Reports surfaced overnight that Turbine, Inc, the producer of the MMORPG (Massively Multi-player Online Role Playing Games) "Lord of the Rings Online" and "Dungeons and Dragons Online" notified their staff of layoffs. Some of the more popular fan-facing developers were impacted, which is how the news leaked to the general public.
Turbine, Inc. is owned by Warner Brothers, which in turn is owned by Times Warner Cable (NYSE: TWX.) The following statement was issued by Warner Brothers Public Relations regarding the layoffs:
“Turbine is transitioning into a free-to-play, mobile development
studio, and as a result we are eliminating some positions. The Lord of
the Rings Online and Dungeons and Dragons online games will continue to
operate as they do now. Re-focusing and reducing the studio size was a
difficult decision for the company, and we are grateful to all of the
Turbine staff for their considerable contributions.”
Dungeons and Dragons online has struggled almost since launch, and subscriber retention has plagued the title for several years. Lord of the Rings Online was a much more successful launch, however even being buoyed by the popularity of the films as well as a resurgence in popularity following the Hobbit trilogy, subscriber base in LoTRO has also waned in recent years. At the end of 2016, LoTRO conducted a "server merge", reducing the total number of playable world instances by at least half. We've seen this occur in numerous other online games over the years, and it is always the result of a dwindling player base. Clearly, the future of the game is about as a clear as a foggy day on the Barrow Downs, but I'm not betting my Turbine Points on LoTRO surviving the end of the current Tolkien license which is set to expire in 2017. I find it highly unlikely Warner Brothers will seek to renew it.
The statement in their press release that they are transitioning to a "free-to-play, mobile development studio" is most telling. It sends a clear signal that, to Turbine, at least, the PC based online gaming platform is nearing end-of-life. Daybreak, the successor to Sony Online Entertainment, also canceled development of a much-awaited title - Everquest Next - earlier this year. Asheron's Call, once the only competitor to the mighty Everquest franchise, ended its run as well. About the only major titles remaining are World of Warcraft, Everquest, and Everquest 2. They are the only titles that are still growing subscribers, and they are the only titles consistently pushing out new expansions. Interestingly, they are also the only titles that operate solely on a monthly subscription basis.
A quick read through Time Warner's 1Q16 Earnings Transcript, released May 4th, is equally telling. Almost half of the earnings call focused on Warner Brothers and the major TV and Movie releases that are at the heart of their revenue. Despite the heavy focus on Warner Brothers, there was not a single mention of Turbine anywhere in the call. That's about as clear a signal as we can get that Turbine is simply not a strategic asset for TWX or for Warner Brothers.
Turbine's layoffs coupled with Warner Brother's PR release signal, to me, not just the impending death of a couple more MMO titles. Rather, they signal the potential demise of the MMORPG genre as we know it today. The remaining giants in that industry are all based on 15-year old technology, so without some major innovation in the field, it's unlikely a successor will emerge that can dethrone WoW as the leader. Perhaps Turbine is on the right track and the future of the online gaming industry is mobile. Certainly, that's where the non-cost-prohibitive VR headsets reside, at least. For now, though, we'll need to watch what develops, but for those waiting for the next great PC based MMO, it looks like it will be a very long wait indeed.
Friday, July 08, 2016
Thursday, July 07, 2016
Market Focus is on Tomorrow's Jobs Report
The Bureau of Labor Statistics will release the June 2016 Employment Situation report (popularly called the "Jobs Report") at 8:30 AM EDT tomorrow. It's one of the most closely watched releases each month, and its trends have a significant impact on the Fed's monetary policy. As you may recall, the May report issued last month stunned the financial world, showing a dismal increase of just 38,000 jobs in the Non-farm Payroll category. When teamed with Brexit, the Italian banking crisis, and increased fears of recession in Europe - all factors Fed Chair Janet Yellen termed "headwinds" - the May report pushed any prospects of another Fed rates hike out into the distant future. The futures market is currently projecting a near 0% chance of a rate hike in September, although it starts to climb ever-so-slightly in the fourth quarter.
Analysts do not expect such a dismal jobs report tomorrow, although the projections of 175,000 on the optimistic side to as low as 140,000 on the pessimistic side are still well under the levels needed to sustain economic growth. The street is also expecting a slight rise in unemployment from 4.7% to 4.8%, and the expectation for hourly average earnings is an increase of 0.2%.
The June report, however, is being closely watched more as a harbinger of the economic outlook for the next twelve months. Some analysts are now placing the risk of recession at 30% for the next year. Given the turmoil in Europe and the impact that contagion can have in the States, I would categorize that 30% as very optimistic. Even Janet Yellen, in the cryptic fashion typical of a Fed Chair, expressed concern last month: “Is the markedly reduced pace of hiring in April and May a harbinger of a persistent slowdown in the broader economy? Or will monthly payroll gains move up toward the solid pace they maintained earlier this year and in 2015?” If, indeed, we see another month of anemic growth, prospects for recession will spike dramatically.
There's one important factor that will not manifest in this report, and that is the effect of Brexit on the US jobs market. The data for the Employment Situations report closed on June 12, well before the UK vote to leave the European Union. That vote sent shock waves through the world markets, including here in the States, and most companies are adjusting their capital plans to account for it. Financial firms in particular are adjusting to the reality of prolonged low interest rates heading into 2017, and most companies with heavy European exposure are still trying to assess what the vote means for them and what adjustments they'll need to make in their 2017 capital plans. Whenever there's uncertainty of that nature, companies become reluctant to add to their workforce. None of this, however, will be reflected in this month's release.
The final data points that will be most interesting concern the Labor Force Participation Rate. You've seen me write time and again that, in my view, this is the most accurate measure of the true employment picture, and the numbers released on June 3 were horrendous. The rate dropped to 62.6%, setting an all-time record of 94,708,000 Americans out of work. Analysts are expecting the rate to drop even lower in tomorrow's release.
What the report will mean for trading tomorrow is anybody's guess. I've long since stopped trying to predict how the market will react to pre-open releases, especially when you have to factor in the contradictory effects of bad news being good for interest rate projections, but bad for future growth projections. I've learned over the years to sit back on release days and let the market sort itself out over the first 30-60 minutes of trading. Tomorrow will be no exception.
Analysts do not expect such a dismal jobs report tomorrow, although the projections of 175,000 on the optimistic side to as low as 140,000 on the pessimistic side are still well under the levels needed to sustain economic growth. The street is also expecting a slight rise in unemployment from 4.7% to 4.8%, and the expectation for hourly average earnings is an increase of 0.2%.
The June report, however, is being closely watched more as a harbinger of the economic outlook for the next twelve months. Some analysts are now placing the risk of recession at 30% for the next year. Given the turmoil in Europe and the impact that contagion can have in the States, I would categorize that 30% as very optimistic. Even Janet Yellen, in the cryptic fashion typical of a Fed Chair, expressed concern last month: “Is the markedly reduced pace of hiring in April and May a harbinger of a persistent slowdown in the broader economy? Or will monthly payroll gains move up toward the solid pace they maintained earlier this year and in 2015?” If, indeed, we see another month of anemic growth, prospects for recession will spike dramatically.
There's one important factor that will not manifest in this report, and that is the effect of Brexit on the US jobs market. The data for the Employment Situations report closed on June 12, well before the UK vote to leave the European Union. That vote sent shock waves through the world markets, including here in the States, and most companies are adjusting their capital plans to account for it. Financial firms in particular are adjusting to the reality of prolonged low interest rates heading into 2017, and most companies with heavy European exposure are still trying to assess what the vote means for them and what adjustments they'll need to make in their 2017 capital plans. Whenever there's uncertainty of that nature, companies become reluctant to add to their workforce. None of this, however, will be reflected in this month's release.
The final data points that will be most interesting concern the Labor Force Participation Rate. You've seen me write time and again that, in my view, this is the most accurate measure of the true employment picture, and the numbers released on June 3 were horrendous. The rate dropped to 62.6%, setting an all-time record of 94,708,000 Americans out of work. Analysts are expecting the rate to drop even lower in tomorrow's release.
What the report will mean for trading tomorrow is anybody's guess. I've long since stopped trying to predict how the market will react to pre-open releases, especially when you have to factor in the contradictory effects of bad news being good for interest rate projections, but bad for future growth projections. I've learned over the years to sit back on release days and let the market sort itself out over the first 30-60 minutes of trading. Tomorrow will be no exception.
Wednesday, July 06, 2016
Awaiting a Pullback on VTR
[Disclaimer: Trading examples used here are not recommendations. They are intended to demonstrate my personal analysis and style of trading. Always do your own analysis and tailor strategies to your own risk tolerance.]
When you consider the Italian Banking Crisis, Brexit, slow growth in the US economy, and the potential for recession looming in Europe, prospects for another Fed rate hike in 2016 are growing slimmer by the day. As a result, the REIT (Real Estate Investment Trust) stocks are starting to soar. One such stock that caught our attention recently is Ventras, Inc (NYSE: VTR.) Headquartered in Chicago, this firm focuses primarily on properties in the healthcare industry, both in the US and Canada.
Looking at the chart, we can see that VTR started an uptrend on February 12, 2016. Wave 1 sub-divided very nicely into 5 sub-waves, and Wave 2 was a classic A-B-C pattern that ended on April 21. We are now into Wave 3, and this wave appears to be extending. The 5th sub-wave (in green) appears to be sub-dividing into another 5-wave impulse, although today's candle with an opening gap down may have signaled the end of that wave. We'll need to watch that for the rest of the week, because if that's the end of Wave 3.v.(v) it would mean that Wave 3 was shorter than Wave 1. That seriously limits the upward potential of Wave 5 since Wave 3 cannot be the shortest wave in a 5 wave Impulse. A bit of caution is warranted here, although Wave 3 has still run up 17 points, so even with a truncated Wave 5 there's good profit potential.
What makes this stock even more attractive on the long side is the very handsome 4.34% forward dividend yield it's currently sporting. VTR has yet to announce it's next dividend, but history shows it will go ex-dividend around September 9th and should be in the $0.73 range. One major caution, though, is that they announce earnings on July 22nd before the open. My personal trading rules don't allow opening a position within 10-days of an earnings announcement, and if open, I close the position the day before any announcement. I don't like the unpredictability of the first 30-minutes of trading following an earnings announcement, so there's no reason to carry that risk forward. Remember, too, that the next FOMC meeting is July 27th. I don't close positions around FOMC meetings, but neither do I open them that day.
How we'll play this is as follows:
When you consider the Italian Banking Crisis, Brexit, slow growth in the US economy, and the potential for recession looming in Europe, prospects for another Fed rate hike in 2016 are growing slimmer by the day. As a result, the REIT (Real Estate Investment Trust) stocks are starting to soar. One such stock that caught our attention recently is Ventras, Inc (NYSE: VTR.) Headquartered in Chicago, this firm focuses primarily on properties in the healthcare industry, both in the US and Canada.
Looking at the chart, we can see that VTR started an uptrend on February 12, 2016. Wave 1 sub-divided very nicely into 5 sub-waves, and Wave 2 was a classic A-B-C pattern that ended on April 21. We are now into Wave 3, and this wave appears to be extending. The 5th sub-wave (in green) appears to be sub-dividing into another 5-wave impulse, although today's candle with an opening gap down may have signaled the end of that wave. We'll need to watch that for the rest of the week, because if that's the end of Wave 3.v.(v) it would mean that Wave 3 was shorter than Wave 1. That seriously limits the upward potential of Wave 5 since Wave 3 cannot be the shortest wave in a 5 wave Impulse. A bit of caution is warranted here, although Wave 3 has still run up 17 points, so even with a truncated Wave 5 there's good profit potential.
What makes this stock even more attractive on the long side is the very handsome 4.34% forward dividend yield it's currently sporting. VTR has yet to announce it's next dividend, but history shows it will go ex-dividend around September 9th and should be in the $0.73 range. One major caution, though, is that they announce earnings on July 22nd before the open. My personal trading rules don't allow opening a position within 10-days of an earnings announcement, and if open, I close the position the day before any announcement. I don't like the unpredictability of the first 30-minutes of trading following an earnings announcement, so there's no reason to carry that risk forward. Remember, too, that the next FOMC meeting is July 27th. I don't close positions around FOMC meetings, but neither do I open them that day.
How we'll play this is as follows:
- If the uptrend resumes this week, we'll take a long position with a stop below 72.57 assuming the reward:risk ratio remains greater than 3:1.
- We'll exit 50% of our position at 76.41. That marks the height of Wave 1.
- We'll set a 1-day trailing stop .10 below the low, and ride it until the remaining position is stopped out.
- We'll close any positions still open on 7/21 at the close.
- If the uptrend does not resume and we enter Wave 4, we'll continue to monitor the pattern for a Wave C. We expect Wave 4 to bottom around 70.21 - the start of sub-wave iv - and if so, we'll enter at that point.
- As in the last case, we'll exit 50% of our position at 76.41. A truncated Wave 5 often just touches the top of Wave 3.
- Wave 5 should be a 5-wave impulse, so at that point we'll trail the remaining 50% just below the low of each sub-wave.
- Once we hit sub-wave 5 of Wave 5, we'll set a 1-day trailing stop .10 below the low and ride it until the remaining position is stopped out.
- In both cases, if we are close to the ex-dividend date, we'll take the .73 adjustment into account when setting our stops. (We don't want to be artificially stopped out because of the dividend adjustment.)
Friday, March 11, 2016
Daybreak Cancels Everquest/Next Development
Daybreak, the online game developer that purchased the popular Everquest franchise from Sony Online Entertainment, today announced the cancellation of their much anticipated Everquest/Next MMORPG. Fans of Everquest, the fantasy online game launched in 1999, were anticipating a return to the world of Norrath after SOE announced the development of what was promised to be a revolutionary change to online gaming with their third title in the series.
Russ Shanks, president of Daybreak, summed up the decision in one sentence. "Unfortunately, as we put together the pieces, we found that it wasn’t fun." While that is certainly a good reason to abandon a game, I'm not convinced it was the only reason.
The world of online gaming is highly competitive, and only a fraction of the games that enter development actually survive. The time and cost involved in creating an MMO is extremely prohibitive, and very few creators are able to withstand the economic pressure. 38 Studios, the bankrupt startup owned by Red Sox star Curt Schilling, is just one highly publicized example of the casualties inflicted by the genre.
For a game to survive, it must truly be a game changer. Look at the history of the genre for proof. Ultima Online was the great-granddaddy of the online games, and what UO did was bring graphics and real-time interaction to the world of the MUDs. Folks that loved the text-based "Multi-User Dungeons" flocked to UO. The game launched in 1997 and it is still alive and well today.
Next in line was Everquest, launched March 16, 1999. EQ brought total immersion and first-person view into the genre. The guild system was so well developed, many guilds are still together today even though the players have long since moved on. It's by far the most addictive online game I've ever encountered. Like UO, Everquest is still alive and well today.
World of Warcraft entered the scene on November 23, 2004. The overall game play and concept was very similar to Everquest, but in true game-changing fashion, WoW introduced a fully functional quest system that incorporated a storyline that was central to the game itself. It brought PvP (Player vs Player) into a genre that had become primarily PvE (Player vs Environment), and through much simplified game mechanics and significantly lower time commitments, it brought online gaming into reach for the Tween age-group. Of all of them, WoW is the strongest of the players today.
Since 2004, however, there has been little to no innovation in the genre. The game engines are virtually unchanged, the game concepts are similar, and about the only major improvements we've seen are in graphics. That is where we've sat for the last 12 years, and that is why I believe Everquest/Next was canceled. The "game changing" features they sought to introduce six years ago when the game was announced are insufficient for the title to survive given today's technological advances.
The next major innovation that will enter the MMORPG world will be Virtual Reality. That's not speculation, that's fact based on the VR technologies already on the market. Any soon-to-be released MMO that does not exploit VR is doomed to failure. That is why EQ/Next was canceled. Any soon-to-be released MMO that does not support multiple diverse platforms is similarly doomed to failure, and that, too, is why EQ/Next was canceled.
So what's the recipe for the next successful MMO, the MMO that will be capable of dethroning World of Warcraft? It will be a game that uses a VR interface but can be launched from a PC, a Mac, a tablet, or a phone. Let the game servers do the heavy lifting, let the VR interface provide all the interaction, and let the "platform" merely serve as the data conduit between the two. When you see the game company that offers that type of gaming concept, jump on it. Anything less, given the technology available today, is doomed to failure. Remember, if you release a concept today, you're going live in 2022 or 2023. That's how long it takes to produce a game. The technology for which you are developing is 6 or 7 years away. If a gaming company does not have the vision to incorporate that technology in their design, then there is no way for them to survive against the competition that does have that vision.
Russ Shanks, president of Daybreak, summed up the decision in one sentence. "Unfortunately, as we put together the pieces, we found that it wasn’t fun." While that is certainly a good reason to abandon a game, I'm not convinced it was the only reason.
The world of online gaming is highly competitive, and only a fraction of the games that enter development actually survive. The time and cost involved in creating an MMO is extremely prohibitive, and very few creators are able to withstand the economic pressure. 38 Studios, the bankrupt startup owned by Red Sox star Curt Schilling, is just one highly publicized example of the casualties inflicted by the genre.
For a game to survive, it must truly be a game changer. Look at the history of the genre for proof. Ultima Online was the great-granddaddy of the online games, and what UO did was bring graphics and real-time interaction to the world of the MUDs. Folks that loved the text-based "Multi-User Dungeons" flocked to UO. The game launched in 1997 and it is still alive and well today.
Next in line was Everquest, launched March 16, 1999. EQ brought total immersion and first-person view into the genre. The guild system was so well developed, many guilds are still together today even though the players have long since moved on. It's by far the most addictive online game I've ever encountered. Like UO, Everquest is still alive and well today.
World of Warcraft entered the scene on November 23, 2004. The overall game play and concept was very similar to Everquest, but in true game-changing fashion, WoW introduced a fully functional quest system that incorporated a storyline that was central to the game itself. It brought PvP (Player vs Player) into a genre that had become primarily PvE (Player vs Environment), and through much simplified game mechanics and significantly lower time commitments, it brought online gaming into reach for the Tween age-group. Of all of them, WoW is the strongest of the players today.
Since 2004, however, there has been little to no innovation in the genre. The game engines are virtually unchanged, the game concepts are similar, and about the only major improvements we've seen are in graphics. That is where we've sat for the last 12 years, and that is why I believe Everquest/Next was canceled. The "game changing" features they sought to introduce six years ago when the game was announced are insufficient for the title to survive given today's technological advances.
The next major innovation that will enter the MMORPG world will be Virtual Reality. That's not speculation, that's fact based on the VR technologies already on the market. Any soon-to-be released MMO that does not exploit VR is doomed to failure. That is why EQ/Next was canceled. Any soon-to-be released MMO that does not support multiple diverse platforms is similarly doomed to failure, and that, too, is why EQ/Next was canceled.
So what's the recipe for the next successful MMO, the MMO that will be capable of dethroning World of Warcraft? It will be a game that uses a VR interface but can be launched from a PC, a Mac, a tablet, or a phone. Let the game servers do the heavy lifting, let the VR interface provide all the interaction, and let the "platform" merely serve as the data conduit between the two. When you see the game company that offers that type of gaming concept, jump on it. Anything less, given the technology available today, is doomed to failure. Remember, if you release a concept today, you're going live in 2022 or 2023. That's how long it takes to produce a game. The technology for which you are developing is 6 or 7 years away. If a gaming company does not have the vision to incorporate that technology in their design, then there is no way for them to survive against the competition that does have that vision.
Friday, February 20, 2015
Enbridge Energy (EEP) In Ascending Triangle Pattern
Enbridge Energy Partners (NYSE: EEP) is deep into a classic Ascending Triangle chart pattern. The company reported mixed earnings on Wednesday, missing analyst earnings estimates by a penny, but beating analyst revenue estimates by $320 Million. What moved the stock, though, was some very positive forward guidance. They expect adjusted operating income to increase by 12% over 2014, and they expect their distributable cash flow to increase by 15%. EEP's stock gained 1.5% in Thursday's trading, bouncing off the triangle's support line on very high volume. With only 45% institutional ownership and with a 5.9% dividend yield, the stock does have some room to run.
For today's discussion, though, let's take a look at the stock pattern itself - an Ascending Triangle. There are several very popular stock patterns that are watched by chartists, and this is one of the more reliable patterns that can be very profitable.
The ascending triangle stock pattern is considered a continuation pattern. So in an uptrend, as EEP has been in for the past year, the pattern is considered bullish. What forms the pattern is a very strong area of resistance - the top horizontal line on this chart - and a support line that has a distinct upward slope - the bottom line on this chart.
For a pattern like this, we want to see at least three touches of each trend line, and in this case, we have five of each. Remember, a chart pattern is intended to give us insight into the behavior of traders. The five touches of the resistance line indicate points where buying pressure has been exhausted, whereas the five touches on the support line indicate the points where selling pressure is exhausted and buyers are again interested in picking up the stock. The entry point for that buying pressure continues to increase, hence the ascending pattern.
There are two ways to play a bullish entry on an ascending triangle. For very aggressive traders, you can enter a long position when price bounces off the support line. This gives the greatest profit potential, but it's also carries much higher risk since there's a well-defined price ceiling in the pattern. An entry point for more conservative traders is to wait until price closes above the resistance line, providing an entry following the breakout.
According to Thomas Bulkowski, the well-regarded guru of stock pattern analysis, breakout is upward 70% of the time on a bullish pattern, and of those that do breakout, 75% of them reach their price targets. That's not a bad average at all! Be aware, though, that there is a pullback to just below the resistance line 57% of the time. That, in fact, provides a third entry possibility since, if you miss the initial breakout, 57% of the time you'll have another chance to get in when the price breaks resistance a second time.
Setting a price target for this type of pattern is relatively straightforward. Subtract the lowest valley in the pattern from the resistance line, and - for a conservative target - multiply that by 75%. Add the result to the resistance line and you have the price target. So using EEP as the example, it would be (40.50-35.00)*0.75 = 4.12. Add that to the resistance line: 40.50 + 4.12 for a price target of 44.62.
For added confidence, we'd really like to see the breakout occur on high volume. Now, the very high volume we saw yesterday was an excellent sign, but remember, that volume was driven primarily by EEP's earnings announcement. I'd like to see volume above its 20-day moving average on the day of the breakout above resistance, as well. Assuming, of course, this is one of the 70% that break upward.
As always, when discussing technical analysis, it's important to remember that the charts are telling us something about the behavior of traders. This analysis alone does not replace the due diligence we still should do before entering a position.
For today's discussion, though, let's take a look at the stock pattern itself - an Ascending Triangle. There are several very popular stock patterns that are watched by chartists, and this is one of the more reliable patterns that can be very profitable.
The ascending triangle stock pattern is considered a continuation pattern. So in an uptrend, as EEP has been in for the past year, the pattern is considered bullish. What forms the pattern is a very strong area of resistance - the top horizontal line on this chart - and a support line that has a distinct upward slope - the bottom line on this chart.
For a pattern like this, we want to see at least three touches of each trend line, and in this case, we have five of each. Remember, a chart pattern is intended to give us insight into the behavior of traders. The five touches of the resistance line indicate points where buying pressure has been exhausted, whereas the five touches on the support line indicate the points where selling pressure is exhausted and buyers are again interested in picking up the stock. The entry point for that buying pressure continues to increase, hence the ascending pattern.
There are two ways to play a bullish entry on an ascending triangle. For very aggressive traders, you can enter a long position when price bounces off the support line. This gives the greatest profit potential, but it's also carries much higher risk since there's a well-defined price ceiling in the pattern. An entry point for more conservative traders is to wait until price closes above the resistance line, providing an entry following the breakout.
According to Thomas Bulkowski, the well-regarded guru of stock pattern analysis, breakout is upward 70% of the time on a bullish pattern, and of those that do breakout, 75% of them reach their price targets. That's not a bad average at all! Be aware, though, that there is a pullback to just below the resistance line 57% of the time. That, in fact, provides a third entry possibility since, if you miss the initial breakout, 57% of the time you'll have another chance to get in when the price breaks resistance a second time.
Setting a price target for this type of pattern is relatively straightforward. Subtract the lowest valley in the pattern from the resistance line, and - for a conservative target - multiply that by 75%. Add the result to the resistance line and you have the price target. So using EEP as the example, it would be (40.50-35.00)*0.75 = 4.12. Add that to the resistance line: 40.50 + 4.12 for a price target of 44.62.
For added confidence, we'd really like to see the breakout occur on high volume. Now, the very high volume we saw yesterday was an excellent sign, but remember, that volume was driven primarily by EEP's earnings announcement. I'd like to see volume above its 20-day moving average on the day of the breakout above resistance, as well. Assuming, of course, this is one of the 70% that break upward.
As always, when discussing technical analysis, it's important to remember that the charts are telling us something about the behavior of traders. This analysis alone does not replace the due diligence we still should do before entering a position.
Tuesday, February 17, 2015
Slight Decline in Housing Market Index Attributed to Weather
The National Association of Home Builders/Wells Fargo Housing Market Index (HMI) was released this morning, and showed a slight decline from last month's release. Builder confidence for newly built single family homes dropped to 55, measuring a two-point decline. The drop, however, is being attributed to the unusually high amount of snow that has blanketed much of the nation for the past month.
Despite the decline, expectations remain very optimistic for a robust building market in the US, once the weather situation improves. Sales expectations for the next six months remained steady at 60, and it has been hovering in that range for some time.
Interestingly, the Home Construction sector has apparently reached that same plateau. Take a look at the weekly chart of the sector:
Notice that it formed a wedge with a very slight upward bias starting in the spring of 2013. The Sector is currently trading at its highs, at least through this decade, but it's showing no signs of attempting to penetrate that channel pattern.
I don't share the optimism being expressed in the Index. Interest rates are currently low, but they will be increasing this year. Home Construction appears flat to me, not increasing, and it's not showing any signs that it's ready to do so. The question is what will drive those projected sales for new home constructions, since current behavior does not support the optimism. The share of new homes being purchased by first-time buyers is at its lowest level since 1987. Given the job market, lack of salary increases, and tight capital constraints being imposed on banks, don't expect this behavior to change anytime soon.
What is growing is the construction of rental apartments and condos, and its to those that first-time buyers are going and it's also where the aging home owner is going. When you look at the number of homes for sale, and in this area the number of For Sale signs in each neighborhood is astonishing, it's quite apparent that there's a significant migration within the current housing market.
Now, that's not all bad news for the housing sector, nor is it bad news for the home suppliers and construction companies. Whether or not a home is new, a buyer moving in immediately wants to put their touch on it. That's great news for companies like Home Depot and Loews that do well whenever homes change ownership.
The point is, don't rely on New Home Sales numbers to gauge the health of the construction business. There was a time prior to the housing bubble when that was a significant measure of the sector, but the behavior of the consumer has changed and we, as traders, must therefore adapt. A better measure would be New and Existing Home Sales, published monthly by the National Association of Home Builders (NAHB). I also really like the Remodeling Market Index, which is also produced Monthly. This report is a great indicator of how the consumer is behaving, and it drives the performance of a number of industrial and cyclical corporations.
We are in a new post-housing bubble market, and the metrics we used prior to the bubble bursting no longer apply. As traders, we need to adapt to the behavior of the consumer, and at present, that consumer is moving into condos or rental apartments, not necessarily new homes. There's profit to be had here if we're willing to adapt to the new metric.
Despite the decline, expectations remain very optimistic for a robust building market in the US, once the weather situation improves. Sales expectations for the next six months remained steady at 60, and it has been hovering in that range for some time.
Interestingly, the Home Construction sector has apparently reached that same plateau. Take a look at the weekly chart of the sector:
Notice that it formed a wedge with a very slight upward bias starting in the spring of 2013. The Sector is currently trading at its highs, at least through this decade, but it's showing no signs of attempting to penetrate that channel pattern.
I don't share the optimism being expressed in the Index. Interest rates are currently low, but they will be increasing this year. Home Construction appears flat to me, not increasing, and it's not showing any signs that it's ready to do so. The question is what will drive those projected sales for new home constructions, since current behavior does not support the optimism. The share of new homes being purchased by first-time buyers is at its lowest level since 1987. Given the job market, lack of salary increases, and tight capital constraints being imposed on banks, don't expect this behavior to change anytime soon.
What is growing is the construction of rental apartments and condos, and its to those that first-time buyers are going and it's also where the aging home owner is going. When you look at the number of homes for sale, and in this area the number of For Sale signs in each neighborhood is astonishing, it's quite apparent that there's a significant migration within the current housing market.
Now, that's not all bad news for the housing sector, nor is it bad news for the home suppliers and construction companies. Whether or not a home is new, a buyer moving in immediately wants to put their touch on it. That's great news for companies like Home Depot and Loews that do well whenever homes change ownership.
The point is, don't rely on New Home Sales numbers to gauge the health of the construction business. There was a time prior to the housing bubble when that was a significant measure of the sector, but the behavior of the consumer has changed and we, as traders, must therefore adapt. A better measure would be New and Existing Home Sales, published monthly by the National Association of Home Builders (NAHB). I also really like the Remodeling Market Index, which is also produced Monthly. This report is a great indicator of how the consumer is behaving, and it drives the performance of a number of industrial and cyclical corporations.
We are in a new post-housing bubble market, and the metrics we used prior to the bubble bursting no longer apply. As traders, we need to adapt to the behavior of the consumer, and at present, that consumer is moving into condos or rental apartments, not necessarily new homes. There's profit to be had here if we're willing to adapt to the new metric.
Monday, February 16, 2015
Greek Stalemate Continues
Despite the optimism expressed late last week, talks between Greece and the other EU Finance Ministers broke off after only four hours today. The talks had been expected to run well into the evening, but were deemed pointless after Greece flatly rejected the EU proposal of a six-month extension to the bailout. The effect on the markets tomorrow is uncertain, and we'll be watching the Asian markets overnight for some indication as to how US equities and bond markets will react. (US markets were closed today for Washington's Birthday, known popularly as Presidents' Day.)
The next major milestone in the sage will come on Wednesday. That's when the European Central Bank (ECB) will decide whether or not to continue their emergency lending program to Greek banks. Without that program, Greek banks have less than 14-weeks of solvency remaining. They are hemorrhaging deposits at the rate of over €2 Billion ($2.27 Billion) per week. In just three months, the banks will not have the collateral needed to obtain loans from the Central Bank, although the real crunch will come in late March when Greece faces some heavy loan repayment requirements.
Part of the problem appears to be a question of semantics. Greece is willing to accept "six months of credit" however they will not accept a six-month extension of the bailout. Economics Commissioner Pierre Moscovici expressed his frustrations, saying "We need more logic and less ideology." The EU officials were dismayed last week by what they portrayed as a total lack of preparation on the part of the Greek finance ministers, and they question whether or not the young government understands the seriousness of the situation. For now, the EU feeling is that Greece is putting political concerns ahead of the dire economic needs facing the nation.
The ball appears to be in Greece's court since several ministers were quoted as saying that further talks would require Greece to request a bailout. A separate but equally contentious issue remains over the austerity programs that were tied to the original bailout. Greece is on record as proposing a halt to those austerity programs as part of any new agreement, however the EU - especially Germany, their largest creditor - wants none of that. According to German Finance Minister Wolfgang Schaeuble, Greece has "lived beyond its means" for a long time. Neither Germany nor the rest of the EU are willing to continue to provide bailout funds without proof that Greece has learned to manage its debt.
Polls in Greece appear to put some pressure on the young leftist government to reach a compromise. 68% of Greeks seek a fair compromise, while only 30% advocate standing firm against the EU. An astonishing 81% want Greece to stay on the Euro.
There is growing fear that the failure of the debt talks will lead to the imposition of strict capital controls. There's precedent for that. In 2013, Cyprus was forced to close the banks for two weeks while capital controls could be introduced. With the Greek banks closed next Monday for the first day of Lent in the Orthodox Church, there's fear that the ECB could impose such restrictions as early as next week.
For now, it's back to the game of brinkmanship. With an inverted yield curve and the yield on short-term Greek bonds now in the upper teens, time is not on Greece's side. They are facing the total collapse of their banking system in a matter of weeks, and the only bargaining chip left in their arsenal is an agreement to remain in the Eurozone. The further this goes, however, the less valuable that chip will become. With the Greek banks losing close to €300 Million per day, the prospect of terms favorable to Greece are diminishing by the hour.
The next major milestone in the sage will come on Wednesday. That's when the European Central Bank (ECB) will decide whether or not to continue their emergency lending program to Greek banks. Without that program, Greek banks have less than 14-weeks of solvency remaining. They are hemorrhaging deposits at the rate of over €2 Billion ($2.27 Billion) per week. In just three months, the banks will not have the collateral needed to obtain loans from the Central Bank, although the real crunch will come in late March when Greece faces some heavy loan repayment requirements.
Part of the problem appears to be a question of semantics. Greece is willing to accept "six months of credit" however they will not accept a six-month extension of the bailout. Economics Commissioner Pierre Moscovici expressed his frustrations, saying "We need more logic and less ideology." The EU officials were dismayed last week by what they portrayed as a total lack of preparation on the part of the Greek finance ministers, and they question whether or not the young government understands the seriousness of the situation. For now, the EU feeling is that Greece is putting political concerns ahead of the dire economic needs facing the nation.
The ball appears to be in Greece's court since several ministers were quoted as saying that further talks would require Greece to request a bailout. A separate but equally contentious issue remains over the austerity programs that were tied to the original bailout. Greece is on record as proposing a halt to those austerity programs as part of any new agreement, however the EU - especially Germany, their largest creditor - wants none of that. According to German Finance Minister Wolfgang Schaeuble, Greece has "lived beyond its means" for a long time. Neither Germany nor the rest of the EU are willing to continue to provide bailout funds without proof that Greece has learned to manage its debt.
Polls in Greece appear to put some pressure on the young leftist government to reach a compromise. 68% of Greeks seek a fair compromise, while only 30% advocate standing firm against the EU. An astonishing 81% want Greece to stay on the Euro.
There is growing fear that the failure of the debt talks will lead to the imposition of strict capital controls. There's precedent for that. In 2013, Cyprus was forced to close the banks for two weeks while capital controls could be introduced. With the Greek banks closed next Monday for the first day of Lent in the Orthodox Church, there's fear that the ECB could impose such restrictions as early as next week.
For now, it's back to the game of brinkmanship. With an inverted yield curve and the yield on short-term Greek bonds now in the upper teens, time is not on Greece's side. They are facing the total collapse of their banking system in a matter of weeks, and the only bargaining chip left in their arsenal is an agreement to remain in the Eurozone. The further this goes, however, the less valuable that chip will become. With the Greek banks losing close to €300 Million per day, the prospect of terms favorable to Greece are diminishing by the hour.
Saturday, February 14, 2015
The Slow Stochastic and the Dow Industrials
One of the technical indicators that I really like to use when charting stocks is the 14-period Slow Stochastic, developed by George Lane in the 1950s. The concept behind this indicator is the theory that prices tend to close near their period highs during an upward trending market, and conversely, they tend to close near their lows during a downward trending market. The Slow Stochastic will oscillate between 0 and 100. Generally, chartists consider a security to be oversold - potentially giving buy indications - when the value is below 20, and they consider it overbought - potentially giving sell indications - when the value is above 80.
The indicator provides two values, and thus two lines, on the chart. The first line, the %K line, charts the closing price of a security as a percentage of its relationship to the high and low of (in my case) the 14-day period of he stock. The second line, the %D line, is a 3-day Simple Moving Average of the %K line. There are several ways to interpret the Slow Stochastic, and I tend to use all of them in conjunction with several other indicators and chart patterns.
Please note! The indicators (like the Slow Stochastic) do not drive stock price. They are merely tools by which we are able to understand the actions of traders, and therefore assess if those traders are pumping money into a stock or taking money out of a stock. The indicators tell us something about the sentiment of the traders, not the health of a company. In using these indicators, we attempt to determine if - based on trader activity - a price is likely to rise or fall over a given time period. Indicators are a starting point, but not an end in themselves, and no indicator's buy or sell signals alone will replace the due diligence needed on the overall fundamentals of the security you are seeking to trade.
Here are the signals we can interpret from the Slow Stochastic indicator:
%K / %D Crossovers
Visually, these will jump out at you with a quick glance at the chart. When %K crosses above %D it's a bullish signal, and conversely, when %D crosses above %K it's bearish. Like most oscillators, though, you can't rely on just this one signal for buy and sell orders.
%K Crosses above 20 or below 80
This is one of my favorite signals since it has a higher tendency to produce winning trades. When the %K line crosses from below 20 to above 20, it generates a buy signal. When it crosses from above 80 to below 80, it generates a sell signal. Now, be careful here. As a general rule, I will only take signals in the direction of the prevailing trend, and for that I like to use the slope of the 50-day closing price's Moving Average. If that slope is increasing, I only take buy signals. If it is decreasing, I only take sell signals. Note: Many traders don't wait for %K to cross back above 20 or below 80. I do, because I've found that it increases the chances of success despite getting you into the trade one or two periods later.
%K Divergence
This doesn't generate buy or sell signals, per se, but it's a very good early warning signal that a trend may be reversing. A bullish divergence would be indicated if prices for the security are reaching lower lows, but the %K line is reaching higher highs. It's an indication that price action is about to reverse and warns us to be alert for a good buy signal. On the other hand, a bearish divergence would be indicated if price is achieving higher highs, yet the %K line is dropping to lower lows. It's a warning that a bullish trend may be exhausted and a decline in price is imminent. In this case, we watch for a good sell signal to either close a position or to open a short position.
So what does all this have to do with the Dow Industrials? Well, let's take a look at both the daily and the weekly charts for the Dow.
Look at the time period starting around October 27th. Closing prices for the Dow were on a very steady upward slope. The Slow Stochastic, however, was on a downward slope in overbought - above 80 - territory. The warning signs should be blaring since that's a classic bearish divergence. Sure enough, the second week of December, the market took a nose dive. Did you notice that, just before it dove, we had a bearish %K/%D crossover? You can see the red line - %D - crossing above %K just as the price started to plummet. That's warning sign number 2. The final warning came when %K crossed below 80 and, well, you can see what the price action did after that.
So where are we are right now? The Slow Stochastic is solidly in overbought territory. %K is above %D and still trending up, but since this is a bound indicator, we know that can't continue much longer. We don't have any divergence yet, though, so other than being in overbought territory there's nothing else in the Stochastic that would have us concerned. (A glance at the actual chart also looks pretty good, although we're trading in the upper 20% of the Bollinger Band which is where I start looking for sell indicators.)
But now let's take a look at the Weekly Chart:
As I've noted in the past, the Dow's been trading in a very nice upward channel, bound by the blue resistance line you see on the chart and the 50-period moving average (in red) as support. Let's look at the Slow Stochastic using the 14-period indicator. The recent down weeks in the market pulled the indicator out of overbought territory and you can see the subsequent (temporary) drop in price. (Remember, the slope of the 50-period moving average is up, so I'd ignore any sell signals here. Tighten stops, or wait for a good long entry, but there's no way I'd go short on any security showing that strong an upward slope.) The Dow bounced very nicely off support again, and we have a very nice bullish crossover following the close at the end of this week. Looking at the lows of the Stochastic, they are forming a nice upward trend line as well, matching the price action of the lows, so there's no divergence, either.
The only warning signs on this chart, in fact, is that we are approaching the resistance line once again, and we're trading in the upper 10% of the Bollinger Band. Whether or not we bounce off resistance and head back down or whether we break through resistance and surge upward will depend on the geopolitical situation as well as the economic indicators released in the coming weeks. Earnings season is essentially over until late March and April, so we won't have earnings announcements pushing the market for the next couple of months.
One last item to note, though, is about the use of any indicator to analyze a market index. Remember that the index - in this case the Dow - is based on the price action of the stocks that comprise that index. In today's age of computerized trading, however, the technical analysis of the index itself is used by traders to gauge whether or not they should take some profits in the stocks that comprise the index or whether or not to enter new positions within that index. Never forget that it's the price action of the underlying securities that drives the index - and thus drive the indicators that we use to analyze that index.
The indicator provides two values, and thus two lines, on the chart. The first line, the %K line, charts the closing price of a security as a percentage of its relationship to the high and low of (in my case) the 14-day period of he stock. The second line, the %D line, is a 3-day Simple Moving Average of the %K line. There are several ways to interpret the Slow Stochastic, and I tend to use all of them in conjunction with several other indicators and chart patterns.
Please note! The indicators (like the Slow Stochastic) do not drive stock price. They are merely tools by which we are able to understand the actions of traders, and therefore assess if those traders are pumping money into a stock or taking money out of a stock. The indicators tell us something about the sentiment of the traders, not the health of a company. In using these indicators, we attempt to determine if - based on trader activity - a price is likely to rise or fall over a given time period. Indicators are a starting point, but not an end in themselves, and no indicator's buy or sell signals alone will replace the due diligence needed on the overall fundamentals of the security you are seeking to trade.
Here are the signals we can interpret from the Slow Stochastic indicator:
%K / %D Crossovers
Visually, these will jump out at you with a quick glance at the chart. When %K crosses above %D it's a bullish signal, and conversely, when %D crosses above %K it's bearish. Like most oscillators, though, you can't rely on just this one signal for buy and sell orders.
%K Crosses above 20 or below 80
This is one of my favorite signals since it has a higher tendency to produce winning trades. When the %K line crosses from below 20 to above 20, it generates a buy signal. When it crosses from above 80 to below 80, it generates a sell signal. Now, be careful here. As a general rule, I will only take signals in the direction of the prevailing trend, and for that I like to use the slope of the 50-day closing price's Moving Average. If that slope is increasing, I only take buy signals. If it is decreasing, I only take sell signals. Note: Many traders don't wait for %K to cross back above 20 or below 80. I do, because I've found that it increases the chances of success despite getting you into the trade one or two periods later.
%K Divergence
This doesn't generate buy or sell signals, per se, but it's a very good early warning signal that a trend may be reversing. A bullish divergence would be indicated if prices for the security are reaching lower lows, but the %K line is reaching higher highs. It's an indication that price action is about to reverse and warns us to be alert for a good buy signal. On the other hand, a bearish divergence would be indicated if price is achieving higher highs, yet the %K line is dropping to lower lows. It's a warning that a bullish trend may be exhausted and a decline in price is imminent. In this case, we watch for a good sell signal to either close a position or to open a short position.
So what does all this have to do with the Dow Industrials? Well, let's take a look at both the daily and the weekly charts for the Dow.
Dow Industrials Daily Chart
Look at the time period starting around October 27th. Closing prices for the Dow were on a very steady upward slope. The Slow Stochastic, however, was on a downward slope in overbought - above 80 - territory. The warning signs should be blaring since that's a classic bearish divergence. Sure enough, the second week of December, the market took a nose dive. Did you notice that, just before it dove, we had a bearish %K/%D crossover? You can see the red line - %D - crossing above %K just as the price started to plummet. That's warning sign number 2. The final warning came when %K crossed below 80 and, well, you can see what the price action did after that.
So where are we are right now? The Slow Stochastic is solidly in overbought territory. %K is above %D and still trending up, but since this is a bound indicator, we know that can't continue much longer. We don't have any divergence yet, though, so other than being in overbought territory there's nothing else in the Stochastic that would have us concerned. (A glance at the actual chart also looks pretty good, although we're trading in the upper 20% of the Bollinger Band which is where I start looking for sell indicators.)
But now let's take a look at the Weekly Chart:
Dow Industrials Weekly Chart
As I've noted in the past, the Dow's been trading in a very nice upward channel, bound by the blue resistance line you see on the chart and the 50-period moving average (in red) as support. Let's look at the Slow Stochastic using the 14-period indicator. The recent down weeks in the market pulled the indicator out of overbought territory and you can see the subsequent (temporary) drop in price. (Remember, the slope of the 50-period moving average is up, so I'd ignore any sell signals here. Tighten stops, or wait for a good long entry, but there's no way I'd go short on any security showing that strong an upward slope.) The Dow bounced very nicely off support again, and we have a very nice bullish crossover following the close at the end of this week. Looking at the lows of the Stochastic, they are forming a nice upward trend line as well, matching the price action of the lows, so there's no divergence, either.
The only warning signs on this chart, in fact, is that we are approaching the resistance line once again, and we're trading in the upper 10% of the Bollinger Band. Whether or not we bounce off resistance and head back down or whether we break through resistance and surge upward will depend on the geopolitical situation as well as the economic indicators released in the coming weeks. Earnings season is essentially over until late March and April, so we won't have earnings announcements pushing the market for the next couple of months.
One last item to note, though, is about the use of any indicator to analyze a market index. Remember that the index - in this case the Dow - is based on the price action of the stocks that comprise that index. In today's age of computerized trading, however, the technical analysis of the index itself is used by traders to gauge whether or not they should take some profits in the stocks that comprise the index or whether or not to enter new positions within that index. Never forget that it's the price action of the underlying securities that drives the index - and thus drive the indicators that we use to analyze that index.
Wednesday, February 11, 2015
Greek / EU Agreement in Principle - Almost, Sort of, Maybe
According to the various financial news wires, sources in Brussels have reported that Greece and the EU have reached an "agreement in principle" related to the outstanding debt issues that have dominated the news for the past month. These sources state that the details are still being worked out, but are expected to be finalized and signed on Monday following an agreement that Greece would remain under the terms of the EU bailout program.
You could hear the FX, Bond, and Equity markets all breathe a tremendous sigh of relief following that breaking news. Treasury bond yields improved, equities futures improved, and the Euro gained against the US Dollar all on the word of an unnamed source that an agreement - minus the details - had been reached.
Is the market setting itself up for disappointment and the significant drop that always follows? Quite possibly. Barring other news, there's a high likelihood that equity markets will surge, especially in Europe, and that may well flow into the morning session in the US tomorrow. The greater the surge, though, the greater the potential for a significant drop heading into the weekend or on Tuesday if an actual agreement fails to manifest.
Such a failure is very possible. Despite the optimism coming from this unnamed source, both Greece and the EU were very quick to dismiss any such agreement in principle. Other sources involved in the negotiations stated that no agreement had been reached, which, barring any details, is certainly true, however they floated the idea that the existing terms of the bailout could be extended. It's very likely that that is indeed one of the offers on the EU side of the table, and given the hard-line stance taken by Germany in recent weeks, that could be viewed as a concession. The likelihood of Greece accepting it, however, is very slim.
It's important to remember the results of the recent Greek election. There was a very clear mandate from the people in support of the Syriza platform, and the fledgeling coalition government will be under extreme political pressure not to accept terms that are in direct opposition to that platform. In fact, an unnamed representative of the Greek government was very quick to dismiss the bailout extension idea as a non-starter.
So how optimistic should we be regarding the "agreement in principle" news? Without any details surfacing, I'd be very cautious. As additional information comes out of Brussels, there's a high potential for significant volatility, at least until there is word from both sides that they have truly reached an agreement. Remember, Monday is a holiday in the US and the equities markets are closed. I will be keeping my trades very short term, and will look to close my short-term open positions before the weekend. The true deadline to settle the Greek debt issue is still two weeks away, which leaves plenty of opportunity for political brinksmanship from both sides of the bargaining table. Be sure to factor in that volatility when you line up your trades tomorrow.
You could hear the FX, Bond, and Equity markets all breathe a tremendous sigh of relief following that breaking news. Treasury bond yields improved, equities futures improved, and the Euro gained against the US Dollar all on the word of an unnamed source that an agreement - minus the details - had been reached.
Is the market setting itself up for disappointment and the significant drop that always follows? Quite possibly. Barring other news, there's a high likelihood that equity markets will surge, especially in Europe, and that may well flow into the morning session in the US tomorrow. The greater the surge, though, the greater the potential for a significant drop heading into the weekend or on Tuesday if an actual agreement fails to manifest.
Such a failure is very possible. Despite the optimism coming from this unnamed source, both Greece and the EU were very quick to dismiss any such agreement in principle. Other sources involved in the negotiations stated that no agreement had been reached, which, barring any details, is certainly true, however they floated the idea that the existing terms of the bailout could be extended. It's very likely that that is indeed one of the offers on the EU side of the table, and given the hard-line stance taken by Germany in recent weeks, that could be viewed as a concession. The likelihood of Greece accepting it, however, is very slim.
It's important to remember the results of the recent Greek election. There was a very clear mandate from the people in support of the Syriza platform, and the fledgeling coalition government will be under extreme political pressure not to accept terms that are in direct opposition to that platform. In fact, an unnamed representative of the Greek government was very quick to dismiss the bailout extension idea as a non-starter.
So how optimistic should we be regarding the "agreement in principle" news? Without any details surfacing, I'd be very cautious. As additional information comes out of Brussels, there's a high potential for significant volatility, at least until there is word from both sides that they have truly reached an agreement. Remember, Monday is a holiday in the US and the equities markets are closed. I will be keeping my trades very short term, and will look to close my short-term open positions before the weekend. The true deadline to settle the Greek debt issue is still two weeks away, which leaves plenty of opportunity for political brinksmanship from both sides of the bargaining table. Be sure to factor in that volatility when you line up your trades tomorrow.
Tuesday, February 10, 2015
Greek Market Action Impact is Slowing
Several conflicting news reports came out in the overnight hours and during the morning trading session, and both reports created some minor fluctuations in the US market. Of interest, though, is that the fluctuations truly were minor. The first report provided some hope of compromise on the Greek Debt situation, and indeed the US market was up a solid 100+ points in early trading. Reports had surfaced that Greece would get a six-month extension to pay off its debt, and that provided a bit of market optimism given the looming February 28th deadline for compliance.
Mid-way through the morning session, however, German Finance Minister Wolfgang Schaeuble threw a large barrel of ice-water on that notion, stating that any claims of an extension are false. The market reacted by pulling back all of its gains since the open, and briefly traded flat. Very briefly. Almost immediately, in fact, the market started to trend back towards its early highs.
As of this writing, however, the market is back up nearly 100 points, despite WTI Crude being down 4.25% for the morning. To all appearances, the market is now shrugging off both the Greek situation and the very volatile price of oil. What is likely is that the impact of both have already been factored into a market dealing with these issues for the last several months.
Specific to Greece, there will almost certainly be a compromise brokered at the last minute. With a GDP the size of the state of Missouri - there are 22 states with a higher GDP than Greece - there's relatively little concern that Greece alone can have a significant impact. Rather, the true concern is how Italy and Spain will respond should Greece ultimately leave the the Eurozone. Compared to Greece's $283 Billion GDP, Spain weighs in at $1.358 Trillion, and Italy tips the monetary scales at $2.071 Trillion. Their economies are significant, and there's a very real concern that, should Greece leave the Eurozone, they could soon follow.
Greek Defence Minister Panos Kammenos outlined a "Plan B" yesterday, although it's doubtful that this is truly a viable plan. According to Kammenos, if no compromise is reached, Greece would seek financial aid elsewhere. "It could the United States at best, it could be Russia, it could be China or other countries," he said. The phraseology suggests that he has not yet explored these options with the countries in question, so for the moment it's pure speculation - and possibly political rhetoric - on his part.
It's doubtful the US would jump into this mix, potentially antagonizing European allies, and Russia is in no financial position to bail out anyone. Stronger ties between Russia and Greece would be interesting politically, but it's doubtful that Russia would be willing or able to open their already strained coffers to purchase those closer ties. China is a possible financier that does have the ability to bail out Greece, but would they be willing to do that when there is so little potential gain from the deal? China is heavily dependent upon exports, primarily to Europe and the US. Greece adds little to that mix, and a Chinese bailout could be perceived as a slap to France and Germany - the two primary antagonists in the current Greek saga.
Wednesday is the day where it should get interesting. European finance ministers are meeting in Brussels tomorrow to review the situation, and Greece is expected to put new proposals on the table at that meeting.
Greek Finance Minister Yanis Varoufakis is expected to detail what's being called "10 surprise reforms" which are expected to replace many of the austerity measures that were part of the original agreement. (The new government was elected on a platform that included the elimination of the current austerity measures.) He is also expected to request a bridge program that would keep the government solvent while they work on a revised debt deal. So far, that has been rejected by Germany, but it's possible it could gain traction when all of the finance ministers meet tomorrow.
It appears that the new government is simply asking for time to assess the mandate of the latest election and reconcile that with their obligations under the current bailout agreement. It's not an unreasonable request, and it would appear that the actions in today's stock market agree that some type of compromise is highly likely. Tomorrow should prove interesting, especially if Germany continues to take a hard-line no-compromise stance. In the end, though, I do expect a solution that reworks the terms of Greece's bailout, implements the new reforms, and allows Greece to remain in the Eurozone. Anything short of that benefits neither Greece nor the Eurozone.
Mid-way through the morning session, however, German Finance Minister Wolfgang Schaeuble threw a large barrel of ice-water on that notion, stating that any claims of an extension are false. The market reacted by pulling back all of its gains since the open, and briefly traded flat. Very briefly. Almost immediately, in fact, the market started to trend back towards its early highs.
As of this writing, however, the market is back up nearly 100 points, despite WTI Crude being down 4.25% for the morning. To all appearances, the market is now shrugging off both the Greek situation and the very volatile price of oil. What is likely is that the impact of both have already been factored into a market dealing with these issues for the last several months.
Specific to Greece, there will almost certainly be a compromise brokered at the last minute. With a GDP the size of the state of Missouri - there are 22 states with a higher GDP than Greece - there's relatively little concern that Greece alone can have a significant impact. Rather, the true concern is how Italy and Spain will respond should Greece ultimately leave the the Eurozone. Compared to Greece's $283 Billion GDP, Spain weighs in at $1.358 Trillion, and Italy tips the monetary scales at $2.071 Trillion. Their economies are significant, and there's a very real concern that, should Greece leave the Eurozone, they could soon follow.
Greek Defence Minister Panos Kammenos outlined a "Plan B" yesterday, although it's doubtful that this is truly a viable plan. According to Kammenos, if no compromise is reached, Greece would seek financial aid elsewhere. "It could the United States at best, it could be Russia, it could be China or other countries," he said. The phraseology suggests that he has not yet explored these options with the countries in question, so for the moment it's pure speculation - and possibly political rhetoric - on his part.
It's doubtful the US would jump into this mix, potentially antagonizing European allies, and Russia is in no financial position to bail out anyone. Stronger ties between Russia and Greece would be interesting politically, but it's doubtful that Russia would be willing or able to open their already strained coffers to purchase those closer ties. China is a possible financier that does have the ability to bail out Greece, but would they be willing to do that when there is so little potential gain from the deal? China is heavily dependent upon exports, primarily to Europe and the US. Greece adds little to that mix, and a Chinese bailout could be perceived as a slap to France and Germany - the two primary antagonists in the current Greek saga.
Wednesday is the day where it should get interesting. European finance ministers are meeting in Brussels tomorrow to review the situation, and Greece is expected to put new proposals on the table at that meeting.
Greek Finance Minister Yanis Varoufakis is expected to detail what's being called "10 surprise reforms" which are expected to replace many of the austerity measures that were part of the original agreement. (The new government was elected on a platform that included the elimination of the current austerity measures.) He is also expected to request a bridge program that would keep the government solvent while they work on a revised debt deal. So far, that has been rejected by Germany, but it's possible it could gain traction when all of the finance ministers meet tomorrow.
It appears that the new government is simply asking for time to assess the mandate of the latest election and reconcile that with their obligations under the current bailout agreement. It's not an unreasonable request, and it would appear that the actions in today's stock market agree that some type of compromise is highly likely. Tomorrow should prove interesting, especially if Germany continues to take a hard-line no-compromise stance. In the end, though, I do expect a solution that reworks the terms of Greece's bailout, implements the new reforms, and allows Greece to remain in the Eurozone. Anything short of that benefits neither Greece nor the Eurozone.
Monday, February 09, 2015
LMCI Comes in Weak at 4.9
The Fed released the January Labor Market Conditions Index this morning. The LMCI, as we discussed yesterday, is comprised of 19 separate economic indicators that provide insight into the health of the job market. With Unemployment continuing to fall and with optimism in last month's non-farm payroll index, expectations were high that today's LMCI number would continue to show improvement. In yesterday's post, I said that I was looking for a value of 6.8 or higher to demonstrate strength in the labor market. Well, we fell far short of that value.
The LMCI for January dropped to 4.9, a decline of 1.2 points off December's 6.1 value. That drop confirms what we've been saying for some time, that the labor market is not as healthy as the unemployment number would lead us to believe. In fact, the decline in January confirms the falling Participation Rate which is now at its worst level since the late 1970s.
What the low values in the LMCI are telling us is that, despite a drop in the Unemployment Rate - which I've already categorized in previous posts as a meaningless number - the other aspects of the job market are in terrible shape. Hours worked per week continue to drop. Wages continue to drop and annual merit increases are barely keeping pace with inflation. Benefits, especially health care benefits, continue to skyrocket in costs to the worker. The number of workers that are leaving the workforce prior to age 65 continues to increase.
Now, it's doubtful that the LMCI is having much of an impact on today's market decline. As of this writing, we're trading near the lows of the day, but the entire day has been down due almost entirely to the standoff between the Eurozone and Greece coupled with the extremely poor trade numbers released by China last night. Those two global constraints are having a far greater impact than the little known LMCI is likely to cause.
What we as traders need to take from this, though, is the warning that the labor market is not at all healthy. We need to keep a very close eye on Average Weekly Hours, Average Hourly Earnings, Hiring Rate and Quit Rate, and Hiring Plans. These will give us a much clearer view as to the conditions of the average worker in the US. I'm expecting all of them to continue to worsen in the short term.
The LMCI for January dropped to 4.9, a decline of 1.2 points off December's 6.1 value. That drop confirms what we've been saying for some time, that the labor market is not as healthy as the unemployment number would lead us to believe. In fact, the decline in January confirms the falling Participation Rate which is now at its worst level since the late 1970s.
What the low values in the LMCI are telling us is that, despite a drop in the Unemployment Rate - which I've already categorized in previous posts as a meaningless number - the other aspects of the job market are in terrible shape. Hours worked per week continue to drop. Wages continue to drop and annual merit increases are barely keeping pace with inflation. Benefits, especially health care benefits, continue to skyrocket in costs to the worker. The number of workers that are leaving the workforce prior to age 65 continues to increase.
Now, it's doubtful that the LMCI is having much of an impact on today's market decline. As of this writing, we're trading near the lows of the day, but the entire day has been down due almost entirely to the standoff between the Eurozone and Greece coupled with the extremely poor trade numbers released by China last night. Those two global constraints are having a far greater impact than the little known LMCI is likely to cause.
What we as traders need to take from this, though, is the warning that the labor market is not at all healthy. We need to keep a very close eye on Average Weekly Hours, Average Hourly Earnings, Hiring Rate and Quit Rate, and Hiring Plans. These will give us a much clearer view as to the conditions of the average worker in the US. I'm expecting all of them to continue to worsen in the short term.
Sunday, February 08, 2015
An Economic Look Ahead to the Week of February 9
As we near the end of this quarter's earnings season, focus will once again turn to geopolitical news and the numerous economic releases that are spread throughout the month. Here's what we're following for the week of February 9th. As a reminder, the following Monday is a holiday in the US and markets will be closed.
Greece vs the Eurozone
On the geopolitical front, the big news continues to be the standoff between Greece and the Eurozone. No progress was cited this weekend in settling the issue of Greek debt, and one official noted that it truly was a case of 1 versus 18 in the negotiations. The two sides remain extremely far apart in their positions, indicating that the crisis will continue for the foreseeable future. The current bailout expires February 28th, and there is nothing to suggest that the standoff won't continue through to the 11th hour.
Essentially, Greece is requesting authority to issue additional short-term debt and to receive profits from the ECB and other central banks that were gained by holding Greek debt. Greece is, in effect, requesting a bridge agreement to keep the government running while they detail a new debt and reform program. The Eurozone is having none of it, however, with even leftist France and Italy taking a hard-line stance against any concessions to Greece.
While a compromise by the end of February is likely, the interim will see continued volatility due to the uncertainty surrounding Greece's financial future as well as its future in the Eurozone. Now, its not in anyone's best interests to see Greece leave the Eurozone, so some compromise is extremely likely before push comes to shove later this month. Don't expect logic to prevent wild market swings in the meantime, however.
China
Switching continents from Europe to Asia, the economic news coming out of China continues to worsen. This evening, China released their import and export numbers, and both were extremely below the market consensus estimates. Chinese exports in January came in at -3.3% versus a projected 6.3%. Imports were just as bad, coming in at -19.9% versus a projected -3%. These two dismal numbers will fuel fears that the Chinese economy is slowing at an even greater rate than anticipated. The import number is especially troubling since it suggests a slow-down in the Chinese industrial sector. The government is expected to reduce their GDP forecast for 2015 to 7%, however given the new data, it's possible the forecast will be even lower. The translation for us, of course, is increased market volatility.
Ukraine vs Russia
Finally, news out of the on-going Ukraine and Russia squabble continues to degrade. I'm skeptical, however, that this will drive much market action, however, since the effects of the conflict appear to already be factored in. More likely, news of an agreement would spur some positive market action, however, continued conflict appears now to be the accepted status quo. I'm keeping an eye on reports that the US is considering arms shipments to Ukraine since that may produce short-term trading opportunities, but beyond that I don't see this situation adding much to the economic picture in the near future.
With the geopolitical backdrop now in focus, let's take a look at what economic releases are coming this week.
Monday, February 9.
12:00 EST 15:00 GMT - US Labor Market Conditions Index. I'm looking for a value in excess of 6.8 to indicate continued growth in the job market. The Participation Rate is hovering in the 62.7 range, and unemployment is in the 5.6% range, so I'm looking to this number (currently at 6.1) to paint a broader picture of the overall health of the labor market.
20:30 EST 01:30 GMT - China's Consumer Price Index and Producer Price Index. These two numbers are a good measure of inflation in the Chinese economy. The CPI is forecast to be 1.0 (down from1.5) and the PPI is forecast to be -3.8, down from -3.3. If that holds, they will confirm the continuing belief of an economic slowdown in China.
Tuesday, February 10.
01:45 EST 06:45 GMT - Swiss Unemployment.
03:15 EST 08:15 GMT - Swiss CPI. Normally we wouldn't pay much attention to the Swiss Unemployment or CPI numbers, however in light of recent action by the Swiss Bank and the resulting market volatility here in the States, we'll watch these numbers and pay attention to any reaction here as a result. Unemployment is forecast to hold steady at 3.2% and the CPI is expected to drop to -0.6%, down from -0.3%.
08:20 EST 13:20 GMT - Jeffery M. Lacker Speech. The President of the Richmond Fed is the featured speaker at the 30th Annual Emerging Issues Forum, Innovation Reconstructed in Raleigh, North Carolina. His speech is entitled "Education, Innovation, and Economic Growth." His comments are being watched as a signal for volatility in the strength of the US Dollar.
12:00 EST 15:00 GMT - US Wholesale Inventories. This number is expected to drop to 0.1% down from 0.8%. Wholesale Inventories are used as a means of predicting the GDP for the quarter and the year. In effect, a lower number signals a growing economy and a higher number signals a weakening economy. This one will move the markets if it does not come in at the consensus value.
Wednesday, February 11.
08:00 EST 13:00 GMT - Richard Fisher Speech. The President of the Dallas Fed is the featured speaker at a breakfast being held at the Economic Club of New York. He is expected to discuss how the Fed currently views the US economy and the value of the US Dollar. Fed watchers will be dissecting his comments to ascertain when the Fed will begin interest rate hikes.
Thursday, February 12.
02:00 EST 07:00 GMT - Eurozone Harmonized Consumer Price Index. Germany will release their CPI at the same time. The German number will show the rate of inflation in Germany, and the Harmonized number will show the rate of inflation using a methodology incorporated across the entire Eurozone. The German CPI is expected to drop to -0.3% and the Harmonized CPI is expected to drop to -0.5%. Both demonstrate a deflationary trend that further confirms the weakness in the European economy.
05:00 EST 10:00 GMT - European Industrial Production. This number shows the volume of production of industries such as factories and manufacturing. Increased production is indicative of a growing economy whereas decreased production is indicative of a slowing economy. Interestingly, the number is forecast to increase to .3%, up from -0.4% last month.
08:30 EST 13:30 GMT - US Jobless Claims. This is a weekly number and reflects the number of new unemployment claims. There's no consensus number published, however the previous week's number was 278K. In general, a larger number indicates weakness in the economy and a smaller number indicates strength.
08:30 EST 13:30 GMT - US Retail Sales. Here's the big release in the US for the week. This number is widely used as an indicator for consumer spending. The consensus is for the number to improve to -0.5%, up from -0.9%. Any deviation from the consensus will drive the markets accordingly.
Friday, February 13.
01:30 EST 06:30 GMT - France and Germany's GDP. Of the two, the German number is the one that's expected to move the market. The Quarter-over-Quarter number is forecast to grow to 0.3%, up from 0.1%.
05:00 EST 10:00 GMT - Eurozone GDP. The Year-over-Year GDP for the Eurozone is the number being closely watched, and is expected to hold steady at 0.8%. Weakness in this number will have an adverse effect on the US markets heading into the long weekend. The Quarter-over-Quarter number is also expected to hold steady at 0.2%. Something to watch will be divergence between the two numbers with the QoQ value being treated as an indicator for the year ahead.
09:55 EST 14:55 GMT - US Reuters/Michigan Consumer Sentiment. This is a measure of how likely consumers are to spend money, based on their feelings about the overall economy. The forecast is for the number to hold steady at 98.1.
Greece vs the Eurozone
On the geopolitical front, the big news continues to be the standoff between Greece and the Eurozone. No progress was cited this weekend in settling the issue of Greek debt, and one official noted that it truly was a case of 1 versus 18 in the negotiations. The two sides remain extremely far apart in their positions, indicating that the crisis will continue for the foreseeable future. The current bailout expires February 28th, and there is nothing to suggest that the standoff won't continue through to the 11th hour.
Essentially, Greece is requesting authority to issue additional short-term debt and to receive profits from the ECB and other central banks that were gained by holding Greek debt. Greece is, in effect, requesting a bridge agreement to keep the government running while they detail a new debt and reform program. The Eurozone is having none of it, however, with even leftist France and Italy taking a hard-line stance against any concessions to Greece.
While a compromise by the end of February is likely, the interim will see continued volatility due to the uncertainty surrounding Greece's financial future as well as its future in the Eurozone. Now, its not in anyone's best interests to see Greece leave the Eurozone, so some compromise is extremely likely before push comes to shove later this month. Don't expect logic to prevent wild market swings in the meantime, however.
China
Switching continents from Europe to Asia, the economic news coming out of China continues to worsen. This evening, China released their import and export numbers, and both were extremely below the market consensus estimates. Chinese exports in January came in at -3.3% versus a projected 6.3%. Imports were just as bad, coming in at -19.9% versus a projected -3%. These two dismal numbers will fuel fears that the Chinese economy is slowing at an even greater rate than anticipated. The import number is especially troubling since it suggests a slow-down in the Chinese industrial sector. The government is expected to reduce their GDP forecast for 2015 to 7%, however given the new data, it's possible the forecast will be even lower. The translation for us, of course, is increased market volatility.
Ukraine vs Russia
Finally, news out of the on-going Ukraine and Russia squabble continues to degrade. I'm skeptical, however, that this will drive much market action, however, since the effects of the conflict appear to already be factored in. More likely, news of an agreement would spur some positive market action, however, continued conflict appears now to be the accepted status quo. I'm keeping an eye on reports that the US is considering arms shipments to Ukraine since that may produce short-term trading opportunities, but beyond that I don't see this situation adding much to the economic picture in the near future.
With the geopolitical backdrop now in focus, let's take a look at what economic releases are coming this week.
Monday, February 9.
12:00 EST 15:00 GMT - US Labor Market Conditions Index. I'm looking for a value in excess of 6.8 to indicate continued growth in the job market. The Participation Rate is hovering in the 62.7 range, and unemployment is in the 5.6% range, so I'm looking to this number (currently at 6.1) to paint a broader picture of the overall health of the labor market.
20:30 EST 01:30 GMT - China's Consumer Price Index and Producer Price Index. These two numbers are a good measure of inflation in the Chinese economy. The CPI is forecast to be 1.0 (down from1.5) and the PPI is forecast to be -3.8, down from -3.3. If that holds, they will confirm the continuing belief of an economic slowdown in China.
Tuesday, February 10.
01:45 EST 06:45 GMT - Swiss Unemployment.
03:15 EST 08:15 GMT - Swiss CPI. Normally we wouldn't pay much attention to the Swiss Unemployment or CPI numbers, however in light of recent action by the Swiss Bank and the resulting market volatility here in the States, we'll watch these numbers and pay attention to any reaction here as a result. Unemployment is forecast to hold steady at 3.2% and the CPI is expected to drop to -0.6%, down from -0.3%.
08:20 EST 13:20 GMT - Jeffery M. Lacker Speech. The President of the Richmond Fed is the featured speaker at the 30th Annual Emerging Issues Forum, Innovation Reconstructed in Raleigh, North Carolina. His speech is entitled "Education, Innovation, and Economic Growth." His comments are being watched as a signal for volatility in the strength of the US Dollar.
12:00 EST 15:00 GMT - US Wholesale Inventories. This number is expected to drop to 0.1% down from 0.8%. Wholesale Inventories are used as a means of predicting the GDP for the quarter and the year. In effect, a lower number signals a growing economy and a higher number signals a weakening economy. This one will move the markets if it does not come in at the consensus value.
Wednesday, February 11.
08:00 EST 13:00 GMT - Richard Fisher Speech. The President of the Dallas Fed is the featured speaker at a breakfast being held at the Economic Club of New York. He is expected to discuss how the Fed currently views the US economy and the value of the US Dollar. Fed watchers will be dissecting his comments to ascertain when the Fed will begin interest rate hikes.
Thursday, February 12.
02:00 EST 07:00 GMT - Eurozone Harmonized Consumer Price Index. Germany will release their CPI at the same time. The German number will show the rate of inflation in Germany, and the Harmonized number will show the rate of inflation using a methodology incorporated across the entire Eurozone. The German CPI is expected to drop to -0.3% and the Harmonized CPI is expected to drop to -0.5%. Both demonstrate a deflationary trend that further confirms the weakness in the European economy.
05:00 EST 10:00 GMT - European Industrial Production. This number shows the volume of production of industries such as factories and manufacturing. Increased production is indicative of a growing economy whereas decreased production is indicative of a slowing economy. Interestingly, the number is forecast to increase to .3%, up from -0.4% last month.
08:30 EST 13:30 GMT - US Jobless Claims. This is a weekly number and reflects the number of new unemployment claims. There's no consensus number published, however the previous week's number was 278K. In general, a larger number indicates weakness in the economy and a smaller number indicates strength.
08:30 EST 13:30 GMT - US Retail Sales. Here's the big release in the US for the week. This number is widely used as an indicator for consumer spending. The consensus is for the number to improve to -0.5%, up from -0.9%. Any deviation from the consensus will drive the markets accordingly.
Friday, February 13.
01:30 EST 06:30 GMT - France and Germany's GDP. Of the two, the German number is the one that's expected to move the market. The Quarter-over-Quarter number is forecast to grow to 0.3%, up from 0.1%.
05:00 EST 10:00 GMT - Eurozone GDP. The Year-over-Year GDP for the Eurozone is the number being closely watched, and is expected to hold steady at 0.8%. Weakness in this number will have an adverse effect on the US markets heading into the long weekend. The Quarter-over-Quarter number is also expected to hold steady at 0.2%. Something to watch will be divergence between the two numbers with the QoQ value being treated as an indicator for the year ahead.
09:55 EST 14:55 GMT - US Reuters/Michigan Consumer Sentiment. This is a measure of how likely consumers are to spend money, based on their feelings about the overall economy. The forecast is for the number to hold steady at 98.1.
Labor Market Conditions Index (LMCI) - A One Size Fits All View of the Labor Market
A quick glance at the economic calendar for any month makes it clear that there are numerous data elements that detail aspects of the labor market. Frequently, these elements directly contradict each other, which increases the difficulty in truly assessing the overall health and the overall trends that impact the workforce. Take, for example, the two most popular measures of the health of the job market, the Unemployment Rate (currently 5.6%) and the Participation Index (currently 62.7%.) The former has been trending downward for the past couple of years and is an indication of a healthy and growing workforce. The latter, however, has also been trending downward since 2010, and is an indication of a large number of eligible workers leaving the workforce. Both statistics are accurate to what they are intended to indicate, but neither accurately depict the health of the labor market in totality.
In an attempt to reconcile all the various economic indicators that touch some aspect of the labor market - and there are 19 such indicators - the Federal Reserve Board implemented a new index in mid-2014 that incorporates all of them. The Labor Market Conditions Index (LMCI) provides a single at-a-glance number that factors in such diverse measures as the number of hours worked, wages, hiring rates, hiring plans, jobs that are hard to fill, and the rate at which workers transition between unemployed to employed. There is a heavy weight placed on indicators that correlate well to each other, while those that diverge from other indicators are given less of a weight in the calculation of LMCI. Therefore, the jury is still out as to the effectiveness of this single Indicator of Indicators.
The LMCI for December - reported in January, 2015 - sits at 6.1, and it has been trending upward since August. As you can see from the following chart, however, the health of the labor market is not accurately portrayed by the Unemployment Rate, which has been improving steadily for two years. Neither is it accurately portrayed by the Participation Index which has been degrading steadily for four years. Rather, the correlation of the wide range of indicators gives a much more meaningful view of the overall health of the labor market. At least, that's the message it seems to portray looking at the graph of the last two years. To put the current graph in perspective, LMCI reached a maximum value of 28.6 in September, 1983. Its worst value was -43.3 in May, 1980.
The Labor Market Conditions Index for January, 2015 will be released on Monday, February 9 at 12:00 EST (15:00 GMT). While the data that comprise the indicator go back to the early 1970s, the indicator itself is still in its infancy. It remains to be seen how much of an influence LMCI will have on the overall market. With this being the only economic indicator of significance being announced on Monday, however, expect it to have some influence over afternoon trading, barring any geopolitical developments coming out of Greece, Germany, Ukraine, or Russia. While no consensus estimate has been released, I'm looking for a value of 6.9 or higher to indicate healthy growth in the labor market. A lesser value would indicate that factors other than the Unemployment Rate are taking a heavier toll on the job market than is currently factored into the economic outlook.
In an attempt to reconcile all the various economic indicators that touch some aspect of the labor market - and there are 19 such indicators - the Federal Reserve Board implemented a new index in mid-2014 that incorporates all of them. The Labor Market Conditions Index (LMCI) provides a single at-a-glance number that factors in such diverse measures as the number of hours worked, wages, hiring rates, hiring plans, jobs that are hard to fill, and the rate at which workers transition between unemployed to employed. There is a heavy weight placed on indicators that correlate well to each other, while those that diverge from other indicators are given less of a weight in the calculation of LMCI. Therefore, the jury is still out as to the effectiveness of this single Indicator of Indicators.
Indicators Included in LMCI
 |
 |
| LIMC - January 2013 to December 2014 |
The Labor Market Conditions Index for January, 2015 will be released on Monday, February 9 at 12:00 EST (15:00 GMT). While the data that comprise the indicator go back to the early 1970s, the indicator itself is still in its infancy. It remains to be seen how much of an influence LMCI will have on the overall market. With this being the only economic indicator of significance being announced on Monday, however, expect it to have some influence over afternoon trading, barring any geopolitical developments coming out of Greece, Germany, Ukraine, or Russia. While no consensus estimate has been released, I'm looking for a value of 6.9 or higher to indicate healthy growth in the labor market. A lesser value would indicate that factors other than the Unemployment Rate are taking a heavier toll on the job market than is currently factored into the economic outlook.
Tuesday, February 03, 2015
End of an Era for One-Time Electronics Giant Radio Shack
Once the "go to" company for innovators, engineers, and electronics enthusiasts, Radio Shack executed its final trade on the New York Stock Exchange on Monday, February 2, 2015. How far has this giant fallen? In 1999 at the height of the Dotcom boom, Radio Shack soared to $79.50 per share. Their final closing price yesterday was 24 cents per share.
The New York Stock Exchange has delisted the stock for failure to submit a plan to return to a $50 Million market cap as required for membership in the exchange. Radio Shack is expected to default on its debt this month, and a bankruptcy filing is seen as imminent. Reports have surfaced that both Amazon and Sprint are interested in purchasing a few of their stores, however the bulk of their tangible assets will likely be liquidated at auction.
How could a 94-year giant like Radio Shack crumble so quickly? In just 15-years they went from an electronics giant to extinction. The answer can be summed up in two words: Quality and Delivery. From the 1980s forward, the quality of products sold under the Realistic and Tandy brands were increasingly called into question and, in many circles, openly ridiculed. The TRS-80, Radio Shack's popular personal computer line was nicknamed the "Trash-80" and not without justification. Realistic branded items become noted for extremely low quality and a much higher price tag than the company could justify.
While the Dotcom boom pushed Radio Shack's stock to record heights, the company never truly adapted to the online landscape. While online retailers emerged in the electronics and technology space, Radio Shack was either unable or unwilling to shift their model away from an old-style brick and mortar strip-mall occupant. They simply couldn't compete with the online giants, and in such a niche market, their business model was doomed to failure in the age of the highly versatile online superstore that also had a local physical presence.
The same failure to adapt to the online retail world is what doomed Borders, once a giant book retailer just as computer retailers like CompUSA fell victim to the same emerging online trends. Radio Shack's failure should come as no surprise to anyone, but it should serve as a warning to any franchise that relies primarily on a local brick and mortar presence. As companies like Amazon improve their delivery models, offering same-day service in many localities and next-day service in others, the traditional strip-mall franchises must either adapt or face extinction. Any chain that is not growing their online presence at a rapid rate must take a hard look at their business model since the retail world may well be passing them by. Just ask Radio Shack.
The New York Stock Exchange has delisted the stock for failure to submit a plan to return to a $50 Million market cap as required for membership in the exchange. Radio Shack is expected to default on its debt this month, and a bankruptcy filing is seen as imminent. Reports have surfaced that both Amazon and Sprint are interested in purchasing a few of their stores, however the bulk of their tangible assets will likely be liquidated at auction.
How could a 94-year giant like Radio Shack crumble so quickly? In just 15-years they went from an electronics giant to extinction. The answer can be summed up in two words: Quality and Delivery. From the 1980s forward, the quality of products sold under the Realistic and Tandy brands were increasingly called into question and, in many circles, openly ridiculed. The TRS-80, Radio Shack's popular personal computer line was nicknamed the "Trash-80" and not without justification. Realistic branded items become noted for extremely low quality and a much higher price tag than the company could justify.
While the Dotcom boom pushed Radio Shack's stock to record heights, the company never truly adapted to the online landscape. While online retailers emerged in the electronics and technology space, Radio Shack was either unable or unwilling to shift their model away from an old-style brick and mortar strip-mall occupant. They simply couldn't compete with the online giants, and in such a niche market, their business model was doomed to failure in the age of the highly versatile online superstore that also had a local physical presence.
The same failure to adapt to the online retail world is what doomed Borders, once a giant book retailer just as computer retailers like CompUSA fell victim to the same emerging online trends. Radio Shack's failure should come as no surprise to anyone, but it should serve as a warning to any franchise that relies primarily on a local brick and mortar presence. As companies like Amazon improve their delivery models, offering same-day service in many localities and next-day service in others, the traditional strip-mall franchises must either adapt or face extinction. Any chain that is not growing their online presence at a rapid rate must take a hard look at their business model since the retail world may well be passing them by. Just ask Radio Shack.
Staples and Office Depot Rumors - But What's Changed?
Office supply giant Staples (Nasdaq: SPLS) was up almost 2.5% pre-market on reports of advanced talks to merge with rival Office Depot (Nasdaq: ODP). The latter was also up about 1.5% on the rumor. There are no details available regarding the proposed deal, so it's hard to say whether the current pricing is accurate.
This is not the first time Staples and Office Depot have appeared at the merger altar. The last time, however, was 1997 and federal regulars squashed that deal citing anti-trust concerns. They had no such concerns in 2013, however, when they permitted the merger of Office Depot and Office Max. Neither were required to divest any stores, and the FTC acknowledged then that the competition in that space had increased considerably.
There is never any assurance that deals of this nature will proceed, even without regulatory anti-trust concerns. Trading on rumor of merger is always speculative, and unless you play in the after-hours market, you're typically looking at the taillights of that price movement. That's likely the case today, although there may be more room in the Office Depot price as details are revealed.
The question, though, is what's changed since 1997 that would allow such a merger? The answer is simple: the entire industry has changed. In 1997, Staples was primarily a stationary store. Today, stationary is still a large part of their business, but they are also a major technology store, selling laptops, desktops, and virtually every component imaginable for a device in that space. They are into the tablet space, the cell phone space, the office furniture space, and the software space. Staples is no longer your neighborhood stationary superstore. Neither, for that matter, is Office Depot.
As Staples' focus has adjusted to the changing times, so, too, has their competition. In addition to similar box stores (like Office Depot,) Staples is also in the same market as technology giant Best Buy. Wal*Mart and Target also offer a similar array of products at equally competitive prices. Staples and Office Depot are both, however, dwarfed by Amazon, especially when you consider the wide spider web of Amazon marketplace partners.
With the stunning growth of online sales in that industry, and with Amazon emerging as a global retail force, fears of anti-trust in a deal between Staples and Office Depot are greatly diminished. Of course, you can never truly predict what the FTC will do in these situations, but thinking globally, it is safe to say that the prospects of this merger being approved are significantly greater today than at any time in the past.
Trading on this type of rumor remains speculative, at least if your objective is quick price action profit, but longer term it's likely that Staples will emerge as a much stronger, more profitable company once the efficiencies arising from the merger are realized. That's the way I'm looking to play this. I like the wide range of products offered by Staples, and I like the convenience of having their brick and mortar presence for those "emergency" purchases. I also like the efficiencies that would be gained by merging these two companies, and the potential benefits that will bring into their online sales space. So this will be one to watch, but outside of short term trades, I'd like to see the details emerge before determining a good entry and longer-term price target.
This is not the first time Staples and Office Depot have appeared at the merger altar. The last time, however, was 1997 and federal regulars squashed that deal citing anti-trust concerns. They had no such concerns in 2013, however, when they permitted the merger of Office Depot and Office Max. Neither were required to divest any stores, and the FTC acknowledged then that the competition in that space had increased considerably.
There is never any assurance that deals of this nature will proceed, even without regulatory anti-trust concerns. Trading on rumor of merger is always speculative, and unless you play in the after-hours market, you're typically looking at the taillights of that price movement. That's likely the case today, although there may be more room in the Office Depot price as details are revealed.
The question, though, is what's changed since 1997 that would allow such a merger? The answer is simple: the entire industry has changed. In 1997, Staples was primarily a stationary store. Today, stationary is still a large part of their business, but they are also a major technology store, selling laptops, desktops, and virtually every component imaginable for a device in that space. They are into the tablet space, the cell phone space, the office furniture space, and the software space. Staples is no longer your neighborhood stationary superstore. Neither, for that matter, is Office Depot.
As Staples' focus has adjusted to the changing times, so, too, has their competition. In addition to similar box stores (like Office Depot,) Staples is also in the same market as technology giant Best Buy. Wal*Mart and Target also offer a similar array of products at equally competitive prices. Staples and Office Depot are both, however, dwarfed by Amazon, especially when you consider the wide spider web of Amazon marketplace partners.
With the stunning growth of online sales in that industry, and with Amazon emerging as a global retail force, fears of anti-trust in a deal between Staples and Office Depot are greatly diminished. Of course, you can never truly predict what the FTC will do in these situations, but thinking globally, it is safe to say that the prospects of this merger being approved are significantly greater today than at any time in the past.
Trading on this type of rumor remains speculative, at least if your objective is quick price action profit, but longer term it's likely that Staples will emerge as a much stronger, more profitable company once the efficiencies arising from the merger are realized. That's the way I'm looking to play this. I like the wide range of products offered by Staples, and I like the convenience of having their brick and mortar presence for those "emergency" purchases. I also like the efficiencies that would be gained by merging these two companies, and the potential benefits that will bring into their online sales space. So this will be one to watch, but outside of short term trades, I'd like to see the details emerge before determining a good entry and longer-term price target.
Sunday, February 01, 2015
Why I Am So Critical of Those That Sing Our National Anthem
The Napoleonic Wars had taken their toll on British resources. In the early 1800s they started to empress US citizens into the British Navy on the pretense that people of Irish or Scottish decent could not renounce being subjects of the King despite their US citizenship. In 1812, the US had had enough, and war with Great Britain ensued. It was not going well. The War of 1812 was a naval war, and the British were the kings of the seas. Despite some US victories in the Great Lakes, by 1814 the survival of the fledgeling nation was in serious doubt. Washington had been sacked and burned. The US Capitol and the White House had been torched. Alexandria, VA had been sacked. The British fleet set their sights on Baltimore and had only to overcome Fort McHenry, which guarded the mouth of the river. On September 3rd, 1814, President Madison sent two emissaries under a flag of truce to the HMS Tonnant. Their objective was a prisoner exchange, to which the British agreed. Since an attack on the Fort was imminent, however, the two emissaries - Francis Scott Key and John Stuart Skinner - were forced to remain on the Tonnant until the battle was over.
The British engaged Fort McHenry on the evening of September 13, 1814. At stake in that battle was American Independence. Key watched the battle unfold from the deck of the Tonnant. Inspired by what he saw that night, Key wrote a four stanza poem on the back of a letter he had in his pocket. That poem - The Defense of Fort McHenry - became what we know today as our national anthem. The first stanza is what we hear sung before every sporting event today.
Read the words. Understand what Key is describing. Understand what was at stake on that fateful night in 1814. And before you ever presume to sing this song in front of an audience, understand full well that you are paying tribute to the defense of a nation. It is not a song to honor you, the singer. It is a song sung to honor a victory, pulled from the jaws of defeat, a victory that secured a nation. Do not perform it. Honor it.
The Defense of Fort McHenry:
O say can you see by the dawn's early light,
What so proudly we hailed at the twilight's last gleaming,
Whose broad stripes and bright stars through the perilous fight,
O'er the ramparts we watched, were so gallantly streaming?
And the rockets' red glare, the bombs bursting in air,
Gave proof through the night that our flag was still there;
O say does that star-spangled banner yet wave,
O'er the land of the free and the home of the brave?
On the shore dimly seen through the mists of the deep,
Where the foe's haughty host in dread silence reposes,
What is that which the breeze, o'er the towering steep,
As it fitfully blows, half conceals, half discloses?
Now it catches the gleam of the morning's first beam,
In full glory reflected now shines in the stream:
'Tis the star-spangled banner, O! long may it wave
O'er the land of the free and the home of the brave.
And where is that band who so vauntingly swore
That the havoc of war and the battle's confusion,
A home and a country, should leave us no more?
Their blood has washed out their foul footsteps' pollution.
No refuge could save the hireling and slave
From the terror of flight, or the gloom of the grave:
And the star-spangled banner in triumph doth wave,
O'er the land of the free and the home of the brave.
O thus be it ever, when freemen shall stand
Between their loved homes and the war's desolation.
Blest with vict'ry and peace, may the Heav'n rescued land
Praise the Power that hath made and preserved us a nation!
Then conquer we must, when our cause it is just,
And this be our motto: "In God is our trust."
And the star-spangled banner in triumph shall wave
O'er the land of the free and the home of the brave |
| Dow Industrial Average Weekly Chart |
- The Dow is trading well above its 250-period moving average (Green line).
- The Dow is trading above its 50-period exponential moving average (Red line.)
- The slope of both the 50-period and the 250 period averages is at a consistent upward (bullish) angle.
- The 50-period line has been acting as support since late 2011.
- Resistance - the green line - is proceeding upward at a very healthy slope and - since January 2014 - has been running parallel to the 50-period line.
- Volume has been relatively stable since late 2013 and is not showing any of the wild increases that would signal a trend change.
- We're trading at a support level right now (top dashed blue line) and there is a very strong support level around 16,500, coinciding with a 23.6% Fibonacci retracement line.
- The weekly chart is still experiencing higher highs and higher lows. That is the textbook definition of an uptrend.
Now, there's certainly plenty of headwind in the global market.
- Greece is in a staring contest with the ECB and with Germany over what to do with their debt.
- Russia's economy is in meltdown.
- Europe's economy has slowed to a point hovering just above a recession.
- China's GDP, while still a very healthy 6.7%, has slowed considerably.
- The Middle East, Africa, and Latin America are all stalled.
- The US Dollar continues to strengthen against other key currencies.
- A labor dispute at the ports on the US west coast is hampering imports that should otherwise be soaring.
- The collapse of oil prices is starting to put pressure on numerous industries, threatening the growth in the otherwise healthy US economy.
Take advantage of these downturns in the Dow, the S&P, and the Nasdaq. They represent the best buying opportunities we've had in a while. Don't fear this growing volatility; embrace it. Every dip in prices in the coming weeks is your opportunity to enter this still healthy and still growing bull market without paying too high a premium. This bull has not yet run its course, nor do I expect it to end in 2015.
Saturday, January 31, 2015
Caterpillar Is a Pure Energy Play in 2015
Following last Tuesday's earnings announcement, Caterpillar (NYSE: CAT) was crushed, falling $7 per share from $86 down to $79 overnight. It's stayed in that $79 range for the rest of the week, based entirely on it's gloomy outlook for 2015.
The exposure CAT has in the energy sectors is significant, and with no foreseeable end to low oil prices, it's no wonder that the stock of this well-run company has been pummeled. The good news for traders and investors alike, however, is that we now have oil as a leading indicator for this company's eventual rebound. Take a look at a chart of CAT (red line) compared with the Energy iShares ETF (blue line.)
The correlation between the two makes sense when you consider the company's outlook for 2015. CAT is forecasting a 9% decline in revenue compared to 2014, primarily as a result of depressed oil and gas prices. Consider what CAT sells relative to that industry:
If the price remains low for the better part of 2015 - and at present, there's not much to suggest it won't - then the turbine business is expected to decline well into 2016. Without a dramatic price move in oil in the short term, it's reasonable to expect CAT's stock price to remain depressed at least through their next earning period. It's for that reason that I'm using oil prices as the leading indicator CAT's future growth.
In their January 27th conference call, CAT offered some insight into several other industries of note.
The good news for the strong dollar, however, is in terms of overseas manufacturing. Companies based in the US, like CAT, that have extensive overseas manufacturing facilities are expected to see much lower costs thanks to the favorable exchange rates. In fact, CAT anticipates this artificial cost reduction as offsetting the impact to revenue in the overseas markets. It's a factor to consider when looking at opportunities in other companies with a strong overseas manufacturing presence.
So there you have 2015 in a nutshell, at least as it pertains to companies with heavy exposure in the oil and gas industries. As to CAT, watch the oil ETFs for signs of strength once the price of oil stabilizes and begins to recover. I'm expecting the oil ETFs to be a leading indicator that will signal a great entry point for CAT, and one that may provide an excellent cross-earnings announcement play in the quarter in which we see oil rebound.
The exposure CAT has in the energy sectors is significant, and with no foreseeable end to low oil prices, it's no wonder that the stock of this well-run company has been pummeled. The good news for traders and investors alike, however, is that we now have oil as a leading indicator for this company's eventual rebound. Take a look at a chart of CAT (red line) compared with the Energy iShares ETF (blue line.)
 |
| CAT (red) vs IYE (blue) |
The correlation between the two makes sense when you consider the company's outlook for 2015. CAT is forecasting a 9% decline in revenue compared to 2014, primarily as a result of depressed oil and gas prices. Consider what CAT sells relative to that industry:
- Engines for drilling;
- Engines, transmissions, and pressure pumps for well servicing;
- Engines for compression sets for gas gathering;
- Engines and turbines for pipelines;
- Turbines for offshore production pipelines.
If the price remains low for the better part of 2015 - and at present, there's not much to suggest it won't - then the turbine business is expected to decline well into 2016. Without a dramatic price move in oil in the short term, it's reasonable to expect CAT's stock price to remain depressed at least through their next earning period. It's for that reason that I'm using oil prices as the leading indicator CAT's future growth.
In their January 27th conference call, CAT offered some insight into several other industries of note.
- Agriculture is expected to be weak in 2015. This will lead to lower sales of industrial engines, and you can translate that into lower sales of other farm equipment. It may, however, be good news for the parts industries, since there will be a greater desire for maintenance as opposed to new purchases.
- The rail business is expected to be down, at least according to CAT. Now, this runs contrary to what we're hearing from others that have exposure to that industry, so it remains to be seen if CAT is being overly pessimistic or if this is a reflection of their more global position as opposed to a pure domestic play.
- Construction is expected to be up in the US. This coincides with the view from others in that industry, and given the pessimistic outlook portrayed by CAT as a whole, this adds a measure of weight to the strength of the construction industry domestically.
- Construction everywhere else is expected to be down. That's a recurring theme, with Europe leading the charge into recession. China's growth is slowing, and construction is forecast to decline there as well.
- Mining is very weak, with commodity prices - especially for copper, iron ore, and coal - trading well below normal. Interestingly, CAT does not foresee this improving in 2015. If they're right, the various mining industries will face serious headwinds throughout the coming year.
The good news for the strong dollar, however, is in terms of overseas manufacturing. Companies based in the US, like CAT, that have extensive overseas manufacturing facilities are expected to see much lower costs thanks to the favorable exchange rates. In fact, CAT anticipates this artificial cost reduction as offsetting the impact to revenue in the overseas markets. It's a factor to consider when looking at opportunities in other companies with a strong overseas manufacturing presence.
So there you have 2015 in a nutshell, at least as it pertains to companies with heavy exposure in the oil and gas industries. As to CAT, watch the oil ETFs for signs of strength once the price of oil stabilizes and begins to recover. I'm expecting the oil ETFs to be a leading indicator that will signal a great entry point for CAT, and one that may provide an excellent cross-earnings announcement play in the quarter in which we see oil rebound.
Wednesday, January 28, 2015
A Neutral Fed Announcement Spooks Markets
The Federal Open Markets Committee (FOMC) issued a statement today that sent the US markets into a nose-dive. With earnings across most sectors disappointing the markets throughout January, and with economic data being a further disappointment, speculation on the street was pushing estimates of interest rate hikes out into the September time-frame. The Fed dispelled those notions this afternoon, and the Dow tumbled 190 points in response.
In today's release, FOMC stated, "Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy." This is being interpreted as indicating a rate increase announcement no earlier than June, however it's not the dovish indicator the markets were hoping for.
It doesn't help that the FOMC's assessment of current economic conditions appears to be a bit rosier than those being seen by investors and traders. Consider the following statements:
FOMC stated, "Labor market conditions have improved further, with strong job gains and a lower unemployment rate." While it's true that unemployment has declined to about the 5.6% level, the Participation Index - a much more accurate measure of the workforce - has declined to its lowest level (62.7%) since 1978 and it continues to decline. This would indicate that the number of eligible workers that are unemployed is increasing, not decreasing. As to job gains, if you take Texas, Washington DC, Arkansas, and Utah out of the mix, the nation is actually shedding jobs at a rapid rate. Almost all of the net national gains are coming just from the state of Texas.
Here's the raw data just for Texas: Joint Economic Committee - Texas Economic Data
Next, the FOMC stated, "Household spending is rising moderately." That's an interesting view, considering the Retail Sales number recently released was the largest decline experienced in 11 months. If household spending is rising, one must question where they are spending it since it clearly wasn't in retail stores last month.
They stated, "Recent declines in energy prices have boosted household purchasing power." There's certainly more money in the consumer's pockets resulting from a decline in gas prices, however, as has been discussed several times over the past couple of weeks, there is no evidence that the consumer is spending that money. In fact, there's evidence mounting that the decline in energy prices is about to have an extreme negative impact in the oil producing states that have driven the overall job growth since the recession. With oil rigs closing, and oil companies starting massive layoffs, the conditions in states like Texas, Oklahoma, California, and North Dakota, among others, will quickly deteriorate.
Finally, FOMC stated, "Inflation has declined further below the Committee’s longer-run objective, largely reflecting declines in energy prices. Market-based measures of inflation compensation have declined substantially in recent months; survey-based measures of longer-term inflation expectations have remained stable." The problem with this statement is that both CPI and Core CPI are down. This means that, even excluding food and energy, inflation is down. It makes sense, since wages are not increasing. (Average in the latest release was a mere 1.7%.) In other words, inflation is dropping, not because of energy prices, but because of a gradual softening of the economy as a whole.
What may have spooked the market the most is this phrase in their press release: "In determining how long to maintain this target range, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation." It's that "and expected" part that is disturbing. Since their assessment of inflation to date is not accurate, the thought that they will react based on what they expect to happen implies a rate hike that will be premature in an economy that cannot tolerate it.
The only truly encouraging statement in the release is in the very last sentence: "The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run." This is, from what we can determine, the only acknowledgement that there are global economic forces that are providing extreme headwinds to US economic growth. The strength of the dollar, a crumbling European economy, the renewed threat of a Greek Crisis, and the evaporation of Russia's economy are enough to give even the most bullish investor pause. Add to that a reduction in the rate of growth in China and India, and there's the prospect of a US economy barely able to sustain forward momentum.
We're nearing the end of this quarter's earnings season. There are definitely very strong sectors that will provide excellent trading opportunities in this uncertain market. Aerospace, Auto Parts, and Utilities are all looking pretty good right now. Keep an eye on the remaining announcements, and trade into strength (or short into weakness, if that's to your liking.) For now, though, expect volatility to remain high given the uncertainty around when the Fed will decide to move on rates.
In today's release, FOMC stated, "Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy." This is being interpreted as indicating a rate increase announcement no earlier than June, however it's not the dovish indicator the markets were hoping for.
It doesn't help that the FOMC's assessment of current economic conditions appears to be a bit rosier than those being seen by investors and traders. Consider the following statements:
FOMC stated, "Labor market conditions have improved further, with strong job gains and a lower unemployment rate." While it's true that unemployment has declined to about the 5.6% level, the Participation Index - a much more accurate measure of the workforce - has declined to its lowest level (62.7%) since 1978 and it continues to decline. This would indicate that the number of eligible workers that are unemployed is increasing, not decreasing. As to job gains, if you take Texas, Washington DC, Arkansas, and Utah out of the mix, the nation is actually shedding jobs at a rapid rate. Almost all of the net national gains are coming just from the state of Texas.
 |
| Job Gains vs Unemployment |
Here's the raw data just for Texas: Joint Economic Committee - Texas Economic Data
Next, the FOMC stated, "Household spending is rising moderately." That's an interesting view, considering the Retail Sales number recently released was the largest decline experienced in 11 months. If household spending is rising, one must question where they are spending it since it clearly wasn't in retail stores last month.
They stated, "Recent declines in energy prices have boosted household purchasing power." There's certainly more money in the consumer's pockets resulting from a decline in gas prices, however, as has been discussed several times over the past couple of weeks, there is no evidence that the consumer is spending that money. In fact, there's evidence mounting that the decline in energy prices is about to have an extreme negative impact in the oil producing states that have driven the overall job growth since the recession. With oil rigs closing, and oil companies starting massive layoffs, the conditions in states like Texas, Oklahoma, California, and North Dakota, among others, will quickly deteriorate.
Finally, FOMC stated, "Inflation has declined further below the Committee’s longer-run objective, largely reflecting declines in energy prices. Market-based measures of inflation compensation have declined substantially in recent months; survey-based measures of longer-term inflation expectations have remained stable." The problem with this statement is that both CPI and Core CPI are down. This means that, even excluding food and energy, inflation is down. It makes sense, since wages are not increasing. (Average in the latest release was a mere 1.7%.) In other words, inflation is dropping, not because of energy prices, but because of a gradual softening of the economy as a whole.
What may have spooked the market the most is this phrase in their press release: "In determining how long to maintain this target range, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation." It's that "and expected" part that is disturbing. Since their assessment of inflation to date is not accurate, the thought that they will react based on what they expect to happen implies a rate hike that will be premature in an economy that cannot tolerate it.
The only truly encouraging statement in the release is in the very last sentence: "The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run." This is, from what we can determine, the only acknowledgement that there are global economic forces that are providing extreme headwinds to US economic growth. The strength of the dollar, a crumbling European economy, the renewed threat of a Greek Crisis, and the evaporation of Russia's economy are enough to give even the most bullish investor pause. Add to that a reduction in the rate of growth in China and India, and there's the prospect of a US economy barely able to sustain forward momentum.
We're nearing the end of this quarter's earnings season. There are definitely very strong sectors that will provide excellent trading opportunities in this uncertain market. Aerospace, Auto Parts, and Utilities are all looking pretty good right now. Keep an eye on the remaining announcements, and trade into strength (or short into weakness, if that's to your liking.) For now, though, expect volatility to remain high given the uncertainty around when the Fed will decide to move on rates.
Directionless Microsoft is Out of Touch With Consumer Demand
What do you do when a product launch is so horrendous that it's not only completely rejected by the consumer, it also drives down the sales of other companies' hardware that would potentially use that product? Well, if you're Microsoft (Nasdaq: MSFT) you repeat the error on an even bigger scale.
Windows 8, a complete makeover of Microsoft's operating system, was a complete failure in the PC market. (Windows XP and Windows 7 were highly successful. To capitalize on that success, Microsoft threw the entire OS out and redesigned it into something the consumer loathed. You'd think they'd have learned from Windows/ME, wouldn't you?) While it had some success in the company's tiny portions of the phone and tablet worlds, PC users rejected the entire concept in droves. Even in the laptop space, where you could argue that there was some chance of success, I continue to be stunned by the number of people that ask me how they could replace the Windows 8 that came with the box with Windows 7. The message was loud and clear, or at least it should have been. Not, apparently, for Microsoft.
Enter Windows 10. Yet another new look for the OS, Windows 10 seeks to continue down the same path as Windows 8 by providing a single interface between the phone, the tablet, the laptop, and the PC. At some point, we can only hope that someone in Redmond realizes that the demands of a user looking at a 5 inch screen are dramatically different from the user looking at two 29 inch screens. Interaction with a screen 8 inches from my nose is dramatically different from my interaction with a screen 2 feet away. On a phone, I'm looking for a simple interface with lettering large enough to read with rapidly aging eyes. On a PC, I'm looking to maximize real estate on screens larger than the TV set I had in my living room as a kid. The needs are different, the user behavior is different, the way you interact with the devices is different. The concept of a one-sized-fits-all operating system is, and always will be, a failure.
Next we have the one component virtually every user touches almost constantly: the web browser. Now, everyone has their favorite browser, for a variety of reasons, and the defense of their favorite browser frequently turns into a Holy War. At present, there are really only four choices in the browser world - Internet Explorer, Firefox, Chrome, and Safari. None of them are perfect, but with the exception of IE, the others are at least stable, and offer a bit of backward compatibility. I'd be doing cartwheels over Firefox, in fact, if they'd only fix the memory issue that's plagued that browser for close to a decade.
Enter Cortana. This is yet another attempt by Microsoft to prove they cannot distinguish between a phone and a desktop. Basically, Microsoft is attempting to bring Apple's Siri to the desktop. There's only one problem. I don't need Siri on my desktop. I don't need a hands-free desktop experience; in fact, I don't want a hands-free desktop experience. There's nothing I've seen in any of the Cortana demos to date that leads me to conclude that this is the browser solution of the future. Certainly, it's not about to make me run out and install Windows 10 - an operating system I intend to avoid with even more gusto than I avoided Windows 8. A point Microsoft seems to be forgetting is that there is no revenue generated just from the browser. Certainly, there's potential revenue from Bing - their search engine - however the competition with Google is fierce, and given the amount of data Google collects, they have the distinct advantage (except in China.) Cortana isn't about to increase revenue for Microsoft, and after the Windows 8 and now Windows 10 fiascoes, that's precisely what Microsoft needs.
Finally, have you looked at the bundles attached to new laptops, lately? Office 365, complete with a "free" one-year subscription, now seems to be the standard offering. Office 365 is a subscription based software service, forcing users to make extensive use of Microsoft's cloud offering just to use basic functions like word processing, spreadsheets, etc. While connectivity isn't necessarily an issue in the desktop space (although it's a bit presumptuous to assume that everyone using a spreadsheet has Internet connectivity all the time) it's definitely an issue in the laptop space. The concept of a laptop is portability, and there are plenty of times I find myself with my laptop outside of a WiFi zone. Not, mind you, that I'm willing to use a public WiFi for anything confidential, anyway.
Now, there may be plenty of people willing to enter into a subscription contract for software. Adobe's had a bit of success with that in the photo editing space, but that's more of a function of the outrageous price of Photoshop, for anyone other than a student. I'm not one of those people. There may also be plenty of people willing to store their documents "in the cloud" - meaning, on servers in a data center over which you have zero control. Sure, I'll let you store my grocery list in the cloud. Financial and personal data? Not a chance. Google "Identity Theft" if you're curious as to why.
Microsoft has clearly lost their vision with regards to consumer requirements. The only reason I now have to run a Windows based PC is for online gaming. Everything else I do on a PC can be done for far less cost running a Linux OS, and using open source solutions like Open Office to do everything Microsoft Office can do without the high cost or a subscription charge for the latter. (In fact, I have Ubuntu on a laptop that dates to 2004, is a single core processor running 1 GB of memory, and it outperforms this quad-core desktop with 6 GB of memory running Windows 7.) With the exception of playing an online MMO, there's nothing I do today on a Windows box that cannot be done under Linux for a fraction of the cost and a fraction of the CPU and Memory requirements.
Microsoft's stock was absolutely crushed following their latest earnings announcement and their conference call. Their earnings were in-line with expectations, and their revenue beat by $140 million. So why were they crushed? (They're down over 10% from their pre-announcement price.) They were - and still are - getting crushed because they have lost sight of what the consumer wants. The products they are delivering in 2015 are not products in demand by the consumer. In fact, it's fair to say that the consumer is demanding the exact opposite of what's being delivered. This is a company in turmoil, and until there are fundamental changes at the top of the house, it will be a stock to avoid.
Windows 8, a complete makeover of Microsoft's operating system, was a complete failure in the PC market. (Windows XP and Windows 7 were highly successful. To capitalize on that success, Microsoft threw the entire OS out and redesigned it into something the consumer loathed. You'd think they'd have learned from Windows/ME, wouldn't you?) While it had some success in the company's tiny portions of the phone and tablet worlds, PC users rejected the entire concept in droves. Even in the laptop space, where you could argue that there was some chance of success, I continue to be stunned by the number of people that ask me how they could replace the Windows 8 that came with the box with Windows 7. The message was loud and clear, or at least it should have been. Not, apparently, for Microsoft.
Enter Windows 10. Yet another new look for the OS, Windows 10 seeks to continue down the same path as Windows 8 by providing a single interface between the phone, the tablet, the laptop, and the PC. At some point, we can only hope that someone in Redmond realizes that the demands of a user looking at a 5 inch screen are dramatically different from the user looking at two 29 inch screens. Interaction with a screen 8 inches from my nose is dramatically different from my interaction with a screen 2 feet away. On a phone, I'm looking for a simple interface with lettering large enough to read with rapidly aging eyes. On a PC, I'm looking to maximize real estate on screens larger than the TV set I had in my living room as a kid. The needs are different, the user behavior is different, the way you interact with the devices is different. The concept of a one-sized-fits-all operating system is, and always will be, a failure.
Next we have the one component virtually every user touches almost constantly: the web browser. Now, everyone has their favorite browser, for a variety of reasons, and the defense of their favorite browser frequently turns into a Holy War. At present, there are really only four choices in the browser world - Internet Explorer, Firefox, Chrome, and Safari. None of them are perfect, but with the exception of IE, the others are at least stable, and offer a bit of backward compatibility. I'd be doing cartwheels over Firefox, in fact, if they'd only fix the memory issue that's plagued that browser for close to a decade.
Enter Cortana. This is yet another attempt by Microsoft to prove they cannot distinguish between a phone and a desktop. Basically, Microsoft is attempting to bring Apple's Siri to the desktop. There's only one problem. I don't need Siri on my desktop. I don't need a hands-free desktop experience; in fact, I don't want a hands-free desktop experience. There's nothing I've seen in any of the Cortana demos to date that leads me to conclude that this is the browser solution of the future. Certainly, it's not about to make me run out and install Windows 10 - an operating system I intend to avoid with even more gusto than I avoided Windows 8. A point Microsoft seems to be forgetting is that there is no revenue generated just from the browser. Certainly, there's potential revenue from Bing - their search engine - however the competition with Google is fierce, and given the amount of data Google collects, they have the distinct advantage (except in China.) Cortana isn't about to increase revenue for Microsoft, and after the Windows 8 and now Windows 10 fiascoes, that's precisely what Microsoft needs.
Finally, have you looked at the bundles attached to new laptops, lately? Office 365, complete with a "free" one-year subscription, now seems to be the standard offering. Office 365 is a subscription based software service, forcing users to make extensive use of Microsoft's cloud offering just to use basic functions like word processing, spreadsheets, etc. While connectivity isn't necessarily an issue in the desktop space (although it's a bit presumptuous to assume that everyone using a spreadsheet has Internet connectivity all the time) it's definitely an issue in the laptop space. The concept of a laptop is portability, and there are plenty of times I find myself with my laptop outside of a WiFi zone. Not, mind you, that I'm willing to use a public WiFi for anything confidential, anyway.
Now, there may be plenty of people willing to enter into a subscription contract for software. Adobe's had a bit of success with that in the photo editing space, but that's more of a function of the outrageous price of Photoshop, for anyone other than a student. I'm not one of those people. There may also be plenty of people willing to store their documents "in the cloud" - meaning, on servers in a data center over which you have zero control. Sure, I'll let you store my grocery list in the cloud. Financial and personal data? Not a chance. Google "Identity Theft" if you're curious as to why.
Microsoft has clearly lost their vision with regards to consumer requirements. The only reason I now have to run a Windows based PC is for online gaming. Everything else I do on a PC can be done for far less cost running a Linux OS, and using open source solutions like Open Office to do everything Microsoft Office can do without the high cost or a subscription charge for the latter. (In fact, I have Ubuntu on a laptop that dates to 2004, is a single core processor running 1 GB of memory, and it outperforms this quad-core desktop with 6 GB of memory running Windows 7.) With the exception of playing an online MMO, there's nothing I do today on a Windows box that cannot be done under Linux for a fraction of the cost and a fraction of the CPU and Memory requirements.
Microsoft's stock was absolutely crushed following their latest earnings announcement and their conference call. Their earnings were in-line with expectations, and their revenue beat by $140 million. So why were they crushed? (They're down over 10% from their pre-announcement price.) They were - and still are - getting crushed because they have lost sight of what the consumer wants. The products they are delivering in 2015 are not products in demand by the consumer. In fact, it's fair to say that the consumer is demanding the exact opposite of what's being delivered. This is a company in turmoil, and until there are fundamental changes at the top of the house, it will be a stock to avoid.
Sunday, January 25, 2015
Greece's Leftist Syriza Just Shy of Absolute Majority
Greek elections were held today, and the leftist Syriza party emerged the clear victors, taking 149 seats in the 300 seat Parliament. Despite the solid win, they fell just short of an outright majority. Party leader Alexis Tsipras hailed his victory as an end to the "vicious cycle of austerity," although Tsipras significantly toned down the anti-austerity rhetoric as the election drew near.
Tsipras now finds himself in a precarious position, balanced between his anti-euro political base, and the reality of Greek creditors trying to fend off a default on their massive debt. Whether or not Greece remains in the Eurozone is now a matter of debate, although in recent weeks, both Tsipras and German Chancellor Merkel have insisted that Greece should remain. A Greek exit would be destabilizing at best, not only for Greece, but for the Eurozone as a whole. To be sure, Italy and Spain will be keeping a close eye on Greece's decision.
Uncertainty in Greece has left financial markets unsettled several times in the past few years, and with the shift in the balance of power today, there's definitely an element of uncertainty heading into tomorrow's open. The outcome of today's election has been heralded in the polls for several months, but the moderation of Tsipras' anti-euro public sentiments can be seen as an indication that he is transitioning away from the political rhetoric needed to win and towards the reality of what it will take to lead. That may help impose a measure of stability as we wait and see how the new government takes shape.
What also remains to be seen is how the political landscape, and not just the economic landscape, develops with Syriza in power. They have publicly supported a Greek exit from NATO, and - not surprisingly - have criticized economic sanctions against Russia. As is the case with their anti-eurozone rhetoric, however, Tsipras has backed away from the extreme anti-NATO views in recent weeks. As Bloomberg stated, "Syriza is sacrificing its more revolutionary ambitions to the overriding goal of getting better terms for Greece’s economic aid package."
It will now be interesting to watch the market dynamics. Last week, we had a huge adrenaline boost on Thursday with the ECB's announcement of Quantitative Easing measures that far surpassed expectations. The adrenaline high wore off on Friday, though, as earnings reports in the US were mostly lackluster. Now we have the Greek elections upon which to focus tomorrow. Between the Greek elections and several important economic announcements in Europe tomorrow, including the Eurogroup Meeting, three IFO announcements, and December's Retail Sales report, Monday should be an interesting - and possibly quite volatile - trading day overseas. It will be interesting to see how this spills over into the US market, heading into some key domestic releases mid-week.
Tsipras now finds himself in a precarious position, balanced between his anti-euro political base, and the reality of Greek creditors trying to fend off a default on their massive debt. Whether or not Greece remains in the Eurozone is now a matter of debate, although in recent weeks, both Tsipras and German Chancellor Merkel have insisted that Greece should remain. A Greek exit would be destabilizing at best, not only for Greece, but for the Eurozone as a whole. To be sure, Italy and Spain will be keeping a close eye on Greece's decision.
Uncertainty in Greece has left financial markets unsettled several times in the past few years, and with the shift in the balance of power today, there's definitely an element of uncertainty heading into tomorrow's open. The outcome of today's election has been heralded in the polls for several months, but the moderation of Tsipras' anti-euro public sentiments can be seen as an indication that he is transitioning away from the political rhetoric needed to win and towards the reality of what it will take to lead. That may help impose a measure of stability as we wait and see how the new government takes shape.
What also remains to be seen is how the political landscape, and not just the economic landscape, develops with Syriza in power. They have publicly supported a Greek exit from NATO, and - not surprisingly - have criticized economic sanctions against Russia. As is the case with their anti-eurozone rhetoric, however, Tsipras has backed away from the extreme anti-NATO views in recent weeks. As Bloomberg stated, "Syriza is sacrificing its more revolutionary ambitions to the overriding goal of getting better terms for Greece’s economic aid package."
It will now be interesting to watch the market dynamics. Last week, we had a huge adrenaline boost on Thursday with the ECB's announcement of Quantitative Easing measures that far surpassed expectations. The adrenaline high wore off on Friday, though, as earnings reports in the US were mostly lackluster. Now we have the Greek elections upon which to focus tomorrow. Between the Greek elections and several important economic announcements in Europe tomorrow, including the Eurogroup Meeting, three IFO announcements, and December's Retail Sales report, Monday should be an interesting - and possibly quite volatile - trading day overseas. It will be interesting to see how this spills over into the US market, heading into some key domestic releases mid-week.
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