Good Morning. As I have stated a time or two, I am not a deep-thinking, macro-driven investor. No, I prefer to keep things simple and try to stay in tune with the overall market environment. Our goal is to try and utilize the appropriate strategy for the environment and to not stray too far from what is actually happening in the market. My thinking is that while this approach may not get me on the cover of magazines, it will keep me out of trouble and on the right side of the market's really important trends.
However, I recognize that there are a good many investors out there that prefer to invest according to their macro view of the world. The plan here is pretty straightforward. One develops a theme and then takes positions designed to benefit from that theme. And it is is this approach that made John Paulson a household name as he first "called" and then profited wildly from the credit crisis in 2008. (Although, to be fair, we should also recognize that he nearly went bankrupt waiting for his theme to play out!)
So, since a large number of people I talk to on a daily basis are looking for our view on various macro themes, I thought I'd take a few minutes and provide a quick overview of our view of the global macro world. To be sure, this will not be an exhaustive analysis. Rather, I'll attempt to offer up an executive summary of our view on each of the global macro categories: U.S. Stocks, U.S. Bonds (and in turn, the U.S. economy), European Stocks, Chinese Stocks and Emerging Markets, Commodities, and Currencies.
So here goes ... This morning we will review the U.S. markets and then will continue on with the other categories as the week progresses - depending on the action in the markets.
U.S. Stock Market: We believe that U.S. stocks remain in a bull phase. The question here isn't which type of animal we are dealing with but rather whether this is a "cyclical" (1-3 years) or "secular" (a decade or two) bull market. The first chart below is a weekly chart of the S&P 500 since early 2009. This clearly shows that, at the very least, we've got a "cyclical" bull on our hands.
The next chart is a monthly closing chart of the S&P 500 since 1980. While the index did hit a new high recently and that high was above the 2008 high-water mark, some still make the argument that stocks will soon enter another bear market and the trading range that began in 2000 will continue.
The next chart, which displays the Russell 2000 Smallcap Index monthly, which would seem to argue for the idea that a secular bull is underway.
Our view is that unless we see another crisis, the U.S. stock market will unlikely succumb to another serious bear market in the near-term. Valuations are "fair," interest rates remain low from an historical standpoint, the Fed is still friendly, inflation is low and earnings are good. All of which, would seem to argue in favor of higher stock prices in the intermediate- to long-term.
U.S. Bond Market: Unless you live in a cave, you know that yields have spiked recently as traders have assumed that "tapering" (i.e. the Fed cutting back on its QE program over time) is the same thing as "tightening." Mr. Bernanke and the rest of the Fed Governors have gone out of their way to point out that slowly cutting back on the amount of QE stimulus being provided to the economy each month (i.e. tapering) is NOT the same thing as raising rates.
However, traders believe that the Fed tapering its purchases means there will be less bond buying, which, in turn, means less demand going forward. And since the Fed has been the major buyer of bonds since QE3 began, this raises the question of who will be the buyers of bonds in the future? Thus, from a macro point of view, it is time to exit the bond market from a strategic/tactical standpoint.
Below is a chart of the Yield of the 10-Year T-Note. If memory serves, the recent 100 basis point (100 bp = 1 percent) move has been the most rapid in history. This is due to the fact that traders and investors alike are all making the same move (selling bonds) at the same time.
What's the outlook for bonds? In short, as long as the U.S. economy continues to improve and the globe avoids another crisis, the outlook for the bond market is negative. So much so, that we are likely seeing the beginning of a secular bear in bonds that could last a very long time. Therefore, our thought on the bond market is to use ANY rally in prices to get the heck out of the way.
However, be advised that this is a VERY popular view at this time. The key question in my mind is how much money will want to "get out of bonds" over the next year or so. Given that more than $1.25 trillion has gone into bond funds over the last six years, the exodus may take a while. Thus, this could mean that the bond market may be difficult for quite some time.
U.S. Economy: The current status of the economy is a "good news/bad news" situation. While the housing market and some consumer sectors have clearly improved and the jobs market is starting to show some signs of life, the manufacturing sector continues to muddle along. As such, the Economic indicators remain mixed at best. This means the economy is likely to remain in a slow growth environment going forward. We are currently expecting something on the order of 2.0% GDP growth for 2013. However, we do see the possibility of an upside surprise in the economic data in the latter part of the year.
U.S. Fed Policy: Although this remains an area that is being hotly debated, the Bernanke Fed is more transparent and provides more communication/forward guidance than any Fed in history. As such, if one steps away from the blinking screens and simply focuses on what the Fed has been saying, the outlook becomes quite clear.
The Bottom Line: The Fed is likely to begin "tapering" its bond purchases at either the September or October FOMC meeting (most of the money is currently on the September meeting). Bernanke and friends have also made it clear that all decisions relating to changes in monetary policy will be dependent on the economic data, with the primary focus being the unemployment rate. Bernanke has also said that the Fed will not consider raising rates before the unemployment rate falls to 6.5%. However, many economists believe that the Fed may not begin to take action until the rate gets closer to 6.0%.
At the current pace of job creation, the unemployment rate is not projected to reach the Fed's target until sometime in 2015. So, while traders currently believe that "tapering equals tightening" the Fed is likely to stay friendly (on paper at least) for some time.
Next time, we'll look at China, the Emerging Markets, Commodities, and Currencies.
P.S. Please use the "contact us" tab and let me know if you find this type of analysis useful as we have been talking about providing this type of update on a monthly basis.
Turning to This Morning ...
Although Asian markets sank on concerns that the PBOC is not going to provide the stimulus traders crave, European bourses are significantly stronger in the early going. Sentiment is being supported by positive news flow from Greece and Portugal. In short, the Troika issued a review of Greece on Sunday saying that the prospects are there for the country to return to growth in 2014 and that requirements have been met for Greece to receive the next tranche of funding. U.S. stock futures are following Europe higher and currently point to gains at the open. Note also the Alcoa kicks off the earnings season after the close today.
Here are the Pre-Market indicators we review each morning before the opening bell ...
Major Foreign Markets:
- Japan: -1.40%
- Hong Kong: -1.31%
- Shanghai: -2.45%
- London: +0.82%
- Germany: +2.27%
- France: +1.66%
- Italy: +1.31%
- Spain: +1.43%
Crude Oil Futures: -$0.45 to $102.77
Gold: +$20.30 to $1233.00
Dollar: lowrer against the yen, euro and pound
10-Year Bond Yield: Currently trading at 2.699
Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: +9.96
- Dow Jones Industrial Average: +79
- NASDAQ Composite: +17.03
Thought For The Day... "When you combine ignorance and leverage, you get some pretty interesting results." - Warren Buffett
Positions in stocks mentioned: none