How Will It All Work Out When Rates Rise?

[ HT TwoPintWitty ]

"This line jumped out as one that can't possibly be correct, and if it is.wow. The fact that family borrowing continued to increase at its historic pace of about 8 per cent a quarter reflects an increase in home buying - purchases that were encouraged by mortgage rates that fell to record lows as the Bank of Canada dropped its benchmark lending rate to an unprecedented 0.25 per cent and set up emergency cash auctions to ensure banks had access to enough money to continue lending.

8 percent a QUARTER? 8 percent a year in increased borrowing isn't sustainable. Wages have been increasing by what? Like 2-3% on avg?"

FN: How exactly is the BOC going to raise rates from 0.25 to a more normal level of NOT ZERO without making all these new mortgages instantly unaffordable? All the poor bastards buying houses with 1.75% variable rates would ingloriously implode at even just 3.50%... as that would double their mortgage payments overnight. When, NOT IF, inflation finally does rear its ugly head these rates could easily TRIPLE to a whopping 5.25%. The effect on house prices will be disastrous. Historically 5.25% is actually ridiculously low. Something between 7% and 9% isn't even astronomical if there are inflation pressures.

The recession is over. Cue the painful recovery: "The recession is over, but not the pain.

Canada's central bank predicted Thursday that the economy would expand this quarter, suggesting the economic contraction lasted for about nine months, considerably shorter than the previous two recessions in the early 1990s and the early 1980s.

The Bank of Canada's reassessment of the state of the economy is perhaps the clearest signal yet that the worst of the recession is over."

No Job = No Confidence

“At these levels in the market, there’s not a lot of room for error. Anything that deviates brings about a reevaluation by the market.” -Mark Freeman, Westwood Management Corp.

FN: Jobs are all that really matter now. Parabolic stock markets fueled by short squeezes don't do a whole heck of a lot for Joe Sixpack. They may briefly inspire some hope, but when the paychecks shrink or stop altogether, it really doesn't matter that stocks had another green day.

If the consumer is not going to be the leader of the recovery, what will? Bear in mind, overcapacity is rampant. EVERYWHERE and in EVERYTHING.

U.S. Economy: Consumer Sentiment Falls on Concern Over Jobs: "Confidence among U.S. consumers fell in July for the first time in five months as mounting unemployment and stagnant wages shook households.

The Reuters/University of Michigan final index of consumer sentiment decreased to 66, in line with forecasts, from 70.8 in June. A preliminary report for July showed a reading of 64.6.

The biggest employment slump of any recession in the last eight decades is making Americans less secure, which is likely to restrain spending and lift savings. Amazon.com Inc. cut prices last quarter to boost sales and American Express Co. said more cardholders fell behind on payments, resulting in lower- than-anticipated earnings that hurt stocks today.

“The consumer isn’t going to be a leader in this recovery,” said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts, who accurately forecast the drop in sentiment. “Consumers are aware that the labor market is still pretty bleak. Any recovery in consumer spending will be very, very modest.”"

FN: While companies are reporting bottom line beats, the real story are the top line misses. Revenues continue to drop... and rapidly. The earnings beats are all the result of massive cost cutting measures such as head count cuts, salary reductions and bonus eliminations. Obviously this does not help the consumer at all... which also means the economy be able to rebound. The consumer is still over leveraged and the debt burden has not yet been worked off.

U.S. Stocks Drop as Microsoft, American Express, Amazon Retreat: "U.S. stocks fell from the highest levels of the year as Microsoft Corp., American Express Co. and Amazon.com Inc. posted disappointing quarterly results and consumer confidence fell for the first time in five months.

Microsoft declined 9.4 percent, the most since January, on lower profit and sales than analysts estimated. American Express slipped 1.6 percent after saying earnings decreased as the recession made it harder for cardholders to keep up with payments. Amazon.com slumped 7.7 percent following price cuts that caused the online retailer’s revenue to miss projections."

US Dollar Strength, Despite Equity Rally

FN: Despite yesterday's impressive rally in equities the US Dollar Index (USD) held firm at support. US dollar strength could be foreshadowing the end of this move higher in equities.

Not a Major Accumulation Day

FN: Yesterday's rally was impressive to be sure. Volume pickd up to match and important levels were broken to the upside. However, yesterday was NOT a "Major Accumulation Day". Not even close. The ratio of up volume to down volume was 5:1.

Breakout or fakeout? Markets have really stretch deep into overbought territory. Was this the blowout top of the move?

Morgan Stanley, Wells Fargo: No Green Shoots

FN: After being up 6 of the last 7 trading days and now knocking on the underside of resistance, it's probably time for the Bulls to take a break. Losses from the financials who are not Goldman Sachs should inspire some profit taking and a more sober assessment of reality.

Morgan Stanley Loss Misses Estimates on Debt Costs (Update1): "Morgan Stanley reported a bigger second-quarter loss than analysts expected as costs to repay the U.S. government and charges from an improvement in the firm’s own debt overwhelmed revenue.

The loss from continuing operations was $159 million, or $1.37 a share, compared with earnings of $689 million, or 61 cents, in the same period a year earlier, the New York-based company said today in a statement. The average estimate of 19 analysts surveyed by Bloomberg was for a 54-cent loss. The results include a $2.3 billion accounting charge related to tighter credit spreads.

Chief Executive Officer John Mack raised $6.9 billion by selling stock in the quarter, paid $10 billion and an $850 million dividend to the U.S. government and took control of Citigroup Inc.’s Smith Barney brokerage division. All three of Morgan Stanley’s divisions lost money, while rising stock and bond markets fueled profits at competitors, including record earnings of $3.4 billion at Goldman Sachs Group Inc."

Wells Fargo Says Bad Loans Rise in Second Quarter; Shares Drop: "Wells Fargo & Co., the biggest U.S. home lender this year, said bad loans jumped in the second quarter as the recession made it harder for borrowers to keep up with payments. The shares dropped 5 percent in early trading.

Assets no longer collecting interest climbed 45 percent to $18.3 billion as of June 30 from the first quarter, the San Francisco-based bank said today in a statement. The increase was disclosed as Wells Fargo reported second-quarter net income soared 81 percent to a record $3.17 billion.

Wells Fargo added to credit reserves amid a 26-year high in unemployment and rising commercial real estate delinquencies. While the acquisition of Wachovia Corp. in January bolstered deposits and home lending, the bank must stanch losses from defaults in California and a portfolio of option adjustable-rate mortgages, ranked among the riskiest loans issued during the housing boom."

FN: So there was a 45% increase in assets no longer collecting interest! Holy shit! That is a serious deterioration in their balance sheet. $18.3 billion isn't exactly pocket change. Whatever happened to all them "green shoots"? The whacky world of accounting allows this bank to sit on $18.3 billion of defaulted debt while recording "second-quarter net income soared 81 percent to a record $3.17 billion". Uh huh. That makes perfect sense.

Nobody's Worried About Anything Anymore

FN: A dangerous level of complacency has set in. Nobody is worried about anything anymore. The near death experience of CIT didn't rattle markets. The solution, a private extension of another $3 billion in debt, merely kicks the can down the road. The whole budget impasse with California didn't even cause a twitch in muni markets. The 8th largest economy in the world starts handing out IOUs and nobody flinches? Come on! Yesterday Bernanke explained that his "exit strategy" consisted of doing the "opposite". Duh! But in reality it doesn't work that way. When Bernanke finaly decides to sell off the junk he accumulated to build a massive balance sheet, the market will front run him... spiking real interest rates and putting a break on any economic recovery then.

Anyways... problems for later. Right now, today, volatility (VIX) has scraped along the bottom of the MA Enevelope for too long now. VIX should snap higher from here and put equities, which are just as overstretched on the upside, under pressure.

Bye Bye Volume

Almost 80% of Stocks Above 50 Day Simple Moving Average

Dark Pools, Goldman Front Running

[ HT Displaced EMA ]

FN: Goldman Sachs (GS) could be using Dark Pools to front run order flow.

China: Having Difficulty Raising Debt

FN: This is the third failure in two weeks. The government will now spring into action and apply some heavy handed solutions... but the point remains: It is becoming more and more difficult to raise massive amounts of debt. It is simple really. Every country in the world is raising record amounts of debt. That just can't work out. The math won't allow it. The savings aren't there and where they are, they are already deployed. This means they have to be pulled from such things as equities... eventually... to finance this debt.

Worse yet, if the Chinese can't secure funding internally for their debt they will eventually have to convert some of their dollar holdings back into Yuan. That means they'll have to sell US Treasuries first, and then sell US dollars to buy Yuan.

China Fails to Complete 20 Bln Yuan of Bill Sales, Traders Say: "China’s finance ministry failed to meet its debt-sale target for a third time in two weeks at a 182- day bill sale, according to traders at Galaxy Securities Co. and China Citic Bank in Beijing. The ministry had tried to sell 20 billion yuan of bills and only sold 18.51 billion yuan, traders said. The average yield for the bills sold was 1.6011 percent, they said.

The average yield was 21 basis points higher than the 1.39 percent in secondary market trading yesterday, based on rates compiled by Chinabond, the nation’s biggest debt-clearing house. The government last sold similar-maturity bills on June 19 at 0.85 percent. A basis point is 0.01 percentage point."

Big Gap: Advancing Issues and Up Volume

FN: Big gaps between advacning issues (blue line) and up volume (red line) resulted in big drops in equities (grey area).

We now have a pretty big gap.

Throw in all sorts of overbought indicators, and the odds of a big correction appear to be pretty large.

Banks Not Participating

FN: The Banks (BKX) stopped participating in the rally on Thursday, putting in two consecutive down days even as the broader indices pushed higher. This rally has pushed everything into overbought terrority and weakness in the financials indicates the rally is coming to an end.