IN-DEPTH: TRANSCRIPTION - THE YEAR OF THE "RIGHT SHOULDER"?
SLIDE 5 - INTRA-MARKET SIGNALS
I would like to begin this session with a discussion regarding the Intra-Market signals and what prompted us in Q4 2018 to call 2019 as likely the year of the "Right Shoulder"!
Let's start with the currency market and specifically the US Dollar.
The chart I show here we drew not long after the Financial Crisis. This Elliptical Theory chart has turned out to be an extraordinary chart in calling both the bottom in the US$ and the time frame of its expected rally.
You can see it hit our HPTZ (circles located on the right side of the Ellipses ring).
We are now however, at a very critical time regarding the dollar and whether it follows the Ellipse higher or trades within the red channel. On a more detailed view which you can find on the MATASII site you will see we have broken outside the Ellipse with significant overhead resistance not much higher than we are presently trading.
This US$ chart shows that we appear to be within an "Ending Diagonal" pattern pointing us towards a "Right Shoulder" termination in 2019..... before heading lower in the Presidential Election Cycle year.
Quantitative Tightening and higher rates have been good for the dollar since they were initiated but both are being reversed since the Fed recently changed policy direction guidance.
There appears to be more lift left in the US dollar (likely a "fight to safety" shock of some sort - Brexit? a Geo-Political event?) before heading lower.
The Bond Market as represented by the 10 Year US Treasury is also signaling a possible "Right Shoulder" in 2019. This TNX chart of the 10 Year's Yield, which we initiated in 2016, has also turned out to be very accurate and you have seen it many times as it has unfolded.
We are not sure we have quite found the bottom in this drop in yields but do see 10 Year yields rising towards 2.80-3.05% later in 2019.
We noted that last week Morgan Stanley changed their year end yield target also to 2.8%. I need to add that neither of us are in the mainstream on this outlook.
A Ratio that has helped us significantly over the years is the SPX: TNX ratio plotted on a log scale.
We see yet another Head & Shoulders here, within a clearly emerging "Doomed Top".
The ratio suggests for this to occur we need to see yields fall further while equities continue to strengthen - at least in the short to intermediate term in 2019.
We see this to be the case in the 10Y US Treasury but what about equities?
This is another chart you have seen many times as it has unfolded. As you not doubt recall we called the bounce to the right shoulder prior to the bottom reversal shown at the bottom of the chart.
Though we called for a "W" bottom versus a "V" we were fairly accurate on the level we would reach to achieve our forecasted "Right Shoulder". We took less time than we predicted and also broke the "black" trend line which we initially felt would contain the lift.
We are watching closely to see whether the "dotted" black line holds or whether we lift higher than originally anticipated ... towards the labelled convergence shown by "?" markets.
Increasingly strong expectations for a Chinese Trade Agreement may be the trigger for this which would likely be a "Buy on the Rumor -- Sell on the News" event.
Shown here is the DJIA chart we have also had in place since early 2018. The Right Shoulder is higher in the DJIA and this may the final level we see, being a slightly different pattern than the S&P 500.
Time will tell, but you can see why we called 2019 the year of the "Right Shoulder" and that appears to have been a great call. - so far at least.
Another chart to watch is Credit as represented by High Yield Bonds. We show here the "JNK" for the higher credit risk Junk bonds.
The year end reversal has been absolutely dramatic. Money has poured back into this higher yield area.
The as yet "unfilled" gaps is something we are watching closely and had troubled us when they weren't filled when the High Yield market appeared to be crashing.
A little more strength would satisfy this chart.
All in all looking across the Intra-Market charts we have a pretty strong case of evidence for a possible "Right Shoulder" correlation.
SLIDE 12 - TIMING - LONGER TERM - FUNDAMENTALS
Let's switch gears to see if we can find further evidence.
In these LONGWave videos we continue to reinforce that markets in the long term are about Fundamentals, in the Intermediate Term about Risk and in the Shorter term about Consumer Confidence and Sentiment.
Lets have a quick look at each.
The US Equity markets are still close to being overvalued by 100% based on an aggregated composite of Arithmetic & Geometric measures. These Include the Crestmont P/E. the Cyclical PE 10, the Q Ratio and the S&P 500 Composite from its Regression
We are clearly at historic "nose bleed" levels.
Analysts are now calling 4% Global EPS growth forecast in 2019, Down from 24% in 2018
The US economic cycle is set to become the longest in history in July 2019; but US, Eurozone & Chinese growth has repeatedly struggled to exceed expectations.
The inability of economic growth to hit "escape velocity" helps explains why global profits have consistently missed expectations, most notably in Europe.
Years of big upside surprises to EPS have typically been the results of one-off policy interventions, for example the 2018 US tax cuts.
Monetary Policy has resulted in the number of "zombie" companies (According to the OECD) and defined as companies with profits (EBIT) less than interest payments - to total 536 in 2018 -- not far off the highs seen during the Global Financial Crisis (at 626).
At 536, the number of zombie companies in the world is 13% of total
SLIDE 15 - TIMING - INTERMEDIATE TERM - RISKS
When we look at Risk we like to look at changes in the Global Credit Default Swaps or CDS's.
What stands out to us is that since June of last year CDS have deteriorated substantially and especially in the EU & UK. Brexit has had an impact along with the steady deterioration in EU Economic growth.
Financial Markets are worried about slowing Global Trade and a looming Recession and where safety can be found.
Remember, in recessions it is not uncommon for many stocks to lose 50% of their market capitalization and the financial markets are acutely aware of this!
SLIDE 16 - TIMING - SHORT TERM - SENTIMENT
Just in case you thought you had seen the last "Head & Shoulders" chart, here is yet another!
We have peaked during this cycle in both Consumer Confidence and the U of Michigan's Consumer Sentiment.
Note at the bottom that the GDP Regression (shown in red) has been steadily deteriorating during this apparent "topping" formation.
If this is a true H&S then this is what we would expect to see.
What particularly worries me is the dramatic collapse in Small Business Optimism. It is shown here in Red and over-layed onto our Consumer Confidence H&S for comparison.
My sense is that even though the markets are continuing to rise there is increasing skepticism. The smart money charts show them leaving as well as more or less a "buyers" strike.
The rally is being driven by forced short covering (shorts are targeted) and Buybacks as both Democrats and Republicans are threatening to change the Tax laws on Buyback.
We may already be past the emotional peak in the market.
We certainly have significant ANXIETY out there from both those missing the rally and those in it.
However, doing anything about that ANXIETY is another matter! COMPLACENCY is at extremes!!
The graph shown here on the upper left is constructed by normalizing VIX (equity volatility), MOVE (bond volatility) and CVIX (US dollar volatility) and then aggregating the results into an equal-weighted index.
The y-axis denotes the percentage of time that the same or lower levels of aggregated volatility occurred since 2010.
The current level is 1.91%, meaning that only 1.91% of readings registered at a lower level. The market is highly COMPLACENT.
SLIDE 21 - DRIVERS - FLOWS & LIQUIDITY
There is now a belief that the Central Banks have investors "backs"!
Notice the correlation between the MSCI World Index and Global Money Supply that occurred in December.
Prior to the central bank's liquidity injections the MSCI World Index was following the Economic Surprise Index lower.
That has abruptly changed!
The markets are being driven by liquidity primarily from China & Japan.
SLIDE 22 - DRIVERS - YIELD
This is what has pushed up high risk credit - we showed this previously with this JNK chart.
SLIDE 23 - DRIVERS - CREDIT
Meanwhile, yield curve as represented between the 10Y and 3 Month T-Bill has inverted. We last saw this prior to the Dotcom Bubble Implosion and the Financial Crisis. Both preceded Recessions.
Everything seems to be indicating the same outlook is ahead.
SLIDE 24 - DRIVERS - INFLATION
As we outlined in a previous video we believe Inflation lies despite the four D's! Deflation ispresently being driven by:
- Excess Debt,
- Bank Deleveraging and
- Tech Disruption,
Though all will continue globally for the foreseeable future what is beginning to occur in the US is an inability to fund government debt. The US dependency of foreign buyers to buy increasing levels of US debt is a major problem. This will push up interest rates in the US which will foster inflation in an economy now built on low finance rates.
This years Thesis paper on De-Dollarization lays out the case for this.
However, this years Thesis paper doesn't discuss additional compounding problems such as:
- An unfunded $84T entitlements problem that is presently being fictitiously held together by holding US Treasury Bills as Assets which will soon have to be sold to pay the entitlements,
- A $210T Fiscal Gap consisting of massive "contingent liabilities" that are likely to have to be paid if the global economy experiences anything close to chronic slowing growth,
- Underfunded and aging National Infrastructure,
.. and more as we outlined in our video on growing Services Inflation within a Services Economy.
Remember, Hyperinflation is first and foremost a Currency event and that is what lies ahead for the US.
SLIDE 25 - PIVOTS & PATTERNS
The Bond Market and S&P 500 have diverged with the "Jaws of Death". This last occurred prior to the 2008 Financial Crisis. It took about 9 months to close before both headed lower. Again, later in 2019.
Rates as shown in the top left graphic have plummeted based on the rate of global economic slowing. The signs are everywhere if we chose to acknowledge them.
SLIDE 27 - OBSERVATIONS
Our broad based SII Watch List are also sending us signals.
Our recent addition of late cycle sectors such as Consumer Staples, Utilities and Healthcare are seeing significant movement after only a brief period of introduction,
We are concerned about Q1 Earnings and most importantly forward corporate earnings guidance. We suspect this quarters Earning may begin the closure of the "Jaws" we just looked at.
There is little doubt that the Federal Reserve will soon attempt to lower rates but it doesn't control the long end of the curve without introducing QE4. Credit is not growing fast enough and therefore presently the Wealth Effect (by the wealthy) to invest further in financial assets. It isn't main street that is investing but rather the wealthy - and this must be maintained if a recession is to be pushed out.
SLIDE 28 - SII -ROTATION.
To put this in perspective, between 1952 and 2009 every time credit expanded by less than 2%, the US went into a recession.
Adjusted for inflation in 2018 total credit increased by 1.9% down from 2.2% in 2017 and 2.7% in 2016.
Taking rates down dramatically is likely not to be enough. especially as price inflation picks up and salary pressures continue to mount.
SLIDE 30 - DATES
The key dates to watch between now and August 1st are the shown here.
We continue to live in interesting times!
SLIDE 31 - THEY'LL PRINT THE MONEY!
I always end with a reminder that they will print the money to solve these and all problems. It is the only answer politicians will ever agree on.
As these two charts show, both China and Japan already have and continue to.
When the BOJ's estimated aggregate ETF balance totals 29 trillion yen (about quarter trillion dollars) you know it is only a matter of time before other central banks follow suit to keep asset prices from falling.
They will print the money to solve any and all problems until such time as no one will take the money or it is of no value.
That day is still in the future so take advantage of the opportunities as they currently exist.
Investing is always easier when you know with relative certainty how the powers to be will react. Your chances of
I would like take a moment as a reminder:
DO NO NOT TRADE FROM ANY OF THESE SLIDES - they are for educational and discussions purposes ONLY.
Thank you for listening and until next month may 2019 be an outstanding investment year for you and your family.
I sincerely thank you for listening!