Macros Top Factors 2020

By pjain      Published Jan. 19, 2020, 4:45 a.m. in blog Invest   

Macro 2020 Jan Outlook actionable

Euphoria - MELT UP provision - double up!

HFTs, Macro and quants/CTAs are trend-following quants that trade futures contracts and commodity options are sprinting to chase the market’s upward momentum is giving rise to a systematic market melt-up. But these guys are VERY agile and will jump out faster than you can!

Keep tight Trailing stop losses


GEO: No China trade war, Iran beaten

China "resolved" not solved

  1. China's signed the first-step agreement between the world’s two largest economies and promised to purchase some $200 billion of American goods over two years and to make changes to its intellectual property and technology rules.

  2. However, while no new tariffs will be added, neither will prior ones be removed.

  3. Phase Two trade deal won’t be reached. so China’s ability to acquire intellectual property isn’t capped. This will lead to an erosion of the economic co-dependence between the U.S. and China.

  4. Big tech AND EU/US industry will be hurt most as decoupling will occur. Separate standards for 5G and other tech hardware will be bad news for the future of world economies.

  5. China will seek global markets using its BRI esp. Africa, and then start cutting imports from other countries first, then even USA down the road.

Iran cowed on response - oil unlikely to spike

  • ”killing of the top Iranian general at the Baghdad airport on Jan. 3. Oil prices gained more than 3% with analysts saying that Iran’s chosen method of retaliation would determine the next move for oil.
  • Iran fired missiles at bases in Iraq housing U.S. troops
  • Later traders appeared to be less concerned, and oil gave back a more than 2% gain to settle little changed, even spending some time in negative territory.
  • Trump’s claimed that Iran “appears to be standing down,

1. Economy Performance - stumble possible, but no recession

In 2020 a recession will be avoided, but that economic growth will fall short of estimates. This will prompt the Federal Reserve to slash interest rates twice by a quarter point (or one big cut) to 1%, down from the current range of 1.5% to 1.75%. -- Byron Wien of Blackstone Jan 2020 prediction

In an effort to boost the economy, President Trump will use “every executive authority he has to stimulate growth,” which includes cutting payroll taxes. Trump will also put huge pressure on Fed - resulting in cuts RAPIDO .. so to keep market up till Oct'20.

RATES: Fed passive - Supportive - No rate rises - insurance cuts if Economy stumbles

Fed will cut interest rates twice and the S&P 500 will rebound to an all-time high despite an increase in market volatility, - Byron Wein Blackstone

Byron Wien of Blackstone predicts that the yield on the 10-year treasury will approach 2.5%, and that the yield curve will steepen. This is a widely followed metric on the Street, since recessions are typically preceded by a steepening of the yield curve.

2. Corporate Earnings flat but market doesn't expect "problems"

At the end of 2020, the S&P 500 will likely trade off anticipated FORWARD earnings in 2021.

Corporate Earnings per share (EPS) expected to rise by 6% in 2020 and 5% in 2021, according to Goldman’s 2020 U.S. Equity Outlook report. - Blackstone's Wien predicts that earnings being on track, or coming in better than expected, would boost the market.

3. PE Valuations and Sentiment

Valuations rising Q1'2020

  • The Trailing PE for a few recent years are
Year Jan 1st PE trailing
2020 25 * est
2019 19.6
2018 25
2017 23.6
2016 22
2015 20
2014 18
2013 17
2012 15
2011 16.3
2010 20.7 * Recession
2009 71 - then it fell massively by March'09
2008 21.5
2007 17.4
2005 20
2003 31.4
2001 27.6
2000 29
1999 33
1998 24.3
1996 18
1992 26 * Recession

4. What will SPY look forward - OUR TAKE

  • Most sell-side TV-types projecting average S&P at 3,300 by end 2020 or 7% up for the year.
  • Big tech is rising RAPIDLY - but rest is stagnant!

5. High Volatility - Go up high in H1 and then fall before going up by end of year/election

  • Volatility will increase and there will be “several market corrections greater than 5% throughout the year.” Wien predicts that the S&P 500 will top 3,500 for the first time — around 8% higher than where the index currently trades — but volatility will increase and there will be “several market corrections greater than 5% throughout the year.” - Byron Wien, Blackstone

  • The bulk of that will be rising in Q1 of 2020.

Sector diverge

Financials - NIM hurting all.


Technology led all sectors in 2019 returning 48% best year in a decade with Apple, Microsoft doubling. The top five U.S. companies — Apple, Microsoft, Alphabet, Amazon and Facebook — now claim 18% of the S&P 500 market capitalization, the highest percentage ever, But now while Jan FAAMNG are going great, overall, reversion to mean (esp. on cyclical slowdown - ads get cut) the craze will go down, and they could invert.

Energy, Oil at $70 - flat no spike

Defense and Airlines

Boeing backlash subsides, lifting airline stocks 2020 will be the year that Boeing’s embattled 737 max aircraft returns to the skies, according to Wien, which means upside ahead for airline stocks. He said that the company will fix the issues surrounding the aircraft, and that deliveries will begin again. This, in turn, will allow airlines to “operate more efficiently and increase profits.” “The stocks become market leaders,” he said of airline names. - Byron Wein Jan'2020

POL: Democratic win in 2019 could undo Trump Tax Cuts, add Wealth Tax => 30%+ drop in stocks

If the Democratic Party also gets control of the Senate and possibly the POTUS/White House in 2021, the current corporate tax rate would likely be elevated back to levels seen prior to the Trump administration’s sweeping tax cuts in 2017. The proposals of the major Democratic candidates are to increase corporate tax rates and to take that incremental tax revenue and redirect it towards other social purposes.

  • Under Trump U.S. companies effective tax went from 27% to 19%. The incremental income went to EPS, a strong reason for stocks jump in 2017 and 2019 on top of buybacks. If this is reversed, a 30%+ drop is possible.


Macro Key Factors

US Equity $7T vs GDP

Huge Buybacks - Corporates big buyers of equity

Significant low-interest motivated buybacks ie share repurchases is a key factor on rising prices.

Shrinking Equity Markets on LBOs, M&A

The shrinking of the U.S. equity supply, including buyouts to private equity firms, acquisitions is acknowledged as a significant factor contributing to the rise in equity prices.

This should continue in 2020, but at an anticipated rate in the $500 billion range, or around half of the 2019 total.

Who Owns Equities - and Big Stock Buyers of 2020 - HFs

High Freq Trades esp. MELTUP - GS, JPM and lots of Midsize funds

The Fed in Not-QE has been pumping in REPOs of $300b+ in short term liquidity into the system. Clearly a lot seems to go into trading systems.

Quant funds, multi-strategy funds, and high frequency traders, with $1.5-$2 T in liquid assets. It’s impossible to know how much these groups are influencing each new all-time record - but they represent HOT MONEY that flows in and follows the news factors.

An estimate is that hedge funds ALONE could put $150 billion of incremental buying power. If that magnitude of move is already underway, it could be propelling the price of some top performing tech/communications stocks including Apple, Facebook, Netflix, Google, Microsoft and

ETFs - passive funds dominate

MFs - hurting as passive

Mutual funds net sellers of U.S. equity,

INST: Pension Funds $4T assets - reducing Equity exposures

The largest group of U.S. institutional investors are the state and municipal pension plans with nationwide system comprising over $4 trillion in assets. Just the California and New York state funds contain close to $600 billion combined

  • Pension directors are reducing their domestic equity exposure for last few years, perhaps on valuation concerns.

    CALPERS 24% us equity, MASS in mid 10s weighting - this is far less than 50%+

Retail: own 20% - PEAK Holding Continue to add 401ks $5-10k/$100k

They own 20% or $7 trillion of the total U.S. market ownership, added to their stock portfolios in 2019.

A Goldman Sachs study: households now have a comparable equity allocation to 2007, only surpassed by the dotcom bubble of 2000, implying that retail buying is an unlikely driver of the current move.

INST: Hedge funds - playing catchup

  • $1.45T investible funds - but only 50% is in equities - most do alternative assets

  • 2020 - playing catchup - An estimate is that hedge funds could put $150 billion of incremental buying power. If that magnitude of move is already underway, it could be propelling the price of some top performing tech/communications stocks including Apple, Facebook, Netflix, Google, Microsoft and

  • 2019 returned 15% missed out 32% gain - hard to justify 2/20 fees as very low index funds

INST: Sovereign Funds - seeking PE risk - not expanding Equity

They are well-heeled, but currency is a major factor - international policies like security ZIRP/NIRP have many of them buying bonds esp. US Treasuries.

They have been increasing their private equity allocations, but generally at the expense of equities.

Endowments - low equity allocations

  • Historically Yale, Harvard, etc. have been VERY LOW equity allocations with us, global equity under 10%. This is because they get modeled returns better with huge mix of alternative investments like real estate, PE, VC, etc. on top of bonds, etc.


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