What I’m Watching This Week – 24 September 2012

Cliff diving anyone?

As expected, the stock market pulled back slightly after setting new highs after the announcement of QE3.  At the end of the week, the Dow Industrials, S&P 500 and NASDAQ Composite were all off marginally, while the Russell 2000 was down 1%.  Eight of twelve major foreign indexes were mired in the red, with the Shanghai Composite sliding the most with a loss of more than 4.5%.  The overall global equity picture has become very defensive, Europe is having mood swings like a manic-depressive, in China, a symphony of bad news is bringing to daylight areas of significant weakness and vulnerability, and here in the U.S., our Congress, ran out the backdoor like their collective hair was on fire.  Wait, weren’t they just on summer vacation?  And now they are gone again, not to return until after the election?  Returning to their districts and constituents these Mongrels, will proudly exclaim that they have done a good job this year legislatively and that they should be rewarded for such heroic actions by being re-elected to Congress.   If I had my way….

The US Treasury 10 year notes close under 1.8%. The 30 year closed to yield at less than 3% and the 5 year closed under 70 basis points.  The flight to safety has been reasonably successful for those who kept the durations short.  The opportunities to buy more at better yields remain on the horizon.  There was extensive profit taking with commodities last week, WTI crude oil fell on aggressive selling, closing just above $93 and Corn pulled back under $7.50.

I remain optimistic, but highly cautious going into this week.  Monetary expansion is the charge of the global day.  Many integral economic indicators continue to give me that lower back tingle; you know that feeling when something isn’t as solid as it should be.  A little bearish maneuvering wouldn’t hurt the positioning this week as the quarter comes to an end.   First time unemployment claims look to again exceeded forecast and very weak outlooks from FedEx confirms again a slowdown in the global economy. Last Friday’s across the board reversal action in stocks significantly caught my attention.  While purely a technical signal; that rose up enough of a flag that now requires further analysis.  I remain optimistic but cautiously defensive.

What I’m Watching This Week – 17 September 2012

Good things come in 3’s??

Depending upon how your mind warps reality:

1)      Quantitative Easing has no positive economic effect and never will.  It is all smoke and mirrors, and it will end badly either through deflation, or hyperinflation, or both.

Or

2)      QE has lowered interest rates by a few basis points and generated a gain of about 2+ million jobs over what otherwise would have happened. Stock price increases reflected the improved economic prospects from the program, and also created a virtuous cycle of confidence and wealth effects.

That’s kind of it in a nutshell.  A week after the European Central Bank introduced its Outright Monetary Transactions (OMT) program, the Federal Reserve unveiled its newest version of monetary easing or QE3 as the media have begun to call it.  This time around it’s an open-ended program to buy mortgage bonds, plus an extension of the earlier Operation Twist to suppress short-term rates out to mid-2015.  Its immediate byproduct helped risk asset extend their rally for a second week.

The Dow Industrials, S&P 500, NASDAQ, and Russell 2000 all recorded new 52 week highs and eleven of twelve major foreign indexes joined in the global equity rally.  Only the Shanghai Composite didn’t participate, as investors realized the 1 Trillion Dollar Chinese infrastructure spending program had begun with initiatives that were already underway in that economy and there really wasn’t any cause for a victory lap.  Like having your own party, the day after everyone attended the bigger party; not too many showed up and those that did were hung over.

U.S. Treasury yields continued to move with the 30 year seeing 3.1%, the 10 year settling at 1.88% and the 5 year cresting at 73 basis points.  Yields on investment grade corporate and municipal bonds charted alongside Treasuries higher, but junk bonds were bid much higher.  TIPS on the other hand saw yields fall, as bond investors sought inflation protection.  To be clear, inflation anticipation on a macro level is the 800 pound gorilla in the room, but given the surge in commodity prices, bond buyers are being realistic in seeking protection.   Gold and silver continued their torrid upward advance, with gold adding another 2% and silver more than 3%.  Copper advanced more than 4.6%.  Crude oil briefly topped $100 before settling at $99 at the close on Friday.  Natural gas couldn’t hold above $3. The grains remained mostly flat while the softs began to show some momentum and strength, with sugar coming off a bottom and coffee making an 11% move.  So much for the quiet but effective stimulus of lower prices that actual consumers enjoyed over the summer.  Unmistakably, Fed policy and a declining U.S. dollar is bullish for the commodities and in the case of oil; unrest in the Middle East is helping to raise prices measurably.

I remain optimistic.  The current mantra of “The trend is your Friend” or “don’t fight the Fed” (or the ECB for the matter) holds true. The S&P 500 has gained more than 4% in the last two weeks, reaching its highest level since December 2007; the Russell 2000 has registered an even larger 6% gain.  However, I absolutely expect a pullback, and soon.  Many stocks are extended to the upside, and chasing those that have already made significant upward moves isn’t the best game plan.  I suspect that this rally is real and stocks will continue to move higher but I would not be surprised to see a number of down days before we get to October.  Europe hasn’t resolved its situation, Asia in mired in a slowdown and we have a Fiscal Cliff staring us in the face with no adult sitting behind the wheel, willing to slam on the brakes before we go over that cliff.  My eyes are open for a surprise ‘left hook’ within the next 50 days.  Whether I’m right or wrong, time will tell.   I remain cautious but optimistic.

What I’m Watching This Week – 10 September 2012

What now?

After all the buildup concerning Fed Chair Bernanke’s Jackson Hole speech, European Central Banking President Mario Draghi’s speech, and both the Democrat and Republican political (theater) conventions, have we been left with a clear picture of what’s to come?  While some of the economic data is better, the jobs picture remains underwhelming.

U.S. equities participated in a global rally following Thursday’s ECB announcement.  By Friday’s close the major indexes had all recorded solid weekly gains, led by the Russell 2000 with an advance of more than 3.7%. The S&P 500 and the NASDAQ made new, year to date highs, while the Dow and Russell came up just short.  The Twelve major foreign indexes were also positive.

The 30 year bond ended the week above 2.8%.  Gold pushed past $1,700 and silver kept pace. Copper broke out thanks likely to the announcement of a Chinese 1 trillion-dollar infrastructure initiative.  (Infrastructure spending…what a concept – our moronic Congress somehow doesn’t understand this unfortunately).   Crude oil did not move and Natural gas continued to trade under $3.  Grains were mostly flat as were the softs.  The (King) U.S. dollar was down against most of the major currencies.   If the Fed doesn’t open a new round of Quantitative Easing, we could see the dollar index firm up and regain strength.   Cautiously, I’ll be watching to see what the week brings, as soon as Wednesday, as the German Federal Constitutional Court is expected to issue a favorable ruling to allow Germany’s participation in the permanent European Stability Mechanism bailout facility, there is the outside possibility that the Court could rule against the ESM, which would cause an immediate and sharp drop in the euro and European stocks.  Expect a significant correction (not panic) if the court rules against ESM participation.

I remain optimistic.  Home prices continue to rise, job creation was strong (according to ADP and various other analysts) and Auto sales are rebounding.  The official jobs numbers reflected a weak economy as the official employment data is roughly consistent with the GDP numbers; growth of 2% or so.  Not great but positive regardless.  The ECB purchases will be “sterilized” so that the overall balance sheet does not expand.  This is not the money printing that some hunger after (like we did here in the U.S.), to some, this sounds good, but could prove difficult to sustain in the long run.  Also the ECB will not have seniority to private creditors – a very positive point for the banks and other institutional holders of sovereign debt.  Negatively, foreign economic indicators (Europe and China) all declined last week.  Confidence remains meek, however I remain optimistic, cautious and oh…did I mention I’m ridiculously ecstatic that my beloved San Francisco 49ers went into Green Bay and put a hurting on the Packers.  Ahem, there are a few individuals, who will remain unnamed, that I expect to see parading around for the next full MONTH in 49er jerseys.  HA HA HA – choke on that, chumps!!!!

What I’m Watching This Week – 4 September 2012

As flat as Nebraska

Well…the major U.S. indexes moved just about half a percentage point last week except for on Friday in response to the Fed Chairman’s comments.   On the other side of the world, 11 of 12 major foreign indexes were down for the week with the German DAX composite matching the Nebraska like flatness we saw here during the majority of the week.  It is difficult to imagine that there will not be some form of substantial easing by the European Central Bank after Draghi’s stated commitment to “do whatever it takes.”  This week brings meetings of the ECB and Bank of England. While the BOE is unlikely to move the markets, the ECB meeting could be a significant turn for European situation.  With all the chatter coming from Europe, I’m led to think that some significant program is in the works.  We shall see.

Treasury yields fell sharply on Friday, particularly the five-year note, which closed at .59 basis points.   The 10-year note closed to yield at 1.56%, while the 30 year bond ended the week at 2.68. TIPS, and corporate bonds participated in the rally, but municipals kept quiet for the most part.  One thing from last week I have to mention, the moronic stance the Republican Party’s presidential platform took in regards to Gold.  You would think they would do the simple math to discover that there isn’t enough gold in the world to return the U.S. to a gold standard.  Good grief, ridiculous nonsense.  But hey, when you live in imaginary fantasy land you had best expect ignorance on an epic scale.  Pathetic pandering at its worst makes me wonder what the Democrats have tucked into their bag this week.  Where are the adults in the American political process hiding?

I remain optimistic.  Positive numbers regarding a recovery in the housing markets, factory orders showing a year over year increase of nearly 3%, corporate earnings continue to be reasonably good and the Fed seems to be positioning itself to be on their side of the market bulls.  That little bit of growth, however lackluster, is keeping the economy out of recession.  We’ll see how the unemployment numbers register this week beginning on Thursday.  The consensus view after the Jackson Hole symposium seems to be that some form of monetary accommodation is all but certain.  On the negative side, expect the morons in Congress to expel more hot air and accomplish absolutely nothing to solve our problems.  A pox of both chambers of Congress, they are utterly pathetic.  I am not expecting a strong employment report unfortunately, but I remain optimistic for the week ahead.