Market Outlook | May 30, 2017

“Business has only two functions - marketing and innovation.” Milan Kundera

Stumped & Stunned

The professional crowd is somewhat stunned, while feeling a bit stumped and humbled by ongoing market performance. Not many money managers successfully predicted a sustainable period of low yields, low volatility and higher stocks. When looking back, the big trends seem obvious in hindsight, but hardly clear at all when reflecting and sifting through the collective predictions of yesteryears. Surely, innovative areas, such as NASDAQ based stocks, e-commerce and biotech, are being selectively rewarded. Heading into the holiday weekend, Google and Amazon are racing to get to $1000 per share. This in itself captures the post-2008 period of efficiency and the mass distribution of daily utilized technology. As simplistic as it may be, owners of these two stocks alone could have produced fruitful results. At the end of the day, the fervor for innovation and a complete game changing nature of disruptive technology is one of the reasons NASDAQ is elevating.

Amidst the premium pricing that’s rewarding to  disruptive  companies, the broad average indexes (i.e. S&P 500) have elevated in value, mostly driven by a lack of alternatives for yield and, of course, the unnatural and very low interest rates. The chatter of the S&P 500 index at a record high is a snapshot of averages, after all, and it shapes the sentiment of casual observers, but there's more to decipher. Averages do not tell a full story, sentiment deals with a mixture of emotions, and the paradoxical nuances are lost in big headline chatter. There is no question that NASDAQ and the S&P 500 index in tandem benefit greatly from Central Bank policies. Similarly, it’s hard to dismiss the bubble-like climate in real estate and stocks that was created by a wave of unnatural low rates and failure to address impactful policy changes by elected officials. The reckless leadership and the shameless willingness to confront the truth of the Federal Reserve is stunning.

Rapid Changes

Even if the broad averages signal record highs, old business models are getting "killed" as bankruptcy is becoming a familiar theme.  Any observer of the retail sector is seeing this.  The on-line model is causing a mass change, forcing recognizable brands to be near obsolete.

 "Nine retailers have filed [for bankruptcy] in just the first three months of 2017, according to data provided exclusively to CNBC from AlixPartners consulting firm. That equals the number for all of 2016. It also puts the industry on pace for the highest number of such filings since 2009, when 18 retailers resorted to that action." (CNBC, March 31, 2017)

Traditional areas in Financial Services are facing same pressure from FinTech (innovative and efficient solutions) and a demanding tech savvy consumer is changing the landscape. Meanwhile, fees charged by financial institutions are coming down significantly. For fund managers, the shrinking fees feels like a lack of confidence. In recent years, the glorification attributed to hedge fund managers as "money makers" has calm down and failed to impress. The obsession with passive strategies via ETFs have gained traction and mass appeal, but passive strategies do seem golden in a smooth-sailing market without major turbulence. Banks are rushing to readjust their business models and exiting non-core businesses. Some Hedge Fund magic is gone and the shift towards machines and computer generated trades is popular, and, possibly, the "desperate" near-term solution to unimpressive returns by so-called professionals. Perhaps, the scarcest quality is the admission of failure by most money managers.

While broad indexes roar and inflation talks dissipate, one cannot help but realize the real economy is not healthy. Treasury Yields are quietly sinking below 2.5%, and rate-hike chatter has waned to a near deafening silence. With the ongoing horrific theatrics of politics, it's fair to say, the establishment has failed badly, the Central Bank cannot create wealth for a majority of America and stocks do not measure the average American’s well-being, as touted so often. Perhaps, that’s why some prominent multi-decade managers (i.e. Paul Singer, Seth Klarman) are warning of added risk that’s dismissed by the market.

At the same time, Emerging Market debts have been mysterious and less understood. Moody’s downgrade of China appeared like a long-overdue event. The catalysts for turbulence are plenty, including the overly suppressed volatility and sudden realization of a weak economy.  Timing the market has proven nearly impossible, but enough warnings have been heard.

The Grand Search

Fear is talked about a lot in relation to the current chaotic market response; and factors that stimulate fear circulate too often, but the grand panic has not been felt, yet. From Congressional gridlock to sensational partisan rifts to overheating segments in credit markets, there is talk of fear. That is quite customary.  From the auto loan bubble to student loans to pending disasters somewhere to possible shifts away from numbing ultra-low rate environment, there’s looming chaos that awaits. From debt piling in China to credibility issues with Western Central Banks, there’s more to truth to decipher.  

Some participants are asking: Why bother timing the penultimate top and waiting for cracks to foreshadow a script that's been seen before. From Bitcoin's explosion to NASDAQ's uproar, what's justified or not is still a question worth uncovering, as the answer seems illusive yet again. Others are sitting out, waiting for distress opportunities to emerge and not risking Capital to overpay for high-flying stocks or demonstrate some bravado by betting against the status-quo and Fed-led uptrend.

Article Quotes:

"Even Fifth Avenue retail doesn’t seem to be immune from the crunch. In April, Ralph Lauren said it would shutter its Polo flagship location as part of a cost-cutting spree to strengthen the business. Vacancy rates on Fifth Avenue between 42nd and 49th streets reached a high of 31 percent last year. And eight of the 11 Manhattan retail neighborhoods tracked by Cushman & Wakefield saw availability rates climb between 0.6 and 8.2 percent. Major Fifth Avenue landlords such as Joseph Sitt’s Thor Equities are also feeling the pain. There’s been speculation that vacancies are putting pressure on the company’s bottom line." (The Real Deal, May 17, 2017)

“China buys U.S. debt for the same reasons other countries buy U.S. debt, with two caveats. The crippling 1997 Asian Financial Crisis prompted Asian economies, including China, to build up foreign exchange reserves as a safety net. More specifically, China holds large exchange reserves, which were built up over time due in part to persistent surpluses in the current account, to inhibit cash inflows from trade and investment from destabilizing the domestic economy. China’s large U.S. Treasury holdings say as much about U.S. power in the global economy as any particularity of the Chinese economy. Broadly speaking, U.S. debt is an in-demand asset. It is safe and convenient. As the world’s reserve currency, the U.S. dollar is extensively used in international transactions. Trade goods are priced in dollars and due to its high demand, the dollar can easily be cashed in. Furthermore, the U.S. government has never defaulted on its debt.” (CSIS, May 2017)

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 22, 2017

“Confidence is a very fragile thing.” (Joe Montana)

Visible Trends

Since March 1 2017, a few big picture items have become a little clearer. 1) The US Dollar weakness continues  2) The odds of a US rate hike seem low and even lower 3) The Real economy is not quite as vibrant, as witnessed by low 10-year yields 4) Record stock market highs and low volatility continue to persist with mild and non-lasting blips. Of course, the rising stock market and low volatility are nothing new, regardless of the DC power shift. Yet, the collective US markets appear eager for an excuse to sell while feeling a bit unsettled about the DC political gridlock that’s mind-numbing, deflating and, at times, quite shocking. Being bullish in anticipation of policy changes is not looking too promising. However, as long as interest rates are low and the collective narrative remains more or less the same, then change is hard to visualize.

The lethargic stock market action is enticing for bears who want to throw the towel and uneventful for bulls riding the trend. But the trends mentioned above are signaling what’s been brewing in the undercurrent of Western societies. The lack of lift and ignition of the real economy is a real issue. It’s not a populist message or fear-mongering tactics as some would like to outline. Again, Trump’s victory and the eventual Brexit outcome have redefined the post 2008 crisis.  The intellectual class is slowly coming to terms with depleted growth rates, but the record high stocks somehow overshadow the more brutal and unpleasant side of current conditions. The intersection between artificially induced interest rates (higher stock prices) and a not so rosy real economy is slowly approaching.

 Re-Emergence

Since the start of the year, as the US dollar weakened along with commodities, and on a broader level, emerging markets have done well.  From India to South Korea, EM has been on a solid run in 2017, mainly since investors were looking to rotate out of a stretched US. Plus, EM currencies have outperformed the Dollar in the first part of the year. Of course, last week’s sudden downturn in Brazilian stocks and currency leads investors to briefly reassess risk and ask further questions. Interestingly, jumping on EM quickly for better returns might not be an easy answer:

“Investors are earning less and less extra yield to own emerging-markets debt… These nations have been adding leverage. They're more susceptible to unpleasant surprises out of China or other large economies. And some, like Brazil, have some serious political and fiscal challenges that can easily erupt in ways that could impede the functioning of their capital markets.” (Bloomberg, May 18, 2017)

With China remaining such a wild card, the real risk of EM isn’t understood. It’s quite clear that low yields in developed countries have triggered rotation into riskier EM in the ongoing search for higher yields. Perhaps, the low interest rate environment in the developed world, from Germany to the UK to the US, reignites demand for EM debt and other risker assets. Yet, like all critical questions, is the risk in EM worth the reward? So far lots of bullets have been dodged. Perhaps, this is more of a country by country risk rather than a broad conclusion regarding developing markets. That said, Chinese debt is the most watched and is potentially highly vulnerable, and the discovery of bad or large debt can spark a meaningful and inter-connected reaction. The[HM1]  recent EM ease among investors and the smooth sailing run should be taken lightly without any skepticism.

Radical Shifts

From retail to financials, there’s a growing concern that’s been impacting traditional companies and jobs. The boom of artificial intelligence, self-driving cars, Amazon’s logistic driven empire, disruptive technologies across multiple sectors, increasing shift towards on-line retailers and more efficiency has led to further pressure on the job market. Surely, new skills are needed for the general population, while efficiencies lead to less job creations. The changing landscape of new skills, mixed with aging population begs the question of this transition impact on labor markets. (See below in Article quotes). Ultimately, if broad based job creation fails to materialize then consumer spending might be impacted. Yet, the new economy is being understood, and it is no accident that Nasdaq’s big winners are Amazon, Netflix and Google, which pave the way for the new economy. However, without broad participation, and encouraging polices in DC, it’s harder and harder to visualize a robust real economy.

Article Quotes:

“China is attempting cure itself of an addiction to debt. The problem is, that could just stoke yet more demand. Take local-government debt, one of the biggest contributors to the overall growth in debt in recent years. A major concern has been off-balance-sheet ‘local-government financing vehicles,’ whose debt now represents around 10% of China’s $8 trillion bond market. The money raised is supposed to finance infrastructure projects and the like. But much of it—around half, according to Wind Info—has been put to unproductive uses like paying down old debt and keeping moribund local companies alive. The debt is often issued in the guise of corporate bonds, and can be bought by banks. Beijing is now trying to rein in the financing vehicles’ voracious debt appetite. Though the debt isn’t recorded on local governments’ books, there’s little doubt they will be on the hook if defaults start growing. As of 2016, local-government debt totaled 33 trillion yuan ($4.782 trillion), of which UBS analysts estimate a third is implicit or hidden liabilities.” (Wall Street Journal, May 15, 2017)

“During his presentation, Bullard explained that U.S. macroeconomic data since the March 2017 meeting of the Federal Open Market Committee (FOMC) have been relatively weak, on balance. For instance, he noted that U.S. inflation and inflation expectations have surprised to the downside in recent months. In discussing the FOMC’s March increase in the policy rate (i.e., the federal funds rate target), he noted that the financial market reaction has been the opposite of what would typically be expected. ‘This may suggest that the FOMC’s contemplated policy rate path is overly aggressive relative to actual incoming data on U.S. macroeconomic performance,’ he said. In discussing the FOMC’s March increase in the policy rate (i.e., the federal funds rate target), he noted that the financial market reaction has been the opposite of what would typically be expected. ‘This may suggest that the FOMC’s contemplated policy rate path is overly aggressive relative to actual incoming data on U.S. macroeconomic performance,’ he said.” (Federal Reserve Bank of St. Louis, May 19, 2017)

Key Levels: (Prices as of Close: May 19, 2017)

S&P 500 Index [2,381.73] – The March 1^st highs of 2,400 are on the radar for many observers since that was a tangible and historical peak point. Interestingly, last week’s record highs of 2,405.77 triggered a reaction of fading enthusiasm.

Crude (Spot) [$50.33] – Once again, there is a mild sign of staying above $48. January highs of $55.24 can be the next target for bulls.

Gold [$1252.00] –   For over four years, the commodity has hovered around $1,200. Gold desperately lacks positive momentum and sideways action remains in place.

DXY – US Dollar Index [97.14] – Dollar weakness continues with annual lows being made, yet again, on Friday. The post-Trump rally has not witnessed a stronger dollar and that’s becoming quite a macro theme.

US 10 Year Treasury Yields [2.23%] – Since Trump was elected, 10-year has stayed above 2.20% but peaked at 2.62% in mid-March. Despite the economic improvement chatters, yields remain closer to 2.20%, showing lack of trust by bond markets on the economic conditions.

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 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.

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