The Coming Shift

Ray Dalio is out with another LinkedIn article on his purview of the current and future investing environment. Dalio touches on the subject of Recency Bias and our human emotional attachment to identifying the future based on the recent past. It is Dalio’s thesis that paradigm shifts happen around decades. His article focuses on the next possible paradigm shift.

The worst thing one can do, especially late in a paradigm, is to build one’s portfolio based on what would have worked well over the prior 10 years, yet that’s typical. – Ray Dalio Bridgewater Associates

The Past

Central banks have been lowering interest rates and doing quantitative easing (i.e., printing money and buying financial assets) in ways that are unsustainable. Easing in these ways has been a strong stimulative force since 2009,…That bolstered asset prices…That form of easing is approaching its limits

The Present

Expected returns and risk premiums of non-cash assets are being driven down toward the cash return, so there is less incentive to buy them, so it will become progressively more difficult to push their prices up. 

The Future or Predicting The Paradigm Shift

By looking at who has what assets and liabilities, asking yourself who the central bank needs to help most, and figuring out what they are most likely to do given the tools they have at their disposal, you can get at the most likely monetary policy shifts, which are the main drivers of paradigm shifts. 

To me, it seems obvious that they have to help the debtors relative to the creditors… For these reasons, I believe that monetizations of debt and currency depreciations will eventually pick up, which will reduce the value of money and real returns for creditors..

How to Profit

…those (assets) that will most likely do best will be those that do well when the value of money is being depreciated and domestic and international conflicts are significant, such as gold. Additionally…most investors are underweighted in such assets, meaning that if they just wanted to have a better balanced portfolio to reduce risk, they would have more of this sort of asset. For this reason, I believe that it would be both risk-reducing and return-enhancing to consider adding gold to one’s portfolio. 

We were we were out in front of that one as we anticipated the shift to gold. We saw the pressures building in the marketplace and we fortunate enough to have placed some capital in the area of precious metals. We think Dalio is correct as adding precious metals in this environment will help provide better risk adjusted returns. We will count ourselves lucky and look to add precious metals where we find it advantageous as long as the paradigm holds.

We mentioned last week that one thing had us holding fire on adding more equity exposure and that was the reluctance of small caps and Transports to break out of their relative rut. Both of these market segments tried to break out this week and failed. That could portend further weakness in the coming days.

Central banks are seeing diminishing returns on their loose monetary policy and are running out of bullets. The only thing that can save them now is to let inflation run hotter than normal in order to inflate away the excess debt that has been created. We have said that precious metals had our rapt attention and now our attention is turning to oil. Oil stocks suffered the same fate as Transports and small caps. The tried to break out early in the week but saw no follow through. We could see further weakness in this area as well but geopolitics could have something to say about that. A resurgence of the Iranian crisis would help oil stocks.

Markets are very quiet with volume and volatility at holiday like levels. The FOMC meets again in a week and is widely expected to cut rates. Why? Things look just fine here in the US. It is the rest of the world that has the Fed’s attention and concern. Central banks around the world are cutting rates and that will send the US Dollar higher, hurt trade exports from the US and may pressure emerging markets whose debt is denominated in US Dollars. Lowering rates would help alleviate those issues. All eyes are on the Fed and Trump’s twitter account -those that aren’t at the beach of course.

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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.

Running Hot

The sideways market we have been in for 18 months is trying to break out to the upside as we suspected. One thing that has us holding fire is that the Transports and small caps are not participating. That may change soon. Transports are the key because transports are a widely followed indicator for the worldwide economy. If the transports are headed higher and the economy is headed higher that could be leading us to an overheating market – with the Fed lowering rates. Both Transports and small caps are moving towards resistance and a break out could bring more investors back into equities.

You never want to try and catch the last 10% of a secular bull market. How do you know when to cut bait? We are on guard for a steepening of the yield curve. Markets can run higher in the face of a yield curve inversion. It is the steepening of the yield curve after the inversion that screams get out. When the Fed begins lowering rates the yield curve may steepen which is the signal to start looking for exits. The Fed all but stated that they are cutting rates next month. If the yield curve steepens the danger increases.

If you follow us you know we have been bullish on bonds when few others have and that has served us well. The Fed is expected to cut rates but the rally may have already come and gone. It is counter intuitive but if the Fed is going to lower rates in the coming months we see the rate on the 10 year moving higher. The bond market has pushed the Fed to lower rates and the Fed will slowly walk towards the bond market. The market has probably pushed rates too far too fast. We see rates headed higher for now. We are backing off our bullish stance on bonds and have reduced trading positions and the duration in our bond allocations. It has been a very good year for us so far in the bond department. We are taking risk off the table there.

Central banks are seeing diminishing returns on their loose monetary policy and are running out of bullets. The only thing that can save them now is to let inflation run hotter than normal in order to inflate away the excess debt that has been created. We have said that precious metals had our rapt attention and now our attention is turning to oil. Oil stocks have done nothing for 6 years and they are approaching a break out level. We can’t say that they are definitely going to break out but we have a close eye on them. Most offer generous dividend yields and with central banks around the world lowering rates those dividends are now more valuable.

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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.

The Way to Bet

The race doesn’t always go to the swift or the strong – but that’s the way to bet. – Grantland Rice

you should invest more when the tickets in the bowl are in your favorYou should invest less when they are against your favor and what determines the mix of the tickets in the bowl is largely where we stand in the cycle. -Howard Marks Oaktree

Howard Marks is one of the great investors of our time and he is constantly sharing his thoughts in his famous memos. In a recent interview he outlined his analogy that investing is like picking tickets out of a bowl. Some are winning tickets and some are losing tickets. The amount of winning or losing tickets in the bowl depends on where we are in the economic and market cycle. By analyzing where we are in the cycle the above average investor can judge correctly whether there are more winning tickets or more losing tickets in the bowl. The investor doesn’t know the outcome of picking a ticket but understands the probability of picking a winning or losing ticket.

We invest more heavily when we perceive there to be more winning tickets in the bowl than losing tickets. When we perceive that the losing tickets in the bowl outnumber the winning tickets – we still invest- but with a bit more caution.  We still invest because we cannot predict the future. It is still possible to pick winning tickets when the odds are stacked against us – it’s just less likely. That is why we invest with more caution. We analyze where we are in the cycle and the preponderance of winning or losing tickets. It is then that we manage our aggressiveness and how much we diversify or how much we hedge. So, much like the great sportswriter Grantland Rice, Howard Marks tells us how to place our investing bets.

The Current Quarter 

On the heels of the best quarter in stocks in a decade we must say we would have been impressed if we had only managed to hold on to those gains. We got that and a bit more with equities advancing 3.8% in Q2. This quarter had the added benefit of advancing bond and gold prices. While you might think long term bonds and gold seem like strange bed fellows the Federal Reserve saw to their advance through their latest shift back towards a renewed dovish policy. The Federal Reserve’s move back towards easier money policies had just about all assets looking up.

It was a positive quarter for risk assets in spite of lower economic numbers, a trade war between the two largest economies on the planet and an inverted yield curve. We do wonder how long asset prices can ignore a global economic slump while pressing ever higher in valuation. Investors have been trained by central banks over the last 3o years to respond positively to loose monetary policy. Markets ignore negative news and even come to embrace it as negative economic news means that the Fed is even more likely to ease policy. The market climbs an ever steeper wall of worry while continuing to buy assets at a decreasing risk premium.

According to the sharp eyes of Michael Wilson at Morgan Stanley more than 100% of this rally in 2019 is from multiple expansion – the excess amount investors are willing to pay for the same amount of earnings. At almost 17 times forward 12 month earnings per share (EPS) the S&P is trading at elevated valuations and those valuations are elevated not due to higher earnings but due to higher expectations or the willingness to pay more money for the same dollar of earnings.

This quarter we saw  economic bellwethers such as UPS, Intel and 3M all have their worst trading days since 2008 Financial Crisis or even as far back as 1987 in 3M’s case. These are old line companies that we have used for decades to gather information to assess the health of the global economy and ascertain the next move in the market. We can see further evidence of the failing health of the worldwide economy in JPMorgan’s Global Manufacturing Purchasing Managers Index. This widely followed index fell to its lowest level in over six-and-a-half years and posted back-to-back sub-50.0 readings for the first time since the second half of 2012. A sub 50 reading is an indicator of economic contraction.

The global economy seems to be slowing and bond investors are reacting to that by driving yields lower but equity investors are partying on – pushing averages back to all time high levels. However, it does seem that the market averages are being driven by ever smaller numbers in their leadership and the echoes of 1999 are being felt as we see big name tech stocks come public. Initial Public Offerings (IPOs) are all the rage and that should have your attention. When those in the know – Venture Capital owners of these privately held companies- begin to sell – check your wallet. 80% of the IPO’s in 2018 had zero earnings and that is the highest level since the Tech Bubble of 1999-2000.

Losing  Tickets

We continue to see a very difficult investing environment (fewer winning tickets in the bowl) made all the more difficult by stubbornly high valuation levels. Current equity valuations have been seen only twice previously. Those two periods were the 1929 and 2000 time periods – which are widely known for their stock market selloffs. While President Trump is engaging in trade wars with just about all of major trading partners worldwide economic numbers are falling into a slump. We see a recession on the horizon here in the United States as leading economic indicators foreshadow a slowdown while the key indicator of recessions – an inverted yield curve – remains inverted. While an inverted yield curve is seen as an indicator of a possible recession history shows that stock markets can continue to rally once the curve inverts for 9-18 months.

The real indicator to run for the exits is when the curve begins to steepen. That may being to happen next month as the Federal Reserve has indicated that they intend to lower rates at their July meeting. We find this significant, in that, the Federal Reserve is adding to the moral hazard in the markets.  They are encouraging risk taking when the stock market here in the US is at an all time high. Markets have rallied from the Christmas lows back to where they were in 2016 when interest rates were at a similar level. While investors may currently find valuations less than attractive – given a limitless supply of liquidity at historically low interest rates, it makes those valuations at bit more enticing. At some point, investors will see diminishing returns to monetary policy changes and may demand a larger margin of safety to their purchases.

The bond and stock markets continue to be stuck splitting the difference between being a late cycle market which is richly priced and one that is being enhanced by central bank liquidity. The Fed, once again, is in the business of encouraging risk taking. Take a look at bitcoin. Once again it is in the headlines as its rapid ascent catches our attention. While the Fed managed to pop that bubble in 2018 its recent reemergence is directly related to the lack of political will of the Federal Reserve to tighten policy. The rallies in stock, bond and gold markets this quarter are also directly related to central bank largesse. Bitcoin may now be the temperature gauge for risk sentiment in the market.

Winning Tickets

Last quarter we mentioned that we perceived investors as looking to rent this rally as buyers in late 2018 and perhaps turn into sellers as the rally prospered. That turned out to be accurate. Most investors are now under-weight equities and over –weight longer term bonds. While we would expect equities to retreat from this level we know from history that when everyone expects something to happen – something else will. Most of the investing world has been caught flat footed or, at least, under invested in equities by the flip flop of the Federal Reserve.

In the last 6 months US equity fund flows have been the most negative since the global financial crisis. It seems as though everyone in the industry is prepared for a move lower in stocks. Machine generated algorithms and corporate buybacks have held equity prices at relatively high valuations in spite of economic headwinds while professional active investors sold equities and collected dry powder in the face of a slowing global economy.

That dry powder could keep equities elevated or give them support in any downturn in the second half of 2019. The Fear of  Missing Out (FOMO) on the part of institutional investors could even lead to a spike in the S&P to new all time highs. If the Federal Reserve cuts rates repeatedly in the second half of 2019 it may begin to appear as though were are in the same environment as 1998 when the Fed cut rates and exacerbated the Internet Bubble. This likelihood is increased further if, after having cut rates, the trade wars were resolved and tariffs were removed. Now you can see why we find this to be such an interesting and difficult investing environment. While an economic slump with markets at all-time highs should lead to a reduction in valuations and lower stock prices – sometimes markets don’t do what would make sense. When everyone expects something to happen -something else will.

What’s Next 

Where does this market go next? When markets find themselves in a sideways trend they tend to break out the same way that they came in. It allows time for corporate earnings to increase and justify valuations. In this case markets are digesting the gains earned in the late 2016-17 time frame. The more time that passes the less likely the equity market is to head meaningfully lower. Markets rarely trade sideways for years and then suddenly crash (never say never). This market has taken everything thrown at it and stayed within reach of all time highs while investing professionals have taken down risk meaningfully and have cash at their disposal to meet a strong sell off. It appears that most professionals and pundits see a recession on the horizon especially in the absence of a trade deal. That recession risk has investors holding lots of cash. A break out could have investing pros underperforming and force them to put cash to work.

For the last 18 months our assessment has been correct as the path in the equity market has been sideways and it has been advantageous to sit and collect our dividends while we took down risk. We saw fewer winning tickets in the bowl at that point in the cycle and felt that it made sense to diversify and hedge in greater numbers. We sit until we see a clear direction to take advantage of but with each month ticking by we get closer to putting more risk back into the portfolio. While we can make a long list of negatives – for ten years we have see markets run higher induced by central bank intervention in spite of horrible economic numbers. If central bankers continue to prod investors to purchase assets by lowering interest rates and adding liquidity, at some point, reluctant investors will be forced back into markets.

Again, we are reminded of the 1998 period when markets were riding high and central bankers flooded the economy with cash in response to the Asian Debt Crisis and impending Y2K.  That blew the last of the Internet Bubble before it popped in 2000. It is possible that the recession on the horizon that people are seeing is just a slowdown caused by the global trade war. In that case, the Fed could find itself having overly loose monetary policy in its response to a global slowdown much akin to their response to the debt crisis in 1998.

You may have noticed the increased presence of precious metals in your portfolio. We talk of seasonal periods from time to time and find that the most helpful information is when something that performs well when it is in a seasonally weak period may be in for further strength. That asset right now is gold. Gold historically performs poorly in the summer months. The month of June has been very good to the returns of gold investors in 2019. While precious metals cannot be valued by their cash flow and pay no dividends they are also more valuable in rocky geopolitical times and have higher value in the land of zero interest rates. While subject to more technical market risk (and possibly a shorter holding period) the gold market is seeing its highest prices in 6 years. 

The Dow Jones Transports and the Russell 1000 may just be the key to the equity market in the second half of 2019. These two areas of the market have stubbornly refused to participate in the latest rally from the December lows and their support is critical. The Transports, in particular, are a bell weather of global economic health and their movement may precede the next leg higher or lower in the equity market. In the past week both of these areas have started to perform better than the overall market. If they continue this positive action then perhaps the global slowdown was just that – only a slowdown. 

First, widespread fear is your friend as an investor, because it serves up bargain purchases. Second, personal fear is your enemy.

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 CEO of Goldman Sachs 

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.Warren Buffett 

Terry@BlackthornAsset.com

Disclosure: According to SEC Custody Rule 206(4)-(a)(2), Blackthorn urges you to compare statements/reports initiated by your Blackthorn with the Account Statement from the custodian of your account for data consistency. To that end, if you find any discrepancy between these reports and the statement(s) that you received from your account’s custodian, please contact your Advisor or custodian. Also, please notify your Advisor promptly if you do not receive a statement(s) from your custodian on at least a quarterly basis.

Blackthorn is an investment adviser registered in the state of Georgia. Blackthorn is primarily engaged in providing discretionary investment advisory services for high net worth individuals.

All information provided herein is for informational purposes only and should not be deemed as a recommendation to buy or sell securities. All investments involve risk including the loss of principal. This transmission is confidential and may not be redistributed without the express written consent of Blackthorn Asset Management LLC and does not constitute an offer to sell or the solicitation of an offer to purchase any security or investment product. Any such offer or solicitation may only be made by means of delivery of an approved confidential offering memorandum.

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On The Edge

It is so important to have a handle on your emotions when investing. Bonds, stocks and gold all seem to be headed to new highs as investors are buying everything that isn’t nailed down as central banks around the world loosen policy even further.  This move higher has investors on edge looking to chase asset prices with possibly the most important in the last two years on tap. Investors are under weight equities and may be about to panic. It appears that everyone sees a recession on the horizon especially if there is no trade deal. That recession has investors holding lots of cash. A break out could have investing pros underperforming and could force them to put cash to work.

For ten years we have see markets run higher on central bank intervention in spite of horrible economic numbers. This is only slightly different. We see a recession on the horizon but markets look to be heading higher first. We may be catching the last ten percent and that is never wise but we can’t fight ALL of the world’s central banks. A pullback this week could find a lot of cash waiting to be deployed.

We are on guard for a steepening of the yield curve. It is not the inversion of the yield curve that screams recession – it is the steepening of the yield curve after inversion. The inversion of the yield curve is the bond market telling the Fed that they have it wrong – the economy is weakening – and they need to cut rates. When the Fed begins lowering rates the yield curve steepens which is the signal that the recession has begun. The Fed all but stated that they are cutting rates next month. If the yield curve steepens the danger increases.

We have been in a sideways market for 18 months. Generally, when we see this type of market the market will break out the way it came into the current level. In this case that breakout would go higher. This week was triple option expiration and we discount what happened as it is really more about the options market than the overall market sentiment. The week after OPEX is usually negative. A selloff could be exacerbated by investors seeing an overbought market turning tail and rethinking their response to the Fed and that may turn out to be a great buying opportunity. With the G20 at the end of the week this is going to be one very interesting week and it may dictate the tone over the next few months if not years.

We said that precious metals had our rapt attention and they had a great week last week. The Federal Reserve lowering interest rates should weaken the US Dollar and help gold bulls. Gold is now very over bought having run to their highest level in 6 years. Be careful.

 

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.

My #1 Rule of Investing

We are not market timers, we are risk managers, which means we gradually adjust our allocation in accordance with a shift in those warning flags for the level of danger in the market.

Most money managers out there follow a blind buy-and-hold approach. That’s not a problem for investors in their 20s and 30s because dollar cost averaging will bail you out from any severe bear markets. But for someone in retirement or near retirement, the last thing they want to have happen is to ride through a bear market like we had in 2008. – Jim Stack – Stack Financial Management

Jim stack is a very successful advisor in Montana. He makes several key points here. You must understand where we are in the market cycle but, maybe more importantly, you must also understand how it relates to your particular situation in your investing lifetime. Slide your risk up and down with the market cycles and take into account if you have the runway to wait out any large decline. If you don’t – take less risk.

I have a friend, who is close to retirement; ask me last week whether he should sell stocks. I inquired as to how much of his portfolio was in stocks. He said 100%. Never have 100% of your funds in stocks! My #1 rule in investing is to never be forced to do something. If you are 100% in stocks and you need liquidity to pay bills and the market is down you will be forced to sell when stocks are cheap. This is when you should be buying.  Like Warren Buffett says you want to buy more hamburgers at the store when they go on sale.  What about the heavy emotional weight of being 100% invested in stocks? It will lead to mistakes. If someone is 100% invested in stocks they may waver when the time is right to buy because the losses have been so painful. He or she is more likely to sell and compound their losses when cheaper prices come because those losses will be so large they won’t be able to handle it emotionally. Always have options.

While the 50 DMA on the S&P 500 was support it has now become resistance at 2870. It will be important for the bulls to get back above that level early on in the week. The 200 DMA on the S&P 500 is now important support and that line is at 2776. Summer trading can very light and head either way but right now we are leaning towards the advantage going to the bears. Investors are getting frustrated by the dominance of the computerized trading and their response to different tweets. That may only further encourage traders/ investors to walk away as summer approaches and a lack of volume could create more volatility.

We have found over the years that it is helpful to look to the bond market as a key to understanding the future direction of the stock market. We had noted recently that the bond market looked as if it was getting stronger and that could mean that stocks were headed south. We have been getting longer in our duration and buying the 20 year bond ETF to lengthen our bond duration and more effectively hedge our equity holdings. It has worked pretty well so far and we don’t see a reason to change as of yet. Bonds have had a good run here and may be topping out soon but the bulls have the ball. We expect what could be coming is an extreme move in the bond market and, if it does, that may give us very clear expectations of what to do in stocks.

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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.

Twitter Bombs

Last week we suggested an investor emotion check after starting 2019 in a straight line higher. Are we giddy given the gains so far in 2019? Well, last week turned out to be a gut check. Markets having reached the old highs are now sputtering on China Trade Wars. If it wasn’t the China Trade War it would have been something else. These old highs are proving difficult to overcome. The good news is that the market has spent almost 18 months since we hit the 2666 level on the S&P. Markets can relieve overbought measures in one of two ways – the can go down or sideways long enough to attain more realistic valuations. Every month we get closer and closer to option #2 and every month that goes by softens the veracity and depth of option #1.

IPO’s are all the rage and that should have your attention. When those in the know – Venture Capital owners of these privately held companies- begin to sell check your wallet. 80% of the IPO’s in 2018 had zero earnings and that is the highest level since the Tech Bubble of 1999-2000.

In the years since the Great Financial Crisis (GFC) investors and regulators have been focused on the big banks and correcting the problems of the last crisis. The next crisis won’t stem from the big banks. It will come from corporate debt. In its semi-annual release of the Financial Stability Report this week, The Fed continued to warn that asset valuations are elevated, risk appetite is high, and they specifically warned about the perils of risky corporate debt. The Fed noted that the companies with the biggest existing debt loads were the ones taking on the riskiest loans and protections for lenders were eroding further. We are steering clear of debt laden companies with large dividends as they may be the first to take the hit.

We suspected that a Trade Deal was at hand and the market would see it as a “sell on the news” event. We were right for the wrong reasons but we will take it. The 50 DMA on the S&P 500 appears to be some sort of Maginot Line and seems to be defended at all costs. That is odd. It is usually the 200 DMA that is the line in the sand. Traders/ investors may begin to walk away as summer approaches. Summer is the beginning of the seasonally weak period for markets – between May and November. The November to May period, historically, has much better returns. After starting 2019 so well I see investors taking some money off of the table and heading for the Hamptons. The Twitter bombs may hit and no one may be there to catch the market – with low volume comes volatility.

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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.

At the Quarter Pole

The most critical thing to control for successful investing is your emotions. We all have our own relationship to money and we react in our own unique way. In December we heard some groans from investors as they watched their returns slip away but we also heard from some who were cheering our purchases on with the joy of a bargain shopper at Christmas time. Fast forward to April – where we have spoken to several clients who are downright giddy with where we are so far in 2019. Being up 8-10% at the quarter pole of the race is exciting but there is still a lot of race to be run. At this point it is good for an emotional check. Are we upset we are missing out on upside? Perhaps we have been a bit too conservative and that is our nature. Are we giddy we have returned so much so quickly? Our ego can tell us when to cut bait and take down our risk. Being aware of our emotional response to money can guide us to what our next move should be.

The Fed has turned a bit more hawkish and markets hit a bump in the road. Markets have been expecting the Fed to cut rates and while Powell didn’t take that off of the table he certainly wasn’t promising one soon. The dip buyers were back and helped push markets back up but they did some damage to the charts. Traders are looking for a pullback of some sort and as we enter the weaker season for stocks and there are plenty of reasons why that might happen.

Economic number after number seems to be negative. Auto sales saw their biggest monthly drop since 2011 and the lowest sales since 2014. Global semiconductor sales, an indicator of economic health, fell 15% in Q1 and are down 25% from their peak in October yet the semiconductor index is up 36% year to date. Mortgage refi’s and applications are falling and that is with interest rates falling. We have seen the biggest monthly fall in refi’s since 2013. I could go on. Beyond Meat went public this week and rose 160% the first day. Softbank is talking about going public with an IPO of its $100 B Vision fund. When you feel like you are railing against the wind that is usually close to the top but momentum makes you look silly. Data is down and those in the know are selling. Makes you wonder.

2019 has been a spectacular year so far so we don’t expect investors to continue to press their bets. It might be better to let things play out on the economic and trade front while the market digests these big gains. We suspect that the market may sell on the news of a US – China trade deal. Markets that have bought on the rumor may then sell the news or markets may be disappointed by the trade deal outcome. Either way we suspect markets traders could say sold after an initial rally. The 200 DMA on the S&P 500 is at about 2774. That will be the first major line of support should stocks falter. There are lots of investors missing out on this rally so we expect any sell off to be met with buyers.

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.

Old vs New

We said that a dull week was power to the bulls. We were right and the S&P 500 has reached a new closing high. The internals of the market seem to be diverging a bit from the positive path that the averages are on. The market seems to be a bifurcated one where big name tech stocks are driving the averages higher and old line economic ones are falling. Last week we saw UPS, Intel and 3M all have the worst days since 2008 or even as far back as 1987 in 3M’s case. Those are old line economic indicators that we have used for decades to gather information to ascertain the next move in the economy and the market. Strangely enough, the US 10 Year Treasury had a good week as well with rates declining to 2.5%. Not a new low but things are trending in that direction. What does all of this mean? The global economy seems to be slowing and bonds are reacting to that but equity investors are partying on. The market averages are being driven by ever smaller numbers in their leadership. It feels a bit like 1999 complete with big name tech stock IPO’s.

Slack is the latest to announce that they are going public. They have decided to do a direct listing rather than a traditional IPO. What does that mean? It means that Slack insiders will be able to sell their stock in 60 days rather than the traditional 180 days. The unicorns that have been private companies for so long are now rushing to the market and sucking up capital.

We warned of a melt up and here we are. The volume is drying up on the rally and professional investors, while upset about missing out; don’t seem to be in any rush to get back into markets. Assets are rising due to pure momentum. The computers are in charge.

The market is approaching all time highs but with less exuberance than one would expect. 2019 has been a spectacular year so far so we don’t expect investors to press their bets. It might be better to let things play out on the economic and trade front while the market digests these big gains. The 200 DMA on the S&P 500 is at about 2766. That will be the first major line of support should stocks falter. There are lots of investors missing out on this rally so we expect any sell off to be met with buyers.

 

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.

Drink the Wine

We hope that you had a chance to read our latest Quarterly Letter – Be Your Own Master – The New Retirement.  

The key to saving enough to retire is in deferring consumption. We have always been more of a saver and working on Wall Street tended to help with deferring consumption as well. We would work all year and spend our salary but when the bonus came we just put it in the bank. This is why 401k’s work so well as a saving vehicle. We never have a chance to spend the money as it comes straight out of our pay check before we even have a chance to get our hands on it. People seem to be either spenders or savers. The “live for today” type vs. the “I had better save for a rainy day” type. I have always enjoyed money going into the bank much more than I have enjoyed money coming out so count me in the latter category. The dawn of 2019 came and we have found ourselves at the end of an era with one of our in-laws passing away. When we went to clean out the house we found some wine in the kitchen. It turns out that we had given a case of some special wine to the in laws a number of years ago. When we opened the wine we found the wine had spoiled. While this is may be more for the “Save for a Rainy Day” crowd we were reminded that when deferring consumption – don’t forget to take the time to drink the wine.

This was another dull week so that is a gift to the bulls. The longer that the bulls are able to hold things here and digest the gains of 2019 the more legitimate the advance becomes. There is a real chance of a melt up here as most professionals got left behind during the swoon of late 2018 and run higher in 2019. Most professionals sought to rent this rally as the idea that the lows of December would need to be tested – or so that is how the textbooks would draw things up. The Federal Reserve having changed its stance in January has investors chasing the market higher as performance has suffered and there is a real fear of missing out (FOMO) on any further rally.

We have had several clients note our large cash positions as we sold some significant equity longs in 2018 and early 2019. One thing to note here is that, while we have had a monster rally in 2019, cash has outperformed stocks over the last six months.

The market is approaching all time highs but with less exuberance than one would expect. 2019 has been a spectacular year so far so we don’t expect investors to press their bets. It might be better to let things play out on the economic and trade front while the market digests these big gains. The 200 DMA on the S&P 500 is at about 2766. That will be the first major line of support should stocks falter. There are lots of investors missing out on this rally so we expect any sell off to be met with buyers.

 

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.

Be Your Own Master – The New Retirement

 This really is one of my favorite times of the year and not just because the Masters Invitational Golf Tournament is taking place in our home state. I love this time of year because I get to talk to clients more than any other part of the year. Most of that is in tax preparation but I enjoy the interaction all the same and I always learn something. The theme this year seems to be about retirement.  I often get the question “When can I retire?” What is different this year is the question has become – “What is retirement?”  Retirement is a relatively new phenomenon. My grandfather retired and was given a pension and social security as his was the first real generation in the history of the world to “retire”. But what did retirement mean? It meant getting a gold watch and getting paid to sit at home. Unfortunately, it also most likely meant you were going to die soon thereafter.

Fortunately, for my grandfather he lived along and healthy life. I would go to lunch with him and ask for his best advice. The most important and prescient advice that he gave me is that had he known how long he was going to live he would have had another career. The life expectancy of men in his time was about 65 years old.  When he retired he didn’t expect to live much longer. He was an actuary and knew the math. Retirement for his generation generally didn’t last long.

His generation was really the first generation to use their brains and not dig ditches or push a plow. Manual labor was out so why the rush to retire? They were told that was what they were supposed to do. Retirement for our generation may include working longer than previous generations. The New Retirement, for those who are prepared, may be about having options.

Our generation will redefine what retirement is. Retirement is becoming the time in your life when you are the Master of your own destiny. You get to dictate the terms. In our mid 40’s and 50’s we are busy grinding it out every day and our families are counting on us. We put up with things that we may not enjoy or even hate. We do that because we can’t afford to quit that job with the abhorrent boss or terrible pay. I have several clients who have been on the cusp of retirement over the last several years and when reaching their goal they have decided to keep working. Why? It has dawned on them that once they were in a position to retire – they no longer wanted to retire. Why would you want to quit? You are now at your most valuable. You have incredible work/life experience and the responsibilities of being at home are mostly gone. You can work more efficiently now and even mentor the next generation at work.   

When we have saved enough money to “retire” we can wake up on a Tuesday and say no to that boss without fear. We can leap from that negative environment without another job in hand because we are prepared to take care of ourselves. What we are seeing now is men and women who have gained financial independence are continuing to work well after they need to. It is because they want to. It is because they can dictate the terms, some for the first time in their careers. The recipe is to work longer, dictate the terms and be your own Master. Make your retirement what you want it to be and on your terms. Studies tell us that those that are happiest and healthiest in retirement are those that have purpose, a strong community of friends and stay active. Let’s face it. Most of us are not digging ditches for a living. We are using our brains. Why not work longer? What saving our pennies does for us in the new retirement is it gives us choices. The new retirement may be continuing to work while having the financial assets to do it at your pace, with whom, and where you find it most enjoyable. 

The Current Quarter 

No one said investing was easy but if you look at the numbers for Q1 you might think so. I had one client tell me that this was the best quarter he has ever had. We are glad to hear that. It was quite a quarter! This was the best quarter for World stocks since 2012. It was the best quarter for US stocks since 2009 and the best start to a year since 1998. Commodities were also flying as they are up 83% on an annualized basis. If they continue at this pace 2019 would be the best year for commodities since 1973, which, incidentally was the best year ever for commodities.  If stocks continue their trajectory global equities will be up 67% by the end of the year. That would make for the best year since 1933, which, coincidentally, was the best year ever for stocks.

While the returns in Q1 were enjoyable we think that this has become one of the most difficult investing environments we have ever encountered. The yield curve has inverted and un-inverted, equity valuations are near all-time highs and we are 10 years into a bull market fueled by emergency monetary policies. There continue to be negative yields on over a trillion dollars worth of government bonds around the globe and now we see that global growth is slowing. Global stocks and bond yields have decoupled and that, historically, has not been a harbinger of good things to come. 

Why Such a Great Q1?

 Or

 How the Fed Wimped Out 

“It’s ‘pretty obvious’ the Fed is moving to the whims of the markets.”– Art Cashin NYSE Floor Operations UBS

Last fall the Federal Reserve seemed determined to remove excess monetary accommodation which had fed the rise in asset prices and wealth inequality. That is until December came and markets dropped 14%. As far back as 2014 we see from the Fed Minutes that Fed Chairman Jerome Powell was aware of the risk taking that the Fed had encouraged market participants to make and the moral hazard that it had created.

I think we are actually at a point of encouraging risk-taking, and that should give us pause. Investors really do understand now that we will be there to prevent serious losses. -Jay Powell FOMC Minutes 2014

In the fall of 2018 Mr. Powell seemed determined to extinguish some of that risk and continued with his withdrawal of monetary accommodation through rate hikes and balance sheet reduction and, as we expected, those withdrawals were a negative for asset prices and stock prices fell. What may be more important here is that the pace of the retreat in asset prices may have been the straw that broke Powell’s back. He is faced with a boss who sees the level of the stock market as a barometer of his success. In that environment perhaps the political pressure was too much to bear and Powell backed off of his approach. The reality to us is that the swiftness of the fall in asset prices had more to due to with the calendar than his approach. This is an important concept that I will only touch on. In today’s market, volatility is tied to liquidity. In less liquid times of the market volatility rises. The end of the calendar year is one of those times and it may have squelched Powell’s grander plan.

So, from expectations for two to three more rate hikes in 2019 and a balance sheet reduction on auto pilot, Powell quickly made a U-turn and announced that the balance sheet reduction would be complete by the end of 2019. The market has also ascertained that there will be no rate hikes in 2019 and perhaps even a rate cut. Other central banks such as the Chinese central bank and the ECB quickly followed suit with their own liquidity measures. The liquidity spigot was back on and so was the race to buy assets.

The market is now stuck splitting the difference between being a late cycle market which is richly priced and one that is being enhanced by central bank liquidity. The market now knows that the Fed will have its back and, is again, in the business of encouraging risk taking. The Fed Put as it is called is now located right at the December lows and the whole of the investing world knows it. The Fed has shown its cards and its position has been exposed. Buy the Dip is back.

But what is important is that the Fed is not going to allow any further steep correction beyond that,
if it can, and Powell has already shown his hand in terms of where his “put” is… and it is at the December lows.”

– David Rosenberg
Chief Economist & Strategist, Gluskin Sheff + Associates Inc.

 You cannot fight the Fed is the old mantra and this is apparently still true – in either direction. When the Fed appeared to tighten markets fell. When they loosened the reins markets jumped faster than they fell. While we were correct in our assessment of the negative impact of a tighter Fed in late 2018 we have been taken by surprise by their quick flip flop and the markets outstanding response due to the impact of a more dovish stance by the Fed. We don’t think that we are alone. We foresaw that Wall Street was looking to rent this rally as buyers in Late 2018 in the idea that the lows of December would need to be tested once again. Markets tend to fall in predictable cycles and that would be the template. The flip flop by the Fed has turned that strategy on its ear and most of the investing world was caught flat footed or, at least, under invested in equities. 

It’s Different this Time 

“The reality is that maybe the word ‘cycle’ is no longer even relevant, given that we have so much unconventional central-bank involvement.” Dubravko Lakos-Bujas JP Morgan chief U.S. equity strategist

The most dangerous words in investing may be “It’s different this time”. History doesn’t repeat but it does rhyme. We have a tendency to extrapolate what is current to what will happen in the future. It is called Recency Bias. Cycles exist in nature, in humans and in human nature – we tend to repeat the mistakes of the past. Every time the world has faced a new crisis since 2009 central banks have stepped in to solve the problem. So much so that the world’s investors have become conditioned to expect their response which, in and of itself, levitates asset prices. After the Brexit vote in June of 2016 central bankers didn’t even respond to the perceived crisis. Investors did their work for them. Investors, expecting the banks to chime in, elevated asset prices for them.

We have seen central banks try and elongate or eliminate cycles in the past and it has never worked for very long. At some point even that cycle ends. Cycles are still relevant it is just that this central bank cycle may last longer than we think. In this rally, the latest of central bank’s levitating acts, stock valuations here in the US have risen while earnings for US corporations are falling. Fundamentals do not seem matter in light of dovish central bank policy. It’s never different this time and at some point central bankers will fail in their resurrection of asset prices in the time of crisis.

What’s Next 

As the first quarter comes to a close we see the S&P approaching its all time highs last seen in October of 2018. In the last six months we have seen expectations and macro-economic data collapse. We have also seen the widely followed Economic Data Index from Citigroup fall to its lowest level since July of 2017 while semiconductors, a widely watched indicator of economic health, have reached all time highs. This presents a bit of conundrum.

According to the sharp eyes of Michael Wilson at Morgan Stanley more than 100% of this rally in 2019 is from multiple expansion – the excess amount investors are willing to pay for the same amount of earnings. At almost 17 times forward 12 month earnings per share (EPS) the S&P is trading at elevated valuations and those valuations are elevated not due to more earnings but due to higher expectations or the willingness to pay more money for the same dollar of earnings. In light of that, keep in mind that we expect this quarter to be the first negative year over year quarter for earnings since 2015/16.

Why are investors willing to pay more for earnings in light of the current environment? It could be because investors see a temporary slowdown in earnings and that a rebound in growth will occur over the latter half of 2019. While that rebound may happen we believe it is due to the recently reinvigorated dovish monetary policy. The markets seem to be completely reliant on dovish central bankers. Markets see any temporary earnings trough as being met with even more dovish monetary policy from around the globe. There is nothing to fear as central bankers have made it clear they will always come the rescue.

The market seems to be hanging its hat on the idea that when the yield curve inverts the market heads higher for 9-18 months before the recession hits. Since 1966, the average gain one year after inversion is 8%. The sample size is too small to be significant but that isn’t stopping the bulls. The canary in the coalmine may be when the curve begins to steepen – when the Fed cuts rates. The last three times the Federal Reserve cut rates the US was in recession within 3 months (h/t ZH). The average drawdown in a recession is 35%.  Markets may continue to run higher as investors have a Fear of Missing out (FOMO) on further gains. It looks like everyone thinks they will just get out before everyone else. Those exits close quickly once the selling starts especially in the less liquid ETF’s. 

So where are we? Markets, to an extent, are dictating policy. The Federal Reserve is hamstrung by this and is now path dependent. They are dependent on the path of asset prices.  Stocks values will move up to a critical level. Fed officials may then take the opportunity to become more hawkish and discuss raising rates and shrinking the balance sheet.  Asset prices will begin to go lower as confidence declines and demand softens. Once the stock market reaches critical support levels you will then begin to see Fed officials out making speeches about how they are flexible in regards to the balance sheet/interest rates and that we have a strong economy and everything is fine. Assets will then, most likely, find their footing and begin to rise. Wash, rinse, repeat. 

First, widespread fear is your friend as an investor, because it serves up bargain purchases. Second, personal fear is your enemy.

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 CEO of Goldman Sachs 

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.Warren Buffett

 Disclosure: According to SEC Custody Rule 206(4)-(a)(2), Blackthorn urges you to compare statements/reports initiated by your Blackthorn with the Account Statement from the custodian of your account for data consistency. To that end, if you find any discrepancy between these reports and the statement(s) that you received from your account’s custodian, please contact your Advisor or custodian. Also, please notify your Advisor promptly if you do not receive a statement(s) from your custodian on at least a quarterly basis.

Blackthorn is an investment adviser registered in the state of Georgia. Blackthorn is primarily engaged in providing discretionary investment advisory services for high net worth individuals.

All information provided herein is for informational purposes only and should not be deemed as a recommendation to buy or sell securities. All investments involve risk including the loss of principal. This transmission is confidential and may not be redistributed without the express written consent of Blackthorn Asset Management LLC and does not constitute an offer to sell or the solicitation of an offer to purchase any security or investment product. Any such offer or solicitation may only be made by means of delivery of an approved confidential offering memorandum.

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