Submitted by Seabreeze Partners’ Doug Kass,
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Looking in the past and looking forward — politics has become more important than the central banks’ actions in determining stock market behavior
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CCAR results set the stage for an extended period of higher banks stock performance
“It was all night pouring, pouring rain, but not a drop on me.”
– Grateful Dead, Bertha
As of 5:30 am, S&P futures (+13 handles) are nearly +40 handles above the premarket lows of Thursday (where we covered our (SPY) short position). This may be testimony to:
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Quite a bit of luck.
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The willingness to unemotionally trade within an expected trading range during non traditional market trading hours (” I am a pajama trader and proud of it“).
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A positive market reception to good CCAR results – and an after market climb in bank stocks.
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A marked reversal from general market optimism to market skepticism seen in the investor sentiment studies highlighted by the Divine Ms M and Peter Boockvar.
CCAR Results
Dont’ let others’ negativity take you down, stay positive – is the theme of the Grateful Dead quote I start today’s missive with — particularly as it relates to the substantive return of capital that large money centers will now undertake.
Traders (and business commentators), who likely never even analyzed bank balance sheets and income statements, were downtrodden and had begun to look unfavorably on the group into yesterday’s CCAR results in large measure because of 12 consecutive daily down days for the group.
Banks remain my largest individual industry exposure. The industry is woefully over capitalized and will be returning capital back for years. With solid, expanding and almost monopoly like deposit bases (which grew through Fed friendly and assisted acquisitions as an outgrowth of The Great Recession of 2007-09), this asset sensitive industry will prosper, over the long term, as interest rates inevitably rise.
Should interest rates normalize (to above consensus levels), which I believe to be ultimately likely, the value of those low cost deposits will rise exponentially. And so will bank industry profits.
Though I am attracted more from the standpoint of a multi year opportunity, last week I opined that a short term price reversal/opportunity may have also developed over the near term.
[ZH: Let’s hope for his sake that Doug is right and it’s different this time]
Donald Trump and the Markets
“Donald Trump Will Make Economic Uncertainty and Market Volatility Great Again. #MUVGA!”
– Kass Diary
The second quarter of 2018 was period in which politics, specifically the combative actions of our President, transcended (in importance) even the actions of central banks.
I expect this to be the case in the last half of this year.
The traditional view appears to be that Trump’s hardline tactics with China is another example of “The Art of the Deal,” where strategy can suddenly make a U-turn and the White House can declare a win.
I respectfully disagree and view the Administration’s stance as an act of economic warfare based on spurious economic theory. (The relationship between imports and US GDP is not inverse as Navarro and Lighthizer apparently believe. Rather, over history, there is a direct relationship between deficits and US GDP).
Moreover, it appears that Trump is targeting a more combative strategy against China’s upgrading of its economy in an attempt for the US to maintain global economic leadership. As such, Trump’s China policy may be more than just tariffs.
I see the policy relationships between the US and China as well as with Mexico, Canada and others jeopardizing and souring previous bilateral relationships as a broader protectionist strategy that could “have a life of their own.” This could have a meaningful impact on business and investor, global economic growth and on our markets.
That economic impact could even be more deleterious than the pivot of global monetary policy from ease to restraint.
Bottom Line
“Watch each card you play and play it slow.”
– Grateful Dead, Deal
In other words, make it a point to take risks, build bridges and, at times, be an investment contrarian. But always tread lightly!
Both the month of June and all of 2018 has seen little progress in the markets, overall. But there have been important opportunities to deliver excess returns in your portfolios in the new regime of volatility.
Stay independent in view (reject ” Group Stink“) and recognize that, from an intermediate term standpoint there are plenty of risks, but also may present plenty of rewards for the unimpassioned and opportunistic trader.
As I look towards the second half of 2018 I see market conditions increasingly influenced by (wrong headed) policy in Washington, D.C., growing political partisanship and a pivot from central bank ease to restraint (an important contributor to heightened – and no longer suppressed – market volatility).
I start the day with a small net long exposure – but that wont last long if the market continues to advance.
Fare thee well.
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