Tuesday, April 19, 2016

What a long strange road it's been...

I thought I'd take a moment to revisit what has transpired in the global markets over the past two months because it really has been unprecedented.

Back in mid-February the global markets were sitting on a razor's edge.  From a technical perspective if stocks fell another 1% they looked like they might fall 50%.  This technical backdrop was coupled with a fundamental picture that was deteriorating across the globe.  China, technology, oil, energy, pharma, everything was (maybe is??) entering a slowdown at the same time.  This had all of the hallmarks of a major 2008/2009 meltdown lining up again.

And then just as it seemed the stars had aligned something changed almost overnight.  The key catalyst that started the market's historic surge from February (up 14% in 2 months - roughly an 85% annualized rate of return) was the bounce in crude oil prices.

If you remember in February we were starting to see the first signs of retail gasoline prices cracking the $2.00 mark.  West Texas crude oil was hovering around $31/ barrel and the outlook was grim.  The world is awash in oil right now and central bank policies have encouraged many countries and companies to expand capacity beyond what the market can bear.  These companies and countries  need to keeps pumping oil to make their debt payments but this supply issue is coupled with another major problem -- the growth in demand for oil is falling right now.  Okay, so in a logical world you would say - supply is growing, demand is falling the price of this product should continue to decline.  However, we no longer operate in a world dictated by logic.

The oil markets are now heavily influenced by the same electronic trading platforms that have made a mockery of our stock markets.  These trading bots, for lack of a better term, are scanning every headline for a hint on the direction of crude oil.  Conveniently, at the moment when oil prices and the US stock market were on a razor's edge word began circulating that OPEC was going hold a meeting to discuss a production freeze in April.

The problems with this concept are many -

1) OPEC members are notorious cheats.  They say they will only produce X, yet they will produce x+10%.

2) OPEC's influence is waning in light of US/Canadian/Russian production.

3) You have to get parties that don't particularly like one another (Iraq, Iran, UAE, Saudi Arabia) to agree to terms.

However, the rumor of a meeting set off a buying frenzy in the oil markets which ultimately spread to other commodity classes (Why? No one knows, why ask questions, just BUY!!!).  This is an oversimplification but there are many stock programs that see the world through a simple lens of "if/then" relationships.

Since, oil prices were up that must mean demand was going up, right?

And if demand is going up, that means the global economy is picking up steam and that must mean stocks are set to rebound so....


Now, there have been other catalysts that have played a role - the Fed's unclear messaging, Japan's panic move to negative interest rates, etc - but the most significant and consistent driver of the oil and stock markets has been this idea that oil prices were going higher.

Every day brought a new rumor - "Russia says......", "Iran says......." "Saudi minister says......" and every headline brought more buyers.  Then a funny thing happened - they met this weekend and the result was no agreement on production.

Wait, WHAT!?!?! So, the 15% bounce in stocks and the 30% bounce in oil prices that were all driven by the premise of a major agreement on reducing supply has been a fraud?  Obviously, this means oil prices and stock prices are set to plummet, right?

Again, we are trying to apply logic to an illogical world.  Yes, the immediate reaction by the humans in the market was to sell both oil and stocks (oil slipped 5% and some global markets were off 3% immediately) but as the programs started kicking in around 9:45 am yesterday it was clear that this was not your father's market.  Stocks and oil prices ripped higher for the rest of the day until the Dow managed to end above 18,000 for the first time in 9 months.

So, that's the back story of the past 2 months, but let's consider what is going on in the US right now.

* Q1 GDP estimates are around 0.3% to 0.5% growth.  That's a round error away from being in contraction.  Seven years into the "recovery" the US is growing at about 1/10th of what would be considered healthy.

Well, you might say Q1 2014 and Q1 2015 were weak as well - true, but remember we blamed that weakness on a polar vortex and East Coast blizzards.  Who can we blame for this weakness in the wake of the warmest winter in 20 years?

*Freight shipments are weak and trailing even weak first quarters like 2015 and 2014.

* Look at some of the early results from huge US companies - IBM, Morgan Stanley, Goldman Sachs - the disconnect between these results and a stock market that is within a whisper of its all-time high is strange.

* I continue to believe that the real price of oil given the current supply/demand picture should be around $25/barrel.  When evaluating a forecast like that you have to ask yourself are you a bigger believer in the power of market fundamentals or Central Bankers?  The Central Banks have had a much more significant role over the past 7 years but over the past 100 years I'd say that fundamentals tend to win out.

To summarize - I'm feeling a little like Don Quixote at the moment because I know certain things to be true but the markets are telling me that what I know is wrong every single day.  Eventually, that may change but until then I'll be out tilting at windmills.


PS - I wrote this late at night and my spell check isn't working so please excuse any errors :)

Friday, February 12, 2016

Was Time Warner reading my blog?

Suddenly at 8:57 last night - bang! No internet, no TV, no phone.  That'll teach me to tell people how to avoid their silly rental fees. *

Later I found out that it wasn't just me, but for a moment I was ready to slip over to the side with people wearing tinfoil hats.

Speaking of crazy conspiracies...have you noticed 2.5% jump in stocks since yesterday afternoon?  This might be one of the world's greatest coincidences of all-time, but yesterday as the S&P 500 slipped right down to that critical 1812 number that was about to cause sell orders to flood the market when a strange oil headline crossed about the prospect of OPEC meeting to cut production.  This headline single-handedly saved the stock market as oil stocks spiked dragging everything else along for the ride.

Today we had a variety of headlines that seemed to indicate that the Fed was not seriously considering negative interest rates at this time (but Japan said that just one week before going to a Negative Interest Rate Policy).  This should have taken some wind out the market if they were hoping for more free candy from the Fed, but the computers that read the headlines missed the context and only picked up on the words Fed & Negative Interest Rates.  This sparked some more panic buying in the morning which beget more buying and the week was saved.

Now we have to deal with the fact that
* the oil headline that saved the market has been ignored by the only parties that really matter - Russia & Saudi Arabia (who appear to be ready to go to war in Syria against one another so I'm thinking they aren't in a real cooperative mood)

* the statement issued to the WSJ was sent around midnight in the middle east which seems a bit odd

* and even the WSJ questioned the validity of the production cuts, but no matter, the active traders had their best week in years and you get to sleep better this weekend as the stock market avoided collapsing for another week.


PS - don't buy any of the nonsense headlines that today's rally was sparked by strong US retail sales. They were wildly over-inflated by seasonal adjustments and if you believed those numbers you'd be selling stocks today because it would bolster the Fed case for raising rates further.

* A special note for Time Warner customers: They are starting the campaign to add a set-top box rental to your account.  If you currently just run the cable wire into the back of your TV, that will no longer work as of June 2016 and you'll need to get a device (like a $40 Roku) or rent a set-top box for $3/month from your friendly neighborhood cable behemoth. For someone like myself with 4 televisions in the house that is $12+/mth forever and I wonder if they'd ever raise the price of the rental? :)  I'm buying an HD antennae and if that provides an adequate signal I'll probably cut the TWC cord for good.

Thursday, February 11, 2016

Not trying to cause a panic, but it's time to FREAK OUT!

Just kidding, relax and take a deep breath.

Global markets are under severe pressure and the numerologists...um, sorry Technical market analysts are running the show right now.  If you remember last week I said the number that everyone on Wall St. was worried about was 1812.  This represents the low of the S&P 500 way, way back in Jan 2016 (yeah, three weeks ago) and it seems like the programs want to retest that number (futures are bouncing around but were 1814 last I checked).

A significant break below that level and I don't know what the machines will unleash but it may not be pretty.

So what's driving this latest move?  I'd guess it's some pretty vague "sentiment" like

* Concerns about Central Banks having few policy tools left


* Fed Chairwoman Yellen's comments yesterday which almost asked the market to crash.

Okay, so that's probably a bit extreme, but in a nutshell this is what the head of the Federal Reserve said -- if markets were to continue to swoon, the Fed could consider reversing its plan to tighten.  This is code for "if Wall Street wants more free gov't cheese in the form of lower rates or direct intervention, stocks need to go lower first".

The market and global economy are acting very much like they did in 2013 when I first saw signs of weakness.  What I did not expect was that the Fed would come to the rescue once again as soon as equity prices dipped.  The major investment houses are about to call the Fed's bluff again - will the Fed come to the rescue for the umpteenth time and more importantly, will it even matter to the markets?

Today might be a wild day as the Fed Chair Yellen will be speaking throughout the day while the markets continue to gyrate.

** Update: This is how crazy the markets have become - in the past 30 minutes before the markets have even opened, buyers have flooded the market assuming that this dip will be sufficient to induce the Fed to act and the futures are well off the lows of the morning.  Good luck trying to figure out how this relates to the actual value of a company anymore.  The stock market is just game of 1's and 0's for the computers.

One final note that I thought I should mention.  When it comes to predicting the outlook for global trade and by default global economic growth would you rather listen to an economist who has never worked outside of a university (ie, most of the current Fed Reserve Bank heads) or someone who runs the world largest shipping company?  Hmm, I'll take the shipping CEO for $200 Alex.....

Well, the CEO of Maersk (you see their containers EVERYWHERE) told the Financial Times yesterday that "It is worse than 2008. Oil is as low as it was in 08-09 and freight rates are lower.  The external conditions are much worse...." so, that's something to keep in mind.


Wednesday, February 10, 2016

Everything is fixed. Go back to your regularly scheduled program.

For the second time in 2 weeks the market stared straight into the abyss and bounced.  The bounce began on Monday when a determined set of programs bought stocks in consistent enough intervals to drag in other programs that use plain vanilla if/then strategies.

Overnight stocks soared on ........ insert random idea here -
Trump victory?
Clinton loss?
The German government promising to save Deutsche Bank?

However, the most likely cause is the one the markets can't seem to live without - Fed Chair Janet Yellen is speaking today.  So, the expectation is that she will utter something even beyond what is taken for granted now, the prospect of negative interest rates or QE4, but perhaps preemptively taking the next Fed rate hike off the table.

At this point the Fed's credibility is the asset that is in the most danger so it will be interesting to see how the market reacts, but right now they want to make money on the buy side so it's a green day for everyone (except Solarcity - YIKES!).


Monday, February 08, 2016

Selling Vonn Miller Jerseys in Charlotte?

With China effectively shutdown for the next week as a result of the Lunar New Year celebrations most people expected a relatively calm week on Wall Street.  However, that calm was severely disrupted this morning - specifically at around 4:55am when someone stepped on the selling accelerator.

A specific sell order hit the market at just before 5am and while it was not particularly large it hit at a moment when the markets were quite "thin" (ie, few buyers and sellers in the market).

Imagine trying to sell Vonn Miller jerseys this morning in Charlotte to understand what it means to sell into a thin market.  You might have to lower your price quite a bit to complete a sale :)  This sell order took the markets lower just as European markets were preparing to open.

So, what is triggering this late round of worries?  Well, there are the usual suspects of slowing growth, concerns about the Central Banks becoming less effective, etc., but I think the greatest concern that I have seen lies in Germany.

Credit Default Swaps (CDS) are incredibly complicated instruments but for simplicity's sake let's just call them insurance.  They are insurance against a company becoming unable to fulfill its obligations.  During the 2008 crisis the CDS signals from Lehman, AIG and Bear Sterns were the most consistent warning signs that something was very, very wrong.  You can use these prices to help calculate the market's assumption that a company may default.

Well, Deutsche Bank (likely the largest bank you've never heard of) has seen their risk of default rise from about 5% to over 16% in the past couple of weeks.  Anything above 10% is disconcerting in my opinion and there doesn't seem to be much relief in sight.  Deutsche Bank also has about $55 trillion - yet trillion with a T - in counterparty exposure.  This simply means that what impacts Deutsche Bank impacts every major financial institution in the world.

I don't know how this will play out and I'm not ready to forecast that Deutsche Bank is the next Lehman Brothers, but this is the stuff behind the headlines that is actually moving the markets.  The lessons of 2008 have been completely ignored and the global banks are more concentrated today than in 2008 and they have assumed even more risk.

For the record my past employers included Lehman Brothers, AIG and..... yep, Deutsche Bank.  I'm going for the global financial crisis catalyst trifecta :)


PS - remember 1810-1815 on the S&P 500 (currently 1880).  If we were to close below those levels the computers will likely go haywire trying to find a new bottom and it could be significantly lower (note, I'm not a technical analyst and I think that technicians are more closely related to numerologists than analysts, but the markets are ruled by the charts right now).

Friday, January 29, 2016

Kudos to National Grid

I am not typically a fan of our local utility as they continuously escalate prices in an era when their cost of electric production should be plummeting, but I've seen them locally taking a proactive step and I wish more companies would follow their lead.

As part of their work to manage the growth of trees around overhead power lines the National Grid does routine tree trimming to take away limbs that could impact the power lines in the event of a wind or ice storm.

In the past week they have been concentrating their efforts around our community and the evidence is everywhere.  I think if you looked around you'd be hard pressed to find a single tree that is threatening our overhead power lines right now.  Given the warm, El Nino influenced winter we're having and the similarities to 1998 when our region was hit by a paralyzing ice storm this is both proactive and surprisingly visionary.

I hope that this isn't just some government grant to keep stabilize National Grid payrolls, I'm hopeful that this is an example of a large corporation realizing that a small investment today can pay great dividends in the future through reduced exposures.

More companies should take up the "Invest for Today, Win Tomorrow" mantra over the "Cut Costs Now, Cut Costs More Tomorrow" policy that is so prevalent in corporate America today.


* I know the tree trimming can be controversial because it can give some of the trees a fairly odd shape, but the benefit of having electricity during the next major storm should offset any discomfort you feel from looking at ugly trees :)

Has the world gone crazy all at once?

Overnight the Bank of Japan announced a fairly shocking move to Negative Interest Rates (you'll hear this referred to as NIRP - negative interest rate policy).  This really caught investors flatfooted because just a week ago the Bank of Japan said they had no plans to adopt such a policy.

In a nutshell, here's what this means - If you buy a government bond in Japan (ie, lend them money) you get to pay the government for the pleasure of lending them your money.

Yes, this is crazy, but this the world we live in now.  Japan has now joined a number of European countries in trying to reflate their economies using old world techniques.

This is akin to a cable TV company hearing that subscribers are leaving them for Amazon Prime & Netflix so they decide to give you a free typewriter with every upgrade.  The central banks around the world are fighting a losing battle to increase inflation (and wages, etc) with tools from the 20th century.  However, we're in the 21st Century and the globalization of our economies means that these tools will no longer work.  Deflation is a beast that can't be contained within borders.  If prices rise in country X, you move your operations to country Y to lower costs.  This is why we are seeing so many of our global economies struggle.  In the long run, this is a very bad sign for the world's 3rd largest economy and it furthers my argument that Japan is a larger version of Greece with a worse demographic outlook.

The global stock market reaction has been very weird.  Initially stocks soared 2% globally only to fall back into negative territory within the hour and then soar again in a very organized trade overnight. While I think you could argue that this is a mild positive for the Japanese stock market (their plan is to weaken the value of the Yen which will increase stock prices, however since your Yen will buy less the average citizen would not be impacted) but the argument that ALL stock prices should rise is really flawed.  The 2nd and 3rd largest economies in the world are beginning to engage in a global currency war (China might pull their own black swan and really devalue the Yuan in response).  This will make our products much more expensive globally and damage the US economy in the long-run.  Currency wars are a zero sum game, if Country A wins, Country B loses.

However, markets are no longer based on rational thoughts like these.


Good luck and remember that Selling the Rips has been the only winning strategy in 2016.


Wednesday, January 27, 2016

Americanize, Americanize, View the World From American Eyes

Any chance to use one of my favorite song lyrics in a blog post is always a plus.

This is a very long article from Atlantic magazine (does the Atlantic even bother to write short articles?) but I'd suggest you take 10 minutes and give it a read this weekend if you value your privacy.

"The company has taken roughly 2.2 billion license-plate photos to date. Each month, it captures and permanently stores about 80 million additional geotagged images. They may well have photographed your license plate. As a result, your whereabouts at given moments in the past are permanently stored. Vigilant Solutions profits by selling access to this data".

As my increasingly wary teen daughter said tonight "We might have to resort to riding our bikes to the store so Amazon won't know when we're out of milk".

Since I'm in a link sharing mood: This interactive chart from McKinsey should be on the home screen of every parent with a child looking at colleges.

While at first it appears very cluttered, I'd suggest you breakdown the data by selecting specific industries (uncheck the "ALL" box on the right hand side of the chart).

In essence, the chart is designed to show you the percentage of a job that can be automated (ie, replaced by a robot or software) versus the pay of that job.  Ideally you want to be in the lower right hand of the chart --- low % of automation & high salary.  However, more interesting are the jobs in the middle and toward the top.  These jobs are high paying but are subject to a high degree of automation.  Network administrators, nuclear power plant techs, etc., these jobs might be in real trouble when companies look to cut costs through automation.

I'd say however, that much of this chart is based on standard industry inputs.  They show very high demand for financial planners, etc., however, I actually think that industry will be completely dead in 20 years so take it all with a grain of salt.  Either way it should prompt some interesting conversations.

And as various doctors in our family have all confirmed make sure your children grow up to be Nurse Anesthetists :)


Has #BTFD been replaced with #STFR?

Today's little temper tantrum in the market caught most of us by surprise.  The consensus expectation for what the Fed would say was actually pretty accurate and yet, the market acted as if it was surprised that most Fed forecasters were actually right.

After 7 years of extraordinary measures to attempt to rescue the US economy the Fed decided in December it was time to see if the economy could ride down the driveway without its training wheels.  The market has responded as it has at each previous point in the Great Recovery - selling off hard and demanding more Fed measures to prop up equities at any and all cost.

This created a clever hashtag related to the markets: Since the Fed has our back, every time the market falls just Buy The Flipping Dip - #BTFD (though the actual word probably isn't flipping but this is a family blog, right?)

Well, now that the Fed seems to be working with either bad data, old data or is just clueless, the markets have become rattled and the question bouncing around Wall Street is should we Sell The Flipping Rip - #STFR (ie, sell every bounce).

So far in 2016, #STFR is winning this battle of wills, but there will be plenty of opportunities for the dip buyers to have their day.

Facebook will be the talk of the town tomorrow after delivering good results (though average daily users seems to have plateaued thankfully).  I'd expect plenty of Fed chatter as they try to confuse the market with what their message REALLY is.

If you've been on the right side of the trading in 2016, this has been an incredibly lucrative year in the first month.  However, I suspect many active traders are getting burned by chasing ideas and that means there may be fewer natural buyers if we get close to those dangerous levels on the S&P 500 again - 1820 is a number to have on a post-it note in your office.  If we break that number the implications for everything from state budgets to the 2016 elections will be huge.