September 2, 2019 BARRON’S M13
Market View
A Sampling of Advisory Opinion
Crude Oil’s 10-Year Message
Chart in Focus
by McLellan Financial Publications
mcoscillator.com
Aug. 30: We currently have trade wars,
presidential tweets, inversions in the yield
curve, slowing earnings growth, decreasing
corporate share buybacks, and all manner of
other problems affecting the stock market.
And yet the long-term message from crude
oil prices says that the stock market ought
to continue trending upward into 2021.
It is a fun attribute of crude oil prices
that their movements give us a 10-year
leading indication of what lies ahead for
the stock market. I discovered this phe-
nomenon a few years ago when taking a
long-term look at crude oil prices on their
own. I happened to notice that the long-
term pattern of crude oil prices looked an
awful lot like that of the DJIA. So I put
them on a chart together, and the result
was less than satisfying. Sometimes they
moved together, sometimes opposite, and
sometimes there was no correlation at all.
It was only after I realized that crude
oil’s movements were getting repeated in
the DJIA with a delay that the clouds
opened up and the sun shone in. After
some tinkering, I discovered that the lag
time was approximately 10 years...Crude
oil prices reached a peak in April 2011.
Looking 10 years forward, that implies a
peak for stock prices in April 2021.
—TOMMCCLELLAN,
Commodities and Bonds
Market Commentary
by Cresset
cressetcapital.com
Aug. 28: Global interest rates are plunging
as investors brace for a worldwide slow-
down. Over the past month, the yield on
the benchmark 10-year Treasury note slid
0.6% to 1.46%, with most of the drop oc-
curring over the past three weeks. This
morning, the U.S. 30-year Treasury bond
yield dipped below 2% for the first time
ever. As we have pointed out in the past,
more than $14 trillion of bonds worldwide
carry negative yields: The French, Ger-
man, and Japanese 10-year notes all offer
negative yields, while the Swiss 10-year
note currently trades at a negative 1.1%.
We believe U.S. interest rates have
fallen too far, too fast relative to actual eco-
nomic conditions. One of the most reliable
indicators of global growth comes not from
the bond market but from the commodity
pits: the relationship between the prices of
copper and gold. Copper is a real-time ba-
rometer of economic activity because it is
an industrial commodity used in construc-
tion (43% of total use), electrical and elec-
tronics products (19%), transportation
equipment (19%), consumer products (12%),
and machinery (7%). Gold, by contrast, has
limited industrial uses and is instead simply
a safe-haven store of value.
Statistically speaking, the variation in
the gold/copper relationship since the end
of Q1/19 explains nearly 97% of the varia-
tion in the benchmark Treasury yield.
That regression implies the 10-year Trea-
sury yield should be 1.6%, not the current
1.46%. While 0.14% doesn’t sound signifi-
cant, it in fact represents a 1.2% price de-
cline in the underlying note.
We maintain our view that the U.S. is
not on the brink of recession. We will con-
tinue to monitor the copper/gold pair for
clues to relative interest rates and the
health of the economy.
—JACKABLIN
Post–Labor Day Playbook
Market Commentary
by Cumberland Advisors
cumber.com
Aug. 28: We enter the post-Labor Day pe-
riod with caution about the policy outlook
in the U.S. and elsewhere. Bonds are in a
barbell and avoiding a ladder...Stock ac-
counts are rebalancing and deploying cash
reserves. Market corrections have allowed
for repricing and entry. Fear is providing
those entry opportunities. Quantitative ac-
counts have been defensive for months;
they are now redeploying as indicators
confirm opportunity and market-based
prices indicate entry. When the inflation-
adjusted interest rate is zero or lower,
money’s usage is free. This is bullish for
many asset prices.
—DAVIDR.KOTOK
Small Caps’ “Death Cross”
Market Commentary
by Gorilla Trades
gorillatrades.com
Aug. 27: The Russell 2000, the main small-
cap benchmark, made headlines yet again
today, closing at its lowest level since Jan-
uary, confirming its relative weakness.
While technicals are not clearly bearish
yet regarding the index, it is well below
both its 50- and 200-day moving averages,
and on another negative note, its short-
term moving average could soon cross be-
low its long-term indicator, as well. The
“death cross” would point to a long-term
trend change, which would cast a shadow
on the ongoing bull market in stocks.
—KENBERMAN
Hedge Fund Lemmings
Commentary
by Stillwater Capital
stillcap.com
Aug. 26: Our standing position is to write
both the good and the bad about hedge
funds. Finding the former is very hard
these days; the latter is a different story.
As they say in the news business, “if it
bleeds, it leads.” This [past] week, the
bleeding was of assets...it looks like 2019
will be even worse for hedge funds that
should be doing well in this environment.
If Bloomberg has the numbers right, and
we have no reason to believe they aren’t,
redemptions from hedge funds are already
up 50% from last year. And by last year
they mean all of last year; right now. we
are only in August.
One of the reasons why the shine is
fading is that managers tend to act like
lemmings, piling into the same trade, often
at the same wrong moment. Goldman
Sachs is finding that health care is the
current Belle of the Ball as the sector has
some of the best earnings growth in the
market and is somewhat insulated from a
global trade slowdown.
In a shock to few, the largest two hold-
ings currently found among hedge fund man-
agers are Amazon.com and Facebook. We
are long the one that has become the domi-
nant global leader in e-commerce and busi-
ness services hosting, while at the same time
short what we consider to be a threat to the
privacy and mental health of many, a fact
that is not lost on the federal government.
—BRYANGOLIGOSKI
Tariffs, Trade, and Tweets
The Weekly Technical Review
by Macro Tides
macrotides.com
Aug. 26: Actions speak louder than words,
or tweets for that matter. When the trade
negotiations were headed toward a positive
resolution between November 2018 and
late April, China allowed the yuan to ap-
preciate 3.9% against the dollar. The path
of the Chinese yuan since late April sug-
gests that China is using the continuing
depreciation of the yuan as part of the
trade war. In late April the yuan was trad-
ing at 6.69 to the dollar but fell to 7.09 on
Aug. 23. Today the yuan was trading at
7.15 to the dollar or -6.9% lower than be-
fore the trade war escalated in early May.
If China was reaching out to the U.S. over
[the past] weekend, as stated by President
TIC [Tweeter in Chief], the yuan probably
wouldn’t have dropped another -0.85% ver-
sus the dollar today.
—JIMWELSH
To be considered for this section, material,
with the author’s name and address, should
be sent to [email protected].
”In a shock to few, the largest two holdings currently found among hedge fund managers are
Amazon.com and Facebook.” —BRYANGOLIGOSKI,STILLWATERCAPITAL