Current Affairs/Investing./Television Media

Interesting TACs of the Week (December 3 – December 9, 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. What Gives?

The Italian vote was a negative but no matter. The big thing was that it was behind us & now stocks didn’t have to worry about it. Same with Draghi. It didn’t matter to stocks whether it was a hawkish QE or dovish taper. It was behind us and stocks rallied. So stocks came out of the previous week’s consolidation & exploded up 3% on the big cap indices & 5.6% on Russell 2000. It is all about getting past potential hurdles & moving on. 

A similar pattern unfolded intra day. When stocks opened down, they would meander for some time. When a sell off didn’t materialize, stocks moved up decisively into the close. Stocks closed up every day this week, something that hasn’t happened since June 2014, per @RyanDetrick. To simple folks like us, this looks a stretch run to December 31. Can the Fed do something next week to pause it? Perhaps, but we doubt it. Will the stock market really care if something they say is negative? We doubt that too. So many investors are dying to get a pause that will let them enter in size. We doubt if the market will oblige them. On the other hand, 

All regions & indices went up this week:

Even emerging markets rallied hard with EEM up 2.9%, Brazilian EWZ up 3.6% & Indian EPI up 4.6%. Lo & Behold, even XLU, the Utilities ETF, rallied 2.5% despite Treasuries falling relentlessly 4 out of 5 days. Frankly, Thursday & Friday felt like December 1999 all over again.  

This is not just the election but near euphoria about the team being assembled by the Trump transition team. Now Gary Cohn of Goldman joining the team that already has Wilbur Ross & Steven Mnuchin!  The raucous celebration of the Trump Thank You Tour creating a seemingly unstoppable force for what he plans to do legislatively. Yes, the conventional wisdom is that this rally is to be faded after the inauguration. We are not sure. Because President Elect Trump understands momentum and he will, we think, drive some positive legislation & issue executive orders right after the inauguration. Then we have:

There is mounting evidence of new individual investor flows into stocks. That seems to have reassured cautious strategists like BAML’s Savita Subramanian who raised her target from 2,000 to 2,700 for her bullish scenario.  That also fits in with BAML’s Sell-Side indicator:

The article quotes BAML:

“Historically, when our indicator has been this low or lower, total returns over the subsequent 12 months have been positive 97% of the time, with median 12-month returns of +25%,”

And how does that chart look?

baml-sell-side-indicator

All this sounds ludicrous. But it is not far fetched. Remember the 1999 rally extended into April 2000 and recall how relentless was the rally in early 1987. During both these rallies, stocks & long duration Treasuries diverged for months before they reversed violently.  Remember how many rate hikes Greenspan did until the 1999-2000 rally ended. Will Yellen be as determined in 2017 as Greenspan was in 2000? Or will she let the economy run hot? Meaning will she raise rates by 25 bps  next week & signal her plan to wait for next 3-6 months before the next hike? 

This rally is an absolute fade if you believe, as David Rosenberg does & as Jeff Gundlach said last week, that the Trump-enthusiasm is more hopium than reality. This rally is still young if you believe as, BAML’s David Woo said on CNBC Squawk Box, that this is “regime change”. Even if you assume it is NOT anything resembling a “regime change”, the real question is when will you know it is not. Not until March-April, right? 

Before all that we get Janet Yellen next week. And at an interesting juncture, we might add:

kimble-stocks-bonds

2. Dollar

Talk about bouncing off support:

bespoke-dollar

3. Treasuries & Bunds

Treasury yields rose every day this week except Wednesday. Perhaps Wednesday was an exception because of safe haven buying ahead of Draghi on Thursday morning. That reversed with a vengeance post Draghi with the 30-year yield exploding up by 11 bps.  It rallied to close only up 6 bps. But the rise resumed Friday with the 30-yr yield up 7.4 bps to close at 3.16%.

On the week, the 30-year rose by 9 bps while the 2-year yield rose 2.5 bps. But this steepening was put to shame by German Bunds. The German 30-year yield exploded up by 20 bps on the week and:

holger-german-30-1

A positive note about yields came from LPL research:

lpl-move

The article says:

  • The MOVE index has averaged 97 over its entire history (6/30/98–12/6/16), but it has averaged approximately 71 over the last five years. So while the reading of 86.6 on December 1, 2016 was on the high side relative to the last five years, it is still low relative to history.
  • Over those five years, the MOVE has been above 80 approximately 25% of the time. Subsequently, one-year total returns have historically been higher following those periods of heightened volatility, relative to lower volatility periods

You would think that individual investors would be scared of buying Municipal bonds given the carnage of the past two months. But the NYC GO issue that came this week was wildly oversubscribed as we hear. The price talk on the non-callable 10-year tranche was lowered from 3% to 2.93% and finally priced at 2.89%. Despite that, only about 10% of those who put in for bonds got any allocation as we hear. Of course, a triple tax-exempt yield of 2.89% on a 10-year NYC GO is so juicy compared to 2.48% on the 10-year Treasury.

Is this deal an omen for fixed income or does it suggest the 10-year needs to get to 3% before it becomes attractive? That 3% figure is a nice big number isn’t it? Of course, 2% would be a much nicer big number for the 10-year yield. What does Janet Yellen prefer? A 3% 10-year yield by letting the economy run hot or a 2% 10-year yield by signalling 3-4 rate hikes in 2017?

4. Stocks

Not much to be said except hallelujah and 

Well, we should quote one more to be two-handed:

Wow!

5. Gold

Gold & Gold miners got hit hard this week.

gdx-breakdown

 

Tom McClellan spoke on CNBC about a 13 & 1/2 month cycle in Gold coming soon with a 8-year cycle also coming soon. All this is supposed to create a a major important bottom, he said. But it could be a month or two late. Not sure this is useful but any talk of a “major important bottom” is relevant.  

6. Oil 

Oil was flat on the week but OIH & XLE rallied by 4% & 2% resp. Oil may turn out to be an important factor in Trump’s foreign policy. A decent floor under oil is the key to reviving US production & energy jobs in America. It takes the pressure off of Middle East regimes. And it helps Trump Administration get Putin’s Russia out of the forced alliance with China that Putin finds stiffling. All this could be crystallized next week if Rex Tillerson of Exxon is nominated to be the Secretary of State. Wit: 

  • – In my view, Rex Tillerson has best personal relationship w Putin of any American. Making him a v interesting Trump SecState choice.

And, with apologies to Peyton Manning:

 

kimble-oil-stocks

 

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MV