Friday, November 15, 2013

Hammer of the Gods: Yellen Speaks, Stocks Hit Record Highs

Last week, Thor: The Dark World dominated at the box office, earnings $85.7 million in its opening weekend. And with no blockbusters scheduled to hit the theaters this week, it looks like Thor could top the box office for a second weekend in a row.

The Dow Jones Industrial Average has a bit of a hot streak going as well. It gained 1.3% this week to 15,961.70, the second consecutive week that closed at a record high. The S&P 500 rose 1.6% to 1,798.18, also a record high. The S&P 500 has closed at a record high 36 times this year, the Dow 38 times.

S&P Capital IQ’s Howard Silverblatt puts those numbers in context:

There have been 1,022 new closing highs since 1928, and I've been at S&P for 548 of them, 53.6%. From 1930 through 1953 there were no new closing highs.

Breadth is near a modern day record; YTD 449 are up and 50 are down, the record since 1980 is 458 up, set in 2003.

Given the broad gains, and the very public new highs (S&P 500 and DJIA), sideline investors are most likely feeling the pressure to get in.  Chasing returns is not a good reason to invest, but when enough do it, the short-term impact is more buying and higher prices. If the market stays anywhere near its current level, we may see higher inflow and a corresponding short-term uptick in prices.

Stocks got there boost this week from Fed Chair-to-be Janet Yellen, who explained why she thought tapering had been beneficial. RBS’s Alberto Gallo considers the downsides of quantitative easing:

Janet Yellen’s testimony yesterday was predictably dovish, causing risk assets to rally globally and pushing the S&P 500 to an all-time high. The hearing reaffirmed her commitment to further easing, to avoiding tapering QE too soon, and also to strong forward guidance to keep front-end rates anchored low. Yellen noted that the benefits of QE still exceeded the costs, but we are increasingly concerned about markets addicted to liquidity from unconventional central bank policy. In the US, QE worked to avoid deflation and capital flight, and has kept consumption stable. However relying on QE has reduced the pressure on the government to implement critical reforms to stimulate growth, such as changes to entitlements, health care reform and state spending. There are other side-effects of QE: it has exacerbated increasing income inequality. The top 1% of Americans now earn 20% of US income compared to 10% in 1860 and 8% in 1774. QE can also generate asset bubbles. For example the US HY market shows signs of overvaluation according to our Junk Bubble Indicator, as average credit quality declines, issuance of cov-lite loans increases and M&A and LBO activity rise, similar to 2007.

Combine Yellen’s dovishness–if it really is dovishness–with idiosyncratic company news, and some stocks were guaranteed to take off. Iron Mountain (IRM), for instance, gained 12% this week after the IRS said it had ended a working group considering REIT conversions and would now turn to its application. Pitney Bowes (PBI), meanwhile, rose 11% this week after activist investor Jana Partners revealed it had accumulated a large stake in the stock. Macy’s (M) advanced 11% after reporting much better earnings than forecast by analysts. Marathon Petroleum (MPC) finished the week up 10% as the difference between the price of oil here in the U.S. and the price abroad widened. Rounding out the top-five: J.C. Penney (JCP). The beaten-down retailer rose 9.7% this week, getting a boost from positive analyst comments and hedge-fund purchases.

When even J.C. Penney is rallying, you have to wonder when the hammer will finally come down.

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