Tuesday, July 25, 2023

Morning Note: Point, and the Problem With, #8

Last Tuesday's post, and the followup video shot Wednesday, didn't get quite the number of hits I think they should have, as I view that particular message as being uber-important right here.

So, if you missed them, no sweat, as yesterday inspired a #8 worth mentioning (last week I featured 7 reasons why stocks continue to hold up right here, followed by 7 counterpoints).

Here again from last week:

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!
As for #8, I'll paraphrase BCA strategist Jonathan LaBerge from yesterday's live discussion:   emphasis mine...
"So the ECB lagged the US in terms of raising rates, monetary policy turned tight later than in the US, and yet you're already seeing some of this weakness."

"This weakness" being abysmal PMI readings (i.e., much of the Eurozone looks recessionary).

"Some of it seems like it is the simple impact of monetary policy, and we know that excess savings in the US were a combination of 2 things; one was the income effect of fiscal transfers, second was the curtailment of spending on services...
We know that the fiscal response in Europe was weaker than it was in the US, ergo you would infer from that excess savings were weaker, or smaller, in the Euro area than they are in the US.

I think what we're seeing in Europe right now, despite the fact that I agree that China is adding to it, fits very firmly with this framework that excess savings are the thing that have prevented the US from sliding into a recession."

"Watch out if we do in fact see excess savings begin to dwindle meaningfully in the US over the next several months."

8. Excess savings in the US may have effectively kept recession at bay, and thus kept the bear market from seeing a poor-earnings-led second leg down.

Potential problem:


Stay tuned...

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

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

US equity averages are up to start the session: Dow by 25 points (0.07%), SP500 up 0.14%, SP500 Equal Weight up 0.17%, Nasdaq 100 up 0.41%, Nasdaq Comp up 0.42, Russell 2000 up 0.46%.

As for yesterday’s session, US equity averages traded higher: Dow up 0.5%, SP500 up 0.4%, SP500 Equal Weight up 0.2%, Nasdaq 100 up 0.1%, Nasdaq Comp up 0.2%, Russell 2000 up 0.3%.

This morning the VIX sits at 13.87, down 0.29%.

Oil futures are up 0.7%, gold's up 0.23%, silver's up 1.21%, copper futures are up 1.80% and the ag complex (DBA) is down 0.13%.

The 10-year treasury is down (yield up) and the dollar is up 0.14%.

Among our 34 core positions (excluding options hedges, cash and money market funds), 20 -- led by URNM (uranium miners), XME (base metals miners), Albemarle, XLB (materials stocks) and DBB (base metals futures) -- are in the green so far this morning... The losers are being led lower by Range Resources, AT&T, XLI (industrial stocks), VNM (Vietnam equities) and XLP (staples stocks).

"Marcel Proust wrote that “what we call our future is the shadow that our past projects in front of us.” It’s easy to understand that our future must somehow be determined by our past. What’s harder to understand is exactly how. The secret is to get out of the “shadow”—to escape the slavish habits and delusive hopes of “what we call our future”—and to recognize deeper patterns at work."

--Howe, Neil. The Fourth Turning Is Here: What the Seasons of History Tell Us about How and When This Crisis Will End 

Have a great day!

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