KITCHEN REPERCUSSIONS?

During the first few days after Magic Mario Draghi, the ECB top gun, opened his new bag of economic magic tricks, the euro shed two percent of its value and is  now down about six percent since early July.

Across the wide Atlantic the U. S. dollar of late has been on its own tear upward against most major currencies. A strong dollar and a weak euro are Milano opera house music to the ears of  Draghi and his minions at the ECB.

And the Chinese yuan has undergone a similar rebirth to the upside, regaining about half of what it previously dropped against the greenback. In the Land of the Rising Sun it's a similar story with the yen falling against the U.S. dollar.

From a macro point the strong dollar and yuan will help the EU and Japan to perhaps export their way to economic nirvana. At least that's the theory. And it's a good one as far as theories go. This is a backdoor way around what these bureaucrats hate to face most, painful, much-needed structural changes. But theories are often like the best plans of mice and men.

When Japan's chief cook and bottle washer, Shinzo Abe, captured Japan's big kitchen in late 2012, he set out to scrub the yen. And so far so good, since the currency is down over 20 percent against the dollar  in less than two years.

If you're in the asset bubble business, it's a good recipe since the upswing in the  Japanese stock market pretty much tracked the down swing in the yen. Some might suggests that's what usually happens when you print a lot of currency.

According to reports we've seen, however, the effect on Japanese exports and its real economy have been less stellar. Now to be sure every situation is a bit different, but in this case not that much. Both Japan and the EU are in a global world of hurt and both are looking to the U.S. which is not that much ahead of them, in the view of some, for help.

Everything has a repercussion. So what's this one? 
t. man hatter

AVAILABLE TO ALL

Forget a horse and all that about my kingdom for such. Most of us would give a bunch for a revision.

 
What's a revision? Well, the ability or opportunity to go back and change the unpleasant or unwanted in life, try that for starters.

Here's an example from http://www.marketwatch.com/story/an-economic-puzzle-has-been-revised-away-2014-09-12.

Payrolls growth has been strong, the unemployment rate has come down, manufacturing and service sentiment was buoyant, consumer credit was expanding, the stock market continues to improve, house prices are still mending, consumer confidence was improving — but consumers weren’t spending?

Well, the new Commerce Department report on retail sales indicates that, actually, spending wasn’t so disastrous.

Not only did retail sales grow 0.6% in August, but that growth came from a better base, as both June and July figures were upwardly revised.

And while the retail sales figures were bolstered by car sales — in turn, juiced by subprime lending — most other categories also had a solid month. Furniture and home-furnishings stores had sales growth of 0.7%. So, too, for electronics and appliances stores.

OK, gas stations had a bad month, and department stores continued to struggle, but the former was due to good news (falling prices) and the latter is a secular story, one of a shift toward Internet-based shopping. In the last 12 months, nonstore sales have climbed 7.1%, while department-store sales have slipped 1.2%. (See: Greed is not good for Macy’s investors.)

The August report — and, importantly, the revisions to June and July — now fit with other pieces of the U.S. economic puzzle.

It's nice to be able to go back and make everything fit. One might say it ought to be available to all.
t. man hatter

TALKING POINTS

Here's an interesting  "Talking Points" from Marc to Market. We take issue with some, like the statement "Plosser, Fischer and Bullard" don't represent the Majority of the FOMC.

That's precisely the point: They should be and that takes us to a second point. The Fed will wait too long to change it's forward guidance. Be that as it is, we like to read those who may hold different views from ours.

Despite all the babble about inflation being AWOL, the folks who go to the store every few days, the people who look at restaurant menus, who pay their electric, trash and water bills; those living on fixed incomes all know what inflation looks like. And it ain't below two percent.

And you could take all those phony, artificial indices the Fed and other central bankers use, load them on a big barge, float 'em out to sea, blow 'me up and nothing would be any different. Prices are still going up.

The recent temporary lull in gasoline prices notwithstanding, it's an electronic version of a computer game to keep the natives from getting too ISIS-like. Check China's recent ploy to promote interracial marriages between Muslims and non-Muslims.
http://www.marctomarket.com/2014/09/six-talking-points.

THE WHITES OF THEIR EYES

If one takes a look at much of the recent stock market's performance one can draw a simple line down the middle of the sectors and look at the ones lagging and those which have done a bit better and perhaps see the symbolism and how it relates to the economy in general.

Concerns about global economic weakness from China to Europe dominate MSM. Even the U.S. is not on solid economic terra firma in the eyes of many.

The world turns, for example, on energy, one of the poorest performing sectors so far in recent weeks. From fears about supply interruptions to growing fears about declining demand presently hold sway among many investors.

But a funny thing in going on, according to today's Financial Tmes, something traders are familiar with, "a so-called 'contango' structure in Brent crude--market jargon for when prices for future delivery exceed spot prices--by keeping oil in storage and banking on an almost risk-free profit when they sell it forward or in time ahead." 

Near term prices for Brent recently hit $98 a barrel for the first time since early 2013. Part of the reason over supply coupled with increasing weak demand. It costs money to store stuff, but it's one way to effect supply. this might turn out to be nothing more than a short-term trading opportunity for traders. But it's also a barometer to test how strong demand weakness might be.

Some investors think global supplies will take a hit in the next couple of  years pushing prices back up. It's a bet on the current meme and the oil glut that all-that-is-well-doesn't stay well. Contrary to what many believe, signs precede not follow.

Joining energy on the down slope are things like discretionary consumer stuff and basic materials, again two sectors at the bottom line that have to do with demand and its prospects for drying up. It's an albatross hanging for now around these sectors. 

The Fed recently as we noted jumped in the parlor game chastising consumers for not spending more. As we said at the time everyone needs a villain or two. The point here is these sectors are proxies for the general economy. Toss in the reaction of so-called safer haven equities like health care and consumer staples as many investors play more defense.

For now when they go back on offense is the question. But one things remains certain, when they do no one will ring a bell beforehand because many investors will be waiting to see the whites of their eyes first.
t. man hatter

ANGNST AND MORE

 
Angst and more could easily be the monicker for some cozy, laid back Deep South legal firm.

But in this case it isn't. It's about anxiety and the popular medicines prescribed to relieve it.

Who among us hasn't experienced his or her share of anxiety? It's rampant in these fast-changing high-tech-laden days. That itself is a paradox. Technology is suppose to makes things easier, less frustrating. Good luck with that one.

In the global effort to understand the causes of Alzheimer’s disease, another culprit emerges: Benzodiazepines. This class of drugs includes the widely prescribed anti-anxiety medications Ativan (lorazepam), Xanax (Alprazolam), Valium (diazepam), and Klonopin (Clonazepam). Researchers from France and Canada report in The BMJ that prolonged use of the drugs – for three months or more – may significantly increase the risk of Alzheimer’s disease years later. The drugs have been associated with short-term cognitive impairment, but the connection to Alzheimer’s has been less clear. Now, the new study finds a convincing, and apparently strong, link between benzodiazepines and Alzheimer’s disease.
http://www.forbes.com/sites/alicegwalton/2014/09/10/common-anxiety-medications-may-increase-risk-of-alzheimers-disease

One concern with studies like this is that reverse causation is at play: It could be that people who are already showing early symptoms of Alzheimer’s – like anxiety, depression, insomnia – are taking benzodiazepines to treat those symptoms. So it’s more that early effects of Alzheimer’s disease “caused” the use of the benzodiazepines, instead of the other way round. But the authors intentionally omitted the five years directly before the Alzheimer’s diagnosis. Instead, they looked at an earlier time period – five to 10 years preceding it. For this reason, and the dosing reasons mentioned above, they say it’s more likely that there is, in fact, a causal relationship going on, where long-term benzodiazepine use may actually trigger Alzheimer’s pathology.

According to the study, more than 50 percent of older people take some kind of mediation for mental health problems. 

POLITICAL CORRECTNESS RUN AMOK

Political correctness like greed apparently knows no bounds as, according to today's Wall Street Journal, "Fossil Fuels Stir Debate at Endowments."

A nationwide showdown between activists and universities over investments in coal, oil and gas intensified Tuesday after a University of California task force abruptly pulled back a draft recommendation not to sell its fossil-fuel holdings.

The group—charged with advising the university's investment committee—had planned to suggest that the state system join Harvard University, Yale University and Brown University in holding fast against activist calls to dump their fossil-fuel investments, said people familiar with the discussions.

But in an hour long meeting Tuesday, several task-force members successfully argued for preserving the option of divestment. The task force subsequently removed from its recommendation to an investment committee language stating that selling those investments "would not meaningfully impact climate change," these people added.

A system spokeswoman said the university isn't currently considering a complete fossil-fuel divestment but may decide to sell some assets as it sets new investment guidelines. 

 http://online.wsj.com/articles/fossil-fuels-stir-debate-at-endowments-1410306277

The University of California system is funded by state taxpayers, some of whom might be activists, but many who are not. This decision, since it could easily cost taxpayers money should be put to the the people, not a rag-tag bunch of wags and political activists. The University system actually belongs to everyone in the state.

Be that as it may, this is just another reason why we like energy stocks going forward. If energy gets anymore unloved, it could become a politician.
t. man hatter

BOND KING SPEAKS

Here's an interesting read from yesterday about Jeffery Gundlach, the Bond King, as Barron's aptly named a few years back. Read it and draw your own conclusions. 

• Hi there — we are just about to get started with Jeffrey Gundlach’s webcast. In the meantime, here are a few things to look out for
• • 1:14 pm
  • 
  • Where are interest rates headed?
  • by Ben Eisen
  • Add a Comment
  Gundlach said on CNBC Tuesday that he sees the benchmark 10-year Treasury note  10_YEAR yield staying in a range between 2.2% and 2.8% (it was at 2.50% on Tuesday). That assessment is driven in part by demand from investors who see U.S. yields as attractive relative to other developed economies, like Germany and Japan, where yields are much lower. Expect him to speak further on this theme.
• • 1:14 pm
  • 
  • Where is monetary policy headed?
  • Add a Comment
  Gundlach said during the same interview Tuesday that he doesn’t believe Federal Reserve Chairwoman Janet Yellen is in a hurry to raise interest rates, even if other Fed officials are. But that accommodation may just be the beginning. In a Financial Times interview, he said that a slow economy may well push the Fed to bring back its bond-buying programs by 2020.
• • 1:15 pm
  • 
  • What's the deal with housing?
  • by Ben Eisen
  • Add a Comment
  If you want to know what’s holding back the economy, look no further than housing, which Gundlach believes will suffer from continued demographic shifts away from home ownership. He suggested shorting home-builder exchange-traded funds during an investment conference in the spring.
• • 1:16 pm
  • 
  • Are junk bonds safe to buy?
  • by Ben Eisen
  • Add a Comment
  Gundlach took a firm stance against the value of corporate credit this year, calling much of the investment-grade and high-yield sectors overvalued. But a mild junk-bond JNK  selloff this summer has made them less highly valued. Gundlach may talk about whether he thinks it’s safe to wade back in.
• • 1:16 pm
  • 
  • Is a stronger dollar here to stay?
  • by Ben Eisen
  • Add a Comment
  Gundlach’s CNBC interview Tuesday revealed a surprising call: He expects the dollar to strengthen substantially against the Japanese yen, which is likely to continue being devalued. Eventually, he sees the dollar USDJPY  rising to ¥200 (it was at ¥106.40 on Tuesday).
• • 1:16 pm
  • 
  • Where is there value in other assets?
  • by Ben Eisen
  • Add a Comment
  In the past, Gundlach has taken positions on specific stocks like Apple Inc. AAPL (some value) and Chipotle Mexican Grill Inc. cmg CMG (against). Gold and bitcoin have also been past topics. Investors will pay attention to what else is on his mind.
• • 1:22 pm
  • 
  • And we're on
  • by Ben Eisen
  • Add a Comment
  And we’re on. The webcast is called “Fixed Income Playbook” and the football metaphor is intentional. The big players in the financial markets are led by Fed’s Janet Yellen and ECB’s Mario Draghi, Gundlach says.
• • 1:24 pm
  • 
  • Big winners
  • by Ben Eisen
  • Add a Comment
  The big winners in fixed-income this year, Gundlach notes:
  

  • Hybrid convertible bonds, which have risen in line with equity strategies.
  • Junk bonds were a big winner last year, and they’re a lesser winner this year.
  • Emerging markets are strong this year though they lost last year.
  • Corporate, international developed markets, mortgages, and government bonds are all up on the year.
• • 1:27 pm
  • 
  • "Interesting year"
  • by Ben Eisen
  • Add a Comment
  10_Year
  <p>Your browser does not support iframes.</p>

  “This has been a really interesting year for investors, because there have been really no problems, only the smallest bumps in the road,” Gundlach says.
  Interest rates are down are down this year, and downside vol has been among the lowest in history amid predictions that this would be a year of increasing benchmark Treasury yields.
• • 1:33 pm
  • 
  • German bunds as an indicator
  • by Ben Eisen
  • Add a Comment

  

  Gundlach is talking about the divergence between U.S. Treasury yields and German bund yields, which has been a major theme this year. German bund yields have fallen, making Treasurys look more attractive to European and Japanese investors.
  “Watch European bond yields” as the most important thing to consider for bond investors, Gundlach says. European yields must rise for U.S. yields to rise. French 10-year yield would have to go over 1.75% for U.S. 10-year to get over 2.80%, he says.
  Read more: One chart shows the diverging fortunes of U.S. and Europe
• • 1:33 pm
  • 
  • A little higher
  • by Ben Eisen
  • Add a Comment
  Rates could move a bit higher, though, he says. Maybe to 2.65% on the U.S. 10-year yield from where we are today, though. We are at  2.50% at the moment
• • 1:36 pm
  • 
  • "Fight this rally"
  • by Ben Eisen
  • Add a Comment
  “It’s almost comical” that people continue to forecasts interest rates will rise, Gundlach says. He puts up a slide of a survey that shows near-unanimous forecasts of rising yields among economists. That forecast has been a real money loser, he says, but people continue to “fight this rally.”
  Read more: 100% of economists think yields will rise within six months
• • 1:42 pm
  • 
  • Why yields can't rise too much
  • by Ben Eisen
  • Add a Comment
  Countries like Spain, France, and Japan all have lower yields than in the U.S. Treasury market. You have to increase country-risk substantially to get more yield, Gundlach says.
  Another factor: mutual funds own a very small portion of the market. Even if mutual funds run for the exit, there are other buyers who will remain in place, Gundlach says.
  The Fed continues to hold onto the Treasurys it owns. And the Fed could even start buying bonds again — reentering QE — which they seem on track to do.
• • 1:46 pm
  • 
  • On GDP growth / Rate hikes
  • by Ben Eisen
  • Add a Comment
  For three years in a row, forecasts for U.S. GDP have been downgraded. That may happen again. Yet “hope springs eternal” that each year will see 3% GDP growth.
  “It doesn’t seem like the economy is exhibiting the type of acceleration that so many people are talking about,” he says. Given that, he doesn’t think the Fed is in a rush to raise rates.
• • 1:48 pm
  • 
  • China a buy
  • by Ben Eisen
  • Add a Comment
  The economy in China is being downgraded, yet the Chinese stock market is strong. The Shanghai index  XX:000010 has risen in recent months, which confirms a buy signal, given the market is cheap compared to recent historical levels. A good option for high-risk investors, he says.
• • 1:50 pm
  • 
  • U.S. dollar strength
  • by Ben Eisen
  • Add a Comment
  usdjpy
  <p>Your browser does not support iframes.</p>

  The dollar is likely to continue strengthening against key rivals. It’s at a 6-year high against the yen  USDJPY . He adds: “you don’t want to be long the euro EURUSD .”
  Taking that concept further, it means you don’t want to own foreign currency bonds, he says.
• • 1:51 pm
  • 
  • Inflation and wages
  • by Ben Eisen
  • Add a Comment
  Inflation is a not problem, Gundlach says. We are seeing some signs of an uptick, but nothing worrisome.
  On wages: The “hollowing out of middle class wages and employment,” is what Yellen and co. are most worried about. The Fed would need to see this move much higher to start talking about seriously raising rates.
  Inflation-adjusted hourly earnings is “not making an progress,” he adds. It seems strange to think that with people losing purchasing power, you would actually raise rates.
• • 1:54 pm
  • 
  • Add a Comment
• • 1:56 pm
  • 
  • Tightening crowd
  • by Ben Eisen
  • Add a Comment
  For argument’s sake, Gundlach lists the reasons people cite for tightening monetary policy:
  

  • Unemployment rate is down
  • Number of people unemployed is lower
  • Utilization rate moving toward some sort of average
  • Apartment vacancy rate is improving
• • 2:03 pm
  • 
  • What the flattening curve means
  • by Ben Eisen
  • Add a Comment
  The yield curve has really changed this year with long rates coming down and short rates moving up slightly. For historical context, the yield curve flattened tremendously between 2004 and 2006, when the Fed was in a cycle of raising interest rates.
  This year, rhetoric on rate rises has increased a lot. Taking the market assumptions of rate hikes next June and overlaying it on the 2004-to-2006 period shows that the Fed could raise interest rates and the 10-year yield may not even sell off. In recent days, it seems almost like the 10-year wants the Fed to raise rates, Gundlach asserts.
  “So many market participants talk about the long end being vulnerable, but the message of the market has been the exact opposite,” Gundlach said. “The market is not signaling a blowout on the long end.”
• • 2:06 pm
  • 
  • Shift on junk bonds?
  • by Ben Eisen
  • Add a Comment
  “Much has been made of high yield inflows and outflows, but too much has been made of it,” Gundlach says.
  There’s not really a trend here in terms of outflows. Gundlach says he’s not really afraid of junk bonds — a shift in language from when he has called the market highly overvalued.
  Read what he has said in the past: Corporate bond rally is next to bust, some fear
• • 2:08 pm
  • 
  • But still doesn't prefer high yield
  • by Ben Eisen
  • Add a Comment
  “I would rather own a mix of non-high yield bonds than high yield, and sprinkle in stocks” for higher-risk securities, Gundlach says. He specifically highlighted emerging market stocks like India.
• • 2:09 pm
  • 
  • Corporate bond impact
  • by Ben Eisen
  • Add a Comment
  Corporate bond issuance is big, and that could be a reason for yields to back up a bit. However, European bond yields need to back up a lot for U.S. yields to make a serious move higher.
• • 2:11 pm
  • 
  • Valuations
  • by Ben Eisen
  • Add a Comment
  An outlook on bond sectors:
  High yield bonds were the most overvalued in history at year end, but now they aren’t as overvalued. Gundlach said he sold some investment grade corporate bonds to buy high yield bonds.
  Mortgage bonds have cheapened a bit since year end, but are still fairly valued.
  Emerging market bonds are still one standard deviation overvalued, but that’s less overvalued than U.S. corporate debt, so preference remains intact for EM.
• • 2:13 pm
  • 
  • Add a Comment
• • 2:14 pm
  • 
  • Housing
  • by Ben Eisen
  • Add a Comment

  

  Getty Images

  Home prices have risen while home ownership declined, Gundlach notes. That suggests the housing market is “kind of sick.” since it’s getting harder to afford a home.
• • 2:17 pm
  • 
    
  • Interest-rate risk
  • by Ben Eisen
  • Add a Comment
  Jeffrey Gundlach notes that he has brought down interest rate risk in his flagship fund. Interest rate risk is lower than the Barclays Agg but still higher than the 10-year Treasury note yield.
  About 62% of the fund is in government credit. Biggest exposures are in agency and non-agency mortgage-backed securities.
  Read more about his interest-rate risk strategy: Gundlach’s crisis-era bet holds rising-rate lesson
• • 2:17 pm
  • 
  • Add a Comment
• • 2:22 pm
  • 
  • Neutral duration
  • by Ben Eisen
  • Add a Comment
  On to the Q+A: What would cause you to move duration to more neutral relative to interest rate risk? Gundlach says you need to higher rates.
• • 2:24 pm
  • 
  • De-leveraging
  • by Ben Eisen
  • Add a Comment
  On de-leveraging: Total debt has been falling due to mortgages defaults. Is that really de-leveraging? Yes, but it’s not necessarily healthy. Leverage remains high.
• • 2:26 pm
  • 
  • Dick Bove on mortgage crisis
  • by Ben Eisen
  • Add a Comment
  Gundlach knocks bank analyst Dick Bove, with whom he disagrees about the possibility for a mortgage crisis this winter. Says Bove is misinformed about this one point, though noting he’s a generally strong banking analyst.
• • 2:32 pm
  • 
  • Gundlach vs Tepper
  • by Ben Eisen
  • Add a Comment
  David Tepper of Appaloosa Management said last week that we are at the “beginning of the end” of the bond market rally in the U.S.  after the last European Central Bank meeting, according to Bloomberg.
  Asked about that quote, Gundlach said “He is a little late to the party.” He noted that, “I said that when it was really true,” back in 2012 when U.S. 10-year Treasury yields put in record lows.
  Nonetheless, Gundlach added that we are at the beginning fo the end of the European bond market rally.
• • 2:35 pm
  • 
  • Call ends
  • by Ben Eisen
  • Add a Comment
  http://blogs.marketwatch.com/thetell/2014/09/09/jeffrey-gundlach-gives-market-calls-and-outlook/