We as traders all know, the FOMC Statements are not where the truth lies really. The Fed has teams of editors, economists, public relations representatives and the like to make sure that there can be no ambiguity to any comma, addition or deletion of a word, the use of an italics, etc. It is about as programmed a message as you can get. HAL, from 2001: “A Space Odyssey” would be proud. Besides, even if we were sharp enough to find the nuance, we are way late to the game with the emergence of all the word scanning HFT protocols out there. It’s with great amusement that for the all trouble these people go through, they still parade the Fed Chairperson out there after the meetings to at best not mess things up. Case in point. Given that this was not an official FOMC minutes release or anything like that, but anytime anyone from the FOMC speaks, especially MS. Yellen, the world listens. There was a simple question about negative rates pertaining to the actions of the Central Bank’s of the ECB, the Swiss the Danes, etc. posted during the Q&A session. Mostly, Ms. Yellen just nodded but at the end had a very curious conclusion (seemingly that we all should know) is that “cash is not a convenient store of value”. What is it then? Last time I checked, the typical US worker is not paid in Gold, Steel, shares of a company or anything like that , they are paid in CASH! In order for the typical person to experience any real wealth growth one of two things has to happen: as prices go up, they need to earn more of those dollars, or prices need to come down. We have talked at length about the dangers or the downward spiral of deflation so we won’t berate that point. Our good friend Rick Santelli had a goo take on it: deflation is the boogeyman… and the only thing that can save the middle class is lower prices”.
This is America! We are used to shouldering the world’s burdens (for better or worse). Sometimes it gets to be a bit much. We are only human and there is only so much we can take. For now, we are happy to try and continue to drag the world out of the mess that quite frankly we had a big hand in creating. But at some point we are going to need some help. That’s why I was more than a little disheartened to read this report from Bank of America which in part said this:
“Our recurrent theme is that most of the world is “old, indebted and unequal”. In our view this is a recipe for debt deflation and weak nominal earnings/economic growth. Proactive central banks figure this out early and fight the inevitable slowdown by implementing QE and weaker currencies. They grab the other guy’s pizza slice. Their asset markets soar. As Figure 5 shows, 70% of the world’s developed markets have inflation below 0.5% – almost as high as the depths of the 2008 financial crisis. So the USD8.6tn in central bank balance sheet expansion (from the Fed, ECB, BOE, BoJ, and PBoC, which amounts to 130% growth over Dec-07 to now) has been unable to get inflation going. Remember: most of the planet is Old, Indebted and Unequal – a recipe for slow nominal growth. That failure to ignite inflation is unlikely to stop central banks from trying QE/QE variants. Asset prices should be well supported by their (fruitless) endeavor wherever it is undertaken, like Japan and Europe currently. Emerging markets are not much better – as Figure 6 shows, about 70% have deflation in their PPIs. According to McKinsey, overall debt has increased by USD57tn in mid-2014 from USD142tn in 2007. China’s total debt has nearly quadrupled, rising to USD28tn by mid-2014, from USD7tn in 2007, fueled by real estate and shadow banking. Debt plus deflation is equal to debt deflation.”
I wrote a few days ago how the much feared inflation that all the pundits were saying that was going to come from all the QE was not the issue. The issue is DEFLATION. Which, per Investopedia, is:
“A general decline in prices, often caused by a reduction in the supply of money or credit. Deflation can be caused also by a decrease in government, personal or investment spending. Declining prices, if they persist, generally create a vicious spiral of negatives such as falling profits, closing factories, shrinking employment and incomes, and increasing defaults on loans by companies and individuals. To counter deflation, the Federal Reserve (the Fed) can use monetary policy to increase the money supply and deliberately induce rising prices, causing inflation. Rising prices provide an essential lubricant for any sustained recovery because businesses increase profits and take some of the depressive pressures off wages and debtors of every kind.”
Seeing the following chart does not bring a sparkle to my eye:
So, we have another “worst since Lehman” data point. For our “data driven” Fed, I am having a hard time seeing a rate hike any time soon.
I have talked to you over the past few weeks about economic reports and how they have embedded in themselves “wiggle room”. That is being kind. Between seasonal adjustments, birth/death rate adjustments, other trailing data points, etc. you can pretty much tell a story from either side of the coin and claim statistical validity. The Fed is trying not to paint itself into a corner by promising the market exactly when they are set to raise interest rates but have kind of cornered themselves into a June – September timeframe. This is at least where the market has seen to price it. But it is becoming increasingly difficult to make a solid case. Among other factors, we have horrendous housing starts numbers coming out and essentially every other nation in the world trying to inflate their currency which in turn deflates ours. In order for the Fed to make a strong case for a hike, things have to be a heck of a lot better here in the US than in the other major economies. Now we learn today from the Atlanta Fed in reference to its GDPNow Model:
“The growth rate of real gross domestic product (GDP) is a key indicator of economic activity, but the official estimate is released with a delay. Our new GDPNow forecasting model provides a “nowcast” of the official estimate prior to its release. Recent forecasts for the GDPNow model are available on our website. More extensive numerical details—including underlying source data, forecasts, and model parameters—are available on our website as well.
The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2015 was 0.3 percent on March 17, down from 0.6 percent on March 12. Following yesterday morning’s industrial production release from the Federal Reserve Board that reported a 17 percent decline in oil and gas well drilling in February, the nowcast for first-quarter real nonresidential structures investment growth fell from -13.3 percent to -19.6 percent.”
They omitted the fact that two weeks ago, their forecast was 1.2%. IT’S BEEN CUT IN HALF TWICE IN THE LAST THREE WEEKS!
I am not saying what the Fed will or won’t say later on today after their meeting. But, it is getting increasingly difficult for me to get behind an even further deflated dollar.
With the endless requests from my colleagues and friends to join their NCAA March Madness pools, I started thinking about how the tournament affects the markets (if at all). I can tell you one thing I do know is that productivity certainly seems to go down with everyone sneaking out of the office to get a quick look at the games. But that is anecdotal at best. But I think we may have a pullback in the works. Just for reference, the S&P 500 was down 1.5% from the beginning of the tournament until the finals last year. If we read what Marketwatch’s Mark Hulbert has to say, maybe here’s one reason why:
“A rigorous study that appeared in the August 2007 issue of the prestigious Journal of Finance suggests that last year’s experience was not a fluke. The study, “Sports Sentiment and Stock Returns,” was conducted by finance professors Alex Edmans of the London Business School and the University of Pennsylvania’s Wharton School; Diego Garcia of the University of North Carolina (Chapel Hill); and Oyvind Norli of the Norwegian School of Management.
The authors measured what happens to a given country’s stock market immediately following losses of its national teams in international competition. They focused primarily on soccer matches in the World Cup, but they also studied cricket, rugby and basketball. They found that, if a country’s team lost, its stock market the next day suffered a significant diminution in return.
As the researchers were unable to find any rational explanation for the result, they concluded that the diminished returns were caused by the “impact of sports results on investor mood.”
“You might wonder what their study has to do with March Madness, since only U.S.-based teams are playing. For each team that loses, another one wins, of course, and investors in the winning team’s region will presumably be as exuberant as fans of the losing team will be despondent. Won’t their moods cancel each other out, leaving no net impact?
No. The researchers found little evidence of a correspondingly positive effect on a country’s stock market when its team won. The consequence of this asymmetry is that stocks will often experience below-average returns whenever large groups of investors become discouraged, even when the dampening of their spirits has nothing to do with investing per se.”
Just some food for thought as we drive ourselves nuts trying to figure out where the heck Wofford College is (Spartanburg, SC) and how far they have to travel to play 5th seeded University of Arkansas in Jacksonville, FL (377.8 miles) to see if that is the 5th seed versus 12th seed upset that happens nearly every year.
Trade well and follow the trend, not the perma-bull OR perma-bear “experts.”
For all the complexities of our global economy, it’s amazing what things boil down to. You can fold into the mix myriad inputs: currency, Iran, Russia, Greece, crude oil, etc. but you can bet your bottom dollar that it will all come down to one word…patience. That is what the trading world will be looking for when the FOMC releases its statement on Wednesday.
“The biggest short term question with regard to the March FOMC is whether the committee chooses to include the ‘patient’ term in their policy statement or drop it,” said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott, in a recent note.
“In terms of impact, retaining the word would imply a first rate hike would be most probable after June and by September 2015.”
It all breaks down to this: the FOMC will raise rate (maybe) at some point. They are not going to raise rates only to have a huge negative reaction to it and thus have to cut rates shortly thereafter. So, they will make their intentions abundantly clear, there will be no surprises. If you take a look at the Fed’s favorite indicator of inflation, the PCE you will see that the case cannot be made to be anything other than patient.
The Fed has no choice but to be patient. They will need a few more data point under their belt before they can pull that trigger. It will be a fun (I mean not fun) week of waiting until Wednesday afternoon before we can find a new single word to parse. Until then…
Trade well and follow the trend, not the perma-bull OR perma-bear “experts.”
I would imagine that if one wanted to pull a scam on someone or, let’s say, on the US stock market, it would be wise not to bring too much attention to it. The folks over at one of the largest HFT’s out there, Virtu, doesn’t seem to think so. First, let’s take a look at the following chart:
Ok, it doesn’t take a genius to figure this one out. Volumes at the CME are essentially flat yet the “quotes” have increased nearly 7x? Why in the world would that be? I am no expert in the HFT world but I would imagine that some sort of quote stuffing is going on here. If 7x the number of quotes results in basically zero increase in volume, I would argue that someone is trying to float some sort of smoke screen over the markets. We then learn further from Virtu’s S-1 that:
“The chart below illustrates our daily Adjusted Net Trading Income from January 1, 2009 through December 31, 2014. The overall breadth and diversity of our market making activities, together with our real-time risk management strategy and technology, have enabled us to have only one overall losing trading day during the period depicted, a total of 1,485 trading days…”
ONE DAY OUT OF 1,485 TRADING FOR A LOSS! Fellas, if you are going to commit fraud at least take a dive once in awhile to throw the dogs off your trail! Don’t kill the Golden Goose! If it is not fraudulent behavior on Virtu’s part then there certainly is something wrong with the way our markets are structured and/or regulated.
Friday’s economic report was unusual in that it created something that no economic report has done in quite some time: it moved the market. Said another way, it was not ignored.
The monthly Non-Farm Payroll data had a consensus reading of 230,000 new jobs added to the economy in February, but everyone was surprised with the print of 295,000. The initial reaction was a slight rise in the ES but was very short lived. From there, it plummeted all day and eventually closed 1% lower.
Specifics from the report include…
Total nonfarm payroll employment rose by 295,000 in February, compared with an average monthly gain of 266,000 over the prior 12 months. Job gains occurred in food services and drinking places, professional and business services, construction, health care, and in transportation and warehousing. Employment in mining declined over the month. (See table B-1.)
In February, food services and drinking places added 59,000 jobs. The industry had added an average of 35,000 jobs per month over the prior 12 months.
Employment in professional and business services increased by 51,000 in February and has risen by 660,000 over the year. In February, employment continued to trend up in management and technical consulting services (+7,000), computer systems design and related services (+5,000), and architectural and engineering services (+5,000).
Construction added 29,000 jobs in February. Employment in specialty trade contractors rose by 27,000, mostly in the residential component. Over the past 12 months, construction has added 321,000 jobs.
In February, employment in health care rose by 24,000, with gains in ambulatory care services (+20,000) and hospitals (+9,000). Health care had added an average of 29,000 jobs per month over the prior 12 months.
Transportation and warehousing added 19,000 jobs in February, with most of the gain occurring in couriers and messengers (+12,000). Employment in transportation and warehousing grew by an average of 14,000 per month over the prior 12 months.
Employment in retail trade continued to trend up in February (+32,000) and has grown by 319,000 over the year. Manufacturing employment continued to trend up in February (+8,000). Within the industry, petroleum and coal products lost 6,000 jobs, largely due to a strike.
Employment in mining decreased by 9,000 in February, with most of the decline in support activities for mining (-7,000).
Employment in other major industries, including wholesale trade, information, financial activities, and government, showed little change over the month.
That data doesn’t look so bad; so why did the market get crushed the way it did? The market believed that the data were so good that the Fed must raise rates sooner than originally expected. After all, Janet Yellen says the Fed is DATA dependent, right? So how can it ignore this report?
Goldman Sachs agrees…
Payroll employment continued to grow at a strong pace, exceeding consensus expectations. The unemployment rate fell due to lower participation. With the final employment report in hand before the upcoming FOMC meeting, we think the Committee will modify its forward guidance on March 18. In our view, the most likely scenario is that the Committee replaces the reference to being “patient” in hiking the funds rate with new language that affords the possibility—without suggesting an overwhelming likelihood—of a hike as early as June. Our forecast remains for the first hike in the fed funds rate to occur in September.
Now this is really odd: Good news is bad news?
Trade well and follow the trend, not the perma-bull OR perma-bear “experts.”
We talked last week how corporate earnings were not going to pull us out of the financial mess the globe has made for itself. It’s going to have to come from real spending in the form of capex which then provides more production (jobs) which then sustains consumption (spending). But, corporate earnings sure could throw a wrench into things. Two main things are afoot here. Back in September 2014, corporate Q1 2015 EPS was forecasted to be 10% year over year. That was quickly revised to a more modest 4%. We now stand at -2.8%. What gives? Two things: Crude Oil prices and an overly strong dollar. It’s no secret how Crude as had a less than net positive effect on the US economy. Lower capex in the US Shale sector and the accompanying job losses there are the two main things that come to mind. Next, the strong dollar’s effect. Let’s take a look at some text taken from a few companies’ latest earnings reports:
–Finally, we do see currency as a continued headwind. We factored into our guidance the headwind of approximately $0.15 to $0.20, which was roughly the same rate of devaluation we experienced in FY 2014.” –Monsanto (Jan. 7)
– “Before I share with you some of the highlights from the quarter, let me provide some background on the impact to our business from the volatile foreign exchange rates. Nearly every currency we do business in weakened against the U.S. dollar when compared against Q3 last year, last quarter or against guidance…These rate changes negatively impacted both the income statement, where we use an average rate for the quarter and the balance sheet, which is translated using spot rates at the end of the quarter. For instance, total revenue would have been $13 million higher using Q3 rates from last year, a $11 million higher using rates from last quarter, and $3 million higher using the rates given in September for guidance.” –Red Hat (Dec. 18)
– “Turning now to revenues, net revenues for the quarter were $7.9 billion, an increase of 7% in U.S. dollars and 10% in local currency, reflecting a negative 3% FX impact compared to the negative 2% impact provided in our business outlook last quarter.” –Accenture (Dec. 18)
– “Our Consumer Foods segment operating profit, adjusted for items impacting comparability, was $310 million or up about 7% from the year-ago period…Foreign exchange had a negative impact of $8 million on net sales and about $6 million on operating profit for this segment this fiscal quarter.” –ConAgra Foods (Dec. 18)
– “And as I mentioned, foreign exchange lowered reported sales by 2 percentage points.” –General Mills (Dec. 17)
– “The as reported numbers were heavily impacted by the strengthening of the U.S. dollar in comparison to other currencies. Total revenue saw a 4% currency headwind which would double what it was at the time of my guidance.” –Oracle (Dec. 17)
“And with all variable costs already trimmed out of existence in the past 5 years, this can mean only one thing -millions more in layoffs, especially if the companies that comprise the above sample are also eager to maintain their record pace of corporate buybacks: something they would be unable to do with the residual cashflow that lower sales generate.”
I cannot wait to see how the BLS comes up with new and improved ways to seasonally adjust and revise the numbers as we go through the next few quarters!
In last’s night email I asked the question, “I cannot wait to see how the BLS comes up with new and improved ways to seasonally adjust and revise the numbers as we go through the next few quarters!” I asked this almost sarcastically and I don’t know how this got by me, but look what I find today:
“Effective with the release of the January 2015 CPI on February 26, 2015, the Bureau of Labor Statistics will utilize a new estimation system for the Consumer Price Index. The new estimation system, the first major improvement to the existing system in over 25 years, is a redesigned, state-of-the-art system with improved flexibility and review capabilities. For more information on this new system, please see http://www.bls.gov/cpi/cpinewest.htm.”
Upon visiting the BLS site, they highlight three main changes.
“Imputation of sampled items unavailable for pricing. When a sampled consumer item is temporarily unavailable, its price change is imputed by the price change of other items within a geographic area. In the current estimation system, these missing prices are imputed by all the price changes within a CPI item stratum.
Imputation of off-cycle prices. Many CPI prices are collected on a bimonthly basis, but the CPI is calculated and published monthly. In the current estimation system, elementary indexes for items that are ‘off-cycle’ are imputed at no change to the current month, and combined with the monthly and ‘on-cycle’ elementary indexes to calculate the higher-level published indexes.
In the new estimation system, off-cycle indexes will no longer be used in the calculation of indexes. Instead, the prices themselves will be imputed, and thus more prices will be used directly in the calculation of the basic (item-area) indexes of the CPI.
Calculation of annual averages for bimonthly areas. Related to this change, the calculation of annual average indexes for areas published on a bimonthly basis will change. In both the current and new estimation systems, the calculation of annual averages is based on the average of 12 monthly indexes, including the six on-cycle published indexes, as well as an estimate of the off-cycle indexes.
In the current estimation system, an annual index for an area published on a bimonthly basis is based on its six published indexes, plus six geometrically interpolated off-cycle indexes.
In the new estimation system, BLS will calculate (instead of interpolate) the unpublished off-cycle indexes, and the calculated indexes for all 12 months will be used in the calculation of the annual averages for areas on a bimonthly publication schedule.”
The net impact of these changes on the All Items U.S. City Average level is expected to be minimal.”
Ok, great! My head is sufficiently spinning. My favorite part of the release is the last sentence. Essentially, they are saying “Trust us! This is not a big deal!” I have learned that when someone (especially a Government Agency) tells me there’s nothing to worry about, it’s time to start worrying. Revise away BLS!
Trade well and follow the trend, not the perma-bull OR perma-bear “experts.”
A few days ago I wrote about how the big price drop in Crude Oil and the parallel shift down in gasoline prices was affecting consumer spending. Long story short is that since this savings comes in at about $7.50 each week, no real traction would ever be made. What are we going to do, buy an extra cup of coffee and a muffin once a week? Courtesy of the US Bureau of Economic Analysis (BEA) we got the first revision of consumer spending. We see that in Q4 2014 “Americans spent even more on healthcare, pushing the total up by $1 billion more, to a whopping $21.4 Bn, or 18% of all spending on goods and services.” When we are asked where the “de facto tax cut” that Americans got in the form of lower gas prices went and why Q4 retail sales were so dismal, let’s take a look at this chart: