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The 10Y Treasury yield just spiked to 2.7387% – its highest since April 2014…
And as it did stocks legged lower…
As it appears the surging cost of funding is starting to spoil the equity market party.
But but but rates are rising for the ‘right’ reason?!
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Just before President Trump headed to the Capitol for last night’s “State of the Union”, the Washington Post reported that top Justice Department officials made a last-ditch plea on Monday to White House Chief of Staff John Kelly about the dangers of publicly releasing the memo.
Shortly before the House Intelligence Committee voted to make the document public, Deputy Attorney General Rod J. Rosenstein warned Kelly that the four-page memo prepared by House Republicans could jeopardize classified information and implored the president to reconsider his support for making it public.
But those pleas from Rosenstein – who isn’t exactly the West Wing’s favorite lawman, and whose name apparently appears in the memo – have apparently fallen on deaf ears.
Last night, President Trump promised a lawmaker that the memo would “100%” be released now that the House Intel Committee has voted to approve its release.
Kilmeade and Kelly
And during a Fox News Radio interview with Brian Kilmeade, Chief of Staff John Kelly added that the memo would be publicly released “pretty quick.”
“I’ll let all the experts decide that when it’s released. This president wants everything out so the American people can make up their own minds,” he said.
John Kelly says on Fox News radio that he’s seen the Nunes memo and that it will be “released pretty quick.” Kelly: “I’ll let all the experts decide that when it’s released. This president wants everything out so the American people can make up their own minds.”
— Kaitlan Collins (@kaitlancollins) January 31, 2018
While Democrats have accused Republicans of using the memo to try and interfere with the Mueller probe, the Wall Street Journal editorial board today explained that Intel Committee Chairman Devin Nunes adhered to procedure during the process of compiling and distributing the memo. The Democrats, who have compiled a memo of their own, have not.
While the reports specific contents are not yet known, last week we reported the four-page “FISA memo” alleges egregious surveillance abuses by the FBI, DOJ and Obama administration, specifically now-former FBI Deputy Director Andrew McCabe, former Director James Comey and Deputy Attorney General Rod Rosenstein.
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Back in 2002, in his first full-fledged State of the Union address, President George W. Bush called Iraq, Iran, and North Korea a terror-sponsoring “axis of evil.”
A little more than a year later, the U.S. invaded Iraq, a decision whose consequences are still being felt today. A change in presidents in the U.S. and Iran, meanwhile, eventually led to a five-nation deal on Iran’s nuclear program, averting military action for the time being. The North Korean regime has continued its nuclear brinkmanship.
In 2018, the axis of evil is making a comeback. President Trump spent a significant portion of his State of the Union last night on North Korea. (Vox.com called it the “scariest part” because it sounded the way Bush used to talk about Iraq.)
Trump invited the parents of Otto Warmbier, the American student thrown into a North Korean jail and returned to the U.S. in a vegetative state. He also invited a North Korean defector who helps other victims of the regime escape to freedom. (Sadly but unsurprisingly, Trump didn’t talk about America’s role in welcoming such refugees.)
Trump also engaged in a bit of fearmongering, claiming that North Korea’s “reckless pursuit” of nuclear missiles “could very soon threaten our homeland” but insisting his administration was “waging a campaign of maximum pressure to prevent that from happening.”
“Past experience has taught us that complacency and concessions only invite aggression and provocation,” the president continued. “I will not repeat the mistakes of past administrations that got us into this dangerous position.”
Trump didn’t elaborate on those past mistakes. Despite his sometimes bombastic rhetoric toward Kim Jong Un, he and his administration have tried to engage China and South Korea in a multilateral solution. Fearmongering could threaten that progress.
On Iran, on the other hand, Trump has been openly hostile to the nuclear deal that de-escalated tensions. For now, nevertheless, he has kept the agreement in place. If he does withdraw, that wouldn’t completely dismantle the deal, since it also involves the United Kingdom, France, Germany, China, and Russia. That didn’t stop Trump from calling on Congress last night to “address the fundamental flaws in the terrible Iran nuclear deal.”
And Iraq? U.S. troops returned there following a three-year break after the official end of the Iraq War, this time to fight ISIS. While claiming “almost 100 percent of the territory” once held by ISIS had been liberated, Trump insisted U.S. troops would remain in Iraq and Syria until “ISIS is defeated.”
Trump also boasted of “tough sanctions” imposed on Cuba and Venezuela. Those dictatorships, while brutal, pose even less of a threat to the U.S. than North Korea or Iran. Meanwhile, other dictatorships, like those in Saudi Arabia or Egypt, continue to be coddled by Washington.
Such schizophrenia can make it difficult for other international actors to anticipate what the U.S. will do, and Trump’s love of confrontational rhetoric can make it hard to de-escalate tensions. A motivated president can always find countries to fit into an “axis of evil.”
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WTI/RBOB limped higher after dropping on API’s surprise crude build overnight, but when DOE reported a massive 6.78mm crude build (breaking 10-week streak), oil prices began to drop again. RBOB rallied as Gasoline inventories drew-down for the first time in 12 weeks.
The crude build was much bigger than usual, thanks to the highest imports since August, another rise to oil production and U.S. refiners lowering their oil inputs. We are now only 81,000 barrels a day away from the 10 million barrel threshold in crude production…
API
DOE
The streak of crude draws and gasoline builds is over…
All eyes were on production this week to see if the magic 10k mark was crossed… It did not make it BUT did rise notably to 9.919mm b/d…
RBOB rallied and WTI sank after the DOE data…
But of course, the machines did not like that and pumped WTI higher…
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Washington is escalating the global war on terror, expanding the U.S. military footprint across the Muslim world while ramping up military operations.
President Donald Trump boasted about some of this in his State of the Union address last night. He urged Congress to ensure that the military “continue to have all necessary power to detain terrorists—wherever we chase them down,” and he announced that he had signed an executive order keeping the detention camp at Guantanamo Bay open.
“Our warriors in Afghanistan also have new rules of engagement,” Trump said of the country where the U.S. is now in its 18th year of war. “Along with their heroic Afghan partners, our military is no longer undermined by artificial timelines, and we no longer tell our enemies our plans.”
Trump also touted progress against the Islamic State in Iraq and Syria (ISIS), saying that “the coalition to defeat ISIS has liberated almost 100 percent of the territory once held by these killers in Iraq and Syria and in other locations as well.” Nonetheless, he quickly added, “there is much more work to be done. We will continue our fight until ISIS is defeated.”
In practice, the U.S is keeping thousands of troops in Iraq and Syria, the second IS in ISIS. The terror group, meanwhile, has spread to Libya—and Afghanistan.
Not long ago, the State of the Union was the place to announce the imminent defeat of “core” Al Qaeda or to boast that there were no Americans left fighting in Iraq. Today, American are fighting in Iraq again. The Pentagon has stopped offering details of troop deployment there or in Syria, for “tactical surprise”; the most recent report revealed 1,720 troops in Syria and nearly 9,000 in Iraq.
Trump has taken advantage of the bipartisan consensus that has coalesced over the last decade and a half on the war on terror. Congress, under both parties, has declined to assert its authority in making war.
Three successive administrations have ordered U.S. operations in Afghanistan and across the Muslim world under the 2001 Authorization for the Use of Military Force, which targeted the perpetrators of the September 11 attacks and “associated forces.” The average ISIS fighter was about 8 years old on 9/11.
Secretary of State Rex Tillerson, meanwhile, suggested earlier this month that the U.S. military presence in Syria has to be open-ended to prevent a resurgence of ISIS. Congress never managed to hold a successful vote on an Authorization for the Use of Military Force for the campaign against the Islamic State, or for any military operation following the Second Iraq War.
In his State of the Union address, Trump called on Congress to end the so-called defense sequester, which modestly limited growth in military spending. The Republican majority is likely to give him this, and pretty much anything he asks for when it comes to the war on terror. What it won’t give him is any oversight or pushback. The war on terror has no end in sight.
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Authored by Lance Roberts via RealInvestmentAdvice.com,
Last week, we started into an exploration of various technical indicators with “What Exactly Is RSI.” This week, I want to continue our exploration into the signals that we most often discuss in our “Technically Speaking” posts and in our weekly Real Investment Reports.
As I wrote, technical analysis is often dismissed by investors for three reasons:
There is no “one method” of technical analysis that works for everyone. Every technician uses different methods, indicators, and time-frames for their own analysis. Much depends on your personal investment time frame, risk tolerance and investing behavior.
This article is the second in the series to discuss some of the more common technical indicators we use in our own portfolio management practice and how we apply them.
(Note: we will be providing our specific methods of technical analysis, indicators, etc., in our forthcoming premium section of Real Investment Advice. Click here for pre-subscription information.)
Today, we will continue our journey with the standard-deviation as measured with “Bollinger Bands,” and “reversions to the mean.”
I am often asked that since there is “always a buyer for every seller,” then how can a market become overbought?
Before we get into the raw technical analysis of showing the “overbought” condition let’s rationalize what one is and how it occurs.
While it is true there is a buyer and seller in every transaction, it is the “supply and demand” of those participants which determines the price. Let me explain.
Imagine two rooms of 100 individuals each that want to buy shares of ABC stock. Room A has 100 individuals that currently own ABC stock and Room B has 100 individuals with cash wanting to buy shares of ABC. The table below shows a very simplified model of this process.
At $10 a share, there are numerous buyers but sellers are few. The demand for the shares drives the price higher which entices more sellers. As long as the demand for shares outpaces the supply of sellers – the price is pushed higher. However, at some point, the price reaches a level that exhausts the supply of buyers. The next price decline occurs as sellers have to begin lowering prices to find buyers.
So, “Yes”, for every buyer there is a seller, but the question is always at “what price?” Since price is determined by the “supply/demand imbalance,” it is only logical that by using historical prices investors can determine what “price” buyers and sellers have previously been most active. Hence, the determination of both “overbought” or “oversold” conditions.
The important point, from a money management standpoint, is the determination of the potential risk/reward opportunity for allocating, or extracting, investment capital at any given time.
As a portfolio manager, clients tend “not to like” having their capital invested in the markets only to almost immediately suffer a principal loss. By using some measures to determine the current risk/reward outcome, the deployment of capital can be more effectively managed.
Now that we have defined what overbought means – I can explain what I mean by overextended. As I discussed in “Revisiting Bob Farrell’s 10 Investing Rules”:
“Like a rubber band that has been stretched too far – it must be relaxed in order to be stretched again. This is exactly the same for stock prices that are anchored to their moving averages. Trends that get overextended in one direction, or another, always return to their long-term average. Even during a strong uptrend or strong downtrend, prices often move back (revert) to a long-term moving average.”
The chart below shows the S&P 500 with a 52-week simple moving average. The bottom chart shows the percentage deviation of the current price of the market from the 52-week moving average. During bullish trending markets, there are regular reversions to the mean that create buying opportunities. However, what is often not stated is that in order to take advantage of such buying opportunities profits should have been taken out of portfolios as deviations from the mean reached historical extremes. Conversely, in bearish trending markets, such reversions from extreme deviations should be used to sell stocks, raise cash and reduce portfolio risk rather than “panic sell” at market bottoms.
The dashed red lines denote when the market changed trends from positive to negative. Understanding, and identifying, when markets change trend is the very essence of portfolio “risk” management.
The idea of “stretching the rubber band” can be measured in several ways, but I will limit our discussion this week to Standard Deviation and measuring deviation with “Bollinger Bands.”
“Standard Deviation” is defined as:
“A measure of the dispersion of a set of data from its mean. The more spread apart the data, the higher the deviation. Standard deviation is calculated as the square root of the variance.”
In plain English this means, and as shown in the chart below, is that the further away from the average that an event occurs the more unlikely it becomes. As shown below, out of 1000 occurrences, only three will fall outside of the area of 3 standard deviations. 95.4% of the time events will occur within two standard deviations.
For the stock market, and as shown in both charts above, the standard deviation is measured is with Bollinger Bands. John Bollinger, a famous technical trader, applied the theory of standard deviation to the financial markets.
Because standard deviation is a measure of volatility, Bollinger created a set of bands that would adjust themselves to the current market conditions. When the markets become more volatile, the bands widen (move further away from the average), and during less volatile periods, the bands contract (move closer to the average).
The math is pretty straight-forward as shown in the table below. (The only difference between 2, 3 or 4 standard deviations from the mean is the multiplication factor at the end of the formula)
This can be calculated in Excel by using the STDEVPA formula as follows:
=Current 52-Week MA level +/- (STDEVPA(52-week range of S&P 500 prices) * 2, 3 or 4)
The following chart illustrates the output.
The dashed purple line is the 52-week (1-year) moving average (or mean) with the shaded area representing 2-standard deviations. As shown in the chart above, 2-standard deviations encompass 95.4% of all probable price movement. Even during the 2012-15, QE3 driven, stock advance, there were several corrections back to the 52-week moving average, or further, which allowed for increases in equity risk within the ongoing bull market advance.
However, currently, the market is pushing towards 4-standard deviations (99.9 percentile) above the 52-week mean. As shown below, this is “rarefied air” for the market historically.
The next chart shows this more clearly. Currently, the deviation above the 52-week moving average is at levels not seen previously going back to 1981. Previously, large deviations from a long-term mean have coincided with mild to severe market corrections and crashes. Given the current extreme deviation, one can only assume a negative outcome in the future.
Over the next several weeks, or even months, the markets can certainly extend the current deviations from long-term mean even further. But that is the nature of every bull market peak, and bubble, throughout history as the seeming impervious advance lures the last of the stock market “holdouts” back into the markets.
As Vitaliy Katsenelson once wrote:
“Our goal is to win a war, and to do that we may need to lose a few battles in the interim. Yes, we want to make money, but it is even more important not to lose it.”
I wholeheartedly agree with that statement which is why we remain invested, but hedged, within our portfolios currently. Unfortunately, for most investors, they have very little understanding of the dynamics of markets and how prices are “ultimately bound by the laws of physics.” While prices can certainly seem to defy the law of gravity in the short-term, the subsequent reversion from extremes has repeatedly led to catastrophic losses for investors who disregard the risk.
With sentiment currently at very high levels, combined with low volatility and excess margin debt, all the ingredients necessary for a sharp market reversion are currently present.
As I noted last week, technical analysis IS NOT some “black box” approach to portfolio management. However, what technical analysis does provide is a method to extract “emotion” from the “buy/sell” process. For us, the fundamentals dictate WHAT we “buy” and “sell” in portfolios, but it is the technicals that drive the WHEN those decisions are implemented. Remaining fully invested in the financial markets without a thorough understanding of your “risk exposure” will likely not have the desired end result you have been promised.
Just remember, in the market there really isn’t such a thing as “bulls” or “bears.” There are only those that “succeed” in reaching their investing goals and those that “fail.”
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Following the plunge in New- and Existing-Home Sales, expectations for a 0.5% acceleration in Pending Home Sales in December were met.
However, YoY, Pending Home Sales NSA dropped 1.8%.
The Northeast dominated the weakness (after a big jump in Nov):
Since the start of the year, Housing-related data has disappointed notably, after ramping remarkably since the storms…
Lawrence Yun, NAR chief economist, says pending sales edged up in December and reached their highest level since last March (111.3).
“Another month of modest increases in contract activity is evidence that the housing market has a small trace of momentum at the start of 2018,” he said. “Jobs are plentiful, wages are finally climbing and the prospect of higher mortgage rates are perhaps encouraging more aspiring buyers to begin their search now.”
Added Yun,
“Sadly, these positive indicators may not lead to a stronger sales pace. Buyers throughout the country continue to be hamstrung by record low supply levels that are pushing up prices — especially at the lower end of the market.” oops “In the short term, the larger paychecks most households will see from the tax cuts may give prospective buyers the ability to save for a larger down payment this year, and the healthy labor economy and job market will continue to boost demand,” said Yun.
“However, there’s no doubt the nation’s most expensive markets with high property taxes are going to be adversely impacted by the tax law.”
However, Yun ended on an oominous note…
“Just how severe is still uncertain, but with homeownership now less incentivized in the tax code, sellers in the upper end of the market may have to adjust their price expectations if they want to trade down or move to less expensive areas. This could in turn lead to both a decrease in sales and home values.”
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CDC Director Brenda Fitzgerald resigned this morning amid a tobacco stock purchase scandal that was revealed yesterday by Politico.
“This morning Secretary Azar accepted Dr. Brenda Fitzgerald’s resignation,” HHS says in emailed release. “Dr. Fitzgerald owns certain complex financial interests that have imposed a broad recusal limiting her ability to complete all of her duties as the CDC Director”
“Due to the nature of these financial interests, Dr. Fitzgerald could not divest from them in a definitive time period”
What happened is that as Politico reported on Tuesday, about one month after the Trump health appointee took over as director of the Centers for Disease Control and Prevention, Brenda Fitzgerald purchased stock in a tobacco company. Of course, as CDC director, Fitzgerald oversees the agency’s efforts to push Americans to stop smoking tobacco products, so the purchase raised questions about conflicts of interest.
According to documents obtained by Politico, last August and September, Fitzgerald bought stock in several companies, including Japan Tobacco, a cigarette manufacturing company. She also purchased stock in pharmaceutical companies Merck & Co. and Bayer, and health insurance company Humana.
In a statement to Politico, a spokesperson for the Department of Health and Human Services acknowledged that Fitzgerald purchased “potentially conflicting” stocks but said that she has now sold them.
“Like all presidential personnel, Dr. Fitzgerald’s financial holdings were reviewed by the HHS Ethics Office, and she was instructed to divest of certain holdings that may pose a conflict of interest. During the divestiture process, her financial account manager purchased some potentially conflicting stock holdings. These additional purchases did not change the scope of Dr. Fitzgerald’s recusal obligations, and Dr. Fitzgerald has since also divested of these newly acquired potentially conflicting publicly traded stock holdings,” the spokesperson said.
Previously, Fitzgerald was already under scrutiny for her stock holdings. She was unable to testify before Congress in January because she had yet to address conflicts of interest created by stock she and her husband own.
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January has been broadly negative for survey-based sentiment as hopeful expectations have been dashed again and again, but Chicago PMI beat, printing 65.7 (64.0 exp) but dropped from December.
The headline Business barometer rose at a slower pace, signaling expansion
Under the hood, things were mixed:
Not a pretty picture so far for surveys in January…
Which has sent ‘soft’ survey data surprises notably lower…
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President Donald Trump used his State of the Union address last night to hype his still-forthcoming infrastructure plan, calling on Congress “to produce a bill that generates at least $1.5 trillion for the new infrastructure investment we need”—a 50 percent increase from his previous promise of a $1 trillion plan.
Little was said about how much of that $1.5 trillion would be coming from federal taxpayers, let alone where the administration planned on getting the money. What few specifics the president did cite highlighted his long-stated intention to streamline federal regulations and to shift more of the financial burden onto state, local, and private actors.
“Every federal dollar should be leveraged by partnering with state and local governments and, where appropriate, tapping into private sector investment,” Trump said, adding that “any bill must also streamline the permitting and approval process—getting it down to no more than two years and perhaps even one.”
The call for streamlining is welcome. Needless to say, some restrictions on government infrastructure projects are essential to protecting property owners and to ensuring taxpayer dollars are dispensed transparently. But others are pointless and duplicative. Current regulations require multiple agencies to issue similar approvals for infrastructure projects, adding years to the time it takes to deliver them. The time it takes to satisfy environmental study requirements has increased from 2.2 years in the 1970s to 6.6 years by 2011, according to one study prepared for the U.S. Treasury.
Trump has already taken some steps to streamline regulations, revoking Obama-era requirements that infrastructure projects account for the effects of climate change, and directing that one federal agency be responsible for issuing environmental permits.
The president’s call for more state, local, and private investment offered few details, but was the subject of much criticism from Trump’s detractors in the lead up to the speech.
Paul Krugman was fairly typical, declaring on Twitter that Trump’s infrastructure plan was “phony, more a privatization scheme than a real plan to build.”
A similar line of argument was advanced by Jacob Leibenluft, a senior advisor at the Center of Budget and Policy Priorities, who fretted that Trump’s goal of limiting federal commitments to infrastructure spending “would not support many needed projects, while shifting costs to states, localities, and individuals and potentially providing opportunities for lucrative private-sector gains.”
A rough draft of funding priorities for the administration’s funding priorities included a funding formula heavily titled toward projects that would be able to attract capital and maintenance dollars from non-federal sources. This in itself sounds bad to many on the left, who posit that states and localities just don’t have the money for needed infrastructure improvements. Leibenluft writes that “if states and cities are to provide financing, only those states and cities that have the ability and the political will to raise new revenues from taxes will be able to benefit, leaving some of the areas most in need of infrastructure investment even further behind.”
This ignores the fact that the states and localities seeking the most in federal infrastructure funding also happen to be some of the country’s wealthiest areas. New York and New Jersey are collectively seeking $13 billion for the New York Metro Area’s Gateway Project—a rail transit scheme that would be used primarily by local riders traveling to and from the country’s richest city.
Projects that rely the most on federal dollars meanwhile have often proven the most unnecessary. Take the Atlanta Streetcar, which relied on the feds to fund half its construction costs, and which has seen its ridership projections fall short while saddling the city with operating costs three times above initial estimates.
Shifting funding burdens onto state, local, and private entities would see more dollars going to projects that local people are actually willing to pay for. That would be the beginning of a far saner infrastructure policy, and it marked one of the few bright spots in Trump’s speech.
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