De-Fanged

My visit to the dentist this week was a bit of a disaster. Having procrastinated from doing anything about with my crowded teeth, I bit the bullet, literally. I got Invisalign. It should help straighten out my fangs but the procedure was unpleasant. Given how painful it was, I didn't take it well. A lack of eating properly on sore teeth, combined with a hard bike ride, left me hypoglycemic. An ambulance ride isn't a fun way to start a weekend.

Stock market FAANGs also got straightened out this week too. This week saw a bit of a cathartic purge of leadership. The favourite hiding place of the last of the lonely bulls came under enormous pressure from regulatory and trade policy uncertainty. Growth stocks are now dramatically under-performing the market, breaking a relative strength uptrend against value stocks. Looks like a double-top to me.

iShares Growth ETF vs Value ETF

Combined with the IPO market debacle-du-jour, UBER, and the proliferation of other fallen angels like LYFT, TSLA and NVDA, you can forgive investors for wondering if there is anyplace to hide. Haven trades have gotten rapidly overdone. Gold added a quick $50 and bonds are pricing in 3 rate cuts. Even uber-dove James Bullard doesn't see that. Bond-like equities have dominated but even they have started to falter.

The positive correlation between growth stocks and bonds has broken down badly. Lower rates are, in stable environments, supportive of higher p.e. ratios. That has helped 'growth' disproportionately over 'value', but only when earnings expectations for growth stocks are positive. Privacy and anticompetitive concerns are now incentivizing lawmakers to submit tech companies to higher scrutiny, thus lowering earnings outlooks. The Huawei dispute has served to politically weaponize U.S. tech companies, simultaneously lowering confidence and growth prospects as the battle for tech supremacy rages on.

On the other hand, flat yield curves and slowing macro growth have challenged value stocks. Banks are looking like value 'traps', especially in negative-yielding Europe. The U.K. market looks cheap, like it has for 15 years, but do I want to invest in that political shit-show? And forget deep cyclicals, materials or energy as hiding places, given the tariff tantrum's effect on commodity sentiment. Seasonality is now negative for energy until late August.

Can you say 'sell in May and....?'

But is really all that bad?

Markets have moved so quickly into the recession camp that upcoming data will be hard-pressed to support the thesis. Employment stats are slow moving variables. Wage growth is still picking up, a lagged response to tight jobs markets. And most importantly, lower interest rates, will cushion any consumer confidence blows stemming from trade war news. Mortgage rates, the most powerful driver of consumer behavior, are dropping smartly. Homebuilding stocks have actually performed well in relative terms since the Powell patience pivot of last fall.

Most importantly, the equity risk premium has blown out to a five year high. Asset allocators have been handed a gift. The bond mania has provided them the mother of all allocations trades once again. Deep pockets only need apply, however, given the deceleration in earnings and the massively negative sentiment.

SPDR Homebuilders vs S&P 500

Mexican tariff threats were a 'huge, really huge' game changer for the bulls. Trump's use of such a blunt economic tool to further his shallow political aims is an 'uncertainty accelerant' of massive proportion. Scaring investors so badly is not going to ingratiate President Drumpf (his actual familial moniker) to his GOP brethren. They have already started to try and talk him off the tariff ledge. Since he can't propose legislation, trade is his weapon of choice. A falling S&P 500 will be a powerful weapon for Republican senators to use as a counter-argument once the giant baby balloon comes home from the U.K.

There has actually been someplace else to hide. Emerging markets, especially India, have performed well, especially ex-China. Not as sensitive to U.S. - China trade, India is the leading market for those looking for a diversification strategy. A growth play that is well below U.S. politician's radar sounds good to me.

iShares ETFs: India vs China

Calling for the end of FAANG as leadership has been a losing bet for years now. It will take a full restoration of coordinated global growth to re-establish the preconditions for a meaningful rotation away from their dominance. Perhaps the truth is in the middle. Rising growth stocks are becoming scarce but not extinct. Health care, as I demonstrated this week, is still in secular ascendance. The 'Boomers' will keep spending to stave off old age.

The current backdrop is unlikely to provide a swift resolution to the economic impediments for global growth. A mild recession is still in the cards, if the current geopolitical construct remains in place. Meanwhile, the trader in me is still staying active, taking a few pot shots. Last week it was TVIX and GLD. This week it's INDA and IHI.

Hardly a buy-and-hold world is it? But the demise of the one way bet on FAANG is actually a good thing if it gets people thinking again!

Risk Model: 1/5 - Risk Off

Although last week's reading on Tuesday was notionally bullish at 3/5, I stated that prudence was still required. One Mexican Drumpf tweet later it all fell apart. I thought about sending out a special alert, but I think most people got the implication of the volatility reversal. We are on shaky ground now, especially with the bond and gold markets signaling such pronounced duress.

Today's Tuesday bounce is perhaps a bottom, but I can't tell from the indicators. We will see the AAII data this week. I thought last week, before the Mexico news, that the reading could turn positive. Not likely this week now that Pres Cheeto is still talking tough. The meeting with Mexico should end in tears, given how entrenched Trump's hatred has become.

The copper market is getting down to an interesting level, holding desperately to $2.60 - a potential triple bottom. Holding on by its teeth? Makes me sore just to think about it!

Commodities could have a good rebound on any lessening of trade tensions and easier money from the FED. The U.S. dollar has stalled out. Short positions in copper are a three year highs. Summer metals rallies are the norm, but what can you say about the current environment? Anything but normal!

Copper Price - 3 Yr Chart