Lighthouse Funds

Lighthouse Funds Investment manager for the Lighthouse Global Equity Fund, a New Zealand unit trust that invests in global equities.

10/10/2022

THE WEEK THAT WAS

The week ended Friday the 7th of October ran to form

US FINANCIAL MARKETS HAVE A WEAK SEASONALITY
- Historically mid-September to mid-October is the weakest period of the year for US financial markets
- That's especially the case in midterm election years, like 2022
- The last 2-3 weeks are consistent with that experience

MAYBE IT'S BECAUSE WE'RE ALL WAITING
- Markets are going sideways a bit at the moment, as we wait for new information
- US September PPI (Wed 12th), September CPI (Thu 13th), and then the Q3 earnings season
- Perhaps particularly this earnings season, as we all try to discern whether there'll be a recession

BUT WE SAW A GLIMPSE OF BULLISH APPETITE
- Monday and Tuesday did show strong gains, as markets hoped the Fed Reserve might follow the RBA in moderating the interest rate rise path
- That seems optimistic to us at this stage. I mean, we think the Fed *should* pause, recognising the big time lag between rate rises and real-economy effects ... but we don't expect they *will* pause
- But once the Fed does slowdown or pause we think markets will go up quickly and strongly ... there is such a bear-ish posture in markets right now that when it changes it will change fast. See December 2018 and January 2019 as an example.

03/10/2022

THE WEEKS THAT WERE

Another catchup through to the week ended 30th of September

US MARKETS' AUGUST SLIDE CONTINUES
- Markets continued the slide that started in mid-August with Powell's speech at Jackson Hole
- In part the slide reflects heightened expectations for more/higher interest rate rises from a more hawkish Fed
- And in part growing fears of a (Fed triggered) recession

MEANWHILE, ELSEWHERE
- Meanwhile the rest of the world is in "hold my beer" mode
- The new UK Conservative administration is pursuing a purist liberalist policy platform that has underwhelmed financial markets (who you'd think would support a liberalist conservative direction)
- Europe continues to spiral into recession as it faces a double-whammy of major energy cost rises and rising interest rates
- And China seems less stable with an ongoing power struggle ahead of this year's 5 year congress

BUT PERHAPS THIS IS THE WORST?
- Leading indicators of inflation appear to be peaking if not moderating
- We're now at the traditional low-point of the US 4-year economic "Presidential cycle" (yes, that's a thing)
- Equity markets are forward looking (cf economic indicators, that are backward looking) and typically reflect conditions expected in 6 months or so ... so perhaps equity markets are due to turn soon?

21/09/2022

THE WEEK THAT WAS

The week that ended Friday the 16th of September was dominated by the Fed - and they didn't even meet this week.

IT'S ALL EYES ON THE FED ...
- The Fed Reserve's next meeting is mid-next week, and the debate is whether they'll raise the cash rate by 75bps or 100bps
- And there's also the question of whether this current rate rise cycle will end ... how many more raises will be required to conquer inflation?

OUR CRYSTAL BALL SAYS ...
- We expect the Fed to raise rates next week by 75bps, not 100bps (we think a 100bps raise would look too much like a panicking Fed)
- We expect a further 75-100bps of raises before the end of 2023.
- But we suspect the Fed will pause/stop after that - which is a more benign forecast than many other commentators.

WHY ARE WE MORE ROSY THAN OTHERS?
- The Fed wants 2% pa inflation, which equals 0.45% per quarter, or 0.15% per month
- July was 0.0%, August 0.1% ... so both months were under the target monthly run rate and provided Sept is

14/09/2022

THE WEEKS THAT WERE

Bit of a catch-up post as we look back over the first part of September

A BIT LIKE A SUPER-HERO MOVIE
- Markets at the moment are stuck in a battle between the bulls and bears, with the momentum moving between the two sides
- Bears were ascendant from mid-August to early-September, triggered by Fed Reserve Chair Jay Powell's speech at Jackson Hole
- Bulls wrestled back the momentum from early-September, with a rally

THEN THERE WAS THE AUGUST 2022 CPI DATA
- Markets expected the CPI to fall 0.1% in August, but instead it rose 0.1%
- Cue the obligatory rout ... all the major indices were down 4-5% on the day
- But let's be pragmatic ... the Fed's 2% pa inflation target equals 0.16% per month, so for the Fed to hit its target we just need to keep monthly inflation below 0.16%
- July was 0.0%, August 0.1% so it looks to us like the Fed is getting on top of inflation

FORGET THE ANNUAL CPI FOR NOW, FOCUS ON THE MONTHLIES
- US annual CPI (and PCE, the Fed's preferred inflation measure) are going to stay high until big historical monthly rises (0.8-1.3% per month) roll out of the calculation
- That won't be complete until July 2023 (June 2022 CPI came in at 1.2%, so good luck getting annual CP at 2% until that datapoint rolls off)
- So for now we recommend focusing on whether each month's value is less than 0.16% ... if they are then the Fed is on track

29/08/2022

THE WEEK THAT WAS

The week that ended Friday the 26th of August just showed how inefficient equity markets actually are.

THE FED WAS THE BIG PLAYER
- Equity markets panicked following Fed Chair Jay Powell's speech on Friday
- Not sure why, Powell just reiterated messages already stated, and was 100% in line with the Fed's clear statutory mandate
- The Fed's job is simple, and consistent, so we're not sure why equity markets lost track of what the Fed will do

BUT MORE BROADLY ...
- The bigger news from the week was ever-louder signals that Europe will slip into a deep recession
- Energy/electricity prices are at never-before-seen levels, which will absorb huge amounts of private & public incomes, taking money away from the rest of the economy
- And China is no better, with biblical-level droughts (is biblical a valid reference for China??), Covid lockdowns and a (terminally?) crashing real estate market

INFLATION IS NOT THE BIGGEST WORRY NOW ...
- It looks like global inflation peaked in June, although energy levels are rising again so there is a risk we speak too soon
- But the risk of recession has increased materially in the last few weeks
- It's quite possible the recessionary pulse will stay central banks hand soon ... although that's a bit like saying the ogre has stopped (yay!), but because it ran away from the dragon (oh!)

22/08/2022

THE WEEK THAT WAS

The week that ended Friday the 19th of August is perhaps a harbinger of the next month.

MARKETS WERE DOWN
- Equity markets slid through the week, after several weeks of gains
- They are still well above the mid-June lows, but the recent run-up has stalled
- Although ... Friday was an options expiry day, and it's true that these generate weird movements that can reverse on Monday

THERE'S A LACK OF BULLISH NEWS
- The Q2 earnings season is largely over, so that's silenced the broadly positive flow of news that's helped the last month
- So some of the recent falls could be because the sugar rush of positive news is over
- And Ryan Cohen's shenanigans with Bed Bath & Beyond have (justifiably) left a bad taste in investors' mouths the last 48 hours

WE SEE THE NEXT FEW WEEKS AS A HOLDING PATTERN
- The next catalysts (up or down, TBD) are likely to be Fed related
- Fed Chairman Powell speaks next Friday, so next week is likely to go sideways, or gently down, until markets hear what he has to say
- And *much* depends on whether August's US CPI number (due 13 Sep) continues July's falls, or reverses them

08/08/2022

THE WEEK THAT WAS

The week that ended Friday the 5th of August was cautiously optimistic.

MORE GOOD NEWS THAN BAD
- Both corporate earnings and general economic news is coming in stronger than expected
- Wall Street had positioned for significant misses and downwards guidance in this earnings season, which largely hasn't come to pass
- Meanwhile inflation leaders (oil & commodities, transport etc) are clearly softening, and the broader economic environment is still looking strong (eg labour markets)

BUT WALL STREET IS STILL POSITIONED VERY DEFENSIVELY
- Despite the recent run-up in equity prices investors remain positioned for a bear market
- Investor sentiment is still (far) more bearish than the Q2 earnings season would suggest or align with
- Cash holdings are higher than average, with investors sitting on the sidelines

EVERYONE'S WAITING ON THE FED
- Everyone's waiting for the Fed to reach the top of this tightening phase
- We suspect that's still 3-5 months away, with the Fed likely to raise by 75bps in September, then a smaller raise in November
- But we expect that once they signal they're pausing rate rises the market will have a strong surge

02/08/2022

THE WEEK THAT WAS

The week that ended Friday the 29th of July was a little confusing.

FIRST, JUST WHERE IS THE FED AT?
- Markets took great comfort from soothing words from Jerome Powell.
- Markets interpreted that to mean the Fed was approaching the end of this tightening phase, which would be very positive.
- But that seems an optimistic interpretation - US inflation is still strong and the Fed still appears to have work to do.

SECOND, JUST WHERE IS ECONOMIC GROWTH?
- US GDP data for Apr-Jun showed a 0.6% fall, which came on the back of similar falls in the major European economies.
- But that seems inconsistent with other economic data, like manufacturing data and GDI.
- We suspect that -0.6% figure will get revised upwards, but we also expect that US GDP growth has peaked and is softening.

THIRD, AT LEAST WE KNOW WHERE CORPORATE EARNINGS ARE
- Apr-Jun quarterly earnings continue to be strong enough to calm fears of an economic apocalypse.
- The biggest headwind appears to be the (currently strong) US dollar rather than lack of demand or inflation.
- We suspect most of July's share market gains have come from unwinding some of the "doomsayer discount" that was applied over the last few months ... but it's quite possible that "doomsayer discount" gets re-applied soon ahead of the Q3 earnings.

25/07/2022

THE WEEK THAT WAS

The week that ended Friday the 22nd of July was textbook.

THE TURD IN THE SWIMMING POOL
- Snap (SNAP) reported earnings this week and it wasn't a good report. More losses.
- Snap has a history of disappointing with earnings misses, and a mixed history of profitability
- But each quarter it's the first advertising/social-media company to report, and the market imbues it with predictive power

THE MARKET VOTING MACHINE
- So the market took a bath on Thursday & Friday, in large part because the market worries that SNAP is predicting the performance of Google, Amazon etc etc.
- But history says it really isn't predictive at all. Sometimes a poor company is just a poor company, not a poor sector.
- Which the market does work out in time, eventually.

INVESTORS' IMPULSE CONTROL
- It's tempting to say Wall Street always over-reacts. Because it does.
- But really it's just a material portion (5%? 10%?) of investors who have poor impulse control. Mouth breathers.
- But at times like this they become the marginal buyer/seller, and that's what sets the price for the short-term.

19/07/2022

THE WEEK THAT WAS

The week ended Friday the 15th of July is probably peak-inflation.

INFLATION SURPRISED (TO THE UPSIDE)
- The big news of the week was always going to be the US June CPI number, which came out on Wednesday (US time)
- Inflation ran hotter than expected, especially given recent drops in key commodities and other other leading indicators
- Which just serves to remind that the monthly CPI number has a lot of lag built into it (let alone NZ's CPI number, that comes out only every 3 months)

THE MARKET GOT ITS PANICKING IN EARLY
- At first glance the US equity markets took the inflation number in their stride, with gains on Thursday and Friday
- But they'd been strongly down on Monday and Tuesday ... clearly markets knew the rough size of the inflation number that was coming
- Overall the week was down

BUT LET'S LOOK AHEAD ...
- Inflation is receeding in the rear mirror as a major concern
- But the Apr-Jun earnings season gathers steam this coming week
- The key read will be the forecasts and any revised estimates for Q3 (Jul-Sep), which speaks to recession risk

10/07/2022

THE WEEK THAT WAS

The week ended Friday the 8th of July was a real change of mood.

UP EVERY DAY
- The Fund was up every day of the week, for its best run since Nov '21.
- Up 8.4% overall through the week (net, NZD).
- No major news or developments by any firm, just seemed to be a general change in market mood.

RECESSION FEARS
- Typically, central banks tighten interest rates to an extent that creates a recession.
- That's semi-intentional, they are trying to reduce economic activity.
- In 2022 though economic activity (globally) appears robust in the face of rising rates. Slowing, but robust.

BUT NEXT WEEK ...
- The Q2 earnings season starts in earnest this coming week.
- And the US CPI number for June is published on Thursday NZT
- We expect the US markets will hold their breath in the first part of the week, then Thu/Fri direction based on how good/bad inflation & earnings prove to be.

03/07/2022

THE WEEK THAT WAS

The week ending Friday the 1st of July brought an ending, a beginning and a question

WE SUSPECT INFLATION HAS PEAKED
- We're start to see key prices come down (commodities, freight, rents etc)
- Big retailers now have rising inventories, which suggests lower prices ahead
- The Fed's preferred inflation measure (PCE inflation) seems to have peaked in April

BUT NOW FEARS OF RECESSION ARE GROWING
- This week's falls on US equity markets seemed driven by fears of recession > lower earnings ahead
- Micron guided Jun-Aug qtr revenue & earnings well below Wall St's consensus, and that after their all-time record Mar-May qtr
- We think recession/earnings concerns have now overtaken inflation/interest rate concerns

WHY ARE US MARKETS SO GLOOMY?
- All developed countries are grappling with inflation & interest rates
- US markets are down 20%-30% on those concerns
- But the FTSE is down just 6-7%, the ASX200 14-15%, the NZX 12% (local currencies)
- All these markets seemed to be similarly boosted by low interest rates, and now heading towards broadly the same higher rates, so not sure why the US markets are down so much further

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