Silver Is Going For Gold… [DIRTY DOZEN]

Tape Reading is rapid-fire horse sense. Its object is to determine whether stocks are being accumulated or distributed, marked up or down, or whether they are neglected by the large interests. The Tape Reader aims to make deductions from each succeeding transaction – every shift of the market kaleidoscope; to grasp a new situation, force it, lightning-like, through the weighing machine of the brain, and to reach a decision which can be acted upon with coolness and precision. It is gauging the momentary supply and demand in particular stocks and in the whole market, comparing the forces behind each and their relationship, each to the other and to all. ~ Anna Coulling, “A Complete Guide To Volume Price Analysis”

In this week’s Dirty Dozen [CHART PACK], we look at bear market breadth, German swap spreads breaching Lehman highs, indications of plunging forward EPS, and reasons to expect a change in the risk premium going forward. We then dive into demand for solar, a parallel play on that trend with highly asymmetric potential, plus more…

  1. This week’s summary of BofAML’s Flow Show (emphasis by me).

  1. Europe is at the mercy of the weather this winter. Let’s pray it’s a mild one… 

  1. @MacroCharts shared a good writeup last week where he gave his view on the path forward for equities. He and I seem to be in the same camp, that camp being that we’re in a cyclical bear with more downside ahead. Although, my short-term tactical view shifted bullish last week. You can find the piece here.

  1. The year-to-date selloff has been due to higher rates, not concerns over growth. Here’s MS (emphasis by me) “Our more pessimistic view on the S&P 500 index is based on analysis that indicates all of the 30% de-rating in the forward S&P 500 P/E that occurred from December to June was due to higher rates. We know this because the equity risk premium (ERP) was flat during this period.. Meanwhile, forward NTM EPS estimates for the S&P 500 have come down by only ~1.5% and P/Es are now ~8% higher. With rates now ~30bp below the June highs, the ERP has fallen once again, to just ~285bp. This makes little sense, particularly given the significant slowdown in earnings we think is still to come.”

  1. But we should expect the EPR to tighten, considering that earnings growth is headed for the floor over the next 12 months (chart via MS).  

  1. MS forecasts a significant decline in EPS, writing “the growth spread between our Non-PMI Leading Earnings Indicator and bottom-up consensus forward 12-month EPS growth has rarely been this low. We find it compelling that breaches of -15% in this spread have coincided almost perfectly with major tops in forward dollar EPS.” 

  1. The above gives good reason to be cautious longer-term. But in the near term, the path of least resistance is up (as long as yields don’t spike too quickly here). Our Trend Fragility indicator, a composite of sentiment and positioning data points, is in the sub 10%’tile of its 3yr average. These levels tend to lead to strong 0-3 month returns.

  1. The world is building a lot of solar… read the following from this BBG piece “The solar boom of the past two decades has left the world with a cumulative 971GW of panels. The polysilicon sector is now betting on hitting something like that level of installations every year. Generating electricity 20% of the time (a fairly typical figure for solar), 940GW of connected panels would be sufficient to supply about 5.8% of the world’s current electricity demand, and then another 5.8% next year, and the next. That would be equivalent to adding the generation of the world’s entire fleet of 438 nuclear power plants — every 20 months.”

  1. The solar ETF (TAN) has been on a nice run since the start of the year, breaking out from its 18-month consolidation.

  1. I’m not particularly interested in playing solar directly. But, it just so happens that silver is a major component in making photovoltaic cells. And if you’ve been reading our work for the past month, you know we’re quite bullish on gold and silver looking out over the next 2-3 years.

Read this great thread from @aschmidt2930 on silver’s developing fundamentals.

  1. @contrarian8888 points out that silver lease rates have gone vertical. This is going to feed into higher prices soon.

12. There’s a number of ways to play this. You can start building a position in the futures. Just understand that PMs will tend to sell off with equities in the first half of a cyclical bear market. So size accordingly. We’re also looking to add some DOTM calls on SIL and/or AG. You can read more on how we execute our DOTM strategy here.

Thanks for reading.

Stay frosty 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.


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.