Monday Dirty Dozen [CHART PACK]

While amateurs go broke by taking large losses, professionals go broke by taking small profits. The problem, in a nutshell, is that human nature does not operate to maximize gain but rather to maximize the chance of a gain. ~ William Eckhardt

In this week’s Dirty Dozen [CHART PACK] we look at BAD earnings revisions, COVID-19 temporal arcs, and normalization estimates, before diving into gold’s relationship to volatility, checking out historic levels being hit in the stock/bond ratio, and discussing the bull case for emerging market equities, plus more…

***click charts to enlarge***  

  1. Most anticipated earnings releases this week via @eWhispers: $NFLX $DAL $KO $INFY $HAL $LMT $ALLY $SNAP $T $DPZ $IBM $PM $INTC $LUV $CMG $BIIB $HCA $VZ $BOH $MTB $ONB $SAP $BMRC $CMA $PHG $AXP $ERIC $CBU $KMB $TFC $PLD $SYF $NEE $LII $NDAQ $LLY $SNA $LVS $TRV $LRCX $KALU $EMR $CIT $FITB

 

  1. Negative revisions to earnings have hit their lowest levels in history. The plus side is that they’ve steadied in recent days and a lot of bearishness is now baked into consensus (chart via Bloomberg).

 

  1. According to JP Morgan’s conceptual schematic chart of COVID-19 cases, the US along with much of Europe is nearing the peak and will hopefully follow in Korea and China’s footsteps.

 

  1. But according to Morgan Stanley’s lead Biotech analyst Matthew Harrison, it’s far too early to rejoice. Matthew writes:

“Investors should realize that this won’t be a “normal” re-opening. In COVID-19: A Prescription to Get the US Back to Work, we argue that only after we see (1) adequate surge capacity in hospitals, (2) broad public health infrastructure to support testing for disease surveillance, (3) robust contact tracing to curtail “hot spots” and (4) widespread availability of serology testing (blood tests to see who is already immune to the virus) can the US confidently return to work. We see this happening in waves starting in mid-summer. Unfortunately, we think there will still be a large number of workers not able to go back to work until a vaccine is abundantly available as social distancing cannot be fully relaxed until we have herd immunity (~60% of people vaccinated).”

 

  1. This chart from Bloomberg shows the 200-day moving average of the CBOE VIX (blue line) along with the performance of gold relative to SPX. Will higher volatility keep real yields pinned down and hence drive gold higher like it did in 08’?

 

  1. I wrote the longer-term bullish case for gold the other week which you can find here. Gold had a weak close on Friday though and there are decent odds it starts another period of extended volatile sideways-to-down chop again. There is crowded spec long positioning that needs to be shaken out. A close below the 1,650 level would nullify the inverted H&S pattern and put me back on the sidelines.

 

  1. According to Bloomberg, “U.S. stocks have gone through their biggest bout of weakness relative to Treasury securities in decades… The ratio started this month by closing at its lowest level since 1983 after tumbling 85% from a high in October 2018.”

 

  1. Invesco shared a similar chart along with the YoY% graph in a recent chart pack (link here). I’m of the opinion that we’re headed for some form of yield curve control here in the US, similar to Japan. The world has too much debt and can’t stomach high real rates. So maybe this ratio is less important in today’s world? Or maybe it’s not. Have to keep an open mind and if there’s one thing that can kill the long gold trade for good it’d be higher rates.

 

  1. EM stocks have only been this cheap relative to the SPX one other time and that was at the bottom of the 08’ market rout. You know what could cause some mean reversion here? Some big Chinese stimulus… It just so happens that aggregate financing hit a new YoY% high last month and excavator sales in the country — a sign of infrastructure building on the way — hit a new record high in March. This could also potentially cause rates to spike.

 

  1. This would be great timing since as @MacroCharts recently pointed out:

“Emerging Markets just suffered the most aggressive selling purge on record (like almost everything else).

Flows are starting to turn up again.

Similar inflections marked every Major bottoming phase in 20 years – and preceded ALL of EM’s biggest historic rallies.”

 

  1. And EM Asia EPS earnings forecasts relative to SPX EPS is inflecting higher. Do we see some catch up soon?

 

  1. Looking at US indices the odds favor some more gains over the very short-term. But… the SPX is about to run into a large supply overhang in the 3,000-3,100 level (red channel below). And a further push higher will likely drive put/call dma’s back into sell territory. The time to buy was two weeks ago. Not now.

Stay safe out there and keep your head on a swivel!

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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.