#1 - Commodity traders are positioned well… as the multi-year, secular uptrend in commodities relative to stocks continues. Randolph and Mortimer (pictured above from the movie Trading Places) know that commodity bull markets don't just last a few years, but rather traditionally last over a decade. Something else they know is that, all bullish commodity cycles include Gold - participating to the upside.
#2 – Randolph and Mortimer are passionate about what they do. Passion is almost the direct opposite of industry’s task-based – measured output. All of the recent concentration on AI has dimmed the effect(s) of passion, and (instead) turned it into a race-to-the-bottom. But this too shall pass, and passion will again become a competitive advantage. Your passion for showing-up, especially when you don’t feel like it – is precisely how you create value. And, it’s the passion that gives us a sense of purpose and value.
#3 – Is this market in trouble? Factually: (a) consumer school loans & credit card debt are at all-time highs, (b) 8% mortgages and WFH have killed the real estate business, (c) cars aren't selling and repos are soaring, (d) banks (except for a couple) are basically insolvent, and (e) we as a nation are still ‘spending like drunken sailors’. (f) What if the Magnificent 7 stocks (AAPL, MSFT, GOOGL, META, AMZN etc.) lose their mojo? (g) What if bonds continue their upward climb toward 7%? Although that creates a nice stable return, it’s not so hot for small businesses that are suddenly borrowing at 12% vs 3% two years ago. So YES, I’m scared of this marketplace.
The Market:
- In 2023, the bond market has experienced an orderly crash. It was the first such crash in over four decades. The amount of principal lost in the meltdown of the debt markets is ~$20T. And, for 99% of bondholders, their positions are illiquid and non-hedgeable. That’s pretty close to the definition of ‘really ugly’.
- U.S. Treasury faces an “interesting” situation as rates rise. The U.S. government’s fiscal outlook is souring because the recent rise in interest rates puts it on track to spend more on interest payments than initially anticipated. Just paying the interest on our nation’s debts will eclipse defense spending in 2025 and surpass Medicare in 2026. More cautious forecasters say that if interest rates remain above economic growth rates for a sustained period, the country risks a ‘debt spiral.’
- Regional Bank fears are growing… which could mean that more weakness is ahead for the industry. Confidence is waning among bank investors as all of their stocks are approaching their spring lows.
- Small Cap stocks… not only underperformed when stocks rallied, but are now leading them lower. With high interest rates and a slowing global economy, the environment for small business is getting harder. Investors are flocking to larger companies with robust balance sheets and lots of cash – that will allow them to ride out any economic weakness.
InfoBits:
- Rite Aid officially filed for Chapter 11 bankruptcy protection. They appointed a new CEO, reached a deal with creditors, and found $3.45B in new funding to execute a restructuring plan. It’s a miracle!
- "Taylor Swift: The Eras Tour" film… hauled in $130m at the global box office, and is now the highest-grossing concert film ever.
- Whatever job security existed in tech… is gone. LinkedIn is cutting 668 workers, Stack Overflow is firing 28% of its staff, Flexport is laying off 20%, and Qualcomm is reducing headcount by 1,258 people.
- Olympic officials approved 5 additional sports… for the 2028 summer Olympics. They are: cricket, lacrosse, baseball and softball, as well as the Olympic debuts of squash and flag football.
- Costco sells more hot dogs… than all Major League Baseball stadiums combined, and half of the entire world’s cashews.
- Home sales hit 2008’s lows, but prices remain high.
- 63% of our youth are using AI weekly.
- Non-college life expectancy plummeted to a new 30-year low.
- This quarter marks Goldman’s eighth straight quarter… of declining profits. Many inside GS would like the bank to spend more time on its core caviar crowd, and a little less time on the Filet-O-Fish set.
- China’s Q3 GDP came in higher than expected… +4.9% YoY.
- Tesla’s profits declined -44% YoY in Q3… even as revenues increased +9%.
- Netflix added 8.8m global subscribers in Q3… and raised prices $3/mo.
- Bank of America reported -$131.6B in unrealized losses… in Q3. Yep, they’re basically insolvent.
- US banks are sitting on $165T in derivative exposure. What happens if a credit event hits and the dominos start falling?
- A record number of households (58%) own stocks. The previous record was ~53% during the dot-com boom and before the 2008 financial crisis.
- Shoppers are substituting private label for ‘name brands’: Private label sales grew 8% in the first half of this year, and over half of the shoppers say that they will continue to choose them.
- This year 30% of white-collar workers have taken paid sick leave… up from 21% in 2019.
- The world’s largest semiconductor manufacturer, Taiwan Semiconductor, saw its largest profit decline in 5 years as demand for consumer electronics slows.
Crypto-Bytes:
- On a tweet proclaiming the SEC just approved an iShares Bitcoin ETF… a $50k BTC long position at 50x leverage – registered an ~$2.5m profit.
- The FTX estate estimates 90% recovery of customer claims.
- Ferrari started accepting crypto payments… in the US, and said it plans to do the same in Europe.
- “At $120B, stablecoins are currently the 16th largest ‘sovereign holder’ of US treasuries. As demand for stablecoins grows, they will soon become too large for the US Government to let fail.”
- The time limit for the SEC to appeal the Grayscale case passed. The court’s “final mandate” is expected within a week, and Bloomberg’s James Seyffart is calling Bitcoin ETFs: a “done deal”. A legal, crypto ETF will be a game-changer – opening the floodgates for mainstream investment into digital assets.
TW3 (That Was - The Week - That Was):
Monday: There’s a rumor going ‘round that the war will stop, and diplomatic measures will take over. Putin and China have called for it. But from where I sit, I'm still seeing stuff blow-up and dead bodies everywhere. There are a total of 21 FED heads speaking this week.
Wednesday: U.S. futures slip as oil and gold prices rise following escalated tensions in the Middle East. Global news headlines are dominated by the hospital blast in Gaza – with both sides blaming each other for the horrific event. US crude futures rise over 3% to ~$90/barrel while gold prices increase over 1% to $1,958 an ounce. The GDXJ (the ETF for junior miners) is doing well and our NFGC has come back to life.
Thursday: Treasury yields continue to wreak havoc on market sentiment. The 10-year yield hit highs around 4.985% overnight (highest since 2007) while the 2-yr rose to 5.24% - raising fears of rates continuing to impact consumer spending negatively.
Friday: Treasury yields pulled back after the 10-yr yield briefly topped 5%, and while oil prices remained ~$90/barrel amid fears that the Israel-Hamas conflict may escalate or expand into other regions of the Middle East. The Volatility Index (VIX) closed above the 21 level for the first time since March. We are below the 200-day moving average, and if we don’t bounce here – 4200 is next and then 3800 on the S&Ps.
AMA (Ask Me Anything…)
All too common are ‘fun’ businesses… where someone finds a hobby they like and tries to turn it into a genuine working opportunity. While the work may be fun, the uphill grind of the project(s) can be exhausting. As a rule of thumb: if it’s something that lots of people can do and customers don’t value that much – it’s probably not worth your time. Taking pictures, singing songs, or playing an instrument are fine hobbies – but hard to turn into occupations.
On the other hand (in the top right quadrant) there are endless opportunities and plenty of work for people who can do difficult things, that are highly valued by customers who are ready to pay for the solution. For example, a forensic accountant gets more paying gigs than a bagpiper.
When you choose to take on a real problem that involves difficult work, you’re serving a customer base that has less alternatives. Your quest will be a long one, but if you’re passionate about the impact you’re creating – this can be an amazing way forward.
If you find yourself in the bottom right quadrant (like a professional athlete or champion poker player) – you’ll do fine. Just know what you’re getting into before you start.
Next Week: Bonds Down … Geo-Political Risks Up!
Bonds have crashed… with the 30-Year (/ZB) loosing ~40% of its principal over the past 36 months. Can you imagine how large the unrealized losses are at our Regional Banks? The more important question is: What’s Left? I realize that if everyone holds their bonds to maturity (another 27 years) – they will get a 100% return on their principal. BUT which institutions / investors have the staying power to wait 27 years to get their principal back. The volume in the bond pits has been orderly; therefore, we have yet to see capitulation. Bonds have caused our corporation’s ‘cost of capital’ to be ~10% - when it was almost 3% two years ago. So, everyone that is ‘rolling over’ debt in the near future – will be in for a rude awakening. The volatility inside of the bond market is higher than the S&P500 – and that’s not good. Even if you see the bonds rally massively, that could be an incredibly bearish sign for the S&Ps.
The Volatility is elevated, but is it high enough? Everything right now is about risk / reward and capital preservation. Markets do not ‘tank’ from all-time-highs, they ‘tank’ from over-sold conditions – like what we have now. The last time we had volatility at these levels, the S&Ps were around 3900. That was with the Regional Banking crisis, and it tells me we have about 350 S&P points lower to go.
Tech is getting dangerous right before earnings: GOOGL, META, and MSFT are virtually unscathed. If/when they release bad earnings next week or question their forward-looking visibility – all three could get sold in a hurry.
Risk / Reward and Capital Preservation… compels us to watch the bonds closely. (a) If bonds continue to sell-off, it’s going to be full on: ‘Panic at the Disco’ because rates will climb higher. (b) If bonds significantly rally, it probably means that traders are selling out of tech stocks (Magnificent 7) and equity markets are moving lower.
SPX Expected Move (EM):
- Last Week (EM) = $90… and we exceeded that declined over $100.
- Next Week (EM) = $94… so we have more risk this coming week than last week.
TIPS:
HODL’s: (Hold On for Dear Life)
- PHYSICAL COMMODITIES = Gold @ $1992/oz. & Silver @ $23.5/oz.
- 17-Week Treasuries @ 5.5%
- **Bitcoin (BTC = $29,600 / in at $4,310)
- **Ethereum (ETH = $1,600 / in at $310)
- Apple (AAPL = $173 / in at $177)
- CCJ – Uranium = ($38.2 / in at $33.8)
- DO – Diamond Offshore ($13.1 / in at $15)
- MESO – Mesoblast Ltd. ($1.2 / in at $3.6)
- NFGC – Newfound Gold ($4.3 / in at $3.8)
o SOLD Jan. $5.00 CALLS
- UEC – Uranium Energy Corp ($5.3 / in at $4.8)
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Please be safe out there!
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