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Bulls Regain Control Of The Market As Fed Taper Looms

While the market started the week a bit sloppily, the bulls charged back on Thursday as earnings season officially got underway…

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This article was originally published by Zero Hedge

Bulls Regain Control Of The Market As Fed Taper Looms

Authored by Lance Roberts via RealInvestmentAdvice.com,

Market Rallies As Earnings Season Kicks Off

Two weeks ago, we laid out the case for why we started increasing our equity exposure in portfolios.

“It is worth noting there are two primary support levels for the S&P. The previous July lows (red dashed line) and the 200-dma. Any meaningful decline occurring in October will most likely be an excellent buying opportunity particularly when the MACD buy signal gets triggered.

The rally back above the 100-dma on Friday was strong and sets up a retest of the 50-dma. If the market can cross that barrier we will trigger the seasonal MACD buy signal suggesting the bull market remains intact for now.

Chart updated through Friday.

While the market started the week a bit sloppily, the bulls charged back on Thursday as earnings season officially got underway. With the market crossing above significant resistance at the 50-dma and turning both seasonal “buy signals” confirmed, it appears a push for previous highs is possible.

Correction Is Over For Now

After nearly a month of selling pressure, the rally over the last couple of days came on cue and supported our recommendation to increase exposure to equities. As noted by Barron’s:

“Market sentiment is getting more buoyant. Thursday, the S&P 500 saw its largest gain since March 5, according to Instinet. The percent of stocks on the index that rose, 95%, was the highest since June 21. Friday, about 90% of components were positive. Instinet sees a high likelihood that the index will reach 4.570 fairly soon, for a more than 2% gain.” 

Two factors are driving the rebound. Earnings, so far, are coming in above estimates. Such isn’t surprising as analysts suppressed estimates going into reporting season. Secondly, bond yields declined.

However, there are still reasons to remain cautious near term. As shown below, the internals of the market, while improved slightly, remain negatively diverged. The number of stocks above respective 50- and 200-dma remains low, the bullish percent index remains weak, and relative strength declines.

Furthermore, most companies haven’t reported earnings yet, and macroeconomic challenges still exist. So far, large banks beat estimates on reduced loan loss reserves, but they don’t deal with supply-chain limitations. We are about to see earnings from companies directly impacted by, and don’t benefit from, higher inflation, labor costs, and supply line disruptions.

Technically, If the current rally is going to push back to all-time highs, the market’s underlying strength must begin to improve markedly over the next couple of weeks. If not, the current rally will likely fail sooner than later. Furthermore, the odds of a correction increase as the Fed begins to reduce monetary accommodation.

FOMC Minutes Confirms Taper Is Coming

In the most recent release of the Federal Reserve’s FOMC minutes, the much anticipated “taper” of bond-buying programs got confirmed. To wit:

The illustrative tapering path was designed to be simple to communicate and entailed a gradual reduction in the pace of net asset purchases that, if begun later this year, would lead the Federal Reserve to end purchases around the middle of next year.

The path featured monthly reductions in the pace of asset purchases, by $10 billion in the case of Treasury securities and $5 billion in the case of agency mortgage-backed securities (MBS). Participants generally commented that the illustrative path provided a straightforward and appropriate template that policymakers might follow, and a couple of participants observed that giving advance notice to the general public of a plan along these lines may reduce the risk of an adverse market reaction to a moderation in asset purchases.

While the Fed did not explicitly discuss rate hikes, as noted in our Daily Commentary, the futures market has already priced in two rate hikes next year.

Between reducing bond purchases and lifting overnight rates, the risk to investors is more than evident. As we noted in “3-Things That Will Trigger The Next Bear Market:”

“The risk of a market correction rises further when the Fed is both tapering its balance sheet and increasing the overnight lending rate.

What we now know, after more than a decade of experience, is that when the Fed starts to slow or drain its monetary liquidity, the clock starts ticking to the next corrective cycle.”

The problem for the Fed is that while they suggest they will “adjust” based on incoming data, they may well get trapped between surging inflation and a recessionary economy.

Inflation: Transient Or Persistant

As noted, the risk to the Fed is getting trapped by inflation. The hope has been that current inflationary pressures from the economic shutdown would be “temporary” or “transient” and resolved as the economy reopened. However, nearly 18-months later, with the economy booming, employment running hot, and more job openings than unemployed persons, the disruptions remain. Notably, prices are surging, particularly in the areas that affect households the most.

If inflation is running ‘hot” and employment is full, the Fed should remove monetary accommodation and hike interest rates. However, with economic growth weak, financial stability dependent on monetary interventions, and record numbers of near-bankrupt companies dependent on low-interest-rate debt, a reversal of accommodation could be disastrous.

The hope was inflation would be transient and monetary accommodations could continue unfettered. Now, as noted by St. Louis President James Bullard, this year’s surge in inflation may well persist amid a strong U.S. economy and tight labor market.

While I do think there is some probability that this will naturally dissipate over the next six months, I wouldn’t say that’s such a strong case that we can count on it,” Bullard said Thursday during a virtual discussion hosted by the Euro 50 Group.

“I would put 50% probability on the dissipation story and 50% probability on the persistent story.”

As Michael Lebowitz noted this week:

“If demand stays high, and supply lines and production remain fractured, inflation will continue to run hot. If such occurs, CEOs may decide not to invest in new production facilities where ‘persistent’ inflation becomes more likely.   

Primarily, ‘persistent’ is not ‘transitory.’ Nor is persistent in the Fed’s forecast. Persistent inflation requires the Fed to take detrimental actions to investors.

Given the oddities of the current environment, and our fiscal leaders’ carelessness, it is something we must consider.” 

Both Bulls And Bears Have Valid Views

Given the potential for a “policy mistake” and our cautionary views, the following email question currently sums up many investors’ views.

“I really am not sure what to do. Should I raise more cash and be defensive with inflationary pressures rising, and the Fed set to taper. Or, should I just stay invested given the market seems to be doing okay?”

For investors, they have gotten caught between logical views.

From the bullish perspective:

  • The market just completed a much-needed 5% correction.

  • Short-term conditions are oversold.

  • Bullish sentiment is largely negative.

  • Earnings season should be supportive.

  • Stock buybacks are running at a record pace.

  • The seasonally strong period of the year tends to be positive for stocks.

However, those views get countered by the bearish perspective discussed last week.

  • Valuations remain elevated.

  • Inflation is proving to be sticker than expected.

  • The Fed confirmed they will likely move forward with “tapering” their balance sheet purchases in November.

  • Economic growth continues to wane.

  • Technical underpinnings remain weak.

  • Corporate profit margins will shrink due to inflationary pressures.

  • Earnings estimates will get downwardly revised keeping valuations elevated.

  • Liquidity continues to contract on a global scale

  • Consumer confidence continues to slide.

Given this backdrop, it is understandable why investors are finding reasons “not” to invest. However, as stated previously, avoiding crashes and downturns can be as costly to investment outcomes as the downturn itself.

Navigating Uncertainty In Your Portfolio

As noted above, the market has not done anything technically wrong. Longer-term, the bullish trend remains intact, the recent correction worked off much of the overbought condition, and investor sentiment is negative enough to support a short-term rally.

However, while we think a rally is likely near-term, there is considerable risk to the market as we head into 2022. Such is why we stated last week:

If you didn’t like the recent decline, you have too much risk in your portfolio. We suggest using any rally to the 50-dma next week to reduce risk and rebalance your portfolio accordingly.

So here are some guidelines to follow.

  1. Move slowly. There is no rush in making dramatic changes.

  2. If you are over-weight equities, DO NOT try and fully adjust your portfolio to your target allocation in one move. Think logically above where you want to be and use the rally to adjust to that level.

  3. Begin by selling laggards and losers. 

  4. Add to sectors, or positions, that are performing with, or outperforming the broader market.

  5. Move “stop-loss” levels up to recent lows for each position. Managing a portfolio without “stop-loss” levels is foolish.

  6. Be prepared to sell into the rally and reduce overall portfolio risk. Not every trade will always be a winner. But keeping a loser will make you a loser of both capital and opportunity. 

  7. If none of this makes any sense to you – please consider hiring someone to manage your portfolio for you. It will be worth the additional expense over the long term.

While we remain optimistic about the markets, we are also taking precautionary steps to tighten up stops, add non-correlated assets, raise some cash, and hedge risk opportunistically on any rally.

…as Seth Klarman from Baupost Capital once stated:

“Can we say when it will end? No. Can we say that it will end? Yes. And when it ends and the trend reverses, here is what we can say for sure. Few will be ready. Few will be prepared.”

We are not in the “prediction business.”

We are in the “risk management business.”

Tyler Durden Sun, 10/17/2021 – 10:30

Author: Tyler Durden

Economics

The Only Road to Riches

Here is the latest issue of The Journal of Investing Wisdom, where I share insightful stuff on investing I am reading and thinking about. Let’s get started….

Here is the latest issue of The Journal of Investing Wisdom, where I share insightful stuff on investing I am reading and thinking about. Let’s get started.

A Thought

You or me are not the market. Earning the long-term returns of the market, of the past or the future, is not in our control. Managing our risks and avoiding ruin, mostly is.

“Rationality is avoidance of systemic ruin,” Nassim Taleb writes.

Peter Bernstein writes in his brilliant book Against the Gods –

Survival is the only road to riches. Let me say that again: Survival is the only road to riches. You should try to maximize return only if losses would not threaten your survival and if you have a compelling future need for the extra gains you might earn.

Trying to avoid the ruin the stock market system enforces upon people who disregard its workings is rational.

Believing that you can beat the system at it, by playing the game mindlessly, isn’t.


A Super Text

Value investing requires a great deal of hard work, unusually strict discipline, and a long-term investment horizon. Few are willing and able to devote sufficient time and effort to become value investors, and only a fraction of those have the proper mindset to succeed.

Like most eighth- grade algebra students, some investors memorize a few formulas or rules and superficially appear competent but do not really understand what they are doing. To achieve long-term success over many financial market and economic cycles, observing a few rules is not enough.

Too many things change too quickly in the investment world for that approach to succeed. It is necessary instead to understand the rationale behind the rules in order to appreciate why they work when they do and don’t when they don’t. Value investing is not a concept that can be learned and applied gradually over time. It is either absorbed and adopted at once, or it is never truly learned.

Value investing is simple to understand but difficult to implement. Value investors are not super-sophisticated analytical wizards who create and apply intricate computer models to find attractive opportunities or assess underlying value.

The hard part is discipline, patience, and judgment. Investors need discipline to avoid the many unattractive pitches that are thrown, patience to wait for the right pitch, and judgment to know when it is time to swing.

~ Seth Klarman, Margin of Safety


An Article

The Winds of Change – Howard Marks

The latest memo from Howard Marks is a must read. He discusses the current investment environment, changing nature of business, inflation and the outlook for the traditional workplace, among other topics. Here’s a passage –

Today, unlike in the 1950s and ’60s, everything seems to change every day. It’s particularly hard to think of a company or industry that won’t either be a disrupter or be disrupted (or both) in the years ahead. Anyone who believes all the firms on today’s list of leading growth companies will still be there in five or ten years has a good chance of being proved wrong.

For investors, this means there’s a new world order. Words like “stable,” “defensive” and “moat” will be less relevant in the future. Much of investing will require more technological expertise than it did in the past. And investments made on the assumptions that tomorrow will look like yesterday must be subject to vastly increased scrutiny.


An Illustration


A Quote

After spending many years in Wall Street and after making and losing millions of dollars, I want to tell you this: It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight!

~ Jesse Lauriston Livermore

A Question

Look at your investment portfolio. Is there a part of it that gives you sleepless nights? If yes, what are you doing with it? Why haven’t you cut it off?


That’s about it from me for today.

If you liked this post, please share with others on WhatsApp, Twitter, LinkedIn. Or just email them the link to this post.

If you are seeing this newsletter for the first time, you may subscribe here.

Stay safe.

Regards, Vishal

The post The Only Road to Riches appeared first on Safal Niveshak.

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Economics

Fed’s Exuberance Index Shows Canada’s Real Estate To Be A “Bubble On A Bubble”

The U.S. Federal Reserve’s latest Exuberance Index (Q2), considered a “smoking gun” for bubbles, shows Canada is well into a real estate bubble – a…

The U.S. Federal Reserve’s latest Exuberance Index (Q2), considered a “smoking gun” for bubbles, shows Canada is well into a real estate bubble – a bubble on a bubble.

This article by Lorimer Wilson, Managing Editor of munKNEE.com, is an edited ([ ]) and abridged (…) version of an article by Daniel Wong of betterdwelling.com

The U.S. Federal Reserve Exuberance Index, considered a “smoking gun” for bubbles, seeks to identify…persistent growth in prices in excess of fundamentals to help policymakers act on bubbles early so countries can minimize the damage. Such exuberant price growth is considered irrational and based on emotion and prone to rapid corrections which can become a threat to more than just one buyer.

How do we use this tool? The index makes understanding market exuberance straightforward for analysts. They provide two sets of numbers, a country’s index and a 95% critical value threshold. If the quarter rises above the threshold it’s an exuberant quarter. After five consecutive quarters of exuberance, you have an exuberant market. That’s a bubble and the Canadian real estate just logged its sixth consecutive quarter as an exuberant market, rising to 3.08 and is now more than double the threshold value of 1.37 needed to be considered as such but it might be a lot worse than that just six quarters.

Starting in Q2 2015, housing saw 14 consecutive quarters of exuberance and then 4 out of 5 following quarters marginally below the threshold but that isn’t enough time for a period to be considered non-exuberant. Canadian real estate is either one longer bubble or a bubble on a bubble since it didn’t correct between. In either case, the gap between fundamentals and prices has expanded this whole time.

Conclusion

A  large correction is needed although the Fed can’t tell you when as policy interventions to extend a bubble can delay a correction and any such action is essentially passing on a deficit of market inefficiency, meaning it has to be paid back later – with interest.

A Few Last Words: 
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The post Fed’s Exuberance Index Shows Canada’s Real Estate To Be A “Bubble On A Bubble” appeared first on munKNEE.com.







Author: Lorimer Wilson

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Economics

Inflation Stretching Budgets Thin For Americans As They Rethink Holiday Buying 

Inflation Stretching Budgets Thin For Americans As They Rethink Holiday Buying 

What looked like a win for workers earlier in the year,…

Inflation Stretching Budgets Thin For Americans As They Rethink Holiday Buying 

What looked like a win for workers earlier in the year, as wages increased, has turned out to be another blow after accounting for inflation. Real wages are negative on the year, and that is impacting how consumers spend this holiday season.

Consumer confidence has been sliding as real wages are negative on the year as consumer prices in October spiked 6.2% YoY, far higher than the +5.9% YoY expected and accelerating from September’s 5.4% YoY; that was the highest print since 1990…

Inflation this holiday season will undoubtedly be a topic at the dinner table. Retailers are pushing costs onto consumers as they attempt to preserve margins. Soaring commodity costs (including decade high in food prices), snarled supply chains, higher transportation costs, labor shortages have allowed shallower discounts. 

Buying attitudes for big purchases has utterly collapsed (due to price concerns)

Despite consumer sentiment waterfalling to COVID lows, a new Deloitte survey shows holiday shoppers are now planning to spend more than they anticipated in September.

Deloitte projects holiday sales could increase by 7% to 9% this year.

We do note that Deloitte’s projection is nominal and so may simply reflect higher prices of the same goods, as opposed to a more positive sentiment reflective of confidence driving Americans to ‘buy more’.

Sure enough:

Of the 1,200 respondents (polled between Oct. 21 to Oct. 25), 41% said the reason for expanding their holiday budgets was higher prices. That’s up from 27% who said the same last year. 

So far, consumers are stomaching price increases as BofA forecast a bigger-than-consensus jump in spending in October.

The survey showed about 63% of consumers experienced a stockout situation, meaning that particular gifts they were looking to buy were not in stock due to supply chain woes. 

How will Americans afford this increase in buying? Simple – the way they always have – credit cards. And that spending is already ramping up as inflation eats away at actual incomes and savings. And sure enough, after shrinking for 2 consecutive months, credit card debt soared by just shy of $10 billion – the second highest this year- and pushed the total revolving credit outstanding back over $1 trillion for the first time since April 2020.

So the Federal Reserve finds itself in a situation where it must stomp out soaring inflation by adjusting monetary policy accordingly (but is deathly afraid of the economic and market consequences of such an action). Failure to taper and lift interest rates to combat inflation will cause even more discontent among consumers who may go on a buying strike because they can barely afford shelter, food, and energy. 

Tyler Durden
Fri, 11/26/2021 – 19:30






Author: Tyler Durden

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