 |
| GET YOUR FACTS HERE |
Back in the day when we used to fool around with some serious medicine, a prominent colleague with an Ivy League pedigree would begin nearly every one of his responses with: "My bias is....."
Based on today's jobs report the market looks more and more bipolar with part of it egged on by growing confidence in the recovery and the other laden with fear about the likelihood of rising interest rates.
New highs in the indexes are becoming almost daily happenings but overall on the year these markers aren't up much.
Call it yin and yang, economic push-pull, financial schizophrenia or whatever you like. But don't it call boring. It's a decent bet something's on the brink. Honeymoons and Goldilocks markets don't last. If they did it would be a fundamental violation of human nature.
Like central banks, we humans usually find a way to screw things up. It kind of comes with the territory. Some might define this skill as bias. Most of the action before long three-day holidays is protective and tame.
The big July holiday is a doorstop between the first half and the last. A brief respite period to either cheer for more of the same or pray for change, depending on one's bias. Will this turn into a picker's market or one just over-inflated looking for a way station to deflate?
As always your guess is about as good as the next guru's. Just try to keep your bias reasonable, if such a thing exists. As Mark Twain once put it: "Get your facts first, and then you can distort them as much as you please."
Just for the mental exercise let's play the dot connecting game.
There are three of them in this round. The first is easy
to understand because it has the term easy in it as in easy money.
The other two
can be described in a single word--collapse. Both risk premium and
volatility, like a good magician, pulled their own Houdini, disappearing a while back
without a trace.
And it's the without a trace that troubles all those who get mislabeled by the bulls and MSM as being bears.
Caution is obviously a word these folks have difficulty
with since they try to use the old black and white parameter, if you're
not with them you must be a bear. These are easy, loose terms to toss
around, one of the hallmarks of modern day gurus and the shallow MSM.
Stock-trading volume in June hit its lowest level for the month in eight years, according to the Wall Street Journal,
not a good sign that individual investors are rushing to call their
brokers. That's a drop of 18% over last June when the tapering news
bulled it's way into the headlines.
Though June's volume did exceed that in May, discount
brokers, a favorite of mom and poppers, according to reports, are
expecting a decline in trading of 20% or more leading to a decline "in
daily average revenue trades for the second three months of the year."
We're not suggesting it, but some might view this as another dot that's collapsed.
With the upcoming July 4th holiday approaching and the stock market being closed, next Monday will really be the start of the second half of 2014.
We all pretty much know what happened during this year's first half, so an appropriate question now might be: What's up for the second half?
The realistic short answer is nobody knows for sure. But many are expecting more bumpiness, a pretty safe call it seems to us, given what's gone before it. Among this group you'll hear such hedged terms as "stretched," "not cheap" or "fair valued" to describe valuations.
Much of the concern centers on the end of QE and when investor attention shifts to the possibility of rising interest rates. Some would suggest the reality of rising rates. But these two suspects just might be the most anticipated events since the turn of the century and the predicted Y2K melt down that never melted down.
Granted there are many more factors involved now, more dreariness seemingly afloat around the globe, not to forget fears about rising inflation that many seem inclined to taking a head-buried-somewhere-the-sun-don't shine approach to.
We'll leave out the deflation worry mongers for now because they've been the darlings of MSM for some time. Perhaps a more accurate term would be uncertainty. But if past is any kind of prologue to the future, stretched valuations can remain stretched for a while as in longer than most think.
In our view, however, many of the assumptions about those valuations have a built-in fallacy. That valuations must always reach previous bubble or, to quote a term making the rounds today, outrageous proportions for something ugly to occur.
That's brings up another interesting question: Just what is ugliness? The kinder, gentler response is the absence of beauty. Most asset classes from bonds to gold to stocks have been up during the first half, not a normal thing in markets. It happens about every once in the twelfth of never.
As any bookie worth his bets will suggest the odds against that continuing are ones he just might want to discuss with you.
If you've ever rode on any public transit system you're most likely familiar with transfers.
Transfers usually have a slight extra charge for allowing you to connect with another part of the transit system to get to your destination. It's simple concept.
A good part of risk management is about transfers. For a fee you can buy an instrument that allows you to transfer that risk to someone else. Most people know them as insurance policies but there are many other forms.
If you buy a home and have a mortgage, the lender usually mandates what's called a homeowner's policy to protect you and the lender from something both presumably don't what to happen, unexpected damage to the property.
It's really just a put option. It has a beginning date and an ending date, cost a certain amount and the closer it gets to expiration the less it's worth if you want to redeem it. In the world of option trading it's known as a decaying asset, much like you and me.
The point is the only way that option can go up in value is if something neither you nor the lender wants to happen. Then it becomes worth a lot more than the funds you most likely begrudgingly coughed up to own it.
In the world of high finance there are all kinds of options, many with fancy names like swaps, Cocos, CLOs, etc., not just the ones that get traded daily on the option exchanges. And the denizens of Wall Street and investment banking are never short on ideas about how to create new ones.
What all these fancy items share is the principle of transfer. Hypothetically, they symbolize something physical behind each transaction like a piece of paper or so many shares of a stock. In the commodities world you could be forced to take physical possession.
Imagine the third Friday of some distant month they deliver two tons of fresh elephant manure to your door. It's a huge, smelly risk
And that's just about where we are now with the Federal Reserve. Having taken most of the risk off their long-time friends, the big banks, the Fed with their crazy QE game and low interest rates have transferred that risk to the global markets.
In plain English, you and me and all those yield starved folks including institutions like asset managers and pension funds who have been forced out onto the same limb seeking some income oxygen. If you think about junk bonds here, you'll recall that the Fed prohibited the big boys from supplying their usual liquidity for corporate bonds.
It was a regulatory form of a slap on the big boys' wrists, a conciliatory signal to the masses that "We got this covered!" According to reports, the bond inventory that these big boys now hold is at a record low, hovering somewhere around $50 billion or a miniscule 0.5% of the entire market.
Transfers have their place and their function. Unlike those transfers one gets on the transit system, however, this is one that in the end won't be cheap.
Copper prices are still down 6% so far this year.
But that may be changing as concerns about the China slowdown appear to be waning. Investors will find out more tomorrow when China's PMI gets released. Other possible reports set for this week--also on Tuesday--is the U.S. ISM followed by Thursday's Bureau of Labor Statistics release of its Employment Situation where some economists are expecting a fifth straight month of good news on the job growth side.
As for copper it's partially been in a funk owing to concerns about Chinese copper financial shenanigans usually described in a kinder, gentler term, irregularities, a sort of a business or MSM invented variation of suspect of interest.
In short, using copper as collateral for loans could skew the real demand picture and create major problems if true and anything goes awry, not that they ever do in the economic world of international finance. Phony loans of the stuff disturb the supply and demand curve. A weaker dollar may also be contributing to the new found better feeling about copper.
At any rate, copper jumped up 1% in two hours this morning pushing the metal to its highest price in over 90 days. If a couple of those reports bring good cheer, it will back the Fed further into a decision corner it's been trying to avoid for months.
At the risk of creating some enemies, it may be fun to be a fan, unless, of course, your team doesn't win, so forget soccer balls for the nonce and keep your eye on copper spools.
TrimTabs, a well-know independent research group that focuses on supply and demand of stock shares and money flows, recently reported that much of the hoopla about companies buying back their shares--a move that many believe has buoyed share prices--is waning.
Founded in 1990, one of TrimTabs premises is that stock prices are more a function of available money than just value. It's another way of saying it's about supply and demand not any different from any tradeable goods in the market.
Buybacks usually occur for one of two reasons: there's a lot of easy money around, as is the case now, or there's actual hidden value out there that's gone unrecognized in general. Some might refer to it as the Buffett play.
The moral of the story is this. As James Authers of the Financial Times points out today in his column, "Tide turning against buybacks ahead of the market top," one of the so-called pillars supporting and even helping push them higher is apparently ending. It's a mouthful of an headline, but worth a look if caution is still a registered word in your lexicon
Citing research from TrimTabs, Authers notes that money flowing into corporate buybacks the last two months declined to its lowest level since the first of 2013. Moreover, announced buybacks, according to TrimTabs, peaked in February 2013 and have drifted lower ever since.
So far this June around $22 billion went to buying back shares compared to about $63 billion last June. And there's more. Announced buybacks among U.S.companies, 38 so far this year, has trended to its lowest level since 2011, according to Authers.
Some have called buybacks the classic example of corporations' lack of imagination, a tactic resorted to when you can't come up with any good ideas to spend your cash. Recall a couple of years back one of MSM's raves was how much cash U.S. corporations were sitting on. It's sort of a business version of shoppers who buy just to be buying because they got the money.
But buybacks, like insider buying, can also represent a value play when corporations view their own shares as being cheap.With the huge run-up in the market most of that has all but changed for arguing this point in our view. Carried to an extreme, what this falls under is the category of the magician's art, financial engineering versus real growth.
The other side of that marker is insider selling, a figure that, according to TrimTabs, is up dramatically in recent weeks. A quick note on this. Given the recent take off in energy, much of it caused by the Iraqi situation, here's just one example. Twelve different insiders at Pioneer Natural Resources Company (PXD) between the end of May and now unloaded 90,400 shares.
Now one company does not a trend make. But there were no purchases during that time and four of the 12 cut their holdings by more than 10%.
No doubt bulls will come up with counter arguments like M & A activity, arguing that a number of them have been cash deals. But there's no unwritten rule that says cash deals create value. Call it a show of confidence or whatever you want. We call it caution.
The market seems set to go higher and there's no shortage of folks who want that. But pulling a few coins off the table in the next upward burst, if there is one, and going long some options if you need to be long might just be the better part of discretion.
Story has it back in my younger days as a cub reporter when if you have to write one more obit page or another story about a church bazaar you think you'll vomit, I was assigned to cover one of those political gatherings where the top politician's smarmy PR guy tries to wiggle his candidate's way into your byline via the libation route.
In the medical profession it's called liver rounds.
The top dog was a Congressman whose name shall remain as anonymous now as it was then. It wasn't as if he didn't have some clout 'cause he did. He was just a glad handing phony with a knack for delivering the Washington bacon to the home crowd. He loved it and so did they. Re-election every two years sealed.
My mother raised us to always be kind to old dogs, children and, whenever possible, drink watermelon wine. Besides being an an aphrodisiac, it soothes the urinary tract. So knocking back a few, no problem.
Hang around politicians and bureaucrats long enough and you soon can read them out loud like one of those classic children's books. Pretty much that's what they are. Self-centered, ego-driven, immature kids running around in adult bodies. Oh, and I almost forgot about temper tantrums when things don't go as planned or someone asks the right question at the wrong time.
On this particular occasion there were some rumors floating around about some land in the sticks that a big federal government project was set to plow its way through the middle of and two of its largest owners were guess who? If you say the Congressman and his PR guy you're gonna ruin the story.
Ikea the big Swedish retailer steps up to the minimum wage plate, announcing what amounts to a 17 % hike in wages set to kick in next year. The huge retailers has 36 stores in the U.S. and says its raise is based on a living-wage calculator that includes such items as housing, food, transportation and medical costs. There's even a provision for taxes.
Many analysts believe that wages are the critical shoe in all this inflation talk. If wages rise and firms can make the expected price hikes that usually follow stick, it'll be off to the races time again. So Fed Chair Janet Yellen with her noise comment may prove more prophetic than anyone thinks.
With any surprises it might someday rival another Fed Chairman's now infamous comment about irrational exuberance. For Yellen's sake one only hopes that unlike the former this one wasn't plagiarized.
And, too, Ikea is not alone in raising minimum wages. The lists is growing..
One of the things we enjoy reading is statements like this one that appears in this week's Barron's: "With no recession on the horizon, there's little need to fret about the bull market's imminent demise Strong economic gains, however, don't always lead to big stock gains."
Correct on both accounts. Inflation is what we're talking about. And inflation can be somewhat good for stocks, but it can also send pocket-book-rattling shivers up the spine of shaky investors that are needed to drive stock prices higher. If the Fed turns out to be wrong--and we believe they already are--it won't say much for their so-called vote of confidence.
There's another term here you see little mention of, though we've espied a few--stagflation. Now you can burn the midnight petrol checking out all the data of the pros and cons apologists will cite to prove their points of view if you want. And that could bring up a really big question bureaucrats and politicians never want to hear:
"Who in the hell is in charge anyway?"
Get caught up in the exercise at your own peril. Just be aware it hasn't made the rounds in a while and like the man said: "What goes about comes about."
Earlier today Federal Reserve of St. Louis President James Bullard, though a non-votng member, added some fuel to the debate by saying he thought the market was correct in looking past the dismal 1Q report "amid other signs that the economy is improving."
Speaking on the Fox News program "Sunday Morning Futures," Bullard added "... he expected that the economy would grow at around 3% for
the rest of the year, and that unemployment would fall below 6% in the
second half. He also said that the Fed’s preferred measure of inflation
could approach its 2% target by year-end"
The economy is in better shape than most realize, Bullard contended: “Both financial markets and the public at large doesn’t realize how close we are to normal, compared with postwar history.”
Should he turn out to be correct, the water filled balloon known as global markets will definitely bulge somewhere. Figure that out ahead of time and you'll save yourself a lot of unnecessary pain. And if you're lucky enough you might make some serious money along the way.
Until next time, that's the way the story has it.
What with the Fourth of July holiday on tap, it's a short week coming up. Again, from Minyanville here's a good summary of the week that is.
Monday, June 30
US Economics (Time Zone: EST)
09:00 ISM Milwaukee, June, prior 63.49
09:45 Chicago Purchasing Manager Index, June, exp. 63, prior 65.5
10:00 Pending Home Sales MoM, May, exp. 1.3%, prior 0.4%
10:30 Dallas Fed, Jun, exp 9.0, prior 8.0
11:00 Fed to purchase $850m-$1.1b bonds in 22-30 year range
11:30 Treasury to sell $25b 3-month bills and $23b 6-month bills
3:00 New York Fed to issue QE schedule for July
Fedspeak:
1:10pm Williams to speak in Sun Valley, Idaho
Global Economics (Time Zone: GMT)
01:00 AUD HIA New Home Sales (MAY)
01:00 NZD NBNZ Business Confidence (JUN)
06:00 JPY Housing Starts (MAY)
06:00 JPY Construction Orders (MAY)
08:30 GBP Mortgage Approvals (MAY)
09:00 EUR Euro-Zone CPI Estimate (JUN)
12:30 CAD GDP (APR)
Earnings
No major reports scheduled
Tuesday, July 1
US Economics (Time Zone: EST)
09:45 US Manufacturing PMI, June F, exp. 57.6, prior 57.5
10:00 ISM Manufacturing, June, exp. 55.8, prior 55.4
10:00 Construction Spending MoM, May, exp. 0.5%, prior 0.2%
5:00 Vehicle Sales, June, exp 16.30M, prior 16.70M
11:00 Treasury to sell 4-week bills
Global Economics (Time Zone: GMT)
JPY Tankan Manufacturing Index (2Q)
01:00 CNY Manufacturing PMI (JUN)
01:35 JPY Manufacturing PMI (JUN F)
01:45 CNY HSBC China Manufacturing PMI (JUN F)
04:30 AUD Reserve Bank of Australia Rate Decision
07:45 EUR Italy Manufacturing PMI (JUN)
07:50 EUR France Manufacturing PMI (JUN F)
07:55 EUR Germany Manufacturing PMI (JUN F)
07:55 EUR Germany Unemployment Rate (JUN)
08:00 EUR Italy Unemployment Rate (MAY P)
08:00 EUR Euro-Zone Manufacturing PMI (JUN F)
08:30 GBP UK PMI Manufacturing (JUN)
09:00 EUR Euro-Zone Unemployment Rate (MAY)
Earnings
No major earnings
Wednesday, July 2
US Economics (Time Zone: EST)
08:15 ADP Employment Change, June, exp. 205k, prior 179k
10:00 Factory Orders, May, exp. -0.3%, prior 0.7%
Fedspeak:
11:00am Yellen to speak in Washington
Global Economics (Time Zone: GMT)
01:30 AUD Trade Balance (MAY)
08:30 GBP Construction PMI (JUN)
Earnings
Before:
Constellation Brands (STZ)
Greenbrier (GBX)
Thursday, July 3
US Economics (Time Zone: EST)
Futures close at 1:00pm ET, equity trading at 1:15pm and cash trading of bonds at 2:00pm today
08:30 Trade Balance, May, exp. -$45b, prior -$47.2b
08:30 Change in Nonfarm Payrolls, June, exp. 210k, prior 217k
08:30 Initial Jobless Claims, June 28, exp. 312k, prior 312k
10:00 ISM Non-Manufacturing Composite, June, exp. 56.0, prior 56.3
Global Economics (Time Zone: GMT)
01:30 AUD Retail Sales (MAY)
01:30 AUD Building Approvals (MAY)
01:35 JPY Japan Services PMI (JUN)
01:45 CNY HSBC China Services PMI (JUN)
07:45 EUR Italy Services PMI (JUN)
07:50 EUR France Services PMI (JUN F)
07:55 EUR Germany Services PMI (JUN F)
08:00 EUR Euro-Zone Services PMI (JUN F)
08:30 GBP UK Services PMI (JUN)
09:00 EUR Euro-Zone Retail Sales (MAY)
11:45 EUR ECB Rate Decision
Earnings
No major reports scheduled
Friday, July 4
US Economics (Time Zone: EST)
US markets closed for holiday
Global Economics (Time Zone: GMT)
06:00 EUR Germany Factory Orders (MAY)
07:30 EUR Germany Construction PMI (JUN)
08:10 EUR Germany Retail PMI (JUN)
08:10 EUR Euro-Zone Retail PMI (JUN)
08:10 EUR France Retail PMI (JUN)
08:10 EUR Italy Retail PMI (JUN)
Earnings
No major reports
Valero Energy (VLO) is one of our PB picks.
Now, we had no intention of listing two energy stocks in a row since our last blurb was about MRO, but given the recent developments with the U.S. decision to start exporting oil (condensates), a move some think could force VLO to pay more for its crude, why not?
The U.S. has prohibited the export of oil since the Arab embargo in 1975. For those who don't recall, it caused long gas lines at the pump and more than a little irate behavior. Some states even had assigned days based on one's license plates when you could legally gas up. And topping off became a new term in the lexicon of American drivers.
So here's just three historical facts--911, the Arab embargo and FDR's confiscating gold--that should warn you anything can happen at any time. And that ought to signal a basic truth in this dimension that never changes: The only person, place or thing you can count on is a simple three-letter word--you. We realize such is anathema to the bureaucrats and politicos who count on you counting on them.
Valero fell last week 8.3% on the news. The largest independent U.S. refiner, Valero profited nicely from the recent shale boom, lowering prices for gas and oil and pushing up the bottom line of refiners. Another way of putting it is, it's all about spreads and margins.
Some investors believe this is the oil-export camel's nose under the edge of the tent. And it won't be long before more party crashers show up seeking more profits. In our view, however, much of the concern is another example of going to the show before you get there.
Valero trades at a decent price per forward earnings, pays roughly a 2% dividend and has some other goodies to recommend it to the patient and prudent. So it remains on our pullback list when the pullback--and it will--arrives.
"How long's this going to take,' the student queried the master?
"However long it takes," the master replied.
And that's the correct answer here. Nobody knows for sure.
As we pointed out before, there's something largely amiss when Spanish 10-year bonds yield less than their U.S. equivalents. And that's just for starters. It's become a wide spread phenomena in the global bond market that literally no one anticipated. Well, there may have been a few like those who always enjoy talking about their fishing ventures.
The Bard may have noted that "All's well that ends well," but the chances of this turning out good when the day of reckoning arrives are slimmer than the waistline on a runway model at a New York fashion show.
As the believers and the apostates line up to debate the convergence issue, investors have to decide whom to believe. And caught right smack dab in the middle is, you guessed it, central bankers. In this case the Mario Man. With his we-got-this-covered assurance he's essentially put a put option, ala Mr. Greenspan, under some raggedy debt instruments that is now spreading to the corporate bond market as well.
One can only fathom the number of books with catchy titles that will in a few years hit bookstore shelves: "When is Junk Junk?" "Why Nobody Told Us" "Where Oh Where Did Mario Go?"
"We Got This Covered!"
Also caught in the middle is the euro, a currency Mario Man and his fellow central bank buccaneers are hoping to depreciate as they swash-buckle their way to some much hoped for inflation.
Much of this on-going saga was recounted today in the Financial Times article, "Eurozone bond rally nears high water mark." To be completely accurate that headline should've had a question mark at the end as the debate rages on.
Nobody knows how long it takes. But if you have any spare crash helmets lying around, now might be a good time to start dusting them off.
