Friday, October 21, 2022

Morning Note: Imagine When...

The precariousness of the present setup continues to express itself... This morning has the runaway freight train that is the US dollar gaining speed as traders abandon the yen (contagious for the pound in particular this morning), and as treasury yields give way (higher) to what may be growing liquidity concerns.

And while our base case says odds favor yet lower lows as the present bear market plays itself out, it is indeed time to begin focusing our attention on how best to exploit what we see as emerging macro opportunities.

Here's last night's entry to our internal market log:


Stocks staged a decent rally overnight and (other than a hiccup when news of the UK’s new prime minister’s resignation hit the wires) into the cash session today as implied vol measures (vix, vxn) gave way to the downside… This, in my view, was consistent with the latest earnings releases (on balance), seasonality, sentiment and so on…

What was growing upward momentum early in the session, however, abruptly reversed on renewed hawkish commentary from today’s Fed speakers… Per Bloomberg below:
"A rally in the S&P 500 fizzled out after Philadelphia Fed chief Patrick Harker said policymakers are likely to raise rates to "well above" 4% this year."

"Fed Governor Lisa Cook also spoke, noting that rates will need to keep rising to get inflation under control."
Which conflicts with what we perceived to be a more dovish tone yesterday out of Kashkari and Bullard.

Clearly, traders remain uber-sensitive to Fed-speak.

Given the multiple headwinds markets face, the presently high level of jitteriness makes perfect sense… And while, indeed, it is incumbent upon us to continue to hedge our clients’ left tail risk with options, we have to remain open to the prospects for some serious right tale risk in equities when, say, the Russia/Ukraine war comes to an end, when China abandons “zero-covid” and injects yet more fiscal stimulus, when inflation, and, with it, interest rates and the dollar, begins to build a little downside momentum, if/when the treasury department begins the duration swap it appears to be contemplating, if the Fed were to concede to the mounting stress that’s showing up in global fixed income and currency markets (as the latest commentary from select members has subtly hinted to of late), and so on.

More importantly for our purposes, beyond the near-term event risk that could push equities markedly in either direction, when we consider the nature of what, among other things, is an early-stage shift to a global labor-friendly regime, we see a world rich in macro-based investment opportunities.

The “trick” will be to invest in the areas governments will be investing in, and to the extent that that investment (spending) involves infrastructure of the traditional, and of the green energy varieties, to invest in the global markets where the massive quantities of the required metals and minerals will be produced… Which, in some instances, happen to sport setups (valuation, yield, and where they presently sit in relation to the business cycle) that are notably more attractive than what we presently find here at home.

Asian equities leaned red overnight, with 11 of the 16 markets we track closing higher.

Europe's taking a hit this morning as well, with all but 16 of the 19 bourses we follow trading lower as I type.

US stocks have done a 180 since I penned the opening paragraph: Dow up 154 points (0.51%), SP500 up 0.36%, SP500 Equal Weight up 0.38%, Nasdaq 100 down 0.01%, Nasdaq Comp down 0.07%, Russell 2000 up 0.30%.

The VIX sits at 29.71, down 0.90%.

Oil futures are up 1.14%, gold's up 0.67%, silver's up 0.78%, copper futures are up 0.62% and the ag complex (DBA) is up 0.22%

The 10-year treasury is down (yield up) and the dollar (coming way off its premarket high) is up only 0.08%

Among our 34 core positions (excluding options hedges, cash and short-term bond ETF), 25 -- led by energy stocks, base metals miners, AT&T, Albemarle and MP Materials -- are in the green so far this morning. The losers are being led lower by AMD, long-term treasuries, communication stocks, Asia Pac equities and Sweden equities.

Can't quote this one enough:
"People get all excited about the price movements, but they completely misunderstand that there is a bigger picture in which those price movements happen. Price movements only have meaning in the context of the fundamental landscape. To use a sailing analogy, the wind matters, but the tide matters, too. If you don’t know what the tide is, and you plan everything just based on the wind, you are going to end up crashing into the rocks."

--Colm O'shea 

Have a great day!

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