Archive for the ‘Stocks - U.S.’ Category

Most Recent Comments Via Twitter

Wednesday, January 28th, 2015

You can access them here (@CiovaccoCapital). You do not need to know anything about Twitter to view our comments or use the links to view charts.

Fed Impacted By Currency Concerns

Wednesday, January 28th, 2015

Currency War Brings Strong Dollar

Sometimes the news stories on Wall Street fit neatly together like a jigsaw puzzle. Japan has been trying to devalue their currency for some time. Quantitative easing was announced last week in Europe to combat slow growth and low inflation. All of the attempts to devalue have created demand for the U.S. dollar. On January 8, The Wall Street Journal noted the challenges a strong dollar brings to the Fed’s Open Market Committee, which is releasing their latest statement Wednesday:

U.S. policy makers would be furious if other countries try to “steal” growth by putting American exports at a disadvantage. But there is probably little that can be done to stop these competitive devaluations once they begin. The Fed could theoretically keep interest rates at or near historic lows far beyond 2015, hoping that this would reduce the attraction of owning dollars. But this is problematic if the recent spurt of U.S. growth continues or accelerates. The Federal Open Market Committee is committed to bringing interest rates up to a historically more normal level. Aside from the dollar legally being a Treasury Department responsibility, the Fed’s primary concern is the systemic risks from domestic asset bubbles if policy is not tightened as growth picks up, not baby-sitting countries that are devaluing.

Why does the Fed care about a strong dollar? The blurb below is from the front page of today’s Wall Street Journal:

The stronger dollar is slicing sales and profits at big American companies, prompting them to put renewed emphasis on cost cutting and cramping the broader U.S. economy. The currency effects are hitting a wide swath of corporate America—from consumer products giant Procter & Gamble Co. to technology stalwart Microsoft Corp. to pharmaceuticals company Pfizer Inc. Those companies and others have expanded aggressively overseas in search of growth and now are finding that those sales are shrinking in value or not keeping up with dollar-based costs.

All of the above should make for a very interesting statement from the Federal Reserve later today.

Puzzle image based on clip art with liberal reuse terms.

Market Scenarios: Winners And Losers

Tuesday, January 27th, 2015

Durables Miss In Big Way

The slow growth/low inflation story gained additional traction Tuesday when durable goods orders came in well below expectations. From The Wall Street Journal:

U.S. businesses broadly cut capital spending in the final months of 2014, raising red flags about the economy’s ability to sustain momentum amid troubles around the globe. Orders for durable goods—products like cars and kitchen appliances designed to last at least three years—fell 3.4% in December from a month earlier, the Commerce Department said Tuesday. Orders have fallen four of the past five months.

Bonds Win In Two Of Three Scenarios

From an investment perspective, there are three major scenarios likely facing investors. Scenario one is an ongoing period of slow growth and low inflation, which can be favorable for both stocks and bonds. Scenario two, slower growth, has gained some momentum with the recent trends in earnings and economic data. Scenario three involves a stronger economy and a shift toward higher inflation. You can see a larger and economically-broader version of the flow diagram below via this link.

The least likely outcome in the short run appears to be scenario three (stronger economy). Given the stock market has not broken down in a meaningful way yet, it seems reasonable to assign the highest probability to scenario one, which is more of the same (slow growth and low inflation). The broader market’s failure to make a new high over the last seven months tells us scenario two (slower growth/recession) is creeping higher on the probability ladder. The video below puts some additional fundamental and historical context around the three scenarios.

After you click play, use the button in the lower-right corner of the video player to view in full-screen mode. Hit Esc to exit full-screen mode.

Video

Video

Strong Dollar Hits Earnings

The fundamental backdrop includes increasing fear of deflation, which has helped increase demand for the world’s reserve currency, the U.S. dollar (UUP). A strong dollar has some negative consequences for U.S. corporations. From Bloomberg:

The dollar’s surge is reducing earnings at American companies from Procter & Gamble Co. (PG) to Pfizer Inc. (PFE) and DuPont Co. that make a large portion of their revenue abroad. P&G, the world’s biggest consumer-products maker, today reported profit that missed analysts’ estimates in the quarter ended Dec. 31 after what Chief Executive Officer A.G. Lafley called “unprecedented” foreign-exchange rate fluctuations reduced sales by 5 percentage points. DuPont and drugmakers Pfizer and Bristol-Myers Squibb Co. (BMY) all posted annual forecasts that trailed predictions, in part because of the dollar.

Investment Implications – The Weight Of The Evidence

In two of the three scenarios described above, bonds can perform well. Consequently, we have been slowly been ratcheting up our fixed income (TLT) exposure in recent weeks. Until the broad stock market breaks down, we can afford to remain patient with our equity-based ETFs (SPY).

Wednesday brings the latest from our friends on the Federal Reserve’s Open Market Committee. If we are willing to pay attention with a flexible and open mind, the market will guide us in the coming days and weeks.

Most Recent Comments Via Twitter

Tuesday, January 27th, 2015

You can access them here (@CiovaccoCapital). You do not need to know anything about Twitter to view our comments or use the links to view charts.

Greek Vote To Test Eurozone

Sunday, January 25th, 2015

Eurozone Exit Talk Will Increase

Just when you may have thought it was safe to jump back into the European waters following the ECB’s stimulative party, elections in Greece may rock the boat. From The Wall Street Journal:

Greek voters have thrown down a gauntlet by handing an impressive victory in Sunday’s elections to Syriza, a radical left-wing party that had campaigned on a promise to secure debt relief. Greece and the eurozone now need to swiftly convince the markets and ordinary Greeks that they can reach a deal. Prolonged uncertainty would lead to capital flight and even bank runs that would inflict serious damage on the Greek economy, potentially leading to Greece’s exit from the eurozone. Much hinges on how all sides conduct themselves in the hours ahead. The markets assume that the risk of Greece exiting the euro is small, but officials close to the situation are not complacent. Some fear that the compromises required on both sides may prove too difficult.

Markets Remain On Edge

The news from Greece is not surprising nor particularly unexpected, which aligns with the still tentative nature of the risk-on vs. risk-off ratios covered in this week’s stock market video.

After you click play, use the button in the lower-right corner of the video player to view in full-screen mode. Hit Esc to exit full-screen mode.

Video

Video

Investment Implications - The Weight Of The Evidence

While the broad market continues to move sideways (see chart below), the bigger picture may call for a reduction in growth exposure this week. In addition to the news from Greece, a Fed announcement is coming Wednesday and GDP figures Friday.

The Most Important Thing For 2015

Friday, January 23rd, 2015

After you click play, use the button in the lower-right corner of the video player to view in full-screen mode. Hit Esc to exit full-screen mode.

Video

Video

Most Recent Comments Via Twitter

Friday, January 23rd, 2015

You can access them here (@CiovaccoCapital). You do not need to know anything about Twitter to view our comments or use the links to view charts.

Are The Stock Bulls In Trouble?

Friday, January 16th, 2015

After you click play, use the button in the lower-right corner of the video player to view in full-screen mode. Hit Esc to exit full-screen mode.

Video

Video

Fine Line Between Patience & Risk Management

Thursday, January 15th, 2015

In last weekend’s video we noted the S&P 500’s trend still looked good, but that there was little margin for error. As we prepare for the most important day of the week (Friday), there are six areas that may attract buyers between 1992 and 1957:

  1. Price is at the bottom of the blue trend channel (see 1 in chart below).
  2. The 38.2% Fibonacci retracement from the October low to the December high sits at 1989. The S&P 500 closed at 1992 Thursday.
  3. The early January low was 1992.
  4. The mid December low was 1972.
  5. Price was rejected at 1970 in October (what once was resistance may now act as support).
  6. The 50% retracement comes in at 1957.
    1. Our last two moves have been defensive in nature (sold tech stocks and bought bonds). If stocks cannot firm up before Friday’s close, the rules will most likely call for additional risk reduction. The levels in the chart above allowed for some patience this week, but the stock market’s margin for error is thin. Is it possible stocks break all six levels in the coming days? Yes, it is possible.

      Other things to consider: (a) the market is closed on Monday, January 19, and (b) the ECB has an important announcement coming next Thursday. We will keep an open mind as things unfold Friday and next week.

Flexible Migration Strategy

Wednesday, January 14th, 2015

Today’s chess move in our accounts aligns with both the “incremental” and “hybrid” strategies. Under the incremental approach, we added to the conservative side today. If a bear market or multiple-month correction evolves from here (not a prediction), we have taken another step toward building a portfolio with a conservative bias. If stocks find their footing soon, we still own equities. The market and the hard data will guide us in terms of the next steps (if any). The hybrid strategy was outlined in a recent video. We will continue to monitor the markets and our accounts closely until things settle down.