Month: December 2022

Authored by Jesse Felder via TheFelderReport.com,

It’s popular on Wall Street to say, “you can’t time the market.”

However, just because most people are bad at it doesn’t mean the tools don’t exist to do it fairly well. In fact, there is one market timing tool in particular that long-term investors should pay close attention to and that is the Coppock Curve. My friend Tom McClellan of McClellan Financial Publications recently wrote about the origin of the indicator:

[Edwin S.] Coppock had been a money manager, and did some work managing assets for the Episcopal Church in the U.S. As part of that, he had a discussion with a priest about the grieving process, and the priest asserted that it takes a person 11 to 14 months to grieve over the loss of a loved one. Coppock concluded that the process of getting over a big loss on an investment might work the same way in terms of human psychology, and so he incorporated that timeframe into his indicator. What he wanted was a way to identify the really important long-term buying opportunities.

And this is really where the Coppock Curve (sometimes called the Coppock Guide) really shines, in helping long-term investors determine when it is an opportune time to get aggressive in the equity market. My friend Jim Stack of InvesTech Research recently wrote about its usefulness:

This indicator has a remarkable 100+ year track record when it comes to signaling the start of a new bull market for stocks. And it is one of the few technical tools that would have kept anxious investors from stepping prematurely into the middle of the 1929-1932 record stock market decline… Coppock Guide buy signals are marked by upturns from readings at or below zero. And often the more negative the reading when it turns upward, the more impressive the profits ahead. Using these guidelines has confirmed practically every major bull market run since 1920, with just two false signals given in 1941 and November 2001.

While it is true that timing stock market peaks may be more difficult, once a bear market has begun, investors using the Coppock Curve at almost any point in time over the past century would have largely been successful in timing major stock market bottoms.

For this reason, it is noteworthy that the Coppock Curve broke below the zero line back in September. Moreover, it is unlikely to form a bottom and curl higher for at least a few more months. Even if the current rally were to continue higher the Coppock Curve likely wouldn’t itself reverse higher before February. And if the rally rolls over once again, it will push the upturn in the indicator out even further. In short, the grieving process for Mr. Market (over the loss of massive monetary stimulus) may take a bit longer than bullish investors today might hope.

So the next time you hear someone say, “you can’t time the market,” perhaps you should think to yourself, “maybe YOU can’t time the market but I know a tool that is pretty good at it.” Because, at the end of the day, everything is forecast. Rather than pretending otherwise, it probably makes sense to utilize a tool like the Coppock Curve to improve your own forecasting ability.

European leaders are scrambling again in a relentless pursuit to price cap Russian crude oil imports before a ban on purchases goes into effect Monday. There has been a disagreement between member states at what price level that cap should be. 

Recall last Friday, EU negotiations on the Russian oil price cap were suspended – despite a willingness by most member states to propose a ceiling of $65 a barrel, though Poland and the Baltic states objected. Earlier this week, there was still disagreement on $62, and now people familiar with the matter tell WSJ the European Commission has discussed lowering the limit to $60 — in hopes all 27 member states will agree. 

An agreement on the cap at the new level would be significantly below benchmark Brent prices, which traded around $89 a barrel Thursday morning.  

Countries such as Poland, Estonia, and Lithuania have argued that proposed price caps were too high and would allow Russia to continue profiting off international crude markets to fund the war in Ukraine. 

WSJ noted senior officials of various member states began discussing the $60 ceiling on Thursday afternoon, and a decision could come as soon as this evening, with the officials saying Polish officials needed time to examine the commission’s plan with Warsaw. 

But even at $60, the price cap could be meaningless because Russia’s production costs are estimated at around $20. 

Russian crude on international markets already trades at a significant discount to Brent. According to Argus Media, on Wednesday, Russia’s Urals were priced at around $48 a barrel at the Baltic port of Primorsk. 

Bloomberg data shows Urals trading around the $60 level…

Furthermore, according to Bloomberg data, China and India are currently buying Russia’s flagship Urals crude oil at a massive $33.28 discount to Brent.

However, summing it all up – the concept of a price cap is meaningless, as explained in “The Ridiculous Reality Of The Russian Oil Price Cap Debate In One Picture.”

The last months have seen broad-based disagreement on where the level should be – not too low as to really hurt Russia (as to prompt retaliation), and not too high to show that European nations are terrified of actually poking the bear. It appears all about virtue-signaling yet again…

And then there’s the risk that Russia could refuse to sell its oil at prices below the cap, thus reducing global supplies that could send prices higher. Kremlin spokesman Dmitry Peskov warned last week countries that impose a price cap could be cut off from Russian crude and crude products

“It feels like they are just trying to make a decision for the sake of a decision. For the time being, we proceed from the directive of President Putin, that we will not supply oil and gas to those states that will introduce and join the ceiling. Of course, we must analyze everything before formulating a position,” Peskov said.

EU member states are forced to choose between two priorities that are almost impossible to resolve: trying to choke off revenue to Russia and avoiding potentially painful spikes in the oil price that could damage the global economy.

The price cap is part of the West’s crusade to squeeze Moscow though many of the sanctions this year have backfired and sparked an energy crisis worldwide. 

Authored by Ven Ram, Bloomberg cross-asset strategist,

Fed Chair Jerome Powell said pretty much what one would have expected him to say on Wednesday. Just earlier this week, we saw how the markets sometimes hear what they want to hear — and it being the last day of the month, stock traders decided it was time to send valuations s-s-s-soaring.

Yes, Powell did remark that the Fed may dial down the pace of its increases as soon as this month, but it was an acknowledgement of what was already known. 

He did follow it up with these lines, which were completely lost on the markets:

“Given our progress in tightening policy, the timing of that moderation is far less significant than the questions of how much further we will need to raise rates to control inflation, and the length of time it will be necessary to hold policy at a restrictive level…

For good measure, he also remarked that the Fed is aiming for “significantly positive real rates,” a message he has delivered before.

Inflation-adjusted policy rates are now around -90 basis points, a far cry from levels where the Fed will look to stop. In other words, if key surveys about short-term inflation expectations stay around current levels, there is just no way the Fed can afford to stop before rates get to 5.25%. And that would probably be the lowest possible level. In other words, the current terminal rate of around 4.90% is not quite where it needs to be. In fact, the Fed has never really been able to wind down its tightening before real rates went significantly higher — which has been circa 200 basis points on average.

Powell doesn’t want to be remembered as someone who left his task on quelling inflation unfinished, and there was ample reiteration of that as well:

“History cautions strongly against prematurely loosening policy. We will stay the course until the job is done.”

So why did stocks rejoice and Treasury yields slump? The markets, we know, are a voting machine in the short run but a weighing machine in the long run.

That means one hard day of partying may be followed by many days being just hung over.

In a series of tweets earlier this week, Elon Musk accused Apple of sabotaging Twitter by slashing advertising spending and threatening to remove the social media platform from the App Store. Such claims led to speculation that Musk would need to build his own smartphone if Twitter was de-platformed from iPhones. However, in a significant sign of de-escalation, Musk tweeted Wednesday that he met with Apple CEO Tim Cook and resolved their issues.

“Good conversation. Among other things, we resolved the misunderstanding about Twitter potentially being removed from the App Store,” Musk tweeted. “Tim was clear that Apple never considered doing so.”

Good conversation. Among other things, we resolved the misunderstanding about Twitter potentially being removed from the App Store. Tim was clear that Apple never considered doing so.

— Elon Musk (@elonmusk) November 30, 2022

Musk tweeted a short clip of a reflecting pool at the center of Apple Park in Cupertino, California. 

Thanks @tim_cook for taking me around Apple’s beautiful HQ pic.twitter.com/xjo4g306gR

— Elon Musk (@elonmusk) November 30, 2022

The meeting comes after the head of Apple’s App Store deleted his Twitter account last month, then Apple deleted all Twitter posts from its official account. Musk said earlier this week that Apple pulled its ad revenue from Twitter while giving no explanation, adding that the Big Tech giant hates “free speech.”

“Apple has mostly stopped advertising on Twitter. Do they hate free speech in America?” he asked. “Apple has also threatened to withhold Twitter from its App Store,” Musk wrote, “but won’t tell us why.” Musk also asked CEO Tim Cook in a tweet, “What’s going on?

Another problem Musk had (ahead of the relaunch of Twitter Blue) was Apple’s 30% fee it charges Twitter for in-app purchases. Musk posted a meme suggesting he could “go to war” with Apple.

“Did you know Apple puts a secret 30% tax on everything you buy through their App Store?” Musk tweeted on Monday.

… and now it appears Cook followed Musk on Twitter. 

👥 @tim_cook (CEO of @Apple) is now following @elonmusk

— Big Tech Alert (@BigTechAlert) December 1, 2022

So they’re now friends? 

By Russell Clark of the Capital Flows and Asset Markets substack

I was having lunch with an old fund manager friend, and we were talking about my recent post – the three profit centers of short selling. I suddenly realized we were getting short interest ratio and borrow cost of a short mixed up. If veteran short sellers could get this concept confused, then anyone could. I thought I would do a quick presentation on the difference between the two and why it is important to distinguish between the two. In my view, borrow cost is a much better metric to look at, as it will be more likely to help you avoid career ending short squeezes.

Short squeezes are part and parcel of life in markets. The problem for short sellers is that as the losses on short selling are unlimited, markets know that if you can push a price high enough, the short seller MUST buy back the position. So short sellers tend to look at various metrics to work out how crowded a position is. One metric is a short interest ratio. Another is cost of borrow. In my experience, cost of borrow is a much better indicator of potential for a short squeeze.

Let’s talk about the short interest ratio first. This ratio is the number of shares out short divided by the number of shares outstanding, is actually widely reported and can be downloaded directly from Bloomberg is you wish. Let us look at one of the worst shorts in history – Tesla. From the moment Tesla was listed it had a very high short interest ratio. For the first few years of its life its short interest was regularly in the 30% range, before collapsing down to much lower levels.

But as can be seen above, Tesla’s short interest ratio fell but short interest never fell. The reason for this is because Tesla has constantly issued shares to fund its capital expenditures.

Tesla is a good example of short interest ratio falling not really indicating the stock is safe from a short squeeze. In 2013, when Tesla did a large capital raising, its short interest ratio fell, but actual total short interest remained high. The reason it remained high was that analysts could still see that there would be future capital raisings, which was correct, but unfortunately for short sellers the stock went massively against them. High levels of absolute short interest always run the risk of a squeeze. Another short squeeze where short interest ratio failed to indicate a short squeeze risk was AMC.

For short sellers in 2020 looking at both the short interest ratio, it was well below levels seen in 2015, but total short interest was near highs, but neither gave a particularly strong warning that AMC was about to have a career ending short squeeze. In fact, despite a relatively high short interest ratio, AMC had been a “wonder short” form mid 2018 to early 2020, before spiking to new all-time highs during Covid.

For this reason, I have tended to focus on cost of borrow to limit short squeeze risk. To put it simply stocks where the borrow cost is less than two percent. Unfortunately, data on the borrow cost is not freely available and can vary according to who is lending the stock out, and who wants to borrow it. But that being said, borrow cost for short selling a stock is very highly correlated with corporate borrowing costs. If we look at the CDS for Tesla, it was at 700 in mid 2019, before collapsing down to a low of 100 in 2021. That is stock borrow would have been expensive in 2019, before falling through 2021.

With AMC we have a traded corporate bond we can look at rather than CDS. As corporate bonds yield rise, cost of borrow also rises. If we look at the 5.75 June 2025 AMC bond, it was relatively well behaved until Covid hit, and the bonds were priced for default very rapidly, something that is now occurring again.

With AMC bonds selling off again, cost of borrow to short the stock is 33% roughly. That means I need to pay to a long owner willing to lend me the stock 33% annually. The way I interpret very high borrow costs is that the stock is a popular short, which we can see from the very high levels of absolute short interest, but also a very unpopular long position. To get hedge funds and other special situation operators to buy the shares, you have to entice them with a very high yield. However once you have lent out a stock, if you then decide you want to sell it, you need to carry out a recall, which means the short seller needs to buy it back and return it before you can actually sell it. This means there will be a few days to weeks, when long investors cannot sell, and short sellers have to buy. This creates an environment where a stock can only go one way.

Before the shenanigans with Telsa, AMC and GME, the all-time capital destruction short squeeze was Volkswagen. The Volkswagen short squeeze was organized by the management of the company, who had quietly managed to secure control of a large amount of VOW GY shares (voting shares). VOW attracted a large number of shorts, due to a) it was the middle of the GFC, and b) it was trading at an all-time high relative to its more liquid preference shares. German listed stocks do not provide short interest ratio as readily as US listed stocks, but the cost of borrow prior to the spike was around 4% (I had a small position at the time, but fortunately all my other shorts were making money so was not a career ending squeeze for me – unlike many other funds).

Hence when I talk about never short a stock with 2% borrow, I am referring only to the cost of borrowing the stock to short sell, and not its short interest ratio. And I do this as I have yet to a stock with a 2% borrow have a career ending short squeeze.

Following ADP’s report of job losses in the goods-producing sector of the economy, it is perhaps no surprise that US Manufacturing surveys suggest that part of the economy is contracting.

• S&P Global US Manufacturing PMI 47.7 (Contraction) in November (final), down from 50.4 in October – the weakest level since June 2020

• US ISM Manufacturing tumbled to 49.0 (Contraction) in November, down from 50.2 in October – weakest since May 2020.

Source: Bloomberg

Under the hood, all the major ISM sub-indices contracted with prices tumbling to 43.0 and jobs and new orders falling…

Source: Bloomberg

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, said:

“A combination of the rising cost of living, higher interest rates and growing recession fears have led to slumping demand for goods in both the home-market and abroad. Companies are consequently cutting production at a rate not seen since the global financial crisis, if the initial pandemic lockdowns are excluded. However, even with the latest production cuts, the downturn in demand has still led to one of the largest increases in unsold stock recorded since survey data were first available 15 years ago, which suggests that companies will continue to reduce production in the coming months to bring these inventories down to more manageable levels.

“Likewise, companies are slashing their purchases of inputs and raw materials at a rate not seen outside of the pandemic since the global financial crisis.

“This slump in demand is increasingly manifesting itself in a shift from a sellers’- to a buyers’-market for a wide variety of goods, as evidenced by improving supply chains, meaning price pressures are now abating rapidly.

“While supply chain worries persist, notably in relation to China’s lockdowns, companies’ concerns are increasingly moving away from the supply side to focusing on the darkening outlook for demand, meaning the business mood remains among the gloomiest seen over the past decade.”

Manufacturing Production is set to tumble…

That should bring down inflation, right Jay?

Authored by Peter Schiff via Academy Securities,

Yesterday was a great “everything” rally day! The market “finally” or “once again” got to price in a “soft landing”. It is possible that Goldilocks survives in the end, but growing up with Slavic folk tales, the stories rarely seemed to work out with “Hallmark” endings.

It started with a deluge of data.

• ADP jobs were weak, but no one understands how their new methodology works.

• The price and inflation components of GDP came in higher than expected, but not by much.

• JOLTS, job opening were down, but better than expected (and still much higher than I find believable).

• Chicago PMI was “Showgirls” bad! Maybe it is “specific” to the Chicago area, but this number stuck out like a sore thumb.  

We only had worse data during the lockdown, in the aftermath of Lehman and at the height of the dotcom bubble bursting (and some fraud at massive IG companies). We will come back to this!

All that really mattered, was Powell.

• Powell confirmed, what us and many other have been saying for some time, the pace of hikes has to slow! That the risk of overtightening is real (we think they already have overtightened, but that’s another story).

• His words helped:

  • Lower the terminal rate to 4.9% according to Bloomberg WIRP. Still a touch high as discussed in this weekend’s Positioning & Key Drivers.

  • Sent the 2-year treasury from 4.55% to a low of 4.31%. The entire yield curve moved and we had some serious bull steepening (or less inversion). There should be more steepening to come!

  • The S&P 500 was up 3% with Nasdaq up 4.5% and the beleaguered ARKK ETF up 7.7%.

  • DXY, a dollar index had a weak day, which continued overnight, and is now the lowest it has been since August and could break through to levels not seen since June!

  • Even crypto participated, though the crypto rally started overnight. More on this another time as it is a sideshow for the moment.

We are also getting signs that China, while technically not submitting to the protestors, is submitting to the protestors. There are hints that China’s “official” policy is noticing changes in how COVID is affecting people, which would support a decision to ease restrictions.

Doesn’t Goldilocks Get Eaten in the End?

Back to the main theme of today’s quick report.

We have been looking for lower yields and admission by the Fed that they have potentially gone too far, too fast. We got that.

But what is next?

• If for no other reason than we got an almost 5% rally in the Nasdaq, look for some Fed speakers to try and talk markets down. It won’t be horribly effective, but it won’t stop them from trying.

• What if the PMI is a sign of things to come? What if, far from being an outlier, this is indicative of the direction the economy is headed? I remain staunchly in the camp that the recession is coming sooner and will be deeper than consensus. It will be driven by high paying jobs being lost, the wealth effect and the inventory overhang!

• NFP should now be set up for a “bad news is bad” trade.

• Don’t underestimate the power of daily and weekly expiration options to drive markets far more than they should be on days like yesterday. It is anyone’s guess on which way the traders driving the market with Friday expiration options will decide to try and drive the market, but after yesterday’s big move, where we started with relatively “neutral” positioning, trading to the downside on any catalyst seems easier than driving it much higher. But in any case this trading pattern has introduced a new randomness to the size of the moves (less so to the direction).

• The quiet grind of QT continues. Liquidity, slowly, but steadily is leaving the system. Far less dramatically than how QE inserted the liquidity, but a likely headwind, nonetheless.

Bottom Line

Small fade on the rates move. Generally think front end yields are still too high and we should see steepening (less inversion).

Larger fade on the equity side. A China reopening would be a wildcard against this, but that, realistically is a spring thing and we have plenty of issues to deal with before then.

It is encouraging that the Fed is finally on the “nearly done hiking” page, but once that gets fully priced in (and it may already be), then we can move to the “done too much hiking already” phase, which won’t be pretty for risk assets (there was a time, in a galaxy far away, where “risk-off” was a thing and stocks did poorly as yields went lower.

The market is in the “just right” stage of the 3 bears story, but I don’t think that is how the story ends!

South Africa is facing deep political turmoil and corresponding uncertainty across markets amid growing calls for President Cyril Ramaphosa to step down over an emerging bizarre scandal centered on the alleged theft of $580,000. The over half million in cash was literally found stuffed in a sofa at a farm that Ramaphosa owns. The timing of the crisis couldn’t be worse given long-awaited economic reforms had only just begun to take shape and improve the country’s outlook. 

The mysterious cash payment has sparked outrage particularly among the opponents of the ruling African National Congress, and with his allies holding emergency consultations. On Thursday South African media is reporting President Ramaphosa is to imminently address the nation as prospect for his resignation grows, and as he faces impeachment.

Ramaphosa, who has advanced himself as an ‘anti-corruption’ and reformist president, has vehemently denied wrongdoing in the scandal coming to be known as “Farmgate”, centered on a game farm he owns in South Africa’s northeast.

According to a summary of the scandal in CNBC: 

In what has become known as the “Farmgate” scandal, Ramaphosa is alleged to have covered up a $4 million theft from his Phala Phala farm in the north east of the country in 2020. Some $580,000 of this was found beneath sofa cushions, and allegations also include working with Namibian authorities to apprehend, torture and bribe the suspects.

Ramaphosa staunchly denies the allegations and has not been charged with any crimes. He maintains that the cash was the proceeds from the sale of buffalo. He has confirmed that the robbery took place, but insists that the amount stolen was smaller than alleged and denies participating in a cover-up.

The rand has weakened more than 3% against the dollar as the country is on edge awaiting Ramaphosa’s and the ANC’s next move. The economic reforms he set in motion are now seen as under threat by the major scandal, also as political succession within the ANC would remain uncertain. 

According to more on the jitters unleashed across South African markets on news of Ramaphosa’s likely impending resignation, via Bloomberg: 

• The yield on 10-year local-currency bonds climbs 74 basis points to 11.55%, the most in a day since December 2015
• Benchmark dollar bonds lead losses among EM peers; 10-year yield up 48bps to 7.42%
• Dollar-rand one-week imlied volatility surges to the highest since May 2022 at 20.4%
• 5-year CDS +12.5% to 274.62 bps, biggest jump since March 2021

Bad image for South Africa and the ANC around the world. #FarmGate pic.twitter.com/OY3wDehwDA

— Banele (@Gentlements) June 13, 2022

developing…