Market Outlook | October 31, 2016

“We are limited but we can push back the borders of our limitations.” (Stephen Covey)

Fuzzy Reality

The market has not had a good grasp on the real economy.  Confusing messages from central banks and an unclear economic growth picture makes this rally lack substance. It is irritating for so many to see the massive disconnect, but this has been going on for too long.  Unimpressive real economy US indicators, Chinese slowdown, desperate nations post Crude price correction, multiple wars in the Middle East, weakening Europe and, of course, a central bank (CB) that's losing credibility all lend to observers’ irritation. Despite the elevated asset prices in stocks, real estate and other risky assets (corporate bonds), the average and not so average risk manager is asking questions regarding risk reduction. Even the perception of an “improving” economy hasn’t quite been accepted with warm hands. Despite a recent rise in US 10 year yields, for the most part bond markets are not quite showing an improvement. Interestingly, during the last few weeks, participants have seen a rise in volatility, sell-off in bonds and a strong Dollar.

Meddling Risk

Deciphering pending government intervention is a growing risk that is being understood by more participants.  These interventions are not only limited to CB interest rates policies. In fact, it extends to fines as witnessed at Wells Fargo and Deutshe Banks. Similarly, more and changing regulations as recently seen in the LIBOR movement have occurred due to new rules. In fact, that has elevated LIBOR prices, changing the status-quo a bit:

“The three-month U.S. dollar London interbank offered rate extended its climb Wednesday, reaching the highest since May 2009. According to strategists at Citigroup Inc. and JPMorgan Chase & Co., it will keep rising for the rest of 2016, potentially eclipsing 1 percent by year-end.” (Bloomberg, October 27,2016)

Other perceived government related risks are clearly visible in elections, which are not only suspenseful in the US but in other key countries, as well. At some point, further government involvement combined with limited small business growth (more on this be below) can bring an accelerated symptom of more socialism to capital markets. That’s a bigger risk still being digested, but it is hardly quantifiable.

Stimulus Failure

Frankly, the Central Bank obsession has made government officials become more of a variable in market movements versus basic fundamental matters. For several years, the Central Banks have been able to dictate the message to participants from Europe to Japan to the UK to the USA.  Bodies of government imposing more regulation, which is a burden to small businesses, has failed to uplift the economy the same way QE trickery has failed to move the needle for the real economy.

Corporate profits have dropped for several quarters sending a signal of lackluster results:

“Profits have fallen for five straight quarters, the longest skid since the last recession, according to the Bureau of Economic Analysis.”  (Bloomberg, October 21, 2016)

The rage in the real economy is felt with Nationalist political candidates gaining some traction. Loss of faith in globalization is another hint of slowdown.  Yet, Central Banks continue to posture of raising rates, but interest rates policies are not quite enough. The endless rate-hike posturing is insulting is some ways. At some point, a collective realization awaits for reorganization, Fed failure or a possible limitation in CB’s policies. Thus, a new era waits in which a shift occurs from CB obsession into a realization of chronic real economy concern. Perhaps, the message here is that rates will stay low for a while, unless policy driven leadership breaks the trend of the current status-quo.    

Article Quotes:

“According to The Heritage Foundation’s research, the Environmental Protection Agency has been the most enthusiastic regulatory agency in the past several years, imposing a staggering $54 billion in new regulations since 2009. But the EPA is not the only culprit. Overall, federal agencies have implemented 229 new major rules (rules expected to cost businesses and individuals over $100 million) since 2009. That adds up to a $107.7 billion increase in regulatory costs in just seven years. The NFIB found the biggest small business complaints included not just the actual costs of compliance, but also the time spent doing paperwork and figuring out new requirements. As NFIB explains, “Wasting entrepreneurs’ time is a serious growth impediment.” With so much money and time tied up in regulatory procedures, small businesses are left with little opportunity or desire to grow.” (The Daily Signal, October 27, 2016)

“Demography is the only thing that matters in the very long run…Because these demographic forces are unlikely to reverse direction very rapidly, the conclusion is that equilibrium and actual interest rates will stay lower for longer than the Fed has previously recognised. Of course, the market has already reached this conclusion, but it is important that the Fed is no longer fighting the market to anything like the same extent as it did in 2014-15. This considerably reduces the risk of a sudden hawkish shift in Fed policy settings in coming years. Furthermore, greater recognition of the permanent effects of demography on the equilibrium real interest rate has important implications for inflation targets, the fiscal stance and supply side economic policy. These considerations are now entering the centre of the debate about macro-economic policy. The relationship between demography, growth and interest rates has been studied by economists ever since the days of Malthus, but it has played relatively little role in mainstream macro-economic discussion in the last few decades.” (Financial Times, October 23, 2016)

Key Levels: (Prices as of Close: October 28, 2016)

S&P 500 Index [2,126.41] –   Approaching a critical support level around 2,120. In the last 2 months, the index has stayed above 2,120; however, another test awaits. Interestingly, the recent failure to stay above a 50-day moving average creates further worrisome technical responses.   

Crude (Spot) [$48.70] –   The recent attempt to surpass $50 remains quite a challenge.  Yet, since August, Crude prices have stabilized and elevated. Upside momentum appears to be waning in the near-term.

Gold [$1,273.00] –   Since August, Gold price has declined on a consistent basis. Some wonder if $1,260 is a bottom again, as seen in June. However, a convincing catalyst is unclear.

DXY – US Dollar Index [98.34] – October reiterated the strength of the Dollar. From September 22 lows of 95.04 to October 28 highs of 99.11, the macro theme of a strong Dollar remains intact.

US 10 Year Treasury Yields [1.84%] – Yields have risen in a noteworthy manner. Since the lows of 1.53% on September 30, 2016, yields have climbed up along with the dollar.

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.

Market Outlook | October 10, 2016

‘The inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of miseries.” (Winston Churchill 1874-1965)

‎Beyond Risks

When one compiles recent developments in financial markets, one realizes that the risk of volatility and high warnings regarding a ‘crash’ are visibly discussed. In fact, the potential death of capitalism or near ‘death’ of public markets is worrisome, and this rapid change is being digested too slowly as other distractions are mounting. Perhaps, a gigantic pivot towards ‘socialism’ should be at the forefront of potential concerns for participants and advocates of free markets. The concealed news items seem to have a more powerful impact than the daily noise of the status-quo that's polluting the market. Money managers have a risk that's concealed and too big to calculate, but an ideological shift is taking place.

Of course, lower yields, saturated markets and suppressed volatility are plenty to chew for investors. But, if there is a glaring fundamental shift on the mechanics, drivers and conductors of financial markets, then is it not bit silly to disregard the real, big picture?  Market participants are too consumed on Fed obsession and the misleading interpretation of risk. Perhaps, wealth creation via financial markets as we once knew is an archaic chapter that's been replaced by unbearable government intervention. ‎More defaults, frauds and calls for bailouts only strengthen the points of those looking to destroy (intentional and unintentionally) capital markets. The demise of the Deutsche Bank is one example currently playing out as the Eurozone contemplates bailing-out, and this theme seems like deje vu to financial market observers.

New Indigestible Era

The Bank of Japan buying equity ETFs, the Fed contemplating stock purchases and painstaking obsession with Central Banks is creating ‎ bigger ideological concerns. It is insane in some ways to think that Bank of Japan is the largest shareholders of many private companies in Japan. Still, this central bank scheme did not help revive growth; however, the action of central banks buying equity ETFs is surely a game-changing paradigm. This has some people numb and others deeply worried without comprehension of what's to follow with government actions:

“Already a top-five owner of 81 companies in Japan’s Nikkei 225 Stock Average, the BOJ is on course to become the No. 1 shareholder in 55 of those firms by the end of next year, according to estimates compiled by Bloomberg from the central bank’s exchange-traded fund holdings. BOJ Governor Haruhiko Kuroda almost doubled his annual ETF buying target last month, adding to an unprecedented campaign to revitalize Japan’s stagnant economy.”  (Bloomberg, August 14, 2016)

Similarly, the post bank bail-out days already have empowered federal government while shredding the public sentiment and trust in banks.  Without trust in capitalism and free-flowing markets, a generation is being swept away with ideas of ‘socialism’ and more turn faithless in the concept of wealth creation. Politicians exploiting this post-crisis dynamics without real economy solutions are utterly dangerous in the intermediate-term.

Stunningly, not only are Central Banks controlling the market narrative, there is early discussion of the Fed potentially buying stocks, which was merely unfathomable last decade. Once example of stunning development:

“Former U.S. Treasury Secretary Lawrence Summers floated the idea of continuous purchases of stocks as a potential ingredient in a recipe for the developed world to strengthen economies struggling with subdued growth and inflation. Among the proposals that deserve ‘serious reflection’ is the purchase of a ‘wider range of assets on a sustained and continuing basis,’ Summers said in a lecture at a Bank of Japan conference in Tokyo Friday. ‘I’m not prepared to make a policy recommendation at this point,’ he told reporters later.” (September 30, 2016)

Bureaucratic Suffocation

Regulators can scrutinize prior behaviors and settle with financial operators, but the net result is lack of job creation, as well as lack of future wealth creation for the middle class. Frankly, without respect and effort for promoting prosperity or rewarding innovation, the US is at risk of losing its glamour as a leader of innovation and small business growth. Damages from the crisis eight years ago have left a very toxic residue in business sentiment and shifted the structural and psychological set-up.

To judge fairly, one would need to admit the reckless promotion of risk by government and accept the reckless participation by banks. Again, those debates still lack closure from congress to courts to the essential attitude of investors. No matter what politicians and agenda-driven folks tell us, government's heavy cooperation with the private sector fails to move the needle in GDP or other critical real economy measures. Socialist countries have failed miserably and the envy of the world was America's ability to promote upward mobility with less bureaucracy. ‎In fact, the same bureaucracy that suffocates growth in Europe should serve as a massive example of what not to do. Wasn't Brexit a reminder of that? Regardless of Brexit concerns for future implications, the European Union’s ability to correct past failures and map a bright future is being heavily doubted. Skepticism is skyrocketing across all angles from government leadership to corporations’ growing influence. Through this chaotic wave of distrust, Nationalism, which seemed like a lost art, is easily gearing to spread like wildfire (as seen in Europe) given the grave condition of wealth creation and crippling status of real economy growth.

Looking Ahead

In the near-term, many election and government decisions will swings the markets. From Brexit to trade policies to Central Bank coordination, the reliance on political leaders is greater than desired.  For money managers, these are risks that are hard to quantify and are not part of the traditional money management analysis. Thus, with looming uncertainties re-occurring constantly, many hedge fund managers and investors are forced to navigate in a suspenseful period. Yet, for the market fundamentals, the disconnect between financial markets (i.e. stock indexes) and real economy must converge at some point. That itself is a mystery to all. Thus, risk perception might be low until a major re-set materializes naturally. This suspense is more like a day-to-day anxiousness for most. That said, this is more like the norm and accelerating faster than imagined.

Article Quotes:

“Nobel Prize-winning economist Joseph Stiglitz predicted in a interview out on Wednesday that Italy and other countries would leave the euro zone in coming years, and he blamed the euro and German austerity policies for Europe's economic problems. Europe lacks the decisiveness to undertake needed reforms such as the creation of a banking union involving joint bank deposit guarantees, and also lacks solidarity across national boundaries, Stiglitz was quoted as saying by Die Welt newspaper. ‘There will still be a euro zone in 10 years, but the question is, what will it look like? It's very unlikely that it will still have 19 members. It's difficult to say who will still belong,’ the paper quoted Stiglitz as saying.’  ‘The people in Italy are increasingly disappointed in the euro,’ Stiglitz was quoted as saying. ‘Italians are starting to realize that Italy doesn't work in the euro,’ he added. He said Germany had already accepted that Greece would leave the euro zone, noting that he had advised both Greece and Portugal in the past to exit the single currency.” (Reuters, October 5, 2016)

“Central banks are embarking on the largest quarterly purchase of assets since quantitative easing was introduced following the financial crisis, as policymakers double down on monetary policy despite growing concern it has reached its limits.

“In the final three months of the year, the UK, Japan and Europe are expected to spend a combined $506bn on assets — the largest quarterly sum created While the US concluded its QE operations in 2014, the BoJ, BoE and ECB are still expanding, pushing the collective balance sheets of G4 central banks to more than $13tn.Citi estimates that the collective balance sheets of central banks is now equal to about 40 per cent of global GDP, a move that is shrinking the universe of securities available for investment, according to credit strategist Hans Lorenzen the early days of the US Federal Reserve’s QE programme in 2009....‎While the US concluded its QE operations in 2014, the BoJ, BoE and ECB are still expanding, pushing the collective balance sheets of G4 central banks to more than $13tn.Citi estimates that the collective balance sheets of central banks is now equal to about 40 per cent of global GDP, a move that is shrinking the universe of securities available for investment, according to credit strategist Hans Lorenzen.” (Financial Times, October 4, 2016)

Key Levels: (Prices as of Close: October 7, 2016)

S&P 500 Index [2,153.74] – After reaching all-time highs on August 15 (2193.81), the index continues to decline. Early signs of peaking have appeared, but they are too mild to be notable.  

Crude (Spot) [$49.81] – Nearly set to re-visit June 9 highs of $51.67. The August and September rallies lifted Crude above $40. 

Gold [$1,258.75] – Signs of a major slowdown in momentum after reaching $1,360. The sharp sell-off, recently, reconfirms slowing buyers’ demand.  Interestingly, the 200 day moving average stands at $1,255 – just a few points removed.

DXY – US Dollar Index [96.63] – Since May, the dollar has bottomed and risen mildly which simply suggests it is maintaining its strength. Annual highs remain at 99.82 reached in January.

US 10 Year Treasury Yields [1.71%] – Mostly trendless. Recently, yields spent a lot of time trading between 1.50% and 1.70%. Certainly, the status-quo remains in place and a catalysts is desperately needed.

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.

Market Outlook | September 26, 2016

“Success builds character, failure reveals it.” (Dave Checkett)

Discovering Failure

The Central Banks’ ability to stimulate economies has and is continuing to fail miserably. Despite interpretations by financial markets, sugar-coating by Phd economists and confusing messages by central banks, the Central Banks’ inability is enough to make market participants uneasy.  The Bank of Japan’s actions serves as a warning for the US and Eurozone, as growth is illusive and real economy vibrancy continues to struggle in low rate environment. It is only a matter of time before policymakers stop pretending that QE is working. In fact, the Federal Reserve is split on rate-hike policy, and the bond markets do not buy the posturing of a rate-hike. In fact, for a long while bond markets have not bought the story. However, with volatility low and panic mostly contained, the Central Banks can feel they have control of financial markets, albeit in a fragile manner.

Equities: The well-established bullish run continues to trigger new all-time highs in some areas. Participants are not owing stocks because of stellar fundamentals, as taught in schools or practiced in prior years. Instead, desperation for yield, lack of alternatives and return chasing keeps people in the traditional liquid markets and primary stocks. Once again, investors are quite aware that earnings are struggling:

“Companies in the S&P 500 are now expected to report negative earnings growth for the sixth consecutive quarter in the coming weeks, according to analysts polled by FactSet. That slump would be the longest since FactSet began tracking the data in 2008.” (Wall Street Journal, September 25, 2016)

Of course, technology and growth driven shares continue to reaffirm confidence and market leadership.  However, broad indexes have traded in a narrow range for several weeks. And stocks do not offer an ideal entry point for longer-term investors. European banks have showcased notable weaknesses and may stir concerns soon.

A deeply awaited re-acceleration in stocks is what keeps the Bulls confident. Over-reliance on the Federal Reserve and complete abandonment of grass-roots fundamentals heightens the risks, especially for ultra-bulls. Not to mention, the shift in the Fed's status-quo is a long awaited catalyst, but with suppressed volatility concern it is not fully visible. 

Money Managers’ vibes: The overall sentiment in public statements and articles showcase money managers are talking down the market and talking up the risks, ‎which is nothing new. What else is new? Money managers continue to ask “what's the basis for growth?” “What's the favorable policy ahead?” And “is the Fed running out of fuel?” One example of a money manager sharing another warning:

“Laurence D. Fink, who runs the world’s largest asset manager as chief executive officer of BlackRock Inc., said markets may fall 15 percent if governments don’t take aggressive fiscal policy actions and there are aberrant results from referendums in Europe.” (Bloomberg, September 22, 2016)

The Fed's scheme: Posturing and confusing market participants has been the motto and, amazingly, it has worked. Even though
 the Fed losses credibility on one hand, it continues to dominate with its influence as the central bank obsession lives on. Most, of the investors’ obsession is driven by the lack of other options. To bet against a Fed-obsessed market takes a lot of courage and can be the rewarding future trade.  It feels like no escape from the consensus view, but a courageous few seeking big rewards are considering the anti-status-quo bet.

Until, participants abandon faith in the Federal Reserve by rushing into "safer" assets, the Fed's confidence on steering the ship remains high. The inflection point is not about participants confidence as much as the Fed's confidence. A divided Fed combined with investors fleeing the Fed's thesis can cause short-term turbulence while sending a long-term message.

The hunt for yields: ‎ Without a justified rate-hike ahead, the status-quo of low interest rates will continue to persist. In turn, chasing high yield investments in riskier areas will continue to manifest itself. Amazingly, Greek 10-year bonds are trading near 8% and Brazilian 10-year is at 11.82%. Basically, in recent years, the risk perception has rapidly calmed down in Europe. Investor demands for riskier ­assets persists even more, which may benefit Emerging Market assets.  

Dodging all risk means facing zero to negative interests, and savers are irate on this set-up given the changes in the fixed income world. Thus, investors feel anxious and eager to put capital to work to generate yields. The numbing effect of low rates drive investors to be a bit impatient at times. Further complacency continues to resurface in the market as central banks openly encourage risk-taking via low rate policies.

Catalyst search:  Besides the massive attention that surrounds the interest rate discussion, commodities are lingering in the background. On one end, if global demand for oil is very low then that confirms further weakness in the real economy. At the same time, supply is abundant and OPEC nations are desperate to keep prices stable. Thus, a weakening commodities market can put further pressure in other assets, such as equities. In a connected way, weaker commodities and a stronger US Dollar can spark some additional shocks, as well. Interestingly, weaker commodity prices can stir further political risk as oil dependant nations (Saudi, Iran, Russia etc) may act out of desperation. Thus,  declining Crude prices (again) can impact commodities, currencies and geopolitical factors in the months ahead.  

Article Quotes:

Post Brexit discussion:  “The European Central Bank doesn't just determine monetary policy. Today the bank provided a list of 'other decisions' taken by its governing council at its most recent meetings, and while most of it is pretty dull, there was one line that seems to indicate that the bank is moving to make sure the U.K. will no longer have anything to do with manufacturing euro banknotes, should a so-called 'hard Brexit' occur… In the context of Brexit's far-ranging economic implications, the location of a money-printing business is possibly of little consequence, but as debates about London's role in clearing rage on, today's move by the ECB does show European institutions are starting to lay the groundwork for a post-U.K. European Union.” (Bloomberg, September 23, 2016)

“Ms Yellen repeatedly stated that politics was not discussed in her committee, adding that this will be reflected in black and white when transcripts of the Fed’s deliberations are released in five years. Nevertheless, there is ample reason for the Fed to tread carefully given the US is less than two months from one of the most fraught general elections in modern times. So where does this leave the hawks in the Fed? Ms Yellen tried to argue that differences between officials are minor, centring on timing rather than fundamental differences of policy. But there is no doubt that she has a revolt on her hands. Three regional Fed presidents — Loretta Mester, Esther George and Eric Rosengren — voted for an increase. This was the first time three members dissented in the same direction since September 2011, and only the fifth time in 30 years, according to a trawl of Fed records by Goldman Sachs.” (Financial Times, September 22, 2016)

Key Levels: (Prices as of Close: September 23, 2016)

S&P 500 Index [2,139.16] – In the last 50 days, the S&P 500 index has wrestled between 2,160 and 2,180-ish. This showcases a debate between bulls hoping for re-acceleration and bears seeing a topping process. In between, few all-time highs have been reached, but mostly it has been range bound.  August 15^th highs of (2,193.81) and August 23^rd highs of (2,193.42) mark the record highs. 

Crude (Spot) [$44.48] –   Still not on solid footing as the supply/demand debate plays out.   A break above $50 has been challenging, and a drop below $40 could trigger further selling pressure. It remains very sensitive to pending catalysts.

Gold [$1,338.65] – A key inflection point approaches. Staying above $1,350 showcases further strength.  Surpassing July 16^th highs ($1,366) is a critical challenge to restore a bullish bias in this ongoing recovery.

DXY – US Dollar Index [95.47] – Not much movement over the last 15 months. The status-quo approach by central banks has not created a defining moment. Plus, EM currencies and commodities have mostly stabilized. Both factors above lead to an uneventful Dollar story thus far.

US 10 Year Treasury Yields [1.61%] –   More and more, signs show yields remaining low for a while.  March 2016 highs of 1.99% seem so far removed today, both in perception and investor mindset. Yet, Brexit lows of 1.31% remain somewhat of an outlier, until the next shock.  

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.

Market Outlook | September 19, 2016

“Time crumbles things; everything grows old under the power of Time and is forgotten through the lapse of Time.” (Aristotle)

The Federal Reserve, through speeches and posturing, tamed the possible financial unrest that's been forming in the market dynamics. However, deferring or dismissing tangible economic concerns is not going to last for too long. After a few rallies this year, investors are taking a hard and close look of the trends ahead. That said, here are three interesting near-term developments:

First, the European stock market is feeling pain, headlined by the decimation of Deutsche Bank shares. Dispute over lawsuits from the US government damages the perception of other banks, and this is not limited to the German banks.  In fact, banking is a less profitable sector in which managers have trimmed jobs while facing increasing regulatory demands. At least, for now, the fundamental weakness of a bank facing legal challenges for lending practices stirs concerns, but this is not new and revisits real economy concerns about revival. For the year, the Spanish stock market is almost down 10% and the Italian broad index is down 24%. German index is down as well for the year. How is this a sign of a healthy condition? How does this prove the European Central Bank is "winning", when stocks are hinting of slowdown while the real economy is in shambles? Can the ECB find further solutions?

Secondly, the global economy weakness is being re-visited as Emerging Market stocks and currencies weaken while commodities, especially oil, continue to drift lower. ‎Markets are preparing for a new era where loose monetary policy is not the be all and end all of solving financial issues. There was demand for EM assets, especially for bargain hunters. After the rally in prices for EM and commodities, investors are wondering if the run needs a breather. The Mexican Peso is hitting a record low, which highlights the EM currency trend.

At the same time, sentiment is shifting in commodities:

“With supply gluts persisting from corn to oil, traders are already gearing up for declines. Investors pulled $791 million out of exchange-traded funds tracking commodities over the past month, a reversal from earlier this year that have still left inflows up by $34.1 billion for the year.” (Bloomberg, September 15, 2016)

Third, the zero to negative interest rate environment is not being celebrated as desired by the Central Bank’s narrative. Instead, the longer interest rates remain very low, the more skepticism that arises regarding further upside catalyst. The convenient script is looking more and more nonsensical. The odds of negative rates in the US are not off the table, which begs further unpresented concerns. For too long, the coordinated near-zero interest policies from Japan to Europe to the US have turned from a stimulus to a toxic catalyst. As Central Banks lose their ability to influence markets, then a chaotic-like trend shift is expected. Collectively, investors are running out of ideas in a period where there might be less ammunition for sound monetary policies.   

Article Quotes:

“The WTO forecast in April the global value of trade in goods would grow by 2.8 percent this year, less than a previous forecast of 3.9 percent. Trade growth has averaged 5 percent per year since 1990, but has not grown by more than 3 percent since 2011. Trade-dependent Singapore expects its non-oil domestic exports to fall by 3 percent to 4 percent in 2016 from the year before. Menon said the other worry for Asia is the tepid growth of private investments in the United States, highlighted by huge cash piles that are not being invested by companies. A Moody's Investors Service report earlier this year said U.S. non-financial companies were holding $1.68 trillion in cash at the end of 2015, up 1.8 percent from $1.65 trillion the previous year.”  (Reuters, September 15, 2016)

“The Bank of England held its benchmark rate steady on Thursday but telegraphed that it still expects to cut it again later this year if the U.K. economy weakens as officials expect. The BOE said in a monthly policy statement that the nine members of its Monetary Policy Committee voted unanimously in September to maintain the BOE’s benchmark rate at 0.25%, after cutting it from 0.5% last month. The move was part of a package of stimulus measures to cushion the economy following Britain’s surprise vote to leave the European Union in June. Officials also revived a long-dormant bond-buying program and extended purchases to include corporate bonds. The panel voted unanimously in September to press ahead with those asset purchases, totaling £70 billion ($92.7 billion). Two policy makers, Kristin Forbes and Ian McCafferty, in August voted against aspects of the bond-buying program but backed the initiative in September, saying that reversing it so soon carried risks.” (September 15, 2016)

Key Levels: (Prices as of Close: September 16, 2016)

S&P 500 Index [2,139.16] – Even the most bullish buyers have been nervous around the 2,100 mark for over two years based on technical charts. The recent break above 2,100 this summer seems to be fading after peaking on August 19, 2016. Finding further upside is the challenge for the market.

Crude (Spot) [$43.03] – The commodity’s ability to stay above $40 is being questioned severely. Supply of oil has expanded and demand is not quite convincing, either.

Gold [$1,308.35] –  Since early July, Gold has been slowing down its upside move.  Staying above $1,300 is critical in the upcoming days.

DXY – US Dollar Index [96.10] – Mostly an uneventful pattern. Last Friday’s close is in-line with the 200 day moving average (96.14). Observers are still waiting for a noteworthy macro shift.

US 10 Year Treasury Yields [1.69%] –   There has been a positive trend since early July in which yields have risen. However, the market is quite familiar with the 1.70% range, which has been seen several times this year. It is not quite clear if the recent rise is sustainable.

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.

Market Outlook | August 29, 2016

“Rules are for the obedience of fools and the guidance of wise men.” Douglas Bader

Misguided Calmness

As the Fed chatter and massive obsession continued last week, the battle between the Central bank and bond markets continued to play out. The Federal Reserve continues to operate with public relation tactics, sending out an army of economists to “talk-up” the financial markets and economic conditions. Once again, a rate-hike is on the table, stirring up headlines, but the skeptical crowd is smelling some desperation. Others sense an election year has its own nuanced story and impact to the Fed’s reactions. Some have  all types of explanations, but the mystery of how this cycle ends lives on. It is a mystery that’s been contained with near-term calmness, but the “quiet” bullish run is justifiably reaching questionable ranges despite no visible signs of worries. 

For a long-while, the bond markets have been skeptical about US growth and fundamental economic expansion. As US 10 year yields remain below 2%, the concept of a rate-hike has not been taken too seriously as the data is murky.  Further improvement in economic data, less fear of recession and some additional revival in the energy sector can provide a further boost for rate-hike justification.  Yet,  strong growth is not clear-cut, mixed data fails to tell the whole story and the status-quo is actually making participants more  anxious.

 The debate whether to raise or not to raise interest rates has turned to more of a theatrical spectacle for financial media and investors' circles. However, the last few years have showcased a tangible pattern of low to negative interest rates, subdued volatility and increased demand for “riskier assets”. Within this context, the Fed faces a skeptical crowd,  unimpressive economic growth and a stock market that’s not quite cheap. Altering messages from the Central bank have stirred enough confusion and created a doubt of creditability, but has not harmed shareholders and bulls significantly. In fact, the bears have capitulated various times as the Federal Reserve attempts to strong-arm the audience into their thesis.

In or Out.

At this stage of the rally, investors are facing a critical question: Whether or not to chase returns in equity markets as the S&P 500 index flirts with all time highs. As the stock rally continues, there is pressure mounting for investors to feel the urge to jump along with the trend. However, there is a risk of assets topping. The warning is there, but the event itself has yet to occur.  Nonetheless,  still there is escalating risk in abiding by Yellen & Co’s plans and views.

How many times have markets heard of a chance of a rate-hike? Last year symbolic rate-hike was not quite earth shattering or convincing. Seriously, there is a credibility problem. Equity markets and other assets have appreciated to make headline splashes, but the substance-light rally is under scrutiny. The Fed, entangled between near-empty promises and loss of credibility, is trying to manage the same bubble it created. Calling a market top for experts has been a brutal exercise, and hedge funds have under-performed, especially with volatility muted. However, it's the invisible that's more worrisome than the more visible market-related headlines. The Fed's bluff is tiring investors, so  much so that they may question if they are with the Fed or willing to sit on the sidelines.

Short-term Digestion

The Dollar strength will be watched closely in the near-term as it relates to rate hike chatter. ‎Asian markets and EM currencies will be evaluated closely as well for some clues.  China’s weakness is being revealed slowly; and US banks are another source that may look at rate-hikes favorably, assuming shareholders believe it’ll actually happen. Amazingly, Yellen's speech itself is enough to stir further speculations on pending actions. Unless, there is a notable market move, most bulls may feel less compelled to sell, especially in a world where Eurozone remains grim, Asia’s growth is not impressive and other markets are still feeling the commodity price readjustments.

Short-term over-reactions and under-reactions can create more confusion rather than clarity. Thus, the next few weeks ahead are tricky from an analytical point of view, but investors must have a firm stance before making a move.  It should be reiterated that to listen and to trust Central Banks narrative is ultimately a choice. Investors have the choice to double down on the Fed's narrative or reduce exposure to Fed-driven markets. More than speculation, courage is one way to dodge major bullets from a risk perspective. Some sparks of rising volatility were seen last week in VIX (Volatility index for stocks). Short-lived or not is another matter, but for now staying disciplined and not overreacting to each new piece of data is a valuable approach.

Article Quotes:

“China’s banks are set to be the biggest losers in the sweeping bailouts of the country’s steel and coal industries. Local governments hoping to save their steel mills and coal miners have announced a series of restructuring plans, enlisting the banks to take the hit by improving the terms of the loans or swapping them for bonds or equity in the struggling groups. The reliance on the banking system to shoulder the burden comes at an inopportune moment, with China’s banks already mired in bad debt — about Rmb15tn ($2.25tn), or 19 per cent of total commercial lending by some accounts. Profit growth at the banks has also fallen over the past two years and could deteriorate further as many of the country’s largest industrial players renege on loans for better state-brokered deals…. The contentious debt-for-equity programme announced earlier this year, in which banks will be asked to swap debt in exchange for equity in ailing companies, would help the banks remove bad debt from their loan books in the near term.” (Financial Times August 28, 2016)

“In recent years, bond yields have been behaving in strange ways. The yields on many government bonds have fallen to historically low levels; in some countries, like Germany and Japan, some have actually turned negative. An investor who pays €100 for a 10-year German government bond will receive less than €100 back if he holds that bond until it matures. Such weirdness looks even more bizarre in Japan, where the government has racked up debt worth nearly 250% of GDP: an obligation one might expect to dent confidence in the government’s credit. Some investors blame central banks for these oddities; they have been printing money and buying bonds (raising the price and pushing down the yield) in order to encourage firms to do more borrowing and investing. Others blame a shortage of safe assets, like government bonds, which are increasingly used as collateral in banking systems and as the savings vehicles of choice in emerging markets. Still others see in low yields a sign that the long-run growth potential of the world economy is declining. The debate cannot easily be resolved. But freakishly low yields do suggest that something strange has happened to financial markets, to the global economy, or to both.” (The Economist, August 24, 2016)

Key Levels: (Prices as of Close: August 26, 2016)

S&P 500 Index [2,169.04] –  August 15, 2016 highs of 2,193.81 set the near-term barometer. This is a very mild short-term pullback in recent trading sessions. More stronger selling is needed to suggest a pending shift in trend.

Crude (Spot) [$47.67] –  A very sharp rise from August 3^rd lows ($39.19) to August 19 highs ($48.75). The suspense remains regarding Crude price's ability to stay above $40, especially after a quick run-up.

Gold [$1,318.15] –  Heavy resistance is forming around $1,350. Investors recall Gold’s inability to surpass $1,400 in 2014, which remains a psychological hurdle for gold bugs.

DXY – US Dollar Index [96.19] –  Most of this year, the dollar has not maintained the same similar strength as before, but it has stabilized around 94. Some signs of a turn are developing but further evidence is needed.

US 10 Year Treasury Yields [1.62%] –  After breaking below 1.70% in June, yields have attempted to climb up as the bond markets fully rejected the “growth” stories. Now investors await a climb back to 1.70%. 

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.

Market Outlook | August 22, 2016

 “But this long run is a misleading guide to current affairs. In the long run we are all dead.”  (John Maynard Keynes 1883-1946)

Collective Revival

After a brutal January 2016, US stocks climbed back up, demonstrating strength and 

reaching record highs. Even Brexit worries did not derail the S&P 500 index, Nasdaq and developed markets. Simply, various market-related concerns mainly ended up being very short-lived and the rally marched on. For every investor the assessment of risk gets trickier by the day. Elevated markets these days are not limited to stocks, since bonds have also rallied significantly.

Interestingly, commodities and Emerging Markets have recovered from “desperate” levels, further emphasizing the ongoing tolerance for “riskier” assets.  Finding bargains is not that easy across many well-established areas, especially at mid-year. Even less than quality areas have found enough buyers either out of desperation for yield or some “perceived” fundamental improvements. The market participants are hardly shy; investors may talk as if they’re nervous, but recent actions suggest further trust in Central Banks and less panic. 

Chasing returns at the wrong part of the cycle is a deadly and dangerous game, as many cycles before have proven. Hedge Funds have tried to revive themselves after a difficult period where differentiation has lacked between thousands of managers. China is not much of a reliable story, and faces its own woes in terms of financial systems. Political uncertainty lingers in the Eurozone to other less established nations, but it is not quite a market moving matter. The US dollar remains a critical barometer for asset classes and currency moves, but the dollar has been mostly trading in a small range and not setting any alarming trends.  Investors have plenty to digest, but the art of knowing which macro trend is relevant at what specific time is highly precious. Otherwise, some of the macro noise may not be too relevant in financial markets despite the multiple brewing macro related factors.

The Credibility Game

For a long-while the bond market has not been buying the strength in the economy.  With US 10 year Treasury yields below 2%, it reconfirms that the Fed’s constant “posturing” lacks credibility. Plus, the Fed’s very limited execution on rate-hikes, besides last December, begs further questions about their trustworthiness. It is a period of calmness on the surface, but terrifying precariousness below. Amazingly, the Fed may force a rate hike because crying wolf too many times is a very damaging blow.

Recently, 3-month Libor rates have  risen, Crude has somewhat stabilized and even 10 year yields have moved up, albeit slowly. All these give the appearance of less worries and more calmness than before. In fact, the sentiment is shifting toward a more positive territory, but 

perception of the risk is all out of whack.

Regarding Junk Energy Bonds: “It seems as if traders are simply disregarding the possibility of another decline in oil prices, or another wave of bankruptcies, simply in their zeal to capture any extra yield they can find. They justify this by telling themselves that the shakeout has already happened and that the energy market is in full recovery mode… It seems investors are demanding a remarkably small premium for all those uncertainties.”  (Bloomberg, August 18, 2016)

Courageous Thinking

The bold and courageous move in this climate is to walk away from the all-time highs in stocks and elevated bond markets.  The Fed may seem untrustworthy with their messaging, assets are too pricey by several measures, and increasingly more market behaviors are driven by the desperation of yield or investors chasing returns. Regardless, the sentiment is shifting more bullish and the upside limit is the big unknown in days and weeks ahead.

Bond markets have not feared a rate-hike for most of this year. That’s been interpreted as bond markets not buying into the economic strength  painted by federal government data; this is a recurring pattern. Interestingly,  as Libor begins to rise a bit and a new round of Fed posturing regarding rate-hikes emerges, there is a growing anticipation of some Fed action.  Yet, an elevated stock market and housing prices fail to capture the struggles of the real economy’s growth potential  Several failed policies and shaky confidence in small businesses add to the stress. Disruptions in multiple sectors also create further damage to many business models on top of all this.  One example of bearish, real economy is the retail sector:

“Sluggish sales at Macy's are hurting more than just the mega-retailer itself. The department store chain recently announced that it would be closing 100 stores in a bid to shore up business. That could impact about $3.64 billion in commercial mortgage-backed securities debt, according to a report by Morningstar Credit Ratings' Steve Jellinek and his team…. These anchor tenants make up a sizeable chunk of mortgage-backed deals, and regional malls typically suffer large losses when vacancy rates surge and loans go into default.” (Business Insider, August 17,2016) 

The damage to the US retail sector goes beyond the sector, impacting other investors, which is another reminder of the weak economic status despite the posturing from the Federal Reserve.

Article Quotes:

Chinese leadership: “Since coming to power almost four years ago, Mr Xi has waged a campaign against corruption. On one reading, this is to clean up the system before he undertakes political reform. On another, it is at its heart an old-fashioned purge of his enemies. Similarly, Mr Xi has centralised power, taking jobs and responsibilities that his predecessor delegated to others. Some observers think this shows he is strong; others conclude that he has been forced to act because he feels weak. Such contradictions are the backdrop to rumours about the forthcoming leadership changes. The only certainty is that the churn will be enormous. By late next year, five of the seven members of the Politburo’s Standing Committee will have reached retirement age. One-third of its 18 other members are due to go with them. In the coming months, as the combination of promotion and retirement cascades through official China, leadership posts will be shaken up at every level of the party. Hundreds of thousands of jobs will be affected, down to the level of rural townships and state-owned enterprises.” (The Economist, August 20, 2016)

Europe struggling to find growth: “Some central bank watchers think the ECB will also ease the rules governing which bonds can be bought under the flagship QE programme. The minutes offered little clue as to how the rules could be relaxed, saying only that the lack of evidence on how the latest headwinds would affect the eurozone meant “it was widely felt among members that it was premature to discuss any possible monetary policy reaction at this stage”. Research published by S&P, a rating agency, on Thursday suggested the UK leaving the EU could limit the effectiveness of the ECB’s negative interest rate policy, by lowering the value of the pound against the euro — though policymakers are more concerned about the exchange rate to the dollar. Financial markets has weathered much of the turmoil that followed the UK’s Leave vote, but share prices for financial companies were still volatile and remained below their pre-referendum levels. This reflected concerns over banks’ low profitability in an environment of low rates and weak growth, as well as high volumes of bad loans.” (Financial Times, August 18, 2016)

Key Levels: (Prices as of Close: August 5, 2016)

S&P 500 Index [2,161.74] – Breaking above 2,100 was noteworthy this summer. Several all-time highs beg further questions. A 20%+ rally since February 2016 lows suggests a remarkable turnaround.

Crude (Spot) [$48.52] – Attempts to re-visit June 9, 2016 highs of $51.67. Interestingly, earlier this month Crude sold-off quickly to $39.19.  The lack of ebb and flow in recent trading action calls into question price stability.

Gold [$1,346.40] –   An ongoing rally continues this summer and calendar year. December 17, 2015 lows of $1,049.40 marked a new bottom.  As the dollar's  strength slows down, Gold has gained further ground.

DXY – US Dollar Index [96.19] –   After establishing strength in 2014, the dollar has traded in a narrow range for the last 18 + months.

US 10 Year Treasury Yields [1.57%] –    In the last month, yields traded in a very narrow range between 1.50-1.60%.  July lows of 1.31% stand out as a possible major low in yields (top in bonds), yet the narrow current range does not provide a clear picture of a trend.

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.