“Business has only two functions - marketing and innovation.” Milan Kundera
Stumped & Stunned
The professional crowd is somewhat stunned, while feeling a bit stumped and humbled by ongoing market performance. Not many money managers successfully predicted a sustainable period of low yields, low volatility and higher stocks. When looking back, the big trends seem obvious in hindsight, but hardly clear at all when reflecting and sifting through the collective predictions of yesteryears. Surely, innovative areas, such as NASDAQ based stocks, e-commerce and biotech, are being selectively rewarded. Heading into the holiday weekend, Google and Amazon are racing to get to $1000 per share. This in itself captures the post-2008 period of efficiency and the mass distribution of daily utilized technology. As simplistic as it may be, owners of these two stocks alone could have produced fruitful results. At the end of the day, the fervor for innovation and a complete game changing nature of disruptive technology is one of the reasons NASDAQ is elevating.
Amidst the premium pricing that’s rewarding to disruptive companies, the broad average indexes (i.e. S&P 500) have elevated in value, mostly driven by a lack of alternatives for yield and, of course, the unnatural and very low interest rates. The chatter of the S&P 500 index at a record high is a snapshot of averages, after all, and it shapes the sentiment of casual observers, but there's more to decipher. Averages do not tell a full story, sentiment deals with a mixture of emotions, and the paradoxical nuances are lost in big headline chatter. There is no question that NASDAQ and the S&P 500 index in tandem benefit greatly from Central Bank policies. Similarly, it’s hard to dismiss the bubble-like climate in real estate and stocks that was created by a wave of unnatural low rates and failure to address impactful policy changes by elected officials. The reckless leadership and the shameless willingness to confront the truth of the Federal Reserve is stunning.
Rapid Changes
Even if the broad averages signal record highs, old business models are getting "killed" as bankruptcy is becoming a familiar theme. Any observer of the retail sector is seeing this. The on-line model is causing a mass change, forcing recognizable brands to be near obsolete.
"Nine retailers have filed [for bankruptcy] in just the first three months of 2017, according to data provided exclusively to CNBC from AlixPartners consulting firm. That equals the number for all of 2016. It also puts the industry on pace for the highest number of such filings since 2009, when 18 retailers resorted to that action." (CNBC, March 31, 2017)
Traditional areas in Financial Services are facing same pressure from FinTech (innovative and efficient solutions) and a demanding tech savvy consumer is changing the landscape. Meanwhile, fees charged by financial institutions are coming down significantly. For fund managers, the shrinking fees feels like a lack of confidence. In recent years, the glorification attributed to hedge fund managers as "money makers" has calm down and failed to impress. The obsession with passive strategies via ETFs have gained traction and mass appeal, but passive strategies do seem golden in a smooth-sailing market without major turbulence. Banks are rushing to readjust their business models and exiting non-core businesses. Some Hedge Fund magic is gone and the shift towards machines and computer generated trades is popular, and, possibly, the "desperate" near-term solution to unimpressive returns by so-called professionals. Perhaps, the scarcest quality is the admission of failure by most money managers.
While broad indexes roar and inflation talks dissipate, one cannot help but realize the real economy is not healthy. Treasury Yields are quietly sinking below 2.5%, and rate-hike chatter has waned to a near deafening silence. With the ongoing horrific theatrics of politics, it's fair to say, the establishment has failed badly, the Central Bank cannot create wealth for a majority of America and stocks do not measure the average American’s well-being, as touted so often. Perhaps, that’s why some prominent multi-decade managers (i.e. Paul Singer, Seth Klarman) are warning of added risk that’s dismissed by the market.
At the same time, Emerging Market debts have been mysterious and less understood. Moody’s downgrade of China appeared like a long-overdue event. The catalysts for turbulence are plenty, including the overly suppressed volatility and sudden realization of a weak economy. Timing the market has proven nearly impossible, but enough warnings have been heard.
The Grand Search
Fear is talked about a lot in relation to the current chaotic market response; and factors that stimulate fear circulate too often, but the grand panic has not been felt, yet. From Congressional gridlock to sensational partisan rifts to overheating segments in credit markets, there is talk of fear. That is quite customary. From the auto loan bubble to student loans to pending disasters somewhere to possible shifts away from numbing ultra-low rate environment, there’s looming chaos that awaits. From debt piling in China to credibility issues with Western Central Banks, there’s more to truth to decipher.
Some participants are asking: Why bother timing the penultimate top and waiting for cracks to foreshadow a script that's been seen before. From Bitcoin's explosion to NASDAQ's uproar, what's justified or not is still a question worth uncovering, as the answer seems illusive yet again. Others are sitting out, waiting for distress opportunities to emerge and not risking Capital to overpay for high-flying stocks or demonstrate some bravado by betting against the status-quo and Fed-led uptrend.
Article Quotes:
"Even Fifth Avenue retail doesn’t seem to be immune from the crunch. In April, Ralph Lauren said it would shutter its Polo flagship location as part of a cost-cutting spree to strengthen the business. Vacancy rates on Fifth Avenue between 42nd and 49th streets reached a high of 31 percent last year. And eight of the 11 Manhattan retail neighborhoods tracked by Cushman & Wakefield saw availability rates climb between 0.6 and 8.2 percent. Major Fifth Avenue landlords such as Joseph Sitt’s Thor Equities are also feeling the pain. There’s been speculation that vacancies are putting pressure on the company’s bottom line." (The Real Deal, May 17, 2017)
“China buys U.S. debt for the same reasons other countries buy U.S. debt, with two caveats. The crippling 1997 Asian Financial Crisis prompted Asian economies, including China, to build up foreign exchange reserves as a safety net. More specifically, China holds large exchange reserves, which were built up over time due in part to persistent surpluses in the current account, to inhibit cash inflows from trade and investment from destabilizing the domestic economy. China’s large U.S. Treasury holdings say as much about U.S. power in the global economy as any particularity of the Chinese economy. Broadly speaking, U.S. debt is an in-demand asset. It is safe and convenient. As the world’s reserve currency, the U.S. dollar is extensively used in international transactions. Trade goods are priced in dollars and due to its high demand, the dollar can easily be cashed in. Furthermore, the U.S. government has never defaulted on its debt.” (CSIS, May 2017)
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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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