My Name is Mario and…

We have talked about the rise in central bank balance sheets and how those balance sheets may be THE most important metric when investing in this era. The European Central Bank (ECB) made an announcement this week and it seems that central bankers while promising to cut back and reduce balance sheets are already hedging their bets. The ECB, while slated to end their form of QE in December, announced that they will continue to use until September of 2018. But they are promising to cut back their monthly usage in half. Like an addict that says that they will quit just not right now. This form of monetary heroin is responsible for the rise in asset prices and it is causing distortions like European High Yield yielding less than the US 10 year. This is the height of lunacy. We are not happy being right. It is our job to make money so while central bankers print and buy assets we stay at the party. The bigger question is will central bankers ever stop printing?  While we see that the G-4 central bank balance sheets are slated to stop growing in 2018 we question the will of central banks to stop the monetary heroin.

We are stuck in our thesis on the concept of the “Fed Put” and how that is going to evolve and effect asset prices. One of the drivers of this relentless march higher is the idea to BTFD. Buy the Dip. Every dip in stock prices is bought because you don’t’ have to worry because if there is a real crisis the central banks will come in and back stop the market. So you find yourself asking, will prices ever go down? That alone has us nervous. If something cannot continue forever it won’t. The market will go down at some point. It always does and it is never different this time.

Tech stocks had a phenomenal week as we saw Amazon up 13% and Intel up 7% on Friday alone. It is starting to feel like a mania as the animal spirits have taken over. The broader market did show some technical signs of weakness. A warning shot across the bow perhaps? We still think that a tax plan passage is a sell the news event.

This is a one way market and investors need to recognize this and take steps to manage risk. Recalibrate. Market structure is responsible. The market is flawed in its design as its automated structure puts the momentum players, the market makers and algorithms in control. While it is pleasurable to see it go up every day it will be much quicker and painful when the market goes down in a one way fashion. For every action there is an equal and opposite reaction.

The ten year Treasury broke through 2.4% and closed the week at 2.416%. We are looking for a new range between 2.4% and 2.6%. Above 2.6% and the warning lights will come on. The bulls are still firmly in control. 2600 on the S&P 500 is the next logical stop. Much as 666 loomed large in early 2009 the number 2666 now looms large for the S&P 500 and is less than 4% away from current levels. Wall Street and investors are a superstitious lot. The animal spirits are unpredictable and in control. Gotta be in it to win it but, maybe just a little less in.

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

To learn more about us and Blackthorn Asset Management LLC visit our website at www.BlackthornAsset.com  or check out our LinkedIn page at https://www.linkedin.com/in/terencereilly/ .

Bond Vigilantes Back

I hope that you all enjoyed your 4^th of July celebrations and BBQ’s. While we were barbequing in our back yards and parks officials across the pond were busy promising more easy money. That got European markets hearts all aflutter and up about 2.5 -3 % across the board. The reason that European officials chose to speak up was due to rapidly rising bond yields, particularly in Portugal. That had officials on edge and feeling the need to speak up. Mario Draghi head of the ECB promised to use the OMT if necessary. To refresh your memory the OMT is a plan that does not even exist. It is just a future promise to step in if things get nasty. How long before the Emperor is seen as having no clothes?

It might not be much longer in light of this morning action here in the US. Fresh off our 4^th of July celebrations market players came back to more easing in Europe and rising markets. The jobs report this morning had junior traders excited. Junior traders love to buy markets. Older more experienced hands have a more cynical bent and there tends to be more short sellers amongst their ranks. The junior traders forgot to check with the boss and their bosses’ boss – the Treasury market. The stock markets older, much wiser brother, the bond market, had broken decisively through the 2.5% yield on the 10 year rising to 2.68% as we write. After rising more than 100 points off of the open the stock market has faded rapidly since. Good news is now bad news.

Keep watching the yield on the 10 year. The yield on the 5 year is now 1.58%. That was the tield on the US 10 year weeks ago. Has the Fed lost control of the bond market? Geopolitics are now playing a role with the army now in charge in Egypt. The Suez Canal moves a lot of crude. Prices are getting a boost.

1620 on the S&P is now proving difficult to surmount. The bears are out. Look to see how this one closes. The more experienced hands will be back on Monday. This could be a key moment to see how the bond market responds to the latest data. It looks like the September FOMC meeting is gonna be a big one. We think that the Fed will be forced to pull back on QE and announce it then. Bernanke wants to do it on his watch and that is the last meeting before Christmas. He doesn’t want to be Scrooge but more importantly he is also cognizant of year end funding issues.

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.