Weekend July 20 2013
China
Paul Krugman comments on China Hitting the Labor Supply Wall. I heard a presentation by a former US ambassador to China. His take was that China will have a decline of at least 50 million in the available work force due to the one child policy. As the parents die ( does anyone retire in China?) there are simply not two children to replace them. This will mean fewer workers. And that means less ability to produce for other nations. And it means the low cost of Chinese labor will be disappearing, this is already happening.
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MSFT - why did the price of MSFT run up anyway?
In the Weekend WSJ on page B1 Bad Day for Tech Titans - MSFT, HPQ were both hit, here is the comment I posted for my accounting students on the professorelam blog.
The announcement by MSFT of earnings and a write off on its 'high profile Surface RT Tablet' (the WSJ description not mine) offers a good deal of insight on why we study accounting.
E/S Expectations were for 75 cents, actual versus 66 cents
I assume the R & d expenditures were capitalized once the Tablet came on the market. but MSFT hd to admit there is nothing there and so the impaired asset was written off.
Here is the CFO's comment.
“We reduced the price of the Surface RT by $150 to $349 per device,” she explained. “As a result of this price change, as well as the inventory adjustments for related parts and accessories, we recorded a $900 million charge to our income statement.
Read more: http://www.itpro.co.uk/tablets/20229/surface-rt-900m-write-down-hits-microsofts-q4-hard#ixzz2ZUm2bEEL
And so the stock price dropped 6.3% in after hours trading. You see, the failure to hit an earnings estimate impacts the stock price. Frankly I was mystified as to why MSFT stock had risen to over $30, does anyone reading this blog own a Surface RT Tablet, better yet, has anybody even seen one in use, i have not.
Or as Amy Hood CFO put it
'I want to be very clear. We know we have to do better particularly on mobile devices.
Yeah but when will that happen? MSFT dropped the price on the table by $150, from %500 to $350, a 30% price cut. Do you suppose there is any gross margin in that for MSFT?
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Oracle, Intel, IBM, MSFT, SAP, Google, all delivering disappointing results.The Heard on the Street article concludes all are too big and too slow to respond to changing tastes.
WSJ Page B 14
TMP Comment - Hmm, that would be part of the stock market topping process
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Crude Oil
I have been asking why the price of WTIC was so high, as there is plenty of supply and reduced usage for gasoline and the highest gasoline inventory since 1984. Page B 5 Crude Oil Prices Converge explains that expanded rail and pipeline shipments have distributed more oil to refineries in the US. Brent and WTIC traded for $108. Friday. Tom McClellan notes we have backwardation in crude prices with a year out trading at $95.
And we have noted the high correlation between crude and stock prices. I suspect crude oil topped for the time being Thursday and Friday. Interestingly John Murphy made a big deal of this, John seems to be coming onto the field at market highs these days.
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Yields on investment grade debt fell below 6% at Thursday's close for the first time since June 4. fueling the bounce, investor sentiment, the prices of T bonds have risen amid reassurances by the FED that the FED is in no hurry to curtail its $85B bond buying program.
Junk Jumps as Bond Boom Page B5
This was our suggestion a few weeks back. I bought some municipal funds that admittedly have lagged this move up in other bond prices. The problem is with ETFs that are thinly traded. TLT for example has moved just opposite TBF.
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Okay let's start with Crude OI.
If this pattern holds we can expect a low into october and then another high in February. Note that Brent in the top panel and WTIC in the main panel have achieved parity at $108. Also note the 25% rise from April. The rapid rise here reminds one of the summer of 2008 when oil hit $145.
Weekly Crude Oil
Crude oil an numerous energy stocks and service companies took out downtrend lines poking to new highs. We noticed last week that oil had broken this downtrend. We suggested Conoco Phillips COP as a best bet and it set a new high this past week.
While the daily MACD in the previous chart looks toppy, the weekly has a way to go. That supports the idea of a final high next February. The trend in crude oil remains up, this suggests higher stock and oil prices in the six moths ahead.
SPX Correlates with Conoco
Again we remind readers that commentators on tv hve it all wrong. Here Conoco is highly correlated to the stock market via the SPX. One is the image of another, it is confidence in the economy that raises oil prices, even in the face of plentiful supply and reduced demand and increased production, all of which happened during this period.
SPX is getting far ahead of its moving averages. We think stocks and oil begin pullbacks here.
Bonds TLT, JUNK, MHD
TLT government bond fund on top, Junk in the middle, and MHD muni closed fund at bottom. Clearly TLT and the municipals have badly lagged Junk in attracting investment. Let's see if things improve this week.
Make no mistake about what is going to happen here. The Federal Government gladly gave the GM bondholders nothing. That was frightening enough. I would not be surprised to see it happen again in Detroit. And if that happens, bond holders everywhere will have a good reason to be frightened. First they are likely facing insolvency. Second there will be no traditional bulwark of support for creditors in bankruptcy court. The next chart tells us what the market is expecting.
US Dollar
The dollar as been in an uptrend since the lows of early 2011. This market sees a scramble for dollars developing. Sure the US has printed lots of the world currency, but then there is lots of dollar denominated debt around. Even supposedly rock solid Texas has problems; Houston, TX has unfunded pension liabilities of over $2 billion. MISH reported on this possibility in October 2009. The bankrutpcy of course is that the city cannot cover future poromises of pensions, this can be put off for some time, and Detroit and GM are prime examples of that.
Consider the left side of this chart. As the financial crisis worsened in fall 2008, the value of the dollar soared, as everyone scrambled to sell assets to raise cash, in dollars. At the moment we do not have a national financial panic. But the dollar has risen to the same level now, as it was during the panic of 2008! This is the 84 level. Meanwhile the value of gold has plummeted. No one expects debts to be paid in gold, but the wise are looking to accumulate more dollars. That is the only rational explanation of why gold is down and the dollar is up.
The Bottom Line
Stocks and crude are a bit overdone but on target for higher prices in late summer.
Bonds will likely bounce and then continue down into the Fall.
The Dollar remains quite strong.
Gold and silver remain on target for Fall lows.
Socionomics
Market extremes are accompanied by extreme behavior. We have noted that bright colors and styles are characteristic of market tops. Still I just cannot agree that this plaid jacket goes with the checkered
shirt.
The WSJ noted this week that one of six Democrats are now voting wiht Republicans to dismantle portions of Obamacare requirements. Even Obama's administration selectively dropped parts of the act for a year. Amid NSA, IRS (see Peggy Noonan this weekend), Syria, Palestine (Brett Stephens described Secretary of State Kerry as a fool on a fool's errand this week), and Snowden, our 1973-74 political meltdown analogy continues.
It's official, the rating is now negative. We are a mere seven months into the new Presidential term, again I am not being political just reporting the amazing analog with this and the Nixon Presidency in its second term.
thanks for reading The Market Perspective
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