Dave Moenning

The Next Big Worry? Well, Never Mind…

A couple weeks back, I opined that the next big problem for the stock market might revolve around global central bankers changing their monetary policy tune on a coordinated basis. The idea was simple. Stocks have enjoyed the benefits of capital creation via global QE programs since the crisis ended in early 2009. The key has been that when banks print money, the cash must go somewhere. And the bottom line is that a fair amount of the freshly minted QE capital consistently found its way into the U.S. stock and bond market.

The worry is that the majority of the world’s central bankers (save Japan, of course) looked to be ready to reverse course. Instead of creating capital, the plan now is for banks to begin to “normalize” their balance sheets. In English, this means the banks plan on selling trillions of dollars of the bonds and funky securities they accumulated to help keep the global banking system afloat over the last eight years.

The thinking is that although no central banker in their right mind would intentionally overwhelm or surprise the markets, a globally coordinated plan to sell bonds would become a massive headwind for the bond market. And the end result is that rates would be expected to rise – maybe a lot. Especially if the inflation that the central bankers have been striving for begins to materialize – or perhaps starts to run hot. Or if all those macro hedgies decide to front-run the Fed by doing some selling of their own.

While this outcome may sound a lot like the plan the bankers have been hatching for some time now, the problem is that the global economy was assumed to be strong when the bankers began to sell. And the big fear has been that the US Fed, the BoE, the ECB, etc., would “miss” on this element and wind up inducing economic weakness – maybe even a recession – in the process.

Recall that last month, investors had begun to worry that central banks around the world were actually turning hawkish. If one connected the dots, it appeared that this might even be a coordinated effort. For example, a string of Fed officials publicly stated they they would be in favor of hiking rates at a faster pace than currently projected by the “dot plot.” In addition, Bank of England officials openly called for an increase in interest rates. And then Super Mario (aka ECB President Mario Draghi) suggested that his bank might need to scale back its monthly bond-buying program. Oh, and the Bank of Canada joined the fray by hiking rates for the first time in seven years.

The bond market definitely noticed as the yield on the U.S. 10-year climbed about a quarter of a percentage point in short order. On a chart basis, it appeared that the 10-year yield was about to break out, a move that technicians said was important. As such, it appeared that rates were on the precipice of something big.

But a funny thing happened on the way to the debacle in the bond market. Since that pivotal moment back on July 7, the worries that central bankers were suddenly turning hawkish in a coordinated fashion have fallen – in a fairly large way.

In fact, the yield on the 10-year has retraced more than half of the late-June move, having fallen from 2.4% to 2.25% over the last nine trading days. From my seat, the sudden change in the market mood is tied to the fact that the inflation data that the Fed, BoE, and ECB were banking on has been moving in the wrong direction. Instead of inflation moving above the 2% target, the data has been coming in weaker than expected. In other words, the premise for central bankers moving faster than anticipated just isn’t there.

And while Yellen’s bunch appeared to want to ignore the data and stick to their plan by calling the downtick in inflation “transitory,” they have since come to their senses. Earlier this month, the Fed Chair acknowledged the inflation trend and said the Fed could adjust its rate policy if inflation doesn’t pick up.

Then last week, the ECB also backed off what had been perceived to be a more hawkish stance by delaying any discussion of winding down its bond buying program until the fall.

So, with the central bankers apparently putting aside talk of moving rates faster than anticipated, yields have come down and the fear of the next big problem appears to have receded. And until/unless inflation starts to perk up in a meaningful way, the bears will have to back away from the panic button. Well, for now, anyway.

Thought For The Day:

If you are determined enough and willing to pay the price, you can get it done. -Mike Ditka

Current Market Drivers

We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).

      1. The State of the U.S. Economic Growth (Fast enough to justify valuations?)

      2. The State of Earnings Growth

      3. The State of Trump Administration Policies

      4. The State of Fed Policy

Wishing you green screens and all the best for a great day,

David D. Moenning
Chief Investment Officer
Sowell Management Services

Disclosure: At the time of publication, Mr. Moenning and/or Sowell Management Services held long positions in the following securities mentioned: none. Note that positions may change at any time.


Disclosures

The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning’s opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report is for informational purposes only. No part of the material presented in this report is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed constitutes a solicitation to purchase or sell securities or any investment program.

Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided.

The analysis provided is based on both technical and fundamental research and is provided “as is” without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.

David D. Moenning is an investment adviser representative of Sowell Management Services, a registered investment advisor. For a complete description of investment risks, fees and services, review the firm brochure (ADV Part 2) which is available by contacting Sowell. Sowell is not registered as a broker-dealer.

Employees and affiliates of Sowell may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Positions may change at any time.

Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results.

Advisory services are offered through Sowell Management Services.

Dave Moenning

The Next Problem Could Be…

Don’t look now fans, but bonds may be back on the list of things to worry about in the stock market. Jeff Gundlach, who has apparently been anointed the new king of the bond market, has suggested that bonds are on the precipice of a bear market and that Ten-year Treasury yields are on course to move “toward 3 percent” this year.

Just over two weeks ago, the yield on the U.S. Gov’t 10-Year closed at the low of the year at 2.137%. The thinking at the time was that inflation indicators were wobbling, the economic outlook was mixed, and the chances of Trump getting anything done in 2017 were falling fast. So, despite all the Fedspeak to the contrary, the markets doubted the Fed’s ability to stay the course. Rates looked to be moving in the opposite direction of the general consensus.

Lest we forget, the yield on the 10-year began 2017 at 2.446% and just about everyone on the planet expected that yield to rise steadily throughout the year. So, when yields dropped to a fresh calendar-year low on June 26, it appeared that the prognosticators of doom and gloom in the bond market had once again failed – in rather spectacular fashion.

However, eight days later, the yield on the 10-year had spiked to 2.396% and looked ready to take out important resistance zones. The move was impressive – and global in scope. And those who don’t spend their days watching the action in markets, were left scratching their heads.

Yield of U.S. Gov’t 10-Year – Daily

View Image Online

So, what gives? Why did bond yields reverse course in violent fashion? Why did the sentiment flip completely in such a short period of time?

No, Janet Yellen didn’t change her tune. No, the Fed didn’t surprise the markets at their June meeting. And no, the inflation data hadn’t suddenly reversed.

The answer actually has nothing to do with the United States economic data, nor inflation, oil, or even the Fed. Nope, this situation started across the pond – and not where you might think.

It turns out that a weaker than expected bond auction in France caused traders in Europe to sit up and take notice (and do some serious selling). Next, Super Mario started “talking taper” (or so traders thought). And then, the Bank of England chimed in with some unexpectedly hawkish comments.

The Lightbulb Goes Off

This coupled with the fact that Yellen & Co. appear to be bent on raising rates and unwinding their $4 trillion balance sheet (yes, despite growth and inflation expectations being downgraded almost daily) caused traders to realize that the “QE Era” was coming to an end.

After nearly of decade of unprecedented global central bank intervention, it appears that the most of the globe’s central banks (save Japan of course, which apparently plans to print money until the end of time) have decided that it is time to step aside.

Yep, that’s right; almost in unison, central bankers have started talking about pulling back on their stimulative efforts. As in ending QE. As in selling some of the mountain of paper the banks have acquired while trying to keep the global economy afloat. And as in “normalizing rates” and monetary policy.

So, what do traders do when they realize that the biggest buyers of bonds are going to (a) stop buying in bulk and (b) move toward becoming net sellers of bonds? They sell, of course.

Whether the current spike in rates will continue or not is anybody’s guess. Whether or not Mr. Gundlach and all the other prognosticators calling for the start of the big, bad bond bear will be right anytime soon is also in question.

However, for me, the takeaway is that when investors decide to do the same thing at the same time, things can get ugly – in a hurry. So, as I’ve been lamenting for some time now, I do not believe we are seeing the type of low risk environment that the volatility metrics might imply.

No, the bottom line is I think risk is elevated and one should play the game accordingly.

Thought For The Day:

If you have everything under control, you’re not moving fast enough. -Mario Andretti

Current Market Drivers

We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can both identify and understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).

      1. The State of the U.S. Economic Growth (Strong enough to justify valuations?)

      2. The State of Earnings Growth (Ditto)

      3. The State of Trump Administration Policies

Wishing you green screens and all the best for a great day,

David D. Moenning
Chief Investment Officer
Sowell Management Services

Disclosure: At the time of publication, Mr. Moenning and/or Sowell Management Services held long positions in the following securities mentioned: none. Note that positions may change at any time.


Disclosures

The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning’s opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report is for informational purposes only. No part of the material presented in this report is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed constitutes a solicitation to purchase or sell securities or any investment program.

Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided.

The analysis provided is based on both technical and fundamental research and is provided “as is” without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.

David D. Moenning is an investment adviser representative of Sowell Management Services, a registered investment advisor. For a complete description of investment risks, fees and services, review the firm brochure (ADV Part 2) which is available by contacting Sowell. Sowell is not registered as a broker-dealer.

Employees and affiliates of Sowell may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Positions may change at any time.

Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results.

Advisory services are offered through Sowell Management Services.

Dave Moenning

Uh, What He Meant To Say Is…

On Tuesday, the stock market experienced its biggest decline in a month (which isn’t really saying much based on the lack of volatility seen since mid-May) on the back of a confluence of negative inputs. One of the primary issues that traders fretted over were comments made by Mario Draghi. In essence, the markets heard the ECB President suggest that his bank may begin to wind down and/or take steps to reduce monetary stimulus. As I opined yesterday, the result was a global selloff in the bond market based on the fear that the central banks all walking back their stimulus efforts at the same time might trigger the big, bad bond bear that analysts have been expecting for years now.

However, in keeping with the strictly sideways trend that has been largely intact for the past four months, stocks reversed course Wednesday, erasing the entirety of Tuesday’s decline and then some. In fact, the venerable S&P 500 index closed yesterday just 12 points (or about 0.5%) from its most recent all-time high. So much for the return of the downside volatility that was the talk of the town on Tuesday, right?

The impetus for the quick reversal in stocks appears to also be tied to Mr. Draghi. More specifically, the intent of Super Mario’s comments.

Recall that on Tuesday, the ECB president said the improvement in the euro-area economy creates room to pull back unconventional measures without tightening the bank’s current policy stance.

What He Meant To Say Is…

But, according to an ECB official, who asked not to be named due to the fact that internal discussions among ECB officials are confidential, the markets basically misinterpreted Draghi’s speech at the ECB Forum on Tuesday in Sintra, Portugal.

The official says that Draghi’s comments were intended to strike a balance between recognizing the currency bloc’s economic strength and warning that monetary support is still needed.

So, on Tuesday, the markets focused on the first part of the statement relating to pulling back on the bank’s “unconventional measures” – aka QE. But on Wednesday, traders recognized the effort to “walk back” Super Mario’s comments and reversed course.

Although the ECB officially declined comment, the bank’s Vice President, Vitor Constancio, scrambled to set the record straight. In a CNBC interview Wednesday, Constancio said that Draghi’s remarks were “totally” in line with ECB policy and that the market’s response was puzzling.

The ECB VP stressed that despite the current economic upswing, inflationary pressures remain subdued. And while an improving economy normally results in higher prices and wages, this does not appear to be the case at the present time in the EU. And since the ECB’s primary objective is an inflation target, there is no need to adjust the bank’s monetary policy.

Constancio emphasized this point by saying that the ECB plans to stay the course here. “If we want to bring inflation to our target of below but close to 2 percent then we have to persist in the type of monetary policy that we have been adopting.”

Although there were other positive inputs in the market yesterday such as Goldman raising its year-end price target on the S&P, further improvement in oil, and Trump telling GOP senators that they are getting “very close” to an agreement on a healthcare plan, the idea that the ECB has no plans to change their QE operations (which are scheduled to run through the end of 2017) allowed traders to breathe a sigh of relief.

Watch Those Bonds

It is interesting to note that the bond traders didn’t appear to completely buy the story as the yield on the US 10-Year rose on Wednesday and is up again in the early going this morning. The 10-year yield has moved from 2.137% on Monday (which was the low of the year) to 2.281% – in less than 4 trading sessions.

Thus, from my perch, traders appear to be either (a) “going the other way” for a trade (lest we forget, the trend in yields had been straight down since May 11) or (b) discounting the inevitable end to the ultra accommodative stances from both the ECB and the Bank of England.

So, I, for one, will be keeping a close eye on the bond market for the foreseeable future.

Publishing Note: I will be taking a mid-year break from the keyboard next week and will not publish Daily State reports.

Thought For The Day:

Only put off until tomorrow what you are willing to die having left undone. – Pablo Picasso

Current Market Drivers

We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can both identify and understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).

      1. The State of the U.S. Economy

      2. The State of Earning Growth

      3. The State of Trump Administration Policies

Wishing you green screens and all the best for a great day,

David D. Moenning
Chief Investment Officer
Sowell Management Services

Disclosure: At the time of publication, Mr. Moenning and/or Sowell Management Services held long positions in the following securities mentioned: none. Note that positions may change at any time.

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Disclosures

The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning’s opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report is for informational purposes only. No part of the material presented in this report is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed constitutes a solicitation to purchase or sell securities or any investment program.

Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided.

The analysis provided is based on both technical and fundamental research and is provided “as is” without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.

David D. Moenning is an investment adviser representative of Sowell Management Services, a registered investment advisor. For a complete description of investment risks, fees and services, review the firm brochure (ADV Part 2) which is available by contacting Sowell. Sowell is not registered as a broker-dealer.

Employees and affiliates of Sowell may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Positions may change at any time.

Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results.

Advisory services are offered through Sowell Management Services.