Month: October 2022

Good Morning Ladies and Gentlemen

«No one left to their own devices can be rational enough to come to consistently reasonable conclusions.» (Steven Pinker)

Interest rates

Yesterday, the European Central Bank lifted its base rate by 0.75%. This move was widely expected. Next Wednesday, November 2, 2022, the next Fed meeting will occur. Again, a rate hike of 0.75 % is expected. For the following meeting on December 14, 2022, only a 0.50% hike is currently favored and priced in. The mood there has changed very recently; some two weeks ago, another rate hike of 0.75% was still priced in. This change of mind by investors has had a relieving effect on the stock markets.

Stats

The period two to three days before a Fed meeting has a positive statistical bias. Furthermore, November is one of the year’s strongest months regarding stock market performance. As a matter of fact, for the last 30 years, November, after April, has been the second-best month of the year, and since World War II, there has not been a down period for the S&P 500 in the twelve months following the mid-term elections.

What is happening to hedge strategies?

U.S. banks such as Goldman Sachs report more extensive sales of put options. At the same time, short-sold index futures are being covered. In other words, institutional equity investors seem to be smoothing out their hedges.

Conclusion

To me, all of this could build an exciting environment for a year-end rally. The risks are still there, yet they seem to be known and in the heads of market participants by now and last but not least:

Sale

People generally buy more things if they are on sale, and they buy less the more expensive they get. However, with financial assets, it is the opposite round. The cheaper they get, the fewer people are interested in them and find all the reasons to see all sorts of risks, and the more expensive they get, the more interest they attract, and risks seem almost non-existent. To me, this is flabbergasting and far away from realism and reason.

Ladies and Gentlemen

As always, please share your opinion with me, but please do not forget (instead of hitting the reply button) to send your messages to: smk@incrementum.li
Many thanks, indeed!

I wish you an excellent start to the day, a great weekend, and above all and still, peace!

Yours truly,

Stefan M. Kremeth
Wealth Management
Incrementum AG – we love managing assets

Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 102
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li

Good Morning Ladies and Gentlemen

The end of last week, the beginning of this week, and also yesterday finally showed some positive market moves. However, the question remains if this is it or if we have further potential. Since I do not know the answer, I am looking at some sentiment indicators, and maybe they can hint at what direction the market will go.

Bank of America (BofA)

To come straight to the point, the BofA Global Research Fund Manager Survey for October sees macro and investor capitulation complete.

This is it, then?

Unfortunately, it is not all that easy. Because central bank capitulation has only just begun, and lack of fund outflows prevents the “big low”. The BofA research has drawn up a list of criteria for the so-called “big low”. The list comprises eleven points, of which the first six result from the fund manager survey. In total, BofA sees seven of the eleven points fulfilled. Just not enough for a “big low”, even if already quite pessimistic.

Macro capitulation

The BofA survey shows that 72% of fund managers expect a weaker global economy. No real surprise, you may think, and yet 72% is quite a number. Nevertheless, this expectation has already been pretty low for the last eight months. Financial markets have taken their time to adjust. Today, I may say, the current levels somewhat better reflect that pessimism.

Investor capitulation

The cash level of global asset managers is at a two-decade high of 6.3% (the previous month’s 6.1%). The last time the cash share was higher was in April 2001.

So what is missing for a more positive outlook?

We need a statement from Fed Chairman Jerome Powell that gives confidence to market participants that inflation is slowly but surely getting tamed and interest increases will stop eventually or at least perform at a lower speed. Then, with 60%, we still see a relatively high share of equities as part of BofA’s assets under management, and last, but not least, funds have so far hardly seen significant outflows.

Research

Once again, and as you all probably know, I am not a big fan of average research issued by the average commercial bank. Much of it always goes in the same direction, always late cyclical and nicely wrapped in consensus-driven statements, and not to forget ESG-compliant. Nevertheless, The investor crowd gobbles this stuff up; why I do not understand because the platitudes from some of these reports could, at times, easily overpower the Swiss alps.

Ladies and Gentlemen

As always, please share your opinion with me, but please do not forget (instead of hitting the reply button) to send your messages to: smk@incrementum.li
Many thanks, indeed!

I wish you an excellent start to the day, a great weekend, and above all and still, peace!

Yours truly,

Stefan M. Kremeth
Wealth Management
Incrementum AG – we love managing assets

Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 102
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li

Good Morning Ladies and Gentlemen

I sometimes get the impression that I am always reading/watching the same narratives. Now, I understand journalism is, by definition, cherry-picking. It reports on rare events, such as wars, epidemics or catastrophes, not on everyday life, i.e. peace, health and security. This tendency towards negativity is exacerbated because journalists fight for clicks and, as moral preachers, want to jolt their audience out of its complacency. The satirical magazine “The Onion” sneered: “CNN holds morning meetings to decide why viewers should panic all day long.” While this may seem funny, it is not; it is dangerous. Think about it.

Conversation with John

Anyway, the other day I had a long conversation with John, and I would like to share some of the thoughts that came up during our conversation. I will concentrate on John’s thoughts; they are much more interesting than mine.

Financial markets may fool participants (Stefan)

Many people make money in a bull trend in whatever asset class and believe it was because of their fantastic judgement. So if they feel happy about it, that is just fine. However, such situations may lead to sorrow once the market trend changes and the investment mood swings from greed to fear. There was so much hot air in the markets at the beginning of this year. Cashflows were unimportant; multiples did not count; the crazier, the better and the faster it went up. A correction was overdue; pitty that even quality companies lose a lot in such an environment. As long as asset managers stick to their investment principles and do not panic, I think they are fine.

Though experiences are necessary (John)

There is a saying that the youth is wasted on the young. Massive losses are how people gain investment wisdom. It is necessary to gain experience to understand that bull trends do not last forever, and neither do bear markets. Experience via direct exposure is the best teacher, not via arguments. A disciplined approach geared towards cash flows is more enduring, but that has limited appeal when new-era companies dominate the landscape.

Predicting the future (John)

The future is hard to predict, yet the Federal Reserve makes so many decisions that deconstruct economics and the future into math models. Words and numbers are insufficient to capture the rich reality we experience via our five senses.  Yikes on the Fed. So many unintended consequences can result, which lead to further variations in the future. My former boss said everyone is right in their prediction of the market. There will be bubbles, crashes, investment fads, cyclical phenomena, inflation, and deflation in a long enough time frame. Timeframes are important. Is one right if the gold bull market will occur 20 years down the line? One can say that he/she is correct every year for the next 20 years and will be proven right due to the fickle nature of markets. When people think of the future, they extrapolate the performance of the recent past. Observing history, most things are cyclical.

Next cycle’s winners (John)

Current cycle winners become the next cycle losers. Prior cycle losers become the following cycle winners. Having an understanding of cycles can make predictions of the future more accurate. Yet, the future is unwritten. However, the key to understanding the future is to understand the environment that the past has created. Unfortunately, too many people think linearly in a nonlinear world.
Did you ever notice how every cycle change needs to have a crash? It resets the allocation of capital and redoes the investment narrative. Trends in motion stay in motion until there is a break in the narrative. For example, a key to the start of a bull market cycle (a focus on arithmetic which is a reality play) is to figure out what industry has started to pay down debt, consolidate, and focus on profitability/dividends instead of dense growth. In contrast, the start of a bear market involves new entrants, loads of debt, and overproduction. Increased competition will threaten profitability (think of pot companies and electric cars).

Ladies and Gentlemen

As always, please share your opinion with me, but please do not forget (instead of hitting the reply button) to send your messages to: smk@incrementum.li
Many thanks, indeed!

I wish you an excellent start to the day, a great weekend, and above all and still, peace!

Yours truly,

Stefan M. Kremeth
Wealth Management
Incrementum AG – we love managing assets

Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 102
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li