“Feelings are not supposed to be logical. Dangerous is
the man who has rationalized his emotions.” (David Borenstein)
Mixed Feelings
The post-election trading action is met with mild
anxiety mixed with unavoidable excitement. Yes, both feelings rolled into one
in this suspenseful period. The anxiety is driven by the
unknown and less-predictable outcomes from a soon to be executive branch regime
that’s deemed unorthodox, as well as from a multi-year bull market that's been
roaring after massive injections of stimulus by the Federal Reserve.
The excitement is generated from a possible shift away
from the dull status-quo that benefited the financial markets (stocks, bonds,
real estate) while hardly improving the real economy. Yes, the conflict
between shareholders of large companies with diversified earnings vs.
individuals that rely on domestic based old economies is the rift of all rifts
on a global scale. The traditional industries have eroded quicker than
imagined (not only manufacturing but retail and a select part of Financial Services).
After all, US voters selected Trump based on the lackluster real economy rather
than the artfully crafted rally driven by the Federal Reserve, which ended up
rewarding stock-owners of all kinds. Yet, voters doubting globalization
are waiting for elections to voice a strong sentiment. In fact, more elections
are pending in Europe, which will provide clarity on the political trend.
A new
outlook and narrative appears to emerge from Trump with hopes of further
growth, more spending and the sheer perception of America-friendly policies and
prosperity. For now, no one is bothering to dig into the details, but markets
have responded with early reactions. The Trump victory has led to the following
market responses: Rising inflation expectations, increasing bond yields, a
stronger Dollar and appreciation in financial.
Voting enables expression of sentiments as seen from
Brexit to Trump's victory. Failure in policy from the Fed to Congress
has consequences is the ultimate message from the developments in 2016. Now the
question is: Can market participants show dissent against the Central Banks
while expressing less confidence in the upside potential of stocks? Is a meaningful sell-off really possible? Or is
the view that the real economy will catch up with the financial markets in
showcasing further bullish runs? Frankly, neither question is answered, yet,
but at best both are bound to be debated.
Admission of Failure
For Central Banks, it was
stunning that their fragile, wishy-washy messaging didn't lead to a damning
blow and major correction thus far. When Trump called out Yellen and the Federal
Bank System it caused the failure of QE, which has been under-the radar, to
move to the forefront of discussion. With LIBOR rising since the summer and 10
year yields surpassing 2%, maybe the Fed found an “out” to raising rates.
Justified or not is a whole process the market will have to digest. Surely, the
Fed's narrative was looking like a joke, exemplified by poor politics and
horrific leadership. To be fair, the Fed mildly admitted to running out
of ammunition, but that declaration was not relayed with conviction and meaning.
If markets sense the Fed is polluting optimism via low rates, we'll know the
picture, narrative and leadership is upside down.
Managing the Script
When all is said and done, the markets were looking
for an excuse to rally (even before elections) and the Fed appears to be
looking to justify a rate hike. Amazingly, the current script might have
solved the two outstanding issues naturally. For now, the markets have concluded
early-on that financial shares are set to continue to move higher as rate-hike
anticipation continues to gain traction. In terms of a rate hike, so many
posturing from Yellen & Co in the past without any action can lead to
further skepticism. With a strong Dollar and higher yields now, the
status-quo maybe shaken a bit. As the volatility in bonds and Emerging
Markets continues to resurface, more questions will be asked about the changing
paradigm.
Article Quotes:
“Where is that extra crude going, if not to refiners?
The IEA estimates some 700,000 barrels a day has been going to China -- but not
for processing into fuels. Rather, all that oil is believed to have gone into
the country's strategic petroleum reserve. Like America's SPR, this oil is
designed to stay put until there's a war or some other crisis, so it functions
like real demand by sucking up barrels from the market. Still, it should worry
oil bulls that, in terms of growth, Chinese strategic stockpiling has
been taking more than two barrels this year for every one taken by the world's
refiners to feed underlying demand. China's growth in real oil demand
this year is forecast to be just 259,000 barrels a day.” (Bloomberg, November 15, 2015)
“The stark contrast between elite and public views of
global economic engagement speaks to a larger divide in American society
regarding the consequences of globalization. A Pew Research
Center survey of members of the Council
on Foreign Relations (CFR) conducted in fall 2013 showed that foreign policy
experts have a “decidedly internationalist outlook” and “see benefits for the
United States from possible effects of increased globalization, including more
U.S. companies moving their operations overseas.” This includes more than
nine-in-ten CFR members (96%) saying that it would mostly help the U.S. economy
if more foreign companies set up operations in the U.S. (compared with
62% of the American public), and 73% thinking more U.S. companies moving
overseas would be mostly beneficial for the economy (versus only 23% among the
general public).” (Pew Research, October 28, 2016)
Key Levels: (Prices as of Close: November 11, 2016)
S&P 500 Index [2,181.90] – The August 15, 2016 high of 2,193 is not too
far removed from the current level. From
mid July to early September, the S&P 500 index traded around 2,160-2,180. Now, after a sharp rally around the 200 day
moving average, the suitability is as suspenseful as the potential re-acceleration.
However, the true test awaits. (As a
side note, around Brexit, the S&P 500 also rallied sharply after flirting
with lows near the 200 day moving average).
Crude (Spot) [$45.69] – Deja
Vu? From June 9, 2016 to August 3, 2016, Crude decline from $51.67 to $39.19. Eerily,
a similar pattern is taking hold recently in which Crude peaked at $51.93
(October 19) and declined to $42.20 (November 14).
Gold [$1,236.45] – So far this year, Gold has proven to hold
above $1,200, albeit now reaching a fragile range. The failure to hold at $1,200
can stir further questions about current trends. Between now and year-end, a
trend needs to be better defined.
DXY – US Dollar Index [101.21] – The Dollar is breaking out of a
2 year range where the index traded within 94-100. Since May 3, 2016 the index
is up over 10%, reinforcing a key theme: A stronger US Dollar. Mild pullbacks
or some breathers are possible, but the dollar remains strong.
US 10 Year Treasury Yields [2.35%] – An explosive run since the
summer lows of 1.31%. Sustaining the current run above 2.40% is a big challenge
that awaits. Next key level is the high of 2014, which hit 3.05%.
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.
