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  • Weighing The Week Ahead: Will Economic News Alter Fed Policy? [View article]
    Thanks Jeff.

    January's release on retail spending supports bbro's thesis that we will likely see further declines in the gasoline and energy component Q215 GDP. In January, retail spending on gasoline plunged nearly 24% over the prior year. Excluding gasoline sales, retail sales rose 6.6% over the year, suggesting consumption spending should be supportive of growth in GDP this year. Even more so is accompanied by wage gains which many believe to be near at hand.
    Mar 1, 2015. 10:54 AM | 3 Likes Like |Link to Comment
  • Weighing The Week Ahead: Pundit Forecasts For 2015 [View article]
    Thanks Jeff,

    I was several days premature in calling a bottom in both equities and oil but clearly equities bottomed on Wednesday and took off with a jump in oil prices and made further gains Thursday and Friday on the back of carefully nuanced statements from the Fed.

    Compared to a week ago, equities are significantly higher and back at record levels, ten years rates are fractionally higher and oil prices are generally a bit lower with both WTI and Brent struggling to find a bottom at 55 and 60, respectively. 60 on Brent is a big number as below that 40% of our shale production is uneconomic and many countries in the Middle East need 100 oil to balance budgets and fund social services. Lots of poker being played.

    In looking at weekly charts, what we just experienced is unusual in the sense that the 5% correction was extremely compressed. Whether this is significant is not known but he correction itself, though, was preordained and likely rooted in technical and seasonal effects.

    Assuming the market remains intact, cyclical rhythms and seasonal effects are likely to drive the market higher. A study of past corrections, reveals the typical fib correction to be about 50% (54% actual) and the subsequent high to be 110% of the retracement level. In, the data 110% popped up four times and 107% three times. The data strongly suggest retracements levels drive the market higher, not a statistic between cyclical highs.

    Parenthetically, for a market to remain in channel for an extended period there must be a series of recurring mathematical sequences and events to control the pace of advance to remain within the channel envelop. This prompted my brief study.

    Again, if the market remains structurally intact its likely the next top will be somewhere around 2170 (1972X1.1) or 190 points higher from where we are today and because of seasonality effects its very possible we may see a sizeable chunk of this gain during December. And if we get to 2170, a 50% retracement would bring us back to where we are today at around 2075 (2170-95) where there would be support for the next cycle.

    Nothing herein should be construed as investment advice.
    Dec 21, 2014. 07:54 AM | 2 Likes Like |Link to Comment
  • Weighing The Week Ahead: Will Crashing Energy Prices Change The Fed's Course? [View article]
    And we are quickly reaching a point where lots of US shale will not be economic and, one would think, force cuts in production. Citi did a study of production breakeven costs for US shale producers and believes when Brent hits $60 close to 40% of all shale production will be uneconomic and below $50 almost 90% of all shale becomes uneconomic. Brent closed at $62 on Friday.
    Dec 14, 2014. 11:03 AM | Likes Like |Link to Comment
  • Weighing The Week Ahead: Will Crashing Energy Prices Change The Fed's Course? [View article]
    Oh, as to Fed watching this is from Northern Trust: Watching the Federal Reserve is a strange and esoteric pursuit. Observers are reduced to endless parsing of adjectives and adverbs, sorting hawks from doves and trying to identify the dots in scatter plots of Fed forecasts. Years ago, we even attempted to correlate the size of the chairman’s briefcase with decisions to raise interest rates. Pretty sad, if you ask me.
    Dec 14, 2014. 08:55 AM | 2 Likes Like |Link to Comment
  • Weighing The Week Ahead: Will Crashing Energy Prices Change The Fed's Course? [View article]
    Thanks Jeff, you navigated a very complicated week with skill and balance.

    There were a few signs the market wanted to blow of some steam to deal with stretched valuations, a weak double top and a couple of others signs of stress and oil happened to be the perfect catalyst. But because oil has often collapsed and the market has traded up, I think its likely other variables are in play.

    Those other things likely include fear of slowing global growth, winds of deflation and particular concern over the economic growth prospects for Japan, China and Europe. Europe is simply a mess with the economy on a gurney along with fresh signs of Greece imploding. And if Abe does not fire the politically unpopular third arrow of reform of labor markets and products markets, Japan will return to life support in the zombie recovery room.

    And growth is slowing in China with many hard indicators pointing down. Less discussed is signs of tentative success in restructuring the economy to encourage greater participation by the consumer which would lead to, among other things, more cars. And we know what cars like and about 75% of all oil is used supporting transportation of all types.

    I have a sense we are nearing a bottom in oil but I do not believe it will be a violent V recovery that some are expecting. It will be a challenge to find a bottom and we will need to watch for the dollar to stabilize, oil prices form a foundation and edge up and watch for the WTI volatility index ($OVX) to pull back. An edifice of resistance in WTI is at $92 and $97

    As to the broader market, I think we are close to putting in a low as the ISEE call/put, $CPCE, VIX term structure inversion, 50DMA and McClellan oscillator all suggest relief is within sight. And if this should prove to be the case it would square beautifully with Chad Gassaway's thinking on the last two weeks of December.

    Things to track not already mentioned would include junk bonds and "external borrowing done by governments and companies in emerging markets is denominated in U.S. dollars, which creates an additional challenge. The latest quarterly review of the Bank of International Settlements notes that loans of international banks to EMs amounted to $3.1 trillion in mid-2014, mainly in dollars. Also, three-quarters of the $2.6 trillion of international debt securities issued by EMs are in dollars."
    Dec 14, 2014. 08:47 AM | 4 Likes Like |Link to Comment
  • Weighing The Week Ahead: Time For Digestion? [View article]
    After thinking and reading a bit more, the US and its balance of trade is likely to be a winner as reduced oil imports at lower prices is likely to further improve our balance of trade. Ambrose Evans-Pritchard suggest that lower oil prices may increase geopolitical instability in the Mid-East as current oil prices will strain state budgets in Yemen, Algeria, Nigeria and Iraq. With footholds already Syria, Iraq and Libya, the Islamic State may find it easier to expand into Algeria and Nigeria with any reduction in social spending. Depending upon how far oil prices fall and how long they remain depressed, there could be an effective transfer of wealth from producers to consumers, enhancing the wealth of countries such as Turkey and India and making them possible investment opportunities.
    Nov 30, 2014. 02:50 PM | 2 Likes Like |Link to Comment
  • Weighing The Week Ahead: Time For Digestion? [View article]
    Thanks Jeff for going the extra mile.

    Even though most markets were trading this past week, the suppression of liquidity from the US holidays likely dampened markets across the globe.

    I think a subset of one of the themes you identify will be picking the winners and losers of the swoon in oil prices. Obviously most consumers are benefitting from lower oil prices but the drop in prices is not helping to increase inflation or raise inflation expectations.

    Further, there is concern that many of the shale producers may have financial problems with the current trajectory of prices. From the many charts I have looked at, it would appear the breakeven prices for many of the Baaken producers is in the low $50s to $70, leading Citi to say to say it would have to fall to $50 or lower to halt shale production. Fitch said at $60 you start to price out a lot of critical mass production around the world, including shale and the Gulf of Mexico.

    If prices continue to fall we will be forced to look at possible reductions in capital spending as the energy sector accounts for around 35% of CAPEX. Lastly, and perhaps most obviously, lower oil prices will cause problems in the high yield market where energy accounts for about 16% of junk bonds.

    I agree with your picks in the energy space and at some point they will be very attractive.
    Nov 30, 2014. 11:37 AM | 4 Likes Like |Link to Comment
  • Weighing The Week Ahead: Are Investors Too Complacent? [View article]
    Thanks Jeff. I offered the link more by way of example than a definitive guide to contemporary valutions. That said, I dont think it hurts in drawing upon history to develop long term trends with the caveat that more recent history should be given greater weight to account for likely evolutionary changes. In this instance, though, the chart correctly identifies what most woud agree to be the most recent period of extreme valuations.
    Nov 23, 2014. 11:15 PM | 1 Like Like |Link to Comment
  • Weighing The Week Ahead: Are Investors Too Complacent? [View article]
    Thanks Jeff for another fine installment of WTWA.

    I'm not sure if there is complacency or simply too many thinking the same thing which raises questions as to the depth of thinking as there are many developments to be watching.

    I think the term divergence will grow in use as major central banks pursue divergent policies with the US poised to tighten while the BOJ, ECB and PBOC continue to ease. Of course, this fuels the dollar and carry trades using yen to purchase dollar denominated assets.

    There are also many divergences taking place within the market with the "divorce" of the S&P 500 from high yield bonds in June. Since that time, the S&P has moved higher while high yield has experienced higher spreads which historically is not a favorable.

    The Yield on junk's back above 6%, comfortably above $SPX free cashflow yield. Stocks have had trouble making headway in this setup since '10. Other divergences include the performance of larger cap stocks versus smaller cap stocks and a 5% rise in the VIX as a new high is printed.

    With respect to complacency and group think, bullish sentiment is beginning to reach extremes as seen in surveys, asset allocation and measures such as the ISEE call/put ratio which has seen several days above 200 which often leads to sub-par performance in the following days.

    Internals of the market remain strong, perhaps too strong. The percent of stocks in the S&P 500 trading above their 50 DMA has soared to 88, right in the middle of the space of 82 to 92 where tops are formed. As an aside, net new highs has been falling and the guge is in a median zone as record highs are printed. A little odd.

    Lastly there has been more discussion than usual about valuations whether using P/E ratios (trailing), CAPE or price to sales. I'll conclude by sharing an interesting analysis and discussion of current valuations:
    Nov 23, 2014. 10:59 AM | 4 Likes Like |Link to Comment
  • Wall Street Breakfast: Abe Delays Sales Tax Hike [View article]
    Abe should be incarcerated, not elected. He has not followed through on ANY of the reforms comprising the "third arrow". Fiscal stimulus was included in the first arrow, then there was stimulus to blunt the impact of the hike in the VAT and now it is likely there will be further stimulus to help pull Japan out of the current recession. Like all politicians, he likes to spend but lacks the brass to enact difficult and unpopular legislative reforms.
    Nov 18, 2014. 08:01 AM | 5 Likes Like |Link to Comment
  • Wall Street Breakfast: Nikkei Dives As Japan Slips Into Recession [View article]
    While most of Japan's contraction is largely attributable to inventory drawdowns and lower capital spending, its clear that the increase in the VAT has had a broad impact upon the economy as it did in 1997 when inventories where very volatile and eventually led to a protracted recession. Secondly, Abenomics is not working as a lower currency was supposed to lead to higher profits which, in turn, were to fund increases in capital spending and higher wages. Thus far, we have simply had higher profits and around $2 trillion of cash lying around.
    Nov 17, 2014. 07:05 AM | 5 Likes Like |Link to Comment
  • Weighing The Week Ahead: Time To Buy Commodities? [View article]
    A very, very interesting point Daro and one which likely has merit. And if we travel the conspiracy grounds, we might also say the Saudi's are content with oil being low to deprive Russia of valuable oil revenues because of its support of Bashar Assad's government in Syria, a regime Saudi Arabia is vehemently opposed to.
    Nov 16, 2014. 11:03 AM | 5 Likes Like |Link to Comment
  • Weighing The Week Ahead: Time To Buy Commodities? [View article]
    Thanks Jeff for another fine installment of WTWA and a very interesting question.

    There are strong correlations between the inverse of the trade-weighted dollar and the following: industrial commodity prices, the Brent crude oil price, and the Emerging Market stock prices. The strength of the dollar has been especially bearish for the price of oil, though causality also runs the other way.

    But there are considerations beyond dollar strength that explain falling commodity prices, including new oil extraction technologies, expanding oil production in the US, waning global growth, geopolitical developments and OPEC policy. OPEC overall, though primarily Saudi Arabia, has decided to maintain current production levels and ride prices down in order to maintain market share.

    They hope lower prices will make it difficult for capital intensive oil exploration ventures in other regions to break even or sustain profitability. Think North Dakota.

    For this (or these reasons) many industry experts and observers believe there is more room for oil to fall before it bottoms out. The International Energy Agency said on Friday that it had further to fall, with downward price pressures likely to build further in the first half of next year. “It is increasingly clear that we have begun a new chapter in the history of the oil markets,” it said.

    With respect to other industrial commodities, they are victims of a stronger dollar, slowing global growth and not so subtle changes in the structure of the Chinese economy. Were industrial commodity prices simply dependent upon strength in the dollar, I would ask you the direction of the dollar and invest accordingly.

    But the direction of the dollar hinges upon many factors including the relative strength of the US economy and our monetary policy vis-- vis those of other large central banks, which is diverging. The ECB and the BOJ are relaxing monetary policy while we are taking the first steps towards tightening, lending strength to the dollar. And Treasury boss Jack Lew is bemoaning this fact and the implication of the US becoming the world's growth engine.

    The stronger dollar will make it difficult for the Fed to increase rates, as increasing rates will fuel more disinflation. Either way, I think the dollar is likely to get stronger which will weigh upon commodity prices in general.
    Nov 16, 2014. 06:54 AM | 7 Likes Like |Link to Comment
  • Weighing The Week Ahead: What Does The End Of QE Mean To The Individual Investor? [View article]
    You make a number of solid points none of which I disagree with but I don't think its as clear cut as you suggest. In mid 2012 the ten year yield, which is now at around 2.3%, was 1.5% while the forward PE ratio was in the 12 to 13 range. The correlation between bonds and equity P/E ratios has been all over the place during the past three years with both positive and negative correlations. At the moment what your position is supported by a highly positive correlation between equity multiples and bond prices. Lastly and to the point of themes, we may hear a lot about monetary policy divergence between global central banks. Thanks.
    Nov 2, 2014. 12:16 PM | 3 Likes Like |Link to Comment
  • Weighing The Week Ahead: What Does The End Of QE Mean To The Individual Investor? [View article]
    Thanks Jeff.

    In the past we have had problems when the forward PE was in the 13 to 15 range. The great recession began when stocks were trading around 15 times forward earnings while during the recovery 13 has frequently been a hurdle. Today it is 15.9 but the internals are very balanced and only one indicator suggests caution. Saturday's news out of China or some other exogenous event will likely spur a pullback but I think the direction is up while benefiting from seasonal effects. November has been a good month while December has been a great month. I don't know how high the market will go but in the recent past two weeks of weakness in RUT has been a great indicator of trouble.
    Nov 2, 2014. 08:51 AM | 4 Likes Like |Link to Comment