THE BIG PICTURE

Last Update: 02-Apr-12 09:04 ET

Credit Cycle is Key to Equity and Economic Recovery

This economic cycle has been driven by credit trends. The market collapse of 2008 and the subsequent recession was the direct result of a credit market implosion. The nascent recovery of 2010 was driven by a stabilization of credit market conditions. Now, credit expansion has begun anew, auguring well for the economic and stock market outlook.

Partisan Views

The analysis of the current economic cycle has been obfuscated by an unnecessary partisan debate.

There is no doubt that there was a housing bubble created over many years which subsequently burst, leaving a deep scar across all economic sectors.

The credit markets froze in 2008 and 2009. Lehman went bankrupt in September 2008. The regular flow of credit between financial institutions stopped. Banks that had lent excessively for years suddenly stopped lending. The contraction of credit slammed the economy.

To some, the basis of this problem was excessive government protection of the housing industry, amounting to subsidization that led to overexpansion of the housing sector and a significant propping up of home prices. Government interference in the markets, particularly for subprime mortgages, was to blame. Many Republicans take this view.

To others, the problem was that an under-regulated Wall Street over-leveraged mortgage debt. A decline in the value of that overvalued debt then led to a cascading implosion that froze the credit markets. Wall Street was to blame. Many Democrats take this view.

In fact, both views have validity. Housing activity and prices were propped up by government support. Wall Street made the eventual decline in mortgage-debt values a disaster through vastly excessive leverage. That created a pro-cyclical decline in asset values that undermined capital levels at banks.

None of this is original analysis. In fact, this article was prompted by an article by the outstanding analyst Robert Samuelson, called “Causes of the Crisis.” Link to: http://www.realclearpolitics.com/articl ... 13521.html

His point was partly that the partisan bickering over the causes will not lead to improved policies, but also to the reality that the roots of the causes of the crisis are based in long-term credit cycles. This is a position Briefing.com has long held.

Long-Term Credit Cycles

Credit is the lifeblood of the modern economy. When credit expands, economic growth accelerates.

During periods of credit expansion, the Federal Reserve needs to control credit growth so that inflation is kept restrained and so that credit bubbles do not occur. Yet, it is probably impossible to do this over the long term.

There is a theory that credit cycles are generational. The generation that grew up in the depression saw the traumas created by the excesses of the 1920s and only accepted debt cautiously.

The next generation or two, however, found that debt helped create wealth. This generation had no fear of debt, and borrowed against their homes to take vacations, and leveraged debt against presumed future income and asset growth. Optimism reigned supreme as forecasts of Dow 40,000 or Nasdaq 10,000 were rampant. Home prices were expected to go up forever and unemployment to remain low.

Eventually, however, excessive optimism and over leverage led to a correction. A disruption to presumed asset values or economic growth undermined the house of cards. A credit contraction occurred and caused a serious recession.

In fact, because credit is so critical to the modern economy, credit-induced recessions are far worse than other forms of recession. Furthermore, recovery for a credit-induced recession takes longer than from other forms of recession such as inventory or interest/inflation-induced recessions. It takes longer for consumers and businesses to repair balance sheets than it does for inventories or interest rates to correct.

During this period of balance sheet repair, longer-term pessimism often sets in. The past few years, there has been frequent talk of a “new normal” of lower market returns, a belief that unemployment will never drop back to previous levels, and high levels of concern over geopolitical issues such as the problems in Europe.

The Current Situation

The implosion in the credit markets was the cause of the current economic problems.
Rebuilding confidence in the credit markets takes time. It takes time for borrowers to repair balance sheets and feel comfortable taking on new debt. It takes time for banks to feel comfortable lending again to anything but perfect credit risks. It also takes a long, long time for governments to put their balance sheets in order, putting a new level of stress on credit market conditions.

Yet, there are clear signs that the credit markets are improving.

Below is the five-year chart of commercial and industrial (C&I) loans from commercial banks.



C&I loans plunged starting in mid-2008. The worst of the recession followed. These business loans have started back up as of mid-2010.

The uptrend in C&I loans is a very strong indication that the credit markets are improving and a very positive sign that economic growth is likely to continue.

There is more good news. Below is a five-year chart of real estate loans from commercial banks.



Not surprisingly, real estate loans took longer to hit bottom than C&I loans. Loans have been heading upward since late 2011. The uptrend appears to be strong enough, however, to expect it to continue. Below is a one-year chart of real estate loans that more clearly shows the recent trend.



Economic and Stock Market Implications

A smoothly operating credit market is essential to a growing modern economy. Credit growth is required to fuel economic expansion.

The uptrend in the key categories of C&I loans and real estate loans is a strong indication that further economic growth is likely.

The uptrend in lending is also a very good sign for the stock market, and financial stocks in particular.

Financial stocks were critical to the stock market trends in recent years up to 2007. Financials were a key driver of profit growth for the S&P 500 overall, and comprised over 20% of the index valuation.

The past few years, financials have been a severe drag on the stock market. The market value of financials as a percentage of the S&P 500 Index is now just 14.9%.
Financial sector valuations are now improving, however.

Most readers are well aware that financials have been on a tear recently. A chart of the XLF financial sector ETF, which is based on banks and brokerage firms, is shown below.



The XLF is up almost 40% over the past six months. It is a major reason the stock market has been up so strongly and steadily the past half year.
What It All Means

The credit markets are healing.

Financial companies and banks have improved their balance sheets and capital positions over the past three years. Lending is picking up again. That is positive for banks and for companies increasingly focused on expansion.

The stronger financial sector reduces the risk that a double-dip recession will occur. This is a credit cycle, and it would probably require another hit to credit conditions to reverse growth. Housing prices and consumer spending trends won’t cause another dip, as some were predicting last year, particularly if employment trends remain strong.

The reduced risk of a double-dip recession and the improvement of credit conditions in Europe have supported the recent stock market rally. Lower risk has allowed stocks to move towards more normal valuations from compressed levels. This can continue as credit market conditions and lending continue to improve.

Consumers, businesses, and financial institutions have repaired balance sheets. Governments have not. This remains a drag on economic growth. A key reason that real GDP has not returned to the long-term potential is that government spending (close to 20% of GDP) is restrained in the US and Europe. This will be the case for many more years.

The overall improvement in credit markets conditions and the return of credit expansion in the key sectors of commercial and industrial and real estate loans has been a major reason the stock market has rallied the past few years. Further credit expansion will keep economic growth on track.

The credit cycle has a long, long way to go before excessive optimism returns. It may even take another generation. Yet, the renewed uptrend in the credit cycle suggests that stock market gains can continue given excellent current valuations in stocks.

--Dick Green, Briefing.com


Read more: http://www.briefing.com/investor/popupp ... z1qtSrbtX5

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Tracking the 'Risk On, Risk Off' Trade

Published: Thursday, 5 Apr 2012 | 12:46 PM ET

By: Bob Pisani
CNBC Reporter

Major indices have come off their early morning lows despite the strong dollar, which has not hurt commodities — or commodities stocks.

This has happened more often in the last month — not all the time, but enough to get notice.

Stronger U.S. economy, stronger dollar, stronger stock market? It could happen more regularly.


Tracking the "risk on, risk off" trade.

I get a lot of questions on what, if any, leading indicators there are that have predictive powers regarding the "risk on, risk off" trade.

I haven't found one, but I have been looking at an interesting ETF recently that is certainly tied to the trade. Check out the PowerShares DB G10 Currency Fund [DBV 24.95 -0.01 (-0.04%) ]. I spent some time Tuesday with Martin Kremenstein, Director of Global Markets for Deutsche Bank, which manages the DBV.

This ETF is a basket of ten global currencies: U.S. Dollars, Euros, Japanese Yen, Canadian Dollars, Swiss Francs, British Pounds, Australian Dollars, New Zealand Dollars, Norwegian Krone and Swedish Krona. They go LONG the three currencies with the highest interest rates, and SHORT the three with the lowest interest rates. It's rebalanced on a quarterly basis.

Currently, they are LONG the Aussie dollar, the New Zealand kiwi, the Norwegian kroner, and SHORT the U.S. dollar, Japanese yen, and Swiss franc.

In other words, it's a proxy for global growth. Most interestingly, the DBV began diverging from the S&P a month ago, another sign that the U.S. was partially decoupling from the rest of the world.

I know, a lot of you believe that it is not possible to decouple, that everything is connected, that everything moves together.

Of course everything is connected, but it doesn't mean there can't be significant outperformance. And the global markets are saying this loud and clear: the U.S. stock market has begun pulling away from Europe.

It's happened again this week, not a great week for stocks, but the S&P is down 0.6 percent, Germany is down 2.4 percent, Spain down 4.5 percent.

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Capitulation Time for Gold Miner ETFs?

April 5th at 3:14pm by John Spence


An exchange traded fund indexed to large-cap gold miners continued its downward spiral this week with a 7% loss on falling precious metal prices. Many investors appear to be throwing in the towel on the beleaguered sector.

Market Vectors Gold Miners (NYSEArca: GDX) touched a fresh 52-week low of $46 a share on Thursday and is on a six-week losing streak.

Market Vectors Junior Gold Miners (NYSEArca: GDXJ) was on track for a loss of more than 8% for the week. [Gold ETFs: Bullion or Mining Stocks?]

The gold miner ETFs followed bullion prices lower after the minutes from the latest Federal Reserve meeting triggered speculation the central bank won’t unveil more quantitative easing unless it sees evidence the economy is weakening.

GDX was down about 9% year to date heading into Thursday’s action, while the small-cap GDXJ slipped nearly 8%. They have been caught in a vicious downtrend since the beginning of March. [Gold Miner ETF Falls to 52-Week Low]

Investors have been waiting in vain for the sector to close the performance gap with gold. Gold miner ETFs have badly lagged bullion prices during gold’s historic rally.

Some analysts believe the underperformance of gold miners is due to the rising popularity of bullion-backed ETFs, which make it easier to invest in the precious metal. The theory is that gold ETFs have diverted money away from miner stocks. [Gold Miner ETFs Lose Their Luster]

“Market sentiment is overwhelmingly bearish on both gold and the miners (the miners are even more hated than the yellow metal itself),” writes Robert Sinn at the Stock Sage blog on Thursday.

“The mining industry has suffered from an industry wide round of cost inflation which has led to margin compression and disappointing earnings results even during a time of robust gold prices,” he added. “It seems to me that this sector is nearing a major inflection point as the institutional investors have largely fled the scene and some of the last stragglers are being carried out feet first as we speak.”

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THE BIG PICTURE

Last Update: 09-Apr-12 08:44 ET

Headwinds Increase

The headwinds for the market that we noted in our March 26 Big Picture have emerged. They may grow stronger. But the fundamentals have not changed. Of course, any downturn in the market will fuel over-the-top bearish comments, which astute investors will keep in perspective.

The Real Headwinds: Earnings and GDP

This past week, the S&P 500 was down for only the third time in the past fourteen weeks, stretching back into December. The index dropped only 0.7% for the week and is still up 27% since early October.

Still, there are reasons to believe last week may have marked the end, at least temporarily, of the bullish trend of the past six months.

The immediate concern is the first quarter earnings reports that start up on Tuesday. The reports won't be great.

Forecasts are for earnings to be up approximately 3% for the quarter. That would mark a sharp slowdown from the 14% earnings growth posted last year. It is also likely that companies will express caution about the outlook for the rest of the year.

Perhaps the best news is that expectations for earnings have dropped significantly over the past couple of weeks, as the likely sluggish growth has been widely discussed. Nevertheless, modest earnings growth is unlikely to reignite the recent market momentum.

Another legitimate concern is the economic outlook. The modest 120,000 March nonfarm payroll gain reported Friday was appropriately interpreted as a disappointment.

First quarter real GDP, to be reported on April 27, is likely to show growth at about a 2% real rate. Recognition that first quarter growth was not particularly strong will reduce underlying optimism about the economy. One key support for optimism had been the three, straight monthly gains of over 200,000 in payrolls.

Reduced confidence that the employment trends are providing solid support to the economic outlook will change how individual reports are interpreted. Now, weakness in an individual report will receive exaggerated attention.

The economic outlook is not greatly altered. Real GDP growth will continue at a solid if unspectacular rate through 2012. A higher level of anxiety about the outlook, however, is likely over the next few months.

Seasonal Factors

Seasonal trends present another problem for the stock market.

The S&P 500 index is up 17.7% over the past two years.

Yet for the five months from April 1 through August 31 in 2010, the S&P 500 fell 11.0%.
For the five months from April 1 through August 31 in 2011, the S&P 500 fell 8.5%.

This pattern of terrible spring and summer months is reflected in the two-year chart for the S&P 500.



Relative weakness in the May through October period for the past 50 years is well documented. The trend the past two years was even worse, and will keep traders on edge in the months ahead.

Amplifying Fears

When the market is up, every piece of news seems bullish. When it is down, the negatives get amplified.

In the weeks ahead, any further market weakness will give impetus to further bearish talk. This will include the legitimate, fundamental concerns over earnings and GDP growth, but may also expand once again to include European debt issues, the US federal deficit, and other as yet discovered problems.

Last week, in fact, we all became Spanish bond traders once again, if only for a day. Watch for renewed hyperbole about European issues causing the end of Western civilization.

Fundamentals Remain Unchanged

The key fundamentals behind the bull market of the past three years have not changed. Stocks represent outstanding relative value compared to bonds. The earnings yield on stocks is high compared to historical averages, and extremely high for the current interest rate environment.

The economic and earnings outlooks haven't changed sufficiently to alter the relative value argument for stocks. The economy will continue to grow at a solid if unspectacular rate through 2012. Earnings growth may be mid-single digits compared to the strong growth the past few years, but that will be sufficient to increase stock values by the end of the year.

Briefing.com remained resolutely bullish the past two summers despite extremely choppy market conditions and high levels of fear related to European debt issues and presumed risks of a double-dip US recession.

Unless the fundamentals change, we will remain bullish through what could be some difficult months ahead.

Of course, any downtick in the market will give bears the opportunity to present their case. Just last week there were articles on major financial sites suggesting that the fundamentals for stocks are bearish. These articles typically focus on the current price/earnings multiple from a historical standpoint, the 10-year Shiller price/earnings multiple, and the current high level of profit margins.

Next week's article will explain why these arguments are wrong.

What It All Means

There are plenty of reasons to expect headwinds in the months ahead. An earnings growth slowdown, continued sluggish economic growth rather than a hoped-for ramp up in GDP, and seasonal factors are all legitimate concerns.

The fundamentals haven't changed, however, and the strong relative value of stocks still supports a long-term bullish view. Just like the past two summers, when the bears got carried away, we will hold to our view unless the fundamentals change. They have not yet.

Still, we fully recognize that risk-averse investors might want to take precautionary measures and perhaps hedge positions. An adjustment to higher-yield, high-quality stocks from more aggressive positions might make sense for some portfolios. Traders might want to quit playing the one-sided "buy every dip" game.

For long-term investors, however, any weakness this summer is likely to prove another excellent buying opportunity, just like the past two years. This is particularly true for young investors making steady 401k investments in stocks.

The near-term headwinds are increasing, but the long-term direction is still forward.

Dick Green
Founder and Chairman, Briefing.com

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Weekly Commentary by Lawrence G. McMillan

from CBOE by contributor

(Editors Note: this was from late Thursday night before the jobs report last Friday)

The stock market has run into a little trouble this week. Things started out well enough, with a strong rally on Monday taking $SPX to new post-2008 highs. However, selling has commenced since then, fueled by several factors: an overbought condition, more poor news out of Europe (concerning Spain), the FOMC minutes which were released on Tuesday and appeared to indicate that the Fed is not planning on any quantitative easing in the near future, and now the Unemployment Report.

The chart of $SPX has held above support, and that is arguably
the most important thing that can be said. There is a strong support
area at 1385-1390.

Equity-only put-call ratios are bullish at this time.

Market breadth (advances minus declines) has been lackluster for some
time now. The breadth indicators rolled over to sell signals this week.

Volatility continues to be a very interesting indicator. If $VIX were to close
above 17 and trend higher, then that would be bearish for stocks.

In summary, we remain bullish as long as $SPX holds above
support. However, the market reaction to the jobs report is likely
to push $SPX below support. If it closes there, that would be bearish.

Larry McMillan
http://www.optionstrategist.com

http://communities.cboe.com/t5/What-s-O ... /ba-p/2563

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THE BIG PICTURE

Last Update: 16-Apr-12 09:13 ET

Bearish Arguments to Ignore

Last week's Big Picture article laid forth the rationale for expecting difficult market conditions over the next several months. There are legitimate concerns. There are also vastly overblown bearish arguments. The distinction between the legitimate concerns and the excessive concerns is important.

Review
Our market view is a bit nuanced, so herewith is a quick review of recent Big Picture articles:

February 28, 2011: "The Long-Term Case for Stocks" emphasized our view, held since the summer of 2010, that stocks represent excellent, long-term relative value. This long-term view has not changed.

October 24, 2011: "The Other Side of Sell in May" noted that seasonal rallies often start in November. The article concluded with the statement: "It is not hard to imagine a repeat over the next six months of the 15% gains the stock market posted each of the past two years during the historically favorable November through April period." This was a very contrarian view at that time considering the drubbing the market had taken that summer. The S&P 500 index rose 14.6% from that posting to April 2, 2012.

January 3, 2012: "The Bullish Alternative" laid out the argument that, "There is a much greater chance that the S&P 500 will rise 10% to 20% in 2012 than is widely, if ever, discussed." After a flat 2011, few were making the case for double-digit S&P gains in 2012. There is still a possibility of a 20% year with a late year rally, as the S&P is already up 9% on the year.

March 26, 2012: "Headwinds" argued that first quarter earnings and first quarter GDP could disappoint, and that "It is possible that sentiment will soon shift to emphasize the negatives."

April 2, 2012: "Headwinds Increase" noted that during the April to August period the past two years the S&P 500 index has averaged a decline of almost 10%. We cautioned that the coming months may experience similar turbulence in the markets.

To summarize: our long-term bullish stance is not changed in the least. However, we fully recognize that seasonal patterns and slower earnings and economic growth could cause market turbulence this summer.

If a decline does occur, the bears will take center stage and overstate their case. Below we dissect some of the poorly thought out arguments that are already appearing.

The Bearish Arguments That Are Wrong

Three of the most persistent bearish arguments were highlighted in a recent article on a major financial web site.

The arguments are:

1) Market valuations as measured by Price/Earnings (P/E) multiples aren't low.
2) The 10-year Shiller P/E shows stocks overvalued.
3) Profit margins are high and using a "normal" profit margin shows stocks are overvalued.

The first argument typically notes a current 14 P/E for the S&P 500 as opposed to a long-term P/E of 15 to 16. The current P/E, it is often argued, isn't all that low considering the risks in the market today.

The problem with this argument is simple -- no consideration is given to the current interest rate environment.

The P/E ratio is nothing more than the inverse of the earnings yield (earnings/price, or E/P). And, as any basic financial course will teach, the present value of a financial asset is the future yield discounted to present value. The current and expected future E/P (or P/E) is only half the analysis. Also critical is the interest rate environment that determines the discounting to present value.
No one would ever analyze bond yields without considering inflation. Otherwise, current bond yields would be well below long-term norms, and, on this simplistic analysis, absurdly low. Put another way, the P/E on bonds right now is way, way above long-term trends. It makes no sense, however, to suggest bonds on this simple measure are ridiculously overvalued.

It also makes no sense to look at the P/E on stocks without reference to interest rates.

The current P/E on the S&P 500 is extremely low when interest rates are taken into consideration. This can be seen in the high earnings yield on stocks (the E/P is about 7%) compared to the meager 2.00% yield on 10-year Treasury notes.

The current P/E, when adjusted for interest rates, is extremely low compared to historical levels. Stocks represent outstanding relative value. (For a more in depth analysis of this, please access our Big Picture archive and see the February 28, 2011, article noted above).

To compare the current P/E to historical levels is simplistic and misses half of the analysis in assessing valuation.

Shiller Long-Term P/E

The Shiller argument seems, at first glance, to make more sense. The Shiller P/E looks at the ten-year average in order to smooth out business cycle impacts. The current ten-year P/E is above the long-term average and might suggest stocks are overvalued.

A breakdown of the data, however, shows why this argument should not be used for current investing considerations.

A high P/E is usually taken to mean that prices are too high. However, the reason the Shiller P/E is high right now is that the E (ten-year earnings) is very low.

The E is low because bank earnings were absolutely horrific in 2008 and 2009. Negative earnings in financials pulled overall earnings down so much that there was a major impact on the 10-year earnings number.

The long-term P/E is high not because of long-term underlying trends, but simply because of huge negative bank earnings in 2008 and 2009 that were due in large part to write-offs.

Frankly, we do not feel this is a reason not to buy stocks today. The Shiller P/E has been used as a bearish argument for the past three years and it has been wrong. The high P/E is because of an anomaly in the data rather than a representative long-term trend.

It is reminiscent of 2003, when the as-reported P/E on the S&P 500 was over 30. The P/E was very high because of one, huge write-off at AOL Time Warner for the previous merger. The high P/E was frequently noted as a reason to be bearish. But as soon as the write-off dropped off the back end, the P/E suddenly plunged -- without any change in the fundamentals. The high P/E caused by an aberrantly low E was not a reason to consider the stock market overvalued.

It will be years before the 2008-2009 bank earnings drop off the 10-year Shiller P/E, yet the concept remains the same. It would be a mistake to think that the high 10-year Shiller P/E indicates the 'P' is too high. The high P/E is not due to underlying long-term trends that are smoothed out over time, but rather to one-time huge write-offs to 'E' in a couple of years that distort current valuations.

The Shiller P/E is often a useful tool. It has not been useful the past three years and we contend that it is not useful at present as well.

The Profit Margin Argument

The profit margin argument has some validity but is often presented in an absurd way.
Profit margins are very high and above long-term averages. The argument is often that margins will return to the long-term average, so that average should be applied to today's numbers to get a true read on earnings.

That is absurd. No company is going to suddenly lower prices, or raise input costs simply to reduce margins. Profits are what they are today. Period. That is the basis of the value of a company.
It is very realistic to assume that margins will move towards the long-term average over a period of years. In fact, that is our assumption. That will occur, however, as revenues rise over the coming years, but costs rise at a faster pace.

As this happens, profits will rise even further from today's levels even while margins drop.
This is where that margin argument as presented is often dead wrong. There is a jump in the argument from "margins have to revert to the norm" to "that means lower profits." The connection between the two is often skipped. That is a huge flaw in logic.

Margins are certainly high, and are likely to come down in the years ahead. That will restrain future profit growth, but there is no reason to assess today's companies on anything other than current profits.

What It All Means

All of the arguments discussed above are attempts to undermine the argument that stocks currently represent excellent value. They are all founded on faulty logic or take into consideration only a part of the necessary calculation.

Stocks represent excellent relative value today because the earnings yield is higher than the long-term average, and it is extremely high given the current interest rate environment.

Last week's Big Picture article laid out the arguments for yet another difficult summer for the stock market. Any downturn due to seasonal and temporary factors, however, has to be distinguished from any change in the long-term fundamentals.

--Dick Green
Founder and Chairman, Briefing.com


Read more: http://www.briefing.com/investor/popupp ... z1sElYAvgV

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Weekly Market Commentary by Lawrence G. McMillan

from CBOE by contributor

The Standard & Poors 500 ($SPX) chart still shows heavy resistance at 1390.

That level has been challenged on five of the last six trading days. So far it has held,

thus making it a very strong resistance area.



Equity-only put-call ratios remain on sell signals, which originated a week ago. These ratios

are now climbing their charts swiftly, solidifying those previous sell signals.



The breadth indicators that we follow have now turned to buy signals.



Volatility indices ($VIX and $VXO) have not responded with roaring enthusiasm to

this week's rally attempts. Rather $VIX has held above 18 for the most part

(below that level this morning). Consider the chart of $VIX, It has risen back into

the 17-21 trading range, which previously held sway back in February.

As long as $VIX is in this range, I would expect the market

to be quite volatile, but probably without much definitive direction.



In summary, even though $SPX has retraced its way back to the 1390 resistance level,

only breadth rolled over to a buy signal. I think it is significant that the put-call ratios

and volatility have not improved on this move. Therefore, there is still a reasonable chance

that $SPX will decline to test the strong support at the 1340 level.



Larry McMillan

optionstrategist.com

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THE BIG PICTURE

Last Update: 23-Apr-12 09:29 ET

Spain's Impact on US Stocks

Global financial markets are preoccupied with economic and financial developments in Spain. The economic implications of a recession in Spain, or in Europe overall, are certainly real and significant. The greatest risk to the US stock market, however, would be from any Spanish-induced credit market disruption. There are indications that this is not a significant risk.

Credit Market Impact from Spanish Stress

The yield on Spain's 10-year bond has climbed from 4.58% on February 1 to as high as 6.02% on April 16, and closed Friday at 5.95%.

Over the same time period, the TED spread, which is the difference between the 3-month LIBOR and the 3-month T-bill rate, has declined nearly 9 bps.

The dichotomy is striking given that the TED spread is regarded as a gauge of perceived credit risk in the general economy.

The lack of any significant increase in the TED spread the past few months suggests that the global credit markets do not fear significant disruptions from the current stress in the Spanish bond market.

This is in contrast to the situation in April 2010, when the Greek debt crisis flared up, as shown in the chart below.

The TED spread was elevated last year, too, when the Greek crisis flared up again at the same time Congress was playing an ill-advised game of chicken with the debt ceiling.
Still, the perception of credit risk resulting from Greek problems was nowhere near that in the wake of the Lehman Brothers bankruptcy, when the TED spread reached 457 basis points. (The long-term average is 30 basis points.)

It is striking that there has not been any upward thrust in the TED spread at a time when a large number of reports are suggesting the spike in Spanish bond yields is a marker pointing to an increasing likelihood that Spain will need a bailout program and that contagion risk is going to increase as a result of bank exposure to Spain's bonds and deteriorating economy.
The problems in Spain are clearly quite real. The Spanish economy is comatose and higher Spanish bond yields are a government-funding problem. Yet, the global credit markets aren't indicating great concern.
No one knows for sure what the future holds. A quiescent TED spread at this juncture, however, seems to imply that there is limited fear of contagion risk from Spain hitting the US economy and US banks.

The TED spread, one of the primary indicators of stress in the global credit markets, is not signaling global concern.

Equity Market Impact from Spanish Stress

The limited concern about any Spanish-induced impact on earnings and balance sheets of US banks is evident in the equity performance of US bank stocks.

The Financial Select Sector SPDR Fund (XLF), which is comprised of bank, brokerage, insurance, and other financial stocks, is up 8% since the end of January.

One factor supporting these stocks is the results of the Federal Reserve's stress test, released in mid-March, which involved a deep-recession scenario by the third quarter of 2012 for the euro area. Only a few banks failed the stress test.

US banks were caught unprepared for credit market disruptions when the Lehman problems hit. That is less so at this time.

What It All Means
The US stock market has been reacting to Spanish bond yields in recent days. This will probably continue over the near term.
The knee-jerk reactions, however, are excessive relative to the fundamental implications.
A weak Spanish economy, and in Europe overall, is certainly a problem for any US company with European sales. US stock prices probably already discount a European recession, however.

The real risk to the US stock market is a significant credit market disruption resulting from panic in Spain. As of now, the global credit markets are indicating that the risk is limited.

As regular readers know, we have been concerned about the headwinds the US equity markets will face in the months ahead. In turbulent times, the negatives get blown out of proportion. Investors should keep this in mind in the weeks ahead when excessive ink will undoubtedly be spilt over anxiety caused by Spain.

Dick Green
Founder and Chairman, Briefing.com
Patrick J. O'Hare
Chief Market Analyst, Briefing Research


Read more: http://www.briefing.com/investor/popupp ... z1ssXvxxW4

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PAGE ONE

Last Update: 04-May-12 08:57 ET

Employment Data no Help

A disappointing April employment report has increased concerns that growth in the US economy is slowing down. The associated anxiety may create a cautious undertone to market sentiment that could take months to dispel.

April nonfarm payrolls rose 115,000. This was down from a revised 154,000 in March and an average of about 240,000 for the three months of December through February.

Payroll growth at the current level is consistent with moderate real GDP growth of about 2%. It is not strong enough to maintain the recent hopes that the economy was moving towards the long-term trend of 3% (or higher growth such as normally follows a recession).

S&P futures fell only slightly following the report, because expectations had been lowered, and a modest down open is indicated.

The breakdown of the employment data had no real surprises. Private payrolls were up 130,000, as government payrolls fell 15,000. Manufacturing payrolls rose 16,000. The average workweek was unchanged at 34.5. Hourly earnings were flat, but this follows two months of above-trend gains. The decline in the unemployment rate will be subjected to the same, and legitimate, argument that it doesn't reflect improving employment conditions as much as workers giving up in the quest for jobs.

The recent economic reports have been mixed. Factory orders have leveled off, housing data have dipped, industrial production has been flat for two straight months, and auto sales for April were flat. There is no sign of a double-dip recession, but the recent data underscore the reality that recoveries from debt/financial market induced recessions take a long time to repair the damage done.

The French and Greek elections this weekend are likely to reflect votes against austerity. European stock markets are broadly lower.

The S&P 500 index is right about where it was six weeks ago. That isn't bad, but the upward momentum from the first quarter is gone.

Dick Green
Founder and Chairman, Briefing.com


Read more: http://www.briefing.com/investor/popupp ... z1tw4bWCd2

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Individual Investors Laughing All the Way to the Bank

from Think BIG by Bespoke

Individual investors are often ridiculed as being the last to get into the market and the last to get out. However, looking at trends in bullish sentiment suggests that individual investors may not be the dopes that many institutional investors often classify them as. In this week's survey of bullish sentiment from the American Association of Individual Investors (AAII), bullish sentiment dropped from 35.4% down to 25.4%. This puts bullish sentiment at the lowest level since September.

Looking at the chart below shows that bullish sentiment on the part of individual investors has been declining since February or about six weeks before the S&P 500 reached its peak. If this was just a one-time event, we could probably chalk up the decline in bullish sentiment ahead of the market peak as a coincidence. The reality, however, is that last year we saw the exact same pattern as bullish sentiment also declined ahead of the big drop in equities. The fact that individual investors have shown such good timing twice in a row now suggests that they deserve more credit than many have been giving them credit for. Perhaps they could even lend a hand to the Chief Investment Office of JP Morgan (JPM).

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