Greece—Edging Closer to Disaster

April 27, 2015

The S&P500 climbed another 1.75% despite a slew of poor economic reports out of the US. Volume also rose slightly, but it’s still at very low levels when compared to the same week in prior years. And volatility continued to grind lower……ending the week at the lowest levels of the current year.

What happened in the US economy?  Nothing good, as usual. The week kicked off with a disastrous Chicago Fed national activity index release. Instead of rising slightly, the index logged a big drop. Initial jobless claims came in about 10,000 worse than predicted. The PMI manufacturing index disappointed, and did so by the biggest margin on record. New home sales plunged, to notch their biggest miss since mid 2013. And then, to cap off the week, durable goods ex-transportation (critical because transportation orders are notoriously volatile) missed badly—instead of rising 0.3% as expected, they fell 0.2%. Only existing home sales beat expectations among all the major reports released last week.

How can this bad economic news be good for stock market prices?  Simple—the worse the economy, the longer the Fed must delay its already long-delayed interest rate hike. And the longer the rates stay low, the better stock speculators feel about staying in stocks and buying even more, on ever rising amounts of margin loans.

The technicals now pint to a very overbought market—both on the daily and the weekly charts, the S&P closing price is hugging the upper Bollinger Band. Interestingly though, this relentless upward momentum is clearly fading in the last twelve months or so. Both RSI and the MACD lines are sliding downwards. Yes both are still in bullish territory, but in a much less convincing way than they were 12-24 months ago. So we see more divergences as prices continue melting up, and divergences on longer term charts (eg. weeklies) are more important that divergences on shorter term charts (eg. dailies).

In the rest of the world, everyone is watching Greece and the looming debt payments that it must make to Europe over the next two months. Unless Greece starts confiscating deposits (say, from its pensions funds) it will not be able to make all these repayments from internal sources. And since its European creditors have staunchly refused to extend any new loans (without Greece agreeing to more severe austerity measures, measures its newly elected government has refused to accept), then the possibility of a Greek exit, or “Grexit”, from the euro becomes more likely…..and soon.

The problem arises in the way in which the world’s financial markets (and even economies) would be affected by a Grexit. The standard line put out by European leaders is that such an event, while not meaningless, would not create a huge ripple effect in markets.

On the other hand, there is a growing concern that the actual effects are not truly knowable in advance and that something far from innocuous may occur if Greece were to leave the euro and default on its debt obligations. Even Goldman Sachs last week warned that there may be more downside than the consensus currently expects.

Either way, the Greek stand-off cannot continue without some resolution—one way or the other—for more than a couple of shorts months. We will not have to wait long for the outcome to become crystal clear.


US Stocks—Still Going Nowhere in 2015

April 20, 2015

The S&P500 dropped back by 1 percent last week on slightly higher volume that the week before when it rose in price. Volatility, as would be expected in a down week, rose somewhat….but still nowhere near any type of panic levels.

The week’s economic reports were particularly poor.  Core producer inflation jumped much more than expected. Retail sales disappointed, and the core sales figure (which exclude auto sales) was a total disaster—instead of rising 0.6% as predicted, it fell 0.4%. The Empire State manufacturing survey went negative; it was supposed to rise for the month. Industrial production plunged, 100% more than it was expected to fall. This was the biggest miss in industrial production since mid-2012. Housing starts also missed, as did initial jobless claims. Core consumer prices, like producer prices, rose twice as much as expected. And finally, leading indicators were weaker than expected. The sole bright spot, in the sea of disappointing results, was a slightly stronger consumer sentiment result….as if that makes any sense given all the other misses.

In terms of technical analysis, the overbought condition has hardly changed….despite last week’s price retreat. On the weekly charts, the S&P is somewhat below its upper Bollinger band, but still on its 50 day moving average and well above its 200 day moving average. On the daily charts, prices have backed off he upper Bollinger band, but they are far from suggesting that a big drop is imminent.

But what is concerning about US stock prices is that prices, now that April is coming to an end, are still just about where they were on January 1st, almost four months earlier.

This is something that hasn’t happened in a while. Does this necessarily signal trouble? As mentioned already, not necessarily.

But this yo-yo four month pattern does suggest that buying forces are weakening and that the almost inevitable climb that we’ve been enjoying for four years (since the summer of 2011) may be in danger of pausing……at the very least.

Very often, this pattern does form the beginnings of a more significant retreat for equity markets. But as usual in this new world of Fed support via Quantitative Easing, we’ll need to wait and see what actually happens!


Bond Liquidity Evaporating

April 13, 2015

Last week, the S&P500 moved up 1.7% on light volume. In fact, the week’s volume was among the lowest of the year, meaning once again that there was little investor conviction behind the price rise. At the same time, volatility dipped, falling to the lows of the year but not nearly as low as it was during the summer of 2014.

The economic picture is still fairly weak. Last week, the labor market conditions index disappointed. ISM services also missed estimates. The JOLTS jobs survey was somewhat weak, and in consumer credit, credit card debt is struggling to grow. On the positive side, initial jobless claims were still fairly low and wholesale trade beat consensus estimates.

The technical picture is still one that shows an extremely overbought condition for the S&P. On the weekly charts, this overbought condition has been in effect, for most of 2014 and for all of 2015. The only time prices backed off meaningfully in 2014 was in October, but they quickly became overvalued again afterwards. On the daily charts, prices have been vacillating above and below the 50 day moving average for most of 2015, and as mentioned in prior posts, this is reflected in an S&P500 that, year-to-date, is almost unchanged.

In terms of investor bullishness, the recent trend has continued to be in effect—investors are more bullish today than they have been in decades. At the same time, the percent of investors who are bearish is also at multi-decade lows.

Margin debt remains sky-high, for example, when measured as a percentage of market capitalization.

The primary fuel for equity increases lately—corporate buybacks—continues to flow.  And the primary source of this buyback fuel has been corporate debt issuance over the last three years. Because for US corporations to buy back more and more stock at higher and higher prices, the only source of cash needed to execute these buybacks—especially when operating cash flow after capital expenditures is insufficient—is the bond market. So US corporations, over the last three years, have gone on a massive borrowing spree, levering up more and more to buy back more and more of their stock.

What could go wrong?

For one thing, as yields on this riskier (due to the higher leverage ratios) corporate debt keep falling (due to the Fed’s suppression of rates), it leaves investors with very little cushion to withstand big fluctuations in price—especially price drops.

Prices can drop if investors reach a tipping point and decide that since yields are too low, they must sell. And if they were to sell as a group, the price of US corporate debt could collapse.  Why? It’s extremely overpriced—relative to history—right now. And it also collapse because there is very little liquidity in the corporate bond markets today, which means that relatively small sales can have devastating impacts on prices. The main reason that banks and brokers hold less bond inventory today is because new regulations make it very costly for them to hold the levels of inventory they held in the past.

The bottom line is that not only are US stock prices vulnerable to a price correction but that US corporate debt markets are vulnerable to a price shock as well. All the more reason to keep dry powder on hand to be able to take advantage of the corrections when they eventually happen.

 


Dismal Jobs Report

April 6, 2015

The S&P500 crept up very slightly last week—by 0.29%. Volume was very light, implying that there was very little conviction behind the buying. And volatility was virtually unchanged; it’s still hovering at fairly complacent levels, but not quite as complacent as the levels reached in the summer of 2014.

Technically, the classic topping formation continues to develop. Last week’s small increase in price did nothing to change this. By Friday’s close, the S&P500 was still nearly where it was when the year started…well over three months ago. All that said, the 200 day moving average is still sloping upward, and the 50 day moving average is still comfortably above the 200 day. In other words, the bull market run is not over.

There were a lot of economic reports last week, starting with personal spending which missed expectations; personal income met expectations. The Dallas Fed manufacturing survey missed badly. Home prices, according to the Case Shiller home price index, did not rise at all last month (not seasonally adjusted figures). Chicago PMI missed very badly, as did ADP employment. ISM manufacturing also missed; construction spending missed as well. On the positive side, consumers—miraculously—are confident, at least according to the consumer confidence survey. Factory orders came in better than expected and initial jobless claims fell to new cyclical lows.

The big news of the week was the March payrolls report. Instead of seeing 247,000 new jobs created, only 126,000 jobs were generated, which was a huge miss….almost 50%. To add insult to injury, the prior two months also saw downward revisions; in other words, January and March weren’t as strong as initially reported. The unemployment rate held at 5.5% but that happened only because even more discouraged job seekers gave up looking and left the job force. The labor force participation rate fell from 62.8% to 62.7%, the lowest level seen since 1978!  Adding the to the bad jobs data, the average workweek also fell a bit; in healthier labor markets, the average workweek holds steady or rises.

Finally, when last week, we noted that platinum was cheap, the expectation was that in the long run, it represented a good value, especially when compared to the price of gold. And while this long-term value is still there, it’s worth noting that platinum….since the post was published a week ago….has jumped about 8%. Yes, it can fall from here, in the short to intermediate term, but it’s nice to see such a big bump immediately after the call was made.