Morning Note: Jotting Down Some Thoughts On Equities, and a little Zen

Thinking through the 2023 equity market phenomenon; what’s behind the rally?

1. The regional bank scare in March brought some $400 billion to bear by the Fed.
2. A belief that virtually anything AI simply can’t lose, regardless of the macro setup… Leading to historically weak breadth until recently.
3. Simply put, it’s difficult for a market to roll over while everyone’s positioned for it… I.e., sentiment was very bearish coming into the year.
4. A steadfast belief that this Fed – despite their tough rhetoric – simply won’t let anything break in, say, 2008, or tech-bubble, fashion… Point #1 bolsters that narrative.
5. That resoundingly bearish sentiment, and positioning, at the start of the year is getting rapidly unwound as panicky pros face the career risk that comes with missing their benchmarks.
6. Massive options speculation, and hedging, in a manner/direction that essentially pins stocks to certain, ever-rising (to this point), levels.
7. A growing consensus that the economy will indeed see inflation reach, and hold, the Fed’s 2% target without bringing on a market-crushing recession. I.e., a “soft landing.”

Problems with the above:

1. (Regional bank scare): Jumping in early every time something cracks inspires the risk-taking and potentially the further consumption that exacerbates asset bubbles and keeps inflation alive at well above the Fed’s 2% target… I.e., ultimately, something’s got to give.
2. (AI) The fervor around everything AI is too reminiscent of the late-90s internet equities dynamic for comfort. I.e., valuations leave zero margin for disappointment/miscalculation right here.
3. (Markets don’t roll over when everyone’s already bearish): Works in both directions: I.e., it’s equally hard for a market to melt higher when everyone’s bullish (positioned for it) – and sentiment has recently flipped on its head (now notably bullish).
4. (Fed won’t break anything): Ditto #1
5. (Bearish pros capitulate): Ditto #3
6. (Options): The unwinding of complacency in the volatility space can morph into a waterfall in a virtual heartbeat, either under its own weight, or in the event of a surprise macro catalyst. 2018 “Valmageddon” would be an example – 5 years hence and clearly amnesia has set in.
7. (Soft Landing): A soft landing virtually assures margin compression (lower corporate earnings) as inflation (higher corporate revenue) abates and, as a consequence of averting a downturn, the labor and commodity markets remain tight… Equities right here are not remotely priced for earnings misses!

Stay tuned...

Asian stocks sold off overnight, with 11 of the 16 markets we track closing lower.

Europe's mostly green so far this morning, with 16 of the 19 bourses we follow trading up as I type.

US equity averages are mixed to start the session: Dow up 201 points (0.58%), SP500 up 0.15%, SP500 Equal Weight up 0.69%, Nasdaq 100 down 0.39%, Nasdaq Comp down 0.42, Russell 2000 up 1.38%.

As for last yesterday’s session, US equity averages traded higher: Dow up 0.2%, SP500 up 0.4%, SP500 Equal Weight up 0.2%, Nasdaq 100 up 1.0%, Nasdaq Comp up 0.9%, Russell 2000 up 1.0%.

This morning the VIX sits at 13.43, down 0.45%.

Oil futures are up 1.47%, gold's up 1.38%, silver's up 0.57%, copper futures are down 0.41% and the ag complex (DBA) is up 0.93%.

The 10-year treasury is up (yield down) and the dollar is up 0.03%.

Among our 34 core positions (excluding options hedges, cash and money market funds), 29 -- led by Range Resources, AT&T, URNM (uranium miners), XME (metals miners) and Dutch Bros -- are in the green so far this morning... The losers are being led lower by DBB (base metals futures), VWO (emerging mkt equities), XLK (tech stocks), LEMB (local currency emerging mkt bonds) and FEZ (Eurozone equities).

Here's a little wisdom we can apply to investing from the classic Zen and the Art of Motorcycle Maintenance:

"...spend your time being aware of things and meditating on them. On sights and sounds, on the mood of the weather and things remembered, on the machine and the countryside you’re in, thinking about things at great leisure and length without being hurried and without feeling you’re losing time."

-- Robert Pirsig 

Have a great day!
Marty