“I would rather live in a world
where my life is surrounded by mystery than live in a world so small that my
mind could comprehend it.” (Harry Emerson Fosdick 1878-1969)
Confusingly Mysterious
The reasons behind why stocks move
up and down draws multiple commentaries filled with guesses of all kinds. They
pollute the airwaves with pundits that guess.
Truly, who knows the day to day market moves? No one, really. It
is a speculative game involving many groups of people, many small unknown
events and fascinating results. Some participants try to reduce their
risk and others look to take their chances based on high conviction
observations. Hence, the fascination and
the constant urges to speculate are driven by mystery as much as the desire to
create wealth.
Sometimes, the market narrative
feels like a “quasi-casino,” where the thrill of opportunity chasing over-takes
common sense. That’s quite contrary to the more common approach in which
professionals view the financial markets as a tool for wealth creation. For
others, it is understanding and managing the risks, like a pilot flying a plane
safely. Meanwhile, there is the public
service element of markets in which pension funds and retirees rely heavily on
financial markets for income, but grasping the nuances and catalysts is still a
mysterious act for them and those managing their money. Risk is never out of
the equation – that’s as clear-cut as it gets.
In other words, participating in markets is being part of the
“mystery” and humbly acknowledging the unknown.
Not to mention, the mostly
revered Central Banks pump out endless speeches, press releases and theoretical
based reports of their reality.
Keep in mind, Central Banks, are a division of government which end up
interfering in the so called “free-markets”.
Yet, to simplify the matters, we all observe that interest rates have
been and continue to be low. That’s the
bottom-line when all the noise settles. Low
rates are such a common policy across nations, it has dampened the faith of
those seeking less intervention and less “artificial” like traits. As
highly documented as it gets, hedge funds are struggling in this new
environment as some adjustment is desperately needed. Meanwhile, key financial
media obsession with the Central Banks has made the markets even more
illusionary and day to day behaviors less-grounded with reality. Of course,
“irrational” behaviors, driven by emotions, were always part of the market, but
now suppressed emotions create even more of a deception of reality. This
still occurs despite the technological advancement of speedy trades and
incredible tools for digesting information rapidly. Perhaps, that’s why there is disconnect
between the real fundamentals of countries and companies versus the financial
tools that grapple with Central Bank narratives.
Thus, yield generating assets are
hard to find, especially those that are reliable and more predictable. Within
this context last week, Qatar issued bonds that surprised observers:
“Qatar sold $9 billion of
Eurobonds, marking the biggest-ever bond issue from the Middle East where
governments are tapping international investors to fill budget holes left by
declining oil and gas revenues.” (Bloomberg, May 25, 2016)
There is no shortage of desperation
for yield generating assets, which means more risk-taking and
a further dive into the mysterious climate.
Inflection Point Revisited
The S&P 500 index is nearing
and facing a major resistance at 2,100 - a level that's been seen before. In
the past, buyers shied away from doubling down into stocks at this level. In
recent occasions going back to last summer and late autumn, the S&P 500
index faded as sellers gained some momentum at this familiar level. A re-test
of this highly tracked level for US stocks awaits, while the murmurs of
rate-hikes pollute the airwaves of financial circles. Similarly, the US 10 year
Treasury yields showed signs of peaking this year around 2%. This is seen in
the recent peaks in March (1.99%), April (1.93%) and possibly again in May
(1.88%). Therefore, both the stock and bond markets are not quite convinced
that there is a robust economy to justify upside moves. Thus it is fair to
ask: Is there a basis for the rate-hike? Is there inflation or noteworthy
growth? When is the Fed going to capitulate to the ugly truth?
Justification for the recent
upside move varies from one observer to the next, but the broad indexes have
mildly re-accelerated. Being bearish is not distinct or contrarian at this
stage. That's due to the well-known fact that the global economy is slow; even
without a G7 meeting, observers are quite familiar with this harsh reality.
Anemic growth is not a short-term event, but concerns loom. This is going to
take a long while to boost global growth, collectively.
The US stock rally since
mid-February appears a bit fatigued and technical levels confirm that, as
stated above. The bargain hunting in commodities already took its course and
entry points now are less attractive than before. (Simple risk-reward observation).
After all, Goldman Sachs commodities index is up nearly 20% for 2016. Similar
trends are visible in EM, as well, where sharp-recoveries have persisted
following the multi-year declines.
Confused and Battered
Economic data signaling
improvements is hardly convincing; a lot of sideways / neutral results is the
new norm. Many days of "mixed data" without any vigor or insight are
nauseating. Stock volatility is suppressed, since there is numbness to bad news
and bad news is not "news" anymore. Sadly, that's been the case for
a long while. China's struggles are even more mysterious than shocking these
days. The global deferral of future problems and the acceptance of Central
bankers as the solution provider is the most scary premise of all. Disengaging
or staying idle from the current narrative has been costly to money managers who
need to catch-up to their peers in terms of performance. Relying on intuition about the real economy
has been penalized, as well. Thus, to survive (via staying in line with broad
indexes) in financial markets has forced professional managers to stomach the
widely accepted illusion since the alternative appears hopeless or brutal. In
other words, gloom and doom has been laughed at and cash earns nearly zero, and
status-quo is too intertwined with bureaucratic forces.
Thus, "Denial"
becomes comforting, especially when crisis-like modes have not become a
tangible reality. This is the "mental game" that benefits the
central banks who know the psyche of investors and asset managers. As
long as interest rates are low, the Fed has leverage to force investors into
risky assets (riskier by the day and riskier with each upward tick) or face
abysmally low returns in cash. But for those emphasizing "survival"
and those willing to see beyond "denial", equity markets are becoming
more of a "casino-like" show rather than a sentiment of
financial/economic reality. It takes courage to walk-away from a
multi-year bull market run, and it takes even more courage to sit-out while not
participating in what's perceived as "growth". Critically,
fund managers have to invest to maintain their job, while independent
individuals can apply discretion, freely. And to this, the outflows have been
expanding. At some point, distrust of the central bank will materialize; all
the signs are there already. It is a choice between accepting the
illusion and facing the reality. The warnings are here and have been
there, but turning a blind-eye is massively promoted at the cost of hard earned
capital that circulates in financial markets.
Article Quotes:
Re: The Russian Economy:
“Oil prices fell to below $30
per barrel and a budget deficit of at least 5 percent seemed inevitable. But
now Russia's political elite is breathing a sigh of relief. Oil is up to more
than $40 per barrel and experts are predicting that prices are more likely to
continue climbing than to collapse, as they did in winter. Of course, oil price
trends cannot be forecast with any certainty. But financial officials
recently stated that if oil remains between $40 and $50 per barrel, the economy
will enter a ‘new reality.’ What does that mean? It refers to a course toward
moderate belt-tightening — higher taxes and stricter collection of them, as
well as limiting imports through protectionist measures. Government
propaganda must be stepped up to convince the Russian people that scheming
foreigners are the cause of their problems, not their leaders' failed economic
policy. This is simply ‘milking the economy.’ Oil and gas revenues will fall.
They totaled 7.43 trillion rubles in 2014, dropped to 5.86 trillion rubles in
2015 and could fall to 4.5 trillion rubles in 2016. Therefore, authorities will
have to cut project investment, reduce funding to the regions and scale back
financial incentives for state employees. That will lead to further decline in
an economy kept afloat by government investment and purchases. Import volumes
have dropped to half of their 2014 level, which means a decline in VAT revenues
from the sale of those goods.” (Moscow Times, May 20, 2016)
China Is Not Quite Advanced:
“In developed markets, the
ultimate refuge for investors in asset-backed securities is that they can
always take possession of the underlying assets. That's small comfort in China.
Even if … another buyer managed to get a hold of the loan rights -- a daunting
task in the Chinese judicial system -- they'd be hard-pressed to collect. After
a successful hostile takeover, Shanshui competitor China Tianrui was unable for
several months to remove the former owners from the company's offices in
Shandong, the site of its most important operations. By the time they took
control, the official seals had vanished, making it difficult for the company
to officially pay its debt (in China, nothing is official without the chops). Lawyers say that without support from a
well connected state-owned company, collecting dues in China is
near-impossible for foreigners. Buying soured loans may look like a
great potential investment, in a U.S.-style legal environment. That's not
China.” (Bloomberg, May
26, 2016)
Key Levels: (Prices as of Close:
May 27, 2016)
Crude (Spot) [$49.33] – The commodity has nearly doubled since the lows
of February 11, 2016 ($26.05). There is a strong run-up where the narrative is
unclear if crude is being driven by supply or demand.
Gold [$1,216.25] – After peaking on May 3rd, Gold
has lost some traction. However, buyer’s conviction is being tested now around
$1,220. The current range is between $1150-1300, where is seems to be stuck.
DXY – US Dollar Index [95.52] – Stabilization
has occurred in the last three months. The Dollar is in a steady range between
94-95. This reflects the sideways pattern that’s persisting across macro
indicators.
US 10 Year Treasury Yields
[1.85%] – Approaching an inflection point like the S&P 500 index. Behavior near
and around 2% will have great implication of sentiment and is pending the Fed’s
action. There is set-up for a possible
defining move.
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.
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