The Pain of Falling Prices - January 6, 2015

Click Here for this Week's Full Letter - January 6, 2015

  

Greetings,

          Happy New Year! Market activity in December was actually more volatile than I anticipated, but ultimately didn’t have much impact on my portfolio. After launching in early August, the “Cup & Handle Fund” finished the year up 14%, a slightly disappointing yet acceptable result considering stocks only gained 5%. I feel very comfortable with my positions as we enter the New Year, and there’s still a sizeable amount of cash waiting to be deployed when attractive opportunities arise. The bull market in uncertainty continues to run full steam ahead, and I’m ready for the parabolic move higher - it’s just a matter of “when.”

           Market pundits are still touting the US as the fittest of all industrialized economies, yet there are still extreme deflationary pressures. Last Friday, the ISM Prices Paid Index recorded its lowest reading since 2012, and the second lowest since the Great Recession. For all the talk of lower oil prices helping consumers, I don’t see how they will support the economy. The highly respected hedge fund Bridgewater Associates believes oil will actually slow GDP by 0.5% in 2015, and the Wall Street Journal seems to agree with my theory that Texas is headed for recession.

          It’s redundant to say this every week, but Europe is still a mess (more on this below). Last Friday, ECB President Draghi gave his strongest hint yet that he’s about to launch a large-scale QE program involving sovereign bonds. On the same day, a senior member of German Chancellor Angela Merkel’s party warned the ECB not to buy debt from Greece or other struggling EU countries – i.e. the countries that need it the most.

          Meanwhile, there’s speculation that Japan could be the first country to test Bernanke’s “Helicopter Money” theory – although Milton Freidman originally came up with the idea in 1969. There wouldn’t be a physical helicopter involved in the execution, but rather pre-loaded debit cards passed out to all citizens. After 12 months, the remaining balance on the debit cards would disappear, incentivizing consumers to hit shopping malls early and often. I’m highly skeptical this will happen in 2015 – after all the BoJ had 4 dissenters over the last expansion of QE – but that’s the direction monetary policy is headed. Interest rates can’t go any lower and QE offers diminishing returns, but cash handouts would almost certainly boost spending while changing our perception of free markets.

  

           January is always a good time to focus on the two R’s: reading and reflection. It typically takes a few weeks for institutional portfolio’s to rebalance giving investors much needed time to outline important themes in the year ahead. That’s what I’ll be focusing on in this newsletter over the next few weeks while formulating my January Investment Letter – if you’d like to start receiving these letters click here. It’s $8.25/month, which would buy you more than 2 million BTU’s of natural gas. Natural gas will keep you warm, but won’t boost your portfolio.

Today’s letter will cover several topics, including:

  • Setting Up for a Greek Tragedy
  • The Sand Trap
  • Winners and Losers – 2014 Edition
  • Chart of the Week

  

With that, I give you this week's letter:

January 6, 2015

  

           As always, if you have any questions or comments or just want to vent, please send me an email at mike@cup-handle.com.

Until next time, tread lightly out there,

Michael Lingenheld

Managing Editor – Cup & Handle Macro

Posted to Cup & Handle Macro Research on Jan 05, 2015 — 11:01 AM
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