“The oil market is the world’s biggest gambling hall.” ~ T. Boone Pickens
In this week’s Dirty Dozen [CHART PACK] we discuss issues with the payroll data and why it’s grossly overstating job growth. We then walk through bonds, CPI leads, and secular thematic rotations, before ending with a look at major compression in oil and a way to play it, plus more…
1. Bonds sold off on Friday following the stronger-than-expected jobs report. But we also saw the unemployment rate, which is derived from the household survey, jump to 4%. And the latter is likely a more accurate reflection of what’s going on in the labor market.
BBG’s Anna Wong writes that “nonfarm payrolls are overstated, and will continue to be so until the forecasts the BLS’ ‘birth-death’ model uses to adjust payrolls take account of the sharp slowdown in business entries since mid-2023, and the rise in business exits. Making proper adjustments, we think the underlying pace of monthly job growth is less than 100k.”
2. Plus, the sectors that saw the greatest strength in hiring were primarily acyclical sectors, such as healthcare and government. So not exactly a good read-through on the state of the labor market (chart via BBG).
3. NFIB Small Business Poor Sales (single most important problem) point to a continued rise in unemployment in the months ahead.
4. CPI comes out this Wednesday and our inflation lead (red line) points to a continued deceleration in inflation.
5. One recent interesting development is that our leading yield indicators have begun rolling over and diverging lower, suggesting we may be near a bottom in bonds (grey, yellow, and gold lines).
6. @TimmerFidelity shared these two great charts showing the long history of secular rotation following 30-year cycles between value and growth, small and large, and US vs ex.US.
7. He writes “If instead of shorting the mega growers to buy everything else, might it be an idea to sell some bonds to buy commodities? It might be a playbook that’s well suited to the new era of Fiscal Dominance, and one where we don’t have to bet against the companies that’ve been at the heart of this secular bull market.”
We agree…
8. Some BIG moves are setting up in markets. We’ve been pointing out the large compression regimes in several major USD pairs and we’re now also seeing this compression in crude. The orange line measures the monthly Bollinger Bandwidth in crude. As the chart below shows, similar past compression regimes have preceded major trends (expansionary regimes).
These signals are directionally agnostic, so the market can break either way, though my bias is it breaks higher.
9. Positioning has been taken down some in crude as it’s been hammered over the past few weeks following the news out of OPEC+. But it still has a ways to go before a contrarian CoT buy signal is triggered.
10. BofA pointed out last week that there’s absolutely zero risk premium baked into the crude market. The charts below show that oil is trading 1std below its historical relative price to both gold and copper.
11. The energy sector has largely been trading in line with its relative EPS trends. We’d want to see this revert higher before aggressively adding exposure to the sector.
12. Two of the biggest winners in our equity book over the past two years have been Vista Energy (VIST) and Tidewater (TDW), both up +603% and +450% over that time respectively. We continue to hold both, though we’ve started taking profits over the past few weeks.
Another name I like in the space, and purely for technical reasons as I haven’t spent much time looking at the fundies yet, is Hemisphere Energy (HME). It’s a smallcap producer that trades on the Canadian exchange. The chart is doing a classic stairstep pattern higher, moving to its own tune with little correlation to the sector. We plan to dig into this one and share our thoughts soon.
Thanks for reading.
