Tuesday, April 26, 2022

Morning Note: Gotta Understand Incentives and Constraints

From last Thursday's note:
"I should add that China has backed itself into the proverbial corner, and is notorious for ramping up the infrastructure spending (whether it needs it or not) to fight its way out. Particularly when its autocratic leadership is looking for reappointment to another term come the second half of this year. That's ultimately a bullish setup for commodities... and, not to mention, Chinese equities (down 36% over the past 12 months) heading into the second half of the year..."
And from yesterday:
"With Xi up for appointment to a first-ever-for-a-Chinese-president third term sometime the second half of this year, he's clearly calculating that a show of "strength" against the virus best serves his political purposes -- at least for the moment. I suspect he believes that markets -- via fiscal and monetary intervention -- will be effectively managed back to life as his day of political reckoning nears."
And a snippet from a yesterday entry to our internal market log:
"Considering China’s history, and declarations of late, of stepping into their controlled economy with monetary easing and fiscal stimulus measures (infrastructure) when needed, the potential for a buy-the-dip snapback in commodities and resources stocks is a legitimate possibility as we meander toward and into the second half of the year.
To add to the upside odds of such a scenario, Xi has huge political incentive to implement serious stimulus measures going forward!"
And, well, here's from Bloomberg last night:
"Yuan strengthens and Chinese stocks recover after the PBOC pledges to increase policy support and promote “healthy and stable” financial market. The CSI 300 index gains 1.4% and ChiNext rises 2%. Hang Seng Tech index jumps more than 5% as the central bank vows to complete internet platform-company rectification quickly."
With politics/geopolitics playing so much into the mix of markets, it behooves us to get our heads around the incentives and constraints motivating world leaders and central bankers. I.e., as investors, we must forever dispense with the dwelling on what we believe should happen and base our actions on what we objectively view as the reality of the moment...

Asian equities leaned slightly green overnight, with 9 of the 16 markets we track closing higher.

Europe's mostly up this morning, with 12 of the 19 bourses we follow in the green as I type.

US stocks are lower to start the session: Dow down 305 points (0.89%), SP500 down 0.93%, SP500 Equal Weight down 0.69%, Nasdaq 100 down 1.49%, Nasdaq Comp down 1.46%, Russell 2000 down 1.17%.

The VIX sits at 28.81, up 6.62%.

Oil futures are up 0.81%, gold's up 0.56%, silver's down 0.13%, copper futures are up 0.11% and the ag complex (DBA) is up 0.41%.

The 10-year treasury is up (yield down) and the dollar is up 0.17%.

Among our 39 core positions (excluding cash and short-term bond ETF), 11 -- led by treasury bonds, carbon credits, gold, ag futures and energy stocks -- are in the green so far this morning. The losers are being led lower by AMD, Latin American equities, semiconductor stocks etf, Sweden equities and US tech stocks.

"I don’t believe that I am an amazing economist who predicts the future. What I actually believe is that I recognize the world as I find it and that I am flexible enough to change my mind."  --Colm O'Shea

Have a great day!

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