Quarterly Commentary

As we near the end of the 3rd quarter of 2014 we find the US$ up nearly 7% on the year, higher than many of the US and Global Stock Indexes’ and only outperformed by the NASD 100 which is up over 12% year to date. Adding further insult to the dwindling returns of the QE infused US based Stock indexes is the fact 30 yr. treasuries (and many long dated treasuries ETFs) are up over 7% year to date.

The flip side of that US$ strength as fueled by the promise of higher Federal Reserve rates (attracting foreign yield seekers) is what the worlds reserve currency impacts upon the balance of world trade, namely; devalued foreign currencies where the Euro € is down nearly 8% year to date, the Swiss CHF is 6.5% lower and the emerging market currencies ETFS are down in access of 7%+ year to date. The highly touted non floating Chinese Yuan ¥ is held to FX spreads at 6.2% lower year to date. The Federal Reserve passed the baton to utilize QE to the ECB to stimulate the Euro zone and that clearly implies a lower € with common projection to 125 to 120.

The fact the Fed assures the market higher rates abound in the future (tentatively mid 2015) to curb anticipated excessive growth normally hammers US treasuries/all debt prices lower. This time around the chaos of the world is feeding US treasury needs due to relatively higher yields (Bunds at 0.9% vs. US10 yr. at 2.5%)…so for now and the projected future through 2017.

Currencies are performing as academics suggest; moving faster than the self fulfilling prophecy of the following actual trade- particularly in commodities. Nearly all the various commodities Indexes are hitting 4 and 5 year lows and look poised to muddle through this sell off for an extended period of time as global demand via GDP slips quarter to quarter.

Kindly bear in mind, the 40+ year global increase of trade and its accustomed trade growth has created greater infrastructure and pipeline of supply of all products. When that demand slips as we are now experiencing; supplies build up and become overly abundant.

Moving into the 4th quarter 2014 with an increasing precarious world filled with exogenous shocks in the Middle East, Euro zone, Asia’s host of issues (Chinese growth, growing protests for social change, Japans growth and viability) and a continued congressional gridlock make for the markets inclined to move in the same direction; lower commodity valuations due to increasing supplies in grains, food stuffs. Energy is in abundance and is bid in the $90 handle due to terrorist threats to global supplies and less so to US domestic supplies because of shale. Some 56% +of US domestic crude is shale. Also crude is beginning to be exported from the US.

Gold is destined to drop further as it’s largely discredited as safe haven vehicle (notice its correlation to US treasuries).  Inflation will have its day in the sun, rest assured- after gold trades below $1000. Gold forecasts below $900 by 2017 are growing among global banks as global inflation only has the earmarks of happening in the future. Reality is; inflation is a monetary phenomenon that generally 22 months of cash infusion to filter through an economy. Not to mention the potent of US higher interest rates to curb any inflationary pressures and expectations as early as 2015, could easily be 2016 or 2017- per the sustainable drivers of the economy. Till than gold is a speculative 50/50 bet as a safe haven trade in a world of growing chaos.

G7 debt markets are operating with the promise of Eurozone QE via the ECB, as the QE baton has been passed from the Fed.  Government driven stimulus from China to compensate for the lower overall projected GDP of under 7.5%, Japan’s version of stimulus is poised to push the Yen to continued new lows vs. the US$ and into a debt to GDP ratio that will grow beyond the current 227%.  The relatively higher US yield of 2.5% in the US 10 yr. Treasury is bound to funnel the higher yield seekers to the US treasury market

The stock market will continue to be a pathfinder to new highs, via momentum, the largess of capital markets. The safe haven mentality as global interest rates competes for monies, sourcing and the searching of greater corporate returns. The significant levels to watch are 1897 in the S&P and 16,550 in the DJIA.

Healthcare/Pharmacy and Utilities are likely to grow over financials and other consumer goods. Commodities, foods, metals miners will need to turn around rather quickly to be wrong on that count.

The Healthcare sector is up 16% year to date and remains a viable trade with the Obama care emphasis being the main driver. Till the composition of congress has any meaningful repel of Obama care this sector should continue to outperform the broader indexes despite any potential raise in interest rates.

Utilities as a group are up 11% year to date; like in the healthcare sector I see no disruptions on the horizon.

The Technology sector has gotten a great deal of the media attention and as a whole is up 7% relative to the NASD index which is up over 12% year to date. Consider that further proof that money is flowing to the index related trades and the outliners are simply riding the wave. Higher US interest rates will likely be the final arbiter of that heard mentally.

Basic Materials and Consumer goods sectors are the main street economy as reflected in the popular indexes and all running at +6% year to date.

The Fed’s assured higher interest rates will impact this sector- squeezing disposable income, housing equity valuations and bound to gain the media’s attention and taking media time away from tech.   Higher interest rates are bound to take the premium off financials and return banks to what was intended all along; lend monies to corporations and consumers. AS QE is removed from the economy shortly, so too are the easy money policies and consequences that have benefitted banks/financials.

Doing more of what works and less of what doesn’t is bound to continue through 4th quarter 2014.

Respectfully yours,
Jim Moen

FULL RISK DISCLOSURE: Futures trading contains substantial risk and is not for every investor. An investor could potentially lose all or more than the initial investment. Risk capital is money that can be lost without jeopardizing ones financial security or life style. Only risk capital should be used for trading and only those with sufficient risk capital should consider trading. Past performance is not necessarily indicative of future results. Results are indeed the final arbiter!