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CautiousInvestor

CautiousInvestor
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  • 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: http://bit.ly/1xQydEZ
    Nov 23, 2014. 10:59 AM | 1 Like 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
  • Wall Street Breakfast: IBM To Unload Semiconductor Unit - Report [View article]
    From Yardeni:

    The big dive in the 10-year Treasury bond yield last week pushed the 30-year mortgage rate below 4.00% for the first time since May 28, 2013. That drop could revive mortgage refinancing activity, providing another windfall for consumers. In addition, housing starts, which have stalled around 1.0 million units for the past year, might move higher.

    Even more stimulative for housing activity may be the government’s push to allow Fannie Mae and Freddie Mac to lower lending standards and restrictions on borrowers with weak credit. Lenders would also be protected from claims of making bad loans, according to a 10/17 WSJ article. Déjà vu all over again: The government encouraged sub-prime lending during the previous decade, and it ended very badly. In any event, here we go again: The two biggest assemblers of mortgage-backed securities--that will now be explicitly guaranteed by the government rather than implicitly, as before--“are considering programs that would make it easier for lenders to offer mortgages with down payments of as little as 3% for some borrowers.”
    Oct 20, 2014. 06:59 AM | 4 Likes Like |Link to Comment
  • Weighing The Week Ahead: Is The Stock Market Correction Over? [View article]
    http://on.ft.com/1nvEoud

    The round of central bankers’ supportive comments “smells of a co-ordinated attack to help boost declining sentiment”, said Adrian Miller, director of fixed-income strategy at GMP Securities. “Markets need to check into the Betty Ford Center and go into rehab, to wean themselves off this addiction to central bank support. If that means more volatility and lower prices in some asset classes, so be it.”

    World central bankers may have a tough time checking out of Hotel California
    Oct 19, 2014. 09:09 AM | 1 Like Like |Link to Comment
  • Weighing The Week Ahead: Is The Stock Market Correction Over? [View article]
    Thanks Jeff for another fine installment of WTWA. I think last week's and this week's headlines are inexorably linked and ultimately guidance will assist in answering the many unknowns.

    It was a wild, volatile week and we did approach the edge of a correction. Intra day moves peaked at 2020 and bottomed this past weak at 1820, exactly a 10% drop. Much of the buying and selling was highly technical working off key support and resistance levels.

    When the bottom was in it has hit and go leaving a long buying tail, setting the stage for further moves up reinforced from incoherent noise from Fed officials. And technically the market was and remains heavily over sold providing grounds for further gains.

    With respect to the 200 DMA, we will certainly get there and likely breach it but I'm not sure it will hold unless earnings guidance is strong which is likely doubtful as global growth is slowing, there are wafts of disinflation, the dollar is stronger and geopolitical risks continue to mount.

    Everybody is looking forward and is eager to be reassured. Guidance, more than ever, will solidly trump earnings but with 46% of S&P earnings coming from overseas it may be tough to reach the bar. We do not want a raft of guidance of the type afforded by Ford and MCHP.

    Lastly, a number of risk on measures do not support this move up and keep your eye on Greece as they are entertaining some stupid moves.
    Oct 19, 2014. 08:02 AM | 3 Likes Like |Link to Comment
  • Weighing The Week Ahead: Can Earnings Season Reverse The Stock Market Decline? [View article]
    By many accounts the market is extremely oversold with several measures of breadth and inversion of the VIX term structure offering firm support for this view. But the fact we are close to violating the 200 DMA complicates the analysis because the resolution can take several paths. It can move up and then reverse course and breach the 200 DMA; it can simply fall though; or it can be protracted affair with chop and consolidation and a retest of the 200 dma. To support what bbro said, in most cases and certainly recent cases, a breach of the 200 DMA is not the end of the world and may present a buying opportunity after resolution of the breach. In recent times (last three) resolution has resulted in the index falling 20 to 105 points below the 200 DMA before regaining traction and moving higher. And Dana Lyons observes that two or more 90% selling days (90% volume in declining stocks) within three weeks can be very bullish. We have had these. Lastly, October is a very volatile month and many market corrections have reached their respective lows late in the month.
    Oct 12, 2014. 12:51 PM | 10 Likes Like |Link to Comment
  • Weighing The Week Ahead: Will Global Weakness Drag Down The U.S. Economy? [View article]
    Thanks Jeff for another fine installment of WTWA.

    Just about every multilateral economic organization has warned of either global growth divergences or slowing global growth or both. And Goldman recently released an updated version of their GLI (Global Leading Indicator) showing growth has slowed to 2.6% while noting the world economy has entered a "slowdown" phase.

    Obviously, any slowdown would pose a threat to US growth, corporate growth and US corporate profits derived through exports at a time when the dollar is rising. And with valuations somewhat stretched and margins likely maxed out, sales growth is likely to be the limiting factor for equity appreciation. This is important, as the consensus expects earnings to grow at 12% rate in 2015.

    I don't know whether the market sees a disconnect explaining recent divergences, but divergences are growing and internals are breaking down. For example, the percent of constituents of the S&P 500 trading above their respective 200 DMA has been generally falling and market tops are being at lower levels.

    When the market made a high last July the percent of stocks trading above their 200 DMA was around 85 while the most recent top was made with 77% of the stocks trading above their respective 200 DMA.

    I think some of the weakness in measures of breadth are related to the fact that fewer of the S&P 500 stocks are making the big gains, a divergence impacting breadth. The OEF (largest 100 cap stocks in the 500) has outperformed he broader index since July, making for intra market divergence. It's like a feedback loop.
    Oct 5, 2014. 10:16 AM | 2 Likes Like |Link to Comment
  • Wall Street Breakfast: Tesla To Unveil 'D' And Something Else [View article]
    Yesterdays carnage was largelt a result of mounting concerns global growth is faltering. Global PMI's have been less than inspiring. The ECB just announced it is keeping rates where they are but later in the day will give further details on its asset purchase program. But with gaping holes in European bank balance sheets, it's highly unlikely any fresh funds will be used to make loans. They will buy sovereign debt in advance of the forthcoming stress test to be overseen by the ECB but conducted by Oliver Wyman which suggests the exercise is window dressing. From EUObserver:

    Oliver Wyman is a known name in the world of eurozone bailouts and bank "stress tests."

    Back in 2006, it famously said the Anglo Irish Bank was the best bank in the world. Three years later, the bank had to be nationalised and almost bankrupted the Irish state, which then needed a eurozone bailout.


    Last year in the Spanish bank bailout, Oliver Wyman provided eurozone decision-makers with the numbers they expected and which were politically acceptable - around €60 billion instead of a much larger gap that the banks actually had.

    CI here. Obviously the EU is not serious about undertaking the difficult reforms needed to restore growth and vitality in essentially lifeless economies.
    Oct 2, 2014. 08:08 AM | 3 Likes Like |Link to Comment
  • Wall Street Breakfast: Ebola Stocks Surge After U.S. Case Confirmed [View article]
    The hubris of all this is numbing. It's simply dumb to think the ECB can buy "safer" slices of Greek and Cypriot asset backed securities. In name they may be safer but recent history should remind us that all of this slicing and dicing often offers the unexpected. And once the Greek and Cypriot get their hands on the proceeds of any sale, they will buy soveriegn bonds..........not make new loans.
    Oct 1, 2014. 09:20 AM | 3 Likes Like |Link to Comment
  • Wall Street Breakfast: Argentina Held In Contempt By NY Judge [View article]
    I know what you are saying but they are doing everything posssible to make it worse. Failure to implement promised reforms and rigid immigration policies are causing acute economic pain. They have lousy demographics but their policies amplify their unfavorable circumstances.
    Sep 30, 2014. 09:55 AM | 2 Likes Like |Link to Comment
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