Archive for category: Investing

I wanted to touch upon Mr. Fink’s comments about the pension fund re-balancing.  With the S&P 500 up 25% year-to-date, funds rebalancing their equity exposure to get back in line with their respective allocations makes sense. But my question is, where are they going to go with the cash?  Bonds?

If I’m a PM at a pension fund and I’ve got to reduce my equity exposure, am I going to sell those stocks and allocate that money to bonds, given the impending tapering? If I am, do I go into short-term bonds to protect myself but earn nothing in interest?  If the funds can’t sit in cash, and commodities aren’t viable for the funds (nor do they look bullish at the moment),  are other regions of the world (Europe, emerging markets, Japan, China) that much more attractive compared to the U.S.?

I’m not a fan of investing in something because “there’s nowhere else to go.” But in this 0%, Fed-engineered environment, I do have to admit that it’s a tough question to answer. As a result, I’m not so sure that the rebalancing Mr. Fink is alluding to will be such a negative on stocks, although he’s obviously more-knowledgeable in the area than I am.  But, it is food for thought on why stocks can continue to grind higher.  Capital flows are a powerful influence on markets in the short/medium term.

 

Last Week

It was a relatively quiet week economically speaking, and the “highlight” was the Yellen testimony before the Senate Banking Committee.  She was more “dovish” on the margin than generally was expected, although it’s safe to say nothing really new came from the testimony.

Perhaps most importantly, if you only read the transcript or her prepared remarks and the Q-and-A, you might have thought it was Bernanke giving the testimony.

That’s important (and an underappreciated positive) because, from a policy-continuity standpoint, we know what we’re getting with Yellen (Bernanke part two).  We’re in uncharted waters with how the Fed is going to unwind all this stimulus, and it was comforting to the markets last week that Yellen sounded so “Bernanke-like.”

Turing to actual data, we didn’t get much, and what we got was mixed.  The Empire State Manufacturing Survey was a big miss Friday and caused a bit of a “dovish” response in the markets (bonds up, dollar down), although I think that was more trading noise than anything. The Empire State survey did turn negative for the first time since May, and new orders also fell into negative territory.  But, while that is a bit disconcerting, we need to keep in mind that Empire State has been one of the softer regional surveys and hasn’t been very correlated to national manufacturing activity.  So, it really isn’t going to shift any “tapering” expectations.

Also softening the blow of the big Empire State miss was the October industrial production report, which missed on the headline number because of a reduction in utility output, but the more-important manufacturing component met expectations, rising 0.3%.  So, it confirms the good manufacturing PMIs from October, and implies the economy really didn’t take much of a hit from the government shutdown.

Finally, jobless claims missed expectations, and continue to send a “non-confirmation” signal with regard to the labor market.  (Claims aren’t falling the way they should be, given the improvement in the monthly jobs report.)

Bottom line is the economic data last week didn’t change the outlook for Fed tapering (January-March) or alter people’s perception of the economy (still slow growth).  But, importantly, it didn’t give any reason to think the recovery is stalling, either.  So, bottom line is the data and Yellen were a tailwind for stocks last week.

This Week

This week will be much-busier than the past few weeks from an economic-data standpoint.  The date that the Fed starts to taper QE remains the dominant question for the markets, and we should get some further insight this week.

First, Bernanke speaks Tuesday night. He will comment on the economy, so there’s the potential for him to be “dovish” or “hawkish.”  Additionally, we get the Fed minutes from the October meeting.  Remember, this was the meeting that first caused the tapering expectations to shift back from June to the January-March ‘14 time frame—and that was mostly due to the fact that the FOMC didn’t really downgrade its assessment of the economy (which was taken as “hawkish”).  Obviously, the Fed’s outlook for the economy is critical to when they taper QE, so the minutes will be important to getting more insight into the committee’s opinion of the economy.

There’s a lot of important hard data, too.  The global “flash” manufacturing PMIs for November come Wednesday night (China) and Thursday morning (EU and U.S.).  There’s been some concern the global recovery has been stalling lately, so these PMIs will offer more insight into the state of the world economy.

Domestically, we also get retail sales (Wednesday), and they’ll be watched to gauge the state of the consumer heading into the holiday shopping season. (Keep in mind the retailers are at all-time highs, and M earnings last week resulted in an uptick of expectations for holiday spending.)

It’s fair to say that over the past few weeks domestic data has implied the economy may be a bit better than we think, and international data has implied the global economy may not be as healthy as first thought.  Data this week will go a long way toward confirming or rejecting that sentiment.

This morning’s jobs report was certainly a positive surprise, but despite the fact that the bond market is getting hit hard, I’m not entirely sure that this report pulls forward any Fed tapering from the current March expectations.

First, despite the strong October print, the rolling six month average of the jobs report (which gives a better picture of the labor market) is still just 176k, which is below where the average was in June and well below the 200k+ that most think is necessary for the Fed to start tapering QE.

Second, although it was largely ignored with all the jobs report hysteria this morning, there was another important economic report released at 8:30 AM – Personal Income and Spending.  Contained in that report is something called the Core Price Index, which is the Fed’s preferred measure of inflation.  And, it didn’t change much – the September Core PCE Price Index rose just 0.1% in September, and year over year is up just 1.2%,which is the same level as August, well below the Fed 2.0% target.  Earlier this week Fed President Bullard said they were in no rush to taper QE because inflation is low – and clearly that trend hasn’t changed.

Finally, one of the reasons that the Fed chose not to taper QE in September was because of the rise in interest rates ahead of that meeting..  The Fed saw those increases in interest rates as a threat to the economic recovery.  Well, since the FOMC meeting last week, in just over 7 days the yield on the 10 year Treasury has risen from 2.47% to 2.74%, a one month high.  If rates keep rising into December, that will deter the Fed from tapering QE once again.

Instead of playing the guessing game of “taper vs. no taper,” I think one best ways to play the current environment is to revisit a trade I’ve been on top of since last December – long Japanese stocks/Short the Yen.  To me, the clear takeaway from today’s Report is we won’t see a material decline in the dollar any time soon, and I believe one of the best ways to play that is by getting long Japanese stocks via DXJ or short the yen via YCS.

Regardless of whether the Fed tapers or not, we likely won’t see any material US Dollar weakness over the coming months, and that should mean a resumption of the downtrend in the yen, and a rise in Japanese stocks.

As I’ve been saying in recent editions of The 7:00’s Report, the yen has been held up by various “one offs” over the past few months:  The government shutdown, the spike in SHIBOR rates, and the plunge in the dollar after the “no taper” surprise.  But, with those events removed, I believe the yen decline will resume, as a yen below 100/dollar simply won’t result in the kind of economic growth PM Abe and the BOJ are striving for.  They want the yen lower, and generally speaking you always want to be on the same side of the trade as a countries central bank.

Last Week

With the drama in Washington successfully postponed, focus last week turned to the question of “How much damage has the shutdown and drama done to the economy?”

While it’s still early, based on last week’s data, the answer so far is “definitely some” because economic data almost universally missed expectations last week. Perhaps more disconcerting than that, though, were the weak jobs and durable goods reports. These are from September (and pre-shutdown), and they imply that the economy may have been losing momentum before the last round of drama in Washington.

With regard to WWFD (what will the Fed do), the soft data last week further solidified March 2014 as the “consensus” date for the first tapering of QE. However, many analysts think it could come as soon as January, depending on the data.  But, from a Fed standpoint, last week was marginally “dovish.”

The September jobs report showed 148K jobs added, with a net 9K positive revision for July and August, which was well-below expectations of 180K.  As mentioned,  this data was compiled before the shutdown, and the bottom line is that the jobs market remains largely stuck in neutral—adding between 150K and 200K jobs/month, as it has been doing over the past quarter.  Progress in the labor market has clearly stalled.

Manufacturing data was also disappointing. October flash manufacturing PMI, which is inclusive of the shutdown, missed expectations. New orders, the leading indicator in the report, fell to a multi-month low.  Although, importantly, the PMI did stay above 50—signaling continued expansion in the manufacturing sector—the pace of that expansion is slowing.

On Friday, the September durable goods report was also weak.  The headline number was a beat, but as always with durable goods, you can ignore the headline and instead look at the “New Orders for Non-Defense Capital Goods Excluding Aircraft.”  NDCGXA fell 1.1% in September (so, before the shutdown). This will raise some concerns that businesses are now starting to reduce spending and investment amidst all this uncertainty, which puts our 2% growth rate at risk.

Bottom line is the economy remains a major concern, and also the single-most-important catalyst for higher stock prices. (More QE won’t make the market go substantially higher; we need real economic growth.)

Interestingly, the stock market didn’t sell off in reaction to last week’s data, and that’s because it’s impossible to try and figure out how much of the weakness in the economic data was just temporary (because of the shutdown) and what was more structural.

And, we can expect the market to continue to largely “ignore” weak data for the next few weeks, given the noise from the shutdown.

The economy returning to above-trend growth (meaning 3%-plus) remains the key to substantially higher equity prices. If the data stays soft into December, the dynamic in the market will change, and not for the better.

This Week

This week’s highlight is undoubtedly the FOMC meeting Tuesday/Wednesday.  I’ll give a more in-depth preview of what’s expected, but at this point no one expects any tapering of QE, and in all likelihood this should be a relative non-event.

I would expect the Fed’s commentary on the economy will be downgraded given the government shutdown, and on balance the risk is that the meeting is perceived as “dovish.” But really, the only thing that people are trying to figure out is when will the Fed first taper. Given the data, it looks like the answer is “not in 2013.”

Away from the Fed, we get several key economic reports. These will be watched, but don’t expect the market to necessarily trade off them like we’d normally see, given the “noise” in the data and all that’s happened in the economy since September.

We get more insight into the state of the manufacturing industry with industrial production this morning and the final Institute for Supply Management’s manufacturing PMIs Friday.  In light of the soft durable goods report (and flash PMI), these pieces of data will be watched to see if they confirm the slowing growth we’ve seen in other recent manufacturing and business investment reports.

On the consumer side, September retail sales will be released tomorrow morning.  Recent data have implied consumer spending is slowing a bit, but consumer confidence readings in the wake of the shutdown have plunged lately.

This will keep concerns high that the consumer might materially slow down as we approach the holiday season.  It hasn’t happened yet, but that’s a legitimate concern for the market, because as the American consumer goes, so goes the U.S. economy.

Finally, this week would normally be “jobs week” but because of the shutdown, the October jobs report has been delayed till next week.  But, we do get the ADP jobs report Wednesday, so look for that number to potentially move markets more so than normal. That release will include the period of the October shutdown, and will offer a preview of how much damage was done to the labor market by the shutdown.