4 AM Wake Up Call

Our return from Thanksgiving break was certainly an interesting one. Right off the bat we saw an almost 850 point drop in the Dow Jones from Black Friday until Tuesday as President Trump was quoted as saying that he saw the chances of a trade deal lessening. Markets were bailed out by a 4am anonymously sourced report that trade discussions were back on. You can’t say that this market isn’t interesting.

The tariff deadline is set for a week from today – December 15th. We expect it to pass without any grand gestures. The key to this game seems to be delay, tweet and delay some more. The Chinese are not inclined to make a deal. The Chinese government thinks in terms of decades and centuries – not the next news cycle and tomorrow’s stock market open. As far as the Chinese are concerned they have the view that Trump may be out in a year so why should they help him by making a deal. The Chinese do need to keep talks alive as they require more pork than they can get their hands on as a vicious swine fever has culled their herds. China produces half of the world’s pork supply and pork is the most consumed meat in the country. Back in the 1990’s when obtaining our Political Science degree it was common knowledge that the most feared situation in the Chinese Communist party was unrest and rebellion among its immense population. The most dangerous event would be if something happened to their pig herds and the availability of pork. Empty bellies lead to rebellion.   Alfred Henry Lewis, the American novelist, once said that only 9 meals separate mankind and anarchy.

The Chinese will delay and Trump will bellow. The jobs report on Friday bought Trump more time and has given him more leverage over the Chinese. The jobs report should also put the Fed at ease concerning the trade war and the economy. The Fed will, however, keep plying the market with QE4 until the second quarter of 2020. We would warn you that we would expect that an announcement of a Phase Trade One deal would negatively impact the market. Buy on the rumor(s) and sell on the news.

There was a chart making the rounds this week in reference to the Fed balance sheet and stock market performance. The chart implies, and we agree, that, as goes the balance sheet so goes the market. In the past nine weeks the Fed’s balance sheet has grown in eight of them. Of those nine weeks only one week saw a lower stock market. I will let you guess which week was lower.

Equity valuations keep soaring and are now in the top 10% of all time rivaling the Dot Com Era of 2000-2001. That era also had the Fed stuffing money into the system ahead of Y2K which led to the expansion and bursting of the Dot Com Bubble. Why our obsession with valuations? From valuations we can extrapolate future returns. Higher valuations imply lower future returns. Central bankers continue to push rates lower and pour money into the system pressing asset prices higher. Check out the following chart from Zero Hedge.

In the past 5 years, the S&P 500 stock index has risen over 50% and during that period operating profits for non-financial companies have declined over 15%, a drop that has always been associated with economic recessions.

GDP - S&P

Source: Bloomberg

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The Fed is pushing money into the system at a rate equal to QE1 when there was a crisis at hand. Central bankers are planning on keeping the money spigot open in 2020. It should continue to push asset prices higher as long as investors don’t lose confidence in the Fed. The music is playing. Dance closer to the door.

 

 

 

 

 

 

I think we aspire less to foresee the future and more to be a great contingency planner… you can respond very fast to what’s happening because you thought through all the possibilities, – Lloyd  Blankfein

To learn more about us and Blackthorn Asset Management LLC visit our website at www.BlackthornAsset.com .

 

 

A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill

 

Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor.

Published in: on December 8, 2019 at 6:29 pm  Leave a Comment  
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Foot on The Gas

Will the Fed ever normalize or even just stop adding liquidity? If, in 2007, you had a discussion with anyone in our industry and predicted where we would be with monetary policy in 2019 they would have laughed you out of the room. Policy at this juncture reminds us of the Weimar Republic Germany during the 1921-23 period. In preparation for WW I, the German government borrowed for the costs of the war. They would easily win the war and pay for it with the reparations they would demand from their defeated enemies – as was the custom of the day. Turns out taking the Kaiser and giving the points was a bad idea. Now, having lost the War to End All Wars the Germans were forced to pay up – not collect. What could they do? They decided to print money, buy foreign currencies with it and pay back their debts. Only thing is – that had a double – whammy effect on the German currency. The German currency went lower because they were printing more of it and the foreign currency they bought went up in price driving the German currency even lower. Inflation got so out of control that the cost of bread would double by noon. The problem was that the only thing worse than continuing the policy was stopping it.

The Federal Reserve is in the same position as the German government. The only thing worse than continuing QE is stopping and reversing QE.  There is a clear result to their stopping and/or reversing QE. Markets will go down. If markets go down the corporate debt market will seize up. If the corporate debt markets seize there are no more buybacks and the support pillars of the stock market are removed. Remove those and you lose consumer confidence. Lose confidence and the economy spirals. We had a bump in the road in the money markets earlier this year and, fearing disruption in the markets, the Fed resumed QE at a faster pace than QE 1, 2 or 3 all with the S&P 500 at all time highs. Does anyone really believe they will be able to stop QE let alone reverse QE? Stop QE and you are faced with an economic recession, if not, depression. Don’t stop QE and you are left with a gravity defying stock market that has lost its logical underpinnings. We are beginning to believe that we have to have a monstrous blow off top in equities in order to convince government regulators to take their foot off of the gas pedal.

There is a palpable feeling of FOMO in markets as we approach year end. We have entered the seasonally favorable period for stock market returns and investors are chasing asset prices higher. It doesn’t help that corporate buybacks are hitting all time levels while the amount of stock shrinks propelling stocks ever higher. Equities are bit over bought here and due for a rest but FOMO is strong as professional investors lag further behind benchmarks.

Bonds and stocks diverged a bit in the past two weeks in a risk off pattern. We feel that corporate debt and high yield in particular hold the key. A massive amount of debt is piled in the BBB region. Should that debt fall into junk territory corporate buybacks could suffer and they are the linchpin of markets. High yield seems to be struggling here as distressed investors look at the junk laden energy sector as their next playground.

“if the economy encounters a downturn, we could see a good deal of corporate distress. If corporations are in distress, they fire workers and cut back on investment spending. And I think that’s something that could make the next recession a deeper recession”. Janet Yellen former FOMC Chair

Small caps and transports refuse to budge out of their recent ranges. It is getting hard to argue though as the S&P break higher is dragging financials, tech and health care with it. The Fed is dragging us all back into markets with their adding to liquidity.

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I think we aspire less to foresee the future and more to be a great contingency planner… you can respond very fast to what’s happening because you thought through all the possibilities, – Lloyd  Blankfein

To learn more about us and Blackthorn Asset Management LLC visit our website at www.BlackthornAsset.com .

 

 

A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill

 

Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor.

Froth

We are always looking to history as our guide as markets can be an emotional animal and we, as humans, repeat our patterns. From DataTrek, by way of Arthur Cashin, comes Nick Colas and Jessica Rabe’s analysis of what follows for markets after a good year. For the last 90 years the average total return for the S&P 500 after a 25% gain is 9.4%. The odds of a really big loss for the next year are quite low from a historical perspective but the odds of having a positive year for the S&P are slightly less than normal. Good news – bad news. Huge advances in the S&P 500 seem to bring forward returns but also the positive vibes keep coming.

Small caps and transports refuse to budge out of their recent ranges. It is getting hard to argue though as the S&P break higher is dragging financials, tech and health care with it. The Fed is dragging us all back into markets with their adding to liquidity. Know the risks. Bank of America nails it here with their thoughts on the market. The music is playing and we have to dance we just get the feeling that at some point there won’t be enough chairs.

the last financial crisis was in part fueled by the Fed’s reluctance to tighten financial conditions as housing markets showed early signs of froth. It seems the Fed’s abundant-reserve regime may carry a new set of risks by supporting increased interconnectedness and overly easy policy (expanding balance sheet during an economic expansion) to maintain funding conditions that may short-circuit the market’s ability to accurately price the supply and demand for leverage as asset prices rise.” –Ralph Axel Bank of America

Here are some interesting observations from Michael Hartnett over at Bank of America. Apple’s market cap is now larger than the entire US energy sector. Disney’s market cap is now larger than the top 5 European banks. When divergences open up like this it usually pays to be a bit of a contrarian. Right now we are seeing investors adding to their European and Japanese holdings and rotating away from the US a bit.

Corporate insiders in the US are dumping stock at a rate not seen since right before the Dot Com bubble burst back in 2000. This is now the longest bull market in history and the GDP is about to print less than 1% which is dangerously close to contraction territory while the earnings growth for US corporations is turning negative in the fourth quarter of 2019. But since when have earnings mattered? Not since the dawn of QE in 2009.  Well, here we are again. The Federal Reserve is once again pumping money into the system at a very rapid rate and stocks are responding. The Fed has added $288 billion into the system in the past two months and will continue to add for the next six months. This is the fastest rate at which the Fed has added liquidity since 2013. So you don’t have to Google it the S&P 500 went up 29% in 2013. The market melt up in early 2018 may hold some parallels.

 

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I think we aspire less to foresee the future and more to be a great contingency planner… you can respond very fast to what’s happening because you thought through all the possibilities, – Lloyd  Blankfein

To learn more about us and Blackthorn Asset Management LLC visit our website at www.BlackthornAsset.com .

 

 

A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill

 

Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor.

What’s Driving Stocks?

As you know we have postulated for almost two years that we were in a holding pattern for stocks. November has shown some promise in breaking out of that slump but there are still some key segments of the market that are struggling to break out to new highs – those being Transports and small caps. If you have been reading along you know that we see the breakout of these two segments of the market to be the key to divining if this break out is real.

While I am cautiously optimistic about near term prospects for the equity market those feelings are equally tempered by how late in the cycle we are for the economy and stocks. We are currently in the tenth year of what usually is a 7 year bull market. This bull market is currently the longest on record and valuations are stretched historically. The fear of a recession on the horizon is real as the latest numbers from the Atlanta Fed see Q4’s GDP looking around 1%.  I believe that any recession in the US is still two or three quarters but we continue to be underweight equities. We still see risk asymmetrically skewed to the downside. We dare not go even more underweight should the Fed engineer a soft landing (or see a Trump payroll cut in 2020) and see equities run higher.  In essence, we are trying to have our cake and eat it too. While prepared for a recession on the horizon and attendant stock sell off we will still be adding to our capital gains should stocks continue to push higher.

It is really hard to buy into this latest rally. S&P earnings are negative year over year for the past 3 quarters yet valuations continue to not only hold on but grind higher in the case of the S&P 500. While we look under the hood of the market and see that important bell weathers of the economy are lagging, in the manner of small caps and transportation stocks, you can also see that earnings growth is not driving the stock market higher it is the most recent liquidity injection from the Federal Reserve and continued massive buybacks from corporate America. 

The really big market mover recently may be Jerome Powell’s comments that he is willing to let inflation run. 

I think we would need to see a really significant move up in inflation that’s persistent before we even consider raising rates to address inflation concerns.” – Jerome Powell 10/30/2019 

The words REALLY SIGNIFICANT may be what has led to the turn higher in stocks and bond yields.

As we look to the next decade for investing the most overriding issue has to be the inflation/deflation debate. The biggest winner in an inflationary scenario will be the biggest debtor. The biggest debtors are governments. Remember – the Fed wants inflation and needs inflation. There is no other way to pay back all of this government debt. It must be inflated away. 

Things must be getting serious if Terry is putting charts in the blog this week.

Steepening of curve before recession Bloomberg

This chart courtesy of Bloomberg shows the steepening of the yield curve before the last two recessions. You can see from the shaded areas showing recessions that a quick steepening of the yield curve happened right before both events in 2001 and 2008. Could this be the third time? You can see the curve inverted in early 2000 and again in 2006. When the curve steepening reached 50 bp the recession was at hand. We are currently at 26 bp. 

According to Barron’s, US Valuations are at about 17.2 times forward earnings which is about 20% above its average. Europe is running at just about its average while Japanese stocks are well below average. Maybe US stocks have run too far for too long and it is time to look for value elsewhere.

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I think we aspire less to foresee the future and more to be a great contingency planner… you can respond very fast to what’s happening because you thought through all the possibilities, – Lloyd  Blankfein

To learn more about us and Blackthorn Asset Management LLC visit our website at www.BlackthornAsset.com .

 

A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill

Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor.

Decision Time

 Zero earnings growth, falling PMI’s and slowing GDP growth are not indicators of high times around the corner but here we go. The market has been moving sideways for 22 months – since January 2018. Perhaps, Friday was the day of the breakout. I think I need a bit more convincing as markets are stretched shorter term. The difference between this breakout and others over the last few months is that the October window is now closed. Investors know that over the last 50 years the November to May time period holds all the gains. If you had bought stocks in May and sold in November every year for the last 50 years you would have returned close to zero. If you bought in November and sold in May you would have reaped almost all of the gains in that period. Professional investors are back at work and ready to jump on a breakout in stocks.   

I am a risk manager by trade and, in general, root for the market to go down. Why? I am constantly a buyer of stocks. It is much harder to buy them with valuations so elevated and with economic indicators sliding. We have been writing for months that Trump has something up his sleeve. He knows he will not be reelected with a slumping stock market and an economic malaise. He needs spending and job growth. For months he has badgered the Federal Reserve into rate cuts and QE with his trade war being the final piece of the puzzle to convince the Fed. Now that the monetary heroin is flowing again payroll tax cuts and a truce in the trade war are just what Trump needs to get things really humming in front of the election. It is going to be an interesting spring.   All of these recent changes in policy may have huge effects down the road and adds to our thesis that a blow off top and even higher equity prices could result. We are not excited about chasing returns and momentum with valuations this high but we don’t get to choose the markets we have to invest in and invest we must.

If you follow us you know that we are always on the lookout for several leading investors whenever they speak. One of our favorites is Jeffrey Gundlach from Doubleline. While most investors just talk markets up we think Jeffrey speaks truth to markets. He gave an interview this week to a German finance magazine. We have long talked about the effect of corporate buybacks and their support of equity prices. One thing that we know is eventually that fuel to the markets will sputter. Gundlach explains the current Achilles heel of the US corporate debt market and how things may play out. 

How big is the problem (corporate bonds)?

Morgan Stanley Research put out an analysis about a year ago. By only looking at leverage ratios, over 30% of the investment grade corporate bond market should be rated below investment grade.

Is it better to own stocks then?

The US equity market will be the worst performing equity market in the world if you look at the past three major economic downturns, globally. Before each of those three downturns there was one segment of the global stock market that outperformed in a noticeable way, and the economies related to that stock market were perceived as to be invincible.

This time US stocks are crushing every other area. It’s due to some fundamentals like the better economy, but also due to tax cuts and share buybacks. In the next recession, corporate bonds will collapse, and buybacks will stop. The dollar has already topped. It may begin falling in earnest during the next downturn and US equities will lose the most. They will probably not make it back to the peak for quite a while. When the US market drops, it will drop a lot.

We agree with Gundlach that, at some point, the fuel of corporate buybacks will stumble and bring down historically elevated US equity valuations. Europe and Japan look much cheaper and may provide better risk reward opportunities going forward.

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I think we aspire less to foresee the future and more to be a great contingency planner… you can respond very fast to what’s happening because you thought through all the possibilities, – Lloyd  Blankfein

To learn more about us and Blackthorn Asset Management LLC visit our website at www.BlackthornAsset.com . 

A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill

Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor.

Lowering the Bar

The past two weeks have been filled with earnings reports, trade deal rumors and central bankers making speeches. While earnings reports have stepped over lowered bars for success earnings are still down 5-10% year over year which at presently elevated valuations should have been a bit more painful that it has been. Given that, the internals of the market are showing promise. Small cap stocks and transports here in the US are showing some strength while Europe and Japan are showing signs that they could be breaking out to higher levels. A rotation out of US high growth stocks being exchanged for value and assets flowing to a much cheaper European and Japanese markets makes sense in light of the high valuations here in the US. There even seems to be a possible bid for emerging markets given weakness in the US dollar. These rotations could make a plea for some investing capital. Our major concern is still the year end liquidity issues that seem to pop up every year around this time.

US financial stocks have shown some bounce in their step in recent days as well. Market bellwether JP Morgan is now at new highs. Further signs of a positive breakout in JP Morgan’s stock could pull money off of the sidelines and into equities. This is the strongest part of the year seasonally for stocks and investors don’t want to get left behind. The November to May time period has offered all of the gains in stocks going back several decades. The May to November time period (Sell in May and Go Away) has offered none.

While we fear a recession on the horizon we have more respect at the moment for the year end liquidity issues. Our big question right now is about the recent issues in the overnight money markets. Is what we are seeing simply liquidity issues in the repo market or is there a bank that is in trouble that no one wants to lend to? We shall see but for now we see a US President that wants to get elected hammering out a trade deal with China to boost markets further. This all while central bankers have opened up the monetary spigots in light of trade issues and slowing economy.  Once he signs a trade deal with the monetary policy heroin flowing the economy should bounce. That is the pain trade anyway.

It seems as though we are still in the midst of bear markets rolling from one sector to another. Tech earnings went stagnant two years ago. Since then it has been all about the buybacks. It might be tech and high growth stocks turn in the bear camp next with perhaps financials as the beneficiary. Investors see the signs of recession right around the corner and have lightened up on risk yet the market refuses to yield. The trading range on the small caps and transports in the US is getting tighter and ready to break one way or the other. Gold is holding its own and digesting its gains. Europe and Japan, while stuck in the mud economically, are seeing some positive action in their markets. The US Dollar may be the next key. If the Dollar begins to fall that would help a host of assets that investors would then turn to.

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I think we aspire less to foresee the future and more to be a great contingency planner… you can respond very fast to what’s happening because you thought through all the possibilities, – Lloyd  Blankfein

To learn more about us and Blackthorn Asset Management LLC visit our website at www.BlackthornAsset.com . 

A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill

Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor.

Down the Rabbit Hole

Why, sometimes I’ve believed as many as six impossible things before breakfast.

The White Queen, Alice Through the Looking Glass, by Lewis Carroll

Investors now buy equities not for future growth but for current income, and buy bonds to participate in price rallies – Bank of America

While believing the impossible may help foster the imagination and lead to new ideas believing the impossible in investing is a sure way to the poor house. Down the rabbit hole we go. In this low rate environment it is easy to think perhaps I will just buy IBM. It has a 4.3% dividend. That’s higher than I can get in bonds. That yield can disappear pretty quickly. IBM is down 26% from its highs in early 2017. Not picking on IBM or giving advice – just an example. Know what you own. If a dividend is high it is probably for a reason- and not a good one. The world is upside down and investors are chasing yield where they once chased return and return where they once chased yield. Reaching for yield is like reaching for that last apple far out on the limb.

According to the latest research from Goldman Sachs buyback announcements and purchases are declining year over year. This makes sense as the Trump tax cuts and repatriation has run its course. As you know we feel that buybacks have been THE fuel levitating markets. That fuel, while not running dry, is losing some punch.

The economic data continues to be sluggish as the trade wars create more ripples. Trump needs a win. He knows that he will not have a second term if the economy turns south in the next 12 months. A trade deal – any trade deal will be necessary. Due to the trade war with China the Fed has responded by pushing rates lower and a renewed QE.  That is now wind at Trump’s back. Once he signs a trade deal with the monetary policy heroin flowing the economy should bounce. That is the pain trade anyway. Investors see the signs of recession right around the corner and have lightened up on risk yet the market refuses to yield. The trading range on the small caps and transports in the US is getting tighter and ready to break on way or the other. Gold is holding its own and digesting its gains. Europe and Japan, while stuck in the mud economically, are seeing some positive action in their markets. The US Dollar may be the next key. If the Dollar begins to fall that would help a host of assets that investors would then turn to.

We released our Quarterly Letter titled Character earlier this month. We hope that you have had a chance to read it. If not here is the link. It goes into greater detail where we think we are in the economic and market cycles and what we are doing about it. While the last two weeks have been full of noise and bluster nothing has changed. We are still firmly entrenched in our trading range between 2850 and 3030 on the S&P 500. We believe that small caps and transports hold the keys to the market here and must be watched closely. Their ranges are getting tighter and tighter and are due for a break out. We still think that the risk in stocks is to the upside for the moment even though we are firmly in the recession is coming camp. Strange days.

I think we aspire less to foresee the future and more to be a great contingency planner… you can respond very fast to what’s happening because you thought through all the possibilities, – Lloyd  Blankfein

To learn more about us and Blackthorn Asset Management LLC visit our website at www.BlackthornAsset.com .

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A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill

 

Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor.

Red Flags

We have been working on our quarterly letter and will look to have it out next week so this week’s blog is a short one. As if we didn’t have enough to worry about in light of a slowing global economy, trade wars and impeachment proceedings we got an email this week that may win the Red Flag Award for 2019.

Christmas has come early this year. 

I can now do No Doc Commercial Real Estate Loans for you or your clients. 

We will not ask borrowers for tax returns, bank statements, leases, rent rolls or historical operating statements! 

For a refi or cash-out, all we need is a completed application and a credit report. 

If you are buying commercial real estate, include a purchase contract to those docs and that’s it.

Oh boy! No doc loans? Didn’t we do this already? Artificially low interest rates downside is the inefficient allocation of resources and asset bubbles. Are bankers and shadow bankers reaching too far out on the limb?

The S&P 500 has closed down two weeks in a row but, in light of the Saudi oil field attacks, that may go down as a slight win for the bulls. While the S&P 500 is still holding strong to its rising trend small caps and transports have struggled and may have failed in their breakout. In our experience from failed breakouts usually come fast moves in the opposite direction. The bears have the ball. Key economic bell weathers like JP Morgan and FedEx have failed in their breakouts too and that has us cautious. Overall, stocks are still stuck in neutral. Gold has stubbornly maintained its gains and that is impressive -especially when you take into account the recent strength of the US Dollar.

I think we aspire less to foresee the future and more to be a great contingency planner… you can respond very fast to what’s happening because you thought through all the possibilities, – Lloyd  Blankfein

To learn more about us and Blackthorn Asset Management LLC visit our website at www.BlackthornAsset.com .

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A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill

 

Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor.

Fill ‘er Up

“There are decades when nothing happens; and there are weeks when decades happen.” — Lenin

For the past few weeks we have fielded more than the usual number of calls from clients as they saw the Dow Jones rise and fall by hundreds of points at a clip. We gave them reassurance that we were on the case and markets were still stuck in their trading range of the past year and a half. This week, while maybe not as extreme as Lenin’s famous quote, was another deal entirely. Ironically, from the outside it would appear that nothing of importance had happened at all.

There was a massive shift in sentiment in the parts of the market investors were favoring. Growth stocks took a tumble while long hated value stocks began to rise. The discrepancy between growth and value had grown historically large and this was the markets way of correcting it. Rule #2 When everyone thinks something is going to happen something else does. Suddenly, value stocks, financials, energy, and small caps were back in vogue – especially energy.

This was the best week for Small Caps since Dec 2016 and best for Transportation stocks since Dec 2017. We have been warning that your ammunition needed to be held until small cap stocks and transportation stocks were able to break out of their recent doldrums. They now have. A good portion of the recent rally was due to short covering. That brings out a bit of a caution flag. If small caps and transports can hang in there next week and continue their break out then money managers will be forced back in to the market. Managers are under invested as it seems everyone expects the recession to hit any day now. When everyone expects something to happen something else will. One word of warning – the market will perform well as the yield curve begins to steepen. The Fed is meeting this week and that should help push that along, however, the steepening of the curve is when the danger starts. Market valuations are extremely elevated. Caution must be paid – but for now – the bulls have the ball.

This week we saw inflation rear its head with a hotter than expected CPI accompanied by increased wage growth. At this point, late in the cycle, we have the ECB, China, Japan and the US lowering rates and increasing liquidity with the S&P 500 near all time highs. Combine that with expanding wage growth and higher CPI data. Inflation is coming and with it the market is rotating towards financials, energy and small caps. Why is the Fed lowering rates? The yield curve is one answer. We think that they foresee a yearend liquidity problem on the horizon. Kind of reminds us of Y2K when the Fed flooded the system with liquidity and the market, flush with cash, soared to create the final stage of the Internet Bubble. Move forward but with caution.

Before we go any further this is where we need to tell you to stop what you are doing and go fill your car up with gasoline. A drone attack on the largest Saudi oil field has shut in production of approximately 5% of the world’s oil. Saudi oil is some of the finest, cleanest oil on the planet and not easily replaced. Repairs are already underway but prices will be rising in the next few hours and certainly by tomorrow morning’s commute.

lighthouse

I think we aspire less to foresee the future and more to be a great contingency planner… you can respond very fast to what’s happening because you thought through all the possibilities, – Lloyd  Blankfein

To learn more about us and Blackthorn Asset Management LLC visit our website at www.BlackthornAsset.com .

A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill

Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor.

Patience

We have cautioned our clients about the evils of emotions when investing. This past month has given us a good example of why it is important to keep your wits about you and remaining calm while the roller coaster of stocks runs up and down careening about. It is not always easy to remain calm when we are assaulted on a daily basis with the news of another 600 point decline on the Dow Jones and evidence of a recession on the horizon. The reality is that if we are properly allocated with a diverse set of assets we have bought protection against a recession and subsequent stock market downdraft.  Well, our patience has paid off – for the moment. This week saw a modest increase in prices for the S&P 500 and perhaps a breakout of sorts. The S&P rose 1.8% to close at 2978. Recently, we wrote that we were cognizant of a smaller consolidation range on the S&P between 2830 and 2960. The breakout above that 2960 level now lends the advantage to the bulls and given history that would portend a rise into the old highs near 3025.

It is interesting to note that in the midst of a trade war between the two biggest economies on the planet, faced with a global recession and elevated stock market valuations stocks have managed to stay within 5% of their all time highs. While valuations have not retreated from their historically elevated positions what we don’t have is sky high investor sentiment. Investors are pretty cautious right now as corporate buybacks have helped keep stocks from slipping. Investors, having fled this market in anticipation of a recession may be forced back into this market if prices remain stubbornly elevated.

While we have seen a series of higher lows for the S&P since December of last year our confidence in the stock market would be greatly improved if new highs included the participation of small cap stocks and transportation stocks. Small caps and transports are still stuck in neutral. Keep an eye on FedEx. If FedEx can break out of its downward trend then perhaps stocks are on to something. I need more proof of stocks behaving before recommitting capital – especially at this time of year.

It seems as though Wall Street is now buying bonds for capital appreciation and stocks for yield which is in direct contrast to how these investments were intended. Be very careful chasing yield here especially for retirees. Chasing a 5% yield can easily turn into a 15% capital loss. We are turning an eye towards Europe as those valuations are much lower and yields on stocks are much higher. This week was a consolidation week for precious metals and US Treasuries as their recent meteoric rise took a rest.  While we think precious metals are in for a multiyear up trend this past week gave an indication that perhaps some rest is needed.

I think we aspire less to foresee the future and more to be a great contingency planner… you can respond very fast to what’s happening because you thought through all the possibilities, – Lloyd  Blankfein

To learn more about us and Blackthorn Asset Management LLC visit our website at www.BlackthornAsset.com .

 

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A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill

 

Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor.

Published in: on September 8, 2019 at 2:42 pm  Leave a Comment