Trump’s War

While our President has said some wild things our antennae is up as he spoke in an interview with CNBC last week. He has made it clear that he wants a weaker dollar, especially in reference to the Chinese yuan, as the stronger dollar is hurting trade here in the US. It seems that his statement is a not so subtle approach to pressure the Fed into slowing their interest rate hikes. As we have been warning for months now, we felt that the Federal Reserve was going to have to try and withstand some intense political pressure surrounding its handling of monetary policy. While we thought that pressure would come from Congress and other central banks around the world we didn’t anticipate it coming from the White House and so soon. In the interview Trump also made the disturbing statement that “we’re playing with the bank’s money”, in regards to stock market gains. It is clear that we are now in a currency war AND a trade war with China and that the President is willing to wager some of the stock market gains in an effort to “win”.

We have been saying for weeks that we are not comfortable with the narrowing of stock market returns. We are getting that 1999 feeling again as investors pour into high tech stocks and leave value stocks for dead. Howard Marks, the legendary leader of Oaktree Capital, was again out warning on FANG stocks this week. He warned that ETF’s and momentum investing are increasing the risks for the FANG stocks. (Those stocks are Facebook, Amazon, Netflix and Google.) We may have seen a shot across the bow this week as Netflix disappointed with its growth figures and investors jumped out of the stock. Keep an eye on Netflix. If leadership in the market begins to wane it could pressure other assets as liquidity is king.

By way of Arthur Cashin come some statistics on the narrowing of market leadership from his friend Jim Brown at Option Investor. Brown sees the narrowing of market returns as a risk to watch.

There was a lot of discussion last week about the narrow breadth on the S&P. In 2018, only five stocks supplied 91% of the gains on the S&P. The other 495 stocks were tradeoffs.

In any market where breadth is narrow and the leadership is held by only a few stocks, there is always risk of falling. Eventually the gains in those stocks become so unbalanced, investors are forced to sell. This typically happens when the momentum stalls for 2-3 days and traders begin to worry. They eventually pull the exit trigger and the market collapses. I am NOT saying that is going to happen in the coming weeks. However, the gains in these stocks are so large, it WILL happen later this summer. These stocks contributed the most to the S&P gains in 2018. AMZN 35%, NFLX 21%, MSFT 15%, AAPL 12% and FB 8%.

Regardless of their position today, the S&P would not be over 2,800 this weekend without them. The S&P is only up 4.8% for the first half of the year. It is not like we had a 10-15% rally and now everything is overbought. These five stocks are overbought but they still have room to run before the charts begin to look like the Nasdaq bubble in 2000 all over again. As investors, we should understand the risks. – Cashin comments 7/17/18

While equity markets treaded water for the week they managed to hold the 2800 level on the S&P. That is good news for the bulls as they were able to hold their recent highs at this critical resistance level. Let’s see if they can get across the finish line next week and break out of this range. Our experience tells us it may take another small sell off to gain the momentum for the breakout. The Federal Reserve will be draining in the next 7 business days and that may produce a headwind for assets.

No blog the next two weeks as we stumble through Tuscany and celebrate our 50th birthdays.

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.

Tension Builds

We hope that you enjoyed reading our quarterly letter last week. We got some great feedback from people we admire in the industry and we hope that you found it useful as well. If you haven’t read it yet we would encourage you to. Here is the link to our quarterly letter.

2018 is going to be a huge year for corporate buybacks with an expected $800 billion in buybacks but the rest of April may be a bit sparse. Buybacks have, at times, carried this market. The rest of April could struggle with corporations in blackout periods due to earnings. It is interesting to note that Goldman Sachs suspended their buyback for the rest of this quarter. They are investing the money back into their business. Hmmm…

We can now say that the gap has been filled at 2700 in the S&P 500 but it also seems to be proving to be resistance for the time being. We watch gaps because gaps show us where the emotion lies in the market. A break in emotion whether good or bad creates gaps in charts. A healthy dose of good news and we rocket higher creating a gap. Bad news and we see a break lower. We have seen two major breaks in 2018 and they are both in the bears favor. When we get back to those gaps it is natural resistance (support) for markets.

By way of Arthur Cashin comes a note from his friend Jim Brown at Option Investor. It seems that Brown see that buybacks are escalating while the public steps back from the market.

On the public, Jim wrote: Bank of America said equity ownership in individual accounts has declined to 29% compared to the 41% in January. The 29% is an 18 month low. That can be seen as positive from a contrarian perspective. If the market continues higher, individual investors could begin scrambling to add equities to their portfolio. Since the average individual investor functions in a herd mentality, the surge of new buying a couple weeks from now could be at a market top. I wrote back in January that I expected a market decline in late April, early May once all the major earnings had been released. I was not expecting a February decline but my outlook for May is still cautious.

We have been calling for the market to struggle for 9-18 months since we hit 2666 and we continue to trade within 130 points of that number.  We are stuck, for now, in a range between the 100 Day Moving Average (DMA) and the 200 DMA. The 200 DMA is the number most watched by the momentum crowd. If we break below the 200 DMA there are very large funds that will go from 100% long to 100% short. The range that we are building also builds tension. When that tension is released the market will move in conjunction with how much pressure has built. Gold and the 10 Yr Treasury have been stuck in a range for a year. Keep an eye on the door. When these ranges break out things will change rapidly – but for now we wait.

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.

Fear of Missing Out

Courtesy of Cashin’s Comments this week comes an interesting insight about the bond market from a stock market maven who has had a hot hand. Jim Paulsen sent our friend Arthur Cashin an email in which he explains history’s treatment of stocks when bond yields move quickly.

Since 1980, when the 10-year bond yield was more than one standard deviation below its trend, the S&P 500 average annualized gain in the ensuing year was a robust 14.25%! When the 10-year yield was within either one standard deviation above or below trend, the stock market’s average annualized gain in the subsequent year was still a healthy almost 10%. However, when the bond yield was more than one standard deviation above its trend, the stock, market in the following year only provided a paltry 2.71% average annualized gains.

Moreover, whenever yields were higher than one standard deviation above trend, the stock market declined in the ensuing year 43% of the time compared to only about 19% the rest of the time! Within the last month, the 10-year Treasury bond yield has risen beyond one standard deviation above trend (as of Jim’s writing the 10 year was at 2.44%. It ended the week at 2.66%!). Consequently, despite ongoing strength in equity prices, the recent rise in yields may already be starting to pressure the stock market.

Let’s combine that thought about the bond market with current equity valuations. Courtesy of FPA Capital is their note that when the levels in the CAPE Ratio rise above 26, returns from equities decrease. Returns in the past 100 years from current CAPE Ratio levels average NEGATIVE 7% over the next 3 year period.

 

• When S&P 500 CAPE was below 10x, 3-yr returns of 39%; between 10x and 14x, returns of 34%; between 14x and 18x, returns of 13%; between 18x and 22x, returns of 20%; between 22x and 26x, returns of 22%; between 26-30x, returns of negative 1%; greater than 30x, returns of negative 7% (31x today!!!)

 

From a technical perspective we are awestruck by the current level of Relative Strength in the S&P 500. The RSI is at its highest level ever. Ever! The word Unsustainable comes to mind.

Investors seem to be in panic buy mode in a Fear Of Missing Out (FOMO). Money has flowed into mutual fund and stock ETF’s at the highest pace ever over the last four weeks. $58 billion in fresh money hit markets in the last month. Last week was the 7^th highest week ever according to Bank of America. That money came into the market after the market was off to one of its fastest yearly starts on record. We are setting a lot of records lately. That has red flags rising left and right. It’s not to say that the market roar won’t continue but at this pace the market will be up 166% for the 2018 if things continue. What cannot continue – won’t. Trees don’t grow to the sky.

We would remind you that in our blog last week we noted Bond King Jeffrey Gundlach’s line in the sand for equities. In his latest conference call Gundlach stated that the 2.63% level on the 10 year is going to be a very important level and at which stocks may begin to suffer. The 10 year closed the week at 2.663%.

The combination of higher rates, the end of QE and tax reform may push the market and economy into overheating. Late stages of bull markets can have very sharp and quick moves to the upside. It is starting to feel more like 1998-99. That’s the key. Are we in 1998 or 1999? It makes a big difference for our returns. Watch for price acceleration.

If you are not currently receiving our blog by email you can sign up for free at https://terencereilly.wordpress.com/ .

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  or check out our LinkedIn page at https://www.linkedin.com/in/terencereilly/ .

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.

Did the Swamp Win?

Trump Care, Obama Care or tax reform? It was really all about tax reform and not the Affordable Care Act (ACA aka Obama Care).  The shelving of the vote for reforming ACA may lead to markets being buoyed by the fact that Trump will now move on to tax reform.  It was never really about the ACA replace and repeal for Wall Street. The market was just looking for this to pass so that the administration could then move on to tax reform. A shelving of replace and repeal allows the administration to move on to tax reform as the ACA dies a slow death. Remember a yes vote would have just sent it to the Senate where it would have moved at a snail’s pace distracting the administration, delaying tax reform and distracting markets.

Lots of warning signs. The technical aspects of the market are growing less positive. Markets had reached such overbought levels that the next thought from market analysts is to say that there is negative divergence. In English please. Suffice to say that just means that the next up move will not have the same firepower as the last one and market participants could get nervous and pare back longs. By way of Arthur Cashin, we see that according to Jason Goepfert at SentimenTrader hedge funds are pulling back.

“After reaching one of their most-exposed levels in 15 years, hedge funds have started to lessen their positions in stocks. There have been three other times that they were as exposed as they were in the past month, and when they started to pull back and volatility rose, stocks fell hard, fast.” 3/24/17

 Ally Financial and Ford Motors both warned about a drop-off in the car market here in the US. Ally Financial slashed their earnings outlook as they see the worst used car prices in 20 years. Make sense. Have you bought a new car lately? It’s not a car. It’s a computer and we all know Moore’s Law and how our technology gets outdated quickly. Used cars are not nearly as safe as a car made today and the technology is improving rapidly. Pretty soon insurance companies are going to catch on that it is much less likely that a new car is going to get into an accident than a used car without all the latest safety technology. Morgan Stanley came out this week and said that the latest offering from Tesla will be 90% safer than cars currently on the road. Buying a used car in the past seemed frugal. Now it seems almost reckless. Used car prices are dropping. Since the crisis, banks have been extending the length of car loans from 3 years to 7 in some cases. Oops! The banks may have done it again!

This week the market actually saw a daily decline of over 1%! That is the daily decline of 1% or more since October of last year. Think we were overdue?  Turns out that Eric Mindich, of Goldman Sachs fame is getting out of the hedge fund business. That may have helped contribute to the weakness we saw this week. Mindich’s Eton Park hedge fund ran over $12 billion at its peak. It is now returning money to investors and market players may have shorted stocks in front of the liquidation of their positions. A time honored Wall Street tradition of making money off of someone else’s demise.

RBC’s Charlie McElliggott has been proffering some interesting analysis by way of zero hedge. Click on the link for more detail. Careful it gets a little wonky. Suffice to say that Mr. McElliggott seems to be saying that the more volatile things get the lower the market will go. If things stay quiet the market will continue to levitate. Keep an eye on the last 30 minutes of trading as they are the “tell”. He also goes on to say that more and more money is going into the same trades and strategies. Same side of the boat theory. Never ends well when everyone is leaning the same way. We couldn’t agree more with McElliggott and his team at RBC.

A lot depends on the perception of the Trump Administration post vote. Is tax reform coming or has the swamp won? Keep an eye on the last 30 minutes of trading.  We still think that this could be the last 10%. Markets are a touch oversold but caution must still be paid.  We are pressing the bets with our more aggressive clients but pulling back for our more risk averse. A move lower at this juncture should be met with buyers down 5-8% from the highs while history tells us that the old highs will be approached again. That is when the real decisions will need to be made.

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.

Until Something Breaks

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

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

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

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

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

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

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

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

Trump Train or Bulldozer?

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

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

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

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

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

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

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

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

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

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

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

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

Shock Waves

 “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” – Mark Twain

What the heck was that? An unexpected Trump victory sent shock waves through markets this week. What was once up is now down and what was down is now up. You have probably heard various explanations to this weeks 5% rally in the stock market. Here is my take. While many predicted that markets would sell off 5-10% in light of a Trump victory traders took their hints from the Brexit vote back in June. After the Brexit vote markets sold off but then rallied furiously. So this time, traders never let them sell off. Thinking like an old floor trader we saw many investors get caught offside. When everyone is on the same side of the boat the exits get small.

As we have written before Wall Street is agnostic when it comes to the election. They just want to know which way to bet. They got it horribly wrong and that wrong-footedness contributed to the volatility that we saw this week. Longs needed to be sold and shorts bought. The deflation trade was sold and the inflation trade was bought. Bonds, REIT’s and utilities got pummeled while financial stocks and biotechnology ran higher reversing their courses from the past year.

Going forward the street is betting on US dollar trades and less on globalization of trade. They also see inflation coming back with the Republicans running fiscal deficits and increasing spending on infrastructure while controlling both Houses of Congress and 1600 Pennsylvania Avenue.

Market internals tell us that something is amiss. While markets ran up 450 points after FBI Director Comey cleared Hilary Clinton and what seemed to be her path to the White House markets rallied 500 points when Trump sailed to victory. Also, declining stocks have been higher than advancing stocks while the market hits new highs. According to Arthur Cashin at the NYSE the market saw the largest number of simultaneous new highs and new lows in nearly 50 years. Not a sign of strength.

We believe that the path going forward is to continue to follow the aftermath of Brexit on British markets. While a honeymoon period is to be expected we believe that, as has been the case in Britain, as the honeymoon ends equity markets will begin to consolidate their gains post election and gravitate towards their lows of election night. Market closed on Friday at 2164 on the S&P 500. For now, resistance is at 2170 and then 2190. Market is now overbought and should take a breather here. Lots to come in the next month with the forming of a Trump Cabinet, an Italian referendum that could spell further problems for the EU and a likely rate increase here in the United States.

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.

Controlled Burn

I believe risk is most when we feel it least and the risk is least when we feel it most. -Steve Blumenthal CMG

I read Steve Blumenthal’s weekly blog On My Radar every week. I don’t always agree with Steve but he always makes me think. His take on risk really struck a chord with me. I read it over several times. When the wine if flowing and markets are rising we don’t notice that risk is rising. Market moves lower create sheer panic. That gets our attention. It is then that risk is lower. Tops may or may not be forming but the signs are there. Investor complacency. Mega deals. High valuations. Be on guard.

http://www.cmgwealth.com/ri/radar-youve-got-remember-two-things/

Oil has taken a beating over the last week. The negotiations between the OPEC nations have seen more posturing and negotiating and that has oil backing away from $50 a barrel. We think that they are closer to the end of the negotiations than the beginning. Things for the Saudi’s at home are running a little tight and they need higher oil prices. The Saudi’s are looking for cooperation and we think they will make a deal. Right now oil is in a bit of a panic selloff and may seek to retest the lows. Goldman Sachs has piled on by calling for lower oil prices. Doing the opposite of what Goldman says publicly has been a great strategy for years.

http://www.zerohedge.com/news/2016-11-01/goldman-warns-oil-headed-low-40-declining-probability-opec-deal

Arthur Cashin pointed out on Friday morning that the market is on an extended losing streak and it has been picking up steam since breaking through the 2130 level we warned about.

The negative close made it eight down sessions in a row something the S&P hasn’t done since October of 2008 in the days following the Lehman collapse. The severity of the selling was far sharper in 2008. That eight session sell off dinged the S&P for 23% while this move has only sliced 3% from the S&P. 11/4/2016

Friday’s close made it 9 down sessions in a row. That makes for the longest losing streak in 36 years. The market is down only 4.9% from its all time high so this is acting as a very controlled burn. A Trump win could make for more downside but another 5% would be a very healthy 10% correction which we haven’t seen in a while. The big question is will the Federal Reserve still raise rates if Trump wins? That could help propel the selloff. We have our doubts that the Fed will have the stomach for it. If they do we could see cheaper prices. We have had heavy cash positions for some time. One year returns have gone negative on the S&P. Valuations have been high and that justified our cash position. History tells us that markets have struggled to rise from these valuation levels. The market has been stuck in a rut. We would love to see cheaper prices.

Market closed at 2085 which is just above our support level of 2080. Even a blind squirrel finds a nut from time to time. A break of 2080 brings 2040 into play but markets are very oversold and looking for a bounce. 2080 is support for now. We would not be surprised if we do not have a winner on Tuesday night. Gore v Bush. Hold all tickets!

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.

 

 

 

 

 

Do You Remember? Dancing in September

September. A month when thoughts turn to returning to school and the weather cools as investors and traders return from the beach. The relaxation of summer is quickly replaced by the feelings of anxiety. There are no months that strike fear and anxiety in the hearts of investors more than September and October. This year will be no different. The two worst performing months on the calendar are the aforementioned months. The reminder of September 11^th for traders who were there only serves to heighten the anxiety felt. As you know we find that the seasonality of markets to be a reliable source of alpha as human beings refuse to change their well worn patterns. From Arthur Cashin and Jason Goepfert comes some fresh research on the where we stand on the upcoming seasonality and what next month may hold in store.

 1.Volume on the NYSE has been well below average, which is not unusual for a pre-holiday week. When stocks hit new highs on below-average volume, they tend to under-perform a bit longer-term, relative to when they hit new highs on above-average volume.

 2.If the S&P 500 closed August with a gain of 3% or more, then it added to its gains in September 36% of the time. If it also closed at a 12-month high in August, then September was positive only 1 out of 12 times, averaging -2.6%. If August closed with a gain of 1% or more, and a 12-month high, then September was positive only 3 out of 19 times, averaging -1.6%. All data since 1928. – Jason Goepfert Sundial Capital Research

As you know we have felt that the bond market still had legs in its rally in 2014. (2015 may be a different story.) Also by way of Arthur Cashin are the following notes from Barry Habib who has nailed the bond market and its course so far in 2014.

 Here are some additional reasons to support a continuing decline in US yields.  Foreign investors, especially those in Europe, will likely be attracted to investing in US Treasuries.  Not just because of the obvious and wide spread between the US 10-year Note and German 10-year Bund.  There is an added currency play which could greatly improve the returns.  As QE3 comes to a close, we have already seen the Dollar strengthen against the Euro.  This trend should continue as tapering is finalized.  Adding to the Dollar strength against the Euro is the strengthening US economy against the sluggish Eurozone. – Barry Habib

Arthur goes on to mention that another reason to be long US Treasuries is because everyone else is seemingly on the other side of that trade and short US Treasuries. There is massive money short US Treasuries which is a bet that Treasuries will lose their value and have prices head lower. For most of 2014 that trade has been a loser. The thought being that with the Fed ready to start raising rates it would be a no brainer that Treasuries would lose value. Not so much.

Keep your eyes on Us Treasuries as any geopolitical rumblings or deflation in Europe may push more money into bonds. We will find out in the next two months as to how much the Federal Reserve’s QE policy has held up stock prices. Those purchases are being eliminated in the next 60 days. This is where the rubber meets the road. It is ironic that the Fed policy is being withdrawn at the worst point seasonally for stocks. The anxiety level of investors for September and October will only be heightened. Gold keeps trying to break out but is being held back.  As for stocks here is a note we sent to a friend this week.

 Just for kicks – the high in 1987 was put in the day after Labor Day. 

 The chart I am watching is the Small CAP Reversal chart I attached below. It is a textbook reversal pattern. Having said that, nothing right now that is happening from a monetary perspective is in the textbook. Watch the Russell 2000  (IWM). If it closes below 108 it should go to 96 very quickly. That is a 17% drop from current levels. Large caps will not fall by as much but it could change the trend of the market and that could last for months. 

 Now the good part. No problems. Only opportunities. Take a look at the 2nd chart – Dow Jones Bull Bear Cycles. The last two Bear cycles lasted 17 & 18 years. We are 14 years into the current Bear Cycle. Take a look at the 1970’s bear cycle. I expect much the same to happen here. The last major move down is expected by investors and therefore should be much shallower than the previous moves in the Bear Cycle. Investors are prepared this time. (The old – they are not going to get me again!) Granted monetary policy is a bit experimental and anything can happen. I just think a major dip this late into a Bear Cycle will need to be bought. 

 Hope this helps. If you can keep your head while…

 bigcharts.com 

 

 

 

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.

Two Hawks?

Eyes around the world have turned to the Federal Reserve as their exit from Quantitative Easing (QE) has shaken markets. Each Fed member while able to espouse their own opinion is still part of a larger group at work. That is why when we listen to Fed members speak we also look to see the message of the group at large. For instance, when a member noted for their hawkish or dovish tones speaks it is usually offset by a speaker from the opposite camp in following days. We would point out that we heard two speakers this week. One hawk and one dove. The hawk came first by way of Richard Fisher of the Dallas Federal Reserve. Fisher is not backing down from his stance that QE must be wound down. Here is what he had to say by way of Arthur Cashin early this week.

 No Tapering The Tapering? – Dallas Fed President, Richard Fisher, was interviewed by Fox after the NYSE closed.  Here’s what MarketWatch heard:

 Fed’s Fisher sees no reason to slow bond taper

 WASHINGTON (MarketWatch) – Dallas Federal Reserve President Richard Fisher said he thinks the central bank should continue to reduce bond purchases despite falling U.S. stock prices and currency turmoil in overseas economies. In an interview on Fox Business, Fisher on Monday said the Federal Reserve is focused on how the “real” economy is doing and not just the stock market. So long as the economy shows progress, he said, the Fed should cut bond purchases from the current rate of $65 billion a month. Fisher pointed out that stock prices are still sharply higher compared to one year ago and he noted that markets are occasionally prone to sharp gyrations regardless of the health of the economy. Fisher is a voting member this year of the Fed’s policy-setting committee.

 His comments were to be offset by noted dove Chicago Federal Reserve president Charles Evans. Evans chose to emphasize that inflation was low and policy would remain accommodative for some time. He went on to say that inflation and not unemployment was the new bogey. Interestingly, he backed Fisher on the continued tapering of QE.

DETROIT–Chicago Federal Reserve President Charles Evans said Tuesday he is concerned inflation is still below the central bank’s 2% target.

The Fed has indicated it will maintain low rates until unemployment reaches 6.5%, but Mr. Evans said the inflation rate will be a factor in the central bank’s decision on when to raise the federal funds rate. The federal funds rate will stay at zero into 2015, he said.

“As long as inflation is below our 2% objective we can continue to have highly accommodative policy,” Mr. Evans told reporters following a speech to the Detroit Economic Club. “The inflation data is going to continue to be a puzzle.”

Mr. Evans said he sees no evidence of pressure to raise wages. Businesses “are getting by with who they’ve got right now.”

He also defended the pace of the Fed’s tapering of its asset purchases, and said it would be a “high hurdle” to change the $10 billion-a-month reductions over the next several months.

“It’s the right time and approach to moderately reduce our asset purchase pace,” Mr. Evans said.

Noting the recent upheaval in some emerging markets, he said that the Fed made clear in advance that it would be unwinding its quantitative easing, and that this shouldn’t have been “a big surprise” to investors. – WSJ 2/4/14

If that wasn’t enough it seems as though the authorities in China are ending the liquidity game and taking their ball home too. From Bloomberg comes an article this week that outlines China’s issues with shadow banking and liquidity fueled growth there. In an effort to get things under control and prevent a rapid melt down China is willing to withstand further volatility.

China’s central bank said reasonable volatility in money-market interest rates must be tolerated as it manages liquidity in the country’s financial system to rein in credit growth.

China’s benchmark repurchase rate surged to a record in June after the central bank refrained from addressing a cash crunch in the interbank market as it cracked down on shadow finance. The PBOC said today that while it will use tools including the reserve-requirement ratio and short-term lending facilities to ensure “appropriate liquidity,” it won’t bankroll a growth model that relies on investment and debt. – Bloomberg

It looks like the Tapering of liquidity is here to stay and so is volatility. Any hopes that the Fed might be swayed by other central banks, emerging market tremors or stock market volatility can be put to bed. 2014 is off to a rocky start and that will probably continue.

 Well, we did not get our Game Set MATCH as per Tom DeMark as the week ended higher. It’s back to the drawing board for Tom. We did get our oversold bounce although it did look in doubt Wednesday as the bulls seemed quite timid. More volatility to come as Central Banks have green lighted volatility in order to get liquidity back under control.

 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.