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  • Wall Street Breakfast: Must-Know News [View article]
    Forgot something. From the speech:

    "With the federal funds rate pinned near zero, the FOMC has been forced to rely on two less familiar policy tools–the first one being forward guidance regarding the future setting of the federal funds rate and the second being large-scale asset purchases. T. And here are no time-tested guidelines for how these tools should be adjusted in response to changes in the outlook."

    She's basically saying they are "winging it" and since there are no time tested rules for implementing and calibrating these tools the whole thing becomes an experiment guided by subjective judgments. They are flying by the seats of their pants and its only going to get messier with qualitative guidance, using vague language and based on a wider variety of economic indicators.
    Apr 17 08:36 AM | 8 Likes Like |Link to Comment
  • Wall Street Breakfast: Must-Know News [View article]
    Financial stability has shown itself to be an important concern in any policy mix yet it was not mentioned. Further, any casual examination of US consumer and producer prices reveals they have, as of late, remained in the 1% range notwithstanding asset purchases of $85 billion per month which now, of course, is now being tapered. Studies of Japan's experience with QE show a weak relationship between monetary policy and inflation expectations. Obviously I Have doubts about the direction and effectiveness of Fed policy and (1) do not believe increasing bank reserves is increasing broader monetary aggregates which is rendering QE useless and (2) believe much of the global deflationary pulse is a result of global imbalances (glut) in savings and reduced investment demand in advanced economies.
    Apr 17 08:15 AM | 5 Likes Like |Link to Comment
  • Deflation On The Mind [View article]
    Most of the concerns expressed by the IMF are misguided and are likely to lead to bad policy choices.

    First, inflation across Europe varies widely and only several countries are actually experiencing deflation. Low inflation in the eurozone has been driven by falling energy and commodity prices, the appreciation of the euro, relative price adjustments in countries such as Greece, Ireland and Portugal seeking to regain price competitiveness, the global savings glut and reduced investment.

    Secondly, fears of lower prices leading to deferral of purchases and an economic spiral downwards are misplaced and are not supported by the data. A number of studies show that savings decline as prices fall. It is often claimed consumers postpone their spending when they expect prices to fall, ie, they increase their savings. The evidence is strongly against this.

    And thirdly, the US' experience with QE and most of Japan' experience with QE is that large scale asset purchases do not materially affect prices. In the US, for example, producer and consumer prices have remained relatively stable while the Fed's balance sheet has grown over $3 trillion. One of the reasons for this seeming anomaly is that the Fed's actions have increased the monetary base while having little effect on broader aggregates of money supply

    In conclusion, I believe the author is correct in believing structural reforms combined with policies to expand R&D and investment will prove far more constructive than simply purchasing assets or spending money on bridges to nowhere.
    Apr 14 03:08 PM | 1 Like Like |Link to Comment
  • Weighing The Week Ahead: A Volatility Cocktail [View article]
    Thanks Jeff for another great issue of WTWA.

    With RUT sitting on its 200 dma and COMPQ very close to its 200 dma, I do not think we will see an uninterrupted downdraft next week as these are battle ground averages and offer much support for an index on the way down.

    Because valuations of small caps and certain tech sectors started this "adjustment, I think earnings will take on added significance and will be subject to much closer scrutiny than usual. Rather than being important, they will be critically important.

    Everybody knows the first quarter is likely to be weak with, maybe, a 1% increase in per share earnings over the prior year on the back of revenue growth in the area of 2.3%. But for the market to conclude this needed "adjustment" and grind higher, it will need to believe corporations can meet the higher hurdles set for quarters2, 3 and 4.

    And this, of course, will hinge upon guidance and forward looking comments. In this context, I would argue revenue growth will take on added significance as margins are probably maxed out although this does not suggest they will mean revert as wages gains are well contained.
    Apr 13 11:21 AM | 3 Likes Like |Link to Comment
  • Do You Believe The Global Economy Will Improve This Year? [View article]
    Steve, I think the IMF and other institutions with "vested interests" in the health of the global economy are institutionally biased to see things in the most optimistic light making their forecasts something less than useful. This inclination, of course, would apply to the Fed as well who easily has one of the worst forecasting records ever documented.
    Apr 12 12:44 PM | 3 Likes Like |Link to Comment
  • Wall Street Breakfast: Must-Know News [View article]
    Good Morning All

    Given the fragile state of the markets, we should at least see some fireworks if not scorching napalm.

    Japan's plan to reinstate nuclear energy is all the more necessary under Abenomics as the weak yen is making hydrocarbon imports absurdly expensive and is exacerbating trade deficits which have persisted for the last twenty months.

    The current account, though, which includes capital flows, improved in February and swung into surplus after four months of deficits.
    Apr 11 08:02 AM | 3 Likes Like |Link to Comment
  • Wall Street Breakfast: Must-Know News [View article]
    Good Morning All

    Greece's capacity to return to the bond markets is welcome and likely a great relief to Angela Merkel, the paymaster of the EMU. Perhaps of greater significance, notwithstanding deflation and elevated unemployment, Greece's return to the markets is a vindication of sorts of the seemingly harsh economic conditions imposed upon the country by the troika as a precondition to receiving assistance. Most of these conditions were designed to make Greece more competitive, open-up markets and trades, cut red tape and reverse unsustainable economic policies. Most Keynesian argued against "austerity" and for investment in infrastructure and human capital (code speak for transfer payments) and rallied against "hairshirt" economics. While Greece has further to go and more reforms to implement, it along with Ireland, Britain and several other countries are buttressing more conservative economic thought (leaning towards Austrian) embraced by others outside of Keynesian circles. Aware of this challenge to their thinking, Keynesian's are already quickly attempting to discredit the many success stories in this chapter of Greece's history.
    Apr 10 09:07 AM | 3 Likes Like |Link to Comment
  • Wall Street Breakfast: Must-Know News [View article]
    Good morning all...........wafts of burnt napalm are faint and have clearly subsided. In the context of IMF noises and utterances about strengthing global growth, its rather entertaining to read about the collapse in German exports due to turmoil in the Ukraine and strains in emerging markets which the IMF, depending upon the day, refers to as tail risks to an otherwise solid recovery.
    Apr 9 08:57 AM | 2 Likes Like |Link to Comment
  • Wall Street Breakfast: Must-Know News [View article]
    The plot thickens with Yardeni's belief that the markets are believing the ECB will undertake some form of monetary stimulus the center of gravity of which would be the peripherals, of course.

    "While the yen and the Nikkei are marking time waiting for more stimulus from the BOJ, Eurozone bond yields are plunging, especially in the peripheral countries, on expectations that the ECB soon will counter mounting deflationary forces by providing another round of monetary stimulus. The Italian and Spanish 10-year government bond yields are down by about 100bps since late last year to 3.2%. The French yield is down to 2.0%, while the German yield is at 1.5%. Even the Greek bond yield is down to 6.1%. "
    Apr 8 02:47 PM | Likes Like |Link to Comment
  • Wall Street Breakfast: Must-Know News [View article]
    Many interesting points gggl, but much money withdrawn from emerging markets found its way to some of the riskier homes inside the EMU. With money flowing back into EM's, it will be interesting how long the PIIGS can enjoy the low rates that they have recently have benefitted from.
    Apr 8 11:20 AM | 1 Like Like |Link to Comment
  • Wall Street Breakfast: Must-Know News [View article]
    Japan just increased its national sales tax to 8% from 5% at the beginning of the current month. While designed to address Japan’s large public debt, the tax increase is also seen as a critical test of Abenomics as the last sales tax increase in 1997 tipped the country into deep recession at the time of the Asian financial crisis. But why learn from the past?

    The FT reports:

    The index measuring expected business conditions in June at large retail chains – essentially, a tally of optimists minus pessimists – stood at minus 5, a full 29 points below the index for March. The projected deterioration among smaller retailers was even starker, with declines of 41 points seen at medium-sized groups and 36 points at the smallest ones.

    Hiromichi Shirakawa, chief Japan economist at Credit Suisse, said the extent of the expected worsening was more than double that reported on the eve of Japan’s last sales-tax rise, in 1997. That tax increase was followed by a deep recession, an experience that has fostered national anxiety over the latest move.

    Clearly, the BOJ held off taking further steps towards easing until it can gauge the likely damage following the sales tax hike with many believing the country will, again, slip into recession. Once the widely expected damage is confirmed, expect the usual bromides of further QE and additional fiscal spending
    Apr 8 07:38 AM | 7 Likes Like |Link to Comment
  • When Safety Rallies, Pay Attention [View article]
    Very interesting article with insights I share.

    From a top down view, bond-like investments (bonds, REIT's and utilities) have easily outperformed most major market indices with REIT's and the XLU posting gains of around 10% during the first quarter.

    It might be easy to attribute this to this performance to modest expectations for inflation and the prospect for stable yields, but this ignores the prospects for further tapering and other factors. Something else is keeping yields down and the something else could include realization that US values are stretched and the economy may not be that robust notwithstanding assurances to the contrary.

    The big story last week was money flows into emerging markets, particularly India and Indonesia, with cash finding homes in both bonds and equities. Equities offered compelling valuations while bonds became attractive after countless studies concluded that "overall" emerging markets could handle Fed tapering and have less exposure to hard currency debt exposure than originally believed. Plus, foreign exchange reserves are stronger than in prior periods of stress.

    To round out this discussion, I have included some insights offered by others that add further detail and texture to what is taking place in the market.

    With respect to the markets, the PFS Group notes PFS “We are seeing downside leadership in the consumer discretionary, technology, industrial, and health care sectors. This is a big concern for the markets as they collectively make up 56% of the weight in the S&P 1500. Conversely, the strongest areas of the market like energy, materials, telecom, and utilities make up only 18% of the market and aren’t large enough to carry the weight of the market higher.

    And Urban Carmel at the Fat Pitch concludes his Weekly Market Summary with the following: The 2013 market has conditioned everyone to keep their bearish thoughts in check. There were times in 2013 when defensive sectors and bonds led, and equities eventually rebounded to new highs.

    This year seems to be different: NDX and RUT appear to be breaking down, and the large cap indices are masking wide spread weakness among individual stocks. (With the SPX at a new high this week, the 500 individual stocks in the index are down an average of 7% from their 52-week highs (from Bespoke). Just 22% of the index was at a 20-day high and only 10% at a 1-year high on the day of the index's all time high.)

    That, taken together with the larger picture of a market in the tail of the bell-curve on multiple measures, makes a stronger case to expect NDX and RUT to now be leading SPX and the Dow lower.

    Stocks normally perform well in April. It's one of the best months of the year. And perhaps it will be this year too. In a midterm election year like this one, it typically rallies through the third week of the month. The wily market from 2013 would find a way to take advantage of this; will the 2014 market?
    Apr 7 10:50 AM | 3 Likes Like |Link to Comment
  • Flows Into Emerging Markets Surge While Cracks In The U.S. Widen [View article]
    I always enjoy your work and the rigor you apply.

    Most of the classic internals are holding up but some Bespoke identified several points of weakness in the SPX as the market hit a new high.

    With social media and biotech collapsing, widespread sector rotation and the plunge in the RUT and NDX one has to ask whether the RUT and NDX leading the other indices down.
    Apr 6 02:43 PM | Likes Like |Link to Comment
  • Reaching For Yield [View article]
    Spreads in high yield and leveraged loans are too tight; it cannot last. Defaults have been supended in seas of liquidity but once these seas return to normal levels so will cycles of economic activity including defaults.
    Apr 6 02:27 PM | Likes Like |Link to Comment
  • Weighing The Week Ahead: Fluff Or Fundamentals? [View article]
    As always Jeff, a very helpful guide to what happened during the past week and what we should be looking forward to in the coming week.

    The macro picture remains one of positive but slow growth with major concerns being growth in lending slowing, a slight, but persistent, up tick in inventory to sales and a possibly difficult first quarter earnings seasons. The non-farm payroll numbers on Friday confirmed annual employment growth of 1.6% and the monthly increase in the establishment survey has been in this range for 30-months.

    As the NYT observes:

    “One of the many good things about the arrival of spring is that politicians, economists and other policy makers can no longer blame the winter weather for the slow economy and the grinding pace of job growth.

    The employment report for March, released Friday, indicates that weather did not have as negative an impact in January and February as originally believed; job tallies for those months were revised upward. Accordingly, the springtime bounce in employment was not as great as anticipated. The 192,000 new jobs created in March fell short of the consensus forecast for stronger growth. Monthly job growth averaged 178,000 in the first quarter, compared with the monthly average of 194,000 in all of 2013.”

    CI Here. Much noise has been made over the work week week edging up to 33.7 hours in March over February’s reading of 33.4 hours but this acclaimed “surge” is dimmed by the inconvenient truth that the work week one year ago was 33.8 hours. Yes it’s declined over the year.

    Average hourly wages, another interesting metric, declined slightly in March but did increase 2.1% in nominal terms over the year year. Taking into account inflation, real wages increased approximately 1% during the year surprisingly close to growth of .8% in real PDI in the latest report on GDP. And if you want to take it further by looking at mean and/or median incomes while taking into account the number of employed, the results tend to move down and real per capita income of those employed is, at best, flatlining.

    The diffusion index provides insight into breath of hiring and the index for all private industries fell from 62.7 in January to 58.5 in March for all private industries while the index fell during the same period for manufacturing from 55.6 to 50.0. Fifty percent indicates an equal balance between industries with increasing and decreasing employment. Those looking forward have reason to be concerned.

    In summary, then, the unemployment rates has remained essentially unchanged while quarterly job growth has declined from the average of 2013; the work week is marginally down from one year ago; growth in real incomes and wages are essentially stagnant; and the employment diffusion index is falling while there is employment stagnation in manufacturing.

    With respect to the markets, the PFS Group notes PFS “We are seeing downside leadership in the consumer discretionary, technology, industrial, and health care sectors. This is a big concern for the markets as they collectively make up 56% of the weight in the S&P 1500. Conversely, the strongest areas of the market like energy, materials, telecom, and utilities make up only 18% of the market and aren’t large enough to carry the weight of the market higher.

    And Urban Carmel at the Fat Pitch concludes his Weekly Market Summary with the following: The 2013 market has conditioned everyone to keep their bearish thoughts in check. There were times in 2013 when defensive sectors and bonds led, and equities eventually rebounded to new highs.

    This year seems to be different: NDX and RUT appear to be breaking down, and the large cap indices are masking wide spread weakness among individual stocks. (With the SPX at a new high this week, the 500 individual stocks in the index are down an average of 7% from their 52-week highs (from Bespoke). Just 22% of the index was at a 20-day high and only 10% at a 1-year high on the day of the index's all time high.)

    That, taken together with the larger picture of a market in the tail of the bell-curve on multiple measures, makes a stronger case to expect NDX and RUT to now be leading SPX and the Dow lower.

    Stocks normally perform well in April. It's one of the best months of the year. And perhaps it will be this year too. In a midterm election year like this one, it typically rallies through the third week of the month. The wily market from 2013 would find a way to take advantage of this; will the 2014 market?
    Apr 6 12:54 PM | 3 Likes Like |Link to Comment
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