Buyers Euphoria
Research for Online Investors

by John Dalt

8/15/11

The New York Empire State Manufacturing Index came out this morning.  It was terrible at minus 7.70.   Analysts expected a minus 0.40 reading after a minus 3.80 reading last month.  What does it mean?   Verification of the terrible growth numbers we have been seeing.  Manufacturing activity is not picking up, it is sliding backwards.  Good news just keeps coming.

Just before market open, we had a chance for some good news with the TIC Net Long-Term Transactions numbers.  No such luck.  Analysts expected $30.1 billion dollars building on last month’s $24.2 billion.  Money flows were more outbound than anyone anticipated at only $3.7 billion net purchases of U.S. long term securities.

This number picked up capital chasing yield in other currencies as U.S. Treasuries are paying a terrible interest rate, and the currency is falling in value.  Warren Buffet commented on S&P’s downgrade of U.S. credit in Fortune, “U.S. Treasuries are still triple-A in that there is no question that we will repay the interest and the principal.  Every contract will be repaid.  So our bonds are triple-A.  Our currency, the dollar, is not triple-A.  Our bonds are.”

The market digested the economic information and said “Buy, Buy, Buy.”  When does bad news get treated as no news?  We have “Buyers Euphoria.”  Merger Monday helps.  Google (GOOG) announced a buyout of Motorola Mobility (MMI) at $40 per share for a total of $12.5 billion.  This gives Google hardware to build out the Android platform and compete head to head with Apple’s iPhone.  This gave the market a shot in the arm.  The big headline risk now turns to headlines out of the eurozone.

The other “hotspot” for news that impacts investor moods, and our markets, is China.  July trade numbers came out last week.  Their trade surplus rose to $20.4 billion, more than a two-year high.  U.S. exports fell for the second month in June, which blew out our trade deficit to $53.1 billion.  That is our worse monthly number in more than 30 months.

German Chancellor Angela Merkel and French President Nicolas Sarkozy are meeting in Paris tomorrow.  The European Central Bank (ECB) reached deep into the bond market last week to beat down prices on Spanish and Italian debt.  Interest rates were rising, which put all of the rescues at risk.

There are calls from the weakest countries for the eurozone to issue “Eurobonds” that are backed by all the eurozone countries.  Germany has rejected this idea as a “blended bond” would raise their borrowing costs.  Weaker countries would get the benefit of borrowing at the lowest cost.

The eurozone is continuing to search for a way to keep the monetary union together without a political union with some financial controls.  Bad actors get advantages from eurozone membership until their deteriorating financial condition throws the whole region into turmoil.  Germany has proposed a “stability council” of experts.  This council would analyze individual country’s budgets and economic policies.  They could recommend sanctions and whether a country could receive eurozone funds.

This level of intrusion into member country’s sovereignty has not been crossed except when a country need rescue funds.  There has also been a proposal to elect a “European President” that would add legitimacy for political policy coordination.

Gold has reversed its decline since last Wednesday after the CME increased margin requirements.  The market is rallying.  This is a good time to clean up our holdings.  We have seen which stocks took the hardest hits during the recent market weakness.

This is a two edge sword.  They could be the biggest gainers if the “risk on” trade resumes.  They also present the biggest danger to your financial health if the market goes into another tailspin.

I am working on tomorrow’s article.  Do you want to see how big the government will be in ten years, after all the cuts?  Stay tuned.

Tact is the ability to describe others as they see themselves.---Abraham Lincoln

Editor’s note:  I always thought it was telling them to go to hell, and have them glad they were on their way!  Oh wait, that is diplomacy.

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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