Less In

One of our favorite bulls is changing his tone this week as Jim Paulsen of the Leuthold Group seems to be pouring a little cold water on this rally. In his piece titled “No More Juice” Paulsen, a long time bull, says investors should be prepared as central bankers try to wean markets off of the juice (QE). Paulsen has been spot on for years with the market rally since 2008 and when he speaks we listen. We agree with Paulsen and we do not see a market collapse but there is a need to constantly reevaluate and recalibrate where our investment money needs to be in this market.

“As financial markets are weaned off the juice they have been drinking for almost a decade, investors should prepare for a very different bull market in the balance of this recovery,” he said. “Without a chronic injection of financial liquidity, the stock market may struggle more frequently, overall returns are likely to be far lower, and bond yields may customarily rise.”

To be sure, Paulsen is not predicting a market collapse. Instead, he suggests investors will need to shift strategy away from the cyclical U.S.-centric approach that has worked for most of the past 8½ years, due to the likely contraction of money supply compared to nominal GDP growth.

That means value over growth stocks, international over domestic, and inflationary sectors, like energy, materials and industrials, over disinflationary groups like telecom and utilities.

It is our job not to predict but to contingency plan. In order to do that we look to the horizon for what could trip up our investing plans or to find what investments may benefit from changes in the environment. One of biggest worries is China. The yield curve continues to invert in China. For those of you that are new to our blog an inverted yield curve is a sign that a recession may be approaching. A recession in China would have reverberations worldwide. According to FT, Chinese debt has grown from $6T at the beginning of the crisis in 2007 to over $29T today. The government there continues to want reform but needs to proceed with caution to avoid creating a crisis. The Chinese central bank added more reserves to their system this week in one of its biggest injections of 2017 and that helped soothe markets – for now.

In another sign of the imbalances created by central banks and QE it still boggles our minds that European High Yield has less of a yield attached to it than 10 Year US Treasuries. If we have a bubble then it is certainly there. In yet another great piece by John Mauldin, in his Thoughts from the Frontline, he notes the preponderance of negative yielding government bonds. Can you believe that Italy and Spain have short term negative yielding debt? Who would want to own debt from Italy and Spain at negative yields?!  Mauldin also points to Louis Gave and their research suggesting a currency peg could cause a waterfall of problems and they are pointing to Lebanon. It is a very interesting piece. If you don’t get John’s Thoughts From the Frontline, then sign up, it is free.

Market internals continue to deteriorate and that is especially important in light of historically high valuations. The market has entered what seems to be a new pattern of opening lower and rallying back throughout the day. The S&P 500 is up 12 months in a row and has only experienced pullbacks of less than 3% in 2017. The daily range in stocks is the lowest it has been since the 1960’s. The yield curve here in the US is the flattest it has been since 2007 and the curve in China is inverted. Trees cannot grow to the sky and what cannot continue – won’t.  Volatility will return it is only a matter of when. We see the relative strength on the S&P 500 reaching historically overbought levels. When the S&P reaches this level it makes the comparisons very tough. A pullback is warranted in the S&P and when it does the next rally will not be able to surpass these overbought levels. At that time investors will see it as a negative divergence. That is when the market may begin to struggle.

We continue to fret about risk parity and volatility selling. When stocks go down we will look at bond prices. At some point they will both go down in tandem and selling will beget selling. If there is a meltdown, we believe that is where it where we will see it start.

The Warren Buffet of endowment investing is David Swenson from Yale. We were able to watch an hour long interview with the investing legend and have included a link. The interview of Mr. Swenson is from a meeting of the Council on Foreign Relations conducted by former Treasury Secretary Robert Rubin. Here is the money quote.

But when you start out, you were talking about fundamental risks in this world. And when you compare the fundamental risks that we see all around the globe with the lack of volatility in our securities markets, it’s profoundly troubling, and makes me wonder if we’re not setting ourselves up for an ’87 or a ’98, or a 2008-2009. David Swenson Chief Investment Officer Yale University

So much to say and so little space this week. Obviously, we are a bit concerned that the rally is a little long in the tooth and investors may have lost respect for the power of markets amid market’s seeming invincibility. The animal spirits are unpredictable and still in control. Gotta be in it to win it but, maybe just a little less and a little less in. Tax reform passage could be a sell on the news event and we are, warily, watching the turn of the calendar.  Happy Thanksgiving everyone!! No blog next week as we will be still filling up on leftovers.

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.

Advertisements

Crackdown, Smackdown and Fever

Two areas of asset pricing that we always keep an eye on in an attempt to decipher the market’s next move are US Treasuries and the oil patch. Let’s take a look at the current oil market and the commodity sector. Falling oil prices indicate lessening demand and therefore a lagging economy. In a nasty selloff oil is now down 11% in the last 3 weeks. There are rumors of major oil focused hedge funds liquidating or taking all risk off of their books as the price of oil swiftly moves lower. All of this while copper takes a tumble too. A falling oil price (and copper for that matter) does not bode well for the economy, high yield stocks or the stock market. When we talk weak commodities our thoughts immediately turn to China. The recent selloff in the commodity sector is being linked to a tightening of monetary conditions in China. A crackdown by the Chinese government is leading to higher interest rates and a tightening of the money supply in an effort to deleverage the economy. That, in turn, leads to lower commodity prices as China is one of the world’s largest consumers of commodities. A slowdown in China needs to be on our radar.

We have also been seeing a drift lower in hard data on the US economy. This data has been dragging since the failure of Trump & Co. to repeal Obama Care the first time in March. It seems that the market is waiting on some good to come out of Washington DC. We should never count on anything to come out of Washington DC.

The market is stuck in consolidation mode. In spite of recent data on a slowing economy we still expect the market to break out of its recent range to the upside and in favor of the bulls. More often than not when a market consolidates a major move it breaks out of that pattern the same way that it came into it. It’s all about momentum and the animal spirits of the market. That would mean we break out to the upside. There are lots of negatives about like weak US data, a Chinese slowdown and massive insider selling by US Corporate executives but the market refuses to break down. Many astute investors are warning about valuations in the market and are taking down risk.  They could be forced to chase the market higher adding fuel to the fire of animal spirits.

There is currently a massive speculative fervor in the crypto currencies like Bit Coin and Ethereum. A speculative fever has broken out and it is suspected that a lot of that money is coming out of China as capital controls are implemented and from Japan where a tax on investing in crypto currencies is going to be waived soon. Please approach with caution! This market is moving fast.

This may be a bit too inside baseball but the lack of volatility is important to watch. One of the most popular trades on the street over the last few years has been to sell volatility. Massive selling of volatility compresses the price of volatility, the numbers of players executing this strategy increases with the trade’s success and it brings in more and more investors to the trade. The word is that 95% of the float in VXX (Volatility ETN) is being used to short volatility. Ladies and gentlemen 30% would be large, but 95%!! The boat is listing to port as too many investors are in on this trade. This will explode violently in their faces. We don’t know when but it will. It always does. The risk parity trade and the selling of volatility combined with the reliance on passive investing ETF’s with High Frequency Trading market makers create a structural weakness in the market and will at some point create an opportunity for those with cash when the time comes. Forewarned is forearmed.

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/ .

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.

Ride the Wave

So much has happened and so much to talk about. We could talk about the seemingly globally coordinated easing from central banks around the globe. Central banks easing policy in the last two weeks have included Norway, Sweden, the Bank Of Japan (BOJ), the European Central Bank (ECB), the Chinese central bank and of course our own recent dovish statement from the US Federal Reserve,. We could talk about how that has led to a weaker US Dollar which in turn has helped oil, precious metal and emerging markets stage a turnaround in fortunes. Or perhaps we should discuss how Central bank maneuvers have helped US markets regain all of the ground they had lost so far in 2016.

We could talk about all this but here is what we think would be most useful right now. The key to making money in these markets lies in Investor Psychology. How we understand it and our own emotions when it comes to investing our money is the key to success.  Here are two charts that can help you be more successful in understanding how emotions play a role in your investing process.  Courtesy of CNBC, the first chart shows two 12% rallies in the last 7 months. The second is a chart of investor psychology. After our second 12% rally in 7 months you should ask yourself, Where are you on this chart? Are you relieved? Optimistic? Thrilled? Sell risk when prices are rising and buy risk when prices are falling. Understanding and keeping your emotions in check is the key to making money in markets like these. Ride the wave.

Be fearful when others are greedy and greedy when others are fearful. – Warren Buffett

 

 

 

If the Dow Jones holds its gains for the next two weeks we will have seen the biggest quarterly comeback in stock markets since 1933. We don’t have to remind you that the 1933 rally took place smack in the middle of the Great Depression. Risks are rising after our second 12% rally in months. It is going to be hard to move higher from here but don’t bet against continued central bank largess. The stock market is up 12% in 26 trading days. Not bad. But it does remind us of a blog post from back in October of 2015.

October 2015 will go down as the best performing month for the S&P 500 in four years.  I think that we all enjoyed the ride back up in October. The S&P 500 rallied 8.3% and followed through with more gains today to get the S&P 500 into the plus column for 2015. Those gains would be nice gains for an entire year – never mind a month! Whenever we get to thinking how much we have gained we cannot help but to contemplate the downside. We must always be on guard to temper our greed/ego just as much as we would concentrate on opportunity when fear strikes.

As a reminder the S&P 500 closed October of 2015 at 2080. It would be 10% lower by January of 2016.

Central bank policy in Europe and the US is having the same effect. Earnings estimates are heading lower while stocks ride higher. Not a great recipe for success. Risk is rising.

We cannot predict with 100% accuracy every move in the market but what we can do is try and profit by tactically allocating and hedging our portfolio in times of market stress to take advantage of market volatility. Investing is not a game of perfection but of managing the risk inside one’s portfolio. We do not jump in and jump out of the market wholesale. By divesting ourselves of overpriced assets and availing ourselves of opportunities when prices are low allows us to take advantage of the long term benefits that the math of compounding brings.

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

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

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

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

Warren Buffett’s Favorite Metric

Warren Buffett’s favorite metric for the market over the years has been the Ratio of US Market Capitalization to United States GDP. Here is a copy of it below from Ned Davis Research. Ned Davis Research is one of the best independent research outfits in the business and I have followed their insights for over 25 years.

What I find fascinating about this chart is the high levels of valuation since the mid 1990’s. I believe that this time period should be considered the Golden Age of Central banking. This was the Era of Greenspan and the Greenspan Put. Alan Greenspan was the Chairman of the US Federal Reserve Bank from 1987-2006. It was Greenspan that realized the power of central banking. Central bankers in previous eras did not have the tools at their disposal to manage monetary policy as effectively as Greenspan. It was the removal of the Gold Standard by Richard Nixon which allowed central bankers in the US to pull forward growth in order to manage downturns more effectively. Note however that since 1995, valuations in the market have exceeded the average levels consistently with the exception of the 2008 crash. That leaves us with some very big questions. How long can central bankers keep pulling forward returns? How long will markets continue to give higher than normal valuations to markets based on central bank policy? Ned Davis Research

Ned Davis March 2016 Mkt Cap GDP

The one era most like our current one is that the late 1936 – early 1937 period. Current high levels of Price Earnings ratios, and, historically low 10 Year yields combine in a disturbing stew now as they did in 1937. Coming out of the Great Depression Federal Reserve officials saw prices in the stock market build to uncomfortable levels and with inflation on the horizon began to raise interest rates. The first tightening in August 1936 did not hurt stock prices or the economy, as is typical.

The tightening of interest rates was made worse by currency wars as European nations chose to move in the opposite direction of US monetary policy. The world began to demand US Dollars and gold. As inflation picked up to 5% the Federal Reserve raised rates further in March of 1937 and again in May 1937. This tighter monetary policy reduced liquidity and sent bond and stock prices much tumbling. Stocks would bottom a year later down 50% from prior levels.

Given the high level of valuations in the Golden Age of Central Banking how will assets perform if the Federal Reserve wants to exit the policies that brought forth those valuations? Central bankers may find that The Golden Age of Central Banking may give way to the Roach Motel of Central Banking. They can get in but they cannot get out.  It’s all about how markets react to the second and third rate hikes.

In our last blog post we mentioned the key levels for the market and now we are there. The bulls did not have much trouble surmounting the 1940 level but 2000 may prove more difficult.

The next level for the bulls is the 2000 number on the S&P 500 and then 2020. We have a confluence of moving averages and resistance zones to overcome here but the bulls have the bears on the run and shorts are covering as they feel the pain.  The risk at the moment is skewed to the downside as we have come very far very fast since the lows of 1812 in mid February. The market is extremely overbought and needs to rest. Let’s see if the bears can push back the bulls. Markets are looking for central bank intervention and if not from China this weekend then perhaps the ECB next week. Shorts are feeling the pain and the bulls may have their hearts set on 2100 on the S&P

Clients have been asking what metrics we are looking at as far as taking more equity risk. The 200 Day Moving Average (DMA) is the Maginot Line when it comes to seeing markets as bull markets or bear markets. Obviously, we would take more equity risk if we felt that we are in a bull market. Currently with the S&P 500 below its 200 DMA we are inclined to believe that we are in a bear market and continue to hedge risk. Let’s see if the bulls can get above and stay above the 200 DMA.

Oil’s bounce is alleviating pressure on borrowers and drillers but prices need to get back above $50 a barrel to really stop the pain. Forced selling of oil and oil related debt may be easing for now but the pain may only be delayed. High yield debt has seen money pour into that sector in the last week. Investors may be catching a falling knife there with more pain to come.

In our last blog post we asked you to keep an eye on gold. We feel that foreign investors could find solace here as the games of currency wars and negative interest rates heat up. That continues to be the case. Gold has been the star of 2016 and this week was no different. The yellow metal may be due for a rest but it might a short one. Negative interest rates in Europe are helping as are the concurrent currency wars between Japan, China, the US and Europe. Hold on tight and keep an eye on gold. Ray Dalio was at the University of Texas this week telling retail investors that they should consider holding 5% of their assets in gold. Look at Sprott Physical Gold Trust (PHYS) ETF and SPDR Gold Trust (GLD) ETF if you are determined to hold gold in your portfolio. PHYS has had better performance this year than GLD.

Not recommendation just information. Investing is not a game of perfect.  It is a game of probabilities.

 

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.

Where to Place Your Bets

 

Speaking to clients this week all the talk was about the Super Bowl, the election and how far markets have to fall. First of all, let’s just get the Super Bowl talk out of the way. We are of the sentimental type and are wishing that as this is Peyton’s Manning’s’ last rodeo we hope that he gets to go out on top. Having said that Barack Obama is in his last rodeo as Commander in Chief and statistically speaking, last rodeos by second term President have never been very good for markets.

Markets hate uncertainty. By not knowing who will occupy the White House in January market participants do not know where to place their bets. According to Sam Stovall over at S&P IQ the fourth year of a second term President is up only 44% of the time versus the average year of being positive 66% of the time. The returns, as you might expect, are also subpar. The average fourth year of a second term US President is down 1.2% versus the average stock market return of 7% since 1900. If the market players do not know who is going to be President they do not know where to place their bets. For example, if a Democrat were to occupy the White House in January market players may bet on wind and solar. If, on the other hand, a Republican is in the White House beaten down coal companies might be a good bet. So you see it is not Hilary vs. Trump that has the market in a tizzy. It is the uncertainty. The market is agnostic on the race for the White House. It just wants to know which way to bet.

We have said in prior posts that it is really all about the Federal Reserve policy unwind that is moving markets but it does have other co-conspirators. The other underpinnings of doubt are the race for the White House, China and the price of oil. As those underpinnings become resolved the market can regain its footing because in becoming resolved they may precipitate a sharp fall in asset prices which could change Federal Reserve polices.

How far could prices fall? Again from Sam Stovall, we see some excellent statistical information in the following graph.  A bear market is conferred when stocks fall 20% from their peak. The peak of our current market was seen on May 21st of 2015 at the price level of 2130 on the S&P 500. The average bear market since the end of WW II falls 32.7% while taking 9 months to fall 20% and 14 months to eventually hit its bottom.

 

 

S&P 500 Bear Markets Since 1946

Looking at Mr. Stovall’s chart what stand out to us is the 1968 – 1982 period. Much as the 1966-1982 period we believe that we are in a secular bear market. Much like the 1966-82 secular bear we have had two Mega Meltdowns. If history does not repeat but rhyme we could enter our third cyclical bear market of the 2000-2018 secular bear market and we would expect it to mimic the 1980-1982 bear market. We believe that we may be entering what S&P IQ would term a Garden Variety bear market. Those averages would call for a 26.4% down move from the peak that would last 14 months in duration. The 1980 bear market lasted 20 months and was lower by 27.1% from its peak. Numbers such as those would put our markets at 1555 on the S&P 500 in July of 2016.

We are not finding many bulls in the market right now. That alone tells us that investors are prepared after two Mega Meltdowns in the last 16 years. If we are to have a bear market we think it far likelier that we will have one of the Garden Variety and this summer investors may have a better idea of where to place their bets.

As investors we create scenarios and try to invest appropriately. Using this information we have had lower than normal equity allocations and higher than average cash positions. We are also currently hedging our equity allocations for our more aggressive clients. That should allow us to outperform in a down market. Remember, markets go down far faster than they go up. We are not making predictions here. Investing is not a game of perfect.  It is a game of probabilities.

 

 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.

Fickle Stock Markets and Daughter’s Driving

‘There are decades where nothing happens; and there are weeks where decades happen.’  – Vladimir Ilyich Lenin

It has been some time since our last quarterly letter but then again not much of anything of consequence has happened since the summer began. As you can see from our above quote, stolen from Vladimir Lenin, this week has seen some market moving news. China’s devaluation this week felt earth moving. A little background perhaps? Currencies are a tool which governments can use to speed up or slow down their economies. China has seen a serious deterioration in its export driven economy in recent weeks. A weaker currency is a lever to pull to get exports going again. Look at the relationship between the US and China. If I wanted to buy Chinese manufactured goods I would use US Dollars to do it. If the Chinese currency goes lower versus the US Dollar than my Dollars go farther. Instead of it costing $600 dollars for a piece of furniture maybe it only costs $540 now. If I am a dealer here in the US maybe I increase my purchases by 10%. A nice little jumpstart to the Chinese economy and cheaper goods here in the US. Cheaper goods is a good thing right? Well, maybe not so much. You now have the idea that China is not only exporting goods but cheaper goods and prices begin to fall. The Federal Reserve here in the US has been trying to ignite INFLATION and not having much success. Now we may be seeing waves of deflation hitting our shores further pushing the Federal Reserve into a bind. China is now exporting deflation around the world.

This puts the Federal Reserve in a bigger bind than they were previously. The IMF and World Bank have asked them not to raise interest rates. Higher interest rates in the US will only make the Dollar rise faster and higher. Why is that a problem? I can go travel internationally for less money. The problem is that many countries tie their currencies to the US Dollar. Their currencies are rising and that is harming their economies. These countries may have to devalue their currencies and around and around we go in a race to the bottom. Eventually something will have to give. For now my money is on a currency like the Malaysian Ringgit. A currency in a far off land none of us are concerned about until we are all very concerned. This sounds much like the beginnings of the 1997 Asia Financial Crisis. That crisis started with the collapse of the Thai Baht. The crisis migrated its way to Russia where they defaulted on their debt and soon to the US where the collapse of a large hedge fund forced the Federal Reserve to intervene. We are all interconnected. Watch out for currency crises.

From Jason Goepfert of SentimenTrader comes an interesting statistic. Friday’s have historically been up days in the market. No one likes to have risk on a weekend so shorts like to cover. Shorts have infinite risk. If you are short over a weekend and the company that you are short is purchased you have infinite risk. Not much fun at the beach worrying about that so you cover your position driving prices higher. Goepfert points out that over the last 3 months out of 12 Fridays the S&P 500 has been down 10 times. Investors seem to be seeing the glass as half empty and not half full with the unexpected weekend surprise being skewed to the downside.

Clients are asking about my feelings on commodities and crude oil in particular. Anecdotally, I am hearing advisors ask about eliminating commodities from model portfolios. As clear as a bell being rung we may be closer to the bottom in commodities than the top.

“Corporate insiders in the energy sector have dried up their selling activity while making some buys. At the same time, sentiment on crude oil has soured to one of its worst levels in over a decade. When we’ve seen this kind of difference in opinion between insiders and public, energy stocks have consistently rallied.”  –  Jason Goepfert – Cashin’s Comments – 7/28/2015

When there is no one left to sell…

Keep an eye on gold, silver and oil but especially copper. Copper may tell us whether China – the global growth engine- is getting back on its feet.

It is getting harder and harder to generate a return in these markets. The S&P 500 has moved in a 5% range since last November when the Federal Reserve stopped increasing its balance sheet. Bonds have continued to do well as interest rates are back to recent lows. The 200 day Moving Average (DMA) is critical support on the S&P 500. China’s actions may be the key. If they continue to let their currency depreciate then markets may suffer. Keep an eye on the US Dollar. If the Federal Reserve raises rates while China continues to depreciate then the probability of downside risks accelerate. We could be in for a bumpy ride here. September and October can be the cruelest times of the year for investors.

The Dow Jones Industrial Average has swung to either side of breakeven in 2015 over 20 times. No other year has been so fickle, the closest being the 20 times the blue chip index swung in both 1934 and 1994, according to research compiled by Bespoke Investment Group. This shows the lack of conviction by market participants going back to last November. As a reminder, 1934 finished up 4.1% for the year while in 1994 the Dow Jones closed higher by just 2.1%. The years after the most fickle years look like this. 1935 was up 38.6% and 1995 was up 33.5%. Not enough data to go on but we will keep digging.

My oldest got her Driver’s License on Friday. Time is flying by. After her test, the first thing that I did was call my insurance agent. For all of you, this is a good time of the year to check out your insurance and make sure that you are getting the most bang for your buck whether it be home, auto, life or liability. If you need help I have some excellent resources for you. As a disclosure I am a fee only Registered Investment Advisor. I do not make money on your insurance needs. My only goal is to help you protect your assets and save money.

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 is Building and Heads Roll in Saudi Arabia

A recovery in China, the world’s second-biggest economy, would influence securities and commodities prices around the globe, said Stanley Druckenmiller. For instance, it would send German government bond prices lower, boost European exporters and lift the price of oil. Stanley Druckenmiller – BLOOMBERG 4/15/2015

I have included a link the whole Druckenmiller interview with Bloomberg. It is 45 minutes long but well worth the time. Druckenmiller is one of the greatest investors of our generation and he touches on topics including Central Bank policy, oil prices and the economy in China. Druckenmiller obviously believes that a recovery in China would have reverberations worldwide.

http://www.bloomberg.com/news/articles/2015-04-15/druckenmiller-bets-on-market-surprise-with-china-boom-oil-rise

Central banks continue to dominate the conversation. Central banks in the US, Japan and Europe are buying up bond issuance and inflating asset prices. As long as central banks maintain current policy asset prices will continue to climb. A slow down in balance sheet growth would bring slower asset price growth much as it has in the United States since last October. Investors are nervous but policy is still accommodating. History has shown that markets do not turn on a dime on the first rate hike by the Federal Reserve. It is the second rate hike that begins to slow markets. Rest assured Fed officials have made it clear that they will catch markets when they fall. We may be in a period of subdued returns as markets show signs of slowing their ascent but not turning lower. We are long but have our guard up.

Market is still stuck in an increasingly tighter range and the tension is building. The range in the S&P 500 is now 2040 -2120. Markets tend to break out the way that they came in. The odds are that it breaks out to the upside with 2200 as a target. The volume has been increasing on the downside of late but the market is holding its levels and its all important 200 day moving average. A sustained break below that area would bring out sellers but until then the trend is higher. While metrics have the market at historically high valuations we don’t see asset prices turning lower until central bank policy changes.

In our last blog post we told you to keep an eye on Saudi Arabian policies affecting the price of oil. Saudi Arabia replaced the head of its state-run oil company this week. We think that oil prices may benefit. Keep an eye on Saudi Arabia. Druckenmiller thinks China is recovering. We agree with Druckenmiller that the US Dollar will continue its recent trend and that may be a headwind for commodities but a recovery in China will take precedence. A Chinese recovery will benefit all commodities including oil, copper and gold.

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.

Broken Clocks and Sandcastles

Many of you have been anxious to hear how we feel things are unfolding. While we are busy this week writing our quarterly letter we thought that given the volatility and pain of this week we would write you a small note. Like a broken clock that is right twice a day we have been in tune with the market of late. We felt that the wind down of QE in October would bring volatility to the markets that the Fed, while not welcoming it, would ALLOW volatility to proceed. This bull market has been built on the back of dullness. Most of the returns garnered since the lows in 2009 have been when volatility was low. High volatility has been seen only during pullbacks in the market. A lack of volatility breeds complacency and risk taking. Stability can breed instability. Like a child’s pile of sand at the beach that grows ever higher it only takes one additional grain of sand to knock down an entire side and you don’t know which grain of sand that will be. The Federal Reserve knows this and, I feel, senses the need to bring back volatility and a respect for risk. Not to mention the fact that they may be out of bullets.

As a reminder we had this to say in our blog post back titled Riding the Waves back in July.

The central theme here is that investors should be expecting an increase in volatility as the Federal Reserve tries to exit its loose monetary policy. We expect trading bands to widen over the coming months as Fed officials warn of approaching volatility. The bankers are asking for it and the Fed is ready to let it happen. We intend to be prepared. https://terencereilly.wordpress.com/2014/07/07/riding-the-waves/

The bearish thesis that we laid out certainly showed itself this week as the S&P 500 had its worst week in two years. Our key level on the Russell 2000 ETF (IWM) had been a break of 108 which would lead the bears to make a push down to 96. We closed Friday at 104.74. (Remember these are not predictions just food for thought. Broken clocks you know.) The market is oversold at this point and due for a bounce. October’s Ghosts are out and about as fear is rising. Tough Thursday’s in October which are followed by dull Fridays have led to historic Monday’s. Tuesday could be a chance for the bulls to push back as Turnaround Tuesday comes back into vogue.  We will move our stop loss a little higher as a move above 114 on IWM would mean that the bulls are back in charge.

We are still very concerned about the Fed’s exit from QE while seemingly the rest of the world’s central banks are ramping up their money printing efforts. Currency wars are all the rage as it is a race to the bottom. If your currency is lower than your neighbors you will sell more stuff. Japan, China and Europe are seemingly in economic decline while Russia may be in the midst of a currency crisis. Not a great feeling when profit margins in the US are at all time highs with overpriced markets and highly margined accounts.

Keep an eye on the Russian Ruble. Small caps are the road map. Monday morning may be very interesting if history is our guide.

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.

BlowOff Top? and Gold

The recent advances in the market look stretched as the S&P is up slightly on the week. Concerns are rising that the speculators have taken over the market. In fact, margin debt at the NYSE has now reached an all time high at $401 Billion. Expectations that a weaker economy will keep the Fed’s foot on the accelerator have speculators in a tizzy and portfolio/hedge fund managers playing along. Market returns may become even more convex as the year end approaches. Professional money managers that are underperforming may chase the market higher as they try and keep apace. Managers well in the black for the year may be inclined to sell at the slightest hint of trouble. What goes up must go higher and what comes down may go even lower. Newtonian Markets will continue until acted upon by an equal and opposite force. Recent pattern has the market trending higher for a 15-18 day period and then lower for a 15 day period. We are now on Day 12 of the most recent up cycle. Market could start to cycle off next week as it seems to be struggling at new highs.

New market highs are coupled with consternation that the economy may be slowing as evidenced by the price of WTI Crude which has broken support at $100 a barrel. Bond yields which were advancing and looking to pierce the 3% level on the 10 year US Treasury are now trying to push down through 2.5%. The move lower in bond yields coupled with gold’s recent ascent are portraying an accommodative Fed but lower oil prices mean the Fed may be contending with a weaker economy.

Where are valuations? Margin debt is at an all time high as speculators run about. Byron Wien, noted bull and Vice Chairmen of investment firm Blackstone, thinks that although the market may head higher he is not all-in on the bull parade. He told investors in his October commentary: “I have learned over the years that it is a good idea to be at least somewhat defensive when most others think almost everything is headed in the right direction.” –Blackstone Vice Chairman Byron Wien. (H/t to Katie Young over at CNBC.)

Concerns on valuations from the corner office caught our eye this week when Texas Instruments CFO Kevin March had this comment in response to a question on more acquisitions by TI in their latest earnings conference call this week. Given the valuations that we presently see with many companies out there that might be an attractive addition to our portfolio, it’s difficult for us to look at what we might have to pay for some of those acquisitions and actually get a reasonable return on the investment for our shareholders.”

Valuations and the market look stretched as significant resistance levels have been met. However, the possibility does exist for a speculative blow off top given attitudes towards continued support from the easy money policies of the FOMC.

Keep an eye on the Far East. China and Japan were down big overnight. China may be trying to rein in inflation and withdrawing excess supplies of cash out of the system. Is this temporary or a new longer term move? Japan’s struggles may be more currency related. Precious metals may begin to play a larger role.

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

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

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

Published in: on October 25, 2013 at 10:22 am  Leave a Comment  
Tags: , , , , , , , , , ,