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CautiousInvestor

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  • 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
  • Are Emerging Markets Too Toxic To Touch? [View article]
    I understand and agree that economic growth does not directly correlate with growth in share prices, but China's GDP per capita may be 1/6th that of South Korea giving it more room to grow, expand and migrate-up the value added chain before hitting what is commonly referred to as a wealth ceiling.

    In my mind, China offers a larger opportunity than does South Korea but carries with it far greater uncertainty and risk.

    While China has a highly leveraged business sector (business debt/GDP is the highest in the world), suffers from excess capacity, is experiencing property bubbles and is too reliant upon investment to support GDP, they may be able avoid a bloodbath with good luck and an artful mix of policies. The operative word is may as the challenges are great and many of China's goals are internally inconsistent, dimming the odds of China averting a major correction.

    In his first speech as premier to the National People’s Congress, a two-hour recital of the government’s intentions, Mr Li promised to maintain rapid growth, contain inflation, create 10m new jobs, rein in extreme pollution and tackle growing financial risks while simultaneously transforming the country’s growth model.

    But with consumer spending growth stable over recent years and exports on course only for a moderate acceleration, any appreciable slowdown in credit and investment would be almost certain to pull growth below 7.5% which is why, after the obligatory language about boosting consumption, increasing domestic demand and transforming China’s growth model, the premier got down to the point: “We will take investment as the key to maintaining stable economic growth,” he said.

    And last Sunday, China's Urbanization Plan was announced which envisions a massive building program of transport networks, urban infrastructure and residential real estate from now until 2020 that they hope will prop up the economy amid flagging growth.

    Over the longer term, China’s leaders want to shift the country’s growth model to make it less infrastructure driven and more reliant on services and consumption, but they insist that they must keep investment levels high in the short term to guarantee employment and political stability. Mr Li and his colleagues understand that China must move away from its unsustainable addiction to credit-fuelled infrastructure and real estate investment. But they also know that this cannot be achieved overnight.

    “Debate rages over how this tale will end. Most analysts believe that the Chinese economy will once again expand by more than 7 per cent this year, despite ballooning private sector debts. But the pessimistic minority has history on its side. Only five developing countries have had a credit boom nearly as big as China’s. All of them went on to suffer a credit crisis and a major economic slowdown.

    Recent studies have isolated the most reliable signal of a looming financial crisis and it is the “credit gap”, or the increase in private sector credit as a proportion of economic output over the most recent five-year period. In China, that gap has risen since 2008 by a stunning 71 percentage points, taking total debt to about 230 per cent of gross domestic product.

    A credit boom of this scale is not likely to end well. Looking back over the past 50 years and focusing on the most extreme credit booms – the top 0.5 per cent – turns up 33 cases, with a minimum credit gap of 42 percentage points.

    Of these nations, 22 suffered a credit crisis in the subsequent five years and all suffered an economic slowdown. On average, the annual economic growth rate fell from 5.2 per cent to 1.8 per cent. Not one country got away without facing either a crisis or a major economic slowdown. Thailand, Malaysia, Chile, Zimbabwe and Latvia have had a gap higher than 60 points. All those binges ended in a severe credit crisis.

    Those who trust in China’s exceptionalism say it has special defenses. It has a war chest of foreign exchange reserves and a current account surplus, reducing its dependence on foreign capital flows. Its banks are supported by large domestic savings, and enjoy low loan-to-deposit ratios. History, however, shows that although these factors can help ward off some kinds of trouble – a currency or balance-of-payments crisis – they offer no guarantee against a domestic credit crisis.

    These defenses have failed before. Taiwan suffered a banking crisis in 1995, despite having foreign exchange reserves that totaled 45 per cent of GDP, a slightly higher level than China has today. Taiwan’s banks also enjoyed low loan-to-deposit ratios, but that did not avert a credit crunch. Banking crises also hit Japan in the 1970s and Malaysia in the 1990s, even though these countries had savings rates of about 40 per cent of GDP. Furthermore, there is no strong link between the state of the current account and the outbreak of credit crises."
    Mar 30 10:52 AM | 3 Likes Like |Link to Comment
  • Detailed Case To Short The S&P 500: This Time Isn't Different [View article]
    Go Lakers, I agree with your sentiment and would note the author fails to address/examine market internals typically examined to determine whether a top is being formed. The internals most commonly examined are percent of stocks trading above their 200 DMA, advance decline lines, volume and new highs and lows. Of these, the percentage of stocks within the S&P trading above their respective 200 DMA has been declining but other metrics do not suggest an imminent collapse. Further, the author fails to incorporate within his analysis geopolitical issues and possible event risks associated with China. The anlysis is incomplete and lacks rigor.
    Mar 24 06:05 PM | 3 Likes Like |Link to Comment
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