Decision Time

 Zero earnings growth, falling PMI’s and slowing GDP growth are not indicators of high times around the corner but here we go. The market has been moving sideways for 22 months – since January 2018. Perhaps, Friday was the day of the breakout. I think I need a bit more convincing as markets are stretched shorter term. The difference between this breakout and others over the last few months is that the October window is now closed. Investors know that over the last 50 years the November to May time period holds all the gains. If you had bought stocks in May and sold in November every year for the last 50 years you would have returned close to zero. If you bought in November and sold in May you would have reaped almost all of the gains in that period. Professional investors are back at work and ready to jump on a breakout in stocks.   

I am a risk manager by trade and, in general, root for the market to go down. Why? I am constantly a buyer of stocks. It is much harder to buy them with valuations so elevated and with economic indicators sliding. We have been writing for months that Trump has something up his sleeve. He knows he will not be reelected with a slumping stock market and an economic malaise. He needs spending and job growth. For months he has badgered the Federal Reserve into rate cuts and QE with his trade war being the final piece of the puzzle to convince the Fed. Now that the monetary heroin is flowing again payroll tax cuts and a truce in the trade war are just what Trump needs to get things really humming in front of the election. It is going to be an interesting spring.   All of these recent changes in policy may have huge effects down the road and adds to our thesis that a blow off top and even higher equity prices could result. We are not excited about chasing returns and momentum with valuations this high but we don’t get to choose the markets we have to invest in and invest we must.

If you follow us you know that we are always on the lookout for several leading investors whenever they speak. One of our favorites is Jeffrey Gundlach from Doubleline. While most investors just talk markets up we think Jeffrey speaks truth to markets. He gave an interview this week to a German finance magazine. We have long talked about the effect of corporate buybacks and their support of equity prices. One thing that we know is eventually that fuel to the markets will sputter. Gundlach explains the current Achilles heel of the US corporate debt market and how things may play out. 

How big is the problem (corporate bonds)?

Morgan Stanley Research put out an analysis about a year ago. By only looking at leverage ratios, over 30% of the investment grade corporate bond market should be rated below investment grade.

Is it better to own stocks then?

The US equity market will be the worst performing equity market in the world if you look at the past three major economic downturns, globally. Before each of those three downturns there was one segment of the global stock market that outperformed in a noticeable way, and the economies related to that stock market were perceived as to be invincible.

This time US stocks are crushing every other area. It’s due to some fundamentals like the better economy, but also due to tax cuts and share buybacks. In the next recession, corporate bonds will collapse, and buybacks will stop. The dollar has already topped. It may begin falling in earnest during the next downturn and US equities will lose the most. They will probably not make it back to the peak for quite a while. When the US market drops, it will drop a lot.

We agree with Gundlach that, at some point, the fuel of corporate buybacks will stumble and bring down historically elevated US equity valuations. Europe and Japan look much cheaper and may provide better risk reward opportunities going forward.

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.

Cross Your Fingers

The parade of famous money managers coming out to proclaim that asset valuations are too high continues. This week’s contestants included Paul Singer of Elliott Management and Bill Gross from Janus funds. Speaking at the Bloomberg Invest summit in New York, Bill Gross proclaimed that in regard to US markets as an investor you are “buying high and crossing your fingers”. Bloomberg

Singer had the following to say:

“I don’t think that the fixes that have been put into place have actually created a sound financial system. I don’t believe that confidence is justified in policy makers and central bankers.”

“If and when confidence is lost, it could be lost in a very abrupt fashion causing conceivably a ruckus in bond markets, stock markets and in financial institutions.” – Paul Singer

While we agree with the parade of money managers that markets are overvalued, overly complacent and apathetic to growing risks, until markets recognize those risks, assets prices will continue to rise. Here is our next level of thinking on the subject. Singer has just raised $5 billion in ready cash and he is anxious to deploy it. He, like other underinvested money managers, needs lower prices. We think that the animal spirits playbook is still alive. Markets have not broken down and still seem to be headed higher. Higher markets may force investors to chase it even higher.

While there was plenty of potential for fireworks as we came into the week it went out with a real thud. Most eyes were on Thursday and the Comey congressional testimony but it was Friday that provided the only action of the week. In a week that saw the world’s largest natural gas supplier, Qatar, being cut off from supplies and creating food shortages in one of the richest nations on earth, markets didn’t even blink. While the much hyped James Comey testimony and a hung parliament in the United Kingdom election didn’t move markets it was a reevaluation of tech stock prices on Friday that gave the week any life at all. The fireworks were provided by Face book, Amazon and Apple. The street has been making noise that the high flying tech stocks needed a breather and they got that breather on Friday. The key is will we see a real rotation out of tech and growth and into value stocks and the 2017 YTD laggards. We will see next week if that is what we have in store for the summer of 2017.

Equities are still in the middle of what we anticipate to be the new range on the S&P 500. For now we see support at 2400 on the S&P 500 with 2475 providing resistance. Interest rates may have seen their interim low for awhile. Financials and energy were the standout performers on Friday with small and mid cap stocks getting a day in the sun. Small and mid cap stocks have lagged so far in 2017.Perhaps they have further to run if this rotation continues.

If you are not currently receiving our blog by email you can sign up for free at https://terencereilly.wordpress.com/ .

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

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

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

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

Trump Troubles

A roller coaster runs up and down spins around and around while finishing where you started and it probably cost you money. – Arthur Cashin

We all rode the rollercoaster this week.  While there was plenty of noise and bluster the market fell less than one half of one percent this week. We feel that the volatility in the market was more about the massive positioning of trader’s being short volatility and not as much about Trump. Trump is just the excuse. Could this be a warning shot across the bow in the crowded volatility trade? Perhaps. Be careful. We are entering a slow period for the market seasonally. There just aren’t as many players around during the summer months and moves could become more pronounced. I, for one, would welcome back some volatility. It keeps investors onsides.

Financials are very important to the bullishness of the US stock market. The yield curve is flattening. That means that the bond market sees the economy slowing and the prospect of higher rates on the long end decreasing. The Fed will not be able to continue to raise rates if the economy is faltering. Financials are probably the most important sector of the stock market. Without financials it is hard to get the index to extend higher. The market is pricing in a June rate hike but chances are diminishing that the Fed will be able to raise rates a third time in 2017. Trump’s troubles make a fiscal bump less likely. If you have followed our blog you know that we made the case that a Trump bump from fiscal stimulus would give the Fed cover to raise rates. If that gets lost in the swamp then it makes the Fed’s job a lot more difficult. Our next point of interest is the Fed’s balance sheet. They are making noise that shrinking it is becoming a priority. That will be a huge factor in 2018.

West Texas crude was able to hold its recent lows and was able to close this week above the psychologically important $50 a barrel level. It could be just a bounce off of the OPEC meeting and Russian compliance or we could be seeing more growth worldwide. Oil has a top on it as if crude goes higher as more shale players will come online capping the price of oil but it is worth watching as an indicator of growth around the world.

Given all that happened this week the market is still stuck in consolidation mode. Emerging markets and Europe have been the place to be but Brazil took a hard shot this week. Keep an eye on Brazil. Impeachment is a strong word. Given the very small sample of US Presidents that have been on the impeachment trail stock markets have not reacted negatively in the longer term based on the impeachment process. Having said that, impeachment is also not likely given that Republicans control the House, that is until the midterm elections in 2018.  It is hard to argue against the bull thesis as the market continues to hold its recent range of 2330-2400 on the S&P 500. Until we break decidedly below 2330 we hold on to the bullish thesis.

If you are not currently receiving our blog by email you can sign up for free at https://terencereilly.wordpress.com/ .

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

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

 

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

 

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

Gradual Squeeze

Local governments are in serious trouble as we are now seeing in Puerto Rico and Connecticut. High taxes, capital flight and pension obligations are going to meet the new order. We see technology and social changes on the horizon that continue to cut out the middle man and the ultimate middle man is government. Driverless cars? No more speeding tickets, DUI’s, parking tickets and lower drug arrests from stopped vehicles. All bring in less revenue for your local and state government. About seven years ago Meredith Whitney offered that muni defaults would begin to rise. She was laughed out of the building.

Ray Dalio is CEO of Bridgewater Associates, one of the largest hedge funds in the world. Ray takes into account not just the numbers as his theories about investing are more all encompassing about where we are in the cycles of debt and the economy while taking into account social and political factors. In his latest blog post on LinkedIn he had this to say on the current environment. We have taken Ray’s thoughts and applied them to muni bond investing. Time to think about a gradual squeeze in muni’s and rising default rates?  https://www.linkedin.com/pulse/big-picture-ray-dalio

At the same time, the longer-term picture is concerning because we have a lot of debt and a lot of non-debt obligations (pensions, healthcare entitlements, social security, etc.) coming due, which will increasingly create a “squeeze”; this squeeze will come gradually, not as a shock, and will hurt those who are now most in distress the hardest.

Central banks’ powers to rectify these problems are more limited than normal, which adds to the downside risks. Central banks’ powers to ease are less than normal because they have limited abilities to lower interest rates from where they are and because increased QE would be less effective than normal with risk premiums where they are. Similarly, effective fiscal policy help is more elusive because of political fragmentation.

Wells Fargo’s unauthorized account scandal is growing. It is now estimated that they created over 3.5 million accounts. If you are still with a traditional broker and not a fiduciary you should ask yourself, “Why?”

Commodities continue to have a rough go of it. Iron ore, copper, and rubber are all well off of their highs with iron ore down 20% and rubber down 30%. The tightening of money in China is having a chilling effect on commodity prices around the globe. West Texas Crude (WTI) rose about 3% on the week but is still under the crucial $50 a barrel mark. Keep an eye on oil for clues about the economy and stock market. The Saudi’s are looking to IPO their precious Saudi Aramco, the largest oil company in the world, and are going to want oil prices higher in order to get more money into their treasury. The Iranians and the Russians may try and pump more oil in order to push prices lower as their interests run counter to the Saudi’s. OPEC meets on May 25^th. Oil has been on a roller coaster in 2017 and we do not think that the second half of the year will be any different.

The market is still stuck in consolidation mode. The S&P 500’s leadership continues to help pull the index higher while the amount of stocks above their 50 day moving average drops from 80% to 50%. Things are getting narrow at the top. This could be another sign that investors should be adding active management back into their portfolio. Stock trends continue as Hong Kong, England, Brazil, Japan, and the US all continue to consolidate gains or head higher. China? Not so much. Hard to argue against the bull thesis as the market continue to hold gains or plow higher. We think a southern neighbor could be the next leading stock market.

We still expect the market to break out of its recent range to the upside and in favor of the bulls. More often than not when a market consolidates a major move it breaks out of that pattern the same way that it came into it. It’s all about momentum and the animal spirits of the market.

If you are not currently receiving our blog by email you can sign up for free at https://terencereilly.wordpress.com/ .

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

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

 

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

 

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

 

Crackdown, Smackdown and Fever

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

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

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

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

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

If you are not currently receiving our blog by email you can sign up for free at https://terencereilly.wordpress.com/ .

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

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

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

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

1987?

Most investors are primarily oriented toward return, how much they can make and pay little attention to risk, how much they can lose.”

— Seth Klarman

Every week I read Steve Blumenthal’s from CMG Capital Management’s letter On My Radar . It is an excellent source of insights and research that Steve’s puts out every week. I really admire Steve’s style, wit and ideas on the investing universe. This week he mentions a quote attributed to Seth Klarman. We read everything we see from or about Seth as he is an investing legend. The quote struck us this morning as we had conversations this week with two of our more aggressive clients. They are able to be aggressive because they push risk to the back of their minds and continue to push forward and focus on returns. They have both been very aggressive from the financial crisis in 2008 until this week. Coincidentally, both have backed off and are ready to take some risk off of the table. Anecdotal I know, but, I think that it does have some value as it seems that a wide swath of investors now see the market as fully valued. What does that mean? The second level of thinking tells us that the market, since the market has been able to hold an overvalued level it could have further to run. Investors have pulled some risk out waiting for markets to take a breather and give them a better entry point – which it has not. They may be pulled back in chasing prices higher. We believe the animal spirits still have control of this market. The Trump Trade is still moving forward. Could tax reform be the “sell the news” event?

Our biggest question outside a possible shutdown of the federal government is about inflation. No. Not North Korea. I think the media has pumped that one enough. Inflation is our focus as some reports indicate this week that wage inflation could be on the rise. Wage inflation here in the United States could keep the Fed raising rates even while the economy sputters. The yield curve continues to flatten which is not good news for the banks while oil seems to be holding below $50 a barrel. Neither is good news for the market and bad news for both sectors makes it harder for the overall market to rally. These are two huge sectors; percentage wise, for the market and their reluctance to rally makes it harder for the tide to lift other boats. It also makes the any rally narrower with the likes of Apple, Amazon and Google leading the charge.

French election results give the ECB and the Federal Reserve the green light to be more aggressive in tightening policy. Inflation is also a green light. The pressure is building on central banks to take away the punchbowl. North Korea has the media on edge but I am more worried about inflation and Congress shutting down the government. The market is counting on movement out of Washington on healthcare and tax reform. It is never a good idea to count on Washington.

Mario Gabelli made mention that a 1987 style event could happen again this year. We do not disagree. We believe the market structure is in place that could lead to a moment where markets collapse quickly and temporarily. We believe it will be an opportunity for courageous investors but it will also be quick as there is a still a lot of money sloshing around markets looking for a home. Market is still stuck in its range for now between 2330 – 2400 on the S&P 500. Our thesis since last October has been a Trump win followed by a 30% rally with an equivalent selloff in the fall of 2017 much like 1987. Markets are still following that script.

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.

Behind Closed Doors

Known for being press shy, unlike some hedge fund managers, Paul Tudor Jones broke onto the trading scene with a splash by calling the 1987 stock market crash just days before it happened. So it was big news this week when it was revealed that Paul Tudor Jones, at a closed door meeting this week at Goldman Sachs, said that the Federal Reserve should be freaked out by this one “terrifying chart”. The chart in question also happens to be Warren Buffett’s primary indicator of market valuations.

It makes for good headlines but we have to say we have followed this chart for years and it is not a very good timing indicator for market corrections. However, it is a very good guide to the valuation of the overall market here in the Unites States and it is quite high. Market s can stay irrational longer than you can remain solvent betting against them. Interest rates and ballooning central bank balance sheets have pushed asset prices around the world to new heights.

It remains to be considered that IF central banks ever stop buying or, god forbid sell, then markets should fall. More interestingly, Jones said that the catalyst to the market fall will be risk parity funds. A bit inside baseball but, basically, the explosion of risk parity funds is based on momentum. The lower the market goes the more risk parity funds will have to sell equities. It could exacerbate any run in the market just as it has on the upside. :

We have been weighing in on the active vs. passive debate in the last few weeks as we feel that we have reached an inflection point. We believe that the pendulum swings back when it reaches extremes and we believe that we may be at that point. Think of it like this.  If everyone is invested 100% in ETF’s, passive management, then wouldn’t it be prudent to employ an active allocation to try and capture what inefficiencies are created by blindly piling en masse into ETF’s. We have been vocal proponents of the benefits of passive management but the pendulum may have swung too far and more evidence, however anecdotal, was presented this week by the creation of an ETF for ETF’s. An exchange traded fund (ETF) was created this week to follow the companies that benefit from the growth in the ETF industry. Maybe sometimes they do ring a bell. Time for more research.

Congress has been closed so the Trump Reflation obsession was put on hold and investors and media grew obsessed with geopolitical concerns with a spotlight on the French elections and North Korea.  Rates are falling while gold is rising. Fear is rising as some are reaching for protection in what is known as the “fear trade”. A move to gold and US Treasuries is the usually accompaniment when fear rises, especially in light of geopolitical concerns. Investors have become a bit more defensive. We may see rates rise and gold fall when Congress gets back into session.

Last 30 minutes of trading thesis has been inconclusive so far. No definitive pattern yet. Market seems to be in a consolidation pattern. The market seems to be digesting its gains and gathering itself before a move to a higher summit. Markets do not top out like this – spending weeks at a given level. The odds are that markets, when leaving a consolidation phase, move in the direction in which they came in.

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.

WW III

We felt in recent months that there were too many people on the one side of the boat. That “side of the boat” was investors heavily shorting US Treasuries are they prepared for the Federal Reserve to raise rates three times this year. When everyone thinks something will happen you can almost guarantee that something else will. The 10 year closed Thursday at 2.23%. While a lot of because of geopolitical concerns and the long weekend we still think investors are too short Treasuries. This could be the last move lower in Treasuries as the short sellers’ force yields lower to cover their shorts and stop their pain. For now, we are still long duration but looking to sell into strength.

The last 30 minutes of trading have been abysmal. Four out of the last 5 trading sessions markets have moved lower in the last 30 minutes. We postulated in recent posts that the last 30 minutes are the “tell” in the market right now. Thursday was exacerbated by geopolitics and the long weekend so next week will help make that clue a bit more solid. Keep an eye on the last 30 minutes as that may be our best clue as to the near term direction of the market.

Strange week. Congress went out on Easter recess and so investors and the media began to focus (perhaps obsess) on geopolitics. The beneficiaries were the usual suspects of bonds and precious metals. Let’s see how things play out early next week if WW III doesn’t manage to break out this weekend.

Another week and another famous hedge fund manager is giving money back to clients. We take this as a sign that we could be at or near an inflection point. Jeff Ubben is a highly respected hedge fund manager and is giving 10% of his fund back to clients. He is finding it difficult to find value in this market. Valuations are stretched.

Active vs. Passive management has not been much of a fight over the last decade but we think that there are signs that perhaps we should be tilting more in the direction of adding some more active management. One of the headlines in Barron’s this weekend is “Can Humans Still Beat the Market”. This week Pennsylvania’s elected treasurer announced he is moving $1B from active to passive management to save $5M in fees. Treasurer Moving to Passive Investments

We know the argument all too well. Active is less predictable. It is more costly. It also pathetically tax inefficient. We think that investors have become too blind buying the whole market and there is room for active. The pendulum will swing back. We are diving back into researching for the active players who will outperform.

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.

Did the Swamp Win?

Trump Care, Obama Care or tax reform? It was really all about tax reform and not the Affordable Care Act (ACA aka Obama Care).  The shelving of the vote for reforming ACA may lead to markets being buoyed by the fact that Trump will now move on to tax reform.  It was never really about the ACA replace and repeal for Wall Street. The market was just looking for this to pass so that the administration could then move on to tax reform. A shelving of replace and repeal allows the administration to move on to tax reform as the ACA dies a slow death. Remember a yes vote would have just sent it to the Senate where it would have moved at a snail’s pace distracting the administration, delaying tax reform and distracting markets.

Lots of warning signs. The technical aspects of the market are growing less positive. Markets had reached such overbought levels that the next thought from market analysts is to say that there is negative divergence. In English please. Suffice to say that just means that the next up move will not have the same firepower as the last one and market participants could get nervous and pare back longs. By way of Arthur Cashin, we see that according to Jason Goepfert at SentimenTrader hedge funds are pulling back.

“After reaching one of their most-exposed levels in 15 years, hedge funds have started to lessen their positions in stocks. There have been three other times that they were as exposed as they were in the past month, and when they started to pull back and volatility rose, stocks fell hard, fast.” 3/24/17

 Ally Financial and Ford Motors both warned about a drop-off in the car market here in the US. Ally Financial slashed their earnings outlook as they see the worst used car prices in 20 years. Make sense. Have you bought a new car lately? It’s not a car. It’s a computer and we all know Moore’s Law and how our technology gets outdated quickly. Used cars are not nearly as safe as a car made today and the technology is improving rapidly. Pretty soon insurance companies are going to catch on that it is much less likely that a new car is going to get into an accident than a used car without all the latest safety technology. Morgan Stanley came out this week and said that the latest offering from Tesla will be 90% safer than cars currently on the road. Buying a used car in the past seemed frugal. Now it seems almost reckless. Used car prices are dropping. Since the crisis, banks have been extending the length of car loans from 3 years to 7 in some cases. Oops! The banks may have done it again!

This week the market actually saw a daily decline of over 1%! That is the daily decline of 1% or more since October of last year. Think we were overdue?  Turns out that Eric Mindich, of Goldman Sachs fame is getting out of the hedge fund business. That may have helped contribute to the weakness we saw this week. Mindich’s Eton Park hedge fund ran over $12 billion at its peak. It is now returning money to investors and market players may have shorted stocks in front of the liquidation of their positions. A time honored Wall Street tradition of making money off of someone else’s demise.

RBC’s Charlie McElliggott has been proffering some interesting analysis by way of zero hedge. Click on the link for more detail. Careful it gets a little wonky. Suffice to say that Mr. McElliggott seems to be saying that the more volatile things get the lower the market will go. If things stay quiet the market will continue to levitate. Keep an eye on the last 30 minutes of trading as they are the “tell”. He also goes on to say that more and more money is going into the same trades and strategies. Same side of the boat theory. Never ends well when everyone is leaning the same way. We couldn’t agree more with McElliggott and his team at RBC.

A lot depends on the perception of the Trump Administration post vote. Is tax reform coming or has the swamp won? Keep an eye on the last 30 minutes of trading.  We still think that this could be the last 10%. Markets are a touch oversold but caution must still be paid.  We are pressing the bets with our more aggressive clients but pulling back for our more risk averse. A move lower at this juncture should be met with buyers down 5-8% from the highs while history tells us that the old highs will be approached again. That is when the real decisions will need to be made.

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.

This House is Rocking

Janet Yellen seems petrified of scaring the market. We have news for her. At some point she will. It’s her job to take away the punchbowl when the party gets started and this house is rocking. The Federal Reserve uptick in interest rates, while widely telegraphed, still managed to surprise markets by it being couched in the most dovish way possible.

How did Janet Yellen do that? The Fed has been consistent in stating that 2% inflation was a target of theirs. In her latest press conference, Yellen made it clear that the 2% target is a target but not a “ceiling”. Additionally, her comment that the return to 2% inflation should be “sustained” made it clear to the market that the Fed is okay with letting the economy run a little hot.  Janet Yellen may have to talk back the market’s reaction this week from her dovish rate hike. The market reacted positively which we expected but we did not expect the extent of that positive reaction.

“surprisingly, financial markets took the meeting as a large dovish surprise—the third-largest at an FOMC meeting since 2000 outside the financial crisis, based on the co-movement of different asset prices.” – Goldman’s Jan Hatzius 3/15/17

The risk is that the market and economy may overheat. There is also a risk that the Fed could throw cold water on it if Trump’s fiscal and tax objectives get bogged down in the swap which we think they already have. The Fed is damned if they do and damned if they don’t. It’s a guessing game with imperfect information. The kind of decision a trader makes and not the kind that academics make well. The time is ripe for a policy error. Now whether that error takes the market higher or lower depends on the action of the Fed. Right now by portraying this rate hike as dovishly as they did the animal spirits in the market are taking things higher. Next week should tell us a lot more about how the market feels.

The Fed is boxed in. A canary in the coalmine, small-caps keep sagging. The Russell 2000 dipped into negative year-to-date territory on Tuesday morning. There was nary a mention of the debt ceiling that was reached this week. This is going to be a problem and, possibly, with the rancor in DC, it could become THE problem. The Treasury only has about one month’s cash on hand. Less than Google or Apple have on their books.

Yellen raised rates but couched it so dovishly the market rallied. She is afraid of a negative market reaction. She should be afraid of a positive market reaction as the real reason she raised rates was to cool off the market. Market seems ready to continue its running with the bulls as we suspected. This could be the last 10%. Caution. We are pressing the bets with our more aggressive clients but pulling back for our more risk averse.

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.