Diogenes and The Bond King

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

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

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

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

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

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

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

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

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

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

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

 

 

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

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Until Something Breaks

Until something breaks. The old Wall Street adage is 3 hikes and a stumble. In his latest webcast this week, Jeff Gundlach, the current bond maven on Wall Street, made it clear that he expects the Federal Reserve to begin a campaign of sequential interest rate hikes until “something breaks”. In Cashin’s Comments this week, Arthur notes that David Rosenberg’s (Gluskin Sheff) research shows that since World War II, the Fed has embarked on 13 tightening cycles. Ten of those cycles led to recessions. While we do not see a recession on the horizon we do believe the Fed is behind the curve and may need to hike more aggressively than they would like. That will create imbalances throughout the system much like the sequential rates hikes in 1982, 1987, 1990, 1997 and 2007. The crises ranged from the Latin American debt crisis in 1982 to the S&L crisis in 1990 to the subprime debt crisis of 2007.

The question remains, will history prove right or are things different this time? I always hesitate to say “things are different this time” because that is always the death knell. It’s like when Jim Nantz says, “this kicker hasn’t missed an extra point all season” and the kicker then goes on to botch the critical extra point.  The reality is that the Fed may be so far behind the curve that this rate hike, the third of this cycle or even the fourth rate hike doesn’t affect the market but sooner or later the Fed will hike and something will break. They are academics and they never anticipate change. It’s like driving using the rear view mirror (h/t BR). The data is from the past and doesn’t show what is happening now. They will hike until something breaks. If they do not raise rates next week the animal spirits in the market may take equity valuations even higher. The Fed is boxed in.

Valuations are quite extended and perhaps rate hikes will bring things gently back to earth. Much is being made of the idea that there seems to be a global upturn in economies. The global upturn and Trump’s policies could provide more cover for the Fed to raise rates to try and cool valuations off. You have to remember that they are not the only central bank adding fuel to the fire. Japan, China and Europe are all doing the same. We see some cracks in the foundation as High Yield and small cap stocks lagged this week. It is no surprise that high yield struggled as West Texas Crude dropped 9% on the week to finish under the psychological $50 mark.

Momentum is very powerful and still in the hands of the bulls. Lots of positives out there but things are priced for perfection. Keep an eye on crude next week. Lower crude could continue to pressure high yield. High yield and oil could be the canary in the coalmine.

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.

Bulletproof

If something cannot go on forever, it will stop. – Herbert Stein American Economist

Herbert Stein was an American Economist who worked in several White House administrations and was, more famously, the father of the actor Ben Stein. (Ferris Bueller’s Day Off – “Bueller? – Bueller?”) If Mr. Stein were still with us he might find his famous quote useful this week. What we had was another 5 days of trading and another 3% higher for the S&P 500. Investors continue to plow into financials, industrials and materials while moving away from bonds and bond like equities such as utilities and real estate. Investment professionals are afraid of being left in the dust and having clients see that their portfolios don’t include the latest outperformers so they are adding them at a heady clip. It is the time honored tradition called “Window Dressing”.

Trees don’t grow to the sky and what cannot continue – won’t. David Rosenberg from Gluskin Sheff was quick to note this week that Reagan’s honeymoon lasted 6 months and 6% before seeing the market fall 25% over the next two years in the face of a rising dollar and rising bond yields. Sound familiar?

Monetary policy has been responsible for the majority of the gains in the stock market since the crisis began in 2008. The Federal Reserve pulled forward returns in seeking to engage “animal spirits” in the stock market to raise valuations. The belief was that rising asset prices would help the economy by shoring up balance sheets with higher valuations and by engendering decision makers with the confidence that higher prices would bring. Fast forward 8 years and we are truly seeing “animal spirits”. Our overriding question over the last 8 years is what happens when the monetary policy accommodation rug gets pulled out from underneath the investor? A decrease in monetary accommodation here in the US will only send the US Dollar higher, decrease asset values, and exacerbate geopolitical uncertainty in emerging markets while increasing volatility in asset pricing around the globe. We are starting to see central bankers around the world attempt to withdraw accommodation. File this one under” be careful what you wish for”.

Two things are being bandied about as fact. One thesis that traders seem to be buying into is the “Inauguration Day Trade”. Traders believe, as proffered by Jeff Gundlach, that this rally will peak before Inauguration Day. The second is that bond yields in excess of 2.75% on the 10 year will cause stock prices to fall. Keep an eye on both the yield and the calendar.

Dow Theory kicked in on Wednesday. Transports are up almost 50% from their lows in January to eclipse the all time highs of late 2014. Up 17% in the last month!! This has all the earmarks of a blow off top and we may not be finished yet. We have speculated for some time that this would be how this bull market ended – Straight up in spectacular fashion. While we have been cautious on the valuations of this market for some time the missing ingredient to a top in the market has been investor euphoria. Well, the Trump win may have provided just that. Hang on tight.

Markets are overbought. Santa may have arrived early. January may see some reversal of fortune but it looks like the trade is in place for now. Out with bonds and bond like equities and in with financials, industrials and materials. Market continues to shrug off major geopolitical financial events at an ever faster pace. The Italian Referendum was shrugged off in minutes. Ego kills when it comes to investing. Bulls are feeling bulletproof.

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 December 10, 2016 at 12:59 pm  Leave a Comment  
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The Trump Rally Meets The Swamp

The Trump Rally while rooted in ideology and investment theory is not necessarily rooted in reality. While tax reforms, reduced regulation and fiscal stimulus could make for a powerful combination stoking the economy and inflation it is not certain this combination will actually happen and if it does happen it will not happen for some time. Expectations are running a bit too high and this is still Washington DC after all. The roots of the Trump Rally are bound to get stuck in the mud of the Swamp.

Interest rates and the US dollar are rising which can be a dangerous combination. The market can rally with rising interest rates and we believe that it is healthy for interest rates to rise from here and that low interest rates were actually inhibiting growth in the economy. Some semblance of higher interest rates are good for the economy. But for the stock market the current high level of valuations were predicated on TINA (There Is No Alternative). At some point, bonds, real estate or other asset classes become an alternative. The high levels of asset valuations were predicated on low interest rates as all investments are evaluated versus the risk free rate of the 10 year Treasury. A rising ten year means that models may have priced assets too richly.

As you know we follow certain financial leaders and Jeff Gundlach at DoubleLine is one we find most open with his thoughts. Gundlach is on record saying that the 10 year could go to 6% in the next 4 or 5 years. We are of the same thought although not as drastic. In the near term we believe that yields have gone too far too fast along with equities in the post Trump win world. Gundlach spoke to Reuters this week and caused markets to pause as he said much the same. Gundlach feels that the bond selloff has seen its low for now and stocks will take a breather before Inauguration Day. After he spoke bonds rallied and stocks fell. Evidently we are not the only ones listening intently to Gundlach’s views.

Another one of our favorite investing legends is Stanley Druckenmiller. He spoke this week at the Robin Hood Conference in NYC. Druckenmiller does Gundlach one better. He believes that the yield on the 10 year will rise to over 6% in the next year or two!! Druckenmiller is shorting the Euro and the Yen and he believes that if the 10 year rises above 3% then the stock market could see a 10% correction. Let’s face it. The stock market can face a 10% correction if someone sneezes in the Middle East.  A 10% correction is not something to be feared but anticipated. I think that the real takeaway is that at some point the yield on the 10 year becomes more enticing to investors than being in the stock market. The pendulum will swing and bonds will usually give you the correct signals. Keep an eye on the 10 year for hints as what stocks will do.

This Sunday’s referendum in Italy is the markets next boogeyman. Journalist and pundits are predicting the next great financial calamity if there is a “No” vote in Italy. Where have we heard this before? Italy has had 67 governments formed in the last 70 years. Why should 2017 be any different? We don’t mean to diminish the battle that is going on with bad loans at some of Italy’s biggest banks but somehow after seeing the predictions that Brexit would be bad for markets and Trump would be bad for markets we have a hard time believing the next great financial calamity follows the next populist regime change. The Italian Referendum should be another interesting vote. It might be time to become familiar with the name – Beppe Grillo.

Market is working off its collective over bought and oversold conditions. The 10 year closed Friday at 2.39% and should see resistance at the 2.5% level. Stocks have relieved some of their overbought condition but the Trump Rally is seeing some buyer’s remorse at 2200 on the S&P 500. Keep an eye on Italy this weekend.

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

You’ve Got Mail

Just when I thought I was out. They pull me back in.

 – Michael Corleone Godfather III

Was it Michael Corleone or James Comey Director of the FBI? Comey has to be thinking the same as the Godfather as Anthony Weiner’s emails have pulled Comey back into the Clinton investigation and thrown the election and markets for a loop. The S&P 500 was holding support above the 2130 level that we spoke of last week until the explosive news of a reopening of the Clinton email investigation hit the tape on Friday. Markets closed under 2130 for the second time triggering Jeffrey Gundlach’s warning. Monday is going to be a very important day for the short term direction of the market.

Mega mergers are not typically seen as very good for markets. In fact they usually serve as a warning post and signs of a potential top. We were served up with the news of three merger/takeovers last Monday morning. The largest being the ATT Time Warner deal. The AOL Time Warner deal served as the warning bell at the top of the 2000 bull market and the subsequent tech crash. When large companies have squeezed the last drop of growth out of their companies and the business cycle is near the top the playbook calls for buying growth. At the end of the business cycle the only thing left to do is acquire the growth that is not obtainable organically. ATT has recently seen a slowdown in the growth of subscribers. Is this the Hail Mary Pass for ATT? The AOL Time Warner merger is now studied in business classes as the classic failed mega merger. How will history see the ATT Time Warner merger? Better we suspect but sometimes they do ring bells at the top.

As far as the technicals go the 50 Day Moving Average (DMA) on the S&P 500 is now declining. Also, the last two weeks have seen market swoons instead of rallies at the end of the market day. Both serve as warning signs for a tired market. We are entering, which is historically, the best part of the year for stocks. The election and the Federal Reserve may have something to say about that. We are now staring at an election in chaos and a Federal Reserve committee meeting in December where they have all but promised the market that they will raise rates. Will they still raise rates if Trump wins and markets swoon? 2130 is being tested. Pass or fail?

The S&P 500 has now closed below its 100 day moving average for the third straight week. If 2130 fails then the next real level of support is the always critical 200 day moving average at 2078 on the S&P 500.

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.

Heavyweights

Two heavyweight investors took to the airwaves this week to give their views on current markets and Federal Reserve actions. David Tepper who manages Appaloosa Management and is one of the more successful hedge fund managers noted that he is “pretty light in the market and we have a lot of cash”. He is “pretty cautious “on the market right now and he points towards the election for that caution. He feels that if the election provides a shock to the market it could put the Fed on hold. If the market is not shocked by the election we could get a relief rally. It appears that he, like everyone else, is looking for fiscal spending to ramp up.

If the market goes down because of the election, Tepper said the Federal will also be less likely to raise its benchmark federal funds rate. But if the market holds at current levels, Tepper said the central bank will likely raise rates because the economy is “at a point where they should raise rates.”

“But if you do get some sort of mixed government or something that’s near what’s going on right now … then you’ll get some relief after this election’s over. I think they have to anticipate business investment going up, especially if you have more or less of a status quo economically,” Tepper said. This would include the Republicans retaining their control over the House, he added.

http://www.cnbc.com/2016/10/17/billionaire-david-tepper-im-generally-pretty-cautious-on-the-market.html

Jeffrey Gundlach was the other heavyweight investor to weigh in this week. Gundlach manages over $100 billion at DoubleLine Capital and we find him to be the single most valuable investment opinion to follow. He has given some prescient guidance since the crisis of 2009 and we have invested with great confidence in Double Line. While Gundlach is mainly known for his bond acumen he also espouses his views on equities. He gave an interview this week noting a critical support level of 2130 on the S&P 500. We closed below that level on Monday of this week. According to Gundlach, we need a second close below it to confirm more downside to the market.

Wiki leaks continue to drip. Denial of service attacks on the East Coast put a slight chill into markets. Pressure continues to build. The S&P 500 has now closed below its 100 day moving average for the second straight week. The next real level of support is the always critical 200 day moving average at 2070 on the S&P 500. Keep an eye on 2130.

Is this long national nightmare over yet? Vote early and vote often.

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.

Squeezing the Lemon – Dalio and Gundlach

Ray Dalio spoke at the Delivering Alpha Conference with CNBC. He made interesting note that interest rates cannot be made materially lower and may in fact “go the other way”. As bond yields go down it has the effect of making stocks more valuable. The bond bull market that has seen interest rates on the US 10 Year sink from 15% in the early 1980’s to 1.5% today may be over and that tailwind that it has given us to invest may becoming a headwind. Interestingly, Jeffrey Gundlach of Double Line Funds presented his latest webcast focused on the same idea. The lemon has been squeezed. It is time to look at bonds a bit differently. Those of you have followed us for the last several years know that we have been bullish on bonds longer than most and that has served us well. It may be time to change that thinking.

http://www.cnbc.com/2016/09/13/bridgewaters-dalio-theres-a-dangerous-situation-in-the-debt-market-now.html

Deutsche Bank got word that the Department of Justice (DOJ) was looking for $14 billion to settle a probe tied to activity in mortgage backed securities. That is with a B. Why are we concerned about Deutsche Bank? DB is one of the world’s largest derivative dealers. They are a key linchpin in the financial ecosystem. The settlement will be much lower than $14B but any number above $4billion could bring into question Deutsche Bank’s capital position. European banks are already under extreme pressure with negative interest rates severely impairing their ability to make money. DB and Italian banks are on our watch list.

Explosive devices in NYC lend help to Trump. Markets may not react positively to a Trump victory and may be leaning a bit too heavily towards factoring in a Clinton victory. Not making a statement here. The deal is Wall Street doesn’t like uncertainty. Trump has no political track record and the Street has no way of knowing where to place bets on a Trump victory except that he just might shake things up. Clinton is the status quo. The Street doesn’t like uncertainty.

Federal Reserve and Bank of Japan opine this week. Things may be quiet until then. We don’t expect much. The Fed is going to be wary of raising rates in front of an election that is running very close. It is also a great excuse to hold steady as they are terrified that the market might go down on a rate hike. The Fed may never raise rates again until there is a change in leadership at the Fed. Their current policy of waiting until the perfect time will never work. There is always something to be afraid of.

Stocks and bonds have been uncomfortably correlated. That means stocks and bonds have been going in the same direction. An asset allocation between them relies on them going in opposite directions. Risk Parity funds have been taking a hit of late. They could be forced to de-lever and raise cash. Market is sitting right on its 100 day moving average and that has Momentum traders on edge.  Market could swing sharply in either direction. Watch how stocks and bonds relate. Stay on your toes.

Taper Lite on Tap?

The old adage of “Sell on Rosh Hashanah, Buy on Yom Kippur” is a little out of sorts this year as the market has risen a little over 1.5% since the dawn of the Jewish New Year. The market is relieved to see no tomahawk missiles flying off US warships in the Mediterranean. The stand-down has moved gold and bonds lower and US equities higher in relief trading. All eyes are now on the Federal Reserve as they meet next week. The market has been left to traders as investors continue to sit on their wallets and await the latest from the oracle in DC. Which way monetary policy? Will the FOMC taper down their buying of bonds? As the deficit shrinks they may be forced to do just that.

The unwind of the “war trade” has kept the 10 yr bumping its head on the 3% level. The key to future action may be the reaction of the US 10 year to new Fed policy. How will stocks react if we break through 3% on taper action? Next week’s FOMC statement is going to go a long way in determining the future direction in all markets – gold, bonds, stocks and otherwise. Keep an eye on the 10 year.

One item that caught our eye this week was data on mortgage originations. Originations are down 30% at JPMorgan and Wells Fargo according to the WSJ. The real estate market is THE driver of the US economy. The Fed may not want to taper mortgage backed securities given the latest data. A Taper Lite may be on tap.

Widely followed bond fund manager Jeffrey Gundlach held another webcast this week. They are always interesting if you get a chance to catch one. In it Gundlach noted that Ray Dalio, founder of $145 billion hedge-fund firm Bridgewater Associates, believes that the next major financial crisis may come from an emerging-market country, said India is the most likely candidate to trigger such a crisis. The country is most vulnerable because it relies too much on outside capital to finance its budget deficit. China and Russia, by contrast, are relatively insulated, Gundlach said. -Bloomberg

Emerging markets have been stronger on a lesser taper expectation. Taper conclusions from the Fed next week may roil emerging markets the most. Keep an eye on Malaysia and India as their current account deficits are showing weakness. We still expect this 1680-1685 area on the S&P 500 to give resistance to bulls here in the US until Fed moves. Today is an expiration day so expect big volume on the open and close with little to move markets in between. It’s all about the Fed now.  The FOMC meeting runs from September 17-18 with a press conference to follow.

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, 2013 at 8:52 am  Leave a Comment  
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