Interesting TACs of the Week (April 25 – May 1, 2015)

 

Summary – A top-down review of interesting calls and comments made last week in Treasuries, 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. WOW

Last week we began with ” WOW – How else can you describe what they did to Amazon, Microsoft, Google, Domino’s Pizza on Thursday?” This week, we got a WOW in the other direction – How else can you describe what they did to Twitter, LinkedIn, Yahoo this week? These social networking stock are down 20%+ this week. Is that symmetry or does old beat new as the Boomers know so well. 

2. U.S. Economy & Fed Meeting

Is the U.S. economy improving or faltering? We don’t have a clue unless some how employment is OK, income is higher, spending is improving but manufacturing, GDP etc. are crappy. Yes, Q1 GDP came in at 0.2% – #Fuggetaboutit. We all know it is history. But then the Atlanta Fed chimed in about Q2 on Friday with their forward looking forecast:

  • “The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2015 was 0.8 percent on May 1, down slightly from 0.9 percent on April 30. The nowcast for second-quarter real nonresidential structures investment growth fell to -20 percent following this morning’s construction spending report from the U.S. Census Bureau.” .

What about ISM?

  • Bespoke ‏@bespokeinvest – ISM Manufacturing’s current streak of 6 months without an increase is the longest in over a decade. https://www.bespokepremium.com/think-big-blog/its-a-start-ism-manufacturing-unchanged-in-april/ …

050115ISM Main Chart Bespoke wrote:

  • “the Employment component of this month’s report showed one of the largest declines relative to March and at a level of 48.3 is now at its lowest level since September 2009.  Thankfully, manufacturing is a small share of the overall economy

050115ISM Employment

So GDP is pukey & Manufacturing employment data is declining. Where then is the positive news? 
  • David Rosenberg – Friday – A nice bounce in consumption spending to close Q1 –  nominal persumption expenditure rose 0.4% MoM in March
 Those who prefer pictures,
 

  • Urban Carmel -@ukarlewitz – Best employment growth in more than 10 yrs and now the highest compensation growth in 8 yrs. Tailwind for consumption  Embedded image permalink
 

With rising incomes, credit should flow, right?
  • Kelly Evans ‏@Kelly_Evans – There are “perceptions that credit isn’t available, but it really IS available now.” -Wells Fargo CEO John Stumpf @CNBC $WFC
So we have rising wages, higher personal incomes, increased availability of credit and all this leads to 0.8% Q2 GDP? We can’t even laugh at the Atlanta Fed because they hit the bulls-eye for Q1.
We are not smart enough to figure it out. So we will wait for next Friday’s payroll report.
2. Fed Meeting & its impact
What did the Fed say, really? All we remember is that they removed the calendar guidance. So they are now even more data-dependent than they were before? They dismissed Q1 weakness as temporary. Will they dismiss Q2 weakness if Atlanta Fed proves correct again? We can’t tell but then we can’t even tell how the markets reacted to the Fed statement, not even after 2 full post-Fed trading days.
The most immediate action we saw was in FX:
  • Eric Scott Hunsader ‏@nanexllc – FOMC causes major currency reversal
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Interest rates shot up despite the pathetically weak Q1 GDP. Rates were already on a rising trajectory and the trend assumed what it wanted to assume about the Fed. Or as forexlive.com asked – is it a massive unwind of a big macro trade?
  • “We know that FX traders are short euros and long dollars but it’s also a gigantic trade in bond markets. All the foreigners who front-ran ECB QE via German bonds are getting out of the trade. Because they hedged the FX side of the trade by selling euros and buying USD, they have to reverse the trade. By the same token, many Europeans may have bought Treasuries unhedged, expecting the euro to keep falling but they’re now feeling the FX squeeze. All evidence points to this as a pure euro short squeeze.”

A similar point was made on Thursday by:

  • Lisa Abramowicz ‏@LisaAbramowicz1 – “Market positioning on European bonds have reached levels so extreme that some people are getting out.” http://bloom.bg/1ETN4mt  @business
But what about Draghi’s QE?
  • Thursday – Chris Whittall ‏@Chris_Whittall – Bund yields almost back at pre-Qe levels. Almost
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Actually, the trade began pre-Fed. Bund yields closed on Friday April 24 at 57.1 bps for 30-yr and 15.2 bps for the 10-yr. These rose slowly on Monday & Tuesday by about 2 bps each for the 30-yr Bund. And then boom – rise of 16 bps on the 30-yr Bund yield on Wednesday to close at 77.1bps. Why? Perhaps:
  • Holger Zschaepitz ‏@Schuldensuehner – Markets panicking after higher than expected German inflation Embedded image permalink

The DAX closed down 350+ points or 3% and all this was pre-Fed statement. The German yields rose a bit more on Thursday and did little on Friday to close the week at 82.5 bps & 35.7 bps, an increase of 25 bps & 20 bps for 30-yr & 10-yr yields resp. This better not have been about inflation because:

  • Charlie Bilello, CMT @MktOutperform – In bond markets, big story was spike in Bund yields after Gundlach-Gross short comments. Still at -1% real yield.  
If a small exit caused this tumult, what will happen when a big positions in Bunds & Treasuries are liquidated? What about the huge monies invested in Euro-short European equity mutual funds?
Fortunately, the Dollar has gotten oversold & the Euro overbought by week’s end. Do we get a counter-trend move next week, at least until the payroll report on Friday? What about the intermediate term for the Euro?
UPDATE: Euro Facing First BIG Test In Its Bottoming AttemptOn March 4 we posted a piece titled “Setup In Place For Possible Euro Bottom”. In that post, we laid out a possible scenario wherein the Euro could finally attempt to establish a bottom of some significance following its bloodletting since last May. The key point was a technical one. On an initial low on January 23, the Euro closed at 1.12. The significance of that level is that it represented the 61.8% Fibonacci Retracement of the Euro’s move from its all-time low in 2000 to its all-time high in 2008. In our experience, it does not get much more significant than that.At the time of the March 4 post, the Euro was breaking down below that low. The point of our post was that, given A) the huge significance of the 1.12 level, B) the utterly washed-out status of the currency and C) the record short position on the part of speculators in Euro futures, the setup was in place for a potential bottom. Breaking the 1.12 level was obviously a concern. However, it was not a surprise since we figured that in order to establish the strongest potential bottom, the level was likely to break, temporarily, before being recovered. Thus, we have been on the lookout for such a recovery.Admittedly the breakdown went a bit deeper and the current bounce has taken a bit longer than is optimal for a false breakdown. However, given the importance of this asset globally and the violence of the preceding decline, any magnitude of extremity should not be a surprise. Thus, we believe the setup we laid out is still valid &ndash; and potentially in the works now. As we said in the March 4 post, traders should watch for &ndash; but not anticipate &ndash; the recovery of the 1.12 line before considering the potential bottom to be developed.Given the depths of the breakdown below 1.12, we have a slightly tweaked level to monitor regarding the Euro’s recovery. It is still in the same 1.12 ballpark, however, the lower lows gave us a new reference point to use in further determining the precise significant levels. Specifically, using Fibonacci Retracements from various highs over the past year down to the recent low, we can derive these levels which the Euro will need to recover before it is likely to accelerate any move to the upside. Specifically, those levels are the following:The 61.8% Fibonacci Retracement of the 2000-2008 Rally ~1.121 (still)The 38.2% Fibonacci Retracement of the December 2014-March 2015 Decline ~1.126The 23.6% Fibonacci Retracement of the May 2014-March 2015 Decline ~1.128Additionally, the consolidation following the initial January 23 low ~1.12 - 1.13Last week, we posted a chart of the U.S. Dollar, noting the first demonstrable cracks in the armor of its rally. We suggested that this was perhaps the most noteworthy development of the week, despite many equity markets achieving milestones. Indeed, its weakness has spilled over to this week, evidently sending some shockwaves throughout the global financial markets. This includes the Euro currency, naturally, as it is the major counter-weight to the Dollar Index. This week’s major development could possibly be the move in the Euro.The Euro has traversed the potential bottoming course that we laid out in March, though in a more deliberate fashion. Nonetheless, the moment of truth is here for the currency. The 1.12-1.13 area is THE big challenge that the Euro must overcome if we are to consider a potential long-term turn higher. Given the significance of the level, we do not expect it to give way easily &ndash; just as the Dollar rally will not easily die. The Euro is presently challenging this key area, reaching as high as 1.126 today. While the first attempt at this level is likely to fail, we will continue to watch it. If and when the Euro is successful in overcoming the 1.12-1.13 level, in our view, a major longer-term turn higher could be in the works. And given the record shorts in the Euro still, a move above that level could see a rapid acceleration of the bounce, fueled by massive short-covering.________</p><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br />
<p>More </p><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br />
<p>from Dana Lyons, JLFMI and My401kPro.The commentary included in this blog is provided for informational purposes only. It does not constitute a recommendation to invest in any specific investment product or service. Proper due diligence should be performed before investing in any investment vehicle. There is a risk of loss involved in all investments. UPDATE: Euro Facing First BIG Test In Its Bottoming Attempt
Read his article for details on Hemachandra-Fibonacci levels. A summary of what he wrote:
  • “The 1.12-1.13 area is THE big challenge that the Euro must overcome if we are to consider a potential long-term turn higher. Given the significance of the level, we do not expect it to give way easily – just as the Dollar rally will not easily die. … If and when the Euro is successful in overcoming the 1.12-1.13 level, in our view, a major longer-term turn higher could be in the works. And given the record shorts in the Euro still, a move above that level could see a rapid acceleration of the bounce, fueled by massive short-covering.”
This week might have served as a glimpse of what might come one day when a few big positions get closed. What is that investment tenet – when elephants fight, rabbits should dive into their holes?
Come on Chair Yellen, go ahead and make our day by tightening into this mess? It would be fun to watch assuming we are safe in our rabbit holes by then.
3. Treasuries
This was just as bad a week for Treasury yields as it was for Bund yields. The 30-yr & 10-yr yields rose by 21-20 bps & the 5-year yield rose by 18 bps. The 3-yr & 2-yr yields rose by 12 bps & 9.5 bps resp. Yields rose every day of this week across the yield curve regardless of the economic data or the Fed.
This action made a mockery of the GaveKal article on Tuesday titled The Smart Money Is Getting Long Treasury Bonds Again. They could be just early thought given that commercials are patient money.
  • “We observe that the commercials have been adding to their long positioning in the 10-year for most of the year following a large reduction in net long contracts in January. Meanwhile in the 30-year, the commercials have flip flopped from being net short in November to net long today. Positioning for neither contract is at an extreme yet, but the move has been large enough for us to not rule out the possibility that rates go lower before to long.”
The Treasury ETFs, TLT & ETF, fell by 4% & 5.5% resp. By Friday’s close, TLT was sitting at $124.00, just atop its 200-day moving average or $123.95. As we have noted before, a decisive break of the 200-day moving average has resulted in a significant fall into June-July. The 30-year closing yield of 2.8270% is just below its 200-day moving average of 2.87%. So next week should prove critical.
Larry McDonald & ACG Analytics put out a capitulation buy of 1/3rd position of TLT on Friday afternoon and Keith McCullough tweeted that he had “sent out a signal to buy Munis and Treasuries earlier today” and that TLT was “right back to where you could have bought more in DEC, MAR, and now MAY“.
Those who believe that high yield bonds are a good place to hide when the Fed raises interest rates should run not walk to hear Jeffrey Gundlach’s views. His interview with BTV’s Erik Schtazker is a must watch in our opinion.
  • “If you go back to last 8 times Fed raised interest rates or taking away stimulus via QE, takes us all the way back to the mid 80s, & thats the whole life of the junk bond market since the mid 80s, every single time, if you sold high yield bonds & bout Treasury bonds the day of the 1st Fed hike, you were able to buy them back cheaper relative to Treasuries during the hiking cycle – every single time.”
The really interesting part of the interview is about what might happen when interest rates begin rise secularly and that, Gundlach, believes may not happen for a couple of years.
 
4. May is here
Every May we hear about the “Sell in May and Go Away” expression on FinTV. This time, we will preempt that discussion by charts from smart traders.
  • Charlie Bilello, CMT @MktOutperform – Typical  Typical May starts strong, begins to weaken after the 6th trading day. .   Embedded image permalink

 

  • Nautilus Research ‏@NautilusCap – Flattish years in SP by end of April $SPY
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  • Dana Lyons – @JLyonsFundMGMT  – (Post) A Few Twists To The “Sell In May” Phenomenon – via @YahooFinance $DIA http://tmblr.co/Zyun3q1jgdSNf

This is a detailed article that looks at May from two different angles. Read it to get the full value of the discussion.

image
His conclusion:
  • the “Sell In May And Go Away” adage should only be treated as a slight headwind for the market over the next 6 months. Although, given the returns following moderate gains over the preceding 6 months (as in our present situation) perhaps that slight headwind has been neutralized

But what about the next 3 months? Dana Lyons answered that in his article May Has Become The (short-term) “Toppiest” Month.

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5. Equities
The past two declines have been reversed in just one day. This is impressive and suggests that as soon as the selling stops, the markets reverse as if on a string and snap back. We will see if this Friday’s snap back leads to another run at the highs. That’s when we will see if we can break through or fall back again. Remember 10-year yields oscillated for 27 sessions between 1.86% & 1.99% to break out this week with force. It does feel as if there is a move coming in equities, up or down.
Another way to look at it is:
  • Northy – @NorthmanTrader – The $VIX musical chair range keeps getting small and smaller and smaller…
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The oscillator seems to suggest a direction:
  • Jason Goepfert ‏@sentimentrader – Consistent half-hourly closes near the high is pushing the Oscillator close to its maximum
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What the oscillator above suggests was expressed differently by Roger McNamee, as fundamentally driven as any one is.
  • I am not negative but I am extremely cautious because I think oil was the last positive that we could have here – we cannot take rates any lower, & it is hard to imagine the chaos we see around the world is somehow gonna go away & give us another big lift“.
All this caution & lack of exuberant bulls does make one wonder whether the stock market could surprise on the upside in the summer – yields could fall, payrolls could come in just enough, Greece might get a deal and who knows, we could get a new high in the next couple of months. And who knows S&P could even outperform Emerging Markets in such a move. The bigger surprise might be if S&P goes on such an up move while bond yields rise hard into June-July. That, as we recall, what happened in 2007.  
5. Commodities, Oil & Gold
The swagger in commodities is back with an impressive rally in Copper and of course Oil. Copper is a relative newcomer to this rally but Oil has been phenomenal.
  • Nautilus Research ‏@NautilusCap – WTI Crude up 25% in a  month  $USO. 
Embedded image permalink
The previous signals have led to higher oil prices at least in the short term.
 
And T. Boone Pickens is back. He was bullish and gave simple reasons for his bullishness to CNBC’s Brian Sullivan:
  • Predicts $70 oil by year-end; Oil prices in $90-$100 within 12-18 months – Cushing changing from filling to drawing; high gasoline use & production rolling over; Eagleford/Bakken on decline because of shutting down of rigs; Permian will go next; You are now at record inventories; a year from now you are moving towards record low inventories; In December we had 1509 rigs on oil at that point; today you are 700; liitle less than 700;
  • natural gas is oversupplied, oversupplied, oversupplied; its just cheap; nat gas will be >$3 in winter; there has been so much swtchint top nat gas at some point we weill see it;

A similar target was given by:

  • Cousin_Vinny ‏@Couzin_Vinny – $SPY bounce would be nice but $CL_F my biggest position for weeks http://stks.co/r1x73  38.2 target Shorterm 67.38
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The bullishness case for Oil was summarized in Crude cuts keep coming: .

  • “Even with the recent rebound in the price of crude oil, don’t look for production cuts to stop. Oil is breaking out as it is clear that crash in oil prices significantly changed the fundamentals and the future production growth curve. … Today, this will be expressed in part by the Baker Hughes U.S. rig count number. Last week the U.S. oil rig count falls for the 20th week in a row as the oil rig count dropped by 31 rigs. That is down to only 703 active rigs down from 1600.”
  • “Oil is also getting support from wondering just what is going on in the Kingdom of Saudi Arabia. The Saudi Arabia’s Supreme Economic Council has approved a restructuring of Saudi Aramco that includes separating it from the oil ministry. The new Supreme Economic Council is a body formed by King Salman earlier this year to replace the Supreme Petroleum Council kicking out Saudi Oil minister Ali Naimi’s inner circle, which used to help set the kingdom’s oil policy.  Naimi is getting isolated!”

Speaking of the Baker Hughes report,

  • John Kicklighter ‏@JohnKicklighter – The US oil and gas rig count from Baker Hughes down for a 21st week. Situation still looking like 2008 
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And speaking of Saudi Arabia,

  • Javier Blas ‏@JavierBlas2 – MUST READ: #SaudiArabia Is Burning Through its Petrodollar at a Record Pace #oil http://www.bloomberg.com/news/articles/2015-04-30/oil-plunge-royal-handouts-trigger-record-drop-in-saudi-reserves …

But what about natural gas?

  • J.C. Parets ‏@allstarcharts – I think NatGas gets > $3.30. Break of wedge. Target = former resistance & 38.2% Fib retracement of Q4-Q1
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But a suggestion of caution:

  • Andrew Thrasher, CMT ‏@AndrewThrasher – @allstarcharts Momentum has gotten ahead of itself a little bit, I’d be surprised if we didn’t see a pullback of some sort. Interesting setup

Nothing acts as ugly as Gold. Dollar up, Dollar down, Gold just gets trashed. Is it about to be shot now?

The worst sign for a market is when it can’t rally on good news. April was a dream month for the gold bulls.

  • Soft economic news prompted much speculation about a later Fed hike
  • The US dollar dove late in the month
  • The ECB continued to print
  • Commodities were broadly stronger

Even with all those tailwinds, gold couldn’t make any headway. Repeated tests of $1220 failed and after the Fed restated its optimistic outlook, gold prices took a $40 tumble. On Friday the April low of $1175 gave way in a quick move down to $1170. … That leave little support on the chart until the March low of $1144

May is the worst month for gold — on average — over the past decade. Prices average a 1.1% drop. The past four years have been especially dire, with prices averaging a 4.33% decline. … It’s not just may, the May-June period is the worst two month period on the calendar

All this technical & seasonal. What about a fundamental reason? The Oil Slump Is Emptying the Stores of Dubai, according to Bloomberg.

Gold Traders In The Dubai Gold Souk

But is all this negativity a sign of a rally according to:

  • Elliott Wave Int’l ‏@elliottwaveintl – Gold’s price pattern & lopsided sentiment=clues well before the precious metal’s price rise… http://bit.ly/1JVk1wR 
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Given that Sunday is coming up:

  • Interesting Laws ?@InterestingLaws – It is illegal for a man to scowl at his wife on Sunday. (Detroit, Michigan)

 

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