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The New Bull Market

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Screen Shot 2020-08-22 at 5.54.23 AM.png


Now that SPY has exceeded its previous high from the crash, we are officially in a new bull market.

The primary issue (risk) bubbling below the surface is:

Screen Shot 2020-08-22 at 5.48.45 AM.png
Screen Shot 2020-08-22 at 5.49.28 AM.png
Screen Shot 2020-08-22 at 5.51.16 AM.png


The real spectre of inflation. It is not a risk for tomorrow. It is a risk that is, if it occurs, still a little way down the road. But it doesn't hurt to prepare for its possible arrival. The question with inflation is whether the Central Banks actually do anything. If they do nothing and/or very little, then Gold/Silver/Property/Stocks will all do well (stocks to a point). If however, the Fed either (a) leans against or (b) allows the long end of the fixed income market free rein, then only stocks will do well (to a point, probably to about 6.5%).

The big macro question is: (a) will inflation take hold, (b) will it (if it does) be controlled, (c) if so how.

Over the w/e I'll be looking at the various charts that will provide us with the early warning and crossover points should this risk eventuate. It still seems most likely that the origin of inflationary pressures, will one again, originate from POO and the issues created by the Arabs in their price war earlier in the year.

jog on
duc
 
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Oil Patch News:

Oil retreated at the end of the week on more negative news from the U.S. labor market. Oil prices fell back to a familiar trading range in the low-$40s. “With all the bullish headlines that we’ve seen over the last weeks regarding inventories,” the inability to break higher does not bode well, Tariq Zahir, managing member of the global macro program at Tyche Capital Advisors LLC, told Bloomberg. “Crude fails to break to the upside and you’re in a contango market, so risk is to the downside.”

Metal markets surge on Chinese stimulus. Copper prices surged to a two-year high at over $6,700 per tonne this week. Other metals followed suit. The combination of monetary stimulus, a weaker dollar and China’s fiscal stimulus has led to a surge in metals prices.

OPEC: Inventories falling slower than expected. U.S. oil inventories declined again last week, the fifth time in six weeks. But the process will take a while. OPEC warned that the drawdowns are “slower than anticipated with growing risks of a prolonged wave of COVID-19.” The slow pace underscores the “fragility of the market.”

OPEC+ offset could total 2.3 mb/d. The group of OPEC+ producers that may need to compensate for past overproduction could cut by as much as 2.31 mb/d for one month, according to OPEC+ calculations seen by Reuters. If spread over more than one month, the figure would be smaller.

Islamists attack Mozambique LNG. A major LNG project in Mozambique could face delays as Islamic militants seized a port handling key equipment. The multi-billion-dollar project is backed by Total (NYSE: TOT).

Libya’s GNA announces ceasefire. Libya’s internationally-recognized government in Tripoli announced an immediate ceasefire. The head of the Government of National Accord, or GNA, issued instructions to “all military forces to immediately cease fire and all combat operations in all Libyan territories.” The GNA also called for elections in March and an end to the oil embargo.

Natural gas prices surge, but drillers not coming back yet. Natural gas prices have shot up to $2.30/MMBtu, as a heatwave, supply shut-ins, and LNG cancellations have quickly tightened up the market. Hedge funds and other money managers have stepped up bullish bets, betting that prices will continue to rise. But Appalachian gas drillers are not returning to drilling just yet, instead preferring a cautious approach. “If we don’t end up with a cold winter, the bull case for ’21 is pushed into 2022,” CNX (NYSE: CNX) Chief Operating Officer Chad Griffith told investors on a call.

LNG market tightens. After a substantial glut that saw dozens of U.S. LNG cargoes canceled, the global LNG market appears to be turning a corner. Prices in Asia and Europe have hit multi-month highs. Goldman Sachs said that TTF gas prices (Europe) are on the rise and the rally could be sustained. Goldman said it expected the headwinds that had led to U.S. LNG cancellations “to disappear in 2021 as the global gas market moves to a more balanced setting.” The bank stuck with a Henry Hub forecast of $3.23/MMBtu for 2021. Meanwhile, Bank of America largely agreed and put out a JKM (Asia LNG) forecast price of $6/MMBtu by December 2020.

Aramco suspends investment in Chinese refinery. Saudi Aramco is suspending its investment in a joint venture developing a US$10-billion refinery and petrochemicals complex in China amid CAPEX cuts.

Electric trucks could put a dent in emissions. California recently approved regulations to mandate the increased use of electric heavy-duty trucks. “The long-term effect of expanding California’s approach nationally would reduce oil consumption in 2045 by 16 to 17%,” according to a new analysis.

Wall Street wants GM to spin off EVs. Deutsche Bank said that if GM (NYSE: GM) spun off its EV business, it would immediately be valued at around $15 to $20 billion, and could potentially be worth up to $100 billion. “Spinning it off essentially creates value, it could unlock a massive amount of value, actually,” Deutsche Bank analyst Emmanuel Rosner told CNBC. The less GM retains of the electric vehicle operations, “the better it would be for value creation,” according to Rosner.

Offshore rig service company files for bankruptcy. Valaris PLC, a London-based offshore drilling contractor, filed for bankruptcy Wednesday. The company warned of a prolonged contraction in offshore drilling activity.

Premier Oil to raise $530 million to cover debt. Premier Oil (LON: PMO) is seeking to raise $530m from shareholders as part of a $2.9bn refinancing effort. Premier will use $300 million to pay down some of its $2.4 billion debt pile.

Two tropical storms heading for the Gulf of Mexico. Twin storms are aimed at the U.S. Gulf Coast, potentially threatening offshore oil platforms and onshore refineries and processing facilities.

Turkey announces Black Sea gas discovery. Turkey announced a significant natural gas discovery in the Black Sea, which could cut the countries energy imports if developed. “There is a natural gas finding in the Tuna 1 well,” a source told Reuters. “The expected reserve is 26 trillion cubic feet or 800 billion cubic meters, and it meets approximately 20 years of Turkey’s needs.” However, the source said it could take years to bring online.


jog on
duc
 

over9k

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asfgagdsgsdg.jpg


Even the supermajors are still on a long gradual decline. Total appears to have fared the best so far.
 
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Looking at the 'inflation' trade.

Screen Shot 2020-08-22 at 1.51.34 PM.png


US Dollar as against Commodities: the source of the inflation trade. Not yet triggered. Either the dollar needs to fall further or commodities need to rise. Currently there has been a significant curtailment in stimulus. Unless this trend reverses for any reason, the dollar may have already found a bottom.

Screen Shot 2020-08-22 at 2.44.45 PM.png


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Oil, petrol, gas. All are low and could very easily move higher and if they move higher, could well move in lockstep together, which of course intensifies the risk. Now if we say for the moment that the dollar has stabilised (by no means certain) then a rise in energy prices driven by returning demand and supply destruction, could also (assuming the dollar stays where it is) ignite inflationary pressure. With vaccine news all over the wires, returning demand will be sooner than later.

What has already risen in anticipation of inflation. The problem is this is only a valid trade if real yields remain negative. As soon as real yields turn positive, this trade is over.

Screen Shot 2020-08-22 at 1.47.16 PM.png


Screen Shot 2020-08-22 at 1.52.09 PM.png


Simply to inform us when the trade is on because the trend has ended. Low inflation and low yields have been the trend since August 1982. Is that trade over? Not yet, but it seems to have reached a 'top'. Given the rather extreme circumstances that have prevailed earlier in the year, as we return to more normal times, we will be bumping up against that trend line.

Screen Shot 2020-08-22 at 1.50.19 PM.png

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And just a bit of everything:

Screen Shot 2020-08-22 at 1.50.57 PM.png


And the broad market:

Screen Shot 2020-08-22 at 2.10.29 PM.png


No inflation to worry about currently. What if inflation occurs? Then (pretty much) everything that is currently low moves higher and everything that is high, moves lower: if interest rates rise in response to that inflation.

That is the only real question currently. Would the Fed. allow or even actively, move rates higher in response to inflation? How much inflation would be necessary?

The risk that is being bandied about currently is that the US dollar, due to the massive interventions, will fall as against the other fiat currencies, thereby on an exchange basis (even assuming commodity prices don't move much) driving US costs higher. If you have a fall in the dollar and a rise in commodity prices (the double whammy) then inflation ignites to an explosive situation. Now as we have already seen, domestically, the Fed. interventions have slowed. What that chart does not show are the Fed. swap lines with the rest of the world.

In scenario 1 (of course depending on how far how fast the dollar falls) I think the Fed. does little. If we have a scenario 2, I think the Fed. acts and moves rates higher. So the remaining question, scenario 1.5 where the dollar falls and Bonds (are allowed by the Fed at the long end) to move to higher yields. How far would they move? My guess to about 3% as a starting point. After that it would depend on what the dollar did in response. I think though that a move to 3% would halt any weakness in the dollar based on a purely dollar slide, absent any significant move in oil due to supply constraints (which there could well be) and what the Arabs do.

jog on
duc
 

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Now that the CARES Act has expired and nothing will (can) occur before September leaves the following situation:

Screen Shot 2020-08-23 at 7.43.29 AM.png
Screen Shot 2020-08-23 at 7.43.52 AM.png


Which has analysts calculating the fall off in consumer spending above.

If Fiscal Policy is off the table for the moment at least, then the Fed. can step in (again) with increased Monetary Policy interventions:

(a) Municipal Lending Facility (MLF) which holds $500B to provide loans. These could be for 50yrs at 0% interest, first payment at 40yrs. Essentially cash; and

(b)Main St Lending Facility (MsLF), which is a fund of $75B for small businesses; and

(c) Buy foreign currency, thereby depreciating the US dollar.

They could of course do all 3. The one that from an inflation point-of-view has the impact is selling the dollar. How much and how long? Given the speed of the decline in the dollar recently (the insiders are possibly telling us something) this either already is happening or could happen very soon.

Screen Shot 2020-08-23 at 7.58.16 AM.png


The fall through the first (top) support/resistance was not really an issue as the COVID spike would always correct at some point. However the continued drop combined with the speed of the drop is more important. We have a trading range that has existed between 2015 - 2018 (less that dip lower in 2018 and move higher for COVID) which we are currently in. We then have an air space to the next trading range 2011 - 2014. A move to that trading range is going to ignite inflation.

Would the Fed sell the dollar hard enough to enter that exchange rate level? I have no idea. If they did, there would be repercussions and many of them would likely be unforeseen. Unforeseen consequences have a nasty habit of really f***ing up your positions.

Now we are left with a real unknown quantity, we need to try and figure out a reasonable plan to manage that possibility, all of which could have adverse consequences on positions going forward. This is actually a situation where a purely mechanical system could be a godsend...no thinking, in or out.

Now if the Fed. were to sell the US dollar, obviously they want it weak = inflationary. Therefore:

(a) they would exert yield curve control at the long end, as the long end will sell-off hard;
(b) inflation without any constraints would send;
(c) commodities higher;
(d) emerging markets higher;
(e) foreign currencies higher;

So all commodities would likely be a good position to hold. Gold/Silver already started their run. Oil still undervalued in this scenario as are agricultural commodities and stocks associated with those commodities.

If the Fed. doesn't control the long end, short Treasuries.

Long Emerging markets (EEM).
Long foreign currencies (FXE) and Swiss Franc.

With regard to the current trend in the markets: the big tech. leaders would be fine, they have foreign earnings (any stock that has foreign earnings should be fine) small caps and some medium (most) would probably tread water or lose, depending on how much inflation was generated.

Financials would not be a great place to be, but I will actually do some research into that. The big money centre banks would probably be fine, they are worldwide and have diversified income streams. It would be more the small regional banks that could/would have issues. I'll look into that.

Any thoughts? Feel free to add.

jog on
duc

 

over9k

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The fed has actively stated that they've changed their policy to tolerate higher inflation short term. And there's been a pretty consistent trend even before coronavirus of little guys getting snuffed out and more and more business going to the big players in almost every industry. This is easy to prove looking at things like sp500 vs sp500 equal weight:

fasdfasdfasdfas.jpg
fdsgsfdfdsgfdsdsgds.jpg


Take this and put it on steroids with coronavirus - it's not an accident that across basically all industries, the smaller the company, the faster it fell. I'm not being funny when I say that an effective strategy would be to just find the handful of biggest players in every sector (that hasn't gone to absolute shite), and sit on them.

I'm going to hold the stuff that kept pulling through the lack of more stimulus - several of my positions got hosed when more stimulus didn't happen but several just kept rising (NVDA and PEZ are my golden children at the moment).

The last couple of days have seen big tech rallies/tech driven index gains (so nasdaq obviously the highest). We'll see if that continues (I suspect it will).

Everyone panicked when the jobless claims spiked after the boosted unemployment payments stopped but that lasted literally a day and everything's now just carrying on as if nothing's changed. Consumer staples would obviously bounce again if everyone got the jitters and started panic buying (again).
 

over9k

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adsfgdfgdgfd.jpg

asfdgasdfgadsgads.jpg

Also probably not a coincidence that the exchange rate broke trend right when the PUC payments stopped. It's cracked the 71c mark a couple of times since and just been choppy for the last month. If it busts 70c, then it's showtime.
 
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Now that the CARES Act has expired and nothing will (can) occur before September leaves the following situation:

View attachment 108054 View attachment 108055

Which has analysts calculating the fall off in consumer spending above.

If Fiscal Policy is off the table for the moment at least, then the Fed. can step in (again) with increased Monetary Policy interventions:

(a) Municipal Lending Facility (MLF) which holds $500B to provide loans. These could be for 50yrs at 0% interest, first payment at 40yrs. Essentially cash; and

(b)Main St Lending Facility (MsLF), which is a fund of $75B for small businesses; and

(c) Buy foreign currency, thereby depreciating the US dollar.

They could of course do all 3. The one that from an inflation point-of-view has the impact is selling the dollar. How much and how long? Given the speed of the decline in the dollar recently (the insiders are possibly telling us something) this either already is happening or could happen very soon.

View attachment 108056

The fall through the first (top) support/resistance was not really an issue as the COVID spike would always correct at some point. However the continued drop combined with the speed of the drop is more important. We have a trading range that has existed between 2015 - 2018 (less that dip lower in 2018 and move higher for COVID) which we are currently in. We then have an air space to the next trading range 2011 - 2014. A move to that trading range is going to ignite inflation.

Would the Fed sell the dollar hard enough to enter that exchange rate level? I have no idea. If they did, there would be repercussions and many of them would likely be unforeseen. Unforeseen consequences have a nasty habit of really f***ing up your positions.

Now we are left with a real unknown quantity, we need to try and figure out a reasonable plan to manage that possibility, all of which could have adverse consequences on positions going forward. This is actually a situation where a purely mechanical system could be a godsend...no thinking, in or out.

Now if the Fed. were to sell the US dollar, obviously they want it weak = inflationary. Therefore:

(a) they would exert yield curve control at the long end, as the long end will sell-off hard;
(b) inflation without any constraints would send;
(c) commodities higher;
(d) emerging markets higher;
(e) foreign currencies higher;

So all commodities would likely be a good position to hold. Gold/Silver already started their run. Oil still undervalued in this scenario as are agricultural commodities and stocks associated with those commodities.

If the Fed. doesn't control the long end, short Treasuries.

Long Emerging markets (EEM).
Long foreign currencies (FXE) and Swiss Franc.

With regard to the current trend in the markets: the big tech. leaders would be fine, they have foreign earnings (any stock that has foreign earnings should be fine) small caps and some medium (most) would probably tread water or lose, depending on how much inflation was generated.

Financials would not be a great place to be, but I will actually do some research into that. The big money centre banks would probably be fine, they are worldwide and have diversified income streams. It would be more the small regional banks that could/would have issues. I'll look into that.

Any thoughts? Feel free to add.

jog on
duc
I think the oilers.major ones, might be in a good position, oil will rise..already has, US dollar fall would reduce production cost world wide as this is the currency used to pay from parts to workers
 
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The US dollar still holds the primary reserve currency status based on the following factors:

(a) Bretton Woods agreement, which is a series of alliances post WWII;
(b) Highly developed network of Correspondent banks.

So the risk is that the belligerence of President Trump towards his traditional allies, risks the hegemony of the US dollar as the primary reserve currency, which, has to date, always mitigated dollar weakness. If due to the political turmoil the status quo is altered or damaged permanently, that could impact the status of the dollar, which, due to the unprecedented stimulus to date, has created a potential for inflationary pressures.

Therefore, a Biden victory could see (absent Fed selling of the dollar) a resurgence in the US dollar as Biden and the Democrats mend fences that P. Trump has trampled on.

With regard to the network of correspondent banks, at least 1 competitive system is being attempted to be set up for oil into Europe. Whether it is successful over time we will find out. ATM, there is no viable option, so the Fed. still holds the monopoly on that network, and hence, for the moment #1 reserve status.


jog on
duc
 
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Returning to the market for the moment: a chart I haven't posted for a while.

Screen Shot 2020-08-23 at 2.27.53 PM.png
Screen Shot 2020-08-23 at 2.28.51 PM.png


So these are the advancing v declining. The top chart demonstrates simply how bifurcated the market has become in that the index SPY, can advance, even while the majority of stocks fall. That is the AAPL effect as AAPL has blown through $2T. market cap.

The other point to note is that we are pretty much at the bounce point for the majority of stocks. I'll compare to other measures that I follow, however, on this chart we are ready to move higher with most sectors/stocks ready to participate to the upside.

Even if we were to have inflation, which currently we don't, stocks would continue to move higher in the shorter term anyway. So the inflation musings are simply preparation for might eventually come down the river based more on political (fiscal) and monetary policies.

jog on
duc
 

over9k

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Oh for anyone wondering, KSA is the etf you need to buy in order to buy aramco. You'll notice that it's continued to rise lately, in stark contrast to even the supermajors of oil.

But the geopolitical environment (aka the saudi's & iranians wanting to wipe each other out and the americans no longer caring if they do) means that it is NOT a long term investment. DYOR.
 
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Issues in the Treasury market to pay attention to going forward into next year:

Screen Shot 2020-08-25 at 2.48.45 AM.png
Screen Shot 2020-08-25 at 2.49.02 AM.png


Not something that is going to happen today or even tomorrow. Might never happen. However, worth keeping an eye on.

jog on
duc
 
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Towards the close now:

Screen Shot 2020-08-25 at 6.50.18 AM.png
Screen Shot 2020-08-25 at 6.50.49 AM.png


And we had a broad advance across all sectors of the market (see Sunday's post). So much so that we are now sitting at the top of the range again. I'll update the after market closes charts later.

The Retail sector is (a) driven by AMZN and (b) the state of the remaining sector:

Screen Shot 2020-08-25 at 6.58.19 AM.png




jog on
duc

 
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Election issues will increasingly start to dominate the news.

Screen Shot 2020-08-25 at 2.14.08 PM.png
Screen Shot 2020-08-25 at 2.16.09 PM.png


I think Trump holds onto the WH. Whether or not those indicated sectors benefit, who knows. The market as a whole, always loves year 1 irrespective of which party holds power in WH.

jog on
duc
 

over9k

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"As an example of the narrowing market breadth, Wilson pointed to Friday, when Apple Inc.’s 5% gain could be framed as accounting for all of the total return of the S&P 500 and Nasdaq 100. For the week, the S&P 500 climbed 0.7% to an all-time high while the equal-weight version of the index fell 1.5%, a sign that the average stock didn’t participate in the advance like megacaps...While the lopsided market is nothing new -- the total value of Apple and the other four largest stocks have surged 49% this year while the rest of the market is down 4% "

https://www.bloomberg.com/news/arti...KZhuf0pdlJTCYssoKAu2R6tX70av5aU4kjcXTkfsgLXWM
There's your "bull market".
 

over9k

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So let's compare ALL the megatech vs your BEST non-tech etf, XLY:

asfdasfadsfasdfgvcadsgadsgds.jpg

fgadsfdsgdsg.jpg


Only in the past 3 months has the difference even so much as reduced, and the megatech is still head & shoulders above. Pool the megatech against a pool of your etf's and it looks even worse.

I didn't buy apple but I didn't buy google or microsoft either, so swings & roundabouts I guess. I'm holding amazon.

Megatech even outperforms the tech ETF (XLK) over both time horizons:

11.jpg

22.jpg


It's not just tech driving the market, it's the megatech.
 
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over9k

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What we're better off doing is looking at what's changed over the past month as it's been about a month since stimulus ended and that's the only significant factor other than the virus:

33.jpg


The only difference we see is that it's now facebook taking over 2nd place from amazon, which is still higher than even XLY anyway. In short, even without stimulus, megatech is still head & shoulders above the entire rest of the market.

Meanwhile, PEZ, the etf I mentioned I was buying ages ago that in your other thread you then derided/basically just said was ****, has done this:

44.jpg
 

over9k

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Finally, it's worth looking at what was going on before vs after stimulus end.

Before stimulus end, I had a portfolio of what I called stay-at-home tech (ZM & DOCU being just two of them) that was outperforming even apple:

55.jpg

That was then sold off HARD as everyone took profits before earnings season & possible stimulus end and has just gone choppy AF since, whilst apple (and facebook) has gone to the moon:

66.jpg


Stimulus is looking increasingly unlikely, but if we do get more of it, there's a very good chance we see a return to the stay-at-home tech madness vs the megatech madness we've seen without it and thus a rotation will be in order.

That massive chop in ZM & DOCU has occurred each time the stimulus has gotten delayed, then the market's anticipated it coming (remember when the politicians were banging on about trying to get a new package before the august recess?), then lost hope, then gained it again etc etc. Pretty hard to see the several corresponding rallies & then drops as a whole bunch of coincidences.
 
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