Foot on The Gas

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

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

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

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

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

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

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.

Froth

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

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

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

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

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

 

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.

What’s Driving Stocks?

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

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

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

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

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

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

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

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

Steepening of curve before recession Bloomberg

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

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

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.

Decision Time

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

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

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

How big is the problem (corporate bonds)?

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

Is it better to own stocks then?

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

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

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

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.

Lowering the Bar

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

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

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

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

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.

Down the Rabbit Hole

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

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

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

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

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

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

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

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

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

lighthouse

 

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

 

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

Red Flags

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

Christmas has come early this year. 

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

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

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

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

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

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

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

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

lighthouse

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.

Tariffs and Tweets

We received a bit more than the usual phone calls from clients this week as stocks gyrated about. Up 300, down 600, up 200, up 100 and up 63 is getting to be a normal week. But if you take note, like a rollercoaster, we go up, down and all around speeding in different directions while we end up back in the same place except this ride didn’t cost us money. By sticking to a diverse asset allocation we have made money in the last 18 months of sideways markets in stock dividends, bond interest and bond appreciation. Do not let the news headlines, tweets and tariffs set you adrift from your investing plan.

We see running a diverse asset allocation that is dynamically updated during the economic cycle as the one true way to positive returns. The hard part is managing the natural human tendency to run for the hills when things get hot. While most pundits were scaring clients out of bonds we made handsome profits. Don’t listen to the pundits and don’t watch the news. The pundits are there to fill up air time and entertain while the news is just trying to scare up some ratings.

While we would expect stocks to follow the path of bond yields here and head lower, we are still stuck in neutral between 2830 and 2960 (we are currently at 2847, at the lower end of the interim range) on the S&P 500. Above 2960 momentum buyers may come flooding in. Conversely, below 2830 the 2800 level (and 200 DMA) looms large. Any breech here and algorithmic selling will take over. When in doubt we defer to the bond market and lower yields have us looking for lower stocks.

You might ask – if we think that stocks are going down then why are we still invested? One factor is that we don’t know that stocks are going down. 18 months ago we were faced with the idea that stocks would go sideways for a year and a half and the vast majority of investors thought owning bonds was a bad idea. We kept our bond holdings and even increased duration earlier this summer. We stuck to our approach and that consisted of owning a diverse allocation of stocks and bonds. In this environment it turns out that was the best approach and a return was generated in a neutral environment.

Now we think that stocks could be in for a tumble. Should we dump stocks?

Last week we said the following.

The Fed may restart QE in the face of year end liquidity pressures. That would send stocks higher. Would the Fed do that with stocks at all time highs or will they let stocks falter first? We think that they should wait but don’t think they will.

In the latest Fed Minutes released this week there are 6 mentions of asset purchases by the Federal Reserve board members. Board members seem confident that asset purchases are a good thing and they could move preemptively.

What is to say that the Federal Reserve will not preemptively begin to purchase assets changing the direction of stocks and bond yields? A portfolio of solely defensive bonds would suffer greatly in this environment. The successful investor has a diverse asset allocation and dynamically adjusts it in the wake of changing economic cycles. Never all in and never all out.

We are positioned defensively and would not mind lower equity prices. The economic cycle appears to be aged as the expansion has lasted for over a decade. Valuations are historically elevated. Small cap stocks here in the US as well as Transportation stocks are now firmly below their 200 DMA and that could portend a further move lower. We see the calendar having an outsized effect on returns here. We could see a liquidity squeeze (and downward pressure on stocks) as we approach the last quarter of the year while professional investors look to protect gains.

There is further evidence this week that the Fed may be preparing the next QE and in that period we would expect equities to rally and bond yields to rise. We hope to see lower valuations to add to our allocations before the next QE starts but there are no guarantees.  September is one of the most volatile months. Hang on tight and don’t watch the news.

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 .

lighthouse

 

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 Slump

We see a stock market that is either in denial or one that fully anticipates that the Federal Reserve is prepared to embark on the next round of QE. It does appear that the Fed will act it is just a matter of when. Will they let the market fall first before they act? That is the safer path. For now, the stock market defies gravity while bond yields tumble. While we would expect stocks to follow the path of bond yields here and head lower, we see a stock market stuck in neutral between 2830 and 2960 (we are currently at 2888, right in the middle of the interim range) on the S&P 500. Above 2960 momentum buyers may come flooding in. Conversely, below 2830 the 2800 level (and 200 DMA) looms large. Any breech here and algorithmic selling will take over. When in doubt we defer to the bond market and lower yields have us looking for lower stocks.

We are positioned defensively and would not mind lower equity prices. We see the calendar having an outsized effect on returns here. We could see a liquidity squeeze (and downward pressure on stocks) as we approach the last quarter of the year while professional investors look to protect gains.  For now the S&P 500 should still be considered range bound between 2550-3000 with the 200 Day Moving Average looming as critical support at 2799.

The politics of being the Federal Reserve chair are even more intense this year. A recession and stock market fall could doom a Trump second term. The President has been on the Fed pretty good and is looking to set them up for the blame. It won’t work. Inflation is also starting to ramp up as tariffs begin to take their toll. A shopping trip to Wal-Mart costs 5% more than it did last June. America is Wal-Mart Nation. A fall in stocks and a rise in inflation would doom Trump. How willing is Mr. Powell willing to help out President Trump? That may be the key to investing in late 2019 and early 2020. Powell’s speech from Jackson Hole next week should be a real market mover. Since Powell took over his speeches have not been well received by Wall Street as the market has fallen more often than not.

The Fed may restart QE in the face of year end liquidity pressures. That would send stocks higher. Would the Fed do that with stocks at all time highs or will they let stocks falter first? We think that they should wait but don’t think they will. August, September and October are not the best months for the market historically. We continue to position defensively. We are favoring solid dividend paying stocks that have higher momentum and we have been buying gold while avoiding banks like the plague. Gold has had a good run and so have bonds. Caution should be paid there.

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 .

 

lighthouse

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.

Storm Clouds?

 

Very ,very interesting comments from the Coca- Cola CEO this week. As you know we have been writing that it just might be possible that the approaching storm of recession gets headed off and the global growth slowdown is just that – a slowdown. At least that is how the market seems to perceive it. Perhaps, the Fed rate cut will do the trick next week and the slowdown was more about the fear of a slowdown and trade wars. The CEO of Coke James Quincey had this to say on their earnings call this week.

“We saw some clouds on the horizon, too,” … “But the storm never arrived, so by sticking to our plan, by executing against our strategy, we’ve been able to deliver stronger momentum than even we were expecting.

Quincey went on to say that the clouds are still present but the company is feeling more optimistic about the second half of the year. That is basically how the market is looking from a technical perspective. The internal pressures are building in the stock market and we have been pressing the case that small caps and transportation stocks needed to get going in order for the market to move further north. We got a breakout in Transportation stocks this week. Perhaps next week we will see the small caps break out. The key is going to be the Fed meeting next week. A rate cut combined with an ending of the Quantitative Easing process could propel stocks higher.

Stocks are higher than they should be from a valuation perspective. Since 2014 there has basically been zero earnings growth from the S&P 500 yet the S&P 500 stock index is up 50%. That is all multiple expansion or giving stocks a higher valuation based on the same earnings. Why is that? Monetary policy is responsible for the higher prices as interest rates are the major input to calculate valuations of stocks. Another reason stocks are higher is the two biggest buyers in the market place are price agnostic -Corporate buybacks and algorithms. Neither care what the price is -they just pay it. Lower interest rate most times will equal higher stocks in valuation models. The thing is what if interest rates are headed lower because the economy is headed for the rocks. That is second level thinking but for now stocks seem intent on heading higher. Let’s see what the Fed has to say next week.

The US stock market appears to be breaking higher and we have added back some equity allocation to our more aggressive clients. We are holding our fire until we see the Fed next week and how stocks – specifically Transports and small caps react. All eyes are on the Fed.  We had a great week last week as we bolted up to JFK airport to see our lovely Aunt Pat for her 88th and we celebrated my 51st when we got home – A great week and another interesting one ahead.

 

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.