Kickin’ the suburbs’ tires this weekend…
Video documentary: The Financial Panic of 1873 | The West (Ken Burns, PBS)
Starting a country-wide chain reaction, Jay Cooke & Company declared bankruptcy in 1873 after overleveraging itself to finance the Northern Pacific Railroad–America’s 2nd transcontinental track.
The resulting liquidity crisis caused the first ever NYSE closure.
#Systemic #Domino effect
Stock market indicators: Fundamentals, technicals & sentiment (September 19, 2013) | Yardeni Research (Dr. Ed’s Blog)
AAII’s Bull/Bear ratio @ 1.51x is receding from the edge of its exuberant range (2-3x), but a low $VIX & $SPX Put/Call ratio remain.
Some sectors show unprecedented spreads over their 200DMAs–even by pre-crisis 2007 standards:
Highest above SMA- $XLV $XLI $XLY $XLB
Lowest at/under SMA- $IYZ $XLU
[Overall, this quantitative data is mildly bearish, bucking the bullish narrative that’s overshadowed the wall of worry–from debt ceiling/government shutdown debates to the Fed’s new, October QE taper. The key takeaway recommends a rotation out of the highest momentum sectors du jour.]
#Bearish #Contrarian Indicators $DPG
Rail traffic weekly: Moving the needle | Association of American Railroads (AAR)
Weekly traffic +3.1% y/y; ytd growth increases to +1.2%.
7 of 10 carload groups posted gains: motor vehicles & parts +14.4%, petroleum +14.4%; farm products ex-grain -9.8%.
[8th consecutive week of growth brings a big 20bp increase in ytd volume.]
Federal Reserve Open Market Committee statement & press conference (September 18, 2013) | Calculated Risk
Fed surprises the Street & the world by not tapering QE:
Economic data were “close” to being consistent with FOMC forecasts, but they’d like further confirmation before reducing LSAPs, since housing & employment data faltered over the summer.
Bernanke said that the rise in rates since the FOMC’s June meeting was a self-fulfilling prophecy in that the Fed doesn’t have to taper now, “avoiding a tightening until the economy is growing the way we want it to be… [and] I don’t recall stating [in June] that we would do any particular thing at this [September] meeting.”
Next meeting is October 29-30; next presser is December 17-18; but Bernanke said they may taper whenever they feel ready: “We certainly could arrange a public, on-the-record conference call or some other way of answering the media’s questions.”
[Reported that same morning, the miss in August housing starts & downward revision of July’s data may have contributed to the decision to defer; in addition to the debt ceiling debate/government shutdown in front of Congress, of which Bernanke was wary in 2012 too. Intraday: $SPX +1.22%, $AGG +84bps, $FVX -17bps @ 1.436, $TNX -15bps @ 2.708, $GC_F +4.25%, $EEM +4.20%.]
US household incomes (1967-2012) | Doug Short (dshort @ Advisor Perspectives)
Charts display nominal & real mean household income by quintile:
Inflation-adjusted incomes peaked in 2006 for the top earners (-6.1% from the high for top 5% & -5% for top quintile), 2000 for middle class (-6.8%) & 1999 for lower class (-11.1%).
European automakers set to outperform other cyclical shares | Reuters
Automotives +28% ytd are best performing sector in Europe & the first sector for which analysts have started raising/upgrading earnings forecasts.
With US car sales at 6 year highs, European autos at 8.7x FwPE are cheaper than any comparable cyclical sector. Further, they’re the highest correlated to rising PMIs.
Analysts say the positive catalysts aren’t priced in, like “a strong Chinese market, a pick-up in the U.S. market, signs of recovery in Europe, and the likelihood of the replacement cycle.”
[We swapped our Ford ($F) for Volkswagen ($VLKAY) this week. Previously: The scary story about booming US car sales]
China eyes private funds to tackle bad-debt buildup, avoid bailouts | Reuters
Chinese banks are raising subordinated debt & non-tradeable preferred stock to meet Basel III regulations for capital adequacy & frontrun any liquidity/insolvency crises:
“12 of China’s 17 listed banks have already announced plans to raise around 425B yuan ($69.47B)… to bolster their balance sheets with funding from commercial investors, and possibly a way for the government to inject capital directly if private funds aren’t enough.”
Realistic estimates now have nonperforming loans between 3-6%, but current loan-loss provisions can withstand 20% defaults. Worst case, losses could reach 20% of GDP ($3T) vs 16% in 1999, including the shadow banking system that accounts for 26% of credit.
[This is exactly why known-unknowns rarely lead to crises: the problems are identified, acknowledged, discounted & addressed.]
#Grey swan $FXI