Beware the Humphrey-Hawkish of July



We have mentioned in past years that we have clouded memories in the back of our minds of this week in July being significant for market turns. It was something we used to watch when trading equities in the late 90s in the heady bull run of that period and, just eyeballing the chart below (vertical lines indicating this week) we can see it working well nailing some dramatic turns since.



Ok, not every year (last year being a damp squib) but enough for us to be looking out for a turn this week. But why this week of the year and why the response? Well, it's almost as though some chairman of a Federal Reserve somewhere was saying something significant enough to turn markets! Indeed yes, back through the years these are the dates of the summer Humphrey-Hawkins testimonies. No spooky planetary alignment involved, just Al or BB doing their stuff to sound stimulatory or restraining.

We can effectively see this as during down waves in markets and any emergent recoveries, HH has tended to produce up swings  as policy was aimed to be stimulatory. During periods of excess, when policy was swinging the other way, we saw turns lower, though 2006 is a clear example of the Fed not seeing what it was getting itself into and effecting policy that just made things worse in the end.

As for tomorrow's impact, we run into this July's HH at full steam ahead for equities (at all time highs in SPX) leading us to feel that a turn obviously will be to the downside. Against that though we really can't see BB being anything other than "balanced" and not wishing to rock the boat.

Our best-fit scenario would be if BB tries to be central in message but (having had a market response that first read him as hawkish at the June statement with respect to tapering, that then swung to reading him as dovish in the post-minute speech) the markets once again over react and this time swing back to reading him as hawkish. That would catalyse our "3rd week in July" turn.

However there is also an extreme version of this "market misreading him as uber-hawkish" risk. If BB were to be asked a question along the lines of "Aren't you worried about equities becoming a bubble?". he may slip on his words enough to create a headline storm along the lines of Greenspan's "irrational exuberance" speech. Stocks would dump in a display of short term fireworks, but no serious long term harm would be done. Meanwhile policy could stay accommodative.

Nice idea, but a dangerous play. But hey, it is his last testimony so why not celebrate it with fireworks.
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Anonymous
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July 17, 2013 at 2:07 AM ×

Sounds fun.

Can't wait to hear what Ben will say next.

Oh by the way, raise your hand if you signed up for this...

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Gus
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July 17, 2013 at 3:26 AM ×

"... we have arrived at my major timing point of July 19th, which for months I have suggested represents the best potential for the first meaningful decline of the year ... with a potential news backdrop supporting the rationale for a trading top including: the “Fed speak” of July 17/18th, weaker than expected earnings/revenues season, rumblings out of the D.C. Beltway about sequestration taking a “bite” out of the economy accompanied by arguments about debt-ceilings and continuing resolutions, etc." Jeffrey Saut

http://www.raymondjames.com/inv_strat.htm

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amplitudeinthehouse
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July 17, 2013 at 6:37 AM ×

So what , fella, I have to trade the scrubber?

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abee crombie
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July 17, 2013 at 2:00 PM ×

"I emphasize that, because our asset purchases depend on economic and financial developments, they are by no means on a preset course. On the one hand, if economic conditions were to improve faster than expected, and inflation appeared to be rising decisively back toward our objective, the pace of asset purchases could be reduced somewhat more quickly. On the other hand, if the outlook for employment were to become relatively less favorable, if inflation did not appear to be moving back toward 2 percent, or if financial conditions--which have tightened recently--were judged to be insufficiently accommodative to allow us to attain our mandated objectives, the current pace of purchases could be maintained for longer. Indeed, if needed, the Committee would be prepared to employ all of its tools, including an increase the pace of purchases for a time, to promote a return to maximum employment in a context of price stability." -- the beard

isnt this what he meant to say all along and what most of us knew. They want out but they are going to do it based on the data and the rate of increase in yields. Maybe the Q&A will give better insights

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Anonymous
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July 17, 2013 at 2:14 PM ×

Good call on housing by LB and maybe some others I missed. House of cards, it is. Doesn't seem too early to press this now, either XHB or some select ones like PHM. A more conservative play may be to pair an [arguably] better managed one such as LEN, though I think the whole sector needs its baby/bathwater 'come to Jesus' moment just like the fixed income space had.

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abee crombie
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July 17, 2013 at 4:34 PM ×

While I am still very positive on housing (assuming interest rates dont go above 5 - 5.5%) I am still trying to wrap my head around the concept of homebuilder stocks. Now I am not here to question Lennar or Toll or the other guys as a business. They are successful. But in terms of paying a high multiple (20x earnings) for a company that has to constantly buy land, is a little odd considering historical margins were at peak 10%. And the best homebuilders today only have land inventory for 2015. Just something to consider for those longer term investors.

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Leftback
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July 17, 2013 at 4:41 PM ×

There are no bad investments, just bad prices. We suggest that XHB at $31 is a bad price.....

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Leftback
admin
July 17, 2013 at 4:47 PM ×

Bond market finally getting the message that we will not see any rate hikes in 2014, tapering or no tapering. Yields will drift lower.

Yesterday was the start of a rotation in equities from stuff that is highly speculative to stuff that is quietly boring and earns money. Some of that stuff isn't in the US. Take a look at the chart for Gazprom. You could have had that at 2 times earnings in June....

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Leftback
admin
July 17, 2013 at 5:10 PM ×

Disappointing new home sales, the homebuilder stocks rally anyway. KBH up 3.5% today but banging up against really serious chart resistance at $20.

The hour for shorting cometh soon..... we have been very happy doing nothing all week.

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Anonymous
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July 17, 2013 at 5:41 PM ×

LB. Hopefully the distinction between tapering and hiking is now clear. Curve can resteepen. And the ST funding LT asset model can bounce (perhaps with a vengeance). coughmreitcough.

In any case we have filled our boots with what remains our favourite play (non agency bonds). Much less rate sensitive so better for the coronaries.

Now, is it me or are multiple on small caps getting a bit crazy. We know better than to try and short the darling of the day, but you know ...

DD

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abee crombie
admin
July 17, 2013 at 7:01 PM ×

DD, what better way to buy 'merica, than to buy small caps.

but yea their P/Es are getting up there (see Dr Eds blog) and the private equity guys are selling them out. Not a sure sign of a top but not the best entry signal either.

But as g(f)artman says, the chart is going from the lower left to the upper right, buy it!

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Leftback
admin
July 17, 2013 at 7:18 PM ×

Curve probably will not steepen much when the piss weak state of the US economy is revealed on July 31st (cough0.6% GDPcough). Clearly it is safe to go back in the water regarding mREITs as the short term rate is "safe as houses", unlike the XHB....

Long MORT, Short XHB?

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Leftback
admin
July 17, 2013 at 7:27 PM ×

We would offer that the Monday after expiration is often a good time for Mr Market to take a dump. OpEx week usually gives vol sellers a chance to bend Mr. Shorty over and ramp the silly season stocks a bit higher. Fridays in the summer are a joke. No rush for the time being ....

Monday 22nd we get the Existing Home Sales number and that will show another hole below the waterline of SS Economy, caused when she ran into the rogue Rate Spike iceberg. So for now it's silent running for the LB submarine, load the torpedos and wait....

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