Fukushima - Some Background and Intra-day Markets

Just some information I found interesting and/or useful in assessing the impact of japan's nuclear problems.









From Stratfor:

The nuclear reactor situation in Japan has deteriorated significantly. Two more explosions occurred at the Fukushima Daiichi nuclear power plant on March 15.

The first occurred at 6:10 a.m. local time at reactor No. 2, which had seen nuclear fuel rods exposed for several hours after dropping water levels due to mishaps in the emergency cooling efforts. Within three hours the amount of radiation at the plant rose to 163 times the previously recorded level, according to Japan’s Nuclear and Industrial Safety Agency.

Elsewhere, radiation levels were said to have reached 400 times the “annual legal limit” at reactor No. 3. Authorities differed on whether the reactor pressure vessel at reactor No. 2 was damaged after the explosion, but said the reactor’s pressure-suppression system may have been damaged possibly allowing a radiation leak. After this, a fire erupted at reactor No. 4 and was subsequently extinguished, according to Kyodo. Kyodo also reported the government has ordered a no-fly zone 30 kilometers around the reactor, and Prime Minister Naoto Kan has expanded to 30 kilometers the range within which citizens should remain indoors and warned that further leaks are possible.

Chiba prefecture, to the east of Tokyo and connected to the metropolitan area, saw levels reportedly two to four times above the “normal” level. Utsunomiya, Tochigi prefecture, north of Tokyo, reported radiation at 33 times the normal level measured there. Kanagawa prefecture, south of Tokyo, reported radiation at up to nine times the normal level. Finally, a higher than normal amount was reported in Tokyo. The government says radiation levels have reached levels hazardous to human health. Wind direction, temperature, and topography all play a crucial factor in the spread of radioactive materials as well as their diffusion, and wind direction is not easily predictable and constantly shifting, with reports saying it could shift west and then back eastward to sea within the next day. It is impossible to know how reliable these preliminary readings are but they suggest a dramatic worsening as well as a wider spread than at any time since the emergency began.

Full post here:  Red Alert: Radiation Rising and Heading South in Japan | STRATFOR

Fukushima vs Chernobyl:

The Chernobyl accident was the product of human error when a test was poorly executed, while the Japanese failure was triggered by an earthquake and tsunami.

Most importantly, thick containment walls at the Fukushima Daini plant shield the reactor cores so that even if there was a meltdown of the nuclear fuel it's unlikely to lead to a major escape of dangerous radioactive clouds into the atmosphere.

At Chernobyl, there was no containment structure. "When it blew, it blew everything straight out into the atmosphere," said Murray Jennex of San Diego State University.

The most severe contamination occurred within the so-called Exclusion Zone, a circular area around the power plant with a radius of 30 kilometers (19 miles) that has been deemed unsuitable for living and is closed to unsanctioned visitors. 

Fukushima vs Three Mile Island:

Three Mile Island:  About half the reactor core in one unit at the Three Mile Island plant in Pennsylvania melted due to the loss of coolant. The other unit suffered no damage and still operates today.  The plant did vent a small amount of radiation to release pressure but nuclear experts said that release did not result in radiation levels beyond what environmental regulations allow.  Operators at Three Mile Island stopped the meltdown by restoring cooling water to the reactor core.

Looking at all three nuclear accidents, thus far Fukushima is more closely related to Three Mile Island than Chernobyl, but the situation continues to deteriorate.  The situation is now deemed more dangerous than Three Mile Island (a 6 out of 7 versus 3MI's 5).


Known radiation levels:

(Reuters) The International Atomic Energy Agency (IAEA), citing information it had received from Japanese authorities at 0350 GMT, said on Tuesday dose rates of up to 400 millisievert per hour have been reported at the Fukushima power plant site. It did not give details or comparisons on the radiation level but exposure to over 100 millisieverts a year is a level which can lead to cancer, according to the World Nuclear Association. The Vienna-based IAEA uses the unit to measure doses of radiation received by people.

Okay, now the money part (of course, in no way minimizing the impact of this tragedy):

 So, what are the markets doing on this:  puking risk!

iShares MSCI Japan Index (EWJ):

SPY:

The Yen:  The yen rose against all of its major counterparts as risk inJapan of radiation leaks from crippled nuclear power stations boosted speculation that insurers will repatriate assets to pay for earthquake damages.

Risk off means risk free (in theory - not mine) rallies:

7s and 10s are enjoying some popularity here.  I would love to short tens here, but stepping in front of freight trains can, at times, lead to severely adverse consequences.

Is this overdone?  It is anyones guess.  The broad based sell-off of just about anything (except, of course, Netflix) may present opportunities, but a full scale meltdown will kick the market in the chops.  I am sidelined for now.

Another Day in the Market, Another Day Further from Retirement

Who buried the fuel rod in the market?  Ouch.  Not a good day to be short the long bond (even if you are long 7-10yrs) or long oil, commodities, stocks (of any cap) or, well, anything (but "risk free" treasuries).  Yuck.

Too much heat in the kitchen!

Thursday Market Recap

Well, its Thursday and I find myself sitting here trying to digest what happened today so I can try to piece it together, make sense of it and try to fit it into a macro picture.  Why?  I am not sure, for myself and my book, obviously but beyond that I hear/read nothing from anyone out there as to their thoughts.  So much for the collective wisdom of markets (yes, getting somewhat disheartened by the lack of response/comments).  In any event, lets begin.

Equities:

Equities had a mixed day, starting out strong, then rolling over as the dollar strengthened.  The overall trend of the market continues to be higher, but the test will be the April highs (1220 on S&P, 122 on SPY).  Would not be surprised if we tested the highs again (financials willing) as earnings have been decent and a bullish undertone seems to be in place.  A lot could depend on the nature and amount of QE2, which is baked in the cake.  I am not sure the Fed/Treasury could pull out now if they wanted to as the market would roll over and the "stocks go up always" policy objective would fail going into elections (keep an eye on the elections).

Here's a snapshot of the US equities markets today:

And a little longer term perspective (longer term in market eyes - trading, not investor):

A little more positive conviction will get us to the test point, beyond which I am not sure how we go much higher unless we see multiple expansion as earnings expansion does not seem to be in place (have you seen some of the guidance by the bigger firms?).

As for the international markets (well, to me anyhow) we saw the same type of action we saw in the states, with continental Europe outperforming.  Commodity currency countries were somewhat weak - although Australia is in the green as I write.

I am still somewhat nervous over Brazil, their market was down today and I can't overlook the increase in CDS being bought on the sovereign.

 In any event,  here is the capitalization chart:

Gee, midcaps still leading the pack?  We are not surprised, are we?

And growth Value:

Growth, really?

Okay all, I realize I skipped fixed income and currencies (yeah, I know, on the day of the $1.5B EBAY deal too), but a fella has to know when his time is up - at least for the day.  Be sure to check out Seeking Alpha for more posts (although the blog has been getting the lions share).

Good luck, lets be careful out there.

Monday Market Recap

Monday already.  Market has a mixed tone as Citi beat, Apple guidance disappoints, Rio and BHP call it a day for their JV and Walmart brings a megadebt offering.  Nothing occurring today that changes my outlook on the markets.  Liked the IP number today (for the trend if nothing else), bank mess seems manageable (ugly, but manageable), Europe was quiet (well, Europe ex France) and political market commentary was somewhat muted.  Still long midcap growth (VOT) with a mild small cap exposure (IJR), bonds (AGG) - with a corporate tilt (LQD) and short long treasuries (TBT), own preferred through closed ends (JPS, PFD) and continue to like C$ and A$.

How about a couple numbers:


Equities:

S&P is posting stale data, so lets move to a different source (yep, Google):

Summary:

And a little sector action:

Financials found their legs today with Citi's earnings, Basic materials took it on the chin with the breakup of the BHP/RIO ore JV, healthcare just continues to motor along.

Growth/Value:

Value steeling some of growth's thunder in midcap space (IWS = midcap val, IWP=midcap growth).

Small cap eating up midcap's advantage (IWO= smallcap Growth).  Keep your eye on this.  Combine the two and...

BOOM, smallcap value (IWN=smallcap value) making its move.  I think it is too early for this to stick, but I will be keeping my eye on it.

Fixed Income:

Mr. Rollback borrows $5B from the markets today.  They buy everything cheap.

IG finally had an up breadth day with advancers leading decliners by 1.38x, but with lower volume.  HY barely held on to a positive adv/decl ratio, turning in a 1.01x on lower volume.

Curve steepening brought to you by stronger belly of the curve.  Still like the steepener trade.

Forex:

Uncle sam gains some ground (as of writing after giving some turf earlier.  QE2 is not going to allow for much gain here.




Errata:

Bank of America announced on Monday that it would resume home foreclosures in nearly two dozen states, despite the running controversy over how banks handled tens of thousands of cases of homeowners facing eviction. Bank of America, the nation’s largest bank and the servicer of roughly one in five American mortgages, insisted that it had not found a single example where a foreclosure proceeding was brought in error.
Bank of America said it would resume foreclosures in the 23 states where judicial approval was required after an internal review turned up no evidence that cases were filed in error. However, Bank of America’s suspension will remain in effect in the 27 other states that do not require a judge’s approval to foreclose, as the bank’s paperwork review proceeds state by state. It was the only bank to initiate a nationwide freeze.Not the end of this issue, not at all.


The Journal found that all of the 10 most popular apps on Facebook were transmitting users' IDs to outside companies.  The apps, ranked by research company Inside Network Inc. (based on monthly users), include Zynga Game Network Inc.'s FarmVille, with 59 million users, and Texas HoldEm Poker and FrontierVille. Three of the top 10 apps, including FarmVille, also have been transmitting personal information about a user's friends to outside companies.  The information being transmitted is one of Facebook's basic building blocks: the unique "Facebook ID" number assigned to every user on the site. Since a Facebook user ID is a public part of any Facebook profile, anyone can use an ID number to look up a person's name, using a standard Web browser, even if that person has set all of his or her Facebook information to be private. For other users, the Facebook ID reveals information they have set to share with "everyone," including age, residence, occupation and photos.   You can't be paranoid enough.


Good luck, lets be careful out there.

Thursday Market Recap

Happy Thursday.  Banks got whacked today as the foreclosure mess took center stage and initial jobless claims rose more than expected.  Market played bank-whack-a-mole in both fixed income and equities, with large bank CDS out 5-20bps and shares down 3-6%.  Earnings mixed, but some positive signs within them (see earlier post on JBHT).  How about some numbers:

Equities:

Smack down on financials, but the rest of the market didn't fare too bad, staples, tech and telecom closed positive.  Still decent on the year though.  Growth/value anyone?

Midcap growth outpaced value, widening the spread between the two.

Given the sector divergence we saw today, correlations within the S&P fell:

On that note, here are asset class correlations (using ETFs):

(trying to find a new source of cross asset correlations, would appreciate any thoughts).

Fixed Income:

Decent day today, with JPM leading the market with size in 10s and 30s ($2.75Bln 10yr +180 and $1.25Bln 30yr +165). Dubai Elec & Water (Ba2/NR) tapped for $2B in 6s and 10s.  Secondary action:

IG advance/decline ratio was 0.57x, financials whacked it and took the most active slots - all down.  HY adv/dec ratio was 1.08x (lower, but still positive) - Ally got whacked and Harrahs kept up the good work.

Steepen it up.

Australian iron-ore mining company Fortescue Metals Group Ltd. is looking to raise US$2 billion in the U.S. and European bond markets, according to two people familiar with the matter, as the miner accelerates its expansion plans to capitalize on the currently high price of iron ore.The Perth-based miner, Australia's third-largest listed producer of iron ore behind global giants Bhp Billiton Ltd. (BHP) and Rio Tinto Ltd. (RTP), refinanced another portion of its debt on Oct. 10 in order to give it flexibility to expand.

Forex:

Dollar breather.  Here's an interesting chart:  commodity duel.

Errata:


Seagate Technology Plc, the world’s largest maker of disk drives, is in talks to be purchased by TPG Capital and KKR & Co., according to people with direct knowledge of the discussions.The private-equity firms are considering an offer of about $16 a share, which would value the company at $7.55 billion, said two of the people, who declined to be identified because the discussions are private. The firms are looking to contribute about $4 billion in equity and may seek other private-equity funds as partners, the people said. The new old thing.  Careful, corporate buyers get a strong COC with an "any" agency downgrade provision.


Four private-equity firms are exploring bids for Northrop Grumman Corp.’s shipbuilding unit, which may draw offers for at least $2.5 billion by a deadline next week, said people with knowledge of the matter.Bain Capital LLC, Carlyle Group, KKR & Co. and TPG Capital have been examining the unit’s finances and meeting with its executives, said the people, who spoke on condition of anonymity because the talks are private. The price may range from $2.5 billion to more than $3 billion, the people said.

More than 100,000 U.S. homes were seized by lenders in September, a record number that probably will decline in coming months as major banks halt repossessions and review their foreclosure practices. Lenders took over 102,134 properties last month, RealtyTrac Inc. said in a report today. That was the highest monthly tally since the company began tracking the data in 2005, surpassing the August record of 95,364. Foreclosure filings, including default and auction notices, rose 3 percent from the prior month to 347,420. One out of every 371 households received a notice.Click your heels three times - its getting better, its getting better, its getting better.

U.S. video game industry sales fell in September, painting a potentially grim picture for the crucial holiday shopping season.U.S. sales throughout for video game software, hardware and accessories fell to about $1.2 billion, a drop of 8% from roughly $1.32 billion in the same month a year earlier, according to market research firm NPD Group. Analyst Anita Frazier said the slowdown particularly hit video game hardware makers, whose sales fell 19% from the previous year. ZAP!


Warren Buffett's Berkshire Hathaway Inc. sold 370,146 shares of Moody's Corp. (MCO), as the conglomerate continues to pare down its stake in the credit-rating company. Thursday's share sale is the latest in a series. Berkshire has been shaving its stake in the company in fits and starts for more than a year. Last month, the company sold nearly 2 million shares. With the latest sale, Buffett's company now has 28.5 million shares of Moody's, while its stake remains about 12%. The sale, at a price of $27.65 per share, was worth $10.2 million. Moody's had about 236 million shares outstanding as of June 30.

Reverberations from the economic crisis are continuing to hit oil and gas drilling in the North Sea as companies focus on cash flow and cost control, said a report from consultancy Deloitte Friday. In Norwegian waters, just seven exploration or appraisal wells were drilled in the third quarter, an unusually large decline of 56% from the same period in 2009, the report said. Across the first nine months of 2010, drilling activity was down 30% on year. Twenty-four exploration and appraisal wells were drilled on the U.K. continental shelf in the third quarter, a fall of 20% on year, the report said. Drilling activity across the first nine months of 2010 was 9% lower on year. 

Bottom line:  Trades remain in place with long midcaps, long intermediate treasuries, short long treasuries, long LQD, long Aussie and Loonie.

Wednesday Market Recap

Another day, another dollar (or two).  Equities better, short/intermediate treasuries better, credit better - its all good.

Fixed Income:

Secondary volume increased today in both IG and HY space.  Decliners lead advancers in IG space with a 0.87x ratio and the unstoppable HY advancers lead decliners by 1.55x.  WaMu had a decent gain on the news of the tax payment (see earlier post) and Harrahs had decent returns today as well.  All financials in the most active in the IG arena.

Decent new issue calendar today, with Raytheon leading the charge with $2B across 5s,10s and 30s - personally thought it was kinda tight.   Post Properties priced $150MM of 7yr paper at +300 - Decent value here, a nice steep credit curve.

From Bloomberg: Companies are selling debt that protects bondholders against credit-damaging mergers at a record pace as Blackstone Group LP, Bain Capital LLC and other buyout firms announce takeovers at the fastest rate since 2007.
Forty-five percent of bonds sold in the U.S. and Europe by investment-grade non-financial companies last quarter contained a so-called poison put, compared with 40 percent in the three months ended in June, according to data compiled by Bloomberg. Use of the provision, which lets investors sell debt back to the issuer at a premium in an acquisition, has doubled since 2008.The covenant they are talking about is the change of control covenant which requires the issuer to purchase the debt at $101 if there is a change of control that leads to non-investment grade ratings (gotta watch the verbiage in the COC - any of the agencies vs. each of the agencies for a downgrade below IG).  Funny, but the market doesn't seem to price in a premium for the covenant until the sh#t hits the fan, then look at the difference in Px - example is SLE where COC bonds came to rest around $101 while non-COC bonds got cracked around 20pts.

Story here: Bloomberg COC

Treasuries muted.  Rally still has legs though, IMHO.

Equities:

Energy, Materials and Industrials clear winners in the S&P500.

Interesting fact (from S&P):  Standard & Poor’s, the world’s leading index provider, announced today that of the approximately 7,000 publicly owned companies that report dividend information to Standard & Poor’s, only 35 decreased their dividend payment during the third quarter of 2010 marking a continued, dramatic improvement from the 135 that lowered their dividend payment during the third quarter of 2009.   Dividend increases rose 56.4% during the third quarter to 299 from the 191 recorded during the third quarter of 2009.  Year-to-date, 117 have decreased their dividend payment compared to 730 for the corresponding period last year, representing an 84% decline in negative news. 1033 issues have increased their rate so far this year, a 46% gain over the 707 issues that did so last year.

Howzabout a little growth vs Value?

 

Yeah, didn't surprise me either.

Little market cap action?

Difference between the two narrowed, but not enough to make me want to swap into small caps.

Currencies:

Another day, another kick in the teeth for the dollar (well deserved and policy intended).  The headines today: 

Canadian Dollar Climbs To New Multi-month Highs Against Greenback; 
Australian Dollar Jumps To New Multi-year High Against Greenback 
Dollar Plunges To Fresh 15-year Low Against Yen

Now, have I been saying to get a little loonie?  Go down under?

Errata:

AOL Inc. and several private-equity firms are exploring making an offer to buy Yahoo Inc., according to people familiar with the matter, devising a bold plan to marry two big Internet brands facing steep challenges.
Silver Lake Partners and Blackstone Group LP are among the firms that have expressed interest in teaming up with AOL to buy Yahoo or trying to take it private on their own, these people said. They added that at least two or three other firms could be interested in participating if a formal buyout proposal is drawn up.

The U.S. increased its crude-oil price forecast for 2011 by $1 a barrel on projections that global economic growth will lead to higher demand and that inventories in industrialized nations will decline.
West Texas Intermediate oil, the U.S. benchmark grade, will average $83 a barrel next year, up from a September forecast of $82, according to the Energy Department’s monthly Short-Term Energy Outlook. The estimate includes an assumption that OPEC will boost its output as prices rise, tempering a bigger gain.

Bottom line:  Short long treasuries (TBF), long intermediate treasuries (IEF), long corporate bonds (LQD), long midcap growth (IWP), long A$ (FXA), long loonie (FXC).  You want an equity market neutral strategy?  Short SPY (a long SH position), long IWP.  This is from a long-only viewpoint.  Thought I might want to start trying to put it in action.  THOUGHTS????

 Good luck, lets be careful out there.

Tuesday Market Recap

Its Tuesday and we are back to watching scrolling/flashing numbers on our monitors (some were doing just that yesterday, but I was winding up a camping trip), as the market waited for FOMC minutes and clues as to the next round of stimulative policy actions (QE2...).  Well, the minutes were released and just what everyone thought would be included was (I'll paraphrase): "Holy cow, its not working like we thought, lets do some more."  On this, bonds rolled over and equities went positive, guess we know what is driving the markets.  This should tell us a lot.  Investing on hoped for policy actions cannot be sustained (as they say, hope is not a strategy) and typically ends up bad.  Thoughts?? (yeah, I keep asking, but to no avail).  Anyway here's some numbers:

Fixed Income:

Lower secondary volume than usual today and decliners lead advancers in IG space (0.84x).  High yield just kept on rolling with an advance/decline ratio of 1.04x.  Citi's bonds lost some ground today, and financials were the most active today (only 2 of 10 that weren't financials were Hess (Baa2/BBB) and Anadarko (Ba1/BBB-) with Hess down and APC up).

The curve:

Treasury 30-year bonds yielded a record 1.39 percentage points more than 10-year notes on speculation the Federal Reserve will buy medium-term debt as it tries to keep down borrowing costs.The longest maturities, those most sensitive to inflation, lagged behind shorter-term notes after the Fed said yesterday is prepared to ease monetary policy to keep costs in the economy from falling. The Treasury is scheduled to sell $21 billion of 10-year notes today and $13 billion of 30-year bonds tomorrow. 

Good day for German Bunds, JGBs rolled over, Britain rallied and AUS steepened as the long end sold off.


Equities:

First the numbers:

Financials lead the pack higher on favorable FOMC minutes:  Here's some intraday:

Financials intraday:

On the growth/value front, no change:

Midcap continuing its lead versus small caps (I still think its too early for small caps, and I am looking for signs of real growth to determine a fundamental and sustainable inflection point):

ForEx:

Apparently, forex traders believe that further quantitative easing will be detrimental to the dollar (ya think?).


Errata:

The FDIC, which had delayed its vote at the request of members of the Financial Stability Oversight Council, today proposed a temporary rule asserting that all creditors must be prepared to absorb losses in an agency-run liquidation. Some may continue to receive payments to maintain system stability or maximize recoveries, the FDIC said. Attempting to assuage banking-industry uncertainty about how creditors would be treated in a resolution, the FDIC included a provision barring shareholders, long-term bondholders and subordinated debt holders from bridge entities formed to manage healthy parts of failed firms. Some short-term creditors might be brought into a bridge entity if they are deemed essential to its operation.


Well, there ya have it - QE2 cementing the administration policy entitled "stocks go up always".

Good luck, lets be careful out there.

Fed Minutes - More Pushing on a String?

Fed minutes from Reuters (emphasis mine):

(Reuters) - Federal Reserve officials believed in September the struggling recovery might soon need more help, and they discussed several ways to provide support, including the possible adoption of a price-level target. Policy-makers had a "sense that (more) accommodation may be appropriate before long," the central bank said on Tuesday.

In minutes of the its last policy-setting session held September 21, the Fed said officials discussed several approaches to aiding the economy but focused on buying additional longer-term Treasury securities and ways to nudge the public into expecting higher levels of inflation in the future.To help shift inflation expectations, policy-makers debated providing more detailed information about what rates of inflation they would prefer, or the possibility of making clear they would tolerate a higher level of inflation on a temporary basis, a policy approach known as price-level targeting.

They also discussed the possibility of targeting a path for GDP growth. 

The September meeting's minutes showed a number of Fed officials were close to pulling the trigger. "Many members considered the recent and anticipated progress toward meeting the committee's mandate of maximum employment and price stability to be unsatisfactory," the Fed said.  Several officials felt that unless conditions improved, they would consider it appropriate to take action soon in hopes of spurring a stronger recovery.

This could be a set up for QE2, but recent comments (see earlier post) might contradict the message.  Always take new comments versus prior comments.  Stocks lift on QEHope.  Myopic.

S&P Earnings Estimates Cut

Estimates for S&P 500 companies’ combined 2011 profit fell as low as $95.17 last month from an August high of $96.16 and posted the first quarterly reduction since the three months ended June 2009, according to more than 8,500 analyst forecasts tracked by Bloomberg. The revision came as the benchmark gauge for U.S. equities rose 8.8 percent last month, the largest September advance since 1939.

A massive one moth rise followed by an earnings cut.  Nice.

Read it all here:  S&P Earnings Cut

Market Review Friday/Sunday

Yeah, I didn't get to posting the recap on Friday (or anything since), but sometimes a fella has work outside the blog to do.  Anyway, here goes:  A quiet Friday in bonds - primary and secondary markets were light compared to recent days,equities were up a bit, and US$continued its fall.



Fixed Income:

Secondary volume was light on Friday as only $15B of straight corporate debt changed hands.  Adv/DEC ratios for IG and HY were 1.05 and 1.03, respectively.  Ig still has some room IMHO, as does HY, although high yield looks like its getting heady although fund flows into both are still strong.

The curve steepened a bit, with 30yr bonds trading down while other maturities traded up marginally.  QE2 (or the equivalent) ought to help put a floor under prices (see article below).  I think that govvies still have room to move up given the somewhat lackluster economic data we have seen recently and the policy goal of increasing employment and stabilizing housing.



Elsewhere in bond market news: 

• China offered on Saturday to buy Greek government bonds when Athens resumes issuing, in a show of support for the country whose debt burden pushed the euro zone into crisis and required an international bailout. Premier Wen Jiabao made the offer at the start of a two-day visit to Greece, his first stop on a tour of Europe, and also said he wanted to boost shipping and trade ties with Athens, underscoring Beijing's use of economic strength to win friends.  "With its foreign exchange reserve, China has already bought and is holding Greek bonds and will keep a positive stance in participating and buying bonds that Greece will issue," Wen said, speaking through an interpreter. 
• Federal Reserve policy makers are now debating how to deploy tools for more unconventional easing as two top officials indicated action may be needed to lower unemployment persisting near 10 percent.
  “Further action is likely to be warranted unless the economic outlook evolves in a way that makes me more confident that we will see better outcomes for both employment and inflation before too long,” New York Fed president William Dudley said yesterday. His comments, following Chairman Ben S. Bernanke’s statement on Sept. 30 that the Fed has a duty to aid the economy, indicate that the outlook has weakened enough for action, said former Fed Governor Laurence Meyer. Dudley, vice chairman of the Fed’s policy-setting Open Market Committee, said additional securities purchases can have a “significant” effect on the economy.
   

Equity:

Stocks rose modestly as higher-than-estimated consumer spending and confidence were somewhat offset by a drop in manufacturing. Financial stocks rebounded, and energy firms rose as crude oil futures hit a seven-week high














Growth - value continues its divergence generally, what is interesting is that in large cap space, value is making a run at growth.






Currencies:


Reserve Bank of Australia will have their interest rate announcement tomorrow (10/4).  Due to the hawkish stance of policy makers, we might see a 25bp increase in the benchmark rate to 4.25%.  This should help support (and drive) the Aussie due to its high yield.

Key Pairs:

Watch the Euro as it has been testing highs.  It is off slightly in Asia (as of this writing).  I like the yen vs. euro, A$ and C$ vs. US$.  One thing that could throw the wrench in these though is if Europe rolls over again (still?) and investors keep showing the love to the US cap markets.








Asia is currently pointing to a higher US open.  Good luck this week, lets be careful out there.

GDP Thoughts

Looking at the US GDP release for some clues as to the corporate condition, I do not see much to be overly optimistic about.

1.    Profits from current production (corporate profits with inventory valuation and capital consumption adjustments) increased $47.5 billion in the second quarter, compared with an increase of $148.4 billion in the first quarter.  Current-production cash flow (net cash flow with inventory valuation  adjustment) -- the internal funds available to corporations for investment -- increased $61.1 billion in the second quarter, compared with an increase of $33.3 billion in the first.  The cash flow number looks pretty good.

2.Domestic profits of financial corporations decreased $3.4 billion in the second quarter, in contrast to an increase of $5.2 billion in the first.  Domestic profits of nonfinancial corporations increased $48.2 billion in the second quarter, compared with an increase of $117.2 billion in the first. 

3.    Profits before tax increased $15.3 billion in the second quarter, compared with an increase of $224.5 billion in the first.  The before-tax measure of profits does not reflect, as does profits from current production, the capital consumption and inventory valuation adjustments.  These adjustments convert depreciation of fixed assets and inventory withdrawals reported on a tax-return, historical-cost basis to the current-cost measures used in the national income and product accounts.  The capital consumption adjustment decreased $0.8 billion in the second quarter (from -$169.9 billion to -$170.7 billion), compared with a decrease of $106.9 billion in the first.  The inventory valuation adjustment increased $32.9 billion (from -$36.4 billion to -$3.5 billion), compared with an increase of $30.8 billion.

While Positive, we can see that corporate profit growth is slowing (as of Q2) and I would not be surprised to see it slow further in Q3.

Stocks are rallying on the news.  What exactly is there to cheer about?  The overall GDP number - +1.7% - was above expectations (+1.6%), but by no means strong. Prices are under control (+0.1%) and possibly heading lower (this, however, would not be good) and personal consumption was better (+2.2% vs +1.9% in Q1).  

Treasuries are rallying on the news (this I get), shaving a couple of bps off their yield.  10s are now 2.48%, 5s at 1.26%.

Yee haa, always moving.  Good hunting. 

Wednesday Market Review

Another day of light volume in the markets as participants digested statements by Fed members and data while taking a breather.  Risk traded lower (except HY) as a result.  Will have to see what impact the political posturing by the US towards China has on US markets tomorrow.

Fixed Income:

Investment grade turned in its first day of decliners outpacing advancers in a while at 0.90x on lighter volume.  HY advancers trumped decliners by 1.37x on better volume.  Bigger gainers today were BP, GE and AIG in IG space and Lehman, F and Clear Channle in HY space.
Pretty light new issue calendar today as well.

US Govvies sold off a bit today, despite the strong 7yr auction.  10s-30s curve flattened as 10s lost a bit more than 30s.  Elsewhere in the world Japan, the UK and Australian govt markets had a positive day, while German and Hong Kong markets lost ground.





Equities:

Primary indicies were down across the board today with concerns over the banks continuing and expectations of weaker growth.  I expect that this weakness will continue, although I have been proven wrong thus far.

IT the only sector to produce positive returns today.  Financials and materials lead the pack lower today.  What has changed in the last two days is beyond me.

Small caps outperformed today, turning in a modestly positive performance.  Growth continues to outperform value (no surprise).












Currency:

Another day, another kick in the face for the dollar.  The Euro continues to surprise me. While one might impulsively say it is dollar weakness not euro strength, the EUR/JPY and EUR/GBP pairs contradict this.  Also interesting is the decline of the Loonie despite commodity strength.


Commodities:

Its all good here.





Suggestions?  Thoughts? Comments?  Would love to hear them.  Am I missing something?  Anyone want to provide "boots on the ground" insight?  Come on, I know you're out there.


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