OVERNIGHT

The U.S. dollar rallied overnight in Asian trading and coupled with the Japanese Nikki surging 3.5% could push U.S. stocks higher later today.

TOKYO (Reuters) - The dollar gained on Monday after upbeat data restored some calm to the financial markets, prompting equities to rally back from deep losses and triggering a rise in Treasury yields.

The greenback got a further lift against the yen after reports that Japan's $1.2 trillion Government Pension Investment Fund (GPIF) could boost foreign asset holdings, seen spurring demand for foreign currencies.

The dollar was up 0.4 percent at 107.345 yen, pulling further away from a five-week low of 105.195 hit the previous week.

The U.S. currency hit a six-year high at the start of this month, poking above 110 yen - a level at which nearly half of Japanese firms think the government should start defending it, according to a Reuters poll."The dollar could extend its gains to the mid-107 yen level if equity market sentiment in Asia and Europe improve," said Masafumi Yamamoto, a market strategist for Praevidentia Strategy in Tokyo. "The GPIF news is also rare as it touches on figures related to foreign asset allocations and could be leading to further selling of the yen."

On Friday, data showed U.S. consumer sentiment come in stronger than expected, restoring some faith in the U.S. economy and calming nerves after a week that saw Wall Street buffeted and Treasury yields fall sharply on global growth concerns.

Taking tips from Friday's rebound on Wall Street, Tokyo's Nikkei, which hit a five-month trough on 
Friday, surged 3.5 percent.

In focus was whether the equity markets can retain their semblance of calm in the face of coming data.

"There are not a lot of immediate factors today for currencies, which will continue to watch changes in risk sentiment while awaiting data starting tomorrow such as those from China," said Shinichiro Kadota, chief Japan FX strategist at Barclays Bank in Tokyo

Indicators including September industrial output, retail sales and third quarter GDP will be released in China on Tuesday.

Other data this week that could have a bearing on global risk sentiment includes U.S. inflation on Wednesday and euro zone and German PMI indexes on Thursday.

The two-year U.S. Treasury yield, often correlated to the dollar's performance, had risen to 0.378 percent from a 17-month trough of 0.244 percent reached last week.

The euro was steady at $1.2764 after pulling away from a three-week peak of $1.2887 scaled last week.

The dollar index, which measures the greenback against a basket of six major currencies, rose 0.1 percent to 85.209 after dropping to a three-week trough of 84.472.

Commodity currencies, sensitive to perceived shifts in global demand, also fared better as pessimism over the economy was tempered and risk sentiment declined.

Meanwhile, in Europe equities are expected to rise today, Reuters reports.

PARIS, Oct 20 - European stocks were set to rise on Monday, adding to the previous session's sharp rebound after robust U.S. macro data helped soothe worries over the pace of global growth. Financial spreadbetters expected Britain's FTSE 100 to open 26 to 27 points higher, or up 0.4 percent, Germany's DAX to open 34 to 35 points higher, or up 0.4 percent, and France's CAC 40 to open flat to up by 1 point, or 0.02 percent higher. On Friday, the Thomson Reuters/University of Michigan index of U.S. consumer sentiment was surprisingly strong, rising to its highest level in more than seven years....

READY TO RUN AT SHORT NOTICE

 
 When risky stuff hits trouble, all other asset classes get involved

Before the crash, the average time taken for full liquidation of corporate bond portfolios by mutual funds and ETFs was around five days. It is now nearer five weeks.

Why is that? Largely because regulators have made it tough for banks to run trading desks, by making it expensive to hold risky assets such as corporate debt on their balance sheets. And as trading has dried up, so has liquidity.

The above quotes are from Tony Jackson's  "The Long View" in the Financial Times, are about behavior as much as about market data. Push the threshold high enough and smart people will alter their behavior.

That the banks are not dumb enough or they are prohibited from owning these risky asset without the possibility of reward shouldn't surprise. So what if it's true they got caught holding them in the previous market crash and had to sell off better assets owing to dried up liquidity, that's what you have now, dried up liquidity.

Jackson goes on. The name for this is contamination. When the risky stuff hits trouble, all other assets get involved, and everyone takes a hit.

Once again the simple truth here is about behavior. When the paddy wagon comes they take the good girls along with the bad ones downtown. The other inviolable truth is every action has within it a counter reaction, another thing regulators and bureaucrat never to seem to comprehend.

Jackson correctly notes: And the truth is investment professionals know all this. Like farmers on the slopes of Vesuvius, they are ready to run at short notice.

COLLUSION BY ANY OTHER NAME

 Who says there's no such thing as collusion?

The weekend edition of the Financial Times carried this sub headline: "Hints that US and UK monetary policy tightening could be delayed help temper turbulent week."

After what turned out to be a more turbulent week with volatility once again grabbing the cynosure than many expected, some monetary officials suddenly stepped out of the shadows to issue what many believe, we among them, were coordinated soothing statements to calm investor nerves.

The ferocity of market moves appears to have alarmed policy makers, with Andy Haldane, the Bank of England's chief economist, saying yesterday (Friday) that he favored delayed interest rate rises. He said evidence of a weaker global economy, lower inflation pressures and low wage growth had forced him to reassess the UK economic outlook.

Haldane's comments, as pointed out by the Times, followed those of St. Louis Federal Reserve Bank Chief James Bullard from a day earlier when Bullard suggested that the Fed should continue with its asset purchases instead of ending them.

Collusion by any other name is still collusion. And as one money manager put these central banker commentaries, given their timing, "....smell of a coordinated attack to help boost declining sentiment," something central bankers everywhere can ill afford.

Losing investor confidence, especially in view of an upcoming  election, would spell further disaster for the Fed's friends in Washington and on Wall Street. 

"Markets need to check into the Betty Ford Center and go into rehab, to wean themselves off this addiction to central bank support. If that means more volatility and lower prices in some assets, so be it," he said.

And there my thirsty friends you have the crux of the matter.  Central bankers and regulators are control freaks with a severe permanent case of OCD.  And that's the big problem with these screw-ups.

People with OCD generally recognize their obsessions and compulsions as irrational and may become further distressed by this realization.

That would be fine if it applied to bureaucrats, central bankers and regulators. Unfortunately it doesn't.

The more this hand-wringing goes on, the more one should be thinking behind the curve.
t. man hatter

UPCOMING WEEK

Jim Dandy didn't ride to the rescue last week but it appears for now that earnings apparently did. And you can look for more this week as Apple, Boeing, Coke, Microsoft and others report. Here at home September CPI Wednesday follows China's GDP report on Tuesday.

Monday, October 20

US Economics (Time Zone: EST)
 
No major economic reports
11:00 Fed to purchase $1b-$1.25b notes in 5 to 6-year range
11:30 Treasury to sell $24b 3-month bills and $30b 6-month bills
 
Global Economics (Time Zone: GMT)

06:00 EUR German PPI
 
Earnings
 
Before:
Halliburton (HAL)
Valeant Pharma (VRX)
Hasbro (HAS)
 
After:
Texas Instruments (TXN)
Chipotle Mexican Grill (CMG)
IBM (IBM)
Apple (AAPL)
Rent-A-Center (RCII)

Tuesday, October 21

US Economics (Time Zone: EST)
 
10:00 Existing Home Sales (Sep) - expected 5.10M, prior 5.05M
11:00 Fed to purchase $1.4b-$1.7b notes in 7 to 10-year range
11:30 Treasury to sell 4-week bills

Global Economics (Time Zone: GMT)

02:00 CNY Retail Sales, Industrial Production, Fixed Investment
02:00 CNY GDP (3Q)
04:30 JPY All Industry Activity Index
06:00 CHF Trade Balance
08:30 GBP Public Budget

Earnings

Before:
Coca-Cola (KO)
Harley-Davidson (HOG)
Kimberly-Clark (KMB)
McDonald's (MCD)
United Tech (UTX)
Lockheed Martin (LMT)
Regions Financial (RF)
Verizon (VZ)
Reynolds American (RAI)
 
After:
Six Flags Entertainment
Cree (CREE)
Yahoo! (YHOO)
E-Trade Financial (ETFC)
Broadcom (BRCM)
VMWare (VMW)
Discover Financial (DFC)
Intuitive Surgical (ISRG)

Wednesday, October 22

US Economics (Time Zone: EST)

07:00 MBA Mortgage Apps
08:30 Consumer Price Index YoY (Sep) - expected 1.6%, prior 1.7%
08:30 CPI Ex Food & Energy YoY - exp 1.8%, prior 1.7%

Global Economics (Time Zone: GMT)
 
JPY Trade Balance
00:30 AUD CPI (3Q)
08:30 GBP Bank of England Minutes
14:00 CAD Bank of Canada Rate Decision
21:45 NZD CPI

Earnings

Before:
Abbott Labs (ABT)
Boeing (BA)
Dow Chemical (DOW)
General Dynamics (GD)
Northrop Grumman (NOC)
Stanley Black & Decker (SWK)
Biogen (BIIB)
US Bancorp (USB)
Owens Corning (OC)
Angie's List (ANGI)
Xerox (XRX)
Ingersoll-Rand (IR)
Norfolk Southern (NSU)
EMC (EMC)
 
After:
Citrix (CTXS)
AT&T (T)
Tractor Supply (TSCO)
Skechers (SKX)
SLM (SLM)
Yelp (YELP)
 
Fortinet (FTNT)
Lumber Liquidator (LL)

Thursday, October 23

US Economics (Time Zone: EST)

08:30 Initial Jobless Claims, expected 294k, prior 287k
08:30 Continuing Claims - exp 2440K, prior 2429k
08:30 Chicago Fed National Activity Index (Sep) - prior -0.21
09:00 FHFA Home Price Index MoM (Aug) - exp 0.3%, prior 0.1%
09:45 Markit US Manufacturing PMI (Oct prelim) - exp 57.0, prior 57.5
10:00 Leading Index (Sep) - exp 0.7%, prior 0.2%
11:00 Kansas City Fed - exp 6, prior 6
11:00 Fed to purchase $1.35b-$1.65b notes in 6 to 7-year range
1:00 Treasury selling $7b 30-year TIPS (reopening)
 
Global Economics (Time Zone: GMT)

AUD RBA's Stevens speaks in Sydney
Japan Investors Purchases of Foreign Stocks/Bonds
01:35 JPY Manufacturing PMI (Oct prelim)
01:45 CNY HSBC Manufacturing PMI (Oct prelim)
07:30 EUR German Manufacturing & Services PMI (Oct prelim)
08:00 EUR Eurozone Manufacturing & Services PMI (Oct prelim)
08:30 GBP Retail Sales
14:00 EUR Eurozone Consumer Confidence (Oct advance)

Earnings

Before:
Eli Lilly (LLY)
Union Pacific (UNP)
T Rowe Price (TROW)
Lorillard (LO)
KKR & Co (KKR)
Janus Capital (JNS)
Dr Pepper Snapple (DPS)
Caterpillar (CAT)
UnderArmour (UA)
 
After:
Freescale Semi (FSL)
Altera (ALTR)
Microsoft (MSFT)
Deckers Outdoor (DECK)
Amazon.com (AMZN)
Juniper Networks (JNPR)
Riverbed (RVBD)
Pandora (P)
 
3M (MMM)
Occidental Petroleum (OXY)
Comcast (CMCSA)

Friday, October 24

US Economics (Time Zone: EST)

10:00 New Home Sales (Sep) - expected 470K, prior 504K

Global Economics (Time Zone: GMT)

NZD Trade Balance
01:30 CNY China Property Prices
02:00 CNY Leading Index
06:00 EUR German GfK Consumer Confidence
08:30 GBP 3Q GDP (advance)

Earnings

Cabot Oil & Gas (COG)
Colgate-Palmolive (CL)
Procter & Gamble (PG)
Moody's (MCO)
Ford (F)
UPS (UPS)
Bristol-Myers (BMY)
State Street (STT)

Twitter: @MichaelSedacca

POSSIBLE DEAL REACHED

It looks as if Russia and the Ukraine has reach a tentative deal to supply much of Europe with gas this winter, Reuters is reporting.

Just what impact that will have on local economies remains to be seen. But this is a case of one side wants the fuel and the other side wants to be paid.

Russia's Vladimir Putin told reporters that a deal ensuring gas supplies "at least for the winter" had been reached after a final one-on-one meeting with Ukraine's Petro Poroshenko, which followed talks attended by European leaders.

"We agreed on all the parameters of this deal," Putin said, but he urged European countries to help Ukraine meet a debt for gas, which he said stood at $4.5 billion.
The agreement followed a hectic series of meetings on the margins of a summit between Asian and European leaders in Milan at which Europeans showed no signs of agreeing to lift sanctions against Moscow imposed over the Ukraine crisis. 

The news of a  possible deal comes on top of Moodys, the bond rating agency, cutting Russia's credit rating to the second lowest investment grade, acording to Bloomberg.

Citing sluggish growth prospects, Moody's downgraded the rating one level form Baa2 to Basa1 nd did not change its negative outlook for Russia's future. Last April Standard & :Poor downgraded the debt to BBB-, a notch below Moody's.

The ruble has lost 13 percent against the dollar in the past three months, more than any other currencies tracked by Bloomberg, extending its drop this year to 19 percent. Foreign reserves have declined 11 percent this year to a four-year low of $452 billion as the central bank acted to shore up the ruble, Bloomberg also noted, while declining energy prices have been putting more pressure on Russia.

 Here's chart from Business Insiders on the countries most effected by falling energy prices.
http://www.businessinsider.com/these-6-countries-will-be-screwed-if-oil-prices-keep-falling-2014-10?

NOT MUCH COMFORT IN THE TRUTH

Usually there's not much comfort in the truth.

Here's an example from the head of Germany's central bank, Jens Weidmann.

“The biggest bottleneck for growth in the euro area is not monetary policy, nor is it the lack of fiscal stimulus: it is the structural barriers that impede competition, innovation and
 productivity,” he said.

So the war of economic policy differences between Italy and France and German officials continues as noted in today's Wall Street Journal.

Changes don't come easy, so goes the old saying. And structural ones are even more difficult.

But the disagreement is hardly limited to these three heavy weights as pointed out in another WSJ article today by Ian Birrell, a former speech writer for Conservative UK Prime Minster David Cameron, "An Earthquake Called Ukip Hits Britain."

Ukip, the UK Independence Party that recently got its first member elected to Parliament, and might get a second in an upcoming election, has sent ripples through the stodgy, arthritic two-party British political system. One of UKIP's big memes is anti-EU.

Now we don't know if U.S. Vice President Joe Biden stole a page from Cameron or if it was the other way around. Biden recently called U.S. Tea Party members "crazy." However, since Biden is a known plagiarist, we suspect it's the former.

At any rate, Cameron once dismissed UKIP's as a bunch of "fruit cakes, loonies and closet racists."

Nut cases or otherwise, another disturbing fact happened when a British newspaper poll showed "one in four British voters support Ukip."

As the dissatisfaction spreads concerns grow among British office holders "Much of Europe," Birrell writes, "is being buffeted by similar political turmoil."

Now with the return of the Greek situation and growing fears of further deflation, falling energy prices and volatile stock markets worldwide, maybe politicians like Cameron and Biden will learn a little respect because their contempt for real people is blatant and then some.
t. man hatter

PULL OUT YOUR OUIJA BOARDS

What's the difference between an econometric model and a mechanical link?

Not much if you're in the government forecasting business, according to an editorial in today's Wall Street Journal, "Government Forecasters Might as Well Use a Ouija Board."

Government economic forecasts receive a great deal of attention and are used to make a case for or against legislation or public policies. How good are the forecasts? The answer: not very. Forecasting is an inexact science at best, and the trust that Congress and the public invest in these estimates is not warranted.

The author, Edward P. Lazear ,a Stanford business professor and a former 2006-2009 chairman of the Council of Economic Advisers, writes about government predicted 1999-2013 GDP growth:

My analysis of 1999-2013 reveals that the CBO’s real GDP growth forecasts for the next year were off, on average, by 1.7 percentage points, either too high or low. Administration forecasts were similarly off by a slightly larger 1.8 percentage points on average, also to high or too low. Given that the average growth rate during this period was only 2.1%, errors of this magnitude are substantial.

Perhaps most damning: History is a better predictor of annual growth than government forecasts. Simply assuming that GDP growth will be 3.1% in each year—the average annual rate for the 30 years that precede the study period—results in an average forecast error of 1.5 percentage points. 

We've been writing about these suspect predictions for some time. Lazear goes on to point out that no actual data is used but rather a similar approach method employed to forecast jobs created or saved numbers.

The same approach is used to forecast jobs “created or saved” by the stimulus. Government economists generally assume a mechanical link between forecasted GDP growth and forecasted job growth. This means that estimating job effects is subject to the same qualification as estimated GDP effects. Both are based on models, not actual experience. The CBO described the methodology in its report, but those who reported or trumpeted the CBO’s stimulus numbers were generally unaware of how GDP or jobs numbers were generated.

Our one beef with Lazear's article is comparing Ouija boards to these model-driven, mechanical forecasters is an extremely unkind cut to all those dusty Ouija boards packed away in cluttered closets everywhere. 

http://online.wsj.com/articles/edward-lazear-government-forecasters-might-as-well-use-a-ouija-board-1413503121

OVER NIGHT

Things at least in Europe have calmed a bit as Reuters reports.

LONDON (Reuters) - World stocks hit a nine-month low on Friday but oil and southern European bonds were off their week's worst levels, as investors began to dust themselves off after one of the most volatile spells in world markets in years.

Nerves remained fragile, but some reassuring words from U.S. and European policymakers, U.S. data, and a sense there could be bargains to be had after the major falls in global equity and commodity markets, drew buyers in off the sidelines.

Bourses in London (.FTSE), Frankfurt (.GDAXI) and Paris (.FCHI) started the day up 1 to 1.5 percent and Athens (.ATG) rose 4.5 percent as Greek governments bonds steadied after their worst run since the height of the euro crisis in mid-2012.

Admittedly, this may be a lull in the storm that's hit world markets of late, but many investors will at least privately welcome it in the wake turmoil for the fourth straight week in the U.S. and Europe but the sixth for emerging markets.

Meanwhile, Bloomberg posted an interesting story about cash build ups in high yield or junk bond funds.

In a junk-bond market that has been anything but high-yield for almost two years, the world’s biggest debt-fund managers have been stockpiling cash for a selloff. After the worst one in three years, they’re getting ready to pounce.

Firms from Pacific Investment Management Co. to Blackstone Group LP say they are poised to scoop up speculative-grade corporate bonds after yields rose to the highest levels in more than a year. They’re looking for bargains after building up the highest levels of cash in almost three years.http://www.bloomberg.com/news/2014-10-17/pimco-to-blackstone-preparing-to-feast-after-yield-surge.html

So maybe in one form or another the calvary is set to ride to the rescue notwithstanding the Ebola outbreak, China, the looming threat of more deflation and collapsing oil prices.

As the saying goes the one-eyed man is king in the land of the blind. We shall see.

BIG ROCK CANDY MOUNTAIN

 

Most people have heard of back to the future. Well, with the S&P 500 it's now back to the first of the year because as of yesterday's close that's about where we are.

According to Market Watch, The S&P 500 Index has fallen 8% from its September highs, when it topped 2,000 points. We’re now back to where we started at the beginning of the year.

The drop has been fast and furious, with the benchmark index recently posting its worst three-day run since the dark days of 2011 amid the European debt crisis. It recorded its worst session of the year Wednesday
.
Those previous declines proved to be buying opportunities. Since August 2011, the S&P 500 is up almost 80%.

Does that mean that history will repeat itself here and investors will once again start buying this dip or is it a form of equity Armageddon that will cause investors to close their wallets and go home for a long while? 

If the answer to that were easy markets would essentially stop being markets and everyone would find his or her way to the Big Rock Candy Mountain of success. 

About the only sure thing here is that ain't going to occur anytime soon because in the real world there ain't no Big Rock Candy Mountain. Only winners and losers.

In the meantime, if you have an idea of what's valuable and what you want to own, don't be too shy. And if it will screw up your courage a bit, here's a quote from Warren Buffett he gave a couple  of days ago.

“I like buying it as it goes down, and the more it goes down, the more I like to buy,” Buffett told CNBC.
t. man hatter

A WAYS TO GO

Most investors worthy of the name know who Big Ben Bernanke is, the $250,000 a speech speech maker.

Just kidding.

Like those who have gone before him, Bernanke is now moving about trying to solidify his place in Federal Reserve history.  And for him it's most likely going to be a hard sell. There's a certain irony here since Bernanke described himself on the job as a salesman, trying to sell the pubic that all is well that ends swell.

For it to end well for him he has to sell the public on the idea of economic recovery from the 2008 crisis that continues to remain elusive to say the least in the minds of many Americans. After a recent speech in New York the former Princeton economics professor was asked:

"....who was to blame for the 2008 financial crisis, he pleaded for some understanding from historians, saying:

Nobody is going to come out looking all that good, I tell you, when historians write it, but again I ask only for those future stories to think in real time and don’t impose the retrospective knowledge on what we were seeing as we went through the crisis.”

Even as Bernanke works hard to ensure his legacy is portrayed in a more positive light, there is a feeling that most Americans could not care less.

“You know, according to a recent poll, 17% of the population still thinks that Alan Greenspan is the chairman of the Federal Reserve. So I must have made a big impression,” Bernanke joked Wednesday, referring to a Pew Research Center poll that came out earlier this month. 

Bernanke painted himself as a salesman – one who has to sell the message of recovery to the public. It’s something he feels he hasn’t done well.

One of the parts of being a Fed chairman that Bernanke found to be a bit difficult is communicating with three different audiences simultaneously: the markets, the US Congress and the public.

He suggested that he felt burdened by the weight of what he could say and its effect on markets.

http://www.theguardian.com/money/us-money-blog/2014/oct/10/ben-bernanke-set-record-straight-book

Judging from stock market reactions the last few days, well looks as if its got a ways to go, Mr. Bernanke.