September 27, 2019
By Steve Blumenthal
“When I look at markets, I first start to create a long-term big picture.
I look at structural trends in economics, in demographics, in politics, etc. etc.
And then I try to analyze the business cycle and were we sit in the cycle.”
– Felix Zulauf,
Founder, Zulauf Asset Management
I’ve followed Felix Zulauf for years through my subscription to Barron’s. He was a member of the Barron’s Roundtable until 2017. Barron’s wrote, “Simply put, Felix always knew—and still knows—better than most how to connect the dots among central bankers’ actions, fiscal policies, currency gyrations, geopolitics, and the price of assets, hard and soft.”
Like Ray Dalio, Stan Druckenmiller, Bob Farrell, Paul Tudor Jones, Mark Finn and other investment greats, I want to know what Felix is thinking and you may as well. I met Felix for the first time last May at Mauldin’s Strategic Investment Conference in Dallas. We were backstage together prior to Felix’s presentation. If you recall, I wrote about him in early June and shared with you his views on the global markets. You can find that letter here.
Serendipitously, old friend, Jennifer Mendel, was also attending the conference. Jennifer worked for Ned Davis Research in the 1990s and covered my account. Her father, Ed Mendel, co-founded Ned Davis Research (“NDR”) with Ned Davis. Ed and Ned were one of the first to create a research business around technical analysis. Jennifer approached Felix with the idea to create Zulauf Consulting. Jennifer runs the publishing, sales and marketing from her office in Wayne, Pennsylvania (suburban Philadelphia). After the conference, Jennifer and I met for coffee at Gryphon Café in Wayne and CMG became their newest client.
A few weeks ago, I joined Jennifer and Felix Zulauf on a private client webinar. Felix shared his views and answered a number of questions. He didn’t disappoint. Today, as a one-time courtesy from Team Zulauf, I share with you my notes and a link to the webinar recording. Grab that coffee and get comfortable. Felix believes a correction in the -20% range is immediately ahead. He shares his views on the direction of interest rates, corporate earnings, the dollar and gold. There are a number of charts but the journey through them moves quickly. I’ll begin with a bottom-line summary and then walk you back to the summary. Like Google maps, I like to see the destination and then the various possible paths to that destination. Felix is clear and direct. Enjoy.
If a friend forwarded this email to you and you’d like to be on the weekly list, you can sign up to receive my free On My Radar letter here.
Included in this week’s On My Radar:
- Zulauf’s Bottom Line, What’s Ahead
- The Turmoil in Money Markets, Part II
- Trade Signals – Despite Geopolitical Uncertainty, Equity & Fixed Income Signals Remain Bullish
- Personal Note – Gone Golfing
Zulauf’s Bottom Line, What’s Ahead
In early June 2019, I shared my notes from Felix’s keynote presentation at Mauldin’s Strategic Investment Conference in Dallas. You can find it here.
At that time, Felix said the global slowdown should eventually impact markets. He said, “The rally from the December low is over.” On December 27, he sent out a report to his clients saying this is the low. Then on May 2, he sent out a note saying there’s a “new sell signal.” I think we have started the second decline in this bear market that was interrupted by a nice rally. The S&P 500 peaked at 2,945, sold off and rallied to 3,000 in July. It sits at 2,976 today. His sell signal remains in place. On what to watch: He said, “The key is the Fed. If the Fed changes policy quickly and this weakens the dollar, we could have an extension of the business cycle. And that will be an investment decision we will have to make in the second half of this year. It depends on what they do…”
September 12, 2019 Webinar Notes and Link to Recording
Bottom line: In terms of big macro moves, Felix says the cocktail presented to investors is highly toxic.
- Felix believes a September 2019 stock market peak will be followed by a 20% correction with the low coming in late December or early January. That will send the S&P 500 back towards the December 24, 2018 low near 2,300. He believes interest rates are still headed lower and will bottom around the same time, perhaps making a long-term bottom.
- On top of a slowing world economy and already very low real and nominal growth, the world is facing a sharply deteriorating liquidity condition because the U.S. Treasury must replenish its account at the Fed from levels as low as $111 billion in mid-August, $156 billion in early September and $196 billion in mid-September to near $400 billion. Draining $250 billion of liquidity within two to three months could shock the financial markets, even if the Fed cuts rates. (Steve here: In 2015, Congress mandated that the Fed keep $400 billion of cash in their piggy bank in case of a Government shutdown or a crisis-like event. Last December the Fed’s balance went from $400 billion to $111 billion. That’s money that is injected into the system. A QE-like effect on markets. When they have to replenish the piggy bank, they sell more Treasury debt and put the cash proceeds back in the piggy bank. That’s like a quantitative tightening that pulls money out of the financial system. I believe the recent hit to the money market system is partially a result of the Treasury’s recent actions.)
- As they did in late 2018 and early 2019, the Fed and global central bankers will respond aggressively and that will put a floor on the downside. He believes this is a pattern we will be in for some time. Market support will be very much dependent on the Fed’s, central bankers’ and policymakers’ responses.
- Like Dalio, he believes we sit late in a long-term debt cycle and such cycles present significant challenges.
- China, the engine of growth to the world, is the major driver of the global economic slowdown. Their private market debt has peaked and they are stuck in terms of their ability to stimulate more growth. Trade wars are a concern.
- He believes gold is in a secular long-term bull market, but expects a short-term sell-off from recent highs. He likes gold on dips.
- He doesn’t see a 2008-like crash. More of a range-bound equity market with big swings up and then down and then up again. An environment that favors active management over passive. He thinks value is a better place to be over growth and shows you how you might time your entry.
Post this post, Felix asked us if we could kindly remove the charts from the post. We can provide you with a link to the replay of the webinar. You will be able to see the charts and listen to Felix as he walks you through the presentation. Additionally, Felix as given us permission to share a print out of his answers to the questions his subscribers submitted post the webinar. If you are interested, please email Blumenthal@cmgwealth.com and we will send you a copy of that report.
Personally, I find Felix’s thinking important. He is a brilliant thinker, understands how the financial systems function, understands human tendencies and he is a seasoned investor/trader with his significant wealth in the game. I had no idea he offered a subscription service and I’m thrilled to be a client.
His consulting and research firm, Zulauf Consulting, is expensive. Most of his clients are institutional investors, hedge fund managers, family offices, pension fund managers and governments. If you would like to learn me, send me an email and note “ZULAUF” in the subject line and I’ll put you in touch with his team. My email address is firstname.lastname@example.org.
The Turmoil in Money Markets, Part II
The actions by the Treasury to find the emergency piggy bank back to $400 billion likely has something to do with the recent turmoil in money markets but there is likely more. The point is, something is wrong in the financial system. Last week we talked about the disruption in the money market. It’s worsened. This from Axios’ Dion Rabouin:
Despite tens of billions of dollars of cash infusions every day for more than a week, things are getting worse, not better, in the systemically important repo market that banks use to access cash.
Driving the News: It’s prompted the New York Fed to again increase the size of overnight cash loans offered to $100 billion a day, and to double the size of a 2-week offering to $60 billion.
Why it matters: The dysfunctional market signals “that something’s very wrong with the financial system,” former Minneapolis Fed president Narayana Kocherlakota wrote in an op-ed for Bloomberg.
What’s happening: The market is designed to operate so that banks with collateral like U.S. Treasury bonds can quickly trade those for cash, but a decreasing level of liquidity has banks “scraping the bottom” and relying on the Fed’s infusions to conduct everyday business, strategists tell Axios.
- The clearest evidence of this market stress was Wednesday when the Fed supplied $75 billion of cash and got $92 billion of offers, showing an extreme lack of available dollars.
What we’re hearing: “Nobody knows right now whether this will blow over or not,” Danielle DiMartino Booth, CEO of Quill Intelligence and a former adviser to the Dallas Fed, tells Axios.
Threat level: The injections are prompting suspicion the Fed is instituting a clandestine new phase of quantitative easing to boost asset prices and help stimulate the economy, but that’s not the case, according to market strategists.
The big picture: The unexpectedly large budget deficits of the Trump administration, combined with the Fed’s attempt to unwind its previously $5 trillion balance sheet, have caused a backup in the market. The Fed is now having to supply cash to fix the plumbing in a process that looks eerily similar to QE.
- Strategists who have spoken with Fed officials are expecting the central bank to unveil a $300 billion–$500 billion standing credit line to the market at its meeting next month, in order to provide consistent liquidity and keep the market functioning.
The bottom line: “What the Fed is trying to do is make sure we don’t have episodes like this in the future,” said Ian Lyngen, the head U.S. rates strategist at BMO Capital Markets, a primary dealer that does business directly with the Fed.
- If the market dysfunction continues, “that’s going to weigh on corporate profitability, the cost of money becomes more expensive, and then it has real economic consequences,” Lyngen tells Axios.
Trade Signals – Despite Geopolitical Uncertainty, Equity & Fixed Income Signals Remain Bullish
September 25, 2019
S&P 500 Index — 2,984
Notable this week:
Market Commentary & Trends: Experienced investors know that the market hates uncertainty. Generally, markets sell off in times of geopolitical turmoil, armed conflict and uncertainty. When these circumstances occur, investors seek safe harbors to ride out the squalls. Currently, investors are processing news of possible impeachment of President Donald J. Trump, unresolved trade conflict between the U.S. and China, trade issues between the U.S. and E.U., tensions in the Middle East (i.e., Iran, political uncertainty in Israel), Brexit, etc.
At this writing, the U.S. equity markets are up, while global markets finished lower. Notably, this week the Zweig Bond Model returned to a buy signal. The signal is a pure trend-following process that looks at price as well as the yield curve. It is my favorite trend indicator for the direction of high quality bond prices and interest rates. Also, the NDR Daily Trading Sentiment Composite declined, which is a short-term bullish signal for stocks.
The trend in the High Yield bond market is bullish. The trend in Gold remains bullish. The indicator dashboard section is next, followed by the updated charts with explanations.
Not a recommendation for you to buy or sell any security. For information purposes only. Please talk with your advisor about needs, goals, time horizon and risk tolerances.
Click here for this week’s Trade Signals.
Personal Note – Gone Golfing
“Be humble. I always believed the higher a monkey climbs in the tree,
the more people below can see his ass. You don’t have to be that monkey.”
– T. Boone Pickens (1928-2019)
The trees are beginning to turn. Fall is here. I love the chill in the air and the cool nights. Golf is in the line-up for tomorrow. It is the annual “Wild Boar” golf tournament at my club. I’m partnered with a good friend and we are hoping for the best, that is, a top three finish and a pro shop credit. I’m forbidden to buy another Stonewall golf shirt with a cow logo on it but, hey, the way I can miss the fairways, a few extra golf balls sit well in the bag. My putting has been off so, tonight, I plan to get to the putting green. It is fun to have something to look forward to. Mostly, it’s just great fun to be with friends. After golf, we gather to eat the wild boar long-time friend Bill Curley has been smoking for two days. That with a cold IPA will be awesome.
I really enjoyed my time in St. Louis this past week with our partners at e3 Wealth. They run a multi-family office firm with a team of about 50. I ate a little too much food and wine at Capital Grill on Wednesday evening, however, I was lucky to run into Craig Berube, former Philadelphia Flyer great and current head coach of the St. Louis Blues. Craig was seated at the bar and I told him I’m a crazy Flyers fan. I told him that I and many Flyers fans were pulling for him to win last year’s Stanley Cup. The Blues pulled it off in game seven. Big for his city and big for him. Hockey players are the true gladiators of sports and as you can tell by this photo, a gladiator indeed. He’s a tough looking guy and at age 53 still looks like he can dish out a few hits.
I’m off to LA late Monday evening for meetings and returning on a red-eye flight home late Wednesday night. NYC follows mid-month. Wishing you a fun weekend.
Stephen B. Blumenthal
Executive Chairman & CIO
CMG Capital Management Group, Inc.
Stephen Blumenthal founded CMG Capital Management Group in 1992 and serves today as its Executive Chairman and CIO. Steve authors a free weekly e-letter entitled, “On My Radar.” Steve shares his views on macroeconomic research, valuations, portfolio construction, asset allocation and risk management.
Click here to receive his free weekly e-letter.
Follow Steve on Twitter @SBlumenthalCMG and LinkedIn.
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