The Week’s Message: A Week’s Worth of Messages

There’s a lot on our research plate this week, so, in an effort to buy myself some extra time — while keeping the weekly message pertinent, and, ideally, useful to subscribers — I’m going to highlight what I believe to be the highlights from the blog since last week’s weekly message:

Beginning with the most recent:

From this morning’s note:
As for stocks, they’re liquid, easy to trade and one needs zero knowledge of economics, fundamental or technical analysis, let alone an understanding of capital flows, currency risks and so on. All one needs is a few bucks and a cell phone to have at it. And few things are more stimulating for some (for many) than the lure of “easy money”. My point? Such an easy-to-access asset class — particularly at the end of its longest-ever positive run — is likely to be the last in line to properly reflect underlying real-world reality.

From yesterday’s evening note:

“Druckenmiller is the Ted Williams of investing. Perhaps the greatest investor of all time. He is a global macro investor with a track record that spans decades, has annualized returns near 30% and has never had a down year.”

Stan Druckenmiller said the prospect of a V-shaped recovery in the U.S. is “a fantasy” and the risk-reward calculation for equities is the worst he’s seen in his lifetime.

“A) 55 of the 60 SP500 Healthcare companies have reported aggregate year-over-year earnings growth of +9.3%

B) All 65 of the SP500’s Financial companies have reported an aggregate year-over-year earnings crash of -35.1%Does that partly explain why Healthcare Stocks (XLV) are only -0.7% YTD vs. Financials (XLF) having crashed -29.0%? A: Absolutely.

The next question is, always, what’s next? Well, since the ROC of Earnings Growth mattered in Q1 (those are Q1, pre-virus EPS reports), fully loaded with all of its divergences, the macro market is telling you it’s going to matter here, again, in Q2.”

By the way, our current core allocation to healthcare is 15.2%, financials are 3.5%… I.e., we too believe that the fundamentals will ultimately prevail…

From yesterday’s morning note:
So, today the Fed makes its first purchases of junk bonds. And the stock market — after selling off markedly overnight — is now in celebration mode. Funny thing is, as I type, gold and bonds are trading higher as well, and copper’s trading off a tiny bit. The latter three reflect the weak (to put it mildly) economy, the former reflects the FOMO (fear of missing out)…

From Monday’s evening note:
I have to tell ya, at this juncture, the similarities between our current experience and the tech bubble bear market (valuations, S&P 500 concentration, tech leadership, the above, etc.) are striking.

From Monday’s quote of the day:

“The “reopening” of the economy(ies) was an asset to the bulls alongside waves of fiscal and monetary stimulus in early-April. The “big trade” will be the market digesting the wildly disappointing nature of the positive deltas in GROWTH we’re likely to see across the balance of domestic and global high-frequency economic statistics in the MAY through JULY time frame.

The US economy in particular is transitioning from an economic depression to a recession, not a “recovery”… This expectations mismatch on “new economic expansion” vs. “continuation of the recession” will likely emerge a key theme throughout 2H20E.

Be careful out there.”

From Monday’s morning note:
Now, a contrarian (you typically want to be a contrarian in the short-term) bear would tell you that things are beginning to look up (or down, as the case may be) when you consider that investment advisors and options traders are signaling that they think things are looking up. What might have the contrarian hesitating however is the fact that the individual investor (per the weekly AAII survey) hasn’t yet taken the bull trap bait, and that futures traders are just too stubbornly bearish.

Back to my video: Note that when we turn the clock back to the 2008 debacle, futures traders patiently held their ground and ultimately turned out to be right, in a very big way.

You might say times have changed, but no. Viewing this impressive rally in stocks — at this juncture — as anything but your classic bear market retracement rally would be the definition of dangerous, in my humble view…

Therefore, clients, as frustrating as it may be to have your portfolios hedged, and therefore their performance notably muted as implied volatility has plummeted of late (doing a real number on the value of our options hedge), if managing risk is what you rely on us to do, we would be sorely shirking our responsibility were we to approach the present setup in any other way.

The narrative around today’s rally was fascinating (in that it presumably sparked the rally), and familiar. Against yet another literally economy-shattering jobless claims number came news that U.S. and China trade negotiators are up for a chat next week.

So let’s think through why such news might have the bulls all giddy. For starters, it kinda makes sense given how the infamous US/China trade dispute was the source of a fair amount of market volatility over roughly the two years leading up to the current recession. But to presume that even in the off-(zero)-chance they come out of next week’s talk with an agreement to go immediately back to the trade regime that existed pre-trade war, could the pre-trade war economy have held up against the historic headwinds this one faces? I don’t suspect that I need to answer that question for you.

Macro analyst Roger Hirst in a RealVision conversation this evening speaks smartly about the risks the economy and markets face in the months to come:

“…it’s that reality, the reality of the real economy in three or four months time. Because it’s the consumer side this time; which had survived, even in 2008, while it was a massive hit to mortgages and housing and all the rest of it. And in 2000 it was really just the leverage in the equity market, while the consumer stayed pretty well throughout. This time around the consumer is really under pressure, and we haven’t seen that for a long time. I think that’s going to be very difficult because it’s the balance sheet, which is a solvency issue rather than a liquidity issue, that’s going to reverberate for months and months after this.”

From last Thursday’s morning note:
The other point worth noting, that’s presently positive for stocks, is the plunge in volatility. The VIX (tracks the price of S&P 500 options implied volatility), as I type “trades” at 30.90, down from 40+ on Monday. That’s a big 3-day drop, and is certainly doing a number on the value of our hedges this week. However, historically-speaking, a 30 VIX denotes a very dangerous market to play in…

In a nutshell, the credit markets remain, on balance, stressed. Not to the extent they were during the current equity bear market’s initial selloff, but certainly so relative to where they were, say, this time last year. And that, the improvement off the bottom, is due to — and the still relatively stressed levels are in spite of — the trillions of dollars worth of best efforts by the Fed.

As for sovereign fixed income, the developed world’s bond markets clearly reflect the desperate nature of global general conditions.

Well, team (clients), I understand how frustrating it can be playing defense when everyone around us is sinking shots like (and thinking they’re) Steph Curry — although few of you are complaining (as we’re still nicely ahead of the game year-to-date). But having scouted and played/coached in literally every tournament since 1984, well, let’s just say that our latest scouting reports — not to mention the threatening weather — dictate that we stick to our defensive game plan for the time being.

Thanks for reading!


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