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CautiousInvestor

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  • Core CPI up 0.1% in July vs. 0.2% estimate [View news story]
    Spot on bbro and down from last month's yoy reading of 2.1%. Lowest monthly reading in last five months.
    Aug 19 12:40 PM | 3 Likes Like |Link to Comment
  • Weighing The Week Ahead: Time For Central Bankers To Unwind? [View article]
    Jeff, you are so consistent in producing outstanding work I would have thought you would have wanted to add to the "bad" the collapse of economic growth in both Europe and Japan, fueling speculation that Europe will introduce LSAP and Japan will possibly increase their purchase of JGB's. In response, 10 year rates declined across the globe throug most of the week with investors looking at comparative returns. And weak retail sales and a slightly higher level of initial claims, may have moved some to believe the Fed will tighten later than sooner leading global investors to pump over a $billion into six Asian emerging markets tracked by Bloomberg. While pretty optimistic on US equities in the near term, I believe waning global economic growth is looming larger as a concern. And like India's new central banker (Raghuram Rajan) , who is easily the brightest among the lot, I think Jackson Hole is simply another reminder that “Central bankers have had enormous responsibilities thrust on them to compensate, essentially, for the failings of the political system. And my worry is we don’t have sufficient tools to do that, but we’re not willing to say it. And, as a result, we push as hard as we can on the existing tools, and they may create more risk in the system.” An early critic of quantitative easing, Rajan picked a very public fight this January, accusing the US Fed of reining in QE without considering the effect on emerging economies, not least the period of capital flight and investor panic in India, prior to his arrival at the RBI. “Six years since the financial crisis, central banks still have their foot fully on the accelerator . . . [pus... credit into emerging markets,” he says. “We don’t know how this will end . . .  It may end smoothly, if we let the air out of these inflated markets slowly, or by a series of mini-crises. But it may be more dramatic if, one fine day, suddenly the world realises the US is going to raise interest rates quite quickly . . . then the air will go out much faster.” Even worse, he says, is a broader pattern of globalisation beset by repeated crises, as developed and developing worlds fail to co-ordinate, sending capital washing back and forth between them, violently destabilising their financial systems.
    Aug 17 12:15 PM | 5 Likes Like |Link to Comment
  • Wall Street Breakfast: Kinder Morgan Consolidates Oil-And-Gas Pipeline Empire [View article]
    While it is welcome news that Russian military exercises near the Ukrainian border have ended, Israel and Palestinian factions have accepted an Egyptian proposal for a fresh ceasefire in Gaza and US air strikes have succeeded in slowing the Isis advance in northern Iraq none of these geopolitical threats has been resolved but markets are buoyant simply because each of these threats has improved at the margin. We all know durable solutions are years out and if the market is going to move on every news dispatch on intractable issues, volatility is certain to increase.
    Aug 11 07:48 AM | 6 Likes Like |Link to Comment
  • Weighing The Week Ahead: The Market Risk From Current Crises [View article]
    Great article Jeff, so encyclopedic there is little room for comment beyond saying job well done. You left little wiggle room to add value but I have a few perspectives.

    The market is of two minds with treasuries falling to 13 months lows on worries over a farrago of geopolitical threats including Gaza, the Ukraine and the return of military action in Iraq. Equities, however, after hitting the 100 DMA bounced on Friday with some believing the market will move higher while others doubt there will there will be enough buyers to form a sustainable advance in a typically hostile seasonal climate.

    By many momentum measures the market became oversold towards the end of last week and Friday’s price action is likely technical more than anything else. And we know markets often retrace around 3% (Urban Carmel) as they approach big, fat round numbers and whether 1988 on the S&P is such a number history will decide.

    We also know September is typically cruel to equities and we know the end to prior periods of QE ended with corrections of 17% (2010) and 21% (2011), respectively. And lastly, we know through work by Ned Davis that at the outset of a series of rate hike it’s not unusual for stocks to correct 5% or so before regaining footing and moving higher. We’ve got a bunch of hurdles in front of us and opportunities for traders to front run history.

    Against this backdrop, the US economy appears to be holding up with rather well with no new major developments with most expecting housing to disappoint and hoping for CAPEX to take up the slack. And, as Jeff notes, US corporate earnings continue grind higher.

    The critical issue now seems to be monitoring for geopolitical risk for blowback on the global economy. The International Monetary Fund has reduced its estimate for World GDP real growth to a little more than 2%. It was 4% in 2010 and comfortably above 2% until recently. There is a general perception that growth around the world is slowing although resumption of growth in China appears to neutralizing weak conditions in Europe including Italy reentering recession and the prospect of Germany doing the same.

    With all of this said, few doubt (at the moment) the long term trend of the market and many are waiting for the market to retest the high of 1988 which will be a crucial juncture. In the meantime, it must be asked whether there are enough dip buyers to offset the likely crowd of those wishing to reduce risk.
    Aug 10 10:05 AM | 4 Likes Like |Link to Comment
  • Wall Street Breakfast: Sprint Drops T-Mobile Bid And Replaces CEO [View article]
    Exactly how smart Putin is will become clear with history.

    Your point about the UN, though, is important inasmuch as I cannot think of any multi lateral institution that is more politicized and less capable than the UN.
    Aug 6 10:47 AM | 5 Likes Like |Link to Comment
  • Wall Street Breakfast: Sprint Drops T-Mobile Bid And Replaces CEO [View article]
    No mention of Obama encouraging corporations to invest in Africa? While opportunities exist, Obama and others offer a biased and naive perspective of investing in Africa which overlooks many of the factors that have limited FDI including ethnic polarization, political instability, corruption and civil wars among others. Joseph Siglitz has attacked colonial powers for extracting natural resources without obsessing over how their economies can be further developed. Rather than being consumed with exploitation of resources, Mr Stiglitz should be equally concerned about how monies generated through resource sales to colonial powers have been used in specific resource rich countries to benefit their respective populations to safeguard against widespread graft. From an article in the FT: Analysts said that ambitious multibillion-dollar projects in the DRC have a long history of complications, as well as a tendency to ignite geostrategic rivalries. Moreover opaque, high-level interference by members of President Joseph Kabila’s administration in commercial contracts has been de rigueur – although some improvements in the investment climate have taken place recently. Obviously, countries on the continent have some housekeeping to do before they become attractive locales for large scale FDI. And, as mentioned by Mr Stglitz, the landscape is indeed highly differentiated, meaning investment potential will vary widely by country.
    Aug 6 08:25 AM | 5 Likes Like |Link to Comment
  • Wall Street Breakfast: Portugal Rescues Banco Espirito Santo With $6.6B [View article]
    We're on the same page gggl but from what I remember they are going to look at macro scenarios of higher rates, deteriorating credit quality, stalling policy reforms and lack of needed balance sheet repair. A collapse of housing prices may be included in the broader category of deteriorating credit quality. In any event, it will fascinating to watch how the stress test unfolds as there is also concern about whether politics will get in the way of the ECB's drive to restructure or wind down "zombie" banks and reverse financial fragmentation in Europe.
    Aug 4 09:04 AM | 2 Likes Like |Link to Comment
  • Wall Street Breakfast: Portugal Rescues Banco Espirito Santo With $6.6B [View article]
    The ECB is preparing to stress test a wide swath of European banks before taking on the role of supervisor of EMU banks sometime in November.

    From my readings I am inclined to think that European banks hold more than their fare share of impaired assets and will either be shut down or recapitalized to avoid becoming a zombie bank that serves absolutely no purpose. Malaise is seen in the contraction in lending.

    My hope is that the stress test will be something more than theater and that the rescue of Banco Espirito Santo, which will destroy much of the value of investments made by equity and subordinated debt holders, is seen as a test case for a tougher stance by EU regulators, who have promised to protect taxpayers from the cost of bailing out mismanaged banks.
    Aug 4 08:07 AM | 2 Likes Like |Link to Comment
  • Weighing The Week Ahead: Will The Fed Experiment End Badly? [View article]
    Interesting comment and one that is particularly applicable to the EMU where PMI's are edging up against gravity while bank lending contracts and area economic activity continues to be largely supported by the German economy. Economic activity remains very uneven and France has become the poster child for economic malaise. European capital markets are less developed than those of the US and corporations on the continent tend to rely more upon bank lending than their US counterparts. But European banks are saddled with non-performing loans, low capital ratios and an imminent stress test before the ECB takes over supervision of EMU banks sometime in mid November. Many economists say Europe is at least five years behind the US in cleaning up its banks, which explains in part why the euro zone's economic recovery is so slow and fragile. Much like a reality show, it will fascinating to watch how the stress test unfolds as "there is also concern about whether politics will get in the way of the ECB's drive to restructure or wind down "zombie" banks and reverse financial fragmentation in Europe. And in the case of restructuring, who will be stuck with coming out of pocket?
    Aug 3 12:26 PM | 1 Like Like |Link to Comment
  • Weighing The Week Ahead: Will The Fed Experiment End Badly? [View article]
    Nice to have you back Jeff.

    Cam Hui and many others have noted important divergences in US markets including declining breath, decay in percentage of stocks trading above their 200 day MA and High Yield credit spreads. Deterioration in breath began in early July.

    Almost in parallel, many have noted the market was becoming stretched in the sense that it has been a long time without a decent correction. And we know the more extended the market becomes, the larger the eventual decline may be.

    At this point, I'm inclined to believe the market "wanted" (and maybe wants) to go down and the combination of problems with Portugal's Banco Espírito Santo, Argentina and the Fed being possibly behind the curve were enough to allow sellers to gain control.

    Similar to the quote from Barry Ritholtz, I think this may be the beginning of a healthy and much needed correction rather than a secular change providing that 10 year yields remain below 5%.
    Aug 3 09:14 AM | 9 Likes Like |Link to Comment
  • Is A Stock Market Correction Imminent? [View article]
    Sage words Michael but sooner or later this market must correct. Since 1980, there have been 16 events in which the market has realized a winning streak of five months or longer with all, except the current streak, starting their runs following a significant correction or an extended period of sideways trading. And at present we have the divergences mentioned by the author along with a doubtful bond market and very high global equity allocations and the highest put call ratio since December, 2004. With that said and barring an exogenous shock, I would be very, very reluctant to invest against this market but routinely trade against it. While remote, a recession would bring the market to its knees while an unexpected hike in rates would likely lead to a correction as would a geo-political event that threatened the global economy.
    Jul 27 12:01 PM | 4 Likes Like |Link to Comment
  • Fed Likely To Implement Negative Deposit Rates [View article]
    Interesting article but I would take the other side of the bet on your thesis.

    The experience with negative rates on excess reserves is practically limited to Denmark. And when Denmark introduced negative rates, it did so to stem the appreciation of the krone against the euro.

    Negative rates dampened the outflows and depressed the value of the krone but did not lead to expanded lending; in fact the tax on excess reserves led to a contraction in both deposits and lending.

    The tax on reserves squeezed margins and led to higher rates. We'll have to see how it works out in the EMU but the logic and dynamics of Danish experience convinced the British and Japanese central banks not to experiment with the policy.

    Separately, I'm not sure how excess reserves subject to negative interest rates will be transmuted into other assets as excess reserves are part of the monetary base and that is under the exclusive control of the Federal Reserve; a bank cannot buy stocks or bonds with reserves.

    One last thought, the deposit flight referenced earlier could easily support higher asset prices as the monies must land somewhere.
    Jun 22 03:01 PM | 3 Likes Like |Link to Comment
  • Weighing The Week Ahead: Is The Fed Behind The Curve? [View article]
    Nice installment of WTWA Jeff and a critical theme.

    It would appear Ms. Yellen and her colleagues are experiencing difficulty in reconciling policy decisions with possible economic backdrops. At one extreme, economic shortfalls result from tight bank credit, large households debts or restrictive fiscal policies while at the other extreme long running secular forces, such as slow-growing workforce productivity, lack of investment or the retirement of workers, hold back the supply side of the economy and its growth potential. The two scenarios described deserve differentiated interest rate policies. Compounding the complications, is the attention that should be given to the long term unemployed with one camp arguing the long term unemployed are disengaged from the economy and therefore have little effect little effect on wages and inflation, implying policy should be determined by looking narrowly at those out of work for shorter periods. This group sees an imminent rate hike. The other camp, including Ms.Yellen, believe the long term unemployed are engaged in the economy and are still looking for work and once employed will help hold down inflation, suggesting rate hikes can be delayed. The near term policy rate outlook suggests Ms Yellen believes the long term unemployed can be successfully reabsorbed into the workforce while the longer term rate outlook is slightly lower because long-run growth potential of the economy is marginally impaired.
    Jun 22 10:40 AM | 3 Likes Like |Link to Comment
  • Weighing The Week Ahead: Time For A Market Breakout? [View article]
    Nice installment of WTWA Jeff. Something very odd has taken place over the past months beginning early March. Around that time, RUT and XLY start to deteriorate and begin a descent, both absolute and relative, while XLE continued on its upward path. And a shift to value took place as well as investors rebalanced portfolios away from higher P/E stocks. And then we get smacked around in early April and around mid May there is gaping divergence between XLY and XLE......suggesting almost a climatic late cycle event as this divergence is easily identified in looking at events in 2007/2008. Relying upon memory, XLY began deteriorating about three months before the market topped while XLE continued to rise around six months after the top. Segue. As this is happening, market internals are falling apart and look simply awful. And then in early May everything begins to reverse course with RUT rebounding along with XLY and most of the market with the exception of XLU. And the internals of the S&P, particularly new highs and percent stocks trading above 20 and 50 day averages, reclaim health......almost too healthy, making me think it will rest (price says correction but volume does not) before it resumes its ascent to Laslo Birinyi's target of 1970. He's as good as anybody and Tepper called CNBC and said most of his concerns had been allayed.
    Jun 8 08:41 AM | 2 Likes Like |Link to Comment
  • ECB Likely To Cause Next Sector Rotation From Energy Into Consumer Discretionary [View article]
    Opinion on TLTRO is across the board but what I found interesting is that while Draghi said the four year monies could only be used to help business lending the truth is that they can be used in carry trades by purchasing government bonds with the provision that the monies be repaid within two years as opposed to four if monies are used to support business lending.
    Jun 7 10:50 AM | Likes Like |Link to Comment
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