Market Report 20 June

What's on the report

Markets around the world continue to fall on the back of Ben Bernanke's speech yesterday which indicated a strengthening economy.

Market Participants fear the fed will begin to taper its stimulus program which is supposed to keep the economy afloat.

PMI numbers indicate contraction in China at a growing rate as well as in the Eurozone including Germany.

UK retail sale look to have improved in the last month.


What I think

There is an obvious disconnect between current market movement and the fundamental drivers of the market as a whole. Economic expansion and GDP growth of 3 - 3.5% are impressive numbers and should indicate a probable expansion of company earnings. This sentiment is clearly not shared by markets around the world as indicated by their reaction to Bernanke's speech yesterday.

On the other hand, this sell off is matched by an increase in 10 year interest rates, This increase forecasts the end of cheap money for corporations therefore an expansion of interest expense across the board and a shrinking of bottom lines.

Analysts have been touting to no end the demise of the recent 30 year bond bull market, It's worth nothing that if they are right, the bond market has typically been a predictor of the direction a stock market should go. Owing to the interest rate theories and the bond market direction, it is easy to see this market fall into a 5-10% correction in the medium term. However, if we believe the Fed's assessment of the economy, we should see growing earnings in the coming quarters which will bolster the stock market further.


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Today's Daily Report

In todays Daily Report, US futures remain largely sideways while Asian markets traded mostly upwards as currencies took a hit on increased safe haven demands.

These are your headlines
Tensions in Syria forced the US government to take forceful actions in arming Syrian rebels, this is bolstering commodity prices especially WTI crude oil.

The Federal Reserve bank meets today to discuss monetary policy actions, the market remains on edge as talk of taper could send stock prices spiraling down.

Japanese stocks begin to rise again as the yen loses value, conversely the Chinese Yuan has been seen to appreciate and adversely affect Chinese stocks.

Finch Ratings agency fears a Japanese style deflation crisis arising in China.

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Returning to the unfamiliar

Since I've been buried in six volumes of riveting finance concepts developed by the CFA Institute, the markets have gone on quite a rally. Whenever it seemed to have reached some sort of exhaustion point and a correction was imminent, there was some sort of force pushing the indices to new all time highs. Perhaps irrational exuberance or a justified rally, this market has been quite different than what we've seen in the last two years. But what has defined this market rally, similar to previous ones, is investor risk appetite. This behavior has been fueled by various statistical evidence that proves that we are indeed experiencing a gradual economic recovery which has been fed by the federal reserves' determination to provide liquidity and increased risk appetite in the economy.

These events have fueled this market for several months and continue to destroy the accounts and patience of investors with decidedly short positions, and strangle fixed income investors who rely on yield. During this interesting market rallies we have seen some quite exciting stories; Japanese stocks have soared with the debasement of the yen, and then pull back slightly, Google has continued to inch towards world domination (My friend actually referred to the whole internet as Google), the tech giant Apple has been humbled in the markets, Elon Mosks' Tesla has defied EV critics and proved "profitable", precious metals have been destroyed while other commodities have seen incredible pull backs in certain areas and volatility in others, and finally the highly anticipated "tapering" of the QE initiative is being discussed extensively in the media.

Of course the main measure of the integrity of any market move is the quality of the companies earnings. Q1 earnings reporting were average overall; 65.2% of the companies in the S&P 500 beat bottom line expectation, but top line figures saw an average decline of 1% and only 49% of companies reporting above expected revenues. Furthermore, analysts revised down earnings expectations for Q2 but left estimates for earnings growth for the year at approximately 6%. The news has not been overwhelmingly bullish nor bearish , but the underlying feeling of economic expansion has led to a broad market rally.

I believe this puts the market at a disequilibrium and presents active investment professionals some trading opportunity. Owing to the idea that all stocks are not created equal, I put it to you that there are some stocks showing tremendous value potential and others that are generously valued, and a stock picker with great market timing will be able to take advantage of this disequilibrium. Over the next few weeks i will look to profile some companies which i believe fit into these categories and give my rationale behind each thesis.

That is not to say that this is an active managers market in the least bit, Passive investment strategies will find ample opportunity to re-enter this market in pull-backs, but as we have recently witnessed, pull backs come scarce and shallow in this medium term bull market. The 3 weeks from May 20th to June 6th was the largest pull back the market has experienced since april, with stocks barely retreating 5%. The Dow barely broke below its 50 DMA before employment numbers released on June 6th lent a beacon of hope to which investors hung on and ignited a rally.

This new paradigm bags the question "is this market doomed to succeed ?" I say this because it seems that regardless of the tenor of news that is released, a market rally occurs. Bad economic numbers briefly quenches the exuberance, until investors realize that the Fed has basically guaranteed free money until numbers improve, this is followed by a rally. Conversely, good economic data is initially met with market excitement and the prospect of "tapering" or the Fed cutting the proverbial umbilical cord is completely thrown out of the window. While there are clear forces supporting the market, what will cause the ceiling to reveal it self, and how will the market retreat?


Please look out for a daily news letter coming soon to My Trading Book as well as various reports on companies and macroeconomic themes.

Till then
There's always a Bull Market somewhere.