Friday, 25 June 2021 / Published in Analysis

The Fed last week basically told us what most of us suspected.

First, the Fed was optimistic about economic growth, while anticipating higher inflation, while stressing that COVID is still a risk.

The Fed will continue to purchase $120B of assets each month until, and I quote, “substantial further progress has been made toward the Committee’s maximum employment and price stability goals”. At the same time, is has not given the market when tapering will begin.

The Fed is also insisting higher inflation is transitory and is mostly due to supply chain “bottlenecks”.

Finally, the Fed shed some light on when it might raise interest rates or takeoff. This expectation is now set towards the end of 2023.

Overall, the bond market does not seem to worry about inflation, siding with the Central Bank. Please note it now seems yields peeked several months ago.

Also note that even assuming rates do rise towards the end of 2023, that is a very long way in the future to be able to position any portfolio. However, it might be a headwind.

The dollar initially rallied, but it has since given back most of its gains. As a sidenote, I personally do not consider the Fed statements dollar positive.

Overall, the Fed is still very accommodative, and does not want to surprise markets, giving a heads up of its intention’s way in advance. This is very market positive, because it provides participants time to digest and price everything in advance.

The bottom line is that the Fed continues to be supportive of both the economy and markets, but please note that now we have two headwinds. First at some point the markets will be concerned about interest rates if they rise, and second, inflation concerns are on everyone’s mind. If we add to these the valuation landscape, investors need to be extra cautious looking ahead.

Monday, 24 May 2021 / Published in Analysis

I don’t claim to be an expert on the crypto space and don’t really understand it. Yes, blockchain might prove useful, but I fail to understand why a crypto asset should be worth billions because of the usefulness of blockchain. Second, I disagree that cryptos are a hedge against inflation. I also disagree with the notion that cryptos will replace currencies, or that they are an alternative to Central Banks. 

However irrespective of what one believes, what is important for investors at the moment is that the regulatory cloud we have mentioned in the past is just beginning. And the regulatory assault on the crypto space is coming from multiple sides.  

SEC chairman Garry Gensler in a recent House committee hearing, made it clear that there is no investor protection regime for the crypto space at the moment, implying the need for regulation. He also mentioned regulating exchanges and that he was concerned about price manipulation. Coinbase, for example, is registered in most states as a money transmitter, not as an exchange.  

Meanwhile in China, where banks have been banned from getting involved in crypto for several years now, is also preparing more regulatory scrutiny. As a result, two miners said they will cease operations in China citing “regulatory risks”. 

Finally, the Biden administration’s tax enforcement plan released Thursday calls for transactions of more than $10,000 to be reported to the IRS. This might lead to many investors liquidating their holdings before any such plan becomes law.  

We don’t really have a crypto strategy and as a general rule of thumb don’t get involved in the space. However irrespective of the different opinions about cryptos, investors who venture in the space need to be aware of the regulatory risks. These might include, but not limited to, tax liability risks, regulatory scrutiny of exchanges, clarity in the ownership structure of many cryptos, and investor protection regulations.  

Please note that the appeal of the crypto space has been that it was a non-regulated and decentralized investment. However, if regulators enforce the same regulatory scrutiny on the crypto space as in other investments, that could alter the appeal of the space, and the value of cryptos as perceived by participants in the space.   

Tuesday, 30 March 2021 / Published in Analysis

As we have said many times over the past several months, while the market as a whole is not in bubble territory, many parts of the market are. In particular, the technology sector is as expensive as I have ever seen.

In fact, one of my worries has been that when the technology sector did correct, it might bring down the entire market. The good news is that this has not happened, and the market overall is holding up.

This in my mind means two things. The first is that the bull market is still intact. The second is that the rotation we have been seeing over the past several months seems to be enough (at least for now) to prevent a general market correction, even as many of the high-flying technology names correct or do nothing.

Also, the fact that the high PE and High Price/Sales stocks are correcting , should also bring down the market multiple over the next few quarters, which is a good thing.

This in turn should be good for active managed portfolios and less for passive portfolios or passive investment instruments.

Finally, this also means the liquidity wave we have been riding since the beginning of the pandemic is alive and well, but investors have to change strategy and find new winners.

Like the old wall street saying goes, never fight the Fed or never fight the central bank as I say. And with the Fed still purchasing 120 billion in assets every month, this liquidity wave is still alive and well.

Thursday, 11 March 2021 / Published in Analysis

A short while ago I questioned if 2021 might be a sell the COVID 19 vaccine news trade. I said it probably won’t, because central banks will keep pumping liquidity. However, a new twist is now unfolding, and that is higher bond yields.  

For example, 10-year US government bonds yields have risen to 1.5%, and the 30-year yield is now at around 2.20%, with most yields in other major markets also increasing.  

In my mind, irrespective if inflation comes back, as most think it will, I find it hard to believe that the long end of sovereign debt can increase by a lot without central banks intervening. This because the interest cost to governments will rise substantially, something that will make an already bad fiscal situation much worse.  

So, the question is, can central banks bring down long dated bonds if they want to? The answer is yes, and I think they will do just that at some point. But the even more important question is, how might markets react to such a development? The answer is we don’t really know, because on the one hand we will have inflation and higher growth because of a COVID vaccine, but yields will not be reflecting such a reality, as they have in the past. 

My guess is that if markets start correcting, central banks will communicate that they will start buying longer dated bonds to keep yields down to avoid markets correcting by much. But the truth is we don’t know how markets will react to such a reality, irrespective of what central banks say and do. But until we see price action to the contrary, we have to keep trusting an old Wall Street saying that says never fight the Fed, or generally speaking, never fight Central Banks.  

For example, 10-year US government bonds yields have risen to 1.5%, and the 30-year yield is now at around 2.20%, with most yields in other major markets also increasing.  

In my mind, irrespective if inflation comes back, as most think it will, I find it hard to believe that the long end of sovereign debt can increase by a lot without central banks intervening. This because the interest cost to governments will rise substantially, something that will make an already bad fiscal situation much worse.  

So, the question is, can central banks bring down long dated bonds if they want to? The answer is yes, and I think they will do just that at some point. But the even more important question is, how might markets react to such a development? The answer is we don’t really know, because on the one hand we will have inflation and higher growth because of a COVID vaccine, but yields will not be reflecting such a reality, as they have in the past. 

My guess is that if markets start correcting, central banks will communicate that they will start buying longer dated bonds to keep yields down to avoid markets correcting by much. But the truth is we don’t know how markets will react to such a reality, irrespective of what central banks say and do. But until we see price action to the contrary, we have to keep trusting an old Wall Street saying that says never fight the Fed, or generally speaking, never fight Central Banks.  

Tuesday, 23 February 2021 / Published in Analysis

When 100% of outstanding shares are shorted in any stock, you get a sort of a black hole short interest phenomenon. In other words, even if someone covers his shorts, someone comes on top and shorts even more shares. Very soon more than 100% of all outstanding shares are sold short and covering becomes impossible, because there are no available shares to be covered. More or less, that is what happened in the case of Gamestop.

But Gamestop is not the only heavy shorted stock. There are many more than meets the eye. And it’s not just stocks that are heavily shorted, EFTs are shorted also. For example, according to an article from the Motley Fool site (link here) the SPDR S&P Biotech EFT (XBI) has a short interest of 103%%, the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) is shorted to the tune of 91% and the SPDR S&P Retail ETF (XRT) has a short-interest ratio of 465% recently. Yes you heard right, 465%. The ETF has 2.6 million shares outstanding with more than 12 million shares short. In comparison, the short interest of Gamestop as f Feb 5 was 89%.

The question is, are seasoned professionals right in shorting these securities so much? The answer is yes and no. Professional investors and managers know all too well that any mania can’t last forever, however a speculative mania can last longer than anyone imagines, and stocks can rise for no reason, or much more than thought possible. In other words, as Keynes correctly said, markets can remain irrational longer than you can remain solvent.

The bottom line is that we are witnessing a market like no other in history. A speculative frenzy I have never seen before, and a market that behaves irrational in every respect.

I am not sure how this ends or how long it will last, but I am sure that in the end, irrationality will be punished, and prudence rewarded.

Wednesday, 03 February 2021 / Published in Analysis

I have never subscribed to the theory that interest rate differentials are what determine the value of currencies. Yes, differentials do play a role, but in my opinion a lot less than most people think.

While the yield spread between 10-year US treasuries and 10-year Bunds has increased, this has not stopped the dollar falling almost 10% vs the Euro. Obviously if yield was the main driver of currencies, this should not have happened.

When looking at the current valuation of the dollar, many other factors are in play at the moment, that overshadow yield differentials.

The greatest factor is Inflation tolerance: The Fed has repeated many times that it will tolerate higher inflation for a considerable amount of time, even after the pandemic ends. At the same time, it has also said it will continue to purchase assets for at least the same amount of time.

And contrary to what happened in 2018-2019, when the Fed tried to raise interest rates in order to offset the US government’s increased spending, this time around the Fed will do nothing of the sort, instead opting for continued bond purchases and thus preventing yields from rising.

This will probably create a dilemma for holders of US treasuries. And the dilemma is, will the interest earned compensate for the dollar inflation they will incur. The answer is probably not, which might an additional reason for the correction of the dollar.

Finally, because the fed’s balance sheet is poised to rise for the foreseeable future, in a way this dilutes the value of the dollar a bit. However insofar as the rise of the Euro vs the dollar, please also remember that the US has a twin deficit while the Euro zone a current account surplus.

Wednesday, 27 January 2021 / Published in Global Finance

The renewable energy sector was one of the best investment opportunities in 2020, as the new US administration plans to re-join the Paris Climate Accord and make the country a global leader on climate change policy. 

Joe Biden plans to make the US a 100% clean energy economy with net-zero emissions by 2050, while he also plans to decarbonize the US power sector by 2035, utilizing renewable energy solutions.

The entire auto market is pivoting from gasoline-powered cars to electric cars, and analysts believe that we are still in the early stages of this seismic shift as the electric car industry is young and growing quickly.

Electric Vehicle penetration of total passenger car sales measured less than 5% in 2020, while that share is expected to rise at 20% in 2025 and up to 50% in 20 years. Traditional car companies such as Volkswagen and Ford have started getting involved in the sector to match the increasing demand.

The large growth rate in the Chinese and European EV markets and the favourable government policies have made electric vehicles one of the hottest topics on the financial markets in 2020. 

Tesla has become the world’s largest automaker in the world with a market capitalization of $800 billion, after its share skyrocketed by 800% last year, making its founder, Elon Musk the world’s richest man in 2021. 

Tuesday, 26 January 2021 / Published in Equities & Indices

Global financial markets slightly fall in Tuesday trade, retreating from their record highs over persistent anxieties about possible barriers to Joe Biden’s $1.9T fiscal pandemic-relief stimulus and the rising Covid-19 cases around the world.


Uncertainty over the time and size of the US stimulus package:

US futures moved slightly lower on Tuesday amid softer risk appetite among investors over disagreements on President Joe Biden’s $1.9T stimulus package. The market worries about the timing of the package to be agreed as the Congress members debate about the size of the relief bill needed to stimulate the US economy. Even the Democratic Majority Leader Chuck Schumer notified yesterday that a complete bill could be four to six weeks away.


Covid worries and fresh lockdowns:

The market participants concern about the growing number of Covid cases around the world, especially in China. Many governments in Europe and Asia including China and Hong Kong have set additional strict lockdown measures to limit the spread of the new fast-spreading variant virus, increasing the economic damage in the local markets.


US markets:

The tech-heavy Nasdaq Composite rose 0.7% on Monday, hitting an intraday fresh all-time high of 13.700 before closed at 13.635, lifted by robust gains in some tech giants such as Apple, Microsoft, and Facebook.

The S&P 500 index also closed at record highs of 3.855, up 0.4% ahead of corporate earnings, while the industrial Dow Jones index slightly dropped 0.1% to 30.960 amid losses in Boeing and cyclical sectors over stimulus worries.


Asia-Pacific Markets:

Stocks in Asia retreated nearly 2% from their record highs in Tuesday trade following the overnight losses on Wall Street amid a general risk aversion sentiment and the geopolitical tension in the region.

The Hang Seng index in Hong Kong led to losses in Asia by 2.4%, following by 2% losses in China’s mainland indices after the boiling tensions in the Taiwan Strait and the South China Sea. Hence, South Korea’s Kospi followed with 2.2% losses, Japan’s Nikkei 225 slid 1%, while markets in Australia and India are closed for public holidays.


Commodities-Forex and Fed’s 2-day policy meeting:

WTI and Brent crude oil prices fell 1% on Tuesday morning to $52 and $55.50 per barrel respectively after China (the world’s largest fuel consumer) reported rising new virus cases and fresh restrictions, causing doubts over petroleum demand recovery in the country.

Gold and Silver prices rise above $1.850/oz and $25.50/oz respectively, gaining support from the falling 10-year US Treasury yields near 1.03%, despite the US dollar strengthen.

The DXY-US dollar index against major currencies rises to 90.50 while the EUR/USD retreated from the resistance level of 1.22, finding support near 1.21.

The recent strength in the safe-haven greenback came after the risk aversion mood over the speed and size of Biden’s stimulus bill, and ahead of the Federal Reserve’s two-day policy meeting, which is scheduled to begin later in the day.

Investors expect FED to maintain its dovish monetary policy and keep the zero interest rates for a longer time to help the US economy mitigate the pandemic-led damages.

The dovish Fed is a bearish signal for the US Treasury yields and US dollar while it is a bullish catalyst for the non-yielding gold and silver precious metals and other dollar-denominated commodities.

Friday, 22 January 2021 / Published in Analysis

Cryptocurrency market has witnessed a massive selling pressure in the past few days, with Bitcoin price falling below $29.000 for the first time since Jan. 05, 2021, on growing concerns over regulation attention and a widespread profit-taking after the extraordinary rally.


Regulation attention from US Treasury and ECB:

The recent price rally and enthusiasm in the crypto market have lost some steam after Janet Yellen’s comments, President Joe Biden’s pick to head the US Treasury, during a US Senate hearing on January 19, 2021.

Yellen expressed concerns that cryptocurrencies could be used to finance malign and illegal activities, adding that she is intended to work closely with the Federal Reserve Board and the other federal banking and securities regulators on how to implement an effective regulatory framework for Cryptocurrencies and other fintech innovations. That followed a call last week from European Central Bank President Christine Lagarde for global regulation of Cryptocurrencies.


Bitcoin and Ethereum sell-off:

The price of the world’s most popular cryptocurrency initially lost as much as 17% to $28.800 on Thursday night, before bouncing back between $30.000-$32.000 on Friday. Bitcoin is trading 30% below its record high of $42.000 posted at Jan.08, 2021.

Ethereum, the second most valuable digital currency after Bitcoin, dropped even more yesterday, declining 22% toward $1.040, only three days after posting a fresh all-time high at $1.440.

The price of Ethereum, which was founded from the Russian-Canadian programmer Vitaly Buterin back in 2014, entered 2020 at near $120 per coin. The popularity of Bitcoin and the massive inflows from institutional investors have helped Ethereum to post a parabolic rise above $1.000 at the end of 2020.


Rocky start of 2021:

While the 2020 was a great year for Cryptos with lots of bullish developments, tremendous price rallies up to 300%, popularity, and media coverage even as they still have limited real-world usage, however in the first 3 weeks of 2021, the bears have taken control, bringing lots of pressure, huge price swings and volatility.

The recent two-day sell-off wiped out more than $100 billion from the crypto market capitalization, which it now stands at around $900 billion, while the Bitcoin’s dominance rate is 65%.

Thursday, 21 January 2021 / Published in Equities & Indices

Global equities hit fresh record highs on improved risk sentiment, gaining support from Netflix’s robust corporate earnings, Biden’s inauguration, and the falling US dollar-Yields.

Biden’s inauguration-A new American chapter:

The 78-year-old Democrat Joseph Robinette Biden Jr. became the 46th president of the United States on Wednesday, while Kamala Harris became the first Black American woman to become vice president.

The “Biden-Harris” inauguration has completed the most violent power transfer in recent American history, exactly two weeks after a group of ex-president Trump’s supporters stormed into the Capitol Hill building and leaving five people dead.

On top of that, Trump became the first president since Andrew Johnson in 1869 not to attend his successor’s inauguration, ahead of his second impeachment trial in the coming weeks.


Market Reaction:

All US stock indices extended the recent rally by ending Wednesday’s trading session at fresh record highs. The Dow Jones rose 0.83% to 31.188, almost 100 points above its previous all-time high. The S&P 500 was up 1.4% to 3.851, the Nasdaq Composite gained 2% to 13.457, while the small-cap benchmark Russell 2000 popped 0.4% to 2.158.

The share of the streaming giant Netflix hit a record high of $586, up 17% yesterday, after it reported strong subscriber growth and share buybacks. Also, the shares gained an additional boost after the company announced that they would no longer need to borrow billions of dollars to finance its TV shows and movies.

Asian-Pacific equities advanced on Thursday morning, following the overnight gains in Wall Street. Shares in Australia edged higher by 0.7% as the local unemployment rate came in at 6.6% in December, below expectations for 6.7%. China’s Shanghai Composite rose 1.3%, Japan’s Nikkei 225 ended up 0.80%, while Hong Kong’s Hang Seng index settled 0.20% higher.


Forex market:

Falling Treasury Yields weigh on the US dollar

The 10-year US Treasury yields edged lower to 1.08% as investors expect Federal Reserve to continue with its dovish monetary policy and not taper until the end of the year.

The recent back foot in yields, together with the market risk appetite, and dovish Fed monetary policies have weighed on the greenback. The DXY-US dollar index, which tracks the greenback against a basket of major currencies, dropped below 90.20, only a few days after it reached 91 levels.

The optimism around the massive $1.9T US fiscal package has sent investors away from the safe-haven currencies such as the US dollar, Japanese Yen and Swiss Franc and into more growth-led currencies such as Euro, Sterling, and the commodities-led currencies of Canadian, Australia, and New Zealand dollars.

The EUR/USD pair advances back above 1.2140, the USDJPY slips near 103.400, the USD/CAD falls to a 3-year low of 1.2630. Meanwhile, the NZD and AUD extend gains against the greenback to 0.722 and 0.777 respectively on improved Aussie unemployment rates and higher commodities prices.


Commodities:

Energy:

WTI and Brent crude prices advance near $53 and $56 per barrel respectively, over a growing optimism that the massive fiscal and monetary pandemic-relief packages will improve the global economic growth and hence the demand for petroleum products.

Furthermore, crude prices took an extra boost after China, the world’s larger crude consumer, shown an increase in fuel demand by 3%, a record high in the pandemic-shaken 2020.


Precious Metals:

Gold and Silver have gained traction recently, climbing to weekly highs of $1.870/oz and $26/oz, as they considered the ideal hedge against inflation and US dollar devaluation amid the $1.9T US stimulus.

Hence, the precious metals gain support from the dovish Fed, while the lower Treasury yields reduce the opportunity cost of holding non-yielding gold and silver metals.