June 21: Should we wait to buy stocks, bonds or everything?

By Jeffrey Cohen, Investment Advisor Representative
US Advanced Computing Infrastructure, Inc.
​June 20 2022: 2120 ET (updated)

Key take-away: we should not buy financial assets (stocks, bonds or bets on commodities) if we are in a recession. However, we can only know that after the fact, once the media/government tell us. By then, it is too late.

Game theory suggests that the markets are falling precisely because we are in a recession, and you just don't know it yet. Or, it does not matter, because the losses are so bad, it is profitable to act like we are in a recession, especially before you do, and sell everything that is not nailed down, before prices fall.

The marklets are down significantly over the past year, although the comparables are tough. A year ago we were enjoying the post COVID-19 pandemic rise in stock prices. These falls are off that recovery. Also, the riskfree rate is higher in our model than it was a week ago. Notice the forward looking market return is 3.5% on a fully diversified basis. The trend is not our friend in the markets right now.

Riskfree rate                                   =  1.50%
Actual SPY return                          =  -12.16%
Use floor S&P500 rate                  =  5.00%
Actual IWM return                         =  -26.55%
Use floor Russell 2000 rate         =  5.00%
Actual QQQ return                         =  -20.08%
Use floor NASDAQ 100 rate        =  5.00%
===========================================
Market return                                =  3.50%

We ran our models on Friday night and spent the long weekend celebrating our family. We went out, visited a museum, and walked along Lake Michigan. We were together. My daughters gave me cards and sent me texts while my sons bought me a Home Depot gift card. We saw grandma. All is good in the world.

However, we do feel a little tight financially. Not only are gas and food more expensive, but so are insurance, property taxes and almost everything we spend money on. We are stretched across the extended family, and it is likely that you are too.

So, is this the week that the market goes up? Our model says to invest in a leveraged ETF that should outperform the S&P 500 significantly, and to pair it with one or a few high BETA stocks. The model also suggests that the largest S&P 500 tech stocks and large money managers are some of those consolidating the most, and may be ready for a run higher. That seems ridiculous to us on a holiday when people seem worried, but it is not 'people' or retail that determines stock prices in the short-term. It is the large-scale money managers, pension funds, wealth funds, and asset managers.

As investment managers, we are not sure that you should buy anything on Tuesday. This is the purpose of today's post and tomorrow morning's video. Should we wait to turn bullish, even if it is just for a week to catch a bear rally?

How to answer the question:

The question is to decide whether we are in a recession, which is a period of negative 'real' economic growth over a 6-month contiguous period. Real means after inflation, which has been running 8-12% over the past 6-months. So, has our economy been growing, in constant prices, at 8%-12% over the past six months?

We are not sure. Growth seems weaker than that based on anecdotes, direct observation in our small corner of the world, social media, news, and our 'feelings.' We heard retailers bulked up on inventory that nobody wants, that cannot be helpful.

However, we can look at specific factors. 

Supply

• Supply shortages and constraints are limiting spending and consumption. For example, flight delays and cancellations this weekend (Fri - Sun) exceeded 10,000 according to FlightAware. 
• Shipping in/out of Los Angeles, CA ports tells a story. For the most recent month in 2022, Imports are down 7% and Exports are up 14% on a TEU equivalent basis (Ioaded containers). 
• Housing and new construction & inventory building are all less profitable than they were before given increases in interest rates and energy, all things being equal.
• Labor is more expensive, which makes the US Services Industry sector more expensive, all things being equal. This includes restaurants, personal services, and financial services.
• Copper prices are kissing $4.00 per pound, down around 10% from when we started watching them recently. 

Demand

• Covid numbers are flat.
• Inflation is up dramatically in non-discretionary areas like gasoline and food.
• Imported items from Asia and other countries with weak currencies (e.g., Brazil and Mexico) will be artificially cheaper for Americans in the short-term.
• Automobile sales for new vehicles is low historically.

Stock Market signals:

• US Equity / Stock futures are higher, over 1% higher on Sunday evening. The earliest bets of the week are bullish.
• US Treasury bond futures are down, about 1/8 to 1/2 on Sunday evening. The earliest bets of the week are bearish, betting on higher interest rates.
• The price of US stocks continues to fall, with stocks that have already fallen getting cheaper by the week. The number of new lows each day is in the hundreds.
• The price of US bonds also continues to fall, with bonds hitting new lows each day numbering in the hundreds. 

Credit Quality:
This is our 'truth stone' in this market. If the US consumer cannot pay their bills, the economy slows down. Banks and credit-providing businesses will take losses, and restrict credit at a time of higher interest rates.

Crypto and Bitcoin:
These 'assets' or retail bets are down considerably over the past 2 weeks, when they broke below support levels around $30,000 and fell $10,000 or more. We saw prices as low as $18,300 this weekend.

Currencies:
The USD / Japanese Yen price is again climbing (Yen is weakening vs. US Dollar), now over 135.14.
However, the EuroDollar is almost $1.06 which shows the Euro strengthening vs. US Dollar, likely because the European Central Bank will start raising interest rates as well. 

War:

• China and USA are heightening tensions over the Taiwan Strait. China says that this is not international water and that US ships are only allowed to pass with prior permission, and likely after buying a ticket (and the price will not be cheap). 
• Russia and the Western World continue their fight in Ukraine, and Russia seems to be winning these days.

OK, so what are you going to do on Tuesday?

We truly don't know. We have restricted our cash in our trading account so any moves would be very small. We will likely just double down a bit more if prices move against us significantly.

We will reevaluate this at 0700 ET tomorrow and discuss it in our livestream video at 0730 on youtube. 

​GLTA

It's Tuesday morning and things are still not clear.

We know that US Equity Futures are green and up significantly (1.78% to 2.00% across the three indices we track). This is a big morning move, and should send equities rocketing higher. We just don't buy it this morning, unless there are some internal moves happening.

What would we be looking for:

• Rebalancing of portfolios. Some 60/40, actively managed, or fixed return funds need to stay invested in equities to a certain extent. Today, the first trading day after OPEX, could be the day the buys happen (and maybe at the open).
• Global money flows into the US, maybe due to excessive imports or divergence in interest rates.
• Economic news
• Earnings news
• Political news
• Commodities, currencies, interest rates
• Energy prices (oil, electricity, natural gas, gasoline)
• Crypto and alternative investment movements.
• Technical factors in the market (imbalances or funny patterns). This is last on our list, and seems the most like voodoo.

There is no real news. Asian markets ex.China are up, China markets are down. Not sure if Asian equities strength is due to views of US economic demand for imports, money flows, or just a sunny, positive day with Japan leading the way with quantitative easing and 'cheap money.'

CNN was absolutely boring. ZeroHedge largely irrelevant except for Lithuania enforcing the sanctions on Kaliningrad. I think this is great, BTW. European integrity and consistency in action. Russia is so angry they are turning more red than they already are.  Link here.