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Morning Notes For November 9th 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:

  • USA gets downgraded by a Chinese rating agency – this news actually hit Tuesday 10 AM ET. China's Dagong Global Credit Rating Co. downgraded the U.S. to A+ from AA, with a negative outlook, because of quantitative easing – Bloomberg
  • Gold continued its post-QE2 climb, surpassing the US $1,410 mark on November 9 as China announced a number of measures designed to curb inflows of hot money. – Roubini Global Economics

Ten Year Chart of Gold
gold price 10 year chart Nov 2010

  • An international backlash against the Federal Reserve's move last week to pump billions of dollars into the U.S. economy is threatening to undercut the Obama administration's economic goals for this week's G-20 meeting of world leaders. – Washington Post
  • US homeowners can't take advantage of lower rates – homeowners are unable to take advantage of low rates because of negative equity and/or stringent new lending requirements. Refinancing levels are well below where they normally should be given how low rates are. FT
  • "New risks for munis" – The greatest default risk is in smaller municipalities with shrinking tax revenue bases and large projects. WSJ
  • According to the WSJ, the Fed is expected to grant approval to some US banks to resume capital payouts to shareholders (either via buybacks and/or dividends) although its not clear whether a public announcement will be made (or if the banks will simply be given guidance privately).
  • US Housing market – new bleak Q3 report published from Zillow – "Nationally, home values continued to decline, and several local markets that had been showing strong signs of stabilization took a turn for the worse." – Zillow
  • Inflation/food worries – one of the lead FT articles – "food price fears as US warns on crop yields" – the US government again on Tuesday cut its forecast for corn yields, raising concerns about surging prices. Worry growing over supply shocks. – FT
  • CNBC's Steve Liesman reports that the G20 Leaders Summit communiqué, it is officially be published this weekend, will call for more flexible, market-based exchange rates and will also declare that no financial institution should be too big to fail. The leaders are expected to endorse the Basel III rule changes. Large systemically important banks will be encouraged to create "living wills." – CNBC
  • Banks – the G20 has drawn up a "two-tier" bank regulatory plan, whereby global regulators would focus their attentions on large world-spanning institutions instead of more domestic-focused firms. This means that many banks in Japan and China, which have a more domestic focus, would wind up being exempted from the new regulatory framework. A list of 20 large global banks whose importance is "systemic" is being drawn up. Some of the banks that may wind up on that list: GS, MS, BAC, C, RBS, HSBC, Barclays, RBC, Standard Chartered, UBS, CS, SocGen, BNP, Santander, BBVA, Mizuho, Sumitomo, Nomura, Mitsubishi, Unicredit, Intesa, DB, and ING (and some think the Japanese banks may wind up being removed as they are primary domestic institutions). FT
  • Goldman Sachs Asset Management's Jim O'Neill said China is accelerating the yuan's appreciation as part of the "grand bargain" to win US support for Beijing to gain a bigger say at the International Monetary Fund. – Bloomberg
  • The National Federation of Independent Business Index of Small Business Optimism improved by 2.7 in October to 91.7, though it remains in "recession territory" and well below the long-term average of 98.7 – Roubini Global Economics

NFIB Small Business Optimism Index
nfib small business optimism index chart Nov 2010

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Let's get on with this week's summary of sentiment data because we have a lot to cover:

Sentiment Surveys
This week's retail investor survey from the AAII shows an abrupt reversal. It was just four weeks ago in late August that the AAII's bull ratio (the percentage of bulls divided by the percentage of bulls and bear) fell below 30%. That threshold is the limit I was watching as a sign of too much pessimism.

And now, we are seeing the exact opposite with 51% bulls and only 24% bears, giving up a bull ratio of 68% - the highest for the whole year and the level at which we've seen the equity market react several times previously. As you can see from the chart, in recent years, we've seen this level reached only a handful of times: December 2009, May 2008, and October 2007. A quick glance at the chart of the S&P 500 will tell you that all of those instances were much better selling opportunities than buying ones:

aaii bull ratio chart Sep 2010

Having said that, looking at the long-term chart of the AAII data, it is clear that the bull ratio can reach much higher than the current 68%. In fact, as early as 5 years ago, the bull ratio went above 80%. And the highest point for the dataset was during the summer of 2003, at 89%. During bull markets, sentiment reacts differently and it takes quite a bit of optimism to reach an 'extreme' point.

Investors Intelligence
In contrast to the AAII, stock newsletter editors, as measured by ChartCraft's Investors Intelligence survey, were little changed from last week with 36.7% bulls and 31.1% bears. This is the second week the bulls have recovered from a yearly low but since reaching a top in January and April, optimism has been waning pretty consistently in this survey:

investors intelligence bull ratio Sep 2010

Daily Sentiment Index
This week the DSI for the S&P 500 index reached 83%. This is an elevated level but shy of an extremely optimistic level. In mid-April, the DSI reached 92% as the equity market reached an important top. For a chart with comparison to the S&P 500 index, see the previous Sentiment Overview (Week of April 16th 2010).

Bloomberg Professional Confidence Index
I was looking forward to this month's results from the Bloomberg Professional Confidence survey but sadly, it seems that it is being discontinued. This survey was conducted through the Bloomberg terminal and reached mostly an institutional audience for their take on various financial and economic questions. The survey included geographic breakdowns as well as asset allocation questions. The chart below shows the historical results for the global economic sentiment.
Continue reading 'Sentiment Overview: Week Of September 17th, 2010'

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Here is this week's sentiment overview:

Sentiment Surveys
Let's start this week's overview with the Investors Intelligence measuring newsletter editors optimism. I referred to it briefly yesterday when I mentioned several technical analysts points of view.

Stock newsletter editors are usually a rather bullish bunch because doom and gloom, while being accurate at times, isn't very popular. We almost always see more bulls than bears in the II weekly numbers and to hit an extreme bullish reading, we look at the bullish camp being 3 times larger than the bears.

Within that context, this week's reading of 32.6% bulls and 34.8% bears does indicate capitulation by stock newsletter editors. The bull/bear ratio is 0.94 - the lowest since April 2009 as the market was just climbing out of the crater left by the 2008 bear market.

American Association of Individual Investors
In contrast, this week the retail investors bolted back to the bullish side. The AAII bulls had a huge 18.4% point increase in bullishness to reach 39.4%. What the bulls gained, the bears lost, moving from last week's 57% to end up at 37.8% this week. As a result, the bull ratio went from 27% to 51%:

AAII bull ratio Jul 2010 update2

Historically, it is rare to see the AAII bull ratio fallen below 30% and recover above 50% the next week. In fact, going back over the whole history of this indicator, every time it has fallen so much, it has taken it at least 2 weeks to recover - with one exception. That was on April 20th 2005 (not shown on chart) when the bull ratio jumped from 28% to 53% in one week. The increased volatility on the tape is translating into major volatility in the sentiment measures.

The fact that retail investors have renewed their optimism so fast will undoubtedly lead many to conclude that it is a negative sign for the market. But based on a quick historical study done by Jason Goepfert, it isn't all that conclusive. With a 71% probability the market is slightly higher (+0.7%) 2 weeks later and going forward to 6 months later, it is a coin toss - basically no edge at all.

Keep in mind that the bull ratio is still under where it was in mid-June 2010 (58%) when the S&P 500 topped out and rolled over. As well, the current bull ratio is right around the 10 year average.

Hulbert Stock Newsletter Sentiment
Another measure of stock newsletter editor sentiment confirms the Investors Intelligence data. Even though the S&P 500 bottomed out in early July and went on a rampage almost hitting 1100 (intra-day high) the Hulbert Stocks Newsletter Sentiment (HSNSI) actually fell indicating that editors were so skeptical of the rally they were recommending to their clients to go even more short.
Continue reading 'Sentiment Overview: Week Of July 16th, 2010'

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This is a guest post by Tyler S. Lang:

Our economy is at a crossroads and in order to get sustainable growth we need to see positive trends in employment. The following are some leading indicators to help us monitor these trends. For the sake of brevity, I have kept the commentary to a minimum so let me know if you have any questions.

My overall conclusion is that we should see net hiring start in the second quarter. Keep in mind that the February data will probably be skewed due to the widespread snowstorms.

The List of Indicators:

  • Average Weekly Hours for Manufacturing Employees
  • Temporary Hiring & Non-farm Payrolls
  • Initial Jobless Claims
  • Small Business Hiring Plans
  • Hiring across different sizes of Employers (from ADP)
  • Underemployment (U6) minus headline Unemployment
  • Ratio of Unemployed to the Number of Job Openings
  • "Jobs are Plentiful" minus "Jobs are hard to get"

Which way are we headed?
help wanted or unemployment line
Continue reading 'The Case For Near-Term Job Market Improvement'

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Here's this week's rather comprehensive sentiment summary:

The weekly retail investor's sentiment survey from AAII is little changed. Both camps are 1% points higher, making it 43% bears and 35% bulls. The AAII has returned to more 'neutral' territory after the early November extreme (when we had 56% bears and only 22% bulls).

Usually, we'd see a huge up move after such an extremely gloomy mood among retail investors. After all, things were about this dark and foreboding back in February and March, just before the rally was ignited. But since early November the S&P 500 has only eked out a 5% gain. This baffling response may be explained by the turbulent cross currents in sentiment as we'll see below.

Investors Intelligence
In contrast to the AAII, the newsletter sentiment is extremely bullish. This week, the Investors Intelligence bulls a smidgen less than last week, at 48.4% but what has everyone's attention is another record low for the bears at 16.5%. This means that for a second week, there are about 3 optimists for every 1 pessimist out there in newsletter editor-land. If you're trying to be contrarian, this can be confusing! Which metric do you listen to? which do you discount?

investors intelligence sentiment survey Dec 2009 extreme

While everyone has been concentrating on the dichotomy between the Investors Intelligence bullish and bearish camps, it isn't all that uncommon to see this much optimism in this sentiment measure. In contrast to the AAII survey, the third option is not "neutral" but rather newsletter editors expecting a "correction" in the short term (and a rise in the market long term). Right now, that describes 35.1% of editors which is the highest since 1992. Strangely enough, while the interplay of the bullish and bearish camp is a contrarian measure, the correction camp has actually been accurate (when at an extreme, like now).

CNN Money Poll
While economists are debating whether we've already seen the end of the recession, the average person in the US has no doubt. According to a recent CNN/Opinion Research poll, 84% of Americans believe that we are still in a recession. The poll also found only 15% who believed that things were getting better while 39% believed that things were getting worse!

Public Perception of Bankers
Thanks to their inability to take responsibility for the financial crisis and their infinite sense of entitlement, I'm sure you won't be surprised to learn that the public image of bankers is scraping the bottom of the barrel:
public perception of bankers Gallup poll
Source: Gallup

NFIB Survey
The survey of business optimism from the National Federation of Independent Business's (NFIB) throws cold water on the nonfarm payroll surprise. The November results indicate that small businesses, the engine of the US economy, continue to see weak sales growth, frozen credit and lending conditions and not surprisingly, few employment intentions.
Continue reading 'Sentiment Overview: Week Of December 11th, 2009'

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