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John Furlan's  Instablog

John Furlan
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John Furlan has been familiar with financial markets for many of the past thirty years. Please contact him at jf09sa@gmail.com.
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  • Fed, ECB Still On Hold During Difficult Transitions

    Friday's 115k increase in nonfarm payrolls was "disappointing," "worse than expected" for the second month in a row, sending SPX down -1.6% to 1369, it is now 1350.

    A very subpar recovery in employment hasn't prevented a very strong 3-year bull market, with SPY up 119% at its peak, greatly aided by extraordinary Fed policies, as I wrote Apr 29.

    What has changed since Apr 3-4 is that financial markets believe the Fed and ECB are on hold, which continued at last week's ECB meeting. Not coincidentally global stocks topped Apr 2, see my Apr 16, Apr 5.

    Since then, bulls' "heads I win, tails you lose" game of good news is good, and bad news is okay, hoping key central banks ease even further, see my Mar 27, that drove the Oct 4 rally has not worked.

    Except in China since April 4, whose stock market not coincidentally has risen. Other emerging market central banks are easing, that hasn't yet stopped significant downtrends in EEM, BKF, see charts below.

    In the U.S., more experts are saying housing has bottomed. ITB home construction and IYR REIT etfs have been doing well, giving bulls some hope that the expansion might become more self-sustaining. XLK tech has weakened recently, with the Facebook roadshow just starting.

    Bulls hope housing and strong auto sales offset the disappointing employment numbers, pointing out the seasonal adjustment issues with a warm winter and Easter, and the +/- 100k margin of error.

    The bulls' case would be that, as long as earnings growth seems okay, up 7-8% in 1Q, interest rates remain extremely low, Europe stays contained, a big if, it's possible that the market p/e rises some time in 2012 closer to its long-term average.

    But timing is difficult. As I wrote April 23, the three major regions are in the middle of trying to make their own key transitions, which don't always go smoothly, again most obviously in Europe. Those are to a:

    "1) more stable financial situation in Europe; 2) more self-sustaining economic recovery in the U.S.; and 3) more sustainable basis for [continued high] economic growth in China."

    European politics in the news is not surprising. On Feb 7, I wrote "Will Europe Tail Risk Shift to Political Unrest from Policy Making," on Feb 23, "Greece Deal, Eurozone Austerity in Race with Economy."

    So my ongoing advice for months has been that whenever VIX gets low enough, perhaps below 16, then consider it an opportunity to hedge with cheaper puts. I.e., hedge when you can, not when you have to.

    LEFT CLICK on charts to enlarge. Relative strength, top panel of each chart, is to SPY, except SPX and ACWI, which is to LQD, investment grade corporate bonds. Bottom panels show rate of change over 5 and 21 days, i.e. one week and month of trading day, which strongly impact the mood of traders about a security, i.e. have they been making or losing money.

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    May 08 5:25 PM | Link | Comment!
  • Earnings, Not Jobs, GDP, Has Driven Bull Market

    Earnings, not employment, reported this Fri, or GDP last, has directly driven the bull market.

    Conflating the state of employment and the economy with that of corporate profits and the stock market accounts for much muddied analysis and poor investment decisions the past three years.

    Fri's Apr nonfarm payroll is expected to increase 165k, from 120k in Mar, down from an average 258k in Jan-Feb. Initial jobless claims 4-week ma has increased from 363k 3/31 to 382k 4/21, see charts.

    So far 1Q earnings of SPX are up 5-6%, versus estimates close to 0% (about 74% "beat," a contrived game). Stoxx 600 companies have beat estimates by 7%. Both indexes rallied off recent lows last week.

    The now 3-year bull market has been driven by strong earnings, extremely low interest rates, and below average market p/e, with periodic scares about Europe debt.

    The U.S. had had a very strong recovery in profits and stock prices, SPX up 111% from its Mar 2009 lows. It has been very weak versus the past for growth of employment and GDP, see charts.

    In the long run the stock market discounts corporate cash flows. Employment and GDP mainly matter to the stock market not in themselves, but in how they impact earnings, interest rates, and risk premiums.

    That impact can be more direct, e.g. on revenue growth and profit margins, or indirect, e.g. systemic financial and political risks, e.g. in Europe (Spain's unemployment is 24.4%).

    From the WSJ Fri, "Thirty-five big U.S.-based multinational companies added jobs much faster than other U.S. employers in the past two years, but nearly three-fourths of those jobs were overseas."

    Arguably stubbornly high unemployment would increase the chances of Obama losing the election, which market consensus probably might consider positive for stock prices.

    LEFT CLICK on charts to enlarge. For real GDP and total nonfarm employees, holding a clear straight edge along different sections of the line (trying to visually best fit a regression) will help show the shifts in growth rates (those are log charts) over decades, and where current values would be now if those shifts had not occurred.

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    Apr 29 11:38 PM | Link | Comment!
  • Guess What's Leading The Market Up?

    AAPL is far and away THE market leader. It's getting help from the much smaller home builders.

    Residential construction is the best performing of 212 groups the past week, up 9.5%. ITB etf is up 3.7% today, and a whopping 87% off its Oct 4 low.

    Home builders, a very volatile group, have had big runs before in this Mar 09 bull market. At 15.33, ITB is still below its high of 15.77 the week of 4/30/10.

    So will this time be different? I quoted in my post yesterday a couple of experts, Moody's Zandi and Zillow's Humphries, with positive comments on the housing market.

    I try to closely follow this group, e.g. my Mar 28 post, "Housing Key to Economy, Strong Market Rally."

    Not because of its size. Home construction is a small part of GDP, and home builders are not large companies. Lennar, the largest market cap, is $5.2 b, AAPL $567 b.

    Rather because residential real estate has been and still remains the key factor for "wealth" creation for the American middle class.

    That hasn't changed after the 2007-09 crisis, nothing yet has come along to replace real estate in the American economy.

    That's why Bernanke keeps trying to get a single-family home recovery going.

    Btw, IYR REIT etf made a new bull market high today, as commercial real estate is also doing better.

    As I've mentioned before, I much prefer to watch ITB than the more popular XHB. ITB's top five holdings are all homebuilders accounting for 44% of its assets, versus only one for XHB of its top ten at only 4% of its assets.

    LEFT CLICK on charts to enlarge. ITB's relative strength to SPY has increased 19.2% since Dec 20, the day before Draghi's ECB LTRO turned global market sentiment up (aided by Bernanke's dollar swap in late Nov).

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    Apr 26 6:23 PM | Link | Comment!
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  • On my Instablog, XLF holding critical support. OIH, QQQ up, EEM down, disconnect of energy, tech dependence on emerging markets. Charts.
    Jan 26, 2010
  • I just posted a series of charts on my Instablog showing AAPL vs GOOG, XLK, QQQ, SPY, and ACWI.
    Jan 25, 2010
  • Bullish in 2009, 1/19 wrote "First Key Decision Point Imminent" on 1/21, see last Instablog "Emerging Markets," submitted but not published
    Jan 22, 2010
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