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.

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Bump in the (Silk) Road?

With each passing day, week and month we are more in awe of this market. It just keeps plugging along higher and higher. There is no predicting when the momentum will shift so we continue to be invested but just a little less so. The winning strategy is to recalibrate our investing, downshifting in our risk while seeking better risk adjusted returns. It is not our job to prognosticate but to keep an eye on what could upset the apple cart and how to profit from it. Our latest worry is China. China has just completed its most recent 5 Year Congress. Every 5 years the leaders in China get together to elect leadership and formulate the next 5 year plan. Xi Jinping continues to consolidate his power and his grip on one of the great economic engines on the planet. Leading into the congress the leadership there chose stability over change. Now that the congress is over Xi can get back to work. We are looking at China to see if, now that leadership has another 5 years in charge, change is about to come to China. Will China now try to reel in shadow lending in the country and its rampant real estate market? Will they allow a more rapid depreciation in the Yuan? If change comes to China it will reach our shores soon enough as the economic ripples will be felt worldwide.

From Cashin’s Comments this week comes some interesting facts cited by the sharp eyed Bob Pisani from CNBC.

Technology is so strong this month that it accounts for 75% of the gain in the S&P 500, according to Standard & Poors. Without Tech, the S&P would only be up roughly 0.5%. It’s worse than that: five stocks are most of the gain. Big tech this month Facebook up 15.5% Amazon up 12.5% Apple up 8.2% Google up 6.1% Microsoft up 6.0%…Those five stocks accounted for 52% of the gain in the entire S&P 500. What happens if we look at the S&P 500 and equal weight all of the stocks? A very different picture. There’s an ETF for that: the Guggenheim S&P 500 Equal Weight ETF (RSP) is up 1.1 percent for the month. That is exactly half the gain of the regular S&P 500. 

Investor sentiment is always hard to gauge but we keep an eye on it to try and delve where the animal spirits reside. Market pundits have described this rally from 2009 as the most hated rally ever. Most hated maybe because investors have been behind the curve the whole time chasing it ever higher. Also from the NYSE’s resident sage, Arthur Cashin, comes this opinion on market sentiment from Peter Boockvar at the Lindsay Group. Maybe investors have now caught the tiger by the tail. 

This boat is now standing room only. Investors Intelligence said Bulls rose 1.2 pts to 63.5, that is the highest in about 30 years. It peaked at 65 in 1987. Bears fell to 14.4 from 15.1 and that is the lowest since May 2015. The spread between the two of 49.1, is just below the 1987 peak of 50.5. I’ve said this before, when sentiment gets this stretched, markets tend to consolidate its gains.  Given those figures, it’s tough to claim that this is the “most hated rally in history”.

The market has finished higher ten months in a row!! In a era of monetary extremes this is one for the ages. We have never had a year that the market closed higher for the first ten months of the year. Never. By way of Deutsche Bank’s Jim Reid, we see that the record is 12 months in a row set in 1949-1950 and 1935-1936. We grow concerned that the rally is growing even more stretched and more narrow in its rise. The techs are in charge as the Big Five accounted for half of the gains last month. A rally that grows more and more narrow is not a healthy market. S&P 500 shows signs of slowing its ascent. The market could use a consolidation period. It makes for a much stronger foundation. The bulls are still in control but with the President out of the country we tend to get a little nervous. We still see 2600 as logical resistance for now. The animal spirits are unpredictable and still in control. Gotta be in it to win it but, maybe just a little less in.

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.

Very Superstitious

There is no getting around the 30th Anniversary of the Crash of 1987 and all of the attendant media coverage this week. We ourselves have been writing about it all year. While history doesn’t repeat it does rhyme and we fancy ourselves not as divine prognosticators but as contingency planners for your wealth. That is why we are slaves to history and attempt to continually create plausible scenarios and investing thesis.

When we look back on the Crash of ’87 we can learn several things. The overarching lesson is that it is never different this time. You can read more on that in our recent quarterly letter here. Here is a quote from Howard Marks and his experience on that October day in 1987. Marks was the Head of the High Yield Department at The Trust Company of the West at the time.

 Portfolio insurance convinced people that they could somehow own more stocks without increased risk, which is fanciful. And like all silver bullets, it didn’t work.

-Marks

 It is never different this time. Risk is still risk and the widely accepted reason for the excessive price action that day was portfolio insurance. The selling of volatility and risk parity are today’s version of portfolio insurance. Investors are selling volatility with abandon. That creates a lower implied risk environment. Those figures go into automated strategies that take on more and more risk as stocks rise and volatility falls. More stocks with less risk- Great idea! In the next sharp market move volatility will be the driver as investors scramble to cover their shorts wiping out many involved in that trade.

 One of the drivers of this relentless march higher in stock prices is that there seems to be a consensus that there is no reason to fear the Federal Reserve. After all if stock prices do come crashing down the Fed will be there to support markets. Right?! So why ever sell? You just buy more if prices fall because the Fed has your back. What could possibly go wrong?

Trump’s tax plan is looking to be moving along. A passage of that tax plan in an economy which is already at full employment could tip the Fed into aggressive tightening mode. A passage of this tax package may be “ill timed” to quote NY Federal Reserve’s Bill Dudley. Dudley is considered the second most powerful person at the Federal Reserve. His remarks mesh very well with Michael Hartnett’s recent comments over at Bank of America. Hartnett has been calling for a melt up this year as we have. Hartnett is looking for that end with a spike in wages and inflation. If Trump’s tax package is passed that may be just what we get. Higher wages and inflation may force the Fed’s hand to tighten more aggressively than planned and investors may again be shocked into “fearing the Fed”. Hartnett’s call is for a 10% correction and not a 1987 style crash. For the record, we also do not think that markets will crash because of the fervent belief in the “Fed Put” but a correction is well overdue.

The ten year Treasury is still stuck between 2.1 and 2.4%. If it breaks through 2.4% then 2.6% is the new area of resistance and that should be a tough area to get through. Why are we harping on the 10 year lately? It should be our canary in the coalmine for equities. Higher interest rates could break the back of this equity market. The question is what is the magic number? A decisive break through the 2.7-2.8% level could mean that rates are headed higher longer term breaking the 30 year down move.

The punch through 2500 on the S&P 500 still has the bulls in control. Like a running back that has open field in front of them the S&P is taking off. There are no real resistance points as it is all theoretical now. 2600 is the next logical stop. Much as 666 loomed large in early 2009 the number 2666 now looms large for the S&P 500. Wall Street and investors are a superstitious lot. The animal spirits are unpredictable and in control. All is still going according to our thesis of a 1987 type melt up. The tax agenda from the White House could be a “sell on the news” event. Gotta be in it to win it but, maybe just a little less in.

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.

One More Thing to Consider in Retirement

One of the next big crisis’ in the United States is pension funding. If you think that this will not affect you think again. It will hit you right in your wallet when you can least afford it – in your retirement. As a good portion of my readers and clients are approaching retirement this probable pension crisis should factor into where you retire.

I have been reading John Mauldin’s Thoughts From the Frontline for over twenty years on the recommendation of Arthur Cashin. If you haven’t read John’s work here is a link to his website. It is sent to over 1 million readers a week. It is well worth your time. Here are the highlights from John’s latest letter in regards to the looming pension crisis.

Total unfunded liabilities in state and local pensions have roughly quintupled in the last decade.

According to a 2014 Pew study, only 15 states follow policies that have funded at least 100% of their pension needs.

The only way to bring it out of the spiral is with huge cuts to other needed services or with massive tax cuts to pension benefits.

But wait, it gets worse. The graph we showed earlier stated that unfunded pension liabilities for state and local governments was $2 trillion. But that assumes an average 7% compound return. What if we assume 4% compound returns? Now the admitted unfunded pension liability is $4 trillion. But what if we have a recession and the stock market goes down by the past average of more than 40%? Now you have an unfunded liability in the range of $7–8 trillion.

We throw the words a trillion dollars around, not realizing how much that actually is. Combined state and local revenues for the US total around $2.6 trillion.

This issue is going to set neighbor against neighbor and retirees against taxpayers. It will become one of the most heated battles of my lifetime. It will make the Trump-Clinton campaigns look like a school kids’ tiddlywinks smackdown.

http://www.mauldineconomics.com/frontlinethoughts/pension-storm-warning

The ten year Treasury hit 2.28% mid week and looks to be headed back to resistance at 2.5%. A decisive break through the 2.7-2.8% level could mean that rates are headed higher longer term breaking the 30 year down move.  The punch through 2480 on the S&P 500 still has the bulls in control. The next target on the S&P 500 is 2540. The market is still firmly in an uptrend but there are signs that bulls may not be all that strong. Gallup poll has 68% of investors optimistic about the stock market over the next year. That matches the record high for that poll set in January of 2000.  Investor sentiment is very high which is a contra indicator while valuations are in the 90th percentile historically. The animal spirits are unpredictable. Gotta be in it to win it but maybe just a little less in. Keep an eye on the 10 year and commodities.

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.

 

 

 

Diogenes and The Bond King

Jeffrey Gundlach from DoubleLine Funds gave another one of his webcasts this week. In a world of investing you have to know who is telling you their honest thoughts and who is just talking their book. We believe that Gundlach tells you his honest thoughts and his track record shows that he is well worth watching. The first thing that you need to know is that Gundlach is a bond fund manager who is not that high on the bond market right now. The “Bond King” doesn’t like bonds. How is that for honest? The Greek philosopher, Diogenes, would have never found what he was looking for on Wall Street, but then again, Gundlach is in LA.

Gundlach is constantly on the search for anomalies that may warn of an impending recession. In his “chart of the day” Gundlach presented a chart showing a ratio of the value of commodities to the S&P 500. The median value over the last 50 years stands at 4.1. That ratio is currently less than 1. That tells us that either commodities are very cheap or equities are expensive (or a combination of both). The last two times it got this low was just before the 1970’s Oil Crisis and during the Dot Com Bubble. Gundlach predicts that commodities will gain steam next year when the US 10 Year rate rises. Time to look at commodities.

One chart that Gundlach brought up was what we would term “The Chart of Next Year – 2018”. It shows the growth in the G4 Central Bank balance sheets since the beginning of the GFC until now and it overlays the rise in Global equity value. If you accept that the rise in equities was fueled by the rise in central bank balance sheets understand that the G4 balance sheet is projected to shrink beginning in 2018. Stalled growth in central bank balance sheets will equal stalled growth in equity prices and lower returns. A decline in central bank balance sheets will lead to a decline in equity prices around the globe.

QE has been highly correlated with risk assets (specifically the S&P 500) “levitating,” Gundlach said. That has been true since 2009 and on a global basis, he said. The actions by other central banks have lifted the prices of non-U.S. equity markets.

Gundlach said that when earnings are revised down, equity prices fall and vice versa. Except that wasn’t true when QE was going on. Now that central banks are tapering globally (“quantitative tightening”), it is a bad sign for equities, according to Gundlach.

“Maybe we will start getting into trouble in mid-2018, as QE goes away and the German 10-year yield goes up,” Gundlach said.

West Texas Crude is still below $50 a barrel but is challenging that critical level of resistance. The Saudi Arabian government is rumored to be looking at delaying its very important IPO of Saudi Aramaco.  Saudi Aramco is their state owned oil company and the biggest oil company in the world. It is valued in the Trillions of dollars!! Could it be because they are seeing higher oil prices on the horizon? $60 a barrel in crude would bring in substantially more money in the IPO than $50. It’s a big bet by a big and knowledgeable player.

Just to review. This week we experienced Hurricane IRMA, North Korea test fired a missile across Japan, terrorism in France and England while hard economic data continued to deteriorate in China and the US. So, logically, we should have new all time highs in the stock market and the best week of the year for the Dow Jones Industrials. By the way, if you needed any more evidence that the computers are in charge the S&P 500 closed Friday at exactly 2500. While we are on the subject of crazy Jeffrey Gundlach pointed out in his webcast that European junk bonds have the same yield as a U.S. Treasury basket (the Merrill Lynch U.S. Treasury Index). He said that spread is typically 700 basis points or more.

Gold was able to hold $1300 this week.  The ten year Treasury rocketed off its lows of 2.05% to close the week at 2.20% it what looks to be a failed breakdown. The S&P 500 broke through 2480 to close the week at 2500. That makes the next target on the S&P 500 2540. The caution signs are still there but the market is still firmly in an uptrend. The punch through 2480 on the S&P 500 could instigate the animal spirits and give the bulls room to run. Friday was a Quadruple Witching meaning that 4 sets of options expired on the same day. It happens four times a year. Things can change suddenly after expiration as all hands were more concerned with the options market than the stock market itself. Early next week is going to give us better clues as to if this breakout in the S&P will get legs. Gotta be in it to win it but maybe just a little less in. Keep an eye on the 10 year and commodities.

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.

Priceless Investing Advice

Being in the investment arena our job is mostly about gathering information. Reading. Lots and lots of reading. Corporate reports, sell side research, blogs, websites, financial journals, and the like. We have our favorite sources and investors.  If you have read our notes for any length of time you know that we read anything that we can get our hands on that Howard Marks has written. Mr. Marks’ latest note is out this week. Marks doesn’t write every week or even on a consistent basis but when he writes he has something to say and he envelopes everything he writes with priceless investing wisdom. If you are a serious investor you must read the whole piece. I am having trouble just boiling it down to a few well turned phrases or sound bites but here goes.

 As I explained on CNBC, there are two things I would never say when referring to the market: “get out” and “it’s time.”  I’m not that smart, and I’m never that sure. 

 “Investing is not black or white, in or out, risky or safe.”  The key word is “calibrate.”  The amount you have invested, your allocation of capital among the various possibilities, and the riskiness of the things you own all should be calibrated along a continuum that runs from aggressive to defensive. 

 If it’s true, as I believe, that (a) the easy money in this cycle has been made, (b) the world is a risky place, and (c) securities are priced high, then people should probably be taking less risk today than they did three, five or seven years ago.  Not “out,” but “less risk” and “more caution.”

Marks mentions that he is not referring to this market as a “bubble”. He is probably right. There are no signs of euphoria (other than bit coin) but investors are begrudgingly going along with higher prices. It is more of a FOMO (Fear of Missing Out) mentality. Valuations are high and rising and “getting out” at the top is a pipe dream. Rather than jump in and jump out of the market we seek to re-calibrate our investment allocation in regards to the risk premium in the market. If prices are high then we wish to take some risk of the table. We can put our money into investments that have less risk or place them with outside managers with a history of performing well in riskier markets. We can also choose to place more of our assets in cash which is essentially a call option on risk. We, like Marks, continue to proceed but with caution. “Calling a top” and “getting out” are a Fool’s Errand but lessening our risk in light of historical valuations is a prudent thing to do.   

In regards to risky behavior we call your attention to something that we have seen for some time, over and over again and it costs investors huge sums of money. This time around it is the sale of “Cat Bonds” to the small investor. Once the province of big money center banks and off shore insurance companies “Cat Bonds” are catastrophe bonds sold by large reinsurance companies. The short story is you can make high yield returns by investing in bonds which insure against wind damage, hurricanes, earthquakes and other catastrophic events. Suffice to say that those investors after several years of decent returns will return to work on Monday with a lot less digits in those accounts. Those investors will be wiped out completely if Irma has her way with Florida this weekend. How do you spot these enemies to your portfolio the next time? It is easy. If someone promises you an above average yield in a product that is unlisted (it does not trade on an exchange) with high management fees – run, do not walk away from this investment advisor. I have seen too many of these investments in investor’s portfolios in my time. The advisor ends up with his management fees and the client ends up with the goose egg.

 When the pressure is on we like to have what we term “adults” in the room. The “adults” are not only the smartest people in the room but they are people who know how and when to make a decision. Stanley Fischer is one of those “adults”. Dr Fischer, former professor at MIT, vice chairman of CitiGroup, and chief economist of the World Bank, and former Governor of the Bank of Israel, resigned his position as vice chair of the Federal Reserve. Fischer played the role of intelligent hawk who we felt comfortable leaving in charge of the store. As this critical time approaches of the Fed removing stimulus his absence alone makes us less confident in the “adults” left in the room. In one of his last public speeches as part of the Federal Reserve Dr Fischer warned about historically high asset valuations.


Let me conclude my assessment of current financial stability conditions with a discussion of asset valuation pressures… In equity markets, price-to-earnings ratios now stand in the top quintiles of their historical distributions, while corporate bond spreads are near their post-crisis lows. …

The general rise in valuation pressures may be partly explained by a generally brighter economic outlook, but there are signs that risk appetite increased as well…So far, the evidently high risk appetite has not lead to increased leverage across the financial system, but close monitoring is warranted.

https://www.federalreserve.gov/newsevents/speech/fischer20170627a.htm

West Texas Crude has had some wild moves post Hurricane Harvey but is still stuck between $45-50 a barrel. The safe havens benefited this week as gold has sufficiently punched through $1300 making that area now support.  The ten year Treasury which had been stuck between 2.15% and 2.40% since April finished the week at 2.05% which could augur a price movement down into the 1.75-1.85% area. The move is on into the safe havens while stocks mystically continue to hold their gains and their range between 2420-2480. While the caution signs are there the market is still firmly in an uptrend. A punch through 2480 on the S&P 500 could give the bulls room to run. The rally off of the lows has been anything but active. A low volume run up doesn’t bring with it much conviction but the animal spirits could take over regardless with a swift punch through 2480. The pressure is building.

 Harvey was the story last week. This week it’s IRMA. Best of luck to all our friends and family in Florida. Hold on tight.

 

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.

 

 

 

Pressure is Building and Hurricane Relief Homework

The markets perceived safe havens of gold and the US Treasuries continue to rally. The yield on the 10 year is back to flirting with the 2% level. Gold is trying to break through $1300 an ounce and was outperforming the S&P 500 for 2017. Those are not exactly confidence builders for stock investors. Those are flight to safety trades.

 While lower interest rates have been a hallmark of this bull market, used to justify virtually any valuation, the lens through which investors view them is nuanced. Too low and they start to suggest economic stress.

After rallying in sync for much of 2017, bonds and stocks have become disjointed as economic data misses expectations for the third straight month. The one-month correlation between the S&P 500 and the Bloomberg Barclays Global Aggregate Bond Index is at the lowest since April, with the S&P 500 flat lining since its Aug. 7 high, as 10-year yields dropped 11 basis points.

We grown concerned when the bond market looks anxious and the stock market ignores it but this is not your father’s stock market. This market has shrugged off thermonuclear war fears with North Korea, Presidential special prosecutors, the firing of a sitting FBI Director, a potential debt ceiling debate/default, rising interest rates and the expected shrinking of the Federal Reserve balance sheet.

The S&P 500 rallied off of its lows of 2430 to close the week at 2476. That brings us back to the resistance levels that we have been talking about since mid July. The market has rebounded quite quickly. What is interesting is that investors have been seemingly unanimous in calling for a market setback in the August – October timeframe. If that selloff does not come we may that melt up we have been talking about (ala 1987). Fund managers are under invested and do not wish to disappoint clients come year end. Time is money. A punch through 2480 on the S&P 500 could give the bulls room to run. The rally off of the lows of last week has been anything but active. A low volume run up doesn’t bring with it much conviction but the animal spirits could take over regardless with a swift punch through 2480.

Hurricane Harvey may be helping the stock market by taking a debt ceiling fight off of the table but you wouldn’t know it by looking at the short term bond market. The calendar around when we suspect the government will run out of money has grown quite active and its pricing is indicating that the bond market doesn’t have that much faith in Washington.

Since 1950, August and September are the worst performing months for the S&P 500. However, in the last ten years it is January and June that have taken the mantle of worst performing months. While the caution signs are there the market is still firmly in an uptrend. Support on the S&P 500 is very strong at its 100 Day Moving Average (DMA) and the 2420-2400 area is support for now. Trading desks have been understaffed since Memorial Day and markets have gone nowhere. Oil is stuck between $45-50 a barrel while gold struggles with $1300. The S&P 500 is range bound for now between 2420-2480. The ten year Treasury has been stuck between 2.1% and 2.40% since April. The pressure is building. With staff back in town things may get very interesting very quickly.

Harvey may bring some shortages up and down the east coast. Fill up before you leave the house. Have a great Holiday weekend!

Our old friends at Charity Navigator have done the homework for you and listed a few highly rated organizations for Hurricane Harvey relief. You can see more at their link below.

If you’re looking for a local charity to support in the wake of Hurricane Harvey please consider Houston SPCAHouston Humane SocietyHouston Food BankFood Bank of Corpus Christi, or San Antonio Humane Society. These highly-rated organizations are located in the most-affected areas and are providing support to individuals and animals.

– Charity Navigator

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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/ .

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.

Caution Flags

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

“…algorithmic traders and institutional investors are a larger presence in various markets than previously, and the willingness of these institutions to support liquidity in stressful conditions is uncertain.”- Janet Yellen Jackson Hole 8/25/17

In Janet Yellen’s speech this week at Jackson Hole she brokers the subject of market structure and her anxieties surrounding the structural integrity of the market given additional stress.  Will current market structure provide the liquidity needed given a stressful event? We think that it will not and a temporary condition will be created consisting of a lack of liquidity will happen for a time. The pessimist sees what would be a very scary moment if market structure lets us down in the next stressful period. What we see on the horizon is a market structure that we think will fail and will create a big opportunity. Market structure. We see the risk as real and evidently we are not the only one.

Dow Theory is the long running thesis that if Dow Jones Industrials are hitting new highs then its brethren in the Dow Jones Transports should be hitting highs as well. The Industrials make the goods and the Transports ship the goods. So if the one is doing well shouldn’t the other? We are not the only one concerned. By way of Arthur Cashin, comes Jason Goepfert recent notes on the topic.

Jason Goepfert, the resident sage at SentimenTrader noted the recent wide divergence between the Dow Industrial and Dow Transports. He recalls that prior similar divergences have rarely been resolved in a bullish fashion. Here’s a bit of what he wrote: The Dow indexes are out of gear. The Dow Transportation Average continues to badly lag its brother index, the Dow Industrial Average. The Transports are not only below their 200-day average, they just dropped to a fresh multi-month low. Yet the Industrials are more than 5% above their own 200-day average, a divergence which has tended to resolve to the downside for both indexes, especially in the shorter-term.

While we have the caution flag up we are intrigued by how many analysts and investors are calling for a downturn. When everyone expects something to happen something else usually does. From Bloomberg this week comes notes from Morgan Stanley, HSBC and Citigroup that markets long term relationships are breaking down and signaling that a correction is in store.

Analysts at the Wall Street behemoths cite signals including the breakdown of long-standing relationships between stocks, bonds and commodities as well as investors ignoring valuation fundamentals and data. It all means stock and credit markets are at risk of a painful drop.

“Equities have become less correlated with FX, FX has become less correlated with rates, and everything has become less sensitive to oil,” Andrew Sheets, Morgan Stanley’s chief cross-asset strategist, wrote in a note published Tuesday.

https://www.bloomberg.com/news/articles/2017-08-22/wall-street-banks-warn-winter-is-coming-as-business-cycle-peaks

At the beginning of this week stocks were very oversold and due for a bounce. Equities were so oversold, in fact, that we did buy some equities for underinvested and new clients. The S&P is now approaching very important resistance levels at 2450 and again at 2475. 2475 is THE resistance level that the market has been struggling with since mid July. The market looks tired here and the seasonality is not in its favor with September and the October debt ceiling approaching. A failure at 2475 could give the bears confidence. The S&P 500 saw support at its 100 Day Moving Average (DMA) and the 2420-2400 area is support for now. The next support is the 200 DMA at 2350 which is down about 3.7% from here. If markets fell to that level that would be a 5.5% drop from the all time highs, certainly, not a major crisis. However, the bulls would need to hold the 2350 level or then the bears are in charge. We are still concerned that while the S&P 500 has held in there the Russell 2000 is struggling. That coupled with high valuations and a negative Dow Theory signal has us sending up caution flags.

 

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.

Fear and Greed

While most of America seemed to be mired in statue controversies and rumored and real resignations we choose to focus on making money for our clients. Our focus was on the FOMC Minutes that came out this week. We think that it has real clues as to policy and market direction (i.e. making money). Here, as follows, is the garbled Fed Speak hidden deep in the minutes which we will interpret for you.

This overall assessment incorporated the staff’s judgment that, since the April assessment, vulnerabilities associated with asset valuation pressures had edged up from notable to elevated, as asset prices remained high or climbed further, risk spreads narrowed, and expected and actual volatility remained muted in a range of financial markets…

 recent equity price increases might not provide much additional impetus to aggregate spending on goods and services.

 According to one view, the easing of financial conditions meant that the economic effects of the Committee’s actions in gradually removing policy accommodation had been largely offset by other factors influencing financial markets, and that a tighter monetary policy than otherwise was warranted.

We interpret the committee’s thoughts as, while the committee likes higher stock prices, a further rise in stocks isn’t going to help much. In fact, higher stock prices may actually increase risk. No one seems to be noticing that risk is elevated and hedging accordingly which only heightens risk even further. And by the way, our (the FOMC) tighter policies (raising rates) haven’t really done much and we are going to need to tighten policy much more than we thought. Was that a warning shot across the bow? The Fed doesn’t want stocks to go up much more and tighter policy is coming.

As always, from Arthur Cashin and his sources, comes a very interesting note about the technical aspects of the market. We study technicals because it gives us insight to the psychology of the market. The numbers show where Fear and Greed reside. After Jason’s note came out earlier this week markets were repelled by the 2475 area and fell 2% from that level. Here is Jason’s note.

While they closed within hailing distance of the day’s highs, the session had some very odd aspects. Here’s what the sharp-eyed Jason Goepfert of SentimenTrader noted in his report. More lows. Despite a 1% surge in the S&P 500, its best gain in months, and being within sight of an all-time high, there were more combined new 52-week lows than 52-week highs on the NYSE and Nasdaq exchanges. This is highly abnormal. Since 1965, it has only been seen a handful of days in 1998, 1999, 2000, and 2015 -Cashin’s Comments 8/15/17

NY Federal Reserve President Dudley sees chances of a Fed rate hike higher than the market is currently forecasting in December. Chances for that rate hike are now close to 50% and rising. The market continues to reject the 2475 area on the S&P 500. As a resistance area it is growing in its importance. The bulls still have the ball but they need to get their act together.

The S&P 500 is at its 100 Day Moving Average (DMA) and the 2420-2400 area is support for now. The next support is the 200 DMA at 2350 which is down about 3% from here. If markets fell to that level that would be a 5.5% drop from the all time highs, certainly, not a major crisis. However, the bulls would need to hold the 2350 or then the bears are in charge. The S&P 500 is 2.5% from its highs while the Russell 2000 is down more than 6%. The broader market indicator failed to hold its 200 DMA this week. Not a healthy sign. Always have some dry powder on hand.

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.

 

 

 

Fall Is In The Air

As much consternation was shown this week the S&P 500 was only down 1.4%. While markets have slowly marched ever skyward since 2015, lulling investors into complacency, market internals seem to be breaking down of late and just in time for the traditionally weak fall season. Our friends over at Lucena Research are at the forefront of applying Artificial Intelligence and Machine Learning to investment decision making. Their note to us on Monday researched some market internals as they dug up some dirt on the recent divergence of the S&P 500 and the Dow Jones Industrials. Their research came up with 39 instances of this type of divergence in the last 17 years. According to their research, over the next year the S&P 500’s average drawdown was 8.5% with the bottom of the expected bearish move coming within 7 months on average.  Here is the link to their note. Brilliant stuff.

http://lucenaresearch.com/wp-content/themes/lucena-theme/predictions/8-7-17.html

Also showing the internal weakness of the market is that the market has grown increasingly narrow in its ascent. An article from CNBC this week shows that 20% of the S&P 500 is in correction territory. A “correction” is generally accepted to be when a stock has retreated more than 10% from its high. 200 of the 500 stocks in the S&P 500 are in correction territory including Amazon, General Electric and Exxon. The S&P 500 is up over 9% in 2017. It shows how narrow the rally in stocks has become. The article goes on to note that less than 60% of the Russell 3000 is trading above its 200 day moving average (DMA). The 200 DMA is the dividing line between being long term bullish on a stock and long term bearish. The market’s strength is slipping.

Things are starting to get interesting. The market rejected 2475 on the S&P 500 as that area still holds as resistance. The bulls need to get back in gear. We closed the most eventful week in months in the middle of our range. We still see support at 2400. The likelihood of an actual shooting war in the Korean Peninsula is very low but we have never seen diplomacy by Twitter. The bulls need to hold 2400. As a side note we do find it refreshing that the market is actually taking geopolitics into account. The biggest contributor to the downside move this week may have been the short volatility trade. Shorting volatility has worked for years but we have been noting that it is a crowded trade and traders were due to get burned. Those traders looking for cover may have made an outsized contribution to the swings in the market this week. Might be time to take some chips off of the table if you haven’t already.

 

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.