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markettakers · 8 years ago

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Market Outlook | August 21, 2017

The doom build-up

There's a desperation that's brewing to find bargains or to see market tops across private and public sectors of the financial markets. The doubters, who've wrote, shouted and acted about the "over-stretched" markets, are now pondering the long-awaited correction, which still seems quite illusive. The doubters of the current trend include seasoned professionals, active money managers and perplexed observers of all kinds. Since July 26, the VIX (Volatility index) has woken up from a slumber, going from 8 to 14. Perhaps, the dormant risk has brought levelness or some pulse to the smooth-sailing market. Albeit, this is all minor when digesting the nine-year bull market.

Shocking Calm

Yet, the status-quo has not been quite derailed. As yields come down faster even in nations that are risky on many levels, such as Greece and Spain, big capital is still looking for investable areas. Amazingly, even after the Barcelona terrorist attack by Islamic groups, the Spanish 10-year government bond is trading around 1.5%. Italian long-dated bonds stand at 2.03%, and Greek 10-year bonds stand at 5.63%. Just to put things in perspective, five years ago Greek Bonds stood near 24%. That was around the height of the European crisis. Clearly, today the “perception of risk” has dramatically lessened, at least in financial markets. There's nothing shocking about the very low to negative interest rates at this junction. In fact, it's a tiresome reality, but one day this perception of calmness will explode to various doses of reality. When's that day? Are early clues visible yet? Haven't we heard it before to only see years go by? The suspense lives on a bit, but the artful coordination by Central Banks has enabled a narrative of low risk to persist boldly.

Bargain Hunting

The “value-seeking” camp is desperate to find bargains, despite appearing calm and patient for a long-awaited market correction. What exactly is “value” these days? Google or Amazon? It is hard to claim the best performing stocks are in value related areas when “FANG” has caused such explosive momentum in stocks, where these relatively authentic companies have gobbled up a noteworthy market’s share, putting others to shame. Where's the bargain? In energy, retail or some specific beaten-up names? Value chasers are looking for near-obsolete retail that may survive the onslaught or an energy company that can overcome the massive pressure from the oil glut. In reality so many professionals are seeking or fearing a massive reset, an ultimate test of reality, a notable shock to test the coordinated Central Bank’s narrative, a correction to expose the hidden risks and to identify the true state of the real economy. The dream of the short seller and the nightmare of the ultra-bull have not converged yet, leaving more anxiousness and suspense. The short seller will not stop being skeptical even after taking a beating from the ongoing bull market. And the momentum chaser is not eager to abruptly sell, since the very minor hiccups and panic like traits suggest the resilience of the status-quo.

Bitcoins are battling for a moment of supremacy, too, given the huge run up. FinTech boom is visible left and right, from payment processors to Cyber security to robo-advisor. There's the massive innovation gold rush, where only few survive. Again, even in the private and venture world, the entry point for new investment is not ideal (for the most part), considering longer-term commitment. A correction is a good barometer of risk perception and less visible realities. Perhaps, a breather of sorts enables all to reassess past risks and risks moving ahead.

Key Levels: (Prices as of Close: August 18, 2017)

S&P 500 Index [2,425.55] – After peaking on August 8 at 2,490.87, the index has been in a mild correction mode. Certainly, the bulls are being tested with their conviction; a break below 2,400 can set off a wave of compounding fear.

Crude (Spot) [$48.51] – Between the glut of supply and rift between Saudi and Qatar, the prices for Oil seem quite stable. Of course, surging above $50 has been quite a challenge, and many traders are noting that. Yet, June 21, 2017 lows of $42.05 have set the tone for now.

Gold [$1295.80] – Re-acceleration continues since early July. An interesting development where the strength has picked up momentum, causing gold to break above $1,300, is sending a technical message. With defensive-like assets in demand, maybe Gold benefits a little as the Central Bank theme is being doubted a bit.

DXY – US Dollar Index [93.43] – There’s one trend that’s crystal clear in 2017 and since Trump’s presidency: weak dollar. Is it related to the calendar year or White House? Maybe it does not matter. Frankly put, has a stronger Euro and EM FX driven the dollar lower on a relative basis?

US 10 Year Treasury Yields [2.19%] – After failing to surpass 2.30%, yields have declined in a period of rising gold prices and volatility equity index – which further signals the rush to safe assets. Plus, the bond markets do not have a lot of faith on the real economy recovery.

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.

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markettakers · 8 years ago

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Market Outlook | August 7, 2017

Collective Stock Obsession

The Swiss Central Bank owned large cap tech stocks - such as Apple - demonstrate how the same Central Banks that drove a coordinated low interest rate environment are also profiting from rising stocks in their own portfolio. It's quite hilarious or logical that the promoters of “risk-taking” are also looking to put their capital to work in more liquid large cap US companies. Of course, weakening the Swiss Franc is one driver, as well. Importantly, this highlights a bigger theme in which so much capital is looking for shelter given the low interest rates. Frankly, investors of all kinds (small individuals or large Central banks) cannot get enough of allocating to tech stocks regardless of valuation to combat the ultra-low interest rate environment.

“For now, the Swiss National Bank holds on to it, and invests it around the world--but not in Switzerland. It held $2.7 billion in Apple Inc. stock, for instance, at the end of March. Some lawmakers and many economists think a sovereign-wealth fund created outside the SNB should invest a chunk at home.” (Wall Street Journal, August 2, 2017)

Amazingly, as if FANG (Facebook, Apple, Netflix & Google) were not already too explosive and in high demand, it’s quite interesting how the momentum chasing is accelerating. But when Central Banks are buying stocks there’s a screaming conflict of interest that’s quite evident. Not to mention the age-old saying of “Don’t fight the Fed” is even strengthened further, scaring bulls away and encouraging professional managers to go “all-in” with stocks. As being cautious is nearly laughed at, the unprecedented times of a Central Bank led bull market should be worrying even if it has led to further wealth creation.

Interestingly, talking about Central Banks buying public securities: The Bank of Japan (BOJ) continues to own a significant portion of the Japanese’s stock market via ETFs. Frankly, this feels like a nationalization-like move, where the central government influence is quite major. The low polices combined with an expanding balance sheet, which leads to desperation to purchase liquid securities, has led to this reality of BOJ buying ETFs.

“The central bank [Bank of Japan] has been buying ETFs since 2010, but has been increasing its purchases as part of a package of unprecedented stimulus under Kuroda aimed at revitalizing the economy, virtually doubling its annual buying target to 6 trillion yen in July 2016. The BOJ owned about 71 percent of all shares in Japan-listed ETFs at the end of June, according to a Bloomberg analysis of data from the central bank and Japan’s Investment Trusts Association. That’s equivalent to about 2.5 percent of Japanese stock market capitalization.” (Bloomberg, July 20, 2017)

Waiting for Event

The long-awaited "event" for a major correction, a sell-off that's noticeable or a closer to 10% drop in S&P 500 Index is anxiously awaited. Folks like Alliance Bernstein remind us that this cycle, without a notable sell-off, is quite stunning: "S&P 500 Index has suffered a 10% downturn every 33 weeks on average. Yet today it’s been more than 70 weeks since the last 10% correction" (AB Blog, July 24, 2017).

A desperately awaited correction is causing symptoms of greed for more risk taking, numbness to risk and dismissal of rational discipline. Is this waiting for the event that pays or preparing for the post-distress purchases and opportunities? Is the next blow-up going to felt in ETFs? Have short sellers bailed out after mainly false tops? Is there a point where the Central Bank loses credibility – all at once? Have the macro conflicts – from North Korea to the Qatar/Saudi rift – been ignored for too long? Who knows? Unclear and unanswerable questions remain for now.

However, between now and year-end can serve as an interesting and telling period that can unravel the multi-year bull cycle, or at least shed light on the most vital catalysts.

Uniformity’s Gain & Pain

The coordinated effort among Central Banks in western countries is resulting in further synchronization of financial markets. In addition to the ultra-low interest rates combined with non-visible inflation, there is a ferocious competition to weaken currencies and maintain the addictive low rate climate. At this stage, the mostly "deferred" correction is creating even more anxiety. Yet, without major changes to the status quo, the catalyst remains quite mysterious. It's undeniable that risk is mounting, even if not felt in sentiment and volatility measures. When Greek bonds trade below 6%, something is odd; just like the so-called robust US economy still sports a US 10-year yield below 2.5%. These abnormalities taken as the norm is usually a discomforting situation. Timing the market has proven to be an impossible task especially for professionals, as exhibited in hedge funds. Thus, skeptics are sidelined while bulls ride the wave and get blinded by the numbing simplicity of a rising market.

Key Levels: (Prices as of Close August 4, 2017)

S&P 500 Index [2,476.83] –From November 4 2016- July 27, 2017, the index went up 19.21%. Most outstandingly, the run-up was quite smooth without any major hick-up, which further highlights the near-death of volatility. Interestingly, the highs of July 27 2,484.83 remain the all-time high and near-term benchmark.

Crude (Spot) [$49.58] – Since February, early signs of fading Oil prices have remained. Surpassing $52 has proven to be quite difficult – mainly due to supply glut – as $50 remains a near-term challenge.

Gold [$1,257.70] – Still attempting to recover from the second half price collapse of 2016. The 50-day moving average stands at $1,251.55, which mostly tells the story. March 2014 highs of $1,385.00 seems not easily attainable in the near-term.

DXY – US Dollar Index [93.54] – From January 3 until August 4, 2017, the dollar index dropped by over 10%. The reversal from last year’s King Dollar to deceleration of a weaker Dollar defines the story of 2017, mostly. Lack of basis for a rate hike in the US and unconvincing economy strength are contributing to a convincingly lower Dollar.

US 10 Year Treasury Yields [2.26%] – Again, bond markets are suggesting that a rate hike or economic strength is not easily visible. June 14, 2017 lows of 2.12% are worth tracking in the foreseeable future.

Dear Readers:

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markettakers · 8 years ago

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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 21st 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:

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markettakers · 8 years ago

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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 19th high of 2453.82 remains the record high, but sideways action remains in place.

Crude (Spot) [$47.07] – June 21st 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:

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markettakers · 8 years ago

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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:

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markettakers · 8 years ago

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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.

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markettakers · 8 years ago

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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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markettakers · 8 years ago

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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 1st 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.

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markettakers · 8 years ago

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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:

If the US economy was so strong, then why is the US 10 Year Yield below 3%?

Retail and financial services seem vulnerable, isn’t that damaging for the real economy?

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:

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markettakers · 8 years ago

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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 1st 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:

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markettakers · 8 years ago

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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 1st 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 3rd peak of 103.82. The dollar strength theme has slowed down most of this year, fizzling after the November election.

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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markettakers · 8 years ago

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Market Outlook | March 13, 2017

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

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

Shifting Narrative

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

Convenience Driven

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

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

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

Mysterious Catalysts

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

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

Article Quotes

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

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

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

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

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

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

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

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

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markettakers · 8 years ago

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Market Outlook | March 5, 2016

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

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

Professional Mockery

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

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

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

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

Digesting Clues

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

Notable Catalyst

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

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

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

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

Article Quotes

Beyond trade and markets:

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

Eurozone Revival:

“Purchasing manager indices for the manufacturing sector in Central Europe recorded another strong result in February, according to data released on March 1. The data is just the latest set that suggests a strong start to the year for the Visegrad economies following a disappointing second half of 2016. The uplift in business conditions in the region shadows strong readings in confidence and activity in the Eurozone – and Germany in particular – which supplies the bulk of the Visegrad economies' export demand… The Eurozone saw a 0.2 point gain to 55.4 in February, the highest level of the index since April 2011. The German reading hit a 69-month peak at 56.8. Where German industry goes, Central Europe tends to follow. Industrial sectors in the Czech Republic, Hungary and Poland are all led by their role in the supply chain of Europe’s largest economy and exporter.” (bne IntelliNews, March 1, 2017)

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

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

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

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

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

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

Dear Readers:

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markettakers · 8 years ago

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Market Outlook | February 27, 2017

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

Unanimous Cheering

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

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

Bond’s Concern

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

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

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

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

Anticipated Turn

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

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

Article Quotes

“Bond traders are calling the Federal Reserve’s bluff. For weeks now, everyone from Janet Yellen to Fed newcomer Patrick Harker has been trying to jawbone investors into believing an interest-rate increase in March is on the table. That the meeting is “live.” Yet try as they might, the bond market seems unconvinced there’s much behind the tough talk. With less than three weeks to go, traders see slightly more than a one-in-three chance the central bank raises rates. That’s well short of the 50 percent minimum that has predicated every rate hike in the past quarter-century, according to data compiled by Bianco Research. Reasons for the skepticism are varied, but the one that stands out is the simple fact that Fed officials are running out of time to make their case. The February jobs report comes five days before Fed officials gather and inflation data will be released mere hours before their decision is announced. Both key metrics come out during the Fed’s public blackout period, which starts on March 4, leaving traders in the dark about the central bank’s intentions.” (Bloomberg, February 26, 2017)“A new era of low crude prices and stricter regulations on climate change is pushing energy companies and resource-rich governments to confront the possibility that some fossil-fuel resources are likely to be left in the ground. In a signal that the threat is growing more serious, Exxon Mobil Corp. (XOM) is expected in the coming week to disclose that as much as 3.6 billion barrels of oil that it planned to produce in Canada in the next few decades is no longer profitable to extract. The acknowledgment by Exxon, after the company spent about $20 billion to put the oil sands at the center of its growth plans, highlights how dramatically expectations have changed about the future prospects of the region. Once considered a safe bet, Canada's vast deposits are emerging as among the first and most visible reserves at risk of being stranded by a combination of high costs, low prices and tough new environmental rules.” (Wall Street Journal, February 17, 2017)

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

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

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

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

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

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

Dear Readers:

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markettakers · 8 years ago

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Market Outlook | February 21, 2017

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

Its Own World

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

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

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

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

Rate Focused

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

Hints of Unease

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

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

Sluggish Macro

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

Article Quotes

Europe-China Conflict:

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

Potential Turn:

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

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

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

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

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

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

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

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markettakers · 8 years ago

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Market Outlook | February 13, 2017

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

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

The Bulls Mindset

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

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

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

The Bearish Perspective

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

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

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

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

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

However, Greek bonds are rising again, the Eurozone crisis is being slowly revisited and prior concerns, such as status of Italian banks, cannot go away. In other words, the many unsolved issues from before leads the bears to worry. In fact, financial times put it best: “Failure to tell truth to power lies beneath much of what is going wrong in Europe right now. It may not be the principal cause of the Greek debt crisis, which is now on its umpteenth iteration. But it is more than a mere contributing factor…. Europeans are not used to such bluntness. The Germans protested. The European Commission protested. So did the Greeks. They all want to keep up the fairy tale of Greek debt sustainability for a little while longer.” (Financial Times, February 12, 2017)

Reconciliation

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

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

Article Quotes

Hedge Fund Performance:

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

Ongoing Doubts:

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

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

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

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

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

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

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

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markettakers · 8 years ago

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Market Outlook | January 17, 2017

“A single event can awaken within us a stranger totally unknown to us. To live is to be slowly born.” (Antoine de Saint-Exupery 1900-1944)

Synchronized Elation

Higher movements in US stocks, interest rates and oil prices not only materialized in recent months, but the optimism of this trend-continuation remained in place. The collective expectation of better economic signs, mixed with some tangible data of slight improvement, begs the question: what really is the status of global growth? In the US, is labor data signaling some mild revival? Bank earnings were somewhat healthy, matching the trend of rising interest rates. And fiscal policies are expected to be implemented in a favorable way despite the mind-numbing DC gridlock. Even the Federal Reserve is feeling a bit optimistic about the economy, and relentless buyers continue to accumulate shares. Expectations, like the bullish spirits, remain very uplifted, which sets the bar too high.

The Dow 20,000 obsession is alive and well. Perhaps, that milestone serves more entertainment value for financial pundits than observers of the real economy. Apparently, the rising interest rates have not quite derailed the bullish market; even a mild slowdown in the US Dollar has not stopped the positive momentum. Yet, in grasping the events ahead it helps to identify the “known unknowns” versus the “unknown unknowns”. Turbulence is inevitable, but the critical catalyst is the mysterious element for risk managers. In most cases, the way the script plays out is driven by surprises and which catalyst will set the tone.

The KNOWN Unknowns

As Trump looks to enter the White House this Friday, the key US stock indexes are flirting with record highs. Through this headline chatter there are lingering issues that will be highly tracked and discussed. Here are some of the known concerns that are familiar to participants:

1. Brexit implementation - Financial markets digested the Brexit decision, but the details of the exit process will shed additional light while triggering more volatility. There is a posturing game between the European Union and UK leadership. The short-term volatility does not mean there won’t be long-term benefits, but predicting the theatrical elements appears genuinely difficult. Of course, the British Pound has felt the pain of Brexit and the turnaround for the currency is unclear. Inevitably, expect more volatility as the twist and turns continue given pending negotiations. Trading ‎opportunities will present themselves and political agendas will spin the reality, which will create more deception. In other words, the true impact of Brexit may not be straightforward.

2. Trump-GOP relationship - The 2016 election gave republicans the White House and Congress, so new regimes are expected to implement a new path. However, not everyone sees eye to eye on fiscal spending, lower taxes and less regulation. Thus, how the DC political climate shapes up will be essential for investors and business leaders. ‎ As inauguration looms this Friday, now the speculative policy-driven euphoria and financial speculations from supporters and antagonists will be tested a bit. Although, anxiousness can overtake investors and media observers alike, true judgment of policies impact on economic/ financial markets may require patience.

3. Central Banks influence - In the year ahead, less reliance on the Central Banks (CB) and the continuation of rising rates is highly anticipated. Although Europe seems stuck in a near-zero climate, US rates are rising. Even in China short-term rates are rising, as well. The link between populism and distaste for CBs might be a bigger theme than currently discussed. In other words, from Emerging Markets to Developed Markets, the doubt is mounting on the success of monetary policies. In fact, CB’s are bound to face collective scrutiny that can force them to be less influential on financial markets. That’s a fundamental shift from the last eight years and noteworthy for all investors.

If the US economy is perceived to grow and get healthier, then the pace of rate hike and faith in central banks can be more telling. Already, interest rates are rising in the US, as some economic improvements are perceived and mixed optimism is brewing. Rising rates inversely impacting stocks and real estate remains to be seen. Perhaps, that’s the risk for those that enjoyed the rise of asset prices due to ultra-low rates. If there is a crisis or bursting of a bubble, then a collective rage can point to the CB’s policy failures. Thus, Yellen & Co. must be a bit nervous as their reputation and institutions credibility is on the line.

‎4. China - There are many questions about Chinese growth and the impact of multiple stimulus efforts. But, the China-West relationship is rocky from political, military and trade tensions. ‎ In addition, the Trump-China relationship will be highly watched and publicized, but both sides will need to navigate closely to contain the outbursts. Surely, new trade policies or South China Sea rifts can shake markets a bit. From a fundamental point, how the earnings of global companies are impacted will be more of a direct and immediate interest to investors. So much of the global economy is intertwined into the topics that impact the Chinese market from Commodities to Interest rate policies. The fragility of the Chinese status-quo is surely a mega matter.

5. European Elections - As faith in globalization suffers severe scrutiny, the demand for Nationalism and re-defining sovereign values has grown. That said, Nationalistic parties are in more demand than recent years, which surely can change the completion of the EU as well as business sentiment. Like all topics above, the European election themes are interconnected to Macro factors. Brexit and Trump are reminders of this anti-establishment trend. Some may go that direction; others might go towards a dangerous path. Either way, that’s going to drive the perception of policy risk. No question, 2017 can embark on a new era and shift that might take a while to digest.

Accepting the Unknown

There are many factors that can alter the post-election euphoria and multi-year bull cycle. Surely, sensitivity and suspense have escalated in tandem because the global tension has yet to calm. Despite the posturing from the Federal Reserve, who kept rates and volatility low, there are real economy uncertainties, which will be confronted. The tame volatility that’s been witnessed for a while may provide the earliest hints. But even if volatility inches higher, the question will remain, how will the dust settle after near-term uncertainties? Eventually, noise is bound to resurface, and one or two events can drive the rest of the market narrative. All that said, it seems a bit wise to admit the unknown and not to overly claim it’s quantifiable. Perhaps that’s the healthy approach ahead of an action-packed period.

Key Levels: (Prices as of Close: January 13, 2017)

S&P 500 Index [2,274.64] –A intra-day high of 2,282.10 was reached on January 6, 2017. This further emphasizes the record-high trading behavior that’s been common in recent years.

Crude (Spot) [$52.37] –Appears trapped in a range between $50-54. The commodities ability to stay above $50 appears noteworthy in the weeks ahead.

Gold [$1,190.35] – Desperately attempts to bottom. The December 15, 2016 low of $1,126.95 is on the radar for both buyers and sellers. The multi-year, sluggish price action lingers especially with a move below $1,200.

DXY – US Dollar Index [101.18] – Strong dollar momentum is waning and slowing a bit. A breather here is be expected after a strong run since May 2016.

US 10 Year Treasury Yields [2.39%] – Since July 2016, the turnaround from the low of 1. 31%, has set the tone for a new trend. The re-acceleration from November lows is even more stunning, at least in the near-term.

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