The U.S. dollar remains a very powerful force…
If you had to point your finger to one instrument driving the bus for all the others, then the U.S. dollar has to be it. Its strength comes from the weakness of other economies and markets, and the fact that the U.S. is the next major central bank to start raising rates. With no strong headwind in sight, the strengthening dollar should continue to benefit U.S. equities while pressuring the commodity complexes. Finding unhedged international investments will remain difficult, but the good news is that you will be able to fund your cheaper foreign vacations with the returns of capital from your soon-to-be-closing commodity hedge funds. So keep the U.S. dollar on your watchlist to help you with other parts of your portfolio… and get out those travel websites and guides you’ve been saving for that next big trip.
N:UUP:
A strong U.S. dollar = strong U.S. stocks (via S&P 500).
If you are digging for more U.S. stocks, you are correct that all of the returns in 2015 have been in the largest names.
With November nearly done and Q4 and 2015 drawing to a close, let’s look at the major influences:
- A continued strong U.S.$ leads to…
- Further Commodity pain which…
- Hurts Emerging Markets and resource-based economies
- Credit spreads continue to widen as Energy, Mining, EM credits get pummeled
- Bets on a future Fed hike help banks, hurt bonds
- Small Caps start to outperform in November (just reversion or getting strong U.S.$ help?)
(prices ended 11/27/15)
Here is that Small Cap chart (Russell 2000) breaking out on an absolute and relative basis:
But Junk Bonds (SPDR Barclays High Yield Bond (N:JNK)) remain challenged:
And your ugly chart of the week: Gold (via N:GLD) breaks to new lows…
Speaking of commodities, this quote will also require energy lenders to count more sheep:
“I lose sleep over what could unfold” – Thomas Watters, managing director of S&P’s oil and gas ratings
The strong dollar and weak commodities are helping to take iShares MSCI Emerging Markets (N:EEM) to a very oversold position:
If you are digging through the EM dumpster and looking at Brazil, then you must read this interview with Luis Stuhlberger…
“Brazil is going to get much worse before it gets better”… At home, Mr. Stuhlberger sees problems deeper than a political crisis and low prices for commodity exports. “The country isn’t financially viable,” he said. “The government has tried to build a European social democracy in the third world. The numbers don’t add up.” Despite high taxes — at 36 percent of the country’s gross domestic product, Brazil’s tax burden is about the same as Germany’s — the country is running a gaping budget deficit, in part because Brazilians retire with a government pension at an average age of 54. “There will have to be a major crisis before the population accepts cuts in social spending,” Mr. Stuhlberger said.
And though outrage at the way some of that spending is diverted has led to a groundbreaking investigation into corruption, Mr. Stuhlberger said the corruption was so endemic he feared that no new, clean political institutions existed to replace the old ones. While he waits for the crisis to deepen, his Brazilian allocation is mostly in local inflation-protected bonds. He also holds currency derivatives that will profit if the real falls further, and has a small position long on Petrobras bonds and short on the stock.
If you are a U.S.-focused investor then Morgan Stanley (N:MS) has some difficult news for you…
“The flatness of the [expected efficient] frontier means that the optimal portfolio will lie near the left-hand extreme of the red line for a variety of investor utility functions,” explained Sheets, which in effect, equals greater exposure to credit. “Relative to prior later-cycle periods, growth looks weaker, central bank policy looks looser, and credit risk premiums are more elevated.”
I can’t even recall the last time that I was in a bank branch.
Millennials are increasingly turning to digital banking channels to perform their banking activities, and they’re visiting their banks’ branches less often than ever before. The behaviors and preferences of this generation — which makes up the largest share of both the US population and the employed population, at 26% and 34%, respectively — will shape the future of the bank, as well as the relationship between the bank and the customer. As third parties increasingly provide the services that consumers are using to manage their finances, the valuable relationship between banks and their customers will continue to deteriorate.
Who didn’t think that Colorado and Washington residential prices were going to accelerate?
As of last week, there were 517 Medical and 394 Recreational Marijuana Stores in Colorado. This compares to 322 Starbucks (O:SBUX) locations.
(@conorsen)
Hopefully the Norwegian Pension Fund bought in Colorado last year…
One by one, the giant investment funds are quietly switching out of government bonds, the most overpriced assets on the planet.
Nobody wants to be caught flat-footed if the latest surge in the global money supply finally catches fire and ignites reflation, closing the chapter on our strange Lost Decade of secular stagnation.
The Norwegian Pension Fund, the world’s top sovereign wealth fund, is rotating a chunk of its $860bn of assets into property in London, Paris, Berlin, Milan, New York, San Francisco and now Tokyo and East Asia. “Every real estate investment deal we do is funded by sales of government bonds,” says Yngve Slyngstad, the chief executive.
It already owns part of the Quadrant 3 building on Regent Street, and bought the Pollen Estate – along with Saville Row – from the Church Commissioners last year. But this is just a nibble. The fund is eyeing a 15pc weighting in property, an inflation-hedge if ever there was one.
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