Archive for September, 2012

Weekly Recap & Outlook – 09.28.12

Friday, September 28th, 2012

Tower Private Advisors

 Capital Markets Recap

The first editor of the Wall Street Journal was Charles H. Dow (1851-1902). From editorials he wrote, what has been termed Dow Theory was distilled. According to the bible of technical analysis, Technical Analysis of Stock Trends, by Edwards and Magee, Dow, “did not think of his ‘theory’ as a device for forecasting the stock market, or even as a guide to investors, but rather as a barometer of general business trends.” Among other of its basic tenets is this one, the two averages, the Dow Jones Industrial Average and the Dow Jones Transportation Average, must confirm each other for a trend to be valid. For example, a 52-week high in the Industrials is unconfirmed (as an indicator of some trend) until the Transportation index also notches a 52-week high. As one might expect by the terminology, a trend is suspect until it ha been confirmed.

The thinking behind the notion of confirmation of the two averages was simple and elegant. If the Industrials was an indication of the strength of an economy, then there ought to be more goods being shipped; thus, the Transporation average should reflect that strength. Today, one could rightly argue that much our economy isn’t shipped, it’s downloaded, which is to say that, in a service economy, transportation isn’t a relevant indicator. Still, the concept continues to work, and, accordingly, ignoring the chart below may be done at one’s peril.

And here’s a closer look, with details added. The lower green circle marks a new high for the Industrials, but the next peak for the Transports wasn’t a new high, leaving the advance by the Industrials unconfirmed.

Maybe this is a perfect use of the Theory as envisioned by Charles Dow, as a general barometer of business conditions. It seems that most folks don’t think that the latest iteration of QE (Quantitative Easing) will have any effect on the economy (I disagree.) On that count, the Dow Theory seems supportive. In a sense, it’s saying, sure, the Industrials are up, but that move isn’t supported by strength in the economy. If it were, the Transports would be up, too.

Market participants should care, too, however, given the Theory’s tendency to be right. In that context, the Theory is saying the upward trend for stocks is not to be believed until it’s the Industrials average is confirmed by the Transports average, and it needs to advance by about 7.5% to do so.

The latest issue of The Economist featured a concise guide to Quantitative Easing, featuring a guide to investing under three possible scenarios. I agree with what’s expressed in it, so I call it a balanced look  at the phenomenon. Here is a link to the article, but it may require a subscription. The gist of the article is this:

  • Previous rounds of QE have had the effect of boosting stock prices “without boosting profits.” It’s what some guy from HSBC has likened to a “sugar high.”
  • On the other hand, QE may be underestimated, as “it is impossible to know what things would have looked like without the previous rounds of monetary stimulus.”
  • As for the effect on stocks–the pieces of electronic paper traded amongst market participants–”investors will be pushed out of low-risk assets into the stockmarket,” and that will push stock prices higher.
  • “The other asset class to benefit from previous rounds of QE has been commodities. This seems rational.” They would benefit from increased economic growth and any inflation.
  • There are three possible scenarios:
    1. The economy stays stagnant, inflation low.
      • “The right strategy in those circumstances would be to buy government bonds.”
    2. The economy recovers to pre-crisis growth levels.
      • “The right strategy then would be to buy equities.”
    3. Inflation accelerates rapidly
      • “In that case, buy commodities, especially gold.”


Maybe they don’t use the middle finger in Iran…

Short one this week…

Graig P. Stettner, CFA, CMT

Chief Investment Officer

Tower Private Advisors


Weekly Recap & Outlook – 09.21.12

Friday, September 21st, 2012

Tower Private Advisors

  • Troubling Volatility Index readings
  • Headline hodge podge



Weekly Recap & Outlook – 09.07.12

Friday, September 7th, 2012

Tower Private Advisors

‘running out of time on this Friday afternoon, but the Europeans moved closer to a solution this weeek, and you need to know about it.

The market had known that the European Central Bank (ECB) was to be meeting  yesterday, and high hopes had been placed on the ECB chief, Mario Draghi. He did not disappoint, as evidenced by market action yesterday. In short, the ECB addressed the issue of liquidity by announcing a plan to buy sovereign bonds to keep interest rates low. The central bank will buy the debt of nations whose interest rates are rising–the usual suspects of Spain, Italy, et al–and that buying will push interest rates down for that country. Even the idea of Mr. Draghi pursuing this option has pushed interest rates down in the aforementioned countries, as can be seen below.

Here are the salient points of the deal.

  1. No limit to purchases was mentioned, which means that the ECB will buy bonds until rates are below danger levels. The open-ended nature of the deal should serve to kneecap any bond vigilantes.
  2. The purchases will be sterilized, which means the ECB will offset purchases with bond sales from its portfolio. In turn, that means the ECB’s balance sheet, which had grown by 64% since March 2011, won’t expand any further, and the ECB can avoid charges of printing money.
  3. The countries whose debt the ECB buys will, by definition, be the countries with the worst fiscal pictures, and they’ll have to comply with “long-term fiscal solvency,” as BCA Research put it in a report today.

Notice the difference and similarity between the ECB and Fed actions. Both are intent on keeping interest rates low (similarity). The ECB, however, is trying to keep rates low so that overleveraged countries can continue to fund themselves by issuing debt. On the other hand, the Federal Reserve is keeping rates low to support the housing market and to push investors into riskier assets to affect the ec0nomy through the wealth effect (“gee, my 401(k) is bigger; I think I’ll buy a new car.”) The U.S. is trying to stimulate the economy; the ECB is trying to buy time for overleveraged countries.

Think of it this way. In the U.S., we experienced our Lehman Moment, when our markets and economy nearly siezed up entirely. Almost exactly four years later we’re still trying to jump start–sticking with the engine metaphor, we’re spraying ether into the carburetor–the economy. What the ECB is trying to do is to help all of Europe avoid its Lehman Moment (ours involved a company; theirs would have involved acountry.)

Some have called what the ECB did kicking the can down the road, but it really didn’t. It addressed a problem with probably the best means it had. This should keep interest rates low in those troubled countries–Greece, by virtue of item #3 in the deal above, may [is likely to] still go under, but market participants will have had ample opportunity to prepare themselves for it–thus, helping them avoid an illiquidity problem; i.e. their Lehman Moment.

What does make it seem like can kicking is that the underlying problems of the troubled countries have not been addressed. Spain and others are still in recession–as may be all of Europe; German, the strongest, biggest European country is struggling to avoid recession. Spain and the others are still hugely overleveraged. Those problems can only be fixed by growing economies. I’m guessing that about four years from now, the ECB will be seeking ways to stimulate its economies, having avoided its Lehman Moment.

That was the biggest reason for markets to rally this week.

Today might have been a heyday for conspiracy theorists, what with the big Nonfarm Payrolls Report coming out the same week of the Democratic Convention. Alas, it wasn’t to be, as the number of jobs created was just 96,000, well below the anticipated 130,000 and the prior month’s 163,000. So put that in your Trilateral Commission pipe and smoke it. There was a silver lining in the cloud, and that was in the form of the–headline-making–Unemployment Rate, which fell to 8.1% from 8.3%. It didn’t, however, come down for the right reasons. Indeed, while the number of unemployed folks fell by 250,000, the Labor Force shrank by 368,000. Those folks said, in effect, forget it, and in so doing they removed themselves from the counted.

It’s easier to understand from the employment side of the equation. The number of employed folks fell by 119,000, from 142,220,000 to 142,101,000…bad, right? But the labor force fell by 368,000, from 155,013,000 to 154,645,000. That’s bad, too. In this case, though, it seems that two wrongs make a right, because when you divide the numerator (142,101,000) by the denominator (154,645,000) you find the Employment Rate has risen, from 91.75% to 91.89%. Remember that while two wrongs don’t make a right, two Wrights make an airplane. 

In short, while the unemployment rate will be the headline, thus satisfying the conspiracy folks, it is not good. It fell because the labor force fell by more than the number of people employed.

Curiously, perhaps, that forces Ben Bernanke into the same position ECB chief Mario Draghi found himself a few days ago, with a lot riding on what he said. As a result of our soggy jobs report, investors are pushing up their expectations for Quantitative Easing round #3, some to as soon as next week. We have one research service that calls us if it sees its name here, so it’ll remain unnamed, but its report on this subject included the following in red bold type:  “the odds are very high the Fed will launch QE3 next week,” and Credit Suisse said, “the poor August jobs figures cement our view that the FOMC will vote for more policy accommodation at the September 13 meeting.”

While each round of quantitative easing has produced less spectacular results–otherwise known as diminishing returns–its like crack cocaine for an addict…a quick hit gets you by until the next.

Judging by the action in gold, that market is anticipating quantitative easing by whatever name. The chart below features gold in terms of Euros and in dollars. Both confirm the other.