Sunday, May 23, 2010

Economist Nouriel Roubini Summarizes the EU Crisis


EU: "These governments do not have credibility"

Economist Nouriel Roubini* recently was interviewed by BBC Radio and summarized the EU Crisis as "significant economic and financial trouble in the Euro Zone" that "Even money cannot resolve problems of insolvency in the Euro Zone".  The EU, ECB, IMF bailout package of almost $1 trillion, announced May 10, has not calmed the markets because investors are concerned about:
1) Some European countries being insolvent.
2) Problems in the EU financial system, including access to liquidity.
3) Economic growth in the Euro Zone.
4) Loss of competitiveness in the Euro Zone.

If the austerity packages by Greece, Spain, and other EU countries, i.e., raising taxes and cutting budgets, are actually implemented, Roubini thinks "the markets should stabilize".  However, he raises the concern as to whether the political will can persevere.  Because of the riots, violence, and strikes, do the governments of particularly Greece and Spain have the strength to do the fiscal austerity that will be "extremely painful"?  Investors' confidence on the duration, and therefore effectiveness, of the austerity packages is paramount.

These fiscal austerity packages, raising taxes and cutting government spending, create another problem, they lead to more economic contraction and more severe recession.  Can these fiscal austerity packages be continued for 2,3,4 years while output, income, jobs are falling?  There could be a political backlash against these fiscal austerity packages and be reversed - "and that's what the markets are worried about today".  "These governments do not have credibility".

Global Recession and Financial Crisis: "It's not over"

"In my view, it's not over".  "What we are facing right now in the Euro Zone is a second stage of the peaking of the financial crisis".  "In some sense, what we are seeing today in Greece is the tip of the iceberg".  Regarding the UK: too early to tell about the new coalition, "not yet tested", "we'll see when the tough decisions have to be made on revenues and spending whether the coalition will remain strong".

BBC Radio

The BBC Radio interview can be listened to here.

American professor of economics at New York University's Stern School of Business and chairman of Roubini Global Economics, an economic consultancy firm.


Wednesday, May 12, 2010

S&P 500 Industrials Sector: Encouraging Fundamentals (XLI Update)


XLI is up +7.76% for the week, down -0.64% for the month, up +16.44% for the year, and up +110.68% since the March 9, 2009 market bottom. Very positive manufacturing data has been released so far this year  for the USA, Europe, China, and the World, so I remain bullish on XLI.  Q1 earnings season data (revenues, eps, outlook) has been very encouraging for the industrials sector.

The Conference Board Leading Economic Index
On Monday, April 19, TCB issued its March LEI for the USA, as noted in my previous post.  The March LEI was up a very positive +1.4% to an all-time high of 109.6.  This economic metric is very encouraging for USA equities and for the industrials sector in particular, e.g. XLI.

XLI ETF & Portfolio Holdings
XLI is an Industrials ETF designed to represent the industrial sector of the S&P 500, which is 10.75% of the entire S&P 500. The industrials are varied, including aerospace and defense, building products, construction and engineering, electrical equipment, conglomerates, machinery, commercial services and supplies, air freight and logistics, airlines, marine, road and rail, and transportation infrastructure companies. See the XLI Industrials portfolio holdings here.  This is a very popular and liquid ETF.

XLI Daily Chart
Below is the XLI daily chart for 2010.

Noteworthy Closing Prices on Daily Chart below:
Current Close 32.36 (Higher yellow horizontal line)
2010 YTD 4-29-10 High 33.36
YE 12-31-09 27.79
Month EMA 29.01 (Lower yellow horizontal line)

XLI: Encouraging Fundamentals

Intermediate-Term Trend
The intermediate-term signal, the comparison of the 25 day and 50 day simple moving averages, signalled a bull market for the XLI on March 9 (the 1 year anniversary of the bottom for XLI, btw). This signal remains intact.  That is, the 25d sma is greater than the 50d sma.

The current closing price, the higher yellow horizontal line, is now above a lot of recent resistance.  However, XLI is still below the 2010 YTD high, which is recent resistance. XLI is trading in the middle of the September 2008 sideways trading range.  XLI is also trading in the July, August, September 2006 (plus early 2006) area.

There are multiple levels of support below, including the April 19 dip of 32.03.  Other notable near term support is the previous 2010 YTD of 29.57 on January 11.  There is long term support back in July through September 2006.

Moving Averages
XLI regained the 25 day simple moving average today which is very encouraging.  The 25d, 50d, 100d, and 200d sma's are all ascending. All the moving averages are being pulled upwards by the XLI rally.

Uptrend Line
The uptrend line, a rate of price ascent, is from the March 9,.2009 closing low of 15.36 up through the February 8, 2010 closing low of 26.90. The February 8 closing low was the bottom of the previous 2010 pullback. XLI bounced above this trendline on February 9, tested the trendline on May 6 and 7, yet has remained above.

Downtrend Line
A downtrend line, a rate of price descent, not shown, is from the October 9, 2007 all-time closing high of 41.90 down through the May 19, 2008 peak closing high of 39.72. XLI is below this trendline, which is now in the 32.90 area.

Relative Strength Index (RSI)
RSI 14 day = 46.95 is reasonable, above the recent low of 36.77 on May 7
RSI 28 day = 53.77 is reasonable, above the recent low of 43.88 on May 7
The RSIs are reasonable, leaning towards oversold, indicating XLI can go higher.

MACD (12,26,9)
The MACD has been bearish since April 30, but is uptrending..

Long-Term Trend
The lower yellow horizontal line is the 10 month exponential moving average from the monthly chart, which I have overlayed on this daily chart. That is the line in the sand, so to speak, for the long term signal of a bear market. The XLI is above this signal at the current close, the higher yellow horizontal line.

USA and Global industrial, jobs, leading indicators, and GDP data are positive and signalling economic growth, which is bullish for XLIXLI has rallied from the recent pullback and is approaching the 2010 YTD closing high. The RSIs are reasonable, leaning towards oversold.  The MACD is bearish but uptrending.  I think XLI will ultimately break through upside to yet more new 2010 highs. Ongoing consolidation trading and mild pullbacks will occur as XLI stair steps upwards at a slow pace. The intermediate term trend and long term trend remain bullish.

We have a long position in XLI.


Tuesday, May 11, 2010

Nouriel Roubini Discusses $1 Trillion European Loan Package


"It's Going To Be Ugly"

(Photo: Greek anti-austerity riots in May 2010)

Economist Nouriel Roubini, formerly known as "Dr. Doom" for his predicting the sub prime mortgage crisis, reviews the EU, ECB, IMF Bailout of Greece, weaker EU countries, the EU financial system, and the Euro itself.

New York University Economic Professor Roubini questions 1) if Greece and other similar countries have the political will to make the fiscal sacrifices necessary, 2) if there is the political will to raise taxes and cut spending, and 3) these countries have lost market share and competitive advantage to Asian countries.  In addition the appreciation of the Euro over the past years places the weaker countries at a competitive disadvantage.

Mr. Roubini notes that the IMF predicts Greece, Portugal, Spain, and Italy will have three more years of recession, which amplifies the fiscal austerity measures they must implement.  He thinks these countries won't be able to do this and will eventually have to restructure their sovereign debt and perhaps even exit the EU.

(Bloomberg Video)


Monday, May 10, 2010

Euro Rallies on EU, ECB, & IMF "Show of Force"


The Euro may have bottomed on Thursday, May 6, possibly for the short term and probably for the intermediate term..  The Euro rallied on Sunday and now into Monday, May 10 on the EU announcement of of a nearly $1 trillion package to rescue Greece, the EU financial system, and the Euro.

While the EU bailout addresses short term and intermediate term liquidity issues, the intermediate term and long term solvency issues are not resolved until austerity measures have been implemented and succeed.

Reaction in worldwide markets has been positive, including the USA equities markets which should gap up big at the Monday opening.

Below is the EUR/USD currency cross daily chart from the highs of late November/early December 2009 through early Monday, May 10, 2010.  As can be seen, the Euro is a long way down from the highs, but has bounced up from the May 6 low.

The Euro 1.30 is a key benchmark and psychological price that must be overcome, but has not at the time of this posting.  Once this resistance is broken, an upside breakout should ensue to the 1.32+ area.

More information on the EU announcment is readily available on major news and business website.


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