Pro Perspectives 12/3/19

December 3, 2019

Yesterday we talked about the weak November U.S. manufacturing data, and recalled back to early October, when a big negative surprise in the manufacturing data kicked off a few sharp down days in stocks. 

Two days in, and the month of December continues to repeat the narratives surrounding stocks in early October.  Similar to the start of Octoer, we’ve had a weak manufacturing number.  Similar to the start of October, Trump has been hammering away at the Fed again, pushing for another cut (this time at the December 11 meeting).  And similar to October, Trump has ramped up aggression on the trade front.

It was early October when the headline hit that the World Trade Organization has sided against a longstanding United States complaint against the EU over subsidies that have been given to the European aircraft maker, AirBus — anti-competitive to American aircraft maker, Boeing.  This decision awarded the U.S. the right to sanction the $7.5 billion of EU imports related to the case.

Yesterday, not only did Trump put Brazil and Argentina into the tariff fray, but the U.S. threatened to step up the tariffs on the EU.

What about China?  Back in October, as Chinese officials were due to meet in Washington for a promising round of trade talks, Trump went on the offensive. The Trump team blacklisted eight Chinese tech firms and restricted the visas on some Chinese officials, all of which they associated with human rights abuses on Muslim minorities in China.  This looked like a major spoiler heading into the high level trade talks.

Why did he ramp up the tensions back in October?  Leverage.

Trump always had leverage over the Chinese on these negotiations, and has been in complete control (able to make concessions and pull the trigger on a deal at any time).   But that leverage eroded as economic data began to erode and as the timeline narrowed toward next year’s election.   But Trump found an angle to regain leverage. By taking aim at the human rights abuses of the CCP, he telegraphed to the Chinese how he might bring the rest of the world over to his side, to join the fight.  Did it work?  Just days later, the Chinese Vice Premier was shaking hands with Trump in the Oval Office on a deal.

Fast forward to this week, and Trump, again, has ramped up the offensive on China, though a “Phase one” deal is supposed to be all but “papered.”  Why?  Perhaps its more leverage to get final details of a “Phase one” deal to swing his way.

From a risk perspective (of a bluff being called):  Remember, the central banks are already positioned for a worst case scenario — an indefinite trade war.

Pro Perspectives 12/2/19

December 2, 2019

We start the month of December with some negatives on trade and another contractionary reading on U.S. manufacturing.

Remember, back in early October, we had a big negative surprise in the ISM Manufacturing number – the worst reading in 10 years.  That started October with a few sharp down days in stocks.

In my Pro Perspectives note that day, we looked at this historical chart of the ISM …

As you can see, above the 50 level represents expansion in the manufacturing sector.  Below 50 represents contraction.  The September number (the big negative surprise) was 47.8.  The report this morning, measuring manufacturing activity from the month of November was 48.1 – still in contraction. 

Now, back in my October note, we discussed the commonalities of the dips below the 50 level in this index.  The big one:  Central banks responded in each case.  And in each case, the decline in manufacturing activity reversed.

What’s happening now, in this current manufacturing contraction?  Central banks are responding again.  The Fed has cut rates three times, stopped quantitative tightening and has started aggressively expanding the balance sheet again.  China is firing every bullet it has.  Global central banks around the world are cutting rates.  And the ECB has restarted QE.

So, what should we expect this time?  An about-face in manufacturing activity. That’s what we’re getting, albeit slowly. The manufacturing data in the U.S., China and Eurozone are all moving higher from the lows of the year.

Now, with the news this morning, we kick off December with a down day in stocks.

The S&P 500 remains up more than 24% on the year, but there are clear memories of what happened last December.  Stocks plunged as much as 18% on the month, and finished down 10% — the worst December on record.

What’s the difference?  The Fed and the ECB were proving to be a violent headwind for the global economy twelve months ago.  Now they’ve flip-flopped on policy, and are a tailwind.

As for December in general:  It tends to be a good month for stocks. If we look back at annual returns on the S&P 500 dating back to 1950, stocks are up 74% of the time in the month of December, with an average gain of +1.4%.

Pro Perspectives 11/26/19

November 27, 2019

As we discussed yesterday, with the melt-up in stocks and the easing market angst surrounding trade, the stage is set for some positive surprises in the economic data to start shifting the sentiment on the global economic outlook. 

With that, we had reports on October durable goods orders today, and a second reading on the Q3 GDP.  Both came in hotter than expected.

The October orders for big-ticket manufactured goods (Durable goods orders) were expected to fall – it rose. And instead of a 1.9% reading on Q3 GDP, it came in at 2.1% — another jolt of fuel for stocks.

And now we start looking at the prospects for a big upside surprise in Q4 economic activity. As you can see in the Atlanta Fed’s GDP forecast, the expectations bar is very low (looking for just 0.4% growth in Q4).

 
When the market reopens on Friday, the focus will be on the performance of Black Friday.  With that, remember, we’re beginning to see a rise of the disrupted. And no industry has been more disrupted/damaged than retail.

As we’ve discussed, with the regulatory screws tightening on the disruptors (the tech giants), we may finally be entering the stage where we see the disrupted/survivors, competing, if not beating the disruptors.  If the survivors have moved aggressively to align with the changing economy, in many cases they have the distribution and scale to win back share, if not become the ultimate winner (e.g. Walmart).

Have a great Thanksgiving! 
Pro Perspectives 11/26/19

November 26, 2019

In early October, when the President shook the hand of the Vice Premier of China in the Oval Office, I thought the intent was clearly to signal the end of the trade war (for the moment), to clear the overhang of uncertainty on markets, and move any further phases of negotiations to back burner issues for the global economy. 

We’ve since had a melt-up in stocks. The market angst surrounding trade continues to ease. And with both of these as a backdrop, I suspect we’re going to be seeing a “re-rating” of the economic outlook.

The catalyst will first come in the form of positive economic surprises.  And we have a slate of data coming tomorrow.  We get reports on October durable good orders, the second look at Q3 GDP and inflation data (the Fed’s favored core PCE measure).

The hurdle of a formal deal signing clearly remains important. But assuming that comes — combine that with the ultra-accommodative stance of central banks, and we should expect the market to be on alert for hotter data, and signals that inflation might be on the move.

With that, among the winners today have been commodities.  The economic bellwether, copper, was up 1.1% on the day.

Pro Perspectives 11/25/19

November 25, 2019

Stocks are trading to another new record high today, as we near the last month of the year.

As you might recall, the last month of 2018 wasn’t so friendly. The S&P futures lost 18% peak-to-trough.  It was ugly, and it was only curtailed by intervention.

Intervention?

To counter the indiscriminate selling of stocks, on December 23rd, we had a response from the U.S. Treasury Secretary (a call out to the major banks) and, the following day, a meeting of the “President’s Working Group” on financial markets.  That was an intervention signal.  When stocks re-opened after Christmas the bottom was in — stocks rallied 7% over the last four days of the year.  The S&P 500 is now up 34% from the December 26th low.

What has changed?  The two most powerful central banks in the world (the Fed and the ECB) that were creating a dangerous headwind for the global economy, have since become a tailwind.

As I said in my January 2nd note, if we look back through history, major turning points in markets have often been the result of some form of intervention.  We had intervention, and we had a major turning point.

Now, let’s take a look at a chart of the notable laggard in the U.S. indicies this year:  small caps.  I say laggard not because the small cap index hasn’t had a good year, but because it still requires another 8% to return to the record highs of last year.  But today, it’s finally breaking out.  

 

Pro Perspectives 11/22/19

November 22, 2019

This past week, we’ve discussed the effect of expanding central bank balance sheets on stocks and the economy.  

As Bernanke said in the depths of the financial crisis, it tends to ease financial conditions, which promotes lower mortgage rates and higher stock prices, which promotes economic growth. 

But as we found earlier this year, in the post-crisis environment, removing global liquidity (prematurely) can create the opposite outcome.  The combination of the Fed’s quantitative tightening program, and the ECB’s exit of its three-year QE program late last year, sent global financial markets haywire.

The aggregate balance sheet of the three most powerful central banks (the Fed, ECB and BOJ) in the world peaked in August of 2018.

Stocks went on to post a loss for the full-year, after being positive for the first three quarters.  That’s the first time on record that happened.  And it has the worst December since the Great Depressions.    

Here’s a look back at the chart …
As we discussed in my August note, maybe most damaging factor was the “rate of change” in global liquidity.  In combination the three most powerful central banks had been pumping liquidity into the global economy at a double-digit rate throughout the post-crisis period.  That swung to a negative rate of change in a little more than a year. The world did not digest that well. And that has put the central banks back into action.

But the switch has been flipped.  The aggregate balance sheet of the world’s most central banks has stopped declining, and has now returned to new record highs.  

 

Pro Perspectives 11/21/19

November 21, 2019

The ECB restarted its QE program this month.  The plan is to buy 20 billion euros worth of bonds, indefinitely. 

To refresh your memory, it was just December of last year that the ECB quit the three-year QE program that more than doubled the size of the their balance sheet.

But unlike QE in the U.S., the ECB’s program didn’t do much for European stocks.

With that, we’ve talked about the prospects of seeing the ECB add stocks to the mix in their asset purchase program, in effort to drive investment, and ultimately demand.  The BOJ has done it, with some success (at least for the Nikkei).

Remember, ECB govenor Ollie Rehn said back in August that the ECB should ‘overshoot, rather than undershoot’ on this next iteration of QE.  And he didn’t rule out a plan to outright buy stocks.  On that note, we’ll hear from the ECB again on December 12th, led by their new President (Christine Lagarde).

In the meantime, nothing has been better for global stability that the Fed’s new “don’t call it QE” program.  They’ve bought more than a quarter-trillion-dollars worth of Treasury bills since August, returning the aggregate balance sheet of the big three central banks (the Fed, ECB and BOJ) back to record high levels.
Pro Perspectives 11/20/19

November 20, 2019

Stop me if you’ve heard this one before:   ‘sources say, trade deal might not happen.’ 

These unnamed “insiders” appear to spend a lot of time communicating with journalists, as these headlines come in almost daily.

The key words from these headlines are picked up instantly by the algorithmic trading systems of hedge funds, and we get immediate selling.  The selling fades (and likely turns into buying by the same hedge funds) and we get a V-shaped bounce.   

Still, disappointment on a trade deal continues to be considered the biggest risk to markets.  But it’s probably overblown.  The position that has been taken by the Fed and ECB are probably more important at this point, both expanding their respective balance sheets again.  That’s a shock absorber for financial markets and the global economy.

And with respect to the China deal, as time has passed between the hand shake in the Oval Office (between Trump and China’s Vice Premier) and now, people seem to forget who has the position of strength.

As we’ve discussed, Trump regained his leverage on China back in October.  He telegraphed how the specter of the fight might change, by taking aim at the human rights abuses of the CCP.  If China chooses to hold out on a deal (in hopes of waiting it out through the election), Trump can escalate the focus on China’s human rights record, making “dealing with China” the biggest issue in the U.S. election, and in geopolitics. 

Join me here to get all of my in-depth analysis on the big picture, and to get access to my carefully curated list of “stocks to buy” now.

 

 

 

 
Pro Perspectives 11/19/19

November 19, 2019

Historically, when the Fed ends a tightening cycle, it has been a great time to be in the stock market. 

This year, we’ve had the end of a tightening cycle, and a great stock market.

Let’s take a look back at my December 17th note of last year, for some details on how we got here (from rate hikes, to rate cuts … from a stock market bust to a boom) .  And then we’ll take a look at the year’s stock market performance, relative to the 1995 analog we’ve been projecting all year.

December 17, 2018 – Pro Perspectives

As I said on Friday, stocks clearly have a significant influence on confidence.  And confidence ultimately feeds into economic activity. 

So, stocks matter. 

On that note, the slide in stocks has started to inflict some damage. The consensus view surrounding stocks and the economy seems to have rapidly deteriorated over just the past week.

As you can see in the chart below of stocks, we touched the February correction lows late in the day today. 

 

This is all setting up for a very big Fed decision on Wednesday.  The Fed has hiked three times this year.  They are said to be data dependent, yet they have systematically hiked seven times since the 2016 election, despite tame inflation.  

With that, this is the first time since 1994 that stocks, bonds, real estate and gold have all been losers on the year (i.e. negative returns).  And it’s the first time since 1994 that cash has been the highest returning asset class.    

It so happens that the Fed back in 1994 was also systematically raising interest rates into a low inflation, recoverying economy — in anticipation that inflation would quicken.  It didn’t happen.  They ended up choking off growth.  The scenario this time looks very similar.  The Fed paused back early 1995, and then ended up cutting rates.  Stocks boomed, returning 36% on the year.  

So, 2018 looked like a repeat 1994.  And 2019 has looked like a repeat of 1995.
With that, in the chart below, I’ve overlaid stock market performance from the current year (2019) onto 1995 (both indexed at 100). … 

You can see the steady 45-degree angle in the rise of stocks back in 1995.  With a very similar backdrop, the rise in stocks hasn’t been quite as tight and pretty, but we continue to climb toward the very big number from 1995 (+36%).  Incidentally, back in ’95, stocks added another 5 percentage points from this mid-November date, through the last trading day of the year.  Following that year, the S&P 500 did +20%, +31%, +27% and +20% to end the 1990s. 

Join me here to get all of my in-depth analysis on the big picture, and to get access to my carefully curated list of “stocks to buy” now.

 

Pro Perspectives 11/18/19

November 18, 2019

As we’ve discussed, the Fed has gone from shrinking the balance sheet (quantitative tightening) to expanding the balance sheet again, with any eye toward buying almost half-a-trillion dollars worth of Treasury bills. 

This reversal in global liquidity is probably more important than the flip-flop in interest rates.  And it has been aggressive, as you can see in the chart below.  They’ve already bought $267 billion worth of short-term Treasuries.

With this underpinning, stocks have gone up!  Why?

Let’s take a look back at a quote from the architect of the Fed’s emergency monetary policies.

When the Fed announced QE2 in late 2010, Bernanke penned a column for the Washington Post, titled, Aiding the Economy:  What the Fed Did and Why.

“… low and falling inflation indicate that the economy has considerable spare capacity, implying that there is scope for monetary policy to support further gains in employment without risking economic overheating. The FOMC decided this week … to deliver that support by purchasing additional longer-term securities, as it did in 2008 and 2009. The FOMC intends to buy an additional $600 billion of longer-term Treasury securities by mid-2011 …

This approach eased financial conditions … Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.” 

In short, as Bernanke acknowledged here, and more explicitly as he continued doing lengthy interviews to answer critics of QE, QE tends to make stocks go up – which is an intended consequence. 

Join me here to get all of my in-depth analysis on the big picture, and to get access to my carefully curated list of “stocks to buy” now.