Macro, Markets, and Malarkey

Stocks and Bonds
It feels like forever ago, but back in February, the S&P 500 hit its lowest level since 2014 as global growth fears spooked investors, leading to liquidations and deleveraging—most notably for sovereign wealth funds.

Fast forward to now…as of the end of July 2016, the S&P 500 closed at 2,173.60—up 7.5% from the beginning of the year. And, 10-year treasury yields started the year at 2.24%; as of the end of July 2016, rates were at 1.46%—a 35% decline in yield from the beginning of the year. These are big movements in both domestic stock and bond markets which investors shouldn’t take lightly.


Also, more than $11 trillion in negative yielding bonds are outstanding, largely in Europe and Japan. The Financial Times wrote a great piece recently highlighting the post-Brexit surge in investor bond purchases.[1]


This means that if an investor holds one of these bonds until maturity, they actually lose money. They are also paying the issuer for the right to own these bonds, versus receiving some sort of payment in return—as Finance 101 teaches us should be the case. Governments with massive stimulus policies (ECB, Bank of Japan, and now the Bank of England) are buying up bonds, bidding up the price of these bonds and thus sending yields negative. Accelerating the decline in yields is the fact that the supply of such bonds is not ample enough to meet this demand. Negative yields are supposed to entice investors to invest in other assets, since they clearly lose money by investing in such bonds. This hasn’t happened. And yes, this is completely backwards and deflationary.

Currencies and Commodities
Currency markets have not been immune to this storyline; as Europe and Japan use monetary policy to help grow their economies, foreign investments flow to the US for its higher yields. Since May, foreign buying coupled with more hawkish Fed speak has strengthened the US dollar versus other currencies.


If the US dollar continues to strengthen or simply stays strong on a relative basis, this has the potential effect of placing a lid on US inflation. The stronger the US economy gets versus its global counterparts, the stronger the dollar looks versus other currencies.

A strong dollar is usually a negative for commodities. And in fact, the strong dollar has kept commodity markets mostly in check since early May, as we wrote about in Commodities at a Crossroads. Of note, crude oil fell to under $30 a barrel earlier this year, sliding alongside the S&P 500, touching its lowest levels since May of 2002. It then spiked to above $50, and now hovers just north of $40 due to dollar related price pressure—nearly 20% below its peak in June of $50.11.

The US Economy and Election
That’s not all. We’ve barely discussed the domestic economy. Here at home, despite anemic GDP growth of 1.2% for Q2, economic growth is indeed expanding as evidenced by the latest payroll and hiring figures. Non-farm payrolls increased by 255,000 in July on a seasonally-adjusted basis, with the unemployment rate at a very healthy 4.9%. Wage growth and labor market improvements here in the US makes a strong case for the Fed to raise rates. Our view is they should raise rates in September, ahead of the election. Whether they will or not remains another question.

Lastly, and as an homage to Vice President Biden’s favorite saying, “malarkey,” rhetoric around the US election has truly captured the American public, including ourselves. We are seeing raw democracy at work here and elsewhere. People are voting against the establishment; it’s a small segment of the human race, but it affects us all. In the meantime, it may become clearer that at extremes, when enough of the populace is truly feeling disadvantaged, capitalism has to make some changes. Otherwise capitalism and democracy are not going to work when the rule of law favors a few as opposed to the many. While this line of thinking may be too philosophical for a financial markets blog, it merits consideration because it does affect one’s view on investing.

Thus far financial markets have not reacted to the election news melee, but investors should pay attention. Should the Republicans lose their majority in the House and Senate, and Hillary Clinton is elected, this could have a dramatic impact on GDP as government spending will very likely increase…then again, it will also increase if Trump builds his wall.

What Should Investors Do?
Stocks can be at record highs throughout the year. The reality is that it doesn’t take much of a move to set a new record high when you have just made one. Odds are we will see low growth for the rest of the year, maybe the rest of the decade. One should expect dispersion by country and company with thoughtful, well analyzed decisions to make on what to own. This is going to take real professionals who are either doing real fundamental analysis or machine learning or can take advantage of the volatility and the anomalies. It’s going to be a different market. We all know that global and country growth comes from demographics and technology (of which productivity is a subset if you can measure it). But, there is a payback when the easy money goes away, causing slower growth than the demographics and technology would suggest.

In light of this, our view is that investors should have two areas of their portfolio well covered. First, there are downside risks to the market right now. Ignoring this fact would potentially leave one’s portfolio without a buffer, and we believe every portfolio needs uncorrelated assets. While it is self-serving to advocate for managed futures, Altegris has a focus on managed futures because time and time again they have performed during some of the worst periods for traditional equity markets.

Equity markets could continue to push for new highs, but we believe they are also susceptible to periods of steep losses. Managed futures performance has historically been uncorrelated to the performance of the broad stock market, and we strongly believe all investors with risk capital should consider this diversifying return stream, given the current macro picture.

The second bookend to investors’ portfolios, given the market environment, is private equity. Private equity was one of the few areas that didn’t sell off when investors panicked earlier this year, and whose returns can be orthogonal to the returns of traditional markets. Now, private equity is not a liquid investment option, so investors must be thoughtful in terms of just how much they allocate. But it is the forgoing of frequent liquidity that makes private equity attractive in our opinion. This is what is commonly referred to as the illiquidity premium, which is essentially the potential reward of enhanced returns—over time. This potential for enhanced returns may be particularly attractive for investors given the uncertainty in traditional equities at present.

The bottom line is that investors should aim to diversify portfolios. Look for ways to grow and preserve capital in your portfolio and seek returns in areas where investment managers have a real edge and understanding of the underlying investments. Pay attention, and invest for the future of your portfolios.


Data sourced from Bloomberg unless otherwise specified.

[1] Financial Times, June 29, 2016:

A Look at the Year Ahead

Providing some answers to the questions on the media’s minds (and maybe the investors’).

This is the time of year when we get a lot of questions regarding our outlook for next year including a call for point estimates on the usual indices and other variables. It is somewhat pointless to provide point estimates, but we did some of that below. We are in an unusual environment, with many variables that can certainly see some volatility throughout the year with, in my view, greater dispersion in results, similar to this past year. We are working on our annual Altegris Perpectives piece, “What to Expect in 2016 (and Beyond).” I must say, it is a harder year for developing definitive expectations than I have seen in a long time. That says something about the markets and increases the desire to spend time with the micro folks as opposed to the macro types. Historically, when this has been the case, that has paid off.  Paying Attention is still the advice, but I would add the words of my friend and former co-worker many years back, Art Cashin, “…Stay Nimble.”  As many of you who on occasion read the Altegris Blogs, you have seen me write that Past Performance is Not Indicative of Future Results. Given some of the dispersion we did see in 2015, this may be a time when last year’s performance may be more indicative of this coming year’s results.

Below are some of the consistent questions that have come up from those looking for answers.


Taking into consideration the rollercoaster some equity investors found themselves on this past year, particularly in August, what are the biggest risks facing investors in the stock market in 2016?

There’s a long list of factors impacting the stock market as we begin the New Year. The global slowdown, a strong dollar and the Federal Reserve’s late-in-the-game rate change, to name a few, all add a degree of uncertainty for investors. I would also stress two other factors that will play into investor returns: another year of profit disappointment driven by wage increases and the end of the oil dividend for many corporations.


What will be the biggest surprise for investors over the next 12 to 18 months?

Inflation could pick up a lot faster than widely anticipated. I would encourage investors to keep an eye on wage growth.


How are you advising clients looking to allocate assets and potentially reinvigorate their returns entering into the New Year?

We’ll be publishing an in-depth outlook with a few wild cards shortly, but I can provide a quick preview of what we’re seeing in the markets.

To the extent an investor doesn’t need liquidity, the opportunities in the less liquid parts of the markets will likely benefit from a growing illiquidity premium. Just don’t buy a daily liquidity fund that has been buying illiquid securities to juice returns.

Investors experienced no to low equity returns in 2015. We’re predicting more of the same for equities next year. It may prove to be a good year for true equity hedge fund managers. In terms of fixed income, we’re anticipating some credit accidents, but on balance, no major credit meltdowns. The recent moves in the high yield markets may have provided some opportunities if one does very specific credit analysis security by security.  Activist and event-driven managers are likely to experience favorable returns as M&A activity continues to be strong going into 2016. As we have seen this past year, sometimes an activist approach doesn’t work, but I think over time it does. This recent action does open up opportunities for those who have a longer time horizon and are dealing in the less liquid parts of the markets. I recently made a point (which I stole from one of our own, Greg Brucher) “…investors buy and hope, activists buy and influence, and private equity firms buy and fix.”  There will be a lot of situations open for fixing over the next few years.


Given Donald Trump’s campaign has been getting a lot of media attention, with speculation that he could actually have a shot at the Republican nomination, what would the election of Donald Trump mean for equities?

Trump’s nomination would most likely be a negative for equities since it would represent some element of disarray in the Republican Party. If he is elected, however, we think it could potentially be positive for the markets. Most of the programs he is calling for would raise debt levels more than any previous administration’s policies. The upside for the economy would be a lot of fiscal stimulus. The downside is that it would inevitably increase rates. This would also bode well for defense stocks. Whoever is elected, I think the odds of more fiscal action is higher than it has been over the last 8 years, even amidst ongoing dysfunction at the Congressional level.

Historically, the President only affects stocks on the margin. But as we’ve seen with Trump’s campaign for the nomination, a Trump presidency would no doubt be a different animal.


Who would be the best presidential candidate for the stock market? 

I’m more interested in picking the best candidate for the country. While one could say what’s good for the stock market is good for the country, I tend to think it’s the other way around. Historically, markets have done better under Democratic presidents, but it’s a close call.


Looking forward to the next 12 months, on which sectors are you taking a bullish or bearish stance?

We’re bullish on defense stocks, technology and healthcare. In terms of technology, we’re actually favoring old tech over new tech, particularly companies involved with the cloud, cybersecurity and have been spending on R&D.  Moore’s Law continues to be operative.

Consumer staples and most fast food companies are where we’re currently bearish. While staples tend to be a more defensive sector that does relatively well in slow growth environments, changing eating and drinking habits among Americans are going to make it tough for these companies to keep up and generate meaningful returns. Once again, it is company by company, but they won’t all be making the adjustments to new habits in a timely fashion.


If you had to give 2016 year-end targets for a handful of major market indicators and indices, what would they be?

Take the point estimates with a grain of salt because on any given day those numbers can and will change. But overall the market may keep pace with nominal GDP results next year in spite of the profit picture looking quite weak.

S&P 500: 2,120 (but with big dispersion)

Dow: 18,100

10-year Treasury yield: 2.65%

Gold: $1150

Crude oil (WTI): $52 (this was my target before this latest downdraft and I’m sticking with it—at the moment)

Fed Funds Rate: 0.75%

Employment Numbers Surprise Almost No One; Alter No Fed Expectations, But…

Are we entering a longer growth, but lower return environment?

The Numbers

April employment numbers of 223,000 jobs added dropped the unemployment rate to 5.4%. March numbers were revised lower to 85,000 jobs vs. the 126,000 previously reported. Wages rose quite modestly month-over-month. This report provided a sigh of relief for the bulls on both the stock and the bond markets, reinforcing a view that the Federal Reserve will be in no hurry to raise rates. But, there are some nuances to the report, which we will discuss in the geek session below, that continue to suggest that the labor market is tight, wages will likely rise, and we will see the Funds rate rising this year. The pace will likely be slow. We still need more data.


What We are Watching—The Usual Plus China

As we have said before we are watching the employment numbers, wages and commodity prices with a further eye on China. As we indicated in our Perspectives “What to Expect…” pieces we believe the China numbers will prove disappointing as the country continues its transition to a more consumption-driven economy. We received some reinforcement on this view from Michael Pettis at our Altegris Mauldin Economics Strategic Investment Conference (SIC 2015) a week ago Michael believes that China will ultimately see its growth rate fall substantially—possibly to 4% or less as investment as a percent of GDP declines while consumption rises. Whether that number ultimately occurs, the direction and the mix of growth would indicate commodity prices could stay low as this important incremental buyer adds to industrial and infrastructure capacity at a slower rate. I spent some time at the Milken Conference before our SIC 2015 began, focusing on the China presentations to get some other views on the outlook. I heard little suggesting that China would take actions to maintain its growth at the reported 7% level. Instead, China is taking a very strategic long-term view both domestically and internationally. Infrastructure (e.g., Silk Road initiatives) is geared toward the strategic; internal policy initiatives (e.g., corruption, intellectual property, environment, technology, property) are geared toward the strategic. Currency is geared toward the strategic. China will take steps to avoid problems with the banking system—and those are significant–, but the message was China believes it can maintain political stability during a period of declining growth rates. I specifically asked someone (who will remain nameless) if there was any number from China that would change his view on what could happen next. The response: there was no number; low numbers are expected. News that could change his view would relate to political instability, not economic instability, suggesting disagreement between those currently in power pushing change and those who want the status quo. He dismissed that possibility but did bring it up, so it is worth watching. One has to watch through opaque lenses. In addition, to quote Gary Shilling at our SIC, “growth can cover a multitude of sins.” Gary was making that point with Lacy Hunt of Hoisington Investment Management, who was forecasting very slow global growth for decades to come stemming from the debt load the world’s economies are carrying. It certainly applies to China, as the slower growth may expose “sins” of which we are currently unaware.


Where Does that Leave Us?

In the short-term, the markets are reacting to every data point that indicates when the Fed may be tightening and at what pace. I believe that the data as we move through the quarter will support a view that the US economy is growing and the labor market is continuing to tighten. The Fed will wait for the data on the quarter, but the markets may not. We do need more data.

I agree with the general tone of the SIC that we are in for an extended period of low growth in the US and globally. The macro risks would appear to be more geopolitical than economic. The ultimate effect is on corporate profitability. With slower top-line growth, a more competitive battle for market share is likely. Specific company results will be more management dependent with a different mix of sectors performing well vs. the QE world we have been living in.

If the market comes to believe that the economic cycle will be slower but extended, multiples could rise above what are now some pretty full levels. If multiples do rise, discounting an apparently more certain future with lower rates, surprisingly, volatility could rise with it. Markets will react more violently in both directions to any news that pushes the longer-term view one way or the other. That volatility will most likely come from the interactions of the US economy with the rest of the world, the impact of that on currency and the ultimate rebalancing of supply and demand in the commodity sector. Although, Peter Diamandis at SIC presented a view of a world of “Abundance” (his book) that was hard to ignore, forecasting a world of oversupply in all factors of production. His presentation also reinforced a focus on technology as a driver of variable returns throughout many industries, including the technology and social media industries themselves. As Moore’s Law continues to march along, or even accelerate, we may see new disruptors disrupting the “old” disruptors. It is possible that includes some of the “old technology” companies surprisingly re-emerging as the “Internet of Things” and “Big Data” become even more important.

Rates will likely rise in the US, but the pace and magnitude may be consistent with a low growth environment with the real rate of interest being close to zero. In that environment one would have to look away from simply investing in the indexes to achieve returns. Active management, risk management, and a true look at the need for immediate liquidity versus long-term capital building should become a more significant part of the search for solutions in a low-return environment.


Specific Observations from the Strategic Investment Conference

Thoughts from the SIC that relate to employment and the Fed, included a view from Dave Rosenberg, echoed by others with some variations, that we were in for a very long but low growth cycle with a recession several years away.

Jim Bianco expressed the view that the Fed is most interested in financial market stability and is unlikely to raise rates until the Fed dots (the governors’ forecasts of the Funds rate) and the financial futures were closer together. The financial markets clearly are reflecting a slower pace for Funds rates rising than the dots from the Fed governors. On the other hand, former Fed governor Larry Meyer, who should know, said to Pay Attention to the governors’ forecasts of timing and degree. The markets will have to react. Chairperson Yellen’s recent comments about the markets would tend to support that observation. Jeff Gundlach said he would expect the Fed to allow the two key variables, employment and inflation, to run “hot,” above the targets for some time before raising rates. A view he has expressed in other fora subsequently.

The above comments specifically related to employment, the US economy and the Fed. There were many more observations from the various speakers at the SIC on a variety of global topics. You will be seeing those in videos we will be posting from many of the presenters as well as additional blog posts.


And Now for the Geek View on Employment

The actual employment rate fell from 5.4650% to 5.4427%. Rounding gets one from 5.5% to 5.4%. 14,000 more unemployed would have kept the number at 5.5%. One modest revision could get us there. To get to 5.3% from where we are would take a significantly larger change in the numbers. It might take us several months to see that. We may find ourselves “stuck” at 5.4% for some time even if the employment rolls increase by 200,000 or more for the next several months. The pundits will have a field day.

However, there are some strange things going on. I have commented previously that we are dealing with seasonally adjusted numbers. As the table below shows, we actually employed 1,178,000 more individuals in April. That ended up being 223,000 seasonally adjusted persons. Last year the actual employment increase of 1,152,000 people on the first go-round was seasonally adjusted to 288,000. The seasonal adjustment factors for 2015 have changed and could produce surprising numbers to the upside as we move through the year.


The unemployment rates (RU) broken down by demographics do say something about tightness in the labor markets. For example, the RU for those 25 and older is at 4.5%. Those with less than a high school education in that age group are at 8.6% while those with a college degree or more are at 2.7%. 16-19 yr. olds have a 17.1% RU. The black community is at 9.6% vs. whites at 4.7%. As I have said before, using Fed policy to deal with issues around education and training is not the most efficient and economically sensible approach to these structural and social problems.

I pay more attention to wages as an indication of the degree of tightness in the labor markets. The wage gains, while modest, are rising. Hourly earnings are up 1.85% from a year ago, and the index of weekly payrolls is up 4.7%. This is in spite of the declines related to the extraction (logging and mining) industries.  For logging and mining, hourly earnings are down about 1% from a year ago to $26.26 per hour (third highest vs. utilities at $34.01 and Information Services at 28.69). Weekly earnings are down 2.9% to $1213/week vs. a $704 average overall. Logging and mining still has the highest weekly hours worked: 46.2/week vs. 33.7/week overall. These results do support our view that the labor markets, away from energy, are tightening enough to produce an increase in wage growth, which ultimately works its way into the profit picture—particularly in a slow growth environment.

The real message, though, is take all these numbers with several grains of salt. There is always more to dissect in the labor market. I can’t wait for the next JOLTS report…

Messaging and Positioning in a Different Risk and Return World

A conversation about real estate with broader implications

I don’t ordinarily write about specific funds under the Altegris umbrella, but a recent meeting with a gatekeeper and Burland East, who is the fund sub-adviser of the Altegris/AACA Real Estate Long Short Fund (RAAIX) produced some more general observations.

Burl has been involved in the real estate business for over 30 years as an analyst, investment banker, direct investor, public securities investor and an advisor and spokesperson in the industry. As CEO of American Assets Capital Advisers (AACA), he has been managing the current fund since its inception as a hedge fund in 2011 through its conversion to a mutual fund in early January 2014, to the present.

The specific investment approach focuses on owning companies in real estate sectors where the tenant is denied choice, exhibited by:

  • Few sector participants
  • High barriers to entry for new owners/developers
  • High barriers to exit for tenants
  • High secular demand

While these characteristics reflect AACA’s long-bias philosophy, it has the ability to take short positions exhibiting opposite characteristics, with the goal to generate alpha, hedge systematic risks, or hedge the current stage of the real estate market cycle. The fund is currently about 120% long and 20% short—half in interest rate and credit spreads and half in specific equity securities. That number can vary day-to-day and, certainly, over time as we move further along in the real estate and interest rate cycle.

At the meeting, Burl said he believed we were in the fourth inning of the current real estate cycle. The gatekeeper response was a view that we may be further along in the cycle; they already had a number of approved real estate funds, although none that were hedged; and there was a concern that exposure in the sector was already high from chasing yield and performance. My expressed thought was there were two ways to deal with this view: 1) suggest to the system that exposures should be cut back, which is a very specific timing call, or 2) deliver the message by introducing a real estate fund that does take a hedged approach, is definitely not a benchmark hugger, and looks for alpha on both the long and the short side of the market. The message would be that straight beta exposure to the sector may be producing higher risk if we are further along in the cycle (even if just the fourth inning), and shifting real estate assets to a manager who is taking a hedged approach may reduce some of the elements of risk in a long only portfolio. Of course, other risks exist in a non-diversified portfolio and past performance is not indicative of future results. However, if one wishes to introduce a sense that risk may be higher in a specific sector such as real estate, recommending a hedged approach may get that message across more clearly than just saying risks are higher without offering such an alternative.

To a great extent, this is a message we have been delivering regarding all of our alternative strategies from managed futures to long/short fixed income. The end of quantitative easing (“QE”) in the US combined with central bank moves elsewhere in the world has increased equity and credit dispersion among sectors and geographies against a backdrop of more systematic currency and commodity trends. This doesn’t necessarily call for a wholesale shift in broad asset allocations. It does suggest that we are moving into an investment climate where active management and absolute return strategies, including long/short management, could become more the core of portfolios with beta plays being the higher-risk shorter-term moves on the margin. The illiquidity premium may reassert itself as dispersion produces opportunities with longer holding periods a requisite for returns.

I will say again, the past performance we have seen during the period of US QE is not indicative of future returns and future measures of risk. Pay Attention to the specific characteristics of every mandate in your portfolio with an eye on the changing environment as the US moves slowly toward “normalization” while much of the rest of the world plays catch-up.



Altegris Advisors, LLC is a CFTC-registered commodity pool operator, commodity trading advisor, NFA member, and SEC-registered investment adviser. Altegris Advisors sponsors privately offered commodity pools and hedge funds, and advises alternative strategy mutual funds that may pursue investment returns through a combination of managed futures, global macro, long/short equity, long/short fixed income and/or other investment strategies.

Investors should carefully consider the investment objectives, risks, charges and expenses of the Altegris/AACA Real Estate Long Short Fund. This and other important information is contained in the Fund’s Prospectus and the Summary Prospectus, which can be obtained by calling (888) 524-9441. Read the prospectus carefully before investing.

The Altegris/AACA Real Estate Long Short Fund is distributed by Northern Lights Distributors, LLC. Altegris Advisors, AACA and Northern Lights Distributors, LLC are not affiliated.


Equity securities such as those held by the Fund are subject to market risk and loss due to industry and company news or general economic decline. Equity securities of smaller or medium-sized companies are subject to more volatility than larger, more established companies. The concentration in real estate securities entails sector risk and greater sensitivity to overall economic conditions as well as credit risk and interest rate risk.

The Fund will engage in short selling and short position derivative activities, which are considered speculative and involve significant financial risk. Short positions profit from a decline in price so the Fund may incur a loss on a short position if the price increases. The potential for loss in shorting is unlimited. Shorting may also result in higher transaction costs which reduce return. The use of derivatives, such as futures and options involves additional risks such as leverage risk and tracking risk. Long options positions may expire worthless. The use of leverage will cause the Fund to incur additional expenses and can magnify the Fund’s gains or losses.

Foreign investments are subject to additional risks including currency fluctuation, adverse social and economic conditions, political instability, and differing auditing and legal standards. These risks are magnified in emerging markets. Preferred stock and convertible debt securities are subject to credit risk and interest rate risk. As interest rates rise, the value of fixed income securities will typically fall. Credit risk, liquidity risk, and potential for default are heightened for below investment grade or lower quality debt securities, also known as “junk” bonds or “high-yield” securities. Any ETFs held reflect the risks and additional expenses of owning the underlying securities.

Funds that are new have a limited history of operations. Higher portfolio turnover may result in higher costs. The manager or sub-adviser’s judgments about the value and potential appreciation or depreciation of a particular security in which the Fund invests or sells short may prove to be inaccurate and may not produce the desired results. The Fund is non-diversified and may invest more than 5% of total assets in the securities of one or more issuers, so performance may be more sensitive to any single economic, business or regulatory occurrence than a more diversified fund.


Alpha. A measure of performance on a risk-adjusted basis. Alpha is often considered to represent the value that a portfolio manager adds to or subtracts from a fund’s return. A positive alpha of 1.0 means the fund has outperformed its benchmark index by 1%. Correspondingly, a similar negative alpha would indicate an underperformance of 1%. Beta. A measure of volatility that reflects the tendency of a security’s returns and how it responds to swings in the markets. A beta of 1 indicates that the security’s price will move with the market. A beta of less than 1 means that the security will be less volatile than the market. A beta of greater than 1 indicates that the security’s price will be more volatile than the market. Long. Buying an asset/security that gives partial ownership to the buyer of the position. Long positions profit from an increase in price. Short. Selling an asset/security that may have been borrowed from a third party with the intention of buying back at a later date. Short positions profit from a decline in price. If a short position increases in price, the potential loss of an uncovered short is unlimited.


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