Tower Private Advisors
- Bill Poole, former St. Louis Fed Governor
- Taxes – II: Soaking the Rich
- Completely fascinating for data junkies
- Google – a glimmer of hope?
- Markets setting up for hopes dashed? (they were)
- You won’t believe this
- Market action calls for defense
- Yields and alternatives to bonds
- Economics still soggy
- Plenty to spook markets next week
This is a rather long one. Look at the pictures. Read the underlined sections to get the gist.
Capital Markets Recap
Europe didn’t fare much better.
Here’s a weekly chart of the S & P 500 going back to 2007, that index’s all-time high. To it I’ve overlaid a Fibonacci retracement, where the crucial levels are dotted and dashed. Typically, rebounds–or retracements, as they’re called–will pause at those levels. On the rebound, those levels can serve as resistance that, if penetrated then serves as support, or if not penetrated, well, they stymie the advance.
The Fibonacci retracement levels have come into play a few times. Last Fall the 38.2% retracement level served as support. The 61.8% retracement level served as resistance in April (first circle), and the 38.2% retracement level again served as support in July.
Sometimes it helps to shift to a weekly chart to lose some of the noise in price fluctuations. For example, in the chart below and to the right, it looks like breakouts through the 50% retracement level failed, and, indeed, in the daily chart they did fail. In contrast, the chart that is immediately below shows that not once, on a weekly basis, did we close above the 50% level (the thin vertical lines shows the intra-week action, however.)
Here’s the bottom line for the market, as represented by the S & P 500: until we get a weekly close above 1121, we should remain defensive. For us, that means sticking with the consensus of our four key strategy services, which is a modest overweight to equities. A weekly close below 1013.78 would send us scurrying for the safety of cash.
Speaking of cash and scurrying, investors–more like speculators–are scurrying to bury their funds in ultra-low yielding Treasuries. The chart below shows the yield history for the 2-, 5-, 10-, and 30-year bonds.
The 2-year note reached an all-time low (0.51% . . . per year) last Friday. With the slightest whiff of inflation the yield is completely wiped out, losing money safely, as we heard it put today. Our 2-year Certificate of Deposit yields almost three times that much, and yet 1.50% annual inflation obliterates its yield. (The implied inflation rate for the next five years is 1.40%).
I picked up a comment somewhere that hedge funds are partly responsible for the drop in yields; they’ve supposedly piled into them. We can check out their positioning in Treasuries by looking at the Commitments of Traders reports that are published by the Commodity Futures Trading Commission. Futures participants of a particular size have to identify themselves as Commercials (i.e. basically producers; in grains these are the farmers, in securities, the banks) or Speculators (small or large). The Speculators–or Specs–are the hedge funds, and these groups tend to be trend followers. If they were responsible for the ultra-low yields, we could expect to see very large, net-long (i.e. short positions netted against long positions) positions relative to history.
In fact, as the chart below shows, we really don’t see that at all. Only in the 5-year Treasury are speculators at net-long positions. If anything, they’re betting that rates will rise.
Here’s an idea for an alternative to bonds. Why not find a rock-solid stock or two and just buy and hold them? I performed a screen on the Bloomberg looking for companies with these characteristics:
- Traded in the U.S.
- Greater than $2 billion market capitalization
- Total debt to total assets less than 10% (deflation will kill companies with lots of debt, but rolling over debt in an inflationary environment will push interest expense up)
- Altman’s Z-score greater than 3 (i.e. bankruptcy risk is remote)
- Current dividend yield greater than 3%
The table below shows what I came up, ten companies you’ll quickly recognize. Chuck out the technology companies, get rid of the fickle teen/tween retailer, and you’re left with Raytheon (3.36%), Genuine Parts, NAPA auto parts parent, (3.85%), Chevron (3.74%), and Intel (3.24%). Sure they could go down, but one could be buying bonds with interest rates near their lowest levels. A reversal of that could send bond prices into the tank.
Bloomberg indicated that a Goldman Sachs report pegs the odds of a double-dip recession at 25-30%. The folks at Goldie–even the economist types–are no slackers, so this shouldn’t be quickly dismissed. On the other hand, Niels Borh, a physicist, once said that, “prediction is very difficult, especially about the future.” (No, it wasn’t Yogi Berra.)
Cisco Systems repeated the second quarter earnings routine: beat estimates, issue cautious outlook , watch stock crater (-10%). Here are a couple of examples of analyst folly (both from the same analyst):
- 7/27: “Setting up for a stronger 2H”
- 8/12: “F2011 Expectations reset; buying opportunity”
And here’s another example of analyst silliness. Family Dollar Stores (FDO) has been a great stock. It’s up 55% in 2010, and one firm suggested Walmart should buy the company. One sage analyst, Neil Currie at UBS, decided that yesterday was the time to advise clients to buy the stock. He’s looking for a heroic move to $50, a snazzy 16% move.
Probably no surprise here, but a study by the U.S. authorities found that in “35 of 58″ Toyota crashes, brakes were not used.
This is the second anecdote behind the claim that auto dealers are clamoring for inventories: “Jaguar Land Rover asks Ford for more engines as demand surges.”
Nothing happy here
Not surprisingly, the NFIB’s Small Business Optimism index showed a further weakening. It’s still above the March low, so we’ll generously call it a correction in an improving trend.
Nonfarm Productivity fell by (-)0.9%, a full percent below the expectation and far worse than the upwardly-revised 3.9% in the second quarter. That’s good, at the margin of the margin, for folks looking for work, as improving productivity is the bane of those looking for work. Contrariwise, lowered productivity means that more workers are needed to maintain the same level of output. In fact, if productivity plummeted it would give fiscal stimulus a boost. Just imagine if the local road-paving job took double the current five-man crew to lay a mile of asphalt. Suddenly, you’re paying ten workers to do the same thing it used to take five to do. That’s it, if we could require steam-powered road-paving equipment, the stimulus would do a lot more for the economy.
The weekly release of Initial Jobless Claims didn’t show much change. It was up 2,000 from the upwardly-revised number from last week (482,000), but was far worse than economists expected (465,000). That didn’t help Thursday’s trading.
Consumer Price Index data did little to subdue fears of deflation. On a year-over-year basis, the headline index rose by just 1.2%, while the Core reading was up by just 0.9%. Deflation remains the current fear. Bloomberg disagreed with me, however, saying, “U.S. consumer prices rise first time in four months, easing deflation risk.”
Plenty to jolt the markets
Key indicators to watch
- Empire State Manufacturing index (August) – Monday
- Philly Fed index (August) – Thursday
- Leading Economic Indicators (July) – Thursday
- Initial Jobless Claims (weekly) – Thursday
- Producer Price Index (July) – Tuesday – anything that clarifies the __flation picture will be closely watched
- NAHB Housing Market Index (August) – Monday
- Housing Starts & Building Permits – (July) – Tuesday
Graig P. Stettner, CFA, CMT
Vice President & Portfolio Manager
Tower Private Advisors