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    2 Reasons Why the Odds are Stacked Against the Fed

    We continue to hew to our favorite scenario of a market downturn in the intermediate future …

    In 2 Painstaking Reasons the Market can expect a Midlife Crisis we show how total business sales have been dipping lower while total inventory build is stagnant or moving higher.

    That’s a recipe for a recession!

    Think about how apparel stores cope with a similar situation.

    They DRAMATICALLY discount prices to move stock.

    On the capital market shelf, as it were, where can we find an over-abundance of inventory?

    The corporate and junk bond markets come to mind as crowded trades given recent levels of issuance:

     

    Corporations have used this debt to:

    1. Buy back stock
    2. Make acquisitions
    3. Fund operations.

    But wait!

    9 out of 10 S&P sectors have lower consensus estimates today than January 1st.

    The S&P 500 estimated earnings for Q1/16 have been slashed from $29 down to $26 during Q1/16. GDP estimates have been slashed too.

    A recession would accelerate the pressure on corporate profits and leave many companies financially strapped which would surely impact corporate credit.

                               

    Revisiting our forecast for Higher Rates in 2H16.

     

    While credit risk is becoming problematic, interest rate risk is still one of our major concerns. In our 2016 Market Forecast we said:

    “Growth in the US. continues to accelerate albeit at sluggish levels by historical standards. As we approach full employment, wages begin to increase stoking (highly suppressed) inflation fears and driving long-term rates higher. “

    So far we remain alone in our prediction. While employment and wage growth remain sluggish, core CPI numbers continue to come in above expectations stoking suppressed inflation fears.

    We consider the nascent trend of TIPs outperforming Treasuries (red below) as one to watch.

    Someone out there is buying inflation protection!

    The correlation between inflation expectations (TIPS v Treasuries) seems to visually correlate with higher commodity prices (blue line).

    So what’s driving commodities higher from depressed values?

    1. Bearish psychology has become so overwhelming that there is nobody left to sell;
    2. Bargain hunting;
    3. Out of control money printing (China) and negative interest rates (Japan and Europe) driving money into hard assets as a store of value;
    4. Geopolitical tensions causing a renewed arms race – is the market discounting a war mongering President circa. November 2016?

    We’re not sure but considering the facts we feel there are ample arguments to be made that support a continuation in higher commodity prices … and thus higher inflation expectations!

    There seems to be a lot of risk out there, both in credit and rates, which is perhaps why the leading equity averages have gone NOWHERE in over 17 months!

    The Fed is seemingly in a Catch-22;

    • higher rates impact the corporate bond market negatively;
    • but standing still as inflation expectations ratchet higher is not a plausible course of action either.

     

    Stay Safe!
    GREG

    ---

    Thank you for reading my post. I regularly write about private market opportunities and trends. If you would like to read my regular posts feel free to also connect on LinkedIn, Twitter or via Atlanta Capital Group.

    Greg Silberman is the Chief Investment Officer of Atlanta Capital Group. Atlanta Capital Group specializes in creating custom private market solutions for RIA/Family Office clients and is an active acquirer of independent wealth management practices.

    Advisory Services offered through Atlanta Capital Group.

    Securities offered through Triad Advisors, Member FINRA / SIPC.

    Atlanta Capital Group is not affiliated with Triad Advisors

    Nothing in this article should be interpreted as a recommendation to buy any security. Please conduct your own due diligence.  

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    2 Painstaking Reasons the Market can expect a Midlife Crisis

    In our last market note (How to Unleash a Dragon) we commented that a rally in March was expected given the degree of selling in January and part of February.

    The magnitude and breadth of the rebound has surprised us but short covering rallies are normally quite breathtaking.

    Our suspicions of a short-covering rally were confirmed in a note from JP Morgan’s Prime Brokerage unit which read:

    “JPM’s prime brokerage team saw heavy short covering across all sectors adding additional upward pressure, “particularly with respect to single names that had been oversold earlier in the year.” JPM’s report goes on to note that, “March brought the heaviest net covering seen by the Prime Brokerage in several years.”

    GS comment: JP Morgan is one of the largest hedge fund prime brokers in the world. Given the recent fallout in hedge fund darlings such as Valeant and Sun Edison we are led to believe that hedge funds have received large redemption requests and to fund them they have had to trim their longs and buyback their shorts.

    We are reminded of the famous Ben Graham quote:

    “In the short run, the market is a voting machine but in the long run, it is a weighing machine.”

    In fact market dislocations are seldom fundamentally driven but more often technical or liquidity orientated. Typically investors realize that their greed has led them into an overvalued crowded trade and as they rush to the exits, fundamental valuations temporarily give way to emotions such as fear.

    Now that the rebound is advanced we are left with the question of whether the weighing machine is in balance or out of kilter.

    Total Business Sales indicates out of kilter.

    Having peaked in August 2014 total business sales has been on the decline and recently moved to new lows. The trend here is lower until further information comes to light.

     Total Business Inventories have continued to build while sales have slowed. If we squint at the data we could postulate inventories have levelled out since about July 2015.

     Essentially high business inventories and low sales is a potential signal of a recession – hardly the stuff stock market bulls are made of.

    So we are left with 2 conclusions.

    A)     The short covering rally will be over soon and the weighing machine will reassert itself on the downside;

     B)      Global stimulus aka. money printing is floating asset prices higher despite poor fundamentals. As my friend Garic Moran of TG Moran Capital reminded me Germany’s stock market did great under similar conditions during the 1920s hyperinflation!

     The beauty is that the market will have to reveal its hand soon because this rebound is stretched in both time and magnitude.

     Best
    Greg

     ---Thank you for reading my post. I regularly write about private market opportunities and trends. If you would like to read my regular posts feel free to also connect on LinkedIn, Twitter or via Atlanta Capital Group.

    Greg Silberman is the Chief Investment Officer of Atlanta Capital Group. Atlanta Capital Group specializes in creating custom private market solutions for RIA/Family Office clients and is an active acquirer of independent wealth management practices.

    Advisory Services offered through Atlanta Capital Group.

    Securities offered through Triad Advisors, Member FINRA / SIPC.

    Atlanta Capital Group is not affiliated with Triad Advisors

    Nothing in this article should be interpreted as a recommendation to buy any security. Please conduct your own due diligence.  

    Main pic: Great Ocean Road, Wye River, Australia by Jamie Mink

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