Higher markets on encouraging signs about the Greek debt crisis

Oversold stocks started the week strong.  Dow rose 77, advancers ahead oi decliners 2-1 & NAZ was up 22.  Bank stocks led the way up but the Financial Index remains near 200 where it has been stuck for a month.

S&P 500 Financials Sector Index

Value	200.77
Change	2.00     (1.0%)

The MLP index fell 1 to the 362s while the REIT index rose 1½ to 237.  Junk bond funds were higher following a good week & Treasury yields were little changed.  Oil continues weak on the increased supply coming to market in Jul & gold dipped below $1500 an ounce.

JPMorgan Chase Capital XVI (AMJ)

Treasury yields:

U.S. 3-month	0.005%
U.S. 2-year	0.357%
U.S. 10-year	2.874%

CLQ11.NYM

....Crude Oil Aug 11

...90.64

.... 0.52 (0.6%)

GCM11.CMX

...Gold Jun 11

.......1,497.00

... 3.50

(0.2%)

Photo:   Bloomberg

The Federal Reserve (FED) will remain the biggest buyer of Treasuries, even after the QE2 ends Thurs, as the central bank uses its $2.9T balance sheet to keep interest rates low.  When the $600B program winds down, the FED said it will continue to buy Treasuries with proceeds from the maturing debt it currently owns. That could mean purchases of as much as $300B of debt in the next 12 months without adding money to the financial system.  Ben Bernanke said last week that progress bringing down the 9.1% unemployment rate was “frustratingly slow.” 

Fed May Buy $300 Billion in Treasuries After QE2


George Papandreou, Greek Prime Minister, faces a 2nd survival test this week as the parliament votes on a 5-year austerity plan. Failure to pass the plan may lead to the euro area’s first sovereign default as Greece needs to cover €6.6B ($9.4B) of maturing bonds in Aug. Complicating matters, the week will be marked by a 48-hour general strike in Greece. The uncertain outcome is unnerving investors who last week pushed the € to a record low against the Swiss franc. The yield on Greece’s 10-year notes rose 3 basis points to 16.81%.  The thought of contagion is unnerving investors.

Papandreou Faces Showdown on Austerity


Citigroup Q2 profit estimate was reduced by 2 analysts who said the bank’s fixed-income & trading revenue was likely to tumble.  EPS of the 3rd largest US lender could be 97¢, 20% lower than a previous forecast of $1.22 according to one analyst while the other cut his estimate to 95¢. The average estimate of 22 analysts is 99¢.  Citi’s fixed-income revenue is projected to tumble 20% from Q1 & trading revenue could fall 15% (Q1 trading revenue was $4.9B).  I'm a big fan of Citi, but it has to get over big bumps in the road especially with the many problems facing banks.  The stock rose 35¢ in an up market.

 Citigroup’s EPS Profit Estimate Cut by Analysts on Weak Trading Revenue

Citigroup Inc. (C)

Bulls are happy with rising markets, but this seems to be more of a nervous reaction.  Maybe bears are taking a long weekend holiday.  Greek debts are the center of attention & nothing has been resolved but the country does not look like it wants to along with austerity moves.  The administration is getting involved with discussions on raising the debt limit (by Aug 2) which will involve budget cuts, one more tough battle.  Jul is still shaping up as a difficult month.

Dow Industrials (INDU)

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Markets are sputtering, trying to rebound from yesterday's losses

Stocks have been near break even today.  Dow is only up 1 (barely above 11K support), advancers ahead of decliners about 2-1 & NAZ is up a stronger 13.  Bank stocks began the day giving a lift to the Financial Index, but that has slipped into the red.

S&P 500 FINANCIALS INDEX

Value	197.40
Change	-0.62  (-0.3%)

The MLP index rebounded 1 to the 355s & the REIT index as up 2½ to the 211s.  Junk bond funds are strong, bouncing back 1-2% after yesterday's big losses.  There is buying in Treasuries.  The yield on the 10 year Treasury bond fell 4 basis points to 2.80% & sharply below the intra-day highs over 2.90% yesterday.

Treasury yields:

U.S. 3-month		0.13%
U.S. 2-year		0.48%
U.S. 10-year		2.82%

Alerian MLP Index   ---   2 weeks



Dow Jones REIT Index   ---   2 weeks



10-Year Treasury Yield Index   ---   2 weeks




Oil pared losses after a US gov report showed a decline in inventories.  But overall, commodities are quiet.

CLZ10.NYM

...Crude Oil Dec 10

...81.70

... 0.64  (0.8%)

GCX10.CMX

...Gold Nov 10

....1,338.70 .

... 0.40

(0.0%)

Gold Super Cycle Link!  

Click Here

Photo:  Bloomberg


Starts on new homes in the US slumped in Oct to the lowest in 1-1/2 years mainly due to sharply reduced building of multi-unit homes.  The Commerce Dept reported overall construction starts plummeted 11.7% to a 519K annual rate from a downwardly revised 588K in Sep, the weakest starts rate since 477K in Apr 2009 (when the economy was still coping with the severe impact of the 2007-8 financial crisis).  Forecasts had anticipated a starts rate in Oct of 600K!  But permit applications for new building edged up to a 550K rate last month from an upwardly revised 547K in Sept.  The drop in Oct starts was concentrated in multi-unit buildings. Single-family home starts were down 1.1% from Sep to 436K but multi-unit construction starts plunged 43.5% to 83K.  One hopeful sign in the starts numbers was that inventories of completed but unsold homes fell to a record low 79K, suggesting the drag from an overhang of unsold homes might be lightening.  Dreary conditions in the important housing market (shown below) will not end soon.

U.S. Home Starts Drop More Than Forecast on Multifamily Slump


Housing starts - 1 year



Single family starts - 1 year



Building permits -1 year





The Federal Reserve (FED) plan to expand purchases of Treasuries has triggered criticism from Reps & some economists who wrote an open letter protesting the move.  In addition, Germany, China & Brazil are unhappy about the plan.  But Dems support the move.  Even though the program is continuing, the criticism may fan dissent within the FED over the quantitative-easing policy which could limit its ability to take further measures if the economy remains weak. 2 weeks ago, the FED said it intended to buy the securities by the end of Jun, yet would “adjust” the program if circumstances change. This storm over quantitative easing, so named because it focuses on changes in the quantity of money the FED creates through bond purchases rather than changes in interest rates, could cause the FED to stop short of the $600B target. This confusion is partially responsible for the recent run up of interest rates on Treasuries (i.e. selling in Treasury debt).

Fed May Hesitate on More Easing After Critics Question Mandate


The IPO for General Motors, scheduled for today, may raise $15.8B after the Treasury & United Auto Workers’ retiree health-care trust increased the shares they are selling. The IPO was expanded by 31% to 478M shares, after boosting the offer price to as much as $33 a share (from the mid $20s). An overallotment & an offering of preferred shares may increase the total amount raised to about $22.7B which would make it the biggest IPO in history.  The Treasury needs to sell GM stock for an average of about $45 a share to break even on its entire investment.

GM Increases IPO Size as Treasury, UAW Sell More Shares


Stocks are looking for direction.  European countries are scrambling to work out a bailout plan for Ireland.  Even if they do, the haunting question is when will the next weak country need help?  There is a modest sense of relief as the € is up half a penny to $1.35+.  Widespread unhappiness with QE2 is making all markets nervous.  Dismal housing numbers did not help.  Dow went over 11K, after failing to do so for many weeks, one month ago.  Now it's up to the bulls to show if they are serious about sustaining this market rally.


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Higher markets on calls for an end to QE2

Stocks are recovering lost ground from last week.  Dow is up 50, advancers ahead of decliners 3-2 (not a convincing sign for today's rally) while NAZ is up only 2.  Banks are leading the rally bringing the Financial Index further above the 200 support line.


S&P 500 FINANCIALS INDEX

Value	203.26
Change	2.29  (1.1%)

The Alerian MLP Index bounced back 3 to the 262s after last week's minor setback, taking it within 1% of the record highs set last week.  The REIT index also rebounded, up 1 to the 219s.  Junk bond funds were little changed, at or near 2 year highs.  The big news is the dramatic rise in Treasury yields at a time when the Federal Reserve just started buying Treasuries to help the economy.  Treasuries fell for a 3rd day after a group, including former Rep gov officials & economists, urged the Federal Reserve to halt purchases of gov bonds because it may risk a surge in inflation.  10-year bond yields reached the highest in 3 months as the yield shot up 10 basis points today & is up a startling 35 basis points in less than 2 weeks (shown in the chart below).  The yield on the 2 year Treasuries is up almost 20 basis points from its record lows just last month!

Treasury yields:

U.S. 3-month		0.12%
U.S. 2-year		0.52%
U.S. 10-year		2.85%

Alerian MLP Index   ---   2 weeks



Dow Jones REIT Index   ---   2 weeks



10-Year Treasury Yield Index   ---   2 weeks




Commodities are higher but these are not significant moves.  Gold is near its 2 year highs made last week while gold is not far of the 1400+ records just set.

CLZ10.NYM

...Crude Oil Dec 10

...85.25

... 0.42

(0.5%)

GCX10.CMX

...Gold Nov 10

....1,368.30

... 2.90  (0.2%)

Gold Super Cycle Link! Click Here

US retail sales grew sharply in Oct, the 4th straight monthly gain.  Consumers flocked to auto showrooms & made more purchases online.  Retail sales jumped 1.2%, the largest increase since Mar according to the Commerce Dept.  Excluding motor vehicles, however, retail sales rose a more modest 0.4%.  Sales between Aug-Oct have grown 6.3% compared to the same period last year.  The increase reflects a gradually improving economy after a spring lull.  The biggest increase occurred in the auto segment, as sales of vehicles & parts leaped 5%, expected in light of previously reported auto sales.  Sales at building-supply stores, meanwhile, scored a 1.9% increase.  Sales at non-store retailers such as catalogs & online retailers and at stores catering to leisure-time activities, such as reading & music, posted a 1.0% increase.  Several retail sectors, however, did not draw as many shoppers. Sales at department stores, furniture & home stores, & electronic & appliance stores all fell 0.7% compared to the prior month.

Retail Sales in U.S. Rose 1.2% in October, Most in Seven Months

Source:  MarketWatch

 

Photo:  Bloomberg

Caterpillar (CAT), a Dow stock & the world's largest construction & mining equipment maker, will buy Bucyrus Intl, maker of surface mining equipment used for mining raw commodities, for $7.6B.  CAT will pay $92 per share, the deal is expected to close in mid-2011.  BUCY jumped 29% to $89.59.  "Our performance through the global economic turmoil of 2008-2009 allowed us to emerge with a strong balance sheet and the ability to make strategic investments in companies like Bucyrus," said CAT CEO Doug Oberhelman.  CAT said last month it expects the global economy to grow by about 3.5% next year but the company predicts developing regions will grow at double that rate. Even in the emerging economies where growth is slower, CAT said the replacement of worn out machinery will drive sales before those economies markedly improve.  Cat was up 1.72 & has had an impressive rise off its lows in the 20s at the bottom of the stock market 2 years ago.

Caterpillar Buys Bucyrus for $7.6 Billion to Grow Mining Range

Bucyrus   ---   6 months



Caterpillar   ---   2 years





Leaders of the world’s biggest economies ended 4 days of talks at the G-20 without taking decisive measures to address the global imbalances that have fueled asset bubbles & risk leading to a protectionist backlash.  Asia-Pacific leaders in Japan pledged to take “concrete steps” toward creating a regional free-trade agreement without setting a target for achieving that goal. Their meeting “opposed protectionist trade actions” while failing to agree on a remedy for trade & investment distortions.  China indicated no change in the country’s currency trade policies adding pressure for quick reforms.  Confusion over what to do next to aid different global economies can weigh on markets.  The rapid rise in Treasury yields has disturbing implications for the stock markets.  Apple (AAPL) has paused after reaching new record highs with its earnings & new product announcements last month.  It has been a market leader since the market lows & stalling out is not what the bulls want to see.


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