Lighthouse Investment Management

Weekly Chart Window

October 14, 2013

14, 2013 Weekly Chart Window - October 14

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Lighthouse Investment Management

Contents
Bank Loans and Leases.................................................................................................................................. 3 Nominal Bond Yields ..................................................................................................................................... 4 Real Bond Yields ............................................................................................................................................ 5 TIPS-derived Inflation Expectations .............................................................................................................. 6 Treasury Securities: Foreign Buying / Selling ................................................................................................ 7 Corporate Bond Spreads ............................................................................................................................... 8 Currencies: Major Markets ........................................................................................................................... 9 Currencies: Emerging Markets .................................................................................................................... 10 Currencies: Scandinavia and Switzerland ................................................................................................... 11 Stock Market: Moving Averages ................................................................................................................. 12 Stock Market: MACD................................................................................................................................... 13 Stock Market: Stocks Above 50-Day MAVG ................................................................................................ 14 Stock Market: Stocks Above 200-Day MAVG .............................................................................................. 15 Stock Market: Net New Highs ..................................................................................................................... 16 Stock Market: New Highs/Lows Ratio ......................................................................................................... 17 Lighthouse Timing Index ............................................................................................................................. 18

Weekly Chart Window - October 14, 2013

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Lighthouse Investment Management
Bank Loans and Leases

Observations:
• • •

In the week ending 10/2, banks increased loans and leases by $23bn to $7,341bn The growth rate over the past 12 months has increased to 2.5% (from 2.3%) The growth rate over the past 13 weeks has increased to +0.3% (from -0.1%)

CONCLUSION: Despite record-low interest rates, bank lending is stagnating. If current trends continue, the year-over-year growth rate will soon approach zero. In a credit-based economy, this is a warning sign.

Weekly Chart Window - October 14, 2013

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Lighthouse Investment Management
Nominal Bond Yields

Observations:
• • •

30-year Treasury Bond yields rose to 3.75% (from 3.71% previous week) 10-year Treasury Note yields rose to 2.71% (from 2.62% previous week) The increase in yields since May 2013 was not driven by increased inflation expectations (on the contrary - inflation expectations are receding, see page 5); instead, an increase in real yields was the driving force

CONCLUSION: The Fed wants to depress real yields, so investors (desperate for returns) buy riskier investments. Rising asset prices create a modest wealth effect. Low rates enable financing of projects that would otherwise have been unattractive, leading to misallocation of capital. The Fed's intention to gently reduce 'quantitative easing' has failed.

Weekly Chart Window - October 14, 2013

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Lighthouse Investment Management
Real Bond Yields

Observations:
• • • • •

Real (inflation-adjusted) bond yields rose slightly 30-year real yields rose to 1.43% (1.38% previous week) 10-year real yields rose to 0.50% (0.43%) 5-year real yields rose to -0.37% (-0.41%) Accepting negative real returns only made sense if investors were expecting severe and longlasting deflation (TIPS principle amounts are adjusted by inflation, hence reduced in case of deflation, but always paid back at par [100%], and therefore have a 'free' deflation protection embedded).

CONCLUSION: The Fed is trying to 'have the cake and eat it'; they want to depress real yields, but increase inflation expectations. These two goals are, in free markets, not compatible. It seems that even $1 trillion in annual asset purchases are not enough to enforce the Fed's will.

Weekly Chart Window - October 14, 2013

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Lighthouse Investment Management
TIPS-derived Inflation Expectations

Observations: • • • • • Inflation expectations are calculated by subtracting real (TIPS) yields from nominal yields 30-year inflation expectations remained at 2.32% 10-year inflation expectations rose slightly to 2.21% (2.20%) 5-year inflation expectations rose slightly to 1.81% (1.77%) The Fed prefers elevated inflation expectations in order to motivate consumers to spend. A slowing velocity of money counters the Fed's efforts. Recent talk from Bernanke about possible 'tapering' of QE later in 2013 led to doubts regarding the Fed's policy of N-GDP targeting, adopted only in late 2012. CONCLUSION: Nominal and real interest rates have declined in 2013 despite the Fed's purchase of $2trn in Treasury securities. The Fed has failed to achieve its goal (depress yields) and, despite record bond purchases, has lost control of the yield curve. The Fed's credibility is waning, which might ultimately hurt the dollar's value. Page 6

Weekly Chart Window - October 14, 2013

Lighthouse Investment Management
Treasury Securities: Foreign Buying / Selling

Observations: • Of total marketable Treasury securities outstanding ($11.5trn), 41% is held by foreigners, with China (1.3trn) and Japan (1.1trn) accounting for more than half (52%) of all foreign holdings. Non-US central banks (red area) reduced purchases of Treasury Notes and Bonds from $230bn (January 2013) to $60bn as of July. March (-17bn), April (-24bn) and July (-16bn) were among the top 10 months in terms of largest non-US CB selling ever. Other foreign investors (purple area) have reduced their purchases from $580bn (September 2010) to a mere $10bn (July 2013). Year-to-date they have been net sellers of $39bn. The Fed (2trn) and other central banks (3.5trn) together own 48% of marketable Treasury paper.

CONCLUSION: Foreigners stopped buying Treasury securities. The Fed must increase QE to cheapen the dollar if it wants to force foreign CB's to resume buying again (as result of FX interventions).

Weekly Chart Window - October 14, 2013

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Lighthouse Investment Management
Corporate Bond Spreads

Observations: • • • The yield spread for AAA-rated corporate bonds (not shown) declined to 0.73% (from 0.74%) The yields spread for BBB-rated corporate bonds declined to 2.03% (from 2.08% previous week) The yield spread for CCC- or lower rated corporate bonds declined to 8.35% (8.43%)

CONCLUSION: Corporate bond spreads are still depressed by historic standards. However, spreads should continue to mean-revert (just as real yields), especially as economic growth slows.

Weekly Chart Window - October 14, 2013

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Lighthouse Investment Management
Currencies: Major Markets

Observations: • • Euro, Pound and Yen are strengthening against the Dollar The Chinese Central Bank has, for now, stopped the appreciation of the Yuan

CONCLUSION: The Dollar has been weakened by the Fed's decision not to reduce asset purchases for now. This trend should continue unless a financial crisis emerges.

Weekly Chart Window - October 14, 2013

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Lighthouse Investment Management
Currencies: Emerging Markets

Observations: • Some emerging Market currencies continue to rebound against the US Dollar after the Fed surprisingly refrained from reducing monthly bond purchases. Exceptions are the Indonesian Rupiah, the Turkish Lira and the South African Rand. Stronger EM currencies make exports less competitive, leading to a deterioration of trade balances. The main driver behind the recent decline in EM currencies were escalating current account deficits. In case of renewed weakness, central banks would have to intervene to support their currencies, losing vital currency reserves in the process. As forward FX rates are directly linked to short-term interest rates, central banks try to discourage short selling by raising rates. Weak currencies trigger capital flight by international investors lured by higher yields; rising bond yields risk pushing already weakening economies into recession

CONCLUSION: Deteriorating conditions in emerging markets could spill over into developed markets. Global companies might feel negative impacts in their earnings. Weekly Chart Window - October 14, 2013 Page 10

Lighthouse Investment Management
Currencies: Scandinavia and Switzerland

Observations: • • • The Norwegian Kroner continued its weakness after oil prices fell The Swedish Riksbank warned of a local housing bubble and surging household debt The Swiss Franc strengthened to around 1.22 to the Euro, the strongest since April 2013 and not far from the 'line in the sand' of 1.20 drawn by the Swiss National Bank

CONCLUSION: Renewed discussions about Greece's membership in the Euro-zone, now that German elections are over, could lead to upwards pressure on the Swiss Franc, forcing the SNB to buy more Euros against Swiss Francs.

Weekly Chart Window - October 14, 2013

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Lighthouse Investment Management
Stock Market: Moving Averages

Observations: • • • All moving averages have a positive slope (pointing upwards) However, the 50-day moving average has topped out The 10-day mavg is intercepting the 50-day moving average - a warning sign

CONCLUSION: The uptrend is still intact

Weekly Chart Window - October 14, 2013

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Lighthouse Investment Management
Stock Market: MACD

Observations: • • The S&P 500 Index is around 5% above its 200-day moving average, which is a bit extended The S&P is less extended from its 100-day moving average (which is to be expected, as shorter averages tend to follow the index more quickly) All three derivatives of moving averages are rising, suggesting the stock market is gaining momentum.

CONCLUSION: It is impossible to tell if the correction is already over.

Weekly Chart Window - October 14, 2013

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Lighthouse Investment Management
Stock Market: Stocks Above 50-Day MAVG

Observations: • • • 57% (previously 63%) of the 500 stocks within the S&P Index are above their 50-day moving average. More than half of the S&P 500 members are in a medium-term uptrend. This is a good sign. The indicator has topped out, while its average is rising - conflicting signs.

CONCLUSION: More than half of the members of the S&P 500 index are back in a medium-term up trend. However, if the market turns lower, the two most recent peaks would be below the previous high - a negative sign.

Weekly Chart Window - October 14, 2013

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Lighthouse Investment Management
Stock Market: Stocks Above 200-Day MAVG

Observations: • 79% (previously 81%) of the 500 stocks within the S&P Index are above their 200-day moving average More half of the stocks in the S&P 500 Index are in a long-term uptrend. This is a healthy sign. However, The trend is declining, and the indicator remains below its 50-day moving average - a warning sign.

• •

CONCLUSION: Most stocks are still in a long-term uptrend, but the number is decreasing. A warning sign.

Weekly Chart Window - October 14, 2013

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Lighthouse Investment Management
Stock Market: Net New Highs

Observations: • The number of NYSE-listed stocks with new 52-week highs is higher than the number of stocks with new 52-week lows. This is a positive sign as recent stock market gains are supported by the majority of stocks (a wide 'breadth").

CONCLUSION: No divergence detected. No warning sign.

Weekly Chart Window - October 14, 2013

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Lighthouse Investment Management
Stock Market: New Highs/Lows Ratio

Observations: • NYSE-listed stocks with new 52-week highs exceed the number of stocks with new 52-week lows by a ratio of 9 : 1, with a sideways trend (previously = 9 : 1). The ratio's 50-day moving average (dotted line) is pointing upwards - a positive The ratio remains above 5 - a positive sign

• •

CONCLUSION: This indicator stopped to deliver a "sell" signal

Weekly Chart Window - October 14, 2013

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Lighthouse Investment Management
Lighthouse Timing Index

Observations: • The Lighthouse Timing Index remained at zero (previously: 0) points

CONCLUSION: Our composite index suggests that while the correction has been interrupted it is too early to say whether a bear market has begun or the rally would carry the market to new all-time highs. A neutral stance is recommended.

Note: This index is a trend-confirming indicator, and will not be able to anticipate market tops or bottoms in advance. Due to smoothing of data, a certain time lag of about two weeks is to be expected.

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Lighthouse Investment Management
Any questions or feedback welcome. Alex.Gloy@LighthouseInvestmentManagement.com

Disclaimer: It should be self-evident this is for informational and educational purposes only and shall not be taken as investment advice. Nothing posted here shall constitute a solicitation, recommendation or endorsement to buy or sell any security or other financial instrument. You shouldn't be surprised that accounts managed by Lighthouse Investment Management or the author may have financial interests in any instruments mentioned in these posts. We may buy or sell at any time, might not disclose those actions and we might not necessarily disclose updated information should we discover a fault with our analysis. The author has no obligation to update any information posted here. We reserve the right to make investment decisions inconsistent with the views expressed here. We can't make any representations or warranties as to the accuracy, completeness or timeliness of the information posted. All liability for errors, omissions, misinterpretation or misuse of any information posted is excluded. +++++++++++++++++++++++++++++++++++++++ All clients have their own individual accounts held at an independent, well-known brokerage company (US) or bank (Europe). This institution executes trades, sends confirms and statements. Lighthouse Investment Management does not take custody of any client assets.

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