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Too Many Shorts...

BentinPartner Weekly




Optimism ruled throughout most of the past week, enabling stocks to print new highs for the year, starting with optimism on the approaching final act of the debt ceiling theatre, firming up expectations that the Fed will skip tightening rates this month, a further drop in commodities contributing to take away the inflation narrative, more economic data pointing towards more softness but no hard landing in US economic activity and finally, a stellar job report on Friday that beat market expectations for an historic 14th consecutive time thanks to a 231k assumed job growth coming from the birth /death model (measuring sometimes mostly fictitious job creation).


Congress agreed to extend the US debt ceiling until after the 2024 US elections, kicking the can further down the road, leaving the Treasury in a position to now have raise USD2.1trn before year end to refill the TGA account and fund an expected 2trn deficit this year, leaving military and social spending unaffected. The NYT estimated the US federal deficit will reach USD50trn before the end of the decade.


The “Fiscal Responsibility Act” brought the debt ceiling theatre to its last act, soothing some investors’ concerns. More money will be spent which will not prevent the US debt from reaching 130% of US/GDP by year end with the wealth gap getting wider and the economy expected to grow only at an anaemic rate of 2% this year before possibly entering into recession in 2024.

Fitch said it could still downgrade the long-term US debt rating despite the debt limit resolution, due to “the fiscal deterioration of the past 15 years, growing polarization and repeated brinkmanship on the debt limit”.


“Worriers”, grew concerned last week by spiralling violence that US and European authorities are now trying to contain in Kosovo, a Balkan nation created after the breakup of Yugoslavia in the 1990s, after Kosovo authorities pushed to install ethnic Albanian mayors in areas dominated by ethnic Serbs following local elections that were boycotted by the Serbs and dismissed by international observers as unrepresentative, the WSJ reported. This brought back a hot spot in an area that remains a powder keg for historical reasons.


However, technically, the market continued to improve with the strongest performance coming from the banking sector which rallied 5% (and PacWest which squeezed 14%). Gains were broad-based, this time with improving breadth, and likely force feeding some significant short squeeze activity among a heavily “hedged” speculative hedge funds.


Judging from the non-commercial short base on the S&P 500 futures, it is difficult to imagine the prevailing historic short speculative positioning being conducive to equity market weakness, at least not over the short term…without fresh negative catalysts.





Energy and Industrials also rose 3% which concurred favourably to broaden an equity market rally of which the big negative so far was its narrowness. Even small caps broke out, reaching the top of our z-score report (+3.9 sigma) on Friday.


Elsewhere, the BoJ was said to be unlikely to change its yield curve control program amidst speculation Prime Minister F. Kishida will call a snap election, according to a former board member.


In its week end opinion, Morgan Stanley said “the global economy sees large regional divergence and that it expects China’s recovery to reaccelerate despite a recent run of weak data, with ~6% annualized growth in 2H23 and additional easing if growth continues to disappoint. More broadly, Asia sees much stronger growth, lower inflation and easier policy than the US and Europe over our forecast horizon”, Morgan Stanley opined, building a case for some continued recovery in Chinese equity markets.


 

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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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