Market Outlook | March 5, 2017

“No man ever reached to excellence in any one art or profession without having passed through the slow and painful process of study and preparation.” (Horace 65 BC-8 BC)

Summary: Record high stock markets have exposed the weakness of Hedge Fund managers. Developments in China are as much of a concern as the Eurozone to global sentiment. Fragility in both markets is worth watching for as the trigger for the next panic.  The art of speculation is losing its luster recently as the bull market gives the impression that buy and hold is “easy” and “fruitful”. 

Professional Mockery

Professional money managers appear confused, overly cautious and desperate to deal with the current financial climate. In a simplistic manner, low interest rates do drive up financial asset prices such as stocks, that’s quite evident. Yes, that’s clear from the Dow 20,000 chatter to the mainstream media buzzing about record highs. But this higher stock market move with low rates is hardly new. The sheer rally of key US indexes and massive underperformance by hedge funds has created a world that’s: a) Too skeptical about the value of professional money managers b) Finds it simple to just own stocks or a basket of stocks as a way to speculate.  These performance driven fundamental concerns are facing the money management industry more than Brexit, Trump and other macro events. Of course, the lack of volatility has made it even more difficult for short-term traders to generate appealing returns.

In the fall of last year, investors were doubting professionals’ ability to navigate this landscape: “Hedge funds have suffered their biggest withdrawals since the financial crisis, with investors pulling $23.3 billion in the first half of the 2016, according to data from Hedge Fund Research Inc” (Bloomberg, September 12, 2016).

The critical question remains, why did money managers fight the existing trend? Isn’t it simple (in hindsight of course) to own stocks as long as interest rates are low given stimulus efforts? Nothing is easy in the game of speculation. For some, the concept of taking directional risks appears like a losing effort, especially with lower volatility and increased machine trading.  For others, after 2008, the stock market wasn’t the novelty path towards wealth creation given the wealth destruction. Now, the hedge fund industry is under severe pressure to lower fees, and the value-add is being questioned because “professionals” have been stumped, badly. But like all things, cycles change and so do fortunes. Perhaps soon.

Through all this, the stock markets are roaring to record highs and the parabolic run is inviting many doubters as well as euphoric speculators. Unprecedented moves at times but a multi-year stock appreciation is looking dangerously invincible and long-time doubters look like overly cautious skeptics. The real economy and day-to-day lives of Americans are not too joyful nor thrilled with the status-quo. Yet, the stock market, with a narrative of its own, is so disconnected, it’s understandable that even the sharpest money managers are stunned by the current bull market.  Yet, investors relying on or outsourcing to hedge fund managers are losing faith given lackluster returns, so that’s also natural to expect.

Digesting Clues

Interestingly, on July 8 2016, Gold prices peaked at $1,366 and US 10-Year Yields bottomed at 1.31%.  A critical inverse relationship is taking hold. Last summer’s inflection points are vital now considering rate-hike chatter is accelerating and Gold prices are stalling. This Gold-Treasury yields relationship tells us that a rush to “safety” (driven by panic) leads to higher gold prices and lower yields. As Yellen & Co discuss interest rate hikes, the behavior of Gold and Treasury Yields will be telling and worth watching closely for new trends. Does the bond market really trust that the economy has improved? And are big picture global concerns going be expressed via buyers purchasing more Gold? Both serve as a metric to measure attitude and perception of risk. For now, the commodities and bond markets are not too optimistic or too anxious either – evenly keeled, both asset classes await the next major catalyst. 

Notable Catalyst

Now that China's banking system has overtaken the Eurozone, the investor community needs to beware of the leveraged Chinese economy.

“Chinese bank assets hit $33tn at the end of 2016, versus $31tn for the eurozone, $16tn for the US and $7tn for Japan.” (Financial Times, March 4, 2017)

What's stunning is the last panic that was felt in financial markets was in August 2015, sparked by worries of the Chinese market. That said, the Eurozone worries from Greece to Brexit have circulated day-to-day discussions. Yet, the overleveraged Chinese market is at the forefront of re-sparking turbulence. There has been much talk about slowing GDP growth projections and tensions brewing in the South China Sea.  Not to mention, the hostile Trump-China relationship regarding trade remains a wild card from political standpoint.

With China being a critical driver of global growth, if the sentiment towards China shifts, then a confidence scare can spark a worldwide market sell-off.  In the weeks and month ahead, financial absolvers will feel very compelled to follow and track details of Chinese market nuances.  If global growth slows down, while the China vs. US rift escalates, then sour sentiment towards globalization can spark all types of worries. Therefore, the health of China’s economy is a vital trigger point for non-financial events, as well.

Article Quotes

Beyond trade and markets:

“China omitted a key defense spending figure from its budget for the first time in almost four decades -- before an official disclosed the number -- highlighting concerns about transparency in the world’s largest military. While authorities said defense expenditures would rise “about 7 percent” this year, the budget report published by the Ministry of Finance on Sunday omitted the figures. Later, a ministry information officer said China’s military budget would increase 7 percent this year to 1.044 trillion yuan ($151 billion). That’s the slowest pace since at least 1991…. The slowdown in Chinese spending growth comes as U.S. President Donald Trump vows to beef up U.S. defense spending by $84 billion over the next two years. That plan includes reductions in spending for the State Department and federal agencies that aren’t involved in security.”  (Bloomberg March 5, 2017).

Eurozone Revival:

“Purchasing manager indices for the manufacturing sector in Central Europe recorded another strong result in February, according to data released on March 1. The data is just the latest set that suggests a strong start to the year for the Visegrad economies following a disappointing second half of 2016. The uplift in business conditions in the region shadows strong readings in confidence and activity in the Eurozone – and Germany in particular – which supplies the bulk of the Visegrad economies' export demand… The Eurozone saw a 0.2 point gain to 55.4 in February, the highest level of the index since April 2011. The German reading hit a 69-month peak at 56.8.

Where German industry goes, Central Europe tends to follow. Industrial sectors in the Czech Republic, Hungary and Poland are all led by their role in the supply chain of Europe’s largest economy and exporter.” (bne IntelliNews, March 1, 2017)

Key Levels: (Prices as of Close: March 3, 2017)

S&P 500 Index [2,383.12] – Another record high. Since February 11, 2016 lows (1,810.10), the index is up 32.6%. A massive turnaround since last year’s worrisome period.

Crude (Spot) [$53.33] –   Sitting between $50-54, in a narrow trading range. While directionless for now, crude is seeking tangible guidance and catalysts.

Gold [$1,226.50] – Peaked recently at $1,257.20 following a mid-December recovery.

DXY – US Dollar Index [101.54] – For the last four months, the dollar index has stayed above 100, confirming the dollar strength theme. Interestingly, since the Trump victory, the index broke and stayed above 100. Now, whether or not this euphoric response has some 

legs will be tested.    

US 10 Year Treasury Yields [2.47%] –   Getting closer to 2.50%. An intriguing level, since in the past few years, 10-year yields failed to stay above 2.50%. In the last four years, surpassing 3% has been a severe challenge. The difference now seems to be as mysterious as the bond market remains skeptical.   

Dear Readers:

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 | February 27, 2017

 “There is no terror in a bang, only in the anticipation of it.” Alfred Hitchcock (1899-1980)

Unanimous Cheering

The Dow Jones Index’s eleven straight trading day winning streak has attracted even more attention from mainstream observers, as well as typical followers of financial markets.  Yet, the age-old narrative is unsurprising, as stocks roaring to record highs with ultra-muted volatility is becoming a norm. Less relevant is the chatter of the pre or post Trump, which still remains mysterious given pending policies. Frankly, taking political credit for the current bull market is hard to snatch from Central Banks, who have engineered the current climate. In fact, in coordinated effort, the central banks have ensured that lower rates provide further fuel to equity prices.

The theatrics of Dow 20,000 or the current winning streak still seems less meaningful for the real economy, radical political rifts and middle class woes in developed markets. Not to mention, an elevation of share prices of very large companies is not going to derail the growing populist movements, either.  Of course, it buys time for political leaders and it provides some bragging rights for select circles while encouraging risk-taking for those solely focused on capital appreciation.

Bond’s Concern

As March is upon us, some will look to last February when the markets marked a low after sharp selloffs. For now, crisis or panic reactions seem too distant for some, while numbing to others. Invincibility can form in a misleading manner, but there are enough doubts to the status-quo when digging deeper.  

Basically the Trump and Brexit results were very short-lived, at least, for followers of equity markets. Yet, the bond markets have made it clear about their cautious and low growth stance. First, yields are still quite low from the US to Europe. German bond yields are near zero or negative, and US 10 year Treasury Yields remain below 2.50%, which stresses the cautious stance regarding global growth.

“The two-year Schatz yield fell 5 bps to a record low of minus 0.95 percent. It is set to end the week around 15 basis points lower - a steeper drop than in any single week since December 2011.” (Reuters, February 24, 2017)

Secondly, there is still demand for safety, and, in terms of Europe, overreliance on central bank stimulus is a tangible theme. These resounding signs of confidence are apparent despite what has worked in the past in gluing together a bullish market.  Thirdly, the Dollar has been in a holding pattern without a major directional move. Finally, commodities are awaiting a notable catalyst for a directional move. Crude’s supply-demand dynamics are not fully convincing for a surge in prices, but shrinking supply is an anticipated factor.

Anticipated Turn

So with European troubles being dismissed and failing to cause major turbulence, there is a chance that the EU crisis can resurface anytime now. The Dow's streak raises the stakes much higher and, of course, disappointments are inevitable. One would need to go back to 2015 to realize a notable panic in August of that year. For those that forgot, here is the reminder of a sell-off sparked by Chinese related fears (Wiki http://bit.ly/2lp8qjT).

At this stage, there are many catalysts for a sour turn, from further rushes to safe havens to an unconvincing real economy growth to failing stimulus attempts. Wanting more than a short-term correction that can come and go, investors are waiting for a long-term picture of sustainable policies. In terms of  tangible fiscal or coordinated pro-business polices, market participants are forced to stand by patiently. The rise of asset prices and current market narrative are not providing the answers of a sustainable economy and sound policies. In the very near-term, the Dow Jones Index movements may capture ones attention, but the populist movement is reminding us that tangible growth is desperately awaited. In fact, low interest rates and higher stocks have hardly impressed or impacted the average worker in the Western World.

Article Quotes

“Bond traders are calling the Federal Reserve’s bluff. For weeks now, everyone from Janet Yellen to Fed newcomer Patrick Harker has been trying to jawbone investors into believing an interest-rate increase in March is on the table. That the meeting is “live.” Yet try as they might, the bond market seems unconvinced there’s much behind the tough talk. With less than three weeks to go, traders see slightly more than a one-in-three chance the central bank raises rates. That’s well short of the 50 percent minimum that has predicated every rate hike in the past quarter-century, according to data compiled by Bianco Research. Reasons for the skepticism are varied, but the one that stands out is the simple fact that Fed officials are running out of time to make their case. The February jobs report comes five days before Fed officials gather and inflation data will be released mere hours before their decision is announced. Both key metrics come out during the Fed’s public blackout period, which starts on March 4, leaving traders in the dark about the central bank’s intentions.” (Bloomberg, February 26, 2017)

 

“A new era of low crude prices and stricter regulations on climate change is pushing energy companies and resource-rich governments to confront the possibility that some fossil-fuel resources are likely to be left in the ground. In a signal that the threat is growing more serious, Exxon Mobil Corp. (XOM) is expected in the coming week to disclose that as much as 3.6 billion barrels of oil that it planned to produce in Canada in the next few decades is no longer profitable to extract. The acknowledgment by Exxon, after the company spent about $20 billion to put the oil sands at the center of its growth plans, highlights how dramatically expectations have changed about the future prospects of the region. Once considered a safe bet, Canada's vast deposits are emerging as among the first and most visible reserves at risk of being stranded by a combination of high costs, low prices and tough new environmental rules.” (Wall Street Journal, February 17, 2017)

Key Levels: (Prices as of Close: February 24, 2017)

S&P 500 Index [2,367.34] – Interestingly, the intra-day highs of 2,368.26 set on February 23, 2017 marked the all-time highs.  Record highs, only a few ticks removed, further reminds us of the unwavering bull market.

Crude (Spot) [$53.99] – Based on the last two summer responses, Crude prices have convinced participants on its resilience to stay above $40. As for the upside potential, buyers are wondering if prices can bust above $54 after settling above $50 for the last few months.

Gold [$1,253.65] – There is confidence on Gold prices staying above $1,150, but doubts remain about revisiting July 6, 2016 highs of $1,366.25.

DXY – US Dollar Index [101.09] –   Since May 2016, the Dollar has shown resilience and strength. Amazingly, it was in May 2011 when DXY bottomed at 72; it has ran up over 40% since then. When commodities and EM FX weakened, the Dollar accelerated further.

US 10 Year Treasury Yields [2.31%] –    For the last four years, staying above 3% has not quite materialized, leaving investors to think higher yields remain challenging. Lack of inflation and positive real economy growth numbers can drive 10 year even lower in the coming years.

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 | February 21, 2017

 “Stubbornness does have its helpful features. You always know what you're going to be thinking tomorrow.” Glen Beaman

 Its Own World

The stubbornly robust US stock market continues to go much higher, given low interest rates and increased global liquidity. It may be even harder to imagine that volatility is very tame, despite political twists and turns, macro concerns, and an unconvincing growth environment. The overly anticipated trend reversal is that stocks have not materialized and the bull market is about to turn eight years old. Since the March 2009 extreme lows, the S&P 500 index has mustered over a 250% return. Basically, a smooth-sailing appreciation in stocks appears quite disconnected from “ground” level sentiment that’s causing daily political uproar and middle class dissatisfaction. At times the financial markets seem like it lives in a world of its own.

To claim this stock rally was fueled by Obama’s policies or Trump’s post-election optimism may not tell the complete story. Markets have not overly cared about theatrical and contentious politics thus far. It’s true, during the Obama post-crisis era, Quantitative Easing policies materialized in an aggressive manner but hardly stimulated the real economy. And yes, the Trump rally was driven by investors who looked ahead to fiscal changes, lower taxes and lower regulation.  Now, with the promised fiscal reforms requiring additional time and clarity, investors are not sure what to digest or how to act, except for sticking with status-quo.

“There is a Republican tax-cut plan, an existing one crafted by House Speaker Paul Ryan and Ways and Means Committee Chairman Kevin Brady. But it is splitting Senate and House Republicans, as well as the business community it is designed to help. Nobody is quite sure what the White House position is, or when it will become clear. And the whole process is being slowed down by the struggle over whether and how to repeal the Affordable Care Act, which itself is bogged down in uncertainty.” (Wall Street Journal, February 20, 2017)

Further delays to the execution of fiscal policies appear to continue political civil war, Congressional tactics and challenges to progress in the public sectors. What has shifted is the lack of faith in Central Banks and establishment politicians – those visible points cannot be dismissed.  Clearly, Trump and Brexit trends demonstrated these revolt-like responses. Yet, for investors spats between political parties or gloom and doom statements from high-profile money managers are not going to share their thinking.

Rate Focused

However, when push comes to shove, the financial markets remain overly focused on interest rates and the consequences of low rates, which leads investors to desperately seek yields. This combination promotes higher stock prices and further risk taking. Amazingly, quantifying the ongoing risks is not easy until the damage is done and, of course, timing the chaos requires a mixture of luck and randomness. In other words, the various concerns boil down to global growth. From China to Europe to US, what’s the fundamental driver of growth across industries?  Not to mention, the protectionism wave raises even further questions on global growth. These developments do not exude tons of confidence. If there were notable signs of US growth, then the US 10-year yields would be moving higher and Yellen would not be hesitant to raise rates. Amazingly, the Federal Reserve has been hesitant to hike and lacks solid evidence of a heating economy. Economic strength today is still murky.

Hints of Unease

The constant liquidity provided by central banks floods the market with more cash, which puts pressure on yields, encourages more risk taking and boosts share prices of most stocks. Inherently, this effect is as obvious as it seems; from ECB to BOJ, the low rate policies are in effect. In the US, inflation expectations and economic growth numbers are mixed. Can Yellen raise rates in a justified manner?            

The known concerns in Europe are well-documented, the uncertainties are much discussed, but the outcome of the theatrics remains a constant unknown. This can be seen from Brexit implementation to potential “Grexit” to the rapid demand for Nationalism that’s brewing on the ground level. The political crisis across the Eurozone has not derailed or altered the path of stock markets, for now. The fallout or gains from Brexit are grossly misunderstood and negotiation with Greece is an ongoing matter of deferring the not pretty reality. Either way, major changes aren’t easy to adjust to. Plus, elections in France and Germany can spark further changes that can test the fortitude of an optimist.

Sluggish Macro

Since the post-Trump victory rally, there is some mild pause and ongoing sideways action in interest rates, oil, gold prices and dollar index. Although, US stocks have roared in a dramatic fashion, the commodity and currency trends are lackluster or nearly trendless. From supply-demand dynamics in Crude to some EM currencies attempting a recovery, the participants hint of waiting before overeating. The inverse relationship between US stocks and EM-Commodities is worth tracking. Not all assets are as cheerful as the broad US indexes (S&P 500, Dow Jones and Nasdaq) along with a strong US Dollar. A theme that’s not new, but vividly stands out even more in a less certain world.

 Article Quotes

Europe-China Conflict:

“Brussels is investigating a showcase Chinese rail project that aims to extend Beijing’s ‘One Belt, One Road’ initiative into the heart of Europe, potentially putting the European Commission at loggerheads with China. …Any legal setback to China’s first railway project in Europe would be a diplomatic embarrassment for Beijing, which made the railway its cornerstone offering to win support from central and eastern European nations during a summit attended by the countries in 2013. At issue for the commission are separate agreements signed by the Hungarian and Serbian authorities. But the main focus is on Hungary, an EU member state that is subject to the full rigour of European procurement law. As a prospective member of the bloc, Serbia is subject to looser rules. Failure to comply with EU tender laws may be punished by fines and proceedings to reverse infringements. ‘If push comes to shove and if it turns out that the Hungarians have awarded a public works contract of a particular dimension without tender they will of course have infringed EU legislation,’ said a senior EU official.” (Financial Times, February 20, 2017)

Potential Turn:

“It is not unlikely that interest rate differentials may widen to new extremes before they reverse. This is because political uncertainty surrounding fiscal policy means uncertainty about how monetary policy may respond. Still, there is a limit or floor on how low or high interest rates can go before they become more permanently damaging to the financial system. Markets have taken a view that eventually the Fed will face a “ceiling” on U.S. short-term nominal interest rates, especially in the wake of excessive fiscal policy that may overheat the economy and cause a recession. In Europe, markets have expressed their opinion that negative rates can’t go on forever, and therefore the amount of negative yielding bonds has fallen from more than $10 trillion to less than $5 trillion, according to recent J.P. Morgan research estimates.” (Bloomberg, February 17, 2017)

Key Levels: (Prices as of Close: February 17, 2017)

S&P 500 Index [2,316.10] – From June 27, 2016 lows (1991.68) to February 16 highs (2351.31), the index is up 18%.

Crude (Spot) [$53.40] – Nearly three months of sideways patter. The current $50-54 range remains familiar for both buyers and sellers.  A directional catalyst is needed to tilt the neutral behavior.

Gold [$1,228.30] – After bottoming in mid-December, Gold prices are mildly suggesting the ability to hold around and above $1,200. Yet, confirmation is needed if Gold prices are stabilizing.

DXY – US Dollar Index [100.80] – Nearly four months of DXY staying above 100 suggests that King Dollar is still a major theme, but there has been no major reacceleration since November. The January 3^rd peak of 103.82 is worth tracking if that marked a meaningful top. For now, it remains mostly neutral and reaffirms the existing trend.

US 10 Year Treasury Yields [2.41%] –   For about five years, 10-year yields have hovered under 3% and mostly above 1.50%. The multi-decade downtrend is still intact despite some occasional spurts.  

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 | February 13, 2017

“Never become so much of an expert that you stop gaining expertise. View life as a continuous learning experience.” (Denis Waitley)

To grasp the current debate between bulls and bears, it helps to understand the mindset of investors and the power of perception. With the expanding list of unknowns regarding macro events, it's amazing to see that angst is mostly suppressed and anxiety is barely visible despite the murmurs of “bubble-like” traits within the financial service industry. The dominance of the status-quo is remarkable, and speculating the catalyst of a pending correction is suspenseful.

The Bulls Mindset

With stock markets roaring to all-time highs, the confidence of Bulls is hardly shaken given the ongoing resilience witnessed from past worries. Volatility indicators have been knocked down, which only signals that turbulence is not feared by most. Amazingly, VIX (Volatility index) being closer to 10 and near 10-year lows only feels like an exclamation point for those who've ridden the pre- and post-Trump stock rally. Political rifts and Federal Government posturing aside, there is a clear-cut agreement of a bull market. Even the Dow 20,000 mark was not needed to re-confirm the known bullish run, despite mixed real economy data that have puzzled experts and casual observers. 

Hubris or not, the status-quo of ultra-low interest rates ends up boosting the prices of stock and real estate prices. Plus, high-profile money managers have been skeptical for 2-3 years, and that public skepticism did not derail US stocks, either. That said, some participants may be asking: Why listen to "experts"? Not to mention, Hedge Funds, on average, have not thrilled investors and even endowments have struggled to outperform in this bullish environment. Anti-establishment Trump is wrestling with re-writing and redefining the well-established market narrative. Thus, the simplicity of this ongoing stock market run is centered on “stick with what's working” especially when fixed income, commodities or non-US investments have had their own shares of turbulence recently. The perception of risk is muted and the urgency of "not missing out" in the current rally plays into investor behavior and decisions. Also, passive investors who bought a basket of US stocks are quite pleased and even encouraging those who sat out to join the rally. This is how momentum is built and extended.

The Trump-Yellen relationship is in early stages, but participants are not completely convinced that rates will go much higher and the Dollar will get stronger. On both points, there is a lot to be seen from weak dollar policy to the Fed's search for a justifiable rate-hike. Even mysterious elements end up leading folks to choose US stocks as the best relative option. At the end of the day, Trump and Yellen may not mind higher stocks, which serves as a tool to boost both their egos, despite their fundamental policy and political differences. Even the Trump-Yellen politically charged disagreements have remained tamer than anticipated. Perhaps, the power of the bullish run feeds into old habits that are hard to change, and why change them? The burden of proof of a pending shift in sentiment is on the bearish crowd, at least, that’s the message from the markets. This week, Yellen will address and rate hike implications, and, surely, it will be digested and dissected carefully by pundits and investors.

The Bearish Perspective

To start, the bearish argument is made by some pointing to the stretch valuations or the natural need for a breather in share prices. Others have been citing the Central Bank induced low rate environment that has fueled an appreciation in asset prices, leading to more risk-taking and reckless actions.  At the same time, the low rate environment has a mixed impact on the real economy and ultimately highlights the disconnect between financial markets and small businesses.

Equally, there are questions of eroding fundamentals as highlighted in the retail sector and other areas feeling the effects of technology. NASDAQ high flyers such as Google, Facebook and Amazon have greatly benefited in the new economy, but other companies and business models have been tested or left behind. NASDAQ is flirting with all-time highs, but public and prove entities don't share the same joy.  There are questions about collective job and wealth creation:

“Some indicators of labor-market slack also increased, which should push away inflation concerns. The underemployment rate, which includes people stuck in part-time work who want a full-time job, rose to a three-month high of 9.4 percent.” (Bloomberg[BD1] , February 3, 2016 )

Simply, the Sanders and Trump rise reflected some of the struggles in the real economy for a much broader US population. Yet, the political banter and chatter for the greater need of policy driven stimulus is being received with concerns. There are real issues that are worrisome in current economic models, where the mismatch between skills and demand has left a challenging labor market.

The bearish view has been proven dead wrong at various junctions in recent years, as the multi-year price appreciation continues. Perhaps, investors are numb from hearing about too many warnings too often. Plus, the distant memories of 2000, 2008 and 2011 fail to spark a nervous breakdown. In other words, the known concerns aren’t going to sucker punch investors. More or less, it’s been backed in.  Lack of major defaults and crash-like events have been absent to alter the bullish narrative, but merely “we’re due” is what keeps the pessimists less active. Yet, the strange part of this muted turbulence is the Brexit and Trump results. Both historic outcomes have obviously reawakened concerns of globalization via the referendum on the political status-quo. Brexit and Trump results naturally suggest an outright demand for nationalism at all cost.  In a quick gut-check, the majority would say, Nationalism would inversely impact this market that’s been shaped by globalization in recent decades. However, the market isn't digesting these events and quantifying Brexit/Trump is not quite easy, thus worries are deferred for now. 

However, Greek bonds are rising again, the Eurozone crisis is being slowly revisited and prior concerns, such as status of Italian banks, cannot go away. In other words, the many unsolved issues from before leads the bears to worry. In fact, financial times put it best:

“Failure to tell truth to power lies beneath much of what is going wrong in Europe right now. It may not be the principal cause of the Greek debt crisis, which is now on its umpteenth iteration. But it is more than a mere contributing factor…. Europeans are not used to such bluntness. The Germans protested. The European Commission protested. So did the Greeks. They all want to keep up the fairy tale of Greek debt sustainability for a little while longer.” (Financial Times, February 12, 2017)

Reconciliation

The bull-bear debate has been one-sided for too long. Yes, the markets are typically biased on the bullish side, so some of this complacency is less surprising. The truth is not clear and bound to have a paradox. Yes, anxiety seems tame for now. One thing is clear, the catalyst of an all-0ut panic is difficult to calculate since the list of worries has mounted.

For now based on macro indicators, investors are very comfortable with the prevailing status-quo of low rates, contained inflation, and ongoing investor search for yield. Maybe there is a bigger message, regardless of Trump and Brexit, interest rate polices are what captures the financial markets. More and more, US stocks aren’t caught up in foreign policies or political clashes, but sensitivity to rates remains a critical reality.  As long as US 10 year yields fail to surpass 3%, inflation fears seem muted. Volatility spikes do not seem visible from the sharp uptick in rates. The last major spike in volatility was on August 28, 2015 when the VIX (Volatility index) reached 53.29 after bottoming at 10.88 on August 7, 2015.  (Worth noting: VIX today is around 10.85).  A three week stock market sell-off period in August 2015 was the last time that the markets truly panicked and rattled the bulls.  Perhaps, lower yields and failure of central banks to stimulate the real economy is what will give more legitimacy for the bearish argument.  In an amazing way, the fewer signs of economy revival, the friendlier environment for stocks.

Article Quotes

Hedge Fund Performance:

“Professional investors are more informed, more highly educated and more competitive than ever before. Yet they are all competing for a shrinking slice of the alpha pie. This is what author Michael Mauboussin calls the paradox of skill. Mauboussin says, ‘It's not that managers have gotten dumber. It's precisely the opposite. The average manager is more skillful than in past years. The paradox of skill says that when the outcome of an activity combines skill and luck, as skill improves, luck becomes more important in shaping results.’How many institutional investors bother to ask themselves if the investment managers they are investing with are lucky or truly exhibit skill?... The increased competition and larger capital base made it nearly impossible for these funds to keep up their outperformance.” (CNBC, February 7, 2017)

Ongoing Doubts:

“Inflation expectations, which surged immediately following the presidential election, have stalled in recent weeks. That suggests investors are questioning the economic growth the new administration hopes to deliver. The strong dollar has also prompted import prices to cool. And investors have recently dialed back expectations that the Federal Reserve will raise interest rates at least three times this year. A slew of economic data this week as well as Fed Chairwoman Janet Yellen’s semiannual testimony before Congress will likely reinforce these modest expectations The so-called Humphrey-Hawkins hearings, beginning Tuesday, will mark Ms. Yellen’s first appearance before lawmakers since Donald Trump was sworn in as president. Mr. Trump criticized her sharply during his campaign and GOP lawmakers have considered taking steps to subject the Fed to greater congressional scrutiny, topics which Ms. Yellen will undoubtedly face.” (The Wall Street Journal, February 12, 2017)

Key Levels: (Prices as of Close: February 10, 2017)

S&P 500 Index [2,316.10] – Record highs again. Since November 4, the index has rallied over 11%. Since breaking above 2,100, the index solidified an explosive bullish run.

Crude (Spot) [$53.86] – Trading between $50-54 in the past 2+ months. This is due to a combination of near-term stability and lack of catalysts at the current junction. The supply-demand dynamics that kept Crude below $50 are changing via OPEC agreement, but soft demand is still mysterious.

Gold [$1,228.30] – Strong case to be made that Gold has bottomed out around $1, 150.00. That said, visualizing a meaningful move requires optimism given the 4 year sideways pattern.

DXY – US Dollar Index [100.80] – Back to the common and familiar 100 range.  After peaking on January 3, 2017 at 103.82, the strong dollar trend has taken a breather. Since mid-2016, the dollar acceleration has been a major theme.

US 10 Year Treasury Yields [2.40%] – Confronting critical level. Interestingly in June 2015, Yields peaked at 2.49% and declined. Now, Yields are approaching similar levels. If the status-quo remains with rate-hike policies, surpassing beyond 2.50% seems challenging. A suspenseful period awaits for those seeking notable directional moves.

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