Seeking Alpha

CautiousInvestor

CautiousInvestor
Send Message
View as an RSS Feed
View CautiousInvestor's Comments BY TICKER:
Latest  |  Highest rated
  • The FOMC Is Plotting 'Normalization' [View article]
    You do ask many interesting questions for which there are no easy answers for the reasons you point out and that LSAP is largely an experiment.

    Additionally, interesting points are made about the Fed, which is technically owned by the nation's banks but which is said to be independent with the "benefit" congressional oversight. That said, I'm sure it enjoys cozy relationships with larger banks and the Treasury.

    While the narrative you describe is indeed taking place, Fed actions do not suggest any abrupt normalization. Treasury holding are currently around $2.4 trillion and without "tapering" holding might be in the area of $2.5 trillion. Until Fed purchases are completely curtailed its balance sheet will continue to expand albeit at a slower pace.

    With respect to the federal funds rate, there is nothing that hints of normalization. The Fed drew attention to this point in its March policy statement, when it said officials believed rates would remain below the 4% level that they see as appropriate in the long-run, even after the unemployment rate and inflation get back to normal levels.

    And this guidance appears to be gaining traction as the primary dealer survey conducted in April "shows bond dealers expected the fed funds rate to average just 2.75% for the coming decade. That projection includes an expectation of rates remaining near zero this year and then slowly rising starting in 2015 to 3.75% by the first half of 2018. Dealers don’t appear to expect the fed funds rate to get much higher than the 3.75% rate they foresee by 2018, given their low forecast for the entire decade."

    So, for the time being, the balance sheet will continue to expand while rates remain well below levels seen as appropriate. I hope you revisit this interesting subject in about four or five months when tapering is scheduled to be completed.
    May 25, 2014. 04:29 PM | Likes Like |Link to Comment
  • Weighing The Week Ahead: Will Sluggish Housing Growth Derail The Economy? [View article]
    Thanks Jeff for yet another great installment of WTWA.


    Several week ago, when you addressed divergences, you posted a chart via Business Insider showing COMPQ and RUT were already in bear market territory because 20% or more of members comprising the respective indices were 20% or more off their 52 week highs.


    While these are useful gauges for assessing the state of the market they must be used carefully because "being off 20% or more from the 52 week high" is a derived average. For the INDU it is 22.2% but in 2000 20% of the stocks in the INDU had declined an average 55% at the market top. This tool must be used in conjunction with five or six other measures of market breadth to "see" the entire picture.

    The other meme I got pounded with this week is extraordinarily low volatility seen across equities, debt, credit and currencies. While there is much disagreement as to how this will play out, there is broad agreement that low volatility leads to complacency which in turn leads to speculation, leverage and a build-up of excesses in risk based assets. Some expect an increase in volatility as part of normal, healthy market behavior but, if we don't, it is argued that squeezing out short term volatility may lead to storing up longer term volatility.

    Lastly and with respect to housing, many younger people are delaying household formation and/or renting. Piles of student debt, less than acceptable credit scores and the inability to cough up the required down payment are encouraging those that do leave the nest to rent.

    If housing should remain weak, it's essential that business investment pick-up the slack and recent surveys suggest business spending could increase as much as 7% in 2014.

    Thanks again.
    May 25, 2014. 12:06 PM | 3 Likes Like |Link to Comment
  • Wall Street Breakfast: Must-Know News [View article]
    We have been wrong footed again by Putin with his own asian pivot, with the nexus of the US, China and Russia clearly tilting away from our interests.
    May 21, 2014. 08:23 AM | 5 Likes Like |Link to Comment
  • Weighing The Week Ahead: What Does The Bond Rally Mean For Stocks? [View article]
    DD, if you adjust the graph to show 2011 through the current period I think the picture becomes clearer. You will see the euro 1.0/1.2 trilion expansion in the balance sheet from LTRO 1 and 2 and most (all) of the recent contraction in the ECB balance sheet is largely (all) a result of LTRO repayments. So, in a word yes.
    May 18, 2014. 04:28 PM | 2 Likes Like |Link to Comment
  • 7 Signs China's Economy Is Headed For Collapse [View article]
    Thanks for the kind words Samuraitrader.

    Your last reply including comments on demographics sparked something unaddressed in this interesting discussion: China's demographics, which will be horrible by 2050 as a result of low fertility rates. More here: http://econ.st/JrReCu

    I think this, along with the need to create about 10 million jobs a year, is moving China's leaders to push the envelop in sustaining elevated GDP and creating jobs through what are, perhaps, unsustainable polices. If they don't create enough jobs by 2050 their social safety nets, including pension systems, will be stretched to breaking creating yet another dire predicament.


    In fact, this is already underway as the linked article notes "China set up a national pensions fund in 2000, but only about 365m people have a formal pension. And the system is in crisis. The country's unfunded pension liability is roughly 150% of GDP. Almost half the (separate) pension funds run by provinces are in the red, and local governments have sometimes reneged on payments."


    Chinese leaders have about 35 years to successfully undertake transformational work of immense scale.
    May 18, 2014. 03:31 PM | Likes Like |Link to Comment
  • 7 Signs China's Economy Is Headed For Collapse [View article]
    To really understand what is going on in China, I think you have break down the generalization of bubble into its constituents. There is excess housing stock, bridges, malls and cities to nowhere, surplus productive capacity in steel, chemical and cement, low utilization rates and an unsustainable rate of investment as a percentage of GDP. And I'm sure there are other areas of surplus.

    Addressing each of these is beyond the scope of this reply but when all are added together these excess has created a "credit gap", something we can deal with in its singularity.

    As the FT reported "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"
    May 18, 2014. 01:21 PM | 13 Likes Like |Link to Comment
  • Weighing The Week Ahead: What Does The Bond Rally Mean For Stocks? [View article]
    Ooops, huge typo

    "My own studies show the internals of the SP100 (super cap) are stronger than the SP500; the SP500 (big cap) are stronger than the SP400 (medium cap); and the SP 600 (small cap) are stronger than the SP400. How much longer can the big boys keep the ship afloat?"

    Correction: the internals of the SP 400 (medium cap) are stronger than the internals of SP 600 (small cap). Internals were determined by examining the percentage of stocks trading above a spectrum of daily averages.
    May 18, 2014. 11:47 AM | Likes Like |Link to Comment
  • Weighing The Week Ahead: What Does The Bond Rally Mean For Stocks? [View article]
    DD, that is very good point - also one made by Yardeni - I omitted from my laundry list that could help explain the drop in US yields. And it could, as you suggest, be one of the main drivers of lower rates. From Yardeni:

    More surprising than the rally in US Treasury bonds is the plunge in Eurozone government bond yields, especially in the peripheral countries. The German and French yields are both back below 2.00% at 1.37% and 1.94%, respectively. The Italian and Spanish yields are at 3.02% and 2.98%, respectively, with the Italian yield down 108bps ytd and 140bps since the start of last year; the Spanish yield is down 116bps and 220bps over the comparable time periods. They were both around 7.00% during the summer of 2012. To global bond investors, US Treasury yields of 2.50%-3.00% must be very attractive given how low rates have fallen in the Eurozone.

    (CI here) I think much of what we have seen Europe as of late is built upon expectations of forthcoming action by the ECB to introduce a mix of highly accommodative monetary policies to depreciate the euro, arrest deflation and stimulate growth. This announcement is expected in early June and it will be interesting to watch the reaction of the market, particularly should it disappoint.
    May 18, 2014. 11:28 AM | 2 Likes Like |Link to Comment
  • Weighing The Week Ahead: What Does The Bond Rally Mean For Stocks? [View article]
    I always enjoy your material Jeff and I tend to agree with your broad thesis but would like to add some color here and there.

    About a week ago the Irrelevant Investor posted this: This is small caps’ 36th peak-to-trough decline of at least 10% since 2000, with an average decline of 17.1%. Of the first thirty-five corrections, every one of them were accompanied by large-caps also falling, until now (an average decline of 12.8%). The thing that has people scratching their heads is why large-caps have been blessed with impunity while small-caps have begun to roll over. The Russell 2000 is 10% off the recent highs and the S&P 500 up 0.12% over the same period.

    My own studies show the internals of the SP100 (super cap) are stronger than the SP500; the SP500 (big cap) are stronger than the SP400 (medium cap); and the SP 600 (small cap) are stronger than the SP400. How much longer can the big boys keep the ship afloat?

    And with many of the internals weakening and divergences continuing, this would support the argument that we are likely to see a correction of the S&P 500 and perhaps a retest of one or more lines of resistance including the 200 dma. If we don't, then this chapter of market history will be repealed.

    Lastly, I'm not sure what the bond market is telling us because, as you suggest, there are so many things could explain the recent rally in longer dated bonds. First, there is limited supply as the Fed holds 45% to 49% of all outstanding treasuries with maturities 10 years or greater. Second, there is an unwinding of holdings in peripheral European and emerging market debt and some of that is coming home. Third, there is concern about the course of the US economy and continuing wafts of global deflation Fourth, many bond pundits believe that, while the Fed will increase the FFR, they will not increase it as much as thought several months ago. And lastly, there is likely a short squeeze underway as noted by the new bond king Jeff Gundlach.

    Historically, the bond market has been informative but at moment I think goat entrails may offer as much or more insight into US equity markets as bonds do.

    Again, great article.
    May 18, 2014. 10:07 AM | 7 Likes Like |Link to Comment
  • Surveying The Stock Market Battle Lines [View article]
    I always enjoy your material Eric and I tend to agree with your broad thesis but would like to add some color here and there.

    About a week ago the Irrelevant Investor posted this: This is small caps’ 36th peak-to-trough decline of at least 10% since 2000, with an average decline of 17.1%. Of the first thirty-five corrections, every one of them were accompanied by large-caps also falling, until now (an average decline of 12.8%). The thing that has people scratching their heads is why large-caps have been blessed with impunity while small-caps have begun to roll over. The Russell 2000 is 10% off the recent highs and the S&P 500 up 0.12% over the same period.

    With many of the internals weakening, this would support the argument that we are likely to see a correction of the S&P 500 and perhaps a retest of one or more lines of resistance including the 200 dma. If we don't, then this chapter of history will be repealed.

    As to earnings, when all is said and done we are likely to see a 5.5% yoy increase in 1Q2014 SPX earnings on the back of revenue growth in the 2.5% range. As you mention, many are concerned with revenue growth and the rate of global growth does nothing but intensify these concerns particularly when many analysts are expecting earnings increases of 8% to 9% in calendar 2014. Given limited revenue opportunities, this is possible only through expanding already stretched margins and/or financial engineering largely in the form of share buybacks. With valuations already high by most measures, this only adds to concern.

    Lastly, I'm not sure what the bond market is telling us because there are so many things could explain the recent rally in longer dated bonds. First, there is limited supply as the Fed holds 45% to 49% of all outstanding treasuries with maturities 10 years or greater. Second, there is an unwinding of holdings in peripheral European and emerging market debt and some of that is coming home. Third, there is concern about the course of the US economy and continuing wafts of global deflation Fourth, many bond pundits believe that, while the Fed will increase the FFR, they will not increase it as much as thought several months ago. And lastly, there is likely a short squeeze underway as noted by the new bond king Jeff Gundlach.

    Historically, the bond market has been informative but at moment I think goat entrails may offer as much or more insight into US equity markets as bonds will.

    Again, great article.
    May 17, 2014. 01:48 PM | 2 Likes Like |Link to Comment
  • Wall Street Breakfast: Must-Know News [View article]
    gggl, you are spot on about Ireland but take a look at Greece whose 10yr yield has increased from 5.9% in early April to about 6.8% today. And I was sloppy in saying PIIGS was a crowded trade, as it is the southern peripherals that is really the crowded trade and the group to be most affected by a less robust policy response from the ECB than most expect. Plus, Greece is going through another round of political instability.
    May 16, 2014. 11:45 AM | 1 Like Like |Link to Comment
  • Wall Street Breakfast: Must-Know News [View article]
    Blueline, thanks for the reminder. The litany is endless, with the latest insult to Americans is redcorating VA offices and meeting rooms at a cost of $500 million while veterans continue to die from treatment delays and falsified patient-appointment reports. Rest assured, though, Secretary Shinseki is mad as hell.
    May 16, 2014. 09:14 AM | 8 Likes Like |Link to Comment
  • Wall Street Breakfast: Must-Know News [View article]
    gggl, yesterday the yield on 10 yr Italian bonds went from 2.9% to 3.15%
    May 16, 2014. 08:42 AM | 3 Likes Like |Link to Comment
  • Wall Street Breakfast: Must-Know News [View article]
    With respect to the PIIGS debt, a recent conference made clear this was a very crowded trade and likely to come apart. Some may now be realizing the accommodative measures and policies being considered by the ECB, which helped drive the trade, are unlikely to include large scale purchases of sovereign debt. The premise is being reexamined.
    May 16, 2014. 08:13 AM | 2 Likes Like |Link to Comment
  • Wall Street Breakfast: Must-Know News [View article]
    As to containing carbon emissions, I'm stunned to read that the administration is concerned with limits of their legal authority. Rather than enforce his signature accomplishment, Obama has been busily using his pen and phone to change the AHCA, and its enforcement, as he sees fit and in line with political winds. Why start worrying now?
    May 16, 2014. 07:49 AM | 9 Likes Like |Link to Comment
COMMENTS STATS
3,075 Comments
15,117 Likes