Tuesday, April 25, 2023

Key Highlights

Here are some key highlights from our latest messaging herein:


"As for the notion that tech's a screaming buy because interest rates are coming down (i.e., because inflation -- and the economy -- is weakening), well, that's like saying tech stocks should be treated like bond investments, as opposed to companies with earnings generated by things like consumer spending, demand for chips, corporate ad spending and so on -- i.e., things that go down when the economy goes down." 

 April 20:

"...rates traders are flashing recession signals and the NY Fed’s probability model for a downturn has risen toward 60%. The consensus forecast is for two quarters of negative growth, data compiled by Bloomberg Intelligence show.

“We have never seen markets trough before the start of a recession,” Credit Suisse Group AG strategists, including Andrew Garthwaite, wrote in a note dated April 18. They put the probability of a US recession by the first quarter of 2024 a
t 80%.""

April 18: 

"...anything that would challenge the pricing in of the Fed loosening later this year conflicts with the notion that this year’s disinflation-fueled rally (in tech stocks in particular) is legit... Or, let’s say, conflicts with the notion that it's not your classic bear market rally (read bull trap).

And that would be your conundrum, as, and I can’t emphasize this enough, an environment that would justify the latter-year softening that Fed fund futures are presently pricing in (read a recessionary environment) is anything but bullish for equities (even, if not in particular [at these levels], for tech)."

April 17: 

"Note the 6-month US outlook (green line) in our Sentix graph below:

Per Bloomberg yesterday, Diesel is flashing a warning sign as well:

Emphasis mine:
"In China, the number of trucks running on highways is noticeably down in recent weeks. In Europe, diesel’s premium to crude futures recently plunged to the lowest level in more than a year. In the US, demand is on track to contract 2% in 2023, S&P Global Inc. says. Excluding 2020, when much of the economy briefly came to a standstill, that 2% slump would be the biggest drop in America’s diesel use since 2016.

We are “assuming one of the worst economic climates in recent memory outside of the 2008-2009 financial crisis and the pandemic,” said Debnil Chowdhury, S&P’s head of Americas fuels and refining.

No matter how you crunch it, demand for the heavy-machinery fuel that powers everything from commercial trucking fleets to construction equipment is weakening in many of the world’s largest economies. Viewed as an early signal of weaker industrial activity and reduced consumer spending, the pullback has recession-watchers on high alert."

“Diesel demand can act as a leading indicator for broader growth as an early sign that spending by households is waning,” said Ben Ayers, a senior economist in the US with Nationwide Economics. “An expected drop in diesel demand fits with building recession risks across the economy.”"

April 13:

"In their "daily insights" yesterday, BCA essentially echoed what we've been preaching for months:

Emphasis mine...

"...the problem for equities is that while it is true that lower interest rates are a positive development, lingering price pressures imply that the Fed will only cut interest rates this year if the economic deterioration is consistent with recessionary conditions. For equities, this macro environment would be negative for corporate earnings."
The Fed's own economists, per March meeting minutes, expect a recession (albeit mild) later this year:

“Given their assessment of the potential economic effects of the recent banking sector developments, the staff’s projection at the time of the March meeting included a mild recession starting later this year, with a recovery over the subsequent two years.”"

Stay tuned... 

Asian stocks were mostly red overnight, with 10 of the 16 markets we track closing lower.

Europe is down virtually across the board so far this morning, with 17 of the 19 bourses we follow trading down as I type.

US equity averages are red to start the session: Dow down 125 points (0.37%), SP500 down 0.81%, SP500 Equal Weight down 1.01%, Nasdaq 100 down 0.86%, Nasdaq Comp down 0.99%, Russell 2000 down 1.52%.

The VIX sits at 18.21 up 7.82%.

Oil futures are down 2.83%, gold's down 0.15%, silver's down 1.80%, copper futures are down 2.80% and the ag complex (DBA) is down 0.95%.

The 10-year treasury is up (yield down) and the dollar is up 0.46%.

Among our 37 core positions (excluding options hedges, cash and money market funds), only 6 -- TLT (long-term treasuries), VGIT (intermediate-term treasuries), EMB (emerging market bonds), JNJ, AT&T and XLP (consumer staples stocks) -- are in the green so far this morning... The losers are being led lower by OIH (oil services companies), MP Materials, Dutch Bros, XME (metals miners) and Albemarle.

There's never a bad time to share my favorite quote:
"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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