“We could never learn to be brave and patient, if
there were only joy in the world.” (Hellen Keller 1880-1968)
Fruitless Games
Public markets appear to be suppressing pain,
volatility and further uncertainty by trading within a range. The Fed-obsessed
culture that's searching for the next trick, clue or message must be getting
old and lacking basis. Central Banks' tiresome messaging without conviction does not help
participants. The already less
convincing data confuses investors month over month, as justification for
growth is hard to prove.
Here is one example:
“The details showed that some people entering the
labor force were only able to find part-time employment. The number of
Americans working part-time for economic reasons rose by 135,000 to 6.12
million, the most since August.” (Bloomberg, April 1, 2016)
Add politics to the mix of the less than convincing
data; then surely, the environment is a bit tricky and quite misleading on the
interpretation of well-being. This includes managing the Greece/Eurozone
ongoing crisis as well as potential Brexit, which is a less imagined but bigger
risk. Government officials now have to manage a raging voter base in the US and
Europe at a time where global growth is very weak. This creates a stunning set-up for policymakers, a partially
entertaining event for observes and an emotionally exhausting ordeal for
operators in the financial services industry.
Limited Powers
The return expectations for public markets (i.e.
S&P 500 index) showcase the suppression of expectations. Returns have been too low for too long with
yields, as faith in public markets is being questioned by pensions as well as
individuals. Are markets a misleading
sentiment indicator? That's been the case for over 24 months, as the bullish
cycle continues to pause. The over-reliance in Fed statements or monthly
job numbers is not providing enough clues, but leave the investor base rather
clueless on the next move or decision. At the end of the day, the
US 10 year yields are below 2%, suggesting the economy is not that vibrant
after all. Pundits may hype the
speculative game of “to hike or not to hike.” However, finding a basis to hike
rates has been difficult and bond markets are not buying the “strong” recovery
story. The global slowdown from China to commodities is one clear issue. Yet,
Western leaders have not resolved the issue of re-generating growth via
policies and pro-business priorities. Thus, the Central Banks have
reached their limited powers and giving them too much attention is a near
worthless exercise for those seeking fruitful returns.
Pondering Ahead
The macro climate has remained about the same without
major changes. The US dollar, yields (in developed markets) and equity prices
are in trading in familiar areas without marking new trends and ranges. A
deadlock in broad indexes leads to further unease and anxiousness, despite the
so called calmness in volatility. More capital is seeking shelter, so the
relative appeal of investor demand favors US and liquid assets. Chasing
less impressive returns before unresolved issues play out seems risky.
Of course, the magnitude of the risk is not fully known.
The optimist might think that the upside is intact and
worth adding to; however, even in a period where the Volatility index (VIX) is
near annual lows, to feel comfortable with the current environment will be
difficult for most. The daring bunch may chase returns here, as the risk-reward
seem appealing. Others may look at Emerging Markets and commodities, where
bargain hunting is quite alive and well. Themes that are discounted from the recent
China and commodity demise may offer an appealing entry point, but even that’s
a bit riskier than the average investor may desire. Simply, overpaying for “safe assets” versus
relatively underpaying for cheap asses is the quest for glory for fund managers
ahead. Reaching a high conviction level
is the challenge for both types of risk-seekers. Waiting for the Fed,
however, is not a way to build conviction, as conventional wisdom may strongly
suggest.
Article Quotes:
“Greece and its EU/IMF lenders will resume talks on
the country's fiscal and reform progress this week aiming to bridge differences
and conclude a key bailout review, which will pave the way for negotiations on
long-desired debt relief. The review has been adjourned twice since
February, mainly due to a rift among the lenders over the estimated size of
Greece's fiscal gap by 2018, as well as disagreements with Athens on pension
reforms and the management of bad loans. Inspectors from the European
Commission, the European Central Bank, the European Stability Mechanism and the
International Monetary Fund interrupted the review last month, taking a break
for Catholic Easter, government officials said. Talks are expected to resume on Monday and Athens
hopes for a compromise before April 22, when euro zone finance ministers are
expected to assess its progress.” (Reuters, April 3, 2016).
“Rising risks to the outlook placed Yellen’s legacy in
danger. If the first rate hike wasn’t a mistake, certainly follow up
hikes would be. And there is no room to run; if you want to “normalize”
policy, Yellen needs to ensure that rates rise well above zero before the next
recession hits. The incoming data suggests that means the economy needs to run
hotter for longer if the Fed wants to leave the zero bound behind. Yellen is
getting that message. But perhaps more than anything, the risk of deteriorating
inflation expectations – the basis for the Fed’s credibility on its inflation
target – signaled to Yellen that rates hike need to be put on hold. Continue to
watch those survey-based measures; they could be key for the timing of the next
rate hike.” (EconomistView April 1, 2016)
Key Levels: (Prices as of Close:
April 1, 2016)
S&P 500 Index [2,072.78] – Since the February
lows, the index is showing some strength. Breaking 2,100 can fuel further
upside momentum. Last year in the summer and late winter, the index failed to
surpass 2,100.
Crude (Spot) [$36.79] – Struggled to stay
above or at $40. An unsettled bottoming process occurs as supply-demand
dynamics are not clear for participants. Revisiting prior bottoms of $26 is
still not out of the question at this stage.
Gold [$1,213.60] – For several months, the bottom
appeared to be in place. Yet, breaking above $1,300 has not been stable.
DXY – US Dollar Index [94.61] – Dollar strength has
declined recently. 94 seems to be the ultimate low. Further tests await in
terms of dollar strength.
US 10 Year Treasury Yields [1.77%] – Failed to get
closer to or above 1.80%. This is a further sign of bond markets not being
convinced of rate hikes or actual improving economy.
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