Tuesday, January 10, 2023

Morning Note: Careful What You Wish For!

If you're interested in gaming the day-to-day movements in markets, you'll need to develop an understanding of the immediate focus of (what presently inspires) short-term traders... You develop that understanding by simply matching headlines and data to the immediate, and near-term, market reaction when they're released... Do this long enough, and consistently (with an open mind), and you'll have a decent understanding of what to expect when, for example, an economic headline comes in hot or cold. 

Well, I suppose I should add that one should have a working knowledge of intermarket relationships, macro economics, present political and geopolitical setups and constraints, technical analysis, yada yada -- but, hey, just trying to make a point here!

Case in point being last week's ISM December Services PMI release... As I mentioned in Friday's video, on Thursday Nick and I discussed its prospects and its near-term ramifications -- and turns out we were spot on! The score came in seriously weak, and stocks seriously rallied on the news, which is precisely the scenario we discussed -- i.e., if it comes in strong, stocks sell off big, if it comes in weak, stocks explode higher.

Pretty smart, huh? Well, we got that part right, but yours truly, the "experienced" one, totally whiffed in terms of my expectation as to how the survey would actually read... I expected it to come in hot, and, thus, the market to sell off big.

That said, however, looking beyond the very short-term, our present thesis indeed happens to be spot on with what the survey denoted -- that the economy is everyday getting closer to recession (again, I simply didn't see it showing up in a December services sector survey)... 

As for our view of the attendant go-forward risk/reward setup, as it relates to equities, Bloomberg's Cameron Crise seems to share our sentiment.

The following from his "Macro Man" column, published yesterday morning, will sound very familiar to regular readers of this blog.

Emphasis mine: 

"Equity investors are now cheering for signs of weak growth
in the hopes that it will encourage those same central bankers to ease off on the monetary brakes. Growth that’s too weak obviously threatens the already-tottering edifice of earnings expectations, and perhaps with it current market pricing. The rest of the world has looked attractive relative to the US market for some time now, and investors seem to be piling into the theme. Despite S&P 500 underperformance last year, US stocks still look dreadfully expensive compared with other markets,
even when we adjust for sector composition.

The echo of last Friday’s price action continues to
reverberate across financial markets. While the earnings data from the employment report provided a crumb of comfort on the inflation front, it was the weak growth implied by the services ISM that really kick-started the bond and equity market rally in earnest. And small wonder — that was an 8 standard deviation miss (!!!) on the headline reading, taking it to levels that are
almost always associated with recession. With the Fed still focused on a labor market ostensibly running hotter than what is consistent with the achievement of the inflation mandate, I guess it’s understandable that equity investors adopted a “bad news is good news” perspective.

But they should be careful what they wish for. Downside risks to earnings have by now become a well-digested theme, and an optimist might suggest that a lot of bad news has now been discounted. It’s true that earnings expectations for 2023 are now at their lowest levels since April of 2021, so clearly analysts have started heeding the warnings about the economic impact of tightening. Yet it’s worth noting that the current level of the services ISM is consistent with an EPS drawdown much more severe than anything currently forecast. Using data since the inception of the services ISM in July 1997, a reading of 49.6 is consistent with an EPS drawdown of more than 36% from peak.

I think it’s safe to say that that sort of outcome is not in
the price of equities."

Asian stocks leaned red overnight, with 9 of the 16 markets we track closing lower.

Europe's struggling so far this morning, with 14 of the 19 of the bourses we follow trading down as I type.

US stocks are catching a bit of a bid to start the day: Dow up 69 points (0.21%), SP500 up 0.23%, SP500 Equal Weight up 0.03%, Nasdaq 100 up 0.45%, Nasdaq Comp up 0.48%, Russell 2000 up 0.46%.

The VIX sits at 21.60, down 1.68%.

Oil futures are up 0.04%, gold's up 0.45%, silver's up 0.46%, copper futures are up 0.51% and the ag complex (DBA) is down 0.69%.

The 10-year treasury is down (yield up) and the dollar is up 0.21%

Among our 36 core positions (excluding options hedges, cash and short-term bond ETF), 25 -- led by Amazon, AT&T, MP Materials, healthcare stocks and Brazil equities -- are in the green so far this morning. The losers are being led lower by treasury bonds, ag futures, Albemarle, utilities stocks and emerging market bonds.

"...life can alternate—quite unpredictably—between periods of boring predictability and wild unpredictability."

--Tetlock, Philip E.. Expert Political Judgment  

Have a great day!

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