Overvalued - Both the U.S. equity markets and the U.S. dollar.

U.S. Dollar Overvalued

I’ll be traveling all week and that offers the opportunity to catch up on my readings. I have been reading much about the strength of the U.S. dollar, its weakening uptrend and its effect on corporate earnings in 1Q15. Comments from the strategists at HSBC (via Market Watch) are warning, “The party is nearly over, it’s time to gather your belongings and get out while you can,” They explain the various stages of an asset bubble as explained in the chart below and warn that the U.S. is in the fourth and final stage of the run and a fall is inevitable.

A recent article in Pipczar provided this U.S. analysis that I thought was interesting. “The DXY index broke higher following the FOMC minutes yesterday. This created a double bottom in the USD index, broke a “bearish wedge” (should have broke lower but instead broke higher) and looks to be on the way to testing range highs. However, the double bottom has a projected target above the recent trend highs. If we break higher, I am looking for a target of about 101.50 which is a 127% extension of the recent range:”

“If this rally does happen, it is likely to be viewed as a squeeze as there have been so many traders trying to call a “top” in the USD as of late. That type of behavior is very common when you see very explosive and strong trend like the one in the USD index in recent months. Frankly (I have to admit) I agree with that thesis, however have had a difficult time trading it lately. So, I have been buying the USD (mostly) on dips as of late instead of trying to short the USD.

If the DXY does move higher as planned and makes a brief new high, the monthly 61.8 retracement level is at about 102.00. I have felt the last couple weeks that the 61.8% Fibonacci level at 102.00 has been “unfinished business” for the USD bulls anyway. . If we hit the 101.50-102.00 I would be looking for a longer term reversal (or bigger consolidation) of the US Dollar Index.”

Stockcharts.com on the coming correction of the U.S. dollar: “The U.S. Dollar has been chopping around its recent high for over a month, and we think it is probably topping out after a major advance. While the current EMA structure is still strongly bullish (50EMA above the 200EMA, and 20EMA above the 50EMA), we can see some technical deterioration in our indicators. (We use UUP as a surrogate for the dollar.)

(1) Price has broken to the right of the parabolic arc that supported the recent advance, giving an initial warning. It is primarily a sideways move and could be interpreted as a consolidation, but some other things undermine that idea.

(2) The April price high is lower than the March price high, but the recent OBV top is higher than the March top. This is a reverse divergence, which essentially tells us that higher volume was unable to push price higher--kind of an internal blow-off.

(3) Finally, the PMO has topped below the signal line, which we always view as bearish.”

“On the weekly chart we see the near-vertical advance over the last nine months, a situation that often results in a collapse to more reasonable levels. Also, the weekly PMO has topped again in very overbought territory. The DecisionPoint Trend Model for UUP is on a BUY signal in both the intermediate and long term, however, we are seeing technical deterioration in those time frames as well as in the short term. We think there is likely to be a sharp correction soon. As for a downside target, it is typical for a parabolic advance to collapse into the basing pattern that preceded it, in this case a range of 20 to 23.”

U.S. Equities Overvalued

Market valuations continue to drive the financial headlines with more and more analysts calling the U.S. equity market a bubble that will eventually deflate leaving a trail of devastation behind it. I too believe the market is overvalued but understand that market sentiment can be a powerful driver of equity prices. This article from Forbes provides several charts to show the lofty valuation of our stock market. The author uses five charts to make the case that excessively loose monetary policy has expanded multiples to extreme levels. Using Tobin’s Q, market capitalization to GDP (Buffet), CAPE valuation (Shiller), price to peak earnings (Hussman) and historical dividend yield he goes on to show that for each valuation metric, the story is the same – the market is overvalued. His argument is that when interest rates start to rise, much of the energy behind this market rally will fade.

Taken from Business Insider, “More investors are worried about overvalued stocks and bonds than at any time in at least the past 12 years. That's the message from Bank of America Merrill Lynch's latest survey of fund managers, which polls 145 participants managing a combined $494 billion (£337.4 billion) in assets on how they feel about a bunch of different investments.” A Similar survey paints the same picture for investors that think the U.S. dollar is overvalued at this point.

Tom Bowley from stockcharts.com used an analysis of the VIX trading patterns to offer warning signs that the market is due for a correction. He goes on to write, “On the next chart, take a look at how the VIX performed relative to the S&P 500 throughout the bull market from 2002 to 2007: Volatility declined throughout the bull market - until early 2007.  Despite an ongoing bull market that lasted into the 4th quarter of 2007, the VIX started ramping up and moving against the grain.  Put another way, the stock market was getting nervous BEFORE the stock market topped.  That's a warning sign.  From a common sense perspective, if fear is increasing and nothing bad has happened technically, what might happen once an actual technical breakdown occurs?  Well, we know what happened and it wasn't pretty.”

“Now let's fast forward to the six year bull market that we're currently enjoying.  We'll look at the same chart: Recent S&P 500 highs have been accompanied by slightly higher lows on the VIX.  It's pretty obvious on the chart that this normally doesn't occur.  Also, bear markets don't begin when volatility is high, they begin when the stock market is complacent and the VIX is low. 

 

In 2007, there were a TON of warning signs that the market was topping and central bankers around the globe weren't supporting that bull market the way they've been supporting this one.  And the rise in the VIX was much more pronounced in 2007 despite the S&P 500 attempts at setting further all-time highs.  Clearly, we have a completely different set of circumstances in 2015 and the rise in the VIX is much more subtle.  Nonetheless, sentiment is an important secondary indicator when evaluating the health of a stock market advance.  If nothing else, keep this chart on your radar and if volatility continues rising on further rises in the S&P 500, you may want to grow much more cautious.”

That said, not everyone believes the market is overvalued. Derek Tomczyk, CFA points out in an article he wrote for Seeking Alpha, “The chart below shows the trailing EY and excess EY (eEY) as well as the real interest rate over the past 132 years. The inflation figure used to convert the nominal interest rate into the real interest rate is a 10-year trailing annualized CPI increase. This is why the EY series starts in 1881 instead of 1871, as in last year's chart.”

He goes on to conclude, “What we see is that outside of the depths of the 2008 financial crisis, the S&P 500 is still the cheapest it has been since around 1988. What is also evident is that the bull market that followed 1988 drove stock valuations to extremely overvalued levels but did not actually end until 2001. It also proves that stock markets do not trade at fair value very often and can become wildly over- or undervalued. If the stock market price reflected valuations at all times, the red line on the above graph would be almost entirely flat. To determine the fair value eEY level, we assume the average eEY over the past 132 years should give us a good indication. This comes in at 5.04% and is very close to the current level of 4.94%. This appears to say that we are very close to fairly valued as the S&P currently stands.”

I suppose I see the point in using the 10 year treasury rate as a means to measure equity risk premium. The so called “Fed Model” has worked in the past as a warning against excessive valuations, but there is one point to make. Since the Federal Reserve started its quantitative easing and more importantly in this case operation twist campaigns, its stated goals were to keep rates low (perhaps artificially) and transfer assets into higher risk assets for those investors seeking yield. While Mr. Tomczyk’s analysis is thorough and sensible, one needs to wonder (and that’s all we can really do until we understand the consequences of our years of unorthodox monetary policy) how monetary policy has altered the usefulness of this equity risk premium analysis. Given the current state on monetary policy, the average yield used may not be appropriate given the actions of the Fed. I believe this distortion will be a temporary one but one to consider nonetheless.

Richard Bernstein made the case that given today’s inflation environment, stocks are fairly valued given the stage of the economic cycle we are in. The chart below is the analysis that he provided and one can see where we are on his trailing P/E and inflation model. I have a great respect for Mr. Bernstein and have followed his brilliant work for years. I appreciate the analysis but when I look at where we are currently positioned on his chart, it seems a little off the beaten path. Would untethered market forces have that data point drift so far to the left or is there some monetary policy influence assisting it?

 

 



 

Only time will tell. We wrote a blog note a few weeks ago that agreed with the general consensus that the market appears overvalued. That said, the market is a function of intrinsic value AND market sentiment. We have a cautious outlook but understand that market sentiment can be a powerful force. The trend is up and will most likely continue until there is a catalyst that changes that direction.

 

Joseph S. Kalinowski, CFA

 

No part of this report may be reproduced in any manner without the expressed written permission of Squared Concept Partners, LLC.  Any information presented in this report is for informational purposes only.  All opinions expressed in this report are subject to change without notice.  Squared Concept Partners, LLC is an independent asset management and consulting company. These entities may have had in the past or may have in the present or future long or short positions, or own options on the companies discussed.  In some cases, these positions may have been established prior to the writing of the particular report. 

The above information should not be construed as a solicitation to buy or sell the securities discussed herein.  The publisher of this report cannot verify the accuracy of this information.  The owners of Squared Concept Partners, LLC and its affiliated companies may also be conducting trades based on the firm’s research ideas.  They also may hold positions contrary to the ideas presented in the research as market conditions may warrant. 

This analysis should not be considered investment advice and may not be suitable for the readers’ portfolio. This analysis has been written without consideration to the readers’ risk and return profile nor has the readers’ liquidity needs, time horizon, tax circumstances or unique preferences been taken into account. Any purchase or sale activity in any securities or other instrument should be based upon the readers’ own analysis and conclusions. Past performance is not indicative of future results.

 

 

The Looming Crisis

There is an obvious desire by the Federal Reserve to normalize monetary policy by taking a less accommodative approach. In my opinion it appears an increase in the Fed funds rate this year is an inevitable event even if we do not see employment and inflation statistics start to heat up. The postponement of tighter monetary policy will only come should we see major deterioration in the employment and inflation picture. At the "The New Normal Monetary Policy," a research conference sponsored by the Federal Reserve Bank of San Francisco, Janet Yellen said, “An important factor working to increase my confidence in the inflation outlook will be continued improvement in the labor market. A substantial body of theory, informed by considerable historical evidence, suggests that inflation will eventually begin to rise as resource utilization continues to tighten.  It is largely for this reason that a significant pickup in incoming readings on core inflation will not be a precondition for me to judge that an initial increase in the federal funds rate would be warranted [emphasis added]. With respect to wages, I anticipate that real wage gains for American workers are likely to pick up to a rate more in line with trend labor productivity growth as employment settles in at its maximum sustainable level. We could see nominal wage growth eventually running notably higher than the current roughly 2 percent pace. But the outlook for wages is highly uncertain even if price inflation does move back to 2 percent and labor market conditions continue to improve as projected.”

She is putting forth the notion that, “neither wage nor price inflation is indispensable for me to achieve reasonable confidence that inflation will move back to 2 percent over time. That said, I would be uncomfortable raising the federal funds rate if readings on wage growth, core consumer prices, and other indicators of underlying inflation pressures were to weaken, if market-based measures of inflation compensation were to fall appreciably further, or if survey-based measures were to begin to decline noticeably.”

Of course when tracking and analyzing economic statistics one needs the appropriate runway to smooth out any erratic readings but it certainly appears that the economy has stalled in the first quarter of this year. Admittedly this slowdown has much to do with inclement weather conditions but what if these trends start to take hold and appear in the second quarter. Claes Fornell wrote an oped in the Investors Business Daily entitled, “Recovery Will Lose Energy Unless Consumers Start Spending”. In it he states, “Many economic forecasters predict growth and momentum building in 2015. However, economic growth is usually not associated with prolonged near-zero interest rates, continued low inflation, weak consumer spending, global slowdown or declining customer satisfaction.” He concludes, “At the same time, it is important to recognize that increased productivity, the standard cure for slow growth, won't do the job this time. Improved productivity matters little if consumers don't buy. On the contrary, it is likely to have a detrimental effect. When fewer workers are needed to produce the same output of goods and services in a market with weak demand, the result could well be greater unemployment, less consumer spending growth and a weaker economy.”

TownHall Finance.com sums it up nicely, “Steady hiring is supposed to fire up economic growth. Cheap gasoline is supposed to power consumer spending. Falling unemployment is supposed to boost wages. Low mortgage rates are supposed to spur home buying. America's economic might is supposed to benefit its workers. Yet all those common assumptions about how an economy thrives appear to have broken down during the first three months of 2015.”

Retail Sales

Indeed retail sales have been quite soft in light of lower gasoline prices. Many economists and investors (including this investor) thought increased disposable income would be reflected in the retail sales figures and that has yet to materialize. Our investment thesis that we shared with our clients was flawed in this respect although the investment outcome was acceptable with the consumer discretionary sector up over 7% for the year as opposed to the S&P 500 that is up roughly 2%.

This soft patch in retail sales hasn’t deterred the Fed yet but clearly they are monitoring the progress in the figures. Janet Yellen states in her speech, “I am cautiously optimistic that, in the context of moderate growth in aggregate output and spending, labor market conditions are likely to improve further in coming months. In particular, and despite the somewhat disappointing tone of the recent retail sales data, I think consumer spending is likely to expand at a good clip this year given such robust fundamentals as strong employment gains, boosts to real incomes from lower energy prices, continued increases in household wealth, and a relatively high level of consumer confidence.”

We are seeing more and more folks coming out and telling us that gasoline prices and retail sales just do not correlate. According to the Robin Report, “Let’s start with the gas theory. The Robin Report Chief Strategy Officer Judith Russell looked at the monthly change in gas prices and retail sales for the past eight years. And as indicated in the chart below, there is neither a significant bump up, nor down, in retail sales accompanying rising or falling gas prices. She even looked at regressions with different segments in retail, and found that there simply does not seem to be a correlation, period. In other words, the gas theory is an empty tank.”

So where is the increased disposable income going. There seems to be an increase in household savings but perhaps more importantly is the dramatic increase in health care spending. The chart below found on Zero Hedge shows the spending habits of Americans in the final GDP readings.

Wages

The theory supported by Fed Chair Yellen is that increased improvement in employment will absorb excess labor slack and thus wages will start to rise. With the unemployment rate declining one needs to assume this as logic, except wages have been slow to rise along with the employment situation and has only recently started to show slight increases. So why have wages been stuck in no-growth mode since the economic recovery started.

According to Lance Roberts, “The issue is that the only type of employment that really matters with respect to long-term economic prosperity is "full-time" employment. It is only full-time employment ultimately leads to higher rates of household formation. Unfortunately, since the financial crisis, full-time employment has been primarily a function of population growth rather than a strengthening economy.  This is why the labor force participation rate remains near its lows.”

Thus if a large part of the decline in the unemployment number (the Fed seems to be targeting 5% to 5.2%) is due to decreased labor participation and under-employment, it may be quite some time before true employment gains are reflected in wages.

Inflation

It is widely known that the Federal Reserve wants to get the rate of inflation up to its threshold level of 2%. Global deflation has been the topic of discussion amongst economists everywhere and while Fed Chair Yellen has commented that a rise in the inflation data is not a precursor in her decision to raise rates, the figures are bleak.

Looking at both the CPI data and the Fed preferred PCE data (taken from Fat Pitch), the inflation rate remains solidly below the 2% mark and seems to be going in the wrong direction.

Why not be Patient?

We completely understand that monetary policy is a blunt tool and the timing of policy moves needs a vision that looks several quarters and years in advance. The unenviable task of projecting the movement of such a dynamic economy that far in advance through a brume of ever changing economic conditions is difficult to say the least. Global economic growth projections are being lowered and U.S. economic growth projections are no different. The Atlanta Federal Reserve trimmed 1Q GDP projections. Corporate earnings and revenue growth have been in decline with 1Q15 earnings season expected to show contraction year-over-year. Employment, retail sales and inflation on the surface doesn’t paint an urgent need for tighter monetary policy, although the folks at the Fed are surely smarter than I am and their interpretation of the various economic models is far more sophisticated. That said there’s still a sense of necessity to get back to normalized monetary policy in spite of still subdued economic recovery statistics.

Crisis mode.

Jamie Dimon rattled the financial world with his shareholder letter last week basically saying there exists another crisis looming. He writes, “Treasury markets were quite turbulent in the spring and summer of 2013, when the Fed hinted that it soon would slow its asset purchases. Then on one day, October 15, 2014, Treasury securities moved 40 basis points, statistically 7 to 8 standard deviations – an unprecedented move – an event that is supposed to happen only once in every 3 billion years or so (the Treasury market has only been around for 200 years or so – of course, this should make you question statistics to begin with). Some currencies recently have had similar large moves. Importantly, Treasuries and major country currencies are considered the most standardized and liquid financial instruments in the world. The good news is that almost no one was significantly hurt by this, which does show good resilience in the system. But this happened in what we still would consider a fairly benign environment. If it were to happen in a stressed environment, it could have far worse consequences.”

He is highlighting “liquidity risk” inherent in the market currently. A run on the market in an illiquid environment is a very bad thing. I was watching CNBC one morning and saw Larry Summers basically agreeing with the statements made by Mr. Dimon (see the interview here).

Then I started reading an article (via Business Insider) where Deutsche Bank's Torsten Slok stated, “...Before the crisis, monthly volumes in Treasury trading for primary dealers was 10% to 12% of the total stock of Treasuries outstanding, see the blue line in the chart below. Today, volumes have fallen to just 4%. So it is clear that there is much less liquidity in the sense that dealers are trading a smaller share of all Treasuries outstanding. Is liquidity in markets low for structural reasons, including regulation, high frequency trading, and more Treasuries held by the Fed and other central banks? Or is liquidity low simply because investors are sitting on the sidelines and have been burnt too many times by betting on higher rates? I hear from clients a broad range of views on this and whether it is going to be a problem as we get closer to Fed liftoff. I continue to believe that this is a topic investors across asset classes need to spend time on; just because the risks are difficult to quantify doesn’t mean that we can ignore the issue.”

So perhaps the Fed is attempting to get back to normalcy so that it has ammunition in place in the event of a new crisis. Certainly a crisis of liquidity will require Fed assistance and if they are unprepared or lack substantial abilities to help stem the damage then the next crisis could indeed be worse than 2008. Not to sound like a conspiracy theorist but I decided to go back and read the transcript of the speech by Chair Yellen.

Indeed she makes mention of such a scenario in her speech. “A second reason for the Committee to proceed cautiously in removing policy accommodation relates to asymmetries in the effectiveness of monetary policy in the vicinity of the zero lower bound. In the event that growth in employment and overall activity proves unexpectedly robust and inflation moves significantly above our 2 percent objective, the FOMC can and will raise interest rates as needed to rein in inflation. But if growth was to falter and inflation was to fall yet further, the effective lower bound on nominal interest rates could limit the Committee's ability to provide the needed degree of accommodation. With an already large balance sheet, for example, the FOMC might be concerned about potential costs and risks associated with further asset purchases.” [emphasis added].

Fiscal policy is largely ineffective at this point. Banking regulations that have been put in place to detect and possibly deter the next financial crisis will actually stymie damage control (according to both Mr. Dimon and Mr. Summers) in the event of a crisis. Perhaps the Fed is our last line of defense in such a scenario and perhaps there lies a concern by the Fed to its effectiveness in providing that much needed liquidity in the event of a crisis. As Mr. Dimon states in his letter, “The trigger to the next crisis will not be the same as the trigger to the last one – but there will be another crisis.”  

Perhaps something worth watching.

 Joseph S. Kalinowski, CFA

Additional Reading:

Fed rate hike reverse: September now more likely – CNN Money

Why you should discount the headline NFP number – The Humble Student of the Markets

With claims this low, hiring is likely to increase – Calafia Beach Pundit

Calling It Like It Is – Street Talk with Lance Roberts

Data Continues To Suggest Fed Should Remain On Hold – Street Talk with Lance Roberts

More Growth Worries: Atlanta Fed Lowers First Quarter GDP Growth Forecast to 0% - MoneyShow.com

Wage growth is improving, but the chart still looks scary – Business Insider

No part of this report may be reproduced in any manner without the expressed written permission of Squared Concept Partners, LLC.  Any information presented in this report is for informational purposes only.  All opinions expressed in this report are subject to change without notice.  Squared Concept Partners, LLC is an independent asset management and consulting company. These entities may have had in the past or may have in the present or future long or short positions, or own options on the companies discussed.  In some cases, these positions may have been established prior to the writing of the particular report. 

The above information should not be construed as a solicitation to buy or sell the securities discussed herein.  The publisher of this report cannot verify the accuracy of this information.  The owners of Squared Concept Partners, LLC and its affiliated companies may also be conducting trades based on the firm’s research ideas.  They also may hold positions contrary to the ideas presented in the research as market conditions may warrant. 

This analysis should not be considered investment advice and may not be suitable for the readers’ portfolio. This analysis has been written without consideration to the readers’ risk and return profile nor has the readers’ liquidity needs, time horizon, tax circumstances or unique preferences been taken into account. Any purchase or sale activity in any securities or other instrument should be based upon the readers’ own analysis and conclusions. Past performance is not indicative of future results.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PGM Update

This has been a terrible month for precious metals and especially metals in the PGM space. Even though it seems platinum “caught a bid” last week palladium has taken it on the chin. For the squeamish investor this is certainly discouraging news but it’s never easy being a contrarian.  We continue to believe in the PGM growth story as we highlighted in previous analysis;   A Palladium Growth Story - Commodities Should Look Interesting to Contrarians and Look to Platinum and the PGM in 2015.

There have been a few notable headlines regarding palladium recently, the most interesting story from Mineweb that states, “Russia’s central bank has agreed “in principle” to sell some of its palladium stock to a fund of investors led by Norilsk Nickel.” The sale is taking place because of favorable market conditions for the metal and Norilsk seeks “to guarantee the availability of stock for long-term customers and to increase market transparency.” On the surface that seems reasonable but this investor thinks it has more to do with the financial condition of Russia and its need for cash in light of the recent geopolitical turmoil and resulting sanctions as well as the oil bear market.

That said, I agree with the general concept that palladium remains an attractive investment even though it is falling out of favor. Palladium ETF’s suffered massive outflows last week that negatively impacted prices. According to a recent report by Reuters “Palladium ETFs, popular investment vehicles which issue securities backed by physical metal, saw outflows of nearly 50,000 ounces in the week to Friday”

Theoretically one can understand the somewhat dour mood when it comes to PGM. The end of quantitative easing and loose monetary policy in this country, non-existent inflationary pressures, a general commodities bear market and the strong U.S. dollar all provide a headwind for palladium appreciation. Alhambra Investment Partners recently pointed to dollar woes and flat lining wages as a cause for slowing auto sales. As we all understand, the importance of auto sales is paramount for palladium demand. Alhambra goes on to say, “The March figures are only estimated based on the pace of sales through March 11, which is already a problem if the trend like February holds – the first estimate for February was for a new car pace of 13.5 million SAAR but is now estimated significantly below that at 12.7 million (total vehicle sales first estimate was 16.7 million, revised down to 16.2 million). As you would expect, snow is being blamed for the discrepancy in the month, and we will see how it plays out in March, but even if the current estimates hold up they represent essentially no sales growth over March 2014.”

So how concerned should we be regarding the demand for palladium?

We continue to believe that Palladium demand offers attractive supply and demand dynamics. The March vehicle sales were not as dour as presented by Alhambra Investment Partners.  US auto sales for March registered an annualized rate of 17.05 million units beating the consensus forecasts for 16.90 million units. According to the Fiscal Times (Via Business Insider), “Car-buying service TrueCar expects that 17 million new vehicles will be sold this year. That would represent a year-over-year increase of as much as 3 percent. The estimate is in line with forecasts done by Bank of America Merrill Lynch analyst John Murphy and the National Automobile Dealers Association. For the auto industry overall, revenue is expected to have jumped 89 percent this year over 2009, according to TrueCar. “The industry hasn’t been at the 17 million-unit level since 2005, and considering that the U.S. population has expanded by roughly 9 percent since then, it’s clear we’re in a market with strong natural growth drivers,” said John Krafcik, TrueCar’s president, in a press release. “Even in the economic boom years of the 1990s the industry didn’t achieve six consecutive years of growth.”

But is the supply demand picture enough to drive the price of palladium higher. I recently sat with the folks at CPM Group to discuss the virtues of PGM and they made an excellent point. Their clients have expressed PGM fatigue and are no longer willing to wait for the desired outcome. Withdrawals from platinum and palladium ETF’s are at record highs and investor sentiment surrounding PGM is lousy. The general bear market for commodities has had a profound impact of PGM prices even though the underlying fundamentals remain sound. I read an interesting article that said something similar.  MetalMiner points out, “A bearish commodity environment, a strong dollar and low oil prices are punishing palladium prices as well as the rest of precious metals. Despite the apparent positive palladium fundamentals, the big picture better change or the bank will see its price forecast come in way off from reality.”

It is true that negative investor sentiment, the stronger dollar and the threat of tighter monetary policy all provide a headwind for PGM investment, but the recent economic data leads this investor to believe that all is on rosy on the U.S. economic front. March jobs report showed job creation but not nearly as much as expected, durable goods has been soft and retail sales have shown curious weakness given the price of gasoline.  

It seems we are seeing the all-too-familiar start and stop economic growth that has plagued us since the great recession. The only difference now is that the Fed has backed off their quantitative easing stance that appears to have been the support for the economy when things started to dwindle. So with the economy showing lackluster growth (not recession) and no quantitative easing on the horizon, this may delay the Fed’s decision for tighter monetary policy and thus cap the strength behind the U.S. dollar.

We’ve noted in the past and still believe that, given the supply and demand dynamics surrounding palladium, it offers an attractive investment opportunity for those that are not concerned about the near-term volatility. In light of the weaker than expected economic growth and the potential for a more dovish Fed and subdued U.S. dollar, this may be the perfect environment for PGM to shake the negative sentiment that surrounds it as an investment opportunity.

Joseph S. Kalinowski, CFA

No part of this report may be reproduced in any manner without the expressed written permission of Squared Concept Partners, LLC.  Any information presented in this report is for informational purposes only.  All opinions expressed in this report are subject to change without notice.  Squared Concept Partners, LLC is an independent asset management and consulting company. These entities may have had in the past or may have in the present or future long or short positions, or own options on the companies discussed.  In some cases, these positions may have been established prior to the writing of the particular report. 

The above information should not be construed as a solicitation to buy or sell the securities discussed herein.  The publisher of this report cannot verify the accuracy of this information.  The owners of Squared Concept Partners, LLC and its affiliated companies may also be conducting trades based on the firm’s research ideas.  They also may hold positions contrary to the ideas presented in the research as market conditions may warrant. 

This analysis should not be considered investment advice and may not be suitable for the readers’ portfolio. This analysis has been written without consideration to the readers’ risk and return profile nor has the readers’ liquidity needs, time horizon, tax circumstances or unique preferences been taken into account. Any purchase or sale activity in any securities or other instrument should be based upon the readers’ own analysis and conclusions. Past performance is not indicative of future results.