With grim headlines from Ukraine and China, a bad week for major global indexes is coming to an end.» Read More
First, the good news: we have safely put a grim January in the rear-view mirror, and we are still in the middle of the "Best Six Month" theory, (the theory that the Dow Jones Industrial Average consistently outperforms in the six-month period between November 1 and April 30th).
Now, here comes the bad news:
One thing's for sure: I find it hard to believe that the overnight weakness is due to a drop in euro zone prices. The yen is stronger, and the Turkish lira is down again as investors flock to safe haven U.S. debt.
We continue to grapple with emerging market fallout, due to lower liquidity stemming from the Federal Reserve's tapering policy. These conditions cannot be solved by some magic bullet.
Thursday is the biggest earnings day of the quarter, with roughly 10 percent (56 companies) in the S&P 500 reporting. So far, we have almost over 45 percent of the Index reporting results.
As it stands, earnings growth is at 7.3 percent—the best showing since the 7.7 percent rise in the fourth quarter (Q4) of 2012, with 65 percent beating expectations (about average), according to S&P Capital IQ. Collectively, revenue is up 3.5 percent.
Futures rallied as Q4 GDP came in up 3.2 percent, with the price index up 1.1 percent as expected, still well below the Federal Reserve's target. However, most traders are very focused on the January numbers; unfortunately PMI/ISM won't hit until next week.
The Federal Reserve statement continued its tapering program as expected, but other than that the statement was essentially unchanged, with no change in the forward guidance.
There was no nod to emerging markets, not even an indirect nod toward "recent market volatility" or any other vague stand-in term.
This, to my mind, is a sign of strength. The Fed seems to be increasingly confident that the economy is growing modestly, and judging by the reaction of the bond market (the 10-year yield fell below 2.7 percent, first time in two months), they are convincing many players that tapering is indeed not tightening.
But modest growth does not mean robust growth, another reason bond yields may be moderating. I mentioned this morning that many of the attendees I spoke with yesterday at the ETF.com Inside ETFs Conference in Florida believe the taper means growth will slow, so they are more cautious on equities in anticipation of Q4 being the high GDP print for the cycle.
As for emerging markets, they have generally reacted negatively to the Fed announcement, with the main Emerging Market ETF (EEM) briefly fluttering, then moving to the lows of the day.
Bottom line: The Fed went as far as it could to continue the taper and keep everything else unchanged. Given there was no press conference, it was probably a smart move, even if it means a modest down move for stocks.
One thing is for sure: The market weakness is not because earnings are terrible. We are one-third the way through earnings season...169 companies of the S&P 500 has reported so far. We have earnings growth of seven percent, the best showing since the 7.7 percent rise in Q4 2012. About 70 percent of those reporting are beating on earnings (above the average of 65 percent). Revenue growth of 3.5 percent is also strong.
Despite some high-profile guidance disappointment, such as Boeing (BA) today, 40 companies have provided earnings guidance, with 25 negative, 15 positive, for a negative/positive ratio of 1.7. Historically, that ratio has been 2.4 over the past 15 years.
At first glance, it seems to me that the price decline for those who disappoint on guidance is steeper than it is in the past. BA is down 5.7 percent; EMC (EMC) down 3.2 percent, Tupperware (TUP) down more than six percent. But this is the problem in a down market: Stocks decline on their own news as well as to a general decline in the market, which makes the decline worse; in a rising market, the sell-off is not as steep even in those stocks that disappoint.
Once again, we are at one of those strange moments in modern trading where an obscure currency—the Turkish lira—is being watched carefully this morning, specifically the dollar/lira relationship.
Why? Because the aggressive actions by the Turkish central bank overnight--raising their overnight lending rate from 7.75 percent to 12 percent--are being watched to see if that kind of strong medicine will stabilize the markets.
Many traders are not trading—they just appear to be watching.
There's lots of reasons why traders don't like China, principally that it is a Black Box: not only is there economic uncertainty, there is a lack of transparency. These issues have been around for a long time.
But a more recent issue has been an apparent credit crunch.
I noted yesterday that it's been a very strange year...there are a lot of divergences in the market.
The Dow Jones Industrials are down 2.4 percent, but the Dow Transports are up 2.3 percent, and the Nasdaq and the Russell 2000 are also up fractionally. In other words, it's been largely big-cap weakness in 2014 while the rest of the market is holding up fine.
But let's look a little bit farther below the surface.
An ugly day for the markets. We saw two separate drops in our markets:
First: Last night in S&P futures on the poor Chinese PMI, which moved unexpectedly to 49.6 (indicating contraction) from 50.5 in December. New orders, exports, employment and backlogs all saw declines; and
Second: This morning on the open.
What's going on? Concerns about Chinese growth, mostly. Most Chinese economic numbers have been below expectations for the past several weeks. The HSBC flash manufacturing PMI last night was another surprise. The fall was mainly due to a big drop in new orders, suggesting that domestic demand may be falling. There are also signs that inventory levels are high, not good if demand is moderating.
There also appears to be a bit of a credit crunch going on, and money seems to be very tight. The People's Bank of China had to inject large amounts of money into the economy this week to allay concerns of a shortage of cash ahead of the Chinese New Year.
The Dollar/Yen relationship is the key. The yen strengthened against the dollar overnight. The yen carry trade (borrow yen cheap, convert to dollars and invest) is one of the prime sources of funding for the U.S. stock market.
Many hedge funds are highly leveraged; they get some of that leverage from the yen carry trade. When the yen suddenly strengthens, it makes that trade more expensive, and at some point prohibitively expensive, which requires unwinds of the trade.
That means selling stocks with money bought from the carry trade, and it means bonds higher, gold rallies.
There's another issue: Stocks are expensive. I mean they are high-priced. The leading stocks are the speculative high-tech names. The price points of these stocks are in the stratosphere: Apple $548, Amazon $400, Visa $228, LinkedIn $217 and Tesla $179.
That means if you want to buy these stocks, you need a ton of capital. The yen carry trade becomes even more important.
Adding to the problem: Everyone is on the same side of the boat, so it creates problems because there are tons of offers and no bidders.
This is creating a lot of havoc in the currency world, and there are some specific issues affecting other countries as well:
Stock futures were trading up after the close yesterday, as earnings from eBay and Netflix contributed to the upbeat mood. That all changed around 8:30 PM ET, when China's HSBC flash manufacturing figures came out.
It dropped notably in January, falling to 49.6 (indicating contraction) from 50.5 in December. New orders, exports, employment and backlogs all saw declines.
We are going into the Chinese New Year, so not clear if this is slower growth or just a seasonal issue.
Who had the most influence on financial markets in the last 25 years? CNBC has released a "Top 200" business leaders today, with the goal of narrowing it down to 25, with viewer input.
It's a fascinating list, a trip down Memory Lane for those of us who were around at the very beginning of CNBC 25 years ago.
I'd like to narrow the question down to the area I spend much of my time: Financial markets. Who had the most influence on financial markets? Who had the most influence on the way we trade, on the stock/bond/insurance/banking industry in the past 25 years?
It's a narrower question, but for the people I hang out with--sell-side traders and long/short equity hedge fund traders--it's the most relevant question.
At first blush, you would come up with a list that's top-heavy with three groups of people:
I've thought about this for a few days and talked to a few dozen trader friends. Here are the eight people I think mattered most, in no order:
First: Central bankers Ben Bernanke and Alan Greenspan, first for the rise of the Central Bank and its unprecedented power vis-a-vis financial markets...and Bernanke in particular for having staved off a nuclear financial crisis that brought the world to its knees.
Second: Sandy Weill, the former head of Citigroup who broke Glass Steagall and created the mega-bank. His dream of bringing together a bank (Citi) with a brokerage firm (Smith Barney) and an insurance company (Travelers) created the first "financial supermarket" in the late 1990s. Repeal of Glass Steagall got all the huge European Banks into the investment banking business, forced Goldman Sachs to go public to raise the capital necessary to compete with them, and was the final dagger in the partnership culture on Wall Street.
Third: Bill Gross for polarizing bond picking. It's hard enough to pick stocks that outperform, it's even tougher to pick bonds, but Gross of PIMCO emerged as a true bond superstar and amassed an enormous following around active management of bond portfolios.
Fourth: Charles Schwab. It's hard for anyone to remember, but commissions were fixed by law until 1975; the elimination of those commissions allowed Schwab and his imitators to change the way stocks are owned and traded. He has run a great retail business, offering advice (and, at times, solace) to his customers, and they revolutionized the retail business through cheaper commissions and the internet. He made E*TRADE, Scottrade and TD Ameritrade possible.
Fifth: Mike Bloomberg. Bloomberg terminals are, hands down, the finest terminals in the business. Just ask anyone who uses them and suddenly can't get hold of one. He changed information technology and the way information is disseminated.
Sixth: Ken Griffin. He created Citadel from scratch, and is one of the great pioneers of quantitative analysis. He used the most cutting-edge technology long before anyone else--trading activities like algorithmic trading and high-frequency trading were employed by his firm early on. He has survived periods of extreme volatility and turmoil that have put many of his contemporaries out of business. He was an early critic of the poor risk-management procedures among Wall Street firms prior to the 2008 crash. He has never had a serious regulatory issue that I am aware of. My one beef with him is that he is reclusive and does not like to talk to the press or anyone else, although that seems to be changing in the past couple years.
Seven: Eliot Spitzer. I know, strange choice. But he was responsible for forcing the division between research and investment banking, which included the prohibition that research analysts could not be paid out from investment banking fees. This was a sea change for the cost revenue model of every firm on Wall Street. This may be a stretch, but I also think his pursuit of Dick Grasso accelerated the move toward electronic trading because Grasso was a big defender of the NYSE floor; after his premature ouster his successors were much more sympathetic to moving away from the floor.
However, if I had to single it down to one person that I think had the most influence on the financial markets, the one I would choose i:
Eight: Jack Bogle. Heinsisted that the average investor would not, in the long run, outperform the market, and set up a mutual fund company (Vanguard) way back in 1974 around that concept, which was built on the ideas of economists like Eugene Fama and Burton Malkiel.
The indexing concept, he believed, would be The Great Equalizer for the average guy.
He won. He created the Vanguard 500 Index Fund in 1975, the first index mutual fund. It gave rise to a long string of low-cost funds, altered the way millions of Americans invest, saved those investors billions of dollars in fees, and indirectly led to the creation of the entire exchange-traded fund (ETF) industry.
JPMorgan's chief U.S. equity strategist, Tom Lee, said that a "construction boom" seems imminent and should boost stocks.
Global investment management firm Pimco underperformed its peers last month, according to estimates by data tracker Morningstar, following internal strife at the company.
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