Morning Roundup

By Mark Masterson on June 4, 2015

Good morning,

Below are the news items moving markets today…..

Executive Summary:

First, the Morning Roundups will be less frequent next week as we are taking some vacation to the beautiful North Carolina mountains.  So – I will really load this roundup with some updates across the board.  Our goal – get you up to speed on the most important issues over the next week.  They include….Greece, Employment/Economy, Bond volatility, Currency/Dollar, Stocks.  Here we go…..

Let’s start here in the U.S. with the employment reports released today.  All eyes are on these jobs numbers, and more importantly – tomorrows jobs report – to help signal where the Fed will lean with a rate hike.  Keep in mind, most of the economic data remains mixed to on the weaker side, but jobs remain important for the market.  So, today we got a little good news. First, planned jobs cuts fell sharply as the energy sector continues to slow its layoffs.  This may be a trend that continues….

US job cuts plunged 33% to 41,034 in May: Challenger  / Job cuts announced by U.S. companies declined sharply in May as the energy sector laid off fewer workers.

Then, initial jobless claims came in slightly better than expected.  Initial jobless claims fall to 276,000 (278,000 expected) http://read.bi/1AM6IPU

 

Below you can see where we are in terms of the 4 week average of claims.  Folks, since 1970, it just does not get much better than this.  If that is the case, it can get worse.

Charts: Bloomberg

 

Tomorrow we get the NFP job number.  If it is strong, look for markets to react negatively as expectations for a Fed rate hike in 2015 rise.  If it is in line, or weak, look for markets to respond with some relief.  It is a very hard call to make.  Goldman takes a stab at it….Goldman Sachs presents just 1 reason why the jobs report could be great… but 4 reasons why it might stink http://read.bi/1BLM7pH

 

For our part, we continue to look at the economy as a whole.  Perhaps we get a good jobs number here and there, yet the broad economic picture remains weak to neutral.  The Atlanta Fed model now tracks second quarter GDP at 1.1%.  That is much better than the -.7% in the first quarter – if true.  Yet, what were expectations for the first half of 2015 for most economists?  Most certainly it was not for a flat GDP.  We continue to expect the Fed to hold off on rate hikes.  We are not alone…..

Dr Doom: Forget a Fed rate hike; QE4 coming

 

Let’s move on to Greece.  The situation remains fluid.  There is no deal between Greece and its debtors yet.  Many meetings, just no deal.  Wednesday evening’s “high level” meeting between between Greek PM Alexis Tsipras, Jean-Claude Juncker and Jeroem Dijsselbloem came and went with no result.  Greece seems to be sticking to his party’s position around pension cuts and a higher VAT, a stance that is apparently incompatible with the prepackaged deal prepared for him by Merkel, Hollande, Junker, and Draghi on Tuesday. Greece presented its own proposal on Monday evening, but the Troika seems to be saying that their offer is the final offer.  Here’s more via Bloomberg:  “Tsipras said demands by the euro area and the IMF for cuts in the income of poor pensioners and increases in value-added tax on power are unacceptable, highlighting what have been red lines in Greece’s stance since his anti-austerity Syriza party swept to power in snap elections in January.  “Ideas like cutting benefits for low-income pensioners, or raising the VAT rate for electricity by 10 percentage points, can’t be a basis for discussion,” he said…“There was a constructive will from the European Commission to reach a common understanding,” he said.

Greece has looked to the commission for support to dilute the austerity-first formula that’s underpinned two Greek rescues totaling 240 billion euros since 2010. This has led to clashes with creditors who say such bailout conditions have worked for other countries such as Ireland now out of aid programs and Greece should get no special treatment.  Creditors want the targets for the primary budget surplus – – the budget balance excluding interest payments — to be 1 percent of gross domestic product this year, 2 percent of GDP in 2016, 3 percent in 2017 and 3.5 percent in 2018, said the Greek official, who called these proposals a “good basis” for further deliberations on the matter.Tsipras said both sides were “very close” to an agreement on the targets for the primary surplus.

 

It appears a carrot was offered this morning…From Reuters:

IF DEAL IS ACCEPTED, EU/IMF PLAN AIMS TO UNLOCK 10.9 BLN EUROS FROM EFSF TO COVER GREEK NEEDS OVER JULY-AUGUST: RTRS.

• Greek Groundhog Day Continues With Talks Failing to Break Impasse (BBG)
• Greece and Its Creditors Agree on Some Measures in Bailout Talks (WSJ)

So, Greece’s game if chicken is coming to an end.  It must, as you can see below – I have no idea how Greece will cover all their payments over the summer without more bailout money.

Greece’s repayment schedule over the summer, via Deutsche:

To make matters worse, just look at the most recent  Greek unemployment figures just announced. 25.6%.  Wow.

Chart below from Bloomberg

Finally, a quick look at bonds.  They have been very volatile.  Lot’s of talk and articles about panic, crash, etc.  Typical of extremes.  More on this in the charts section below.

• There is ‘sheer panic’ in the bond market http://read.bi/1BLN8OE
• BofA Explains How the Bond Rout Could Turn Into a Bloodbath
• This one chart explains the chaos we’re seeing in the bond market right now http://read.bi/1H3T3Vt 

• Bond market sell-off rumbles on, stocks feel the pinch (Reuters)
• Bond Rout Wipes Out 2015 Gains as Traders Stay Glued to Screens (BBG) 

One of the most accurate bond managers, and economists has been Dr. Lacy Hunt.  I will leave you with an article/interview and his views – as they are very counter trend currently….

Dr. Lacy Hunt on US Endgame and Greatest Risk to Financial Markets  FS

The key question and answer….

Many believe that the bull market in bonds is close to an end and that bond yields have hit their all-time lows. What is your view?

“I don’t think that we are anywhere near the secular low in long-term rates. I think that’s way out in front of us. Right now for example you can get 3% on the 30-year bond; the inflation rate is nil, which means you get a 3% real yield. In the last 145 years or since 1870 the real yield has averaged about 2%, which means right now that your real yield is 50% better than what the average investor got in about a century and a half. I think there’s great value in the long end of the treasury market. Doesn’t mean that you’ll achieve that value immediately but from an investment standpoint there’s significant value…in the long end of the Treasury market.”

 

Articles of Interest:

 

• Here’s Bill Gross’ Next Big Short
• Fighting Re-Starts In Ukraine…
• The Fed & The Bond Vigilantes – Randall Forsyth, Barron’s
• Why oil prices won’t crash again http://read.bi/1Q7gNOe

• GE Said to Hire Banks to Start Sale on $20 Billion Assets (BBG)
• Alibaba Pictures plans $1.6bn share sale (FT)
• How Companies Justify Big Pay Raises for CEOs (BBG)

Charts of the day:

 

Let’s start with stocks….

Markets have been chopping up and down lately.  Going nowhere and really grinding up both the bulls and the bears.  You can see it on the below chart of the S&P since January 1^st….Yet, there is an upward bias to the grind and chop.  This looks like a rising pennant type of formation.  It looks like the market will touch the lower support line of the pennant, then shoot higher towards the top.  Until it breaks either up or down out of this formation, there is nothing to tell.

 

With a longer term perspective, the S&P still remains in the upward sloping channel.  Again, perhaps it wants to shake out all participants and work its way to the lower band of this channel before heading higher?

This type of market can be very frustrating for investors and keeps them guessing….

 

 

Here is another possible view of the same S&P 500 chart. What if we are forming a slow, rolling top?  It’s possible after 5 years of market gains.  There are a number of warning signs out there that we are overdue for a correction.  Notice the RSI at the top of the below chart that shows the wegde forming. We are now at the tip of that.  Could it break out sharply either up or down?  Yes, most certainly.  In fact, when any pattern works its way into a tip like this we are moving towards a powerful move for sure.  Time will tell.

There are a lot of other equity charts we could post for sure.  Some look quite good – although likely are due for a correction as well.  Europe, Japan, China, select emerging markets – all look strong.  Our view remains that the US will finish on a solid note – likely because the Fed will not raise rates, or will do so in a very limited manner.  Global equities will outperform in 2015.

 

 

Moving on to bonds……

 

Let’s focus on the 20 year US treasury or TLT ETF.  The below chart shows that US Treasury bonds have been falling (as yields have been rising) for much of the year.  Treasury bonds appear to be in a falling wedge right now, but have hit a level that looks like it might provide some support.  Everyone hates bonds – having read an article a day or two ago that traders are the most short Treasuries they have ever been.

 

 

Stepping back a little in time – 3 years – and looking at the same chart only strengthens the case above.  Notice clearly the falling wedge and support at the horizontal line?  If bonds can hold here, we may be nearing a turn.  I believe that falling wedge patterns tend to break to the bullish side, and rising wedges to the downside.  Time will tell.  I will say that there has been a huge increase in bearish bond articles and “bond crashing” notes and tweets.  Perhaps nearing a turn.

Bond volatility has been on the rise in Europe for sure.  The most notable has been the German Bund.  Remember we commented many times on how there were trillions of euros of negative yielding bonds, most of them in Europe?  That has changed.  A few short months ago, the German bund had a yield of -.05%.  Last night it hit 1%.  That is a massive, massive sell off in German bonds.  The chart below.

 

 

How about the US dollar…..

It looks like it wants to head lower.  In the chart below you see the parabolic look we pointed out many times.  It broke out of that, and headed sharply lower.  Then it staged a rally, after becoming oversold…(the blue circle at the bottom).  After the rally, it is now overbought (red circle at the bottom) and has turned lower again.

 

 

 

Chart: Bank of America

 

 

Quote of the day:

One of the most important keys to Success is having the discipline to do what you know you should do, even when you dont feel like doing it.