David Fuller and Eoin Treacy's Comment of the Day
Category - General

    "Fickle February"

    Thanks to a subscriber for this report by Jeffrey Saut for Raymond James. Here is a section:

    One of them, and arguably the smartest strategist on “The Street,” is my friend Tony Dwyer, who writes:

    Why bother worrying about a retest? Given our positive fundamental core thesis and 3100 target, many wonder why we bother calling for a retest of the “shock drop” ending the week of 02/09.  The answer is simple – when a retest happens, fear it is something more significant causes many to reduce risk, just at the very time history suggests increasing it.  In all prior occurrences of such a historic spike in the 10-week rate-of change in volatility as measured by the CBOE Volatility Index (VIX), there was an average bounce of 5.62% (ex-2008 instance) prior to the retesting of the low 30 trading days later.  With a gain of 4.89% from our signal highlighted in “Shock drops, pops and flops,” the market is following the script, which means the comfort of the rebound should soon fade, either from fear of Fed, disappointing data, or some combination of the two.

    Obviously, opinions vary on the “Street of Dreams,” but that’s what makes a market.  We happen to think a full retest of the “selling climax lows” is not going to happen, but then anything can happen in the equity markets.  So, what caused yesterday’s Dow Dump (-380 points).  Well, we think it was cognitive dissonance, which would be the ability to hold two disparate thoughts at the same time.  In the current case it is whether to believe the softening headline economic reports (durable goods, housing, etc.), or the details within those reports that show final sales up 3.3%, domestic final sales better by 4.3%, and private domestic final purchases improving by 4.6%, which suggest the economy is really strong.  We continue to think the economy is stronger than a “garlic milkshake!”  This morning the S&P 500 futures are off about 7-points as we write at 5:12 a.m. as the Street awaits Fed head Powell’s part 2 testimony to lawmakers.  Clearly, Wall Street is currently of the belief that Jay Powell is more hawkish than his predecessors.  Surely time will tell; but, until he demonstrates a more dovish disposition, the perception will be the new Fed Chair is a hawk.

    This section continues in the Subscriber's Area.

    Dogmas of the Quiet Past, Why Higher Rates are on the Horizon

    Thanks to a subscriber for this article by Pamela Rosenau which appeared in Forbes. Here is a section:

    For starters, history tells us that the dynamics of the supply and demand for money are relevant for determining an appropriate level for interest rates. The Federal Reserve is decreasing the supply of money by tapering their balance sheet, while the demand for money will increase with the latest bout of expansionary fiscal policy (i.e. tax reform). Professor Lars Oxelheim of the Financial Times, recently wrote how historical precedence has shown how this supply/demand shift can lead to significantly higher interest rates over a short period of time. Of course, this would impact the valuation of all asset classes as discount rates head higher. Market strategist Dave Rosenberg recently added that “we have a government policy that is aimed at pushing fiscal deficits higher and pulling trade deficits lower. Say this over and over again – these two goals can only co-exist with rising interest rates.”

    Also, who is going to stroll in on their white horse and be the new big US treasury bond buyer? We know that the Fed is pruning their bond portfolio. After all, newly installed Fed Chairman Powell showed his true colors six years ago when he warned of the “Greenspan put” and its implicit encouragement of risk taking. Considering his concerns back then, I cannot imagine him being overly dovish given the valuation excesses in our environment today. Furthermore, the Chinese could play monetary hardball as a response to any hostile U.S. trade actions and choose to mitigate their participation in our auctions, thus causing a sudden spike or pernicious reset in interest rates. Frankly, Xi Jinping has a license to do whatever he wants at this point.

    This section continues in the Subscriber's Area.

    Why Italian Elections Matter: A New Type of Populism Is Rising

    This article by Giovanni Legorano for the Wall Street Journal may be of interest to subscribers. Here is a section:

    The election is likely to prompt a question that could force 5 Star to define its future—and potentially that of Italy, too. Is it a governing force or simply a protest movement?

    On one side are members, including Luigi Di Maio, the party’s 31-year-old candidate for premier, who are pushing it to join an alliance with mainstream parties. According to polls, 5 Star would receive about 27% of votes—not enough to govern alone, but potentially enough to play a major part in a coalition government.

    Mr. Grillo has roundly rejected that scenario, saying that unless 5 Star wins an outright majority, it should remain an opposition party. Joining a coalition government is “like saying that a panda can eat raw meat,” he said in January. “We only eat bamboo.”

    If no single party or coalition emerges with a parliamentary majority, Italy’s president could ask parties to attempt to form a grand, cross-party coalition that could have a limited lifespan.

    This section continues in the Subscriber's Area.

    More Trouble for the Equity Markets Ahead

    Thanks to a subscriber for this article by Byron Wein for Blackstone which may be of interest to subscribers. Here is a section:

    Some skeptics believe all this good news about the prospects for the economy supports the bearish, not the bullish, case for the equity market. They argue that the economy was already doing well before the fiscal stimulus provided by the tax cut. With unemployment at 4.1% and headed to 3.5%, the economy did not need any stimulus. It was already at full employment and the additional federal spending would cause the economy to overheat, resulting in higher inflation to and rising bond yields. They argue that those who are bullish on the market should hope for slower growth. My view is that this is an earnings-driven market and the improving profit forecasts will offset rising inflation and interest rates.

    Some observers believe a 10% correction is enough, at least for a while. Valuations have come down to reasonable levels, the market is no longer excessively overbought and intermediate-term interest rates are showing signs of stabilizing. The Crowd Sentiment indicator has moved from close to 80 down to 61, putting it in “neutral” territory where we could see a short term rally. It would be nice if investors had to endure only two weeks of pain before the market headed higher again.

    I believe the positive sentiment that provided the background for the decline has only partially been corrected. Consumer confidence is high, reaching levels not seen since the late 1990s, but the savings rate has dropped to 3.4% as consumer net worth has increased. The last time the savings rate was this low was two years before the 2008-9 recession. We know that the Federal Reserve is moving toward a more restrictive monetary policy and the European Central Bank is talking about tapering. Less accommodative monetary policies are generally not good for the equity markets. Consumer debt has risen sharply since 2009 as confidence has increased, but federal debt may be the real problem. According to Doug Kass and Larry McDonald, that debt was $9 trillion in 2007 and carried a cost of servicing of 4.75% or about $425 billion a year. (In 2000 it was only $6 trillion with a cost of servicing of 6% or $360 billion, but with a tax cut and two wars to finance, debt soared in the new millennium.) Today it is $20.5 trillion with a debt service cost of 2.25% or $460 billion, slightly more than in 2007. Think of what interest rates going above 3% would do to the budget deficit.

    None of these issues make me bearish but they do make me think the correction is not over. I am bothered by the role that quantitative algorithmic trading and leveraged Exchange Traded Funds played in accentuating the rise in the market and its decline. These are basically trading tools, not investment strategies, and while it can be argued that traders contribute to market liquidity, I fear that these mechanical techniques have produced a certain level of instability in frenetic periods such as the one we just experienced.

    This section continues in the Subscriber's Area.

    Email of the day on how to invest in Africa

    Thank you very much for another nice long term video. I think your idea the potential of Africa is very interesting. Would you have any suggestions how to invest to benefit from the growth of Africa? Thanks in advance

    This section continues in the Subscriber's Area.

    Will Modi lose the next Lok Sabha election in 2019?

    Thanks to a subscriber for this article by Arvind Kala for which may be of interest to subscribers. Here is a section: 

    Earlier the poor Indian farmer could sell his cow for Rs 25000 when it stopped giving milk. No longer. Now cattle buyers don't step forward lest Hindu goons lynch them.

    So the farmer with an unproductive cow leaves it in some open area, and this cow becomes yet another addition to the tens of thousands of emaciated cows standing around in the countryside.

    Worse, they eat up the farmer's crop. Losing him the little he has.

    India has 120 million cows, according to the last agriculture census. Why would those cow-owners vote for a Modi who impoverishes them?

    When Nanded voted against the BJP and Modi this week, it was speaking for all of rural India. Village voters will pulverize Modi in 2019.

    About urban distress, facts speak. Mahesh Vyas is India's most respected statistician and founder of CMIE, our most credible source on the Indian economy.

    Citing figures, he wrote that demonetization triggered huge job losses. Seven million of them in one year between Jan 2016 and Jan 2017. He was talking of formal jobs in the private sector.

    Those seven milllost jobs means at least 28 million people pauperized, at four people per family, people who depended on those salaries to eat and live.

    Today a failing GST has paralyzed commerce all over India. Small traders and manufacturers just can't cope with the paperwork.

    And they can't afford the services of trained accountants.

    This section continues in the Subscriber's Area.

    Macro Morsels February 27th 2018

    Thanks to a subscriber for this report from D. Harding at Maybank dated the 17th, which may be of interest. Here is a section on commodity led inflation or vice versa: