Ok, so we got the "phase 1" of the trade deal signed which lifts some of the "uncertainty" from the market. I've said it before, this trade war is a fugazi. It's just a distraction/narrative for market participants to pay attention to. Ultimately, it's not going to have a material impact on the economy no matter how it's settled. Major downturns are not caused by this type of silliness. They are caused when a material underpinning of the economy unravels and spills over into other sectors. The US was never overly dependent on China, it's the other way around. Yes, the trade drama can cause significant ST noise but it's all just noise. Another thing that can cause a significant downturn in the market (but not collapse) is when you get too much enthusiasm from the crowd. This creates an overcrowded long exposure making the market vulnerable to a rug pull. A good example was the 1987 and 2018 declines whereby sentiment got overheated and the market had a serious rout with the economy still relatively fine i.e. not in recession.
I would speculate right now that we are in a position where a lot of "pros" and retail as well, are caught flat footed because they've been positioned rather defensively all year. The pros in particular are probably begging for a big pullback, but in such a situation were so many people are caught leaning the wrong way, it doesn't seem likely there will be one. I'm also noticing ST trader types and/or hedgers relentlessly trying to top tick the market because anytime the market shows even the slightest hint of weakness the put/call ratio spikes to 1 or thereabouts. This is creating yet another layer of support as these traders get their fingers burned over and over. You can see it the intraday charts. You can actually see a finger-like pattern in the chart which is indicative of shorts getting squeezed and stopped out. Maybe we''ll see a swift change in attitude shortly but until we do, don't hold your breath for a big pullback just yet in my opinion.
Friday, December 13, 2019
Wednesday, December 11, 2019
The main purpose of the stock market is to make fools of as many men as possible
In these politically correct times I suppose I should change the title of this post to "the main purpose of the stock market is to make fools of as many people as possible" but fuck being politically correct, the original title stands. This phrase which is the motto of my blog was coined by Bernard Baruch, a US business man of the early 1900's. It's the most accurate description of the stock market that I can think of. The stock market is seldom obvious, seldom does what the majority expect it to do and the reason why is because the market is already aware of and therefore reflective of common expectations, views, fears, ect. So, if you want to "beat" the market you have to position yourself for how those expectations will be changing in the future.
Throughout this bull run that began in 2009 there has been no shortage of worries, no shortage of calls from "experts" warning us about immanent doom. Where are the "permabulls" who are calling for outlandish upside like Dow 30,000 in the late 90s? There are none to speak of. Yes, you can find bulls but they are relatively modest and few in number compared to the doom and gloomers.
I'm in the advisory business and all I've been hearing since last year is this "late cycle" narrative from the wholesalers I deal with. Everyone's on alert for the next downturn like I've never seen before and the "pros" have been positioning themselves accordingly. The inversion of the yield curve is what really got everyone going since it has historically signaled an immanent recession. I'm not going to divulge as to whether the yield curve signal was as strong or meaningful as in the previous instances due to global distortions. What is key to note is the frenzy of attention the inversion garnered as a harbinger of doom whereas in the past, the yield curve inversion was not as nearly paid attention to. It speaks to the underlying, deep rooted pessimism that still lingers from the 2008 crash. If we go by the motto of this blog, then we are probably not in the late cycle. It would suggest that the cycle still has at least 2 more years to go. When was the last time the investment "pros" as a whole correctly positioned themselves for "late cycle"? The answer is never. The 2008 collapse was a "surprise" just like every other major downturn. Another great example of a surprise was the collapse of oil prices in 2014-2015. How many "experts" were calling for "late cycle" oil prior to that collapse? The answer is 0. Literally 0.
My point here is that the time to really get worried about the long term is when there are no worries! We saw that type of no worries feeling in late 2017- early 2018 when "global synchronized growth" was the common mantra and retail was pouring money into the market. This ultimately led to a 20% correction which wiped out the optimism reverting it back to the pessimism that had been persisting for years prior to it. 2019 was characterized by fears of an immanent recession which never came to pass. Now we are starting to see green shoots of a rebound as Global PMIs have been turning up, so called "progress" on the trade war has happened and the Fed cutting rates appearing to be on hold for the foreseeable future. Yet this budding optimism, if you want to call it that, is still quite fragile because there's still quite the concern about what would go wrong on the trade war front, the repo market, politics, ect. The bottom line here is that there is still plenty of room for upside re-rating of expectations which would send the market notably higher in 2020. What the market does in the next few weeks is a tough call as it typically is.
Throughout this bull run that began in 2009 there has been no shortage of worries, no shortage of calls from "experts" warning us about immanent doom. Where are the "permabulls" who are calling for outlandish upside like Dow 30,000 in the late 90s? There are none to speak of. Yes, you can find bulls but they are relatively modest and few in number compared to the doom and gloomers.
I'm in the advisory business and all I've been hearing since last year is this "late cycle" narrative from the wholesalers I deal with. Everyone's on alert for the next downturn like I've never seen before and the "pros" have been positioning themselves accordingly. The inversion of the yield curve is what really got everyone going since it has historically signaled an immanent recession. I'm not going to divulge as to whether the yield curve signal was as strong or meaningful as in the previous instances due to global distortions. What is key to note is the frenzy of attention the inversion garnered as a harbinger of doom whereas in the past, the yield curve inversion was not as nearly paid attention to. It speaks to the underlying, deep rooted pessimism that still lingers from the 2008 crash. If we go by the motto of this blog, then we are probably not in the late cycle. It would suggest that the cycle still has at least 2 more years to go. When was the last time the investment "pros" as a whole correctly positioned themselves for "late cycle"? The answer is never. The 2008 collapse was a "surprise" just like every other major downturn. Another great example of a surprise was the collapse of oil prices in 2014-2015. How many "experts" were calling for "late cycle" oil prior to that collapse? The answer is 0. Literally 0.
My point here is that the time to really get worried about the long term is when there are no worries! We saw that type of no worries feeling in late 2017- early 2018 when "global synchronized growth" was the common mantra and retail was pouring money into the market. This ultimately led to a 20% correction which wiped out the optimism reverting it back to the pessimism that had been persisting for years prior to it. 2019 was characterized by fears of an immanent recession which never came to pass. Now we are starting to see green shoots of a rebound as Global PMIs have been turning up, so called "progress" on the trade war has happened and the Fed cutting rates appearing to be on hold for the foreseeable future. Yet this budding optimism, if you want to call it that, is still quite fragile because there's still quite the concern about what would go wrong on the trade war front, the repo market, politics, ect. The bottom line here is that there is still plenty of room for upside re-rating of expectations which would send the market notably higher in 2020. What the market does in the next few weeks is a tough call as it typically is.
Thursday, November 21, 2019
The Rodney Dangerfield market - it still gets no respect
I know it's been a while since my last post. I would have liked to have posted sooner but I've been busy. Since my last post the market dipped as I had expected but it was a relatively minor dip and it wasn't too long before the market had a major rally and hit fresh all time highs, the main reasons of which appear to be the notion that the Fed has hinted that it will be on hold for some time, trade "progress" is being made with China and jobs data suggesting that the US economy is not heading into a recession as many have been fearing all year long. So, does this mean that investors in general are finally embracing the market showing unbridled optimism? Hell no. All I see so far is pessimism unwinding and rather reluctantly so. We are still seeing no meaningful fund inflows. Aside from Trump, very few people in the media have been celebrating/embracing this upside breakout to new highs. And I have not seen one market bear, not fucking one of these miserable, self righteous clowns come out and say "you know what, I was wrong and I've been wrong for so long that it's so embarrassing". I'm talking about clowns like Gundlach, Schiff, zerohedge and the rest of them. I find it hysterical that these jokers are still given all the attention they get over the years despite being so comically wrong over and over and over....and it does not matter if the market were to make a major top today, these guys can't come out and say that they were right but early. No fucking way, not when you've been bearish from DAY 1 of this bull market. I wonder how my millions have been lost or foregone by their followers. Do yourself a favor and NEVER listen to any of these clowns again if you have been. This is not to say never be bearish, but just don't follow these jokers. They will poison your mind. It's funny how I see some sarcastic tweets that say things like "thanks for QE and easy money the market is at new highs". My response to that would be this....if you knew QE and easy money would bring the market to new highs WHY THE FUCK DID YOU NOT TAKE ADVANTAGE OF IT and then thank the Fed? Instead, you moan and complained about it! That's the same as spotting $100 on the street and not picking it up and then complaining the next day that you don't have $100! The excuses from the pessimists are pathetic. They are so wrapped up in their loser dogma and negativity.
The message I've been preaching here for years is that until we see evidence which strong suggests investors in general have FULLY embraced the bull market, the bull market will continue. Until we reach that point, there will be corrections, there will be scary moments but the benefit of the doubt has to go to the bulls I realize this can be very difficult to believe in at times, I myself have had serious doubts at times. It's easy to doubt yourself especially during down days and negative headlines but this has been the correct way to approach the market. And if you're watching the market day by day, tick by tick it makes it even harder to follow this approach. It's also very difficult to correctly time every ST wiggle in the market. Now having said that, you know I can't resist making a ST call on the market at times so allow me to indulge. The market would appear due for a least a bit of a consolidation here but I gotta tell you, everyone seems to making this call which to me means that any pullback won't be that deep at this time. Whenever you see ST trader types show complacency such as buying a lot of calls relative to puts, at the first hint of weakness you see them rapidly embrace the bear side again piling into puts. This is happening now as the market has been rolling over a bit here.
The only time we saw people in general show any love for the market for a sustained period of time was q4 of 2017 until Feb 2018 which was evident by heavy inflows to equity funds and anecdotal commentary from the financial media with their "global synchronized growth" mantra. At that time I was warning about this. By the time we reached the end of 2018, that optimism was wiped out completely and was replaced with pessimism. At best, we are at the point of neutrality now. We will see a return to optimism once it crystal clear that the global economy is on the rise, political uncertainty is low and all is well again, but at that point the market would probably be 15-20% higher. I said here before that you have to skate to where the puck is going to be not where it is now. If you wait for everything to be hunky dory you will miss out most of the gains or even worse get in near the point where things start to head for the worse.
Let's talk about early 2018 for a second. At the time I was debating with myself whether the optimism that was evident was a sign that the bull market peak was immanent. I concluded that the market would probably have a severe correction but that the bull market could still be in tact because we didn't really see optimism turn to euphoria. You could argue that the bubble in bitcoin and cannabis stocks were symptoms of euphoria but they ware isolated pockets of the market since they didn't garner large scale institutional ownership. When you look at what caused the last few recessions it was the result of a major sector in the economy going bust which created a crisis that spilled over to the broad economy, that can only happen if there is large scale exposure i.e. institutional ownership of the sector in crisis. We saw that happen with MBS in 2008 and the technology sector in 2000. Bitcoin and weed stocks were largely avoided by institutional investors/firms and so that's why I had hope that there would not be a major economic fallout when their bubbles burst. There is this notion that the next crisis could be from the corporate bond market of which there is a lot of low credit credit quality bonds that have been issued in recent years. Maybe that could be it, but I would suspect that until interest rates have a very notable rise, there's no need to worry about that for now.
The bottom line is that bull markets climb a wall of worry. So long as there are enough people worried out there it keeps expectations low and guards up which makes downturns in the market likely to be just temporary corrections. It's impossible to always know the timing of the corrections, how deep they will go and how long they last. The market is simply too random in the ST. However, you still need to pick your spots. It's not wise to chase a market that has gone up in a straight line because after all, there is always going to be uncertainty. This is why I often use the words "likely" or "probably" because you can't know for sure what the market is going to do but the longer the time frame, the less "noise" plays a factor and so you should be making most of your bets on longer term time frames with strong conviction. It's also OK to not have any positions when there's no decent setups/entry points or when your conviction level is not strong either way. The market will always be there when you wake up the next morning.
The message I've been preaching here for years is that until we see evidence which strong suggests investors in general have FULLY embraced the bull market, the bull market will continue. Until we reach that point, there will be corrections, there will be scary moments but the benefit of the doubt has to go to the bulls I realize this can be very difficult to believe in at times, I myself have had serious doubts at times. It's easy to doubt yourself especially during down days and negative headlines but this has been the correct way to approach the market. And if you're watching the market day by day, tick by tick it makes it even harder to follow this approach. It's also very difficult to correctly time every ST wiggle in the market. Now having said that, you know I can't resist making a ST call on the market at times so allow me to indulge. The market would appear due for a least a bit of a consolidation here but I gotta tell you, everyone seems to making this call which to me means that any pullback won't be that deep at this time. Whenever you see ST trader types show complacency such as buying a lot of calls relative to puts, at the first hint of weakness you see them rapidly embrace the bear side again piling into puts. This is happening now as the market has been rolling over a bit here.
The only time we saw people in general show any love for the market for a sustained period of time was q4 of 2017 until Feb 2018 which was evident by heavy inflows to equity funds and anecdotal commentary from the financial media with their "global synchronized growth" mantra. At that time I was warning about this. By the time we reached the end of 2018, that optimism was wiped out completely and was replaced with pessimism. At best, we are at the point of neutrality now. We will see a return to optimism once it crystal clear that the global economy is on the rise, political uncertainty is low and all is well again, but at that point the market would probably be 15-20% higher. I said here before that you have to skate to where the puck is going to be not where it is now. If you wait for everything to be hunky dory you will miss out most of the gains or even worse get in near the point where things start to head for the worse.
Let's talk about early 2018 for a second. At the time I was debating with myself whether the optimism that was evident was a sign that the bull market peak was immanent. I concluded that the market would probably have a severe correction but that the bull market could still be in tact because we didn't really see optimism turn to euphoria. You could argue that the bubble in bitcoin and cannabis stocks were symptoms of euphoria but they ware isolated pockets of the market since they didn't garner large scale institutional ownership. When you look at what caused the last few recessions it was the result of a major sector in the economy going bust which created a crisis that spilled over to the broad economy, that can only happen if there is large scale exposure i.e. institutional ownership of the sector in crisis. We saw that happen with MBS in 2008 and the technology sector in 2000. Bitcoin and weed stocks were largely avoided by institutional investors/firms and so that's why I had hope that there would not be a major economic fallout when their bubbles burst. There is this notion that the next crisis could be from the corporate bond market of which there is a lot of low credit credit quality bonds that have been issued in recent years. Maybe that could be it, but I would suspect that until interest rates have a very notable rise, there's no need to worry about that for now.
The bottom line is that bull markets climb a wall of worry. So long as there are enough people worried out there it keeps expectations low and guards up which makes downturns in the market likely to be just temporary corrections. It's impossible to always know the timing of the corrections, how deep they will go and how long they last. The market is simply too random in the ST. However, you still need to pick your spots. It's not wise to chase a market that has gone up in a straight line because after all, there is always going to be uncertainty. This is why I often use the words "likely" or "probably" because you can't know for sure what the market is going to do but the longer the time frame, the less "noise" plays a factor and so you should be making most of your bets on longer term time frames with strong conviction. It's also OK to not have any positions when there's no decent setups/entry points or when your conviction level is not strong either way. The market will always be there when you wake up the next morning.
Tuesday, September 17, 2019
Beware of bull trap
This move up we've seen out of the "trading range" doesn't feel right. Pull/call ratios have collapsed and bond yields have spiked quite a bit. I smell a trap...it feels too easy. I've been mentioning lately how I felt that bonds yields were close to a medium or long term bottom and so it's not too surprising to me to see this action but as I've said before, if you look at when notable corrections began, it coincided after a period of rising bond yields. Now mind you, one can make the case that since bond yields had declined so much, there could be plenty more unwind (rise) in bond yields before the market runs into trouble. That could very well be the case, however, it's all about risk reward. The risk/reward to go long when the market is overbought, put/call ratios have collapsed and bond yields have spike is simply not good. That's not necessarily an invitation to go short either but for a small ST downside play it's looking tempting. From a longer term perspective, there is still plenty of potential bullish fuel as fund flows continue to show cautiousness. There was a modest inflow last week which suggests maybe some folks are starting to poke their heads out from their hole..maybe.just in time for Mr. Market to whack it back down one more time before the real upside breakout occurs. I might end up being too cute here getting a little too fixated on the ST, but again, it's about risk/reward and I just don't like it here on the long side at this moment.
Tuesday, August 27, 2019
Deep thoughts
It's always a healthy endeavor to challenge your own views about the market and anything else that you have a belief about. After all, nobody can know with certainty what the future holds for the market and so to have an unwavering view is the wrong approach. It's quite often the case market pundits/gurus take a particular view on the market and dig in their heels no matter what, even when the market had made a complete and utter fool of them. Pride, ego, dogma all get in the way. To change their view and admit being wrong would be an act of weakness according to them. I've said this before, fuck pride and check your ego at the door. The market is not an exact science yet I've seen people act as if they cracked the code. Sometimes you will find a guru get a hot hand and for a period of times he/she looks like a genius only for them to go from genius to goat. This is why you should never take anyone's view's as gospel, no matter how right they have been in the past and why you have to own your own view. I do my best to synthesize my views by gathering objective info that has had predictive power, reading commentaries from people who have a good track record and by using experience/intuition. I've done this long enough to know that there are times when adjustments need to be made to my outlook or an outright 180 degree pivot i.e. an admission of being wrong.
I've been stating here for a while that I believe a bullish resolution will ultimately result here mainly due to evidence that indicates that investors in general have been primarily bearish/skeptical in the face of a prolonged market rally - this has been the primary thesis of my general bullishness during the entire bull market since 2009. The few times when complacency started creeping in, the market would eventually have a notable correction turning complacency back to fear/skepticism thus allowing the bull market to resume. But what if we are at a point where the economic fundamentals take such a turn for the worse that it would override the bullish implications of bearish sentiment? This is what happened in 2008. Bearish sentiment didn't matter because the fundamentals were so bad, mind you, 2008 was a 1 in 100 year type storm. In a bear market when economic fundamentals are deteriorating, bearish sentiment is only natural and therefore loses contrarian implications until it reaches great extremes. The same can be said about bullish sentiment in a bull market.
Right now the economic fundamentals in the US are still generally good. There has been a lot of hysteria about the yield curve predicting an immanent recession but there has been no material signs of weakness in the hard data that would suggest one. Earnings are still growing and initial claims for unemployment insurance are trending flat/down for the past 12 months. If you look at previous recessions you will notice that claims had been creeping higher for the preceding 12 months or so. So, as scary as the markets and headlines can be, it's critical to be as objective as possible. Can the yield curve be suggesting that we will soon see notable deterioration in the economy? It sure can, but more supporting evidence needs to be seen and as I stated in prior posts, the fact that everyone is making such a big deal about the yield curve suggests to me that it won't be as effective in the recession call this time, much like how I remember in 2001 everyone jumping for joy when the Fed cut rates by 50 bps because history showed that the market would be higher in 12 months. But I would be lying if I said that I have no concerns about the yield curve. I do. It has to be respected but I would have to think that the thirst for positive yield around the globe must be distorting the message of the bond market to some notable degree however.
What really bothers me in the antics of Trump. When he bragged about the stock market making new record highs, that was quite cringe worthy. I actually agree with his stance on China and his criticism of the Fed but the manner in which he expresses his opinions are quite classless to say the least. He seems to be going off the rails with his constant bashing of people and media on twitter which makes me think that one day he could somehow cause a black swan (orange swan?) type of event.This is something that lots of people feared from the 1st day he took office. However, let's always remember this...despite Trump's hard line stance on China and the Fed you would have to assume he doesn't want to sabotage himself with elections taking place next year. I get the sense that all of these brutal twitter tactics could be just a front/posturing. He will end up softening his stance and get a trade deal done sooner rather than later I would suspect. Trump watches the stock market and uses it as leverage. He tends to announce higher tariffs when the stock market is near a high and then tries to sooth the market after it has come down. Ultimately, he wants a higher stock market and strong economy come election time next year. Trump could very will turn out to be an evil genius or utter buffoon which I'm sure lots of people already think the latter applies.
September has the potential to be turning point in the market with the FOMC meeting mid month and scheduled US China trade talks. Let's keep an eye on expectations for these. If people are too hopeful, we would probably see another downleg to this correction if there's anything short of a decisive rate cut and dovish stance by the Fed and/or meaningful progress on trade talks.
I've been stating here for a while that I believe a bullish resolution will ultimately result here mainly due to evidence that indicates that investors in general have been primarily bearish/skeptical in the face of a prolonged market rally - this has been the primary thesis of my general bullishness during the entire bull market since 2009. The few times when complacency started creeping in, the market would eventually have a notable correction turning complacency back to fear/skepticism thus allowing the bull market to resume. But what if we are at a point where the economic fundamentals take such a turn for the worse that it would override the bullish implications of bearish sentiment? This is what happened in 2008. Bearish sentiment didn't matter because the fundamentals were so bad, mind you, 2008 was a 1 in 100 year type storm. In a bear market when economic fundamentals are deteriorating, bearish sentiment is only natural and therefore loses contrarian implications until it reaches great extremes. The same can be said about bullish sentiment in a bull market.
Right now the economic fundamentals in the US are still generally good. There has been a lot of hysteria about the yield curve predicting an immanent recession but there has been no material signs of weakness in the hard data that would suggest one. Earnings are still growing and initial claims for unemployment insurance are trending flat/down for the past 12 months. If you look at previous recessions you will notice that claims had been creeping higher for the preceding 12 months or so. So, as scary as the markets and headlines can be, it's critical to be as objective as possible. Can the yield curve be suggesting that we will soon see notable deterioration in the economy? It sure can, but more supporting evidence needs to be seen and as I stated in prior posts, the fact that everyone is making such a big deal about the yield curve suggests to me that it won't be as effective in the recession call this time, much like how I remember in 2001 everyone jumping for joy when the Fed cut rates by 50 bps because history showed that the market would be higher in 12 months. But I would be lying if I said that I have no concerns about the yield curve. I do. It has to be respected but I would have to think that the thirst for positive yield around the globe must be distorting the message of the bond market to some notable degree however.
What really bothers me in the antics of Trump. When he bragged about the stock market making new record highs, that was quite cringe worthy. I actually agree with his stance on China and his criticism of the Fed but the manner in which he expresses his opinions are quite classless to say the least. He seems to be going off the rails with his constant bashing of people and media on twitter which makes me think that one day he could somehow cause a black swan (orange swan?) type of event.This is something that lots of people feared from the 1st day he took office. However, let's always remember this...despite Trump's hard line stance on China and the Fed you would have to assume he doesn't want to sabotage himself with elections taking place next year. I get the sense that all of these brutal twitter tactics could be just a front/posturing. He will end up softening his stance and get a trade deal done sooner rather than later I would suspect. Trump watches the stock market and uses it as leverage. He tends to announce higher tariffs when the stock market is near a high and then tries to sooth the market after it has come down. Ultimately, he wants a higher stock market and strong economy come election time next year. Trump could very will turn out to be an evil genius or utter buffoon which I'm sure lots of people already think the latter applies.
September has the potential to be turning point in the market with the FOMC meeting mid month and scheduled US China trade talks. Let's keep an eye on expectations for these. If people are too hopeful, we would probably see another downleg to this correction if there's anything short of a decisive rate cut and dovish stance by the Fed and/or meaningful progress on trade talks.
Monday, August 19, 2019
The most telegraphed recession? I wouldn't bet on it!
Recently the 2 and 10 year US government treasury yield curve spread became inverted creating all kinds of hysteria and fears about a recession, compounding the negative sentiment created by the trade war fears. Here are some headlines that appeared last Wednesday in the Globe and Mail.
"Inverted yield curve rattles investors wary of dying stock bull market"
"US Treasury bond curve inverts for first time since 2007 in recession warning"
"Countdown to recession: What an inverted yield curve means"
"Buying this dip is a losing proposition at this stage of the market cycle"
These headlines tell you the wall of worry is very much alive and well. If a US recession is immanent it would be the most telegraphed recession of all time! We know that Mr. Market doesn't make things this obvious. As per the motto of this blog which has held true over and over again, Mr. Market makes fools of the majority. The reason why is because the market is all knowing of whatever the consensus expectation is and hence it gets priced in accordingly. All it takes is a little bit of news that goes contrary to the consensus and it will send the market sharply in the opposite direction. Furthermore, whenever there is a such a widely held concern/fear, you can bet that government authorities are well aware of it and will get motivated to take action to counter it in this post 2008 world. We are now hearing talks that European authorities are mulling over increased spending plans which is causing futures to surge as I type this. There is also hopes that Powell will hint at accelerated rate cuts in the Jackson hole meeting this week.
Could these hopes of Stimulus and Jackson hole be premature? Yes, but it just goes to show you that all it takes is a little bit of positive news in this environment of entrenched negative sentiment to trigger a strong upside move in the market.
A good analogy to describe the market would be this. If you know you're going to get punched in the head, you will put your guard up to protect yourself. You would still feel the punch but the force of it will be blunted and you won't get knocked out - that is the equivalent of what's been happening to the market recently with the trade ware and interest rate hysteria. These concerns have been well known and well feared all year which is why the market has only corrected and not cratered every time there is a flare up of these fears. Investors/traders have had their guard up the entire year for the most part. The punches that knock you out are the ones you don't see coming.
Ultimately, I expect a bullish resolution to this but as I've said many times, the ST is always difficult to navigate because you never know what the headlines are going to be when you wake up in the morning or if fickle traders will flip flop from being too negative to too positive. Chasing the market to either the upside or downside has been a disaster for traders during this corrective phase.
Let's talk about bonds again....as I type this, the consensus view is that low US bond yields are not only justified but a bargain because rates are negative in Europe and Japan. This view is coming AFTER when bonds have had one the biggest rallies in years and are extremely overbought on multiple time frames! It reminds me of the global synchronized growth consensus of stocks in early 2018 at a time AFTER the market was extremely overbought on multiple time frames....we all know how that played out. The question I have for the bond bulls is this....where the fuck were you a year ago when bond prices were much lower? Oh wait...you were telling everyone to avoid bonds like the plague because the fed was raising rates! You were telling people that bond prices were overvalued and that the 10 year yield was heading to 4-5%. You were telling people who owned balanced portfolios that they need to look for an alternatives for the traditional fixed income part of their portfolio.
Right now expectations for bonds are very high at a time in which they are very overbought, not to mention having received a ton of inflows, again, just like with stocks coming into 2018. This makes bonds ripe for a classic rug pull from Mr. Market. At the very least, it warrants one to not make any new purchases of bonds. In my view bonds are in a position that is vulnerable to a strong reversal of its primary trend the moment there are signs of economic and inflation upturns. I would expect that a year from now we will see bond prices notably lower and hence yields notably higher than they are now.
"Inverted yield curve rattles investors wary of dying stock bull market"
"US Treasury bond curve inverts for first time since 2007 in recession warning"
"Countdown to recession: What an inverted yield curve means"
"Buying this dip is a losing proposition at this stage of the market cycle"
These headlines tell you the wall of worry is very much alive and well. If a US recession is immanent it would be the most telegraphed recession of all time! We know that Mr. Market doesn't make things this obvious. As per the motto of this blog which has held true over and over again, Mr. Market makes fools of the majority. The reason why is because the market is all knowing of whatever the consensus expectation is and hence it gets priced in accordingly. All it takes is a little bit of news that goes contrary to the consensus and it will send the market sharply in the opposite direction. Furthermore, whenever there is a such a widely held concern/fear, you can bet that government authorities are well aware of it and will get motivated to take action to counter it in this post 2008 world. We are now hearing talks that European authorities are mulling over increased spending plans which is causing futures to surge as I type this. There is also hopes that Powell will hint at accelerated rate cuts in the Jackson hole meeting this week.
Could these hopes of Stimulus and Jackson hole be premature? Yes, but it just goes to show you that all it takes is a little bit of positive news in this environment of entrenched negative sentiment to trigger a strong upside move in the market.
A good analogy to describe the market would be this. If you know you're going to get punched in the head, you will put your guard up to protect yourself. You would still feel the punch but the force of it will be blunted and you won't get knocked out - that is the equivalent of what's been happening to the market recently with the trade ware and interest rate hysteria. These concerns have been well known and well feared all year which is why the market has only corrected and not cratered every time there is a flare up of these fears. Investors/traders have had their guard up the entire year for the most part. The punches that knock you out are the ones you don't see coming.
Ultimately, I expect a bullish resolution to this but as I've said many times, the ST is always difficult to navigate because you never know what the headlines are going to be when you wake up in the morning or if fickle traders will flip flop from being too negative to too positive. Chasing the market to either the upside or downside has been a disaster for traders during this corrective phase.
Let's talk about bonds again....as I type this, the consensus view is that low US bond yields are not only justified but a bargain because rates are negative in Europe and Japan. This view is coming AFTER when bonds have had one the biggest rallies in years and are extremely overbought on multiple time frames! It reminds me of the global synchronized growth consensus of stocks in early 2018 at a time AFTER the market was extremely overbought on multiple time frames....we all know how that played out. The question I have for the bond bulls is this....where the fuck were you a year ago when bond prices were much lower? Oh wait...you were telling everyone to avoid bonds like the plague because the fed was raising rates! You were telling people that bond prices were overvalued and that the 10 year yield was heading to 4-5%. You were telling people who owned balanced portfolios that they need to look for an alternatives for the traditional fixed income part of their portfolio.
Right now expectations for bonds are very high at a time in which they are very overbought, not to mention having received a ton of inflows, again, just like with stocks coming into 2018. This makes bonds ripe for a classic rug pull from Mr. Market. At the very least, it warrants one to not make any new purchases of bonds. In my view bonds are in a position that is vulnerable to a strong reversal of its primary trend the moment there are signs of economic and inflation upturns. I would expect that a year from now we will see bond prices notably lower and hence yields notably higher than they are now.
Tuesday, August 6, 2019
Is the trade war a fugazi?
Since my last post markets climbed to hit new all time highs before suffering a sharp but relatively shallow correction. When the market was at its all time high there was little celebration with the exception of Trump on twitter. Equity fund flows continued to be generally negative/flat. There was a bit of complacency in the put/call ratios and some measures of sentiment like Investor's Intelligence and AAII sentiment did perk up a bit but no signs of the type of high complacency we saw in early 2018 which ultimately led to a 20% drop in the stock market.
Let's look at what triggered this correction. It was once again Trump induced via a slapping of additional tariffs on China. It's arguable as to the exact impact of the "trade war" but from what I can see it's going to end up being a fugazi, i.e. a red herring, i.e. it's not going to matter much when all is said and done. Ask yourself what has been the main drivers of the US economy? Trade with China would have to rank low on the list. This bull market has not been driven by US consumers buying cheap goods from China nor will it ever be.
Look back to what caused US recessions in the past - they were home grown issues that were at the heart of the US economy. They were credit crunches mainly due to housing downturns with an notable exception in 2000 which was due to a tech boom gone bust. In 2015/2016 when the energy sector had a major downturn, that was a good example of something that could have caused a recession since it was a notable sector in the US economy, but it didn't because it turned out not to be a large enough sector to infect the broader economy plus lower energy prices was a boon for consumers and non-energy businesses. It seems highly unlikely to me that any fallout from Chinese trade wars would be large enough to derail the US economy because it simply is not large enough to matter. What it does do is create angst, uncertainty and hesitancy which results in these types of corrections. This trade war may delay capital spending to some degree but I doubt it will be material enough to matter.
Throughout these past 10 years we have seen all sorts of worries/problems that made everyone fret. For instance in 2010 it was PIGS, in 2011 it was Moody's downgrade of US government debt, in 2013 it was the taper tantrum, in 2015/2016 it was energy. Ultimately, none of these things mattered much because they were not material enough to derail growth in the US economy.
Remember all the worries last year about the $4 trillion corporate refinancing tsunami that was to set to hit starting 2019? Well, thanks to plummeting bond yields, corporations and consumers are be able to refinance at quite favorable terms...and they can thank the pessimists for that! Higher interest rates were a headwind in 2018 and they are now a tailwind in 2019.
So far this recent drop in the market appears to be wiping out the green shoots of complacency that I mentioned previously. Put/call ratios are soaring and the VIX has notably spiked. Let's see how AAII sentiment turns out this week. History suggest AAII bulls will be running for cover. It's always difficult to pinpoint the ST direction of the market but so far this has the look and feel of a correction, not something nastier.
A few comments about bonds. They are currently at the most overbought level since July 2017 if you look at how far below the 10 year yield is from its 200 DMA (33% below!). At the very least this suggests bond yields should be close to a medium term bottom and maybe even a long term bottom. Sentiment and fund flows for bonds also confirm this. A year ago everyone hated bonds and there were no "experts" recommending investors buy them as the expectation was for higher interest rates. Now everyone seems to think that US bonds are a bargain even with the 10 year at sub 2% because of the $14 trillion in negative yielding bonds out there. Always remember the motto of this blog...I will be looking to buy puts on TLT soon.
Let's look at what triggered this correction. It was once again Trump induced via a slapping of additional tariffs on China. It's arguable as to the exact impact of the "trade war" but from what I can see it's going to end up being a fugazi, i.e. a red herring, i.e. it's not going to matter much when all is said and done. Ask yourself what has been the main drivers of the US economy? Trade with China would have to rank low on the list. This bull market has not been driven by US consumers buying cheap goods from China nor will it ever be.
Look back to what caused US recessions in the past - they were home grown issues that were at the heart of the US economy. They were credit crunches mainly due to housing downturns with an notable exception in 2000 which was due to a tech boom gone bust. In 2015/2016 when the energy sector had a major downturn, that was a good example of something that could have caused a recession since it was a notable sector in the US economy, but it didn't because it turned out not to be a large enough sector to infect the broader economy plus lower energy prices was a boon for consumers and non-energy businesses. It seems highly unlikely to me that any fallout from Chinese trade wars would be large enough to derail the US economy because it simply is not large enough to matter. What it does do is create angst, uncertainty and hesitancy which results in these types of corrections. This trade war may delay capital spending to some degree but I doubt it will be material enough to matter.
Throughout these past 10 years we have seen all sorts of worries/problems that made everyone fret. For instance in 2010 it was PIGS, in 2011 it was Moody's downgrade of US government debt, in 2013 it was the taper tantrum, in 2015/2016 it was energy. Ultimately, none of these things mattered much because they were not material enough to derail growth in the US economy.
Remember all the worries last year about the $4 trillion corporate refinancing tsunami that was to set to hit starting 2019? Well, thanks to plummeting bond yields, corporations and consumers are be able to refinance at quite favorable terms...and they can thank the pessimists for that! Higher interest rates were a headwind in 2018 and they are now a tailwind in 2019.
So far this recent drop in the market appears to be wiping out the green shoots of complacency that I mentioned previously. Put/call ratios are soaring and the VIX has notably spiked. Let's see how AAII sentiment turns out this week. History suggest AAII bulls will be running for cover. It's always difficult to pinpoint the ST direction of the market but so far this has the look and feel of a correction, not something nastier.
A few comments about bonds. They are currently at the most overbought level since July 2017 if you look at how far below the 10 year yield is from its 200 DMA (33% below!). At the very least this suggests bond yields should be close to a medium term bottom and maybe even a long term bottom. Sentiment and fund flows for bonds also confirm this. A year ago everyone hated bonds and there were no "experts" recommending investors buy them as the expectation was for higher interest rates. Now everyone seems to think that US bonds are a bargain even with the 10 year at sub 2% because of the $14 trillion in negative yielding bonds out there. Always remember the motto of this blog...I will be looking to buy puts on TLT soon.
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