Seminal leaders in finance thoughts for 2016

OK, so not quite a seminal leader thoughts, but my own musings on the year gone by and the year to come, the very fact you clicked on the link however will further prove my theory on Trump ’16, keep reading to find out, prize at the end of the blog post for you.

It is around this time of year that most of us like to take stock of the year we have just experienced and more importantly we like to pontificate about what the coming year has in store for us. Many in my industry engage in what is often a useless art form of prediction of what is to come and how the landscape might look for investors or the world in general.

First off let’s have a quick look at the major themes in the financial arena this year. 2015 looked a lot like previous years gone by where investors were primarily concerned with a few major topics. These topics have been beaten to death by commentators and the media alike so I won’t go into depth on them but safe to say the main themes were the following:

  • The FED and if/when the committee were going to raise rates
  • The ECB and if/ how much QE they were going to deliver
  • Greece, the never ending saga – came to the forefront once more
  • Geo-political tensions – Russia aggravated, Syria intensified and ISIS became a household name
  • Energy and commodities in general were one way traffic
  • China swooned and everyone temporarily lost their bloody mind

While these were the major themes of 2015, I would struggle to say that we resolved any of these major issues. Greece was again given a lifeline but for how long that lasts is anyone guess, the ECB delivered on QE but now investors are going into 2016 with nothing but MORE on their mind. Energy is still in the toilet and leaving central bankers wondering who they got to “sleep with for a little inflation round here.” Metals are also at multi year lows as China fresh from a rout in its stock market are apparently taking a breather from single handled support of the global construction market.

One thing you could say is “resolved” is that finally the FED have raised rates for the first time in nine years. You can argue until you are blue in the face about whether this is a good or bad idea but can we just all agree to disagree and at least accept the notion that it has finally been done. After 7 years of ZIRP and easy money policy the cost of capital has risen by 25bps, when you say it like that it doesn’t sound so bad does it? How the FED intends to proceed is now the argument for 2016 and I just cannot wait to be saturated with all that content.

What might be the big macro themes of 2016?

  • Path of US rates will be talked about ad nauseum
  • How will other major central bankers respond to the new FED policy, mainly the BOE and RBA, RBNZ?
  • US presidential elections-
  • Volatile energy prices – weakness with intermittent bids coming through in WTI/Brent
  • EM markets and how they will cope with a stronger dollar and low commodity prices
  • How will major super powers combine to deal with ISIS if at all?
  • Will we see any inflation in the Euro area
  • Regime changes- US presidential (circus/cycle), monetary policy- creates uncertainty.

 

What might equities look like?

Currently as I write this a little shiver is going through the equity markets. The ECB failed to enlarge their QE programme, the BOJ did not enlarge either and the FED stopped theirs a year ago and have just raised rates. Some people are literally losing their mind calling for Armageddon etc. Let’s all stop and take a breather. Yes, it’s fair to say that equity markets are due a pull back. Most equity people are somewhere between two camps of thought on QE.  You either believe that QE was mildly supportive in getting us out of the financial crisis and at some point over the last few years actual fundamentals took over and drove equities to all-time highs or you are full on zerohedge type reader and accuse the central bank of the largest Ponzi scheme perpetuated on the American people that makes Madoff look like a boy scout.

Im going to sit on the fence and say that QE was supportive of equity prices and drove required rates of return lower therefore making equities look more attractive to the average investor who had to turn in monthly results in order to get paid. At some point fundamentals did take over and some companies prospered and some didn’t. But either way if you accept that stimulus affected the rally then it stands to reason that once removed there are some withdrawal effects that any addict must suffer through before they are free to prosper.

So in short I would assume that throughout 2016, European and Japanese equities will outperform US equites, for the wrong reasons. EU equities are still supported by an accommodative monetary policy and a cheap currency, what they lack is a solid banking system so it will take time to recover fully, but the headline risk of being short Europe is too much to handle mentally for investors who are so used to large sharp rallies occurring in equities under an easy monetary policy regime.

What I did like recently was Kuroda attempt to throw a twist into his QQE (quantitative and qualitative) programme by saying that he will invest roughly $3bln into companies who invest in human capital. This is important, it is a signalling mechanism to say that the BOJ is behind companies who not only hire more but invest in their people to incentivise them to work more or more importantly innovate more. Once this message filters down appropriately to the top/middle management in Japanese companies who are probably invested in the company they are going to push for more hiring, better wages and hopefully empowering their employees to be more innovative.

I think this is important as what we saw in the US was share price appreciation from a lot of financial engineering like buybacks, instead of this wouldn’t it be better for companies to have issued cheap debt and invested in their actual company?? Anyway it remains to be seen how it works but I think in theory, I like it, and I commend Kuroda for trying new tactics and learning from the US QE programme. On the subject of recent disappointment that he did not enlarge the QQE programme I think again he should be commended, what is the point when energy prices are in the toilet, it would be like flogging a dead horse, I think better to wait for an uptick in inflation and then squeeze it- hard, so glad he saved his bullets (or arrows).

US equities are going to trade like a baby foal learning to walk. But that is because technically it is learning to walk again on its own with no stabilisers, there will be a few bumps along the way, maybe even some dramatic falls, I think those that are waiting to help it back up after one of these falls will do just fine.

If you are a stock picker I think 2016 will be your year as fundamental stock picking will be back in style in the US. Momentum investing will have to be more granular and I think that applying a big picture macro view of just being “long or short “stocks in general will not pay off as it may have in the last few years.

The US will start 2016 with two major regime changes in the mix, one is monetary policy. While I feel that a fed rate of only 50bps is still extremely accommodative it is a change of policy from previous few years (nearly decade) investors will have to come to terms with this and be comfortable that this is not the start of an aggressive tightening policy. Also the US presidential elections creates uncertainty. While I refuse to engage in that process as it is a total circus I do have some words of advice on a certain Donald trump.

If you are relatively sane individual you will view Trumps momentum as farcical, embarrassing, shameless and many other words that are not fit to print here. The problem is Trump is the perfect person to run in a US presidential race. He can fund himself, he understands how to wind people up, to get attention and he has no problem uttering factual inaccuracies. But perhaps most of all his modus operandi fits in very well with the current set up of the media. US elections are a media frenzy, the current distribution platforms used by media is to compete for clicks. Donald Trump spews “clickbait” from his mouth at every opportunity.

The only way to stop Trump is to take away his power- the media- stop clicking. Trump feeds off the theory that there is no such thing as bad PR, the current landscape and architecture of the media’s distribution machine is literally single handledly supporting Trumps bid- Clicks mean revenue for the media- when we stop clicking on Trump related content – he will go away. If we continue to click, he will continue to gain momentum and sadly while most people can’t fathom him in the White house just remind yourself that “Wubya” was voted in TWICE.

Two sectors that will be in the news almost every day I think will be the most obvious ones as they are already there now. Energy will be a huge suckfest for most of 2016, price wars are not fun and even less fun when you are a small competitor going up against a deep-pocketed monstrosity of an army. I’m not just talking about Saudi Arabia here, Im also talking about the large Oil players, the likes of BP, Exxon etc etc. these guys have every incentive in the world to assist Saudi in driving out the small oil shale players and picking up the pieces when the blood is literally scattered all over the floor.

We are not there yet – I think we are one or three quarters away from seeing some decent casualties and my thoughts will not be on the spot oil price but I would rather see downward movement further out the curve to really put pressure on the small players. The inability to hedge 1-2 yrs out will seriously affect the cash flows of these companies, coupled with repayments due on A LOT OF BONDS and you see why all the big cash rich oil companies have to do is sit and wait and pick up these companies for pennies in the dollar. Big oil companies do not like to invest in their own infrastructure, and even less likely to do so when oil is trading sub $50, therefore it seems much easier to grow through acquisition and when better to make those acquisitions than when the industry is in disarray and you are sitting on a pile of cash. (See what Warren Buffet did with both BAML and GS back during the financial crisis)

We are already seeing in the resources sector capital raising (Glencore) and dividend cutting AAL & potentially BHP. This is for two reasons either A: Shore up a balance sheet, or B: to make acquisitions. I will be happy to call a low in the SXEP or energy sector in general when I see an audacious play by one of the big oil names, if even one of them cuts their dividend to finance an acquisition then it will be the beginning of the end so to speak.

The other sector will be biotech. Biotech has probably been the major benefactor of the easy money policy over last few years and dare I say certainly looked like a sector in bubble territory. This has been the classic momentum trade over the last few years and like anything that has attracted large amounts of investment dollars so too has it attracted large amounts of scoundrels and “innovative” ways of making money.

We have already encountered two high profile cases, one large scale scandal with Valent and some questionable business practises (which remain to be fully investigated etc ) and another smaller one in a certain Martin Shrkeli, who has recently been accused of some dodgy practises also. In my humble opinion this is down to one thing and one thing only, a sector that has attracted so much $$$ is now seeing mission creep. Biotech is a sector that is supposed to advance society’s needs and make people a ton of money in the process. It does not need to have companies run by hedge fund managers. I think you will see a lot more dirty linen been aired and scrutiny on the sector from political, legal and regulatory officials which will knock the wind from investors sails for the time being until things have been cleaned up a bit.

Technology I think will continue to steam roll, not sure you will see the lofty valuations for IPO’s or VC funded deals as we have over the last two years. FB has dominated the social media space to the point that a credible competitor in TWTR is really struggling to innovate and come up with something meaningful to distinguish itself. FB holds the power in this space, what was once a very dynamic and ever changing niche is starting to look like all things Facebook at the moment- see the most recent mobile app for LNKD and you will see what I mean- almost an exact replica.

NFLX is in a great spot I think and as long as can still fund and create organic content like house of cards, OITNB etc etc then will remain like a gym subscription for most people, either you use it every day and get way more than your money’s worth or you use it occasionally when it’s raining outside. Certainly if they get into streaming live sports then this could be a very dominant company.

Apple, Amazon, google etc will all continue to be dominant in their relevant niche(s) and make some serious bank which they can either return to shareholders or dangle in front of them threatening acquisitions and inorganic growth either way you are going to have to come up with a very special product to knock these guys from the top spot. Apple in particular is receiving some attention from naysayers specifically about the I-watch.

There is literally no point in listening to the opinion of someone over the age of thirty as to whether the I-watch is a good idea or not. Apple are designing products for the future and could care less what a +30 yr old thinks of their watch. They care what a 16 yr old thinks about the watch. So in short when it comes to the tech space- your opinion is worthless if you are old like me, ask someone younger, much younger.

The rise of ETF’s will probably continue and with it stupid acronyms like FANG, BAGEL etc, hopefully someone will create one called HAVESOMERESPECTFORYOURSELFANDSTOPCREATINGSTUPIDACRONYMSFORCOLLECTIVE INVESTMENTSCHEMES…….. might be a bit long though. ETF’s are a financial product like anything else, they do not mitigate risk at all, the liquidity is determined by the liquidity of the underlying products.

Do your homework on them but as I think with nearly any financial product they are as dangerous and as safe wholly down to the people holding them. If they continuously get pushed down the throats of retail traders or causal investors then yes at some point we will have a problem.  I always say that when people dabble in the stock market then it is akin to me trying to wire up my house, it would probably be safer for all involved if I just called an electrician.

 

What might Commodities look like?

As per above you probably already guessed my view on commodities for 2016, in short I continue to expect weakness in oil with some severe snap backs in price. We have a situation where speculators are short and commercials are long. Speculators are aligned with the desires of the power brokers of the industry i.e the Saudis and big oil.

The commercials, specifically small mid cap US shale players are long and wrong (by design) and struggling to breathe. However when speculators are short in decent size it always leads to horrible snap backs in the price, remember speculators need to produce monthly returns and therefore subject to profit taking at given moments. I will be watching the longer end of the curve to see downward movement there at a faster rate than spot to see when things are really pinching and that will be my hat tip to when things are looking like a recovery is due. If I were to play pin the tail on the donkey I would say getting long end of Q2/Q3 wouldn’t be the worst idea but that is pure magic 8 ball type thinking.

In the metals arena I will stop at saying for gold and silver, who cares? I never have and never will see the attraction of investing in them. Also I believe in moderate USD strength. If you believe that FIAT money or paper money has no intrinsic value, then I don’t understand why you think Gold has any intrinsic value. It’s just a shiny lump of metal, it only has value because someone else says it does, much like paper currency. If Armageddon ever happens having all the gold in the world will not help you. I will not accept your bars of gold for my food and water, and finally if gold is such a good investment why is it that goldbugs are always at pains to try and sell it to you??!

Copper, platinum and iron ore I think might stage a very modest recovery over the course of 2016 but I don’t think it will be all that significant. China have built a lot over the last few years, I think their agenda is to now fill that space before they go ahead and do it all over again and I can’t think of another country in the world that has the financial resources, demand or frankly their shit together to embark on a massive infrastructure spend to support global metals industry again. In saying that some of the steel supplies look uber cheap, if you are a balance sheet guru and don’t think these guys are going bankrupt then they look attractive on a longer term basis.

In the Ags space I have little value to offer apart from there is always natural supply and demand for so it’s more of a traders market, buy when prices are low and sell when they are high, easy really.

 

What might FX look like?

In simple terms I don’t think that next year will look all too different from the latter half of this year. I believe in moderate USD strength, a split camp between further rate rises and less rates rises will keep the DXY trading in a range around the 100 level. We have seen a roughly +20% rally in the USD since QE ended and now that rates have risen a whopping 25bps eventually I think that things will calm for a while and we are not likely to see any huge dollar rallies. That will help stabilise matters for a while in emerging market currencies.

It remains to be seen if Draghi wants to step on the gas with QE and further devalue the Euro, I don’t think he will, for the simple fact that he has already been very effective, don’t forget the euro has dropped from 1.40 in about a year and a half and bond yields are frighteningly low in Europe, so on the two most important factors Draghi is a success.

Inflation is stubborn but largely due to oil prices, Im willing to give him benefit of doubt and say he has done a marvellous job of creating conditions for Europe to prosper, we just need the political structures in place to be as dynamic and responsive and we might actually stand a chance! Also as I referred to before with Kuroda, no point in spitting out bullets on QE when oil is wreaking havoc on inflation, things will settle over the next two quarters and then you stand a better chance of your actions having an impact.

I would think we see one more rate rise next year in the US, more likely in H2 and more likely to the latter half of H2. What will be an interesting cross to trade will be GBPUSD. For now you should expect weakness in GBP but it remains to be seen if Carney will follow the FED, I don’t think he will for a few more quarters to be honest but I think it will be newsworthy stuff for the foreseeable and therefore a trader’s friend.

 

What might Volatility look like?

Due to innovations in financial products volatility can be seen as an asset class in its own right now. Be long it not short it, shorting vol is sooooo last year. But if you want to learn how to trade, then this is the asset class for you. Volatility by its nature is “whippy” unless you can dedicate your time to timing and getting and getting out at right time, then step away from this space, its not for you and you are fighting the pros who have much bigger resources and smarts than you do. Just accept it and move on.

 

What might Credit look like?

Ugh, tough one, Im tempted to say it’s a bubble blah blah but that’s too easy and I am far from a credit expert. Bonds in general have been the pension fund managers friend for the last thirty years, there is so much money out there with a clear mandate to invest in bonds that it makes it difficult for me to believe to they will crash, burst or whatever Armageddon scenarios some have painted for that market. It will take a structural change in markets for investors to switch their mandates from investing primarily in bonds to other alternative assets (which is occurring, but ever so slowly and not even a fraction of the wealth that is managed through bonds).  If we see some inflation next year then yes there might start to be some rotation, but if your view is that inflation will be steady or even declining then don’t panic.

In short this is what you will most likely see:

Government bonds of states involved in QE will remain bid with intermittent stages of panic approaching important meetings, QE looks to be staying for a while in EU and Japan so there is no reason to assume a major reversal of yields in these areas.

US Treasury yields may rise a little, they have gone nowhere this year, and the US ten year so far has reacted like an uninterested French man so far to the rate rise. With inflation in the toilet owing to energy prices it will be a case of if US investors feel that low oil prices will lead to a consumer boom such that is enough to counteract the deflative powers of low oil prices, which I feel the jury is still out on.

High yield credit has already gone through something of a reversal of late, owing to a bit of panic recently over liquidity issues. This will provide opportunities for high yield investors if continues, which If you feel that there will be weakness in stock markets may just prove to be the case. Much like my thoughts on the US stock markets this will give rise to opportunities in the high yield space for those with a calm head and deep pockets.

 

If you stuck with me all the way to the end then your reward will be that this blog goes on no longer, you will also be one of the very few people who actually read an article in its entirety, another side-effect of the media bombardment these days, but that’s a whole other blog post ……………

 

Happy Holidays and good luck in 2016

 

Jeff

 

 

 

 

 

 

 

 

 

 

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