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Morning Notes For August 19th 2010 at Trader’s Narrative

Morning Notes For August 19th 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:

Initial Jobless Claims: Survey 478k Actual 500k Prior 484 Revised 488
jobless claims Aug 2010

  • Jobless claims are one of the better leading indicators of the economy and one of the best coincident indicators of payroll employment changes. The rising pace of layoffs since early February presaged the slowdown in hiring in May and the slowdown in the economy in the second half of the second quarter. Today’s data suggest things could deteriorate further before they improve. – FTN Financial
  • The SEC sued New Jersey for securities fraud, saying the state lied about the condition of its two largest pension funds when issuing securities. The state settled without admitting wrongdoing. The SEC is not likely to go after the federal government for failing to recognize the unfunded liabilities in SS and Medicare, but it might go after New York, Illinois and California, according to the WSJ. – FTN
  • S&P 500 technical update (from Krauss): daily momentum is on the cusp of an oversold buy signal. A weekly close above 1079 would confirm a bullish reversal week. Bulls need to push back above the 1107 August range breakdown and the 1116 200 day moving average to restart the rally towards 1130-1150 interim resistance – JPM’s Krauss
  • Housing - Homeowners were less confident about the value of their homes in the second quarter, with one-third believing home prices had not yet reached a bottom.
  • US banks receive benefit from new Basel III proposals – a new report from Barclays says major US banks should be able to comply w/new Basel III capital rules w/o having to raise substantial new amounts of equity. US banks will have to raise new capital amounting to only 50% of original forecasts. FT
  • GLD becoming popular gold vehicle for HFs – with its growing popularity, there are growing signs that gold is becoming less a hedge vs. equities as correlations with stock moves have risen – WSJ
  • Mortgage refinancings jumped in the past week, which advanced 17% to a high since May of last year (out Wed pre-open) – WSJ

Of Interest:

  • The decoupling of stocks & bond yields continues to widen

10 year bond SP500 spread Aug 2010

Bond yields and stock prices are generally positively correlated…yields move up as growth is repriced higher. Money moves out of fixed income and into risk assets such as equities. Yet in this latest equity rally yields have come down. Which one is wrong? There have been periods in the past during which the correlation between bond yields and stock prices has been persistently negative (1990’s). It could be that strange things are happening in Fixed Income (FI) markets with Quantitative Easing and government intervention. Thus, it seems quite possible that stocks could continue to rally without FI markets pricing in higher growth. The truth is, however, I don’t have a clear answer but I am reluctant to simply assume that the correlation will automatically resume.

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