The Week Ahead

Asian morning trade has been mixed with the Sensex down -.45% in opening trade while the Hong Kong Hang Seng up .55% and the Nikkei up +.52%. The Nifty Index was down -.49%.

Volatility has been the name of the game over the last 7 months. Since the start of May, the S&P has shot up or down nearly 1234 points, or about the same as the value of the Index itself, that is absolutely insane volatility and to drive the point home further the S&P is nearly unchanged since the start of the year, down 2.17%!

In the past volatility historically has been very high at turning points with tops typically more volatile then bottoms, however I'm not sure I've ever seen this degree of volatility. It's little wonder that some of the flagship hedge funds are at a loss greater then the S&P-500. Give yourselves some credit for even trading in this market, it's been about as unfriendly as a market can get no matter which side of the fence you are on. Just keep your emotions in mind and hopefully in check, this kind of volatility is enough to give the Locals on the floor of the NYSE heart palpitations.

I believe Friday's NFP (Non-Farm Payrolls) were a big disappointment. We know the NFP missed consensus and I have no idea what the real whisper number was floating around the Street, but there were some outlier expectations that were hugely optimistic. The truth of the matter is that the US needs to generate about 265k jobs a month from now until December 2016 to return to the December 2007 levels and this monthly number is not static, it keeps rising. For perspective, that's about 15.8 million jobs that need to be created in the next 60 months.

We have some “All Eyes on Europe” events this week: Mer-kozy meet on Monday, The European Central Bank and Bank of England on Thursday and finishing the week, Friday the EU summit, so there's a lot of potential volatility drivers and that's just Europe.

Friday we saw House Republican's send the Euro tumbling as they propose legislation to keep the IMF from bailing out Italy and Spain, whether this be straight IMF intervention or the much talked about ECB loan to the IMF as the ECB would be the financier and the MF the proxy due to EU/German treaties which tie the ECB's hands to some degree. In any case, the Euro didn't like it and the European close was a bit ugly Friday. We've talked about this before in the context of the IMF board of governors voting to double the IMF quotas, but only 5% or so of the member nations have passed legislation allowing it, the biggest contributors including "the” biggest, the USA, have not taken up the issue and it seems to be a moot point anyway, but Republicans are going the extra step to make sure no US taxpayer money is spent by the IMF bailing out what Senator Tom Coburn has called, “A Problem that is not solvable” as “Europe is going to default eventually”.

However, tonight the sewing circle is back in full swing with Reuters repporting a story to be published by German newspaper Die Welt, that in essence, the whole congressional slap down of the IMF could be avoided if the F_E_D were to fund the IMF-Ah, there's our Monday rumor.

Reuters:

Fed may give loans to IMF to help euro zone: paper

The Federal Reserve, along with the 17 euro zone national central banks, may help provide the International Monetary Fund with funds that could be used to aid debt-ridden states, a German newspaper said.

“Treasury Secretary Timothy Geithner may discuss the idea in the coming weeks when he visits Europe, the paper said.”

A story like that may just get the Republican establishment behind Ron Paul. Also the secrecy of the White House and Timmy G is partly what has ticked the Republicans off.

And more volatility....

The situation in Iran is getting just as volatile and unpredictable as in the EU. We've seen at least two mysterious explosions at missile facilities near nuclear facilities in the last few weeks inside Iran. Early this week satellite imagery showed that an Iranian missile base was pretty much totally destroyed. The details and press releases surrounding the event have been suspicious and murky.

Here are the pictures of the base before and after, if this was due to the transportation of ammunition as the Iranians say, it's a bit interesting how so many buildings seem to have been precisely targeted.

Before

After

It didn't stop there, but there was a second explosion at another facility. Russian and US warships are in the area and a Chinese official said, “China would enter World War 3 to protect Iran”. We also saw heightened tensions between Great Britain and other EU countries and Iran as Iranian protestors set the UK embassy ablaze; the UK pulled their diplomats as did a few other EU countries and expelled Iranian diplomats. The EU is talking about possible oil sanctions and Iran is vowing crude will ht $250 a barrel which has me holding on to my oil shorts with nimble fingers. This weekend brings news of a U.S. Stealth Sentinel reconnoissance drone shot down in Iranian airspace in the eastern part of the country, apparently crossing the border from within Afghanistan. Iran also said that its military response would not be contained with Iran's borders ANYMORE.

From Strafor, here's Wednesday's Naval Update with the CVN-74 Aircraft Carrier right in the red zone.

For well over a month I have been suggesting that it is likely that commodity performance is reflecting a problem in China, I had no 3C data or charts to back it up, I was simply listening to the market. In China is was just about a week or so ago (it's hard to keep track with the pace of events) we saw a horrendous manufacturing PMI number and this out of the heavily massaged Chinese data which tends to be very opaque. The Manufacturing PMI came in below 50 which means contraction in manufacturing, which is precisely what I have been saying the prices of commodities lately were likely telling us, “There's a problem in China”. So add manufacturing to a 2007 US-like housing meltdown and you get the PboC lowering banks Reserve Requirement Ratios and this is a 180 degree tun just a few short months after China was pushing policy in the opposite direction to fight inflation. 

As I have mentioned in the past, as any political operative knows, if you want to bury a story, release it Friday night and this past Friday night the Chinese released their non-Manufacturing PMI and guess what, it fell to its lowest level sine the 2008 financial crisis and below 50, once again signaling contraction in the non-manufacturing sectors. This would also be the first deterioration in the number since early 2011 (February). Since US PMI data is not in recessionary or in contraction yet, there has been a “media-sell” going around that the US is decoupling with the world. Greenspan said it best, “It is just not credible that the United States can remain an oasis of prosperity unaffected by a world that is experiencing greatly increased stress".

One item to note that is at odds with the US “Decoupling” theory is that top line gross profit margins for the 420 non-financial S&P components has seen its worst quarter to quarter decline since Q1 of 2009. We saw margins squeezed during March of 2010, but that was largely blamed on higher input costs as Quantitative Easing was stoking the flames of inflation, this time around that's not the case, commodity inflation is on the decline so the Top line decline is at odds with the “Decoupling theory and more in line with a lag as Japan, the EU and the latest entry in the Global slowdown, China are all putting pressure on the global economy. So the S&P Gross Profit data seems to support a lag theory more so then the 'US is an island unto itself” argument. Q4 earnings should confirm.


As of the open in commodity, FX and futures, the Euro was up a bit, here it is as of my last capture...

 This decline is Friday about the time the Republicans said they would try to block the IMF bailing out the Eu. Over near the blue line is the Sunday night open.

 There's a bit of a triangle looking formation, but keep in mind Europe doesn't open for another hour and a half.

Here's a closer look. It looks like the Euro got a little bump around the time the Reuters story came out about the F_E_D financing the IMF, it's near $1.3418 right now.


Here's the ES open...

 ES has opened up, but way out of line with Context now that all the credit markets are open.

 And once again, like Friday, ES is hugging the VWAP.

We won't know what our credit/Risk asset indicators look like until the New York open, but Context is a good proxy and I've watched it leak lower all night, every time I look without fail, yet ES is pretty steady.

That's a pretty serious dislocation between the two, smells a little fishy so I'll be looking forward to our own specific credit/risk indicators as tonight as of this moment, even with the Middle East stuff going on, Crude is moving lower as is gold, copper and silver. So ES being flat and gapped up isn't making a lot of sense.

OK, Europe open soon, I'll take a nap and see you in a bit.