Archive for October 24th, 2012
Monetary Cliff? (Merk)
Wednesday, October 24th, 2012
by Axel Merk, Merk Funds
As the presidential election is rapidly approaching, little attention seems to be getting paid to the question that may affect voters the most: what will happen to the “easy money” policy? Federal Reserve (Fed) Chairman Bernanke’s current term will expire in January 2014 and Republican candidate Mitt Romney has vowed that if elected, he would replace Bernanke. Given the tremendous amount of money the Fed has “printed” and the commitment to keep interest rates low until mid-2015, the election may impact everything from mortgage costs to the cost of financing the U.S. debt. Trillions are at stake, as well as the fate of the U.S. dollar.
Should Obama be re-elected, Bernanke might continue to serve as Fed Chairman; other likely candidates include the Fed’s Vice Chairman Janet Yellen and Obama’s former economic advisor Christina Romer. With any of them, we expect the Fed policy to be continuingly dominated by the dovish camp, and moving – with varying enthusiasm depending on the pick of Fed Chair – towards a formal employment target, further diluting any inflation target. We are not only talking about Bernanke and the other two candidates’ individual policy stances (though all three are known as monetary “doves”, i.e. generally favoring more accommodative monetary policy), but also the composition of voting members of the Federal Open Market Committee (FOMC), as we will discuss below.
If Romney were to be elected, a front-runner for the Fed Chairman post is Glenn Hubbard, Dean of Columbia Business School and a top economic adviser to Romney. Hubbard has expressed his skepticism about the mechanism that Bernanke used to boost the economy. In our analysis, an FOMC led by Hubbard (or another Romney appointee) will be leaning toward mopping up the liquidity sooner. Extending forward guidance to mid-2015 will also be under question. It will no doubt add uncertainty to monetary policy and increase market volatility.
More importantly, however, a “hawkish” Fed Chair, i.e. one that favors monetary tightening, might put to the test Bernanke’s claim that he can raise rates in “15 minutes”. Technically, of course, the Fed can raise rates by paying interest on reserves held at the Fed or sell assets acquired during various rounds of quantitative easing. The challenge, no matter who the Fed Chair is going to be, is the impact any tightening might have on the economy. Bernanke has cautioned many times that rates should not be raised before the recovery is firmly “entrenched.” What he is referring to is that market forces may still warrant further de-leveraging. If the stimulus is removed too early, so Bernanke has argued, the economy might fall back into recession. A more hawkish Fed Chair, such as a Glenn Hubbard, may accept a recession as an acceptable cost to exit monetary largesse; however, because there is so much stimulus in the economy, just a little bit of tightening may well have an amplified effect in slowing down the economy. Keep in mind that European countries are complaining when their cost of borrowing rises to 4%, calling 7% unsustainable. Given that the U.S. budget deficit is higher than that of the Eurozone as a whole, and that our fiscal outlook is rather bleak, it remains to be seen just how much tightening the economy can bear. Our forecast is that with a Republican administration, we are likely to get a rather volatile interest rate environment, as any attempt to tighten may have to be reversed rather quickly. Fasten your seatbelts, as shockwaves may be expressed in the bond market and the “tranquility” investors have fled to by chasing U.S. bonds may well come to an end. Foreigners that have historically been large buyers of U.S. bonds may well reduce their appetite to finance U.S. debt, with potentially negative implications for the U.S. dollar.
Let’s dig a little deeper and look at who actually decides on interest rates: it is the voting members of the FOMC that ultimately make the imminent monetary policy decisions, rather than the noise creating pundits and non-voting members.
Three factors will further boost the dovish camp, which already dominates the FOMC committee:
- Two previously vacant seats on the Fed’s Board of Governors were recently filled by Jeremy Stein and Jerome Powell this May. Like other board governors, both Stein and Powell appear to be in favor of Bernanke’s dovish policy. Stein was a Harvard economics professor and used to be more ‘hawkish’ before he took office. But in his first keynote speech as a board governor on Oct. 11, Stein openly supported QE3 and called for continuing asset purchases in absence of a substantial improvement in the labor market. Jerome Powell was a lawyer and private equity investor as well as an undersecretary under George H.W. Bush. Powell has also expressed support for more easing, with inflation an afterthought. Their appointments not only fill all voting seats at the Fed for the first time since 2006, but also further increase the board’s dove-hawk ratio from 9-1 to 11-1. The influence will also carry on to the following years, as board governors hold non-rotating voting rights.
- Additionally, four current voting members will be replaced next year, including Richmond Fed president Jeffrey Lacker, who has dissented in every FOMC meeting this year. Regional Fed Presidents, unlike Governors, vote on a rotating basis. In 2013, Kansas Fed president Esther George is likely to be the only voting member who appears to hold a hawkish stance. George has expressed her opposition to QE3 and the Fed’s balance sheet expansion, echoing her predecessor Thomas Hoenig’s hawkish tone. But given that she is not a Ph.D. economist, her passion and influence is likely to be more on regulatory than monetary issues; we doubt she will be as vocal as Hoenig or Lacker. In our assessment, the FOMC committee may be “über-dovish” in 2013.
- Finally, Minneapolis Fed President Narayana Kocherlakota, who was known as a monetary policy hawk, has recently shifted to a more dovish stance. He surprised the market with remarks supporting the Fed’s decision to keep rates extraordinarily low until the unemployment rate has fallen below 5.5%, as long as inflation remains below 2.25%. Kocherlakota will be a voting member in 2014, but his shift of stance will weaken the hawkish voice. With fewer dissidents on the board, the Fed may continue to err firmly on the side of inflation and stick to to its mid-2015 low rate pledge.
- No matter who wins the election, we will see a policy dilemma for the Fed in the coming years: On the one side, should economic data continue to surprise to the upside, it will be increasingly difficult for the Fed to carry on its dovish policies. On the other side, if the Fed were to abandon its current commitment, we foresee rising market volatility. The U.S. economy is likely to face a “monetary policy cliff” in addition to the “fiscal cliff”. With easy money, inflation risks may well continue to rise, possibly imposing higher bond yields (lower bond prices) and a weaker dollar. With tight money, the Fed may induce a bond selloff. Historically, because foreigners are active buyers of U.S. bonds, the dollar has weakened during early and mid-phases of tightening, as the bond bull market turns into a bear market. It’s only during late phases of tightening that the dollar has historically benefited as the bond market turns yet again into a bull market. We encourage investors to review their portfolios to account for the risk that bonds may be selling off, taking the U.S. dollar along with it.
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Axel Merk is President and Chief Investment Officer, Merk Investments
Yuan Fang is a Financial Analyst at Merk Investments and member of the portfolio management group.
Merk Investments, Manager of the Merk Funds.
This report was prepared by Merk Investments LLC, and reflects the current opinions of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any investment security, nor provide investment advice.
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Tech Talk: 50-day MA Breached, Intermediate Trend and 200-day MA Threatened
Wednesday, October 24th, 2012
Upcoming US Events for Today:
- New Homes Sales for September will be released at 10:00am. The market expects 385K versus 373K previous.
- Weekly Crude Inventories will be released at 10:30am.
- The FOMC Rate Decision will be released at 2:15pm. The market expects no change at 0.25%.
Upcoming International Events for Today:
- German PMI for October will be released at 3:30am EST. PMI Manufacturing is expected to reveal 48.0 versus 47.3 previous. PMI Services is expected to show 50.2 versus 50.6 previous.
- Euro-Zone PMI for October will be released at 4:00am EST. PMI Manufacturing is expected to reveal 46.5 versus 46.0 previous. PMI Services is expected to show 46.4 versus 46.0 previous.
- German IFO Economic Sentiment for October will be released at 4:00am EST. The market expects 101.6 versus 101.4 previous.
The Market
Equity markets logged another dismal session on Tuesday with the Dow Jones Industrial Average falling 243 points while the S&P 500 shed 20 points. Losses were led my the materials sector as Dow component DuPont missed on earnings, sending the stock lower by 9%, the most significant drop since the fourth quarter of 2008 when the stock dropped by an equivalent margin on four different occasions over a seven week period. Positive seasonal tendencies for the stock are primarily weighted toward the first half of the year as material sector benefits from improved manufacturing and production conditions.
DuPont Earnings History & Projections:
Tuesday’s declines caused significant technical damage to a market that was already teetering on an edge following Monday’s volatile session. Both the Dow Jones Industrial Average and the S&P 500 broke firmly below 50-day moving averages, putting the current decline on an intermediate time-scale. And in addition to the positive intermediate 4-month old trend channel that was broken on Friday, the negative short-term trend channel that had been in place for the past month has also been breached, escalating the severity of the declines. Both the Russell 2000 and the Nasdaq Composite have been trading below 50-day averages for a few days, now testing 200-day moving averages, a break of which could be significantly detrimental to the approaching 6-month positive seasonal trend. Losses are more typical for the six month seasonal trend between November and April when major benchmarks trade below 200-day averages during the period. It will be critical for the seasonal trend ahead that the market finds support soon, otherwise gains ahead may be in doubt. The S&P 500 will likely test support somewhere above its 200-day average. However, given the overwhelming evidence of a market that is rolling over, it is no longer a matter of what levels the market will find as support, but rather how long will the new declining trend last. Earnings focus is taking the steam out of this market, a scenario that may continue until the bulk of earnings have been reported by the end of next week. Stocks will have likely reacted to this backward looking data and begin to refocus on the future outlook, which, if recent economic data provides an indication, is showing signs of improving in the US with recent upside surprises in consumer confidence, housing, and manufacturing. Clarity pertaining to the election and the fiscal cliff could help alleviate excessive cash balances on corporate balance sheets that currently sit at historic highs. Cash balances have swelled 14 percent and are on track toward $1.5 trillion for the Standard & Poor’s 500, according to JPMorgan. Cash balances could be used for shareholder distributions, share buybacks, takeovers, or even hiring, each of which could be positive for equity values into 2013.
Companies reporting earrings today include AT&T, Boeing, Bristol-Myers, Canadian Pacific Railway, Corning, Delta Airlines, Dr. Pepper Snapple Group, Eli Lilly, EMC Corp, General Dynamics, Lockheed Martin, Northrop Grumman, Teck Cominco, Tupperware Corp, US Airways, Agnico-Eagle Mines, Akamai, Citrix, F5 Networks, Owens-Illinois, and Symantec. Today will be one of the busiest days for earnings yet this cycle with 186 companies reporting. The number of companies reporting tomorrow balloon to 309. Stay tuned tomorrow for the seasonal charts of some of the major companies as many stocks enter periods of seasonal strength at the end of this month.
Sentiment on Tuesday, as gauged by the put-call ratio, ended bearish at 1.06. A bearish trend in sentiment remains intact.
S&P 500 Index
Chart Courtesy of StockCharts.com
TSE Composite
Chart Courtesy of StockCharts.com
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John Taylor: “Quantitative Easing Has Diminishing Returns”
Wednesday, October 24th, 2012
From John Taylor, Chairman of FX Concepts,
Questions
Over the past few days Bill Gross at PIMCO made some noise within the financial community comparing the “Bernanke Put”/QE-infinity currently propping the markets to the mid-1980’s concept of ‘portfolio insurance’. Of course, we all know the end result of this failed attempt at investment utopia as portfolio insurance was a primary cause of the 1987 stock market crash for both psychological and practical reasons. We agree in principle with Mr. Gross, and actually made a similar argument last year ahead of the summer meltdown in pro-risk assets. We find it funny and a little sad that so many professional investors now scoff at the notion. Is this time really that different? Is it really that far fetched to believe that the “can’t lose” aura that propelled equities higher over the first half of 1987 is precisely the exact same one that has seen pro-risk markets levitate ever higher since David Tepper made his infamous “win-win” speech on CNBC way back in September of 2010? However, here we are more than two years later and only one of Mr. Tepper’s “wins” has actually come to fruition as despite policymakers best efforts their impact is clearly having less and less impact. How long will free market forces allow this to go on? How long did institutional equity investors give firms like LOR (Leland O’Brian Rubinstein Associates, Inc) in those dark days of October 25 years ago before throwing in the towel in their trust of portfolio insurance and admitting they were not invulnerable investors? Are the markets today heading towards a similar revelation?
The price action over the past few weeks in the wake of the markets getting more from the Fed than they could have ever expected heading into an election is a clue that the times indeed could be a changing. The 1987 paradigm underwent a similar period of choppy trade before melting down. Of course, crashes by their nature are a rare breed and the probability of one occurring is astronomically low. That said, should the S&P 500 fail to hold the 1400 level over the next few days (especially on a closing basis) we wouldn’t wait around too long in anticipation that the modern day version of LOR will save the day. The chart makes it clear that quantitative easing has diminishing returns. Soon they could be negative.
Copyright © FX Concepts
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An Interesting Parallel Between April and October
Wednesday, October 24th, 2012
by Mark Hanna, Market Montage
Someone pointed this out to me so I thought I’d pass it along. Back in April the S&P 500 was hanging in there while there was a lot of damage being done in the Russell 2000. So the main index everyone watches was benign but a lot of stocks under the surface were being damaged. This is reminiscent of what has been happening in October up until this late last week when the S&P 500 (and DJIA) finally began taking some bullets.
However here is the really interesting part. Apple (AAPL) dropped from a peak of $644 to a low of $555 in a few week span going into its earnings back in April; a drop of 13.8%. It then gapped up dramatically on its earning day … and then began to roll over. That led to a very bad May in markets.
Flash forward half a year. Apple dropped from a peak of $705 to a low of $609 in a few week span going into tomorrow’s earnings; a drop of 13.6%. If it gaps up dramatically on earnings Friday … hmm. 
Disclosure Notice
Any securities mentioned on this page are not held by the author in his personal portfolio. Securities mentioned may or may not be held by the author in the mutual fund he manages, the Paladin Long Short Fund (PALFX). For a list of the aforementioned fund’s holdings at the end of the prior quarter, visit the Paladin Funds website at http://www.paladinfunds.com/holdings/blog
Copyright © Market Montage
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S&P 500 Stocks Getting Hit Hard on Earnings (Bespoke)
Wednesday, October 24th, 2012
Last earnings season, S&P 500 stocks did well while non-S&P 500 stocks struggled. So far this earnings season, the opposite has taken place. A total of 250 stocks have reported earnings since Alcoa (AA) kicked things off earlier this month. These stocks have averaged a one-day change of -0.09% on their report days. As shown below, however, S&P 500 stocks have been the ones heading lower, averaging a one-day decline of 1.06% on earnings. Non-S&P 500 stocks, on the other hand, have actually averaged a gain of 0.47% on their report days.
The weakness for S&P 500 stocks is apparent when looking at one-day performance by sector as well. Below we highlight the average one-day change on earnings for sectors that have had at least 10 stocks report this season. The average S&P 500 Materials stock that has reported has declined 3.19% on its report day, but non-S&P 500 Materials stocks have gained 0.50%. For Technology, the divergence is even wider. S&P 500 Tech stocks that have reported have declined an average of 2.71% on their report days. Non-S&P 500 Tech stocks have averaged a nice gain of 2.16%.
Every sector but Health Care has seen non-S&P 500 stocks do much better than S&P 500 stocks on their report days this earnings season. For whatever reason, investors have the blue-chip blues right now, and it’s causing the broad markets a lot of trouble.
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Copyright © Bespoke Investment Group
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Overbought to Oversold in Five Days
Wednesday, October 24th, 2012
Below is a look at our trading range screen for the S&P 500 and its ten sectors. For each sector, the dot represents where it is currently trading within its range, while the tail represents where it was trading one week ago. The green shading represents oversold territory (more than 1 standard deviations below its 50-day moving average), while the red shading represents overbought territory.
As shown, the S&P 500 and two sectors — Consumer Staples and Industrials — have moved from overbought to oversold in just five trading days. Consumer Staples has had the biggest negative swing, as it is now more than two standard deviations below its 50-day. Technology and Telecom are the other two sectors that are oversold.
While five sectors were overbought last week at this time, no sectors remain overbought after today’s big market decline. Just three sectors remain above their 50-day moving averages — Health Care, Utilities and (surprisingly) Financials.
Copyright © Bespoke Investment Group
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It is Time to Pare Back (Mark Grant)
Wednesday, October 24th, 2012
Via Mark Grant, author of Out of the Box,
If you aren’t the lead dog the scenery never changes.
I stated, quite some time ago, that the recession in Europe would proceed to the United States. It was just a matter of time before the austerity demanded on the Continent began to have its affects in America. We are in earnings season and the numbers have not been pretty. China is in a slow-down, you may append what terminology that you like, but the reality of it is staring you in the face. Exports by all of Asia to Europe are not only in decline but the waterfall is a steep cascade as denoted by China whose exports to Italy are off almost thirty-seven percent. France had to inject $9 billion into Peugeot today as VW reported out profits that declined nineteen percent. I project that by the first quarter of next year that America will also be in a recession as the spillover from Europe darkens our shores.
“There are some people who live in a dream world, and there are some who face reality; and then there are those who turn one into the other.”
-Douglas Everett
The equity markets went up, bonds compressed, as the never ending printing presses rolled on in Europe, in China, in Britain and in America. Printing trumped the European recession until the spigots were either turned off or became ineffective. What else is that you can promise the markets after “limitless” and “uncapped” play out? The world’s financial markets have lived off of the largesse of the world’s central banks while the financial projections of each nation in Europe and the IMF churned out numbers, relied upon by many, that were absolute fantasies as proven by the subsequent quarters when real numbers appeared to the gasps of those in the various marketplaces that had expected something else entirely. With short rates at just above Zero, with everything promised now except the kitchen sink and with the economies in a major part of Europe falling into the abyss where is it that you think we are going besides down? I would argue that the central banks did what they could, delayed the inevitable but that it was always a question of when and not if before earnings turned grim and the markets reversed.
“The difference between fiction and reality? Fiction has to make sense.”
-Tom Clancy
It is nice to think that the world is mollified by the ECB and the decline in yields of the troubled countries in Europe but that is only part of the story and a relatively small piece at that. The debt keeps growing in Spain, Portugal, Greece, Italy so that the drop in funding costs is more than cancelled out by the amount of debt that must be serviced. Europe has yet to confront further loans to Greece, Spain, Portugal and Cyprus because they cannot agree on how to proceed so the whole lot languishes in Elysian Fields as the effects of the poppies must have overcome the necessity of doing anything. It is a Xanax induced environment as Greece runs out of money and as Spain faces regional debt issue, bank debt issues and the possibility of several parts of Spain that wish to disassociate from the country.
Well, I can tell you with certainty that you can only do nothing for so long because eventually the lack of capital forces your hand and it is usually just at a time when everyone is surprised that your elbows are on the table and that you have demonstrated such poor table manners. I suggest taking a long and hard look at what you own now, what equities have outperformed, what bonds have compressed beyond your expectations and taking some money off the table now before the markets take your profits off the table for you. “Preservation of Capital” remains in force and I humbly suggest that you preserve some now before it is no longer your choice!
“Reality is merely an illusion; though a very persistent one.”
-Albert Einstein
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SIA Canadian ETF Report (October 23, 2012)
Wednesday, October 24th, 2012
SIA Canadian ETF Report, October 23, 2012 (siacharts.com)
Complete Canadian ETF Report Here
Green – Favoured
Yellow – Neutral
Red – Out of favour
Important Disclaimer
SIACharts.com specifically represents that it does not give investment advice or advocate the purchase or sale of any security or investment. None of the information contained in this website or document constitutes an offer to sell or the solicitation of an offer to buy any security or other investment or an offer to provide investment services of any kind. Neither SIACharts.com (FundCharts Inc.) nor its third party content providers shall be liable for any errors, inaccuracies or delays in content, or for any actions taken in reliance thereon.
Copyright © siacharts.com
Some Relatively Upbeat Data from China Gives a Respite
Wednesday, October 24th, 2012
by Mark Hanna, Market Montage
With the S&P 500 firmly below the April 2012 highs of 1422, and the mood dour any bit of good news – however modest – is prone to offer a bit of a bounce for markets. China delivered that overnight with a contractionary … but less so… flash purchasing managers index report.
- HSBC Corp.’s purchasing managers’ index for manufacturing rose to 49.1 points — a three-month high — from 47.9 points in September on a 100-point scale on which numbers below 50 indicate a contraction.
At this point charts everywhere are broken and it is going to take time to recreate bases from which stocks can deliver any form of sustained gains. That said if you have been following along in 2012 you know almost all the upside has come in the form of overnight gap ups due to interventions or rumors of interventions / policy changes from central authorities. I don’t know what central bankers have left in their bag other than an expansion of QEInfinity that should be coming at the December meeting (to offset Operation Twist running off) and maybe something from China. Of course the ECB plans to help Spain… once Spain asks – which also will be “one of those days” we act surprised and people buy stocks of all sorts in lemming fashion. But in the near term the farther indexes get away from key support (or resistance) the harder they tend to snap. We saw that early last week when a quick and dirty 3 day rally happened. Markets are in a similar oversold condition now. Of course the more bearish situation is to rally modestly to work off the oversold condition which simply sets up for a new round of selling.
Keep in mind we have the FOMC announcement today (no one expects anything) and Apple tomorrow after the bell – the company announced the iPad mini (and a new iPad version) yesterday and it was met with boos and hisses.
As for the indexes the S&P 500 is in no man’s land right here – not down far enough to hit amy key support but quite oversold; it is now firmly below the 50 day moving average. The NASDAQ on the other hand is far more washed out as tech stocks were the leaders down over the past month, and bounced off the 200 day moving average yesterday.
Speaking to China, I would like to point out after being a laggard almost all of 2012 it has performed decently here the past month….
and the U.S. ETF to reflect Chinese shares has shook off this correction very well…
Copyright © Market Montage
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SIA Bulletin: Caterpillar (CAT) (October 24, 2012)
Wednesday, October 24th, 2012
SIA Charts Daily Stock Report (siacharts.com)
Caterpillar (CAT) – Since falling out of the favoured zone, in the SIA S&P 100 Report back on May 8, 2012, Caterpillar (CAT) has fallen 13%.
Resistance is now overhead at $89.38 and again at $94.85. Support is at $77.81 and at $67.74.
Green – Favoured
Yellow – Neutral
Red – Out of favour
Important Disclaimer
SIACharts.com specifically represents that it does not give investment advice or advocate the purchase or sale of any security or investment. None of the information contained in this website or document constitutes an offer to sell or the solicitation of an offer to buy any security or other investment or an offer to provide investment services of any kind. Neither SIACharts.com (FundCharts Inc.) nor its third party content providers shall be liable for any errors, inaccuracies or delays in content, or for any actions taken in reliance thereon.
Copyright © siacharts.com
