Market Outlook | August 21, 2017

The Doom Build-Up      

There's a desperation that's brewing to find bargains or to see market tops across private and public sectors of the financial markets. The doubters, who've wrote, shouted and acted about the "over-stretched" markets, are now pondering the long-awaited correction, which still seems quite illusive. The doubters of the current trend include seasoned professionals, active money managers and perplexed observers of all kinds. Since July 26, the VIX (Volatility index) has woken up from a slumber, going from 8 to 14. Perhaps, the dormant risk has brought levelness or some pulse to the smooth-sailing market. Albeit, this is all minor when digesting the nine-year bull market.

Shocking Calm

Yet, the status-quo has not been quite derailed. As yields come down faster even in nations that are risky on many levels, such as Greece and Spain, big capital is still looking for investable areas. Amazingly, even after the Barcelona terrorist attack by Islamic groups, the Spanish 10-year government bond is trading around 1.5%. Italian long-dated bonds stand at 2.03%, and Greek 10-year bonds stand at 5.63%.  Just to put things in perspective, five years ago Greek Bonds stood near 24%. That was around the height of the European crisis. Clearly, today the “perception of risk” has dramatically lessened, at least in financial markets. There's nothing shocking about the very low to negative interest rates at this junction. In fact, it's a tiresome reality, but one day this perception of calmness will explode to various doses of reality.  When's that day?  Are early clues visible yet? Haven't we heard it before to only see years go by? The suspense lives on a bit, but the artful coordination by Central Banks has enabled a narrative of low risk to persist boldly.

 Bargain Hunting

The “value-seeking” camp is desperate to find bargains, despite appearing calm and patient for a long-awaited market correction. What exactly is “value” these days? Google or Amazon? It is hard to claim the best performing stocks are in value related areas when “FANG” has caused such explosive momentum in stocks, where these relatively authentic companies have gobbled up a noteworthy market’s share, putting others to shame. Where's the bargain? In energy, retail or some specific beaten-up names? Value chasers are looking for near-obsolete retail that may survive the onslaught or an energy company that can overcome the massive pressure from the oil glut. In reality so many professionals are seeking or fearing a massive reset, an ultimate test of reality, a notable shock to test the coordinated Central Bank’s narrative, a correction to expose the hidden risks and to identify the true state of the real economy. The dream of the short seller and the nightmare of the ultra-bull have not converged yet, leaving more anxiousness and suspense. The short seller will not stop being skeptical even after taking a beating from the ongoing bull market. And the momentum chaser is not eager to abruptly sell, since the very minor hiccups and panic like traits suggest the resilience of the status-quo. 

Bitcoins are battling for a moment of supremacy, too, given the huge run up. FinTech boom is visible left and right, from payment processors to Cyber security to robo-advisor. There's the massive innovation gold rush, where only few survive. Again, even in the private and venture world, the entry point for new investment is not ideal (for the most part), considering longer-term commitment. A correction is a good barometer of risk perception and less visible realities. Perhaps, a breather of sorts enables all to reassess past risks and risks moving ahead.

Key Levels: (Prices as of Close: August 18, 2017)

S&P 500 Index [2,425.55] – After peaking on August 8 at 2,490.87, the index has been in a mild correction mode. Certainly, the bulls are being tested with their conviction; a break below 2,400 can set off a wave of compounding fear.

Crude (Spot) [$48.51] – Between the glut of supply and rift between Saudi and Qatar, the prices for Oil seem quite stable. Of course, surging above $50 has been quite a challenge, and many traders are noting that. Yet, June 21, 2017 lows of $42.05 have set the tone for now.  

Gold [$1295.80] – Re-acceleration continues since early July. An interesting development where the strength has picked up momentum, causing gold to break above $1,300, is sending a technical message. With defensive-like assets in demand, maybe Gold benefits a little as the Central Bank theme is being doubted a bit.

DXY – US Dollar Index [93.43] – There’s one trend that’s crystal clear in 2017 and since Trump’s presidency: weak dollar. Is it related to the calendar year or White House? Maybe it does not matter. Frankly put, has a stronger Euro and EM FX driven the dollar lower on a relative basis?

US 10 Year Treasury Yields [2.19%] –   After failing to surpass 2.30%, yields have declined in a period of rising gold prices and volatility equity index – which further signals the rush to safe assets. Plus, the bond markets do not have a lot of faith on the real economy recovery.

Dear Readers:

The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed.

Market Outlook | August 7, 2017

Collective Stock Obsession

The Swiss Central Bank owned large cap tech stocks - such as Apple - demonstrate how the same Central Banks that drove a coordinated low interest rate environment are also profiting from rising stocks in their own portfolio. It's quite hilarious or logical that the promoters of “risk-taking” are also looking to put their capital to work in more liquid large cap US companies. Of course, weakening the Swiss Franc is one driver, as well. Importantly, this highlights a bigger theme in which so much capital is looking for shelter given the low interest rates. Frankly, investors of all kinds (small individuals or large Central banks) cannot get enough of allocating to tech stocks regardless of valuation to combat the ultra-low interest rate environment.

“For now, the Swiss National Bank holds on to it, and invests it around the world--but not in Switzerland. It held $2.7 billion in Apple Inc. stock, for instance, at the end of March. Some lawmakers and many economists think a sovereign-wealth fund created outside the SNB should invest a chunk at home.” (Wall Street Journal, August 2, 2017)

Amazingly, as if FANG (Facebook, Apple, Netflix & Google) were not already too explosive and in high demand, it’s quite interesting how the momentum chasing is accelerating. But when Central Banks are buying stocks there’s a screaming conflict of interest that’s quite evident. Not to mention the age-old saying of “Don’t fight the Fed” is even strengthened further, scaring bulls away and encouraging professional managers to go “all-in” with stocks. As being cautious is nearly laughed at, the unprecedented times of a Central Bank led bull market should be worrying even if it has led to further wealth creation. 

Interestingly, talking about Central Banks buying public securities: The Bank of Japan (BOJ) continues to own a significant portion of the Japanese’s stock market via ETFs. Frankly, this feels like a nationalization-like move, where the central government influence is quite major. The low polices combined with an expanding balance sheet, which leads to desperation to purchase liquid securities, has led to this reality of BOJ buying ETFs.

“The central bank [Bank of Japan] has been buying ETFs since 2010, but has been increasing its purchases as part of a package of unprecedented stimulus under Kuroda aimed at revitalizing the economy, virtually doubling its annual buying target to 6 trillion yen in July 2016. The BOJ owned about 71 percent of all shares in Japan-listed ETFs at the end of June, according to a Bloomberg analysis of data from the central bank and Japan’s Investment Trusts Association. That’s equivalent to about 2.5 percent of Japanese stock market capitalization.” (Bloomberg, July 20, 2017)

Waiting for Event

The long-awaited "event" for a major correction, a sell-off that's noticeable or a closer to 10% drop in S&P 500 Index is anxiously awaited.  Folks like Alliance Bernstein remind us that this cycle, without a notable sell-off, is quite stunning: "S&P 500 Index has suffered a 10% downturn every 33 weeks on average. Yet today it’s been more than 70 weeks since the last 10% correction" (AB Blog, July 24, 2017).

A desperately awaited correction is causing symptoms of greed for more risk taking, numbness to risk and dismissal of rational discipline. Is this waiting for the event that pays or preparing for the post-distress purchases and opportunities? Is the next blow-up going to felt in ETFs? Have short sellers bailed out after mainly false tops? Is there a point where the Central Bank loses credibility – all at once? Have the macro conflicts – from North Korea to the Qatar/Saudi rift – been ignored for too long? Who knows? Unclear and unanswerable questions remain for now.

However, between now and year-end can serve as an interesting and telling period that can unravel the multi-year bull cycle, or at least shed light on the most vital catalysts.

Uniformity’s Gain & Pain

The coordinated effort among Central Banks in western countries is resulting in further synchronization of financial markets. In addition to the ultra-low interest rates combined with non-visible inflation, there is a ferocious competition to weaken currencies and maintain the addictive low rate climate. At this stage, the mostly "deferred" correction is creating even more anxiety. Yet, without major changes to the status quo, the catalyst remains quite mysterious. It's undeniable that risk is mounting, even if not felt in sentiment and volatility measures. When Greek bonds trade below 6%, something is odd; just like the so-called robust US economy still sports a US 10-year yield below 2.5%. These abnormalities taken as the norm is usually a discomforting situation. Timing the market has proven to be an impossible task especially for professionals, as exhibited in hedge funds. Thus, skeptics are sidelined while bulls ride the wave and get blinded by the numbing simplicity of a rising market.

Key Levels: (Prices as of Close August 4, 2017)

S&P 500 Index [2,476.83] –From November 4 2016- July 27, 2017, the index went up 19.21%. Most outstandingly, the run-up was quite smooth without any major hick-up, which further highlights the near-death of volatility. Interestingly, the highs of July 27 2,484.83 remain the all-time high and near-term benchmark.

Crude (Spot) [$49.58] – Since February, early signs of fading Oil prices have remained. Surpassing $52 has proven to be quite difficult – mainly due to supply glut – as $50 remains a near-term challenge.      

Gold [$1,257.70] – Still attempting to recover from the second half price collapse of 2016. The 50-day moving average stands at $1,251.55, which mostly tells the story. March 2014 highs of $1,385.00 seems not easily attainable in the near-term.

DXY – US Dollar Index [93.54] –    From January 3 until August 4, 2017, the dollar index dropped by over 10%. The reversal from last year’s King Dollar to deceleration of a weaker Dollar defines the story of 2017, mostly. Lack of basis for a rate hike in the US and unconvincing economy strength are contributing to a convincingly lower Dollar.

US 10 Year Treasury Yields [2.26%] – Again, bond markets are suggesting that a rate hike or economic strength is not easily visible. June 14, 2017 lows of 2.12% are worth tracking in the foreseeable future.

  

Dear Readers:

The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed.

Market Outlook | July 24, 2017

“Great events make me quiet and calm; it is only trifles that irritate my nerves.” Queen Victoria (1837-1901)

Tiring Reality

Stock prices have benefited from low and near-zero interest rates. Here’s the heart of the matter:  The chances of major changes to the “low interest rate” climate seem even less likely, which means more status-quo— which theoretically continues to justify further ownership of US stocks.  That’s been the case for a while and remains the consensus when considering the many bears that got either humiliated or crushed financially by this bull market. The interconnected link between low interest rates, tamed volatility and higher asset prices (stocks and real estate) is still intact, at least in the minds of the fatigued observes.

Mysterious Ending

The screams and shots of higher valuations did not get broad reception. The outrage for a “delayed” or “overdue” stock market collapse has angered pundits and stunned professionals while giving the Central Banks the last laugh, at least so far. There is not much of a compelling or unheard case to make sellers bail out of the well-established rally in an abrupt manner. In a way, all possibilities of a noteworthy stock market “crash,” have been heard by observers in some capacity.  The weak economic numbers from retail to auto to general mix data have not worried the bullish US stock markets.

For over two years, one could easily have made the case that the real economy is truly bleeding – look no further than the enthusiastic Bernie or Trump supporters, who have been fueled by outrage for massive establishment overhaul. Yet, the stock market in the US is on an island of its own. Regardless of weak wage growth, rapid consolidations and gridlocked government the stock market roared and is so far continuing to roar. The resilience of the S&P 500 Index and Nasdaq is still impressive, and, like all bull-markets when the momentum flows, it surely goes without a defined end.

All that said, the obsession of the next catalyst remains, and many speculate on what can derail the current trend. However, timing a demise of sorts is purely a guessing game. The obsession to nail a collapse, whether in late summer or early fall or near year-end, is all mysterious. Frankly, who knows! Too many bears have sounded the alarm before so even the shocking should not be surprising, but change usually surprises more than imagined. As summer is rapidly moving forward, the crisis prediction game lives on as the broad indexes continue to make new highs. Ah, the irony of all things, the more investors prepare for crisis, the more the bull market dances with joy. This dichotomy is mesmerizing; the suspense is tantalizing, though the anxiousness is not too thrilling for risk managers.

The Fading Dollar & Yields

The combination of a strong Euro, lower US interest rates and the lack of fiscal progress in DC have led to a weaker US Dollar. All the buildup and momentum to the Trump presidency and December rate hike are fading old news, and the Dollar is weaker. Frankly, large US companies in the S&P 500 index benefit even further from a weaker dollar. Here’s one reason:  

The weak dollar is bad news for American vacationers with plans to travel abroad. But it’s good news for America’s multinational companies because as the dollar declines, the sales and earnings generated abroad get a boost from the foreign currency translation. According to S&P Dow Jones Indices, S&P 500 (^GSPC) companies produce about 43% of their sales outside of the U.S” (Yahoo Finance, July 21, 2017).

The weaker dollar has not helped move Oil higher, as some may have expected. Yet, the bond markets, which never bought into the “recovering economy” narrative, are truly making another statement with US 10 year yields remaining below 2.50% after stalling earlier this spring. Despite short-term yields rising, it has been quite clear that growth remains unconvincing, and the suitability of growth seems even bleaker than most pundits would like to admit. The disconnect between roaring stocks and subdued, long-term interest rates is the grand unsolved puzzle of financial services. Roaring stocks and subdued rates are a reality that have coexisted – regardless of explanations the Federal Reserve is struggling to provide.

Article Quotes:

“The European Central Bank has reached the same spot the Federal Reserve reached four years ago. For financial markets on both sides of the Atlantic, it is an event that comes with consequences. In May 2013, then-Fed Chairman Ben Bernanke told Congress the central bank later that year might begin tapering its asset purchases—remarks that sent Treasury yields sharply higher, and ultimately forced the Fed to push back its plans. The ECB is keen not to relive the so-called taper tantrum. Following its meeting on Thursday, President Mario Draghi took care to not lay out any sort of timetable for when the central bank will start reducing purchases...As European credit markets adjust for an eventual ECB tightening, and as the ECB shadow rate rises, the euro may rise sharply against other currencies, including the dollar. In contrast to what happened during the Fed’s shadow rate rise, long-term bond yields also could move higher since there will be one less central bank draining supply. The world that investors find themselves in will look a lot different than the one they are in now.” (Wall Street Journal, July 23, 2017)

Mideast Rift, Natural Gas and future implications: “The ultimate agenda of the Saudi-led alliance is to deter Qatar from continuing its relationship with Iran, Saudi Arabia’s regional arch rival. But even the Guardian notes that “cutting ties to Iran would prove incredibly difficult,” as Iran and Qatar share a massive offshore natural gas field that supplies Qatar with much of its wealth. In fact, Iran immediately came to Qatar’s aid and began supplying the country with food after the Saudi-led sanctions created a shortage within the country. Shaking off Iran and Turkey —the two countries that have stood by Qatar’s side during this feud — is almost unthinkable. Qatar would be left without a single ally on either side of the Middle East region. Qatar was initially among a handful of countries, including Turkey and Saudi Arabia, that wanted to install a natural gas pipeline through Syria and into Europe. Instead, the Syrian government turned to Iran and Iraq to run a pipeline eastward and cut out the formerly mentioned countries completely. This is precisely why Qatar, Saudi Arabia, and Turkey have been among some of the heaviest backers of the Syrian opposition fighters. This pipeline dispute pitted the Sunni Gulf States against the Shia-dominated bloc of Iran, Iraq, and Syria (Syria’s president is from a minority denomination of the Shia sect of Islam). Although Iran and Qatar shared this lucrative gas field, they were directly at odds in regard to how the field should have been utilized.” (Centre for Research on Globalization, June 28, 2017)

Key Levels: (Prices as of Close: July 21, 2017)

S&P 500 Index [2,472.27] –   Since November 4, 2016 lows, the index has gone up nearly 18%.  In about 8+ months, the uptrend, without a noteworthy hiccup, has redefined the strength of the multi-year bull market.

Crude (Spot) [$45.77] –    This summer’s low of 42.05 from June 21^st and the November 14, 2016 low of $42.20 are on the radar of commodity observers as some sort of a guide. Since the mid-2014 commodity collapse, Crude has shown some life and revival, but the supply glut is a serious issue and surpassing $50 remains quite challenging.  

Gold [$1,248.55] – Stuck in a multi-month range between $1,200-$1,260.  Momentum has been lacking for a while and a catalyst is desperately needed.

DXY – US Dollar Index [93.85] –    Since the start of the year, the Dollar has remained in a downtrend, mainly since European interest rates have mildly recovered from near-zero rates. Plus, with inflation not being much of an issue and real economic growth not pleasing observers, aggressive rate hikes seem less plausible. Surely, the Trump Era has kicked off with what appears like a weak dollar policy, intentionally or unintentionally.     

     

US 10 Year Treasury Yields [2.23%] –From the March 14, 2017 peak of 2.62%, the long bond yields have lost momentum. Again, like the weaker dollar, participants are sensing the real economy is not that strong; rate hikes are less likely and the sugarcoated words of the Central Banks are less  and less believable.   

 

Dear Readers:

The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed.

Market Outlook | July 5, 2017

“It is dangerous to be right when the government is wrong.” (Voltaire 1694-1788) 

Grasping the Narrative

Three Fridays ago, high-octane NASDAQ stocks temporarily showed signs of slowing. Perhaps, that began to set the tone for a June that symbolized a breather to the ongoing near-record high broad index performance. Even debt markets are mildly realizing that some of the madness in “yield chasing” requires an occasional sanity check. From an overheating auto sector to retail, there’s signs of concern and contemplation of tragic end possibilities to this smooth-sailing cycle. However, the tame volatility and overly calming message by Central Banks makes the “fear” of overheating seem out of favor and unwarranted.

It’s no accident that most of the bond markets have been lethargic in buying into the Fed’s story of “economic improvement”, as the 10-year yields remain in low standing in the familiar territory of below 2.5%. Of course, short-term rates have risen to a nine year high from ultra-low levels (2-year US Treasury Yields closed at a meager 1.41%), showcasing the impact of the Fed’s recent hikes and the ongoing perception of rising rates ahead. Perhaps, the rate hike anticipation builds into the optimism in bank stocks which are being favored. Plus, if the shares of Tech high-fliers begin to normalize away from euphoria, then more capital will seek to rotate into interest-sensitive themes.

Yet, in order to grasp the impact of the Fed’s policy versus perception of economic growth, one is left with too many mixed economic data, unconvincing inflation and a frustrated voter class. It is hard to get a clear picture on inflation, which surely is not digestible and not convincing on many levels. Inflation is not the primary concern at this moment since the lack of wage growth, lower energy prices, expanding aging population and lack of wealth creation beyond financial asset appreciation are also weighing on observers’ minds. Not to mention further M&A, more robust e-commerce and fierce retail competition is gearing to drive prices even lower. This all adds  up to formulate deflation pressures rather than previously feared “inflation”.

Grand ol’ Theme

Despite the day-to-day market swings, the grand old theme of relatively low rates and rising real estate and stock prices is abundantly familiar in Europe and the US. But that’s too well documented by now and predicting the so called “turn” or market “top” has proven to be a deadly game, especially for professional money managers. For capital allocators and retirees, “yield chasing” is the desperate feeling for a need to take risk or the mind games that come with feeling left out of the multi-year rally.  

Risk-taking is a form of an addiction, like low rates and low volatility. The Central Bank-induced reality is tempting more risk-taking. The skeptics are left to hold cash earning near-zero while awaiting distressed opportunities or mode ideal entry points for liquid markets. Patience might be rewarded, but opportunity can be missed too, as many have learned.

This tireless loop of relatively low interest rates in which yield-starved investors seek “risker” returns, mixed with skepticism from professional pundits regarding elevated stock markets, persists. This revolving pattern in not the summer theme, but rather an all-year round theme to a point where the surprise element has diminished given low volatility. At times it’s hard to tell what’s more numbing, the near all-time high stocks or the grand market top calls by pundits? Frankly, both seem sensational at times. The near or all-time high stocks is today’s reality; meanwhile, the timing of the demise of all this is just speculation. ‘Tis life in the investment world. For the skeptic crowd, the root of bearish catalysts needs to be clarified, as event-watchers eagerly await.

Innovations & Wastefulness

The Industrial Revolution of our generation has been felt from Apple to Google to Amazon to Facebook to Tesla, creating lifestyle changes in industries, but also reshaping the labor markets. There’s a massive change in retail, groceries and other industries like newspapers, autos and Fintech, as well. Of course, M&A is geared to heat-up with large companies looking to acquire smaller companies, and there’s deflationary pressures mounting – where prices are lower for consumers. However, the enhanced benefits for consumers in the near-term will lead to more obsolete jobs in several sectors, which impacts the economy adversely. Therefore, the pace of new economy jobs may (or needs to) pick up. This will require new skills and force the working class to reinvent themselves in several areas. Bracing for a rapidly changing and competitive economy is hard to do, but important to come to terms with at this stage.

Wage growth remains a challenge as policy makers struggle to find a solution to the inefficient and costly healthcare and education systems.  Inadequacies in healthcare and education continue to hurt Americans and deflate sentiment and optimism. Meanwhile, the American voter, in the middle class especially, is not too thrilled by gridlock in DC, lack of meaningful growth policies and policymakers’ pragmatism to identify priorities.  From tax reform to the healthcare debate, the inefficiency of the public sector is a bottleneck to growth as much as the efficiencies of recent innovations. Whether through human deficiency via politics and outdated policies or by human efficiency through machines – wealth creation for most is being attacked from both sides.  

In the intellectual circles, debate about Yellen’s effectiveness, the possible rift in Middle East between Qatar and Saudi, and innovative ideas seem to dominate discussions. In the real economy, rising home prices (due to Yellen’s policies), extension of Federal powers to a less effective government and the media who entertain headlines without sense of urgency resurface in the middle class circle. The glaring disconnect between low interest rate policies that inflate stocks versus bad policies that increase costs while lessening taxpayer benefits is apparent. If Trump’s victory symbolized voters’ outrage against the establishment, one should only imagine what more status-quo can do to the anger level of the middle class. Urgency for reform is becoming popular despite the failed executions and circus-like actions.

Key Levels: (Prices as of Close: July 3, 2017)

S&P 500 Index [2,429.01] –    The Index is staying above 2,400, which sets the new landmark for the recent record high moves. The June 19^th high of 2453.82 remains the record high, but sideways action remains in place.

Crude (Spot) [$47.07] –   June 21^st annual lows of $42 stands out after the weakness exhibited by Crude during the first half of the year. Since March, Crude weakness has decelerated, which reiterates the supply glut.

Gold [$1,229.25] – Prices retraced from $1,336.25 to 1,126.95 in the second half of 2016; this year some mild recovery in Gold ended up materializing. Now, a mild pause is formulating.

DXY – US Dollar Index [96.21] –    The Dollar weakness has been quite a downtrend after a strong 2016. The strength from last year faltered during this first half. Interestingly, the May 3, 2016 of 91.91 can be a noteworthy point to redefine the Dollar’s trend.

US 10 Year Treasury Yields [2.34%] – Last July, yields bottomed at 1.31%. Today, after 100 basis points later, yields remain below 3% as the annual highs of 2.62% in March define the next benchmark.

Dear Readers:

The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed.

Market Outlook | June 19, 2017

“Conflict is inevitable, but combat is optional.” Max Lucade

Dancing with the Inevitable

The stock market eventual peak is inevitable, so is the market realization of failed Central Bank policies and mega deals at the end of cycles. There are moments where one event or another will transpire. 

Before expanding on the three themes, waiting for the inevitable market event is one matter. Making money while waiting for the inevitable “cataclysmic” ripple effect is a daunting task and requires a tremendous amount of wit and, of course, luck. Waiting for the inevitable by preparing the next move is another approach to either buy distressed assets or reduce risk from current exposure.  Barging search and increased cash exposure in the near-term are being contemplated by professional money managers.

The FOMC is struggling between defending their credibility and confronting the realities of growth and potential failed prior policies.  The Federal Reserve raised rates in a symbolic manner last week rather than in a  meaningful manner during a period where growth is slowing and the stock markets are closer to record highs. At some point, many wonder, when's the narrative of low rates, higher stocks and muted volatility going to shift? “When” remains a major unknown and the landscape  is not crystal clear.  

Disconnect & Discontent

For too long the acceptance of rising stocks reflected improving economic data, and that data have been used to casually dispense comforting messaging while ignoring the lower long-term bond yields and lower inflation. Not to mention, the outrage of the voting class and distrust of Federal leadership are  intertwined in the anger against failed DC policies. The failure of the Fed to implement a pro-growth environment may end up being the ultimate highlight of the disconnect between financial market narratives and the common person’s daily sentiment. Of course, growing disconnect and discontent can pave an inevitable spark in volatility. Although, it must be said, the false alarms regarding a spike in volatility have shaped numbness in investors.

The conundrum of low rate policies is not only a US matter, but a global issue where Central Banks will have to confront the misleading stimulus story that's more political than tangible at this juncture.  The UK, Europe and Japan have mastered the trickery of low rates raising asset prices, but failure to raise wages creates political unease. The UK elections have demonstrated a shift in one year, from Brexit to far-left, showcasing the rapid and dangerous shift from one extreme to another. The swing is nothealthy or comforting for those seeking stability.

Summer Fridays

Two Friday's ago, Nasdaq’s leading stocks retraced sharply during the afternoon, which begged questions about the suitability of high-octane growth stocks such as Facebook, Apple, Netflix and Google (FANG). It is quite natural that a crowded trade has a breather, and even more natural for participants to ponder, debate and speculate on the penultimate market top. Now, timing is everything, but timing the market with automated or classic human emotion is nearly impossible as many bears have learned the harsh way in recent years.

Last Friday's Amazon's announcement of acquiring Whole Foods reiterated that the post-2008 cycle winners are in a position for mega deals and are eager to deploy capital. They are maturing from a growth company to potentially a "value" company.  The Time Warner-AOL deal comes to mind from the late 90's as an example of a mega-deal flow ahead of the tech bust in 2000. Now, Amazon is a conductor of an industrial revolution of its own, with logistics and incredible alternatives to traditional retail, newspaper and other means of reaching wider audiences. Yet, Amazon taking on debt while integrating a new purchase may shift its status from a growth company to a more “value” driven path. And the momentum chasers may have to re-evaluate Amazon's soaring stock price, which call into  question other tech high-flying companies. Perhaps, the Friday when FANG sold off after making record highs was a slight reminder. Yes, the next phase of growth remains questionable or mysterious for some tech companies, especially in the context of the current script. So far the Amazon empire has been remarkable across quite a few industries and the efficiency has reshaped the business landscape between old, near-obsolete models (i.e. traditional retail) and ongoing innovative ideas.

Reconciling Conflicts

Stock markets are performing at near-record highs, yet long-term bond yields are suffering. There are low prices for consumers, but also a lack of wage growth.  Real estate prices increase, but there is a lack of wealth creation for the middle class. On-line efficiency is expanding, but traditional business models are collapsing. There are talks of rate hikes but lower inflation numbers, muted financial market volatility but political outrage at the ground level, a reigniting of Middle Eastern rifts but mildly declining Oil prices, etc. …All highlight some noteworthy dichotomies.

Key Levels: (Prices as of Close: June 16, 2017)

S&P 500 Index [2,433.15] –   June 9, 2017 highs of 2,446 remain the record highs, and in the near-term, sets the benchmark for bulls. So far, June’s turbulence and shaky movement is creating suspense for the long awaited “top”.  A break below 2,400 can set off further panic based on prior trading patterns.

Crude (Spot) [$44.74] – April and May 2017 showcased a lack of upside momentum with crude falling below $52. The glut supply seems to be a bigger matter than pending disruptions in the Middle East such as Libya and diplomatic tension with Qatar and Saudis.

Gold [$1,266.55] –   A mildly positive trend since December 2015 lows of $1,049.40 remains intact. Recent signs of stabilization appear, but not a major surge as Gold bugs expected. Interestingly, Bitcoin has skyrocketed higher than Gold as the alternative currency.

DXY – US Dollar Index [97.27] –   Less than what most expected this year, the Dollar is weaker, and the annual peak was reached in January.

US 10 Year Treasury Yields [2.15%] – March 2017 highs of 2.62% seem a long time ago since 10-year yield is hovering below 2.20%, even during a week that the Fed raised short-term rates. The chronic low rate enjoinment is more pronounced now as dipping below 2% seems like a feasible reality.

 

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