Trading thoughts by Howard L:
- If you are going to panic, panic early – then raise cash.
- Markets do not care how you feel.
- Complacency is a bug in humans.
- Volatility is a market feature that squashes human complacency.
99% of an athlete’s training is devoted to the last 1% of performance. After all, the entire point of the competition is how extreme the last few steps are. On the other hand, options for an entrepreneur are clear:
- (a) focus on activities where you’re in the sweet spot of the curve – where more preparation, focus, and effort get you 80% there and lead to huge benefits.
- (b) walk away from competitions against people who are committed to finding that last 1% - it’s just too expensive. If you refuse to walk away, then embrace the unreasonable and accept that you’re at the whim of your competition.
While the last 1% is thrilling, it’s difficult to build a sustainable business around it.
In terms of JOBS:
- Hiring is down -8.1% YoY and down -2% since May.
- Miami is the only U.S. metro above pre-pandemic hiring levels.
- Tech and retail jobs have fallen sharply – while gov’t, construction, education and healthcare have fallen less.
- Job searching is harder, and requires more time.
- Employees are quitting at a slower than pre-pandemic pace.
- Unemployment has climbed past November 2021 levels.
The Market:
Why are Markets Falling…
- Follow-the-Money… The Japanese Carry-Trade is being unwound. The Carry-Trade blossomed because of ZIRP (Zero Interest Rate Policy). Basically, you could borrow cheap money from Japan (negative rates), invest it at much higher rates in other areas of the world, profit on the interest rate differential, and pay back your Japanese loan – Rinse ‘n Repeat. A 3-month dollar-yen carry trade can earn ~5% free-money on an annualized basis, and this has gone on for ages with untold billions/trillions in the pipeline. Well, Japan raised their interest rates on Thursday, causing their markets to drop 5.8%, and drastically cutting profits on the Carry-Trade. Much of the selling we’re seeing is due to the debt crisis caused by the Carry-Trade unwind, falling U.S. interest rates, and rising Japanese rates.
- Earnings were Kryptonite for Tech… Non-stellar MAG-7 earnings fueled an increase in market volatility. Multiple +$100B and +$1T companies have erased +30% of their value in a matter of days. INTC just erased 33% of its value over the past 2 days while NVDA is behaving like a meme stock. The Mag-7 have lost a combined +$3T over the past 3 weeks.
- We LOST Jobs in July… The latest JOBS report stunk, but don’t believe the numbers. The headline showed that we added +114k jobs in July, and the unemployment rate rose to 4.3%. Unfortunately, those +114k jobs included 246k (fake) birth/death model jobs. In real terms, we LOST -132,000 jobs in July, and the unemployment rate rose to ~12%. [Birth/Death Model explained == https://www.bls.gov/web/empsit/cesbd.htm ]
In a nutshell… the loss of the Carry-Trade eliminates a profit source for large banks and hedge funds, corporate Tech Earnings just sucked, and nobody’s Hiring. That puts us on the edge of a Stagflation Recession == Inflation + Slowing Economy.
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InfoBits:
- Last week the Big 3… (the Bank of Japan, the Bank of England, and the US FED) met expectations: BoJ = raised interest rates, BoE = cut interest rates, and FED = stood pat.
- Credit Card Interest Rates are at 13-year highs… and car repos are up +23%.
- McDonald’s sales are softening… as lower-income customers reduce their number of visits.
- A $1 million starter home is increasingly the norm… across 237 U.S. cities.
- +65m Americans will face higher electricity bills next year... as the U.S. grid is seeing rising demand and less supply.
- ‘Mo Money’… The U.S. Treasury will need $1.3T additional (that we don’t have) – to make it through 2024.
- Starbucks saw their second straight quarterly sales decline.
- AMD’s revenue grew +9% YoY… and both AMD and NVIDIA plan to release new AI chips annually.
- Meta has agreed to pay Texas $1.4B… for collecting facial recognition information on millions of users.
- U.S. job openings moved lower… with the ratio of job openings to available workers at its lowest level since June 2021.
- Germany’s economy unexpectedly contracted during Q2.
- Meta can stay in the AI race because… they grew revenue by 22% in Q2, and are using AI to accelerate revenue by 32% in Q3.
- TikTok is paying MSFT +$20m/month… to buy OpenAI models.
- Taco Bell will roll out AI-powered voice drive-thru’s… by EOY.
- Intel laid off 15,000 employees after miserable Q2 financials.
- Apple’s sales grew 5% in Q2… and Buffett sold half of his shares.
Crypto-Bytes:
- Despite Mt. Gox (BTC) distributions… BTC has risen ~12% since the distributions began.
- Web3 gaming has raised billions in VC funding since 2018… but no crypto-game (as of yet) has broken through in a truly mainstream way.
- Stablecoins are the best business model in crypto…
- Step 1: Users give stablecoins electronic dollars, and they give the user digital dollars in return.
- Step 2: Stablecoins then deposit the users’ electronic dollars in Treasuries – earning +5% interest.
- Step 3: Stablecoins exchange digital dollars for electronic dollars when the user wishes – keeping the interest.
- Tether (a stablecoin issuer) made $5.2B in profit for the first half of 2024 – with about 60 employees. [That’s an amazing business model.]
- Morgan Stanley ok’d their wealth advisors… to recommend Bitcoin ETFs.
- Bitcoin miners require ~$60,625 worth of energy… to produce 1 BTC.
- The U.S. Gov’t plans to sell its $130m in Bitcoin linked to Silk Road.
- Bitcoin ETF inflows surged while Ethereum struggled.
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TW3 (That Was - The Week - That Was):
Monday: This week: AMD & MSFT report earnings on Tuesday, ARM & LRCX on Wednesday, and INTC reports on Thursday. If +2 of these companies can report strong earnings and guidance – NVDA can make it back to 125-130. Tuesday is the beginning of the 2-day FOMC meeting.
Tuesday: U.S. futures are higher before some economic data, and ahead of earnings from MSFT and AMD. Hopefully MSFT and AMD will produce good numbers after GOOGL and TSLA disappointed. In economic data, job openings are declining from 12m in March 2022 to ~8m now.
Wednesday: I can’t explain why the S&Ps are up +95, and the NAS is up +550 – on a couple earnings announcements last evening. The FED’s statement didn’t cut rates, but laid the groundwork for a cut in September.
Thursday: The indexes screamed higher out of the gate, but are now very red. Part of this fall is organic, and part was the ISM report which produced an inflationary ‘Prices Paid’ number. The final piece was the Bank of Japan raising interest rates and all but eliminating the Carry-Trade. Investors are also concerned that because our FED was late to decide to raise rates – they’ll be late when it comes to lowering them as well. Calling for a serious pull back has been futile, but if we're going to get one – this is a good start.
Morgan’s Moments…
Remember July… the S&P 500 rose ~1%, the Dow jumped ~4.4%, the Russell 2000 was up over +10%, and the NAS lost -0.75%. Gold prices rose over 4% in July, especially after Powell hinted that a September interest rate cut could be on the table. The U.S. dollar added to losses following rate cut hopes, and treasury yields ended at lows not seen since March. Middle East tensions continued to rise, but WTI crude oil still fell -4% in July and Brent crude fell -7%.
The VIX also Rises… My favorite time to look for new stock ideas is when the market is falling and the VIX (volatility index) is rising. It is also a time to build a list of growth stocks that are in uptrends that are currently 20 to 30% off their highs.
Remember: “BUY when the VIX is high”:
- The S&Ps and NAS have broken key short-term support, and now face a major technical level test.
- Growth concerns, monetary policy, and a crowded currency unwind are driving market behavior.
- Stretched valuations and a Mag-7 focus elevates the stakes.
Last Friday displayed a clear sense of investor fear, which was surprising due to previous market euphoria. Honestly, most market indicators are little-changed. Why wouldn’t our FED, the PPT, and/or Big Banks just step in and ‘buy-the-dip’ – especially during an election year? We will see over the next several weeks.
Next Week: Volatility Strikes Back…
Bkgd: Bad news is bad news once again. The unwinding of the carry trade, terrible jobs numbers, and tech’s kryptonite earnings are all pointing to an economic slowdown. Crude oil is pricing in a recession, and bonds are in a duck-and-cover stance.
- Volatility has spiked signaling intense market uncertainty.
- Despite Wednesday’s FED comments, speculation is circulating about potential emergency interest rate cuts.
- Friday’s options volume was a record high, and the SPX expected move for next week is ~$144.
Volatility continues to emerge: On Wednesday, markets ripped higher on our FED playing nice and hinting at a September rate cut. Thursday, the S&Ps were sitting at the upper-edge of their expected move – before collapsing. However, the S&Ps ended the week moving slightly outside the lower edge of their expected move. This was NOT A CRASH. Having said that, we are seeing some damage within the NASDAQ – specifically inside the MAG-7 (excluding AAPL).
Volatility: VIX, VVIX, Vol futures: On Friday, the VVIX touched 160, the VIX hit 30 – and those 2 events have only happened a handful of other times over the past 3 years. F-E-A-R was in the air, and every trader (even those in the Hamptons) was put on notice. Everyone welcomed Friday and the weekend to regroup ‘n rethink. Make no mistake, this market will have issues as long as Volatility is this elevated.
Bonds are pricing in: ‘Duck ‘n Cover’: Last week the Bonds (/ZB) went parabolic to the upside – driving interest rates dramatically lower. Some other areas of safety were: gold, utilities (XLU) and healthcare (XLV). Meanwhile, oil prices have dropped (pricing in an economic slowdown) which is interesting given the increased temperature of the Middle Eastern conflict.
Correlation/Capitulation was close… but not all-the-way there. 80% of the S&P100 were down on Friday, and the ones that moved higher – didn’t increase by much. FYI: a true measure of capitulation looks for 95% downside correlation.
Markets are asking for a FED rate cut of 50bps… based upon a couple reports generated from fictitiously suspect and statistically limited sample-sized groups of data. In my opinion, our FED will not and should not respond to such calls for action. They can (and will) work their magic behind-the-scenes because this is still an election year.
SPX Expected Move (EM)…
- Last Week’s EM = $104, and we moved $135 to the downside.
- Next Week’s EM = $144 … showing a 40% increase in risk.
- Tip #1: FADE any bounce higher.
- Tip #2: Do NOT jump in and buy-that-first-dip. This could be the market correction we have not seen for a decade. This market has been controlled by our FED & Treasury for 15 years; therefore, it could have forgotten how to solve problems on its own.
- Tip #3: “Remember to BUY – when the VIX is high.”
TIPS:
HODL’s: (Hold On for Dear Life)
- 13 to 17-Week Treasuries @ 5.24%
- Physical Commodities = Gold @ $2,486/oz. & Silver @ $28.7/oz.
- **Bitcoin (BTC = $60,600 / in at $4,310)
- **Ethereum (ETH = 3,000 / in at $310)
- HROW – Harrow Health == $23.6 / in at $12
- **MARA – Marathon Digital = ($17 / in at $12)
- Weekly: BUY Puts for protection & SELL Cov-Calls for income
- INDA – India ETF ($56.10 / in at $50)
- **IBIT – Blackrock’s Spot Bitcoin ETF ($35.6 / in at $24)
- **RIOT – Riot Bitcoin Mining ($8.50 / in at $12.5) / Sold Sept $16 Cov-Calls
NEW’ish ADDS:
- +NEE – Energy: Jan ’25: $80 / $100 Call Spread – efficient energy production.
- +TLT – Bonds: Jan ’26: $110 / $130 Call Spread – given rates are declining.
- +SPY – S&Ps: Jan ’25: $520 to $500 Put Spread – as a hedge.
** Crypto-Currency aware
Please be safe out there!
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