Alan's Alert 8-5-2021

 

Weekly unemployment figures came out this morning. Initial claims dropped by over 20k on a non-seasonally adjusted basis. Continued claims also dropped. They are down by over 181k. This is good news on both fronts. We also had a reduction of nearly 77k off the pandemic assistance.

However, we are still a long way from getting back to pre-pandemic levels. This means the Fed will still have license to buy treasuries and mortgage-backed securities. Their day of taper is still well out in the distance.

I had previously reported that the market was pricing in an announcement at the Jackson Hole Fed meeting this month. I believe the market is going to be sorely disappointed. The continued slow pace of the unemployment picture will either cause the Fed to go off-script and taper early or delay their taper announcement until later in the year.

This brings me to the meat of today’s alert; crowded trades.

As a former follower of Robert Wenzel’s daily alert, I was well informed of the coming inflationary wave. By continuing to follow the cues from the money stock reports, we can be prepared for added inflationary pressure. Since this data is publicly available, anyone with a eye on the Fed can also be informed of the rapid expansion of the money supply. Many doubt the Fed’s transitory stance. The thinking goes; they’ve been wrong in the past, they are probably wrong on this, we should position for it.

When this happens, the market gets skewed. Players in the market can overplay their hand. Then the Fed can come in and remind everyone who the boss is.

In reality, I should add an 8th rule to my list of trading rules; don’t fight the Fed. The Fed has way more staying power than your portfolio. If you aren’t prepared to cut your losses and be patient, you could end up like this:

So, when is the best time to get off a crowded train? As soon as you can. When you are trading with the herd, you’ll get stomped when they stampede for the exits. So what’s a trader to do? Be patient. If you’ve been following along, you know that this inflation is going to stick around. We are slowly getting confirmation of this trend. Once the market comes to the same realization, we’ll know where to be; silver, oil, gold, and short interest rate ETFs.

Tony Greer sat down with Real Vision a little over two weeks ago. Tony does macro analysis at his website TGMacro.com. He is a momentum guy and has tons of market experience. His interview with Real Vision is worth a listen. At one point he talks about gold. It seems that he knows, gold is where to be in the future. Right now, he cautions to stay away because of the Fed. When the momentum guys see that the Fed is involved, they don’t want to fight that battle. All seasoned traders know not to go toe-to-toe with the Federal Reserve. His advice; soft commodities and oil. If the Fed is keeping their eye on interest rates and hard commodities, you need to go somewhere else to watch your market thesis play out.

Alan's Alert 8-4-2021

 

“Will it blend” was a marketing campaign for a line of blenders.  The guy pictured above (Tom Dickson) is the founder of the company.  He had this viral campaign to put all sorts of things into the blender to see how it would perform.  This spun off into all sorts of appearances on late night tv and the history channel.  Will it blend was a huge hit.  I bring this up because we have a new campaign to follow.  It’s called…  will it pass?

The infrastructure bill has been talked about since Biden was sworn in.  It started off as a $3.5 trillion dollar package but has slowly been losing steam.  It looked like such a sure thing back in February when the administration was meeting with lawmakers to hammer out the details.  Since then, it has gyrated between committees in the House and Senate.  It was cut down to $2 trillion and the green wing of the democrat party started to get in on the process.  Now it has been blended down to a $1 trillion dollar price tag.  Still, it looks questionable if it will pass.  The Hill reports that close to 300 amendments have been filed to be debated and possibly added to the bill and this is just the Senate side of the bill.  Since Nancy Pelosi has recessed the House for 7 weeks, we won’t see the House debate this until late September at the earliest.  Senators currently are warning that a rush to hold a vote would be a mistake.  That means it could drag out for several weeks for the Senate to come to a compromise. 

When the infrastructure bill was first being debated, Robert Wenzel had indicated that this would be “madness on top of madness”.  I agree as there is no money for such a large plan and there are only three ways to finance such a boondoggle; print money, borrow it through bond issuance, or increase taxes.  If money is printed, it just adds more gas to the fire.  The CPI and the money stock reports coming from the Fed would go crazy.  If the proposal is funded through bond issuance, the Fed would have to find a way to monetize it as the pool of bond buyers has been slowly evaporating.  The final route, raising taxes, would cut private sector capital investments and translate to lower productivity and ultimately, upward pressure on consumer goods.  There are no good options here.  The best answer would be to see if the 2700 pages of the bill plus the roughly 300 amendments would blend. 

 

If the infrastructure bill does find a way to pass, it would be a boon for copper.  Copper plays a huge role in renewable energy technology, given its conductivity characteristics.  Freeport-McMoRan (FCX) and Southern Copper Corporation (SCCO) would be the place to be.  They had a big run from September 2020 to late February 2021.  Did the market realize at the end of February that the proposed infrastructure package wouldn’t make it through Congress?  Because both companies have flat-lined. 

 

Changes are coming to the alert over the next week.  I’ve got two projects I’m working on.  One will be completed this week, the other I hope to have done in two weeks’ time.  Stay tuned as I’ll have an update and unveiling on Monday.  There will be no alert on Friday as I’ll be on vacation (yeah!).

 

Alan's Alert 8-3-2021

 

A question that has plagued new investors for time immemorial is, how do I make money in the stock market?  Volumes upon volumes of books have been written on the topic.  Many well-known, some not as popular.  Possibly the most famous is Ben Graham’s book, “The Intelligent Investor”.  Ben Graham was Warren Buffet’s mentor.  Ben’s work has influenced an untold number of investors, but making money in the market doesn’t always equate to following someone else’s formula.  The question of making money in the market can be boiled down further into: what determines which stocks go up and which go down?  This question is solved by economics 101, supply and demand.  When the supply of buyers is large and the number of sellers is small, the price has to go up to find an equilibrium.  The same is true in reverse.  If the quantity of sellers is large and the pool of buyers small, the price must go down to find equilibrium.

So, we want to find stocks that have a large pool of buyers and a small pool of sellers.  How do we find these stocks?  This line of questioning begins to lead us into the psychology of the participants of the market.  Lance Roberts of RealInvestmentAdvice.com said it best when he said, “Price measures the current psychology of the herd and is the clearest representation of the behavioral dynamics of the market.”  What Lance is saying here is that the herd (a large pool of buyers) controls the price of a stock and that price reflects the current mindset of the herd.  If the herd has been whipped into a buying frenzy, the stock could skyrocket.  If the herd has concerns about the future profitability or other’s opinions on the stock, the stock could plummet.

The true key to profits in the market then is this: buy the stock before the herd and sell before they change their minds.  Amazing right?  You simply… buy low and sell high.  This worn-out phrase has been around forever.  Unfortunately for most, they struggle to determine what “low” means and how to define “high”.  Just because a certain stock looks high-priced, does not mean it is “high”.  This also works on the flipside; stocks priced cheaply are not necessarily “low”.  In Daniel Kahneman’s book, “Thinking Fast, & Slow”, he looked at investors who thought they were buying low.  What he found was that individual investors liked to “lock-in” their gains by selling the “winners” and that they would hang on to the “losers”.  However, the recent winners had a tendency to do better than the recent losers in the short run.  This leads to my second trading rule, “Let winner runs; sell losers short”.  You do not want to get stuck with a loser in your portfolio.  This is why a stop point is important.  Once the trade has gone against you, you need to have a system for selling it.  Whether that is a percentage loss or a time frame is up to the individual investor.  Losers in your portfolio not only influence your trading mentality but they are a drag on your portfolio.

It is important to respect the herd’s current mentality when it comes to the price of a stock.  The herd determines the trend and the trend is your friend.  No one is bigger than the herd and no one can run against the trend.  You may feel that you know something the herd doesn’t.  We could know with certainty that inflation we are witnessing is perpetual and that gold is the place to be to preserve buying power, however this doesn’t mean the herd will change its mind.  The herd can run against you and make you bankrupt before it changes its mind.  This is why patience is so important.  There should never be a rush to make an investment and there is nothing wrong with sitting in cash until a good deal comes along.  This isn’t baseball.  We don’t get called out after 3 strikes.  We can look at 20 strikes before we decide to swing.  We could look at 100 strikes.  The only way to get called out in this game is if you run out of capital.

“Don’t worry about missing a rally.  Worry about losing your money” – Dr Michael Burry

 

Without further ado, here are my seven trading rules:

1. For every buyer, there must be a seller
2. Let winners run; sell losers short
3. Respect the trend, no one is bigger or smarter than the market
4. Be patient
5. This time is never different
6. Always go against the herd
7. Know yourself

 

You know the rules, and so do I.  So, let’s...

In July, Planet Money, a podcast put on by NPR, recently dove into their archives and uncovered a gem.  They remastered a classic and re-posted it to their website.  It’s called, “The Great Inflation Classic” and has a great look into the mentality of herds.  I highly recommend a listen.  They interview Paul Volcker and question why he had to raise interest rates as high as he did.  The plain and simple answer, to break the herd’s mentality that inflation would continue.  In time, we could see the herd’s mentality surrounding inflation change again.

Alan's Alert 8-2-2021

 

Over the weekend I dove head-first into what the odds of another lockdown truly are and what it would actually look like.  I came to the realization that it is probably going to happen.  The government is trapped in an echo chamber.  They are desperate to keep a stranglehold on the power that they got from the first round of lockdowns.  In fact, roughly an hour ago, Posobiec tweeted again:

 

What will be interesting this time around will be the public’s reaction.  The first round of lockdowns worked because the public had been whipped into a frenzy about covid.  It was a completely unknown disease and the media pounded the “novel” portion into the public’s head.  It was constantly repeated that this wasn’t the flu.  The reports out of China looked dire.  Anybody remember seeing the videos of people falling down face first in the streets of China?
 
This time around, things are different.  We have several vaccines available, some people now have had the virus and have natural immunity, and the public has witnessed the devastation that a lockdown has on the economy.  To be able to pull off a repeat of the March 2020 lockdown, looks like a tall task.  If it happens, I believe we will have a bifurcation.  Blue states will jump at the chance to lockdown once more.  Red states will be leery.
 
There is a chance that this is completely overblown and there will be no lockdown.  The administration could authorize some other kind of emergency measure and avoid a shutdown of the economy. 
 
Ultimately, my job as an investor isn’t to decide what policy is best, it is to see through the smoke and mirrors to understand what the market’s reaction will be.  Unfortunately, we have only one instance of data on what a lockdown does to the stock market and that data isn’t good.  The last lockdown saw a deep drawdown of the all the general market indices.  Even silver crashed by 30%.  Oil by 68%.  However, had you bought at the end of March, you would be sitting on terrific gains.  Since this lockdown could look different, it is anyone’s guess how the market will react.

 

 

 

 

 

 

Construction spending continues to decline from its pre-shutdown peak.  This is bad news for the continued expansion of the economy.

 

Construction spending is split into two categories, residential and non-residential.  A closer look reveals a big slowdown in non-residential construction.  This tells me that businesses reliant on providing services to construction companies will begin to contract.  This should worry anyone who believes in the skyscraper effect.  The theory was put forth by a British economist named Andrew Lawrence in 1999.  It has been refined over the years by Dr. Mark Thornton.  Dr. Thornton has a book named, “The Skyscraper Curse” which you can read for free on Mises.org.  I’ve not read it but I’ve listened to several of Mark’s interviews and read a few of his articles on the subject.  These two stand out to me in particular; Skyscrapers and Business Cycles and this interview with the Mises Institute.  The takeaway, when the construction of new skyscrapers stops, economic hardship is not far behind. 

 

 

The Federal Reserve posted new data for the assets and liabilities of commercial banks in the US on Friday.  The decline of commercial and industrial loans continues while non-commercial loans and leases saw a small increase.

 

 

 

It looks like the economy is running out of steam.  How will the economy continue its expansion phase without new loans and business expansion?  Where will new growth come from?  Meanwhile, deposits at banks continue to run above trend.

 

 

Consumers are now sitting on a stockpile of cash in the bank.  Ironically, the banks don’t want it.  They’ve been furiously sending it back to the Fed in hopes of achieving any sort of return.  Even if that return is 0.05%

 

 

Earlier this year, New York Fed President John Williams had indicated that the repo markets were working as expected.  The Fed has spilled liquidity into the banks, now the Fed is mopping up the excess through these facilities.

 

 

Finally, I wanted to take a quick look at interest rates.

 

The 10-year minus the 2-year treasury is still in positive territory.  The spread has come down sharply since the peak at the end of March. 

 

Looking at the big picture, rates appear to be flatlining.

Typically, this is great news for investors.  Flat/declining rates mean that investors should go long growth vs value stocks.  Fixed income is also a good buy.  Emerging markets and commodities would struggle.  The trouble is that the rates at starting so low that they don’t have far to fall.  This could be a very short rally for this trend.

 

 

Alan's Alert 7-30-2021

 

For the fourth month in a row the Federal Reserve’s favorite inflation indicator has been on the rise.  The Personal Consumption Expenditures excluding food and energy (Core PCE index) has risen to 3.5% year-over-year.  Amazingly, the Core PCE came in below the consensus estimate of 3.7%. 

 

On a monthly basis, the increase was 0.4% for the month of June.  This would translate to 4.8% on an annual basis if the Core PCE index would stay steady for 12 months.

 

You can see that the steepness of the curve has lessened.  I’m sure this will be talked up on the financial media and by members of the Fed.  We are still a long way from determining if the transitory inflation thesis will prove correct but the fact of the matter is, the Fed has gone all in on their transitory thesis. 

 

During this week’s FOMC meeting and press conference, Jerome Powell defined what “substantial further progress” meant.  Chairman Powell had been using the phrase over the course of the government shutdowns.  He had been stating that the Fed was administering an accommodative policy to aid in the economic recovery.  Now that the National Bureau of Economic Research has declared the recession over, the Fed has been dragging their feet in ending the purchases of treasury bonds, mortgage-backed securities, and raising the Fed funds rate.  To be able to drag his feet further, Powell came up with the phrase “substantial further progress” without defining what that meant.  This week he defined the term as being synonymous with maximum employment.  This has allowed Powell and company to continue to kick the can down the road.

 

Also, during this most recent FOMC meeting, Powell had admitted that progress had been made towards their goals.  This would seem to mean that we are getting closer to the moment the Fed will begin to taper their balance sheet expansion.  Bank of America ran a report looking at changes in option premiums and it came to the conclusion that the market believes the taper announcement will happen at Jackson Hole.  This is where the next Fed meeting will take place, which will be August 26^th -28^th. 

To me, this seems too early for the Fed to make that kind of announcement.  We will still have states paying pandemic related unemployment assistance until the beginning of September.  Which means the picture on employment won’t start to clear up until the end of September or beginning of October.  In an unfortunate twist, the latest unemployment figures that came out on Thursday showed an increase in the amount of people getting the pandemic assistance!

Initial claims dropped by 24k but continuing claims rose by 7k and over 211k people were put back onto the pandemic assistance doles.  In an effort to keep even more people on the government dole, a judge in Arkansas has ordered the state to resume federal pandemic unemployment benefits.  If the Fed has tied the tapering of asset purchases to the unemployment rate, we have a long way to go before “substantial further progress” will have been made.

 

 

 

Late last night, I got a tip from David at Live Better Now.  He alerted me to a tweet from Jack Posobiec.  Jack is a former military intelligence officer and a senior editor at the news website HumanEvents.com.  Jack is known for having an ear (or two) to the ground in DC.  He’s been accused of having a “mole” in the White House and seems to be in-the-know before the news media.  Last night he posted the following:

Anyone who has followed Poso for any length of time will know, he does not write click-bait styled headlines or tweets to get views.  While it seems like a stretch that another shutdown could happen, the truth is, those in power have enjoyed wielding it against those that aren’t in power.  If we see another lockdown, we could see another crash in the stock market and more “accommodative policies” by the Fed.  The CDC has really talked up the delta variant and has now “leaked” to the Washington Post their latest attempt to stir up fear.  My guess is that this supposed “leak” was an attempt to gauge if another lockdown could take place.  The problem those in power are facing is that Americans have grown Covid lockdown weary.  What happens if the government mandates another lockdown and Americans don’t cower in fear?  The government will look foolish and there is nothing that the narcissists in power hate more than looking ridiculous.  Which brings me to my latest meme!  In an effort to continue the power of memes over the narcissists in power I bring you…  COVID VARIANT BINGO!

 

Now I’ve already taken care of the popular and not-so-popular variants that have been posted to the WHO’s website.  What makes this exciting is that four new variants have been discovered (P.3, P.2, B.1.427 & B.1.429).  Will they get Greek labels?  Only the “scientists” at the WHO know for sure.  Keep me up-to-date with an email if I miss a new variant getting labelled.  I would hate to miss the opportunity to see a COVID VARIANT BINGO achieved.

 

 

One last thing…

Have a safe weekend.  We’ll see you next week!