by ilene - September 1st, 2015 6:33 pm
Courtesy of Sober Look
The majority of economists still expect the Federal Reserve to begin the long-awaited liftoff next month.
However is this dovish FOMC truly prepared to "pull the trigger" this time? Here are some reasons the central bank is likely to delay the first hike.
1. While the Fed officially talks about not being focused on the currency markets, the recent dollar rally should give them some food for thought. The global "currency wars" have sent the trade-weighted US dollar to the highest levels in over a decade. This will continue to put pressure on US manufacturing (and even some services sectors) as US labor and other costs of production rise relative to other nations.
2. Commodity prices, led by crude oil and industrial metals, hit new multi-year lows, reigniting disinflationary pressures. Note that the Bloomberg Commodity Index is at the lowest level since 2002. Some at the Fed continue to view this as "transient", but the full impact of such a move is yet to be fully felt in the economy. Here is a broad commodities index.
In fact as of Sunday night in NY, WTI futures are trading below $40/bbl.
3. Driven to a large extent by commodity prices as well as economic weakness in China, US breakeven inflation expectations are declining sharply as well. Does this look like a great environment to begin raising rates?
4. Some point to the recent stability in "core inflation", with CPI ex food and energy remaining around 1.8% and providing support for a less accommodative policy. However the main driver of this stability is the rising cost of shelter. Core CPI excluding shelter is below 1% (YoY).
by ilene - September 1st, 2015 5:49 pm
By John Mauldin
“Measurement theory shows that strong assumptions are required for certain statistics to provide meaningful information about reality. Measurement theory encourages people to think about the meaning of their data. It encourages critical assessment of the assumptions behind the analysis.
“In ‘pure’ science, we can form a better, more coherent, and objective picture of the world, based on the information measurement provides. The information allows us to create models of (parts of) the world and formulate laws and theorems. We must then determine (again) by measuring whether these models, hypotheses, theorems, and laws are a valid representation of the world.”
“In science, the term observer effect refers to changes that the act of observation will make on a phenomenon being observed. This is often the result of instruments that, by necessity, alter the state of what they measure in some manner.
“It was, perhaps, the most unusual episode in the long running duel between the two giants of twentieth century economic thought. During World War Two, John Maynard Keynes and Friedrich Hayek spent all night together, alone, on the roof of the chapel of King’s College, Cambridge. Their task was to gaze at the skies and watch for German bombers aiming to pour incendiary bombs upon the picturesque small cities of England….
“Night after night the faculty and students of King’s, armed with shovels, took it in turns to man the roof of the ornate Gothic chapel, whose foundation stone was laid by Henry VI in 1441. The fire watchmen of St. Paul’s Cathedral in London had discovered that there was no recourse against an exploding bomb, but if an incendiary could be tipped over the edge of the parapet before it set fire to the roof, damage could be kept to a minimum. And so Keynes, just short of sixty years old, and Hayek, aged forty-one, sat and waited for the impending German onslaught, their shovels propped against the limestone balustrade. They were joined by a common fear that they would not emerge brave nor nimble enough to save their venerable stone charge.”
– Nicholas Wapshot in Keynes Hayek: The
by ilene - September 1st, 2015 1:13 pm
Primary Dealers were sellers last week in both the coupons and the futures as they continued to hold larger long positions in Treasury coupons than they have for several years. Conversely, their long position in the futures continues its downtrend of the past year, reaching a new low. They remain moderately long the futures, but they appear to be persistently selling futures into strength while they maintain a modest net long position in the coupons.
August is usually a month where Treasury supply pressures both stocks and bonds but this year Treasury supply was light. Lighter than usual supply should continue through September. This would normally be a bullish factor for both stocks and bonds. However, other sources of supply, or demand depressants, have pressured prices, particularly money destruction in commodities, emerging markets, and especially China.
As long as Treasury supply remains relatively light, tracking the various classes of buyers, particularly dealers, US commercial banks, and foreign central banks, will give us key insights into the outlook for both stocks and bonds. Supply may be a benign influence, but if buyers are pressured elsewhere, they’ll pull their bids and prices will decline. The longer that dynamic continues, the more likely it becomes that the US economy would weaken, the US deficit would widen, and Treasury borrowing would increase, putting more pressure on securities prices.
The issue at that point would be when would the Fed resume QE.
by Market Shadows - September 1st, 2015 12:05 pm
Financial Markets and Economy
Global markets are melting down (Business Insider)
Global markets are getting smoked again.
Dow futures are down 323 points, S&P 500 futures are down 40 points, and Nasdaq futures are down 93 points.
U.K. stocks declined as investors considered further indications that the Chinese economy is slowing down.
Bwin.party Digital Entertainment Plc dropped 1.5 percent after its takeover battle took another twist with a revised proposal from 888 Holdings Plc. BP Plc slid 1 percent as oil’s biggest three-day rally in 25 years stalled before U.S. government data forecast to show crude stockpiles expanded.
The dollar slumped against the yen on Tuesday, as a fresh bout of weakness in global stock markets following weak Chinese data sent investors scurrying to the perceived safety of the Japanese currency.
The greenback USDJPY, -1.04% fetched ¥119.59, down from ¥121.22 late Monday in New York.
A major warning from the most reliable bellwether of the world economy (Business Insider)
South Korean exports plunged 14.7% in August from a year ago. This was much worse than the 5.9% decline expected by economist. And it was the biggest drop since August 2009
This is a troubling sign as Korea's exports represent the world's imports. Because it is the first monthly set of hard economic numbers from a major economy, economists across Wall Street dub South Korean exports as the global economic "canary in the coal mine."
China’s securities regulator asked brokerages to step up their support for share prices by contributing 100 billion yuan ($15.7 billion) to the nation’s market rescue fund and increasing stock buybacks, according to people familiar with the matter.
The China Securities Regulatory Commission gave the order on rescue-fund contributions at a meeting with representatives
by ilene - August 31st, 2015 10:40 pm
Courtesy of The Banker
“Let’s start at the very beginning, a very good place to start,” sings my children’s favorite nanny-from-the-movies, Maria.
School started for my girls this week, so I’m in the mood for new beginnings. New school uniforms, freshly sharpened #2 pencils, and lined notebooks still unblemished with unicorn stickers.
Besides inheritance (obviously the very best way, because remember your first $5.43 Million arrives tax free!) the next two best ways for a person to get wealthy are investing throughout your lifetime, and starting a business.
Neither of these two methods – slow-and-steady investing beginning at a young age or entrepreneurship – require extraordinary talent or prior knowledge. In fact, the biggest common barrier to both methods is simply getting started.
But how does one even do that? Let’s not under-estimate the difficulty of the “getting started” part!
I have a reader who regularly emails me to the effect (I’m paraphrasing a bunch of his emails) “You need to tell everybody – especially young people – how to call up a brokerage company and how to buy their first stock or mutual fund. They don’t need special knowledge, they just need to get started now, contribute regularly, and never sell. And they’ll end up rich.”
Of course he’s right. You should all totally do this.
Even so, many will resist the advice.
A managerie of discount brokers. Sadly, none of them pay me to list their brands
My question back to my reader: How do we get people to start at the very beginning?
I really don’t know how to fulfill my reader’s wish of inducing people to call up a brokerage firm, open up an account, and buy their first stock or mutual fund. I wish I had the words to express the importance of beginning, like, right now.
Goethe didn’t really say this, but…
by ilene - August 31st, 2015 9:54 pm
Michael Batnick studies the "death cross" and finds that the 50-day moving average crossing below the 200-day moving average is a short-term bad sign but post-death cross life is not as bad as the name suggests.
Courtesy of Joshua Brown
Michael Batnick, our firm’s director of research, goes toe to toe with the Death Cross fixation among traders and the financial media:
On Friday the S&P 500 experienced what is known as a “death cross.” This is when the 50-day moving average crosses below the 200-day moving average and as you can guess by the name, is allegedly a negative signal for stocks moving forward.
A lot of work has been done to debunk the myth of the death cross and yet we continue to hear about it whether it’s in an index, a sector or a specific stock. Here are two reasons why it refuses to go away: 1) It sounds ominous, people love that and 2) over the last fifty years, a death cross occurred before each of the ten worst years. Not only did they appear but in eight of those ten years the indicator was quite timely, saving those who listened from further downside.
So if it identified the very worst years, wouldn’t it be foolish to dismiss this as a valid indicator?
Picture via Pixabay.
by Market Shadows - August 31st, 2015 8:42 pm
Financial Markets and Economy
In 1863, the Dowlais Iron Company had recovered from a business slump, but had no cash to invest for a new blast furnace, despite having made a profit. To explain why there were no funds to invest, the manager made a new financial statement that was called a comparison balance sheet, which showed that the company was holding too much inventory. This new financial statement was the genesis of [the] cash flow statement that is used today. In the United States in 1973, the Financial Accounting Standards Board (FASB) defined rules that made it mandatory under Generally Accepted Accounting Principles (US GAAP) to report sources and uses of funds, but the definition of "funds" was not clear. Net working capital might be cash or might be the difference between current assets and current liabilities. — The Cash Flow Statement, Wikipedia.
As if those events weren't enough, a technology glitch is adding to the confusion.
Dow posts worst August decline in 17 years (Market Watch)
The month of August can be pretty rough for stock investors. But this August has earned its place in the record books, as stocks were unsettled by uncertainty over the state of affairs in the world’s second largest economy, China.
As far as Augusts go, this has been the worst in nearly two decades for the Dow Jones Industrial Average DJIA, -0.69%
by ilene - August 31st, 2015 7:13 pm
Courtesy of James Howard Kunstler
The tremors rattling markets are not exactly what they seem to be. A meme prevails that these movements represent a kind of financial peristalsis — regular wavelike workings of eternal progress toward an epic more of everything, especially profits! You can forget the supposedly “normal” cycles of the techno-industrial arrangement, which means, in particular, the business cycle of the standard economics textbooks. Those cycle are dying.
They’re dying because there really are Limits to Growth and we are now solidly in grips of those limits. Only we can’t recognize the way it is expressing itself, especially in political terms. What’s afoot is a not “recession” but a permanent contraction of what has been normal for a little over two hundred years. There is not going to be more of everything, especially profits, and the stock buyback orgy that has animated the corporate executive suites will be recognized shortly for what it is: an asset-stripping operation.
What’s happening now is a permanent contraction. Well, of course, nothing lasts forever, and the contraction is one phase of a greater transition. The cornucopians and techno-narcissists would like to think that we are transitioning into an even more lavish era of techno-wonderama — life in a padded recliner tapping on a tablet for everything! I don’t think so. Rather, we’re going medieval, and we’re doing it the hard way because there’s just not enough to go around and the swollen populations of the world are going to be fighting over what’s left.
Actually, we’ll be lucky if we can go medieval, because there’s no guarantee that the contraction has to stop there, especially if we behave really badly about it — and based on the way we’re acting now, it’s hard to be optimistic about our behavior improving. Going medieval would imply living within the solar energy income of the planet, and by that I don’t mean photo-voltaic panels, but rather what the planet might provide in the way of plant and animal “income” for a substantially smaller population of humans. That plus a long-term resource salvage operation.
by ilene - August 31st, 2015 2:55 pm
Courtesy of Wade of Investing Caffeine
At the trough of the recent correction, which was underscored by a brief but sharp -1,100 point drop in the Dow Jones Industrial Average, the Dow had temporarily corrected by -16.2% from its peak in May, earlier this year. Whether we retest or break below the 15,370 level again is debatable, but with the Dow almost reaching “bear market” (-20%) territory, it begs the question of whether the U.S. has caught a recessionary flu from the ill international markets’ colds?
Certainly, several factors have investors concerned about a potential recession, including the following: slowing growth and financial market instability in China; contraction of -0.4% in Japan’s Q2 GDP growth; and turmoil in emerging markets like Russia and Brazil. With stock prices down more than double digits, it appears investors factored in a significant chance of a recession occurring. Although the Tech Bubble of 2000 and generational Great Recession of 2008-2009 were no ordinary recessions, your more garden variety recessions like the 1980 and 1990 recessions resulted in peak to trough declines in the Dow Jones Industrial Average of -20.5% and -22.5%, respectively.
In other words, with the Dow recently down -16.2% in three months, investors were awfully close to factoring in a full blown U.S. recession. Should this be the case? In answering this question, one must certainly understand the stock market is a predicting or discounting mechanism. However, if we pull out our economic thermometers, right now there are no definitive indicators sending us to the recessionary doctor’s office. Here are a number of the indicators to review.
Yield Curve Indicator
For starters, let’s take a look at the yield curve. Traditionally, in a normally expanding economy, we would normally expect inflationary expectations and a term premium for holding longer maturity bonds to equate to a positively shaped yield curve (e.g., shorter term 2-Year Treasuries with interest rates lower than 30-Year Treasuries). Interestingly, historically an inverted yield curve (shorter term interest rates are higher than longer term rates) has been an excellent leading indicator and warning signal for unhealthy stock market conditions forthcoming.