Many investors are anxious about the market losses they may have experienced, many investors are anxious about buying at a perceived market bottom and are erroneously rushing back into the market.  We are neither.  We believe that we have just experienced the first quarter of what we anticipate being a year-long recession.  We have been in front of the selloff, and we are holding out for markets to mathematically and thematically signal a good re-entry point for our reserved cash.  Since the beginning of 2021 over $12 trillion in U.S. stock market value has vanished.

“On a lot of levels, it’s worse now than in 2008. If 2008 was about Wall Street collapsing on itself, on all its conflicts of interests and lies, this one is more about Main Street. Main Street is broke. Main Street is taking all this inflation into their cost of living. Main Street has the highest credit-card interest going back to the 1990s. It’s way worse than 2008 on that basis. If you’re trying to pay your bills with credit, it’s getting worse and worse. And then they’re going to lose their jobs. Labor collapsing is always the last thing to go down. We’re right on the cusp of the labor cycle going the wrong way.” – Hedgeye CEO Keith McCullough

Some highlights:

•       September was the worst month for the S&P 500 since March 2020

•       The S&P 500 was down -9.3% for the month; the Nasdaq was pummeled -10.5%

•       Year-to-date the S&P 500 is in crash territory down over -22%; the Nasdaq Index and Russell Small Cap Index are down ~-30%

Indexes & Indicators
Cumulative Total Returns YTD
S&P 500	-23.9%
DJIA	-19.7%
NASDAQ	-32.0%
Russell 2000	-25.1%
Foreign Stocks	-26.8%
Emerging Markets	-26.9%
Top 3 S&P Sectors
Energy	34.9%
Utilities	-6.5%
Consumer Staples	-11.8%
Bottom 3 S&P Sectors
Consumer Disc.	-39.0%
Communication Srv.	-31.4%
Info. Tech.	-29.9%
Bonds
10 Year Treasury	-16.9%
US Bonds	-14.6%
Global Bonds	-19.9%
Municipal Bonds	-12.1%
Market Indicators
Fed Funds Target	3.25%
Inflation (Core CPI)	6.3%
Unemployment	3.7%
GDP (6/30/2022)	-0.6%

Walmart’s seasonal employees went from 150,000 last year to 40,000 this year.  Snapchat laid off 20% of their workforce.  Currently the volatility indexes of the S&P, Nasdaq and Russell are all in the mid-30 range (anything over 30 is considered extremely treacherous).  Business travel has suffered, and leisure travel is starting to slow.  Currently the spread between the 2-10 year yield curve (a foreteller of market movement and sentiment) is inverted over 50BPs.  An inversion we haven’t seen since 1982.

Despite the embellished news reports, Europe’s peril is far worse than ours.  We would not be surprised if bad things were to come of Credit Suisse, one of the largest European banking institutions, as credit default swaps have widened to a meaningful 300bps. At this number, there is significant counterparty risk and lenders, and investment partners will be wary to lend the bank money.  We believe this recession is global.

Countries around the world have been raising interest rates and are all experiencing a massive slowdown.  Irish confidence dropped to the lowest point since 2008 and their inflation numbers are at a 40 year high.  Belgium confidence is the lowest since 1985 and the UK confidence is the lowest since its historical tracking.  German PPI is raging at an all-time high of 43% (Producer Pricing Index-Inflation measurement).  China, which is essential for commodities and luxury good purchases, there economy is slow despite their rate cuts and over 100 million citizens are still on lockdown. 

In our last newsletter we discussed the need to remain vigilant and not to fall for the market head fakes.  This is proving true in any metric you look at specifically based on market performance across all broad market indexes.  The Fed Reserve has raised rates, from 0% in the beginning of the year, to 2.50% currently, and with a target of 3.25%.  30-year fixed mortgage rates have gone from 3% to over 6% today.  Non-farm payrolls, unemployment and PPI are all reporting in the next 10 days.  We anticipate aggressive numbers will maintain the Feds course of drastically tightening money supply and raising rates. 

In our models we have sold our utility exposure, healthcare and consumer staples.  These were all great positions to hold in a slowdown but are currently not worth holding in high volatility market environments.  We have been fortunate to be ahead of the game and have taken advantage of the raising rate environment.  As such we continue to buy individual bonds and have seen a continuing opportunity in negotiable bank CDs.  Banks are desperate for cash and are issuing bonds at rates of almost 80bps over the treasury market. 

We continue to believe we are extremely well positioned for the markets ahead.  Please call or email any questions or concerns.  Lastly, we are lucky to have partnered with a seasoned, passionate, and comprehensive research partner, Hedgeye.  This research is provided by Keith McCullough and the entire Hedgeye team.  Thank you and we will talk soon. 

As we head into the fourth quarter of 2021, the domestic economic backdrop has vacillated between a strong reflationary trend and muted growth coupled with high inflation.  Quite a range we do admit.  Despite the feds pacifying depictions of transitory inflation, we have seen container shipping up over 300% year over year, home prices up 20% for the year and the 19 commodities on the CRB index are at all-time highs. We are seeing inflation broadening across multiple venues.  Wheat is up 30% and coal is up 35% for the past month alone.  Oil is at its highest level since 2014.  In turn, 7 of the 11 S&P 500 sectors are positive for the quarter and all 11 sectors are positive for the year.  The 10-year yield bottomed around 1% in February and has trended towards the positive from July thru September.  All the while the 10-year has moved from an early quarter 1.4% to 1.48% near quarter-end.  High yield spreads have widened slightly from 3.05 to 3.20 at the end of the quarter, and the steepening of the yield curve remains for the most part unchanged.  The bond market is a great foreteller of the economy and the equity markets.  Given the recent metrics and the unwavering of spreads during the recent bouts of episodic volatility, we maintain that we are still in a growth-oriented market.  Bitcoin is currently around $47,000/coin as the dollar fails to maintain strength and interest rates and inflation remain unabated.

Download the full Quarterly here!

During mid-3rd quarter, the 10-year depressed and with it came some concerns that the market was expressing a slow-down.  In response, we harvested some energy and industrials sector gains.  We used this cash to incrementally add gold and utilities as well as add to our existing REIT exposure.  Shortly after, bull market trends became clearer and our stagnant market fears quickly dissipated.  We exited those positions in order to increase our energy, real estate investment trust (over weighted in public storage and apartment rentals) and commodity exposures.  We do anticipate adding gold and utilities again and with significant weights.  However, timing is very important.  Gold needs more than inflation to appreciate.  Specifically, it doesn’t like rising interest rates like we are seeing with an increasing 10-year treasury.  Utilities usually perform well during depressed growth and moderate inflationary environments.  We anticipate adding those positions sometime 2nd quarter of 2022. 

As we speak, the longest shipping regatta in history is waiting to set sail in Long Beach California.  Currently there are 60 ships backed up in the West Coast harbor.  This is a good illustration of increased demand and continued supply chain bottlenecks.  We think that these supply chain issues will continue thru the beginning of next year and help to maintain upward pressure on inflation, CPI (Consumer Pricing Index) and PPI (Producer Pricing Index).

Please remember we are not in the game of timing the markets, but we can adjust and look to ride the areas where the volatility is manageable and the opportunities for growth seem best positioned.  To time the market, would require us to be precisely correct when to sell and it would also require us to be precisely correct when to buy.  Rarely are both done with precision.  Portfolio rebalancing and reallocating our gains to opportunities that haven’t appreciated is the most efficient way to protect the portfolio.   We look forward to discussing more with you at our next meeting or over the phone when it is convenient for you.  And with that, we are going to get back at it.  Cheers to another strong quarter.