Archive for August 15th, 2012
Summarizing America’s Record Drought In One Picture
Wednesday, August 15th, 2012
No commentary necessary. Click for better image.
Source: USDA
Tags: Necessary Source, Record Drought, Usda
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Market Outlook: Risk On Thursday
Wednesday, August 15th, 2012
Cisco
Well, miracles do still happen, that dog of a stock for the last (too long to count) actually beat for the quarter, yes I am talking about Cisco. Cisco quarterly reports often send the market down 200 points; they have woefully underperformed the market by a large margin. Not only did Cisco have a good quarter in this environment, but they raised their dividend by 75%. Can you say short squeeze tomorrow? If all goes well in the conference call with reasonable guidance, and given the preview on CNBC, expect a big Risk On day tomorrow for equities.
Chart Source: Yahoo Finance, Aug. 15, 2012
In fact, because we are right up against resistance in several markets such as Oil, Bonds and the S&P, the volume should finally pick up and some key resistance levels could get blown through on Thursday. Cisco is one of those bellwether stocks that either lifts or plunges the rest of the market; expect a nice pop at the opening as shorts are pushed a little outside their comfort zones on Thursday.
The next question is whether tomorrow`s potential rally if it does play out as I anticipate will be a rally that can finish the day on the highs or is a prime candidate for the fade team to come in at the highs and sell into with gusto. But hey one miracle at a time, what`s next HP beating and having a good quarter as well? That`s probably too much to ask for but if they do the shorts could get a much higher entry point.
Oil Markets
Other things to watch out for on Thursday are if Crude Oil can take the next leg up after a bullish inventory report. If WTI breaks above $95 on Thursday then the $100 level is in play again with that range being from $92 to $99.70 yes remember that range. Gas prices have been going up, not sure who is buying all this gas, but inventories are starting to get stretched.
Chart Source: FT.com, August 15, 2012
My first impression is that the US is now exporting more gas than previously as an arbitrage play with cheaper WTI versus Brent being attractive for exports in the southern region of the US. But whatever the case, whether Iran Oil has really been off the grey market it cannot be denied that US refineries are running like crazy and we have lopped off 20 million barrels off the Oil inventory picture in short fashion.
So watch Crude Oil, as Brent is already moving towards pricing in an Iranian escalation of tensions and seems headed towards $120 a barrel relatively quick. Some trial balloons in the media seem to be taking hold coming out of Israel, stay tuned to this circus show as it could get quite scary and provide some interesting election fodder for the candidates.
Bonds
Well, the 10-year is bumping up against the 1.8% area, let`s watch tomorrow for some continuation of this move with traders getting pushed to some extent, and does a big move tomorrow push some safe haven capital into riskier assets on Thursday. The bond market could steal the show at the opening as that trade is so crowded I would hate to see even a glimpse of what that repositioning might look like with its derivative effect playing out for Risk Assets.
Chart Source: Yahoo Finance, August 15, 2012
All in all, we should expect much higher volumes on Thursday with some key levels tested in some pivotal markets, much better than the snooze fest of the past three days. When in doubt follow the price!
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Tags: Arbitrage, August 15, Chart Source, Cnbc, Conference Call, Crude Oil, First Impression, Gas Prices, Gusto, Inventories, Inventory Report, Market Outlook, Miracles, Oil Bonds, Oil Markets, Prime Candidate, Quarterly Reports, Resistance Levels, Short squeeze, Wti
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Asset Class Correlations in 2012 (Bespoke)
Wednesday, August 15th, 2012
Below we have updated our asset class correlation matrices for 2012 and over the last ten years. The correlations are based on daily percentage moves. A correlation of 1 means the two asset classes move exactly inline with each other, while a correlation of -1 means they move in the exact opposite direction. A correlation of zero means there is no correlation between the two. We also created a matrix that subtracts the correlations over the past ten years from the correlations in 2012 so you can see whether relationships between the various asset classes have gotten stronger or weaker in 2012.
So far in 2012, the Industrials sector has been the most closely correlated with the S&P 500 as a whole, while the two sectors that have been most closely correlated with each other are Materials and Industrials. Utilities has been the least correlated sector with the S&P 500 in 2012, and the two sectors that have been the least correlated with each other so far this year have been Utilities and Technology.
Unsurprisingly, Energy is the sector that has been the most closely correlated with oil in 2012, while Telecom has the lowest correlation with oil. Materials has been the most closely correlated sector with gold. Both gold and oil have been inversely correlated with the dollar. The two most inversely correlated asset classes in 2012 have been the S&P 500 and the long bond at -0.62. So when interest rates are down, the market is usually down as well, and vice versa.
If we compare the correlations so far in 2012 to the correlations over the past ten years, we see that the inverse correlations between the long bond and stocks as well as the dollar and stocks have gotten more extreme. Both Telecom and Utilities have seen their correlations with the S&P 500 and the other eight sectors drop quite a bit as well. So if you’re overweight these two sectors, you’ve really outperformed on down market days, and you’ve underperformed on market up days. The two sectors that have seen their correlations increase the most with each other in 2012 have been Financials and Energy. Finally, both gold and oil have seen their correlations with the S&P 500 and all ten sectors increase significantly this year. In this regards, the gold protection trade hasn’t been working as well as gold bugs would like.
Bespoke’s wealth management arm offers an all-ETF asset allocation portfolio for investors looking for a balanced approach. To learn more, visit http://bespokepremium.com/mm.
Copyright © Bespoke Investment Group
Goldman Pulls the Plug on More QE in 2012
Wednesday, August 15th, 2012
One of the most vocal advocates of a NEW QE announcement next month, at either the FOMC meeting or Jackson Hole – Goldman Sachs – has just pulled the plug. From Jan Hatzius: “The US economic data continue to look a bit stronger. Tuesday’s retail sales report for July beat expectations, while inventory accumulation showed a further slowdown in June. Our Q3 GDP tracking estimate edged up to 2.3%. The recent news also has implications for Fed policy. While QE3 at the September 12-13 FOMC meeting remains possible, our best estimate is that it will take until late 2012/early 2013 before Fed officials return to balance sheet expansion.” Just as we have been saying. Which means the Fed is now out of the picture until the end of 2012. And with corn prices where they are, so is the PBOC. As for the ECB – talk to Rajoy, who will do nothing as long as 10 Year yields are under 8%. Which means that, as explained previously, Spain and Italy, and in fact the entire world, must all be destroyed first, before they are saved.
Full Goldman note:
The US economic recovery remains sluggish, but we believe that it will pick up a bit in coming months. Tuesday’s data were generally in line with this expectation:
1. Stronger retail sales. The July retail sales report showed a clear upside surprise, with a 0.9% gain in sales excluding autos, building materials, and gasoline. The month-to-month strength was broad-based, with sizable gains in most core categories, although it mainly served to reverse some of the declines in the prior month.
2. Slower inventory accumulation. Inventory accumulation has slowed clearly in recent months, with book-value business inventories up just 0.1% in June, down from a peak of 0.8% in January. We believe that this slowdown has been partly responsible for the disappointing performance in manufacturing surveys such as the ISM and Philly Fed. If it is ending, that should help the manufacturing sector over the next few months.
Our proprietary measures of US economic growth have also picked up a bit further. Our Q3 GDP tracking estimate rose to 2.3% from 2.2%, our current activity indicator (CAI) now stands at 1.2% in July after 1.1% in June, and our US-MAP index of US economic data surprises is moving quickly further toward neutral readings on a 60-day exponential moving average basis.
The recent news on the pace of the recovery also has implications for Federal Reserve policy. To be clear, our own view remains that there is a very solid case for additional accommodation under the Fed’s dual mandate of maximum employment and 2% inflation. And we do believe that Fed officials will ultimately decide to ease policy further.
However, in contrast to a number of other forecasters, we do not expect a move to QE3 at the September 12-13 FOMC meeting. Although Fed officials clearly adopted a strong easing bias at the July 31-August 1 FOMC meeting, we do not think that this amounts to a pre-commitment to QE3. Instead, we believe that continued weakness is necessary to prompt a substantial easing move. And so far, that weakness is not showing up in the data. Among the top-tier indicators released since the meeting, only the July ISM manufacturing index was a (modest) disappointment. In contrast, the July employment report was at worst a split verdict, the July nonmanufacturing ISM was a bit better than expected, jobless claims have surprised on the low side over the past few weeks, the June trade deficit showed an unexpected decline, and the July retail sales report surprised on the upside.
Other factors have also, at the margin, swung against the expectation of aggressive near-term easing. The inflation outlook has become a bit cloudier in the wake of the recent recovery in commodity prices; while Tuesday’s upside surprise on producer prices was largely driven by volatile sectors such as vehicles and tobacco, underlying price pressures were also a touch firmer than we had expected. Moreover, our GS financial conditions index has now fully unwound the tightening seen in the second quarter, and we have found previously that the meeting-by-meeting probability of Fed easing is quite sensitive to financial conditions.
To be sure, the uncertainty around the near-term trajectory of Fed policy remains substantial. Several FOMC meeting participants, specifically Presidents Evans, Rosengren, and Williams, are making the case for additional easing via potentially open-ended balance sheet expansion. And it might well be that Chairman Bernanke will use his speech at the upcoming Jackson Hole Symposium to explain why the Fed’s mandate calls for further accommodation in the near term. We will be receptive to these messages and will review our monetary policy forecasts as needed. But our call remains that the return to QE will not happen until late 2012/early 2013, and at the margin the recent data have made us a bit more confident.
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Pressure on Long Bonds Tailwind for Dividend Stocks (or High Yield Bonds)
Wednesday, August 15th, 2012
by Don Vialoux, TimingtheMarket.ca
(Editor’s Note: Mr. Vialoux is scheduled to appear on BNN’s Market Call today at 1:00 PM)
Interesting Chart
U.S. long term bond prices have come under significant pressure during the past three weeks. Weakness comes at a time when U.S. equity markets have been moving higher. Early evidence that investors are switching from low yield Treasuries into higher yield equities!
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Heating Oil Futures (HO) Seasonal Chart
Example of a Leibovit Volume Reversal Signal on Ford
S&P 500 Index during Presidential Election Years When The Race Is Close By Mid-August
Recent election polls show that the race this year is close. Similar situations occurred in 1992, 2000 and 2008. Following are charts for those years. Notice the tendency for U.S. equity markets to move lower from August to October followed by an upside move following the election. History is about to repeat.
Disclaimer: Comments and opinions offered in this report at www.timingthemarket.ca are for information only. They should not be considered as advice to purchase or to sell mentioned securities. Data offered in this report is believed to be accurate, but is not guaranteed.
Don and Jon Vialoux are research analysts for Horizons Investment Management Inc. All of the views expressed herein are the personal views of the authors and are not necessarily the views of Horizons Investment Management Inc., although any of the recommendations found herein may be reflected in positions or transactions in the various client portfolios managed by Horizons Investment Management Inc
Horizons Seasonal Rotation ETF HAC August 14th 2012
Tags: ETF, ETFs, Seasonal, Seasonal Trades, Seasonality
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S&P 100 Index Approaching its Trendline Resistance (August 15, 2012)
Wednesday, August 15th, 2012
by Don Vialoux, EquityClock.com
Upcoming US Events for Today:
- Consumer Price Index for July will be released at 8:30am. The market expects an increase of 0.2% versus no change (0.0%) previous. Core CPI is expected to show an increase of 0.2%, consistent with the previous report.
- The Empire Manufacturing Survey for August will be released at 8:30am. The market expects 7.00 versus 7.39 previous.
- Treasury International Flows for June will be released at 9:00am.
- Industrial Production for July will be released at 9:15am. The market expects an increase of 0.5% versus 0.4% previous. Capacity Utilization is expected to show 79.2% versus 78.9% previous.
- The NAHB Housing Market Index for August will be released at 10:00am. The market expects no change at 35.
- Weekly Crude Inventories will be released at 10:30am.
Upcoming International Events for Today:
- The Bank of England Minutes will be released at 4:30am EST.
- Great Britain Jobless Claims Change for July will be released at 4:30am EST. The market expects 7,000 versus 6,100 previous.
The Markets
Markets ended mixed, yet again, on Tuesday as enthusiasm surrounding better than expected economic data in the US failed to carry equities throughout the day. Retail Sales for July were reported to be significantly better than expected, increasing by 0.8% over the course of the month compared to analyst estimates of a gain of only 0.3%. However, as Zerohedge.com points out, seasonal adjustments were a significant factor behind the report as retail sales actually declined by 0.9%. Seasonal adjustment skew in economic data has been rather ubiquitous for the majority of the year due to factors such as weather and trends in economic data from previous years providing a distorted comparable. Data is expected to become more normalized as we near the Fall months.
As equity benchmarks, such as the S&P 500 and Dow Jones Industrial average, start to show signs of resisting around year-to-date highs, the S&P 100 Index charted a new 4-year high on Tuesday at 648.78, although ending slightly off of this level by the closing bell. The S&P 100 is composed of the largest and most established companies in the world, with stock prices that are usually less volatile than the overall market. As a result of the low beta composition, it is no wonder that investors are flocking to these “mega-cap” stocks during this period of uncertainty. The benchmark has been outperforming the S&P 500 for the past year as a result of the approximately 2% dividend yield, which is better than the yield on 10-year treasury notes. The benchmark is now approaching the upper limit of a multi-year declining trend channel that dates back to the all-time highs for this index in 2000. Another benchmark at or near trendline resistance.
Sentiment on Tuesday, as gauged by the put-call ratio, ended bullish at 0.82.
S&P 500 Index
Chart Courtesy of StockCharts.com
TSE Composite
Chart Courtesy of StockCharts.com
Horizons Seasonal Rotation ETF (TSX:HAC)
- Closing Market Value: $12.40 (up 0.32%)
- Closing NAV/Unit: $12.37 (unchanged)
Performance*
| 2012 Year-to-Date | Since Inception (Nov 19, 2009) | |
| HAC.TO | 1.56% | 23.7% |
* performance calculated on Closing NAV/Unit as provided by custodian
Click Here to learn more about the proprietary, seasonal rotation investment strategy developed by research analysts Don Vialoux, Brooke Thackray, and Jon Vialoux.
The Rise of Brazil’s Middle Class
Wednesday, August 15th, 2012
by Mark Hanna, Market Montage
With the Summer Olympics over, the only thing standing between Brazil on the world stage for a bevy of major sporting events is Russia in 18 months. After that Brazil will be hosting both the World Cup in 2014 and the Summer games of 2016. So this country will definitely be introduced to the world stage. Every country attempts to grow it’s economy in various ways, and Brazil’s latest efforts have been a combination of reliance on natural resources combination with a type of redistribution of wealth that would not do very well in the American political spehere. But after decades of extreme polarization in its wealth distribution, the growth of the middle class is bringing many new opportunities. However, to a country which has gone head first into debt funded spending – some pitfalls also are being seen. The AP takes a closer look:
- …an estimated 40 million people such as Costa have joined the ranks of Brazil’s middle class between 2003 and 2011, according to the Fundacao Getulio Vargas economic think tank, providing them with enormous purchasing power and sparking businesses to come up with new marketing techniques to woo them.
- For most of its modern history, Brazil has been a nation of the starkest economic divides: Super rich, super poor. Businesses that sold anything but the most basic items trained their sights on the upper strata.
- Now, Brazil is a major player in a global economic shift that is seeing formerly “developing” nations morph into “middle income” countries — where a burgeoning middle class is driving a boom in business to capitalize on the sea change. From gyms to hair salons, travel agencies to home appliance stores, “everyone wants to dance with the new middle class,” a recent opinion article in the Folha de S. Paulo daily said.
- The metamorphosis is largely the product of a decade of mostly solid economic growth and an array of cash-transfer social programs that pay Brazilians a stipend for meeting social goals, such as keeping their kids in school.
- The economic think tank defines the middle class, or Class C as it’s known here, as households with monthly incomes of $600 to $2,590. In 1993, just over 45 million people were considered Class C. In 2011, their ranks had swollen to more than 105 million — accounting for 46 percent of the country’s buying power.
- In 2000, 4.2 million small businesses had less than 100 employees, according to the Brazilian Support Service for Micro and Small Businesses, a private industry group. A decade later, 6.1 million small businesses had such workforces, and the number of larger businesses doubled to 60,000.
- In beauty-obsessed Brazil, straight, white teeth are almost as much of a status symbol as fast cars. So braces, along with computers, cell phones and college degrees, often count among the newly minted middle class’ first investments, said marketing specialist Meirelles. “For a long time, braces were seen as something that was reserved for people in Ipanema or Leblon,” said Temido, referring to two of Rio’s most chic, highest-rent neighborhoods. “Our innovation was to introduce techniques that made it possible to make care both high-quality and affordable.”
- With Brazil’s commodity-driven growth slowing over the last year, the government is looking to domestic consumers, particularly the Class C, to spur on the economy. The Central Bank has slashed a benchmark interest rate to a record low, hoping it will spark consumer spending by generally making credit more available.
- But skeptics worry that the new consumers are already too indebted to shoulder the lion’s share of future growth. Economists estimate 20 percent of Brazilians’ household monthly income goes to debt payments, and the Serasa Experian credit rating agency said that in the first half of 2012, consumer defaults in Brazil were 19.1 percent higher than in the same period last year.
Minimum Volatility: Bowling with Bumpers
Wednesday, August 15th, 2012
by Russ Koesterich, Chief Investment Strategist, iShares
A few weeks ago, I was sitting on an industry panel with a financial advisor who was talking about his client experiences over the last couple of years. He mentioned that market volatility has driven many of his clients away from investing in the equity markets, but that minimum volatility ETFs (such as the iShares MSCI USA Minimum Volatility ETF – USMV) have provided them with a way to dip a toe back in the markets without taking on an uncomfortable amount of risk. The advisor compared these funds to “bowling with bumpers.”
I thought this was a great analogy, and not only because I’m a terrible bowler. The concept of most of these minimum volatility ETFs (or min vol, as we call them around here) is that they track indexes that seek to capture the broad equity market with a reduced amount of volatility. By minimizing volatility, these indexes seek to provide better risk-adjusted returns and protect against some of the downside risks that occur in the market from time to time.
In the chart below, the red line represents the VIX Index, also referred to as the “fear index”, which is commonly used to reflect market volatility. The blue bars in the chart represent the monthly performance difference between the MSCI USA Minimum Volatility Index and the S&P 500. When the blue bar is above the zero percent axis, the min vol index is outperforming the S&P 500. Conversely when the blue bar is below the 0 axis, the min vol index is underperforming.
When volatility is rising, equity markets have typically faltered because there is a lot of fear in the market. As you can see from this chart, when the VIX was rising, the min vol index was usually outperforming the S&P 500. In other words, when the equity markets were dropping, the min vol index acted as a cushion in these volatile markets, providing stronger relative performance. However, when fear started to ease out of the market and the VIX began to decline, the S&P 500 generally outperformed the minimum volatility index.
So if a min vol strategy tends to outperform the broader equity markets when volatility is on the rise, yet underperform when volatility abates, wouldn’t it just be a wash? Not so fast. The chart below shows the performance of the same two indexes over the same time period with both set to a base value of 100 points. Here you can see that by limiting the downside during some of the deepest troughs of a volatile market, the min vol index was better able to capitalize on a rebound.
My colleague and fellow iShares blogger Daniel Morillo has talked about the low risk anomaly in the past. Basically, this anomaly leads to the idea that from a performance measurement standpoint, minimum volatility indexes have captured a greater percentage of the upside than they have on the downside. For example, based on the monthly index returns in the second chart, the min vol index captured about 77% of the upside of the market, yet only captured about 61% of the downside. Furthermore, it did so with roughly 25% less risk than the S&P 500 (measured by standard deviation), creating a smoother ride and superior risk-adjusted returns.
And this is why I like the “bowling with bumpers” analogy. Minimum volatility indexes seek to minimize the effects of the occasional gutter ball, allowing investors to focus more on their long-term investment objectives – the pins at the end of the alley.
Source: Bloomberg
Daniel Prince, CFA, Vice President, is a member of the iShares ETF Due Diligence Team. The team reviews models, recommended lists and platforms for partner firms and delivers collaborative and timely information on new product, product enhancement, educational and competitive intelligence content.
Mr. Prince’s service with the firm dates back to 2007, including his years with Barclays Global Investors (BGI), which merged with BlackRock in 2009. At BGI, Mr. Prince was a senior sales strategist for the US iShares Sales Strategy team. Prior to joining BGI, Mr. Prince was a senior analyst at Wilshire Associates.
Mr. Prince holds the Chartered Financial Analyst designation and is a member of the CFA Society of San Francisco. Mr. Prince earned a BS degree in business administration from the Haas School of Business at UC Berkeley in 2003
The iShares Minimum Volatility Funds may experience more than minimum volatility as there is no guarantee that the underlying index’s strategy of seeking to lower volatility will be successful.
Index returns are for illustrative purposes only and do not represent actual iShares Fund performance. Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results. For actual iShares Fund performance, please visit www.iShares.com or request a prospectus by calling 1-800-iShares (1-800-474-2737).
Tags: Koesterich
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From Wicked Volatility to None
Wednesday, August 15th, 2012
by Mark Hanna, Market Montage
After a late spring and summer of wicked volatility, the market has gone on snooze since a week ago Monday. It appears once the market reassessed Draghi’s comments the Friday after the ECB meeting, everyone has gone on vacation – volume has dried up (yesterday second lowest volume of the year), and the S&P 500 has moved in a relatively small range of 15 points or less for six sessions. Frankly a welcome change from the rollercoaster since April. The closely watched volatility index has also fallen sharply as the global central banker put appears to have calmed everyone. At 13.70 the VIX is at the lowest level post financial crisis era – it hasn’t seen this level since July 2007. This morning appears to be the first there will be a more than modest movement in markets as a slightly overbought condition has been worked off via time rather than price.
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