Week In Brief: February 12

February 15, 2016

Myths tend to be religious and political narratives that transcend the possibilities of human experience. Expressing our literal or metaphorical grasp of aspects of reality.
These constructs have been used to propagate knowledge, fear or love, per the intentions of the myth makers responsible for their dissemination.
Unlike other animals, humans are blessed -- or cursed, depending on one's perspective -- with the tendency to ponder the present, past and future. We consider our place in the world. And ponder the threats, or monsters, that might do us harm.

Consider the Chimera, the bestial offspring of the monsters Echnida and Typhon. Cerberus, Gorgon and Scylla being a few siblings of note. Quite a family, really.
Chimera was a fire breathing beast with the heads of a lion, goat and dragon. Thus the word "chimerical," meaning unreal, imaginary or fantastical.
Chimera was birthed by the denizens of Lycia in ancient Turkey, who pitted themselves against the mythical beast. He plagued their dreams, tormented their days. Of course, Chimera attacked the Lycians through a nearby volcano which they'd named after him. How else to ascribe such horror to a natural occurrence but by its metaphorically tormenting Lycia in concert with a fire breathing beast? So giving birth to a monster, the Chimera.
Six centuries later, we have come a long way. Though not far enough to free ourselves of the tendency to mythologize the unexplainable. Especially when that which we don't understand happens to frighten us, as well.
We see it in the markets every day. With each sell off, pullback and correction. Investors reach into their psyches, envisioning the Chimeras of past financial crises. Envisioning their return. Preparing to terrorize their nest eggs and security, once more.
Investors have evolved. Though not enough to leave behind the fearful myth-making tendencies created to explain and live beside the facets of life we do not understand.
Today, it would seem that Chimera has returned. Riding atop elevated levels of fear and uncertainty. Somewhere just off the coast. Ready to come ashore. And lay siege to everything for which we've worked so hard. Six centuries later. We are still plagued by the Chimeras of our past.
Mythology aside, last week was saved by Friday's frenetic bout of short covering. One that sent stocks skyward. Consequently, the week saw the S&P 500 cede only 81 basis points.
Before Friday, it looked like just another hot mess in a litany of travesties tucked into the weekly periods of 2016 thus far. In fact, some investors have set their Monday alarms to chime, "Here we go again" at 7 am.
Midweek, stocks rolled over like the family dog. Falling precipitously until they arrived just a hair above the January 2015 and October 2014 lows. We've longed discussed the trading ranges the market has been following. And it's helpful to recall that stocks have long memories. Always aware of the paths they've taken. Often using such points to pause and turn back in the midst of notable declines.
Thursday was such a day. And when big cap stocks arrived at their former lows they used the opportunity to pause, reflect, and turn higher. Forgoing an opportunity to sow further discontent.
Some market students call it "price memory." It is responsible for stocks trading within specific channels over extended periods. Bouncing off specific moving averages. Almost a visceral response to points that prove familiar. Like lazy reptiles that find their way back to the same sunny rocks, year after year.
Speaking of sunny rocks, gold has woken from a long slumber. Up 18 percent on the year and sitting at a one-year high. The yellow metal finds itself propelled higher on the backs of lowered confidence in global monetary policy. If not a darkening view towards the system itself.
People have lost confidence in the public institutions that assist in society's maintenance. Having watched a number of nations usher in negative interest rates. While any number of countries participate in a competition to debase their currencies.
Historically, there have been two U.S. government institutions largely perceived as infallible by the American public: the military, and the Fed.
Recent polling reveals that the military continues as the most respected of all American institutions. The Fed, on the other hand, has been laid low. To the point that markets no longer believe in the Fed, nor other central banks, at all.
QE hasn't worked as planned. Stated inflation and economic growth goals have failed to matriculate. In fact, it appears that government bonds have been the principal beneficiaries. Which serves to keep rates low. Even as the federal government's $19 trillion debt creeps ever higher. Hmm. If I was not a pragmatist, I'd say there was a conspiracy in there somewhere.
Accordingly, DoubleLine Capital's Jeff Gundlach believes that gold will likely hit $1,400 as investors continue losing faith in central banks. Which means that the opportunity in gold and gold mining stocks could be preparing to crank up. When this opportunity has arisen in the past following torrid bear markets? The upside has been significant. So, we'll be watching these developments closely.
Now, let's head over to the oil fields.
Over the weekend, Russia and Saudi Arabia met to discuss the current state of affairs affecting global energy producers. Anyone with chips on the table was hoping for an agreement on production cuts. Which would raise the price of oil. Such an agreement did not materialize. Instead, both nations determined to freeze production at current record levels. Stating that this would represent the "beginning of a process" that would require "other steps to stabilize and improve markets."
Saudi Arabia has not achieved its objective. That being the bankruptcy of many U.S. shale oil producers. For now, however, the Kingdom will stay the course. Inflicting as much damage as it can on U.S. producers, as well as on its sworn enemy, Iran, which is only now beginning to legally sell oil in global markets. While we consider such discussions as possible inflection points signaling a Saudi willingness to consider a change in trajectory, such alterations remain months away.
Finally, where does all this leave global equity markets? Did the S&P 500 index hit bottom at 1,829?
Doubtful. There are three reliable tells for market bottoms. Tells that reveal when it's safe to get back in.
First, when the S&P 500 drops 5 percent or more in a day. Second, when the CBOE VIX Index (fear index) breaches 40. Third, when everything sells off for a few days and correlations for all stocks approach 1.0 -- that is, perfect correlation.
None of these have occurred. What has transpired, though, is as follows:
-Stocks showing technical weakness
-Lack of purchasing power amid the American middle class
-Stock market is signaling a recession
-Earnings growth is weak and the outlook is weaker
-Strong U.S. dollar hurting sales, exports, and earnings of multi-nationals
-Falling commodity prices
-China's economic weakness and capital flight
-Emerging domestic and global leadership crisis
-Elevating levels of geopolitical crisis
-End of Fed QE policy
-Rumors of more QE (regardless the lack of results)
-Negative interest rates seen around the world
-Crisis of confidence in domestic and foreign government institutions
That's quite a list. But don't fear. We know the ocean is replete with apex predators called sharks. And still we swim there. Almost always without incident.
In lieu of which the fact remains: the market is no longer cheap. And currently, earnings are in decline. Thus far, Q4 blended earnings have declined by -3.8 percent. If the index posts a Q4 earnings decline it will mark the first time it has done so for three consecutive year-over-year quarterly earnings declines since Q1 2009 through Q3 2009.
Now, an observation...
Was in Miami Beach last week. Gazing out from a client's 23rd-floor oceanfront condo. To the east lay the Atlantic. To the west? Bal Harbor, North Beach and then greater Miami.
Standing there, I had a revelation. Or maybe it was deja vu. Staring out over the splendor of Miami Beach and beyond, I saw hundreds of cranes aside so many buildings, assisting in a myriad of residential and commercial projects. And I recalled viewing the same phenomenon in 2006. A sea of cranes. Making over a city by the sea. A year and a half later, the Credit Crisis unfolded.
What's next? Anybody's guess.
We believe markets may soon run higher. Which may represent a good time to lighten up on non-favored positions. If, that is, the elevated levels of uncertainty have begun to weigh on you.
As for us? We find ourselves somewhere between complacency and emergency tactics. Meaning, though we expect the next move to be higher, we believe that a marked move lower could be on its way.
Of course, all of this volatility could simply turn out to be the kind of buying opportunity usually reserved for recessions -- only without the recession. Either way, each investor must act in accordance with his individual tolerance for risk and uncertainty.
Remember, violent markets, like nature itself, are only a Chimera of our making. As common as a passing storm. Don't be emotionally overcome. Have a plan in place. Enact it when necessary. Before long, the howling winds and broiling seas will have passed in search of distant shores.
Feel free to get in touch with us if you've any questions about current allocations and plans moving forward. And stay vigilant.
Weekly Results
Major markets finished down last week. The DJIA lost 1.43%, the S&P 500 fell 0.81%, and the NASDAQ dropped 0.59%. Small cap stocks fell 1.38%. However, the 10-year Treasury bond yield grew 8 basis point to 1.75%. Gold rose $64.10 per ounce, or 5.46%.

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