Succinct Summations for the week ending May 24. Very light data week despite all the noise.

Positives:

1. U.S. jobless claims fell 23k to 340k v expectations of 345k.
2. Housing remains a significant tailwind in the U.S. as existing home sales increase 0.6% m/o/m in April to 4.94M units, the highest reading since November 2009.
3. U.S. new home sales rose 2.3% m/o/m in April to 454k versus expectations of 425k.
4. U.S. April Durable goods orders shows a nice beat, showing a rise of 3.3% v expectations of +1.5%.
5. Durable good ex-trans rose 1.3% v expectations of +0.5%
6. Dow Jones had gone a record 100 days without a 3 day losing streak, that was snapped this week (market could use a breather).
7. Despite a very noisy week, the S&P 500 is up >15% YTD, through May!

Negatives:

1. The Nikkei had a violent selloff Wednesday night, selling off 12.5% peak to trough.
2. The 7% overnight down move is the equivalent of 1,117 Dow points. Only the 10th time in the last 50 years the Nikkei declined more than 7% in a single day.
3. Wednesday saw a nasty reversal in the market with the Dow dropping nearly 300 points from the highs of the day to the lows.
4. The S&P 500 had not been up 1%only to finish down 1% since August 2011 (market came off the lows at the end of day to avoid this).
5. China’s May flash PMI comes in at 49.6 v expectations of 50.4, a 7 month low for the worlds second biggest economy, signaling contraction.
6. Japan’s April exports rose 3.8% y/o/y v expectations of 5.4%. C’mon Abe.
7. Secular decline in the PC market is reaffirmed by HP, whose PC sales fell (Wow!) 20% from a year ago.
8. Bernanke had a difficult time communicating the Fed’s intentions. Mr. Market had a difficult time digesting the fact that tapering can begin as early as this summer.
9. U.S. core capital shipments came in light than expected, declining 1.5% m/o/m v expectations or a 0.5% drop.

Thanks, Mike!

click for ginormous chart

Source: Kimble Charting

 

Awesome chart from Chris Kimble showing the Nikkei going back to 1982 — in particular, the downtrend that began in 1989 and still persists to this day.

Chris notes that Declines of 32% to 60% taken place at this level for the past 20 years!

One would normally expect a pullback and consolidation after a long move up to a major trendline, and under pre-Abenomics stimulus, that would be my highest probability outcome (pre-stimulus, I have no idea!).

The key here is if and when the Nikkei breaks through that trendline, it is likely the beginning of a longer term multi-year breakout. This is why we put on Japan exposure for clients much earlier this year.

 

~~~

Disclosure: Clients are long GAL, DXJ, which have substantial exposure to Japan.

This is the presentation I gave at the IPI yesterday:

It does not look like the best weather this weekend, so I expect to be around to keep you entertained:

• The Smart Money Is Still Bullish (Barron’s)
• Notes from the PIMCO Investment Summit with Mohamed El-Erian (The Reformed Broker) Is this the dumb money?
• With ‘Abenomics,’ Japan catches a sense of revival (WaPo) see also Japan the Model: We are in economic terms, all Japanese (NYT)
• Gold Traders Most Bullish in a Month After Bernanke (Bloomberg)
• The Rules, Part XXXVIII (The Aleph Blog)
• Why pension funds are eating your 401(k)’s lunch (Reuters)
• Tax Two-fer:
…..-In Tax Overhaul Debate, Large vs. Small Companies (NYT)
…..-The Corrosive Effect of Apple’s Tax Avoidance (NYT)
• Four Reasons Housing Recovery Isn’t Yet Boosting Economy (Real Time Economics)
• Android’s Market Share Is Literally A Joke (Tech.pinions)
• Photos: Tornadoes wreak havoc in US (Boston.com’s Big Picture)

What are you reading?

 

World Shakes Off Nikkei’s 7.3% Plunge

Source: WSJ

Since it is a Friday before a 3 day holiday weekend, it is a good time to kick back, and think about what the recent market action might (or might not) mean.

• Most Day-to-day market action is noise, There is very little signal involved, with the vast majority of commentary simply after-the-fact rationalizations of what just occurred.

• Over the years, one of the few exceptions that I have found is the IntraDay reversal. After a long move in either direction, followed by a big flip can be worrisome. (it is not, however, conclusive).

• I do pay attention to days like Wednesday that start out strong and end weak. The caveat: All bets are off on FOMC minute days, as we seem to have a big spike in volatility (someone must have done a study on this).

• Never confuse a forecast with an analysis.

• Consider a day that starts out 150 Dow points up (or down) and ending the day down (or up) 150. That 300 point swing is more significant than a down (up) 300 point day. We sometimes see it at major tops and bottoms, as it reflects an exhaustion of one side in the battle of supply and demand. (Candlestick technicians have the data on shooting stars and dojis; if this interest you see Steve Nison’s book Japanese Candlestick Charting Techniques).

• Be aware of your own timeline — are you a trader or an investor? (Then act like it).

• Of course, all of this can reflects your biases, holdings, fears and worries. That is why I try to think about issues such abstractly, and referencing current positions. Otherwise, we encounter the problem that markets can serve as Rorschach tests, reflecting peoples pre-existing investment postures, not what they truly think.

• Bears see the intraday reversal such as Wednesday as a very significant change in tone; Bulls see a comeback such as Thursday as proof of a Japanese overreaction to weak China economic news, that was not applicable to the US.

• Lately, it seems that markets close the day much stronger than the early morning futures would imply. I’d love to see the actual data on that (Closes vs AM Futures). It is similar to what used to be called the Smart Money Index, something created by Don Hays. (I have no clue if SMI has any insight).

• My key takeaway is that the cognitive bias is immense. Most of the attempts we see to interpret short or even intermediate term market action are often overwhelmingly filled with rationalizations of existing positions.

• So much of what we have learned from the data is counter-intuitive. The most challenging thing confronting the vast majority of investors is their inability to make objective, emotion-free decisions based on empirical data. Instincts, hunches and emotions are killers when it comes to the markets.

 

Identifying the cognitive errors we make is only the first step; Developing a way to respond to them, preventing this aspect of our personalities from affecting investing decisions is an ongoing, indeed, never-ending process.

What are you doing to prevent your biases and emotions  from getting in your own way?

Ouch! There is a valid point to be made about emotions in Trading, but it gets lost in the sauce here:

At a University of Virginia symposium in late April, Paul Tudor Jones responded to a question about why the panel only featured “rich, white, middle-aged men.”

Tudor responded by saying that trading requires intense focus, which he believes many women lose when they have children. The panel featured (from left to right) U-Va. professor David Mick, Paul Tudor Jones of Tudor Investment Corporation, Julian Robertson of Tiger Management, John Griffin of Blue Ridge Capital and moderator Jeff Walker, chairman of the U-Va. Council of Foundations

Paul Tudor Jones comments on the lack of female traders

Click to enlarge

Source: Sci-News

Forget “Peak Oil” and “Peak Credit” … Are We On the Downslope of “Peak Intelligence”?

 

Scientists say that we have much smaller brains than our ancestors had 20,000 years ago … and we might have gotten stupider since agriculture became widespread.

Indeed, Huffington Post reports that we’ve probably gotten dumber than even our Victorian ancestors:

A provocative new study suggests human intelligence is on the decline. In fact, it indicates that Westerners have lost 14 I.Q. points on average since the Victorian Era.

******

As for Dr. te Nijenhuis and colleagues, they analyzed the results of 14 intelligence studies conducted between 1884 to 2004, including one by Sir Francis Galton, an English anthropologist and a cousin of Charles Darwin. Each study gauged participants’ so-called visual reaction times — how long it took them to press a button in response to seeing a stimulus. Reaction time reflects a person’s mental processing speed, and so is considered an indication of general intelligence.

***

In the late 19th Century, visual reaction times averaged around 194 milliseconds, the analysis showed. In 2004 that time had grown to 275 milliseconds. Even though the machine gauging reaction time in the late 19th Century was less sophisticated than that used in recent years, Dr. te Nijenhuis told The Huffington Post that the old data is directly comparable to modern data.

Other research has suggested an apparent rise in I.Q. scores since the 1940s, a phenomenon known as the Flynn Effect. But Dr. te Nijenhuis suggested the Flynn Effect reflects the influence of environmental factors — such as better education, hygiene and nutrition — and may mask the true decline in genetically inherited intelligence in the Western world.

This new research was published in the April 13 issue of Intelligence.

There are several theories for why we are getting dumber, including the following (the first 2 come from the HuffPost article):

(1) Dr. Jan te Nijenhuis points to the fact that women of high intelligence tend to have fewer children than do women of lower intelligence. This negative association between I.Q. and fertility has been demonstrated time and again in research over the last century.

(2) “The reduction in human intelligence … would have begun at the time that genetic selection became more relaxed,” Dr. Gerald Crabtree, professor of pathology and developmental biology at Stanford University, told The Huffington Post in an email. “I projected this occurred as our ancestors began to live in more supportive high density societies (cities) and had access to a steady supply of food. Both of these might have resulted from the invention of agriculture, which occurred about 5,000 to 12,000 years ago.”

(3)  Humans evolved to eat a lot of Omega 3s:

Wild game animals have much higher levels of essential Omega 3 fatty acids than domesticated animals. Indeed, leading nutritionists say that humans evolved to consume a lot of Omega 3 fatty acids in the wild game and fish which they ate (more), and that a low Omega 3 diet is a very new trend within the last 100 years or so.

In other words, while omega 3s have just now been discovered by modern science, we evolved to get a lot of omega 3s … and if we just eat a modern, fast food diet without getting enough omega 3s, it can cause all sorts of health problems.

So something just discovered by science can be a central fuel which our bodies evolved to use.

Omega 3s – in turn – boosts intelligence and help prevent cognitive decline.

(4)  Exercise boosts intelligence … and our ancestors got a lot more exercise than we do!

In addition, high levels of cortisol – the chemical released by the body when one is under continuous, unrelenting stress – and poverty can physically impair the brain and people’s ability to learn.

On the other hand, relaxing activities like meditation and prayer have been shown to increase brain mass and connectivity in certain areas of the brain.

Hunter-gatherers had more leisure time – and a more playful attitude – than we do today.

(5) Toxic chemicals in the environment can reduce intelligence.  Examples include flame retardant, lead (found in many lipsticks), certain pesticides (and see this and this), and fluoride.

Jess Bachman

Did you know that the 400 richest people in America are wealthier than the bottom 60%? The 1%, you say? More like the 1% of the 1% of the 1% — and you can fit them all on one 747 commercial jet. This video has the details

My thunderstorm afternoon train reading:

• The Uncertainty of Risk (n+1) see also Adaptation (The Reformed Broker)
• Home Supply Limited by Americans Lacking Equity to Sell (Bloomberg)
• Greenspan’s Market Persists (Alhambra Investment Partners) and How Much of a Dove Is Bernanke, Really? (Businessweek)
• Oil Manipulation Inquiry Shows EU’s Hammer After Libor (Bloomberg)
• The Mirage that is Financial Literacy (money&markets)
• How Nations Tried to Keep Striving Migrants In (Echoes)
• Nocera: Tim Cook’s reality distortion field (NYT) see also Tim Cook’s improbable victory in D.C. (Reuters)
• Is This Big Tea Party Group Really an Innocent Victim of the IRS? (MoJo)
• X-BOX: Steve Jobs’ Dream Device Has Arrived (Slate)
• 10 Novels That Are More Action-Packed Than Most Summer Movies (io9)

Whatcha reading?

 

America’s Corporation-Tax Receipts Falter Even as Company Profits Soar

Source: Economist

Your lunchtime viewing:

Dudley Discusses Taper Decision, Mandates, Yellen

Renaissance Macro Research, May 14, 2013

 

Jeff deGraaf, technician extraordinaire (formerly of Lehman now at Renaissance Macro Research) makes an interesting observation about the heavily overbought markets.

Last week, the S&P500 had ~93% of all stocks trading over their 200 day moving average. Normally, this degree of overbought should lead to a correction. As you can see in the inset box, it sometimes does.

However, if you are looking out a year, we see that over the past 3 instances, markets have been higher.

The takeaway is that you should determine if you are a trader or an investor before thinking about whether to lighten up or add on dips.

Different timelines and holding periods should consider different responses to the volatility.

Note you can get see the updated version of this measure at various places online (Index Indicators, StockCharts, Decision Point. You can read more about this measure here.
 

My morning reads:

• Japan’s mini crash: Blame China(FT Alphaville) see also Dumb money returns to Japan (ft.com)
• Extreme Fear (Joe Fahmy)
• Bernanke to Congress: I’m Not the Problem. You Are. (The Fiscal Times) see also Wonkbook: Bernanke lashes Congress (Wonkblog)
• Why Investors Fail (Motley Fool)
• Dudley Says Decision on Taper Will Require 3-4 Months (Bloomberg)
• Investing in Gold: Does It Stack Up? (Knowledge at Wharton)
• Teens are tired of Facebook ‘drama,’ find refuge on Twitter and elsewhere, says Pew (The Verge) see also Teens, Social Media, and Privacy (Pew Internet)
• Six Facts Lost in the IRS Scandal (ProPublica)
• Putting Apple in an Xbox (WSJ) see also The race to a “smart” television is over. Xbox won (pandodaily)
• Inside Google’s Secret Lab (Businessweek)

What are you reading?

 

Japanese Stocks Fall 7.3% Overnight

Source: WSJ

Source: Amazon

 

BP-SC4000

I just ordered this — regularly $100, on sale for $25. Looks pretty cool.

click for updated futures

 

 

US futures are down following yesterday’s intra-day reversal after the FOMC minutes were released.

Nikkei is down 7.3%. Japan’s Topix index tumbled the most since the aftermath of the March 2011 tsunami and nuclear disaster. This follows a 50% rally in the Japanese market on Abenomics. Hong Kong Hang Seng Index is down 2.54%.

Major European indices are off 2-3%. EuroStoxx down 2.3%; FTSE100 off 1.9%. Deutsche Borse got whacked for 2.7%, wqhile the CAC40 is hit for 2.3%.

Josh has more details here; World market updates here.

 

 

 

 

 

Boeing’s 787 Dreamliner is poised to clear another hurdle in restoring its image as United Airlines, the only U.S. operator, resumes flights after the jet’s lithium-ion battery flaws forced a three-month grounding. Adam Johnson reports from the plane on Bloomberg Television’s “Street Smart.” (Source: Bloomberg)

Why Is the Fed Bailing Out the World … On Our Dime?

 

We noted even before the TARP bailout law was signed into law that bailout moneys could flow to foreign banks.

We were right. A large percentage of the bailouts went to foreign banks (and see this). And so did a huge portion of the money from quantitative easing. More here and here.

Ron Paul noted in 2011 that essentially 100% of New York Federal Reserve Bank loans went to foreign banks.

A former high-level Federal Reserve official said that the Fed is secretly bailing out Europe.

The Fed has bailed out Gaddafi’s Libyan bank, the Arab Banking Corporation of Bahrain, and the banks of Bavaria, Korea and Mexico … but has shafted normal Americans.

The Financial Times reported in February:

Foreign banks also have a striking amount of cash at the Fed, potentially aggravating the Fed’s PR problem. Analysts at Stone & McCarthy noted recently that there had been a steep increase in foreign banks placing reserves at the Fed and suggested that “US banks may have distaste for the opportunistic arbitrage”, between lower market rates and the interest on reserves, whereas overseas institutions “might not feel encumbered in the same fashion”.

Canada’s TD Bank, Germany’s Deutsche Bank and Switzerland’s UBS each have more than $12bn at the Fed.

Yesterday, Zero Hedge provided an update to this story.  ZH reports that the Fed’s quantitative easing program has injected huge sums into foreign banks:

The latest H.8 report demonstrates, as of the most recently weekly data, the Fed’s policies have led to foreign banks operating in the US holding an all time high amount of reserves, surpassing $1 trillion for the first time, or $1,033 billion to be precise.

This means that, as we expected several months ago, the only recipient of ongoing Fed money printing are not US banks, but foreign banks operating in the US. For those confused about the big picture, here is a chart showing the breakdown of cash held by big and small US banks as well as foreign banks, superimposed to total reserves created by the Fed since the start of the Great Financial Crisis. The correlation is 100%.

And just to prove that ALL the unsterilized cash from both QE2 and QEternity has essentially gone to support offshore banks, here is the conclusive chart showing the change in Fed reserves and cash held by foreign banks:

Finally, tying it all together, here is chart showing cash at US banks vs cash at foreign banks operating in the US. At $1.03 trillion in foreign cash, the Fed’s policies have once again led to more cash being held by foreign banks than all cash held by domestic banks.

We are confident that we speak for all when we say: “Thank you Ben – insolvent foreign banks appreciate your ongoing QE2 and QEternity-funded generosity“

In a separate report, ZH notes that Bank of Korea Governor Kim Choong-soo said:

World may face rate risk if U.S. exits from QE

Too bad that quantitative easing doesn’t help Main Street or the average American. It only helps big banks, giant corporations, and big investors. And by causing food and gas prices skyrocket, it takes a bigger bite out of the little guy’s paycheck, and thus makes the poor even poorer.

And it’s a shame that a study of 124 banking crises by the International Monetary Fund foundthat bailing out banks which are only pretending to be solvent  – like most of the big banks – harms the economy.

And what a farce that:

The bailout money is just going to line the pockets of the wealthy, instead of helping to stabilize the economy or even the companies receiving the bailouts:

• Bailout money is being used to subsidize companies run by horrible business men, allowing the bankers to receive fat bonuses, to redecorate their offices, and to buy gold toilets and prostitutes

• A lot of the bailout money is going to the failing companies’ shareholders

• Indeed, a leading progressive economist says that the true purpose of the bank rescue plans is “a massive redistribution of wealth to the bank shareholders and their top executives”

• The Treasury Department encouraged banks to use the bailout money to buy their competitors, and pushed through an amendment to the tax laws which rewards mergers in the banking industry (this has caused a lot of companies to bite off more than they can chew, destabilizing the acquiring companies)

Click to enlarge

 

 

Discuss . . .