Pro Perspectives 12/12/19

December 12, 2019

We talked yesterday about the surprisingly more dovish Fed communication yesterday.  

By this morning, Trump added to the melt-up formula with hints of a signed trade deal coming.  This afternoon reports said terms were officially agreed to by both parties.

With that, stocks have traded to new record highs today.  Yields traded to the highest levels in a month.  And commodities are moving.

Now, will all of this in mind, it’s very clear that confidence has waned, as time has passed, because of uncertainty about the trade war outcome.  Waning confidence has led to declining manufacturing output and weak business investment. That, in turn, has led to lower inflation expectations.  And this all has led to a pivot by global central banks to a (near) maximum easing stance.

Does a legitimate signed deal turn it all around?  My view: Yes.

As we’ve discussed for the past several months, with rate cuts under his belt, Trump can claim victory on the trade war whenever he wants (he has had the position of strength).  He can then turn back to Congress on the next pillar in Trumponomics — a $2 trillion infrastructure spend (which the Democrats want).  Remember, he’s the one that walked away from deal talks back in May (he’s in the position of strength).

This would set up for the economic boom scenario we’ve talked about for some time. 

Remember, coming out of the Great Recession, we haven’t had big bounce back in growth that is typical following a deep economic contraction.  In fact, at this point, we would need six-years of 6% growth to put us back on path of trend growth (from the 2007 peak in GDP).

We haven’t had growth like that since emerging from the Great-Depression.  The mid-30s bounce-back started with a reduction of tariffs and government spending programs.  That’s precisely what’s lining up (i.e. reduction of tariffs and government spending). 

 

Pro Perspectives 12/11/19

December 11, 2019

We entered the Fed meeting today expecting no surprises.  I would point out two statements that surprised me:

After three rate cuts in five months, and over $300 billion of asset purchases, Powell described monetary policy at this point as only “somewhat” accommodative.

Statement #2:  Remember Powell’s statement this summer that rate cuts were simply a “mid-cycle adjustment” (i.e. a reset in a longer term hiking cycle)?  It made Powell sound like he was in denial about the Fed’s mistakes of the prior year.  The markets didn’t like it.  Today, he walked that back by saying, “need for rate increases is less than it was in the mid 1990s cut cycle.”

Bottom line:  We were expecting a “we’re on hold, nothing else to talk about” tone from the Fed.  But we got a more dovish Fed communication.

You could argue that this all indicates that the Fed has no confidence that the global trade wars will be resolved.  I would argue that they now (finally) understand, given the persistently subdued inflation data, that the downside risks of being overly easy are less (maybe far less) than being overly tight.  The latter, the markets should like.

Pro Perspectives 12/10/19

December 10, 2019

The Fed meets tomorrow.  It should be a non-event. 

As we discussed yesterday, the Fed is no longer following the “wait and see” strategy when it comes the the potential of an endless trade war.   With three rates cuts and balance sheet expansion at a better than trillion-dollar annualized pace, they are positioned for the worst-case scenario — and not likely moving until proven otherwise.

With global QE back to full speed, and the growing likelihood that Europe will follow the lead of the U.S., and now Japan with aggressive fiscal stimulus (i.e. deficit spending), is it time to buy gold again?

Gold was unusually up today in a market that carried a relatively positive tone for the day.

But as you can see in the chart below, gold has been on the move lower since the Fed has been expanding the balance sheet.

At the depths of the global financial crisis, when the Fed launched QE, gold started the sharp climb from sub $700 to over $1,900 — all on the fear that QE would trigger runaway inflation.  It didn’t happen.  By the time QE2 and QE3 rolled around, the behavior of gold prices changed.  Gold went up in anticipation of QE.  But gold went down when the Fed actually starts expanding the balance sheet.

I suspect the time to buy gold will be the trade war overhang is officially cleared, and the global economic data starts producing positive surprises, especially in inflation.

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Pro Perspectives 12/9/19

December 9, 2019

On Friday we talked about the big ECB meeting on the agenda for Thursday.

This will be Christine Lagarde’s debut as ECB President.

She inherits the job after a decade of global stimulus that has left the eurozone economy running at 1% growth and 1% inflation.

Her predecessor, Mario Draghi, recently restarted another bond buying program (QE) in Europe, with no clear end in mind.  And that’s not only because of the sluggish economy, but because the economy has been deteriorating from weak levels. 

Friday’s German industrial production data was a good example (chart below) …

We already know that Lagarde is making her plea to eurozone lawmakers for fiscal stimulus, with hopes to follow the leads of the U.S., and most recently Japan (which just announced the intent to launch a quarter of a trillion dollars worth of fiscal stimulus).

But will she do something more aggressive and creative on the monetary stimulus front?  Over the past few months, we’ve discussed the prospects of the ECB following the path of Japan, by outright buying European stocks.

It all boils down to the risks of the trade war ramping up in Europe.  As we’ve seen, global central banks (namely the Fed and ECB) made the mistake last year of ignoring the potential outcomes from the trade war.  The markets threw a penalty flag on them, and this year, they’ve been reversing course and positioning for the worst-case scenario.  There is far less downside from being positioned defensively and getting a positive surprise, than trying to react to a negative surprise. 

With this ECB meeting coming down the pike, let’s take a look at the recent trends in some key European data.

You can see, the trough in economic sentiment in Europe was back in 2012, when Draghi came to the rescue to ward off a debt default in Italy and Spain.  The ECB became the “do whatever it takes” backstop against all risks.  And confidence came roaring back. But sentiment/ and the outlook turned when Trump launched tariffs on China.  

Similarly, the PMIs in Europe topped out and have been on the slide since Trump acted early last year on his tariff threats. 

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 12/6/19

December 6, 2019

Stocks continued to complete the “V” shaped recovery on the week, following the big jobs report this morning. 

Let’s take a look at some charts as we end the week.

First, here’s a look at the “V” in the S&P 500, as we close back near record highs today …

And as we discussed yesterday, we had a similar “V” in the interest rate market …

Today, the notable mover was copper – up 3.2% on the day.  This is where you see some early bets of upside surprises coming for the economy (which fits the theme we’ve been discussing). 

Now, let’s take a look at the sleeper market for next week.  Spanish stocks (and European stocks, in general).  

The media will be focused on the Fed next week, but the bigger event might be in Europe.  As we discussed yesterday, Christine Lagarde will make her debut as the ECB President in her first policy-setting meeting with the governing council.

In recent months, we’ve talked about the prospects of the ECB ramping up the QE program by outright buying European stocks.   Curiously, this week, as U.S. stocks were in an ugly slide, European stocks were holding positive most of the day.  Was the ECB involved?  Maybe.  We will find out next week. 

This data point today on German Industrial Production (down 5.3% year-over-year) will contribute to the case for pulling all of the levers at the ECB. 

 

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Pro Perspectives 12/5/19

December 5, 2019

Yesterday we talked about the “V” shaped move in stocks to open December — a sharp down move, followed by a sharp recovery.

We’ve had the same in yields.

As you can see in the chart below, since Monday, the U.S. 10-year government bond yield has done a (near) round trip …

What didn’t move was the market’s expectations on the Fed next week.  The fed funds futures market has been pricing in a zero chance of a cut on Wednesday.  That hasn’t changed, despite the sharp move lower in stocks and market interest rates to start the week.

But as we know, the Fed already has the peddle to the metal – with three rate cuts this year, and with a resumption of balance sheet expansion.  As you can see in the chart below, that has been good for stocks …
Add to this, we now have the BOJ following the lead of the Fed with big, bold fiscal stimulus (5% of GDP).  And expect Christine Lagarde’s debut next week as ECB President, to include pleas to European lawmakers for fiscal stimulus.  With this backdrop, a formal deal with China would unleash a U.S. (first) and (then) a global economic boom.

 

Pro Perspectives 12/4/19

December 4, 2019

Yesterday we laid out the parallels between early October and these first few days of December.  The mood in early October, surrounding stocks (and the risk environment), soured on 1) weak manufacturing data, and 2) more hard ball from Trump, on trade.  We’ve had the same this week.  

And so far, we’ve had a similar response in stocks. First down sharply, then up sharply.

Why?  Remember, back in October, Trump ramped up the aggression against China, and it paid off.  Days later they were shaking hands on a deal. The S&P went on to 2% gain on the month.  

So, yesterday we get more tough talk from Trump on China, giving the appearance that he was blowing up a potential deal.   But as we discussed in my note yesterday, it looked like a repeat of his October tactic – to gain additional leverage, perhaps to get final details of a “Phase one” deal to swing his way.   That appears to be the case.  By last night, reports were saying Kushner’s recent involvement in the negotiations meant a conclusion was near, and there were reports that China was working out who to send to a deal signing (also saying it won’t be Xi). 

So we have this chart on stocks …

How much is a signed trade document worth to the stock market?  A handshake in October was a 7% move in 21 days (from the lows of October, to the end of the month).   

Remember, we’ve been talking about the 1995 analog all year long, where stocks rose as much as 36% on the year, as the Fed was forced to reverse course on monetary policy.  We’re seeing the same dynamic from 2018 to 2019.

With the above in mind, the S&P 500 closes today up 24%.  With a forward P/E still well below 20 and a 10-year yield of 1.75%, a 30%+ year is still in the picture.

 

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!