Stocks Fall Lower As US Sovereign Debt Interest Rates Rise And As China Plans Credit Tightening

Financial market report for January 20, 2011

Introduction
Matthew Craft, of the Associated Press reports Stocks Edge Lower On Fears Of Chinese Rate Hike, stocks, commodities fall as surging in Chinese economic growth leads to fears of a rate hike. “Worries that China may raise its interest rates sent copper, oil and the companies that produce them lower. Commodities fell sharply after China reported that its economy expanded 10.3 percent in 2010, renewing concerns that the country’s central bank will increase borrowing rates to slow growth. China’s inflation surged 4.6 percent in December. Demand from China has been a big factor in sending commodities prices surging over the past year. Companies that produce commodities, such as aluminum maker Alcoa Inc., AA, have been counting on that demand to continue. “All investors and companies these days are clinging to this Chinese demand story,” said Jack Ablin, chief investment officer at Harris Private Bank. “And anything that could cause that to falter could have ugly implications.” Oil, USO, and copper, JJC, fell more than 2 percent. Silver, SLV, fell 4 percent. Freeport-McMoRan Copper & Gold Inc., FCX, dropped 5 percent even after the mining giant reported 60 percent higher income in the fourth quarter as a result of higher copper and gold prices.”

I … Stocks fell lower on falling US sovereign debt and on falling currencies.   

A … The 30 10 US sovereign debt yield curve flattened more today taking bonds overall lower.
Bond vigilantes called the interest rates on US Sovereign debt higher.
The interest rate on the 30 Year US Government Bond, $TYX, rose to 4.62%
The interest rate on the 10 Year US Government Note, $TNX, rose to 3.46%.

The 30 10 US sovereign debt yield curve, $TYX:$TNX, flattened more today. It has commenced an Elliott Wave 3 down this week. The 30 10 US Sovereign has now entered into the most aggressive phase of its deterioration, with the result that there will be a severe deleveraging of stocks and bonds globally. The 30 10 US Sovereign Debt yield curve, along with yen carry trade, and Swiss Franc carry trade investing and the recent dollar liquidity coming from QE 1 and QE 2 have been the great investment levers of a prior age of prosperity. The world is now passing into an age of delveraging and austerity.

The 30 Year US Government Bond, EDV, -1.6%
The 10 Year US Government Note, TLT, -1.4%

Total Bonds, BND, -0.4% continuing their fall lower in a bull flag pattern.

Longer duration corporate bonds, BLV, -1.0%
Shorter duration corporate bonds, LQD, -0.4%

Sovereign debt interest rates rose globally turning world government bonds, emerging market bonds, and international corporate bonds lower.
World Government Bonds, BWX, -0.5%
Emerging Market Bonds, EMB, -0.4%
International Corporate Bonds, PICB, -0.6%

Junk bonds, JNK, are perceived to be a “money good” safe haven investment for now as they have remained their moneyness steady, at their market top, which came in early January.

B … The major world currencies and emerging market currencies turned lower on rising sovereign debt interest rates globally, turning world shares, VT, 0.6% lower.
Major world currencies, DBV, -0.4%
Emerging market currencies, CEW, -0.7%

World shares, VT, fell 0.6% lower.

The emerging markets, EEM, fell 1.1 lower, as emerging market currencies, CEW, fell 0.7%.

South African Rand, SZR, -1.9% turned South Africa, EZA, -1.6%
New Zealand Dollar, BNZ, -1.5% turned New Zealand, ENZL, -1,1%
Australian Dollar, FXA, -1.3% turned Australia, EWA, -1.7%, Small Caps, KROO, -1.5%
Swiss Franc, FXF, -1.2% turned Switzerland, EWL, -1.3%
Japanese Yen, FXY, -1.1% turned Japan, EWJ, -0.9, Japan Small Caps, JSC, -0.9%
Swedish Krona, FXS, -0.6% turned Sweden, EWD, -1.7%
British Pound, FXB, -0.6% turned United Kingdom, EWU, -1.9%.

Euro, FXE, traded unchanged yet the European shares, VGK, -0.6% .

The US Dollar, $USD, traded unchanged at 78.79.

Austria, EWO, -1.8% following Switzerland and Sweden lower.   

Turkey, TUR, -2.6%, following currencies lower; Turkey is a poster country for carry trade investing; its fall lower suggests that carry trade investments are unwinding globally.  

Debt deleveraging is producing a global deleveraging shock. The chart of the optimized carry trade ETN, ICI, shows that carry trade investing proved unsuccessful on December 29, 2010 as this metric of carry trade investing entered an Elliott Wave 3 of 3 Down after Ben Bernanke formally announced QE 2 and the European Leaders failed to come to a comprehensive solution to the European sovereign debt crisis.

The chart of world shares relative to the yen, ACWI:FXY, communicates that peak wealth was achieved on Friday, January 14, 2011.

C … Base metals and precious metals fell lower.
Base Metals, DBB, fell 2.9% with Lead, LD, -3.4%, and Copper, JJC, -2.6%. Yi Tian and Maria Kolesnikova of Bloomberg report  Copper Drops Most in Two Months on Speculation China to Restrain Economy. Copper fell the most in two months on concern that China, the world’s biggest metal consumer, will take more steps to restrain the economy. Copper futures for March delivery fell 11.1 cents, or 2.5 percent, to $4.259 a pound at 10:25 a.m. on the Comex in New York. (Hat Tip to Gary of Between The Hedges)

Silver, SLV, -4.4%
Gold, GLD, -1.9%

D … Basic material stocks shares fell lower taking the Russell 2000 small cap growth, textile manufacturers, disk drive manufacturers, transportation, global small caps, world stocks, and the Morgan Stanley Cyclical Index stocks lower on deleveraging US sovereign debt.

A deleveraging crisis has commence. The world has passed from the age of leveraging and economic growth … and into the age of deleveraging and economic contraction.
Silver mining, SIL, -4.3%
Exploratory silver mining, SSRI, -4.1%
Gold mining, GDX, -1.5%; the gold mining shares were the first to sell off with sovereign debt and the flattening yield curve. Their correction is likely reaching or has likely reached the point whee they are ready for somewhat of a bounce higher when gold moves higher as stocks sell off.   
Junior gold mining, GDXJ, -3.3%
Copper mining stocks, COPX, -3.9%
Uranium stocks, URA, -2.5%
Coal stocks, KOL, -1.2%
Basic Materials, IYM, -1.5%
International Basic Materials, DBN, -1.5%

Chemical stocks fell lower,
Balchem, BCPC, -1.7
Dupont, DD, -1.5
LSB Industries, LXU, -2.7
New Market, NEU,  -2.4

Refinery stocks fell lower, Western Refining, WNR, -4.2%

Global industrial mining stocks fell lower,
General Moly, GMO, -4.6%
Horsehead Holding, ZINC, -1.8%
BHP Billiton, BHP,  -2.8%
Cliff Resources, CLF, -3.5%
Tech Resources, TCK, -3.4%

Textile manufacturer, Unify, UFI, -2.0%

Transportation: Railroad, GWR, -2.0%

Disk Drive manufacturers,
Quantum, QTM, -1.8%
Western Digital, WDC, -3.6%

Russell 2000 Growth, IWO, -1.4
Russell 2000, IWM,  -1.0%
Global Small Caps, VSS, -1.1%
World Stocks, VT, -0.5%

Chart of the Morgan Stanley Cyclical Index, $CYC, -0.7%, shows that the cyclical trade has broken down.

Morgan Stanley Cyclical Index Components falling lower included:
Basic Materials Component, Freeport McMoRan, FCX,  -3.7%
Automotive Component, Johnson Controls, JCI, -3.3%
Paper Component, International Paper, IP, -2.4%
Transportation Component, Ryder, R, -1.6%.

II … Networking, software and semiconductors fell lower taking the Nasdaq 100 lower.
Nasdaq 100, QTEC, -1.5%

Networking, IGN, -3.4%
Software, IGV, -1.6%
Semiconductors, XSD, -1.3%

EMC Corp, EMC, -1.5%

Cypress Semiconductors, CY, -1.5%
STM Electronics, STM, -2.3%

III … Internet stocks weighed on the Dow.
Google, GOOG, -0.8% and Amazon, AMZN, -2.6% are part of a the larger group of Dow Internet Stocks, FDN, -1.8%, that sold off today.. Its wise for traders to take gain on these at this time.  

IV … Credit tightening and inflation destruction turned Indonesia, China Materials, China, China Small Caps,  China Financials lower, the BRICS lower, Indonesia, agriculture production, global shipping, MRO services, technology leaders, and industrial leaders.  

Inflation sensitive Indonesia, IDX, -3.5%, continued its dive lower.

The Shanghai shares, CAF, -1.4%, are leading stocks lower globally.   

China Materials, CHIM, -2.0%
China, YAO, -1.6%
China Small Caps, HAO, -1.5%
China Financials, CHIX, -1.7%

The BRICS, EEB, -1.1% and Thailand, THD, -1.2%

Inflation sensitive agriculture production, shares, MOO, -2.1 falling lower on falling fertilizer manufacturers POT and MOS.

MRO Services
DXPE, DXP, -1.7%
UTI Worldwide,  UTIW, -2.3%

Industrial leaders
Belden, BDC, -2.0%
Cummins, CMI,
Eaton, ETN, -3.8%
Parker Hannifen, PH, -6.1%

Machine tool manufacturers
Flow International, FLOW, -5.5%
International Tool Works, ITW, -1.4%
Timken, TKR, -3.7%
Mettler Toledo, MTD, -2.5%

Small Cap Industrial Shares, XLIS, -0.6%
Polypore, PPO, -4.1%
Watts Water Technology, WTS, -1.3%

Small Cap Technology Shares, XLKS, -1.6%
Avid Technology, AVID, -3.6%
Universal Display, PANL, -5.6%
Measurement Specialties, MEAS, -4.1%
OYO Geospace, OYOG, -2.1%

Global shipping, Ship Finance Intl, SFL, -1.8%

Shani Raja of Bloomberg reports: Asian Stocks Drop as China Economic Reports Prompt Tightening Speculation. Asian stocks fell, with the regional benchmark index sliding the most in almost two months, as Chinese economic reports prompted speculation the country will do more to fight inflation and U.S. earnings disappointed. The MSCI Asia Pacific Index fell 1.3 percent to 138.66 as of 7:34 p.m. in Tokyo, with about seven stocks declining for every that rose. “It’s fair to say that this data will add to pressure on China to tighten,” said Shane Oliver, Sydney-based head of investment strategy at AMP Capital Ltd., which manages about $93 billion. Hong Kong’s Hang Seng Index dropped 1.7 percent, its biggest intraday decline in a month, and the Shanghai Composite Index fell 2.9 percent. Japan’s Nikkei 225 Stock Average retreated 1.1 percent. South Korea’s Kospi Index slipped 0.4 percent, while Australia’s S&P/ASX 200 Index dropped 1.1 percent. “If the economy keeps growing at the current pace, inflation (Hat tip to Gary of Between The Hedges)

V … Mining intensive countries fell lower.
Canada Small Caps, CNDA, -2.1%
Australia, EWA, -1.7%
Australia Small Caps, KROO, -1.5%
South Africa, EZA, -1.7%
Peru, EPU, -1.2%.

VI … Frontier markets turned lower.
Frontier markets, FRN, -1.5%.

VII … Japan shares turned down.
The Nikkei 225, ^N225, has turned down from its January 13, 2011 high of 10,589 to close at 10,437.31.
EWJ, -0.9%
JSC, -0.9%.  

VIII … Home building shares bounce up making for an excellent short selling opportunity.
Lowes, LOW, +3.7%
Home Depot, HD,  +2.4

IX … Utility Shares rise to rally high
Utilities, XLU,  +0.7%
International Utilities, DBU, 1.6%
Southern Company, SO, is consistently listed among the top U.S. electric service providers in customer satisfaction by the American Customer Satisfaction Index; it pays a 4.7%

X … Conclusion and investment application.
A flattening 30 10 US sovereign debt yield curve, inflation destruction, China credit tightening, and currency deflation have commenced the mother of all bear markets.

A flattening 30 10 US sovereign debt yield curve, $TYX:$TNX, communicates that moneyness that has come from sovereign debt seigniorage is passed away.

Jack McHugh in Big Picture article 2011 in Preview: A Year of Transition (or Worse) relates: “Fed Chairman Bernanke calls these asset purchases “monetary policy” and others call them “Quantitative Easing”. What they should rightly be called is debt monetization and money-printing. The world is awash in fiat currency paper. If, as I believe, the policies we’ve seen since 2009 eventually lead to some sort of funding problem in the U.S.”

US Treasury auctions and other central bank Treasury auctions will fail, the sovereign crisis seen in Europe will manifest globally. Then out of chaos a Sovereign and a Seignior will rise to power to provide new moneyness and a new seigniorage system.    

Gold is the sovereign currency and storehouse of investment value. The chart of gold relative to the Australian Dollar, GLD:FXA, communicates that gold, even though falling notationally in value, has maintained its worth relative to the Australian Dollar.  

In European News
Spain’s Central Bank Plans To Print Euros To Bailout Cajas In Operation Similar To Ireland’s Central Bank Bailout Of Its Banks.
A … Spain’s central bank to print Euros to save regional home loan banks.
Sara Schaefer Munoz and Jonathan House of the Wall Street Journal report Spain to Ramp Up Bailout of Banks. Spain plans to pour billions more euros into its troubled savings banks and force them to be more open about their lending practices, people familiar with the matter said, an acknowledgment that previous efforts to fix the banks have fallen flat as the country seeks to ward off an international bailout. In a first step, Spain is preparing to issue €3 billion ($4 billion) in debt in coming days, the people familiar with the matter said. Government officials are putting plans in place to eventually raise as much as €30 billion, according to these people, though some say the final tally will be less. The hope is that a series of capital injections will quell investor jitters about the savings banks, known as cajas (literally, “boxes”), which have been a thorn in Spain’s side as it seeks to convince investors that the country’s finances are stable. The fate of the cajas is inextricably tied to the fate of Spain and potentially to the euro itself. Fear that the savings banks can’t raise funds on their own and will need a government bailout was one reason ratings agency Moody’s put Spain’s rating on review for a downgrade last month. (Hat Tip to Gary of Between The Hedges)

B … The Spanish bailout is similar to that of the Irish Central Bank as Daily Bell staff report End Of Euro? …Ireland Prints Own Notes.

C … Jeffrey Donovan of Bloomberg reports Euro Bonds at Risk as Moody’s, S&P Poised to Lower Credit Ratings.
Europe’s most-indebted countries are vulnerable to additional rating cuts driving up their borrowing costs, which may pressure policy makers to muster a more aggressive response to the region’s debt crisis. “To say that we are at the bottom of credit ratings cycle, by implication one will have to believe that the deleveraging process has come to an end,” said Peter Geikie-Cobb, who helps manage about $6.5 billion at Thames River Capital U.K. Ltd. in London. “I don’t think that’s the case.” Fitch Ratings cut Greece to BB+ on Jan. 14, joining Standard & Poor’s and Moody’s Investors Service in bestowing junk status on the country’s debt. Moody’s began reviewing Portugal and Spain in December after S&P started its three-month clock on whether to downgrade Spanish debt. The European Union’s so-called peripheral countries have seen their creditworthiness evaporate as surging budget deficits and slumping economic growth boosted debt. The bailouts of Greece and Ireland have focused investor scrutiny on other high- deficit countries such as Portugal, Spain and Belgium. “The risks of ratings changes in the next few months are high, and the rather more Pavlovian reaction of short-term trading books will indeed be sensitive to such changes,” said Marc Ostwald, a strategist with Monument Securities in London. A wave of ratings downgrades could begin within weeks. (Hat Tip to Gary of Between The Hedges)