Our letter this week is going to take more of an informational tidbit tone. We feel the markets as of late have been driven by late summer vacations, schools starting up and unfortunately that menacing North Korea. Also, let’s not forget the alt left/right chaos, but that’s for another day. We feel there are some good bits of information each week and we will do our best in bringing them to you. In this 24/7/365 data deluge, there is a lot of junk and effectively we want to be your data filter if you will.
First up Charles Hugh-Smith (oftwominds blog) posted a great chart:
When everyone talks about the stock market parabolic bubble or the Bitcoin bubble, please, nothing transcends a bubble more than this depiction of income inequality right here in this chart. “Grab Your Torch and Pitchforks!” (Shrek 2001)
Ok to the data this week, August payrolls missed by 24k adding only 156k jobs. The prior two months were also revised sharply lower by 41k combined. Average hourly earnings also posted a 2.2% yoy, which was the lowest rate of increase since January. So, all in all, not the kind of numbers the FED will be comfortable with raising rates. Thus, the bond market took it in stride as an indication to steepen the curve and rally in price (fall in yields) continuing our cyclical pattern of higher rates in the first half of the year, to be followed by lower rates into the end of the year. We are quite sure your empirical data types will scrutinize our observation, but we know the truth, every decade starts with a higher 10yr rate then it ends and this decade will of course be no different. As for the bond futures, we suspected the break of the December contract above 155-00 would open the door for a test to 159, this trend is still in progress. This also means the 10yr yields continue to probe below 2.21% on their way to 2%.
On the equity front the SP500 closed the week with a new yearly high close of 2474.25. Obviously, the payroll data took on the old mantra that bad news is good news, anything to keep the rate hiking FED at bay, right? Adding further to the EPS compression this week was the blockbuster take over by United Technologies of Rockwell. By removing the Rockwell shares, consolidation continues to reduce the available for purchase supply of shares, which increase the prices vis a vis. The United Technologies Rockwell deal was valued at $23B. UT will pay $140 a share in cash and stock ($93.33 in cash and $46.67 in UT stock) The deal comes at a 30% premium over the ending July 2017 share price. This is the second largest Aerospace deal, which is second to UT’s 2012 acquisition of Goodrich, a $16.5B deal. (source WSJ)
After 10 straight weeks and some $30B pulled from US equity funds, the first week of September saw an inflow of some $300M. (BofA) Prior to that the 10-week losing streak was the longest in some 13 years! We can’t help but to think at least a few investors are beginning to feel just a bit fortunate and have the keen sense to take profit. As speculators, investors and traders all know, “Nobody ever went broke by taking a few chips off the table.” Now is this a sign that the bull market will continue? Perhaps, but further data in the coming weeks will see if this was just an anomaly, given the paltry $300M number or if further selling ensues. We all know in index land, especially the SP500 that all new pushes come once the “buck” is achieved, that is a trade above let’s say 2500 is now required for the next 100 handle up move. So basically, the way we see it, either the market bull gets near and above 2500 (SP500) or it stagnates and moves lower.
The equity euphoria from Friday was short lived as per the usual odd timing of North Korea’s missile launches, this time over the weekend, sent shares tumbling on the Sunday night holiday shortened session. North Korea’s latest threats now include the possibility of an EMP strike. The goal of an EMP strike or electromagnetic pulse would be to knock out a countries entire electrical grid. One can only imagine the nightmare of not having electrical power for a few days, let alone weeks at a time, can you imagine the chaos? One thing that strikes us odd and something we have touched on in the past is trying to figure out what NK stands to gain from all of this. We can’t figure out exactly the positive outcomes from such provocation but if anyone has insight, please let us know.
In other pertinent economic news John Cochrane wrote an excellent piece in the WSJ opinion section on VAT or value added tax which can be found Here (Subscription required) One point he made and which makes perfect sense was this, he said “Well, if the federal government is going to spend 20% of GDP, the VAT will sooner or later have to be about 20%.” See it is this type of thinking that we need to cultivate. In DC it seems doing nothing is their base case policy and keeping status quo is their goal. How much will GDP grow if we move to a VAT instead of an income tax? Everything would be consumption based. Yes, the argument could be people would tend to save as oppose to spend so then what? Yes, we are fully aware of the paradox of thrift, yet savings should be cultivated, thrift should be cultivated, prudence should be cultivated, not criticized. One thing is certain, the tax code is far too complicated and beyond its use, we keeping thinking Occam’s Razor, why complicate things?
Another tidbit out this week was China’s decision to crack down on ICOs or Initial Coin Offerings. This shouldn’t be much of a surprise to our readers as the SEC crackdown on these things months ago. All the rage across the social media sites was how this is another blow to Bitcoin and blockchain and the whole crypto currency landscape. Bitcoin and Ethereum lost 12% and 23% respectively on the news, but have recovered half of that as of this letter. We love the haters on social media, but we just chalk them up into the “uninformed” bin and move on. Despite the media’s continued assault on this bubble, we of course are here to maintain sense and balance. The way we see it is, a crackdown on ICOs are blockchain and Bitcoin positive not negative. By continuing further government intervention into every new player that seeks entry into the crypto space, lends more legitimacy to the entire market place. As we have stated in the past, its par for the course for any invention to have an adjustment period and blockchain and Bitcoin, will be no different.
This week’s trading focus will be upon the ECB and their central bank meeting this Thursday. The ECB will have to figure out a way to continue its bond monetization program considering the shrinking available supply. It will have to figure out how a stronger Euro fits into their mix. We talked in the past of Plaza Accord 2.0 and a lot of seemingly unaware US Dollar dip buyers but we think the fate of the US dollar is sealed a bit and the strength of both the Euro and the Yen as well as Gold is very telling. Adding to the negative dollar theme is the fact that China is ready to launch a new crude oil futures contract denominate in Yuan and convertible to gold. If they are successful in creating this Asian oil benchmark, then the petrodollar is truly at risk. Unfortunately, with this comes certain geopolitical uncertainty, which in our minds are going to shape the power structures for years to come.
Finally, we leave you with the weekly settles below, the Nasdaq punching a nice 23% gain, Gold over 14% and of course Bitcoin up over 410% this year alone. Anyway, we hope you closed out this summer’s Labor Day holiday enjoying some leisure time, maybe a BBQ with family and friends, or perhaps a late-night lake camp fire. We always emphasize taking a break from the markets and the everyday grind. The most important things in life are found outside of work and we must enjoy the fruits of our labor from time to time. We love when we can park our cooler on our front lawn and draw the neighborhood outside and watch the local kids all running wild. It’s amazing the power of physically socializing and interacting and not just hiding in the virtual world. The stories that are told, the personal effects we tend to feel. We consider ourselves fortunate that we live in a neighborhood that still exhibits facets of times gone past. We are fortunate that we speak with our neighbors consider them friends and can share experiences without expectations. We often find ourselves longing for tranquility and inner peace and all too often we struggle to find it. It is comforting to know that there are still a few areas where humanity still exists and humans can still, well act like humans. So, with the last Bell’s Oberon in hand, with the boat pulled from the lake and the fishing poles stored for another year, thank you all for enjoying the journey with us, CHEERS!
Finally, we will decidedly end our notes with our reaffirmation of the growing need for alternative strategies. We would like to think that our alternative view on markets is consistent with our preference for alternative risk and alpha driven strategies. Alternatives offer the investor a unique opportunity at non correlated returns and overall risk diversification. We believe combining traditional strategies with an alternative solution gives an investor a well-rounded approach to managing their long term portfolio. With the growing concentration of risk involved in passive index funds, with newly created artificial intelligence led investing and overall market illiquidity in times of market stress, alternatives can offset some of these risks.
It is our goal to keep you abreast of all the growing market risks as well as keep you aligned with potential alternative strategies to combat such risks. We hope you stay the course with us, ask more questions and become accustomed to looking at the markets from the same scope we do. Feel free to point out any inconsistencies, any questions that relate to the topics we talk about or even suggest certain markets that you may want more color upon.
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