Buzz on the Street: What's Going on in Yellen's Melon
A look back at the happenings on Wall Street this week, as seen by Minyanville's Buzz & Banter.
Here is a small sampling of the 120+ posts seen on the Buzz & Banter this week:
Monday, February 10, 2014
There's No Tellin' What Yellen Is Smellin'
A few things to think about moving forward.
The next FOMC meeting is on March 19, and it will be the first for Janet Yellen as the new Chair. The meeting will also have a press conference. Additionally, we'll have the February NFP report by then (March 7), which should help give a better sense of what we'll expect at the meeting. Another poor report and we'll get taper with a strong reiteration of forward guidance and the potential for the tapering program to be momentarily halted. A report back near 170K-200K, and they will say that the recent economic data has been due to the extreme weather. I think that weather is part of it, just take a look at natural gas's performance lately, but the soft patch is very real.
This week, she will give the annual Humphrey Hawkins testimony to Congress. She will speak in front of the House on Tuesday morning and in front of the Senate on Thursday morning. There will be prepared remarks before the speech, but I do not expect any new groundbreaking information from her. She can't say anything about tapering. The FOMC is set on the course of continuing to reduce purchases, but she will likely get some "tough" questions from Congress on how the recent soft employment reports affect her decision-making. Her response will likely be that it is not just her, but the whole committee, that decides monetary policy.
The one thing that will "matter," to me at least, is what she says about optimal control. Basically, that's the new fancy word for forward guidance, of trying to tell the market where interest rates should be over the next five years. At this stage, realistically, it will be hard for the forward curve to shift out any further into the future - meaning that things are already priced pretty darn good. So, it seems like the front end stands to be disappointed, in my view. Check out the chart below of the Eurodollar curve from Dec 20 (blue) -- when tapering started -- versus today (orange). The biggest change has happened in Dec 2015 versus Dec 2017. This means that with the drop-off in credit growth and and the softer economic growth in 2014, the market is expecting the lower rates commitment to be reiterated, again.
Minyan James reminded me over the weekend of a recurring "problem" in the closed end bond fund space. The PIMCO High Income Fund (NYSE:PHK) has been running a premium to NAV in excess of 40%-50% for quite some time. The fund is personally run by Bill Gross, so that adds some allure for investors to own it. What's even more impressive is that a large number of the assets that the fund owns are also at significant premiums to par. So essentially, using the Lloyd's preferred as an example (at 35% above par) you're buying a bond at 152% of par. There is a caveat to that explanation as it is not all negative. The assets that that fund owns, such as the Lloyd's 12% hybrid perpetual preferred with no call for ten years (it's largest holding), insures that the fund won't have to worry about lower dividend payments in the future.
Bottom line, the point that I'm trying to get across is this. If you're going to invest in these vehicles (not just for a trade), it's worth taking the time to see what they own. Morningstar has a lot of great, free resources that can be helpful on their website, and your broker should as well.
And lastly, from personal experience today, if you are given the option to get Windows 8 on your work computer.... don't! Stick with Windows 7.
Tuesday, February 11, 2014
Janet Yellen is speaking, and perhaps not surprisingly, she isn't saying much to disrupt the tape. The question, of course, is how much of her dovish demeanor is baked into the tape given the S&P (INDEXSP:.INX) has rallied 4% since last Wednesday.
S&P 1809-1812 is on the radars of a few technical types, although that may be splitting hairs following the knife higher through S&P 1780 and 1800 (note: the 50-day is sitting at 1809, for those keeping track at home). Market breadth is 2:1 positive, tech trades are dry (minus select high-flyers such as LinkedIn (NYSE:LNKD) and Tesla (NASDAQ:TSLA)), and the banks are mixed-to-lower, which is most certainly worthy of a nose-scrunch.
On the trading front, I'm flattish following my lucky cover in biotech last Tuesday and unlucky sale in GW Pharmaceuticals (NASDAQ:GWPH). We still own some Twitter (NYSE:TWTR) for the kids with a long-term lens, although I'll admit to having second thoughts there. Indeed, the time to close your eyes and buy long-term exposure, however small and token, was five years and 177% ago. No matter how bullish you are, we can all agree that we're closer to the turn now than we were then.
Watch those banks -- as go the piggies, so goes the poke -- and remember that today's close is entirely more important than intra-day levels.
Wednesday, February 12, 2014
Minyan Mailbag: Flotek (FTK)
How are you feeling about Flotek (NYSE:FTK)? It has had a massive run and looks overbought in the short term.
Great eyes Mike!
Flotek was mentioned as my pick for Minyanville's "Stocks To Watch in 2014" article. I love this stock long term, and I don't think it is anywhere close to being finished. However, it is overbought in the short term. It held the 200-day moving average well and rocketed higher, so that tells me that it just needed a reset. Now that it has made new highs, it probably will trade sideways for a couple of weeks to work off some of the overbought condition and allow the moving averages to catch up. It should maintain the breakout zone over 23.50-24.00, and it should be ok above that zone. I think we could see this in the 40s by mid next year and perhaps the high 30s by year end.
Click to enlarge
Yellen Aftermath and the Root of Bear "Hope"
I never pulled the trigger on that potential Yellen short-side set-up that I posted on Monday because the market did not ramp into the resistance zone that I laid out. Obviously, I am glad that I did not enter the trade. Yellen did nothing to establish inflation fighting credentials as I thought she might be inclined to do. Having said that, she also did nothing to signal a more dovish Fed. In sum, the Yellen testimony was a non-event, and the market seemed to decompress from that.
The fact that the market rallied on such a non-event is somewhat telling, I believe. I think it is reflective of the fact that far too many people have been "hoping" for a 10%-15% correction. I have been fighting mightily against this tendency myself. What sort of hope am I talking about? The "hope" in this case is not a simple matter of greed or a desire to buy stocks at cheaper prices; it is it is akin to a "longing" for a "comfort zone" that matches our past experiences - at least for those of us that have been trading and investing for many years.
I think that much of what technical analysis has taught us through training and experience is currently working against us. Technical analysis is all about mean-reversion and cycles. It's about ebbs and flows in the demand for securities. Cyclical fluctuations in prices that reflect this ebb and flow of the demand for stocks is the "normal" state of affairs in markets and is a product of human psychology. That is why we see repeating patterns in the charts. But QE has dramatically changed the environment because it has introduced a new source of demand that historically has not been there. Therefore, technical analysis -- which is based on the presumed repetition of past trends with regard to the ebb and flow of the demand for stocks -- is sending us false signals. Technical analysis is causing us to expect pull-backs and corrections that never materialize because a new source of demand (QE) is there to buy each dip before supports are tested and/or before the market completes a "measured" decline.
Please note that QE is alive and well, and it is crucial to understand that it's impact on asset prices is going to last for a long after the taper is over and after QE has ceased. The excess liquidity in the economy will not go away with the end of QE. That excess liquidity is here to stay for a very long time.
Therefore, I believe that as traders and investors, our historically honed instincts notwithstanding, our bias needs to remain strongly to the upside for the next few months and even years. Expecting history to "rhyme" I believe is a sucker's game because QE has changed the environment in very important ways. It didn't change human nature. But it changed the sandbox in which we are all playing and in which human nature manifests itself.
Please note that I am not saying that markets cannot or will not fall. I am simply saying that a heavier "burden of proof" should be required before investing money on a bear hypothesis. With QE, the market is a "stacked deck" against bearish scenarios, and our trading and investment needs to adjust for this fact.
Thursday, February 13, 2014
Emerging Markets: Too Bear, Too Fast
Note: This is an addendum to a recent Market Report by Rafael Diamond covering Global Emerging Markets.
Background: We were bearish in Emerging Markets in mid January, but the decline happened much too fast, and a temporary period of stabilization now seems more likely.
The first chart below is our long-term trend model for the Bovespa (Brazil) at the 9th most oversold reading in the last 20 years.
Click to enlarge
The model has begun to curve higher since bottoming on February 5, 2014.
The second chart below is the average historical return for the eight extremes, if a trader bought the close of the first UP day after the model got this oversold:
[x-axis = number of days held, y-axis = average historical return]
Click to enlarge
Sixty days out, every signal was significantly profitable versus its draw down. The only exception was 2008, which lost over 20% initially, but two months later was up 10%.
These are the individual charts -- note especially the 1998 chart:
Click to enlarge
Though we remain structurally bearish on Emerging Markets, if history repeats, Brazilian stocks could rise as much as 15-20% by April 2014.
Our forecast for a 1998-style contagion later this year remains intact; however, with the front-loaded selling witnessed in January, it now appears more likely to begin from higher levels.
Though certainly not a "go out and buy everything in EM" call, if Brazil stabilizes over the projected window of 3 months, this may be correlated with stability in the rest of the EM complex -- contributing positively to investor sentiment, particularly in DM equity markets, which were used as a hedge for illiquid EM exposure during the recent sell-off.
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