The Zigmont Report (Daily Market Recap for 8/10/18)

Mike Zigmont

Mike Zigmont, author of the Zigmont Report, is a partner at New York-based Harvest Volatility Management, a hedge fund with over $12B AUM, offering volatility management solutions to its investor base worldwide.  Mike has been publishing his daily newsletter (Monday-Friday) privately for the firm’s investors and his personal contacts in the investment business since 2008, sending it daily shortly after the market close.

The opinions expressed below are my own and do not necessarily represent those of Harvest Volatility Management, LLC.

Blame it on Turkey.  For the first time in two weeks, the S&P fell more than 10 points.  That’s not that big of a selloff by the way but for the bears it’s like manna from heaven.  Risk-off was the tone of the entire day with a little bit of downside acceleration in the afternoon.  There was a dip-buying spurt in the last hour that reduced the damage.  Capital flow was about normal at 98%.

So what about Turkey?

Well, it’s funny how markets don’t care until they care.  Turkey has been steadily worsening since a state of emergency was declared in July of 2016 (interestingly it was lifted three weeks ago).  Back in 2016 there was a coup and a whole lot of people were rounded up (thousands).  You and I both know whether that was a positive or a negative in the human rights sense as well as in the economic sense.

Anywho, the Turkish Lira has been steadily weakening since the state of emergency began.  The Lira weakening began to accelerate in March and it has gone parabolic since early July.  This past week has been really nasty.

President Erdogan gave a speech today claiming the Turkish economy is growing at a record pace and that all the problems with the Lira and the economy were being imposed from the outside and that the Turkish people should buy the Lira with their gold and other savings.

His speech did not help the Lira in the markets.  Also Trump just doubled the steel and aluminum tariffs on Turkey.  When it rains, it pours.

Here’s my point/question:

Why now?  Why are global markets talking about Turkey today?  Yesterday wasn’t much different.  Turkey has been flashing a huge warning light since 2016 for cryin’ out loud.

The answer is that the Lira essentially broke today.  When a currency breaks, it matters across the globe.  Right now the experts are saying the problems are contained and that all this negativity will remain localized.

Maybe they are right, I’m not an expert on Turkey’s interconnectedness, but let me take this opportunity to loudly express my skepticism!

The Turkish mess, that has been ignored for years, finally spilled out into the currency markets and is starting to spill into equity markets.  There’s a whole geo-political angle here that’s a complete wildcard too.  Turkey is a NATO member but US/Turkey rhetoric is heating up.  Things can get worse.  I’m not talking about WWIII, I’m just saying that investor attitudes could easily tilt towards risk-focused instead of return-focused.

That alone could take some of the valuation out of equities.  I think the knee-jerk dip-buyers are leaping before looking today and I say caveat emptor.

Anyway, we will see how things develop next week.

Have great weekend, see you Monday,