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What I’m thinking about besides interest rates on my paid JubakAM.com site today–it’s Alibaba

posted on August 28, 2015 at 7:32 pm

For the last few posts on my free JubakPicks.com site I’ve looked at where the bottom might be after the recent plunge and at macro factors such as U.S. GDP growth and potential interest rate increases that will help determine where that bottom is.

But the stock market remains a market of stocks, so the question of buying at anything you think is a bottom comes down to what specific stock(s) do you buy (or not if you think the timing is wrong.)

Today on my paid JubakAM.com site I take a look at the first of three Internet sector leaders that I’d like to buy on this volatility. First up is Alibaba (BABA), the Amazon.com of China (or is it the other way around.) Alibaba’s New York traded ADRs had dropped well before the June 12 peak in Shanghai on fears that margins would fall in fiscal 2015 and 2016 as the company ramped up spending to adapt to the increasing use of mobile devices and to fend off competition from companies such as JD.com (JD). I also took a look at the challenge to growth at parent Alibaba caused by the carving out of Ant Financial, the most promising growth engine for Alibaba, into a separate company controlled by Alibaba founder Jack Ma.

In coming days I’ll take a look on JubakAM.com at Netflix (NFLX) and Facebook (FB).

That’s what I’m working on at my subscription JubakAM.com site–I think there’s some value to you in passing on the direction of my thinking about this market on that site. Hope so anyway.

And, of course, there’s an ulterior motive: If you decide that you’d like more detail on those posts, I’m hoping that you’ll subscribe to my site at JubakAM.com for $199 a year. (By the way, you can get a full refund during the first seven days if you change your mind for any reason.)

“More compelling!” No, “Less Compelling!” It’s the battle of the data as the Federal Reserve heads off to its Jackson Hole retreat to think about interest rates

posted on August 28, 2015 at 7:13 pm

If you’re old enough to remember, today’s comments from the Federal Reserve at the annual retreat conducted by the Kansas City Fed in Jackson Hole will remind you of those Miller Lite adds where one gang of retired athletes yelled “More flavor” at another group that yelled “Less filling.”

Only today it’s Fed members yelling “More compelling” and “Less compelling” at each other over the potential for an initial interest rate increase when the central bank’s Open Market Committee meets on September 17. On Wednesday New York Fed President William Dudley helped push the market toward higher by saying that recent market turbulence had made the case for a September interest rate increase “less compelling.” Today Fed vice chairman Stanley Fisch said reports on the U.S. economy had been “impressive” and “the economy is returning to normal.”

And then Fischer, in an interview with CNBC balanced between the two positions:

“I think it’s early to tell, the change in the circumstances which began with the Chinese devaluation is relatively new and we’re still watching how it unfolds. I wouldn’t want to go ahead and decide right now what the case is, more compelling, less compelling.” (Fischer will make an official appearance tomorrow on a panel at the conference.)

No wonder that U.S. stocks are meandering aimlessly with a slight downward bias today

Would you want to be ahead of potential news on the Fed’s thinking tomorrow—even if the likelihood of any significant news is relatively small?

Complicating the situation are comments from James Bullard, President of the St. Louis Fed, suggesting that the central bank could pass on a September decision but give itself the option of moving in October by adding a press conference to the agenda that day. Many traders had decided that the Federal Reserve wouldn’t act in October because the central bank doesn’t like to move on interest rates at meetings without a scheduled press conference that would let it explain its thinking.

Odds of a decision at the October 28 meeting had climbed to 47% from 40% on Thursday. Meanwhile odds of a September increase have recovered to 38% after having dropped to 28% after the big down day in Shanghai on Monday.

The next important data point will be the jobs number for August scheduled to be reported on Friday, September 4. A strong read on the creation of new jobs—200,000 or more—would raise the odds for a September increase. Economists are currently forecasting a 220,000 gain.

To me the idea of adding a press conference and putting October on the schedule suggests a way for the Fed to split the difference between moving in September without convincing data and seeming indecisive by waiting until December.

Meanwhile, as of the close today, the Standard & Poor’s 500 stock index was ahead 0.06%  0.06% and the Dow Jones Industrial Average was off 0.07%. (By the way, the photo today is of the Andes in Chile. I didn’t have a photo of the Tetons.)

On revision second quarter U.S. GDP revised up to 3.7% from 2.3%–and U.S. stocks are off and running

posted on August 27, 2015 at 7:47 pm

Back on August 22 I posted that it looked like second quarter U.S. GDP growth would get revised upwards in a release scheduled for today, August 27. The initial estimate of 2.3% annualized growth could get revised upwards by as much as a full percentage point, I wrote.

Boy, was I wrong. Second quarter growth was revised upwards today to an 3.7% annualized rate, an increase of 1.4 percentage points from the prior estimate. None of the economists surveyed by Bloomberg forecast that big a revision. In addition, contracts to purchase previously owned homes climbed in July for the sixth time in the last seven months.

On the good news, U.S. stocks climbed with the Standard & Poor’s 500 up by 2.43 at the close and the Dow Jones Industrial Average ahead by 2.27%. (It didn’t hurt that China’s markets staged a big rally overnight, with the Shanghai Composite climbing 5.34%. That gave U.S. stocks plenty of upward momentum at the open.

So far, at least, I haven’t seen any comments suggesting that the higher than expected 3.7% growth rate might be strong enough to put a September interest rate increase back on the table. The consensus, which I don’t agree with, is that that ship has sailed.

One reason that I’m hearing today for thinking that this stronger than expected growth won’t lead the Fed to act in September is the fragility of the financial markets. Analysts raising that point aren’t gesturing at the Chinese equity markets but at the U.S. credit markets. The spread between the yields on high-yield bonds and Treasuries has expanded to 600 basis points (or 6 percentage points) as investors ramp up their anxiety about rising defaults, especially in the energy sector. Even taking out energy high yield bonds, also known as junk bonds, the spread to Treasuries is 100 basis points higher than a year ago. Does the Federal Reserve want to raise interest rates, they ask, when the debt markets are looking so shaky—at least in the high yield sector?

Volatility, which had spiked hard earlier in the weak, continued to fall with the Chicago Board Options Exchange Volatility Index, the VIX, declining today by another 9.2% to 27.52 after a 14% drop the day before. That’s quite a reversal from the charge in volatility that saw the VIX climb to its highest level since October 2011.

What is now a two-day rally in U.S. stocks put the S&P 500 on a path to its strongest back-to-back advance of the six-year bull market.

Two posts today on my paid JubakAm.com site on finding bottoms in the Shanghai and U.S. markets

posted on August 26, 2015 at 8:00 pm
NY Stock Exchange floor

Today on my paid JubakAM.com site I crawl out on a limb to look at when and where we might see an actual bottom in Shanghai and U.S. markets. Seemed like a good time to do that given the big rally in U.S. stocks today and the upcoming Jackson Hole conference that’s likely to generate some fireworks about the timing of a  Federal Reserve interest rate increase.

Looking at the long base-building that Shanghai put in from 2012 to August 2014 to set up the current rally, I conclude that we could still see another 25% to the downside in this market. I would be willing, on a risk/reward basis, however, to start putting money to work in China after another 12% or so decline. The market doesn’t have to go back to that base.

In the case of the U.S. markets I conclude that today’s bounce after six down days is a sign of a bottoming process but that the process is likely to stretch into September. I also note four stocks that I’d like to buy when that process is further along.

Just thought I’d let you know what I’m working on at JubakAM.com–I think there’s some value to you in passing on the direction of my thinking about this market on that site. Hope so anyway.

And, of course, there’s an ulterior motive: If you decide that you’d like more detail on those posts, I’m hoping that you’ll subscribe to my site at JubakAM.com for $199 a year. (By the way, you can get a full refund during the first seven days if you change your mind for any reason.)

Is a September interest rate increase from the Fed really off the table? The consensus believes it is

posted on August 26, 2015 at 7:51 pm

The consensus now says that the Federal Reserve won’t raise interest rates—for the first time since 2006—when it’s Open Market Committee meets on September 17.

On August 18, the Fed funds futures market pointed to an almost 50/50 chance (48%) of a September move in interest rates off the current zero rate that has held since 2008.

On August 25, the odds had fallen to just 28%. And markets were giving an increase in 2015 at all just a 50/50 chance. That was down from 73% on August 18.

The consensus vote is now for an initial rate increase in March 2016 (72%).

That’s what a renewed bear market in Chinese equities, a continued meltdown in emerging market stocks and currencies, and the fall of U.S. indexes into a technical (10% decline) correction will do to sentiment.

The markets—and in this case I think that means the big players on Wall Street—have decided that the Fed won’t risk adding to market turmoil by increasing interest rates in September.

There are good reasons to think that the current consensus is wrong. Wall Street may be voting its own hopes rather than coolly calculating the odds.

Why do I think the consensus might be wrong?

  • The Chinese meltdown hasn’t significantly weakened the U.S. economy—and the strength of the U.S. economy, particularly the strength of the U.S. labor market—is the single biggest feature in the Fed’s calculations. Today government numbers showed, for example, that orders for capital goods, the stuff that companies use to make stuff, rose in July by the most in more than a year. Orders for all durable goods—that’s stuff that’s meant to last for more than three years–climbed by 2%. That was stronger than any forecast by any economist surveyed by Bloomberg. And there’s a very good chance that on next revision GDP growth for the second quarter will get a big upward revision.
  • The Fed would really like to disabuse the stock market of its belief that every time markets flag the central bank will ride to the rescue. A strong belief that the Fed (and other central banks) will shower the markets with cheap cash whenever they get into trouble is a key market belief from the years following the Global Financial Crisis. The Fed would like to eat away at that certainty—because the central bank sees it as a key element in creating asset bubbles.
  • If not now, when? It’s not like the problems in the Chinese economy and financial system or the weakness in emerging market economies and currencies will end in just a few weeks. What is supposed to change that will make raising interest rates “better” in March?
  • We’re only talking about 25 basis points (100 basis points equals one percentage point) in any initial interest rate increase. Much of that has already been anticipated by the markets. And an interest rate increase of that size off of a base near 0% isn’t going to change conditions very much
  • The Fed has so thoroughly signaled a September or at least a 2015 interest rate increase that Janet Yellen and crew at the Fed may well feel the central bank’s credibility is at stake.

That’s not to say there aren’t reasons to believe the Fed will stay its hand—at least for September. Emerging markets and their currencies are indeed very fragile after China’s devaluation of the yuan. Countries such as Brazil and Turkey and Russia don’t need even 25 basis points in extra inducement for money to flow into dollars and out of the real, lira, and ruble. And we know that the current global financial market is so nervous that even a minor move—like a 4.5% devaluation of the yuan versus the dollar—can have huge unexpected effects.

The best near-term indicator of the Fed’s intentions is likely to be Federal Reserve vice-chairman Stanley Fischer ‘s Saturday appearance on a panel at the Kansas City Fed’s annual Jackson Hole conference. (Fischer, as of the current schedule, will be the senior Fed figure present since chair Janet Yellen isn’t scheduled to attend. Speculate all you want about what that means. European Central Bank president Mario Draghi is, so far, scheduled to be absent as well.)

If Fischer focuses on the strength in the U.S. economy and, in particular, on the solid gains in the U.S. labor market, it will be read as an endorsement of a September increase. Comments that indicate the Fed sees current dollar strength and low oil prices as “transitory” will also be seen as signs that the Fed is leaning toward a September move.

In the current very sensitive market, Fischer comments that point to a September increase could well set off another round of losses in emerging markets and China in the days after the Jackson Hole conference. I remain convinced, however, that in the longer run putting in place the first interest rate increase of a very modest 25 basis points is likely to help stabilize global markets. Putting the increase in the books and observing that global markets and currencies haven’t collapsed would be a very positive step toward stabilizing these financial markets.

Worth following Fischer’s comments at Jackson Hole? You bet.

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