Never Just One Cockroach

History suggests two immediate consequences from tightening: higher volatility and lower valuations, meaning earnings and ultimately the economy are left to drive prices. Psychologically, bulls and bears will get an answer to a question that has lingered over markets: how much of the Standard & Poor’s 500 Index’s 202 percent jump since March 2009 is sustainable without stimulus? – 12/16/15

As you probably know the Federal Reserve raised interest rates this week for the first time in over 7 years. The changes to that policy are bound to have some sort of negative repercussions exacerbated by an environment where all other of the large central banks are still in easing mode. We have spoken before about the effect of the US Dollar on Emerging Markets and commodities and those effects will only be worsened by the changes in Fed policy. We are not saying that Fed policy is wrong we are just looking out for the Piper to be paid.

 The buildup in government debt, he said, “tries to prop up the economy at the expense of the future.” Zero-interest-rate policy pushes consumption forward and changes the discounting mechanism, he said. Indeed, there no discount mechanism, he said, so you “fully value everything.”

“Once you’ve done all of those things you are quite a few yards into the tractor pull,” he said. “And that sled is getting heavier and heavier and heavier. That is why it is getting harder and harder to make money.”- Jeffrey Gundlach Doubleline Funds 12/8/15

 There is never just one cockroach. The biggest headline for us over the last two weeks is not the Federal Reserve policy change, as that was widely anticipated, but the redemption requests and subsequent suspension of those requests from the Third Avenue High Yield Fund. Third Avenue is a highly respected player in the institutional money game. This is not some fly by night Ponzi scheme. The fact is that Third Avenue got caught swimming naked when the tide went out in the high yield market. As you well know, the high yield market is dominated by energy companies and the descent of oil from its lofty perch has decimated that space. Understand that a redemption request is just investors looking to get money out of a fund and cut their losses. That is usually not a problem. However, when a fund suspends those requests they are saying that they need more time to come up with the cash. Selling too much, too quickly may upset the market for those assets and cause the fund to sell at fire sales prices. As for the broader market this can cause a cascading effect. If this fund sells at a huge discount then other may be forced to sell and we create a viscous spiral. So they put up the gates. By putting up the gates investors search elsewhere for liquidity asking others funds for cash and forcing them to sell. And around and around we go. This is what crises are made of.

The large spread between the top 10 stocks in the S&P 500 and the rest of the market is also flashing a warning signal. A bifurcation in the markets is a sign that the rally has gotten too constrained and is losing steam.

The S&P 500 has a big performance issue that should be a focus for investors: Too much of the index return is coming from too few of its stocks.

The 10 most valuable companies in the market are up roughly 14 percent as a group this year, versus a loss of close to 6 percent for the rest of the stock market.

That 20 percentage-point spread between the biggest stocks and the rest of the index is the widest since 1999, heading into the dot-com bust.

A widening of the spread between the market’s best performers and the rest of the market should be viewed as a cautionary sign. Jason Trennert Strategas Research Partners 12/9/2015

We continue to see an upswing in volatility here in the 4th Quarter of 2015. We believe that will continue in 2016.  While we are cognizant of low returns in this environment we have believed it prudent to have cash on the sidelines. We are now getting closer to putting some of that to work given lower asset prices in response to Federal Reserve policies. We expect 2016 to be a year full of volatility and opportunity. We wish you all a very Merry Christmas and a Joyous Holiday!

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 .

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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