According to this theory, population growth in excess of the productivity gains of the land has several effects on social institutions. First, it leads to persistent price inflation, falling real wages, rural misery, urban migration, and increased frequency of food riots and wage protests. Second, rapid expansion of population results in elite overproduction—an increased number of aspirants for the limited supply of elite positions. Increased intra-elite competition leads to the formation of rival patronage networks vying for state rewards. As a result, elites become riven by increasing rivalry and factionalism. Third, population growth leads to expansion of the army and the bureaucracy and to rising real costs. States have no choice but to seek to expand taxation, despite resistance from the elites and the general populace. ~ Peter Turchin, Ages of Discord
Good morning!
In this week’s Dirty Dozen [CHART PACK] we look at rising yields and what that means for sector and style factors. We then cover Chinese investment and what this means for base metals and a potential copper short, before finally ending with a left-for-dead consumer electronic company with improving fundies and a great technical setup, plus more…
***click charts to enlarge***
1. The 10-year yield broke out from its multi-month range last week and is now back to its highest levels since June.
2. This is an important signal and if this move in yields is durable then we should see corresponding breakouts in small-caps and yield-sensitive industries, with energy and financials at the top of that list (chart via RenMac).
3. Ned Davis Research recently published a report making the case for a strong rally into the end of the year. They point out that Q4 shows the strongest seasonality in recent years, especially while in a secular bull.
4. Their Risk-on/Risk-off diffusion index shows an improving risk-taking backdrop, coming off low levels hit last month. NDR writes “If the total of the two indices rises above 100 from its current level of 67, it will provide a strong confirmation of a year-end rally driven by expectations of assertive economic growth.”
5. Their risk-on cyclical/consumer ratio “has started to recover, consistent with a rally driven by reversing economic sentiment.”
6. And relative credit performance is also confirming an improving risk backdrop, despite the recent dip in equities. This type of positive divergence typically ends with stocks converging upwards.
7. The two best performing sectors year to date are energy and financials, with real-estate a close third. I expect this outperformance to continue.
8. @mrblonde_macro makes a compelling case (link here) for getting more defensive here though.
He argues that slowing growth, deteriorating cyclical earnings revision breadth, and crowded positioning, make the market ripe for a painful decline. I don’t disagree with this take and think we’ll see it play out within the next couple of months. But, as of now, the technicals tell another story and the conditions for a larger top have not yet been put in. So I think we go on one more leg up before we see a multi-month correction.
9. As always, we’ll be watching the tape and changing our opinions (and positioning) accordingly. The SPX is currently above the midline of its monthly bar. Bulls need it to close above this level while bears want to push it below by month’s end. There are only four trading days left in the month, so we’ll see who wins out soon…
10. Two big developments are underway, both of which will have an outsized impact on macro over the next 12-months. This is China’s clampdown on speculation in its real estate sector and the Fed’s recent (and surprisingly) hawkish shift, which is bringing forward the pricing of rate hikes.
The chart below shows China’s FAI for real estate and its correlation with base metals, which are likely due for some reversion to their long-term means soon.
11. BHP is the world’s largest producer of copper, amongst other things that are used to build Chinese real estate. Its stock has collapsed over the last two months giving us good reason to watch copper closely here, as BHP often acts as a lead on the metal.
12. I remember when GPRO first IPO’d back in 14’ and bank analysts were pumping the stock, calling it not a hardware play but a new digital medial company or some other such nonsense. The stock briefly ran up to stupid valuations. The founder/CEO Nick Woodman smartly dumped a bunch of his shares into the frenzy. Then the chart collapsed and I’ve barely heard a peep about it in the years since.
GPRO is now what we call a left for dead play. It gets little coverage and has hardly any fanfare. I like to check in on these hated burned-out names from time to time to see if the fundamentals have at all changed.
You can occasionally find amazing transformations matched with dirt-cheap valuations because the hangover of bad sentiment is so strong. I think that’s what we have now with this little camera maker.
GPRO started selling DTC through its website last year, which now accounts for over 50% of sales, boosting margins by over 9%. It also recently launched a subscription business where they charge fifty bucks a year giving them access to a host of benefits (ie, increased cloud storage, discounts, video editing, etc…). The rollout has so far been wildly popular and GPRO should do close to $100mn in recurring sales next year from the subscription alone, most of which will be gross profits.
The stock currently trades for 12x EPS and should see a sharp pick up in sales this year and next, as people start to get back outside and do stuff worth filming. Technically, the chart has broken out of a multi-year base and has formed a larger bullish wedge. We should see a breakout to the upside soon.
Thanks for reading.
Stay safe out there and keep your head on a swivel.
Your Macro Operator,
Alex
