At the Contrary Forum, did you say you expect a "ranging" bull market or a "raging" bull market the next 2-3 years? There is a big difference!

Eoin Treacy's view

Thank you for a topical question and yes there is a big difference. It was a pleasure to see so many familiar faces at the 53rd annual Contrary Opinion Forum this year. It was also enlightening to learn that the concern most people exhibited was whether there is going to be a recession next year. My first slide laid out in no uncertain terms that I do not believe there will be a recession in the USA next year. I had a feeling many people were bearish but was surprised at how bearish. 

In short I believe we are in for a ranging environment but still in a secular bull market overall. 

Here is a link to my presentation and here some of the main points:

•    The carry trade is still positive and does not signal a recession is imminent. 
Global central bank balance sheets have expanded by $500 billion since the Fed stopped printing.

•    The Fed has some major decisions coming up as the Treasury will need to begin refinancing from next year. That adds an additional headwind to raising interest rates. 

•    Treasury yields continue to have base formation characteristics but there is no sign yet that the base has been completed. 

•    The failure of ETF pricing models on August 24th has had a similarly debilitating effect on sentiment to that on May 6th 2010 but everyone knows that was also a great buying opportunity. 

•    Nevertheless this selloff has not fallen on every sector equally and has represented a catalyst for rotation. 

•    The VIX is used by algorithmic trading systems to calculate position size. A high value in the VIX means smaller long positions and larger short positions. This also works in reverse. 

•    The Dollar has already staged an impressive rally against a host of emerging market currencies. Closing Dollar carry trades has been a significant influence on the depth of the correction in emerging markets.

•    Interest rates are still at zero so money is cheap to borrow.

•    Low inflation, modest wage growth and a strong Dollar have acted against the Fed raising rates. 

•    $3trillion in US Dollar denominated emerging market bonds may also have influenced their decision not to raise rate in September. 

•    BB yields have broken out and are being led higher by energy bonds. 

•    The primary worry right now is about the ability of issuers to make coupon payments which would be helped by a commodity rally. 

•    However refinancing pressure doesn’t kick in until 2019. 

•    Petrobras successfully issued a 100-year US Dollar bond in June so while yields are high, default is not a given. 

•    The Real has lent the Brazilian economy a much needed boost in competitiveness. 

•    The Rand has done the same for South Africa and the Rupiah for Indonesia while companies like Samsung, Kia and Hyundai would benefit enormously from continued weakness in the Won. 

•    Oil prices have been subject to lengthy ranges punctuated by impressive bull markets over the last 120 years. Prices are at the lower side of the current range and potential for a bounce outweighs scope for significant additional downside. 

•    MLPs have been particularly hard hit because they are generally leveraged businesses with high yields that have been attractive destinations for carry traders. This is an accelerating downtrend and while there is the prospect that some of the more overleveraged exploration businesses go bust, the wider pipeline sector is increasingly attractive. 

•    China’s broad market valuations are back below those of Wall Street and the market has already had a significant pullback. 

•    CHN trades at a discount to NAV of 16% and has a solid record of paying special dividends in December. 

•    Volatility has been conspicuously absent from India suggesting there have been less leveraged positions targeting that market. It remains a key beneficiary of low commodity prices and is cutting interest rates. 

•    Gold is reasonably steady but needs to break the medium-term progression of lower rally highs before I can justify getting excited about it. 

The other main topic people appeared interested in was in when the Fed can be expected to raise interest rates. Louis Navellier, like me, highlighted the impact higher rates will have on the Federal deficit and argued the Fed has little choice but to be very cautious. Regardless whether the first interest rate hike is in December or in 2016, they are likely to wait and see before hiking again. 

Michael Vardas from Northern Trust Capital Markets made some very clear points about the impact regulations like Basel III, Comprehensive Capital Analysis & Review (CCAR), liquidity coverage, net solidity ratios, liquidity coverage ratios, Dodd Frank, the Volcker rule, MFID II etc. are having on the bottom line of banks. He pointed out that most banks are losing money on money market funds and can’t wait for rates to rise because they will finally be able to charge fees. He also pointed out that the cost of complying with this additional regulation would have an impact on the ability of banks to increase their dividends in a meaningful way, particularly against the background of low interest rates. For me at least this helped to flesh out why so many in the financial sector are impatient for rates to rise. 

James Garriss from the Browning Newsletter pointed out that the predictable changes in ocean cycles 15 years ago have been some of the primary influences on the severity of hurricanes since, and that this can be expected to continue for another 15 years. He also pointed out that even though California is expected to get plentiful rain and snow this winter it is unlikely to have a meaningful impact on the drought. 

The USA is the only place I’ve taught a seminar where delegates ask what the tax implications are of selling. The US tax code is arcane for the uninitiated and the ability to structure one’s affairs in an efficient manner can have a significant effect on the internal rate of return on one’s portfolio. It was therefore interesting that a tax lawyer, William Lipkind, was invited to speak at this year’s event. His focus was on the use of insurance policies and trust structures to manage exposure to taxes.