Search results matching tag 'Anthony Mirhaydari'

The rebirth of the American consumer

Stock bulls await the dollar's collapse

Anthony Mirhaydari — Tue, 13 Oct 2009 19:05:00 GMT

While the primary trend for stocks continues to arch skyward, we are beginning to see equity traders react to some new developments over in the world of fixed-income, commodities, and currencies. This has made for choppy trading over the last few days.

Much of the catalyst for the recent gains in equities has been the depreciation of the U.S. dollar. Traders are using the greenback as a funding currency in carry trades with riskier, higher yielding assets because of super-low U.S. interest rates. They borrow dollars cheaply, sell them short, and use the proceeds to buy commodities and bonds in countries like Brazil and Australia.

They can do this with confidence because of the apparent support for dollar devaluation among officials in Washington -- who are hoping to boost employment by reviving the competitiveness of our exports -- along with prolonged support for low rates at the Federal Reserve.

With so much leverage at work in the carry trade, investors are very sensitive to unfavorable position movements. So whenever the U.S. dollar rises, stocks fall, bonds fall, gold falls, and the yen sinks, it causes carry traders to cringe in agony. Any indication that cross-asset correlation trends are changing, be it statements by policymakers or rumors in the newspapers, will cause unease.

This is important because you must recognize that at this point in the cycle, it's not corporate earnings reports or economic data causing the most volatility lately: It's changes in currency relationships as traders react to government or central bank officials' comments.

There were a few developments over the past week that furrowed the brows of hedgies in the carry trade.

The first were those comments from Bernanke that the Fed won't print money forever. During a speech last Thursday night, Bernanke discussed how the bank plans to exit its accommodative policy stance. There was lots of talk about reducing the amount of reserves held by money center banks along with interest rate increases to discourage lending.

This is a big change in tone from just a few months ago, when all the Fed could talk about was how much debt it wanted to buy. But I still think he is only saying this to keep the decline of the dollar from being a completely one-way trade. Before becoming Fed chairman Bernanke made a career out of studying and explaining why the Fed should not curb easy-money policies amid a deflation threat until the danger has clearly passed. That moment has been defined by him and others as a point at which rock-solid employment growth has been established. Figure late 2010 at the earliest.

We also had reports that central banks in Thailand, Malaysia, Hong Kong, Singapore, and Taiwan were actively buying the dollar to check its fall against their currencies. The idea is that their exporters can't handle such a dramatic drop in profitability and competitiveness. Since the Asian financial crisis of the late 1990s, export-oriented countries on the Pacific Rim have enjoyed a period of prosperity enabled by their devalued currencies, a strong dollar, and the accumulation of foreign exchange reserves. These people aren't going to give all that up easily.

All of this, along with building political pressure from the Republican Party to halt the dollar's slide, has helped stabilize the dollar over the last month. Yet if stocks are to push higher from here, as I believe they are, then it may be on the back of continued declines in the dollar. U.S. officials will talk about how they prefer a strong dollar, but won't do anything about it.

Disclosure: The author does not own or control a position in any of the funds or companies mentioned.

Anthony Mirhaydari is a researcher for the Strategic Advantage investment newsletter. He can be contacted at anthony.mirhaydari@live.com. Feel free to comment below.

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The rebirth of the American consumer

Anthony Mirhaydari — Tue, 13 Oct 2009 18:17:00 GMT

Don't look now, but a nation of shoppers is about to be reborn. Thanks to rising stock prices, stabilizing home values, increased savings, improved confidence in the economy, and reduced debt, there is building evidence that the quintessentially American capacity for consumption is returning. The key has been a recovery in net worth and more manageable debt burdens.

According to Deutsche Bank economists, from a low in the first quarter, households are already halfway down the road to rebuilding net worth to the 20-year average of 533% of income. Also, thanks to ultra-low interest rates, debt service ratios are quickly returning to more normal levels even as total debt levels remain elevated. This helps spending since people focus on monthly payments, not the total balance outstanding.

It's worth noting that the stock market is already pricing in a more optimistic outlook in this area. Retailers and other consumer discretionary stocks have been on fire: Specialty outlet Lululemon (LULU) is up some 470% from its March low while big-toy manufacturer Polaris (PII) is up more than 200%. The Consumer Discretionary SPDR (XLY), meanwhile, has returned to levels last seen in the summer of 2008.

The big question is how consumers will respond now that their financial situation is somewhat improved.

With 70% of the U.S. economy dependent on the consumer, much depends on the savings rate -- which current stands at about 4%. Deutsche Bank built a savings model that factors in things like net worth, credit card interest rates, consumer sentiment, and the unemployment rate. They predict the savings rate to increase to 6% over the next several years.

So what are the implications? Bank of America - Merill Lynch economists believe that such a moderate rise in the savings rate could complete the healing of household balance sheet. And the drag on the economy would be relatively modest, with consumption growth falling by 0.25% to 0.75%.

Under this scenario, debt levels would remain elevated as new savings are used to buy high-yielding assets to boost wealth instead of paying down debt. You've gotta love this solution. Better to own more than owe less. Especially since the vast majority of consumer debt is tied to real estate and early repayment of mortgage debt isn't as popular as taking a flyer on a hot stock idea.

If this is true, than the biggest beneficiaries of the return of the consumer could be asset managers like SEI Investments (SEIC) and Blackrock (BLK) instead of luxury retailers like Coach (COH) and Tiffany (TIF).

Disclosure: The author does not own or control a position in any of the funds or companies mentioned.

Anthony Mirhaydari is a researcher for the Strategic Advantage investment newsletter. He can be contacted at anthony.mirhaydari@live.com. Feel free to comment below.

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Stock-to-gold ratio at a decision point

Anthony Mirhaydari — Thu, 08 Oct 2009 17:43:00 GMT

After removing the inflationary effects of the Fed's dollar printing, stocks are now sitting at the lows reached after the swoon in early September. By looking at the relative performance of the S&P 500 to gold futures, investors are nearing something of a decision point.

One of two things can happen from here. Gold, which blasted to a new high of $1,044 on Wednesday, could continue to outpace stocks. Or we could see gold cool off and stocks start posting some real, inflation-adjusted gains.

My guess is the September lows for the stock-to-gold ratio will serve as critical support for another move higher. Why? Well the two big movements in the gold-adjusted S&P 500 occurred between April and May (first-quarter earnings season) and July and August (second-quarter earnings).

Analyst estimates for the third quarter as they stand now don't adequately account for the healing that has occurred in the global economy over the last three months. Thomson Reuters puts the current Q3 earnings growth rate for the S&P 500 at -24.8%. This is slightly worse than the -20% estimated earnings growth rate that prevailed back in July and August and the -17.2% analysts expected back in April -- so expectations have come down quite a bit. This is a good thing since lowered expectations are easier to beat.

Take a look at the chart above. During both the Q1 and Q2 earnings seasons, positive surprises during the first two weeks forced analysts to positively revise their earnings estimates. Credit Suisse analysts expect a similar trend to develop over the next few weeks. With Aluminum giant Alcoa (AA) kicking things off Wednesday night with a surprise return to profitability, earnings upgrades should provide the impetus needed to get the adjusted S&P 500 moving again.

My positions

My portfolio at Wall Street Survivor is now up 25.3% for the month versus a 1.2% rise in the S&P 500. My largest gainer is the DB Double Long Base Metal ETF (BDD), which is up 16.4% since I added it on Monday.

Disclosure: The author does not own or control a position in any of the funds or companies mentioned.

Anthony Mirhaydari is a researcher for the Strategic Advantage investment newsletter. He can be contacted at anthony.mirhaydari@live.com. Feel free to comment below.

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Federal Reserve restarts the money pump

Anthony Mirhaydari — Mon, 05 Oct 2009 19:04:00 GMT

Stocks should soon start enjoying the benefits of a renewed surge in liquidity courtesy of the Federal Reserve.

Although the Fed pulled the punch bowl away in one area, by announcing the discontinuation of its direct debt purchases back on September 23, it has quietly been gunning the money supply. Clearly something has Ben Bernanke & Co. worried. Maybe it was Friday's terrible jobs report.

As you can see in the chart below, the effective Federal Funds rate -- which is the short-term inter-bank lending rate that the Fed targets -- has plummeted over the past few weeks. It reached 0.07% last Thursday, well below the Fed's target rate of 0.125% and beneath the levels that prevailed late last year in the wake of the credit crisis. Effective interest rates haven't been that low since 1961. The measure has since rebounded slightly.

Research by Tom McClellan of the McClellan Market Report shows that stocks react to changes in the effective Fed Funds rate with a lag of about 13 trading days. My guess is that over the next few weeks, as Q3 earnings are reported, this flood of money will help power a very fast, very powerful rally that will take the S&P 500 near the 1,200 level and the Dow over the 10,000 threshold.

My Positions

My portfolio at Wall Street Survivor is off to a good start in October: As I write this, I'm up 9.8% for the month versus a 3% decline on the S&P 500.
I've exited my long Treasury position, the Direxion 30 Year Treasury Bull 3x (TMF), for a 3.7% gain over a four-day holding period. I've also exited my precious metal shorts.

With some renewed dollar weakness brought on by the Fed's money pumping, an oversold condition, and Q3 earnings season about to begin, the risk trade looks to be back on. I've added a number of leveraged, high-beta positions to take advantage of this including the Direxion Daily Financial Bull 3x ETF (FAS). Be sure to check my future posts for trade updates.

Disclosure: The author does not own or control a position in any of the funds or companies mentioned.

Anthony Mirhaydari is a researcher for the Strategic Advantage investment newsletter. He can be contacted at anthony.mirhaydari@live.com. Feel free to comment below.

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Why stocks look oversold

Anthony Mirhaydari — Sat, 03 Oct 2009 01:24:00 GMT

Since the Federal Reserve announced on September 23 that it would not be extending its direct purchases of mortgages and U.S. Treasuries, stocks have lost more than 4%. At the time, I wondered if the Fed had killed the bull market.

While that remains to be seen, in the near term at least, stocks look ripe for a rebound after sliding lower on a spate of sour economic news. On Tuesday, we got word that consumer confidence had slipped. On Wednesday, the Chicago PMI came in under expectations. Thursday saw very weak domestic auto sales. And of course, we had a horrible jobs report.

By all measures, with investors shaky after Thursday's plummet, the bears should have smashed the major indices on Friday. The fact that they didn't press their advantage, along with some other corroborating evidence, indicates we have a classic oversold scenario on our hands. This should help support stocks until Alcoa (AA) kicks off the third-quarter earnings season next Wednesday. Here's why.

According to Paul Desmond and his team at Lowry Research, the percentage of stocks above their 10-day moving average has plummeted to just 8.13%. Not since the March low has this metric fallen to such depths. Not during the brief May selloff. Not during the prolonged weakness in June and July. Not during the dramatic but short-lived drop at the beginning of September.

Such widespread weakness indicates sellers are not worried about earnings quality, valuation levels, or performing any other type of fundamental analysis on what they are throwing out of their portfolios. Good or bad, everything is getting dumped in an attempt to reduce risk exposures. Obviously, this is a sign pessimism has probably reached a nadir.

Moreover, during Thursday's 2.6% drop on the S&P 500 breadth was extremely negative: Declining issues outpaced advancers by 5 to 1 on the New York Stock Exchange. Volume on declining issues accounted for a full 95% of total volume. Any session in which up or down volume makes up more than 90% of total volume are rare events that signifies sentiment has reached an extreme.

And finally, Tom McClellan of the McClellan Market Report points us to what's known as the Arms Index. Developed by Richard Arms, it compares the ratio of advancing - declining issues and compares it to the ratio of up volume to down volume. A low reading, of say 0.5, indicates an overbought condition while a high reading of 2.0 or higher shows an oversold condition.

Thursday's session registered an impressive 3.63 on the Arms Index. This is the highest reading since early February. The good news is that by this measure stocks are at their most oversold levels in seven months. The bad news is that the last time the Arms Index was so high, they went on to lose 22% before bottoming in March.

Disclosure: The author does not own or control a position in any of the funds or companies mentioned.

Anthony Mirhaydari is a researcher for the Strategic Advantage investment newsletter. He can be contacted at anthony.mirhaydari@live.com. Feel free to comment below.

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Is the 'junk' stock rally ending?

Is there hope for the labor market?

Anthony Mirhaydari — Fri, 02 Oct 2009 20:29:00 GMT

Friday saw the release of the latest employment situation report and boy was it a doozy. Payrolls fell by another 263,000 in September, well under the consensus estimate of a loss of 170,000. The unemployment rate inched higher to 9.8% -- which now stands at the highest level since 1983.

Given the steady increase in consumer confidence and Wall Street expectations over the summer, these numbers are about as comforting as a splash of ice cold water on a winter morning. Digging into the details only makes it worse: The household survey component reported a whopping 782,000 jobs were lost last month compared to a 392,000 drop in August.

Are there any redeeming qualities? This may come as a surprise, but I think there are a few reasons to be hopeful.

First, it's important to not get caught up in the month-to-month undulations.

Stepping back for a minute, it's clear that the intensity with which jobs are being lost continues to decline after reaching a peak of 741,000 back in January. We're already seeing signs that some of the industries that were hit first -- finance and manufacturing -- are beginning to expand payrolls again. General Motors recently added a third shift to three plants and will be restoring 3,000 jobs. And Goldman Sachs plans to recruit up to 200 people for its asset management business.

Moreover, the "diffusion index" compiled by the Bureau of Labor Statistics continues to improve. This metric compares the percent of industries that have increasing employment compared to those with decreasing employment. A 50% reading indicates an equal balance between the two. Looking at the three-month measure, we've seen some incredible improvement.

Among the 83 industries within the manufacturing subindex, the diffusion index has gone from a low of 3.6% in February and March to 22.3% in September. The broader non-farm payroll index has more than doubled from a low of 14.2% to a current reading of 28%.

And finally, there are indications that corporate America slashed its payrolls far too deeply given the actual depth of the recession. This means that once the recovery actually gathers some momentum, the pace of new hiring could very well surprise to the upside.

According to the economists at the ISI Group in New York, there is a 73% correlation between peak-to-trough declines in GDP and the associated decline in payroll employment. So far, the economy has contracted by about 3.8% from its peak in the second quarter of 2008. Thus, based on ISI's employment model, we would expect a decline in payroll employment of around 3.6% or so. Instead, without even factoring in September's job losses, payrolls are already down 5%.

While these deep job cuts and the associated gains in productivity have provided a boost to corporate profits, they are simply unsustainable over the long haul.

Anthony Mirhaydari is a researcher for the Strategic Advantage investment newsletter. He can be contacted at anthony.mirhaydari@live.com. Feel free to comment below.

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Famous bear Faber's forecast: 'Total disaster'

Is the 'junk' stock rally ending?

A new bull market -- in Treasury bonds?

Anthony Mirhaydari — Thu, 01 Oct 2009 04:54:00 GMT

As investors are distracted by the volatility in the stock market, boring ol' Treasury bonds have been going wild. Since August 10, the iShares 20+ Year Treasury Bond ETF (TLT) has gained 9.4% versus a 4.6% return for the S&P 500.

This is all quite curious since normally at this stage of an economic recovery, defensive assets like Treasury bonds should be lagging as investors price in corporate profit growth and an increasingly inflationary environment. Indeed, the urge to avoid government debt should be especially strong given the massive increase in the global money supply as central bankers around the world fought to keep financial Armageddon at bay. Add to this large and growing fiscal deficits and the associated increase in the supply of government debt.

Yet, money continues to flow into the government's coffers as investors line up to throw a few billion at Uncle Sam. Here's why.

Part of the reason has been that commercial banks, worried about expanding their loan portfolio in the midst of a recession, have been parking capital in Treasuries. Gluskin Sheff economist David Rosenberg finds that banks snapped up over $20 billion worth of government debt so far this month.

Retail investors are also partially responsible: The latest TrimTabs data has only $2.5 billion flowing into equity mutual funds since March compared to the $254 billion that have chased bonds.

And finally, deflation fears have professional bond managers like PIMCO's Bill Gross increasing $178 billion Total Return Fund's investment in government-related bonds from 25% in July to 44% now.

But the most interesting factor is the resurrection of the carry trade.

Back in the go-go days of 2006, hotshot traders would borrow at ultra-low Japanese interest rates, sell the yen, and invest the proceeds in country that offered higher returns such as Australia or the United States. This strategy was highly profitable until the Japanese yen exploded higher in the summer of 2007 as institutional investors sold U.S. stocks and bought back yen to close the trade.

According to a source in the murky world of "global macro" hedge funds, the latest iteration has traders borrowing at ultra-low short-term interest rates in the United States, selling the dollar short, establishing a long position in Japanese yen futures, and investing the balance in long-term U.S. Treasuries.

Leverage this up with credit, and the play pays handsomely as long as short-term Treasuries stay cheap (that is, as long as the Fed keeps rates low), long-dated bonds continue to rise, the dollar continues to fall, and the yen continues to rise. Three out of the four criteria depend on the Federal Reserve; the fourth depends on the new government in Tokyo.

And on this last point, hedge funds like what they've heard so far from Hirohisa Fujii, Japan's finance minister. Despite the yen's 38% rise from its 2007 low and the 12.6% rise since March, Fujii indicated that Tokyo would not intervene to check its currency's rise. He added that "foreign exchange dumping" to protect Japanese exporters would be wrong. Compare this to the active manipulation being carried out in Switzerland, China, and elsewhere.

While this latest crowded trade will most certainly unwind in dramatic fashion once the Fed starts hiking rates, for now you can participate through the iShares 20+ Year Treasury Bond ETF (TLT). Alternatively, if you are feeling risky, you can use the Direxion Daily 30-Year Treasury Bull 3x Shares (TMF), which returns three times the daily return on 30-year Treasuries.

But beware: To my eyes, it looks like this new carry trade is due for a temporary setback as the yen drops and the dollar rises before the long-term trends resume.

Disclosure: The author does not own or control a position in any of the funds or companies mentioned.

Anthony Mirhaydari is a researcher for the Strategic Advantage investment newsletter. He can be contacted at anthony.mirhaydari@live.com. Feel free to comment below.