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The New World



by Larry Levin 


It’s all a matter of perspective when looking at the globe.

Pre-Columbus, the assumption was that the world was flat until the new world was discovered. Post-Bernanke, the new world is the only map that matters – at least from the perspective of the U.S. equity markets.

Monday morning things weren’t looking good on the global front. Italy is an economic basket case. Italian debt jumped in 2012 to 127 percent of gross domestic product from 120.8 percent a year earlier. As Bloomberg notes, that’s the most since 1924, when Mussolini won 64 percent of the popular vote in elections that opposition members said were marked by irregularities.

But Italy was just the back story to China as we learned things have run seriously amok with their over-heated real estate markets. China’s cabinet announced late on Friday an increase in down payments and loan rates for buyers of second homes in cities where prices are rising too quickly. The announcement came ahead of the start of China’s annual parliamentary meetings.

On top of that, the Chinese PMI indicator missed, sliding from 56.2 to 54.China’s CSI300 share index plunged on Monday to its steepest daily loss since November 2010, with the property and banking sectors diving in response to more tightening measures Beijing announced late last week to contain housing costs. The CSI300 index of the top Shanghai and Shenzhen A-share listings closed down 4.6 percent at 2,545.7, its heaviest loss in a single day since Nov. 12, 2010. The Shanghai Composite Index tumbled 3.7 percent. A gauge of property developers listed in Shanghai dived 9.3 percent, its biggest daily loss since June 2008.

So what happened to the U.S. markets, after opening lower, the market shrugged this and any and all other bad news off to close higher. Who says the world isn’t flat?

Volatility Commentary    

Very slow news day today but negative tones were set early as China’s Shanghai exchange plunges 3.7%. The government has taken further measures to cool down the country’s property boom.  The major gauge of property developers falls 9.3%. “When there are new rules like these, it extends far beyond property shares,” says an analyst.  Federal Reserve Vice Chair, Janet Yellen, spoke this morning.  Really no big surprises as she stated the Fed’s asset purchase program is alive and well.  QE will continue until there are distinct improvements in the labor market.

Looking forward into the week we see ISM Non-manufacturing on Tuesday, ADP Employment report and Beige Book on Wednesday, International Trade, and Jobless Claims on Thursday and then the much anticipated Employment Situation report on Friday.

Today we will take a moment to not necessarily highlight a specific trade but to give a little insight into what we think perhaps is happening in the world in general.  Let’s take a look at Oil, Corn, Gold and Equities.  This should give us a nice snapshot without getting too complicated.  Oil, Grains and Gold it can be argued are all supportive to Equities right now.  Equities are one of the best leading indicators for an economy.  Gold is a very good barometer of the “fear quotient” in the world.  When people get scared, they buy gold.  Gold has been in a very distinct bear pattern since October of 2012.  Looking back as far as May 2011, Oil prices have been on the decline.  Some may argue that this points to a slowdown in economic production.  We don’t discount the fact that it may be but it could also be an increase in supply.  Increased supply and efficiencies in oil sands and shale oil are two contributing factors to this increased supply.  In Corn, after rallying to all-time highs last July (in the middle of a severe drought), prices have come off approximately 15%.  The USDA has issued reports of record high planting acres and should we experience more normal weather, grain prices should decline.  If grain prices do decline, it would be due to more supply and steady demand.  If you don’t have to pay record prices to feed yourselves, perhaps you have money left around to spend on something else.  All of these examples point to a bullish bias to equities.

Currency Spotlight      

As the FX market waits for the plethora of central bank decisions, Monday trading was one of the tightest range bound markets we have seen in recent months.  The U.S. dollar started the day stronger but finished weaker against most of its European and commodity trading partners.

One of the key topics is whether or not the Bank of England will cut rates or add stimulus.  The pound may be in for a surprise rebound if we do not get anything this go around.  While the outgoing governor, Mervyn King looks like he wants to go out on a dovish note, the other BOE members are not completely behind him.  The minutes from the last meeting suggested that a rate cut was considered and we discovered that King, Fisher and Miles all wanted more stimulus.

Yesterday, UK Construction PMI printed its worst level since October 2009.  The data showed a drop in output to 46.8, from 48.7 during January.  That was the fourth consecutive print below the neutral 50.0 level and a clear sign that the doom/gloom statistics are not any better in the UK.

While general central bank theory suggest lower rates will help UK exports and stimulate the economy, the BOE may not necessary really want to join the currency war and help devalue the pound.  The British economy is heavily dependent on importing raw materials and exporters not too long ago used to deal with a currency that was twice as strong as the dollar.  Action is not a given this month and traders should avoid jumping on the pound short at these levels.

If the BOE remains neutral, the pound may rebound even further to the dollar.

Stock Watch List 

The Dow closed up on a rally from the lows following a similar pattern as Friday. Closing positive today also broke a streak of having the markets close down in negative territory on Monday’s. I can see the markets push up as it seems the early slide was due to news from China and not from the Sequester Cliff. The market just does not seem to care about it whatsoever, so it is back to business as usual and we will continue to rally to all time highs.

Apple(AAPL) tumbled to new 52 week lows as support levels continue to collapse. Not only are these levels getting broken, but they are now turning into resistance. Case in point on Friday’s trading session, the price $435.00 was a recent 52 week low that served as support. Once it broke through this price level and retraced to try and get above $435.00, it failed to gain momentum and would falter back down. With stuck buyers and aggressive sellers coming into play, this stock kept pushing further down. This was the case again at the price $425.00 as buyers fought to push it back up for 3 hours straight. Once again the stock slid down and hit $419.00 where it found immediate support. This is another critical level to look at for this stock. If it fails to climb back up and the pressure sustains on $419.00, then look for $409.00 to be the next defined support level. This stock is in a big struggle and anyone playing the upside for a intermediate term play has felt the wrath of the sellers. Play the momentum and trend in your favor until the stock tells you differently. Until we break $484.00 this will remain a bearish stock.

I still see the market in a struggle for control, although the bulls are winning out here. The all time highs in the Dow are in sight and it might be a struggle up here for control. Look for the slides with immediate rallies to continue. This will offer up great opportunities to enter on the dips and you can also play the slides down, giving you chances to play both sides of the field. Protect your profits early on, and look at critical technical levels to trade off of. Open Position: ABT X Stocks to Watch: AAPL GOOG IBM AMZN PCLN BBRY FB CTXS BAC C GS CMI CAT NFLX WDC LULU LNKD DIS KORS FOSL X QCOM STZ NKE CHKP JNPR POT GMCR HLF ABT LOW HD LEN TOL.