Weekly Notes With Tiho — Issue 16Location: Sveti Stefan, MontenegroHello there friends.I’m sending you regards from the extremely beautiful 15th century fortified island called Saint Stephan.Back in those days, this was a pirate’s haven and a hiding place from the Ottoman Empire.Today, it is an extremely beautiful resort where tennis champions like Novak Djokovic have their lavish weddings.I’ve been very busy with extensive travel through this mountainous region. Away from financial markets, I am tracking the progress of various real estate projects around Kotor Bay that are currently in their building process.Two of major ones include Portonovi (Europe’s most expensive luxury resort) and Lustica Bay (stunning marina village and golf course development). Real estate investors and others
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Weekly Notes With Tiho — Issue 16
Location: Sveti Stefan, Montenegro
Hello there friends.
I’m sending you regards from the extremely beautiful 15th century fortified island called Saint Stephan.
Back in those days, this was a pirate’s haven and a hiding place from the Ottoman Empire.
Today, it is an extremely beautiful resort where tennis champions like Novak Djokovic have their lavish weddings.
I’ve been very busy with extensive travel through this mountainous region. Away from financial markets, I am tracking the progress of various real estate projects around Kotor Bay that are currently in their building process.
Two of major ones include Portonovi (Europe’s most expensive luxury resort) and Lustica Bay (stunning marina village and golf course development). Real estate investors and others with curiosity, should definitely visit these two websites.
The Week That Was
Now… let us get straight into the financial markets.
US equities rebounded strongly and the slight pullback since August seems to have ended for now.
Technically, stock markets are still overbought and overdue for real correction of at least 5% or so.
It has been a long time since the market experienced one of those.
Furthermore, geopolitical risks remain as next week starts with the whole world focusing on the North Korean nuclear test. So far, we are watching Gold do a Monday morning gap up, while the S&P 500 does a Monday morning gap down.
Last week was an interesting one.
Out of all the major global macro asset classes I track, it was technology stocks that led to the upside — with a gain of 2.84% for the week.
US Small Caps and Gold tied for second place with a 2.66% gain.
On the other hand, investment grade bonds and the Treasury Long Bond declined slightly.
Out of the 50 country stock indices I track closely, only 12 declined.
On the other hand, 21 countries rose by 1% or more… and seven rose by 2% or more.
On the downside, Pakistan and Greece disappointed investors. Pakistan, in particular, has been a colossal disappointment this year, down almost 18%. It’s starting to become an oversold market, especially from the shorter term perspective (useful more for traders).
Emerging Markets Still Outperforming
Chinese Small Caps listed on the Shenzhen Stock Exchange continue to outperform, finishing the week up over 5% and now almost 20% year to date.
Egypt, Russia, and Thailand were also big gainers as Emerging Markets continue their push towards new record highs.
The lost decade is over, as the Emerging Markets Total Return Index posts a new all time closing high.
I know I sound like a broken record here, but it’s the foreign stocks that are doing all the heavy lifting in 2017.
Looking at the relative strength of Europe, Developed Asia and Emerging Markets against the US — it is crystal clear where value investors should be positioning themselves.
Bonds Like Geopolitics
The United States interest rate curve — also known as the yield curve — has continued to flatten.
Maturities from 5 years through to 10, 20 and 30 years have seen rates fall.
Meanwhile, the Federal Reserve has been busy pushing up short term rates.
Bonds have rebounded strongly this year and have recently benefited from geopolitical risk linked to North Korea (just like Gold).
Inflation Linkers continue to underperform nominal Treasuries, while credit continues to outperform.
Spreads remain very narrow and starting to rise, while overall market volatility very complacent and also starting to rise.
Treasury Long Bond is by and large the worst performing fixed income asset class over the last twelve months.
Regular readers will always remember me saying that periods of underperformance usually — but not always — lead to periods of outperformance and visa versa.
Having said that, bond investors should also pay close attention to Federal Reserve. It is about to start unwinding its balance sheet very soon.
US Dollar Rebounding
The weak greenback has been a gift to investors that have followed my advice and allocated their capital towards foreign markets in 2017.
This has also been true for my clients.
The more aggressive version of the Atlas Investor Portfolio — which some of my more opportunistic clients use — has gained 23.6% year the date.
Moreover, it would not surprise me to see even better results from investors who focused entirely towards foreign equities.
Year to date Poland is up 51%, Turkey 49%, Austria 41%, India 31%, Mexico 30%, Hong Kong 30%, South Korea 29% and China 27% — all in USD terms.
Furthermore, Gold is up 16% and Gold mining companies have gained almost 20% this year.
Such a strong performance has created short term overbought conditions, where various assets are prone to enter a corrective state.
This is especially true if the US Dollar was to put in a meaningful bottom and rebound strongly from here.
With traders sentiment extremely bearish (only 10% bulls last week) and hedge fund positioning heavily on the short side (over $20 billion excluding the Yen), US Dollar is attempting to rebound from the oversold conditions I discussed recently.
As explained last week, I have started tilting my client’s portfolios towards a more defensive state. This basically means protecting solid year to date gains discussed above.
If you would like to know how I am positioning my client’s portfolios for the second half of 2017 and which asset classes I’m overweighting — get in contact by clicking below and filling out the brief survey.