Morning Note: Hot CPI, Hedging Oil — And — Successful Investors and Poker Players Think Alike…

We’ve made our case; that the Fed finds itself in the worst of corners, and its board members are not remotely willing to take measures that would actually fulfil their mandate of low, steady inflation. For, if they do, they’ll catch the blame for popping the mother of all asset bubbles.

Now, that said, and make no mistake, with this morning’s CPI print* they’ll be catching some serious heat to do something. So they will… Well, they will say something — the same something they’ve been saying — that this inflation is “transitory” and that they have the tools to handle it if it’s not. 

Yep, and those tools are the ones I’m talking about that they can’t (won’t) use. Except that is — I suspect — for a wee bit of “tapering” their monthly bond purchases, which, I strongly suspect, will happen on the mortgage side; no way they touch treasuries (not without touching off something ugly in the markets).

*US CPI for June rose 5.4% year over year, 0.9% month over month. Annualizing last month’s reading gets us to 10.8% inflation. Annualizing the past 4 monthly readings gets us to 8.4%. Suffice to say, inflation is presently running very hot!


Note to clients (re: managing near-term risk in oil):

As clients and regular readers have noticed, we remain bullish (long-term) on energy — and I’m not talking just renewables right here.

In a nutshell, fossil fuel markets have seen massive capital expenditure reduction of late — with the expectation of more cuts to come. I.e., we’re talking less capacity to produce to an extent that we think massively overcompensates for the go-forward reduction in demand due to the adoption in renewables.

So, again, intermediate to long-term, we want to be in that space. In the short-run, however, we see heightened risk potentially coming from a sharp increase in global covid cases and/or potentially serious riffs within OPEC.

Of course, the flip side to that narrative would be that the recent covid wave abates, global economies resume aggressively opening up and, therefore, fossil fuel demand (and its price) skyrockets. And, among OPEC+, the Saudis, the Russians and the UAE come to terms on production increases to attempt to, at best, keep up with increased demand and are, therefore, supportive of the price going forward.

FYI Clients: Our two positions directly in that space are XLE and OIH, which combined occupy 14.5% of our core target allocation to U.S. equities. Each position has returned over 30% year-to-date.  Thus, given the notable near-term downside risk (as well as the longer-term upside potential), we’ve decided to hedge both positions (assuming your portfolio is large enough [you have enough exposure to hedge (minimum 50 shares])) against the potential for a not-small decline over the next few months, while maintaining our target allocation going forward. I.e., yesterday we took very small profits on each, which amounted to 1.6% and 1.8% respectively and used the proceeds to purchase protective put options out to late October. We’ll look to capture nice gains from the puts if indeed energy corrects between now and then. If not, we’ll be managing the positions as they near expiration based on our short-term energy thesis at the time — all the while giving up very little to protect a decent chunk of what have been nice profits so far this year.


Asian equities mostly rallied overnight, with all but 2 of the 16 markets we track (3 were closed) closing higher.

Europe’s leaning green this morning, with 14 of the 19 bourses we follow trading higher as I type.

US stocks are mixed to start the session: Dow down 67 points (0.19%), SP500 up 0.03%, SP500 Equal Weight down 0.52%, Nasdaq 100 up 0.58%, Nasdaq Comp up 0.29%, Russell 2000 down 1.19%.

The VIX (SP500 implied volatility) is up 0.19%. VXN (Nasdaq 100 i.v.) is up 1.73%.

Oil futures are up 0.05%, gold’s up 0.25%, silver’s down 0.41%, copper futures are down 0.73% and the ag complex is down 0.28%.

The 10-year treasury is up (yield down) and the dollar is up 0.30%.

Led by gold miners, KRNB (carbon credits), tech stocks, consumer staples stocks and emerging market equities — but dragged by MP (rare earth miner), bank stocks, oil services stocks, metals miners and uranium miners — our core portfolio is off 0.14% to start the day.



While it may seem improper for a portfolio manager to equate investing with poker, truly, they have their similarities, particularly in terms of how successful professionals in each think. 


Replace poker with investing as you read the following from poker champ Annie Duke’s excellent book Thinking in Bets:

“Poker gives us the leeway to make mistakes that we never spot because we win the hand anyway and so don’t go looking for them, or the leeway to do everything right, still lose, and treat the losing result as proof that we made a mistake.

Resulting, assuming that our decision-making is good or bad based on a small set of outcomes, is a pretty reasonable strategy for learning in chess. But not in poker—or life.”


Have a great day!
Marty

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