Gone Fishing Newsletter: Macro Themes for Q4

by | Oct 1, 2018 | Newsletter

Macro Themes for Q4

Bulls and Bears are both wrong – as laid out ‘clearly’ in this Schwab Market Perspective.

Although the US markets are climbing that proverbial “Wall of Worry” to all-time-highs, the divergence between US gain and Emerging Market/China losses are striking. In fact, the EEM relative under-performance vs SPX has only been surpassed less than 1% of the time since 2000. This could soon mean that EM are a buy, which may or may not cause US markets to pullback – more likely they chop sideways into year end. At least until mid term elections November 6!

China and Yuan Devaluation Risks: Big picture, markets are still uncertain about Trade Wars with China, even if NAFTA is negotiated to a close with both Mexico and Canada this week.

JP Morgan sees weaker China Currency, Trade War escalation: Now expects the yuan to drop to 7.01 per dollar by the end of December and 7.19 by September 2019, after previously projecting it at 7.00 in 12 months’ time, i.

Rate Spike and the US Dollar: The USD has decoupled from the rising 10-year yields of late, so I will be watching with great interest if this continues as it is a sign of ‘internal’ market stress and more to the point ensuing volatility. For the most part, I still expect trade tariffs to impact US profit growth, earnings and lead to price inflation. An Oil Spike will fuel inflation which can ignite even more Rate Spikes.

Dollar Break With Yields Prompts Concern U.S. Has Funding Issue

FAANG Stress:  Valuations in $AAPL and $AMZN are not justifying the premium in their stock prices says this long time bull, so he’s selling them both and thinking of going short after holding them multiple years.

As bond yields rise, future cash flows thrown off by FAANGs are far less attractive. During the February bond yield surge, FAANGs dropped 12-14%.

All these ETFs are a bit like shadow banks. They are like the CDOs on the eve of the financial crisis. @Convertbond Lawrence McDonald

What about all those passive ETFs that hold predominately FAANG stocks you ask? It’s like walking with elephants I suppose. They seem passive enough but every twitch must be watched, guarded against. A stampede – unstoppable power in its destruction.

Bonds Over Equities: Bond prices are falling which is pushing up yields, and as such equities will be less attractive. In 2016, stocks yielded substantially more than bonds which helped fuel their rally; today its the other way around.

At 3.5% the 10-year has upside risk if the term premium reverts higher as a result of QT. According to my calculations, the 10-year could end up at 4.0% if this happens. In fact, the recent move higher in real rates hints at a coming reset for the term premium. Jurrien Timmer of Fidelity

BuyBacks: We enter, albeit briefly, the buyback blackout period prior to Q3 Earnings Reports. For the record books, we just hit $189 billion in Q2 stock buybacks which was up 60% YOY. With that kind of volume, you’d think the market would be higher!

Buybacks help boost stock price for some companies – like $AAPL – but not all! For example, $BBBY (@BedBathBeyond) has spent over $8.5 Bn on share repurchases over the last 10 years, about 4x the current market cap. If you look at a chart you will see their price is down 80% from the highs, prompting the question why they didn’t invest that money in their business instead.

Earnings Expectations: Both higher expected and real rates, combined with slower global growth and 3Q negative guidance could, I say COULD, prompt those perennial bullish analysts to lower SPY expectations. Then what will investment managers do?

Only ~110 or so S&P companies issue guidance these days. But of the 98 that have, more than 3/4 are negative pre-annoucements — the highest percentage in nearly 3 years. (via )

Volatility: VIX is known historically to make a strong showing  in October.

Oil Spike: I saw price action post EIA inventories on 9/19 when WTIC was $70 that caused me to flip from Short to Long Crude. Originally I thought Trump’s threatening tweets would effectively lower Oil prices into the November Elections in order to avoid being blamed for the rise in oil prices that are a byproduct of his sanctions on Iran – going into effect, ironically, about the same time as the US elections. After the 9/19 Inventories, I also had a technical pattern that did not confirm for lower. In fact, it completely reversed on me after that more than bullish draw (10X) on oil stockpiles.

Refiners have carried on processing at elevated rates well after the end of the normal summer driving season and into September in order to rebuild previously depleted distillate stocks. But the now-plentiful supply of gasoline and to a lesser extent distillate implies refiners will have to cut processing more sharply than usual over the next couple of months to avoid creating a glut of refined products. John Kemp, Reuters

I also know how higher yields can drag commodities higher and I had been right about the 30bp advance in the 10-year yields, so I made the call for an Oil Spike. Less than 2 weeks later, Crude is now $73, but I see mounting technical price action and macro backdrop that is pointing to a continuation of higher oil prices well into next year.

But then….

I wouldn’t be surprised by:

Europe’s Bad Timing: Fully expecting ECB to hike next year about the same time we experience another $100 oil shock in Brent.

And Let’s Not Rule Out an Oil Bust After the Boom:  

Imposing artificially higher prices on the world through supply management always backfires. Daniel Lacalle

The risk? Prices not based on fundamentals eventually go bust.

 

Thanks for reading and please consider joining me in the LIVE Trading Room where we work through Value and Momentum trade ideas and set ups every trading day.

At LaDucTrading, Samantha LaDuc leads the analysis, education and trading services. She analyzes price patterns and inter-market relationships across stocks, commodities, currencies and interest rates; develops macro investment themes to identify tactical trading opportunities; and employs strategic technical analysis to deliver high conviction stock, sector and market calls. Through LIVE portfolio-tracking, across multiple time-frames, we offer real-time Trade Alerts via SMS/email that frame the Thesis, Triggers, Time Frames, Trade Set-ups and Option Tactics. Samantha excels in chart pattern recognition, volatility insight with some big-picture macro perspective thrown in.

More Macro:  @SamanthaLaDuc  Macro-to-Micro: @LaDucTrading