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STRATEGY: While Powell’s comments unnerved markets Monday, despite the “3 biggie” risks, stocks have already discounted lots of bad news
Powell says “inflation is much too high” and investors show paper hands
Fed Chair Powell spoke at the NABE (National Association of Business Economics) and spoke about the need to fight inflation. And markets reversed from earlier gains to end the day down modestly. Given the tumult and treachery of 2022, it is not surprising that markets remain hesitant and show little conviction.
However, in our view, Powell’s comments are not really incremental. The 3 big concerns for markets remain:
– inflation risks
– risk of Fed policy error
– Russia-Ukraine war
Collectively, these 3 issues pose the greatest risk to the current expansion and hence, are the pivot points to a larger market downturn. We all know markets seek visibility — but resolution of these 3 issues will not happen for months. Thus, we are not surprised investors have a “hair trigger.”
…but we believe lots of bad news is priced in, and hence, while short-term visibility is poor, risk/reward 6M to 12M is strong
Rising inflation is creating a burden for US households, but the key question is whether this rising burden will break households into an outright contraction — in turn, creating a US recession.
– Consumers today have among the strongest balance sheets ever,
– whether measured by excess savings
– or even debt service ratios
Thus, while the rise in inflation risks bending the economy towards contraction, this resilience reduces the risk of an outright contraction. Of course, inflation rising uncomfortably for multi-years is what concerns the Fed. And this should also concern equity markets. But take a look at some charts below.
Household debt service ratio, a measure created by the Federal Reserve to measure the debt burden of households, remains at multi-decade lows. Granted, this is a function of low interest rates. But it is also a function of manageable levels of leverage, relative to wage income. As shown below, higher levels of leverage are seen prior to economic cycle tops.
In fact, Goldman Sachs’ economic team shows that household delinquency rates among a spectrum of loan products remains low.
– an upturn of delinquencies is seen for a period prior to a cycle top
– thus, while inflation of food and energy stresses household finances, this is not yet showing up in rising delinquencies
And perhaps the most “eye-catching” analysis by the GS team is the measure of excess savings. This looks at excess savings as a percent of household income.
– the bottom two quintiles of income (lowest)
– have excess savings of 13% to 14% of income
– this is actually higher than those held by higher income households
In other words, according to GS, this excess savings is what can help cushion households from the rising burden from inflation.
STRATEGY: Lots of bad news is priced into equity markets, but the current environment means “don’t be a hero”
Markets remain volatile. And there are some positive developments, so investors should not become too structurally pessimistic. However, stocks are tracking with our base case (from December 2021) that 1H would be treacherous, for all of the reasons we are seeing now.
– meaning
– this is not a time to be a “hero”
– or make a “big call”
Given stocks fell nearly 15% (at the worst by 2/24), a lot of bad news was priced in. And thus, the risk/reward for stocks has improved materially today compared to the start of 2022. And for those investors with a time horizon beyond the next 4-6 weeks, we think the risk/reward is positive.
…For all this “bearish talk” the S&P 500 is on the verge of regaining its 200D
A simple rule of thumb to determine positive or negative trend in stocks is to look at the price relative to the 200D moving average:
– above 200D = bull / uptrend
– below 200D = bear / downtrend
And as the chart below highlights, for much of 2022, the S&P 500 has been below the 200D moving average. In fact, this downturn is the first seen since 2020 pandemic lows.
Yet, here is the interesting takeaway:
– for all the concerns of rising inflation risk and WWIII
– the S&P 500 briefly touched the 200D moving average
– The “close” counts most
– So the S&P 500 closed below the 200D, unfortunately
But to me, this is a positive development. Equity markets are levitating, even in the face of continued bad news.
– what will happen when we actually get some incrementally positive news?
…Mark Newton, Head of Technical Strategy, sees interest rates hitting resistance aka peaking
Another “half-full” perspective is that interest rates could soon be hitting long-term resistance. In other words, the rise in rates, which has hurt equity valuations, could be stalling.
– Mark Newton, Head of Technical Strategy, sees 2.3% as a key level
– and 2.5% is where technical outlook favors a reversal
– based on DeMark analytics
Again, if rates stall here, this would run counter to the market’s expectations for a continued rise in inflation. After all, if inflation rises but interest rates flatten, the “real rate” would become even more negative. And “negative real rate” is actually stimulative for financial assets.
DATA ON RUSSIA-UKRAINE WAR: Tracking Russia-Ukraine war statistics — 2,421 Ukrainian civilian casualties so far
Our data science team, led by tireless Ken, is scraping data from several sources to track some high level data around the Russia-Ukraine war.
– Ukrainian civilian casualties
– Ukraine population movements
– Ukrainian military losses, except personnel
– Russian estimated losses of personnel and material
Ukraine has lost an estimated 69% of its tanks and 85% of its aircraft
Our data science team, led by tireless Ken, has been tracking the casualties and losses associated with the Russia-Ukraine war. And while Ukraine has staged an impressive resistance, the reported losses of equipment show that Ukraine has lost a substantial share of its equipment:
– by our team’s analysis, using reported data
– Ukraine has lost 1,506 tanks or 69% of its equipment
– Ukraine has lost 112 aircraft, or 85% of its fleet
By these measures, the armament of that army is rapidly depleting. I am not sure if this is a well known fact. But this also highlights why the nation is seeking to replenish its equipment.
With each passing day, Ukraine is experiencing further losses of critical equipment.
The number of casualties is 60 on 3/20, and a total of 2,421 have been reported to the UN.
The flow of migrations out of Ukraine had been steady at about 100,000 to 200,000 per day, but dropped to about 60,000 over the past few days. And a total of 3.5 million have fled so far.
– 55% are entering into Poland
– curiously, 6% or 231k or so, have entered Russia
If one is wondering about reported losses of equipment, we are citing statistics provided by the opposing ministry officials.
– est. 112 Ukraine planes lost
– est. 1,506 tanks lost
– this seems like a lot of equipment
Russian losses are higher
– est. 15,000 Russian soldiers killed
– est. 498 tanks
– est. 97 aircraft
– est. 1,535 armored vehicles
Our team says this data is scraped and can be updated daily. So, we will post these figures for now. And that way, we can get a sense for the intensity of the hostilities.
Thomas Hu, of Kyber Capital, also shared this website which is a crowd sourced view of reported activities. There is a lot to the website, and I encourage you to check it out. The website URL is https://maphub.net/Cen4infoRes/russian-ukraine-monitor
For instance, if you click on one of the icons, a verified post is shown. There is geolocation and other data attached.
STRATEGY: 2022 theme –> BEEF –> Bitcoin (B) + Bitcoin equities (E) + Energy (E) + FAANG (F)
As for sectors, the pleas by Ukraine and sanctions are strengthening the case for our “BEEF” strategy. That is, BEEF is
– Bitcoin + Bitcoin Equities BITO -2.33% GBTC -2.28% BITW 1.05%
– Energy
– FAANG FNGS 0.89% QQQ 0.36%
Combined, it can be shorted to BEEF.
PS: Homebuilders (Oct – Apr aka Golden 6 months) XHB -0.76%
Why is this making stronger BEEF?
– Energy supply is now a sovereign priority
– this helps Energy stocks
– Ukraine and Russia both want access to alternative currencies
– this strengthens case for Bitcoin and bitcoin equities
– if Global economy slows, growth stocks lead
– hence, FANG starts to lead FB AAPL 0.39% AMZN -0.20% NFLX 0.72% GOOG -0.57%
All in all, one wants to be Overweight BEEF
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33 Granny Shot Ideas: We performed our quarterly rebalance on 2/3. Full stock list here –> Click here _____________________________
POINT 1: Daily COVID-19 cases
This data will be updated every Friday.
POINT 2: Vaccination Progress
This data will be updated every Friday.
POINT 3: Tracking the seasonality of COVID-19
This data will be updated every Friday.
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