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The Dog is Eating His Own Tail...

Updated: Sep 25, 2020

BentinPartner Weekly

Dear Reader,

Widespread economic devastation and grim prospects of an economic recovery amidst a developing second wave did not stop equity markets or rather US equity markets last month and last week as they remained fueled by the Fed’s unwavering support and expectations for more fiscal stimulus.

Over the past week, the S&P500 gained 0,8% (5,5% YTD) completing the recovery from the post Covid selloff while the Nasdaq100 climbed 3,6% (32,6% YTD), supported by Tesla’s bubbling dynamics that were further fueled by a stock split (that will make the stock look more “affordable”) and the much talked about likely entry of this stock into the S&P index that will have many passive investors forced to invest in the stock. Also helping was the continued rally in tech Covid names that are cannibalizing the rest of the economy. The US small cap index was weaker however, dropping -1,6% (-6,7% YTD) as investors continued to pile into tech names that not only rallied over the summer but went ballistic over the past few weeks while most international indices languished or headed lower.

US markets are now extremely -and more than ever- techno dependent…It might be wise to sit out a few more days as well before expressing any negativity on Tesla. While shorts on Tesla (+400% YTD with a PE of 895) shares have been decimated, Friday afternoon saw a Bloomberg article stating that bears have gone extinct on the market as a whole with the USD13trn market rebound.

There are still some negatives to account for in today’s vibrant (but US centric) risk appetite context; the upcoming US elections that are not a done deal for D. Trump (he is seen lagging by 10 points) and the turn for the worse in the US/China relationship. D. Trump called off trade talks (except with Taiwan…) last week. The US State department told colleges and universities it would be “prudent” to divest from Chinese firms in the likely outcome that enhanced listing standards lead to a wholesale delisting of Chinese firms from US exchanges. The only logical and “prudent” thing to do (Chinese markets keep outperforming US counterparts this year) as a free investor will be to move their holdings of Chinese shares from the US exchanges to Hong Kong.

One thing is clear from what is happening in the tech sector more broadly; it is exacerbating inequality in stock market as never before. One position at one of the tech firms considered as “must have” in today’s portfolios is a ticket to extraordinary riches that day traders are only trying to reproduce without grants. It is fueling speculation as never before at the same time as millions of people are losing their jobs amidst gloomy prospects for doomed industries. It is quite astonishing that nothing is being made to cool things off. Probably because nobody dares…ahead of the elections when everything cheerleader in chief D. Trump says or does is aimed at propping up stocks (including with the overnight non-FDA approved announcement of yet another break through Covid treatment) as a testament of his “economic” success…

Another circular relationship struck us last week, with Apple going on a borrowing binge at ridiculously low rates, to finance share buybacks and prop up its share price (this did not prevent 1/5 stock split serving the exact same purpose). What is odd is that Apple is now issuing bonds yielding near zero, courtesy of the Fed money printing which serves to fund (entirely?) not only the galloping US fiscal deficit but also a skyrocketing corporate issuance that includes…. directly or indirectly Apple bonds…. This is the illustration of a dog eating its own tail and a good reason why, despite the recent corrections, the dollar is still likely heading lower with a mirror like positive action on precious metals. Still and over the short term we squared our dollar short.

CBOE Volatility Index rallied 2,2% (63,6% YTD) to 22,54.

The Eurostoxx50 lagged further -1,5% (-11,1%), underperforming the S&P500 by-2,3% on a lower than expected PMI in Europe contrasted with a stronger than expected one in the US).

Diversified EM equities (VWO) gained 0,6% (-1,1%), outperforming the S&P500 by -0,1%.

The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies was unchanged on the week (-3,0% YTD) as was the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) (-3,2% YTD). The dollar managed a small bounce late last week after the Fed minutes suggested the Fed was not considering imminently the introduction of yield curve control. There is no need for it at the moment…and when the facts change the Fed will likely change its mind as well.

10Y US Treasuries rallied -8bps (-129bps) to 0,63% recovering the setback from the previous week. 10Y Bunds dropped -9bps (-32bps) to -0,51%. 10Y Italian BTPs dropped -4bps (-47bps) to 0,94%, underperforming Bunds by 4bps.

US High Yield (HY) Average Spread over Treasuries climbed 3bps (165bps) to 5,01%. US Investment Grade Average OAS climbed 4bps (38bps) to 1,39%.

In European credit markets, EUR 5Y Senior Financial Spread dropped -1bps (12bps) to 0,64%.

Gold dropped -0,2% (27,9%) while Silver gained 1,3% (50,1%). Major Gold Mines (GDX) gained 1,3% (39,7%).

Goldman Sachs Commodity Index dropped -1,1% (-27,3%). WTI Crude gained 0,8% (-30,7%).

Over the week end…

Asian stocks are trading higher this morning, supported by last Friday’s US rally.

The Washington Post echoed D. Trump’s sister opinion about her brother (not his niece) thinks of his brother…

Protesters gathered in Minsk as opposition forces try to keep up pressure on Belarus President Lukashenko (whose Kremlin support is only half hearted given that the opposition is pro-Russian as well).

Have a nice week ahead.

Marc Bentin, BentinPartner GmbH

Founder, Chief Investment Officer


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