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Gary Tanashian
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Gary Tanashian is proprietor of Actionable, hype-free technical, macro economic and sentiment analysis is provided in the premium newsletter Notes From the Rabbit Hole ( Complimentary analysis and commentary is available at the 'Biiwii Blog'... More
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  • 'Taper Pace May Be Too Slow'

    Plosser: Taper Pace May be Too Slow

    My second favorite Bad Cop says…

    "We must back away from increasing the degree of policy accommodation in a manner commensurate with an improving economy," Plosser told a panel in Paris. "Reducing the pace of asset purchases in measured steps is moving in the right direction, but the pace may leave us well behind the curve if the economy continues to play out according to the FOMC forecasts."

    Especially since they are not actually withdrawing policy. All tapering does is provide implied profit margin for banks and lenders, considering Fed Funds are held near 0% and the implied spread to longer term lending rates.

    "If the economy continues to improve, we could find ourselves still trying to increase accommodation in an environment in which history suggests that policy should perhaps be moving in the opposite direction," Plosser said.

    Plosser is telling us, in not so many words, exactly what I have been claiming; as long as ZIRP is held, we are INCREASING accommodation, not decreasing it. The 'taper' hype is just that, hype.

    Now I wonder why he does not just outright mention ZIRP? They want to tame the permissive bubble making policy? Do a surprise rate hike on the Fed Funds.

    A nation hopped up on greed moves forward with the media obsessed on QE's declining asset purchases and still nobody's making a peep about the real inflation, which is where money is lent to financial institutions at 0% at the expense of Grandma, our kids and any other would-be savers.

    I'd like to think the Bad Cops are sincere, but until they start to speak directly about ZIRP I have to believe they are just part of a media campaign designed to give the impression that there is some kind of debate about tightening policy. I've said it before and I'll say it again, as long as ZIRP is held they are inflating. Period.

    Mar 10 8:44 AM | Link | Comment!
  • Stock Market: Bullish While It's Bullish

    A point I have been trying to make since the beginning, which in my case for public writing was 2004, is "but it is what it is" (biiwii). The name of the website was a direct (and bullish) response to my own bearish bias (which endures to this day because I have seen no improvement in monetary policy making) as the Greenspan era credit fueled cyclical bull market was getting ramped up. In other words, it is what it is; don't fight it. It was bullish.

    Today we have a decent 'jobs' number for February, considering the weather. Earlier in the week the ISM manufacturing data came in strong, again considering the weather. The stock market has a potential melt up scenario and really, things seem pretty good with the recent recovery from a winter blip in economic data.

    It is bullish while it is bullish. In other words, as long as the positive effects of policy making and speculative sentiment last the economy and the stock market are going to remain positive and bullish, respectively. That has never been a point of contention.

    PE ratios and other valuation metrics, while not at value levels by any means, have not been in bubble territory. That is because corporate profits have been very strong. That is a fundamental underpinning and it is real, to conventional analysis. Yet another point I have been trying to make over the last year or so is that it is the backdrop against which these profits are earned that is not sustainable and hence not real.

    (click to enlarge)

    Profits & Debt, courtesy of SlopeCharts

    The act of holding Zero Interest Rate Policy (ZIRP) for 5+ years and purchasing $Billions in T bonds and MBS has served to leverage debt toward economic growth. A great job by our dear policy makers. But just as the commercial credit bubble that fueled the cyclical bull market (terminated 2007) came with built in hazards, so too does this one.

    That previous cycle was bullish while it was bullish. Then, when enough credit had been issued and enough risk taken on, it was time for the balancing of the books. That is a polite way of saying market liquidation.

    This market is bullish while it is bullish. But when the distortions in credit (this time official as opposed to commercial) seek their natural balance - and they will one day - the adjustment is going to be a bitch. There is documented evidence of excessive margin debt in play along with several other signs of leveraged excess, like A Warning on Junk Loans.

    But as is typical of human nature, warnings will not be heeded - not really - until it is too late. Until then, it's a game of musical chairs in a market comprising an increasing proportion of the public; the same public that just became aware that there was a bull market going on around mid-2013.

    The bull market is 5 years old, which is roughly the longevity of the last two cycles. While a nice, neat 5 year lifespan would be fitting, we have the bull's potential out to mid-year or, given recent developments (see first link above) possibly even late year. It's bullish while it's bullish and not one moment longer. That moment may have arrived as I hit the 'publish' button on this post or it may be out there on the horizon.

    Mar 08 5:06 PM | Link | 1 Comment
  • Watch Semiconductors' Market Leadership

    In January of 2013 NFTRH used the Semiconductor sector as a 'canary in a coal mine' to a potential coming phase of US manufacturing strength and an economic bounce. This had negative implications for gold but normally would have had positive implications for commodities positively correlated to the economy.

    That did not materialize in 2013 (as China decelerated) although with the recent launch of various 'outlier' commodity sectors like agriculture, natural gas and uranium along with persistent strength in crude oil and the highly speculative TSX Venture Exchange (CDNX), we now consider the view that some inflationary chickens (rising cost effects) may be coming home to roost. The economic bounce was after all instigated by an inflationary mix of ZIRP on the Fed Funds rate and long-term Treasury bond buying.

    We are managing precious metals and commodities on an ongoing basis, but today I want to focus back where it all began, with the canaries in the coal mine. Our early alert came in the form of personal information received about a ramp up in Semiconductor fab equipment orders from a friend in the field. If fab equipment companies like Applied Materials and Lam Research were ramping up then it meant that the Semiconductor companies themselves were gearing a new build cycle. This was 'early warning' stuff.

    But now the Semiconductor index itself, which has led the rally since Q4, 2012 (and is still leading despite some other leadership indicators like the BKX-SPX ratio falling off lately) is at a very important big picture pivot point. Here is SOX-SPX, showing leadership during the most intense phase of the cyclical bull market…

    (click to enlarge)

    Dialing out to a monthly view of the nominal SOX index we find the really compelling picture. The Semiconductors are technically above 10 year old resistance! ← You know I don't use (!) very often in my analysis. A March close above 560.68 is needed to confirm this breakout.

    NFTRH has incidentally, added the SMH Market Vectors Semiconductor ETF to the extensive list of strategic ETFs charted each week (joining several precious metals, commodity and stock ETFs) due to SOX' current status.

    (click to enlarge)

    What I find interesting is that most rallies over the last decade have pinged along from the bottom to the top Bollinger Bands and back again. But the current trend is much like the pre-2000 (and pre-blow off) trend as it hugs the top BB line. This is very much in line with the current question we are asking of the markets, 'melt up or correct here and now?'.

    Put it this way, if the SOX holds above the resistance line through March, the odds become heavily tilted toward an upside market blow off, which I believe would be the nature of the bull's end. We have had bull market termination scheduled for spring to mid-year for many months, but a picture like the above could force the analysis to adjust this potential out to Q4, 2014. We'll just have to be patient and let things unfold.

    Bottom Line

    The red line on the chart directly above represents a key level for market players. It is exquisite in that the implications of success or failure at this line are so very different.

    Success means a cyclical bull market blow off is probably engaging that would kill every bear before eventually wiping out greedy bulls (silver 2011 style) who over stay their welcome. Alternatively, take the breakout as a given at this moment and one risks the pain of a potential reversal and failure.

    Regardless, the potential of the SOX is very clear. The best (and crazy sounding) measured target is 953. Improbable I know, but how much about this bull market has seemed probable well in advance? Respecting potentials and probabilities while keeping ego and intellect under control will see us through. So will following the market's road maps, like the one above. It is very clear.

    Take advantage of a free 30 day trial of the entire NFTRH service, including a detailed weekly report, interim updates and 'Key ETF' updates. Over 90% of those who have used the trial have remained on as paying premium subscribers due to the value they have received over the trial period.

    Mar 06 6:21 AM | Link | Comment!
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