Editor’s Note: In this series of articles, we include important or interesting videoclips with our comments. This is an article that expresses our personal opinions about comments made on Television 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. Yellen took action
Clearly Dr. Yellen has been just as worried as us about the toxic consequences of the flattening yield curve, the condition that was “the game in the markets”, as Rick Santelli put it last week. And the recent flattening was entirely her doing as we discussed last week. .
This Monday, she took remedial action. She delivered a statement that left no room for doubt about her intentions. David Zervos of Jeffries called it the “most dovish speech” he had “ever heard from a Fed Chairman”. A similar yet different description came from David Rosenberg who wrote “… in 27 years of reading Fed speeches, I have never before seen one that was as political as the one Janet Yellen gave in Chicago on Monday…” She clearly took back her crazy “6 months” statement in her press conference on Wednesday, March 19.
It worked. The yield curve bear-steepened for three straight days and stock indices rallied hard for three straight days to close at new all time highs (Dow very close to its new high). The run to new highs in stocks was easy to understand. The economy was on an up trajectory and Chair Yellen was going to keep the spigots open no matter what. Like 2013 all over again, it seemed.
Then came Friday’s decent job number of 192,000, a miss from consensus of 200K and crazy “whisper numbers” into 300Ks. And the yield curve bull-steepened sharply with the 5-year yield falling by 8 bps vs. the 30-year yield falling by only 3.7 bps. A big drop but only half as much as the 15.9 bps rise in the 5-year yield caused by her “6 months” statement on Fed-Wednesday, March 19.
Despite her speech on Monday and the miss in payrolls number on Friday, the 30-5 year yield curve is still 20 bps higher than it was on Tuesday, March 18, the day before her “6 months” comment. Next week should tell us whether the short end really believes her readopted dovish posture or not.
The 30-year yield is almost unchanged from its close on Tuesday, March 18, demonstrating what Rick Santelli said on Friday “the long end is not buying economic growth“.
Some were more explicit:
- Keith McCullough of HedgEye in his Friday’s Macro Notebook video – be long growth slowing – buy bonds, 2.5% would be no problem at all in next 3-6 months on the 10-year bond yield & that’s why are long of it in long bond terms
- David Rosenberg on Friday – keep in mind that the 10-year U.S. Treasury note is priced for three or four hikes. If we don’t get them, the risk is that we end up with the yield heading to 2.25% instead of 3.25%.
- Guy Adami of CNBC Fast Money 5 pm edition predicted that TLT will go to 115.
Remember the 30-year yield rises up when QE is increased and falls when QE is reduced. So now the real question for the yield curve is whether Dr. Yellen tapers her taper. That may be why the yield curve steepened to its high on Wednesday upon hearing St. Louis President James Bullard say “Slowing inflation would pressure Fed to slow tapering” on Bloomberg Radio.
How likely is a taper of the Fed’s taper? David Rosenberg says “taper is on, practically no matter what“. But does he exclude a tapered taper? We don’t know. We do know that Jeremy Stein, the Fed governor most concerned about mal-effects of QE, resigned as a member of the board on Friday.
So watch how the yield curve reacts to economic data that will be released over the next two weeks, especially to the inflation numbers.
2. Why not two curves instead of one?
Rick Santelli would say heck yes. Because he has been talking about the yield spread between US Treasuries & German Bunds. Tom McClellan has also been listening to Santelli as he wrote in his article Bund Spread’s Message for the Stock Market:
- “The folks who watch international bond yields have been giving a lot of attention lately to the fact that the spread between the 10-year U.S Treasury Note and the equivalent government bond from Germany is now up to its widest point since 2005. CNBC’s Rick Santelli showed a chart of it in a segment on April 2, 2014, and what caught my eye was how much that yield spread looked like the behavior of the stock market”
- “As noted above, the T-Note to Bund spread was just slightly higher in 2005, and also back in 1999, and both instances were associated with toppy conditions for the U.S. stock market. If I were to try and craft a “rule” about this relationship, then I would say it gives a pretty good top signal for the stock market when it rises up above about 100 basis points (1 percentage point), and then turns down.”
- “That turning down part is important, because the spread can keep on rising as stock prices keep on rising. Only after the spread starts turning down does it seem to matter for stock prices, and with some degree of lag”
- “Right now, the still-rising spread means that risk-seeking (or safety-avoiding) behavior is still on the rise. And why not, with the Fed still giving away free money at the short term end of the maturity spectrum. But at some point in the future, the amount of this spread implies that we are going to have to see a 2001-03 or 2008-09 style bear market, just to restore equilibrium in both the international bond markets and the U.S. stock market”
3. U.S. Equities
Canaccord strategist Tony Dwyer was steadfastly bullish in 2013. He remains so as he told BTV’s Surveillance on Tuesday, April 1:
- “There is only one thing that kills a bull market. And its this – the market correla
tes to the direction of earnings; the direction of earnings is driven by economic activity; economic activity is driven by the steepness of the yield curve; that’s driven by Fed policy and that is driven by core inflation. So until you get core inflation expectations going up enough and make the Fed aggressive enough, this tape is going higher. We will have corrections along the way but until you invert the yield curve, you are not going to [kill?] the market.”
Clearly Dr. Yellen agrees and that’s why she steepened the yield curve this past Monday. If all this has made you tired of curves, then think of goldilocks courtesy of Paul Richards of UBS on CNBC FM -1/2:
- “I think you are seeing a correction of the Nasdaq. Nothing wrong with the Nasdaq. I think the problem was the market had no faith in the general economy and, hence, general stocks as in the S&P. In Q1 the market in the absence of anything else to invest in went into something they trusted – that was silicon valley. Now we see a correction. In general, I think it’s fine.”
- “Goldilocks. Fantastic number today. Keeps it on track. They don’t increase tapering and yet it wasn’t a 160 number. We would have had a problem. Money is going to find a home. The economy is pumping along just fine. Renewed confidence in China now. Europe looks to have calmed. No one is talk about the Ukraine anymore. Everything is fine.”
When asked where he would invest now, Richards answered EM and Brazil in particular. It is “showing signs of real growth again- can find value there”, he added. But webmasters of CNBC.com deleted this answer from their videoclip of the segment. They must think they are Avatars of God on earth because they sure work in mysterious ways.
Jim Cramer gave sound advice to his individual investor viewers (yes, he is one CNBC anchor who doesn’t use the pejorative term “retail”) on Mad Money on Friday:
- “they killed it. no mincing words. they crushed the nasdaq, with the tech-laden, tech-heavy, tech-stinking index falling 2.6%. Dow gave up 160 points. S&P dropped 1.25%. the difference is stark.”
- “you might want to sell something to buy something here. I don’t want you betting the farm on the portion of the market that’s looking way too much like March and April of 2000, when the dot-com bust began and the froth kept getting burned off.
- “there are so many stocks that are actually undervalued versus their historical prices. that’s very good. unfortunately, those names are barely down. they actually did quite well today. and that means they aren’t bargains relative to the broad swath of merchandise that got hammered”
- “if the sell-off is part of something bigger, and we can’t rule that out, then being a hero and backing up the truck, that could be a major mistake. In fact, on a lift like we might get on Monday morning, which I’m certainly predicting is a possibility, I would be a seller, not a buyer, of much of the damaged goods. yes, there has been too much technical damage, among many of the newer Nasdaq stocks, and the charts are now a seller’s best friend. until we’re sure this isn’t the 2000-style parable, caution, not aggression, is going to be warranted.”
Carter Worth of Oppenheimer & CNBC Options Action offered similar advice on Friday:
- “resist the temptation to think the market is oversold; presumptively it is not. … Monday is not likely to be a good day”
Todd Harrison of Minyanville tweeted a summary & link to an interesting article on Wednesday, April 2:
- “The Smart Money Flow Index (SMFI) is calculated by taking the price of the Dow Jones Industrial Average (INDEXDJX:.DJI) at 10:00 a.m. on any given day, subtracting it from the previous day’s close, and adding it to the next day’s closing price. The first 30 minutes represent “emotional buying,” driven by greed and fear of the crowd; smart money typically waits until the end of the day. If/when the DJIA makes a new high that is not confirmed by the SMFI, there is usually trouble ahead. Check out the chart.”
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