Traders Edge 7-17-12

The U.S. stock markets are likely to open higher following the positive results of the Spanish bond auction. The yields on the 10-year Spanish bonds, which were approaching the all important 7% rate, have fallen more than 10 basis points on speculation of a large bailout of the country's banks. Risk-on is back, at least for today.

Bernanke is slated to talk to Congress today and tomorrow to discuss monetary policy with the Senate Banking Committee. (can be watched live here- http://www.c-span.org/Events/Fed-Chairman-Goes-Before-Senate-Cmte-for-Monetary-Policy-Report/10737432369/) Traders eyes and ears will be watching the testimony to see if the Fed Chairman gives hints towards a QE3 program. It is our belief that a future QE program is almost assured, but that traders looking for an imminent money printing regime will be disappointed. Although the monetary statistics and the World economy have slowed, it is our belief that there is enough pockets of strength to keep the Fed on the sidelines. We think that any future QE3 program will be big and bold and will only occur when the economy and/or inflation expectations slow significantly.

The S&P 500 seems stuck in a trading range in the short-term, as traders weigh second quarter earnings (beginning in earnest this week) and monetary/political actions.

We continue to watch the UUP and FXE for any indication of a trend change in the forex markets.

Handicapping an Escalation in the Arab Spring

With drought conditions in the U.S. and other farming regions pushing up agricultural commodities, we wonder if a flare up in the Arab Spring revolts will result. If you remember, what ultimately ended up being a political movement that toppled regimes in the Middle East, such as Egypt and Libya, began as protests in Tunisia and Morocco due to the rising food prices.

Of course, drought conditions will only be a short-term phenomenon and the parabolic moves in agricultural commodities that have been a result will also be short-lived. However, much of the Middle East and the developing World lives near, at, or below the poverty level, and any significant rise in food prices exacerbates the problem. Added to this volatile mix is the political tension created by high unemployment rates, demographics that skew toward young males, and a general belief in the illegitimacy of the respective governments. In addition, we should not completely discount the possibility of QE3, which would act to push down the value of the dollar and ultimately lead to higher prices of all dollar-priced commodities.

What say you?

The three-year charts for corn, wheat, and soybeans. 

Links to Ponder 7-16-12

NABE survey- “The rising sales and profit margins experienced earlier in the year may have been short-lived

http://www.nabe.com/publib/indsum.html

More Chinese stimulus coming. Premiere Wen warns on recovery momentum

Wilbur Ross- Coal to face headwinds for years. (We shall see who is correct- a reduction in gas wells reducing supply and more normal winter can make headwinds disappear rather quickly. Especially considering natural gas prices are significantly higher world wide than in the U.S.)

http://www.bloomberg.com/news/2012-07-16/wilbur-ross-says-u-s-coal-is-facing-years-of-headwinds.html?cmpid=yhoo

Retail sales down 0.5% in June

http://www.bloomberg.com/news/2012-07-16/retail-purchases-in-u-s-unexpectedly-decreased-0-5-in-june.html

.....and the chart

http://www.bloomberg.com/quote/RSTAMOM:IND

An AIDS vaccine on the horizon?

http://news.yahoo.com/scientists-see-aids-vaccine-within-reach-decades-140323401--finance.html

A LIMRA study suggests that consumers that work with financial advisors are more ready for retirement

http://www.advisorone.com/2012/07/13/consumers-with-advisors-better-off-limra?ref=hp

Correlation of Stocks and Bonds- more interesting than you think.

http://www.cbsnews.com/8301-505123_162-57464128/the-correlation-of-bond-and-stock-returns/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+cbsnews%2Ffeed+%28CBSNews.com%29&utm_content=Google+Reader

Handicapping QE3 (1)

http://www.economonitor.com/blog/2012/07/283411/?utm_source=rss&utm_medium=rss&utm_campaign=283411

 Handicapping QE3 (2)

http://politicalcalculations.blogspot.com/2012/07/whither-qe3.html

Want better team dynamics- insert more humor.

http://www.bakadesuyo.com/do-work-teams-fail-because-they-dont-joke-aro?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+bakadesuyo+%28Barking+up+the+wrong+tree%29&utm_content=Google+Reader

Be more lucky.

http://www.bakadesuyo.com/how-can-you-make-yourself-luckier?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+bakadesuyo+%28Barking+up+the+wrong+tree%29&utm_content=Google+Reader

Traders Edge 7-16-12- A Tale of Two Earnings

The stock market in the U.S. is market is set to open lower as World indices closed or are trading mixed. Although earnings began last week, the real meat of quarterly earnings starts today, and will only begin to taper off next week. Retail sales and business inventories are set to be released in the U.S and may add fuel to the volatility fire surrounding earnings reports. The Consensus is looking for a paltry 0.1% rise in retail sales and and 0.2% gain in business inventories.

As for last Friday earnings announcements, Consol Energy (ticker CNX) reported their second quarter production updates. The company stated the coal division produced 14.6 million tons of coal, which includes 1.1 million tons of low-vol (read higher priced) metallurgical coal . In addition, the gas division produced 37.3 Bcf in natural in the second quarter. Although the company indicated that they continue to see some weakness (via talk of continue increased vacation schedules), we think these figures do not necessarily point to the calamity that the stock is indicating.

The shares of CNX are up against a short-term resistance level and the downtrend has not been broken. That said, we continue to believe that coal stocks remain attractive for a long-term purchase.

As for other earnings, both JP Morgan (ticker JPM) and Wells Fargo (ticker WFC) reported their quarterly results. It appears that investors liked what they saw. Shares of JPM traded up nearly 6% while WFC gained more than 3%. These results and the subsequent share price rise helped boost the the Financial spider ETF (ticker XLF) by nearly 3%

Although EPS beat the consensus at JPM, we are surprised as to the degree that the reduction in credit-related costs added to earnings (as a note, it is our opinion that most large banking concerns have significant leeway to reported any earnings number they want, considering the portfolios are marked to model. This adds a large degree of uncertainty to results in any one quarter). In the second quarter, credit costs were just 0.9% of revenue versus 6.6% in the year-ago period and 2.7% in the first quarter of 2012. The credit costs booked against revenue appears small relative to past revenue results and compared to net charge-offs, totaling $2.3 billion. That said, nonperforming assets as percentage of assets has improved over the last four quarters.

As for the chart, watch the resistance around $38.

In comparison, the results at WFC look cleaner. Although the performance is not directly attributable to the quality of the earnings, we also note that shares of WFC are ahead of JPM (see below). Credit-related costs were 14.6% of interest revenue in the second quarter. This compares to 16.3% in the first quarter of 2012 and 14.8% in the year ago period. In addition, nonperforming assets ticked down from the sequential quarter and the year ago period, a positive indication. That said, total charges of about $2.2 billion were ahead of the credit-related costs of $1.8 billion.

Update on Money Supply

The latest money supply figures were released by the Federal Reserve last Friday. Growth rates remain tepid at best, and continue to hover around stall speed. The 12-week annualized growth rate in M2 was a measly 1.7%, or a 4.9% average over the last three months. Growth rates in MZM, a more comprehensive definition of money, were worse off. Through July 2nd, the 13-week annualized growth rate was just 1.2% and an average of 3.4% over the last 3-months. Taking inflation into account, the real 3-month average rate of change in money was just 1.1% for M2 and a decline of 1.3% for MZM.

We think these figures point to tepid economic growth at best and note that the trajectory for growth has been down since before December 2011. That said, we also think that monetary statistics do not yet point towards a recession.

Sunday Afterthought 7-15-12

We thought we would introduce a new weekly piece covering topics (any topic) outside of the investment world. To succeed in the investments and in life in general, we really need to be renaissance men and women.

This week's topic of sorts is the hubble space telescope and specifically the pictures taken by it. Althought there is nothing new about either, there is nothing more awe inspiring that will also make you feel insignificant while part of something great all at the same time. We uploaded a few pictures that we thought we impressive.

More (a lot more) can be found from the below. Enjoy.

http://hubblesite.org/gallery/album/entire

Links of Interest 7-14-12

7 Signs to watch for an upcoming recession- via Barry Ritholtz-
http://www.ritholtz.com/blog/2012/07/7-factors-to-watch-in-a-slowing-economy/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+TheBigPicture+%28The+Big+Picture%29

Chinese premiere Wen talks about China's need to take action...

http://www.china-briefing.com/news/2012/07/13/wen-china-needs-to-take-action-to-boost-investor-confidence.html

.... while Chinese Industrial Production is up 9.6% but,

http://english.cri.cn/6826/2012/07/13/53s711634.htm

Chinese economic data is questioned

http://www.bloomberg.com/news/2012-07-13/china-economic-data-questioned-as-electricity-use-slows.html

In the U.S., more evidence mounts that the Housing bust is over

http://online.wsj.com/article/SB10001424052702303644004577520414196790098.html

After at least three cities in California have gone BK. Some claim bankruptcy not a trend

http://www.nytimes.com/2012/07/13/business/bankruptcy-in-california-isnt-seen-as-a-trend.html?partner=rss&emc=rss

 And they could be right

The potential benefits from QE3 on hard assets may be overstated. It is better to watch China

http://silverinvestingnews.com/12878/chinas-relevance-growingqe3-not-so-much.html

Insights into better decision making

http://www.bakadesuyo.com/should-you-work-harder-on-simple-problems-or?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+bakadesuyo+%28Barking+up+the+wrong+tree%29&utm_content=Google+Reader

Is the commodity supercycle over? (Our Note- Probably not as long as the developing world continues to develop)

http://www.ft.com/intl/cms/s/0/f0921d54-bfa4-11e1-8bf2-00144feabdc0.html?ftcamp=published_links%2Frss%2Fmarkets%2Ffeed%2F%2Fproduct#axzz20RYn0iOD