Buzz on the Street: Responding to the Syrian Crisis, the Market Remains Volatile
A look back at the happenings on Wall Street this week, as seen by Minyanville's Buzz & Banter.
Here is a small sampling of this week's activity in the Buzz.
Monday, August 26, 2013
Following Up on Nominal GDP and Interest Rates
I received a lot of emails about my earlier comment on the relationship between Treasury yields and nominal GDP, so I thought it would be helpful if I clarified my thoughts with a chart.
My point is that when the 10-year Treasury yield increases "above" the growth rate of nominal GDP YoY from "below," the US has always gone into a recession. An example would be when the 10-year yield increases to 3% from 2% with nominal GDP at 2.9%.
I've always viewed the Treasury curve as a proxy for the demand for money, which means that either credit growth (loan demand, GDP) will follow the recent rate increase higher, or growth will fall because the cost of credit has risen too much, too fast. The second half of the year should give a lot more clarity on that subject. I am constructive that I am being too concerned because PCE (consumption) growth has picked up in recent months. The July consumption figure is due out on Friday morning.
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Clear and Present Markets: 8/26/2013
With the interns departed and kids headed back to school, it is time to delve back into the markets ahead of what I expect to be considerable volatility.
1. The WSJ homepage, this morning, tells a story of unsustainable spending. On the left side, you have headlines about the US role in the Middle East. On the right side, you have a story about transporting domestic oil.
It bears noting that as we prepare for a battle over the debt ceiling and the budget, the President's 2014 Budget calls for a 98% increase in income tax collections and a 25% increase in payroll taxes by 2020. I don't see how you can take another $1.3 trillion out of the consumers pocket without negatively impacting the economy, unless there is a commensurate increase in wages. In addition, since the individual will fund 80% of the government revenue, the country will have to better define its investment and spending priorities, and defense spending is a primary target. Throughout history, taxes on global trade have supported military expansion, and when military expansion outpaced the ability of taxes to fund that expansion, the economic, political, and military influence of the regime declined. This is why many nations are challenging the US politically and why we are debating our involvement in these actions. Our military is overextended, and we can't continue supporting our military to the degree we have in the past.
Oil is another segment in which we see unsustainable spending. Low interest rates have funded capital expenditures that exceed the cash flows from those investments, and many exploration & production companies have been forced to sell assets to fund drilling programs. As interest rates increase and fewer mid-stream assets are available to spin-off as MLPs, domestic oil production has to decline because the cash to fund that production comes at a higher cost. It is often overlooked how important low interest rates have been to domestic oil production, and one impact of a 3% yield on the 10-year Treasury is that capital intensive businesses will experience negative operating leverage as the cost of capital increases.
2. I have been expecting an increase in M&A activity, which has not materialized. The news of Amgen (NASDSAQ:AMGN) acquiring Onyx (NASDAQ:ONXX) brought this catalyst back on to my radar. Companies are at the limit of driving earnings growth through financial engineering of the balance sheet, and M&A provides another opportunity to drive growth by leveraging the cash flows of an under-leveraged competitor. Managers have been pretty disciplined, stating that prices are not attractive, but as Todd often says, "buyers are higher." As pressure builds on managers to deliver growth, M&A funded with cheap debt is another way to engineer growth.
3. Last week, a colleague and I were contemplating the future of the "big box" store, and the earnings of Dick's (NYSE:DKS) and PetSmart (NASDAQ:PETM) painted a stark difference in results and strategy. Dick's sales are traditionally volatile and have become more dependent on apparel recently. Dick's expects square footage growth to be the primary driver of earnings growth, and the company thinks services like return-to-store and ship-to-store will prevent Amazon (NASDAQ:AMZN) from disrupting its business model. PetSmart had much stronger results, which were driven by the growth in services like grooming, kennel, and training. PetSmart's use of services to drive traffic to the store ultimately helps them drive sales of items that might otherwise be purchased on-line. Coupling services with the traditional offering helps insulate the brick & mortar business from the on-line threat. Dick's is not doing enough to differentiate its experience. I would like to see Dick's take its service offering a step further, moving beyond hiring a golf pro and adding an ESPN Sports Science type experience, coupled with coaching (in a variety of sports), that makes the store a destination and drives both service revenue and other sales. There is entirely too much retail square footage in this country, and how it is utilized as on-line sales claim an increasing percentage of sales will determine the winners and losers.
Gold Gains Momentums
Gold is approaching its record high from 2 years ago. The action in miners such as Franco-Nevada (NYSE:FNV) exemplify the recent strength in the sector with Franco-Nevada stabbing through its 200 DMA six months after violating it in February.
See FNV for 2013 below with 200 DMA.
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Note Friday/today's strength was setup from a textbook backtest of a Rule-of-4 Breakout (a breakout over triple tops).
Tuesday, August 27, 2013
The Risk of Staycation
While I'm "off" this week, I'm spending the time with my family at our home--which means I'm only a few steps from my home office systems. A blessing and a curse perhaps, but either way, here are a few quick thoughts:
S&P (INDEXSP:.INX) 1640 matters on a closing basis; if we push through there on the downside, S&P 1600 and the 200-day at 1560 come into play through a technical lens.
Gold (NYSEARCA:GLD) has room to $1500 before it collides with the downtrend (technical resistance).
The specter of geopolitical unrest in the Middle East -- aside from it being an unfortunate evolution of social mood -- is on the margin constructive for both gold and crude.
Deflation is the other side of that trade, which makes both risky investments. See both sides.
I don't know JC Penney (NYSE:JCP) intimately, but I would think that once the Ackman overage works itself off, the stock has room to bounce.
Tapes that are weak all day (with breadth 2:1 negative or worse) tend to end that way BUT given how thin this week is (and will be), it won't take much to push an agenda (volatility is the opposite of liquidity).
Trading smaller "lots" is one way to address this dynamic; and of course, the ability not to trade is often as powerful as trading ability. Keep loose grips on those handlebars. September looms large on the horizon.
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Chart of the Day -- Russell 2000 and 2% Down Days
For today's chart of the day, we took the Russell 2000 (INDEXRUSSELL:RUT) year-to-date and plotted 2% down days for the index against it, marked by glowing red bars.
If you'll notice, every time the Russell 2000 fell 2% or more this year, the market was within range of an interim low.
Today, the Russell is down 2.3%, marking the biggest decline since June 20. Time will tell whether this signal holds again -- in the meantime, be aware that it isn't perfect as the bottoms weren't immediate.
Either way, a failure to rebound could within the next few trading days could indicate a change in character, especially if the S&P 500 fails to get back up above its 50 DMA, which has marked a key turning point numerous times this year.
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The Square of 9 Called It Right on This Stock
Around two weeks ago, we flagged the potential Apple (NASDAQ:AAPL) square-out at 512/513.
This was a big level since it was 540 degrees up from low. 540 degrees being a true square or cube (6 sides of 90 degrees = 540 degrees).
The Square of 9 Wheel continues to prove its value -- especially on those items that are widely watched, being part of the Street's 'spiritus mundi'.
Knowing the significance of 512 on AAPL not only would have saved/created financial capital but also substantial emotional capital, which is worth its weight in gold in this game.
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