Posts Tagged ‘quantitative easing’

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

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Wkly Rcp & Outlook – 07.27.12

Friday, July 27th, 2012

Tower Private Advisors

Short one this week…

Capital Markets

 

 

 Equity markets rallied sharply from this week’s lows, and they’ve sustained the rally for two days. If I’m not mistaken, it also breaks a series of Friday declines. The reason for the rally is a general swing to optimism by investors on the comments of one man, European Central Bank chief Mario Draghi, who said–during our waking hours the morning of July 26th–that…

Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.

Those are pretty strong words, and the market took part of them at their face value. Unfortunately, the markets neglected two key things.

  1. The ECB and other figures in Europe have been long on talk; short on doing. So, while the ECB may stand ready to “do,” it has yet to.
  2. The phrase ”within our mandate” eliminates a few things. For example, “within its mandate,” the ECB cannot buy unlimited quantities of sovereign debt like our Federal Reserve can. The ECB can, however, provide unlimited liquidity to a bank. That’s a key allowance, in that the European Stability Mechanism, the ESM, is said to be the salvation for the European crisis. Indeed, our BCA Research service includes this as one of the final steps to–once and for all–ending the crisis, if not the underlying problem of not enough growth in over-leveraged, uncompetitive countries. There’s just one problem: the ESM isn’t a bank yet.

A couple of things belie the rally of the last two days. From the table above, one can see that Emerging Markets were down on the week, while they would be big beneficiaries of a healing of the Europe problem. Second, I did not confirm this, myself, but I had heard that sovereign bonds had not responded with as much vigor as the [what seem to me to be just oversold] stocks.

Gold responded as strongly as any of the major (i.e. non-country) equity indexes above, and that suggests that the notion of quantitative easing (in the U.S.) and the ESM becoming a bank (in the end, money printing, aka quantitative easing) are getting some traction.

Oh, and wouldn’t you think that an open-ended, final-answer promise to “save the Euro,” would have prompted a rally in…uh…the Euro?

This Week

Eight economic releases stood out this week. In chronological order…

  1. Richmond Fed Manufacturing Index – plummeted; went from -3 to -17
  2. House Price Index – better than expected; equal to prior figure
  3. New Home Sales – worse than expected; worse than the prior figure
  4. Capital Goods Orders – double what was expected; triple the prior figure
  5. Initial Jobless Claims – back to the lowest level of the last five years
  6. Pending Home Sales – fell sharply; worse than expected
  7. Second Quarter GDP – dropped from 1.9% Q1 pace to 1.5%; better than the 1.4% expected
  8. University of Michigan Consumer Confidence – virtually unchanged from prior figure

So the tally is four worse than before; two unchanged; two better than the prior release. Versus expectations, it was almost a flip-flop, where five were better than expected; just three were worse than expected.

It’s the comparison against expectations that allowed the Citigroup Economic Surprise index to turn up, and the stock market with it, as is on display below.

The whole money game is about expectations–from earnings estimates to economic forecasts. Those guesses about the future get priced into securities and markets, while actual results either surpass, meet,  or fall short of the estimates, leaving markets to recalibrate their assessments of securities, markets, and economies.

As can be seen from the top panel of the chart above, there is a pattern to economists’ estimates. They aren’t entirely a random walk. Instead, economists–for extended periods of time–consistently over or underestimate  the strength of the–in this case–U.S. economy. We’ve just gone through one of those stretches of underestimating the strength of the economy, and it appears that the economy is transitioning to a period of better strength than economists are expecting. That says nothing about whether the economy is strengthening, just whether or not it’s beating economists’ consensus forecasts.

Next Friday, we will see the release of what will arguably be August’s biggest economic release, Nonfarm Payrolls. From July 2011 through February 2012, the number of jobs added exceeded what economists had forecast, so economists ratcheted up their forecasts until the number of jobs started coming up short, and from March 2012 through July 2012, the number of jobs created was less than expected; i.e. economists have been too optimistic, and that has to be getting old.

As a consequence–as of today–economists think that 100,000 jobs will have been added to the establishment payrolls. They will revise those estimates through next Thursday, and the consensus estimate will likely change after Wednesday, when ADP releases its Employment Change index.

I’ve talked to a number of folks who believe in aliens who believe that everything is a conspiracy, and the conspiracy du jour is that the figures are all bunk (I don’t necessarily disagree, per se, but they’ve been bunk because they’re faulty measures for some time) and the White House will pull out all stops to ensure its present resident gets to renew his lease on one Pennsylvania Avenue set of digs. So, combine that with chastened economists who want to get a forecast right–they’ve been on the wrong side (optimism) and need to get on the right side (currently, pessimism)–and you’ve got a recipe for a positive surprise in the Nonfarm Payrolls–August’s biggest release–which kicks off the second half rally that is typical of election years. I’m just guessing, not promising.

Graig P. Stettner, CFA, CMT

Chief Investment Officer

Tower Private Advisors

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Weekly Recap & Outlook – 06.15.12

Friday, June 15th, 2012

Tower Private Advisors

Below

  • Markets expecting some Federal Reserve help?
  • Important Greek elections coming up

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Weekly Recap & Outlook – 06.01.12

Friday, June 1st, 2012

Tower Private Advisors

Below

  • Spain getting ready to circle the toilet bowl
  • A fix for emotion-driven investing
  • Lousy payrolls report

(more…)

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[Early] Weekly Recap & Outlook – 08.25.11

Thursday, August 25th, 2011

Tower Private Advisors

Below

  • Jackson Hole
  • Apple
  • Gold contest

(more…)

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