UnThreaded | Threaded | Whole Thread (10) | Ignore Thread Prev Thread | Next Thread
Author: WendyBG Big gold star, 5000 posts Top Favorite Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 465070  
Subject: Control Panel: Storm clears out Date: 2/23/2014 1:03 PM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 39
After the little storm of Extreme Fear that blew through in early February, the Fear & Greed Index has risen back to neutral. Investors are shifting toward risk-on investments (stocks, high yield bonds) and away from risk-off investments, such as the USD and Treasuries. We have seen this pattern many times before. The next move is usually toward Greed.

Long-term Treasury yields are gradually rising again. The yield curve is not as steep as it was before the storm blew in about a month ago, but it is steepening. This is normal for an improving economy. If the economy strengthens in the spring as the unusually harsh winter weather mitigates, the yield curve will probably steepen further. It is normal for interest rates to rise in the spring as the demand for mortgage lending increases.

ECRI (the Economic Cycle Research Institute) says that the economy has "Failure To Launch." They write, "It is now quite clear that the economy is decelerating, not accelerating, with growth in ECRI's Weekly Coincident Index (see chart) falling rapidly." While the growth rate is still positive, it is only about half what it was in 11/2013. The LEI dropped, but that was within the noise of a generally climbing trend. For perspective, ECRI has been bearish since early 2013. Their predictions failed to jive with the consistently growing economy (or even with their own increasing Leading Economic Index) and especially with the bullish stock market. So it's hard to say whether their prediction of a slowdown will be correct this time. The Fed's data series are only current to the end of last year (e.g. New Factory Orders).

Commodities, such as gold, oil and corn, are rising our of their near-term channels. This could be the beginning of a sustained trend change but it is a little early to tell.

It is also early to tell whether the SPX has resumed its 2013 bullish trend since it has not made a new high. The last new high was 1848 on 1/15/2014, so the "mungofitch 99-day rule" is still bullish. The "mungofitch Lagged MA" is also strongly bullish. Several measures of market internals that deteriorated during the storm are now recovering. The SPX P/E ratio is high but not in bubble territory.

The money supply continues to grow. The Fed continues to pump money, as shown by the growth in their assets (despite the slight "taper").

As aleax pointed out, Velocity is important in determining economic activity in the "real economy." The velocity of money is the frequency at which one unit of currency is used to purchase domestically- produced goods and services within a given time period. Both Velocity and the Money Multiplier (the ratio of M1 to the St. Louis Adjusted Monetary Base) are very low. If these metrics grew faster than the increase in production, consumer price inflation would increase.

However, Velocity and the Money Multiplier refer to M1 (cash and very short-term equivalents). They do not apply to money invested in the asset markets. The Federal Reserve continues to pump money into the asset markets, which is inflating asset prices. The Fed is quite satisfied with its results -- low inflation in consumer prices with high inflation in asset prices.

In addition to Fed pumping, NYSE margin credit is at a record high. The WSJ is reporting that small investors are buying more stocks on margin. This is a driver for a bubble in the stock market that can burst with devastating effect, since margin calls can force selling of good assets to finance the debts on falling assets.

A large part of the U.S. economy depends upon real estate. The Bureau of Labor Statistics adjusted its Producer Price Index (PPI) last week to include construction and services in addition to goods.

The spring season for real estate begins in March in warmer areas of the country. The average 30-Year Fixed Rate Mortgage is still over 4%, as it has maintained since June 2013. The average sales price of a new home as high as it was in 2005. The Case-Schiller averages are rising. Housing permits and starts are rising, although still low on a historical basis.

Non-U.S. stock markets around the world have popped back up as the storm cleared. The USD and euro are stable within their channels as the CAD continues to fall.

Despite the unrest in the Ukraine, Venezuela, Syria, etc., there are no financially disturbing stories in the press, just the usual chit-chat.

The 2014 spring real estate season will tell whether higher mortgage rates will "bite" housing sales and whether higher real interest rates will "bite" consumer spending, which is 70% of GDP. So far, Personal Consumption Expenditures are increasing although Disposable Personal Income stagnated in the second half of 2013. Consumers are borrowing but keeping the Household Debt Service Payments as a Percent of Disposable Personal Income at the lowest level since 1980.

If ECRI is correct and the real economy is slowing significantly, the effect will be longer-term. The 2007 recession started many months after interest rates (including mortgages) began to rise in 2005.

The METAR for next week is bullish. The storm has blown out and the weather is clear.

Wendy

http://stockcharts.com/freecharts/candleglance.html?$INDU,$S...

http://stockcharts.com/freecharts/candleglance.html?$IRX,$US...

http://money.cnn.com/data/fear-and-greed/

http://stockcharts.com/freecharts/candleglance.html?$USD,$SP...

http://stockcharts.com/freecharts/yieldcurve.php

https://www.businesscycle.com/

https://www.businesscycle.com/ecri-news-events/news-details/...

http://research.stlouisfed.org/fred2/series/AMTMNO

http://research.stlouisfed.org/fred2/series/SP500

http://stockcharts.com/h-sc/ui?s=$SPX&p=D&yr=1&m...

http://www.nowandfutures.com/articles/20060426M3b,_repos_&am...
http://research.stlouisfed.org/fred2/series/MZM
http://research.stlouisfed.org/fred2/series/M2
http://research.stlouisfed.org/fred2/series/MULT
http://research.stlouisfed.org/fred2/series/M1V
http://research.stlouisfed.org/fred2/series/WSHOL

http://www.nyxdata.com/nysedata/asp/factbook/viewer_edition....

http://online.wsj.com/news/articles/SB1000142405270230363640...

http://research.stlouisfed.org/fred2/series/MORTGAGE30US
http://research.stlouisfed.org/fred2/series/PERMIT
http://research.stlouisfed.org/fred2/series/HOUST
http://research.stlouisfed.org/fred2/series/SPCS20RSA
http://research.stlouisfed.org/fred2/series/SPCS10RSA
http://research.stlouisfed.org/fred2/series/ASPNHSUS

http://stockcharts.com/freecharts/candleglance.html?$STOX5E,...

http://stockcharts.com/freecharts/candleglance.html?$HSI,$ST...

http://stockcharts.com/freecharts/candleglance.html?$USD,$XA...

http://www.smithers.co.uk/page.php?id=34
http://www.multpl.com/
http://www.multpl.com/shiller-pe/

http://research.stlouisfed.org/fred2/series/PCE
http://research.stlouisfed.org/fred2/series/PCECC96
http://research.stlouisfed.org/fred2/series/A229RC0
http://research.stlouisfed.org/fred2/series/A229RC0
http://research.stlouisfed.org/fred2/series/TDSP
http://research.stlouisfed.org/fred2/series/TOTALNS
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Print the post Back To Top
Author: AndrewXnn Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 445348 of 465070
Subject: Re: Control Panel: Storm clears out Date: 2/23/2014 10:26 PM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 0
Why do you claim that long term treasury yields are rising?

The 10y is at 2.73%, which is down from 3.01% at the beginning of the year or 2.75% last week.

Print the post Back To Top
Author: knighttof3 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 445352 of 465070
Subject: Re: Control Panel: Storm clears out Date: 2/23/2014 11:42 PM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 0
Wendy,
a well researched post, as always! But I don't know if the following is true:
Long-term Treasury yields are gradually rising again. The yield curve is not as steep as it was before the storm blew in about a month ago, but it is steepening. This is normal for an improving economy. If the economy strengthens in the spring as the unusually harsh winter weather mitigates, the yield curve will probably steepen further. It is normal for interest rates to rise in the spring as the demand for mortgage lending increases.

My understanding is that the yield curve lowers and steepens when the economy is slowing and rises and flattens when the growth in the economy is accelarating. In other words, short term rates rise and fall much more rapidly than long term rates (in all scenarios.)

Maybe by "steepens" you actually meant "rises" (i.e. referring to the absolute levels and not the slope of the yield curve)?

Print the post Back To Top
Author: WendyBG Big gold star, 5000 posts Top Favorite Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 445376 of 465070
Subject: Re: Control Panel: Storm clears out Date: 2/24/2014 12:11 PM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 5
<In other words, short term rates rise and fall much more rapidly than long term rates (in all scenarios.)>

In a free market, you are correct, as shown by the Dynamic Yield Curve.

However, the market has not been free since 2008, when the Federal Reserve pegged the short-term rate to essentially zero. This is like tying a dog's tail to a tree. The tail can't wag anymore (the short-term bonds that used to wag most) and only his front end (long-term rates) can move. It's unnatural, but that's the situation we will have until the Fed frees the market again.

Wendy

Print the post Back To Top
Author: WendyBG Big gold star, 5000 posts Top Favorite Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 445377 of 465070
Subject: Re: Control Panel: Storm clears out Date: 2/24/2014 12:12 PM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 2
Here's the Dynamic Yield Curve so you can see for yourself.
http://stockcharts.com/freecharts/yieldcurve.php

Wendy

Print the post Back To Top
Author: rubberthinking Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 445382 of 465070
Subject: Re: Control Panel: Storm clears out Date: 2/24/2014 12:52 PM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 0
Wendy,

This is a fascinating Bloomberg article on the FED's quarterly forecast reporting process. A lot of things at the FED are starting to change. Molasses moves faster. Dave

http://www.bloomberg.com/news/2014-02-24/yellen-seeking-new-...

Snip:

As Janet Yellen seeks to forge a consensus on a new strategy for communicating the Federal Reserve’s intention to keep rates low, she can reach for a six-year-old tool: the Fed’s quarterly forecasts.

Policy makers plan to abandon their promise to hold interest rates near zero at least as long as unemployment remains above 6.5 percent, according to minutes of their January meeting. With the jobless rate dropping to 6.6 percent and the economy still in need of support from the Fed, the strategy is nearly obsolete.



Print the post Back To Top
Author: brucedoe Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 445384 of 465070
Subject: Re: Control Panel: Storm clears out Date: 2/24/2014 1:01 PM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 1
Although the trading day is still on, the S&P500 has set a new record high intraday this Monday February 24th.

The new 52-week highs this last week totaled 353 and the lows only 52, better than the week before when the highs were 272 and lows 67. both weeks were good and much better than for the two weeks before that. So yes, it seems like the market is climbing a "wall of worry" again. And the breadth was positive too the last two weeks and even the week before that whereas it had been negative for two weeks before that, one of which had good new high and low figures.

As has been the case for some months now, the NASDAQ has been even better than the NYSE with 368 new 52-week highs this last week and only 47 new lows whereas the week before saw 291 new 52-week highs vs 54 new 52-week lows. the breadth was also positive this last week although not as good as the week before.

So here is even more information for "risk on."

brucedoe

Print the post Back To Top
Author: WendyBG Big gold star, 5000 posts Top Favorite Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 445425 of 465070
Subject: Re: Control Panel: Storm clears out Date: 2/24/2014 9:03 PM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 3
<Why do you claim that long term treasury yields are rising?>

The charts show a dip in Treasury yields in early February consistent with the "Extreme Fear" seen at that time. The increase since that time is slight but I think it will continue as confidence builds.

http://stockcharts.com/freecharts/candleglance.html?$IRX,$US...

Wendy

Print the post Back To Top
Author: Mega CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 445491 of 465070
Subject: Re: Control Panel: Storm clears out Date: 2/25/2014 2:26 PM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 0
I think your Fear and Greed Index might be miscalibrated if you think early February was "extreme fear" and we are presently neutral.

Every flavor of risk is overbought, not only on a short term basis but on a multiyear and multidecade basis.

Print the post Back To Top
Author: WendyBG Big gold star, 5000 posts Top Favorite Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 445542 of 465070
Subject: Re: Control Panel: Storm clears out Date: 2/25/2014 11:31 PM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 9
<I think your Fear and Greed Index might be miscalibrated if you think early February was "extreme fear" and we are presently neutral.

Every flavor of risk is overbought, not only on a short term basis but on a multiyear and multidecade basis. >

I agree with you. However, the Fear and Greed Index is not an absolute index but a relative index. It measures movements so it is useful as a short-term indicator.

http://money.cnn.com/data/fear-and-greed/

The weekly Control Panel and METAR "weather report" are only useful for the short term, such as a week or two. It reports which assets are advancing and declining relative to each other, not relative to historical valuations.

I have included two of Mungofitch's momentum indicators in the Control Panel (the "99-day rule" and "Long MA"). Both of these are bullish. However, mungofitch has said many times that his calculations show that stocks are overvalued by 40% on a historical basis.

My own studies of Treasury bond real yields, which cover 60 years of data, show that bonds are overvalued by about as much on a historical basis. So both of us are deeply bearish on a long-term value basis -- but we don't know how "long" it will be. My big brother, Jeff (OrmontUS), thinks 2 years and I am inclined to agree based on the timing of the 2007 recession and 2008 financial crisis after Treasury yields began to rise in 2005.

That does not change the usefulness of shorter term indicators for those who are invested in these markets.

Wendy

Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Print the post Back To Top
UnThreaded | Threaded | Whole Thread (10) | Ignore Thread Prev Thread | Next Thread
Advertisement