Apathetic in Ankara - May 21, 2015

Click Here for this Week's Full Letter - May 21, 2015

     

Greetings,

           We’re only a few weeks away from the one year anniversary of the US launching military attacks against ISIS, and it continues to dominate the headlines. Just this week ISIS took control of Ramadi, only a 1.5 hour drive from Baghdad (according to Google Maps), while a team of Delta Force soldiers killed ISIS’s “CFO” in Syria. What has gone unmentioned is Turkey’s apathetic efforts to combat instability in the region, even though it shares a border with both Syria and Iraq. Instead, President Erdogan spends his time silencing the media and “purging” political opponents.

          The market has taken notice. Unlike other emerging markets that saw strong growth over the past decade behind China’s consumption of commodities, Turkey used its strong demographics and educated workforce to grow through domestic demand. Unfortunately, much of that progress has been undone under Erdogan’s leadership. Nationwide, consumer confidence is at a five-year low and unemployment has risen to 11%. Erdogan believes the economy is stagnating because of high domestic interest rates (10.75%) and the parliament voting down large investment projects. He has called the central bank’s governor a traitor for not cutting rates more aggressively.

          Of course, domestic interest rates are high for a reason. Specifically, CPI is running well above trend at 8% Y/Y and the Turkish Lira continues to spiral lower. Turkey also runs a sizeable current account deficit at 6% of GDP, even though the value of its oil imports have declined dramatically.

          Instead of shoring up his country’s weaknesses Erdogan has instead relied on conspiracy theories and threats. The President’s chief economic advisor believes a malicious “interest rate lobby” is holding Turkey back, and has suggested Erdogan’s opponents tried to kill him via telekinesis. Another advisor warned President Obama of “serious and undesirable political consequences for humanity” if the Fed raises rates.

          I’ve been bearish on Turkey for some time now, mainly because of its repugnant leader, but I don’t see any reason to turn bullish now. The Middle East is still mired in chaos and it seems as though things are only getting worse. My investment pick from last October was buying the Israeli ETF (EIS) and selling Turkey (TUR), which has since produced 5% gains. Israel has its hands full with Palestine, Hezbollah and Iran, but at least the country’s vibrant tech sector and natural gas reserves offer some tools for the invisible hand.

      

          The Cup & Handle Fund is up about 1.0% on the year, and +15.5% since August (inception). I turned bearish on crude oil last Thursday, which provided a perfect hedge for some of my other energy-related positions. Next week should see a lot of fireworks as several of my holdings report first quarter results. I sent out my May letter on Monday, and the recommendation has already rallied 5%. My picks have been spot-on this year, but I wish they could wait a little while before rallying so that my readers can establish a position. If you’d like to start receiving these letters click here.

Today’s letter will cover several topics, including:

  • Digging for a Bottom
  • Retail Rollover
  • The Squeeze Continues
  • Chart of the Week

With that I give you this week's letter:

May 21, 2015

    

          As always, if you have any questions or comments or just want to vent, please send me an email at mike@cup-handle.com.

Until next time, tread lightly out there,

Michael Lingenheld

Managing Editor – Cup & Handle Macro

Posted to Cup & Handle Macro Research on May 21, 2015 — 10:05 AM
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