PAUL KRAKE: The half empty glass - April 23, 2018
Blotter: The half empty glass
There is nothing more frustrating for the average investor than when great news is ignored. While anyone who has been doing this for a while will appreciate that no one factor determines the price of an asset, when key drivers are rejected, it is infuriating. Earnings determine the trajectory of stock prices. Over the long haul, this is indisputable. Yet, bumper Q1 earnings out of the US have been met with selling pressure, generated by secondary forces that most tactical investors didn’t see coming. Despite what will likely continue to be a robust earning season, it could well result in lower equity prices and a return to the February lows for global indices.
Global equities, led by the US, have shown on several occasions in 2018 that they are very uncomfortable when US 10-year bond yields approach 3%. Not enough of us, including myself, were focused on this as yields rose over the last couple of weeks. You will get a longer Flagship report from me on Tuesday that will again outline why I believe bond yields are capped for the balance of the year. While yields can always move a little higher over the next week or so, the Thematic Model Portfolio will be adding aggressively above 2.95% in the US 10-year.
I am convinced that global inflationary expectation will wane, growth will continue to soften at the margin and profit growth is peaking. Not dramatically but enough to cap yields around the globe.
Peaking is the perfect word to describe the current environment. We will witness peaking global inflation that will put a lid on yields. The market is focused on peak iPhone sales and peaking semiconductor demand as the boon from cryptocurrency mining is losing its allure. Technology investors are finding new ways to be bearish and this is despite stellar profits from the likes of Netflix, that is well on the way to world domination. Will strong earnings this week from the likes of Alphabet turn the tide? Tell me where US yields are. Above 2.90% and I say no. US GDP on Friday has low expectations. A strong, yield spiking number and stocks are toast.
For all my tactical bearishness, I remain very constructive, especially for EM, on a two-year view. A 3%-4% sell off from here will provide you with an outstanding buying opportunity, if you can hold stocks for multiple quarters. Emerging market underperformance will come to an end soon. Since March 20th and the escalation of US / China trade tensions, the China A-Share market has underperformed the SPX by north of 7%. This looks excessive and I think that Beijing will put a line in the sand for the Shanghai composite at 3000. EM stocks, especially in China, are just too darn cheap in the aggregate not to buy dips soon. The narrative will become even more compelling if US rates are capped. The intention is for the model portfolio to add 15% in Chinese stocks down around 3000.
The USD will continue to bounce for the next few weeks but again, this is tactical. We were stopped out of our GBPUSD short position at the highs of Monday, a sacrifice to the trading Gods that we all have to make from time to time. I feel the rally will be temporary. Capital flows matter and with the US running twin deficits that are approaching 7% of GDP, USD weakness in favor of high quality EM economies will re-establish itself. G10 currency trading is tough in the near term. I want to sell USDJPY above 108.00 to take advantage of a current account surplus approaching 4% of GDP. We will leave an offer at 108.10 JPY to sell a 25% position.
ECB, BOJ and Riksbank meet this week. On Monday, Japan, Germany, the EU and US report PMIs. On Tuesday, US New Home Sales and Consumer Confidence, Australian CPI and German Business Conditions. Wednesday, US Durable Goods. Thursday, SK GDP. Friday, Japanese Jobs, CPI and IP, German employment, the UK and US GDP.
Founder, View from the Peak
IND-X Advisors Limited
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