Behind Closed Doors

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

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

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

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

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

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

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

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

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

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

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Published in: on April 22, 2017 at 6:31 am  Leave a Comment  
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Did the Swamp Win?

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

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

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

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

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

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

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

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

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

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

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

Trump Train or Bulldozer?

All eyes are on Trump and Washington DC as the Trump Train rolls through our capital. Trump has been even more aggressive in using Executive Orders and in speaking to foreign leaders than most suspected and that has the Street on edge. Maybe we need to rename the Trump Train to the Trump Bulldozer. While most eyes are on Trump we are increasingly focused on the Fed. The Fed must attempt to act in concert with the President and his fiscal policy to avoid overheating or stalling the economy but good luck to them anticipating his next move. The Fed has made noise in recent weeks that perhaps it could shrink the size of its portfolio. The Fed has been consistent, in that, there was an inherent belief at the Eccles Building that the Fed did not need to shrink its balance sheet and that doing so would be the last maneuver in its process of normalizing rates. Ben Bernanke, former Fed Chairman, took the time out to explain in his blog why that is simply not a good idea. Could it be that politics are playing a role at the Fed?

…best approach is to allow a passive runoff of maturing assets, without attempting to vary the pace of rundown for policy purposes. However, even with such a cautious approach, the effects of initiating a reduction in the Fed’s balance sheet are uncertain. Accordingly, it would be prudent not to initiate that process until the short-term interest rate is safely away from the effective lower bound. 

…the FOMC may still ultimately agree that the optimal balance sheet need not be radically smaller than its current level. If so, then the process of shrinking the balance sheet need not be rapid or urgently begun.  Ben Bernanke

 Why is the Fed now talking about shrinking its balance sheet and not raising rates? We would like to see more consistency from the Fed. They have insinuated that three rates hikes are due this year. After taking a pass on raising rates this week and not setting the table for one in March the market is now pricing in just two rate hikes. The first rate hike is due in June and the second in December. If you have not read our Quarterly Letter you can take a peak for a further discussion on the topic. The short version is, if the Fed raises rates too slowly Trump’s policies may overheat the stock market which is at already historical valuations.

 If Fed Speak can’t jawbone a March rate hike back onto the table, policymakers will have precious little room for error to make good on their promised three rate increases for the remainder of the year. Danielle DiMartino Booth

February is the worst performing month in the October – May period but investors are heavily loaded up on equities regardless.  By way of Arthur Cashin , here are the widely followed Jason Goepfert’s notes on the market’s latest gyrations or lack thereof.

 After spurting to a new all-time high in late January, the S&P 500 has had a daily change of less than 0.1% for five of the six sessions since then. That’s almost unprecedented, but there have been times when it has contracted into an extremely tight range after a breakout. Several of those have occurred in just the past few years, and all of them preceded a tough slog for stocks over the medium-term. Hedge funds are betting that the rally continues. Exposure to stocks among macro hedge funds is estimated to be the highest since July 2015 and the 4th-highest in the past decade. The three other times it got this high, stocks struggled as the funds reduced exposure and eventually went short.

Stocks have stalled. Investors are heavily exposed to equities. February is not the best month for equities so investors aren’t expecting much. The market has a way of surprising you. Could the market finally be ready to make a move? Investors seem to be heavily tilted to the rally side of the boat.

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.