The wave of austerity measures, cost cutting, and tax increases across Europe, Asia, and the United States may be getting ahead of itself. On the plus side, plans to get the “fiscal house in order” have been pushed off to a more reasonable timeframe. Don’t forget, the IMF and ECB were looking for Greece to get back under 3% debt to GDP by 2012 initially. As it became evident that more countries were in trouble, the timeframe was pushed out. However, Britain and Japan have joined in the call. With the US debts piling up, the pressure is on to raise taxes in the US and to cut expenditures. It looks as though a great deal of attention is being put on cutting Social Security, or at least raising the retirement age. Unfortunately, that will have an impact as well, keeping older people in the workforce, taking up jobs that would otherwise be offered to the younger population. Such a move could prolong higher unemployment. Globally, the call to cut spending and increase taxes should slow growth, if not cause a recession in many countries. The problem is that we are all facing a debt crisis at the same time. Not everyone can look to take drastic measures without causing a deflationary spiral, and that is the fear that is pushing to the surface following the G-20 meeting.
Now called the G-20 Pledge, governments are looking to cut their deficits in half by 2013 and reach stability by 2016. If, “as goes the US, so goes the world”, one must ask, have you met our congressional leaders? However, the US does seem to be on a better economic footing, despite the high debt levels. The Dollar firmed and the Euro slipped back under 1.23 to 1.2277. Its 21-day trading moving average is at 1.2215 and the low last week was 1.2209 versus the Dollar. Keep an eye on this low. If we break below 1.2209, we would likely be in for a test of the June 7th low of 1.1877 (although a “test” does not mean you have to see a print at that level). The recent rally high of 1.2487 will be coincident to the Euro’s falling 10-week moving average, which is currently at 1.2522 and falling about .0025 per day. Therefore, resistance at the 1.25 level is what traders will start watching. This is a fairly narrow range and one of which the market will be keenly aware.
After significant Treasury auctions proved to be of little impediment to the global desire for our debt, the yields on Treasuries across the curve fell yesterday. The benchmark 10-year yield fell to 3.02%, the lowest level since seeing the end of the post-financial collapse of the banking system in April 2009. There is excellent support under 3.0%. However, there is a fairly well-defined longer-term “double-top” formation with the high yield at 4.0% and the intervening low at 3.1044. Any technician can tell you that the range of the double top projected down will give you the target. That would be 2.20%, slightly above the record low of 2.025% seen in December 2008. Yield is not the same as a stock or index. Approaching zero is not an option. Every tick lower in yield requires a significant flight to safety issue, especially at this level. Therefore, I would take the short-term potential for seeing a lower yield in short-term increments. The recent “wedge” gives us a potential target of 2.91%. Since its 21-day moving average is coincident with the very sharp downtrend line, we would advise using this as a rolling stop. The 21-day closed yesterday at 3.2153%.
Earnings expectations are front and center. We are just weeks away from the official start of the season. Recent reports from companies that are not on the calendar year suggest earnings projections will be in-line, but that the forward-looking statements will express a great deal of caution. This was at the heart of the recent market decline. The S & P fell from a high of 1130 to its closing low yesterday of 1074 on the cautious outlook being expressed by those companies that have reported. The economic outlook has also been rather mixed. Housing is clearly the largest negative issue. Unfortunately, these data are going to be skewed by a post-stimulus slump in sales. We all knew it was coming. Now it’s just a matter of how deep and how long it will last. It was a tough week and it won’t be made any easier by today’s S & P/CaseShiller Home Price Index. The expected increase in home prices reflects the expectation that the data are pumped up through June to reflect the increase in sales at closing. This is an April reading, which is expected to show a rise to 144.3 from 143.3.
The economy isn’t exactly heading into the third quarter with any robust strength. Personal Incomes in May rose 0.4% after a healthy increase of 0.5% in April. Expectations were for a rise of 0.5%, but April was revised up one tenth, so the two months combined are on target. Personal Spending rose 0.2%, slightly ahead of the 0.1% anticipated. At least the consumer is not completely dead. The Dallas Fed released its regional manufacturing activity report for June, -4.0, down from 2.9. An increase to 3.2 was anticipated, so it was a bit of a disappointment. In fact, most of the component data turned red. Production fell to -1.9 from 20.8. New Orders fell to -8.2 from 18.7. Shipments slid to -9.0 from 14.8. Only Capacity Utilization was in the green at +2.7, but still down dramatically from +18.7. The only piece of good news was that Inventories were also down, slipping to -8.6 from -4.6. What this suggests is that companies were anticipating a slowdown in activity and accurately adjusted production, still using available inventory to make up for any shortfalls. This is an indication of being “lean and mean”. As disappointing as it is on the jobs front, companies are ahead of the curve.
The averages started the week in the red. The modest losses were accompanied by the lightest volume we’ve seen since early April. As the quarter draws to a close, we may see some window dressing. However, we still lack the catalyst the market is needs, and that is beating earnings estimates. We expected to see a “consolidation day” after the volume volatility associated with the Russell rebalancing. Yesterday was a success, in that respect. We continue to look for consolidation within the recent trading range. This has been healthy, as the market absorbs the reality of a slower growth economy.
The wave of austerity measures, cost cutting, and tax increases across Europe, Asia, and the United States may be getting ahead of itself. On the plus side, plans to get the “fiscal house in order” have been pushed off to a more reasonable timeframe. Don’t forget, the IMF and ECB were looking for Greece to get back under 3% debt to GDP by 2012 initially. As it became evident that more countries were in trouble, the timeframe was pushed out. However, Britain and Japan have joined in the call. With the US debts piling up, the pressure is on to raise taxes in the US and to cut expenditures. It looks as though a great deal of attention is being put on cutting Social Security, or at least raising the retirement age. Unfortunately, that will have an impact as well, keeping older people in the workforce, taking up jobs that would otherwise be offered to the younger population. Such a move could prolong higher unemployment. Globally, the call to cut spending and increase taxes should slow growth, if not cause a recession in many countries. The problem is that we are all facing a debt crisis at the same time. Not everyone can look to take drastic measures without causing a deflationary spiral, and that is the fear that is pushing to the surface following the G-20 meeting.
Now called the G-20 Pledge, governments are looking to cut their deficits in half by 2013 and reach stability by 2016. If, “as goes the US, so goes the world”, one must ask, have you met our congressional leaders? However, the US does seem to be on a better economic footing, despite the high debt levels. The Dollar firmed and the Euro slipped back under 1.23 to 1.2277. Its 21-day trading moving average is at 1.2215 and the low last week was 1.2209 versus the Dollar. Keep an eye on this low. If we break below 1.2209, we would likely be in for a test of the June 7th low of 1.1877 (although a “test” does not mean you have to see a print at that level). The recent rally high of 1.2487 will be coincident to the Euro’s falling 10-week moving average, which is currently at 1.2522 and falling about .0025 per day. Therefore, resistance at the 1.25 level is what traders will start watching. This is a fairly narrow range and one of which the market will be keenly aware.
After significant Treasury auctions proved to be of little impediment to the global desire for our debt, the yields on Treasuries across the curve fell yesterday. The benchmark 10-year yield fell to 3.02%, the lowest level since seeing the end of the post-financial collapse of the banking system in April 2009. There is excellent support under 3.0%. However, there is a fairly well-defined longer-term “double-top” formation with the high yield at 4.0% and the intervening low at 3.1044. Any technician can tell you that the range of the double top projected down will give you the target. That would be 2.20%, slightly above the record low of 2.025% seen in December 2008. Yield is not the same as a stock or index. Approaching zero is not an option. Every tick lower in yield requires a significant flight to safety issue, especially at this level. Therefore, I would take the short-term potential for seeing a lower yield in short-term increments. The recent “wedge” gives us a potential target of 2.91%. Since its 21-day moving average is coincident with the very sharp downtrend line, we would advise using this as a rolling stop. The 21-day closed yesterday at 3.2153%.
Earnings expectations are front and center. We are just weeks away from the official start of the season. Recent reports from companies that are not on the calendar year suggest earnings projections will be in-line, but that the forward-looking statements will express a great deal of caution. This was at the heart of the recent market decline. The S & P fell from a high of 1130 to its closing low yesterday of 1074 on the cautious outlook being expressed by those companies that have reported. The economic outlook has also been rather mixed. Housing is clearly the largest negative issue. Unfortunately, these data are going to be skewed by a post-stimulus slump in sales. We all knew it was coming. Now it’s just a matter of how deep and how long it will last. It was a tough week and it won’t be made any easier by today’s S & P/CaseShiller Home Price Index. The expected increase in home prices reflects the expectation that the data are pumped up through June to reflect the increase in sales at closing. This is an April reading, which is expected to show a rise to 144.3 from 143.3.
The economy isn’t exactly heading into the third quarter with any robust strength. Personal Incomes in May rose 0.4% after a healthy increase of 0.5% in April. Expectations were for a rise of 0.5%, but April was revised up one tenth, so the two months combined are on target. Personal Spending rose 0.2%, slightly ahead of the 0.1% anticipated. At least the consumer is not completely dead. The Dallas Fed released its regional manufacturing activity report for June, -4.0, down from 2.9. An increase to 3.2 was anticipated, so it was a bit of a disappointment. In fact, most of the component data turned red. Production fell to -1.9 from 20.8. New Orders fell to -8.2 from 18.7. Shipments slid to -9.0 from 14.8. Only Capacity Utilization was in the green at +2.7, but still down dramatically from +18.7. The only piece of good news was that Inventories were also down, slipping to -8.6 from -4.6. What this suggests is that companies were anticipating a slowdown in activity and accurately adjusted production, still using available inventory to make up for any shortfalls. This is an indication of being “lean and mean”. As disappointing as it is on the jobs front, companies are ahead of the curve.
The averages started the week in the red. The modest losses were accompanied by the lightest volume we’ve seen since early April. As the quarter draws to a close, we may see some window dressing. However, we still lack the catalyst the market is needs, and that is beating earnings estimates. We expected to see a “consolidation day” after the volume volatility associated with the Russell rebalancing. Yesterday was a success, in that respect. We continue to look for consolidation within the recent trading range. This has been healthy, as the market absorbs the reality of a slower growth economy.