Why the Fed is unlikely to reduce its assets on the balance sheet?

The evolution of the US Federal Reserve's monetary policy is once again being speculated on as some sections of market participants are becoming presumptuously inclined to the comments made by regional members of the Fed in terms of different approaches that are still available to the central bank in tightening the monetary environment.

A commonly referred to figure that forms the basis of argument for some critics is found in the form of the Fed's balance sheet, all the assets purchased or sold in the process of controlling money supply.

Before the start of the Financial Crisis in 2008, the Federal Reserve had an accumulated $1 trillion worth of assets. From this point onwards it expanded this figure to well over $4.5 trillion through three separate bond purchasing programs, otherwise known as Quantitative Easing, which is often cited as unsuccessfully rebooting the US economy and triggering similar programs in other developed nations.  

Top Fed officials are in no hurry to reduce their $4.5 trillion portfolio of securities and other assets https://t.co/W1JPw9lBWi

— Real Time Economics (@WSJecon) February 27, 2017

Assessing the current tempo of the FOMC's interest rate hikes, the US has only seen two such event from an expectant six forecasted at the beginning of the policy shift in December 2015.

This leaves interest rates at 0.75%, a miniscule reflection to the heights of its tyranny of yesteryear.

Yet the impact of a 50 basis points rise in interest rates on the global financial system holds more gravitas than its counteraction and thus been implemented with more awareness to any negative influence it may impose of the system.

Will the Fed be liberal in it's approach to reduce its assets?

Highly unlikely as its conservative stance in hiking would be in direct conflict with this type of action which it believes could have adverse impacts on the stability of the financial system as a whole.

It isn't surprising that we haven't seen much activity coming from the Fed as factors placing a strain on the world economy has caused politicians to become distracted from the primary objective of returning the globe to signs of encouraging economic activity.

US President Donald Trump could play a pivotal role for the Fed though if his economic policy ignites the engines of growth and spurs inflation to exceed through its current ceiling. If we were to see a quickening of inflation, the real value of debt levels in the US could be dramatically reduced.

However judging by the hostility between Trump and his nation, there are no certainties of this happening.

The Fed will be hoping for a better response to Trump's proposed budget measures which he campaigned as "Less Taxes, More Spending" in an effort to use it as a platform from which it can execute interest rate hikes with certitude that the US economy will be able to absorb hikes with a measure of sustainability.

Technical Analysis: Advanced Micro Devices Inc.

Advanced Micro Devices Inc. Daily

The best way to describe this chart; Trend Following 101, there's nothing simpler to spot than a security that exhibits higher highs and higher lows coupled with a strong and steady 50 moving average in the direction of the prevailing trend that correspondingly triggers a buy signal when the stochastic lies oversold. 

It appears as if $14 is standing as resistance to bullish optimism but won't provide much of a fight when weighed up against the strengths listed in the paragraph above and the divergence emerging from the stochastic that indicates the continuation of the trend.

Company Analysis: BHP Billiton Ltd.

BHP Billiton, the world's largest mining company has reported better than expected earnings, recovering sharply from a troubled market environment enclaved by a glut of supply and slowdown in Chinese economic growth. 

The company's main contributing commodities all performed outstandingly as capital expenditure cuts have gone a long way in shoring up investors confidence who have seen the move as eliminating short term surpluses. 

Needless to say the overcapacity that's plagued the industry for an extended period of time remains a major concern for management whose hesitancy to mark the bottom of the downward cycle has led to the board to take a cautious approach in their strategic decisions, citing political uncertainty as a prime risk factor.

An excerpt from BHP Billiton's 1H 2017 results presentation.
For more info go to: http://www.bhpbilliton.com/-/media/documents/media/reports-and-presentations/2017/170221_bhpbillitonresultsforthehalfyearended31december2016_presentation.pdf?la=en 

Prospects

On the prospects of iron ore and metallurgical coal, these markets have experienced a rejuvenation of buying, especially from China whose government has drastically cut away from using subsidies to prop up state-owned mines in the sector. 

The Chinese government is under particular pressure to shape up it's fiscal affairs accordingly after years of using debt as a stimulus for growth which has left the government in danger of falling into the same fate as its counterparts Japan.

Because of China's increased focus on fiscal consolidation, it's likely that the country's mining ambitions and sponsorships will be kept to a minimum, opening the passage for global resources companies to once again take the reigns and supply the commodities market. 

In respect of the two commodities mentioned above, the combined percentage of contribution to EBITDA is 60% which bodes positively for the company. 

When looking at oil, the horizon becomes more blurred when contemplating the effects of an expectant(now implemented) production cuts by OPEC and Non-OPEC countries. 

The price has responded as most would've assumed however comments made by the Saudi Arabian oil minister pertaining to the need to extend the current agreement has left uncertainty together with evidence building that US shale gas producers are resuming production, effectively offsetting any cuts made.  

Financial Analysis

Apart from underlying profits surging past estimates, the company announced a dividend of 40 cents compared to an expected 30 cents, increasing the payout to 2.5 times of the previous dividend, leaving a strong indication of healthier cash flows. 

The announcement of a reduction in debt by $2.5 billion from a bond buyback program sweetened the results with the company currently sitting with debt levels just over $20 billion after wiping off a fifth of it's debt in the last year.  

BHP Billiton Ltd., the world’s biggest mining company, said first-half profit jumped more than sevenfold.#METLhttps://t.co/McGfMpI206 pic.twitter.com/2BkZZD7C5Y

— BN Commodities (@BNCommodities) February 21, 2017 

 A further reduction in debt signals management's cautious nature given the measure of losses absorbed during a difficult period, as well as lending a favour to the CFO to trim back on the vulnerability the company may find itself in.

The move could also be seen as the company expecting a rise in interest rates, specifically in the US which should see more profits feed into the bottom line.

Technical Analysis: Kraft-Heinz Corp.

A distinct pattern that's taken shape since late 2015 is the resemblance of a step structure in the price consolidating for an extended period and then breaking through to the next level in a rather smooth transition. 

What is to be expected is the measure of control that happens behind the moves to the next level of highs or lows. The reason for pointing this out is based on the observation that the price is currently situated near the previous highs with potential to breakthrough those levels. 

The MACD is registering a favourable reading which will be optimal for the buyers in this respect but caution must be shown as the moving averages on the indicator are sitting lowly in positive territory and subsequently look set to turn downwards below the zero line.  

Yellen in the firing line as Trump's comments draw relevance

With just under a year left in her first tenure as Chair of the Federal Reserve, Janet Yellen has been forced to defend the central bank's actions subsequent to the onset of the Financial Crisis as well as field questions about a possible imbalance in over utilising monetary policy in an effort to substitute the shortcomings of the Obama administration's lack of an appropriate economic strategy that failed to produce the necessary growth needed.

Testimony given during Yellen's appearance before the Senate's Banking Committee reveal an intolerable tone setting in as indications begin to emerge on how Republicans are expected to deal with newly incumbent US president's views that the Dodd-Frank Act on financial reforms are stunting the growth of the economy by shutting out small to medium enterprises from raising loans.

Besides this, President Trump has also been noted as saying that the appointment of Janet Yellen was "highly political" and the Federal Reserve was being used to mask the failings of the previous administration. He went on to stress the importance of political independence in the monetary body.

These comments were made while Trump was the Republican presidential nominee.  

Fed’s Yellen spars with legislators on regulation, economy https://t.co/7eD0Rznz6h pic.twitter.com/3lH6Ih1n4O

— Business Day (@BDliveSA) February 16, 2017

Yellen isn't going to find much refuge in the year ahead and will ultimately be pressured to defend the actions of the Fed in the attempt to save its credibility amongst the financial sector.

However there is an argument that's been growing with intensity with every passing year over the sedative response central banks across the globe have taken in normalising the interest rate cycle.

In some cases central banks, like the ECB and BOJ, have taken the decision to continue using easing measures without much success while causing concern with investors over the length of continuity with such programs and it's ability to deliver on it's promises of prospects.

The Fed doesn't have too much pressure in this respect as it's the only major economy to have begun the process of interest rate normalisation, however with that being said, it might very well press Yellen to aggressively lift rates if she's to have any chance of keeping her job ... a fate that still hangs in the balance.  

Technical Analysis: Global X Uranium ETF

Following a stable and consistent downward run, this instrument has transitioned perfectly with the bottoming phase being proportionate in the lows registered as well as in formation. There was hardly much of a struggle at $16 as price eased its way past this important resistance mark. 

The ideal target for this setup would be roughly around $22 however it's very likely that we could see a retest of $16. 

Reverse bearish divergence is evident and considering the fact that the uptrend in force wouldn't be classified as dominant as of yet, the downtrend could still play a good part in bring down the price.   

Toshiba: Where did it all go wrong?

Who would've thought a decade ago when the Japanese technology conglomerate, Toshiba, decided to pour billions into the acquisition of Westinghouse, a company that designs, manufactures and commissions nuclear plants, would be staring down the barrel of bankruptcy after management told shareholders of it's intentions to absorb a mammoth $6.3 billion writedown of the business?

This is what management's expressed views was following a failure to release it's financial results and having to seek permission for an extension of a month from the Japanese securities regulator to finalise an approval from auditors in presenting the figures.

Toshiba to take $6.3 billion hit on U.S nuclear unit https://t.co/P59OfnCDEx

— Reuters Top News (@Reuters) February 14, 2017

You would've been forgiven had you thought the demand for energy production was set to expand into the early to mid 2010's considering the exponential growth experienced in China as well as the uncertain relations between the Western World and the Middle East over the dominance of the energy market, more particular the oil price.

Alternative ways of powering the economy were a hotbed of political conversation with policymakers pushing the agenda at every possible moment as if to ascend it's level of priority closer to the top of the pile.

How did Toshiba get it all wrong?

Although the drive to innovations in the energy sector was seen to be a lucrative opportunity for most investors, the parts of the industry that received the most attention were those promoting renewable energy, as well as the inclusion of the production of synthetic fuel from natural gas in an bid to bypass conventional means of importing gasoline.

Nuclear energy hardly featured in any future plans, let alone presented a favourable space for investment when weighing up the unfavourability as an option, led by European leaders who drove their ambitions of powering their entire nations on green energy.

And let's not forget about the Fukushima nuclear disaster of 2011 where a lapse of judgement in safety precautions were eventually exposed during an occurrence of a devastating tsunami that damaged the reputation of Japanese expertise in the field of nuclear.  

Why the world superpowers matter most? 

One of the major characteristics when it comes to investing in energy production is the issue of intensity in the amount of funds needed to finance these projects. Because of the scale and timeframes of these projects it's usually governments that become the decisive factor.

Evaluating the production playing field in terms of energy, it's easily known that developed economies consume the greater share of total production than their emerging counterparts, translating into a higher level of investment to keep the system current.

Although emerging markets may be flirting with the idea of introducing nuclear in the not so distant future, it's the developed nations who provide the biggest source of revenue generation and when considering that most of these countries have chosen to move away from it doesn't bode well for companies like Toshiba.      

Technical Analysis: Allergan Plc

Allergan PLC.

This stock had a strong build up into the highs of $330 before tapering off and falling back into line of trading normalcy without running away with itself. The pullback down to $195 is a unique figure in the formation of the uptrend to come. 

It's previous struggle at around this level during the momentous runaway does stand out as an oddity but also laid the support for the present pullback to easily find assistance in curbing the seller's enthusiasm. 

There looks to have formed a fairly large inverted cup and handle pattern that's dominated the chart for the last six months. 

Given that the above chart has been taken on a Monthly basis, the anticipation of a break to the downside would've wrote this stocks fortune but not this time. 

A strong bounce off $195 and the proceeding rally close to the highs of the handle does leave bears feeling vulnerable at present. 

The change of polarity in both the 13 day moving average and the RSI gives impetus to the bulls to take things higher from here with the first target being a close above $260. 

From here it's likely that this stock could rally all the way up to $430 in a short amount of time and considering the P/E ratio lies just above 6.5, there's more space for movement than one thinks.    

Technical Analysis: Twilio Inc.

Twilio Inc. Daily

A recently listed company, this stock started off it's debut with a bang having run from IPO price of $15 all the way up to $70 before sellers winded their momentum and sent the price back towards it's listing levels. 

The depth of the fallback was a sheer 57% drop before a throwback set in however effort was feeble and it wasn't long before the sellers took control again. 

What distinguishes the two parts of the downtrend is the characteristic of lows and particularly how they were registered.

In the first phase there was no support whatsoever from buyers which meant price kept sinking past previous lows whereas in the second phase there's a display of buyers gradually stepping in and producing the necessary zeal to allow for a throwback. 

The current rally in place is the strongest yet with signs of buyers emerging by indications of the price securing itself above the previous low near $28.  

European woes aiding fresh uncertainty in the market

I stumbled across this chart posted by Cecile Vannucci on Twitter and found the observation thought provoking. The underlying instrument being studied is the SPDR EuroStoxx 50 ETF, a popular depository receipt listed on the New York Stock Exchange that tracks the movements of the EuroStoxx 50 index in Europe.

The activity being followed is the amount of short interest positions taken on a weekly basis with the vertical axis representing the level of quantity traded.

Analysing the chart,  the evidence of asymmetry is quite prominent when assessing the magnitude of volumes produced just in the last week when compared against preceding stages.

The closest figure in this set of data to come anywhere near this number happened almost a year ago however the volumes recorded in that particular registered 20 000 whereas the current aggregate sitting shy of 100 000 contract, a staggering five times the volume.

An anomaly or signs of things to come as the quantity of put options traded on SPDR EuroStoxx 50 ETF surges ... $FEZ pic.twitter.com/SJCdX0Si14

— Quinton Mendes (@CadeTradeR) February 6, 2017

Investigating further with charting, it immediately becomes noticeable that the EuroStoxx 50 has been confined to a downtrend since the second half of 2014 whilst only breaking free of this containment in recent weeks.

A lateral resistance just below $35 has acted as a catalyst for bearish traders to take advantage in the past with the prospects of this happening strengthening when used in conjunction with the information provided above.

SPDR EuroStoxx 50 ETF

With European political dynamics drifting into limbo in the months ahead, it's not surprising to see the state of play being set up.

Both the Dutch and French elections are bound to create uncertainty going into voting day on March 15th and April 23rd respectively with right-wing nationalism surging forward in the polls leading up to elections.

Added to this is the re-introduction yet again of the Greece debt crisis which hardly goes a year without shaking the institution of the EU.

A tricky political issue that refuses to go away but coincidently is responsible for claiming power away from ruling governments.

Unless something drastically changes, which is highly unlikely, the tone being set by financial market participants will ultimately remain until some resolve is found.

Technical Analysis: AutoNation inc.

AutoNation Inc. Weekly

A consolidatory trend has laid claim to activity in this stock over the past year or so after a severe drop in price. The lows of $41.50 that's been tested twice over this period but don't look to be set in stone as most of the price movement has occurred above $44.

Resistance just under $54 has prevented the price from surging higher and delivering the throwback many buyers were looking for.

The stochastic seems perfectly poised to hint at the next direction of the price from it's present state. Although it should be noted that the current rally off the lows of $41.50 back to the top of resistance has been the strongest yet in this cycle of  the trend.

Long tails left to the top of candles together with the area of overbought captured by the stochastic does leave a sense of pessimism.  

Technical Analysis: United States Steel Corp.

United States Steel Corp. Daily 6 Months

Analysis shown on this stock two months ago indicated an incredible run in a short span of time but signs of an imminent slowdown in momentum perking up with a decrease in volumes whilst price levels continued to rise as well as shakiness in a measure of trendiness.

We've witnessed a consolidation phase occur since the start of December till present with a fairly steady shift in price finding shallow support not far from the previous highs.

Observing the behaviour of the price line with the 13 day moving average, the moment price began stumbling below and reclaiming the space above on a frequent basis the consolidation set in. Since then we've seen the 13 SMA follow the price closely.

Any positive shift above the 13 SMA could trigger bullishness for traders looking to capture the next swing higher.

 The $32 horizontal support line looks sturdy enough to hold buyers for a little while longer with a degree of comfort in knowing this.

Decreasing volumes coupled with a slow grinding downtrend could suggest the sellers are running out of steam to drive prices lower.

Wiese's Steinhoff & Shoprite tie up could prove problematic

As the proposed merger between retail giants Shoprite and Steinhoff International continues to dominate company news headlines, the hesitancy of investors from both sides of the spectrum has driven quite a few to wonder if the sketchy details of a tabled deal would be advantageous in the interest of all parties.

The architect of this endeavour is none other than Christo Wiese, chairman and sizable shareholder in both entities whose wishes are to consolidate his investments into one company.

However he'll need to explain why the deal renders the move necessary and how it's going to add value to other shareholders besides himself, a feat that most analysts can't envisage to be compelling.

Although it can be said that Wiese has received the backing from another large shareholder in the Public Investment Corporation which bodes well for his chances of completing the deal.  

SHP SRH SNHE Steinhoff / Shoprite - Renewal of joint cautionary announcement https://t.co/Ab6lVnvXDK

— JSE_SENS (@JSE_SENS) January 31, 2017

A main criticism of the deal stems from the fact that Wiese is the chairman for both companies, a principal position in ensuring good corporate governance is undertaken to take into consideration the interest of all stakeholders involved throughout the business and not merely that of shareholders.

By implication, Wiese is bypassing a moral & ethical consideration in favour of self interest.

Suppose the deal were to be approved, the likelihood of a cutback on labour costs is tentatively high on a reasoning of eliminating job duplication in the quest to find synergies.

As the chairman of the board Wiese is ethically obliged to take care of the interests of all stakeholders including that of the companies labour force which means this situation could turn it's ugly head if trade unions decide to dig their heels in on the prospects of a strong case.  

The deal doesn't make sense and it certainly doesn't appeal to to all stakeholders involved in it and although to pass it through might not be a difficult task to do if backed by other larger shareholders, the ideal objective would to have everyone on board and create value for more than one person.