Current Affairs/Investing./Television Media

Interesting TACs of the Week (March 25 – April 1, 2016)

Posted on by MV

 

Summary – A top-down review of interesting calls and comments made last week in Treasuries, monetary policy, economics, stocks, bonds & commodities. TAC 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.She Rules The Waves.

What are capital flows except waves of money? And Janet Yellen rules those waves as she proved during the March FOMC meeting and on this past Tuesday in her speech at the Economic Club of NY. She dismissed the verbal nonsense peddled by 3-4 Fed heads last week about a Fed rate hike in April. She was so dovish that she stunned even those who expected her to be dovish. 

Almost every asset class, except U.S. Dollar & Oil, rallied strongly on Tuesday afternoon. The biggest rally on Tuesday afternoon came from Gold & Gold Miners which rallied 1.8% & 5.5% resp. Treasuries also rallied by 1% at the long end. Russsell 2000 & Nasdaq rallied by 2.6% and 1.6% resp. But stocks were the only asset that rallied further on Thursday & Friday. 

Chair Yellen had categorically removed the risk of an April hike on Tuesday. That is why stocks went on a relentless rally on Friday after a positive surprise from ISM number. We are now in a set up in which the risk of recession is virtually removed & the FOMC is on hold – can you get a better fundamental backdrop for stocks?

Yes, the Atlanta Fed is calling for a 0.7% GDP but who cares if the jobs number remains strongish and manufacturing might come back a bit? Treasury yields should have shot up hard on Friday but they didn’t. In fact, the yield curve bull-steepened and what can be more bullish for stocks than that?

For U.S. stocks at least. The Nikkei was down 3.5% overnight and the DAX closed down 1.7% despite the NFP & ISM numbers. The next hurdle for U.S. stocks would be the earnings. 

The reality is all three major asset classes have had great first quarter. Stocks after the worst start in January in decades ended up with the best quarterly comeback for the Dow since 1933. Treasuries had the best quarter in years and Gold had the best quarter in decades. Such is the magic of coordinated & concerted central bank action. 

2. Bonds.

Treasuries have enjoyed a monster quarter with TLT & EDV up 8.4% & 12.4% resp. The yields collapsed across the yield curve in the quarter with the 5-year yield down the most by 52 bps. The longer yields are down by 41-48 bps. But these pale in comparison to the fall of 69 bps in the German 30-year bond. The downward pressure from European yields has created a divergence between economic conditions in America and Treasury yields.

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Yes, the Fed may end up raising rates in June but that is 2.5 months away. No wonder the sentiment in bonds is so positive. History suggests that Treasuries should underperform but doesn’t that depend on European yields at least until the U.S. economic data turns stronger or until we get closer to June?  

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Yellen also did wonders for other segments like closed end funds in credit and 

3. Stocks

People who got bullish in early February had advised selling the ensuing rally between 1950 & 1970. That seemed so universal a sentiment that we wondered on in February 12:

  • “But what if this consensus wisdom proves to be wrong and the 1950-1970 level is decisively broken to the upside? What if the economic data in early March dispels the R-fear and Draghi acts & Fed speaks dovishly? Are conditions are place for a real move higher?”

A month later on March 12 we wondered:

  • “But what if the Crude Oil rally keeps going, what if the rally in Crude keeps rallying High Yield bonds & what if the Fed gives an unexpected dovish signal this week & the data keeps coming in OK? Could we see a bigger than anticipated rally into April & May? Of course, we don’t have a clue ourselves. But we do see a near total consensus that this is a rally in a bear market and that it will fail.”

As of this Friday, the S&P has rallied by 260 handles in less than 8 weeks. And the rally looks more positive both in the index & in many stocks that are breaking out:

The real question is whether the S&P gets to a new all-time high by May before people get told to sell & walk away. And that would depend on earnings in April. Doesn’t that also depend on how badly the earnings expectations were downgraded in January? 

Clearly the indices are in overbought territory but is that a good overbought condition or a bad one? Are there any confirmed sell signals? Lawrence McMillan of Option Strategist wrote on Friday:

  • “In summary, there are no confirmed sell signals, although the standard equity-only put-call ratio is very close to becoming the first one. Thus we remain short-term bullish, but remain vigilant and don’t be complacent.”

There are divergences building, one being between breadth & price per Northmantrader.com:

NYAD

Sentiment is another:

  • Martin Enlund ‏@enlundm  – Aside from a few days in December, macro hedgies most bullish stocks since July 2015, after which stocks crashed

Sentiment is also reaching highs in emerging markets:

  • ValueWalk ‏@valuewalk  – U.S.-based EM stock funds posted $73M in outflows just one wk after hauling in $3B, their third-greatest week ever

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Since both Treasuries & stocks are overbought & overloved, which one sells off first? Or will the trigger come from the Dollar?

4. Dollar, Emerging Markets & Commodities

Emerging market currencies got a big boost from the Yellen speech:

But the Dollar looks oversold. And virtually all of the central bank dovish talk seems behind us. And the flows into emerging markets seem like a short term top. So is the stage set for a bounce in the Dollar? Is that what this week’s 7% fall in Oil suggesting?

5. Gold

In contrast to oil, Gold has already given up 1/3 rd of its rally off the bottom. A fundamental reason for Gold to rally is the excess liquidity being promised by Chair Yellen via rates held down lower than optimal.

 

Carter Worth of CNBC Options Action comes to his Buy GLD call based on completion of a 1/3rd give up of the big rally off the bottom. 

 

6. The Pepper of Life – Trumpism Universal? 

Watch the 14-minute film below: The story turns 3 times, the last time at minute 10:45 into what Trump & Sanders are basing their campaigns on. The clip has English subtitles. Do watch it. You will pause every time you sprinkle pepper on your food. Elections all over the world will soon be driven by such issues:

[embedyt] http://www.youtube.com/watch?v=1nUAPIysIdE[/embedyt]

 

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MV