Thursday, April 10, 2014

Emerging Market Debt Options to Hedge Fed Taper and Stock Volatility

Managing money in the current financial market is beginning to resemble the game of musical chairs I played years ago in grade school.  Last year, at virtually the same moment in the year, the market “forces” decided that the music would stop and the debt market, primarily the longer duration bond market as well as high dividend paying stocks such as utilities (VPU), telecom (VZ) (T) and REITs (VNQ), would not have a seat at the table.  Municipal bonds (MUB) last summer were also ostracized from the game, with the fears of bankruptcies in Detroit and Puerto Rico looming large and investors warned to stay away as the market was far too risky for entry.

The T-Bond (TLT) (TLH) (IEF) route moved the 10 year from around 2% in early 2013 to a high touching 3% precisely at year end.  The longer duration securities such as the 30 year also traded down in value, up in yield in 2013, about 90 basis points to end the year at almost 4%.  All the related interest-sensitive markets were beaten into submission going into year end.  Opportunities for savvy income investors were plentiful – for a brief moment.

Market Dancing to a Different Tune in 2014

Since the beginning of 2014, however, the music has been noticeably different.

(read complete article)

Tuesday, April 1, 2014

Stock Market Ends Q1 2014 on an Uptick on Charitable Rate Fed Speak – Buyers Beware

On March 31, 2014, the last trading day of the quarter, the stock market moved higher allowing the S&P500 to eke out a gain of 1.6% YTD, while the DOW shows a YTD loss of -.7%.  Fed Chair Janet Yellen took center stage giving a heart wrenching speech about the lack of work for the under employed and her perspective that excessive slack remains in the economy.  It sounded more like a speech by for the head of a charitable organization like the Red Cross than the head of the most the most powerful central bank on the planet.

The extremely “dovish” speech by Chair Yellen should come as no surprise to anyone.  Investors, however, should not be lulled into a false sense of safety by the recent Fed talk.  The current market has been run up by a large diversion in the flow of funds driven by the over $1T QE3 program at the Fed which began in January 2013.  This program is scheduled to be wound down over the remainder of 2014.  What should be a concern for investors is that the market stood virtually at a standstill in Q1 despite what continued to be extraordinary bond purchase levels by the Federal Reserve. During the quarter the purchase rate was reduced by $10B per month, having been maintained at $85B throughout 2013.  Based on this trend alone, stock investors should be cautious when setting new positions.  But there are other measurable signals which show cracks in the current market valuation.

Wednesday, March 26, 2014

Is the U.S. Energy Boom all it's “Fracked Up” to be?

You can hear the heightened expectations in the current business news every trading session.  The exploration and production activities which are cranking up in the Bakken, Eagle Ford, Marcellus and other plays are producing a glut of oil and gas which will lead to energy independence and cheaper energy well into the future for American consumers.  Laudable goals and U.S. citizens which think to the contrary are definitely a minority.  The expectations have become so ingrained the psyche of the market that the forward price curve for the benchmark WTI NYMEX delivered crude oil shows lower price levels on contracts reaching as far into the future as can be seen visually in the graph below. 

Ironically, the activity in the energy market is happening during a time period when the sitting U.S. President is resoundingly anti-carbon based energy and providing only regulatory roadblocks through the Department of Energy.  This information alone should cause investor skepticism about the ability of the U.S. energy

Monday, March 3, 2014

New All-time S&P500 Highs - What will Derail the Stock Market Party?

To help investors looking for a system to track the relative attractiveness of the U.S. equity market, the Financial Relativity Index has been created based on a set of leading indicators derived from the research contained in the book, Theory of Financial Relativity.  The index is a heuristic used to gauge the relative attractiveness of investing in stocks at a given time based on the interaction of major market forces and the resulting impact on the rate of change in the price levels of stocks (DOW Signal), money (Interest Rate Spreads) and energy (Oil).  All of the signals in the multivariate model possess characteristics which have a high probability of being exhibited prior to a sustained equity market downturn accompanied by economic recession; and likewise remain within certain parameters when the equity market is more attractive as an investment such as during a post recession rebound or an economic expansion.

Signals Advise More Equity Investment Caution

The status of the Theory of Financial Relativity leading equity market indicators as of 2/28/2014 is show in the table below.
At the end of February, the major US stock market indexes (DIA) (SPY) were increasingly becoming less attractive investment alternatives.  The trend in the market signals were pointing to potential market instability

Thursday, January 30, 2014

Bernanke’s Legacy - Lessons in QE and an 800 lb Gorilla

The Federal Reserve members bid farewell to Ben Bernanke at his last formal FOMC meeting on January 29th, 2014.  The story surrounding his departure as Fed Chairman for me is what he has taught the investing community about the power and limitations of Federal Reserve policy.  In addition, the forming story is that investors are beginning to adjust their portfolio to deal with the 800 lb gorilla he is leaving behind for Chairwoman Janet Yellen to manage.  His legacy, in my opinion, will be shaped by what happens to the $2.4 Trillion dollars (and still growing) in excess reserves currently on deposit at the Fed in the U.S. banking system.

Saturday, January 25, 2014

Financial Relativity Index Reflects Increasing Risk of Deflation Driven Market Decline

The status of the Financial Relativity leading equity market indicators as of 1/24/2013 is show in the table below.  The Financial Relativity Index is published and periodically updated on the website to track the health of the U.S. financial market.  


Re-Cap of Status on 12/31/2013

At the end of 2013 there were two cautionary areas which indicated slightly elevated risk of an impending market reversal, but as a whole the status for equity investing remained green.  The first yellow signal was triggered by the major market indexes trading above their previous all-time highs posted prior to the last correction.  The prior correction highs were set in 2008.  The history of “true” stock market corrections (where stocks decline on a year over year basis), not just a brief pull-back, shows that this market condition is necessary but not sufficient for a downturn to eventually ignite.  The elevated level of the market at the end of 2013 by itself did not mean it was time to run for cover, only to invoke a higher level of caution in equity investing going forward.  This signal can remain at a cautionary status for years before the other signals begin to confirm a market correction is imminent.

Wednesday, January 22, 2014

Mid-term Election Years and Stock Market Performance – What can be Learned?

Many prominent investing managers and firms are warning of a likely 10% stock market pull-back in 2014, so I figured it might make sense to assess what might cause the market to break-down.

You might be expecting my rationale for a potential 2014 pull-back in stocks to start with continued poor corporate revenue growth and low aggregate demand relative to the acceleration in share prices in 2013. Such an analysis, although relevant, would be far too rational an approach for the current political economy in my opinion.  Fundamentals have rarely mattered since the 2008 crisis, and I do not expect a change in the Federal Reserve driven 2014 economy. The current stock market is pricing in slow but steady growth and a Federal Reserve that continues to remain a backstop for any downturn.  Who can lose in this environment?

But factors exist that potentially are not priced into the market.  And one that I find very intriguing is the potential change on the horizon that could be triggered by the upcoming mid-term election.

Saturday, January 4, 2014

Will these Oil & Gas Royalty Trust Dogs Hunt in 2014?

Fixed income investors searching for yield in the U.S. Royalty Trust sector have been caught in a “buzz-saw” since the end of October 2013 through the latest year end trading session.  The chart below gives a good idea of the carnage across the sector, particularly in the fixed termination date Trusts operated by Chesapeake Energy (CHK) and SandRidge Energy (SD).  The decline comes only 8 months after a similar steep decline that began in February of 2013.  The retracement of losses after the February move was small, so the collapse that began at the end of October is a continuation of the severe bearish sentiment in the sector.