Alright, we’re talking about tariffs, Brexit, TARGET2, Macron. What else are we seeing? Well, curiously enough, as the equity markets hit their lows last week, we noticed that the Nasdaq was actually outperforming broader markets, writes Nell Sloane Tuesday.

Last week we touched on the importance of the Federal Reserve and their waffling in regard to staying consistent with their rate hiking plans. The Fed is supposed to be independent of political influence, but it seems that POTUS and his constant remarks have taken their toll as Jerome Powell seems to be tight roping his options right now. 

We all know that the markets have extended this current economic cycle well past historical precedents. Then again considering the amount of global QE, why would we expect anything else?

We wouldn’t, we haven’t, but the game has certainly changed. The Fed has hiked rates and the Fed Funds now sits at 2.25% and the expectation for another 25bp hike at the upcoming meeting next week stands at 75%.

We do not feel the Fed has the guts not to go through with it, despite the abysmal performance of equities as of late, but we will know soon enough.

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The U.S. bond market, particularly the yield curve is beginning to front run the Fed a bit, calling their bluff and saying, your rate hiking cycle is near complete. We have spoken at length about our call for the Fed Funds to reach parity with the U.S. 10-year yields. And we still feel this will be the case sometime just after Q1 2019.

Two more hikes should do it, December and March consecutively.  The equity markets will remain on the ropes as this cycle plays out and calls for new highs there seem overly optimistic. Yeah, we hear record corporate earnings, margins are good, yadda, yadda, yadda.

We would rather just play the odds here saying the Fed will continue the path irrespective of the level of the Nasdaq (NDX) or S&P 500 (SPX), well we think they should at least.

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What could derail their plan is the ongoing U.S.-China tariff war. This week it hit a new low as Canada, at the request of the U.S. arrested Huawei CFO Meng Wanzhou, who happens to also be the founder’s daughter. The U.S. alleges she committed fraud in regard to working around U.S. sanctions with Iran. China has issued heavy warnings, if her release is not granted and has even recalled their U.S. ambassador.

We have said all along currency wars can lead to hot wars and this is certainly a dangerous step in that direction. We have to admit the equity markets may brush this news off, but it will certainly have direct ramifications of things like this continue to heat up.

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We also saw Brexit back in the mix this week and Trump even stated it may hurt the UK in terms of trade with the U.S., the U.S. enjoys a net $4.6 billion trade surplus with the UK so we don’t really think that is a big issue.

The bigger Brexit issue is what will it mean for other EU countries? Will they start to think about an exit? Can the other countries like Italy, Spain, etc. exit?

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Who knows, the interesting thing about all of this is the TARGET2 balance of the peripheral EU, who ultimately holds the claims to those imbalances? The ECB? How will they actually collect or be made whole on these trillion-dollar claims?

We think all these questions will become relevant in the next decade and investors should be fully aware of the currency ramifications. We also believe the U.S. dollar (USD) has remained strong, not only because of the Fed’s rate hikes, but because of the uncertainty that exists in both the EU as well as Asia.

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Yellow vests in France: Speaking of the EU, we can’t help but notice Emmanuel Macron totally being blindsided by the powerful populist uprising of the yellow vests or gilet jaune protesters. What started out as a viral video has turned into over 100,000 strong protesting, destroying and burning up the streets of Paris.

As one French retired Air Force worker was quoted saying, “Macron taxes the poor and gives it to the rich,” (WSJ) Sounds like a central banker to us…the globalists have taught him well!

What’s crazy about this movement is that we see the populist movement that has propelled Trump to the presidency here has taken hold across the Atlantic as well. That so-called conspiracy movement known as “Q” has also received worldwide attention. We spoke of this movement last year, as some of our sources have been quick to point out the ongoing struggles of mainstream to squash this thing.
Well this picture from France tells us, this movement is growing and it’s not just here, the #WWG1WGA movement is well entrenched, whether the globalists like it or not.

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Mainstream pundits can denounce it, call it conspiracy all they want…but everyone that doesn’t have their head buried in the mud, understands that sometimes the commoner does rise up and it has the tendency to grow into a movement that can change the course of history. We are glad we enlightened you to this last year, as we pride ourselves in knowing just enough about a lot of things that matter. Believe us when we say, this movement matters.

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Alright we have tariffs out of the way, Brexit, TARGET2, Macron. What else are we seeing?

Well, curiously enough, as the equity markets hit their lows last week, we noticed something, that the Nasdaq was actually outperforming the broader markets.

We know the tech sector has come off quite a bit and we can mainly attribute this outperformance to a few heavy hitters taking a stand that this move has come to far too fast.

Last week’s note and the one prior spoke of the all-important 6495 level in December Nasdaq futures as being our line in the sand. It held the first time down and it hasn’t really been tested that closely again.

We took this as a cue that risk players are back in dipping toes, even if the CTA macro trend players are jumping on the equity short bandwagon. We are too smart to realize money flow is fickle, it only has loyalty to returns and it moves faster than AI can anticipate despite all their data and technological wizardry.

So, let’s take a look at the FAANGs vs the S&P chart to demonstrate the level we are watching, very, very closely:

FAANGS vs SP Chart

The December Nasdaq continues to be buoyed by our 6495 level, shown here, but down trend is obvious. However, don’t be fooled, a break out of this channel to the upside is likely given the recent bottom pickers for risk as well as they never make it easy to just sell and walk away, 6750 trade above would pressure the shorts:

E-mini NASDAQ Chart

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Another one of our favorite charts is Feb. Gold, it’s had a decent run up since August and sits right near heavy fib resistance. Although we view the chart as very constructive, we expect some LME banks and players to find this level an appealing short:

Gold Daily Chart

We like tracking Gold vs. Silver and as a spread, you can see the clear outperformance of Gold, but resistance in the spread, just as the futures charts suggesting is close by:

Gold vs. Silver Spread

Well, that’s it. We expect the Fed to do its thing next week and hike the Fed Funds up another 25bp. Remember that adds another few billion to the banks for free, via IOER.

We suspect the equity markets may test the recent shorts wherewithal but overall, we anticipate a range trade. Barring any major catastrophes, we tend to think people have placed their chips on the table and are in mode of  wait and see what cards are flopped.

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Finally, we want to show you this chart from one of our favorite analysts at Pension Partners, where he points out that the 20-year total return for the SPY and Vanguard Long Bond fund are exactly the same…Show that to your favorite equity pitching advisor!

20 year SPY vs Vanguard Long Bond Fund returns

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Finally, we will decidedly end our notes with our reaffirmation of the growing need for alternative strategies. We would like to think that our alternative view on markets is consistent with our preference for alternative risk and alpha driven strategies. 

Alternatives offer the investor a unique opportunity at non-correlated returns and overall risk diversification. We believe combining traditional strategies with an alternative solution gives an investor a well-rounded approach to managing their long-term portfolio. 

With the growing concentration of risk involved in passive index funds, with newly created artificial intelligence led investing and overall market illiquidity in times of market stress, alternatives can offset some of these risks. 

Cheers,

Nell

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