FOMC and ECB Disappoint with Lack of Action


Author Larry Berman

Posted: 3 Aug 2012 re-posted from etfcm

The FOMC did exactly what we and many others suspected they would do yesterday—nothing! Washington did exactly what we thought they would do yesterday—waste time and money. Congress went through the motions to pass an extension of the “Bush” tax cuts so that when they are out politicking for votes in the coming months, they can blame the Democrats for not supporting the Bill.

The market should be somewhat disappointed that the ECB did not confirm or detail the bond buying plan. However, it had little response to the rate announcement and is waiting for the press conference, and perhaps Friday’s NFP report. A weak close Friday with 2/3rds of earnings in the bag (read the good news side) will turn the focus back to the global macro risks, which as all will know is a #()%!#$ mess. Aggressive traders can be short at the end of the weak if we close below 1375, a close above 1395 suggests a retest of the May highs.

A quick comment on yesterday’s mini “flash crash” caused by Knight Trading—expect more of the same as even more computers trade with computers.

The Promise of QE3 Lurking in the Backdrop


Author Larry Berman

Posted: 25 June 2012 re-posted from etfcm

The S&P 500 has traded back into the initial key resistance zone from the previous support levels between 1340-1357 and the key retracements from 1345-1363 (yesterday’s high). Initially, the market should stall here and the FOMC announcement sets up the day that way, but if there is a promise of liquidity in the pipeline, corrections should be very shallow. We took a little off the table yesterday, but not much. We could be very surprised how much the promise of QE3 lurking in the backdrop supports this market for a while given that Europe promises a big bazooka of support for their debt issues too.

Ultimately, earnings need to grow for the market to do much better, and when P&G warns that things are slowing, that’s when all should sit up and take notice. It’s one thing when a cyclical like FEDEX warns, but P&G is another. We expect the Fed to extend the twist today and use words suggesting balance sheet expansion is likely if warranted. That should be bullish, but they may not say it that way. According to one survey on June 18th, 58% of economists expect them to extend twist.

 

The Market Shows a Pattern of Ignoring Bad News


Author Larry Berman

Posted: 25 June 2012 re-posted from etfcm

The market is showing a remarkable pattern of ignoring bad news. Spanish bond yields continue to head north of 7% and the time bomb is ticking for a solution to the debt crisis.

The S&P 500 tested the 50-day average and the 50% retracement with a few more tiers of resistance at 1357 and at 1363, with little above that zone until a retest of the 52-week highs. While we do not see a return to the 52-week highs as likely, we could squeeze this market a bit higher.

Last summer, the final bounce before the fall in late July through early October, bounced to about 2% below the previous peak, which would put the current bounce potential a bit closer to 1395. ORCL pre-announced some good numbers and an increased buyback program, and we have to say the on-line video of the new MSFT tablet looks HOT! However, FDX guided a bit lower as they often do, which is not too surprising given the slowing global growth theme.

This could be just what the market needs to get a little excited ahead of earnings, especially if the FOMC extends the twist and the Troika continues the big $2T bazooka safety net talk.

 

Is the QE glass half-full or empty?


Author Cam Hui

Posted: 12 June 2012

How the market reacts to news can be an important clue of future direction. In my last post, I wrote that you shouldn’t expect too much from the ECB or Fed this week. The European Central Bank certainly disappointed the bulls with their inaction, not only on interest rates, but on the prospects for “extraordinary measures”.

Now it’s Ben Bernanke’s turn.

We already have a clue on what Bernanke will say from Jon Hilsenrath’s WSJ article entitled Fed Considers More Action Amid New Recovery Doubts. Here is what I am watching for. Will the markets key on the comment that action is not likely in the June FOMC meeting?

The Fed’s next meeting, June 19 and 20, could be too soon for conclusive decisions. Fed policy makers have many unanswered questions and have had trouble forming a consensus in the past. Top Fed officials have said that they would support new measures if they became convinced the U.S. wasn’t making progress on bringing down unemployment. Recent disappointing employment reports have raised this possibility, but the data might be a temporary blip. Moreover, the Fed’s options for more easing are sure to stir internal resistance at the central bank if they are considered.

Or will the market key on the fact that the Fed is considering further quantitative easing [emphasis added]?

Their options include doing nothing and continuing to assess the economic outlook—or more strongly signaling a willingness to act later if the outlook more clearly worsens. Fed policy makers could take a small precautionary measure, like extending for a short period its “Operation Twist” program—in which the Fed is selling short-term securities and using the proceeds to buy long-term securities. Or, policy makers could take bolder action such as launching another large round of bond purchases if they become convinced of a significant slowdown.

What Hilsenrath wrote is not that different from what New York Fed President Dudley said in late May in the WSJ, that the Fed will act should it see signs of economic weakness:

Expectations for U.S. economic growth, while “pretty disappointing” at around 2.4%, is sufficient to keep the central bank from easing monetary policy, Federal Reserve Bank of New York President William Dudley said.

“My view is that, if we continue to see improvement in the economy, in terms of using up the slack in available resources, then I think it’s hard to argue that we absolutely must do something more in terms of the monetary policy front,” Dudley said in an interview with CNBC, aired Thursday.

Now that we know what Chairman Bernanke is likely to say, watch the market reaction. Is the QE glass half-full or half-empty?

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. (“Qwest”). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.

Potential for a “Risk-On” Short Covering Rally


Author Larry Berman

Posted: June 3 2012 re-posted from etfcm

Just as soon as dollar-euro broke 1.25, it broke 1.24, and there is really no important support until 1.19ish. The bigger and growing risk is that the euro breaks up and it is destabilizing to the markets for several years. US traded European ETF (VGK) is within 2% of the 2010 and 2011 lows, so it is time for the ECB to step it up.

That could mean we are on the doorstep of a “risk-on” short covering rally, which could see the TSX jump at least 3-5% or a bit more. The time line for a catalyst is likely through the June 20th FOMC and the June 17th Greek election, so we could see some bumpy days in between.

Expect WTI to fall back to at least $80ish and Brent below $100 before energy finds its footing. We are seeing some degree of divergence with oil stocks holding in a bit better than WTI, notwithstanding yesterday’s 3.3% clocking. Building exposure to the energy sector for longer-term investors is making sense on valuation, but risk of lower lows in the coming months is still reasonably high.

 

Bad news is bad news, good news is…


Author Cam Hui

Posted: 09 Apr 2012

It’s always good to have a long weekend once in a while as it gives me time to think and reflect, rather than to react in a knee-jerk fashion to news. So what to make of the shocker of a NFP release last Friday?

Upon further consideration, it sounds bad as the stock market is caught by the dilemma where bad news is bad news and good news may be bad news.

Why was employment rising so quickly?
Ben Bernanke’s speech to National Association for Business Economics Annual Conference provides some clues. He said that:

[T]he better jobs numbers seem somewhat out of sync with the overall pace of economic expansion. What explains this apparent discrepancy and what implications does it have for the future course of the labor market and the economy?

The apparent discrepancy is due to Okun’s Law [emphasis added]:

Okun noted that, because of ongoing increases in the size of the labor force and in the level of productivity, real GDP growth close to the rate of growth of its potential is normally required just to hold the unemployment rate steady. To reduce the unemployment rate, therefore, the economy must grow at a pace above its potential. More specifically, according to currently accepted versions of Okun’s law, to achieve a 1 percentage point decline in the unemployment rate in the course of a year, real GDP must grow approximately 2 percentage points faster than the rate of growth of potential GDP over that period. So, for illustration, if the potential rate of GDP growth is 2 percent, Okun’s law says that GDP must grow at about a 4 percent rate for one year to achieve a 1 percentage point reduction in the rate of unemployment.

Why are we seeing unemployment falling so quickly when GDP is growing so slowly? Chairman Bernanke explains:

[A]n examination of recent deviations from Okun’s law suggests that the recent decline in the unemployment rate may reflect, at least in part, a reversal of the unusually large layoffs that occurred during late 2008 and over 2009. To the extent that this reversal has been completed, further significant improvements in the unemployment rate will likely require a more-rapid expansion of production and demand from consumers and businesses, a process that can be supported by continued accommodative policies.

Stalling employment gains would provide fuel for policy doves (like Bernanke) within the FOMC for further rounds of QE. As I wrote before (see How easy is this Fed?), the Fed is unlikely to have the political capital to engage in quantitative easing in the 2H as it is an election year. So will the data deteriorate fast enough to warrant QE? They are unlikely to act at the April meeting on a single month’s data, especially when there is a 90% chance that the actual number lies between 20K and 220K. Doves will focus on the falling employment number, while hawks will focus on the falling UNemployment number. What if the next month’s NFP came in around 150K? Will that be enough? I doubt it.

I agree with Tim Duy when he summarized his reaction to last Friday’s NFP release as [emphasis added]:

A disappointing jobs report for those who expected the US economy was about to rocket forward, but one consistent with the slow and steady trend into which the US economy appears to have settled. And no reason to change the basic outlook for monetary policy – the Fed is on hold until the data breaks cleanly one direction or the other.

The markets sold off last week when the FOMC minutes revealed that, while QE3 remained on the table, further rounds of QE are unlikely unless the economic data significantly deteriorates. For now, bad news (on employment) is bad news, unless it’s really, really bad.

Improving employment = Profit recession
What if last Friday’s number was a statistical blip and employment continues to improve? Chairman Bernanke explains:

[A]nother interpretation of the recent improvement is that it represents a catch-up from outsized job losses during and just after the recession. In 2008 and 2009, the decline in payrolls and the associated jump in unemployment were extraordinary…In other words, employers reduced their workforces at an unusually rapid rate near the business cycle trough–perhaps because they feared an even more severe contraction to come or, with credit availability sharply curtailed, they were trying to conserve available cash.

Now that the economy has improved, businesses need to add workers to catch up. Indeed, we can see that from the graph below which shows a picture of rising labor productivity:

The price of rising employment in “defiance” of Okun’s Law is a profit recession, with sales rising but profits falling as the gain begin accruing to the suppliers of labor rather to the suppliers of capital. Ed Yardeni documented this phenomena as he showed that consensus sales estimates have been rising:

…while earnings estimates growth has been stagnant:

In a way, Yardeni is implicitly endorsing this view of employment catch-up with his analysis of the jobs picture before the NFP release.

This outlook is also consistent with Gallup’s observation of falling unemployment, rising economic confidence and improving consumer spending. In addition, the Conference Board also reported that CEO hiring plans are rising.

As we move into another Earnings Season, the interaction between employment and profits bear watching. Whether the inflection point for earnings to start rolling over happens this quarter or next quarter, I have no idea. I do, however, have a pretty good idea of the trajectory of the US corporate earnings for the rest of the year.

Equity outlook: US likely to roll over, does it all depend on China?
So there you have it. If we get good news on the labor front, it means a profit recession, which is bad for the stock market. If we bad news on employment, the Fed’s hands are tied for the second half of 2012 unless the economy really craters.

Looking ahead to 2013, we have the Bush era tax cuts expiring. With little agreement in Congress ahead of an election year, the US is likely to see rising fiscal drag in 2013. As we enter the second half of 2012, the markets will start to look forward and discount slower American growth, which would be negative for stock prices.

Ben Inker, the head of asset allocation at GMO, essentially voiced the similar concerns over potential margin compression as the effects of fiscal drag become more evident next year:

High profit margins are the biggest impediment to returns in the equity markets. “The big issue is profits are at an all-time high relative to GDP,” Inker said. “We don’t think that is sustainable. We think it’s going to come down.”

The question is, why has that occurred amid a relatively weak global economy? And what could cause it to change?

Inker believes the reversal of government budget deficits will kill margins. Profits have risen as corporations have successfully cut labor costs, but that was a short-term gain, Inker said. Normally, wage reductions and workforce cutbacks leave less money for consumers to spend across the whole economy. That didn’t happen over the last several years because the government stepped in with offsetting stimulus measures, allowing disposable income to remain high despite the fact that labor income has been shrinking.

Hence current profits cannot last for long. Even though he expects modest growth in the global economy, lower unemployment and higher capacity utilization, Inker said that “as a necessary condition of decent growth, we need to see profit margins come down.”

Today, US equities are the market leader based on a belief of an improving consumer (see This bull depends on the US consumer), Europe is starting to go sideways on concerns over Spain, Portugal, etc., and China is not showing strength.

My Asset Inflation-Deflation Trend Model moved to a neutral reading early last week (see Time to take some risk off the table), which is the likely correct tactical response for now as the markets aren’t in any imminent danger of tanking dramatically. Looking forward, however, the 12-month outlook for the US are faltering. There are a number of China bulls starting to come out of the woodwork (see example here), but I can see no technical turnaround in Chinese related markets for the moment.

Under these circumstances, the bulls only hope are dependent on a revival of Chinese growth in the 2H, which is a risky bet on timing. While my inner trader isn’t outright bearish, my inner investor tells me that selling in May is starting to sound good right now.

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. (“Qwest”). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.

Bernanke Plays the Ace


Author Larry Berman

Posted: 27 Mar 2012 re-posted from etfcm

Bernanke played the ace again yesterday in the face of other FOMC members talking about removing accommodation. In any case, it unleashed the quarter end window dressers a few days early and it took the market right up to the next area of resistance from the parallel channel of the lows from 2010 and 2011 projected from the 2011 highs is right around where we are going to open this morning.

Of note, mainland Chinese stocks (PEK) continue to falter and could be the leading indicator for this current phase of the market cycle—this should be on your front burner. The notion that the US can decouple from the rest of the world entering a slowing period is nonsense. Enthusiasm for US equities that can do no wrong and are being pumped by the US entertainment media (aka CNBC) gives us an almost giddy sense of benign neglect.

Investors looking to hedge the growing downside risk should avoid VXX for the toxic steepness of the futures curve and have a healthy mix of SPLV and SH to play the next few quarters.

 

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