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David Moenning is a the Chief Investment Officer at Heritage Capital, which focuses on active risk management of the U.S. stock market. Dave is also the proprietor of StateoftheMarkets.com, which provides free and subscription-based portfolio services. Dave began his investment career in 1980... More
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  • The New Battle Cry: Inflation Or Bust!

    Daily State of the Markets
    Friday, October 31, 2014

    As someone who entered the investing business in 1980, it is very odd to see the central bankers of the world now focused on trying to increase inflation. Back in the day, inflation was the enemy. An enemy Paul Volcker was locked in battle with for years as runaway inflation threatened the very core of the U.S. economy after the oil shocks in the 1970's.

    Now fast-forward 30 years or so and one finds that today's enemy is just the opposite. Today everyone is worried about and focused on the potential for deflation. As a result, central bankers from the U.S., Europe, and Japan have been doing their darndest to boost the official inflation readings over the last couple years.

    The key appears to be that none of the world's bankers want to see a replay of what happened in Japan from 1989 through, well, today. In short, a deflationary cycle took over twenty five years ago in Japan that has kept the economy stagnant and has been a cycle that so far at least, has been nearly impossible to escape.

    As a student of the Great Depression, Ben Bernanke knew that a downwardly spiraling deflationary cycle was the biggest threat to the U.S. economy after the credit crisis ended. As such, "Gentle Ben" did everything in his power to push up the value of such things as stocks and real estate.

    And although the unemployment rate in the U.S. has come down dramatically since 2009 and the economy now appears to finally be able to stand on its own two feet, Janet Yellen's Fed is also taking no chances with deflation. While Yellen's bunch did finally put an end to their latest and greatest QE program this week, they will continue to reinvest the income from the $4+ trillion in bonds they now own and will keep rates near zero for a "considerable time."

    The result of the U.S. Fed's efforts on stocks and real estate have been nothing short of impressive. While home prices have not completely recovered from their bubbly heights, they have advanced smartly from the lows. And the U.S. stock market has enjoyed an advance of more than 200 percent since the dark days of 2009.

    S&P 500 - Daily

    View Larger Image

    Japan Implementing U.S. Playbook

    In light of these results, Japan's Prime Minister Shinzo Abe decided a couple years back to use the U.S. Fed's playbook with regard to ending the deflationary cycle. The plan was to implement a QE program in Japan that on a percentage of GDP basis, was even bigger than the program in the U.S.

    However, the Japanese have taken the idea one step further by buying up ETFs and Real-Estate Investment Trusts as well as bonds. Thus, the Japanese government was less vague about its intentions and has been directly buying stocks, bonds and REITs on the open market.

    The problem is that so far at least, the plan has not been nearly as successful in Japan as in the U.S.

    iShares Japan (NYSEARCA:EWJ) - Daily

    View Larger Image

    As the chart above clearly shows, Japanese stocks have not enjoyed the joyride to the upside that has been seen in the U.S. What's more, the rate of inflation has remained stubbornly low lately. And the bottom line is this appears to be unacceptable to the powers that be in Japan.

    Japan Now Pulling Out All the Stops

    However, this may be about to change as the BOJ shocked the financial world overnight by upping its QE program from about ¥50 billion a year to ¥80 billion - an increase of 60 percent!

    Japan's central bank said they would buy longer-term JGB's (Japanese Government Bonds) and would triple the rate of purchases of ETFs and real-estate investment trusts.

    But wait, there's more. The Government Pension Investment Fund announced yesterday that it was raising its allocation to domestic equities to 25 percent from 12 percent.

    It will suffice to say that Japanese officials want stocks to get moving higher.

    Officially, the BOJ still believes that the Japanese economy is recovering. However, officials also voiced concerns about their efforts to win the war on deflation.

    "If the current downward pressure on prices remains, albeit in the short term, there is a risk that conversion of deflationary mind-set, which has so far been progressing steadily, might be delayed," the BOJ said in a statement.

    In stepping back to look at this situation, the word you are probably looking for here is, wow! The Japanese are clearly going for broke and pulling out all the stops in an effort to get stocks and real estate moving higher.

    So far so good on that score as the Japanese stock market soared +4.8 percent overnight.

    Why Should We Care About Japan?

    The key here is that there is going to be a lot more money sloshing around the global financial system looking for a home. And if the past is any guide, a fair amount of the freshly minted money is likely to end up in the U.S. stock market.

    So, while the U.S. is now stepping away from the printing press, it looks like the Japanese are planning on picking up the slack.

    Oh, and speaking of more money printing, the traditionally hawkish ECB Governor Ewald Nowotny told CNBC today that one "should never say never" when pressed on the topic of an official QE program in the Eurozone.

    So, what has the response been to all of this been in the market? So far at least it appears that the phrase of the day is "Party on, Wayne!"

    Turning To This Morning

    Today's market is all about QE. The Bank of Japan shocked the markets overnight by boosting its QQE (Qualitative and Quantitative Easing) program by an eye-popping 60%. The BOJ will now be buying 80 billion yen a year (about $730 billion) worth of Japanese government bonds, REITs, and ETFs. (Yep, that's right, the BOJ is being sly, they are buying stocks outright.) In addition Japan's Government Pension fund announced that it was more than doubling its allocation to Japanese stocks, going from 12% to 25%. Then across the pond, the ECB's Ewald Nowotny, who is traditionally quite hawkish on anything relating to boosting the economy via monetary policy said "we should never say never" when pressed on the topic of QE in the Eurozone. Global markets have popped in response with Japan surging almost 5%, Europe's bourses are up smartly, and S&P futures are pointing to a new all-time highs at the open.

    Pre-Game Indicators

    Here are the Pre-Market indicators we review each morning before the opening bell...

    Major Foreign Markets:
    Japan: +4.83%
    Hong Kong: +1.25%
    Shanghai: +1.21%
    London: +1.24%
    Germany: +2.11%
    France: +2.26%
    Italy: +2.15%
    Spain: +1.93%

    Crude Oil Futures: -$0.64 to $80.48

    Gold: -$29.70 at $1168.90

    Dollar: higher against the yen and pound, lower vs. euro

    10-Year Bond Yield: Currently trading at 2.332%

    Stock Indices in U.S. (relative to fair value):
    S&P 500: +21.65
    Dow Jones Industrial Average: +176
    NASDAQ Composite: +59.21

    Thought For The Day:

    If you can't explain it simply, you don't understand it well enough. - Albert Einstein

    Wishing you green screens and all the best for a great day,

    David D. Moenning
    President, Chief Investment Officer
    Heritage Capital Research
    Check Out the NEW Website!

    Positions in stocks mentioned: none

    Follow Me on Twitter: @StateDave (Twitter is the new Ticker Tape)

    Advertisement
    Will You Be Ready For The NEXT Bear Market?

    Heritage Capital Research's NextGen Active Risk Manager Can Help
    Contact Heritage for more information or call us at (847) 807-3590


    The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning's opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report is for informational purposes only. No part of the material presented in this report is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed nor any Portfolio constitutes a solicitation to purchase or sell securities or any investment program.

    Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided.

    The analysis provided is based on both technical and fundamental research and is provided "as is" without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.

    David D. Moenning, an advisor representative of CONCERT Wealth Management Inc. (CONCERT), is founder of Heritage Capital Advisors LLC, a legal business entity doing business as Heritage Capital Research (Heritage). Advisory services are offered through CONCERT Wealth Management, Inc., an SEC registered investment advisor. For a complete description of investment risks, fees and services review the CONCERT firm brochure (ADV Part 2) which is available from your Investment Representative or by contacting Heritage or CONCERT.

    Mr. Moenning is also the owner of Heritage Capital Management (HCM) a state-registered investment adviser. HCM also serves as a sub-advisor to other investment advisory firms. Neither HCM, Heritage, or CONCERT is registered as a broker-dealer.

    Employees and affiliates of Heritage and HCM may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Editors will indicate whether they or Heritage/HCM has a position in stocks or other securities mentioned in any publication. The disclosures will be accurate as of the time of publication and may change thereafter without notice.

    Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results.

    Oct 31 8:53 AM | Link | Comment!
  • Hawkish Or Just Plain Pragmatic?

    Daily State of the Markets
    Thursday, October 30, 2014

    As expected, Janet Yellen's Fed announced yesterday that their QE bond-buying program was coming to an end. The move was widely telegraphed and could be viewed as a positive since the Fed no longer thinks the economy is weak enough to require the Fed's help.

    To support the relatively upbeat view of the economy, the statement released by the FOMC led off with an acknowledgement of the improvement in the jobs market. Specifically, the Fed wrote, "Labor market conditions improved somewhat further, with solid job gains and a lower unemployment rate."

    In addition, the FOMC statement said that "a range of labor market indicators suggests that underutilization of labor resources is gradually diminishing." In Fed-speak, this too was considered an upgrade to the labor market.

    Remember, the Fed has what is called a "dual mandate," meaning that they really have two jobs: full employment (i.e. the unemployment rate) and price stability (inflation). So, one key takeaway from the Fed statement yesterday is that the Fed believes it is getting somewhere on the first goal.

    The FOMC basically said as much via the line in the statement which read, "The Committee judges that there has been a substantial improvement in the outlook for the labor market since the inception of its current asset purchase program."

    What's the Problem?

    Stocks initially sold off on the release of the Fed's statement. And although a late rally kept the losses to a minimum, futures then immediately retreated after the close and are pointing lower again in the early going today.

    So what gives? Why would stocks move lower in response to the Fed saying things are looking up?

    The key to the current pullback appears to be fairly straightforward. You see, the fast money masters of the universe have decreed that the FOMC statement was "more hawkish" than had been expected. And remember, Wall Street does NOT like surprises - especially coming from the Fed.

    In English, the takeaway from the FOMC statement is that the Fed may need to turn from being "dovish" toward the economy (i.e. lending a stimulative hand) to being more "hawkish" on the inflation front (making sure that inflation stays at or below their 2% target). And if the latter is the case, then the fear is that rates will need to begin to rise sooner than currently anticipated.

    Apparently, traders had expected another warm and fuzzy statement from Ms. Yellen's bunch. Given that Fed Governors such as James Bullard, who tends to lean toward being an inflation hawk, had recently stated that the Fed could delay the end of QE or even do more if the economy shows signs of weakness, traders expected the FOMC statement to show more concern about the potential downside risks stemming from Europe.

    Although Ms. Yellen's gang of central bankers did say that rates would remain at their current levels for a "considerable time," the real key here is the view that the Fed became "incrementally more hawkish" with yesterday's statement.

    It's All About Inflation Now

    Perhaps the key takeaway from the Fed's statement is that the committee's focus is now squarely on inflation. And as such, the most important line in the statement was, "Although inflation in the near term will likely be held down by lower energy prices and other factors, the Committee judges that the likelihood of inflation running persistently below 2 percent has diminished somewhat since early this year."

    While this language sounds tame enough, traders took it to mean that the Fed may be more concerned about inflation than they have been. And as a result, rates may need to rise sooner than the street currently expects.

    On the topic of rates, the Fed's statement made it clear that the FOMC will remain "data dependent." And if one reads the entire statement they will probably come away with something along the lines of, "Okay, that makes sense."

    Cutting to the chase, the Fed is saying that they want to err on the side of caution and keep rates low for a "considerable time." But, they are also saying hey, if the economy and/or inflation expectations start to heat up, we're going to have to do our jobs and take some action. Which, to those with an objective view, would seem to be logical.

    One More Thing

    If you are still wondering why traders and their computers might see any of this as being negative, there is one more thing to keep in mind at this stage of the game. Lest we forget, the market has run an awfully long way in a VERY short period of time.

    And as the chart below shows, there is now important resistance overhead as the S&P approaches its all-time highs.

    S&P 500 - Daily

    View Larger Image

    So, in light of the fact that the S&P had popped up 9 percent in 9 days off the intraday low, with much of the gain fueled by Fed-speak both at home and across the pond, a period of backing and filling is probably in order until traders can figure out whether or not the improvement in the economy is a good thing.

    Turning To This Morning

    The news flow has been fairly quiet so far this morning as traders remain focused on the implications from yesterday's FOMC statement. The bottom line here is that the Fed's position was viewed as being more hawkish than had been expected. As such, traders worry that interest rates will need to rise sooner than expected. On the front, rates did rise after the Fed released its statement. In other news, the European Banking Authority said that today that banks should not feel too secure following ECB stress tests. As a result, European bourses are down hard today. Here at home, the focus is on the GDP report, which came in above expectations and futures are pointing to a weak open on Wall Street.

    Pre-Game Indicators

    Here are the Pre-Market indicators we review each morning before the opening bell...

    Major Foreign Markets:
    Japan: +0.67%
    Hong Kong: -0.49%
    Shanghai: +0.76%
    London: -0.85%
    Germany: -1.50%
    France: -1.01%
    Italy: -2.04%
    Spain: -2.02%

    Crude Oil Futures: -$0.83 to $81.37

    Gold: -$22.20 at $1202.70

    Dollar: higher against the yen and pound, lower vs. euro

    10-Year Bond Yield: Currently trading at 2.310%

    Stock Indices in U.S. (relative to fair value):
    S&P 500: -9.10
    Dow Jones Industrial Average: -14
    NASDAQ Composite: -24.85

    Thought For The Day:

    It is best to deal with your problems before they deal with your happiness. --Unknown

    Wishing you green screens and all the best for a great day,

    David D. Moenning
    President, Chief Investment Officer
    Heritage Capital Research
    Check Out the NEW Website!

    Positions in stocks mentioned: none

    Follow Me on Twitter: @StateDave (Twitter is the new Ticker Tape)

    Advertisement
    Will You Be Ready For The NEXT Bear Market?

    Heritage Capital Research's NextGen Active Risk Manager Can Help
    Contact Heritage for more information or call us at (847) 807-3590


    The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning's opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report is for informational purposes only. No part of the material presented in this report is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed nor any Portfolio constitutes a solicitation to purchase or sell securities or any investment program.

    Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided.

    The analysis provided is based on both technical and fundamental research and is provided "as is" without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.

    David D. Moenning, an advisor representative of CONCERT Wealth Management Inc. (CONCERT), is founder of Heritage Capital Advisors LLC, a legal business entity doing business as Heritage Capital Research (Heritage). Advisory services are offered through CONCERT Wealth Management, Inc., an SEC registered investment advisor. For a complete description of investment risks, fees and services review the CONCERT firm brochure (ADV Part 2) which is available from your Investment Representative or by contacting Heritage or CONCERT.

    Mr. Moenning is also the owner of Heritage Capital Management (HCM) a state-registered investment adviser. HCM also serves as a sub-advisor to other investment advisory firms. Neither HCM, Heritage, or CONCERT is registered as a broker-dealer.

    Employees and affiliates of Heritage and HCM may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Editors will indicate whether they or Heritage/HCM has a position in stocks or other securities mentioned in any publication. The disclosures will be accurate as of the time of publication and may change thereafter without notice.

    Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results.

    Oct 30 8:59 AM | Link | Comment!
  • Apparently There Is Nothing To Fear But...

    Daily State of the Markets
    Wednesday, October 29, 2014

    The bulls put a bit of an exclamation point on what is turning out to be a real joyride to the upside higher yesterday as the S&P 500 once again rallied hard without the benefit of an obvious catalyst. The rally pushed the venerable index back above its 50-day moving average and to within spitting distance (1.35% to be exact) of an all-time high.

    While the rather violent "V Bottom" seen over the last 9 sessions has left many investors scratching their heads, it is worth noting that both the Dow Jones Transports and NASDAQ 100 indices closed at a new all-time highs yesterday. So, perhaps there is something more than an algo-induced blast happening here.

    Recall that two weeks ago, traders were worried about all kinds of things. But, in looking at the charts below, the question that immediately jumps to mind is: What me worry?

    Dow Jones Transportation Index - Daily

    View Larger Image

    NASDAQ 100 - Daily

    View Larger Image

    However, given that the entire investing world was terrified of #GrowthSlowing at the beginning of the month, the real question on traders' minds is, what gives?

    Nothing to Fear But...

    Tuesday's session was accompanied by several modestly positive inputs such as China's Industrial Production numbers, which triggered a 2% rally in Shanghai, an ECB official saying that there is no risk of Europe entering a Japan-style deflationary cycle, and some U.S. data that came in better than expected.

    On the data front, there was some good news and some bad news. While the report on Durable Goods Orders clearly fell flat, the Conference Board's Consumer Confidence Index definitely surprised to the upside. And remember, the U.S. consumer accounts for more than two-thirds of this country's GDP. So, as John and Jane Q. Public go, so goes the economy.

    The Consumer Confidence Index came in above expectations, hit its best level in 7 years, and both the Expectations and Present Situation components were positive. In fact, the Present Situation component index was the highest since February, 2008.

    Why do we care, you ask? Two reasons, really. First, the report bodes well for the all-important holiday shopping season, which is set to kick off in a couple weeks. And second, the upbeat reading on consumer confidence has historically lead to an annualized gain of about 3.3% for U.S. GDP in the next couple of quarters. And the key here is that this is above current expectations.

    To be sure, none of the above would normally trigger a 190-point gain on the Dow - especially after the index had already popped 660 points in just 8 days. But with the recent numbers in China showing that their economy is not exactly falling off of a cliff, the ECB saying all the right stuff, earnings in the U.S. coming in better than expected again, and the U.S. economy looking just fine, thank you, well... the only thing to fear right now appears to be is fear itself.

    There is One Fear Worth Noting

    On the subject of fear, there is one type that is getting a lot of press right now: #FOMO. Yep, that's right fans, it's that time of year again where fund managers begin to worry about "missing out" on the traditional year-end rally.

    There have been several articles recently that have detailed the trials and tribulations encountered by hedge funds this year. According to the reports, with the exception of hedge funds managing futures (think commodities), the rest of the industry has been sucking wind this year and many big funds are underperforming badly.

    So, with nothing to fear and a stock market that is on a run, managers may be inclined to just throw in the towel and jump on board the bull train. And as silly as that may sound, it has happened many, many times in the past.

    However, before you run out and start levering up your holdings for the anticipated year-end run, we should recognize that the current Bullard-induced blast higher has run an awfully long way in a very short period of time. And as such, some backing and filling would seem to be in order in the near-term. Unless of course, the fear-of-missing-out simply overruns any and all rationality.

    Turning To This Morning

    After yesterday's impressive close in the U.S., traders were treated to some bad news. First, Facebook came out and said that expenses are going to be rising in the coming quarter. This caused traders to crush the stock in the after hours session. Next, the Department of Homeland Security announced they are enhancing security around U.S. Gov't buildings in D.C. and other cities in response to the attack in Canada and other threats. And then there was the report that the SEC itself has been releasing data to subscribers (meaning HFT outfits) early and high speed traders have been jumping on insider buying/selling filings before the data is available to the public. Oops. But then overnight, Japan's Industrial Production numbers were better than expected and the European Commission announced that they will accept both France and Italy's budgets as is. And finally, lest we forget, it's another Fed Day today as we will get the results of the FOMC's latest meeting this afternoon. It is a foregone conclusion that QEII will finally end but traders will be listening intently to the rest of the Fed's statement. And as a result, we should brace for the usual post-Fed insanity from the algo crowd. But for now, U.S. futures point to a mixed open on Wall Street.

    Pre-Game Indicators

    Here are the Pre-Market indicators we review each morning before the opening bell...

    Major Foreign Markets:
    Japan: +1.46%
    Hong Kong: +1.27%
    Shanghai: +1.50%
    London: +0.68%
    Germany: +0.65%
    France: +0.15%
    Italy: -0.67%
    Spain: -0.51%

    Crude Oil Futures: +$0.68 to $82.10

    Gold: -$1.70 at $1227.70

    Dollar: lower against the yen, higher ve. euro and pound

    10-Year Bond Yield: Currently trading at 2.292%

    Stock Indices in U.S. (relative to fair value):
    S&P 500: -0.40
    Dow Jones Industrial Average: +15
    NASDAQ Composite: -11.28

    Thought For The Day:

    The future belongs to those who believe in the beauty of their dreams. -Eleanor Roosevelt

    Wishing you green screens and all the best for a great day,

    David D. Moenning
    President, Chief Investment Officer
    Heritage Capital Research
    Check Out the NEW Website!

    Positions in stocks mentioned: none

    Follow Me on Twitter: @StateDave (Twitter is the new Ticker Tape)

    Advertisement
    Will You Be Ready For The NEXT Bear Market?

    Heritage Capital Research's NextGen Active Risk Manager Can Help
    Contact Heritage for more information or call us at (847) 807-3590


    The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning's opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report is for informational purposes only. No part of the material presented in this report is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed nor any Portfolio constitutes a solicitation to purchase or sell securities or any investment program.

    Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided.

    The analysis provided is based on both technical and fundamental research and is provided "as is" without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.

    David D. Moenning, an advisor representative of CONCERT Wealth Management Inc. (CONCERT), is founder of Heritage Capital Advisors LLC, a legal business entity doing business as Heritage Capital Research (Heritage). Advisory services are offered through CONCERT Wealth Management, Inc., an SEC registered investment advisor. For a complete description of investment risks, fees and services review the CONCERT firm brochure (ADV Part 2) which is available from your Investment Representative or by contacting Heritage or CONCERT.

    Mr. Moenning is also the owner of Heritage Capital Management (HCM) a state-registered investment adviser. HCM also serves as a sub-advisor to other investment advisory firms. Neither HCM, Heritage, or CONCERT is registered as a broker-dealer.

    Employees and affiliates of Heritage and HCM may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Editors will indicate whether they or Heritage/HCM has a position in stocks or other securities mentioned in any publication. The disclosures will be accurate as of the time of publication and may change thereafter without notice.

    Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results.

    Oct 29 8:48 AM | Link | Comment!
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