Interesting TACs of the Week (June 28 – July 3, 2014)

 

Editor’s Note: In this series of articles, we include important or interesting tweets, articles, videoclips with our comments. This is an article that expresses our personal opinions about comments made on Television, Tweeter, 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. Macro Viewpoints & its affiliates expressly disclaim all liability in respect to actions taken based on any or all of the information in 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.  U.S. Economy

Back in December 2013, David Rosenberg bet on real GDP growth of 3% in 2014 and at least one 300-handle payroll report. With Q1 GDP at -2.9%, his first bet will be a loser, we bet. But we are inclined to give him the 2nd part of his bet with this week’s NFM report. A 288,000 payroll report is close enough for prediction work, we think. And he seems to be correct in his general assessment so far in Q2. So what did he say after the 281,000 ADP report on Wednesday?

  • Gluskin Sheff ‏@GluskinSheffInc – David Rosenberg: Auto sales are clearly in overdrive and ISM is consistent with a 4 pct growth economy

With Auto sales, ISM, & payrolls all showing a strengthening economy, what’s not to like? And right on cue, the Consumer Discretionary sector made a new high on Friday along with major indices. Treasury yields shot up in the immediate aftermath of the payroll report prompting tweets like the one below:

  • Friday am – Urban Carmel ‏@ukarlewitz – TLT – sub 110.5 is a break of key S. TYX 3.5% and TNX 2.7% key R.

Looked like these levels were a goner and then we saw: .

  • Friday am – Downtown Josh Brown ‏@ReformedBroker – Now the funny part, bonds will rally just to f*** with everybody again.

And right on his cue, bonds began rallying from their vertical decline. The 10-yr yield backed away from 2.7% to close at 2.64%, a mere 1.3 bps rise on the day and the 30-year yield also backed away from 3.5% to close at 3.47% virtually unchanged on the day despite the strength in the economy & the rally in stock indices.

Assuming Downtown Brown meant “frustrate” in his tweet, he proved to be absolutely correct. Thursday’s action in long Treasuries has to be extremely frustrating for stock bulls. Paul Richards of UBS is not among the frustrated though, because in his 2.75% is the new 3% call on CNBC FM -1/2 on Wednesday, he had predicted:

  • the comment I would make, Melissa, we could see a 300,000 payroll number tomorrow and I don’t think the ten-year yield goes above say 2.65%. That’s the search for yield and that is why stocks continue to push higher. .

Isn’t this called “goldilocks”? Well, someone did this week but more than later in Equities section.

2. The Difference one Year makes

How nutty was Thursday’s action in long maturity Treasuries? Look back to July 5, 2013, the day a stunner of a payroll report showed a gain of 195,000 jobs. How did Treasuries react on July 5, 2013?

  • 30-yr yield up 20 bps to 3.7%, 10-yr yld up 22 bps to 2.73% & 5-yr yld up 18 bps to 1.60%; TLT down 3.4% to $106.25; all spread products got hit hard.

And on this Thursday with a gain of 288,000 jobs, a 48% higher number than the one on July 5, 2013?

  • 30-yr yld up 0.3 bps to 3.47% (lower than on 7/5/2013), 10-yr yld up 1.3 bps to 2.64% (lower than on 7/5/2013), 5-yr yld up 2.5 bps to 1.74%. TLT down 36 bps to $110.68 (higher than on 7/5/2013) & up to $110.90 in the 1-2 pm after-market when bonds were open to trade. Spread product ETFs like HYG, JNK & EMB closed basically unchanged.

Is this what they mean by strong payroll growth is priced in? Or is the Treasury market sending a message by closing 10-yr yield below 2.66% as Rick Santelli said?

There was another asset class that behaved like Treasuries last year & this week:

  • Friday July 5, 2013 – U.S. Dollar UUP up 1.45% to $22.90, GLD down 2.14% to $118.16, GDX down 5.17% to $22.93, GDXJ down 5.28% to $34.28 & SLV down 4.10% to $18.24;
  • Thursday July 3, 2014 – U.S. Dollar UUP up 38 bps to $21.39, GLD down 52 bps to $127.03, GDX down 19 bps to 26.43, GDXJ up 2.65% to $42.65, SLV down 20 bps to $20.26.

But stocks went up big & VIX fell hard on both Friday July 5 2013 & on this Thursday. 

We have no idea what the above divergence means, whether a strengthening economy is already priced in, whether Treasuries & precious metals are expressing disdain for the economic strength, or whether the trends that began in 2014 will continue either due to Newtonian inertia or due to gentle guiding hands from DC, Brussels & Tokyo?

3. Equities

The trend continues – Stock indices keep reaching new all-time highs, volatility keeps getting squashed, bearish sentiment keeps disappearing and gurus keep raising their price targets like:.

  • Jeremy Siegel on CNBC FM -1/2 – “I think we’re going to get to 18 and above. Could it go to 19, 20? It could … We could be overvalued at 20-21,000, at least in the short run,… Again, just like I said a year ago, markets often go beyond fair market value before they correct back down”
  • Erin Gibbs on CNBC Closing Bell “look at forward next year’s earnings, we’re looking at 10%, 11% growth … we’re looking on target of  2015. it’s very dependent on can they deliver third and fourth quarter earnings”

The one exception was a man who has been correctly bullish for the past few years. When such a bullish guy uses both “goldilocks” & “top” in the same segment, we listen. : 

  • James Paulsen on CNBC Squawk Box – “I really think there is probably a growing sense of goldilocks here a little bit, which is maybe what you need to get a market top. I think there is a sense that we’re growing 3%-plus. it looks like we might the rest of the year quote/unquote. that’s not too cold anymore. it’s also not overly hot. there is not a sense of run away inflation or imminent fed tightening. I think the combo package does give you a sense of goldilocks and a straight methodical upward move in the market. I think that’s what’s drawing more and more capital in slowly. I don’t know. I still think we’re probably pretty close to the highs for the year. I think today’s ADP reports is a signal of what’s to come, where good news has been good for the market up until now. it might start to be interpreted as bad news if we embroil inflation indicators with it & higher bond yields. maybe that’s what we will deal with through the rest of this year”

That might be a big “if” given how treasury yields refused to stay up despite the strength in payrolls on Thursday.

So far, bullish bulls like James Paulsen & Tony Dwyer have been as wrong in their bearish or cautionary predictions as the bears. Goes to show the presence of a guiding hand.

So what does an equity investor buy? Ralph Acampora said he doesn’t like to buy extended sectors like Semiconductors while Louise Yamada expressed her favorite dictum – “longer the base, the higher in space“about Semis & in particular about Intel:

  • “semi conductor group, which we just shared has broken out through ten years of consolidation, breakout here on Intel. this is Intel, breakout through $29.30 and the longer the base the higher in space concept. you can keep going up to the mid- to higher 30s at least a first stop for Intel

Paul Richards used a corollary of his macro view of his 2.75% is the new 3% to say: 

  • “I love the Nikkei. I think the Q3 trade, third quarter trade is going to be Japan. QE 2 coming through. six months until they get 2% inflation and I think Kuroda will press the button -that to me will push the Nikkei substantially higher into Q3 and Q4 and dollar-yen will follow through. I think China is still very focused on enough stimulus to make sure they don’t have an accident there as well, combine that with Japan. emerging market, emerging market yields, critically equities,are going to win in this environment and will spill over into Brazil and others. I think so long as we don’t have a geopolitical accident, which has still got to be at some time priced into the market, maybe more of end of year event, I think risk is fine and emerging markets are going to win.”

Corrections do not begin without visible divergences. Tom McClellan sees some in his Alarming Sign in NDX Stocks’ Drawdown article:

  • “… for now, the message is that the average stock making up the Nasdaq 100 Index is not confirming the bullish message of the NDX’s higher price highs.” 
  • “What we are seeing lately is a declining number of Dow components participating in the uptrend that way, and a drop of this indicator below its 15-day moving average. This condition also comes as a divergence appears between prices and the indicator.”
  • “As with the NDX stocks’ indicator above, the divergence does not absolutely have to persist; the market could just power through it, but that is not usually the way things usually work out.”

Since Draghi became Super-Mario in August 2012, divergences have been correcting bullishly. At some point, they won’t. But will that point despite the guiding hand? We will know when the markets tell us.

 

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