Market Outlook | December 19, 2016

‘There's a certain amount of disorder that has to be reorganized.’ (William S. Paley)

Impactful Change

The bull market that was well established in US stocks accelerated further after a Trump victory. The Trump-rally is mostly driven by optimism circulating in the business world and anticipation of less regulation and even possibly lower taxes. Unlike the last few years, the stock market rally was driven by a coordinated low interest rate environment (i.e QE) that boosted asset prices while failing to meaningfully stimulate the real economy. Surely, if the last eight years showcased economic strength (as witnessed in stocks and real estate) then events like Brexit and Trump victory would have been very unlikely.

It’s quite evident, recently, that “a bullish stock market does not quite mean a strong real economy” will be the legacy of Obama (and other European leaders). And the newfound energy of Trump is gearing to revive the meek economy that’s been wobbling and barely above water.  This past year has shown, the centralization of key decisions, such as interest rates or government policies (at EU, UN and Central Banks), have driven local Westerners to long for and demand independence and radical change.

Basically, the unsettled feeling towards the establishment and status-quo can be reflected in the market dynamics soon enough. Yes – even if stocks roared with interest rates being low, the middle class felt betrayed in the US and UK, and even global growth was not as vibrant like in the early to mid 200o’s. When all is said all and done, Yellen struggled to raise rates during the last three years because the real economy growth (via wage growth and inflation) was not quite convincing. It is critical to keep in mind that inflation expectations are looking upward for now based on short-term data. However, once the Trump-mania hype settles in and his new regime takes over the White House and congress, the true test awaits. Markets were desperate for new catalysts and even more desperate to break out of the over-reliance on the near-zero interest rate policies.

 Shifting Script

The major disconnect between the real economy and financial markets led by US stocks has been quite alarming for a long while. Certainly, this misalignment serves as one of many key themes in recent years. The Trump victory has created the sense that reliance on Fed-driven low interest rates and big government is going to shift. The Yellen-Trump relationship has been awaited with great excitement and anxiety since Trump displayed an openly anti-Federal Reserve ideology. Interestingly, Yellen & Co have postured about  interest rate hikes on many occasions, only to pull the trigger 12 months after the last rate hike in December 2015. Thus, higher interest rates and a strong Dollar have been brewing silently, even before the election. Now, with protectionist policies touted by Trump, the Dollar looks stronger with domestic companies looking to benefit greatly, especially in Small Cap companies. At the same time, unease about globalization hurts some EM currencies, too.

The Trump victory provided a stimulus in the perception of the real economy. Maybe, this is positioned to replace the ‘stimuli’ from the low interest rate games. However, the Federal Reserve narrative and credibility benefits from rising inflation expectations as they took a ‘hawkish’ stance, which was illustrated this last week. More interest rate hikes are expected, albeit a grand promise for now, but that’s nothing new—We have heard many unfulfilled Fed promises before.

The US 10 year Treasury Yields closed near 2.60%, sending another wake-up call regarding interest rate trends. The new GOP congress and Trump are expected to create a business friendly environment. Thus, justifying a rate hike for Yellen seemed a bit easier than before, and having interest rates rise enables Trump to ride some ‘hope’ into 2017. For risk managers, the suspense has heightened. The bull market is aging further by the day and the narrative is being reorganized. The paradigm is shifting and so is the risk/reward that many got accustomed to in a very complacent manner.  Thus, there is a lot to digest and adjust ahead, and surprises are plenty for money managers of all kinds. 

Search for Bargains

As the surge in US stocks continues, curiosity awaits about early 2017 market behavior. Are stocks overvalued? Is energy the place to be given favorable policies? Are interest rates in the US set to rise further? Is the Fed’s role going to diminish and change dramatically?

First and foremost, a breather seems long awaited in US markets from stocks to bond sell-offs. Clearly, the strong run has been too impressive and a correction is long awaited.  Secondly, a follow-through is needed for the stronger Dollar, higher yields and higher stock that’s been witnessed after the US election. Finally, new trends are inevitably set to develop from energy to financial services, especially in areas that have underperformed in recent years. That will offer great upside benefits, but with policy changes playing out in Europe and Trump-GOP dynamics being a wildcard, there are a lot of unknowns.

Amazingly, the Nasdaq index is up over 300% since March 2009 lows as tech related areas have shown notable strength since the 2008 crisis.  Meanwhile looking ahead, bargains maybe found in Energy, Emerging Markets and US-based sectors.  The market has been rewarding shares broadly, but soon winners and losers will be clearly defined. Thus, the short-term suspense can create longer-term opportunities. Perhaps, the focused investor with high conviction may find fruitful returns even if the suspense expands.

Article Quotes:

“Like all bonds world-wide, Chinese bonds are under pressure from the U.S. Federal Reserve’s plans for faster interest-rate increases than some expected. China may guide its own rates higher to prevent the Chinese currency from weakening faster against the dollar, a scenario that would further squeeze Chinese borrowers in need of cheap finance. China’s total debt surged to around $27 trillion this year, or 260% of gross domestic product, compared with 154% in 2008 at the start of a stimulus program to offset the financial crisis. It is continuing to grow at more than twice the pace of the economy…. The clearest sign that many Chinese are worried is the amount of money flowing out of China despite strict measures to stop it. China’s foreign reserves have dropped by 21% to $3.05 trillion in the past two years. But since much of the financial system is lightly regulated, the true amount of leverage in the system is unknown. Market experts say asset managers routinely use bonds as collateral to buy more bonds, repeating the process many times over.” (Wall Street Journal, December 18, 2016)

“There is a fairly broad but cautious agreement that QE has stimulated demand. The causality is hard to prove, but since the launch of QE growth has picked up in both of its main aspects: investment and consumption. Studies document the positive impact on asset prices and a reduction in long term borrowing costs. The bigger question is when we should begin to exit the programme. Some argue that the time is now. For example, the German Council of Economic Advisors agree that QE has managed to stimulate demand, but feel that the ‘exceptionally loose monetary policy by the European Central Bank is no longer appropriate.’ Another line of complaint against QE is that it squeezes the profitability of banks. This is a valid concern, because weak profitability encourages banks to tighten the supply of credit to the real economy. Improving access to credit was the very purpose of the ECB’s QE programme, so it would be counterproductive to carry on if the programme is hurting bank profits.” (Bruegel, December 8, 2016)

Key Levels: (Prices as of Close: November 25, 2016)

S&P 500 Index [2,258.07] –   Over a 9% rally since November 4^th lows of (2,083.79).  The common theme of all-time highs continues.

Crude (Spot) [$51.90] –    Facing resistance at $52; however, the uptrend remains intact. The last several months have displayed stabilization around $45-50. Even before the OPEC deal, Crude rallied from $26 to $50; something to keep in mind given several narratives.

Gold [$1,173.50] –   Steady decline since July 8^th peak. It appears that Gold is even more inversely correlated to the Dollar strength. Even a recent commodity rally has not awoken Gold prices for revival.

DXY – US Dollar Index [102.95] –   Explosive forth quarter. Further strength in the Dollar showcases a continuation of the uptrend established in 2014. Relative to other currencies and Gold, the Dollar remains appealing.

US 10 Year Treasury Yields [2.59%] – A rate hike combined with increasing inflation expectations has continued the yield rise. A remarkable turnaround since July 6, 2016 lows of 1.31%.

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 | December 5, 2016

“Faith is a continuation of reason.’ (William Adams 1564-1620) 

Vibrant Action

The last few weeks have set-off all types of reactions: Surging bond yields, skyrocketing Crude prices, further optimism in US stocks, weaker Gold prices, rapid migration to Small Cap stocks, sharp rises in bank stock shares, and even more hope of better business environments.  There is a lot to digest, globally. Yet, some trends were already in place, notably the strong stock market and strengthening dollar. Even yields were moderately bottoming since the summer months, during a period when Trump was the underdog. Now, the Federal Reserve may feel compelled to raise rates as the mentality has shifted focus towards more real economy optimism rather than the failures of QE to stimulate in a meaningful manner. It’s amazing what attitude can do, but this market perception is still fragile enough to stir more suspense. 

Re-affirmations 

The familiar status-quo since 2008 has been lower rate policies, higher asset prices (stocks and real estate), limited stock market volatility, more regulation and an aourdous environment for small businesses. Yet, the post Trump victory era further accelerated the stock’s bullish run, reaffirmed strength in dollar and reawakening further inflation expectations. Of course, this is a knee-jerk reaction over a very limited period – but the buzz is on and the thought of shake-up adds on to the narrative.  Simply, there is a theme that suggests infrastructure spending will lead to jobs, and many are quick to buy into it. This is reflected in inflation expectations rising, which suggests that financial markets are optimistic about Trump’s pending policies. 

Similarly, domestic companies expected to benefit from protectionist policies surely alerted a manic buying in smaller cap companies. However, it is way too pre-mature to make government policy calls, even if markets are celebrating a new business friendly regime. Even market calls seem susceptible to even more volatility than witnessed during the last 8 years. The recent euphoric purchasing seems like panicked buying by confused investors, indicating potential disappointments ahead. For now, one can reiterate the same thing we knew in the summer and spring: The well-established bullish run in stocks is intact. Hence, the S&P 500 index is currently up 10% for 2016, which is rather impressive considering all the worries of Brexit, Trump and the indigestible instability in both developed and developing countries. 

Pending Shifts 

In a paradoxical way, the post-Trump victory rally is not the origination of much talked about recent themes but rather it’s the acceleration of some existing market trends. The Dollar has been strong for few years following the collapse of EM and commodities. Stocks have been up for several years. Even weakness in Tech names such as Apple, Google, and Netflix started in October, ahead of the elections.  Thus, investors should ask: Which existing theme is going to get derailed?

Naturally, the low-rate environment is the topic of high priority. Was it due for a shake-up after QE failed to stimulate the economy? Yes – regardless of Trump— the skeptics of Central Banks were groaning and those groans were getting louder this year, globally. Was the bond market due to see a sell-off? Sure, the Great Rotation, a slogan for the shift away from bonds into stocks, has been talked about without much to show. Now, incredibly, the US bond market dramatic sell-off is re-triggering the panic out of fixed income, leading to further buying in stocks and running to other alternative/non-traditional areas.  Importantly, since bottoming at 1.31%, yields have been rising in the US 10 Year Treasury since July. Now, if Crude prices rise and inflation picks up then there is a case for a robust economy. But more substance is needed than just near-term perception. 

Before being swept away in the Trump-mania, a deep breather for all is a reminder that not many things dramatically change over-night. In other words, foundations and sentiment were building way before the highly anticipated election. Amazingly, Yellen might be thrilled that Trump has redefined the current script, which should help the Federal Reserve justify a pending hike. The market paradigm is eager to shift, bringing thrilling suspense back to markets again.

Article Quotes: 

OPEC’s decision: 

“While there remains uncertainty, it is increasingly evident U.S. shale can rebound sharply when prices recover. Just how quickly it returns and how quickly global demand grows will determine whether OPEC’s decision to cut output maximizes its revenue through higher prices or just losing market share to U.S. suppliers. Both the magnitude and shorter time cycles of U.S. shale oil are now acting as significant new constraints on OPEC’s ability control oil prices and the producer group may not have the power long feared following the Arab Oil Embargo of 1973 to manipulate oil prices. Saudi Arabia holds little spare oil production capacity to tap when oil prices spike. It has made clear that it has no interest in being the swing supplier to prop up low prices resulting from structural market forces. But the agreement in Vienna is a reminder that OPEC collective action is still possible when producers see opportunities and favorable circumstances to boost revenue. In addition, looking beyond 2020, significant new OPEC supplies will yet be needed to meet higher demand.” (Reuters, December 2, 2016) 

As US looks to trim stimulus, European Central Bank set to extend stimulus efforts:

“The ECB will keep the pace of purchases -- currently scheduled to run until at least March -- unchanged “at least initially’ and “might communicate that they retain the freedom to adjust this if conditions change,’ said Claus Vistesen, chief euro-area economist at Pantheon Macroeconomics Ltd. in Newcastle, England. ‘This will be a difficult balancing act, and markets won’t like that.’ Draghi might tread carefully after last year’s December policy announcement fell short of investor expectations and markets sold off. While their calls for government support have grown louder, officials have committed to keep their stimulus in place until the recovery is self-sustained and inflation on an upward trend. An extension of QE will require the ECB to tweak some of the parameters that regulate the program, according to 88 percent of respondents, even if an increase in bond yields has alleviated concerns that the central bank will face a scarcity of debt to buy” (Bloomberg December 5, 2016)

Key Levels: (Prices as of Close: November 25, 2016)

S&P 500 Index [2,191.95] –   Hovering around all-time highs. The intra-day highs were set on November 30 at 2, 214.10.

Crude (Spot) [$51.68] –     Despite the dramatic rise post the OPEC supply cut announcement, and it is important to remember, Crude has been trading between 44-50 since May. The peak of $51.67 on June 9, 2016 remains the next critical point.  At $44 buyers seem eager, at $50 the buyers’ moment has faded.

Gold [$1,173.50] –   Steady decline since the July 8^th peak. Expectations growing for a rally here, as the commodity is trading below the 50 and 200 day averages.  Reactions at or near $1,200 will remain critical. 

DXY – US Dollar Index [100.77] –   Further strength confirmed. The last two times the DXY index peaked around 100 was in March 2015 and December 2015. It is unclear if this breakout will last, but several forces favor a stronger dollar. 

US 10 Year Treasury Yields [2.38%] – Closely approaching June 2015 highs of 2.49%. Inflation expectations are rising, economic growth perception is rising as well, with pending rate hikes all contributing to higher yields. So far a very explosive run since July 6 lows of 1.31%.

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 28, 2016

“We are all in the gutter, but some of us are looking at the stars.” (Oscar Wilde)

Euphoria Digested

As headlines loudly proclaim US stocks moving higher to record highs, we should not forget the well-established bull market that has been in place for a while. The post Trump market euphoria is not quite a turnaround from the deeply depressed price levels in stocks, but rather a further exclamation point to the current bull market in US stocks. Similarly,  the rise in US 10 year Treasury Yields, inflation expectations and a stronger Dollar beg a similar question of if this is an acceleration of what’s established or a new game changing trend?

The Dollar has been stronger, as exemplified by a noticeable strength versus most currencies in 2014. That said, investors of all kinds are facing the question of whether to chase the returns or to stay lightly positioned into 2017.  For a couple of years, the feeling of “don’t want to miss out” has infiltrated the mindset of stock investors. Yet, the interest rate picture is where a new trend may follow, as suspenseful observers await.  Bond markets are where the volatility is brewing, and now investors are forced to shift their mindsets.  The sell-off in bond markets seems abrupt for now, but continued selling in bonds can be a dramatic shift that some participants have long awaited.  Now, Italy’s referendum vote is adding further anxiety and more votes await in Europe.

Shifting Dynamics

The QE era that fueled stocks maybe nearing an end, not only because of a new White House regime but because of a Central Bank model under severe scrutiny.  On one hand, equity buyers who have benefited greatly from QE should  not complain or bemoan policies that benefited financial markets more than the real economy. However, on the other hand, the Trump victory (like Brexit) symbolizes the failure of the real economy, where job and wage growth aren’t as rosy as painted by economist and political pundits. Thus, the conundrum has fully struck. Maybe the recent “melt-up” in stocks was a mere continuation of the bullish theme in financial markets.  Betting on new trends with conviction is too challenging since the Trump-Yellen, Trump-Congress and Trump-Financial Markets relationships are yet to be fully discovered. The grand plans of lower regulation and lower taxes need to materialize a bit.

Two years ago…

The collapse of commodities in recent years has weakened BRICs and other Emerging Markets (EM). In 2014, the Dollar strength and EM weakness were  critical themes that played out across equities, currencies and commodities. Perhaps, the effects of that remain in place and, again, are being revisited.  This serves as a reminder to all that the Emerging Market fund (EEM) peaked on September 5, 2014 and has been in a downtrend ever since. Even before protectionist policies were anticipated, this was the market’s response. Now, policies tied to Nationalism are not only fueled by a Trump-led US, but are also vibrant theme in upcoming European elections. Again, in the election shuffle and media hype, it is easy to get lost with convenient narratives. However, the Dollar, since 2008, has stopped its perennial weakness; and, in the last few years, the EM fragility has brought the greenback at the forefront of strong currencies.

Continuing on the theme that relates to 2014, it was the January of that month when US 10 year yields peaked at 3.05%. Since then, a constant decline in Treasury Yields has mirrored the low rate policies, which are deeply ingrained in observers’ minds. The upcoming months will determine if either the new post QE/Central Bank era of dictating a low rate environment or a period where suppressed inflation and roaring rates can shift the dynamics dramatically.  Now, if bond markets have finally accepted that inflation is rising and that government spending will stimulate the economy, then revisiting the 3.0% on the 10 year yield does not seem farfetched. However, the Central Bank’s lethargic status-quo is still hanging in the backdrop.  

Article Quotes:

“A new paper from Hyun Song Shin of the Bank for International Settlements suggests that a stronger dollar may have significant financial, as well as trade, effects in emerging markets. Many companies have borrowed in dollars, so the cost of repaying their debt rises when the greenback gains ground against their domestic currencies. Much of this borrowing is conducted through the banking system, leaving the banks exposed to the risk of a rising dollar. Accordingly Mr Shin finds that “dollar appreciation is associated with a slowing of cross-border dollar lending”—in other words, a tightening of credit conditions in emerging markets. The dollar may be a better indicator of risk appetite than the VIX index of equity volatility, the paper argues. But investors are also worried that the election of Mr Trump signals a turning-point in globalisation. On the campaign trail, he pledged to renegotiate the North American Free-Trade Agreement, NAFTA, to declare China a currency manipulator and to impose protectionist tariffs.”(Economist, November 19, 2016)

“First, there is the prospect of divergence in growth and central-bank interest rates: the market thinks both are heading higher in the U.S. but remaining muted in Europe. Expectations of short-dated Eurozone interest rates have fallen back, even as market-based measures of medium-term inflation expectations have risen, ING notes. Secondly, and more worryingly, German bonds are benefiting because southern European government bonds have been hit. The 10-year spread between Italy and Germany has reached its widest point since May 2014, despite European Central Bank bond purchases. France has come under pressure too. Political and credit risk are coming to the fore again in Europe, encouraging investors to seek safety. The divergence could be here to stay, with Europe facing a packed election calendar in 2017. Bond investors need to get used to a world where markets are no longer in sync.”  (Wall Street Journal, November 22, 2016)

Key Levels: (Prices as of Close: November 25, 2016)

S&P 500 Index [2,213.35] – Another all-time high. After spending the last several months trading between 2080-2180, this recent move up is a re-acceleration of an already existing bullish trend.  

Crude (Spot) [$46.06] –     Held above $44 recently. Surely, the OPEC meeting is the near-term catalyst.  Importantly, since May 2016, the commodity has traded between $42-50.  Now, breaking above $50 is the upcoming challenge.

Gold [$1,187] –   The recent break below $1,220 suggests extended weakness. Some will view this as deeply oversold and an opportunity to purchase. If there is a rate hike in December, it’ll be interesting to see how Gold responds. 

DXY – US Dollar Index [101.49] – Strength remains.  A break above 100 can trigger a new wave of Dollar strength that inversely impacts other currencies. In terms of a next key level, the July 2001 high of 121.02 is somewhat on the radar. Amazingly, from 2001-2008, the Dollar weakness was a consistent and glaring trend. Some reversal has been brewing.

US 10 Year Treasury Yields [2.35%] –    Above the 200 day moving average (2.20%) and confirming a near-term uptrend. The spike from 1.80% to 2.41% this month is rather stunning, but needs lasting substance.

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 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.