Happy Friday,

Speed remains the Covid-19 Age signature… speed that on some days can be dizzying - even for a grizzled vet like me. Having a process, a POV is key to staying upright & not succumbing to vertigo.

We noted last week that risk asset prices were extended - the Robinhood bros were making news and all seemed well - then boom, stocks sold off 4 days in a row, longest since mid-March, capped by yesterday's sell fest - Covid speed.

Our read? The pullback is a good thing - as new bull markets develop, signs of speculation, sharp up moves, followed by pullbacks are a sign of investors aligning their expectations of the future with current price levels. Today, machine led markets trade almost immediately to pain points as demonstrated by yesterday's fall right to SPY 3k support (back to levels seen 2 weeks ago) - like bad tasting medicine - it's healthy.

Buy the dips; 6% down days are good days to build positions in the Cyclical, Value, non US, Credit, Comm, spaces.

This week’s take home point? Today's non US mkt response is another tell - a tell that market leadership is moving away from the US to ROW… a one day, 6% pullback in US equity markets and Asia falls small and Europe trades up? No USD uptick? Hmmm.

The US chickens could be coming home to roost as lax decision marking around reopenings lead to case surges and more importantly sharp rises in hospitalizations in several states. The latter is likely to lead to some reimposed restrictions which will in turn, sharpen the distinction between the chaotic US response to Covid -19 & that of Germany or Japan for example.

Forward looking markets are focused on the reopening process & the policy support for such; the risk of renewed shutdowns are a principal market risk that increasingly appears to reside mainly in the US.

Treasury Sec. Mnuchin made it clear there will not be a national shutdown, even with a true 2nd wave (current situation is not that) so it's worth noting that the states showing worst case surges make up roughly 20% of the US economy. Reopenings will continue in much of the country as will fiscal support (Mnuchin’s other message). Thus the US is likely to lag not collapse again.

The longest US expansion (128 months) ended in February to be replaced by perhaps the shortest recession ever (Feb - May)... that is Covid speed. The last several recessions lasted close to a year. JPM expects US Q3 GDP to be up 30% annualized.

In the months ahead we expect a large scale return of workers & a demand recovery that strains an upended supply chain and creates a whiff of inflation. Inventories are V low across both wholesale & retail segments, a legacy of the US - China trade war. The surprise could be demand that is much stronger, much faster than expected. BofA reports that 1st week June credit card spending fell only 6% vs yr ago levels vs down 20%+ just 2 months ago.

Notwithstanding the UST rally of the past week or so, the direction is higher rates, back towards our 1% target and likely towards1.25% - 1.5% as we enter Fall.

This suggests plenty of room and support for the Rotation Trade to continue as investors remain quite UW and last week’s big up move reflected short covering rather than true buying.

TGIF!

TPW Investment Management Team

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Happy Friday,

Wow, what a week - been a tough one here in NYC but we are optimists so let's look on the bright side: NYC had zero CV19 deaths mid week - 1st time since March 12th - while the 1% of protestors doing gratuitous looting have been subdued - both bring hope that the greatest city in the world, supine Monday night, can rise & conquer anything thrown at it. Phase One reopen starts Monday.

Last week’s take home point: we are in a new bull market. It didn't take long for those words to ring out as SPY capped its best 50 day stretch EVER with volumes popping, VIX collapsing and the Rotation trade leading the way.

This week’s take home point: the Rotation trade - in regions, sectors & styles - is in its infancy. It could take markets to new ATHs. Yes, new ATHs. In the very near term equities are overbought so Buy the Dips.

The BTE US May Jobs #s cement the turn to Cyclicals from Defensives, from Tech Growth ( now source of cash) to Value and from the US and USD to ROW (in our case primarily DM x US).

We have noted the self-reinforcing nature of the rotation trade as those who missed the bottom determined they had not and would not miss the rotation trade. The Jobs data & reopenings could prompt an asset allocation shift from bonds to stocks - as the 10 yr blows out towards our 1% target & the 30 yr starts to approach 2% the yield curve steepens, banks make money and the rotation trade gets a tailwind.

One does not want to be UW Banks - on either side of the Atlantic. JPM expects Q2 trading revenues to be up 50% Y/Y. US bank EPS is likely to be better than expected. EU banks, left for dead, have staged a big time recovery; MS notes they trade at a 27% discount to FV.

Meanwhile, European policy makers from the ECB, to the EC to Mrs. Merkel have surprised to the upside & brought the Rolling Thunder. Bunds react (on the way to zero?) and help spark the UST selloff which then is magnified by the jobs #. The case for long duration BUNDS/USTs looks less appealing by the day; they are massively over owned & could provide plenty of fuel for more equity fire in both the US and Europe. Give them a whiff of inflation and look out.

Looking for an uncrowded place to invest some cash - look no further than European Equity where BofA notes the first inflow in 8 weeks, a paltry $600M - yes $600M in a world of Trillions. BofA also notes US equity OW biggest in five years while EU equity UW largest in eight years.

We have been positive and OW equity since April with a Rotation (Cyclical/Value) and DM ex US focus. The action now is in Bonds and FX with the USD signaling real cracks in the American Dream. In the very near term, cross asset moves are extended but the change in direction is clear.

We have wondered for several months whether Covid19 would be able to upend the USD and US financial asset dominance like it has with everything else. It seems like the combo of the botched US virus response & the lack of leadership displayed during the past week of protest may be sufficient catalysts.

Protests reinforce the shift to Big Govt & wealth distribution that was evident from CV19 and increase the likelihood of a Democratic sweep in November. This suggests the coming election season could be among the nastiest and most dangerous in modern American history. For an offshore investor OW the US or an overweight domestic investor rebalancing into Europe & Japan makes sense.

A whole crop of US investors may need to learn about the ROW for the first time in their careers. DM x US markets are ahead of the US in reopening, are bringing the policy thunder on a regular basis, are much cheaper and completely under owned. This trade too is in its infancy.

The Euro rally is the best since 2011, USD has just had its worst two week span in 8 years against both DM and EM FX with DXY rolling over & breaking support. A$/Y breaking out - a VG proxy for global growth.

It's probably worth spending some thinking time this weekend on what could derail this freight train: botched reopenings, CV19 outbreaks, poor Q2 EPS, seasonals (August - Oct worst seasonal period)?

The investment firmament is shifting under our feet - the rotation has legs - it is early days.

Be on the right side of history & be well.

TGIF indeed!

TPW Investment Management Team

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Happy Friday,

Today’s Musings come straight from Jay’s notes from a fun visit with Jon Ferro on BTV's The Open this morning - talking reflation & new bull market.

Link to full show (Jay gets on at minute 28).

NOTES:

SPY breaks above 3k and clears technical hurdles - blue sky above. Question is whether it draws in buyers? Surveys (BofA) suggest bearish sentiment remains dominant: 80% see U or W recovery, 70% see bear mkt, BofA Bull/Bear sentiment indicator pinned at zero - uber bearish.

I think we are in a new bull market - as one of my most experienced and best buddies said to me today – “I want to leave you with one point - we are in a new bull market.”

While not a technician, I respect & incorporate such, especially in fast moving markets. Technicals increasingly suggest new bull with unequivocally strong breadth thrust as 90% of SPY above 50 dma, the rally off the lows has retraced 66% of drop, moves above 61% typically suggest new bull and perhaps most importantly the shift in leadership from Tech to Cyclical - Value, Small Caps.

The Druckenmiller - Tepper equity hate fest a few weeks ago was the tell. It led to a quick 6% pullback - the S&P then ripped roughly 12% led by Cyclical- Value segments… when old leadership takes a break & new leadership emerges that tends to be a new bull market. Also suggests lots of left behind $ ready to come in on any pullbacks.

US Growth - Value spread remains at near record wides - how will it resolve? Does Tech crash or does the market broaden into Value - Cyclicals and go higher? Recovery supports the bull thesis while US tech is at risk in an election year as the Trump Twitter fight suggests. Hating on Big Tech and China represent the only two bipartisan POV in DC.

Reflation watch: CRB index breaking out, raw material prices skyrocketing: gasoline, oil, lumber up 81%, 62% and 45% off lows. Unlike in 2008-9, US consumer in good health with housing and stock market wealth intact, new home sales are already recovering while inventory is low, esp vs 09/10.

Today’s Consumer spending headline is a classic example of Bear Market headline vs Bull Market insight. Headline: US consumer spending plunges most ever; insight, US consumer income up 10% m/m vs -6% forecast while savings rate hits unbelievable 33%. Economists have no idea how to forecast policy support because they have never seen it.

The surprise will be US consumer demand recovering much faster than expected; BofA survey of 1st US states reopening reports restaurant spend already at 70% of Feb average. UPS’s move to peak pricing, 1st time ever outside for XMAS season, illustrates how better than expected (BTE) demand & supply chain disruption ( Covid-19, China) could lead to some inflationary pressures when none are expected, pushing up rates and helping Financials.

One thing Covid-19 has not yet upended - USD and US financial asset dominance - will it continue? Signs of non US starting to OP. Look at Japan: lift natl emergency and double stimulus in same week, cheapest major DM at 14.5x forward PE vs US at 21.5x, EWJ (Japan ETF) breaks above 200dmav, cash rich, and cyclical play. In Europe, the Joint Recovery Fund tied into the Green Deal sets stage for Europe (15x forward) to recover. Germany, Europe’s economic engine, is starting to recover with retail sales coming in BTE & Merkel stimulating big time (EWG -Germany ETF, up 11% on month, approaching 200d).

US - China tensions escalate with HK troubles: 4 unknowns with national security law: what it will look like (China drafting now), when it will take effect, how it will be enforced and what will the US response be? Speed/ferocity of US response driven mainly by US domestic political considerations. Lots of smoke yes, fire no - neither side can afford more economic weakness. Cold War no, War of Words yes (benefits both Xi and Trump).

The US better hope it's not a new Cold War bc it is on its own here - note EU response (sanctions not the answer) note pan Asia response - crickets. Market point: China = more than 1/3 broad EM equity index. Watch HK banks for capital flight indicators. Regarding non-US equity allocation EAFE beats EM, especially given DM policy flex (witness EU/Japan in past week) vs lack thereof in EM.

Risks remain: Covid-19 clusters turn to national outbreaks, US - China devolves into more trade tariffs (though been there done that), US reopening proves more haphazard than response to date...Buy Dips.

Final Covid-19 thoughts: virus serves to accelerate Tri Polar World process of regional integration as supply chains regionalize & capital flows stay closer to home. Covid-19 “prevention paradox” playing out: lockdown success leads to complaints about too slow reopening.

Feels that way in NYC for sure…

TGIF - what short week - this was loooong.

TPW Investment Management Team

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Happy Friday,

One group that didn't stay home were the Chinese whose May Day vacation period included over 100M domestic trips. Why is that important? Because several weeks have passed with no outbreaks, suggesting China can continue to comfortably open its domestic economy.

China’s Two Sessions National Congress also just opened, in sharp contrast to the US House which just allowed proxy voting for the 1st time in its history. Expect China to announce additional stimulus though perhaps not a formal growth target which seems smart.

As the US ups its anti-China rhetoric one group stands silent - no prizes for guessing it’s the US corporate sector - companies realize that exiting China is a nonstarter, even more so than breaking up NAFTA. Trivium, a China focused research shop, notes that their conversations with foreign companies do NOT suggest a mass run for the exits.

Don't be put off by the heated US - China rhetoric - neither can afford concrete action that further adds to economic weakness.

We noted in our 2H Outlook piece (link) that the one thing Covid-19 has not yet upended is US equity & USD leadership. We also noted that speed is Covid-19’s signature; we expect that to continue in two areas. First, in terms of the speed of science and vaccine development and second in terms of how fast reflation becomes part of the market’s lexicon. Investor positioning is offsides for both.

As the reopening queue expands from Asia to Europe and now to all 50 US states we note that the 1st in, 1st out economies, especially those who handled Covid-19 best, are starting to provide global equity leadership. Still early but China, S Korea, Denmark, Germany are all outperforming over the past month.

We saw the first glimmers of US reflation buying in the Cyclical and Value segments off the bottom of last week’s near 5% pullback. Small Caps, Energy, Miners, Banks led the way back up while Tech lagged. Note Europe & Asia are Cyclical/Value plays. EU Recovery Fund talk suggests glimmers of a turn there as well.

A friend and former MS colleague, Jordi Visser, CIO at Weiss, is on top of the Reflation Case & just put out a VG webinar on his views which dovetail with my own. Do yourself a favor; find and watch it. We laid out our thoughts on the matter here (Webinar link).

Unprecedented liquidity, supply chain disruption, big jumps in delivery times, consumer inflation expectations picking up - Reflation seeds are being sown & very, very few are positioned properly. AAII net bearish is at 09 lows, 10 yr UST at .7%.

Investors should note that they are protected - a V shaped recovery will bring in more buyers, especially once SPY clears the 200dmav (2995) while absent a V, additional stimulus will be forthcoming - after all, it's an election year. History tells us that once economies bottom (and we have bottomed) meaningful equity losses are unlikely.

Spare a thought for the Search for Yield - it remains well and truly in place. Take a look at EMB, the EM $ debt instrument, up over 5% in the past month. US HY remains attractive while on the equity side Japan’s cash rich companies offer a solid yield pickup vs the US.

One fun fact about Japan: it might be the best place in the world to be looking for a job: today, there are 40% more vacancies than job seekers….the country’s lousy demographics have become a positive!

On that cheery note, TGIF, enjoy the long weekend and if you go to the beach be sure to practice social distancing!

TPW Investment Management Team

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Happy Friday,

Many have noted that the bond market is not confirming the sharp equity rally. What if it's about to? On Bloomberg earlier this week with Jon Ferro (Link) who noted we might be early on this non consensus call.

Oil has bottomed (noted 2 weeks ago), global economic activity too (today's UER in rear view), re openings occur without Covid-19 outbreaks, BofA notes 80% foresee U/W, headlines scream deflation.

Forthcoming UST supply will be huge & focused on the long end as the Treasury reintroduces a 20 yr bond. Next week’s $96B of long dated supply will give a signal.

Fed pins the short end & even if Fed Futures forecast of negative rates is wrong (thru Jan 22) & it will be wrong, further YC steepening seems likely. A 1% 10 yr doesn't seem like too much of a stretch, does it?

What are the Cross Asset implications? More support for equities, even up here at 2900, helps Financials which helps the Value Factor & Cyclical sectors catch a bid which in turn helps the equity market advance broaden out. Tech has been a huge winner from collapse in long rates as it supports ever higher valuations on future CF. That prop may pop. Recall our long standing focus on possible new leadership? Pay attn here - we remain with a Tech - Value Bar bell.

Commodities should do well - still down 40% ytd. The USD might weaken - already showing signs - A$ strong last month, A$/Yen cross threatening to break out (global growth indicator). $/Y down 5 weeks in a row - longest losing streak in a decade. Good for Gold/miners.

Our 2020 Outlook, written last December, was titled: Reflation 2020. It may still turn out right. China’s reopening is picking up steam: April car deliveries to dealers up Y/Y, Disney Shanghai reopening with tx sold out in minutes (and yet the US can't decide if it will have Fall football season - ugh).

Oil bottom, broad commodity price bottom, meat shortages (US wholesale beef prices +100% y/y), supply chain interruptions, US - China trade tiff, global money spigot turned full on… who's to say inflation won't return - certainly not me (TIPs).

What else? Brazil, my old stomping grounds (launched a Brazil Fund way, way, way back in the day) sees its FX blow out… Do you know what LatAM equity represents as % of ACWI? Blow your mind: less than 1%... yes less than 1%. Wait for MOF Guedes to make his move before stepping in.

Reopenings are key: No 2nd waves/outbreaks in China, Taiwan, Denmark, Austria, Germany. Schools reopening, manufacturers up & running. Watch next 2 weeks for any virus fallout from China Labor Day vacations (115M domestic tourist trips); Beijing now telling its residents to STOP wearing masks outdoors.

US re opening underway in the chaotic nature which has symbolized the Trump Admin response to the entire situation. Good news: CA reopening its manufacturing base, Michigan its auto plants. Bad news: still not close to national testing - tracing levels needed; over 50% of states reopening don't meet Federal guidelines to reopen.US re opening riskiest yet.

Have thought China could be a test bed for the US as we follow in the footsteps of those ahead of us in the re-opening queue but starting to think that's not right - China has stomped out Covid-19 almost completely with only a handful of new cases every day… US cases still well over 20k PER DAY.. China can reopen Shanghai Disney & have thousands of folks there. Doing the same in the US seems foolhardy.

The Tri Polar World implications of Covid-19 continue to manifest: from supply chain regionalization to travel- tourist bubbles ( China - SK, Aussie-NZ) and beyond. Our TPW framework remains robust as does our Global RIsk Nexus (GRN) work which helped identify speed in all its manifestations (with science to come) as key to understanding/investing in the Covid Age.

Stay Frosty My Friends.

TPW Investment Management

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Happy Friday,

Welcome to May - after a tortuous March decline & a rocket ship rally in April, investors enter May asking themselves that proverbial question: should they sell in May & go away?

With the S&P running into technical resistance around the 3K level (61.8% retracement, 200dma) it seems appealing & some profit taking makes sense.

But we ain’t playing checkers or even chess - we are playing speed chess with the algos where the moves come fast and furious.

Our focus is on the reopening process believing that the success or failure of such will dictate risk asset direction. The premise is simple: a failed re-opening means risk assets head south in a hurry. A successful re-openings imply higher risk asset prices as shorts cover, cash comes off the sidelines & markets broaden as Cyclicals/Value start to work.

According to BofA surveys, the betting today is on a U (52%) or W (22%) shaped recovery; only 15% expect a V. That tells one where the opportunity lies.

As I learned climbing in the High Himalayas back in the day, we want to follow in the footsteps of those in front of us, namely Asia and parts of Europe which have already reopened. In China, we note no 2nd waves of Covid-19, the production side is back almost 100% while consumer demand picks up fairly sharply. (We like China’s online voucher program - smart folks will copy it).

S Korea is reopening as are parts of Europe; Austria re-opened several weeks ago & no 2nd wave. Within a week or two much of Europe will be in some form of re-opening with companies copying policies used to re-open in China.

Various US states are also re-opening. The US re-opening seems most risky given the lack of testing capacity while case curves have not been bent to the extent most experts suggest.

From a risk asset pov, JPM has pointed out the speed of the advance has been fast relative to history though akin to past exogenous recessions. Re-opening needs to go well for risk assets to build on their recent performance.

Positives include the all in nature of the global policy response coupled with the multipolar science/tech community effort to develop biomedical responses to Covid-19. The latter could have a significant influence on consumer confidence. A bearish outlook entails fighting both the Fed & the global science community.

In addition there is tremendous liquidity coursing through the world economic system: in the US JPM notes a roughly $1T increase in money market funds & bank deposits over the past 2 months while BofA notes money market funds are closing in on $5T of assets. In Europe broad money growth is running at 7%+ y/y.

The liquidity boom includes the US savings rate which reached 13% in Q1, a 39 year high, as well as in the corporate space where April US IG issuance reached a record $250B. This suggests that as the economy opens companies & consumers will have cash to spend - the question is will they have the confidence to do so?

Amidst the market action we note the Value factor may be starting to bottom. A broader market advance will be a healthier market advance; the Cyclical/Value segments should perform as economies recover. We continue to favor a Tech/Value equity barbell.

Speaking of tech, did you note the comments from Microsoft's CEO: “two years of digital adoption in two months”. Hard to be bearish tech.

We noted the 3rd shoe dropping in last week’s Musings. Commodities remain the runt of the litter with The Economist noting that in real terms its broad commodity index is back at 1860 levels - yes, 1860! At the same time, the A$, a global growth proxy, rose 6% in April.

Two more quick points; first, the USD remains a Tall Poppy - note the collapse in shorting costs though - back to 2015 levels (we tweeted on this) and second note the Trump Admin ramping up its China attacks - for anyone thinking about broad EM equity exposure this could be a headwind given that China is likely to feature as a Trump campaign bogeyman.

As we look to learn from those ahead of us one Q really stands out, especially as a parent with school age children: how can some countries re open schools TODAY and the US can't commit to opening on campus/in person in 5 months? It just boggles the mind.

Enjoy May Day - you have labored long and hard these past few months!

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Happy Friday,

Credit imploded, stocks too and this week Oil and by extension Commodities joined the party. Guess what that means? No more shoes to drop!

Makes sense for Comm to drop fast & last (note the speed). No CB support for hard assets and Oil has been in a supply surge vs rest of Comm space cutting supply. It’s coming for Oil - watch US rig count #s today: already down 36% in a month; need another 30% to get to 2016 low.

On the + side, expect China to ramp up Fixed Asset Inv (FAI) as Pres. Xi highlights need for old (Transport, hydro, energy) and new (5G, AI, IoT) infrastructure investment. More in upcoming key Two Sessions meet, likely in late May with side benefit of signaling Covid-19 control. China stimulus estimates to date = roughly 2.5% of GDP vs 19% in the GFC aftermath > don't expect a repeat but stimulus is ramping in China.

Rolling Thunder (link) policy response continues with BOJ discussing open ended bond purchases, ECB joining Fed in buying sub IG debt for collateral, US topping up PPP plan while the EC signs off on immediate $580 B spend and discusses LT $1.5-2T plan tied to upcoming budget. Bit of a can kick but Europeans do love their football - new decision date May 6th.

We have argued that current econ data don't mean much for markets but US jobless claim rollover does reinforce the speed and up front nature of the Covid-19 sudden stop economic shock. This allows investors to look thru & discount it. A key point many struggle with.

Lot of focus on possible Italy downgrade to junk today - much less on how Sov debt issues are flying off the shelf, making YouTube food fight videos look tame. Ex A: this week’s Italian debt issue (yes same Italy) for 16 B Euros. Guess what the demand was: 100B, 6x oversubscribed… demand for yield is real people.

We remain constructive and focused forward. We like the Comm space - it's the only asset class that hasn't bounced big and its day is coming: LC energy with dividends, miners, gold.

We note S&P has been sideways for several weeks - trying to decide whether the next move is up or down. The re openings, in Europe & here in the US, will tell the tale. Next week 7 US states will end their stay at home policy even though the US lacks sufficient testing and tracing capacity. The big risk is that the US reopens, stocks rock to 3,000 and then we have a failed re opening with cases exploding and stocks sinking back toward 24-2500.

Much ink has been spilled on how Covid-19 has changed the world - never be the same etc etc. We aren’t sure but we are focused on whether it leads to new leadership in global equities… that is THE question & one worth musing over this weekend….

TGIF!

TPW Investment Management Team

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Happy Friday,

This week was the first in several where time seemed to slow back down and financial markets began to once again respect their speed limits.

Volatility is down, trading volumes have collapsed & price action has been muted across risk assets with Oil the obvious exception (time will tell if justified).

So here are four areas that would seem worth musing over.

1. Bad economic news seems to be pretty much in risk asset prices. For example, one has to respect the equity/debt price action given a doubling of US jobless claims to well over 6M. Same with PMIs, UER and other data points. It is worth noting that some regions/economies were doing pretty well pre crisis (EU Feb retail sales +3% y/y).

2. If Bad Economic News is the price, what about Good News? Good economic news remains elusive & will likely stay that way for the next month or two. Good news exists on the policy side as Rolling Thunder continues with Japanese stimulus expected next week and the US unveiling its $350B Paycheck Protection Program (PPP), moving closer to the EU labor model. Broad DM Govt backstop is in place.

3. Uncertain economic & earnings data suggests our main focus should be on the coronavirus & the longevity of aggressive social distancing. The good news is that the Italian case curve has clearly bent & NYC’s appears imminent; our NYC mantra: “empty is good, empty is good” is working. The bad news is renewed travel restrictions in Wuhan - a real worry given 2nd wave concerns.

4. Part two of our coronavirus focus should be on the coming out process - what will the economic rebound look like? Currently, China is our only guidepost & there it looks like the economy V-lined back to 80% production levels and then stabilized - for how long and why are things we will learn more about as time passes. Watch S Korea; its economic reopening is expected to begin next week.

From an investment POV, the market’s technicals would seem to be the best NT guidepost. The 20dmav for example seems to be capping many equity assets; suggesting the deleveraging puke was quickly made up by the rally. Breaking out: up or down will likely require some coronavirus clarity. Studies suggest longer term equity upside post a Q like we just had; in addition we continue to consider a leadership change.

One would think we are due some good news on the coronavirus…its Friday afternoon & Spring is coming - rest up!

TPW Investment Management Team

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Happy Friday,

So much happening, so fast, in so many different areas - how to stay on top of it all?

At TPWIM, we have created a live, internal Good News, Bad News document. Structure helps & so we tie it back to our Global Risk Nexus (GRN) work: Economics, Politics, Policy & Markets and add a Health section. Below are some thoughts - I hope they are of help. Please reach out with Qs/comments.

HEALTH:

• If references to war are any indication, then policymakers & populaces are finally taking the coronavirus seriously. China reporting no new domestic cases is the ray of sunshine. But as in Good News, Bad News, Italy's continued case expansion and the US waffle between testing and social distancing is the bad. CA lock down and positive market reaction suggests much is discounted.

ECONOMICS:

• Economists also appear to have gotten the war memo with recession calls proliferating and truly scary Q declines forecast (JPM). A week ago it was Q2 US GDP -2%, now its -14%.. UER fears were 5%, now 10% + and Mnuchin’s 20% scares everyone. China’s horrid Jan - Feb data dump set the stage for these shifts - lets hope its recovery does the same (China reportedly now 75% + back in operation). Again, much is discounted.

POLITICS:

• Big Govt is BACK. US election likely to turn on who best represents a safe pair of hands; China - US tussle for influence leaning in China’s direction as US plays catch up to virus; Europe has a huge opportunity to take big steps in safe asset creation, joint fiscal policy etc. Tri Polar World implications are significant > a story for another day.

POLICY:

• War references pour fast & furious from Pres, PM, MOF etc. Rolling Thunder indeed. Much easier to respond to public health emergencies than to bail out bankers. No global coordination but 40+ rate cuts & roughly $4T in CB balance sheet and fiscal support is a lot of firepower. How much is enough is & will remain unclear; the key is that Govts (ex China which is keeping its powder dry) will do whatever it takes, even in Germany.

MARKETS:

• Gyrations like we have witnessed across assets and geographies these past two weeks update the 1929 Crash story in ways that hit close to home. Personal story: my Grandfather was in the markets then: He got married, went on a transatlantic honeymoon cruise and returned home to find himself busted. Selling the family silver indeed.

• In 2020, we have lots of price discovery, massive, machine led, deleveraging by volatility traders, systematic managers & risk parity players leading markets from “record breaking” to “broken”. This market, structure, fund etc is “broken”, the US credit market and dare one say it, the UST market, the most liquid safe asset in the globe… dysfunctional if not broken.

• Good news is the Fed has the GFC playbook & is using it. Value players are talking up a generational opportunity. VAR players have delevered. Top down tough given EPS uncertainty; 10% off 2020 US EPS of $170 gets $150 or so which puts SPY at 2400 on 16x forward. ROW was and is cheap; Japan eq cash rich; EU banks at .4x BV.

UPSHOT:

• A lot has been priced in, policy makers are on war footing, positioning is much cleaner, family silver has been sold, starting to get our arms around the various impacts of coronavirus.

WATCH:

• Volatility (needs to stabilize/decline), hedges (need to act like hedges), correlation of one needs to come in (1 month implied SPY @ .98 mid-week). Next week: March PMIs, low 40s whisper #, Quarterly rebalancing (MS suggests $160B to buy eq). Peak (EU-US) cases remain key missing variable. Italy in focus - potential case peak in next week or so.

OPEN QUESTION:

• Will the bear market will lead to new leadership? As the health, economic, policy and market parameters stabilize then one can start to visualize the future. While today it's blurry as heck (WFH has not caused an early happy hour); a return to status quo ante seems unlikely.

Rest up, be well and hopefully find some quiet time to digest everything….

TPW Investment Management Team

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Happy Friday,

The good news? It's Friday. The bad news? It's only Friday morning.

Investors clearly not buying risk (except us) ahead of the weekend’s China PMI releases and who knows what else.

Given this week’s near unprecedented selloff one can be forgiven for thinking the world is ending, maybe bc machines are driving the train? Risk assets have given back Fall Risk Asset Rally gains & are O/S; safe havens, namely long duration UST, are very O/B.

Looking at economic data: various Fed Q1 US GDP Nowcasts (between 2-2.7%), European data flows (solid thru Feb), China reopening’s (Apple, Toyota, Starbucks), one could have a very different POV. The St. Louis Fed's Financial Stress Index is benign as is Chicago Fed’s Financial Conditions Index.

China/ Asia ex Japan best performing region, rest of world punished; sale of US Min Vol & Gold ETFs recently suggest we are in the panic phase of selling.

Headline risks from here: EU Schengen closing, US outbreaks, WHO pandemic announcement. A week ago G-20 whiffed on coronavirus with SPY close to ATHs - financial markets have once again alerted policy makers that they need to act.

Expect a meaningful policy response: growing expectation of a Fed cut, HK “helicopter money” drop, EM rate cuts, open discussion around fiscal stimulus in Germany & elsewhere. China is likely to tie its policy response to Q1 GDP release.

Risk asset direction likely determined by race between virus spread and attendant econ effects vs getting China back on stream/global policy response. Bloomberg Economics estimates China now operating at 60-70%. More cases are a given but with roughly 40 countries already affected & on high alert, big outbreaks should be contained. China could be 80-90% back by March end.

As BTV video shows we see more risk in long-dated UST at current prices than global equities and think investors should be building a buy list focused on Cyclical/Value segments. Much has been discounted. Global Econ entered the virus in broad recovery mode with Comp PMIs for Global, Advanced and EM economies all averaged over 52 in January. Q1 will be weak but expect sharp, stimulus supported pick up in 2H led by ex-US economies with more room to act.

Growing risk that ex-US recovery & growing US political risk (Super Tuesday next week while virus represents a real challenge- threat to a US Pres riding high post impeachment) could coalesce to stimulate outflows from still expensive US safe haven.

Get some rest - you deserve it!

TPW Investment Management Team

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Happy Friday,

Written or spoken word, we have it. TPWIM's POV available via an in depth ETF.com interview with Summit Roy as well as a 10 Questions in 10 Minutes MarketDesk podcast with Ben Phillips. Both feature CIO Jay Pelosky & cover a lot of ground, including current AA and top ETF holdings. Enjoy!

Lots to muse over as coronavirus concerns continue to bubble.

New virus cases in China continue to decline sharply while US Industrials report close to 100% of China plants up & running at roughly 50% capacity, expecting to ramp to 100% thru March. China stocks up roughly 4% on the week.

Growing pan Asian virus cases are rattling markets & leading to increased fiscal efforts (SK, Singapore) to offset the feared economic hit. Note Feb mtd SK exports +12% y/y, suggesting global growth pick up into virus fears.

Expect more fiscal talk at the G-20 meeting this weekend.

US rates continue to reflect safe haven bids, leading to negative real rates in the US; the last negative real rate stretch was in the 1970s… current nominal 10 yr UST levels have proven to be the bottom several times.

USD rally while rates fall and deficits expand is a little disconcerting - current DXY level marks top of recent range. Yen no longer a safe haven while growth concerns undermine Euro.

The move to Green is having unexpected effects, including turning Utilities into “Growth” stocks (ICLN anyone). That combined with the low rate revaluation boost to the Growth/tech segment (the biggest portions of ESG ETFs) have caused Growth to rally even more.

The results: YTD Growth - Value perf spread the biggest in decades. Tech valuation spread vs SPY widest since 2009 while BofA notes “full capitulation into deflation assets”.

By the way did you see the rising amount of Activism in Japan where the PE firms are circling as well as the Italian Bank M&A in Europe? Pay attn!

Speaking of Europe, JPM just noted that European Q4 EPS ex energy at +6% was better than US ex energy while February Composite PMI best in 6 months.

Net-net, we continue to expect the virus impact will be sharp & short lived; consequently, the growth rebound should be sharp as inventory rebuild could be epic, leading to many of current cross asset relationships to unwind, including an ESG whack through the Growth segment.

TGIF & and Have yourself a weekend!

TPW Investment Management Team

Journey

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Happy Friday,

It's all Coronavirus all the time…bad for those affected (though usually not life-threatening) but great for bonds and arguably good for stocks that needed a pullback. One could almost call it healthy for markets.

It's also looking like a buying opportunity, especially in commodities which have been massively oversold. China’s financial markets open Monday (closed since Jan 23rd) including commodity markets… might be a nice entry point. As well as a chance to sell bonds and reload on the ex-US, Value and Cyclical trades which lagged recently as rally latecomers bought the old favs: US, Growth, and Tech - big OPers all this month.

While virus fears filled the air, global econ data flow has been broad based & best in over a year, which should support the rotation noted above. Raise, Hold em or Fold em… we are looking to raise.

We don't expect the virus’s economic impact to derail the growth recovery but the data might be a little choppy in the months ahead which coupled with US political risk (Feel the Bern) could lead to some consolidation.

Note that Q4 EPS are coming in better than expected in US & EU; the last of our Big Four Signposts: an EPS bottom, is indeed upon us.

In other, Tri Polar World related news, the USMCA was signed into law by Pres. Trump and Great Britain has left the EU as Brexit finally happens - with a yawn.

Inside ETFs Conf down in FL was anything but a yawn as ESG/Climate chatter filled the halls as did the intricacies of transparent, semi-transparent, active ETFs.

Maybe it was because 2019 was a winner for all invested but market views seemed consensus driven and less about how to use ETFs to build portfolios and OP & more about what might sell at a few bps above zero.

Direct Indexing is still a topic that the ETF industry is trying to wrap their heads after last year’s bomb claiming that DI was going to cause “great ETF unwrapping”. We believe this is a great space for ESG since it can be individualized as well as the tax optimization for clients.

Great seeing everyone down there and glad to see the industry continue to grow!

Have a great weekend & enjoy the big game!

TPW Investment Management Team

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Happy Friday,

US - China trade deal & market reaction once again confirm the Buy the Rumor, Sell the News nature of risk assets. Broad China equities up ~15% and S&P 500 up ~11% over past 3 months.

While US - EU trade is up next and US/Iran friction remains hot, risk assets continue to (correctly) focus on our Lower for Longer Global Growth Path = Higher for Longer Stock Prices mantra.

China data is supportive of an L shaped recovery while the rest of Asia shows signs of picking up.

Broad European equities are in full “Show Me” mode only up ~8% in the past 3 months, even while Bunds sell off meaningfully and it’s Econ Surprise Index has rocked. Europe’s Green Deal remains a focus as back door stimulus - see Germany.

The last of our Big Four Signposts, earnings (other 3 are: easing cycle, trade truce, global growth bottom), looks to be coming into focus as Q4 earnings should mark an earnings cycle bottom.

While geopolitical headlines remain front and center even America’s 3rd Impeachment in its near 250-year history has not been enough to cause a (healthy) market pullback.

Super Tuesday may change that; it is the likely roadblock up ahead (March 3rd to be exact) as the progressive candidates of the Democratic Party could do well, spooking complacent markets. How complacent? Just check out the publicly listed Private Equity companies over the past few months… no Liz Warren fear there.

Late to the party equity investors have hopped on the existing winners: US, Growth, Tech, creating some consternation in those advocating leadership changes...watch US transports - a breakout could support the leadership shift camp. Remember Dow Theory?

It's nice to see winter temps finally descend on Manhattan - just in time for the Davos crowd to add to the carbon load in order to talk about how bad climate change is…

TPWIM will be down in Florida for the Inside ETF Conference. Jay is speaking on the 2020 Alpha Panel on Tuesday afternoon and we would love to connect if you are down there. Let us know.

TGIF and stay warm!

TPW Investment Management Team

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Happy Friday,

Jay talks through our Year Ahead outlook: Reflation 2020. We remain on a Lower for Longer Global Growth Path which we believe can lead to Higher for Longer Global Stock Prices

Stay positive my friends!

Jay and Jamie

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Happy Friday,

Wall St is rediscovering that old, good time religion: profit worship. Uber’s fall from grace (90% of all capital it raised is now underwater) will have that cleansing effect.

Timing is good at least, as the earnings cycle looks to be bottoming and acceleration thru 2020 seems in the cards (as tweeted @tpwim).

EPS Bottom is one of the Big Four Signposts we have used to navigate our Fall Risk Asset Rally positioning.

The other Three Signposts are also trending positive:

1.    Global Central Bank Easing continues unimpeded with JPM looking for more cuts in Q4 than in Q3.

2.    Global Growth Bottoming as Global Manuf PMIs inflect up in that sub 51 sweet spot (also tweeted)

3.    Trade Fears ebbing as mutual tariff rollbacks become a trending topic (note better than expected trade #s in both China and Germany).

JPM notes (ok, we like JPM’s research) that tariff rollbacks are NOT in current 2020 EPS estimates and could lead to 25% SPY EPS growth over the coming 24 months.

We focus on two additional points:

1.    For all the “equity markets are extended” talk, we note that ACWI is roughly flat since its Jan 2018 high (yesterday close was 0.5% from ATH) and (Europe down ~15%, Japan down ~7%)

2.    The last time Manuf PMis inflected upwards was in the 2016-18 period when ACWI rose ~50%. We aren't expecting the same mega move (lack of China stimulus, higher starting point etc) but there IS room for global equity to go meaningfully higher over the coming 12-18 months.

We see the Fall Risk Asset Rally morphing into Reflation 2020 and remain OW non US DM equity, Value and Cyclicals together with FI yield plays: US/EU HY, EM $ debt & Pref.

From a Tri Polar World framework POV, we are picking up increasing signs of regional integration: Asia’s Regional Comprehensive Economic Partnership (RCEP), Europe’s refocus on Capital Market Union (CMU) and Africa’s 54 country Continental Free Trade Agreement, to name just a few.

As we like to say: it's a Tri Polar World - we just live in it!

TGIF & stay toasty this weekend!

 Jay & Jamie

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Happy Friday,

Violent political protest spans the globe yet financial markets remain calm; ACWI up 3% for October, HK up 4.5% though Chile was down 7%. Is it a case of parallel universes, the power of cheap money and lots of it? 

I struggle to understand how the political class does not see the huge opportunity to use cheap money to address social concerns of the young & the restless (Baby Boomers don't riot). Housing & jobs in HK, transport in Santiago etc. Post GFC the global political class has been MIA.

Speaking of Santiago the cancellation of the APEC Summit, far from stoking worries of no US - China trade deal, has boosted the likelihood of a deal as both sides reassure talks are on track. 

Q3 US GDP #s show why Pres. Trump needs a deal, as the US consumer is the only bright light in a trend 2% growth picture. The collapse in business investment can be tied directly to the trade tiff and syncs up with US CEO confidence at GFC lows.

Nov 1st suggests it’s time to start thinking about 2020 and while a recession whiff can bring the duration bulls out in force, it's worth thinking about Reflation 2020 and the potential for another leg up in global risk assets led by non US markets, Value and Cyclicals ...ACWI remains slightly below its Jan 2018 high… markets have been marking time for 2 yrs.

Working on a new theme: Lower for Longer Global Growth = Higher for Longer Global Stocks...let me know what you think.

Hope no one threw up over those Grubhub #s this week - another nail in the throw $ at it PE space? Loved this line: food delivery may always be a low margin business - seriously?

At least in public portfolios you know what you own - given the size of the cash raises in PE land everyone has a slice of these winners - hand grenades left and right…

Finally a post Halloween fun fact: when S&P is up 15% or more by 10/31 it is up 100% of the time the next two months, averaging 5% return ( h/tip HSBC).

Oh and congrats to the Nats - the best thing to come out of DC in a long, long, long time…best comeback team EVER… love their slogan: 

Let's go 1-0 today.

 Jay & Jamie

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Happy Friday,

Today’s Musings is brought to you by the #3:

1.    SPY back over 3k for 1st time since July while Asian and European equity up for the 3rd week in a row (outperforming US equity)

2.    Ahead of next week’s meeting, Fed funds futures contract pricing in 34 bps of cuts between now & YE;

3.    Q3 EPS coming in better than (low bar) expected in US and Europe with y/y +2% in US vs -4% consensus & EU EPS coming in -1% y/y vs -3% forecast - revenue growth up nicely in both

A 3 part China piece: 

1.    China ranked #31 in World Bank's 190 country study of business competitiveness - up from #46 a yr ago & counter to US narrative, reflecting a China that continues to open up and improve its offering.

2.    China's Yuan strengthens vs the USD for the 3rd week in a row - longest streak this year.

3.    China's 10 yr bond yield backs up to 3.25%, highest in several months.

To finish on a non #3 note: low vol(ume) in US equity trading & low vol(atility) in bonds, lowest of the year, suggest investors are looking for direction - TPWIM expects continued good risk asset performance into year end.

TGIF people!

 Jay & Jamie

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Happy Friday,

A good week for TPWIM’s Fall Risk Asset Rally thesis in terms of performance & underpinnings.

Feels like one of those times when good news = good news and bad news = good news (for risk assets) as it brings forward more policy response. So where is the bad news? ….Status quo.

There was forward progress on Brexit (more over the weekend) while US-China trade awaits the mid-Nov APEC Summit. Trump wants the photo op signing while Chinese fear a Trump walkout - both sides need a W so expect a signing in Chile. 

Our principal theme: A Lower for Longer Global Growth Path, was validated by the IMF this week when it noted it expects “no improvement” in the growth profiles over the coming 5 years of the Big Four: the US, China, EU, and India > low growth is a feature, not a bug.

US politics continues to bubble along with growing concerns over an Elizabeth Warren presidency. Too early IMO but will note two points. First, Dems would need a sweep to fully unleash what Wall St worries about. Secondly, and more importantly, most of the sectors in her line of fire are unloved and cheap relative to history. The 30% SPY declines being bandied about seem way out of line.

Pay attn to the USD & the FX market: after a sleepy period the USD is bumping up against important levels across both DM FX (109 level in $/Yen) and EM FX (broke below 200-day support vs MXN @ 19.26). With the back up in long-duration UST many late buyers (post mid-August) are now under water on unhedged positions while seasonality argues for higher rates, suggesting a possible accelerant here.

USD rollover would stimulate a shift into non-US equity where Japan is enjoying a stealth rally & the Euro Stoxx 50 looks to be breaking out of a long term downtrend vs US equity.

Fun EPS point: bottoms up 12 M forward SPY price targets suggest a 3300 SPY next October according to Factset.

Stay positive my friends!

Jay and Jamie

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Happy Friday,

Jay talks through our Friday Musings.

Stay positive my friends!

Jay and Jamie

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Happy Friday,

First, we want to say how saddened we are to hear of the passing of Envestnet’s CEO and Co-founder Jud Bergman and his wife Mary Miller-Bergman. There are not enough words to describe Jud and how important he has been in our industry.

To the markets, what a start to the month & the Q! It's worth noting that bad October starts (-1% on day one) tend to end well - both for the month (+3.7% avg) and thru YE (+7.2% avg).

Political news is front & center - I was asked to handicap the 2020 Pres race on BTV earlier this week - Said I had no insight there but that what I was watching (& think you should too) is how 2020 EPS estimates make it through Q3 results season. 

For all the recession angst, 2020 S&P 500 EPS estimates remain at +10% vs +11% at 6/30 - the analyst community has yet to buy into the recession call.

Also filed under the “don't look now” category is the US yield curve which has been steepening and 2/10 yr UST spread is the widest since early August… could the Fed be in process of achieving its curve steepening objective?

Speaking of politics it's worth noting that if impeachment goes forward it will be the first time a President's party controls the Senate; watch the Pres approval #s for the tell - if they fall more Republicans might be willing to break away.

PMIs were also in the news on both sides of the Atlantic with both Manuf and Services weaker than expected. We tweeted a neat JPM graphic (follow us @tpwim) showing how the current Manuf PMI regime (under 51 and declining) has the poorest return profile while the next stage (under 51 and rising) offers 4-5x the return profile… that return differential is worth playing for folks.

A few other data points worthy of note: ACWX outperforming S&P this week and since the beginning of August - also note US Value has outperformed US Growth over the past 1,3 & 6 months (mostly due to the sharp move last month). The shift from US to ROW and from Growth to Value are essentially the same moves. 

Given how stretched these relationships are regime shifts are likely to be significant and multi-year in nature -  just when a 10 year run of US outperformance has convinced clients that it's the only game in town.

We hope you enjoy the new video Musings - let us know what you think.

TGIF for sure - enjoy the Fall weekend!

Jay and Jamie

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