Morning Note: Key Highlights

Here are some key highlights from our latest messaging herein:

Tuesday:

"...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."

Monday:

"...in terms of the Fed, while indeed they'll fold when the going gets tough, the question is how tough will it have to get before they fold up their monetary tightening tent? For the moment, they're remaining, well, tough, themselves, and promise to keep rates higher for much longer than markets are presently discounting..."

Last Friday:

"...couple a still-strong labor market with "No participants anticipated that it would be appropriate to begin reducing the federal funds rate target in 2023" from the Fed's December meeting minutes, and one could conclude that the market's living in Lalaland right here."

Now, that said, I totally get it... And, frankly, I totally agree that odds are far higher than zero that the Fed will pivot to easy policy sometime in 2023, despite what they stated during their last meeting.

Thing is, I don't think that happens without a recession and without an accompanying notable decline in stock prices, as earnings underdeliver versus presently priced-in expectations… So, even though I agree that the Fed may indeed pivot this year, I don’t know that the bulls understand what it’ll take to make it happen."

Last Thursday:

"We've probably spent ample time of late on our view that the current bear market likely has more downside to play out before the coast is clear, but I'll go ahead and offer up the 3 main (most obvious) fundamental bullet-points explaining why that makes sense to us: 

• Odds favor recession (albeit mild in our present view) in 2023.

• Corporate earnings estimates (embedded in stock prices) don't appear to reflect recessionary conditions.

• The Fed, and the ECB, in particular, continue to voice their commitment to tighter monetary policy in order to tame inflation, despite rising recession risk.

If, on the other hand, as some strategists contend, should factors such as the relative strength of the consumer (read service sector activity), a still-strong labor market, inflation continuing to abate, China reengaging with the global economy (although that one could get initially dicey as covid cases spike) and so on, ultimately overcome otherwise recessionary forces, then, in fact, the worst may indeed be over... Which is a possibility we're open to.

But, before we move on, allow me to state the bears' counterpoints to that last paragraph:

While consumers continue to spend on services, their credit card balances are on the rise and their savings rate has plummeted -- one, therefore, has to wonder how sustainable that "relative strength" will be going forward... That "still-strong" labor market has been explicitly targeted by the Fed as needing to weaken if they're going to get inflation under control (i.e., as long as it's strong, they say they'll keep tightening)... Indeed, inflation will continue to abate in the short-run, however, the next point -- China's reengagement -- will likely gain steam, which, given the consumption engine that China is, could be net inflationary further into 2023... Throw in the $1.7 trillion in spending the U.S. government is scheduled to do next year and, yeah, getting inflation under wraps without a recession is gonna be a tall order.

Asian stocks rallied overnight, with 12 of the 16 markets we track closing higher.

Europe's green nearly across the board so far this morning as well, with 15 of the 19 bourses we follow trading up as I type.

US stocks are mixed to start the session: Dow up 116 points (0.34%), SP500 down 0.04%, SP500 Equal Weight down 0.09%, Nasdaq 100 down 0.40%, Nasdaq Comp down 0.33%, Russell 2000 up 0.42%.

The VIX sits at 19.55, down 7.35% (interesting!).

Oil futures are up 1.67%, gold's up 0.72%, silver's up 1.25%, copper futures are up 0.16% and the ag complex (DBA) is down 0.15%.

The 10-year treasury is up (yield down) and the dollar is down 0.52%.

Among our 36 core positions (excluding options hedges, cash and short-term bond ETF), 25 -- led by Disney, energy stocks, silver, Asia-Pac stocks and silver -- are in the green so far this morning. The losers are being led lower by cyber security stocks, uranium miners, Vietnam equities, Amazon and consumer staples stocks.

I've featured this quote before, but it's one worth requoting:

"...one’s ability to anticipate and deal well with the future depends on one’s understanding of the cause/effect relationships that make things change, and one’s ability to understand these cause/effect relationships comes from studying how they have changed in the past."

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

Have a great day!
Marty