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Morning Notes For August 30th 2010

The following is a guest post by a buy-side analyst working in a US asset management firm. The author's comments are in italics. I welcome your feedback in the comments:

  • Bernanke’s Friday speech at Jackson Hole was one of the most closely watched by any policy maker in months. The Fed Chairman warned monetary policy alone cannot fix the economy (a warning not to raise taxes?). He also promised more support for the economy if needed from a balance sheet expansion by the Fed and purchases of Treasuries or "other securities." – FTN Financial
  • Fed Jackson Hole Symposium – overall sanguine tone from the event – bankers overall think the recovery will stay on track; We'll slog our way through this," said Thomas Hoenig – WSJ
  • ECB chief Trichet suggested it may be time to start tightening in Europe. Investor confidence rose again in Germany, where the economy is strong, but peripheral Europe is still in recession.
  • The White House unveiled two new programs to prop up housing over the weekend. The first will provide loans for the unemployed to pay their mortgages. The second is an FHA refinancing program for delinquent borrowers. Shaun Donovan, HUD Secretary, said the Administration has not decided whether to revive the first time homebuyer tax credit.
  • President Obama's job approval rating slipped to 43% for the week of Aug. 16-22, down one point from the previous administration low point of a week ago. – Gallup

obama approval rating Aug 2010

  • RGE Analysis by Nouriel Roubini, Christian Menegatti and Prajakta Bhide: The tailwinds of H1 2010 will become headwinds in H2: The fiscal stimulus will turn into a fiscal drag; the inventory adjustment that boosted growth is done; and base effects and temporary Census hiring are gone. If growth were to remain at "stall" speed (1% or below) for long, the risk of a negative feedback loop from the real economy to the financial system and back to the real economy would become very high. Policy makers are running out of policy bullets: Monetary policy can do close to nothing for the real economy as more quantitative easing will not push banks to lend more, and there is neither political will nor room for additional fiscal stimulus. – RGE Monitor
  • "Google to launch Facebook competitor very soon." That line from Kevin Rose, the tech entrepreneur who founded the content-sharing site Digg, unleashed a sense that the online world as we know it was about to fundamentally change. – WP
  • BP/Gulf – an internal BP report has found that the co’s engineers misinterpreted pressure data that signaled a blowout was imminent – Bloomberg
  • Tax cuts – some senior Dems having second thoughts about allowing Bush tax cuts to expire for wealthy; some Democrats are pressing to have the Bush rates extended, at least for another year (Washington Post – note this article was out early on Fri).
  • Analyst ratings - For the first time since at least 1997, fewer than 29 percent of ratings for stocks covered by brokerages worldwide are "Buys," according to 159,919 recommendations compiled by Bloomberg. Analysts are turning more pessimistic – Bloomberg
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Subprime Mortgages: Then & Now

Here is an interesting exercise in nostalgia. Google (GOOG) is celebrating their 10th anniversary by allowing us to rewind the hand of time and search the internet, as it appeared in their search engine back in 2001.

Click to see the results of googling for "subprime mortgage" then and now (warning this is a LARGE image):

subprime google results 2001 and 2008 compared

Among the 2001 results there is only one which would ring a little warning bell: the Office of the Currency Comptroller expressing concern (I added the word concern because it was truncated in the search results).

If you want to search for other terms you can find this special edition 2001 Google search engine here. Keep in mind that Google search results are geographically targeted and I'm located in Canada so depending where you are, your results may vary slightly.

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Here are two free online tools that analyse the relationship between stocks and help you to find correlated stocks (or negatively correlated stocks):

Select Sector SPDR Correlation Tracker
stock correlation calculator sectorpdr.com

Any quantjock worth his salt will laugh at such a simplistic treatment of correlation but for the rest of us it is a useful tool. How useful is it and why would you want that kind of information in the first place?

Knowing the correlation of one stock to another helps you in define your portfolio. After all, what good is owning separate stocks or even ETFs if most of them are correlated? If you don't diversifying your holdings you are at risk that a market shock will effect them all at once and in the same way.

impactopia market topologyAnother reason to look for correlated stocks is to engage in pair trading. This is where you aren't interested in a stock per se but the relationship between two stocks. There are different strategies but the simplest is to watch the relationship and when it gets out of historical norms, to go long one and short the other.

Another online resource is Market Topology, now renamed: Impactopia.

They offer more robust analysis with a choice of time frames as well as the ability to graph the spread of two stocks or each, side by side. To use the site you may find it asks you to sign up but the service is free.

Impactopia has other goodies if you explore enough. For example, it plots a "tree" of the security you are curious about mapping out its relationship with other securities. You can see Google's (GOOG) tree to above.

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Ever since Google's breathless announcement more than a year ago that they were going to offer real time stock quotes to everyone, I've been waiting to see if they would make good on their promise.

Well, it took much longer than they or anyone else thought but you can now get "real time" data for NASDAQ traded securities on the internet for free.

I put real time in quotes because the data is refreshed every second and only the trades that cross on the NASDAQ platform will be transmitted. So trades that take place on the NYSE, AMEX and other ECNs are not included. This is a key factor and will become more so as competing platforms continue to attract trades away from traditional exchanges. Just be aware that you are not getting the complete picture.

And that means that no matter how interesting this announcement is, no serious trader is going to cancel their data subscription just yet. But for everyone else, it is a nice little bonus to be able to have just this much more accurate stock prices.

I'm curious but haven't found anything regarding how exactly this works or what sort of deal was struck. Selling real time data was and is the bread and butter of traditional trading platforms such as NYSE and NASDAQ. Obviously the rules have changed.

For now the data will only appear in the top search engine result when you type in a stock symbol, otherwise known as the OneBox:

free real time nasdaq quotes from google

But soon the data stream will be diverted to flow into the large charts. And although Google spearheaded this initiative, the NASDAQ free real-time data partnership includes Dow Jones & Co. affiliate sites such as CNBC, WSJ, MarketWatch and Barron's. So keep an eye out for it on those sites as well.

As if it needs to be said: I would strongly recommend against using this data service to actually place trades intra-day. Especially in fast moving market conditions. But if you are swing trading or position trading and don't particularly care about the sort of fill you get, I suppose it can be a good "backup" quote provider or sorts.

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This week the markets were propelled ahead by the positive earnings of major tech companies like Intel (INTC) and Google (GOOG). Here is the sentiment summary:

Sentiment Surveys
Investor's Intelligence results are basically unchanged so no need to delve into them. The AAII survey this week shows a reemergence of bearishness with 49% of respondents in that camp (only 30% are bullish). This is rather odd because the market has continued to go higher but part of the mysterious gloominess of the retail investor may be that the survey was completed on Thursday, before Friday's powerful rally.

In any case, as a contrarian and a current long, I always welcome pessimism, especially when it is accompanied by higher prices.

Market Breadth
With the rise in market prices, the percentage of stocks above moving averages has also increased. The shortest time frame I use is the 10 day moving average and it now shows about 82%, very close to levels which have pushed back rallies in the past. This is where we found this indicator last October when most indexes created their swing highs.

percent spx above 10 day MA April 2008
Chart from indexindicators.com

But is is a very short term metric which doesn't preclude the market from rising higher in longer time frames. More importantly, the percentage of S&P 500 stocks above their 50 day and 200 day moving averages are 71% and 40%, respectively. The most important is the longer metric which is still very low.

It reached eye popping lows of 15% in January and again in March 2008. We haven't seen numbers that low since the darkest days of the last bear market. This was one of the reasons I was unapologetically bullish. As I've brought to your attention repeatedly, such extremely low breadth numbers have always marked the start of a new bull run.

But right now, we're a tiny bit over extended and I wouldn't be surprised to see the market yet again pause and/or be rebuffed at the 1400 level which has turned it back 3 previous times. The difference now is that there are more and more stocks participating in the rally, as can be seen by the number of stocks above their 200 day averages.

CBOE Put Call Ratio
After spiking higher than 1.30 the CBOE equity only put call ratio backed off this week in a hurry, falling below 0.59 - this is the lowest number since early February 2008. And yet another short term argument for the tape to run into resistance.

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