More signs of waning confidence in the economy and the Trump
Administration. Yesterday was yet another “risk-off” day but it would appear
that we are starting to break out in many sectors that would indicate
additional weakness to come.
On the Trump Administration.
President Trump gave an interview to the Wall Street
Journal. One can see why the actions of his policy positions can cause jitters
in the market. It’s one thing to hold a core position and alter that position
as your view changes. It’s a completely different thing to flip positions
entirely. If I were to say I used to drink coffee with milk and sugar but I’ve
changed to drinking it black. My core liking of coffee remains intact but I’ve
changed position on the periphery. If I were to say I love coffee last week but
say I hate coffee this week – that’s a sign of instability and uncertainty. Two
things the market does not appreciate.
President Trump on Chair Yellen yesterday (Business
Insider)…“Janet Yellen may not be
done as the Federal Reserve chair just yet.
President Donald Trump
told The Wall Street Journal that he was undecided to bring Yellen back as Fed
Chair after her term expires in 2018, saying she is "not toast."
"I like her, I
respect her," Trump said. "It's very early."
Trump called out
Yellen multiple times during his campaign, saying the Fed's low interest
rate policy was hurting the economy, in addition to accusing the
central bank of colluding with former President Obama, Hillary Clinton, and the
Democratic Party…In terms of Fed policy, Trump admitted to the Journal that he
is a fan of low interest rates.
"I do like a
low-interest rate policy, I must be honest with you," the president said.”
President Trump on Chair Yellen six months ago (Business
Insider) … “Republican presidential
candidate Donald Trump is going after Janet Yellen again, claiming that the
Federal Reserve is creating an investment bubble.
During the first
presidential debate, Trump said that the economy is having "the worst
revival of an economy since the Great Depression" and that nothing in the
country is healing after the financial crisis.
Additionally, Trump
said that because of record low interest rates from the Fed, the country's
economy is "in a big, fat, ugly bubble," with debt increasing while
the "only thing that looks good is the stock market."
Thus when interest
rates increase, the bubble would burst and the stock market would crash.
Trump also repeated
his claims that the Fed is keeping interest rates low while President Barack
Obama is in office in order to keep the economy going until Obama leaves
office.”
What about China? I can recall the thousands of times Trump
bashed the Chinese trade policies in every debate, stump speech and interview
he had given during the campaign. It was almost laughable the number of times
he attacked China. It was truly one of the staples of his campaign.
Back in June this is what was reported by Time, “At the end of the speech, Trump turned to a
favorite topic: China. The final three points of Trump's seven-point trade plan
concern China's "currency [manipulation]" and "theft."
First, "I am
going to instruct my Treasury Secretary to label China a currency manipulator.
Any country that devalues their currency in order to take advantage of the
United States will be met with sharply," Trump said. Ad-libbing, he
continued, "And that includes tariffs and taxes." This marked a sharp
break from Republican orthodoxy of the last several decades, which is to oppose
new taxes during election campaigns.
Trump argued that
"China's entrance into the World Trade Organization has enabled the
greatest jobs theft in history." According to the McKinsey Global
Institute, the U.S. lost about 1/3rd of its manufacturing base between 2000 and
2010, some 6 million jobs, as TIME recently reported. Only about 700,000 were
lost to China, through 'tradable' areas like apparel and electronics.
Trump also said,
"If China does not stop its illegal activities, including its theft of
American trade secrets, this is very easy. This is so easy, I love saying this.
I will use every lawful presidential power to remedy trade disputes, including
the application of tariffs, consistent with Section 201 and 301 of the Trade
Act of 1974 and Section 232 of the Trade Expansion Act of 1962."”
Now…” Trump, in an
interview with the Wall Street Journal on Wednesday, appeared to acknowledged
that China hasn’t been intervening to weaken its currency recently. “They’re
not currency manipulators," he said.” – Newsmax.
How about his thoughts on the monthly employment figures? On
the campaign trail, “Trump repeatedly
claimed during the campaign that the federal government was understating the
real unemployment rate.
"Don't believe
these phony numbers," Trump told supporters early last year. "The
number is probably 28, 29, as high as 35 [percent]. In fact, I even heard
recently 42 percent." - NPR
But after a solid jobs report in February – a full month in
office, President Trump switched stances. “On
Friday, many eagerly waited to see how Trump would characterize February’s
stellar jobs report. He retweeted the Drudge Report’s take, which characterized
the latest jobs report as “GREAT AGAIN.”
The White House Press
Secretary, Sean Spicer, didn’t mince words at a press conference Friday
afternoon when Eamon Javers, a reporter for CNBC, brought up Trump’s previous
doubts about the report’s veracity. “Does the president believe that this jobs
report was an accurate and a fair way to measure the economy?” Javers asked. In
response, Spicer said, “I talked to the president prior to this, and he said to
quote him very clearly. They may have
been phony in the past, but it’s very real now.”” [emphasis ours] – The Atlantic
Really?
Someone needs to get a handle on the Trump Doctrine so
market participants know where he is going to land. Until then, reckless tweets
and mixed signals will not help the stock market.
On Yields Analysis.
Take a look at treasuries yields. The 10Y yield has started
to deteriorate and has fallen back below 2.3%. This does not bode well for the
equity markets or the markets confidence in the economic picture looking
forward.
The yield curve has started to aggressively flatten and the
30Y treasury prices relative to stock prices have start moving in a direction
that is painful for the stock market.
The chart below compares the prices of investment grade
bonds (AGG) to speculative grade bonds (HYG) on a monthly basis. When this
relative price comparison is in an uptrend (above its 5-month exponential
moving average), equity returns have suffered. It seems we are about to see the
cross above the 5-month moving average. We would stay out of the market should
we see this trend continue.
On Metals.
Gold is breaking out. Not a great sign for the economy and
perhaps a response to increased global tensions (China
moving 150,000 troops to the North Korea border).
Copper and steel prices are tumbling and breaking down. Another
blow to the reflation trade theory.
The gold to copper ratio is heading in the wrong direction.
The markets.
The breakdown in financials and small caps continue to be worrisome.
The S&P 500 looks set to fall a bit further. The VIX is
showing inversion now but still can head higher…a bad sign for the market. We’d
like to see a little more “panic” in the market before getting comfortable
deploying additional assets. We usually would like to see inversion accompanied
by a +50% price move in the VIX and a spike in the Put/Call ratio. The past, a
combination of these events usually marks a good buying opportunity – assuming the
economy isn’t heading for a recession.
Utilities are taking off. This is a “risk-off” trade that doesn’t
bode well for the economy and confidence in the Trump Administration.
We consider the Japanese Yen as a risk-off measure. It too
is breaking out.
The strong US dollar will also put a damper on things should
it continue to strengthen. It seems President Trump understands this. Yesterday
he tried to talk down the dollar. From Bloomberg, “The dollar slumped and Treasury bond yields dropped to the lowest
level this year after President Donald Trump said he will not brand China a
currency manipulator and added that the greenback was getting too strong. U.S.
stocks declined for a second day as volatility climbed again across asset
classes.
The Bloomberg Dollar
Spot Index fell as much as 0.4 percent after Trump made the comments in an
interview with the Wall Street Journal on Wednesday, abandoning a core promise
of his election platform that tapped into voter anger about trade-driven job
losses.”
“The remarks are seen
as reducing the risk that China could dump its holding of Treasuries in
retaliation for being tagged a currency manipulator. China’s currency
traded outside of the country gained the most since last month.”
Even with the US dollar pull-back yesterday…it’s still
trading near the top end of its range.
Bottom Line: This is
a discouraging market. Every indication signals to US market weakness ahead. We
have positions in the market with hedges in place. We also don’t feel confident
enough to completely short the market because a single tweet or some encouraging
event can spark the next rally. The bull market remains intact so shorting
outright (as opposed to hedges) is a risky proposition.
We continue to wait
for a better entry point to deploy assets. For now – we just block and tackle.
Joseph S. Kalinowski, CFA
Twitter: @jskalinowski
Facebook: https://www.facebook.com/JoeKalinowskiCFA/
Blog: http://squaredconcept.blogspot.com/
Tumblr: trader-rants
Additional Reading:
A better global economy means the 'reflation trade' could keep going strong
– Business Insider
No part of this report may be reproduced in any manner
without the expressed written permission of Squared Concept Asset Management,
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 Asset Management, LLC is a
Registered Investment Advisory 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 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 Asset Management, 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 considered. 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.
No comments:
Post a Comment