Author Archives: opadmin

Fasten Your Seatbelts!

Gold had its best first quarter in years, up $174 an ounce or roughly 16%! The S&P 500 declined 11% in the first few days of January in what was the worst start for any year ever. It recovered by the end of the quarter to a little better than breakeven year to date. We are now at trading levels first broached back in November 2014. That is not a lot of progress over that time frame.

What are some of the reasons for the volatility?

As we have written in the past, it comes down to earnings. The Wall Street Journal reports “analysts project earnings for S&P 500 companies to slump about 8.5% from a year earlier, according to FactSet estimates as of March 31, with particularly downbeat reports expected from the energy sector. “The corporate earnings outlook is low to flat,” said Oliver Pursche, chief executive at Bruderman & Co. Following a two-month rally in U.S. stocks, “the best word for sentiment right now is probably ‘confused,’ ” he said.”

Weak earnings have been projected and anticipated for months now. It has been difficult to quantify how much the earnings slump has been discounted as equity markets are hovering at higher levels. Energy companies will have the worst declines by far. Oddly enough, energy stocks have had some of the best returns this year, primarily on short covering and hopes of an output agreement by producing nations.

We technically remain in a “bull market” despite earnings. Bloomberg Gadfly writes “only a bear market can kill a bull market, and traditionally it takes a 20 percent plunge from a peak to mark the beginning of one. The S&P 500 is down about 4 percent from its last record, and it never officially experienced a 20 percent drop, even amid the ugliness of August and January, so the bull is still running, at least theoretically.

But it sure doesn’t feel like it. The main reason is that last record was such a long time ago — May 21, 2015, almost a full year. And in fact the level that the index is trading at now was first reached in November 2014, so it is basically where it was a year and a half ago.”

The most recent estimates from analysts show profits returning to 5.1 percent growth in the third quarter and 10 percent in the fourth, according to Bloomberg’s tally.

Another reason: The Fed. They continue to tell us why rates need to go higher and then do the opposite. This has been going on for years now. Great central government planning! A June rate hike is now on their agenda. Don’t plan on one happening for the rest of the year.
This is all going on simultaneously while Fed Chairwoman Yellen has been exploring the possibility of negative rates (you pay a bank to hold your savings) here in the U.S.A. I fail to understand why she thinks negative rates will be beneficial after we’ve been suffering with a Zero interest rate policy in place for several years now.

The policy has been a disaster in Japan and Europe so far. The Wall Street Journal writes “Monetary-policy makers, bankers and economists are looking to the experience of Europe and Japan and asking whether subzero rates would boost the U.S. economy.”

“It is a hypothetical question for now; the Federal Reserve has signaled it expects to raise interest rates by a total of half a percentage point this year, not cut them. But with rates just barely above zero, the recovery getting long in the tooth and Fed Chairwoman Janet Yellen saying in February the U.S. central bank was studying the feasibility of using negative rates should it need to give the economy an extra boost, the discussion is hard to avoid.”

Think about this: In Denmark some mortgage holders are benefitting inversely. With negative interest rates, they’re actually receiving interest payments from the banks they initially borrowed from! Over there the banks pay you to borrow and charge you to save. Excellent central bank planning!

We remain very cautious on the outlook for stocks. There are too many scenarios (militarily, politically and economically) developing with very low levels of certainty. This July we have back-to-back conventions: The Republicans in Cleveland and the Democrats in Philadelphia and anything is possible. Unfortunately, it sounds like certain people are going to express their first amendment rights in anything but a peaceful way.

Spring is here, the flowers are blooming and baseball is back. What could be better? Go out and enjoy the day!

Brock Hamilton
April 2016

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Gold, Guns, Tobacco and Whiskey

I am not commenting on what was in Humphrey Bogart’s saddle pack in the 1948 production of “The Treasure of the Sierra Madre”. The asset categories in the title are some of the best performing stock groups so far this year. We do own gold but have held off on guns, tobacco and whiskey. And what a year gold is having!

2016 is starting out as the worst year ever for the Dow Jones and S&P 500. As of February 3, the Dow is down 6% and the S&P 500 is down 7% year to date. Both indices were basically flat for 2015. Many Hedge Funds (you know, the “smart money”) went out of business last year while others suffered extraordinary losses.

Volatility has been tremendous. It’s not uncommon to have the Dow up 200 points in the morning and then see a reversal and finish the day with the Dow 200 points lower. Not a single IPO was priced in January; something not seen in years.

S&P 500 One Year – 2/3/2015 to 2/3/2016

chart

So what is the outlook for 2016? Recession talk is getting louder and louder. Will the Fed raise rates again this year as planned? What happens if they don’t?

Bloomberg had some interesting comments on the matter: “Go ahead, make a prediction about 2016. It’s easy if you try. Don’t worry if you’re wrong. You can always come up with a new one next week.”

“That’s what a growing number of Wall Street analysts seem to be doing as they revise their forecasts almost as soon as they have made them.” They went on to say: ” You can’t really blame the strategists. Just think, every week, central bankers come out with new statements. They make mistakes. They’re running out of ammunition to support markets. Central bankers watch stocks and bonds, which are increasingly moody as investors, in turn, watch central bankers. The global economy is clearly slowing, but by how much? Who knows. Nobody trusts China. Whither oil. Analysts at big banks are clearly struggling to make sense of it all.”

We’re all in uncharted territory with the grand experiment of the world’s central banks. The best of the best remain absolutely clueless!

The clueless are now setting us up for the possibility of “NEGATIVE INTEREST RATES” in the U.S. It means what is says. Banks may charge you to hold your deposits. The U.S. Treasury could issue bonds whereby you get back less than you put in.

Do you think it’s not possible? The Financial Times reports today: “The universe of negative yielding debt around the world grows beyond $5Trillion as central banks indicate further easing. If major government bond markets are right, the global economy is sliding towards recession and central bank easing policies will pull borrowing rates deeper into negative territory.”

Many big investment firms are hoarding cash and many investors are becoming skittish and increasingly bearish on risky assets. Markets hate uncertainty. It is in great abundance now. It’s hard to see how stocks and riskier bonds could experience a sustained rally until a greater degree of confidence sets in.

To finalize, we are maintaining relatively low levels of equity exposure now as the volatility returns day after day. Stocks and other assets are being “re-priced” based on the slowing global economies and the ongoing depression in the oil patch. Patience should be rewarded!

world

J. Brock Hamilton
February 2016

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Worst Start Ever

Well, there is no need to mince words about how the year for stocks is starting out. The first week of trading in 2016 has turned out to be the worst start to a year for stocks in history! 2015 ended the year as the worst year for stocks since 2008. U.S. stocks closed out the final trading day of 2015 with both the Dow and S&P 500 suffering their first year of negative returns since 2008 when the financial crisis was in full swing.

The S&P 500 had a loss of less than 1% and the Dow Jones Index finished 2015 with a loss of 2.2%. As of this writing the S&P 500 is down 7% and the Nasdaq is down 9% since the start of 2016.

The reasons for the declines are many: The end of Quantative Easing by the Fed; the first official interest rate increase in years; and extremely over inflated assets around the world funded by cheap debt.

Because of the amount of debt created in the last eight years, central bankers remain desperate and are taking all measures necessary to stimulate growth and inflation. That’s the only way to pay down the debt in the future.

Earnings growth in jeopardy
Investors in the S&P 500 have had to endure something in 2015 that they haven’t seen since 2009: persistent weakness in corporate profits. During the second and third quarters of 2015, the S&P 500 posted year-over-year declines in earnings, and as of the end of the year, analysts expect another round of falling earnings when companies report their fourth-quarter results in the next few weeks. Analysts expect earnings to fall by about 4% when S&P 500 companies report their fourth-quarter earnings starting this week and for revenues to decline about 3%. If things work out that way, the S&P 500 earnings will fall in 2015 for the first time in six years. Forbes reports, “This follows a drop of 0.8% in the third quarter. If the market does have two consecutive quarters of negative earnings growth, it would meet the definition for a profit recession. This is clearly the biggest risk markets are facing right now, as a contraction in earnings could presage an economic recession.”

Commodities in a spiral
Around the globe, commodity prices are in a full-scale depression. We all know where a barrel of West Texas oil is trading. Unprecedented demand to meet China’s construction demands over the last twenty years is slowing dramatically. The New York Times reported, “China’s economy is slumping. U.S. companies, struggling to pay their debts as interest rates rise, must keep producing. All the excess is crushing prices; hurting commodity-dependent economies across emerging markets like Brazil and Venezuela and developed countries like Australia and Canada. The geopolitical and financial consequences of this shift have shaken investor confidence. Concerns over global growth intensified in recent days, when weakness in China prompted a stock sell-off.”

It’s amazing to see the cause and effects of the trillions of dollars of cheap debt that has been issued in the last few years to finance commodity-based assets and fund public entitlements.

Where we are today:

One-Year chart of the SP500. The red area is the trading range year to date.

chart

As you can see, the SP500 is very oversold on a short-term basis accompanied by an extraordinary level of volatility. We are very close to approaching last year’s lows: the 1000-point decline on August 24th.

Despite formidable headwinds, lower prices will bring great opportunities to buy great companies.

We are due for a rally!

J. Brock Hamilton
January 13, 2016

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Brace for Turbulence

On May 19, 2015 the Dow Jones Industrials finished the day at 18,312 – a record close.

On August 25th, the index closed at 15,666, down 2,646 points or 14.5% from its May high. The day before, the Dow Jones Industrials went down over 1000 points in the opening minutes of trading. Dow and S&P 500 components such as G.E., Apple, Merck and Home Depot had traded 15-25% lower than where they were trading the previous week. Many other stocks and ETFs were down more than 50% alone during the first several minutes of trading on August 24th. Officials remain clueless as to the reasons for the price volatility that day.

As for September 30th, the third quarter included the largest percentage declines for U.S. stock indexes and the most volatility since 2011.

The Dow closed down 7.5 % for the quarter and 8.6 % year to date.

chart1

The Dow Jones Index has been swinging up and down an average of 350 to 400 points daily since mid August. The reasons are many. Growth in China is slowing, U.S. corporate earnings estimates are declining and, as usual, the Federal Reserve’s complete lack of credibility and dysfunctionality has investors paring back equity exposure.

Speaking of the Fed, the greatest monetary experiment in the history of the world continues. Bloomberg reports, “The bond market isn’t buying what Federal Reserve Chair Janet Yellen is selling on inflation. While she reiterated last week that the Fed expects inflation to gradually rise back near 2 percent, long- and short-term market forecasts for price gains have plunged to their lowest levels since 2009.” How could anyone forget 2009?

Earnings are the most important driver of stock prices. Recently, earnings growth has flattened out and expectations for coming periods are for negative growth.

The WSJ reports “two factors are giving some analysts and traders pause and likely leading to further market swings: Wall Street analysts expect quarterly corporate earnings will decline for the second quarter in a row for the first time since the financial crisis, and financing conditions are tightening in corporate-bond markets”.

“3Q earnings season could prove turbulent given recent macro developments,” Goldman Sachs’ David Kostin wrote on September 25th. “Slower economic growth in the US and China and a lower oil price than we previously assumed translate into a reduced profit forecast and a lower trajectory for US stocks.”

chart2

On the energy front: Can you imagine what the price of oil would be without the new U.S. fracking technology now that the Russians are the leading superpower in the Middle East? How about north of $200 a barrel!

Crude oil remains low at $45 per barrel but we are starting to hear reports of production declines (which is positive) and banks reducing credit lines for many U.S. energy companies.

The Baker Hughes rig count came out today. The number of active oil and gas drilling rigs in the United States is now 809 – a decline of 1113 or 58% from this day last year. This news, along with the low price of oil, declining production and banks reducing credit is all very positive for future investment in energy stocks. These factors should eventually lead to higher prices.

With the earnings outlook souring, markets down for the year and the Fed in disarray, what can one conclude? I’ll take a long shot and guess that the 4th quarter will actually turn out to be a pretty good one. Who knows, I’ve heard the words Melt Up being thrown around. We shall see.

J. Brock Hamilton
October 2, 2015

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The Two-Legged Stool

Today the S&P 500 is trading back to where it was in December 2014. Volatility is picking up in the U.S. and the “MoMos” are getting hit hard. Internal technicals are horrible too. Many stocks are starting to “breakdown” significantly. Energy, materials, and media entertainment have been weak and biotechnology is just beginning to break lower. Is this the start of a brief decline like we have seen so many times over the last five years or is it something more significant? One thing that we have repeated over and over is that there is very little liquidity in the stock and bond markets when confronted with sustained selling. The HFT program traders will always beat you. On the other hand, with the way this market trades, it wouldn’t surprise me to see new highs this fall despite the current pullback.

The Credit Strategist writes: “A 2% gain in the S&P 500 in July disguised serious deterioration in market internals and a blood bath in commodities and junk bonds. The major stock indices are hovering near their all-time highs courtesy of narrowing leadership by a small number of technology, social media and biotech stocks whose valuations are increasingly reminiscent of the late 1990s. While a small group of stocks was rising and the S&P 500 was recovering its June losses, the commodities complex was collapsing. On July 20th, the Bloomberg Commodities Index hit its lowest level since 2002 as the Nasdaq Composite Index hit new highs. Investors are valuing things they cannot see much more highly than things staring them right in the face. The last time they did that, they lived to regret it.”

China

China’s stock market crash hit a new phase in July as officials began acting on their convictions that high frequency traders are responsible in part for the crash that has sent shares downward by 30% in the last month and a half after stocks rose by 140% in the preceding year.

Global growth is waning and commodities are sending an undeniable signal that trouble lies ahead. Growth in China, which has led the global economic recovery since the financial crisis, is slowing significantly due to problems that reach beyond its plummeting stock markets. Observers have largely ignored the fact that China’s growth has been fueled by an unprecedented debt issuance that can no longer be sustained. China no longer has a functioning stock market. After allowing the market to inflate into an epic bubble, Chinese regulators panicked and shut down normal market mechanisms by outlawing selling by large shareholders, allowing more than half the listed companies to suspend their shares from trading, and threatening short-sellers and journalists. While these measures may temporarily slow the sell-off, they have destroyed the credibility of the market. Communists practicing capitalism?

Oil

Oil has come back down again and may retest the 2015 lows and possibly go lower. Unless some new technology takes hydrocarbons out of the picture as dirt cheap energy, oil is always going to be a massively important commodity. Forbes writes: “We are in the crash phase of oil, but oil will recover; it’s simply a question of when rather than if. Unless the world falls into some kind of new depression, low oil prices will spur a new boom and with that boom demand for oil will soar and when it does so will the price of oil.”

Ambrose Evan-Pritchard began a recent column with “Saudi Arabia may go broke before the US oil industry buckles.” We’ve said in the past that sustained low oil prices will sow the seeds of the next oil boom. We shall see.

U.S. Indices – Year to date as of 8/6/2015

Dow Jones Industrials 17,419 -2.25%
S&P 500 2,083 + 1.21%
Nasdaq 5056 + 6.77%
Crude Oil $44.66 -15.34%
Ceramic OSP Impedance Control
Polymide Hard and Soft Gold Plated Blind/Buried Vias

Have a great summer!

J. Brock Hamilton
August 6, 2015

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2015 Half Time Report

Greece – no comment as the story changes several times a day. A great lesson in lending.

China – in just three weeks, stocks listed on Mainland China’s most prominent exchange tumbled 30% from seven-year highs. The even more speculative ChiNext Index has lost 42% of its value over 21 days. If you shorted stocks you risked arrest. Many shareholders have been prohibited from selling. Other stocks have just stopped trading. This story is in an early development stage.

U.S.A. – The outlook for U.S. equities remains generally positive, but the market has seen a six-year bull run, including a rise in the Standard & Poor’s 500 Index of more than 200% without a meaningful correction. As a result, investors should expect higher levels of volatility in the near term.

June followed the May playbook that saw the broader indexes moving slightly higher before selling off at the end of the month. The bulls staged a modest comeback during June on positive economic news and the Fed’s dovish comments concerning an interest rate hike. Volatility has returned with a vengeance in early July as markets remain at or near all time highs. We have observed, as in the past, that there is a very low level of liquidity in the equity markets when faced with any meaningful and sustained selling. That’s a significant problem.

S&P 500 – July 2014 to July 2015

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MarketWatch reports that “with the Federal Reserve’s quantitative-easing program out of the picture, share buybacks are now the preferred way to boost stock prices in the face of softening earnings. But like QE, it is unclear how long the buyback boom can last.

In the first quarter of 2015, companies in the S&P 500 index returned more money to shareholders than they earned. The last time that happened was in the fourth quarter of 2008, when the entire S&P 500 reported a slight loss for the quarter but still spent $110 billion on dividends and buybacks.

What’s tethering executives to a reliance on share-count reduction has been the growth of stock-based compensation, so companies are under the gun to buy back shares to prevent dilution.

In the first quarter, S&P 500 companies spent $237.69 billion on dividends and buybacks, while reporting operating earnings of $228.36 billion, according to data compiled by S&P/Dow Jones.

Valuation: The S&P 500 is currently trading 16.5 times forward estimates of its companies’ earnings, according to recent data from Reuters. Forward estimates are an important metric that many analysts use to gauge the attractiveness of equity indexes. The S&P 500 is about 10 percent more expensive than its historic average of 15, according to Reuters estimates. Earnings multiples are only one half of their historic highs reached at the peak of the Dot.Com bubble in 1999.

Is the market overvalued? On an earnings basis – NO. In a rising rate environment – YES.

chart2

We remain cautiously optimistic even as negative geopolitical and financial events continue to evolve. Perhaps the Fed will increase interest rates someday… perhaps. We look forward to it.

Have a great summer!

J. Brock Hamilton July 2015

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Change in the Air?

Last week, Janet Yellen, Chairman of the Federal Reserve Bank, said to Christine Lagarde, the head of the International Monetary Fund, that “equity market valuations at this point are quite high.” Perhaps she knows something!

Despite various strong or weak economic reports this year, there has been a steady stream of Fed officials starting to “talk up” the potential for rising rates.

Earlier today, Federal Reserve Bank of San Francisco President John Williams said that the U.S. central bank is unlikely to provide much warning ahead of an increase in short-term interest rates.

Very few investors are really prepared for what could happen if interest rates were to rise faster than expected. There have been so many false starts in the past that most market participants remain complacent and will only be motivated to react after the fact.

Business Insider (www.businessinsider.com) reports: “the big disconnect in the US stock market just keeps getting bigger.”

“A new Bank of America Merrill Lynch survey published Thursday finds that US investors have pulled $99 billion out of equities year-to-date — including net outflows in 11 of the past 12 weeks — despite stock prices continuing to break record highs.”

This week also saw the biggest outflows from equity ($17.2 billion) and high-yield bond funds ($2.6 billion) this year. This data follows a similar report from BAML last month showing that investors pulled $79 billion from the stock market so far this year and pulled money out in nine of the ten weeks to that point.

According to Bank of America Merrill Lynch, as this imbalance grows so does the risk of something we haven’t seen in the market in years: a correction.

chart1

The color-coded graph below, from the bottom of the financial crisis in 2009 to the present, shows the return on the S&P 500 after specific Fed actions, which have dramatically propelled markets to higher levels.

s&p

Can the trend in the graph change significantly if the Fed finally ends it artificial manipulation of the stock and bond markets? Can the asset bubbles created over the last six years be deflated in an orderly manner without the support of the Fed’s zero interest rate policy? I think you know the answer.

Six years from the March 2009 equity market trough, the Fed’s continued “emergency” largess is putting capital markets, as well as the underlying real economy, at increasing risk. Asset prices are elevated. Global debt to gross domestic product is higher today than it was prior to the 2008 financial crisis, creating significant deflationary pressure.

As stated in the past, we believe that the stock market could become exceptionally volatile if and when rates begin to rise. We welcome any rise in interest rates after years of financial repression from the Federal Reserve.

J. Brock Hamilton
May 11, 2015

Disclaimers

The materials contained in this document have been obtained, derived and prepared based on information from public and private sources that Hamilton Advisors, Inc. (“Hamilton”) believes to be reliable however no representation, warranty or undertaking, stated or implied, is given as to the accuracy or completeness of the information contained herein, and Hamilton expressly disclaims any liability for the accuracy and completeness of information contained in this document. Any charts, tables and graphs contained in this document are not intended to be used to assist the reader in determining which securities to buy or sell or when to buy or sell securities.

This document is distributed for general informational and educational purposes only and is not intended to constitute legal, tax, accounting or investment advice. The information, opinions and views contained herein have not been tailored to the investment objectives of any one individual, are current only as of the date when posted and may be subject to change at any time without prior notice. Hamilton does not have any obligation to provide revised opinions in the event of changed circumstances. The information contained herein is not, and shall not constitute an offer to sell, a solicitation of an offer to buy, or an offer to purchase any securities, nor should it be deemed to be an offer, or a solicitation of an offer, to purchase or sell any investment product or service.

Past performance does not guarantee future returns and should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Investing entails risks, including possible loss of principal. The price of, value of and income from securities or financial instruments can fall as well as rise.

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Negative Mortgage Rates?

Stocks

The first quarter of 2015 has come and gone. US equity markets entered choppy waters in the first quarter and major stock market indices finished Q1 2015 mixed. The S&P 500 registered a paltry yet positive quarterly gain of 0.4% to end at 2067.9. This marks nine consecutive quarterly gains for the index and volatility is back to the forefront.

The markets entered choppy waters in Q1 2015 and faced multiple headwinds in the form of a strong dollar, negative earnings revisions, and anxiety over the looming Federal Funds rate hike. It comes as no surprise that the quarter was marked by an uptick in volatility.

U.S. Dollar

Speaking of the dollar, the increase will put pressure on companies with significant international sales. A stronger dollar makes our exports more expensive and imports less expensive. Take a look at the dramatic rise in the U.S. dollar vs. a basket of global currencies over the last eighteen months.

U.S. Dollar Index – October 2013 to April 2015
us-dollar
Interest rates

In the U.S., the Fed is looking for signs of a move back toward 2% inflation and evidence of wage inflation before it raises the bellwether Fed Funds rate for the first time since 2006. The Fed acknowledges an improved economic environment and healthier labor market but it also recognizes that there is very little pressure on core inflation and that a strengthening dollar has already put a burden on U.S. exporters.

In Europe, interest rates are going lower. German 10-year bonds now yield .10% (that’s one tenth of one percent). The following Wall Street Journal story is extraordinarily remarkable:

Wall Street Journal 4/13/2015

“Negative interest rates in Europe have created a previously inconceivable problem for some banks: They may soon have to pay interest to customers who borrow from them.

“In countries such as Spain, Portugal and Italy the base interest rate used for many loans, especially mortgages, is Euribor, which stands for the euro interbank offered rate. Euribor is based on how much it costs European banks to borrow from each other. This benchmark and others like it have been falling sharply, in some cases into negative territory, since the European Central Bank introduced measures last year meant to boost the Eurozone economy.”

Because banks set interest rates on many loans as a small additional percentage above or below a benchmark such as Euribor, the tumbling rates are leaving some banks facing the paradox of actually owing interest to borrowers. At least one bank, Spain’s Bankinter has been paying some customers interest on their mortgages by deducting that amount from the principal the client owes.”

This has to be a signal that we are near a bottom in this interest rate cycle.

Oil

Oil continues to hover around the $50 level with forecasts of the price recovering to the mid $60 level. We shall see. Most forecasters missed the 50% decline from last July.

The New York Times reports, “Citigroup, for one, expects prices to continue falling in the coming months, as output remains high, supply is building up and investors who had helped prop up prices begin to sell.”

“While prices have held relatively firm, there are significant signs of weakness ahead,” Citigroup said in a note to clients on Tuesday.”

West Texas Oil – April 2014 to April 2015
west-texas
Outlook

Wells Fargo writes, “some stock investors seem quite certain that the Fed is on the verge of hiking interest rates at their mid-June monetary policy meeting. Keep in mind the meeting is only two months away, a blink of an eye in Fed-time. There hasn’t been anything close to what we would consider a clear message from our central bankers that they are ready to pull the trigger and start the long process of normalizing rates that soon. In fact, there seems to be considerable disagreement within the Fed over the timing of the initial rate increase in this cycle.”

We agree. The Fed’s message continues to be clear as mud.

J. Brock Hamilton
April 13, 2015

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#BUBBLETROUBLE

It is interesting to see new trends in investing develop. The most recent one  is “Are Stocks in a Bubble?” Such a simple word thrown around with such impunity.  Group Think  regarding “Bubbles” is a hot topic.  Stocks, art, bonds and condos in New York are all the rage.

With stocks, junk bonds and other asset classes flying high these days, the topic of “bubbles” is very much of the moment. Many people will tell you high prices reflect high future returns, and to just invest your money and go with the flow. The market knows what it is doing, they say. The market is wise.  Others tell you to duck.

The New York Times recently stated “With relatively little fanfare, the stock market has become expensive again. We obviously can’t know which way stock prices are headed.”  We agree.

On the other hand, some insane activity  has gripped the ultra luxury housing segment in New York, where within 24 hours, an overzealous seller tried to flip a $31 million three-bedroom condo at One57 purchased on May 6, to an even more overzealous buyer on May 7 for… $41 milliona $10 million price increase in one day!

“Capitalist Exploits” writes, “Risk is now underwritten by central banks, whose balance sheet liabilities have exploded. What could possibly go wrong? Haven’t I read this story before?

 

58-4mill

$58.4 Million. A steal….really!

This piece of “art” wasn’t even handmade. Nope…built in a factory.

 

Bubbles are relatively easy to identify, especially when there exists something to compare and contrast them to – a benchmark.

 

Interest rates no longer reflect fundamentals in any way. Junk bonds trade for ridiculous values, stocks, real estate, antiques, art; even classic cars seem to be trading at either all time highs or close to. The one consistent when digging into the interplay of the financial markets is a market driven by artificially low interest rates. When the price of capital is manipulated is it any surprise that we see this reflected in asset prices?”  

A legendary investor  recently penned : I estimate the market is currently overvalued by 65%, predominately because of the types of investors driving the market in the short-term.” He expects the market to go higher into the 2016 presidential elections.

Morgan Stanley’s outlook states the case rather succinctly: It’s been five years since the nadir of the great financial crisis, but the scars remain fresh in many investors’ minds. As a result, the increased crosscurrents and market volatility are being met with more fear and uncertainty than one might expect in a generally flat-performance year. Furthermore, it is the institutional-investment community that is exhibiting the most concern.

 

” As we have noted many times, this recovery has been slower and more difficult, which is exactly why the Federal Reserve has been engaged in extraordinary monetary policy like Quantitative Easing (QE). Instead of the typical two to three years, it has taken five years for this recovery to reach a self-sustaining state. The Fed, recognizing this, is winding down QE—and that has sparked a significant leadership change toward energy, materials, pharmaceuticals, industrials and large-cap technology stocks.”

The equity markets continue to remain very fragile and relatively illiquid. Remember that the majority of trading volume these days is done by HFT – high frequency trading.  The HFT algorithms can just as easily tilt to the downside as they can tilt to the upside.

I believe that as long as the perception is that the Federal Reserve will remain accommodative with its “zero interest rate” policy, assets will remain at elevated levels. When the perception changes before The Fed’s actual policy changes, the volatility will show us where the Bubbles really exist.

 

J. Brock Hamilton                                                                                                                          May 2014

 

 

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The Barbarous Relic in Favor again?

2013 was quite a year for U.S. stock markets and a poor year for gold. While we continue to be constructive on equities, gold may be putting in a bottom as the one-year chart below indicates.

What will gold do? I have no idea. Debt around the world continues to grow out of control, the Federal Reserve continues to “print” money to keep assets inflated and we have read reports of continued massive buying of gold by the Chinese banks. According to Dennis Gartman “China’s demand for gold was up 41% last year over the prior year.”  Gold has risen nearly 10% this year.

On any given day I could show you articles and blogs about how gold’s collapse is imminent or that it’s rise to $5000 is only a few years away. It’s like listening to politicians.

FebruaryGraph

On the interest rate front, The Wall Street Journal reports some voting Fed members are getting more hawkish about ending the era of low interest rates. We could not be happier to hear that but have been largely disappointed by the previous calls in the past, which have only led to lower rates.

The Journal reports “Conversation at the Federal Reserve’s most recent policy meeting turned to something that hasn’t been a serious topic for years: the possibility of interest-rate increases in the near future. “

“The Fed has held short-term interest rates near zero since December 2008, near the height of the financial crisis, and Chairwoman Janet Yellen shows no appetite for raising them soon. Investors, seeing that, generally don’t see Fed rate increases until well into 2015, a view also held by many officials.

Still, a “few” Fed officials argued at a Jan. 28-29 policy meeting that increases might be needed soon to prevent the economy from overheating, according to minutes of the meeting released Wednesday. These officials were most likely from the Fed’s band of policy “hawks” who have largely failed in resisting the central bank’s easy-money policies.

The fact that the subject came up at all in January shows how the central bank’s policy debate is slowly and subtly evolving and might offer the first glimmers on a distant horizon of a Fed move. Surprising declines in the unemployment rate in recent months have forced officials to start discussing their plans for eventual rate hikes, what will impel them to act and how to guide the public about their likely course in the months ahead.”

Former Reagan budget director David Stockman recently stated in a Bloomberg interview that ” Calamity Janet (Yellen) has no clue how to wean Wall Street from the pathetic addiction to this massive stimulus, easy money that has been going on for the entire century.

I backed that up because she has spent her whole life as a monetary bureaucrat in the Fed system, and has no clue what honest capital and genuine free markets are about.

[She] believes the entire system has to be run by a monetary politburo, turning all the dials and short-term interest rates and yield curves and the entire financial system.

She is part of group-think, part of the Keynesian consensus that 12 people are running a $16 trillion economy.

They are delusional.”

Mr. Stockman minces no words.

Equities are at all time highs and interest rates artificially suppressed by the Fed remain at all time lows. The economy continues to be just strong enough to keep GDP rising and just weak enough for the Fed to keep interest rates artificially low. Something is going to have to give and at some point we are going to have a huge move in the re-pricing of assets around the globe. We are only a headline away!

 

J. Brock Hamilton
February 20, 2014

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