Q1 2019 Market Update

Sunday 4/28/19

Dear Clients, Friends and Colleagues,

As I mentioned in my “Year End Market Update” which went out at the end of January:

“At the end of the day, as I have said many times before, it all comes down to Central Banker actions around the Globe. That’s It!!!! Jerome Powell has already stated that he “may” pause the Rate Hikes, coupled with the Wall Street Journal article on Friday 1/25/19 (which made a case for the potential pause of the “Balance Sheet Runoff”) and of course an about face of the Central Bank Liquidity in the markets.”

What I forgot to mentioned at that time was the news article about Steven Mnuchin calling all 6 Major US Banks the day after Christmas to activate their collective “PPT’s – Plunge Protection Teams”. Also remember back in early December Powell was still planning for “3 – 4 more rate hikes and the Balance Sheet Renormalization running on auto-pilot in the background”. Summarizing: So we had the call to the Bank PPT’s and an historic amount of Chinese Liquidity pumped into the Global System through the first quarter, coupled with the reality that Jerome Powell has in fact “Paused” the rate hike cycle and also confirmed the Federal Reserve’s “Pause” of the “Balance Sheet Renormalization”. Add that all together and what do you get? A stock market rally for the ages. The Green line below is the S&P 5oo Index and the Blue line is the Global Money Supply as Central Bankers ”saved” the markets once again. Yet at the same time, the Red line is Forward Earnings Revisions (collapsing) and the Yellow line is the Economic Surprise Index (also collapsing). The gap between global money-supply-fueled equity exuberance and macro- and micro-economic data has never been greater…

S&P 500 Index Graph, S&P 500 Estimated Earnings Per Share, Citi Economic Surprise Index, Global Money Supply Graph

The gap between global money-supply-fueled equity exuberance and macro- and micro-economic data has never been greater…

Economic Growth Trends, Citigroup Economic Data, Emerging Markets Economic Growth, United States Economic Growth, G10 Countries Economic Growth

Economic Growth Trends – Citigroup Economic Data Change Indices.

You will also notice in this chart below that investors have continued to hold onto their “Safe Haven” investments of US Treasury Bonds, Gold and (VIX) Volatility Protection. Investors have NOT been buying into this artificial levitation in the markets as shown by the separation between the two lines below.

S&P 500 Index, Risk On, Risk Off, VIX, Volatility Protection, Safe Haven, US Treasury Bonds, Gold.

Investors have NOT been buying into this artificial levitation in the markets.

So getting back to the Fed, this actually became a 180 degree “about face” and complete capitulation by the Fed the day after Christmas as they succumbed to stock market pressures. Stop and think about that for just a second…. The Fed is supposed to be focused on economic conditions (which have recently only been deteriorating since February) and interest rate policy, when in fact their “reaction function” is completely dictated by stock market movements. THAT, my friends, is a look behind the curtain to see a demure little man pulling levers and controlling the illusion of the “Great and Powerful Fed (OZ)”. Bottom line is this, for the Fed to have such a dramatic instantaneous change of heart delineates exactly how FRAGILE this whole “House of Cards” construct really is….. Central Banks and the Money Supply is ALL THAT MATTERS. Until it isn’t….

And non-other than JP Morgan has something to say about that:
“JPMorgan: We Are Fast Approaching The Point Where Banks Run Out Of Liquidity – In other words, as JPM puts it, the liquidity conditions in the US banking system are perhaps close to their tightest in a decade. In short, there is still some $1.4 trillion in excess reserve sloshing in the financial system as a remnant from the trillions in liquidity generated by the Fed but, drumroll, it is no longer enough to ensure that the US financial system won’t suffer some “unexpected event.””

Federal Reserve Balances, Liquidity Conditions, Tight Money, Unexpected Event, US Financial System, JP Morgan, Banks run out of liquidity,

The liquidity conditions in the US banking system are perhaps close to their tightest in a decade.

Here is some insight and commentary from “The NT”:

S&P 500 Index, Quantitative Easing, Federal Reserve, Global Central Banks, Janet Yellen, Jerome Powell, Steve Mnuchin, Liquidity Calls.

S&P 500 market stick saves by the the US Federal reserve, Global Central Banks, Yellen & Powell.

What comes next? “From October 1987 to October 2019 and all points meeting there for quadruple confluence suggesting a massive technical reaction to take place there at a point where key individual stocks would be massively overbought and disconnected from the underlying economy.”

S&P 500 Index, Individual Stocks, Overbought, Economy, Technical Analysis, Trend Lines,

From October 1987 to October 2019 and all points meeting there for quadruple confluence suggesting a massive technical reaction to take place.

What would happen then? “Here’s a technically based possibility. A classic megaphone structure that suggests a 30% drop from the pattern top. What’s this scenario suggest? 5%-7% upside risk and 25%-30% downside risk. What’s the implication? You already know:”

S&P 500 Index, Charting, Technical Analysis, Megaphone pattern, Market Drop.

A classic megaphone structure that suggests a 30% drop from the pattern top.

Meanwhile, back at the Ranch….

Continuing Jobless Claims, first increase, 12 year run, posotove change.

Continuing Jobless Claims.

So how have our 5 Model Portfolio Funds fared since their respective inceptions? Here are the updated lifetime performance graphs as of 3/31/19.

Conservative “Total Return Income” Model since 8/1/17, +2.19%: (Broad US Markets VLGI in Gray, -1.16%)

Beat the market, Value Line Geometric Index, VLG, Conservative Model Fund, Total Return Income Model Fund.

Conservative “Total Return Income” Model since 8/1/17, +2.19%: (Broad US Markets VLGI in Gray, -1.16%)

Moderate “Global Opportunity” Model since 8/1/17. -0.26%: (Broad US Markets VLGI in Gray, -1.16%)

Beat the market, Value Line Geometric Index, VLG, Moderate Model Fund, Global Opportunity Model Fund

Moderate “Global Opportunity” Model since 8/1/17. -0.26%: (Broad US Markets VLGI in Gray, -1.16%)

Aggressive “100% International Equities” Model since 8/1/18, -3.33%: (Broad US Markets VLGI in Gray, -8.13%)

Beat the market, Value Line Geometric Index, VLG, Aggressive Model Fund, 100% International Equities Model Fund

Aggressive “100% International Equities” Model since 8/1/18, -3.33%: (Broad US Markets VLGI in Gray, -8.13%)

Aggressive “100% US Equities” Model since 8/1/18, +2.11%: (Broad US Markets VLGI in Gray, -8.13%)

Beat the market, Value Line Geometric Index, VLG, Aggressive Model Fund, 100% US Equities Model Fund

Aggressive “100% US Equities” Model since 8/1/18, +2.11%: (Broad US Markets VLGI in Gray, -8.13%)

Contrarian “Long/Short All Weather” Model since 8/1/17, -12.04%: (Broad US Markets VLGI in Gray, -1.16%)

Long/Short, All Weather Fund, Value Line Geometric Index, VLG, Contrarian Model Fund, Long/Short All Weather Contrarian Model Fund

Contrarian “Long/Short All Weather” Model since 8/1/17, -12.04%: (Broad US Markets VLGI in Gray, -1.16%)

As you can see 4 of the 5 funds are still all outperforming the Broad US Markets (VLGI) over their respective “lifespans” since they were each started.

The last Long/Short Fund is specifically designed to benefit from the larger Macro Economic changes yet to come with an increase in commodity inflation (think current Midwest Farmland floods and reduced supply and ultimately a weakening US Dollar) and from the inevitable recession and market swoon/drop/crash (Pick your poison). But History is telling us that right now is a great time to “Love Commodities” and be “Cautious with Stocks”…

S&P 500 Index, Bloomberg, Commodities Index, Severe divergence, historical divergence between stocks and commodities.

Historical Divergence between the S&P 500 Index and the Bloomberg Commodity Index.

S&P 500 Index, Bloomberg, Commodities Index, Severe divergence, historical divergence between stocks and commodities.

Historical Divergence between the S&P 500 Index and the Bloomberg Commodity Index.

Our approach is quite simple: “Invest for Growth, but more importantly Mitigate the Losses, if we do that Returns will take care of themselves”. So if we mitigate the Large Losses in the first place, then we DO NOT have to “Make Back” those losses and so it becomes growth on top of growth. Now think about that over Full Market Cycles (Both Up & Down) and you start to see the value of what we do. The chart below shows a “Buy & Hold” approach (Orange Line) with 100% invested in the S&P 500 Index Vs. a simple “Buy, Hold & Sell” (what we do)(Blue Line) strategy to mitigate and extract the large losses out of the performance equation. You see what can happen to “the numbers” yourself…

S&P 500 Index, Buy & Hold, Buy Hold & Sell, Risk Management, Loss Mitigation, Loss Protection, Market Loss, Market Risk, Exceptional Reurns, outsized returns.

“Buy & Hold” Vs. “Buy, Hold & Sell – Risk Management”

Please feel free to reach out to me with any questions.

Take care and talk again soon,

Cory Reader
Chief Investment Officer
HK Wealth Management, Inc.

213-509-6544

Email: creader@hkwmanagement.com
Web: www.hkwmanagement.com

Past performance does not guarantee future results. All investments carry some degree of risk.

The Answer is: YES!

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