The Ishares Core Short-Term US Bond ETF is in a strong uptrend as large players continue to buy short term bonds.
A large amount of money is going into fixed-income exchange-traded funds in the first half of 2017, easily beating 2016’s record inflows. Traders are betting that the Federal Reserve will hike rates before the end of the year. Bond traders are front-running rate hikes in short term bonds in a bet that there will be another rate hike this year and up to three in 2018.
The Ishares Core Short-Term US Bond ETF Chart
ISTB has a decent setup pattern. The rising large players volume shows big players are positioning in short term bonds. The rising Twiggs Money Flow shows traders are accumulating on pullbacks. Prices have been consolidating lately. There is a resistance zone just above the current price starting at $50.45. Right above this resistance zone may be a good entry point. There is a support zone below the current price at $50.38, a stop order could be placed below this zone.
The dollar did a big drop today after the FOMC announcement left rates unchanged. The Federal Reserve said the reduction of the balance sheet will begin relatively soon. I think relatively soon means September 2017.
The US economy is healthy enough to absorb gradual rate increases and the reduction of the Federal Reserve’s balance sheet, Fed Chair Janet Yellen testimony before Congress on July 12, 2017.
Federal Reserve Chair Janet Yellen told Congress on Wednesday that the bank hopes to keep raising a key interest rate and also intends to begin this year, the reduction of its bond holdings.
Yellen took note of several factors, such as household wealth and job gains that she said should fuel growth.
In what could be one of her last appearances on Capitol Hill, Yellen portrayed a market that, while growing gradually, continued to add jobs, gained from continuous household consumption and a recent leap in business investment, and was currently being supported too by stronger economic conditions overseas.
She blamed the economic slowdown in the first half of 2017 on inflation. She said Fed officials are watching developments closely to be certain price gains go back toward the 2 percent inflation target of the Fed.
Janet Yellen Testimony Freak Out Over Inflation
Janet Yellen seemed a little freaked out over the big drop in inflation over the last few months.
I take Yellen’s comments on inflation to mean that the economy should not have the CPI plunging in this part of the economic cycle. In fact, just the opposite should be occurring. But she added that it was considered by officials as an anomaly; inflation is predicted by the Fed next year.
Many economists believe the Fed, which has raised rates three times, will increase rates yet another time this year.
The Fed continues to anticipate that the development of the market economy will justify gradual increases in the federal funds rate over time while reductions in the Fed’s holdings of more than $4 trillion in securities will probably start “this year”.
In her prepared testimony before the House Financial Services Committee, Janet Yellen testimony repeated the message she’s been sending: the market has improved enough that it no longer requires the support the central bank began providing in 2008 in the aftermath of a serious financial crisis and the deepest recession since the 1930s.
In light of the continuing expansion, the Fed plans to keep raising its benchmark rate of interest and to lower its investment holdings, Ms. Yellen said in prepared testimony. She did not offer details concerning the time of the next actions of the Fed. Analysts expect the Fed to begin shaving its bond portfolio before the end of 2017.
The economy began the year with a slow growth rate of just 1.4 percent, it has regained momentum in recent months, aided by strong job gains, a revival of business investment and a strengthening of international markets.
Bottom line: the market is at full employment and the Fed is moving rates. As the Fed reinvests some of the bond holdings which mature monthly, they will decrease that reinvestment to reduce their balance sheet which will mark the beginning of QT (quantitative tightening). Many believe that QT began this year when the Fed did a series of rate hikes.
The Fed needs to keep policy accommodative to keep on supporting the recovery, but may hit a “neutral” rate quicker than anticipated. Estimates are that inflation has been dropping so fast that we could be near zero right now. Yellen has said the Fed expects estimates of the inflation rate to grow over time.
Yellen said in her testimony that as it stands rates “might not need to rise all that much farther” to reach neutral.
Yellen said growth remains moderate with business investment and consumer spending picking up, and the US economy is benefiting from growth in other countries too.
A strengthening in economic development abroad has provided significant support for U.S. manufacturing production and exports, Yellen said.
The Fed slashed its key policy rate to near zero to fight the worst economic recession since the 1930s, and kept it there for seven years before nudging it higher in December 2015. It left the rate unchanged before increasing it again in December 2016, March 2017, and June 2017 of this year.
At its June meeting, the Fed indicated that it expected to start decreasing its $4.5 trillion balance sheet after this year, a measure that could put slow upward pressure on longer-term prices for such things as home mortgages.
Yellen said, the market seemed to be in a virtuous loop of hiring, investment and spending which should increase resource usage somewhat further, thereby fostering a quicker rate of wage growth and price increases.
The Janet Yellen testimony was fairly uneventful except for her comments on falling inflation which seemed to baffle the Fed as to why this was happening at this point during the economic cycle.
The stock market today is about half the size it was in 1996. In the U.S, the number of stocks has fallen by half in the past 20 years, from 7,322 to 3,671 last year according to a report from Barron’s (link above).
Stock Market Today Is Half the Size Thanks To the Fed
I know, it’s every bloggers favorite past-time to lay blame for everything at the foot of the Federal Reserve. But folks, if the shoe fits…
Ultra low interest rates means that companies have access to plenty of low interest loans. With a lot of money sloshing around at the corporate level thanks to years worth of QE, why would a company want to go public and deal with the headaches of regulatory compliance?
Companies are also choosing to exit public markets at a vastly greater clip than the number that are joining the public marketplace. The number of initial public offerings in the U.S. has declined by almost 90% annually in the past 20 years.
According to Pantheon and others, what’s left in the public marketplace isn’t as fast growing as the universe of publicly traded stocks from past decades.
That explains why finding the next Walmart, Amazon, Google, or Netflix in the stock market today just became a lot harder. Do you think that’s an exaggeration? Think again.
Tony Dwyer of Canaccord Genuity says that there’s this narrative out there that the yield curve flattening is telling you that the economy is closer to recession and the stock market is in trouble. Tony Dwyer disagrees and thinks the yield curve shows that now is a terrific time to buy stocks (link to CNBC article above).
Tony Dwyer says that the U.S. Treasury yield curve as measured by the six month to 10-year spread has historically signaled at least two more years until a bull market peaks and then goes into a recession.
The yield curve could continue to flatten for another two years before going flat or inverted and then once it does, it takes another 3 to 6 months for a recession to hit so Tony Dwyer could be right about the 2 year time-line but his logic is wrong.
The problem with Dwyer’s logic is that you can’t just look at the spread. You have to consider that the current rate hike cycle is different than any other cycle Dwyer uses on his chart. Never before has the Fed hiked rates in an economy this weak with inflation so low.
To accept Dwyer’s argument, you’d need to really embrace tunnel vision and losing sight of the forest for the trees.
The Federal Reserve shouldn’t be tightening policy with the evidence so clear that it’s falling well short of its inflation mandate. The interest rate policy is wrong because their math is wrong.
Right now the Fed’s inflation goal is 2 percent. Why so low? Fed rate hikes are keeping inflation too low and possibly will lead to the next recession.
Central bank officials are being too vigilant against an inflation problem that doesn’t currently exist.
When the next downturn hits, there will not be much of an inflation safety margin against deflation.
The US has had interest rates at near zero for nearly seven years. When the next recession hits, rates will fall back to zero again like they do during almost every recession. Is the central bank’s interest rate policy meant to keep rates stuck near zero for 7 years? No. So the logic behind a 2 percent target is wrong. If a 2 percent target doesn’t get rates high enough to keep them away from zero, then maybe a 4 percent one will.
Capital expenditures are very low, so most of the increase in debt was returned to shareholders, either in the form of M&A or stock buybacks. The increase in debt suggests that companies find borrowing cheap because interest rates are low. So money is easy, but demand is not very strong. Demand for products will continue to fall as the Fed hikes rates and makes borrowing more expensive.
Interest Rate Policy Is Too Tight at 2 Percent Inflation Target
Credit-card users, home-equity borrowers and homeowners with adjustable-rate mortgages, auto loans, all will likely see their monthly payments rise as the Federal Reserve’s interest rate hikes ripple on the other side of the economy.
The flattening yield curve seems to be saying rates are nearing a peak. The decelerating inflation rate as well as the slowing loan origination markets are signaling that Fed policy is a bit too tight. If policy is already too tight now, when the Fed begins reducing its balance sheet in a few months things will get even tighter.
You can think of the yield curve as a gauge for how far away the Fed is from completing its rate hike cycle. The fed funds rate is currently around 1.16%. The two-year is 1.35%. This suggests the market thinks there is one more rate hike coming. But the five-year is at 1.77%, which suggests the market doesn’t think interest rate policy will reverse in the coming years.
TrueCar Inc of Santa Monica California is a solid looking stock that’s in a strong uptrend. Institutional buy transactions have increased by 21% over the last 3 months. What do institutional investors like about this company?
TrueCar Inc Santa Monica CA
On May 9, 2017, TrueCar reported a Q1 EPS loss of -$0.01 versus the -$0.02 estimate. Revenue also beat rising 22.5% year-over-year to $75.8 million versus the $73.34 million estimate. Units were 217,656 in 1Q17, up 24% from 174,982 in 1Q16. Franchise dealer count was 11,734 as of March 31, 2017, a record and an increase from 11,151 as of December 31, 2016. Independent dealer count was 2,716 as of March 31, 2017, a record and an increase from 2,597 as of December 31, 2016.
The biggest risk I see with this company is if the car market completely crashes because of interest rate hikes. We know that auto sales have been coming down, while auto loan delinquencies have been rising.
I have mixed feelings about this stock and would prefer to trade it as a short term swing trade.
TrueCar, Inc. is a digital automotive marketplace dedicated to being the most transparent brand in the industry. TrueCar shows consumers what others paid for the car they want, so they can recognize a fair price. Users receive upfront pricing information when they connect with TrueCar Certified Dealers, allowing them to enjoy a more confident buying experience. TrueCar operates its own site and powers car-buying programs for over 500 companies, including some of the most trusted brands in the world such as USAA, AARP and American Express. TrueCar has a network of over 14,000 Certified Dealers and currently, over one third of all new car buyers engage with the TrueCar network during their purchasing process.
TRUE looks like a good entry on the chart with a candle over candle reversal off the 20 SMA. Prices have been consolidating lately and the volatility has been reduced. There is a little resistance above the current price. Another positive sign is the recent Pocket Pivot signal.
The Effective Volume suggests large institutional traders are accumulating the stock but again, anything having to do with the auto industry is dangerous as auto sales have plunged from Federal Reserve rate hikes.
Housing starts have contracted for the third month in a row. According to an article in the WSJ (link above) economists had forecast a 3.4% increase. The actual number was a -5.5% decrease. That’s a huge miss folks and the reason is the “builders can’t keep up” fallacy.
Housing Starts Are Falling From Rate Hikes
The reason that economists keep getting surprised about weakness in the housing sector is that their reasoning is wrong about why the sector is contracting.
Think about the spin that home builders are struggling to meet buyer demand and so that’s why starts are falling. One simple chart defeats that reasoning: Interest Rates versus Housing Starts.
Clearly you can see that when interest rates rise, starts fall. When interest rates fall, starts rise. The high correlation between rates and housing looks like a mirror image.
Anyone who has recently purchased a house has likely overpaid for it and we know this because the average selling price of homes is above even the 2007, $322,100 high.
The average selling price today is $374,500 which is insane because wages have not kept pace with the rising cost of homes.
Now we have the Fed hiking rates which pushes up the cost of financing a home and thus it pushes housing starts down. That’s what rate hikes do, they slow down the economy because they make it more expensive to finance consumption.
Something important happened on the Consumer Price Index today and if you’re not following it, you’re a rookie. Don’t be a rookie. Listen to what the CPI is saying.
Consumer Price Index Is Saying Fed Should Not Raise Rates
A common theme that you will continue to hear me drive home is that the economy is too weak for the Federal Reserve to hike rates. Today, the CPI confirms that IMO.
The CPI missed. The CPI forecast was for no change at 0%, the actual number was -0.1%. That is a big miss for this indicator folks.
Don’t be that rookie that follows the Fed press conferences after rate hikes where Yellen says the economy is growing at a moderate pace and everything is fine. Everything is not fine and I think the CPI release today confirms that.
Maneco64 posted this video on YouTube today about the Consumer Price Index and I think he nails the analysis.