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Brian Dightman
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Brian Dightman founded Dightman Capital, an independent Registered Investment Advisor firm in 2007, just in time to deploy defensive strategies prior to the 2008 credit crisis. He has more than 10 years of industry experience and currently manages Global Growth Strategies which have been GIPSĀ®... More
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Dightman Capital
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Global Market Monitor
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  • The Big Risk Of A Negative Feedback Loop

    [I wrote this over the weekend. SA passed on the article Monday afternoon: UPDATE - I sold out of the last of my international stock exposure near the top of the recovery rally today and cut U.S. Growth stock exposure by 50% nearly nailing today's top. I feel very lucky and grateful. I don't like to see small losses grow but more importantly I feel the likelihood we retest today's lows is VERY HIGH.]

    • U.S. Real Estate & IPO Market Key To Stock Market Near-term.
    • U.S Consumer Is In A Foul Mood.
    • Negative Feedback Loop Could Produce Viscous Market.

    Last week was the worst week for stocks in years, with major indices closing near lows on a spike in volume on Friday. In terms of the growth strategy I manage, I'll be looking to take additional defensive action in client accounts if conditions continue to deteriorate. I started reducing exposure to stocks earlier this summer and my growth strategy is now underweight stocks by approximately one-third.

    The nature of this particular correction has increased the odds we are going to see a steeper decline. There are a few strings still holding markets together but it would not take much for them to break. The biggest risk for the U.S. is the impact a potential negative feedback loop could create. The opposite of the wealth effect, where consumers are supposed to increase their consumption based on higher 401k balances, a negative feedback loop is where bad news causes consumers to pull-back their spending which causes economic conditions to deteriorate making things worse. The possibility of this type of scenario developing is very high given the currently cynical nature of consumers. Tired of being lied to and told increasingly what they must do and cannot do, the U.S. consumer is in a foul mood.

    Let's start with what is working, U.S. real estate. As I have mentioned to clients and in public commentary recently, the recovery in U.S. real estate is one of the few bright spots in the U.S. economy. While the current market sell-off put a dent in some of the investments I have been following in this industry, Home Depot (NYSE:HD), C B R E Group (NYSE:CBG), and more broadly the iShares Real Estate ETF (NYSEARCA:IYR) are trying to hold on. HD is the strongest of the group and remains just below a recent all-time high breakout earlier this month. CBG is also trading near an all-time high it hit earlier this year but has move to the bottom of a trading range. A move lower by this commercial real estate leader would be a bearish development for this market segment. More broadly, IYR has yet to reach its all-time high back in 2007. It has a small loss year-to-day and is trading in the lower half of a base it started in February. Home builders have been doing well in 2015 and Lennar Corp (NYSE:LEN) remains near the breakout it established earlier this month. As long as real estate related stocks hold at current levels there is a reasonable chance markets will settle down for a more shallow correction. Additional weakness in real estate related investments could spell trouble for the broader economy and stock market.

    The other factor I am watching closely based on the positive impact it is having on the market right now is good-old innovation, despite the continuous attack on American exceptionalism. The current IPO market, while not as strong as other cycles, has witnessed many new companies achieve an IPO from technology, healthcare, consumer and many other industries. The First Trust IPOX 100 EFT (NYSEARCA:FPX) fell below its 200 day moving average on Friday so ideally this fund can trade back above that level on the way to new all-time highs, something it achieved earlier this year on a history going back to 2006.

    In terms of economic growth it remains a mixed picture. In the U.S. New Jobless Claims continue to come in a bit higher, perhaps marking a bottom. Housing activity continues to ramp up with existing-home sales up for the 3rd consecutive month. Internationally, China's manufacturing activity hit a 6-year low and Greece's Prime Minster Alexis Tsipras resigned complicating their ongoing bailout program.

    Given the swift and steep selloff in stocks the likelihood of a Fed rate hike in September has fallen. Expect a full slate of appearances over the coming days designed to bring stability to the markets. The Fed could find itself in a real bind if markets don't stabilize soon.

    With a current forward P/E of 16.5 for the S&P 500, stocks appear only slightly overpriced based on historical measures. If stocks correct based on a mediocre economy not justifying an above mean forward P/E, a 15% correction would take the market down to a forward P/E of 14. After last week we are about half there. This assumes nothing changes with EPS estimates currently at $127.40 according to FactSet. Any rumblings from corporate America about weaker forward guidance would be very difficult for the market to handle at this juncture.

    When you add it all up we find the U.S. stock market and economy in a very precarious position, one were many remain unemployed or under employed. Despite the stats, participation rates are way down and wages have stagnated. Additional market declines could cause consumers to tighten the purse strings which would crimp corporate sales and earnings; that is when things could get much worse.

    While some suggest the sell-off of 2008 was a once in a lifetime event, investors concerned it could happen again should be prepared to take action now. I successfully navigated the 2008 market with very small declines and have composite performance data to back it up. I have already generated a good portion of cash in my growth strategy and I will be looking to move more defensively depending on how things unfold going forward. If this sounds interesting to you drop me a line. Better days should return but in the meantime it looks like policy makers need to do a much better job of addressing secular changes in our economy if they want to avoid asset bubbles and create a more sustainable recovery.

    Tags: IYR, HD, CBG, LEN, Macro Outlook
    Aug 24 3:42 PM | Link | Comment!
  • Crazy July Asset-Market Moves, More Ahead?

    Last week in my Dightman Capital commentary I mentioned August performance may provide some clues to how investors are going to position themselves for the end of the year. After looking at July returns I raised an eyebrow. The month served-up many large moves, both up and down; some you would not expect. Others make you shake your head.

    Readers know when I evaluate the health of the U.S. stock market I place a lot of emphasis on the performance of leading stocks. Leading stocks are those companies with strong sales and earnings growth along with other fundamentals. When investors are willing to bid up the prices of this category of stocks there is an element of risk taking in the market that tends to be healthy for the market overall. Right now leading stocks are one of the few categories of stocks performing well and with many coming from the Nasdaq 100 (NASDAQ:QQQ) we understand why the index delivered an amazing 4.5% return in July! Impressive right?

    Consider this, 20+ year treasuries (NYSEARCA:TLT) also had a strong month, up 4.5% too. This on the verge of a rate-hike cycle kick-off! Regarding short-term bonds (NYSEARCA:SHY), they held firm, essentially flat for the month. The bond market was hardly concerned about rising rates or inflation in July. To have the Nasdaq 100 and Long Treasuries deliver such strong performance during the same period is odd.

    Real estate (NYSEARCA:IYR), after getting hammered earlier this year also rallied in July, up 5%! Real estate, along with other interest-rate sensitive equities (like utilities), have been under pressure most of this year as result of possible higher borrowing costs in the near future. It is interesting as we approach the actual rate hike event (not!) real estate and utilities rally. Maybe they over corrected earlier this year but a rate hike seemed to become less of a concern for these markets in July.

    One the downside, we have the following in July:

    Oil (NYSEARCA:USO), down -21.5% and commodities (NYSEARCA:DBC) in general, down -12.6%. Gold (NYSEARCA:GLD) fell another -6.6%. Those are very big ONE MONTH moves! Perhaps it will mark the final chapter in the multi-year bear market for commodities but without more robust global growth that is unlikely.

    Chinese stocks (NYSEARCA:FXI) listed on U.S. exchanges declined -12.2%, emerging market stocks (NYSEARCA:EEM) fell -6.3%.

    How do we make sense of a bond rally on the verge of rate hikes when stocks are also in rally mode and commodities continue to get crushed? Some of the bond buying can be attributed to money that has to find its way into that asset class as an investment mandate. There is so much money in the world right now long-bonds appear to be the lucky recipient of money flows by pension managers, insurance companies and the well healed. Outside of asset inflation there is very little concern about broad consumer-price inflation. This could change quickly and when the Chinese start to liquidate their estimated $1.6 Trillion in U.S. Treasuries we could see a divergence between the primary and secondary markets prices/yields for U.S. treasuries. Let's hope that doesn't actually happen. For more on the drivers in this area check the article on the following: balance of payments, exchange reserves, current account, etc..

    Real estate may also be the lucky recipient of money looking for a home or evidence of inflation hedging long-term. While the economy continues to underwhelm and talk of debt restructuring abounds, real estate rallies. In real estate we do have some evidence of inflation where rents and prices have climbed. Cities with strong economic growth versus those stagnating are seeing the lion's share of gains. We also clearly have evidence of money chasing assets (check out this article on Chinese buyers). Don't get too excited, the asset class is still down -6% over the last 6 months. Whether the recent bounce represents a new leg up for the asset class remains to be seen but the technical picture looks pretty good and on the verge of a breakout.

    Deflation continues to be an issue as evidenced by the persistent decline in commodity prices. Some of the lower prices are the result of supply (energy markets) but that simply cannot be the case for ALL commodities and there are simply very few, if any, commodities where prices are being bid up. This must be driving central bankers crazy as they desperately try and inflate the global economy.

    Taken as a whole the combination of asset price direction is not very encouraging. Commodities have been in a multi-year bear market yet to find a bottom. Emerging market stocks continue to struggle despite an improved U.S. economy and recovery attempts in Europe and Japan not to mention continual policy action by the Chinese. Bonds are clearly not concerned about rising rates at this point and why should they be. The Rate normalization the Fed is looking to accomplish can't even lift off so the likelihood of a big-move in short-term rates appears low. More troubling is the risk-off trade bonds may be signaling. Long-bond price action in July could be the result of moving down too far too fast. If anything you would have expected the bond market to stabilize and maybe move up slightly, not deliver a strong rally.

    Here's a list of several leading stocks that are performing well (not recommendations) in the current environment Disney (NYSE:DIS), Under Armor (NYSE:UA), Ulta Cosmetics and Fragrance (NASDAQ:ULTA), Intrexon Corporation (NYSE:XON), and Manhattan Associates (NASDAQ:MANH). I have been tracking these stocks since they broke-out earlier this year.

    As long as we have decent action with leading stocks I will maintain my exposure to U.S. stocks. Once this part of the market breaks down the likelihood we will enter into a longer-term correction will increase, in my opinion. All of which should represent a buying opportunity as policy makers cook up another batch of QE/stimulus to reflate once again. Then again, there is so much money sloshing around in the global economy every time stocks correct 5% money flows in to take advantage of the lower prices. It has been laughed at by some but just maybe we will see Dow 30,000 before the next bear market arrives. It is looking less likely as economic growth continues to disappoint in the U.S. and around the world. However, in a policy driven market investors have to be prepared for just about anything.

    Aug 03 10:53 AM | Link | Comment!
  • 1.5% Drop In QAI Caused By Sloppy Trading
    • "Market On Close" Orders Can Be Dangerous.
    • Auction Markets Require Other Side For Fill.
    • Market Makers & Specialist Hedge Risk.

    When entering the market to buy or sell a security investors look for as much pricing security as possible. As an auction market prices move around so the assurance of a specific price is difficult to secure. Fortunately, investor have some tools in the form of limits, stops, and in some cases more advanced trading tools that might provide some level of price assurance.

    Last Friday someone placed a trade to sell a position in the IQ Hedged Multi-Strategy ETF (NYSEARCA:QAI) as a Market On Close order. This type of order attempts to have the order filled at the last price of the day. The problem with this order is it requires a buyer to be presentat that very moment in time. If nobody is ready to purchase the shares of a sell order as a Market On Close, then a Market Maker or Specialists can come in and fill the order. The opposite would be true if the order was to buy. However, since the Market Maker or Specialists has to take the shares into inventory to fill the trade (because there was nobody for the other side of the trade at that moment) they will do so at a price they feel hedges their exposure. The more exposure (volatility of underlying, market conditions, order size, time held in inventory, etc.) the more of a hedge they are going to look for as the seller of QAI on Friday, January 30th, found out. After trading for the day between a high of $29.59 and a low of $29.42, the last trade for QAI suddenly plunged by 1.5% to $29, a very uncharacteristic move for this ETF. QAI traded 239k shares on the day and has an NAV north of $1 Billion, so it is not an illiquid ETF. The Market On Close order was for around 14k shares.

    This order could have been easily absorbed by the market if more time was provided. Or the seller could have settled for a partial fill by putting a limit on it and selling the rest on Monday when the price of QAI opened up around 1.5% to $29.42. This is a good reminder that a little planning can provide tremendous value when entering the market with a larger trade.

    Feb 03 3:26 PM | Link | Comment!
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