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Capital Markets Recap

Top Stories

A collection from this week’s daily CFA Smartbrief…

• A survey of readers of the Smartbrief showed that 39.1% are concerned about “significant inflation arising within the next thre years;” 19.6% think it’ll take more than three years; 13.8% say there’s “no risk of significant inflation at this time;” and just 5.8% see it being an issue in the next 12 months.
• Apparently, there is starting to be some concern amongst the Fed’s members about continued bond buying, and a push seems to be developing to end the purchases before the Fed’s targeted 6.5% unemployment rate is reached. (Minutes word cloud below.)
• In what I think is the equivalent of an electronic corkboard, Pinterest appears to be valued at $2.5 billion!
• “Obama warns of harm to economy if sequester takes effect.” GASP! Funny that he championed the sequester at the time.
• A spokesman from the ECB expects the Eurozone economy to improve in 2013
• Office Depot and OfficeMax are apparently hooking up in an effort to combat Staples’ strength.
• John Mauldin has referred to Japan as a bug in search of a windshield. That was more evident this week, as that country’s leader asked the President to allow natural gas exports to Japan, whose power production has been greatly curtailed what with its shuttered nuclear power plants.

This Week

The minutes from the January meeting of the Federal Open Markets Committee were released this week. The word cloud of the text is below. As usual, the Fed wiseguys are concerned about inflation (wishing for it?).

A slew of housing data was released this week. The National Association of Homebuilders saw its eponymously named index decline by a point (47 v. 46) and come up two shy (46 v. 48) versus expectations. The decline was  a result of lower prospective buyer traffic. Housing Starts declined by 8.5% over December, while Building Permits continued to climb higher. The former doesn’t look like a significant setback.
 

The desire to keep this budding housing recover–it’s been budding for quite a while–alive is one major reason the Fed won’t allow rates to rise significantly. I wish some government smarty-pants would take the same approach to gasoline prices. I was sorta liking paying $3.25 a gallon. I’m all for free markets and all of that, but this is crazy…+18% in two months? What about that boom in U.S. energy production?

This prolly explains some of it. U.S. refineries are operating well below average and at some of the lowest capacity utilization levels on record.

It looks like the speculators have had considerable influence on gasoline prices. The small and large speculators–as distinguished from the producers, who are considered the hedgers, as they’re hedging the prices of their production–have nearly record long positions in the unleaded gasoline. (The small speculators–typically, the dumb money–do have a record short position.) Meanwhile, the producers have a near record short position. I foresee lower gasoline prices in our future. Chart below courtesy of SentimenTrader.com.

 Next Week

Key indicators to watch

• Chicago Fed National Activity Index
• Q4 GDP – second iteration
• Initial Jobless Claims

Housing indicators

• Case Shiller Home Price Index
• New Home Sales
• Pending Home Sales

Regional activity surveys

• Dallas Fed Manufacturing Activity
• Richmond Fed Manufacturing Index
• NAPM – Milwaukee
• Chicago Purchasing Managers Index
• Kansas City Fed Manufacturing Activity

Graig P. Stettner, CFA, CMT
Chief Investment Officer
Tower Private Advisors

Tower Private Advisors

A really short one this week…

Everything’s okay as long as everything’s okay. Well, it’s not as poetic as c’est la vie (such is life) or que sera, sera (what will be, will be), but Europe looks okay so long as Europe looks okay, which is to say it ain’t fixed yet. Yields rose and stocks fell in Spain and Italy, as the former reeled from allegations that senior government officials benefited from some sort of slush fund; in the latter, crackpot Silvio Berlusconi’s surge in PM polls upset markets there.

In the U.S., markets shrugged off those worries, with only the S&P 500 declining on the week, and that just barely. Here, we are awash in enthusiasm. Stocks saw record inflows in January, and there is increasing talk of investors finally coming back to equities. Unfortunately, January is always a big month for equity inflows, and this January was probably an exceptional one, as investors who rushed to sell before the inevitable fiscal-cliff induced capital gains tax rate increase now were flush with cash to invest. It’s likely that the record inflows reflected some of that reinvestment.

One survey, conducted by the National Association of Active Investment Managers showed a record level of enthusiasm for stock, as is shown below. It showed managers 104% invested, meaning they were using leverage to get additional exposure. That was last week. This week’s survey showed a drop to a still-quite-elevated level of 94% invested. What I didn’t see mentioned regarding the survey is the near-record drop in the number of participants that week. Maybe that left the lunatics running the asylum–and it’s not to deny that enthusiasm is running quite high; it is.

Graig P. Stettner, CFA, CMT
Chief Investment Officer
Tower Private Advisors

Tower Private Advisors

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• Take a survey
• Tepid employment report

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Tower Private Advisors

Capital Markets Recap

Stock markets certainly seem invincible of late, shrugging off all challenges. That’s reflected by a low Fear Index, another name for the VIX index, the 30-day forward volatility implied by option prices. Historically, a low VIX has been associated with a top in stocks…but not always, as the chart on display, below, shows. Low VIX readings in the last few years–more importantly, reversals from them–have marked short-term tops in stock prices, and the current reading is the lowest since…[cue Jaws music]…2007, but there was almost a three-year period when the VIX was lower than it is now. There other signs of some danger for stocks, the current rally is the longest since one in 2007 where we’ve gone without a 10% or more correction. Sentiment, as measured by various polls of different groups of investors, however, isn’t yet all steamed up. For now, enjoy the ride.

Top Stories

• House suspends national debt limit – the irrelevancy of Congress continues…until the chickens come home to roost
• Germany is repatriating gold from the U.S., as it intends to store 50% of its gold reserves within its borders. A survey of CFA Smartbrief readers indicated that most (36.25%) see it as a move by Germany to prepare for a systemic crisis. Gold bugs are atwittter.
• A financial transaction tax is moving forward in Europe; getting some air time in the U.S. In addition to punishing those nasty banks and hedge funds–i.e. the 1%–a financial transaction tax would slow down High Frequency Traders (HFT), who get blamed for everything from flash crashes to global warming (kidding). I’m unclear how it works, but one or both parties to a financial transaction (i.e. trade) would pay a tax, raising the cost of those transactions. Increased costs lower activity; thus, trading slows down. According to our friends at Strategas Research Partners, Treasury Secretary Timmy Geithner has opposed the tax, but his “more left of center” replacement might be supportive of it, especially since he’s NOT from Goldman Sachs.
• If you haven’t heard, U.S. shale oil and gas have the potential to make the U.S. energy independent in some years. The Algerian oil field terrorist attack and subsequent bloody attack by the Algerian government forces might encourage some foreign operators in Algeria to shift to the U.S., where we have a tendency to not take over things other than, like, city parks.
• In the category of, are you kidding, Joe Biden might be gearing up for a 2016 run at the White House.

Oops

• Apple shares fell by 10% on disappointing iPhone sales. That monstrous Samsung Galaxy screen seems to be winning fans.

Yippee

• The General Accounting Office–does that sound British, or what–says that the Dodd-Frank Act is “less than half implemented.”

Investment products

• Oaktree and Rivernorth are launching a high-yield bond mutual fund. The RiverNorth/Oaktree High Income fund will invest in closed-end funds and high-yield bonds and bank loans. Only a little bit late to the party.
• First Trust will launch two of the more popular flavors of ETFs these days: an Enhanced (oooo…) High Income Fund and, naturally, an Enhanced Low Beta Income ETF. The time for high-income funds is not when income is low, nor is the time for low-volatility funds after the high volatility has already been visited upon markets.
• John Hancock–no, not him; the company–is looking to use derivatives in an actively-managed ETF. Of course, it will only use derivatives to reduce risk.

This Week

There hasn’t been much in the way of economic releases with one day left in the week. There are starting to be some troubling developments in the regional surveys conducted every month by several of the Federal Reserve districts. This week, the Richmond Fed Manufacturing Index was released, and instead of the expected +5 reading (i.e. expansion in the sector) it came in at -12. Now, this sucker clocked in at -42 back in early ’09, so there’s no need to make a recession call, but other than a lower July 2012 reading (-17) this is the lowest it’s been since 2009. It doesn’t take a sophisticated data analysis package to determine that the direction for the major Fed surveys is decidedly downward. Where that ends up is anyone’s guess.

Have you noticed that mortgage rates are sorta low? Here’s the current sign in our lobby, which advertises the 15-year mortgage rate.

The weekly Mortage Applications index was out this week, as usual. The index jumped by 7%, following a 15% jump last week. It’s hard to imagine that there’s anyone who hasn’t refinanced yet, but in fact, the average 30-year national mortgage rate is a percent lower than it was at the end of July 2011. Roughly speaking, anyone who refinanced prior to July 2011 can save at least 1% on his or her mortgage rate. Shameless plug: click here to send an e-mail to Tower mortgage ace, Nathan Willis, to find out current rates. So, there’s plenty of room for the refi boom to continue. And, at long last, the Purchase Index–mortgage applications are divided amongst refinances and purchases–is perking up. It’s making 3-year highs, as there seems to be something to this housing recovery thing.

Next Week

Key indicators to watch

• Durable Goods Orders
• Q4 GDP – our first look
• FOMC Rate Decision
• Personal Income, Spending, and Saving
• Initial Jobless Claims

Housing

• Pending Home Sales
• Case-Shiller Home Price Index

Regional

• Purchasing Managers Index – Milwaukee
• Chicago Purchasing Manager index