BitCoin and Sexy Investing

We have been telling you to keep an eye on Bitcoin as an indicator of risk. Since we last wrote about bitcoin two weeks ago it rallied 14% and we saw a subsequent rally in equity markets here in the US. Coincidence? Probably not. Bitcoin is an illiquid fast moving market. It may be giving us hints as we try and understand the valuation of this market and how it is going to break out of its current seven month range. Will the bears or bulls take charge? Bitcoin’s price action may give us clues as to the direction of the slower moving equity market. As speculators gain confidence in bitcoin and join the rally speculators in equity markets gain confidence as well. Equity markets have had two very good weeks back to back and the S&P 500 has rallied just over 3%. Keep an eye on bitcoin. Disclosure: 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.

Two weeks ago we thought markets might be a bit oversold and due for a bounce. The moving averages have held and the bulls took the advantage. The S&P has since rallied 3% in two weeks. The S&P closed the week at 2801. While we are still stuck in our 2550-2800 range we have finally gotten back to the upper level of that range at 2800 – a level we have not seen since March. While equity markets are a touch overbought here the series of higher lows put in since March give the edge to the bulls. We are anxious to see if the bulls can break free of this trading range that we have been in for the last 7 months. An upside breakout of this range could lead to an assault on 3000. 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. We are not calling for a break out here but we are on guard for one and the wind tilts in the bulls favor. Just good contingency planning.

We want to tell you about a great email letter that we get from Eric Barker. Some time ago we started reading Barker’s emails and have since read his book. He delivers great insights, often backed by credible science, that are helpful life hacks. His post this morning was How to be Smarter with Money.

Love this quote.

“Being smart with money is short term boring but long term sexy.” – Eric Barker

 

Here is his summation. Get his book – Barking Up the Wrong Tree.

Sum Up

This is how to be smarter with money:

  • Reminder – You Cannot Predict The Future:Timing the market isn’t investing; it’s gambling. And how would you react if I said I planned on funding my retirement through gambling?
  • Ask, “What Does Money Mean To Me?”:Make a simple plan and then make sure your investments serve it.
  • Feelings Can Be Very Expensive:Investing is boring. And make sure it stays that way. Don’t “play” the market. That’s how you get played.
  • Use the 72-Hour Test:Very few things need to be bought immediately. Let them sit in your shopping cart for 3 days to prevent impulse buys. (The only exception is my book, which should be purchased immediately and in bulk.)
  • Automate Good Behavior:Until our robot overlords arrive, make sure to take advantage of our robot underlings. The best way to be consistent about good behavior is to automate it.
  • Use The Overnight Test:If all your investments got sold, which ones would you actually re-buy? And why doesn’t your portfolio look like that now?
  • Know The Fundamental Rules of Investing:Pay off debt. Diversify. Keep costs low. Eliminate unsystematic risk.
  • Be Ignorant And Lazy:“TMI” is a bad idea with people you’ve just met and with investing. If your money is already hard at work, why interrupt it?

Simple, but not easy. So plan, automate and be lazy so you can get out of your own way.

It’s not gambling, but that doesn’t mean it’s not rewarding.

Being smart with money is short-term boring, but long-term sexy.

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.

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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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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.

NetFlix Partying Like it’s 1999

Trade wars and tariffs continue to grab the headlines as small and mid cap stocks in the United States outperform. The theory is that small and mid cap stocks will not suffer as much as their large caps brethren due to their lack of international sales. Lately, what has piqued our interest is the tremendous disparity between large cap tech (i.e. Netflix) and consumer staples (i.e. Kraft Heinz). Not advice folks, just examples. We are getting that 1999 feeling again. 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. This is Not advice. We are just bringing attention to disparate valuations.

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. The World Cup has the eyes of Europe and Asia as the tournament tends to keep a lid on things and so will August beach vacations. Those would months 8 and 9.

We have been telling you to keep an eye on Bitcoin as an indicator of risk. It was another tough week for bitcoin as it fell 6% from where we last marked it to a current level of $6061 (Fri 4pm).We felt that the $6777 level was a key level of support. We would now look to the $4000 area as support. Let’s see if any continued selling has an effect on speculators in equities. 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. Bitcoin will begin to interest us when it falls 90% from its high of $19,200.

The S&P closed the week at 2754 or smaller than 1% loss for the week. The S&P 500 has consolidated its run from the last few weeks and that is healthy. The 200 DMA is sitting right about 2666. Small and mid caps continue to lead but are a bit over bought and signaling that they may need to take a breather. Gold has broken below support levels and is a bit oversold and looking to 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 .

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.

Melt Up Redux

We got a great peak at what hedge fund legend Paul Tudor Jones is up to in an interview with CNBC last week. The publicity shy manager does not often give interviews and is most well known for calling the 1987 crash to the day. In his latest interview he is calling for a melt up in the markets as fiscal and monetary policy are creating too much stimulation for the economy. What may be great for the economy is not necessarily good for the market because, at some point, the Federal Reserve will have to put a clamp on the economy and inflation. But for now, that is not the case as Jones points out that rates are way too low for this point in the cycle while also having late cycle stimulative fiscal policy. He points to 1987, 1999 and 1989 Japan as analogous periods.

“we’ve got fiscal policy that literally came from another galaxy and we have monetary laxity. And that brew is what has got the stock market so jacked up.”

I think we’ll see rates move significantly higher beginning some time late third quarter, early fourth quarter.  And I think it will interesting because I think the stock market also has the ability to go a lot higher at the end of the year.

We’ve got interest rates that again look unlike anything that we’ve seen in the stock market top before and we’ve got a 6% budget deficit during peace time with 3.8% unemployment. So yes I think this is going to end with a lot higher prices and forcing the Fed to shut it off. And we’ll probably go through the same thing. It’s an old story. We’ll probably play it again.

Jones was asked what he sees occurring next in the markets. At first he expects a summer lull but then he expects fireworks in the third and fourth quarters of 2018.

I think you’ll see rates go up and stocks go up in tandem at the end of the year. If you ask me to kind of think of some analogy, I would pick 1987 in the U.S., not necessarily saying we’re going to have a crash but a time when you had a budget deficit, and you had stocks and rates going up for a period of time. 1999 in the U.S., that one also jumped to my mind when things got crazy the end of the year. 1989 in Japan. Again, they had strong fiscal monetary pulses that worked their way through the stock market. So I could see things getting crazy particularly at year end after the midterm elections. I could see them get crazy to the upside.

Here is a link to the full interview on CNBC if you have the time.

Crazy to the upside. We see the Federal Reserve as being behind the curve on rates. They will continue to raise rates slowly and consistently until something breaks. However, real rates are so low that they may be raising rates for some time as the economy (and inflation) roar. This could catch investors off guard as they lower the risk in their portfolios based on the Fed tightening. If markets continue to rise, in spite of the Fed tightening, this would force professional investors to chase the market as they chase performance. We called the melt up in stocks in the post Trump election period and then a 1987 style crash. Markets have adjusted to their new levels so a massive downside from here is increasingly out of the cards. Could we have another melt up in the post midterm election period? Jones is calling for one and we are starting to lean in that direction as well.

We have been telling you to keep an eye on Bitcoin as an indicator of risk. It was a tough week for bitcoin as it fell just over 15% from where we last marked it to a current level of $6475.We have been watching the $6777 level as an important level of support and that appears to have broken. Let’s see how it performs next week. As a reminder 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. Bitcoin will begin to interest us when it falls 90% from its high of $19,200. Then we might take a look.

The S&P closed the week at 2779. Funny, that’s what we said last week. That’s right one of the biggest weeks of the year for the market with tons of market moving news and nothing happened. S&P consolidated its run from the last few weeks and that is healthy. The World Cup is on for the next month and that usually leads to some pretty quiet days. Europe will be dead quiet and then they go on vacation in August. Never short a dull market.  Happy Father’s Day Dad and to all of you dads out 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.

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.

Watch List

While none of us really want to circle back and explore the Euro crisis again we may not have any choice. We are back to Ital-eave which, by the way, is my personal favorite portmanteau created since the dawn of the GFC. Italy is the third largest sovereign borrower in the world and has large structural, demographic and cultural issues holding back its economy much like Greece only multiple times larger. This brings us to the question of how could their debt, prior to this crisis reawakening, trade at negative interest rates. Negative interest rates are quite possibly the world’s biggest bubble ever and it has been blown by central banks intentionally. Years from now people will scratch their heads in disbelief at this crisis. Italy’s debt was just a bonfire searching for a match.

This week saw new highs on the Russell which has served to fill the bulls with enthusiasm. And why not? (Sarcasm alert.) This week we saw a new anti establishment government in Italy, the third largest sovereign debtor and a new anti establishment party gain power in Spain. We also saw a trade war heat up between the US and the rest of the developed world while the world’s most dangerous bank saw its stock price sink into the single digits. Of all of the above the one we most fear is Deutsche Bank. This week it became known publicly that the Federal Reserve had put Deutsche Bank on its troubled watch list. This news led to S&P downgrading the company’s debt to BBB+.  Why is this important?

“Further counterparty aversion could follow in the event of a downgrade, especially with those clients that have ‘automatic rating triggers’ within their risk policies,” according to the Goldman Sachs report. That in turn may hurt Deutsche Bank’s market share further and weaken the company’s ability to generate revenue, the analysts argued. – Bloomberg

One thing we have learned over the years. When Wall Street smells blood in the water and sees weakness it will exploit it. Look for pressure to come to bear on Deutsche Bank. It is not another Lehman but it is systemically important. Ripples will be felt.

We have been telling you to keep an eye on Bitcoin. It bounced slightly this week to close on Friday at $7500. Not much of a bounce considering the currency fluctuations in emerging market should be supportive of bitcoin. It still has our attention. $6777 is important support for bitcoin. Lumber has been on our radar as it has flown higher in the last 24 months. It appears that a peak may have been hit last month as lumber closed limit down for several trading days in a row. Could this be the canary in the coalmine for housing which has been red hot?

The S&P closed the week at 2734 or up about one half of one percent on the week but still near our fulcrum of 2666. The Russell is holding its recent new highs and mid cap and small cap stocks are looking to break out of their range. That makes sense as small and mid caps are not as vulnerable to trade wars and fluctuations in the US Dollar. That is giving new power to the bulls. The Russell may drag its large cap brethren up with them. The first of the month almost always helps the bulls with new money to the market. Let’s see how they perform next week as they stare at another rate hike from the Fed but, for now, the bulls are in charge.

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.

Stolen Picasso

My wife stole my Picasso!! Great story making the rounds of late. A billionaire investor was very proud of the $50 million Picasso that hung over his bed. His wife, being a fairly good artist, quipped sarcastically that she could paint that! The billionaire investor quickly dismissed his wife’s claim. Years later, after the divorce, and walking into that bedroom each night it dawned on him to look at the picture a bit more closely. It turns out that she was a pretty good artist. Know what you own.

Jeff Gundlach held another webcast this week and shared his views on the market. They are always worth the time. Gundlach is still focused on the 30 year bond and the critical level of 3.22%. We had one close above that number but Gundlach is looking for two consecutive closes above 3.22% which would signal the end of the 30 year bond bull market in his view. (The 30 year closed the week at 3.09%.) However, we see that there are major short positions in the bond market and it is our feeling that those positions may hold interest rates down for a bit. Remember, when everyone thinks something is going to happen – something else will.

While we have a trucker shortage here in the US, truckers in Brazil are going on strike. Gasoline prices in Brazil are rising so quickly that truckers cannot make any money. The rising dollar is having an impact around the world in emerging countries like Brazil, Argentina and Turkey. We won’t even mention the disaster that is Venezuela, a once proud country with major oil reserves. Keep an eye on emerging markets. Their pain can cause waves throughout the rest of the developed world.

We have been telling you to keep an eye on Bitcoin. It is trading at a new recent low below $7300 down from $9800 three weeks ago.  The crypto currency market is shaping up as a temperature gauge for risk. It may be the canary in the coalmine for other risk assets. $6777 is important support for bitcoin. The S&P closed the week at 2721 or about 55 points above our fulcrum of 2666. It has been 5 full months since we first hit 2666. Remember, we thought that we could spend 9-18 months here. The S&P has been stuck between the 100 day moving average and the 200 day but in recent days seems to have found support at the 100 DMA. That gives a slight edge to the bulls.

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.

666 Redux

Rollarcoaster markets. Around and around, up and down and we are back where we started. Hopefully, it didn’t cost you money. Another week and month and we are stuck at 2(666). You can read our thesis on the number 666 in our postings Bitcoin and Warning Shot. The short version is that the market has struggled at 2 times, 3 times and now 4 times the low on the S&P 500 of 666. It’s not magic. Its algorithms. The computers are in charge and for now the trading houses love the volatility but it’s all just churning. We have expected this churning to last 9- 18 months but we are getting closer to taking the under on that bet.

While the pundits are obsessed with Elon Musk’s seeming breakdown we will continue to obsess over the recent ranges of gold, stocks and bonds. It could be a long summer as the doldrums kick in but given our track record it will happen when we are furthest from the office. We have a knack for taking vacations at exactly the right time. For an inside tip look at your August calendar.

We continue to be invested because we do not know which way the market will head and time is money. It’s boring and it’s not sexy but look at where you cash, your dry powder, is invested. The differences are staggering and it is well worth your time to pick up 200 basis points. The market continues to struggle and is stuck in the range between 2550-2700 on the S&P 500. The longer it stays in the range the better it is for the bulls and the harder the breakout will be when it comes. We see the market breaking to 2850 and new highs or a trapdoor opening with a swift move to 2400 or lower. The market still struggles with 2666 as we closed the week at 2664 (which is the actual 4 x 666). We are stuck, for now, in a range between the 100 Day Moving Average (DMA) and the 200 DMA and that range is growing tighter each week as the 200 day is trending higher. Something will have to give. Keep an eye on the door. When these ranges break things will change rapidly – but for now we wait.

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.

Tension Builds

We hope that you enjoyed reading our quarterly letter last week. We got some great feedback from people we admire in the industry and we hope that you found it useful as well. If you haven’t read it yet we would encourage you to. Here is the link to our quarterly letter.

2018 is going to be a huge year for corporate buybacks with an expected $800 billion in buybacks but the rest of April may be a bit sparse. Buybacks have, at times, carried this market. The rest of April could struggle with corporations in blackout periods due to earnings. It is interesting to note that Goldman Sachs suspended their buyback for the rest of this quarter. They are investing the money back into their business. Hmmm…

We can now say that the gap has been filled at 2700 in the S&P 500 but it also seems to be proving to be resistance for the time being. We watch gaps because gaps show us where the emotion lies in the market. A break in emotion whether good or bad creates gaps in charts. A healthy dose of good news and we rocket higher creating a gap. Bad news and we see a break lower. We have seen two major breaks in 2018 and they are both in the bears favor. When we get back to those gaps it is natural resistance (support) for markets.

By way of Arthur Cashin comes a note from his friend Jim Brown at Option Investor. It seems that Brown see that buybacks are escalating while the public steps back from the market.

On the public, Jim wrote: Bank of America said equity ownership in individual accounts has declined to 29% compared to the 41% in January. The 29% is an 18 month low. That can be seen as positive from a contrarian perspective. If the market continues higher, individual investors could begin scrambling to add equities to their portfolio. Since the average individual investor functions in a herd mentality, the surge of new buying a couple weeks from now could be at a market top. I wrote back in January that I expected a market decline in late April, early May once all the major earnings had been released. I was not expecting a February decline but my outlook for May is still cautious.

We have been calling for the market to struggle for 9-18 months since we hit 2666 and we continue to trade within 130 points of that number.  We are stuck, for now, in a range between the 100 Day Moving Average (DMA) and the 200 DMA. The 200 DMA is the number most watched by the momentum crowd. If we break below the 200 DMA there are very large funds that will go from 100% long to 100% short. The range that we are building also builds tension. When that tension is released the market will move in conjunction with how much pressure has built. Gold and the 10 Yr Treasury have been stuck in a range for a year. Keep an eye on the door. When these ranges break out things will change rapidly – but for now we wait.

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.

Blackthorn Quarterly Letter April 2018

 Roaring

For some time we have been warning about a melt up in the markets. The stage had been set for asset prices to roar higher. Well, 2018 came roaring in like a lion with, what appears to be, the late stages of a market melt up.  At its zenith the S&P 500 was up almost 7.5% for the month! The incredible start to 2018 was clearly unsustainable and it was obvious that some sort of correction in 2018 was likely. February was clearly much different than January, in that, the S&P 500 that we had come to enjoy over the last 13 months had now turned south.  The volatility quake of February was just what the market needed to wake it from its relentless sleep walk higher. While we have enjoyed the last 9 quarters of positive pricing it was just a matter of time before markets reverted closer to their historical glide path

While we have made note in our letters of historically elevated valuation metrics we see further anecdotal evidence of that elevated pricing in legendary investor Warren Buffett’s latest Annual Letter. Buffett is well known to be constantly on the search for deals in the marketplace. His job is to allocate capital and he does that in buying stocks in companies or preferably entire companies as he adds to his portfolio. One of the main challenges in running Berkshire Hathaway is consistently putting newly acquired capital to work as it is a capital generating machine. In his latest annual address he notes that prices for assets are challenging. He described that finding a deal ata sensible purchase price” has become a challenge”.Berkshire Hathaway Annual Letter 2/26/2018

Why are prices so elevated? As you know from our writings, it is our opinion that elevated prices are directly related to central bank policy around the globe. A policy that, if even spoken of in polite circles a decade ago, would have gotten you laughed out of a room of economists. This past decade has been filled with rising asset prices due to the fire hose of central bank policy. Historically low interest rates, growing balance sheets, and low volatility all combined in excel spreadsheets to justify higher valuations for assets.

This never before attempted policy is now being seen by central bankers as being long in the tooth. Central bankers are now enacting tighter policy if only to have “bullets in the gun”. There is always another crisis and policymakers know they will be expected to respond. Policy maker’s response to the next crisis would be limited in scope if interest rates are along the zero bound and they hold an inordinately large balance sheet. Federal Reserve officials have been more overt in their recent communications that they are concerned about having the capacity to respond to a crisis in the future.

“Long-term risks include reduced capacity of both fiscal and monetary policy to act against downturns. Eric Rosengren Boston Fed President speech 4/13/18

What Changed?

What has changed is the tax cut. The tax plan really started in the middle of September and that’s when you saw the bond market reacting. …At that point, the market had shifted from its disinflationary mindset to a moderate inflation mindset. And that’s the repricing that has been taking place. Jeff  Sherman CIO Doubleline Funds

Central bankers are right to be concerned as the market perceives a change in mindset. Change can create volatility. Volatility can create fear. Fear can manifest itself in a lack of faith in the Fed to maintain stability. Instability creates lower asset prices.  Investors are seeing inflation on the horizon for the first time in a decade and that necessitates a rotation into a different investment game plan. Currently, investors are walking a tightrope between investing for inflation and investing for deflation. A deflationary game plan includes investing in longer term bonds and buying stocks when central bankers inject capital. An inflationary game plan includes commodities, low duration bonds and equities when inflation is controlled. We are walking a tightrope of investing options as the two outcomes are polar opposites.

“We have to deal with the possibility that at one point the Fed and other central banks may have to take more drastic action than they currently anticipate” and rates “may go higher and faster than people expect.” – JP Morgan CEO Jamie Dimon Annual Letter 2018

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.

Until Something Breaks

And if you respect financial history, what the Fed has always done is hike until something breaks. We definitely had the debt build up. Looking at debt to GDP, people talk a lot about a bond bubble. But it’s not in the treasury market and it’s not in the housing market. It’s in Corporate America – Jeff Sherman CIO Doubleline Funds

What could break? We surmise that it may be the corporate debt market. Currently the 2 year US Treasury is the highest it has been since 2008 and if interest rates continue to rise there is concern that corporations may not be able to refinance debt that is coming due in the next two years. The artificially low interest rate regime that has prevailed since the GFC has given rise to zombie companies. Zombie companies are corporations that would have otherwise, with normalized interest rates, not been able to refinance their debt and stay alive. Those companies may not be able to stay afloat with rising interest rates and with less access to capital. That could create a significant drag on the economy as they close their doors. An additional concern is the rising share of the US budget that is being outlaid to interest payments. If rates were to normalize then the US budget is in danger of becoming a slave to its interest payments. That is the cross for the Federal Reserve to bear. How much is tightening is too much? How much can they tighten before something breaks?

Asset prices, which have risen on the back of loose central bank policy, should now, theoretically, reverse given central bankers current goal of tightening monetary policy. Central bankers are walking a fine line when trying to reverse their experimental policy. The trick here is for central bankers strike a balance where they are able to rein in policy without collapsing asset prices.

One of the biggest keys to success in this environment will be how the Fed responds to the markets’ response to any change in policy. If the market falls into a bear market a key driver will be how the Federal Reserve responds to any market correction. That response is likely to determine how long and how deep any correction might be. Our first clues may not come from the equity market as to markets overall response but from the bond market. Bond yields may be the risk temperature gauge for markets. Rising/falling bond yields or a continued flattening of the yield curve may portend equity market action.

“Spreads between corporate bonds and 10-yr Treasuries has fallen to relatively low levels, notes studies have showing investor confidence that generates low credit spreads often precedes subsequent economic reversals.” – Eric Rosengren Boston Fed President

The rising specter of inflation may have been the initial culprit of the recent sell off in February but that is normal for this late in the cycle. Pundits are saying “but the economy is doing so well”. The reason markets sell off when the economy is doing well is due to the central bank and its efforts to maintain a balance between prices and a strong economy. If the economy is doing well central banks will raise rates to slow the economy as inflation begins to rise. The reverse is true as well. If deflation arises and the economy is performing poorly central banks will lower rates to stir the economy and its concerns about inflation go on the back burner.

Then the acceleration of demand into capacity constraints and rise in prices and profits causes interest rates to rise and central banks to tighten monetary policy, which causes stock and other asset prices to fall because all assets are priced as the present value of their future cash flows and interest rates are the discount rate used to calculate present values. That is why it is not unusual to see strong economies accompanied by falling stock and other asset prices, which is curious to people who wonder why stocks go down when the economy is strong and don’t understand how this dynamic works. -Ray Dalio Bridgewater Associates

We continue to believe that central bank purchases will dictate asset pricing and while we can try and predict when asset flows will turn negative we cannot predict when markets will react to that reversal in flow. Buy the dip may have turned into sell the rip. The 3% level on the 10 year is the key. Equity markets continue to tumble whenever bond yields rise and bond yields fall whenever equity markets stumble. We are stuck in a loop. Markets may be stuck in neutral until central bankers either stop tightening or tighten too much.

 What’s Next

For one thing, I’m convinced the easy money has been made.  … the one thing we can say for sure is that the current prospects for making money in U.S. equities aren’t what they were half a dozen years ago.  And if that’s the case, isn’t it appropriate to take less risk in equities than one took six years ago? – Howard Marks Co-Chairman Oaktree Capital 1/23/2018

The lack of volatility in recent years has led to a one way market – up. So far in 2018 we have seen the return of volatility that has been missing from market advances in recent years. As we see a rise in the fear gauge we expect a repricing of assets and, with that, markets are going to be increasingly volatile and move in two ways- both up and down- rather than what we have seen over the last 9 quarters. While it may become more difficult to make money in this environment we feel that opportunities will present themselves to readjust asset allocations to our benefit. In the past 25 sessions, as we write, we have seen the Dow move triple digits in 21 of those sessions. While that may offer opportunities it also may indicate that something is not quite right under the surface. How do we position ourselves at the current time when it comes to equities? Here is some advice from Benjamin Graham, Warren Buffett’s mentor.

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 of the 1969-70 type with equanimity. It is hard for us to see how strong confidence can be justified at the levels existing in early 1972. Thus, we would counsel against a greater than 50% apportionment to common stocks at this time. -Benjamin Graham The Intelligent Investor

 From Graham’s perspective he saw a massive run higher in the Dow Jones from 1942 -66 and, subsequently, saw markets struggle in 1969-70 period. The move lower from 1969-70 totaled a 35% loss in equities. That is the kind of loss Graham is talking about. Graham’s lack of confidence in 1972 was well founded as a massive bear market would take place from 1972-74.

We wholeheartedly agree with Graham as to strategy. We also think that Graham would agree with us on the market’s current position and the highly elevated valuations that we see today. We are not saying that a massive bear market is around the corner. What we are saying is that equities are at historical valuations. Is it not prudent to take less risk in equities than one took 6 years ago? The current markets may consolidate and then move higher still but we are not willing to bet the farm on that. We expect a long period of consolidation and a move higher or a shorter period of consolidation and a move lower. We must position accordingly.

Emotional Capital

We have spent a good deal of time lately talking to clients about emotional capital. When cycles reach a more mature stage it is prudent to sell some winners and build a cash (and emotional) cushion with which to buy future bargains. That way when market losses come you are keenly aware that you prepared for this moment and this money was set aside to buy assets at bargain prices. If you are holding too much in the way of assets when they begin to fall you will be tempted to start selling. It is then that you will be managing your money from an emotional point of view.

 lighthouse

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

As investors, our job is NOT making the case for why markets will go up. Making the case for why markets will rise is a pointless endeavor because we are already invested. If the markets rise, terrific. We all made money, and we are the better for it. However, that is not our job. Our job, is to analyze, understand, measure, and prepare for what will reduce the value of our invested capital. –Lance Roberts

 

 

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.