Month: August 2012

Will a strong dollar finally be good sign for stocks?

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The weak dollar-strong stocks trade that has dominated markets for the past three years has been breaking down, providing hopes that greenback gains don’t have to be a bad thing for equity investors.

Though the dollar still trades at relatively low levels against the world’s currencies, it has been on a steady trajectory higher since hitting its low of July 2011.

The surge has come as fears have intensified over the effect the European sovereign debt crisis is having on the global economy.

But rather than drag US stocks down, as a stronger dollar had done since the depths of the 2008 financial crisis, the move has coincided with a general though volatile levitation of the equity markets.

“The direction of the dollar and the direction of the market seem to be overall in sync at this point, and it’s been a process that started just about 12 months ago,” says John Stoltzfus, chief market strategist at Oppenheimer in New York. “A lot of this correlation that is occurring is really related in part at least to the fact that the US is being considered by global equity investors as the place to be right now as the more relatively stable economy compared to Europe or the emerging markets.”

Indeed, the dollar index, which measures the greenback against a basket of its global competitors, has gained about 10% over the past 12 months, while the Standard & Poor’s 500 has rallied a shade more in the same period.

That happened even as the Federal Reserve maintained its weak-dollar policy through various monetary easing programs.

“With the dollar strength comes appreciation, pun intended, of this market for the S&P 500 via desire for exposure to US-based asset classes,” Stoltzfus says.

The dollar-stocks relationship is, to be sure, a tenuous and complicated one.

It’s a hard argument to make – with 1.5% gross domestic product growth and an 8.3% unemployment rate – that the move to the dollar has been inspired by powerful US economic strength.

Rather, the American economy is seen these days as simply a safer place to park money than Europe, with its daunting debt problems, or even China, where growth has pulled back.

The dollar and US stocks, then, are benefiting more from a safe-haven desire than a strong vote of investor confidence.

“If the dollar is rallying out of fear, that is an entirely different animal,” says Dave Lutz, managing director of trading at Stifel Nicolaus in Baltimore. “Obviously, that’s a risk-aversion trade and that would be negative for the market.”

Regardless, Lutz sees the positive correlation between stocks and the dollar as likely to continue.

“Obviously we’re not seeing massive growth signs here in the US We are seeing stability in the housing market, which is important, and we are starting to see indicators a touch better,” he says. “You compare that to the absolute disaster that the European Union has now, and we’re the best boat of a sinking fleet, if you will.”

_PAGEBREAK_

The dollar index is just one barometer, and many traders prefer simply to watch the dollar’s move against the euro. In that case, the euro peaked around 1.45 against the dollar last August and has been a steady path lower as well.

That relationship could cause some problems, though.

Analysts have been cutting their earnings outlooks at a steady rate, basing their opinions in part on trade advantages Europe will have with a lower currency.

Jim Paulsen, chief market strategist at Wells Capital Management in Minneapolis, has a 1,500 price target for the S&P 500 this year but is concerned over whether the market gains will hold up if the euro keeps weakening.

Technical analysts say a recent mild strengthening of the euro is running out of steam, with the dollar likely to rise soon.

“I don’t know if you can get to where you were in the ’80s and ’90s where a strong dollar was looked at as a positive overall,” Paulsen says. “The thing that’s problematic is there’s a safe-haven premium in the dollar. If you’re going to put the market up, part of that’s going to be in rising confidence. If there’s rising confidence, I suspect probably for a while some of that dollar premium comes out.”

The Federal Reserve also stands at the ready to provide more asset purchases – quantitative easing – should the economic picture worsen. That would pull the dollar down, something Paulsen says will be positive for commodities and metals in particular.

“If the Fed does not supply as many dollars because the economy is doing better, you lose the safe-haven premium,” he says. “I suspect that the dollar is more likely to come off a little bit here than go up with the market.”

© 2012 CNBC.com

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Is the market rally just a set-up for a bigger ‘collapse’?

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Global stocks have been rallying in recent weeks, climbing a “wall of worry” and confounding the bears, leading a number of strategists to warn the gains are unlikely to last and investors should remain cautious.

“I think we’re in choppy waters and that continues. You’ve got to remember to sell if you own the stock market now,” Charlie Morris, Head of Absolute Return at HSBC Global Asset Management told CNBC Europe’s “Squawk Box” on Wednesday.

Morris says with bad news on the global economy over the past year, the market had “tried to collapse”, but with so many people short stocks, the conditions hadn’t been ripe. That, he says, could change after the current rally ends.

“You need to trip the market to have a proper collapse. So you almost need to set it up with a rally, get everyone excited and then it can fall,” Morris said. “If there are risks, the risks to a very negative market come after this rally fades.”

US stocks gained for a third consecutive session on Tuesday with the S&P 500 finishing above 1400, while European stocks hit a 4-month high on expectations policymakers will soon decisively address the region’s debt crisis. Asian stocks also hit a three-month high on Wednesday, with Japan’s Nikkei breaking above its 75-day moving average.

Sandy Jadeja, Chief Technical Analyst at City Index told CNBC on Tuesday that despite being bullish on the Dow for the past two weeks he was now growing concerned. He said there was a clear divergence between the technical indicators and the current price levels on longer-term charts for the Dow.

“Watch out for the end of this week, if we start seeing a negative close by the end of the week, that would suggest that next week, and the week after, we’ll start pushing to the lower side.”

Other market watchers have been warning that based on economic fundamentals, the current rally is irrational. “The rally on Friday after the release of the employment figures and the consumer confidence index really has no economic merit,” Dan Geller, chief research officer of the Money Market Index economic index told CNBC Monday. (Related: Jittery Market Basics)

Barclays equity strategist Barry Knapp also pointed out in a note to clients on Wednesday that the underlying factors in terms of “expectations of US and global growth deterioration, less accommodative monetary policy, earnings growth deceleration and elevated public policy uncertainty” were the same as they had been in the second quarter when US stocks dropped 10%.

He said investors who were defensively positioned could buy call options on small cap stocks and select cyclical stocks to ensure they didn’t lose out on the rally. But, he added: “We remain unconvinced that investors should chase the low volume ‘wall of worry’ August rally.”

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By CNBC’s Deepanshu Bagchee, Managing Digital Editor, CNBC International

© 2012 CNBC.com

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Stay away from Europe: Pimco

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Bill Gross latest message to investors – don’t put your money into Europe because they are not going to get out of their debt crisis any time soon.

Gross, Founder and Co-Chief Investment Officer of Pimco, manager of the world’s largest bond fund, wrote in an editorial in the Financial Times on Monday that the ultimate aim of European leaders is to get their hands on private-sector money because they know they will need it to fund the European economy. The current public-spending program is not sustainable and efforts to fix the debt crisis have been, and will be, futile, he said.

Policymakers in Europe now face an unprecedented expansion of risk spreads and credit agency downgrades which “almost guarantee that sickbed countries can never be discharged from intensive care,” he added. He warned investors not to part with their money.

“Investors get distracted by the hundreds of billions of euros in sovereign policy checks, promises that make for media headlines but forget it’s their trillions that are the real objective,” Gross wrote. “Even Mr Hollande in left-leaning France recognizes that the private sector is critical for future growth in the EU. He knows that, without its partnership, a one-sided funding via state-controlled banks and central banks will inevitably lead to high debt-to-GDP ratios and a downhill vicious cycle of recession.”

“Psst…investors: Stay dry my friends!” Gross said.

The crisis in Spain and Italy looks unlikely to be resolved soon and investors focusing on the 7% yields in their sovereign bonds may be missing the point, Gross wrote. Europe may not be able to bring yields down to 4%, and even if they could, it wouldn’t be enough to get Spain and Italy out of financial trouble, he said.

“Interest rates over and above each country’s nominal GDP growth rate will inevitably add to a country’s debt as a percentage of GDP, even if budgets are in primary balance,” he said. “At current yields, growth rates, and deficits, the spread may incrementally add 2-3% to Spain and Italy’s tenuous debt ratios  every year.”

If GDP growth remains close to flat, the two nations will still drown in debt even if they have to borrow at 4%. And without the private sector’s participation, all efforts such as the European Financial Stability Facility and ultimately the European Stability Mechanism, will be futile, he said.

Gross added that European policymakers have lost trust among investors with half-baked policies, and credit rating agencies downgrades are also forcing them to seek safer returns elsewhere.

“And after policymakers finally appreciate the fragility of their rigged fiscal and monetary system; after all of that – there is no coming home, there is no going back in the water,” he said.

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© 2012 CNBC.com

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Knight is still trying to find out what went wrong: CEO

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Knight Capital Group still does not know what caused the trading glitch last week that sent the company into a near-death spiral, but is taking steps to make sure there isn’t a repeat performance, CEO Thomas Joyce told CNBC.

Speaking just a short time after the company announced a USD 400 million deal that keeps the troubled trading company afloat, Joyce pledged in an interview that the trading firm protected its clients and is taking responsibility for the mistake.

A software error triggered a sharp rise in volume just after the opening bell Wednesday, creating price distortions on nearly 150 stocks. Knight’s share price has since plummeted, unabated even by Monday’s recapitalization arrangement.

“Sadly it was a very simple breakdown – a very large breakdown – but a very simple breakdown,” Joyce said on the “Squawk on the Street” program. “It was an issue with trading technology. You can be assured that now that we are doing an internal investigation to identify what truly happened and we can source the facts behind it.”

The Knight snafu struck another blow against investor confidence in a market haunted by problems with high-frequency trading programs that began in earnest with the May 6, 2010 Flash Crash, which sent the Dow industrials plunging nearly 1,000 points in a few minutes.

Since then, the market has seen blowups with the BATS trading platform initial public offering, the Facebook IPO fiasco on the Nasdaq platform, as well as an assortment of other mini-Flash Crashes on individual stocks.

Joyce pledged that his firm would try to plug whatever holes are in its system.

“You’re probably not going to be surprised to learn that since that large mistake Wednesday morning we’ve been focused on a couple other things rather than simply a post-mortem,” he said. “So we’re going to be into the post-mortem quickly and we’re going to come out with solutions as to how we can enhance the system and enhance the environment here.”

He stressed that even though shareholders will take a beating on the rescue deal, the company will survive and is “in arguably better financial shape than we were a week ago.” Joyce made an unsuccessful effort over the weekend to get the Securities and Exchange Commission to cancel many of the faulty trades involved, according to a Wall Street Journal report.

A consortium of investors will buy convertible shares that will work out as 267 millions shares of common stock, giving them about a 70% stake in Knight and substantially diluting current shareholders.

“We took the consequences,” Joyce said. “None of our clients took the consequences. More importantly, the industry didn’t suffer.”

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London Olympics an ‘economic failure’: Roubini

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Famously bearish economist Nouriel Roubini has branded the Olympics an “economic failure”, saying Londoners have left the city and tourists have stayed away following “excess warnings”.

The Games (click for more on the Olympic Games) were meant to boost tourism in the United Kingdom and in London in particular with an extra million visitors a day, but many shopkeepers have reported a drop in activity.

Warnings of enormous pressure on the city’s public transport network and overcrowding in the city’s busiest districts prompted many Londoners to book holidays or work from home during the Games, while tourists have shunned the West End which contains many of London’s biggest attractions.

Research group Experian said the Olympics appear to have adversely affected the number of people visiting shops in West London, with decreases week-on-week and year-on-year of 11.65% and 12.40% respectively on the first Saturday of the Games.

On the first Sunday however, visitors numbers were up marginally.

“The Olympics are an economic failure as London is totally empty: hotels, restaurants, streets,” Roubini tweeted. “It turns out London is totally empty. A zombie city.”

“The West End – usually packed on any Saturday night – was an empty waste land last night: barely a soul to be found in theatres, bars, etc,” he said on Twitter. “They pushed most Londoners to escape, they told 2 million to work at home.”

He blamed UK policymakers for scaring citizens and tourists alike in the run-up to the Games.

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ECB provides a little breathing space, but no more

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The European Central kept the pressure on troubled euro zone countries on Thursday, sending a clear signal that while the bank may take further measures to bring sky-high borrowing costs down, struggling countries must act and take responsibility for their finances.

“First of all governments need to go to the EFSF; the ECB cannot replace governments,” Draghi told reporters at a news conference after the central bank left rates on hold at 0.75%.

Troubled member states (related: world’s biggest debtor nations) can submit a request for aid from the European Financial Stability Facility (EFSF), Europe’s rescue fund, which can then respond by buying up bonds to drive yields down. But Germany wants to attach strict conditions to such a move.

German officials have also warned the ECB against large-scale bond buying in recent days and Draghi conceded that the German Bundesbank and chief Jens Weidmann had their “reservations” about the bond-buying program.

“The ECB is trying to put the ball firmly back in the court of the politicians. Monetary policy cannot solve this crisis. It can provide breathing space but it cannot solve it, James Ashley, senior economist at RBC Capital Markets told CNBC.

“And the problem with the ECB is that while it continues to provide that breathing space, all it is doing is taking the pressure off the governments, so there’s a fine balance to get here between taking the pressure off and alleviating market conditions and improving the macro outlook, but at the same time keeping the pressure on to try and get the governments to do something,” he said.

Draghi urged governments to push ahead with reforms and fiscal consolidation and said they should take further “decisive and urgent steps” to improve competitiveness.

“I don’t think the ECB is out of options but I think at the moment, it doesn’t want to use those options,” Ashley said.

_PAGEBREAK_

Draghi raised hopes for decisive ECB action last week when he said the bank would do all it could do preserve the single currency. German Chancellor Angela Merkel and French President Francois Hollande added their voices to the promise to safeguard the euro.

That message sent stock markets sharply higher as investors speculated that the ECB would re-start bond purchases to bring down borrowing costs for countries such as Italy and Spain.

They currently face interest rates considered unsustainable in the long term.

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But some analysts sought to temper the euphoria that followed Draghi’s coments, pointing out that the ECB President had added the caveat that measures needed to fall within the scope of the ECB’s mandate.

Draghi repeated on Thursday that the bank would do whatever was in its power to preserve the euro as a stable currency.

The ECB has already taken on over 200 billion euro of debt from euro zone countries.

Volker Wieland of the House of Finance research center in Frankfort pointed out that it was not the ECB’s job to ease market conditions for certain governments and not for others.

“They can do quantitative easing if there’s a threat of deflation – that’s obviously not the case anywhere at the moment – so they should just stay away from it,” he said.

“The situation right now calls for much more action on the national level. There’s no point in buying time. The key country right now is Italy and Monti is running out of time – the election is coming up,” Wieland said.

According to him, markets will want a greater degree of certainty that reforms will be implemented in countries struggling with high borrowing costs, even if the governments there change.

© 2012 CNBC.com

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

The Knight Fiasco: How did it lose USD 440 m?

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Well, that didn’t take long. Knight Capital announced a pre-tax loss of approximately USD 440 million on its “technology issue” yesterday, and also said they had traded out of its entire erroneous trade position.

Wow: USD 440 million? How on earth did it lose that much? It’s easy to see. I noted many times yesterday that the volume in the first half hour of trading on the New York Stock Exchange floor was titantic: shortly after 10 a.m. ET, it was about 300 million shares, well more than twice normal volume at that time.

This would indicate that the trading program that came out of Knight resulted in millions of duplicate trades. And it was not going to get much relief in the form of busted (erroneous) trades. The NYSE last night busted trading in only a half-dozen stocks and declared that “no additional symbols will be considered for review.”

The NYSE was not being mean-spirited: The definition of what constitutes an “erroneous” trade is very carefully defined, and the NYSE determined that based on that definition only a half-dozen stocks fell into that category.

Once that happened, Knight was faced with tens of millions (at least) of trades that were not clearly “erroneous,” but which it is likely liable to cover. At that point, it was just a matter of doing the math.

That’s why it was able to come up with a number so quickly.

While losses may be settled for the moment, the longer-term risk is reputational. Knight has a very large retail customer order base which may begin to question its ability to execute.

Patrick O’Shaugnessy at Raymond James downgraded Knight from “strong buy” to “market perform,” saying “these events will limit Knight’s earnings multiple expansion due to perceived risks of its market-making business model.”

Two questions:

1) What exactly caused this “technology issue”? Knight still hasn’t told us. I mentioned several times yesterday that the NYSE had launched a new program Wednesday, the Retail Liquidity Program (RLP), essentially a dark pool inside the NYSE. It is quite possible that Knight had a problem interacting with that program due to some kind of coding issue. Other firms apparently interacted with the RLP without incident.

2) Why did it take so long to shut the damn errant program off? It ran for almost 30 minutes! Traders on the floor noticed a problem within the first couple minutes of the open — I was standing there — but it appears to have kept running to almost 10 a.m. ET.

Huh? Traders seemed baffled that it kept running, but when I asked a couple guys, “Why don’t they just call up the source of the trade and tell them to hit the kill switch?” nobody had an answer.

I think the problem was the NYSE DID contact Knight, and it may have taken Knight some time to identify the problem. If this is correct — and I think it is — this will give more ammunition to those who are arguing for more robust oversight over the trading systems … at the very least better interactivity and more redundancy.

By CNBC’s Bob Pisani

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© 2012 CNBC, Inc. All Rights Reserved

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India needs to take action on rupee: StanChart Asia CEO

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The weak Indian rupee has impacted earnings at Standard Chartered Bank and India needs to exercise some “fiscal control” with regards to the currency, Jaspal Bindra, CEO Asia for Standard Chartered, said on Thursday.

The Asia-focused British lender on Wednesday said its first-half pre-tax profit rose 9% to USD 3.95 billion compared to the same period a year ago. But a slowdown in key markets such as India hurt growth in wealth management income.

“Clearly we have slowed in India, in line with the drop in GDP growth we have seen in that market. But the large hit that has come, is from the exchange, which clearly needs some correction purely from fiscal control in that country,” Bindra told CNBC Asia`s “Squawk Box.”

India`s currency, the rupee, hit record lows in late June at about 57.32 to the US dollar, driven down by the country`s stubbornly high inflation rate, slowing economic growth and concerns about a lack of progress on fiscal reforms.

Bindra said there are some positive signs such as the appointment earlier this week of Palaniappan Chidambaram as India`s new finance minister. Chidambaram is viewed as a market-friendly reformer and was finance minister in the mid-1990s, when he carried through a series of reforms that were viewed as positive for spurring India`s rapid economic growth at that time.

“We are encouraged that the oil price reduction and the change in the finance minister might be the watershed that is required. Having said that we are very confident about the medium-term prospects for India and we are increasing our investment there in branches, technology and products,” Bindra said.

India, Asia`s third-largest economy, has been in the spotlight this week after massive power outages highlight the country`s poor infrastructure and puts its ambitions as a global economic power at risk.

Referring to how Standard Chartered was competing against its competitors in the region, Bindra said the bank was benefiting as European banks scale back on business in Asia.

“Generally on the competition, particularly the European competition, which has to deleverage, we are winning market share on that count,” he said.

“More importantly, … we are the only major bank that has been upgraded by all three rating agencies since the financial crisis, we`ve been able to attract very good talent from our competitors,” he added.

Copyright 2011 cnbc.com

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Stocks dip after Fed: Should Bernanke have done more?

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Equities in the US and Asia fell in tandem after the US Federal Reserve failed to offer new monetary stimulus on Wednesday. While the outcome was largely expected, some observers say it`s not so much what the Fed could have done, but what it should have said.

Although Fed officials said the US economy had “decelerated somewhat,” they also held back on fresh measures, dashing expectations among some investors and sending risk assets such as stocks and commodities lower.

According to Randy Kroszner, Former Fed Governor and now Professor Of Economics at University of Chicago`s Booth School of Business, the Fed could have provided a “little bit more guidance” to boost market confidence.

Besides signaling that they would buy more assets in the mortgage markets to lower the borrowing costs of consumers, Fed officials could also be more outspoken on future moves, he added.

“They can also consider some what I call “open mouth” operations, rather than open market operations,” Kroszner told CNBC Asia`s “Squawk Box” on Wednesday. “They`ve made a clear commitment to do something because in the last statement, they said they were prepared to take further action. Here, they say that they will act if things don`t get better. So they could give clearer explanation for what are those conditions.”

For example, the Fed could say they will act when inflation is below their target of 2% or when unemployment rate is above 8%, Kroszner said.

“They might say, listen, those are the conditions under which we will act,” he added. “And I think that will give a little bit of boost of confidence to the markets.”

Weakness in the world`s biggest economy is weighing on investors, who want the Fed to do more to stimulate growth. The US economy grew just 1.5% in the second quarter, slowing from a 2% expansion in the first quarter as consumer spending faltered, and unemployment has stayed over 8% for six months. Job creation slowed sharply in the second quarter to just 75,000 jobs per month from 226,000 in the first quarter.

Tim Condon, Head of Research for Asia with ING, said it might be time for the Fed to do something different if they wanted to kick-start the US economy again. During the peak of the financial crisis in 2008, the Fed expanded its balance sheet by USD 600 billion by adding new assets and new liabilities. In 2010, the Federal Reserve purchased USD 1.25 trillion of mortgage-backed securities in order to support the sagging mortgage market.

Condon argues that the previous monetary easing has not worked and it`s time to give the Fed more firepower.

“QE1 and QE2 were time bound and they were limited in size and people looked through them,” he said. “Maybe it`s time they tried monetary easing in the form of an open-ended operation, that is not time bound, to get inflation to a certain level or GDP to a certain level and I think it would be very effective.”

However, not everyone is convinced that further policy moves by the Federal Reserve would do the trick. Another former Fed Governor Robert Heller, said the most important thing now is not for the Fed to provide more stimulus. Instead, the government would have to adopt pro-growth policies.

“They (the Fed) are doing all they can do but what you have to do is take away some of the obstacles to growth,” Heller told CNBC. “The increase in rules and regulations; Dodd Frank rules are being implemented all over the place, Sarbanes-Oxley is still weighing on the economy, and in addition, we have all kinds of environmental rules that are becoming increasingly burdensome to economic growth.”

Similarly, Geoff Lewis, Global Market Strategist with JP Morgan Asset Management said there was no need for the Fed to act now because the US economy could rebound in the second half of the year.

“We don`t think the need is likely to arise, at least in the second half of 2012 so it`s about time I think the Fed told investors, don`t look to us all the time for relief and support,” Lewis said. “Don`t look to us to pull a rabbit out of the hat. The US is recovering gradually and so from that point of view, I`m quite happy with the Fed`s inaction.”

Copyright 2011 cnbc.com

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Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Expect less from fear-addled market: Bill Gross

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Pimco bond maven Bill Gross tempered his dour outlook for stocks, telling CNBC on Wednesday that equity bulls “should expect less” from a market bound to be undermined by slowing global growth that will lower returns.

Gross also qualified some of the criticism that drew a strong defense of stock market returns from finance professor Jeremy Siegel. Earlier this week, the fund manager caused a stir with his monthly outlook when he said stock market returns were all but built on a Ponzi scheme.

“I`m not dissing stocks, I`m simply suggesting that the double-digit returns investors grew used to over the past 20 or 30 years basically are a thing of the past,” Gross said. Still, “stocks will do better than bonds in the long, long-term,” he added.

Paraphrasing an old hit song by disco queen Donna Summer, Gross joked that retiring baby boomer investors were going to have to “work hard for the money” instead of expecting the money to work hard for them.

With Europe`s debt crisis battering markets and fears growing about the health of the US economy, Gross stated that equities have a higher risk premium built into their prices.

Gross spoke after the Federal Reserve left its policy unchanged, yet stopped short of injecting the economy with a new round of quantitative easing , as some observers speculated.

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

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Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow