Author: dredheadz

Momentary lack of muscular coordination….

It wasn’t just me, last week, who noticed again that even with good economic news, the market and the purveyors of doom and gloom greeted earnings season with little if any enthusiasm. Yes, the rally coming out of 3rd quarter hasn’t been sustained. The markets were tap dancing on 4 year highs and a noticeable pullback was more than anticipated. The U.S. market has performed as expected, mainly consolidating and building a new base. The possibility of a larger pullback remains, and there is enough evidence to warrant a cautious approach as we move deeper into the month. Especially during earnings season, when it’s not the news that holds primary importance, it’s the market’s reaction to that news.

Last week’s losses ranged from just over 2% on the Dow to nearly 3% on the NASDAQ. Internationally, it wasn’t exactly pretty either with nine of the twelve major markets posting losses. There’s significant caution across the globe, the world economy isn’t deteriorating disastrously as some would have you believe, but also the world economies aren’t reacting particularly well either. Europe is fretting over its possibility of double dip recession. The populations in a few European countries aren’t exactly ‘dancing in the street’ in support of austerity. Spain is in need of financial rescue, Cypress needs a bailout and Greece is pleading for a new debt program. In a counter signal to Europe, the Chinese economy is showing tiny signs of improvement; Chinese export and inflation data for September came in better than expected, with exports jumping 9.9% on year to a record $186.4B. The infrastructure projects that have been proceeding are assisting the steel sector and prices for Iron Ore are up from multi-year lows.

I remain optimistic. This week brings Retail sales reports Monday morning, and per my calculations, should be nicely surprising. A second round of the Presidential debates arrives on Tuesday. Building permits and housing numbers on Wednesday (which I also expect to be better than expected). And then the Initial Jobless claim numbers on Thursday, spiced with a little extra intrigue after last week’s silliness. A little positive coordination and the markets could spring back towards the upside. A little more positive global coordination and we could see a very bullish posture continue for the next several weeks. It’s a very close call and much depends on psychology and sentiment. I’m feeling quite agile right now, while I look to the week with a cautious eye and expect many to present a downbeat outlook; I see opportunity to seize the day even when the overall earnings story is mixed. I remain optimistic.

And now the list, as of close of market 12 October 2012.

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Fear can’t kill you, but it sure as hell will make you sweat profusely

The “October Effect” is the theory that stocks tend to decline during the month of October.  Historically, October hasn’t produced the most confidence building events on record to be honest (the crash of 1987 occurred on the 19^th which saw the Dow plummet 22.6% in one day is in recent memory as is October of 2008 where the S&P 500 was down by more than 27% at one point in the month).  I don’t buy into the theory as the statistics produce a different reality.  However a recent survey shows that a majority of individual investors were unable to correctly identify the fact that the S&P 500 index has risen in the last 3 years (2009, 2010 and 2011).  The barrage of confusing and outright false headlines, often with a political motivation, has sent some ordinary Mom and Pop investors fleeing, waiting to see the election result, what happens in Europe, whether there is a recession, and what happens with the fiscal cliff.  They are traumatized and that disaffection is widespread.  Many are just simply unwilling to commit, out of pure fear.

Others, not paralyzed by emotion or the bloviating of the “talking head political pundit’; haven’t let the rhetoric distract them from their analysis of data.  They didn’t sell in May – In fact they bought, and it wasn’t bond or money market funds it was equities.  The callous influence of politics gave these investors’ confidence. Why?  Because their understanding of the data accurately reflected what we fundamentally see:  modest growth – far less than what is needed for a healthy recovery but certainly not a recession. They were rewarded again by last week’s ISM manufacturing index registering in expansion territory at 51.5, that’s baseline but solid growth.  The employment situation is consistent and its ongoing improvement is respectable.  The payroll job increase was within expectations and the upward revisions to the prior months obviously proved to contribute a significant benefit.  The hourly wage moved higher. Household employment gains revealed a swell in part-time employment, about 2/3 of the newly employed. This is better than unemployment, but less than ideal.  And lest we forget, the controversial decline in unemployment.  Jack Welsh and the other conspiracy believers, be damned, I doubt a department full of career bureaucrats (republican and democrat) would destroy their careers to provide political cover to this President or any other President.  Didn’t Nixon try something like that?  I don’t recall that as working out so well.  Allowing a political opinion to influence the interpretation of data and its judgment is indicative of a culture of pathetic panic.  Facts are pesky little things you know.

I remain optimistic.  How much risk am I or should anyone else be willing to take at this point in time?  The correct answer is different for everyone and currently a large number have decided to watch from the sidelines.  “Markets can remain illogical far longer than you or I can remain solvent” are words from John Maynard Keynes and words to follow.  And when they do regain some logic and the markets rally, many are afraid that they have arrived too late to participate.  Dennis Gartman states “In trading/Investing, an understanding of mass psychology is often more important than an understanding of economics.   The news has been encouraging, if you care to look beyond the noisemakers.  I remain optimistic, cautiously attentive.

And now the list, as of close of market 5 October 2012.
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Everything is debatable

Its 4th quarter and it’s been an incredibly interesting year hasn’t it?  The world should be transfixed with fear, doom and gloom as some commentators continue to be shout out at full volume.  The U.S. and Asian economies are like the dinosaurs of ancient.  Stuck in the tar pits, no quick escape, the more you fight the deeper into the muck you sink and a complete rescue from the situation is becoming more difficult to rationalize.  The U.S., in particular, behaving like Thelma and Louise, moving at top speed towards a financial cliff, fully cognitive of the effect of what a failure to compromise will bring but indignant to the reality of having to do so.   In Europe, they are chest deep in yak droppings.  (That’s about the prettiest way I can verse it, actually).   Social unrest is slowly beginning to bubble to the surface, a possible financial catastrophe remains on the horizon for Greece, Italy and Spain.  Yikes.

Remarkable as it is significant, with all the risk present, the U.S. stock market is up double digits for the year and hovering near post crisis highs.  Housing prices are moving higher.  Growth, albeit weak, has resumed with assistance from the expansionary Fed policy of Quantitative Easing.  Consumer confidence has spiked higher and the jobs picture is actually a little better than we are giving it credit.  The Bureau of Labor Statistics (BLS) announced a preliminary benchmark revision for payroll employment.  Net job creation was actually about 350K better than previously reported and private job creation was 400K better for the twelve months ending in March, 2012.    All isn’t beautiful however, as business confidence is still lacking.  Some businesses are ultra conservative right now, waiting until after the election to commit to expansion or new hiring.  Corporate earnings forecasts have moved lower.  This is the basis of the weakness in the manufacturing sectors.

I remain optimistic.  This week if we get good data, the market will rally.  If Spain gets closer to a bailout, the market will rally.  Tuesday we get the Auto Sales reports, Wednesday is ADP employment changes data and non-manufacturing PMI numbers.  Thursday we get initial unemployment claims and continuing claims.   Friday the Non-Farm Payrolls numbers arrive, President Obama will know what that number is on Wednesday – candidate Romney will not.  (I’ll be paying close attention to the President’s body language on Wednesday evening- it will be an indication on his confidence or lack thereof).   Oh by the way, we have the beginnings of 3rd Quarter earnings season.  That’s just this week.  There is a good deal of upside for the U.S. economy, regardless who wins the election.  How that upside will be acknowledged and utilized is the phantom issue.  Some policies of the past and some of the present have proven to be failures, other have been successes.  It is reasonable to expect that we could see further gains in stock prices regardless of underlying economic conditions.  It is also prudent to protect against the very real risk to the downside.  I remain optimistic, defensive and alert.

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.

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.