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Trading Politics – Part 1

Tyler here. 

This month I started a video series called Trading Politics over on our partner youtube channel Fallible. 

The first video introduces the most popular political prediction market in the United States, PredictIt.

In the past we’ve used the prediction markets on PredictIt to help us position our portfolio during key election events. 

The two most notable ones were the Trump upset in 2016 and then the subsequent French election in 2017 when the whole world was freaking out about Le Pen taking charge. 

When the markets on PredictIt diverge from the option markets going into an event there’s money to be made because someone is wrong… either the traders on PredictIt or the traders in the market. 

There are multiple ways to play a disparity, you can take an outright position on a PredictIt political contract or another option is to go into traditional financial markets and find a trade that will benefit off of a political “surprise.”

Since the 2016/2017 election year, interest in politics (and betting on its outcomes) has increased considerably. 

PredictIt spreads 100s of markets now ranging from election results, to impeachment odds, to weekly tweet markets for Trump.

(Yes you read that right you can make money betting on how many times Trump will tweet in a week!)

I’m starting the Trading Politics series to gear everyone up for the 2020 election year. I expect fireworks again just like the 2016 election year that will bring us a ton of opportunity to profit using the PredictIt platform as dumb money flows in to back their favorite candidate. 

We recently partnered with PredictIt and they’ve given all of our readers an opportunity to earn a 100% match on their initial deposit up to $20. 

All you have to do is click the link below and deposit $20, then PredictIt will match it and you can start trading on the platform! 

Click here to open up a PredictIt account and claim your free $20! 

I’m excited for this. Trading a market like PredictIt not only allows us to make money on the politico noise, it also serves as a valuable cross-training tool for financial trading. The skills we pick up by sniping the PredictIt mispricings will carry over into our normal trading and level us up further. 

That’s all I got for today! 

Happy Trading.

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Your Monday Dirty Dozen [CHART PACK]

There are in fact four very significant stumbling blocks in the way of grasping the truth… namely, the example of weak and unworthy authority, longstanding custom, the feeling of the ignorant crowd, and the hiding of our own ignorance while making a display of our apparent knowledge. ~ Roger Bacon

Good morning and a Happy Veterans Day to those of you serving and who have served!

In this week’s Dirty Dozen [CHART PACK] we look at signs of a global rebound in growth, green shoots in Europe, trouble ahead for US bonds, check-in on the four drivers of gold, and check out oil extraction costs in different parts of the world, plus more…

  1. It seems like just yesterday *checks notes: it was yesterday* that the bears were pointing to falling semiconductor demand as incontrovertible proof that we were in a recession. Looks like they forgot to send that memo to the semi index which has been on a complete tear and is now implying a strong reversal in the ISM over the coming months (chart via BofAML, h/t @carlquitanilla).

  1. Speaking of ISM, this chart from Citi shows that momentum (the 3m chg in 3mma) in global manufacturing PMIs has stabilized and is even turning up in some regions.

  1. Another positive development is that we’re seeing real money growth (real M1 YY%) pick up in Europe as shown below in the chart from Citi. This matters because growth in the money stock typically precedes growth in the underlying economy, hence the strong and often leading correlation between the two.

  1. There’s a host of other data points pointing to at least an intermediate bottom in Europe. German orders-to-inventories ratio is turning up along with Ifo Manufacturing Expectations (charts from Citi). And here’s a bonus chart of German New Orders putting in its first positive print on a YY% basis in a while, which more often than not leads Industrial Production.

  1. A rebound in European growth would be notable for a number of reasons. One of these being that negative bound European interest rates have acted as an anchor on US yields, pulling them lower as capital was forced into US bonds to seek a return. German Bund yields bottomed in September and have been steadily rising since. A pickup in growth would accelerate this trend which in turn would lead to a selloff in US bonds (rise in yields). Chart below is a weekly of US T-Bond futures.

  1. JPMorgan’s recent UST client survey shows that there’s plenty of long positioning to unwind.

  1. A selloff in bonds (rise in yields) would be very bad for gold since the real (inflation-adjusted) interest rate is the primary driver of the price of gold over time (falling real rates is bullish gold and vice-versa). Rising real rates will be coming at a time when gold is working off a speculation frenzy shown by historically high open interest, net spec positioning, and sentiment (via Consensus Inc.)

  1. Look for gold to pullback to the $1,400 level near its 200-day moving average (blue line). This will set up another major buying opportunity in the yellow metal.

  1. Rising US rates combined with a recent strong bounce from the US dollar off its 200-day moving average may prove to be a momentary headwind to emerging markets. The below chart is a weekly of the IShares MSCI Emerging Market ETF (EEM). It looks to be putting in a temporary reversal after being rejected by its upper weekly Bollinger Band.

  1. Something to keep in an eye on is the speed at which yields rise over the coming weeks. Luckily for stocks, the rate-of-change in BAA yields is turning up from an extremely depressed level but if it continues rising at this pace it’ll soon begin to exert pressure on equities.

  1. We are seeing increasing signs of extremes in short-term sentiment and positioning as investors rush to gain exposure to the breakout in stocks. But this is coming off the backdrop of longer-term indicators showing extreme bearishness. When in bull trends, like the one we just started, it’s important to not overreact to every sign of overbought/overoptimism. We want to focus on exploiting the broader trend higher and not allow ourselves to get shaken out along the way by focusing on the minutiae. Put another way, short-term extremes in sentiment and positioning will eventually lead to a correction but you’re better off buying the correction than selling the reversal until the bigger picture says otherwise.

  1. And finally, here’s a great chart showing the post-tax breakevens for new oil projects from around the world via the Saudi Aramco prospectus (h/t @acosgrove003).

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A Simple Playbook For Finding Deep Value

Earlier this week we talked about how the greatest value investors obsess over how much they can lose. They don’t care about the upside. They want to know the downside. These investors used various valuation tools to arrive at that downside number. 

We then argued that to generate outsized returns, you need to fish where there’s few fishermen. You need to turn over rocks in the dark corners of the market. 

The investors we profiled do exactly that. They comb through bankruptcy notices, all-time-low lists and special situation scenarios. These corners of the market offer little competition. A chance at handsome returns for those willing to do the work.

A Simple Playbook

The greatest investors follow a simple playbook for long-term success. And we’re revealing that playbook in this month’s Value Ventures:

  • You’ll learn how to find and value deeply discounted companies. 
  • You can layer these strategies on an existing investment philosophy, or as diversification in a larger set of factors. 

Along with these strategies, you’ll learn exactly where we’re looking for deep value. This is an area we think is ready for a massive bull run. 

You’ll receive three stock ideas from this area to jumpstart your own research. 

Creating Positive Asymmetry

Value Ventures is all about positive asymmetry. How do we do this? We combine deep value, fundamental bottoms-up investing with multiple risk management systems. In doing so, we create positive skew to the upside on each position (think call options). 

We won’t get them all right. And that’s the beauty. We don’t need to get them all right. We just need a couple great ideas a year. 

By adhering to our process, we cut our losers short and let our winners run. We’re not confined to traditional value investing jargon. This doctrine preaches buy-and-hold at all costs. Our goal is not to lose money. 

The Value Ventures process focuses on long-term shifts in sentiment, fundamentals and chart patterns. We bet big on a notional basis, while risking a smaller part of our actual capital. 

This is our bread and butter. It’s what we’re most passionate about. 

Value Venture’s Margin of Safety

Most value investing newsletters charge $3,000 or more per year for this type of information. We’re not like that. We’re value investors, after all. We want to provide the best information at the most affordable price. 

Because of this, we’re offering Value Ventures until this Sunday, November 10th at 11:59PM,  for $497/year! That’s $200 off our normal price of $697/year.  

So for less than a cup of Starbucks coffee a day, you gain access to:

  • 12+ deep dives into off-the-beaten path stocks a year
  • Bullet-proof Entry and Exit strategies to keep you in the game longer
  • Actionable investment philosophy and strategies
  • Continuous updates on existing stock ideas
  • 24/7 access for questions, comments or discussion
  • Bonus: Spin-Offs Crash Course

As a margin of safety, we also have a 30-day money back guarantee. If you’re not satisfied with the product, let us know. We’ll refund your order. No questions asked.  

So grab your hard hat, it’s time to venture!

Click here to access Value Ventures! 

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Why The Traditional Financial Advisory Model Will Fail

How Financial Advisors Can Survive The Low-Fee Apocalypse

ETFs and robo-advisors are killing the traditional financial advisory model. Those that want to survive need to overhaul their approach. The standard 1% AUM fee no longer works. The future success of financial advisors is through subscription-based, freemium business models. Advisors that change their model while going smaller (not larger) will thrive.

Financial advisors must switch from an asset-gathering model to a tier-based subscription service. Cut fees for lower-end clients and offer exclusive, personal services to high-end clients. If the financial advisors want to contend with the machines they need to learn from their rivals in tech. Freemium, subscription-based business models can work.

History Rhymes: Robo-Advisers and Vanguard’s Playbook

Leading the destruction of traditional financial advisory models is Vanguard. This isn’t new to Vanguard. They’re the same company that destroyed the traditional mutual fund model. Their weapon? Cheaper ETF alternatives. The mega-asset manager is doing the same thing with financial advisors.

In his WSJ article The Rise of Ultra-Cheap Financial Advisors, Jason Zweig highlights this shift in Vanguard’s model (emphasis mine):

“Vanguard manages approximately $3 trillion in mutual funds and exchange-traded funds for a pittance of 0.19% in average annual expenses. The firm’s Personal Advisor Services unit, which provides investment management and financial planning for a flat 0.3% annual fee for most clients, has $3.6 billion in assets, up from just $755 million at the end of 2013.”

They come in and rip through the price floor. They’re able to absorb the lower cost due to their scale. Then they make up for the lower fees by growing AUM. If this makes you think about Amazon’s model, you’re on the right track.

But it’s not just Vanguard that’s challenging traditional financial advisors. It’s the robots. It’s automation. It’s everything we expected.

The Rise of the Robots

To say robo-advisors have changed the financial advisory industry is an understatement. They’ve forced advisers to do two things:

  1. Justify their high fees to their clients
  2. Feel pressure to offer more service to justify their fees

Technology-driven companies offer basement level expenses for portfolio management. On top of that, many robo-advisers are introducing high-yielding interest bank accounts. Lex Sokolkin thinks these high-yielding interest accounts are customer acquisition costs.

Meanwhile, Charles Schwab now offers $30/month unlimited financial planning for its clients. This is in contrast to their historical 28bps asset-based fee. How are they able to charge so little? Most of their smaller clients are in automated, AI-driven portfolios. These portfolios automatically rebalance and adjust based on individuals’ risk tolerances.

Cynthia Loh, VP of Digital Advice at Schwab, says clients are demanding this type of payment and transparency. She goes on to say, “Customers are used to engaging with subscription services.” The demand for this service is growing. Since launching the new subscription-based offering, the company’s seen a 40% increase in average household assets enrolled.

But, But, Muh Human Interaction

The rise in robo-advisor popularity coincides with one of the longest bull markets in history. I’m not saying there’s a direct correlation between stock market rise and a move towards AI-drive advice. Yet people tend not to worry about their assets if all they do is appreciate in value.

What happens during the next economic downturn? Will robo-advisors remain as popular? Will people crave the comfort of their personal advisor? A defense among advisors is that they’re not paid for out-performance. They’re paid to manage their clients’ emotions.

Fair enough. But if that’s the case, doesn’t it make more sense to price your services in the same manner as a clinical psychologist? Via an hourly/session rate? If a client calls once or twice a year, why should advisors be compensated for ‘managing’ automated portfolios driven by AI … for 1% a year?

Millennials Are Familiar with Subscription-Based Models

Netflix, Amazon, Hulu, Disney+ … I could go on. The number of subscription-based services grows every day. We’re no longer a society that buys and owns things. Rather we rent, lease and subscribe to products and services on a term-by-term basis.

This shift is important for the financial advisory space because future growth will come from a generation used to a different model. A model not based on assets under management. But a model based on flexibility, transparency and technology.

The growth in subscription-based services is mind-boggling. They’ve grown 100% a year for the last five years. 15% of all online shoppers subscribe to at least one subscription-based service.

If your goal is to capture the next largest market (millennials and Gen X’ers) it makes sense, then, to offer something of familiarity.

A Few Survival Ideas

Offer Subscription-based revenue model for younger clients

Younger clients may not have sizable assets yet, but over time they will. Offering a subscription-based solution now gets your foot in the door and share in their wallet. Then, as they grow and accrue more assets, your firm becomes the natural solution to their needs.

Ken Fisher is an out-spoken critic of the subscription-based model. In a Barrons.com article, Fisher says, “[it’s a] stupid model aimed at moneyless clients. Subscription fee-based models work great for advisors who want to stay tiny and accomplish very little.”

Fisher isn’t the only critic. Many advisors claim they spend most of their time as psychologists, not as investment decision-makers. A subscription-based service could result in hundreds of questions each month. After all, clients would try and squeeze out as much value per charge as they could.

Use The Machines

This model can work on existing clients with small accounts. Many advisors use low-cost ETFs that automatically rebalance. Instead of charging based on assets under management, you charge a monthly (or yearly) recurring amount until a certain AUM is reached.

The argument against this is that these small account clients will take up advisors time and energy. Then, if you charge a smaller, subscription-style service on that time and energy, you net a loss.

Combat that using an automated approach. Pairing a low-cost ETF with automatic rebalancing reduces the time and energy needed to monitor the portfolio. It’s also about setting realistic expectations between client and advisor. The advisor should make the client aware that with X amount of assets, you’ll get X amount of service.

And it’s not low-quality, bottom-of-the-barrel service, either. That’s a common misconception about this method. You’re simply not offering the full suite of services that you would a client with 50x more money. If anything, it gives smaller clients an incentive to stay and grow their assets with you.

Platform-type business or (Financial Wellness as a Service)

Financial advisors must ask themselves this question: “Do we integrate or separate?” The technology disruption will force advisors to make a decision. Do they want to be the aggregator or a specializer? The subscription model works for both decisions.

If you choose to specialize, focus on one area of wealth management or financial planning. Then do that better than anyone. An example of this would be an advisory firm that exclusively offers estate planning advice.

Then there’s the aggregator method (or dare I say) Financial Wellness as a Service (FWaaS). Like Disney+ or Netflix, a FWaaS model combines all areas of wealth management. You’d have investment management, financial planning, estate planning, tax advice, retirement planning, savings accounts, and more.

The goal with this service is to be the one-stop-shop for all your client’s financial wellness. Check out the picture on the right from the Earnst & Young report:

The Costco Model Applied to AUM

The secret to success could lie in Costco’s business model. If you’re not familiar, AK at Fallible has an incredible series on COST. In short, COST makes no money on the produce they sell. Instead, all the money is made on the annual membership service. Membership revenues drop straight down to the bottom-line in pure profit.

So how can financial advisory firms learn from Costco? Advisors can turn AUM fees into an at-cost charge. Like Costco buying and selling peanuts for the same price, investment firms could charge AUM fees at-cost of their back-end processes. For example, if you operate at 0.35% of AUM fees, charge 0.35%.

Sure, you won’t make money on these fees.

But that’s the point.

The goal is to get your foot in the door. From here, you charge a subscription-based service based on financial planning, wealth management, tax guidance, estate planning, etc. The service can be customizable and personalized. Unique to each individual.

Concluding Thoughts: The Real Winners

Advisors, now more than ever, are closet-indexing their client’s assets. Clients in firms that index should demand lower fees for asset management. After all, they can get the same management for fraction of the cost with robo-advisors.

A tiered service service (as opposed to fee-based) based on asset level will keep financial advisory firms relevant amongst the robots, automation and larger competitors.

The winners of the future will be the firms that integrate the younger, lower asset level clients with subscription-based models, while providing tailored, fee-based services for high-net-worth clients.

This combination captures the best of both technology and personalization. Advisors can focus their time and energy on serving their highest-priority clients. In turn, their lower tier clients receive adequate services for their current asset level.

AI, automation and ETFs drastically reduce the cost of acquiring (and keeping) smaller asset clients. In turn, you increase the probability of accruing more assets as your smaller clients gain wealth.

Main Source: NextWave Consumer Financial Services: financial subscriptions are coming, Ernst & Young LLP

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The Next Deep Value Corner of The Market

In my last article I shared the strategies of three famous value investors. Each investor had one shared theme: focus on downside protection.

These investors knew that in order to generate outsized returns, they needed to not lose money. Not losing money keeps them around long enough to reap the benefits of deep value investing.

Venturing Where Others Won’t

It’s also important to know where these investing legends found their ideas. How did they screen for stocks? Which rocks did they overturn? What was their sourcing process?

Let’s take a look at each investor.

Seth Klarman

Klarman searches through the market’s junk drawer. He focuses on companies on the verge of bankruptcy and stocks trading below cash or assets. These aren’t crowded investment spaces. You won’t find these companies on CNBC, Bloomberg or FinTwit.

Where to Find Klarman-like ideas: SEC Filings, Google Alerts, All-Time Lows

The tool I use to find companies on the verge of bankruptcy is to set Google Alerts. I’ll set alerts for the keywords:“Reorganization of bankruptcy” or “Chapter 11 stocks”. You can also scroll through filings of companies trading around their all-time lows.

You gotta put in the work. But then again, this is valuable work as other investors aren’t looking in these spaces.

Joel Greenblatt

Greenblatt loved spin-offs and dedicated most of his book You Can Be a Stock Market Genius to the topic. We’ve covered spin-offs in previous emails, but let’s recap.

The reason spin-offs are attractive is because of forced selling. Institutions can’t hold certain spin-offs. This forces them to sell the shares for non-fundamental reasons.

Where to Find Spin-offs: Google Alerts, SEC Filings, Spin-off websites

My favorite tool to find new spin-off ideas is a simple Google Alert for the keywords “stock spin-off” or “spin off”. You’ll sift through a few TV show spin-off rumors, but it’s worth the time. I also search for SEC filing Form 10-12/B. Companies must file this form when spinning off a company.

For more information on spin-offs, check out the website Stock Spinoff Investing.

Michael Burry

Burry preferred ‘ick’ stocks. These are stocks most investors pass over without a second glance. Along with these, Burry looks for ‘rare birds’. Rare birds are liquidation situations, stocks below net cash, etc. Things you’d find Klarman looking at.Where to find ick stocks: 52-week low list, all-time low list

Where’s The Next Deep Value Corner?

These investors go where others won’t to generate differentiated returns. In this month’s Value Ventures we’re diving deep into one of those areas.

This area remains untouched by a majority of the investment community.

Yet we believe this area is on the cusp of a major bull run and we’re revealing our top two picks.

A Potential 5-Bagger

Whenever you hear “potential five-bagger”, you roll your eyes and assume it’s another high-flying, cannabis stock. Yet one of the companies we found has the potential to be a five-bagger without much growth. In fact, if the company stays exactly where it is, we still see 300% upside.

This potential five-bagger meets all our requirements for an off-the-beaten-path idea. Management owns over 90% of the business. It’s the leader in its industry. It’s growing revenues, EBITDA and paying down debt. It trades less than $3,000 per-day. And market cap is around $350M.

It’s one of the cheapest businesses I’ve found in 2019.

You can read all about it in this month’s Value Ventures report. All you have to do is sign up at the link below:

Click here to discover the market’s next 5-bagger!

If you have any interest in catching this stock’s run make sure you subscribe now, because sooner or later the herd’s going to jump in and send this stock soaring.

Click here to subscribe to Value Ventures!

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It’s The Downside That Matters

As investors, we want to ensure we’ve done all we can to profit from our hard work and due diligence. We read annual reports, scroll through slide deck presentations and read earnings transcripts. 

We’re business owners. Investing in actual businesses, not blips on a Bloomberg. In doing so, we try to understand the business as best we can. We study tailwinds, headwinds and competition. 

Some might think we do all these things to figure out how much money we can make from an investment. After all, we spent hours, days, even weeks studying this business. Shouldn’t we be rewarded for our efforts? 

Yet what if I told you the world’s greatest investors don’t focus on the upside of a business’ valuation?

It’s The Downside That Matters

The greatest investors focused on how much they can lose. Not how much they’ll make. Let’s look at three of the most-famous value investors as examples. 

Seth Klarman

Seth Klarman wrote the book on Margin of Safety. The idea is simple. An investor should pay a cheap enough price to account for volatility, bad luck and human error. 

Klarman used a variety of methods to find margin of safety. Net asset value, net cash value and net current asset value were some of his favorites. He would then invest in companies in which their stock prices were lower than the asset value. 

Joel Greenblatt

Greenblatt ran Gotham Asset Management from 1985 to 2006. During that time, Greenblatt compounded capital at a mind-numbing 40%. 

He generated those returns by focusing on the downside and let the upside take care of itself. Like Klarman, Greenblatt wanted a large margin of safety. He (like us) wanted to buy dollars for pennies. 

Greenblatt focused on cash flows, on earnings yields. It’s this distinction that differentiates him from Klarman. Greenblatt wanted to buy stocks today for less than what their cash would be worth in the future. The wider that gap, the more margin of safety.

This quote from Greenblatt sums up his strategy: 

“My biggest position isn’t in the stock that I think will go up the highest. It’s in the stock where I don’t think I’ll lose any money.”

Michael Burry

Michael Burry did things different from the others. His approach helped him achieve outsized returns at Scion Asset Management. His approach is simple, powerful and prevents him from losing his shirt in times of panic. 

Get Paid For Your Diligence — Follow The Greats

In next month’s Value Ventures, I’m laying out Burry’s entire investment process — the process that gives him his edge. We use this same process with every new investment idea pitched in our monthly Value Ventures report. 

Burry’s process keeps us in winners longer while cutting our losses quickly. All while investing in super cheap companies. The holy grail of successful investing. 

If you want to go deep on Burry’s process make sure to sign up for Value Ventures before the latest issue releases on Thursday, November 7th! After this date prices will rise going into the holiday season.  

Click this link to access Value Ventures!

Every purchase comes with a 30-day refund window so there’s absolutely no risk to check out the report. We’ll refund you no questions asked. In other words, there’s built in margin of safety with your purchase!

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Your Monday Dirty Dozen [CHART PACK]

It is poor policy, I find, to wait for Opportunity to knock at your door. I train my ear so that I can hear Opportunity coming down the street long before it reaches my door. When Opportunity knocks, I try to reach out, grab Opportunity by the collar and yank it in.  ~ Richard D. Wyckoff

Good morning!

In this week’s Dirty Dozen [CHART PACK] we look at price targets following new record highs, check out rising global markets, dissect fund flows to see where capital is headed, look at world equity valuations, and see what’s going on in Putin’s Russia, plus more…

  1. Both the S&P 500 and Nasdaq made new all-time weekly highs last week. The technician Peter Brandt (@PeterLBrandt) has a measured move target on the S&P of 3,524. Approximately 15% higher from current levels.

  1. This chart from Callum Thomas (@Callum_Thomas) shows it’s not just US markets that are moving higher. The percentage of countries at least 20% off their 52-week lows is trending up from a very low base.

  1. We’re starting to see a reversal in flows out of bonds and into equities for the first time in a long while (chart via BofAML).

  1. Like a rubber band that has been wound tight, there’s plenty of potential energy to unravel. A process that could spark a flood back into risk assets (chart via BofAML).

  1. The reason behind the lopsided flows is that money managers are bearish… and I mean extremely bearish… Barron’s latest “Big Money Poll” finds that only 27% of fund managers surveyed are bullish on stocks over the next 12-months. That’s the lowest bullish reading in more than 20-years.

  1. Valuations in the US are back near levels that in the past have acted as headwinds for equity market returns. This doesn’t mean we can’t see US multiples expand further (they probably will). But it increases the fragility of the trend.

  1. It also means that investors who now find themselves horribly underinvested and who are looking to dramatically up their exposure to equities may look elsewhere.

  1. The US has long earned its valuation premium over the rest-of-the-world due to its strong trend in earnings. But, BofAML noted in a recent report that this trend may be changing, writing “The US one-month ERR (0.49) has dropped below the global ERR (0.65) which is unusual. Note that in the post-crisis period, the S&P 500 ERR has been above the Global ERR 74% of the time, underscoring the earnings prowess of the S&P 500 relative to other regions due to its secular growth and quality biases. Are the tides shifting? Other signals suggest shifts from the US to other neglected pockets. Our global team notes that the October ratio improved the most in Asia Pac ex-Japan and Emerging Markets, but the ratio fell the most in the US (Europe’s ratio remained unchanged).”

  1. Equity markets have been benefitting from improved financial conditions this year relative to last. One of the few remaining conditions that have been tightening liquidity has been the persistently strong US dollar. But the USD is back below its 200-day moving average and as I noted in last week’s Dozen, we might finally be seeing the turn in King Dollar. A trend that would further boost financial conditions and make underweighted ex.US assets even more attractive.

  1. One of the cheapest markets at the moment is Russia (RSX) which just broke out to new multi-year highs last week.

  1. Remember how a month ago the bears were sharing this chart of the ISM Manufacturing New Export Orders which had just hit new post-crisis lows? Well, it just rebounded in one of its strongest MoM reversals. I wonder why those same people aren’t sharing the chart now?

  1. Finally, one of my favorite leading recession indicators, the Philadelphia Fed Leading State Index, came out with another solid print this last month (when it crosses below the red horizontal line is when you need to worry). Just another sign, amongst many, that a recession is still a ways off.

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Your Monday Dirty Dozen [CHART PACK]

There are really four kinds of trades or bets: good bets, bad bets, winning bets, and losing bets. Most people think that a losing trade was a bad bet. That is absolutely wrong. You can lose money even on a good bet. If the odds on a bet are 50/50 and the payoff is $2 versus a $1 risk, that is a good bet even if you lose. The important point is that if you do enough of those trades or bets, eventually you have to come out ahead.  ~ Larry Hite

Good morning!

In this week’s Dirty Dozen [CHART PACK] we look at breakouts, breadth, and credit confirmations that are ALL signaling a move higher in global risk assets. Also, we look at positioning amongst inflation assets and see where the pain points in the US dollar are amongst CTAs. Plus more…

  1. Markets are breaking out to the upside everywhere. The S&P 500 Value Index is one of them. It made a new all-time high last week. According to Sentiment Trader, when the index “broke out to a new all-time high for the first time in 200+ days, the S&P 500 Value Index always went higher 6 months later”.

  1. When trying to gauge the strength of the underlying market trend, it’s key to pay attention to what’s going on under the hood in the individual issues. Breadth will nearly always precede major changes to the trend. This chart from @MacroCharts shows that breadth in the S&P is at its best level in over a year.

  1. I’m seeing similar indications of strength in nearly all my breadth and momentum indicators. Take the NYSE AD-line for example. It just made a new cycle high last week.

  1. And this strength isn’t just isolated to the equity market. Just as importantly, it’s showing up in credit as well. This past week we saw credit’s relative performance break out to new 18-month highs. This is exactly the type of action you want to see before a major move higher in stocks.

  1. Our “Leaders” are all doing what they’re supposed to be doing; moving up and to the right. Notice how the news and fintwit bears were all whining about Texas Instruments (TXN) earnings miss and lower guidance? Yet, the semis index (SMH) made new all-time highs last week (chart below is a weekly). Check your bias.

  1. Another thing to keep an eye on is cyclical vs defensive relative performance. Financials and industrials are on the verge of breaking out and the copper/gold ratio looks like it’s about to do the same. Another rate cut from the Fed this week (something which is looking likely) will steepen the curve and drive a bullish thrust in relative cyclical/defensive performance.

  1. I know I’ve been hammering this point over and over the last couple of months but sentiment and positioning remain in stark contrast to markets that are hitting new highs. The NAAIM Average Stock Exposure Index is at 65%, well below its 3yr and 5yr averages.

  1. And Nomura’s Global Equity Sentiment Index is back in negative territory. Apparently, no one is impressed with the across the board breakouts that are happening. This is exactly the type of sentiment we want to see for the next leg higher.

  1. We’re at a critical level for the US dollar. It’s still well within a technical uptrend and above its 200-day moving average. But as this chart from Nomura shows, if it moves any lower from here it will trigger selling from CTAs which could spark a positive feedback loop of a lower USD and more forced selling. The FOMC this week will be key to where the USD trades in the weeks to come.

  1. And CTA’s are positioned fairly long the dollar against a number of pairs (chart via Nomura).

  1. If we do see the dollar trade lower from here it’ll be a nice and needed tailwind for crude where hedge fund short positioning has become increasingly crowded on the short side (chart via @Warrenpies & h/t @TN).

  1. We’ll end with another great chart from @MacroCharts that serves as a perfect reflection of the current positioning/sentiment zeitgeist. Citi’s Long/Short Inflation Ratio is at levels that have marked the absolute lows in long/short inflation positioning two other times this cycle. Stocks are breaking out on the back of strong breadth while bonds are looking precarious and the Fed is likely to cut right at the moment when the global manufacturing recession has troughed. Position accordingly.

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Your Monday Dirty Dozen [CHART PACK]

It may be readily conceived that if men passionately bent upon physical gratifications desire greatly, they are also easily discouraged; as their ultimate object is to enjoy, the means to reach that object must be prompt and easy or the trouble of acquiring the gratification would be greater than the gratification itself. Their prevailing frame of mind, then, is at once ardent and relaxed, violent and enervated. Death is often less dreaded by them than perseverance in continuous efforts to one goal.
~ Alexis de Tocqueville

Good morning!

In this week’s Dirty Dozen [CHART PACK] we look at the widening gap between the positive hard data and the horrendous soft data, we check in on global central bankers to see what they’re up to, take a look at earnings season and where the beats and misses are trending and more…

  1. There’s been a lot of talk about the growing divergence between hard and soft (survey) data over the past few months. Here’s a great chart from Citi showing just how unusual the current gap between the two is. The red circles highlight the fact that when the two diverge it’s usually the soft data the reverts back to the hard economic numbers. The one time this didn’t happen though was in 2008 so… feel free to go ahead and use this chart to confirm your priors.

  1. A benefit of the declining global economic picture, for risk assets at least, is that it has central bankers around the world hitting the gas pedal again. The percent of central banks cutting rates hit its highest level since the GFC this month (chart via FT).

  1. Citi’s Bear Market Checklist is still giving the all-clear. Current warnings only add up to 25%. For an official bear market signal, we need to see amber and red warnings add up to over 50%.

  1. I think this quarter’s earnings will be the big tell on where things are headed in the intermediate-term. And we have a busy week on that front, with a number of highly followed companies reporting over the next five days (chart via Earnings Whispers).

  1. So far, companies have had an easy time hurdling the low bar (pessimistic earnings consensus) with 84% of S&P 500s companies that have reported so far, surprising on the upside.

  1. That’s not to say the longer-term earnings picture is all hunky-dory. NDR’s SPX Earnings Model, which breaks earnings into two main categories (1) strong earnings growth and (2) weak earnings growth, shows that the trend has just moved into the “Weak Earnings Zone”. There’s been a number of instances where the model has crossed into these levels only to rebound later but something to keep in mind (chart via NDR & CMG Wealth).

  1. One thing that I think isn’t properly appreciated by the bears is just how much buybacks are driving this bull market. Net share destruction (share issuance – buybacks) has been significant. Companies buying back their stock has been pretty much the only demand source propping up this market year-to-date as investors have been net sellers for the most part. It’s difficult for me to see how this trend doesn’t continue as long as the credit market stays willing to fund it, which they appear to be at the moment (chart via NDR and CMG Wealth).

  1. The money supply in the US (both M1 and M2) has been picking up since the beginning of the year.

  1. This graph from Sentiment Trader shows that when the 12m growth in M2 is greater than 5.5%, as it is now. It tends to be positive for stock market returns going forward.

  1. @TN shared this great chart last week showing the Rydex Bull-Bear Asset Spread. When this ratio spikes, like it is now, it means that investors are positioning defensively. The highlighted points note that this is almost always a bullish sign going forward for the market.

  1. This graph from Koyfin (the best free charting and market analysis tool out there) shows country ETF performance over the last month. I like to regularly check up on this gauge of short-term momentum to see where the money is flowing. It looks to me like capital is starting to make its way back to the undesirables (the unloved and underweighted). Europe and Lat-Am, and even parts of Asia are worth a look. If the dollar breaks here then these will take off like a banshee.

  1. Malaysia (EWM) is one of these charts worth watching. It’s nearing 10-year lows and has been trading lower in a tight coiling descending wedge pattern. Patterns like this often precede explosive moves higher. Plus, I hear the country is readying major tax cuts and fiscal stimulus is on the way.

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Your Monday Dirty Dozen [CHART PACK]

The point of forecasting is not to attempt illusory certainty, but to identify the full range of possible outcomes. ~ Paul Saffo

Good morning!

In this week’s Dirty Dozen [CHART PACK] we look at more charts showing the pervasive bearishness amongst investors; from sentiment near multi-decade lows to persistent outflows in EM stocks. We also check out seasonality, some gold charts and more. Here we go…

  1. Credit Suisse’s Global Risk Appetite is at depressed levels showing investors around the world have grown increasingly bearish.

  1. Individual Investors in the US aren’t immune to the negativity. AAII %Bulls is near 30-year lows.

  1. The 50-day moving average of the Total Put/Call ratio is close to 2 Stdev above its 12-month rolling average. This means investors have been persistently buying downside protection at a high rate. Similar trends in the past have tended to mark major bottoms.

  1. Investors across the board (from retail to institutions) have been net sellers of EM stocks since the start of the year (chart via MS).

  1. The chart below from Morgan Stanley shows how consistent these outflows have been week after week.

  1. The graph below shows GEM Fund Manager weighting relative to the MSCI EM Index (via MS).

  1. @MacroCharts recently shared this great chart showing the FX-adjusted US flows into Chinese equities. The outflows are at extremes. I agree with his thinking below. Many EM charts have built a nice coiled base. Weak hands look like they’ve all been washed out. It’s not going to take much in the way of “positive surprises” to reverse these flows.

  1. Tom McClellan noted in a recent blog post (link here) how the equity market’s seasonal have been shifting forward in recent years.

  1. If stocks start getting bid and we enter a new period of risk-on then bonds and gold should continue their recent bouts of weakness. Expect gold to continue to retrace and consolidate for a while.

  1. It’s probably going to take a few weeks if not a couple of months to work off the sentiment and FOMO buying that chased into this rally over the last few months. The chart below shows CFTC open interest (for futures only) spiking to all-time highs. We can see that similar spikes in speculation in the past have preceded extended retracements.

  1. Another data point showing extremely bearish positioning. Spec longs in the S&P are near levels that have marked major bottoms in the past. I hope you’re seeing the pattern here…

  1. We’re going to need to see the ISM bottom soon (I think it will) or else the odds increase that we’re on the cusp of an earnings recession. The chart below shows the ISM Manufacturing Index and TTM EPS for the SPX.

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