Getting Closer - September 24, 2015

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Greetings,

We’re not there yet, but markets are hovering around some pretty slippery levels. The PMI data released this week, our first look at September, was essentially more of the same. Asia is still slowing down, Europe is growing at a slower pace, and the US is flat M/M. The market has had time to digest these macro trends suggesting weaker growth, but some micro developments are forcing bulls to retreat. The most obvious example is Volkswagen, which is looking down the barrel of an $18 billion fine. Shares in VW are down -35% this week, and -56% since March. 1 in every 7 German jobs is related to the auto industry, so it’s no surprise the DAX is currently testing the August 24th lows.

Caterpillar (CAT) is trading at its lowest level since 2010. The slide in commodity prices has hit CAT particularly hard, but news that the company is slashing 10,000 jobs and lowering its 2015 revenue forecast by $1 billion startled investors this morning. Another major German employer, Deutsche Bank (DB), is trading at financial crisis levels as the company deals with a new CEO, several scandals and exposure to the aforementioned VW. As if that wasn’t enough, biotech, a sector that has looked bulletproof for several years, is starting to roll over – more on this below.

What markets do look good in this environment? Bonds. The Fed’s decision to hold off on rate hikes before December seems more and more like a green light to buy Treasury’s. The 10-2Y section of the yield curve continues to flatten as the market increasingly anticipates “lower for longer.” Norway and Taiwan both unexpectedly cut interest rates overnight, sending global short rates to fresh all-time lows. Actions like these hardly indicate that policymakers are confident in the direction this economy is headed.

Mario Draghi gave a speech yesterday saying he’ll wait longer before deciding whether or not to expand QECB. And given EUR’s recent propensity to rally during risk-off turbulence, I suspect Draghi will act sooner rather than later. Although it’s unclear how much this would actually help the European economy considering Euribor futures indicate negative yields out to March 2017 already. More than anything Draghi needs EUR to fall relative to USD, but that’s easier said than done.

Then there’s gold. The monetary metal has quietly put up a good fight, and is now up YTD vs. EUR, CAD, AUD, MXN, BRL, TRY, CNY and INR – to name a few. And those are just the major currencies. The yellow metal is in a full-fledged bull market relative to most emerging and frontier currencies, where a lot of wealth has been destroyed this year. Gold is down less than 3% relative to USD, but if the Fed gets painted into a corner where it can’t raise rates, expect gold to be the best performing currency of 2015.

The Cup & Handle Fund is up around 7.0% YTD, and +21.5% Y/Y. We added some new shorts this week and made small tweaks to the portfolio. I still feel like my execution of these themes has been sloppy and the returns should higher, but the main catalyst has to come to fruition. So we’ll stay patient. I hope to have the October investor letter out next week, but too soon to tell. If you’d like to start receiving these letters click here.


With that I give you this week's letter:

September 24, 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 Sep 24, 2015 — 2:09 PM
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