Archive for the 'Economy' Category

Through A Trader’s Eyes Podcast #5 – February 2, 2010

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Upside Surprise To GDP Growth

On Friday morning, one of my favorite pieces of economic data was reported much better than expected.  The GDP Growth Rate (Quarter over quarter annualized) was reported at 5.7% vs. a 4.7% estimate.  This is also much higher than the last report of 2.2%.  Below is the S&P 500 (blue line) and the GDP growth rate (red).  This is one of the few economic indicators that is actually correlated with stock prices.  This indicator measures not how big our economy but the rate of change of growth.  Investors buy or sell stocks based on whether or not the economic growth is accelerating or decelerating.


You can see above that since 1998, the stock market has been very correlated to this number.  The stock market bottomed in March 2009 before the economy actually started to accelerate but leading economic indicators at the time were pointing in that direction.  It’s been up ever since.  In 2009, I was on television several times using a number of 5%+ for GDP growth.  Some agreed with me but most were shocked that I would say such a thing.  Here we are now in early 2010 with a reading of almost 6%.  I anticipate this number will peak at some point and start to head the other direction.  I could look similar to the 2004 & 2005 time frame.  The economy was accelerating in 2003 then began to slow down.  The are a few differences this time versus 2004.  First, the economy this time has expanded at a much faster clip and secondly I don’t believe this is the beginning of a multi-year bull market.

At the end of the day, the economy will begin to slow.  It will keep growing but just at a slower pace and I think the stock market will follow with more of a sideways choppy pattern.  But, for now, enjoy the better than expected report and potentially an oversold bounce.

Strike

Intel’s strong earnings on Thursday weren’t that big of a surprise given the fact that Windows 7 is now firmly in place.  After the bell, Intel beat sales & earnings expectations giving the stock a boost.  Barring some short-term pullbacks, this clears the way for higher prices for tech in general.  Windows 7 was released last fall and it’s beginning to trickle through tech land, just like low interest rates and stimulus trickled through the financial system.  Most businesses I know still use Windows XP and skipped Vista all together.  Vista looked different and acted different but was too unstable to run a business on.  In addition, many vendors of software that I used simply weren’t compatible with Vista.  Windows 7 is now Vista without all the bugs.  It’s more secure than XP and basically it’s just time to move on.  It’s becoming harder and harder to even find a new computer installed with Windows XP.  Businesses now have a reason to upgrade.  Microsoft was the bowling ball and some of the pins are Intel, Marvel Technologies, Sandisk, Applied Materials, Texas Instruments, etc.  I expect more strong earnings from these guys as well over the next few weeks.  IBM announces their earnings on the 19th and they should be excellent.  You can get fancy owning individual companies but I still like the ETFs in this space like IGM & XLK.

With strong tech results coming, stronger bank results would add even more life to this impressive bull market.  JP Morgan, Wells Fargo, Citigroup, Morgan Stanley, & US Bancorp all report over the next few days.  Strong results from the financial sector give investors that were hesitant another reason to buy.  As I see it right now, there’s simply no sellers.  Any bad news is being ignored and investors are focusing on low rates, an improving economy, and better news from companies.  I would caution those of you that are under invested and dying to get into this market.  I would be patient and average in because while the light is still very green to buy stocks, the short-term is getting a little overheated.  A lot of sectors and stocks are participating in this rally which is very bullish, but bull markets pause and breathe.  So, in the short-term, be guarded but this bull market isn’t done yet.

It’s Only A Matter Of Time

When will the Fed raise rates?  That will be the question of 2010.  We’ve seen Australia raise rates in the last few months.  On Thursday, China raised interest rates as well.  Will Bernanke join in the fun?  While it’s important when the Open Market Committee raise rates, investors need to be focusing on long-term rates.  Remember, the Fed doesn’t control long-term rates.  They change short-term rates which affects your CDs, money markets, etc.  Don’t get me wrong, they definitely influence long-term rates, but they don’t directly control them like they do short-term rates.  How do they influence long-term rates?  By purchasing and selling bonds.  When they purchase mortgage bonds and treasuries in mass quantities, long-term rates fall.  In 2010, I believe they will dramatically slow this process.  Hence, uncapping the lid on interest rates.  The idea is to let rates rise slowly without making a big to do and announcing it like they would do with short-term rates.  But, that rise in rates will negatively affect your mutual funds, bonds, many of the stocks you own, and perhaps the economy.  Obviously it depends on how high rates go and how fast they get there.  The Fed may try to let rates rise in a methodical way but with all the stimulus they’ve created and as long as it’s been in the system, it could be like a slingshot causing rates to spike fast and violent.

Many of you have already positioned yourself to take advantage of higher rates by owning various assets including the Proshares Ultrashort Lehman 20+ Treasury ETF (TBT).  Since October, it’s up about 20% (it is positively correlated with interest rates).  You’ll hear in the media that because everyone thinks rates will rise, maybe they won’t.  Perhaps they won’t in the next couple of weeks, but I’m confident they will rise in 2010.  Therefore, I’m and advocate of reducing exposure to longer-term bonds, especially long-term treasuries and re-allocating to bonds that benefit from a rise in rates and ETFs that benefit from that rise as well.

You may be asking why wouldn’t the Fed just start raising rates now if the economy continues to improve.  Never forget there are political ramifications for raising and lowering rates when an election is approaching.

Therefore, watch what the Fed is doing and not what they are saying.  In addition, watch what the market is telling you about rates.  Be patient on these rising rates investments.  They will be longer-term trades.

The Last Piece Of The Inflationary Puzzle

Everyday, I receive some comment either in an e-mail, a comment on this blog, or a comment on my radio show regarding future inflation.  When will it come?  What will it look like?  Why hasn’t it started already?

The Fed has injected more money in the system (along with other governments) than we’ve ever seen.  The monetary base (basically the amount of money in the system) which goes up about 6% per year has risen over 130% in just the last 12 months.  TIPS have risen in price.  Gold has risen dramatically this year.  Other commodities have followed suit.  So, why is everyone still worried about deflation?  I think it’s interest rates.  Interest rates have stayed low for some time while all of these other inflationary indicators have been rising.  They have been artificially held down by the Fed through their bond purchasing program.  Remember, when bonds are purchased, rates go down.  When bonds are sold, rates rise.  The Fed is slowing down their purchasing of all different types of bonds from treasuries to mortgage bonds.  In addition, they’ve started testing reverse repos to remove some of the liquidity.  We’ve seen rates begin to slowly rise.

On Tuesday, there were several pieces of economic data released.  the Producer Price Index was much higher than anticipated.  We knew these numbers would be high because they are being compared to an abnormally low number last year at this time.  But, they were even much higher than the estimates.  This caused rates to move up even more.


You can see above that we’ve broken the downtrend that had been in place since early summer.  This may be the beginning of rates rising at a faster pace.  Once this starts, I believe it’ll be like a freight train.  It’s going to be very hard to stop.  This is the time to look in the portfolio and see how much is in interest rate sensitive securities.  This could not only put a damper on bond prices but equity prices as well.

This post published at www.karleggerss.com

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As Goes The Dollar…

Lately, all the talk has been about the dollar.  It’s almost 100% inversely correlated with just about everything else.  When the dollar is down, gold’s up, oil’s up, stocks are up, emerging markets are up, etc.  So, perhaps we really can’t get a huge sell off unless the dollar spikes.  It’s had a few days where it appeared as though the trend was changing.  But, then down it went to new lows.

To me, it’s all about the 50-day moving average.  Until we break above the 50-day moving average, the downtrend is still intact.  Take a look at the picture below.  The green line is that 50-day moving average.  Keep an eye on this green line and that may give you a better idea on the direction of the stock market.


Television

I’ll be on CNBC Asia this evening at 5:10 p.m. CST & Fox Business tomorrow morning at 8:10 & 8:30 a.m. CST.  Make sure you tune in.

Keep Them Printing Presses Going

We often hear about the federal government contuing to keep the printing presses going 24/7.  The Monetary Base is the most common measure of this.  Over the past 50 years, the monetary base has risen about 6% per year on average.  But, you can see from the graph below it’s grown over 130% just in the last 12 months.

Just like that steroid shot when you’re kids are sick, it works in the short run and makes them feel better, but you can’t keep doing it without some long-term damage.

 


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