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&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 has pushed bullishness to extreme greed conditions as measured by the Fear & Greed Index.
Have We Seen This Before?
Of course, because markets move in cycles as does investor sentiment. As seen below, when readings reach/exceed the 80 level, buyers begin to dry up.
Amber Alert for Global PMI’s
The table below illustrates weakening Global PMI’s since the growth rate of the business cycle peaked in late 2017 / early 2018. As of September 2019, the Global PMI as most of the countries below are at or below the 50 level. Question becomes, are the PMI’s bottoming? TRI believes there is still 2 to 3 more quarters of lower levels before bottoming out.
Industrial Growth Rate Peaked Before Trade War
The ECRI chart below provides more insight as to the cyclical slowdown of business cycle. The ECRI GLMI Growth indicator shows economic growth rates peaked in mid 2017, while Global PMI did not peak until early 2018. This represents the cyclical portion of the economic cycle which has further to go to the downside.
Trump’s trade war did not start until Spring of 2018, which is creating the secular supply chain issues (end of globalization). This restructuring will likely take years to reset and flow through the system.
Global Trade Volumes, eek…
Combining the cyclical slowdown with secular restructuring needed, the below chart shows the drop in global trade volumes.
Weak Earnings Outlook
TRI notes these trade levels take approximately 12 months to flow into company earnings. So far earnings estimates for the coming 12 months appear to be positive, which TRI believe is overly optimistic. Lower EPS into 2020 are a real risk and just around the corner.
Can China Turn The World Around?
China is on the world’s largest economies which has just printed the worst economic growth rate in 30 years. Which is likely overstated still.
And the level of credit growth is not promising as it is pointing to slower growth. No upticks expected in the short-term.
Share Buybacks Are Yuuuge!
The S&P500 companies are returning more than 100% of their free cash flow to shareholders. That means, less capital is being reinvested into R&D or growth capex. Will this limited reinvestment in our economy lead to what happened to Kraft Heinz earlier this year? For those of you that don’t know what happened, just pull up a chart of Kraft Heinz.
Disappointing Canadian Elections
Canadians went back to the polls, resulting in a minority government. It’s interesting to note, that each political platform campaigned on promises of tax breaks or additional tax credits. More social programs and handouts. TRI does not disagree with helping those in need.
However, TRI was not able to point down one political platform focused on helping Canadians increase their income, improve business competitiveness or invest in innovation. It seems Canadians are focused on re-distributing our current income pie, with limited desire to grow the pie – not a recipe for long-term prosperity. Very sad, indeed.
But, Opportunity Is Around the Corner
With all the caution and defensive positioning, TRI believe capital preservation is key for the average investor. A lower risk opportunity to add to risk assets will emerge in 2020 … so patience is recommended for now.
TRI Global Macro Fund Is Live!
Total Return Investor Global Macro Fund went live on November 1st! The fund is available to individual and institutional investors.
The strategy is based on the TRI Cycles & Trends investment process targeting double digit returns. Please contact email@example.com or 778 330 3302 for more information or to provide expressions of interest.
TRI Cycle & Trend Signals*
The TRI Cycle and Trend Signals are shown below. These signals are as of market close on Nov 2, 2019. Please see the TRI Overview document for further information.
Source: Fieldhouse Capital Management
* 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.