Tuesday, September 12, 2023

Morning Note: Key (important) Highlights

 A few key highlights from our latest messaging herein:


The signs for the global economy sent out by the "first mover" among the economic indicators - the sentix economic index - point to a further downturn and a strengthening of the economic downturn forces. The situation in Germany remains particularly precarious. Here we are measuring the weakest situation values since July 2020, when the economy was slowed by the first Corona lockdown. Germany is also weighing heavily on the economy in the euro zone as a whole. The recession is progressing.
But even for the USA, which has so far held up well and defied the restrictive FED policy, the economic data are falling markedly. The tipping point of a global recession is less distant than one might think.

Last Thursday: 

So, bottom line, our base case remains: In a real sense, the equity market unwittingly finds itself between the proverbial rock and a hard place… Should the economy not cool off measurably (read recession), inflation will not meander down to the Fed’s target, in which case the Fed will continue tightening until, yep, the economy cools off measurably (read recession)… In which case, the go-forward projected corporate earnings that are fully-reflected in current stock prices will likely not come to pass, in which case, stock prices will have to adjust (lower) to fully-reflect what likely will come to pass.

Now, this is not to say that a soft landing isn’t a distinct possibility, it’s just that, in my view, the escape route out from between that proverbial rock and a hard place is a distinctly narrow one indeed.

So, if the above scenario plays out, stocks would see yet another promising rally as the data finally begin to roll over for good (into the next recession) – as the Fed will then have to legitimately prime for a pivot… However, and alas, said rally would culminate as bear trap/blowoff tops always do, by delivering the maximum pain to those least prepared for them.

Last Wednesday:

Again, and clearly, there are numerous relatively attractive long-term opportunities outside our borders... Now, that said, the operative phrase above comes from our opening paragraph, "beyond whatever's left in the current cycle." I.e., while we are, in a big way, optimistic when we think, thematically, out a few years, as for the next few months, well... not so much.

So, stay tuned, and stay hedged (for now).

Last Tuesday:

Bottom line: Given what are historically-high US equity market valuations, what remains relatively tight monetary policy, generally high geopolitical risks, notably uncertain economic conditions (above average recession odds on a 6-12 month outlook), a sharp deterioration in market breadth, net bullish market sentiment, and, on-balance, tight credit market conditions, prudence precludes us from adding measurable risk to our current core allocation.

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

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

US equity averages (save for small caps) are lower to start the session: Dow by 75 points (0.22%), SP500 down 0.26%, SP500 Equal Weight down 0.07%, Nasdaq 100 down 0.21%, Nasdaq Comp down 0.12%, Russell 2000 up 0.29%.

As for yesterday’s session, US equity averages closed higher: Dow up 0.3%, SP500 up 0.7%, SP500 Equal Weight up 0.2%, Nasdaq 100 down 1.2%, Nasdaq Comp up 1.1%%, Russell 2000 up 0.2%.

This morning the VIX sits at 14.01, up 1.52%.

Oil futures are up 1.59%, nat gas futures are up 1.53%, gold's down 0.70%, silver's down 0.76%, copper futures are down 0.79% and the ag complex (DBA) is down 0.13%.

The 10-year treasury is down (yield up) and the dollar is up 0.28%.

Among our 34 core positions (excluding options hedges, cash and money market funds), 12 -- led by VNM (Vietnam equities), Range Resources, MP Materials, XLE (energy stocks) and OIH (oil services stocks) -- are in the green so far this morning... The losers are being led lower by Dutch Bros, AT&T, FEZ (Eurozone stocks), XLK (tech stocks) and GLD (gold).

"...one’s ability to anticipate and deal well with the future depends on one’s understanding of the cause/effect relationships that make things change, and one’s ability to understand these cause/effect relationships comes from studying how they have changed in the past."

--Dalio, Ray. Principles for Dealing with the Changing World Order: Why Nations Succeed and Fail 

Have a great day!

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