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. TD Combo
No we don’t mean TD Combo analytics of Tom DeMark. We mean the Tepper-Draghi combo of the two most powerful movers of the stock market. Draghi did everything that most expected of him and more. But it wasn’t enough. And how could it be? As Peter Boockvar said on CNBC Closing Bell “the Fed will have removed $600 billion of QE by next month and the market is focused on ECB?“
The Euro had gone down hard in the immediate aftermath of the Draghi decision. But it turned and closed up on the day. As Rick Santelli explained on CNBC Street Signs, the Euro went higher because “because they did things that look a bit shock and awey, but basically they’re not“.
Even the stock market was meandering and slowly giving up its gains when the clouds parted and the market heard a voice from the proverbial sky – that “his concerns had been alleviated“. That he is, of course, David Tepper, the man totally identified as the Voice of the bullish impact of QE on the US stock market.
The stock market heard this message and lifted in a glorious celebration. The Russell 2000 ETF, IWM, rallied by 2 full points in about an hour & half from while the S&P lifted by about a point. The other risk classes hardly moved. This unique behavior of the U.S. stock market on Thursday was captured by GaveKal in their article titled Stocks the Only Economically Sensitive Asset Trading Higher Today.
Why were stocks the only risk asset to go up on Thursday? Because stocks have a champion named David Tepper, the man markets follow when it comes to being bullish due to QE. Yes, CNBC’s Kate Kelly kept stating repeatedly that Tepper was “being very very cautious in what he says” and that he was
“just a little less nervous“. The bull market didn’t care about these caveats and stampeded to where it wanted to go. This mood continued after a non-negative jobs number on Friday. In this 2-day period, the IWM rallied from $112.5 to $116 on Friday afternoon to close at $115.88 while the S&P 500 moved by 2 points.
The shock and awe did not come from Draghi; it was delivered by Tepper. That is why we put the “T” before the “D” in our combo.
Kudos to Paul Richards of UBS who called this on Wednesday noon on CNBC FM-1/2:
- the one thing about Draghi, everyone expects disappointment from him. he’s never disappointed. … he going to go for it..he is going to give you 15bps cut, that is priced in; he is going to start talking about an LTRO may be announce it and then I think he is going to mention QE in his press conference.
Richards went on to predict a move to 2,000 for the S&P and said he preferred Asia, Europe and US stocks in that order.And the Euro? Richards said:
- “this is the guy who saved the euro at 1.2450; at 1.3950 he said it is too high, now it is at 1.36; he made two big statements on the Euro – at 1.2450 % 1.3950; the mean is 1.31-1.32 – that’s his target“
A different view came from Market Anthropology:
- “On the day the ECB broke the ZIRP barrier and went where no central bank has ever gone, the euro ended the day up 0.45%. If we were in a production studio on a satire news set, Draghi’s briefing would have taken place on an aircraft carrier in the North Sea beneath a 2003 “Mission Accomplished” banner. … Long story short – we still like the Euro“
2. Volatility
Take the VIX symbol off of your screen, said Carter Worth of CNBC Options Action on Friday post-market. This so-called measure of risk or fear could well be on the verge of being extinct as Tepper extinguished risk from the U.S. stock market for now and the only fear left is:
- Friday – Marc Eckelberry @AheadoftheNews – the only fear out there is fear of shorting. #ES_F
The $VIX traded with a 10-handle on Friday afternoon after a decline of almost 8% on the day prompting:
- Hedgeye @Hedgeye – “It’s never stayed lower than that. And never is a long time.” app.hedgeye.com/unlocked_content/35984-10-vix … via @KeithMcCullough pic.twitter.com/HNGKPdA4Q1
One simple reason for the fall in $VIX has been the most simple – Large speculators have been shorting the $VIX without any fear of a spike or even a rise, according to a Bloomberg.com article Hedge Funds Betting on Calm as Volatility Shorts Increase.
We did not find anyone who was prepared to call the fall in the $VIX as capitulation. The only bullish call on $VIX we found on Friday was:
- Urban Carmel @ukarlewitz – Vix trivia: since the start of 2012, Vix has spiked up to its BB top every even numbered month
If $VIX does go to the upper bound of its band, what would it do to the short $VIX positions?
3. U.S. Equities
David Tepper was the not only guru whose concerns were alleviated this week. Ralph Acampora acknowledged so on CNBC Closing Bell on Friday afternoon in the least enthusiastic bullish opinion we have heard from him:
- a lot of concerns I have are evaporating; I can’t fight the tape Kelly; the market goes higher.
As we noted in Section 1 above, Paul Richards is confident of getting to S&P 2000. J
ack Bouroudjian was as bullish as ever on Wednesday on CNBC Closing Bell calling this the most disrespected, most unfanfared rally which has been up 150 points since the April low.
Lawrence McMillan was also bullish in his Friday summary:
- “If there were any doubts about the validity of the breakout to new all- time highs, they should be satisfied by now. $SPX has support at 1900, and then all the way down to 1860. … In summary, the intermediate-term outlook is bullish. The overbought conditions do exist, but they are not major. So any correction would likely be short-lived“
But the man, who was bullish on May 10, the man who wrote about 1975 target of his reverse head & shoulders formation, wrote about an inflection point in small caps on Friday:
- Todd Harrison @todd_harrison – Small-caps at a technical inflection. $RUT @minyanville pic.twitter.com/XohEAQLCcZ
Keith McCullough seemed ready to issue a sell signal on IWM on Friday morning. But we have no idea whether he actually issued one to his clients. Hear him directly in his video linked in his tweet on Friday:
-
HedgeyeTV @HedgeyeTV – NEW VIDEO | @KeithMcCullough‘s Macro Notebook 6/6
EURO $FEZ UST10YR $TLT RUSSELL 2000 $RUT http://app.hedgeye.com/media/1084-vid eo-keith-s-macro-notebook-6-6-euro-ust10yr- … pic.twitter.com/bATq5TVWe3russell-2000
Then you have:
- Marc Eckelberry @AheadoftheNews – if we do not get a decent pullback soon, market would be in real danger of falling apart in July in a very meaningful way.
- Nick @NicholasOC – $SPX 10 pts above weekly Bollinger. Violates every rule I have to go long here. Not saying can’t go higher but I’ve been trading for 12 yrs
4. Emerging Markets
Emerging market equities outperformed S&P 500 on both Thursday and Friday. After all, the injection of liquidity into the European banking system is positive for emerging market equities. As Tim Seymour of CNBC FM pointed out on Friday, the sell off in EM assets was largely due to fears of liquidity withdrawals from EM by European Banks. He likes Korea, Chile & Peru as laggards that could benefit as money rotates from winners like India & Brazil. His colleague Pete Najarian remains bullish on India as he has been during the post-election rally. Giddy-up Pete! And what a rally it has been, up 5% just this week and 20% for the year.
But interest in EM equities pales in comparison to the flood of inflows into EM Debt funds in the past few weeks. Central Bank liquidity has to go someplace and high yields in EM are so much more attractive than those in the DM space.
5. U.S. Treasuries
As Rick Santelli said this week, there are two basic reasons for the refusal of treasury yields to climb up:
- no sustainable economic backbone in US, &
- relative spread trade to Euro bonds
A quietly positive Non Farm payroll number of 217,000 (soothing as Pimco’s Paul McCulley called it) did nothing to shake Rick’s first point. And long rates fell on Friday morning. Then they started slowly rising from about 10:30 am and closed near the highs on Friday. But the 10-year yield did close just below 2.60% and TLT closed just above its 50-day moving average. The 30-year & 10-year yields closed at the same levels as Tuesday’s close with Friday essentially giving up the small rally on Wednesday & Thursday.
How do we interpret this?
- Bullish action in Treasury prices because they did not fall & rates did not rise despite the explosive rally in S&P and IWM, meaning action is bullish if the asset class did not fall when it should have, OR
- Bearish action because Treasuries could not maintain their morning rally after the good news of a lukewarm payroll number?
We will let the bond market tell us next week. Some of the bears point to the uptick in inflation.
- Paul Richards – “every piece of data has inflation creeping in. people are talking about it now. you get on the streets, and inflation is a factor. that’s another reason why everyone is giving up on the 10-year, going back to 225. I think it is going to 2.75% and up almost to 3% – inflation will be a key factor“
- David Gerstenhaber of Argonaut – “Bonds are a SELL; not short; economy bounced back strongly from Q1; inflation picking up; 2-2.25% PCE; very different than deflation scare in markets”
We recall that an uptick in inflation has been a concern of David Rosenberg for 2014. As we noted before, QE is never a positive for long duration Treasuries and the action in Treasuries did change on May 8, the day Draghi served his verbal notice.
But Rick’s second point may come into play for Treasuries. The action in European bonds has been nuts. As ForexLive.com pointed out on Friday:
- “French yields hit a record low today and 10-year Treasuries are now yielding nearly 90 basis points more than their French counterparts. … Italian 10-year spreads have narrowed to 16 basis points from 529 bps in 2011.”
- “To anyone who has the option to choose, these spreads make it much more attractive to own Treasuries (and US dollars) rather than European sovereigns. PIMCO’s Bill Gross was out today saying European yields have fallen too far and that PIMCO has been a big holder of Spanish and Italian debt. If people like Gross are selling, that money will end up back in US dollars“
GaveKal gave a more detailed analysis of why European bond money will move into US. In their well titled article The ECB And Kicking The Dog, they wrote:
- “For the last five years, there has been a pretty strong correlation between the size of the net debit/credit position of foreign banks vs. their US operations and bond yields. In a nutshell, when foreign banks increase the amount they have deposited in their US operations, US Treasury rates fal
l.” - “By moving to impose negative deposit rates, the ECB is instituting a tax on banks holding excess reserves. This is the equivalent of the ECB kicking the dog.”
- “So, where then do European banks part their excess reserves to avoid being kicked? If the last few years is any guide, some may end up in the US banking system via European banks intra-company transfers in order to earn the 25bps the Fed is paying.”
So do they first sell off European bonds and move the money into US Treasuries or do US Treasuries sell off on inflation fears and that leads to an ugly sell off in European bonds? The answer depends on whether the 2003 Mission Accomplished analogy of Market Anthropology (see section 1 above) is valid or whether Draghi has once again convinced the markets that the analogy below is incorrect:
- Market Anthropology @MktAnthropology – Although it’s the mirror cycle of where the Fed goosed the SPX, no coincidence of what&where Draghi attempts to avoid pic.twitter.com/LrKWz6niN6
6. Gold & Silver
A very negative tone was sounded by Louise Yamada on Tuesday on CNBC Futures Now:
- Down 35 percent from its 2011 peak, the yellow metal has lost some $50 per troy ounce in the past week. And master technical analyst Louise Yamada doesn’t see the pain ending anytime soon.
- “The bigger the drop, the bigger the need for repair,”
- Unfortunately, at this time, “All the momentum indicators — daily, weekly and monthly, which is the most structural — are looking very negative.”
- What makes this so troubling is that gold is getting close to a critical level.
- Eyeing gold’s trading range between about $1,400 and $1,200, Yamada says that “if $1,200 can’t hold, we might flip even to $1,100, and that would actually break the 2005 trend for gold.”
A bullish view came from the same Mission Accomplished article from Market Anthropology on Friday:
- “Similar to the offsides market positioning present in the EURUSD, we expect silver to capitulate higher off long-term support that was tested over the past year”.
What we saw this week was a small turn in Gold & Silver after the Draghi decision on Thursday morning. Whether that turn is sustainable or not would be a small part of the bigger question – whether what Draghi engineered on Thursday proves sustainable or not.
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