Don’t Forget About the DOW

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Interestingly, the Dow was a big outperformer on the day (up .76%), and usually when that happens there is one stock that is up several percentage points that skews the average.  Interestingly, that was not the case on Monday, as the strength in the Dow was evenly spread across many of the index components (TRV, The Travelers, was the best performing stock in the index up just 1.79%).

The Dow is now up 5.76% for the year, about half of the S&P 500.  The reason for this underperformance has to do with the sectors that have rallied the most year to date (Tech and Financials) which are more heavily weighted in the S&P than in the Dow (plus the Dow doesn’t have AAPL).

But, the outperformance today should be noted.  If we are heading into a period of concern/weakness in the markets, the sturdy, somewhat stodgy, industrial companies in the Dow, with strong cash flows, good yields, and decidedly less economically sensitive businesses, will outperform.

If investors are concerned about the market trading like it’s 2011, then perhaps it’s helpful to look at what worked in 2011.  Keep in mind, in 2011 the Dow finished up 5.5%, while the S&P was flat, and the NASDAQ fell 1.8%.

 

Government Waste and Taxes

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I was watching the coverage of the Republican primary results on Tuesday night, and as I was channel surfing I came across Bill O’Reilly’s talking points memo with which he opens each show. I have mixed emotions about Mr. O’Reilly—his understanding of markets and economics leaves something be desired, but generally speaking his talking points memos are pretty good.

The one on Tuesday night was focused on a conference that a government agency called the General Services Administration held outside of Las Vegas that cost the tax payers $820,000 for 300 attendees!

First, I didn’t even know we had a “General Services Administration” but apparently it’s been around for a while (President Truman created it) and it seems to be a sort of procurement arm of the Federal government.

Regardless, the agency spent $820,000 on this conference which consisted of $146,000 on catering and $130,000 to scout the location!

To be fair, upon hearing of this President Obama promptly fired the head of the agency, but this is anecdotally representative of why some people so vehemently hate paying taxes.

I think most rationale people realize we all need to pay taxes—we need a military, roads, the FAA, inspection of our food, etc. I don’t think most people mind paying for those things.

What they do mind is having their hard earned money pissed away by a bunch of people who seems to have no regard for the effort it took to earn that money. It’s a respect and waste issue, and it’s been going on for years—well beyond the current administration, although I think they’ve exacerbated the problem.

I believe it would be a good idea to make everyone in the country pay their taxes by writing a check each quarter, just like I have had to at different points in my career, and which I do presently.

It’s one thing to have your taxes automatically deducted from your paycheck as so many do—human psychology makes it so that you really don’t even notice the cost. They money was never in your account, so you don’t really miss it when it’s gone.

But, to write a check to the U.S. Treasury—and to have that check be the biggest check you have written the entire year (most likely) and to get no direct benefit for writing it (as opposed to spending that same amount of money on a TV or boat or something) is a totally different story. It makes you appreciate that taxes are real money that is yours—it’s not just some numbers on a statement that you don’t ever receive.

Then, to know that much of that large amount of money that is coming out of your savings account will be wasted by a bunch of jack asses paying 130k to scout a 5 star hotel to have some convention, makes you want to scream in anger.

I believe waste is at the heart of the tax debate, and why so many in this country don’t want their taxes raised. It’s not that they don’t mind paying their fair share—it’s that they don’t want even more of their money being completely and utterly wasted.

The utter disregard and lack of respect for the people’s money is at epidemic levels in this country, as evidenced by the explosion of government spending over the last ten years, and sadly it continues unabated. What a disgrace.

 

 

Takeaway from Hawkish Fed Minutes

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The bottom line of the minutes from The Fed’s March meeting was that there is little probability of the Fed doing any additional stimulus unless the economic data weakens.

In particular, this is the sentence that got markets moving: “A couple of members indicated that the initiation of additional stimulus could become necessary if the economy lost momentum or if inflation seemed likely to remain below two percent.”

The important part of that statement is “could become necessary” which signals that the committee does not view any additional QE as necessary at the moment.

Effect

The minutes had a big effect on markets. Stocks were already lower heading into the release, but fell sharply post release (Dow down over 100 points) as the realization hit traders that, for now, additional accommodation is off the table.

The U.S. dollar, Euro, Gold and Treasuries were also big movers off the release, as Gold and the Euro fell hard, while the U.S. Dollar and Treasury yields moved sharply higher.

Takeaway

I had said in Monday’s issue, and throughout last week, that I thought the market had misinterpreted Bernanke’s testimony from last Monday and that is wasn’t signaling additional QE. That turned out to be correct.

For a market that has become addicted to quantitative easing and accommodation from the Fed, this news is obviously disappointing in the short term.

But, we need to see the forest for the trees here. The Fed doesn’t see the need to do additional QE because the economy appears to be getting stronger and it isn’t needed.

That is a good thing for stocks if we look beyond the very short term. It is also a good thing for commodities, even through it doesn’t look like it right now. The reason is because The Fed is not going to raise rates any time soon, and we can expect the inflationary implications of The Fed’s previous actions to begin to filter through the economy, and continue the re-inflation that has already begun.

This is a time to use short term weakness to establish a position in equities and commodities. I’m not saying to do it today, as we probably have some more selling to be done—but I will view any decline in the commodities markets based on the disappointment of less stimulus as a buying opportunity. Get your shopping list ready.

 

Bernanke Comments Don’t Signal QE3

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The market took this speech as dovish, and expectations for QE3 rose slightly. I, however, don’t particularly find the comments “dovish.” Anyone who knows to watch the average work week component in the monthly jobs data knows that we’re not seeing additional hiring because of expanding economic conditions.

Bernanke, in my opinion, just said out loud what many already know. The labor market is getting better, but it isn’t healed, and it is still very fragile.

For a while we’ve known that Bernanke and the Fed are data dependent, and if the data gets worse, they’ll be more accommodative.

We knew this coming into the speech: If the economic data gets worse, the Fed will be quick to move with more accommodative policy. If the data gets better, the Fed will be much slower to raise rates. That was the reality we all knew before the speech, and I believe that is the reality after the speech.

 

 

Steepening Yield Curve a Bullish Sign for Bank Stocks

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As you probably know, the banking sector has been one of the best performing of the year (up 28% year to date). I think it’s safe to say that the banks have probably become a bit overbought here, and that a correction of some sort is due. So, if you’re not already long the banks, it would be foolish to buy them here.

But, that short term overbought situation aside, one of the things that has been happening lately, that is very bullish for banks, is that the yield curve has been steepening for the first time in a while.

The difference in yield between the 10 year government bond and the two year government bond has risen sharply so far this year, and that speaks directly to banks “Net Interest Margin.“

As you probably know, banks make money by borrowing short term at low rates, and lending long term at high rates. That difference is called the Net Interest Margin, and that’s the profit the bank earns.

Well, as the yield curve steepens, the net interest margin of banks increases. So, despite the potential of a decline in the short term, the underlying fundamentals are turning more positive for banks, and a decline in the banks should be viewed as a long term buying opportunity.

Finally, while a steepening yield curve is bullish for bank stocks, there is actually an ETN that you can buy that actually rises as the yield curve itself steepens. The ETN symbol is STPP. Seems like there’s an ETF (or ETN) for everything these days.

 

Important Shift in Yields

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While everyone was focused on equities yesterday, I think the most important market movements we saw yesterday came from the 10 and 30 year treasuries.

It looks at though 10 and 30 year yields have finally, after months, broken out to the upside.  As I’ve said repeatedly, getting long yields is going to be one of those “trades of a lifetime” but the trick is you’re got to be patient.

It looks to me like yields have finally broken out to the upside, and with the fundamentals of a less accommodative/more hawkish Fed, the technical and fundamentals are in line.

I’ve been faked out too many times on this trade so I’ll wait for another close or two before putting a position on, but it looks like the time is finally near to get long yields.

The above is an excerpt from the Sevens Report. To read the entire article and to receive daily commentary on all major markets and market moving economic and geo-political events, sign up today to request a free 2-week trial of the Sevens Report.

 

Greece Recap and Preview – Watch the Deadlines

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The net/net of Thursday’s news on Greece is that the Greek government has agreed to the troika’s austerity demands.  However, the European financial ministers now say the deal isn’t done, and that there won’t be a formal announcement this week.

The best way to keep an eye on this theatre of the absurd is to look to the deadlines, as we can reasonably guess the various groups will get their act together by then . . .

The above is an excerpt from the Sevens Report. To read the entire article and to receive daily commentary on all major markets and market moving economic and geo-political events, sign up today to request a free 2-week trial of the Sevens Report.

So There’s Just One More Thing About Greece

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Just when you thought it was safe to finally stop paying attention to Athens, we have a pretty important event occurring on Thursday of this week with regards to the Greek bailout.

Thursday is the day that private Greek bond holders have to agree to exchange their current bonds for longer dated bonds with lower interest rates.

This is important for two reasons:  First, unless 66% of the private bond holders agree to the voluntary swap, the entire debt renegotiation is void (and so is the Greek bailout, because the private bond holders are an integral piece to the entire package).  Second, if less than less than 75% of the private debt holders agree to the voluntary swap, that will trigger “Collective Action Causes.”

CAC’s are basically laws passed in the Greek Parliament last week that would force those private bondholders to swap their debt, voluntary or not (it would basically say they aren’t going to pay the old bonds and instead will pay them what the new bonds state) . . .

The above is an excerpt from the Sevens Report. To read the entire article and to receive daily commentary on all major markets and market moving economic and geo-political events, sign up today to request a free 2-week trial of the Sevens Report.

A Quick Note on the Expiration of the ECB’s LTRO’s

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I’ve been saying for a while now that one of the most important events of the week was the expiration of the ECB’s LTRO’s that occurred Wednesday.

Like goldilocks, the demand for the 1% loans for 3 years from European banks was almost perfect at a little over 500 billion Euro’s.  It wasn’t too little (if so, the market would think that banks might need it later) and it wasn’t too much (if so, the market would think things were worse than they appear) . . .

The above is an excerpt from the Sevens Report. To read the entire article and to receive daily commentary on all major markets and market moving economic and geo-political events, sign up today to request a free 2-week trial of the Sevens Report.

 

The Consumer Financial Protection Bureau

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The recently formed Consumer Financial Protection Bureau released an email on Wednesday that showed its intent to begin an inquiry into bank’s checking account courtesy overdraft practices.

In the announcement, the group cited a 2008 study that found just under 10 percent of bank customers incurred more than 80 percent of overdraft fees.

In what must have been a shocking discovery to them, the vast majority of those people were young customers and those with low incomes.

In fact, the number one reason for the inquiry is the fact that courtesy overdraft fees disproportionately affect those two groups, again those with low incomes and young people . . .

The above is an excerpt from the Sevens Report. To read the entire article and to receive daily commentary on all major markets and market moving economic and geo-political events, sign up today to request a free 2-week trial of the Sevens Report.