What’s Driving Stocks?

As you know we have postulated for almost two years that we were in a holding pattern for stocks. November has shown some promise in breaking out of that slump but there are still some key segments of the market that are struggling to break out to new highs – those being Transports and small caps. If you have been reading along you know that we see the breakout of these two segments of the market to be the key to divining if this break out is real.

While I am cautiously optimistic about near term prospects for the equity market those feelings are equally tempered by how late in the cycle we are for the economy and stocks. We are currently in the tenth year of what usually is a 7 year bull market. This bull market is currently the longest on record and valuations are stretched historically. The fear of a recession on the horizon is real as the latest numbers from the Atlanta Fed see Q4’s GDP looking around 1%.  I believe that any recession in the US is still two or three quarters but we continue to be underweight equities. We still see risk asymmetrically skewed to the downside. We dare not go even more underweight should the Fed engineer a soft landing (or see a Trump payroll cut in 2020) and see equities run higher.  In essence, we are trying to have our cake and eat it too. While prepared for a recession on the horizon and attendant stock sell off we will still be adding to our capital gains should stocks continue to push higher.

It is really hard to buy into this latest rally. S&P earnings are negative year over year for the past 3 quarters yet valuations continue to not only hold on but grind higher in the case of the S&P 500. While we look under the hood of the market and see that important bell weathers of the economy are lagging, in the manner of small caps and transportation stocks, you can also see that earnings growth is not driving the stock market higher it is the most recent liquidity injection from the Federal Reserve and continued massive buybacks from corporate America. 

The really big market mover recently may be Jerome Powell’s comments that he is willing to let inflation run. 

I think we would need to see a really significant move up in inflation that’s persistent before we even consider raising rates to address inflation concerns.” – Jerome Powell 10/30/2019 

The words REALLY SIGNIFICANT may be what has led to the turn higher in stocks and bond yields.

As we look to the next decade for investing the most overriding issue has to be the inflation/deflation debate. The biggest winner in an inflationary scenario will be the biggest debtor. The biggest debtors are governments. Remember – the Fed wants inflation and needs inflation. There is no other way to pay back all of this government debt. It must be inflated away. 

Things must be getting serious if Terry is putting charts in the blog this week.

Steepening of curve before recession Bloomberg

This chart courtesy of Bloomberg shows the steepening of the yield curve before the last two recessions. You can see from the shaded areas showing recessions that a quick steepening of the yield curve happened right before both events in 2001 and 2008. Could this be the third time? You can see the curve inverted in early 2000 and again in 2006. When the curve steepening reached 50 bp the recession was at hand. We are currently at 26 bp. 

According to Barron’s, US Valuations are at about 17.2 times forward earnings which is about 20% above its average. Europe is running at just about its average while Japanese stocks are well below average. Maybe US stocks have run too far for too long and it is time to look for value elsewhere.

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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.

Down the Rabbit Hole

Why, sometimes I’ve believed as many as six impossible things before breakfast.

The White Queen, Alice Through the Looking Glass, by Lewis Carroll

Investors now buy equities not for future growth but for current income, and buy bonds to participate in price rallies – Bank of America

While believing the impossible may help foster the imagination and lead to new ideas believing the impossible in investing is a sure way to the poor house. Down the rabbit hole we go. In this low rate environment it is easy to think perhaps I will just buy IBM. It has a 4.3% dividend. That’s higher than I can get in bonds. That yield can disappear pretty quickly. IBM is down 26% from its highs in early 2017. Not picking on IBM or giving advice – just an example. Know what you own. If a dividend is high it is probably for a reason- and not a good one. The world is upside down and investors are chasing yield where they once chased return and return where they once chased yield. Reaching for yield is like reaching for that last apple far out on the limb.

According to the latest research from Goldman Sachs buyback announcements and purchases are declining year over year. This makes sense as the Trump tax cuts and repatriation has run its course. As you know we feel that buybacks have been THE fuel levitating markets. That fuel, while not running dry, is losing some punch.

The economic data continues to be sluggish as the trade wars create more ripples. Trump needs a win. He knows that he will not have a second term if the economy turns south in the next 12 months. A trade deal – any trade deal will be necessary. Due to the trade war with China the Fed has responded by pushing rates lower and a renewed QE.  That is now wind at Trump’s back. Once he signs a trade deal with the monetary policy heroin flowing the economy should bounce. That is the pain trade anyway. Investors see the signs of recession right around the corner and have lightened up on risk yet the market refuses to yield. The trading range on the small caps and transports in the US is getting tighter and ready to break on way or the other. Gold is holding its own and digesting its gains. Europe and Japan, while stuck in the mud economically, are seeing some positive action in their markets. The US Dollar may be the next key. If the Dollar begins to fall that would help a host of assets that investors would then turn to.

We released our Quarterly Letter titled Character earlier this month. We hope that you have had a chance to read it. If not here is the link. It goes into greater detail where we think we are in the economic and market cycles and what we are doing about it. While the last two weeks have been full of noise and bluster nothing has changed. We are still firmly entrenched in our trading range between 2850 and 3030 on the S&P 500. We believe that small caps and transports hold the keys to the market here and must be watched closely. Their ranges are getting tighter and tighter and are due for a break out. We still think that the risk in stocks is to the upside for the moment even though we are firmly in the recession is coming camp. Strange days.

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.

Red Flags

We have been working on our quarterly letter and will look to have it out next week so this week’s blog is a short one. As if we didn’t have enough to worry about in light of a slowing global economy, trade wars and impeachment proceedings we got an email this week that may win the Red Flag Award for 2019.

Christmas has come early this year. 

I can now do No Doc Commercial Real Estate Loans for you or your clients. 

We will not ask borrowers for tax returns, bank statements, leases, rent rolls or historical operating statements! 

For a refi or cash-out, all we need is a completed application and a credit report. 

If you are buying commercial real estate, include a purchase contract to those docs and that’s it.

Oh boy! No doc loans? Didn’t we do this already? Artificially low interest rates downside is the inefficient allocation of resources and asset bubbles. Are bankers and shadow bankers reaching too far out on the limb?

The S&P 500 has closed down two weeks in a row but, in light of the Saudi oil field attacks, that may go down as a slight win for the bulls. While the S&P 500 is still holding strong to its rising trend small caps and transports have struggled and may have failed in their breakout. In our experience from failed breakouts usually come fast moves in the opposite direction. The bears have the ball. Key economic bell weathers like JP Morgan and FedEx have failed in their breakouts too and that has us cautious. Overall, stocks are still stuck in neutral. Gold has stubbornly maintained its gains and that is impressive -especially when you take into account the recent strength of the US Dollar.

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.

Tariffs and Tweets

We received a bit more than the usual phone calls from clients this week as stocks gyrated about. Up 300, down 600, up 200, up 100 and up 63 is getting to be a normal week. But if you take note, like a rollercoaster, we go up, down and all around speeding in different directions while we end up back in the same place except this ride didn’t cost us money. By sticking to a diverse asset allocation we have made money in the last 18 months of sideways markets in stock dividends, bond interest and bond appreciation. Do not let the news headlines, tweets and tariffs set you adrift from your investing plan.

We see running a diverse asset allocation that is dynamically updated during the economic cycle as the one true way to positive returns. The hard part is managing the natural human tendency to run for the hills when things get hot. While most pundits were scaring clients out of bonds we made handsome profits. Don’t listen to the pundits and don’t watch the news. The pundits are there to fill up air time and entertain while the news is just trying to scare up some ratings.

While we would expect stocks to follow the path of bond yields here and head lower, we are still stuck in neutral between 2830 and 2960 (we are currently at 2847, at the lower end of the interim range) on the S&P 500. Above 2960 momentum buyers may come flooding in. Conversely, below 2830 the 2800 level (and 200 DMA) looms large. Any breech here and algorithmic selling will take over. When in doubt we defer to the bond market and lower yields have us looking for lower stocks.

You might ask – if we think that stocks are going down then why are we still invested? One factor is that we don’t know that stocks are going down. 18 months ago we were faced with the idea that stocks would go sideways for a year and a half and the vast majority of investors thought owning bonds was a bad idea. We kept our bond holdings and even increased duration earlier this summer. We stuck to our approach and that consisted of owning a diverse allocation of stocks and bonds. In this environment it turns out that was the best approach and a return was generated in a neutral environment.

Now we think that stocks could be in for a tumble. Should we dump stocks?

Last week we said the following.

The Fed may restart QE in the face of year end liquidity pressures. That would send stocks higher. Would the Fed do that with stocks at all time highs or will they let stocks falter first? We think that they should wait but don’t think they will.

In the latest Fed Minutes released this week there are 6 mentions of asset purchases by the Federal Reserve board members. Board members seem confident that asset purchases are a good thing and they could move preemptively.

What is to say that the Federal Reserve will not preemptively begin to purchase assets changing the direction of stocks and bond yields? A portfolio of solely defensive bonds would suffer greatly in this environment. The successful investor has a diverse asset allocation and dynamically adjusts it in the wake of changing economic cycles. Never all in and never all out.

We are positioned defensively and would not mind lower equity prices. The economic cycle appears to be aged as the expansion has lasted for over a decade. Valuations are historically elevated. Small cap stocks here in the US as well as Transportation stocks are now firmly below their 200 DMA and that could portend a further move lower. We see the calendar having an outsized effect on returns here. We could see a liquidity squeeze (and downward pressure on stocks) as we approach the last quarter of the year while professional investors look to protect gains.

There is further evidence this week that the Fed may be preparing the next QE and in that period we would expect equities to rally and bond yields to rise. We hope to see lower valuations to add to our allocations before the next QE starts but there are no guarantees.  September is one of the most volatile months. Hang on tight and don’t watch the news.

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.

Trump Slump

We see a stock market that is either in denial or one that fully anticipates that the Federal Reserve is prepared to embark on the next round of QE. It does appear that the Fed will act it is just a matter of when. Will they let the market fall first before they act? That is the safer path. For now, the stock market defies gravity while bond yields tumble. While we would expect stocks to follow the path of bond yields here and head lower, we see a stock market stuck in neutral between 2830 and 2960 (we are currently at 2888, right in the middle of the interim range) on the S&P 500. Above 2960 momentum buyers may come flooding in. Conversely, below 2830 the 2800 level (and 200 DMA) looms large. Any breech here and algorithmic selling will take over. When in doubt we defer to the bond market and lower yields have us looking for lower stocks.

We are positioned defensively and would not mind lower equity prices. We see the calendar having an outsized effect on returns here. We could see a liquidity squeeze (and downward pressure on stocks) as we approach the last quarter of the year while professional investors look to protect gains.  For now the S&P 500 should still be considered range bound between 2550-3000 with the 200 Day Moving Average looming as critical support at 2799.

The politics of being the Federal Reserve chair are even more intense this year. A recession and stock market fall could doom a Trump second term. The President has been on the Fed pretty good and is looking to set them up for the blame. It won’t work. Inflation is also starting to ramp up as tariffs begin to take their toll. A shopping trip to Wal-Mart costs 5% more than it did last June. America is Wal-Mart Nation. A fall in stocks and a rise in inflation would doom Trump. How willing is Mr. Powell willing to help out President Trump? That may be the key to investing in late 2019 and early 2020. Powell’s speech from Jackson Hole next week should be a real market mover. Since Powell took over his speeches have not been well received by Wall Street as the market has fallen more often than not.

The Fed may restart QE in the face of year end liquidity pressures. That would send stocks higher. Would the Fed do that with stocks at all time highs or will they let stocks falter first? We think that they should wait but don’t think they will. August, September and October are not the best months for the market historically. We continue to position defensively. We are favoring solid dividend paying stocks that have higher momentum and we have been buying gold while avoiding banks like the plague. Gold has had a good run and so have bonds. Caution should be paid there.

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.

Tariffs and Apple

Corporations have been falling all over themselves to buy back stock and borrowing billions to do it. If you have read us for some time you know we are not fans of corporate buybacks. They really only enrich the corporate executives as they buy stock with reckless abandon – mostly because the money is not theirs it’s the shareholders. We were the specialist in Ford Motor back in the day and Chairman Greenspan announced a 50 bps emergency rate cut. Ford was off to the races. At one point, with the stock up $5, the corporate buyback trader was screaming that he wasn’t buying enough stock. Months later Ford halted their buyback completely in light of the Ford Explorer Rollover debacle. The buyback hit the mothballs for years. The cash had been wasted as the stock plummeted.

Apple’s recent buyback statistics are sobering. Apple’s net income is exactly the same as it was four years ago yet due to their extensive buyback. Apple’s earnings per share have vaulted from $9.22 to $11.51 all due to having less stock outstanding. The only growth in Cupertino is coming from financial engineering and now Apple has spent half its cash hoard. I’m having Ford Rollover Flashbacks. Corporate buybacks are increasing and so is corporate leverage. For the second year in a row US corporations have spent more on buying their stock back than on capital equipment. Now US corporations have borrowed billions to buy their own stock back in order to inflate executive bonuses while increasing corporate leverage all along the way. That Piper will need to be paid at some point. This doesn’t end well. If and when the indiscriminate buyers in the market place (corporations and algorithms) stop buying stock it will lead to a vicious spiral lower.

Say what you want about President Trump he sure keeps things interesting. As the Fed lowered rates this week in response to the slowing global economy and China – US trade war Trump responded by turning up the heat another notch. Trump wasted little time in adding tariffs to more consumer goods out of China including iPhones. Trump now knows that if he turns up the heat on China by raising tariffs the Fed will lower rates – just like Trump has been asking for.

We saw a market that wanted to go higher leading into the Fed meeting but we were wary as Transports and small caps had yet to convincingly break out higher. We held fire and were right to do so. The small caps and transports now have failed break outs in light of the spreading trade war – not a good sign for markets.

Global risks appeared to be increasing but investors seemed reluctant to fight the Fed. That may have all changed last week especially as we enter the always volatile months of August, September and October. We continue to position defensively.

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.

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.

lighthouse

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

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

 

 

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

 

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

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 .

 

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.

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.

lighthouse

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

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

 

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

 

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