Archive for category: Investing

We’ve got to keep an eye on Greece again now that yesterday’s closure of the public broadcasting company by Prime Minister Antonis Samaras has ignited a political crisis. This has significantly increased the chances of a “no-confidence” vote and snap (or, early) elections. (Everyone remember how markets reacted the last time it happened in May of last year?)

The turmoil centers around the closure yesterday of the Greek national broadcasting company, ERT, and the immediate firing of all 2,600 employees.  The decision, as you would expect, made the unions go crazy—there are calls from the broadcasting employees’ union for a strike and there are signs of solidarity from other unions as well.  But, potential strikes aren’t really the concern. (This is Greece after all; they know how to handle a strike.)

The bigger issue here is that Samaras basically closed ERT unilaterally, without really consulting his coalition partners, the PASOK party and Democratic Left.  They have come out and said they are not in support of this and are working on legislation to replace the decision.

Further complicating things is the fact that the closure of ERT is basically being done to comply with Troika demands of 2,000 public sector job cuts by the end of the summer, which are required for the next tranche of bailout cash.  So, anti-European party Syriza is keying off this to generate support.

Again, the danger here is that the Samaras-led government faces a “no-confidence vote” and fails, causing snap elections, which again opens the door to an anti-European group like Syriza gaining control … and then we have a re-igniting of the European crisis.

We’re several steps away from that now, but the situation bears watching. If there is a no-confidence vote and the government fails, expect that to be a macro headwind for risk assets.

Over the past several weeks we’ve been witnessing equities go through an “adjustment period” as the reality of Fed “tapering” and ultimately removing QE sets in.  Because this adjustment is an ongoing process, I don’t know if last week was just a typical correction and now it’s time to get “all in” in equities broadly.

But, the clear takeaway from last week was that Fed “tapering” remains very much on schedule, and as a result we should see continued downward pressure on bonds/upward pressure on rates.

I know that successful investing/trading is best achieved by finding clear trends in sectors & corners of the market, so if stocks will continue to “adjust” to the prospects for lower bonds/higher rates, then let everyone else worry about the “broad” market’s near term direction, while we get incrementally more long things that do well in a rising interest rate environment (some names to consider are: TBF, TBT, SJB, financials, equities broadly, and very selectively, hard asset related sectors and stocks).

So, put bluntly, stop worrying about where how to market is going to adjust to higher rates, and instead just get “long” higher rates – that’s the definitive trend in the market right now. 

Economic data remains critical (it’s the one thing that can de-rail the “tapering” narrative), and the FOMC meeting on the 19th is the next major catalyst.  Nothing really important happens domestically this week, though.  So, as long as Japan behaves, I think we’ll see a continued drift higher in broad markets this week.

Good” vs. “Bad” Interest-Rate Increases & Why Inflation Is a Potential Value Play Right Now.

One of the points I’ve been trying to drive home about the recent increase in interest rates has not been so much the amount of increase, but rather the pace.

That’s because a slow, orderly rise in interest rates actually would be welcomed by the market.  This would be considered a “good” rise in interest rates because it would reflect expected improvement in the economy and the onset of some initial inflation—both of which are exactly what the Fed is trying to accomplish.

So, that type of interest-rate rise would actually validate the Fed’s policies.

The other type of interest-rate increase is a rapid, disorderly increase, which is the result of surging inflation expectations, worries about fiscal solvency, or a mass exodus of investors from the bond market in an effort to lock in profits.

That’s what we got a whiff of in Japan last week, and that’s why the market got spooked.

So, again, it’s the pace of interest-rate increases that matters, not the fact that they are rising.

So far, the market has embraced the increase in interest rates largely as the “good” kind.  Interest rates are rising because the outlook for the economy is improving and inflation expectations are starting to turn as the investment community gets more-comfortable with the idea of more-permanent economic growth.

If that plays out and we do experience the “good” type of interest-rate increases, then buying “inflation” is the value play in the market right now, because there is no inflation at the moment. But, if we are witnessing the “good” interest-rate increases, there will be inflation in the future.

So, keep an eye on inflation-linked assets like stocks generally (but again, avoid “yield-proxy” stocks), and specifically basic materials and hard-asset producers, which have lagged badly this year.

Also, gold, commodities generally, and land/real estate sectors will also outperform during a “good” increase in rates.

We aren’t there yet, so I wouldn’t be the hero and try to pile into beaten-down basic materials sectors or gold today.  But, keep an eye on them (or I’ll do it for you) as they are one sector where we could all generate some alpha if interest rates continue rise in a “good” way.

Bottom Line

I believe there are two key takeaways from yesterday’s price action.

First, before markets reversed (while they were at record highs) I spoke to a colleague on a desk and he remarked how the most unbelievable thing about this rally isn’t so much the strong buy demand, but instead the total and complete lack of anyone booking any profits and selling at least part of their long positions.  There was simply nothing coming for sale.

Normally you make money doing the opposite of what the crowd is doing, so the fact that the market has marched higher like it has and no one is booking any profits tells me that’s probably the right thing to do (some profits, I’m not saying get out).   The S&P could rally another 20% from here (sentiment remains very skeptical and many people were asking if “this is it” yesterday, thinking this is the start to the inevitable correction).  But, yesterday’s “shot across the bow” reversal is a signal to put at least some money in your pocket. 

(Yesterday’s sell off was more about the bond market than most realize. 
When the 10 year yield broke through 2% and the 30 year Treasury moved to
new multi-week lows, the decline in stocks accelerated.)

Second, don’t ignore the fact that utilities badly underperformed and bonds sold off hard.  That tells me this is about the market starting to discount higher interest rates, and that may be the next big trend that can make us some money.  If you don’t have any positive exposure in your accounts to rising rates (either through bank stocks or inverse ETFs on the long bond) then start thinking about getting some, because the next big trend emerging may, finally, be of higher rates and lower bond prices.

Economics

Last Week

Last week was very quiet economically speaking, although what little data there was generally beat expectations. The majority of the data last week was internationally focused.

In Europe, the composite PMIs (manufacturing and service), German manufacturers orders, industrial production, and exports all were better than expectations.  The bottom line out of Europe last week was the data implied a slight uptick in economic growth, although most of the releases are pretty minor ones.  The fact that they were watched was more a result of the very quiet calendar, rather than for insight into the EU economy.

In China, trade balance beat estimates, although the export data looked somewhat suspect and people were generally discounting it.  The big print of the week, Chinese CPI, was a bit higher than expected, but PPI was lower so it was considered a wash.

There was only one notable release last week domestically and that was jobless claims, which again were positive and moved to new lows, implying continued incremental improvement in the labor market (claims are at their lowest level since January 2008).

The real focus last week, however, was on central banks, and specifically whether the Fed was more seriously considering tapering the current QE program than was generally believed.  Speculation on that caused stocks to stall late in the week and caused the U.S. dollar to surge higher.  Also, speculation is boiling over about what the ECB does next, and the growing expectation that they will “do more” was furthered last week by comments from various ECB officials.

This Week

There is more data this week than last, although it still shouldn’t be classified as a “busy” week.  Importantly, the market will likely trade more off central bank expectations than the absolute data itself, so we need to be looking at economic data through the prism of “what will it make the central bank do.”

Given that, we may be facing this perverse “good data is bad for the risk assets” situation as in the very short term the market seems a bit spooked by the Fed considering “tapering” QE.

In Europe it’s the same sort of thing, only the market has priced in, to a point, the expectation of the ECB doing “more.”  If the economic data is stronger than expected, then we might see the market react negatively.

In that vein, inflation data this week (CPI and HICP, which is the euro inflation index, both released Thursday) will be pretty important.  At this point, the Fed seems borderline dismissive of the dis-inflation creeping into the economy, but that may not be the case if CPI declines further.  So, a low CPI reading will be dovish (and probably positive for risk assets), while higher CPI will be hawkish.  In Europe, disinflation is seen as the main catalyst pushing the ECB to “do more,” so it the same thing—low HICP will be dovish while high HICP will be hawkish.

Elsewhere, retail sales (today) will be closely watched as the consumer lately has shown some signs of exhaustion due to higher payroll taxes and healthcare costs. Any further evidence of that trend won’t be welcomed by the market.  We also get our first look at May economic activity via the Empire and Philly Fed manufacturing surveys (Wed/Thurs).  Again these data points are important because the market is watching to see if the slowdown in growth in late March and April is merely temporary.

Other numbers to keep an eye on are industrial production (Wed) and another round of housing data kicks off Thursday with Housing Starts.  In Europe, this week looks pretty quiet, as industrial production and the German ZEW survey (both Tues) are the only releases to watch.

So, this week the market will be looking at the data in the context of:  1) Is the economic slowdown in the U.S.  only temporary, and is May data starting to pick back up and 2) What will the data mean for central bank’s propensity to reduce or expand accommodation.  Keep those two things in mind this week as the data is released.