Thursday, February 28, 2013

Doomsday Deferred


Maybe we can stay lucky

BOM has always been concerned about the rising burden of government debt interest, and we've blogged it many times. But we must admit that so far, it has not been quite the problem we feared. In fact, in the two years since we clocked off, official debt interest has only increased by £4bn pa - a surprisingly small sum when set against annual borrowing of £100bn plus.

The reason of course is that for the last five years government borrowing costs - gilt yields - have remained at historically very low levels. Right now, the yield on ten-year gilts is back below 2%, which means new borrowing is cheap, and refinancing old maturing gilts with much higher yields actually cuts overall debt interest payments. So the doomsday machine has remained quietly dormant, at least for taxpayers (although savers and retirees taking out annuities have suffered grievously from low interest rates).

However, nobody should assume this situation will last for another five years.

For one thing, the Bank of England will not go on buying up the government's debt indefinitely. The bulk of its £375bn Quantitative Easing asset purchases have been government debt, and when the QE programme ends, so will the purchases. At a stroke, one of the main factors holding down gilt yields will be removed.

Second, all around the world central banks are pumping money into their sickly economies. So far inflation has been quiescent, but the lesson of history is that sooner or later, open money sluices overflow into raging inflation. Bond investors head for the hills, bond prices sink and yields surge. There's no good reason to think this time will be any different.

True, the official debt interest projections do not incorporate this doomsday outlook. They assume that gilt yields will rise gradually to just 3.4% by 2017-18. But they also tell us that every one percentage point above their base assumption adds another £8bn pa to debt interest by the end of the period. So even if yields merely returned to their average during the decade immediately before the Crash, it would add £12-15bn to annual debt interest. And if inflation does take off, yields will go a lot higher.

There's a further point, one we have also blogged many times: the official measure of debt is a serious understatement of the Real National Debt. Among other things, the official debt figures ignore the government's pension obligations - both to public employees and state pensioners - and PFI. Which means that to get a true measure of debt servicing we need to add on to the cost of debt interest, the annual costs of servicing those obligations. Which is what we've done in the following chart (all figures taken from latest OBR, DWP, and HMT projections):


What we're saying here is that by 2017-18, payments in respect of the government's past debt obligations will amount to £200bn pa. Which means that getting on for one-third of everything taxpayers hand over is going to service debt. The amount left over for everything else - health, education, defence, law and order, and all - will be severely squeezed.

Doomsday may have been deferred, but even without the likely blow-out in the gilt market, servicing the government's debts is set to make life increasingly difficult.

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GDP Gets Slight Bump For Q4

Markets are mixed to higher in early trading.  The second estimate of Q4 GDP was raised from its original estimate of -0.1% to a small gain of +0.1%.  The boost came from an upward revision to real final sales which was revised to a gain of 1.7% from 1.1% previously.

Also, the Chicago PMI for February came in above expectations at 56.8, which was also higher than January's reading of 55.6.

Asian markets were higher across the board overnight, expect for India where the government proposed a one-year 10% tax surcharge on high income earners.  Japan's PMI rose to 48.5 and its housing starts rose 5.0% last month.  China advanced 2.3% on hopes economic activity will pick up.

Europe's markets are slightly higher except for Italy where concerns persist about the new government (or lack thereof).  Spain's Q4 GDP contracted -0.8%.  And the Eurozone CPI came in at 2.0%.

The euro is slipping today and the dollar is rising.  This is weighing on commodities.  Gold prices are back down to $1587, and oil prices are a bit lower near $92.60.  Copper and silver prices are lower as well, while ag prices look firm.

The 10-year yield is slightly lower at 1.88%.  And the VIX is up 1% hovering near the 15.0 level after a big 2-day plunge from the 19 level it closed at on Monday.

Trading comment: The market rallied strongly yesterday, showing surprising resilience following Monday's sharp selloff.  Volume wasn't as high as during the selloff, which is a slight knock on the rally.  But it's the price action in the end that counts.  Fresh breakouts in individual stocks have decreased as many stocks were already extended from strong runups and still need more time to consolidate those recent gains.  Overall, the action in the market appears pretty healthy and weakness can be used to add to stocks.  We continue to look for opportunities to increase equity allocations at the margin while trimming back plain vanilla fixed income exposure.

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Wednesday, February 27, 2013

The Freeze That Never Was


We need a new freezer

Back in his first budget in 2010, George Osborne imposed a two-year public sector pay freeze. It supposedly applied to all staff except the low paid, who were to get a flat £250 annual increase.

Unfortunately the freeze failed, as can be seen from the path of average public sector earnings since then:


Moreover, while the official ONS earnings stats show a 5% increase, calculations based on dividing the total pay bill by the number of employees suggest the true pay increase may well have been closer to 10%.

The pay freeze was a key element in George's attempt to curtail spending, so this is a serious failure. With a starting pay bill of around £170bn, a 5% overshoot is getting on for £10bn pa, and a 10% overshoot closer to £20bn. Annually.

So what went wrong?

Well, some of it - maybe one percent - is explained by the decision to exempt lower paid employees. Some may be explained by changes in the composition of the workforce. But most of the overshoot almost certainly reflects the operation of our old friend the incremental scale.

Virtually unknown in the private sector, this is the long-established practice of giving public employees guaranteed annual pay increases simply for serving another year. So for example, a newly qualified teacher generally starts on a salary of £21,588 (outside London). But she is starting at the foot of an incremental scale which then carries her up to £31,552 within 5 years - an almost 50% increase which is awarded irrespective of fiscal restraint or a Chancellor's freeze.

Yes, of course, experience does generally make employees more valuable, and over time we'd expect to see that reflected in pay. But in most of the private sector, increases are never automatic, and in tough times for the business a pay freeze generally means just that - a freeze for everyone, irrespective of their additional experience and overall merit. The viability of the business must come first, with the understanding that individual injustices can always be righted once the crisis is past.

And remember that this non-freeze comes on top of public sector pay that is already excessive against private sector equivalents. According to the ONS, on a like-for-like basis public sector pay rates currently exceed private sector by around 7%. The Institute for Fiscal Studies comes up with a similar 8% figure.

And on top of that, 80% of public sector employees still enjoy index-linked final salary pensions that are simply not available to most private sector employees: indeed, only around 10% of private sector workers now have any final salary pension.

How much is that worth? A lot: previous estimates suggest that higher average employer pension contributions in the public sector boost total rewards by about 10%. And in addition - even after recent reforms - public sector pension contributions are insufficient to fund the projected final cost of the pensions themselves. The difference will have to be made up by taxpayers, which adds further to overall rewards in the public sector.

In the BOM book (chapter 2) we present estimates suggesting the overall overpayment - taking account of both the pay premium and the pensions benefit - is of the order of 30-40%. In money terms that's somewhere in excess of £50bn pa, a sum that would go a long way towards cutting the deficit.

With such a big annual overpayment, the failure of George's freeze is worrying. In fairness, he clearly recognises the problem, and has at least attempted to tackle it - both through pay and action to reform pensions. But he hasn't done enough. And replacing his freeze with a 1% future cap was most unwise.

We will return to this.

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Stocks Rally On Strong Economic Data

The market is higher for a second day after bouncing from Monday's large selloff.  This morning investors got some good news in the form of solid economic data.  And Bernanke continues to testify before Congress in Day 2 of his bi-annual testimony.

The first economic report was durable goods.  The headline figure showed a decrease of -5.2%, but this was due to a sharp 46% drop in defense aircraft orders.  Excluding  transportation, durable goods rose a solid 1.9% in January. 

The second piece of data was pending home sales for January, which rose 4.5% on top of last month's 4.3% rise.  Today's home sales data was much better than expected.

Asian markets ended mostly higher.  Hong Kong's GDP rose 1.2%.  Taiwan industrial production surged 19.2%.  And Japanese retail sales declined -1.1%.

Europe's markets are slightly positive following selling off the last 2 days.  Italy auctioned off debt which met its target, but yields were about 70 basis points higher than previous auctions.  We have been highlight the Italian election because of its market impact.  Yesterday a top German economic advisors said that the results of the Italian election could cause the euro crisis to return "with a vengeance".

The dollar is lower today, but not helping precious metals.  Gold prices are lower to $1602, and silver and copper are lower as well.  Ag prices are up a bit and oil is a tad higher near $92.75.

The 10-year yield is roughly flat at 1.87%.  And the VIX continues to fall from its Monday highs, down another 11% today back below the 15 level.  Quite a turnaround.

Trading comment: The market is nicely higher for a second day.  But yesterday's gains came on lighter volume, and it's still early in the trading session today.  Monday's high volume reversal is likely to take more than a few days to be erased.  I continue to think that at the very least the market has more work to to in terms of time with this recent pullback/consolidation.  As such, we are not inclined to chase this 2-day bounce, but would rather look for further weakness to use as a buying opportunity, possibly as the S&P 500 approaches its 50-day support.

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Tuesday, February 26, 2013

Housing Data Remains Strong

The markets opened higher this morning on the heels of some solid economic data and also an attempt to bounce from yesterday's late day selloff.

The December Case-Shiller Home Price Index rose 6.8%, on top of last month's 5.5% gain.  Additionally, new home sales for January rose to 437,000 from December's pace of 378,000.  This data has helped boost homebuilding stocks in early trading.

Separately, the latest consumer confidence reading for February rose to 69.6, well above estimates and above last month's reading of 58.6.

But the spotlight today will be on Fed Chairman Bernanke who is appearing before the Senate as part of the Humphrey-Hawkins testimony.  He will likely reiterate the Fed's stance to remain accomodative until economic conditions warrant easing back on asset purchases and raising interest rates.

Europe's markets are lower for a second day after Italian elections remain uncertain and worry investors about the fate of recent economic reforms in Italy.  Italy's stock market is down -4% today, and weighing on Europe at large.

Asian markets were down across the board overnight on the heels of a big down day in the US as well as continued reports out of China suggesting that they are looking to tighten property measures.

The dollar is flattish today and commodities are mixed.  Gold prices are bouncing above the $1600 level to $1611, while oil prices are weak again down near $92.50.  Copper and silver prices are higher. 

The 10-year yield is fading further back down to 1.85%.

And the volatility index is down 5% to 18.0 after spiking a whopping 35% yesterday, it biggest move since August 2011.  In our experience, big spikes in the VIX like yesterday don't usually market the end of higher volatility.  So we are managing risk appropriately.

Trading comment: This morning's bounce was fairly weak and is already beginning to lose steam.  Yesterday's selloff came on high volume, and the number of distribution days (high volume selling) in the market has grown recently.  We think this pullback has more work to do, partly in terms of testing lower levels on the indexes but also in terms of time.  Most selloffs take somewhere in the neighborhood of 4-6 weeks to run their course.  So in that sense we are still in the early phases of this current correction.

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Monday, February 25, 2013

So How Are Those Cuts Coming Along?


Are we quite sure these things work?

When we left on our two year sabbatical at the start of 2011, public spending was running at an annual rate of £700bn (Total Managed Expenditure). Now we're back and the most recent official figures say it's running at £674bn (2012-13). So that's a cut of around £25bn in just two years. Fantastic!

Hmm... given what we know about previous cuts programmes, that actually sounds a bit too fantastic. Perhaps we should lift the bonnet and check the underlying figures...

Ah... now we can see. It turns out that the official spending figure of £674bn is net of a £28bn inward transfer of assets from the Post Office pension fund. Removing that bit of jiggery-pokery, we discover that underlying spending is actually up. Moreover, if it hadn't been for a big fall in investment, the increase in overall spending would have been getting on for £20bn. Two days back, and we're already reminded never to take official headline numbers at face value.

Looking forward from here, the most recent projection from the Office for Budget Responsibility (OBR) has spending continuing to rise, reaching £745bn by the time of the next election. So despite the talk, that's continued growth throughout the Parliament. Two years on, and we seem to be stuck in the same old place.

Yes, of course, we ought to adjust for inflation. But even when we do that, the planned cuts look more like a scratch compared to the huge Labour spending splurge they're supposed to be addressing. Here's the OBR's five year projection spliced on to the back history:



True, spending is down a bit from its peak between 2008 and 2010, but that simply reflects the completion of Crash related emergency capital spending. From here on, overall spending stays flat in real terms right through to the election. It's the next government that's meant to get the line heading down again. Cuts, what cuts?

What the coalition is actually doing is to cap, not cut. The idea is that by holding the line on spending it will allow time for economic growth to do its magic work and boost tax revenues. The public finances will eventually rebalance as revenue catches up with spending.

Which is a great idea if you can somehow get some growth. In fact, it's pretty well what the Thatcher government did during the 1980s. They never did manage to cut spending - as we can see from the chart - but they did sit on it for a prolonged period. And in their case, they did manage to get some growth going again so tax revenues grew strongly.

Now, just remind me - how did they get that growth again? Wasn't there something about slashing tax rates and breaking up public sector monopolies?

Next month George presents his third budget. He's already taken steps to cut taxes on enterprise and effort, but the clock is ticking louder now. We need to see more tax cuts.

Spending? Well, as we argue in the book, tinkering around at the margins isn't going to do it. We need full-blooded structural reform to both public services and welfare entitlements. We'll be taking a closer look at both over coming weeks.

PS Many thanks to all of you who've welcomed me back to the blogosphere. Quite a few of my must-read blogs - such as the good Doc Crippen - have disappeared over the last couple of years, which is a sad loss. Yes, it is a commitment, and yes, it can eat time, but blogging is still a great way to share ideas, and for those of us beyond the Westminster bubble it is a way of contributing to a wider debate.

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Monday Morning Musings

There are no US economic reports this morning which has left the markets to take their cue from overseas.  The big news around the globe this morning is the Italian elections.  Stocks opened higher amid indications that Pier Bersani's party would be victorious.  But as conflicting reports began to surface, the markets early gains began to fade.

This can be seen most clearly in the Italy ETF (EWI).  It opened 4% higher this morning but has since reversed all the way down to a 1.1% loss so far.  The Dow and S&P 500 also opened in positive territory but as of now have given up those gains and are trading near the flat line.

Europe's markets were all higher this morning but are more mixed as Berlusconi makes headway in the Italian polls.  After the close on Friday, Moody's downgraded the UK from its 'AAA' rating.

Asian markets were higher across the board overnight, led by a 2.4% gain in Japan.  China rose 0.5% despite its HSBC Manuf. Indiex missing estimates and coming in at 50.4, a four-month low.

The dollar is still lower today, and commodities are mixed.  Oil prices are flat near $93.10 while gold prices are bouncing a little to $1585.

The 10-year yield is flat near 1.96%.  And the volatility index was lower earlier but is currently nearly 2% higher to 14.45.

Trading comment: If the market gives up its gains today and closes in the lower half of the day's range, it's likely a good indication that the market needs some more time to consolidate its recent months of gains.  The same comments could apply to lots of stocks that have risen a lot lately and appear extended in price.  I think some consolidation would be healthy for the market here, and provide a sturdier base for further gains.  This week is the last week of trading for February with March starting on Friday.  Looking back at market history, March is one of the more volatile months and the prospect of a correction would not be all that surprising.  Especially if bullish sentiment remains overly complacent in the weeks ahead.

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Sunday, February 24, 2013

Sure Enough, Two Years Later...


That's the Xmas presents sorted

It took a whole lot longer than expected, but the book is finally written and published. Hurrah! Imaginatively entitled Burning Our Money, it's available now from Biteback, Amazon, Waterstones, and all good booksellers.

BOM the book draws together everything we've learned about government waste during six years of blogging it. The themes will be familiar to regular readers of the blog, but the book explores the issues in greater depth, setting out some possible solutions. And as always with BOM, there are plenty of facts and figures to support the analysis.

Here are some chapter headlines:

  • Despite all that agonised wrangling over cuts, government still spends nearly half of everything we earn: the OECD says that government spending will consume 48% of our GDP this year, compared to the international average of 42% (chapter 1).
  • The public sector routinely overpays for its supplies and labour, with staff getting substantially more than their private sector equivalents: depending on how you value those gold-plated pensions, labour costs are overrunning by as much as £60bn pa (chapter 2). 
  • Although NHS spending doubled under Labour, the NHS still underperforms overseas counterparts, causing thousands of avoidable deaths: according to the OECD 50,000 people under the age of 75 die every year from conditions that should have been treatable (chapter 4). 
  • Our government pays welfare benefits to three-quarters of British households, despite our high level of general prosperity (chapter 6). 
  • Our state schools are among the world's most expensive, yet performance is slipping down the international league tables and we suffer the worst social mobility (chapter 8). 
  • Our criminal justice system is the most expensive in the developed world, yet our crime rate is one of the highest (chapter 9). 
  • Compared to the most efficient governments elsewhere, ours wastes enough money to abolish income tax for everyone earning less than £50,000 (chapter 10). 
  • Despite promises of simplification and transparency, our government continues to hide its true costs behind a murky shroud of stealth taxation and disguised borrowing (chapters 11 and 12). 
Of course, none of these issues are exactly new, but when we dwelt in the land of milk and honey - the one from which we were so cruelly ejected in 2008 - we reckoned we could defer them until another day. No longer. Out here in the chilly wastes of mountainous debts, broken banks, and marauding competitors, we must act or go under. When even the credit rating agencies recognise the problem, we have to act. Somehow we've got to grip government spending and bring it back down to a sustainable level - which we reckon is around 35% of GDP.

Nobody says it will be easy, but it has to be done. And that's why we need to understand just how the government comes to waste so much of our cash. Because the irony of our present sticky position is that if we could somehow eliminate the waste, we'd pretty well eliminate the overspending problem - the numbers are that big.

So what can we do? To start with, we can learn from what works abroad. And the biggest lesson there is that size matters: it really does. The most efficient governments among developed economies are almost always the smaller ones. We've blogged a version of this chart before, but this one comes from the book (chapter 10):


Beyond that, choice and competition work. Just like with our supermarkets, when the suppliers of health and education services have to compete for customers, efficiency is driven up - something we can see operating in health systems based on competing social insurers (chapter 5), decentralised public service systems with localised tax authorities (chapter 3), and increasingly in free school systems (chapter 6).

And yes, supermarkets drop clangers too, but when they do so they have to put them right pronto: compare and contrast the speed with which Tesco moved to tackle its horsemeat disaster, with the long and shameful prevarication following recent disasters in the NHS (Mid-Staffs) and the BBC (Savile). As customers we have no effective power over tax-funded suppliers - they get paid however shockingly poor their service - and we can only watch as our politicos bicker over who's to blame. Far more powerful if suppliers who persistently fail us simply don't get any more of our business.

And that's the main conclusion of the book. To achieve a serious reduction in government waste, we need a serious restructuring in the way public services are delivered and paid for. We need real choice and competition, which among other things, means breaking up the NHS, accelerating the move to school independence, and empowering local councils by decentralising the tax system (chapter 13).

Restructuring like this will not be at all comfortable, and even worse, public service reform is only part of the discomfort. It's going to be just as necessary to cut welfare entitlements, and not only for those famous scroungers (chapter 8). Decent hard-working families and pensioners will also have to share the pain, with for example, the state pension age increasing to at least 70 (chapter 12).

So refreshed by two years of intensive thinking about such unthinkables, it's back to the blog. I do hope some of you will buy and read the book, not because I hope to get rich on the royalties, but because I think the issue of government waste needs far more public exposure than it gets. True, the awareness of waste has increased over the last decade, and the Coalition has taken a number of steps to address the issue. But there's much left to do, and the really tough decisions remain ahead of us.

We just have to keep plugging away.

PS Wat Tyler: after six years of non-stop blogging action, Tyler reckons he's too knackered to resume. So I'll be taking his place. Hopefully I can persuade Tyler's old muckers like the Major and Mr Gomulka to contribute their own bracing observations, just as they've done in the past.

PPS In restarting the blog I've transferred it onto Blogger's new enhanced platform. It promises a better blogging experience going forward, but it does mean the blog no longer shows the old comment streams - sorry about that. We've also lost some of the blog-roll links and other side-bar items, but I will be able to reinstate them.

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Friday, February 22, 2013

Early Bounce From 2-Day Selloff

The market is bouncing in early trading following the 2-day selloff that took the major indexes down by roughly -2%.  I don't expect a big pickup in volume as its Friday, so traders will have to wait until next week to see if sellers emerge again or if the brief selloff was enough to work off the recent overbought condition.

There have been a few more earnings reports trickling in.  On the upside are HPQ, DRI, AIG, and PSA.  On the downside is ANF.

There are no major economic reports to speak of today in the U.S.

Asian markets were mostly lower overnight.  China and Hong Kong both closed lower on continued concerns that Beijing will move to further tighten policy to cool home price speculation.  The central bank head in Australia said they may be done lowering rates as they wait for previous cuts to work their way through the system.  And Singapore reported GDP rose +1.5%, above expectations.

Europe's markets are higher across the board today as they too rebound from sharp 2-day selloffs.  Contributing to the rebound was a strong business climate survey in Germany that rose to 107.4.  The FT is reporting that Bankia will report an annual loss of 19 billion euros next week, which would be the largest loss in Spanish corporate history.

The dollar is higher for a third day and still pressuring commodities.  Oil prices are a bit lower near $92.70 and gold prices are fading a bit also down to $1572.  Copper and silver prices are weak again also.

The 10-year yield is lower to 1.96%.  And the volatility index is hovering right around the 15.0 level.  The VIX had a very strong spike the last 2 days, rising as much as 30% from the start of the week.

Trading comment: Yesterday we lightened up a bit on our ETF hedges after a 2% pullback.  We still held on to some, and would look to scale out of more if this pullback has more work to do in the next week or so.  Lots of stocks are extended, and even if the market is down going down sharply it could take some time for many stocks to consolidate their recent gains and build a new base if they are to continue higher. 

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Thursday, February 21, 2013

The Pullback: Day 2

The market is selling off in early trading after some rare selling pressure surfaced yesterday with the market closing at its lows.  Global markets were also in selling mode overnight, and today our markets are pulling back for a second day.

The S&P 500 has only pulled back 2% so far, but given the way the markets have performed this year it wouldn't be all that surprising to see the markets bounce back following this brief 2% pullback.  Energy stocks are down the most so far today, while defensive consumer staples are bucking the weakness (with a good earnings reaction in WMT).

Economic news was mostly light today.  The big surprise was the Philly Fed survey, which fell all the way to -12.5 from -5.8 in January.  Economists were looking for it to move back into positive territory.    Existing home sales hit 4.92 million units in January, slightly below expectations but above the prior month's level of 4.90 million units.

The dollar is up again and adding to pressure on commodities.  Oil prices are lower to $93.30, and copper prices are lower again also.  Gold has been very weak lately but today is seeing a relief bounce only back to $1580.

Asian markets were down across the board overnight.  China led the declines with a -3.0% selloff, its biggest loss in 15 months.  Investors worried over rumors that Beijing is looking at new measures to cool off property speculation.  S&P said China faces downside risks resulting from its property bubble and it could carry significant GDP implications.

Europe's markets were also down across the board after regional PMI readings in France and Germany came in below expectations.  The PMI reading for the overall Eurozone was 47.8 and the services component was 47.3.  Both were weaker than expected and remain in the range that signifies contraction in the economy. 

Trading comment:  We are starting to lighten up a bit on some of our ETF hedges around the SPX 1500 level.  We think there is a 50/50 chance that a 2% dip is all we might see on this first leg down.  If that is right, the market could bounce in the near-term.  The alternative scenario is that any bounce is weak and short-lived, and that the market continues to correct to the tune of something closer to 3-5%.  Even that scenario is not a disaster and should prove to be a good buying opportunity to add to equity exposure.

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Keeping Real-Time Marketing Real.



Did Oreo really win the Superbowl? Did Dulux have a Oreo moment during the Brits last night?

Real-time content marketing is all the rage, but let's face some facts. Oreo's Superbowl success waa based on a rightly praised but very traditional existing campaign and, I'd argue, they got lucky with the power blackout. The question that will never be answered is what would have happened if the lights had stayed on? Would the versions thay must have pre-prepared to focus upon preditable outcomes of team victorie, individual performances or the half-time show have had the same impact?

This leads us to last night's Dulux tweet.

Although smart, my guess is that it wasn't genunely real-time marketing as the statuette design was announced long ago. Nothing wrong with that, but look at the small number of online shares. That's really is mini. It's all very well for the writer to suggest the spread was much wider beause he liked the idea, but that doesn't mean it did.

This sort of agile response can work well and has dne in print advertiasing for decades, but now that lead-times are reduced, there's a big danger lurking below the surface. Having created a "content command centre" will marketers dare to remain silent in the absence of a really good real-time idea? Or is it more likely that we'll be carpet-bombed with the misjudged and the mediocre?

More than ever, the emphasis has to be less on the real-time and more on the real marketing.

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Wednesday, February 20, 2013

Commodities Taking It On The Chin

The market is lower in early trading, though we have seen early morning weakness plenty of times this year that have never amounted to much.  We will have to see if dip buyers step in again later in the trading session.

Commodities are in the spotlight as they trade particularly weak in the face of a rising dollar today. Oil prices are falling back to $94, and gold prices have broken below the $1600 level to around $1579.  Copper and silver prices are also lower.

Materials stocks are lagging the market, while defensive utilities stocks are bucking the weakness so far.

In economic data, housing starts came in at 890,000 units for January.  The prior month's figures were revised downward to a rate of 973,000.  And producer prices rose 0.2%, slightly above estimates of 0.1%.

Asian markets were higher across the board overnight.  China rose 0.6% as property stocks rebounded from yesterday's losses.  Malaysia reported GDP rose 6.4% in the latest period, above expectations of 5.5%.

Europe's markets are little changed despite the unemployment rate in the UK ticking higher to 7.8%, industrial new orders in Italy declining -1.8%, and Greece having its first general strike this year in protest of the austerity measures.

The 10-year yield is only slightly lower at 2.01%.  And the VIX is moving higher by 7% so far up to 13.25.  It will be interesting to see if it can regain the 15 level where it traded around for so long. 

Trading comment: The market has weakened a bit further, but still a moderate pullback by most standards.  The commodity wheels are coming off here, with many metals stocks down by more than 5%.  Gold also continues to trade horribly and it feels like there are lots of commodity traders caught leaning the wrong way as many though gold could only go higher with central banks racing to provide quantitative easing.  Disappointing housing data today is adding to the weakness, with homebuilding stocks weak and reverberating down the food chain of materials suppliers.  We are hoping for more weakness to add to stocks at better prices.

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Tuesday, February 19, 2013

Stair-stepping To New Highs

The markets are once again making small moves to new highs after a brief pause on Friday that saw some light selling pressure.  We have called this the stair-step market because each time the market moves to new highs, it seems to then move sideways for just a bit before taking the next step and moving higher again.  This pattern has persisted since the start of the year with very little pullback to offer investors a better buying opportunity.

This morning's only real economic report was the NAHB Housing index which slid to 46 from 47 last month.  But it didn't have a big effect on the market. 

One sector that is taking it on the chin today are the health insurers which are selling off after the Centers for Medicare and Medicaid proposed lower co-payments for 2014.

Asian markets were mostly lower overnight.  The G20 meetings came and went with little fanfare.  The Japanese finance minister said the central bank has no plans to buy foreign bonds.

Europe's markets are mostly higher this morning after the German ZEW Economic survey spiked to 48.2 vs. expectations of 35.0.  The ZEW survey for the Eurozone also came in better than expected at 42.4.  Separately, the French foreign minister said the country's 2013 GDP growth target will likely be cut by 50 basis points to 0.2%-0.3%.

The dollar is roughly flat today but most commodities are lower.  Oil prices are slightly weaker near $95.75 and gold prices are down near the $1600 level.  Silver prices are also lower and copper prices are down over 2%.

The 10-year yield briefly touched 2.05% last Thursday before reversing lower.  It is currently holding at the 2.00% level. 

The VIX is up 2% to 12.75 today, still a low absolute level that is not indicative of an immediate pickup in volatility.

Trading comment: We really have no big changes to our recent comments.  We continue to trade around our positions in terms of trimming stocks that have had outsized moves higher, while also looking for fresh breakouts in stocks that look ready to run.  We have trimmed some of our bond etf exposure, but prefer to wait for the inevitable pullback before adding to our equity allocations in a more meaningful way.

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Thursday, February 14, 2013

Buffett Goes After A Biggie

The market is slightly lower in early trading, but not nearly enough to call it a selloff.  Most of the indexes are merely down fractionally while the small and mid-cap indexes are bucking the weakness.

There has been some notable M&A action this morning.  Warren Buffett is making a big acquisition by acquiring Heinz (HNZ) for $28 billion and a 20% premium to yesterday's close.  Also, Constellation Brands (STZ) is spiking 35% after a revised agreement to divest the US Groupo Modelo business.

Weekly jobless claims came in better than expected, but there hasn't been much other market moving economic data.

Overnight Asian markets were mostly higher.  China remained closed for the holiday, but Hong Kong reopened with a 0.9% gain.  Japan's Economic Minister said the economy remains weak now but will gradually recover with help of Bank of Japan.

Europe's markets are down across the board after a string of weak GDP readings.  Germany's Q4 GDP came in at -0.6%, France was -0.3%, Italy contracted -0.9%, and Greece dropped -6.0%.  In all, Eurozone GDP for Q4 contracted -0.6%, more than expected.

The dollar index is rallying but commodities are mixed.  Oil prices are firm around $97.45 while gold prices are bit weak down to $1640.

The 10-year yield is higher to 2.03%, right at its January highs.  The volatility index is flat again just below the 13.0 level.

Trading comment: The dip buying mentality persists.  The S&P 500 dipped this morning near the open, down near the 1515 level but quickly found its footing and began to recoup its early losses.  Energy stocks are higher today while tech remains weak again.  The Nasdaq still trails the recent gains in the S&P 500, so after some further consolidation we could see it play catch-up to the other indexes.  If AAPL were to embark on a new uptrend that would really help the Nasdaq overall.

KAM Advisors has long positions in AAPL, STZ

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Wednesday, February 13, 2013

The Slow Grind Continues

The markets are higher again in early trading as the slow grind higher continues.  The S&P 500 is making new highs near 1525, about 50 points away from its all-time highs.  For the Nasdaq 100, it is still about 100 points shy of its 52-week high.  People don't talk about the all-time highs for the Nasdaq, at least not in polite circles.

In economic news, January retail sales rose +0.1%, and +0.2% excluding autos.  That was slightly better than expected, but below last month's reading of +0.5%.

In corporate news, Comcast announced it will buy the remaining stake in NBC Universal owned by GE for $16.7 billion.  Earnings season also continues to wind down, but quite a few companies still reported last night and this morning.

Stocks rising on earnings:  CMCSA, TRLA, ASPS, MSA, PGR, LO, VMI

Stocks falling on earnings:  RAX, MRK, AMX, DPS, DE

Asian markets were mixed overnight.  India and Australia rose, Japan fell, and Hong Kong and China remained closed for the holiday.  The Australian Chamber of Commerce expects the Reserve Bank of Australia to cut rates again due to weak business and consumer confidence.

European markets are also mixed.  Bank of England governor Mervyn King said he expects the country's inflation rate to climb to 3.0% this year, but that it will not result in looser monetary policy.

The dollar is roughly flat and commodities are mixed to lower.  Gold prices are weaker again down to $1644, while oil prices are holding up around $97.75.

The 10-year yield is bouncing near the 2.02% level.  It has still not broken above January's highs of 2.03%.

The VIX is up +2% today but still stuck near the 13.0 level.

Trading comment: There isn't all that much to add to our recent comments about the market.  The slow grind higher appears to continue to drag money into the market from the sidelines.  Bullish sentiment is hovering near levels that in the past have market short-term tops for the market and preceded pullbacks.  At this point it's hard to see the catalysts for such a pullback.  Some expected one to come after the State of the Union address, but so far there isn't much selling.  We continue to buy stocks if they are breaking out of well defined consolidations, but are also trimming some positions that have had big runs and holding some cash for if and when we ever get a pullback.  One thing that is a bit worrisome is that the view that we are due for a pullback is becoming very consensus, and we know that the herd is rarely accurate at predicting short-term market trends.

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Tuesday, February 12, 2013

Gold Can't Rally Despite Weaker Dollar

The dollar has been weaker for the past 2 days but gold hasn't been able to rally at all.  Two days doesn't make a trend, but normally gold responds positively to dollar weakness.  The inability of gold to rally recently has some gold bugs questioning their bullish thesis, Dennis Gartman among them.  Technically, gold has still not been able to break the downtrend that started last October.

There isn't any market moving economic data to speak of today.  Overnight, Asian markets were mostly higher, at least the ones that were open.  China and Hong Kong remain closed for the Golden Week holiday.  Japan rose 1.9% after reporting that household confidence rose to 43.3 (vs. 40.5 consensus).

European markets are also generally higher.  The corruption scandals in Italy are heating up.  And the ECB Vice President said G-20 nations should commit to letting their currencies float freely.

Earnings season is slowing down, but a few stocks rising on earnings today includes: KORS, FOSL, and MAS.  KO is trading lower after reporting.

The 10-year yield is up a bit today to 1.97%.  It has been consolidating around that 2.0% level since late January, which leads us to believe we could see another push higher in the near future.

The volatility index is roughly flat near the 13 level, still a low absolute level that indicates traders aren't looking for a big market move in the short-term.

Trading comment: The stair-step market continues.  The market rallied strongly on Friday, and so far today for a second day is merely consolidating those gains in a quiet fashion.  Today financials are leading the action while tech takes a back seat.  AAPL is weighing on the tech sector after Tim Cook presented at a conference today but didn't give the sort of details some were hoping for.  He said he was serious about returning cash to shareholders, but didn't specify whether the dividend would be raised or buybacks would be stepped up.  He also hinted at the possibility of a cheaper iPhone, but didn't unveil anything. 

KAM Advisors has long positions in AAPL, KO

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Monday, February 11, 2013

Monday Morning Musings

The market is slightly lower in early trading, but once again the selling doesn't feel like it has much bite.  On Friday the markets broke out of their recent trading range with the S&P 500 moving to new highs on the year.  Those waiting for a deeper pullback continue to be frustrated as this stair-step market continues.

There hasn't been a lot of market moving news this morning, with no big economic releases.  Asian markets were mostly closed for the holiday.  Japan, Hong Kong and China were all closed for trading.  Australia and India were open and finished slightly lower.

Core European markets are higher today but peripheral countries like Spain and Italy are not participating.  Germany auctioned off 6-month bills at a yield of 0.02%.  This was actually the first auction with a positive yield since June of last year.  Crazy.

The dollar is lower this morning, but most commodities are selling off.  Some traders are citing the EU looking to force Cypress debt holders to take losses in a bailout.  Oil prices are fairly steady near $95.75 but gold prices are falling back to $1650.

The 10-year yield is up fractionally to 1.96%.  And the volatility index is flat near the 13.0 level.

Trading comment: The market continues to trade in a benign fashion with mild 1-2 day pullbacks followed by rallies that push the indexes to new highs.  This can be a frustrating pattern for underinvested managers who dont' want to chase the market and await a larger pullback.  More of the investor sentiment indicators are flashing caution signals as bullish sentiment climbs to levels that in the past have preceded a correction.  But sentiment indicators are not the best timing indicators, meaning that bullish sentiment could persist for a while as the market continues to climb and pull in hesitant cash from the sidelines.  We would not chase stocks that are extended on the charts, but think that fresh breakouts could continue to work.

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Friday, February 8, 2013

Stocks Back In Rally Mode

The market sold off yesterday morning, but by the end of trading it rallied back to close with just a small loss on the day.  Investors hoping for a bigger pullback continue to be frustrated with the stair-step action of the market, and today we are back in rally mode with the S&P 500 breaking above the highs of its recent trading range.

In economic news, the US trade deficit shrank in December, but the brief strikes at the ports of LA and Long Beach likely contributed to the lower numbers.

In earnings news there are lots of stocks moving, especially for a Friday.  I continue to find more stocks showing positive reactions than negative ones.

Stocks rising on earnings:  LNKD, FLT, ATVI, ATHN, AOL, SIRO, AGNC

Stocks falling on earnings:  NUAN, MCO, CSTR

Asian markets were mostly higher overnight.  China also posted better than expected trade data, with it's trade surplus rising to $29.15 billion on a 25% jump in exports.  That should please those looking for improving economic strength in China.  For its part, the Reserve Bank of Australia lowered its GDP projections for 2013 to 2.50% (from 2.75%).

European markets are mostly higher as they rebound from recent weakness.  Germany's trade surplus came in ahead of estimates, and France's trade deficit was smaller than expected.

The dollar is higher again today, and commodities are mixed.  Oil prices are a bit higher near $96.45 while gold prices are flat around $1670.  Silver and copper prices are higher. 

The 10-year yield is bouncing today to 1.98% and still consolidating below the 2.0% level where we continue to look for a breakout.

The VIX is down -4% today back below the 13 level to 12.90.

Trading comment: Sentiment continues to grow more bullish to the point where complacency is now a red flag for the market.  Extreme bullish sentiment is not the best timing indicator, as bullish sentiment can persist for weeks before the market tops.  But is has served as a good warning indicator in the past.  At these junctures when sentiment is overly bullish, the best course is usually to raise a little cash and be patient.  There is often a larger pullback at some point and that will offer a better buying opportunity than chasing extended stocks in a rising market.

KAM Advisors has long positions in AGNC

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Thursday, February 7, 2013

The Wisdom Of Dave Trott.



1) Don't define yourself by your department.

2) Being professional means being objective.

3) People must notice the advertising (words that never appear in the brief).

4) It's all about Bernbach's "Timeless Human Truths".

5) Branding: being unable to repeat the ad without naming the product.

6) You don't need twelve housewives from Slough.

7) Ads don't run on the boardroom table.


Photo by Nicole Yershon, shoulder by me.

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ECB Keeps Interest Rates Steady, Euro Falls

The market is lower in early trading mostly on profit taking and a couple slightly weaker economic reports.

This morning Q4 productivity came in at -2.0%, below estimates.  Also unit labor costs increased by 4.5%, well above the 2.4% estimate and a higher figure than we have seen in a while.  Unit labor costs are one of the biggest inflation components, so if this is a trend it could worry inflation hawks.

Asian markets ended mostly lower overnight.  Australian unemployment held steady at 5.4%.  China fell -0.7% to snap its 8-day winning streak.  Next week various Asian markets will be closed in celebration of the Golden Week.  Wouldn't it be nice if our markets closed for a week?

Europe's markets are mixed this morning after the ECB held interest rates steady at 0.75% and the Bank of England held its rates at 0.50%.  The British Chancellor of the Exchequer called for more monetary easing to stimulate growth, but the income BofE governor struck a more hawkish tone in recent remarks.

The dollar is getting a big boost with the euro down today, but commodities are mixed.  Oil prices are lower near $96.25 but gold prices are bucking the trend and moving higher today to $1680.

The 10-year yield is fading back a tad to the 1.96% level.  And the volatility index is up 6% this morning back above the 14 level to 14.25.  But it's still early.

Trading comment: Markets don't go up in straight lines forever, and even strong bull markets need time to rest and rebuild their internal energy.  We have commented recently about bullish sentiment reaching extreme levels on some of the indicators we follow (NAAIM).  We haven't seen much more than a 1-2 day pullback so far this year, but that increases the odds that a more meaningful one is in store for investors.  We have been trimming stocks that have had big runs so far in 2013, and are raising cash levels just a bit.  We would like to see a pullback in the S&P 500 below the 1500 level to be more comfortable putting that cash back to work.  A pullback to somewhere like the 1475 level would be more attractive.  As well, some of the leading stocks that look extended need some time to consolidate their recent gains.  So overall this feels like a spot where investors would be well served to be patient.

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Wednesday, February 6, 2013

Japan Surges On Hopes Of More Quantitative Easing

Markets are slightly lower this morning on the heels of some weakness in Europe and mild profit taking.  But the indexes found their lows in the first hour of trading and have since started to bounce back into positive territory.  Dip buyers continue to surface quickly on declines.  It is still early in the session, and it is how the market closes that counts.  But recent selloffs have not been able to gain much traction.

Overnight Asian markets were higher, led by a 3.8% surge in Japan.  That puts the Nikkei at its best levels since September 2008.  To put that 3.8% move into perspective, if the Dow rallied that much it would equate to a 530 point surge.  China was up only 0.1%, but that was good enough to push its winning streak to 8 consecutive days.

It's a different story in Europe, where concerns over derivatives losses at Italian banks are weighing on sentiment.  Italy and Germany are both leading on the downside.

On the earnings front, we are seeing more stocks rising that falling in reaction to their reports.

Stocks rising on earnings: RL, DIS, CERN, CMI, STE, TWXS, WYN, MAC, CMG

Stocks falling on earnings: EXPE, NUS, SYT, SU

Commodities are mixed with the dollar index in positive territory today.  Oil prices are a bit lower near $96.15 while gold prices are up a bit to $1675.

The 10-year yield continues to consolidate around that 2.0% level, currently hovering just below it at 1.99%.  The longer the TNX trades sideways around these levels the more likely it is that we see another push to the upside in yields.

The volatility index is up slightly today, but still below the 14.0 level.

Trading comment: We are always looking for signs that bullish sentiment is hitting extreme levels.  Last week the NAAIM investor survey surged to a level of 104.  We went back and looked for another reading above the 100 level and could not find once instance.  This indicator started back in 2006, so this is the highest reading it has ever registered.  Food for thought as the market continues to churn near its highs.  This is the first red flag among the sentiment indicators, but if more join the fray on the bullish side it would make this rally more risky and raise the odds of a more meaningful pullback.  Food for thought.

KAM Advisors has long positions in EXPE

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Tuesday, February 5, 2013

Was That The Pullback??

The market is sharply higher after closing on its lows yesterday.  We commented that depending on how desperate portfolio managers are to put cash to work we could see dip buyers emerge quickly.  But for the market to only be lower for one day is surprising.  Although the day is still early.

It is unclear what the real catalyst is for this morning's move.  It could be the news that Obama will seek a package to avoid the sequester.  Outside of that there aren't too many datapoints that would boost stocks.

Earnings continue to trickle in, but are a mixed bag for the most part.  In economic news, the January ISM Services Index came in at 55.2, which is below last month's reading of 56.1.

Asian markets were mostly lower overnight, led by a 2.3% decline in Hong Kong and -1.9% in Japan.  China actually closed a bit higher after its HSBC Services index rose to a 4-month high of 54.0.

Europe's markets are bouncing from yesterday's selloff.  A number of countries in Europe released their services PMI readings.  Overall, the Eurozone PMI came in at 48.6.

The dollar is slightly lower today, while commodities are mixed.  Oil prices are higher near $96.85 while gold prices are weak around $1671.

The 10-year yield is rising again today and back to the 2.0% level reached last week.  The volatility index is down -5% after a big spike higher yesterday and back below the 14.0 level.

Trading comment: We have been looking for a pause in the market, but didn't think it would only last one day, especially given that the selloff yesterday was more pronounced than we have seen in weeks.  That said, the S&P 500 is back above the 1500 level but not by a meaningful amount.  The SPX first hit 1500 on 1/24, and at the time we said there would likely be some consolidation around that key level before moving convincingly above it.  So far it has been 8 trading sessions that we have oscillated around that 1500 level.  So the market may have actually built back up some of its internal energy, although we still think the consolidation last a bit longer.

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Monday, February 4, 2013

Monday Morning Musings

Markets are trading lower in early trading, taking their cues from overseas where European markets are under pressure.  But I don't think we are entering another period where Europe will be driving sentiment for US markets.  Rather, we have talked about the market being overbought and overdue for a small pullback.  So today's news could just be the catalyst.

Earnings season is slowing down a bit, but there are still reports that will be coming in all week.

Stocks rising on earnings:  HUM, CLX, TDG, BRO

Stocks falling on earnings:  SYY, RCL, GCI, CYOU

Asian markets were mixed overnight.  China rose another 0.4% after its non-manuf. PMI rose to 56.2, its highest level since August.  But Europe's markets are down across the board, with selloffs in excess of 1.0%.

In Spain, the spotlight is on PM Rajoy as allegations swirl that he received as much as 250k EUR in regular payments from a secret swiss bank account.  And in Italy several banks are under scrutiny over questionable derivative deals.

In other news, Acme Packet (APKT) is spiking 22% after news that it will be acquired by Oracle (ORCL) for $29.25 a share.

The 10-year yield is lower today falling below the 2.0% level to 1.97%.  And the volatility index is spiking higher after a big plunge on Friday that took it back down in the 12- level.  Currently the VIX is 8% higher just below the 14 level.

Trading comment: Most traders and investors are looking for a pullback since the market has rallied so much already this year.  Often times the market doesn't do what the majority of people are looking for.  If that's the case, we could see this pullback again fall on the mild side of the equation as underinvested portfolio managers eagerly put money to work on signs of weakness.  This is the type of pattern that eventually brings out too much bullishness among investors which then sets the market up for a larger correction.  But we don't think we are there yet.

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Friday, February 1, 2013

It's The Reaction To The News That Counts

Despite some lower than expected economic reports this week, the market is powering to new highs this morning.  Great traders always say its the reaction in stocks to the news that counts more than the news itself.  On Wednesday when we got the weak GDP headline, a weak market would have plummeted.  But instead we saw a mild, orderly decline.  And today's jobs report came in below expectations which normal causes selling in stocks but instead we just saw the Dow hit 14,000 for the first time since 2007.  You can call it anything you want, but that's the type of action one sees in a bull market.

Although the payrolls report came in below expectations at 157,000 (vs. 180k consensus) the January ISM manuf. index rose to 53.1, which is nearly a one-year high in that index and points to stronger manufacturing activity.  There has been lots of chatter about corporations moving jobs back to the US and an upturn in the manufacturing sector. 

There were also strong ISM manuf reports in other parts of the world.  China rallied +1.4% overnight after its HSBC manuf. PMI rose to 52.3 from 51.9 previously.  And the PMI for the Eurozone rose to 47.9, above expectations.  While this is a better reading for the Eurozone area, the sub-50 figure still points to an overall contraction in economic activity in Europe.  Readings above 50 mark expansion.

I would have expected further selloff in bonds, but bond prices are up today pushing the yield on the 10-year down to 1.95%.

The volatility index is seeing a big plunge so far today, down -9% back below the 13 level.

Trading comment: We talked about bullish stampedes this week and how they often last 17-25 session with only 1-2 day pullbacks along the way, according to Raymond James.  So it isn't that surprising to see the market spike higher this morning after it's 2-day pause Wednesday and Thursday of this week.  But the market remains extended and still likely needs more consolidation.  We don't think that the first test of Dow 14,000 since 2007 will be successful.  It is more likely that we see some backing and filling before a second successful attempt.  We also don't want to chase stocks that are extended, and you can find lots of them.  From healthcare to industrials, many charts look unsustainable.  That doesn't mean you can't buy new positions in stocks that are breaking out, just be careful of chasing extended stocks that could be vulnerable to pullbacks.

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