14 Nov Capital 19 Catch-Up
Weekly Index Movement
|Aussie All Ords
It was a monster week for US equities contributing to what has been a very strong fourth quarter so far. Outside of the Nasdaq100, every other major index ETF has rallied 10% so far.
Let’s dig into why.
First – US midterm elections. The expectations were the Republican Party would gain control of the House and Senate. The result was that Democrats did a lot better and look to have increased their control of the Senate but Republicans probably have the house. (there is still some counting to do to confirm this)
Overall though, this was a good result for stocks. It means Biden won’t be able to easily sign any new major spending deals and that will help with inflation.
It’s been a while since I’ve enjoyed a good Trump quote but he did not disappoint last week:
“Well, I think if they win, I should get all the credit,” Trump said in an interview with NewsNation that aired Tuesday. “And if they lose, I should not be blamed at all.
Last week I let you in on my secret US election trade. Turns out the timing of that fits in exactly with US midterms and since usually the party in control loses it in midterms I now have a reason why this trade works so well. (I just found it by number crunching years ago)
The second reason stocks performed so well last week was inflation. Or the lack of it.
CPI core came in at +0.4% m-o-m in October. The same as it did in September. But headline CPI was only +7.7% y-o-y vs +8.2% in September. It really does now look like we have seen peak inflation.
That number resulted in the 10yr yield plummeting down to +3.9% and the 2Yr down to +4.4%
Markets now expect only 50bps on December 14th instead of 75bps and then 25bps on February 1st and even cuts before the end of 2023.
Which of course led to a reversal in fortunes of long-duration assets like tech stocks.
One part of the tech sector, Semiconductors, have had an atrocious year. The Philidelphia Semiconductor index was down 40% prior to the CPI report but has rallied over 13% since.
We would argue that this index is more important than the Dow Jones Transports and replaces that index in Dow Theory. The fact it has seen such a bounce is positive for stocks overall as it can be a leading indicator for the rest of the market.
All of which begs the question “have we seen the bottom?”
My opinion (Matt) is, I don’t know, but I’m not ready to jump back into long-duration assets yet.
There are definitely fewer negative signs out there and the market will bottom before any positive signs come through. But one low monthly inflation print isn’t likely to change the course of Fed thinking. Three months ago we got a single low print and it went back up the next month.
Consider this from Cleveland Fed President Loretta Mester:
“Despite the moves we have made so far, given that inflation has consistently proven to be more persistent than expected and there are significant costs of continued high inflation, I currently view the larger risks as coming from tightening too little.”
I’m worried the market is persistently expecting interest rate cuts next year, despite Fed Chair Powell telling us this won’t happen.
Keep your tech allocations to less than 20% of your portfolio for now. We could see a reversal of these gains if the Fed ploughs ahead with a 75bps move in December.
We will be keeping a close eye on Fed speak between now and then to see if we can extract any indication of a softening in their views to confirm this rally.
Something we will not be softening our view on is cryptocurrency and last week was a classic example of why.
FTX is a large crypto-exchange that issues its own token called FTT. Coindesk published an article saying a sister company, Alameda Research, had an unusually large portion of funds tied up in FTT, around 40%. That made a rival crypto-exchange, Binance, nervous and they announced they would be selling their $500million stake in FTT. With so much FTT tied up in FTX/Alameda there was little liquidity which led to a run on FTT and by the end of the week FTX was filing for bankruptcy.
If none of this makes sense to you, don’t invest in crypto. If it does make sense, you will see why it isn’t a good idea to invest in crypto.
The whole thing is one big ponzi scheme and the cracks are showing. In this example, Binance took the opportunity to put a rival out of business and all that had to do was announce they were selling the
The latest news comes in the form of a rumour customer funds in FTX were used to prop up Alameda and FTT. Oh dear. The CEO that authorised this is in trouble. No suprise to see he resigned over the weekend. But not as much trouble as the investors who might not be seeing any return of funds.
No doubt all the crypto diamond hands will be saying “that won’t happen to my coin that was made by a teenager in his garage and looks like a purple pelican because it is worth $0.0000015 now and I’m never going to have to work because it is going to $20,000 per coin.”
Next on my radar this week is China. You might have seen stories about reduced Covid restrictions. Don’t get excited. It does not mean China is re-opening. The relaxations are so minor I’m surprised they made the news.
However, if you do think this is a sign of a Chinese recovery, the way to play it is through large-cap US energy. No point in taking excessive risk on direct Chinese exposure, but as China does re-open, it will increase its energy usage and the price of oil will rise.
Energy remains the best place to be right now.
My last comment of the week is this. It is easy to be fooled by a large up day. But that in and of itself is not a reason to think anything has changed.
If you were walking through New York City and saw a guy walking towards you who was 7’2 tall, you might think “I wonder he if is a basketball player” or maybe “wow he is a tall man” but you would not be thinking that seeing this guy “meant” anything.
The average American male is 5’10 or 70 inches with a standard deviation of 3 inches.
Thursday’s 5.5% move was a 5.5 standard deviation move.
Multiple 3 inches by 5.5 and add 70 and you get 86.5 inches of 7’2.
Thursday’s rally was as statistically likely as seeing a basketball player in the street. It does not mean anything has changed.
CatchUp Stock Tips
|Gain / Loss
|1 Aug 22
|8 Aug 22
|15 Aug 22
|22 Aug 22
|5 Sep 22
|12 Sep 22
|19 Sep 22
Stock values can go down as well as up. It is possible to lose 100% of your investment in a stock. Any advice given by Capital 19 is general advice only and does not take your personal circumstances into account.