It's a trader's day with U.S. jobs on tap

It's a trader's day with U.S. jobs on tap
The chase by Frances Horodelski:

Just so you know, the first Friday of every month is “World Smile Day” – so do so!

A trader’s day. First, at 8:30 am ET we get the U.S. jobs numbers with expectations around 200,000 jobs and an unemployment rate of 5.1%. We’ll also be hearing from Stanley Fischer, Vice-Chair of the Fed will be speaking at 1:30 pm ET. His topic is “Macroprudential Regulation and Supervision” and he is giving the speech at the “Macroprudential Monetary Policy” conference. If you don’t know what macroprudential means here’s the definition: “The term macroprudential regulation characterizes the approach to financial regulation aimed to mitigate the risk of the financial system as a whole (or "systemic risk").” Traders will be not be focusing on that term but on any further indication that a rate rise is imminent.

The bullish items are lining up – it seems so easy. Market internals are oversold (although maybe not deeply so), the pessimism continues to rise whether it is the AAII survey or the Investors Intelligence one (the latter is showing bullish sentiment at 24.7% - the lowest since October 2008 – and historically it doesn’t get much lower than this), ratio of new highs to new lows is in oversold territory, we’re in one of the more seasonally bullish times of the year (although October can be a little rocky for sure). RBC did some historical work looking at the quarterly performance of the S&P 500 and of treasury bonds following a quarter of significant outperformance of the latter vs the former. In the 18 instances in 45 years when there has been such a wide outperformance (950 basis points), equities outperformed 67% of the time with an average outperformance of 7.7%. When stocks did underperform over that historical time frame, the period was “characterized by a sharp slowing in payroll growth” – an event not likely right at the moment.

The news this morning, beyond the jobs, will focus on the Canadian banks following yesterday’s capital raise of $300 million by National Bank on the restructuring announcement and potential risk to its $165 million investment in Maple Bank, a German asset that is under investigation. National Bank owns just under 15% of the bank. The company’s CET1 ratio (common equity tier 1) will be 9.8% at the end of fiscal 2015, including the restructuring charges and the capital raise although a write-down of its Maple assets could reduce CET1 by 13 basis points. For comparisons and based on a Scotiabank report, the CET1 ratios for the other banks, pro-forma various activities, are BMO (9.7%), BNS (10.3%), CIBC (10.78%), Royal Bank (9.41%), TD (9.96%).

Interesting items crossing my desk include a report from Scotiabank outlining its Q3 strategy, asset allocation and model portfolio. In the latter, Scotia has increased its exposure in select groups including banks moving to overweight with BMO replacing TD, increasing rails, mining (adding TRQ), energy (adding MEG). Staples, discretionary and cash move lower and according to strategist Vincent Delisle “we plan to revisit our gold exposure after Fed lift-off. Following these moves, our stance in Energy remains underweight and we are now market weight base metals.” Meanwhile, CIBC is adjusting its outlook in the metals space and is upgrading Teck Resources on the basis of relative valuation – ranking of names in the same are First Quantum, Teck, Cameco and Capstone.

Equity markets are firm as is the Canadian dollar, bonds are small to the downside, oil is up, gold down (couldn’t make that lift through the resistance line at $1,150), Japanese stocks are back in positive territory for the year. Weathermen are watching Hurricane Joaquin as it gathers power but the current thinking is it will miss the U.S. TPP trade talks continue. And the day begins (and a weekend ahead).

Smile.

What is the street watching? First, there is a report circling from JP Morgan’s quantitative team

Pot and politics (but not together!)
The chase by Frances Horodelski:

Friday’s child is full of loving and giving. Hope you have both today.

For perspective, here’s what the week has wrought: As of last night’s close, and compared to last Friday’s close, the Dow is higher by 1.18%, the TSX by more than 2% and oil +4.57%. Volatility is a day-to-day event, the result is often times something different. Anyway, Friday is here and while Chinese markets rallied, the rest of the world is giving some back (remember the Dow was up 1000 points in two days).

What is the street watching? First, there is a report circling from JP Morgan’s quantitative team that highlights the potential for some significant selling ahead based on option and derivative positioning by trading accounts such as CTAs (commodity trading accounts), Risk Parity portfolios and Volatility Managed strategies. The report reads like a math treatise and easily undermines anyone’s belief that investing is all about buying good companies at good prices. The upshot of the report is that more wild down swings (like Monday’s 1100 point drop) are head. There is one glimmer of hope in the article is that some of these positions could be the first to reverse (that is start buying) when volatility declines. This report is being given some attention because a similar report was distributed last Friday that essentially laid out the events for Monday. We’ll see.

The street is also watching the last of the bank earnings with a modest beat by Bank of Nova Scotia that belies the strong underlying performance including +15% in Canadian banking and +11% in international banking. As Greg Bonnell noted this morning, if this is how our Canadian banks weather the weakening storm of the Canadian and international economies, they’ll be pretty well set-up for the improvement on the other side. We’ll be speaking with the CFO of Scotia this morning. The bulls like the numbers for BNS; the bears however have some lingering concerns. The three banks that were expected to raise dividends (Royal, CIBC and BNS) did so. And the cycle continues.

The world is waiting for Jackson Hole this weekend and especially the key note speaker, Stanley Fischer. Notwithstanding the markets react to comments from Dudley and George and Lockhart, the two people that matter most are Janet Yellen (not attending the conference) and Mr. Fischer. His words will be well parsed for his leaning on the next move (September, October, December, next year). Apparently the must attend event is a discussion on global inflation with Mr. Fischer, BOE Governor Mark Carney and the Reserve Bank of India Governor Raghuram Rajan.

Analyst are changing opinions this morning including a buy rating on CIBC from Veritas, buy of Citigroup from Guggenheim and New Gold a buy at Mackie Research.

Finally, there are bulls and bears out there. Carl Icahn is probably neither but pragmatic. He has taken an 8.48% stake in Freeport McMoRan – one of the worst performing S&P 500 stocks in the past three years having collapsed from more than $60 to a low of $7.52 this week. Will be an interesting story to watch – gold, copper, and oil.

Keeping it short today. Join us at BNN today when the President of the CFA Institute provides a four-point plan for how the financial services industry can clean up its act. We’ll also talk pot and politics (but not together!). Have a great weekend.

Flash Crash - Funds Algorithem trading systems dump stocks on mass...

And the fear index the VIX shot to 50 today and back down...

Bulls Vs Bears...Markets Crashing But There Is Hope!

What's real and what's hyperbole 
The chase by Frances Horodelski:

The bears playbook will be much in evidence today and I can hear their growling everywhere. The Dow futures are down more than 400 points at 7:30 a.m. ET. Here is the tally from last week: The Dow down 5.82%. The S&P 500 down 5.77%. The Nasdaq down 6.78%. The S&P/TSX down 5.63%. All ten sectors in the U.S. were lower last week led by Energy (-8.65%) while in Canada it was similar carnage but healthcare led the way (-9.43%) and there was one bright light – telecom +1% on the week. Golds too outperformed with a positive week, with 20 out of 21 members higher led by Alamos Gold (+21.5%) and the sector higher by 6%. Canadian banks which will be much in focus this week with third quarter reports, also had a dismal week with group down 4.7% led lower by Canadian Western Bank (-9%). Year to date the group is down 11.89% with Home Capital and Canadian Western Bank shareholders feeling the most pain (-44% and -32%, respectively). But no bank was spared – all ten components are down on the year. The yield on the Canadian Bank index is 4.33%.

As I said last week, this is one of the most anticipated corrections in years. Most expected theChinese stocks to fall after a speculative feeding frenzy that took the market to ridiculous levels of valuation. Most thought a correction of some magnitude would be “healthy” and many portfolio managers were waiting for the opportunity to buy. Most didn’t expect it to happen in one or two days. Orderly declines are much more healthy than disorderly ones – this one is turning disorderly. Remember that the margin clerks rule when markets collapse like this (now down almost 600 points on the Dow).

So there will be bears. But let’s highlight the bulls’ playbook for fun. Corrections happen and we’re in one. They aren’t great but let’s look at some of the things that could point to something decent ahead. Earnings in the second quarter (excluding energy) showed a decent 10+ gains for S&P 500 companies. The American economy continues to grow (and the Atlanta Fed GDPNow gauge has been showing an acceleration of expectations albeit still modest). Jobs are plentiful and the jobless rate has fallen. The number of millennials has surpassed the number of bombers in the American population have the potential for more homes, more cars and more consumption generally. The Fed remains accommodative (remember the balance sheet isn’t shrinking, they remain committed to re-investing maturing bonds and rates – with or without a hike – are exceptionally low. The CNN fear/greed index is at FIVE (paralytic fear). The amount of damage underneath the averages is severe including more than 80% of NYSE and TSX listed stocks down trading below their respective 50 day moving averages. Stocks are relatively expensive (compared to their own history) but still not outrageous (the bears love the charts that show stocks are the third most expensive compared to 1929 and 2000). The S&P is trading at 16.65x forecasted earnings while the TSX is at 16.8x. The ECB remains committed to “whatever it takes” and continues to buy some $65 billion worth of bonds per month. There is no credit crunch here folks – the leading cause of recessions historically (I know it is always different this time but still important to watch what matters). While all fingers are pointing to China, their ability to soften any blow is mighty (the PBOC’s reserve ratios are at 18.5% compared to the Fed’s 0.25%). According to the latest insider reports, insiders are decidedly bullish with sellers:buyers at 7:1 versus 25:1 in June (insiders on average tend to be sellers rather than buyers given options and significant components of compensation related to stock).

Now if you want to get bearish, there are no shortage of reasons (including the technical picture which always can be convincing when trend lines are broken). Unfortunately, they seem to me to be the same reasons on a loop – Fed, Europe and China. This week it is China. Remember to step back and focus on what is real and what is hyperbole. There will be a lot of the latter today. It used to be when the world was a mess, the world flocked to the U.S. dollar and U.S. treasuries. That isn’t happening as traders are buying the Euro, the yen and the Swiss Franc,

There will be news. Like the Iranians who are intent on shipping oil at any price. There are earnings this week (Best Buy tomorrow and Gamestop and Tiffanys on Thursday). There will be economic data releases including U.S. housing tomorrow, durable goods on Wednesdayand a second look at U.S. Q2 GDP on Thursday.

This not a time to be a hero but it is also not a time to panic. Take a hard look at each and every company in your portfolio and put your bear hat on. Do the numbers under the most uncompromising of scenarios – and see what will remain standing. Hold fast. And hold onto your hat. For months strategists have been forecasting heightened volatility. We’re there now. September is the worst month of the year seasonally – but maybe September came a month early. At BNN we’ll try to cut through the noise and provide clear-headed analysis. Stay with us.