Tag: finance

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“There be those who say things and places have souls, and there be those who say they have not; I dare not say, myself, but I will tell of the street.”

H.P. Lovecraft

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Submitted by Lance Roberts of STA Wealth Management,

Correction Awakens Sleeping Bears

Since the end of 2012, the S&P 500 has been on an inexhaustible rise despite rising geopolitical tensions, extremely cold weather and weak economic data. The driver, of course, has been the massive liquidity inflows from the Federal Reserve that have catapulted the markets from their previous upward bullish trend into an accelerated push.  This is shown in the chart below.

However, the recent market correction has taken on a different flavor with a deterioration in market internals and a narrowing of leadership.

Walter Murphy noted on Wednesday that:

"NYSE declining stocks exceeded winners by 5:1 while the up/down volume ratio was bearish by a more robust 11:2 margin.

 

In recent comments, we thought that last week’s breach of the 1978 double-bottom was a warning for lower lows. The importance of that breakdown was brought home today for at least four reasons. First, the S&P closed below what has been the dominant intermediate uptrend line from the November 2012 low. Second, the percentage of NYSE stocks below their 200-dma is below 45% for the 1st time since November 2012. Third, the decline has an impulsive look to it. Finally, intermediate to longer term Coppock oscillators are deteriorating for a majority of indexes and stocks."

With both the number of S&P 500 stocks above their 200 day moving average and on "bullish buy signals" deteriorating since mid-2013, the increasing divergence of prices from the underlying performance is cause for concern.

I have also noted that the market has broken below the accelerated bullish uptrend, and a normal 38.2% correction would pull the index towards 1750 currently. While such a decline currently seems beyond the grasp of reality, it would actually be a healthy 13% retracement from the peak. However, since such a correction has not been witnessed since 2012, it will feel far worse for most individuals who have become overly complacent during the market's accelerated advance.

Portfolio Action: What is missed by the "buy and hold" crowd is that "portfolio management" is NOT about selling everything and hiding in cash. As investors, our job is "buy low and sell high." With the markets showing signs of deterioration on multiple levels, this is probably a good indication that it is time to prepare to rebalance portfolios, "trim" winners and "sell losers."

However, with the markets oversold on a very short-term basis it is advisable not to "panic sell," but use "bounces" to rebalance portfolios. Yes, this will mean an increased cash weighting in your portfolio that is earning NOTHING, however, having cash is what gives you the ability to "buy low" when the current correction process is complete. 

 

Plunging Oil Prices Hit Energy Stocks

The recent spike in the US Dollar has impacted many areas of the commodity complex but has been particularly nasty to oil prices. There are many issues weighing on oil prices currently from reduced demand due to globally weak economies, a reduction in driving miles, continued improvements in fuel efficiency and a rising supply/demand imbalance due to the explosion of domestic "fracking."

Recent estimates from of demand growth from OPEC, the U.S. Energy Information Administration (EIA) and the International Energy Agency (IEA) place demand growth at 900,000 to 1.05 million barrels a day in 2014, and rising to around 1.2 million to 1.3 million barrels a day in 2015. The problem is that supply growth is projected to surpass that demand by rising to 1.6 million barrels a day in 2014 and 1.3 million barrels a day in 2015. Most all of that supply growth will come from fracking in North Dakota’s Bakken, and the Permian Basin and Eagle Ford plays in Texas.The Dollar Spike And Market Corrections

While fracking has been a boon to U.S. energy stocks the costs of drilling wells has been climbing, and the decline rate of production from fracking is extremely steep. This year independent oil producers will spend roughly $1.50 for every $1.00 of revenue they get back. Furthermore, it will take roughly 2,500 new wells a year just to sustain the output of 1 million barrels a day in the Bakken shale alone. (As a comparison Iraq can do the same with 60 wells)

If the confluence of the rising dollar and supply/demand imbalances push oil prices below $85/bbl the profitability of drilling new wells becomes much less attractive and existing revenue streams for producers will deplete fairly rapidly. The poses a significant risk to energy related investments due the recent deviation in price performance from the underlying commodity. 

As shown, the performance of energy stocks has historically been closely correlated with the performance of oil prices with the exception of the liquidity driven asset inflations in 2007 and 2012-13.

Portfolio Action: Energy related investments are under pressure by falling energy prices and the rising dollar. As discussed above with reference to "portfolio management," energy is an area that is ripe for "pruning and weeding" on any bounce. There is much "hope" built into energy stocks currently but there is mounting evidence that fracking may not be the "nirvana" most are expecting.

 

U.S. Dollar Spikes And Historical Market Impacts

As I discussed yesterday, the implications to investors of a strongly rising U.S. dollar is important as it has a negative effect on stock market prices. One of the last remaining last remaining footholds of the "bulls" has been the strength in corporate profits.

"With valuations now expensive, interest rates set to rise and yield spreads narrowing as the Fed removes monetary liquidity, the risks to markets have risen substantially since the beginning of the year. This increase in risk, as the Federal Reserve extracts support from the markets and economy, is being reflected by the surge in the dollar as 'safety' is sought. This has occurred each time QE has been extracted, and the surge in the dollar has been historically associated with market corrections."

As Sigmund Holmes recently penned similar thoughts:

"The dollar also rallied in the [2011] although it didn’t really get started until later in the correction in September and October. This time the dollar has had a major rally even before the official end of QE. The end of QE 2 also ushered in the Euro crisis and once again, albeit to a lesser degree, we are seeing problems in Europe. One final similarity is that the economic data going into the correction was fairly good as it is now. It was only after the correction and the onset of the European problems that US economic data started to deteriorate. One can’t help but think of George Soros’ theory of reflexivity whereby it is markets that move the economy rather than the other way around.

 

We’ll see if this continues to develop in a similar fashion to 2011. I have a sneaky suspicion that it may actually turn into a bigger correction. There are a lot of people in this market who really don’t want to own it and any hint of losses may be enough to send the hedge fund and mutual fund traders to the door in an effort to protect the old year end bonus."

Portfolio Action: The spike in the U.S. dollar is a drag on U.S. exports that comprise roughly 40% of domestic profits. Again, there is much "hope" built on sustained growth in U.S. profits as shown in the chart below. (Read: Analyzing Earnings Q2 2014)  

The reality is that the trend is historically unsustainable and eventually will lead to a mean-reverting event in asset prices as fantasy collides with reality. The loss of capital, when it occurs, will be much greater than most are currently capable of comprehending. Again, this why a disciplined process of "portfolio management" is necessary to protect capital against such catastrophic losses.

Final Note:  I heard an advisor say recently that major stock market declines only happens during recessions. While he is correct, here is something worth pondering:  "Did a recession cause the correction, or did the correction cause the recession?"

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It appears the ruling elite have finally woken up to the reality in which the rest of the world’s laboring populace has been living. IMF head Christine Lagarde stated this morning she is “monitoring buoyant markets” with “lots of hesitation” while noting “weak economies.” We have one simple question for the oompa-loompa-colored ‘economic expert’ – what took so long?

• LAGARDE SAYS DISCONNECT BETWEEN MARKETS, ECONOMY ‘QUITE WORRYING’
• LAGARDE SAYS FED’S QE POLICY HAS ‘DONE MUCH TO AID RECOVERY’

You decide!

 

And then there’s this…

• LAGARDE SEES WORRY MARKET, LIQUIDITY RISK MOVING TO ‘SHADOWS’
• LAGARDE: GLOBAL RECOVERY `BRITTLE, UNEVEN AND BESET BY RISKS’
• LAGARDE: WORLD ECONOMY NEEDS BOLD MOVES TO AVOID `NEW MEDIOCRE’

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Contained?

CNN reports that a Washington-area hospital has admitted a patient with symptoms possibly associated with Ebola, the Howard University Hospital said Friday.

The patient, who was not named, had traveled to Nigeria and upon returning was “presenting with symptoms that could be associated with Ebola,” according to hospital spokeswoman Kerry-Ann Hamilton.

The unidentified patient is listed in stable condition, according to Kerry-Ann Hamilton, a spokesperson for the hospital.

The hospital released the following statement:

We can confirm that a patient has been admitted to Howard University Hospital in stable condition, following travel to Nigeria and presenting with symptoms that could be associated with Ebola.

 

In an abundance of caution, we have activated the appropriate infection control protocols, including isolating the patient.

 

Our medical team continues to evaluate and monitor progress in close collaboration with the CDC and the Department of Health.

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Via ConvergEx’s Nick Colas,

Have the S&P 500 and Dow Jones Industrial Average seen their highs for the year?  At this point in 2014, it’s probably a coin toss.  There are several factors in favor of a further rally, to be sure.  Corporate profits are still robust, revenue expectations are modest, and long term interest rates remain equity-friendly.  On the flip side of the U.S. equity market coin: long term valuations are toppy, plenty of other markets (commodities, bonds) seem to signal an impending global recession, and a host of geopolitical concerns now seem to be hitting a full boil. Also, let’s not forget that the Russell 2000 peaked in, oh, March (1209) and July (1208) and is down 8.8% from that last high. By that measure, equities are already rolling over. It is true that markets climb a wall of worry. Until it falls on them.

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Sometime in my early teenage years, my parents decided it was time I learn the appropriate protocols for dating. Since I had no actual prospects, the whole discussion was uncomfortable and unnecessary.  Still, their faith in my eventual introduction to society was reassuring, so I let them talk. Their advice centered on the correct way to pay a restaurant bill. They assured me that this was very important.

I remember their counsel to this day, and it went like this:

• At some point during the coffee service post-dinner, your date will excuse herself and leave the table.
• This is your cue to ask the waiter for the check. You do this by signaling with a gesture that resembles the signing of a credit card slip.
• You take care of the bill and hand the folder back to the waiter and shake their hand to thank them. 
• Your date magically returns, never having had to see a crass exchange of money.

Yes, my parents were from a different time and place so this was all they knew.  Needless to say, I spent many years wondering why no one seemed to go along. The random times when a date did follow the guidelines never seemed to repeat itself, even when it was the same woman both times. I am sure somewhere – perhaps among minor European aristocracy – my parents’ advice is still relevant. But nowhere else.

I feel a similar confusion now, looking at charts of the S&P 500 and the Dow Jones Industrial Average.  The playbook I learned in the 1990s was “Don’t fight the Fed”.  When the U.S. central bank starts to raise interest rates, you ask for the check and move to the sidelines until things shake out. Until then, stocks are the place to be. But the price action of the last few days is causing flashbacks to my first dates as a young man. Which is to say confused and anxious that no one seems to know the script but me.

Have U.S. stocks peaked for the year, ahead of the Fed’s anticipated moves to raise interest rates in 2015?  The simple case for a “Yes” answer is that markets discount earnings and macro events roughly 6 months in the future. If the Fed is to raise rates in Q2 2015 – the current wisdom – then a selloff starting about now would be perfectly consistent. At the same time, U.S. stocks have been resilient for years. A “Chicken Little” bearish case hasn’t been especially prescient during that time.

The bullish case for U.S. stocks is both reassuringly and maddeningly straightforward. There’s no real magic to the argument; it essentially hopes that investor psychology stays pretty much in the same vein as the last 5 years.

The highlight reel is as follows:

Corporate earnings remain robust. The S&P 500 index companies reported earnings of $25/share last quarter, and $27/share on an operating basis. This quarter is slated to run closer to $27/share reported and $29/share operating. Yes, I know companies buy back a lot of stock and that helps the comps. But that’s a good thing if you are a shareholder. Even if earnings grow no further, the S&P 500 will earn $108/share over the next 4 quarters. And that is an all-time record in the midst of a subpar U.S. economic recovery and a tough picture in Europe. Pretty impressive, that.

 

On this basis, valuations aren’t horrible. Damning with faint praise, yes, but consider the numbers. At current prices, U.S. stocks are at 18x earnings. Given that 10 year Treasuries yield 2.5%, that’s about right. And if corporate America can continue to grow the earnings base (and after the last 5 years of excellent bottom line results why doubt that?), then stocks have further room to the upside.

 

Interest rates remain low, which not only helps stock valuations but consumer purchases of houses, cars, and other big-ticket items. Job growth isn’t great – hence the low rates – but it is good enough to create some (2-3% GDP) economic growth.

 

Revenue growth in corporate America has been anemic since 2010, but expectations are quite low for Q3 and Q4 2014. After years of seeing their companies miss top line growth targets, Wall Street analysts finally have some beatable revenue numbers in their models. For the companies of the Dow Jones Industrial Average, for example, these are just 2.3% and 1.6% for the next two quarters. Consider that population growth runs 1% and inflation is 2%, those modest hurdles indeed.

The bearish case on the same points looks like this:

Valuations are super-rich by historical standards. Just look at the Shiller P/E, a measure of current stock prices versus the average of the last 10 years of corporate earnings. The current reading sits at 26.1x, against a long run average of just 16.6x.  Black Tuesday of 1929 occurred at 30x, and the peak in the dot com era was close to 45. The post-war lows were in the early 1980s at less than 10x.  Any way you look at this measure, U.S. stocks are not cheap.  Not even a little bit.

 

If you just looked at commodity prices and bond yields, you’d be bracing for a global recession in 2015 accompanied by strong deflationary pressures.  Crude oil at $90 and 10-year Treasuries yielding 2.51% are no one’s idea of a “Green means go” signal to buy stocks.  When one market – stocks – signals the potential for further earnings growth and multiple others refute that optimism, it is time to grow cautious.

 

Geopolitical concerns seem to be taking a bite out of equity market confidence of late.  The list of above-the-fold news stories that have taken chunks out of this market include: Russia/Ukraine, ISIS/Iraq, Chinese economic slowdown, Hong Kong protests and (as of tonight’s aftermarket announcement) Ebola in the U.S.

The bottom line is that the positive and negative stories for U.S. stocks are quite evenly weighted.  Possibly as even as we’ve seen since the March 2009 lows. Yes, you could add more weight to one or the other sides of this scale, but overall the balance is pretty even.  If the last five years of stock market history has any weight, the bullish argument should continue to hold and we will see one more run to new highs in 2014. As for me, I think I will ask for the check.

via Zero Hedge http://ift.tt/1pMdGrM Tyler Durden

It has been a week since Bill Gross dropped a tape-bomb on the fixed-income market and walked away from the firm he founded decades ago. Since then the world and their pet rabbit have commented (most notably David Tepper’s “who cares?”); but one man has been markedly silent… until now. In an interview on Bloomberg TV, former PIMCO Co-CEO Mohamed Al-Erian told Betty Liu that Bill Gross’ “departure – the fact that it happened and how it happened – was a surprise.”

 

Brief interview here:

 

Full Transcript:

BETTY LIU: Well for more reaction on the jobs data I want to bring in Bloomberg View columnist and former PIMCO CEO, Mohamed El-Erian, who joins us a little jetlagged from London. Mohamed, great to see you this morning. Look, you went through the jobs report yourself. And how do you think the Fed is going to interpret this? Does this at all change Janet Yellen’s schedule on interest rates?
 
MOHAMED EL-ERIAN: I don’t think so. It is the mirror image of the report we talked about a month ago. This time around it is the headline numbers that are really encouraging. If you add the job creation plus the revisions you’re looking at almost 320,000 new jobs. That’s taken the three-month average to 224,000. That’s really good. And the unemployment rate is down.
 
But on the other hand, the internals this time around are less encouraging, particularly long-term unemployment stuck at three million, youth unemployment up to 20 percent, and of course the participation rate is coming down. So net-net this is a mixed report. And the most disappointing aspects, Betty, is one that you’ve been talking about for the last half hour, which is wage growth. Wage growth simply is not there yet.
 
LIU: It isn’t there yet. And do you have any further clarity or explanation as to why? With the labor market tightening we haven’t seen wage growth escape at all.
 
EL-ERIAN: I think this is a different economy. And I think people are starting to realize that this is a different economy. In addition, little steps that should be taken, the minimum wage, et cetera, are not being taken. And that’s part of a bigger problem that we don’t have a holistic policy response as yet because of the polarization of Congress.
 
LIU: And given that, we’ve seen, Mohamed, more market volatility, right? Do you expect that if we continue to get numbers like this where it kind of shows a mixed picture that this volatility is only going to increase?
 
EL-ERIAN: I think volatility will increase, Betty, but for a different reason. We are living in a world in which the main policymakers, the central banks, have gone from a multispeed world, where they were doing the same thing but at different speeds, to a multitrack world where they’re doing different things. And the result of that is that currencies are on the move. And when currencies move sharply they tend to transmit volatility to other markets. And that’s what I think we’re going to see more of looking forward.
 
LIU: And speaking about volatility, Mohamed, if I may change topics for a moment, of course we’ve seen a lot of volatility at your former firm, PIMCO. This is the first time, Mohamed, that you and I are speaking and you’re speaking anywhere really about PIMCO since Bill Gross left a few weeks ago. He started his job at Janus. Were you as shocked as everybody else with Bill Gross leaving PIMCO?
 
EL-ERIAN: Yes. I was very surprised, but what I wasn’t surprised about, Betty, is that they were able to draw on a very deep bench of talented people who have established track records, who have industry awards and who have been part of the process. They’ve been managing more than 80 percent of the assets at PIMCO.
 
So Bill’s departure, both the fact that it happened and how it happened was a surprise, but what wasn’t a surprise was the incredible bench and a very strong team led by Dan Ivacsyn. I’ve worked with these people. I know them really well. They are superb and Dan Ivacsyn is superb as a leader.
 
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The further one digs into today’s “blockbuster” jobs report, the uglier it gets. Because it is not only the participation rate collapse, the slide in average earnings, but, topping it all off, we just learned that the future of the US workforce is bleak. In fact, with the age of the median employed male now in their mid-40’s, the US workforce has never been older. Case in point: the September data confimed that the whopping surge in jobs… was thanks to your “grandparents” those in the 55-69 age group, which comprised the vast majority of the job additions in the month, at a whopping 230K.This was the biggest monthly jobs increase in the 55 and over age group since February!

What about the prime worker demographic, those aged 25-54 and whose work output is supposed to propel the US economy forward? They lost 10,000 jobs.

Of course, don’t expect any of this to be mentioned on any financial entertainment outlets: it would spoil the party of today’s “surging” jobs day.

 

Then again in retospect, it has never been a stronger labor market. Well, if you are 55 and over that is, the age group that just hit a record 32.6 million in jobs.

 

Some addition detail:

Here is the breakdown of job gains by all age groups since the start of the depression in December 2007: 5.5 million jobs “gained” in the 55-69 age group. What about the core, 25-54 demographic? Negative 2.04 million.

 

In fact, looked at differently, it continues to be a story of two labor forces – those aged 55 and older, and everyone else.

 

And finally, putting it all in context, here is the reason for the drop in the labor force participation rate. Apparently someone forgot to tell those 55 and older they are retiring in droves.

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Submitted by Charles Hugh-Smith of OfTwoMinds blog,

We've put all our hopes, dreams and chips on Plan A, as if security flows from institutional promises rather than from being adaptable, resilient and able to create value in a variety of circumstances.

 

via Zero Hedge http://ift.tt/1x6HdlS Tyler Durden

ISM Services printed modestly better than expected but dropped down from last month's 2005 highs. Printing at 58.6 vs 58.5 expectations, the seasonally-adjusted ISM data shows business activity dropping and new orders at 4-mointh lows. Markit Services PMI fell for the 3rd month in a row to its lowest since May but Markit's chief economist sees "good reason to believe growth will pick up once again," from somewhere, despite maunfacturing PMI also fading. The divergence between Markit's and the Government's surveys of the Services industry in America remain large.

ISM Services fell back from its exuberant 2005 highs of last month…

 

which fits with the weakness in manufacturing PMI this month…

 

 

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Markit Services PMI dropped 3 months in a row to lowest since May…

 

Commenting on the PMI data, Chris Williamson, Chief Economist at Markit said:

"The PMI surveys signalled an easing in the pace of economic growth in September, but there's good reason to believe that growth will be sustained at a robust pace in coming months and could even pick up again."

 

"A slowing in the pace of service sector growth in September matched a similar easing in the pace of manufacturing output growth seen during the month, suggesting the overall pace of economic expansion dipped to the weakest since May. But the surveys nevertheless still point to the economy growing at an annualized rate of at least 3% in the 3rd quarter."

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The two-faces of the Non-Manufacturing industry in America…

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It's down but we hope it goes up… brilliant

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