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News Letter: 12-4-11

Current Conditions:


VIX = 37.52   +0.11   + 0.40%

Gross Profit Margin For S&P 500 Companies Tumbles In Q3, Worst Sequential Drop Since Q1 2009

Topline numbers continue to grow, and rose 2.6% in Q3 over Q2 (a substantial slow down from the 4.3% rise in Q2 compared to Q1), profits as represented by gross margins, fared far less well as total Gross Profit margins declined by 1.9% from 42.6% in Q2, almost on par with the recent historic record high of 42.8% from December 2009, to a two year low of 41.8%: a number seen last in Q1 2011 when commodity input costs soared and crushed both margins and bottom lines. Aside from the 1.9% drop in March 2010, the next worst drop in margins was back in March 2009. This time however there was no surge in commodity prices: in fact in the three months between June and August, input costs on the margin were declining substantially, or so the US government would like us to believe. And while corporate EPS did not broadly surprise to the downside, this was a function of top line pull through still going strong. So how much longer until the revenue potential of these 420 workhorse companies plateaus and start dropping? What happens to record corporate EPS if margin pressures are coupled with top line weakness? We already have one of the components: how long until the stresses in Europe and now China materialize into top line misses? We will find out in just over a month when companies begin reporting their full year numbers. Or worse, look for disappointing revenue preannouncements: while so far avoided, this time around it will be far more difficult to kick the revenue can into the future with Europe now officially entering a recession.


EUR Shorts Surge, Back To 17 Month Highs As Bearish Sentiment Returns


Net non-commercial spec shorts surged to more than -100,000 for the first time since June 2010, or specifically -104,302. Granted this is as of November 29, so before the Fed’s FX swap intervention. this does confirm that the EURUSD continues to act like a tightly wound coil, and any credible resolution to the European crisis will result in the biggest short covering squeeze in the EUR in years, sending both the currency and its S&P 500 derivative soaring. Now the question remains: does a credible resolution exist? The irony is that the only real solution is the ECB printing. Yet for the first time ever in monetary history that announcement of the the ECB’s dilution of the European currency will actually send the currency surging, due to the technical unwind of the shorts overwhelming the fundamental weakness of the currency. Granted, it will be a transitory response, but who really can predict the long-run these days anyway?

The NFP Report: Records In Jobless Duration And People Who Want A Job As Civilian Labor Force Plunges 

Here are the four most important data points and charts from today’s job report: the civilian labor force declined from 154,198 to 153,883, a 315K decline despite the civilian non-institutional population increased (as expected) from 240,269 to 240,441: always the easiest way to push down the unemployment rate. Percentage wise this was a drop from 64.2% to 64.0%: the lowest since back in 1983. Naturally, this would mean that the people not part of the labor force rose, and indeed they did by 487,000 to a record 86,558 from 86,071. This also means that more people are looking for a job: and indeed, the number of “Persons who want a job now” rose by 192K to a record 6.595 million. And lastly, confirming the behind the scenes disaster of theUSjobless picture, the average duration of unemployment rose to a new record 40.9 weeks from 39.4 weeks previously. And that is your “improving” jobless picture in a nutshell.

Market Behavioral Analysis:

Treacherous market conditions remain the rule of the day. 3-5 % rallies and declines on the utterance of political figures throughout the world coupled with inconclusive economic data (if that data can be believed) is producing declining market participation and outsized moves in both directions. Equity markets continue to react to the plan of the day while it seems that credit markets don’t believe that a workable solution will be found this week’s slight improvement in Euro credit spreads aside. The spread between UST and German Bund performance is signaling a worsening crisis with UST the only remaining “Safe Haven”. We look for more of the same until either a “workable “plan is offered or the inevitable debt destruction arrives.

Relative price action US Treasury vs German Bund


S&P 500

We have an established short position @1223.  The market rallied viciously on coordinated CB action to enable European banks to acquire the USD they so badly need. Once again The 200 Day X MA has provided temporary resistance. Fundamentally we are very bearish, however, we are technical traders and the technicals are beginning to look more bullish. Equity markets may be looking past the ugly fundamental data to the realization that the ultimate “fix” will be historic fiat printing and the inflation of asset prices, stocks included. We are looking for a move back to the Pivot to close shorts.



After our roll we are short March US Bonds from 141’05.  Whereas equity markets may be looking forward to the inevitable fiat print and the associated nominal price gains, Bonds are reacting to Dollar flows as freighted money looks for a safe harbor. At some point a workable plan will be produced that will include fiat printing or there will be a collapse of the economies in Europe that will result in a worldwide recession which will induce Fed fiat printing. We may feel some pain first but are looking to the Pivot at 139 for profit target.



Currencies: Euro:

We are short EC @ 1.4040. As the 12-9 “deadline” approaches we expect all kinds a fanciful bailout plans to drive Euro both up and down. The chart in the opening indicating large spec short position worries us and we will oook to take profits @ 1.32200.


Energy: Crude:

We exited our long from $95 at 101.15 and are currently flat. We look to establishe longs at either a pullback to the Pivot at 89 or a two day bottom at 94. In the long run the resolution of Debt Crisis will be fiat printing and higher commodity prices Crude especially.


Metals: Silver:

Unfortunately we closed our Copper position at a small profit one day before the CB’s coordinated move and a spike in Copper. We still are long SI and are looking for a move to 36 to take profits as the world continues too seek stable “money”.


 Open Positions:


Closed Positions:


Performance based on a $200,000 futures account.





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