Morning Roundup

By Mark Masterson on August 10, 2015

Good morning,

Below are the news items moving markets today…..

 

Executive Summary:

 

Global markets look to rebound after a bumpy week last week.  The catalyst today appears to be a surge in Chinese equities of over 5%.  Why did the Shanghai surge?  Terrible data over the weekend.  The much weaker than expected trade data emboldened investors that more stimulus is on the way.  In addition, word is getting around that Greek banks will receive a cash injection as soon as a bailout deal is signed.

Let’s be honest – this has been a frustrating year.  Markets zig and zag, but as of yet have not delivered any results.  Individual names have either surged, or been slaughtered after earnings reports, yet the broad index remains unchanged.  Look at the mix of returns below….

 

Dow                                                                 -1.1%

S&P 500                                                          2%

DJ Dividend                                                    -2%

MSCI World                                                    1.1% (Global stocks excluding the US)

MSCI EAFA                                                    4.6%

MSCI Emerging Markets                                -7.4%

 

So equities have been volatile, and many feel like they have lost a great deal – yet they are either up or down just a hair this year.

 

Investors have not received much help from bonds either.

Barclays Aggregate Treasury bond index      .2%

Barclays Aggregate Bond index                     .7%

Barclays Muni Composite                              .9%

Barclays High Yield                                        1.1%

 

How about alternatives…..Nope.  No help either

Bloomberg Commodity index                         -13%

Credit Suisse Hedge fund index                     2%

DJ Precious Metals index                               -7.5%

 

So what gives?  It seems all markets are trying to determine what the Fed is going to do next.  Fed Presidents repeatedly suggest a rate hike is likely in September.  Yet, the street is divided into three camps…..

 

1. Some – like us – believe the Fed will remain on hold. Growth is just not strong enough to support higher rates in the US.  If the Fed hikes rates, the economy will contract into a recession within one to two quarters.   The stronger dollar has already hurt earnings.  According to FactSet, Q2 S&P 500 revenue growth is already at a negative 3.3% and earnings declined by 1.3%.  Higher rates will send the dollar even higher, and corporate America will be hurt.  WARREN BUFFETT: It’s going to be ‘very tough’ for the Fed to raise rates in September http://read.bi/1MkqeqT
2. Others believe growth is just fine and the economy needs a rate hike.  They point to solid unemployment numbers, a higher market, and moderate growth across the board as the primary reason.
3. Finally, there is another camp that thinks the Fed needs to raise rates for credibility, but will be one and done.  I can see this case as well.  The Fed may raise rates just to keep some credibility, but make it clear that no further hikes are coming unless growth really picks up.  This would also allow some wiggle room to lower rates again if growth stalls – which the Fed has no room today.

 

Will it be 1, 2, or 3?  Absolutely no one knows.  I doubt even the Fed knows for sure.  That is why the market can’t get any traction –either up or down.

 

 

Articles of Interest:

 

• Grim China data keeps stimulus hopes alive (Reuters)
• Berkshire Hathaway to Buy Precision Castparts for About $37 Billion (BBG)
• Greece, lenders in final push to seal new bailout (Reuters)
• Quantitative Easing With Chinese Characteristics Takes Shape (BBG)
• Greece nears €86bn accord with creditors (FT)
• Oil Futures Signal Weak Prices Could Last Years (WSJ)
• Drop in long-term investment hinders eurozone recovery (FT)
• FED’S FISCHER: ‘A large part of the current inflation is temporary’ http://read.bi/1MkrSZQ
• WARREN BUFFETT: Stocks are going ‘a lot higher’ http://read.bi/1MkqA0T
• GRANTHAM: We could be headed for a ‘very different’ type of crash in 2016 http://read.bi/1OYnMny 
• Berkshire Hathaway is down more than $3,000 per share http://read.bi/1MkCKGZ

Charts of the day:

 

All kinds of charts below.

 

First, lets look at oil.  It has been in a sharp sell-off for the past month.  It now rests on support that dates back to early in the year.  It is possible that this is a double, or even triple bottom.  Oil is very oversold, and from that perspective appears to want to bounce soon.

 

Chart: Bloomberg

 

Broad commodities have been in a major sell-off.  Again, this calls into question global growth.  The CRB index chart is below…..There are 19 commodities that make up the CRB Index:  Aluminum, Cocoa, Coffee, Copper, Corn, Cotton, Crude Oil, Gold, Heating Oil, Lean Hogs, Live Cattle, Natural Gas, Nickel, Orange Juice, Silver, Soybeans, Sugar, Unleaded Gas and Wheat. The plummeting value of the weighted average of these commodities is screaming one thing loudly: the rate of global growth is plummeting.

 

 

Below from Greg Guenthner who comments on the narrow range for the broad market recently.

1. The S&P 500 is trapped in its longest consolidation period in 65 years 

According to Price Action Lab, the 4.75% range that has hugged the S&P since late February is the largest consolidation period in the market since the 1950s. Even though yesterday’s action was tough to watch, stocks remain in this historically tight range—so it’s difficult to get too bullish or bearish without a break one way or the other.

2. 113 components of the S&P 500 are now in a bear market

This gnarly statistic is courtesy of my pal Ryan Detrick. Ryan recently asked if the S&P 500 is “broken and in a stealth bear market”—and I think he makes a very interesting case that you should consider… “With the S&P 500 just 1.94% off its recent 52-week high, for 22% of its components to be in a bear market is quite worrisome,” Ryan says. “Again, is this showing major deterioration beneath the surface and suggesting a stealth bear market?” Maybe so. And if we are entering a stealth bear market, there’s one group of stocks that look especially vulnerable…

3. Small-cap stocks are dangerously close to breaking down

The Russell 2000 small-cap index was smacking around the major averages earlier this year. But since June, these small stocks have started to lose momentum. Take a look:

Lawrence McDonald ‏@Convertbond  commented on Twitter that high yield spreads have started to rise.  “Spread has expanded by 50bps (0.50%) from a year ago, most since 2012, even as the S&P 500 Index rallied  “

He suggests that this could be a warning for a broad market correction as high yield credit often leads stocks…..

 

 Lawrence McDonald ‏@Convertbond

 

Finally, this chart below is mind boggling.  It shows the S&P 500 in green and commodities in red.  They have an epic divergence.  Either commodities are about to rise/rally to meet stocks, as it did in 2002, or stocks will fall to meet commodities as it did in 1999.  This cannot go on forever….

 Chart Bloomberg

Quote of the day:

 

Never spend more than 10% of your time on problems, and spend at least 90% of your time on solutions.