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STRATEGY: On 2/24/2022, > 40% of S&P 500 stocks were in a bear market = 9 of 9 times past 30 years stocks higher 12M out (ex-recession)
Credit markets and investors are still hawkish = equity markets need to discount/resolve this
The major difference in 2022 compared to the pandemic era is the bond market has become “hawkish” — that is, the bond market is dealing with the dilemma of inflation risk, Fed “behind the curve” and the economic consequences of the Russia-Ukraine war (how large). And many of the pundits of the credit world are hawkish:
– Mohamed El-Erian says “Fed is losing credibility” and thus, leans bearish on market outlook
– Thus, the key takeaway is the credit markets are turning in a way that is a headwind for equity markets
This market dilemma is evident if you look at the yield curve. Take a look below, it is “messed up”
– curve steep 1M to 3Y –> Fed hikes signaled
– 3Y to 10Y portion inverted –> fears of a “recession”
– 30Y less 20Y inverted –> why??
This is not a yield curve that seems to be telling one story, but multiple stories.
Below, we highlight the multiple factors buffeting the yield curve:
– inflation risks –> 1M to 3Y
– Fed hikes coming –> 1M to 3Y
– War leads to disaster –> inversions at the long end
– Hikes risk a recession –> inversions after 3Y
The bond market is reflecting the “3 biggies” that are also causing turmoil in equities
…Fundstrat sees less than a 15% chance of a negative outcome, better than market assessment of 50%-ish
What do we see as odds of a negative outcome? The future is uncertain. But we see the odds of a recession far lower than consensus:
– as many point out, the yield curve is implying a 50% chance of a recession
– we see the risk at 15% or less, meaning recession should not be priced into the “central case”
To state the obvious, the key to market outcome, is whether events in coming months lead to
– positive outcome for economy –> inflation cools or War ends
– negative outcome for economy –> inflation becomes “unanchored” or war expands
The key pivot, arguably, is the direction of inflation. Why not war?
– Wars are generally economically stimulative
– that is why markets tend to bottom at invasion –> remember “sell the buildup, buy the invasion”
– that happened in 2022 already
…Brian Rauscher, Head of Global Portfolio Strategy, sees the US dealing with “two inflation events” not “structural inflation”
Brian Rauscher, our Head of Global Portfolio Strategy, shared with me his recent thoughts on inflation risks and he too sees “downside” in 2H2022. His perspective provided a lot of clarity and his rationale is below:
– inflation has stemmed from “two events” recently
– first is the supply-chain/COVID-19 related shortages driving “goods inflation”
– that was working its way through the economy and now showing up in services, but the “goods piece” is peaking
– second event is commodity-driven and now “further fueled” by the Russia-Ukraine war
– in the background is labor shortages, partially stemming from COVID-19 factors such as restrictions, vax requirements, PTSD, etc
– this differs from prior drivers of structural inflation
– monetary debasement (currency crash)
– overly strong aggregate demand versus output (look at capacity utilization still low)
Overall, Brian’s arguments are sound and a good summary of the case for a “downside break” in inflation risk.
…LA port backlog is dropping to “normal” levels rapidly
The best example of easing supply chain glitches is the rapidly improving situation at the LA/Long Beach ports. See below.
– no explanation needed
Similarly, look at the Cass Freight Shipments Index. This tracks the movement of goods in the US and a good real time barometer of economic vitality:
– Cass freight has rolled over hard
– now negative YoY
– Cass freight leads CPI by 6 months
– meaning?
– we think CPI risks roll over to downside in 2H2022
Hence, again, we think inflation risks break to the downside. By the way, this is consistent with the view by Mark Newton, Head of Technical Strategy, who sees the 10-year rates rolling over in 2H2022. And he sees strong resistance at 2.50% 10-year yield.
STRATEGY: Lots of bad news baked in = risk/reward positive 6M to 12M out = 2H outlook remains strong
The S&P 500 has managed to regain its 200D moving average, which we see as a tentative “good sign”:
– if equities can sustain a move above S&P 500 4,700,
– this would strengthen case that risk/reward is decidedly positive
– we still believe “you can’t get hurt buying stocks here 6M to 12M out”
– but it is hard to have conviction in the near-term,
– looking out 6M to 12M, we lean bullish, because we see risk of recession lower than market “priced in”
– when S&P 500 was down 15% from its peak, that is a ~66% odds of recession price in
– bond market yield curve 10Y less 2Y is pricing in a 50% odds of a recession
Thus, if odds are below 50%, then stocks overshot to the downside
…On 2/24/2022, > 40% of S&P 500 stocks were in a bear market = 9 of 9 times past 30 years stocks higher 12M out (ex-recession)
On this last point, take a look at the chart below. This shows the “% of stocks 20% off their 52-week highs”
– thank you Mark Newton and Rob Sluymer for your assistance
The chart shows this figure soared to > 40% on 2/24 (day of invasion):
– prior major market lows are shown below
– in a full blown recession, this figure can soar to 90% or more
– but in major “non-recession lows” of 2016 and 2018, this bottomed at 58% to 67%
– so 41% was 2/3 of the way to the December 2018 or Feb 2016 lows
This is a LOT OF BAD NEWS PRICED IN
In fact, let’s look at the times this figure moved past 40% — that is “crossing the line”
– this is shown below
This happened 14 times since 1995
– 9 of the 14 took place when US was NOT IN RECESSION
– 9 of 9 times, stocks higher 12M later, 100% win ratio
– median gain 17%
– 8 of 9 times, stocks higher 6M later
– 10% median gain
See the picture? The risk/reward 6M to 12M out is very strong. This is the important time horizon to keep in mind. Don’t get too bearish.
DATA ON RUSSIA-UKRAINE WAR: Tracking Russia-Ukraine war statistics — 2,510 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
– Ukraine military losses, except personnel
– Russian estimated losses of personnel and material
Ukraine has lost an estimated 70% 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 1,528 tanks or 70% 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 89 on 3/21, and a total of 2,510 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 has dropped to around 60,000 per day recently. And a total of 3.6 million have fled so far.
– 55% are entering into Poland
– curiously, 7% or 252k 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. 1,528 tanks lost
– this seems like a lot of equipment
Russian losses are higher
– est. 15,300 Russian soldiers killed
– est. 509 tanks
– est. 99 aircraft
– est. 1,556 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 -3.19% GBTC -3.14% BITW
– Energy
– FAANG FNGS -1.35% QQQ -1.84%
Combined, it can be shorted to BEEF.
PS: Homebuilders (Oct – Apr aka Golden 6 months) XHB 0.35%
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 -0.03% AMZN -2.84% NFLX -0.11% GOOG 0.24%
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.
