Category: US & Canada

Posted on

Sell in May and run away?

Markets fell sharply today. But before we look at the charts, let’s examine three fundamental measures of market stress.

A yield differential near zero indicates bank margins are being squeezed. Lending normally slows, leading to a recession. But the current yield differential of 1.45%, calculated by subtracting the yield on 3-month T-bills from the yield on 10-year Treasuries, is reasonably healthy.

Yield Differential

The yield spread between the lowest investment grade corporate bonds (Baa) and 10-year Treasuries is a useful measure of market risk. The risk premium widens in times of uncertainty. Since 2016 the Baa spread has fallen by more than one percent, to 2.25%, indicating low market risk.

10-Year Corporate Bond Spreads

The above indications are supported by the St Louis Fed Financial Stress Index which is at a record low of -1.451 since its commencement in 1994.

St Louis Fed Financial Stress Index

The St Louis Fed Financial Stress Index measures the degree of financial stress in the markets and is constructed from 18 weekly data series: seven interest rate series, six yield spreads and five other indicators. Each of these variables captures some aspect of financial stress. Accordingly, as the level of financial stress in the economy changes, the data series are likely to move together.

The average value of the index, which begins in late 1993, is designed to be zero. Thus, zero is viewed as representing normal financial market conditions. Values below zero suggest below-average financial market stress, while values above zero suggest above-average financial market stress.

Real GDP growth dipped to 1.9% for the first quarter 2017, compared to 2.0% for Q4 2016. While growth is modest, hours worked by nonfarm employees improved to 1.55% in April 2017 from a low of 1.03% in February, suggesting that growth is likely to continue.

Real GDP & Hours Worked

There is little sign of stress in financial markets other than the latest Trump turmoil.

Posted on

Trump Turmoil

Discussion of a possible impeachment action against President Donald Trump is rife in the media and seems to have spooked financial markets.

The Dollar Index fell through support at 98.50, signaling another decline. The long-term target is 93.00.

Dollar Index

Gold rallied, breaking through resistance at $1250/ounce. Follow-through above $1300 would signal another advance, with a target of the 2016 high at $1375.

Spot Gold

Dow Jones Industrial Average retreated from resistance at 21000. Expect a test of medium-term support at 20400. Reversal below 20000 would be cause for concern.

Dow Jones Industrial Average

The S&P 500 is headed for a test of medium-term support at 2320. Breach would likewise signal a strong correction.

S&P 500

We are likely to get a secondary correction but I expect the bull market to continue. Impeachment of Trump would be a temporary setback and would make me more bullish on the long-term outlook.

It’s probably better to have him inside the tent pissing out,
than outside the tent pissing in.

~ President Lyndon Johnson on FBI Director J. Edgar Hoover whom he mistrusted

Posted on

The Only Question Investors Have Is About Trump | Bloomberg

Barry Ritholz sums up the impact President Donald Trump will have on your investments:

….We start with an overlooked truth: Presidents, regardless of party, get too much credit for when things go right and too much blame when they go wrong.

….Yes, Donald Trump can and will affect the economy and the markets. But we should not put all of our focus on the marginal impact of the president while giving short shrift to more important things such as corporate revenue and earnings, the Federal Reserve, interest rates, inflation, congressional spending, employment, retail sales, Supreme Court decisions, and, of course, valuations.

Quite right. Janet Yellen probably has more power over your investments than Trump does.

….I think we all hoped that once the election was over, we could go back to our normal lives without the incessant parade of campaign news.

No such luck.

Investors need a way to sequester the noisy news flow out of the White House. It is too easy to let the relentless and disturbing headlines throw off long-term financial plans. Investors must read the news, but not let it interfere with thinking clearly.

Look, let’s be honest about the commander-in-chief: He is the world’s leading Twitter troll, a man whose main goal is to interrupt your thinking, misquote and insult other people, engage in rhetorical sleight of hand, and impugn the integrity of those trying to do honest work. What all trolls want is a reaction, something Trump has achieved to great success.

Rule No. 1 on the internet is “Do not feed the trolls.” No one can really ignore the president of the United States, but it’s probably best to view much of what he says or tweets as minor background noise.

The President is not a conciliatory figure who is going to govern from the middle. The acrimonious feud with Democrats and the media is likely to continue for most of his term. So long as the GOP have a majority in Congress and the Senate, Trump has a fair shot at tax reform and infrastructure programs. If that should change, expect Obama-style gridlock.

Source: The Only Question Investors Have Is About Trump – Bloomberg

Posted on

US inflation falls, Personal Consumption grows

A dip in the latest consumer price index (CPI) growth figures brings the inflation measure back in line with the Fed target of 2.0%. Inflationary pressures appear contained, easing Fed motivation to implement restrictive monetary policy.

Consumer Price Index

Personal consumption continues to grow at a modest pace. The down-turn in expenditure on services would be cause for concern — this normally precedes a recession — if not for a strong rise in expenditure on durables.

Personal Consumption

Manufacturers new orders for capital goods display a similar recovery.

Manufacturers New Orders: Capital Goods ex-Defense

The housing recovery continues at a modest pace.

Housing

Construction spending as a percentage of GDP remains soft, suggesting that the recovery still has plenty of room for improvement.

Construction/GDP

Posted on

S&P 500 Price-Earnings Ratio rises

With 84.4% of S&P 500 index constituents having reported first-quarter earnings, 302 (73.84%) beat their earnings estimates while 77 (18.83%) missed. Forward estimates for 2017 contracted by an average of 4.6% over the last 12 months but not sufficient to raise the forward Price-Earnings Ratio above 20. That is the threshold level above which we consider the market to be over-priced.

Forward Price Earnings Ratio for S&P 500

Comparing the forward estimates for 2017 to actual earnings for 1989, we see that the market is expected to deliver a compound average growth rate of 6.0% over almost three decades.

With a dividend yield of 2.16%, that delivers a total return to investors of just over 8 percent.

Price-Earnings ratios fluctuate over time, so any improvement in the ratio should be considered temporary.

Buybacks have averaged just over 3 percent since 2011. The motivation for buybacks is that they should accelerate earnings growth but there is little evidence as yet to support this. As Reported Earnings grew at an average rate of 3.2% between December 2011 and 2016, below the long-term average.

A spike in earnings is projected for 2017 and 2018. Hopefully this continues. Else there will be a strong case for restoring dividends and reducing stock buybacks.

Posted on

Nasdaq buying pressure

The Nasdaq 100 continues its impressive climb, shown here on a monthly chart. Rising troughs on Twiggs Money Flow signal strong buying pressure and a test of 6000 is likely.

Nasdaq 100

Dow Jones Industrial Average continues to test resistance at 21000 after a shallow correction. Elevated troughs on Twiggs Money Flow again signal buying pressure. Breakout is likely and would signal a fresh advance, with an immediate target of 22000.

Dow Jones Industrial Average

Posted on

Echoes of the Past: Syria, Chemical Weapons, and Civilian Targeting

Everyone should read this as a reminder of the brutality that states may employ for political ends, whether Ethiopia (1935), Chechnya (1995), Iraq (1998) or Syria (2017). Chemical weapons such as sarin or mustard gas leave horrific injuries, but any deliberate targeting of civilians — such as bombing of hospitals and residential neighborhoods — should IMO be treated as a war crime.

Luke O’Brien is a U.S. Army officer assigned to Aberdeen Proving Ground and is currently a Countering Weapons of Mass Destruction Graduate Fellow at National Defense University:

…..Perhaps the most notorious example of this from recent memory, however, was the Iraqi chemical attack on the Kurdish town of Halabja in March 1988, as part of the Anfal Campaign at the end of the Iran-Iraq War. This attack struck the small Kurdish village with both conventional and chemical bombs, including sarin, just as Assad’s forces would nearly 30 years later. The first attacks used normal high-explosive bombs, which both drove civilians into basement shelters as well as broke open the villages windows and doors. These initials attacks were then followed up with chemical munitions, which quickly filled the basement shelters and killed their occupants.

Such brutality was intentional. The attacks were intended to break the back of the Kurdish peshmerga militia by depopulating its support. Commenting on the matter at the time, Iraqi Gen. Ali Hassan al-Majid bragged that he would “kill [all the Kurds] with chemical weapons.” The chemical bombardment of Halabja had its desired effect, with a stream of surviving civilians abandoning the town and fleeing to nearby Iran. This use of chemical weapons, moreover, had another added benefit: driving away civilians and insurgents who had become numb to the effects of conventional weapons…..

Read more at: Echoes of the Past: Syria, Chemical Weapons, and Civilian Targeting

Posted on

Dow prepares for a fresh advance

Dow Jones Industrial Average is testing resistance at 21000 after a shallow correction. Rising troughs above zero on Twiggs Money Flow signal strong buying pressure. Breakout is likely and would signal a fresh advance, with an immediate target of 22000.

Dow Jones Industrial Average

Small Cap stocks are also advancing, with the Russell 2000 Index testing resistance at 14.00. Breakout is likely and would offer an immediate target of 15.00.

Russell 2000 Small Caps

A broad advance across large and small caps, suggests low market risk. Advance of only large caps would indicate that investors are risk averse. Advance of only small caps normally occurs towards the frothy end of stage III of a bull market — when the smart money is taking profits while the dumb money has lost all fear.

Posted on

Weak Dollar strengthens gold outlook

The Dollar Index broke support at 100 despite strengthening interest rates, warning of a down-trend. Target for a decline would be the May 2016 low of 93.

Dollar Index

China has burned through a trillion dollars of foreign reserves in the last 3 years, attempting to support the yuan. I believe the sell-off is unlikely to abate and plays a major part in the Dollar’s weakness.

China: Foreign Reserves

A falling Dollar would strengthen demand for gold. Spot Gold is retracing from resistance at $1300/ounce and is likely to find support at $1240/$1250. Respect of support would suggest another advance; confirmed if gold breaks $1300.

Spot Gold

Spot Silver displays a more bearish medium-term outlook, however, with a stronger correction testing support at $17.00/ounce. Breach of support would test the primary level at $15.65 and warn of further gold weakness.

Spot Silver

Powered by WordPress / WordPress Maintenance Service By Website Helper