Just about the time we were all being lulled to sleep by the low volatility in global markets all H--- broke loose in the past several trading days.
The five year drama in Greece persists. The never ending watch for China to implode continues apace. Some pundits think these two dramas are about to reach their final act, but we are not so sure.
Clearly the Greeks are closer to the end of their tragedy than they are to the beginning. But we still don't see consensus on what "the end" is. Our bet is that they "Grexit" the Eurozone, but we wouldn't put overwhelming odds on it. Frankly, we would welcome it because it would put an end to this five year long drama that has influenced financial markets for too long.
The Chinese government continues to find more options to keep their "economic miracle" going than the U.S. Fed has rabbits to pull out of their hat. Give the Chinese government credit for being faster on their feet than boxers, Sugar Ray Leonard or Muhammad Ali.
We have been watching pundits call for an economic implosion for at least 5 to 6 years and it hasn't happened yet. We will meet with our key "China maven" on July 12th to get an update. We like the fact that he is Chinese and among the wealthiest in the country. We have come to respect his insights.
If the markets didn't have enough to worry about, Puerto Rico is clearly insolvent and about to default on much of their debt.
If that wasn't enough, closing the NYSE for unexplained reasons today hasn't helped confidence in markets.
Here is a quick summary of our "take" on various markets:
1. In the very short term U.S. stocks are very oversold and likely due for a bounce.
2. A bounce may be a good opportunity to take profits on winners and sell losers. It may also be an opportunity to rotate portfolios into more defensive positions. Longer term charts of all major U.S. stock indexes are starting to roll over in what looks like major topping patterns. We are starting to see some of the same technical sell signals that we saw at the market tops in 2000 and 2007. It is early in the development of these patterns but they are getting clearer on the monthly and weekly charts.
3. A majority of "pundits" seem to expect the U.S. Fed to start raising interest rates in September or October 2015. We remain in the camp that rate increases are more likely in 2016. They will certainly come someday but we are not in the camp that they are imminent.
4. A majority of "pundits" expect the 10 year U.S. Treasury yield to exceed 2.7% by the end of the year. That may happen, but there is currently no technical evidence that long term rates will rise this year.
5. We wrote on April 22nd that the STOXX Euro 600 stock index was on the verge of a major breakout to the upside. That has not happened. The index has retreated in May, June and July. We'd like to be brave enough to buy European stocks on weakness, but we aren't. We want to see much more resolution to the Greek crisis before acting.
6. We noted on April 22nd that commodity prices had collapsed this year. The CRB Commodity Index is approaching the low it made in 2009. This index has been treading sideways for the past couple of months.
7. Agricultural commodities have also collapsed. The Powershares DB Multi Sector Commodity Trust Agriculture Fund (DBA) is also trading near the 2009 low.
8. Gold has often become the "safe haven" trade when other markets are "toppy" or collapsing. That has not happened so far. The trend in gold prices remains down and is bearish on daily, weekly, and monthly charts. The price is near four year lows.
9. Copper is entrenched in a multi-year bear market and is approaching a 4 1/2 year low in price.
This industrial metal is often referred to as "Dr. Copper" which is "market lingo for the base metal that is reputed to have a Ph.D. in economics because of its ability to predict turning points in the global economy. Because of copper's widespread applications in most sectors of the economy".
10. China stock indexes are collapsing and scaring everyone. We are probably less concerned about this downturn in their markets than most. A significant correction was overdue. What goes up too fast usually corrects as quickly and sometimes violently. When it is over a great buying opportunity has been created.
11. Health care, biotech and technology shares related to cyber security remain pockets of strength in the U.S. market and should be bought on any weakness.
12. If there is one trade that seems to have low downside risk and much higher upside opportunity it looks like "Buy" the Dow Jones Utilities Average.
13. In January we wrote, "The U.S. dollar looks like it is in the early stages of a new long-term secular bull market. We pointed out that the U.S. dollar index started to decline in 2001 and had been in a "bear market" ever since. It was in the very early stages of breaking out of that down trend in January 2015. We suspected that it would retreat somewhat and then resume its upward trend. It has actually trended sideways since January. The technical base case is that once the consolidation is complete the U.S. Dollar index should continue its upward momentum.
14. While gold has often been the "safe haven" trade in the past it seems to us that the U.S. Dollar is playing that roll in markets right now.
We are now a little more than half way through the year and it has been a tough year to make money. We remain patient and unperturbed by the situation.
Periods of high volatility usually offer the opportunity for "price discovery". Assets that collapse quickly in price were often in weak hands in the first place. They get sold out of fear, or in some cases because they are the only thing that can be sold. The Chinese stock market is a great example right now. With trading restricted on more than half the market people sell what they can to create liquidity. Moves in price get exaggerated as everyone sells the same stocks. Buying opportunities appear.
We suspect that the second half of 2015 will also be full of challenges but we are confident that we are accumulating great assets for our tactical portfolios, ORCA and Mendocino.
Phillip Lampe is in the midst of a complete review of all assets in Cape Lookout and we are really enjoying his analysis. We will be making a few adjustments to strengthen that portfolio. We will write specifically about it in our next newsletter.
Capital is being preserved and coupons being clipped in the "all-bond" accounts (formerly Pt. Reyes group).
The prices of stocks in the Dividend Diamond model have struggled this year, but the dividend income keeps rising, slowly but surely. We have noticed that all higher yield equity portfolios are struggling so far in 2015. The mainstream base case is that long term bond yields may rise significantly and offer competition to higher yield stocks. That may happen, but we have made it clear that is not our base case. Rising dividend income still remains on of our favorite investment strategies.
All the best,
MANAGING MEMBER & CHIEF INVESTMENT OFFICER
5T Wealth Management
(707) 603-2672 Office
(707) 486-7333 Cell
Disclosure and Disclaimer - Updated last on July 23, 2012 by Paul Krsek:
ELLUMINATION is the proprietary newsletter written for clients, friends, and affiliates of 5T WEALTH MANAGEMENT .
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