Loading...
 

Chameleon Asset Strategies Blog

Stephen Padwe

Stephen Padwe

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

 

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

 

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

 

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

 

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

 

The markets have recovered handsomely from their recent lows however I don’t think they’ll linger up here very long. I believe that we’ve just entered the narrow window of opportunity that I spoke about previously. Here’s some food for thought-

 Contrary to what most advisors with tell you, taking profits here does NOT mean that you don’t have a long term perspective. As I’m writing this the S&P 500 is down around 7% from its all-time high. In the last 2 bear markets, it declined around 50% from its high. It can happen again, statistically a large move down should happen again, and with each year that ticks by, the odds increase. If you look at the big picture, we have what appears to be the most defined market ceiling of my lifetime and plenty of room to fall below. You are not acting irrationally by choosing to sell into this rally.

 This is a good place to change strategies if you want to. Many investors wait until the worst time to make decisions – Don’t do that. If you’re worried about the global economy, geopolitical risks, etc. act now as opposed to after the damage has been done. It doesn’t have to be all or nothing either; there is middle ground. If you didn’t take any measures to hedge/reduce your exposure at year end when I suggested it, this is your next best place to do so. Consider having at least part of your risk portfolio invested in strategies that are designed to function in a market that goes up or down.

The S&P 500 futures have been battling higher for the last 2 weeks and investors are getting excited again at the prospect that a bottom may have been put in. Hopefully they’re right, but I doubt it. Just above where we are lurks a massive glut of anxious bears who have been patiently waiting for our exhausted bulls to arrive. I’d like to see the rally continue a bit higher, but don’t expect much more. By most measures, price has been stretched, the indexes are overbought and we’re nearing the most logical places for major players to begin selling again. As I’ve mentioned in previous posts, I expect to see the market reverse course within the red box. I’ll be very aggressively looking for short opportunities in the S&P futures near 2000.

All the best,

Stephen

 

Last week the markets were pretty upbeat. We saw some of the first signs of positive activity in the oil patch in quite some time. Global banks recovered a sizable chunk of the year’s losses. Stock index futures also managed to make some significant headway.

The March oil contract made a new low however the April contract held its January low and has risen a few dollars from there. This is a relatively subtle difference in the charts, but it carries quite a bit of technical significance as the selling pressure has subsided somewhat. It’s still too early to be calling a bottom at this point as the fundamentals remain pretty ugly, but it's a start. Many analysts see price stability in energy as a prerequisite to any sustainable rally in stocks.

Jamie Dimon ( The CEO of JP Morgan Chase Bank) personally bought 500,000 shares of his company, worth around $26 million. His confidence in the strength of the US banking system attracted many other buyers. Deutsche Bank will buy back around $5 billion of its senior debt, which helped to sooth some fears over its capital position. The market loved these headlines but I really don’t see any material change in the environment that sent them tumbling in the first place, save for a pause in the oil freefall. The currency fiasco in Latin America, systemic debt fears tied to depressed commodity prices, and fallout from slowing growth in China are still very much in play. Take the bounce with a grain of salt.

Equity futures rebounded nicely after a rough start to the month. Unfortunately, the rally appears to consist predominantly of short covering and not necessarily new buyers stepping in. This fluffy rally has also pushed the S&P right into the upper part of its trading range while reaching an overbought condition ( when prices move up too fast in a very short amount of time ) This would normally be a setup for sellers to return to the market. A close above 1950 and we’ll probably see a short term extension of the rally – a close below 1900 and one would expect to revisit 1800. We’ll see what happens.

All the best,

Stephen

 

 Crude started the week by heading below $30 again and breaking all recent support; Equity futures fell with them. On Thursday around 12:45, a carefully crafted, suspiciously timed headline was released, which stated that OPEC may have an emergency meeting and begin coordinated production cuts. Both oil and equity futures were at their session lows, which also happened to be the lowest intraday levels for both that we’ve seen in recent years. The futures surged on the news and took advantage of a long weekend where traders prefer to close their short positions, which fueled the gains. If ( and it’s a HUGE if) there is any truth to the rumor, these markets have a good chance of rallying further in the near term. If there is no merit to the rumor, which I suspect that there is not, plan to see oil continue to make fresh lows and drag index futures helplessly along with them.

 Why do I think that the rumor isn’t true or won’t carry the weight that people hope it will? Saudi Arabia has been silent on this headline, once again. The statements they have made in the past indicate that they have a very clear agenda, which is to keep prices low until high cost producers are flushed out and stop oversupplying the market. We’ve just barely started to see the kind of pain necessary to fulfill their aspirations. Most companies have halted drilling and a few high profile oil players have cut dividends, but in my opinion there has been no meaningful decrease in production. I believe that the Saudis are committed to their goal and will continue to pump at record levels while boycotting any efforts of other weaker players to slow the bleeding.

In the near term, oil will continue to take center stage and lead index futures. Gold and Treasury futures have surged  and are due for a pullback before continuing on their trajectory. I’ll be looking for attractive places to buy them and join the trend.

   

All the best,

Stephen

 

This week Nasdaq futures dropped like a rock while the other major indices held up much better. Why such a divergence? Investors chose to shed risk and start playing some DEFENSE ...  Utilities, telecom, and consumer staples are sectors showing price stability as large players seek safety over growth. Historically, this is a move that is made in anticipation of economic weakness and in my opinion is evidence of a shift in overall market sentiment.

The S&P futures were able to hold the 1865 level, but given the price action in the Nasdaq futures, it appears that the next leg down may be upon us. The next few days will be telling. A close above 1925 in the S&P futures and there's a chance we continue higher in the short term. A close below 1850 and the fabric may unwind rather quickly. I’m going to watch things unfold and let stocks pick a direction. The price of oil will likely create a catalyst in one direction or the other. Until then I’ll be looking for opportunities in other markets.

 

 

Take care,

Stephen

 

 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

 

Page 1 of 2
 All works
  • Quick Contact

      720-331-2227

      This email address is being protected from spambots. You need JavaScript enabled to view it.

    Send Us A Message