Friday, 29th of June 2018
Today is the last day of June. Looking at the intra-day charts of the month it sure looks like it was a rough ride. The old adage “Sell in May and go away” could have been designed to June 2018. Quite a nerve wracking ride, but at the end of the day, the DJIA closing last night at 24’216 “only” lost some 0.80% for the month… In reality, following the consigns of the said adage would have been costly- Sell and buy back for July would cost in transaction charges more than this market decline… AND today, Friday, the last trading day of Q2 has the futures pointing up, almost enough to flatten the month… Extending this review to the quarter, i.e., back to March first we see that the DJIA is down some 1.59% and is likely to close Q2 with something like a 1% loss.
Investor money is haemorrhaging out of global stock funds at a pace not seen since just after the financial crisis exploded. Global equity funds have seen outflows of $12.4 billion in June, a level not seen since October 2008, according to market research firm TrimTabs. Lehman Brothers collapsed in September of that year, triggering the worst economic downturn since the Great Depression and helping fuel a bear market that would see major indexes lose more than 60% of their value. The most recent exodus, which includes exchange-traded and mutual funds, comes amid worries that the much-touted synchronized global expansion is running out of gas, as well as some unwinding of what had been a hugely successful trade in emerging market stocks. The iShares MSCI Emerging Markets ETF, which tracks the group, surged more than 18% in a five-month span from July 2017 to January 2018, but has given back a big chunk of those gains in 2018 and is down about 10.3% year to date. By comparison, the S&P 500 has risen nearly 1% during a volatile 2018, while the Vanguard FTSE All-World ex-US Index Fund, which tracks global equities minus the U.S., is off more than 6.5% this year.
With all the Trump-Shenanigans going on, and no doubt, looming ahead, the markets have been very resilient! Even the VIX, the so-called “Fear Index” is trading higher than it was at the close of last year and has spiked during the June quarter to 18. But now, it is at 15.50, a historically low level.
Let’s peek at the classic (if ineffective) escape road named Gold. It is now at $1’249 down some $70 year to date. Then there is the new Messiah, the promised salvation from government meddling with our money, Bitcoin- at $5’913 now, it has fallen from $13’500 or so, down 56% year-to-date. Yes, we feel vindicated here. We remain as sceptical as we have been since its arrival. Stay away from what you don’t understand is our mantra! And happiness is found with the US Dollar which had misbehaved in not following our consigns- The DXY being the trade weighted Dollar Index, is now at 95! Up some 3.50% from 91.80 at year end, but quite some ways off where we thought it ought to trade, some 5% higher yet…
Oil is yet another friendly asset, with WTI rising through $73/Bbl and Brent closing on $80/Bbl we read into these figures that there is demand for the gunk, i.e., with energy demand present and clearly rising, the global economy is riding through the Trump Tariffs, the breakdown of politically correct diplomatic conventions and the rise of populism as a simplistic response to refugees and asylum seekers in our western worlds. But yes, regardless of global warming and the “Green efforts”, oil remains the motor of the global economy. We call it friendly, as it listened to us taking positions in the sector earlier in the quarter… An index that tracks oil and gas stocks is on pace for its best quarter since the final three months of 2011 as U.S. crude hit 3½-year highs on Wednesday. The SPDR S&P Oil and Gas Exploration and Production fund, better known as the XOP, is up more than 22% this quarter. The exchange-traded fund tracks a group of 69 energy stocks, from the drillers that produce oil and gas to the refiners that turn crude into fuel. We remind you that much of the oil price is affected by political currents- no least being Trump’s push to seal-off Iranian oil.
Looking forward, in just a few days we will be full into Q2 reporting season. We are confident that the recent past will repeat itself yet again, and reports will beat analysts’ expectations! Yes, although they have been consistently wrong, these are the same analysts for this quarter. “Even if profits peaked in (the first quarter of) 2018, which remains uncertain, history suggests the stock market has room to appreciate,” Mickey Levy, Berenberg’s chief Americas and Asia economist, said in a client note this week. He pointed to data demonstrating how in every economic expansion since the mid-1970s, the S&P 500 index went on to appreciate for a “significant period” after corporate profits peaked. While many market analysts view the current environment for stocks as late-cycle, Levy described it as characteristically like “middle stages of prior cycles” — which might not be as evident, he said, due to its fairly stretched-out duration.
Meanwhile, investing titan Mark Mobius recently predicted an impending correction of up to 30%, while billionaire investor Jim Mellon of Burnbrae Group similarly forecast a significant correction. Pointing to the Dow Jones’ downward moves in recent weeks, Mellon warned, “We’re almost flat on the year — this is the beginning of a serious correction in my opinion.”
Well, somebody will be right at the end of the day. We will point out, just as an aside, that the analysis of Warren Buffet’s investing style concludes that his real “secret” is that he NEVER sells anything…
And if you think that Trump is being weird or worst, let us roll your sights back to 1985. Reagan said that “if trade is not fair for all, then trade is free in name only” and that he would not “stand by and watch American workers lose their jobs because other nations do not play by the rules.” Back then the Evil from The East was Japan… There were constant attacks on trade, demands on car quotas, steel exports, and 100%tariffs on Japanese televisions, Japanese computers and It went on and on… Deja vu? Yes, and in spite of the intelligent consensus that free and unhindered trade is the best route, Ronny Reagan presided over an amazing economy. Let’s not fear the Donald quacks… like Trump, Reagan also had a huge fiscal deficit that he wanted to reduce but the protectionist measures he undertook only saw the trade deficit with Japan increase. The Japanese moved production offshore. Just as we think China will do over time as well.
Let’s look at bond yields which didn’t flame up once the US Ten Year Note reached the 3% yield level. All is OK, it fell back down to 2.85% whilst German and Japanese yields hover on either side of the Zero line. Looking at a chart of the benchmark US 10-year note, we see huge swings in a minuscule range since say two years. And for the chartists, the yield trend-line faces down since the start of this year. Whilst this is emotional support for the belief that there is no imminent crash in bond prices, it doesn’t give us a desire to go “long duration” for the meagre yields on offer. We strongly suggest that is you must remain in the fixed-income asset-class, keep duration short and invest in the alternative-type managers.
U.S. President Donald Trump has said that “trade wars are good, and easy to win.” In the $5.1-trillion-a-day foreign-exchange market though, it’s not so obvious that America’s currency will triumph over its peers. We expect that the old, long standing trade wisdom “don’t go against the Carry” will prevail yet again! Stay with the high yielding US$.
We leave June and join you into Summer with a thought from Dale Carnegie – “Success is getting what you want. Happiness is wanting what you get.”
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