Archive for category: Investing

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.

 

Gold:  Since December of last year, the 23 & 30 day moving averages have capped any rally, and they look to be doing so again.  $1440 is critical support at this point.

 

Economics

Last Week

Economic data was almost universally disappointing last week, although it obviously didn’t have the expected effect on the market (more on why below).

The big numbers of last week, the global flash PMIs, all either missed expectations (China, U.S. and Germany) or met low expectations and remained below 50 (EMU), signaling contraction.  The flash manufacturing PMIs certainly showed that the slowdown in growth in the global economy seen in March has so far carried over into April.

The durable goods number was also soft, as new orders for non-defense capital goods ex. aircraft (NDCGXA) increased slightly in March, but only after February data was revised lower.  This implies that along with the consumer, businesses scaled back spending and investment in March.

In Europe, the German IFO survey also missed expectations, and between that and Germany’s weak manufacturing PMI, evidence is mounting that shows the mighty German economy is finally being dragged down by the rest of Europe.

Finally, Q1 U.S. GDP was a bit of a mixed bag.  Negatively, the headline showed 2.5% annual growth in Q1 vs. (E) 3%, and final sales of domestic product, which is GDP less inventories, rose 1.5%.  (It’s helpful to exclude inventories because big inventory accumulation subtracts from next quarter’s GDP as de-stocking occurs).

Positively, PCE, personal consumption expenditures, beat estimates at 3.2%, so the consumer kept spending in Q1, although that’s being discounted a bit because of the soft March retail sales data.

So, bottom line on GDP is we remain in a very slow growth economy, just as we’ve been for the last several years.

This Week

This is a very important week, plain and simple.  First, final readings of global manufacturing PMIs are released Tuesday night (China) and Wednesday morning (Europe & U.S.).  While some of the power is taken out of these numbers given the flash estimates from last week, they will still move markets.

Second, it’s jobs week.  Friday brings the April jobs report, but before then we’ll have the ADP report Wednesday, and weekly claims and the Challenger layoff report Thursday.

Third, and most importantly, the Fed, ECB and Bank of England all have interest rate meetings Wednesday (Fed) and Thursday morning (ECB and BOE).

These meetings are the most important events of the week.  Markets didn’t decline on the weak economic data from last week due to the perception (and expectation in the case of the ECB) that central banks are going to either stay the course with current QE programs and other accommodation, or become more accommodative.  That expectation makes the weak data from March/April somewhat irrelevant, because if CBs stay “easy” or get “easier” it’s assumed that the weak economic data will just be a bump in the road of a greater recovery.

The ECB in particular will be the most watched CB this week.  A 25-basis-point rate cut is fully priced in at this point, so at a minimum that’s what the market is expecting.  I’ll preview it more when we get closer, but the ECB better reveal unconventional easing measures or strongly hint they are on the way, otherwise there will be some substantial disappointment.

At the Fed, the tide appears to be turning with regard to the discussion about ending QE this year.  Given the soft economic and inflation data recently, the market will be looking for some “dovish” commentary from the Fed about being committed to keeping QE on as long as necessary.

As stated, this week is very important from a macro perspective.  The bad economic data was overlooked last week because of expectations for central banks; now they need to deliver (or the data needs to get better).

Economic data has been the main driver of the market lately, and yesterday pretty much all the economic data we received missed expectations. Chinese, EMU, German and U.S Flash Manufacturing PMIs all either declined from last month and missed expectations, or stayed at the same levels as last month but still signaled contraction in the manufacturing sector.

So, with the economic data so bad—why did stocks rally yesterday?

The answer is changing market expectations of Europe. Keep in mind that the market is a discounting mechanism—it’s always trying to factor in future occurrences in today’s prices. Yesterday, the markets expectations of some potential future events in Europe trumped the reality of weak economic data.

In particular, the market rally yesterday, which was led by European markets, was based on the fact that there is a growing belief (supported by some evidence) that Europe will abandon its multi-year campaign of austerity for PIIGS countries (which has led to stagnant economic growth in the EMU) and instead focus on fostering economic growth.

Additionally, yesterday’s bad economic data in the EMU was seen as increasing the chances of the ECB cutting rates next week, which the market views as a economic positive for the region.

All this relates back to the markets main concern and the catalyst for the recent correction, which is the stalling of global economic growth and the creeping of deflation, which is emanating from Europe.

The reasoning for yesterday rally goes something like this:

If Europe abandons austerity and starts to foster economic growth, and if the ECB not only cuts interest rates but also does additional, unconventional easing measures like a new LTRO or even QE, then the ECB will finally join the Bank of Japan, Bank of England and Fed in being ultra accommodative and directly combating deflation and spurring economic growth.

If this actually happens, and the EU and the ECB actually follow through with measures designed to stimulate growth, then it is a bullish game changer—and in that scenario you would want to buy European markets with both hands, similarly to how we should have bought the S&P at the start of QE2 and how we bought DXJ when Abe was elected. It’s very, very similar—if it comes to fruition.

Keep in mind, though, there are a lot of “ifs” that are assumed in that statement—and while several articles are hailing the end of austerity in Europe and calling for a rate cut, those of us who have traded this crisis from the beginning are well aware of European Leader’s multiple “false starts” with regards to taking steps to resolve the crisis.

From a “how do we know” standpoint, we should continue to watch the SXPP (STOXX Basic Materials Index) to see if it can bottom, and the ECB meeting next week to see 1) If they even do a rate cut (its not certain) and 2) If they reference any unconventional measures are being considered.

I for one will continue to be cautious, as there will be plenty of money to be made being long Europe if and when the tide turns and the EU and ECB are ready to embrace economic growth.