SANTA RALLY UNDERWAY
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December 20, 2013

12-20-2013 6-10-35 PM santa

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The big news Friday came from a higher than expected GDP report (4.1% vs 3.6% exp & prior 3.6%) which pushed stocks higher and (surprisingly) bond interest rates lower. This lower interest rate phenomenon is most likely due to the Fed’s “Operation Twist” which will cause the yield curve to flatten.

It’s important to study the details of the GDP report like our friends at Consumer Metrics have done. The full report goes heavily into the details but the summary is below:

Summary

For the past two months we have wondered how the BEA's latest growth estimates might impact the Federal Reserve's stance on monetary policy -- and particularly the duration and size of QE. At face value the new headline growth rate of 4.12% qualifies as "healthy economic growth," and places the US among the fastest growing developed countries. In fact, a growth rate above 4% would argue for far more than a modest $10 billion per month taper -- if not a return to more historically normal interest rates.

Then why such a modest monetary response?

The Federal Reserve clearly understands that the headline 4.12% is neither real nor sustainable:

-- The vast majority of the economy (consumer spending -- nearly 70% of GDP) was growing at a paltry 1.35%.

-- Over 40% of the headline number came from growing inventories. Conventional wisdom has this component reversing itself in future quarters -- reverting to a long term net zero gain or loss. In fact, since 2006 the average annualized real contribution from inventories has been essentially zero (-0.02%). Bloated inventories have a tendency to normalize, and in coming quarters we can expect production cuts to accomplish just that.

-- Employment numbers, while technically improving, are still weak by historic "full employment" standards. And it is increasingly obvious that the modest improvement in the unemployment numbers is an artifact of a major deformation of the work force -- with fewer people choosing to look for work and more being forced to accept multiple part time jobs.

-- Real per capita disposable income is still down -0.85% year-to-date. And if households continue to normalize their savings rates over the next few quarters (just as they have over the past two quarters while attempting to move back towards the savings level "comfort zone" seen prior to the January FICA increase), those increased savings will have to come from reduced spending.

-- The aggregate numbers continue to mask an ongoing shift in income distribution: although the average per capita income data has grown some 3.3% since October 2008 (per the BEA), the median household income has shrunk some 7% over that same time span (per Sentier Research). Thus whatever growth the BEA is reporting is not likely to shared by the vast majority of the electorate.


Arguably, the "healthy economic growth" implied in the 4.12% headline growth rate might be considered a tad delusional. And apparently the Federal Reserve knows that only too well.

Another interesting report that was little noticed was released by RealtyTrac showing 42% of residential home sales in November were by cash buyers. This came on the heels of a Bloomberg report that Blackstone Group had acquired 41,000 homes in the past two years. These have been put in a rental pool with a bond offering backed by these propertie

With algos just buying GDP headlines stocks moved sharply higher early. As the day wore on, those traders getting out of Dodge early to begin their holiday vacations allowed for some late day selling. Leading the charge higher was Tech (QQQ), Small Caps (IWM), Homebuilders (ITB), Biotech (IBB), Australia (EWA) and India (EPI) to name a few. Laggards included China (FXI), Brazil (EWZ), Turkey (TUR), Solar (TAN), International REITs (RWX), International Small Caps (GWX) and Emerging Markets (EEM). The poor performance of laggards highlights what we’ve pointed out over the last month; U.S. markets, and others dominated by central bank money printing, are taking a lonely walk away from the rest of the world.

We featured a short video today on a popular China ETF (GXC) which highlights the separation noted above.

Our staff puts together the daily top 20 ETF market movers by percentage change in volume for gainers, decliners and emerging volume.

Volume Friday was higher given mechanical quadwitching action. Breadth per the WSJ was positive.

12-20-2013 6-30-41 PM diary

12-22-2013 1-48-40 PM Chart of the Day 1.2

Charts of the Day
  • SPY 5 MINUTE

    SPY 5 MINUTE

  • .SPX WEEKLY

    .SPX WEEKLY

  • INDU WEEKLY

    INDU WEEKLY

  • RUT WEEKLY

    RUT WEEKLY

  • .NDX WEEKLY

    .NDX WEEKLY

  • QQEW WEEKLY

    QQEW WEEKLY

  • RSP WEEKLY

    RSP WEEKLY

  • IWM WEEKLY

    IWM WEEKLY

  • VBR WEEKLY

    VBR WEEKLY

  • XLF WEEKLY

    XLF WEEKLY

  • XLI WEEKLY

    XLI WEEKLY

  • IYR WEEKLY

    IYR WEEKLY

  • ITB WEEKLY

    ITB WEEKLY

  • IYT WEEKLY

    IYT WEEKLY

  • IEF WEEKLY

    IEF WEEKLY

  • TLT WEEKLY

    TLT WEEKLY

  • UUP WEEKLY

    UUP WEEKLY

  • FXE WEEKLY

    FXE WEEKLY

  • FXA WEEKLY

    FXA WEEKLY

  • GLD WEEKLY

    GLD WEEKLY

  • GDX WEEKLY

    GDX WEEKLY

  • SLV WEEKLY

    SLV WEEKLY

  • DBB WEEKLY

    DBB WEEKLY

  • USO WEEKLY

    USO WEEKLY

  • GCC WEEKLY

    GCC WEEKLY

  • IEV WEEKLY

    IEV WEEKLY

  • VEA WEEKLY

    VEA WEEKLY

  • EEM WEEKLY

    EEM WEEKLY

  • EWA WEEKLY

    EWA WEEKLY

  • EWJ WEEKLY

    EWJ WEEKLY

  • EWS WEEKLY

    EWS WEEKLY

  • EWG WEEKLY

    EWG WEEKLY

  • EWZ WEEKLY

    EWZ WEEKLY

  • EPI WEEKLY

    EPI WEEKLY

  • FXI WEEKLY

    FXI WEEKLY

  • NYMO

    NYMO

    The NYMO is a market breadth indicator that is based on the difference between the number of advancing and declining issues on the NYSE. When readings are +60/-60 markets are extended short-term.


     

  • NYSI

    NYSI

    The McClellan Summation Index is a long-term version of the McClellan Oscillator. It is a market breadth indicator, and interpretation is similar to that of the McClellan Oscillator, except that it is more suited to major trends. I believe readings of +1000/-1000 reveal markets as much extended

  • VIX

    VIX

    The VIX is a widely used measure of market risk and is often referred to as the "investor fear gauge". Our own interpretation is highlighted in the chart above. The VIX measures the level of put option activity over a 30-day period. Greater buying of put options (protection) causes the index to rise.

  • TEST

    TEST

  • TEST 2

    TEST 2

...

 

A bullish week as now bulls seized the tape and rescued it from previous uncertainty. We must acknowledge it is the season for a Santa rally and it’s hard to expect much more as trading will turn light beginning next week.

Next week will feature 3.5 days of trading. Economic data will include Personal Income & Outlays and Consumer Sentiment (Monday); Durable Goods Orders, FHFA House Price Index, New Home Sales (Tuesday) and Jobless Claims (Thursday).

Let’s see what happens.

 

 

 



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