This House is Rocking

Janet Yellen seems petrified of scaring the market. We have news for her. At some point she will. It’s her job to take away the punchbowl when the party gets started and this house is rocking. The Federal Reserve uptick in interest rates, while widely telegraphed, still managed to surprise markets by it being couched in the most dovish way possible.

How did Janet Yellen do that? The Fed has been consistent in stating that 2% inflation was a target of theirs. In her latest press conference, Yellen made it clear that the 2% target is a target but not a “ceiling”. Additionally, her comment that the return to 2% inflation should be “sustained” made it clear to the market that the Fed is okay with letting the economy run a little hot.  Janet Yellen may have to talk back the market’s reaction this week from her dovish rate hike. The market reacted positively which we expected but we did not expect the extent of that positive reaction.

surprisingly, financial markets took the meeting as a large dovish surprise—the third-largest at an FOMC meeting since 2000 outside the financial crisis, based on the co-movement of different asset prices.” – Goldman’s Jan Hatzius 3/15/17

The risk is that the market and economy may overheat. There is also a risk that the Fed could throw cold water on it if Trump’s fiscal and tax objectives get bogged down in the swap which we think they already have. The Fed is damned if they do and damned if they don’t. It’s a guessing game with imperfect information. The kind of decision a trader makes and not the kind that academics make well. The time is ripe for a policy error. Now whether that error takes the market higher or lower depends on the action of the Fed. Right now by portraying this rate hike as dovishly as they did the animal spirits in the market are taking things higher. Next week should tell us a lot more about how the market feels.

The Fed is boxed in. A canary in the coalmine, small-caps keep sagging. The Russell 2000 dipped into negative year-to-date territory on Tuesday morning. There was nary a mention of the debt ceiling that was reached this week. This is going to be a problem and, possibly, with the rancor in DC, it could become THE problem. The Treasury only has about one month’s cash on hand. Less than Google or Apple have on their books.

Yellen raised rates but couched it so dovishly the market rallied. She is afraid of a negative market reaction. She should be afraid of a positive market reaction as the real reason she raised rates was to cool off the market. Market seems ready to continue its running with the bulls as we suspected. This could be the last 10%. Caution. We are pressing the bets with our more aggressive clients but pulling back for our more risk averse.

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 March 18, 2017 at 9:00 am  Leave a Comment  
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Until Something Breaks

Until something breaks. The old Wall Street adage is 3 hikes and a stumble. In his latest webcast this week, Jeff Gundlach, the current bond maven on Wall Street, made it clear that he expects the Federal Reserve to begin a campaign of sequential interest rate hikes until “something breaks”. In Cashin’s Comments this week, Arthur notes that David Rosenberg’s (Gluskin Sheff) research shows that since World War II, the Fed has embarked on 13 tightening cycles. Ten of those cycles led to recessions. While we do not see a recession on the horizon we do believe the Fed is behind the curve and may need to hike more aggressively than they would like. That will create imbalances throughout the system much like the sequential rates hikes in 1982, 1987, 1990, 1997 and 2007. The crises ranged from the Latin American debt crisis in 1982 to the S&L crisis in 1990 to the subprime debt crisis of 2007.

The question remains, will history prove right or are things different this time? I always hesitate to say “things are different this time” because that is always the death knell. It’s like when Jim Nantz says, “this kicker hasn’t missed an extra point all season” and the kicker then goes on to botch the critical extra point.  The reality is that the Fed may be so far behind the curve that this rate hike, the third of this cycle or even the fourth rate hike doesn’t affect the market but sooner or later the Fed will hike and something will break. They are academics and they never anticipate change. It’s like driving using the rear view mirror (h/t BR). The data is from the past and doesn’t show what is happening now. They will hike until something breaks. If they do not raise rates next week the animal spirits in the market may take equity valuations even higher. The Fed is boxed in.

Valuations are quite extended and perhaps rate hikes will bring things gently back to earth. Much is being made of the idea that there seems to be a global upturn in economies. The global upturn and Trump’s policies could provide more cover for the Fed to raise rates to try and cool valuations off. You have to remember that they are not the only central bank adding fuel to the fire. Japan, China and Europe are all doing the same. We see some cracks in the foundation as High Yield and small cap stocks lagged this week. It is no surprise that high yield struggled as West Texas Crude dropped 9% on the week to finish under the psychological $50 mark.

Momentum is very powerful and still in the hands of the bulls. Lots of positives out there but things are priced for perfection. Keep an eye on crude next week. Lower crude could continue to pressure high yield. High yield and oil could be the canary in the coalmine.

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.

Warren Buffett’s Latest Wisdom

One thing we look forward to every year is Warren Buffett’s annual letter that comes out in February. Here is more sage long term investing advice from the Oracle of Omaha.

Moreover, the years ahead will occasionally deliver major market declines – even panics – that will affect virtually all stocks…During such scary periods, you should never forget two things: First, widespread fear is your friend as an investor, because it serves up bargain purchases. Second, personal fear is your enemy. It will also be unwarranted. Investors who avoid high and unnecessary costs and simply sit for an extended period with a collection of large, conservatively-financed American businesses will almost certainly do well.

We, at Blackthorn, as Registered Investment Advisors, have a fiduciary obligation to our clients. We are very conscious of high and unnecessary costs and how they drive down our clients returns. Patience, discipline, a well thought out investing plan and low costs. Do yourself a favor and ask your advisor to explain any and all fees that you pay. Mutual fund fees, 12b-1 fees, Brokerage fees, Investment management fees, and Wrap fees are all examples of unnecessary fees and costs.  If you are using a broker and they cannot easily and transparently list and explain your fees and costs to you then move on to someone who has a fiduciary obligation to you.

Beware the Ides of March is what you will be seeing all week in the investing media headlines. March 15th is fraught with stumbling blocks this year. A Dutch election is scheduled for this week which could move markets. More importantly, the Federal Reserve is meeting and March 15th is the day we reach a debt ceiling deadline here in the United States. The Federal Reserve will be meeting and they seem to be boxed in a corner. Rate hike odds according to Bloomberg are pushing 90%. This is the key move we have been highlighting for 2017. If the Fed does not raise rates markets may soar even higher as retail investors and animal spirits push into the market. If the Fed does raise rates it could pour some cold water on investors and slow the rally.

Retail investors are pouring into ETF’s as shown by the fact that the SPY had its largest inflow since 2014 this week and its second largest daily inflow since 2011. As per a report from CNBC company insiders are dumping stock into the marketplace at accelerated rates. For the moment caution must be heeded. Wall Street lore suggests that the third rate hike is when markets start to falter. A rate rise in March 15th would be the third rate rise of this cycle with the stated goal of two more rate hikes in 2017. History rhymes. It does not repeat. It could be different this time as we are starting from such a low level. For now, momentum is with the bulls but if retail investors are in charge things could change very quickly.

Stocks are still extremely overbought but this week they showed some slowing in their ascent. Stocks have run a long way and should stop to rest and acclimate to their new elevation. Finally, this week we saw a close in the S&P more than 1% away from its previous close. We have now not seen a move 1% lower in over 90 sessions.  Animal spirits are running high as retail investors are pouring into ETF’s like the SPY. We continue to be wary of market structure and overreliance on ETF’s. Late day marches higher in SPY are being blamed on retail buyers late to the party. Know what you own. No pushback on the idea that Germany should leave the Euro. Need to follow that one further down the rabbit hole.

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.

 

Back to the Future – 1987 and Trump

The Trump Rally continues as we expected. Given our thesis in our January Letter the possibility of a policy error by the Federal Reserve and/or the Trump Administration looks to be increasing. We believe that a policy error could set the stage for a substantial rally and then fall ala 1987. 1987 should not be looked at in fear but in anticipation of an opportunity. The table looks like it is getting set. Combine the clamor and excitement over deregulation and tax reform with a slow moving Fed and you have room for the Animal Spirits to run as investor euphoria takes hold. A 30% run from the lows before Election Day would put us squarely in Bubble territory as the S&P 500 would approach the 2750 area. A subsequent 30% retreat would bring us back to the 2000 area. Currently at 2367 on the S&P 500 one can see the potential for misstep by exiting one’s holdings completely and trying to time reentry. One solution is to dial back risk as you see markets rising and adding when the risk premium is more in your favor. Always make sure that you have the ability to buy when discounts come.

United States 10 year yields peaked at 2.6% in mid December and have been steadily falling back to the 2.3% level. We still think that the lows are in for the 10 year but the steady drip lower in yields has us concerned. The bond market is the much wiser brother of the stock market. The actions in the bond market have us thinking that investors see risk on the horizon. 2 year bond yields in Germany have reached new lows of negative (0.90%). NEGATIVE!! You buy the bonds and pay the government!

The Fed is struggling to make the March meeting look Live. The Fed has proposed that they will raise rates three times in 2017 and that just might not be possible if they do not raise rates in March. We believe March is the first key to understanding where equity markets are headed. If the Federal Reserve drags their feet and does not raise rates at the March meeting equity markets could overheat. Fed officials will then be forced to overreact at later policy meetings as they get behind the curve. The time is ripe for a policy error and markets could react swiftly.

From our good friend and mentor Arthur Cashin’s Comments February 23, 2017.

Is The Past Prologue? Maybe We Should Hope Not – The ever vigilant Jason Goepfert at SentimenTrader combed his prodigious files to see how many times the Dow closed at record highs for nine straight days. Here’s what he discovered: The Dow climbed to its 9th straight record. Going back to 1897, the index has accomplished such a feat only 5 other times. The momentum persisted in the months ahead every time, with impressive returns. But when it ended, it led to 2 crashes, 1 bear market and 1 stretch of choppiness. The five instances were 1927; 1929; 1955; 1964 and 1987. Here’s how Jason summed up his review: Like many instances of massive momentum, however, when it stopped, it stopped hard. Two of them led up to the crash in 1929, one to the crash in 1987, one to the extended bear markets of the 1960- 1970s and the other a period of extended choppy price action. So a little something for everyone there.

Momentum is towards higher prices. Stocks are extremely overbought. The S&P 500 has not seen a close of up or down more than 1% in over 50 sessions. Complacency is high. Machines seem to be running the market. Right now we are wary of market structure and overreliance on ETF’s. Know what you own. Keep an eye on bonds both here and in Europe. Europe is bubbling again. What if Germany left the euro? Discuss.

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.

Trump Train or Bulldozer?

All eyes are on Trump and Washington DC as the Trump Train rolls through our capital. Trump has been even more aggressive in using Executive Orders and in speaking to foreign leaders than most suspected and that has the Street on edge. Maybe we need to rename the Trump Train to the Trump Bulldozer. While most eyes are on Trump we are increasingly focused on the Fed. The Fed must attempt to act in concert with the President and his fiscal policy to avoid overheating or stalling the economy but good luck to them anticipating his next move. The Fed has made noise in recent weeks that perhaps it could shrink the size of its portfolio. The Fed has been consistent, in that, there was an inherent belief at the Eccles Building that the Fed did not need to shrink its balance sheet and that doing so would be the last maneuver in its process of normalizing rates. Ben Bernanke, former Fed Chairman, took the time out to explain in his blog why that is simply not a good idea. Could it be that politics are playing a role at the Fed?

…best approach is to allow a passive runoff of maturing assets, without attempting to vary the pace of rundown for policy purposes. However, even with such a cautious approach, the effects of initiating a reduction in the Fed’s balance sheet are uncertain. Accordingly, it would be prudent not to initiate that process until the short-term interest rate is safely away from the effective lower bound. 

…the FOMC may still ultimately agree that the optimal balance sheet need not be radically smaller than its current level. If so, then the process of shrinking the balance sheet need not be rapid or urgently begun.  Ben Bernanke

 Why is the Fed now talking about shrinking its balance sheet and not raising rates? We would like to see more consistency from the Fed. They have insinuated that three rates hikes are due this year. After taking a pass on raising rates this week and not setting the table for one in March the market is now pricing in just two rate hikes. The first rate hike is due in June and the second in December. If you have not read our Quarterly Letter you can take a peak for a further discussion on the topic. The short version is, if the Fed raises rates too slowly Trump’s policies may overheat the stock market which is at already historical valuations.

 If Fed Speak can’t jawbone a March rate hike back onto the table, policymakers will have precious little room for error to make good on their promised three rate increases for the remainder of the year. Danielle DiMartino Booth

February is the worst performing month in the October – May period but investors are heavily loaded up on equities regardless.  By way of Arthur Cashin , here are the widely followed Jason Goepfert’s notes on the market’s latest gyrations or lack thereof.

 After spurting to a new all-time high in late January, the S&P 500 has had a daily change of less than 0.1% for five of the six sessions since then. That’s almost unprecedented, but there have been times when it has contracted into an extremely tight range after a breakout. Several of those have occurred in just the past few years, and all of them preceded a tough slog for stocks over the medium-term. Hedge funds are betting that the rally continues. Exposure to stocks among macro hedge funds is estimated to be the highest since July 2015 and the 4th-highest in the past decade. The three other times it got this high, stocks struggled as the funds reduced exposure and eventually went short.

Stocks have stalled. Investors are heavily exposed to equities. February is not the best month for equities so investors aren’t expecting much. The market has a way of surprising you. Could the market finally be ready to make a move? Investors seem to be heavily tilted to the rally side of the boat.

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.

High and Rising

“Is Trump aggressive and thoughtful or aggressive and reckless?”

– Ray Dalio  Davos World Economic Forum 1/18/17

And we sit and we wait. How will Trump preside? The market and market players would have been more at ease with a Clinton presidency. She would have been easier to predict. Trump is different. He does not have years of governance or position papers in order for us to decipher his next move. Judging by his Inaugural Address, which will be forever known as the American Carnage speech, we can see that he intends to be aggressive and populist. The question remains is he going to be thoughtful in his aggressiveness or reckless? Is his aggressiveness just the first shot in a never ending negotiation? We get the feeling that everything Trump does is a negotiation and everything he says is a means to an end in that negotiation. Will it be a thoughtful negotiation or a reckless one? Businessmen like Trump tend to get their way and get it quickly. Let’s see how he feels after the first 100 days of getting bogged down in the swamp. What starts off thoughtful could become reckless.

If it feels as if we have been waiting two years for some resolution to the current market environment it’s because we have. With the exception of a one month rally that started on Election Night 2016 the stock market has gone nowhere since the ending of QE3 in late 2014. Central bank policy here in the US has been one of tightening and that has kept a clamp on equity pricing. It is with the possibility of an administration that would spend fiscally to stimulate the economy along with committing to tax reform and deregulation that the market has seen further fuel for the latest rise in equity prices.

If you haven’t read our Quarterly Letter the synopsis is that the combination of experimental central bank policy and the new administration’s stated goals raises the odds that we are going to have some sort of error in monetary and/or fiscal policy. Any policy error could resolve itself in one of two ways. If central banks drag their feet and raise rates too slowly then that policy error could insight animal spirits and drive equity valuations even higher, possibly to bubble like valuations. Raise rates too quickly and equity prices fall sharply. The current populist rhetoric has us thinking of the 1930’s. The 1930’s had tremendous rallies and stumbles in the stock market. Not to say that we will repeat the pattern of the 1930’s but things certainly rhyme with talk of income inequality, trade barriers and populist rhetoric.

Equity valuations are high and bond prices could be in bubble territory. We do not think equity prices are in bubble territory yet. We continue to lean away from bond like equities and more towards seeking value where we can find it. As for bonds, we believe the bottom to be in for yields in the 35 year bull market. Our duration is quite low and we look forward to rising bond yields as they will allow us to reinvest at higher yields.

Keep an eye on Washington and on Twitter. In the next 100 days we may find out if Trump is going to be thoughtful or reckless. The idea of the return to the 1930’s does not make us feel warm and fuzzy but we believe that the pendulum swings to extremes and back again. A populist uprising is the natural evolution of globalization. It should be expected that once populism’s peak has been reached the pendulum will swing back but for the moment Trump and populism are in full swing.

If you would like to read more of our thoughts and a deeper dive into what we see coming in 2017 follow the link below to our website and our First Quarterly Letter of 2017.

http://blackthornasset.com/investment-philosophy/outlook-qtrly-letter/

 

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.

 

When Everyone Agrees

Here is a short blog today as we are currently writing our end of the year letter and formulating our investment thesis for 2017. Bob Farrell was an absolute legend during his 5 decades on Wall Street and finished his career on the Street as the Chief Strategist at Merrill Lynch. Farrell encapsulated his 45 years of experience in his widely distributed 10 Rules for Investing.  As our thoughts turn to what is going to happen in 2017 we find ourselves turning to his sage like wisdom. While they are all of equal importance we find ourselves drawn to #9 as 2017 dawns.

  1. Markets tend to return to the mean over time.
  2. Excesses in one direction will lead to an opposite excess in the other direction.
  3. There are no new eras — excesses are never permanent.
  4. Exponential rising and falling markets usually go further than you think.
  5. The public buys the most at the top and the least at the bottom.
  6. Fear and greed are stronger than long-term resolve.
  7. Markets are strongest when they are broad and weakest when they narrow.
  8. Bear markets have three stages.
  9. When all the experts and forecasts agree, something else is going to happen.
  10. Bull markets are more fun than bear markets.

Seemingly, every single investing professional that we read or talk has the same expectations for 2017. Experts see a January dip being bought and Wall Street’s best and brightest see 2017 returning a rather staid 5% on average according to Barron’s. We have a funny feeling that isn’t quite how it’s going to work out. When everyone agrees – something else will happen. We will be back next week with our thoughts on how we feel it is going to work out. Hope you have a healthy, happy and prosperous 2017!!

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.

 

Buckle Up

In the 1st Quarter of 2017 it will mark 8 years of the bull. Valuations are elevated to say the least but new policies from the White House and Republicans may give another boost to the market. A new resident at 1600 Pennsylvania Avenue can introduce risk to the market. A new leader in the Executive Office may prefer to take a recession or market rout early on in their term in order to blame the other guy. But this new leader seems to be unlike any other we have ever seen. In the short term moving into Q1 we think that there may be some buyer’s remorse on the Trump win. Not in relation to Trump (we are agnostic politically in terms of making investment returns) but in relation to getting those policies of decreased regulation, lower taxes and the repatriation of funds actually passed. The Supreme Court may have to come first.

January could find some bumps in the road but once a bull market gets this far we expect it to end in spectacular fashion. Two years come to mind that took place in a rising interest rate environment – 1981 and 1987. In 1981 Ronald Reagan came into the Oval Office with great expectations and saw stock prices up 5% in the first quarter of his Presidency.The market then fell over 19% in Reagan’s first nine months in office. While this does rhyme somewhat with the Trump Rally the landscape was very different in 1981. Although 1981 was a period of rising interest rates we saw a nation that was struggling with a 14 year bear market and an economy that was treading water with Fed Fund rates in the early teens and rising. 1981 was an environment of low valuations and high interest rates which is just the opposite of what we have today.

A year that might have more significance would be 1987. At the dawn of 1987 share prices had appreciated more than 100% from the lows put in 5 years earlier and the year began with a bang. The Dow Jones would be up 35% by August of that year. While the Federal Reserve was raising rates euphoria ran wild on Wall Street with seemingly daily mergers creating wealth for shareholders. “Animal Spirits” of a rising stock market took hold and shares ran higher with investors fearing that they were being left behind and easy money was being made on Wall Street. 2017 could bring something very similar. Investors are anxious as valuations are historically elevated and, while not wanting to take on added risk, there is a fear of being left behind. According to Sir John Templeton bull markets die in euphoria. We are at the point where we think this market is close to euphoria and it being more likely that this bull move ends with a bang and not with a whimper. While valuations have us cautious and protecting against negative shocks to the system what we could see is a shocking move higher.  

In Jeremy Grantham’s work on bubbles he postulated in June of last year that the market could run up to close to 3000 on the S&P 500 before breaking under the weight of excessive bubble – like valuations. That would be about 30% from here.

This week it became evident that Trump’s win could give rise to policies that would provide the Fed the cover that it needs to be more aggressive in raising rates. In their first post election meeting Janet Yellen and the Federal Reserve are predicted 3 interest rates hikes in 2017 rather than the 2 expected previously. While we all know the Fed is notoriously inept at predicting anything its current projections show a more aggressive hawkishness from its previous stance. This could help normalize interest rates into the range of 2-5% that the Fed prefers. This would be healthy from a longer term perspective and give the Federal Reserve ammunition should another crisis arise but it may produce some bumps in the road near term. We think that this normalization would be a net positive by giving business owners more confidence and more impetus to invest in their organizations which in the long term would be supportive to jobs and the economy.  

US Treasury rates on the 10 year are hovering around 2.6% as they seemingly stabilized this week. As far as equities go investors kept their wallet on their hip this week and did not drive the market into further overbought territory. There is some angst over the end of the year and the memory of the last several January’s which saw equities move lower. We expect investors are ready and willing to buy the next dip. That dip will probably not be pronounced and may provide kindling for the animal spirits to drive the market higher in 2017.   

Chinese may be struggling as they saw had debt and currency issues this week. Their currency is falling rapidly as they try to maintain control. China’s economy and their relationship with the US is shaping up to be THE story of 2017.The Saudi’s still wish to see a higher oil price at least until the Aramco IPO gets floated in 2017. They will try and keep oil stable and rising until then. Watch the Aramco IPO for clues as to oil’s direction. Markets are still overbought and Santa has not even arrived yet. Market pundits are seemingly all calling for a low return year. What you expect is not usually what you get when it comes to the stock market. When everyone is leaning one way we lean the other. We see volatility coming back and some wide swings up and down. Buckle up.   

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.

Bulletproof

If something cannot go on forever, it will stop. – Herbert Stein American Economist

Herbert Stein was an American Economist who worked in several White House administrations and was, more famously, the father of the actor Ben Stein. (Ferris Bueller’s Day Off – “Bueller? – Bueller?”) If Mr. Stein were still with us he might find his famous quote useful this week. What we had was another 5 days of trading and another 3% higher for the S&P 500. Investors continue to plow into financials, industrials and materials while moving away from bonds and bond like equities such as utilities and real estate. Investment professionals are afraid of being left in the dust and having clients see that their portfolios don’t include the latest outperformers so they are adding them at a heady clip. It is the time honored tradition called “Window Dressing”.

Trees don’t grow to the sky and what cannot continue – won’t. David Rosenberg from Gluskin Sheff was quick to note this week that Reagan’s honeymoon lasted 6 months and 6% before seeing the market fall 25% over the next two years in the face of a rising dollar and rising bond yields. Sound familiar?

Monetary policy has been responsible for the majority of the gains in the stock market since the crisis began in 2008. The Federal Reserve pulled forward returns in seeking to engage “animal spirits” in the stock market to raise valuations. The belief was that rising asset prices would help the economy by shoring up balance sheets with higher valuations and by engendering decision makers with the confidence that higher prices would bring. Fast forward 8 years and we are truly seeing “animal spirits”. Our overriding question over the last 8 years is what happens when the monetary policy accommodation rug gets pulled out from underneath the investor? A decrease in monetary accommodation here in the US will only send the US Dollar higher, decrease asset values, and exacerbate geopolitical uncertainty in emerging markets while increasing volatility in asset pricing around the globe. We are starting to see central bankers around the world attempt to withdraw accommodation. File this one under” be careful what you wish for”.

Two things are being bandied about as fact. One thesis that traders seem to be buying into is the “Inauguration Day Trade”. Traders believe, as proffered by Jeff Gundlach, that this rally will peak before Inauguration Day. The second is that bond yields in excess of 2.75% on the 10 year will cause stock prices to fall. Keep an eye on both the yield and the calendar.

Dow Theory kicked in on Wednesday. Transports are up almost 50% from their lows in January to eclipse the all time highs of late 2014. Up 17% in the last month!! This has all the earmarks of a blow off top and we may not be finished yet. We have speculated for some time that this would be how this bull market ended – Straight up in spectacular fashion. While we have been cautious on the valuations of this market for some time the missing ingredient to a top in the market has been investor euphoria. Well, the Trump win may have provided just that. Hang on tight.

Markets are overbought. Santa may have arrived early. January may see some reversal of fortune but it looks like the trade is in place for now. Out with bonds and bond like equities and in with financials, industrials and materials. Market continues to shrug off major geopolitical financial events at an ever faster pace. The Italian Referendum was shrugged off in minutes. Ego kills when it comes to investing. Bulls are feeling bulletproof.

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 10, 2016 at 12:59 pm  Leave a Comment  
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The Trump Rally Meets The Swamp

The Trump Rally while rooted in ideology and investment theory is not necessarily rooted in reality. While tax reforms, reduced regulation and fiscal stimulus could make for a powerful combination stoking the economy and inflation it is not certain this combination will actually happen and if it does happen it will not happen for some time. Expectations are running a bit too high and this is still Washington DC after all. The roots of the Trump Rally are bound to get stuck in the mud of the Swamp.

Interest rates and the US dollar are rising which can be a dangerous combination. The market can rally with rising interest rates and we believe that it is healthy for interest rates to rise from here and that low interest rates were actually inhibiting growth in the economy. Some semblance of higher interest rates are good for the economy. But for the stock market the current high level of valuations were predicated on TINA (There Is No Alternative). At some point, bonds, real estate or other asset classes become an alternative. The high levels of asset valuations were predicated on low interest rates as all investments are evaluated versus the risk free rate of the 10 year Treasury. A rising ten year means that models may have priced assets too richly.

As you know we follow certain financial leaders and Jeff Gundlach at DoubleLine is one we find most open with his thoughts. Gundlach is on record saying that the 10 year could go to 6% in the next 4 or 5 years. We are of the same thought although not as drastic. In the near term we believe that yields have gone too far too fast along with equities in the post Trump win world. Gundlach spoke to Reuters this week and caused markets to pause as he said much the same. Gundlach feels that the bond selloff has seen its low for now and stocks will take a breather before Inauguration Day. After he spoke bonds rallied and stocks fell. Evidently we are not the only ones listening intently to Gundlach’s views.

Another one of our favorite investing legends is Stanley Druckenmiller. He spoke this week at the Robin Hood Conference in NYC. Druckenmiller does Gundlach one better. He believes that the yield on the 10 year will rise to over 6% in the next year or two!! Druckenmiller is shorting the Euro and the Yen and he believes that if the 10 year rises above 3% then the stock market could see a 10% correction. Let’s face it. The stock market can face a 10% correction if someone sneezes in the Middle East.  A 10% correction is not something to be feared but anticipated. I think that the real takeaway is that at some point the yield on the 10 year becomes more enticing to investors than being in the stock market. The pendulum will swing and bonds will usually give you the correct signals. Keep an eye on the 10 year for hints as what stocks will do.

This Sunday’s referendum in Italy is the markets next boogeyman. Journalist and pundits are predicting the next great financial calamity if there is a “No” vote in Italy. Where have we heard this before? Italy has had 67 governments formed in the last 70 years. Why should 2017 be any different? We don’t mean to diminish the battle that is going on with bad loans at some of Italy’s biggest banks but somehow after seeing the predictions that Brexit would be bad for markets and Trump would be bad for markets we have a hard time believing the next great financial calamity follows the next populist regime change. The Italian Referendum should be another interesting vote. It might be time to become familiar with the name – Beppe Grillo.

Market is working off its collective over bought and oversold conditions. The 10 year closed Friday at 2.39% and should see resistance at the 2.5% level. Stocks have relieved some of their overbought condition but the Trump Rally is seeing some buyer’s remorse at 2200 on the S&P 500. Keep an eye on Italy this weekend.

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