Archive for category: Investing

This Week

This is an extremely busy week of potential macro-economic catalysts and for more color into what the Fed might do next.

First, there is an FOMC meeting Wednesday. This is an “old school”-type meeting, so don’t expect economic projections or a press conference.  There is no change expected to interest rates or the QE program. “Tapering” at this meeting would be a huge surprise, although most do expect the Fed to further attempt to “talk down” rates, as they have (successfully) been doing for the last three weeks.  In particular, Hilsenrath’s article in the WSJ Thursday implied the Fed will potentially extend its “forward guidance” on how long interest rates will stay low, or perhaps lower the “thresholds” that would warrant tightening (currently unemployment below 6.5% or inflation above 2.5%).  So, there is some form of “rhetorical” easing expected from this meeting.

Second, it’s jobs week (and I’m sure the Fed will have the numbers when they meet Wednesday, so their statement may give some clues about the jobs report).  As usual, we’ll get the ADP report Wednesday, weekly claims Thursday, and then the government report Friday.  Given weekly claims have remained relatively stationary for four months, no one is expecting this jobs number to deviate significantly from the past few months’ reports.

Third, we get the official ISM manufacturing reports for China (which includes the government report), and the EU and the U.S. on Wednesday night/Thursday morning.  These are more important for China and Europe, and investors will be looking for confirmation of the “flash” estimates we got last week.  Especially look at Europe, if the report stays above 50 (which signals expansion in the manufacturing sector)—we could see some more upside in European shares.

Fourth, there’s an ECB meeting Thursday morning.  The fact that the ECB relaxed collateral requirements at smaller commercial banks for access to ECB funds has some thinking that there could be some additional programs announced at this meeting. But no one expects interest rates to change.  The key will be the commentary on the EU economy (it should be a bit more upbeat) and the pledge that the ECB will remain extremely accommodative for a long time.

Fifth, we get the first look at Q2 GDP, and as I said last week, this number is going to be ugly.  Most are expecting between 0.0% and 1.0% GDP growth in the second quarter, but a negative number is not out of the question.  But, the market shouldn’t really react that much, because everyone is expecting growth to materialize in the second half of the year (and it must; otherwise stocks are expensive).

Finally, to end the week, personal income and expenditures will be released Friday after the jobs report, and that’s important because it contains “core PCE,” which is the Fed’s preferred measure of inflation.  Inflation is currently running too low, and that’s making some Fed officials nervous about “tapering” too soon, lest we get a whiff of deflation.  But, if core PCE starts ticking up, like CPI did earlier in July, then “tapering” will become more solidified, and it’ll be taken as marginally “hawkish” (i.e., bonds-negative, dollar-positive).

Last Week

Economic data wasn’t the main market driver last week, as earnings have taken center stage.  But, the data was mostly positive and the big takeaway from last week is that Fed “tapering” remains very much on schedule for September.

The first look at July manufacturing data was pretty encouraging, as the Empire State Manufacturing Survey, Philly Fed Manufacturing Index and industrial production all pointed to a continued recovery in the manufacturing sector—something that, if confirmed by this week’s national manufacturing flash PMIs, would be an economic positive.

Housing was also in focus last week, but the results were more mixed than the manufacturing data.  Positively, homebuilder sentiment hit a new high, reflecting the fact that homebuilders, so far, don’t think higher interest rates will hurt the market.  Housing starts, however, had a big headline drop, which spooked some investors. However, it’s important to note that drop came from the multi-family segment.  The more-important single-family segment was basically flat month-over-month, so the number wasn’t as bad as expected.  The takeaway is that the question of whether or not higher rates might slow the housing recovery remains very much unanswered.

The one definitive negative last week was the retail sales report, which missed expectations and implies, somewhat, that the consumer might be slowing spending.  Whether consumer spending can continue through tax increases, sequestration, etc. has been a concern for some time.  And, last week’s numbers, while not definitively saying the consumer is slowing, will keep the debate, and concern, alive.  Finally, jobless claims reversed their recent increase last week (the increase was mostly due to the July Fourth holiday skewing the data), so the jobs market continues to improve at about the same pace we saw last month (which is a positive).

Internationally, there was a lot of Chinese economic data last week. Given the concern about China’s economy, it was closely watched.  But, the result was relatively anticlimactic. The data largely met reduced expectations, and 7.5% growth remains a key number to watch.  The Chinese government said they still expect ‘13 GDP growth to be 7.5%, but most believe there’s downside risk to that number.  If expected GDP growth drops below 7.5% and moves toward 7%, that’ll be a headwind for commodities and global equities.  So, the situation in China remains precarious.

Again, the main takeaway from the data last week was that nothing was released that changed the current expectation of Fed “tapering” to begin in September.

This Week

The highlight of the week undoubtedly will be the global “flash” manufacturing PMIs released in China (Tuesday night) and Europe and the U.S. (Wednesday morning).  The international data will be more market-moving than the U.S. data. In particular, markets will be looking for:

1) Stabilization of the Chinese manufacturing sector  (so the PMI doesn’t fall much further than last month’s 48.3).

2) An uptick in growth in the EU manufacturing sector (so an uptick from last month’s 48.7).

If the data reflect both those events, it’ll be a tailwind for stocks and commodities, and vice-versa.

Looking domestically, housing and manufacturing continue to be the key areas of focus this week.  Given the uncertain nature about the housing recovery, existing home sales (today) and new home sales (Wednesday) will be closely watched for more color on whether higher rates are slowing the housing market.  In manufacturing, June durable goods are released, and are expected to give further insight as to whether we are seeing a growing recovery in manufacturing.

Finally, weekly unemployment claims will be monitored to make sure they “stick” at current low levels, and that the spike higher in early July was indeed a one-off July Fourth statistical aberration.

While the international PMIs this week are pretty important with regard to sentiment toward China and Europe, domestically the data is more anecdotal with regard to WWFD. Nothing on its own this week will likely alter the present course of Fed “tapering” unless there is a big negative surprise.

The key here remains that the equity market continues to get more comfortable with the reality of “tapering.”  Keep in mind that the market broke from its highs almost two months ago on the Hilsenrath WSJ article that said the Fed was game planning its exit, so markets have been adjusting to this new Fed reality, sometimes violently, for 2 plus months.

So, as long as current expectations are generally met:  “Tapering” starting in September, QE ending in mid/early ‘14, then what will decide if this market moves to new highs or not is boring old economic data and earnings.  As long as rallies in bond yields and stocks are no longer mutually exclusive, as they have been since May, and emerging market bonds continue to stabilize (they don’t have to rally, they just have to not implode) then the path of least resistance for the market is higher, as long as the data is “ok”.

1650 is a key level in the S&P 500 and we’re going to open well above it this morning.  A strong close today and tomorrow could bring in momentum buyers off the sidelines and accelerate the rally into the end of the week, so that’s an important level to watch.

The analysis of the Fed minutes yesterday caused a bit of whiplash. Initially, the takeaway from the minutes was that they were “dovish,” and we saw stocks move higher and Treasuries rally/yields fall.

But, that interpretation was incorrect (as is often the case with initial interpretations of anything Fed-related). That’s why there is a popular trading axiom that states “the first move of the market after a Fed event is usually the wrong one.”

What the speed-reading programs and analysts didn’t see—in their “dovish” interpretation—was that, buried in the appendix, was this passage:

“Given their respective economic outlooks, all participants but one judged that it would be appropriate to continue purchasing both agency mortgage-backed securities and longer-term Treasury securities.

“About half of these participants indicated that it likely would be appropriate to end asset purchases late this year. Many other participants anticipated that it likely would be appropriate to continue purchases into 2014.” (Emphasis added).

Remember back to Ben Bernanke’s press conference after the Federal Open Market Committee statement.  What surprised the market was that Bernanke said the broad consensus of the Fed was that QE should end in mid-2014, which was earlier than the consensus thinking at that time. (Consensus was for QE to end in late ’14.)

Well, the “end date” of QE may be closer than “mid” 2014, depending on data, which is trending better since the last Fed meeting.

Of the 19 participants at the meeting, at least one leans toward QE ending immediately.  Of the remaining 18, “about half” thought QE should end later this year, presumably at the December meeting.

That’s another “hawkish” surprise, and we did see the effects of it when Treasuries sold off into the close and the Dollar Index pared some losses.  Now, does that mean QE will end in December?  Probably not, as Bernanke/Yellen and Dudley still dominate the Fed and they are doves.

But,  for all the gaming of the Fed, the takeaway here is that “tapering” remains very much on schedule, and it would appear that the risk is for QE ending sooner than current expectations, rather than later.

So, with regard to the market, the minutes only further reinforced the fact that interest rates are going higher as is the U.S. Dollar, unless economic data turns decidedly worse.  So, in my opinion, today’s Dollar Index decline and Treasury rally is doing nothing other than providing a great entry point to get exposure to the most powerful trends in the market:  Higher rates, which strengthens the bullish case for “short bond” plays like TBF, TBT, SJB, banks, etc.

Economics

Last Week

Friday’s jobs report capped what was a good week for domestic economic data, and the main takeaway was that Fed “tapering” expectations in September were further cemented by the data.

Looking at the jobs report, it was a pretty “Goldilocks” number.  The June report was a bit better than expectations (195K vs. 161K) but, almost more importantly, we saw a net 70K increase in the May and June figures.  The unemployment rate held steady at 7.6%, but that came with a welcomed increase in the participation rate and employment-to-population ratio.  Overall, this was a very solid report.

As mentioned, the rest of the data from last week was also pretty solid. The final reading on both manufacturing PMIs and the non-manufacturing PMIs were in-line or better than expectations. Plus, evidence continues to build that manufacturing is seeing a bit of an uptick in activity.

So, in the context of “WWFD” (What Will the Fed Do?), the good economic data last week—which generally shows there is no loss of economic momentum from Q1, as many expected there would be—further cements the likelihood that the Fed will taper QE in September.

While the domestic data was good and it implies “less-accommodative” monetary policy going forward, the same cannot be said for the rest of the world.  Outside of the jobs report Friday, the surprisingly dovish European Central Bank and Bank of England meetings Thursday were the biggest events of the week.

Mario Draghi and new BOE Governor Marc Carney both implemented “forward guidance” to emphasize the different directions of monetary policy between the Fed and the ECB and BOE, respectively.  While the Fed looks to taper, both the ECB and BOE remain firmly in easing mode, with a bias toward more accommodation in the future.

Looking at the actual data in Europe, the takeaway from last week is that we are seeing signs of stabilization in the European Union’s economy (small signs, but at least it’s a step in the right direction).  Manufacturing PMIs and EU retail sales both showed improvement, and of particular note were the UK numbers, which continue to get better and better.

Finally, China remains the area of greatest concern, economically speaking.  Manufacturing and composite PMIs both were in-line with pretty low expectations, and it is clear from the data that the Chinese economy is losing momentum.  And, the People’s Bank of China’s recent actions to burst the credit bubble in the property market will only slow growth further.

Seven-percent growth is now the number to watch—if you see expected 2013 GDP growth dip below 7% for China in the coming months (or if a lot of sell-side firms downgrade their growth expectations below 7%) then look for more weakness in China.

Bottom line with data last week was that it 1)Cemented the expectation that the Fed will begin to “taper” QE in September, and 2) Reinforced the monetary-policy divergence between the U.S. and the rest of the world.

So, we can expect recent trends of the higher dollar/lower “everything else” and higher yields to continue until the domestic data becomes soft, or international data improves.

This Week

Focus turns from the “macro” to the “micro” as the economic calendar is very slow this week, and the market’s focus will turn toward earnings.

With little actual data domestically (jobless claims Thursday is the highlight, and PPI Friday is the only other number), the Fed will remain a focal point.

FOMC minutes will be released Wednesday but, given the large amount of communication from Fed presidents over the past two weeks, I’m not sure there’s going to be a lot of additional insight to glean from the minutes.  The market expects “tapering” in September, and I doubt anything in the minutes will alter that expectation. (The risk, if anything, is that they are slightly hawkish.)

There are also multiple Fed speakers this week:  Bernanke Wednesday, Daniel Tarullo Thursday, and James Bullard and John Williams Friday). Their comments bear watching, as I imagine the Fed will continue trying to “talk down” interest rates and reinforce the “tapering is not tightening” PR campaign.  So, expect them to be on balance dovish, but again I doubt any of it will change current market expectations.

What Makes Me Wrong on Bonds?

It’s obvious to anyone reading this report over the past several weeks that I’m a big long-bond bear, that I think we’ve seen the “top” in Treasuries, and that a long decline in bond prices and a higher move in bond yields has begun.

I’m also aware that a “dovish” Bernanke this week could cause a short-term unwinding of the “higher-rates” trade and send TBF and TBT lower, while “yield-proxy” sectors like utilities and telecom and REITs rebound.  But, I believe that any such trade would just provide an excellent entry point for the larger trend of higher rates.

But, like any good trader, I’m constantly thinking about what would happen that would make me wrong about the direction in bonds.  Well, I thought about this over the weekend and there are three things that can happen that would make my opinion in bonds incorrect.

1. Scenario One:  Japanese & Emerging-Market Debt Enter a Crisis Phase. The swings we’ve seen in emerging-market debt and the Japanese yen have, so far, been volatile but contained.  But, if that volatility increases—and people begin to worry that emerging markets or Japan might lose the ability to sell debt and fund themselves—it would create a crisis. And in a crisis, money flows into U.S. Treasuries, as they remain the “safest” and most-liquid asset in the world. It would be the exact same thing that happened when Europe was in the depths of its crisis.  European investors bought Treasuries for return “of” capital, not return “on” capital.

2. Scenario Two:  Dis-Inflation Becomes “De-flation.” Fed President James Bullard has been one of the most-vocal of the Fed presidents voicing his concern for the low inflation readings globally.  Low inflation, in an environment of massive liquidity, reflects a lack of demand for money and potential deflation.  So, if the five-year inflation expectations on TIPS (one of the best measures of expected inflation), continue to decline—then the Fed will almost certainly abandon “tapering” and may even consider “more” QE.

3. Scenario Three:  The Economy Sees A Summer Swoon—Again.  I was speaking to a subscriber last week and he presented a counter argument from another analyst that basically said we’re in for years of 1%-2% GDP growth, low equity returns, and low bond returns.  So, not quite the 20+ year deflation of Japan, but not that much better, either.  In that scenario, there would be no Fed tapering and likely steady or more QE. Economic data will be the key to watch for this potential scenario.

I remain a bond bear and I believe I’m right on bonds, but I wanted these scenarios on paper so I can watch for them.  Having too much confidence in this business is as dangerous as having too little.