April 7, 2014
First of all, in case you were wondering, you would have had possession of this PTO Market Update last week however it only went to our HFT (High Frequency Traders) subscribers. The reason is the HFT subscribers pay a much higher price for early access to our information and prefer that we release to the public only after they (HFT) can front run the public with our market thoughts and analysis. We apologize for any inconvenience (loss of money) this may have caused you but we are doing our very best to insure that we maintain the level of price and data manipulation required of us by the Exchanges. Please address your complaints to Eric Holder at the DOJ …
Ok seriously, here is a summary of what we have been concerned about and what we have previously written in recent PTO’s:
1) Despite recent rounds of the Fed’s QE stimulus “tapering” (still $55B/month down from $85B), bonds yields are lower not higher as most would have otherwise expected. The bond vigilantes never surfaced with enough enthusiasm to stave off nervous equity capital seeking safer havens. Bond prices and yields are trapped in a range with prices holding lows and making new highs (inverse for bond yields).
2) The dollar is also trapped in a range with marginally lower lows and lower highs within the range. As we have been warning, a break below 79 in the dollar index will test the patience and nerves of any holder of dollar assets … especially those that are inherently leveraged. With the NYSE margin balances at all-time highs (above the highs of 2007), one could readily look for a substantial haircut to the equity markets.
3) Earnings and net margins have been decelerating for the past several quarters. We believe top-line growth and margin expansion (or contraction) will become more of the focus, and with increased prevalence, in the upcoming Q1 earnings announcements set to begin on April 8th with Alcoa kicking the season off once again. Be particularly focused on top-line or organic growth AND net margins vs. the headline earnings numbers that attract the attention of the talking heads!
4) Geo-political chaos. Putin vs. Obama, no match … Putin prevails with Obama in checkmate. The question is how much Putin will want to push the red-line with the Russian currency (Ruble) and the Russian economy coming unhinged. To say the least, the Germans and the whole of Europe are sitting on edge but maybe less so now that winter is past and their need for heating fuel has abated.
5) The “dip buyers” have been increasingly buying shallower dips for fear of being left behind thus exposing themselves to ever smaller “corrections”. Even those purchasers whom have previously “bought badly” (at higher highs) have counted on being bailed out as the market marches to yet again higher highs. What happens if it doesn’t and when do the “Johnny-come-lately’s” puke out (some literally and some figuratively)?
6) Along with the aforementioned, is the crowd that suggests “there’s nowhere else to go”, collectively chanting “be long and stay strong equities”. We have been preaching, perhaps to deaf ears, that cash ain’t bad especially if you can get paid to own it (low or zero duration bond strategies).
7) The equity markets have been trapped in a choppy range at or near all-time highs in most indices. IPOs can’t come out fast enough and several reverse lower than their opening prints within relatively short time periods. The high flyers (aka, highly leveraged) such as the Russell 2000, the bio-techs, pharma including medical equipment makers and the “change the world” heart throbs (Tesla, et al) have been taken out to the shed of late for a beating. We’re not suggesting that they might not make another stratospheric challenge, but we are wondering if the crying towel might get thrown in … and if so, is the baby (large cap) wrapped in it?
8) Pay closer attention to stock repurchases and stock splits. The former (repurchases) is a “cheap” way, with the low cost of borrowing to corporate America, to dress up their EPS’ whilst keeping happy their non-suspecting investing public. The later (stock splits) is corporate America’s version of “buy one and get one free” sales with the buyer owning two of something they may not need or may not want.
9) Real price discovery is all but a figment of the past due to the massive amounts of intervention and flat out price manipulation by the world’s central bankers courtesy of the US Fed as the proverbial band leader. Stimulus, money printing and other various forms of “pushing on a string” with an effort to borrow ones way out of debt will eventually end in tears. The only question is when, by what catalyst and how dramatic the collateral damages will be (more on this in subsequent PTO’s with preference to HFT’s of course).
We tried to get a “top ten” list but we felt that you are sufficiently depressed by now so we will end now … whoops, except one last repeated caveat. We strongly feel that Yellen, and the remainder of the academics at the Fed, Treasury and leading world monetary central planners, will be tested with a real world crisis. We continue to feel that the Keynesian socialists will be stunned into paralysis like a deer in the headlights of an oncoming eighteen wheeler.
Ronald M. George
William J. Taylor