Saturday, October 8, 2016

MAD Weekly Review 10/8/2016

"Train the same. Stay the same" -  Dan XSport Fitness Trainer.

That quote is from a trainer friend of mine. He was hitting some impressive heavy sets of dumbbell snatches, and when I commented on it that was his response. He and I are about the only two people that ever do any Olympic style training at the gym. I consider that an absolute shame considering the vast benefits from that style of training.

I mention this because when things stay the same economically you get the same results. Or in other words
when interest rates and policies don't change you don't get much action.  This week we finally started to see some action from policy makers, and participants finally started to hit full throttle on their expectations and portfolio management. Specifically I mean a change in US interest rates, ECB tapering, England completing it's steps to leave the EU.

This week wasn't the same in a few ways.  We had major shifts in interest rate expectations which affected Gold, Oil, and other rate sensitive sectors. Then came comments from ECB and it's tapering of asset purchases. Followed up with comments by British Prime Minister Theresa May that she would absolutely follow through with Brexit which made an exciting week for the Pound which fell nearly 3%. That's a large move for a currency. Although the Pound has been the poster child for currency volatility this year.

It's now no secret the Fed is raising rates this year. most people expect that to happen in December to avoid doing it during the elections in November.  Since the Fed's August rhetoric, and the subsequent meeting in September when Yellen essentially said rates are going up soon, the market has been slowly rotating and adjusting it's stance. Interest rate expectations jumped as high as 69.5% for December this week.

After 2 months sector rotation is readily apparent as large down moves this week have capped off recent trends. The largest rate sensitive sectors Real Estate(XLRE), Utilities(XLU), and Financials(XLF) are where we see this rotation. XLRE hit a high right at the end of July, and ever since has been heading down hard. Utilities also hit a high earlier in July and it's been bad news ever since.

Visit to see more great charts.

You can see XLF(top line) is up 8% the last 3 months, and while it's hard to tell from the chart XLU and XLRE are both down around 8%. That's a 16 point spread between them both!!! That's monstrous.  Financials benefit from rising rates as it increases their net interest margin, or basically the difference between how they fund loans short term, and lend them out long term.  Real Estate and Utilities on the other hand benefit from lower lending costs, and not so much from higher lending costs.

Gold and Oil also had large moves. The ETF that tracks Gold, "GLD", moved 5.58% this week as it hit a low of $118.42. That's below it's 200 day SMA which it hasn't traded below in 8 months. Gold is influenced by a variety of factors. Lately currency and interest rates have been leading the way. As traders start pricing in higher rates and US Dollar strength, something else must go with it.

West Texas Crude Oil(WTIC)was up 3.6% for the week and 11.6% the last two weeks as OPEC members talked about finally getting their act together to curb production. We'll see if it lasts. The cartel has only 4 members in the top 10 oil producing nations. So their control isn't what it used to be in the 60's and 70's. This might come as a surprise to most people, but the USA is the worlds largest producer of oilNote the divergent gap between GLD and WTIC.
Visit to see more great charts.

Now onto really awesome Economic stats

We received a lot of economic data this week. Construction spending was down a bit(-0.7%) after having a strong season.  Also Auto Sales came in strong with 5.30 million units, up from 4.9 million.  While good for auto-makers I still can't figure out why despite strong sales valuations at many auto-manufacturer's are so low.  TM, F, GM, HMC, and more sport lower than P/E's than the market average right now.

Now our never ending jobs review.  Remember we have a Jobs Problem due to structural issues!!! Non-Farm Payrolls(new jobs) came in at 156k and August was revised up a bit to 167k.  That's strong enough for the Fed in my opinion. Especially since Initial Claims for Unemployment(newly unemployed people) continue to come in at record lows. Here we see the extremely divergent paths of both data sets.

The market is most likely going to continue on it's choppy path as it awaits the November elections, and occasional turbulence from overseas. Despite the markets being down for the week, Energy stocks actually provided a boost so it could have been worse.

We also have Q3 earnings season starting next week, and hitting full stride the two following weeks. So expect that to dominate headlines and market movements. It will be key to see what companies are going to do as they prepare for higher interest rates, and if they'll continue to slow down dividend increases as the year comes to an end.

IndexStarted WeekEnded WeekChange% ChangeYTD %
S&P 5002168.272153.74-14.53-0.75.4
Russell 20001251.651236.56-15.09-1.28.9
That caps it off for the week. I have a ton of great articles coming out the next two weeks so continue to stay tuned. Enjoy the best days of Autumn, or Fall if you prefer. The MAD Consultant

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