Mid year market overview ?>

Mid year market overview

We have recently seen how US stock markets have reached an historic top. In my opinion that has been provoked by the lack of greater returns in any other safer asset. We can see that in many economies interest rates are below zero, in an effort by central banks to increase inflation. That has not been effective as we can see in the Eurozone for example. Keeping interest rates below zero has also had an impact in fixed income returns, that has been really low since the 2008 crisis, where central banks decided to decrease rates in order to stimulate the economy.

But, despite knowing all that, do stock deserve a so high valuation? I mean, do fundamentals support those highs? For me, the answer is a clear ‘NO’. As I have previously said in my Seeking Alpha macro articles, since 2012 (aprox) we can see how the P/E gap have been increased to unsustainable levels. But the problem is becoming more concerning right now with the real decline of earnings in many industries. I mean, right now, the problem was that earnings were growing at a lower pace than shares prices, but now, in 2015-2016, earnings have started to be affected by the currency war that’s been holding out there by central banks, deflation and the slowing down of emerging markets (even the sell side has started to realize that stocks are not cheap any more and has downgraded its recommendations, but well, I don’t believe in sell side recommendations).

One of my major concerns right now, apart from the probable brexit, is the disconnection between the FED and the real economy. I mean, it seems that they’re just worried and take into account job reports in order to set or not a rate hike. That’s a huge mistake. I thin that a central bank such as the FED, that in my opinion, is the ‘world central bank’ must take into account the whole picture. You know, we are in a slowing down global economy, with emerging markets suffering the Chinese slowdown, oil producers flooding markets with assets or issuing huge amounts of debt in order to keep spending at the same levels as when oil was at $100 per barrel in order to keep stability, etc. Right now, the world economy is a drifting boat, there’s a real lack of a ‘captain/economic engine’. Yellen must think that their decisions doesn’t ony affect its country but the whole world.

Economies are not more closed economies and everything has an impact into something, so I would ask for more responsibility to the FED in order to help global recovery or at least, not pushing it downside more.

As we can see in the following image, despite the stocks recovery from the beginning of the year turbulence, gold prices are becoming higher due to the uncertainty that’s reigning in the market.

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Everyone can also see that there’s a debt bubble out there, as despite becoming lower due to a deleverage in the crisis, the ‘economic recovery’ has been fueled via cheap credit and as a consequence a really huge increase of sovereign and private debt.

We also have the refugee problem in the Eurozone, that’s also hit by Greece (the never ending story), the Brexit, Spanish elections, the growing extremism in the continent and the weakness of its banks, that despite the QE conducted by the ECB are still weak (that’s a really strange thing and makes me think about what would happen if the ECB decided not to help them with a QE. We’ll see what happens when Draghi decides to purchase private debt). All that is going to cause instability and volatility will be increased. So, again, one of my bets is to be long on any European volatility linked asset.

We can also see how there are many stocks that can be a bubble such as Tesla (I’ll write about it during the next 15 days as I still have 2 exams left), the luxury sector that’s suffering due to the low demand from Asia and some concerns in the biotech sector.

So, to profit from all that, I would recommend to buy put options on European indexes (prefereably Spanish or Italian ones as I think are one of the weakest ones). I would also be short on American indexes or, long into the VIX or gold in order to profit from an expected correction due to the lack of fundamentals support, the gap between them and stock valuations and the weak and concerning global macro situation.

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