Archive for category: Investing

Greek Election Update (Originally Released 12.29.14)

The biggest event of this holiday week has already come and gone, as the Greek Parliament failed to elect a President and there will not be general elections in early February. PM Samara’s gamble has failed, and as of this writing the Athens stock market is down 11% and European markets are off about 1%.

From an investment standpoint, despite the drop in Greek shares, we do not see this as a negative game changer. To be clear, the reason stocks are down is because the market is afraid the looming election will delay QE by the ECB at the Jan 22nd meeting, not because of a fear Greece will leave the EU or default if Syriza gains a majority. It is important to realize the true “negative” outcome the market is worrying about.

Bottom line, even if Syriza wins the general election, the party has moderated materially and no one is afraid of another default/Greek exit showdown. This is all about QE and frankly we don’t think this results in a delay of QE be the ECB in January, assuming the governing council is planning on doing it already.

So, we do not see this as a negative game changer in our “Europe outperforms” thesis, and we would be patient buyers of this dip.  

Gold futures have been very volatile to start the week thanks to multiple catalysts in the market. Futures initially fell yesterday as Swiss voters rejected a proposal to increase the central bank’s gold holdings. But then news broke that India, one of the world’s largest gold consumers, lifted trade restrictions on gold imports, causing futures to reverse morning losses. Then, yesterday’s rally extended as investors bought up the precious metal as a “safety asset” after the downgrade of Japanese debt by Moody’s.

A massive short squeeze then ensued that pushed gold through $1200, but as with most short squeezes, there was little conviction and this morning gold is back down through $1200/oz. Gold remains very volatile at these levels, and we maintain a general downward bias short term as the dollar remains strong.

The technicals confirmed that position on the charts early this week as the trend-line drawn from the August highs across the top of the highs of the last short squeeze (that occurred in late Sept.-early Oct.) halted this weeks rally. .

To sign up for a Free Trial to the Sevens Report simply fill out the form on the right hand side of this page.

Time to Buy XLE?

Fundamentally, the outlook for oil remains broadly the same: Waiting on OPEC. But, as we discussed earlier this week, most major energy companies are not aggressively shutting in aggregate production, as increases from profitable wells are offsetting shut-ins from high-cost wells.

From a macro standpoint, pressure is mounting on OPEC, the Iranian negotiations may be breaking down and miss the late November deadline, and calls for sub $70 oil are very loud. So, we have energy stocks that are sharply off the highs and some potential positive catalysts on the horizon (OPEC meeting next week). So, to a point, XLE now has some “ok” fundamentals and potentially positive-turning technicals. Obviously this is a high risk/high return prospect, but XLE is worth a look especially if it breaks through that 50-day MA, which it should do today.

This was an excerpt from today’s Sevens Report, to continue reading today’s Report, simply sign up for a Free Trial on the right hand side of this page.

FOMC Minutes

The FOMC minutes didn’t contain many surprises, but on balance they did confirm that the FOMC is more committed to normalizing policy than the market thought before the October meeting.

Yesterday I focused on the difference between market-based and sentiment-based inflation expectations, and so too did the Fed in its minutes. The takeaway is that “most” Fed officials looked at the declines in market-based measures of inflation expectations as “noise” rather than a rising deflation threat.

The FOMC also cited that sentiment-based indicators of inflation expectations remain stable. While inflation likely would decline in the near term thanks to commodity prices, the committee remained confident they would reach their 2% goal sooner than later.

I know this is somewhat tedious, but it’s important, because the bottom line is that, as long as sentiment-based inflation expectations remain stable, the drop in market-based inflation expectations will not make the Fed more dovish.

This was an excerpt from today’s Sevens Report. To continue reading today’s report, simply sign up for a Free Trial on the right hand side of this page.

Atlanta Fed Business Inflation Expectations

• YOY Business Inflation Expectations increased to 2.0% from 1.9% in October

Takeaway

Around 10 AM yesterday, the Dollar Index rallied and bonds sold off (a typically “hawkish” reaction). The reason was a slight uptick in the little-followed Atlanta Fed Business Inflation Expectations Survey.

What made the report “hawkish” wasn’t the fact that expectations for year-over-year inflation rose to 2.0% (they were at 2.1% earlier this year). Instead it was that the percent of business executives who saw inflation as starting to trend higher over the next 12 months jumped from 54% in May (the last time the questions was asked) to 63% in November, which is a multi-year high.

Declining inflation expectations as measured by the bond market have been a big topic of discussion and are partially responsible for the “dis-inflation” talk here in the U.S. But actual expectations by business owners for inflation pressures over the coming 12 months are trending materially higher—not lower.

Combine that with the uptick in the Fed’s quarterly wage inflation data, and there are growing signs that wage inflation has bottomed and is finally trending upward. (This is anecdotally confirmed by the U-6 underemployment index dropping to multi year lows at 11.5% in last week’s jobs report.)

Bottom line, I’m pointing this out because there are very few people prepared for inflation. From a portfolio standpoint, while it isn’t something we need to position for today, it is something we need to watch for. That’s because there are signs emerging that inflation has bottomed, and is starting to (slowly) gain some upward momentum, led by wage gains.

This is something we will continue to watch over the coming months/quarter, because if we do see inflation, that’s a major trend change few people are properly positioned for at this time.

This was an excerpt from today’s Sevens Report. To continue reading today’s Report, simply sign up for a Free Trial on the right hand side of this page.