With Joe in South Carolina playing God’s game, I am reminded of the picturesque backdrop behind the 18th green of Harbour Town Golf Links. There stands a gleaming red and white light house, a historic structure designed to guide maritime travelers.
For the past year, investors brave enough to venture for open water have been rewarded, the S&P is up over 20%. But many investors, with a preference for sunny days and a steady tail wind, have shelved their investing itinerary, altered their horizon or even abandoned ship. In these times it is extremely important to have an intelligent plan. Don’t give up the entire expected market return in any given year. And, don’t think your ship is so strong that it will surely pass with ease through an iceberg laden Arctic.
As the fog of monetary policy obscures price discovery in an ocean swarming with high frequency pirates, one must rely on experience, common sense and perhaps less sophisticated, yet, reliable markers to safely navigate the open seas. This week the stock market dropped 2.2%. This is by no means an SOS, but there are reasons to be on alert.
The economic data was light and mixed yet again. PPI came in at 1.1%. This was higher than expected, but lower than last months 1.7% reading. Breaking it down, the underlying core index was unchanged and energy prices were up 4.6%. This continues to be as expected and not positive for equities. The Fed’s Beige Book outlined an economy growing modestly in 10 of 12 districts, mixed manufacturing, slight increases in residential real estate and consumer spending and flat job growth. Rising input costs with no commensurate rise elsewhere hurt margins. The trade deficit widened to $44.2 bln. Notably, both imports and exports dropped, reflective of continued global weakness. Looking forward to next week we will get numbers for industrial production, construction and home sales.
Across the pond, Europe continues to hash out the bankruptcy of nations in the political arena. Central banks extend more credit, but alas, this just goes toward credit enhancement strategies and eventual write-offs. The continued de-levering of the financial sector keeps the Euro surprisingly strong as much of these debt obligations are in the form of Euro denominated loans to each other. Europe will continue this process. I can foresee a potential debt for equity swap, but this won’t happen until growth and confidence is restored. Europe continues to be the poster child for what not to do; but, there will be an end to this and Europe will eventually offer great value.
The plot has thickened over the past 2 weeks in our political soap opera. The republican candidate performed quite well in a face to face presidential debate, breathing life into his campaign. A wounded donkey camp sent its combative vice president to battle a young, rising Ryan. Biden didn’t meaningfully derail the republican ticket and I suspect that much of the country wasn’t listening anyway. A polarized America may have already made up their minds. Google searches indicated Americans were most interested in the meaning of the oft used Bidenism “Malarkey,” and the age of Mr. Ryan. In a world where austerity is currently out of favor, perhaps an invigorated republican candidate is a negative for Mr. Market.
Monitoring the middle east, there are events worth noting. Last weekend Iran sent a drone over Israel to take photos of Israeli military bases. Israel briefly engaged in a cyber battle to control the craft before eventually blowing it up. There is an ongoing cyber war currently being waged in the area. Cyber attacks on regional US and allied financial and oil interests as well as the Israeli military have increased. Netanyahu called for early elections, citing a budgetary stand-off during a time of heightened national security as the primary reason. This has been an on going strategy of sanctions and military deterrents and not widely covered in the US press. Last month the US conducted a naval operation in the area, inviting 25 other countries to participate. The Persian Gulf looked like a military board game for 12 days. Iran offered a deal this week to cease military uranium enrichment in exchange for reduced sanctions. This was promptly rejected because supervisory conditions were noticeably absent. Unfortunately, status quo in the region is never comfortable. I call attention to it today as some increased news reminds us of the risks.
But it is this candlestick chart which is signalling caution. It’s an old lighthouse, the one we glimpse daily. Technically, the S&P put in a double top at the end of last week and it finished this week right on an important support line. Leading the weakness are the technology, industrial, material and energy sectors.
In today’s environment one must remain vigilant. One favors a ball in the sand over a shot out of bounds. If your light house marks a hidden shoal, steer for calmer water. Know that some light houses are old relics, they previously marked a safe harbor but, today, may be marking an obscured bond pitfall.
Joe, don’t be greedy and go for the pin. Aim slightly into the prevailing wind, in the general direction of that red and white landmark. Your ball should land safely in the middle of the 18th green. With a bit of luck, a one putt will win you a skin. But a tap in par will be extremely satisfying and may be the best hole you play all year.
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For information on Alhambra Investment Partners’ money management services and global portfolio approach to capital preservation, Douglas R. Terry, CFA is reachable at: firstname.lastname@example.org