Art of the Turn

You gotta love China. Their last minute request for a for tariff roll-back as a prerequisite for signing a trade deal is dripping with irony. Just when it looks like there is agreement, you push for more. It's like making an offer on a house and asking the seller to throw in the furniture.

But turnaround is fair play. President Xi's move is right out of Donald Trump's own book, The Art of the Deal. Trump only has himself to blame after years of touting his somewhat spotty record of deal-making. Xi probably has a translated copy on his bedside table.

Head WH trade negotiator, Wilber Ross, has been strongly hinting at a 'done deal' for weeks now. Any glitch now could roil the nascent risk rally. Although monetary conditions and better earnings are supportive elements of the recent new market highs, de-escalation of trade tensions is still a key element.

The 'turn' towards a more aggressive investment posture is brewing. But markets could easily pull-back after such a quick run-up. As I pointed out last week, there has been very little volume supporting the rally. Without confirmation from actual buyers, a set-back is still possible. We all remember what happened last April.

But in my view, we should be so lucky.

A sharp set back in the markets would be a gift. A U.S. economic soft landing confirmation came this morning from the better than expected Services PMI report. The crescendo of recession calls heard last month is now looking more like 'fake news'.

As my call of Oct 22nd pointed out, the industrial slowdown, was 'priced-in'. The market averages may not have shown it, but a global slowdown had already been baked into the market cake. The August panic into bonds and spike in bearish sentiment was a capitulatory turning point.

And should 'the Donald' tire of whipping up his base with a self-flagellating tariff war, he could easily acquiesce to the Xi gambit and sign the putative 'deal'. With the litmus test of a rising stock market his only offset to declining popularity readings, it makes sense. Prez Cheeto needs to turn his focus to the increasingly important impeachment fight & 2020 election race. He now sees the folly of pursuing a trade war as a way to control the political narrative. Besides, vilifying Democrats is so easy, what with their scattered approach to coherent policymaking.

And please don't forget, stocks are a monetary phenomenon. With easy money policies in ascendancy virtually everywhere, defensive investors are now fighting the tape. China lowered rates again this morning. In your face, perma-bears.

So far, so good for the rotation. Banks have come off their lows, led by my pick JP Morgan. Health Care has rallied, after being under a cloud of negative sentiment. Technology, led by the Semis has rallied hard. Energy ETFs are on fire, with OIH up 5.0%.

The opposite is true of the hiding places, Bonds, Utlities and Staples - down 5.0%, 2.3% and 1.4% respectively for the last month. Gold has gone as flat as a bear's hibernation pulse.

We are very close to breaking the back of the pessimism and fear that has dominated the markets over the past two years. The chart below is another way of expressing that. It shows the recent sharp sell-off in the Invesco Low Volatility ETF relative to the High Beta alternative. The sharp decline is notable. Also notable are the failed attempts at breaking the uptrend. Although the markets have violently rotated into pro-cyclical leadership, the jury is still out until this trend line breaks.

Low Volatility ETF/High Beta ETF

Such is the fate of an active market player. You have to make decisions without all the necessary information at hand. We still have a long way to go to climb the Gorilla Hill of risk, but I like what I see so far. The turn towards a better economy is shaping up nicely.

I especially like the dismissiveness and cynicism of the bears. Their half-empty glasses may be quickly filled should the massive hoard of de-risked cash and bond-like equities start to move in a more pro-cyclical fashion.

Buffet's Berkshire Hathaway apparently has a $128B cash hoard. He's been frozen in his tracks as he waits for a cheap, growing, stable company to suddenly appear from out of nowhere. Sorry. Warren, that ain't gonna happen.

My advice, Mr. Oracle, buy something cyclical.

Risk Model: 4/5 - Risk On

The recent risk-on call from the model in mid-October has been bang-on! After doubting it at first, my 'buy' call (October 22 - "Over the Valley") has still provided some good profits, especially in financials. I have been looking for a fourth quarter bottoming 'process' slowly reverses the crowded defensive investor positioning. That doesn't mean we should be going for broke and buying 'Triple C' debt and Junior Mining shares just yet.

The damage to the economy from the Brexit/Trade related confidence hit is having real impacts on economic growth. As well, the secular stagnation resulting from demographic and technological forces has yet to reverse. The Millenials/Gen Y demand curve is very different that that of the Baby Boom Generation. They have a preference for less "stuff" and more "experiences". That doesn't help the makers of consumer durables, especially autos.

So take a minute here to catch your breath in the market. The climb up to the top becomes tougher with every step. A good 'Tuesday at 11' pause today could be just what is needed.