Have The Stock Market Bulls Gone On Holiday

By: PaddyPowerTrader

The bulls have finally gone on holiday as investors deem it prudent to take some risk off the table ahead of the Fed’s pronouncements tonight post 7pm and the retails sales number due Thursday 13.30. Double the expected drop in wholesale inventories and marked weakness in financials were the main culprit with Citibank down after being sued by seven Norwegian local authorities on the back of some alleged mis-selling of derivatives.

Bank of America also showed up in the red after Rockdales’ analyst Dick Bove said delays over settling an SEC case (which is being opposed by a judge) is hurting the stock. CIT shares tanked after delaying its 10-Q filing and the note is out that the company may have to file for bankruptcy if it cannot get new financing or complete a debt tender. The S&P 500 is now back to where it was prior to Friday’s payrolls report. Indeed the S&P 500 looks set for further weakness in the short-term. 950 is a potential short-term target as it is both its uptrend support and support from the previous high in June. 950 is also the 50% retracement of the recent sharp rally that commenced in early July and is in the proximity to the 50 day.

Today’s Market Moving Stories

• In a case of a bear in a china shop, China’s Shanghai Composite Index ended 4.7% lower at 3112.72 , a one-month low, as investors took flight amid mounting concerns government-led investment and lending growth are beginning to moderate. The share-price decline came a day after the People’s Bank of China said lending by Chinese banks totalled $52.1 billion in July, a decline of 77% from the prior month, and fixed-asset investment growth eased to 30% in July from a rise of 35% in June.
• The US ABC consumer confidence rose from -49 to -47 with the state of the economy -84 (-84 previous) personal finances -6 (-12) and the buy ing climate -50 (-52). In contrast the US small business optimism index provided quite a gloomy outlook with the details of the report suggesting profits are being squeezed, earnings trends are weak and sentiment fragile. Only 5% of those surveyed suggested now was a good time to expand.
• The Bank of Japan’s Governor Masaaki Shirakawa said that “it would be important to have an appropriate built-in exit mechanism which reduces the incentive to use the [extraordinary credit] facility as market functioning recovers”. He noted that some time would be needed before various excesses in the private sector are unwound and the economy can return to a sustainable growth path. Japanese wholesale price fell a record 8.5% yoy in July, a slightly greater drop than the consensus forecast of -8.7% and a significantly larger fall than the 6.7% decline recorded in June. The slide was largely due to halving in oil prices in the previous twelve months.
• White House economic adviser Larry Summers said “in more obvious indicators like the stock market, less obvious indicators like credit spreads, the spread between LIBOR and federal funds, forward markets and what they suggest about housing prices…what one sees is a substantial return to normality”. However, he added: “We have a long way to go… The problems were not created in a week or a month or a year and they will not be resolved in a week or a month or a year.”
• Closer to home, ECB Council member Erkki Liikanen believes that “recovery of the financial markets is such that we are now in a better situation than before the Lehman crisis… Nevertheless one has to say there is uncertainty in the air. There are some first signs of a turnaround… although the situation is better (financial crisis) is not completely over.” He added: “During the latter part of this year we will see more precisely whether the bottom has been reached in the Eurozone”.
• For those of you who have been following my posts and aren’t actively trading the lads in paddypowertrader are running a trading game. There are decent prizes for it and it might be worth opening an account.
• Some deep thoughts on why America isn’t working. Ron Paul and Peter Schiff have been calling out the faulty underlying economic principles in the US economy for years.
• A recovery that only a statistician could love. Data that points to an improving economy also suggests continued pain for many.

Irish Snippets
Smurfit Kappa has reported Q2 results slightly ahead of forecasts with EBITDA of €184m. Of greater significance however is the announcement of a €60/tonne increase in containerboard prices from September 1st. This is in response to rising input costs and if it succeeds (a big if), it would be a significant positive for Smurfit Kappa and the sector as they can’t keep on producing at a loss. There are actually rumours that rivals are looking to increase prices by €100/tonne. Sounds like a bit of a cartel to me!

The Irish Supreme Court yesterday dismissed the appeal by six companies controlled by developer Liam Carroll against the High Court’s decision to refuse to appoint an examiner. The companies sought court protection when ACC Bank commenced winding-up proceedings to recover its loans of €136m. Yesterday’s decision paves the way for ACC Bank, and other banks, to take action to recover their loans. There has been some misplaced talk that such an outcome could sink NAMA even before she’s set sail. A receiver may well discover that NAMA is the only realistic buyer out there. NAMA may well yet be nicknamed TINA i.e. There Is No Alternative! A spokesman for the Department of Finance has said that the Carroll decision will have no impact on NAMA and it will proceed as planned.

Data Ahead Today
UK unemployment for June will be released at 09:30. The key issue is how/if the increasing gap between the improving claimant count and deteriorating labour force survey measures of unemployment resolves itself. The claimant count should rise by 35K in July, nudging the unemployment rate up to 4.9%. Employment should fall by 295K. Earnings should be benign with ex-bonuses growth edging lower to 2.5%, while total earnings should tick up to 2.4%.

Euro area industrial production for June is due at 10:00. Output should rise by 0.5%, meaning production fell by 2.6% in Q1 after a 7.5% drop in Q1.

At 10:30 we’ll get the Bank of England (BoE) inflation report. The MPC surprised the City by announcing a £50bn extension of Quantitative Easing (to £175bn) at its August meeting. The accompanying statement did little to elucidate the BoE’s thinking – it is far from clear what the decisive factors were. The MPC Minutes from the previous meeting (on 8-9 July) stated that: “Overall, little evidence had emerged since May to change the Committee’s views about the broad shape of the prospects for the economy in the medium term, although the downside risks to GDP in the near term had probably diminished”. Hence, the first thing the Governor will be required to do will be to explain what changed since the July meeting. In my view, the predominant theme over the past month has been the improvement in economic survey data and financial market sentiment (equity rally).

At 13:30 the US trade balance is out. The trade deficit should widen a little to $29bn.

Then at 19:15, we get the Fed’s interest rate decision. Rates will be left on hold and the Fed will probably want to lean against market expectations of hikes, while maintaining its flexibility. Regarding Quantitative Easing, my overriding belief is that there will be no meaningful expansion in the Treasury buying programme, which has a ceiling of $300bn. Overall they don’t want to rock the boat now.

Earnings from Macy’s.

And Finally… The Wall Street Bum

Disclosures = None

By The Mole
PaddyPowerTrader.com

The Mole is a man in the know. I don’t trade for a living, but instead work for a well-known Irish institution, heading a desk that regularly trades over €100 million a day. I aim to provide top quality, up-to-date and relevant market news and data, so that traders can make more informed decisions”.© 2009 Copyright PaddyPowerTrader - All Rights Reserved
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