November 16 Market Review

Another day of the "de-risking" trade.  Anyone else getting tired of the "Europe has a plan!", "Europe has no plan" volatility.  Lets cut straight to the point - there is no possible plan!  Brushing aside for the moment the constitutional crisis enveloping the continent, what we have is a downward spiraling ecosystem.  Debt piled on when times were good (and a haughty wink-wink, nod-nod by the EU regarding debt levels) turned to lead as the system slowed.  In order to tame the beast, austerity measures are bantered about which are growth killers (not to mention they get in the way of the mountain of entitlements the populace is used to) and result in higher relative debt/GDP ratios for the foreseeable future.  The populace chokes, governments collapse and the sovereign crisis continues.  Then comes the good part - the crisis spreads (probably a poor choice of words, I will admit) to the banking sector (poor choice because it has always been in the banking sector as well) which compounds the problem, further retards growth and ushers in a "new 2008" crisis.  Good stuff, no?  Yeah, just wait until we address the capital shenanigans the Eurobanks like to play with risk, risk models and risk management (recall what AIGFP was used for - removing capital hogs from Eurobank balance sheets).

In any event, enough of my discourse, what the hell did we see out there today:

Equities:

After grinding back up from an out of the gate drop, Fitch come out with a report on US banks and their exposure to Europe.  Some snippets:

Contagion Effects Potentially Large: U.S. banks could be greatly affected if contagion continues to spread beyond the stressed European markets (Greece, Ireland, Italy, Portugal, and Spain). Exposures to large European countries and banks are sizable. The ongoing economic and market effects are additional concerns. The crisis has been negatively affecting European credit profiles and has resulted in numerous rating actions recently.

Report here:  11-16 Fitch

Net exposure.  Gotta love it.  Ummmm, what happens when exchanges are voluntary and 50% of your holding is wiped out without triggering your insurance policy....  Yup, net is gross.  Honestly, is this news?

Risk - Is it Being Priced In?

After an interesting afternoon in the hospital, I am going to attempt a recap of the days affairs and attach some opinions to them.


First off, equities took a breather today as they have been grinding higher.  I look at this action as rational and fully expect the market to trade down.  Snapshot of the equity market over the last week:

So, why do I think that the market should be headed lower?  Risk friends, its all about the risk.  Consider:

1. Libya is going to be anything but easy.  What to do after enforcing the UN no-fly zone?  Wait for the power vacuum if Gadhafi is removed.  This is long haul stuff that the US and Europe (and some Arab states) find themselves embroiled in.
2. Bahrain - Saudi forces in the country point to Saudi concerns about the country and the wider region - especially as Iranian influence is being seen behind the scenes.
3. Yemen - Saleh has resisted stepping down as calls for his resignation increase.  He has asked the Saudi's for help within his country as the Saudis play a role in the country and have ties to tribal leaders.
4. Increasing number of protests in Saudi Arabia itself.
5. Still uncertain outcome in Japan with their nuclear issues.  Power has been delivered, but do the generators work and can they cool the systems?  Will be days or weeks until we know.  
6. Irish stress tests - are we gonna see the $35B that was not going to be used get used?  How bad is it really?
7. Housing data came in bad - yeah, I know there is point to point volatility, but the bigger picture is not good.  At some point FNM and FRE are going to have to be dealt with.  Will banks step in?

Bottom line, I don't like the risk profile and I don't like how the market is somewhat shrugging off the risk.  I like (and am long) oil, think silver is still interesting, still like credit products (bonds and preferred) although they are getting heady as well.  New issue calendar has been robust as there are willing buyers - points to some upside (but not much from here).

Wednesday Market Wrap

Another day of uncertainty and volatility.  The risks I listed yesterday were only compounded today leading to more risk shedding.  Until we see some resolution in Japan (and to a lesser extent the middle east), I don't see much of a rebound in risk.  That said, we might see some dip buying at some point.


Some economic and news review:


Home construction plunged 22.5% in February from January to a seasonally adjusted 479,000 homes. It was the lowest level since April 2009 and the second-lowest on records dating back more than a half-century.  Single-family homes fell 11.8% in February. Apartment and condominium construction dropped 47%.  Building permits fell 8.1% last month to the lowest level on records dating back to 1960. Permit requests for single-family homes saw the biggest decline. Apartments and condos remained flat.  This, when piled on the MBA data suggest housing isn't posting a sharp rebound (at least last month as the numbers are volatile).


The Labor Department on Wednesday said the producer price index jumped 1.6% last month, following increases of 0.8% in January and 0.9% in December. Producer prices have risen an unadjusted 5.6% over the past 12 months.  Core producer prices rose a much smaller 0.2%, but it was still the third straight monthly increase. Core prices have risen a much slower 1.8% over the past year. Economists surveyed by MarketWatch had predicted a 0.7 % increase in overall producer prices and a 0.2% increase in the core rate.  Inflation in the pipeline.  Stay close to home on the duration front and watch manufacturers for their ability to pass on price increases.

Reuters reported Wednesday that Patrick Parkinson, the director of the Federal's Division of Banking Supervision and Regulation, that although asset quality was "stabilizing," the banking system was "still in the repair and recovery stage." "Around 30 percent of all banks have less than satisfactory supervisory ratings," he is quoted as saying at the American Bankers Association annual government relations summit Washington, according to Reuters.  Great.
The Federal Reserve Bank of New York bought $6.58 billion in Treasury debt on Wednesday, the latest operation of the Fed's second round of quantitative easing to support lending and spending. Dealers offered to sell the Fed $26.46 billion in debt maturing from 2015 to 2016.  $26B offered, $6.5B bought.  Gotta keep those rates down.

Fixed Income:

Another interesting day in the fixed income markets.  Housing numbers and increased risk overwhelmed the wholesale inflation numbers.

"Risk free" had another strong day as investors shed risk and bought govvies.  Seriously, Look at the long end.  Bets against the long end (like my TBT) are getting crushed.  Curve is flattening though.

Credit markets had a tough day (although trace hi/lo data would suggest otherwise).  Market traded down a bit with CDS ending at HV15 126/136 +5   IG15 91½/92 +3   HY15 101 9/16/101¾.

Cliffs, AGL and Teva were in the market.  Teva broke better, Cliffs broke wider and AGL broke tighter.


While CDS was wider, credit was up on the day using LQD as a proxy:

Equities:


Risk off!  Selloff continued.  Equities tanked mid-day but rebounded somewhat as conditions in Japan seemed to get better (debatable at best, but optimistic).

Not pretty for risk here in the states.

The sell-off was broad based, but conglomerates and tech got an extra bit of beating.  Personally think the drop in GE is overdone, but then again, I am long the name.

Global markets fared no better.


Commodities:


Commodities were mixed, but mostly down.  Gold came back as did silver and cotton got spanked.  I Don't expect much of a rebound in commodities until the damage in Japan is known and we start to get a feel for the global demand impact.

Currencies:


A decent spike in the Yen after a pretty dramatic sell-off.  Greenback is at a 15yr low vs the yen.

While the euro fell versus the dollar, it rebounded a bit late in the day.

Market Review February 28, 2011

Market overview for February 28.


Corporate Market: Decent day today as some issuance came back with Juniper Networks doing a billion in 5s, 10s and 30s (existing 30s sold off on the deal) and Arcelormittal announcing a benchmark size deal in 5s, 10s and 30s.  

As I have so graciously outlined, issues hitting their highs continue to trounce issues selling at their lows. Tells me that credit is still being sought after. Personally, I would still be a buyer of credit - the hell with the polyannas saying bubble and risk due to rising rates - as the risk premium relative to the yield is still attractive and as far as rising rates, credit should provide excess returns vs treasuries or you can swap into floating. For disclosure, I am long LQD.

Equities: Equities eeked out about 50bps on the day as oil fell somewhat on assurances supplies will be maintained. Investors also seemed heartened by Fedspeak about increasing oil prices not affecting growth.

Advance-declines were a little better than 2 to 1 positive on the New York Stock Exchange, and negative by 2 issues on Nasdaq about dead flat. Up/down volume was 2 to 1 positive on New York with total volume was just under 1.25 billion. Nasdaq traded just over 2 billion shares, and had about an 11 to 9 negative ratio.

As I have continually maintained, mid-cap growth is still the sector to be in.  Here's a little snapshot of YTD large cap growth (SPY), mid cap growth (IWP) and small cap growth (IWO).  I am still overweighted mid cap growth in the passive portfolio with small cap growth bringing up the rear.

Personally, I think equities are getting a bit stretched, but I don't fight tides.

Wednesday 12-01-2010 Recap - Risk On!

Ever see the Fantastic Four?  The human torch used to always say "Flame On!" and woosh, he was on fire.  Today we heard "Risk On!" and the market was on fire.  Why?

Ok, start with some decent economic news, ADP payrolls ahead of consensus (sounds good for NFP, right?).  From the release:

This month’s ADP National Employment Report shows an acceleration of employment and suggests the nation’s employment situation is brightening somewhat.  November’s gain in private-sector employment is the largest in three years.  This is the tenth consecutive month of gains, which have averaged 47,000 during that period.  Nevertheless, employment gains of this magnitude are not sufficient to lower the unemployment rate, which likely will remain above 9% for all of 2011.  Furthermore, given modest GDP growth in the second and third quarters, and the usual lag of employment behind GDP, it would not be surprising to see several more months of only moderate gains in employment even as the economic recovery gathers momentum.

Is this a nascent employment recovery taking hold?  I believe so.  Will it really move the needle?  I do not think it will for a while.  That said, the market is looking for reasons to rally, and this is giving it one.

Add in the perpetual EU comment and volatility:

(Bloomberg):  Trichet told the European Parliament late on Nov. 30 that some investors are underestimating governments’ determination to defend financial stability in the currency bloc.

(Bloomberg/BW): The EU's monetary affairs commissioner says measures like the weekend bailout of Ireland could pave the way for added steps from the European Central Bank to contain the continent's government debt crisis.  Olli Rehn says in a speech Wednesday that "these measures could provide a sound basis for the continuation of actions of stabilization by the ECB, which has played a key role in ensuring financial stability in the euro area, for instance last May."

(Reuters): European Commission President Jose Manuel Barroso said on Wednesday he had every confidence in the European Central Bank and was sure it would take whatever action is needed to protect euro zone stability.  "I am sure the ECB is analysing the current situation and that it will take the decisions necessary to guarantee the financial stability of the euro zone," Barroso said after attending a meeting in Brussels.

Whatta ya get:

And once again, the world is safe!  Place yer bets.

So, where was the equity action at (in the US)?

And what of the globe you ask:

Risk party like its 1999!

(looking for a better world snapshot page - suggestions????)

Did the re-risk trade extend to debt markets?

 Nope.

This was all about the lowest part of the capital structure, first loss and eternal duration.

Personally, I am not completely sold on the "risk on" trade, but who am I to fight it?  You know what they say about the collective wisdom of markets (or collective wisdom generally).

Treasuries got whacked, might want to start looking at long 10yr (let it get hit just a little more and start to leg back in).  Listen to the ECB to get EUR/USD direction (or market direction generally). Get out of the way of the A$, hearing fast money taking it off the table.  Large caps won the day, look for Mids to catch up and, as always, keep yer eyes on smalls.  Commodities doing well (ex-meats), let 'er ride.

And as always, be careful, make money and have fun (yeah, its possible).

Market Cap Update

Equity market cap update:

Mid-caps continue to outperform, small-caps passing large-caps, so I am maintaining my mid-cap position with a little small-cap added for good measure within my passive allocation.  As I posted on Tuesday, FEZ would be a good play on the bailout.  Outperforming SPY by 200bps last two days.  Still a little left to go - watch for an actual announcement and pay attention to the roll of the ECB.

Small Caps Fly, but I am not Convinced

Small caps crushed the competition today returning just north of 2% while midcaps fell just short of a 1% return and the S&P eeked out just north of 75bps (yeah, only, right).

Now the growth area of small and mids:

Mid growth lead small growth, so where did the small caps lead come from (yeah, seems somewhat obvious, but...)

Yep, all value driven.  So, small value leads mid value today.

Is there a change going on?

 

 Versus mid-cap value, I'd have to say small-caps are taking the lead.

But within small caps, value still trails growth.

But wait, what about mid-cap growth versus small-cap growth:

3mo period, mid-cap leads...

1 month period small-cap leads

5 day period mid-caps still lead.

Bottom line:  I don't think a transition is in place from mid-growth to small-growth quite yet, but the relationship bears careful following as we may be seeing the beginning of the transition.  I am still holding my mid-growth position until we get a better, less volatile sign of a transition.

Thursday Market Recap

Well, its Thursday and I find myself sitting here trying to digest what happened today so I can try to piece it together, make sense of it and try to fit it into a macro picture.  Why?  I am not sure, for myself and my book, obviously but beyond that I hear/read nothing from anyone out there as to their thoughts.  So much for the collective wisdom of markets (yes, getting somewhat disheartened by the lack of response/comments).  In any event, lets begin.

Equities:

Equities had a mixed day, starting out strong, then rolling over as the dollar strengthened.  The overall trend of the market continues to be higher, but the test will be the April highs (1220 on S&P, 122 on SPY).  Would not be surprised if we tested the highs again (financials willing) as earnings have been decent and a bullish undertone seems to be in place.  A lot could depend on the nature and amount of QE2, which is baked in the cake.  I am not sure the Fed/Treasury could pull out now if they wanted to as the market would roll over and the "stocks go up always" policy objective would fail going into elections (keep an eye on the elections).

Here's a snapshot of the US equities markets today:

And a little longer term perspective (longer term in market eyes - trading, not investor):

A little more positive conviction will get us to the test point, beyond which I am not sure how we go much higher unless we see multiple expansion as earnings expansion does not seem to be in place (have you seen some of the guidance by the bigger firms?).

As for the international markets (well, to me anyhow) we saw the same type of action we saw in the states, with continental Europe outperforming.  Commodity currency countries were somewhat weak - although Australia is in the green as I write.

I am still somewhat nervous over Brazil, their market was down today and I can't overlook the increase in CDS being bought on the sovereign.

 In any event,  here is the capitalization chart:

Gee, midcaps still leading the pack?  We are not surprised, are we?

And growth Value:

Growth, really?

Okay all, I realize I skipped fixed income and currencies (yeah, I know, on the day of the $1.5B EBAY deal too), but a fella has to know when his time is up - at least for the day.  Be sure to check out Seeking Alpha for more posts (although the blog has been getting the lions share).

Good luck, lets be careful out there.

Are Small Caps Making Their Move?

I have recently been looking at the market segmented by market capitalization.  I swapped out of large caps into mid caps a while back and have been monitoring the situation to determine when it would be time to swap into small caps.  Here's the chart as of today (using ETFs as proxies):

As you can see, small caps (IJR) have been steadily moving in on mid caps (IWR).  This is YTD.



Now over the last six months:

September was indeed a good month, especially for small caps.



And in table form (yes, not the same ETFs, but a fella takes what he can get):

Same thing.


Now lets look at the growth style of small and mid caps:

IWO Rus SC Growth
IWP Rus MC Growth

Small caps catching up in growth space.


So, from this surface investigation, it appears that the market is a buyer of risk (small caps).  That said, I believe it is still a little early to be swapping into small caps.


Would love to hear thoughts.

Monday Market Recap

Somewhat mixed day in the capital markets today.  Here is some data and thoughts:

Equities:

Equities tried to rally throughout the day, but just couldn't pull it off.  Financials got whacked as news of a breakdown in the MTD/STD merger hit the tape, European banks got hit (yep, another day in Ireland), and Citi found out the government might not be out by the end of the year.  Telecom and utilities pulled off positive performance due to the perceived safety of the sectors.

Like it or not, the near term trend continues to be up.  Tactical overweight.

Growth stocks continued to diverge from value as investors continued to jump on the equity gravy train.

Growth is where you want to focus a tactical overweight in equities.


Fixed Income:

Secondary IG market volume was low today compared to recent days and advancers outnumbered decliners 1.65x.  In the HY market, advancers outnumbered decliners 1.3x.

$13.5B priced new issue today, with notables being NBCU with $4.1B and Santander with $1.1B.

The yield curve steepened as 7s and 10s rose more than 30yr bonds.  Despite all the talk about "bond bubbles", I believe that treasuries still have some upside from here as there is a price insensitive buyer (I have heard instead of cash tax refunds, we could be getting treasuries).  Treasuries rallied on the back of a record setting 2yr auction.




Currencies:

Dollar continues to get beaten on as participants speculate that QE2 (or whatever the heck they will call it) is on the way, and rates in the US aren't attractive relative to most other currencies.







Bottom line today:  mixed on risk, still strong demand for govvies and credit and resistance against the leper formerly known as the dollar.