Dave Gonigam – September 7, 2011
- Looking ahead to the rest of September… Stimulus, Europe, Lehman memories and Eddie Murphy
- Return of the Creature: Debt ceiling days away from rearing its head again
- Chris Mayer on why Europe isn’t fixed… plus, a telling sign of a 2008 redux
- “Chase Burning” artist’s eBay auction tops van Gogh’s take measured in gold ounces
As traders returned to their desks from a long weekend, or even a long summer, one question was top of mind…
Would September turn out like most Septembers — historically, the market’s worst month? Or September of last year — the best September since 1939?
The first two trading days of this week have yielded an early answer — both!
After dropping 300 points yesterday morning, the Dow recovered all but 100 of those points by day’s end. As of this writing, the blue chips are up another 200.
The big move today is attributed to the following…
- Executive shake-ups at Bank of America and Yahoo
- Germany’s highest court turning away a constitutional challenge to eurozone bailouts
- Hopes that the president’s “jobs speech” will goose growth
- Eddie Murphy being named host of the next Oscars telecast.
Well, the last one makes about as much sense as the others. The court ruling and the speech have about as much chance of restoring “normalcy” as Murphy. Maybe less…
The president, we’re told, will propose $300 billion in new stimulus tomorrow night — half of it tax cuts, half of it new spending. What he proposes to do about the debt ceiling, we don’t know… but he’ll need to propose something quick.
Under the Obama-Boehner deal signed into law Aug. 2, the ceiling was raised an initial $400 billion — sort of an appetizer before the feast.
Thus, the current ceiling is $14.694 trillion. As of the close of business last Friday, the most recent figures available, the total debt subject to that limit is nearly $14.650 trillion.
Hmmm… Only $45 billion in wiggle room. In a $3.8 trillion budget, the ceiling will likely come into play next week. Treasury would have to start borrowing from federal pension funds and performing other accounting trickery.
The president can ask to bump up the ceiling another $500 billion. In a convoluted procedure that would make the Founders pound their heads against a brick wall, Congress can choose to either do nothing and allow the ceiling to increase… or take a vote on whether to reject said increase.
And some people thought the Aug. 2 agreement actually settled something.
Nor is Europe “fixed.” Traders in the credit default swap market give Greece an 87.9% probability of default in the next five years.
Meanwhile, “the yield on 1-year Greek bonds rose to 82%,” says Chris Mayer. “Think about that. That’s the market saying a Greek default is inevitable. But the problems, of course, don’t stop with Greece, or this wouldn’t be worth reporting. All of Europe is under a cloud. The banking system is on the verge of collapse.
“Europe has the same problem the U.S. did in '08, except that in the U.S., banks held mortgage debt that was going up in flames and opening up huge craters in bank balance sheets. In Europe, it’s sovereign debt. In other words, European banks hold Greek paper, and Italian paper and Spanish paper and the rest.”
“Signs of credit distress are increasing,” says Eric Fry at The Daily Reckoning, looking for parallels between 2008 and today. “One of the most telling is the direction of Libor interest rates.”
“Libor stands for ‘London interbank offered rate.’ It is the rate at which banks borrow unsecured funds from other banks in the London wholesale money market (or interbank lending market).
“In most circumstances, Libor rates track short-term Treasury rates. But in the midst of crisis conditions, Libor rates tend to spike, while Treasury rates fall. That’s exactly what happened during the credit crisis of 2008.”
“In the depths of the crisis, Libor rates soared, reflecting the reluctance of banks to lend money to other banks. The more worrisome the crisis seemed to be, the higher Libor rates climbed. As such, the Libor rate functioned as a kind of ‘fear gauge.’”
“And so it remains…”
“During the last few weeks, Libor rates have been on the rise once again. They have not risen high enough to sound a distress signal, but they have risen high enough to raise an eyebrow.”
“On Sept. 29, the German parliament votes on a sovereign debt package,” says Strategic Currency Trader’s Abe Cofnas, looking ahead to a tangle at least as knotty as the U.S. debt ceiling. “It’s not at all certain it will pass. Chancellor Angela Merkel is facing a lot of opposition.”
“This could be a joker in the deck for the euro. Expect a lot of volatility. The EUR/USD could see a breakdown of the $1.40 level. This is positive for the dollar. There is also increased probability that the European Central Bank will CUT rates. In other words, the grass is not greener on the other side of the Atlantic.”
For the moment, the euro is holding above that key level, at $1.405. The dollar index has weakened, but not much, to 75.7.
“There are two big factors that could be significant for investors in September,” says Penny Momentum Trader editor Jonas Elmerraji. “The first is the correlation between the S&P 500 index and its constituent stocks, and the second is the bullish technical break upward that the S&P 500 itself is trying to make.”
“High correlations mean that most of the stocks in the market are behaving like the S&P 500. Right now, the CBOE S&P 500 Implied Correlation Index is the highest it’s been since the mini-crash last March. That means that for better or worse, all stock investors are getting the same treatment.”
“Some (albeit few) stocks are showing better-than-average relative strength right now. Tech names in particular should hold up well this month.”
“The big caveat to all of this is a breakdown below 1,120 in the S&P. That’s the technical sell signal that traders will be watching intently.”
Gold is getting hammered today. But in the rarefied air gold occupies these days, “hammered” still means it’s holding above $1,800 — a level first reached less than a month ago.
At last check, the spot price was $1,807. Silver has held above $40 for nearly two weeks now, currently trading at $41.15.
Aside from gold being “the last safe haven” we identified yesterday, there’s another reason gold’s overall trend this year is up.
“When you look forward to the supply situation from the world mining industry,” says our resident rockhound Byron King, “there is a great danger that world mine supply could drop dramatically and precipitously in, say, the next five-10 years.
“The next two-three years will probably be OK,” Byron said recently on The Money Answers Show podcast, “but by five years from now, you could see a country like South Africa have a precipitous drop in gold output because many of their mines are literally as deep as the technical limits of the ability to dig a hole.
“If not this year,” Byron concluded, “certainly early next year, 2012, we’re going to see gold prices over $2,000 an ounce. And I could see, within a couple of years, gold in the $2,500 an ounce range.”
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With a few hours remaining in his eBay auction, artist Alex Schaefer appears set to bring in a tidy sum after his unfortunate run-in with the law.
As we mentioned last week, Schaefer’s portrayal of a burning Chase bank branch in Van Nuys, Calif., earned him two visits from the local constabulary — one while he worked at his easel across the street from the bank and another at his home days later.
“Do you hate banks? Do you plan to do that to the bank?” were among the probing questions he was asked by detectives, no doubt eager for the plaudits that would come with preventing another Sept. 11.
For his trouble, Schaefer will make out better than Vincent van Gogh when he painted Red Vineyard at Arles. As Schaefer explained in his eBay listing, legend has it van Gogh was paid 400 francs, or 4.1 ounces of gold. Today, that would be about $7,500.
Schaefer started the bidding on Chase Burning at a one-half ounce ($920), but he’s set to collect more than five and a half.
Meanwhile, “I have listed a new painting of a bank on fire,” says Schaefer, “This time, it’s Bank of America. Painted from life from the patio of my local Starbucks.”
“The irony,” quips the L.A. Taco blog, “is that now the only people who can afford to buy his work are the same people who looted the financial system in the first place — bankers.”
Cheers,
Dave Gonigam
The 5 Min. Forecast
P.S. Gold stocks are off today… but not nearly as much as the metal itself. The HUI index is down less than 1% from yesterday’s record.
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