Inside Thursday, Semiconductor Mania and The Financials

January 15, 2021 at 4:53 am  ·  Category: Interest Rates, Market Commentary, Stocks, Technical Analysis

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What happened yesterday was very interesting and captured beautifully in a tweet and chart by Yuriy Matso: “Everyone is selling their large cap tech stocks in order to buy more small cap stocks” (Tweet and Chart Source: Yuriy Matso Twitter, January 14, 2:21 pm PST).

As you can see, the Russell 2000 gained strength all day long as the Nasdaq lost it with the former finishing +2.05% and the latter -0.12%.

The NASDAQ is dominated by the Big 6 (AAPL AMZN MSFT GOOG GOOGL TSLA FB) and, as you can see in this chart from Gregory Krupinsky, at least the biggest 4 of the 6 are currently stuck in sand (Chart Source: Gregory Krupinsky Twitter, January 13, 4:04pm PST).

Krupinsky writes: “These have not been very exciting lately but look out if these get going”. An alternative interpretation is that these have been the leaders and are topping out first as bull market tops are a process (for an excellent extended and historically informed discussion see Paul Desmond, “An Exploration of the Nature of Bull Market Tops”, Lowry’s) whereas bottoms are an event. Only the price action will confirm which interpretation is correct.

In my next life I want to come back as a semiconductor – Ryan Detrick Twitter, January 14, 7:12am PST

One sector that is not stuck is semiconductors. The semiconductors are frequently played through their two major ETFs, SOXX and SMH, which were +2.12% and +2.49%, respectively, yesterday. And it wasn’t just yesterday. 2kaykim beautifully captured the SMH’s incredible move off the March lows (Chart Source: 2kaykim Twitter, January 14, 9:39am PST).

Taiwan Semiconductor (TSM) at 14% and Nvidia (NVDA) at 6% are the two largest components of the SMH and trading at 37x and 60x Trailing 12 Month EPS, respectively.

In addition, as you can see, the chart is starting to go parabolic and looks to me like a potential blow off top a la TSLA and Bitcoin (“When The Chart Goes Parabolic It’s Time To Sell”, Top Gun Financial, January 8).

Semiconductors are off to their best start to a year since 2003. This trend is closer to the end than the beginning IMO (Chart Source; BeSpoke Twitter, January 14, 8:20am PST).

Lastly, I’d like to say a word about the financials. The spread between the 10 year and 2 year treasury continues to grow boosting banks’ Net Interest Margin and the stocks have responded (Chart Source: Liz Ann Sonders Twitter, January 14, 4:11am PST; Chart Source: 2kaykim Twitter, January 12, 9:52am PST).

(Note: 2kaykim’s chart is from Tuesday intraday but is still relevant as the XLF closed Thursday at $31.46).

We will learn more this morning as JPM just reported (4am PST) and WFC & C will report in 40 minutes (5am PST). Note that yields only started to really move up this year, with the 10 Year Treasury yield up 21 basis points in the first 9 trading days of the year so this won’t start impacting bank earnings until this quarter. That was evident in JPM’s report in which its Interest Rate Spread was 1.74% compared to 1.75% in 3Q20.

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“I will buy The Hamptons”: TSLA, Bitcoin, Call Options, Microcap and Penny Stocks

January 14, 2021 at 4:34 am  ·  Category: Bitcoin, Fundamental Analysis, Sentiment Analysis, Technical Analysis, TSLA

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When the capital development of a country is subject to the whims of a casino the job is likely to be ill done – Keynes, The General Theory

There’s no other way to put it: The stock market has become worse than a casino. I’d rather take my money and play poker than invest in some of things investors are piling into. I know my expected return is much higher.

Let’s start with The Everything Bubble’s poster boy stock: Tesla (TSLA). At Wednesay’s close of $854.41, TSLA had a market cap just shy of $950 billion. That gives it a trailing P/E of 465x – and it’s worse than that. TSLA makes a lot of its money by selling Automotive Regulatory Credits, not cars. If you exclude the money they make from selling those credits to other car manufacturers and just include the money they make selling cars to consumers, the trailing P/E is 951x. That means TSLA would have to grow its earnings from selling cars by 10x just to have a 95x trailing P/E – which would still be high!

Another way of looking at TSLA’s insane valuation is to take its market cap and divide it by the number of cars it sold in 2020 (~500k). Doing so gives the you the value investors are placing on each car TSLA sold. That number is currently just shy of $1.9 million! Obviously, it doesn’t make sense to value a company that sells a product with an average selling price below $100k at almost $2 million per unit. Nobody ever said the stock market had to make sense though.

What’s crazy is that TSLA is starting to look like one of the better speculative investments in this market as investors move into more and more speculative corners of the market.

I’ve talked a lot about Bitcoin so I’ll keep this brief. Bitcoin recently pierced $40k and is currently around $38k and I don’t think most people, even those investing in it, have the slightest clue what exactly it is. I’m not 100% sure but this could very well be a contemporary version of Tulip Mania.

As if buying stock at these prices weren’t speculative enough, investors are piling into call options like never before. Over the last 5 days, an average of 27 million call contracts have traded hands, an all time record, according to Sentimentrader (Chart Source: Sentimentrader, “More than 1 trillion served”, January 13).

Investors are also venturing into Microcap and Penny Stocks. The Russell Microcap Index is 40% above its 200 DMA! In their tweet accompanying the following chart, Strategas wrote “This earned a ‘wow’ from us” (Chart Source: Strategas Twitter, January 13, 6:08am PST).

Microcaps have a market cap between $50 million and $300 million and are still generally risky but legitimate companies. Penny stocks are a whole different story. You really have no idea what you’re buying here in most cases as it’s hard to even get reliable information about most penny stocks. Nevertheless, investors are piling in with more than 1 trillion shares of penny stocks trading hands in December, according to Sentimentrader (Chart Source: Sentimentrader Twitter, January 13, 6:47am).

What’s disappointing is that many professional investors managing tens of billions of dollars are buying into this madness. For example, Cathie Wood and Ron Baron are two examples of Uber TSLA bulls.

It’s more understandable for a fraud like Chamath Palihapitiya to call for TSLA to “double and triple again” from these levels and for Bitcoin to hit $150k. This tweet from Chamath is one of the most hilarious things I have come across in my life:

When $BTC gets to $150k, I will buy The Hamptons and convert it to sleepaway camps for kids, working farms and low cost housing (Chamath Palihapitiya Twitter, December 30, 2020, 7:38am).

You can’t make this stuff up!

Last come The Kiddie Technicians like JC Parets, Ian McMillan, Aaron Jackson and Patrick Dunuwila who believe, based on the price action, that we are at the very start of a global mega bull market. You can’t really do more than chuckle as they are just children.

If Keynes, who has some of the greatest quotes on economics and investing ever, thought the Roaring 1920s stock market was a casino, I would love to hear how he would have characterized what’s taking place right now.

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Financials On Fire, Investors Pile Into Penny Stocks, Put/Call Ratio Continues Lower

January 13, 2021 at 3:34 am  ·  Category: Everything Bubble, Interest Rates, Sentiment Analysis, Technical Analysis, Twitter

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The financials are catching fire as growing belief in the recovery decreases concern about their loan portfolios and rising interest rates increase their net interest margin . The S&P Financials are up more than 32% since November, according to Bloomberg’s Lisa Abramowicz, and are breaking out to new bull market highs (Chart Source: Lisa Abramowicz Twitter, January 12, 11:37am PST; Chart Source: 2kaykim Twitter, January 12, 9:52am PST).

We’ll learn more Friday when JPM WFC & C report 4Q earnings.

While the Financials are in the spotlight right now, just about everything is ripping with 92% of S&P components above their 200 DMA. As you can see, however, returns 5 days, 1 month and 3 months out are below average when the market is this strong (Chart Source: Daniel Lacalle Twitter, January 12, 10:26am PST).

The market is so frothy, in fact, that investors are now wading into the lowest priced stocks which have done the best so far in 2021 through Monday (Chart Source: MacroCharts Twitter, January 13, 12:00am PST).

This as the Equity Put/Call ratio plumbs new lows (Chart Source: Andrew O’Connell Twitter, January 12, 4:35pm PST).

I thought we’d reached the point of maximum optimism at the beginning of December but things continue to get frothier and frothier. We all know how this movie ends.

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Investors Have Never Been More Euphoric, TSLA & Bitcoin, Emerging Markets Breaking Out, ACI Earnings Preview

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[Permabears] are terrible people – JC Parets, “Financials Are Emerging Leaders”, January 10, 2021

According to the Citi Panic/Euphoria Model, investors have never been more euphoric than they are now (Chart Source: Sentimentrader, “Moving beyond optimism to euphoria”, January 11, 2021).

It’s gotten to the point where, from the bulls perspective, being bearish not only makes you wrong but a “terrible person”!

On Friday morning, I wrote “When The Chart Goes Parabolic It’s Time To Sell” in reference to Bitcoin and TSLA. To me, these two are the ones to watch as a gauge of investor risk appetite. If they start to crash, that could well be the canary in the coal mine for financial markets. Turns out my timing was pretty good as both have done poorly since Friday morning.

Here’s an excellent chart of Bitcoin’s Sunday from Market Wizard Linda Radschke (Chart Source: Linda Radschke Twitter, January 11, 6:20am PST).

Only time will tell, but that really looks like the beginning of the crash phase in the generic blow off top chart I posted in Friday morning’s blog.

TSLA also had a bad day Monday, down 7.82% on 1 1/3x average volume.

While a bounce in each of these assets wouldn’t be a surprise, renewed selling would be a sign for me that the music may be stopping.

Nevertheless, the technicians remained all bulled up turning their focus to Emerging Markets now. Both Willie Delwiche and JC Parets recently pointed out the breakout in EEM, the leading emerging markets ETF (Chart Source: Willie Delwiche Twitter, January 11, 2021; Charts Source: JC Parets, “New Bullish Themes Are Emerging”, January 10, 2021).

The three charts show the same thing: EEM breaking out from its 2007 highs and relative to the S&P. So let’s keep an eye on EEM as well to see if it continues to move higher or if this is a “false breakout”. Parets points out that China now makes up 41.44% of the EEM.

4Q20 Earnings Season gets kicked off in earnest Friday with JPM WFC & C but Albertson’s (ACI, market cap $10 billion), the nation’s 2nd leading grocery chain reports later this morning. As Top Gun has a position in Kroger (KR), the leading grocery chain in the country, I’m interested to see how ACI is doing for the light it could shed on KR.

Both ACI and KR are “Pandemic Beneficiaries” as restaurants were closed or restricted to takeout for much of 2020 leaving consumers with no choice but to prepare their own food. This can be seen in ACI’s most recently completed quarter, ended September 12, 2020, when their Identical Store Sales Growth was 13.8% resulting in an increase in Adjusted EPS to 60 cents from 17 cents a year ago (Source: Albertson’s FY2Q Earnings Report). While the vaccine and reopening later this year will put some pressure on grocery stores, both of these stocks offer excellent value IMO. They will also benefit if the bubble pops, pushing the economy into recession or worse.

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This Will End In Tears

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(Table Source: Jeroen Blokland Twitter, January 7, 11:20pm

Emotionally, it was a bruising week. Rioters stormed the Capitol Building and disrupted the certification of the US presidential results. The Democrats won the two Senate seats up for grabs in Georgia. Friday’s payrolls report showed that the US shed 140,000 jobs in December…. All three could have – should have – caused the stock market to drop – Ben Levisohn, “The Stock Market Had a Fantastic Week. Now It Needs to Drop”, Barron’s, The Trader Column, Saturday January 9 [SUBCRIPTION REQUIRED]

Despite Democrats taking control of the Senate giving them complete control of Washington, a riot at the Capitol egged on by the current President and a bad jobs report, the stock market had a terrific first week of 2021 (S&P +1.8%, Nasdaq +2.4% and Russell +5.9%).

TSLA surged 25% on the week adding almost $200 billion in market cap and brining it to within spitting distance of a $1 trillion valuation. Blokland’s chart above was as of Thursday and so doesn’t take account of TSLA’s +7.84% on almost 2x average volume Friday which likely pushed Elon Musk’s net worth over $200 billion.

In a tweet accompanying the TSLA chart below, Walter Deemer quoted Bob Farrell: “Parabolic advances usually carry further than you think, but they do not correct by going sideways”. (Chart Source: Walter Deemer Twitter, January 8, 7:44am PST).

The other leading poster boy for the mania currently raging through financial markets is Bitcoin which surged through $40k last week (Chart Source: Arun Chopra Twitter, January 7, 8:31am PST).

But the speculation is not limited to these two assets. In fact, it’s almost anywhere you look. For example, shares of Baidu (BIDU) are up 81% in 7 weeks, including a +15.57% move Friday on almost 4x average volume. Why? Speculation that they will enter the electric vehicle (EV) market (“EV Dreams Power Baidu but May Not Last”, Jacky Wong, WSJ, January 8 [SUBSCRIPTION REQUIRED]).

Meanwhile, in the real world, it was a bad week for America. The Democratic wins in the Georgia Senate runoff races give them total control of Washington. That means an increased likelihood of higher capital gains and corporate income taxes, increased spending on things like clean energy, a push towards socialized medicine and increased regulation of business.

If that wasn’t bad enough, our current President egged on a mob who subsequently rioted at the Capitol, likely destroying his legacy and political future in the process (see Kim Strassel, “Trump Erases His Legacy”, WSJ, January 8).

Caught in its own manic reverie, Wall Street ignored both of these political developments in addition to a bad Jobs Report Friday that showed a loss of 140,000 jobs in December as COVID surged throughout the country.

Lastly, interest rates exploded higher in the wake of the Georgia Senate runoff elections with the 10 Year Treasury Yield closing the week at 1.105%. This is because investors expect bigger deficits from a Democrat controlled government. Yields are still very low but moving higher quickly. This is not a bullish development for our highly indebted economy as increasing debt service costs will squeeze governments, businesses and households (Chart Source: Michael Kahn Twitter, January 8, 1:03pm PST).

Accompanying Instagram Market Commentary

Note: This will likely serve as Monday’s morning market blog.

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When The Chart Goes Parabolic It’s Time To Sell

January 8, 2021 at 2:01 am  ·  Category: Ayn Rand, Bitcoin, Everything Bubble, Instagram, Technical Analysis, TSLA, Twitter

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Sometimes luck plays such a big role in an individual’s success that the average person can’t help but mistake it for skill. Chamath Palihapitiya is that guy for the bull market starting in 2009. Starting as one of the first Facebook employees to investing in TSLA and Bitcoin, Chamath understands nothing, has been rewarded for his ignorance with billions and sees himself as a financial genius whose self image has been embraced by the media. In reality, he is the perfect prototype for an Ayn Rand villian, a complete second hander who sees himself as a brilliant financial mind, Peter Keating with the self image of Francisco D’anconia.

When $BTC gets to $150k, I will buy the Hanptons and convert it to sleepaway camps for kids, working farms and low cost housing – Chamath Palihapitiya Twitter, December 30, 2020, 7:38am PST

Bitcoin may well hit $150k in this insane market but, if it does, it will only go down in history as a contemporary example of Tulip Mania. Bitcoin has now gone from $10k to $40k in 90 days. What justifies that move? Nothing. What’s its cause? Pure speculation. When the chart goes parabolic it’s time to sell. I’m not calling a top. I’m saying we are close and when it does top, it will crash (Chart Source: Arun Chopra Twitter, January 7, 8:31am PST).

The big disruption that’s coming is to power utilities. There are trillions of dollars of bonds, of capex and of value sitting inside the energy generation infrastructure of the world that’s going to go upside down. And when that goes pear-shaped, Tesla will double and triple again – Chamath Palihapitiya, CNBC’s Fast Money Halftime, Thursday January 7 (quoted in “Chamath Palihapitiya says there’s a big disruption coming that will cause Tesla to double again”, CNBC.com, January 7, 2021 [SUBSCRIPTION REQUIRED]

While I have no idea what going “pear-shaped” means, if TSLA does double and triple again, like Bitcoin, it will have nothing to do with fundamentals and everything to do with pure speculation. I’ve made the case against TSLA many times so I won’t repeat myself here except briefly. TSLA closed yesterday at $816.04 giving it market cap of ~$900 billion. In 2020, they delivered ~500k cars. If you do the math, the market is now valuing TSLA at $1.8 million per delivered car in 2020.

Bitcoin and TSLA are the best examples of the manic speculation currently taking place in financial markets but the Russell 2000 itself isn’t far behind. Now having more than doubled in less than 10 months, it is more than 35% above its 200 DMA – the most since at least 1980 (Chart Source: Liz Ann Sonders Twitter, January 7, 4:10am PST).

As they say folks: You can’t make this stuff up! Real life is indeed stranger than fiction.

Accompanying Premarket Instagram Commentary

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The Great Disconnect Grows: Dems Control Senate, Trump Supporters Protest, Russell ATHs, Bitcoin $37k and TSLA $756, Extreme Speculative Behavior and Bubble Valuations

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It was quite a day for our country yesterday. Let’s start with the Democrats surprise wins in both Georgia Senate runoffs to take control of the Senate. The Democrats now control the Presidency, House and the Senate opening the door for President Elect Biden to push through his program of higher capital gains and corporate income taxes, increased spending on clean energy, socialized medicine and increased business regulation. This is not a business friendly political program.

In Washington D.C., Trump supporters protested the election by storming the Capitol embracing violence and chaos in the same way as the BLM movement last year. The social fabric is fraying.

However, the stock market couldn’t care less as the Russell surged 3.98% to an All Time High of 2,058, Bitcoin broke through $37k and TSLA also hit an All Time High of $756. NYSE + NASDAQ volume was enormous at 13.773 billion shares. The 10 year Treasury yield also exceeded 1% for the first time since March.

The single most dependable feature of the late stages of the great bubbles has been really crazy investor behavior, especially on the part of individuals – Jeremy Grantham, “Waiting for the Last Dance”, January 5

As noted yesterday, individual investors are indeed acting “really crazy” as they made up 54% of the premium spent on calls at the end of last week compared to 28% for professionals.

Correlated with this extreme speculative behavior are bubble valuations. With a P/E of 43x, the NASDAQ is now approaching the heights seen at the peak of the Dot Com Bubble (Chart Source: Daniel Lacalle Twitter, January 6, 12:59am PST).

In sum, the disconnect between stock prices and reality continued to grow yesterday.

Accompanying Premarket Instagram Commentary

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Please Shoot Me On The Midnight Train To Georgia: Adventures In The Bubble

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I just woke up to the NASDAQ Futures being -2% as Democrat control of the Senate becomes a real possibility with one of the two Georgia Senate seat runoffs being called for Democrats and the other too close to call. A Democratic sweep would mean Democratic control of the Presidency, House and Senate and hence the ability to push through their agenda, including higher capital gains and corporate income taxes as well as more clean energy mandates and regulations of business in general. Apparently, investors think stocks on the NASDAQ have the most to lose.

The long, long bull market since 2009 has finally matured into a fully-fledged epic bubble. Featuring extreme overvaluation, explosive price increases, frenzied issuance, and hysterically speculative investor behavior, I believe this event will be recorded as one of the great bubble of financial history, right along with the South Sea Bubble, 1929, and 2000 – Jeremy Grantham, “Waiting For The Last Dance”, GMO, January 5, 2021

Yesterday, legendary investor Jeremy Grantham doubled down on his bubble call saying that he didn’t see the bubble lasting beyond late Spring or early Summer, “coinciding with the broad rollout of the COVID vaccine”. According to Grantham, there are many aspects of the current market that suggest to him that it is an epic bubble but “the single most dependable feature of the late stages of the great bubbles has been really crazy investor behavior, especially on the part of individuals”. This is the moment, Grantham also wrote, when professional investors show their true mettle and careers will be made and broken.

And, yes, individual investors are acting absolutely insane. According to Sentimentrader, even more so than in 2000, individual investors are buying calls like mad. To end last week, 54% of call premium, the amount of money spent to buy calls, was being spent by investors buying less than 10 contracts i.e. individual investors compared to 28% for those buying more than 50 contracts i.e. professional investors. While not as extreme as late August/early September, this exceeds what we saw in 2000 when individual investors were tripping over themselves to buy calls on the latest Dot Com name and bragging at cocktail parties about how much money they were making (TSLA, anyone?)(“No letup in leverage”, Sentimentrader, January 5, 2021).

Speaking of TSLA, Morgan Stanley’s Adam Jonas raised hit Price Target (PT) yesterday afternoon from $540 to $810 sending TSLA shares up almost 2% to ~$750 in the after hours. At $750, TSLA would have a market cap of ~$830 billion or $1.66 million per car sold in 2020 (“Tesla 4Q 2020 Vehicle Production and Deliveries”, Press Release, January 2, 2021).

Meanwhile, JP Morgan said on Monday that Bitcoin could hit $146k as it “crowds out” gold as the preferred hedge against declines in fiat currencies (“JP Morgan Says Bitcoin Could Surge to $146,000 in Long Term”, Bloomberg, Jan 4, 2021).

The Russell 2000 was recently more than 30% above its 200 DMA – the most in the last 20 years. Since the only other two times in the relevant period the index was more than 25% above its 200 DMA were 2003 and 2009, Krupinski and The Chart Report’s Patrick Dunuwila take this as another piece of evidence that we are actually at the beginning of a new bull market (Chart Source: Gregory Krupinski Twitter, January 4, 2021, 5:04pm).

Further reason not to worry is The Irrelevant Investor Michael Batnick’s “refutation” of Grantham. Ignoring all other valuation metrics to focus on Free Cash Flow Yield, Batnick suggests that stocks are “not cheap, but really not close to expensive”. Batnick concludes: “I will go on record that I don’t think this is anywhere near like 1999 or 1929. Are there pockets of excess? Absolutely, I’m not blind. But a 70% decline in the major averages? Sorry, I don’t see it” (“One Of The Great Bubbles Of Financial History”, Michael Batnick, The Irrelevant Investor, January 5, 2021).

I’m sorry you don’t see it either, Michael, because it is so obvious and therefore reveals your caliber as an investor. I applaud your moxie for taking on Grantham but really it’s foolhardiness. This reminds me of all the self proclaimed “Kobe Stoppers” during the great basketball player’s career. That never really worked out too well for them. Mediocrities shouldn’t try to take on legends.

The one positive development I see is that the odds of getting shot during this madness are rising rapidly as Americans bought guns at a rate never seen before in 2020 (Chart Source: “Stocking Up The Gun Safes”, BeSpoke, January 4, 2021).

This has been a boon for the gun manufacturers Smith & Wesson (SWBI) and Sturm, Ruger (RGR) who saw their sales rise 119% and 53% in their most recent quarters, respectively.

If you can keep your head when all about you   
    Are losing theirs and blaming it on you,   
If you can trust yourself when all men doubt you,
    But make allowance for their doubting too;   
If you can wait and not be tired by waiting,
    Or being lied about, don’t deal in lies,
Or being hated, don’t give way to hating.
    And yet don’t look too good, nor talk too wise.

“If”, Rudyard Kipling

Keep your heads folks – and keep them on a swivel too!

Accompanying Premarket Instagram Commentary

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Monday’s Action; Gold, Bitcoin and The Crashing Dollar

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Good Morning ladies and gentlemen and welcome to 2021! Monday was an exciting day and not what the bulls had in mind. After opening up, the markets sold off hard before a late day rally. The S&P was -1.48% on the day while the NASDAQ and Russell were -1.47%. Volume in the major index ETFs (SPY, QQQ, IWM) as well on the NYSE and NASDAQ on a whole was significantly higher than average.

Does it mean anything? Nobody knows. The legendary short term trader Scott Redler put it this way in an annotated chart of the S&P he posted to Twitter at 12:05pm PST: “It’s hard to tell if “THAT” was the shakeout. Or is this a Day #1 down that leads to more of a corrective phase. Usually the day or so after tells the real story. I don’t take on more risk into a a Day #1 down, just in case there’s #2, #3, #4 thereafter. I’d rather see some market discovery with less risk” (Chart and Quote Source: Scott Redler Twitter, Monday January 4, 2021, 12:05pm PST).

The last thing I want to say about Monday is that the S&P closed right on its 21 DMA – which it hasn’t closed below since Tuesday November 3 (pre-vaccine). Bulls will want to see that level hold.

Moving on, I want to discuss the crashing dollar and how to play it. The dollar index is currently at 89.81 – just above major support from early 2018 (Chart Source: Aksel Kibar Twitter, Monday January 4, 8:17am PST).

If that level doesn’t hold, we could have a certified dollar crisis on our hands with little support until the 2008 lows in the low 70s. Obviously, the cause of this is the extremely loose monetary policies of The Federal Reserve. While other major central banks are creating tremendous amounts of money, they are not creating as much as the Fed, in a race to the bottom among fiat currencies.

Investors are playing this in one of two ways: Gold and Bitcoin. In a lot of ways, it’s a generational thing. The old timers like me (I’m 43!) like gold because of its proven history while the Millenials like Bitcoin because of its volatility and their belief that digital currency is the way of the future.

For whatever reason, investors piled into gold and the gold miners on Monday, sending shares of the major gold miner ETFs, GDX and GDXJ, up ~7% on more than 2x average volume. GDX is now poking its head above a 5 month downtrend (Chart Source: Greg Rieben Twitter, Monday January 4, 2021, 6:37am PST).

Historically, the other safe haven asset besides gold was US treasuries. However, investors are preferring gold over Treasuries, correctly IMO, because of concerns about the dollar and inflation, I believe (Chart Source: Rafael Marulanda Twitter, Monday January 4, 2021, 11:57am PST).

Nevertheless, the Millenials are quick to remind you, Bitcoin is far outperforming gold (Chart Source: Aaron Jackson, “21 Charts for 2021”, January 3, 2021).

Here’s the Millenial Jackson on Bitcoin: “Bitcoin’s breakout heard round the world could just head to 100K. The size of the base suggests 125K isn’t out of the question. It’s not going to happen overnight or in a straight line, but the action couldn’t be much better”.

I prefer gold because it’s proven but there’s no reason you can’t split your positioning in this part of your portfolio between gold, Bitcoin (and silver as well). They’re all aimed at doing the same thing: protecting you from the race to the bottom among fiat currencies.

Because of my view that we are in a massive bubble, Top Gun is defensively positioned which worked perfectly yesterday. Our largest positions, GDX and GDXJ, were up ~7% each as mentioned earlier and our three defensive stocks were up 3.18%, 2.36% and 1.16%, respectively – not bad considering the market’s overall performance. Top Gun was +2.81% on the day despite being almost 50% cash.

Accompanying Premarket Instagram Commentary

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Economic Growth, QE Infinity and The Great Disconnect

December 31, 2020 at 4:06 am  ·  Category: Ayn Rand, Books, Economics, Everything Bubble, Federal Reserve, Instagram

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2020 represents the complete triumph of liquidity over fundamentals – Matt King, Citigroup, 2021 Outlook

There’s not a lot to say about the market today so I’m going to step back and explain the cause of economic growth, why that’s not what’s driven financial markets in 2020 and how that has resulted in what Jeremy Grantham has characterized as “The Great Disconnect”.

Economic growth is caused by an increase in productivity. That is, for some reason, the economy is able to get more output per unit of labor. The causes of this are increased capital intensity, innovation, a better educated workforce, etc… For example, increased capital intensity means workers are working with more and better capital which allows them to get more done per unit of labor.

Innovation, new inventions or new ways of doing things, also increases productivity. Think about the personal computer and how much that has increased our productivity. One of my favorite fictional examples comes from Ayn Rand’s “Atlas Shrugged”. Two of the heroes, Hank Reardon and Dagny Taggart, are exploring an abandoned motor factory when they stumble across a motor that can make energy from atmospheric electricity. Imagine what this would do to economic production. All of a sudden manufacturing firms that use a lot of energy in production wouldn’t have to spend all that money on energy. They’d just have to invest in the motor and their costs would drop significantly. This would fatten their margins, allowing them to reinvest in the business by buying new capital equipment or hiring more workers. Of course, the energy industry would become like the horse and buggy but the benefits to the overall economy would far outweigh the concentrated costs to the energy industry, whose assets and workers would be freed up to do new, productive things.

If you look at any chart of the major indexes this year, you’d think productivity was skyrocketing and economic growth exploding but that couldn’t be further from the truth. What is propelling financial markets around the world isn’t any improvement in the real economy but massive injections of liquidity by global central banks. According to Mike Bird in yesterday’s WSJ, the three major central banks – the Fed, the ECB and the BoJ – have injected $8 trillion into financial markets this year (“How The 2020 QE Boom Might Trip Up Central Bankers”, Mike Bird, WSJ, December 30).

While this has been good for holders of financial assets, it is actually a negative for long term growth because it has created a massive asset bubble, characterized by extreme overvaluation and “irrational exuberance”, that will pop creating enormous economic carnage. Printing money doesn’t create economic growth, increasing productivity does. This is now the third major bubble in the last 20 years (Dot Com, Housing, Everything Bubble).

The only financial market participant I’m aware of to have called for this disconnect of the price of financial assets and fundamentals and recommend going long on this basis is Rothko Research (For a recent take of theirs see “Letter To Equity Bears: Do Not Underestimate The Force Of Liquidity”, Rothko Research, Seeking Alpha, December 9). Rothko thinks this liquidity driven market can continue for another year before topping in early 2022.

When does the madness end? Unfortunately, market timing is much more of an art than science. There is no technical indicator that can tell you when the market or an individual security has topped or bottomed. Therefore, what you have to do is create a mosaic of fundamentals, technicals, sentiment, macro, history, etc.. in order to understand where we might be in the evolution of the bubble.

Zooming out to analyze the big picture seemed like the right thing to do on the last trading day of 2020. So, ladies and gentlemen, now you know “What’s Going On”. I wish you all a Happy New Year. I’ll be back on Monday January 4, 2021.

Accompanying Premarket Instagram Commentary

Posted by Greg Feirman  ·  Link  ·  No Comments Yet »