Wednesday, May 13, 2015

The Morning Call---The pin action in the bond market still a concern

The Morning Call


The Market

The indices (DJIA 18068, S&P 2099) fell again yesterday, though they did recover from major early losses by the end of the day.  Both remained above its 100 day moving average; and both finished below their trend lines connecting lower highs---putting them back in sync with respect to those trend lines.

Longer term, the indices continue to trade well within their uptrends across all timeframes: short term (17149-19946, 2012-2993), intermediate term (17296-22411, 1816-2589 and long term (5369-18873, 797-2132).  

Volume rose slightly; breadth was mixed.  The VIX was up fractionally, but closed below its 100 day moving average, below the upper boundary of a very short term downtrend and within a short trading range---all a plus for stocks. 

The long Treasury inched higher after taking a beating on Monday.  The bounce was not surprising given that it ended Monday’s trading near the bottom of its short term downtrend.  That was helped by a short covering rally after central banks stepped in big to yesterday’s Treasury auction.  TLT remained below its 100 day moving average.

What is driving the bond market? (short):

            And (short):

            A bull on the bond market (medium):

Fighting the Fed (medium):

GLD lifted a tad, but still closed below its 100 day moving average and continued to build a head and shoulders formation.  This chart is still ugly.

Oil rose and closed back above the upper boundary of its short term trading range for the second time.  The lack of success of the first challenge suggests that follow through may be tough to come by; that said, a challenge to the upper end of the trading range lends more credence to the notion that oil has found a bottom and is building a base.

Bottom line: the technical picture remains somewhat confused as the indices continue to churn between the ever narrowing range separating their 100 day moving averages and their trends to lower highs.  I said before that a break has to come because the trends are converging.  I have no idea which way that will be but (1) the risk reward at this point is in the favor of risk and (2) if the Averages break up, I believe that the upper boundaries of their long term uptrends represent formidable resistance.

The latest from Stock Traders’ Almanac (short):

Yesterday’s minor uptick notwithstanding, the recent waterfall formation in bond prices is concerning.  At current levels, TLT could experience a nice rally and never get out of its short term downtrend.  So we need a lot more momentum to the upside before the long bond price even stabilizes.

            I can’t remember the last day in which multiple economic releases were made and they were all positive: month to date retail chain store sales, the April small business optimism index and the April US budget surplus were all ahead of expectations.  Of course, one day does not a trend make; but I will take good news anyway I can get it. 

            Two points:

(1)   while I discounted the impact of weather and the west coast longshoremen’s strike on first quarter numbers, it doesn’t mean that they had no impact.  Some improvement was almost inevitable.  That said, when fourteen of the last fifteen weeks having witnessed a steady stream of disappointing economic stats, it is going to take a lot of  progress just to get to a flat economic performance,

(2)   which brings me to my second point and that is, our downward revised economic forecast was not for a recession; it was for a lower rate of growth.  In order to get that, we need better data or I will have to lower the outlook to a recession.

***overnight, the DOJ is contemplating ripping up an agreement not to prosecute UBS for rigging interest rates

No economic releases from overseas, though Greece continues to generate headlines. As I reported yesterday, Greece did manage to repay the E750 million loan from the IMF; but only by doing some fancy footwork, drawing on reserves at the IMF which has to be repaid in 30 days.  In short, that is a one-time measure that in effect digs Greece into an even deeper hole since it has used up one of its sole remaining assets and left its liabilities unchanged---quite a financial feat; sort of like burning down your uninsured house but still having the mortgage.

To make matters a bit worse, the IMF told the Troika it no longer wished to participate in the bail talks---probably a temper tantrum over the ECB unwillingness to accept any haircuts on the loans to Greece.  Whatever the reason, it will make an ultimate bailout agreement all the more difficult.
            The latest from Greece (medium):

            Greek creditors seeking E3 billion in budget cuts (medium):

            It turns out that there is a Plan B for a Grexit (medium):

            ***overnight, first quarter eurozone growth rose while Chinese industrial output, retail sales and fixed asset investment were all below estimates.

Bottom line: the economic data finally showed some improvement.  Partly it was inevitable; partly it was absolutely necessary, otherwise the absence of progress in the April figures would suggest that our revised 2015 GDP growth estimate might still be too high.

The Greek bailout negotiations remained as confused as ever.  Yesterday’s repayment of the IMF loan was hardly a positive, in that the country now has E750 million fewer assets (but the same amount of liabilities) to help it through the current crises.  Given the eurocrats proclivity to kick the can down the road, I have no clue when or how this situation resolves itself.  But I have little doubt that the longer it goes on, the more painful the outcome. 

 I can’t emphasize strongly enough that I believe that the key investment strategy today is to take advantage of the current high prices to sell any stock that has been a disappointment or no longer fits your investment criteria and to trim the holding of any stock that has doubled or more in price.

Bear in mind, this is not a recommendation to run for the hills.  Our Portfolios are still 55-60% invested and their cash position is a function of individual stocks either hitting their Sell Half Prices or their underlying company failing to meet the requisite minimum financial criteria needed for inclusion in our Universe.

            Has sales growth peaked (short)?

      Investing for Survival

Is It Time To Move Wealth Outside Of The Financial System?


·         How negative interest rates change the game.
·         How one safely stores and insures cash privately.
·         How safely stored cash can be a better investment than negative interest rate bonds.
We are experiencing an unusual phenomenon in the financial world at present, that being negative interest rates. Professors in economics and finance were teaching students as late as 2007 that the absolute bottom for interest rates would be 0%. Yet at the height of the 2008 financial crisis, interest rates on 1-month T-bills fell below 0% for the first time in history. Now, negative interest rates are becoming more common. The extreme case as of the time of this writing is the 10-year Swiss bond, which peaked at -0.28%. Some bond investors are comfortable with these negative rates because they feel interest rates will go even lower, enabling them to sell the bonds at a higher price. However, an average investor seeking no risk is unlikely to accept a bond with a negative interest rate. With safe haven investment now costing the investor, options outside the conventional financial system become a viable option.
When people think of storing cash outside of the financial system, it brings to mind images of storing cash in a mattress, cookie jar or other home hiding places. Having known someone who left a large amount of silver in an attic after selling a house, I'm not advocating this approach. Assuming an investor exhausts the $250,000 FDIC insurance deposit limit (or mistrusts the FDIC's ability to pay), one alternative worth considering is a safe deposit box. A box large enough to hold $1 million in $100 bills can be rented for about $200/yr. While banks themselves will not insure the contents of a safe deposit box, insurance on a box's contents can be purchased for up to $1 million in valuables. This $1 million in insurance can be purchased for as little as $2,000/yr. Hence, having a fully insured $1 million in a safety deposit box costs about $2,200, the equivalent of an interest rate of -0.22%. This cost compares favorably to the 10-year Swiss bond at -0.28% mentioned earlier. And unlike this Swiss bond, whose principal is locked away for 10 years, the assets in a safe deposit box are only locked away until the time the box holder decides to remove them.
Today's unique financial environment of negative interest rates creates both the temptation and the opportunity for cash hoarding outside of the conventional financial system. Admittedly, in just about any other time in history, this would be an unwise financial strategy. Even now, this approach best fits those who need to protect amounts that are insurable by private insurance but not the FDIC. However, if these negative interest rates are the indicator of a bond bubble, and some of the more dire predictions about the world's financial state come to pass, cash in a safe deposit box protected by private insurance might prove to be a critical and secure asset.
            Bonus read: 27 health tips backed up by science (medium):
      News on Stocks in Our Portfolios

   This Week’s Data

            Month to date retail chain store sales improved versus the comparable period a year ago.

            The April small business optimism index was reported at 96.9 versus expectations of 96.0.

            The April US budget surplus was $156.7 billion versus estimates of $153 billion.
            Weekly mortgage applications fell 3.4% while purchase applications were off 0.2%.

            April retail sales were unchanged from March versus forecasts of up 0.2%; ex autos and gas, they were up 0.2% versus consensus of up 0.4%.

            April export prices declined 0.7% versus expectations of an increase of 0.1%; import prices decreased 0.3% versus estimates of a rise of 0.4%.


            Household debt increased slightly in the first quarter (short):



Mohamed El Erian on political polarization (medium and a must read):

Obama loses first round in Trans Pacific partnership trade talks; and here is where the objections are coming from (long but a must read):

  International War Against Radical Islam

            Iran sends naval escort for ship carrying ‘humanitarian’ aid to Yemen (short):

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