Saturday, September 25, 2010

Sitting on a Signal

The Fed met to discuss the condition of the economy on Sept 21. The U.S. central bankers said they were “prepared to provide additional accommodation if needed to support the economic recovery.” They also left the benchmark lending rate in a range of zero to 0.25 percent while noting that inflation measures were at levels “somewhat below” the central bank’s mandate to achieve stable prices and full employment.
The Fed statement boosted speculation the central bank will buy more Treasuries sometime later this year.

Fundamentally, toxic assets(?) are still on the balance sheets of the TBTF banks in the US, UK and Europe. (See the second graph). Banks are the lynch pin in our credit based world and they hold all the political cards too. Fundamentally, the continuing high probability (99%) danger is that consumer and commercial lending does not occur with enough volume to contribute to a real economic recovery. That leaves the economy to look to the government for stimulus of some shape.
The S&P Index has broken through resistance at 1131 on the S&P this week. The dollar has fallen and teh Fed is talking like more money printing is expected. All are encouraging signals for equities.

Here is a look at the condition of large US banks, looking at the non-performing loans in a couple of different ways through June 30. The blue line illustrates the percent of banks whose allowance for loan loss reserves exceeds their non-performing loans, looking only at banks with assets greater than $20 billion. The red line shows the total of non-performing loans as a percent of assets at all banks. The message in this graph is that banks in general have not been in a worse condition to lend since this data collection series was started in 1988.

Here is a look at the bond market from several types of bond indexes. The primary view is of the Barclays aggregate bond index. This index is about 60% treasury bonds, 20% agencies and 20% corporate credits. Clipped in below is the ETF that tracks the Barclays 1-3 Yr Treasury Bond. Below it is the ETF that tracks the Barclays 1-3 Yr Credit Bond. This ETF also includes 25% exposure to foreign quasi-sovereign credit. Are bond prices turning lower in a sustainable move?

There are some stock market sectors that can be early indicators of the mood in the market. The horizontal gray and red bars show volume by price. Semi-conductors are one sector. Are they making a breakout? Emerging markets continue to be taking the lead. And in its own world is gold, represented below by stocks of the miner's.

After considering the condition of the major lenders, trends in the bond markets, several unique stock market sectors now look at currency from the US dollar perspective. The next graphs illustrate how much foreign currency the US$ will purchase. For a brief and helpful description of how currency rates are determined, read the article by John Hussman dated August 23, 2010.

Lastly, consider the number of stocks in the S&P 500 making a price that exceeds their 150 day moving average. Obviously, a sign of strength in those company prices. The clip on the bottom of this graph illustrates the S&P 500 price for a simple comparison.

Conclusions made from this analysis lead me to think there is money moving out of the safety perceived in bonds and into the risk that is in the emerging market equities and the gold miners. The recent strength in semi conductors had a lot of resistance to bull through and it appears to have done that. A little more time, moving above the new support level will prove it is a breakout. These are interesting times. We might look back and see that the sectors that have 'always' owned the definition of volatile, emerging markets and precious metals miner's, have become the new blue chips. Keep an eye on them.