Key News
*Bank of America May Need About $34 Billion of Capital (Bloomberg)
* Europe Retail Sales Drop by Record as Recession Bites (Bloomberg)
*China Says Global Easing Policies Risk Devaluation (Bloomberg)
*Almost One-Quarter of U.S. Homeowners Underwater as Values Sink (Bloomberg)
The Event Agenda
The Morning Run-Down
If (when) we see another down turn, or shock in the economy, the Treasury estimates Bank of America would need another $34 billion in capital survive. The stress tests look ugly. This is a problem for the blind optimists that had already forecasted a rosy scenario and filed it away as the next testament of recovery. But going into the NY open this morning, a better ADP jobs number is trumping the stress test news. With that, the dollar is moving lower, global stocks are moving higher, commodities are higher, treasuries are lower…and financial market participants are happy to be wearing risk. As a result of this pervasive sentiment, the ted spread (a key proxy for credit risk) has narrowed to levels not seen since May of last year—revisiting the lows since the commencement of the economic crisis.
There are many factors that are elevating the risk threat; however, markets for the moment are hanging onto the ADP data (an historically unreliable predictor of payroll numbers, which are due out on Friday).
Ø The euro was softer earlier this morning as retail sales in the Eurozone fell off of a cliff– the largest retreat on record.
Ø The Swiss National Bank postured again this morning for a lower Swiss franc.
Ø Nearly a quarter of US homeowners are underwater on their mortgages. This is a problem that is at the core of the crisis and is worsening– and to this point, without a solution.
Going into the critical data points of the next couple of days, there is significant risk of a negative surprise —especially with the market leaning in one direction. And many key markets are either at or approaching key longer term technical levels. Enter a catalyst… like the bank stress tests, two European central bank meetings and US employment data and this all sets the stage for a reversal in sentiment.
{ 2 comments… read them below or add one }
bryan: everything you have written makes great sense. it has been awhile since i have seen rational writeups which don’t involve chasing the latest trend (however ridiculous they sound). guess i have not been reading your blog
sadly, i am dealing the recent bear rally like move has sorely tested my holding power. i have been reducing risk on my client portfolio in anticipation for future market correction which i believe may be severe. this has been very challenging but i have no intention on chasing this potential bubble.
Wishing you all the best, keep those reports coming!
Bryan Rich Reply:
May 11th, 2009 at 2:07 PM
thanks for the message.
I don’t understand what you are recommending. It appears the bubble is growing larger as US currency is trying to covertly reinforce itself. At the point of bursting, what is the recommended recourse? Example: 20% gold, 30% silver, 50% Australian dollars? FAZ? DXO? And are 10%-secured ETFs like SLV a reasonable vehicle?