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 It’s a computer and we all know Moore’s Law and how our technology gets outdated quickly.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.

High and Rising

“Is Trump aggressive and thoughtful or aggressive and reckless?”

– Ray Dalio  Davos World Economic Forum 1/18/17

And we sit and we wait. How will Trump preside? The market and market players would have been more at ease with a Clinton presidency. She would have been easier to predict. Trump is different. He does not have years of governance or position papers in order for us to decipher his next move. Judging by his Inaugural Address, which will be forever known as the American Carnage speech, we can see that he intends to be aggressive and populist. The question remains is he going to be thoughtful in his aggressiveness or reckless? Is his aggressiveness just the first shot in a never ending negotiation? We get the feeling that everything Trump does is a negotiation and everything he says is a means to an end in that negotiation. Will it be a thoughtful negotiation or a reckless one? Businessmen like Trump tend to get their way and get it quickly. Let’s see how he feels after the first 100 days of getting bogged down in the swamp. What starts off thoughtful could become reckless.

If it feels as if we have been waiting two years for some resolution to the current market environment it’s because we have. With the exception of a one month rally that started on Election Night 2016 the stock market has gone nowhere since the ending of QE3 in late 2014. Central bank policy here in the US has been one of tightening and that has kept a clamp on equity pricing. It is with the possibility of an administration that would spend fiscally to stimulate the economy along with committing to tax reform and deregulation that the market has seen further fuel for the latest rise in equity prices.

If you haven’t read our Quarterly Letter the synopsis is that the combination of experimental central bank policy and the new administration’s stated goals raises the odds that we are going to have some sort of error in monetary and/or fiscal policy. Any policy error could resolve itself in one of two ways. If central banks drag their feet and raise rates too slowly then that policy error could insight animal spirits and drive equity valuations even higher, possibly to bubble like valuations. Raise rates too quickly and equity prices fall sharply. The current populist rhetoric has us thinking of the 1930’s. The 1930’s had tremendous rallies and stumbles in the stock market. Not to say that we will repeat the pattern of the 1930’s but things certainly rhyme with talk of income inequality, trade barriers and populist rhetoric.

Equity valuations are high and bond prices could be in bubble territory. We do not think equity prices are in bubble territory yet. We continue to lean away from bond like equities and more towards seeking value where we can find it. As for bonds, we believe the bottom to be in for yields in the 35 year bull market. Our duration is quite low and we look forward to rising bond yields as they will allow us to reinvest at higher yields.

Keep an eye on Washington and on Twitter. In the next 100 days we may find out if Trump is going to be thoughtful or reckless. The idea of the return to the 1930’s does not make us feel warm and fuzzy but we believe that the pendulum swings to extremes and back again. A populist uprising is the natural evolution of globalization. It should be expected that once populism’s peak has been reached the pendulum will swing back but for the moment Trump and populism are in full swing.

If you would like to read more of our thoughts and a deeper dive into what we see coming in 2017 follow the link below to our website and our First Quarterly Letter of 2017.

http://blackthornasset.com/investment-philosophy/outlook-qtrly-letter/

 

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.

 

Elevator or the Stairs??

Small caps have been our roadmap as we continue to assess the risk/reward conundrum that investing in a central bank dominated world presents. Small caps led us to see the shortcomings in the market before its brief fall in mid October which allowed us to use some dry powder and positively influence our returns this quarter. While the selloff was brief and somewhat violent the aftermath has been anything but. A long slow grind higher has all those who missed the selloff regretting their reticence. This bull market has been built on low volatility interspersed with infrequent violent selloffs. The market has a way of taking the stairs up and the elevator down. Our vigilance to any signs of volatility is of paramount importance and will continue to portend downside moves.

Our antenna is raised to any talk of increased bands of volatility in markets, of letting markets run. In the Federal Open Market Committee (FOMC) October minutes there is one paragraph that stands out for us and that is its mention of volatility. When markets began to rally in mid October its rally can traced to a Federal Reserve official commenting that it would be possible to delay the end of its Quantitative Easing (QE) program. It is evident in the committee minutes that it does not want markets to get used to officials jawboning markets when they become volatile. The emphasis is ours in the following statement but it does appear that the committee is willing to expand the bands of volatility. Stairs up and elevator down.

…members considered the advantages and disadvantages of adding language to the statement to acknowledge recent developments in financial markets. On the one hand, including a reference would show that the Committee was monitoring financial developments while also providing an opportunity to note that financial conditions remained highly supportive of growth. On the other hand, including a reference risked the possibility of suggesting greater concern on the part of the Committee than was actually the case, perhaps leading to the misimpression that monetary policy was likely to respond to increases in volatility. In the end, the Committee decided not to include such a reference. 

Minutes of the Federal Open Market Committee October 28-29, 2014

http://www.federalreserve.gov/monetarypolicy/fomcminutes20141029.htm

Bill Gross of Janus is out with his latest missive and in it he complains of Central Banks trying to cure this debt crisis with more debt and the consequences of such. He is one of several high profile investors calling for low future investing returns and the need for investors to have cash on hand.

Markets are reaching the point of low return and diminishing liquidity. Investors may want to begin to take some chips off the table: raise asset quality, reduce duration, and prepare for at least a halt of asset appreciation engineered upon a false central bank premise of artificial yields, QE and the trickling down of faux wealth to the working class. If the nursery rhyme theme is apropos to the future, as well as the past, investors should remember that while “Jack and Jill went up the hill,” that “Jack fell down, broke his crown, and Jill came tumbling after.

Bill Gross Janus 12/04/2014

https://www.janus.com/bill-gross-investment-outlook

One of our favorite investment letters to read is Jeremy Grantham as he takes a quantitative approach to value investing. His study of bubbles in markets has led him and his team to conclude that bubble territory is 2250 on the S&P 500. Here are his comments from his latest letter.

Nevertheless, despite my nervousness I am still a believer that the Fed will engineer a fully-fledged bubble (S&P 500 over 2250) before a very serious decline.

My personal fond hope and expectation is still for a market that runs deep into bubble territory (which starts, as mentioned earlier, at 2250 on the S&P 500 on our data) before crashing as it always does. Hopefully by then, but depending on what the rest of the world’s equities do, our holdings of global equities will be down to 20% or less. Usually the bubble excitement – which seems inevitably to be led by U.S. markets – starts about now, entering the sweet spot of the Presidential Cycle’s year three, but occasionally, as you have probably discovered the hard way already, history can be a snare and not a help.

http://www.gmo.com/websitecontent/GMO_QtlyLetter_3Q14_full.pdf

Investors have reason to be excited. From a seasonal perspective this period of time from November 2014 to March of 2015 would represent, historically, the best period of returns. Market players may have a hard time resisting a rise in stock prices as the stars are aligned for further gains in this cycle if history and seasonality is any guide. It could however lead to a buying panic as equity valuations become further stretched and investor’s party like its 1999.

For the last few years the time to take profits has been when volatility shows up. When volatility calms down it is time to ride markets slow grind higher. Keep both hands on the wheel. When volatility rises take cover. When the storm passes you can advance. Volatility is the key. Higher volatility equals lower stocks.

Watch the Russell 2000 for clues to equity prices. Lower oil. Is it a supply issue or a demand issue? We think it both. It could lead to more geopolitical issues.

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.