Archive for category: Investing

Last Week

There were just two notable U.S. economic releases last week. Although neither was enough to force a change in the outlook for Fed policy, August retail sales were strong and incrementally viewed as increasing the chances for a hawkish statement change this week.  Outside of that, the most important thing that happened last week from a data standpoint was some soft Chinese data renewed some concerns about the pace of growth.

Starting with the U.S., though, the most important number last week was Friday’s retail sales report.  The headline met expectations (up +0.6% m/m) but it was a better report than that.

The key indicator of retail sales is the “control” group that excludes car purchases, gasoline purchases, building material purchases and food service. As such it gives the best read on true consumer spending.

The “control” group rose +0.4% in August, but more importantly the July number was revised higher from 0.1% to 0.4%, dismissing the concern that consumer spending had suddenly dropped off during the summer.

Does this number, by itself, mean the Fed will get more “hawkish” this week?  No, it doesn’t—but consumer spending was one of the more sluggish sectors of the economy, and incrementally it bolsters the argument for the “hawks” to remove “considerable time” from the statement. So, bottom line, the retail sales report doesn’t mean any expectations of actual Fed policy will change. But for this week’s statement, it was viewed as slightly more “hawkish.” (Silly as it is, these are the things we need to worry about in the age of ZIRP and QE.)

Internationally, European data was almost all second tier last week, although it was better than recent reports.  But, nothing last week changed the outlook for Europe (i.e., the continuation of a slow recovery).

There was a lot of Chinese data out last week, though, and generally it was disappointing. CPI and PPI were both below expectations (which is usually seen as a positive). But taken in the context of the soft import numbers two weeks ago, the lower inflation numbers furthered the concern that domestic demand in China is slowing.

Over the weekend, industrial production missed estimates (6.9% yoy vs. (E) 8.7%) while retail sales met.  There are some concerns re-emerging about the pace of growth in China, but it’ll take more disappointing data (specifically, a lot more disappointing data) before legitimate concerns about a potential “hard landing” take shape.

China is transforming its economy, and that’s going to produce periods of slower growth. But the Chinese central bank and administration remain committed to around 7%-7.5% annual GDP growth. As long as that’s the case, China shouldn’t be a major macro headwind (although it will weigh on emerging markets, which is a positive for EUM).

This Week

Obviously the FOMC meeting is the highlight this week, and the entire focus seems to be on whether the wording “considerable time” will be removed from the statement released at 2 p.m. Wednesday. Keep in mind, though, this is one of the meetings where we’ll get the Fed forecasts (the “dots”) and the Fed chair press conference.

I’ll preview it in Wednesday’s Report, but the bottom line is “considerable time” is the focus of the meeting. There is a definite fear the Fed will get very, very slightly more hawkish in tone (and given this Fed’s propensity to stay “dovish,” I’m worried the market may be a touch ahead of itself and we could see a “sell the rumor, buy the news” reaction).

Part of the reason the market expects this shift is because of the Chair’s press conference—the FOMC can remove “considerable time” from the statement and then she can refute that the Fed is getting more “hawkish” at the press conference.  If they don’t do it here, the next press conference isn’t until December.

Outside of the Fed, we get our first look at September economic data via the Empire State manufacturing survey (this morning) and Philly Fed (Thursday), and in all likelihood they’ll both show that manufacturing activity in their respective regions continues to grow at a good pace. (However, activity in those regions has gotten pretty hot, so don’t be surprised by a dip in the numbers –but on an absolute level, activity should stay brisk.)

The other notable domestic release is the August housing data, with housing starts Thursday. The market will be looking for confirmation that the acceleration in the rebound we saw in the July data is continuing.

Internationally it is a very quiet week in both Europe and Asia.  The German ZEW survey (out tomorrow) is probably the highlight. If the survey can surprise to the upside, this could help investor sentiment toward Europe as we approach the implementation of the ECB’s Targeted Long-Term Refinancing Operation (TLTRO) and private-market QE program (which starts in October).

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Bottom Line—It’s About “Considerable Time”

If there was one specific reason stocks have traded “heavy” for over a week now (Friday’s rally aside), it’s Fed expectations.  This market remains Fed-dominated, plain and simple.  And, levels of Fed angst are slowly on the rise as we near the Sept. 17 FOMC meeting.

In particular, there is the worry that the Fed will remove the term “considerable time” from the official statement.  This “considerable time” pertains to when the Fed will raise rates after QE stops this October.    So, the current statement says the Fed won’t raise rates for a “considerable time” after QE ends in October.

But, quietly there has been a movement gaining steam in the FOMC to remove that phrase from the statement. If that happens next Wednesday, it’ll be taken as mildly “hawkish” because logically markets will assume rates will rise sooner than later.

That growing expectation, along with the apparent break in the European bond buying fever, is what’s weighing on Treasuries and stocks—and it underscores a very important point.

If we are in for a sell off/correction of some sort, then it likely will come with both stocks and bonds going down—so the expectation that even if stocks drop we can hide in bonds will no longer be valid in the short term  – assuming this bond rally of 2014 really has broken (which I believe it has).

Bottom line is you have to respect this rally, but this market continues to feel heavy to me.  I would not be adding any new long exposure here.  JNK continues to be under pressure (down again yesterday and well below 41.00) and I maintain that is a leading indicator, and because there are so many “late longs” in this market that begrudgingly added long exposure during the last three weeks, the potential for a very ugly day between now and the FOMC meeting next Wednesday is on the rise.

 

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JNK Is Rolling Over—That is A Warning Sign

JNK, the junk bond ETF, accurately forecast the July/early August decline in the stock market. Now, it’s rolling over again—providing a potential warning sign that we may be in for another dip.

In the July 22 issue of the Report, we included a chart that showed how junk bonds had broken a 2014 uptrend, and warned it could be a negative sign for stocks.

Likewise, we kept watching JNK as the leading indicator for the stock market during the late-July/early August sell-off. We pointed out on Aug. 13 that JNK was close to breaking back above resistance at $41 and, if successful, could signal an end to the stock sell-off.  JNK did break resistance, and over the next week the S&P 500 rallied 50 points in a straight line …

So, to recap:

• JNK topped on 6/23/14.
• SPY basically topped on 7/3, 11 days after JNK.  (The SPX did make a nominal new high on 7/24 but really the market was chopping for those three weeks.)
• JNK declined -4.21% peak to trough, bottoming on Aug. 1.
• SPX declined -4.25% peak to trough and bottomed on 8/7, one week after JNK.

So, JNK peaked and bottomed one week before SPY, and the declines were almost identical.

And, while nothing in the market is 100% guaranteed, it sure seems like JNK acted as a leading indicator for stocks.

And, that makes sense fundamentally.  If we are going to see a decline in stocks, it’s going to be due to fears about the Fed getting too hawkish, which will come with higher rates.  And, when rates do start to rise, junk bonds will get hit the hardest because they are the sector of the bond market that is the most overbought, thanks to years of QE and the subsequent reach for yield.

Turning to the present, JNK is rolling over, as the chart on pg. 1 shows.  JNK peaked on 8/26 and is now down 4 days in a row, again below support at the $41 level.

Point being—JNK acted as a leading indicator for stocks 2 months ago, and I believe it’s continuing to do so now.  Does that make me outright bearish on stocks?  No, you can’t fight this tape and have to respect the rally.  But, it is a warning sign we need to monitor, and it may be an indication that we’re in for another sell-off in the coming weeks.

 

Is This As Good As It Gets for the S&P 500?

The outlook for U.S. stocks remains positive, as the “Four Pillars” of the rally remain intact:  Global central bank accommodation (this was mildly solidified last week by the ECB and the soft jobs report), a clear macro-economic horizon (also further solidified by the Ukraine/Russia cease-fire), global economic recovery and reasonable valuations.

But, one characteristic of last week’s market that I didn’t like is there was no real desire for buyers to push stocks higher. The two failed rallies at 2,010 in the SPX are representative of the sentiment that this may be as good as it gets in the U.S:  Economic growth (according to most metrics) is accelerating, but any material improvements will be met with a “hawkish” Fed.  Washington is coming back into focus via the mid-term elections (the absence of any tomfoolery from Washington has been an underappreciated tailwind for the market).  And from a valuation standpoint, even if the economic data stay “Goldilocks,” you’re buying an SPX that is trading at 15.4X 2015 earnings—again not prohibitively expensive, but not cheap, either.

Now, to be clear, I’m not saying there’s anything wrong with the market and/or to de-risk. But unless we get some additional multiple expansion by an uptick in earnings, I’m not sure what else out there is going to carry stocks higher in the near term. So, I think a consolidation/chop sideways is in order.

Adding to this is the growing attractiveness of Europe (and to a lesser extent Asia).  European stocks, while mired in slow growth at the moment, are about to see the implementation of growth-stimulating programs. Meanwhile in Japan and China, both the respective governments and central banks are intent on helping their economies.  And, the above regions trade at a significant discount on a valuation basis compared to the U.S.

So, point being, while I wouldn’t materially decrease U.S. equity allocations, I would point any new or tactical capital toward some other regions (especially Europe) as there is just a lot more room for improvement over there than there is in the U.S. at this moment.