More Airstrikes Announced… Markets Don’t Care

Last night, President Obama announced an expansion of the campaign against ISIS with targeted airstrikes in Syria. And as we have seen so many times over the past 10 years, the financial markets responded with a big yawn as if to say that, financially, nobody really cares.

Are investors being complacent or realistic?

My theory on geopolitical news is twofold. First, reaction depends on how solid a footing the markets are on. Cherry picking with the benefit of hindsight, in July 2006, for example, Israel and Lebanon were involved in armed conflict. Stocks peaked in early May and sold off roughly 10% to their momentum low in mid June before the fighting ever began. After a feeble market bounce, the news out of the Middle East took a turn for the worse in mid July and stocks sold off again with the strong tailwind of poor market underpinnings. Today, we have many of the major stock market indices close to all time highs on solid but not great footing, very different from a market that is already in decline.

The second way I form an opinion on market impact from geopolitical news is to take a worst case scenario and see what economic impact it might have. If Russia fully invaded Ukraine and then began to march into Belarus or elsewhere, the worst case scenario would be a return to a Soviet Union style dictatorship from a very large and resource rich economy as well as a modern day Cold War with the West. That would likely cause global markets to become unglued for a long period of time.

The worst case in Syria and/or Iraq with airstrikes and even limited group troops does not move the needle for our economy, let alone the global economy. Similar to when Assad used chemical weapons on his own people, certainly a horrific worst case scenario, global markets did not respond negatively for more than a few hours as there was not going to be any impact on the global economy.

From my seat, investors responded appropriately and realistically to the president’s speech last night. Complacency is already in our stock market judging from the extreme level of bullishness in the various sentiment surveys, but sentiment alone does not usually have a direct impact on stocks. There is usually a catalyst first.

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Don’t Fall Asleep

Over the past few weeks I have written that stocks seem “tired” or “in need of a pullback or consolidation.” Remember, stock market digestion can occur two different ways; one by price declining 2-5% or price simply moves sideways for an extended period. Right now, it looks like we are getting the latter as the S&P 500 has essentially gone nowhere for more than two weeks.

While all this boredom was occurring, we had a weak employment report, Russia/Ukraine cease fire signed and broken and QE Europe announced by the ECB, certainly lots of news to get stocks moving in some direction if they were ready. Eventually, the market will begin to move again with some significance and I would not be at all surprised if the first move fakes out the masses.

On the sector front much has changed over the past month when I had lots of trouble finding sectors that looked appealing. Now and maybe even more so in another week, most sectors look attractive in one form or another. While banks and energy are lagging and struggling, almost all other sectors look like they want to resolve higher.

I have spoken a lot about my bullish take on long-term treasuries for most of 2014 given the continued sub par economic growth conditions. Recently, however, bonds have had their issues and may need more weakness before the next rally can take hold.

I am keenly watching gold for signs of reversal and I think the shiny metal is getting closer, but as with bonds, it needs some work on the downside before a big rally begins.

Finally, there is this little company in Cupertino CA with the same name as a popular fruit that is unveiling its 6th iPhone any minute. Will the market care?

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Beware the Ominous September… or not

Each year at this time, we hear the pundits roll out the ominous stats regarding the stock market’s performance for September. “It’s the worst month of the year.” “Be careful.” “Do some selling.”

Those sound an awful lot like “Sell in May and Go Away.”

The thing about compiling market stats is that over decades and decades the averages tend to really smooth out. Additionally, much depends on when you begin and end your study. Further, if you add enough qualifiers to the study, you can make the results give almost any message you want.

Historically, on average over the past 100 years, September has been a weak month with stocks peaking during the first week and selling off to a low in mid October. That’s fact.

Ari Wald of Oppenheimer added a twist to this data. He found that when the S&P 500 was above its 200 day moving average (long-term trend) to begin the month, stocks closed higher by roughly 0.40% versus a loss of 2.70% when price was below its 200 day moving average. For what it’s worth, the S&P 500 closed August well above its long-term trend.

What’s my take as we head into the final month of the third quarter?

As I wrote here last week, stocks look a bit tired and in need of some rest. That rest could come in the form of price declining 2-4% or enter a small trading to refresh.

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Happy Labor Day!

As we say goodbye to the unofficial end of summer, this Labor Day remember those who helped build our great country and celebrate the achievements of the American workforce.
Wishing you a safe and enjoyable Labor Day filled with family, friends and cookouts!
 
Heritage Capital LLC

Stocks Looking a Little Tired

The bull market remains alive and reasonably healthy. I am still long-term bullish. I am still fairly bullish over the intermediate-term.

With that out of the way, stocks are looking a little weary at all time highs, which should not be totally unexpected. The market has powered higher all month and started to struggle a bit of late. At least for now, I think risk equals reward or perhaps even slightly outweighs reward.

To refresh the rally, stocks can either decline over the coming few weeks or enter a sideways trading range for a few weeks to a month. Should the market continue higher here without participation remaining strong, I would have more intermediate-term concerns. For now, a mild, orderly and routine 2-5% pullback would be very welcome.

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Treasuries Sneak Quietly into Favor

As you know, I have been a treasury bond bull almost all year, putting me squarely in the severe minority camp. 2014 began with the masses all forecasting much higher interest rates across the spectrum. Astute investors know that the masses are usually wrong, especially at major turning points.

Jeff Benjamin from Investment News continues to listen to my usually contrarian side of investing and wrote a great article which you can click on below. Keep in mind that this market has rallied tremendously and is certainly due for a pause or outright decline at some point sooner than later. The easiest money has already been made.

Treasuries Sneak Quietly into Favor

In a few minutes Janet Yellen speaks at the Fed’s annual summit from Jackson Hole Wyoming which happens to be one of the greatest ski resorts on earth. People say they go for the winter, but stay for the summer. Anyway, unlike her predecessor who used Jackson Hole to lay the ground for further QE, Yellen is likely to say absolutely nothing meaningfully new.

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The Fed has It Wrong with the Taper

This is certainly not new news for my readers, but I continue to be in the very lonely camp that the Fed is misguided in tapering the $85 billion in monthly bond purchases and they should totally hold off raising interest rates until our economy gets to the other side of the next recession.

As you know, we have been in the slow growth and no inflation camp for years, a theme we still have a high degree of confidence in, hence our very large position in long-term treasuries this year in our Global Asset Allocation program.

Yields on the 10 year note have hit our downside target of 2.5% and even stretched to almost 2.3% before reversing. In the short-term, yields will probably rise and then at least revisit the 2.3% area next month or later.

Below is the most controversial of the three segments I did with the good folks at Yahoo Finance last week. Enjoy!

Fed Has It WRONG

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Rumors of the US Dollar’s Demise Have Been Much Exaggerated

The second segment I did on Yahoo Finance last Thursday was not a new one for long time readers. As many of you know, I turned very positive on the US Dollar right about the time Bear Sterns needed a bailout in March 2008. That was long before any QE (money printing) began.

Historically, the dollar spent most of its life oscillating between 80 and 120 on the US Dollar Index, an index containing a basket of currencies with the majority of the weighting against the Euro and Yen.

When the economy is strong and interest rates are typically in an uptrend, the index rises and vice versa. Usually, the US Dollar Index in anticipation of a weaker economy and lower rates and bottoms in anticipation of higher rates and a better economy. Remember, this is all relative against the rest of the world, but primarily against Europe and Japan. Additionally, in times of international crisis, the dollar is typically viewed as a safe haven.

For the past 6 years, the greenback has and continues to be one of the most hated investments, especially by the general public. They very wrongly assume that printing $5 trillion would devastate the dollar as the doomday’ers would have you believe. I can’t tell you how many times I have heard pundits talk about the “plunging dollar” or how Ben Bernanke’s money printing continues to punish it. The truth is, the US Dollar Index has never been lower than it was in March 2008.

Anyway, I didn’t mean for this post to be this long and go on and on. The segment I did last week on Yahoo Finance is below.

Why the Dollar Bears Have Been Wrong for the Past 5 Years

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The Most Hated Bull Market Continues

Yesterday, I spent a jam packed, fun filled day in New York City with client meetings and media interviews. Although I don’t enjoy the commute in and out of the city, I do enjoy the hustle and bustle as long as the weather is good since I like to walk as much as I can. I absolutely hate taking dirty, smelly cabs that take forever to get around, but I will hop on the subway when I have to go downtown.

I began my day with the good folks at Yahoo Finance creating three controversial segments. Jeff Macke, my favorite regular host who loves to disagree, ride me and try to get me out of comfort zone was on vacation so Milanee Kapadia filled in and did a masterful job. I really enjoyed chatting with her. She has a way about her interviews that is unique in today’s fast paced environment.

The first segment is below and it’s certainly not new to my readers who know I have and continue to believe that this is the most hated and disavowed bull market of the modern investing era.

“Hated” Bull Market

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M&A Hot Means Market Not?

Merger and acquisition activity has long been a trusty sign of a maturing equity market cycle

By Jeff Benjamin

Jul 16, 2014 @ 11:55 am (Updated 3:54 pm) EST

Twenty-First Century Fox Inc.’s offer Wednesday to pay $92 billion for Time Warner Inc. is all the proof anyone needs that the M&A market is hotter than ever.

In mid-day trading, Time Warner shares were up almost 16% in an otherwise flat equity market.

As economic indicators go, merger and acquisition activity has long been a trusty sign of a maturing equity market cycle, which can now be added to a long list of frothy-market indicators.

The latest data from Intralinks Holdings Inc. show that 2014 merger and acquisition activity is on track for its first year-over-year increase since 2010. The estimated total of this year’s announced deals could be up as much as 10% over last year, according to Matt Porzio, vice president of strategy and product marketing at Intralinks. The company does not share data on numbers of deals, just movements by percentage.

“Now that we’re halfway through the year we can see what the announced deals are likely to look like,” he said. “The M&A market has been pretty much flat or down since the end of the financial crisis, but finally the announced deals will be up.”

According to the Intralinks Deal Flow Indicator, through June there was a 16% quarter-over-quarter and 12% year-over-year increase in early-stage global M&A activity.

The company’s forecast for increased activity in announced deals throughout the end of the year is based on due diligence activity that it monitors on its platform, which enables companies to quietly research and negotiate deals.

“The combination of a good lending environment and high quality assets and companies for sale are driving this growth,” Mr. Porzio said. “Deal volume continues to go up and we expect to see a good number of high profile deal announcements through the end of 2014, especially in sectors like manufacturing and telecommunications, media and entertainment.”

While M&A activity is a reliable indicator of market cycles and patterns, it doesn’t always translate well to investment opportunities, according to Paul Schatz, president of Heritage Capital.

“Merger arbitrage strategies are above most investors’ and most advisers’ pay grades,” he said. “But, typically, during the life of a bull market, seeing M&A activity steadily increasing suggests a maturing market, especially when the buyers are not paying with cash.”

In periods like right now, when equity market valuations are high and debt is inexpensive, acquisitions can be fueled by and easily financed with stock and debt, Mr. Schatz added.

“When money is so cheap, why pay with cash when you can float bonds and use company stock?” he said. “This is a normal progression of a bull market, but it doesn’t mean it will end tomorrow, just that it is progressing along.”

Joseph Witthohn, portfolio manager at Emerald Asset Management, agrees that the pace of M&A is strong and will likely get stronger as the economic recovery continues.

“I suspect all the recent activity is simply the case of companies realizing that they better get moving before some other company comes in, makes an acquisition and changes the playing field,” he said. “With the U.S. economic recovery appearing to be strengthening, not allowing competitors to increase market share becomes an even more important goal.”

Despite all the activity and indications of more to come, it remains a tough racket for most average investors, based on the performance of two of the highest-profile M&A-strategy mutual funds. The $2.5 billion Arbitrage Fund (ARBFX) has gained just 1% since the start of the year, while the $5.6 billion Merger Investor Fund (MERFX) has gained 2.8%.

Both funds, however, are “market neutral,” which means they are not expected to post outsized gains or significant underperformance.

Over the same period, the S&P 500 Index has gained 7.9%, and the market neutral category, in which the merger funds are categorized by Morningstar Inc., has gained 1.3%.