Farther, Higher (Lower?), Faster
Posted on Sunday, February 23rd, 2014
The important thing in life is not the triumph but the struggle, the essential thing is not to have conquered but to have fought well. – Pierre de Coubertin -Founder of the Modern Olympics
I have always been drawn to the Olympic ideals and the value that they place on excellence, friendship and respect. It is these values that have a place in the promotion of peace played by the Olympics and the ancient tradition of respecting a truce while the Olympics were played. While the Olympics are drawing to a close it is back to reality for politics as the Ukraine erupts and for markets as another option expiration week ends.
This week in the equity markets saw more of the bounce back from the selloff that started in late January. We expected as much and now we have approached the old high. The real test comes next week. The market has rallied back to its old high but this is where the street may begin to question the rally’s validity. If the rally cannot break through the old high it may be in danger of falling and retesting the lows around 1740 on the S&P500. Conversely, a breakout above the old high next week could bring more money in as investors feel that they missed another dip and that this market may never go down again. A breach of either of these levels could bring swift resolution to the question of whether or not 2014 will bring more volatility for equity prices.
Not only are Federal Reserve officials pushing to be transparent about the ending of QE one of our close allies is out trying to back up the Federal Reserve. Ripples felt in emerging markets from the tapering of QE here in the United States have caused a stir of late and we are getting some backup from our friends Down Under. Here is some insight by way of Arthur Cashin and his friends at the Lindsey Group. (Emphasis mine.)
The Australian Treasurer Joe Hockey also had some comments about the Fed tapering, its impact on the global economy and how to deal with it. He said “It’s not something that hasn’t been foreshadowed…The world can no longer rely on methadone every day. Sooner or later we need to wean ourselves off and that’s what tapering is about…Our own central banks have the responsibility to act in our national interests. It’s a balancing act. The US Fed can speak for itself, but I don’t see any systemic difficulties in developing markets.”. Cashin 2/13/14 Peter Boockvar Lindsey Group
It looks like the Tapering of QE is here to stay for the time being. Officials around the world are telling you to get used to the US backing away from QE.
Are markets expensive? The question is continually asked by investors. Here is one clue. Three very large M&A deals have been announced in recent days. Comcast is buying Time Warner Cable for $45B in an ALL stock deal. Actavis is acquiring Forest Labs for $25B of which 2/3rds will be paid in stock. The third deal has Facebook buying privately held Whatsapp for $19B of which 75% of that purchase price is also in stock. That tells you what the acquiring company’s execs think about their own stock. It is certainly not cheap. If a business uses stock instead of cash to make a deal it tells you that the stock is expensive and that cash is coveted. Here are three companies that obviously feel that their stock is a good currency to trade to gain value.
It looks like the Tapering of liquidity is here to stay and so is volatility. Any hopes that the Fed might be swayed by other central banks, emerging market tremors or stock market volatility can be put to bed. 2014 is off to a rocky start and that will probably continue.
We did get our oversold bounce although it may have gone a bit further than we expected. The key to continued market performance may lie in how equities perform next week. The support and resistance levels of 1740 and 1850 on the S&P 500 must be watched. Net week should go a long way as to telling us who is in control – the Bulls or the Bears.
To learn more about us and Blackthorn Asset Management LLC visit our website at www.BlackthornAsset.com .
A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill
Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor.