Market Update: 7/12/13

Even with well thought out research and analysis there is no way to determine what the Federal Reserve Bank and Ben Bernanke are going to do next. Their plan to “Taper” Bond purchases was reversed in a matter of days and the stock market was sent higher. Unfortunately for us very few people are able to get Ben’s information before he goes public. In my opinion the Federal Reserve originally had a thoughtful plan to taper off their $85billion per month of bond purchases. Yes this did raise rates, but like I stated in last week’s email it wasn’t necessary a bad thing. The normalizing of rates higher would relieve the massive speculation that was going on in markets like housing. Short term pain for longer term benefits. For the stock market I fundamentally and technically feel the same in that we should use caution. Especially if Ben Bernanke and the Federal Reserve are not able to get rates to fall. Plus there is a new headwind with the rise in oil prices as a result of Egypt and market speculation fed by Ben Bernanke (pun intended!). That will act as a tax against the economies of the world and slow growth. If the S&P 500 index passes 1687 then it might have some more upside, but I feel its limited compared to the downside. Sometimes exercising caution when crowds are at a frenzy is one of the toughest things to do!

S&P 500:

10 Year Treasury Bond:

Oil:

2013 Summer Market Update

Here is a new update on recent market actions to give you a clue on what we are looking at when managing your money. I have started to incorporate new trading skills by using Technical Analysis. “Timing can be everything”. And with technical analysis I hope to help fine tune those transition points and improve results. Obviously in the investment world nobody has the crystal ball, but the combination of my fundamental analysis & new technical analysis should help. Hopefully my analysis below helps you conclude the same. So without further ado here is my take on the state of things as we continue into July.

From the beginning of the year until the 2^nd half of May the market was on a tear. Since May 22^nd the market has slowed and languished a bit. I see this continuing until the S&P 500 drops to around 1500. If we look at the short term chart below it seems to confirm that the next move is more likely to head lower to 1500 versus back up to the peak of 1687. The short term trend has been broken and is struggling to recover. 

Next is a medium term chart showing a positive ascending channel since the summer of 2011 US debt downgrade. It has not been broken. You can clearly see that by April/May stocks really got ahead of themselves and broke above the trend only to correct below it. Based on technical analysis the S&P 500 could fall to about 1500 as it reverts back to the mean. 1500 is only about 11% off the peak of 1687 and would not break the channel. See below for the medium term chart which I feel is the most convincing one.

The S&P 500 has been following an establish ascending channel which has been positive for the long-term health of the market is since 2009. Currently I don’t see anything on the horizon that will break such strong long term upward momentum.

 Now let’s use some Fundamental Analysis to determine if these moves make sense. Again I see short term correction to possibly 1500pts for the S&P 500 before making a move back up. In the short term the reason for the drop is a result of 3 catalysts. The 1^st and most significant is a potential change in Federal Reserve Bank stimulus policy. The “Fed” has really been the greatest driver of stocks, bonds, and commodity prices over the last 5+ years. The Fed came out in May and then June before backtracking that it would taper then stop it’s bond purchasing program of Quantitative Easing. Which currently has a run rate of $85billion in Treasury/Mortgage bond purchases per month! World markets have become increasingly dependent on this massive stimulus from central banks around the world. So the thought of stopping the “free money train” creates a lot of unknowns. This has had a big effect on the bond market as well. Which leads to the other catalyst for my short term bearishness. A sudden increase of interest rates across the board. In an economy that is indebted as ours that can be troublesome. Here is the 10 year Treasury Bond Yield chart showing just how big a move this is:  

The third catalyst is the global economy is showing signs of slowing with China & Europe leading the way in that department. To save ink I will leave that for another time.

The verdict is however not all bad and should keep the medium and long term trends intact. Here are the bullish factors that should keep those inline. There are no signs of an impending recession within the US. We continue to muddle through as an economy. In fact the reason the Federal Reserve is looking to slow its stimulus is because economic factors have shown improvement. They want the economy to grow organically and without stimulus. That’s a good thing, but it must still prove it to the markets. I am not worried about interest rates going much higher in the short term after their big move. Rates act to slow an economy that has been very speculative. Rates have been manipulated well below real interest over the last 5+ years. That causes speculation. The example of course is the housing market frenzy over the last 18 months. It isn’t healthy for housing to be so one-sided and going up as quick as it has during that time frame. Housing believe it or not historically only goes up at about the same rate as inflation, 3%/yr. Obviously in the last 10 years it has been a lot more volatile. Corporations are in great shape with healthy balance sheets and profits. Today’s reported number of 194,000 new jobs confirms that health. All of these factors again should keep the medium & long term trends in tact even though there is likely short term market pain headed our way.

So the next week to the next month or two I will be monitoring the charts and fundamentals as they change. There should be some volatility as things get sorted out. We will see how it all plays out soon enough! 

Deja Vu All over Again and Again??

It has been awhile since my last email commentary on the markets, but there are some important developments playing out. For those of you I have had the opportunity to meet with in 2012 I’ve shared my theme of “Policy Driving”. Policy being driven by Governments and Central Bank actions are continuing to have a substantial effect on the markets. You turn on CNBC or Bloomberg there is constant talk of “QE”, “LTRO”, “Stimulus”, etc. The latest iteration of that was the European Central Bank (ECB) Long Term Refinancing Operations (LTRO) that was in effect from December 2011 until February 2012. The market responded extremely well. So I must have a Mae Culpa for not predicting the effect this would have on the markets as a lot of our positioning was defensive. However a lot of the funds in the portfolios by design did take advantage of the rally. 

Going forward the market since March and really April has been hitting some resistance. This seems to be playing out similarly to 2010 & 2011 where the US stock market tops around April then runs into trouble during the summer followed by stimulus from governments/central banks making the markets take off. So I think remaining in the defensive positioning going into summer is very prudent. Especially when one of my main concerns is that the US Debt Ceiling is projected to be breached after August in an election season no less! When the debt ceiling was extended it was suppose to be good until 2013, but the government deficits so far have been larger than projected. I will be monitoring this extensively as we get closer to the date. So for the time being let's hunker down and wait for intervention. Hopefully the market takes to the "medicine" like in 2010 and 2011. What I fear and what keeps me up at night is when the "medicine" doesn't take. But that's another post in the future because it's not a question of if, but when....

Seth Klarman's Rare Interview

A fabulous interview with an investment heavy weight, Seth Klarman:

An Interview with Seth Klarman and Charlie Rose from Facing History and Ourselves on Vimeo.

David Rosenberg on Wealthtrack using the D word

Consuelo Mack of Wealthtrack does some great in depth interviews with the leading financial minds out there. David Rosenberg former Merrill Lynch economist and now economist of Gluskin Sheff is one of those great leading minds. I have followed him for some time now and his analysis is top notch. He called the financial crisis and the recession of 2008. Many detractors will point to him not seeing the 2009-11 rebound in stocks. However his strategy of bonds, income producing stocks, and precious metals has been very successful with incrementally less risk. Now he is using the D-word, Depression, to describe the times we are in. I tend to agree with him believe it or not. I don't think it's as visible as it was in the 1930s. We have social safety nets that have been hiding the stress. Food stamps being an example of this stress. They have increased in usage since the start of the financial crisis and are up to 15% of the population using them. The Huffington Post has further details on this. Whether we call it a Great Depression or not remains to be seen and will be determined in large part by governmental policy snafus. At the very least we are in a balance sheet recession. Which are financial in nature and are long drawn out affairs. I think the label of "depression" will come well after the fact so don't expect it to become mainstream anytime soon.

Luckily for us David Rosenberg does take an optimistic twist at the end. Which I feel is very important as we go through tougher times. We will get through this and political/leadership change in the developed world will eventually occur and help. In addition deleveraging and time will be the most helpful. Watch it all and enjoy:

Hugh Hendry Latest at London School of Economics

This series is by far the best of Hugh Hendry out there that I have seen. Not only does it go over his various trades, but also his thought process on them. What I like as well is you really learn about Hugh and get a feeling for his process and who he is as an individual. It's almost like you were at the conference and having a personal conversation with him. They're great videos and a treasure for all of us to review and reflect on:

Part 1:


Part 2:


Part 3:


Part 4:


Part 5:

The “Tug-a-war” of 2011 Continues between Market Bulls vs. Bears!

The Bulls have regained the momentum! Anticipation & initial good news from the European Debt crisis had markets rebounding from 5 straight months of losses in one of the better months on record. Europe’s take on its heavily indebted nations for the last 18 months has been really a policy of “kicking the can down the road”. The best analogy I heard was they were not only kicking the can down the road but when they ran out of road they began paving more road to continue the kicking! As is all too clear with our own politicians nothing ever seems to get done until there is a major crisis at hand. This is truly a step in the right direction for Europe as they are actually trying to restructure Greek debt with the “voluntary” 50% reduction. Coupled with other bullish winds of healthy corporate balance sheets, low interest rates, accommodative Central Banks, and Government intervention has given strength to the rally.

 

However one still has to be cautious in a market environment where a lot of the factors that gave us the summer downturn are still real & present. Sovereign nation debt is still growing at alarming rates in the Developed world as Economic Growth sputters behind. The little economic growth we have had has in fact been showing signs of slowing since summer. The recession threat might be greater then what most experts think. The stock & commodity markets have also shown an amazing amount of correlation to government and central bank intervention. It was relatively easy to predict this summer’s market downturn when the market was no longer supported by Federal Reserve Bank’s QE2 (Quantitative Easing). Lastly the lack of political leadership to make difficult/unpopular decisions from the developed world has been troubling. A lot of the structural imbalances built up over the years in our economy still have not been addressed.

 

Predictions of the future however are always difficult and unpredictable. A balanced approach with emphasis on “playing defense” during the next 6-18 months in my opinion is still the prudent move. I am happy to see the European leaders finally coming to the realization of needing to restructure Greek debts. This is a big start to dealing with the world’s debt problem but the details of the EU summit still need to be ironed out. In addition the Europeans will have to deal with the much larger debt problems of Ireland, Portugal, Spain, and Italy.Time will tell.

Rob Arnott's latest: We're in a Recession

Rob Arnott talks with Market Watch about his views that the US is already in a recession, China's soft landing, and taking incremental risk. Enjoy:

Ray Dalio's Latest Interview with Chralie Rose

Anytime you have the opportunity to listen/watch Ray Dalio of Bridgewater Associates talk than you are better off having done so. His approach to global economics and assessment of the "machine" is truly revealing to his success as an investor. Whether you agree with him or not on the various subjects how he comes to his conclusions is what fellow mercenaries should study and emulate. Follow the link to Charlie Rose's website and enjoy!

Hugh Hendry's Latest Media Appearance

Hugh Hendry is back after a hiatus from making media appearances. According to him his new "CEO" has requested that he not make anymore media appearances. Luckily for us he was a able to sneak on to a BBC radio show to give his views of the European Crisis. Enjoy:



and the long version of the video:

Kyle Bass on CNBC discussing the latest on the European Crisis

Kyle Bass from Hayman Capital was on CNBC's Strategy Room last Wednesday to discuss the European Crisis. He parses through the noise on the situation with how "the period we are going to go through, people are going to lose a lot of money." Flat out he doesn't believe that Greece and the PIIGS are not going to have an orderly default, but the world is not going to end. He does see a recession on the way as I do. The video is top notch:

Rob Arnott Discusses the Euro Crisis

Rob Arnott always has interesting insight on the markets and in this video from the Breakout Blog of Yahoo! Finance is no exception. Talking Euro crisis and potential effects with Jeff Macke:

Amazon's Blatant Bribery

Do I use/like Amazon.com? Yes!
Do I think California taxes are too high? Yes!
Do I generally think businesses are taxed too much? Yes!
Do I think certain businesses should get special treatment? Absolutely not!

So it's unbelievable to me that Amazon would be so bold to try to "buy" a special tax deal from the state of California. Reuters is reporting that Amazon is offering up to 7,000 jobs if California drops its online sales tax for 2 years.

To me business/capitalism needs a level playing field where competition is key. The businesses are forced to compete by giving benefits to the end consumer of a better product or service. When businesses have an unfair advantage that skews the marketplace. In this instance Amazon has the ability to undercut brick & mortar businesses in California by about 9-10%. (Unbelievable state & local taxes are that high. We get so little for it too) This hurts a lot of small business too. And leads me to the point that is unseen by many. That of course is that large businesses have the unfair advantage of being able to negotiate special tax treatments or deals that small businesses just can't. They also have a vast team of accountants and lawyers that are able to expose the tax loopholes. Not withstanding a lot of the loopholes in corporate tax code is designed to be exposed by "privileged businesses" in privileged industries. The most notable example is all the special benefits and treatments for real estate & construction of late. (Not shocking a disproportional of resources & energy went to fueling that bubble) I feel strongly simplifying the tax code and yes, even reducing tax rates benefit business, job creation, and in particular small business. Many studies have proven that small business is the real driver of jobs, not larger businesses and especially not government.

A note to investors of Amazon. Be careful of the effects of these new tax laws on Amazon's bottom line. Margins are already thin and the share price is already at "explosive growth" valuation with P/E ratio of 92 based on the closing price on 9/2/11. Is Amazon an innovative company in retail & cloud computing? Yes. I will still continue to use them because I hate wasting time driving to the mall and shopping when I can do it from the friendly confines of home. This by no means is a recommendation to buy or sell AMZN. Just make sure to do your homework with this investment or other for that matter.

August... What a month! Now what?

Today was the last market day of the bumpy month of August. We saw a ton of volatility in the beginning and a market rebound off the lows at the end of the month. Many have asked what are the reasons for the rebound and what is the near future outlook? Besides the traditional oversold bounce from such a violent move downward the market has been helped in my opinion by Ben Bernanke and the central bank signaling/hinting at major monetary stimulus. The minutes that came out recently and the debate during the meeting makes this more of a certainty.

Back in March I discussed my Thoughts on the End of QE2 and what would likely occur in the aftermath. It appears that my forecast has been accurate... so far. It certainly looks like there is high probability of a “QE3” or other major intervention into the markets. With those hints the markets have responded and are up 8% since Bernanke and the Fed met on August 9th. This is playing out eerily similar to what happened last year and could be beneficial to the stock markets believe it or not. However there are some factors out there that may not lead to the same repeat. Three factors that prevent me from getting out of defensive positioning at this point are: 1. that the economic numbers & 2. the European crisis are worse than this time last year. 3. The last monetary stimulus “medicine” was beginning to show some troubling side effects. Side effects like a run up on commodity prices and risky assets. The medicine didn’t prevent the weak economic numbers discussed in factor 1 that were showing up before the stimulus had been withdrawn (6/30/11). In addition I would like to see some technical breakout on the S&P 500 index to show that this August has been put behind us. Until then be careful out there because the bear doesn't look like its hibernated just yet.

Another favorite Merc: Kyle Bass of Hayman Capital

I am a big fan of Kyle Bass and his insights. His analysis seems spot on again in this CNBC clip:

Arnott: Market Hyped Up on Stimulus

Another great Mercenary is Rob Arnott of Research Affiliates. His viewpoints are always welcomed and this Morningstar video is no exception. A key part in the interview is at minute 2 as he expresses his caution and thoughts on the Stimulus. Where he explains his concerns of $4 Trillion of borrowed stimulus getting a measly 1/2 Trillion in economic output. Well put Rob!

Arnott: Market Hyped Up on Stimulus

Gundlach: Stock Market Will Have Trouble Topping Bonds

The Mercs are always a fan of anything from the bond maven Jeffrey Gundlach. Follow the link and enjoy!

Gundlach: Stock Market Will Have Trouble Topping Bonds