The Generals Are About To Be Shot… [DIRTY DOZEN]

For those who ignore the energetic and material imperatives of our world, those who prefer mantras of green solutions to understanding how we have come to this point, the prescription is easy: just decarbonize—switch from burning fossil carbon to converting inexhaustible flows of renewable energies. The real wrench in the works: we are a fossil-fueled civilization whose technical and scientific advances, quality of life, and prosperity rest on the combustion of huge quantities of fossil carbon, and we cannot simply walk away from this critical determinant of our fortunes in a few decades, never mind years. ~ Vaclav Smil, “How The World Really Works”

In this week’s Dirty Dozen [CHART PACK], we look at sticky inflation dynamics and what this means for stock market multiples. We then discuss long-term breadth and liquidity indicators signaling a high probability this bear heads lower. And finally, we cover the Generals (MSFT, GOOGL, AMZN, AAPL, FB) and a leading indicator that shows why they’re about to get shot, plus more… 

Oh, and also, before I forget… A number of you have been asking about it, so we’ve decided to run an enrollment period for our Collective (link here for more info). We’ll be closing our doors on Sunday. If you’ve got any questions, don’t hesitate to shoot me a message.

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

  1. Stop talking about a Fed pivot. It’s not happening…

From BofA: “Inflation is Secular not Transitory: US freight railway workers 14% pay rise, US strategic oil supply down to 434mn barrels (lowest since 1984), Germany nationalizing utility sector, EU steel sector seeking govt aid, G7 price controls on energy prices, UK/EU fiscal policy panic approaching €750bn, G7 significantly raising military spending, geopolitical policy on Russia/Ukraine, China/Taiwan moving in bad directions…peace to war, globalization to nationalism, inequality to inclusion, budget balance to fiscal panic, invisible hand to visible fist…secular deflation to secular inflation.” 

  1. I’m pulling this chart from my weekend Market Prep note to Collective members. It’s busy, but here’s the main takeaway. 

Fed fund futures are pricing 4.3% by Spring. Inflation is coming down, but it will be a good while before it’s back to the Fed’s 2% mandated goal. There are a number of reasons (many listed above) to believe that we’re in a stickier inflation regime. In which case, the market will, by necessity, trade at lower average multiples, and this cyclical bear market will continue down over the coming months.

  1. This slide from our weekly Trifecta Chart Pack shows that longer-term measures of breadth are indicative of a cyclical bear market. We’d need to see a material improvement in these measures before turning more constructive on any timeframe longer than a few weeks. 

  1. And it’s the same with measures of liquidity/financial conditions. But these conditions won’t improve until the Fed shifts direction, which isn’t happening any time soon.

  1. MSFT has broken below its recent multi-month consolidation, as well as its larger decade-long parabolic trend, where the stock saw a 1,245% return over the last 10 years. 

The measured move target on this breakdown is $177 a share, or 27% below current prices. 

  1. The Generals get shot last in a bull market, and that’s what we’re seeing play out today. Net block order flows gave a good lead on the tops for the majors (I pointed this out back in early Spring). This indicator tracks net block money flows (trades greater than 10k shares.) Institutional selling has accelerated over the past month as the whales swim for the exits. 

  1. Surprisingly, NFLX is the only FANG original that has seen large buyers stepping in following its big selloff. 

  1. This has propped the stock up, making it the top performing FAANG stock over the past 3-months. 

  1. I could never in good conscious recommend NFLX as a buy, seeing as how their content makes the Lifetime network look like HBO back in the days of The Wire. But… its chart is constructive, showing strong relative outperformance against the market. And it’s quite cheap relative to its history. 

  1. PowerSchool Holdings (PWSC) is a beaten-down SAAS stock with strong relative performance across multiple timeframes. And the chart is currently forming the handle to a 6-month cup-n-handle pattern. 

Finviz, the company “provides cloud-based software to the K-12 education market. Its solution is embedded in school workflows and is used on daily basis by educators, students, administrators, and parents in schools and districts representing approximately 45 million students worldwide. Its cloud-based technology platform helps schools and districts manage state reporting and related compliance, special education, finance, human resource, talent, registration, attendance, funding, learning, instruction, grading, college and career readiness, assessments, and analytics.”

We will be digging into this name some more.

  1. YPF Sociedad Anonima (YPF:US ADR), an Argentinian energy producer, has gone on a tear over the past two months. Rising over 150% since late July after breaking out from a 30-month coiling wedge base. 

This name is one on my shortlist for names to dig into. I’ll be sharing what I find with members of the Collective soon. Shoot me a message if you have any info/thoughts on this one. 

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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.