Posted by Larry Doyle on August 3rd, 2012 9:50 AM |
The monthly jobs report came out and is viewed as slightly better than expected but provides both sides of the political debate sufficient fodder to spin it to their advantage.
While equity markets want to put a happy face on the report (an increase in non-farm payroll of 163,000 jobs along with an uptick in the unemployment rate to 8.3%), I have little real confidence in the report signaling meaningful improvement in our economy.
Why am I concerned that our economy is poised to slow and potentially contract? Forget the employment report, let’s look elsewhere to get a better read on economic growth going into year end. (more…)
Posted by Larry Doyle on October 27th, 2009 9:50 AM |
Are emerging markets now the teacher instead of the student? As such, are recent developments in select emerging markets signaling a turn in our markets? Let’s look closer and navigate this corner of our global economic landscape.
Recall that the global market turmoil of 1998 was precipitated by the devaluation of the Russian ruble. As that domino fell, global markets and economies reacted violently. Here in the United States, the meltdown in the broad market caused the failure of the hedge fund Long Term Capital Management. In hindsight, many believe the Fed-orchestrated takeover of LTCM by Wall Street banks set the table for the massive increase in leverage on Wall Street which led to the current crisis. However, what were the lessons learned in the emerging markets from the 1998 crisis?
Many emerging markets were effectively forced to take support from the IMF as a result of the 1998 economic meltdown. The IMF support came with many strings attached. Those strings were tied to strict controls and onerous burdens imposed on many emerging market governments. Having been forced to live under these burdens once, these governments do not want a visit from the IMF again. As such, they have done a much better job at getting their fiscal houses in order and keeping them in order. Many other governments primarily in the Western hemisphere, including the United States, should have done the same.
How is this playing out currently? (more…)
Posted by Larry Doyle on October 10th, 2009 10:12 AM |
We are reaching a point in our new “Uncle Sam” economy where rhetoric from Wall Street, Washington, and global financial centers seems to be having greater impact than true market and economic fundamentals. Why? Our financial and political ‘wizards’ are working overtime to reconnect the great ‘disconnect’ between Wall Street and Main Street. While we receive glimmers of hope in certain economic statistics, the dark clouds in employment and housing remain daunting.
Are the ‘Washington wizards’ (Bernanke, Geithner, Summers) providing hints of support for our greenback while truly hoping for a manageable decline? I believe they are, and I believe this financial engineering is a very dangerous game.
I thank you for reading my work, and now let’s collectively ‘navigate the economic landscape,’ the mission of Sense on Cents.
> Non-manufacturing Institute of Supply Management: this report rose above 50 (an indication of growth) with a positive development in new orders (this is clearly good), but with no signs of improvement in employment and pricing power by manufacturers.
> Redbook: indications of slight improvement in same store sales although next week’s Retail Sales report will likely look exceptionally weak as it incorporates an end to the ‘Cash for Clunkers’ program. Overall signs point to what is expected to be a weak holiday retail season.
> Jobless Claims: overall claims declined, which presents a sign of stability within employment. That said, it is hard to be optimistic on the employment front on the heels of the employment report released on October 2nd (embedded within the Equity section of this commentary).
> Trade Deficit: this deficit surprisingly narrowed, with a slight increase in exports combined with a slight decrease in imports. All other things being equal, this report would be positive for our dollar but the noise surrounding our currency is overwhelming the focus within this one month reading.
I would typically lead my review with focus on the equity and bond markets, but those sectors are actually following developments in the currency and commodity markets so let’s shift our focus accordingly.
How did the markets handle the Fed-speak, the data, and technical flows? Let’s continue navigating. The figures I provide are the weekly close and the month-to-date returns on a percentage basis.
$/Yen: 89.78 vs. 89.68
Euro/Dollar: 1.4709 vs. 1.4635
U.S. Dollar Index: 76.35 vs. 76.72
Commentary: the overall U.S. Dollar Index has declined by approximately .5% this month, but the volatility and focus on movements in this space have been tremendous. Precipitated by an increase in rates by the Australian Central Bank midweek, the U.S. Dollar Index plunged below 76 which represents multi-year lows. The dollar weakness led to a move higher in global equities as traders, investors, and speculators were emboldened to enter into more ‘positive dollar carry trades.’
While I think Washington is not disappointed in a relatively weak dollar, although they should be (“Dollar Devaluation Is a Dangerous Game”), other countries are not overly keen about further dollar weakness. Why? A weak dollar puts those countries in a marginally less competitive position in international trade. ECB President Jean-Claude Trichet voiced his concerns on this topic. Rest assured, the Asian nations feel the same way although they are careful in their comments. Adding further fuel to dollar weakness was speculation that the trading of oil and a basket of other commodities, which are currently transacted in U.S. dollars, would shift trading away from being dollar-based. On that note, let’s review the action in commodities.
Oil: $72.29/barrel vs. $70.39
Gold: $1050.1/oz. vs. $1008.2 !!!! THE BIG WINNER !!!!
DJ-UBS Commodity Index: 129.177 vs. 127.683
Commentary: I view this segment of the market to be the STRONGEST indicator of the global economic pulse. Additionally, the price action in commodities is likely a strong indication of the ‘positive carry’ trade put on by hedge funds and other traders.
The overall commodity index has moved higher by approximately 1.2% on the month, but the movements within specific commodities is gaining the real focus. Gold specifically has soared by over 4% this month. Why? Market speculation about a potential further slide in the greenback would be inflationary. Oil and other commodities also benefited from the story I referenced above. The conundrum I find in this space revolves around overall levels of international trade. Are these commodities moving higher truly because of an increase in demand or merely because of speculative investing and trading? Where do we go to get a pulse on that? The Baltic Dry Index. How is our friendly indicator of global shipping activity doing?
The Baltic Dry Index continues to move marginally lower. Can global equities in general and commodities specifically increase in value if the major indicator of global trade, that being the BDI (Baltic Dry Index), is in a downtrend? I think not for the long haul, but for a period of time a cheap funding vehicle, that is the U.S. dollar, can override market fundamentals.
I read these commodity tea leaves as sign of inflationary expectations in these ‘inputs’ while we encounter deflationary pressures in wages and real estate. What a world.
DJIA: 9865, +1.6%
Nasdaq: 2139, +0.8%
S&P 500: 1071, +1.3%
MSCI Emerging Mkt Index: 946, +3.6%
DJ Global ex U.S.: 197.6, +1.5%
Commentary: equities regained momentum after last week’s selloff. Recall how just one week ago, we faced a remarkably weak and disappointing Unemployment Report which culminated a week in which equities had given up approximately 2%. Well, we not only recaptured that decline but rallied further by another 1-2%. This past week accounted for the strongest advancement in equities since early July. Are we poised for a breakout past 10,000 on the Dow? Well, we need to remain focused on what is driving the market . . . and that is the weak greenback.
Indications of economic strength in Australia compelled the Australian Central Bank to raise rates which drove the Aussie higher and the dollar to new lows. In the process, the ‘dollar carry trade’ gained momentum propelling global equities higher.
The initial earnings reports released continue to show no real signs of improvement in top line revenue generated by increased sales while the bottom lines have improved given ongoing cost cutting progams. If a company cuts ALL its costs, will its stock still go higher? Rising stock values ultimately need to be driven by ‘growth.’
2yr Treasury: .97%, an increase of 2 basis points or .01%
10yr Treasury: 3.39%, an increase of 9 basis points
The yield curve steepened (longer maturities underperformed shorter maturities) under the weight of another Treasury refunding (3yr, 10yr, and 30yr). The 30yr auction on Thursday was disappointing which precipitated the selloff. The bond market has been trading in sync with equities for the last few months. That price action is an anomaly as typically bonds will trade in an inverse relationship with equities. Comments by Bernanke in the latter part of the week about an eventual and timely increase in rates by the Fed did take the wind out of the bond market’s sails.
COY (High Yield ETF): 6.64, +3.8%
FMY (Mortgage ETF): 17.85, +0.3%
ITE (Government ETF): 57.77, -0.3%
NXR (Municipal ETF): 14.46, +0.1%
Commentary: while interest rates did move marginally higher over the week, overall they remain at remarkably low levels. The high-yield market remains on fire as that sector is benefiting from a lot of hedge funds allocating capital via the ‘dollar carry trade’ referenced previously.
The game continues. The disconnect between the overall domestic economy and the price action in the markets presents what one noted investor described as ‘the greatest experiment’ in modern finance. To the extent that people are putting money to work, I would focus on buying quality and utilizing ‘dollar cost averaging’ techniques.
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Thoughts, comments, questions always appreciated.
Have a great day and weekend.
Posted by Larry Doyle on October 9th, 2009 11:30 AM |
High five to a good friend for sharing with us tremendous insights just released by Credit Suisse. While individuals can and should develop opinions on the economy and markets, the global flow of capital from investors (obviously central banks now count as investors given massive quantitative easing programs) will determine overall market levels. Let’s navigate and assess how Credit Suisse’s client base has positioned themselves and decipher what it all means.
Credit Suisse research analysts report the following:
We are close to finishing our marketing trip in the US and Continental Europe—and take a look at the main issues our clients are focused on at the moment.
1. Caveated bullishness: Hedge funds appear optimistic (focusing on Q3 earnings as the next catalyst). Long-only funds seem cautious, while retail investors are buying bonds rather than equity. We feel there is enough scepticism to leave us bullish.
LD’s comment: CS means bullish on equities.
2. Many asset allocators still prefer credit (bonds) to equity, so there is switching potential.
LD’s comment: Asset allocators are money managers, investment advisors, et al. This comment translates into the fact that money which has been allocated to the bond market could move into equities causing a move higher in equities and a move down in bonds.
3. Investors’ main dilemma: Why have margins stabilised at such high levels? Most feel the reason is cyclical (leaving limited upside in earnings), but we suspect it could be more structural.
LD’s comment: Margins refer to corporate profit margins. The fact that CS believes that profit margins are being supported by structural developments in companies and the economy is a VERY positive assessment as it indicates a change in the foundation of the global economy which would drive equities higher.
4. Economy: Very few clients are positioning themselves aggressively on a macro view. There is little confidence on final demand given the level of excess household leverage. A third of investors are bearish on US housing (too many, in our view). Clients still see inflation, not deflation, as the main risk.
LD’s comment: investors would appear to be more cautious than optimistic with concerns that there is excess liquidity from central banks which will ultimately lead to inflation.
5. Consensus catalyst for next leg down is severe dollar weakness (LD’s highlight), leading to a US bond funding crisis or government tightening fiscal policy too early. Two areas of worrying consensus: 99% of investors appear to be dollar bears and nearly everyone believes the Fed will be very slow to raise rates.
LD’s comment: if 99% of investors are dollar bears and are positioning themselves that way in one way, shape or form, then the dollar will find support. Why? When too many people are on one side of a boat, that boat tips. If the dollar does rally, then many ‘dollar carry trades’ may enter the ‘pain chamber’ and risk-based assets would likely sell off.
6. Regions: Strong consensus to be long of emerging markets (NJA is felt to have large upside potential if US retail sales recover and the dollar remains weak). Clients are more positive on Europe than they have been for the past two years. Investors have quickly capitulated on a tactically positive call on Japan. Renewed focus on domestic plays in dollar-linked countries (especially the Middle East).
LD’s comment: NJA is non-Japan Asia
7. Sectors: We believe most clients have a bar-bell type strategy. Consensus longs are tech and commodities/gold. We found far too many oil bulls for our liking. There is a huge variance of views on banks. Sectors where there is still doubt: life companies (too opaque), media, telecoms, steel and pharma. There were very few questions on defensives.
8. Style: Clients are looking for quality growth, shifting away from the credit-related plays.
Overall, I view this report as decidedly constructive on the economy and markets, albeit with plenty of reasons for caution.
Thoughts, comments, questions always appreciated.
Posted by Larry Doyle on October 8th, 2009 9:24 AM |
Can we ‘devalue’ our way back to our days of economic ‘wine and roses?’
Many debt-laden countries throughout economic history have chosen to implicitly or explicitly pursue a devaluation of their currency as a means of improving their economies. Are the ‘wizards in Washington’ taking this approach? Aside from a few perfunctory comments in defense of the greenback, Washington has been largely silent on the topic of the declining value of the dollar. Many believe Washington very much favors a weaker currency as a means of supporting our economy. I believe this of Washington, as well. Let’s navigate.
Going back to the G20 in London last Spring, the Obama administration has attempted to curry political favor with emerging economies, especially the BRIC nations, by ceding dollar sovereigncy as the preeminent international reserve currency in return for support of global economic stimulus programs. Why does Washington believe a weak currency serves our economic interests? A weak currency generates and supports the following:
1. Promotes inflation as imports decline. Washington would like some inflation, given the massive deflationary pressures presented by falling wages and declines in the value of commercial and residential real estate.
2. Promotes exports for corporations with a multi-national presence.
3. Supports labor by making it more attractive for companies to keep jobs here as opposed to opening factories or sending work overseas.
So, in light of our current economic crisis, why wouldn’t we want a substantially cheaper dollar to maximize these benefits?
Recall that economists always need to keep certain variables static in order to study the impact of a change in another variable or multiple variables. This approach, known as ‘ceteris paribus,’ is not quite as easy as some may think. Why? Variables are NEVER static, or ‘ceteris is NEVER paribus.’ (more…)
Posted by Larry Doyle on July 25th, 2009 10:07 PM |
UPDATE: The show has concluded, but you can listen to a recording in its entirety by clicking the Play button on the audio player below. Once the playback has started, you can fast forward or rewind to any portion of the show by clicking at any point along the play bar.
Please join me this Sunday evening July 26th from 8-9pm for my weekly internet radio show, No Quarter Radio’s Sense on Cents with Larry Doyle. For our newer readers and listeners, this show is a weekly one hour discussion, commentary, and review of the markets, economy, and world of global finance. Call-ins and a chat room promote active Q/A.
This week I have a very special guest. Allow me to introduce a man who, in the world of international finance, needs no introduction: Dr. Paulo Vieira da Cunha, renowned emerging market economist of Tandem Global Partners.
Former Deputy Governor of the Central Bank of Brazil and one of three Monetary Policy Committee Members, Dr. Vieira da Cunha was Brazil’s representative at the G-20 meeting of Central Bank Governors and Finance Ministers until January 2008. Dr. Vieira da Cunha is a visiting scholar at Columbia University and a consultant to the International Monetary Fund (IMF).
For nearly a decade, he produced and managed research on Latin America for the global securities industry, first at Lehman Brothers and later at HSBC where he managed research teams in Buenos Aires, Mexico City, New York, and Sao Paulo.
Dr. Vieira da Cunha had a distinguished career at the World Bank where he was Senior Adviser to the Chief Economist, Nobel Laureate Joe Stiglitz from 1993 to 1996. From 1996 to 1998 he was the Lead Economist for Mexico and also had operational assignments on Russia, Turkey, and Uganda.
Prior to joining the World Bank, he was the CFO of a large state enterprise in the state of Sao Paolo (Prodesp) as well as advisor to the Secretary of Budget and Finances on the issues of renegotiation of domestic and foreign debt. Earlier in his career he held senior positions in the government of the State of Sao Paolo.
To say that I am excited to have Dr. Vieira da Cunha on NQR’s Sense on Cents with Larry Doyle this Sunday evening would be a gross understatement. With the emerging markets leading the world at this juncture, there is much to navigate in this sector of our economic landscape. Dr. Vieira is uniquely qualified to provide perspectives and insights not commonly found.
Please spread the word.