The caution continues to be global…

Friday Spring Break Edition | March 18, 2016

The caution continues to be global…

“Proceeding cautiously in removing policy accommodation at this time will allow us to verify that the labour market is continuing to strengthen despite the risks from abroad.” (Janet Yellen, Fed Chair)

It was a big week in the markets. The FOMC met and elected to hold rates steady this month which was anticipated. What was unexpected was the Fed’s shift in thought that global financial pressures are now carrying an even larger presence than the risk of inflation. You can see in the chart below that the Fed did not change their outlook for core inflation, yet they told the markets to expect two interest rate increases rather than four in 2016. Why? Global financial worries.

The market reacted by crushing short-term rates, selling the U.S. Dollar, selling Financial Stocks, and buying inflationary assets. This makes sense if you believe that the Fed is happy to help the world’s financial system by allowing the U.S. inflation scene to run a bit hotter than they hoped. (We did get a good inflation data point last week in the Core CPI which is now running at a three-month annualized rate of 3.0% due to a recent surge in Clothing and Healthcare.)

So some new directions for portfolio managers and advisors to evaluate for their portfolios. Below is some data that shows you what the market wants to own in a weak US Dollar environment, and where chips are being placed this month. While the bounce in Equities and Risk has continued, under the surface has been some meaningful portfolio shifts into industries, geographies and strategies that will benefit from a weaker US$, a longer interest rate increase cycle and hotter inflation.

(Natixis/TheDailyShot)

Specific detail on the fall in the two-year U.S. Treasury Yield and its effect on the U.S. Dollar…

The Dollar broke its February low. Will the October low now be in play? Remember that the Long U.S. Dollar has been one of the more popular Macro trades over the last two years.

Big Forex volatility tells you that some of those very large long U.S. Dollar positions are being unwound…

And when the U.S. Dollar comes under pressure, most every global commodity benefits…


(WSJ)

Now for a look at some of the top Sectors, Geographies and Strategies in March…

To quickly sum, the Energy and Metals commodity impact is running heavily through all of these ETFs. These are also all the ETFs that were among the worst performing for 2015. So now you must decide if this rotation is real or just temporary.

A more detailed chart of the March ETF performances showing the grab for more risk and selling of safety…

If you want to know why some many notable portfolio managers are having a tough 2016, just look at where their big bets started 2016…

@LadyFOHF: Most crowded trade (per BAML survey) is now short EM. #laggingindicators

If you are looking to reallocate away from long dollar investments (or get away from an underperforming Nasdaq), this was an interesting chart that the team put in front of me this week…

GMO looks to be having a good 2016 given their seven-year forecast for EM Equity/Debt and Commodity outperformance…

(@valuewalk)

So are all the investors who have been ramping flows into EM bond funds…

(@SoberLook)

Then there is that five-year, most loved part of the market that investors cannot sell fast enough…


There are plenty of great biotech companies. But when a hot sector goes on sale with few catalysts and an angry political environment ahead, the price can fall farther than you would ever expect…


The Valeant overhang has done nothing to help Health Care valuations…

Did management think that investors would just overlook the $600 million dollar accounting error in their press release?

(Game of Thrones)

The only thing better than watching the Valeant circus has been the recent Brazilian episode of Game of Thrones…

If you had a Tyrion Lannister analyst on staff, you would be able to make a mint day trading the Bovespa. Only he could play the political game of chess that is occurring between the President and the Judicial system. But one thing is for certain is that the financial markets want Dilma Rousseff and her team of corrupt officials sent to the dungeon. And if the citizens want it and the markets want it then it might be time to call Uber-ship, plane and dragon.

Finally, have a great Spring Break…

I know many of you are heading out this week or next with the kids. Mom said that Lake Tahoe got four feet of snow this week, and it is snowing here in Colorado as I type with two-to-three feet forecast for the Colorado Rockies. Travel safe and enjoy your break wherever you are headed.


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