Month: June 2021

Authored by Lance Roberts via RealInvestmentAdvice.com,

A recent Bloomberg article made the case that since 2009 “sell signals” are useless during “mania” markets. To wit:

“If you bailed because of Bollinger Bands, ran away from relative strength or took direction from the directional market indicator in 2021, you paid for it.

It’s testament to the straight-up trajectory of stocks that virtually all signals that told investors to do anything but buy have done them a disservice this year. In fact, when applied to the S&P 500, 15 of 22 chart-based indicators tracked by Bloomberg have actually lost money, back-testing data show. And all are doing worse than a simple buy-and-hold strategy, which is up 11%.” – Bloomberg

Note: “Bloomberg’s back-testing model purchases the S&P 500 when an indicator signals a ‘buy’ and holds it until the system generates a ‘sell.’ The index gets sold, and a short position established, until a buy is triggered.”

See, you should “buy and hold” invest, right?

Investing Based On Hindsight

Bloomberg goes on the clarify essential points.

“Of course, few investors employ technical studies in isolation, and even when they do, they rarely rely on a single charting technique to inform decisions. But if anything, the exercise is a reminder of the futility of calling a market top in a year when the journey has basically been a one-way trip.”

– Bloomberg

In the short term, which can even include a 12-year bull market cycle, there are periods where “buy and hold” investing outperforms any other form of asset management. The problem is that you only know for sure that “buy and hold” was the proper strategy in hindsight.

Most only have a limited amount of time to invest for retirement for investors, so “getting it right” largely depends on two factors.

1. When you start your investing process; and

2. Avoiding major drawdowns

With the vast amount of individuals already vastly under-saved, the current “bear market” cycle will reveal the full extent of the “retirement crisis” silently lurking in the shadows. The Fed, Government bailouts, and low interest rates can’t fix this problem.

Such isn’t just about the “baby boomers,” either. Millennials are haunted by the same problems as their prospects of “economic prosperity” get set back years.

But here is the real problem for “baby boomers.”

Crashes Matter

Financial advisors regularly tell clients that the market grew 6% annually since 1900. Therefore, that is what returns will be in the future. The chart below shows $100,000 invested at 6% annually from 2000 or 2007.

Unfortunately, it didn’t work out that way. 

During the past 20-years, the annual return for stocks has been just 4.96% annualized. Since the peak of 2007, returns have annualized roughly 8.14%. Over the next decade, current valuations suggest average returns will return to 2% or less.

For boomers who start in 2000, whose financial plans assume high return rates to offset a savings shortfall, they are now well short of their retirement goals. For those who started in 2007 they finally got back on track this year. The question is can they keep it?

Unfortunately, investment returns are far worse, as a vast majority of fully-invested individuals in 2007 liquidated out of the market by the end of 2008. It took years before they returned to the market. As such, actual returns are vastly different than what the index suggests.

Here is the sequence of events by age:

1. 30’s: In 1980, the “baby boomer” generation is working, saving, and investing during the ’80-’90s bull market.

2. 50’s: From 2000 to 2002, the “Dot.Com” crash cuts investments by 50%.

3. 53-57: From 2003-2007, the market grows savings back to breakeven.

4. 57-58:  The 2008 “Financial Crisis” wipes out 100% of the gains of the previous bull market and resets savings values back to 1995 levels.

5. 58-63: From 2009-2013, financial markets rose, growing savings back to the turn of the century.

6. 63-71: In 2021, investors finally made some progress towards their retirement goals.

Today, for most individuals heading into retirement, the importance of “mean-reverting events” should not be dismissed.

A Simple Backtest

To successfully invest for the long-term requires the avoidance of the destruction caused by crashes. Such is where even the most basic forms of technical analysis can supplement a good portfolio allocation strategy.

Using Portfolio Visualizer, I show a simplistic backtest of a switching model from stocks (SPY) to bonds (TLT.) 

“Tactical asset allocation model results from Aug 2002 to Apr 2021 for SPDR S&P 500 ETF Trust (SPY) is a function of a 10 calendar month simple moving average and 15 calendar month simple moving average crossover. The tactical asset allocation model is invested in the S&P 500 index when the short moving average is greater than or equal to the long moving average. Otherwise, the portfolio is invested in iShares 20+ Year Treasury Bond ETF (TLT).” 

I used this time frame to capture:

• The post “Dot.com” crash bull market,

• The “Financial Crisis” bear market, 

• And the 12-year Central Bank infused “one-way” bull market.

Portfolio Visualizer illustrates the annual returns and volatility:

Just An Example

Importantly, this is just an example of how technical analysis can improve returns over a “buy and hold” strategy during full-market cycles. During a bull cycle, “buy and hold” will outperform. However, as stated, you won’t know when that has changed until it is too late.

For example, an individual runs 100 stop signs without consequence and saves an hour driving to work. It is easy to assume that such activity is “risk-free” because no negative outcome has occurred. On the 101st event, the driver is hit and killed. Was applying the brakes and paying attention to the risk worth avoiding the eventual outcome?

The same applies to the markets. Just because there has been no consequence to investors taking on excess risk over the last 12-years doesn’t mean there won’t be.

Risks Are Mounting

“The temptation to book profits and bail is getting hard to resist after the S&P 500’s best 12-month rally since the 1930s. Increasing the anxiety are a mountain of charts signaling a market that’s stretched to its limits.” – Bloomberg

Bloomberg is correct. Numerous measures are suggesting “risk” far outpaces “reward” currently. But technically, the market remains in a bullish trend for now. How do you navigate such a market safely?

It is essential to understand that no one ever said you must be 100% allocated to equity risk at all times. The chart below shows three allocation models since 1999: 100% Stocks, 60% Stocks and 40% Bonds, and 100% Bonds.

Most would assume that the blue line is 100% stocks.

You would be wrong.

Since 1999, an all bond portfolio (blue line) and a 60/40 blended allocation (orange line) outperformed investors who were 100% long stocks. The reason is the reduction of capital destruction during mean-reverting events.

It is true that over the last 12-years, a 100% stock portfolio grossly outperformed other models. However, given the more extreme valuations, deviations, and speculative activity in the market today, it is unlikely the current streak will go uninterrupted into the future.

Investing Isn’t A Competition.

The markets are indeed currently exceedingly exuberant on many fronts. With margin debt at records, stock prices near all-time highs, and “junk bond yields” near record lows, the bullish media continues to suggest there is no reason for concern.

Of course, such should not be a surprise. At market peaks – “everyone’s in the pool.”

“The investor’s chief problem – and even his worst enemy – is likely to be himself.” – Benjamin Graham

Such brings up some essential investment guidelines as we head into the last half of the year.

• Investing is not a competition. There are no prizes for winning but there are severe penalties for losing.

• Emotions have no place in investing.You are generally better off doing the opposite of what you “feel.” 

• The ONLY investments that you can “buy and hold” are those that provide an income stream with a return of principal function.

• Market valuations (except at extremes) are very poor market timing devices.

• Fundamentals and Economics drive long-term investment decisions – “Greed and Fear” drive short-term trading. 

• “Market timing” is impossible– managing exposure to risk is both logical and possible.

• Investment is about discipline and patience. Lacking either one can be destructive to your investment goals.

• There is no value in daily media commentary– turn off the television and save the mental capital.

• Investing is no different than gambling– both are “guesses” about future outcomes based on probabilities.

• No investment strategy works all the time. The trick is knowing the difference between a bad investment strategy and one that is temporarily out of favor.

The one lesson you should have learned in 2020?

“The unexpected outcome occurs more often than you expect.”

As expected, OPEC+ announced it would hike oil output in July, sticking to its previously leaked plan as Saudi Arabia’s energy minister struck a bullish tone about the global recovery. As Energy Intel’s Amena Bakr summarized:

• OPEC+ agreed to keep the existing April 2020 deal unchanged
• Reconfirmed the existing commitment of the 10th OPEC and non-OPEC Ministerial in April 2020 amended in June, September, and December 2020, as well as in January and April 2021 to gradually return 2 mb/d to the market, with the pace being determined according to market conditions.

Saudi Energy Minister Prince Abdulaziz bin Salman recapped the prevailing optimism as the meeting started: “The demand picture has shown clear signs of improvement.” Russia’s Alexander Novak also spoke of the “gradual economic recovery.”

As part of the return to normal, the oil producers will push ahead with an increase of 841,000 barrels per day in July, following hikes in May and June, Bloomberg reported citing delegates.

OPEC and its non-US allies have spent more the past 14 months rescuing prices from historic lows and an unprecedented plunge in negative territory for WTI on April 20, 2020, and are only cautiously returning supply. Now the story is shifting: oil prices above $71 are fueling inflation concerns and if OPEC doesn’t add more oil, there’s a risk the market becomes too tight, undermining the global recovery. Furthermore, as OPEC+ hopes to capitalize on rising prices, it doesn’t want prices to rise too high as to push US shale producers out of hibernation and into overdrive, resulting in another production glut.

For now, the cartel is also embracing caution. Prince Abdulaziz echoed the concerns of his fellow delegates when he said there are still “clouds” on the horizon, first and foremost the question of what happens to millions of daily barrels in Iranian oil supply.

Iran’s potential return to international markets is one factor weighing on ministers’ decision-making. The impact of new variants of Covid-19 is another. And while there’s a wide deficit in the market to fill in the second half of the year, those two considerations could see some producers argue for a pause before further hikes.

“Covid-19 is a persistent and unpredictable foe, and vicious mutations remain a threat,” OPEC Secretary-General Mohammad Barkindo said.

The organization is now scheduled to hold supply unchanged until April 2022, according to the deal signed a year ago to rescue producers from a bitter price war. While the agreement can be renegotiated – and there’ll be pressure to do so as demand continues to recover – it provides a fallback position for the group, with the excess oil inventories built up during the pandemic now back to pre-covid levels.

Tuesday’s meeting didn’t tackle the period after July, delegates told their preferred news outlets.

Fatih Birol, executive director of the International Energy Agency, told Bloomberg that if the alliance doesn’t boost output later this year, prices will face further upward pressure, with $80 oil increasingly likely. Some are even whispering of triple digit prices.

“One thing is clear: in the absence of changing the policies, with the strong growth coming from the U.S., China, Europe, we will see a widening gap” between demand and supply, Birol said.

Just hours ago we noted that Tesla was continuing down a rocky road in China, with some Chinese government agencies re-evaluating whether or not employees would even be allowed to drive Tesla vehicles on their premises.

It was just moments after we published that article that we were reminded of just how supersaturated China’s EV market has truly become. The country now has 846 registered auto manufacturers, according to a note from Bloomberg, who contends that a shakeout is “looming”. 

Spurred by incentives offered by Beijing, about 300 of those manufacturers are in the business of making new energy vehicles. 

The Chinese government has offered tax breaks, subsidies and land grants to any company with plans of moving into the NEV space, spurring intense competition between names like Hozon, Li Auto, Nio Geely and Xpeng. 

Provinces like Zhejiang are spending billions on developing the sector. Zhejiang plans to invest more than $47 billion into the space by 2025. And there has been no doubt that investors are still willing to throw money at EV names. Bloomberg writes:

Shanghai-based electric carmaker Nio — which targets a similar buyer to Tesla — completed its New York initial public offering less than four years after it was started, the shortest timeframe of listed automakers globally, its founder William Li claimed in a speech this month. A surge of investment the past year has seen Nio and others like it, including Evergrande NEV — the automotive arm of China’s most indebted property company, which is yet to make its own car — now valued more than the likes of Renault and Nissan.

With the influx of names comes excess, however. Many of the budding EV companies coming to fruition in China wouldn’t be able to survive without help from the government and are struggling to turn a profit consistently, if at all. The warning signs are there: provinces like Jiangsu are already “sounding the alarm on operating efficiency”, making it clear that the sector is starting to become unavoidably overcrowded. 

Eventually, the tide is going to go out on these names, leaving only a fraction of the players that are currently jostling for position. We’re guessing that being in favor with the Chinese government is going to be a key factor in the success of many of these companies. As we have documented over the last year, it seems like that favor has deteriorated for Tesla. 

Recall, we noted over the weekend that government bodies have been asked to check and report on employees who own Teslas in Zhejiang and Guangxi. Employees are being “forbidden” from driving into certain official areas, due to supposed security risks, the report notes. 

Other official Chinese bodies are following suit. The China Meteorological Administration, for example, has already told its employees not to buy Tesla EVs and, if they have already, to transfer ownership of the vehicles. The Propaganda Department of the Chinese Communist Party (yes, this is actually what it is called) is also “checking whether any employees or their family own Teslas.”

Any continued major hiccups in Tesla’s relationship with China could be devastating for the automaker, who relies on the world’s largest auto market to help it redline production to meet Wall Street’s increasingly optimistic expectations. 

Which leads to the obvious question: when the “shakeout” does happen in the world’s largest auto market, will Tesla be a survivor?

…the most liquid stock market in the world?

Just prior to the open, VIX did another of its now infamous mini-flash-crashes (no that’s not a fat finger)…

And while stocks were higher from Friday’s close, they puked shortly after the better than expected Manufacturing survey data signaled stagflation…

Get back to work Mr.Powell (even if you are cornered).

Authored by Steve Watson via Summit News,

Students in Washington DC eagerly signed a fake petition to ‘cancel Memorial Day’, agreeing that the holiday “celebrates American Imperialism.”

Campus Reform reporter Addison Smith conducted the experiment to get an idea of how many students would happily forget about the day of remembrance for fallen US heroes.

Smith managed to get 50 signatures in a short time, with some condemning the holiday before even reading the petition.

One student said “I don’t think Memorial Day should be a thing that we celebrate… I feel like it’s a celebration of U.S. imperialism and colonialism.”

The student added “I didn’t really think in this way until I got to college, and like, I took women’s and gender studies classes, and that put me on this path where I’m like, “Yea, like, f-ck the U.S.’”

Smith further poked the bear by asking the students if he’d like to completely abolish the US military, to which replied “yes please,” after blathering about acquiring ‘the language’ he needs to have this mindset from ‘social justice’… or something.

Watch:

A similar experiment by the Daily Caller found that many Americans don’t even know what Memorial Day is for, with one man commenting “most Americans don’t know because they’re stupid, but that’s OK.”

Perhaps more Americans feel this way, or simply don’t know what the day means anymore because their so called leaders refuse to acknowledge it:

I’m sure they would if they could. https://t.co/ggjHBpOiW7 pic.twitter.com/LGNLf2Ainb

— Kurt Schlichter (@KurtSchlichter) May 29, 2021

Anything else you wanted to mention about this weekend, Mr. President? https://t.co/g0iCsv61pD

— Nan Hayworth, M.D. (@NanHayworth) May 30, 2021

Biden: “stay cool this weekend.”
Kamala: “enjoy the long weekend.”

Trump and Pence: pic.twitter.com/PphhoHsWfp

— ForAmerica (@ForAmerica) May 30, 2021

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With ‘hard’ data serially disappointing over-exuberant expectations for the last few months, ‘soft’ surveys continue to offer ‘hope’ (albeit mixed) for recovery-hyping equity bulls that the vast gap between the market and economic reality will somehow be filled.  After ISM’s surprise tumble last month (and PMI’s ongoing rise in flash data), the final data for May was expected to show marginal improvements for both manufacturing surveys.

• Markit US Manufacturing PMI beat expectations, rising from 60.5 for April and from 61.5 flash for May to a final 62.1 for May – a record high.

• ISM Manufacturing beat expectations, rising from 60.7 in April and expectations of 61.0 for May to 61.2.

Source: Bloomberg

Markit notes that the degree of optimism remained upbeat on average, but dipped to a seven-month low amid concerns regarding future supply flows. And that lack of optimism is clear in the ISM employment data which tumbled…

Source: Bloomberg

Chris Williamson, Chief Business Economist at IHS Markit said:

“US manufacturers are enjoying a bumper second quarter, with the PMI hitting a new high for the second month running in May. Inflows of new orders are surging at a rate unsurpassed in 14 years of survey history, buoyed by reviving domestic demand and record export sales as economies reopen from COVID-19 restrictions. However, elevated levels of other survey indicators are less welcome: prices charged by manufacturers are also rising at an unprecedented rate, linked to soaring input costs and unparalleled capacity constraints.

“Not only is operating capacity being curbed by record supply chain delays so far in the second quarter, but firms have also been increasingly unable to hire sufficient staff. Hence backlogs of work are building up at an unprecedented rate, as firms struggle to meet demand.

However, there is some darker clouds on the horizon, as Williamson notes:

“These backlogs of orders should support further production growth in the next few months, adding to signs of impressive economic expansion over the summer. But manufacturers’ expectations further ahead have moderated, hinting that the growth rate is peaking, linked to worries about capacity limits being reached, rising prices hitting demand and a peaking of stimulus measures.”

The Fed is cornered – as markets start to face up to the reality of waning free money, Powell and his pals can’t ease any more amid “unprecedented” crushing of Americans’ living standards by the soaring inflation being seen everywhere.

By Michael Every of Rabobank

Three Babies and ‘The Man’

Yesterday saw the Chinese Politburo –‘The Man’, as they used to call state authority in the US– deciding it is now okay for Chinese families to have three babies, not two. So it was a case of “Three Babies and ‘The Man’”. However, this hardly made the media splash the shift from one to two children did in 2015 – and understandably so. This latest step underlines the message in the PBOC’s recent working paper on an ageing population, which called for radical action to see more births (and more mercantilism if the population declines). Yet the outcomes of this policy are, in most expert eyes, likely to be negligible. Why should families who didn’t rush to have two children when allowed now race to have three? As such, China’s rapid ageing and population decline will almost certainly continue, with major global implications – though as we noted in ‘A Midwife Crisis’, should it succeed in raising the number of babies to three, it would also have a huge impact given the size of its population and their commodity appetite.

China also made another splash, on the FX front, by raising the FX reserve requirement ratio by 2ppts to 7% for the first time since 2007, effectively locking up billions of FX in banks – not that it moved markets much in the end. This is the latest step in efforts to prevent CNY from appreciating against USD despite the huge trade surpluses China is running, and the large capital flows it is seeing from Western fund managers searching for yield. It is also about as clear a signal as those self-same Western fund managers can ever hope to be sent: some form of FX ‘action’ will continue, if not FX war – where China points to the US as the instigator. But there is a wrinkle.

Countries usually push back against FX appreciation because it is deflationary, and encourage depreciation because it is inflationary. Yet the US doesn’t like that a weaker USD also means higher commodity prices, partly because of Chinese demand: they want the juice of a stimulus-driven weaker USD with none of the pith and pips of inflation. For its part, China doesn’t like a stronger CNY partly because it encourages commodity inflation by making the price of these USD-priced imports cheaper in CNY terms, which allows demand to stay high even as USD prices rise. So both sides can perhaps agree short term that a signal of weaker CNY helps both fight inflation. However, in the bigger picture, both want a reflationary weaker currency (and China a “stable” one) and lower commodity prices – which can only happen if the other’s commodity demand drops significantly. How is FX cooperation going to work out then? “Success has many parents, but failure is an orphan” as they say.

Hedge funds are apparently getting the message near-term, however, as Bloomberg reports that they are scaling back bullish bets on commodities for a third week. Apparently this shift is for a variety of fundamental-based reasons, and “any future price gains will depend more on actual supply and demand rather than speculative buying across raw materials”. Sure they will – right up until global commodity prices start going up sharply again on the back of ultra-loose monetary policy and/or mega fiscal stimulus, or some kind of fresh geopolitical or logistical issue. Because that’s how markets, and hedge funds, work.

Underlining exactly these kind of risks, a cyber-attack has shut down an Australian plant of Brazillian-owned global meat-processing giant JBS, the world’s largest facility. The firm does not know if it will be out of action for days, or weeks, or multiple weeks, but the longer the closure lasts, the greater the market disruption. Fortunately, meat shortages do not look likely. However, just weeks after the US oil pipeline hack that saw gas stations empty and pump prices surge, the threat of ‘grey zone’ cyber warfare to Western economies has been made clear again. This attack was notably preceded by PMs Morrison and Ardern holding a joint press conference, where they agreed to support each other, Morrison adding “As great partners, friends, allies and deep family, there will be those far from here who would who would seek to divide us. They will not succeed.“

On which note, the EU still has no idea what to do about Belarus given it desires rapprochement with Russia and its Nord Stream 2 gas. Moreover, the Irish foreign minister just visited Beijing, and promised to “deepen cooperation” on cybersecurity, which may raise a few eyebrows in the US, to be “welcoming and open” to Chinese FDI, and stressed that signing the CAI investment deal was a priority – which may raise a few eyebrows in the EU parliament. While resonating well in Berlin, this is also more than a tad out of line with public opinion in Ireland; and it suggests another area of EU disunity within its “open strategic autonomy”, where the emphasis actually seems most to mostly be on the “open”.    

US President Biden meanwhile gave a Memorial Day speech at Arlington National Cemetery, in which he noted that democracy was worth dying for, yet that “Democracy itself is in peril, here at home and around the world. What we do now…how we honour the memory of the fallen, will determine whether or not democracy will long endure.” He added that we all take democracy “for granted”, and that “the biggest question” is whether it can win in a “struggle taking place around the world” against “autocracy.” That’s a very Cold War speech – but this isn’t reflected in most global markets headlines: logically one of the two must be wrong.

Lastly, the WHO is changing the name of different Covid-19 variants from numeric codes such as B.1.351 to a simple “Beta”, “Gama”, “Delta”, etc., to: 1) make things easier for the public; and 2) make things less stigmatizing for the countries where mutations arise – because stigma is obviously the largest public global health threat right now, and we don’t seem to have a vaccine against it. Meanwhile, the official US intelligence search goes on for the “Alpha” of Covid-19, and the knock-on “Omega” of the conclusion is far from clear.   

The collapse of Greensill Capital has been the biggest financial scandal of the year so far, having set off a massive public corruption scandal in the UK that has deeply embarrassed the ruling Conservative Party due to the close involvement of former PM David Cameron, who was on the Greensill payroll and was caught trying to steer relief funds meant for small businesses to Greensill to help avert its collapse.

Most recently, Credit Suisse cited Greensill as its reason for cutting off SoftBank from all future investment-banking business after the Japanese mega-conglomerate with a VC arm was caught lying about its real role in CS’s trade finance funds that were stocked with Greensill-packaged assets. Softbank was essentially using the fund to quietly bolster some of its portfolio companies, while also serving as an investor in the fund – an obvious conflict that we first pointed out in 2019.

But while the Greensill scandal forces a rethink of lobbying laws in Britain, at least one American politician has now been caught up in the madness: Republican West Virginia Gov. Jim Justice, who is now in the bag for $700MM thanks to Greensill’s collapse.

Gov. Jim Justice

According to WSJ’s sources, Justice (who handily run reelection in the fall after switching from a Democrat to a Republican) is personally on the hook for nearly $700MM in loans to his coal companies – loans that were taken out from Greensill.

He is also dealing with several “unrelated lawsuits” that are also putting financial pressure on his coal company. Some of the loans to Justice’s companies were sliced up and incorporated into securities that wound up, among other places, in the $10 billion Credit Suisse fund that was gated at the beginning of the Greensill crisis.

Justice’s Bluestone Resources is in talks to repay borrowers including Credit Suisse and others.The company has been ID’s as “one of three major borrowers” involved with the fund.

Bluestone hadn’t expected to begin repaying the Greensill loans until 2023 at the earliest, it said in a lawsuit fled back in March, right around the time that Greensill filed for insolvency in the UK. Greensill’s financial troubles are supposedly responsible for Justice being dropped from the Forbes’ billionaires’ list. It now estimates his net worth at $450 million, down from $1.2 billion in April 2020.

Bluestone and Greensill began their financing relationship in May 2018, when Greensill Vice Chairman Roland Hartley-Urquhart reached out to the firm through a mutual acquaintance. Bluestone companies received financing over a three-year period, and when the first set of loans matured, Greensill replaced them with new loans in a process that became known as a “cashless roll,” just one of the sketchy practices embraced by Greensill and its borrowers. In one particularly egregious process, Greensill and Bluestone embraced “prospective receivables” which haven’t yet been generated. These “prospective” loans were sometimes booked from “prospective buyers”, some of whom (likely many of whom) never actually became Bluestone customers.