Editor’s Note: In this series of articles, we include important or interesting videoclips with our comments. This is an article that expresses our personal opinions about comments made on Television and in Print. It is NOT intended to provide any investment advice of any type whatsoever. No one should base any investing decisions or conclusions based on anything written in or inferred from this article. Investing is a serious matter and all investment decisions should only be taken after a detailed discussion with your investment advisor and should be subject to your objectives, suitability requirements and risk tolerance.
1. Taper Schmeper again?
No! Please No, Drs. Bernanke & Yellen. We are plain fed up with this taper crap. You have every conceivable reason except one to begin your taper next week. Will you please do so and put us out of our misery? And what’s that solitary reason that suggests no taper? Same as usual – lack of inflation.
- Lakshman Achuthan @businesscycle on Tuesday, December 10 – Fed taper assumes “inflation moving back toward its longer-run objective.” Never mind PCE inflation down to just 0.7% vs. 2.0% Fed target
Par for Achuthan’s recent course, the very next day the market began factoring in a taper next week and the “appointment” of Stanley Fisher as Fed Vice-Chairman. Stocks, bonds & gold all fell on Wednesday & Thursday while stocks & bonds both closed virtually flat on Friday. This is what BlackRock warns will happen in 2014 – stocks, bonds will trade in tandem making diversification difficult.
If the Fed acts true to its recent form, they would not taper and then we could see some fireworks post-Fed into Friday’s triple-witching.
2. David Rosenberg on U.S. Economy.
In contrast to BlackRock which sees a limping fragile 2.5% GDP growth for 2014, David Rosenberg has bet on real GDP growth of 3% next year and at least one 3-handle payroll report. His bullish stance is well explained in his article titled U.S. economy in 2014 has more upside than many think:
- Federal fiscal policy is set to shift to neutral from radical restraint and the broad state/local government sector is no longer shedding jobs and is, in fact, spending on infrastructure programs again. On top of that, manufacturing is on a visible upswing. Net exports will be supported by a firmer tone to the overseas economy.
- But the centrepiece of next year’s expected acceleration really boils down to the consumer. It is the most essential sector at more than 70% of GDP. And what drives spending is less the Fed’s quest for a ‘wealth effect,’ which only makes rich people richer, but more organic income, 80% of which comes from working people.
- Since the pool of available labour is already shrinking to five-year lows and every measure of labour demand on the rise, one can reasonably expect wages to rise discernibly in coming years…. By hook or by crook, wages are going up next year (minimum wages for sure and this trend is going global)
Strongly recommend reading it. The bottom line is that much of the juice has been squeezed out of many asset classes. … below is a very brief summary:
- Equities over bonds; equities not cheap; favor Europe & Japan on valuation; Contrarian idea is to overweight emerging markets.
- Volatility is on sale – It is better to buy an umbrella before the rain. Volatility is cheap and many assets are expensive.
BlackRock discusses Three Scenarios for 2014
- Low for Longer -55% – growth is low and fragile, running close to stall speed. Jobs and wage growth are muted in the developed world. Inflation is low but stable; Financial conditions stay very loose—but the growth of liquidity is slowing due to reduced Fed bond buying. The risk of QE-induced asset bubbles builds; real rates and overall volatility stay subdued. Momentum can easily propel equities higher. The hunt for yield intensifies. low investor conviction in trades and lofty valuations leave little room for error.
- Growth Breakout – 25% – global growth gains momentum, pent-up demand is unleashed and animal spirits return, creating a virtuous circle. Inflation rises gradually liquidity provision is slowing— very gradually.central bankers somehow engineer smooth policy transitions toward (eventual) monetary tightening; real rates go up, driven by rising inflation expectations. This is mostly bad for bonds and mixed for stocks (growth trumps income). cyclical assets (including commodities) should do well before rate fears kick in. Volatility rises;
- Imbalances Tip Over – 20% – Squeezed real incomes, debt burdens or austerity cause recessions and/or china’s economy slows markedly; low inflation tips over into deflation central banks either tighten policy too fast or too late; capital flees emerging economies with external deficits. A downturn delivers zero nominal interest rates—but rising real ones. Markets sell off on a QE exit or exogenous shock. risk assets fall and volatility spikes. Safe-haven government bonds get a second life
The important call is on diversification because BlackRock argues equities & bonds will be more correlated which makes diversifying a challenge. Ideas include market-neutral portfolios & infrastructure.
4. U.S. Equities
Rob Kapito of BlackRock on BTV Market Makers on Monday, December 9
- stocks are
actually being priced more on price momentum vs earnings, revenues are
not coming in where everybody thought they would, they are getting
pretty toppy as far as valuation goes; PEs right now are pretty high, we have squeezed a lot of
juice out of that ..may be we have a little bit more,,, we want to be a
bit cautious for the longer term right now
- and that they should start to look
to diversify into other assets such as infrastructure, may be real
estate, other hard assets may be emerging markets, may be alternatives, and we want to make sure
people are using this diversification understanding that correlation may
work against them.. if the market does react in the way we are thinking
- we are starting to develop a bit of a basket of diversification for them
if this particular environment does arrive; next year could be a bit of
a boring year as far as where rates are and as far as where the stock
- In a nutshell, I feel like 2014 is going to feel a lot like 2004 and 1994 when the economy surprised to the high side after a prolonged period of unsatisfactory post-recession growth. Reparation of highly leveraged balance sheets delayed, but, in the end, did not derail a vigorous expansion.
- That by no means guarantees a stellar year for the markets, because, as we saw in 2013 with a softer year for the economy, multiple expansion premised on Fed-induced liquidity can act as a very powerful antidote. Plus, a rising bond-yield environment will at some point provide some competition for the yield delivered by the stock market.
Lawrence McMillan in his Friday’s article:
- The market — as measured by the S&P 500 Index ($SPX) — has declined on eight of the last ten days, and that has taken a toll on the technical indicators. However, $SPX is sitting right on support at or just below 1780 (see Figure 1). Hence, shorting the market now could be a mistake
- In summary, if the market breaks down, it could make a sharp, but short-lived plunge lower, but we expect a rally by year-end.
Two interesting tweets below:
Ryan Detrick, CMT @RyanDetrick on Friday afternoon – Huh. Last time II bulls-bears was this high (currently 43.9%) was 6/18/03 – not the worst time to be long. $SPY
Jason Goepfert @sentimentrader on Tuesday morning – Last two instances of McClellan Sum <200 and Oscillator <0 with $SPX at a high: 12/3/99 and 7/19/07 pic.twitter.com/cpUr8OXwQT
Peter Fisher of BlackRock on BTV Market Makers on Monday December 9
- we may
see a bigger change in volatility than we will in the level of rates;
… forward rates aren’t that far off where you think equilibrium might
be in the absence of QE, those may start drifting up a little bit, they
already have.. but it is the change in volatility that is going to have a
bigger impact, a little more uncertainty – we don’t know what is going
to happen next.. than it is on the level of rates, …long end – it
is probably gonna back up a little bit, so the spot 10-year rate will
keep backing up to where forward rates are.. but it is not going to fall
out of bed..
Gary Shilling on Bloomberg.com – Love Yourself Some Treasuries
- I believe Treasury yields are more likely to go down than up. First, persistent slow growth, gridlock in Washington, business uncertainty, and ample supplies of capacity and labor on a global scale mean the U.S. employment situation will probably remain weak
- Inflation is close to zero and deflation is probably only being forestalled by huge fiscal and monetary stimulus efforts With inflation this close to zero, it won’t take much of a hiccup to rattle the economy. And deflation is distinctly beneficial to Treasuries
- The initial Christmas retail selling season may be telling, and the risks are on the down side. I’m also focused on corporate profit, which may not hold up in the face of persistently slow sales growth, the lack of pricing power and increasing difficulty in raising profit margins
- I expect further declines in Treasury yields, and my forecasts may yet be realized. The “bond rally of a lifetime” will end someday, but it probably isn’t over yet.
6. Emerging Markets
BlackRock – EM vs DM – top contrarian idea for 2014
- Emerging equities look cheap on almost every measure —except the stuff that really counts in a liquidity crunch: free cash flow. EM companies generally are not great stewards of capital. And the few quality EM stocks have rocketed upward—leaving little room for error.
- countries are in a beauty contest, trying to attract money flows by raising rates and implementing investor-friendly measures. Yet this pageant could turn ugly if Imbalances Tip Over and currencies go into freefall. Think capital controls and expropriations Yet valuations are cheap, positioning is light (investors are bearish) and growth is likely to pick up a bit in 2014. Overweighting emerging stocks versus developed markets was the top contrarian idea for 2014 among our portfolio managers in a recent poll.
- The long-term arguments for emerging markets are compelling, too:
- rising real wages have boosted emerging market consumption (along with trends such as urbanization and better access to financial services). This is a boon for EM companies and multinationals alike.
- countries such as china could boost productivity through automation and improved management. Many EM economies have better credit reports than developed markets. (Taiwan, chile and South korea all rank higher than the united States in our BSRI.
David Rosenberg in Case for Staying Totally Invested
- emerging markets, which now trade very close to a single-digit forward PE multiple and have fallen completely out of favour, even though they have begun to show some signs of stabilization
- The ambitious pro-market and pro-freedom reforms just unveiled by the Chinese leadership are very constructive developments. China is opting for more moderate growth of 7% rather than 10% or 12%, but the shift underway from excessive reliance on exports and fixed industrial investment toward internal consumption is going to ultimately lead to more stable growth and fewer boom-bust episodes, and, at some point, likely revive interest in the beaten-up commodity sector
- Looking ahead to 2014, I see a base case for global growth of 3.5% after two years of subdued 3% real GDP gains
Gemma Godfrey of Brooks Macdonald on CNBC FM 1/2 on Thursday
- EM equities were also potentially less volatile than they might appear because “a lot of the hot money has already left the markets because of the last time the markets got spooked that the Fed was about to taper” … Many susceptible economies, such as Indonesia, have already experienced a “significant withdrawal” of investment capital
- emerging markets that are struggling with deficits are going to be laggards, so that’s the likes of Turkey, etc., … Also, markets like Brazil, where there’s a lack of a catalyst, could also lag like the markets”
- Godfrey said that she had turned positive on India, predicting a catalyst coinciding with its upcoming elections and an improvement in sentiment there, as well as on China. “They’re opening up for business,” she said. “So there’s going to be a lot of positive news flow coming out of an area that’s significantly underperformed so far.”
Michael Hartnett of BAC-Merrill Lynch – Consensus is Long Europe & Short EM
- Flow differential between EU & EM over the past 4m at an extreme 97th percentile
Source: BofA Merrill Lynch Global Investment Strategy, EPFR Global
Last week’s comments by Tom McClellan & Larry McDonald were echoed by a couple of others this week.
Mark Dow on CNBC Futures Now on Thursday December 12
- “Now is a really good time, risk-reward-wise, to put on a long gold or a long silver trade,” With gold near the year’s low at $1,179, “you could see that the stops are nearby, and you could get a bounce to $1,400 or something along those lines, or maybe even more”
- the net long position in gold dropped to just 16 percent, or 26,774 futures and options contracts as of Dec. 3, which is the smallest net long position since June 2007
- “If you look at t
he sentiment and the futures positioning, there are record-low gold longs—in fact, it’s almost net flat, and that’s something we haven’t seen in a long, long, long time,”
- So while Dow remains a long-term gold bear, he says a short-term bounce will “really be about the price action and positioning”
This was scoffed at by CNBC Conributor Brian Stutland on the same show:
- “I don’t think there is a bounce that’s coming here,… I mean, I would rather just stick with the long-term trend, which is lower”
Jon Najarian of CNBC Fast Money felt there was a whoosh coming before year-end which should be bought.
George Davis of RBC on CNBC Futures Now on Tuesday, December 10
- “Over the next week or two, we could see a corrective rally that potentially takes us up toward the $1,310 area, … A lot of the technical indicators are oversold, … “
- “Gold will likely break below $1,180 in mid-January or mid-February—that type of window, … Once bullion breaks below that level—its 2013 low—we’re going to see an increase in bearish sentiment that potentially takes us down to $1,100 initially and potentially the $1,060 level“
David Banister on Minyanville – Gold’s Bear Cycle Coming to a Close in December
- we are seeing patterns commiserate with what Elliott Wave theory calls a “truncated fifth wave” pattern. All bear cycles have five full waves to the downside from the highs, and we have been in wave 5 since the 1434 highs.
- Recently, gold hit a bottom at 1211 spot pricing last week and that is when we began to consider a truncated fifth wave pattern
- If we fast-forward a week later, we had gold running up to 1261, which was the pivot resistance line we told readers to watch for. We hit it on the nose and backed off to 1224 yesterday. We now expect that if gold holds the 1211 area, that we will again rally back up and over 1261 and then head to the 1313 resistance zone. We would like to see gold get over 1313, and if it does, our targets are in the 1560 ranges for gold in the first half of 2014
- Aggressive investors should consider accumulating quality gold-producing and gold-exploration small caps, or gold itself depending on their preferences during these last few weeks of December as our Elliott Wave analysis is signaling a bottom is near. We would again watch 1211 as a key level to hold for this possible truncated wave 5 to work out.
Despite all the negative press in 2013, the Indian Sensex hit another all-time high earlier this week on positive news from last week’s election results. For a more detailed discussion of this topic, see our adjacent article A Macro View of Indian Elections.
An example of how resilient, cool or uncaring Indians are is the following tweet & photo. Would you drive or be driven on this road under this rock?.
Send your feedback to email@example.com Or @MacroViewpoints on Twitter.