Still Believe in Santa?
Posted on Monday, December 3rd, 2018
Jay Powell from the FOMC made the biggest headlines last week as he walked back hawkish comments from October 3rd that started the stock downdraft. We thought he might. Here is what we said the week prior.
Fed officials may try to walk back hawkish comments and markets may rally on those comments but as long as the flow is to decrease the balance sheet asset prices will struggle.
Blind Squirrels have to eat too and sometimes we are lucky enough to find a nut. Markets rallied on his seemingly dovish comments as shorts ran for cover and markets rallied. We don’t see his comments as dovish though. He said almost exactly what he said in October but he said it a bit differently. The game plan is still to keep tightening while raising rates and taking down the balance sheet. That flow will keep markets on the defensive.
This week is all about the results of the G20. The market stands to announce its verdict this morning with early line being up 400 points on the Dow Jones. That twitter account is paying dividends. Don’t get caught up in the day to day and the twitterverse. The near term is dictated by jumpy traders and quants. The real longer trend and cycle is determined by monetary policy and the Fed and that has not changed. Let the traders chase this market. We are still stuck in the range between 2550-2950 on the S&P 500 and anything else is just noise.
2019 is still going to be a tough year and the problems may stem from corporate credit. Fear is growing in this very important sector of investing. GE and PCG have their problems but the decline in the price of oil could bring issues as well if oil companies begin to struggle to pay back their debts. There is a huge amount of debt rolling over in 2019 into higher yielding debt. Margin pressure is going to increase for US corporations and perhaps even solvency for some.
The Federal Reserve issued a cautionary note Wednesday about risks to financial stability, saying trade tensions, geopolitical uncertainty and a buildup in corporate debt among firms with weak balance sheets pose strong threats.
The S&P 500 lost 3.5% during the usually slumber Thanksgiving week. This past week the S&P 500 made a complete U Turn with a 4.8% rally. This was the best week for the S&P and the NASDAQ since 2011. These are not the types of days that you see in bull markets. These are bear market days. The volatility is brought by investors reaching for liquidity on the down moves and seeking long exposure and covering shorts as they chase the market higher. This week was really one big short covering rally. Short covers tend to be fast and sharp and die off quickly. It’s like throwing kerosene on a fire.
Mini range from the last month is 2625 – 2825 on the S&P 500. Investment managers are going to try and keep this rally going into the end of the year to make their numbers look good. Some still believe in Santa Claus. There are also esoteric concerns about liquidity and bank reserves at the end of the year which could exacerbate things.
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.