Trump Troubles

A roller coaster runs up and down spins around and around while finishing where you started and it probably cost you money. – Arthur Cashin

We all rode the rollercoaster this week.  While there was plenty of noise and bluster the market fell less than one half of one percent this week. We feel that the volatility in the market was more about the massive positioning of trader’s being short volatility and not as much about Trump. Trump is just the excuse. Could this be a warning shot across the bow in the crowded volatility trade? Perhaps. Be careful. We are entering a slow period for the market seasonally. There just aren’t as many players around during the summer months and moves could become more pronounced. I, for one, would welcome back some volatility. It keeps investors onsides.

Financials are very important to the bullishness of the US stock market. The yield curve is flattening. That means that the bond market sees the economy slowing and the prospect of higher rates on the long end decreasing. The Fed will not be able to continue to raise rates if the economy is faltering. Financials are probably the most important sector of the stock market. Without financials it is hard to get the index to extend higher. The market is pricing in a June rate hike but chances are diminishing that the Fed will be able to raise rates a third time in 2017. Trump’s troubles make a fiscal bump less likely. If you have followed our blog you know that we made the case that a Trump bump from fiscal stimulus would give the Fed cover to raise rates. If that gets lost in the swamp then it makes the Fed’s job a lot more difficult. Our next point of interest is the Fed’s balance sheet. They are making noise that shrinking it is becoming a priority. That will be a huge factor in 2018.

West Texas crude was able to hold its recent lows and was able to close this week above the psychologically important $50 a barrel level. It could be just a bounce off of the OPEC meeting and Russian compliance or we could be seeing more growth worldwide. Oil has a top on it as if crude goes higher as more shale players will come online capping the price of oil but it is worth watching as an indicator of growth around the world.

Given all that happened this week the market is still stuck in consolidation mode. Emerging markets and Europe have been the place to be but Brazil took a hard shot this week. Keep an eye on Brazil. Impeachment is a strong word. Given the very small sample of US Presidents that have been on the impeachment trail stock markets have not reacted negatively in the longer term based on the impeachment process. Having said that, impeachment is also not likely given that Republicans control the House, that is until the midterm elections in 2018.  It is hard to argue against the bull thesis as the market continues to hold its recent range of 2330-2400 on the S&P 500. Until we break decidedly below 2330 we hold on to the bullish thesis.

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

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

 

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 May 20, 2017 at 8:24 am  Leave a Comment  
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Crackdown, Smackdown and Fever

Two areas of asset pricing that we always keep an eye on in an attempt to decipher the market’s next move are US Treasuries and the oil patch. Let’s take a look at the current oil market and the commodity sector. Falling oil prices indicate lessening demand and therefore a lagging economy. In a nasty selloff oil is now down 11% in the last 3 weeks. There are rumors of major oil focused hedge funds liquidating or taking all risk off of their books as the price of oil swiftly moves lower. All of this while copper takes a tumble too. A falling oil price (and copper for that matter) does not bode well for the economy, high yield stocks or the stock market. When we talk weak commodities our thoughts immediately turn to China. The recent selloff in the commodity sector is being linked to a tightening of monetary conditions in China. A crackdown by the Chinese government is leading to higher interest rates and a tightening of the money supply in an effort to deleverage the economy. That, in turn, leads to lower commodity prices as China is one of the world’s largest consumers of commodities. A slowdown in China needs to be on our radar.

We have also been seeing a drift lower in hard data on the US economy. This data has been dragging since the failure of Trump & Co. to repeal Obama Care the first time in March. It seems that the market is waiting on some good to come out of Washington DC. We should never count on anything to come out of Washington DC.

The market is stuck in consolidation mode. In spite of recent data on a slowing economy we still expect the market to break out of its recent range to the upside and in favor of the bulls. More often than not when a market consolidates a major move it breaks out of that pattern the same way that it came into it. It’s all about momentum and the animal spirits of the market. That would mean we break out to the upside. There are lots of negatives about like weak US data, a Chinese slowdown and massive insider selling by US Corporate executives but the market refuses to break down. Many astute investors are warning about valuations in the market and are taking down risk.  They could be forced to chase the market higher adding fuel to the fire of animal spirits.

There is currently a massive speculative fervor in the crypto currencies like Bit Coin and Ethereum. A speculative fever has broken out and it is suspected that a lot of that money is coming out of China as capital controls are implemented and from Japan where a tax on investing in crypto currencies is going to be waived soon. Please approach with caution! This market is moving fast.

This may be a bit too inside baseball but the lack of volatility is important to watch. One of the most popular trades on the street over the last few years has been to sell volatility. Massive selling of volatility compresses the price of volatility, the numbers of players executing this strategy increases with the trade’s success and it brings in more and more investors to the trade. The word is that 95% of the float in VXX (Volatility ETN) is being used to short volatility. Ladies and gentlemen 30% would be large, but 95%!! The boat is listing to port as too many investors are in on this trade. This will explode violently in their faces. We don’t know when but it will. It always does. The risk parity trade and the selling of volatility combined with the reliance on passive investing ETF’s with High Frequency Trading market makers create a structural weakness in the market and will at some point create an opportunity for those with cash when the time comes. Forewarned is forearmed.

If you are not currently receiving our blog by email you can sign up for free at https://terencereilly.wordpress.com/ .

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

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

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.

Volatility and Goldilocks

The Federal Open Market Committee (FOMC) Minutes from the April 29-30 2014 meeting were released this week. While there was not much in the way of surprises in the minutes there were two items that caught our eye. The first was that the committee noted that a couple of participants felt that conditions in the leveraged loan market had become stretched. We were early on into leveraged loans the past couple of years and that has served us well. Some clients will now see a reduction in that area in the coming months as we wish to back away from any repercussions associated with a bubble in leveraged and covenant lite loans.

The second item that caught our eye was the committee’s reference to declining credit spreads which imply an increase in investors’ appetite for risk. The committee also noted that the low level of expected volatility is also implying an increase in investors risk appetite.

While the Technicals of the broader market and the S&P 500 do not indicate any imminent failure small cap stocks continue to maintain their divergence from their large cap brethren. Market participants seem be plowing money into large caps and “safer” stocks while small caps are abandoned. What we may be seeing here is that institutional investors are forced to invest client’s money and are placing that money into safer assets like large cap stocks while a stealth bear market takes place underneath in small caps and biotech. When confusion reigns we turn our eyes to the bond market. The bond market is not playing along with a new high in equities (S&P 500 and Dow Jones) and is indicating a move lower in stocks. It gives us reason to pause when equities seem to be ignoring clues emanating from bond market.

Bill Dudley, the President of the Federal Reserve Board of NY, is a very influential member of the FOMC. When he speaks we listen intently. In a speech this week Dudley noted that he expects rates to stay lower long and well below the historical average of 4.25%. In private meetings Ben Bernanke former Chairman of the FOMC reportedly has stated much the same and that he does not expect rates to normalize in his lifetime. Strong words.

Last week we noted that the summer may be bumpy we think that any retreat by stocks will be backstopped at some point by the Federal Reserve. This week NY Fed President Dudley volunteered that the Fed will be more aggressive in raising rates if markets allow and less aggressive if they do not. The market is calling the tune and the Fed will apply the brakes or the gas depending on the market’s reaction to Fed policy. We think that the Fed will allow some volatility but not just too much. It’s Goldilocks monetary policy. Look for trading bands to widen over the coming months. The last three months have been some of the least volatile since 2006.

The Bank of England is considering whether to raise rates. What happens in England is a precursor to what happens here in the US. Keep an eye on the Bank of England. Treasuries and Gold continue to be our risk temperature gauge. Watch the yield on the 10 Year US Treasury at the 2.5% level and $1300 on gold.

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.