Market Outlook | June 19, 2017

“Conflict is inevitable, but combat is optional.” Max Lucade

Dancing with the Inevitable

The stock market eventual peak is inevitable, so is the market realization of failed Central Bank policies and mega deals at the end of cycles. There are moments where one event or another will transpire. 

Before expanding on the three themes, waiting for the inevitable market event is one matter. Making money while waiting for the inevitable “cataclysmic” ripple effect is a daunting task and requires a tremendous amount of wit and, of course, luck. Waiting for the inevitable by preparing the next move is another approach to either buy distressed assets or reduce risk from current exposure.  Barging search and increased cash exposure in the near-term are being contemplated by professional money managers.

The FOMC is struggling between defending their credibility and confronting the realities of growth and potential failed prior policies.  The Federal Reserve raised rates in a symbolic manner last week rather than in a  meaningful manner during a period where growth is slowing and the stock markets are closer to record highs. At some point, many wonder, when's the narrative of low rates, higher stocks and muted volatility going to shift? “When” remains a major unknown and the landscape  is not crystal clear.  

Disconnect & Discontent

For too long the acceptance of rising stocks reflected improving economic data, and that data have been used to casually dispense comforting messaging while ignoring the lower long-term bond yields and lower inflation. Not to mention, the outrage of the voting class and distrust of Federal leadership are  intertwined in the anger against failed DC policies. The failure of the Fed to implement a pro-growth environment may end up being the ultimate highlight of the disconnect between financial market narratives and the common person’s daily sentiment. Of course, growing disconnect and discontent can pave an inevitable spark in volatility. Although, it must be said, the false alarms regarding a spike in volatility have shaped numbness in investors.

The conundrum of low rate policies is not only a US matter, but a global issue where Central Banks will have to confront the misleading stimulus story that's more political than tangible at this juncture.  The UK, Europe and Japan have mastered the trickery of low rates raising asset prices, but failure to raise wages creates political unease. The UK elections have demonstrated a shift in one year, from Brexit to far-left, showcasing the rapid and dangerous shift from one extreme to another. The swing is nothealthy or comforting for those seeking stability.

Summer Fridays

Two Friday's ago, Nasdaq’s leading stocks retraced sharply during the afternoon, which begged questions about the suitability of high-octane growth stocks such as Facebook, Apple, Netflix and Google (FANG). It is quite natural that a crowded trade has a breather, and even more natural for participants to ponder, debate and speculate on the penultimate market top. Now, timing is everything, but timing the market with automated or classic human emotion is nearly impossible as many bears have learned the harsh way in recent years.

Last Friday's Amazon's announcement of acquiring Whole Foods reiterated that the post-2008 cycle winners are in a position for mega deals and are eager to deploy capital. They are maturing from a growth company to potentially a "value" company.  The Time Warner-AOL deal comes to mind from the late 90's as an example of a mega-deal flow ahead of the tech bust in 2000. Now, Amazon is a conductor of an industrial revolution of its own, with logistics and incredible alternatives to traditional retail, newspaper and other means of reaching wider audiences. Yet, Amazon taking on debt while integrating a new purchase may shift its status from a growth company to a more “value” driven path. And the momentum chasers may have to re-evaluate Amazon's soaring stock price, which call into  question other tech high-flying companies. Perhaps, the Friday when FANG sold off after making record highs was a slight reminder. Yes, the next phase of growth remains questionable or mysterious for some tech companies, especially in the context of the current script. So far the Amazon empire has been remarkable across quite a few industries and the efficiency has reshaped the business landscape between old, near-obsolete models (i.e. traditional retail) and ongoing innovative ideas.

Reconciling Conflicts

Stock markets are performing at near-record highs, yet long-term bond yields are suffering. There are low prices for consumers, but also a lack of wage growth.  Real estate prices increase, but there is a lack of wealth creation for the middle class. On-line efficiency is expanding, but traditional business models are collapsing. There are talks of rate hikes but lower inflation numbers, muted financial market volatility but political outrage at the ground level, a reigniting of Middle Eastern rifts but mildly declining Oil prices, etc. …All highlight some noteworthy dichotomies.

Key Levels: (Prices as of Close: June 16, 2017)

S&P 500 Index [2,433.15] –   June 9, 2017 highs of 2,446 remain the record highs, and in the near-term, sets the benchmark for bulls. So far, June’s turbulence and shaky movement is creating suspense for the long awaited “top”.  A break below 2,400 can set off further panic based on prior trading patterns.

Crude (Spot) [$44.74] – April and May 2017 showcased a lack of upside momentum with crude falling below $52. The glut supply seems to be a bigger matter than pending disruptions in the Middle East such as Libya and diplomatic tension with Qatar and Saudis.

Gold [$1,266.55] –   A mildly positive trend since December 2015 lows of $1,049.40 remains intact. Recent signs of stabilization appear, but not a major surge as Gold bugs expected. Interestingly, Bitcoin has skyrocketed higher than Gold as the alternative currency.

DXY – US Dollar Index [97.27] –   Less than what most expected this year, the Dollar is weaker, and the annual peak was reached in January.

US 10 Year Treasury Yields [2.15%] – March 2017 highs of 2.62% seem a long time ago since 10-year yield is hovering below 2.20%, even during a week that the Fed raised short-term rates. The chronic low rate enjoinment is more pronounced now as dipping below 2% seems like a feasible reality.

 

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 | June 12, 2017

“In times of rapid change, experience could be your worst enemy.” (Jean Paul Getty - 1892-1976)

Sudden Reminder

The sudden Nasdaq sell-off on Friday afternoon triggered a reminder of the smooth-sailing multi-year bullish run, which has continued so far. The mostly stumped and defeated long-time money managers have for so long waited for a grand sell-off in Nasdaq stocks, particularly of what’s been known as the FANG's (Facebook, Apple, Netflix and Google). Now the anticipation of spiking volatility for correction from "overvalued" levels to market place is causing observers to realize the weakness of the real economy, which should all should playout sooner rather than later. No investment guru was needed to highlight that tech giants were reaching a crowded point with lots of momentum chasing. When the bulls keep getting rewarded, the natural inclination to follow the herd is inevitable, especially professional money managers who must stay invested. The mind-numbing trend of higher stocks, (and other asset prices such as real estate, junk bonds, etc.), lower yields and muted volatility have been reigning as the grand themes for financial services. To the delight of Central Banks, major shocks have been averted and bearish investors have been mocked ad nauseam, leaving a crowd of investors overwhelmed in momentum driven stocks, primarily in Tech driven areas. 

The Skeptic Revival

The ongoing disconnect between a sluggish economy and financial markets mixed with a dissatisfied voting class and unease of key global relationships can add to a growing list of investor worries.  For too long this has been making headlines or outlined by seasoned professionals. The silent skeptics are now ready to reiterate the undeniable unsuitability of the bullish run that has inflated asset classes, while creating a rift and anger in the political circles due to bleeding real economy and neglect by the establishment to revive policy-driven growth. If the Trump victory and Brexit results were not a loud enough of a statement, the failure of asset prices to hold at elevated levels can serve as an even bigger "reality check" for financial markets. There is no shortage of negative catalysts, from the China downgrade to the Saudi vs. Qatar rift to less than impressive growth numbers. Somehow, a market that's been flooded with logical cases for a downside move found a summer Friday afternoon, after hitting record highs, to reawaken the living bears. At some point, momentum fades, but timing the glorious top is a dangerous and near impossible task.  

Dullness Noted

The last three months witnessed decline in Crude prices, a weakening in the Dollar, and lower yields. There’s a lot to digest from here, from a potential oversupply of Crude to fading Trump optimism to not impressive real economy to ongoing low rate central polices. Regardless of the reason why these trends have materialized in recent months, it’s important to note that Crude, the Dollar and interest rate themes have traded in tandem recently. The vibrancy of the real economy is being questioned despite near-record highs in US broad stock indexes. There’s a question that looms: if the high-octane Technology stocks are out of favor, then where’s the favorable areas to rotate to? Is it Energy or Emerging Markets? Is there a panic that’s waiting? The lesson in the marketplace is quite clear, timing the market is a difficult task for anyone, even for professionals who’ve noticed trends for multi-decades. At the same time, timing the length of a correction is quite difficult, too.

Frankly, there’s no shortage of excuses to drive the market into a chaotic mode. The convergence of the real economy’s trend with stock prices would suggest that stocks need a reality check. Equally, when an investment is too saturated and assumed to be the best, then vulnerability awaits. With that said, the stage is setting up for anxiousness that’s been brewing slowly, but not represented in headlines via a mega splash.

Key Levels: (Prices as of Close: June 9, 2017)

S&P 500 Index [2,431.77] –   The intra-day high on June 9, 2017 of 2446.20  either marks the penultimate top or marks the next benchmark for record highs. Interestingly, a break below 2,400 can awaken further sellers and increase a loss of momentum.  

Crude (Spot) [$45.83] –   Since the break below $52 in March this year, Crude prices have struggled to recover. Perhaps, this is another signal of expanding supply, including in US output. There is a fading upside momentum so far, despite the rising tension in the Middle East.

Gold [$1,266.55] – Steadily rising since January 27 lows of $1,184.85. In the near-term, investors will see if $1,280 is a peak of sorts.  

DXY – US Dollar Index [97.27] – Since the March 2, 2017 peak of 102.26, the Dollar Index has been in a downward trend. For over three months the Dollar strength theme has faltered.

US 10 Year Treasury Yields [2.20%] – Closer to 3-month lows, as low yields remain in a constant downtrend. The majority continue to realize that surpassing 3% is a lot to ask, at least rapidly.                      

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 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.

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