Knight Reading

by CC July 13, 2011 10:56 pm • Commentary



  • 8:30 a.m. ET: We get weekly jobless claims, which are expected to stay stubbornly above 400,000.
  • 8:30 a.m.: A busy Labor Department also releases producer prices for June. They’re expected to fall, thanks to a helpful decline in oil.

Earnings: Buckle up, we’ll hear from:

  • Google
  • J.P. Morgan Chase


  • 10:00 a.m.: The Bernankenator repeats his testimony in the Senate, where all the women are strong, all the men are good-looking and all the children are above average. Is the market dumb enough to rally twice on the same non-news? We’ll find out.


The Dow surged as much 164 points today, before ending up about 45, after Ben Bernanke left the door open for further accommodative measures should the economic recovery falter. Investors are giddy at the notion of a third round of QE.

But market watchers cautioned that the only way the Fed would employ such stimulus is if the economic recovery were to hit a serious speed bump.

While investors cheer now, they may not be prepared for the pain that the economy and the stock market would need to experience before the Fed were to step in again.

“If anything, the comments this morning make it more concrete that the economy is extremely weak and not recovering as anticipated,” said Ben Halliburton, chief investment officer at Tradition Capital Management.

An anemic labor market, ongoing problems in the housing market and the troublesome euro-zone sovereign-debt situation have weighed on the market for months. But for all the headwinds plaguing investors, the blue-chip Dow is only about 2% off its three-year closing high hit in late April.

By comparison, the Dow dropped as much as 15% last summer in the months leading up to the enactment of the Fed’s second round of quantitative easing, or QE2.

Analysts suggest a similar decline for U.S. stocks would be necessary for the Fed to pull the trigger on QE3, meaning investors would have to tolerate a bigger move to the downside before benefiting from a new round of stimulus.

“I believe it will take a 15% to 20% drop in stocks and/or very poor economic data before he acts again, neither of which we have now,” said Peter Boockvar, managing director and equity strategist at Miller Tabak & Co.


We have been waiting for this – the RBS report on eurozone debt crisis, policy options and end game scenarios.

And it doesn’t disappoint.

The RBS team, lead by chief economist Jacques Cailloux, reckons the Euro area is at ‘breakpoint’, which for those of you not familiar with the term is…

a means of acquiring knowledge about a program during its execution. During the interruption, the programmer inspects the test environment (general purpose registers, memory, logs, files, etc.) to find out whether the program is functioning as expected. In practice, a breakpoint consists of one or more conditions that determine when a program’s execution should be interrupted. [Wiki]

Cailloux & Co expect the crisis to continue and threaten the entire euro area because policy makers still don’t understand market dynamics. A Greek debt swap might bring temporary relief but investors will soon refocus on the systemic issues, they say.

As such a continent wide response is required to address the powerful contagion channels which are threatening the stability of the entire region.

Solutions are available but because of bungling by politicians the costs are rising. And that means the end game will be massive intervention by the ECB.


...the rally in the S&P 500 of 3.8% over the past four weeks has come with HIGHER industry sector correlations. That’s unusual for U.S. equity markets, which have tended towards lower correlations in rising markets and clustered returns when things get ugly.

In fact, the average price correlation of the 10 major industry sectors (as tracked by their ETFs) to the S&P 500 tightened up to 89% last month, the highest level since late 2010. Since lower correlations are a necessary sign of healthy markets, this puts the end-of-second-quarter rally on the Greek debt “resolution” in serious doubt.

Yesterday’s decline of 1.8% for the S&P highlights the fragility of that recent move higher and supports this cautious interpretation of the correlation data. Gold, in contrast, continues to behave the way the textbooks say it should: little-to-no correlation with financial assets.

Pragmatic Capitalism

“When 2012 begins, the economy is already scheduled to lose more than $300 billion in federal support, as several programs aimed at propping up growth in recent years expire or fade away by the end of this year. Policy changes now on the books will result in the most severe fiscal tightening in more than 40 years, subtracting an estimated 1.5 percentage points from GDP growth next year, according to an analysis by economists at J.P. Morgan Chase.

…Expiring programs will help to reduce 2012 deficit but at a heavy cost to the economy, especially in the first half of the year. So far the private-sector, which has grown by a modest 2.9 percent over the past year, has not shown the oomph needed to absorb a 1.5 percentage point hit to GDP growth while also supporting a growth rate strong enough to reduce unemployment. For example, for the economy in 2012 to make the mid-point of the Federal Reserve’s 3.3-to-3.7 percent growth projection, private-sector GDP would have to grow 5 percent, a pace not achieved since the tech-stock boom more than a decade ago.”