on today. With respect to longer-run prospects, however, my own view is more optimistic. As I will discuss, although important problems certainly exist, the growth fundamentals of the United States do not appear to have been permanently altered by the shocks of the past four years. It may take some time, but we can reasonably expect to see a return to growth rates and employment levels consistent with those underlying fundamentals. In the interim, however, the challenges for U.S. economic policymakers are twofold: first, to help our economy further recover from the crisis and the ensuing recession, and second, to do so in a way that will allow the economy to realize its longer-term growth potential. Economic policies should be evaluated in light of both of those objectives.
|EUR/USD 5-Month Chart (freestockcharts.com)|
|EUR/USD Longer Term (freestockcharts.com)|
|Royal Bank of Scotland 5Y CDS (bloomberg.com)|
|Royal Bank of Scotland Stock (stockcharts.com)|
"Investors are worried that during times of quickly deteriorating asset prices, high volatility, and rising risks to the economic recovery, banks could be left with too little capital and a potential lack of support since governments are constrained by high indebtedness," UniCredit credit strategist Christian Weber said."
|Courtesy of tsevis on Flickr (for Fortune)|
"Letter from Steve Jobs
To the Apple Board of Directors and the Apple Community:
I have always said if there ever came a day when I could no longer meet my duties and expectations as Apple’s CEO, I would be the first to let you know. Unfortunately, that day has come.
I hereby resign as CEO of Apple. I would like to serve, if the Board sees fit, as Chairman of the Board, director and Apple employee.
As far as my successor goes, I strongly recommend that we execute our succession plan and name Tim Cook as CEO of Apple.
I believe Apple’s brightest and most innovative days are ahead of it. And I look forward to watching and contributing to its success in a new role.
I have made some of the best friends of my life at Apple, and I thank you all for the many years of being able to work alongside you.
"Mr. Blodget is making “exaggerated and unwarranted claims,” which is what the SEC stated publicly when he was permanently banned from the securities industry in 2003.
The sovereign exposure is off by a factor of 10.
The commercial real estate figures are off by a factor of four.
The mortgage analysis was provided by a hedge fund that has acknowledged it will benefit if our stock price declines.
The blogger’s recommendations on goodwill accounting would be prohibited by generally acceptable accounting practices.
Traditional bank valuation relies upon tangible book value per share, which excludes by definition 100 percent of goodwill and other intangibles. As of June 30, our tangible book value per share was $12.65."
|BAC 5Y CDS (source: Bloomberg)|
"But even during the 1970s and early 1980s, the last major secular lows in the stock market, we were trading slightly below book value at maybe 90% of book value or something like that. I did expect the stock market to decline into a secular low to around a book value of slightly below that. Book value is roughly 500 or a little bit over 500, depending on how you define it.
|AGRO vs. CORN, CCI Index, S&P GSCI Commodities Index (StockCharts)|
|German DAX Composite (StockCharts.com)|
|Rusoro Mining (RML) Courtesy of StockCharts.com|
"We've finished the bull market, the cyclical bull, and we're in a new cyclical bear. Most of the global markets are down 20% or more. The New York Stock Exchange, the Russell 2000 are already at the bear market 20% threshold. And having in place our three momentum sell signals on a monthly basis for most of the markets except the U.S. at this point, suggests that we're in a cyclical bear market."
"We're at the point right now where the next trip down will probably generate a buy signal," said DeMark, founder of Market Studies LLC. "Everything we follow is indicating the Dow Jones and the S&P should make a minor new recovery high, and probably the Nasdaq, too." (read article at SF Gate)
|George Soros - World Economic Forum on Flickr|
|A look at the bear market and |
monthly MA's from my previous post
"Although many on Wall Street believe the market is currently undervalued we disagree. The market expected the S&P 500 to earn $108 in early May of 2008 but due to the bursting of the bubble the earnings came in at $50 for operating earnings (excludes write-offs) and $15 for reported earnings (GAAP). The analysts that are using $100 this year and more next year for the S&P 500 and a P/E of 15 to magically come up with 1500 on the index are guilty of faulty reasoning. We believe we will trade at below 10 times depressed earnings which should take us down to the lows of 2009 or below. It is clear to us that there will have to be a global slowdown in the second half of this year and next. The reasoning for the slowdown is again the debt, but not just the sovereign debt, the private debt is even worse than the public debt." continue reading
"if you're going to address the deficit problem even incrementally, low Treasury bond yields make tremendous sense, because addressing the deficit fairly clearly leads to weaker economic growth.
Already, we have $350 billion of fiscal drag coming our way in 2012 if policies are not changed with the sunsetting of tax cuts from the Bush era and also from the payroll tax reduction that was put in place at year-end 2010. $350 billion of fiscal drag is a lot, particularly when we're living with de minimis GDP growth to begin with, in the first half of 2011. Let's remember, the first half of 2011 GDP growth was a beneficiary of stimulus. (from Morningstar transcript)
"I don't see any idea why you should be long the market. What I see is why you should be long the bond market because as you know I've been calling for deflation. And not a recession, I think we could go into a depression during the next couple of years" (Charles Nenner in video #2)
|EUR/USD Judgment Day|
"BNP Paribas , Societe Generale and Credit Agricole CIB's credit default swaps widened sharply on Wednesday amid fears that France could soon lose its triple-A credit rating.
EUR/USD 2 year (freestockcharts)
By 1510 GMT BNP Paribas' five-year CDS had widened 35 bps to 246 bps, Societe Generale's CDS was 65 bps wider at 334 bps while Credit Agricole CIB's CDS had widened 23.5 bps to 265 bps, according to Markit data." (Reuters)
CMA adds CDS data on key sovereign debts to its free-of-charge daily Marketflash
CMA Marketflash helps subscribers keep up-to-date with changes in sovereign credit risk quality
CMA, the leading source of reliable, independent OTC market data, today announced that for the rest of August it is publishing additional credit default swap (CDS) information on key sovereign debts to CMA Marketflash, its daily email sent free of charge to subscribers. This will help keep subscribers informed of changes in the quality of sovereign credit risk in the midst of increasing uncertainty following the rating downgrade of the United States credit rating and the continued volatility in European sovereign debt risk.
|China 5Y CDS vs. FXI (see below)|
|Federal Reserve (Source: Flickr)|
"The Committee currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013."
"As we had suggested in recent weeks, a U.S. downgrade was going to likely be more negative for the equity market than Treasuries, and that is exactly how the week is starting off. The reason is that history shows that downgrades light a fire under policymakers and the belt-tightening budget cuts ensue, taking a big chunk out of demand growth and hence profits. It is not just the United States — the problem of excessive debt is global, from China to Brazil to many parts of Europe. And let’s not forget the Canadian consumer." -David Rosenberg [continue reading]
"EURUSD remains bearish under resistance at 1.4420.
Source: MIG Bank
- Exited at 1.4205 (Breakeven). EUR/USD’s price activity remains bearish, despite a two-day reactionary bounce which failed in resistance at 1.4420. This confirms another bearish pattern, weighed down by additional failed breakouts from the major “Bermuda” triangle pattern. We prefer to open a trade setup once this pattern triggers a meaningful directional breakout.
- Our long standing bearish view remains in play while the downtrend (from May) holds. A resumption of lower will target 1.3938 (200-DMA), where a large amount of die-hard trend followers will be watching closely for repeat support or a big squeeze lower. Only a close above 1.4580 will lead to a reassessment of this view.
- Inversely, the US dollar index is resuming its oversold bounce from key support at 73.50-73.00. We expect this level to hold (as the last point of defence), helping launch a rebound back into 80.00 over the multi-week/month horizon."
"THE PRESIDENT: Good afternoon, everybody. On Friday, we learned that the United States received a downgrade by one of the credit rating agencies -- not so much because they doubt our ability to pay our debt if we make good decisions, but because after witnessing a month of wrangling over raising the debt ceiling, they doubted our political system’s ability to act. The markets, on the other hand, continue to believe our credit status is AAA. In fact, Warren Buffett, who knows a thing or two about good investments, said, “If there were a quadruple-A rating, I’d give the United States that.” I, and most of the world’s investors, agree.
That doesn’t mean we don’t have a problem. The fact is, we didn’t need a rating agency to tell us that we need a balanced, long-term approach to deficit reduction. That was true last week. That was true last year. That was true the day I took office. And we didn’t need a rating agency to tell us that the gridlock in Washington over the last several months has not been constructive, to say the least. We knew from the outset that a prolonged debate over the debt ceiling -- a debate where the threat of default was used as a bargaining chip -- could do enormous damage to our economy and the world’s. That threat, coming after a string of economic disruptions in Europe, Japan and the Middle East, has now roiled the markets and dampened consumer confidence and slowed the pace of recovery.
So all of this is a legitimate source of concern. But here’s the good news: Our problems are eminently solvable.* And we know what we have to do to solve them. With respect to debt, our problem is not confidence in our credit -- the markets continue to reaffirm our credit as among the world’s safest. Our challenge is the need to tackle our deficits over the long term.
|SPX:GOLD (see below)|