Managing the Present

Today's mechanics of low rates, low volatility, increased buybacks, more Mergers & Acquisitions, and US equities relative appeal reflect the present state of inner workings. These factors serve as the different ‘engines’ that enable this bull market to roar. These forces of supply/demand of available shares, limited investments options, and demand for liquidity in times of uncertainly all rationally justify elevated equity prices. Even the gloom and doomer must acknowledge these ‘engines’ that tell a story of survival (for investors) rather than sentiment. Money managers must live in the present as they're inclined to generate returns, not over-think outlier events. Taking no risk and glorifying cash positions is not the pragmatic option for most, albeit there is the right time for everything.

Chatter of tomorrow’s fears is not aligned with the limited investment options offered in the market. Until this set-up changes, patience is desperately required for those contemplating the next noteworthy and fruitful move.

Market Outlook | June 15, 2015

‘‘Man spends his life in reasoning on the past, in complaining of the present, in fearing future.” (Antoine Rivarol)

Summary

The last four months have showcased narrow trading patterns from commodities to equities to the US dollar. Either the known trend (low rates, bullish equities and low volatility) is becoming exhausted or trepidation is looming ahead from a series of unknown events.

The tug of war between the status quo and the potential suspenseful moves ahead lives on. As seen before in prior periods, this debate is nothing new since the fate of the status quo is tied highly to the Fed’s messaging. Basically, a much needed catalyst remains long awaited and the Fed is deemed to have the answer. For investors the reward seems to lie in figuring out the present and not fearing the future. Perhaps that’s the mental challenge that’s playing out at this critical junction.

Contemplation

On one side, the markets have softly spoken in recent weeks. Prices reflect the sentiment and reasoning of participants. Right now, the lack of significant movement in prices, which reflects dull like patterns from S&P 500 index to Crude to Volatility index, seems to be uneventful for day-to-day observers.

Suspense, as usual, is mounting when reading current sentiment-based expressions. Meanwhile, speculating on the next direction is tricky, as usual, but recent price patterns suggest a mixture of calmness or neutrality. However, that “calmness” can be interpreted by some as the silence ahead of a looming, large move in either direction.

Why the “suspense”? Is it Fed driven? Greece? Extended Valuations? Or is the mood of anxiousness the usual feeling surrounding not knowing the shift or trend or magnitude of the pending moves. The hype around interest rate hikes is dominating financial services news but it has been for a while. Predicting the rate hike is a daunting task, and many will flood the airways pondering this topic. However, it only matters when the Fed takes action. Otherwise, it is merely a contemplation or intellectually stimulating chatter.

The Cost of Worrying

In the past, worrying about “suspenseful” results or turbulence ended up being irrelevant in day-to-day trading patterns. Acknowledging past results is only part of the puzzle, so one asks: What's the major fear‎ about the future? As if any future is known—It's not. Fearing the unknown (i.e. interest rate moves or spikes in volatility) has not proven to be a successful strategy; it's only a natural feeling that's to be expected. Fearing the past will repeat itself is equally just as natural a response, but when and how the past repeats itself is a mystery. A mystery that's quantified (or incorrectly assessed) as risk. So fearing the future without an actionable stance is pretty much meaningless. A lesson that's been taught by these markets for those who are willing to attentively dive into the wisdom that's not pleasant to hear. Even with this understanding, the mystery lives on.

Amazingly, enough pundits have addressed issues related to upcoming crisis or bubble-like symptoms. Some of those troubling points carry more weight than others and knowing what concerns to weigh is the ultimate challenge in risk taking. Frankly, risk-taking is accepting the “unknown”. Commodities are weak, emerging markets are struggling, and both are in a cyclical rut. Eurozone troubles are well documented, China’s near-term troubles are commonly discussed, and the US tech boom is often presumed to be in the late innings. The worries are known, the timing is not.

Some have realized there are more things to worry about than imagined. That’s the nature of risk management. Similarly, some disconnects between the Fed conducted interest rate policy and various hints of slowdowns from data points have been well established. Yes, some economic trends are not that great, but are better than the days after the post-2008 melt down. Plus, US assets are relatively better than most markets, too. Anxiety has been plentifully addressed, but it has not bothered the market either. Thus, those betting on sentiment have realized that it does not reward in practical terms (at least thus far).

Even before the next move, up or down, there is massive trepidation that's building. It starts with the latest worry of increasing bond volatility which has been lively enough to get attention:

“The ‘unprecedented’ volatility in government bond markets is making it ‘a lot more difficult to get trades done,’ said Henk Rozendaal, global head of fixed income trading at Rabobank. Mr. Rozendaal said that banks’ risk appetite is low at the moment due to volatility in German bonds in particular. ‘Bond volumes used to be good. Now, banks don’t want to trade large blocks of bonds, because they have no way of getting out of these positions quickly if things explode,’ he said.” (Wall Street Journal, June 5, 2015)

Managing the Present

Today's mechanics of low rates, low volatility, increased buybacks, more Mergers & Acquisitions, and US equities relative appeal reflect the present state of inner workings. These factors serve as the different ‘engines’ that enable this bull market to roar. These forces of supply/demand of available shares, limited investments options, and demand for liquidity in times of uncertainly all rationally justify elevated equity prices. Even the gloom and doomer must acknowledge these ‘engines’ that tell a story of survival (for investors) rather than sentiment. Money managers must live in the present as they're inclined to generate returns, not over-think outlier events. Taking no risk and glorifying cash positions is not the pragmatic option for most, albeit there is the right time for everything.

Chatter of tomorrow’s fears is not aligned with the limited investment options offered in the market. Until this set-up changes, patience is desperately required for those contemplating the next noteworthy and fruitful move.


Article Quotes:

“China's leadership has long been impressed with the Singapore model. Since Deng Xiaoping, its government has been much more interested in capitalism in the style of Lee Kuan Yew than class struggle in the style of Karl Marx. In China, the mix of markets and smart management has indisputably worked another miracle, and on a vastly larger scale than Lee's. It's a record that can make investors credulous. Lately, the government has defied predictions of an economic hard landing: The economy has slowed, but hasn't crashed. Beijing wanted a gentle slowdown -- part of its effort to rebalance the economy toward consumption and away from exports and investment -- so it pulled some fiscal and monetary levers and that's what happened. Targeted growth of 7 percent in gross domestic product this year, fast by any other country's standards, looks achievable.” (Bloomberg View, June 14, 2015)

“Fed stimulus, widely accepted as a tonic for stocks, usually kicks off in the middle of weak spells. The six months following the start of the last three easing cycles saw stocks lose 8.2% on average, while returns were barely positive in the preceding six months.Equity downturns usually precede economic ones, and the Fed often takes financial markets into account when making policy. So the fact that easing cycles are associated with more calamity for stocks than tightening shouldn’t be surprising. This tightening cycle will be different simply because rates should remain very low by historical standards for months or even years. Meanwhile, stock investors never have been so attuned to the Fed’s actions, jumping on every nuance in language. The ultimate impact on stock prices this time is harder to predict. A safe bet, though, is for extreme choppiness around the Fed’s move.” (Wall Street Journal, June 14, 2015)

Key Levels: (Prices as of Close: June 12, 2015)

S&P 500 Index [2094.11] – On several occasions buyers have stepped in at the 2080 range in recent weeks. Meanwhile, buyers' enthusiasm has waned at 2120 in the last 50 days. Both are awaiting some game-changing catalysts.

Crude (Spot) [$59.96] – The last several weeks have witnessed an uneventful movement between $58-62 levels. This confirms the price stabilization after the demise in 2014.

Gold [$1,178.50] – Mostly flat from March–June. A narrow range is forming from $1,180-$1,220. The lack of catalysts tells the story of unmoving trading patterns.

DXY – US Dollar Index [94.97] – After an explosive 2014, the dollar strength has moderated during the last 2-3 months.

US 10 Year Treasury Yields [2.39%] – There is further evidence of a break-out above 2.20%, which was not the case in March. The highs of 3.05% from January 2014 are the next key target for observers. This recent run mirrors the move in 2013, from 1.99% (June 2013) to 3% (September 2013).




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