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Why Is This the Most Hated Bull Market in History?

The Dow rallied 0.6% this week to climb back above 18,000, a now-3.3% year-to-date gain taking the blue chip index to within 1% of all-time closing highs. If you count dividends, the S&P 500 already made a new historic high Monday. Investors are getting more comfortable with risk again as yield on the 10-year U.S treasury rose ten basis points to 1.85%. Despite the milestones for U.S. stocks, though, investors don't seem to be in a particularly celebratory mood.

Legendary investor Sir John Templeton once said: "Bull markets are born on pessimism, grown on skepticism, mature on optimism, and die on euphoria." Even as indexes reached record levels last year, you would have been hard-pressed to find any signs of euphoria. You could make a case the convalescence of the U.S. labor market and consumer has given rise to optimism, but there has remained a healthy serving of skepticism.

The following feature appeared in SkyBridge Capital's "Wall Street Weekly" newsletter, where every weekend we break down the most important stories from the world of finance, economics and geopolitics.

So why are investors so hesitant to embrace this bull market? The reasons are pretty straight-forward: economic growth is lackluster, with the Atlanta Fed's GDPNow tool forecasting only 0.3% growth in Q1, and earnings are set to contract for the third-straight quarter. Earnings multiples are stretched the upper band of historical levels. However, investing is a relative game. When you have steady inflows and global central banks hell-bent on stoking credit activity and inflation, money will flow into the most attractive areas. We're not saying skeptical investors are wrong to proceed with caution, but there is a difference between being right and making money in financial markets.

Speaking of earnings, American companies are struggling to consistently meet even dampened expectations. After the close Thursday, tech heavyweights Alphabet (GOOGL) and Microsoft (MSFT) fell short of bottom-line expectations, sinking 5.4% and 7.2%, respectively. However, the negative sentiment failed to engulf market indexes, the Dow and S&P 500 finishing above the flat-line and the Nasdaq falling only 0.8%.

Last week we talked about how even dismal bank earnings were enough to lift the beaten-down sector. That trend held true this week with Goldman Sachs (GS). The company's revenue and profit fell 60% and 40%, respectively, to the lowest levels of CEO Lloyd Blankfein's decade in charge. But both figures exceeded expectations and the stock rallied 5.2% for the week.

Amid all of these mundanely mediocre bank earnings is perhaps some good news. While Wall Street may be settling into a less lucrative new normal, there were no multi-billion-dollar trading losses, massive new fines stemming from the crisis or signs of systemic weakness. For a sector down 23% year-to-date in February but now entering a new bull market, boring is the new blockbuster.

Oil comeback belies lack of coordination

Stocks aren't the only assets rallying despite marginal fundamentals. West Texas Intermediate (WTI) crude rallied another 8.4% this week, taking its year-to-date gains to more than 18%, despite an unproductive meeting of major oil producers in Doha, Qatar. Officials from 16 of the top oil producing countries met to discuss an output freeze, but unsurprisingly no agreement was reached given almost half the world's oil production wasn't represented. Oil futures initially traded down as much as 7% Sunday evening, but rallied all the way back as the oil supply glut shows signs of self-correcting, particularly in regard to falling U.S. shale production. Iran's reluctance to even entertain the idea of easing back into global oil markets makes its fierce rival Saudi Arabia unlikely to consider curbing production.

Meanwhile, Saudi Arabia is moving forward with plans to diversify its economy away from the daily whims of energy markets. The kingdom is said to have picked the investment bankers to lead its partial IPO of state oil company Aramco. To show it is willing to wait out this period of low oil prices to maintain market share, the Saudis have reportedly agreed to terms on a $10 billion loan to fund its deficit. It's all part of 31-year-old Deputy Crown Prince Prince Mohammed bin Salman's $2 trillion plan to modernize Saudi Arabia and wean the kingdom off oil.

Saudi Arabia has long benefitted in the Middle East from its close (albeit complicated) relationship with the United States, but with President Obama pursuing diplomacy with traditional adversaries like Iran and the U.S. pushing for the prosecution of Saudi officials over the "28-pages" in the 9/11 commission report, the kingdom likely sees a need to reduce its dependency on America's friendship. If the 9/11 bill passes, the Saudis are threatening to sell $750 billion in U.S. Treasuries and other assets, although the threat is very exaggerated.

Things looking up in South America

As a head of state, it's never a good sign when your approval rating falls below the inflation rate. That's the reality facing Brazilian President Dilma Rousseff who, as cabinet members defect and impeachment comes closer to fruition, isn't going down without a fight. She has accused her political rivals of staging a coup motivated by sexism and appealed to the United Nations.

With a purge of the corrupt political establishment on the horizon, Brazil's crisis has taken on a Carnival atmosphere, only tempered by the fact the Vice President is even more unpopular than Rousseff (although he too could face impeachment). Brazilian markets continue to rally in anticipation of a new dawn.
Once Argentina agreed with remaining holdout creditors and New York Federal Judge Thomas P. Griesa lifted the injunction preventing it from paying those bondholders, attention shifted to the country's return to global credit markets. President Mauricio Macri and Finance Minister Alfonso Prat-Gray plotted a $15 billion bold sale, but questions remained about the level of demand for Argentina's debt at a time when emerging markets were under heavy pressure.

While overall stress in emerging markets has eased considerably, that doesn't fully explain the overwhelming demand for Argentina's bond offering, which last week swelled to $16.5 billion. The offering was wildly oversubscribed, causing yields to come in lower than expected. Argentina sold bonds ranging in maturity from three to 30 years, with the 10- and 30-year notes yielding 7.5% and 8.0%, respectively. But even at higher-than-expected prices, it appears Argentina left meat on the bone as those bonds rallied on secondary markets in early trading. Welcome back, Argentina.

China getting too much credit

Although China and Hong Kong equity indexes are 12% and 22% off their late January lows, respectively, things look to be taking a downward turn in Asian credit markets. Defaults at state-owned enterprises are on the rise, driving up yields and triggering the biggest selloff in onshore junk debt since 2014. Standard and Poor's has cut ratings on Chinese firms at the fastest pace since 2003. A delay in payment collection caused by inventory stockpiles within the Chinese supply chain has also triggered concerns about a potentially dangerous chain reaction whereby corporations don't have enough cash to pay debts.
China's prolificacy in producing steel has led to an oversupply crisis for the global steel industry, and now Chinese banks are also being told by global financial watchdogs to stop lending to zombie steel and coal firms. George Soros is still around, and he thinks China's debt-fueled economy resembles the United States before the 2008 financial crisis. Interesting, hadn't thought of that.

Falling off the unicorn

Well, that escalated quickly. Theranos was once a soaring $9 billion unicorn set to revolutionize the healthcare industry with its finger-prick blood-testing system. As it turned out, the technology didn't actually work and journalists heaped heavy criticism on devastated Theranos founder Elizabeth Holmes. That is now the least of her worries as Theranos is facing a criminal probe, which is rare for a private company.

Elsewhere in the mystical realm, Uber has overtaken rental cars among business travelers. The company also settled a class action labor dispute with its drivers in California and Massachusetts that will see it pay the drivers $100 million and allow them to solicit tips from riders.

Prominent venture capital investor Bill Gurley thinks private markets have become dangerous.

Yahoo! turning yellow?

Yahoo! is essentially an irrelevant brand at this point, but that doesn't make its saga any less entertaining. The company posted a loss during the most recent quarter as revenue declined once again. The brand has fallen so far it could end up being bought by the Yellow Pages. Let that sink in - a tech company could be bought by the Yellow Pages. Last week we wrote about suggestions Marissa Mayer and company were dragging their feet on a potential sale, but she heard her critics and wants them to know the company is moving "decisively" to find the right deal.

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