Change Is The Only Constant…The Velocity Of Change Is Frightening

By: Kent Engelke | Capitol Securities

The Trump trade has officially been completely “unwound.” The 10 and 30 year Treasury yields have reversed themselves and are now at the lowest levels for 2017. Bloomberg writes the short interest in the Russell 2000 futures contracts have grown the most since 2008. Mega capitalized international growth issues are again outperforming.

Wow! Talk about change from January where Main Street — defined as the small and value caps — were surging over Wall Street and Treasury yields were gapping higher on hopes of regulatory and tax reform.

But the world has radically changed since January. Brinkmanship and nationalism — both patriotic and economic — is surging globally. The populist fervor in Europe is at levels not experienced since the 1930s. I believe this is not reflected in the markets for one primary reason.

As noted a gazillion times and according to the SEC, the markets have been co-opted by algorithmic and ETF trading utilizing technology over macroeconomic and geopolitical thought. Further referencing a December 2015 SEC statement, approximately 90% of equity trading and 95% of Treasury trading is done electronically and such an environment “has created an unbalanced playing field that is benefiting only a few.”

Bloomberg reported yesterday the number of stock and bond analysts are at an all-time low, a trend the newswires is projecting will continue into infinity given the vast proliferation and dominance of passive index trading where by definition the big gets bigger and the small gets smaller.

As noted above, the environment has radically changed. Historically, the markets are the greatest discounter of all events, but has this discounting mechanism broke because of the proliferation of ETFs and algo traders? Because of today’s trading mechanics, a strong argument can be made that yesterday’s performance is indicative of future performance, a phrase that it is forbidden in the securities industry.

I will argue yes, but I will also argue that reality will ultimately prevail, thus suggesting there could be a prolonged period of underperformance for the mega capitalized growth issues (a term in itself that is oxymoronic). When everyone already owns something or everyone is already following the same strategy, typically a prolonged period of underperformance commences.

Change is the only constant. What has changed however is the velocity of change. Ten months ago, few suggested today’s geopolitical environment where populism, economic and patriotic nationalism will again become the dominant philosophy and even fewer had suggested that brinkmanship will return to be the cornerstone of American foreign policy, the cornerstone that existed since 1945 and took a hiatus from 2009-2016.

Commenting about yesterday’s market action, the Dow was virtually unchanged while the NASDAQ fell almost 0.5%, perhaps the result of valuation concerns of the mega capitalized technology growth issues. Treasuries ended around session low yields.

What will happen today?

Last night the foreign markets were mixed. London was down 0.07%, Paris was up 0.10% and Frankfurt was unchanged. China was down 0.46%, Japan was down 1.04% and Hang Sang was up 0.93%.

The Dow should open nominally lower ahead of the commencement of first quarter earnings season and geopolitical uncertainty. Oil is quietly higher ahead of an inventory survey and Saudi Arabia’s comments that it is willing to extend production cuts. The 10-year is unchanged at 2.30%.


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