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Chameleon Asset Strategies Blog

05 May

The Robot – A bad dance move and maybe a worse way to invest right now.

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The Robot – A bad dance move and maybe a worse way to invest right now.

While it’s true that most of the time advisors and managers alike are probably paid too much to do little, now is the time that true financial professionals will earn every penny. In my opinion, it is also the absolute worst time to be a passive investor following a mechanical model that worked well in the past. When both stocks and bonds have been appreciating nicely for many years following a crisis, it is easy to believe that they will continue this way forever. Clichés are regurgitated by people and media to the point where most of the public accepts them as fact… That doesn’t make them true. For example, the old adage used to be that over any 10 year period in history, you always make money in stocks. Now they say over any 15 yr period, you always make money in stocks. Diversification is the only free lunch... A balanced portfolio returns 6-8% a year on average while most retail investors only realizes 3% … You can’t time the market, so don’t attempt to…You can’t outsmart the market, so don’t try to pick individual stocks, Fees are the enemy, etc etc.

With this mountain of evidence in favor of simply owning an extremely low cost index vehicle or utilizing a robo strategy that avoids all of the mistake that investors make, why isn’t everyone firing their advisors, dumping their funds and riding off into the sunset with their fortunes? Well, a lot of people are doing the first two things and hoping for the 3rd.  I can understand the appeal of a “Matrix” like intelligent being at the helm of one’s financial future, systematically rebalancing your way to financial success with mechanical precision and Swiss timing, but perception and reality drift apart here. The strategies above are more like cruise control than self-driving cars and there’s a big difference. Cruise control is great for long road trips and open highway. Improved gas mileage, lower wear and tear on the vehicle, less driver fatigue... We’ve just had the ideal market for cruise control - 7 years of market stimulation/manipulation by the Fed. Things are looking great in the rear view mirror but is that what things look like through the windshield? Everyone and every robot is a genius in a bull market, but I personally think it’s far more likely that we’re entering traffic, a construction zone or a city that will require more than a brick on the gas pedal and a locked steering wheel.

Self-driving cars exist, but they’re not available to the masses. If you think you have one, you might want to read the manual a little more carefully. Check the fine print and you’ll probably also notice that the vehicle only drives forward and doesn’t function in reverse ( most portfolios, robo or advised only do well when asset prices are rising – bull markets)  If you’re switching on cruise control right now, make sure that your eyes are open, that you’re facing forward, and have air sick bags within reach. I’m looking forward to buying a shiny new Tesla at some point that will chauffeur me around while I trade in the back seat, but today is not that day. 

As I forecasted last week, the dollar has reversed and is appreciating again vs other currencies around the world. If the index pushes through 95, I would expect a sell off in a variety of commodities that have been helped by the dollar weakness. This will put pressure on energy producers and miners, which have been responsible for a large part of the recent equity market rebound. I’ve been pretty vocal about my lack of belief in the rally in US stock index futures. In the last several sessions, they’ve been losing steam and working on a down trend. I’ll continue to look for quality selling opportunities as I believe that current prices are ludicrous given the global turmoil. 10 Yr. Treasury futures are also flirting with breakout territory, which will pour accelerant on the moves if they occur as expected. Time will tell!

 

 

Take care,

Stephen

 

05 May

We get our weather from the Pacific… will we import the market carnage also?

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We get our weather from the Pacific… will we import the market carnage also?

Accelerated by the Bank of Japan’s decision to take no further action Thursday, Nikkei futures fell by 10.8% last week. It’s a topic for another time, but global financial markets have become insatiably addicted to free money and ever greater amounts of stimulus. The mere thought of interrupting the morphine drip incites panic as seen in Japan. It’s no secret that Japan has a multitude of economic problems, but it is still the world’s 3rd largest economy and one would be wise to pay attention to what is happening there. The world’s 2nd largest economy, China, has also been experiencing a severe slowdown in economic activity. While the true state of affairs is somewhat opaque, we do know that Apple sales in China dropped 26% this quarter. Not exactly a beautiful picture.

So will the mess cross the Pacific and infect our markets also? You wouldn’t know it by looking at the S&P flirting with all time highs, but I think that it already has. We haven’t met the technical definition of recession yet, but GDP sliding from a 3.9% peak print in 2015 to last week’s .7% doesn’t inspire confidence. Nasdaq futures have broken the uptrend and moved down through support. There will be bounces here and there but I’m expecting the selling to continue for a while as it is exhibiting textbook bear market behavior.

   

The dollar index has recently weakened very significantly against other currencies around the globe. This weakness has helped commodities stage a bit of a rebound, but I don’t think that this tailwind is going to continue. The Europeans, Chinese and most certainly the Japanese are not happy about their relative strength to the dollar as it makes their exports less competitive. Given that our Fed is still contemplating another rate hike and the rest of the world is considering further easing it seems that central bankers would prefer to stay within this range vs allowing another destabilizing force to be exerted. I don’t know who will flinch first but I think the odds favor a little dollar strength from here.

 

All the best,

Stephen

 

04 Apr

US Treasuries moving UP, Oil moving DOWN, Equities are… in fantasy land!

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US Treasuries moving UP, Oil moving DOWN, Equities are…  in fantasy land!

US equity markets have been married to the price of oil for many months now, yet that correlation appears to have relaxed in the last few weeks. S&P futures have maintained their uptrend and continue to rally significantly higher while Oil has fallen nearly 16% from its recent peak. Did the economics for domestic oil producers magically change? No - sub 40 oil prices should put the default risk for a large portion of the industry right back on the table. Furthermore, this drop in crude has occurred alongside a very sharp decline in the US dollar, which typically provides buoyancy for commodity prices. We’ve seen build after build in inventory and coordinated production cuts hinge on Iran voluntarily dialing back. I’m expecting a bounce here ($35-$36), but aside from declining rig counts, the fundamentals are eroding again.

While Equities march up, one would expect US treasuries to fall, however that too is not the case. As anticipated, the 10 Yr yield is compressing again as prices slice through key resistance levels. Given the ridiculously low yields for other comparable government issued debt around the world, I think that our treasuries are reasonably priced and can continue to move quite a bit higher in the absence of Fed tightening.

Add all of this up and we have market forces that are grossly out of balance. Treasuries and Oil are behaving as I’d expect them to given the data flow. In my opinion, the odd man out here is US stocks. I think that S&P futures have priced in an “all clear” for energy producers which hasn’t happened and may not. None of the major indexes have made a new high, and all still have a chart consistent with continuation of a bear market. All are once again sitting in attractive sell zones. We haven’t had a meaningful move to the downside in over a month… My money is on calm before the storm, not happily ever after.

All the best,

Stephen

 

03 Mar

Performance Enhancing Policies in Europe, Fed meeting Tuesday & Wednesday

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Performance Enhancing Policies in Europe, Fed meeting Tuesday & Wednesday

On Thursday of last week, the ECB announced even more robust stimulus measures. They increased their asset purchase program from 60 to 80 billion Euros a month and broadened the scope of the assets that they’re able to purchase. They dropped their interest rates even further into negative territory and exercised additional creativity to address bank balance sheet vulnerabilities. This was an impressive policy response which has real merit in terms of being able to mitigate systemic risk in the European banking system.

On the flip side of this coin, one would conclude that economic conditions in Europe continue to be mediocre/unfavorable to the point that these measures were required. I do believe that they’ve managed to eliminate some of the systemic risks associated with debt tied to depressed commodity producers however this “bazooka” as it’s being called, further impedes day to day banking operations and profits. People are also wondering whether the ECB has any further capabilities should the intended outcome not be achieved. Given the controversy over these actions, I think that support for further easing and stimulus is virtually non-existent.

The Federal reserve will be meeting again this week to discuss domestic economic activity and their proposed path for interest rates in the future.  I’m not going to attempt to speculate on their conversation and the ensuing market reaction. I will however say that the 10 year Treasury yield has increased very significantly in the last few months and now has a great deal of room to move back down if they leave the door open. On a relative value basis as compared to the German equivalent, our 10 yr is now even more attractive and I would look for the spread to narrow as opposed to moving further apart. 

I think that the recent rally in the price of oil and other key commodities has given equity markets quite a bit of leash to move up however I am still far more interested in taking short positions at these levels than chasing momentum and hoping that they can break through the fortress of resistance above. The risk remains to the downside as global growth appears to continue on a contracting glide. The gameplan this week is the same as last – I’ll be looking for quality opportunities to sell equities and buy Treasuries and Gold. A close in oil below $36 will likely bring quite a bit of fear back the market.   

 

All the best,

Stephen

 

03 Mar

All of the pieces are in place- Nothing left to do but watch and wait.

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All of the pieces are in place- Nothing left to do but watch and wait.

All of the stock market index futures have rallied into areas of supply and momentum appears to be slowing. Copper and Oil have blasted higher where they should now encounter selling pressure for the first time in weeks. The US dollar index has been taking a hit as of late and providing a tailwind for most commodities. It still has a bit further to drop before finding demand, but at that point it will likely become a headwind instead.

 

Gains in the Nasdaq futures have been noticeably weak compared to the S&P and Russell due to lack of exposure to energy and materials. Both areas have experienced a combination of bottom fishing and short covering – neither of which are representative of sustainable progress. I’d expect it to try to catch up if for some reason we get wonderful news, otherwise it appears ready to lead to the downside. I’m of the persuasion that we’re still in an environment where investors are shedding risk and seeking stable, more reasonably priced assets so the relative underperformance and further slide fits the narrative.

I’ll be looking for short opportunities in equity futures and buying opportunities in US treasuries and Gold.

 

All the best,

Stephen

 

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