5.31.13 - Week In Review

US Consumer Confidence grew to the highest level in five years at 76.2 versus the predicted 71.2. On Friday a consumer confidence survey from the University of Michigan reported at six year highs, 84.5 for May, up from 76.4 from April. One of the main contributing factors in the recent increase was an improved job market as well as consumers saying that for the first time in years there financial situation had improved rather then gotten worse.

German unemployment unexpectedly rose by 21,000, higher than the predicted 5,000. This rise was in line with the past three months, as the labor markets in Germany suffer from the economic slowdown. The entirety of the increase in unemployment came from western Germany. Job vacancies continued their downward trend, falling by 7,000 after April's 10,000 decline, suggesting labor demand has not yet reached a trough despite the increasing jobless numbers.

German CPI rose from 1.1% to 1.7% versus the expected 1.4%. Although better than expected and better than the previous months this data alone wasn't enough to buoy the euro. The OECD updated its global growth forecasts, and continued to note that the Eurozone will likely lag and that the region continues to face stronger challenges than its developed world peers.

US GDP rose by only 2.4%, below the expected 2.5% that was released as the preliminary data. As one of the more negative pieces of data to be release this week, the GDP report tempered expectations for people and reinforced the global slowdown that we are indeed experiencing. Although not the final GDP report for the first quarter, the third and final report will be released in a month, it is the revised and more accurate of the two reports.

News Out of Japan Points to Strength

A slew of Japanese data came out today, pointing towards a mediocre pace of growth for Japan. A list of the reported data is as follows:

- Markit/JMMA PMI for May was 51.5, as compared to the 51.1 expected, showing signs of expansion and growth
- Household Spending 1.5% year over year, below the expected 3.0%
- Unemployment rate came in at 4.1%, as expected
- Job-applicant ratio was 0.89, higher than the expected 0.87
- Industrial production (preliminary) was up 1.7%, almost triple the expected 0.6%
- April Industrial Production (preliminary) registered -2.3%, better than the expected -3.4%
-  National CPI y/y for April: -0.7%  (expected -0.7%, prior was -0.9%) as expected
- National CPI Ex-Fresh Food y/y for April: -0.4% (expected -0.4%, prior was -0.5%) as expected
- National CPI Ex Food & Energy for April y/y: -0.6 % (expected -0.7%, prior was -0.8%) better than expected
- Tokyo CPI y/y for May : -0.2 % (expected -0.4%, prior was -0.7%) better than expected
- Tokyo CPI Ex-Fresh Food for May y/y: +0.1 % (expected -0.2%, prior was -0.3%) better than expected
- Tokyo CPI Ex Food & Energy for May y/y: -0.3  % (expected -0.7%, prior was -0.7%) better than expected

All in all, gains in the markets reflected the mostly positive news releases, the Nikkei posted gains of 2.06% as of writing. Bank of Japan Deputy Governor Nakaso spoke at the Japan Cabinet Office ESRI international conference, stating that aims to hit 2% inflation were in place and a time frame to hit that target was approximately two years.As such, the Bank of Japan is committed to maintaining their QE, while keeping a close eye on the yields of Japanese bonds. He doesn't expect a big spike in yields and believes that recovery for Japan will be evident mid 2013 with a stronger economy.

Mixed Data from the EU and Germany Cannot Help European Markets

A surprise came in the form of German unemployment today with four times the forecast amount, increasing by 21,000. This blew the prediction of 5,000 out of the water, bring the total unemployment numbers to 2.96 million individuals. This is the fourth straight monthly gain, hardly positive signs coming out of the banker of the European Union. The adjusted jobless rate maintained at 6.9%, just above the twenty year low of 6.8%. Other news from the area included an expected 0.1% GDP increase as well as gains in the German Consumer Price Inflation, accelerating at an annualized rate of 1.5% for May higher than the predicted 1.3%.   The month over month Consumer Price inflation also grew, at a more moderate 0.5%. 

The already good condition of the labor market makes it difficult for the numbers to improve, but economists still see a better future for the unemployment figures. “Germany’s economy is solid, and sooner or later the unemployment numbers will go down again,” said Alexander Koch, an economist at UniCredit Group in Munich. “I’m quite optimistic for the months to come.”
The immediate response in EUR/USD and USD/CHF were both evident, as EUR/USD added 0.73%, trading at 1.2948. European stock markets, however, were not able to break out of the slump, Germany's DAX tumbled 1.6%, the EURO STOXX 50 dropped 1.4%, France’s CAC 40 retreated 1.5%, while London’s FTSE 100 tumbled 1.6%.  

Inflation dropped as well for the EU bloc, down from 1.7% in March to 1.2% in April, concerning central bankers and possibly making the economic situation in Europe more difficult, as banks are no longer certain about maintaining the low margins. European central bank deputy Vitor Constancio said that financial stability in the euro has improved in recent months. A number of positive points had been observed, such as a reduction in stress in the financial sector, a fall in sovereign bond yields and spreads of distressed countries, increased bank deposits and capital and reserves, lower bank funding costs and reduced reliance of banks on the eurosystem of central banks for financing. "Nevertheless, the situation remains fragile," Constancio said.

Consumer Confidence Rises to 5-Year High, Spurs Stock Markets

The consumer confidence index was released today at 76.2, the highest it's been since February of 2008. April's index came in at 69 and a year ago the index read 64.9. This suggests that US consumer's are doing well despite the actions in Washington, showing resilience that points to signs of strength in the US economy. Additionally, home values hit their highest levels in six years. "Back-to-back monthly gains suggest that consumer confidence is on the mend and may be regaining the traction it lost due to the fiscal cliff, payroll tax hike and sequester," Lynn Franco, director of economic indicators at The Conference Board, said in a statement. Not only was consumer confidence high but prices for homes across the country rose as well, reinforcing the idea that the US is doing. During the first quarter the Standard & Poor/Case-Schiller home price index for the nation rose 10.9% from a year earlier, the largest gain since April 2006.

Initially up 208 points, the DJIA shaved points during the later part of the session but still managed to close triple digits positive for the day, extending the blue-chip index's gains to twenty straight sessions. The last time this happened was the 15 straight gains posted in 1927. The S&P recorded gains of about 10 points, closing at 1,660.06, the Nasdaq posted gains of 29.74 to 3,488.89, all in all recording gains for the past ten consecutive days. 

The biggest story was perhaps in the bond market, as analysts are picking through the Fed speakers' comments, reigniting fears that the bond purchasing program will be ended soon. This is leading to an increase in yields, creating a more bleak outlook for the bond market in general. As shown in the image below, the channel that has contained the US 10 yr Yield since August '12 looks to offer resistance around the 2.155% area, but continued US strength through positive reports could lead to a subsequent breakout of those levels. Current US 10 yr yields are around 2.122%. Close-by levels to watch out for are 2.136% (filling the April 2012 gap), 2.155% (channel resistance), 2.178% (78.6% retracement of 2012 decline) and finally 2.191 ( 38.2% retracement of 2011-12 decline). 

Using the MACD Indicator

As news today has been slow due to the US and UK holidays, I decided to take a look at the MACD (Moving Average Convergence Divergence) indicator as well as show a few areas in which it can be used to find profits. The MACD is one of my go to indicators I hope that this breakdown of the indicator is as helpful to me as it is to you.

Created by Gerard Appel in the 1970's with the histogram added by Thomas Aspray in the 1986, the MACD used historical data in the form of closing prices to notify traders of potential changes in trend or momentum. For starters, the MACD is calculated by subtracting the 26 period EMA (exponential moving average) from the 12 period EMA. Then a 9 period EMA is plotted over the MACD, serving as a buy/sell signal when it crosses. When the EMA's are diverging, momentum is increasing and as they are converging momentum is decreasing. As taken from the Wikipedia page:

Above is a MACD of the Nasdaq 100 ETF, showing different crosses that occur from the MACD indicator.  The Histogram, the bars on the zero line, represents the difference between the MACD and the MACD signal line, the 9 period EMA of the MACD. 

Three common ways of using the MACD are: 1) crossovers 2) divergence and 3) dramatic rises. Crossovers occur when the MACD line crosses over the 9 period signal line; when the MACD line rises above the signal line it is a buy signal and when the MACD drops beneath the signal line it is a sell signal. These are only one examples of signals, however, and are not reliable when not used in conjunction with other signals that may come later. Divergence occurs when the price action diverges from the MACD, signalling that the current trend is likely to end. 

Dramatic rises are also an important part of the analysis of the MACD. Dramatic rises are characterized by movements of the shorter period EMA pulling away from the longer period EMA very quickly, signaling that it is overbought and will return to normal conditions eventually. Something else that is important to look out for while using the MACD indicator is movement of the MACD through the zero line. When the MACD is above the zero line it indicates an upwards trend and while it is below the zero line it is in a downtrend. The areas above or below the zero line can also be used as reference to support and resistance areas. When the MACD is returning to the zero line it is a sign of potential weakening of the trend.

Advantages to using the MACD: a simple indicator with a lot to offer, mastering the MACD is not a very labor-intensive process but can bring about sizable rewards. 

Drawbacks to using the MACD: whipsaws and false signals are common, making it difficult to hold a profit if  fees and commission are part of your trading. Using longer time frames in your analysis can minimize the impact of whipsaw.

Additional chart to help you understand how channeling the movement of the MACD indicator can give you the jump on when a trend is reversing

Weekend Stock Analysis: AAPL

This weekend the following stock is going to be examined through a fundamental lens: AAPL. The areas of fundamental analysis are Growth, Value, Profitability and Cash Flow. 

AAPL stats compared with competitors

	EPS	P/E	ROE '12	ROE '13	ROA '12	ROA '13
AAPL	41.9	10.63	42.84%	29.14%	28.54%	19.60%
DELL	1 .06	12.54	24.21%	4.87%	5.15%	1.13%
HPQ	-6.8	n/a	-41.43%	18.61%	-10.62%	4.06%
MSFT	1.94	17.66	27.51%	32.54%	14.77%	18.48%

Growth for Apple has been impressive, beating analysts expectations by an average of 8.60% in the last six reports. Total revenue clocked in at $169.07 billion by the end of the last twelve months, an increase of more than 256% from the same duration of time three years ago where profits posted were $47.38 billion. The upcoming reports will be important to watch as the remarkable growth displayed suggests that it is gaining market shares from rivals. Sales were up 12.11% from the same quarter last year One sign of potential weakness came in a yearly drop in last quarters profit as compared to the quarter of last year, but monitoring the upcoming reports will be the only way to truly gauge the growth. Stock price rose by 0.55% after beating analysts expectations on April 24th, 2013. The next earnings report is set to be released in July. Growth was overall given a grade of a B from www.marketgrader.com, helped by a strong EPS and hindered by a less than average short term market growth as well as a medium growth potential.
 
Value is high for Apple, as stock price is relatively cheap given the EPS growth rate in the past two years. Borrowing the indicator from www.marketgrader.com, the calculation at the twelve month period end of each quarter for the past two years is for the company's annualized growth rate, which is then used to compute the company's "optimum" P/E, which show a strong 41.30% annual growth rate. Trailing twelve month P/E is 10.55 and the forwards P/E is 10.96 which is still lower than the S&P 500's 15.20 forward P/E. According to www.marketgrader.com, "Investors therefore see more value in the company's future earnings but not as much as they see in the market in general; coupled with the company's strong fundamentals, this situation could represent an interesting but risky opportunity, meaning short term volatility with the possibility of handsome returns in the long term."

Profitability is one of the strongest areas for Apple, as in the last four quarters Apple earned a profit of $39.67 billion. This profit equates to 23.46% of its sales for the period. Operating income "represents a company's earnings from its normal operations before any so-called non-operating income and/or costs such as interest expense, taxes and special items" (taken from www.investopedia.com). The operating income of Apple accounted for 30.90% of its sales in the last four quarters, more than three times the average operating income of the Computer Processing Hardware industry (7.10%). As the chart above says, the Return on Equity decreased from 37.68% to 29.28%, still a respectable amount. One of the most important qualities of Apple as a company is the total lack of debt while sitting pretty on cash reserves. 

Cash Flow up until the most recent quarter was up 4.12% compared to the same period a year earlier. Most recently the cash flow declined by 10.54% to $12.50 billion, which is the only speed bump in an otherwise spectacular financial position the company is in. According to its twelve month trailing operating income 38.56% returns were made on $135.49 billion of invested capital. The after tax cost of equity came out to 7.22%, resulting in an EVA of 31.34%. EVA, or economic value added, is the calculation of what profits remain after the cost of a company's capital, both equity and debt, are subtracted from operating profit. Along with a recent hike in the dividends paid out by Apple from $2.65 to $3.05 as of the reporting quarter on December 31, 2012 the total dividend payout amounted to $10.34 billion for the year, which at 18.71% of cash flow is healthy.

5.24.13 - Week in Review

Bernanke's speech creates a turbulent week for stocks as well as an uncertain outlook moving forwards. Bernanke said that the Fed will continue the current pace of $85 billion of purchases every month, at least until the unemployment numbers get closer to or hit 6.5%. Currently at 7.5%, there is still a sizable improvement to be made. Speculation persisted throughout his speech and the markets adjusted accordingly. As fears set in that QE would soon end, the highs of 1,690 gave way to the pessimists, finally reaching 1,648.82 during the Friday afternoon session after regaining some lost ground.

US Durable Goods report came in much better than anticipated for the month. A sign of resilience and growth of the economy came in the form of the US durable goods report, as consumer spending on goods came in at 3.3%, more than twice the amount expected by economists polled (1.5%). Although not a sign of "rip-roaring strength", Stephen Stanley of Pierpoint Securities in Stamford, CT, said that it was indeed "better than expected." The lower expectation of 1.5% came in part from the increased taxes in January as well as widespread budget cuts in March, but the strong consumer spending gives many the impression that the US is in a good position globally. Other data tempers the ideas that the global recovery is well underway, as shipments of core capital goods fell 1.5% as well as shipments of capital goods in the defense sector fell 5.6% in April.

Gains in the Nikkei 225 are trimmed by profit seeking investors. The Japanese stock market dropped over 1,100 points in a day, the largest point drop since 2000. Initial concerns of a global pullback in equities were exacerbated by losses of 2.1% in other markets such as the London FTSE-100, the French CAC and the German DAX. These events are believed to have been the efforts of profit seeking investors closing out long positions instead of fears about the global economy, although it is worth noting that we are indeed in a global slowdown, as noted by the seven month low May PMI report coming from China's HSBC.

FOMC Minutes show division in the ranks of the Fed. Although Bernanke's speeches have been eerily consistent, other members of the Fed have dissenting views on the necessity of QE and ideas as to when it should end. These dissenters spooked the bulls into the resulting drop in the S&P 500, even though their opinions matter little in the grand scheme of things. Speculation into the true meaning behind the words of Bernanke has once again proven to be the problem, as investors seem scared and uncertain. For good reason they are uncertain, in the released minutes records of ideas ranged from immediate tapering of the QE program to another participant advocating for the increase in asset purchases. Notably, “A number of participants expressed willingness to adjust the flow of purchases downward as early as the June meeting if the economic information received by that time showed evidence of sufficiently strong and sustained growth.”

What are the implications of the Nikkei Plunge?

The Japanese Nikkei 225 dropped over 1,100 points in what traders are calling either an overdue correction or a dire signal of things to come. The fall started in the afternoon session, ignited by weak Chinese data in the form of HSBC's May preliminary Purchasing Manager's Index, at a seven month low of 49.6. Another possibility brought up was that of the higher yields in play, up 7 basis points to a high of 0.955. These high yields were a source of concern for investors, as they hit levels that haven't been reached since April 5th of 2012.
During the Thursday session, words of reassurance came from Japanese Economy Akira Amari, saying that the "pace of the Nikkei’s rise recently was faster than expected." This points to a less dire situation as he tried to defuse fears that investors potentially faced as they watched the market drop over a thousand points, but it is a valid idea that needs to be fully fleshed out before the worries of the drop get out of hand. The Nikkei was one of the chief beneficiaries of the Japanese governments aggressive monetary policy as it was bolstered to an 81% gain since early October of last year, and its currency devalued by around 25%. This means that there were profits to be taken and as investors' confidence was being shaken in other areas of the world closing profitable long positions in the Japanese Nikkei secured them the cash that is indeed king. 

Fears maintained throughout the day that the drop in the Nikkei 225 would change the psychology of the market, as only 10 times in the 50 or so year history of the Japanese Nikkei has it dropped by more than 7%. So, is it profit taking with a side of weak data? Or is it a negative implication of things to come?

On Wednesday, Bank of Japan Governor Haruhiko Kuroda acknowledged the volatile bond markets, but doesn't think they will have any lasting impact on the real domestic economy of Japan. The resulting 7.3% drop in the Nikkei 225 might have shaken his confidence, but as the new day's session begins as of this writing, stocks are back up 2.7% since the opening bell. This revival in the confidence of the Nikkei will be tested in the upcoming hours, but time will tell in the end whether investors were truly just taking profits or have taken this drop to heart, becoming ever more wary of the Nikkei.

The true test of the global confidence will not likely be shown in the performance of the US stocks (as the QE crutch is still going strong) but rather in developing countries and their respective currencies. A few currencies that were dragged into the mess Thursday were developing nations' currencies such as the Mexican peso, the Turkish lira and the Phillipine peso. 

 In short, the drop in the Nikkei is testament to the dangers of buying into established rallies, as profit taking becomes a viable source of income for investors hurting in other areas of the world. As for the fears of a US market crash, we are in fact due for a correction. When is anyone's guess. If you want to know the probability, however, according to Josh Brown, history suggests an average of three 5% pullbacks a year, one 10% correction each year, and a 20% sell-off every three and a half years. Additionally, "The fact that we haven’t had so much as three or more down days linked together since December of 2012 and nary a 2% decline year-to-date, I suppose the optimal thing would be to go lower and get that out of the way. The predominant bear case of late has been the absence of a correction and the overbought readings of every sector".

Potential Warning Sign for the S&P500?

Today, Fed Speaker Ben Bernanke said that to taper the QE program would be premature and would have negative effects if they were to end it soon. Citing unemployment numbers, which by the way are hovering at 7.5%, still higher than healthy economies expect, Bernanke said "a premature tightening of monetary policy could lead interest rates to rise temporarily but would also carry a substantial risk of slowing or ending the economic recovery and causing inflation to fall further".

As expected, stocks rose on the speech. While they prematurely rose 40 points beforehand, just minutes after the prepared news surfaced they continued to rise to 85 points on the session. As the potential for tapering was mentioned the markets lost ground, but continued to make up lost ground throughout the entirety of the speech.

In general, the economy has shown renewed signs of strength, with an average of 208K jobs added per month since November, up from 138K per month for the previous six months. These signs of strength mean little if they are not in line with what the QE program hopes to achieve, however close they come.

One potential warning sign comes from the current divergence of the AUD and the S&P500. Historically, strong bull stock markets are met with Aussie strength, but as this chart shows: http://media.dailyfx.com/illustrations/2013/05/22/australian_dollar_and_the_s_and_p_500_body_Chart.png
the current divergence is quite large and noticeable. The first of two scenarios that arises from this divergence is that there is a large bubble being perpetuated by the Fed's QE program of purchasing $85 billion a month. This implies that a crash is coming, although with the continued support of the QE it will be held off for at least a little while. The second possibility is in line with the first, that a large sell-off or correction is coming for the S&P500. Even though in the previous post I said that Deutschebank and Goldman Sachs have revised their year-end goals for around 1,800, it already includes the possibility of a sell-off and a continued rally.

Critics of the purchase program fear that the continuation of extremely low interest could cause inflation to skyrocket, or at least inflate a bubble of the equities market, something that potentially could burst and disrupt the economy as a whole, similar to the housing market crash. These fears were addressed by Bernanke through confirming that if tapering were to begin, it would not be an all-at-once exit of the QE program, stating additionally that the pace could increase if it were deemed necessary.

All in all, long positions for the S&P500 are expected to taper out as the end of QE comes into view. We are in phase two of the growth, where common investors are flocking to add long positions to their portfolio in light of the S&P's recent gains. As the positions from common investors increase, it is safe to say that we are closer to the peak than anywhere else and are in the later stages of either Elliot Wave theory or Dow theory, both are signs that the downwards move is imminent. The correction, or crash, will most likely come sometime in the upcoming months, but only time will tell.

Is QE Ending? A Preemptive Analysis of the Impact of a Stoppage of QE

Tomorrow, May 22nd, 2013 the Fed's Ben Bernanke will speak at 10 am on the future of the US QE policy of buying bonds every month. Earlier today, two speakers hinted at the future of the QE program, suggesting that the program is not close to ending, sparking the 19th consecutive positive close for the US Stock Market. 

The first speaker, New York Fed President William Dudley spoke to the effectiveness of the program thus far, however he also said that he was not sure what the next best move was, whether an increase or decrease in the pace of bond buying. 

St Louis Fed President James Bullard was the second speaker, saying that the government should continue with the current program, modifying it as needed when the inflation and growth data is released. It is of his opinion that the current QE program has been very efficient and will continue to aid the economy. 

For those who aren't aware, the goal of the QE program is to keep the economy up by boosting economic growth and lowering the jobless rate. As Bullard said, it is up to these sets of data to be able to definitively say whether or not the method has been effective towards the stated goals.

“Broadly speaking, investors are really waiting to see what Mr. Bernanke is going to say in front of Congress,” said Andrew Wilkinson, chief economic strategist for Miller Tabak. “The next 20 points in the S&P 500 are probably predicated on what he has to say.”

So the question remains, what happens when the music stops? If Bernanke decides that the country has had enough QE, what is next? An insight into this question can be found if you observe the actions of the S&P with and without the boost of QE. As calculated by the good folks at www.zerohedge.com, the increase with QE is +1,142.5 points. Without? -290.6 points. Although not as dire as some people would like, it is worrying nonetheless. It seems logical to believe the next step of a removal of QE from the fundamental picture is an immediate drop in the S&P, how much is anyones guess. However if one looks at the amount of time that QE has been assisting the S&P and how many days it hasn't been in the past few years, it comes out to approximately a point per day(+1142.5 points, 1230 days, or .93 points per day) of positive for QE assistance, and approximately a point per day (-290.6 points, 289 days, or 1.01 points per day). This is a very basic average, but over time it probably will even out to a point per day movement after an initial reaction.

The bulls are out in full force, as recent firms Goldman Sachs and Deutschebank raised outlooks for year-end S&P numbers to 1750 and 1800, respectively. This implies that they both believe QE is far from over, as the only way many traders see these goals being hit is with the assistance of the Fed and QE continuing strong.