It's been 2.5 momths since I posted one of Lance Lewis pieces. Tonight's is excellent.
Fed Mouthpiece Says A “Pause” Is Right Around The Corner
dailymarketsummary.com
Asia was mostly higher overnight, with Japan rallying over a percent to another new multiyear high. Europe was up half a percent this morning, and the US futures were up just a touch.
We opened slightly higher in the S&Ps. After a slight dip, we surged to a marginal new high for the day but then backed off slightly once again. From there, things started to get a little wild.
A Bloomberg article by John Berry (a well-known Fed mouthpiece) then hit the wires, and the title was “Fed Likely to Pause After Another Rate Increase”. That was all anybody needed to see. The S&Ps immediately exploded almost a percent to the upside. Gold and silver ramped, while the dollar slumped. Interestingly, the long end of curve was also spanked in the fixed income market, steepening the yield curve.
We hit our high for the day in the S&Ps in the early afternoon and spent the remainder of the session bouncing around near the highs to go out just off the best levels of the session. Volume was extra meaty (1.6 bil on the NYSE and 2.4 bil on the NASDAQ). Breadth was over 2 to 1 positive.
The chips were 2 to 4 percent for the most part, with a few 5 percent gainers (like XLNX) mixed in as well. The equips were up 2 to 3 percent on average. The SOX popped over 2 percent. Can we say “chasing beta”?
The rest of tech was higher across the board but unremarkable as usual. As for the momo twins, GOOG jumped 5 percent, and AAPL jumped over 6 percent. With preannouncement season coming to a close and today’s hint from the Fed’s mouthpiece, it’s a good bet that the bulls are probably going to make a play for beta and trigger some sort of catch-up move in the NASDAQ. That’s not an endorsement of the move, but as a bear on equities, it’s a reason to continue to be cautious about being short anything tech-related in my opinion.
The financials were mostly higher. The BKX rose a freckle, and the XBD rose over 2 percent to a new all-time high. MER rose a percent to just shy of a new high, and the derivative king rose just a touch. C rose an eyelash, while BAC fell a hair. GE rose a percent.
GM fell nearly 3 percent after revealing in its 10K that the GMAC sale might not go through. AIG rose a touch. ABK rose half a percent, and MBI rose nearly 2 percent. The mortgage lenders were mostly higher by 1 to 3 percent. IMH, which is a mortgage REIT, raised its dividend and jumped over 13 percent as a result. If the yield curve continues to steepen, as I suspect it may, the mortgage REITs are likely to have some sizeable bounces given how many shorts there are in those names. FRE fell half a percent, and FNM fell over a percent.
The retailers were mostly higher but fairly tame, with the RTH up just a touch. TGT rose a freckle, while BBY fell over a percent.
The homies were mixed and mostly up or down a percent or so. As interest rates move higher in the long end, we should continue to see the homies and utilities come under pressure despite what may be a continued ramporama in the rest of the stock market.
Crude oil rose 38 cents to $66.45 and a new high for the week in the wake of the UN Security Council unanimously calling for Iran to stop uranium enrichment. It also didn’t hurt that we had a big drawdown in weekly US inventories. The XOI rose over a percent. The XNG rose a percent, and the OSX rose nearly 2 percent. The JOC rose a touch, and the CRB rose just a touch to a new high for the month. The XLB rose nearly 2 percent to a new all-time closing high.
The base metals turned around from early losses and were higher nearly across the board, with both copper and zinc both making new highs.
Gold opened down about $3 near $563 this morning in the US, but it had traded as low as $560.20 overnight in the wake of yesterday’s FOMC statement. The yellow metal began inching higher well before the Berry article hit the tape, but when the article did hit, gold ramped another $7 into the close to end on virtually the very best levels of the session, up $6.30 to $573.30, which also notably breaks the downtrend on the charts that we highlighted last night. Silver also rallied and rose over 2 percent to another new multiyear high.
The HUI jumped over 4 percent to a new high for the week and the month. The juniors once again outperformed for the most part. GSS jumped over 7 percent to a new high for the month. CBJ rose over 4 percent, and NSU rose over 2 percent to another new closing high (note yesterday’s column should have read “on no news that I am aware of” regarding why NSU leaped 8 percent yesterday).
Today’s rally in the gold complex was the sort of reaction that I thought we might get yesterday if the Fed had inserted some sort of hint that it was almost done. Turns out that we got the hint after all; it just didn’t come in the official statement and instead came in the form of a journalist that the Fed frequently uses to get a message across to the market.
I still think there’s a very good chance that we could see new highs in both the shares and the metal by Friday. We may need some sort of rest after that, but I continue to believe that we are setting up for some sort of parabolic move in gold. I’d also note that the gold mutual fund flows data has now swung back to net inflows as of Monday, and as was the case back in December, this is typically when the gold shares really start to explode upward.
Keep in mind that if the gold shares are beginning a new leg up, the XAU index (currently at 139) will make a new all-time high above 157 (last seen in 1987). If we see that, it’s a pretty good bet that the gold share complex is going to go absolutely bananas to the upside. Remember, there are still a large number of gold bulls that bailed out of the gold shares back in December and are still looking for a big selloff to let them back in at lower prices, and when (and importantly if) these people see a new all-time high in the gold shares, I suspect it’s going to trigger a panic of sorts to “get in” before the train leaves the station. So, even though the golds may get overbought here soon, I’m not sure that they’re going to come in all that much, much like we saw in mid-December.
The US dollar index fell just a hair. The yen fell a hair, and the euro was flat. Not much movement in the buck so far in reaction to the Berry article, but it’s only been one day.
Treasuries were lower, with the yield on the 10yr rising to 4.80% and a new high for the year. The 2/10 spread widened nearly 4 bps to + .5 bps, as the curve re-steepened again today in the wake of the Berry article. As we get more hints that the Fed wants to stop (emphasis on “wants”), the curve should continue to steepen, as inflation expectations rise. Will the Fed be able to stop if the long end falls out of bed, however? That’s the bigger question, but we’ll jump off that bridge if and when we get to it.
The 10yr junk spread to treasuries collapsed 17 bps to 278 bps over treasuries. Obviously the credit markets are fairly excited about the idea of a Fed pause, and I suspect that will continue to be the case until long-term interest rates rise enough to spook people.
I can’t say that I am too surprised by today’s snapback rally in stocks or the Berry article indicating that a pause is right around the corner, although it only goes to show you that even a blind, deaf and dumb squirrel like myself can find an acorn every now and then.
Again, I continue to expect stocks to try and celebrate the idea of the Fed pausing. Every “Mad Money” lunatic (and his mom, dad, sister, dog, etc) is now going to want to get as levered up and long as possible ahead of what they believe will be an explosion to the upside when the Fed pauses, and the stampede to strap on beta may have already begun today.
Along those same lines, however, I expect the gold shares to continue to outperform during the rally as well, as a result of increasing fear on the part of other investors that the Fed is indeed going to stop and allow inflation to accelerate in order to cushion the impact of imploding housing bubble.
With everybody levering up ahead of the Fed pause, I still think it’s a good bet that stocks will peak slightly before or on the actual news of a Fed pause and that whatever blowoff that potentially develops from here will probably mark some sort of important peak in stocks.
For the moment, however, the benefit of the doubt continues to go to the bulls in my book. The point at which things may change is where the weakness in the dollar and the bond market finally get the stock bulls’ attention. But until then, the stock bulls remain in charge, even though the gold shares are likely to continue to leave the rest of the stock market in the dust I suspect.
Lastly, I’m going to be traveling tomorrow and Friday, so there will be no column on those days. But DMS will return at the usual time and place on Monday, April 3rd.
While I cannot provide personalized investment advice or recommendations, I welcome feedback and observations by subscribers. You can email me at Lance Lewis.
Disclaimer: Lance Lewis periodically publishes columns expressing his personal views regarding particular securities, securities market conditions, and personal and institutional investing in general, as well as related subjects.
Mr. Lewis is the president of Lewis Capital, which manages a hedge fund in Dallas, Texas. This fund regularly buys, sells, or holds securities that are the subject of his columns, or options with respect to those securities, and regularly holds positions in such securities or options as of the date those columns are published. The views and opinions expressed in Mr. Lewis' columns are not intended to constitute a description of the securities bought, sold, or held by the fund. The views and opinions expressed in Mr. Lewis' columns are also not an indication of any intention to buy, sell, or hold any security on behalf of the fund, and investment decisions made on behalf of the fund may change at any time and for any reason. Mr. Lewis' columns are not intended to constitute investment advice or a recommendation to buy, sell, or hold any security. |
