Apparently, the flogging of the dollar will continue until morale improves. I said my peace on the topic last week, but that hasn’t prevented markets from upping the pressure on the greenback. The prospect of a government shutdown added to the pain last week—it is now a reality—but so far other markets haven’t taken note. Bond yields have been rising, although not faster than before the dollar was taken to the woodshed. And equities…well, it’s looking pretty good, isn’t? Global equities rallied incessantly last year, and they have come out swinging in 2018. The MSCI World is up a punchy 4.3% year-to-date, and we aren’t even through the first four weeks of trading. In case you’re wondering, this pace would deliver a cool 74.5% return for the year, if sustained. Even the most ardent equity bulls probably don’t believe that, but I am starting to wonder what exactly we’re supposed to expect. I have also reached the stage where I am struggling to make sense of my equity models. I concede that the technical picture is mixed. My normalised put/call ratio on the S&P 500 has collapsed, indicating that few investors are bothered to hedge. Breadth, however, remains resilient, hinting the big bear is still far away.Read More
Equities continued to roar higher last week, but they played second fiddle to FX and bond markets in terms signal over noise. In currencies, King Dollar is under attack from all sides. I am no chartist, but it’s looking grim for the dollar. EURUSD is about to complete a break-out from an inverted H&S, GBPUSD is making higher lows, USDJPY is flirting with a break lower from a long and tight range, and USDCNY similarly looks poised to re-test its lows. DXY traded with a 91 handle in a few sessions last week, tagging its Q3 lows. On that occasion, the dollar stepped back from the brink in part due to intervention from the PBoC. With rumours swirling that China is losing its taste for U.S. treasuries—it makes sense given a dwindling CA surplus—we should be watching whether the PBoC is willing to draw a line in the sand, again, at 6.45. I suspect it will because I doubt that it will want to invite further scrutiny about what happens if or when the economy opens up an external deficit.
You would probably think that the dollar’s lousy performance be associated with lower yields, and narrowing rate spreads with the rest of the world. Au contraire, U.S. bond yields have been rising, which has led analysts to argue that yield differentials have ceded to other macroeconomic fundamentals.Read More
On a headline level, 2018 has started exactly as 2017 finished. Stocks are up, U.S. short term rates are up—but the dollar has traded heavy—and economic data continue to tell a story of a synchronised upturn in global growth. The bears are furious, or perhaps just confused. Hussman recently published a prepper’s guide to a hypervalued market. And value investor extraordinaire—and famed bear—Jeremy Grantham from GMO invokes the “highest-priced markets in US history,” but also proclaims that we’re now in the “melt-up phase” of the bull market. I am all for holding opposing views at the same time, but markets demand a view and a position. So which is it Mr. Grantham? Long, short, or flat? I am not holding my breath for an answer. I have long since left the extremes behind. Picture a spectrum with Hussman and GMO at one end, and the wet-behind-the-ears trader, who have never experienced a sizeable drawdown in Spoos, at the other end. Hint: You want to be somewhere in between.
Separating signal from noise is an important skill in this game, and markets currently are throwing a number of curve balls at investors. What better way to kick off 2018 than by highlighting the ones that matter.Read More
Barring a disaster in the final trading sessions of the year, the portfolio will return about 5%—excluding fees and dividends—in 2017. This is a far cry from the nearly 20% of the MSCI World, but better than a hole in the head. The good news was concentrated in the first half of the year. Profit-taking trades in Wells Fargo, Sabadell and Japanese equities added to the strong performance. From spring onwards, however, performance hit the skids, and only recently have returns started to improve. Slumps in General Electric, Xper have been the primary drags, but the dumpster fire has been more broad-based than that. A 15% allocation to gold and commodities—industrial and soft—for example, haven’t done me any favours either. Neither have exposure to producers of generic medicines and other small-cap pharma firms. Finally, various attempts to hedge out impending, but ultimately non-existing, sell-offs in the market as a whole also have hurt. Syntel and Urban Outfitters have been rising from the ashes in recent months, and I am hoping that further mean reversion will reach the rest of the portfolio next year. Given where we are in the cycle, the risk of a balanced equity portfolio losing money is rising. But let’s see whether I can’t come up with some ideas.Read More