Who Could Have Seen This Coming?

Much is being made of the move in Treasuries this week. Quite frankly we are surprised that seemingly every TV pundit is saying that no one could have seen this coming. That is simply not true. The Citigroup Foreign Exchange department certainly saw this coming as did a host of others. The thesis has been out there for months that when QE came to end we would see lower interest rates and lower stock prices and is part of what convinced us to add duration back in January. Here is what we had to say in our Quarterly Letter at the beginning of the year.

Citigroup Foreign Exchange Technicals group has done extensive research that shows, counter intuitively, that Quantitative Easing leads to higher rates during QE and that the end of QE brings lower rates on the US Treasury 10 year. Citi’s thesis is that more QE leads to a rush into higher risk assets and the dumping of bonds to the government as the buyer. The end of QE brings money back into safer assets like the US 10 year as it flows out of stocks and hot money destinations like emerging markets. 1/18/14 Blackthorn Quarterly Letter

David Tepper, founder of Appaloosa Management, made waves at the SALT conference in Las Vegas this week. Tepper, who pulled in a cool $3.5 billion in compensation last year shocked the investors by stating that this is now a “dangerous market”, “don’t be too fricking long” and that now is a “time to preserve money”, “have cash”. Tepper is a nervous long and has pulled back his exposure in the market. Why is this a big deal? It was Tepper who one of the more voracious bulls on the street alluding to what he called the “Bernanke Put”. This was the concept that as long as the Federal Reserve was putting capital into the markets, prices would only go higher. He pressed his bets throughout. Now the sudden nervousness. Markets got nervous too.

“I think we’re OK,” he said of the current investing climate, “but listen, there’s times to make money and there’s times not to lose money. This is probably (a time when) you’re supposed to think about preserving some of your money. If you’re 120 percent invested, it’s probably too much. You can still be long, but you probably should have some cash.”

Chief among Tepper’s concerns is a deflationary environment and a European Central Bank (ECB) that badly needs to ease monetary policy.

“The ECB—they better ease in June,” Tepper said. “I don’t know how far behind the curve, but I think they’re really, really far behind the curve.”

Should be an interesting summer.

Bonds are helping as we added duration. Stocks are dragging. While the summer may be bumpy we think that any retreat by stocks will be backstopped at some point by the Federal Reserve. Volatility this summer and early fall as the Fed eliminates QE could lead to nice gains come spring time as the Presidential Cycle reasserts itself. Patience is a virtue. Charts of the S&P 500, NASDAQ and Dow Jones are all approaching key levels of support. Next week may be critical.  Treasuries and Gold continue to be our risk temperature gauge. Keep an eye on the 10 Year US Treasury at the 2.5% level and the 50 day moving average on the S&P 500. Have some cash on the sidelines as Tepper suggested.

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.


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