Millers Market Musings: Retrenchment – China, European Elections, and the Fracturing of the Markets
This edition of Miller’s Market Musings is going to be a little different. Instead of the normal commentary on market conditions, I’m instead giving you a glimpse of what’s been happening inside the Matrix. Miller’s Market Matrix provides a more in-depth look into markets, as well as specific buy and sell recommendations. I am only providing the more in depth market views here – if you want the specific stock and macro trades, you will need to email me to be a part of the regular list and a sample edition. This is because this letter is often reprinted on various websites over which I have no control, and it is not appropriate for all investors, especially unsophisticated ones. I don’t want anyone blowing themselves up by shorting something they don’t understand. Don’t be stupid. It’s a simple rule… Email me at email@example.com to be added to the list.
It’s been quite busy over here in the Matrix. Earnings season was very interesting, as different sectors of the U.S. economy appear to be on wildly divergent paths. Retailers with stores apparently are dead in the water, while Amazon continues to soar. Healthcare stocks are battlegrounds of believers and doomsayers, while “Trump Trade” stocks like industrials, financials, and defense seem unstoppable – at least for now. This week I am off to a community bank conference, where I am meeting with well over a dozen management teams of banks from all over the country. I will report back with any interesting insights. These are the folks on the front lines of the economy, those that actually see what small businesses are doing. As a result, they often have good insight into the broader economy and its outlook.
So here we are about 6 weeks in to the new Trump Administration, and am I the only one that thinks that things are a little, umm, unsettled at 1600 Pennsylvania Avenue? Just wondering. I’m a news junkie and my Twitter feed populated with reporters and politicians from both sides of the aisle and overseas. For the first time in years, they all actually seem to agree with each other. The only thing is that they all agree that there is some strange stuff happening in D.C. Whether strange is good or bad depends on your worldview and desired outcome from the retrenchment in the executive branch that is occurring. But strange is the common ground upon which everyone seems to agree. And strange isn’t usually a good thing for markets in the long term.
Let’s review a bit what’s been happening in the world, or at least that which is relevant to financial markets. China is the middle of its annual National People’s Congress meetings. It just announced it will be targeting “about” 6.5% growth in GDP this year. But will this level of growth be possible at the same time it is trying to manage a debt bubble the likes of which the world has never seen? If they slow growth and tighten financial conditions to control rampant speculation in financial and property markets, they risk a rolling series of market crashes. Don’t slow growth and tighten financial conditions, and they risk continuing to inflate these bubbles further. Can they walk this narrow path without incident? Maybe. Will they? I doubt it. We’re adding a short on China to the portfolio. I think the risk-reward is favorable for a short, but it’s not for the faint of heart.
The remainder of the letter (about 9 pages) is full of charts and graphs that look better in a PDF. Simply click here for the PDF version of the letter.
Article by Jeffrey Miller, Partner, Eight Bridges Capital Management