Tuesday, March 12, 2024

Morning Note: Key Highlights

This morning's inflation data, in the aggregate, came in a touch hotter than expected, but not to the point -- at least in pre-market action -- to derail the equity market's expectation of a mid-year rate cut.

Meanwhile, here are a few key highlights from our latest messaging herein:

Last Thursday:

"...in yesterday's market snapshot I talked about the abundance of mixed signals that seem to be presently influencing markets, and, as I suggested, while Tuesday's action offered up hints of how the present cycle may indeed ultimately play out, I said that I think it's still too soon to make that call.

Bloomberg macro expert Cameron Crise made a similar observation in his column yesterday:
"Tuesday’s price action offered a couple of hints about the sort of comeuppance that may unfold for over-exuberant investors, but hints were all they were."
He then went on to warn the unsuspecting investor of the precarious nature of the present equity market setup:
"...the valuations of some popular securities look cuckoo, and have rarely rewarded investors for taking buy-and-hold risk at similar points in the past. Things can always get more expensive, though, so going short can be tough (even if sentiment is such that a short position would usually work in “normal” markets.) Participating in parabolic markets is fine, as long as you’re prepared for the other side of the parabola...""

Last Tuesday:

“…the sort of signal you look for when you're concerned that present levels may be dangerously over-owned:”
"Then there's yours truly, who, as I suggested Monday, believes that what Wall Street currently wants isn't ultimately what's in its own best interest:
"As for the time being, recent "hotter" than expected CPI and PPI -- potentially PCE this week -- notwithstanding, I do believe that before the current cycle runs its ultimate course, those who, on behalf of their stock positions, pray for dis(or de)flation will indeed see their prayers answered in the affirmative.

Thing is, beyond the knee-jerk rally that'll no doubt come on "cooler" inflation data and sweettalk from the Fed, there's, alas, that 'F' word that'll ultimately be rolling off the tongues of many a Wall Street analyst, economist, market guru, yada yada!

That word being Fundamentals!

You see, there's this thing called a profit margin, which measures the space between what a company spends to produce its wares and the price at which it charges its customers... And of course when we're talking in(dis or de)flation, we're talking about the latter.

You know where I'm going with this: If inflation's ultimately coming down, the overall pace of price increases is by definition coming down as well... And if recession indeed arrives along the way, we're no longer talking the pace of price increase, we're talking outright price declines in many venues... Venues where, for one example, the cost of labor has risen at an historical pace these past few years.

And what happens to profit margins in such a scenario? Stock prices? Jobs in general?""

February 22:

"The following from BCA's narrative around this week's US Leading Economic Indicators (LEI) release should sound very familiar to clients and regular readers:
"Indeed, the US economy has been robust and the data do not point to an imminent recession. Financial conditions have eased, home prices have risen and consumer sentiment has rebounded. All these factors are supporting economic activity.

However, our base case remains that a recession is likely in late 2024 or early 2025. Beneath the surface of the resilient labor market, some of the leading indicators are weakening. Similarly, default rates on credit cards and auto loans have risen and the tailwind from excess pandemic savings is fading.

Additionally, the year-on-year change in the US LEI is a reliable leading indicator of recessions and although this measure has improved, it is still contracting by 6.97% in January. Its recessionary signal is even more accurate when it coincides with episodes of restrictive monetary policy and inverted yield curve. While the 2-year/10-year yield curve has flattened in recent months, the 3-year/10-year remains deeply inverted.""

February 20:

"Not much to add this morning to our weekend video update, except perhaps the following on objectivity, and humility (absolute must-have qualities if one is to be a successful investor) from William Bernstein's outstanding volume The Delusions of Crowds: Why People Go Mad in Groups:
“…the more points of view a group brings to bear on an estimate, the more accurate that estimate is liable to be. Diversity of opinion also benefits the individual as well; as put by F. Scott Fitzgerald, “The test of a first-rate intelligence is the ability to hold two opposing ideas in mind at the same time and still retain the ability to function.”

Over the past three decades, psychologist Philip Tetlock has examined the forecasting accuracy of hundreds of well-regarded experts; he found that those who took into account a wide variety of often contradictory viewpoints performed better than those who viewed the world through a single theoretical lens. In plain English: beware the ideologue and the true believer, whether in politics, in religion, or in finance.”"

Asian equities mostly rose overnight, with 12 of the 16 markets we track closing higher.

Same for Europe so far this morning, with 15 of the 19 bourses we follow trading up as I type.

US equity averages are mixed to start the session: Dow up 21 points (0.06%), SP500 up 0.23%, SP500 Equal Weight down 0.21%, Nasdaq 100 up 0.16%, Nasdaq Comp up 0.26%, Russell 2000 down 0.67%.

This morning the VIX sits at 14.75.

Oil futures are down 0.33%, nat gas futures are up 1.65%, gold's down 1.14%, silver's down 1.52, copper futures are down 0.57% and the ag complex (DBA) is up 0.07%.

The 10-year treasury is down (yield up) and the dollar is up 0.29%.

Among our 36 core positions (excluding options hedges, cash and money market funds), 12 -- led by Dutch Bros, XLK (tech stocks), EWM (Malaysia equities), Johnson & Johnson and VWO (emerging mkt equities) -- are in the green so far this morning... The losers are GDX (gold miners), SLV (silver), XME (base metals miners), URNM (uranium miners) and gold.

My standby, always timely!, quote (when conditions are sketchy):
"People get all excited about the price movements, but they completely misunderstand that there is a bigger picture in which those price movements happen. Price movements only have meaning in the context of the fundamental landscape. To use a sailing analogy, the wind matters, but the tide matters, too. If you don’t know what the tide is, and you plan everything just based on the wind, you are going to end up crashing into the rocks."

--Colm O'shea

Have a great day!

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