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.

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

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

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.

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Broken Clocks and Sandcastles

Many of you have been anxious to hear how we feel things are unfolding. While we are busy this week writing our quarterly letter we thought that given the volatility and pain of this week we would write you a small note. Like a broken clock that is right twice a day we have been in tune with the market of late. We felt that the wind down of QE in October would bring volatility to the markets that the Fed, while not welcoming it, would ALLOW volatility to proceed. This bull market has been built on the back of dullness. Most of the returns garnered since the lows in 2009 have been when volatility was low. High volatility has been seen only during pullbacks in the market. A lack of volatility breeds complacency and risk taking. Stability can breed instability. Like a child’s pile of sand at the beach that grows ever higher it only takes one additional grain of sand to knock down an entire side and you don’t know which grain of sand that will be. The Federal Reserve knows this and, I feel, senses the need to bring back volatility and a respect for risk. Not to mention the fact that they may be out of bullets.

As a reminder we had this to say in our blog post back titled Riding the Waves back in July.

The central theme here is that investors should be expecting an increase in volatility as the Federal Reserve tries to exit its loose monetary policy. We expect trading bands to widen over the coming months as Fed officials warn of approaching volatility. The bankers are asking for it and the Fed is ready to let it happen. We intend to be prepared. https://terencereilly.wordpress.com/2014/07/07/riding-the-waves/

The bearish thesis that we laid out certainly showed itself this week as the S&P 500 had its worst week in two years. Our key level on the Russell 2000 ETF (IWM) had been a break of 108 which would lead the bears to make a push down to 96. We closed Friday at 104.74. (Remember these are not predictions just food for thought. Broken clocks you know.) The market is oversold at this point and due for a bounce. October’s Ghosts are out and about as fear is rising. Tough Thursday’s in October which are followed by dull Fridays have led to historic Monday’s. Tuesday could be a chance for the bulls to push back as Turnaround Tuesday comes back into vogue.  We will move our stop loss a little higher as a move above 114 on IWM would mean that the bulls are back in charge.

We are still very concerned about the Fed’s exit from QE while seemingly the rest of the world’s central banks are ramping up their money printing efforts. Currency wars are all the rage as it is a race to the bottom. If your currency is lower than your neighbors you will sell more stuff. Japan, China and Europe are seemingly in economic decline while Russia may be in the midst of a currency crisis. Not a great feeling when profit margins in the US are at all time highs with overpriced markets and highly margined accounts.

Keep an eye on the Russian Ruble. Small caps are the road map. Monday morning may be very interesting if history is our guide.

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.

Euphoria and Scrambled F-15’s

Unresponsive plane. Scrambled F-15’s. Something went horribly wrong. Those were the headlines last week when a single prop plane suffered a sudden and catastrophic loss of cabin pressure. We have a colleague who is a very astute investor with a lifelong connection to flying, the aviation industry and the investigation of plane crashes. According to our colleague, a plane flying at 31,000 feet needs to be pressurized in order to protect it from the outside elements. A cabin that loses pressure can quickly turn into a death trap. Typical procedure when faced with a loss of pressurization would be to declare an emergency and reduce your altitude to 20,000 while donning an oxygen mask. The pilot’s other choice would be to declare an emergency and proceed to 10,000 where he/she could breathe without assistance. It may be speculation at this point but it appears that last week a pilot with over 20 years experience lost pressurization over the eastern United States and F-15 fighter jets were scrambled in response. According to air traffic controller transcripts the pilot stated “We have an indication that is not correct on the plane”. He proceeded to reduce his altitude to 28,000 feet.

“Not correct on the plane.” As humans we have a tendency to go with our gut or ignore warnings signals because all looks or seems fine. Why didn’t a pilot with 20 years experience declare an emergency? Why didn’t he quickly descend to 20,000 feet and put on his oxygen mask or just go straight to 10,000 and avoid danger completely as his signals were indicating? One of the symptoms of not receiving enough oxygen is a feeling of euphoria. Was it pilot error due to the loss of oxygen or was he simply ignoring the indicator light? As humans we tend to ignore things that get in our way. We may not want to come down from 31,000 feet because the air is thinner and we will get to our destination faster. Managing your investments is like being a pilot. It is about managing risks to get to your destination.

Being long the market seems to be bringing feelings of euphoria as the market marches ever higher. All systems go. Let’s not let the feelings of euphoria take over us. Let’s make sure we are paying attention to our warning indicators. The indicator lights are flashing red in the markets. If we come down from 31,000 feet we may get to our investing destination a little slower but at least we will still get there. Let’s make sure we get to our investing destination. Is it time to come down to 20,000 feet and put our oxygen mask on?

This is what we had to say in our last blog post and not much has changed on the technical front. The Russell 2000 has moved below some of its moving averages and that has us leaning even more towards our bearish thesis. A move above 118 on IWM is our stop loss and that would mean that the bulls are back in charge.

 The chart I am watching is the Small CAP Reversal chart I attached below. It is a textbook reversal pattern. Having said that, nothing right now that is happening from a monetary perspective is in the textbook. Watch the Russell 2000  (IWM). If it closes below 108 it should go to 96 very quickly. That is a 17% drop from current levels. Large caps will not fall by as much but it could change the trend of the market and that could last for months. 

 Hope this helps. If you can keep your head while…

 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.

Published in: on September 13, 2014 at 8:47 am  Leave a Comment  
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Do You Remember? Dancing in September

September. A month when thoughts turn to returning to school and the weather cools as investors and traders return from the beach. The relaxation of summer is quickly replaced by the feelings of anxiety. There are no months that strike fear and anxiety in the hearts of investors more than September and October. This year will be no different. The two worst performing months on the calendar are the aforementioned months. The reminder of September 11th for traders who were there only serves to heighten the anxiety felt. As you know we find that the seasonality of markets to be a reliable source of alpha as human beings refuse to change their well worn patterns. From Arthur Cashin and Jason Goepfert comes some fresh research on the where we stand on the upcoming seasonality and what next month may hold in store.

 1.Volume on the NYSE has been well below average, which is not unusual for a pre-holiday week. When stocks hit new highs on below-average volume, they tend to under-perform a bit longer-term, relative to when they hit new highs on above-average volume.

 2.If the S&P 500 closed August with a gain of 3% or more, then it added to its gains in September 36% of the time. If it also closed at a 12-month high in August, then September was positive only 1 out of 12 times, averaging -2.6%. If August closed with a gain of 1% or more, and a 12-month high, then September was positive only 3 out of 19 times, averaging -1.6%. All data since 1928. – Jason Goepfert Sundial Capital Research

As you know we have felt that the bond market still had legs in its rally in 2014. (2015 may be a different story.) Also by way of Arthur Cashin are the following notes from Barry Habib who has nailed the bond market and its course so far in 2014.

 Here are some additional reasons to support a continuing decline in US yields.  Foreign investors, especially those in Europe, will likely be attracted to investing in US Treasuries.  Not just because of the obvious and wide spread between the US 10-year Note and German 10-year Bund.  There is an added currency play which could greatly improve the returns.  As QE3 comes to a close, we have already seen the Dollar strengthen against the Euro.  This trend should continue as tapering is finalized.  Adding to the Dollar strength against the Euro is the strengthening US economy against the sluggish Eurozone. – Barry Habib

Arthur goes on to mention that another reason to be long US Treasuries is because everyone else is seemingly on the other side of that trade and short US Treasuries. There is massive money short US Treasuries which is a bet that Treasuries will lose their value and have prices head lower. For most of 2014 that trade has been a loser. The thought being that with the Fed ready to start raising rates it would be a no brainer that Treasuries would lose value. Not so much.

Keep your eyes on Us Treasuries as any geopolitical rumblings or deflation in Europe may push more money into bonds. We will find out in the next two months as to how much the Federal Reserve’s QE policy has held up stock prices. Those purchases are being eliminated in the next 60 days. This is where the rubber meets the road. It is ironic that the Fed policy is being withdrawn at the worst point seasonally for stocks. The anxiety level of investors for September and October will only be heightened. Gold keeps trying to break out but is being held back.  As for stocks here is a note we sent to a friend this week.

 Just for kicks – the high in 1987 was put in the day after Labor Day. 

 The chart I am watching is the Small CAP Reversal chart I attached below. It is a textbook reversal pattern. Having said that, nothing right now that is happening from a monetary perspective is in the textbook. Watch the Russell 2000  (IWM). If it closes below 108 it should go to 96 very quickly. That is a 17% drop from current levels. Large caps will not fall by as much but it could change the trend of the market and that could last for months. 

 Now the good part. No problems. Only opportunities. Take a look at the 2nd chart – Dow Jones Bull Bear Cycles. The last two Bear cycles lasted 17 & 18 years. We are 14 years into the current Bear Cycle. Take a look at the 1970’s bear cycle. I expect much the same to happen here. The last major move down is expected by investors and therefore should be much shallower than the previous moves in the Bear Cycle. Investors are prepared this time. (The old – they are not going to get me again!) Granted monetary policy is a bit experimental and anything can happen. I just think a major dip this late into a Bear Cycle will need to be bought. 

 Hope this helps. If you can keep your head while…

 bigcharts.com 

 Small Cap Reversal August 2014

 Dow Jones Bull Bear Cycle

 

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.

And They Danced

Most of the major banks have been out and about in the last week with mea culpas on earnings as Citi JPMorgan and GS are all complaining that low volatility is hurting profits. Who needs bankers and traders when there is no movement in the market? It appears that the Federal Reserve’s monetary policy has dampened volatility and bankers are asking for it back. Building on what Bill Dudley FRBNY President said last week that the Fed is prepared for more volatility in the markets. Volatility is coming. The bankers are asking for it and the Fed is ready to let it happen. Be ready.

Laszlo Birinyi was out and about this week making market calls. Birinyi has an amazing track record and is considered the consummate bull. All bullish all the time. He expressed this week that the bull market may be its last phase – the exuberance phase.

The market is not cheap but it is not especially expensive either,” he wrote Tuesday to clients of his Westport, Conn.-based investment management and research firm. Mr. Birinyi, a long-time bull, was among a select group of Wall Streeters who called the bottom in stocks in March 2009 and has remained optimistic ever since.

But his latest price target is far from exuberant. The S&P 500 at 1970 would mark another 3.1% gain from current levels and an overall 6.6% gain for the year. WSJ 5/27/2014

http://blogs.wsj.com/moneybeat/2014/05/27/laszlo-birinyi-sp-500-to-1970-this-year/

For those so inclined here is a more granular analysis on the market internals from FBN’s very astute JC O’Hara.

Perceived Discrepancies with New Highs

 The market once again made a new high. This continues to be a market you cannot bet against. There are many perceived discrepancies between what one would expect to find at new highs vs. what we currently have. Small Caps are lagging, yields continue to decline, new highs are scarce, and the average stock is still -11% from making a new 52 week high. Combine that with depressed readings from the VIX, credit spreads, and other market stress indicators and you have managers that are paralyzed in their decision-making processes. Many market forces and technical studies are giving contradictory signals. At the end of the day we cannot discredit the markets new high.

 Sure, this may be a late stage market breakout, and according to the masses, a pullback is ‘needed’, but money continues to find its way into stocks. Someone likes the market so much they are willing to add exposure at all-time highs. We want to highlight that this is not just a US market rally, but a global developed market rally. The MSCI Developed Market Index just surpassed its 2007 highs. New Highs have the power to quickly change sentiment. We are at multiyear high levels of neutral readings according to AAII. According to NAAIM, the average manager is under exposed to where we would expect them to be positioned at new highs. This creates a market chase scenario which is dangerous. While we do not love our dance partner we are still on the dance floor and the music continues to play…

What a week in the Treasury market! Yields looked to be breaking down below 2.4% on the 10 year with 2.36% as important support. The bond market seemed to be saying that deflation and not inflation was the risk as the economy appeared to be slowing. Equities would have none of that as they rallied through resistance. Who is right? The bond market or the stock market? What makes sense to us is that the economy may be slowing which is benefiting bonds and bond bears are chasing prices higher and moving yields lower. The equity market on the other hand is still feeding at the Federal Reserve trough. As long as the Fed is still injecting money, its current pace is $45billion a month, stocks will continue to ascend. Its slowing of asset purchases has only slowed the ascent of the market. It will be interesting to see what happens when it does stop its purchases. Gold failed at the $1300 level miserably. Intellectually that also lands in the bond camp of a slowing economy and less than normal inflation. Treasuries and Gold continue to be our risk temperature gauge. Watch the yield on the 10 Year US Treasury and keep an eye on gold. We could be in for an equity melt up here as investors are caught with too much cash. While the FOMC continues to play the music investors are forced to dance.

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.