Disclaimer. After nearly 40 years managing money for some of the largest life offices and investment managers in the world, I think I have something to offer. These days I'm retired, and I can't by law give you advice. While I do make mistakes, I try hard to do my analysis thoroughly, and to make sure my data are correct (old habits die hard!) Also, don't ask me why I called it "Volewica". It's too late, now.

BTW, clicking on most charts will produce the original-sized, i.e., bigger version.

Saturday, June 30, 2012

Happy days are here again

The agreement to at last do something sensible in Europe gave the markets a powerful push. Wall St up over 2%, the Euro Stoxx 50 up nearly 5%.

The danger of a death cross in the S&P500 has passed for now.  Time to get back in.  There are still risks.  Greece is the biggest but I think that's pretty much priced in.  The agreement though does make defaults by Italy and Spain less likely, and the survival of the euro more likely.  I'd still like to see a lower bank rate from the ECB, but maybe we might get that too.  Europe is after all in recession.  Even the ECB must see that.

Note how last night's close in the S&P is above the previous high of 10 days ago, and how recent lows have been successively higher.  Note a similar pattern from the Euro 500 -- only from a lower base.  How long this rally will last, I don't know.  But the risks of being out of the market are now greater than the risks of being in.  At least, that's what I think.

Friday, June 29, 2012

Step one

So the other Euro members managed to persuade/bully Unsere Angela to accept that the Spanish bank bailout funds are not to rank ahead of other Spanish government debt.  Good.  Common sense at last.  And they also decided that future bank bailouts will come from the stability fund and not have conditions. Έύρηκα!
Or perhaps, rather, wunderbar!

So at last we get a central bank with a central bank rescue system.  The euro area banks will be saved not by national governments but by the ESM (European Stability Mechanism, i.e., the Euro area governments collectively) and the ECB.  The way it happens in the US or Oz, where banks are saved even if they happen to be located in a state with problems.  The Fed doesn't refuse support to banks in Florida.  The RBA goes on supporting banks in Tasmania.  As they should.

Not yet a common fiscal system, but it's step one on a long road.  If the reports are true this is a huge step forward, and might actually save the euro and the world economy.  Key point:  this will separate bank solvency from sovereign solvency.  At least this particular pernicious feedback doom-loop has been terminated (bank failures >> bailouts >> higher government debt >> high interest rate >> more bank failures.)  About time.

Plus -- will wonders never cease? -- E120 billion "growth package".

Time to put money back on the table.  For the time being, anyway.

Angela's Vision.

By Peter Schrank from The Economist Magazine

An editorial from The Economist:

IN THESE times of tribulation for the euro, Germany offers a prophecy. One day, when the euro zone has got beyond the wilderness of austerity and structural reform, it will be rewarded with prosperity. Europe will have worked off its debt and become more competitive. Markets will see that the real problems of the world economy lie in debt-laden America and Japan. 
The more the outside world criticises Germany, the more fervently senior German officials cling to this vision. Others have reason for doubt. In the third year of the euro crisis things are getting worse. Even good news brings no relief. Greece avoided the meltdown that an election victory by the anti-austerity Syriza party might have brought. But the new government of Antonis Samaras, leader of the centre-right New Democracy party, may not be able to halt Greece’s death spiral. An agreement to give Spain up to €100 billion ($127 billion) of euro-zone loans to recapitalise its banks did not stop the slide for long. Markets jumped at hints from the G20 summit that European rescue funds might start buying Spanish and Italian bonds, but for how long?
Read the rest here.

Thursday, June 28, 2012

US Housing ... a genuine upturn at last?

The Case-Shiller national house price index for April shows the third monthly rise and a gradual move back towards positive year-on-year territory (see chart below).  It's been here before in this cycle, and then prices started to fall again.  So maybe it'll do that again (cue dramatic music and the appearance of a villain from right stage labelled "fiscal cliff").  But the mortgage rate has fallen from 5.1 % then to 3.6% now.  Housing starts are still sluggish, and recent strength is prolly weather-related, but their trend is still up --- slowly.

Housing matters because although it's only a couple of percent of GDP, it fluctuates massively over the cycle, adding in it's own right a further couple of percent to the upswing and taking it away in the downswing.  But it also adds indirectly, because new houses often means new household appliances, new carpets, new curtains.    And it also adds to confidence: most ppl's main asset is their home.  If its price has stabilised or is rising, they feel more comfortable spending -- the so-called "wealth effect".

So if this rise in house prices is sustained, this will put strong underpinning underneath the recovery.  Always assuming we remain villain free.

Oh joy, oh rapture unforeseen, 
 The clouded sky is now serene, 

Well, we have yet to deal with the dual villains, Fiscal Cliff in the US and Batty Austerity in Europe.  On verra.

Click on chat to enlarge

Wednesday, June 27, 2012



The chart below shows the average survey results for the Philadelphia (P), Dallas (D) and Richmond (R) Fed  regional surveys compared with the national ISM manufacturing survey.   Good correlation, and it suggests that the upcoming ISM numbers (next week) will be bad.  So the question is, is this because the mild weather early this year brought forward activity, especially construction (you can't pour concrete below freezing point) which raised activity levels in Q1 and so reduced them in Q2.  Now if the strength in Q1 and the weakness in Q2 wasn't due to "payback", then the Dallas Fed's survey should not show payback in Q2, because Texas doesn't get cold enough to stop construction.  And it didn't.

So am I reading too much into this?  Maybe.  And in any case, in the short-term the market will likely respond negatively to a weak ISM.  But if I'm right, growth will resume in Q3.  Which is more or less what the forward-looking components of these surveys suggest.

Tuesday, June 26, 2012

Oil price plunge

The oil price is plunging.  This isn't because there've been lots of new discoveries.  It's because demand is falling, and that's because the world economy is slowing.

Notice how it made a "death cross" a couple of months ago, and is heading towards its previous low in mid-2011?   Other commodity prices are falling too.  Combine that with weak economies and you're going to get falling inflation.  Deflation?  Could be.  Not at all a pleasant prospect when Western economies are so heavily indebted.

Dallas Fed index rebounds

The production component is shown in the chart, compared with the overall ISM national index.  Didn't stop Wall Street falling again, though:  Europe, obviously.  And the S&P500 is perilously close to a death cross.

Monday, June 25, 2012

June's Philly Fed index

Like most of the regional surveys (whether from the ISM or the Fed) the data are much more "spiky" than the broader national indices, so I've plotted the 3 month moving average of the Philly Fed data.  And the correlation with the national index isn't that close on a month-to-month basis, though the broad trends are comparable.  More evidence (along with such indicators as initial claims) of a soggy economy.  Again, I wouldn't worry too much about it except that Europe is in strife and the China tanker is struggling to change direction.

Copper bear market

A death cross (see this piece for explanation) in copper.  A pattern duplicated across most commodities (base metals, gold, oil ....)


Sunday, June 24, 2012

Next Week's US Data

The big one of course will be the employment and unemployment data, out on July 6th, which is the week after.

In the meantime we'll have some regional Fed surveys and the Chicago PMI.  I'll have a look at them when they're published.  The average of the regional surveys gives a good guide to the national ISM manufacturing survey.  For what it's worth, I think they'll be soggy.  The fiscal cliff after the elections and the European debacle have impacted confidence, not just in the US but here in Oz too.

A demain!

Friday, June 22, 2012

Death Crosses

A scary term for a scary event:  when the shorter moving average crosses the longer one on the downside.  It's the signal of a longer term downtrend starting.

In the chart below, the black line (the 50 day moving average) crossed the olive green line (the 150 day moving average) a couple of weeks ago.  Now, at a time of sideways movement with a lot of volatility you do run the risk of being whipsawed (i.e., getting in and then getting out again too soon, at an unfavourable price) if you use this kind of technical analysis.    All the same, the rally since the low is fairly typical of a bear market correction.  The market gets oversold and rallies back to the moving average, in this case a falling moving average.  If it turns down when it grazes the moving average, that's bearish.

See what a good sell signal it was in early June 2011?  And how the market rallied back to the short term moving average, before selling off again?  As I said above, not always infallible, but ...

Keep your eyes peeled, folks.  Interesting times.

Euro PMI for June

Markit's preliminary reading of the Euro area PMI came out last night (=today in America).  Unsurprisingly, another fall, though a small one, from 45.1 to 44.8.

The chart below shows the year-on-year change in the euro currency area industrial production (right scale) and the PMI (left scale).

The slide continues.

As Markit put it:

Euro-region gross domestic product probably dropped 0.6 percent in the second quarter, according to Chris Williamson, chief economist at Markit. In the year’s first three months, the area’s economy stalled. 
“The downturn is gathering pace and spreading across the region, with Germany on course for a marginal fall in GDP in the second quarter, though far steeper declines are likely elsewhere,” Williamson wrote in the statement. “Firms are preparing for conditions to worsen in the coming months, with the darker outlook often attributed to uncertainty caused by the region’s ongoing economic and political crises.”
It's bizarre that the ECB hasn't cut its discount rate to zero.  Staggering incompetence, from them and the European pollies.

Thursday, June 21, 2012

World Growth ...

... sluggish.  We only have data for the US and China for May IP, with my estimates for the other countries.  But this is what the 3 month rate of change for world IP (industrial production) looks like:  May slowing somewhat.  Still likely to be revised later, when actual data become available -- and prolly revised down.

The chart shows the percentage change of my indices of industrial production over the same index 3 months ago, not annualised.

Thursday, June 14, 2012

Spanish Bond Yield at crisis high

But note how it fell last time (In November) when the ECB pumped a trillion dollars in low interest loans to European banks.  Will they do it again?  My guess is yes.

[Chart courtesy of Bloomberg]

The European Dominoes

A handy graphic from the BBC about the ramifications of the crisis, with potted commentaries on each country or institution.

How Germans Botched the Spanish Bank Bailout

A trenchant -- but insightful -- article on the mess that is Europe.

Meanwhile, in April, Euro industrial Production (IP) fell again by 0.8% month-on-month.  The chart below includes my estimates for May (another fall).

Thursday, June 7, 2012

So, about those numbers

The employment report and the ISM numbers were soggy but not yet disastrous.  Payrolls rose a scant 70K or so in May, and what is to me more concerning, previous data were revised down.

The chart below shows the change in the unemployment rate over six months, inverted, since unemployment rises when economic growth is low or negative.  The change (i.e., the decline, but shown above the zero line 'cos it's inverted, OK?) in the unemployment rate was running at the highest levels in nearly 3 decades.  And it's slowed back to a rate of decline consistent with previous recoveries.  So not that bad. Yet.

Click on image to get a bigger picture

The slide in the combined ISM survey results is more worrying.  I've "extreme-adjusted" the data, which uses a statistical technique invented by the NBER in the US to remove or reduce "spikes" in the data.

If these soggy numbers were happening in just the US, I wouldn't be so worried. But they aren't.