After a rocky January, the stock market got back on track in February with the S&P 500 finishing the month +5.5%. The bull market celebrates its sixth birthday this month, and do they ever grow up fast. If stocks stick to their current trend-line (chart below), we’ll see the S&P 500 well above 2,300 by the end of this year.
Of course, there are numerous reasons to believe the market won’t reach such elevated levels. For one thing, besides Apple (AAPL), profits are slowing rapidly. As of February 10, Apple’s 4Q profit growth exceeded those of all S&P 500 companies that had reported (347 of them), combined. In aggregate, those 347 companies reported a 3% contraction in earnings.
The much ballyhooed bonanza in consumer spending that was expected after oil prices plunged is M.I.A. Consumer discretionary companies, stores that depend on disposable income, are forecast to post profit growth of 5.8% this quarter and 8.9% in the second. Four months ago, the forecasts were for a 15% increase for each quarter. Despite the obvious warning signs, it’s hard to have a sizable correction when policymakers seemingly have a fix for every problem.
Whether it be Greece, Ukraine or deflation the markets still trust policymakers to snuff out any problems that may arise. It doesn’t seem to matter if they actually solve these problems as long as the consequences are kicked far enough down the road for the rally to continue.
The European Union is now in outright deflation (along with the US) but investors appear confident the ECB’s QE program, which kicks off this month, will be the solution. However, the logistics of this program are more complicated than you may think. The ECB’s purchases will be made in proportion to each country’s share of the EU’s population and GDP, meaning they’ll need to buy 12 billion EUR of German Bunds every month until September 2016.
The problem is that Germany’s net issuance for 2015 is projected to be just 15 billion EUR. In other words, the ECB is planning to buy more than 25 times the amount Bund issuance will grow over that period. So when new 5-Year German notes are sold with negative yields, as they were last week, we shouldn’t be surprised because investors are simply paying up for supply. It might seem like this purchasing program could backfire, but markets won’t start worrying until policymakers lose control.
The Cup & Handle Fund was down marginally last week, up 10% since inception. I’m starting to build a position in a high-conviction currency position, and so far it’s been moving in my favor. My February investment pick, which was energy related, has already rallied more than 12 % since the recommendation went out – if you’d like to start receiving these letters click here.
Today’s letter will cover several topics, including:
With that, I give you this week's letter:
March 3, 2015
As always, if you have any questions or comments or just want to vent, please send me an email at email@example.com.
Until next time, tread lightly out there,
Managing Editor – Cup & Handle Macro