Central Banks Are Not Equipped For Today’s Crisis

The drop in global trade, stemming from the Covid-19 virus is a tinderbox that will likely cripple the liquidity of the small, medium and large business globally – ultimately testing their solvency. TRI believes this risk is being majorly underestimated – including the risk that the market decline hasn’t completed, but rather is just starting. A major credit crisis has likely begun. TRI is not all doom and gloom, as a great buying opportunity will likely emerge later in 2020.

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Let’s Make A Deal…

Let’s Make A Deal… I mean, let’s make a deal to make a deal.  Deal? Just more jawboning from the US & China to drive investor sentiment higher.  The mid-October announcement of a Phase 1 US-China trade deal helped spark risk markets higher.  The announced deal has little substance in terms of details, size, or timing.  All the while the economic data prints continue to weaken.  Economic back drop is now being hit from both cyclical forces as well as secular forces as the era of globalization has ended. The S&P500 is showing resiliency by bouncing back above 3,000 level and now tagging the resistance line from early 2018. Daily and weekly cycles are both on bullish trends with the upside breakout.  Source: Tradingview.com The S&P 500 last daily cycle low bottomed on Oct 3, with the last weekly cycle bottomed on Jun 3.  The daily cycle low came just at the government began talking up the chances of a deal. TRI expects the next daily cycle low between early Nov and early Dec. TRI will need to see a daily swing high form, as the first piece of evidence of current cycles topping. No Fear, Just Greed Investor sentiment…

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The Greenback Attack; US Dollar Shortage

The Greenback Attack; US Dollar Shortage A strong US Dollar is the arch nemesis of risk assets given its role in funding credit and being the de facto global reserve currency.  The US Dollar has been steadily rising since Feb 2018 when the current business cycle’s growth rate peaked. All the while risk asset valuations have been topping with the S&P500 being the last hold out.  USD strength is now at a point where it is negatively impacting underlying economic growth. Source: Tradingview.com The repo market rates spiked over the last week as those funding markets are seeing a shortage of USD and high-quality collateral such as US Treasuries. This stress in the “plumbing” of the financial system is worrying. USD vs PMI To look at it another way, if we invert the year over year change in the USD there is a high correlation to the phasing of the business cycle as represented by the ISM Purchasing Manager’s Index.  As the USD weakens, we see the ISM PMI increase, and vice versa. When the USD is strengthening the ISM PMI rolls over as does the business cycle.  The Oct 2019 ISM PMI printed 47.8, the weakest print in 10…

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How Many Negatives Make a Positive?

How Many Negatives Make a Positive? For all intents and purposes US and Canadian real interest rates are now negative across most of their yield curves.  Should investors listen to the bond market which sits at historically low and negative interest rates or the S&P500 that is again flirting with all time highs?  TRI advises caution for risk assets, as the topping process for equities continues and we do not yet have enough negatives to make a positive risk/reward profile for risk assets. The business cycle is declining and on the cusp of contraction.  The Federal Reserve and the European Central Bank confirmed this as they lowered there key short-term lending rates again and are again implementing various forms of Quantitative Easing. Source: Tradingview.com Longer term (10 and 30 year) US nominal interest rate now average around 2%. As seen below, US inflation is averaging about 2%.  Two minus two equals zero. The 10-year term real interest rates are -0.3%.   Even the 0.25% countertrend bounce higher in interest rates since early September has not put a dent in the downtrend in rates. Source: www.bls.gov Daily and monthly cycles and trends are bullish for the bonds, while the weekly cycle and…

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The Trump That Tweeted Wolf

The Trump That Tweeted Wolf Market sentiment is shifting. Tariffs on, tariffs off, tariffs delayed, new talks, talks cancelled, retaliation, no retaliation. Prior to this week, markets had large knee jerk reactions of 2, 3, even 4% moves to Trump’s tweets.  However, this week Trump’s tweets didn’t move the markets as much, the reactions appear to have become much more muted. Trump’s tactics remind us of the boy who cried wolf one too many times. TRI’s concern is that the big bad wolf is not just the trade war, but more importantly the downturn of the global business cycle. It appears many investors are ignoring the message economic indicators and asset prices are flashing across equity, interest rates, commodities and currencies. TRI believes the trade war is exacerbating the downturn in economic cycle, not its cause. Investors have now priced in much of the trade war drama and timing of resolution with a high uncertainty premium. In best case structure and timing of any resolution is far from clear, besides the fact the global supply chain is drastically changing.  Markets are now looking through the trade war challenges and will be focusing on economic growth prospects. Let’s see what the…

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Bull…Whip! Trade War’s Impact on the Global Supply Chain

Bull…Whip! Trade War’s Impact on the Global Supply Chain So far, the trade war has done nothing.  That is correct, NOTHING! Trade and business investment are halting to a stop, nothing is happening! This is a big problem!  The global supply chain as we knew it is suffering from paralysis as world trade is de-globalizing.  This is having a negative effect on asset prices across the board. The trifecta of 1. tariffs, 2. renegotiations of trade deals, and 3. the naturally occurring down phase of the business cycle has consumers and business halting consumption and investment because of uncertainty and rising costs. Uncertainty of interest rates, prices, tariffs, regulations and perhaps most importantly credit availability.  This in turn is negatively impacting revenue, income, cashflow and ultimately valuation levels across all asset classes. However, it is not all doom and gloom.  Even though the global economy needs to go through a period of painful adjustments and restructuring, as noted above, once we complete the down phase of the business cycle, consumption and investment will re-ignite.  Hopefully, by that time governments will also provide a clearer policy path and align incentives for consumers and business restart investing. Bullwhip Effect in the Supply…

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Has the Business Cycle Trapped the Fed and the Bulls?

Has the Business Cycle Trapped the Fed and the Bulls? The US Federal Reserve’s first interest rate cut in 10 years sent risk assets pummelling as many global equity markets fell 3% or more. Despite all the central bank interventions, the business cycle is alive and well.  TRI believes the down leg of the business cycle is well underway, where the weakening global economy triggers cascading declines in output, employment, income and sales. Ultimately leading to re-pricing of risk assets lower while sovereign debt becomes a safe-haven play.  The US or shall we say global trade war is creating additional economic headwinds. TRI’s June 2019 scenario of a bear and then bull traps for investors is playing out well. The bear trap beat the bears up pretty good, as the S&P500 rallied over 10% out of the June daily and weekly cycle lows. Now the setup appears to be complete for bull trap, right as the Fed’s cut interest rates.  The Fed now appears to be trapped as well, as its credibility is in question, and lower interest rates are on the horizon. As of August 2, the S&P 500 is on a bearish daily and weekly cycle trend. This…

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Sit & Wait

Sit & Wait … The S&P 500 rallied to new all-times highs out of the June daily and weekly cycle lows as the Federal Reserve saved as interest rate cuts are likely on the horizon.  Meanwhile, the underlying economic data continues to deteriorate. The Global Composite PMI printed 51.2, sitting at a 3-year low. In such market environments we must sit and wait and let the market tip its hat – more policy driven asset inflation or deflation and repricing of risk assets lower. TRI stated in early June that the market might be setting up 2 more traps. First for the bears and the second one for the bulls. So far, the bears have been beaten up pretty good as the market rallied out of the June weekly cycle low. Now we wait for the setup to complete the bull trap …  before market rolls over. As of July 8, the S&P 500 is on bullish trend signal for the daily, weekly and monthly cycles. Higher prices can be expected as a break of 2,950 is needed to signal a potential top. Until then SPX can rally to next Fibonacci cluster at 3,045. The daily cycle is expected to…

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Another Trap Ahead for Both the Bears & Bulls?

Another Trap Ahead for Both the Bears & Bulls? The topping process for equity markets is just that, a process. The process catches many investors off guard as the numerous twists and turns whipsaw their conviction and positioning.  TRI’s anticipatory indicators continue to point to significant economic headwinds in the year ahead.  TRI believes this will result in risk assets being re-priced materially lower.  But before we get there, the risk markets appear to be setting up two more traps, one for the bears and then one for the bulls, before the larger degree sell-off materializes into Fall 2019 / Winter 2020. Source: Tradingview.com Bulls and bears alike have become more polarized from the current market action.  TRI is neither a perma-bull, nor a perma-bear.   TRI’s endeavors to provide independent and objective market insights and portfolio management through a proprietary and repeatable investment process anchored around the business cycle. TRI process is probability based, as there are not guarantees or certainties with investing.  At times TRI might be early or late on call and will openly acknowledge misses or changes in our expectations as new information surfaces. TRI’s goal is to protect our client’s capital and grow it regardless of…

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Shots Fired! Is the Yield Curve About To Steepen?

Shots Fired! Is the Yield Curve About Steepen? Trouble for risk assets creeps closer as the flat yield curve (and in several terms inverted) begins to steepen with short-term rates falling faster than long-term rates.  The US 2-year yields just broke below the previous weekly cycle low of Dec 2018.  While the US 10-year and 30-year yields are basis points away on the verge of breaking down too. TRI expects the 2-year yields to fall faster than the longer dated treasury bonds, causing the yield curve to steepen over the next 12 months. Source: Tradingview.com Meanwhile in equity markets, the S&P 500 has managed to make new highs on more pronounced negative divergence with the RSI indicator and several other key markets.  As seen below, none of the NYSE Composite, Russell 2000, Emerging Markets or the World Ex-US ETF’s have been able to make new cycle highs.  This is very troublesome for TRI, as it signals major market weakness disguised behind the strength of US mega cap stocks. Source: Tradingview.com The historical US10Y – US2Y yield curve provides some very interesting information as we enter the next phase of the business cycle.  On 3 occasions - 2004, 2010-12 and 2014…

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The Air Is Getting Thin Up Here

The Air Is Getting Thin Up Here As the S&P500 rallied to all time highs, breadth is getting thinner up here even as the move up doesn’t appear complete.  Risks on the long side of the market are elevated as it targets the 3,011 to 3,040 levels. The Gov’t of Canada 10-year yields have been range bound between the 1.50% and 1.80% range, short-term consolidations are normal after the large move lower since Oct 2018. Gold’s monthly cycle has turned down triggering a monthly bearish trend change with expectations of lower prices. Market Trends The S&P 500 Daily cycle has turned bearish, while the Weekly cycle remains bullish. Can10yr rates are weakening on Daily and Weekly basis, and bullish on the Monthly. USDCAD Daily, Weekly and Monthly cycles remain bullish. TRI Cycle & Trend Signals* The TRI Cycle and Trend Signals are shown below.  These signals are as of market close on May 3, 2019.  Please see the TRI Overview document for further information. Source: Fieldhouse Capital Management Equity – Air Is Getting Thin Up Here In April the S&P500 rallied to all time highs, moving through the resistance zone of 2,800 to 2,880 TRI highlighted in early 2019. Technology…

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Risks Are Rising, Breadth Is Falling

Risks Are Rising, Breadth is Falling The S&P 500 has rallied to the 2,800/80 resistance zone with an increasing number of negative divergences, hinting that the move from Dec 2019 is close to a finale.  The Canadian Financial sector is likely to correct greater than 15%, as it moves into the 4-year cycle low. The move down in Can 10-year rates is stretched and rates can consolidate or even have a counter-trend bounce higher as it digests recent price action below the 1.80% resistance level. Market Trends The S&P 500 daily cycle is in the final stage of topping, which will lead the topping of the weekly cycle as well. Can10yr rates triggered a daily sell signal, but this move into the daily cycle low should be counter-trend move before rates continue lower. USDCAD daily cycle is topping, while longer-term weekly and monthly cycles remain positive. TRI Cycle & Trend Signals* The TRI Cycle and Trend Signals are shown below.  These signals are as of market close on March 29, 2019.  Please see the TRI Overview document for further information. Source: Fieldhouse Capital Management Equity – Risks Are Rising, Breadth Is Falling The S&P 500 has rallied to the 2,800…

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Risk Assets Extending Higher. Are Negative Rates Ahead?

Risk Assets Extending Higher. Are Negative Rates Ahead? The S&P500 and risk assets continue to extend higher as the daily MACD has registered such high levels only twice before.  The S&P 500 can continue to extend higher as it bounces against overhead resistance in the 2,800 to 2,880 level. The improving sentiment and valuation multiples can be tied directly to the Federal Reserve’s capitulation on further policy rate hikes.  But TRI believes, the Federal Reserve does not control the business cycle, and the headwinds for slower growth into early 2020 cannot be undone merely by the Fed moving to the sidelines. TRI senses the powers that be are beginning to float trial balloons of what is likely coming down the pipeline in North America…  while TRI is likely early on this call of negative policy rates… don’t be surprised when you pay banks to hold your deposits. Market Trends The S&P 500 continues to push higher, even after a bite size daily cycle low of Feb 8. Indications are for higher prices, but caution is warranted as the easy part is behind us. If the daily cycle fails to make new highs above 2.05% and the daily cycle becomes left-translated,…

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