The Four Horsemen of Portfolio Decimation
They Ride. Shadowed faces. Unrecognizable to a generation of investors. Every village they pass through... terrified. Asian markets have been awful overnight. Europe opened in the hole, as well. Crude has been sloppy. You can hear their thunder. Their hooves upon the road, headed toward a net-long portfolio near you -- which is most of us.
It's been so very long. I certainly did not miss them, but I knew that I would see them again. Though I would not mind if they never showed their face in these parts again. That said, here they are... the Four Horsemen. The fact is that when these four all show their faces at one time, it may already be too late to seek shelter... you are going to have to fight from where you now stand. They are:
1) Utilities. This rider was first on the scene. Utilities have led for a month, and have been strong for a quarter.
2) U.S. Sovereign Debt. We have seen weakness here, but not lately and certainly not this morning.
3) The VIX. Suddenly above 20, the Volatility Index now closes in on 25. Who among you remembers this number higher than 50, 60 or even 80? Yeah, kids... it does that.
4) Gold. Always last to the beat-down. Always when the folks are in their most-frightened state. This morning, December Gold futures are honing in on the $1240 level. And $1265 is a tough neighborhood, by the way.
The Environment Provided
I have preached, in fact I have over-preached, on staying agile in tough markets. Remember, when the beat-down comes your way, I want you all to cover the P/L on your screen with a post-it. This one little trick is something I do myself. By doing this, the trader allows him or herself to make tough, reasoned decisions without the constant distraction that one's profit/loss number can be.
Key to remember here, one must understand that they are actually in a fight. Then one must identify both danger, as well as targets of opportunity. After that, the trader can adapt to the new environment. Do not even worry about overcoming market adversity. One overcomes naturally once properly adjusting to these new conditions. You will not know that you have overcome until you already have.
Are We In A Bear Market?
Great question. We are certainly in a confirmed market correction. The Four Horsemen have been released by the titans of doom. So are we in the early stages of a bear market? Is this just another selloff, as in February and April? Market movement is far more violent now that human decision-makers play a far less significant role in price discovery. Hey, humans were too slow for the big players. Well, you reap what you sow.
Back to the question at hand. I have this handy dandy little checklist on the wall in my office. It has been there gathering dust for many years. I force myself to look at it from time to time. I think maybe today, we bring it back for the masses. This is my bear market checklist -- it may or may not put you at ease. Probably not.
What Causes Bear Markets?
1) Geopolitical Threats. Yes, we have some of this. Trade conflict. Primarily, but not solely, with China. Threat of a Cold War. Trouble brewing in the Middle East.
2) Threat of Recession. No, not yet. There are cracks in the pavement, but at the headline level, the economy remains a long way from recession.
3) Problematic Inflation. No, not there yet. There are signs, but consumer-level inflation unrelated to trade conflict has not yet become dangerous.
4) High Equity Valuation. Equity markets are not, I repeat not, trading above their five-year averages for forward looking P/E. Of course, gang, the earnings "E" could be wrong.
5) Investor Exuberance. Not a problem. There is absolutely none of this present in the marketplace.
6) Dangerous Monetary Policy. Ding, ding, ding. We have a winner, ladies and gentlemen. The current trajectory of monetary policy depicts either a complete lack of understanding at the FOMC of the current environment, or the overt intent to purposefully slow economic growth. I am honestly perplexed by the inability to learn, reason and adapt at this level.
Are two out of six conditions clearly met enough for the bear? Perhaps. Should those two conditions persist without correcting themselves, the geopolitical, and reckless monetary policy certainly have the ability to eventually bring recession about.
Cold War Part Deux
In 1979, President Carter's administration ceased diplomatic recognition of the government in Taiwan as independent of mainland China, as the U.S. and China normalized relations. The Chinese government has a "One China" policy, where the role of Taiwan is concerned. As for Taiwan, the "island province" is more than autonomous, the island has its own government and its own head of state.
That head of state, President Tsai Ing-Wen placed a congratulatory phone call to President-elect Trump after his election in December of 2016. The acceptance of that phone call made headlines at the time. On Monday, news broke that the USS Antietam, a guided missile cruiser, and the USS Curtis Wright, a guided missile destroyer, had traversed their way through the Taiwan Straight.
I want you to understand this. This was no speedy drive by. This was a 16-hour trip, by two U.S. warships enforcing their right to travel international waters -- waters that China would obviously dispute the use of the word "international" as descriptive. The U.S. ships were shadowed by Chinese warships. This is cold war behavior. Been there, done that.
The entire defense sector reports this week. At least the big guys do. Margin compression and the potential for lost contracts weigh heavy on these stocks right now. This is one area where I will be slow to withdraw amid weakness. Domestic and allied monies intended for this space will not draw down in a Cold War environment. Lockheed Martin (LMT) reports this morning. The numbers should be good. However, the firm has a number of deals in place with Saudi Arabia. My plan is to wait for the call before doing anything stupid. Boeing (BA) , General Dynamics (GD) , and Northrop Grumman (NOC) all report tomorrow morning, while Raytheon (RTN) will go to the tape on Thursday morning.
My Thought For The Day
Would a market crash surprise me? No. Would a reversal to the upside surprise me? A little. But in this era, we need to be prepared for anything, because nothing is as it should be. The most important things to remember are that if you are healthy and somebody loves you, you've already won. These things pass. Maybe not quickly. But they always pass.
Economics (All Times Eastern)
08:55 - Redbook (Weekly): Last 5.8% y/y.
09:30 - Fed Speaker: Minneapolis Fed Pres. Neel Kashkari.
10:00 - Richmond Fed Manufacturing Index (Oct): Expecting 25, Last 29.
13:30 - Fed Speaker: Atlanta Fed Pres. Raphael Bostic.
14:15 - Fed Speaker: Dallas Fed Pres. Robert Kaplan.
16:30 - API Oil Inventories (Weekly): Last -2.1M.
18:15 - Fed Speaker: Chicago Fed Pres. Charles Evans.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (MMM) (2.70), (CAT) (2.85), (HOG) (0.54), (LMT) (4.31), (MCD) (1.99), (UTX) (1.82), (VZ) (1.19)
After the Close: (COF) (2.87), (CB) (2.39), (RHI) (0.92), (TXN) (1.58)
