Market Outlook for week of September 27, 2010

This hasn’t exactly been a warm week for China.  From territorial disputes with Japan, growing uncertainty about North Korea’s changing of the guard, and continued pressure by the U.S. and Europe about its undervalued currency – China has responded rather coldly – it simply refuses to be told what to do.  A tit for tat protectionist tussle between the U.S. and China ensued over the past month, and last Thursday, China’s premier re-emphasized China’s tough stance on the renminbi.  These developments caused the dollar to sell off hard and gold to rally, and spooked the equity markets.  Until Friday morning when a decent enough durable orders report supposedly triggered a wave of buying.  The durable goods report was not stellar by any means – it was actually down -1.3%.  No, there must have been other reasons for the huge gap up on Friday’s open.   All one can say is that equity traders’ view of the world had radically changed from Thursday afternoon to Friday morning.

The question now is whether equity markets will move higher based on this overnight change of sentiment.  Do Bernanke’s comments last week reemphasizing the need for quantitative easing (QE) have anything to do with it?  Last week’s FOMC statement read “inflation is likely to remain subdued for some time before rising to levels the committee considers consistent with its mandate.”  In effect, Bernanke made it perfectly clear that he felt that there were no inflationary pressures in sight.  This means that the Fed will continue to add liquidity to the economy whenever necessary.  That takes care of the monetary side of the macroeconomic puzzle.

As for the fiscal side?  Well, there is no sign that either the GOP or the democrats want to iron out the debate on the Bush tax cuts before the elections in November.  This uncertainty will keep downward pressure on the dollar as well as on Treasuries, barring any talk of fiscal restraint by the administration.  Added uncertainty comes from Larry Summers’ departure from the economic advisory team.  Will Summers’ replacement be someone with more of a populist message?  This uncertainty will also add to pressures on the greenback and on treasury bonds.  With this backdrop one can understand why the Chinese are not pleased about demands to let the renminbi appreciate.  With over $868 billion in Treasury bond holdings, China certainly wants the dollar to remain stable and the U.S. to show more fiscal restraint.  That’s slightly less than $3,000 that every American owes the Chinese government.  On the one hand, China would not mind aligning with the Tea Party rhetoric of keeping the size of government small – but they would not agree with the Tea Party’s means of getting there – by lowering taxes.  This would jeopardize America’s ability to balance its budget and create a crisis of confidence as far as our creditworthiness is concerned.

All this uncertainty keeps a lid on the equity markets.   There may be a few more days of follow-through binge buying for the equity markets, but then reality will once again set in – reality in the form of Q3 earnings reports in October and further economic statistics – with particular focus on jobs reports.  Then we have the pre-electoral phase.  It is expected that the democrats will lose a few seats in both houses of Congress.  From the perspective of the Treasury market, a little GOP pickup wouldn’t hurt – because it will mean that the administration will have less power to implement fiscal stimulus policies.  This development would also keep a lid on the rally in the stock market.  But let’s not forget the floor that Bernanke has built to support the financial markets – and the Fed is quite a force to be reckoned with.

R. Wiegs

Market outlook for September 20, 2010

Market Outlook for week of September 20, 2010

The macroeconomic figures that came out last week point to continued weakness for the U.S. economy.  The jobs data, although stabilizing, is still not showing signs of improvement.  Official estimates of unemployment still hover slightly below 10% -while unofficial estimates that incorporate individuals from the workforce that have given up on seeking permanent employment (as opposed to part-time jobbers, e.g.) are around 16%.  These employment stats are still much better than the 25% unemployment rate that Americans experienced during the Great Depression, but they are still scary.

The jobs data must improve first before we can really say that the U.S. economy has bottomed out.  Due to jobs weakness, consumer sentiment numbers last week showed continued signs of weakness.   It is also taking its toll on the housing market, which also remains weak.

Source: http://www.bloomberg.com/markets/economic-calendar/

Recent U.S. GDP data clocked in at a 1.6% year-on-year, which is well below the expected 3% growth rate that is typical for previous recoveries from recessions.  In addition, last week’s CPI report showed that inflation is very much under control – at 1.1%.  This compares with a long-term historical average rate of inflation in this country of 3.1%, based on government inflation data going back to 1926.

The bottom line is that we’re in a very soft patch economically with little if any growth or inflation.  This backdrop will clearly influence what the Fed has to say at this Tuesday’s FOMC meeting.  Investors will be paying close attention to the Fed’s description of economic conditions.  If the Fed paints a subdued picture, the implication is that it will continue adding vast sums of liquidity to the system in the form of quantitative easing (QE).  Global stock markets and precious metals markets, particularly, have been celebrating QE, as have the high yield and investment grade bond markets.  The current prevailing opinion among most economists is that the Fed will engage in at least one more round of QE in the form of at least $500 billion in purchases of long-term U.S. Treasury bonds and agency debt, by the end of this year or in early 2011.  As mentioned in a previous report, the Fed has bought over $1.75 trillion of these bonds from commercial and investment banks in an effort to keep the longer duration bond yields low and add massive amounts of liquidity to the system.  Typically, adding this much liquidity to the system triggers inflationary pressures.  An extreme case of this would be the German hyperinflation of the 1930’s, when the Weimar government turned on the printing presses and flooded the German economy with useless monopoly paper money.  But the U.S. is in a much different situation today than Germany was in the 1930’s.  Today, the threat is deflation – not inflation – as the U.S. economy tries to mop up trillions of dollars of government, commercial and household debt.  Japan experienced a similar situation during the 1990’s as it tried to “dry up” its debt overhang situation.  For over a decade, Japan experienced little to no GDP growth and no inflation whatsoever.  With 10-year Japanese government yields at 1.03%, there is still no sign of inflationary pressures in Japan. The Fed is absolutely spot on to implement QE in order to jumpstart the economy.

The threat that the Fed is mindful of but has little control over in and of itself is fiscal policy.  It must coordinate QE together with the Treasury department in the form of responsible fiscal stimulus.  The Obama administration is toeing the line carefully to give the economy some push through fiscal stimulus in the form of tax breaks to businesses that add more workers to their payrolls, by extending the Bush tax cuts for the middle to lower classes, giving tax breaks for home purchases, cash-for-clunkers, etc. – but it does not want to appear to be reckless about all this government spending.  If fiscal stimulus spending gets out of hand the federal budget deficit could easily exceed 10%.  We all saw what happened to the Euro when Greece, Spain, Portugal and Ireland scrambled to deal with defaulting banks and budget deficits that pushed the 10% of GDP level.  More important than the effect that the perception of fiscal irresponsibility has on the currency is its effect on long-term bond yields.  The ten year U.S. government bond yield would go through the roof.  The result would be to wipe out all the beneficial impact of the Fed’s QE policy – namely, low rates for borrowers in order to jumpstart the economy.  This is a key reason why the Fed is coordinating its policies so closely with the administration.

For now, it is unlikely that the Fed will suggest that it is done with QE at this week’s FOMC meeting.  That would put a damper on the festive mood that we’ve seen in the equity markets since the beginning of September.  The Fed is more likely to give the economy more time to put more positive stats on the board.

Richard Wiegand

ProActInvest Market Commentary for September 13, 2010

Hi Everyone,

According to a recent article in Investment News, a small but growing number of financial advisors (or FAs as they’re known in the business) are partnering with therapists, embarking on more of a “holistic approach” to helping their clients cope with the emotional and psychological stresses of their personal finances.  One wonders whether therapists would even be needed if FAs actually did their jobs and managed their client’s money properly.  I guess that would be asking for way too much – after all, FAs are not really money managers – they’re more like glorified hand-holders in times of duress.  Now it looks like they’re passing the buck on this responsibility as well.

Anyway, back to the markets.  This is quadruple witching week (when index futures, options and stock options all expire at the end of the week), which means that the market will most likely drift during the first part of the week and then pick up some steam towards Friday’s close, as traders square away their open derivative positions.

In terms of macroeconomic reports, we have some budgetary and retail sales figures, as well as industrial production, PPI and CPI coming out later on in the week.  A good calendar for these figures to refer to can be found at Bloomberg’s web site, at http://www.bloomberg.com/markets/economic-calendar.  It’s a good idea to keep abreast of these numbers, if only to see how the market reacts to them.  As the director of an emerging markets hedge fund once told me years ago when I managed a portfolio of high yield emerging market bonds for him, “The news in an of itself is not as important as how the market reacts to it…”   As long as the news isn’t something tragic about a loved one, I guess what he said makes a lot of sense.  As I pondered that remark over the years I can’t seem to get an image of Dylan reeling off placards from the “Subterranean Homesick Blues” video – flashing news stories or topical issues in front of my face.  Instead of Dylan though, it’s all media sources that we get showered with.  “So what do you (i.e. the markets) think of THIS news…or THAT news?”  Sometimes, the market will blow off or ho-hum a news story completely; else it will celebrate with applause; and of course, it can react violently to news as well.  Here’s when this sort of analysis may be useful:  if a series of bad news stories hits the tape and the market is either ignoring these developments or even rallying in the face of  them – you can be pretty sure that the market wants to go a lot higher.  Conversely, if the market is giving the thumbs down to a series of pretty good news – it is acting wobbly and will probably sell off hard.

Among some other key issues to keep tabs on are as follows:

• Republicans and Democrats are likely to agree about giving tax breaks to lower and middle class Americans (while higher earners will likely see the Bush tax cuts evaporate).  It appears that the administration is trying to coordinate and maintain a policy of fiscal and monetary stimulus combined with fiscal responsibility – which so far sounds reasonable to the markets

• Fed quantitative easing (QE) policy are likely to mollify concerns about taking away tax breaks from the rich (I’m referring to the market’s reactions to these developments, and not making a political statement). (I talked about QE in my previous blog in greater detail).

• Basel III accords – which forces banks to raise capital reserve requirements to almost 10% of assets – double what it currently is – while this development has been in the making since the major economies coordinated bailouts for the financial system in 2008, the Europeans had been dragging their feet about the capital percentage requirements as well as how much time to give banks time to comply with these new capital standards.  Keep an eye out especially for Bank of America (BAC), CItigroup (C) and UBS this week – for these are among the banks whose profitability will be hardest hit by the new capital reserve requirements.  It will also be interesting to see how the whole financial sector reacts to this development (XLF).  The financial sector is often viewed as a leading indicator for the stock market (which itself is a leading economic indicator).

As far as the overall markets are concerned, my two U.S. equity models (Market Barometer and Swing) are still bullish.  You can view a chart of these signals by clicking on the attached chart below.

That’s all for now.  Have a great week.

R. Wiegs

ProActInvest.net

ProActInvest Market Commentary for September 7, 2010

Hi Everyone,

The prevailing theme for this week’s market review of major asset classes (benchmark indices and ETFs) is the impact that Quantitative Easing (QE) is having on the global financial markets.  QE is the monetary policy that Bernanke espoused at last week’s global central bank meeting in Jackson Hole, Wyoming.  QE is a policy that the Bank of Japan (BOJ) used in the 1990’s to get its economy off the ground.  QE essentially involves massive purchases of Treasury bonds and mortgage-related debt.  Since 2008, the Fed has has bought over $1.75 trillion of these bonds from commercial and investment banks in an effort to keep the longer duration bond yields low and add massive amounts of liquidity to the system.  What do the banks do with all these excess reserves after the Fed goes on a bond buying spree?  They swap the cash for higher yielding corporate bonds (mainly investment grade).  The result so far has been to keep borrowing costs low for everyone (individuals, home buyers and businesses).

Adding liquidity has indeed driven investment grade bonds to new highs.  But worries about too much liquidity are also driving the price of tangibles/commodities higher.  This would include gold (GLD), silver (SLV), basic materials (XLB), and agricultural commodities (DBA) prices.  Even real estate funds (IYR, RWX) have been experiencing a nice pop.  Many commodity sensitive producing countries like Australia (EWA) and Canada (EWC) are also showing some leadership among the major global stock markets.  The developed Asia ETF (EPP) is also showing signs of strength.

As you may know, the S&P 500 index bounced about 5.3% last week.  All the global stock markets followed suit.  It is way too early to call this an uptrend.  One could call this a form of (much needed) stabilization.  Both my stock models are now in bullish mode (click on the chart below).  While we could see the market take a bit of a breather this week, in my opinion that’s all it would be.  Some very key market forces are in place to stabilize the equity markets.  It would not be a good idea to short here, but rather to find some ideas among the commodity sensitives.  This development once again coincides with the concept of quantitative easing (QE).  One final thought: if the Fed is so determined to keep long-term interest rates low it probably wouldn’t be such a good idea to short investment grade bonds (CSJ, CIU, LQD) or even high yield bonds (HYG) at the moment.  At least for the moment.

Have a good week.

R. Wiegs

ProActInvest Market Commentary for September 2, 2010

Hello Investors,

As I am trying to familiarize myself with a different and more challenging blog software, I’ll apologize for any glitches in advance.

The markets put in a great show on Wednesday, which vindicated the early warning signals generated by the faster ProActInvest Swing model, which turned bullish as of the close on 08/27.

Meanwhile, the slower and longer-term ProActInvest Market Barometer model went into neutral territory as of the 09/01 close.

If you combine the two models, I guess you could say that we should be at least somewhat bullish.  For those of you who dimmed the switches on equities during the recent bear market, you should probably turn the lights back on, at least somewhat.

I’ll be watching support levels on gold sensitive positions (like GLD and GDX) as well as on Treasuries (TLT), as some of the fear subsides from the equity markets.

Not to say that we’re completely out of the woods yet as far as the equity markets are concerned, but the reasons to be short stocks relative to other asset classes (as I mentioned in previous blog posts) are waning.

Below is a chart of the two equity timing models. Notice how we broke through the 10-day exponential moving average (10-day XMA), and we are on route to test the 50-day XMA and 200-day XMA resistance around the 109.00 level for the SPY (S&P 500 ETF).  It is not unlikely that we can go all the way up to test the 110.50 resistance level (see the horizontal line) just above the 100-day XMA later on in September.  Heck, that’s only 1.5% away.  But after a 3% move like today, we may have to wait a bit for this.

As always, I welcome any questions, comments, reflections, suggestions or even critical diatribe that you may have.

Regards,

R. Wiegs

ProActInvest Market Commentary for August 30, 2010

Good Morning,

As of Friday’s close, my shorter-term Swing Model for the S&P 500 turned positive (bullish).

Meanwhile, the longer-term Market Barometer is still in negative territory.

The presents a mixed or neutral scenario, which coincides with a low volume period that is typical going into a holiday weekend.  Absent any other exogenous significant events, we have the end of the first week of the month’s employment numbers this coming Friday, which could put present some volatility.

The message from Jackson Hole, Wyoming from the key central bank governors appears to be one of continued concern about global economic weakness for the developed economies (U.S., Japan, and the Euro-zone – particularly the peripheral European countries like Spain, Portugal, Greece and Ireland).  This translates into further quantitative easing by the Fed (by which the Treasury will continue to buy billions of long-term U.S. Treasury bonds).  This in turn will keep borrowing costs extremely low in the U.S. for everyone from home buyers to credit card users to corporate borrowers tapping into the credit markets for loans.

This development may be what’s caused the precious metals markets to resume their uptrend, not to mention the equity markets to bounce.  Interestingly, the emerging market equity indices are not leading the bounce (as China and India have expressed concern about their economies overheating).  Instead, the small cap indices right here in the U.S. stole the show last Friday, and are likely to lead a prolonged bounce after Labor Day weekend.  That’s when I expect the equity markets to turn on the juice once again as traders are once again reminded that stocks offer a lot more upside potential than bonds and that Q2’s earnings reports weren’t all that bad.

Have a good week.

R. Wiegs

ProActInvest Market Commentary for August 27, 2010

As we near the last week of August and Labor Day weekend, we have GDP figures out tomorrow and a Bernanke statement to be delivered from an annual summit of key central bankers at Jackson Hole, Wyoming.

What can or will Bernanke say to mollify perceptions of a weak U.S. economy, and perhaps lend some strength and stabilization to the stock market?  With many players going away on vacation and many bond ETF investors long as can be to capture yield going into the end  of the month, it would appear not very much.

How strong can the GDP report be?  Germany’s recent strong GDP figures are due for the most part to the weaker Euro (the Greece-Portugal-Ireland credit risk issues were actually a boon to German exports).  Meanwhile, the U.S. dollar strengthened during this period, while the Fed initiated quantitative easing to add even more liquidity to the system – not good omens for a strong GDP report tomorrow.

The equity markets are still weak and the bond market across the board looks strong as ever.

Please find below a chartwith summary signals for my Market Barometer and Swing model signals.

Regards,

R Wiegs

ProActInvest Market Commentary for August 23, 2010

Hi Everyone,

As we approach Labor Day weekend, volume appears to be waning.  This is typical for the late summer as market players wrap up things up and try to get away before the kids head back to school.

The directional signals aren’t as clear as when the wind is blowing strong – the sails across various markets are luffing in the wind.  But there is a pullback phase for equities and the current signals on my long and swing models for the SPY (S&P 500 index) are still short.

While my faster Swing model lost money last week (it went short as of Thursday night’s close), the longer term Market Barometer has been short since 08/11.  The Swing model generates about 2 signals per month vs. the 1 signal per month of the Market Barometer, but has also made about 10.5% since the middle of April while Market Barometer made 5.4%.

My positions are lighter than normal in my ETF Navigator – but there are a few markets that may show signs of continuation.   This model made some money last week as the bond positions kicked in to offset a small losing long position in XLB.  The long GLD position also helped.

That’s all I’ve got for now.  I welcome your comments and feedback.

Regards,

RWiegs

ProActInvest Market Commentary for August 18, 2010

Two prevailing themes stand out this evening as far as money flows into major ETFs – these market forces should carry over into next week.

1) There is renewed interest in the precious metals and basic materials sectors.

2) There appears to be a shifting over into shorter duration fixed income instruments.

As far as the overall equity markets are concerned, we are getting conflicting signals as we are clearly in a defined trading range.  The significant levels to watch for the SPY (109.79 close) are:

110.40 resistance

109.55 support

Regards,

ProActInvest Market Analytics