On the heels of the weakness in US stocks last week, Investors Intelligence said Bulls fell to 48.1 from 50.5 and is just a few weeks removed from 60 which coincided with another short term stock market top. Again, most of the shift from Bulls ended up on the Correction side as they rose to 33.6, the most since the week before the US election from 31.4 last week. There remains this stubborn aversion of being bearish as Bears were up just .2 pts to 18.3. The lowest it got this year was 16.2 in early July. These II figures follow the 15 level (‘Extreme Fear’) seen in the CNN Fear-Greed index as of Monday’s close and which rebounded by 8 pts on yesterday’s rally. I said on day one 2017 that the year would be defined by the tug of war between the hopes for fiscal reform on one hand and the reversal (or moderation) of central bank easing on the other. For a broad basket of stocks, their rally ended 3 weeks after the US election. I’ll repeat my belief that the biggest influence on equities this year and into 2018 will be the behavior of the Fed, ECB and BoJ, not North Korea, tax reform (will still be nice), Trump or something else. As we priced in earnings growth over the past 5 years two times over, it’s all about where multiples will go.
On this last point, Cisco Systems made $.53 per share in their fiscal year 2000. The estimate for fiscal year 2018 is $2.44. Thus, if realized in 2018, a 360% increase in earnings over 18 years. Cisco’s stock yesterday closed 61% below its March 2000 peak.
The MBA said mortgage applications to buy a home fell 1.5% for a 2nd straight week which takes the index to the lowest level since mid February although they are still up 8.7% y/o/y. On where housing goes from here, I’ll say again that price now really matters and if we see continued 5-6% annual gains, the seeds are sown for a slowdown in sales. Refi apps were flat but down 38% y/o/y even though the average 30 yr mortgage rate sits at the lowest level since November.
In a pre Jackson Hole warm up, Mario Draghi spoke in Germany but instead of giving us any clues on the direction of policy, he instead patted himself and fellow central bankers on the effectiveness of QE and NIRP. “Policy actions undertaken in the last ten years in monetary policy and in regulation and supervision have made the world more resilient…While forward guidance is a useful instrument, recent research has highlighted that its effectiveness can be improved if combined with other non-standard monetary policies.” Don’t even get me started on this one.
I consider that peak easing in the Eurozone took place right before the first taper on April 1st , therefore this game has only started its 2nd half. Mr. Draghi, don’t celebrate a victory until the game is over and won. Instead, the usefulness of Draghi’s ‘non standard monetary policies’, aka negative interest rates and buying all bonds in sight should only be celebrated when he is no longer buying securities and the deposit rate has a plus sign on it. If then he hasn’t blown up the European bond market, I’ll buy him dinner. The same can be said for Yellen and Kuroda. If a soft landing can be achieved after not just ending this regime of monetary extremism but rates go back to some semblance of normalcy, I’ll be the first to yell from the mountain tops that I was dead wrong on central bankers and admit that money printing works and negative/zero interest rates is a useful tool. I don’t expect to be climbing any mountains but I will if I’m wrong.
Putting aside the ECB’s inflation forecast for 2018 in deciding what to do with QE, according to the current capital key restrictions where they can’t own more than 1/3 of each nation’s debt, they are literally running out of bonds to buy. According to an FT article yesterday, they will have met this ceiling for German bunds in February and will hit the limit for Portugal, Ireland and the Netherlands in April/May. They’ll be left buying Spain, Italy and French paper. Will the German’s let Draghi change the rules? I doubt it.
The euro did rally after Draghi spoke and some European sovereign bonds went negative, mostly in the periphery countries where quietly Italian yields are at a one month high. Also modestly impacting FX and bonds was the slightly better than expected eurozone manufacturing and services composite index which was 55.8 in August vs 55.7 in July. The estimate was 55.5. Germany’s index was up 1 pt m/o/m while France was flat. Markit did cite some bifurcation in the data. “There was further evidence of growth cooling in the service sector, where both business activity and new orders rose at the weakest rates since January. However, this was counterbalanced by further impressive manufacturing data as goods producers were able to secure new export orders at the fastest pace in 6 ½ years.” Also, backlogs rose to the highest level in 11 years. On pricing, “both input costs and output prices increased at faster rates in August” but the gains were modest. Markit expects a good Q3 GDP performance for the region after a solid one (relatively speaking) in Q2. The major European bourses are dead flat today with .50% declines in Spain and Italy.
In Japan, its manufacturing PMI index from Markit in August rose .7 pts to 52.8 which is right at the average level year to date. Markit said the growth was “supported by a mix of strengthened demand from both domestic and external sources.” The number is never market moving but the yen is stronger along with general weakness in the US dollar after yesterday’s bounce. The Nikkei was up modestly after 5 straight days of declines that took the Nikkei to the lowest level since early May.