Hawkier Fed, Drowning Oil, and Insiders Jumping Ship

The following is an excerpt from our weekly Market Brief. If you’re interested in learning more about Market Briefs and the Macro Ops Hub, click here.

The Fed is going to hike this Wednesday. They’ve made that clear. But why the complete reversal in tone since their last meeting?

The answer is obviously because of the Fed’s unspoken third mandate — putting caps on bubbles. This is something it’s historically been poor at. But Yellen and team have commented in recent weeks on the market’s seemingly lack of concern over economic and political “uncertainty”.

Charts like the one below are evidence of this:

So the Fed’s gonna hike. But the real question is, do they talk dovish following this week’s hike as has been their modus operandi? Or do they increase their hawkish rhetoric out of fear that the market and expectations are running away from them?

I don’t know, but we’ll find out shortly.

We nailed the breakdown in oil. Our option play in Vol Ops should pay out nicely.

Now we just need to see if oil experiences another v-bottom reversal at its 200-day like it did the last two times, or if the third time’s the charm and she trips off the cliff here.

What happens to oil will have big implications because it’s wagging the tail of credit (see nearly identical chart below). If oil turns lower, then credit will continue lower and we’ll see spreads begin to widen and defaults increase.

SPDR Bloomberg Barclays High Yield Bond ETF

Not to mention what a lower oil price will do to S&P earnings over the coming year. The rebound in oil prices have been a big boon to earnings and revenue growth over the last year. The chart below shows expected forward earnings for the SPX, Energy and SPX ex-energy.

If oil prices roll over from here then expect that blue line to come crashing back down. And the green line showing S&P companies ex-energy doesn’t look a whole lot exciting either.

Indicators are pointing South for the credit cycle. The chart below is a prime example of an end of cycle liquidity suck. Falling liquidity = falling demand = falling growth = asset prices adjusting lower.

The 12-month, 3-month and 1- month change in bank lending (an aggregate of business, consumer, and real estate loans) growth is rolling over and looks like might actually start contracting later in the year.

This liquidity tightening is happening all while sentiment and retail participation is markedly picking up. The chart below shows soft data (dark blue) which is various business and consumer sentiment survey data compared to the hard numbers (light blue) which report actual data on the economic state of our country.

Large divergences between exuberantly optimistic soft data and the actual hard numbers as shown in the chart above don’t have a history of working out well for those giddy individuals.

My call last week for a coming market retrace still stands. The divergence between breadth and credit is still there (has actually widened more). I suspect the market levitates for the next few days and starts selling off into the end of the week.

I’m not calling a top here, just a retrace. The highs haven’t been made on this market yet. It has some more room to run. But expect things to start getting a lot more bumpy…

The above is an excerpt from our weekly Market Brief. If you’re interested in learning more about Market Briefs and the Macro Ops Hub, click here.

 

 

SPDR Bloomberg Barclays High Yield Bond ETF

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Brandon Beylo

Value Investor

Brandon has been a professional investor focusing on value for over 13 years, spending his time in small to micro-cap companies, spin-offs, SPACs, and deep value liquidation situations. Over time, he’s developed a deeper understanding for what deep-value investing actually means, and refined his philosophy to include any business trading at a wild discount to what he thinks its worth in 3-5 years.

Brandon has a tenacious passion for investing, broad-based learning, and business. He previously worked for several leading investment firms before joining the team at Macro Ops. He lives by the famous Munger mantra of trying to get a little smarter each day.

AK

Investing & Personal Finance

AK is the founder of Macro Ops and the host of Fallible.

He started out in corporate economics for a Fortune 50 company before moving to a long/short equity investment firm.

With Macro Ops focused primarily on institutional clients, AK moved to servicing new investors just starting their journey. He takes the professional research and education produced at Macro Ops and breaks it down for beginners. The goal is to help clients find the best solution for their investing needs through effective education.

Tyler Kling

Volatility & Options Trader

Former trade desk manager at $100+ million family office where he oversaw multiple traders and helped develop cutting edge quantitative strategies in the derivatives market.

He worked as a consultant to the family office’s in-house fund of funds in the areas of portfolio manager evaluation and capital allocation.

Certified in Quantitative Finance from the Fitch Learning Center in London, England where he studied under famous quants such as Paul Wilmott.

Alex Barrow

Macro Trader

Founder and head macro trader at Macro Ops. Alex joined the US Marine Corps on his 18th birthday just one month after the 9/11 terrorist attacks. He subsequently spent a decade in the military. Serving in various capacities from scout sniper to interrogator and counterintelligence specialist. Following his military service, he worked as a contract intelligence professional for a number of US agencies (from the DIA to FBI) with a focus on counterintelligence and terrorist financing. He also spent time consulting for a tech company that specialized in building analytic software for finance and intelligence analysis.

After leaving the field of intelligence he went to work at a global macro hedge fund. He’s been professionally involved in markets since 2005, has consulted with a number of the leading names in the hedge fund space, and now manages his own family office while running Macro Ops. He’s published over 300 white papers on complex financial and macroeconomic topics, writes regularly about investment/market trends, and frequently speaks at conferences on trading and investing.

Macro Ops is a market research firm geared toward professional and experienced retail traders and investors. Macro Ops’ research has been featured in Forbes, Marketwatch, Business Insider, and Real Vision as well as a number of other leading publications.

You can find out more about Alex on his LinkedIn account here and also find him on Twitter where he frequently shares his market research.