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Listen in as Teeka Tiwari, Chris Rowe, Costas Bocelli, Ed Pawelec and special guests give you the world financial news that you need to be profitable every market day... Sign up today to receive audio commentary every morning from some of the brightest minds in the industry.
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By Ed Pawelec - Creator: Price Shock Trader
Chicken Little is famed for proclaiming, after being hit on the head with an acorn, that the sky was falling. Her friends, hen, duck, and goose, helped sound the alarm when they heard the news. Fox, however, didn’t even care. Instead he used their fear to lure them to his den where he enjoyed a feast of fowl.In our story, Mario Draghi, president of the European Central Bank (ECB), sounded the alarm yesterday with a call of “renewed weakening of economic growth and heightened uncertainty” in the Eurozone. He proclaimed that interest rates will fall as he cut the banks' key lending rate to .75% while slashing the deposit rate to zero. His friends at the Bank of England, the People's Bank of China, the National Bank of Denmark, and even lowly Kenya jumped on the easing band wagon.
The question is: Will the markets respond to more easy money, or will all the easing just be fodder for a failing global economy?
A Race to the Bottom
Yesterday’s ECB action was largely priced into the equity markets, as was the increased bond buying by the Bank of England. But China’s move was a surprise, and what stood out in my mind was the move by Denmark. Although a member of the European Union, Denmark maintains its own currency, the krone. The Danish Central Bank is now charging .2% on certificates of deposit.
You read that correctly. The interest rate for CDs in Denmark is now negative .2%.
The logic behind that is to prevent the krone from appreciating against the Euro. Countries around the world are trying to devalue their currencies so that they can maintain an edge in exports. For that theory to work, some country has to have a strong currency and a functioning economy for a weaker currency to have the desired economic effect of increasing exports. No one wins a race to debase, and there is some question as to whether any economy is functioning. This is the primary reason yesterday’s additional easing was greeted with a big yawn in the global markets.
Services Hang On While Manufacturing Slumps
In other news yesterday, and on the domestic front, the Institute for Supply Management (ISM) reported its monthly non-manufacturing index at a weaker than expected 52.1 for June. Although a reading above 50 indicates growth, it was 1.6 points lower than the May reading, with month over month declines in 7 of the 10 categories reported.
Still, the US is doing better than Europe’s core, Germany. Over the July 4th holiday, Markit Economics announced that the German services sector moved into contraction with a final reading of 49.9 for June compared to a prior flash reading of 50.3. Here again, a reading below 50 indicates contraction and follows Monday’s worst reading in 3 years for this core European country’s manufacturing sector.
It was the same in the US. On Monday the dismal ISM report on manufacturing moved below the critical 50 level to 49.7, well below consensus of 52. The report showed weaker month over month readings in 8 of 10 categories. Ironically, the broad market shrugged this off, as the weakness fired expectations of additional easing from the Fed beyond its extension of Operation Twist.
Notably, within both of this week’s ISM reports, the exports components moved into contraction. This suggests that all this easy money may provide short term support for equities and other asset prices, but it certainly does not appear to be benefiting our economy -- particularly in the area where it is supposed to help the most.
The Fox’s Den
The markets continue to demand more easing despite the lack of evidence that it helps the economy. This morning’s jobs number is a further indicator that the economy is not in recovery. Yesterday ADP announced private sector payrolls increased by 175,000 and everyone started upping their estimates for today’s non-farm payrolls. Expectations jumped to 100,000 from 90,000, but even the original estimate was not met. Only 80,000 jobs were created in June and the unemployment rate held steady at 8.2%. That is unlikely to spur the confidence necessary for a full-fledged recovery anytime soon.
The S&P 500 is trading at the top of its range, and may even push to 1400 as central bankers slash interest rates, but for this to become a sustained leg higher the economy needs to expand rather than just muddle along. If I am wrong and the economy is doing better than advertised, it will show up in corporate profits and the outlook for the second half of the year.
As I discussed in last week’s article “The Single Number to Watch This Earnings Season”, estimates are coming down but may still end up disappointing.
Unofficially, earnings season kicks off after the close on Monday with a report from Alcoa (AA). The information that will be released in the coming weeks will show us whether easy money is really stimulating business and the economy, or if falling rates are simply luring investors to the fox’s den where they may meet an untimely demise.
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Ed Pawelec has been active in the options markets for nearly 2 decades. His interest in options began when he studied economics and finance at Washington University in St. Louis. At that time, options were a very new instrument among listed financial products. He began his trading career on the Philadelphia Stock Exchange (PHLX) in 1993 as an equity options clerk, and quickly worked his way up, eventually becoming a successful market maker. In addition to working as an options market maker on the PHLX, Ed also acted as portfolio manager on the buy side, and as an options execution specialist and strategist on the sell side. At IFII, Ed merges his passion for financial education with his enthusiasm for options trading and passes along to individual investors tricks and secrets they usually have access to nowhere else. |
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Directly Impact the Size of Your Wallet
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Are Global Central Banks In Panic Mode?
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The U.S. economy created just 80,000 jobs in June and the unemployment rate held steady at 8.2 percent, reflecting continued slow growth in the economy. Read More »
Today's Laugh Line
"The Democratic Convention is $27 million in debt. They had to cancel the kick-off event at the Charlotte Motor Speedway. A speedway is the perfect place for the Democratic Convention. You go around in circles, turn left every few seconds, and you end up right where you started. " -- Jay Leno
(Got Jokes? Send your best jokes or funny videos to editor@tycoonresearch.com ... if it makes us laugh, you might just see it in The Tycoon Report some day!)
1934: FDR Signs Securities Exchange Act
1934: FDR Signs Securities Exchange Act
The New Deal swept through Wall Street on this day in 1934, as President Franklin Roosevelt signed the Securities Exchange Act. With the swoop of his pen, Roosevelt sanctioned a set of regulations designed to rein in the stock swapping shenanigans and duplicitous sales tactics that had riddled the New York Stock Exchange (NYSE) and helped spark the Great Crash of 1929. Along with imposing registration requirements for all exchanges and curbing stock purchases by cash-strapped traders, the legislation created the Securities Exchange Commission (SEC). The SEC was charged with nothing less than reviving the public's tattered faith in the stock market, and was thus given the lead to monitor both brokerage houses and investment banks. Few pieces of New Deal legislation played well on Wall Street; the Securities Exchange Act -- along with the adjoining Exchange Act passed in 1933 -- was particularly loathed by traders and investmen t leaders. Whatever the fiscal and moral impact of the Great Crash, Wall Street had operated almost entirely unfettered since the late eighteenth century and was hardly ready to submit to government control. However, the relative restraint of the Securities Exchange Act, which, despite its regulatory bent, left traders a fair amount of latitude, and the ensuing appointment of Joseph P. Kennedy, a business-friendly industrialist, to head the SEC eased Wall Street's fears.
Source: www.history.com
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