November 30, 2018

What happened this past week?  Stock indices advanced this week in varying degrees; mainland China exchanges and European bourses eeked out positive results, while North American equity indices surged between 4% and 5% as investors welcomed a dovish shift by the Fed (both Powell’s speech and the minutes) and looked forward to a ceasefire coming out of the Trump-Xi dinner at the G20 this weekend. The bottom line is that the Fed will be on hold for at least 90 days into 2019 awaiting the outcome of the new trade talks agreement. On Saturday evening, the U.S. and China both agreed to a 90-day ceasefire on any additional trade tariffs. Included in the standstill agreement was that China would purchase a substantial additional amount of agricultural, energy, industrial and other products from the U.S. Trump agreed in return to acknowledge the one-China policy to gain added support from China in negotiations with North Korea. China also agreed to designate the opioid Fentanyl as a controlled substance and would show willingness to reconsider the NXP / Qualcomm merger if it is renewed. In addition, Rome and Brussels appear to be narrowing their fiscal differences (although Brexit is headed in the wrong direction and the December 11 UK parliament vote is probably going to fail). On the data front, the big numbers included China’s NBS PMIs for November (which fell short of expectations), the U.S. PCE for October (the core came in light), and the Eurozone CPI for November (the core was light as well).
What are the investment conclusions from all of this?  Clearly, the financial markets will breathe a sigh of relief from the new trade talks agreement. Here again we expect the perception of what will occur down the road will be far from reality, but it won’t matter for the foreseeable future. We would expect the yield curve to steepen slightly as pressure will be off the short end of the curve with the Fed on hold after December, the U.S. dollar should weaken, all commodity prices will lift, and stock prices will broadly rise into year-end at least. Growth will slow during 2019, but if trade deals are reached, the economic outlook beyond 2019 will improve which would necessitate a shift in asset mix from a currently more defensive one. We would expect the Fed to then resume raising rates too. We would expect many mini cycles over the next year depending on various outcomes.
There are a few important events this coming week, including Powell’s Congressional testimony (Wednesday, December 5), the OPEC meeting (which begins Thursday, December 6), the German CDU party convention (December 7-8), the U.S. jobs report for November (Friday, December 7), and U.S. government funding (funding for parts of the government expires on December 8). In addition, there are a bunch of earnings this week, including DG/HDS (Tuesday before market open), HPE/MRVL/TOL (Tuesday after market close), LULU/SNPS (Wednesday after market close), HOV/KR/MIK (Thursday before market open), AVGO/ULTA (Thursday after market close), and MTN (Friday before market open).
Your BSD Global Tech investment mandate is 98% fully invested across 10 tech vendor sectors and a number of legitimate technology end-users, while carrying a 9% short equity indice derivatives position (on the notional value of the stock portfolio) to protect us from those inevitable market drawdownsIf the market’s fundamental / technical / capital flow foundations suffer a material change, We will adjust our long biased stock portfolio and our short derivatives hedge. We have a ‘shopping list’ of technology vendors and end-users ready to invest when those inevitable pullbacks occur. Meanwhile, our technology stock portfolio still permits us to participate in the melt-up of this secular bull market.