Archive for December, 2015

The FED does the US -analysis

Posted: December 17, 2015 in Uncategorized

The FED hiked! There are lot’s of very good commentaries out there, so I will just look at the details. The main words were the consensus was unanimous and rate hike gradual with a wait and see approach.

The Fed predicts a faster rates of hike (25bps per quarter) versus the market ( two 0.25bps).

The motivation could be that Yellen looks at the employment data. There is a subset of the really employable people (well you can’t hire an electrician for a banking position and vice versa) and that figure is practically at full employment…so salary have to rise. This will be one of the main source of volatility for 2016.

Inflation is going to 2% (not towards).

They are not addressing the huge Federal Reserve balance sheet. They will be still rolling over  maturities into buying securities as my friend Pippa Malgreem says…if this is hawkish…it is a joke.

What happened just after

Stocks after an initial muted response jumped (expected rate increase and expected dovish commentary).

Gold jumped, oil and gold were dumped and bond were pumped up.

The awkward thing is that the longer dated US bond yield went lower…indicating an increase probability of …rate cut (or at least non movement) – definitely the market does not believe the 4 rises per quarter are doable.

So the main questions for the market 2016 will be.

  • Is it the rate increase sustainable? If not…Quantitative Easing 4?
  • How fast the Fed will increase
  • How they will address the rate increase with the huge balance sheet the US has?

So what is in store for 2016 after the rate hike (historically speaking)

  • Higher volatility (risk)
  • Market driven by earning as valuation get lowered
  • High yield US corporate bond will bring us heightened risk
  • Increase in bond yield will mean a lower search for yield – so high dividend shares will be less on demand (so foreign money will move out of Australia, specially banks) together with infrastructure
  • favorite sector (US) financials, tech, healthcare, selected industrials
  • favorite regions: Japan, Europe
  • China will increase the de-pegging from the USD, with more currencies consequences. An initial rally in Emerging Market can be seen …but then you need to be very selective

 

So a more real market and not money printing – after March, be careful what you wish for…you just might get it as the Pussycat Dolls say it.

Until March, enjoy! Xmas Rally, as predicted in previous posts, just started

 

Bloomberg – Australia’s Budget Blows Out as Growth Slows, Iron Ore Slumps http://bloom.bg/1OsOIug

Well did not took a genius to forecast that.

And, I repeat, the blame is on PM John Howard who spent the boom money to bribe the electorate instead of investing in infrastructure and diversifying the economy

Well by now you should know that, in this period, I am against indexing (both for 2015 and 2016).

My friends at Market Vectors saved me some research and it clarifies what I mean

The ASX performed +1.76% year to 30 Nov 2015.

The top 10 shares which represents over 60% of the ASX and are the core of 80% of the SMSF managed by institutionally aligned advisers and private individuals…performed dismally

Look at the price movement (dividend is not included)

CBA -5.04%

BHP -31.68%

WBC -0.57%

ANZ-13.4%

Telstra -8.04%

NAB -9.9%

WOW -20.18%

WES -6.59%

Scentre (Westfield spin off) +18.29%

WPL -18.94%

So it is better to take an active approach.

What is in store for 2016…let’s see

Major Banks….they have pretty much arrived to full valuation – between rising capital requiring and slowing of real estate you will be happy if they do not more

Mining – Iron Ore, apart monthly swings – will not do anything major. China is transforming into a consumer economy or slowing down. Anyway steel consumption will not increase, so there  is a cap there

Energy – this could be more positive once a low is settled in as Middle East is ripe for a major accident.

There are other bright spots but not enough to influence the index. So keep away from indexing.

 

 

Amazing show of skills from blackrock/ishares

Bloomberg – Five Mind-Blowing Stats from the Selloff in the Biggest Junk Bond ETF http://bloom.bg/1jY5tVO

The Fed and credits market

Posted: December 14, 2015 in Uncategorized

Just when everyone thought the Fed will have an easy job in raising rates…naturally the storms gather again.

The high yield credit markets are in meltdown (the CCC curve is similar to the one in Sep 2008) and 2 US credit funds already closed down and are trying to wind down.

China is again spurring the Yuan devaluation idea

Commodities are in meltdown.

Not an happy spot

2016 Markets and the world

Posted: December 14, 2015 in Uncategorized

Before going in details let’s review my forecast for 2015 as per my blog posts between 28 Nov 2014 and 13 January 15.

Stock market. Not an index following year. Outcome slightly positive with an off chance of negative return. Not a pretty year for Australia. Score Good(still thinking US positive after this week)

Oil USD 35 to USD 40 Score Good

Gold weak with a maximum top of USD1300. Score Average

Iron Ore: $65 or lower Score Average

AUD USD 70/75cents. Score Good

Geopolitics: weak China, issues with Greece, Sinai (Egypt),  Syria.

First look at 2016:

December 2017

Stock market similar to this one, but with an increase of volatility. After march the markets will start to worry about the pace of the FED rate increase and China Yuan target is about 7 (so further weakening)Definitely avoid indexing. Big issues are brewing in the high yield credit market with the pace of rate increase of the Fed. Each year passing the chance of a big crash increases (think elastic band the more you pull the more likely it will break). Australia will fare better than expected as resources will level off. Banks will go nowhere, but commodities now are oversold . There is still a chance of negative index outcome, but still a minority chance 30% (not negligible)

Oil by year end will be back around USD60/65.

Gold will be higher (still analysis to be done).

USD /AUD same levels or weaker (still some analysis to be done).

Geopolitics. It is a US presidential year. Trump has really good chance to make it, but there are too many Spanish voters in US. Too close to call.

The big space to watch is Turkey versus Iran (yes practically we are in a bloc situation Russia/Iran/Iraq /Syria/Egypt (China as neutral) versus Turkey/Saudi/NATO/USA (NATO starting to be very uncomfortable) is part of the main battle). Saudis are in a bit of an issue as the war on two fronts stretches even their finance, with oil so low.

Europe will proceed with the slow disintegration. The Schengen (free visa) protocol will be restricted if not suspended.  Terrorism will continue.
The English referendum on Europe  would be a catalyst for issues, but we do not know yet if it is 2016 or 2017.

Russia will try to divide and conquer Europe and trying keep their balancing act between looking scary and just manipulate (without really attacking)

China will stabilize and proceed with reforms, but tensions will remain high.

The common pattern in all this is

After the Global Financial Crisis all came together to save the world….and now they are going back to …save themselves.

The most focal point is the interlink between high yield credit markets (specially energy and US auto loan) and Fed moves.

More to come…

In October 2014 on this blog I wrote I saw a signal that indicates, I  the most likely pattern, that the market -index following- in the best hypothesis  will be stuck for a long period.

The biggest issue that all the institutionally owned financial planning firms..do just that.

It shows in the market and things are not looking pretty under the surface.

Follow the link.

Bloomberg – Let’s Just Hope Shipping Isn’t Telling the Real Story of China http://bloom.bg/1TBNz7o

Where is the Xmas Rally?

Posted: December 10, 2015 in Uncategorized

We are seeing considerable volatility…quite normal as again the FED should rise interest this time (80% of chance if you look at bonds).

Definitely an incredibly stupid moment to sell bond now (you never do it before Xmas/holiday in general) or near an important Fed decision..u just get lower prices.

So where is Santa…well still in Finland (joke). The rally most probably will start after the 18th.

The market is now particularly prone to accidents before the 18 (say a terrorist attack or if the Russian decide to help the Iraqis expel the Turkish troops in Iraq).

Apart the scaremongering the initial rising rates are positive for the market.

But definitely we need to get used to more volatility.

So even if tomorrow markets will be up (oversold now) expect volatility for a while.

And with banks stalled by capital rising and mining in crisis…better look overseas.

The price of oil are collapsing finally reaching my target (posted in a long time ago) of approximately $35 (practically the 1985 low inflation adjusted). Nobody knows the minimum but let’s say close enough.

As the Media says that OPEC is in tatters, the reality is that the Saudi are starting to try to understand if this is the level to weed out the competitors and they are contacting counterparts (also outside OPEC) to see if next year would be the one to start cutting production.

Also the Saudi financially are starting to be..not stressed, but under pressure with 2 expensive wars at the doorsteps (coalition against IS and Yemen).

So technically is the moment to start accumulating.
If they cut  oil will start rising (oil is in a tunnel say usd25 to usd65 dollars). If they do not cut other countries in the Middle East will start to burn and a war will make oil rise.

Quite simple in the end.

Australia has entered a phase which, if politicians do not wake up, will be considered our lost decade.

A lost decade is not a crisis per, simply a period in which there is not much gain to be made (say in the index we stay between 4800 and 6000), in general a slow positive number overall (this bar external shock as China, US rates and unforeseen events).

Cost cuts, Capex and increased regulatory environment will reduce growth. Ex top 20 shares will be more interesting specially if exposed to foreign thematic.

Real estate, if we are lucky, will be subdued. Already real estate agent Mcgrath in Sydney admitted that the Chinese demand slowed by 15% year on year…and Sydney house prices dropped the most in 5 years. As China spurs internal consumption it will be more difficult for Chinese to export capital.

Resource boom is now busted. Stop blaming our current PM. The real issue is that very few understand that the issue is John Howard.
In the height of the boom he should have invested in infrastructure and not just bribing the population with tax cuts.

So a lost decade is not a crisis per se, but a period of slow growth and of vulnerability to external issues. 

Lucky enough PM Turnbull at least seems to understand the problem. If it can be solved, that is a different proposition.