Carl’s Corner – 2013

Carl Perthel Alt Text

Carl Perthel, CMT

Disclaimer: The views expressed are those of Carl Perthel, CMT. These views are subject to change at any time and The American Asset Management Group, Inc. (AAMG) disclaims any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions for AAMG are based on many factors, may not be relied upon as an indication of trading intent on behalf of AAMG.

 

*** Carl’s Corner for December 1, 2013 ***

For those of you who were unable to tune-in to the Conference Call on November 13, a transcript is now available at www.aamg.com under the tab, “Past Market Views-Markets Unplugged X.” I would invite you to visit the website and read the Conference Call transcript regarding our current views on the financial markets. We hold these calls twice a year on the second Wednesdays in May and November.

Right now, the stock market’s theme song comes from Sonny and Cher’s Billboard Top 100 hit (peaking at #6) in 1967; “The Beat Goes On.” 1967 was coined the “Summer of Love” by social scientists, a carefree, flower-filled time; a social phenomenon that occurred during the summer of 1967 for those who chose to travel to San Francisco to experience love, unity and reflection. As the beat goes on in 2013, this year will go down as the year of “Equity Love;” a rich, bountiful trading and investing environment for equity, long-only, bullish market participants, spawned by a low interest rate environment, sponsored by the U.S. Federal Reserve, allowing some credit-worthy candidates to “re-fi” like the Dwight D. Eisenhower and John F. Kennedy generation. Similar to 1967, 2013 has given us a general feeling that “all is right with the (stock market) world.” Just give a swift “kick of the can,” down the road, compliments of the U.S. Congress and others, and remain in a melodic dream, fostered by “easy money.”  For those lucky enough to be “long” in the U.S. stock market at any time this year, it has been euphoria, a “purple haze”…make that a green (as in money) haze. And the beat goes on… or should we start humming, “What a Long, Strange Trip It’s Been…”

Of course, the year after the “Summer of Love,” 1968, was downright ugly, marked by race riots, assassinations and cities on flame. Nothing lasts forever. Not a prediction for next year, just an observation that markets are no more than a reflection of the human psyche, where “price” is a proxy for how investor’s feel and feelings are subject to change. Just like the differences in 1967 and 1968 show diametrically opposed views of societal feelings, so doesn’t the market continually reflect changes in investor’s feelings through their social and emotional responses, based on how and where market participants put their money in the financial markets or take money out of the financial markets?

To validate the view that investors are still “smelling the flowers” in the U.S. stock market, like the hippies were smelling them in each other’s hair in 1967, Investor’s Business Daily reported on November 27, “(for October as the most recent data point) that investors inserted $21.06 Billion in stock fund inflows versus bond funds bleeding $15.6 Billion on the outflow.”

October was the second-largest (equity) monthly inflow this year, trailing only January’s $37.43 Billion, according to the Investment Company Institute (ICI).

It was the 10th month in a row of stock fund inflow. Right now, investors love purchasing stocks. ICI alludes to signs that equity inflows rose in November, as well.

There is another reason for investors to feel good about the stock market going forward. By a 14-8 vote from the Senate Banking Committee a week ago, Janet Yellen moves closer to becoming the Fed Chair.  Ms. Yellen is considered “accommodative.” The word “accommodative” translates to a rising stock market. At her hearing she said, “The objective here is to assure a strong and robust recovery so that we get back to full employment.” Yellen said, “Stock prices have risen pretty robustly,” but she didn’t “see stock prices in territory that suggests bubble-like conditions.” Authors note: Among other clues, “bullish” magazine covers typically signal the end of a bull market.

Our “in-house” stock market barometer that monitors the relationships between bonds, stocks and commodities (for further details please view Markets Unplugged VIII at www.aamg.com) points to some signs of life in the commodity patch. Maybe Goldman Sachs sees the same, having just upgraded a key issue in the Farming & Construction sub-industry group on November 25. With China’s new policies of  trying to bolster aggregate demand at home and commodities in a strong seasonal cycle, historically strong in fourth quarters during the year, maybe commodities will follow the rising move in equities that normally occur after bonds “roll over.”

Upon examining our sub-industry group model, one is left humming the aforementioned Sonny and Cher song, with the exception of upgrades to specialty chemicals, major integrated oil and oil and gas refining (all commodity related issues). Price moves higher in these groups fall into line with the positive seasonality one historically experiences in the oil patch in December. If the economy does find good footing in the quarters ahead, money may rotate into the basic material sector, where you find oil and gas, synthetics, chemicals, agricultural chemicals, industrial and precious metals.

I wish all of you the happiest of Holidays and a Happy New Year.

Carl Perthel, CMT

 

*** Carl’s Corner for November 1, 2013 ***

The government shutdown came and went. The stock market yawned; down no more than -3.12% and then back to new rally highs by October 18th, one day after the government re-opened from its October 1st  closing date. Congress reached a bi-partisan measure to avert defaulting on its debt obligations. Standard & Poor’s estimated that $24 Billion was taken out of the U.S. economy because of the disruption. For those market-watchers looking for reasons not to have the Fed “taper” or raise rates, due to economic sluggishness, the government just gave them 24 billion reasons during the shutdown for them to maintain their current course of action.

The Federal Reserve just finished a two-day policy meeting. Mentioned last month, we doubted there would be a change in QE3 policy and the result of this meeting was for the Fed not to change monetary policy. We postulated that tapering would likely be off the table until early next year or maybe as late as springtime.  What would overturn the Fed’s policy stance and have them move toward tapering? The analogy would be similar to NFL referees examining instant replay after facing a coach’s “challenge.”   To challenge Fed policy and “overturn” its decision to continue “loose money,” starting with a tapering initiative, there would have to be “clear and present” evidence from the replay booth citing stronger economic numbers, supporting improvement in housing, employment and manufacturing.  A “challenge” will unlikely present itself until we get stronger statistics in these vital economic areas.

Since 2014 is an election year, perhaps a hint of change in business policy coming from our legislative branch may give impetus to spurring the economy? Lawmaker rhetoric for “manufacturing friendly” government regulations might put some wind in the economic sails. The preferential tax treatment for U.S. multinationals to move off shore is attractive. Maybe a change in the tax treatment for large corporations could draw businesses offshore back home along with thousands of lost jobs? Rhetoric creates perception and sometimes that’s all it takes to start policy momentum.

Our in-house research started signaling stronger momentum in stock prices, represented by the financial sector, in early winter at the beginning of this year, followed by strength in railroad stocks in late winter and the industrials in late spring. The Transportation Average broke to new highs this month.

Couple strength in these areas with the “favorable” equity (six month) seasonal phenomena starting this month and we have reason to believe that the 55 month cyclical bull market starting in 2009 still has “some legs.”

Transports often lead the rest of the market in both directions. Truckers and railroads (both strong currently) get an early look at changes in the amount of raw materials and supplies carried to manufacturers and the amount of finished goods moving from manufacturers to wholesalers and retailers here, and around the world. Transports made new highs in their averages this month.

Talk of the “transportations” brings us back to Dow Theory, a subject we have discussed previously in Research Notes. Basically, a Dow Theory Confirmation occurs when both the Dow Jones Transportation Index and the Dow Jones Industrial Average reach new highs together or in close proximity to one another. A Dow Theory confirmation will validate the continuation of a “bull” trend in the equity markets. A Dow Theory Confirmation occurred in late September. Since late September, both indexes had fallen back, but by October 29, they again confirmed each other, each reaching new highs with the “transports” leading the way.

Regarding the business cycle (Sam Stovall, S&P Guide to Sector Investing; Publisher: McGraw-Hill (1995)), our sector work puts us in an Early Expansion phase; where things are starting to pick up. Consumer expectations are rising, industrial production is growing, interest rates have bottomed and the yield curve is starting to get steeper. Historically, successful sectors at this stage include transportation and technology. Next, Middle Expansion starts with rewarding the Industrials, known as Capital Goods and Services. The Industrial Sector is improving. Should the economy move too quickly and the Fed not “get out in front of it” by slowing down QE3 stimulus, the Fed could face the potential problem of inflation down the road. At some point the morphine drip of “easy money” will dissipate. Recent economic numbers dispute a stronger economy, but remember our research examines equity prices as a proxy for what the economy may have in store for us because stock market pricing leads the economy. The stock market is NOT the economy. That’s why market averages (pricing) can turn up in poor economic environments (e.g., 2009) and conversely, turn down when economic numbers are robust (e.g., 2007).

See you next month.

Carl Perthel, CMT

 

*** Carl’s Corner for October 1, 2013 ***

Our “blue skies” scenario (please see Markets Unplugged – IX at http://www.aamg.com/markets-unplugged-ix/ for the conference call transcript regarding “blue skies”) continued for another month, although “price trajectory” coincided with the “unfavorable” season in equities. Historically, May through October sees higher volatility in the equity markets while price moves sideways to down.  True to form, August and September’s price action in the benchmark SP-500 has experienced a slight decline of – 0.25% over the two month period. Since late May, the SP-500 has moved only +1.65% (sideways). Prices from late May to October 1 have decelerated 90%, compared to the +17.53% move In the SP-500 from the beginning of this year to the May highs.

Despite the summer malaise, just about every market participant is happy and the general consensus is for the equity market to continue higher, with this caveat; as long as investors perceive that the Federal Reserve Bank of the United States (the Fed) is accommodative to an “easy money” program through the purchase of bonds and mortgage backed securities. We noted in our last edition of Carl’s Corner that this “backstop mentality” was reminiscent of 1999 when everyone felt the same way about Alan Greenspan and the security blanket he was providing the equity markets. Remember the Greenspan “put?”

After Bernanke’s mention of “tapering,” in early May, the bond market sold off, followed by a stock market “selloff” in late May.  Since Bernanke’s statement, Wall Street expected   his word to be backed up by an official action which would restrain the “easy money policy” we’ve experienced since 2009. But to everyone’s surprise at the Fed’s September meeting, the Fed did not institute tapering of its $85 Billion monthly bond and mortgage backed security purchases. In essence, by not initiating a tapering policy, after insinuating it would, the Fed has created another measure of euphoria for market participants.  Essentially, the Fed created another “feel good” scenario without having to implement another quantitative easing action. This behavior reminds me of a parent telling their child they cannot have another cookie, then turning about and saying, “Well, maybe you can have one if you behave.” Not only will this behavior cause a child to stop crying, but Bernanke’s turnabout keeps market participants happy, knowing that the cookie jar will remain available.

With this turn of events this is the first time, going back to the 20th century, that one can remember when the Fed did not carry out on its talking points. As convoluted as Greenspan’s messages used to be, that Fed Chairman pretty much telegraphed to the markets what the Fed’s intentions were for upcoming policy decisions. So it’s been with Bernanke- up to now. Maybe there was a change of heart, or strategy, by issuing a “no decision” on tapering. Perhaps the Fed has decided that Congress needs to get involved in policy decisions before it decides what must happen?

Decisions from Congress have been few and far between. It appears the Federal Government will close, starting October 1, due to a “no decision” ruling.

The last time Congress had to make a decision on the budget (in 2011), the equity markets fell more than -18%. When our legislative branch (people with large equity portfolios and a lot to lose in a tumbling market) can come to a budget decision, then the Fed will eventually have to “make the call” again. It’s a tough time for the Fed. Their “no decision” may be the result of these points of view: (1) On one hand, a “no decision” on tapering may be the result of weak economic numbers not yet reported, which may lead to weaker earnings and earnings guidance. That would be a negative for the markets. (2) The “no decision” may be the Fed communicating to the legislative branch that they would like to get some guidance, see a budget resolution and some policy action coming from our law makers to better understand their point of view. (3) Or, was a “no decision” the opportunity to buy some time to sure up monetary strategy as the Fed transitions between Bernanke and the new Fed Chairperson to be elected early next year? Regardless, a weak economy, a lack of legislative guidance or ultimately, a decision to taper next year, could weigh negatively on the market over the next month or two.

The Fed’s call on “tapering,” will most likely fall on the shoulders of the new Federal Reserve Chairperson next year. Should this be the case, we continue to see “kicking the can” down the road and “easy money” carrying on for a few more innings. Where she stops, nobody knows.

The long bond has been heading higher this past month while yields have been declining; a positive for borrowers, whether purchasing or re-financing properties, paying down credit card debt, businesses borrowing for expansion or government entities having to pay off debt service. High rates are in nobody’s best interest. On a relative basis, rates aren’t so bad are they? Are you old enough to remember 17% rates on an auto loan or 10% interest payments on a mortgage?

Technically speaking, benchmark prices on the equity market indices remain above the 2000 and 2007 highs of 1560 on the SP500, which keeps the aging, cyclical bull market in an uptrend. Shorter term bull markets (cyclical) within long term (secular) bear markets average about 42 months. This month will mark our 55th month from the beginning of the current cyclical bull market which started in March 2009. The secular bear market started with the dot com crash in March of 2000. Prior to this cyclical bull market, the last cyclical bull market from 2002-2007 lasted 60 months.

On a positive note, positive seasonality in equity pricing may start up next month, depending on how the government handles the budget crisis (government shutdown), the pending debt ceiling and when the Federal Reserve decides how to handle tapering.

See you next month.

Carl Perthel, CMT

 

*** Carl’s Corner for August 1, 2013 ***

As we noted on the May 8th Conference Call (please see Markets Unplugged – IX under Past Market Views for the conference call transcript regarding “blue skies”), it’s a “blue skies” scenario; just about every market participant is happy and the general consensus is for the equity market to continue higher as long as the Federal Reserve Bank of the United States (the Fed) is accommodative to an “easy money” program through the purchase of bonds and mortgage backed securities. This “backstop mentality” reminds me of 1999 when everyone felt the same way about Alan Greenspan and the security blanket he was providing the equity markets. Remember the Greenspan “put?”

Historically, July is typically the best performing month of the third quarter according to the Trader’s Almanac (Wiley 2013). The coming two months, August and September are historically two out of the three worst performing months of the year on the equity calendar. But, as we pointed out in a Research Note from last October, “Do not stand in front of the Fed.” So the question remains, can the Fed overcome the market’s typical selling pressure in the next two months? Thus far, it appears that as long as the “marketplace” perceives Chairman Bernanke will backstop the equity markets and continue to provide stimulus through its “easy money” policies, it’s hard to buck the rising uptrend in equity prices.

One can only imagine the market’s response when the market’s “morphine” is discontinued. Bernanke’s remarks alluding to “tapering” in May sent the bond and equity markets into a tailspin. If the Fed sees weak to flat economic numbers, they will not have to utter that phrase again. If the economy strengthens, they will. The head scratcher is, “what constitutes an improving economy and does the Fed want to admit signs of improvement when they show up?” Now there is talk that the target rate of unemployment will be lowered before stimulus will end. What next?

The late Dr. Herb Stein of the University of Chicago coined the definition of inflation as “too many dollars chasing too few goods.” It would seem that the U.S. and global central banks have provided the ammo for the first part of this definition since 2008. The Fed balance sheet is now $3.5 Trillion, having grown $750 Billion since last September! When the global consumer returns to the trough, the second part of Dr. Stein’s definition of “too few goods” may move front and center.

Certainly, substitutes like natural gas for oil and genetically modified fruits and vegetables for plentiful harvests could fill some need for substitutes to accommodate rising global consumption; food and energy being the most basic. These substitutes may mitigate “demand-pull inflation.”

But yesterday afternoon the Fed’s new message from their latest meeting was they are worried about low inflation and therefore must keep vigilant, using stimulus to alleviate the “low inflation” condition. I would suggest to government economists that they INCLUDE food and energy prices in their inflation equation so this silliness will cease and we keep ourselves at arms- length from a Japan model for recovery. One of our inflation barometers, the Treasury Inflation Protection Securities (TIPS) instruments responded immediately by moving up almost +1% from the 2:00 PM Fed meeting notes release.

You might ask “will easy money ever end?” Ultimately, the purpose of stimulus policies the past 5 years in the U.S. (TARP, QE2, Operation Twist, and QE3) and from the major banks around the world; The European Central Bank, Bank of England, Bank of Japan and the People’s Bank of China, is to grow and repair a broken global financial system, caused by the Credit Crisis in 2008. “Easy money” is a “double-edged sword.” The stimulus and resulting low rates have forced money into the equity markets because money seeks yield and appreciation. For now there is nowhere else for money to go. Once the U.S. and globe recovers, then the tapering of “easy money” must follow. It is inevitable. Or is it?  Japan is pondering “when,” still, after all these years.

A little inflation might be a good start for a rebound in the battered commodity- related countries that lifted all boats in the mid-2000s.  But European and Chinese consumers will have to come back on-line for this to happen.  Barron’s Magazine (July 22, 2013) is in favor of Europe.

Our in-house research finds “upgrades” in the Technology sector this month. This is a sector that has lagged on the S&P500 Sector list thus far in 2013, ranking 8 out of the 9 Sectors we monitor.  Historically, September “boots-up” technology. Application software, data storage and networking highlight this area.  Industry-Group “downgrades” are found in the Industrial Goods Sector; in “Residential Construction,” “Cement” and “General Building Materials,” which may reflect decreases in pending home sales, mortgage applications, new housing starts, building permits, and future starts. Mortgage rate spikes have added to near-term uncertainty in these sub-groups.

See you next month.

P.S. Another sign that the Fed will continue the stimulus occurred with today’s employment numbers (August 2, 2013), which fell short of expectations.

Carl Perthel, CMT

 

*** Carl’s Corner for June 1, 2013 ***

Looking back to a research note dated last October, we stated, “Fed stimulus has been good for the equity markets since a ceiling on interest rates force investors out of low yielding bonds to seek higher yielding instruments like stocks. Until the market shows us differently, do not stand in front of the Fed.” That phrase continues to ring true, with dividend paying equities leading the way. Specifically, through April 2013, it was the healthcare, utility and consumer staple sectors leading the charge. Good dividends and defense. But, under our new break above the cloud line into “blue skies;” just this month, the S&P500 closed above the 2000 and 2007 highs. Maybe “defense” was yesterday’s story?

During a business cycle, money will eventually rotate out of bonds once the markets perceive the economy is improving. Our sector work shows marked improvement in auto and truck manufacturing here in the U.S. during the month of May; a good sign that our economy is improving at a fundamental level. Existing home sales and home prices have been rising over the past year. Consumer sentiment is back to the highs seen at the last market top. What’s not to like? Was this not the purpose of the Fed’s multi-pronged stimulus approach: TARP, QE2, Operation Twist and QE3?

The Fed hinted last week, in the FOMC minutes and in a Bernanke testimony, that stimulus may take a holiday sometime this summer if the economy continues to improve. The equity market did not like the news, initially. Is the horse out of the barn?  Just the “talk” of pulling stimulus has already influenced interest rates. The 10-year yield jumped +30% in the month of May from 1.63% to 2.17%! We cited “jawboning” by the Federal Reserve in the March 2013 Notes. The Fed is “testing the waters” again and preparing market participants for the inevitable ceasing of stimulus should the economy continue to improve. “Jawboning,” about stimulus ending, diminishes the “shock” equities would experience in the short run if stimulus ceased without a forewarning from the Federal Reserve.

Even though rising rates, as a result of ceasing stimulus, coupled with a stronger economy, may be seen by some market participants as a negative, there are positives. Rising rates on the long end of the yield curve is positive for banks and lending. Lending is a positive for the U.S. economy and housing. Higher rates may force potential home-buyers off the sidelines to consider purchasing; “Let’s lock in low rates now before they move higher,” may be the rallying cry. Regional banks may be a beneficiary of this possible scenario, since they are a major force behind mortgage lending and re-financing.

The Financial, Industrial and Energy sectors are the three leaders relative to performance for May 2013. These new leaders exhibit a marked difference from the defensive sectors of health care, utilities and consumer staples that led the S&P500 Sector List for the first four months of this year. These new leaders correlate with a strengthening economy and provide another piece of validating evidence for a U.S. economy trying to turn the corner. Although May represents only one month of data in our sector analysis, should this trend continue, it would signify a move from defense and uncertainty to non-defensive sectors. Is this the beginning of the move in the economy we’ve been waiting for?  The perception from many media circles, “That it just keeps getting better,” not only sells media advertising, but is the “siren song” for new investors near all market tops to purchase stocks.

Remember, it’s “topsy turvy” regarding the stock market and the economy. Consumer confidence is non-existent at market bottoms, before the stock market rises (think 2009). Consumer confidence reaches its highs near stock market tops.  In fact, the Thompson Reuters/University of Michigan Consumer Confidence Index reached 84.5 this month, its highest level since July 2007, three months before the last cyclical bear market.

If the U.S. Economy from 2008 until now were a M*A*S*H  television episode, I would liken Federal Chairman Ben Bernanke to Dr. Hawkeye Pierce, perhaps accomplishing his greatest mission (procedure);  getting the patient in triage (Uncle Sam) off the gurney, out of the tent, and finally ambulatory. He has implemented great economic (surgical) skill and monetary stimulus (blood and morphine) to assist in the patient’s recovery. Uncle Sam must continue to face the challenges of recovery, getting back his faculties and working through the process of coming off stimulus (the morphine drip), so he may get back into action.

Carl Perthel, CMT

 

*** Carl’s Corner for April 1, 2013 ***

As we begin our march through this year’s second quarter, positive seasonality continues. Looking back just twelve months ago, Q1, 2012 ended with a positive gain of +12.6% including dividends, accounting for almost 80% of last year’s annual gains.  Q1, 2013 has produced similar double-digit returns of +10.6%. Now the question is, “Are we going to see a lack-luster Q2 through Q4, 2013 like we did last year, where those three quarters, combined, gained only +3.4%?” If that is so, then we may have already seen the “lions share” of gains for 2013.

Regarding the S&P500, let’s put the current state of affairs into perspective. From the March 2009 lows of 667, it took only four years for the S&P500 to move higher and close above 1565, a high not seen since October 2007. A closing high of 1569 on the S&P500 occurred on the last trading day of March 2013. Since 2009, the index has increased +134%. In the prior cyclical bull market from the low in October of 2002, it took the S&P500 five years, to increase +104% before peaking in October 2007. The significance of the recent 4-year ascent is that returns off the lows have been condensed over time. Usually, the steeper a price trajectory, the less likely the opportunity for price to continue higher.

Relative to market structure, the S&P500 index is bracketed by the years 2000 and 2007 high points at about 1575. At the structure’s base we find the 2002 and 2007 lows in the area of 750. By connecting the highs and lows with parallel lines we find ourselves in a range bound market from 2000 to 2013. Our closing high in price at the present time represents a potential third data point in the 1570 zone where past price action has stalled and moved lower. The primary reason for prices to move lower from former highs is investor psychology. Those investors, who purchased stocks at the 2000 and 2007 highs and have held their stocks through the ensuing downward moves, now find themselves back at “break even.” Therefore, they have an emotional reason to sell. These folks are thinking, “Finally, I’m back, just get me out!”

Academic studies support “favorable” seasonality beginning in late autumn each year. True to form, we’ve seen a “bullish” move of +16% since mid-November 2012. But we all know that trees do not grow to the sky. Likewise, positive seasonality may give way to its opposite cycle as soon as late April, or as we experienced in 1980, as late as June. We will be examining this “time window” over the next few months and keep you posted regarding a change in market tenor.

Carl Perthel, CMT