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Chameleon Asset Strategies Blog

Items filtered by date: January 2016 - Chameleon Asset Strategies

 As of Friday the S&P 500 is out of correction territory!... but not out of the woods. This anticipated rally in the index futures is just a normal component of a bear market as it continues to take shape. Historically, some of the best moves to the upside have occurred within an overall downtrend. The timing of this move fits the narrative perfectly. In my previous posts, I’ve commented on the Financial WMP’s (Weapons of mass production) that are being deployed right now all around the world as governments and central bankers attempt to stem the declines. This latest mammoth stimulus measure by the Bank of Japan helped to coax buyers out and drive prices higher. We’re also in the midst of earning’s season and companies are both reporting on the previous quarter and providing guidance for the future. Fund managers and retail investors alike tend to put cash to work during these periods as talented CEOs and commentators paint a somewhat optimistic picture of the future. You can see the phenomenon at work - last week the US Dollar, Gold, Oil, 10 Yr. US Treasury, and Equity futures all moved higher. This really isn’t supposed to happen and one would think that at least one of these markets is lying to us (-:

So far things are progressing according to the 2016 playbook and I’ll continue to look for short term buying opportunities. I’m expecting to see the major index futures continue to fight their way higher again this week as the negative tone mellows and the bulls start talking about how we’ve seen “the bottom”. That’s your queue to start looking for a chair – When it’s obvious to the world that the music isn’t playing anymore, your options become far more limited and the competition for seats increases immensely. I sent the picture on the left to a client last week to help illustrate the market path I’m looking for. The picture to the right includes Friday’s surge. If you’ve missed my previous commentary and are still fully invested, I believe that the area inside of the box (1960-2030) will represent your best opportunity to sell S&P Futures for the next couple of years. As global GDP continues to contract, I just don’t see any meaningful upside. I do however see a few potential catalysts to the downside. I’m not a doom and gloom guy that’s suggesting you liquidate everything and buy gold with the proceeds, but there are very real problems taking shape. Equities are risk assets that typically experience large swings due to their liquidity and forward looking nature. This isn’t going to be 2008 all over again in the sense that we have the exact scenario play out as it did then, but I think it’s naïve to assume that a decline of similar magnitude is impossible because we fixed the banking system. 2008 wasn’t 2001 because we didn’t have a tech bubble, but your portfolio probably couldn’t tell the difference. Doesn’t it make sense to have a good portion of your money in a vehicle that is designed to function in a multidirectional market?

 

 The United States by many measures IS healthier than it was in 2008 and healthier than other developed economies around the world. I don’t think that we’ll fall into a vicious recession here, but we can still have a bear market with a good economy. How is that possible?

Doc brown has the answer “Marty, you’re not thinking 4th dimensionally” - The question isn’t “is the glass half full or half empty”, it’s whether it is filling or draining that Wall Street cares about. In reality the glass is actually a lot closer to being full, but depending on what data you follow the glass appears to be draining now. One can make the case that though we’ve experienced growth and reduced energy costs, that effect has been offset by increases in the cost of healthcare and housing. Couple that with an increased savings rate and stock fueling consumption suffers. Around half of the revenue from S&P 500 companies and our large tech giants is generated outside of the United States. When you look abroad, the deterioration is far more obvious. Brazil, Russia, Venezuela… Yikes. Sovereign wealth funds have been selling stocks to make up for budget shortfalls, and in my opinion this has to continue for some time. According to the SWFI, 4 of the top 5 funds ( Norway, Abu Dhabi, Saudi Arabia & Kuwait) have been built by oil revenue and have a collective value of around $3 Trillion. These funds used to be net buyers helping to propel global stocks markets higher, but with $30 oil they have been converted to large sellers. The Saudis are waging a very public price war with the intention of destroying the oil industry in entire countries. We’ve seen (in my humble opinion) a statically insignificant decrease in production thus far, so provided that the Saudis stick to their plan, this trend will continue until we see real carnage in the oil patch. When you have plenty of willing sellers and fewer and fewer willing buyers you can’t possibly expect anything other than lower prices.

If your portfolio isn’t tooled to take advantage of this environment, give me a call.

 

All the best,

Stephen

 

With “Super Mario” ( ECB President Mario Draghi) telegraphing more stimulus in Europe, the Bank of Japan making similar hints, state sponsored buying in China, and the deafening roar of oil popping by almost 9% on Friday, it would seem that we’re cruising along in the fast lane now! This music blaring, windows down rally has been loud enough to drown out a variety of other not so pretty data points. The good news is that I think we have a bit more open road in front of us, so I’ll be continuing to buy it on the way up. The bad news is that these Financial WMP’s ( Weapons of Mass Production ) are likely running out of both ammunition and potency. While the markets love this WMP smack, the other side of the coin is that central banking officials are seeing continued weakness that requires them to intervene.

So what does this mean and what do you do?

We’re rallying from the low 1800s as I mentioned in my previous posts, albeit even lower than I was anticipating. This tells us a few things; We traded below August lows and below the October 2014’s Ebola scare low -having to dip that far to find willing buyers is extremely bearish, which reinforces my position that the equity index futures will not be making any new highs in the near future and have a passport stamped for a trip down south. We need to prepare to capitalize on a narrow window of opportunity where the optimism transitions once again to a more accurate embrace of reality. I expect that transition to occur inside this red box (between approximately 1960 and 2030 )

 

 

If you weren’t prepared to avoid this mess last time, let’s review a few things from my “Iceberg Ahead” post:

So where are we at in our journey across the Atlantic?

We’re starting to receive warnings of icebergs in the region. It appears that we’ve spotted a mass floating ahead of us. It could be harmless sea ice or it could be an iceberg. I’m encouraging everyone to consider reducing speed from full, to perhaps a level more conducive to maneuvering – evaluate your exposure to risky asset classes, increase cash positions or explore alternatives. If you don’t want to change anything with your speed and heading, take an inventory of your lifeboats and consider increasing them - there are ways to hedge your exposure. If you want to get closer to the ice before taking any action, review your procedures for evasive action if you choose to take it – make sure that you can access all of your accounts quickly, talk to your advisors about a plan ahead of time and get an understanding of the logistical framework that they’re operating in.”

I am again encouraging people to consider the steps above. I believe that at this point, the global economy has made contact with an iceberg and is taking on water. I’m getting déjà vu as I see the deployment of WMP’s and the possibility of euphoric buying on earnings the same way as after the flash crash 2.0 in August. As that smoke clears, I’ll once again be looking to aggressively sell.

13 Time is the oil charm! A few other things to consider

This rally is being fueled by the “Perfect Storm” -lots of pun intended (-: The WMP’s by themselves typically give equity futures a solid boost. Inclimate weather in the northeast is also a huge tailwind for the price of both oil and natural gas as consumption spikes to heat millions of homes. We moved forward one contract month in oil also, which must now take into account the seasonal demand shift as refineries prepare for the summer driving season. The bottom line is that the underlying fundamentals, in my opinion, have only temporarily changed for the better. As Iranian oil comes to market and the price war continues, there remains a serious supply overhang and production imbalance. It’s too early to call a bottom. This will mark the 13th time we’ve seen a bounce of 3$ or more in the price of oil in the last year. As we celebrate oil holding onto $30, I personally think that the global debt default risks associated with low oil don’t diminish much until we’re over $50 a barrel. Though I’m happy to see it, and there’s room to continue up further, I won’t be jumping in to energy just yet.

If you don’t think that your portfolio is positioned to take advantage of this environment, give me a call.

 

All the best,

Stephen

 

 

 

2016 Playbook –

In the S&P futures market, we’re in the neighborhood of the August lows again. I’m expecting a rally from this area as we begin earnings season and optimistic investors find the sale on stocks to be irresistible. I am looking for short term buying opportunities only and do not expect to make it back up anywhere near the previous highs of 2100. If the markets are able to sneak up, I’ll again be very actively looking to sell. If you’re still holding on to long positions, this bounce could give you a chance to snag a lifeboat and exit. I do not think that you want to be making long term purchases here as I expect the selling pressure to come back in force later in the year and push the equity markets significantly lower than where they are now.

 

 

 

Here are few items to keep an eye on in the new year –

As many companies fail to meet their goals for Q4, I’m looking for them to announce cost cutting measures, which usually translates to a reduction of headcount. As a result, I think that unemployment will actually start ticking up again, ending the steady decline we’ve enjoyed over the last several years. I’ve been anticipating weakness in retail due to the Amazon effect and inventory builds that force companies to discount their merchandise and cause margin compression.

In my opinion, the economic data that arrived at year end was soft and indicative of further deterioration. Global GDP forecasts have been revised down. Domestic housing seemed weak, auto sales were solid but failed to meet expectations, and manufacturing continues to disappoint. The numbers themselves aren’t the issue, it’s the trend that is disturbing. I’m expecting to see these metrics continue to slide in the wrong direction as the year progresses.

We’ve been distracted somewhat from the depressed pricing in the commodities space but if the environment doesn’t improve quickly, the concerns over debt tied to these operations will probably take center stage again. Oil has received the bulk of the press, but a similar trend is unfolding with regards to iron, copper, gas, and coal as well. Some people believe that our exposure here in the US isn’t enough to create any systemic problems, but the risk I see is in other countries who have aggressively built out their infrastructure (using large amounts of inexpensive debt) to supply China’s appetite for a variety of raw materials. As that appetite has dissipated, production has continued to be robust. It’s a bit of a game of chicken as large players have mortgaged their futures on a near term rebound in prices that is seeming less and less likely every day. I can easily see this chatter escalating to a crisis that sends equity futures tumbling further. Conversely, if commodities can stabilize and rebound, there may be chance of a soft landing

In summary, I think that the bears are coming out of hibernation and will be here to stay for a while this time. It seems as though the charts and the fundamentals are in agreement finally and we’ll proceed beyond a garden variety correction. If you don’t think that your portfolio is positioned to take advantage of this new landscape, give me a call.

 

All the best,

Stephen

 

I was asked 3 times yesterday “is this is a good time to buy into the markets?” - because everyone knows that in order to make a profit, you have to buy low and sell high… right?… right??? Not exactly.

Everyone’s philosophy is different, everyone’s financial situation and goals are different… Depending on your strategy, the answer can be different, but take the following into consideration. Most people and advisors spend their entire life exercising the first mandate of that phrase… Buy…when convenient, buy low. When you’re a genetic bull, you want the market to go up forever, when you’re an average investor in this country you buy things and hope to sell them on some day in the distant future, at a higher price.

So who is selling if all of the smart people are buying at such fantastic discounts? Contrary to the explanations that I hear floating around, it probably isn’t your nervous neighbor. The S&P 500 futures market is one of the largest in the world. It doesn’t move with the magnitude that it has when a few people get scared. It is a massive ship that I believe is steered by very large institutions, banks, and funds all around the world. They’re digesting the data and choosing to be sellers.

Anyone who bought more than 3 years ago is probably selling at a price higher than they bought, so at a relatively high price which =profit.  So people following the mantra completely and exercising the second part, which says to sell high, are possible sellers here.

The inverse of the equation is also true – You can sell high and buy back low. People like me are attempting to do that. Consider today’s price action in the S&P futures – We had a blowout headline unemployment number, just fantastic compared to expectations. The market rallied aggressively up to a place where it sold off yesterday and fell immediately back down further than where it was when the news was released. Scratch the paint a little more and the implication of that number is that the Fed will have supporting data to raise rates again.

A few days ago, Richard Fisher said (Former Dallas Fed President) – “We front end loaded, at the federal reserve, an enormous rally in order to accomplish a wealth effect” . Just how big was the rally? Around 300% off of the bottom for S&P Futures. Most of our homes have returned to or now exceed 2008 peak valuations. The Fed has purchased somewhere in the neighborhood of $4.5 Trillion worth of Treasuries, bonds, and mortgage backed securities… Companies have been borrowing money inexpensively and buying back their stock to artificially simulate growth. The economy has had the proverbial training wheels attached and daddy pushing it since our last decline. The training wheels just came off and there is no longer any forward push from the government. If declining rates have a stimulative effect, it stands to reason that rising rates are a headwind.

When I look at the big picture, I see a market that has been propelled higher for many years. Statistically we’re due for a bear market every 6 years or so – we’re right on schedule. The environment that incubated this rally was fantastic and free of so many of the concerns we see today. Manufacturing recession, systemic debt defaults related to depressed commodity prices, conflict escalation fears in the middle east and North Korea, slowing growth in China and around the world, etc, etc… The argument can be made that there are a lot of good things happening, and I don’t deny that. If everything were bad, we would have already crashed. I do however see deterioration. I see a ship that has arrived in port and is now sailing south after so many chances to continue north. There simply hasn’t been anyone willing to pay a higher price and therefore I believe we’ll see people willing to part with their investments at lower prices.

I wake up in the morning each day and have the luxury of deciding whether I want to try to profit from the markets moving up or heading down. As of now, I am predominantly looking for selling opportunities in the S&P 500 Futures. I’ll be selectively looking for short term buying opportunities in the green box ( low 1800’s) , but I think that we’ll eventually move below that area also.  When you look at the chart, do you think we’re closer to being high or low? No one knows exactly what will happen, but if someone in the last few days has told you to buy, you’re probably talking to a genetic bull. We ARE lower than the highs, but history has taught us that we can always go lower.

Take Care!

Stephen

 


 

 

 

 Titanic lessons, simple steps to prepare for market uncertainty.

Whether you’re an eternal optimist or believe that the global economy is hanging by a thread, now is a good time to revisit what you own and make sure that you have a gameplan for an environment that has profoundly changed. Jenna and I watched The Titanic this weekend and unfortunately it is an example of something magnificent failing in a way that was anything but graceful. There are few parallels that we can draw as the disaster was much more severe than it should have been.

Leading up to the fateful impact, the ship was cruising at near maximum speed even after being warned of iceberg dangers by other ships. Some believe that the captain was focused on breaking records for the maiden voyage and thus ignored the input he was receiving. Ironically, conventional investment wisdom calls for a very similar focus on the destination and a deliberate ignorance of scary data. This is the right attitude most of the time, except…when you don’t have enough lifeboats and an iceberg comes into view.

As everyone knows, the Titanic had enough lifeboat capacity for only around half of the passengers, which is funny because in the last few economic declines, there has only been enough lifeboats for about half of your money (-:  The cruise industry has corrected this obvious flaw in their safety protocols but many investors have not and remain exposed exactly as they were before.

When the iceberg was spotted, the crew’s actions were spontaneous and uncoordinated. Some historians say that the ship initially turned into the iceberg instead of away from it. Reversing the ships engines also reduced the ship’s ability to maneuver. If the crew had a choreographed, rehearsed technique for avoiding this type of collision, the outcome may very well have been different. The rank and file of the crew were unaware of the lifeboat deficit and didn’t fill them up. A tiny bit of knowledge and procedural change for loading the boats would have saved a few hundred more passengers. Many investors have thought about the risks that exist in their portfolio, but without taking precautions ahead of time and having a designed plan of action, the results probably won’t be as desired.

 So where are we at in our journey across the Atlantic?

We’re starting to receive warnings of icebergs in the region. It appears that we’ve spotted a mass floating ahead of us. It could be harmless sea ice or it could be an iceberg. I’m encouraging everyone to consider reducing speed from full, to perhaps a level more conducive to maneuvering – evaluate your exposure to risky asset classes, increase cash positions or explore alternatives. If you don’t want to change anything with your speed and heading, take an inventory of your lifeboats and consider increasing them - there are ways to hedge your exposure. If you want to get closer to the ice before taking any action, review your procedures for evasive action if you choose to take it – make sure that you can access all of your accounts quickly, talk to your advisors about a plan ahead of time and get an understanding of the logistical framework that they’re operating in.

So what’s changed? Stock market indexes are close to all-time highs, everything is great right?

The Fed has increased the interest rate charged to banks for overnight deposits by .25%. While this is a very small increase, it marks the end of a cycle of declining rates which started in 1981. They’ve telegraphed an increase of around 1% for 2016. Historically, the Fed increases this rate to slow down economic expansion in the country. Experts are somewhat divided over whether the economy is healthy enough to warrant these measures to curb growth, and their decision is thus a very controversial one in light of the fact that the rest of the world is moving in the opposite direction.

Manufacturing in the US has been declining precipitously. The December 31st Chicago PMI posted its sharpest monthly decline and lowest level since 2009. While manufacturing is a relatively small part of the US economy, there is a similar trend unfolding in China where manufacturing is a very large part of their economy. Historically, declines in manufacturing to the level that was just posted indicate serious problems domestically.

The data isn’t all bad as the US consumer appears to be fairly healthy. Big tech continues to be very strong, albeit one of the only bright spots in the stock market in 2015. We’re going to get more data regarding holiday spending and that will likely provide the markets with a catalyst for a move in one direction or another. It’s not time to panic, but you don’t want to hear the ice grinding against the hull before you take steps to avoid a dip in freezing water.

I hope everyone had a great holiday season, good luck sticking to those resolutions!

 

Happy New Year!

Stephen


  

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