Market Talk

Let’s start putting some of the pieces of this puzzle together, shall we?

The news has been almost uniformly bad the past two weeks, unless you were the one person in your office pool who had Virginia Commonwealth. But stocks have been on a tear. Why, exactly?

We have a few facts from which to start constructing a theory:

- On March 16, the yen spiked, reaching Y76 to the dollar. The next day, finance ministers from the G7 nations held a conference call and agreed to intervene in the forex markets to put a cap on the yen.

- The DJIA and S&P 500 hit their year low on March 16.

- The yield on the U.S. 10-year Treasury note hit a year low of 3.20% on March 16.

Since March 16:

- The yen has appreciated no further, and currently resides around Y82.88.

- The DJIA is up about 6.5%. The S&P is up about 5.8%.

- The 10-year Treasury yield rose as high as 3.49% on Tuesday. Through Tuesday, it had risen every session since March 16, a streak that has not occurred since 1990.

Do not think these various things are unconnected. March 16 was a pivotal day in the global markets.

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Crude prices are back over $105 a barrel, something that until the Japanese calamity was a major story, given the wide implications. There is not a single aspect of the global economy that isn’t touched by oil prices, and some participants, think small truckers, say, or your average consumer, are touched more.

But even large companies have to deal with higher oil prices, and for some industries it’s an undeniable millstone. I’m thinking airlines, which weeks ago already said they to see their profits cut in half this year just on oil prices alone.

How many body blows can the global economy absorb, and the American economy in particular? I’d guess it isn’t many more, and given the confusion that seems to cover this entire Libyan intervention, it’s a good bet oil prices will climb higher, putting more pressure on small truckers, consumers, airlines and everybody else.

Dennis Gartman, who edits and publishes The Gartman Letter, sums it up well in his morning missive:

Energy prices are quite a good deal higher as the markets try to make sense of the situation in Libya…a senseless situation if there ever was one. We have a madman on one hand, and a Constitutional “crisis” on the other, and no one truly understands what the end-game shall be. In most instances, confusion breeds contempt and lower prices, but in the energy world confusion breeds stronger, higher prices.

The only people who benefit from the confusion, it seems, are oil traders.

There were two things I saw last week that put the fear of God in me. Both came Wednesday. One seems to be improving; the other remains a wild card, and that’s why I bring it up.

That was the first time I saw close-up pictures of the mangled Fukushima Daiichi nuclear plant. The walls that contain two of the reactors are completely gone. The upper third is missing from another. Seeing those pictures, it was pretty obvious to me that a total meltdown was a very real possibility. Those pictures were worth more than 1,000 words, and every word was absolutely shocking.

The Fukushima 50 have had some success in stabilizing the plant as of Sunday, and I fervently pray they are ultimately successful. God bless their courage. Were that others were so dedicated.

The second thing caught my attention Wednesday was the yen’s frenzied spike just after 5 p.m. New York time. The yen, which had been strengthening since last Friday’s earthquake, suddenly broke through all resistance and spiked higher. Lightning fast. Straight up. It was a black-swan kind of thing. Shorts were forced to sell, and that only contributed to the rise. It was chaotic.

“I can almost guarantee you that a few (hedge) funds out there were hurt very, very badly,” Dennis Gartman, who edits and publishes The Gartman Letter, said via email.  “No one ever escapes that sort of action entirely.”

I’ve had the feeling since last Friday that the ramifications of Japan’s nightmare are going to be larger than people initially suspected, and they are going to end up in places where people don’t expect, and in a world as tightly connected as the one in which we live, that increases the odds that one haywire event will have a cascading and destructive effect. Something like the yen’s sudden jerk has the potential to spark a global unwinding. It’s a scary thing to contemplate.

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Dennis Gartman touched on the topic of the yen, as he does most every day, in today’s Gartman Letter:

THE PANIC CONTINUES and quite honestly that is all one can say at this point, for the violence of the moves since the close of trading in N. America last evening have been nothing short of astounding. We cannot recall markets such as these since the days more than a decade ago when Long Term Capital Management was collapsing amidst the panic that was the Russian Crisis. That August we can recall the Yen moving 7 “Big Figures” in one day, sufficient to take trader after investor after institution after speculator…bullish and bearish of all markets everywhere… out of the positions with sizeable losses. Such are the markets when panic breaks out.

Gartman makes the point, without coming out and saying it. The horrific events of the past week in Japan, an earthquake followed by a tsunami followed by a nuclear crisis that, are still playing out. You do not know where this crisis is going to lead. Nobody does, and anybody who says the worst is over is trying to sell you something they do not, in fact, own.

Yesterday’s frantic trading in the yen — pushing it to a new record high against the dollar — were stunning in their pace, and even if the forex market doesn’t get as much press as the stock market, it pointed to a big shift in the marketplace. How big, and what else it will affect, remain to be seen.

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Well, it looks like Barton Biggs was right, for right now.

Biggs got a lot of publicity after declaring that the sell-off in Japanese stocks was overdone, and he’d be buying. Not sure if he meant he’d be buying right now –you’d think a savvy guy like him would’ve squared his positions before opening his mouth — but the Nikkei shot back up overnight, gaining almost 6%. This is being treated in most quarters as a near-revelation, and given the dire state of the news coming out of Japan, it can be forgiven if people seize upon some scrap of good news.

Still, the road back for Japan is going to be long and arduous. It’s hard to even keep up with the headlines about the nuclear plant alone. There are reports that food and gas supplies are starting to run out. From the Journal:

Food and gas supplies are rapidly running out in parts of Japan, leaving people not only in the earthquake-stricken northeast but also in Tokyo scrambling to grab what’s left on the emptying shelves at groceries and convenience stores.

Chief Cabinet Secretary Yukio Edano reported that supplies are being depleted not only in the evacuation zone around the Fukushima Daiichi nuclear-power complex but also in neighboring areas including Iwaki, a city on the northeastern coast.

There is going to be a lot of confusion in the days and weeks ahead, even months, and while guys like Biggs can afford to ride out almost anything, but mere mortals need to tread more carefully. The volatility, the swings in the market, have been head-spinning lately. The Dow appeared on the verge of collapse yesterday, then rebounded, posting only a moderate fall.

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We pointed last week to the $103-$104 area as a breakout range for Nymex crude. Well, as you can see it broke through that, holding around the $105 level this morning. Having broken through that resistance wall, it appears to be headed higher.

The key level still appears to be this $103 range. It fell into that area earlier, then bounced back, and as of this writing it appears to be testing the level again (looks like two tests of it so far today.) If support there holds, Newswires’ Stephen Cox wrote this morning, crude will be headed for about the $107/barrel level, and ultimately to $127.

Don’t even wonder what that’ll do to gas prices. You’ll have more reporters than customers at the truck stops on the New Jersey Turnpike.

At the same time, the level to watch for on the DJIA is 12000, which represents roughly the uptrend line drawn back to the August lows, as noted by Dennis Gartman, who edits and publishes The Gartman Letter. Gartman wrote that the Nasdaq Comp may have already broken its uptrend line, and if the Dow closes under 12000, it’ll be headed for 11400.

Right now, stocks are surging, with the Dow up 70. They’re fighting. We’ll see where that goes; markets are very, very volatile these days.

I used to think all this technical analysis stuff was goofy, that there’s no way to boil a market run by human beings to a bunch of numbers. But I got to tell you, I’ve watched more than my share of these numbers get hit, and the market lurches up or down in reaction. In a world where most of the markets are controlled by computers, and those computers have these numbers programmed into them, it makes sense to pay attention.

I’ll tell you, if I hear one more person rationalize Friday’s jobs report by trying to explain to me the difference between the household and establishment surveys, I’ll lose what’s left of my mind. I must’ve heard that 40 times on Friday, as if nobody’d ever realized it before. When Austan Goolsbee started explaining it on Charlie Rose, I knew I’d heard more than enough. It was time to turn off the TV and pick up Marcus Aurelius’ Meditations. I needed a break.

Forget all that household/establishment nonsense. Here’s a better, if somewhat dismissive, take on the report, from Dennis Gartman, who edits and publishes the daily Gartman Letter:

Our long standing clients know that we’ve tried far more often than not to be out of the office on days when the Employment Situation Report is released for over the decades we’ve been producing TGL and for the years before than when were in Chicago and worked for A.G. Becker & Company as that wonderful firms financial futures analyst we’ve found this report to be quite silly. We really cannot think of another way to describe this report, for it is indeed silly. The revisions are huge; the “Street’s” and our misses on the report are even larger, and there is rarely sense to the report from one month to the other. There is sense over time, but we are forced to deal with it in one month increments and that we find comical.

Friday’s numbers were perhaps the most comical of all, for as everyone now knows non-farm payrolls were perhaps 1/5th of what had been expected while the unemployment rate, which should have risen even if the payrolls number had come where the Street’s consensus had expected it, fell sharply. This is stuff and nonsense, and we can only hope that Friday’s report shall chasten almost everyone on the Street to do as we try to do: be out of the office and pay this report no heed whatsoever.

But, as he goes on, there was one sort of small, interesting, notable little thing that most people left out while explaining the difference between the household and establishment surveys. That is, they left out the bit about how many people got left out of the surveys.

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Got to get outta dodge and head home, but here’s a couple more opinions on the whole Egypt story for your evening commute.

Read Jerry Seib’s excellent take on not only what’s happening right now in Egypt, but what it means in a historical sense. He notes there have been three distinct phases to Mideast politics since the 1950s, and…

A fourth phase likely started over the weekend in Egypt. But whether the political “reform” movement in Cairo’s streets turns out to be a positive or negative turn for the region—and for the U.S.—depends much on Hosni Mubarak, Mohamed ElBaradei and, to a lesser extent, Barack Obama. If history is any guide, it may take months, if not years, to know precisely the outcome.

On that angle, Dennis Gartman, who edits and publishes the closely followed Gartman Letter, has this to say about the historic import of the day:

We’ve no idea how the current turn of events shall play out in the coming hours, days, weeks, months or perhaps even years. These are events unlike any the world has seen since the post-French Revolution Era when revolution swept across the world. When the brilliant Chinese political leader, Zhou En-Lai, was asked in the 1970’s what he thought of the French Revolution, he replied, wisely, “It is too early to tell.”

He was right. It was too early to tell even almost two hundred years after the events.

Gartman notes that the Russian Revolution of 1917 actually started in 1905 with a peasant uprising. An uprising of starving peasants. There’s that food prices angle.

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The major indexes, the Dow and S&P 500, have been dancing near some big, round numbers lately: 12000 for the former and 1300 for the latter. Seems they’re dancing away from them now, and everybody’s dog-piling on the idea that a sell-off is here.

First, you’ll get the “healthy” sell-off crowd opining. This crew says, rightly, that stocks can’t go up in a straight line, and at some point they need to pull back. They’re right, to a point. The market doesn’t ever go up in a straight line. It does always “pause.” Those pauses, though, always lead to the question is it more than a quote-unquote pause.

A correction of 10% shouldn’t be unthinkable, given that the S&P 500 rose about 22% from the August lows to 1296 a few days ago. A correction of 20% will start to make people sweat. I have some trouble imagining a big, big sell-off, given that the Fed is still pumping $80 billion or so into the marketplace every month. But, you know, interest rates were supposed to fall, too.

Dennis Gartman, who writes the popular Gartman Letter, doesn’t mince words in his commentary today: a sell-off’s coming:

A correction…perhaps a rather serious one…has begun. It shall not require much to take the S&P, for example, down from just under 1300 to just over 1200 over the course of the next several weeks, but that is very likely what we shall see happen.

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Remember those groovy '70s?

Inflation, it seems to us, is an overblown boogieman. Sure, it exists, and in severe cases, see Zimbabwe, it can wreck an economy. But in a world of fiat currency, inflation is just a fact of life. We have all been living with inflation since Nixon took the country off the gold standard. It’s there, it exists, we’re used to it.

But deflation, now that’s a different bird.

Deflation is the great danger. Deflation destroys asset values. Deflation wrecks businesses. Deflation is to be feared and fought tooth and nail. So to us, all this focus on inflation, and the inflationary implications of the myriad central bank liquidity measures, seems almost like whistling past the graveyard.

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