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November 6, 2009
MARKET OVERVIEW
SECTOR OVERVIEW
What's HOT
--Checking in with TK Ng
Beating the Markets with Megatrends and ETFs--Continued
Former VE Analyst and Quant Guru T.K. Ng published the following on his Blog "Random Thoughts"
recently. It has been edited and re-published for our Weekly Newsletter. The original version can be
found HERE.
An often-noted feature of current financial markets is that when US equities go up, the US
dollar goes down--and vice versa. All other things being equal, a strong demand for the
assets of a country--in this case its stocks, should result in its currency rising. However, the
US dollar doesn't work that way. The dollar is the world currency of last resort, and the US
stock market also dominates and is considered the most liquid in the world. This dominance
and liquidity means that an unusual sequence of events occurs: US equities fall-----> world
markets fall----->investors flee to safety of US$.
This negative correlation can be seen in the chart below, which tracks the LTM performance
of the Dow--blue line, and Dollar--red line, via a couple of popular ETFs. I added the recent
general trend lines in red and we see that as US equities bounced from the bottom, the dollar
suffered a decline in value. The pattern is most clear and firm after the stock market lows of
March 2009.
DIA DOW ETF, UUP US$ Index ETF
Will this firm negative correlation between US$ and US equities remain? That is the big
question. In my view, the gradual long-term decline of the US$ versus major world currencies
is likely to continue given the trillion dollar debts that the US government has run up via the
wars in Iraq and Afghanistan as well as the stimulus and bailout packages of the Bush and
Obama Administrations.
The decline will be buffered somewhat by the fact that the dollar remains the currency of last
resort and there is still strong demand for US Treasuries. This is so because the emerging
countries that are buying Treasuries are not able to re-invest their export earnings elsewhere.
Also, by buying US Treasuries, they are keeping their currencies down so as not to endanger
the competitiveness of their exports.
However, should another drastic and significant drop occur in US equity markets --whether
due to a disastrous drop in corporate earnings or another round of credit crunch or some
other factor, we could see an alteration in the mildly negative rate of correlation between the
dollar and equities. If that were to occur, then we could see a falling US stock market along
with a falling US dollar.
How can we make a play on this analysis? If you feel the that the US deficit, spending, and
political unwillingness to deal with the economic crisis at home will lead to a further
weakening of the dollar, why not invest in that belief? Using the PowerShares DB US Dollar
Bearish ETF (UDN)-- which is the inverse of the US$ Index, we can short the US$.
If other equity markets remain strongly correlated with the DJIA, a fall in US equities will also
cause a corresponding decline in Asian and other emerging markets. However, although I
still believe in the the positive correlation between US and other Asian markets [excluding
Japan], I also feel that this situation will decrease over time-- i.e. Asia will continue to "de-
couple" from the US. Therefore, while shorting the US$ via UDN, consider taking on more
foreign market exposure if there is another dip in the US equities markets.
Consider the chart below, here we see the relative performance of several ETFs that cover
Asia vs US stocks. As you can see, US equities have been lagging markets in Asia.
DIA DOW ETF, AAXJ MSCI All Asia Ex-Japan ETF, FXI Xinhua China 25 ETF, IDX Market Vectors Indonesia ETF
There are many ETFs which allow investors to accomplish this goal. As we have noted
before, iShares MSCI All Asia Ex Japan (AAXJ) provides exposure to a wide-range of Asian
markets. If you want a more concentrated--albeit more volatile--approach, you can gain
exposure to just China through the ETF of the Xinhua China 25 (FXI). Or, if you want to be a
pioneer, get in early on Indonesia during a pullback via the Market Vectors Indonesia Index
ETF(IDX).
Commodities
Comex Gold reached a new all time high at $1098.5 on Wednesday,
which is above my quarterly pivot at $1094.4, but shy of my semiannual
resistance at $1101.9.
Comex Copper is above its 200-week simple moving average at 294
with monthly resistance
at 324.5. Weekly support is at 286.2.
Nymex Crude oil is above its 200-week simple moving average at $75.45 with a weekly pivot
at $79.17 and quarterly resistance at $83.16.
The Fed ignores the charts for gold, copper and crude oil, the same mistake the
Greenspan / Bernanke Feds have made since 2000. The FOMC now says that they will
keep the Funds rate at zero to 0.25% for an extended period--thus endorsing the dollar-carry
trade (which fuels commodity speculation and hence future inflation). The seeds of inflation
are planted in the charts for commodities--this is a dumb thing to ignore.
This will lead to yet another failed Fed Policy!
Banking
The America’s Community Bankers Index (ABAQ) – is approaching its July 10th low at
131.76, and is down 27.3% year to date. The daily chart is oversold, but the 21-day simple
moving average at 146.40 is below the 50-day at 147.74, and these are converging towards
the 200-day at 143.63. This is the source of future bank failures.
The Regional Banking Index (BKX) – is down 5.8% year to date with the S&P 500 up 15.9%
year to date. The BKX has become oversold with the 21-day and 50-day simple moving
averages crossing into negative territory as resistances at 44.75 and 46.12. The 200-day is
support at 36.90.
No Job Creation = No end to Recession. Banks will lead the return to the multi-year Bear
Market that began in October 2007--ABAQ peaked in December 2006, while BKX peaked in
February 2007. I first called the 2008-09 recession and the subsequent market declines in
March 2007!
There can be no bull market with a bear market in community and regional banks!
The Fed
The Fed's most recent Statement shows a total lack of confidence that the 3.5% GDP
growth can be sustained. They are endorsing the dollar-carry trade-- which fuels commodity
speculation and inflation expectations.
The FOMC says that economic activity continued to pick up since their September meeting.
Yet conditions in the financial markets were roughly unchanged--which is surprising given
comments by Bernanke and Geithner that conditions were improving. They are
cheerleading but lack the confidence that the team can win!
The FOMC says that household spending expanded but remains contained by ongoing job
losses, sluggish income growth, lower housing wealth and tight credit. This is why community
and regional banks led the market lower in late trade on Wednesday.
The FOMC says that businesses are still cutting back on fixed investment and staffing--
albeit at a slower pace. “Although economic activity is likely to remain weak for a time, the
Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal
and monetary stimulus, and market forces will support a strengthening of economic growth
and a gradual return to higher levels of resource utilization in a context of price stability.”
Again, this demonstrates a lack of confidence-- just as we saw at the September FOMC
meeting.
Jobs
Nonfarm Payrolls declined 190,000 with the unemployment rate reaching an historic 10.2%.
Most important is that hours worked stayed anemic at just 33.0 hours. The underemployment
rate is 17.5%.
Initial Jobless Claims came in at 512,000 last week was well above the 350,000 threshold
that correlates to Recession. Congress has extended jobless benefits by another twenty
weeks, which should keep jobless claims well above 350,000 for an extended period.
Productivity levels are extremely high because lower business activities are being
accomplished by much fewer workers.
Former Fed Chief Alan Greenspan has opined that it would take several months of
100,000 plus job growth before the unemployment rate starts to decline.
Housing
Even though the Federal Housing Authority (FHA) has tightened credit standards, many
mortgages issues in 2007 and 2008 mortgages are turning sour. Defaults on loans
guaranteed in 2007 are at 24%, loans in the first half of 2008 about 20% sour. At fault is
Congress, who encouraged the FHA to save as many homeowners as possible by refinancing
loans that should not have been issued in the first place.
Later this month the FHA will disclose that their level of reserves has fallen below the
federally mandated level for the first time in its 75-year history. The FHA, which doesn't make
loans but insures lenders against losses if a borrower defaults on mortgages where the
borrower has made a down payment of as little as 3.5%. This guarantee includes half of all
home-purchase loans made in the country’s hardest-hit housing markets. This policy has
added to the potential burden on taxpayers if home-price declines resume.
In addition, delinquencies on refinance loans are rising faster than those on new loans for
the past three years. It seems like the FHA is attempting to restart a housing bubble by taking
on riskier loans beginning in 2007, by guaranteeing loans of borrowers with credit scores of
less than 600. Sources say that these types of loans were increased by FHA to 37% in 2007,
up from 30% in 2006.