Skip to main content

Aug 24 2013 Weekend Market Comment

Aug 24 2013 -  Ya we could talk about Microsoft stock shoot up because Steve Ballmer is leaving. You know you're a bad manager when a huge company like Microsoft stock goes up 20% and more on the news you're leaving!

Microsoft in its current state is a hard company to run. It’s less a corporation than it is a pile of vaguely related businesses, including gaming (Xbox, Kinect), software (Office, Windows), hardware, and web services (Bing, cloud versions of staples like Office). But that lack of focus is due in no small part to Ballmer, under whose leadership Microsoft has had a habit of acquiring companies, and then absorbing them badly. One of them, Andy Rubin, went on to create Android and run the Android division of Google. It will not matter in the end, with it's "we want to be IBM light" core principles, Microsoft has not been relevant for years.

We also could dwell on the three hour computer freeze at the Nasdaq, but in my mind they are all non-events and if you care you can read about it on any financial site like CNBC Yahoo Bloomberg or the Financial Times.

But lets get on with talking about how to make some real money. The Market showed some surprising strength this week. After six days down on the seventh day they did rally and the traders saw it was good.

Of course that has turned or indicators up a bit. Below is our green arrows graph -- of course the mind can easily picture a bounce here just like mid -April, but that’s the discipline, because our top indicator is still pointed down and we could get a little W bounce like the last turn around. Or the markets could fall a part period remember the market can do what it wants we must trade what we are given and so far we do not have a “green arrow” and so no license to sprout bulls-horns.

OK so we are probably ready for a bounce, I expect it but this one could be very short lived. As sleepy low volume August retreats and the money mangers get back from the Hamptons,  navigating what's ahead in September could be more than a little scary. September is historically the worst month for stocks but this year, the calendar is a minefield for markets. From the Federal Reserve's mid-month meeting to German elections, Japanese and U.S. tax changes, there's a long list of potential catalysts for pain.

The Dow, on average, has been down about one percent in September, and so far this month, it's down more than 3 percent, its worst monthly performance in more than a year. The weakness shows in the NYSE market forces.

It also shows in just how extended this market is over its averages. This is the S&P500 over its 200 day moving average (brown line); this has been one very long running bull we are really way up over the averages.

Now think about what is coming this fall, here are the three horsemen of the apocalypse.
1) U.S. Budget Deadline
2) Tapering and with it rising bond yield
3) Emerging market meltdown.

Add to that China might be in a financial pull back, also the rising tensions in places like Egypt and Syria who are just begging for some intervention.

So lets start with the budget deadline
Without a deal this fall, the U.S. government will shut down. Republican leaders fear their party would end up getting blamed, leading to disastrous results in the 2014 congressional elections. The options include using a deadline in November for raising the nation's borrowing limit as leverage to push Republican causes. Their main priorities are weakening Obama's signature healthcare changes, securing broad tax reforms and getting Obama to approve the Keystone XL oil pipeline from Canada and the northern states to Texas Gulf refineries. Meanwhile the President has pushed back sighting the republican position as a childish and dangerous game. In any case the market hate uncertainty if the two parties cannot agree with the market this overbought the sell off could be sharp.

Post Tapering World
As I have said before the taper must happen because of three key reasons:

  1. Unemployment drops steadily, yes they are lower quality McJobs but people are slowly sucking it up and getting back to flipping burgers instead of building massive McMansion houses.   
  2. Central bankers are starting to worry that the benefits of additional QE are starting to be offset by the risks. Central bank balance sheets have have become so swollen they’ll prove difficult to unwind once inflation sets in; and, QE has inflated asset prices to levels where when policy starts to normalize, financial crises are likely to ensue.
  3. The U.S. bond purchase program is swelling the balance sheets of banks. The absence of significant inflation in the past few years does not mean that it won't rise in the future. When businesses and households eventually increase their demand for loans, thanks to QE commercial banks have way more than adequate capital. Money that could be lent, but is not, so called "Excess free reserves" are piling up.  Up until now that liquidity has been used to make risk free money buying U.S. treasuries but rising rates means that game is over, now banks must lend to customers to make money. The resulting growth of spending by businesses and households might be welcome at first, but it could soon become a source of unwanted inflation.

Now contemplate that:  Low paying jobs + higher interest rates + aggressive lending = STAGFLATION. The worst of all possible outcomes. That horrible world of things cost more but buying power is dropping. The immediate response will be to raise interest rates to curb inflation but that will make it worse not better.

Emerging Market Meltdown
China growth has flattened and the government has curbed the commodity hoarders. The results are that the rest of the BRIC countries are in a tailspin. No one need Brazil, Australia, Russia. India’s currency is spiralling out of control.

Turns out the end of quantitative easing has spelled an end to easy money for more than just the USA investors around the world wan their money back Here is a good piece on CNBC

Now, as the Fed appears ready to lighten up on the support it is offering to the US market, money is retreating from emerging markets—fast. Here’s a look at outflows from dedicated emerging-market mutual funds in recent weeks by Morgan Stanley:
As the rip-tide of liquidity pours out of a country, it drives the value of the currency lower. That makes imports of crucial foreign products—such as energy—costlier. The surge in spending on imports worsens the current account deficit. That prompts still more worries about investing, setting off a further outflow of investor cash. The decline of the currency gets deeper. A spiral can ensue until you hit something known as a “sudden stop,” which pushes a country into default.

Such tidal waves of foreign investment into and out of emerging markets are a well-known problem, leading to a range of banking collapses, inflationary spirals, sovereign defaults and currency crashes. (Some have referred to them as “capital-flow bonanzas.”) They were at the heart of a slew of crises in the 1990s: Argentina, Thailand, Korea, Mexico, Turkey, Chile and, yes, Indonesia.

How to Trade This
Well you should have some cash waiting for a green arrow, but I would not go as all in with September looming.  Our TBT bet continues to work; there has been a small “flight to safety pull back” but long-term bonds yields should pass 4% and TBT will climb further. You might consider some Emerging Markets Short ETF (ticker EUM). Canadian dividend powerhouse Exchange Income Fund offers a 7% yield and is looking like a good industrial play.

The fortunes of Teck Resources have been brightening.

But right now I am mostly in cash and Canadian pipelines.

Cost of a US Dollar Skyrockets (giggle snort)
Watch Video Here

After fluctuating wildly this morning between $1 and $35, the price of money spiked to an unprecedented $90 a dollar in afternoon trading, plunging international financial markets into chaos. “Wall Street erupted into absolute pandemonium once the price of a dollar jumped past $50—if this keeps up, I wouldn't be surprised if the dollar reached $275 or higher by the closing bell,” said CNBC analyst Marvin Kanisch, noting that the price of 20 dollars had soared well over $1,000 amid frenzied trading before plummeting back down to a more reasonable $430, while the price of five dollars remained steady at $5. “Everywhere you look, panicked investors are clamoring to exchange their dollars—which can only purchase about two cents apiece right now—for more stable dimes and quarters, which are trading at $18 and $32.25, respectively. And with the price of pennies falling below $140 an ounce, it’s easy to understand the sense of urgency. Bottom line: It’s a seller’s market.” With the skyrocketing dollar-to-dollar exchange rate prompting Americans to hoard as much money as possible, President Obama is expected to address the nation later today about easing America’s dependence on domestic currency.

Read My Disclaimer Here