Trumps’s War
Posted on Sunday, July 22nd, 2018
While our President has said some wild things our antennae is up as he spoke in an interview with CNBC last week. He has made it clear that he wants a weaker dollar, especially in reference to the Chinese yuan, as the stronger dollar is hurting trade here in the US. It seems that his statement is a not so subtle approach to pressure the Fed into slowing their interest rate hikes. As we have been warning for months now, we felt that the Federal Reserve was going to have to try and withstand some intense political pressure surrounding its handling of monetary policy. While we thought that pressure would come from Congress and other central banks around the world we didn’t anticipate it coming from the White House and so soon. In the interview Trump also made the disturbing statement that “we’re playing with the bank’s money”, in regards to stock market gains. It is clear that we are now in a currency war AND a trade war with China and that the President is willing to wager some of the stock market gains in an effort to “win”.
We have been saying for weeks that we are not comfortable with the narrowing of stock market returns. We are getting that 1999 feeling again as investors pour into high tech stocks and leave value stocks for dead. Howard Marks, the legendary leader of Oaktree Capital, was again out warning on FANG stocks this week. He warned that ETF’s and momentum investing are increasing the risks for the FANG stocks. (Those stocks are Facebook, Amazon, Netflix and Google.) We may have seen a shot across the bow this week as Netflix disappointed with its growth figures and investors jumped out of the stock. Keep an eye on Netflix. If leadership in the market begins to wane it could pressure other assets as liquidity is king.
By way of Arthur Cashin come some statistics on the narrowing of market leadership from his friend Jim Brown at Option Investor. Brown sees the narrowing of market returns as a risk to watch.
There was a lot of discussion last week about the narrow breadth on the S&P. In 2018, only five stocks supplied 91% of the gains on the S&P. The other 495 stocks were tradeoffs.
In any market where breadth is narrow and the leadership is held by only a few stocks, there is always risk of falling. Eventually the gains in those stocks become so unbalanced, investors are forced to sell. This typically happens when the momentum stalls for 2-3 days and traders begin to worry. They eventually pull the exit trigger and the market collapses. I am NOT saying that is going to happen in the coming weeks. However, the gains in these stocks are so large, it WILL happen later this summer. These stocks contributed the most to the S&P gains in 2018. AMZN 35%, NFLX 21%, MSFT 15%, AAPL 12% and FB 8%.
Regardless of their position today, the S&P would not be over 2,800 this weekend without them. The S&P is only up 4.8% for the first half of the year. It is not like we had a 10-15% rally and now everything is overbought. These five stocks are overbought but they still have room to run before the charts begin to look like the Nasdaq bubble in 2000 all over again. As investors, we should understand the risks. – Cashin comments 7/17/18
While equity markets treaded water for the week they managed to hold the 2800 level on the S&P. That is good news for the bulls as they were able to hold their recent highs at this critical resistance level. Let’s see if they can get across the finish line next week and break out of this range. Our experience tells us it may take another small sell off to gain the momentum for the breakout. The Federal Reserve will be draining in the next 7 business days and that may produce a headwind for assets.
No blog the next two weeks as we stumble through Tuscany and celebrate our 50th birthdays.
I think we aspire less to foresee the future and more to be a great contingency planner… you can respond very fast to what’s happening because you thought through all the possibilities, – Lloyd Blankfein
To learn more about us and Blackthorn Asset Management LLC visit our website at www.BlackthornAsset.com .
A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill
Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor.