Here's a small sampling of the 120+ posts seen on the Buzz & Banter this week:
Monday, June 9, 2014
Fed May Need to Cut Reserve Rate
On Friday afternoon, Fitch released a warning that the European Central Bank (ECB) deposit rate cut may increase deposits by European banks at the US Federal Reserve. Minyanville contributor Vince Foster circulated the idea on Friday (June 6) that raises a potential moral hazard for the US Fed in which it may be baring the cost of the ECB deposit rate. Currently, foreign banks own 49% to 50% of total excess reserves from the Fed through their US subsidiaries. Because banks currently earn -0.1% on their reserves in Europe and 0.25% on their US dollar reserves, this leaves the door open for an arbitrage trade. These banks could withdraw their reserves from the European market and instead offer a similar amount of reserves in the US to the Fed through the Term Deposit Facility (the current rate is 26 to 31 basis points) and earn an approximately 40-basis-point spread. Even hedging in the cross-currency risk by locking it in through term forwards, this is a profitable trade, and they can then re-invest that cash into US assets or use the cash for lending. In the case of depositing those reserves at the Reverse Repo Purchase Facility (RRPF) (at five basis points and probably higher), they can reuse that collateral.
The takeaway is that this might cause the Fed to lower its Interest on the Excess Reserves (IOER) rate to avoid the moral hazard, which would be viewed as a dovish sign by the market. The most likely assets to see a benefit from this would be front-end Treasuries and US stocks.
Beginning with Friday's close, I modeled the expected total return for a 2-year US Treasury note. Currently, the annual rolldown for a two-year note is 30 basis points (five basis points for two months). Should the Fed lower by 10 basis points, to 15 basis points or to an absolute level of, two to five basis points (a marginal level to allow banks to fund their excess reserves), this could lower the two-year note by six to 10 basis points. Taking the larger edge of that range would make the two-year (or a 22-month note) worth 25 basis points in two months, or a 2.06% pre-tax total return.
I'll be watching the EURUSD (EURUSD) basis swap (the shortest term is three months) to see if any of that activity is showing up. On Friday, I saw it gap up by three basis points.
Some are worried that because of European banks doing this arbitrage trade, it will shrink the amount of external financing dollars available and thus push up the price of the dollar versus a number of emerging market Latin American currencies. Perhaps.
Tuesday, June 10, 2014
Investors "Like" Social Media Stocks
Charts included below are of Facebook, LinkedIn, SOCL, Yelp (NYSE:YELP), and Twitter (NYSE:TWTR).
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Wednesday, June 11, 2014
The following is an example of an intraday update and alert sent to subscribers of the Daily Market Report [subscription required].
Following a turndown in its 3-Day Chart, First Solar (NASDAQ:FSLR) is pivoting off its 20 DMA this morning in the face of market weakness. I will look to add to my pilot long swing position on the first intraday pullback this morning. The real challenge for First Solar, will come from a challenge of its $65 strike, which coincides with a backtest of its 50 DMA, especially as there are a series of lower highs since March outstanding. A breakout over a trendline connecting these lower highs would be bullish, triggering a Rule of 4 Breakout. I will update.
Below, see a 10-minute First Solar chart for the week with its 20 DMA and a daily First Solar chart from March with its 50 DMA.
Click to enlarge
Click to enlarge
Thursday, June 12, 2014
Discretionary Vs. Staples -- A Trend Worth Watching
Periodically, I perform a basic relative performance exercise using the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) and the SPDR sector ETFs to make sure that I have a firm grasp of what's actually moving below the surface.
As it stands now, the big theme in 2014 has been a big de-risking.
Utilities (via Utilities SPDR ETF (NYSEARCA:XLU)) was the worst performing sector in 2013, and it has been the best performing sector in 2014, up 11%.
On the flip side, consumer discretionary (via Consumer Discretionary SPDR ETF (NYSEARCA:XLY)) was the best in 2013, and it is the worst this year. Meanwhile, consumer staples (via Consumer Staples Select Sector SPDR ETF (NYSEARCA:XLP)) is outperforming discretionary this year, with a 4.8% gain.
That's a trend worth watching.
The discretionary index essentially tracks the thing people want, with major holdings like Amazon (NASDAQ:AMZN), PriceLine (NASDAQ:PCLN), and Nike (NYSE:NKE). Staples are the things people need, with heavy concentrations in names like Procter & Gamble (NYSE:PG), Altria (NYSE:MO), and Colgate-Palmolive (NYSE:CL).
I created a long-term chart to show the SPY against the relative performance of discretionary to staples (calculated as XLY/XLP and shown on the blue line).
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As you can see, the past two bear markets were preceded by a drop in that XLY/XLP relative performance.
The market could be in the early innings of a third big break this year. This isn't necessarily cause for emergency -- there have been similar breakdowns during the uptrend that started in 2009. But put it on your radar screen as something to monitor.
Click to enlarge
Friday, June 13, 2014
Oil Hits Target
As I posted yesterday morning (June 12) [subscription required] on the Buzz & Banter, CL (crude oil futures) had risk to $107.75. The overnight high was $107.68, so that target has been achieved. Should crude oil futures close above $107.75, risk moves to $112.50, but that would be catastrophic as it should imply a move much higher to between $122 and $123 since $112.50 has been hit three times since 2011 and is weakening as resistance. Support is at $105.20. Right now, being long crude is ill-advised unless it closes above 107.75.
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