Rough Seas Ahead

***(The following is an excerpt from a recent note sent to MO Collective Members)***

Markets are about to hit some rough seas in the month(s) ahead. I’m not calling for a bear market or major crash but more expecting some choppy sideways/slightly lower action. We’re going to button down the hatches a bit (ie, reduce equity exposure). 

Here’s what I don’t like: 

  • Numerous measures of sentiment/positioning are now showing excessive bullishness and complacency
  • Our indicators suggest US GDP is about to roll over hard and that means lower earnings
  • Consensus earnings estimates for Q4 on are way too high considering
  • Market valuations are at levels that have acted as a brake on further gains in the past
  • I’m expecting earnings beats but bearish guidance this quarter

Starting with sentiment and positioning. 

Our Composite Sentiment/Positioning Index is back above the 50 level (red line) which marks excessive bullishness and complacency.

Sentiment Trader’s “Dumb Money Confidence” indicator is near cycle highs. Forward returns for stocks have been weak following similar readings in the past. 

Investors Intelligence Advisor Bullishness is near 60%. The market has dipped or traded sideways over the following month each time this indicator has crossed the 60% mark.

And then our Total Put/Call 10-day moving average indicator shows that investors are complacent and are not hedging their downside relative to their bullish bets. 

Now let’s look at economic growth. 

I’ve been talking about this one a lot, but our Philly Fed indicator suggests US GDP growth is headed for sub 2%.

The Atlanta Fed’s GDP Now Forecast is tracking just 1.6% growth. 

Our Business Conditions Diffusion Index points to the ISM entering contraction territory in the coming months. 

The Yardeni Boom-Bust Barometer, which is a composite fundamental indicator, is diverging from the uptrend in stocks. 

Service’s growth looks like it’s about to follow manufacturing’s lead and trend lower. 

Remember the Levy/Kalecki Profits Equation?  Net investment is what drives profits in an economy, which is why capex or non-residential private fixed investment is so important to both economic and earnings growth. This is why the following is no bueno.

The fiscal stimulus in the US is rolling off. What was once a tailwind is becoming a headwind. Growth in the US is now “catching down” with the rest of the world. This is bearish US equities, bullish bonds, bullish precious metals, and bearish the US dollar.

Considering this backdrop, earnings estimates following Q3 onwards are way too optimistic and the current Forward PE for the S&P 500 is too high at just under 18x next year’s earnings.

Consensus earnings estimates for this quarter are low so I’m expecting some easy beats. But we’re likely going to get decent beats coupled with bearish forward guidance and management commentary this quarter, commentary like the following from CSX Corp’s recent earnings release (excerpt via CNBC): 

“Both global and U.S. economic conditions have been unusual this year, to say the least, and have impacted our volumes. You see it every week in our reported carloads,” Chief Executive James Foote said on a conference call Tuesday after the earnings report. The present economic backdrop is one of the most puzzling I have experienced in my career

Mark Kenneth Wallace, executive vice president of CSX, said on the earnings call. “On the merchandise … there are signs of slowing economic conditions in both IDP and GDP for Q3 and Q4, pointing to a less robust economy in the second half.

“We’ve obviously seen evidence of this in our own business, and now see a softer industrial environment, with signs in our automotive, chemicals and metals segment,” Wallace said.

Brace yourselves for some higher volatility!

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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.


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.