Big Game

Since October, the stock market has been roaring higher on the idea that the Federal Reserve was winning the battle against inflation and was ready to start lowering rates. This was the much-hyped “soft landing” for the economy. Since January 12^th, the market has gone from pricing in 7 rate cuts to just 4, and the market has rallied 5%!! Jim Bianco from Bianco Research notes that the New Zealand central bank has been out in front of this economic cycle. They were the first central bank to move to higher rates in this cycle. They were the first to pause rate hikes and now, will be the first to start hiking rates again. My thesis has been that inflation will be difficult to tame and come in waves. The folks down under are feeling the heat. Are they the canary in the coal mine?  

We made the call in January 2022 that we would be in a sideways to down market for 18-24 months. Since that call, the results have been pretty poor for stocks but even worse for bonds. The S&P 500 is now up 4% from its prior record closing high in January 2022, and gold is up over 12%. Bonds are down over 9%!! We sidestepped the bond losses and have held a decent percentage of gold. We are cognizant of the gains of the last 15 weeks but have learned never to chase the market. A bull run this long hasn’t taken place since 1972. We need to stay patient here. While markets can stay irrational, stair-stepping higher week after week, when markets correct, they take the elevator down. That is how we make quick gains on the market averages.

Enjoy the Big Game. We love the Brock Purdy story and will be rooting for Cinderella to do the unthinkable and go from the last pick in the NFL Draft to Super Bowl champ.

“Short term volatility is greatest at turning points and diminishes as a trend becomes established.”– George Soros 

I think we aspire less to foresee the future and more to be a great contingency planner… you can respond very fast to what’s happening because you thought through all the possibilities, – Lloyd  Blankfein 

A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill 

To learn more about us and Blackthorn Asset Management LLC visit our website at www.BlackthornAsset.com . 

Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor. 

Clean Up

Life is quickly returning to normal around here, bringing a sense of calm. The kids have returned to their work and school routines, securely settled in their apartments and dormitories. The quiet evenings reading by the fire have been quite enjoyable, and I’ve even begun my early spring-cleaning efforts.  There is something so satisfying about cleaning out the basement and cluttered files. I am definitely going to need a dumpster. The thing I am most happy about is cleaning up is my diet. No more cookies and cake for me – for now.  

Spring cleaning and new tax rules – exciting stuff. There are actually two new tax rules that I am excited to talk to some of you about this year. The first and subject of our note today can help you prepare your kids for their future and clean up some accounts gathering dust. As of the beginning of 2024, you can turn a 529 Plan into a ROTH IRA. If you have a 529 Plan Education Account that isn’t being used, keep reading.  

In late 2022, Congress enacted the SECURE 2.0 Act, introducing significant alterations to U.S. tax legislation to enhance Americans’ capacity to increase their retirement savings. Among its provisions is the introduction of a novel option for transferring funds from a 529 account to a Roth IRA. This innovative feature enables families to transform any remaining 529 funds into retirement savings, all while bypassing penalties associated with non-educational withdrawals. 

It’s the IRS. Of course, there are rules. Here they are: 

• The 529 plan must be open for a minimum of 15 years before you can do a 529-to-Roth IRA transfer. 
• The beneficiary of the 529 plan must also be the owner of the Roth IRA. 
• 529 plan contributions made within the last five years aren’t eligible for a tax-free transfer. 
• There’s a lifetime maximum of $35,000 for 529-to-Roth IRA transfers. 
• Normal Roth IRA annual contribution limits apply. 
• There are income limits to the ROTH contribution, but it is over $125,000 (child’s income as a single individual) 
• They have to have earned income and cannot contribute more than they made in income. 

If you have a 529 that has been sitting gathering dust, get in touch, and we can see if this option works for you. 

Stocks were overbought, but sentiment and position have backed off a bit, which is one for the bulls. The yield curve shows signs that it may dis-invert, which has our attention – in a negative way. Given the moves from the November low and hedge fund positioning, we would expect to see the market sell-off by at least 5%. It hasn’t, and that is another one for the bulls.  Our calendar’s next significant data point is the options expiration this Friday, January 19^th. This is one of the top 5 options expirations of the year, and how the market performs in the following days will be very important. We will be watching the market intently on the trading days after the expiry. If stocks fail to sell off, then we could be off to the races. The month of March has significant issues, more of that in a future note.  

We are considering switching to an email note each week rather than wordpress. If you are interested, please let us know at Terry@BlackthornAsset.com

“Short-term volatility is greatest at turning points and diminishes as a trend becomes established.”– George Soros  

I think we aspire less to foresee the future and more to be a great contingency planner… you can respond very fast to what’s happening because you thought through all the possibilities, – Lloyd  Blankfein  

A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill  

To learn more about us and Blackthorn Asset Management LLC visit our website at www.BlackthornAsset.com .  

Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor.  

Time

S&P 500 close on 11/30/21: 4,567

S&P 500 close on 11/30/23: 4,567

We let you know two years ago that we expected to see the market stuck in a trading range for the next 18 months. The numbers above show that the S&P 500 has gone nowhere for two solid years. The question now arises: is it finally time to break free from this persistent range?

We could be getting close, but we have some concerns. Our macro view is that inflation is not yet defeated, and that process may take the better part of a decade. In that time, we could see lower returns on assets and should be more tactical in our approach. Evidence that we may not be breaking out is that some of the biggest losers in 2023, including MEME stocks and heavily shorted stocks, emerged as this week’s big winners. Investors seem to be chasing higher-risk assets or ‘beta’ right now. That is more evidence of a bear market rally or performance chasing at the end of the year.  

There does, however, appear to be a reversal of sorts or an unwinding of legacy positions. Winners of late include real estate stocks and small caps, while big-cap tech did not lead the market last week. Are things changing? For the longer term? The market seems to be coming to the idea of a tighter Fed being removed from the equation. (March rate cut odds hitting a lifetime high of 80%)

It’s worth noting that not all market moves are entirely logical. Given recent economic data and posturing by the Fed, bonds have a real reason to rally. Stocks, on the other hand, need to reconcile the concept that there is mounting evidence that the economy is slowing down. The Atlanta GDPNOW tracker recently slipped from 1.8% to 1.2%. While this could fuel further speculation about rate cuts, the market will ultimately need to come to terms with the impact of weakening economic data on corporate profits. The weeks preceding the first Fed rate cuts will bring anxiety for stocks as their prices are reconciled with a faltering economy.

We are happy with our significant gold positions and our recent bond adds.  We need to stay patient with equities. The market can continue to move higher as conditions are not in place for a significant selloff. Systematic strategies have been unwinding their previous short positioning, particularly in bonds. Currently, equity strategies are only modestly long. The more investors chase this market, the more likely the conditions are created where the market is primed for a selloff, but those conditions don’t exist for now. The options expiration on December 15th is the next big data point on the calendar.

“Short-term volatility is greatest at turning points and diminishes as a trend becomes established.”– George Soros 

I think we aspire less to foresee the future and more to be a great contingency planner… you can respond very fast to what’s happening because you thought through all the possibilities, – Lloyd  Blankfein 

A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill 

To learn more about us and Blackthorn Asset Management LLC visit our website at www.BlackthornAsset.com . 

Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor. 

Wow!

Wow! What a week!  I had the great pleasure of going down to my golf club to watch some of the best college golfers in the world play. It was eye-opening! These kids were hitting golf balls at what seemed like inhuman levels. I have been playing golf for 20 years and love it, so it was incredible to witness what these girls and guys can do with a golf ball. Golf used to be a fat guy smoking a cigarette. These players were natural athletes. I think that I need to work on my game some more.

Wow! That was also an ample description of the stock market. I told you we were in negative gamma. Negative gamma cuts both ways. This is what we said last week.

Negative gamma has us inclined to watch for a reflexive bounce, which could get legs into the end of the year… Year-end sentiment could easily take over in this negative gamma environment. Remember, it works both ways. Volatility up and down. Not just down. They could just as easily rip the market higher on little to no volume. We try to prepare for both.

Volatility goes up AND Down. Our signal first hit about nine weeks ago. Since then, volatility has ramped higher. The rally this week was because so many were underinvested and were forced to buy. The other impetus was the end-of-the-year rally which is very much feared by those under-invested or short. We said we were going to have to be nimble. We bought some bonds, and we bought some stocks this week. I expect the market to hold on here for the rest of 2023. I don’t want to chase but mid-month we should see some pullback. 2024 is going to be another story.

The economy is getting rough, and we still see a recession in the first half of 2024. It wasn’t just payrolls that disappointed this week: so did the unemployment rate, which rose to 3.9% from 3.8%, vs expectations of an unchanged print. Since recent lows in April, this measure is up by 0.5% points, effectively cementing the next recession per Sahm’s rule.

Regarding wages, we find more proof that the labor market bubble has burst, with wage growth in October just 0.2%, down from the upwardly-revised 0.3% in Sept and below the 0.3% estimate.

The markets are reading STAGFLATION.

Rally into Christmas and then the New Year brings changes. Cyclical bear and secular bull. I hope. Looking only for a fat pitch while trying to stay nimble and patient.

“Short term volatility is greatest at turning points and diminishes as a trend becomes established.”– George Soros 

I think we aspire less to foresee the future and more to be a great contingency planner… you can respond very fast to what’s happening because you thought through all the possibilities, – Lloyd  Blankfein 

A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill 

To learn more about us and Blackthorn Asset Management LLC visit our website at www.BlackthornAsset.com . 

Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor. 

Drip

“I suspect that this most sudden and even violent lurch higher in interest rates is going to test financial structures that came into being during the period of very low nominal interest rates.” -Jim Grant

Those financial structures are being tested. On Friday, financials were down 1.8%, while regional banks were down over 2% and close to their early 2023 banking crisis lows. The great frustration about this selloff is that the market is moving so slowly. Drip, Drip, Drip. The regional banks broke through their range and moved 20% lower. The Micro Caps have broken their range and are dripping lower. Microcaps, as judged by the IWC ETF, look like they will probably go down 20% from their most recent range low and are now halfway there. The latest to break down through their support is the small-caps stocks. They have just broken their range. Lower by 20%, I would say. The problem is the drip, drip, drip. It makes sense, though. While rates are dramatically higher which should send stocks lower, the government is shoving money into the system in immense numbers. Trillions. Measures of GDP. It makes no sense, but it keeps the market from plunging. 4000 is the new magnet for the S&P 500.

The S&P 500 is down 10% since the last Fed rate hike in July and down 9% since our Volatility signal went off in early September. The market is getting oversold and due for a bounce. 4000 is a huge support level. Water torture with stocks in negative gamma. That means there will be dips but also rips higher, which will scare some into chasing, followed by another move lower. Negative gamma has us inclined to watch for a reflexive bounce, which could get legs into the end of the year. It’s pretty tricky stuff here. Monday could be very interesting.

I see stock after stock and index after index repeating the same pattern. They all went higher after covid and are now sliding back down to their price just before covid hit. Coincidence? The post-COVID era was just a sugar high full of government stimulus, and that stimulus marches on. The good news? Corporations have had two years to increase earnings and buy back stock. That means their valuations are cheaper and thus more valuable to us at those same prices.

The hard part of the drip, drip, drip is that it makes it harder to hedge. Hedging has a time value that erodes with time. It basically costs you money the longer you hold it. It is making this environment very painful for some.

It is hard to stay on the sidelines, so we nibble. I still think we see some sort of tradeable low for bonds, but it is just drip, drip, drip. Year-end sentiment could easily take over in this negative gamma environment. Remember, it works both ways. Volatility up and down. Not just down. They could just as easily rip the market higher on little to no volume. We try to prepare for both.

“Short term volatility is greatest at turning points and diminishes as a trend becomes established.”– George Soros 

I think we aspire less to foresee the future and more to be a great contingency planner… you can respond very fast to what’s happening because you thought through all the possibilities, – Lloyd  Blankfein 

A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill 

To learn more about us and Blackthorn Asset Management LLC visit our website at www.BlackthornAsset.com . 

Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor. 

Full Swing

College football season is in full swing. I love college football. Having had 2 University of Georgia students and experienced the excitement and the pageantry of college football – not to mention the winning – in the fall Saturday is the day of the week we look forward to the most. It bonds us together as a family and is a passion that we all share and enjoy.  It has gotten to be a tradition that every week we get together with my brothers and their families and watch the Georgia Bulldogs. We have become very superstitious over the last couple of years, and it mostly centers around food. We absolutely must have Jersey Mike subs with jalapeno chips, meatball sandwiches and most definitely no blue taco chips. For some reason they are bad luck.  I love this time of year, but I am packing on the pounds. I am going to slide right into Thanksgiving up 15 pounds at this rate.  I think I am already up a good 7. A little more gym and a little less on the meatballs.

The Saudis are planning to sell another $50 billion in shares in the national oil company known as Aramco. You can bet that the Saudis and friends will try to keep the price of oil trending towards $100 a barrel until they do. The Strategic Petroleum Reserve is the lowest it has been in some time. I think that the administration will not let that stop them from tapping into it again to keep oil prices down. I doubt they will have much luck. There are things happening on the geopolitical stage that are tailwinds at the back of oil prices. We told you that we didn’t think that the battle against inflation was over.

The dollar has been higher for the last 8 weeks. The Fed raising rates and holding them higher for longer is contributing to that rise. We are starting to see tremors of volatility in currencies from the Mexican peso to the Japanese Yen. The Fed may soon be faced with a dilemma. Fight inflation or cause a currency crisis? The US is the world’s central bank, and the world is dependent on dollars. An example is that a country may have its debt denominated in US dollars. Why? No one trusts that country’s currency, so to float the debt it is priced in dollars. When the dollar goes up it is harder for that country to pay back their debt and they must buy dollars – driving the price even higher. You get my drift. A further rise in interest rates and further rise in the dollar is going to cause problems in the emerging market and currencies such as the Peso and the Yen.

We have written about the Generals of the market in the past and their performance is becoming a concern. We have certain stocks in the market that we consider Generals. The Generals lead the market. Some of those Generals are Apple, Nvidia and LMVH the leading luxury goods brand company. They have been taking a beating of late. Will the rest of the market follow?

The market is set to get back into full swing this week as traders get back from the Hamptons. CPI inflation data hits on Wednesday and the Federal Reserve meets the following week.  Our volatility indicator went red briefly but is back to yellow. It means to us that volatility is about to pick up in the markets, so we are a bit cautious here and looking for a selloff. The end of this week brings one of the largest options expirations of the year which could hold the key to unlocking markets and bringing that volatility we have been banging on about.

For now, our signal refuses to go fully red. Maybe the market is going to cool off enough and downside hedges will accumulate which will cushion any news to come our way. We don’t think so. We will continue trusting but verifying our data. The market is due for a burst of volatility. We hope to take advantage.

“Short term volatility is greatest at turning points and diminishes as a trend becomes established.”– George Soros 

I think we aspire less to foresee the future and more to be a great contingency planner… you can respond very fast to what’s happening because you thought through all the possibilities, – Lloyd  Blankfein 

A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill 

To learn more about us and Blackthorn Asset Management LLC visit our website at www.BlackthornAsset.com . 

Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor. 

So Long Summer

My longtime friends from high school and I have a unique tradition. Every five years, we embark on a special trip with our wives. In 2018, on the occasion of our 50th birthday, we celebrated in Tuscany, residing in the splendid villa owned by Trudy Styler and her husband, Sting. This year, we opted for a change of scenery, spending our cherished time aboard a yacht in the sun-soaked landscapes of the French Riviera. Among the destinations, St Tropez stood out as my personal favorite. You can see why people are drawn to it year after year. It is a quaint fishing village with the most perfect and gleaming cobblestone streets. It is so perfect that it makes you feel like you are on a movie set. You feel as if you have stepped back in time to a simpler, more straightforward time and place.

Nonetheless, the vigorous traveling took a toll on both Diane and me, leaving us a bit drained upon our return. Amidst the globetrotting, we managed to carve out a slot to visit Diane’s brother in Palm Coast, Florida. His recent relocation there marked a significant shift after three decades spent in Dallas. Witnessing him embrace this new chapter in his life and seeing him so happy fills us with immense excitement and joy.

As we transition back into work mode following our rejuvenating summer vacation, we find ourselves with a renewed sense of energy and determination. The break has granted us the opportunity to recharge, and we hope you have had a chance to do the same. Now we are poised once again to tackle the challenges of the market. Armed with a refreshed perspective, we’re prepared to take on whatever the markets may throw our way – and we think that it is about to give us all we have bargained for.

While it has been a sleepy summer and, in general, a sleepy 2023 we think that the back half of 2023 is going to be very different that the first half. Our proprietary indicator tells us that volatility is about to make its way back into markets. It is a signal we have developed, taking cues from some of the best and brightest traders and researchers. It only gives us these clues every couple of years. Right now, it is flashing caution. It tells us that volatility is about to rise in the market, and there is a way to play that trade. As a rise in volatility is usually accompanied by a fall in stocks, it also implies that stocks are about to fall, but that is not guaranteed. Our data indicates that we would expect this to start to come to fruition over the next couple of weeks and that stocks should fall between 5-20%.

We mentioned several weeks ago in our letter that it would be most like the market to suck back in all those who had sought shelter for the coming recession. We also mentioned that a break above 4200 on the S&P 500 would be the cause. The rise to 4600 has pulled everyone back into the water. Systematic strategies are back and “all in” while hedge funds net leverage is approaching the 99^th percentile. Going back to 2008, downside protection in puts has never been cheaper. One of the best trades in 2023 has been selling volatility. That is like picking up pennies in front of a steam roller. We think the steam roller is about to have its day.

We see the coming uptick in volatility as an opportunity. This is not the crash of 2008 or 2020.

Band of America writes that we are seeing a turn in psychology, but this is not complacency, according to the investment bank. Such sentiment uplift, especially after a long stint in the panic zone, often suggests a shift in investor psychology rather than complacency, similar to trends observed during 1990-91, 1998-99, 2001-02, 2008-09, 2011, and 2015-16.

We will know if the shift in sentiment turns this into the beginning of a more prolonged bull market when the S&P 500 tests the 4000-4200 area. A short-term selloff of 9-13% would present itself as a healthy selloff burning off positioning too heavily weighted towards the bulls.

“Short term volatility is greatest at turning points and diminishes as a trend becomes established.”– George Soros 

I think we aspire less to foresee the future and more to be a great contingency planner… you can respond very fast to what’s happening because you thought through all the possibilities, – Lloyd  Blankfein 

A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill 

To learn more about us and Blackthorn Asset Management LLC visit our website at www.BlackthornAsset.com . 

Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor. 

The 70’s?

My daughter came to visit this week. We were talking about the economy, and I said that the recession -given the unfolding banking crisis – was now on its way. She looked at me and said “You mean this wasn’t the recession? It gets worse?” Unfortunately. Diane laughed when I told my daughter that this was my third “once in a lifetime” global financial crisis. On other unrelated news my youngest received admission to the University of Georgia – 2 time defending National Champions!! It took an extra year, but he made it. It was wonderful to see him set a lofty goal, take his setbacks in stride and continue with persistence and dedication to his goal. Very proud.  

The Fed has a decision. Now that their interest rate policy is starting to cause things to break, they have two choices – both of which are bad. They can continue to raise interest rates and watch the systemic risk to the system increase or cut interest rates and watch inflation explode. I expect them to raise rates one more time but eventually they will choose to save the system. They will choose financial stability. They will choose inflation. It’s politics.

While this banking crisis looks ugly it does have a silver lining. It should help bring down inflation. The banks will become more cautious about lending, which will lead to a tightening of credit standards. This, in turn, will make it more difficult for small businesses to access credit, which will potentially lead to higher unemployment, slower economic growth and lower asset prices. This will go a long way to fighting inflation.

“CPI doesn’t really matter. What happened over the last 3 days has done Powell’s job for him. Credit creation at banks will collapse & the economy will slow. Inflation will taper off as a result. Any rally on the view that the Fed doesn’t need to raise anymore is silly. If they don’t raise, it’s because of systemic risk to the banking system. Not a positive.” – JPMORGAN

 It won’t, however, cure us of the inflation bug. The Fed will not be able to raise rates high enough to squash it. This is why this is a 10-year fight on inflation will come in waves. We will invest accordingly, and this will include a good amount of tactical movement as asset classes fall into and out of favor.

We have told people in conversation that we felt that Credit Suisse (CS) was next. Probably, not something you should write down and quite irresponsible – to tell you the truth. Finance is all about confidence. Runs on the bank only happen because people have lost faith in that bank. How did we know CS was next? Their Credit Default Swaps (CDS) were trading up front. That was the death knell. Bottom line – that means everyone had lost faith in them and did not want to do business with them. They were a dead bank walking. Lots of rumors as the deal is still in motion but CS will probably be gone by Monday morning. There will be repercussions felt. The next problem is going to be Commercial Real Estate. Small to mid-size banks do 80% of all commercial lending. Credit is going to tighten up. Some firms that hold large Mall or Office space are fighting for their lives. I know of one large name that has CS as its biggest tenant. The dominoes are not done falling.

The playbook from the 70-80’s says to sell on the last rate hike which should come this week. However, the playbook from the last 20 years says buy the last rate hike. I think we go with the 70’s playbook.

This bank problem can fix itself somewhat. Banks are long assets that will rise in price if rates come down. That will help their balance sheet. This is a problem caused by the Fed. They have the power to end it if they don’t let it get out of control. Understand that the Fed wants stocks to go lower to restrict financial conditions to bring down inflation.

Recession is here. The Fed will raise rates again next week to show commitment and strength. if they don’t then everyone assumes we are in deep trouble and panic resumes. It will be the last rate hike for a while. Weekends are going to be important now especially holiday weekends. Banks can blow up, but central banks can act / cut rates. Emergency rate cut would send markets soaring first before falling. 

When Bear Stearns failed markets rallied at first then went lower. Lehman fell months later. Things are now happening in days. If we break 3800 on the S&P we go to 3400 very quickly.

“Short term volatility is greatest at turning points and diminishes as a trend becomes established.”– George Soros 

I think we aspire less to foresee the future and more to be a great contingency planner… you can respond very fast to what’s happening because you thought through all the possibilities, – Lloyd  Blankfein 

A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill 

To learn more about us and Blackthorn Asset Management LLC visit our website at www.BlackthornAsset.com . 

Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor. 

Lucky

We went out to dinner in mid-town Atlanta this week. While that might not seem like a big deal to you, in 15 years, it is probably our 2^nd time out in the big city. Mom was in town and my daughter had a big week at work, so we went out to celebrate. As we sat deliberating the menu, I realized how lucky I am. I was sitting at this wonderful restaurant with the three most important women in my life. Three generations of smart, beautiful women. I’m one lucky guy.

We have always believed that the bond market is a leading indicator for the stock market. Changes in the bond market tend to precede and forecast changes in the stock market. Or as we see it – the bond market is like the stock market’s smarter, older brother. Changes in the bond market reflect changes in interest rates, inflation expectations, and overall economic conditions, all of which have a significant impact on the stock market. When interest rates rise, for example, it becomes more expensive for companies to borrow money, which can negatively impact their earnings and stock prices. This week we saw a bit of a dislocation in the bond/stock market relationship. The bond market is not buying what the stock market is selling. Corporate bonds and high yields have begun to struggle and diverge from the northern trajectory of the stock market. When the bond market diverges with the stock market, we go with the bond market.

We spent the week going through a mountain of research. We were inundated with a plethora of charts of soaring asset prices followed by a sharp fall and a subsequent rebound. Lumber – Used Cars – Eggs –  Orange Juice. The whole world during COVID was doing the same thing at the same time. Government after government also did the same thing – shove money into people’s hands. There is too much money in the system and the Federal Reserve needs to get it out. Inflation is going to come in waves. This is just wave #1. It will take years to normalize policy. Next week is a big week as inflation data is coming out and we have an options expiration at the end of the week. This week will go a long way to determining the direction for the rest of the quarter.

The pain trade might be lower now. The positioning that pushed markets higher at the dawn of 2023 has now flipped. CTA’s and systemic strategies are now long. Shorts have covered, and retail has bought in. If the market were to turn down the CTA’s and systematic strategies would all flip on a dime and begin to chase markets lower. If we head higher, it should be more controlled. The pain trade is lower.  There are concerns in the market that Adani Group (until November it was the largest company in India) has liquidity issues. Another company fighting those rumors is Credit Suisse – the 2^nd largest bank in Switzerland. Interest rates are rising. That is like the tide going out. We might be about to find out that some have been swimming naked.

“Short term volatility is greatest at turning points and diminishes as a trend becomes established.”– George Soros 

I think we aspire less to foresee the future and more to be a great contingency planner… you can respond very fast to what’s happening because you thought through all the possibilities, – Lloyd  Blankfein 

A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill 

To learn more about us and Blackthorn Asset Management LLC visit our website at www.BlackthornAsset.com . 

Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor. 

Last Time

Well, that’s the last time we talk about the virus. Seriously, we heard from both the right and the left on this one. My brain is hardwired to make life decisions just as I would make investing decisions. I simply made a decision with imperfect information and multiple variables. It’s Investing 101. I took my time and assessed the data. The hard part was being patient to get the right amount of data and not giving into my emotions. We invest the same way. Investing should be as unemotional as possible. Unfortunately, the higher the stakes the more emotions get involved. Investing takes patience and discipline. You have to stick to your process which helps eliminate the emotion. The emotions of fear and greed are your enemy.  

Our daughter got word from Caterpillar last week that they will let her know if a full time position is available for her in the next two weeks. Saturday, our senior in high school took the ACT’s for the last time. He felt good about his performance. It is going to be a very important and eventful month in the Reilly house. BTW – all this last stuff is starting to get to me. It is going to be an awfully quiet house next September. Diane said she is going to pick up golf so she can play with me. She went to the range on Saturday and did great for her first time. Maybe that’s it. We need more firsts and less lasts.

All of the major banks have been gradually working their way to becoming bears. This is shocking. Why? Investment banks are ALWAYS bullish. They are selling the dream. Yes, things have probably gone too far in regards to valuations in the stock market. It has to go down some time? Right?! All of the major banks agree that the market is too high and due for an imminent drawdown of 10-20%. One of the rules that we have come to rely on in our investing is from the great Bob Farrell at Merrill Lynch. When everyone agrees that something will happen – something else will probably happen. It is simply the fact that if everyone thinks that the market is going to go down then they are all prepared for it. They are betting on it. They have insured themselves against that risk. If everyone is ready for it then it won’t happen. If no one is prepared for a crash, if no one has insurance, and has on too much risk – then the market can proceed lower. Our signals are telling us that market players have insurance on and are prepared for a drawdown. The market may go down but there is a buffer and strong support underneath.  

I think we aspire less to foresee the future and more to be a great contingency planner… you can respond very fast to what’s happening because you thought through all the possibilities, – Lloyd  Blankfein

A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill

To learn more about us and Blackthorn Asset Management LLC visit our website at www.BlackthornAsset.com .

Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor.