The Confidence Game

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Rabbie Gill

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The Confidence Game

Central banks and President Trump are doing all they can to try to instill confidence into risk markets as there are many cracks below the surface. Flat earnings growth and fading economic growth are being offset with lower interest rates and quantitative easing.  All of this at a time of historical low employment, new highs in the S&P 500 and the greatest economy ever (according to Trump)?

Will these measures fuel a new phase of growth or are they being used to create a mirage of confidence while fundamentals deteriorate?  TRI believe it’s a little bit of both as central banks and politician’s actions have extended the current cycles.

The S&P 500 has failed to follow through on any material downside setups since Dec 2018 as it recently hit another all time high.  Dec 3 marked the last daily cycle low, the last weekly cycle low in Oct 2019.

 

Source: Tradingview.com

TRI cycles are indicating higher prices as, the daily, weekly and monthly cycle and trends are positive for now. TRI continues to follow its signals on various time degrees, as a quick and powerful correction to the downside can happen at any time. Risk is elevated as divergence can extend for prolonged time periods.

Fedex CEO said it best on their recent earnings call “it’s really a tale of two economies and the stock market, of course, is very bullish, but the industrial economy does not reflect growth at all, worldwide, to speak of.”

Next leg lower for interest rates

The US 10Y and 30Y interest rates appear to be completing their monthly cycle highs.  TRI outlined in fall of 2018, that interest rates have likely peaked and were heading lower.  Interest rates did move lower into Sep 2019 monthly cycle low and have since correcting higher in normal cyclical manner.

The 10Y and 30Y interest rates cycle are now posed to continue lower.  A potential move of another 50 to 75 bps lower can result in an 8 to 10% capital gain for 3OY bond holders.

Source: Tradingview.com

The Emerging Markets fear flag is still alive & well

In early September the Emerging Market ETF poked below its bear flag set up. The downside failed to materialize as central banks lowered interest rates, increased liquidity and jawboned markets on the hopes of new trade deals.  The move higher is retesting the prior correction highs.  Stay on your toes over the next several weeks for renewed potential weakness as the downside set up has not been nullified.

Source: Tradingview.com

 Dr. Copper’s set up still there…

Copper showed the first sign of breakdown in Sep 2019 along with Emerging Markets. But as markets do, the sprung higher along with other risk assets.  The move higher appears to better fill out the symmetry of the double head & head and shoulders pattern.  The move higher is very similar to the EEM ETF mentioned above.  The downsides set up has not been nullified with copper, just extended.

Source: Tradingview.com

Close to a trade deal …

TRI came across this visual of the close to a trade deal new releases and tweets… the picture speaks for itself.

 Does the deal have any real substance?

Last week the US & China confirmed that a Phase One Trade Deal was reached. The details are scarce and inconsistent with available hard data. For example, China supposedly has agreed to buy $40 bln of agricultural products from the US next year.  As the chart below shows the highest purchases ever for China have been ~ $26 bln in 2012. In 2018, purchases were less than $10 bln.  This means China will quadruple its purchases next year.  Again, they are trying to instill confidence into a trade dispute which will take years and years to flush out.  As the real number level of trade surfaces, markets will adjust accordingly.

 

Repo market danger

The repo market is under stress and the Federal Reserve is flushing the system with extra liquidity to reduce the pressure on banks and funding facilities.  The Fed will add another $500 bln in liquidity into early Jan 2020.  Again, why all the extra quantitative easing if we are in the best economy ever?

Is it coincidental the rally in risk assets has followed the liquidity injections from the October cycle lows?

Corporate profits set to disappoint

According to Morgan Stanley Leading Economic Indicator earnings growth is likely to move lower into early 2020. If this is the case, then we should also see valuation multiples contract.

Liquidity… its there until its not

TRI can not overstate the risk of liquidity disappearing.  The chart below shows the historical high correlation of small cap earnings quality and investment grade credit spreads.  If the year-end liquidity flush exhausts and earnings growth rates disappoint, then investment grade spreads will likely increase.  That increase in credit spreads will likely be the straw that breaks investors confidence as liquidity disappears for credit leading risk assets lower.

Stay liquid, stay defensive and follow your investment plan.

TRI Cycle & Trend Signals*

The TRI Cycle and Trend Signals are shown below.  These signals are as of market close on Dec 13, 2019.  Please see the TRI Overview document for further information.

* TRI Cycle and Trend Signals are dynamic and may change on a daily, weekly and monthly basis, without notice. The indicators are at a point in time and do not imply that the current trend will persist and should not be considered investment advice.

Disclaimer: This material has been provided solely for information purposes for the use of the recipient and Fieldhouse Capital Management Inc. (FCMI). This material does not constitute an offer or an invitation by or on behalf of FCMI to any person to buy or sell any security. It should not be assumed that the methods, techniques, or indicators presented in these pages will be profitable or that they will not result in losses.  Any reference to past performance is not necessarily a guide to the future and the value of investments may fall as well as rise.  FCMI accepts no liability for any direct or consequential loss arising from investments made in accordance with the attached material. The research and analysis contained in the attached material has been procured from sources which are believed to be reliable and accurate.

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