Posts Tagged ‘Fed’

What a Sector Rotation Chart Says About the US Economy

What sectors rise when the economy begins to emerge from an economic downturn? The answer may surprise you.

Source - http://www.onlineinvestingai.com

The chart to the left is of the economic investment cycle. The blue shaded area represents  the stock market and the yellow the economy.

The first thing you’ll notice is that the stock market  typically bottoms and peaks 6 months to a year before the economy does. This chart also shows that bull markets are formed on the back of a healthy financial and transportation sector.

You’ve probably noticed that the financial sector began to recover thanks to the billions of dollars in backdoor handouts that the Fed has given it. The transportation sector seems to have found a bottom as well as imports and exports rise.

But the problem is that banks still aren’t lending. Consumer credit has dropped for 11 straight months. That’s a record. And with contracting credit comes contracting purchasing power.  Prices inevitably go down (I love cheap milk!).That’s deflation.

Another nagging question is exactly how the banks will do once interest rates rise and the Fed shuts down the printing press. If banks aren’t lending now, I doubt they’ll lend in a tight-money environment.

My prediction: Second half of the year, when the stimulus and quantitative easing wear off, we’ll run into some “rough patches”.

As an investor, you have to realize that the market will start to price in weakness as soon as the data starts coming in weaker. The big clue for you will be if the market sells off because economic data has come in under expectations. If you see that “under expectations” phrase one too many times, you’ll know the repricing is coming.

600,000 or more Job Losses for February?

I have to tell you, the market this week has been downright pathetic.

There’s only so many flat days that I can stand before going insane.

Today marks the third day of range bound trading. And when I say rangebound, I’m not only talking the three major indexes. The dollar moved slightly higher against the Euro and yields on 10-year treasuries slightly moved higher. While gold and the commodity complex lost a little steam.

Maybe it’s just me, but it seems like everyone is just positioning themselves for the jobs report on Friday. Estimates are everywhere. I think the number will come in higher than expected.

And I wouldn’t be shocked to see the market hit new highs. But there’s a few reasons why the party shouldn’t even start.

We have to understand that the Fed is nervous about all the liquidity that’s out there. If the 4^th quarter GDP comes in in frothy and jobs are positive, the Fed will start pulling liquidity out of this market. The FDIC is already warning banks about interest rate risk. The FDIC wants banks to actually test huge jumps in interest rates – I mean 3-4% swings at a time – to make sure that the bank is sufficiently protected.

Why would the FDIC ask banks to protect themselves against such huge swings? I think the FDIC sees something it isn’t saying out loud…

In the end, the big risk is that the Fed pulls out money too quickly.

Another reason why celebrating too early might be foolish has to do with the jobs numbers.

You see, the jobs numbers are nothing more than a sampling that the Bureau of Labor Statistics (BLS) does every month in order to gauge the overall health of the job market.

The Bureau then takes this sampling and applies a few filters to it. It tries to adjust for seasonality, and even adds or subtracts jobs based on “assumptions” of what’s happening to small businesses in the business cycle.

The result is that The BLS has been routinely added about 107,000 jobs a month since February. It’s the birth/death model.

But what happens in February is that the BLS ultimately makes an adjustment to the birth/death number for the previous year. At that time, we’ll probably see jobs decline as the BLS measures just how far off the mark they were. I’m not kidding when I say that the BLS could subtract 600,000 or more jobs.

If the stock market is expecting a positive job number, it will probably be disappointed. And it offers a catalyst for a correction in February.

Stuff to Read

http://www.reuters.com/article/idUSTRE6065MK20100107

http://www.reuters.com/article/idUSTRE5B92XZ20100107

http://www.reuters.com/article/idUSTRE60432520100107

Will the Money Printing Ever End?

Will the Fed keep printing money?

That was the question on everyone’s mind yesterday, as the markets stayed relatively flat all day.

Investors weren’t sure what to make of the Fed Minutes that were released. In those minutes, the Fed openly debated extending the money printing program. It’s interesting that the debate is even around at this point in our so-called recovery.

After all, the Fed has already stopped buying back Treasuries. And it makes a point to tell investors that many of its emergency programs would wind down early this year. Up to this point, it seemed that the Fed was worried about not tightening soon enough.

But the minutes released today showed that this worry wasn’t the consensus. Some of the Fed governors are worried about tightening too soon.

I say rightfully so. Up to this point the “recovery” we’ve seen was led by stimulus and an inventory rebuild. For this recovery to be genuine, consumers need to start spending.

But with consumers drowning in debt, I don’t see consumer spending picking up.

So the economy will drag during the second half of the year. And if the Fed starts tightening right now, it risks pushing the economy into a double-dip recession.

Of course, the temptation to tighten will always be there.

For instance, the Bureau of Labor Statistics’ December Employment Report is expected to show a gain when it gets released on Friday. The Fed might read too much into it… maybe even forget that it was the stimulus and inventory rebuild that helped create these temporary jobs… and decide to quickly tighten rates in order to avoid an inflationary onslaught of epic proportions.

Of course, we in a deflationary time. Debt deflation is still running rampant. Credit is tight. And banks are still going bankrupt everyday.

This isn’t an inflationary environment.

Too bad everyday investors don’t ever think of that stuff. If employment surprises to the upside on Friday, this market could easily make new highs. Dow could hit 11,000 +.

Take your risk money and buy some calls.

Take care,

Charlie

Stuff to Read…

http://www.bloomberg.com/apps/news?pid=20601087&sid=atPFbpy.GylQ&pos=5

http://www.zerohedge.com/article/316000-nfp-print-friday-bls-seasonal-fudge-factors-make-it-very-likely

http://www.reuters.com/article/idUSTRE6060VR20100107

Is 10,500 a no go?

10,500 is like the land the Dow dare not close above.

It didn’t even matter that the unemployment count for November was far better then expected (a 11,000 drop). After starting the day up over 1%, the Dow Jones and the other two indexes both ended the day barely in the green.

The funny thing is that the good economic news actually contributed to the markets rough going. It all has to do with the complex and far reaching implications of an improving labor market and its effect on the dollar.

You see, most currency traders like to see an economy producing jobs. It makes them want to buy more of that currency, pushing the price higher.

The problem is, the dollar is being used to fuel a huge carry trade. If the value of the dollar  increases,  the carry trade becomes more expensive. Eventually any fund that is short dollars (borrowing) will have to unwind its carry trade (close out the loan and take a loss). And the dollar moves up, up, up.

This scenario is pretty much what happened today, albeit on a small scale. The November unemployment report came in strong, and some currency traders took that as a sign of strength for the buck. At the same time, the increase in the dollars value spooked carry traders into closing out their positions.

This drained liquidity from the global markets and resulted in all three major indexes closing at the lows of the day. Frankly, i’m shocked we didn’t close out deeply in the red.

Here’s the kicker…

If the market is weakening over employment numbers, how badly will it weaken once the Fed announces an end to its MBS purchases in the first quarter of 2010? How will the market react if the Fed raises rates by June 2010?Or the passage of FAS 167 in January 2010? All of these things are dollar bullish and should add downside pressure to the stock market throughout the year.

And on a finally note, let me show you a chat of the Dow Jones. It shows the important inflection point we now sit at.

Bailouts, Bailouts Everywhere

Gold has officially broken through $1,200.

All it took was the hope of a bailout of the world’s most extravagant real estate bust – Dubai. Well, not entirely.

Japan also promised it would inject another $114 billion into its economy by offering banks cheap short-term loans. It’s also expanding the type of collateral it receives.

Bailouts are happening all around the world. It’s the new “in” thing to do. Think about it: Nearly every major credit catastrophe has been delayed by a big bailout. Only Iceland and Lehman slipped through the cracks. And now the talking heads use those two stories to convince everybody that a bailout is the best option.

So moving forward I don’t see an end to the bailout bonanza.

You also shouldn’t forget about what money printing means for Japan. It could begin another Yen carry trade. A Yen carry trade plus a Dollar carry trade would allow for a massive bubble to blow. The ending wouldn’t be pretty.

But who knows, maybe the Feds will figure out another way to keep the Ponzi scheme going…

With cheap money pouring into the economy by means of the Yen and Dollar, it’s hard to envision the uptrend breaking. But I still feel that by early next year we could see prices 10-20% lower than they are today.

In the short-term, a break above 10,500 in the Dow Jones would signal more gains ahead. As of right now, though, the Dow isn’t able to settle above that level, which will keep me away from getting into any short-term long positions.

As for gold, I’m not a buyer at these levels. I tend to stay away from any asset that’s gone parabolic (like gold). I loved gold at $1,050. But over $1,200 is hard to swallow, especially with no other significant corrections.

Two Outcomes for the Dollar Carry Trade

Right now the dollar carry trade is fueling the stock market as traders borrow the buck and buy riskier assets (anything else). So when will it all go bust? I’m not sure, i’m not Miss Cleo. But I do see two possible outcomes.

Outcome #1 : Dramatic Fed tightening pushes the buck higher as carry traders sell off their assets and buy back the dollar. In this scenario, markets would plummet viciously.

Outcome #2: The Fed raises rates slower than the rest of the world and the carry trade continues. Eventually, higher interest rates  make the carry trade less profitable and the Japanese Yen, which also has near 0% interest rates, becomes the carry trade of choice. In this scenario, the market keeps moving higher.

What the Feds do depends on inflation expectations. If everyone anticipates higher inflation, the Feds will jack up interest rates quickly. But if  inflation isn’t a concern (the view at the moment) then interest rates won’t move up so quickly.

The economy is running on pointless tax credits and stimulus spending, nothing else. And the U-6 unemployment rate will likely hit 25% by the time this thing bottoms out. So I doubt the Feds will raise rates before the second half of 2010. And if the Feds do raise rates earlier, it just means that inflation expectations had gotten severely out of whack.

That’s why the dollar carry trade will soldier on and keep fueling this market until next year. Sure, we might see a few minor 5% – 10% sell-offs over the next few months. Hell, the Dow may never pass 11,000.  But I doubt we’ll ever see 6,000 on the Dow Jones ever again.

MARKET TREND OUTLOOK

The trend is still up, but the major indexes are all overbought. So we’ll probably see a 3%-5% sell-off.

Use any major sell-offs as entry points unless we see a lower-high, lower-low pattern forming.