Macro report for investing: Spain 27-02-2015

 Introduction: Macro, why bother?

One thing that I believe is very important is the macro-economic strategy. Some analysts try to make very smart and accurate predictions about this and then use it to invest. For me, personally, that’s not a very good strategy because of the huge mistakes that happen when we try to predict macroeconomics. Additionally, it’s something too big for me to focus on at this time.

However, I believe that it is very interesting to be aware of which 3 or 4 principal agents are influencing the market and how we should we deal with them in order to build our portfolios. At no time am I going to try to make precise predictions but I will try to know ‘which direction the wind is blowing’. Once you’ve done this, it is much easier to understand the environment in which you are investing and then apply your technical and fundamental tools to do your stock picking, with the advantage of knowing which sectors could be dangerous and which could be specially strong.

Most important macro ideas:

Central banks, QE: Markets seem to be completely dependent on central banks decisions. We can observe that there are times when markets even respond positively to bad news because they believe that that news will force central banks to use stronger measurements. We can also observe the market reacting negatively to good news because the market is afraid the this might push central banks to back off, such increasing interest rates. Time will say if this evolves to something negative or not. But for today we should consider 2 things: interest rates are low and getting lower, it doesn’t seem like they will increase in the near future and the ECB its starting next Monday (first Monday of March) a QE program that’s going to fill up the markets with liquidity.

OIL: Oil has been decreasing strongly during the last quarters, despite the fact the we can see prices stabilizing right now, it is expected to remain in the lower range for a long time. This is important from both a direct and indirect perspective. The direct impact would be noticed in those businesses that are strongly affected by oil prices, such as airlines (positive impact) or oil companies (negative impact). The indirect impact can be more subtle but still very important. For example, cheap oil means less money thrown into oil as an expense and more money ready to be used for something else, which basically means families would have more free cash to consume – a positive movement for both the economy and the consumption sector, especially supermarkets.

Economic improvement: The economic situation is improving. We can’t say that we are ok or that we are out of the recession-crisis but we can talk about what, in the stock market, is called ‘a positive change in the trend’. This means that we expect Spain to grow more, grow faster, and for unemployment to degrees… This will obviously have a positive impact on everybody and everything. It would increase the business results forecast making the market go up.

Greece: There has been a lot of tension in the market and there’s nothing new that I can say about it. However I’d like to keep in mind that, although the situation is not fixed yet, the current agreement gives the markets a few months to breathe and not have to worry. My conclusion being that we do not need to worry until the end of the 4 month extension  agreed upon between Europe and Greece.

Other interesting factors:

Fixed income is extremely overbought: When someone invests in stocks, it is still important to check what’s going on in the fixed income markets. At the end of the day one needs to check that it is not worth more than another product that could be perceived as a ‘perfect substitute’ that could make money flow in or out of the stock markets. Right now fixed income markets are very overbought, interests are extremely low or even NEGATIVE! This is actually very interesting for me because it means that it should not be able to attract money any longer. So the point where fixed income stops being interesting could be the time for the stock market to get some cash in, driving the markets upwards.

Liquidity: I have observed that most funds and managers have lots of their equity in cash. This means fresh money that has to go somewhere, it is ready for investing. If we add the effect of QE to this, that is more liquidity being injected to the market, what we end up with is a lot of cash that has to find a home. If we also now take the fixed income situation into account, we can see that there seems to be a lot of cash that might have to go directly into the stock market, causing the market rally upwards.