Tag: economy

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.
(available via free subscription – email me at dcherry@nelson-securities.com with ‘Subscribe’ in the subject line for my weekly list of stocks, etfs and mutual funds that I’m watching.)

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.

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!!!!

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.

 

It’s in the Hole…

If you believe the talking heads on CNBC, FOX and even some of the major newspapers across this country of ours, (purposely ignoring those emails from ‘reputable’ sources), Europe is on the brink of falling off the planet, the U.S. economy is repeating a 2008-09 plummet into recession, the world’s political class is unconcerned and unrepentant in their desire for the middle class to falter into oblivion, September is historically terrible for the markets, so run and flee into the hills with your guns, vacuum sealed food and ingots of Gold.  And by the way; there is no Santa Claus.

In nine of the past 11 weeks, we’ve seen U.S. equities post gains and record new highs on the S&P 500 and the NASDAQ 100.  Not too bad if you think about it but certainly not a tiptoeing on a razor’s edge towards disaster.  Globally, weakness was more widespread regarding Asian economic growth and the European debt crisis continuing as more fractures in the united shield appear.  Attention will be diverted to Jackson Hole this week, not only to deconstruct the comments of the Fed Chairman, but the even more keenly awaited speech to be given by ECB President Mario Draghi.  Central bankers, right in front of our eyes are preparing to move the world, again.  At this point anything is possible, so stay tuned and alert.  I think there’s more to that story but time will flesh that out eventually. There is weakness a plenty to go around and the time to act is now.

Treasury yields snapped a four-week run up with a sharp drop. The 5 year note closed just over 70 basis points, the 10 year under 1.7%, and the 30 year bond under 2.8%.  The falling yields ended, at least briefly, a correction in bond prices across most sectors.  WTI crude oil, after trading at more than $98, closed the week just above $96. Natural gas began the week by recovering some of its recent losses, but gave back the entire week of gains on Friday.  Corn reached another new closing high Tuesday, but erased most of the week’s gains by Friday. Wheat saw a comparable trading pattern, but remained above $8.50.

I remain optimistic, cautious and intrigued.  There is no reason for Chairman Bernanke to show his hand this Friday, realistically I’m waiting until after the August employment reports arrive before I can substantiate the ‘hints’  the Fed has been giving for weeks now.  The GOP convention will perhaps grab some more unwanted headlines this week, but I do not see a market moving event coming from it.  They will be more concerned with ‘Imaging’ as they do not need the visual of the GOP celebrating when some communities in the gulf region face the possibility of serious Hurricane damage and flooding.  It will be interesting to say the least.  I remain optimistic.

 

What if something good happened and nobody noticed?

Last week’s started us off with a negative head fake right up until Wednesday when the small and large caps took over and started a new round of peculiar party games.  By Friday, the Russell 2000 had a gain of nearly 2.3%; the NASDAQ came in just under 1.9%, the Dow and S&P 500 squeaking out less than 1%.  Not too bad actually, as the economic data from last week had a generally positive tone.  Globally, 8 of 12 major indexes posted gains with Australia leading the pack while Japan and the Shanghai composite decided to not to participate in the festive atmosphere.

Perhaps some of you noticed lately that the media, particularly CNBC (yes, I’m calling you out) have dived right into the Doom and Gloom, unmitigated fear and conspiracy narrative.  Yeah, funny how the crap I get in “factual emails from unsubstantiated sources” ends up being broadcast by what one would have hoped would be a fair and honest platform for real economic facts and conversation.  If I want to watch and listen to the droning of nonsense and political rubbish, well I can just walk into a restroom and flush the toilet.  At least that way, I know what’s swirling around will soon be where it’s supposed to be, in the sewer, and not broadcast to appeal to the unstudied Neanderthals among us.  CNBC you should know better; when ratings trump knowledge, we all lose. Shame on you.

CNBC withstanding, the data coming in is quite positive.  Building permits are up, inflation data remained pacified, business inventories were lower than forecast and leading economic indicators from the Conference Board remained above zero, and retail sales surged higher.  Yes, there is good news and a fair amount of bad news and we’ll still need more facts to have real confidence going forward however what we don’t need are bogus, pandering partisan stories declaring that the recent gains are the result of governmental adjustments, out of line with anything from the last ten years and in place to only sway to electorate.

Treasury yields rose for the fourth consecutive week: the 5 year crept to .8%, the 10 and 30 year bond yields closed above 1.8% and 2.9% respectively.  The sell-off extended across the bond market, as corporate and municipal bonds were down but within moderate measures.  The pullback in the bond markets should have been anticipated, as bonds have been overbought and it’s thought-provoking to see how anyone could have been flabbergasted.  Commodities continue to move in a sideways direction.   WTI crude oil closed above $95 for the first time since May.  Natural gas continued its retreat, giving back summer gains.   Copper and industrial metals saw irregular trading and the grains sold off on Monday and then advanced again later in the week, with corn back above $8.

The economic calendar is now pretty quiet. Earnings season is basically over.  US Politicians are on vacation (they worked really hard this year-NOT) and European leaders are returning from holiday as well.  A number of very positive trends are occurring right now, with increasing participation from the small caps and the major indexes are closing in on new highs; however there are a number of events on the horizon that have the potential to upset the markets (the Jackson Hole meetings, the European Commission meetings, and German Constitutional Court to name a few).  The markets are holding steady waiting for more information to solidify some conclusive decisions.  I remain optimistic but never foolish.  Keep the current news in perspective.  Politics won’t help the markets, separate that noise from your investments; the fiscal cliff is going to be here after the election like it or not (thanks Congress for a job well done).  There are many good opportunities for the individual investor to gain from.  I remain optimistic.

 

So…what do you call it when it’s a global stimulus?

For those of you that appreciatively noticed, I was on holiday last week, celebrating a reunion of sorts in Las Vegas with a college fraternity brother.  Completely harmless, he’s a physician now, and we aren’t that young anymore.  Wrong.  Names and locations won’t be given to protect the guilty.  Things were done; elegant, disastrously hilarious things were done. Call it our contribution to the ongoing measures of individual economic stimulus (all bar tabs were paid-we have the receipts to prove it!!)

Back in reality, global markets of late are in obvious expectation of accommodative monetary policies.  The recent rally is on the belief that central banks in China, Europe and the U.S. will print as much money as it takes to stimulate the economy and that would support risk assets.  China is signaling further easing and the Bank of England is favoring easing to interest rate cuts.  Germany is experiencing weakness which may create a few more ripples of discontent against Ms. Merkel and reopen the questioning of accommodation. These situations favor risk assets, thus our ‘rally’.   Here in the US…our legislators are off playing in the sand boxes like little children.  Accomplishing much of nothing once again, guess I shouldn’t be surprised.  Our problem is uncertainty.  When blind partisanship combined with poor leadership produce zero positive effects; we the people certainly should be paying attention.  The GOP Convention is now only two weeks away, with the Democrats’ a week later.  I’m so looking forward to the debates.  The verbal munitions will be chosen carefully with shrapnel and carnage brought to maximum effect. I can’t wait.

U.S. equity indexes posted gains last week and gasoline prices in California went surging higher due to a refinery fire. The stock market closed slightly higher on optimism the Fed will boost stimulus measures to stimulate growth.  Trade data showed higher exports and a lower trade deficit and initial jobless claims declined again, down 6000 from last week’s number.  Crude oil and gasoline prices on Friday closed mixed as China’s slowdown in export growth along with the action by the IEA to cut its 2012 and 2013 global demand forecasts supported energy demand concerns. Global markets were down with the European indices in the red and Asian indices ending mixed; further indicating a continued global weakness.

The 5 year Treasury note closed at 70 basis points, the 10 year at 1.65%, and the 30 year under 2.74%.  The dollar rallied on Friday on weak Chinese export data but those gains were vaporized after San Francisco Fed President Williams said it was time to move ahead with QE3.   The specter of inflation is rippling through the bond markets right now as the cyclical sectors of fall begin to churn into movement.  Second quarter was good for bond holders; third quarter has started to rattle their psyche.

I remain optimistic.  A brutal reminder that I’m not as indestructible as perhaps I once thought I was, has given me a new-found clarity.  Caution prevails and significant risk taking should be sidelined right now or assigned to lowly pledges.  I do expect a return to volatility perhaps as soon as Tuesday, more negative European and Chinese news and of course the shenanigans of our own political discourse.  No threat of the dreaded Vegas Technicolor yawn included.  I remain soberly optimistic.

PS.  I’ve received a few requests for access to my weekly stock, ETF and mutual fund list.  Feel free to email me directly (dcherry@nelsonsecurities.com) with ‘subscribe’ in the subject line and I’ll include you in the weekly distribution.