Buzz on the Street: The Futility of Utility Stocks
A look back at the happenings on Wall Street this week, as seen by Minyanville's Buzz & Banter.
Wait -- so the Fed actually won't taper? Surprise! Seriously folks, the entire discussion over an end to QE has been overblown, given that economic data is still mediocre, with industrial production not really showing signs of a significant pickup in growth. What is perhaps most interesting about the market's behavior as of this Buzz is that bonds are selling off even with Bernanke attempting to reassure markets that its too early to pull back on stimulus.
The fact that iShares Barclays 20+ Treasury Bond ETF (NYSEARCA:TLT) has sold off indicates the market is no longer interested in front running the central bank. Continued yield curve steepening remains a positive for risk assets. With many now calling for a correction as intermarket trends improve, I do wonder if the contrarian trade is to bet on a continuation of trend. Our ATAC models used for managing our mutual fund and separate accounts favor US small-caps, waiting for a trade right back into the fat pitch of emerging markets, which may be soon to come.
Last night I finished reading Professor Michael A. Gayed's re-release of his father's classic text Intermarket Analysis & Investing which was recently published in its second addition. If you've never had a chance to peruse these pages. IA&A is a required reading for everyone in the trading community, in my opinion. Mr. Gayed, Sr. pays a lot of attention to the utilities and their implications upon the broader market, particularly the intermarket relationship between utilities vs. leading non-correlated asset classes. Over the last several sessions the iShares Dow Jones US Utilities (NYSEARCA:IDU) has sold off and is now demonstrating a choppy pattern that could be construed as either bull or bear consolidation firmly resting on the 50 DMA. Given the high-yield of the utility sector and its normally risk-adverse investor base, a decrease in the average could mean a few different things:
1. Safe haven investors are finally stepping into other, more frothy sectors. They're no longer happy being "paid to wait."
2. Smart money is not convinced the yield spread between risk-free and utilities justifies the added interest rate risk.
3. Fund managers are being pressured to add alpha.
My thinking is that if utilities sell off further, there's risk of a shock to interest rates in the next 3 to 6 months. Many may recall that the DJUA was first to lead us higher out of the market bottom in August 2011. As a leading sector on the way up, I've got to also respect that it may be a leading sector on the way down. Conversely, should the former high be broken and another sustained leg higher becomes observed, this could be an indication that fear has returned to the market but not in context of rising rates. In other words, another leg higher could be in the cards before a severe sell-off appears.
I'm sure there are many more takeaways other than the ones I've pointed out above. My intention is to share my thought process with Buzz readers. I'm always grateful for your feedback and observations! Those who may follow my posts know that I am in the bear camp currently. As Todd often says, I too, am "Always early." Reason being more often than not is because I'm not trying to get the last little bit of any move. I have a small short on the Russell 2000 currently, which I plan to dollar-cost average higher every 1% or so north of my entry around Friday's high. I've trimmed nearly all my equity longs to only a small fraction of their initial size. I'm not completely bearish of being long "all" equities, just the ones I've shared with you in recent memory. There's always opportunity out there, both long and short. Good luck out there!
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Quick Takeaways From Bernanke
The important things that we expected were in there:
- Fiscal policy is restraining growth (there is a whole section).
- Short-term inflation remains subdued due to things like energy prices, but long-term expectations (think 10-year breakeven rates) remain constant.
- Extended periods of low yields will cause investors to reach for yield:
"Another cost, one that we take very seriously, is the possibility that very low interest rates, if maintained too long, could undermine financial stability. For example, investors or portfolio managers dissatisfied with low returns may "reach for yield" by taking on more credit risk, duration risk, or leverage"
"Recognizing the drawbacks of persistently low rates, the FOMC actively seeks economic conditions consistent with sustainably higher interest rates. Unfortunately, withdrawing policy accommodation at this juncture would be highly unlikely to produce such conditions. A premature tightening of monetary policy could lead interest rates to rise temporarily but would also carry a substantial risk of slowing or ending the economic recovery and causing inflation to fall further."
This doesn't say a whole lot that hasn't been said, but it's a surprise that it was said at all. It sounds like he says they are afraid of withdrawing accommodation because inflation may fall further. Ironically, it signifies that policies aren't working.
Thursday, May 23, 2013
The $10 Trillion Monster
For the last month and a half, the first security that I have looked at everyday is the 10-year Japanese Government Bond, or JGB. The JGB market is $10 Trillion large, which makes it the second largest security in the world behind US Treasuries. The Japanese variables are such that a meltdown in this market has been a higher probability event than most expect. Over the past 6 weeks, we have seen halts in the JGB in the Japanese session as well as unprecedented implied volatility in the options market for JGB's. This has all happened AFTER the Bank of Japan, or BOJ, announced it's newest, extremely large version of QE. What made me sit up and notice is the after effects of the BOJ announcement have INCREASED volatility and DECREASED liquidity in the JGB market. I thought central bank intervention was suppose to calm the bond markets and bring rates down NOT UP? Right now we see that the Japanese Yen (JPYUSD) and the JGB are tightly correlated. Could additional measures announced by the BOJ make this situation worse, bringing both the JPY and JGB lower? I think that is the risk, and when a $10 Trillion market is at stake, it is time to take notice. The unintended consequences could be enormous for the world markets as there are a ton of interest rate derivatives swimming around in the global banking system.
500 and 200-DMA Stats
The market hasn't touched the 50-day moving average since April 19. Typically, in a healthy upward moving market, we get a test about every 45-60 days. A perfect example has been this year. The market crossed the 50-day on December 31 and finally came "close enough" on February 26 (57 days). After that, it stayed above it until around April 18 (53 days). We enter the time window just after this weekend.
The thing that is more concerning is that we have not touched the 200-day moving average in more than 6 months (Nov 28). It runs on about a 6 month cycle -- usually May/June then October/November. Additionally, every year since 2005 (except for 2007) the S&P 500 has hit the 200-day moving average in May or June. Will this year be different, or are we set up for a deeper correction than many are expecting here?
From Divergence to Convergence: SPY vs. GDX
Has "The Great Convergence" started, which will reverse some of "The Great Divergence" between the S&P Index and the Gold Miners?
With yesterday's high volume, key-downside reversal in the SPDR S&P 500 ETF, juxtaposed against yesterday's positive performance by the Market Vectors Gold Miners ETF (NYSEARCA:GDX), coupled with their respective-directionally powerful-daily momentum (RSI) patterns, evidence is mounting that a period of relative performance has commenced for the GDX.
But while relative performance is one thing, to get any real traction on the upside, the GDX must hurdle and sustain above 31.00/30.
In the meantime, my work argues that while the SPDR S&P 500 ETF ratchets to the downside in a corrective period, the Market Vectors Gold Miners ETF will build a significant bottom, ahead of a thrust into a recovery, bull phase.
Friday, May 24, 2013
The Two Yoots
We've done a lot of coverage on the breakdown in the previously market-leading yoots -- I mean utilities,
Today, they're underperforming again.
As I write this, the Dow is down 0.32%, the S&P's down 0.51%, while the utilities ETFs Utilities SPDR (NYSEARCA:XLU) and iShares Dow Jones US Utilities (IDU) are down 0.68% and 0.63% respectively.
I think this is partially because of the previous outperformance, as well as anticipation of rising yields (junk bonds are getting hit as well).
However, even if the higher-yielding stuff continues to get hit, I wonder if downward momentum in the safety stocks (dividend payers and utilities) will actually drive Treasury yields back down.
It's looking ugly out there thus far -- good luck.
One thing to note: a lot of companies have been filing for debt and/or equity offerings this week. Could they be rushing in to borrow before yields really spike?
Minyan Kyle sent me this note yesterday (unedited):
In a world where the corporate buyback charade drives equity prices higher - financed by bond issuance - one has to believe that higher rates don't help a continuation of the charade
That's something to think about...
Good morning - Spain and Italy's bonds and CDS are spiking higher. The levels are not as meaningful yet as the trend and speed of the retracement, but they are getting close to meaning something. The CDS of some large US financials have also bounced pretty hard off all time lows, and high-yield spreads have popped 25bps since Wednesday. Here the levels are nowhere close to being a problem, but again, the trend matters. Same can be said for the 2-year swaps, which earlier this a.m. touched 16bps. 15bps was the level to watch, so now we must really pay attention.
Given Wednesday sharp equity reversal, the concurrent crankiness of credit derivatives raises the first yellow flag over stocks since the Cyprus surprise.
Until and unless the S&P 500 takes out the Wednesday highs and/or credit derivatives take a turn for the better, we should assume a higher level risk in stocks for the near term.
As I have written and tweeted in the last several days, the single (if not sole) leg of the equity stool - the corporate bond market - remains as solid as ever. But that says nothing for potential corrections, and the sharpest corrections take place in bull markets. Not to spook anyone, but the 1987 crash was really just a 4-day, 30% correction in a massive bull move.
Back-to-Back, Chicken Shack
Yesterday, following a 7% haircut in Japan, stateside stocks put on a brave face. The price action, in my view and with 23 years under my belt, could be summed up in one word: fascinating.
The question remains whether, through a different lens, it might qualify as "denial," or the first in the psychological continuum of "denial-migration-panic" which is detailed further in The Three Phases of Leave.
What it did do is embolden the bulls and while this observation isn't back-tested, I've always been wary of "back-to-back" Snappers as the first session creates hope and the second one (the next day) often destroys it.
Goldman (GS) and Apple are trying to provide some upside leadership, yet breadth remains 3:1 negative.
S&P 1634 and S&P 1600 are levels to watch on the downside; S&P 1655 (yesterday's) high will violate the emerging pattern of "lower highs" (a sign of distribution), if and when.
It will get thin and thinner as the day wears on -- three day weekend and all -- so keep that in the back of your mind, and perhaps prepare for it by trading somewhat smaller than you otherwise might.
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