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Tuesday | January 14, 2014

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In The News (Click Title For Full Article)


Jim Bianco: Explaining Away The Weak Payroll Report (Not All Bad Weather)
_______________________________________________________________ Jim Bianco was on CNBC Friday discussing the payroll report with Rick Santelli. To view the interview, click here.

_______________________________________________________________ On January 16, 2014 at 9 AM CT (10:00 AM ET, 7:00 AM PT, and 15:00 GMT), Bianco Research, in conjunction with Arbor Research & Trading, will be hosting a webcast/teleconference moderated by Jim Bianco. Join us Thursday as we discuss what to expect from the markets and economy in 2014.

Bianco Research Wecast Conference Call: What To Expect In 2014

Bad Weather...

Click Here To Register For The Conference Call

Goldman Sachs Doesnt Think Stocks Go Much Higher From Here

US stocks are about as high as theyre going to getbarring an unexpected corporate profit barrage, according to Goldman Sachs. The US investment banks stock analysts write: We believe S&P 500 currently trades close to fair value and the forward path of the market will depend on the trajectory of profits rather than further expansion of the forward [price-to-earnings] multiple from the current 15.9x. We forecast a modest price gain of roughly 3% to our year-end 2014 target of 1900.

U.S. Posts $53B Budget Surplus In December

The U.S. government last month posted the largest budget surplus for any December on record, boosted by payments from government-controlled housing finance giants Fannie Mae and Freddie Mac. The mortgage-finance companies, which were propped up by $187.5 billion in taxpayer money after they were placed under government control in 2008, made hefty dividend payments last month in return for the support they received. Those payments helped the government take in $53 billion more in revenue in December than it paid out, the U.S. Treasury said on Monday.

Bonds Captivate $16 Trillion Of Pensions

Bond buyers stung by the first losses in more than a decade can look to pension funds from companies such as Ford Motor Co. (F) for a measure of redemption. Fords $64 billion pension is piling into bonds to reduce risk and lock in higher interest rates after a surge in yields and the biggest stock gain since 1997 sliced its funding shortfall by about half. The second-largest American automaker, which boosted debt investments to about 70 percent of its U.S. plan assets last year from 55 percent in 2012, is now looking to boost that allocation to 80 percent. Companies are now getting on the bandwagon, Ford Treasurer Neil Schloss said in a Jan. 9 telephone interview from the companys headquarters in Dearborn, Michigan. U.S. pensions, which control $16 trillion, shifted out of equities and into bonds in the third quarter at the fastest rate since 2008, data compiled by the Federal Reserve show. The plans were more willing to own stocks after the Fed dropped its target interest rate close to zero and pushed down yields to record lows with its bond buying to support the U.S. economy crippled by the financial crisis.

Quiet Start Puts U.S. Investors In A Fix

After a bang-up 2013, the stock market is starting 2014 with a whimper. The uncharacteristic dip is leaving investors in a tough position: Selling now could protect them from further declines but could also mean they would miss out on the gains most experts are still forecasting for stocks this year. In the years first seven trading days, the Dow Jones Industrial Average is down 0.8%. That isnt a big dip by stock-market standards, but it marks a clear deviation from the norm. New investment money usually pushes stocks higher at the start of the year. In two-thirds of the years since the Dow Jones Industrial Average was launched in 1896, the blue-chip index has risen in Januarys first seven trading days.

Why Gold Wont Protect You From Inflation

Peter Schiff is the chief strategist at the brokerage firm Euro Pacific. He has a radio show and has written some books. Hes probably most known as calling for a collapse in the dollar and being generally bearish on the U.S. economy. Harry Dent is also a well-known financial commentator. He writes a newsletter and is author of several books. Hes probably most famous for his predictions based on demographics. Hes also a vocal deflationist. Inflation here means generally rising prices. Deflation means prices are generally falling. There are other consequences associated with each. For example, Peter believes interest rates will rise. Harry thinks they will fall. Peter thinks the dollar will lose value, Harry thinks not.

UKs Credit Rating Could Be Threatened As Treasury Guarantees Scotlands Debt

The UKs credit rating could be threatened if Scotland votes for independence after the Treasury pledged to guarantee Scotlands share of the nations 1.4 trillion of debt in all circumstances. Bond traders and economists welcomed the Treasurys clarification that it would stand behind all Government-issued debt instruments in the event of full devolution. However, some warned that the UKs debt to GDP ratio, which is already 76pc, would rise significantly - by about 10pc - which could alarm the rating agencies. The Treasury said an independent Scotland would have to pay for a fair and proportionate share of UK liabilities but that the amount would be worked out as a separate compensation scheme. But a share of the outstanding stock of debt instruments that have been issued by the UK would not be transferred to Scotland.

Key Trends In A Milestone Year for ETFs

Half Of U.S. Counties Havent Recovered From Recession

About half of the nations 3,069 county economies are still short of their prerecession economic output, reflecting the uneven economic recovery, according to a new report from the National Association of Counties. The overall U.S. economy had reached its prerecession level of gross domestic product three years ago, Commerce Department figures show. National statistics mask the reality on the ground, where some county economies were in recession long before December 2007 and others never experienced one at all, said Emilia Istrate, the associations director of research and one of the authors of the report. Thats where Americans feel the economy. They feel it locally. The report, released Monday, examined four economic indicators: GDP, total number of jobs, unemployment rates and home prices. It found wide variations.

Bailing Out Health Insurers And Helping Obamacare

Chinas Balancing Act

For more than two decades, the Chinese government has set an official annual GDP growth target and always managed to hit or exceed its announced rate. This year, Beijing has elected not to identify such a target, leaving many in the business community worrying whether Chinas economic growth in the new year will decelerate further (it has been falling steadily since 2010). Lost in the obsession over growth targets is the fact that, if fully implemented, bold structural reforms announced at the Chinese Communist Party Central Committees 3rd plenum last November will transform Chinas economy altogether. Like most reforms, the measures announced by the Chinese government may produce sustainable long-term growth, but they will almost certainly dampen growth in the short-term. This is not lost on Chinese policymakers. They understand that they are in a no-win situation if they pick a hard GDP target for 2014. Rhetorically, doing so would discredit the new leaderships pledge of ending GDP worship.

Robert Laszewskia prominent consultant to health insurance companiesrecently wrote in a remarkably candid blog post that, while Obamacare is almost certain to cause insurance costs to skyrocket even higher than it already has, insurers wont be losing a lot of sleep over it. How can this be? Because insurance companies wont bear the cost of their own lossesat least not more than about a quarter of them. The other three-quarters will be borne by American taxpayers. For some reason, President Obama hasnt talked about this particular feature of his signature legislation. Indeed, its bad enough that Obamacare is projected by the Congressional Budget Office to funnel $1,071,000,000,000.00 (thats $1.071 trillion) over the next decade (2014 to 2023) from American taxpayers, through Washington, to health insurance companies. Its even worse that Obamacare is trying to coerce Americans into buying those same insurers product (although there are escape routes). Its almost unbelievable that it will also subsidize those same insurers losses.

A Bullish Case For Janet Yellen, Our Confused New Fed Chairman

As is well known now, Janet Yellen was confirmed last Monday as Fed Chairman. On its face, this should concern those who desire economic growth. Figure the Fed itself is superfluous. We dont need a federally chartered lender of last resort. In fact, the banking system would be quite a bit healthier if there werent one owing to the logical truth that private businesses of all stripes would only lend to solvent banks experiencing short-term cash crunches.

Daily Sentiment Indicator


The Daily Sentiment Indicator (DSI) is a short term contrary opinion indicator based on a survey taken by MBH Commodities. The survey assesses the Bullish or Bearish opinions of qualified non-professional traders in order to establish whether a market is overbought or oversold. The number of participants varies on a daily and market-to-market basis depending on the willing participation of those surveyed. The interest rate and currency markets generally garner largest rate of participation. The Arbor Quantitative Analytics Group aggregates the data gathered by MBH Commodities and presents it as a 5 Day Average overlaid with Overbought and Oversold levels at 70 and 30, respectively.

Snapshot Of The US TIPS Report

(Click Chart To View Full Report)

UST 10 YR Note

Close 99-11+

Change +10+32nd

DSI 18% Bullish

USTs - Long-End Overbought at KEY Resistance


USTs continue higher into Wkly Resistances while digesting Decembers sour employment report. 10s and 30s are at an important crossroads having found short-term overbought conditions near Wkly and Mthly Resistances (10s 98-30/99-12 62% hold and 30s 98-18+/99-11 50% hold). Note Mthly Resistance have held 8 consecutive months. Mixed outlook for Tuesday. Bulls nervous about overbought conditions should keep stops tightly below Dly Supports (held 3 days).

UST Curve

UST Curve - 2y10y, 2y30y Testing Key Monthly Support


US 2y5y: 122.9 (-2.2 bps) - Flattening continued Monday and the 2y5y is within striking distance of Wkly Sup 120.7/121.7 (120.7/121.7 (61/58). Additional long term support is stacked below with Mthly Sup 114.1/118.8 (57/63) and then Qtrly Sup 107.0/112.7. Mthly Sup has held for 19 months and we are nearing short term oversold levels again. Steepening through Dly Res 124.8/125.7 (53/64) would shift our focus to Wkly Res 130.7/132.0 (XX/YY). US 2y10y: 246.7 (-2.1 bps) - Momentum favors flattening but both Mthly Sup 245.9/251.2 (In/73) and Wkly Sup 244.2/245.3 (39/69) are favored to limit declines. We also remain near short term oversold levels. Flattening through Dly Sup 244.6/245.1 (52/71) would expose downside to Qtrly Sup 231.6/237.9. Steepening through Dly Res 248.9/249.5. (58/63) would leave Mthly Sup favored to hold and shift our focus to Wkly Res 256.0/257.1 (36/58). US 2y30y: 340.8 (-1.5) - Momentum continues to lean flatter but Mthly Sup 337.7/342.3 (In/56) and Wkly Sup 337.2/338.4 (44/47) remain

significant hurdles. A break would expose limited downside to Qtrly Sup 327.6/333.9. Tuesdays setup leans steeper with Dly Res 342.9/343.4 (74/56). A break would leave Mthly Sup favored to hold and shift our focus to Wkly Res 348.8/350.2 (24/38). US 5y10y: 123.6 (+0.1 bps) - Short term momentum is neutral. The massive cluster of Wkly Sup 118.8/120.6 (30/44), Mthly Sup 117.2/119.0 (50/60) and Qtrly Sup 119/122 remains likely to limit flattening. Well need to see steepening through Wkly Res 126.8/128.5 (43/54) to confirm a lasting swing higher targeting Mthly Res at 135.4/138.9. US 5y30y: 217.7 (+0.7 bps) - Short term momentum is neutral. Wkly Res at 221.5/223.5 (54/67) is the key hurdle for steepening and favored to hold. A break exposes room to 2nd Wkly Res 230.1/231.5. Clustered Wkly Sup 210.1/212.8 (34/76) and Mthly Sup 207.6/210.6 (40/60) coincide with Dex lows and are the key hurdles for renewed flattening. US 10y30y: 93.9 (+0.65 bps) - Momentum is neutral. Wkly Res at 95.0/96.1 (Holding/69) is the key test for further steepening. A break swings ST momentum in favor of steepening into Mthly/Qtrly Res at 103.3/104.9 (42/64). Renewed flattening will face hurdles at Wkly Sup 89.8/90.9 (37/26) and then Mthly Sup 85.1/87.1 (33/76).

US 10YR TIP B/E

Close 2.258

Change -0.012

US TIPS BreakevensFocus On Weekly Supports


US 10y TIP B/E: 2.258 (wkly chg: -1.2 bps) - The weekly picture still leans wider though until we see tightening through Wkly Sup 2.225/2.238 (52/64). 2nd Wkly Sup 2.181/2.189 (15/60) is the next target if we do break lower. A push back above Mthly Res 2.278/2.294 (Holding/67) exposes limited room to firm Wkly Res 2.304/2.311 (33/67), then a bit more to 2nd Wkly Res 2.351/2.357 (10/58).

Spot Gold

Close 1,253.83

Change +8.85

DSI 24% Bullish

Spot Gold - Testing Monthly Resistance


Spot Gold 1,253.83 Continued to push higher on Monday, closing within Monthly Resistance 1,252.27/1,268.00 (61% hold) and just below Weekly Resistance 1,257.51/1,265.11 (56% test / 62% hold). This overlap remains a significant hurdle for bulls, with a break needed to signal a longer term shift towards higher prices. For Monday, Daily Resistance 1,258.24/1,260.59 (48% test / 63% hold). Daily Support 1,243.84/1,246.63 (58% test / 50% hold).

Crude Oil

Close 91.80

Change -0.92

DSI 16% Bullish

Crude Oil - Crude Unable To Sustain Rallies


Crude Oil: 91.80 (-0.92) - Short term oversold conditions have eased but crude has been unable to sustain rallies as it grinds along Qtrly Sup. Short term momentum remains bearish pending a break of Dly Res (held 10 days). Overlapping Wkly Sup 90.96/91.31 (57/54) and 2nd Mthly Sup 90.76/91.44 (Holding/50) have only modest odds of holding. A break reaffirms bearish momentum and exposes downside to 3rd Mthly Sup 88.42/89.10. A rally through Dly Res 92.58/92.74 (52/63) would shift ST momentum to neutral and our focus to Wkly Res 94.35/94.70 (15/57).

S&P 500

Close 1,819.20

Change -23.17

DSI 71% Bullish

S&P 500 - Breaking Wkly Support


The S&P 500 (last: 1819.20 dly chg: -23.17) sank through Wkly Support 1823/1830 (48% hold) on Monday. Another day of decline will put the index in short-term oversold territory. A deeper set-back has to contend with Mthly Support 1790/1802 (71% hold), which has held a whopping 19 consecutive months. For Tuesday, Dly Support 1808/1809 (64% hold) and Resistance 1826/18728 (56% hold).

VIX

Close 13.28

Change +1.14

DSI 22% Bullish

4 Ways The Fed Taper Puts Your Money At Risk


The Feds quantitative easing has thrown an enormous blanket over volatility in the marketplace. The bulls might argue that a tapering of a mere $10 billion per month should be viewed as the equivalent of serving 90-proof spirits rather than the 100-proof stuff that has liquefied the party so far. While thats true, markets will often look at marginal moves to ascertain forward prices, not simply absolute levels. From this standpoint, we should be extremely concerned that even a small tapering will cause a move higher in volatility, especially when viewed on a percentage basis. As such, investments that suffer from higher levels of volatility that is, securities with an embedded short optionality component should be viewed with a greater degree

of caution.

If you have questions, please contact:

Arbor Research Group


Fritz Handler - fritz.handler@arborresearch.com Max Konzelman - max.konzelman@arborresearch.com Tim Oakley - tim.oakley@arborresearch.com

Arbor Research & Trading, LLC 1000 Hart Rd. Barrington, IL 60010 800-606-1872


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