Thursday, January 19, 2017

Weaken the USD to Make America Great Again

About a month ago (see The bear case: How Trumponomics keeps me awake at night), I highlighted a Bloomberg interview with BAML currency strategist David Woo. Woo pointed that there is an inherent contradiction in a couple of Trump's policies. His fiscal policy of tax cuts is pro-growth and therefore USD bullish, but his "America first" trade policy needs a weaker dollar. So what does he really want, a strong dollar, or a weak dollar?

We may have an answer. In a recent WSJ interview, Trump said that the dollar is “too strong”, especially considering the China’s yuan is “dropping like a rock.” While those remarks were made in the context of Sino-American trade relations, Trump signaled that, if he had to choose, he would prioritize a weaker currency over fiscal stimulus.

Trump`s priorities of trade policy over fiscal policy is consistent with his criticism of the House Republican border tax adjustment plan as “too complicated“ (via WSJ). Already, the spectacle of passing a fiscal budget, even with Republican control of the White House, the Senate, and the House, is turning into a public “sausage making“ exercise.

A strategy of USD weakness makes more sense for Trump if he wants to achieve his trade policy objectives. As Larry Summers pointed out, Trump's populist message of attacking trading partners like Mexico has the unintended effect of depressing the Mexican Peso. A lower MXNUSD exchange rate paradoxically incentivizes companies to move production south of the Rio Grande (via AP and Business Insider):
Summers told a panel at the World Economic Forum on Wednesday that the president-elect's "rhetoric and announced policies" over Mexico have led to a big fall in the value of the Mexican peso against the dollar.

That, he said, is a "dagger at Ohio," as it will make it even more attractive for firms to move to Mexico.
The full post can be found at our new site here.

Wednesday, January 18, 2017

The contrarian message from rotation analysis

Mid-week market update: Occasionally, it is useful to step back and view the market through a different prism. I was reviewing the RRG charts of sector, region, and factor, and I found that they are all telling a similar story.

First, let's start with a primer. Relative Rotation Graphs, or RRG charts, are a way of depicting the changes in leadership in different groups, such as sectors, countries or regions, or market factors. The charts are organized into four quadrants. The typical group rotation pattern occurs in a clockwise fashion. Leading groups (top right) deteriorate to weakening groups (bottom right), which then rotates to lagging groups (bottom left), which changes to improving groups (top left), and finally completes the cycle by improving to leading groups (top right) again.

The latest sector rotation chart shows that financial stocks and cyclical stocks (energy, industrials, materials) are the leading groups, but they are weakening. By contrast, defensive sectors are starting to improve from the lagging quadrant to improving. In particular, the upgrade of interest sensitive utilities from lagging to improving quadrant is consistent with the nascent counter-trend rally seen in the bond market.


The full post can be found at our new site here.

Sunday, January 15, 2017

Main Street bulls vs. Washington bears

Preface: Explaining our market timing models
We maintain several market timing models, each with differing time horizons. The "Ultimate Market Timing Model" is a long-term market timing model based on the research outlined in our post, Building the ultimate market timing model. This model tends to generate only a handful of signals each decade.

The Trend Model is an asset allocation model which applies trend following principles based on the inputs of global stock and commodity price. This model has a shorter time horizon and tends to turn over about 4-6 times a year. In essence, it seeks to answer the question, "Is the trend in the global economy expansion (bullish) or contraction (bearish)?"

My inner trader uses the trading component of the Trend Model to look for changes in direction of the main Trend Model signal. A bullish Trend Model signal that gets less bullish is a trading "sell" signal. Conversely, a bearish Trend Model signal that gets less bearish is a trading "buy" signal. The history of actual out-of-sample (not backtested) signals of the trading model are shown by the arrows in the chart below. Past trading of the trading model has shown turnover rates of about 200% per month.



The latest signals of each model are as follows:
  • Ultimate market timing model: Buy equities*
  • Trend Model signal: Risk-on*
  • Trading model: Bearish*
* The performance chart and model readings have been delayed by a week out of respect to our paying subscribers.

Update schedule: I generally update model readings on my site on weekends and tweet mid-week observations at @humblestudent. Subscribers will also receive email notices of any changes in my trading portfolio.


Bifurcated opinions
Opinions are starting to split badly on the market and the economy. Main Street has become more upbeat on the economic outlook. The NFIB small business survey showed that optimism surged in December, though Renaissance Macro pointed out that optimism has not translated yet into a significant upswing in sales growth.


The preliminary January report of UMich consumer confidence shows that it is elevated, though opinions are reportedly split along political lines:
The post-election surge in optimism was accompanied by an unprecedented degree of both positive and negative concerns about the incoming administration spontaneously mentioned when asked about economic news. The importance of government policies and partisanship has sharply risen over the past half century. From 1960 to 2000, the combined average of positive and negative references to government policies was just 6%; during the past six years, this proportion averaged 20%, and rose to new peaks in early January, with positive and negative references totaling 44%.
Chart via Calculated Risk:


By contrast, I am seeing signs of doubt from political circles that Trump will be successful with his pro-growth agenda, even among Republicans. Traditional approaches to sentiment analysis states that the public tends to be slow. When the public finally latches onto an economic theme, it is indicative of a contrarian top (or bottom). On the other hand, the improvement in business and consumer confidence can be signals of broad based economic strength.

So who is right? Main Street, or Washington?


The stakes are high
Here is what's at stake for equity investors. As we enter earnings season, Factset shows that forward EPS continues to rise, which is indicative of Street expectations of broad based cyclical strength.



However, broad based cyclical upturn can only get you so far. This Factset chart also shows that forward P/E ratio is elevated and expensive compared to its own history. Current forward P/E is based on bottom-up derived earnings based only analyst expectations of economic conditions without the Trump fiscal plan. That's because you can't make estimates when you don't have the details of the proposals. A top-down analysis suggests that the Trump tax cuts could add roughly 10% to forward earnings, which would bring down the forward P/E ratio to more reasonable levels (annotations are mine).


To rephrase my previous question: Who is right about the expectations for the Trump tax cuts? Main Street or Washington?

The full post can be found at our new site here.

Wednesday, January 11, 2017

A test for the markets

Mid-week market comment: Arthur Hill at stockcharts recently observed that the Russell 2000 was in a tight consolidation range, which is characterized by a narrowing Bollinger Band. Such conditions tend to resolve themselves with volatility expansions which represent breakouts from the trading range.


His remarks about the Russell 2000 could also be applicable to the current conditions of the SPX as well. The key question is which direction will the breakout occur?

The full post can be found at our new site here.

Monday, January 9, 2017

Good news, bad news from December Jobs Report

I had been meaning to write about the December Jobs Report, which was released last Friday, but I hadn't gotten around to it. The report had elements of both good news and bad news.

The good news is the December report showed a solid market. True, the headline Non-Farm Payroll figure missed market expectations, but November was revised upwards, and the positive revision in November was bigger than the December miss.



In conjunction with the December Jobs Report, the Council of Economic Advisers released a report indicating that the American economy had added more jobs than other advanced economies in the last eight years (via Business Insider).


Notwithstanding the political victory lap nature of the CEA`s report, the December Jobs Report should keep the Fed on track with its expectations of three rate hikes in 2017.

Here is the bad news. There are worrisome signs that the economy is starting to overheat. The combination of Fed actions on interest rates and wage pressures on operating margins are likely to be unfriendly to the stock market. Unless the Trump administration comes through on their promised tax cuts in the near future, upside for equity prices will be limited in 2017.

The full post can be found at our new site here.

Sunday, January 8, 2017

How Trump/Navarro could spark a market crash

Preface: Explaining our market timing models
We maintain several market timing models, each with differing time horizons. The "Ultimate Market Timing Model" is a long-term market timing model based on the research outlined in our post, Building the ultimate market timing model. This model tends to generate only a handful of signals each decade.

The Trend Model is an asset allocation model which applies trend following principles based on the inputs of global stock and commodity price. This model has a shorter time horizon and tends to turn over about 4-6 times a year. In essence, it seeks to answer the question, "Is the trend in the global economy expansion (bullish) or contraction (bearish)?"

My inner trader uses the trading component of the Trend Model to look for changes in direction of the main Trend Model signal. A bullish Trend Model signal that gets less bullish is a trading "sell" signal. Conversely, a bearish Trend Model signal that gets less bearish is a trading "buy" signal. The history of actual out-of-sample (not backtested) signals of the trading model are shown by the arrows in the chart below. Past trading of the trading model has shown turnover rates of about 200% per month.


The latest signals of each model are as follows:
  • Ultimate market timing model: Buy equities*
  • Trend Model signal: Risk-on*
  • Trading model: Bearish (downgrade)*
* The performance chart and model readings have been delayed by a week out of respect to our paying subscribers.

Update schedule: I generally update model readings on my site on weekends and tweet mid-week observations at @humblestudent. Subscribers will also receive email notices of any changes in my trading portfolio.


How the market could crash
At the end of 2016, WSJ reporter Greg Zuckerman made a tweet with ominous implications. Hmm...what happened in 1929?


Here is how a market crash can happen. Donald Trump's appointment of Peter Navarro, the author of Death by China, represents the biggest source of policy tail-risk for the capital markets. Bashing China may be satisfying for Trump supporters, but the Chinese economy is increasingly fragile (see How much 'runway' does China have left?). Impose tariffs on Chinese goods, and you risk a Chinese economic slowdown that drags the world into a synchronized global recession.

While a crash is most definitely not my base case, the scenario of collapsing trade flows from a Chinese hard landing would first tank the Asian economies, followed by Europe, whose banking system are still over-levered and have not fully recovered from the Great Financial Crisis. Under such circumstances, an equity bear market would be a 100% certainty, and a market crash would be within the realm of possibility.

It's hard to estimate the actual probability of a US induced China hard landing scenario. However, we should get better clarity as the Trump team moves into the West Wing of the White House in the coming weeks. In addition, President-Elect Trump may give us some clues on trade when he holds his press conference on Wednesday.

The full post can be found at our new site here.

Wednesday, January 4, 2017

Top-down meets bottom-up: How expensive are stocks?

Recently, I have seen several variations of market analysis concluding that stocks are expensive based on forward P/E ratios. Here is a tweet from Jeroen Blokland. David Rosenberg characterized the current equity environment as picking up pennies in front of a steamroller.


Blokland followed up the above tweet with an additional comment indicating that earnings growth is badly needed.


Does this mean it's time to get cautious and sell your all stocks? Not so fast! A case can be made that the analysis of the forward P/E chart is based on a misread of how forward EPS expectations are formed. On an adjusted basis, stocks do not appear to be expensive at all.

The full post can be found at our new site here.

Monday, January 2, 2017

A 2016 report card

As 2016 has drawn to a close, it's time to review the report card from my 2016 calls. My inner investor performed very well, though my inner trader suffered a number of hiccups. Overall, I had a solid year in 2016.


My inner investor: Steadfastly bullish
The chart below depicts the key highlights of my investment calls, which are based on a 6-24 month time horizon. I remained steadfastly bullish for most of 2016 even as others panicked. The jury is still out on my latest call for a correction in early 2017 (see A correction on the horizon?). My analysis has turned out to be largely correct.


Buy! Blood is in the streets! (January 2016)
Super Tuesday Special: How President Trump could spark a market blow-off (March 2016)
How the SPX could get to 2200 and beyond (June 2016)
A correction on the horizon? (December 2016, the jury is still out on that call)



My inner trader: The devil is in the details
The chart below depicts the calls of my trading model. While they appeared to be very good at first glance, I discovered a couple of problems in implementing the trades.


First, the model was a little slow and did not react to the slow deterioration in the market during the late summer. Even as the model remained long, the slow drip-drip-drip downtrend in prices (marked by the white arrow in the chart) was a little disconcerting. As the trading model is based on sensing changes in price trends, the lack of trade signals highlights a problem when the market moves sideways.

On the other hand, another problem arose when the model became overly sensitized to changes in prices. The trading model experienced whipsawing signals in the aftermath of the Brexit election (buy to sell to buy within a few days) and the US election (buy to sell to buy in the overnight futures market). These two issue highlight the need for further research in the future.

These problems highlight the problem with short-term trading and trading models. The chart above is a weekly chart and therefore does not show the actual price volatility experienced by traders.

Sometimes trading is like that. You think you have the perfect setup, followed by the perfect signal, then you miss on your execution, which results in an unfortunate outcome (click this link if the video is not visible).



I have no idea of what 2017 will bring, though I outlined my market views in my last post (see The cloudy side of Trump). In all likelihood, the incoming Trump administration will create a high degree of uncertainty and market volatility.

I hope that I can help you navigate it in the year to come.

Sunday, January 1, 2017

The cloudy side of Trump

Preface: Explaining our market timing models
We maintain several market timing models, each with differing time horizons. The "Ultimate Market Timing Model" is a long-term market timing model based on the research outlined in our post, Building the ultimate market timing model. This model tends to generate only a handful of signals each decade.

The Trend Model is an asset allocation model which applies trend following principles based on the inputs of global stock and commodity price. This model has a shorter time horizon and tends to turn over about 4-6 times a year. In essence, it seeks to answer the question, "Is the trend in the global economy expansion (bullish) or contraction (bearish)?"

My inner trader uses the trading component of the Trend Model to look for changes in direction of the main Trend Model signal. A bullish Trend Model signal that gets less bullish is a trading "sell" signal. Conversely, a bearish Trend Model signal that gets less bearish is a trading "buy" signal. The history of actual out-of-sample (not backtested) signals of the trading model are shown by the arrows in the chart below. Past trading of the trading model has shown turnover rates of about 200% per month.


The latest signals of each model are as follows:
  • Ultimate market timing model: Buy equities*
  • Trend Model signal: Risk-on*
  • Trading model: Bearish (downgrade)*
* The performance chart and model readings have been delayed by a week out of respect to our paying subscribers.

Update schedule: I generally update model readings on my site on weekends and tweet mid-week observations at @humblestudent. Subscribers will also receive email notices of any changes in my trading portfolio.


Is the Trump honeymoon over?
Bloomberg had a marvelous article that captures the market's mood right now. It is entitled "The sunny side of Trump:There’s reason for short-term optimism. Then he has to deal with his policy contradictions".


How long will this honeymoon last? For American business, the positive scenario is that Trump appoints sensible people, matures in office, and puts most of his considerable energy into the pro-growth parts of his agenda. The negative scenario is that he goes back to being the inciter who flew off the Twitter handle so much during the campaign that his people temporarily seized control of his account.
The bull case, which I laid out two weeks ago (see How Trumponomics can push the SP 500 to 2500+), is well known. Since the election, the stock market has embraced the prospect of a global cyclical upturn, anticipated fiscal stimulus, and buyback gains from a tax holiday fueled repatriation of offshore corporate cash. I went on to outline the bear case as the second part of my series the following week (see The bear case: How Trumponomics keeps me awake at night).

As Inauguration Day approaches, acts such as the appointment of Peter "Death by China" Navarro as trade czar has begun to unnerve the bulls. Market psychology is starting to turn from greed to fear. Concerns are rising that new Trump edicts may see parallels to this scene from Woody Allen`s 1971 comedy, Bananas (click this link if the video is not visible).


To be sure, bullish sentiment has surged in the short-term. Stock prices may have run ahead of themselves and a corrective period is likely. The bigger question is how will the bull and bear case resolve themselves in the longer term? I address that question this week with a scenario analysis that has some surprising results.

The full post can be found at our new site here.

Wednesday, December 28, 2016

A correction on the horizon?

Mid-week market update: It's always nice to take a few days off during the holidays, except all that I got for Christmas was a cold. The stock market doesn't seem to be doing too much better as it tests the bottom of a narrow trading range during what should be a period of positive seasonality.


None of the other major indices, such as the DJIA, NASDAQ, or Russell 2000, have broken support. The one exception is the Dow Jones Transports.



My inner trader has a number of tactical concerns as we look ahead into January.

The full post can be found at our new site here.

Monday, December 26, 2016

The bear case: How Trumpnomics keeps me awake at night

Preface: Explaining our market timing models
We maintain several market timing models, each with differing time horizons. The "Ultimate Market Timing Model" is a long-term market timing model based on the research outlined in our post, Building the ultimate market timing model. This model tends to generate only a handful of signals each decade.

The Trend Model is an asset allocation model which applies trend following principles based on the inputs of global stock and commodity price. This model has a shorter time horizon and tends to turn over about 4-6 times a year. In essence, it seeks to answer the question, "Is the trend in the global economy expansion (bullish) or contraction (bearish)?"

My inner trader uses the trading component of the Trend Model to look for changes in direction of the main Trend Model signal. A bullish Trend Model signal that gets less bullish is a trading "sell" signal. Conversely, a bearish Trend Model signal that gets less bearish is a trading "buy" signal. The history of actual out-of-sample (not backtested) signals of the trading model are shown by the arrows in the chart below. Past trading of the trading model has shown turnover rates of about 200% per month.



The latest signals of each model are as follows:
  • Ultimate market timing model: Buy equities*
  • Trend Model signal: Risk-on*
  • Trading model: Bullish*
The performance chart and model readings have been delayed by a week out of respect to our paying subscribers.

Update schedule: I generally update model readings on my site on weekends and tweet mid-week observations at @humblestudent. Subscribers will also receive email notices of any changes in my trading portfolio.


Trumponomics: The bear case
In last week's post (see How Trumponomics could push the SPX to 2500 and beyond), I laid out the bull case for stocks under a Trump administration and how stock prices could appreciate 20% in 2017, assuming everything goes right. This week, I outline the bear case, or how Trumponomics keeps me awake at night.

Candidate Trump has said many things on the campaign trail, some of which are contradictory. President-elect Trump's cabinet is taking shape and we are now getting some hints about policy direction. Nevertheless, there are a number of contradictions in his stated positions whose unexpected side-effects that could turn out to be equity bearish:
  • Legislative tax cut disappointment 
  • A contradiction in fiscal policy vs. trade policy
  • Geopolitical friction with China
  • Rising geopolitical risk
  • Loss of market confidence
  • A possible collision course with the Federal Reserve
In this post, I will discuss each of these points, and I will end on how I believe these contradictions are likely to be resolved by the market.

The full post can be found at our new site here.

Wednesday, December 21, 2016

Santa Claus rally, or round number-itis?

Mid-week market update: As the Dow approaches the magic 20,000 mark, the question for traders is: Will Santa Claus be coming to town this year, or will the market advance stall as it catches "round number-itis"?



Here is what I am watching.

The full post can be found at our new site here.

Sunday, December 18, 2016

How Trumponomics could push the S&P 500 to 2500+

Preface: Explaining our market timing models
We maintain several market timing models, each with differing time horizons. The "Ultimate Market Timing Model" is a long-term market timing model based on the research outlined in our post, Building the ultimate market timing model. This model tends to generate only a handful of signals each decade.

The Trend Model is an asset allocation model which applies trend following principles based on the inputs of global stock and commodity price. This model has a shorter time horizon and tends to turn over about 4-6 times a year. In essence, it seeks to answer the question, "Is the trend in the global economy expansion (bullish) or contraction (bearish)?"

My inner trader uses the trading component of the Trend Model to look for changes in direction of the main Trend Model signal. A bullish Trend Model signal that gets less bullish is a trading "sell" signal. Conversely, a bearish Trend Model signal that gets less bearish is a trading "buy" signal. The history of actual out-of-sample (not backtested) signals of the trading model are shown by the arrows in the chart below. Past trading of the trading model has shown turnover rates of about 200% per month.



The latest signals of each model are as follows:
  • Ultimate market timing model: Buy equities*
  • Trend Model signal: Risk-on*
  • Trading model: Bullish*
The performance chart and model readings have been delayed by a week out of respect to our paying subscribers.

Update schedule: I generally update model readings on my site on weekends and tweet mid-week observations at @humblestudent. Subscribers will also receive email notices of any changes in my trading portfolio.


Trumponomics: The bull case
It's nearing year-end and prognostication season. Rather than just gaze into my crystal ball and make a forecast for 2017, I will write a two-part series on the likely effects of the new president on the stock market. This week, I focus on the bull case.

Since the recent upside breakout, point and figure charting is pointing to a SPX upside target of 2523, which represents a gain of 11.7% from Friday`s close. I show how that figure is easily achievable under the Trump proposals - and more.


The full post can be found at our new site here.

Wednesday, December 14, 2016

Some perspective on the new dot plot

In my post written last weekend (see Watch the reaction, not just the Fed), I suggested that the key to future stock market trajectory was not just the FOMC statement, but the reaction to the statement and subsequent press conference:
  • What happens to the dot plot?
  • How will the market react to the Fed's message? Will the current market expectations of about two more rate hikes in 2017 change?
  • How will Donald Trump react to the likely quarter-point rate hike?
I had expected a stand pat Summary of Economic Projections (SEP), otherwise known as the "dot plot". Instead, the FOMC shaded up the dot plot, which suggests that 2017 will see three quarter point rate hikes instead of two (chart via Business Insider).


The market reaction was understandably negative. Stock prices fell. Rates rose across the board, but the 2/10 yield curve steepened, which indicated market expectations of better growth.

Here is my perspective on the new dot plot and subsequent market reaction.

The full post can be found at our new site here.

FOMC preview, part II

Further to my last post (see Watch the reaction, not just the Fed), I got a number of questions that asked if there are any factors or nuances from the FOMC statement or subsequent press conference to watch for.

Firstly, I reiterate my point that the reaction to the Fed is far more important to the future direction of stock prices than the Fed statement itself. I expect that the Fed will try very hard to remain apolitical and refuse to react to any possible changes in fiscal policy until they are actually announced. Nevertheless, I will be watching if the committee makes any references to:
  • The strength of the US Dollar; and
  • Any possible changes in the projected path of inflation.
How the Fed views these factors will influence affect the pace of interest rate normalization in 2017.

The full post can be found at out new site here.

Sunday, December 11, 2016

Watch the reaction, not just the Fed

Preface: Explaining our market timing models
We maintain several market timing models, each with differing time horizons. The "Ultimate Market Timing Model" is a long-term market timing model based on the research outlined in our post, Building the ultimate market timing model. This model tends to generate only a handful of signals each decade.

The Trend Model is an asset allocation model which applies trend following principles based on the inputs of global stock and commodity price. This model has a shorter time horizon and tends to turn over about 4-6 times a year. In essence, it seeks to answer the question, "Is the trend in the global economy expansion (bullish) or contraction (bearish)?"

My inner trader uses the trading component of the Trend Model to look for changes in direction of the main Trend Model signal. A bullish Trend Model signal that gets less bullish is a trading "sell" signal. Conversely, a bearish Trend Model signal that gets less bearish is a trading "buy" signal. The history of actual out-of-sample (not backtested) signals of the trading model are shown by the arrows in the chart below. Past trading of the trading model has shown turnover rates of about 200% per month.


The latest signals of each model are as follows:
  • Ultimate market timing model: Buy equities*
  • Trend Model signal: Risk-on*
  • Trading model: Bullish*
The performance chart and model readings have been delayed by a week out of respect to our paying subscribers.

Update schedule: I generally update model readings on my site on weekends and tweet mid-week observations at @humblestudent. Subscribers will also receive email notices of any changes in my trading portfolio.


All eyes on the Fed
As market activity starts to wind down for the holiday season, the major event next week will be the FOMC meeting. The Fed's policy move has been well telegraphed and a quarter-point rate hike will be a foregone conclusion. Bond yields have been rising, and so have inflationary expectations, but that's not a surprise. Sometimes the best part of watching a play where you already know the plot is to watch the audience`s reaction.


Even as bond prices got clobbered, equities have soared. Major US indices achieved new record highs last week. At this rate, the SPX may achieve its point and figure target of over 2500 in the not too distant future.


To stay ahead of the markets, here is what I will be watching next week in the wake of the FOMC announcement:
  • What happens to the dot plot? 
  • How will the market react to the Fed's message? Will the current market expectations of about two more rate hikes in 2017 change?
  • How will Donald Trump react to the likely quarter-point rate hike?
Watch the audience, not just the show.

The full post can be found at our new site here.

Wednesday, December 7, 2016

A tale of two markets

Mid-week market update: It was the best of times, it was the worst of times. Stock prices continue to surge ahead, while the bond market *ahem* is having its difficulties.

The Dow Jones Industrials Average made another record high, followed by the Transportation Average. The combination of the dual all-time highs constitutes a Dow Theory buy signal.



By contrast, investors are fleeing the bond market. Moreover, the yield curve is steepening, which means two things. First, long dated yields are rising higher than short yields, which means that investors at the long end of the maturity curve got hurt more. In addition, a steepening yield curve has historically been the bond market's signal of better growth expectations.



How are we to interpret these differing patterns in stocks and bonds? Have stocks gone too far? Are bonds ready for a comeback?

The full post can be found at our new site here.

Tuesday, December 6, 2016

Do you have what it takes to succeed in finance? (Dani Rodrik trilemma edition)

Dani Rodrik of the Harvard Kennedy School has outlined a trilemma of the global economy.


The Economist explained the trilemma this way:
Dani Rodrik of Harvard University is the author of the best-known such critique. In the late 1990s he pointed out that deeper economic integration required harmonisation of laws and regulations across countries. Differences in rules on employment contracts or product-safety requirements, for instance, act as barriers to trade. Indeed, trade agreements like the Trans-Pacific Partnership focus more on “non-tariff barriers” than they do on tariff reduction. But the consequences often run counter to popular preferences: the French might find themselves barred from supporting a French-language film industry, for example.

Deeper integration, Mr Rodrik reckoned, will therefore lead either to an erosion of democracy, as national leaders disregard the will of the public, or will cause the dissolution of the nation state, as authority moves to supranational bodies elected to create harmonised rules for everyone to follow. These trade-offs create a “trilemma”, in Mr Rodrik’s view: societies cannot be globally integrated, completely sovereign and democratic—they can opt for only two of the three. In the late 1990s Mr Rodrik speculated that the sovereignty of nation states would be the item societies chose to discard. Yet it now seems that economic integration may be more vulnerable.
In practice, it is difficult to integrate global trade without the harmonization of standards and business practices. While that sounds fine in theory, here is an example of what happens when the rubber meets the road.

The full post can be found at our new site here.

Sunday, December 4, 2016

Trump makes stocks great again (for now)

Preface: Explaining our market timing models
We maintain several market timing models, each with differing time horizons. The "Ultimate Market Timing Model" is a long-term market timing model based on the research outlined in our post, Building the ultimate market timing model. This model tends to generate only a handful of signals each decade.

The Trend Model is an asset allocation model which applies trend following principles based on the inputs of global stock and commodity price. This model has a shorter time horizon and tends to turn over about 4-6 times a year. In essence, it seeks to answer the question, "Is the trend in the global economy expansion (bullish) or contraction (bearish)?"

My inner trader uses the trading component of the Trend Model to look for changes in direction of the main Trend Model signal. A bullish Trend Model signal that gets less bullish is a trading "sell" signal. Conversely, a bearish Trend Model signal that gets less bearish is a trading "buy" signal. The history of actual out-of-sample (not backtested) signals of the trading model are shown by the arrows in the chart below. Past trading of the trading model has shown turnover rates of about 200% per month.



The latest signals of each model are as follows:
  • Ultimate market timing model: Buy equities*
  • Trend Model signal: Risk-on*
  • Trading model: Bearish*
The performance chart and model readings have been delayed by a week out of respect to our paying subscribers.

Update schedule: I generally update model readings on my site on weekends and tweet mid-week observations at @humblestudent. Subscribers will also receive email notices of any changes in my trading portfolio.


Remember the Audacity of Hope?
Does anyone remember Obama's "Audacity of Hope" campaign that won him the White House? As a reminder, here is a video clip from eight years ago which depicted an Obama supporter who believed that the new administration would pay for her gas and mortgage. Fast forward to today, Obama's legislative legacy is far less impressive than what his enthusiastic supporters expected from St. Barack of Chicago.


While the jury is still out on what the political expectations are for Donald Trump's win, market expectations are getting positively giddy, which may be setting itself up for disappointment. Here is what Ed Hyman of ISI Evercore observed from his survey of institutional clients:


Will the legacy of Trump's "Make America Great Again" be similar to Obama's "Audacity of Hope"? While it's far too early to make any kind of judgment, I made the point last week that the fundamentals for the current market rally have been in place before the election (see The start of a new Trump bull?), the electoral results seemed to have awakened the market`s animal spirits.

There is much to get enthusiastic about. Evidence of a reflationary turnaround had been brewing since the summer. Many of the stated business friendly policies of the Trump administration are also reasons to get bullish on stocks. However, excess bullishness can carry the risk of the bulls' demise. Jeffrey Gundlach recently warned that the rally was losing steam:
The strong U.S. stock market rally, surge in Treasury yields and strength in the U.S. dollar since Trump's surprising Nov. 8 presidential victory look to be "losing steam," Gundlach, who oversees more than $106 billion at the Los Angeles-based investment management firm, said in a telephone interview.

"The bar was so low on Trump to the point people were expecting markets will go down 80 percent and global depression - and now this guy is the Wizard of Oz and so expectations are high," Gundlach said. "There's no magic here."

Gundlach had warned last month that federal programs take time to implement, rising mortgage rates and monthly payments are not positive for the "psyche of the middle class and broadly," and supporters of defeated White House candidate Hillary Clinton are not in a mood to spend money.

"There is going to be a buyer's remorse period," said Gundlach, who voted for Trump and accurately predicted in January the winner of the presidential election.
Has Trump made stocks great again? Should you get cautious? Here is how I would play the market as I peer into 2017.

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Wednesday, November 30, 2016

A glass half-empty

Mid-week market update: About two weeks ago, I wrote a post indicating that market had focused on the positives of a Trump presidency (see The Trump Presidency: A glass half-full?). Now it seems that market psychology is subtly shifting to a glass half-empty view.

It is very revealing when the new nominees for the key commerce ans treasury cabinet posts make market soothing noises and stock prices barely move. Josh Brown's reaction to Steven Mnuchin as the Secretary of the Treasury and Wilbur Ross as Secretary of Commerce is probably fairly typical of the market:
Good morning. Just wanted to check in briefly to voice my approval for the Treasury Secretary and Commerce Secretary picks announced by the Trump transition team this morning. They’re both highly accomplished and capable people who’ve held senior roles within businesses, even if they don’t have government experience.

To my knowledge, neither is looking to eject homosexuals, Jews or brown people from the country, so that’s a step in the right direction. I don’t believe that either has an agenda against women or takes money directly from Russian banks or posts frog memes on Twitter. Neither pick is a sitcom star from the 1980’s or one of the President-Elect’s children.
The hourly SPX chart below tells the story of a lack of positive reaction to good news. Such market reaction points to short-term bullish exhaustion.



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