MACRO MONITOR
March 30 th , 2015
No shirt no shoes no service. The fact that markets are
closed in the US on Friday, the day when the next BLS
labor situation report is released, is causing some
uncertainty. Well… actually…., it was causing general
unease until comments by the People’s Bank of China
were interpreted as very dovish and possibly the
precursor to further large-scale stimulus. China’s Zhou
basically said that interest rate movements (lowering) and
quantitative easing like measures would be on the table if
inflation started to trend down any further than it already
has.
Instead of global risk markets laser-focused on what
could be an essential part of the Fed’s “data-dependent”
calculus, and nervous over the prospects of a vacuum
between that data and the ability to trade positions,
markets are giddy at the prospects of further currency
wars. If that strikes you as ironic or wrong, well then you
are likely thinking too far into the distance – unlike the
algos, traders and risk managers so prominent in today’s
market.
Whether or not China engages in fiscal or monetary
stimulus is not something for which we have a strong
opinion about. This is a chart (below) that we published
at the end of 20141.
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Admittedly, we are too lazy to update this chart. Some of these numbers
have been revised since it was first published so the chart appears to be
slightly out of whack with what are not considered “actual” numbers. Sorry
that we are lazy. The idea here is that the trends downward in GDP and
inflation are still intact. Here is the most recent data: Q4 2014 Chinese GDP
came in at 1.5%, whereas the latest monthly inflation reading was 1.40%.
Hmmm…. any takers on the conspiracy theory that US Treasury Secretary
Again, we don’t really have a strong opinion on China as
we are not actively engaged in trading that market
currently. However, realizing that the mere prospect of
Chinese policy moves positively affect global markets is
somewhat remarkable and should stand as a stark
reminder that the performance risk assets continue to
largely be pegged to central bank policy.
Beyond Fed data dependency and impending PBoC
moves, the real reference point for global investors
should be whether or not a) the strong US Dollar;
and, b) the weak oil themes are still intact. These two
trends are obviously affected by central bank moves but
in the abstract, disassociated from the arcane world of
secular stagnation debates at the highest levels, traders
Jack Lew’s presence in China is the reason for PBoC verbal aggressiveness
yesterday? Jack: “….listen, you know we’ve got a consumer economy. How the heck
can we grow at 3.0% if Chinese inflation is at the same level as US inflation? It just
doesn’t make sense.” Zhou: “….sorry, what? I’m busy reading Bernanke’s new
blog….”
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trade trends. We believe that both trends are still intact
but acknowledge these risks to the trends:

Oil (WTI crude) seems to be finding an equilibrium
range between $45-$55 and may not move
materially lower as refinery intervention (repair)
season is coming to a close, the lack of crude
storage is not as bad as once rumored, and the US
driving season is starting which will boost demand.

A materially lower EUR/USD (i.e., parity) may
take longer to play out now that the market has
interpreted the latest FOMC statement to be
dovish and that there is very little likelihood of a
June change to interest rate policy2.
The other idea that has become fully entrenched in
traders’ and risk managers’ minds is that volatility will be
higher in 2015. That has been somewhat true for 2015,
but US stock volatility, as measured by the CBOE
Volatility Index, the VIX, is still far below the historical
average of 20. In addition, the VIX has come down from
a level of (around) 17 just ten trading sessions ago to a
15-14 range. And, as we look back on the very recent
past – the last month – US stocks are basically neutral
while the US 10 Yr Treasury Note is down over 7.5% in
yield terms. So US stock volatility is really high? No, not
really, it’s a little higher than it has been over the sanguine
and languid last several years. So investors are giving up
on bonds? Nope, the chase for yield looks like it is as
strong as ever, even as the Fed publicly debates interest
rate movements.
A random walk through a very full brain. Here are
some of the issues that we are thinking about. We are
loathe to throw out staccato thoughts, but sometimes it
is helpful for the fuller context of global risk markets and
one thing is sure right now – context is important and it
is very full!
1.
The biggest risk to global markets continues to be
a mismatch between Fed policy (changes) and
market expectations of Fed actions. At this point,
it seems clear that the market is in disbelief that the
FOMC will increase interest rates quickly and
expects an interest rate “lift off” at the earliest in
September. That September FOMC date as the
anchor for market expectations will move around
based upon the upcoming US economic data.
Should the market start to push forward that
expectation on the back of moderate or weak US
economic data, there is a risk that the FOMC will
still raise interest rates with the flashing red light of
conditionality or caveat that such moves will be
made exceedingly slowly.
Should that
asymmetry of market expectation vs. FOMC
action happen, the market reaction may be to
immediately gravitate towards to the perceived
“neutral rate” rather than to wait around and
listen to the Fed’s calming words about
“gentle glide paths” and the like. Such a market
response would generally kill risk taking, destroy
wealth accumulation, and possibly push the real
economy into a recession. In summary, a Fed that
focuses on the characteristic of rates rises (i.e.,
gentle, slow) versus a market that is obsessed with
the timing of rates rises, risks serious
misinterpretation and cataclysmic reactions.
2.
US stocks are setting up for a losing Q1 earning
season if analyst forecasts are anything to go by.
For the S&P 500, earnings are forecast to decrease
4.6% year over year (i.e., versus Q1 2014). This
mark down in forecasts has been a slowly moving
train repeatedly worsening along the way. At the
end of 2014, analysts were forecasting that Q1
earnings would grow at 4.2% YoY. Even stripping
out energy companies, earnings forecasts are only
expected to grow 1.9%. Ouch. Or rather, does
that mean it will be all that much easier for
companies to beat analyst forecasts? Once again,
we will be looking at sales rather than earnings to
measure the health of the US equity market.
3.
Here is a tweet we wrote on Friday. OK, it is kind
of ugly, in that we meant to write “Decelerating” and
not “Deceleration.” That’s the hazard of smart
phone keyboards. This is essentially the summary
of global risk markets 140 character style.
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SPECIAL DISCLOSURE: Old Blackheath Companies is short oil and
long the US Dollar. These positions are hedged and may change at any time
without further notification.
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4.
Two fairly easy safety moves for stock picking or
portfolio management: a) avoid US Dollar
leveraged companies – that is, avoid huge foreign
exposures; and, b) avoid commodity volatility. So,
don’t buy large cap technology companies and
don’t wade back into energy correlated companies.
As a corollary, there are many very well-run US
companies that are likely to suffer from either US
Dollar strength of commodity weakness that
present very compelling targets for selling out of
the money puts to take advantage of moves in the
coming earnings season.
5.
Greece is nowhere near a resolved issue and some
of the smarter analysts that we follow and respect
have recently upgraded their probability models as
it relates to a Grexit. That is, they believe that is
Grexit is more likely now than at any time. At what
point do the Germans and the Troika say “genug”
(enough)? Is it when Spain gets much closer to
federal elections later this year? We are not yet
convinced that a Grexit is imminent because we
believe that even Syriza understands that the
general populace of Greece wants to stay in the
Eurzone and that Syriza’s rise to power will be
short lived if they take Greece out of the EZ. At
this point, it seems as though Syriza’s focus must
be in selling its own party on face saving measures
rather than materially changing the terms and
conditions of the bailout package3.
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SPECIAL DISCLOSURE: Old Blackheath Companies is long Greek
stocks via ETFs. This position may change at any time without further
notification.
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