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%.

Reading the Short-Term Tea Leaves

To reiterate a comment I think I have made each and every week for at least three years, the bull market may be old and wrinkly, but it’s not dead. It continues to be the most disavowed and hated bull market of the modern investing era and that’s why it will live on. On an almost daily basis, another “market professional” comes out of the woodwork on why stocks should not be at these levels.

Several good friends of mine in the industry have been calling for a 20% decline since early 2012. They tell me that the stock market is manipulated and is heading for doom. Those are the same people who when on the correct side of the market, tell me that it’s all just the normal functions of the capitalist system. To me, it all sounds like sour grapes and rationalizing a wrong position. I have been wrong many times in my 25 year career and will be wrong many more times before all is said and done. It’s okay to be wrong, but it’s not okay to ignore the evidence and stay wrong.

Given my long-term view, that doesn’t mean that the stock market won’t pullback or correct from time to time. It’s been just about three years since the last full fledged 10%+ correction which ended up being roughly 20%. Stocks are long overdue for significant downside, but that doesn’t mean it will happen tomorrow. I have been in the pullback (4-8%) camp for several weeks and remain there today.

At this point I see three possible scenarios for stocks over the coming months, two of which can be seen below. The first one is labeled “bullish scenario” as it has the current bounce running out of steam sooner than later, followed by a decline that exceeds last week’s low by a small margin into the “cushion zone”.

The “cushion zone” is an area where the market spent most of its time between mid February and late May recharges its batteries for that powerful spring rally to all time highs. On the way back down, it’s also the area where stocks should find some cushion as if someone leaped off a ledge and into a giant mattress. That zone should cushion the market’s fall and start a new rally to all time highs next month.

On the other hand, the chart below is the “bearish scenario” which has the stock market actually rallying further than the “bullish scenario” in the very short-term, but stopping before hitting new highs. From there, stocks roll over again, similar to the path we saw in 2011, falling more than 10% and through the “cushion zone”.

 

The good news is that we won’t have to wait long to eliminate one of the aforementioned scenarios. There is a third path that is also possible, but I won’t fully flesh that out for now.

Is your portfolio properly positioned this year? If you are not sure, don’t hesitate to hit REPLY or call the office to schedule a meeting, call or Skype.

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The Bounce The Bounce The Bounce

In the spirit of Herve Villechaize telling Ricardo Montelban on Fantasy Island, “Da Plane Da Plane Da Plane”, here is the bounce, the bounce, the bounce.

After writing about the market bouncing and what was “supposed” to happen in several posts, stocks cooperated on Friday with what has been described as a “huge rally”. I am always keenly aware of what questions I am asked by the average investor as well as the comments. Over the weekend, folks I spoke with were in more of a celebratory mood,  believing the pullback is over and all time highs are in store this month.

I hope to have a Street$marts out later today, but in short, the evidence does not suggest an immediate return to all time highs on the way to Dow 18,000, at least not yet. I am watching a few different scenarios which I will share shortly after I am able to eliminate one.

With the anticipated bounce here, it’s important to watch how far price rallies and what the market internals suggest. High yield bonds were hit very hard and if they do not bounce very hard, that will indicate a more complex and deeper pullback than just 5%. Also, with so many sectors seeing significant damage, this bounce is vital for the intermediate-term trend.

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Getting Anywhere?

Early Monday I wrote about the market setting up for a bounce. And that was certainly the case on Monday. Tuesday, however, was a different story as stocks gave back all of Monday’s gains and then some. Wednesday’s solid action, once again, puts the stock market on bounce alert.

I keep using the word “bounce” instead of rally because it looks like there needs to be some more work on the downside before the current pullback wraps up. With each successive red day, the markets seem to be rebuilding the wall of worry necessary to begin the next meaningful rally. The problem is that this does not happen overnight.

Stocks are “supposed” to make some upside headway right here and now. Treasury bonds are “supposed” to pullback right here and now. Gold is “supposed” to rally right here and now and the dollar is “supposed” to decline right here and now. That’s the short-term scenario, some of which I positioned clients for while some isn’t worth the risk.

I am still keenly watching which sectors lead the bounce and which cannot get off the carpet. Right now, very few look enticing for more than a quick trade.

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Monday is Bounce Day

After some normal volatility on Friday, the bulls held their own and are positioned to see some green as the trading week opens. There are two scenarios I am watching here.

The first is the lows hit on Friday. If the major indices close below those levels sooner than later, we should see some trap door, elevator shaft, immediate selling. That’s the more bearish path. Scenario number two has the market bouncing for a few days and then rolling over to revisit the lows from Friday where the bottom is quickly formed.

As I mentioned last week, the quality of the bounce is so important right now. Poor participation or sector leadership may well have more intermediate-term consequences, but if the bulls can make an internal stand, the stage can be set for Dow 17,500.

Just like with the stock market, treasuries are at an important juncture as well. They are positioned to see more upside, but that needs to be much sooner than later to stave off a multi-week pullback.

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Watching the Bounce

Thursday’s shellacking in the stock market was a bit unusual given how close in time stocks were to all time highs. As I mentioned in Street$marts, my screen was a complete sea of red except for the instruments that go up when stocks go down. As I have over said over and over and over, based on history, the bull market remains alive.

In the short-term, it looks like the best case for the bulls would be a few days of bounce to the upside followed by another decline to revisit this morning’s low or briefly exceed it this month. Then another run to new highs could ensure.

I would become a bit more concerned if stocks began to unravel this afternoon or rallied mildly today followed by an ugly day on Monday. In any case, it’s important to watch which sectors bounce the most or withstand selling pressure the best. So far, I am not heartened to see utilities and staples leading today.

On the bond front, it’s time for treasury bonds to make a stand. They have pulled back for a few days and they need to stabilize here. High yield (junk) bonds have been decimated lately, wiping out the entire gain since January. This is a serious canary in the coal mine if it’s not rectified this year.

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2nd Fed Trend a Success… Pullback is Here

Yesterday, I wrote about the Fed statement day trends. History suggested, a pre announcement market of +-0.50% which was spot on with the day closing green; it closed neutral. Today, the post Fed model called for lower prices which is spot on as well. This is all in the context of the pullback I forecast two days ago.

Today’s action so far is nasty with my entire screen red except for the items that go up during a down market. Days like this bring the market closer to the eventual bottom, but it’s not there yet. Patience…

What is a little different right now is that very few sectors look appealing into the weakness, something that hasn’t been the case since 2011. Additionally, the treasury bond market, which I have been bullish on all year is flirting with the unchanged level when it should be sharply higher.

This will all sort out sooner than although I am very, very glad that we raised so much cash just a few days ago!

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Fed Statement Day Trend

That certainly felt like a quick six weeks since the Fed’s last statement day and press conference! Today, Yellen & Co. conclude their two day meeting with a statement to be released at 2:00 pm est and no press conference. As has been the case since the first taper last December, the Fed will reduce their assets purchases by another $10 billion to $25 billion per month on their to wrapping up quantitative easing this fall.

There has been a strong and playable trend during Fed statement days and today that trend is live. Stocks typically trade in a -.50% to +0.50% band until after 2 pm and then close today in the green. This trend has been successful more than 70% of the time since 2007. It has been noted of late that stocks push higher straight into the announcement and then sell off  through the close but still end higher.

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