Facts weekly ending oct 4 in billions (change/total (impact on reserve yearly %)): - reserves: -15⁄4146 (-19%) - bills 0/.1 (0%) - notes and bonds -8⁄2200 (-10%) - mortgage backed MBS -7⁄1700 (-8.7%)
Conclustions - Lend money, Do not borrow => long term interest rates are artificially high => buy bonds, dividents, corporate bonds => cash becomming scarce and king - Neutral on borrowing short term (bills) => - Lend mortgage, do not buy house with mortgage => mortgage rates are artifically high => buy MBS etf - buy bonds
*- fed balance sheet (active intervention) *- yield curves (20-2 spread): money creation and flow (now: almost zero) *- corporate bond minus treasury spread - export/import - gdp growth/inflation/unemployment - currency - stock market yield
Market Sentiment: Speculate and Adjust
We call the current market sentiment Speculate and Adjust. After each earning season, investors start speculating about the future of the tech stocks and keep betting on which ones will run faster. During the earning calls, adjustments happen: those who could not live up to the expectations fall back to the previous quarter prices (Ex: Twitter and Facebook) but those that surpass expectations will jump (Ex: Amazon and Alphabet and Apple). It is the tech sector that continues to grow while pulling the rest of the economy.
Solid Fundamentals: The US is experiencing high economic growth, low unemployment, and high capex investments despite trade wars and ascending prime rates.
High Volatility: There will be frequent adjustment periods in which the market will tumble to adjust itself to numbers emerging from the earning calls.
Moderate Growth: The market will look like a bumpy ascending hike, growing and falling on an upward slope.
Tech Driven: The tech sector keeps yielding over 20% annual revenue growth, often beating analysts’ expectations. If you subtract the tech companies from S&P 500 the remaining market is stagnant, which is one of the main concerns among market bears.
Tax cut effect: The recent tax cut in favor of businesses is one of the reasons the current bull market is stretching beyond usual economic cycle.
Cautious Market: Investors are cautious about current high stock prices and high P/E ratio as it resembles the great recession (2008) and the dot-com burst (2000). Moreover, the borrowing cost is not cheap anymore (prime-rate in near 3%).
Raising Rates: The Fed is constantly raising the prime rate (borrowing cost from the Federal Reserve) to fight crawling inflation. Consequently, the mortgage rates are raising and less people are buying homes. Please check out Market Risk for greater elaboration.
inVisement thinks the current market is healthy, growing, and cautions. We keep our positions while slowly adding to our cash reserves.
inVisement Position: Hold
inVisement portfolio consists of
- 60% Stocks from GOOGL, MDB, SQ, CRM, TWTR, NVDA
- 25% call options for QQQ, SPY, DIA, AAPL, and GS
- 15% Cash
inVisement is bullish and aiming at 25% return of its portfolio for 2018:
- 15% Return from our stock positions
- 10% Return from our margin account (15% minus 5% borrowing cost)
- 40% Return from our call options
- 0% Return from cash
Total Expected Return = (15%+10%) * 60% + 40% * 25% + 0% * 15% = 25%
Please check out inVisement Portfolio for more info.