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November 2018 Update

By December 5, 2018No Comments

Monthly Recap

November was a relatively calm month following October’s volatility and saw the S&P 500 claw back a 2% gain for the month.  In fact, most asset classes saw positive returns for the month of November with hopes that the market would be smooth sailing through year end.  To recap, here are just some of the noteworthy events and stories from November:

  • Wildfires devastate California as millions are evacuated from their homes and the death count rose to around 85.  PG&E, California’s utility company, is under scrutiny about whether its equipment caused one of the fires.  As a result, PG&E’s stock and bonds fell dramatically in fears that it could go under.
  • Jeff Sessions resigns as US AG at the request of Donald Trump.   Soon thereafter, Trump appointed Matt Whitaker as acting AG to large rebuke.
  • The House of Representatives swung Democratic after the mid term elections dealing a blow to the GOP.
  • The Fed holds interest rates unchanged with eyes to December hike.
  • An article published on Bloomberg stated that soon-to-be-published research will show roughly 22 percent of China’s urban housing stock is unoccupied, according to Professor Gan Li, who runs the main nationwide study. That adds up to more than 50 million empty homes and the highest vacancy rates in the world.
  • The HQ2 debate is over and NY and Virginia have won, or lost depending on who you ask.  At $61K per Amazon Job, NY pays twice what Virginia does and has lead to demonstrations and outcries.
  • During the month, Bitcoin lost nearly a 3rd of its value and dropped as low as $3,650 during the month.  Since peaking in January at $20,000, Bitcoin has lost 80% of its value.
  • Business activity in the euro area grew at its weakest rate in nearly four years during November, according to the latest PMI survey data.  The weaker rise in business activity was fueled by a slowdown in new business inflows to the lowest since the start of 2015.  Manufacturers blamed slower growth on subdued global demand, rising political and economic uncertainty, trade wars and especially sluggish car sales.  It’s becoming increasingly likely that we see a broad European recession coming soon.
  • Oil prices fell about 22% in November, the biggest monthly percentage loss in a decade as traders fretted over a possible glut in global supplies.
  • General Motors Co. will cut more than 14,000 salaried staff and factory workers, or 15% of their global workforce, and close seven factories worldwide by the end of next year, part of a sweeping realignment to prepare for a future of electric and self-driving vehicles.  To no ones surprise, Trump treated about his disappointment and possible retaliation.
  • Federal Reserve Chairman Jerome Powell ignited a market rally by saying interest rates are “just below” broad estimates of a level considered neutral, a setting designed to neither speed nor slow economic growth.  This cause the yield curve to flatten dramatically and recently invert, which I discuss in my 2 cents below.


My 2 Cents

Even though this occurred technically in December, I think it’s important to warrant highlighting here.  For the first time since the financial crisis, we have had our first yield curve inversion when the 5 year treasury bond yielded less than the 2 year treasury bond.  The most widely followed spread is the 10 year and the 2 year treasury bond which hit .13% difference as of 12/4.  As we look to December and with Powell telegraphing to the markets that they may pause rate hikes, it’s possible/likely we’ll see an inversion of the 10/2 year bond before year end.  In the past, yield inversions are harbingers of recessions within 2 years.  I’ve seen a few articles discussing or explaining why this time is different with the yield curve and why it’s not a good tool to forecast trouble anymore to which I completely disagree.  Be wary of the comments, “this time is different”.  If you read any of my past monthly updates, I sound like a broken record.  We are late stage in the business cycle and an investors portfolio should be defensively positioned or positioned in investments that aren’t affected by the business cycle.  If you’re aren’t sure how to do this, cash/money markets are not a bad place to hide.



Charts & Commentary

(In no particular order)

I have read quite a bit of market commentary the past month.  I’ve been incredibly cautious for anyone that knows or works with me and my confirmation bias has been increasing.  Below is a variety of comments from several thought leaders discussing their views of the markets.


Blaine Rollins from 361 Capital on 11/1918
“Many investors have been patiently waiting for credit to break to get them more cautious about the markets. Well, last week was it. Credit spreads across the spectrum broke higher. This is not a good sign as it will cause lenders to pull back their pens making it more expensive to borrow and finance business, thus tightening liquidity across the system. The cost of capital of risk-seeking investors will increase, which will pause new investments and maybe even cause them to sell assets as they now require a higher rate of return. Bank credit officers will tighten their lending screws and require higher standards for that new credit card, auto loan, mortgage or commercial line of credit. There was no real specific reason for the cause last week. Maybe it was the explosion in General Electric credit default swaps. Or maybe it was Paul Tudor Jones’ or Jeffrey Gundlach’s comments about the credit markets. Or maybe it was the continued plunge in oil prices. What we do know is that it has been a very good nine years driven by a ZIRP (zero interest rate policy). ZIRP is now dead so maybe time for a big market and global economy rest”.

Paul Tudor Jones on rising rates

“are going to stress test our whole corporate credit market for the first time.  If you go across the landscape you have levels of leverage that probably aren’t sustainable and could be systemically threatening if we don’t have . . . appropriate responses.”

“…These zero rates and negative rates encourage excess lending and that’s of course why we’re in such a perilous time right now, because if you just think about how repressed and how depressed interest rates have been for so long, the consequence of that is we have an enormous corporate credit bubble here in the United States, the largest corporate credit as a percentage of GDP ever.”

“I don’t know whether we’re supposed to run for the exits but we are at a point in time that I think is really challenging to that paradigm of an ever-growing debt relative to the carrying capacity.”…


Ned Davis Research’s Global Recession Probability Model has considerably deteriorated in recent months, putting the probability of a global recession at over 91.5% based on the last 48 years of data.  As referenced above in the recap, we’re already starting to see Europe deteriorating.

Here’s Germany’s Q3 GDP which was negative and slightly worse than projected.

Japan’s economy posted a negative GDP for the 3rd quarter of this year as well.


The US housing market is starting to show some serious cracks.  Builders are now reporting significant price drops in order to entice buyers.

The average credit score for mortgages while the debt-to-income ratios have been steadily increasing.  This certainly makes the loans the borrowers are taking more risky.  Sound familiar?

Although, residential mortgage growth has been weak as interest rates rise and home price appreciation makes home ownership less affordable.

US household net worth has been increasing and since a lot of homeowners net worth is tied up in their homes, they’ve seen their worth increase on paper.  But as home price appreciation has rapidly recovered since the financial crisis, prices are beyond what many can afford.

A quick note about the Dallas home market via WSJ via 361 Capital

A quick note about the Hampton’s home market via WSJ via 361 Capital

A quick note about the New York home market via WSJ via 361 Capital

This chart shows the average P/E ratio for the Russell 2000 Index. It shows that the market has been more expensive only 6% of the time in the last 20 years. A market supported by a few stocks and high valuations is a sign of a fragile market. The likelihood of a pullback in stocks is high.

With 1 months to go, S&P, Dow and Nasdaq 100 on pace for their 10th consecutive up year. That would be a new record.

Federal outlays to interest payments as a % of GDP are set to spike as the deficit and interest rates increase.  We are spending a lot less today than we did in the 80’s…but keep in mind interest rates were 15% +/- at that time.

As to little surprise, we’re more in debt as a population than we were in 2008.



I hope you enjoyed this months financial markets update.  If you have any questions please contact us directly.  If you’re interested in a topic that you’d like us to address, please email us so we can include them in future updates.

If you’re interested in starting a dialogue and learning how we can help, please click the link below to book a call or meeting with us.

Best Regards,

Jared Toren
CEO & Founder

Sources: Edges & Odds, WSJ Daily Shot, 361 Capital

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