Deflationary Signals or Just A Strong Dollar?

Commodity stocks are getting crushed due to the strong dollar. Look at the XLE energy ETF down 10% from June highs when Middle East concerns were rising. Crude prices of course have also been crushed by the US shale play reducing the need for US imports.  Also look at Gold hitting a nine month low as the rising dollar pushes both crude and the Euro down. Look at this chart courtesy of Kimball Charting Solutions showing a “Deflationary Ball Game” also showing the TR Commodity Index at a 12 Year break. Money continues to flow out of the Yen and the Euro and into the dollar trade like US Treasuries and equities.


Macro Trades- Revisiting Post of 6/18 and “Pomboy Model”

Looking at the market following the cautious easy money policies of the FED we should track the following:

Treasuries now at 2.64%: range bound at low end of 2.5-2.8%; if yield falls below 2.5% then deflationary concerns arise or the economy is weakening.

Corporate Bonds (LQD): the iShares Investment Grade Corporate Bond Fund  ETF peaked at the end of August at $120 so it is tracking rising treasury yield and price declines.

Stocks: Equities remain the best value in a low rate world. Yield seekers would have to take on additional risk so growth and dividend stocks will be attractive. Rising rates help financial stocks.

Gold and Silver: no support; low inflation and strong dollar not good for gold; silver at 2010 lows. If you feel compelled to read gold newsletters and track prices just buy a small position in here and spend time elsewhere.

Looking back at the Barron’s interview of Stephanie Pomboy on 5/24/14 the model has two issues. A stronger dollar or a weak Euro and Yen has not brought in gold as an alternative currency. Also Pomboy thought treasury yields would come down due to a weaker economy and that “the FED Would Have to Reverse Course” i.e. rates would go lower which looks unlikely. QE is ending next month. Shorter dated treasuries will feel the impact of the FED’s gradual tightening with the five year now at 1.8%.


FED Will Hold Rates Low For “Considerable Time”

Purchase of Financial Assets Will Be Scaled Back

After days and even months of ad nauseam media chatter and analysis about the FED course of action there is no change in policy from today’s meeting. QE will be ending in October as planned and the bond buying program will be cut back to $15B a month. Stocks were higher after the FED statement.The “data dependent principle” remains intact i.e. unless there is a change in the low rate of inflation now below its goal, lackluster job growth or a dramatic uptick in the economy rates will remain low. The recovery is slow compared to other recoveries most likely due to lingering effects of the financial crisis. Moreover, there is an underutilization of labor resources and a slight downgrade in FED forecasts for GDP. So for now we should not see a rate hike until mid-2015.

The market reaction is as expected with all major indices up slightly about 0.2% as the “don’t fight the FED” mantra gives the green light to buy stocks.The ten year bond had a slight uptick in yield to 2.60% while the ProShares Ultra Short 20+ETF (TBT) was up slightly to $59.87. Another factor supporting treasuries is extremely low rates in Europe for example the German Bund 10 year yield at 1.05% combined with a weak Euro (1.2871) driving more money to treasuries. FED fund rates are expected to be be raised to 1.375% by end 2015, compared to 1.125% in June.

Gold  is apparently not part of the equation and was flat at $1235. The Dow and Transportation indices are in record territory showing a bias toward cyclical stocks. Industrials were the leading sector near the close.

Biotech stocks were green with major indices up about 1%. Large cap biopharmaceuticals were up slightly but Alexion (ALXN) and Gilead (GILD) were down slightly. There has been a lot of action in small cap speculative stocks lately and we will address this later.

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