Postcards from the Florida Republic - September 11, 2022
September 12, 2022
Current Outlook:?Inflation is “slowing” – largely due to demand destruction. Watch the markets take a victory lap over “8.0%” inflation… and then bang your head against the wall because real interest rates are -5.5%. The markets continue to believe that the Fed won’t keep rates higher for longer… until they realize that the Fed will be raising rates – possibly to 4.25% or even 4.5% by February 2023 and leaving them there for 12 months.?
Dear Future Florida Republic Residents,
Trying to make sense of it?
This silly, silly market.
Why does the S&P 500 keep climbing while the odds of a 4% rate hike keep climbing? Why are the markets effectively pricing in a 75-point hike in September… but we just exploded through 4,000 on the S&P 500… How did the odds of the Fed funds rates moving to 4.25% in February jump from 0.5% to 8.9% in 45 days??
Who is betting on a 4.5% rate move in February 2023??And why?
Why am I now “long” Beyond Meat (BYND) in positive momentum?
Last week, I offered my insight into why a short-term pop in the markets is possible. Funds are now so “over short” in this market that a little optimism creates a massive squeeze.?
Nomura said this week that the never-ending effort to drive this market lower by funds could push it higher. There was an 8.1 to 1 put-to-call ratio for this market…?
Funds are now more bearish today than they were in late 2008.?
So, what does this mean??
Now that the S&P 500 broke above 4,000, and flashed over the 50-day moving average…?I see a clear path back to 4,175.?
I’m specifically looking at the SPDR S&P 500 ETF (SPY ) level of 415 to 417.?
Why this range??
Because that has been the control center for momentum in 2022.?
The 415 level was the key figure in a positive, broad momentum pattern for the markets in both February and March. It was the point of negative momentum for the June selloff and the late August selloff. It has been the source of many large candle moves (up and down) in 2022.
If the SPY can break that level… the 200-day moving average is the last technical test. That’s an upside – low probability – of 4,230. I don’t think it will get that far… but a push to 415 is very possible in a low-volume environment.?
When people are SO bearish, it can become bullish.?
MOMENTUM GOES GREEN
This was too easy.?
Momentum went positive for the S&P 500 on Wednesday morning and the Russell 2000 on Friday morning at 9:35 am.?
It’s a leap of faith to trade momentum like this, but just purchasing the SPY on Wednesday morning generated a 4.1% move.?
And this rally likely won’t last forever. Again, I think 415. For this week, I’m interested in buying Friday’s September 16, 2022, SPY call for $410 and selling the 418 for a cost of $2.00.
That’s a 7% move to 418 from the recent bottom.?
This has been a bonkers year for momentum.?
Most years of experience just two or three negative momentum events since 2015.?
We’ve had five in 2022. (Red hand is negative momentum and ensuing selloff, Green hand is positive and ensuing rebound).
This is why you need to learn how to follow market momentum.
“HELL OR HIGH WATER”
Some people just need to retire.?
Former Federal Reserve Vice Chair Richard Clarida appeared on CNBC this week – with a “stunning” warning about future interest rates moves.
Talking about the Fed’s rate policy, Clarida said:
"I think they're going to 4% hell or high water if I had to put it into two boxes. They are data-dependent, but that's why they're going to 4%. Inflation is way too high."
Hell or high water??
It sounds like the Fed is living on the edge.?
It sounds like things are so challenging that the Federal Reserve will have “the courage to act” and may be willing to push the economy into recession.??
(Note: “The Courage to Act” was the name of former Fed Chair Ben Bernanke’s autobiographic recount of the Fed’s actions after the Great Financial Crisis of 2009. Try not to pull an ocular muscle rolling your eyes at that small fact).
Courage! Strength! Action!?
Clarida had to resign from the central bank last year because he allegedly traded stocks funds on knowledge of Fed policy. According to disclosures, he allegedly sold a stock fund and then repurchased it before the Fed made a policy announcement.?
Now, he’s trying to make the Fed’s policy actions sound daring.?
But one caveat. The market has already priced in a move to 4%...
Clarida’s statement has as many teeth as George Costanza pretending that he’s a “bad boy.”
The real question is whether the Fed will keep interest rates at 4% for 12 or more months. As you can see, the market has priced in cuts starting in the third quarter of 2023. So, for all the talk about “doing everything to contain inflation,” the markets still do not believe the Federal Reserve.?
Loretta Mester at the Cleveland Fed said that the central bank should raise to 4% by the end of the year and just leave it there. I expect this to be the path… but we hit 4.5% first.
Of course, we know that every fast rate hike cycle ends in calamity, either in the U.S. or in some global market.?
Buckle up. We’re looking at not only a volatile market in the final four months of the year… but also well into?2025?
Yes, 2025. Because while everyone is jabbering on about rate hikes, the Fed is also trimming its balance sheet at an unprecedented pace.?
In September, the step up moves from $47.5 billion to $95 billion per month.
In 2018, by comparison, the Fed moved from $30 billion to $50 billion in balance sheet reduction in the fall. The bond market went all “bag of bananas” in November 2018, and then the S&P 500 plunged by 19.8% in December 2018.?
This doesn’t look like a “one-off” period.?
The New York Federal Reserve projects that the central bank will cut about $2.5 TRILLION from its balance sheet by 2025.
That’s… a long… way… to… go.
If you’ve ever drunkenly eyed the chart of the S&P 500 compared to the Fed’s balance sheet, you’d know that correlation could very well create liquidity problems for the stock market.?
I hope you like inverse funds as much as I do.?
Because when this thing goes…
VALUATION PROBLEMS
There’s no greater quote about the pursuit of unprofitable growth stocks (the Cathie Wood strategy) than this one from Scott McNealy, Co-founder of Sun Microsystems, in 2002. When asked about stock trading at?“10 times sales,” he warned:??
“At 10 times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10 straight years in dividends. That assumes I can get that by my shareholders. That assumes I have zero cost of goods sold, which is very hard for a computer company. That assumes zero expenses, which is really hard with 39,000 employees. That assumes I pay no taxes, which is very hard. And that assumes you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R&D for the next 10 years, I can maintain the current revenue run rate. Now, having done that, would any of you like to buy my stock at $64? Do you realize how ridiculous those basic assumptions are? You don’t need any transparency. You don’t need any footnotes. What were you thinking?’?
At 10-times sales, you’ve got a ticking time bomb… one bad earnings report or one slashed financial outlook, and the stock could fall like a stone…
But 20-times sales – and completely unprofitable -- you’re holding a nuclear bomb. “Growth” be damned.?
I scanned non-biotech companies trading at 20 times sales, with market capitalizations over $10 billion… and net profit margins of 0% or worse.?Overvalued… and unprofitable… and stocks prices based on the expectation that these firms will grow at such an aggressive pace that the risk justifies the reward…?
But… it’s not 2020 anymore.
I came up with this list.?
Every one?of these companies could face severe pain in 2023 and beyond.?I wouldn’t buy any of these stocks with your money.
IN MEMORIAM
At the age of 96 years old…?
The world has lost an extraordinary person.
I’m not sure if you saw this in the news.?
You probably didn’t see it in grocery store tabloids… you probably didn’t already hear about it on Good Morning America.?
But at the age of 96 years old…?
The world lost…?
Joseph Colwell was an American hero.?
He passed away in mid-August, a man who served 26 years as a police officer in the Hudson Police Department in Hudson, NY.?
Before that, he served four years in the Pacific Theater of World War II. His military service in World War II prevented him from attending high school graduation.
I had one grandfather in the Baltimore Police Department for decades and another who served in Burma during World War II as an Army Ranger. This truly was our greatest generation… and we continue to lose World War II veterans – whose sacrifice is largely lost on most Americans born after 1980.?
This week, the news will center on the Royal Family and the passing of Queen Elizabeth II. Colwell’s legacy deserves recognition, respect, and mourning.?
Inflation Numbers
This week, we’ll see August's Consumer Price Index (CPI). I’ve seen estimates around 8.0% for the month. That’s still outrageously high, and the Fed will need to take interest rates higher to address inflation.
But some people are already protesting rate hikes. Senator Elizabeth Warren is worried that the Fed will hurt the economy by raising interest rates. Former Labor Secretary Robert Reich and?serious?economist doth protest too. Here’s his take… naturally the profit motive is the problem for Reich.?
“Interest rate hikes are going to fall on average working people — the same people hurt the most by rising prices. Rate hikes also fail to combat one of the main drivers of inflation:?Monopolistic corporations jacking up prices to maximize profits.”
Not only is Reich’s view wrong, but it’s also ignorant.?
Corporations don’t have control of the money supply.?
The Federal Reserve does.?
Take it away, Milton Friedman:?
“If you listen to people in Washington and talk, they will tell you that inflation is produced by greedy businessmen or it's produced by grasping unions or it's produced by spendthrift consumers, or maybe, it's those terrible Arab Sheikhs who are producing it. Now, of course, businessmen are greedy. Who of us isn't? Trade unions are grasping. Who of us isn't? And there's no doubt that the consumer is a spendthrift. At least every man knows that about his wife.
But none of them produce inflation for the very simple reason that neither the businessman, nor the trade union, nor the housewife has a printing press in their basement on which they can turn out those green pieces of paper we call money.”
90-SECOND RABBIT HOLE
Let’s talk rabbit holes…?
Elaine Zelby (2019): “Today, when people say they “went down the rabbit hole,” they usually mean that they got sucked into spending way too long reading about or researching something on the internet.”
Last night, I read an article about Bill Murray. The great actor raised more than $1.2 million in cryptocurrency for a charity.
A hacker immediately stole the money.?
The same article mentioned that Seth Green – from Robot Chicken, Family Guy, Austin Powers, Can’t Hardly Wait, and Enemy of the State – lost several non-fungible tokens (NFTs) to a phishing attack. What happened in the next 90 seconds can’t be unlearned.?
I discovered that Seth Green spent $300,000 to recover an NFT.
Confused that Seth Green had $300,000 to recover an NFT, I read an article that suggests his net worth is between $25 million and $40 million.?
Now, very confused, I learned that Seth Green earns $200,000 per episode for Family Guy.?
Then, I learned that Family Guy’s syndication deal was worth $400 million.
Then I learned that Family’s Guy – as an empire – is worth $2 billion.?
With my mind effectively blown by these numbers… it only got even more insane.
Seth Green is 5’4”.
Then I turned on?Can’t Hardly Wait?and tracked down some Corona Light cans… I forgot that Jason Segel (Forgetting Sarah Marshall is one of my favorite comedy scripts) was in the stoner scene where they talk about that “Hip Lady” Velma from Scooby Doo.
I hope to make it to Jeopardy! one day, and that “Seth Green” is one of the categories. No one likes “Potpourri.”
CHART PARTY?
It’s time for a chart party. Let’s tap these charts!
CHART NO. 1: Wealth Evaporation
New wealth destruction achievement unlocked. American households lost $6.1 trillion in wealth during the second quarter of 2022.?
This is what Washington seems to miss. While they point to the unemployment rate and celebrate the CPI falling from 9.1% to 8.0% or gasoline from $5.00 to $3.75… Americans are poorer.?
CHART NO. 2: Crisis Warning
Are we in a financial crisis right now??
Absolutely. Say it with me.?
Credit Suisse’s Credit Default Swap numbers are the worst since 2009… and there is zero that the Fed or the European Central Bank can do about it.?
The difference between 2009 and today is inflation. One can’t introduce trillions in liquidity to the financial markets without worsening the situation.?
It’s “medicine” time.
CHART NO. 3: Recession Warning
U.S. companies are talking more about recession than any time in recent history. FactSet tracked earnings calls for the term “recession” and found that we’ve already surpassed the mentions from the height of COVID in 2020.?
Washington might be ignoring the problems… but S&P 500 companies are not. The problems are mounting for the economy… we’re already in a technical recession, and Q3 numbers will likely be much lower than expectations due to weakness in the housing market and ongoing challenges for cyclical consumer spending.
CHART NO. 4: Apples and Oranges
So, this is something…
Apple's market capitalization is now equal to the combined market capitalization of the bottom 180 companies on the S&P 500. Have a look at this chart…
When reached for comment on Apple’s market dominance, Senator Elizabeth Warren said, “This is outrageous. People are starving. One company should not have all the?apples?in the market. I have a plan to get every man, woman, and child in America an?orange.”
Let me?explain the joke?to the partisan people in the back…?
Elizabeth Warren never has any idea what’s going on in the economy or stock market… yet, she always has a shitty plan for everything.
Oh… they don’t think it’s funny??
CHART NO. 5: The Bearish Oil Case
I’ve said that oil has a bull case of $115 per barrel and a bear case of $75 per barrel. From a technical standpoint, West Texas Intermediate (WTI) crude is breaking down. The per-barrel price saw its 50-day moving average drop under the 200-day moving average for the first time since 2020 (the dreaded Death Cross).
At the beginning of the year, I said that investors should buy oil-producing companies with a target of $75 per barrel. I’m still very bullish on Crescent Energy (CRGY) and ConocoPhilips (COP). In addition, I expect that Berkshire Hathaway will purchase Occidental (OXY) once the energy company improves its balance sheet and its debt becomes “investment grade.” The latter situation may take a little longer than expected.?
JOHN KERRY IS STILL THE WORST
John Kerry once said he needs a private jet to fly worldwide to educate people and stop climate change.
Well… the numbers are in…, and John Kerry is still just awful.
According to various media reports, Kerry has produced emissions north of 9.54 million pounds (4,772 tons) in carbon since March 2021.?
To put this into perspective, that’s about 300 times what the average American produces yearly.?
I am actively trying to get my carbon footprint up…
And when John Kerry finds a can of motor oil under my bed and asked me why I started using carbon fuels…?
I’ll scream, “From you, John.?I learned it from watching you .”
Look, I do not deny the impact of humankind on the environment. Still, I’ll gladly look through the assumptions in the footnotes of any study and question any and all rationalizations of centralized planning…
Any time someone says that the seas will go up 10 feet… ask them why banks are still providing loans for beachfront properties…
Ask why the Obamas are on... their?third beachfront property?
The lending would have stopped... and the messengers would have balked at living so close to the sea. That’s how this works… okay?
The quote goes that “money talks and bullshit takes the bus.”
Useless Information of 2022
The serious economist Paul Krugman offered some uncanny ability to use Wikipedia to somehow tie Joe Biden into a Tweet about Queen Elizabeth II.
Writes Krugman: “Some perspective. Elizabeth was crowned 60 years after the 2nd?inauguration of Grover Cleveland and 68 years before the inauguration of Joe Biden.”?
“Who is Grover Cleveland?”?thought 45% of his followers…
Anyway, “Quoth the Raven” (Christopher Irons) was not impressed.
I’m sure Krugman is sitting by a yellow banana phone, eagerly awaiting an invitation to join the National Economic Council…?
But no one calls.?
And this is what he does with his time.
POSTCARDS FROM THE FLORIDA REPUBLIC
There is a reason why I live in Florida… and not California.?
Seven years ago, I turned down a job with a company that produces wine, almonds, and hilarious commercials. In hindsight, I thank the stars that I didn’t go the full MBA route.
California is in the middle of “voluntary” conservation efforts to prevent electricity blackouts across the state.?
They’re doing a great job. From the news:
“Today marks the?third straight day?of statewide Flex Alerts asking Californians to?voluntarily conserve energy from 4 to 9 p.m.?And, with temperatures expected to remain 10 to 20 degrees above normal into early next week and more calls for energy conservation expected through Labor Day — in addition to other possible “emergency actions” — the threat is far from over.”
As one can imagine, many people criticize the state that banned gas-powered cars and mandated electric vehicles at a time when the energy grid is massively overwhelmed.?
The standout sycophant??
That’d be our old friend Jennifer Granholm, the Department of Energy Secretary who oversees our nuclear arsenal. A Master of Physics… she is not. When asked about California’s energy policies, she offered this glowing nonsense:?
Granholm said:
"I love that California is unabashedly bold about energy policy … I think it's the canary in the coal mine.”
Who wants to tell her?
The canary in the coal mine ?died by suffocation.
These are the sort of statements that convert desperate atheists and drive them to pray for safe harbor.
This person oversees our energy policy. It gets worse when you talk about what she has planned for the rest of the nation.?
“The nation’s grid has got to be ready. We have to basically double the size of the nation’s electric grid with clean energy,” she said in a separate interview.
Double?
That’s not even close to mathematically correct.?
Again, I point this out because it bears repeating. These people have zero understanding of scale – they lack an essential foresight into how many minerals and other raw materials will be required to make their energy utopia even mildly survivable.?
Let’s look at the simple energy conversion to land data…?
If we want to create a 1,000-megawatt power facility, we have various measurements of land requirements. That sort of facility would produce roughly?6.6 billion kWh in a year.
That’s enough power for roughly 900,000 homes in the Northeast… but only?475,000 homes in the Southern part of the country.
To produce the power of a 1,000-megawatt facility, nuclear power requires 1.3 square miles of land.?
Because of the intermittent nature of solar, energy from the sun’s capacity requirements range between 45 and 75 square miles.?
Wind requires even more land – 260 to 360 square miles…
It’s about 330 miles from Pittsburgh to Philadelphia… and from Pittsburgh to Roanoke, Virginia. So, this land mass is about what I’d expect would be required for a windmill farm producing 1,000 Megawatts.
This is back-of-the-envelope, so if you’re a windmill expert, let me know if my math holds up.
I just want to put that much land into perspective.
Again… 1.3 square miles for nuclear versus more than 300 square miles of land for wind. And that’s just to power – say 500,000 homes.?
There are 123 million homes in the United States.?
And that’s just residential power.
Do you see where the numbers don’t add up?
You only need a few square blocks of a city to produce energy through natural gas to accomplish something.?
And that’s just one part of the big equation.
Then there are all the metals that we’d need to create the actual power grid that would require so many transmission lines and batteries for storage that it paralyzes the mind.
In lithium – alone – you need to increase supply by 4,200% to meet the expected demand for these grand plans.?
Then there’s the copper problem. We don’t have enough… and the Federal Reserve can’t print industrial metals.
“A looming copper shortage ?threatens to derail the clean energy trans, and by extension, climate pledges across the world,” writer Haley Zaremba at OilPrice.com. “According to a recent report from S&P Platts, if copper shortfalls follow projected trends, climate goals will be “short-circuited and remain out of reach.”
Yeah… they didn’t think “scale” through.
How far into the center of the earth are these people planning to drill…?
I hope we find a civilization down there because I’d rather be with the Middle Earth people than being governed by these people…
Meanwhile… on the moon that is California, Governor Gavin Newsom – who should be barred from ever running for office again because of his hypocrisy (and the fact he wore a fleece jacket while begging Californians to reduce their power usage), is blaming “climate change” because of the state’s grid problems.?
Nope.
California’s grid problems aren’t the result of climate change.?
They’re the result of bad public policy…?
Here’s how bad it is… I’m going to defend?Saudi Arabia…
Saudi Arabia is a desert nation with constant 110-degree?temperatures, functioning refineries, and the lowest gasoline prices in any country. Power outages happen… and they are rare. When they happen, their energy ministers go on Twitter and television and apologize profusely to their citizens…
California is a desert state with mismanaged water supplies, one-party feudalism, constant grift that scams its taxpayers, a lack of engineers speaking truth to power, and $6.00 gasoline. When power outages happen, the Governor blames “greed ” – because…?of course. Invisible enemies surround the man.
Listen… It’s 100 degrees in Dubai?right now, and they have a freaking ski slope and the best air conditioning known to man.
California’s policy and the pain are by choice.?
Don’t nationalize California’s energy policies.?Ignore them .
SPEAKING OF USELESS
If we had a fantasy football-style draft of who has and will continue to do the worst job in this Presidential administration… my rankings would go like this.
1) Pete Buttigieg (Transportation)
2) Anthony Blinken (State)
3) Dr. Janet Yellen (Treasury)?
4) Brian Deese (National Economic Council)
5) Jennifer Granholm (Energy)
6) Alejandro Mayorkas (Homeland Security)
7) Deb Haaland (Interior)
8) Gina Raimondo (Commerce)
9) Dr. Cecilia Rouse (Council of Economic Advisers)
10) Michael Regan (EPA)
These people are the Harlem Globetrotters of ineptitude.
Now, you could take anyone in the Top 5 interchangeably and walk away from this political draft thinking you stole the No. 1 pick.
Are you shocked that none of the people have extensive experience in the private sector??
But let’s focus on my No. 1 pick right now.
Where is Pete Buttigieg right now??
The last time we had a shipping crisis, Mayor Pete talked about how affordable electric vehicles are. (They’re not.)
Now, we are on the verge of a massive railway strike pushing inflation back to the moon as supply chains continue to crawl… Things were so bad at the ports in California that companies were shipping products to the East Coast and then shipping them by rail to the West Coast. Now, there aren’t enough ships on the West Coasts, and the rails might shut down.
Oh… and it’s all happening right before the beginning of the United States harvest. Who gives a damn if we have a bumper soybean crop if you can’t move any of the stuff on rails?
It’s not like there hasn’t been a warning about this possible strike. Rail operators were begging for the Transportation Department’s help in July. Oh, well… I’m sure Pete’s on it.
UPDATE: While all this is happening, Buttigieg was in Oakland promising to make more green spaces…?Thanks, bud. Enjoy this picture of him, standing on a bus, wearing a mask, and looking at nothing. Probably his most challenging work in months.
Anyone who votes for this man for President in the future must donate their brain to science in 20 years so we can study it…
The Week Ahead
Monday
Tuesday
Wednesday
Thursday
Friday
This week isn’t the crisis week…?
Wait a week. Also, go to your local baker and purchase a cake.
The cakes are delightful.
That is all.
Garrett