FRIDAY 1/24/14

Aussie dollar drops below 0.87 as the China slowdown concerns create worry around the globe. BOJ’s Kuroda speaks positively on Japan’s recovery. The dollar/yen is 103.15 dropping from the overnight highs so the Nikkei sells off -2%. SSEC is up +0.6%. Samsung reports the lowest growth in the last three years. Novartis heart drug is denied approval so NVS is sold off. The 10-year yield is 2.77% and 2-year 0.35% dropping the 2-10 spread to 242. Fitch maintains Germany’s AAA debt rating with a stable outlook, affirming the S&P’s positive rating for this European leader about one month ago. Europe begins trading and starts the day flat to positive. Euro 1.3679. Pound 1.6658.

The BOE sees no need for a rate increase, walking back prior guidance, since the unemployment rate has quickly dropped to 7.1%, only one tick from the 7.0% rate target. The BOE is in the same pickle as the States. The Fed has set a 6.5% unemployment rate target as a basis to increase tapering and raise benchmark interest rates (the tapering is not tightening ongoing discussion) and the unemployment rate is dropping much faster than expected. Typically, the unemployment rate decreases for good reasons; more people are working and less are looking for work since the economy is strong (like the late 1990’s and 2004-2008).

But currently, unemployment benefits are ending creating a sick and longer-term structural unemployment problem. People are no longer counted in the unemployment statistics and those that are say they are not looking for work since there are no jobs available. This sends the unemployment rate lower but for the wrong reasons creating a problem for central bankers that want to tighten based on the dropping unemployment rate. Companies are taking the Fed’s easy money and funding buybacks to pump stock prices higher instead of buying equipment or hiring employees. There is no demand in the economy and along with rising healthcare costs and other regulations, companies see no reason to expand and instead are simply trying to hang on and keep the doors open.

The falling unemployment rates are a problem for central bankers since their guidance for raising benchmark interest rates are based on the falling unemployment rate. Central banker policies are hurting not helping since the unemployment situation only worsens while at the same time the easy money is creating new asset bubbles in markets. Comically, or tragically, at Davos, many of the big wigs involved in creating this global dilemma congratulate each other on their Keynesian approach to economics as they sip champagne from crystal flutes.

At about 3:30 AM EST, markets deteriorate with Europe turning negative and the futures drop from flat to S&P -5. The dollar/yen drops to the 103 level so the stronger yen sends markets lower. The 10-year yield drops to 2.75% exhibiting risk-off type behavior as traders seek the safety of Treasuries (price moves up and yields down). At 4 AM, S&P -6.5. Dow -60. Nasdaq -12.5.

The Argentine Peso is at 7.90 plummeting in value weaker than the 2002 financial crisis. Argentina becomes more troublesome daily and the concern is contagion spreading to Brazil, Venezuela, and other nations. A collapse in Venezuela could spike oil. Euro banks are exposed to Latin America. The Turkish Lira is 2.327 as the central bank attempts to prop up the weak currency but fails. Turkey woes will greatly affect Europe. The Argentina and Turkey financial situations create concern around the globe. Older traders immediately recall the Thai Baht crisis leading into the Asian Financial Crisis in 1997. No one knew what a baht was. Kind of like an Argentine Peso and Turkish Lira. The Mexico Peso Crisis of 1994 is another example of how a small butterfly flapping its wings can have a dramatic impact on the world.

Brazil speaks optimistically about an economic recovery but bases this confidence on the US, UK, Europe and Japan driving the recovery. Conditions deteriorate in Libya with regional wars killing dozens of people and wounding hundreds. Several explosions occur at Cairo police stations and one near the pyramids killing four and leaving nearly 80 injured. Egypt is in chaos with the travel and tourist industry in collapse.

The Ukraine violence continues as the anti-government activists agree to a ‘truce’ where the government will not use rubber bullets or live ammunition against protestors, will release protestors from jail and will convene parliament to consider reversing the new anti-protest law. The protests are spreading to more cities with the western side of the Ukraine siding with Russia and the left side siding with Europe.

At 4:30 AM, the dollar/yen drops to 102.83. S&P -7. Dow -64. Nasdaq -14. Oil, gold, silver and copper are flat to negative. European markets are down -0.5% or more. Global markets take on a negative, contagion-type, vibe. The talk of a currency crisis is dominating the news flow. Emerging markets are weak. At 5:30 AM, S&P -10. Dow -91. Nasdaq -21. European indexes are selling off from -1.0% to -1.5%. The CAC 40 is -1.4%. Spain’s IBEX is dropping -3.2% due to exposure to Latin America where stocks are selling off strongly. Brazil’s BBVA is down -6% today and down -9% on the week. Perhaps Argentina contagion is underway. The deteriorating Argentina and Turkey financial situations are dominating the discussions at Davos and creating global contagion fears. The Puerto Rico debt mess is another ongoing problem as officials attempt to find solutions to handle $70 billion in debt.

At 6:30 AM, the dollar/yen drops to 102.13 down well over 2 points from only one day ago. Yen shorts are likely covering creating more upside fuel which drives the yen higher, dollar/yen lower, and sends global stock markets lower. S&P -15. Dow -125. Nasdaq -29. Markets are soggy underneath and deteriorating with support levels weakening. WTIC crude oil drops under 97. Gold 1271. Silver 20.21. The 10-year Treasury yield is 2.72%. PG trades flat after beating by a penny but missing on the top line. HON beats on top and bottom lines and jumps +1.4%. The euro moves above 1.37 which will hurt growth prospects for Europe. BAC drops -1.1% pre-market. JNPR is up +4.4%. SWK pops +1.6% on an earnings beat. The earnings releases are positive this morning but overshadowed by the global negativity. HON reverses course and begins selling off.

A few minutes before the bell, the dollar/yen is 102.36 with S&P -12. Dow -104. Nasdaq -20. The broad indexes drop as the opening bell. The VIX spikes above 15. The SPX drops through the critical 50-day MA at 1813. The Dow loses the 50-day MA at 16158.19. The COMPQ loses the 20-day MA at 4174. The RUT is selling off strongly to 1151, below the 20-day MA, and above the 50-day MA at 1139. Moving into lunch time, the RUT is leading the other major indexes lower. Biotech stocks are whacked with IBB -3%. VRTX -4%.

Trannies are getting smoked today down -3.5% (worst sell off for trannies in nine months) so the Dow Theory confirmation signal with the Dow Industrials does not occur. KSU is beaten -15%. Kansas City Southern earnings do not confirm the rosy picture provided by NSC and UNP earlier this week. The airlines are beaten with XAL -3.4% so airlines and railroads send TRAN lower. UAL loses altitude down -4.2%. Market volume is running above average and very robust which is a very bearish indication. The VIX moves above 16. Germany closes at the lows.

 Around lunch time, the Dow is down over 200 points and the SPX prints an 1800 handle not seen for one month. Natty gas tags 5 bucks for the first time since 2010 due to the winter weather (the coldest winter since 1979 which are 100-year type events), low supplies and pipeline disruptions. PG is up +3.2% helped by earnings and traders seeking defensive stocks. WFM also bucks the negative trend up +1%. DFS beats on earnings and gains +5%. CAT is beaten -2.6% and AAPL -1.8% both ahead of earnings releases on Monday. Natty gas is now at 5.07 up 33 cents today, over +7%. Folks will see their winter heating bills increase. Natty prints 5.18 with short traders covering and running for their lives.

At 2 PM, Google’s gmail and blogger Intenet programs crash and will not function properly. GOOG is down -3.2% at 1123. TESS -15.3%. ACAT -9.5%. MCD comments on light consumer traffic in restaurants. Retailers continue to discount leftover goods from the holiday and begin to layoff employees. The severe winter weather continues in the northeast further hurting retailers. The top line revenue numbers remain weak for companies across many different sectors which is an unhealthy sign for the economy. The SPX collapses under the psychological 1800 level. The Dow is down over 250 points falling below 16K. Natty gas is now 5.21 up over +10% today! VIX is up 25% to 17.27.  Traders are concerned that a currency event may occur this weekend creating global financial contagion so they are trimming shares.

The bell rings and the carnage ends with the SPX losing 38 points, -2.1%, to 1790, losing the 1800 level. The Dow plummets 318 points, -2.0%, to 15879, losing the 15.9K level. The Nasdaq loses 91 points, -2.2%, to 4128. The RUT collapses 28 points, -2.4%, to 1144. The SPX and Dow lost the 50-day MA but the COMPQ and RUT have not. SOX drops -2.3%. NYA -2.3%. Gold is higher to 1269. This is the worst week for the major indexes since 2011. For the week, the SPX loses -2.6%, the Dow -3.5%, Nasdaq -1.7%, RUT -2.1%, NYA -3.0%, TRAN -2.3%, SOX -1.7%, XLV -2.4% and XLF -3.7%. The financials were bludgeoned questioning the bullish strategy that the banks would lead the broad indexes higher this year. Instead the financials are leading markets lower. Transportation and healthcare sectors are beaten.

The major indexes have lost the following percentages off their respective tops; SPX -3.2%, Dow -4.3%, Nasdaq -2.9%, RUT -3.4% and NYA -3.8%. A sell off of -10% is considered a correction and -20% a bear market. The VIX explodes +46% higher this week to 18.14 so fear is finally arriving in markets. Natty gas ends at 5.16 up +20% this week. Anyone heating with natural gas will receive higher monthly bills. GWW is slapped -8.4% this week which is particularly worrisome since Grainger is a supplier for small manufacturers and lackluster sales indicate a slowing economy.

 Emerging markets are big losers on the week with TUR -7.6%, EWZ -5.3%, EWY -4.6%, EWM -3.3% and EWW -3.9%. Other losers include WYNN -10.5%, IGT -15.4%, KSU -14.5% and ISRG -5%. Notable winners this week are MSFT up +1.2%, JNPR +6.6% and FFIV +8.2%. Economist Shiller’s CAPE PE is 25.4. After the bell WMT announces 2400 firings from Sam’s Club stores. Retailers do not need as many employees if store traffic is light. The coming layoffs and store closings in the retail sector will be bloody.