Fund managers are required to get their CFA qualifications after very rigorous undergraduate degrees, and in some cases a Master's degree, just to be qualified enough to assess company and market fundamentals to make "sound" decisions. Perhaps a prerequisite in Neuropsychology or Psychoanalysis should be added to the job mandate now -- as that is what one needs to keep sane with an erratic captain at the helm of a ship we all are trying logically to navigate with.
The markets are trying to battle with macro headwinds against solid micro tailwinds. Result? A two-way pull and a lot of volatility for fund managers or hedge funds to endure, whilst trying to hold onto their sanity -- and to their clients. After the so called "Trade Truce," and having "incredibly positive meetings" statements issued on both sides, Thursday morning news was released of the arrest of the CFO of Huawei on undisclosed grounds. Huawei CFO Wanzhou Meng -- also deputy chairwoman and the daughter of Huawei's founder -- was arrested by Canadian authorities on December 1, and she currently faces extradition to the U.S. as a result of a DOJ investigation into whether the Chinese telecom giant sold gear to Iran despite sanctions on exports to the region. China claims there is no wrongdoing, but the event rattled markets, as it will likely increase tensions with China. The bail hearing is on Friday, also the day when U.S. nonfarm payrolls is released. Anyone bored yet?
Clearly consensus on Intellectual Property theft, among other topics of debate, is crucial to come to an agreement. It is unclear whether this arrest will be used to coerce China to "give in" to the U.S. demands. Who knows? But one thing is for certain, the Red Dragon will not easily succumb to such a violation of their rights.
If President Trump has any sense whatsoever, which is debatable, this matter should be resolved immediately, lest the markets spiral out of control with no hopes of a Santa Claus rally. Forget trade truce, it can turn into a full-blown trade war on both sides -- with measures ranging from letting the yuan drop significantly to freezing all imports. What makes matters worse is that this market is dominated by machines and algorithms, which have zero emotional responses and only function on a set of parameters, alerts and signals while chasing momentum both on the way up and back down. This causes aggressive moves on either side in a matter of split seconds -- all before any human can wake up, have their coffee and decide how to manage risk for their portfolio on that given day.
The market is extremely sensitive to any financially sensitive headlines. Fundamentals and logic go out the door; we are left to battle with human emotions mixed with greed and fear. In just less than a week, the market has rallied 5% to then fall back down 5%, and stocks rally 15% to then fall back 20%. Nothing changed for a company's day-to-day business operations or its margins. Is it even worth looking at P/E, EV/EBITDA, free cash flow yield or other "logical" measures of valuation?
One thing is true, no president should be allowed to have such powers to dictate and influence financial markets. Trade wars have become the market's nemesis. This should be grounds for impeachment, alone. Regulators blame hedge funds and proprietary desks for taking on too much risk as the prime cause of the Global Financial Crisis, but where is the regulation to contain one man from dealing with the entire world with a personal vendetta? If this is the way of the world for the next two years, then it almost feels like one might be better off closing up shop today and stopping investing in markets altogether.
Being a creature of logic with a sound engineering degree, mixed a bit of faith in human beings, I believe a market meltdown is in no one's interest. We are now at key supports in the S&P 500, at 2650 -- the lows tested in November. The same pattern holds true of most stocks hitting key supports. Machines will stop generating sell signals, take profit here, and watch for the next move. If this level is broken, then it's pure carnage. But if there is any positive news on nonfarm payrolls or a dovish Fed next week, the market can rally back up.
With the OPEC meeting in Vienna Thursday evening, whispers of a cut of between 1-1.3 million barrels per day should be announced, depending on how much Russia agrees to cut (150,000 bpd or 300,000 bpd). Oil should have been a buy today at $60/bbl Brent, but is vexed by overnight market moves. Copper is grabbing onto its key physical support level of $6000/tonne, with spreads trading tight, implying a tight market. Great buy levels for the "logical sound investor."
As mentioned before, stay nimble, be prudent. The market is no longer a buy-and-hold one, it is one for traders and adrenalin junkies with a few loose neurons.