Last week we saw the technology laden NASDAQ market drop over 10% from its prior week high, hitting 6906 down from a high of 7728 a week earlier. We have spoken at length over the last few letters how insiders and institutions have been selling out of technology positions but retail seems to be picking up what they are putting down. This kind of action where the weak hands are buying from the strong hands is a notorious set up for a market set back and last week did not disappoint.
This last week was full of reports of wide spread over valuations across the gamut of both global equity markets as well as global bond markets, especially Europe. Now we aren’t talking about some bobble headed main stream media types, we are talking about titans, the likes of Ray Dalio, Stan Drunkenmiller, Jeff Gundlach all relaying the same theme, “well above historical norms.” We even read a great piece on the PEG ratio from Fasanara Capital, which stated that the PEG, which is a statistical measure of how expensive a stock is relative to its ability to generate earnings, is well above 1999 highs and probably rightfully so given the plethora of cheap financing from zero rates, unprecedented HY rates and of course continued tax breaks. All that said, the pressure from the rhetoric from the guys we just mentioned should begin to mount, as they most certainly have an agenda attached to such warnings.
The FOMC decided to raise rates another 25bp to a high mark range of 2.25%. We applaud the continued move; however, we feel that we could be doing more and doing it faster. Holding interest rates or real rates still negative, some 10 years after the 2008 crisis is deeply concerning. All too often people focus on the Fed Funds rate, but the real rate, the FF less inflation, is still negative. Rates are still very accommodative...although the FED left that word out of the statement today. Watching Powell is like watching your Accounting professor discuss reconciling the balance sheet on a late spring afternoon. He and the FED continue to use words like transitory, gradual and appropriate, a decade into a recovery and we are still using these words. The dot plots are all calling for continued hikes peaking around 3.25/3.65%. We view this as highly opportunistic and we do not think the global economy nor the domestic economy will be able to absorb such a short rate given the sheer size of global debt growth. For those that haven’t seen, we often use our own “dot plot” picture:
We are going to keep this week’s letter short and to the point. We are sick and tired of the political charade that is ongoing in DC with the tariffs and the SC vote. For us general Americans deserve better and we will just leave it at that. As for the markets, US Treasury yields have risen above the 3% threshold and in no doubt in further anticipation of next week’s FOMC 25bp hike. We aren't a big fan of the FEDs slow drip process, we would rather they just hike the FED FUNDs above the 10yr rate and be done with it. With the ECB and BOJ firmly entrenched in continuing QE operations, the world will certainly absorb a relatively hawkish FED. Further evidence is mounting that the FED itself has become somewhat impotent and that these 25bp hikes amount to nothing more than buying time till the next crisis. Where they will most certainly peg long rates below 2.5%. Anyway, the global corporations have done their own fair share of monetary printing.
First of all, we would like to take a minute to remember all those that lost their lives some 17 years ago today. We will remember that day for quite some time, in fact it was on this day, a sunny crisp Tuesday morning that our phone lines went down to our trading partners inside One World Trade Center at Cantor Fitzgerald. We knew right there and then that something was up and we watched it unfold right before our eyes. Being on the floor of the CBOT, we evacuated and left the city for fear that we might be targeted next. We will never forget those and their families that were so tragically affected that fateful day and we will acknowledge their memorial this time every year for as long as we can.