Bailout Excites Stocks
- A flailing Europe gets a first installment of aid as its banks receive a US-led lifeline.
- Stock markets that looked ready to roll over surge on the prospect of even more excess liquidity.
- China joins in as well, cutting reserve requirements for the first time in three years.
- ADP jobs report jumps over 200K.
- Chicago PMI surges back above 60.
- Easier swap and credit lines are likely just the first step in the new bailout, and that may keep the Wednesday bid under stocks.
Nothing like the smell of a bailout in the morning to excite stocks.
There is nothing like a massive coordinated banking intervention to change the outlook of the financial markets. Tuesday it looked like SP500 and the NASDAQ had a high probability of rolling over. They bounced back up to the 10 day EMA, showed a doji, and looked weak in their range. There was nothing to drive them higher. They were back in the former trading range, and that is a powerful inhibitor to further upside moves. The USD LIBOR was up over 30BP in a month, steadily ticking higher. That indicates that there are problems in Europe, and these are problems that I alluded to many times. Even last night I talked about the likely end of the euro and that there would be defaults inside the EU requiring some smaller players to be kicked out of the union.
This is nothing new to us. We knew there was a problem. As I said before, it seems they were whistling past the graveyard. Everyone felt things would be okay, but look what happened. The stock market crashed on European worries in July and August. It recovered and rallied, but then it fell back into the range. It was not a good situation, and it looked to be heading downside even further. But then enter the Fed and five other central banks, including China. Rates for dollar swaps were lowered. These swaps were already in place, but banks in Europe were not lending to each other just as in 2008 in the United States. They were afraid to wake up one day to find a certain bank was no longer present. Whether it was BNP or Societe Generale, it did not look good for European banks. There were rumors that European banks were going under. I talked about that last week as well.
The move made credit available. It made dollars readily available to those banks so they could conduct business with each other and not have a Lehman-like collapse. Very important to be able to trade and lend in order to conduct business, wouldn’t you say? The answer is unequivocally yes. In came the Fed and five other central banks to provide this liquidity. In other words, they could borrow a lot of dollars at a lower price. That was a big fix and a big boost for those banks. It is important to note that this is a banking fix and not a sovereign debt fix. We are not buying debt from European nations. We are not buying other assets of European nations. We are simply making more dollars available. It is somewhat palatable to us here in the U.S. We are not necessarily printing dollars, but we are making them available. It worked for the banks, and it worked for the stock market in the U.S. as well.
Indeed, it turned what appeared to be an imminent collapse back down to the August-October range into a breakout from the range again by SP500, NASDAQ and the Dow 30. Futures exploded to the upside. They even got more help. From what? It was the ADP Jobs Report, the warm up to the Friday report. The private company ADP announced 206K increase in private payrolls. When 125K were expected, that it is a big boost. September was revised up to 130K from 110K. 110K of the jobs came from small business, 84K from medium-sized business, and 12K from large businesses. Ironic is not it? The smaller the business is, the more jobs they produce. What do you know? Let’s tell that to the people in Washington. They give it lip service, but they do not do anything about it. But that is a whole different story about our putrid economy, which is not looking as bad right now. You have to give it a little nod and say not a bad job.
Not only was the ADP Employment Change looking good, the Chicago PMI for November jumped to 62.6 when it was expected to fall to 57.5. Nice going, Midwest. Looks like the auto industry is doing well. That is the best read since April when it was 67.6. In February it was all the way up to 71.2. We had quite a drop off before it started to pick back up. The worry I have is we are getting the same kind of effect as last year. Last year we had a good, solid Q4. It looked good going into the first of the year, but things peaked, rolled over, and sold off into 2011. I am afraid that might happen again, but I will be more optimistic right now and say it may not. We could have a nice gain in the stock markets around the world because it appears that the central banks are ready once again to turn that liquidity pump back on and get things pumped back up.
Why do I say that? Let us go back to 2008 in the US. We had the problems, the rollover in September into October. It looked very bad. Things were already bad in 2007. It had turned over and was heading lower. The bubbles had burst in housing, and they were bursting everywhere else. It was getting ugly. There was no one lending. That was the big thing, remember? Credit-default swaps went up thousands of percent in just a week or two, and no one could get any money. I had people telling me to take my money and put it in a safety deposit box. I said if it will get as bad as you say it is, it really will not matter because our dollars will be worthless. It would be gold, silver, guns, and ammunition that would be important.
That is something I was discussing with some friends over the Thanksgiving weekend. We were obviously having a grand old time at the dinner table discussing guns, ammunition, and the crack up of the world economies. But seriously, we were talking about what would be valuable is everything got as bad as they said it would. Everyone says to buy gold. I guess gold could be used for bartering if things go to hell in a handbasket, but the real value is not necessarily gold. If it gets as bad as some are saying, the real value will be in things you need to survive and to protect yourself with like guns, ammunition, food, and water. You will need a little gold, but you get the point. I am digressing.
In any event, it was bad then. Things froze up and the banks were not lending. There were all of these facilities put in place here and in Europe to help banks get the money they needed and to help build the links in the chain to make sure that everyone could get what they needed. But it was not enough. It did not stop the problem. Stocks continued to sell. Businesses could not get financing. It was still bad. What actually made the difference for the stock markets was Quantitative Easing. That was the Fed’s ploy. It wanted to get the stock market up to get people feeling wealthy again. It started in March of 2009 and it led to a big rally. Then when it looked as if it could not continue, we had the correction in 2010. But it was a good correction. It was a bunch of inverted head and shoulders and we were able to make a lot of money as the market broke out of that. What broke it out of that head and shoulders? QE2. We had a nice rally. Then when QE2 was coming to an end in June of 2011, the market peaked ahead of it and then bucked and rolled over. We have been chopping around ever since.
Do you think that this dollar credit facility the lowering of the price will be the last stimulus that we will see? No. It will not be the last stimulus we will see because it will not solve the problem. We still have a sovereign debt problem. In order to keep the banks floating and to keep business working in Europe so that they can actually try to grow their economies, live up to their austerity plans, and pay off their debt, they will have to have something to stimulate them. I will not guarantee it, but I would bet they will adopt the U.S. approach of some kind of Quantitative Easing. The ECB is already buying bonds from Greece and apparently Italy. They will do something else. They may not be able to pull it off as we have tried to do in the U.S., but I bet they will give it a shot. That could be what keeps the bid under the market here and in Europe and helps keep stocks moving higher.
There you have it. I do not know if that answers everyone’s questions. I know people will say there are holes in that theory, and there are. There are holes in all theories. But Europe tried to do it its own way just as France always had its own nuclear deterrent. Remember that? Yea right. The EU just had to try it their own way, and it was not working. They were still going to go down hard. So they finally said they would adopt the U.S. way. Kind of a turn of that Churchill statement about America: We try everything else, and then we finally do the right thing. Europe has tried everything else we did not do, and now it will have to do what we did. I am not saying it is the right thing, but it buys it some time. That is exactly what the Fed has tried to do all along. It wants to buy us some time as well as inflate our dollar and cause us grief. That will come down the road.
In any event, that is the lay of the land, and that is not bad for stocks in the near term. The prospect of excess liquidity kept the U.S. market from rolling over and, indeed, produced some outstanding moves on the day.
SP500, +4.33%; NASDAQ, +4.17%; Dow, +4.24; SP600, +5.85%; SOX, +5.87.
Yes, Virginia, there was even buying across the entire market. Santa Claus opened his bag and was buying stocks.
Earlier I mentioned China as it was in the action as well. It reduced its reserve requirements for the first time since 2008. It is finally saying it is worried more about deflation than inflation. The Beijing and other real estate markets are on the verge of collapse, or they have already collapsed. As with any bubble propped up by the government, when it crashes it gets ugly and it takes a long time to get out. It is already cutting reserve requirements for banks to put more liquidity into the system as well. We had a plethora of positives for the market, and we had some major gains.
There was interesting action late in the day. Stocks gapped, rallied, and then paused over lunch and into mid afternoon. Then they rallied sharply into the close. There were some downside positions that we were not looking to close because they were comfortably under resistance. But stocks shot higher late. That is that leveraged ETF effect. When we get big, unexpected moves at the end of the day in the last hour, they have to clean up their books. They have to get even with the market based upon what indices or sectors they cover. You can see the squeeze to the upside or a push to the downside when things are down. That is something that needs to be taken care of because it is getting a big ridiculous.
This was a huge move in the market late in the day, and it was nothing more than the squaring of books of certain ETFs as they have to get ready for the next session. A bit of trivia there, but it is important trivia that we have to pay attention to.
THURSDAY
Thursday is already here. It is the lull before the jobs report on Friday. We will get another piece of jobs data with Initial Jobless Claims. They are expected to drop to 390K. That is in anticipation of what is currently showing as a 123K job gain on the Friday jobs report. That may be revised upward. We will see. The ISM index is coming out, and it is very important. It is expected to creep up to 51, but with that strong Midwestern showing, it may be up to 53 or 54. Who knows? It was a big surprise. Auto sales are always interesting to see. The Midwest has been humming. It could be interesting indeed. On Friday we have the jobs report, of course.
All of this is kind of exciting. There is a bit of a turn r up in the economic data. Of course it has been turning up for a couple of months now, but it seems to be getting stronger. It does not seem to be fading. That is a positive, but it did this last year, too. It looked really good, and then it cooled off rapidly to start 2011. I am still worried about 2012. Tremendously worried about it. We have to pay the bill sometime. Let’s say we come up with Quantitative Easing in Europe. The ECB has already been buying anyway. They might kick the can as we have. But at some point we still have to pay for this. It is tremendously expensive to do this. It is always easier to let markets clear out. It is easier to print money and kick the can down the road. If Europe goes that route, it will gut the euro. There is no doubt about that. We are trying to gut the dollar, and it will gut the euro. What does that leave? It leaves Chinese currency. It leaves maybe Brazilian pesos. It leaves the Canadian dollar and maybe the Australian dollar. It does not do much for us. We may want to look into some currency action as well, by the way. Think about buying other currencies when the time is right. That is a whole other course we could go into if anyone would like to learn about Forex trading and owning other currencies. I can go into that some other time.
What does this spell for our stock market? As noted earlier, usually this kind of activity precedes other more-involved intervention. The camel’s nose is under the tent. Europe is now showing that this is the way it wants to go. It wants to follow the U.S. game plan. I believe the market will sniff out that there will be excess liquidity coming, and that will be good for stocks. Whereas I felt the stock markets had no chance of breaking out above the April and May highs, they may in fact be able to do this if the news keeps coming. The thing is, it will not come immediately. They will buy themselves some time with this announcement today. It bolstered the markets. They will let things work a bit, and then they will have to announce the next phase. They have to get it ready. They cannot just announce it overnight. They have to figure out how they will do it and get it all ready. Plus they have to let the money work into the system for maximum effect. That is what we did here.
With that, the markets will likely sniff it out. What do we expect? I think there would be a bid under the market. It will rise, but it is never straight up. It will rise and rest, surge, then pull back and rest. What we do is look for opportunities to buy into that move when the time is right. Stocks were up big today, and we bought into some positions because we did not think the move was coming back. And it did not. Now we look for other chances to move in. There are some stocks in position even as of the close on Wednesday. It is not that they did not participate; they just were building on their patterns and started to break higher. They are still in good buy position. We will be looking for those. We will also look at downside in case some bad news comes out that they cannot deal with. We can still get downside. There are a lot of stocks that bounced higher to resistance that look vulnerable. We will have those ready just as we had stocks ready for today in the event the market turned. I guarantee it would have turned down but for this news.
In any event, we have upside and downside to play. We are out of the range, so maybe we will not be comfortable trading in that trading range we wanted to. But if the world central banks want to push liquidity into the markets, that is a powerful influence as we have seen in the past. We saw that in 2009 and again in 2010. If they are going to do it, we will be more than happy to participate.
We have a bias to the upside now, as strange as that may seem. We are flipping from a bias to the downside without intervention to a bias to the upside thanks to intervention. That is the way it works. We will look for plays to the upside. We will watch our downside plays that gapped up on us today. If they fall back some, we will look for a better exit point. If they keep falling, maybe we will just continue to play them. I do not think that will be the case, but we have to take whatever the market gives. With government intervention, as we have seen, it can change overnight. So we will take it as it comes. It is just what you have to do. It is not that bad because there have been some good stocks in position to move. Fortunately, we had them and were ready to move. We already had some on. When the time came, we were able to buy and step in.
