Equity Flux: The Stock Market’s Latest Problem

Equity Flux: The Stock Market’s Latest ProblemBlue chips need a big retrenchment.

I never root for losses, but with equities having gone up so much, a correction would be beneficial from a technical perspective.

Action in the stock market and blue chips, specifically, has been spectacular this year. But it’s time for a break.

While history proves it’s not wise to fight the Fed or the ticker tape, the stock market is most definitely a leading indicator.

As a fan of dividend-paying blue chips, utilities and consumer staples are good multiyear investment themes. But being at their cyclical highs, I would not be a buyer right now. These stocks are frothy.

I think it’s probable this year that the U.S. economy will outperform other developed economies. I also see the formation of an equity universe, in which big investors are still buying blue chips.

Corporations do have to perform. But with excellent balance sheets among most blue chips, the stock market can finish the year higher than its current level (save for a shock).

The end of quantitative easing is slowly being priced into the stock market. While more news on the subject from the Fed would result in a sell-off, this is not an unexpected reality.

The one shock that this market is not ready for is a rise in short-term interest rates. This is a possibility, perhaps even by the end of this year, depending on economic news.

Long-term cycles are in a state of fluctuation. (See “Stock Market Fake-Out: Where Is the Retrenchment?”)

I remember Black Monday on October 19, 1987. It was an accident waiting to happen. The stock market crashed, lost a ton of money, then made it back in two years.

There was another financial crisis and recession. Inflation and higher interest rates were part of that picture. Then things took off—again.

Still, it is difficult to be bullish considering where the stock market just came from.

Blue chips are fully priced and the marketplace has placed its bet. Second-quarter earnings season must deliver tangible revenue and earnings growth or investors will bail.

A diminishment or the end to quantitative easing isn’t much of a worry from my perspective. It’s always best to leave the marketplace alone. But the short-term interest rate debate is going to heat up, especially if economic data pick up in the bottom half of the year.

So far, the action in blue chips makes sense. If you were going to be a buyer with all this fragility, investors bought the safest names.

The biggest surprise was that the stock market did not sell off on first-quarter earnings. And the fact that it didn’t increases the likelihood of a major near-term retrenchment.

Article by profitconfidential.com

Why the Housing Market Is Eyeing the Fed’s Bond-Buying Strategy

The Housing Market Is Eyeing the Fed’s Bond-Buying StrategyThe housing market is on full alert as interest rates are edging higher after the Federal Reserve said last week that it may have to reduce its bond buying each month.

Data just came out from the Mortgage Bankers Association that showed the rise in the average contract interest rate for 30-year fixed-rate mortgages has risen 12 basis points to 3.90%, representing the highest level since May 2012. For 20-year mortgages with a balance in excess of $417,500, the rate jumped 14 basis points to 4.07%. (Source: Robinson, M., Mortgage “Applications Down 3rd Week as Rates Jump,” Mortgage Bankers Association web site, last accessed May 30, 2013.)

The impact of the higher rates on the housing market is clearly seen in the demand for mortgage applications, which declined for the third straight week. For the refinancing segment of the mortgage market, the demand plummeted 12% to the lowest point since December 2012.

Now I’m not saying the housing market is set for a collapse, but you need to be careful and take some profits off the table, which is always a prudent strategy to undertake. (Read: “Why Greed Is Not Your Friend When It Comes to Investing.”)

Based on my technical analysis, the chart of the S&P Homebuilders Index below shows the current hesitancy to move higher at the upper resistance, as indicated by the top blue line. If you look back to December 2012, there’s clearly a chance that prices can falter back to the lower support level, as indicated by the red oval in the chart below.

SPDR S&P Homebuilders Chart

Chart courtesy of www.StockCharts.com

The reality is that the move away from the recession and subprime mortgage crisis has been superlative, but I feel some pausing may be due in the housing market.

Just take a look at home prices in the top-20 housing markets nationwide, which surged 10.9% in March, according to the S&P/Case-Shiller Home Price Index. March was the 14th straight up month for prices for the housing market and the highest in six years, so you understand my concern.

Of course, the Fed may be inclined to leave its aggressive stimulus in place due to the high unemployment rate, which continues to be well above the Fed’s target rate of 6.5%—it isn’t expected to fall to this level until 2015 or later.

While the jobs will come, the Fed also knows it must control any bubble-like conditions or risk the threat of another implosion, which is not what you want to see at this time.

This is why the Fed will need to inevitably take its foot off the throttle and ease off on the stimulus. This doesn’t mean the economy and housing market will crash and burn, but the easy money in the stock market will be a thing of the past until the next great bull market.

Article by profitconfidential.com

Monetary Policy Week in Review – May 27-31, 2013: 2 banks raise rates, 3 cut as focus shifts to end of U.S. QE

By www.CentralBankNews.info
    This week 11 central banks took policy decisions with two banks raising rates, three banks cutting rates and the remaining six keeping rates on hold as the dominant force in global markets shifted from Japan’s massive quantitative easing to the prospect of a winding down of extraordinary monetary easing in the United States.
    While the Bank of Japan’s (BOJ) new easing from April accelerated years of capital inflow to emerging markets and put upward pressure on their currencies, the eventual tapering of U.S. asset purchases is having the exact opposite effect, triggering fears that a sudden outflow of funds may lead to a fall in currencies, assets and financial instability.
     One sign of the apparent shift in the direction of global capital is illustrated by the success the central banks in Thailand and Israel had in reversing last year’s appreciation of their currencies with rate cuts.
    Colombia’s central bank, which continued to hold rates steady this week in after slashing them last year, also extended its intervention in foreign exchange markets for another four months to ensure the peso doesn’t appreciate.
    However, the Central Bank of Colombia pointed out that its peso had been falling against the U.S. dollar, either because its exporters are getting lower prices for their goods or because investors are beginning to speculate on the U.S. Federal Reserve reducing its asset purchase program.
    The trigger to this shift in global sentiment was Federal Reserve Chairman Ben Bernanke’s statement to a Congressional committee on May 22 that the Fed could “in the next few meetings take a step down in our pace of purchases.”
    Bernanke’s words lead to a swift fall in U.S. Treasuries and a drop in global stock markets as major investors seem to start the long-awaited adjustment in their portfolios away from emerging markets.
     Other signs of the sudden shift in sentiment and capital flows was the continued fall in Brazil’s real, despite a second consecutive rate hike this week to combat inflation, along with further falls in the currencies of Turkey and South Africa.
    Jose Uribe, governor of the Central Bank of Colombia, already commented on the possible effects of changes to the U.S. policy stance, pointing to the financial crises and trauma in Latin America in the 1980s and 1990s from the reversal of capital flows following tighter policy by the Federal Reserve.
    Unlike then, however, Uribe said Latin American economies are now on a much sounder footing and better able to absorb the shock, shown by their resilience to the Lehman shock, while growth in advanced economies remains sluggish and constrained by debt so the withdrawal of global liquidity is likely to be more gradual.
    “In this context the adjustment of U.S. monetary policy will not lead to such a dire crash for our economies as we have experienced in the past,” Uribe said on May 15.
    Along with this week’s rate cuts by Thailand and Israel, Hungary cut its rate for the 10th time in a row. It was Israel’s second rate cut this month, prompting an adviser to Bank of Israel Governor Stanley Fischer to say that the rate cuts and plans to intervene in foreign markets had been successful in reversing the shekel’s rise.
     In addition to Brazil, Zambia also raised its rate this week due to inflationary pressures while central banks in Canada, Tunisia, Fiji, Moldova, Angola and Colombia maintained rates.
    It was the first time this year that policy rates were raised twice in one week, raising the tantalizing prospect that a four-year trend of declining global policy rates may be coming to an end.
    It is still early days, but if capital really starts flowing out of emerging markets while their economies continue to grow, it will tend to fuel inflation and lead to higher interest rates.
    Through the first 22 weeks of this year, policy rates have been raised 11 times, or 5.2 percent of 211 policy decisions taken by the 90 central banks followed by Central Bank News. This is up from 4.5 percent after week 21.
    Since the Bank of Japan’s launch of its new phase of monetary easing on April 4, policy rates have been cut 18 times by a total of 1,020 basis points in response to weak growth and low inflation. Seven of those rate cuts – for a total reduction of 225 basis points – were partially in response to the BOJ’s easing which has lead to a plunge in the yen and an accompanying rise in other currencies, shifting the global competitive landscape.
    So far this year, rate cuts account for 24 percent of all policy decisions, unchanged from last week but down from 25 percent after week 20.


ISRAEL DM 1.25% 1.50% 2.50%
HUNGARY EM 4.50% 4.75% 7.00%
THAILAND EM  2.50% 2.75% 3.00%
TUNISIA FM 4.00% 4.00% 3.50%
CANADA DM  1.00% 1.00% 1.00%
BRAZIL EM  8.00% 7.50% 8.50%
FIJI 0.50% 0.50% 0.50%
MOLDOVA 3.50% 3.50% 8.00%
ANGOLA 10.00% 10.00% 10.25%
ZAMBIA 9.50% 9.25% 9.00%
COLOMBIA EM 3.25% 3.25% 5.25%

   NEXT WEEK (week 23) features seven scheduled central bank policy meetings, including Australia, Poland, Uganda, Serbia, the European Central Bank, the United Kingdom and Mexico.

COUNTRY MSCI              DATE               RATE        1 YEAR AGO
AUSTRALIA DM 3-Jun 2.75% 3.75%
UGANDA 5-Jun 12.00% 20.00%
POLAND EM 5-Jun 3.00% 4.75%
UNITED KINGDOM DM 6-Jun 0.50% 0.50%
EURO AREA DM 6-Jun 0.50% 0.75%
SERBIA FM 6-Jun 11.25% 9.50%
MEXICO EM 7-Jun 4.00% 4.50%