Patience Is A Virtue - March 10, 2015

Click Here for This Week's Full Letter - March 10, 2015

    

Greetings,

          The latest employment data for February showed continuing labor market strength, sending the US dollar to its highest level in 12 years. Some would even say the USD move looks parabolic, which is synonymous with bubbles. The dollar could peak here, but I doubt it. Currencies are inherently relative value bets, and, at the moment, I don’t see what USD will depreciate against. The Euro? Take a look at the chart below. Net bond issuance from the Eurozone is negative for the first time in the currency-bloc’s history. At the same time, the ECB is buying a fixed amount (60 billion EUR) of debt every month until September 2016. Increased demand combined with shrinking supply means Eurozone rates are headed lower regardless of the economic environment.

           The prospect of higher rates in the US has many investors nervous about the stock market, but legendary investor Stan Druckenmiller isn’t worried. In an interview last week, Druckenmiller made the astute point that if rates are going up, you should short bonds – not necessarily stocks. The stock market is facing several headwinds at the moment, mainly a stronger dollar, but the Federal Reserve has maintained the loosest monetary policy in its history for several years.

          India and China, home to 35% of the world’s population, both cut interest rates within the past 10 days for the second time in 2015 – and they have plenty of room to ease further. Monetary easing is an incredibly powerful tool for policymakers, and it often impacts the economy with a 9-12 month lag. Therefore it’s entirely plausible that we could see the stock market rally appreciably from these already expensive levels, even with higher rates.

          However, as history has taught us, the bigger the boom – the bigger the bust. The fact that there’s a debate over a 25bps hike tells us that while low interest rates boost asset prices, they’ve failed to deliver a robust recovery. Savers are being deprived of interest income and it’s very difficult to invest in these markets. At some point the tide will turn, volatility will pick up and there will be mouth-watering opportunities. Unfortunately, six years into this monetary experiment, it looks like we still need to be patient and wait for asymmetric opportunities.

      

          I made my podcast debut last week on the American Monetary Association’s weekly show. It was recorded in February, but most of the content is still pertinent. The Cup & Handle Fund was roughly flat last week, still up 10% since inception. I’m going to start my writing my March investment letter soon, and subscribers should expect to see the finished product within the next two weeks – if you’d like to start receiving these letters click here.

     

Today’s letter will cover several topics, including:

  • Getting Real in Brazil
  • Buybacks Keep Booming
  • Denmark’s FX Gamble
  • Chart of the Week

   

With that, I give you this week's letter:

March 10, 2015

    

As always, if you have any questions or comments or just want to vent, please send me an email at mike@cup-handle.com.

Until next time, tread lightly out there,

Michael Lingenheld

Managing Editor – Cup & Handle Macro

Posted to Cup & Handle Macro Research on Mar 09, 2015 — 10:03 AM
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