Nasdaq found another all-time high close yesterday at 6,793.291, now up 26.2% year-to-date despite some wags already marking the stock market wobbles of the previous few days as the beginning of the “big one”.
The much-vaunted collapse of overvalued stocks looks as though it was really just a spot of profit-taking and a consolidation of some pretty chunky recent gains.
All of the bears’ certainties to which we have been treated throughout most of this week are now looking, for lack of a better term, weak. Sure, there was uncertainty with respect to President Trump’s proposed tax reforms and although they are still a long way from being out of the woods, their relatively clear and easy passage through the House yesterday sets them up for consideration by the Senate. To suggest that they are, with House approval, halfway there would be fatuous as the issues of state-determined deductions is a hugely thorny one and whatever comes out of the Senate, should the reform proposals end up being passed which is far from certain, will no doubt look quite a different to what appears on the docket now.
Oil slick
Oil has also weakened again although WTI, having bounced off the US$55-level three times without breaking lower, is looking a little stronger this morning albeit more on technicals than fundamentals. The Iranians and the Saudis truly are now standing nose to nose although, should the two end up in armed conflict the money can only be on one side. Persian armies were marching across the Middle East and into India on one side and Greece on the other whilst the great wastes of the Arabian deserts were devoid of much other than a few camels, goats and Bedouin tribesmen.
Oil wealth has provided the house of Saud with much high-tech military hardware but my guess is that if lobbing insults at each other were to metamorphose into the lobbing of things that go “Bang!”, the Saudis would surely be hoping for heavy-duty American assistance. They have been actively grooming President Trump and although the latter has not used the term “Axis of Evil”, his rhetoric is strongly biased that way. And yet oil, supposedly having shot higher on the back of the war of words between Tehran and Riyadh, has been falling at the same time as the political temperature has been rising. Might this too just be a consolidation move on the way to US$60? The retracement has been associated with the report of rising US stockpiles but that particular figure tends to cause short-term moves without meaningfully affecting longer-term trends.
At this point in time I see no reason to doubt that WTI could hit that US$60 level before Christmas although there are, on the other hand, just as many arguments why it shouldn’t. I wrote some years ago that in the long term a slightly overweight exposure to the hydrocarbon sector is never wrong. I see no reason to change that opinion, Tesla truck or no Tesla truck.
Truck stop
I have no doubt that Elon Musk, a marketing wizard of the first order, did not time the launch of the semi-truck so close to the Bonn climate conference entirely by accident. He is turning Tesla product launches into copies of the old Steve Jobs performances and all he needs now is a black roll-neck jumper. What he should be doing, rather than giving us another Roadster, is focusing on the really important issue, which is how to recycle lithium. There are already lots of papers going around providing reasonably sound evidence that the life-cycle pollution of an electric vehicle trumps by quite some margin that of an equivalent petrol-powered one by a worrying margin but nobody seems to care. Please don’t confuse me with facts when my mind is made up. Tesla has, as I have repeatedly pointed out, so far contributed nothing to technological advance and is in many ways nothing more than a triumph of marketing and self-promotion. I will be interested to see when it runs out of money - and run out of money it will - who is prepared to pay for anything more than its manufacturing facilities.
Meanwhile the Treasury curve continues to flatten. The two-year is trading at 1.71% and 10s at 2.35%, which has the 2s/10s spread at a 10-year low of 64bp. Can we read from this ongoing flattening that we are heading for zero and subsequently into inversion, the most powerful indicator that a recession is on its way? The answer is a categorical no. Bond markets are no longer markets but the playground of central banks, which can more or less manipulate the curve at will. Not only do they have the firepower to do so but they have also learnt from hedge funds. One does not have to be the engine, one just has to be the starter motor. Fire up the movement with some tactically well-timed activity and the rest of the market will follow like lambs to the slaughter.
In the past central banks could manipulate front-end rates and, through the repo market, the curve out to one-year at most. Beyond that the monetary authorities could merely verbally influence the market. When Alan Greenspan said that he thought long-end rates were wrong people listened and laughed. That was not his bailiwick. This has changed and even with the declared policy of reducing the Fed’s balance sheet in the offing, the power that it exerts over the shape for the curve remains huge. Thus any attempt to try to read the shape of the curve is dangerous, and much like reading tea leaves, misleading. The basic tenet that there is too much money chasing too few assets of discernible value still stands in the middle of tactical asset allocation decisions. At the same time equities remain the most liquid of financial assets. Case closed, stay long.
Gillian Tett, US managing editor of the FT, has a piece today musing on what difference the pending bitcoin futures contract will have on the market. She makes a very good point that CME will give traders an option beyond being long or not being long. It opens the opportunity to actually and openly short the cryptocurrency and with significant leverage. I recommend the piece.
Alas, it is that time of the week again and all that remains is for me to wish you and yours a happy and peaceful weekend. Tomorrow the white of England meets the green and gold of Australia on the hallowed turf of Twickenham. Of their last 10 encounters since June 19 2010, the Australians have only won two and the 2016 whitewash during England’s last tour of Oz will be sitting uncomfortably in their bones. This should be a really great game and I can think of no place I’d rather be tomorrow afternoon than at Twickers. Of course, if you’d rather watch Bournemouth play Huddersfield at the other game, that’s your funeral.