Treasury Yields to Fall….Again!?

May 26, 2015

The S&P500 barely changed last week. In one of the lowest volume sessions of the year, the index crept up 0.16%. Volatility also barely moved; it dipped just a bit to the lowest levels of the year. Boring, sleepy, directionless—these are the words many market pundits are using to describe the action lately. As mentioned here before, the US equity markets still appear to be poised for a major move—-whether it’s up or down is yet to be determined.

In US macro news, the poor performance continues. Sure, housing starts beat expectations, but only slightly. And sure, initial jobless claims are still well under 300,000, but this statistic is always strongest just as recessions are about to start. But the rest of the reports were a mess. The housing market index missed. The Chicago Fed national activity index missed….badly. The PMI manufacturing flash index missed. The Philly Fed outlook was horrible. Existing home sales missed badly. The Kansas City manufacturing index was a horror show.  So all in all, there is nothing really good to report in the current US economy.

And this ties into the US Treasury yields and their outlook. While they bottomed (in the current year) in early February and reached another low point in mid April, since then, they’ve been creeping up.  From about 1.68% in early February, the 10 year note had risen all the way to about 2.33% in early May. This is a huge move up, after falling for about a year and a half. But then, in later May, yields stopped rising, and started to fall back.

They originally rose, in defiance of the poor economic reports, because Fed officials kept dropping hints that they were going to raise rates despite the weak reports. In fact, many Fed officials simply ignored the poor reports and latched onto the occasional strong report as a justification for raising short-term rates later this year.

But lately, as the abysmal reports kept piling up, the perception in the Treasury markets changed—-if the already moribund economy actually takes a step back and goes into a mild recession, then of course, any talk of raising rates would have to be postponed….indefinitely.  And this seems to be reflected in the recent pull back in rates.

Technically, the 10 year is presently a very strong signal that rates are going to fall further. Treasuries were massively oversold in early May, and some sort of reversal was already expected. But now, if the real economy starts to weaken some more, then a drop well below 2.0% for the US 10 year will be a very reasonable target.

The trade—to go long US Treasuries—seems to be setting itself up nicely again. The first time we noted this was in late 2013. The same trade worked for all of 2014. And now, it appears to be on the cusp of working again in 2015.

Greece is Teetering and the Markets Don’t Care?

May 18, 2015

While the S&P500 barely moved last week, but it did manage to creep up another 0.3%.  Weekly volume was very light—among the lowest of the year. And volatility dipped back down, but not quite to levels reached in late April.

The technicals have changed very little from last week. Yes the US equity markets are still in a bull market mode (and that won’t changed until prices fall below the 200 day moving average far enough and long enough to turn that average downward). Yes prices are still hovering near all-time highs. But at the same time, valuations are super stretched—the markets are as overbought as they’ve ever been, on both the daily and the weekly charts, prices are hugging the upper Bollinger bands. And the lack of clear direction in the equity markets, a phenomenon that started at the beginning of the year, continues to hold true. In fact, an indicator called the Average Directional Index has now fallen to such low levels that the last time we saw this was in mid 2008 and mid 2012. In both cases, the lack of direction was resolved by a sudden drop in the markets….by a huge percentage in late 2008 and a much more limited percentage in 2012. Either way, it looks like this “hovering” effect in the S&P500 will not last much longer. But which way the market moves is yet to be determined.

US economic news was  particularly bad last week. The JOLTS survey missed badly. Retail sales also missed—both headline and ex-autos. Business inventories disappointed. Producer prices plunged; while on the surface this could be seen as a good thing, it usually means that demand for primary goods is falling and that deflationary forces are lurking. The Empire State manufacturing survey missed. Industrial production missed and consumer sentiment registered its biggest miss on record!  Not good.

In Europe, the Greek debt crisis finally appears to be coming to a resolution. Not in a good way, however. Even though Greece made its most recent payment to its creditors recently, it did so by tapping into reserves that were not designed to be used for any payment whatsoever. And now that these reserves are used up, no more large amount of funds appear to be available for repayments that must be made over the next couple of weeks. And since Greece’s creditors are not budging by not issuing concessions or new loans, that means that Greece is on the verge of default.  And by “on the verge”. we’re talking about two weeks.

So how are the markets reacting? Surprisingly, most are yawning. And equity markets in particular seem to be worry free. Sure, some peripheral European government debt market spreads are widening a bit (but they’re still near record low levels) and Greece equity and credit markets are under pressure.  But all in all, not only is there no panic in the air, but there’s a general feeling that even if Greece defaults, the global capital markets are prepared and can handle the potential stress, if any.

Funny, but that was very similar to what the markets were predicting when Bear Stearns was about to fail in early 2008. And by and large, the markets did hold things together for the 4 – 5 months after Bear went down, until of course Lehman failed.

So we will soon find out if Greece goes down, will Greece be a Bear Stearns or will it be more like a Lehman Brothers, or in the most optimistic scenario, will it be none of the above and be a non-event.


The Corporate Buyback Bubble

May 11, 2015

Last week the S&P500 inched up 0.37% on very light volume. Volatility, as measured by the VIX index was virtually unchanged and still hovering at historically low levels. In other words, there was very little net movement and activity in the US equity markets. In fact, as noted here before, the S&P500 has been extremely range-bound since the start of the year. Technical analysts like to point our that when markets get stuck in tight ranges for a long time, they tend to break out strongly—up or down—when the range breaks down; markets don’t exit the range with a whimper!

In other technical news, the bull market move is still in effect. Prices are above the 200 day moving average, and—critically—the 200 day average is still sloping upwards. This can be easily seen on the daily and the weekly charts. But as also mentioned last week, the distribution (or breadth) of stocks that are risking is narrowing. This means that many smaller firms are not participating in the price euphoria the way a smaller group of larger market leaders are doing.

As Wall Street roars, the real economy continues to struggle. Last week, international trade missed expectations badly; this was the biggest miss on record, and will cause the 2nd quarter GDP results to be slashed downward. PMI services also missed, as did ADP employment. Initial jobless claims beat expectations, as did ISM services. The big number of the week, payrolls, only met expectations, as did the headline unemployment rate, and the average workweek.  But average hourly earnings missed.

As the equity market keeps climbing—-and arguably into greater and greater bubble territory as defined by highly accurate historically informed measures of valuation—-a question keeps arising:  if almost everyone who wants to buy stocks, corporate and retail investors included, already owns stocks, and if the Fed has stopped printing money by ending its latest QE program several months ago, then where is the all the money to buy stocks coming from?

Well that’s simple. It’s coming from corporate buybacks, which means that US corporations—-instead of plowing more cash into capital expenditures or stock dividends—are buying their own equity shares, and thereby pushing the prices of these shares every higher.

How much are corporations spending on such buybacks, especially when compared to historical levels? That’s easy, the last time corporations bought as much of their own stock (in total dollars or as a percent of their own market capitalization) was in 2007.  And today, they have actually exceeded both these levels.

Why does that matter?  Because corporations have an awful record when it comes to buying their own shares—they almost always buy the most shares when prices are highest and they tend to sell shares (ie. raise money) when prices are super low.  And given that companies have never bought back more and given that prices have never been higher, one would be foolish not to be concerned.

Remember, just months after corporate buybacks peaked in 2007, the US stock markets began a descent that culminated in a 55% total loss, from peak to trough.

Will this time be different?

The Equity Bubble Persists

May 4, 2015

In what was a very slight retreat, the S&P500 lost about 0.4% last week on light volume. Volatility remained relatively unchanged and hovering near the lows of the year.

Breadth continue to erode. The McClellan Oscillator lost ground, and the percent of stocks above their respective 50 and 150 day moving averages also dropped. Yes, prices are still near all-time highs and yes the 200 day moving average is still sloping upward (with closing prices comfortably above this moving average), but the divergences are growing and for the year, the S&P500 has done very little…..closing last week not much higher than it was at the start of the year.

In economic news, the week was a downright disaster, with almost all major news releases missing consensus forecasts. PMI Services kicked off the week with a miss. The Dallas Fed manufacturing survey notched its worst monthly losing streak ever. Consumer confidence plunged—-recording its biggest miss in five years! The Richmond Fed manufacturing survey missed. GDP missed by a mile. Personal income and personal spending missed; income was particularly bad. PMI manufacturing also missed. ISM manufacturing missed, as did consumer sentiment and construction spending. Only weekly jobless claims and Chicago PMI registered better results than expected.

While we’ve already mentioned that the bull market in US equities is still in effect (and that verdict will not change until prices cross below, and stay below the 200 day moving average to bend it so that it slopes downward), anyone who puts new money “to work” in the US stock market is betting that what is already a very easy to diagnose bubble will become an even larger bubble over the next 1-2 years.

Why is this bubble so easy to diagnose? Because 100 years of data virtually prove that when the stock market valuation relative to GDP and to corporate sales reaches the current levels (levels over 100% above 100 year old norms), that the valuation is not sustainable. And by not sustainable, we don’t mean that they might correct by 5%, 10% or an even more painful 20%, but that prices might correct by 50% or more. Why? Because, from these valuations, they always have. Without fail.

So to bet on stocks today means to bet that 100 years of history are wrong, or at least no longer relevant.  To bet on stocks today means to bet that the usual 50 plunge from such levels will not happen, and that for the first time ever, only a minor correction—to be bought of course!—is the only downside.

Unfortunately, most retail investors and even institutional investors who cannot afford the career cost of “missing out” on gains, even when they’re unsustainable bubble gains, will suffer the consequences when the tide finally turns.

Short-termism is not a disease; it’s a fact of life in investing. And unfortunately, it always comes back to haunt those—which is most everyone—who cannot avoid its grip.  Without fail.