Wednesday, February 3, 2016

The Morning Call---Negative rates and bank profitability

The Morning Call


The Market

The indices (DJIA 16153, S&P 1903) retreated broadly yesterday.  Volume rose continuing the pattern of high volume down days and lower volume up days.  Volatility remained elevated and breadth stunk.

Bank risk is soaring (short):

   The Dow closed [a] below its 100 day moving average, now resistance, [b] below its 200 day moving average, now resistance, [c] below the lower boundary of a short term downtrend {16825-17580}, [c] in an intermediate term trading range {15842-18295}, [d] in a long term uptrend {5471-19343}, [e] and still within a series of lower highs.

The S&P finished [a] below its 100 day moving average, now resistance, [b] below its 200 day moving average, now resistance [c] below the lower boundary of its a short term downtrend {1914-2003}, [d] in an intermediate term trading range {1867-2134}, [e] in a long term uptrend {800-2161}  and [f] still within a series of lower highs. 

The long Treasury roared ending pennies below the upper boundary of its short term trading range.  This pin action continues to suggest declining economic activity and/or the attraction of US yields in a world of more and more negative interest rates.

GLD (108) rose slightly, remaining [a] above its 100 day moving average, now support  [b] right on the upper boundary of its intermediate term downtrend {108} and [c] very near the upper boundary of its short term downtrend {108.5}. 

Bottom line: so much for the support at 1928 marked by a Fibonacci retracement level.  Yesterday’s whackage was troublesome.  Many investors pointed at sharply lower oil prices as a primary causal factor, given its the recent correlation with stocks.  On the other hand, the improving Treasury and gold markets may be signaling something much bigger---that things are amiss in the economy.  That said, both of the indices remain above the lower boundary of very short term uptrends.  Until those levels are violated, this retreat could be nothing more than a sell off from an overbought condition. 

As I noted above, GLD continues to attempt a turn around.  It is above its 100 day moving average and making a run at busting through two proximate resistance levels which will likely not be an easy feat.  Still the challenge is on; if successful, GLD should offer an attractive buying opportunity.

            An early March interim bottom? (short):



            Yesterday was a slow on economic stats.  In the US, month to date retail chain store sales grew at a slower rate than in the prior week.  On the other hand, January light vehicle sales were fractionally ahead of expectations.  Overseas, EU unemployment came in at 10.4% versus estimates of 10.5%.  Nothing here to alter opinions.

            ***overnight, the January Markit EU manufacturing PMI was the lowest reading in four months, the services PMI was also weak and the price index was the lowest since March 2015.

            Getting increasing investor attention are the potential balance sheet and income statement problems in global the banking system.  Clearly, declining oil prices are lowering the loan quality of their energy portfolios.

S&P downgrades credit of ten large energy companies (medium):

In addition, bank margins are not helped by low interest rates (lending spreads); so you can imagine the impact of negative interest rates.   As I have tried to make clear, I don’t think that a 2008/2009 scenario is possible for US banks.  But (1) that doesn’t mean they won’t experience some pain, (2) overseas, the foreign banks are more leveraged and hence are more at risk and (3) we still don’t know the magnitude of risk posed by the massive derivative portfolios of virtually all major banks.

            Ooops; the unintended consequences of negative rates (short):

            But never mind, if first you don’t succeed……….. (short):

            The ultimate consequence of negative rates (medium):

            John Mauldin on the new Japanese negative interest rates (medium):

            Negative rates on a possibility for the Fed (medium):

Bottom line: falling oil prices, narrowing lending spreads and a weakened industrial sector are having an impact on the economy.  It is manifest in the lousy trend in the dataflow.  Despite all the happy talk about the service sector and the consumer being immune to the aforementioned forces, those trends can’t diverge forever.  Sooner or later, the energy, banking and manufacturing sectors have to improve or they will drag the remaining sectors with them. 

I am not suggesting that investors run for the hills.  I am suggesting that in this rally that (1) they take some profits in winners that have held up during this decline and/or eliminate investments that have been a disappointment and (2) they lose the notion of ‘buying the dips’.

Hedge funds were selling the rally (medium):

            Updates on valuation:

            One more (short):


   This Week’s Data

            Month to date retail chain store sales grew less than in the prior week.

            January light vehicle sales were slightly better than forecast (17.6 million versus 17.5 million).
            Weekly mortgage applications fell 2.6% while purchase applications were down 7.0%.

            The January ADP private payroll report showed an increase of 205,000 jobs versus expectations of up 190,000; the December reading was an increase of 267,000 jobs.


            The cautious outlook for capital spending (medium):



Hillary’s emails put lives at risk (medium):

Wednesday morning humor (sort of):  The best reason for voting for Trump (short):


            Is a Grexit back on the table? (medium):

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