June 4, 2019

Danger signs in the stock market

Doug Kass in twitter writes his reasons on why the bull market could be in danger.

The conditions that led to a market being able to recoup most of its late 2018 losses are no longer in place:

* We are closer to an earnings recession than in 4Q2018.

* At year end the domestic economy was prepping for a +3% Real GDP in Q1 2019 - now Real GDP is expected to slide to below +1.5%.

* The Cass Freight Index is showing profound weakness - and other high frequency economic data is weakening. 

* Markets have already priced in multiple interest rate cuts.

* With rates so low now (10 year yield down nearly 100 bps), there are few tools left in the monetary shed. 

* The prospects for any meaningful fiscal stimulation is gone (e.g., an infrastructure build) as the animus between the parties has intensified and will continue to erode as we move to a November, 2020 election.

* As mentioned in my opening missive, global coordination and cooperation is at an all-time low.

* A relatively smooth and non disruptive BREXIT is no longer likely.

* The trade backdrop is a mess - with disputes with Mexico and China (in particular) probably going to continue for quite a while.

* The geopolitical backdrop has deteriorated - particularly with Iran and North Korea.

* Commodities are falling (especially of a Jun 1 crude-kind).

* China's economic growth is no longer stable - it's moving lower (see last night's manufacturing data).

* Technical's have just begun to erode.

June 3, 2019

US Bonds showing signs of buying panic

Doug Kass draws attention to the US bonds via twitter

Besides the apparent overvaluation of bonds based on the implied low US Real GDP growth rate that is imputed (in the equation above) there are other examples of a short term panic in the fixed income markets:

* Get your contrarian hat on as after the 10 year US note's yield has fallen by 100 basis points (to 2.08%), JPMorgan research, in their infinite wisdom, is now calling for a year end 10 year yield of 1.75%!

* The yield on the long bond declined by nearly seven percent last week - that's the largest decline since July, 2016 - when, by my calculation, A Generational Bottom in Yields occurred (ending a 3 1/2 decade bull market in bonds).

* Since 2011 there has been three other examples of such swift and extreme declines , -- all three instances have led to a rapid short term increase in yields and lower bond prices.

May 28, 2019

Trade War and Huawei ban

President Trump has signed an executive order that prohibits U.S. companies from buying telecom equipment from foreign companies at their discretion. And the U.S. Commerce Department has now added Chinese company Huawei and 70 affiliates to its "Entity List” - a move that bans the telecom giant from buying parts and components from U.S. companies without U.S. government approval. Doug Kass on twitter says this is a worrisome development.

The Huawei Situation Deteriorates and holds new risks that investors are not focusing on! The key pressure points are not well understood nor  discussed:

1.  The Yuan is near the end of the permissible band.  The Chinese probably do not want to devalue as it
will cause domestic inflation (and unrest) and worsen results with the U.S. on merchandise trade.  

2.  This may set at risk the HK/Dollar peg. This is the BIG one.

May 1, 2019

Gold buying

A 10 month high in the US Dollar has slightly dented the appeal for the yellow metal. Since gold is priced in the U.S. dollar, a rising U.S. currency acts as a headwind for the metal. But Doug Kass sees value in Gold. 

I reestablished a large position in gold (via GLD) and placed GLD on my Best Ideas List at $120.12.

Everything I see going on - in policy, the abundance of uncertainties  and in the trajectory of global economic growth -  make the case for having a gold position and/or hedge.

Here is my thesis:
* Central banks seem hell bent in continuing their monetary largesse as signs of a structural growth slowdown multiply.

* Whether it's the ease of current policy, or, in the extreme, a broadening acceptance of modern monetary theory (MMT) - the pendulum of monetary belief seems to have shifted to near perpetual ease.

* In the U.S. (from both sides of the political pew) and around the world, prudent financial discipline has been abandoned - government debt loads are breaking new records and will and can not be paid off given structural economic headwinds. 

* Debasing of currencies and disregard for sovereign deficits should be viewed as friendly to the gold markets.

* Real interest rates have fallen sharply - which gold historically is tied to. (The five year real rate has fallen from 1.16% in November to only 0.51% today).

via twitter