Market Outlook | May 15, 2017

 “Life is the art of being well deceived; and in order that the deception may succeed it must be habitual and uninterrupted.” (William Hazlitt 1778-1830)

The Long Game

Amazingly, the market status-quo does not change much, as tame volatility and stable stock market prices continue to persist. Calls for bubbles, from high-profile and average investors since 2008, have proven to be loud screams without substance (at least in precision timing). Even after the Tech Boom, markets quickly recovered and rediscovered the next bubble, which was infested in the mortgage related areas. Since 2008, fears have accumulated at a rapid pace, from Brexit fears to the commodity correction to Eurozone instability to perceived risk of low interest rates. Yet, the stock markets keep going higher.  Taking a slight step back, it is not a shock for markets to go higher over an extended period. From mid-1990 to 2001, from 2003 to 2008 and from spring 2009 until today, the slow and steady upside move resumes in a familiar directional pattern. No wonder, from the incentives of large institutions to the taxation on profits to the ongoing collective, faith in the Federal Reserve and the concept of buy and hold is deeply ingrained in the mindset of American risk-takers.

Perception Wars

The slow and steady upside move is worth understanding beyond the week-to-week point of view. First, the influential financial players need to be identified and simply dissected. Most of the investor sentiment and dominant themes are driven by a few large financial institutions (the usual suspects, aka Wall Street Banks), which impact the mindset created by research and expressed in trading across the board.

For good or bad, the key originator of investor sentiment still is the Central Bank, which now has mastered the art of public relation, television and newspaper.  Not only is the Fed the well-crafted wordsmith, but also the Fed has transformed into a media genius that can manipulate realities and reshape collective perception of reality. Holding press conference often, dominating financial headlines and having market participants follow the desired script (by staying bullish and not causing major volatility) demonstrate the expansion of Fed’s influence on financial markets. No mater weak real economic data, brewing tensions of hostile global regimes, loss of jobs due to machines and lack of wealth creation, the stock market interrupted through the Federal Reserve in the US operates as an engine on its own. It is quite remarkable. Perhaps, the media-savvy US president can learn few things from the made-for-TV drama artist: the Fed. 

Secondly, the Central banks can choose to emphasize one indicator over another and trick observers into thinking real economy weakness is immaterial for day-to-day activities. Yet, there is something truly stunning, Trump and Brexit did not break, shackle, or call out the trick-infested Federal Reserve and their like-minded colleagues.  Finally, the players that range from large financial institutions to political establishment, play a vital role, more on this below. The highly coordinated messaging between the Central Banks, big media, large financial companies and, ultimately, politicians that benefit from a “slow & steady” stock market rise is the machine that keeps on turning. This steady stock market appreciation seems to occur regardless of any visible economic weakness.  This is the trickery that’s misleading.  From the European Central Bank (ECB) to Bank of Japan (BOJ, the low interest rate polices of advanced countries, helps feed into the global message. As for small businesses or others, who don’t see the benefit of this coordination the uproar has been reflected in elections and political groups.

While, the outrage about savers being severely penalized due to low interest rates gets a lot of attention, the equity market has become a “quasi- income generator” and a dangerously  predictable tool to mildly grow one’s wealth. In other words, the appreciation in stock prices has create a notion that the run is steady and given the low volatility, turbulence has died out.

Inevitable Vulnerability

The retail and financial sectors seem to have shown weakness last week, which hints toward them being vulnerable areas in the public market. Retail is seeing an all-out blitz from Amazon and Walmart, where both companies offer quick delivery, robust logistical infrastructure and, of course, competitive prices.   “Already about 89,000 employees in general merchandise stores have been laid off since October, more than the entire number of people working in the coal industry….[Meanwhile] “The internet retail giant's stock [Amazon]  is up 32 percent over the year and it's devouring bricks and mortars while expanding its real-world experiments into bodegas, drone delivery, and airship warehouses.” (CNBC, May 12, 2017).

Financials continue to see migration to electronics and machine-learning. The regulatory climate enhances costs and limits the profitability for very few. Not to mention, low interest rates and low economic growth hurt the fundamentals of consumers.

In terms of the health of the economy versus the roaring stock market indexes, these questions remain:

1. If the US economy was so strong, then why is the US 10 Year Yield below 3%?
2. Retail and financial services seem vulnerable, isn’t that damaging for the real economy?
3. Given high healthcare and education costs, is there any noteworthy wealth that’s been created in the last 5 years?

The gridlock in Washington DC ultimately is the bottleneck to solving tangible issues. The record or near record high stock market movement is a clever attempt to mask some pain or unsolved issues by mainly establishment forces from the traditional left and right.  Therefore, financial analysts cannot ignore this factor when being too bullish or bearish. The ferocious civil-war like political rift is not comforting. Sadly, a major correction might be needed again to restore some sense and priority to real economy matters rather than the cheer-leading of share prices that go higher due to very low interest rates.

Article Quotes:

“Many of Europe’s largest investors are now turning their attention to another risk to their portfolios that is rapidly gaining momentum: the rise of Italy’s Five Star Movement, and its potential to upend the economic bloc. The concern is that Five Star, the anti-establishment party set up in 2009 by Beppe Grillo, the Italian comedian and blogger, could win the country’s next election, which is due to take place within 12 months. Mujtaba Rahman, managing director at Eurasia Group, a consultancy that advises large investors on political risks, says: “The biggest risk in Europe is Italy. The euro area is not working and as long as it fails to deliver growth, populism will continue to grow.” (Financial Times, May 15, 2016)

“China has emerged as a leading fintech player, with banks joined by huge internet players such as Alibaba and Tencent, pumping billions of dollars into areas such as mobile payments and online lending. The central bank says that this fintech revolution has "injected new vitality" into financial services but also throws up "challenges". In response, it is organising an idepth study on how financial and technological developments impact monetary policy, financial markets, financial stability and payments and settlement. In a separate move, the central bank is backing a venture capital firm called Silk Ventures that plans to invest up to $500 million in US and European tech startups, with a focus on fintech, AI and medical technologies.” (Finextra, May 15, 2017).

Key Levels: (Prices as of Close: May 12, 2017)

S&P 500 Index [2,390.90] – Another record high, yet again. The breakout above 2,100 marked a key trend of a bullish run.

Crude (Spot) [$47.84] – Recent months have showcased Crude’s inability to stay above $55. The supply-demand dynamics seem unclear for now.

Gold [$1231.25] –   Surpassing $1,250 in the near-term remains a challenge. Interestingly, the 50-day moving average is at $1,258.

DXY – US Dollar Index [99.25] – Peaked at 103.82 in early January and since then the Dollar strength has slowed down.

US 10 Year Treasury Yields [2.32%] – Yields remains low, but that’s all too familiar these days. March 17, 2017 highs of 2.62% may be the peak for the year but 3% again seems very illusive.

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 | May 1, 2017

“What has puzzled us before seems less mysterious, and the crooked paths look straighter as we approach the end.” Jean Paul Richter (1763-1825)

Stuck with the Familiar

There’s enough professionals and investors in financial services who are left stunned by the simple upward movement of stock prices.  The age old status quo of low interest rates, low volatility and higher stocks market prices remain resoundingly in place, yet again. Beyond so many warnings of calls of a market top from average pundits and well-regarded investors, the stock market has remained strong not only in the US but in Europe as well, with the German stock market up over 8% for 2017.

There is a "bubble" forming somewhere; sure that’s part of any cycle, but the details of how it'll play out have clearly not been realized. Perhaps, the exact “bubble” remains mysterious beyond what's imaginable.

Amazingly, the more the mysterious the unknown, the more the status-quo becomes appealing. Strange psychology indeed. As it relates to the bubble, more common questions are asked: Is the bubble in the low-rate policy of Central Banks? Is the ETF and passive strategy obsession getting overdone? Is the low volatility period about to end? Swirling speculations surely circulate, but have not impacted the market sentiment in an adverse way as some expected. From global worries ranging from Syria to North Korea to changing policies landscapes in key regions, the general sentiment is not breaking down the stock market sentiment easily. Maybe, there's so many concerning issues that investors are becoming numb to worrisome topics. Theories aside, as long as rates remain low in developed markets while emerging markets re-attempt to stand on solid footing, the reinforced idea is to keep assets in developing markets. This preference in developed markets extends from stocks to real estate to the US Dollar. 

Disconnect Revisited

In terms of the real economy, it presents a different story that the bullish financial markets, in which real growth is not visibly vibrant. Long term bond yields are low; in the case of the US 10-year being below 3%, still signals lack of straight. Plus, the results of Trump and Brexit still reflect how the Central Banks’ narrative of crafty words and theoretical chatter fails to paint the reality that's felt by the average voter in the real economy. The ground level realities versus the investment community is creating an earth-shattering disconnect. Of course, in recent years the first quarter data has been weak and first 3 months in 2017 was no different. Trump or Obama is irrelevant, the soft near or below 1% GDP growth signals trouble rather than a robust economy.

Government data is only one way to get a gut check of the economy, but there are misleading factors and trickery that's purely spewing disconnect. This is a common situation that observers are accustomed to by now. The gridlock in Washington DC exhibits further frustration for change seekers; but as Trump is learning, the establishment is quite unbreakable and unfit for rapid policies. So far, the DC gridlock hasn’t bothered bullish participants and, to be fair, the government shutdown few years ago did not bother many investors either. The gridlock in Washington has delayed sound policies that are in favor of business from low regulation to lower taxes. Yet, with implementation taking a while, it is hard to see the revival of the real economy in a meaningful way.

Convenience & Deferral

Amazingly, Trump and Yellen actually are best positioned to ride the current wave rather than derailing the status-quo. Despite Trump being the anti-establishment and “anti-Fed” politician, the hardnosed pre-election comments by Trump are being diluted at a rapid pace. Essentially, having stocks trade around all-time highs is a good spin for political leaders who are desperate to find good news. Similarly, Yellen, who has been ferociously challenged on interest rate polices, is finding that deferring any risk seems easier than confronting reality. Essentially, courageous and bold investors who’ve bet against the Federal Reserve have paid a severe price given the multi-year stock market appreciation. At some point, the natural flow of markets will expose the flaws of low rate policies and the limitation of election officials in making a difference.  

Article Quotes

“While the ECB has six weeks and another round of monthly data to process before its next policy meeting, the latest reports will give ammunition to Governing Council members who have publicly aired their view that the time is near to signal the gradual withdrawal of monetary stimulus. Draghi’s concern is that even discussing the matter too soon, let alone acting, will stymie the recovery.

‘The risks surrounding the euro-area growth outlook, while moving toward a more balanced configuration, are still tilted to the downside,” he said after the Governing Council’s meeting on Thursday, using language that was mildly less dovish than the previous stance. “We have not seen any evidence, or any sufficient evidence, to alter our assessment about the inflation outlook.’ Friday’s inflation data was robust enough to snap a two-day decline for the euro and put it on track for the biggest weekly gain since June. Core price growth, excluding food and energy, accelerated to 1.2 percent in April. That’s the highest reading since June 2013, and the half a percentage point jump from March is the biggest in more than 16 years.” (Bloomberg, April 28, 2017)

“Economist Paulina Restrepo-Echavarria and Senior Research Associate Maria Arias said foreign central banks and other international institutions have been steady buyers of U.S. Treasuries since 2008. However, these institutions have trimmed their holdings of U.S. Treasuries since the size of their holdings peaked in 2015. China and Japan, the two countries holding the most U.S. government debt, had different reasons for reducing their holdings of U.S. Treasuries. ‘China has been selling U.S. Treasuries to defend its yuan in the face of capital outflows due to slower growth,” Restrepo-Echavarria and Arias wrote. “Japan has been swapping Treasuries for cash and T-bills because its prolonged negative interest rates have increased the demand for U.S. dollars.’ Though Treasury holdings by foreign official institutions have declined since 2015, the authors said that U.S. Treasury yields were more or less stable until the latter half of 2016. They noted that the yields on two-year, 10-year and 30-year Treasuries increased 0.24, 0.44 and 0.45 percentage points, respectively, between their lowest point on the week ending July 6 and the week ending Nov. 2.” (St. Louis Federal Reserve, April 20, 2017)

Key Levels: (Prices as of Close: April 28, 2017)

S&P 500 Index [2,384.20] – Approaching March 1^st highs of 2,400, which only reinforces the trend of making or hovering around all-time highs.

Crude (Spot) [$49.33] –    After failing to hold above $52, notable sell-offs persisted in March and April.  Crude still struggles to hold above $50.

Gold [$1,266.45] – The uptrend since Mid-December lows of $1,226.95 remains in place. Intermediate positive trends continue to hold.  

DXY – US Dollar Index [99.05] – Although the annual highs of 103.82 have not been reached in several months, still the strength of the Dollar remains.  Of course, the annual lows of 98.69 was reached last week on April 25.

US 10 Year Treasury Yields [2.41%] – March 14, 2017 peak of 2.62% remains the annual peak, since then Yields have retraced in recent trading days. Breaking below 2.20% can trigger some worries and may symbolize risk-aversion.

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 | March 27, 2017

 “If you wish to be a success in the world, promise everything, deliver nothing.” (Napoleon)

 Sentiment Examined

The fiscal optimism since the November election, which was further accelerated by the State of the Union address, is now noticeably stalling.  A much anticipated pause  coincides with an already blazing hot stock market. Pundits and traders of all kinds are pondering the following question: How much of the US stock market rally since November is attributed to Trump’s victory versus the Fed’s influence via low interest rates? It is hard to quantify, but for too long the driver of asset prices (stocks and home prices) has been attributed to Central banks. Yet, the contrast is stunning when viewing the bond markets. US 10-year Treasury Yields still remains low, further illustrating the lack of conviction in the real economy recovery. The very convenient narrative of higher stocks and economic optimism now faces a major test in terms of confidence. Voters and speculators would be quite distraught to hear that the status-quo has not shifted much, GOP and Trump promises are hard to execute and the establishment drains any outside ideas.  An already explosive stock market, which is dancing around record-highs, did not need much to find an excuse for a sell-off. Now, the week ahead can serve as the penultimate test of confidence.

Gridlock Reappears 

Regardless, of the noise and groans of a failed Healthcare policy attempt in Washington, there's something uneasy about the broader markets. First, after a long run-up, a breather or mild correction is inevitable. Does that mean a 20% or 5% stock market correction? That remains quite a debate, but it is only natural to retrace this as part of reevaluating the sentiment. Secondly, the Fed's recent rate hike mixed with expectation of further rate-hikes seems fuzzy at best. If higher rates are good or bad for Equity prices remains a debate. Third, short-term focus on fiscal policies from the US to Europe can shape the current sentiment.

The promises of lower taxes and less regulation in the US is not as certain as some felt a few weeks ago, after the healthcare debacle more doubts will resurface. Washington will be busy in attempting to restore confidence in the GOP. To Trump & Co to the Federal Reserve, massive PR efforts are already underway. If a stock market drop and weakness in economic trends transpires, then, surely, angst can fuel faster than predicted by risk takers few weeks ago. Already, weakness in industrials, financials and small cap are creating some mild fears that the Trump optimism is fading.

Conductors’ Script 

The Federal Reserve executed their plan of rate-hike after several speeches that attempted to justify the much-anticipated decision. As to the symbolism of the rate hike, the digestion process awaits, the suspense grows as well and the follow-through is even more critical.   Interestingly, the Fed has proven for so many years that low interest rates can boost stock and home prices. A sudden shift away from this age-old narrative can be turbulent, and Yellen’s legacy is at risk.  Not to mention, “promises” of rate-hikes in prior years did not live up to the hype, so the failed promises apply to the Fed as much as Congress and the White House. In a very simply way, investors will have to confirm if the rate hikes were justified since the economy may not be as strong as presented by members of the Central Banks. Again, the disconnect between the real economy and financial markets most likely will persist. Or at least, it’ll remain a puzzle that can be rewarding in deciphering.

The Eurozone is sending a different message. On one end, the ECB is not quite ready to raise rates in the short-term. On the other hand, the European economy is showing progress by traditional measures, with a favorable PMI reading. Reconciling these two factors will continue to be a theme in 2017. Interestingly, the Eurozone’s, which has seen a wave of populism, anticipation of Brexit procedures and ferocious debate on immigration is sending another message that masks the chaotic issues. 

“A gauge of euro-area factory activity jumped to 56.2 in March from 55.4 in February and an index of services surged to 56.5 from 55.5. Both are at the highest in 71 months and well above the key 50 level. The composite measures for both the French and German economies unexpectedly improved, while in France, selling prices rose for the first time since 2012.” (Bloomberg, March 24, 2017)

Like the US, the Eurozone is showing strength by some classic measures. Yet, skeptical crowds await given real issues that have put pressure on establishment leaders. The mixed or confusing state of affairs between daily life and financial markets still does not tell a clear and simply story. 

Article Quotes

“For all the talk of downtown revitalization in places like Detroit, Pittsburgh, and Baltimore, the numbers don’t lie.  The U.S. Census bureau released population estimates covering counties and metro areas today, and the picture is grim for the post-industrial Midwest and Northeast. For example, the city of St. Louis lost nearly 3,500 residents between July 2015 and 2016, representing a 1.1 percent population drop—the sharpest out of any city in the country, and a much sharper local decline than in recent years. Chicago, too, saw its long-term losses compound, with the largest numeric decline out of any metro area: more than 21,000 people, or 0.4 percent of its population. A similar story unfolded in Baltimore, which saw a rapid acceleration in population loss from 2015 to 2016. Pittsburgh, Cleveland, Syracuse, Hartford, Buffalo, Scranton, and Rochester also lost thousands. All told, according to Governing magazine, the ‘146 most densely populated counties lost a total of 539,000 residents to other parts of the country over the 12-month period ending in July, representing the largest decline in recent years.’”  (Citylab, March 23, 2017)

“Although it is not inconceivable that the ECB may move away from negative rates before tapering, our base case remains that they will step back from QE first. The most likely process will involve a six month taper starting in January 2018 and ending by June. We believe it is possible that they begin to raise interest rates whilst tapering but that it is unlikely they do so beforehand. The market currently expects the ECB to return to a positive base rate by around the end of next year. It can be argued the ECB should remove the most unconventional measure of monetary policy first and it is a matter of opinion which policy is more unconventional. Most developed market central banks have added QE to their basket of monetary policy tools whilst only some have ventured into negative rate territory. Furthermore although negative real rates are nothing new, negative nominal rates are much harder for the consumer and general public to appreciate or even understand.” (Business Insider, March 25, 2017)

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

S&P 500 Index [2,343.98] – Since the March 1^st peak of 2400.98, the S&P 500 index has retraced a bit. The slowing momentum is clearly visible. Yet, the index remains above 50 and 200 day moving averages.

Crude (Spot) [$47.97] –Hovering around and attempting to hold at $48.00. Additional supply cuts are awaited to move prices higher, but the demand side is not  robust, as showcased by recent sharp retracement.   

Gold [$1,247.50] – Since Mid-December, Gold prices have accelerated. The next key hurdle to overcome is the 200 day moving average ($1,260). Interestingly, in recent days, the commodity has inversely traded with global equities, which is worth tracking.

DXY – US Dollar Index [99.62] – Continues downtrend since the January 3^rd peak of 103.82. The dollar strength theme has slowed down most of this year, fizzling after the November elections. 

US 10 Year Treasury Yields [2.41%] – The March 14, 2017 peak of 2.62% remains the annual peak, since then Yields have retraced in recent trading days. To put things in perspective, on November 9, 2016 the 10-year was trading at 1.71%, illustrating some optimism which is also staling a bit.

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 | March 13, 2017

“Trouble springs from idleness, and grievous toil from needless ease.” (Benjamin Franklin, 1706-1790)

Summary: 1) Rising interest rates are being seriously considered. 2) The Populist vs. Central Bank Relationship is not clear-cut, as witnessed by Yellen-Trump relationship 3) Catalysts are awaited after a relatively calm period 4) Recent minor trends are worth tracking closely.

Shifting Narrative

Last week marked a massive pivot towards discussion of higher rates in the US, which is nothing new. Interestingly, even the European Central Bank had some discussion about rate hikes recently (article below). Meanwhile, it is quite clear the Federal Reserve appears to sense some confidence and may be potentially gearing for a premature “victory march” after several years of higher stocks, averted panics, lower volatility and widely accepted perception of positivity. Despite the expanding populism in the Western world, stocks do continue to soar.  Perhaps that’s caused by the brilliance of the Central Banks in its ability to lead a coordinated message, influence investors’ mindsets and successfully shape market behaviors. Now, even the skeptical observers of the market rally are forced to obey the Fed's demand. Sure, resistance of this Central Bank coordinated reality is a choice, but as highlighted last week, money managers have paid a huge price for betting against the consensus view.  Yet, it’s what’s ahead that’s worth deciphering, and a rate hike may raise more questions than answers.

Convenience Driven

The market narrative is forming a newer tune. Instead of highlighting the failure of Central Banks to stimulate the economy (beyond stocks), the vibe these days is the self-praise of Central Banks who are looking to justify upcoming rate hikes. Conveniently, the White House appears not to shy away from taking credit of this ongoing market rally and economic strength based on government data. Plenty of ironies here. Amazingly, before the election, the Yellen-Trump rift and disagreements on interest rate policies were highlighted. Today, the Yellen-Trump alliance is a matter of convenience, as long as stocks roar and traditional economic data points prove to be somewhat positive. Simply, confrontation of the status-quo is dangerous for policymakers as well as investors. Feeling too much ease is, frankly, risky, especially when the narrative is not clear at all.

Trump, like any politician, would love to take any positive financial news under his term as a momentum builder. That's only natural. At the same time, Yellen, who's been losing credibility about rate hikes, would love to exploit the current bullish climate to fire away with raising rates from ultra-low levels. Also, Trump, the non-establishment candidate, put a lot of weight on fiscal rather than monetary policies and is caught in a dilemma. On one hand, overly praising the Federal Reserve might be a capitulation of the pre-election message which got many "anti-Fed" observers attracted to his message. On the other hand, enjoying a near-record high stock market since taking office can drum up cheerful slogans.

All that said, the bottom-line is the impact to risk takers, investors and market observers given this dynamic. In a puzzling manner, investors will have to reconcile this mysterious alliance between the anti-establishment US president and the ultimate conductor of the bullish status-quo.

Mysterious Catalysts

DC, under Trump-GOP leadership, is maneuvering quickly on some matters and taking longer on others. Yet, the direct impact in financial markets remains to be seen. The pending and highly anticipated fiscal stimulus, less regulation and lower taxes are truly hard to quantify. Has the market priced that in already? Is this baked in part of the current market? That's unclear, to be bluntly honest. It all remains a mystery for the next 2-3 years.

The markets have spoken with a few clues that can shape the weeks ahead. Crude prices fell 9% last week hinting at the oversupply and a step back for hopes of a commodity revival. Retail Sales have struggled, as well. And financial services are going through various consolidations. With this backdrop, how’s the Fed going to raise rates in a sustainable manner? The global growth picture does not seem as rosy as some may think. Certainly, if commodities and Emerging Markets can not find a revival and the US relative appeal slows down, it can set the stage for some panic-like responses. The Federal Reserve seems confident of strength and economic revival, but many other indicators don’t seem convincing. Thus, this divergence will be discovered soon if the econ is stronger than discussed or if weakness is grossly masked.

Article Quotes

“Part of the ECB’s reasoning for exploring the possibility of raising rates before finishing its 2.28 trillion-euro ($2.4 trillion) bond-buying program lies with the structure of the euro-area economy, the people said. The negative deposit rate is squeezing banks’ profit margins because they can’t generally pass the cost -- charged by the ECB on overnight funds kept at the central bank -- back       to their customers. That potentially holds back lending to companies and households… Some market indicators point to the possibility of a rate hike in 2018 and BNP Paribas has predicted the deposit rate will be increased this September. QE is currently intended to run until at least the end of this year, and most economists surveyed by Bloomberg before the last policy decision said they expect tapering to last until at least mid-2018.” (Bloomberg, March 10, 2017)

“Mickey Levy, an economist at Berenberg, said the central bank was in a difficult situation given the absence of any formal tax reform legislation on which to base its policy expectations. But if Congress does push through pro-growth reforms “the Fed’s policies would not only be behind the curve but way behind the curve,” he argued.  That is not a conclusion that senior Fed policymakers share, with Ms Yellen insisting the Fed has not waited too long to tighten policy. In a recent speech she signalled continued support for the median prediction of three rate increases in 2017 contained in the central bank's December forecasting round…. One key question is whether the Fed will act as soon as June or wait until the northern hemisphere autumn before lifting rates again. The strength of Friday’s jobs data prompted analysts at Goldman Sachs to predict the next move after March would come in June, instead of September previously. Official data showed an extra 235,000 jobs being added in February and unemployment slipping to 4.7 per cent.” (Financial Times, March 11, 2017)

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

S&P 500 Index [2,372.60] – The March 1 peak of 2400.98 sets the benchmark for all-time highs. The Index hovers around record highs and needs another excuse for re-acceleration.

Crude (Spot) [$48.30] – A weekly sharp-sell off leads to annual lows. The supply-demand set up is not favorable for prices as witnessed in recent years. This is reminiscent of recent years when the commodity sector sold aggressively. Again, supply has expanded dramatically. 

Gold [$1,226.50] – Since peaking in 2011, Gold prices are still seeking a solid footing around the $1,200 range. There has been no evidence of strength or meaningful momentum that suggests a notable upward move. 

DXY – US Dollar Index [101.25] – Strength remains intact. Since November 2016, the dollar index has stayed above 100, reaffirming the strength of the currency. The low of February 2, 2017 at 99.23 is a critical point to keep in mind. 

US 10 Year Treasury Yields [2.57%] – In November, yields went from 2.30% to 2.60%. Similarly, after bottoming at 2.30% on January 17, 2017, yields are back to the prior peak of around 2.60%.  Last Friday’s intra-day highs of 2.62% stands out again as a possible near-term peak.

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 | 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.