I am going to be very jammed with research-based company meetings as well as meetings with prospective investors over the next two days, so please bear with me! I am cutting out early to prepare my questions for the research meetings. Thanks for reading my Diary today and I hope it was value added. Enjoy the evening.
I am going to be very jammed with research based company meetings as well as meeting with prospective investors over the next two days so please bear with me!
I am cutting out early to prepare my questions for the research meetings.
Thanks for reading my Diary today and I hope it was value added.
* The minutes will not likely be a market mover * Equities and bonds continue to deliver two different messages
The FOMC minutes mostly focused on why they felt it a prudent time to stop with their hikes, for now. I emphasize 'for now' because they admit that the current level of the fed funds rate is at the lower end of what many consider that so called 'neutral rate.' Thus, it seems they can go either way from here, depending on the incoming data. They highlighted the positives with the economy but also the challenges, some of which of course was the volatility in the financial markets that their own policy helped to create. "Participants noted that some risks to the downside had increased, including the possibilities of a sharper-than-expected slowdown in global economic growth, particularly in China and Europe, a rapid waning of fiscal policy stimulus, or a further tightening of financial market conditions."
More on financial markets:
* "Participants noted that financial asset prices appeared to be sensitive to information regarding trade policy tensions, domestic fiscal and monetary policy, and global economic growth prospects. A couple of participants noted that the rise in credit spreads over recent months, if it were to persist, could restrain future economic activity. Participants agreed that it was important to continue to monitor financial market developments and assess the implications of these developments for the economic outlook."
* "Among those participants who commented on financial stability, a number expressed concerns about the elevated financial market volatility and the apparent decline in investors' willingness to bear risk that occurred toward the end of last year. Although these conditions had eased somewhat in recent weeks, a couple of participants noted that the strain in financial markets might have persisted or spread if it had occurred during a period of less favorable macroeconomic conditions."
They also discussed the analysis of where the balance sheet should end up with most agreeing that a decision on where could be made soon. That number will end up being what the currency in circulation is plus reserves and plus other, with the end result being a balance sheet around $3.5 trillion which means the end of QT by year end:
"Almost all participants thought that it would be desirable to announce before too long a plan to stop reducing the Federal Reserve's asset holdings later this year. Such an announcement would provide more certainty about the process for completing the normalization of the size of the Federal Reserve's balance sheet."
Bottom Line
While the Fed, I believe, clearly had room for the current pause because of the economic slowdown going on overseas, it should also be clear to everyone that they are mostly beholden to asset prices, both the stock market and credit spreads (we will discuss this tomorrow in my opener) with that driving policy. It is policy that they tied themselves to on the upside, as Bernanke specifically wrote and talked about, and now they have to deal with the consequences on the downside. They clearly got spooked but they should never have assumed that the tightening of monetary policy was going to be smooth and pain free.
Bond yields are slightly up with the 10 year yield up 1 bp to 2.65%, a level seen on January 4th when the world's stock markets were in quite a different place.
Something will soon give with what the stock market is saying and what bond yields globally are. You all know my view in which way they will be resolved!
Solid column on "timeframes" from Tim "Not Judy or Phil" Collins, "Stock Trades Are Not Always Either Bullish or Bearish" Timeframes, risk control and money management techniques are important subjects that I try to repeatedly write about. A must read.
I have moved up to large-sized in my (SPY) and (QQQ) shorts this morning from medium-sized. I am medium-sized net short in my portfolio's exposure now.
"My oh my, you sure know how to arrange things.You set it up so well, so carefully.Ain't it funny how your new life didn't change things?You're still the same old girl you used to be.You can't hide your lyin' eyesAnd your smile is a thin disguiseI thought by now you'd realizeThere ain't no way to hide your lyin' eyesThere ain't no way to hide your lyin' eyesHoney, you can't hide your lyin' eyes"
* Staying more reactionary in a machine driven market * Slowly, very slowly, average up in my Index short hedge In accordance with my opener, it is really hard to gauge the short term direction of the markets these days. That said, it sure appears to me that the market is "kind of" exhausted and, perhaps, the upside move on Friday will mark a trading top. I have added to my (SPY) shorts - but I am still only medium-sized as I await for the sort of action that Rev looks for (i.e., a change in price momentum).
Yesterday I pared back my CBS (CBS) holdings. I am now selling the balance (tag ends) of my position given the "mixed" profit report from last week. I will be out of the position by 10 am. I am maintaining the stock on my Best Ideas List - as I would be a buyer under $46/share.
* Genuine price discovery has been supplanted by a changing market structure and policy interference - producing a market of non sequiturs * The market's advance since Christmas - though tradable - may be as meaningless as the three month decline that preceded it * The weight of slowing global economic growth, untenable debt levels, political turmoil and policy issues/concerns could ultimately produce much lower stock prices
"Tell me somethin', girl Are you happy in this modern world? Or do you need more? Is there somethin' else you're searchin' for?" - Lady Gaga, ShallowI am struck by the unusual amount of interference that has prevented or inhibited the natural course of market (share price) discovery. Our markets are in the shallow. 1. Used as an adjective, shallow means of little depth. 2. Used as a noun, its an area of the sea, a lake or a river where the water is not very deep. 3. Used as a verb, (of the sea, a lake, or a river) becomes less deep over time or in a particular place.
"I'm falling In all the good times I find myself longing for change And in the bad times, I fear myself I'm off the deep end, watch as I dive in I'll never meet the ground Crash through the surface, where they can't hurt us We're far from the shallow now"
- Lady Gaga, Shallow
The factors contributing to this unusual market fare these days include: * The disproportionate impact of products and strategies that worship at the altar of price momentum - ETFs (leveraged and unleveraged) and the machines and algos (risk parity, et al). * An aggressively portion (in duration and quantity) of central bank liquidity.
We May Be Deducing Too Much From a Market Fueled by Machines and Algos These sort of conditions have a half life to them - they are transitory and always end. After all, when too many market participants are on the same side of the boat and liquidity provided is too generous, history proves that accidents do happen. Importantly, these conditions may have produced a relatively meaningless rise in the markets since Christmas which followed an equally unimportant decline that began in the middle of September, 2018.
As Divine Ms. M relates this morning in her commentary, a similar period of strength last summer gave way to a September market peak and reversal lower:
Nasdaq has not gone so long without a down day since it went eight in a row back in August (which oddly enough ended on 8/8 if you're into numbers...). In the last two years (since January 2017) it has gone seven straight four times. It went to eight as noted above. It went to nine and once it even went to 10 days in a row (that one ended in late July 2017).
Indeed, if we add up the moves they combine into a non consequential aggregate change in the Indices from September, 2018 to present.
"Tell me something, boy Aren't you tired tryin' to fill that void? Or do you need more? Ain't it hard keepin' it so hardcore?" - Lady Gaga, Shallow
Bottom Line
In our brave, new investment world, buyers live higher and sellers live lower - producing a series of market non sequitur,s tradable, but rather meaningless moves that are short in duration but powerful. Gone is the sense, for now, of the legitimacy of price discovery - replaced, instead, by the artificiality of market structure and the incessant easing (and expansion of liquidity) by our central bank.
And, not surprisingly, the majority of market participants seemed to have accepted this. "Tell me somethin', girl ... Are you happy in this modern world?"
It remains my view that the weight of slowing global economic growth, untenable debt levels, political turmoil and policy issues/concerns could ultimately produce much lower stock prices than are present today.
Here is some good stuff from my buddy/pal/friend "Jazzy" Jeff Saut at Raymond James:
Morning Tack - "Short Term Overbought?!"
If that quote sounds like me, it should because I have been writing about those same divergences and the short-term overbought condition of the equity markets recently. Interestingly, our pals at the invaluable Bespoke Investment Group wrote this yesterday:
"With a 2.5% gain last week, including a rally of over 1% alone on Friday, more than 70% of stocks in the S&P 500 finished the week at overbought levels. We consider 'overbought' to be any time that a stock or index trades one or more standard deviations above its 50-day moving average (DMA). On the flip side, anytime a stock trades one or more standard deviations below its 50-DMA, it is considered oversold. Each day in our Morning Line [Report], we track the percentage of stocks trading at overbought and oversold levels and track their changes on a daily basis, and Friday the net percentage (percent overbought minus percent oversold) exceeded 70%. That was the highest reading in well over a year [see chart]."
Yet, stocks can stay overbought longer than you can stay solvent! Another email I received yesterday from a portfolio manager noted that since 1991, when 90% of the S&P 500 (SPX/2779.76) stocks were above their respective 50-day moving averages, 12 months later the median gain for the SPX has been 14.43%. As market guru Leon Tuey writes:
"From its December low, the S&P has risen seven of the last eight weeks gaining over 18%, a gain which most investors would be thrilled to achieve in one year, never mind in two months. But as mentioned, the S&P doesn't tell the real story. More impressively and as expected, except for the SML Advance-Decline Line, all Advance-Decline Lines closed at record highs. In other words, the broad list of stocks has performed far better than most think. Of course, those who are obsessed with the S&P, the 200-day moving average, busy yelling 'Cyclical Bear Market!', 'Bear Market!', 'Recession!', etc., probably have no idea that the market is at a record high. (One must wonder whether these folks know anything about the market at all.) What are the bears saying now?"
Here too that sounds a lot like me, even though the near-term negatives concern me on a short-term trading basis.
Longer-term, I remain steadfastly bullish, believing this stock market has years of upside left in it!
Peter Boockvar writes about sentiment, data, minutes and the yuan:
According to Investors Intelligence, the Bulls got back above 50 for the first time since October 24, at 51.9 from 49.5 last week. The seven-week streak of higher bullishness is the longest since the post-election time period of November/December 2016. Bears fell to 20.7 from 21.5, giving back last week's increase. Those expecting a correction is now at a four-month low, at 27.4. Bottom line, an extreme read of Bulls is anything above 60, while something that is worth noting is something above 50. II said simply from a purely contrarian standpoint, "As optimism increases, so does the danger."
While the minutes are a whitewashed version of what was actually said during the FOMC meeting as a way for the Fed to convey added information, I don't expect anything new today at 2 p.m. ET outside of why they pivoted to such an extent. We now know the rate hike cycle is on hold (and most likely done) and thus we are left with what happens next with QT. Will it end cold turkey when they reach their balance sheet comfort level (around $3T?) or will they taper the QT until they get there? As we heard from some key Fed members over the past few weeks, that is currently in discussion, with an announcement possible at the coming meeting on March 20.
We got more confirmation of the slowdown in global trade, with Japan's report that exports in January fell 8.4% y/o/y vs. the estimate of down 5.7%. That's the biggest one-month decline since October 2016. Specifically, exports to China plunged by 17%. Bottom line, it's not just the U.S. and China that want a trade deal between the two. Also, we need to get rid of those steel and aluminum tariffs on many of our other trading partners. In response, the 10-yr JGB yield fell further below zero by almost 1 bp to -0.033%. The yen is also weaker, which in turn helped the Nikkei, but the bank stocks were flat as the curve continues to crush their profitability.
Speaking of banks, with talk now picking up that the ECB will release another round of TLTROs to help refinance those coming due, in addition to providing low cost funding, the Euro STOXX bank index today and yesterday are giving back Monday's rally, as bond yields fall further. The German 10-yr yield is down a full bp today to +0.09%. I really hope I don't have to put a minus side in front of that figure again. ECB Executive Board member Peter Praet was noncommittal today on whether and when we'll see new TLTROs, but did confirm that they'll be talking about it.
German PPI for January did surprise to the upside with a 2.6% y/o/y print, above the forecast of up 2.2%. It was led by the rebound in energy prices. As this is not CPI, the German 10-yr breakeven is unchanged at 0.96% vs. 1.38% in mid October.
On inflation, there seems to be a lot of nonchalance in the U.S., particularly on the part of the Fed, that inflation is falling, or at least not an issue, but if anyone listened to company conference calls on Q4 earnings will reveal many companies that are interested in raising prices as transportation costs, labor costs and raw material pricing is squeezing profit margins.
While the U.S. 10-yr yield keeps falling, now sitting at just 2.63%, the lowest since January 4, the 10-yr inflation breakeven is up to 1.88%, the highest since December 10. That implies that real rates keep falling with the 10-yr REAL rate at the lowest since late August. Again, global bond yields are not expecting an economic rebound when we get that Chinese trade deal like global stock markets are. Something has to give soon between the two markets and the messages they are sending.
U.S. Real 10-Year Yield
The yuan is higher vs. the dollar on the report that the U.S. trade negotiating team is asking the Chinese to keep the yuan stable (thus away from weakening it in response to any deal and/or tariffs). I'm all for keeping currencies stable, but it's quite ironic that our Treasury spends countless time for years and years accusing the Chinese of manipulating their currency and now we are asking them to officially manipulate their currency to keep it stable. Chinese Premier just within the last hour, and likely indirectly addressing this negotiating point, is saying that monetary policy will remain "prudent" and they will not resort to "flood like" stimulus. He doesn't seem supportive of another RRR cut anytime soon, but wants banks to lend money on a medium- and long-term basis to "the real economy."
