Tuesday, February 23, 2016

Just came across some interesting commentary

Fundamentalis - what happens if something goes right? Some interesting points at the end:

Aside from sentiment and the election, here is what I think could go right for the stock market over the next 6 – 9 months:

1.) Inflation: sounds like the proverbial pipe-dream, but the core CPI data is starting to increase, and it isn’t just starting to increase, but to increase at an increasing rate. Still it is doubtful that the US consumer is headed for the kind of mild hyper-inflation we saw in the late 1970’s. Services are 80% of GDP, and the services CPI is nearing 3%. It is a drum I’ve beaten before for readers, but check out Bespoke’s research and in particular the Bespoke Weekly letter that Paul Hickey authors every week. Walmart is America’s largest employer and they are scheduled to institute phase II of their wage hike for hourly employees. It will be interesting to see how and where this shows up in inflation and average hourly earnings data (think monthly nonfarm payroll report).

2.) GDP growth: Barron’s noted this weekend that the US economy could be looking at 3% GDP growth in Q1 ’16. Retail sales were strong for January ’16. Growth is good – better earnings growth isn’t showing up in earnings yet, though.

3.) Weaker dollar: the dollar index continues to back off it’s 100 level that it traded around from late March ’15 through early January ’16. A drop through 95 might indicate another leg lower. The important thing though is that the dollar index not strengthen from here and break through 100. My own opinion is that a continued gradual decline in the dollar index gives Janet Yellen some room to push rates higher since a stronger dollar is a “de facto” tightening.

4.) Crude oil prices: a stabilization around $30 wouldn’t do much for the cash-flow strained small and mid-cap energy companies, but at least a stabilization in crude might have a positive psychological affect on investors.

5.) The hardest hit sectors in 2015 – Energy, Basic Materials, the Russell 2000, biotech, and Emerging Markets – start to stabilize. Given the tech and financial bear markets of the 2000’s those two sectors seemed safe for overweighting, but both sectors have been hit hard in 2016.

6.) Value is starting to outperform growth, still not the 900 basis point out-performance that Growth held versus Value in 2015, but it is a start.

One source thinks the three most over-crowded trades are:

1.) Long US-dollar

2.) Short Energy

3.) Short Emerging Markets

Breaking these over-crowded trades might go a long way to breaking the psychology of this market. (Long XLE, IYE, CWO, EEM in small quantities.)

Some things worth considering, there.

Point one is especially intriguing, since part of the present market turmoil seems to originate with confusing a typical winter slowdown with a disproof of the Fed's argument that rate rises should begin now because they see inflation coming 6-12 months down the pipe.

And then the highlighted part of point 3 becomes important as well, since lower dollar is a good substitute for monetary loosening, as Lael Brainard would certainly agree. She'd be okay with rate hikes in a weakening USD environment.

But if you're just assuming that the winter downtrend continues into the future, and that USD appreciation continues into the future, it does become logical to piddle your frilly pink panties.

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