Life moves quickly. Too quickly, if you ask me. There are certain steps taken along the way that one might take perhaps to help prolong well being, while also maximizing the "life" part of being alive. Working one's own portfolio is similar in a microcosmic sort of way. You like the forest. You kick rocks on the trail, you whistle when visibility is reduced. Why? Bears. That's why.
The hiker needs a rest. Sit on a rock, or a log? Not without stomping on it, or hitting it with a stick first. Why? Snakes. Love to swim in the ocean? Try not to go it alone. Nobody likes to be the only item on the menu.
Family life? First aid kit, some non-perishable food, a blanket and an inflated spare in every vehicle. Why? Because if something happens to someone you love, there's a chance it will happen when you're not there. We hedge our chances. Always. To reduce the probability for disaster in the event of unpredictable turns. As the fabled worm of lore, the markets seem to have turned. Trend has not yet changed. That 20-day/200-day Simple Moving Average experiment that I had mentioned is ongoing, though not yet a winner. (Meaning that the experiment is currently a loser. A lot of other talking heads give you that?)
Markets had priced in for good measure a far more cautious Federal Reserve. Markets had priced in for the most part, a trade deal with China. Markets are left in a place where there is uncertainty over just how sure any such deal might be. These markets are left wondering just how much political risk is not effectively priced into the last sale, as Michael Cohen makes headlines every day, as the Mueller investigation crawls to a finish.
The word impeachment is mentioned constantly. Whether this is due to the validity of such an idea or merely because it sells newspapers, we just don't know. We can't know. We do know that every time headlines of that ilk make the rounds, the most pro-business administration in at least many decades becomes that much less effective in moving forward with this kind of agenda.
These unknowns are the "whys." Why I stay above my formerly normal level for my cash allocation, regardless of my aggression elsewhere. Why I spend at least as much time on net basis manipulation as I do on finding the next stock. Everyone in my family has a "woobie" in their car (a stuffed, waterproof, multipurpose "blanket"). You really just never know.
It's the Economy, Stupid
The Wall Street Journal reported on Wednesday night that investors had roughly been leaving the safety of short-term and ultra-short-term debt-related ETFs, while moving toward debt of longer duration. You have all witnessed yields for medium-to-longer-term U.S. Treasury securities contracts over the last four to five months. You have seen similar action at the point of sale abroad, as well. No?
Some consider this pricing behavior, which has worked toward flattening the yield curve over the lifetime of this trend, as a response to the Federal Reserve that overtly changed course late in 2018. Okay, that makes some sense. Perhaps the Fed was late to change tactics. Perhaps the change was only made when a domestic, as well as a global, slowdown was only imminent. The Atlanta Fed's GDPNow model, which is meant to be looked at as a snapshot in time and not a projection, is now tracking at 0.5% for the first quarter annualized. That will change in response to the February jobs numbers due this Friday morning.
The first quarter tends to be the weakest in terms of seasonality in the U.S. The Organization for Economic Cooperation & Development (OECD), as you may already know, took a hatchet to global GDPs for full years 2019 and 2020. While the OECD only shaved their expectations for the U.S. and China by a smidge, the organization more than halved their outlook for Germany this year to an anemic 0.7%.
In fact, the OECD dropped their expectation for the entire eurozone for 2019 from a "gaudy" 1.8% to 1.0%. Amid the pressures of a potentially harder Brexit than many had initially looked for, the UK was not spared here either, dropping from 1.4% to 0.8%. By the way, the OECD had just cut these projections as recently as November.
I'll Be There For You
But will the Fed? Just hours after former New York Fed President William Dudley spoke positively on the possibility of the central bank perhaps resuming its schedule for tightening monetary policy in the second half of the year should labor markets remain strong and growth regain some footing, current New York Fed Pres. John Williams appeared in the media as well, sounding far more dovish than had Dudley.
I will tell you what. While the Fed heads and the like make the rounds and force through their "surface level only" understanding of economic conditions, investor uncertainty and algorithmic response, the one who seems the most astute right now is Dallas Fed Pres. Robert Kaplan. That man does not vote on policy again until next year. At least Kaplan seems to get that ever-growing levels of both corporate and government debt make the U.S. economy that much more interest rate sensitive. Kaplan understands that servicing all of this debt will only amplify (his word) the severity of any slowdown.
Is this how they speak to each other when we are not within earshot? Surely Fed Chair Jerome Powell, by virtue of not truly being an academic, must understand this. Is this, in reality, what forced the Fed's change of heart in late December?
Oh, the next question. Will the Fed still be there when the economy weakens, and when financial markets cry out -- if that was not truly the root cause for the December turn? Where is the Fed put? Is there still a Fed put? Enter the ECB.
The ECB vs. the Greenback
I am writing this hours ahead of the ECB policy meeting on Thursday morning. Likely, if you have made it this far (I thank you), the results of that meeting and maybe even the press conference that follows are now news. I don't think it's much of a stretch to say that there will not be a change in interest rates made by the European Central Bank this morning. I'll go that far.
Investors must be prepared for several other developments that will likely occur as the ECB responds to slower growth caused by Brexit and trade wars, as well as rampant fiscal irresponsibility. The ECB had to revise its expectations for growth. That much is clear. Also, mention must be made of the central bank's plan for succession. Mario Draghi leaves the top spot in October. The real deal that comes out of this March meeting will likely be the creation, or extension, of some kind of enhanced loan facility.
My thought is that the ECB sticks to the idea of the Targeted Long-Term Refinancing Operation (LTRO). The last round of these four-year loans comes of age to the point where they become "short term" by definition this June. As a means of avoiding the violation of existing regulations -- governing such things as how much debt might be kept on the books as short-term versus long-term -- refinancing this debt is the most obvious way that the ECB can ease the monetary condition while also pushing out maturities.
My concern from my hiding spot out here in the bush is just how much strength ECB dovishness puts in the U.S. dollar. Priced in, you say? What if powerful demand for U.S. labor is clearly visible again on Friday? At this point, is that even a good thing?
High Tech and Trade
Just some food for thought. I continue to like the expansion of the business cloud as a once-in-a-lifetime investment opportunity. This change in the business environment will not knock on our doors again, though it may knock on that door for a while. The space, of course, like artificial intelligence, wireless networks, mobile devices, and even the internet, is run by the semiconductor industry.
Semiconductors remains under pressure due to pricing/oversupply issues. Both the business cloud and the semis remain at the mercy of economic growth, not to mention capital spending, but the semis are far more vulnerable to negative headlines related to a trade deal with China. Think the deal is a sure thing? It might be. Blanket in the car. Just do not count on it. President Trump has already shown an ability to walk away from a lousy deal, even if it appears to be a loss politically useful to his domestic opponents.
Take the December balance of trade numbers that the Bureau of Economic Analysis posted on Wednesday. I was nearly shocked by the response across the financial media. Almost no one could see the forest for the trees. The fact that imports are growing while exports are shrinking might look like a failure of policy, to the simple. This condition may also be the result of substantially weaker economies abroad unable to increase demand. Duh. Oh, the strong dollar is surely an anchor as well.
My point is that it is possible that this means a hard-line policy on trade is failing. As a negotiator, I would take this as a sign of weakness in my opponent. President Trump is a negotiator. I am not selling my defense stocks. I am not adding to my semis on weakness. I will add to certain cloud names if dragged lower on mass ETF flows. Rock on.
Economics (All Times Eastern)
08:30 - Initial Jobless Claims (Weekly): Expecting 226K, Last 225K.
08:30 - Unit Labor Costs (Q4): Expecting 0.9% q/q, Last 1.6% q/q.
08:30 - Non-Farm Productivity (Q4): Expecting 2.3% q/q, Last 1.7% q/q.
10:30 - Natural Gas Inventories (Weekly): Last -166B cf.
13:00 - Fed Speaker: Federal Reserve Gov. Lael Brainard.
15:00 - Consumer Credit (Jan): Last $16.55B.