I was well into my second piece on great investment opportunities when a lot of stuff just happened. Let’s interrupt our series of the Three Best Investment Opportunities to touch base on what’s happening in the news and how the markets are reacting now.
NPR has been doing a great job covering the humanitarian side of this disaster but the images of downtown Houston under water are a bit Orwellian. Our thoughts go out to everyone in that part of the country and wish you as much comfort and peace as possible. Oddly enough, I was sitting in a movie with my boys this weekend and watched a preview of Al Gore’s sequel to “An Inconvenient Truth”. Whether or not you believe in Climate Change, you must know that footage and imagery of disasters along our coasts associated with powerful weather systems (Sandy, Andrew, Katrina, Harvey, etc, etc) are coming to Al Gore much easier these days. I don’t need to watch the movie, I can just watch the news today! 70% plus of our country believes that Climate Change is real and needs to be addressed. And yet, Trump and company deny it all while simultaneously writing billion dollar checks in Federal Disaster Relief. Ironic isn’t it? I do wonder how much evidence we need before taking serious action to mitigate the human impact on our global ecosystem (aka climate change). Perhaps Houston looking like Atlantis? Will that be enough? If you’re warm and dry watching the carnage from your TV, probably not. If you’re in a shelter, soaking wet, I’ll bet you are a believer. Sorry for the soap box. I’ll get down now.
The markets are responding as they always do to hurricanes. They push up the price of Home Depot and Lowes banking on the next great wave of home remodeling in Texas. Building materials, industrial metals, wood and other hard asset type securities are also getting a bid for the same reason. On the macro side of things, there will be cause for a delay of game in the theme of a rising economy. The Fed will do nothing to rates for the rest of 2017 but they had already decided that this summer, before Harvey was even on the radar. With zero inflation or wage growth despite plentiful jobs, and an economy that is barely growing more than 2%, they can’t push too hard on the brakes …and they know it. Earnings for the majority of US companies will be largely unaffected by Harvey unless they are already a disaster, or in the disaster business.
North Korea, specifically Kim Jong-Un, is now a global thorn and the world is about to pull out the tweezers. I can’t say how or when it will happen but we can probably anticipate some form of destabilizing act in the near future. If I were a resident, I would leave that country… today. Most of their population probably has very little to do with the actions of their unstable leadership. But they will pay the price as the world cuts them off in all ways. This situation is not good and the markets are appropriately worried. When the markets are worried, big money comes off the table regardless of logic or reason. These situations usually set up some nice discounts to buy, but only after we actually see prices fall rather dramatically either over time or all at once. We have seen neither so far. As I said before, there is way too much firepower in the hands of crazy on both sides for my liking. I think the markets agree.
Gold, Bonds, and Stocks Telling The Same Story
Last week we saw the markets continue a subtle orientation toward defense. Now, it’s pretty obvious. Yesterday, Gold broke UP out of a very long term base. We took entry level positions in gold and gold miners in the last four trading sessions. The US dollar has now broken long term support and is in a confirmed downtrend, now down -10% YTD. Why is the US dollar falling? Well for several reasons. The first is a vote of no confidence that the US economy is going to re-inflate or grow until something meaningful happens. There was no change in the Healthcare system as promised so we’ll continue to see 16-20% of our GDP go unnecessarily to rising healthcare costs. There is also the promise of a showdown in Congress over the debt ceiling, which is all just entertainment because they will raise the debt ceiling in the end (always and forever). The government might shut down for a while in the process, but the markets have never reacted to that other than going higher. Finally, as economic reports come in, it is becoming more obvious that Europe is actually growing with momentum, while the US is not. The Fed is paying attention and will not raise rates in this environment. Generally, we’re in a bit of a pre-recessionary holding pattern, which is also why Treasury bonds are also breaking out to a new high in the short term. Meanwhile, stocks continue to correct from the August 8th high and the market is in a tug-of-war between buyers and sellers.
I doctored up a quick technical look at the S&P 500 and made some notes. A strong move back above 2455 on a closing basis would be good. Given that our model is still slightly negative across a lot of different variables (seasonality, sentiment, momentum, weak breadth, expanding 52 week new lows, high yield sell signal, etc), we still think there is more trouble ahead, especially in early October. All said, these are all reasons why the US dollar is under pressure but it also serves to illustrate the current situation across the different asset classes.
So those are all the major developments this week, not a lot of actual motion but a lot of commotion as we’ve come to expect this time of year. Rest assured that we’re making adjustments as necessary.
I’m sure everyone is looking forward to getting through this.
Best of luck to all