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More Short Covering…

Updated: Feb 4, 2023

BentinPartner Weekly



Stocks ended the week in short covering mode, led by the tech-heavy Nasdaq while the Dow Jones lagged. The sentiment was buoyed on Friday by Netflix results that helped CTAs pressing on the upside once the 200Ma resistance level on major US indices had been breached.


While gains were solid on Friday, they materialized in the context of rising bond yields (bond yields dropped very slightly for the week as a whole) and offset the negative performance seen earlier in the week (on broad indices).


Mike Wilson from Morgan Stanley, in his weekend note, reiterated a call for the S&P to print new lows in Q1-Q2, arguing that most of the improving narrative rested on calls for a softer landing of the US economy and (a suspicious) price action that propelled the most shorted stocks and cyclical names higher, leading investors to believe that they are missing the bottom in a context where most investors lost money last year questioning their own process and losing confidence.


M. Wilson does not bite in the rally “because our work and process are so convincingly bearish on earnings… with the gap between our model and the forward estimates as wide as they have ever been”, arguing that the last time it happened the S&P dropped 34%.


For now, at least, the price action is not supporting this view nor the technical picture but M. Wilson’s track record as one of the best forecasters keeps us on our toes.


Talking of earnings, last week Goldman fell short and Morgan Stanley beat estimates with both stocks taking their own diverging path. Other financials came in mostly better than expected as well.


The World Economic Forum discussed about inflation, the war in Ukraine, climate, and a few others after world political, economic, and business leaders flocked to Davos (mostly using private jets).


The topic of the war in Ukraine and climate change are so political and controversial that not much came out of it. The war in Ukraine in particular remains an unwedgeable risk, discussed ad nauseam (with most sticking to the official Western narrative) but largely ignored and clearly belonging to the black swan category.

The most puzzling news or picture (and confirmation that Russia is preparing for a turn to the worse) was to see anti-missile batteries installed on the rooftop of Russia’s Interior Ministry in Moscow. Over the weekend some cracks appeared on the sacred union to send whatever military equipment it takes to Ukraine as Germany objected during a NATO meeting to transfer heavy tanks to the Ukrainian battlefield any time soon.


On the issue of health and vaccination, the Head of Pfizer delivered the good news in Davos that his company was working on a new “all in one” vaccination for both the seasonal flu and covid… (to save us time and hassle).


Adding to woes from economic data from the past week, job cuts in tech land intensified with Microsoft announcing on Wednesday that it was laying off 10’000 (5% of headcount). Amazon had announced a little earlier that it was cutting 18’000 jobs and Google announced on Friday that it was laying off 6’000 employees (some of whom had recently been promoted) which suggest some precipitation in the decision and one that was perhaps motivated by the need to follow the herd and give its share price a jolt.


Evidence keeps accumulating of the ongoing slump in US real estate with some spreading noted from the housing market to commercial real estate, raising the risks of credit turmoil as rising interest rates take their toll. UK commercial property values fell more than 20% in the second half of 2022, while in the US, the drop was about 9%, Bloomberg reported.


Elsewhere in Japan, (see an article from J. Grant that we forwarded last Wednesday), the odds of an accident continued to rise with analysts opining that “Global funds will pressure the Bank of Japan until it capitulates and tightens policy”.


Signals from the ECB were of varying meaning last week, first signaling on Tuesday that policymakers are starting to consider a slower pace of interest-rate hikes than President Christine Lagarde indicated in December (causing 10y bund yields to drop all the way back to 2%), then on Friday with C. Lagarde promising to stay the course as inflation remains too elevated (which is fairly obvious), causing bond markets to sell off.


Gold and precious metals rose further with GLD reporting the first net buying so far this year and the narrative on precious metals remaining supported by resilient inflation fears and lingering “talks” of de-dollarisation risks which also seemed to fuel the strong rally in cryptocurrencies last week.


 

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Over the past week, the S&P500 dropped -0,3% (3,5% YTD) while the Nasdaq100 gained 1,3% (6,2% YTD). The US small cap index dropped -0,4% (6,1% YTD). AAPL rallied 3,3% (6,1%).

Cboe Volatility Index rallied 5,4% (-8,4% YTD) to 19,85.

The Eurostoxx50 dropped -0,9% (8,9%), underperforming the S&P500 by-0,6%.

Diversified EM equities (VWO) gained 1,5% (9,0%), outperforming the S&P500 by 1,8%.


The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies dropped -0,1% (-1,3%) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) dropped -0,3% (2,2%).


10Y US Treasuries rallied -2bps (-40bps) to 3,48%. 10Y Bunds climbed 1bps (-39bps) to 2,18%. 10Y Italian BTPs dropped -2bps (-72bps) to 3,99%, outperforming Bunds by -3bps.

US High Yield (HY) Average Spread over Treasuries climbed 17bps (-45bps) to 4,24%. US Investment Grade Average OAS climbed 0bps (-9bps) to 1,34%.

In European credit markets, EUR 5Y Senior Financial Spread climbed 3bps (-8bps) to 0,91%.


Gold gained 0,3% (5,6%) while Silver dropped -1,4% (-0,1%). Major Gold Mines (GDX) rose 0,7% (13,1%).


Goldman Sachs Commodity Index gained 1,7% (1,1%). WTI Crude rallied 4,1% (1,7%).




Overnight in Asia,,,


  • S&P500 -4 points; Nikkei +1.1%; CSI300 unch.; Hang Seng +1%

  • Stock futures are little changed overnight awaiting more Fed signaling and a slew of earnings reports this week.

  • Coming days after the company filed for bankruptcy, ex-Genesis executives claimed over the weekend that they raised millions for a crypto hedge fund.



Marc Bentin, BentinPartner GmbH

Chief Investment Officer

 

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Marc Bentin serves as Economic Advisor to Blue Lotus Management,

a specialist multi-manager investment firm, which seeks to provide investors a compelling alternative to the traditional 60/40 equity and bond portfolio by targeting higher returns without amplifying equity risks.


BentinPartner GmbH is Advisor to the Phi Funds AIF, an umbrella Alternative Investment Fund registered and regulated in Lichtenstein, specializing in the management of Funds focused on physical precious metals.

 

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