Our thoughts about the situation that has developed on the US stock market after a strong drawdown in October.
1) such a blow to the long-term uptrend, although it has not yet developed it formally (we are speaking about the S&P-500 and NASDAQ-100 indices), but caused substantial damage that is unlikely to be easily absorbed and ignored.
2) most likely, the market will show new minimums during 2019, which may be another 10-20% lower, depending on the index and industry
3) however, the current drawdown has led to a number of factors that indicate extreme short-term oversold, such as:
— extremely high level of fear for the week: https://money.cnn.com/data/fear-and-greed/
— the value of the RSI indicator on the weekly chart has reached a level below 30% for the first time since 2015
— a positive divergence has been formed on the daily chart of the indices, in which the new minimum of the price was not confirmed by the new minimum of the indicator (see the chart above)
— more volatile Nasdaq and emerging markets indices did not show new lows relative to the S&P-500 index
— the risk appetite in the credit market, expressed by the ratio of high-yield and highly reliable bonds, remains in a clear uptrend (unlike, for example, from 2008).
4) therefore, before going to the new lows, the market is likely to demonstrate a good tradable rally (anything can happen from Apple’s reporting to M&A activity or the seasonal factor after the November elections in the USA)
5) everything said above is, of course, not a guarantee, but only a subjective baseline scenario until the end of the year
6) if it is implemented, this does not negate the fact that at the beginning of next year it will be necessary to move to a more conservative positioning of portfolios
7) for truly long-term portfolios, the current correction is useful, as it has already led to an increase in the expected stock market returns over the next 10 years by about 1% per annum. A decline in the market in 2019 by another 10% will increase this expected return by about the same. The profitability of the bond market, as usual, is as close as possible to the yield to maturity of 10-year Treasures.
The October correction in the US stock market led to a strong local oversold. This, in principle, is understandable (not every month the indices decrease by 5-10%), but, in addition, it is confirmed by some objective data.
On the diagram above, the arrows show the weeks when the outflow of funds from equity funds (mutual funds and ETF) exceeded $ 15 billion. Now the third outflow is observed in 2018 (17.5 billion). That is, if we assume that the long-term uptrend remains in force, then this situation with a high probability will lead to the formation of the next local bottom.
Firstly, as is well seen from the previous cases of record outflows, often after a short bounce upward followed by a second bottom, below the first. The schedule is weekly, so the whole process (rebound, and then the second bottom) can be delayed for 2-3 months. That is, the scenario with the Christmas rally in November-December and entering a new minimum in January-February is quite likely. Keep this in mind if only because the probability of a V-shaped reversal is small.
Secondly, and more importantly, the state of extreme oversold occurs at the very beginning of the long-term downtrend. We do not know in advance at what point the indicator, which for several years worked as a buy signal, will cease to be and will become a sign of a change in the long-term trend. Logic dictates that the longer we are in a cycle, the closer its reversal. And now this development is, of course, more realistic, since the indices have grown too much when compared with history.
Which of these scenarios is more likely depends on the personal perception of the situation: the news background, expectations, etc. Our subjective view is this: if the market does not rebound by the end of October, and SPY closes the month below 272 (now 276), then January minimums test in the 2018 range of 250-255 will become a reality. By the way, even this re-test will not affect the long-term trend, despite its rigidity for short-term speculators.
If the market goes up, and SPY rewrites 281 (the maximum of the recent rebound), then a new historical maximum above 294 will be more likely, and the transition to the new bear market will be postponed, most likely, to the second half of 2019.
A new player has appeared on the market of high-yield (or «junk») bonds. This is a well-known Uber: https://read.bi/2P7Qwo5
Under strict secrecy, the company placed $ 2 billion in debt obligations — 1.5 billion for 8 years at 8% per annum and 0.5 billion for 5 years at 7.5% per annum. There was a re-subscription (applications came in for 3 billion), and the “lucky ones” who got the papers had to sign a confidentiality agreement.
Perhaps this event in preparation for the IPO. A couple of days ago there was an article in the WSJ that investment banks offered Uber to hold an IPO in 2019 at an estimated $ 120 billion. This is despite the fact that in the last round of private placement the valuation was 72 billion. Demand is likely to be high, and we suspect that investors who have agreed to buy these bonds have thus received an entrance ticket to the front row.
Otherwise it is difficult to explain their motivation. There are much more interesting ways to risk capital. The company continues (so far) to stubbornly burn the cache, and it’s still far from reaching profitability. In such conditions, it is better to take the risk of business through stocks, since, at least, you get the whole potential upside in case of success. What is the point of limiting your profitability to some 8% per annum, risking losing everything (and this is possible if the company does not learn how to earn)? This return on the horizon of 8 years can be obtained on a portfolio from different asset classes with rebalancing, and not to concentrate all risk in one name. And the fact that a company with a capitalization of 120 billion is located at 8% per annum is surprising. Something is wrong here. What exactly? A rhetorical question, the answer to which we will probably get from the disclosure of information before the IPO.
Since the beginning of 2018, the ETF MTUM dynamics are noticeably better than the dynamics of the broad US stock market, as expressed by the VTI fund. The difference is 4% for October 17 (MTUM yield is 10.1% versus 6.1% for VTI). And this is undoubtedly an excellent addition to 2017, when the difference in profitability was generally double-digit. But let us pay attention to the fact that in 2018 all advances were reached in Q1, after which the relative dynamics of MTUM / VTI entered the outset (see the diagram above).
So far this does not imply any serious consequences. But the dynamics in October led to the fact that the ratio of MTUM / VTI approached the dangerous line. We mean an important technical level, where the 200-day average and lower consolidation limit coincide. At the same time, MTUM itself tested its 200-day average. True, this test was successful, now the price is already higher, and the absolute uptrend is not damaged yet.
It is very important how the market will behave at these levels. Moreover, the 14-day RSI for MTUM last went below 20% already in 2015. If this oversold again leads to a price reversal, and this, in turn, will lead to the return of the MTUM / VTI ratio to the upper consolidation border, then everything is fine and even leaves good chances to exit the consolidation up and continue the banquet. But if even such a strong oversold is not enough for a reversal, and the MTUM / VTI ratio leaves the corridor not up, but down, this will be a sign of serious weakness. In this case, most likely, the price for the MTUM fund itself will begin to decline faster than the market, and on the horizon of 2019, momentum can be forgotten.
Until the reversal is confirmed, the trend is more likely to continue. But remember this is necessary, forewarned — it means, is armed. Everything is cyclical, and if this cycle screams «I’m over,» then it would be better to hear it.
Yesterday occurred something that, in our opinion, is much more important for the development of the cryptocurrency market than even the excellent news a week ago (about the Yale foundation and the first full-fledged asset management license in Switzerland). One of the largest investment groups in the world, Fidelity, announced the creation of the Fidelity Digital Asset Services division, an institutional platform for investing in cryptocurrency. They will provide trading and storage services for hedge funds, family offices and «other market participants». Running in operation mode is scheduled in early 2019: https://on.mktw.net/2QUQeOJ
If anyone does not know, under the supervision of Fidelity (management, administration, depository services) is 7.2 trillion dollars (data from Barron’s). It is difficult to find a more conservative and more regulated structure. However, they decided to take this step. They did it not spontaneously (hippos do not like sharp movements at all), but after an internal survey, which was conducted among their many institutional investors. 70% of them said they believed in the development of blockchain technologies and, as a result, in the emergence of a new class of assets. After that, the company decided that the game is worth the candle, spent 4 years researching the issue and yesterday came out with this statement about the creation of a special «daughter» (there are already 100 employees, according to the CEO). Absolutely business step, if most of your clients need it, then either you give them this service, or you lose a client. But with an important caveat, if Fidelity, after 4 years of studying the issue, nevertheless came to the conclusion that “a crypto is a scam,” we are sure they would have curtailed the project and would have found a way to explain it to customers. But instead, the company decided to be the first of the “Big Companies” to enter new territory.
Last week, our attention was drawn to two news related to cryptocurrency.
The first is positive that the endowment of Yale University under the direction of David Swensen decided to invest $ 400 million in projects related to the crypt and blockchain at an early stage.
The second is negative, that the well-known economist Nouriel Roubini harshly toured the crypt once again, called her «the father of all scams», and in the end even joked about the fact that the word «shitcoin» cannot be used in relation to the crypt, so how abusive it is for the word «shit» — a useful organic fertilizer: https://cnb.cx/2NESVBO
All this did not affect our opinion about the crypt and blockchain projects, since it is based not on emotions, but on facts. Perhaps it will be wrong, time will tell. But what we want to note. We believe that there is a huge and fundamental difference between these news.
Roubini, who after the crisis of 2008 began to be called «Doctor Doom» and invited under this sousus to various economic forums, allegedly became famous for having «predicted» that crisis. Although he began to “predict” it for many years, but it is clear to all sensible people that if you constantly say that “a crisis is coming,” you will sooner or later enter. Like a watch that stopped, but twice a day shows the exact time.
He is a fairly well-known economist, with his admirers, who teaches at the University of New York. Apparently, there are no other arguments left, and those that they have led so far prove to be untenable.
The question arises, why do they need it? Why do they continue to speak on topics that are not well understood? The answer is simple, and it is well written about in the last book of Nassim Taleb called «Skin in the Game». These numerous commentators, analysts, economists are ready to fill the information space with joy only because they do not risk anything.
What will happen to Roubini if the whole blockchain technology, which he considers simpler than the Excel table, really turns out to be nothing? He will inflate his cheeks and say: «I told you so!». And what will happen to him, if, for example, a bitcoin in a year will cost 35,000, in parallel a more advanced blockchain technology will appear, and the word cryptocurrency will go into mass use? Nothing will happen to him, he will either stop commenting on this topic, or he will say: «Well, it looked too risky, I was reinsured.» He will not lose his place as a professor and all the buns associated with him. That is why his opinion on this issue means little.
Quite another thing is Swensen with his foundation. The person is the epitome of the success of an asset manager. His foundation beats the rest of the universities for many years by the results of management, he earns double-digit returns on a multi-billion dollar portfolio, investing, including not in the mainstream. Yale was the first of the Ivy League universities to invest in hedge funds, private equity funds and venture funds. This gave the result, which is public, and which brought fame to the manager. And now this manager risked his reputation and put a “skin on the table”, having invested 400 million dollars in what, according to the commentator Rubini, who is not responsible for anything, is not even worth the word “shit”.
Can Swensen be wrong? Of course he can. Probably, just like the British Royal Mail, which in the late 1990s arrogantly stated that no sensible person would use Gmail, when the letter can be sent in an envelope with a stamp. But even if Swensen was wrong, he has his «Skin in the Game», and therefore, we have much more respect for his actions.
About this recent article in the WSJ, the schedule from which you see above
In short, the main points are as follows. Until recently, investment consulting remained the last stronghold of high commissions. Commissions are reduced (sometimes to zero) for everything: trading, mutual funds, etf, even hedge funds. Now this trend has come to investment consulting. New technologies allow you to change the ways of communication, reducing the cost of investment advice. Roboadvizor grow and by the end of 2022 under their management will be 600 billion dollars. This is 3 times more than at the end of 2018, but only 3% of the 20-trillionth pie on traditional brokerage accounts. The states have millenial heirs, who tend to ask more questions, for which they pay money. It also contributes to pressure on commissions. But there will always be investors willing to pay a little more for personal contact.
Now to the data on the chart above. For an account of $ 100,000, the average size of commissions is 1.3% per year. At the same time, there is a uniform breakdown between different «forks of commissions» for such clients. 27% of them pay from 1.5 to 1.74% per year, 24% pay from 1.25 to 1.49%, and 33% pay from 1 to 1.24%.
For accounts from 10 million dollars the picture is different. Two thirds (65%) of such customers pay less than 0.75% of assets per year. And only 14% are willing to pay more than 1%.
It is on these numbers that HNWI needs to be guided by investors, and if they ask for more, inquire as to what and decide how expedient it is.
Following the topic of interesting ETFs, today we would like to draw your attention to the FPX fund. This is an ETF from First Trust, the same provider as for the FV fund, which was discussed a couple of posts back. Why can it be interesting to a certain category of investors? Because it partly solves the problems of participating in numerous IPOs on US exchanges. Unfortunately, not at the subscription level, but at the level of already settled securities that was a fundament for trades to begin.
It means that this fund will not allow you to regularly participate in the «hot» IPO with guaranteed allocation and happily leave the papers immediately after the settlement. On the contrary, it waits until the paper is canceled at least 6 days and buys only after that. According to the investment declaration, the fund invests in the top-100 on capitalization among companies that have entered the IPO in the last 1,000 working days (this is approximately 4 years). It is rebalancing on a quarterly basis to seize new promising shares in the portfolio.
As a result, we have a well-diversified portfolio of 100 securities (with a bias, of course, to Technology, which possesses 38%), which were placed relatively recently, and from which, respectively, investors expect future-following growth. Note: in addition to the IPO, this includes spin-offs as well, when a department stands out from its large company in order to organize its own company.
The fund, it must be said, justifies expectations of investors. Since its establishment in 2006, its profitability (including management fees, which is now 0.59% per year) is 11.9% per annum, outpacing the S & P-500 index with its 8.6% per annum. Apparently, therefore, the size of the fund has grown to a quite respectable value of $ 1.2 billion. Those who are interested can read more about the fund at the source: https://bit.ly/2AYE0kS
By the way, in the line of this CC there is a similar fund for foreign (non-American) IPOs with the FPXI ticker. In its portfolio of 50 papers there are such fashionable names as Alibaba and Ferrari. But it’s still exotic that investors have not yet tried (NAV of only $ 26 million), although formally it is outpacing (6% against 5.4% per annum since launch) its own benchmark (MSCI World ex-US index) as well.
Not so long ago, we updated the look at the #dollar on Friday, 08/03/2018
and at #euro on Tuesday, 08/07/2018
Therefore, what is happening now, if it can surprise, then only by its speed, but not by direction. When you first see the reversal of the 2-year trend up, then a sharp impulse (in April) and subsequent consolidation, as it was in the dollar and euro, then the probabilities are in favor of the rate for further growth. Of course, this is only a probability, not a guarantee. But if you have a chance of success, conditionally, 2 to 1, even if at this particular moment the bet does not play, then systematic application of the statistical advantage is finally realized.
By the way, there is no conceptual difference between the market and, for example, the blackjack. You should always look for such introductory notes that give you an advantage. But this is a topic for a separate post, and we will certainly write it)
Returning to the ruble, formally there was an output upwards from consolidation. The reasons are not even that important. Most often such an exit occurs in the middle of a large movement. This gives us guidance on the goals that the dollar and the euro against the ruble will aim at (with kickbacks, of course). The dollar is at least 70. And the euro is a little more difficult, since the exchange rate is influenced by the dynamics of the euro against the dollar. Given that this cross-rate itself is in the consolidation, from which the dynamics are more likely to weaken the dollar, then the euro-ruble movement is unlikely to be of a smaller scale than the dollar-ruble (in%) and will lead to a minimum of 80.
And this, by the way, the minimum goals (70 for the dollar and 80 for the euro) with the horizon until the end of the year. We do not exclude the fact that these goals will be exceeded, and that this will happen more quickly. Subjectively, that’s exactly what we think. But these timing details are important, maybe for option traders, but not for most ordinary investors who want to save capital. Therefore, we will not focus on the dates, but we will return to updating the goals after the levels indicated above are reached.