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Light-Volume Dip Buying: Dave's Daily

Clearly, markets can't continue to produce 4-8% per month returns without some profit-taking or correction. Even in the dotcom days returns like this weren't achieved consistently. A downturn is healthy to weed-out excess. That said, dip buyers are a stubborn bunch and they're programmed to do this until they break their F-10 key.

In a news vacuum, Greece again takes center stage as a debt deal and austerity measures have the goal posts continually moved. Greece should probably just default and get it over with. They would then exit the EMU and the drachma would make a return. The political will for both austerity and debt repayment isn't there. The last major sovereign default was when Argentina defaulted on $95 billion in 2001. Subsequently they were shutout of the capital markets. In 2005 they arranged to pay 30% of amount owed to 75% of the creditors. There is still $7.5 billion outstanding mostly owed to the Paris Club (an informal group of creditors) and negotiations are ongoing. It wasn't the end of the world but the difference now is the EU and EMU relationship with Greece. There wasn't then or now any South American common monetary system or currency.

 

Lingering issues from Friday's employment report include the following startling fact: With the U.S. population 30 million greater than 10 years ago, there is little change in the number of people working. Think about that. This leads to the following humorously modified skit courtesy of Grant Williams, Vulpes Investment Management:

 

COSTELLO: I want to talk about the unemployment rate in America.

ABBOTT: Good "subject" in these terrible "times." It's about 9%.

COSTELLO: That many people are out of work?

ABBOTT: No, that's 16%.

COSTELLO: You just said 9%.

ABBOTT: 9% Unemployed.

COSTELLO: Right 9% out of work.

ABBOTT: No, that's 16%.

COSTELLO: Okay, so it's 16% unemployed.

ABBOTT: No, that's 9%...

COSTELLO: WAIT A MINUTE. Is it 9% or 16%?

ABBOTT: 9% are unemployed. 16% are out of work.

COSTELLO: If you are out of work you are unemployed.

ABBOTT: No, you can't count the "Out of Work" as the unemployed. You have to look for work to be unemployed.

COSTELLO: But ... they are out of work!

ABBOTT: No, you miss my point.

COSTELLO: What point?

ABBOTT: Someone who doesn't look for work, can't be counted with those who look for work. It wouldn't be fair.

COSTELLO: To who?

ABBOTT: The unemployed.

COSTELLO: But they are ALL out of work.

ABBOTT: No, the unemployed are actively looking for work... Those who are

out of work stopped looking. They gave up. And, if you give up, you are no longer in the ranks of the unemployed.

COSTELLO: So if you're off the unemployment roles, that would count as less unemployment?

ABBOTT: Unemployment would go down. Absolutely!

COSTELLO: The unemployment just goes down because you don't look for work?

ABBOTT: Absolutely it goes down. That's how you get to 9%. Otherwise it

would be 16%. You don't want to read about 16% unemployment do ya?

COSTELLO: That would be frightening.

ABBOTT: Absolutely.

COSTELLO: Wait, I got a question for you. That means they're two ways to bring down the unemploy­ment number?

ABBOTT: Two ways is correct.

COSTELLO: Unemployment can go down if someone gets a job?

ABBOTT: Correct.

COSTELLO: And unemployment can also go down if you stop looking for a job?

ABBOTT: Bingo.

COSTELLO: So there are two ways to bring unemployment down, and the easier of the two is to just stop looking for work.

ABBOTT: Now you're thinking like an economist.

Elsewhere, Bill Gross lamented something we've noted for a long time: "What incentive does PIMCO or banks have to buy five-year (or longer) Treasuries at 75bp when the maximum upside capital gain is two percent of par and the downside substantially more?" What else are insurance companies, large pension plans, endowments and baby boomers to buy? After all, aside from baby boomers or individual investors, most have "set" fixed income designations. They "must" buy bonds whether Treasuries or junk.

Stocks opened lower Monday on Greek worries and an absence of supportive economic data overall. The dollar was somewhat stronger which equity bulls hate while bonds rallied. Gold continued to sell-off with a rising dollar, crude oil was also weaker and most other commodity sectors were more or less unchanged.

Earnings announced before and during trading were received quite poorly from some well-watched names including: Humana (HUM) with shares down approximately 5%; Sohu (SOHU) disappointed and shares dropped 15%; and, Sysco (SYY) with shares down 4%. After close, in view will be YUM Brands (YUM) which reported earnings of $.76 vs $.74 expected and Coinstrar (CSTR) which operates Redbox earned $1 vs $.64 expected. CSTR also noted it's buying NCR's entertainment business. As for Sohu the disappointing outlook sent many Chinese internet stocks (BIDU, RENN, and SINA) lower reversing previous enthusiasm over the proposed Facebook launch. This also was a splash of cold water to last week's previous social media ETF winner (SOCL) lower by 2%. 

Volume continues to be light and with so much investor flight from markets we're approaching perhaps a "new normal" in trading. Light volume rallies can make markets more accident prone and heavy selling volume is the normal result. Breadth per the WSJ was mildly negative reversing some, not all, overbought conditions.

 

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