Wednesday, July 6, 2022

Morning Note: Recession Fears Rule, Although...

Yesterday's entry to our internal log covers a fair amount of important ground. Here it is in its entirety:

Note: Non-client subscribers please keep in mind that the following is shared for informational purposes only. Any reference to positioning relates only to the work we perform on behalf of our clients and are in no way whatsoever to be construed as recommendations to the general public. 


An overnight rally in futures gave way to a sharp selloff in the cash session which gave way to a rally that took the SP500 back to the green (albeit barely) by the end of the session.
While the rally in bonds and the dollar has me thinking recession fears ruled today, recession resistant sectors, such as utilities for example (down 3.41%) didn’t remotely reflect that sentiment. Positive gold futures also gave way to selling in the cash session, only – despite crashing yields – it failed to recover (down 2.12% on the day). Blame gold’s action – and the selloff across the entire commodity space – on the rally in the dollar (along with recession fears [with regard to industrial metals]).

Along with commodities, we also felt the pain in non-US equities. Europe, in particular, was a hot mess today. Insanely high gas prices, along with Germany managing its way to its first trade deficit since 1991 seemed to rattle European equities across the board; which itself reflects the horrendous challenge Germany – and the rest of Europe – continues to face around energy, and energy policy going forward.

While our long-term base case for owning foreign equities remains sound (i.e., odds of performance relative to the US over the next several years lean higher), the short-term setup has deteriorated markedly. While, at first blush, it appears that we’re sufficiently hedged using SP500 puts, strong divergence of our non-US exposure, as well as certain US sectors (the index is skewed toward tech), can manifest as greater downside realization than our stress tests presently calculate.

Note: I chose to omit the 3 paragraphs featured here, as they went into notable detail as to how we're addressing the concern noted in the previous paragraph. This is because we have a fair number of non-client subscribers and this takes us into weeds that we would not want them even beginning to think about with regard to implementing themselves, the disclosure above notwithstanding.

Clients, if you'd like that detail, please shoot me an email and I'll gladly forward it to you directly. 


With regard to the hit industrial metals have suffered of late: This is an area that we’re not at this point compelled to hedge specifically. While indeed the action reflects recessionary concerns, when we consider the ramifications of global green energy investment, US infrastructure spending ($1.2 trillion passed, with much of it yet to be allocated), China’s “need” to aggressively stimulate a recovery hampered by recent, and the threat of continued, Covid lockdowns, heightened political risk in the countries where much of the world’s copper is produced, and what has amounted to supply/demand (copper) deficit, suffice to say that the long-term bullish case for the metals space remains very much intact.

Asian equities struggled overnight, with 12 of the 16 markets we track closing lower.

Europe's catching a bid so far this morning, with 13 of the 19 bourses we follow trading higher as I type.

US stocks are mixed: Dow up 38 points (0.12%), SP500 up 0.06%, SP500 Equal Weight down 0.30%, Nasdaq 100 up 0.08%, Nasdaq Comp down 0.03%, Russell 2000 down 0.69%.

The VIX sits at 27.69, up 0.54%.

Oil futures are down 2.79%, gold's down 0.65%, silver's flat, copper futures are down 0.86% and the ag complex (DBA) is up 0.46%.

The 10-year treasury is down (yield up) and the dollar is up a not-small 0.58%.

Among our 38 core positions (excluding options hedges, cash and short-term bond ETF), 9 -- led by healthcare stocks, consumer staples stocks, Sweden equities, utilities stocks and ag futures -- are in the green so far this morning. The losers are being led lower by MP Materials, energy stocks, base metals miners, Albemarle and uranium miners.

So true:
"...investors were generally blind to a major irony in their own ignorance of politics. It was politics and geopolitics that played a major role in the “Great Moderation,” which saw inflation tamed and economic volatility dissipate. But instead of recognizing the important role of politics, the financial industry universally credited and praised a committee of academics setting interest rates. That such moderation was actually underpinned by globalization, massive expansion of the global labor supply, adherence to laissez-faire policies, and global stability enforced by American hegemony is a heretical view.
And, sadly, it's politics and geopolitics that largely explain the fine mess we're presently in...

Have a great day!