Newsletter - 11/18/2023
Happy Thanksgiving!
I have a tremendous amount to be thankful for this year, and truly, you all are part of my list. Last year at this time I was getting ready to retire and didn't know what I was going to do that would be give me purpose in my professional life. And here we are today and I am more passionate about the markets and teaching and helping people than I can remember in my 30 years.
So thank you and have a safe and Happy Thanksgiving!
The Week in Review
The market continues to look for reasons to go higher. This always occurs near the end of a secular bull market. I probably sound like a broken record but I have seen this before and it doesn't end with happiness for all the investors who are jumping in right now. There is a law of diminishing return for hope to drive the market and large jumps due to arguably benign data is a classic tell of a market moving on fumes.
This week it was all about the CPI. CPI came in "lower" than expected by .1 - think about that. It came in lower than expected by .1%. Even though inflation is HIGHER than the Fed's target rate of 2%, which for the life of me I cannot understand why 2% or where 2% came from.
The huge datapoint that the market triggered off of was the CPI. And as I discussed in our Discord chat, when looking at why the CPI "beat" expectations, you have to drill down into the actual data.
Say what??? According to our government health insurance costs went down by 34%. Now, I don't know about you but mine certainly have not.
Google health insurance costs and any site shows that insurance premiums have been going up, not down.
Ok, so yeah the government lies. But this appears to be a lie of such magnitude that the fact the market went up based on it makes the move even more suspect. You are correct. This is what happens when markets are near their tops. They go up on bad news, up on good news, and up on fake news.
Now here's the STUNNER: not only are the health insurance numbers bullshit, the government was so intent upon making sure inflation showed it is "cooling" that they actuall changed how they calculate the number!
In the past, the Health Insurance category represented premiums. But the government announced months ago that they were changing how they calculated it.
Now, the number reflects "how much of the premiums that are paid (by you) that insurers RETAIN." Or in other words, it reflects PREMIUMS PAID - INSURERS COST. Or THEIR PROFIT.
Totally not making this up.
So not only is the number garbage, but its calculation has also been changed so that it would come in at what the Fed wanted.
In fact, here are some REAL inflation numbers from my friends at the Kobeissil Letter:
This is why WE feel like inflation is rising, IT IS, and the government is telling us its going down, ITS NOT. I could write a book on how the disconnect between the way people in DC live (in a bubble) directly affect policy mistakes because it is so disconnected from how you and I live.
The bottomline is that the market was looking for a reason to take stocks higher and the Fed obliged.
However, instead of keying off on data point because it happens to fit your thesis, I prefer to look at the sum of the data points. And there are a ton that are showing not only is the economy not doing well but it is in a recession.
Why does this matter? Because stocks go up on strong growth. At least they did before the GFC. The Fed has the same problem that people have: they have gotten used to cheap credit and are having a big problem learning to live without it. But it will happen and is happening and it WILL cause the markets to C R A S H.
When a market rallies on less and less data points, and when those data points are at odds with a larger group of data points that are saying the opposite, the top is near.
When Being "Right" Means Losing Money
Here's a mistake that many many investors make. They research, they calculate, the learn. Great!
And then they risk capital because their MACRO research tells them that X asset should be trading at Y price.
Also Great!
But then they lose money.
So they add more because they know they are correct - their due diligence
is sound and absent of calculation errors or bias. But still, their investments based on their thesis keeps going down. And so, being a human being, they add more. Because there is no doubt in their mind that the data analysis they did was correct. And they continue to lose more money.
Eventually, they will capitulate either by closing their investment at a huge loss or just by ignoring it all together.
And then it happens.
The investment asset starts to reflect their research. Because they WERE right. Their analysis WAS sound.
But they got something wrong - timing.
It is all about the timing.
I shared the following graphic last week but it bears repeating. Macro data WILL affect stock prices, or any related asset prices. But it takes time.
Macro is the baseline of valuation of what an asset is worth. Price is what the market believes it is worth on any given day. Price is almost never at the same level as macro.
There is always a "MAcro Potential" premium in stocks and assets. Or simply, price is an expectation of FUTURE VALUE.
As we have seen with ENVX and EOSE, sometimes investors get so excited about the expected future value that they make the following mistakes:
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They do not factor in time.
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They assume that their macro expectations will "just happen."
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They do not factor in the total macro picture.
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They do not factor in the total sector macro picture.
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They are unable to factor in any data that is in opposition to their basis because of their own bias and desire - they want to be right and they want to make money.
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They do not account for "Duration Risk" which is the amount of time their money is at risk and is losing.
I could go on and on about this but here's my point: I talk about a lot of macro but I do not trade off of it. Tell me the last time you heard me take a trade off of macro. I will use macro as a trend guide but no more.
If I could sum it up into a simple statement it would be this: macro takes time, an unknow amount of time, time equals risk, and I don't like risk. Therefore, while I am cognizant of macro, there is no way that I will trade off of it.
A Great Question from a Member
So I got the question above from a member and I thought it was excellent as it captures so much of how to trade the current market.
One correction is that the member corrected in chat "interest rates down" to "interest rates up."
Let me take a look at each point he posits and provide some thoughts.
1. "I really appreciate your perspective and level headed response." - Why thank you. But my goal is to always be fact based and that leads to being level headed I guess. I AM passionate about some things and some trades and make it very clear when I am (hatred for ANF) but I know that the path to probability is to leave bias at the door, as well as emotions, if you want to continuously profitable trade.
2. "Doesn't sound like you are too concerned with a blank (sic - black) swan event in this trade in the IMMEDIATE future?" - I am concerned but let's leave this question for last.
3. "This trade - bonds bought" - I think buying bonds here, depending on their duration, will eventually prove to be smart, after it proves to be dumb. The bond market distilled down to its simplest structure is the same as it is for all assets: supply and demand. Let's look at the two largest bond assets: US government and Corporate.
US Government Bonds:
It is my belief we are already in a recession. In a recession, bond values typically are less volatile and go up relative to stocks as investors move to "safety." However, each recession is different as this one is.
This recession is the result of monetary stimulus being pulled from the economy. Less liquidity means less dollars for credit which is what companies use to build growth. Less credit also means less money that you and I have to spend which means less consumption which for a consumption based economy is bad. Very bad.
The problem this time is that one of the reasons that people buy bonds is for the safety due to credit quality - the confidence of the issuer to pay your money back and the interest you will be due. But credit quality needs to be expanded to include the following:
If the issuer, the USG, is going to need to issue MORE bonds/debt than usual, then it will increase supply and therefore, there is the very real risk that such an increase will also make prospective buyers demand a higher yield/return for their investment.
If you own a bond that pays 5% interest and the USG increases the SUPPLY available, then your bonds will go down in value because it will take a higher interest rate to attract new buyers for the additional supply.
Corporate Bonds:
Corporate bonds are even more sensitive to the credit quality of the equation. Buying bonds in a company that is growing and does not have a lot of debt relative to its assets is the "sweet spot" so to speak.
But let's look at the state of corporate America. We have rising layoffs, we have falling demand, and we have inflation. All these things mean less profits which mean less money to pay out in dividends which means more risk. Now this is an overly simplified view but the fact of the matter remains that in a recession, Corporate Bonds are as risky as stocks because the ability of the company to maintain debt payments becomes constrained.
I said that buying bonds here will eventually prove to be smart after it proves to be dumb. Here's what I meant:
I think there is no way that the USG can keep interest rates down forever. Simply, they are going to have to issue more and more debt to fund the current debt interest payments and there is no appetite to cut any spending at the Federal level. As that supply continues to hit the market, investors are going to demand higher interest rates in order to be enticed to take on the risk.
Also, the largest buyers of debt have signaled that they are sellers: Japan and China, each for their own reasons. This reduces demand further.
Then there are the banks. Many people don't understand that those banks that are Primary Dealers with the USG MUST BUY any USG debt at auction that others do not. And banks are not exactly in the best shape either. True, they can borrow money from the USG to buy the USG debt (seems illogical no?) but even then, they have a limit of how much debt they can and will buy.
All of this adds up to lessening demand at exactly the same time the USG is increasing supply.
So initially, buying USG debt will prove to be dumb. Because as the USG is forced to offer higher rates to entice buyers, the principal values of the debt purchased now will go down.
But, after some time, when the Fed is forced to cut interest rates because they will be forced to stimulate the economy, because they will be forced to admit the US is in a recession, those bonds purchased today will go UP in value.
And a recession is bad for the stock market so bonds will provide a harbor from the storm.
Complete oversimplification but you get the idea.
I'M NOT BUYING USG BONDS BECAUSE I DON'T WANT TO BE EXPOSED TO INTEREST RATE RISK, AND CURRENCY RISK, AND DEFAULT RISK, AND ABOUT 100 OTHER RISKS.
I'M NOT BUYING CORPORATES BECAUSE I BELIEVE CORPORATIONS WILL DO WORSE NOT BETTER IN THE NEAR (1-2 YEARS) FUTURE.
I would look to buy those corporate bonds that are trading at a discount relative to the actual asset value of the issuer (remember the sine wave from above?) but that's way off in the future.
4. "Dollar down" - First, I don't trade currencies although I use currencies as a factor in my decisions. Second, I don't believe the "plan" is for the USD to go down. If the USD continues to go down, it will make USG debt cheaper, and USG debt cheaper means interest rates go up. Interest rates up means economy gets worse.
Allow me to put my tinfoil hat on. If the USG wants to fix their deficits, they need to either increase revenues or decrease debt. There is a super simple way the USG can wipe out their debt: make it worthless.
The US is the superpower because of the USD reserves status. I have spoken about this a lot.
The USG could make their debt worthless by letting interest rates rise, a lot, and then foreign holders would be deeply underwater. The USG then could offer to exchange all of that debt for . . . . . USD. Dominance increased.
In the short term, with the Japanese Central Bank (JCB) publicly stating they want the Yen to strengthen, the USG MUST defend the USD. And last I checked, the US is much larger than Japan, on any metric.
Because of the JCB plans, short term (months) I expect the US dollar to strengthen. Longer term, who knows.
IF I TRADED CURRENCIES I WOULD BE LONG THE DOLLAR.
5. "Interest rates up" - Interest rates are eventually headed down. Now, this could be cancelled if the US enters into a hyperinflationary environment. It is important to note that prior to the GFC, real rates averaged between 4.5 to 5% so what we are seeing now is a "readjustment" of expectations back to the baseline.
Interest rates are headed down because I believe the US is in the first innings of a recession. I have already provided data to support this so i won't go over them again.
The USG is going to have to stimulate the economy and one of the ways to do that is by lowering interest rates.
Another way is via stimulus and if the economy collapses, taking the market with it, then that is most definitely what the USG will use. And that will push interest rates even lower.
INTEREST RATES ARE GOING TO BE GOING DOWN. WE ALL TRADE INTEREST RATES VIA STOCKS, WHICH ARE INTEREST RATE SENSISTIVE. INTEREST RATES DOWN MEANS ECONOMY DOWN WHICH MEANS STOCKS DOWN. INTEREST RATES UP MEANS ECONOMY TOO STRONG WHICH MEANS STOCKS UP, BUT ONLY FOR AWHILE.
6. "Equities up" - As you know, I believe we are in the last gasps of this run. I have provided LOTS of reasons and data as to why the market is going higher and why I think ultimately, its going to C R A S H.
Remember that in September and October I was calling for a blow off top. I missed the timing. We are now set up for that move.
Referencing the sine wave above again, prices move to extremes before reversion starts. Furthermore, from the following charts its easy to see that the highs are so close that there is no way that they are not tested.
The high on the Nasdaq was 14446.55 on 7/19. It got as high as 14194.36 on 11/15.
The high the SPX was 4607.07 on 7/27. It got as high as 4541.25 on 9/1.
I fully expect these to be tested and taken out. Think of it this way: last week all that new money (CTA's, Hedges) flooded the market. Do you think they want to the market to go down before they can lock in their bonuses for the year? Do you think that the Fed wants the market to go down and risk negative year end headlines?
Neither do I.
I THINK THE MARKET GOES UP UNTIL JANUARY (THANKS TO @RGB FOR HELPING ME WORK THROUGH THIS) AND THEN I THINK IT WILL GET BAD.
7. Black Swans - This is what always messes up even the smartest analysis: the unknown. Instead of discussing the why and the how, let's just look at a simple list of Black Swans that are currently swimming around:
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CRE
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Banks - one item is that the Bank Term Funding Program is being tapped at a level higher than the GFC:
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Japan - How will they get and when? More importantly, will they fail? YES THEY WILL.
I mean, pick your poison but there is no way the markets avoid all of these and if all of them were to occur, then we get the 50% drawdown.
CLOSING: In closing, I hope I have answered @Bogey's questions. More importantly, I hope you can see how all of it is interrelated and why its important to be aware and on top of what's occurring in each of these markets. Finally, remember that most retail and professionals, never give the above any thought. They buy because others are buying and sell because others are selling. I prefer to be IN FRONT of all of them.
SEND ME MORE QUESTIONS AND I WOULD BE HAPPY TO DO A DEEP DIVE IN THE NEWSLETTER.
From Last Week
From last week, I said that I was going to get long the QQQs.
Well, I did, along with VIPs and in the span of 2 days, about 4 hours of market risk, we made 94%.
I will admit we got a but lucky with the ridiculous reaction to the CPI as I was getting long expecting a test of recent highs.
All based on chart reading coupled with experience and market tenor.
WEEKLY HOW WALLSTREET SCREWS YOU:
Those of you that own or have kept up on the AMC saga are aware of what the gripe is: firms are shorting the stock naked and have done so at a level that is beyond the actual float. They are shorting more shares then there actually exist.
How do they get away with this? Well, by Failing to Deliver. Failing to Deliver means that if they sell the stock (so they are short) and they do not deliver the stock at settlement (naked short). There are actually two different screw jobs going on: first, individual investors are not allowed to "naked short sell," only institutions are. The second screw job is what is going on right now with the SEC.
The SEC has not published the list of stocks, and amounts, that sellers have failed to deliver shares for. In fact, the SEC has actually published for the second half of October but not the first.
Now, I am not going to discuss why the SEC is doing this but I want to use this as example of the larger problem: by not publishing the Fail to Deliver list for the first half of October, the SEC is contributing to any abuses that took place AND is making price discovery impossible. Additionally, the firms that failed to deliver are being given special treatment that is outside of the law while individual investors have no idea which stocks are on the list and how many shares. Effectively, the SEC is aiding and abetting a crime.
This behavior will never change as long as individual investors remain in the dark and are kept unaware. BUT - this is something that most definitely professional advisors should be aware of and do have the responsibility to communicate to their clients. However, most advisors don't know and don't care. I saw it over and over again during my career.
And that's this weeks episode of How Wall Street Screws You.
UPCOMING WEEK:
This week I will be keeping an eye on:
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Really not much. I am expecting this week to be a quiet week and will be in and out of the room - and totally absent on Thursday and Friday.
- No newsletter next week either.
Paid Memberships:
WATCH YOUR EMAIL FOR A NEW MEMBERSHIP LEVEL AND FOR A SALE ON MEMBERSHIPS - COMING TO YOU THIS WEEK!
From this:
To this:
CLOSING COMMENTS:
As I finish this at 1am Saturday, there is news that a 5 day cease fire has been agreed to in Gaza. Truly sad that two warring parties can actually agree to stop killing one another with an actual end date. But I digress.
With this news, I fully expect the market to rally on Monday. Remember, the market is looking for any reason to rally into the end of the year. This news will help encourage the hopium and FOMO that is deeply embedded in the market right now.
But no matter what occurs this week, it will not change what I have been repeating over and over: there are significant and growing structural problems with the economy, the stock market, the bond market. It is only a matter of time.
Merch Store will be up THIS WEEK - no really, I mean it!
VIPs will be able to buy products at a huge discount!
Traders will get 20% off.
Free Members will get 10% off.
Stay Tuned!
Don't forget the Discord live chat is STILL FREE but it will be closing to new members soon. In fact, we have already started removing non-active members.
In the meantime, come and join us - its the best community out there: Discord.
Also, be sure to check out the new page for Daytrading on the website, run by the fine gents @BaconTurkeyClub and @Juggernaut. If you ever wanted to learn or just watch two pros daytrade live, they are at it every day here: DiscordFuturesChannel.
Finally, be sure to check out VampireTrades and his amazing penny stock trades.
Thankyou Family!
theBoss
Nothing above is investment advice nor should it be construed as investment advice. It is offerred for entertainment purposes only. Always consult your advisors before investing any money. Do not "follow" or "mirror" any trade ideas provided. Mr.NotAdvice is not a licensed or registered investment advisor. Do your own research.