BloombergTV Daybreak: Clip & Prep Notes

My out of consensus call: More of the Same for 2H,  is off to a good start.

Research provides major support:  in yrs where 1H drawdowns are under 5% ( 1H 2017 max drawdown = 2.8%) the 2H performance its even better, averaging 8% with 80% up yrs.

So low volatility begets low volatility both in the economy and in the mkts.

What can go wrong? Need to understand risks that can overthrow low vol regime. I use my Global Risk Nexus ( GRN) framework to analyze global economics, politics, policy & markets.

GRN suggests 4 potential risks: DC disfunction, Fed policy mistake, China credit crunch, disappointing earnings. The last is most concerning; I expect PG 2Q earnings but less robust growth in 2H earnings as comps get tougher, likely limiting 2H US upside.

DC policy inertia no longer a surprise - need Govt shutdown, impeachment talk to really affect markets - the former is possible, the latter unlikely this yr, thus stks are able to make new highs in week Pres son admits to meetings Russians.

Fed policy mistake is key Q - another reason to support mkt move last week as Chair Yellen made it clear Fed would go slow… as noted in my piece Fed now has optionality it didn’t have a yr ago. Fed can raise OR lower rates as it needs. Mkt less concerned about Fed, good for stks, bonds, EM.

China credit crunch is a perennial on the bear case list but dont expect to see any big issues in 2H… long China. (MCHI).


Key call is to remain OW non US Dev Mkts that are taking  global equity leadership from the US which has led since GFC bottom in 2009. Europe is preferred area; VG econ data flow yet stocks have been weak as rates rise, esp in Germany. This is a good buy point as 3 major investor bases not yet involved in Europe: SWFs/PFs, reserve managers ( Euro) and companies themselves w stock buybacks at 11 yr low. Play Europe 3 ways: regional ETF ( EZU), favored country, Spain (EWP) and top sector, banks (EUFN) which are massively outperforming US banks. Just in past month Spain and Italy have made major strides in cleaning up zombie banks and NPLs, issues that have bedeviled the region and these countries for nearly a decade….

US equity has a Q of leadership: financials still below March peak, tech pretty well played, etc… I like Industrials which are beginning their 1st major cap ex upgrade cycle in 15 yrs… sector ETF (XLI) as well as stock (GE), an American icon that is at its 52 week low, just absorbed a downgrade by a top tier bank, has a new CEO tasked to make changes and pays a 3.5% div while you wait.

Also like gold as protection in case one of the risks noted above materializes or NK goes sideways, Gulf conflict heats up etc. Large spec futures report 2nd largest short position EVER in gold… 

When many assets are close to all time highs its really nice to populate the portfolio with items that are close to 52 week lows like GE, underowned like Europe or sporting near record short pos like Gold (GLD).


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