Leading indicator? Is it the Dow Jones and S&P 500 that have held supports and look like we might bounce higher OR is it the broader based Russell and tech heavy NDX that have broken below supports? The VIX has not been a good indicator of late for those searching for a sign of optimism or panic, as it continues to hover in the 14-15 range, thus showing signs of uncertainty. The market’s problem is that the economy and geopolitical landscape has stalled and stagnant. That confusion and uncertainty is playing into the market as the Bulls and Bears have no conviction at this point. So for now we flail and flounder, banging around this rather wide and sloppy range. Expect intraday volatility, but I wouldn’t look of a significant trend to develop until all indices break above or below these levels.
To add more uncertainty to the situation has been the recent parade of Fed President’s and Governors who have been interviewed and lectured since the recent FOMC meeting, which included the Yellen gaff in the Q&A session. Dallas Fed Fisher (Hawk) was interviewed and said that we are on track to wind down QE this year and soon raise rates. Chicago Fed Evans (Dove), in a lecture the other day said rates would not rise until late 2015 and the Fed would remain accommodative [QE] well into 2014. Five of the voting members have spoken publicly in one form or another since the FOMC release and their comments conflict with one another. What seems to be happening is that the FOMC statement is more of the voice of the Fed Chair (Yellen) and since it is rather vague, that no one really opposes the statement. Yet their REAL view and expectations for monetary policy going forward clearly differ. That certainly doesn’t bode well for boosting confidence or certainty in forward monetary policy. So we wait, for the next FOMC meeting and what’s next.
Courtesy of Christina’s Rate Roundup
All’s Quiet on the Ukrainian Front
The Ukrainian situation has moved to the back-burner. The US backed down and toned down their rhetoric, while Putin has amassed forces along the border and has taken Crimea. Germany has a massive trade and work relation with Russia, between 300,000 – 500,000 German jobs are directly related with trade with Russia. 25% of Germany’s energy comes from Russia and Russia is one of their biggest trading partners. Any sanctions, embargos, or economic squeezes that Europe would impose on Russia would hurt Germany significantly as well as the rest of Europe. It’s the power of economics, not military might, which are the determining factors. So we wait, Russia has put the West in “check”, we responded by moving a pawn, now it is Russia’s turn.
Courtesy of wikipedia
Sucking Sound of Socialism
Europe’s Debt is another simmering caldron. Europe’s Troika (tripartite – ECB/EC/IMF) has been on can-kicking, money printing, bailout campaign that looks to have no end in sight. Because Greece, Italy, Spain, Cyprus, Portugal have not blown up, doesn’t mean the problem is solved. Greece, just a few months ago, received another bail-out can-kicking round (their 5th) and will of course need another as they burn through the money. The Troika is buying time and hoping that these economies can get off the ground, but the problem remains, the governments continue to push forth government expansionism, deficit spending, socialism – which continues to drain the coffers and in months to years, they go back to the Troika well for more money. France, who had elected its first openly socialist president in decades, raised taxes on the rich, punished businesses, and expanded social reforms (lowering the retirement age, lowering the work week hours, expanded healthcare, expanded welfare). France saw in recent years the biggest exodus of millionaires and billionaires, international businesses moved, and small business growth contracted. France looks like they may have had a realization that higher taxes and penalties HURT the economy and they have hinted at lowering taxes and perhaps trying to welcome back business. Regardless, Europe continues to run on borrowed money (debt) and that means borrowed time. The Ukraine situation is just another volatile monkey wrench that they are not economically prepared to deal with. So we wait, what is the next country with their handout and how much this time?
China’s Growth slows?
China’s growth remains strong, but there are concerns about the contraction of the growth. The world, during the financial crisis, has relied on China’s growth to help off-set the West’s contraction. In the US, over the last few years since the crisis, the top-line revenue growth has come from the emerging markets, predominately China. Now over 50% of all topline revenue in the S&P 500 companies comes from overseas and that continues to grow. The problem however is China’s expansionism was fast and needs to slow. The growth rate in annual incomes is massive and that is raising costs of export goods. China is looking towards Africa as the new source for low cost manufacturing and services, since China’s costs are starting to lose their competitive advantage. There has been hope that India, Southeast Asia, Brazil, and Africa could come on line strong enough to help off-set some of China’s slowdown, however the biggest problems in these nations are political regulations and fractured infrastructure. In Africa, China is actually building entire cities and infrastructure that is needed to expand manufacturing, Africa is far behind. India’s has amazing service and medical, but it is fractured across a massive country that speaks a multitude of languages, broken infrastructure, a terrorist-type war with their Pakistan neighbors, which makes strong economic growth unreliable. What the BRICs and other emerging markets have going for them is massive consumption and upward mobility. The wage growth in these nations continues at over 10% per year, the fastest in the world. That means each year there are millions more that have purchasing power and millionaires are being created daily. The problem is that politics and infrastructure need to get rooted and create a foundation to allow this growth to expand. Will growth in the BRICs slow or accelerate? So we wait, how much will growth slow and will African come on line strong?
US bubble gets bigger
US Debt is the fastest growing economic data point in this nation. US national debt is expanding over $1 trillion per year (almost $18 trillion), Federal Reserve balance sheet (debt) is expanding about $1 trillion per year, US equity exchange margin (debt) is expanding and hitting all-time highs, Student loan debt is over $1 trillion, and in fact every major debt indicator is rapidly expanding.
How much can we continue to expand on spending borrowed money and creating debt? The Federal Reserve is trying to encourage us to borrow and encourage banks to lend, by setting rates at zero. The Keynesian belief is that spending ALONE is what makes economies grow and they don’t care Where, What or How the money to spend is generated. There is certainly a limit, but ask a Keynesian or member of the Fed and they can’t give you an answer. They, like our Government, like the guy next store, will continue to spend credit and create debt – believing it is ok – until it is not. They will not take responsibility or accountability for their debt creation and will continue until they can’t. That is what happened in the dot.com bubble and also the housing bubble, in fact like every bubble (Dutch Tulip Bubble, South Sea Bubble, Railway Bubble, Florida Land Boom, Beanie Baby Bubble, the list is long).
It is a combination of the laws of Supply and Demand vs. the amount of debt that can be generated. The government is certainly a culpable party by their actions (zero interest rates, QE, deficit spending, raising the debt limit, bailouts, giving 100s of billions to foreign nations, etc.) and they are also culpable by their words and beliefs (Keynesian economic philosophy, “fairness”, tax the rich, expansionism, socialism, etc.). No man, no government, no technology, no science, can stop the flow of Supply and Demand and it shouldn’t. It is a law of nature, it is part of society, and it is what drives economies. Our attempts – mainly government regulations, deficit spending, monetary policies, economic and political philosophy, only hyper-inflates these bubbles and also creates disastrous bursts. Would we have had a housing bubble, even if the Fed didn’t lower rates to 1%, Freddie/Fannie didn’t exist, and government legislation and regulations make for easy loans? Sure we would, however there would be NO WAY it would have gotten as big as it did without the aid of the government. So in the infinite wisdom of our government and Federal Reserve, we are duplicating the exact same actions, policies, economic and political beliefs that exacerbated the housing bubble (zero interest rates, bailing out Freddie and Fannie, creating new regulation and legislation to create easy loans. So what do you think the results will be? So we wait, how big will/can the debt bubble get and how will this debt bubble deflate – POP or fizzle?
Courtesy of Optimalmrm
It is the waiting game. The emerging markets and BRICs have a difficult road ahead, which might slow their growth, but the massive amount of consumers and increase in wages will assure that growth will remain. It will certainly help off-set stagnation and rising inflation in the West, but by how much? Additionally there remains some great investments in technology, manufacturing, and services and if the market corrects and gets a pull back, we should look at this as an opportunity to own these strong companies. Create a list of these companies, make sure to analyze their balance sheets, their debt, their growth, and their products, know the company. Then mark down the value in which you think it is worth owning based on their balance sheet, growth, top-line revenue, and profit.
Additionally, make sure to hedge against the rising inflation, there is no way the Fed can keep inflation in check forever while keeping rates at zero and printing $100s of billions per year. Avoid US treasuries, as they pay a negative REAL return when measured against inflation and the only security is really at maturity, for one can take significant principal losses prior to maturity if we see volatility in interest rates.
This market can certainly get another jolt rally higher, but remember the mounting debt, look at the NYSE margin, and also monitor (closely): Top-line revenue growth, P/E ratio, and liabilities. Those are the ultimate risk factors that need to be considered.
Support & Resistance
INDU 16,000 – 16,500
The Dow Jones has been holding up well. Looking at that 16,250 level as short-term support and the pre-market futures look like we will be above that. I would look at intraday resistance around the 16,400 level if the rally continues after the opening. Watch the close and look at 16,250 and 16,400 if we close above or below those levels.
Yesterday I mentioned that 3550 could be a support intraday and look for a bounce. It hit it yesterday and moved higher. We could get up to 3600 before we see resistance. Watch the close for a 3550 and 3600 to see if we close above or below it.
SPX 1840 – 1880
We hit that 1840 intraday yesterday before the bounce and the SPX is holding up much like the Dow Jones. The question is can we push above 1880? Watch the 1840 support and the close. VIX has not been useful in the 14-15 range because it is not indicating fear or greed, but rather it seems it doesn’t know HOW to price volatility at this point. It’s the waiting game.
The broadest market actually looked bad this week and broke a key support. At 1160 this could be a good support and it is interesting that the narrower Dow Jones and also SPX held up better. So where is the broad based order flow? What the RUT carefully, I think it is a better and wider measure for order flow.
Real Growth, Real Economy?
So we are in the waiting game. The major indices are not even tracking with one another and the VIX has not been able to price a rally or a sell-off. Europe debt has been kicked down the road and moved to the back-burner. Ukraine is off the headlines and is quite for now. The US continues to expand its debt and it hasn’t shown any serious signs of cracking of failing yet.
Yet the REAL economy on the ground in the US and West remains weak, growth is tepid, employment sluggish, top-line revenue growth flat. Inflation continues to impact the bottom line of consumers, regardless of CPI reporting. The strength in the economy comes from SMART business running lean, high productivity, and looking abroad for sales growth.
To get real economic growth we need to reverse the debt expansion and pay down the leverage debt, and then we can grow on INCOME strength not whether or not we can continue to borrow and create debt. Until then, we wait.