Housing On Fire – Again

The housing market is absolutely on fire of late. We are hearing tales of bidding wars again. What short memories we have. We had an interesting conversation with some in the core housing supply chains. Their tales are more of woes surrounding supply rationing and trucker shortages. Inflation here we come. The real story is about interest rates and their effect on markets at home and abroad. We have long surmised that it was absurdly low interest rates that were holding back the economy. Our thought process is that with 0% interest rates there is no rush to go out and buy that house, that car or build that factory. Rates are low and will be for some time. Well, now the rush is on to make moves before interest rates run even higher and inflation is entering from stage left. The ironic part is that if the Federal Reserve raises rates further it may push the economy further into overdrive.

If one oversteps the bounds of moderation, the greatest pleasures cease to please. – Epictetus

For a more in depth analysis of where rates may be headed check out this blog post from our friends over at Global Macro Monitor.

As I said, it is all about interest rates. Here is what David Tepper, hedge fund legend and now owner of the Carolina Panthers (who bought the team for a mere $2.2 billion) had to say on about interest rates and the stock market earlier this month.

… a lot of it has to do with interest rates. We’re right on the cusp of breaking out on interest rates at this level around 3%. (the 10 Year closed the week at 3.06%)…But a lot of people don’t think they’re going to break higher – most people are only saying they’re only going to 3.25%. And I think if they only go to 3.25% for the rest of the year then stocks might be up. But too many people are saying that. And when too many people are saying one thing that’s when I start to get worried. So if we break above that, then stocks might have a problem.- David Tepper Appaloosa Management

Now we must deal with the unintended consequences of zero percent interest rates and the unwinding of QE. Because interest rates are headed higher so is the US Dollar. That is having a chilling effect on emerging markets. The iShares Emerging Market ETF is now trading below its 200 DMA and looks like it may be headed for a fall. I remember 1997 and the Asian Crisis very clearly. It was and still is the only time that US stock markets closed early due to trading curbs and the Dow Jones’ 550 point loss that day. We were on the floor that day and it was particularly eerie. The Asian Financial Crisis began in Thailand with the collapse of the Thai Baht and its effects were felt around the globe. Keep an eye on emerging markets like Argentina, Brazil, Turkey and South Africa. Turkey may merit extra attention as inflation in that country just hit 11% and its dictatorial leader is demanding rate cuts!? The economic textbooks would tell you to do the opposite.

Keep an eye on Bitcoin. The crypto currency market seems to be shaping up as a temperature gauge for risk. Bitcoin just made a lower high and there seems to be pressure in the space. As goes bitcoin so goes the market? It is trading at about $8300 as we write. It is very important that the support at $6700 remain steady otherwise bitcoin could see a $2000 fall quite quickly. The S&P closed the week at 2713 or about 50 points above our fulcrum of 2666. It has been 5 full months since we first hit 2666. Remember, we thought that we could spend 9-18 months here. The S&P keeps swinging back and forth between the 100 day moving average and the 200 day. Those lines are sloping upward and so is the market. The bulls have some work to do.

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

lighthouse

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

Advertisements

666 Redux

Rollarcoaster markets. Around and around, up and down and we are back where we started. Hopefully, it didn’t cost you money. Another week and month and we are stuck at 2(666). You can read our thesis on the number 666 in our postings Bitcoin and Warning Shot. The short version is that the market has struggled at 2 times, 3 times and now 4 times the low on the S&P 500 of 666. It’s not magic. Its algorithms. The computers are in charge and for now the trading houses love the volatility but it’s all just churning. We have expected this churning to last 9- 18 months but we are getting closer to taking the under on that bet.

While the pundits are obsessed with Elon Musk’s seeming breakdown we will continue to obsess over the recent ranges of gold, stocks and bonds. It could be a long summer as the doldrums kick in but given our track record it will happen when we are furthest from the office. We have a knack for taking vacations at exactly the right time. For an inside tip look at your August calendar.

We continue to be invested because we do not know which way the market will head and time is money. It’s boring and it’s not sexy but look at where you cash, your dry powder, is invested. The differences are staggering and it is well worth your time to pick up 200 basis points. The market continues to struggle and is stuck in the range between 2550-2700 on the S&P 500. The longer it stays in the range the better it is for the bulls and the harder the breakout will be when it comes. We see the market breaking to 2850 and new highs or a trapdoor opening with a swift move to 2400 or lower. The market still struggles with 2666 as we closed the week at 2664 (which is the actual 4 x 666). We are stuck, for now, in a range between the 100 Day Moving Average (DMA) and the 200 DMA and that range is growing tighter each week as the 200 day is trending higher. Something will have to give. Keep an eye on the door. When these ranges break things will change rapidly – but for now we wait.

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

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

 

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

 

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

Full Swing

One of the most positively anticipated earnings seasons in years is in full swing and most of the news has gone according to plan. As earnings seasons go this has been very good Corporate America. Here is the problem. Markets haven’t budged. That in essence shows how the market is a discount mechanism. Great earnings were widely expected and were priced in months ago. Inflation is the new worry and the statistics that we get next week will most likely show inflation rising above the 2% goal of the Federal Reserve. Next week could signal more rate hikes on the way and a higher 10 Yr Treasury. That could prove negative for stocks.

It seems that we are not the only ones signaling caution as we are seeing that in the positioning of public investors/institutions and sentiment numbers. The key takeaway here is that as investors become more cautious in their positioning it makes it more likely that when we break out of our current range the upside will be exaggerated and the downside could be more limited. Conservative positioning will leave us all with more dry powder and buying power as a group. We are not saying which way it will break but we are trying to decipher which way to lean.

We continue to invest for inflation and anticipate stocks will continue to struggle with their current range. We have low duration with our bond portfolio and continue to add commodities to our asset allocation. The commodity sector is one of the best performing asset classes in 2018. Another focus is our cash and generating for the first time in a decade returns there. Not sexy. Just smart. The market continues to struggle and is stuck in the range between 2550-2700 on the S&P 500. The longer it stays in the range the better it is for the bulls and the harder the breakout will be when it comes. We see the market breaking to 2850 and new highs or a trapdoor opening with a swift move to 2400 or lower. The market still struggles with 2666 as we closed the week at 2669. We are stuck, for now, in a range between the 100 Day Moving Average (DMA) and the 200 DMA and that range is growing tighter each week. Something will have to give. Keep an eye on the door. When these ranges break things will change rapidly – but for now we wait.

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

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

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.

Tension Builds

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

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

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

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

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

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

lighthouse

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.

Trapdoor

The bears won last week as any and all moves by the bulls were rebuffed. The bounces that are coming are of the bear market variety. They are large bounces on light volume as buy interest wanes. The gaps continue to remain unfilled at 2850 and 2700. The bear case is being validated. The 200 Day Moving Average (DMA) is what the entire street will be watching this week. The 200 DMA is a widely used gauge for investors as it is used as a barometer as to whether we are in a bear market or a bull market. We closed the week practically sitting on it. We have not been below the 200 DMA in almost two years since June of 2016. When we violated the 200 DMA in September of 2015 the market struggled for 10 months. We have been calling for the market to struggle for 9-18 months since we hit 2666 on the S&P 500 in December of 2017. We are now 5 months into that struggle. I can hear the question. Why not then just get out of the market? The market can do three things. Go Up, Go Down, or Go Sideways. By being invested you make money in two of those three scenarios. We don’t know that the market is going to go down. We have made some sales at these elevated valuations and with those proceeds we are prepared to makes purchases at lower prices.

If the 200 DMA is violated by a close this week we could see trapdoor selling. By that I mean that bids will be pulled and those who were once buyers become sellers.  Trump made noise again last week on the tariff issue but markets sensed something different in his tone. He tweeted that he would accept a stock market drop because it was up so much already and that trade tariffs are in the best interest of American long term. He might get some push back on that thought, especially, from the bulls.

April, which is historically the best month for the Dow, is off to a very bad start. New money for the month did not help tip the scales in favor of the bulls. The bulls do not have a lot of conviction and if the 200 DMA is violated momentum funds will become sellers further driving the market lower. We expected the market to test 2550 and we did see 2555. Close enough for government work. We now expect the 200 DMA to be tested and for Wall Street to fail that test. We did not see the market bounce into the 2700-2750 area and that gives more power to the bears. The stock market is primed and ready for a drop.

A short one today as we tee up our quarterly letter for next week. I think we will have plenty to talk about.

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.

FANG’s Lay an Egg

The attack on the FANG’s is the second attack of 2018. The first was the short volatility trade that blew up in February. Each attack has a lasting effect on the market. The short vol trade suppressed the price of volatility which helped elevate stock prices. The dismantling of this trade is still reverberating through markets. The next break down is what we call the shooting of the Generals. The leaders of the market have been producing an outsized portion of the gains and those leaders are now being questioned by the market. The move lower in the FANG’s has the market on its heels and investors are nervous. Where will the new market leadership come from? When will it arrive? This is a tough blow for stocks. New leadership cannot come quickly enough and large enough to steady the market. Tech is 25% of the S&P 500 with Apple, Amazon , Google, Microsoft and Facebook making up 14% of the S&P 500. You can see how weakness in just those five stocks will have an outsized negative effect on the S&P 500. The Generals of the market are the leaders. Those leaders, when shot, need to be replaced before the market loses confidence. The market is growing increasingly rudderless. There will be a third shoe to drop.

The FANG’s (Facebook, Amazon, Apple, NetFlix, Google)moved even lower this week as the bears took full control. They are oversold and due for a bounce as is the market. Unfortunately, the bounces that are coming are of the bear market variety. They are very large bounces on light volume. Bear market rallies rise sharply and die in low volume.

The longer the gaps stay unfilled at 2850 and 2700 the more they are validated. The 200 DMA is the key as the market has used it as support but the bulls just can’t get lift off especially as the FANG’s are taking such a pounding. April is, historically, the best month for the Dow. Unfortunately, that number dips in midterm election years. New money for the new month could help but if it doesn’t – watch out. We still anticipate a move to at least touch and test 2550. We do not think the street has studied for the test and may fail. But first, we should see some bounce to test 2700-2750 at the very least. If we don’t retest then that is another win for the bears.

A short one today as it is Easter Sunday. We will also have an abbreviated note next week as we tee up our quarterly letter.

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.

Monday’s Blueprint for Markets

Here is our Blueprint for Monday and beyond. Since the election of Donald Trump we have been building an investing scenario that looked much like 1987. We were calling for a 1987 style melt up and then, a smack down.

A 30% run from the lows before Election Day, much like 1987, …would put us squarely in bubble territory as the S&P 500 would approach the 2750 area. A subsequent 30% retreat would bring us back to the 2000 area. (The S&P 500 was at 2360 as we wrote.) Witches’ Brew Blackthorn Quarterly Letter April 2017

We may have missed the top by 100 points on the S&P 500. Last month we backed off of the 1987 style melt down part of this scenario in light of everyone jumping on the 1987 bandwagon. We have begun to expect a more drawn out solution but you must be prepared for either in this environment.

This is what we had to say in our blog post Warning Shot Across the Bow published 2/4/18.

Our new scenario calls for a more drawn out selloff. First, we may see a drawdown in the magnitude of 5-15% followed by a retracement back to the old highs. From there (You Are Now Here) we should see a selloff of a larger magnitude leading to a bear market over the next 18-24 months. It’s not voodoo. Valuations show that historically we will see limited upside from these levels. Markets are high. Rates are rising. The yield curve is flattening. Markets tend to struggle in the second year of a Presidency as midterm elections approach. It’s not rocket science. It’s the study of psychology and history. We have seen the warning shot across the bow.  Buckle up. It’s going to be a bumpy ride. Watch the central bank balance sheets. If they stop tightening all bets are off.

As far back as October of 2017 we were warning about the 2666 level on the S&P 500 and a struggling market for 18-24 months.

We felt that the market would struggle for 18-24 months when it hit 2666 on the S&P 500. The market has spent time at each multiple of the 666 low in the S&P. 2664 is 4x the 666 level. You must remember we are dealing with algorithms written by humans. Levels like 666 and 2x, 3x and 4x are just levels in a computer program. Be careful of computers. They only do what they are told. As computer use has created a wondrous cycle of upward movement so we can have the vicious spiral downwards.

Market structure could exacerbate may any selloff. We have warned about market structure in the past and here is where you can do further reading from our blog posts – My Name is MarioParadox and Caution Flags.

The market is flawed in its design as its automated structure puts the momentum players, the market makers and algorithms in control. While it is pleasurable to see it go up every day it will be much quicker and painful when the market goes down in a one way fashion. For every action there is an equal and opposite reaction. Blog Post “My Name is Mario” 10/28/2017

We mentioned on Twitter on Thursday morning that gaps at 2850 and 2700 would lead technicians to project a measured move lower to 2550. That was 4% lower as we wrote. We realized that a move of that magnitude would take the S&P down to test the lows from February’s vol quake. What we didn’t realize was how quickly we would get to that number. For next week the old school playbook is for a rough Monday and a chance for the bulls to turn things around Tuesday afternoon. We have a feeling that Wall Street didn’t study for this test. Market is very oversold and due for a bounce. How it reacts to the prior low (2550) will tell us a lot.

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.

Where Are We? – Emotional Capital City

Where are we? Markets are about cycles. We see them repeat over time. The question now is where are we in the cycle? One important reason why we need to be aware of cycles is because investing is an emotional roller coaster.  If we jump out of the market too soon we risk under performance and client angst. If we are too late clients may feel over invested and lack the courage to buy when others are selling. It is then that we run the risk of permanent capital loss. Our job as financial advisors is really about contingency planning, trying to anticipate what happens next and how to respond. An underappreciated part of investment management is how we, as advisors, react to our client’s emotional response. Our ability to respond to market cycles is directly influenced by where our clients are emotionally – their emotional capital.

We have spent a good deal of time lately talking to clients about emotional capital. When cycles reach a more mature stage it is prudent to sell some winners and build a cash (and emotional) cushion with which to buy future bargains. That way when market losses come you are keenly aware that you prepared for this moment and this money was set aside to buy assets at bargain prices. If you are holding too much in the way of assets when they begin to fall you will be tempted to start selling. It is then that you will be managing your money from an emotional point of view. We all know that losses hurt far more than gains feel good. Much as Joseph stored the grain in Egypt during the 7 years of plenty it is time to store some cash to prepare emotionally for when the lean times arrive. Leaving some gains on the table will make you a better investor over the long haul.

Now let Pharaoh look for a man discerning and wise, and set him over the land of Egypt. 34“Let Pharaoh take action to appoint overseers in charge of the land, and let him exact a fifth of the produce of the land of Egypt in the seven years of abundance. 35“Then let them gather all the food of these good years that are coming, and store up the grain for food in the cities under Pharaoh’s authority, and let them guard it. 36“Let the food become as a reserve for the land for the seven years of famine which will occur in the land of Egypt, so that the land will not perish during the famine.” -Genesis 41:34

We caution that we are not seeing anything imminent. We just know that trees don’t grow to the sky and bull markets end. We know that we are in the midst of one of the longest bull markets on record influenced by historical central bank largesse. We don’t know when but we are due for leaner years. We need to store some cash and build emotional capital. The people in the industry whose opinions we respect are advocating caution. Hopefully, it will only be a minor disruption but it is imperative that one is not “all in” when it arrives and we are emotionally prepared to purchase bargains. A recession is the big worry and that still seems some time away. 

The market is still struggling to supplant 2800 on the S&P 500. Bond yields are struggling with rising above 3% on the 10 year. Gold cannot seem to break out and hold above $1350.  The yield curve is flattening. The key takeaway here is that the pressure is building. We are at a crossroads. Bonds. Commodities and equities. We are all waiting.

The bears pushed back this week but we give a slight edge here to the bulls. Stocks are slightly oversold and bonds slightly overbought. The big option expiration came and went without incident. Next week, hopefully, will tell us more but we could just see the tension build. The bulls still need to get over the 2850 gap to really convince us but if they do things will progress quickly. Be on your toes.

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.

 

The Ides of March

“Beware the Ides of March.” As we know from Plutarch, a Greek biographer, a seer had prophesied to Julius Caesar that harm would come to him by the Ides of March. He would, in fact, be assassinated on that day. Wall Street is a superstitious lot but it’s the bears that may feel they got assassinated last week. Some of the feedback that we received on our blog last week was that we were a touch bleak. We don’t feel that it is our job to talk about sunshine and roses. Our job is to be the cynic. Our job is to find the risk and avoid it or profit from it. We are not bleak on the market. We are just looking to manage risk and get the best risk return ratio for our clients. We are still heavily invested in stocks for clients but just underweight them as we feel that the risk reward here is turning against investors. In what is probably the best investing book ever written Benjamin Graham, of whom Warren Buffett is a disciple, outlines how to allocate your investment portfolio.

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 of the 1969-70 type with equanimity. It is hard for us to see how strong confidence can be justified at the levels existing in early 1972. Thus, we would counsel against a greater than 50% apportionment to common stocks at this time. -Benjamin Graham The Intelligent Investor 

We wholeheartedly agree with Graham as to strategy but we also think that Graham would agree with us on the market’s current position and how to allocate in 2018. After seeing a massive run in the Dow Jones from 1942 -66 markets were struggling in 1969-70 period. The move lower from 1968-70 totaled a 35% loss in equities. That is the kind of loss Graham is talking about. Graham’s lack of confidence in 1972 was well founded as a massive bear market would take place from 1972-74. 

Markets tend to go higher over time and the majority of annual returns in stocks are positive. We don’t need to tell you that stocks are a very good investment over the long haul. Our job is to look at risk/return ratios and know when to back off. You wouldn’t bet on Secretariat to win if a $5 bet would return $1. The metrics on stock valuations are historically elevated right now and history tells us that equity returns from here could be subpar. There is nothing wrong with rebalancing, taking profits and taking down risk. We are not out of the market just underweight stocks. 50% in and 50% out. We can find a reason to be happy whatever Monday brings. The key to what Graham is saying is can you weather the storm? If you are overweight and you get a discount in prices you either cannot buy because you are already all in or will not buy because you lack the psychological and emotional will. You should never be all out and never all in. That way, when Mr. Market offers you a ridiculous price on a stock that you have always wanted to buy you are financially and emotionally ready to take advantage. Not gloom and doom. Just proper risk management.

The Ides of March were known in ancient Rome as a time to settle debts. It looks like the bulls settled one with the bears a week early. Last week we said that the line on the bull/bear game was a push. We thought that with the market a touch oversold the bulls had a slight advantage but that neither the bulls nor the bears really had the upper hand. Well, the bulls made it clear they are not ready to go away yet and shrugged off potential trade wars and another high profile resignation from the White House. The bulls had an outstanding week and let the bears know who is really in charge. The bulls now have the gap at 2850 on the S&P 500 clearly in their sights.

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.

Back to the Future

It has been our central operating thesis since the Great Financial Crisis that low interest rates+ low volatility+ larger central bank balance sheets would = higher asset prices. We are now entering an environment where we are seeing higher interest rates+ higher volatility+ smaller central bank balance sheets. We surmise that will = lower asset prices. It’s just math.

The big news this week was probably Trump’s trade policies and tariffs on steel. On that subject we do not believe that those tariffs will see the light of day. He will lose when he goes to the WTO and will be forced to retract them but, then again, we think that his threatened imposition of tariffs is probably only a negotiation tactic. We had several discussions this week on tariffs with people we respect. They made several interesting points about trade and steel and tariffs. My contention is that none of that matters. Wall Street and investors see tariffs and they think trade war. They think trade war then they think about the Great Depression and Smoot Hawley with a shooting war to follow. When it comes to trade wars investors will shoot first and ask questions later. A trade war = lower asset prices.

This week we saw the new Fed Chair go in front of Congress and act hawkish on inflation. Markets reacted negatively. The very next day he seemed to walk back his earlier comments. This is precisely why, as investors, that we need to prepare for inflation. No one wants to fight it. It is not politically acceptable until it is too late. No Fed chair will have the political will to fight inflation until it is raging and it begins to hurt Main Street. The biggest beneficiaries of inflation are the largest debt holders. Who are the largest debt holders? Governments. They need to inflate away their debt. They want inflation because it allows the very existence of bigger government. The political will to fight inflation will not be there until it hurts and hurts Main Street badly.

CONFIDENCE ON INFLATION GETTING STRONGER” – “Hawkish” Fed Chair Powell

NO STRONG EVIDENCE OF DECISIVE MOVE UP IN WAGES, MORE LABOR MARKET GAINS CAN OCCUR WITHOUT CAUSING INFLATION” – “Dovish “ Powell

By far, the most interesting part of the week for us was an interview from Goldman Sachs of Paul Tudor Jones, a legendary hedge fund manager who called the 1987 crash. He has run a Global Macro hedge fund for over 30 years investing in stocks, currencies and commodities. Check out the whole interview if you can. Here are some of the highlights (emphasis ours.)

Interview with Paul Tudor Jones

Allison Nathan: Is the market underestimating commodity-related inflation today? 

Paul Tudor Jones: Absolutely. The S&P GSCI index is up more than 65% from its trough two years ago. In fact, relative to financial assets, the GSCI is at one of its lowest points in history. That has historically been resolved by commodities putting on a stunner of a show, stoking inflation. I wouldn’t be surprised if that happened again.

 Allison Nathan: Does all of this just boil down to the Fed being behind the curve?

Paul Tudor Jones: … The mood is euphoricBut it is unsustainable and comes with costs such as bubbles in stocks and credit. Navigating these bubbles will be one of the most difficult jobs any Fed chair has ever faced.

 Allison Nathan: In this context, what do you want to own?

Paul Tudor Jones:  I want to own commodities, hard assets, and cash. When would I want to buy stocks? When the deficit is 2%, not 5%, and when real short-term rates are 100bp, not negative. With rates so low, you can’t trust asset prices today.

 Allison Nathan: You are well-known for calling Black Monday. Is the recent surge in volatility behind us?

Paul Tudor Jones: In my view, higher volatility is inevitable. Volatility collapsed after the crisis because of central bank manipulation. That game’s over. With inflation pressures now building, we will look back on this low-volatility period as a five standard- deviation event that won’t be repeated.

If you are a regular reader you know that one of our biggest concerns is rising bond yields. By way of our friend, Arthur Cashin, comes some insight on those rising bond yields. Barry Habib is quoted from time to time in Arthur’s Daily Letter and his track record is nothing short of amazing.

 We are going to see 3.04% on the 10-year within the next couple of weeks. That will be the moment of truth. The level of 3.04% matches the top of the 30-year downtrend in yields, as well as the 0% retracement from the highs 4 years ago. In other words…it’s a big deal if this is convincingly broken to the upside, and strongly suggests that the 10-year will hit 3.80% before summer.

Interestingly, Paul Tudor Jones spoke of rising bond yields in his interview. His thought is that the 10 year goes to 3.75% by year end and that was a conservative target. We thought that the S&P 500 would make a run to the old highs but it seems that talk of trade wars has aborted that attempt. The struggle between the bulls and bears is a push right now. Either could take over. Markets are a bit oversold here which gives the edge to the bulls but the failure to trade to old highs and trade war talk tilts things in favor of the bears. So much to say in such a small space. We are looking forward to our quarterly letter where we will get more in depth in some of these issues.

From the Back to 1987 Department:

Gluskin Sheff’s David Rosenberg summed it all up nicely“Hmmm. Let’s see. Tariffs. Sharp bond selloff. Weak dollar policy. Massive twin deficits. New Fed Chairman. Cyclical inflationary pressures. Overvalued stock markets. Heightened volatility. Sounds eerily familiar (from someone who started his career on October 19th, 1987!).”

lighthouse

 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.