Did The Dumb Money Turn Smart? [DIRTY DOZEN]

“You must learn to allow patience and stillness to take over from anxiety and frantic activity… The good player is patient. He is observant, controlling his patience, and organizing his composure. When he sees an opportunity, he explodes.” ~ Jim Lau

Good morning!

In this week’s Dirty Dozen [CHART PACK] I again discuss why stocks are headed lower in the interim but also why we’re getting closer to a major bottom. We talk about why the recession talk is overblown. I then cover some interesting energy charts, sector fund flows, and a discounted uber-leveraged retailer that comes with a lot of hair but might be worth a second look, plus more…

Here’s the summary of BofA’s most recent Flow Show report summary.

Getting close to another B&B Buy Signal. The flush out we’re about to see should do the trick…

@vixologist, who’s a great follow on the twitters, shared this chart last week showing the A-D Line for High Yield. Any BBG users know if this can be created within the terminal? I like checking in on this one as it’s a useful lead but guessing I’ll probably have to pull the data myself into excel.

The Narrative Pendulum sure swings fast nowadays as recession chatter is quickly becoming a dominant narrative. But as I wrote in a Note last week for our Collective, these fears are overblown for a number of reasons. One is the lack of financial imbalances.

GS writes “Consumption and investment booms are often associated with declining or negative financial balances — for example, the IT and CAPEX bubble in the late 1990s and the housing bubble in the mid-2000s. In both cases, the private sector was spending beyond its means, with consumption and investment unsustainably high relative to incomes.”

This is NOT the case today…

Here’s more from GS “Digging deeper into the riskier segments of the corporate sector, we find that highly levered firms are also in a strong financial position in the aggregate, with a financial surplus… Refinancing risk and vulnerability to higher interest rates is also low in the medium-term because most high-yield issuers already refinanced at favorable rates (only 4% of their bonds and loans mature in 2022-2023). h/t to @modestproposal1 for the charts.

SentimenTrader’s Dumb Money Confidence Indicator is hitting extremes. Following past readings, the market ends up an average of 6.36% 2-months later, 92% of the time. These are pretty good odds.

Now, a LOT can happen between now and then, and the dip down before the rip higher is likely to be a doozy. But since we’re not going into a recession, there will be a time to buy within the next few weeks. It’ll be when sentiment and the narrative are really bad.

The time to buy will be when you won’t want to, to paraphrase the OG Walter Deemer.

JPM published a great report on the global energy outlook the other week. Below are a few of the charts. US Oil & Gas companies are printing money and thanks to regulations, investor enforced discipline, and the echo of the last oil bust, they’ll continue to do so for the next few years to come.

I updated our bullish outlook on the energy space last month (link here). The sector has come a long way, outperforming by a wide mile this year. But we’re still in the early innings of this game and there’s still a looong ways to go.

Renewables aren’t showing the typical s-curve growth of adoption seen in other disruptive technologies. Perhaps that’s because this is the first time in human history where we’re trying to force a move backwards to a significantly lower power density source.

The pipedream of living in a purely renewable world will only become more and more apparent as all the tier 1 locations for wind and solar get built out and we see efficiency rates decline significantly as sub-tier 2 and below locales get built.

Some interesting data points in the sector flows from our Sector tab in our HUD. Was not expecting this but technology (XLK) fund flows hit their 100th 3-year percentile recently, while energy (XLE) hit the zero percentile. Quite a head-scratcher this is….

I’ve been periodically pointing this out but here I go again. Speculative positioning in crude remains very low and is showing no signs of reversing. It also looks like a full Western embargo on Russian oil is in the works, which is umm… not bearish (read this BBG piece here).

Yet Another Value Blog put out a good write-up on PRTY the other week (link here).

The TL;DR is that PRTY is a specialty retailer in an “un-amazonable” category that’s trading for cheap; PRTY did $266m in EBITDA last year and their current market cap is $344m. Another critical part of the bull and bear thesis is that PRTY has a very levered balance sheet, their EV is over 1.7B. Financial leverage is like nitrous oxide. It can accelerate a stock’s rerating or nose it straight into the ground.

I haven’t done any DD on them but plan to. We have a couple buddies who run retail-focused funds that are bulled up on the company. The chart is dog crap so don’t need to rush on this one as it’s hopefully headed lower in the near term.