As we face the possibility of another bloodbath on Wall Street Thursday, especially in Big Tech, with Nasdaq futures down 1% as of this writing, it is time to roll out the clichés.
The Macro Rules the Micro
Talking heads on FinTV and compliant sell-siders on Wall Street throw out cliches such as "bad is good" when it comes to economic data. But let me tell you that the deluge of data released Wednesday (especially retail sales, which posted a 1.1% month-over-month decline in December) show that bad is bad.
Higher interest rates make things cost more. How could anyone not know that? So, in an environment where fewer things are sold and workers cost more, companies need to be extra vigilant on fixed costs. Hence layoffs, especially on Wall Street and Big Tech.
Of course that could not happen to a better bunch (or two bunches), in my view. Just know, though, that the people closest to the day-to-day workings of the U.S. economy are showing you that it is slowing. Showing, not telling.
Don't Fight the Fed
The FOMC is going to raise interest rates at its next meeting on February 1. This is not a bullish environment for U.S. equities. Period. So let the blowhards bloviate about 25 or 50 basis points, but please note that higher interest rates are contractionary. Period.
So, if "not fighting the Fed" means going to low-equity asset allocations (at my firm, Excelsior, my clients and I own only energy-related equities now) then let's enjoy another year of flaming our benchmarks in 2023.
Also, Charles Darwin would tell you to go after the weakest of the herd. When you see a company like Tesla (TSLA) implement MASSIVE PRICE CUTS across its product line, by all means, keep shorting TSLA, which was a great trade for ExCap in 2022.
You Can't Time the Market
Au contraire, mon frère. You can, and we did at ExCap in 2022.
The tea leaves are just so obvious and please know that narratives are expensive. The new "inflation is peaking" narrative is based, really, on one factor in the government's price calculations. Note that core CPI and PPI for December were both exactly in line with expectations. But it was the overall PPI-- including non-core items like food and energy for those of us who never eat or travel -- that came in much lower than expectations.
That didn't do anything for market sentiment, because a recession is almost as bad for corporate profits as stagflation. Almost.
But, remember that the non-core deflation that we are seeing, as crude prices have recovered recently, is almost entirely due to the recent collapse in U.S. natural gas prices. But years of experience have taught me that one cold snap can change that. Quickly.
So, if you want to base your entire portfolio construction on the fact that prices for natural gas -- known colloquially as The Widowmaker among futures traders owing to those contracts' ridiculous volatility -- will remain low, go ahead. As we often do, we are taking the other side of that trade by buying natural gas stalwarts like EQT Corp. (EQT) , Devon Energy (DVN) and Southwestern Energy (SWN) .
And, if you want to base your family's retirement nest egg on the fact that:
- The U.S. economy is fine
- The Fed knows what it is doing
- We will continue to have a mild winter
by all means, do so. I will be on the other side of that trade. Markets exist because people disagree.
Email me if you want to hear more disagreements.
