We publish on a 3-day a week schedule:
Monday
SKIP TUESDAY
Wednesday
SKIP THURSDAY
Friday
STRATEGY: Stocks rising in face of March payrolls miss is another “half-full” sign
Many investors see an inevitable recession, reminiscent of the Netflix movie “Don’t Look Up”
Last Friday, the March payrolls missed Street consensus, and yet, equity markets rallied. As the adage goes, stocks bottom on bad news, not good — meaning, it is a good sign when equities rally in the face of bad news. This week, the ISM services index and consumer credit statistics are reported. So there is some important macro, but we know “other” headlines such as commodities, Russia-Ukraine war and China COVID-19 will impact markets.
In conversation after conversation with our institutional investor clients, it is clear investors are trying to properly discount risks that will take months to play out. The seismic risks, which we all know are:
– Russia-Ukraine war has driven a sharp spike in commodity prices
– Spike in oil prices leads to higher gasoline leads to consumer recession (risk of)
– Spike in natural gas leads to higher fertilizer costs leads to higher crop costs leads to starvation (risk of)
– Labor prices are rising leads to higher inflation expectations leads to runaway inflation (risk of)
– Fed is hawkish leads to pushing rates above neutral leads to excess tightening leads to recession (risk of)
You get picture. There are a series of events unfolding, and these triggering events will take time to play out. For equity markets, this is a waiting game and one that will make any investor nervous. Hence, nervous means risk-off. (But, as our clients know, market behavior has not been universally dire and there are many hints of a market bottom.)
In a way, the stock market reminds me of the Netflix 2021 movie “Don’t Look Up” about two scientists who go on a massive media tour to warn the world of a comet on its way to destroy Earth, but nobody seems to care.
– for those convinced “recessionists,” they are the “scientists” and the stock market doesn’t “seem to care”
…the “recessionists” have cogent and solid arguments of the risks
Let me be clear, the “recessionists” have strong arguments in their favor. And there are signs of risks developing.
– most fearfully, the 10Y less 2Y yield curve is inverted (Learn what an inverted yield curve is here)
– there are more inversions as well
– but as our subscribers know, we highlighted this inversion is mainly due to the inflation “backwardation” (see here)
– commodity price spikes can cause social and economic problems, so these can’t be ignored
…But not all market signals are foreboding
Given these risks, it should not be surprising that anyone who sounds “constructive” on equities is viewed as oblivious. In the movie, the President and Chief of Staff, don’t seem to take the scientists seriously.
– if you have not seen the movie
– it is a dark comedy
– but I found it funny
Then again, not all market signals are foreboding. But the key unknowns:
– how much damage will be wrought on the global economy
– how long damage lasts –> this is key, since a short-term spike in commodity prices differs from 12-mos of elevated prices
– what is capacity of corporates and consumers to absorb the shock
– plus, how much is already discounted by markets
And we think, on balance, equity markets are essentially signaling that the US will avoid a recession.
The latest JPMorgan Global Data Watch is titled “Don’t lose sight of the forest or the trees”
– there are very strong forces promoting a PICK-UP in growth
– fading COVID drags, fiscal policy supports (EU, US and China)
– strong underlying fundamentals
…Is JPMorgan US Economist Feroli implying bond market bullying the Fed?
Similarly, Michael Feroli, JPMorgan’s US Economist, noted that he was surprised by the recent pivot by Fed Chair Powell:
– in Feroli’s words
– “It’s hard to see what happened between March 16th and 21st to motivate this change”
– the only thing that really moved is bond yields
– more signs the bond market is bullying the Fed?
– maybe
The bond market is a central driver of markets. And the movement in rates, if fundamentally authentic, are leading indicators. So, we should be wary when the bond market starts acting hawkish. But as we noted in prior notes, this could be due to “inflation backwardation” and in fact, real yields are still negative = good for risk assets.
Is strong rally in High-yield (recovered 2/3 of losses) “whispering” bottom
Similarly, look at the strong rally in HY in recent weeks. The rally in spreads (red line) has recovered all of the losses YTD and brought spreads to slightly better than start of the year:
– HY spreads are flat/improved versus start of year
– if high yield is leading
– implies S&P 500 has further upside
So, high-yield is supportive of improved upside for stocks.
…Goldman Sachs macro analysis highlights US corporates have strong liquidity
And another reason to not be too structurally bearish is the strong liquidity position of corporates. After all, it is a business cycle contraction that leads a recession — meaning, corporates play a key role. Sure, their profit margins will be challenged. But if their liquidity is strong, this prevents a larger downturn risk:
– some great charts by Goldman Sachs
– these 3 charts show
– cash to assets near top decile
– debt servicing capacity is strongest in 23 years
– net debt/EBITDA is not stretched
So, this is another reason not to be too bearish.
…Zweig Breadth Thrust, is this the 4th sign of a equity markets “whispering” bottom?
Jonathan Harrier, a CMT, @jonathanharrier posted that the Nasdaq 100 had a Zweig Breadth Thrust on March 18th.
– The essence of this signal is generated when equity markets are deeply oversold
– and quickly generate positive gains, but not get oversold
– the forward returns of this signal are impressive
– stocks higher 6M and 12M later 89% and 91% of the time
This is now the 4th sign, arguably, of stocks having “whispered” bottom.
The other precedent signs have been:
– 4 consecutive days of > 1% returns (thanks Ryan Detrick) March 2003 and April 2020
– 9 consecutive days when each up day > 1% return (thanks Ryan Detrick) March 2003 and May 2020
– S&P 500 fell 6% below its 200D and then closed above its 200D (thanks tireless Ken) and stocks higher 90% of the time
– now this Zweig Breadth Thrust
…upturn in Nasdaq a big deal since it has been underperforming S&P 500
The Nasdaq has been in a pronounced downtrend since November.
– and has been down 22% peak to trough, far worse than S&P 500
– Zweig Breadth Thrust generated 3/18
– Nasdaq 100 contains many of the most important large-cap Tech stocks
– thus, an uptrend would almost mean S&P 500 will march higher- so if this Zweig Breadth Thrust signal performs again
– odds are high NASDAQ 100 made its 2022 low as well
This is positive
STRATEGY: We lean “bullish” into 2Q2022, but warn of jagged next few months… Stick with BEEF
To recap on equity strategy, we are leaning bullish into 2Q2022.
– this is in context to a challenging 1H2022
– so jagged next 3 months
– but > 88% probability that bottom for 2022 is in
Broadly, our existing sector strategy of BEEF remains valid. Even in war. Even with inflation. In fact, the last few weeks are strengthening the case for our “BEEF” strategy. That is, BEEF is- Bitcoin + Bitcoin Equities BITO 2.47% GBTC 2.46% BITW
– Energy
– FAANG FNGS -0.24% QQQCombined, it can be shorted to BEEF. 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 -0.44% AMZN 0.70% NFLX 0.68% GOOGAll in all, one wants to be Overweight BEEF
_____________________________
33 Granny Shot Ideas: We performed our quarterly rebalance on 2/3. Full stock list here –> Click here _____________________________
DATA ON RUSSIA-UKRAINE WAR: Tracking Russia-Ukraine war statistics — 3,455 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 88% of its tanks and 95% 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 1,903 tanks or 88% of its equipment
– Ukraine has lost 125 aircraft, or 95% 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.
When we hear Russia has deployed 150,000 soldiers in Ukraine, this is not 150,000. As many military people know, for every front-line soldier, there are 4 support soldiers:
– 1 frontline soldier
– 4 support, fuel, ammo, logistics, supply lines, etc, cooks
Thus, if there are 150,000 Russian soldiers in Ukraine, about 30,000 are doing the actual fighting.
– Using data from Ukraine’s Ministry of Defense, estimates of Russian casualties are about 18,000
– Presumably these are front-line soldiers
– Unless Ukraine soldiers are “attacking from behind” and hitting supply lines
This implies over 50% of the frontline soldiers are casualties.
The number of casualties is 113 on 4/2, and a total of 3,455 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 continues to gradually decline and is now around 35,000 per day. And a total of 4.2 million have fled so far.
– 54% are entering into Poland
– curiously, 8% or 350k 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. 125 Ukraine planes lost
– est. 1,903 tanks lost
– this seems like a lot of equipment
Russian losses are higher
– est. 18,000 Russian soldiers killed
– est. 644 tanks
– est. 143 aircraft
– est. 1,830 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.
POINT 1: Daily COVID-19 cases
This data will be updated every Thursday.
POINT 2: Vaccination Progress
This data will be updated every Thursday.
POINT 3: Tracking the seasonality of COVID-19
This data will be updated every Thursday.
