Market Outlook | November 21, 2016

“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.

Market Outlook | November 14, 2016

“Truth makes many appeals, not the least of which is its power to shock.” Jules Renard

Brexit 2.0 

The market participants who listened to mainstream media concluded a Clinton victory, prematurely and mistakenly. Similarly, the consensus view that a Trump victory would lead to a market sell-off forced money managers to hedge against downside moves. Well, when the score was settled with a Trump victory, the overblown-fear subsided amd the ‎"fear" bets took off quickly. Sell-side analysts that jumped into gloom and doom regarding Trump were badly off. The consensus was proven wrong again, like Brexit. And, like Brexit, markets spurred upward rather than down.

The collaborative effort between the media to paint Trump as having no chance really backfired. But outside of the agenda driven politics, it was shocking to see the assumption that a Trump victory painted as a negative to markets. These were reckless predictions considering a well-documented, strange election cycle and a very strange Fed induced market cycle, as well.

Truly, those making big calls now are setting up for another deadly assumption, at least before deciphering Trump's cabinet. A week ago, to tell an average investor that Trump will win and markets will end the week up over 5%  would've cause a shocking or utterly dismissive response. Oh, what a humbling week (for those that can confront the truth) for those digesting surprises. 

Super Disconnect

For years on this blog, there has been one disconnect that's been repeated too many times as a key theme: the disconnect between the real economy and ‎financial markets. If the Fed was right that the economy was healthy, then a Trump victory would seem less possible.  The failures of the establishment are not only evident by Democrats losing the White House and Congress, but a new wave of attacks (from financial industry experts) against centeral banks may follow. Similarly, the upcoming elections in Europe are bound to see more Trump/Brexit like results, as a referendum to the status-quo. The current modus operandi, where large companies benefit from government organizations while small business continues to bleed via hefty regulation, is now a political matter. In fact, it is at the forefront of discussions where policy changes maybe plausible. Similarly, Trump speaking against Yellen should rattle the markets and the failed policies of all central bankers, and not be limited to just the US. Now, we’re entering a period where central banks are going to face even more scrutiny from the GOP and Trump. The paradigm of low rate, low volatility and endless headfakes regarding rate hikes are really tiresome, and an unorthodox leadership in DC can challenge the status-quo more than before.

Risk Management

To jump into infrastructure and related themes in the US, temptations are plenty. Observers are ready to see a rising Dollar, a potential shift in interest rates and other mega shifts as a result of a Trump presidency. Yet, a GOP congress is nothing new for markets and “hope” of a new administration does not materialize quickly into policy or an expected script. Thus, it’s better to grasp where the market is and where it came from before going too far in guessing where it will go. The broad indexes flirting near all-time highs and still a mostly suppressed volatility and a bullish bias is the bigger story. Sustainable or not is the same question that’s been asked for a while, and still those questions linger. The bond markets are flabbergasted, debating between more fiscal spending being dangerous versus some seeing more spending as good for the real economy. These early theses and conclusions need a little untangling before doubling down bets on stock or bond market directions.

Article Quotes:

“Chinese sovereign bonds headed for the longest losing streak in three years, driving the yield curve to the widest in two months, as accelerating inflation and signs of an improving economy damped demand for the safety of government debt.

The difference between the yields on one- and 10-year government notes, a measure known as the yield curve, rose to 67 basis points on Monday. The gap has been forced apart by a surge in the longer-term yield, with a central bank effort to reduce leverage in the financial market and a global selloff adding to the pressure.

China’s economy held ground last month following new measures to cool property markets in almost two dozen big cities, with industrial production matching September’s pace of 6.1 percent. This follows data last week that showed factory-gate inflation exceeded estimates and the consumer-price index rose the most since April, reducing the odds of an interest-rate reduction. China’s debt selloff comes amid a $1.2 trillion global bond rout on speculation Donald Trump will increase spending to boost the U.S. economy, stoking inflation and leading the Federal Reserve to raise interest rates.”  (Bloomberg, November 13, 2016)

“Investors are expected to pour a net $157 billion into emerging markets by the end of the year, according to the Institute for International Finance, seeking relief from the rock-bottom yields prevailing elsewhere around the world. But Mr. Trump’s election has changed that calculus. His emphasis on infrastructure spending and tax cuts has sparked a rally in U.S. stocks and sent benchmark Treasury yields sharply higher. With better yields now available in developed markets and expectations that the Federal Reserve could have to raise key interest rates more aggressively, rather than the slow and gradual approach many analysts had been expecting, investors have a more compelling case to keep their money in the U.S. Emerging market stocks and bonds suffered about $2.4 billion in outflows over the past week, with much of that cash exiting since the election, the IIF said.” (Wall Street Journal, November 13, 2016)

Key Levels: (Prices as of Close: November 11, 2016)

S&P 500 Index [2,164.45] –   The index experienced a sudden spike after several down days. August 15, 2016 highs of 2,193.81 are on the radar. On one end, the all-time highs are not far removed; however, the upside may be short-lived. Buyers and sellers will have to battle out their views in the test of conviction ahead.

Crude (Spot) [$44.07] –   Crude failed to hold at $50. Clearly, the supply-demand dynamics suggests that $50 is a hurdle rate for Crude. Output is high and demand is not quite as robust. Thus, the sideways action ahead is not surprising.

Gold [$1,236.45] –   After peaking in July, the downtrend for gold continues. Technical support stands around $1,240.00, but the commodity did not hold. Some buyers may find the entry point here attractive, but the momentum is hardly positive.

DXY – US Dollar Index [99.06] – The Dollar had an explosive post-election response. The Dollar is moving closer to peak levels from 2015 and the momentum remains strong.

US 10 Year Treasury Yields [2.15%] – Yields finally broke above the 2% range with a sudden spike. Previous resistance at 2.20% has proven to be a hurdle. Interestingly, LIBOR has been rising, as well. Observers await a post-election spike or a notable shift in bond markets.

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 | November 7, 2016

“Betrayal is the only truth that sticks.” (Arthur Miller, 1915-2005)

Pre-event Speculation  

With the election noise accelerating faster than imagined, the market’s pre-event response has been rather resounding. Nine days in a row of S&P 500 index decline combined with a spike in volatility has re-confirmed the obvious – markets dislike uncertainty. Is it possible that Sunday’s changing script of FBI investigation may have stopped the market bleeding?  Lots to ponder until the election results.

Amazingly, a scheduled event, like an election, can be quite tilted, scripted or massively influenced by other forces beyond than the Federal Reserve. Unlike, market-related events for the last eight years where the Fed is the dominate figure, the elections present a time where Central Banks are a secondary market factor. However, like “Brexit” before, the shock and surprise element of an event (voters’ response) may not last longer than 1-2 days. That’s possible. As pundits quarrel about polls and candidates’ shifting momentum, the markets have noticed that prior assumption of a one-sided race is note quite clear. The question for investors is not all about who is going to win. Instead, when the noise dies down regarding election they ask: How is the Fed’s narrative going to be impactful? Surprise or no surprise in the election, the Fed’s role and creditability will be under severe scrutiny in the weeks ahead.

Pinpointing Concerns

Annual returns for S&P 500 are now closer to 2% coming into weekend, showcasing that the upside is slowing. If there was any doubt that QE has failed, Japan is a living daily example. Japanese stocks are down 11%, Bank of Japan (BOJ) is running out of ideas after buying ETFs on their balance sheet, and their anemic economy is at near dead mode. Central Banks have painted a narrative that was too smooth for the "intellectual" class in finance and risk participants, who follow the messaging. The admission of missing inflation target by BOJ illustrated a complete defeat and, frankly, failure of low interest rate policy. The anti-Central Bank rhetoric is not a “revolt of the farmers” or a theoretical discourse by nonconforming professors. Instead, Japan gave us the prelude of QE, while England, Europe and US should take notice on the downfall (or disappointment) of Central Bank reliance.

The failure of Central Banks and the deterioration of the real economy are not overly discussed in influential circles. To claim that QE worked (based on rising markets and suppressed volatility) is grossly misleading, and that’s insulting to avid followers of financial markets with a semi-decent IQ.  Thus, the enraged investors who have lost faith in Central Banks may make further noise to re-create the current narrative. When will all of this come to a head?  A highly prized mystery that keeps market participants entertained and odds makers quite busy. Ultimately those that are heavily bullish on the words of the Federal Reserve might find themselves being betrayed and enraged at some point. Perhaps, that’s why there is a cautionary feeling since mid-summer.  The tiring game of rate-hike posturing and guesses is also a bit numbing to observers. More than the election, the faith of Central Banks remains just as suspenseful.

Conviction Tested

Shares of Tech leaders such as Facebook, Apple, Google, Amazon and Netflix have enjoyed a stunning run. However, in quarters ahead, impressing toward another level again is proving to be difficult. The Tech-led boom has stood out in market where Energy has consolidated, Retail is going through massive adjustments, and financial services are witnessing pressure from all sides. Thus, Tech giants’ stocks, which have provided leadership, serve as the grand leading indicator to sentiment and broad market narrative. Regardless of the election obsession, grasping the current cycle and big winners of the current cycle is rather critical.  If Tech companies desire to sit on heavy cash holdings instead of reinvesting, that may say something about their confidence. More M&A, less supply of shares and risk-hungry investors still reaffirm a bullish biased environment. Yet, the tech innovative company shares that disappoint two or three quarters in a row may trigger a shift in sentiment. As year-end approaches, tracking the big winners is critical when planning for the next 3-6 months.

Article Quotes:

“Unlike the period from 2008 to 2010, when interest-rate differentials vastly favored bringing money to China, and the exchange rate was pegged, the difference between dollar rates and yuan rates have narrowed substantially, plus the Chinese have to account for the possibility the yuan will weaken further. That explains why Federal Reserve rate increases have such a powerful effect on China’s capital flows. The People’s Bank of China, facing such a large outflow, may feel pressure to stand aside and let the currency slide further, rather than waste reserves. It also has to consider that in spending reserves, China’s monetary base shrinks, hampering efforts to boost the economy. And as the yuan slides, each dollar spent out of reserves removes a greater quantity of yuan from the monetary base.” (Wall Street Journal, November 4, 2016)

“The rate of expansion of the eurozone manufacturing sector gathered momentum at the start of the final quarter. Growth of production, new orders, new export orders and employment all accelerated, while price pressures showed further signs of increasing. The final Markit Eurozone Manufacturing PMI rose to a 33-month high of 53.5 in October, up from 52.6 in September and the earlier flash estimate of 53.3. This signaled the steepest rate of improvement in operating conditions since January 2014.The Netherlands surged to the top of the Manufacturing PMI rankings in October, with growth accelerating to a 15-month peak. Germany was also a top performer, expanding at the quickest pace in almost three years.” (Markit, November 2, 2016)

Key Levels: (Prices as of Close: November 4, 2016)

S&P 500 Index [2,085.18] –   The struggles around 2,100 are re-visited again. For a while, the charts have suggested waning momentum around 2,100 for most of 2015 and 2016. Clearly, there is a collective mental hurdle as well as technical warning where buyers seem to fade.

Crude (Spot) [$44.07] –   Failed to move above $50 once again. The sharp recent sell-off suggests that a breakout is not quite feasible in the near-term. Yet, crude finds itself back in the $42-50 range, which has mostly defined the trading ranges for 2016.  Participants are still waiting for a notable supply-demand shift to create a new catalyst.

Gold [$1,302.80] –   Firmly holding above $1,260-$1,280. This serves as a reminder that buyers are eager around those ranges. However, the upside seems to stall around $1,340-1,360. Again, another sign of commodities needing “game-changing” fundamentals to spark a meaningful break-out.

DXY – US Dollar Index [97.06] – Dollar strength is intact. Despite a recent rise in volatility and looming global uncertainty, the currency markets via Dollar has yet to erupt abruptly. The Dollar seems rather steady for now.

US 10 Year Treasury Yields [1.77%] – Once again, 1.80% is proving to be a key resistance level after the recent increase in yields. Interestingly, since July 8, yields have shifted higher. However, 2% seems too illusive, which may strongly indicate the bond markets are not convinced of real growth.

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 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.