Monday, July 17, 2023

Morning Note: Key Highlights, Your Weekly Sector, etc., Update, and what do lower prices mean?

Here are some key highlights from last week's messaging herein:

Last Thursday:

"Now, we indeed remain structural bulls on inflation... "Structural" being the operative word there.. For, as I've stressed multiple times (in videos especially), if/when recession hits, we inflationistas will get lambasted by those who think that, at the end of the day, nothing's really changed, and that inflation will settle right back into essential nothingness for many more decades to come... I.e., as the economy slows, so does inflation -- you can 100% bet on it!
Well, now, you won't catch me lambasting anybody when we emerge from recession (if indeed one's in the offing), and inflation rises -- with ease -- from the ashes, right back above what we firmly believe has become a long-term untenable 2% Fed target... Nope, I promise, there'll be no I-told-you-so's (well, no mean-spirited ones for sure) from me -- you see, I know, from experience, this stuff ain't easy!

Note: I've written volumes on our inflation thesis over the past few years... If you're new to the blog, or if you'd like a review, this one from December 2021 captures it pretty well.

Back to yesterday's CPI print, and why it makes perfect sense to us...

Here I'll fold CPI (in yellow) into the above graph:

Yep, as you can see, falling inflation (this morning’s PPI reading as well) is/was a virtual inevitability given the overall setup signaled by, among other things, that LEI/CEI ratio! What would typically be next (not necessarily tomorrow, mind you) on that graph is what the equity market is not remotely anticipating at this juncture."

 Last Tuesday:

"...we agree that the Fed's swift intervention into the spring banking scare served to support markets in the manner they've grown very accustomed to... The problem being, as we've pointed out ad nauseum over the past couple of years, we're entering a new regime that -- save for recessionary (and temporary) bouts with disinflation (or even outright deflation) -- breeds a structurally (long-term) higher inflation rate, making Fed intervention a less-easy (if not a more tentative) proposition going forward... Hence, the notion that the results of its latest foray are "likely to be exhausted" and that "the pressure on the US economy is thus increasing rather than decreasing.""
Last Monday:
"The following from Louis Gave's excellent interview on last week's Top Traders Unplugged podcast very much comports with our longer-term thesis:
"What's interesting to me today is that we have one message from the equity markets, which is oh, the next bull market is from artificial intelligence, and we have a message from the bond markets that the next bull market is going to be in emerging markets.

I mean, if you look at the past 18 months, Brazilian government bonds have outperformed US treasuries by 50%, that's never happened... Indian government bonds have outperformed US treasuries by like 25%, that's never happened... Same for Indonesia, same for so many of these markets.

Now, to me, a real proper bull market, like something that goes on for 10 years where you make five times your money, is what we call in our research a triple-merit scenario; where you make money on the currencies, you make money on the bonds, you make money on the equities."

"Today, where you're seeing this is in places like Brazil, like India, like Indonesia, like Mexico... And if you take just an axis from basically Istanbul to Jakarta, you draw a line, you got 3.5 billion who live there, incomes are growing by 5% a year, and infrastructure spending in that area is going absolutely bananas because they have access to commodities that they never had before*."

"The excitement is in all these other emerging markets, that are trying to do what China has accomplished, because what China has accomplished throws the gauntlet down to the Indias of this world, to the Saudi Arabias, to the Indonesias, to the Brazils."

"I'm very bullish on all emerging markets.""

And here's your weekly sector, regional and asset class results update:

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

Same for Europe's so far this morning, with 11 of the 19 bourses we follow trading down as I type.

US equity averages are essentially flat to start the session: Dow up 15 points (0.04%), SP500 up 0.02%, SP500 Equal Weight down 0.12%, Nasdaq 100 up 0.19%, Nasdaq Comp up 0.16, Russell 2000 up 0.43%.

As for last Friday’s session, US equity averages (save for the Dow) traded mostly lower: Dow up 0.3%, SP500 down 0.1%, SP500 Equal Weight down 0.6%, Nasdaq 100 down 0.1%, Nasdaq Comp down 0.1%, Russell 2000 down 1.0%%.

This morning the VIX sits at 13.71, up 2.77%.

Oil futures are down 0.84%, gold's down 0.36%, silver's down 0.73%, copper futures are down 2.65% and the ag complex (DBA) is down 0.19%.

The 10-year treasury is down (yield up) and the dollar is up 0.12%.

Among our 34 core positions (excluding options hedges, cash and money market funds), 11 -- led by Albemarle, HACK (cyber security stocks), XLF (financial stocks), VNM (Vietnam equities) and Dutch Bros -- are in the green so far this morning... The losers are being led lower by DBB (base metals futures), Range Resources, FEZ (Eurozone equities), URNM (uranium miners) and XLV (healthcare stocks).

The following snippets from this morning's Bloomberg interview with John Hancock Investment Management's Co-Chief Investment Strategist Matthew Miskin articulates our major concern right here:
"I don't think inflation is even the risk any more..."  "That's all the market seems to care about..."  

"When car prices or any of these prices are coming down, what does that mean? It means revenue growth is coming down. And you're also hearing about wages still being elevated; that's margin compression. What are businesses going to do with margin compression, they're going to have to cut costs."  

"We think that the number one focus on inflation right now is misguided, it should be on growth trends."
With regard to the stock market:
"It's just tapped out. The multiple has gone from 16 times as the beginning of the year to 19 times, it's all sentiment."  "The multiple has basically driven all the return in the market."  

"...what if the consensus narrative doesn't play out?" 

Have a great day!

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