Technical Analysis: EUR/USD and S&P 500

This post will focus solely on technical analysis of currencies and indices.


EUR/USD (Bearish)

EUR/USD - Daily
EUR/USD – Daily

As you can see on the “Daily” chart, Symmetrical Triangle or contracting wedge (both very similar) has been formed. The trading range is contracting, not far away from breakout. You see the small yellow circle (around 1.1020) that EUR/USD is approaching? That’s where I would short EUR/USD. That’s the place where there are trend resistances, and Simple Moving Average (SMA) of 50 and 100 are approaching. Not only that, but Stochastic indicator should get close to 80 (overbought), as EUR/USD goes to that yellow circle. Let’s take a look at 4H (4-Hour) chart.

EUR/USD - 4H (4 Hour) Chart
EUR/USD – 4H (4 Hour) Chart

The first yellow circle you see on the “4H” chart was a sell single because support-turned-resistance at a rising trend line. Same thing is happening right now to EUR/USD, as it approaches the second yellow circle (around 1.1020).

The reason I’m shorting it in the tightening consolidation before the breakout is because there are many technical reasons to short it. Even if it goes opposite direction, my loss will be very limited (Just above the trend – around 1.1030)

Let’s take a look at 1H (1-Hour) chart.

EUR/USD - 1H (1 Hourly) Chart
EUR/USD – 1H (1 Hour) Chart

On 1H chart, I added Fibonacci Retracements indicator. Fibonacci Retracements basically act as support and resistance lines. The red lines you see on “1H” chart, are resistance lines. 61.8% level (or 0.618%) at 1.1012 is known as “golden ratio”. In my past expensive, 61.8% level has worked well. Plus, 61.8% level connects with the two trend lines in the yellow circle.

I would short EUR/USD as it approaches the middle of  the second yellow circle (around 1.1015). Stop loss: 1.1030 (just above the trends lines and golden ratio (0.618%) level. Target: 1.0890 (just above the support trend as seen in the charts above). My target level (1.890) will change as time goes on, to stay in-line with the support trend.


S&P 500 (Bullish)

Let’s take at look “Weekly” chart, going back as far as 2008.

S&P 500 - Monthly
S&P 500 – Monthly

As you can in the “Weekly” chart, ever since hitting bottom in early 2009, S&P 500 have been in a uptrend. If you look at the white-line, there’s a long channel (you can call it a trend if you want). Current price is just above the 50 SMA (Simple Moving Average). Plus, it’s much closer to the support line of the channel.

Let’s take a look at two “Daily” charts.

S&P 500 - Daily
S&P 500 – Daily
S&P 500 - Daily
S&P 500 – Daily

If you look at any of the two “Daily” charts, you can see that the current price is sitting on 200 SMA and on recent-uptrend support (yellow dotted line). Even though it’s a strong signal to go long, I would not. The reason is that it is a 3rd time in over a month that the price is sitting on 200 SMA and uptrend support (yellow dotted line) , and the recent highs in the uptrend range were unable to reach the trend resistance as well break the previous high. It shows that the bulls are losing control and bears are slowly gaining momentum.

Where I would go long is at the circle shown with yellow arrow (around 2042). It’s just above the strong channel (or a trend) support line (Bold-white line) as shown in all three S&P 500 charts above. My stop loss would be just below the bold-white line. My target would be at the resistance level of 2134.

If you have any questions, feel free to leave your questions in the comments section, and/or contact me. Thank you.

U.S. Rate-Hike Impending – Tick Tock

Last Thursday (July 30, 2015), the Bureau of Economic Analysis (BEA) released its advance (1st estimate out of 3) of Gross Domestic Product (GDP) for the second quarter (April, May and June) of the year. It was positive enough to increase the chance of rate-hike in September significantly.


Before we go any further, let’s review what two types of GDP, nominal-dollar terms and real-dollar terms. Current (or nominal-dollar) GDP tallis the value of all goods and services produced in the U.S. using present prices. On the other hand, Real (or chained-dollar) GDP counts only the value of what was physically produced. To clarify the point, suppose a hat-making factory announces that it made $1 million selling hats this year, 11% more than last year. The $1 million represents nominal company sales (or current dollar). However, something is missing. From this future alone, it’s unclear how the factory achieved the extra income. Did it actually sell 11% more hats? Or did it sell the same number of hats as the year before but simply raised prices by 11%? If the factory made more money because it increased the price tag by 11%, then in real (constant-dollar) terms, the true volume of hats sold this year was no greater than last year, at $900,000.

It’s vital to know if the economy grew because the quantity of products sold was greater or whether it was largely the result of price hikes, or inflation. (Source: “The Secrets of Economic Indicators” by Bernard Baumohl)


Real GDP increased at a annualized rate of 2.3%, vs expectations of 2.5%.  This is a major acceleration from the first quarter when real GDP increased 0.6% (expansion), revised from -0.2% (contraction). The economy bounced back after a slow start in the beginning of the year.

Real GDP - Quarterly (1Q 2011-2Q 2015)
Real GDP – Quarterly (1Q 2011-2Q 2015)

In the beginning of the year, US economy was hurt, or “walked backwards” due to unfavorable weather, lower energy prices, West Port strike, and stronger dollar. While, the economy has moved beyond the weather and west port strike, – a strong dollar, and lower energy prices will continue to limit growth.

While first quarter was revised upwards, 2011-2014 was revised lower. The economy grew 1.6% in 2011, down from the 2.3% initial reading; 2.2% in 2012, up from the 1.5% initial reading; 1.5% in 2013, down from 1.7%; and 2.4% in 2014, down from 2.7%. From 2011 to 2014, growth was essentially weaker. The economy expanded by an average annual rate of 2%, below initial reading of 2.3%.

Real GDP - Annual (2011-2014)
Real GDP – Annual (2011-2014)

Growth in the second quarter was boosted by consumer spending. Consumer spending grew at a 2.9% rate from a 1.8% in the first quarter. That is a very good sign because real personal consumption expenditures (PFE) AKA consumer spending, accounts for 70% of total GDP. If people are not spending, it spells serious trouble for the economy.

Real exports increased 5.3% in the second quarter, compared to 6% fall in the first quarter. First quarter’s significant drop was due to west port slowdown. The strong dollar has hurt exports but its effects have eased recently…for now. Port delays in the first quarter freed up exports and temporarily increased exports.

Business investment fell 0.6% in the second quarter, from previous 1.6% increase in the first quarter, as energy companies continue to scale back projects amid low oil prices.

Recently, crude oil prices have fallen back to the Earth. On Monday, August 3, crude oil prices hit just above $45 (currently below $45). It will continue to hurt energy companies, causing them to scale back projects and lay-offs. Low gasoline prices, however, would lead consumers to spend money. It’s better to pay off debts first before spending money on “wants”.

Crude Oil ("/CL" on thinkorswim) - Daily
Crude Oil (“/CL” on thinkorswim) – Daily

On Friday (July 31, 2015), Employment Cost Index (ECI) report for the second quarter was released and it was disappointing.

ECI, a broad measure of workers’ wages and benefits, increased 0.2%, smallest gain since records began in the second quarter of 1982, following 0.7% increase in the first quarter. Wages and salaries, which accounts of 70% of compensation costs, also increased 0.2% in the second quarter, the smallest gain on record.

Employment Cost Index (ECI) - Bloomberg Terminal
Employment Cost Index (ECI) – Bloomberg Terminal

The report suggests that slack remains in the labor market.  The unemployment rate fell to 5.3% in June – the lowest level since April 2008 – close to the Fed’s target of 5% to 5.2%, which the Fed policy makers consider consistent full employment.

S&P 500’s reaction to both GDP and ECI reports.

S&P 500 ("SPX" on thinkorswim) - Hourly
S&P 500 (“SPX” on thinkorswim) – Hourly

Dollar’s reaction to both GDP and ECI reports.

US Dollar ("/DX" on thinkorswim) - Hourly
US Dollar (“/DX” on thinkorswim) – Hourly

The Federal Reserve are counting on rising wages to boost both the economy and inflation (2% target). On Wednesday, July 29, the Fed said it won’t start lifting rates until there is “some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.”

The Fed is monitoring employment, inflation, and wages closely as it moves to closer to raising interest rates from near zero, for the first time since the recession. Raising rates too soon or too late can have its consequences.

The Fed will meet on September 16 and 17. I still believe the Fed will raise rates. If employment, inflation and wage reports are not very strong until September meeting, the Fed might raise the rates by little as 0.10% (10 basis points), instead of 0.25%.

I believe the disappointment of ECI is temporary as more companies are starting to increases wages and more people are slowly entering jobs market. I also believe that GDP continues to be strong. In fact, I believe current Q2 GDP will be revised higher. Preliminary (2nd estimate) of Q2 GDP will be released on Thursday, August 27.

On Friday (August 7), important reading data of US economy will be released, non-farm payrolls AKA jobs report. My guess for employment and unemployment rate is 285K and 5.4%, respectively. I believe wages will stay flat at this time and accelerate in the next few months.

I will take advantage of any pullback in the greenback (US Dollar). Greenback has a room to strengthen more. Currency pairs such as USD/JPY, USD/CAD, I would be long, and I would be short EUR/USD. If you have any questions, feel free to contact me and/or leave comments below. Thank you.

Disappointing Jobs Report – Bye Bye July Rate-Hike

Last Thursday (July 2, 2015), non-farm payrolls report for June for disappointing. 223,000 jobs were added in June, vs expectations of 231,000, compared with an average monthly gain of 250,000 over the last 12 months. Although payrolls grew slightly, the unemployment rate ticked lower to 5.3% from 5.5%. While this may sound to be a good thing, it is not.

Unemployment rate fell due largely to a sharp decline in labor force participation, which fell by 0.3% point to 62.6%, the lowest level since October 1977. Decline in labor force participation shows more people were discouraged by the poor employment prospects that he/she is not actively seeking employments. Therefore, they are not reflected in the unemployment rate. Bottom line: they lost confidence in the jobs markets.

Revisions to the previous months’ job totals has been negative. April fell from 221,000 to 187,000 (-34,000) and May fell from 280,000 to 254,000 (-26,000), bringing losses of 60,000.

Total Non-Farm Payrolls – Monthly Net Change – 2014-Present
Total Non-Farm Payrolls – Monthly Net Change – 2014-Present

Job gains/loss:

Professional/Business services: +64,000. I believe it was largely due to college students who recently graduated or got a job while in school.

Health care: +40,000. ObamaCare continues to boost earnings for health care industry. Recently, health care stocks have been hitting all-time highs.

Retail: +33,000. Well it is summer, isn’t? It’s no wonder more jobs were added in retail.

Restaurants/Bars/etc: +30,000. One word, Summer.

Mining: -4,000. Oil decline has been hitting energy industry hard. Total decline in the industry now stands at 70,000.

While employment numbers are important to the Fed to justify the time to begin normalizing policy, I believe wage growth and Consumer Price Index (CPI) are more important. July rate-hike is off the table largely because wages remained flat. Average hourly earnings in the private sector stood at $24.95, unchanged from May and up 2% from a year earlier.

Average Hourly Earnings - 2014 to Present
Average Hourly Earnings – 2014 to Present

On July 17, CPI report for June will be released at 8:30 AM EST. It will be very important to watch for it. Any spending reports such as Retail Sales will also be important to watch out for because consumer spending makes up 70% of all economic activity. Retail sales account for one-third of it.

I strongly believe September rate liftoff is possible. If future CPI, average hourly earnings, and employment fall in any way, chance of liftoff in September will be reduced.

Following the release of the report on Thursday, US markets were mixed while US Dollar was down. US markers were closed due to 4th of July holiday. The United States is 239 years old.

Standard & Poor 500 ( “SPX” on ThinkorSwim platform) – Hourly
Standard & Poor 500 ( “SPX” on ThinkorSwim platform) – Hourly
US Dollar ( “/DX” on ThinkorSwim platform) – Hourly
US Dollar ( “/DX” on ThinkorSwim platform) – Hourly

 

Thank you for reading. If you have any questions, feel free to contact me. You can leave a comment and contact me on this website, google plus, twitter, and linkedin. Thank you.

Jobs Report Surprises To The Upside – IMF Wrong? (You Decide)

Last Friday (May 5, 2015), Bureau of Labor Statistics released non-farm payrolls (jobs report) for May and it was way beyond expectations. 280,000 jobs were added in May (largest since December) vs. expectations around 225,000. It’s a strong sign that the US economy is recovering from the contraction that occurred in first quarter of 2015 (January-March).

Total Non-Farm Payrolls - Monthly Net Change (June 7, 2015)
Total Non-Farm Payrolls – Monthly Net Change – 2014-Present

 

The unemployment rate ticked higher by 0.1% to 5.5% from 5.4%, as more people are entering labor force (because their confidence in the jobs market are increasing). In May, 397,000 people entered labor force, mostly recent college graduates.

Average hourly earnings increased 0.3% on month-to-month basis from 0.1% in April. Over the year, it increased 2.3%, largest rise since August 2013. It’s indication that future consumer spending will increase. When consumers spend more money, companies generate more money and eventually hire more people. Basically, it’s a short-term demand in the economy.

March and April numbers were revised. March was revised from 85,000 to 119,000 (+34,000) and April revised from 223,000 to 221,000 (-2,000).

There were big increases in employment in professional and business services (+63,000), leisure and hospitality (+57,000), and healthcare (+47,000). Meanwhile, employment in mining fell for the fifth month in a row (-17,000) as low energy prices continues to hurt energy companies.

This is the most important US economic report because it shows how first quarter, which contracted 0.7%, are due to transitory factors and guides the Federal Reserve on the path of raising the interest rates. As a result of strong jobs report, June rate-hike door is not closed. Federal Open Market Committee (FOMC) will be meeting on Tuesday, June 16, and Wednesday, June 17. At 2 PM EST, economic projections, statement and federal funds rate will be released followed by 2:30 PM EST press conference. The markets will be extremely violent during the time because it’s highly watched by investors and traders.

After the release of the report, US Dollar (USD) rose. USD against JPY (Yen) soared to a new 13-year high. US markets were mixed as investors/traders differently interpret what the jobs reports means for the future.

 

S&P 500 Index (SPX) - Hourly
S&P 500 Index (SPX) – Hourly
USD/JPY - Hourly
USD/JPY – Hourly

 

The day before the jobs report, the International Monetary Fund (IMF) slashed its forecasts for US economic growth and called for the Fed to hold off its first rate increase until the first half of 2016. The IMF said a series of negative shocks, including unfavorable weather, a sharp contraction in oil sector investment, the West Coast port strike, and the effects of the stronger dollar, hindered the first quarter of 2015. Thus, it promoted a downgrade to its growth expectations to 2.5% for this year, from 3.1% in April.

Economic Forecasts Souce: http://www.imf.org/external/np/ms/2015/060415.htm
Economic Forecasts
Souce: http://www.imf.org/external/np/ms/2015/060415.htm

IMF says that FOMC should remain data dependent and act after signs of a pickup in wages and inflation. Well, the jobs report for May was positive, including wages. So is IMF wrong? Did they talk too early? You decide.

In IMF’s view, “raising rates too soon could trigger a greater-than-expected tightening of financial conditions or a bout of financial instability, causing the economy to stall. This would likely force the Fed to reverse direction, moving rates back down toward zero with potential costs to credibility.” —- “raising rates too late could cause an acceleration of inflation above the Fed’s 2 percent medium-term objective with monetary policy left having to play catch-up. This could require a more rapid path upward for policy rates with unforeseen consequences, including for financial stability.”

So when is the right time to raise rates? I believe it’s in July or September (no meeting in August) only if we continue to see pickup in wages, employment, and Consumer Price Index (CPI). Even through the chance of rate hike in June is very low, I would not be surprised if Fed decides to hike rates. Even if they do, it will be surprising to most people at Wall Street and markets will definitely be violent – I would consider it “mini-SNB” (SNB – Swiss National Bank), because of SNB’s action in January (unscheduled release – removing the cap on euro-franc).

Feel free to contact me by going to “Contact Me” above or leave your comments below. Twitter: @Khojinur30. Thank you.

 

Expectations for the Fed to raise rates ticked higher

Last Friday (May 22, 2015), U.S Consumer Price Index (CPI) report for April was released and it was in line with expectations. CPI increased a seasonally adjusted 0.1% in April and core-CPI (excludes food and energy) increased 0.3%, largest since January 2013. CPI reflects what people pay for goods and services. It’s an important indicator for inflation. The Federal Reserve watches inflation numbers closely, to determine the health of the US economy and whenever to raise interest rates.

CPI and Core-CPI (Jan 2014 - April 2015)
CPI and Core-CPI (Jan 2014 – April 2015)

Over the past 12-months, CPI declined 0.2% (biggest year-to-year drop since October 2009), largely due to the plunge in energy prices (energy index), which fell 19.4% over the last 12-months. However, core-CPI (which excludes food and energy, the violent categories) increased 1.8% over the last 12-months.

The positive inflation report may suggest that the Fed may not be that far away from raising interest rates. Stronger numbers gives a sense of relief that the US economy is pulling itself out of a slump that dragged growth down to 0.2% (GDP report previous post) in the first quarter of 2015. However, the inflation is far below the Fed’s 2% target.

The positive change in core prices was driven by rising costs for housing, medical care, furniture, and vehicles, while clothing and airfare prices declined. Fall in the oil prices led airplane companies to lower their airfares, to complete with competitors. I believe clothing and airfare prices will start to rise soon because summer is here. In the summer, people tend to travel more often (demand increases), pushing prices up. Oil has rebounded to the range of $60, as oil inventory decreases.

The dollar rose after the CPI report. The greenback (the dollar) gained almost 1%, rising to a highest price level since late-April. US markets were flat on Friday after both the Dow and the S&P 500 hit new records this week.

Dollar Index (/DX) - Hourly
Dollar Index (/DX) – Hourly

According to Federal Open Market Committee (FOMC) meeting minutes released last Wednesday (May 20, 2015), FOMC expects inflation to gradually rise as the labor market improves and transitory effects such as low oil prices fade away. They believed that there would not be enough information of overall health of US economy to start raising rates at their next meeting in June. The next policy meeting takes place on June 16 and June 17.

Chances of rate hike in June are very low, but the door is not closed. If the next non-farm payroll and Prelim GDP (Gross Domestic Product) (Friday, May 29, 2015) comes out very positive, the Fed will likely raise the rates. Prelim GDP is the second estimate of the last quarter. If you want to know more about the first GDP estimate of the last quarter, click here.

Last Friday (May 22, 2015), Federal Reserve Chairwoman Janet Yellen spoke about the US economic outlook at the Greater Providence Chamber of Commerce Economic Outlook in Rhode Island. She said that the Federal Reserve is on track to raise short-term interest rates this year, but will likely proceed slowly and cautiously.

As to trading, I would go long on the dollar and short EUR/USD. Why would I short EUR/USD? Recently, EUR/USD rebounded all the way to above 1.1450. As of right now, it’s around 1.1000. The recent rise in EUR/USD is an opportunity to go short.

News: First, I believe the U.S economy will rebound and future US economic reports will be positive, sending USD higher. Second, I believe Greece will default and eventually leave euro-zone (Greece exiting euro-zone is also known as “Grexit”), which will plunge Euro. Current Greece headlines are just background noises, until we know for sure that Greece will be staying or not.

Technical: If you look at 1-HOUR chart of EUR/USD, you can see that EUR/USD broke a strong support level that used to be resistance. If you look at WEEKLY chart of EUR/USD, you can see that there is a Bearish Engulfing Pattern. Technical seems to be bearish.

EUR/USD - Hourly
EUR/USD – Hourly
EUR/USD - Weekly
EUR/USD – Weekly

 

If you have any questions/comments, feel free to leave comments below and/or contact me by going to “Contact Me” box above. I can also be reached on twitter (@Khojinur30). Thank you.

No Clear Direction Signs For US Economy…….Yet

Last Friday (May 8, 2015), non-farm payrolls report was released and it was in-line with expectations. 223,000 new jobs were added in April, and the unemployment rate fell by 0.1% to 5.4%, the lowest level since May 2008. While, this is a good news. March gains was revised down to 85,000 from the prior estimate of 126,000 (-41,000), lowest since 2012. I believe the April number (223,000) will also be revised lower.

Wage growth remained modest. Over the past 12 months, average hourly earnings have increased by 2.2%. As unemployment rate falls, wages should start to pick up speed, which also will push up inflation.

Fed officials are closely watching the labor market and other key economic reports, as they are in a tough spot on raising short-term rates, which have been held near zero since December 2008.

There is a very little chance of rate hike in June. I believe the Fed won’t hike the interest rates, unless over 350,000 jobs are added in May and unemployment rate goes down by 0.2% to 5.2% (which certainly will not happen).

First quarter was very weak due to; strong U.S. dollar, low energy prices, West Coast port strike, and the bad weather. When these four are combined together, it creates a heavy roof to push down economic growth.

Hiring has been strong in many industries, except energy. About 15,000 energy jobs were lost in April, worst month since May 2009. Lower oil prices increased the pressure on the energy sector. Low energy prices has caused energy companies to lose profits. As a result, they had to cut jobs. Recently, crude oil inventories supply were declining, which caused oil prices to rise above $60.

Last Tuesday (May 5, 2015), trade balance report was released and it exploded. The US trade deficit widened by 43.1% to a seasonally adjusted $51.4 billion in March, largest monthly expansion in the trade gap since December 1996 and the largest deficit reading since October 2008. Trade balance is when you subtract imports from exports. In other words, it’s the difference between imports and exports.

Trade Balance for the past two years
Trade Balance for the past two years

A biggest reason for the weakness was the 9-month slowdown at West Coast port due to a labor contract dispute. West Coast ports is back in business. Imports arriving though the West Coast port surged. Imports increased 7.7% in March, the largest increase on record. While exports only increased 0.9% in March, reflecting strong dollar impact. In the past 12 months, the dollar has jumped almost 10%. Strong dollar had made Americans goods and services less competitive in global markets. Bigger imports and smaller exports mean a bigger deficit.

I believe it’s not to worry about in a long term. Once the backlog is cleared, imports will drop and the trade deficit will also drop.

Recently, the dollar has fallen sharply because of weak US economic reports, including Gross Domestic Product (GDP).

On April 29, 2015 (Wednesday), GDP Advance estimate increased at an annual rate of 0.2% in the first quarter of 2015, down from 2.2% in the fourth quarter of 2014 (-2.0%). This is a huge difference. Economists were anticipating growth of 1% in the first quarter.

Real GDP for the past three years
Real GDP for the past three years

Again, the weakness was due to U.S. dollar, low energy prices, West Coast port strike, and the bad weather. West Coast port strike disrupted the flow of trade, increasing imports which negatively impact GDP. In the past 12 months, the dollar has jumped almost 10%.

According to the report, Real exports of goods and services decreased 7.2% in the first quarter, from an increase of 4.5% in the fourth quarter. Real Imports of goods and services increased 1.8%, from an increase of 10.4% in the fourth quarter.

I’m afraid that Q1 GDP will be revised to negative number. Second estimate (Preliminary) of Q1 GDP will be released on Friday, May 29, 2015.

First quarter GDP was disappointing. I believe the economy should bounce back in the 3 quarters of 2015.

US markets were very happy with the jobs report, but not with other economic reports. The Dow soared more than 250 points, or 1.5% on Friday. While USD bracket currencies were mixed.

Check out the charts below; Dow Jones and US Dollar. US Dollar has fallen signification after hitting of $100.27 on mid-April. Dow Jones has been in a range. Dow Jones chart includes something “extra”, that’s not included in the post here.

US Dollar Index - Four Hourly Chart
US Dollar Index – Four Hourly Chart

 

Dow Jones ($DJI) - Hourly Chart
Dow Jones ($DJI) – Hourly Chart

 

If you have any questions, feel free to contact me anytime by going to “Contact Me” and/or leave comments below. Thank you.

GE’s massive makeover

Last Friday (April 10, 2015), General Electric (GE) announced a plan to sell off real estate and reduce the size of their financial business. They will be selling majority of GE Capital Real Estate assets for about $26.5 billion. GE will also sell away the remaining portion of GE Capital. It aims to complete the sale of GE Capital over the next two years.

GE’s financial unit is one of the largest financial entities, with assets of half a trillion dollars. It includes everything from consumer loans to property. When the financial crisis hit, earnings from GE’s finance unit collapsed. There were (still is) strict regulations on financial services. As a result, Jeff Immelt, CEO of GE, promised to shrink the finance arm.

Ever since the financial crisis, G.E. has taken small steps to shrink its finance operations. Last year, it spun off its private-label credit card business, known as Synchrony Financial (Ticket: SYF), for $2.9 billion initial public offering (IPO).

To who? GE said it would sell nearly all of its real estate portfolio to investors including Blackstone Group and Wells Fargo & Co for $26.5 billion. There are a further $165 billion of assets that needs to be sold. There will be buyers other than Blackstone Group and Wells Fargo & Co. The company plans to keep the finance assets directly related to selling its products such as jet engines, medical equipment, and electrical grid gear. Remember; Warren Buffett has a stake in both GE and Well Fargo. I believe Warren Buffett will be increasing his stake in GE.

Why now? GE is selling their real estate and financial business for two reasons. First, commercial real estate prices are up. Commercial real estate prices are higher today than it was before the financial crisis. Lastly, rates are still low. If the Fed hikes interest rates (cost of borrowing rises), it will be unattractive to finance any deal. Therefore, it’s a perfect time to take an advantage of the low rates and the high prices.

Source: http://www.greenstreetadvisors.com/about/page/cppi/
Source:       http://www.greenstreetadvisors.com/about/page/cppi/

GE is taking the right move, by focusing more on industrial sector. By beginning to sell $26.5 billion worth of real estate assets, GE will be returning to a kind of company it is supposed to be, an industrial company. GE’s operations include jet engines, oil drilling equipment and medical devices. I would not be surprised if GE makes industrial acquisitions, both small and big. I would not even be surprised if GE merges with another industrial business.

Investors are very happy with the deal, including me. General Electric’s stock (Ticker: GE) rose more than 10%, on a heavy volume, to $28.68, highest since September 2008. On Friday, more than 350 million shares (GE) were traded. GE expects to return more than $90 billion in cash to investors through dividends, share buybacks and the Synchrony exchange through the end of 2018. $50 billion will come from a share repurchase program, one of the biggest on record. As of January 31, GE had 10.06 billion shares outstanding. GE expects to reduce it by 20% to 8-8.5 billion by 2018. In the longer term, the stock price will continue to increase.

GE (General Electric) - Daily
GE (General Electric) – Daily

Not only GE wins here, but also Uncle Sam. GE will bring back $36 billion in cash that resides overseas and will have to pay tax to the U.S government, ranging from $4 billion to $6 billion.

GE said it would take after-tax charges of about $16 billion for the restructuring in the first quarter, with $12 billion being non-cash charges. It will reduce their Earnings Per Share (EPS). On Friday (April 17, 2015), GE will report their first quarter earnings.

GE expects that by 2018 more than 90% of its earnings will be generated by its industrial businesses, up from 58% in 2014.

Past & Future:

GE's past and future
GE’s past and future (source: http://www.ge.com)

 

 Note: I currently own shares in GE, which I brought last year at $25.83. I plan to hold on to it. I may even buy more shares. I believe GE’s share-price will reach $38 by the first half of 2016.

If you have any questions, feel free to contact me, and/or leave comments. Thank you.

UPDATE: Click http://www.outofwacc.com/ges-slight-positive-earnings-report-and-its-about-to-change/ or click here.

Fed removes “patient”, and adds twists

Last Wednesday (March 18, 2015), the Federal Reserve released its statement on the monetary policy and its economic projections. The The Fed dropped from its guidance “patient” in reference to its approach to raising the federal funds rate. It was largely to be expected to be removed, which would have send U.S Dollar higher and U.S market lower. However, the opposite happened because of two twists; they lowered their economic projections, and Chair of the Board of Governors of the Federal Reserve System, Janet Yellen’s words during the press conference.

According to the “dot plot”, the Fed lowered median “dot” for 2015 to 0.625% from 1.125% (December). What is “dot plot”? The Dot Plot is part of the Federal Open Market Committee (FOMC)’s economics projections and it shows what each member thinks the federal funds rate should be in the future. It is released quarterly. Sometimes, it might be released more than that, depending on economic circumstances. It gives you a perspective of what each member of FOMC thinks about economic and monetary conditions in the future.

Again, the Fed lowered median “dot” for the end of 2015 to 0.625% from 1.125% in December (-0.50%). The Fed also lowered the “dot” for end of 2016 and 2017. For the end of 2016, it is at 1.875% from 2.5% in December (-0.625%). For the end of 2017, it is at 3.125% from 3.625% in December (-0.50%). Besides, the “dot”, Yellen said one thing that took a toll on the U.S Dollar.

Even though the Fed removed “patient” from the statement, Yellen had “patient” tone during the press conference. Yellen said ““Just because we removed the word “patient” from the statement does not mean we are going to be impatient,”. This sentence alone halted US Dollar from rebounding after it dropped on the statement. There are other things that complicates the timing of the rate-hike.

It’s now more complicated to predict the Fed’s next move because of three reasons; very strong US Dollar, low inflation, and economic crisis in Europe and Japan, if not United Kingdom too. US Dollar is too strong, hurting U.S exports. Inflation has declined due to falling energy prices. The struggling foreign countries economically can also hurt U.S economy. I believe two majors factor of the Fed’s next move are the strong US Dollar, and the low inflation. When both of them are combined together, it makes imports cheaper and keeps inflation lower. I believe Europe will start to get better–as Quantitative Easing (QE) fully kicks in–money starts flowing in Europe. European stocks will probably hit new highs in the coming years because of QE program. Once, the Fed raises the rates, the money will probably flow into Europe from the U.S because of negative interest rates. Low rates have been a key driver of the bull markets in the U.S stock market the past six years. Lower rates makes stocks more attractive to the investors.

Since, the “dot” has dropped harshly, I believe this could be a sign of late delivery of rate hike. They might hike the interest rate in September, not June. However, if non-farm payrolls number continue to be strong, average wage (indicator for inflation) lifts and oil prices rebound, then the door for rate-hike for June might still be open. For now, there is no sign of oil rebounding since it has dropped sharply this week. We will get the next non-farm payroll, which also includes average wage, on April 3.

In the statement, FOMC stated “The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term. This change in the forward guidance does not indicate that the Committee has decided on the timing of the initial increase in the target range.”

The Fed want to be cautions before raising the interest rates. They want more time to be sure; “further improvement in the labor market” and “reasonably confident that inflation will move back to its 2 percent…” Although, non-farm payrolls have been strong lately, inflation is too low. The inflation is low because of the stronger dollar and the plunge in oil prices.

The Fed is in no hurry to increase the interest rate. The Fed said it would definitely not act on rates at “…April FOMC meeting.” and might wait until later in the year. I believe September has higher chance than June, from the rate-hike.

It looks to me that the Fed planned to send US Dollar lower. They probably wanted the US Dollar to be weaker before raising the rates, which could send the US Dollar a lot higher. Their plan worked. The US Dollar dropped so much that it sent EUR/USD (Euro against US Dollar) up 400 pips (above 1.10). U.S market rose after they were down ever since the release of non-farm payrolls for February. Dow gained over 200 points, as well as other indices.

 

Dow Jones (DJI) - 30 Mins
Dow Jones (DJI) – 30 Mins
US Dollar - 30 Mins
US Dollar – 30 Mins
EUR/USD - 30 Mins
EUR/USD – 30 Mins

 

Feel to contact me and/or to leave comments. Don’t forget to follow my twitter account @Khojinur30. At any moment, I might post my view on certain things. Thank you.

US Jobs Report for January 2015

Last Friday (February 6, 2015), US jobs report came out better than expected for prior month. Non-farm payrolls increased to 257,000 and the unemployment rose to 5.7% by 0.1% in January. Plus, data for November and December was “lifted”. November was revised from 353,00 to 423,000 (+70,000) and December was revised from 252,000 to 329,000 (+77,000). Over the past 3 months, U.S has created just over 1 million jobs, strongest since 1997. Only a negative side was the unemployment number. Unemployment number increased because labor force increased. The labor force participation rate rose by 0.2% to 62.9%, showing little more confidence in the jobs market. Average hourly earnings increased by 12 cents to $24.75, which took year-on-year gain to 2.2%, largest since August 2014.

Markets reactions to the report. See for yourself. If you have any questions, feel free to leave comments below.

S&P 500 - Hourly
S&P 500 – Hourly
US Dollar - Hourly
US Dollar – Hourly

 

USD/JPY - Hourly
USD/JPY – Hourly

 

Job gains took place in construction, financial activities, health care and manufacturing. It tells me that the economy is growing and businesses are hiring people for new projects. Businesses probably have positive cash flows to start new projects and hire people. Let’s hope that they are not taking debt that cannot be payed back.

When the rise in hourly wages are combined with lower oil prices, what do you get? People tend to have more money in their pockets. They can spend their money in anything such as retail, vacations, etc, which will increase the profits/revenues of the businesses. They can also pay down the debt that they may have such as student loans, mortgages, etc. Financial crisis in 2008 taught a lot of people lesson, to save money for unexpected emergencies. Young people are more likely to spend the money in areas like retail, entertainment and technology. New technologies tend to excite young people, such as drones.

Strong jobs reports increases the chance of interest-rate hike in June or earlier. Federal Reserve might wait for two more reports to get better sense of where economy is going. If FOMC (Federal Open Market Committee) drops “patient” in its next meeting, there will be higher chance of rate hike in June. The US Dollar is already strong. If FOMC drops “patient”, it will be even more stronger, hurting exports.

I believe FOMC should try to weaken US Dollar before raising interest rate. Even more stronger dollar has the power to hurt exports. Sales of international companies in the U.S can decrease due to stronger dollar. If the US Dollar continues to strength, it can effect US economy is negative way. It will slowly spread.

Feel free to leave comments. Thank you.