Market Outlook | July 24, 2017

“Great events make me quiet and calm; it is only trifles that irritate my nerves.” Queen Victoria (1837-1901)

Tiring Reality

Stock prices have benefited from low and near-zero interest rates. Here’s the heart of the matter:  The chances of major changes to the “low interest rate” climate seem even less likely, which means more status-quo— which theoretically continues to justify further ownership of US stocks.  That’s been the case for a while and remains the consensus when considering the many bears that got either humiliated or crushed financially by this bull market. The interconnected link between low interest rates, tamed volatility and higher asset prices (stocks and real estate) is still intact, at least in the minds of the fatigued observes.

Mysterious Ending

The screams and shots of higher valuations did not get broad reception. The outrage for a “delayed” or “overdue” stock market collapse has angered pundits and stunned professionals while giving the Central Banks the last laugh, at least so far. There is not much of a compelling or unheard case to make sellers bail out of the well-established rally in an abrupt manner. In a way, all possibilities of a noteworthy stock market “crash,” have been heard by observers in some capacity.  The weak economic numbers from retail to auto to general mix data have not worried the bullish US stock markets.

For over two years, one could easily have made the case that the real economy is truly bleeding – look no further than the enthusiastic Bernie or Trump supporters, who have been fueled by outrage for massive establishment overhaul. Yet, the stock market in the US is on an island of its own. Regardless of weak wage growth, rapid consolidations and gridlocked government the stock market roared and is so far continuing to roar. The resilience of the S&P 500 Index and Nasdaq is still impressive, and, like all bull-markets when the momentum flows, it surely goes without a defined end.

All that said, the obsession of the next catalyst remains, and many speculate on what can derail the current trend. However, timing a demise of sorts is purely a guessing game. The obsession to nail a collapse, whether in late summer or early fall or near year-end, is all mysterious. Frankly, who knows! Too many bears have sounded the alarm before so even the shocking should not be surprising, but change usually surprises more than imagined. As summer is rapidly moving forward, the crisis prediction game lives on as the broad indexes continue to make new highs. Ah, the irony of all things, the more investors prepare for crisis, the more the bull market dances with joy. This dichotomy is mesmerizing; the suspense is tantalizing, though the anxiousness is not too thrilling for risk managers.

The Fading Dollar & Yields

The combination of a strong Euro, lower US interest rates and the lack of fiscal progress in DC have led to a weaker US Dollar. All the buildup and momentum to the Trump presidency and December rate hike are fading old news, and the Dollar is weaker. Frankly, large US companies in the S&P 500 index benefit even further from a weaker dollar. Here’s one reason:  

The weak dollar is bad news for American vacationers with plans to travel abroad. But it’s good news for America’s multinational companies because as the dollar declines, the sales and earnings generated abroad get a boost from the foreign currency translation. According to S&P Dow Jones Indices, S&P 500 (^GSPC) companies produce about 43% of their sales outside of the U.S” (Yahoo Finance, July 21, 2017).

The weaker dollar has not helped move Oil higher, as some may have expected. Yet, the bond markets, which never bought into the “recovering economy” narrative, are truly making another statement with US 10 year yields remaining below 2.50% after stalling earlier this spring. Despite short-term yields rising, it has been quite clear that growth remains unconvincing, and the suitability of growth seems even bleaker than most pundits would like to admit. The disconnect between roaring stocks and subdued, long-term interest rates is the grand unsolved puzzle of financial services. Roaring stocks and subdued rates are a reality that have coexisted – regardless of explanations the Federal Reserve is struggling to provide.

Article Quotes:

“The European Central Bank has reached the same spot the Federal Reserve reached four years ago. For financial markets on both sides of the Atlantic, it is an event that comes with consequences. In May 2013, then-Fed Chairman Ben Bernanke told Congress the central bank later that year might begin tapering its asset purchases—remarks that sent Treasury yields sharply higher, and ultimately forced the Fed to push back its plans. The ECB is keen not to relive the so-called taper tantrum. Following its meeting on Thursday, President Mario Draghi took care to not lay out any sort of timetable for when the central bank will start reducing purchases...As European credit markets adjust for an eventual ECB tightening, and as the ECB shadow rate rises, the euro may rise sharply against other currencies, including the dollar. In contrast to what happened during the Fed’s shadow rate rise, long-term bond yields also could move higher since there will be one less central bank draining supply. The world that investors find themselves in will look a lot different than the one they are in now.” (Wall Street Journal, July 23, 2017)

Mideast Rift, Natural Gas and future implications: “The ultimate agenda of the Saudi-led alliance is to deter Qatar from continuing its relationship with Iran, Saudi Arabia’s regional arch rival. But even the Guardian notes that “cutting ties to Iran would prove incredibly difficult,” as Iran and Qatar share a massive offshore natural gas field that supplies Qatar with much of its wealth. In fact, Iran immediately came to Qatar’s aid and began supplying the country with food after the Saudi-led sanctions created a shortage within the country. Shaking off Iran and Turkey —the two countries that have stood by Qatar’s side during this feud — is almost unthinkable. Qatar would be left without a single ally on either side of the Middle East region. Qatar was initially among a handful of countries, including Turkey and Saudi Arabia, that wanted to install a natural gas pipeline through Syria and into Europe. Instead, the Syrian government turned to Iran and Iraq to run a pipeline eastward and cut out the formerly mentioned countries completely. This is precisely why Qatar, Saudi Arabia, and Turkey have been among some of the heaviest backers of the Syrian opposition fighters. This pipeline dispute pitted the Sunni Gulf States against the Shia-dominated bloc of Iran, Iraq, and Syria (Syria’s president is from a minority denomination of the Shia sect of Islam). Although Iran and Qatar shared this lucrative gas field, they were directly at odds in regard to how the field should have been utilized.” (Centre for Research on Globalization, June 28, 2017)

Key Levels: (Prices as of Close: July 21, 2017)

S&P 500 Index [2,472.27] –   Since November 4, 2016 lows, the index has gone up nearly 18%.  In about 8+ months, the uptrend, without a noteworthy hiccup, has redefined the strength of the multi-year bull market.

Crude (Spot) [$45.77] –    This summer’s low of 42.05 from June 21^st and the November 14, 2016 low of $42.20 are on the radar of commodity observers as some sort of a guide. Since the mid-2014 commodity collapse, Crude has shown some life and revival, but the supply glut is a serious issue and surpassing $50 remains quite challenging.  

Gold [$1,248.55] – Stuck in a multi-month range between $1,200-$1,260.  Momentum has been lacking for a while and a catalyst is desperately needed.

DXY – US Dollar Index [93.85] –    Since the start of the year, the Dollar has remained in a downtrend, mainly since European interest rates have mildly recovered from near-zero rates. Plus, with inflation not being much of an issue and real economic growth not pleasing observers, aggressive rate hikes seem less plausible. Surely, the Trump Era has kicked off with what appears like a weak dollar policy, intentionally or unintentionally.     

     

US 10 Year Treasury Yields [2.23%] –From the March 14, 2017 peak of 2.62%, the long bond yields have lost momentum. Again, like the weaker dollar, participants are sensing the real economy is not that strong; rate hikes are less likely and the sugarcoated words of the Central Banks are less  and less believable.   

 

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 | July 5, 2017

“It is dangerous to be right when the government is wrong.” (Voltaire 1694-1788) 

Grasping the Narrative

Three Fridays ago, high-octane NASDAQ stocks temporarily showed signs of slowing. Perhaps, that began to set the tone for a June that symbolized a breather to the ongoing near-record high broad index performance. Even debt markets are mildly realizing that some of the madness in “yield chasing” requires an occasional sanity check. From an overheating auto sector to retail, there’s signs of concern and contemplation of tragic end possibilities to this smooth-sailing cycle. However, the tame volatility and overly calming message by Central Banks makes the “fear” of overheating seem out of favor and unwarranted.

It’s no accident that most of the bond markets have been lethargic in buying into the Fed’s story of “economic improvement”, as the 10-year yields remain in low standing in the familiar territory of below 2.5%. Of course, short-term rates have risen to a nine year high from ultra-low levels (2-year US Treasury Yields closed at a meager 1.41%), showcasing the impact of the Fed’s recent hikes and the ongoing perception of rising rates ahead. Perhaps, the rate hike anticipation builds into the optimism in bank stocks which are being favored. Plus, if the shares of Tech high-fliers begin to normalize away from euphoria, then more capital will seek to rotate into interest-sensitive themes.

Yet, in order to grasp the impact of the Fed’s policy versus perception of economic growth, one is left with too many mixed economic data, unconvincing inflation and a frustrated voter class. It is hard to get a clear picture on inflation, which surely is not digestible and not convincing on many levels. Inflation is not the primary concern at this moment since the lack of wage growth, lower energy prices, expanding aging population and lack of wealth creation beyond financial asset appreciation are also weighing on observers’ minds. Not to mention further M&A, more robust e-commerce and fierce retail competition is gearing to drive prices even lower. This all adds  up to formulate deflation pressures rather than previously feared “inflation”.

Grand ol’ Theme

Despite the day-to-day market swings, the grand old theme of relatively low rates and rising real estate and stock prices is abundantly familiar in Europe and the US. But that’s too well documented by now and predicting the so called “turn” or market “top” has proven to be a deadly game, especially for professional money managers. For capital allocators and retirees, “yield chasing” is the desperate feeling for a need to take risk or the mind games that come with feeling left out of the multi-year rally.  

Risk-taking is a form of an addiction, like low rates and low volatility. The Central Bank-induced reality is tempting more risk-taking. The skeptics are left to hold cash earning near-zero while awaiting distressed opportunities or mode ideal entry points for liquid markets. Patience might be rewarded, but opportunity can be missed too, as many have learned.

This tireless loop of relatively low interest rates in which yield-starved investors seek “risker” returns, mixed with skepticism from professional pundits regarding elevated stock markets, persists. This revolving pattern in not the summer theme, but rather an all-year round theme to a point where the surprise element has diminished given low volatility. At times it’s hard to tell what’s more numbing, the near all-time high stocks or the grand market top calls by pundits? Frankly, both seem sensational at times. The near or all-time high stocks is today’s reality; meanwhile, the timing of the demise of all this is just speculation. ‘Tis life in the investment world. For the skeptic crowd, the root of bearish catalysts needs to be clarified, as event-watchers eagerly await.

Innovations & Wastefulness

The Industrial Revolution of our generation has been felt from Apple to Google to Amazon to Facebook to Tesla, creating lifestyle changes in industries, but also reshaping the labor markets. There’s a massive change in retail, groceries and other industries like newspapers, autos and Fintech, as well. Of course, M&A is geared to heat-up with large companies looking to acquire smaller companies, and there’s deflationary pressures mounting – where prices are lower for consumers. However, the enhanced benefits for consumers in the near-term will lead to more obsolete jobs in several sectors, which impacts the economy adversely. Therefore, the pace of new economy jobs may (or needs to) pick up. This will require new skills and force the working class to reinvent themselves in several areas. Bracing for a rapidly changing and competitive economy is hard to do, but important to come to terms with at this stage.

Wage growth remains a challenge as policy makers struggle to find a solution to the inefficient and costly healthcare and education systems.  Inadequacies in healthcare and education continue to hurt Americans and deflate sentiment and optimism. Meanwhile, the American voter, in the middle class especially, is not too thrilled by gridlock in DC, lack of meaningful growth policies and policymakers’ pragmatism to identify priorities.  From tax reform to the healthcare debate, the inefficiency of the public sector is a bottleneck to growth as much as the efficiencies of recent innovations. Whether through human deficiency via politics and outdated policies or by human efficiency through machines – wealth creation for most is being attacked from both sides.  

In the intellectual circles, debate about Yellen’s effectiveness, the possible rift in Middle East between Qatar and Saudi, and innovative ideas seem to dominate discussions. In the real economy, rising home prices (due to Yellen’s policies), extension of Federal powers to a less effective government and the media who entertain headlines without sense of urgency resurface in the middle class circle. The glaring disconnect between low interest rate policies that inflate stocks versus bad policies that increase costs while lessening taxpayer benefits is apparent. If Trump’s victory symbolized voters’ outrage against the establishment, one should only imagine what more status-quo can do to the anger level of the middle class. Urgency for reform is becoming popular despite the failed executions and circus-like actions.

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

S&P 500 Index [2,429.01] –    The Index is staying above 2,400, which sets the new landmark for the recent record high moves. The June 19^th high of 2453.82 remains the record high, but sideways action remains in place.

Crude (Spot) [$47.07] –   June 21^st annual lows of $42 stands out after the weakness exhibited by Crude during the first half of the year. Since March, Crude weakness has decelerated, which reiterates the supply glut.

Gold [$1,229.25] – Prices retraced from $1,336.25 to 1,126.95 in the second half of 2016; this year some mild recovery in Gold ended up materializing. Now, a mild pause is formulating.

DXY – US Dollar Index [96.21] –    The Dollar weakness has been quite a downtrend after a strong 2016. The strength from last year faltered during this first half. Interestingly, the May 3, 2016 of 91.91 can be a noteworthy point to redefine the Dollar’s trend.

US 10 Year Treasury Yields [2.34%] – Last July, yields bottomed at 1.31%. Today, after 100 basis points later, yields remain below 3% as the annual highs of 2.62% in March define the next benchmark.

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 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)

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