Stocks Rise As The US Dollar And US Government Bonds Sell Off

Financial market report for February 1, 2011

1) … Stocks Rose

Yahoo Finance reports: “Stocks scored their strongest single session gain in eight weeks … support for stocks was wide ranging as nearly 90% of the issues … such a strong, concerted buying effort helped the S&P 500 close comfortably above the 1300 line, which is where it had faltered on a couple of occasions last week, to its best level since August 2008.”

Investors who had sold out of a number of stocks such as Dow Internet Stocks, FDN, the Internet Retail Stocks, HHH, including Amazon, AMZN, piled into Exxon Mobil, XOM, on a good earnings reports, which rose parabolically 4.0%, to close just under 84.00, and piled into Dow Basic Materials, IYM, as well as Dow Financial Services, IYG, and Dow Jones Energy Services, IEZ, causing the Dow, DIA, to have its first close above 12,000 in 2 and ½ years.

Exxon Mobil, XOM, caused Energy shares, XLE, and Small Cap Energy Shares, XLES, to rise strongly. It was three white soldiers for Western Refining, WNR.

Alcoa Aluminum, AA, rose 4.5%. Silver Miners, SIL, regained their prior volatility and rose 4.8%, and copper miners, COPX, rose 4.5%. US Steel, X, rose 3.8%. Steel, SLX, rose 2.9%, and Metal Manufacturing, XME, rose 2.8%. The agricultural sector, MOO, was quite strong and Mosaic, MOS, and Potash, POT, rose strongly. All of these are commodity stocks; they are driven by commodity currencies, CCX. The commodity stocks become volatile at market turns; its much like being allergy sensitive and having allergies during allergy season.

Sunrise Senior Living, SRZ, is the silver mining stock of the health care stocks, in that it is ultra volatile; it rose to a new high today.

The Financials, XLF, rose strongly as did the Semiconductors, XSD; these helped the market indices rise; but nevertheless, the Semiconductors failed to achieve a new high


The rise in the averages such as the Dow Jones, DIA, the S&P, SPY, reflects a rotation out of small cap stocks, and into large cap stocks, and heralds a stock market top as liquidity flows out of the broader base of ETFs, such as US Healthcare Provider, IHF, which had participated in a US dollar liquidity rally.

But today, the worlds major currencies all rose, taking nation stocks, regional stocks, and the world stocks, VT, higher.

The World Small Cap Stocks, VSS, rose to what is a triple high.

The Emerging Market Shares, EEM, rose on rising emerging market currencies, CEW; but its chart clearly shows that these have entered an Elliott Wave 3 of 3 Down.

The Emerging Market Small Cap Shares, EWX, also rose, but are quite badly damaged; stocks here include India Small Cap, SCIF.

2) … US Treasury Bonds Fell Lower with the US Dollar
The 30 Year US Government Bond, EDV, fell 1.6; the 10 Year US Government Note, TLT, fell 0.5.

World Government Bonds and International Corporate Bonds rose, as bond vigilantes let up on calling world interest rates higher; their action is simply an abeyance and not an abatement.
The World Government Bonds, BWX, and International Corporate Bonds, PICB, rose.

3) … Base metal commodities rose  
Base metals, DBB, rose on rising commodity currencies, CCX; those invested in base metals got a free ride today courtesy of the FX currency traders.

The chart of commodities, DJP, suggest that we could be seeing a top, which may have come from the worlds currencies temporarily jumping higher on the sell of the US Dollar today.  

The commodity timber, CUT, continued to receive investor enthusiasm, causing the timber harvesting companies, WOOD, which include Weyerhaeuser, WY, to rise; the paper production companies soared as well and International Paper, IP, rose to a new high.

4) Commentary on the US Central Bank policies
The US Central Bank purchase of debt, which was first announced at Jackson Hole in August 2010, and then formally announced in November 2010, for the purpose of supposedly providing inflation to prevent a deflationary collapse, has monetized the US Debt, causing a severe loss of value in the 30 Year US Government Bond, EDV, and the 10 Year US Government Note, TLT.

Graham Summers of Phoenix Capital Research says: “The cliff approaches, we cry “stop!” but he cannot hear us. All of Bernanke’s monetary policies and actions can be traced to his one core belief: that the US Federal Reserve didn’t do enough to stave off the Great Depression. Never mind that this belief is completely inaccurate (as the data clearly shows), it is the foundation of Bernanke’s entire academic and now monetary career.”

And Steve Matthews of Bloomberg reports Fed May Discuss Easing If Data Weak, Hoenig Tells Market News. The Federal Reserve may consider buying more U.S. Treasury securities than planned if U.S. economic data show weakness, Kansas City Federal Reserve Bank President Thomas Hoenig told Market News International. The economy will expand at least 3.5 percent this year, Hoenig said yesterday in an interview. He reiterated he would like to “normalize” monetary policy by shrinking the Fed’s balance sheet and raising interest rates, the news service said. The Kansas City Fed president expressed concern over rising land prices, Market News International said. “I don’t predict bubbles, but we certainly are beginning to see an acceleration of prices in this part of the country that I haven’t seen since the late 70s or early 80s,” he was quoted as saying. (Hat Tip To Gary of Between The Hedges)

The bond vigilantes gained control of the Interest Rate on the 30 Year US Government bond, $TYX, with the first announcement of QE 2; and then gained control of the 10 Year US Note, $TNX, with the formal announcement.

Monetization of the debt eventually has consequences, and today there was a realization of consequence, with the bond vigilantes calling world government bonds, BWX, and international corporate bonds, PICB, higher; and the currency traders selling the US Dollar, $USD, and calling other world currencies higher and in particular the commodity currencies, CCX higher; these rose 0.96%, giving boost to base metals, DBB, and the precious metals, JJP.  Currencies presented in this Finviz Screener, rose as follows:
Swedish Krona, FXS, 1.3%; causing Sweden, EWD, to rise.
Mexico Peso, FXM, 1.2%, causing Mexico, EWW, to rise.
Australian Dollar, FXA, 1.2%, causing Australia, EWA, to rise.
New Zealand Dollar, BNZ, 1.1%, causing New Zealand, ENZL, to rise.
Canadian Dollar, FXC, 1.0%, causing Canadian Small Caps, CNDA, to rise.
The Euro, FXE, 1.0%, causing European, VGK, to rise.
Emerging Market Currencies, CEW, 1.0%, causing Emerging Markets, EEM, to rise.
The Swiss Franc, FXF, 0.9%, causing Switzerland, EWL, to rise.    
The Yen, FXY, 0.9%, causing Japan, EWJ, to rise.
The British Pound Sterling, FXB, 0.8%, causing the UK, EWU, to rise.
The South African Rand, SZR, 0.6%, causing South Africa, EZA, to rise.
The Indian Rupe, ICN, 0.5%; India, INP, failed to rise.
The Brazilian Real, BZF, 0.4%, causing Brazil, EWZ, to rise.
The Chinese Yuan, CYB 0.3%, causing China, YAO, to rise.
The Russian Ruble, XRU, 0.2%, causing Russia, RSX, to rise.

The rising Euro, FXE, drove European countries such as Italy, EWI, Spain, EWP, and European energy companies Repsol, REP, and ENI, E, to new rally highs. Much was the same for the European Financials, EUFN, and Siemens, SI, whose weekly chart shows three white soldiers. The European charts look completely different from the US Community Banks, QABA, which are in an Elliott Wave 3 Down of disinvestment. It was the announcement of the EFSF monetary authority that began the Euro recovery and its actual funding that completed the rally. The insolvent bank, Banco Santander, STD, rose from a June 2010 low of 8.41 to its current value of 12.69. The chart of Banco Santander, STD, shows that it is cresting up into an Elliott Wave 2 high today and will soon be entering an Elliott Wave 3 Down. The same is true of the Euro, FXE, shown in the above chart which shows a dark filled candlestick on the eve of the Announcement of QE 2, making for a recovery high at 141.50.  James G. Neuger of Bloomberg reports that the EU Nears Agreement on Bailout Fund Buying New Bonds. “European officials are nearing a consensus to enable the euro rescue fund to buy distressed governments’ debt in private placements, while divisions fester over possible acquisitions of outstanding bonds, said three people familiar with the discussions. Agreement on allowing the 440 billion-euro ($605 billion) European Financial Stability Facility to purchase bonds from the issuers may mark a step toward a broader overhaul of the rescue fund. Moves under discussion include secondary market purchases, using loans for governments to retire traded debt at a discount, and better aid terms, the people said.” Bond purchases were the original declared purpose of the EFSF, which was cobbled together on a May weekend after a hastily engineered 110 billion-euro loan package for Greece failed to calm markets. The EFSF was then used to offer loans instead, deemed by Germany to be an easier way of making sure that countries receiving aid cut budget deficits and overhaul their economic management.” It was insider awareness that the EFSF monetary authority will likely have success and that Asian buyers would fund its activities, that brought the Euro and the European Financial Institutions, EUFN, back up from the grave. Some financial institutions have seen an awesome recovery benefit from a rising Euro, FXE; Netherlands, ING Groep NV, ING, is a case in point.

Needless to say the US Dollar, $USD, died today February 1, 2011, as the bond vigilantes called the interest rates higher on US Sovereign Debt, strengthening global competitive currency devaluation which they commenced in selling the emerging market currencies beginning in January 2011. The currency traders now have won their second victory in their ongoing global currency war for control of the world’s people and resources.The recent lollipop hanging man candlestick and the fall in the relative value of the Small Cap Pure Value Shares relative to the Small Cap Pure Growth Shares, RZV:RZG, documents that global competitive currency deflation has been underway since early January. Many are thrilled today because the major indices, the Dow, DIA, the S&P, the New York Composite, NYC, are all at rally highs. Their joy is unfounded and unreasonable as their trading currency, the US Dollar, $USD, buys 0.95% less today.

The currency deflation chart RZV:RZG

The US Dollar, $USD

Those who were invest in gold, GLD, saw their currency and their investment rise 0.72%.

The bond vigilantes and FX currency traders gave seigniorage, that is moneyness, to junk bonds, JNK, higher to close at 40.33, yet the world is passing through an inflection point moving from investment liquidity and into ill-liquidity.  

The gains that the currency traders are achieving, means that the world is passing from an age or risk acceptance, credit availability, economic expansion, affluence … and into an age of risk avoidance, credit shortage, economic contraction, and austerity.

Yes the world is passing from the age of leverage and into the age of deleveraging.

The chart of the Interest Rate on the 30 Year US Government Bond relative to the Interest Rate on the 10 Year Government Note, $TYX:$TNX, shows a deleveraging out of the long term US Treasuries that came with the two announcements of QE 2. It is the inverse of the yield curve.

The 2  30 yield cure is the spread between 2-yr and 30-yr Treasuries, $UST2Y:$TYX; and Mike Mish Shedlock reports the 2 30 Yield Spread reached another new, all-time high  of 401 bps.

The chart of the Carry Trade ETN, ICI, shows a disinvestment out of carry trade investing that commenced with the two announcements of QE 2; borrowing funds at the Bank of Japan at 0.25% interest is no longer a winning process for investing long the markets.

The currency traders will continue their global currency war until are currencies are sorely depleted. Out of their war with the world central bankers, a global Chancellor, a Sovereign, and a global banker, a Seignior, will arise to provide order, moneyness, credit and eventually a global currency.

Investment Watch relates that “At a Fed policy symposium in Jackson Hole, Wyo., Bernanke gave his strongest indication yet that the Fed is ready to resume its large purchases of longer-term debts if the economy worsens. Such purchases would add to the Fed’s already substantial holdings … “We have come a long way, but there is still some way to travel,” Bernanke said. “Central bankers alone cannot solve the world’s economic problems.””   I relate that the Sovereign and the Seignior will come to the aid of Ben Bernanke and the other world central bankers to address the coming world economic, banking and monetary  problems.   

5) … In today’s news
Bespoke Investment Group reports:
Weaker Than Expected Chinese PMI: The PMI manufacturing index came in weaker than expected for the second straight month. Over the last two months, the index has declined from 55.2 down to 52.9, forming what is increasingly beginning to look like a downtrend in the indicator. This reflects Inflation Destruction and Bank Credit Tightening documenting that the world is entering an age of deleveraging. Keith Bradsher of The New York Times reports China Is Poised to Raise Rates Again, Bankers Say. China’s government, increasingly worried about soaring inflation, plans to continue tightening its money supply and will probably raise interest rates again within the month. That is the forecast of economists and bankers with knowledge of policy makers’ views, who insisted on anonymity because of the political and diplomatic sensitivity of Chinese monetary policy.

Ambrose Evans Pritchard of The Telegraph reports
The International Monetary Fund has warned  ‘dangerous’ imbalances have emerged that threaten to derail global recovery and stoke tensions that may ultimately set off civil wars

William Spain of reports
Retailers Flat After Downbeat Sales Report. Retail stocks were generally flat Tuesday as a lackluster weekly sales report kept the sector from rising with the broader markets. Nasty weather hampered shopping for the week ended Jan. 29, dragging retail sales into the red for the fourth week in a row. Sales fell 1%, according to the International Council of Shopping Centers and Goldman Sachs. However, sales on a year-over-year basis rose 1.6  Chart shows Retail, XRT, started to sell off in January, 2011; and that they entered an Elliott Wave 3 of 3 Down on Friday January 28, 2011

Alberto Alerigi Jr of Reuters reports
Brazil Vehicle Sales Sink 36% in January. Emerging Market Consumer stocks, ECON, and Consumer Discretionary, IYC, like retail shares, and the Emerging Market Financials, EMFN, are in an established bear market sell off.

Patrick Henningsen of 21st Century Wire reports on cashless payment system technology and Facebook seigniorage
Cashless society becomes reality as Facebook Nation unveils its new currency. The 21st century has certainly witnessed a progression towards a ‘cashless society’, but social networking giant Facebook is taking things a step further, throwing their hat into the ring with the introduction of a new compulsory monetary policy that will initially govern its share of the multi-billion dollar online games industry.

Shaun Richards reports
Has the under-recording of US inflation led to Egyptian and Tunisian food riots via loose monetary policy?
For some time there has been a debate over how and indeed if the extraordinarily loose monetary policy being implemented by the US central bank the Federal Reserve will affect the rest of the world. Initially there was fear over the effect on exchange rates combined with fears as to what this might do to world asset and commodity markets. It would appear that the effect of pumping an extra US $75 billion of cash a month into the hands of those who used to own Treasury Bonds has helped to drive up food prices. For the people who are struggling to feed themselves Mr. Bernanke’s claim that he is “100% sure” that he could deal with any inflationary response to this must ring very hollow in their ears.

Open Europe reports:
France and Germany close to agreement on “economic government” for the eurozone. The FT reports that France and Germany are closer to agreeing on their plan for an “economic government” in the eurozone, including a system of national crisis resolution regimes for banks and national constitutional amendments to establish a cap on eurozone governments’ borrowing, the so-called “debt brake”.

The article notes that the “pact for competitiveness” proposed by German Chancellor Angela Merkel amounts to a big concession to France, as it will reinforce economic policy coordination only among eurozone countries, rather than all 27 member states.

In an interview with Handelsblatt and other German papers, Spanish Prime Minister José Luis Rodríguez Zapatero has said that the idea of having a more German Europe “would not disturb us, as long as we have a European Germany.” A separate article in the paper quotes Patrick Artus of investment bank Natixis saying that Merkel’s “pact for competitiveness” will do little to close the competitiveness gap between eurozone countries. He argues that eurozone leaders “had better just acknowledge that economies within the eurozone are getting more and more diverse, because all countries have specialised themselves.”

In a comment piece, Handelsblatt’s EU correspondent Ruth Berschens notes that the eurozone debt crisis has forced Germany into making a “spectacular” U-turn on its previous opposition to an “economic government” for the eurozone. “If the governments of the two largest euro countries stand united, there is little the others can do against it,” she argues.

The Irish Independent reports that yesterday borrowing costs for high-debt eurozone countries decreased significantly, although the yield on 10-year Greek bonds is still 10.9%. The Irish Times notes that foreign deposits with Irish banks declined by 40% during 2010. The BBC reports that the unemployment rate in the eurozone remained stable at 10% in December. Irish outgoing Prime Minister Brian Cowen announced yesterday that the general election in Ireland will be held on 25 February.  
FT IHT IHT 2 El País FT Capital Markets Blog BBC AFP Handelsblatt European Voice BBC: Hewitt Irish Times Rheinische Post Welt FT Deutschland FT Deutschland Handelsblatt: Berschens Handelsblatt Handelsblatt: Zapatero Irish Independent

In an interview with Handelsblatt, EU Competition Commissioner Joaquín Almunia has said that he is still concerned about the situation of European banks. “We haven’t crossed the mountain yet,” he warned.  
Handelsblatt: Almunia

MPs will today debate the EU’s 2009 budget and, writing on Conservative Home, Steve Baker MP argues, “We must robustly and resolutely condemn fraud and error in the EU budget.”
Conservative Home: Baker

EU to collect air passengers’ sensitive personal data. EUobserver reports that the Commission will present proposals today on sharing air travellers’ data, including home address, mobile phone number, credit card information and email address, with other member states. The Commission is likely to propose that the measures would cover flights from the EU to third countries, but the UK is pushing for all internal EU flights to be covered by the scheme. The data will be checked by a special unit of the Belgian police and any suspected links with terrorism or serious crime could mean suspects may be prevented from flying or even arrested.
EUobserver Open Europe research

Euractiv reports that, according to Slovenia’s governmental office for climate change, a new coal plant which has obtained €770m of loans from the European Bank for Reconstruction and Development (EBRD) and the European Investment Bank (EIB) will burn lignite – a high-carbon brown coal – in quantities sufficient to use up all Slovenia ’s permitted carbon emissions quota by 2050.  

European carbon markets will start reopening next week, EU officials said yesterday, according to the WSJ. An editorial in the paper argues: “This isn’t a market; it’s merely designed to look like one.”
WSJ WSJ: Editorial

Keywords: inflation destruction, competitive currency devaluation, competitive currency deflation, global currency war, yield curve, age of deleveraging, the Seignior, the sovereign, seigniorage, moneyness, Facebook Seigniorage, carry trade investing, EFSF,


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