“No man ever reached to excellence in any one art or profession without having passed through the slow and painful process of study and preparation.” (Horace 65 BC-8 BC)
Summary: Record high stock markets have exposed the weakness of Hedge Fund managers. Developments in China are as much of a concern as the Eurozone to global sentiment. Fragility in both markets is worth watching for as the trigger for the next panic. The art of speculation is losing its luster recently as the bull market gives the impression that buy and hold is “easy” and “fruitful”.
Professional Mockery
Professional money managers appear
confused, overly cautious and desperate to deal with the current financial
climate. In a simplistic manner, low interest rates do drive up financial asset
prices such as stocks, that’s quite evident. Yes, that’s clear from the Dow
20,000 chatter to the mainstream media buzzing about record highs. But this
higher stock market move with low rates is hardly new. The sheer rally of key
US indexes and massive underperformance by hedge funds has created a world
that’s: a) Too skeptical about the value of professional money managers b)
Finds it simple to just own stocks or a basket of stocks as a way to
speculate. These performance driven
fundamental concerns are facing the money management industry more than Brexit,
Trump and other macro events. Of course, the lack of volatility has made it
even more difficult for short-term traders to generate appealing returns.
In the fall of last year,
investors were doubting professionals’ ability to navigate this landscape: “Hedge
funds have suffered their biggest withdrawals since the financial crisis, with
investors pulling $23.3 billion in the first half of the 2016, according to data
from Hedge Fund Research Inc” (Bloomberg, September 12, 2016).
The critical question remains,
why did money managers fight the existing trend? Isn’t it simple (in hindsight
of course) to own stocks as long as interest rates are low given stimulus efforts?
Nothing is easy in the game of speculation. For some, the concept
of taking directional risks appears like a losing effort, especially with lower
volatility and increased machine trading. For others, after 2008, the stock market
wasn’t the novelty path towards wealth creation given the wealth destruction.
Now, the hedge fund industry is under severe pressure to lower fees, and the
value-add is being questioned because “professionals” have been stumped, badly.
But like all things, cycles change and so do fortunes. Perhaps soon.
Through all this, the stock
markets are roaring to record highs and the parabolic run is inviting many doubters
as well as euphoric speculators. Unprecedented moves at times but a multi-year
stock appreciation is looking dangerously invincible and long-time doubters
look like overly cautious skeptics. The real economy and day-to-day lives of
Americans are not too joyful nor thrilled with the status-quo. Yet, the stock
market, with a narrative of its own, is so disconnected, it’s understandable
that even the sharpest money managers are stunned by the current bull
market. Yet, investors relying on or
outsourcing to hedge fund managers are losing faith given lackluster returns, so
that’s also natural to expect.
Digesting Clues
Interestingly, on July 8 2016,
Gold prices peaked at $1,366 and US 10-Year Yields bottomed at 1.31%. A critical inverse relationship is taking
hold. Last summer’s inflection points are vital now considering rate-hike
chatter is accelerating and Gold prices are stalling. This Gold-Treasury yields
relationship tells us that a rush to “safety” (driven by panic) leads to higher
gold prices and lower yields. As Yellen & Co discuss interest rate hikes,
the behavior of Gold and Treasury Yields will be telling and worth watching closely
for new trends. Does the bond market really trust that the economy has
improved? And are big picture global concerns going be expressed via buyers
purchasing more Gold? Both serve as a metric to measure attitude and perception
of risk. For now, the commodities and bond markets are not too optimistic or
too anxious either – evenly keeled, both asset classes await the next major catalyst.
Notable Catalyst
Now that China's banking
system has overtaken the Eurozone, the investor community needs to beware of
the leveraged Chinese economy.
“Chinese bank assets hit $33tn
at the end of 2016, versus $31tn for the eurozone, $16tn for the US and $7tn
for Japan.” (Financial Times, March 4, 2017)
What's stunning is the last
panic that was felt in financial markets was in August 2015, sparked by worries
of the Chinese market. That said, the Eurozone worries from Greece to Brexit
have circulated day-to-day discussions. Yet, the overleveraged Chinese market
is at the forefront of re-sparking turbulence. There has been much talk about
slowing GDP growth projections and tensions brewing in the South China Sea. Not to mention, the hostile Trump-China
relationship regarding trade remains a wild card from political standpoint.
With China being a critical
driver of global growth, if the sentiment towards China shifts, then a
confidence scare can spark a worldwide market sell-off. In the weeks and month ahead, financial
absolvers will feel very compelled to follow and track details of Chinese
market nuances. If global growth slows
down, while the China vs. US rift escalates, then sour sentiment towards
globalization can spark all types of worries. Therefore, the health of China’s
economy is a vital trigger point for non-financial events, as well.
Article Quotes
Beyond trade and markets:
“China omitted a key defense
spending figure from its budget for the first time in almost four decades -- before an
official disclosed the number -- highlighting concerns about transparency in
the world’s largest military. While authorities said defense expenditures would
rise “about 7 percent” this year, the budget report published by the Ministry
of Finance on Sunday omitted the figures. Later, a ministry information officer
said China’s military budget would increase 7 percent this year to 1.044
trillion yuan ($151 billion). That’s the slowest pace since at least 1991….
The
slowdown in Chinese spending growth comes as U.S. President Donald Trump vows
to beef up U.S. defense spending by $84 billion over the next two years. That
plan includes reductions in spending for the State Department and federal
agencies that aren’t involved in security.”
(Bloomberg March 5, 2017).
Eurozone Revival:
“Purchasing manager indices
for the manufacturing sector in Central Europe recorded another strong result
in February, according to data released on March 1. The data is just the latest
set that suggests a strong start to the year for the Visegrad economies
following a disappointing second half of 2016. The uplift in business
conditions in the region shadows strong readings in confidence and activity in
the Eurozone – and Germany in particular – which supplies the bulk of the
Visegrad economies' export demand… The Eurozone saw a 0.2 point
gain to 55.4 in February, the highest level of the index since April 2011. The
German reading hit a 69-month peak at 56.8.
Where German industry goes,
Central Europe tends to follow. Industrial sectors in the Czech Republic,
Hungary and Poland are all led by their role in the supply chain of Europe’s
largest economy and exporter.” (bne IntelliNews, March 1,
2017)
Key Levels: (Prices as of Close: March 3, 2017)
S&P 500 Index [2,383.12] – Another record high. Since February
11, 2016 lows (1,810.10), the index is up 32.6%. A massive turnaround since
last year’s worrisome period.
Crude (Spot) [$53.33] – Sitting
between $50-54, in a narrow trading range. While directionless for now, crude
is seeking tangible guidance and catalysts.
Gold [$1,226.50] – Peaked recently at $1,257.20 following a mid-December
recovery.
DXY – US Dollar Index [101.54] – For the last four months, the
dollar index has stayed above 100, confirming the dollar strength theme.
Interestingly, since the Trump victory, the index broke and stayed above 100.
Now, whether or not this euphoric response has some
legs will be tested.
US 10 Year Treasury Yields [2.47%] – Getting
closer to 2.50%. An intriguing level, since in the past few years, 10-year yields
failed to stay above 2.50%. In the last four years, surpassing 3% has been a
severe challenge. The difference now seems to be as mysterious as the bond
market remains skeptical.
Dear Readers:
