Financial Wars

It’s all Uncle Sam’s fault! The current crisis in the Turkish Lira and other emerging market currencies can quite simply traced back to the tightening of US Federal Reserve monetary policy. As the Fed tightens and raises rates the US dollar floats higher causing emerging markets to flounder. We have said multiple times that when the Fed starts a tightening cycle they inevitably tighten until something breaks. Something could be breaking sooner than most anticipated. We are on guard for a 1998 type of currency crisis exacerbated by politics as our trade wars seem to be morphing into financial wars.

Markets around the world are floundering this year with negative returns with the exception of the US stock market. Why is that? While we are joking that it is all our fault the reality is that capital goes where it is treated best. Capital is being treated better here in the US than the rest of the world as we have rising interest rates and those rates are multiples higher than what one can find in the rest of the developed world.

“Turkey is trying to rewrite the crisis management chapter in the playbook for emerging markets. It’s trying to go without interest rate hikes. It’s trying to do it without the IMF. That’s hard. It’s not impossible, but it’s hard.” Mohamed El-ErianAllianz

 “There’s denial and a refusal to accept market realities and the fact they will have to hike rates and/or cut spending very sharply. There’s no way of getting round it. It seems like they think they can.“- Julian Rimmer,  Investec Bank

While we have seen a nice bounce in the Turkish Lira we feel that this is nothing more than a dead cat bounce. Nothing has materially changed. This crisis for Turkey has not played out yet and it remains to be seen how it will effect other emerging markets and the US.

While we think that a currency crisis is rising in its probability we still see US markets as being pressured to move higher (especially in illiquid late summer markets) as more capital chases a return here in the US. High and rising short positions in US Treasuries and gold tell us that perhaps investors are leaning too far out over their skis in some areas. Whenever everyone thinks something will happen something else will. Last week was a very good test for the bulls and they passed. Let’s see if they can hold on to the ball as we are on guard for a late summer whipsaw in light markets.

Market valuations are very high and the gap down in the S&P at 2850 had us giving the bears the edge and with all of the currency and emerging market issues we thought that perhaps the bears might take over command of the stock market. This is why we wait for proof. So much for the bears. This is what we had to say last week.

While we have been a practitioner of technical analysis for over 25 years we subscribe to JC Parets, who we feel is one of the best on the street, to give us his input. He has been bullish on the market for quite some time now and in the face of every onslaught he has stayed bullish. This week put him on negative watch for the S&P. His feelings were that given the recent gap this week on the S&P 500 the pressure is on the bulls to confirm they are still in charge and 2800 is critical. He could turn bearish should the market push below 2800.

Needless to say we did not break through the 2800 level on the S&P 500 although it was very close. Not only did we not break down through 2800 level the bulls covered the bearish gap in the S&P at 2850. Now it’s the bulls turn to press the issue. While one can very easily get whipsawed in lightly traded summer markets we wait to see if key lines are crossed. Last week we pointed to 2800 are being important for the bulls to hold. This week we watch to see if the bears hold the line at 2865 on the S&P. The bulls need a close above 2865 to take control. If they can close above that number then they will have the bears on the run. If not, we are still stuck in our trading range and the summer doldrums continue. Even more than the S&P 500 we see greater pressure on the bears in small caps and mid caps.

Turkey has some real problems. Their currency issues and their refusal to address those issues will cause some contagion as it can already be seen in several European banks and weaker currencies. Keep an eye on Turkey but China as well. The Chinese stock market has taken a tumble and its economy looks to be weakening.

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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 .

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

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Banking Legends Warning

Lord Jacob Rothschild , banking scion of the Rothschild family and head of the Rothschild Investment Trust, has been investing with a bearish tilt for the last three years so take this for what it is worth. He was out again this week warning on valuations and market risk. He is currently positioned with only 47% in equities which is historically low for his trust. He is concerned that the 10 year rally in markets could be coming to a close and that investment returns at these valuations could be lower than normal. We most agree with his sentiment that now is not the appropriate time to add risk. You must take risk in your investment portfolio as time is money and cash only loses to inflation, however, now is not the time to be overweight risk.

The cycle is in its tenth positive year, the longest on record. We are now seeing some areas of weaker growth emerge; indeed the IMF has recently predicted some slowdown.

…we continue to believe that this is not an appropriate time to add to risk.

Current stock market valuations remain high by historical standards, inflated by years of low interest rates and the policy of quantitative easing which is now coming to an end.

Problems are likely to continue in emerging markets, compounded by rising interest rates and the US Fed’s monetary policy which has drained global dollar liquidity. We have already seen the impact on the Turkish and Argentinian currencies. -Lord J Rothschild

Market valuations are higher than 84% of the time since 1952 as measured by trailing p/e ratios. Techs continue to rally while value stocks are left for dead. Feels very 1998-99ish. Support for now on the S&P 500 is 2800. Market is not overbought but the gap this week has us on edge. We also see some negative divergences possibly developing. The next level of support after 2800 is the all important moving averages down around 2730 and 2710.

While we have been a practitioner of technical analysis for over 25 years we subscribe to JC Parets, who we feel is one of the best on the street, to give us his input. He has been bullish on the market for quite some time now and in the face of every onslaught he has stayed bullish. This week put him on negative watch for the S&P. His feelings were that given the recent gap this week on the S&P 500 the pressure is on the bulls to confirm they are still in charge and 2800 is critical. He could turn bearish should the market push below 2800. The VIX gapped higher on Friday. Let’s see if it can hold for three days. If it does the bears could be turning up the heat. Late summer days can be very illiquid and can move very quickly. Keep an eye on Turkey.

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

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

lighthouse

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

 

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

Facebook Drops the Ball

Face book dropped the ball. The market was shaping up to be firmly in the hands of the bulls as a break out rally looked to be on. Bitcoin was rallying hard and the S&P 500 was hot on its heels. Face book’s earnings may have changed all of that. We now have two of the FANG’s that look to be in control of the bears. Netflix and now Face book have done serious damage to their charts in recent days and we think that may continue for some time. If two of the more widely owned momentum stocks are in trouble how will the market react? Better stay on your toes. Late summer days can be very illiquid and can move very quickly.  As a reminder this is what we had to say last week.

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

2800 on the S&P 500 is near term support and then 2725. Let’s see if the bulls can hold on in the light of a weak Face book and a weak Netflix. We thought we would give a quick bonus blog before we bolt for Rome. Maybe it’s just me but I always feel like markets have big down days while I am away from the desk. Hope I am wrong this time. The Federal Reserve should be draining over the next few business days and that may produce a headwind.

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

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

lighthouse

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

 

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

Trump’s War

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

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

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

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

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

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

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

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

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

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

lighthouse

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

 

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

BitCoin and Sexy Investing

We have been telling you to keep an eye on Bitcoin as an indicator of risk. Since we last wrote about bitcoin two weeks ago it rallied 14% and we saw a subsequent rally in equity markets here in the US. Coincidence? Probably not. Bitcoin is an illiquid fast moving market. It may be giving us hints as we try and understand the valuation of this market and how it is going to break out of its current seven month range. Will the bears or bulls take charge? Bitcoin’s price action may give us clues as to the direction of the slower moving equity market. As speculators gain confidence in bitcoin and join the rally speculators in equity markets gain confidence as well. Equity markets have had two very good weeks back to back and the S&P 500 has rallied just over 3%. Keep an eye on bitcoin. Disclosure: We are not trading bitcoin nor have much interest in it beyond using it as a temperature gauge for risk sentiment and how that may apply to the stock and bond markets.

Two weeks ago we thought markets might be a bit oversold and due for a bounce. The moving averages have held and the bulls took the advantage. The S&P has since rallied 3% in two weeks. The S&P closed the week at 2801. While we are still stuck in our 2550-2800 range we have finally gotten back to the upper level of that range at 2800 – a level we have not seen since March. While equity markets are a touch overbought here the series of higher lows put in since March give the edge to the bulls. We are anxious to see if the bulls can break free of this trading range that we have been in for the last 7 months. An upside breakout of this range could lead to an assault on 3000. Investing is boring, not sexy. We are not calling market moves or breakouts. We are contingency planners. The equity market in the US has shown a tendency to go up over time so we stay invested in markets. We are not calling tops or bottoms just adjusting the sails a bit. We let the sails out when we see favorable winds. We take them in when we see danger. We are not calling for a break out here but we are on guard for one and the wind tilts in the bulls favor. Just good contingency planning.

We want to tell you about a great email letter that we get from Eric Barker. Some time ago we started reading Barker’s emails and have since read his book. He delivers great insights, often backed by credible science, that are helpful life hacks. His post this morning was How to be Smarter with Money.

Love this quote.

“Being smart with money is short term boring but long term sexy.” – Eric Barker

 

Here is his summation. Get his book – Barking Up the Wrong Tree.

Sum Up

This is how to be smarter with money:

  • Reminder – You Cannot Predict The Future:Timing the market isn’t investing; it’s gambling. And how would you react if I said I planned on funding my retirement through gambling?
  • Ask, “What Does Money Mean To Me?”:Make a simple plan and then make sure your investments serve it.
  • Feelings Can Be Very Expensive:Investing is boring. And make sure it stays that way. Don’t “play” the market. That’s how you get played.
  • Use the 72-Hour Test:Very few things need to be bought immediately. Let them sit in your shopping cart for 3 days to prevent impulse buys. (The only exception is my book, which should be purchased immediately and in bulk.)
  • Automate Good Behavior:Until our robot overlords arrive, make sure to take advantage of our robot underlings. The best way to be consistent about good behavior is to automate it.
  • Use The Overnight Test:If all your investments got sold, which ones would you actually re-buy? And why doesn’t your portfolio look like that now?
  • Know The Fundamental Rules of Investing:Pay off debt. Diversify. Keep costs low. Eliminate unsystematic risk.
  • Be Ignorant And Lazy:“TMI” is a bad idea with people you’ve just met and with investing. If your money is already hard at work, why interrupt it?

Simple, but not easy. So plan, automate and be lazy so you can get out of your own way.

It’s not gambling, but that doesn’t mean it’s not rewarding.

Being smart with money is short-term boring, but long-term sexy.

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

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

lighthouse

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

 

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

Catch 22

Much like a cliffhanger episode of your favorite television show the market gave us a cliffhanger at the end of Q1. The rollercoaster, up and down ride of the S&P 500 in Q1 ended the quarter on the down beat and at key support levels. Would markets hold? Tune in next time.  Well, now we know that those levels held and Q2 produced a slow but steady walk higher in markets. The second quarter saw the S&P 500 Index up just shy of 3% which got the S&P 500 back on the positive side for 2018, albeit, just barely. While a decent quarter was had by equity holders it still appears that the market remains stuck in a consolidation range. The same range that we have predicted it would be stuck in for months and that it cannot quite break out. Why are markets stuck? The economy is doing so well. We have seen tax cuts and the repatriation of money from overseas. Shouldn’t that have markets rocketing higher?

Markets discount news in advance. Investors have anticipated peak profits. The tax cut, fiscal stimulus and repatriation of overseas funds were all widely anticipated. All of these maneuvers have helped profits tremendously but they are also all things that cannot be repeated over and over again as part of the business cycle.  These are one time turbo boosts to the economy. Great earnings were widely expected and were priced in months ago.

The second and most important reason that stocks are treading water is that the Federal Reserve has begun pulling back on liquidity and are now draining money from markets. This is done by the reduction of the holdings on the balance sheet of the Federal Reserve and steadily raising interest rates. While the Federal Reserve has only just begun their plan to withdraw liquidity from historical extremes markets have already begun to sputter.

It appears that markets are now waiting for the next catalyst. As you know we are proponents of the central bank thesis. This is the thesis that we, and others, subscribe to, that proffers that central banks are responsible for the rise in assets prices as a direct correlation to loose monetary policy and the existence of historically large balance sheets at central banks around the globe. Those large balance sheets and low interest rates have helped generate a fourfold rise in the S&P from the nadir of the financial crisis.

The Federal Reserve is just getting started removing excess stimulus and yet the ancillary effects of the removal of easy money are already rippling around the globe. Raising rates and draining the balance sheet have the effect of making dollars more scarce and more valuable. The draining of the balance sheet will lead to the draining of asset markets as there are fewer dollars to go around. This could quite possibly engineer a crisis in emerging markets.

Why emerging markets? Emerging countries have borrowed large amounts of money. Part of the broader problem is that they borrowed it in US Dollar denominated terms. Think about that for a second. Say you are Brazil. You borrow US Dollars and turn it into the Brazilian Real. Your currency drops in value by 14% due to rising US interest rates which make the Dollar more expensive. You now need to pay back your debt in US Dollars. That’s a problem. The country’s economy begins to grind to a halt. Then, authorities from around the world beg the US to stop raising interest rates. This is all happening while the Federal Reserve asset removal from their balance sheet has really been just a drop in the proverbial bucket. Almost akin to losing a deck chair off of the RMS Titanic and yet central bankers around the world are begging the Fed to stop raising rates. Central banks from Europe to Japan have indicated that October of 2018 could see further tightening from central banks around the globe. That could be the next catalyst.

The first half of 2018 has seen that there is a new game in town. The high wire act known as the Federal Reserve has made its impact on markets around the globe. The current tightening policies of the FOMC have led to a rise in the US dollar. That rise has had an impact on emerging markets. In just the past 90 days the Argentinean peso has fallen 30%. Other signs of distress have appeared in the Brazilian real, the Turkish Lira and the South African Rand which are all down over 14% this quarter. We have seen Asian emerging markets fall 3-5% while China leads the way to the downside with a double digit fall in its stock market for 2018. The change in policy by the Fed, by raising rates and shrinking its balance sheet has created a new dynamic. This new dynamic brings with it a flattening yield curve. A flattening yield curve makes it harder for banks to make money by lending and is seen as a harbinger of a slower economy.

In October central banks (US, ECB, BOJ) are poised to jointly deliver a net monthly shrinkage for the first time in 10 years and then the pace of that shrinkage is scheduled to increase as the ECB and BOJ both taper. Will markets respond in kind? We suspect they will. Eventually, if markets move low enough and economies slow enough,  it turns into a political issue. Will the Federal Reserve have the political will to continue shrinking policy as central bankers and politicians from around the world balk?

The Catch 22 for the Fed is firmly in place. As inflation begins to take hold in the US and in Germany central bankers will be forced to tighten policy even more. Politicians will cry out in pain as economies slow or markets fall. If central bankers feel threatened by politicians they may end up behind the curve on inflation. They will be faced with a choice. A choice between inflation in developed markets and currency chaos in emerging markets. Ironically, the next crisis will probably be caused by the central banker’s actions (or inactions) as they try to pare down their balance sheets and normalize interest rates.

Valuations – 1999

We have begun to have that old déjà vu feeling again. When you have been investing long enough you see the same events over and over again. They just come in different forms and names. It’s human nature. We have that feeling that we are seeing the same movie again and perhaps we have seen the ending before. The movie is the late 1990’s.

Growth stocks again have taken a tremendous lead over value stocks and rumblings in emerging markets are growing steadily. Lately, what has piqued our interest is the tremendous disparity between large cap tech (i.e. Netflix) and consumer staples (i.e. Kraft Heinz). 1999 was when tech overtook all reasonable valuations and left good quality companies in the dust. We currently see Netflix valued at 275x earnings with no dividend versus Kraft Heinz at 7 x earnings and a 4.0% dividend. The change in sentiment may not be immediate but it is important as investors that we are not blinded by the bright lights of the pundits and the headline du jour. At some point value will become valuable again and growth will pay the dear price of not having any margin of safety in its valuation.

“Haven’t we seen this movie before? Technology takes over the stock market late in a recovery cycle, seemingly making the bull ageless, pushing portfolios toward a more concentrated new-era exposure, stimulating investor greed bolstered daily by watching a chosen few (FANGs) rise to new heights, and convincing many that tech is really a defensive investment against late-cycle pressures which trouble other investments.”- Leuthold Group’s Jim Paulsen

While the hoards are chasing growth at any price (Amazon, Netflix, Microsoft) we look to note what the smart money is doing. In our April 22 2018 blog we noted that Goldman Sachs made an announcement that went widely missed. Goldman decided to halt the corporate buyback of Goldman stock. That gave us the sneaking suspicion that Goldman’s leadership felt that their stock was not worth the price that it was currently trading. As we write financial stocks have just finished a losing streak of 13 consecutive trading days – a new record. In April, when the announcement was made, Goldman Sachs was priced north of $260 a share. The stock is now down over 15% from those levels. Smart money indeed.

What’s Next

If you are a regular reader you know that we follow certain investors as guides along this journey to try to parse out clues to the macro environment.  Recently, Bridgewater Associates, the largest hedge fund in the world, offered this very direct warning about what comes next.

2019 is setting up to be a dangerous year, as the fiscal stimulus rolls off while the impact of the Fed’s tightening will be peaking.

We are bearish on financial assets as the US economy progresses toward the late cycle, liquidity has been removed, and the markets are pricing in a continuation of recent conditions despite the changing backdrop. ­

Markets are already vulnerable, as the Fed is pulling back liquidity and raising rates, making cash scarcer and more attractive – reversing the easy liquidity and 0% cash rate that helped push money out of the risk curve over the course of the expansion. The danger to assets from the shift in liquidity and the building late-cycle dynamics is compounded by the fact that financial assets are pricing in a Goldilocks scenario of sustained strength, with little chance of either a slump or an overheating as the Fed continues its tightening cycle over the next year and a half. – Bridgewater’s latest Daily Observations authored by co-CIO Greg Jensen

The Fed is pulling back on liquidity as it is the right thing to do for the United States. However, there are many outside the US that don’t share that view. In particular those include emerging markets that are beginning to submerge from Argentina to Turkey to Brazil. Those ripples across the pond from a rising US Dollar will form into waves that eventually hit our shores. This will put pressure on the Fed to slow its tightening cycle. As we always like to say, “There are no problems only opportunities”. We are loath to enter emerging markets as we see the Fed continuing to raise rates but there are places to hide. Currently, small caps and mid caps have been the out performers here in the US. The theory being that small and mid cap stocks will not suffer as much as their large caps brethren due to their lack of international sales.

Elsewhere, we see commodities as a place to generate return. We envision a scenario where the Fed will be handcuffed by political pressure.  The Fed will be forced to slow rate hikes by Congress and by external international pressure. That should allow inflation to run unchecked for some time until the pain delivered by inflation becomes worth the cure and the cure is painful – much higher interest rates. We are already starting to see inflationary wage pressures in trucking and the oil patch. Commodities should continue to flourish under this scenario.

We are more bullish on the US than Europe. We are currently seeing Europe’s economy slow down while the US speeds up. Why? The US and Europe both have QE and are buying assets in the real market. The difference is interest rates. The US is raising interest rates which is creating demand. Europe is not raising rates and therefore there is no impetus or motivation for people to spend. Jobs are getting more plentiful in the US. People can get raises, get better jobs, move, and spend money. Spending leads to more jobs with healthier pay which leads to people moving for better jobs which creates jobs and more spending. You get the picture.

QE is the kindling. Interest rates are the match. Europe just keeps pouring more gas on the fire without lighting the match. It took the US several tries before the market and economy gained confidence and believed that the Fed would continue to raise interest rates. Trump’s fiscal and tax polices helped give the Fed cover and made its story more believable. Europe needs the same. Light the match. Having said this, the fire will only burn so long. What comes next? Commodity prices will rise along with inflation here in the US. The Fed will try to continue to raise rates but the question remains will they end up behind the curve while feeding inflation? We think they will.

Markets are pricing in a goldilocks scenario that is ever elusive and fleeting. Change is the only constant. The market can continue to chug along to higher prices but that will become more difficult as we head into 2019 with less fiscal/tax stimulus and more QT around the world. 

We have been expecting and investing for a 9-18 month period of consolidation after which we should see a rise in volatility as the market breaks out of its consolidation range. Our thesis about the market consolidating its gains around the 2666 level on the S&P 500 for 9- 18 months continues to hold. At the end of June we will have seen month 7. Midterm election years in the United States have a poor record performance wise over history. We would expect more of the same in 2018. In fact, more specifically, July in midterm years has a particularly poor track record. That will have our focus as liquidity remains very light in the summer months and markets could be prone to shocks.

We continue to invest for low and rising inflation and anticipate stocks will continue to struggle within their current range. We have low duration with our bond portfolio and continue to add commodities to our asset allocation. Another focus is our cash and, for the first time in a decade, generating returns there. We continue to be the contingency planner. We are not predicting the direction of the market but developing scenarios and having a plan no matter the outcome. It’s not sexy. It’s Investing 101. Do the basics right and the rest will take care of itself.

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 CEO of Goldman Sachs 

Moreover, the years ahead will occasionally deliver major market declines – even panics – that will affect virtually all stocks…During such scary periods, you should never forget two things: First, widespread fear is your friend as an investor, because it serves up bargain purchases. Second, personal fear is your enemy. It will also be unwarranted. Investors who avoid high and unnecessary costs and simply sit for an extended period with a collection of large, conservatively-financed American businesses will almost certainly do well.Warren Buffett 

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Terry@BlackthornAsset.com

Disclosure: According to SEC Custody Rule 206(4)-(a)(2), Blackthorn urges you to compare statements/reports initiated by your Blackthorn with the Account Statement from the custodian of your account for data consistency. To that end, if you find any discrepancy between these reports and the statement(s) that you received from your account’s custodian, please contact your Advisor or custodian. Also, please notify your Advisor promptly if you do not receive a statement(s) from your custodian on at least a quarterly basis.

Blackthorn is an investment adviser registered in the state of Georgia. Blackthorn is primarily engaged in providing discretionary investment advisory services for high net worth individuals.

All information provided herein is for informational purposes only and should not be deemed as a recommendation to buy or sell securities. All investments involve risk including the loss of principal. This transmission is confidential and may not be redistributed without the express written consent of Blackthorn Asset Management LLC and does not constitute an offer to sell or the solicitation of an offer to purchase any security or investment product. Any such offer or solicitation may only be made by means of delivery of an approved confidential offering memorandum.

Rumblings

We hate when we are not clear. We get questions all the time about clarification. The problem is that the rules handcuff us so that we cannot get too specific as that would constitute advice as per the regulators and we always follow the rules. Suffice to say that there are rumblings in multiple areas underneath the market. One area clearly under attack are emerging markets. Emerging markets are submerging in Argentina, Turkey and Brazil to name a few. China has entered a bear market. We feel that central bank policy is the most influential driver of asset market returns. The current FOMC polices have the US Dollar soaring and capital fleeing emerging markets. We think this is as clear as we can be in writing what the great Benjamin Graham advised investors in 1972.

We can urge that in general the investor should not have more than one half in equities unless he has strong confidence in the soundness of his stock position and is sure that he could view a market decline…Thus, we would counsel against a greater than 50% apportionment to common stocks at this time. -Benjamin Graham The Intelligent Investor (1972)

We continue to see the S&P 500 stuck in a range pivoting around 2666. A trading range has been built. Trading ranges can serve to work off price elevation if they last long enough. One caveat is that trading ranges usually break out the way that they entered and in this case that would be lower. Small and Mid caps continue to power the market in the wake of trade tariffs from the White House but we are seeing negative divergence surrounding their latest new highs. Translated: that means that the excitement in those  areas of the market are less than when they hit their previous highs which suggests a weakening trend. At the end of June we will have seen month 7 of the trading range around 2666. The World Cup has the eyes of Europe and Asia and the tournament tends to keep a lid on things as will August beach vacations. Those would months 8 and 9.

If you have read us for some time you know that we subscribe to the thesis that it has been expansive monetary policy that has led to the rally in asset prices since 2009 and it is monetary tightening that will lead to the reduction in asset prices. Kevin Muir at Macro Tourist writes an insightful blog that I find very interesting. In his note last week he points to the actual days on which the Federal Reserve does the policy tightening and is finding a subsequent drop in the S&P 500. Makes sense to me. Here is a link to the piece. Kevin points to tomorrow to watch for another such drop.

http://www.themacrotourist.com/posts/2018/06/27/anotherqt/

We have been telling you to keep an eye on Bitcoin as an indicator of risk. As risk off has come to the land of Bitcoin it has also appeared to be risk off in other markets as well. Bitcoin fell just a bit to close Friday at of $5900 (Fri 4pm).It has since bounced this weekend but let’s wait until everyone comes back from the beach. We are not trading bitcoin nor have much interest in it beyond using it as a temperature gauge for risk sentiment and how that may apply to the stock and bond markets.

The S&P closed the week at 2718 down from 2754 or a 1.3% loss for the week. The loss would have been greater if not saved by a rally on the last two days of the quarter which is traditional. The S&P 500 is a touch oversold and due for a bounce but the moving averages are starting to turn lower ominously.  Gold has broken below support levels and is now very oversold and looking for a bounce.

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.

NetFlix Partying Like it’s 1999

Trade wars and tariffs continue to grab the headlines as small and mid cap stocks in the United States outperform. The theory is that small and mid cap stocks will not suffer as much as their large caps brethren due to their lack of international sales. Lately, what has piqued our interest is the tremendous disparity between large cap tech (i.e. Netflix) and consumer staples (i.e. Kraft Heinz). Not advice folks, just examples. We are getting that 1999 feeling again. 1999 was when tech overtook all reasonable valuations and left good quality companies in the dust. We currently see Netflix valued at 275x earnings with no dividend versus Kraft Heinz at 7 x earnings and a 4.0% dividend. This is Not advice. We are just bringing attention to disparate valuations.

Our thesis about the market consolidating its gains around the 2666 level on the S&P 500 for 9- 18 months continues to hold. At the end of June we will have seen month 7. The World Cup has the eyes of Europe and Asia as the tournament tends to keep a lid on things and so will August beach vacations. Those would months 8 and 9.

We have been telling you to keep an eye on Bitcoin as an indicator of risk. It was another tough week for bitcoin as it fell 6% from where we last marked it to a current level of $6061 (Fri 4pm).We felt that the $6777 level was a key level of support. We would now look to the $4000 area as support. Let’s see if any continued selling has an effect on speculators in equities. We are not trading bitcoin nor have much interest in it beyond using it as a temperature gauge for risk sentiment and how that may apply to the stock and bond markets. Bitcoin will begin to interest us when it falls 90% from its high of $19,200.

The S&P closed the week at 2754 or smaller than 1% loss for the week. The S&P 500 has consolidated its run from the last few weeks and that is healthy. The 200 DMA is sitting right about 2666. Small and mid caps continue to lead but are a bit over bought and signaling that they may need to take a breather. Gold has broken below support levels and is a bit oversold and looking to bounce.

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

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

lighthouse

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

 

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

Melt Up Redux

We got a great peak at what hedge fund legend Paul Tudor Jones is up to in an interview with CNBC last week. The publicity shy manager does not often give interviews and is most well known for calling the 1987 crash to the day. In his latest interview he is calling for a melt up in the markets as fiscal and monetary policy are creating too much stimulation for the economy. What may be great for the economy is not necessarily good for the market because, at some point, the Federal Reserve will have to put a clamp on the economy and inflation. But for now, that is not the case as Jones points out that rates are way too low for this point in the cycle while also having late cycle stimulative fiscal policy. He points to 1987, 1999 and 1989 Japan as analogous periods.

“we’ve got fiscal policy that literally came from another galaxy and we have monetary laxity. And that brew is what has got the stock market so jacked up.”

I think we’ll see rates move significantly higher beginning some time late third quarter, early fourth quarter.  And I think it will interesting because I think the stock market also has the ability to go a lot higher at the end of the year.

We’ve got interest rates that again look unlike anything that we’ve seen in the stock market top before and we’ve got a 6% budget deficit during peace time with 3.8% unemployment. So yes I think this is going to end with a lot higher prices and forcing the Fed to shut it off. And we’ll probably go through the same thing. It’s an old story. We’ll probably play it again.

Jones was asked what he sees occurring next in the markets. At first he expects a summer lull but then he expects fireworks in the third and fourth quarters of 2018.

I think you’ll see rates go up and stocks go up in tandem at the end of the year. If you ask me to kind of think of some analogy, I would pick 1987 in the U.S., not necessarily saying we’re going to have a crash but a time when you had a budget deficit, and you had stocks and rates going up for a period of time. 1999 in the U.S., that one also jumped to my mind when things got crazy the end of the year. 1989 in Japan. Again, they had strong fiscal monetary pulses that worked their way through the stock market. So I could see things getting crazy particularly at year end after the midterm elections. I could see them get crazy to the upside.

Here is a link to the full interview on CNBC if you have the time.

Crazy to the upside. We see the Federal Reserve as being behind the curve on rates. They will continue to raise rates slowly and consistently until something breaks. However, real rates are so low that they may be raising rates for some time as the economy (and inflation) roar. This could catch investors off guard as they lower the risk in their portfolios based on the Fed tightening. If markets continue to rise, in spite of the Fed tightening, this would force professional investors to chase the market as they chase performance. We called the melt up in stocks in the post Trump election period and then a 1987 style crash. Markets have adjusted to their new levels so a massive downside from here is increasingly out of the cards. Could we have another melt up in the post midterm election period? Jones is calling for one and we are starting to lean in that direction as well.

We have been telling you to keep an eye on Bitcoin as an indicator of risk. It was a tough week for bitcoin as it fell just over 15% from where we last marked it to a current level of $6475.We have been watching the $6777 level as an important level of support and that appears to have broken. Let’s see how it performs next week. As a reminder we are not trading bitcoin nor have much interest in it beyond using it as a temperature gauge for risk sentiment and how that may apply to the stock and bond markets. Bitcoin will begin to interest us when it falls 90% from its high of $19,200. Then we might take a look.

The S&P closed the week at 2779. Funny, that’s what we said last week. That’s right one of the biggest weeks of the year for the market with tons of market moving news and nothing happened. S&P consolidated its run from the last few weeks and that is healthy. The World Cup is on for the next month and that usually leads to some pretty quiet days. Europe will be dead quiet and then they go on vacation in August. Never short a dull market.  Happy Father’s Day Dad and to all of you dads out there!!

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

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

lighthouse

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

 

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

Alchemy – Bulls into Bears

So  much to say and so little space. I guess a chunk will have to wait for my quarterly letter next month.

Bulls into Bears

Some of the most visible market pundits that I term as permanent bulls have turned bearish of late. In fact, in my almost 30 years of doing this, these are people that I have never seen anywhere remotely close to bearish – so this is news. Perhaps it just has to do with how late we are in the cycle but I couldn’t help but notice. Prof. Jeremy Siegal, Abby Joseph Cohen, Leon Cooperman and now Ben Bernanke have all turned bearish in the last few weeks and they all seem to be pointing to how difficult 2019 is going to be. To us, that means, the trouble could start as early as July of 2018 in anticipation of a tough 2019. 

From Jeremy Siegal 

Caution is going to be the word here. 

This is a great year for earnings, no one argues with that. But the tax cut is front-loaded which means that the write-offs on capital equipment are going to accrue to 2018 and not nearly as much in 2019. 

The major threat of the market is higher interest rates going forward. Too many people read the FOMC minutes as being too dovish. –Prof. Jeremy Siegal

From Leon Cooperman

I would be a reducer on strength, not a buyer on strength. I think the market is adequately valued.

I’m sympathetic to the idea that sometime in the next 12 to 24 months, there will be events that will catch the market. In other words, … I think that inflation and interest rates will catch up to the market as we normalize. –Leon Cooperman  Omega Advisors

From the Did He Really Say That Dept?

The stimulus “is going to hit the economy in a big way this year and next year, and then in 2020 Wile E. Coyote is going to go off the cliff,”
– Ben Bernanke,  former Fed Chairman, June 7

 While not a perma-bull the most direct and information laden warning came from the largest hedge fund in the world – Bridgewater Associates.

2019 is setting up to be a dangerous year, as the fiscal stimulus rolls off while the impact of the Fed’s tightening will be peaking. 

We are bearish on financial assets as the US economy progresses toward the late cycle, liquidity has been removed, and the markets are pricing in a continuation of recent conditions despite the changing backdrop. ­- Daily Observations  co-CIO Greg Jensen Bridgewater Associates

The Fed is pulling back on liquidity as it is the right thing to do, however, there are many that don’t share that view. In particular, emerging markets that are beginning to submerge from Argentina to Turkey to Brazil and the ripples across the pond are becoming waves. Those waves will eventually hit these shores and the Fed will have to slow its tightening cycle. There are no problems only opportunities. We are loath to enter emerging markets but see commodities as a place to hide as inflation rears its ugly head as a handcuffed Fed is forced to slow rate hikes by Congress and external international pressure. We are already starting to see wage pressures in trucking and the oil patch. Markets are pricing in a goldilocks scenario that is ever elusive and fleeting. Change is the only constant.

We are also more bullish on the US than Europe. We are currently seeing Europe’s economy slow down while the US speeds up. Why? The US and Europe both have QE and are buying assets in the real market. The difference is interest rates. The US is raising interest rates which is creating demand. People are saying hey interest rates are going up I better, fill in the blank, buy that house, that car, or build that factory. Jobs are getting more plentiful. People can get raises, get better jobs, move, spend money. Europe is not raising rates and therefore there is no impetus or motivation for people to spend. Spending leads to more jobs with healthier pay which leads to people moving for better jobs which creates jobs and more spending. You get the picture.

QE is the kindling. Interest rates are the match. Europe just keeps pouring more gas on the fire without lighting the match. It took the US several tries before the market and economy gained confidence and then believed the Fed would continue to raise interest rates. Trump’s fiscal and tax polices helped give the Fed cover and made its story more believable. Europe needs the same. Light the match. Having said this, the fire will only burn so long. What comes next? Commodity prices will rise along with inflation here in the US. The Fed will try to continue to raise rates but the question remains will they end up behind the curve while feeding inflation? We think they will.

The market can continue to chug along to higher prices but that will become more difficult as we head into 2019 with less fiscal/tax stimulus and more QT around the world. To be sure, Cooperman cautioned that while trouble could be ahead for late next year, he isn’t ready to head to the exits just yet, saying “the conditions normally associated with a big decline are not yet present.” We agree.

Small caps continue to lead while the trade wars stay on the front burner. Keep an eye on the banks. Markets won’t get far without them. You’ll find us in the commodity space. You won’t find us in emerging markets. That’s where the trouble will surface.

We have been telling you to keep an eye on Bitcoin. It bounced slightly this week to close on Friday at $7660.66. It still has our attention. $6777 is important support for bitcoin.

The S&P closed the week at 2779 or up about 1.6% but still near our fulcrum of 2666. 2800 is resistance. Small caps and the Russell are holding their recent new highs but look a bit overbought and could use a rest. We are headed to NY/NJ to see clients and had considered taking the whole week out of the office. We think that is sufficient to confuse the trading gods and expect next week to be an active one. Whenever we are out of the office the trading gods seem to knock the hell out of the market. Next week is a busy one with summits and central bankers galore. Keep your helmets on. The bulls are still in charge and looking for a knockout punch.

pexels-photo-722664.jpeg

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.