Is Bad News Already Priced In?
Saturday, June 9, 12 noon. The market got more bad economic news on the U.S. economy this week, on the euro-zone crisis in Europe, and on the slowing economies in Asia. That followed the avalanche of bad news that fell on it the previous week and resulted in the 2nd worst weekly market decline of [...]

Saturday, June 9, 12 noon.

The market got more bad economic news on the U.S. economy this week, on the euro-zone crisis in Europe, and on the slowing economies in Asia. That followed the avalanche of bad news that fell on it the previous week and resulted in the 2nd worst weekly market decline of the year.

But this week the market rallied anyway, and in its best week of the year.

I said on Thursday’s post that whether the market could build on the rally would likely depend on whether Fed Chairman Bernanke provided encouraging words about another round of stimulus in his testimony Friday morning.

He didn’t, instead saying only that the Fed would continue to monitor the situation. The European Central Bank, the G-7 nations, and European Union officials, had disappointed earlier in the week by deciding not to take action but to only “continue monitoring developments”.

But markets in Europe and the U.S. (not so much in Asia) rallied anyway.

In the U.S., after four straight down days in which the Dow lost 470 points, it has now rallied for four straight days, gaining back 451 points, putting it back almost where it was 8 trading days ago.


Is it only a rally off another short-term oversold condition beneath short-term moving averages, made more volatile by putting a squeeze on short-sellers, or was all the possible bad news already factored into stock prices with the 9% decline since April, making this the beginning of a summer rally?

So far, those who have jumped in to try to catch a bottom have been disappointed, and now face the decision again, whether to jump in or sell into the rally.

With the possibilities both ways for the next 10 days, it’s quite a decision. Of course there is also the alternative of doing nothing, maintaining current positions, short, long, or in cash, and letting the short-term situations shake out a bit more.

Meetings are taking place in Europe this weekend that are liable to result in Spain asking for, and receiving, bailout funds for its banks, the announcement likely before markets open in Asia tomorrow night. A positive for markets Monday? The important Greek elections take place a week from tomorrow, expected to determine whether Greece stays in the euro-zone or not. Worries in advance a negative? The Fed’s next FOMC meeting begins two days later, at which Chairman Bernanke said yesterday that discussions will be about whether or not to provide another round of stimulus.

It’s getting closer to the election. I had said earlier in the year that I expected the Fed will have to try to come to the rescue again this summer, and that in order to not make it look like a political move to affect the election, would probably have to act no later than July.

And, is it possible that the statements by the Fed and European officials that they are only monitoring the situation in spite of the further serious deteriorations, only a ploy to give them time to come up with a plan of massive coordinated action that would surprise markets, providing evidence of the crisis at least being kicked further down the road? 

Because even if the Fed acts, if it acts alone will it be a positive for the market this time for the third time in a row, or is there enough doubt about it working that it would be a case of buying on the hope and selling on the news?

More than enough short-term considerations.

And then there is the intermediate and longer-term outlook to consider.


To read my weekend newspaper column ‘What’s Wrong With Gold?’ click here.

This chart is just an adjunct to my gold column:


Credit Ratings of U.S. Banks To Be Downgraded.

Moody’s rating services, which has been working on analyzing the financial strength of major global banks since February has given a heads-up that it will probably downgrade the ratings of 17 large global banks, including five of the largest in the U.S., by the end of the month. The five are JP Morgan Chase (JPM), Bank of America (BAC), Citigroup ( C), Goldman Sachs (GS), and Morgan Stanley (MS).

The downgrades would cause some problems for the banks, raising their borrowing costs for capital used in their trading and used to make loans to their customers.

More bad news for banks. Regulations are on the way?

The Federal Reserve supposedly “shocked” banks on Thursday when it announced it is approving Basel III for U.S. banks. Basel III is the international bank-capital requirement standards arrived at a year ago by international financial regulators.

The Fed will include all 7,307 banks in the U.S., but somewhat tougher standards on how much capital banks must hold as a cushion will be applied to the largest banks with the most complex operations.

The proposal is now open to a 90-day comment period during which banks are expected to lobby hard against the proposal, and the Fed is already saying it will take any comments seriously in an effort to “try to make the product even better” before finalizing it.

Ah yes. And when a final version is agreed to the Fed says it won’t take effect until – the year 2019.

Spain expected to give in and request aid for its banks.

Like its counterparts in Ireland, Greece and Portugal before their rescues, Spain has been denying it needs rescue from its government debt loads or that its banks need to be bailed out. But reports this morning are that it will give in to pressure from eurozone officials and request a bailout of its banks probably today or tomorrow. (The rules require that Spain must officially request aid before it can be provided).

The pressure on Spain to make such a request quickly is probably so the funds can be provided before the June 17 elections in Greece, on the hope the bailout would prevent more panic if the result of the Greek election increases fear of the eurozone debt crisis spreading to Spain and Italy.

The pressure is coming in conference calls this morning after the International Monetary Fund rushed out a report last night showing that Spain’s banks need at least $46 billion in additional capital, and perhaps double that. 

Forecasts from a bear and a bull:

Excerpts from an interview in Barron’s of Felix Zulauf, Swiss Hedge Fund Manager:

“There is so much debt in the industrialized world that the financial system is virtually bust.”

“I expect disintegration of the euro to begin in the second half of this year. That should lead the world into financial and economic chaos. My two major themes are euro disintegration and bursting of the real estate boom in China.”

“Global policymakers have exhausted a big part of their resources. They realize they carry too much debt and need to tighten policies. Even the U.S. will wake up to this after the election.”

“The euro is not the real problem but a trigger and compounder of the structural problems.”

“. . . . We are witnessing the biggest financial manipulation of all time. The authorities have intervened more and more, and thereby created this monster.” 

“Markets are oversold. The eurozone will come up with new quick fixes and markets will attempt to rally. But I see a cyclical bear market continuing well into 2013. I would hold lots of cash, preferably in U.S. dollars. I don’t expect Treasury yields to hit bottom until the fall, but if you own 10-year bonds I would take some profits and not buy new bonds. Sell the rest in the fall and use a stop-loss order now to protect profits on the remainder until then. I would recommend buying gold if it breaks below $1,500. That could lead to a quick shake-out into the $1,300s.”

“On equities, I see opportunities only on the short-side. I would continue to short the EEM, or iShares MSCI Emerging Markets index fund, which is a bearish play on stocks as well as currencies.”

And to end on a positive note:

From Barron’s interview with Goldman Sachs analyst Abbey Joseph Cohen:

“We have seen a complete reversal of the first-quarter rally. In the U.S., the economic data is a little less sparkling, but it is consistent with real GDP growth of about 2%. . . . . As a result of the sell-off markets offer good value. But value is not a timing device.”

“Stocks are selling at low price/earnings ratios. Companies have strong balance sheets. But what is the catalyst that will turn low valuation into better market performance?”

“Advice for investors? Individual investors have had the stuffing knocked out of them more than once. They are feeling risk-adverse. One concern in the intermediate to long-term is that many risk-adverse investors think it’s safe to buy Treasury bonds. I have confidence in the U.S. Treasury, but with interest rates this low, some people don’t understand the arithmetic – that they could lose a lot of money when rates start rising.”

“On Europe, our European analysts have said for a long time that Europe will muddle through.”

“For 2013, we don’t see robust growth, but an ongoing expansion with gradual improvements. Earnings will hold up because U.S. companies conduct business all over the world.”

Subscribers to Street Smart Report: In addition to the information and signals in the premium content area of today’s blog, a hotline and the new issue of the newsletter are in the subscribers’ area of the Street Smart Report website from Wednesday. Please also stay tuned to the hotline!

Yesterday in the U.S. Market.

A quite positive day in spite of markets being down sharply in Asia in its last session of the week (the DJ Asia-Pacific Index down 1.4%), and a somewhat negative day in Europe.

Volume was very low on the down day, with only 0.68 billion shares traded on the NYSE.

The Dow closed up 93 points, or 0.7%. The S&P 500 closed up 0.8%. The NYSE Composite closed up 0.4%. The Nasdaq closed up 1.0%. The Nasdaq 100 closed up 0.9%. The Russell 2000 closed up 1.2%. The DJ Transportation Avg. closed up 1.1%. The DJ Utilities Avg closed up 0.3%.

Gold closed up $5 an ounce to close at $1,593 an ounce, but down $31 for the week.

Oil closed down $.43 a barrel to $84.39 a barrel.

The U.S. dollar etf UUP closed up 0.3%.

The U.S. Treasury bond etf TLT closed down 0.1%.

Yesterday in European Markets.

European markets were down some yesterday. The London FTSE closed down 0.2%. The German DAX closed down 0.2%. And France’s CAC closed down 0.6%.

Global markets for the week.

The week to week volatility continues. Four weeks ago it was the worst week of the year, followed by a somewhat positive week, followed last week by the 2nd worst week of the year. And now this week, the best week of the year. Dizzying?

Not a good week in Asia though except for India.

THIS WEEK (June 8)
DJIA12554+ 3.6%
S&P 5001325+ 3.7%
NYSE7553+ 3.6%
NASDAQ2858+ 4.0%
NASD 1002559+ 4.1%
Russ 2000769+ 4.3%
DJTransprts5062+ 3.1%
DJ Utilities478+ 3.1%
XOI Oils1,125+ 4.9%
Gold bull.1,593- 1.9%
GoldStcks162- 0.4%
Canada11500+ 1.2%
London5435+ 3.3%
Germany6130+ 1.3%
France3051+ 3.4%
Hong Kong18502- 0.3%
Japan8459+ 0.2%
Australia4111- 0.1%
S. Korea1835+ 0.1%
India16718+ 4.7%
Indonesia3825+ 0.7%
Brazil54276+ 1.5%
Mexico37320+ 0.3%
China2389- 3.9%
LAST WEEK (June 1)
DJIA12118- 2.7%
S&P 5001278- 3.0%
NYSE7292- 3.2%
NASDAQ2747- 3.2%
NASD 1002458- 2.7%
Russ 2000737- 3.8%
DJTransprts4911- 3.3%
DJ Utilities464- 0.7%
XOI Oils1,072- 4.2%
Gold bull.1,624+ 3.3%
GoldStcks163+ 3.1%
Canada11361- 1.9%
London5260- 1.7%
Germany6050- 4.6%
France2950- 3.2%
Hong Kong18558- 0.8%
Japan8440- 1.6%
Australia4116+ 0.9%
S. Korea1834+ 0.6%
India15965- 1.6%
Indonesia3799- 2.6%
Brazil53484- 1.9%
Mexico37195- 0.8%
China2486+ 1.7%
DJIA12454+ 0.7%
S&P 5001317+ 1.7%
NYSE7534+ 1.4%
NASDAQ2837+ 2.1%
NASD 1002527+ 2.0%
Russ 2000766+ 2.6%
DJTransprts5079+ 4.2%
DJ Utilities467+ 0.7%
XOI Oils1,119+ 1.5%
Gold bull.1,572- 1.2%
GoldStcks157+ 6.8%
Canada11576+ 2.6%
London5351+ 1.6%
Germany6339+ 1.1%
France3047+ 1.3%
Hong Kong18713- 1.3%
Japan8580- 0.4%
Australia4081- 0.4%
S. Korea1824+ 2.4%
India16217+ 0.4%
Indonesia3902- 2.0%
Brazil54505+ 0.1%
Mexico37486+ 1.7%
China2444- 0.5%

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Next week’s Economic Reports:

Next week will also be a light week for potential market-moving economic reports. Only a few are due, including the Producer Price Index, Retail Sales, Industrial Production, Consumer Sentiment. To see the full list and times for each release click here, and look at the left side of the page it takes you to.

To read my weekend newspaper column ‘What’s Wrong With Gold?’ click here.

Subscribers to Street Smart Report: In addition to the information and signals in the premium content area of today’s blog, a hotline and the new issue of the newsletter are in the subscribers’ area of the Street Smart Report website from Wednesday. Please also stay tuned to the hotline!

I’ll be back with the next regular blog post on Tuesday morning at 9:25 a.m.

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