This past week has been very choppy, unpredictable and taxing to those who watch the tape. The good news is that we tested the 200 day for most of the week and it held with a good close on Thursday to end the first quarter of 2018. Wether we crash from here or re-gain our footing for a bull market in 2018, Q1 of 2018 will be remembered as a turning point. New tax policies, re-negotiated trade deals, a new Fed Chair and rising interest rates have all been ground zero for increased volatility for equity AND bond markets. Keep in mind that the all-time low in volatility has transpired in both equity and debt markets through the Yellen and Bernake eras so there is a big risk adjustment going on among investing professionals and their investment process. Rising credit risk will be the new normal for the bond markets which is a healthy thing as it will impose better financing discipline among corporate America. But the process of change creates uncertainty with a stipend of rising volatility – a transitory period for the professionals.
Remember, we are still working off this correction from earlier in Q1 so we may have ended this volatile period with a test of the February low this week. A few more days and we should know for sure (good or bad). Notice what happened after the last time we hit an oversold condition in February on the Relative Strength Index (RSI) in the chart below. A double test of a low is very common when you analyze charts – I think it holds. The Bears had their chance this week and couldn’t get the job done.
Here is the chart for the S&P 500:
Happy Easter and Passover from the McCarthy clan!
Chart (s) of the Week
Funny, India looks a lot bigger on a globe…
But here we see the most densely populated cities….
Economic & Central Banking Snippets
- Brussels is considering a €50bn raid on European Central Bank profits and a plastics tax to plug a hole in its long-term budget after Brexit. The European Commission’s ruling college is seeking new sources of revenue to maintain its financial firepower once the EU’s second-biggest net budget contributor leaves the bloc in 2019. One of the measures under discussion is a plan to divert profits made by the eurozone’s 19 national central banks from printing banknotes straight into EU coffers. More than 90% of the so-called seigniorage profits are distributed by the ECB to the eurozone’s 19 central banks that often pass a portion on to their national treasuries. (FT)
- The US economy expanded at a faster clip in Q4 of 2017 than predicted as consumer spending increased more than previously estimated. Real GDP increased 2.9% which compares favorably to the first two readings of 2.6% and 2.5% and topped analysts’ forecasts for growth of 2.7%.
- Treasury bill supply over the past five weeks has already exceeded the 2017 total by over two times. The yield curve is now at its flattest in over ten years and has now managed to not invert for the longest period on record. By the way, an inversion typically means the economy is about to weaken (recession). Here is a quick update on how ten year yields are looking – no runaway move to the upside, so far.
- The European Union holds “grave suspicions” about the dominance of Google and has not ruled out breaking it up, according to the bloc’s antitrust chief Margrethe Vestager. The EU slapped Google with a record €2.4B fine last June for giving its own comparison shopping service an illegal advantage in search results, while related investigations into the Play Store and AdSense are ongoing.
- America’s oldest gunmaker has filed for Chapter 11 bankruptcy protection after reporting negative operating cash flow. Like other gun manufacturers, Remington Outdoor saw sharp sales declines following the 2016 presidential election, as customers apparently saw less urgency to stockpile firearms under President Trump.
- General Motors has threatened to file for bankruptcy in South Korea if its labor union does not make concessions by April 20 amid the worsening financial situation at GM Korea. (FT)
- Poland has signed the largest weapons procurement deal in its history, agreeing with the U.S. to buy Raytheon’s Patriot missile defense system for $4.75B. The NATO member has sped up efforts to overhaul its armory following Russia’s annexation of the Crimea peninsula in 2014.
- Facebook is trying to make its privacy settings clearer by creating a central hub where users can examine the data they are sharing, in its latest effort to address a privacy scandal that has wiped billions from its stock market valuation.
- Moody’s added to the recent woes of Tesla investors late on Tuesday, taking the company’s junk-bond credit rating down a notch to B3 and warning it may fall further if the company has trouble raising $2bn or so of fresh capital. Debt investors have not been spared the pain, with the company’s 2025 unsecured notes trading at about 89.7 cents on the dollar.
- In what historically has been a consistently strong quarter, investment grade bonds will end Q1 with notably weak performance. Investment grade YTD excess returns are –84bp which marks the worst Q1 since 2008. The only other meaningful negative excess returns came in 2000 and 2008, right as those cycles were turning.
- Tesla is voluntarily recalling about 123,000 Model S sedans globally after discovering that certain corroding bolts in cold-weather climates could lead to a power-steering failure. The Silicon Valley auto maker said the recall, believed to be the company’s largest ever, applies to Model S sedans built before April 2016. Tesla said the issue is known to have involved less than 0.02% of the potentially affected vehicles in the U.S. Tesla has sold about 280,000 total vehicles through the end of last year.
That is all for now until next week’s Market Update. If someone forwarded you a copy of this report, you can sign-up directly at www.kiscocap.com.
Please reach out to me if there is anything you want to discuss about the markets, your portfolio (for clients) or if you would like a copy of the firm’s brochure if you are not a client.
Paul J. McCarthy, III
President – Kisco Capital