Thursday, October 13, 2011

Tuesday Thoughts

According to a FT report, European banks will receive a higher-than-expected limit on their capital levels.

The Financial Times just reported:

European authorities plan to set a higher-than-expected capital threshold for the region’s banks and give them six to nine months to achieve that level or face government recapitalizations under the auspices of the eurozone’s 440 billion euro rescue fund.

From Bianco:

Inflation is both a concept and a measurement.

On one level, in concept, we are still seeing a fear of deflation.

On another level, the measures of inflation look like they are going higher. (the tips breakeven is still elevated)

Below is a recap of Jim Bianco’s session from the ‘Big Picture’ conference.

From Jim Bianco:

Market correlations are at the highest level in eight years. Among stocks, the correlation is an amazing 84% relative to the underlying index. (As an example, 494/500 of all the S&P stocks were up yesterday in the big advance.)

The shared fundamental is that the U.S. government and the world's central bankers will do whatever has to be done. The current amount of government intervention is unprecedented (at 30% of GDP, higher by a factor of 6x relative to history). The market understands this, and the government’s role is the primary reason why correlation is high.

What gets correlations to go away? This will only occur when the governments' and central bankers' roles decrease.

These correlations will continue in the near term.

There is one important divergence today -- that is, the difference between the message of the fixed-income and equity markets. Stated simply, credit spreads are widening and credit is underperforming, while stocks are advancing.

The market is now less a market of stocks -- rather, it has become a stock market.

The most crowded trades continue to be long gold and long AAPL. As a contrarian, I would be concerned if I were overweighted.

Probably the next big economic debate will not be recession vs. non-recession; but whether the domestic economy is entering an extended period of subpar and uneven growth that will be difficult for corporations to navigate and produce much in the way of profit advancement. This "new normal," influenced by structural headwinds, will likely limit the market's upside potential and discourages me from expanding my net long exposure at current price levels (and particularly after such a sharp move to the upside).

Run, don’t walk, to read Andrew Ross Sorkin’s ‘Volatility, Thy Name Is E.T.F.” in The New York Times.

Response by the bear: Personal income is 80% of the economy and is in the process of rolling over. Practically everything hinges on this particular metric; only a drop in the savings rate is preventing more serious erosion in consumer spending.

As an aside, both ISMs are where they were in November 2007, and I don't recall that they presaged a "muddle through" 2008 at that time.

We slide to 1075, everyone is freaking out. Too many positive divergences and we get another (tenth?) short-covering rally in past two months, and now there's no recession.

I'm being called "too draconian" now because there is a new plan for Europe! This is all surreal.

Everyone adjusts for Verizon when the August payroll data come out; nobody does it when September data are released, and with that we had almost no jobs growth!

What an economy.

-- David Rosenberg, Gluskin Sheff + Associates