Summary – A top-down review of interesting calls and comments made last week about monetary policy, economics, stocks, bonds & commodities. TACs is our acronym for Tweets, Articles, & Clips – our basic inputs for this article.
Editor’s Note: In this series of articles, we include important or interesting Tweets, Articles, Video Clips 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. Did anything happen this week?
Look at the results of the week and you tell us – Dow, S&P up more than 1%, TLT up 1%, Treasury curve flattened, U.S. Dollar up 1/2%, Euro hardly moved, Oil yawned, Volatility dropped by over 8% – par for this year’s course, right? After all the commentary about the Fed statement & the mid-week action in the Treasury curve, the end of week doesn’t reflect any real change. Even the Scottish vote turned to be a yawner for the GBP which fell slightly post-verdict.
Contrast this with the commentary:
- Martin Feldstein on CNBC Santelli Exchange on Thursday- They are being very cautious but they are communicating to the market that 2015 is going to see a significant increase in short rates and I suspect longer rates as well.. they are telling us by the end of the year  the funds rate will be in the 1.25 -1.5%
- David Rosenberg of Gluskin Sheff on Thursday – From my lens, the message is that the Fed is more convinced that a policy normalization is going to take hold next year even as it exercises patience. … Rates to rise sooner, not later … Fed’s dot plot for funds rate- year-end 2015 – 1.375%; 2016 – 2.875%; 2017 – median dot 3.75% – more or less throwing cold water on the view of there being a terminal rate as low as 2%;
- Jeff Rosenberg of BlackRock on CNBC Squawk Box on Thursday – biggest change in the bond markets yesterday were the real interest rates, the 5-year interest rate in real terms went up 15 bps & you see that through out the market that you are repricing the idea that real interest rates have to go higher.
Notice the above comments were voiced on Thursday and sounded perfect. Then came Friday with a 2% rally in the 30-year zero coupon strip. The 30-year yield fell 7 bps & the 10-year yield fell 5 bps on Friday. Friday changed the week’s banner from a bear-steepening of the curve engineered by Chair Yellen to a bull-flattening on the week from 153 bps to 147 bps on the 30-5 year curve. This amazing action went unnoticed in the euphoria of the biggest IPO in the history of the USA.
What triggered this fall in yields, we don’t know? But it must have spelled “rolaids” to Bill Gross who bravely recommended buying the belly of the curve on post-Fed Wednesday. It must have also comforted tweeters like:
- Will Slaughter @NWPCapital – TIPS market screaming that the Fed will hike too soon, as 5Y rates head higher and falling breakevens forecast a deflationary impulse
- Will Slaughter @NWPCapital – As @DavidSchawel notes, 10 bp plunge in 5Y inflation breakevens today seems to argue that whatever the FOMC is doing here, it is a mistake
- Keith McCullough @KeithMcCullough – Long Bonds $TLT and $EDV remain core holdings for anyone who has had rates falling right this year
The debate here is not just about rates but also about the direction of the U.S. economy:
- David Rosenberg of Gluskin Sheff on Friday – In the U.S., the economy is starting to fire on all cylinders for the first time this cycle.
- Keith McCullough of Hedgeye on Thursday – threat is deflation; growth & inflation slowing at the same time in rate of change terms … $ goes beserk & you get deflation.
Marc Faber made a similar point about the U.S. Dollar on CNBC Squawk Box on Friday:
- “a strong dollar, has already happened in the last 2 months, signifies that international liquidity is tightening & when that happens it is usually not very good for asset markets”
Scott Minerd of Guggenheim partners argued for the doves on Thursday via his chart of the week titled Labor Market Index Suggests No Rate Hike until Late 2015 or 2016:
- Contrary to the Federal Reserve’s forecast in its “dots,” a labor market conditions index
from the Federal Reserve Bank of Kansas City suggests the timing of the Fed’s first rate
hike should be no earlier than late 2015, or possibly even 2016. The index, cited by Yellen
in her recent Jackson Hole speech, uses 19 labor market indicators to measure overall job
market conditions. In the prior two rate hike cycles, the index was positive before the Fed
began raising rates. The underutilization in the labor market, combined with recent
inflation softness, suggests the Fed should maintain the current level of policy rate for a
considerable period of time.
Despite all the above, we still don’t get why long treasury yields fell so hard on Friday. Perhaps it was simply the inability of the 10-yr yield to break through 2.65%, its 200-day moving average despite all the fundamental reasons to do so this week.
First and foremost, a short term cautionary note from Ryan Detrick in his article –Why Next Week Is The Worst Week Of The Year For Stocks:
- “Next week is the 38th week of the year (avg return = -0.59%). Might not mean much to you, but this is actually the worst week of the year for the S&P 500 (SPX) going back to 1950. … Now the 38th week usually takes place during the latter part of September and we all know that September is usually the worst month. Whatever the exact reason, I think this is something traders should be very aware of going into next week”
- “I broke this down a little further and found that September 19 is actually the single worst day to buy and hold for five days. Since ’50, the five trading days after September 19 are higher just 30.4% of the time (14 out of 46 times) for an average return of -1.04%. To summarize, there isn’t a worse day to buy and hold for five trading days than September 19“.
To his credit, Detrick told all of us this on September 18. At the other end of the time spectrum is Louise Yamada who said the following on CNBC Futures Now on Thursday:
- “the S&P and the Nasdaq have been doing extremely well…we have some underlying problems in terms of negative divergences in the indicators but don’t have any structural problems with the equity market at this point“
Referring to the chart below, Yamada said on CNBC Futures Now:
- “Relative to the world, the breakout occurred in 2009. And I would say that we have a new
structural trend in place that should continue, notwithstanding interim pullbacks,”
Wharton professor Jeremy Siegel reiterated his Dow 18,000 prediction on Tuesday on CNBC Squawk Box and Tom Lee reiterated his year end S&P 2100 target on CNBC SOTS on Monday.
The Dow and S&P rallied 1.7% and 1.2% resp. last week but the Russell 2000 fell by 1.2%. Does this divergence matter? Bespoke didn’t say but provided the following not-so-warm data on Friday:
- Bespoke @bespokeinvest – 1984, 1987, 1998 and 2007 are the only years where the Russell 2,000 was down on the year and the S&P 500 was higher.
The October period was pretty brutal in those years as we recall. Scott Minerd used October to make a timing call this week:
- “The bottom line is things are looking pretty good, but while financial markets are in
encouraging shape longer term, now is often the worst time of year for markets. Indeed, October is remembered for the stock market crashes of 1929 and 1987, and the 2008 financial meltdown. The buy signal for the S&P 500 traditionally coincides with the first game of the World Series, so we may have to wait to relax, at least until October 21, when the Fall Classic is scheduled to begin. Until then, investors will likely go through some periods of higher volatility.“
If Russell 2000 is one warning signal, margin debt is another. It was used to make a Sell All Equities call this week per:
- Holger Zschaepitz @Schuldensuehner – DZ Bank makes a crash call on highly overvalued stock mkt & record high margin debt. Recommends to sell all equities. pic.twitter.com/AT7sIbNfRm
Marc Faber used the margin debt levels to discuss a difference between 2007 & now:
- “Margin debt as a % of stock market capitalization it is essentially at 2007 high; … unlike the crisis in 2007-2008, when the recovery came in 2009, emerging economies had a lot of momentum & were still buoyant … China was very strong … now the emerging market complex is slowing down and isn’t growing to grow nearly as much as people had expected … if emerging economies overall can grow next year at say 4%, that would be actually an optimistic scenario“
According to Across the Curve , IMF has come out with “a new paper which chronicles a broad based slowdown in Emerging Market economies”:
- “The fact that we project some rebound in growth for the advanced economies and are lowering it for the emerging economies is suggestive of something internal among the EMs,”
- “According to the IMF’s estimates, a one percentage point slowdown in emerging market growth lowers growth in advanced economies by quarter of a percentage point because of reduced trade.”
- “That means the 2 percentage point reduction in emerging market growth since before the financial crisis could mean a 0.5 percentage point reduction in growth for rich countries such as the US. This suggests the weakness in developing countries could be an important reason for the recent growth disappointments in advanced economies.”
- The IMF said an emerging market slowdown could also mean lower commodity prices and possible trouble for banks that have overextended their lending in countries where growth has abated.
Gold & Silver had a horrible week again with Silver down 4.2% on the week. Is this what Tom McClellan would describe as “the business of putting in a bottom“? Is it a case of a hated asset class getting to a really hated state? Or is this simply a free fall?
We have heard different terms for ISIS but we had not heard the term Tom McClellan used this week:
- “The terrorist group ISIS (AKA the un-Islamic non-state “Army of Satan”) is tying up major portions of oil-rich Mesopotamia. Russian troops are occupying portions of Ukraine, which is a key portal for oil and natural gas to transit to western Europe. And the oil-rich portions of Africa have been subjected to a viral outbreak that is causing the rich and educated in that region to flee for their lives, leaving the others to fend for themselves.”
- “So of course this geopolitical condition means that oil and gasoline prices should plummet, naturally.”
He goes on to suggest that Gasoline in due for a rebound in his article:
- “The latest Commitment of Traders (COT) Report data say that the commercial traders of RBOB futures have been abandoning their once-big net short position in a big way. They are now down to one of their lowest net short positions since 2010. That’s another way of saying that the “smart money” traders are betting on a rebound in gasoline prices.”
- “Whenever this group’s net position gets down this low, RBOB gasoline futures prices tend to rally over the succeeding weeks. That’s a fancy way of saying that your gasoline prices are likely to be headed higher soon. How much higher, and for how long, are not questions that this one datum can answer. And one single sentiment indication does not preclude the possibility of global peace breaking out, leading to even lower oil and gasoline prices. But the odds are in favor of an uptick for gasoline prices.”
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