November 8, 2017
We finally got official news this week that the new FED chief will be Jerome Powell. He will be the first non-economic PHD in over 40 years. We applaud this pick as we know the quagmire the central banks find themselves in will require non-linear thinking, then again, that's being optimistic! Although it is quite a refreshing change of pace to have a non-academic, someone with some real-world experience, to enter the central bank foray. Another thing we like about Powell was his prior comments on the GSE's (government-sponsored enterprises), our readers know full well Fannie and Freddie are a gigantic cash cow for the government, but we also know eventually things will turn and its always best to get rid of a good thing before the going gets bad. So, with that said, we wouldn't be surprised if next year's ruling on the GSE's leans a bit more to rebooting the entities back into the private sector and out of conservatorship. We did kind of smirk when we saw the range estimates to his net worth however, $20-$60 million, hah we opt for the later considering the recent release of the "paradise papers" which shed's light as to the shadow tax haven, so many of these wealthy elites employ.
We also read a great piece from Jim Reid, credit analyst for DB, who titled his work "Is This the Beginning of The End of Fiat Money?" Obviously, we would agree with him as our readers are aware of our opinion on Blockchain & Bitcoin, which by the way, just a heads up, we will be releasing a separate note shortly on those subjects. Anyway, he notes how the current fiat system is inherently unstable and prone to bouts of inflation and how labor conditions may be reversing, and leverage may be turning back in the workers favor. He then went on stating this "Although the current speculative interest in Cryptocurrencies is more to do with blockchain technology than a loss of faith in paper money, at some point there will likely be some median of exchange that becomes more universal and a competitor of paper money." Well Jim, we couldn't agree more! A link to this report can be found HERE
In other news, we read a piece from an interview with Paul McCulley, former chief economist at PIMCO. The one thing he said that stood out to us was this, when asked, Shouldn’t the FED care about widening income and wealth inequality?
He said, "Of course the Fed should care. The more skewed national income is toward the rich, the more difficult it is to maintain a robust aggregate demand growth. Rich people spend a lot, absolutely, but they have a lower marginal propensity to spend than less-affluent citizens. Put differently, give a rich man another dollar, and he’ll spend very little of it. Give a man living paycheck to paycheck another dollar, and he’ll spend all of it.
We couldn't agree more and it’s the growing dilemma the global central banks must face, it’s the good old, how many yachts can you water ski behind, when is enough, enough? Apparently, it's never enough.
Oh, yea the BOE raised rates by 25bp to 0.5%. Hardly anyone noticed and rightfully so, this is just a take back of a rate cut they did just a few years back. We all know QE is still in full effect, just don't tell that to the all the US curve sellers, they don't buy it.
Speaking of US Treasury curve Sellers, here's a look at the 2s10, 60 basis points is lurking:
This week also saw the monthly non-farm payrolls report which used to be the number all traders looked forward to, not so much anymore. Anyway, 261k jobs added, but nearly 1 million people left the workforce, putting a record 95.4 million people no longer considered in the labor force. This metric is not something that says growth is exploding and jobs are plentiful, that we are certain.
Let's look at a few of the notable earnings reports from this week. First up Tesla, which reported a non-GAAP loss of $2.92 exp $2.27. They were expected to deliver 1500 Model 3s, but mustered only 260. Tesla continues to burn cash to the tune of $16 million a day as their free cash flow continues to plummet. Both Tesla's equity and bonds were hit on the news, which isn't shocking considering the market cap hit $62B at its highs. Just to put that number in perspective, it was higher than BMW, who sold nearly 2.5 million vehicles to Tesla's 80,000! Priced for perfection no doubt, so we would suspect some investors to be a bit leery after these numbers. Too add to their misery, congress is contemplating pulling the EV $7500 subsidy, margin compression anyone?
Here the Tesla chart:
On a higher note, Facebook beat and posted a $1.59 exp. $1.28, with active and daily users higher than expected. Shares didn't race higher as the big Z stressed continued spending upon security measures at the firm will impact future profitability.
Apple beat on both EPS and REV posting $2.07 exp $1.87 and $52.6B exp $50.7B. Sales of the Iphone and Ipads both above estimates as well. It’s net income grew 18.9% yoy as Iphone sales declined, displaying inelasticity, however perhaps the Iphone may be butting up against a price ceiling at the $1k mark. Time will tell, but for now Mr. Cook is pleasantly optimistic. Then again, who wouldn't be, if they were sitting on $269B in cash. The only thought in our minds is, when do they put a bid on Tesla? The stock hit fresh highs trading over $170 with a market cap of nearly $900 BILLION!
All this tech euphoria helped the Nasdaq market push higher once again:
On another more civil note, we would like to congratulate CME Group Chairman Emeritus Leo Melamed who was awarded the "Order of the Rising Sun, Gold and Silver star by the Government of Japan. This is a great honor and he certainly deserves it as he played an integral part in spreading financial futures all around the globe.
Speaking of Japan, the Nikkei has been on fire, check it out, who says there's no inflation? Show them this chart:
Over the weekend word was out that Saudi Crown Prince Salman was on a hunt for those conspiring in corruption, in a style straight of the Game of Thrones playbook the young Prince arrested nearly a dozen other princes and 3x more senior officials. Prince Alwaleed bin Talal, the flamboyant jet setter, with ties to the Clinton Foundation, Citigroup and Twitter was one of the notables detained. Plenty of speculation is going on, what does the kingdom need money? Did Talal not give up his Bitcoin crypto key? Is something larger at stake? We can only assume Middle East tensions just went to the nth degree. Toss Lebanon and Iran in this mix and you get the picture. Is this going to be my enemy’s enemy is my friend kind of thing with Israel? We shall see. Hell, we were wondering what was driving the price of oil the last few week, well now we have our answer. See its kind of crazy, people say fundamentals drive prices, hogwash, prices tell us what the true fundamentals are, or what they eventually are going to be…Then again, was this detainment for protection for those detained? We can only wonder and watch as this chapter unfolds.
Here is a chart of Crude:
We can only think that the US 10yr Treasury has been supported by these new tensions as well as yields continue to move lower in the sector:
All these new-found tensions created another spike in our favorite Cryptocurrency and blockchain prodigy Bitcoin. Bitcoin spiked this week to $7500. We know our readers are well engaged by now and aware of how we feel about the space. As to pertaining to getting tired of reporting new highs, NEVER. We know the value of the space and we know many, or shall we say nearly everyone is senile as to its future potential. Everyone but a select few and our readership of course! If anyone asks why would you be dumb enough to invest or buy into this mania, simply say, if it’s a bubble, if it's worthless, then tell me what you think the internet should be valued at. If they can't answer that, then they shouldn't be opining as to the value of Bitcoin. Be on the lookout for our analysis on Bitcoin and Blockchain, it should be quite informative and give you just enough info to want to research more on your own.
Finally, congrats to the Houston Astros on their commanding performance in game 7 of the World Series. In our opinion we have been spoiled by superb displays of competition in back to back World Series. Last year's and this year were an impressive display of the never quit determination that can only come from win or go home games. We read an interesting article in the WSJ about how Houston used a highly analytical approach to building their team. The focus of the article also touched upon how they manufactured a winning chemistry through culture.
How much of being successful in team sports relies upon this type of positive culture generated from a front office on down to their players?
We believe a lot has to do with it, we saw it with the Chicago Cubs last year and the type of atmosphere, the Ricketts laid out down to John Madden and onto the players on the field. The same can be said for Jeff Luhnow and the Houston Astros. You saw it displayed in the way they played, the way they rallied behind each other, their never lose attitude. It is within this cohesive culture that professional sports must align themselves if they want to transcend winning from the clubhouse onto the field.
You know in biz school we studied Herb Kelleher the gritty founder of Southwest Airlines and we found much of their success came down from the type of culture Mr. Kelleher installed from the onset. What type of person is Herb? Well this article from Fortune is great and you should read it HERE, but the article starts out with this, "Herb Kelleher and “éminence grise” shouldn’t really go together. But the Wild Turkey 101-drinking, chain-smoking founder and chairman emeritus of Southwest Airlines, is now 82 and knows more about the airline industry than practically anyone else on the planet. That should lay the groundwork for you as to the type of man he is. Anyhow, Southwest just posted record annual profits and their 44th consecutive year of profitability. All this in an industry which ranks nearly dead last in profitability! Also, congrats to Shalane Flanagan, the first American woman in over 30 years to win the NY city marathon, can't remember the last time we watched someone run on TV, but we enjoyed the last mile. Ok that's it, we leave you with the weekly settles as usual. Thank you for reading and be on the lookout for our Blockchain informational letter, cheers!
Finally, we will decidedly end our notes with our reaffirmation of the growing need for alternative strategies. We would like to think that our alternative view on markets is consistent with our preference for alternative risk and alpha driven strategies. Alternatives offer the investor a unique opportunity at non correlated returns and overall risk diversification. We believe combining traditional strategies with an alternative solution gives an investor a well-rounded approach to managing their long term portfolio. With the growing concentration of risk involved in passive index funds, with newly created artificial intelligence led investing and overall market illiquidity in times of market stress, alternatives can offset some of these risks.
It is our goal to keep you abreast of all the growing market risks as well as keep you aligned with potential alternative strategies to combat such risks. We hope you stay the course with us, ask more questions and become accustomed to looking at the markets from the same scope we do. Feel free to point out any inconsistencies, any questions that relate to the topics we talk about or even suggest certain markets that you may want more color upon.
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Capital Trading Group, LLLP ("CTG") is an investment firm that believes safety and trust are the two most sought after attributes among investors and money managers alike. For over 30 years we have built our business and reputation in efforts to mitigate risk through diversification. We forge long-term relationships with both investors and money managers otherwise known as Commodity Trading Advisors (CTAs).
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