Trump adviser Kudlow calms the markets. Is now the time to buy the dip in stocks?

President Trump’s key economic adviser Larry Kudlow (pictured) jumped into action to try and soothe volatile stock markets yesterday, which were flagging at the open due to China’s announcement of retaliatory tariffs on over 100 American goods. Speaking to Fox Business, Kudlow said Trump’s tariff plans were just “the first proposals”. He added: “In the United States at least, we’re putting it out for comment, it’s going to take a couple months. I doubt if there will be any concrete action for several months.”

The statement seemed to indicate the US is flexible in its approach, and may soften tariffs. Perhaps all of this could just be Trump’s ‘art of the deal’ in action – talking tough to make China come to the negotiating table. Regardless, stocks moved up at the close after the big early selloff yesterday. The S&P500 closed up 1.15% higher. Investors took Kudlow’s words as a good thing.

Is it time to buy the dip in stocks?

It could very well be. Fear over the trading situation between America and China was a significant part of the reason why stock prices (particularly in key US indices) fell over the past month. However, now that reports seem to indicate the two nations are trying to find a way to resolve the dispute behind the scenes in private talks, it seems there is a chance that fears of a full-scale trade war may not come to fruition. Any confirmation of a cessation of hostilities over trade may prompt a surge upward for stocks, not to mention the fact that the start of the earnings season is just around the corner – another potential boon for stock market indexes.

Buying the dip in stocks ahead of the upcoming earnings season could bode well for investors, historical data from Jefferies shows. Analysts at the bank said in a note last week that the S&P500 averaged a gain of nearly 2 percent during an earnings season since 2000 when the period follows a monthly decline.  Keep this in mind as the U.S. earnings season kicks off on April 13 with J.P. Morgan Chase, Wells Fargo and Citigroup releasing quarterly results!

Advertisements

It was a tough first quarter for equities. Here’s some reasons why…

It has generally been a rough first quarter for global stock markets. The rip-roaring gains that made 2017 so lucrative for investors came to a screeching halt in the first 3 months of this year.

The Nasdaq index, which boasts the biggest names in American tech among its constituents (including Apple, Amazon, Facebook and Nvidia among others), went into the red (a loss) for the year after a 3.5% fall during trading this week. The weakness came as investors worried about the future profitability of these companies, in light of a spate of bad press for them recently.

For example, Facebook shares were pulled down by over -12% for the month due to concerns about user privacy following the Cambridge Analytica scandal, while Amazon stock has been under pressure after coming under fire from Trump as well the European Union, which has had the Bezos behemoth in its sight for some time. Last month, the European Commission revealed plans to clamp down on the market dominance of the business of Google amongst other tech titans including Amazon by aiming to tax consumers differently.

Nvidia shares took a large hit too this month (down over -5%) after the firm said it would be halting tests for its autonomous vehicles in light of an incident in which a self-driving Uber hit and killed a pedestrian in Arizona.

The broader picture for stock markets

Despite individual company woes, the broader macro picture is also worrying the markets. It seems reasonable to point out that a lot of selling may be taking place off the back of worries about the future of the US/China trading relationship. In response to President Trump’s tariffs on steel and aluminium enacted last month, China unveiled retaliatory duties worth $3 billion on US food imports, which was quickly followed by tariffs for over 100 goods on April 4th, including cars, certain aircraft, tobacco products, whisky and many others.

Investors will be watching closely for any further escalation in rhetoric and action. Given that both economies provide so much to the engine of global economic growth, the outcome of the trade dispute will be seen as very important for investors trying to predict the future for world stock markets.

December 1st Market Wrap – Tax Reform Stumbles – Corbyn Threatens Banks

Dow Rallies while NIFTY Slips
The Dow Jones index had a bullish performance yesterday, closing at 24,272.35 points – yet another new record. This means it’s rallied by over 1000 points in the space of around a month and a half, thanks to hopes of lower corporate taxes, robust economic growth (around the world, not just the US) and impressive corporate earnings – the key driver.

Markets in Asia went higher today too, following the American lead, Though the NIFTY50 took a battering, shedding over -1%. The index fell below 10,200 weighed down by metal stocks and index heavyweights like Reliance Industries and State Bank of India.

It’s not all bad news though. Yesterday we got new data which showed India’s GDP growth rebounded from a 3-year low in the June quarter thanks to stronger manufacturing performance. Still, the NIFTY seems to be struggling with staying above the 10,400 points mark, consistently falling back, this indicates a bearish trajectory for the time being.

European indices are also lower today, with Italy’s FTSE MIB falling the most, down almost -1%. In individual equities, healthcare stocks including UCB and Novo Nordisk got a boost thanks to an upgrade from Morgan Stanley – the latter being flagged as one of the banks favourites in the pharma space.

Tax Reform Stumbles
A little tax reform momentum was lost yesterday, after the Senate delayed a vote on the Republican tax bill until morning in the US today. Several factors were at play, the first being that Senator Bob Corker (R) seemingly held firm on his commitment that he would not vote for a tax bill that increased the US deficit. He said his vote on the bill would be dependent on some kind of trigger, which would automatically increase taxes if the bill didn’t generate the kind of economic growth the party hopes for.

The Senate parliamentarian said that a fiscal ‘trigger’ is not allowed, which has given more reason for skeptics including Corker to back away from the bill. If a few key Republicans vote against the bill, it may not pass, which would be yet another big stumbling block for Trump as he tries to finally get something passed after his failure on healthcare.

Commodities
Oil prices got a small boost from the OPEC meeting yesterday in Vienna. Arguably the vote for an extension of production cuts was already ‘priced in’ as expectations were high that the group would unanimously agree to continue with cuts, and indeed Russia said it would cut its oil output to the end of 2018. Here is a chart of Brent Crude’s movements since the news broke.

Yesterday Gold prices hit their lowest level in over a week, falling after a new round of promising American economic data filtered into the markets. The good news of lower joblessness and higher GDP did little to sway the markets from expectations of an interest-rate hike later in December. Gold prices have been falling consistently since they peaked in mid-summer.

No Love Lost between Labour and Banks
The leader of Britain’s Labour Party Jeremy Corbyn has hit out at banks and called them speculators and gamblers, who are right to be afraid of a Labour government getting into power.

In a video uploaded to Twitter, the socialist leader said, “Bankers like Morgan Stanley should not run our country but they think they do.” He then took a swipe at the Conservative government for protecting financial institutions interests, while adding that it was these banks which crashed the economy in 2008.

He is right, in that the careless actions of overpaid executives and bankers in both the US and the UK prompted the financial crisis, but failed to mention that it was a Labour leader (not Conservative), that encouraged risk taking in the City of London.

In his Mansion House speech in 2006, Labour’s Chancellor Gordon Brown (who would become Prime Minister the next year), said the British economy would succeed through ‘light touch’ regulation, a ‘competitive tax environment’ and ‘flexibility’. Only 2 years earlier, he had praised Lehman Brothers, the bank which had contributed directly to the crisis and collapsed in 2008. Lehman’s bankruptcy filing was the biggest in history, and its demise contributed to the loss of around $10 trillion from global equity markets.

Ed Balls, another Labour cabinet member, said in 2006, “I believe we are right to avoid prescriptive, heavy-handed regulation in Britain.” It turns out they were both wrong.

The concern among businesses is that a Labour government with a strongly socialist bent under Jeremy Corbyn and his Chancellor John McDonnell would seek to curtail businesses ambitions, increase corporate taxation and generally dissuade foreign investors from wanting to do business in the UK.

The problem with this combative approach towards banks is that, despite its past crimes and misbehavior, the financial services sector is one of the strongest assets the British economy has. A report earlier this year revealed that financial and related professional services workers contribute 1.5 times more to the economy than the average UK employee, while showing that the sector makes up over 10% of the UK economy. It also contributes the most amount of tax already, at 11.5% of the total income for the treasury.

Morgan Stanley said this week that a radical left-wing government under Corbyn is a more serious threat to British markets than Brexit, and that a ‘double whammy’ of Brexit and a Labour leadership could prove ‘toxic’ to UK stock markets.

Patrick Jones

The institutionalisation of Bitcoin

In December 2017, one of the world’s largest derivatives exchanges will officially launch a Bitcoin futures product. At that point, the cryptocurrency market will have changed forever.

Hindsight is a wonderful thing. Just 5 years ago, a single Bitcoin traded below $15 against the US Dollar. As of November 2017, the price peaked above $7500. Many investors who parted with a little of their spare change back in 2012 to invest in the cryptocurrency are now millionaires, but its beginnings were far more humble, and its future was anything but certain.

In 2012, the cryptocurrency existed in relative obscurity, usually known only by those engaging in shady activities such as the purchasing of items on the dark web, where users could find anything from illicit drugs, weapons, medical equipment, passports and ATM hacking guides to hitmen for hire.

The most well known of these sites was the Silk Road, one of the largest online black markets, which users could only access through Tor, an anonymous network originally developed by the United States Navy to protect US intelligence communications online.

ToR
Tor logo containing the onion, which represents how messages are encapsulated in layers of encryption using onion routing technology

For those who ‘travelled’ on the Silk Road, Tor was the first layer of protection from the authorities, but there was yet another for safekeeping — Bitcoin. The mysterious cryptocurrency allowed buyers and sellers alike to conduct transactions directly without using a third-party platform like PayPal, or moving funds from one bank account to another. Through the use of blockchain technology, people could have relative anonymity whilst making dubious purchases. The combined use of these technologies prevented them from leaving a digital footprint which could have been used to prosecute them.

When Silk Road went mainstream after being featured in a Gawker article in June 2011, it quickly caught the interest not only of the public at large, but authorities the world over. It took over 2 years since the piece was published before the Federal Bureau of Investigation stepped in and moved to close the marketplace. In 2013, the sites owner Ross William Ulbricht was arrested by the FBI. Data taken from 2012 showed that business had been booming — with an estimated $15 million worth of transactions being made on an annual basis on Silk Road, all entirely in Bitcoin.

New iterations of the site existed since it was first shut down, but they never had the same traction the original did, but for Bitcoin, the journey was just beginning.

Silkeh
The original logo for the Silk Road marketplace. The name derives from a series of trade routes that connected ancient civilisations across Asia.

Before legal action for the Silk Road came, other sites watched closely by regulators (such as the infamous WikiLeaks website) began accepting Bitcoins as a form of donation. By 2012, WordPress was on board and accepting the cryptocurrency, and it started to look as if Bitcoin was moving into the mainstream.

In the years between its original emergence in 2009 and its huge surges in price throughout 2017 until now, there have been far too many fundamentally important events which have taken place throughout Bitcoin’s historical timeline to be able to discuss in detail here. Sufficed to say however that there has been periods in which the future of Bitcoin as well as other cryptocurrencies like Ethereum and Litecoin have seemed in jeapordy, as regulators who were usually trying to control conventional banks struggled to get a grip of a currency which operates beyond official financial systems and monetary authorities.

Indeed, there have been numerous crackdowns on Bitcoin trading, not least in China this year. In mid-September, Beijing moved to stamp out cryptocurrency exchange trading as well as ICO’s (independent coin offerings), sending the price dipping and diving. By November 2017, the last digital currency exchange in China was officially shut, but this has not stopped the move upwards in Bitcoin’s value.

Regardless of state intervention across the globe, there may yet be hope for crypto fans everywhere. On November the 13th 2017, Terry Duffy, head of the worlds largest options and futures exchange (CME Group), told CNBC that the firm would be listing a Bitcoin futures product as early as next month.

CME Group is the world’s leading and most diverse derivatives exchange marketplace, offering the widest range of global benchmark products across all of the major asset classes, including futures and options based on interest rates, equity indices, foreign exchange, energy and metals.

The move to accomodate digital currencies is symbolic, as it ultimately represents just how far the cryptocurrency has come since its days of relative obscurity.

Noted names in the banking world such as JP Morgan’s Jamie Dimon have trash-talked Bitcoin in the past, calling it a ‘fraud’ and denouncing those who trade it, but others, including Wall Street titan Goldman Sachs have seemed more open to the idea of cryptocurrencies in general. In a recent discussion with CNBC, Goldman CEO Lloyd Blankfein said he would not prevent the firm from establishing an institutional Bitcoin trading desk, according to reports.

Now that an established financial institution like the CME Group has given the official green light for BTC trading, listing it on the exchange, this adds a new level of legitimisation to Bitcoin, and could prompt more and more financial institutions to adopt official BTC trading in future.

This could have the affect of driving up prices further, or indeed the opposite. By pushing digital currencies more into the remit of major financial institutions, are they at risk of becoming more and more regulated? If so, this may undermine the entire premise of cryptocurrencies, which are supposed to provide anonymity for their holders, spenders and buyers.

Regardless of whatever happens next, up until this point the price has been on a tear:

Btc Chart

Bitcoin has survived throughout numerous challenges, but can it withstand the scrutiny of the mainstream?

Patrick Jones

Fed sounds hawkish on interest rates / Trump tax reforms in focus

September 27th

Yesterday Federal Reserve head Janet Yellen reaffirmed the central bank’s commitment to keep pushing interest rates higher, saying that it should not be too gradual in its approach – words that will be seen as refreshingly hawkish to many investors. Confirmation of another rate hike in December has pushed bank stock prices higher this morning once again, even across Europe.

Today a major focus for investors will be what President Trump announces about tax reform in a speech later today in the US. A plan to simplify the American tax code and cut tax rates for individuals (especially those in the middle class) and companies, was a key message in Trump’s campaign. It is expected that the tax rate for corporations will be reduced by 15%, from 35% to 20%.

Though Trump has repeatedly stated that rates for businesses would be reduced to 15%, Republican Speaker of the House Paul Ryan (pictured shaking Trump’s hand) indicated in a New York Times interview recently that this may not be a realistic option. Still, any cuts they can get through would potentially be a great leap forward for the US economy and benefit investors simultaneously.

By reducing overall taxation, US companies may become more competitive financially. With lower rates across the board, many firms who were tempted to move abroad to save capital (cheaper labour costs, lower taxes) may choose to stay in the US too, creating more jobs instead of laying off their US-based workforce. A more favourable environment for businesses and individuals is likely to spur economic growth (which will boost stock markets too). The question now is whether the team behind tax reform can convince congress of the merits of the plan and get it passed.

Merkel win overshadowed

September 22

Angela Merkel has been re-elected as German Chancellor following elections in the country yesterday.

Though it was a convincing win for the CDU/CSU (Christian Democratic Union of Germany and Christian Social Union in Bavaria), the victory was overshadowed by the rise of the AfD (Alternative für Deutschland) party.

Right-wing AfD has gained favour amidst rising anti-migrant sentiment, following Angela Merkel’s open door immigration policies throughout 2015/16.

With the Chancellor having stated in the summer of 2015 that “there is no legal limit to refugee numbers”, hundreds of thousands of undocumented migrants, many of whom were not genuine refugees, flooded into Germany, prompting domestic and international backlash.

The AfD has capitalised off of the social unrest and anger this mass-movement caused and gained 12.6% of the vote yesterday, winning its first seats in the Federal Parliament and becoming the Bundestag’s third largest party.

Stock markets in Europe faltered when markets opened this morning, but are starting to head higher. The major growth of a far-right party in Germany has significant implications for the EU and as such, investors are concerned about the election results. This concern prompted a reasonable sell-off earlier. The Euro is also lower against the Pound and Dollar due to these anxieties.

Why should I diversify my investment portfolio?

Shortly before the financial crisis rocked the world economy in 2007/8, optimism amongst US policymakers was high and widespread.

On June 2nd 2005, only 3 years before many of the worlds largest financial institutions were on the brink of insolvency, Christopher Cox stood in a room full of reporters. Cox was the new Chairman of the Securities and Exchange Commission or the SEC, under the Bush administration. The role of the organisation was to protect investors from foul play in financial markets, ensuring a level playing field between customers and asset management firms.

After his public introduction from President Bush, Cox took to the podium to set out the responsibilities of his new role and the state of the economy. He praised the financial sectors contribution to US economic growth, saying “In this amazing world of instant global communications, the free and efficient movement of capital is helping to create the greatest prosperity in human history.”

Statement on the Economy.  Rose Garden
Chairman of the Federal Reserve Ben Bernanke, President George W. Bush, Secretary of the Treasury Henry ‘Hank’ Paulson & SEC Chairman Christopher Cox in the White House Rose Garden. September 19, 2008.

Little did he know what was around the corner, but of course, no one really knew what was coming. Even the Chairman of the Federal Reserve, Ben Bernanke said in January 2008, “The Federal Reserve is not currently forecasting a recession.” It turned out that the SEC and other bodies that were supposed to protect the interests of investors, had stood by while banks were taking greater and greater risks and engaging in dangerous behaviour. Banks were taking enormous risks in the derivatives market, trading highly complex financial instruments like CDOs (collateralised debt obligations) and MBS (mortgage backed securities). Banks were also highly leveraged, which meant they were borrowing huge sums in order to take part in this kind of activity. There was a get-rich-quick culture pervading the financial sector. In this era of widespread irresponsibility on the part of some of the most famous investment management firms in the world, selling more toxic products to unsuspecting investors meant bigger bonuses. As such, it led to the eventual meltdown.

The damage was more serious that anyone could have imagined. In those years, investors lost life savings, while millions of ordinary citizens became homeless and unemployed, in a financial slump that left no country on the planet unaffected.

2935021856_7a8740b0a1_b (2)
Headline montage from media during the peak of the crisis

Why am I talking about the crisis? Well, it’s merely an example to highlight potential risks and why you should hedge against them as much as possible. Risk is a major factor to consider when choosing what to invest in. Financial markets are entities which are linked to human sentiment. Even if the crowd and the talking heads think they are ‘right’ about the way a price, or a company, or interest rates are heading, markets are still, (in the words of billionaire investor George Soros) “inherently unstable”. Due to this instability, it makes sense to hedge your bets and spread your risk across different sectors, asset classes and types of markets when investing.

Financial markets are all interconnected. Even the largest blue chip stocks which we hear about every day are not immune to external forces which can weaken their fundamentals. Geopolitical circumstances out of your control can cause huge sell offs in a single day, putting your portfolio at risk. Perhaps a war breaks out in Asia and suddenly every stock index from Tokyo to Shanghai loses a ton of its value, for example. Even shiny new instruments like cryptocurrencies which are currently all the rage have been known to lose hundreds of dollars off their value in a single trading day. Yes, it would be nice if markets were predictable and human behaviour was also less impulsive, but this sadly is not the case.

How do I diversify?

Diversification is a form of risk management, but it is also a tool you can use to make money as well.

The idea behind diversifying a portfolio is that investors will be less affected by an event that has a strong impact on a particular industry, company or type of investment. Not putting all of your eggs in one basket is another way of thinking about it.

By ensuring you invest in a multitude of sectors and asset classes, you can be more shielded from external shocks to the market (like geopolitical circumstances, economic downturns and the like).

By keeping investments split into different asset classes, (by choosing varying position sizes in different sectors) investors can become fairly well hedged incase of any destabilising news which will cause prices to fall.

Even if the flavour of the month is a bluechip giant in the S&P500 and every analyst seems to be singing it’s praises, going all in on the stock or similar companies within the same sector can be a foolish decision. Trends come and go frequently. Sectors lose steam, indexes that were once riding all time highs lose their edge. We saw recently how a political crisis in Brazil which engulfed the country’s leader Michel Temer, ignited a huge selloff in Brazilian stock markets. The key Bovespa index saw it’s biggest fall in almost 9 years on the same day corruption charges surfaced.

It is not possible to do away with all risk, but by hedging your positions and keeping your risk spread across different kinds of instruments, you can keep protect yourself against large-scale losses and maintain your well earned gains.