As it stands right now, my model clearly favors TLT – iShares 20+ Year Treasury Bond ETF – as the core position for next week, fourth in a row. In that time, Absolute Return is up 5.9% and the only asset class that comes close is precious metals. Silver is up 14.21%, Platinum is up 10.76% and Gold is up 4.39%. On the year, Absolute Return is up 9.16%.
The media have spent the majority of the morning lauding the fact that equities have recovered the post-Brexit losses. As wonderful as that may be for investors who have recently jumped into the market, breaking even in this market is a blessing and by no means an easy task. Long term investors continue to exhibit high levels of preoccupation with the volatility and valuations seen in equity markets. The Price to Earnings ratios of the principal US indices have been trending up, except for one, the Nasdaq 100 (the Apple effect).
Valuations continue to get stretched (S&P 500 is 24.24x!), exceeding long term averages and expectations of even the less-seasoned analyst, at a time when Inventories to Sales in the US are clearly trending upwards and Corporate Profits have come down after peaking in Q2 2015, both of which typically indicate or precede recessions (area in grey).
This begs a question: why are stocks going up? Answer: Hope that a slow recovery in labor market will help raise consumption and stave off recession. This is a perfectly reasonable expectation, IF interest rates were at more normal levels. They are not. The Federal Reserve wants to raise rates, which would undoubtedly slowdown some economic activity. Other issues affecting monetary policies are:
- Possible UK exit from the Euro Zone (may not happen).
- Italian banking sector NPL’s are at 18% (blue line) and need a bailout.
- China currency devaluation is a very real possibility, due to negative growth momentum.
- Japanese Yen strength is negating whatever effects QE might have on its competitiveness.
To all of this I say the following: Ignore the noise, focus on the signals sent by the price performance of different assets and my Absolute Return model. Long dated treasuries and commodities continue to rise, effectively indicating a lack of confidence in central banks and uncertainty in equities.