Archives for September 2013

Oversold and Looking to Bounce

Stocks continue to feel the hangover from the post Fed no taper party as well as Larry Summers stepping aside. While the Russell 2000 Index of small caps briefly saw all time highs today, the other major indices remain in pull back mode. This all seems very healthy and routine and I would expect another leg higher in the bull market after this period of weakness ends over the coming 2-7 weeks.

In the very short-term, stocks are oversold and are supposed to see a few days of bounce. If they cannot get going by the end of the week, the market should see a deeper decline as we head into October.

Although brief, here is my segment from CNBC on Friday where I spelled out my views.

http://video.cnbc.com/gallery/?video=3000201140&play=1

The lack of taper by the Fed has been all the buzz. Does Bernanke know something? Is there a conspiracy? Is he really coming back as Fed chair?

Dow Jones Shakes Up Industrial Average

Last week, Dow Jones, the keeper of the popular stock market indices Dow Jones Industrials, Transportation and Utilities, had a major shake up in their most widely watched Industrial Average. Being thrown out are Alcoa, Bank of America and Hewlett Packard. On the other hand, Goldman Sachs, Nike and Visa are coming on board.

On the surface, this makes all the sense in the world as Alcoa has been a stodgy old aluminum company while B of A and Hewlett are kind of boring and old fashioned. Oh yeah, and all three have cheap share prices. Let me repeat that in a different way; all three are lower priced stocks. Unlike almost every other popular stock market index, Dow Jones weights each company based on price. So the more expensive the stock price, the more impact on the index. The three downtrodden now account for roughly 2.5% of the index.

With GS, NKE and V trading around $168, $68 and $190 respectively, the divisor for prices move in the Dow just changed significantly. That means the index should have bigger price moves simply because the components have higher share prices. Think of it this way, is it easier for an $8 stock like Alcoa to move $1 or $190 stock like Visa? Of course, it’s Visa by a wide margin.

Now comes the fun part. On the surface, you should conclude that Dow Jones is throwing out AA, BAC and HPQ because they no longer represent our economy as the index intends to and by replacing the with GS, NKE and V, the index is more representative of the economy. I cannot argue with that conclusion.

HOWEVER, I do find it “curious” when Dow Jones reconstitutes the index every few years that we usually see higher priced shares coming in to make it much easier to move the index. Given the Dow’s popularity as the bellwether for what stock market is doing, this change adds some strong juice to get the Dow moving. Wouldn’t it be amazing if this change helped the Dow exceed 16,000 and beyond next year?

Bernanke’s Worry Lines & CNBC’s Closing Bell

I will on CNBC’s Closing Bell today, Friday, at 4:00pm discussing the lack of any taper from the Fed, what they see that the masses don’t and where the markets are ahead.

Earlier this week in Street$marts (click on link to see) and on my blog, www.investfortomorrowblog.com I spelled out the three scenarios that could result from the Fed meeting. While I did not believe any taper was warranted, the market was expecting a token $10-$15 billion. When Bernanke & Company did nothing, risk assets soared, almost as if the heroine addict was given a reprieve from going to rehab.

In my view, the Fed clearly sees something that the masses do not and I have long argued that the markets and economy cannot stand on their own two feet without support. With Janet Yellen (thankfully) seemingly a shoe in to succeed Bernanke, it will be interesting to see if the Fed even tapers at all before she takes office in January.

The Fed’s lack of stimulus reduction does little to change my intermediate-term outlook. It does not make me any more bullish than I already am. I continue to believe that after the next pullback which I expect over the coming 4-8 weeks, stocks should rocket to fresh all time highs well north of 16,000 during the first quarter of 2014.

Regarding bonds as I have written about before, I was waiting for the taper to signal an all clear to buy bonds because negative sentiment had risen to record levels. Anyone even thinking about selling would have done so. It would have been the classic case of the selling the rumor and buying the news. While I am still positive on bonds over the intermediate-term, my conviction is not as high as it would have been had the Fed cut back its purchases.

Bonds are in a bottoming process that should lead to a significant rally sooner than later.

The dollar finally breached its June low which I have been patiently waiting for. I remain (as I have since March 2008) very positive, long-term on the greenback. While it may not be rosy in the U.S., it’s still the best house in a bad neighborhood. I fully expect the dollar to bottom by Thanksgiving and embark on the next leg of a secular (long-term) bull market.

At the same time, that should mean a tailwind for energy prices this fall followed by a significant decline over winter.

Finally, today is the Dow Jones rebalance of Alcoa, Bank of America and Hewlitt being removed and Nike, Goldman and Visa being added. It doesn’t involve a lot of money, but I continue to find it “curious”.

Have a great weekend!

In CT, it’s fall country fair time, apple picking, softball and tee ball for my kids and a celebratory dinner for my closest friend on Saturday. With rain in the forecast for Sunday, I hope to get some TV time with the NFL and season ending golf tournament from East Lake in Atlanta.

Taper Talk

Why does it seem like every single Fed meeting has become “the single most important FOMC meeting ever” in the media? And here we are again. The Fed begins a two day meeting tomorrow and it is widely expected that they will announce the first of many subsequent tapers at either this meeting or the one in November. The only surprise will be if they remove any kind of taper talk from their announcement or commentary. Although I do not agree with tapering at all here, consensus believes the Fed probably begins with a token taper of $10-$15 billion per month skewed towards treasury bonds. If they don’t, something else is at play in Bernanke’s mind.

As you would expect, the financial markets probably have a very negative response if the taper is more than $15 billion. If the taper is as expected, I think you will see moves in both directions until Bernanke’s press conference ends at 3pm and how he couches future tapers. If they surprise without a taper, I would expect a very positive immediate response that would run the stops in at the old highs.

Currently, the Fed is buying $85 billion a month in mortgage back securities and treasury bonds to keep interest rates, specifically mortgage rates, artificially low. That, in turn, helps the housing recovery which is so vitally important to the economy. Equally as important, the printing of $85 billion per month has resulted in dramatically higher stock prices because investors have been almost forced into other investments as bond yields plummeted, not to mention the additional torrent of liquidity in the system.

Should the Fed taper? Should they not taper? How much? When?

There is no right or wrong answer. Once the Fed Funds rate dropped to 0%, Bernanke & Company were forced to use other monetary tools. Printing money has similar results as lowering rates, so in this case, interest rates have effectively been below zero for some time. By beginning the process of ending QE, the Fed is returning rates to 0% for an eventual move to 0.50% and above much later this decade.

I completely understand those who believe the Fed’s hand is too heavy in the market. Forget about the thumb on the scale; Bernanke has his hand, wrist, elbow and arm on it. By that token, those people would rather let what’s left of the free market to rise and fall where it may. No arguments here.

On the other hand, we have an economy that is performing like almost every other post financial crisis period with sub par growth and stubbornly high unemployment. Since our elected clowns in Washington cannot get any fiscal policy passed, the Fed has become the juice of last resort. In effect, the Fed is plugging dykes and adding sandbags until the waters hopefully subside down the road which I continue to believe to be after the next recession.

We cannot have it both ways. I believe that tapering will drain liquidity and adversely impact the markets and economy over the intermediate-term. But long-term, we will be in excellent shape. The quicker we taper, the closer we come to recession and eventually get to the other side. But that comes with pain. Staying the course prolongs the markets’ and economy’s addiction to the crack of QE but prevents more serious short-term injury in hopes of an eventual fiscal solution from Washington.

Take your pick.

Adios Larry Summers

What a pleasant surprise when I walked in the door from my daughter’s softball game and saw that Larry Summers had withdrawn his name from consideration to succeed Ben Bernanke. It’s not a new topic here nor in my commentary in the media that I thought Summers was the wrong person at the wrong time for the job. The man doesn’t play well in the sandbox with others and stuck his feet in his mouth regarding women when he was president of Harvard.

There is no argument that Larry Summers is brilliant, but there are many brilliant people on earth who should not be running the most powerful central bank on earth. Let’s not forget that Summers was a strong proponent of repealing Glass-Steagall, the depression era legislation separating banks and brokerages. That didn’t work out so well for Citi, Bank of America, Wachovia, etc. in 2008. And to go a step further when he worked in the Clinton administration, Summers was also one of the architects who allowed those derivatives of mass destruction, credit default swaps, etc. to be created and allowed to exist unregulated. You remember those, right? The alphabet soup of fancy products that no one understood.

Finally, as I have mentioned before, the Fed has an almost $5 trillion balance sheet, something I forecasted years ago and was laughed at. Even if Larry Summers did not have all the baggage he does, it’s not the right time for a Fed chair who basically was opposed to Bernanke’s quantitative easing (money printing) and would unwind it much quicker than a more dovish person.

Once again, Janet Yellen becomes the front runner and with the bipartisan support already in place, her nomination should sail through. I keep scratching my head why President Obama would push so hard for Summers when congressmen in his own party are so opposed that they felt it necessary to sign a petition supporting Yellen. And that doesn’t take into account how fierce republican opposition already was for Summers. To a dummy like me, Summers nomination was DOA…

Remembering 9-11

Today, we remember the horrific and cowardly events of September 11, 2001. I was not alive when JFK was assassinated or when Pearl Harbor was attacked, but those who were often speak about where they were or what they were doing at that moment. I remember sitting in my office watching CNBC. They had Breaking News that a plane flew into one of the towers at the World Trade Center. My first reaction was a skeptical one. I didn’t see any small prop plane on the ground, figuring it must have hit the building, exploded and fallen to the ground in pieces.

I then saw the S&P 500 futures trade sharply lower before the stock market opened and thought that was ridiculous. I mean, why would it matter to the markets or economy if an amateur pilot screwed up and flew his Cessna into a building. I started writing buy order tickets to take advantage of the “mispricing”.

Workers in other offices in our complex started coming in to my office as we were the only ones who had cable TV. Quickly we learned that this was no Cessna plane and it was no accident. I stood in front of the TV all day wondering about all of my friends who worked in Manhattan and who worked at the WTC. I thought about all of my friends who were flying on that days and how far this attack would spread. How many more planes? How many other attack sites? Were we at war?

Trying to call people in and around NYC was futile. I just stayed glued to the TV for information that just worsened minute by minute as the second tower was hit, the Pentagon, plane crash in PA and the eventual collapse of the twin towers.

We all have stories. One of my close friends got to work at the WTC and realized she forgot her work at home and escaped unharmed. Another acquaintance is often seen in news footage as he was one of the lucky ones who made it out, covered in ash and particles from the collapse. Sadly, one of my childhood and high schools friends worked at the brokerage firm Keefe, Bruyette and Wood. Along with a fraternity brother whom I did not know well at Cantor Fitzgerald, they were on the floors hit directly by the planes.

It pains me when people discount what happened that day, view it with revisionist eyes or believe that our own government in some twisted, sick conspiracy was behind this. And there were those who believed there should be no retaliation for this despicable, disgusting act. That we should simply move on. Try telling the families of the 3000 people who died that day that their loved ones died in vain and our country sat back and did nothing. I don’t think so.

The stock market never opened on 9-11-2001 and when it finally did 7 days later, the world would change forever. There were heroes and casualties in the NYPD and FDNY. Mayor Guiliani stood out and cemented his legacy as a true leader under fire. 9-11 is something I will never, ever forget for so many reasons and I hope you won’t either.

Here is what Cantor Fitzgerald has done to help over the years.

http://charityday.cantor.com/charity-day-2013/

As I wrap up, I am going to put something together where Heritage Capital donates all of our fees earned on 9-11 or a major portion of fees generates from new money over a quarter.

May we never face such a tragedy again…

Paul

Bull Market Run to Continue

Stocks have a done a good job over the past few weeks of shrugging off the events in Syria, the uncertainty at the Fed and the less than stellar economic news. It doesn’t “feel” like the two month consolidation is over and Dow 16,000 is right around the corner, but we will let the market tell us. I do continue to believe that more all time highs are ahead in the fourth quarter and into 2014.

Here is my most recent segment on Fox Business where I discuss a forecast and my favorite sectors.

http://video.foxbusiness.com/v/2630224224001/will-the-bull-market-continue-to-run/

While stocks are bouncing back nicely from the August lows, the bond market simply cannot get off the mat. Given the underwhelming economic news which should have led to a rally, the bond market is fixated on the Fed meeting next week. With the extreme level of negative sentiment, my first reaction to any announcement of tapering by the Fed will be to buy bonds. More on this later…