One Day to the Next

By Notes From the Rabbit Hole

So yesterday market participants were instigated by the media to get hysterical about interest rates. I saw a prominent headline talking about how a market expert (whose name escapes me) forecast that when 10yr yields go through 3% stocks are going to go down big.

Then today, as risk flies ‘off’ ostensibly due to the Trump/China tariff war, yields tank, Treasury bonds rise and stocks go down anyway. Ha ha ha…

If you click the headline they will tell you all you need to know, and way more than you need to know as a rational and calm market participant.

Meanwhile, the Continuum had indicated that a caution point was at hand long ago.

tyx Continue reading One Day to the Next

Out of the Way

By Tim Knight

As usual, Fed Day gave us quite a ride. The big news was that our friends at the FOMC plan to give us another 3 rate hikes this year instead of 4. Guess how many Fed meetings there are with accompanying press conferences left this year? Three. How about that.

My stomach went into a knot the moment the news came out, because everything – – EVERYTHING – – went against me big time. It didn’t last though. Just imagine how many people were short the utilities and got stopped out, all because of a stupid, multi-second Fed spike.

XLUS

Continue reading Out of the Way

Powell Don’t Talk Much Like Yellen…

By Heisenberg

Jury Still Out On Whether That’s Good Or Bad

Ok so in sum, on the Fed: three hikes (total) projected in 2018, a steeper trajectory in 2019 and 2020, upward revisions to growth this year and next, lower unemployment trajectory across the board, and a modest inflation overshoot on core next year and on headline and core in 2020.

Here’s what Neil Dutta, head of U.S. economics at Renaissance Macro Research had to say:

So, next year, the median FOMC official sees a slight overshoot on inflation (+0.1ppt) another 0.3ppt drop in the unemployment rate and just one more rate hike. That’s somewhat less than you’d expect in a standard Taylor Rule type model. That is not really hawkish, in my view. Buy stocks. Buy front end.

Inline with what I was suggesting earlier, the statement was kind of lukewarm on growth, describing economic activity as rising at a “moderate” rate, while describing job gains “strong” – that’s as opposed to the “rising at a solid rate” language and the less exuberant take comes courtesy of household spending and business fixed investment having “moderated”.

Continue reading Powell Don’t Talk Much Like Yellen…

Fed Comes A Little Bit Closer To Taylor Rule…

By Anthony B. Sanders

Raises Target Rate To 1.75% While TR Rudebusch Calls For 6.62% — Only 447 Basis Points To Go!

Yes, Jay (Powell) and the Americans (FOMC) came a little bit closer to The Taylor Rule (Rudebusch Model) with the FOMC voting to increase their target rate to 1.75%. The lower bound is now 1.50%.

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The Taylor Rule (Rudebusch Model) calls for a Fed Funds Target rate of 6.62%. Only 447 basis points left to go, Jay!

Continue reading Fed Comes A Little Bit Closer To Taylor Rule…

The Blind Interviewing The Blind; Or, Bubble Time

By Jeffrey Snider

At the end of last month, the Brookings Institute hosted a conversationwhere one of their most distinguished current scholars introduced and interviewed one of their newest. The former was former Federal Reserve Chairman Ben Bernanke welcoming the latter, former Federal Reserve Chairman Janet Yellen. Listening to them talk was a total delight (thanks T. Tatteo for that), particularly for all the obvious things they almost certainly skipped over intentionally.

If you have the time, it’s worth it in the same way as it is to read through the 2008 FOMC transcripts. Should anyone really need to be convinced they really have no idea what they are doing, this is a pretty good opportunity. It’s one thing to hear about deep economic theory for what hasn’t happened yet; quite another knowing what did happen and how these two people more than any others in the world were supposed to have prevented it.

Instead, they remember 2008 a little differently:

Continue reading The Blind Interviewing The Blind; Or, Bubble Time

Jerome Does an FOMC

By Otto Rock

The short intro piece in this week’s edition of The IKN Weekly, IKN461*:

Jerome does an FOMC

“I don’t care what the newspapers say about me as long as they spell my name right.”  –Phineas Taylor Barnum

There are things we know and things yet to discover about the FOMC meeting this week:

  • We know Jerome Powell sits at the top of the table for the first time.
  • We know that a rate hike is going to happen. Put another way, if rates aren’t hiked a notch the market will be very surprised and the market doesn’t like surprises at the best of times, let alone from a Fed with a brand new chair.
  • We are yet to discover how Fed Head Powell handles the presser post-FOMC, but considering his polished performance in front of Congress a couple of weeks ago, a few pesky journalists are unlikely to ruffle his feathers.
  • But most important of all next week, we are yet to discover the tone and content of the FOMC communiqué, that publication of always close focus will be pored over, examined and debated more intensely than ever as the market tries to interpret the direction Powell will (or at least want to) take.

Anyway, Wednesday’s your day. We’ll see how “King Dollar” looks afterwards (thank you Kudlow) and by definition, gold.

Talking of which, I’m hoping that President Trump’s new (latest?) economic advisor Larry Kudlow continues the gold trash talk and more of his “I would buy King Dollar and I would sell gold” comments are highly welcomed by these pages. Less because Kudlow is a time-tested contrary indicator and more because the average financial professional and market participant, beyond casual mockery of we tinfoil hat wearers, simply doesn’t think about gold very much. Therefore, if the guy whispering in the ear of Trump is talking gold it doesn’t even matter that his comments are negative, it’s going to get more people to at least consider gold’s position in the investment firmament. We are in the political era that PT Barnum could only dream about, after all.

*Yes, that does mean I’ve spent the last 461 weekends writing the thing.

Global Equity Breadth Breakdown

By Callum Thomas

The latest price action across global equities has driven a deterioration in market breadth. The 50-day moving average breadth indicator for the 70 countries we monitor has fallen to levels last seen in the wake of the 2015/16 corrections. It was those corrections which ultimately drove the reset which created the conditions for the new bull market to commence.

The chart comes from a broader discussion on global equities in the weekly macro themes report, which aside from technicals also discussed valuations and earnings cycles.

The chart in question: 50-day moving average country breadth for global equities.

Continue reading Global Equity Breadth Breakdown

Value Investing and Tolerating Pain

By Charlie Bilello

So you want to be a value investor, like the great Warren Buffett. A worthy goal, to be sure. But before going down that road you may want to ask yourself the following question:

What is my tolerance for pain?

You read that word correctly: pain. To be a great value investor, or any investor for that matter, you need to be able to tolerate a high degree of pain.

What kind of pain? Emotional, psychological and at times physical pain stemming from loss, regret, and humiliation.

Why would a value investor need to endure such things? Let’s take a look…

Large cap value stocks have been underperforming since August 2006.

Nearly 12 years of underperformance is a long time, and extremely painful for any value investor that has stuck to their discipline.

How many of us would actually sit there for 12 years and take that pain?

Not too many. In a State Street survey of over 400 institutional investors, only 1% said they would stick with an underperforming “smart beta” strategy for 3 years before seeking a replacement.

Continue reading Value Investing and Tolerating Pain

Fed Day Performance In Rising vs Falling Rate Environments

By Rob Hanna

The Fed holds policy meetings 8 times per year. Many times since starting Quantifiable Edges in 2008, I have discussed the (primarily bullish) edge that exists on the final day of these meetings when the Fed releases its statement and announces any new policy changes. One question I often get about Fed Days is whether it matters if we are in a rising-rate environment, or a declining-rate environment? This is something I explored in the Quantifiable Edges Guide to Fed Days several years ago. And when it comes to actual Fed-Announcement Day performance, I found the results to be somewhat surprising. The 2 studies below are updated from the book. They break down Fed Day performance by environment.

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2018-03-20

It does not seem to matter one bit whether the Fed has been accommodative or not. Fed Days have shown a bullish bias either way. You’ll note the “% Profitable” and “Average Trade” numbers above are almost identical!

A lot of different factors DO matter when examining Fed Day performance. And you can learn about many of them on the blog or in the book. Interestingly, one factor that does NOT seem to matter, is whether the Fed is generally dovish or hawkish.

Have a happy Fed Day tomorrow!

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Another Look at Gold’s True Fundamentals

By Steve Saville

The major long-term driver of the gold price is confidence in the official money and in the institutions (governments, central banks and private banks) that create/promote/sponsor the official money. As far as long-term investors are concerned the gold story is therefore a simple one: gold will be in a bull market when confidence in the financial establishment (money, banks and government) is in a bear market and gold will be in a bear market when confidence in the financial establishment is in a bull market.

In real time it often doesn’t seem that simple, though, because on a weekly, monthly or even yearly basis a lot can happen to throw an investor off the scent. However, the risk of being thrown off the scent can be reduced by having an objective way of measuring the ebbs and flows in the confidence that drives, among other things, the performance of the gold market. That’s why I developed the Gold True Fundamentals Model (GTFM). The GTFM is determined mainly by confidence indicators such as credit spreads, the yield curve, the relative strength of the banking sector and inflation expectations, although it also takes into account the US dollar’s exchange rate and the general commodity-price trend.

Continue reading Another Look at Gold’s True Fundamentals