Interesting TACs of the Week (September 26 – October 2, 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.QE4 to Detox the Fed? 

NY Fed President William Dudley is a smart guy besides being an uber-dove. He was interviewed by Jon Hilsenrath at the WSJ Breakfast confab on Monday, September 28. Hilsenrath was totally focused on the trajectory of Fed rate hikes in 2015 & 2016. So he missed the import of what Dudley said to him five minutes into the interview:

• “… economy is not really that strong & monetary policy isnt quite as easy as people think; if monetary policy was super accomodative right now, then we should see growth much faster than 2% +; that suggests equilibrium interest rates consistent with neutrality of monetary policy are lower than current … “ 

If current “monetary policy is not as easy” as people think, if a “super accommodative monetary policy” would be needed for higher growth and since the current rate is zero, was this unsolicited comment a hint that at least Dudley is already thinking of another QE. WSJ didn’t answer our question and our usual FinTV folks ignored this comment as well. Why did we bother? Why didn’t we ask the one & only Rosie? We didn’t have to because he volunteered his QE comments in his appearance on CNBC SOTS on Thursday: 

• “if things get bad, they will do QE; people are talking about the negative dot; that might have been planted“

Well, things got bad in a hurry:

• Friday – Gluskin Sheff ?@GluskinSheffInc -Rosenberg: Tack on downward revisions, decline in the workweek, and the “real” payroll number was -265k. You read that right.

Friday’s 142,000 number was the 4th consecutive disappointing number and 6th out of last 7.

• Carl Riccadonna ?@Riccanomix – September Jobs Report: Will the deceleration continue?

If you think, that’s bad, look at the story the revisions tell:

• SoberLook.com ‏@SoberLook – Chart (via @NickatFP): Extensive downside revisions to US payrolls figures in 2015 –

 

What does this do to the Fed’s reputation? Rick Santelli said on Tuesday that “the Fed has become toxic“.  A different term was used on Friday:

• fred hickey ?@htsfhickey – Sept&Aug jobs reports miserable.Manufacturing in tatters.Atlanta FED Q3 GDP forecast 0.9% growth. Global econ. rots. Faith in Fed to plunge

Look at the above revisions chart again. It shows higher revisions to NFP during periods of QE and a quarter or so afterwards. So the only way for the Fed to detox its reputation is to launch QE4. If you think that is crazy, look at the action in financial markets on Friday. After a massive plunger of almost Dow 350 points, from 100 up pre-NFP to down 250 at the open, we saw an unrelenting 450 point rally marked by a couple of large buy programs to close the Dow up 200 points. Commodities rallied even harder with Emerging Markets handily outperforming the S&P and the 30-5 year yield curve steepened by 5 bps. This is pure QE action. Jeffrey Gundlach also pointed to hope in the markets on Friday:

• “The reason the markets aren’t going lower is people are holding and hoping“

What could investors be hoping for after the awful NFP number on Friday? US economy rebounding, China shaking off its slowdown or QE-manna from Fed heaven? At least one indicator is already back to pre-taper days:

• Macro Man ?@Macr0man – 4th vs 8th ED contracts now flatter than the closing price on the day the Fed announced the taper 

 

But what about rate hike expectations built into the markets?  Bloomberg points to:

 

2.Bonds

Treasury yields fell off the proverbial cliff after the NFP number. The rally was instantaneous and kept going until its high just after 10:00am. 

• tom keene ‏@tomkeene – the 10-year yet to stabilize .@markets .@TheStalwart

But the long maturity was not the star of the day. That honor belonged to the 5-year yield which dropped to a 1.22% handle at the peak of the Treasury rally. The yield curve bull-flattened on Friday and for the entire week with 30-year yield falling 14 bps while the 5-year yield falling by 19 bps. TLT up 2.5% for the week and EDV, the zero-coupon ETF, was up 3.7%.

But TLT began falling after its high after 10:00am and closed down almost 2 points below its high of the day. TLT also closed below its 200-day moving average. But that is the exception. The yields on the rest of the on-the-run curve closed well below their 200-day moving averages. This is another reason Friday’s action suggests QE4 thinking in the markets.

Credit was a different story.

• Bloomberg Markets ?@markets – It’s been a terrible week for the credit market http://www.bloomberg.com/news/articles/2015-10-02/it-s-been-a-terrible-week-for-the-credit-market …  via @tracyalloway

 

Gundlach said junk bonds are vulnerable: “I’ll think about buying when it stops going down every single day.” The high yield acted badly on Friday despite the rally in other asset classes:

• Terry Danish ?@TerryDanish – HIGH YLD bond prices continue to sink like a diving tuna. 

 

Aren’t they oversold yet?

• Mark Newton ?@MarkNewtonCMT – High Yield $JNK has gotten VERY stretched in ST, but requires a close back > 35.83 from 8/24 for confidence of bounce

 

What about Investment grade credit?

• Tuesday – Charlie Bilello, CMT ‏@MktOutperform – US Investment Grade spreads up to 174 bps, widest level since Sep 2012. Cycle low was 106 bps in June 2014. $LQD

 

When do stocks bounce without credit? Under a QE scenario, empirically speaking.

 

3. US Stocks

The rally in stocks was mega impressive. It featured buy programs and a steady unrelenting buying pressure. It closed on the highs of the day. At times, it felt like a buying panic. But isn’t that par for a very oversold, poorly positioned market in October, a period which is famous for major bottoms & significant rallies into year-end? This rally actually began on Thursday when the broad indices rallied from a down 211 Dow to close in the green. The futures indicated a nearly 100-point rally before the NFP.  Then came the post-NFP deluge with a down 250 point open.

• Sara Sjölin ?@sarasjolin – Markets jitters are back at panic levels, says Credit Suisse and backs up with this chart http://www.marketwatch.com/story/markets-are-back-at-panic-levels-says-credit-suisse-2015-10-02 …

But this was October, sentiment was awful, and large players were underweight. No one wants to get gored by a Q4 bull and no long-oriented player wants to miss out on a Q4 rally. So, 

• At some point bears must ask themselves: Why doesn’t 1900 $SPX break? The answer may potentially lie in this emerging inverse pattern. A revisit to this week’s overnight highs would break the neckline and could trigger a move into the 1970 and above 2000 upon confirmation. Likewise a close below 1900 $SPX will likely negate the pattern:

• What a trap. Massive daily bullish outside reversal, huge weekly bottoming candle combined with double bottom and turning and crossed MACDs. This will take some time to digest:

• Urban Carmel ?@ukarlewitz – Urban Carmel Retweeted Ryan Detrick, CMT Does history repeat? 10/4/11 was the 2011 low

• Sunday, September 27 – J.C. Parets ‏@allstarcharts – NEW POST: Emerging Markets Are Still A Problem http://allstarcharts.com/emerging-markets-still-a-problem/ … $EEM $SPY $FCI $EWZ $ILF $RSX $EPI $EWY

• Wednesday – J.C. Parets ‏@allstarcharts – Doing my global review, appears countries with exposure to commodities are the ones putting in bullish divergences & poised to mean revert

• Wednesday – Charlie Bilello, CMT ‏@MktOutperform – Ratio of commodities to stocks is turning up (ever so slightly) from what has been a persistent downtrend for years

The article by Parets lays out his case in detail with charts. Below is his conclusion:

• I’m a weight-of-the-evidence guy. To me, the bearish implications here for USD/CAD (bullish for Canadian Dollar Futures) are very skewed in one direction. Price-wise this is a buy 100 times out of 100. The Commercial Hedgers, who we consider the smart money, are pretty much as long as they’ve ever been. Sentiment-wise, our data suggests that Canadian Dollars today are more hated then they have ever been (our data goes back 25 years). What more can you ask for?
• Risk management-wise, which is the most important thing, I think the market has made it very clear for us. We only want to be long Canadian Dollars if we are above this week’s lows. That’s it. Below that and there is nothing to talk about. In the case of shorting USD/CAD, we only want to be short below this week’s highs. It’s that simple. Target-wise, sentiment unwinds like this can be very powerful and can take a long time to complete. I would be very patient here taking profits as I think this one has a long way to go.