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AM Brew, Jun 13th 2022
Finally, over the weekend, Crypto went down. A few weeks ago we posted quant research indicating that Crypto was a bit rigged: doing well on weekends but down during weekdays. Subsequent weeks seemed to corroborate this until this past week with Crypto having a decent week capped off by a disastrous weekend - Bitcoin is trading < $25,000 and Ether at $1260 - massive drops from Friday's levels. We are confident BTC isn't going to zero this round, but the typical 80% drop off the $60k high does indicate significant risk of a further 50% drop from these depressed levels. Bitcoin having a tough weekend is a very worrisome data point in a market that appears a bit rigged. Crypto lender Celsuis Network Ltd. suspended withdrawals, transfers & swaps - this is VERY worrisome and an indication that the cryto ponzi is a bit stressed right now. The CEL token was down 50% - the market is now skeptical of huge yields offered in the crypto markets. Its easy to offer a large yield if you can print more ;-) The basic supply reason that makes Bitcoin interesting is the same reason that most of these alt-coins will fail. Crypto long liquidations hit a near-term high of $437 million. Crypto has always bounced back. Bitcoin went from zero to $20k on its own, but the rise to $60k was partially funded by institutional investors. You can bet that institutions will be reviewing their June quarter-end, so BTC has only 2 weeks to avoid the all too predictable institutional response of buy high & sell low.
This graph is onne of the most interesting data points we have seen in a long time:
The great financial crisis was the last time that bonds offered a yield competitive with stock earnings yields. The decade-long bull market was partially a function that stocks were the only game in town - now that stocks are not the only game in town, equities are less attractive. Translation: don't expect a bull market from these depressed levels.
Tesla announced a 3 for 1 split and the stock traded up 2% after hours. Note that this won't add any value - it certainly didn't work for Amazon.
We are writing this at 5:00 a.m., so a lot can change, but the Futures look brutal this morning. The S&P is down -2.4% to 3,800 and the Nasdaq is down almost -3% to 11,500. For the past few weeks, we have been talking about being range bound with 3800 being the bottom of the range. We do think this lower level will attract short term buying. Oil is the wild-card, but oil is trading down 1.6% in the pre-market, so we doubt that things have changed enough to warrant a sharp decline much past 3800.
The Yen breached the psychological 135 level and the pound is trading 1.22 handle. The 2 year US Treasury yield has spiked above 3.2%:
The yield curve has flattened substantially and there is a lot of "value" in the 2 year right now, althought we never thought we would be writing that there is value investing at 3% to fund purchases in an 8% inflationary environment ;-) Lol.
Markets are starting to price a 75 bps hike. We suspect that is the Fed's best option - they want to hike 150 bps - it seems better to just do that in 2 meetings instead of three.
Bear markets look like this - below is a graph of the ViX from October 2008:
Here is this morning's VIX graph:
Goldman is out there saying that earnings estimates are still too high. If Goldman is correct, then we are looking at a nasty bear. For those of you that get to talk to CFOs, they can't give you "guidance" but often they hint at the answer. For example, a company like Helen of Troy, which makes a bunch of plastic items, may say that "oil is challenging and we are working through it" - translation is "we are going to miss or guide down".
Trading desks saying "sell everything but the Dollar" is scary. The dollar is not what it used to be, with Debt/GDP out of control and the political situation delivering a pathetic gun control proposal. The government really needs to throw a trillion at sustainable energy so that we can have low energy prices in 2024. Of course, they are not doing that, while Phoenix heats up to 100 degrees at midnight. Mercury of 100F at midnight means you can't cool down. This doesn't feel like the great crash, but with Putin out there, you never know. Our response to this is that we suggest trading with 5% of your assets, hold a big overweight in cash or short duration bonds, and don't buy too much - TRY TO STEAL INSTEAD OF BUYING.
We learned a few lessons over the last 15 years:
Don't get too caught up in exuberant markets like 2007 or 2021. We remember June 2007 and the market seemed like it went up 37 straight days - 2021 seemed like that too.
When you get to the bear markets, like 2008 and like today: try to steal and not buy. This will slow you down and concentrate your buys in the absolute best trades.
Two years after the start of the bear market, you want to buy as much as you can. You would have been 1 year early if you did this in 2002, but you would have been closer to stealing than buying. You would have been right on target in 2010.
Right now we are in the steal phase. Ask our DeMark team to produce weekly charts or monthly charts in addition to the daily versions. Normally trading has a setup with defined stops. When you steal an asset, there is no stop, there is no quick profit taking. Stealing an asset means 3x or 5x returns, and that takes a few years, usually three years or more.
This is a valuation market. Last year, bonds were stupid. Now bonds have merit, so the stock market is not the only game in town. Over time, the stock market has traded at about 16x earnings. Assuming earnings are stable, we are trading near fair value on a forward-earnings basis. Thus, at 3800, the market is neither cheap nor rich.
For readers with a good balance sheet, today would be a good time to sell some S&P six-month puts. We are short the 3350, 3150, 2900 and 2500 strikes - unless the world order changes (oil at $300, nuclear war etc), the S&P isn't going below $2500. We are quite happy to be short these puts as we would be happy to buy stocks at the 3350 and 3150 levels and we feel we would be stealing at the 2500 strike. Shorting the puts in advance gives us the courage & beer goggles to be able to buy into a crash, Lol.
Finally, it appears that the 10 year & 2 year inverted slightly this morning. To us, this is not news. We are in a recession already. That said, this might scare the markets a bit. Bear markets are scary, but remember, the 11 year bull market was NOT normal - bear markets are normal, but decade-long uninterrupted bull markets are NOT normal.
A Google engineer is claiming its AI is sentient: he believes that Google's AI has both consciousness and a soul. Google is suggesting that the engineer get a psychiatrist - we are siding with Google on this one, but we are out of warmups now and the first inning of the future is here, now. We will be on the lookout for disruption from AI. The Google engineer is claiming that their AI is like a 7 or 8 year old and he is probably right: that machine is super smart and learning fast. Google has both a good business and optionality. Its one of the best high-profile companies and the stock is reasonably priced assuming it doesn't have an epic miss (a small miss won't change the investment case).