March Update

While reviewing current holdings and evaluating potential stock additions, I was taken aback (but not surprised) by the number of newly announced corporate stock repurchase programs.

I quickly lost track of the number of $1 billion plus stock repurchase programs that I came across. As we saw with QE, corporations are plowing their newly found riches from the new tax codes into stock buybacks for the benefit of shareholders and executive pay.

The extra cash flowing into the market will help propel prices higher over the next few months despite inflationary concerns. I expect this trend to continue with an increased uptick in M&A activity.

Market Turbulence

The Bank for International Settlements is very concerned about “long-run turbulence” in the global economy. Known as the “central bankers’ central bank, the BIS (Bank for International Settlements) warned that consumer debts are starting to reach unhealthy levels in many countries around the world.

“The vulnerabilities that have built around the globe during the unusually long period of unusually low interest rates have not gone away,” said BIS chief Claudio Borio. “High debt levels, in both domestic and foreign currency, are still there. And so are frothy valuations, in turn underpinned by low government bond yields — the benchmark for the pricing of all assets.”

“What’s more, the longer the risk-taking continues, the higher the underlying balance sheet exposures may become. Short-run calm comes at the expense of possible long-run turbulence,” Borio said.

High consumer and corporate debt leave less wiggle room for future economic growth, the new tax codes notwithstanding. As we saw with the recent market sell-off, a spike in interest rates spurred by the prospect of increasing inflation has the potential to derail the economy and punish the market.

Inflation Concerns

The core consumer price index (CPI) rose 1.8% year over year. Including all items, the CPI rose 2.1% stoking inflation fears among investors. The news pushed the yield on the 10-year U.S. Treasury note up to 2.9% while the S&P 500 dropped 10% in value.

The resulting volatility spike from these price moves triggered a blow-up of the crowded short volatility trade. The spike in volatility accelerated a rapid unwinding of positions as traders sought to reduce their risk exposure. Leading Inverse VIX ETN’s lost over 90% of their value. At this time, it’s nothing more than a reminder that there is still risk in the market and helped to take some froth out of stock prices. I personally took advantage of the weakness and bought into the market at lower prices.

While the market can unwind faster than anticipated, I’m expecting this to be nothing more than a spanking for market participants in the short-term.

Crowded Trades / Crowded Stocks

Previously I had pointed out that the top quartile of stocks had attracted a greater percentage of money relative to the lower 4 quartiles, than at any time in history. The top 5 holdings of the QQQ now account for more than 40% of the assets of the QQQ technology stock portfolio. Apple is over 11% of the portfolio followed by Microsoft, Amazon and Google (A+C shares) at over 9%. Facebook accounts for just over 5% of the portfolio.

The heavy flows of funds into these 5 stocks has resulted in the QQQ has returning 5.91% year to date while the S&P 500 has returned 2.19% year to date.

While this has been terrific for investors positioned in those stocks, it’s the very essence of the very last stages of a historic bull market. While not in the same context as the stock market, Reggae artist Jimmy Cliff sang;

So as sure as the sun will shine
I’m gonna get my share now of what’s mine
And then the harder they come
The harder they’ll fall, one and all
Ooh the harder they come
The harder they’ll fall, one and all

Strong earnings, new tax codes and stock buybacks provide the foundation for another positive year in the stock market. “I’m going to get my share now of what’s mine”

Offsetting that is high consumer debt, high stock valuations, extreme leverage in the market and the prospect of higher inflation. “And then the harder they come, the harder they’ll fall, one and all