Posts

Economics: This Week and Last Week. February 21, 2017

/in /by

An excerpt from today’s Sevens Report. Subscribe now to get the full report in your inbox before 7am each morning.

Both economic growth and inflation accelerated according to last week’s data, and while the former continues to help support stocks despite a darkening outlook from Washington, the latter also is increasing the likelihood of a more hawkish-than-expected Fed in 2017, and a resumption of the uptrend in interest rates. For now, though, the benefit of the former is outweighing the risk of the latter.

If, however, we do not see any dip in the data between now and early May, I do expect the Fed to hike rates at that May meeting, which would be a marginal hawkish surprise. To boot, if we get a strong Jobs report (out Friday, March 3), then a March rate hike two weeks later isn’t out of the question. Point being, upward pressure is building on interest rates again.

Last Week

Both economic growth and inflation accelerated according to last week’s data.

Looking at last week’s data, it was almost universally strong. Retail Sales, which was the key number last week, handily beat expectations as the headline rose 0.4% vs. (E) 0.1% while the more important “Control” retail sales (which is the best measure of discretionary consumer spending) rose 0.4% vs. (E) 0.3%. Additionally, there were positive revisions to the December data, and clearly the US consumer continues to spend (which is more directly positive for the credit card companies).

Additionally, the first look at February manufacturing data was very strong. Empire Manufacturing beat estimates, rising to 18.7 vs. (E) 7.5, a 2-1/2 year high. However, it was outdone by Philly Fed, which surged to 43.3 vs. (E) 19.3, the highest reading since 1983! Both regional manufacturing surveys are volatile, but clearly they show an uptick in activity, which everyone now expects to be reflected in the national flash PMI.

Even housing data was decent as Housing Starts beat estimates on the headline, while the more important single family starts (the better gauge of the residential real estate market) rose 1.9%. Single family permits, a leading indicator for single family starts, did dip by 2.7%, but even so the important takeaway from this data is that so far, higher interest rates don’t appear to be negatively impacting the residential housing market, and a stable housing market is a key, but underappreciated, ingredient to economic acceleration.

Finally, looking at the Fed, Yellen’s commentary was marginally hawkish, as she was upbeat on the economy, basically saying the nation had achieved full employment and was closing on 2% inflation, and reiterated that a rate hike should be considered at upcoming meetings. None of her comments were new, but the reiteration of them reminds us that the Fed is in a hiking cycle, and the risk is for more hikes… not less.

This Week

The big number this week is the February global flash manufacturing PMI, out Tuesday. With last week’s strong Empire and Philly Surveys, expectations will be pretty elevated for the flash manufacturing PMI, so there is some risk of mild disappointment. On the flip side, if this number is very strong (like Empire and Philly) you will likely see a hawkish reaction out of the markets (dollar/bond yields up) and the expectation for a rate hike before June increases. That, by itself, shouldn’t cause a pullback in stocks, but upward pressure will build on interest rates.

Outside of the flash manufacturing PMIs, the FOMC minutes from the January meeting will be released Wednesday, and investors will parse the comments for any clues as to the likelihood of a March increase. Yet given the amount of political/fiscal uncertainty, and considering the FOMC meeting was before the strong January jobs report and recent acceleration in data, I’d be surprised if the minutes are very hawkish (although given they are dated, I don’t think that not-dovish minutes reduces the chances of a May or even March hike).

Bottom line, the focus will be on the flash manufacturing PMIs, and a good number this week will be supportive for stocks.

Join hundreds of advisors from huge brokerage firms like Morgan Stanley, Merrill Lynch, Wells Fargo Advisors, Raymond James and more… see if the Sevens Report is right for you.

What impact are Trump’s headlines having on markets?

/in /by

Trump makes a lot of headlines, but what actually impacts the market?

After impacting the markets with his comment about a forthcoming “phenomenal” tax plan, the markets have been surprisingly unmoved by any of the headlines coming in from Washington D.C.

This week, we’ve seen stocks focusing on the good economic data (retail sales, Empire Manufacturing) and ignoring the political drama (Trump’s Labor Secretary nominee, Andrew Puzder, withdrew yesterday). Earlier this week, the market also remained steady after the news of National Security Administration Michael Flynn’s resignation.

What might Trump do to impact the market? After campaigning with somewhat hostile trade rhetoric, we’ve the realities of global trade soften his tone a bit. For example, he embraced the “One China” policy of governance over Taiwan. Similarly, so far Trump has resisted instructing the Treasury Department to label China a “currency manipulator” in its semi-annual currency report, due out in late March/early April. That would obviously be bad for stocks.

Find out first and keep your clients and prospects in the know. Sign up for your free trial of the Sevens Report and you’ll get all the market analysis in your inbox by 7am each morning. www.7sReport.com

 

Did One Fund Cause The Rally?

/in /by

Make sense of the rumors FAST. Below is an excerpt from today’s Sevens Report: www.7sReport.com.

Easily the biggest story that circulated trading desks Thursday morning was an article that a $4 billion options fund was blowing up. In doing so, the implication was that is what has caused the relentless really we’ve seen in stocks since last Thursday.

The fund in question is the Catalyst Hedged Futures Strategy, and in a broad sense this fund sells volatility using option strategies.

Did one fund cause this rally?

The story/rumor going around is that this fund sold a massive amount of call spreads, making them effectively short $17 billion worth of S&P 500 Index futures. Well, you can imagine how that’s worked out over the past week, and the takeaway is that this fund has been relentless buying S&P 500 futures over the past week to cover their shorts… and that’s why stocks have surged.

Normally, these stories about funds blowing up and causing a market disruption are little more than rumors created to explain a market that is defying fundamentals. But, markets defy fundamentals in the short term quite frequently without fund blowups.

This, however, is a bit of a unique case, because we can actually see the return data for this fund (it’s an open-ended futures fund). Over the past week, the fund has lost -14%. That has brought its year-to-date return to -13.5%, meaning prior to the last week, the fund was flat year to date. Taking a quick look at historical returns, a 14% weekly move in this fund is not normal, so it’s fair to say that something has gone very wrong there.

Looking more broadly, does the story of this fund explain why the market simply hasn’t been able to go down for a week (and why it suddenly exploded higher last Thursday despite the lack of anything good happening)? Yes, partially.

Even though I can’t directly validate the story, it reinforces my skepticism on this latest move higher from 2,300 in the S&P 500, and that is that this is a rally built on chasing and a squeeze.

 

Skip the jargon, arcane details and drab statistics from in-house research, and get the simple analysis that will improve your performance. Get a free two-week trial of the Sevens Report: www.7sReport.com.

A More Hawkish-Than-Anticipated Federal Reserve: February 15, 2017

/in /by

An excerpt from the Sevens Report. Sign up for a two-week free trial of the full report at www.7sReport.com.

Yesterday I began profiling a couple of non-political risks to explore when making decisions for your clients and talking with prospects. Here’s the second:

Non-Political Risk 2: A More Hawkish-Than-Anticipated Federal Reserve

Profiling this risk seemed only natural, given Yellen’s Humphrey-Hawkins testimony yesterday, and her marginally hawkish comments served as a good reminder that the market is pretty complacent with regards to expected Fed rate hikes in 2017.

Yellen’s comments to the Fed on Tuesday, February 14th, were slightly hawkish.

Starting with Yellen, she was slightly hawkish in her comments mainly because of her upbeat assessment of the economy combined with her reiteration that waiting too long to hike rates would be “unwise,” and that the Fed will consider further increases at “upcoming meetings.” Finally, Yellen repeated that she expects a “few” rate hikes this year (she cited the median dots were three hikes in 2017).

While none of those comments were new, it was a reiteration that the economy is doing relatively well and that the Fed is focused on removing accommodation, and markets reacted slightly hawkishly as the dollar rose while Treasuries declined/yields rose.

From an equity standpoint, the fact that the Fed has not been hawkish so far in 2017 has helped stocks rally, as the 10-year Treasury yield has backed away from the 2.60% level. Above that we believe higher rates will start to become a headwind on stocks. But, there is clearly a risk that rates rise higher than current expectations, and as such we want to profile that risk.

Probability of 3 rate hikes this year (one more than expected)? > 50%. This is my opinion, and it’s higher than the current consensus, but to me it makes sense. If investors think that better growth is going to support the stock market, then why do they expect that acceleration in growth not to invite more interest rate hikes from the Fed? The answer is because the Fed has been ultra dovish for years, but I believe that is changing due to multiple factors.

First, growth is as good as it’s been in years. Second, dis-inflation/deflation is no longer a threat (we think this is an underappreciated change in the macro-economic dynamic). Even in ’13 and ’14, when growth had periods of acceleration, inflation was still trending downward and the Fed was in full QE mode. Now, inflation is trending upwards. Third, the composition of the Fed will change as Trump can nominate three Fed members this year, and it’s a good bet they will be more on the hawkish side. So, while it’s still Yellen’s Fed, the scales should start to tilt toward the hawks later this year.

“Leading Indicators” and, “How do we position if it happens?” sections are restricted to subscribers.

Take advantage of the limited time special offer—if you subscribe to the Sevens Report today, and after the first two weeks you are not completely satisfied, we will refund your first quarterly payment, in full, no questions asked.

Copyright 2017, Kinsale Trading LLC. All Rights Reserved. www.sevensreport.com

Economic Growth Slows: February 14, 2017

/in /by

An excerpt from today’s Sevens Report.

Non-Political Risk #1: Economic Growth Slows.

Stronger economic data remains an unsung hero of this post-election rally, and while Trump gets the headlines, it’s really the economic data that’s enabling this rally as better economic growth is allowing the market to continue to give Trump and the Republicans the benefit of the doubt.

I can go through the litany of reports, but whether it’s PMIs, the Jobs Report, or Business Investment, the data has been accelerating since mid to late 2016, and that’s created the proverbial “rising tide” that’s helped under-write both policy optimism and the rally in stocks.

But, while hope may be growing that there will be less drama from the administration (the reason for Monday’s rally), at the same time there’s growing evidence that actual policy reality will not meet market expectations.

So, in the near term, it’s going to be up to economic data to continue to provide a reason for markets to give Washington the benefit of the doubt, otherwise the sober reality of a market that now trades well over 18X current-year earnings will begin to cause problems.

Bottom line, if economic growth slows in the near term, that will cause a pullback in stocks. So, in today’s Sevens Report for subscribers, I go into detail on: 1) How likely is an economic slow down? 2) What are the leading indicators to watch? and, 3) How do we position if it happens?

First, how likely is an economic slow down? > 50%.

A probability that high may surprise people, but I have several reasons for it: First, we’ve seen an acceleration in economic activity, but we still haven’t really achieved the “breakout” pace of consistent 3% GDP growth that tends to feed on itself and further stimulate the economy. For all the excitement, we’re still in a 2%ish GDP regime (GDP Now from the Atlanta Fed has Q1 GDP at 2.7% in Q1). Point being, things down have to slow very much before the economy is right back in neutral.

Second, the consumer has powered this economic acceleration, but the consumer is tired. Credit creation is slowing, and retail sales reports have been lackluster of late. To boot, the job market remains basically at full employment and while wages are rising, they aren’t rising fast enough to power incremental acceleration consumer spending. Unless we see proof consumers are accessing the equity in their homes, I don’t see what will cause consumer spending to grind higher.

The Citi Economic Surprise Index rose steadily through Q4 of 2016 as economic data consistently beat expectations. Going forward, this index is now an important leading indicator for the market, as any material move back down towards zero will create a headwind on stocks.

Third, business investment has accelerated lately and that is good, but the uncertainty over the tax code changes (and trade in general) has the potential to be-come a headwind on business investment. Here’s my point: The tax changes being discussed in Congress could eliminate interest deductibility and change a host of other tax issues. If I’m a business and I’m thinking of getting a big loan to finance expansion, I’m likely going to wait until there’s more clarity on these and trade issues be-fore taking on too much risk.

Finally, leading indicator of growth for the global economy, China, is actively trying to slow its economy. China’s credit-fueled expansion back in February 2016 marked an inflection point in the global economy and things have been better since. But with a year of stimulus be-hind it, currency issues, and once again overheating property and asset markets, Chinese authorities are trying to cool their economy. The effects aren’t immediate or direct on the US economy, but the fact is that a slow-ing Chinese economy will become a headwind on the US at some point (how much of a headwind depends on how well the cooling is managed).

“Leading Indicators” and, “How do we position if it happens?” sections are restricted to subscribers.

Take advantage of the limited time special offer—if you subscribe to the Sevens Report today, and after the first two weeks you are not completely satisfied, we will refund your first quarterly payment, in full, no questions asked.

Copyright 2017, Kinsale Trading LLC. All Rights Reserved. www.sevensreport.com

The Oil Market: Then and Now

/in /by

The Oil Market: Now and Then

We have included in today’s report a chart that was featured in a Forbes article yesterday regarding the two main influences on the oil market right now: rising US output and OPEC/NOPEC production cuts. At first look, the chart suggests that using hindsight as a gauge, US production lags the rise in rig counts which supports the argument that US production will not rise fast enough to offset the OPEC/NOPEC efforts. But we think that argument is flawed and here is why.

During the last aggressive expansionary phase for US oil production (rising US rig counts/increasing output) which lasted from 2009 to 2014, oil prices were wavering between about $80 and $110/bbl. The correlation between the pace of rig count growth and production growth was rather low as you can see by the difference between the slopes of the two lines in the chart. The likely and simple reason for that low correlation is the fact that there was a lot wild cat drilling, thanks to a surge in industry investment, that turned out to be unsuccessful.

In today’s lower price environment, efficiency is key and exploratory drilling, especially in unconventional areas, is at a minimum while producers focus their time, efforts, and investments on reliable sources of oil with considerably lower lift costs. If this is indeed the case as we believe it is and a good portion of the increasing rig counts that are being reported by BHI are actually DUCs (Drilled but Uncompleted wells) in proven areas, then the relationship between rig counts and production should have a tighter correlation than it did 5-10 years ago.

Bottom line, the fundamental backdrop of the energy market is different right now than it was between 2009 and 2014 and because investment in energy is much lower while the industry remains focused on efficiency, we are more likely to see a tighter correlation between rising rig counts and rising US production which would result in a faster pace of production growth. That in turn would offset the efforts of global producers who are trying to support prices and as a result, leave us in a “lower for longer” oil environment.

 

S&P Holds Key Support Level

/in /by

The S&P 500 fell sharply to start the day yesterday, but a late day rally saw the index reclaim an important support level at 2280 by the Wall Street close.

 

Crude Oil Breakout

/in /by

WTI crude oil futures broke out of a multi-week trading range yesterday and closed just shy of a new 2017 high as a sellers-strike continues ahead of data releases that could confirm (or discredit) proposed global output cuts.

 

Stock Market Update: January 26, 2017

/in /by

Here is a “Stock Market Update” from The Sevens Report: Stocks finally moved Tuesday, as the S&P 500 staged a modest rally following good economic data and well received (but not really positive) political headlines. The S&P 500 rose 0.66%.

stock market updateStocks were flat to start Wednesday trade thanks to generally “ok” economic data from Europe (the European and German flash PMIs were light). There were also a lot of earnings reports, but they were the normal gives and takes, and none of the big companies reporting really moved markets beyond their specific sector (JNJ weighed on healthcare, but that’s it).

After the flat open, stocks started moving higher following a strong January flash manufacturing PMI, and the gains accelerated following several political headlines.

First, the Trump/auto company CEOs meeting was uneventful; then Democrats unveiled a $ 1 trillion infrastructure spending bill, and finally the president signed executive orders to reopen negotiations on the Keystone and Dakota Access pipelines. Stocks hit their highs early afternoon, and the S&P 500 made a new fractional all-time high before backing off just a bit into the close.

Stock Market Update: Trading Color

Yesterday was the first big Trump On day in markets since the first few days of 2017, as small caps and cyclicals handily outperformed.

The Russell 2000 rose 1.5%, more than doubling the S&P 500’s performance while cyclical sectors handily outperformed. Banks (KRE), financials (XLF), industrials (XLI) and basic materials (XLB) all rose more than 1%, with the

latter rising nearly 3% on a big DuPont (DD) earnings beat that pushed the Dow higher (they are heavily weighted in XLB, so the strength there was chemicals based, not commodity based).

Outside of DD earnings there weren’t really any big market movers, with the exception of JNJ weighing on the healthcare sector. XLV dropped 0.70% on the JNJ miss, although the weakness was somewhat isolated as the Healthcare Providers ETF (IHF) rose 0.29%.

Most of the remaining SPDRs we track were up about 0.60% (including consumer staples, which traded pretty well), although utilities were only fractionally higher on the rise in bond yields.

Bottom line, none of the political actions mentioned yesterday were surprises, but overall it was a generally business friendly day of headlines from Washington. That, combined with the PMIs, helped stocks rally.

 

S&P Chart: Strikes New All-Time High

/in /by

S&P Chart: “A new high” is the oldest confirmation signal of a bull market in technical analysis and the S&P reached a new all-time high yesterday leaving the path of least resistance higher still from here.