Roller Coaster

Healthy markets don’t rally 2% in one day as they did on Tuesday. This week the market was faced with President Trump launching trade wars against Mexico and India while the US GDP is slowing, Europe’s de facto economic leader Germany’s manufacturing is collapsing, global trade bell weather South Korea saw its exports collapse further and global bond yields crashed. Copper is down 8 weeks in a row and oil is now in a bear market down 20%. So what changed? The Federal Reserve went fully into the dovish camp – again. Buy The Dip is back! Problem is the Fed won’t cut rates until the market plunges and that won’t happen because the market expects the Fed to cut if it plunges.

It seems as though everyone in the industry is prepared for a move lower in stocks. Algos and corporate buybacks have held equity prices above where they should be while investors got out and collected dry powder in the face of a slowing global economy. If the Fed cuts here it will look like 1998 all over again. When everyone expects something to happen – something else will.

I have been saying in my letters and blog posts for over a year now that I expected choppy sideways markets and it’s been my experience over the years that trying too hard in these types of markets only ends up costing you money. Markets go down and investors chase it lower and sell. The market reverses and investors chase it higher and buy. Like a roller coaster you go around and around – you get nowhere – and it only costs you money.

Where does this market go next? When markets find themselves in a sideways trend they tend to break out the same way that they came in. In this case markets are digesting the gains earned in the late 2016-17 time frame. The more time that passes the less likely the equity market is to head meaningfully lower. Markets rarely trade sideways for years and then suddenly crash (never say never). This market has taken everything thrown at it and stayed close to all time highs and investing professionals have taken down risk meaningfully. That means that pros are ready and have cash at their disposal to meet a strong sell off.

We talk of seasonal periods from time to time and find that the most helpful information is when something that performs well when it is in a seasonally weak period may be in for further strength. That asset right now is gold. Gold historically performs poorly in the summer months. The start to June has been quite different and precious metals may be having their day in the sun. While precious metals cannot be valued by their cash flow and pay no dividends they are subject to more technical market risk, having said that, a further allocation into the precious metals market may need to be thought of in a short term nature.

For the last 18 months our assessment has been correct as the path in the equity market has been sideways and it has been advantageous to sit and collect our dividends while we took down risk. We will sit until we see a clear direction to take advantage of but with each month ticking by we get closer to putting more risk back into the portfolio. Precious metals currently have our rapt attention.

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

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

 

 

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

 

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.

Choices – The NEW Retirement

It is tax time and that is traditionally the time of year when we talk to clients the most. The calendar has just turned and thoughts turn to taxes and retirement. We have had a recurring conversation with several clients these last few weeks. The overriding question is when do I retire? That, inevitably, leads to the question of what does retirement mean? I have several clients who have been on the cusp of retirement the last few years and have decided to keep working. It has dawned on them that once they were in a position to retire – they no longer wanted to retire. Why would you want to quit? You are now at your most valuable. You have incredible work/life experience and the responsibilities of being at home are mostly gone. I can work more efficiently now and even mentor the next generation at work.  Studies tell us that those that are happiest and healthiest in retirement are those that have purpose, a strong community of friends and stay active. Let’s face it. Most of us are not digging ditches for a living. We are using our brains. Why not work longer? What saving our pennies does for us in the new retirement is it gives us choices. If we decide on a Tuesday we just cannot work in a negative environment or for a certain someone any longer we can get up and leave and usually find another opportunity. The new retirement is really about having choices.

We thought that the March OPEX would live up to its billing – volatile and bullish. What a week! Historically, the week following the March OPEX is negative. Leading the propulsion to the upside in 2019 has been corporate buy backs. Those buybacks have been running 40% above Q1 2018! They will now go into a black out period where they cannot buy while their earnings are released. That will give help to any bears left standing. We made our decision to take risk off the table in late January/early February and set the levels (our stops) at which we are forced to change our minds. We are at those stops. Bonds and stocks have completely diverged. Usually, bonds are right (The battle doesn’t always go the bonds but that’s the way to bet. -Grantland Rice) If bonds are right then stocks will head south. Could they both be right? Yes. That would mean the market is betting on QE4 and a continued rise in all asset prices. That means that bad news is good news and Buy The Dip is back.

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

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

 

 

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

 

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.

S&P 500 To Double in 2019

The S&P 500 is up 6.5% for the year in 2019. The S&P is on pace to double in 2019. That is just not sustainable. We ran this headline last January, S&P To Triple in 2018, and you know how that turned out. We outperformed our benchmarks because we had less risk on the table last year. We knew the S&P couldn’t sustain that performance in 2018 and it won’t in 2019.

We have been of the opinion that this market needs to retest the low of Christmas Eve. But, as you know from reading our blog, everyone else feels that way too. That is why we had this to say last week.

Everyone expects the market to find resistance in the 2600-2650 level on the S&P 500 and everyone expects the market to retest its lows from Christmas Eve. When everyone expects something to happen you can expect something else will happen.

Well, we have blown right thru 2600-2650 and closed Friday at 2670. We are surprised we didn’t close right on 2666. There is that number again. We have been telling you for a year that we would struggle for at least 9-18 months at this level which is 4x the low of 666. It looks like we have at least 6 more months. The mathematicians are running this market. They set the programs that run the computers. Keep your eyes on the key levels.

We still think that there is a decent probability that the market runs back into the 2800 level on the S&P 500 before turning lower. The trend following funds will flip from short to long spurring the market higher. Hang on. 2740 may bring out big buyers according to Nomura Securities research. We were fortunate to have bought a decent percentage on Christmas Eve increasing our equity exposure. We sold most of that this week. We think that the market runs into the 2800 level but aren’t sticking around to find out. We lowered equity exposure this week and may look to lower it further if the trend following funds push the market too high. A retest of the Christmas Eve lows is in order. That is at 2350 on the S&P 500. That is 12% lower from here.

You can almost feel the fear from Christmas Eve changing to greed or fear of missing out. When we all start to wonder why we ever sold in the first place it and want to buy it will be time to sell again.

Short blog this week but you can read more from our quarterly letter at Blackthorn Asset.

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 .

 

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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.

Get Paid and Wait Out the Storm

This market has been volatile to say the least and the holiday parties have been a long line of people asking me about the idea of “getting out” of the market. We wrote this to a client this week about recent volatility and we thought we would share it with you.

One other important concept to understand when it comes to successful investing is time and its impact on a portfolio. Investing for retirement means staying invested. We cannot afford to sit on the sidelines and wait for the investing climate that we want -we have to deal with the one we have. We cannot afford to lose out to inflation so we need our assets to provide cash flow and to grow – and to do that we have to take on risk. Our retirement income is dependent on being invested. What we seek is the income that our assets throw off, like dividends from companies like Philip Morris or Coca Cola. Those dividends and our interest from those investments give us an income to spend much like rent from a building. We still have to own the building to get the rent otherwise we are just spending our cash and being in a cash burn situation is never healthy. The advantage (disadvantage) of stocks and bonds (temptation to time the market) is that they are liquid. What we can do with stocks is roll up or roll down our risk exposure according to where we are in the market cycle. If stocks are expensive we roll down our exposure and if markets are cheap we take on more exposure but we never get 100% in stocks or 100% out. I once had a client say to me that he likes to be 50% in stocks and 50% in bonds because that way no matter what happens in the market that day he is happy.  

We currently have a defensive posture and are currently substantially underweight equities for all of our clients. That gives us more dry powder to use as market prices get cheaper. Like buying groceries at Shop Rite if Filet Mignon is on sale we want to have the money to buy two. Keep in mind the realization that if stocks were to sell off more that would actually decrease the risk of owning them and increase our likely returns. 

Ned Davis Research, whom we highly respect, was out with a research note this week which stated that they believe that the market will be down 20-25% over the next 7 months but this will be a non recessionary bear market ending in early Q2 2019. We have to agree with their assessment for now as the economy stills seems on track and we suspect that the inversion of the yield curve, which is signaling recession, is technical in its nature and a recession is not on the horizon. A non recessionary bear typically lasts 7 months and down 20-25% seems reasonable. We are already down 10% from the highs.  2200 on the S&P 500 is down 25% from market highs and is the launching point from the 2016 elections. That may be where we are headed.

The old Wall Street saw is that a bear will come to Broad and Wall should Santa Claus fail to call. A weak December has Wall Street shooting first and asking questions later. We have been consistent in saying that we are stuck a large range between 2550-2950 on the S&P 500. We have also demonstrated a mini range of 2625-2825. On Friday we closed at 2600. The break below 2625 means that markets will need to test the early 2018 lows and broader range lower limit of 2550. We think that Wall Street may not have studied for that test and a breakdown to 2425 is in order. Perhaps, at 2425, we could get the capitulation spike we have been looking for. Russell 2000 and mid caps seems to be leading the way with financials now a contributor. The market will not rally without the support of the financials. Keep an eye on JP Morgan  which is THE financial stock.

This is the Everything Bubble. Some are looking for it to pop. We see it as more of a deflating. The excesses of 2000 or 2007 are just not there and the economy seems to be stable. This deflating could last some time but we don’t see the radical repricing of 2007 on the horizon. Maybe this is worse in your opinion as it may take some time before we begin to head higher again. We like value here and getting paid while we wait for bargains. Cash is yielding 2.4% and there are quality companies yielding 5% out there. Get paid and wait out the storm.

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

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

 

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

 

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.

Cycles

Cycles

The crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought. -Rudiger Dornbusch German economist

The reality is we spend our investing lives preparing for the next crisis. We talk of being a contingency planner – in constant preparation for what could derail our portfolio. We look for risk in everything that we do and hopefully sidestep any big derailments of our portfolio and our goals. One place we look in order to sidestep unnecessary risk is in the study of cycles and how markets are shaped by history and our human response.  There are cycles all around us wherever we look. The most obvious are cycles to the weather and seasons. We have habits that we reproduce every summer, every holiday. As humans we have a predictable psychological respond to certain stimuli. There are cycles in investing and in economics. It is by studying those cycles and investors responses to those cycles that we formulate a plan for investing. We are very excited to see that Howard Marks, from Oaktree Capital Management, is out with his latest book, “Mastering the Market Cycle”. Here Marks explains economic and stock market cycles and why they are important to study. We must admit his writing puts ours to shame.

They (cycles) arise from naturally occurring phenomena but importantly also from the ups and downs of human psychology and form the resultant human behavior. Because human psychology and behavior play such a big part in creating them, these cycles aren’t as regular as the cycles of clock and calendar, but they still give rise to better and worse times for certain actions. And they can profoundly affect investors. – Howard Marks “Mastering the Market Cycle”

In the last three decades it appears that we are stuck in a cycle –a cycle of lurching from one crisis to another. Most of this stems from central bank policy and its interventionist inclinations. Since the 1980’s, in the post Bretton Woods period, the Federal Reserve has been given the power and latitude to influence the economy of the United States unlike any other time in its history. For better or worse, the Fed, in its attempt to satisfy its dual mandate of maximizing employment and stabilizing prices has only succeeded in creating artificial bubbles in the economy.

.…the whole inflation/deflation debate has morphed into a dialectic, which is path dependent on asset prices.   Stocks values move up to a critical level (which holders likely believe to be permanent) that stirs the animal spirits and kicks economic growth into gear.  Inflation eventually becomes an issue moving interest rates higher.  The asset bubble pops, stock values go down, confidence declines, aggregate demand softens and deflation now becomes the headline issue.   Wash, rinse, repeat.  – GMM

In just the last two decades we have seen the Dot Com Bubble in 2000 and in residential real estate in 2008. Where is the bubble today? Some have called it the “everything bubble”. We see the hallmarks of previous bubbles in markets today. The policy of “easy money” from central bankers is causing there to be too much money chasing too few ideas raising asset prices to historical levels not seen since the last crisis. We also see very high levels of confidence while investors take on higher levels of risk for what would appear to be too little reward. Most of your investment return is determined by what level you make your purchase. The investing adage is “to buy when there is blood in the streets”. At this point business confidence is hitting all time highs and valuations are at levels we have not seen since 2000 and 2007. In short there is a very low level of skepticism and an acceptance of low future returns in light of risk.

The themes that provide warning signals in every boom/bust are the general ones: that excessive optimism is a dangerous thing; that risk aversion is an essential ingredient for the market to be safe; and that overly generous capital markets ultimately lead to unwise financing, and thus to danger for participants. – Howard Marks

 

What the wise man does in the beginning, the fool does in the end.” – Warren Buffett

The latest quarter brought more upside for US markets as they have performed markedly different than their European and emerging market counterparts. This out performance by the US is a striking development which can be directly traced back to central bank policy in the US. While most of the world’s major central bankers have held steady on interest rates the US has been methodically raising interest rates. Understand that policy in the US has an outsized effect in the rest of the world. Money has been flocking to the United States to take advantage of its better prospects and rising interest rates. That capital is flowing here and out of emerging markets and is causing disruption. Capital goes where it is treated best and, for now, we see the results in that the S&P 500 was up 7.7% for the quarter!

The lion’s shares of the gains were made in the first 8 weeks of the quarter as the market has slowed its ascent in September. Commodities have gained ground while small caps stocks have lagged possibly due to the resolution of some trade issues and rising interest rates. Our outperformance at Blackthorn has been due to our underweight in international stocks and our very low duration in bonds. (Sometimes it’s not what you do well it’s what you don’t do.)

As you have read our letters you have noted our caution as valuations have, once again, reached all time high levels. As much as we would like to say “once in a lifetime valuations” we cannot because this is our third experience with “once in a lifetime valuations”. We would note that we do not feel that we are at the precipice of another Dot Com meltdown or 2008 Crisis. What we are saying is that the easy money has been made in this cycle and we see the need to be a bit more defensive.

The list of all time great investors warning of sky high valuations and a looming downturn continues to grow. In the last few weeks we have heard from Stan Druckenmiller, Ken Griffin, Howard Marks, Ray Dalio and Lord Jacob Rothschild. These are some of the greatest investing minds of our generation. They see trouble on the horizon.

My position today is very much focused on managing the tail risks for that… we are late in the cycle, – Kenneth Griffin Citadel LLC

Thus I’m not describing a credit bubble or predicting a resulting crash.  But I do think this is the kind of environment – marked by too much money chasing too few deals – in which investors should emphasize caution over aggressiveness. – Howard Marks

…we continue to believe that this is not an appropriate time to add to risk – Lord Jacob Rothschild

What’s Next?

But for me, the import of all the above is that investors should favor strategies, managers and approaches that emphasize limiting losses in declines above ensuring full participation in gains.  You simply can’t have it both ways.Howard Marks

We are struck by the line from Marks above which we emboldened, “emphasize limiting losses above ensuring full participation in gains”. This is not the time to be leveraging returns. The easy money has been made in this part of the cycle and caution should be paid. We can still generate returns but we just need to accept lower returns in exchange for tempering our risk and avoiding big losses. Markets have a real potential here to move lower and move lower quickly. As an investor, it always pays to have some dry powder. In this instance maybe some additional dry powder is warranted.

We are not calling for a full blown collapse ala 2000 or 2008. The reason being is that the economic statistics are strong enough that we and most investors that we follow are not calling for an imminent collapse in the economy or a recession. A recession, on average, will see equities fall in the area of 35%, on average; hence, the reason investors fear a recession.  A recession does not appear to be on the horizon for at least 18-24 months. What we need to be prepared for is a momentary lapse, a crisis of confidence. What we do know is that we are not in the early days of a cycle. There is no blood in the streets; people are not panicking and selling assets wholesale without regard for price. That is an all hands on deck buying moment. This is not it. However, markets continue to rise and we continue to age. We must continue to plan and invest. We cannot choose our market cycle or where we are in that cycle to coincide neatly with our needs. Markets are cyclical. We study history in order to profit from it. While valuations are sky high one cannot predict when they will correct. We, as investors, cannot simply wait out markets. We have children that need to go to college and retirements to save for. We cannot simply move back our aging process because we don’t like the investment opportunities in the market. So what to do? We move on. Manage risk. Find competent managers and find pockets of investments to bring returns forward.

LATEST THOUGHTS

Never make predictions especially about the future. – Casey Stengel

Last month our favorite bond guru, Jeffrey Gundlach, noted that he sees 3.25% on the 30 year as the Maginot Line. He felt that if the US 30 Year bond closed above a 3.25% yield for two consecutive days we could be off to the races for bonds and not in a good way. Since we began our writing the 30 year has indeed closed above the 3.25% level and in fact has risen to 3.40%. The velocity of the move has taken markets aback. The yield on the 10 year is a part of just about everyone’s excel spreadsheets and the pricing of investments. A rapidly rising 10 year could shock markets and test liquidity as valuations are pressured. As far as our bond holdings go we are very short in our duration and perhaps getting shorter. From this positioning a move higher in bond yields would help us as we would be reinvesting our short duration bonds more rapidly into higher yields. However, other markets, such as emerging markets, currencies and stock markets could be in for a shock should rates continue to move higher. How high could bond yields go? Gundlach sees bond yields rising to 6% on the 10 year by 2020-2021.

This market keeps proving its resilience so we try not to fight it. The economy is clicking and Trump tax/repatriation polices are giving it a booster shot. That booster shot is giving the Fed room to tighten more aggressively but their policy is still considered loose. While our Federal Reserve is reducing its balance sheet by $40 million a month global central banks around the world are still injecting $500 million a month collectively into the global financial system. They are slated to take that number to zero early in 2019. Policy is loose but getting tighter. You can almost picture them getting ready to take the punchbowl away.

Right now the economy is riding the sugar high of tax cuts and repatriation with accommodative monetary policy. The Fed knows that this is their cover to raise rates. They are tightening policy and lightening up on their balance sheet holdings. There will come a tipping point where monetary and fiscal policies become too tight. If not, then markets and inflation will run. Right now we are riding markets higher but preparing for higher bond yields and higher commodity prices.

 

Conclusion

Investing is boring, not sexy. We are not calling market moves or breakouts. We are contingency planners. The equity market in the US has shown a tendency to go up over time so we stay invested in markets. We are not calling tops or bottoms just adjusting the sails a bit. We let the sails out when we see favorable winds. We take them in when we see danger because when danger comes, it will come quickly.

…the animal spirits have been unleashed and when these correction occur they happen with very little notice“-Kenneth Griffin Citadel LLC

While we began our letter with the famous quote from Rudiger we emphasize preparedness by ending our letter with this message from Ken Griffin. We are reminded of the sandcastles that we built on the beach as a child. We would pour sand on the pile building ever higher and, at some point, without warning, a side of the sandcastle would collapse. We could not predict which side would fall or which grain would make that side fall. Just like our sandcastle we cannot predict where, when or why markets will recede but we can tell from our study of cycles that the sandcastle has grown high enough to be at risk. Now is the time to pare back now that the easy money has been made in this cycle. We continue to be invested but we are looking for places to cut back on risk and adding active management to weather the approaching storm. It is prudent to sacrifice some return, at this point in the cycle, in order to avoid major losses and to profit from corrections. We cannot run from markets as we know that we must continue to prepare for retirement and our investing goals. Being out of the market is not an option as 0% gains over years will not allow us to reach our goals. In fact, standing aside from markets has the effect of us receiving a negative real return when compared to inflation. So we soldier on, our bucket just a little bit lighter, because when the sandcastle does fall it will come quickly and without warning.

First, widespread fear is your friend as an investor, because it serves up bargain purchases. Second, personal fear is your enemy.

 

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

 

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

 

5845 Ettington Drive

Suwanee, Georgia 30024

678-696-1087

Terry@BlackthornAsset.com

 

 

 

 

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

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

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

 

 

Money isn’t Everything – Solve for Happy

We read an amazing article this week from Mo Gawdat former engineer at Google X. After the loss of his son, Gawdat began to seek what brings happiness. As a financial advisor we are well aware of the studies that show that once our basic needs are met additional funds do not make us all that much happier. So what brings happiness? Solve for Happy is his effort to advance the cause of happiness in people’s lives. Take a minute and read this article by way of CNBC. We think you will be happy that you did. Check out his website.

Solve for Happy

Gawdat boiled down what he saw into “one simple equation, which basically says your happiness is equal to or greater than the difference between the events of your life and your expectations of how life should behave,”

Back to markets. While we think that the chances of a currency crisis is rising in their probability we also see US markets as being pressured to move higher (especially in illiquid late summer markets) as more capital chases a return here in the US. We read everything that we can get our hands on from Charlie McElligott over at Nomura. His writing, while highly technical, provides some great market insights. Here is the money quote from his latest report this week.

WHY SEPTEMBER SETS-UP FOR A POTENTIAL MONSTER EQUITIES/LARGE ‘MOMENTUM’ RALLY – By Charlie McElligott, head of cross-asset strategy at Nomura 

All-in, this sets the table for what I believe could be a “grab” month in U.S. Equities through the month of September and into mid-to-late October; HOWEVER, this then leads to an “overshoot” potential once folks have taken net exposures back significantly higher, as my view has continued to be that by late-October, we should again see heightened cross-asset volatility off the back of negative impact of what will be a large “Quantitative Tightening” impulse via the Fed / ECB / BoJ in this window.

Charlie is clear that he thinks the bulls have the ball. What could slow this market? Charlie touches on that as well. The market has priced in another rate increase from the Fed next month. With that baked in the cake the question the question remains of where do they stand on reducing their balance sheet? According to Charlie, that schedule is very light until late October/early November. That may give bulls more room to run for the next six weeks.  Note his “however”. A breakout here could lead to a reversion in late October/early November.

We are still focused on high and rising short positions in US Treasuries and gold. Those positions tell us that perhaps investors are leaning too far out over their skis in some areas. Whenever everyone thinks something will happen something else will.

We felt that the bulls needed a close above 2865 and they got one on Friday. One close does not a trend make. We insist on two. Monday could be the clincher or the deal breaker. I am leaning towards the bulls as they have the momentum. We could be breaking out of our 2018 range. We are still underweight but less so. Careful not to get whipsawed in the late summer markets but there is a sense of FOMO in the markets. Fear of missing out as the bears are on the run. Small and mid cap stock breakouts look more powerful that large caps. The Chinese have taken some turns in the currency market which have stabilized the Yuan and given relief to Dollar bears. That has in turn helped the Chinese and US stock markets as well as commodities. Currencies from Turkey to China to Brazil are the canaries 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

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

Facebook Drops the Ball

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

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

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

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

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

lighthouse

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

 

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

Catch 22

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

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

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

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

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

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

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

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

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

Valuations – 1999

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

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

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

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

What’s Next

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

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

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

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

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

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

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

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

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

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

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

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

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

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Terry@BlackthornAsset.com

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

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

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

Rumblings

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

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

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

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

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

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

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

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

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

 

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

 

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

Alchemy – Bulls into Bears

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

Bulls into Bears

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

From Jeremy Siegal 

Caution is going to be the word here. 

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

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

From Leon Cooperman

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

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

From the Did He Really Say That Dept?

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

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

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

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

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

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

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

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

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

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

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

pexels-photo-722664.jpeg

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

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

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

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