The sun is up and finally so is the Yinzer Analyst and while he’s getting ready to host a discussion on active ETF’s at the Spring 2015 ETP Forum next Wednesday, there’s always time to discuss the market and man did this go south in a hurry. We’ve talked before about how this bull cycle (at least from 2011 on) has been a Fed induced rally because every bull cycle has a driver that allows investors to unleash their “animal spirits” that usually leads them to do really smart things like putting 100% of the their portfolio in small-cap biotechs who lack a marketable product like the Bioshares Biotechnology Clinical Trials ETF. Continue reading
Last week’s could be best wrapped up by this heat map from Finviz showing the one week performance for the ETF universe. Unless it was inverse or tied to volatility, it was nothing but shades of green last week as the FOMC officially ran out of patience but the doves delivered an unexpected surprise via the dot plot. Continue reading
The Yinzer Analyst has always been a fan of Baron Rothschild’s famous advice to buy when there’s blood in the street and after reviewing the charts of the damage wrought by the dollar’s strong advance you won’t find any markets bloodier than the emerging markets. EEM may be down 2.5% in 2015 but that doesn’t begin to compare to the trailing 1 year performance (down 2.5% compared to SPY’s 13.32 advance) and the even worst 3 year number (up 2.5% to the SPY’s 16.04% advance). It’s been a rough ride for the emerging market nations ever since the Fed embraced QE and the recent run-up in the dollar hasn’t helped the situation this year, but the bloodshed has reached an extreme that has me wondering if the time has come to embrace the fallen angels. Continue reading
It was another busy weekend for the Yinzer Analyst, this time celebrating the victory of my University at Buffalo Bulls over Central Michigan in the Mid-Atlantic Conference. Like every alumni, I’m proud of my school but only when it wins and we’re talking about Buffalo here so wins are few and far between. I might have to do join all the other alums in buying a tee shirt. If the Buffalo Bills ever make it to a post-season the whole city might just go up in flames. What would we do without all the empty buildings and grain silo’s? Continue reading
Spring may have come to Pittsburgh but it’s been a sad few days for the Yinzer Analyst as we mourn the death of Sir Terry Pratchett, creator of Discworld and one of the greatest fantasy writers of the last thirty years. His gift for creating worlds where he could both explore and parody the logical underpinnings of our own had no equal and with characters like Rincewind, Sam Vines and Lord Vetinari offered me an escape from the dull day-to-day drudgery that was grad school. I think I learned more about microeconomics from “The Truth” or finance in “Making Money” than I did by going to class and in a world where Hollywood seems focused on “rebooting” movies that were made in the last decade; he offered something truly unique and wonderful. I’d encourage you all to learn more about him here. But there’s more to today’s posting than just mourning the passing of a great author; today’s action in the market has me more convinced than ever that the time has come to get serious about reducing my equity exposure. Continue reading
The Yinzer Analyst is on the road, so just a short post tonight because there was no way Friday’s Treasury bull slaughter could go by without comment. The Treasury sell-off started with Friday’s Employment Report which was so far above expectations that even the most ignorant trader couldn’t ignore what we’ve been talking about for the last few weeks; that rates are going higher and the Fed isn’t even trying to hide the fact from you. So why dig in and fight it? But the sell-off in Treasuries and the spreading margin calls led to bleeding throughout the market as profits were taken, positions stopped out and heads buried in the sand. The sell-off was so brutal we need Champ Kind to come in and moderate this one for us:
Let’s start with the carnage in the Treasury market where the ten year yield blew through the downtrend channel and pushed back to last December’s highs. Maybe the 200 day moving average can contain it.
You can see a similar story for the 30 year yield although the sell-off wasn’t nearly as severe:
And finally Mr. TLT wasn’t feeling the love although he wasn’t the worst casualty by far on Friday:
That spot was reserved for the gold miners; whether on profit taking or the fact that a Fed rate hike will raise the lease rate and opportunity cost of holding gold (and cutting demand for the metal), the miners took it on the chin and blew through support at $20:
The possibility of a rate hike spilled over into the defensive yield trade where both REIT’s and utilities took it on the chin:
What about the Yinzer Analyst’s favorite trade in long European exposure?
You can see on the daily chart that there isn’t a whole lot of support between $38 and $37 and after that we’ve got the upper boundary of the downtrend line at $36-$36.50 to provide support. Looking at the weekly charts for a longer-term picture you can get a better sense of not just the support at $36 and change but how the uptrend might still be in it’s infancy (fingers crossed.)
What about the picture for domestic equities? Using SPY for the S&P 500 you can see on the daily chart that the market was again denied while trying to breakout of the prior ascending wedge pattern leading to a retracement of the year’s meager gains but for now we’ve got prior support at the 50 day moving average at 206 and then nothing until the 202.5 level.
Looking to the weekly charts, you can see we remain mired in another ascending wedge (bearish) pattern with more strong support at 205 level, so while the market might open down and drift lower we should expect more stickiness around that level.
Which is confirmed by looking at a weekly chart of the S&P 500 itself:
But there were a few flowers blooming amidst the rubble on Friday and not surprisingly found in the financial sector. The possibility of a summer rate hike has helped spark new life in a sector weighed down by the financial repression of a low rate environment. With the possibility of higher interest rate spreads and loan growth through an expanding economy, return on assets might finally get itself out of the low range it’s been stuck in for the last several years. But before you rush out to buy the bank stocks, keep in mind that regional banks are likely to see the biggest boost to EPS (and they outperformed XLF by 150 bps or so on Friday) and even Friday’s rally wasn’t that strong. Two of the largest regional bank ETF’s (IAT and KRE) saw strong buying pressure give way to late afternoon selling as profit taking kicked in and pushed their one-day CMF scores into negative territory. Hardly reassuring:
That’s all folks, now get out there and try to make some money!
This Sunday night I thought we’d try something a little different here at the Yinzer Analyst; more charts, less chit-chat. Maybe it’s the season affective disorder or maybe the death of one of my childhood idols but let’s be honest, if you’re reading this it’s either really late and you have a bed to get to or very early and you need to start planning your trades for the day. We’ll save the deep posts for when you need them, but think of Sunday Night Chartology like Headline News with Robin Meade. A mile wide and six inches deep. All we need is a beautiful newsreader for the podcasts…any volunteers?
First up, let’s look at the broader market using SPY for the S&P 500:
SPY has broken out of the consolidation patter and even fought its way back into ascending wedge pattern but ran out of steam soon after. Momentum has turned and Friday’s close at the low sent the CMF score lower.
On a weekly basis SPY is still stuck in another ascending wedge pattern while momentum hasn’t confirmed a breakout strong enough to make me change my opinion on the strength of this market. I wrote on Saturday that momentum has been slowly weakening since the great Tapering Announcement in December of 2013 and until something changes to add new life to this market, new highs might continue to be seen but the action will be more volatile.
What about domestics bonds? Our last post was bond heavy so tonight we’ll just keep it brief with a chart of TLT:
While last week’s rally was enough to give some traders hope that a decent bottom was forming, I think it’s still too soon to get the “Mission Accomplished” banners ready. The strong January rally had legs all along the $132-$136 range, offering plenty of opportunities for any rally to stall out.
And since it’s hard to separate bonds and the dollar in any discussion of the market this year, let’s move on to Uncle Buck (here using UUP):
On a short-term basis, UUP looks to be almost at the end of it’s consolidation patter and offering the possibility of another move higher this week, but moving to a long-term basis we see a different picture:
Last week’s rally brought us right back to the old high and has me wondering how much more room is there to run for UUP.
And what kind of dollar conversation can you have without talking about gold and commodities? Start with the MarketVectors Gold Miners ETF (GDX):
On a daily basis GDX found support along the 50 day moving average and close to prior support at $20, but will overhead resistance and the 200 day moving average keep GDX from running higher? The weekly charts aren’t much more promising:
Using DBC for our broad commodities benchmark, you can see on the weekly chart that the fund is fighting hard to get back into the downtrend channel that kept it bound for much of 2014. Will a rising dollar sent it back to the recent lows?
It certainly hasn’t helped the recovery in the energy complex:
Or those countries heavily reliant on commodities for their financial well-being like Argentina:
And finally, my two favorite charts showing the continued breakout of European equities versus the S&P 500:
EZU has outperformed SPY by nearly 500 basis points this year and while the weekly charts show that the breakout could be in it’s early stages, the short-term daily charts makes it look like we could be entering a consolidation period for EZU relative to SPY. You might see the fund lose ground against domestic equities, especially if UUP continues to gain ground against FXE.
See, we’re keeping it brief tonight here at the Yinzer Analyst. Good hunting out there tomorrow people!
“Will they, won’t they” the question that raged all week across the financial blogosphere as investors, speculators and the tin foil hat wearing crowd debated whether the FOMC could perform the first rate hike in nearly nine years as early as this June. While investors reacted positively to Janet Yellen’s testimony before the Senate on Tuesday, giving the S&P 500 it’s only positive day for the week and pushing the iShares Treasury Bond 20+Year Fund (TLT) up nearly 1.31%, the mood shifted with the changing tone of the economic data released this week as the market tried to digest what the end of the Fed’s “patience” might bring. With every other financial professional throwing their hat in the ring, it’s time for the Yinzer Analyst to get off his duff and explain to you why the Fed will be raising rates and how you can prepare your portfolio for when it happens.
I’ve talked at length about the Federal Reserve and why it might choose to raise rates now, the impact that it might have on the market and while standing by what I’ve said already, I think it’s to add a new dimension to our thinking. So much of the conversation about the first rate hike in nearly a decade is about whether or not it’s premature, overdue or whether Chairwoman Yellen is just playing chicken with the market to push risk premiums higher. While you can find almost any evidence to support any of those arguments, take it from my years of experience as a portfolio manager that playing those logic games when it comes to the Fed is simply setting yourself up for failure. Plenty of far better money managers that I tried to predict what the Fed was going to do between 2008-2014 and lost WAY more money than they could afford to in the process.
(The Yinzer Analyst thinks this week’s bounce in TLT has more to do with hitting prior resistance than any fundamental case for lower bond yields being made)
The worst part of all was that their mistake was simple; they weren’t just trying to predict the likely course of the Fed and the timing of a rate hike, which is a herculean task in itself (and success largely comes down to luck when you start involving two potential outcomes and a diverse board like the FOMC) but whether explicitly stated or not, their analysis was always tainted by the thought “The Fed SHOULD do this.” With their minds clouded by the belief that they alone knew the correct course of action, they let their opinions on the proper course for the Fed influence their decision making and the rest can write itself. Ben Bernanke one more than one occasion talked about the power of QE to support asset prices and create a wealth effect that would push the market higher and raise investment (more here at the Big Picture.com) He was telling you exactly what was going to happen because he WANTED it to happen and telling the market was the best way to bring that about. Think of it as a self-fulfilling prophecy that many in the market largely ignored.
So what should an honest investor due in a situation like this? First, focus on what the Fed is telling you and look at the same charts they are. Yes, it takes a doctorate in dissimulation to make sense of their minutes and prepared statements, but once you learn to read the signs, the road they’ve been laying out for years is easy to follow. Once you’ve done that, you can start preparing your portfolio for the shape of things to come.
So if the FOMC going to raise the Fed Funds rate in 2015? Yes, they have literally been telling the market for years that they wanted to end what they consider to be extremely accommodative monetary policies and getting off the zero bound is the final step. Everything that’s come out of the Fed recently from Janet Yellen or Stanley Fischer has been reinforcing that hikes are coming in 2015 no matter what the Fed Fund futures are indicating. Remember, they never wanted rates to stay this low for this long and in their minds, the Fed was forced into this. After the politics around the American Recovery and Reinvestment Act of 2009, the national debate shifted from supporting economic stability by maintaining spending to keeping the debt/GDP level tied to a useless target derived from now discredited research. As government spending dropped and actively subtracted from economic growth for years, the focus shifted to loose monetary policy to keep personal consumption expenditures and investment from collapsing. By and large, they’ve succeed; in fact, they are well past the point when they would have raised rates in prior downturns.
Let’s look at a few charts and starting with the headline employment report, during the last two recessions, the Fed Funds rate began to rise around the time that the year over year percentage change in total employment turned positive. No one would argue that the Great Recession was different; employment fell much more drastically than in previous recessions and the average length individuals were unemployed skyrocketed, but from the point of view of the FOMC members, employment growth has been strong and sustained with many members arguing that QE3 was largely pointless and that rates should have risen long before now.
A similar story can be told with real personal consumption expenditures which even in the lowered GDP revision released on Friday are now growing at their fastest rate in years and contributed nearly all of growth in economic output in 2014. Again, the Great Recession saw the largest sustained drop in real PCE since the 70’s and while the growth has stabilized at a lower level seen in prior recoveries, it has gone on for a much-longer period without a rate hike than in other cycles.
You could also look at the growth in commercial and industrial loans; typically rates begin to rise when the year-over-year change in loan growth becomes positive. Like unemployment and real PCE, the Great Recession was far worse than prior ones, but the time has long since passed when rates would begin to rise.
And what about the counter argument that low-inflation means the Fed should commit to keeping rates low (like zeroish) until they have finally broken above the 2% range. We’ve talked about this in prior posts but there are two points against this argument; first is that while many investors may think of inflation as historically running at 3% or 4%, using core CPI to strip out the highly volatile energy component has run far below those levels and in fact has been close to or at the more recent rates for some time. I don’t want to get into some Shadow Stats argument, so just take a look at this chart of the Fed funds rate and core CPI then look at the two solid lines. The first is the average year-over-year change in core CPI for the last ten years, the second is for the twenty year period. Over the last ten years core CPI has been at 1.9% and only slightly higher at 2.1% for the last twenty. You can see we’ve already touched the ten year average in this recovery without sparking a rate hike, something that has driven the hawks on the FOMC mad.
The second argument comes from Stanley Fischer who on Friday noted that the recent rise in economic activity is directly attributable to the FOMC’s policies and that impact is now being felt is only in its early stages. Remember that the Fed is a backwards looking agency; their divination’s for the future rely on recently collected data that is matched to historical patterns for interpretation. Yes, that maybe oversimplifying the situation (and making it somewhat akin to augury) but it’s the truth. The Fed has been terrified of letting inflation creep too high because once the cycle starts, they might not be able to stop it without drastically overshooting the target.
Remember when QE3 was first proposed and then Chairman Bernanke said he was determined to get inflation to 2% or above? Well he lied; neither he or Yellen is at all comfortable with the idea of inflation getting to 2% or above and essentially started talking the market down from its QE3 highs as soon as inflation expectations got anywhere close to 2%. They why comes to down to something we’ve already talked about before; the idea that rising rates will actually increase the velocity of money, raising potential GDP and potentially adding even more inflation to the economy. You can read more about it in a previous post here, but the idea is well documented and with the end of QE3, M2 velocity has begun to stabilize while even the modest rate hike forecasts could be enough to encourage more investors to drawn down their liquid positions and invest the capital.
The final reason (and most important )why the Fed will raise rates is something we’ve talked about extensively here at the Yinzer Analyst, but the Fed is terrified about not just being on the zero bound and having no room to maneuver if the economy weakens but that they’ve deliberately altered how risk is perceived in the market. Let’s start with a few charts:
Investors are willing to commit to 10 year Treasuries for a rate slightly above that of core inflation over the last 10 years. On a 30 year basis they’re willing to lock in a potential risk premium of something like .7%, not exactly confidence inspiring is it? If investors are willing to commit to rates like that, what does it say about the growth outlook in America going forward? Even with the recent collapse in energy prices, is it at all likely that deflation will take hold here at home?
But more importantly, the Fed’s actions have had a major impact on the equity risk premium as well. You can approach it either mathematically where a “risk-free” rate is a vital component of every calculation and in every model used to determine the rate of return for equities. With risk-free rates that were low (or negative) as up until recently, you could justify incredibly high valuations; a situation that has already been slowly unwinding as investors begin to perceive the regime change in the market.
The second way to look at is something we’ve talked about extensively here, most recently on December 14th, the idea that the Federal Reserve has been the prime mover that has kept this market barreling higher. Remember these charts we showed that demonstrated how the major moves in the market coincide with the Fed’s QE programs?
Do you think it’s another coincidence that the market has gone essentially no-where since the end of QE3? While the S&P 500 continued to advance in 2014, it was a highly volatile year compared to 2013 and until the famous Evans rally in mid-October the year was setting up to be a push. With QE3 officially over and the prospect for rate hikes on the table, it’s no wonder the S&P 500 is consolidating while capital continues to flow into European equities at a tremendous rate; capital is going to where monetary conditions are the easiest and escaping where they’re the most uncertain.
So what does a rising rate environment mean for equities going forward and what can your portfolio do about it? Check in for your next few posts on protecting your portfolio and the importance of knowing your risk free rate.