Monday, September 19, 2022

Morning Note: Experiences vs Exercise Equipment

Last Tuesday's CPI number sent a jolt through the markets and had pundits talking up a 1% rate hike come this Wednesday. While such odds immediately popped higher (pricing in a 34% chance) in Fed funds futures, they've calmed back down since to a roughly 21% chance as I type.

The fact that the possibility of a 1% rate hike is out there, and that equity markets got pounded last week, and that the likes of Nomura says it's going to happen, well... lo and behold, suddenly a .75% rate hike may indeed spark a rally... Depending of course on how J. Powell handles Wednesday's presser.

Also offering support for a rally happens to be a sentiment setup that leans contrarianly bullish at present.

Our own "Fear/Greed Barometer" (consists of the VIX, individual investor sentiment (AAII weekly survey), adviser sentiment (Investor Intelligence weekly survey), short interest, futures speculators positioning and the put/call ratio) currently scores 33.33, up 11 points from last week. A positive number denotes net fear among market participants. Which is a net bullish setup... as it implies that there's some significant demand in the offing, should a little good news hit the tape...

Now, before you take that last paragraph and run (into stocks) with it, keep in mind, we’re in a bear market, and like (as I suggested in a recent video) bullish short-term technical setups, other otherwise bullish setups (such as a high fear reading) are prone to failure as well… during a bear market. 

In any event, a 1% rate hike would likely send yet another jolt through the market, without, that is, Powell seriously walking back future hike potential in his post meeting appearance. While, again, .75% could see stocks in the green, without, that is, Powell talking up aggressive future rate hikes...

That message from Fed Ex last week should, frankly, have gotten the Fed's attention... And, recall, our own PWA Index presently scores a -9, which means recession risks presently prevail... So I'm guessing .75%, but don't hold me to it...

Here's on Fed Ex last week:

FedEx said Thursday it is shuttering storefronts and corporate offices while putting off new hires in a belt-tightening drive brought on by drop-off in its global package delivery business.

The company based in Memphis, Tennessee, warned it will likely miss Wall Street's profit target for its fiscal first quarter that ended Aug. 31. And it said it expects business conditions to further weaken in the current quarter amid weaker global volume.

"Global volumes declined as macroeconomic trends significantly worsened later in the quarter, both internationally and in the U.S.," FedEx CEO Raj Subramaniam said in a statement. "We are swiftly addressing these headwinds, but given the speed at which conditions shifted, first-quarter results are below our expectations."

"High operating expenses were also a drag on the company's results, FedEx said. In response, it said it will cut costs by closing over 90 FedEx Office locations and five corporate offices, deferring new hires and operating fewer flights."

Now, all that said, let's not lose sight of the fact that there's also the services side of the economy, and that it makes sense that the covid-induced-spending-on-goods-extravaganza was bound to come way off the boil.

For now, the evidence suggests folks are still spending, but more so on experiences, as opposed to exercise equipment... 

Stay tuned...

Asian equities were mostly lower overnight (Japan's mkt was closed), with only 3 of the markets we track closing higher.

Same for Europe so far this morning as well, with 17 of the 19 bourses we follow trading down as I type.

US stocks continue to selloff: Dow down 182 points (0.59%), SP500 down 0.60%, SP500 Equal Weight down 0.86%, Nasdaq 100 down 0.52%, Nasdaq Comp down 0.57%, Russell 2000 down 0.36%.

The VIX sits at 27.44, up 4.33%.

Oil futures are up 2.57%, gold's down 0.56%, silver's down 1.25%, copper futures are down 0.71% and the ag complex (DBA) is down 0.63%.

The 10-year treasury is down (yield up) and the dollar is up 0.23%

All of our 35 core positions (excluding options hedges, cash and short-term bond ETF), save for the put hedges of course, are trading lower to start the session. -- the least bad so far are cyber security stocks, AMD, defense stocks, treasury bonds and MP Materials. The biggest losers are energy stocks, Sweden equities, healthcare stocks, emerging market equities and Eurozone equities.

"By raising and lowering supplies of money and credit, central banks are able to raise and lower the demand and production of financial assets, goods, and services."

--Dalio, Ray. Principles for Dealing with the Changing World Order

Well, that's indeed what they're counting on right here!

Have a great day!


  1. Marty: thanks for the updates!
    I read something interesting and want to know your thoughts of the following statement: "Legendary investor Stanley Druckenmiller warns there is a ‘high probability’ the stock market will be ‘flat’ for an entire decade". The past market has been great for investors for a very long time. If Stanley Druckenmiller were to be right, would we look into high yield corporate bonds, emerging markets, and etc. for a decent return for the next decade? Nobody knows what would happen in the future, but I do like the fact that we are investing in a macroeconomic level in lieu of a single focused market.

    1. Hi Sam, Druck is no doubt referring to probabilities stemming from recent valuation levels. I've touched on this off and on over the past year+, here's a link to a December 2021 post:

      Below is an excerpt... My reference is entirely about the US equity market ("growth" stocks in particular). We see unusual opportunity in equities in a number of foreign jurisdictions. As well as in commodities for several years to come... And, yes, in certain sectors in the US as well. Bottom line, we believe the lions share of returns over the next decade will be derived from places than what folks grew accustomed to during the last bear market...

      Here you go:

      On several occasions herein we've illustrated what we believe to be the go-forward (long-term) unsustainable outperformance US equities have enjoyed over the rest of the world this past decade.

      In part, it has to do simply with the law of averages (as we've charted in several videos), but it also has to do with present valuation levels and what history suggests about forward return expectations from here. And, not to mention, our longer-term view on the dollar, demographics, geopolitics, etc.

      Here's from Vanguard's latest "Market Perspectives" piece. As you'll see at the bottom, they sympathize: emphasis mine...

      Market perspectives:
      December 2021
      Key highlights
      Vanguard expects the U.S. economic recovery to continue in 2022, though at a naturally slower pace.
      The Fed's tapering program sets the stage for what Vanguard believes will be a late 2022 interest rate hike.
      We foresee inflation persisting above 2% toward the end of 2022, but broad wage gains taking hold could potentially push it higher.
      Asset-class return outlooks

      The greatest change in our outlooks from the June 30 running of the Vanguard Capital Markets Model® (VCMM) was in emerging markets equities. Large price declines in the intervening months lowered valuations, which are reflected in a 10-year forecast range that is 60 basis points higher in the September 30 running. In fixed income, yields increased marginally in the third quarter, allowing for a marginal rise in forecasts for many fixed income sub-asset classes.

      Our 10-year, annualized, nominal return projections, as of September 30, 2021, are shown below. Please note that the figures are based on a 1.0-point range around the rounded 50th percentile of the distribution of return outcomes for equities and a 0.5-point range around the rounded 50th percentile for fixed income.
      Equities Return projection
      U.S. equities 2.3%–4.3%
      U.S. value 3.1%–5.1%
      U.S. growth –0.9%–1.1%

      U.S. large-cap 2.2%–4.2%

      U.S. small-cap 2.2%–4.2%
      U.S. real estate investment trusts 1.9%–3.9%

      Global equities ex-U.S. (unhedged) 5.2%–7.2%
      Ex-U.S. developed mkts (unhedged) 5.3%–7.3%
      Emerging rkts equities (unhedged) 4.2%–6.2%

  2. Wow! Thanks for all the details! Much Appreciated!