Thursday, September 28, 2023

Key Highlights

Here are a few key highlights from our recent messaging herein:

This Tuesday:

"...another way to view the present setup would be to recognize that -- while stocks look [to perhaps put it mildly] expensive -- bonds are beginning to look pretty (historically-speaking) cheap. Hence, my comment that, while it may still be a bit early, we'll definitely be eyeballing duration going forward."

Last Thursday:

"Our assessment has recession odds over the coming months uncomfortably high, while all indications from the Fed are that they indeed believe (or indeed have to say that they believe) that they can safely land -- as opposed to crash -- this plane... Powell reiterated that job-1 is getting inflation sustainably under control... That, in essence, we simply can't have the economy we want without sustainably affordable prices -- supporting their commitment to keeping rates higher for longer, with QT (reducing their balance sheet by $94b a month) seeing no end in sight.

In a nutshell, despite the fact that the latest inflation data would've allowed for a hike yesterday, we actually think Fed funds futures traders have a better handle on where the Fed's ultimately headed than does the Fed itself.

I.e., if recession -- aided by tight monetary policy -- hits over the coming months, the Fed will indeed react, but -- per last week's video update -- we should not expect that to save the market from another leg down... At that point it'll be about what happens to corporate earnings during recession, and what valuations will say about the lofty state of stock prices at the time."
Last Tuesday:
"...the Fed does indeed care about inflation, and they do indeed desire to extinguish it (above their 2% target)... But, thing is, to bring the full, albeit dubious, force of their tools to bear would indeed shock the markets and send reflexive ripple effects into the economy that would indeed bring on recession... And -- back to being harsh -- in the process, they'd do serious short-term harm to their reputation, to the politician, and, yep, to the private equity fund CEO.

At the end of the day, I suppose the big thing-is is the fact that the likelihood of getting, in any sustainable fashion, back to their 2% target is a very heavy lift without the economy actually slipping into recession... And we've looked at what that portends for the equity markets."

Thursday 9/24: 

Here's the opening to a post I penned back on April 20, 2020:
"Keynes suggested circa a century ago that trading (as opposed to, I'll say, investing in) markets is not about assessing fundamentals, it's about what traders think other traders are going to do. And for the more savvy traders, it's about what they think other traders think other traders are going to do."
Now, despite what are in our view deteriorating fundamentals, against what has become, let's call it, a difficult inflation backdrop, stocks have staged an impressive, extended, rally off of precisely the level (3,500 on the SP500 back on Oct 16th of last year) that we targeted when trouble began brewing back in early 2022... Thing is, we dubbed that to be the level that would ultimately (should recession ultimately ensue) be the floor for only the first leg down for a bear market that would see yet another, final, investable level somewhere below our initial target.

Well, not that we're complaining -- as we've been able to make money despite our hedging and diversification -- but, clearly, that next leg down is taking its own sweet time in developing.

So, rather than expounding herein on the trillions of free money giveaways, excess savings, student loan payment moratoriums, yada yada, that have aided conditions along to this point (items that btw have either halted, diminished, or are on the cusp of halting), I'll simply state that the opening quote above pretty much explains it -- the market is simply trading with a call it second-level Pavlovian mentality that when things get the least bit ugly, the Fed will be there first to ring a bell (say stuff), then, if that doesn't work, to lay down the bowl (stimulus) that will have the world lapping up equities with ravish passion.

Well, thing is, there's the closing paragraph to that 2020 message (quoting our friend, colleague and renowned expert on all things options and hedging, Hari Kirshnan):

"In his outstanding, and instructional, book The Second Leg Down, Hari P. Krishnan points to the huge risk that exists when large investors are all "wired" in the same way (the last line should resonate with clients): emphasis mine...
"If large investors are all wired to react to price moves in the same way, volatility can appear out of almost nowhere. As the financial ecosystem becomes less diverse, the risk of spontaneous crises increases. Many risk systems use similar inputs, such as volatility or the level of cross-correlation in the market. This can produce common exit points and severe congestion as a large number of systems are trying to reduce positions en masse. No amount of fundamental analysis can tell you how to avoid these so-called “flash crashes”. Flash crashes are dependent on price action and positioning. The adage that the goal of markets is to produce the most pain to the largest number of investors is appropriate here. The only defences for a lower-frequency trader are to avoid leverage or to use options as insurance."
So, what do we think savvy traders think other traders think other traders are going to do? And when? Hmm....."

Asian stocks leaned slightly green overnight, with 9 of the 16 markets we track closing higher.

Same for Europe so far this morning, with 10 of the 19 bourses we follow trading up as I type.

US equity averages are mixed to start the session: Dow down 3 points (0.01%), SP500 down 0.14%, SP500 Equal Weight up 0.22%, Nasdaq 100 down 0.40%, Nasdaq Comp down 0.40%, Russell 2000 up 0.33%.

As for last yesterday’s session, US equity averages were (save for the Dow) mostly higher: Dow down 0.2%, SP500 up 0.1%, SP500 Equal Weight up 0.1%, Nasdaq 100 up 0.2%, Nasdaq Comp up 0.2%, Russell 2000 up 0.1%.

This morning the VIX sits at 18.64, up 2.64%.

Oil futures are down 1.08%, nat gas futures are up 2.00%, gold's down 0.08%, silver's down 0.27%, copper futures are up 1.63% and the ag complex (DBA) is unchanged.

The 10-year treasury is down (yield up) and the dollar is down 0.27%.

Among our 33 core positions (excluding options hedges, cash and money market funds), 20, led by URNM (uranium miners), Albemarle, DBB (base metals futures), REMX (rare earth miners) and XME (base metals miners), are in the green so far this morning... The losers are being led lower by TLT (long-term treasuries), VNM (Vietnam equities), XBI (biotech stocks), Johnson & Johnson and VWO (emerging mkt equities).

As I continue to preach in client review meetings, you and I may or may not appreciate present-day world trends, but, for us (PWA), managing other people's money demands that we set our biases aside and see the world for what it is, not for how we might prefer it to by... Which is the only way we can successfully navigate (protecting where/when necessary and exploiting inherent opportunities) markets as the years roll by... In other words:

"...instead of creating these expectations of what this should do, or should not be happening, or isn’t right, you cooperate with the form that this moment takes, you drop your expectation that it should be different, you bring a yes to it – the isness – because you realize it’s pointless to argue if it already is. Then a great intelligence is available to you that is not available to you when you reject, deny or don’t want what is."  --Ekhart Tolle


Have a great day!

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