Pride Goeth Before the Fall? – A Performance Review of 2021

It’s been awhile since completing a review of market calls made here at Marginrich.com.  As my general knowledge of market inter-workings and crowd psychology has refined over the past several years increasing in nuance and depth, now’s as good a time as ever.

Let’s start with accuracy percentage and a list of the articles with basic details.  Then I’ll provide a quick, detailed breakdown of each call afterwards down below.  We’ll work backwards from the most current post, skipping 2 posts where I don’t make any directional calls or predictions.

Nine of the 11 asset forecasts between December 2020 and December 2021 were correct, for an accuracy rate of 82%.  Stellar by any definition, especially for a free blog written in spare time.  Each forecast was actionable via options, futures, the underlying asset, or simply raising cash.

Forecasts:

1. Trading Brazil – 12/12/2021:  The Brazilian Real would strengthen against the US Dollar and Brazilian stocks were about to be re-rated higher. (CORRECT)

2. Options Markets Muting Signals – 11/20/2021:  Trapdoor underneath stock markets and potential for a large selloff in the near future. (CORRECT)

3. Insiders, Metaverse, and Options – 11/16/2021:  Options usage too extreme; quick & shallow selloff felt very close. (CORRECT)

4. I Can’t Fight This Feeling – 10/24/2021:  Commodities sentiment extreme and due for a selloff led by oil with a rise in the US Dollar. (CORRECT)

5. If Everybody’s Thinking Alike, then… – 9/13/2021:  Technically, I stated the cannabis sector looked as if it might be basing for a potential up-move.  I didn’t actually make a directional call, but I’ll still own it. Same goes for EWZ, for which I actually did make a directional call 3 months later. (WRONG)

6. Volatility Interpretation – 9/1/2021:  Volatility was about to show its face in stock markets. (CORRECT)

7. I Don’t Know Why I Talk About Crypto in a Public Setting – 8/30/2021:  Ethereum on the verge of another run upwards. (CORRECT)

8. The Best Part of Waking Up – 7/22/2021:  A correction in coffee was imminent. (CORRECT)

9. Bitcoin – A Quick Technical Read – 7/16/2021:  I thought BTC had one more puke-dip into the $20k range, anywhere between $21k and $29k.  Major whiff.  My article actually bottom-ticked that particular correction before BTC went on to return over 100% within 4 months. (WRONG)

10. Oil Taking Its Breather…Finally – 7/7/2021:  Oil correction had begun (not obvious yet) and XLE would sell off accordingly. (CORRECT)

11.  Beware the Secular Trend’s Short-term Counter Move – 12/28/2020:  The Euro/USD pair had reached an extreme point and a USD rally looked primed, which would coincide with potential fear-events in the equity markets. (CORRECT)

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So that’s the quick and dirty.  Keep reading below for a bit more detail and to view the charts better illustrating each forecast.  Each chart will have a yellow circle denoting the date the article was published.

Trading Brazil:

EWZ Performance

Calls on EWZ were the chosen expression for this trade.  Pre-tax return was 100% in less than 2 months.  While everyone has been focused on energy, I focused on an EM component that looked ripe to provide a kickstart to 2022 trading.

Brazilian Real Strenghening Against the USD

Real strengthening vs the USD.  Any reader could’ve bet futures here on the currency pair for a tidy profit.

Options Markets Muting Signals:

NASDAQ Performance

This particular article actually top-ticked the NASDAQ Composite, but I didn’t go short here.  Hindsight being what it is, I should have, but instead I simply raised cash levels for the opportunities that are currently availing themselves.

S&P 500 Performance

My focus was on the NASDAQ in this article however one has to include the S&P 500 if one is going to comment on general equity markets.  No top-tick as there was a bit more demand for the S&P 500, but within a matter of weeks, the trapdoor opened for this index, too.

Insiders, Metaverse, and Options

SPX Performance Turkey Day

You could almost smell the move coming, like a turkey basting for hours.  Then, Black Friday delivered a little fear for the unprepared.  No trade here as raising cash was the strategy, and the ensuing rallies assisted with that process.  Going short up until the past few months was a dangerous endeavor and understanding option flows was and is critical.

I Can’t Fight This Feeling

DBC Performance

That little 11% jaunt downward in the underlying ETF over the next month resulted in a 135% pre-tax return on simple Put purchases.  Of course, energy as a sector is a different beast entirely now, and along with inflation, the Russia/Ukraine conflict has put commodities front and center of the financial space again.

USD Performance

The US Dollar followed it’s typical anti-correlation to commodities by rising.  Since that initial run upwards, it has chopped in this uncertain environment.  I suspect the ultimate, long-term path is downwards for the USD, but that’s a philosophical discussion for another time.

If Everybody’s Thinking Alike, Then…

MJ Performance

Ugh, what else needs to be said?  This one is ugly.  To reiterate, I did not actually make a directional call or bet here.  I simply thought that the bear market in cannabis may be reaching a nadir.  But investors and speculators had other ideas as the market pounded this ETF for an additional 50% loss subsequent to publishing the article.

Volatility Interpretation

VIX Performance

The article literally bottom-ticked the VIX.  Unfortunately, I didn’t directly trade Vol here.  I used the ensuing volatility to pyramid some positions in the long portfolios.

I Don’t Know Why I Talk About Crypto in a Public Setting

ETH Performance

Those percentages in the chart above were from the publishing date of the article (yellow circle).  The actual moves were,  20% as annotated for the first ascent, then a quick 50% downdraft followed by a 75% spike.  If you ignored ETH in 2021, or crypto period, then you missed some of the best trading opportunities of the year.

The Best Part of Waking Up

Coffee Performance

Coffee was the gift that kept on giving for about 4 weeks in late July through late August, before squeezing out of an old school pennant to what seems like non-stop upside.  The initial trade was simple Puts on the JO ETF for a 40% pre-tax return in a week.  Then I was able to scalp 20% in a week out of JO with some Calls before finally squeezing the last bit of Put juice for 10% in a week before THE breakout in coffee.

Subsequent to those trades, I did overestimate the extreme in buying-sentiment and underestimate the impact of the freeze in Brazilian crops.  Consequently, I gave back a bit of the profit with additional Puts and failed to capitalize on the ensuing multi-month rally as a result of my bias.  All additional lessons at a fair tuition price.

Bitcoin – A Quick Technical Read

BTC Performance

I darn near bottom-ticked BTC with this particular forecast.  So wrong!  As BTC goes, so goes the crypto markets so it wasn’t long before I was pursuing the other opportunity as noted above.  As has been said countless times by countless players, trading is all about managing risk (control losses & maximize gains).

Oil Taking Its Breather…Finally

WTIC Performance

Oil (West Texas Intermediate) was overdone.  I top-ticked the high in July on the day of publishing and was fortunate to estimate an unsurprising 20% sell off in the commodity.

XLE Performance

I favored Puts on the XLE as the expression for this trade and the market rewarded me with a 100% pre-tax return in under 8 weeks.

Beware the Secular Trend’s Potential Short-term Counter Move

USD Performance

I published this article in the midst of what felt like virtually everyone expecting the “obvious” demise of the USD.  The dollar’s imminent demise down into the $80’s has since proven to be fallacious logic.  Its haven status as the world’s reserve currency has kept it afloat and demand will probably keep it there for some time until internal and external geopolitical/economic events shift perceptions and capital flows.

Euro Performance

Once again, the anti-correlated pairing could’ve provided currency traders with an exceptional opportunity.  Admittedly, I failed to take advantage of this potential trade with a currency pair expression.

S&P 500 Performance

What I did do was expect more intense volatility.  As such, I purchased hedges which ended up costing me insurance premiums as the S&P 500 simply chopped for a month before continuing onward and upward.  Sure, I was correct about some volatility but wrong about the amplitude.  Still though, I contend that the price paid for peace of mind was worth it.

It’s my sincerest hope that if you’ve read this full performance-review that my skills and experience are apparent.  I’m not some wannabe, greenhorn daytrader posing as a professional.  Although I mostly showcase my technical analysis skills here at the site, I’ve honed my fundamental analysis skills for all asset classes and sectors.   Over the last 20 years, I’ve poured my heart and soul into building an amalgamated skill set around a professional-level understanding of investing, finance, banking, currencies, economics, accounting, business operations, sales, geopolitics, crowd psychology of markets, leading/managing/coaching, and asset management.

Now I’d like to test those skills in the appropriate arena.  If you’re here just to have a read, I hope you’ve enjoyed.  I’ll continue to intermittently share actionable thoughts.  But if any readers from the professional, financial space are interested in how I can benefit their organization, please don’t hesitate to reach out.  Email address is listed at the menu button in the upper-right of the screen.  My LinkedIn profile can be accessed at the About page by clicking the hamburger in the upper-left of the screen.

Here’s to a fruitful 2022 for any and all readers of Marginrich.com.

Oil Taking Its Breather…Finally

For traders who’ve been waiting oh so patiently, it genuinely appears an oil sell-off has begun.  Discretionary trading requires sound, subjective judgement which comes through diligent research and a practiced  hand.  Do I have any of that?  It’s certainly questionable, but you’re here reading so let’s get to the squiggly lines.

There’s a massive confluence of moving averages, Bollinger Bands, and indicators on a weekly chart signaling a sell-off could have some legs, at least temporarily.  Have a look at the monthly chart of West Texas Intermediate (LC).  That horizontal yellow line represents a very good stopping point should momentum build to the downside as H1 P&L’s get protected.

WTIC-Monthly-7-6-2021.png

A 20% correction in oil would not surprise me.  This coincides with action and positioning in the US dollar.  For event-traders, OPEC+ activity has definitely raised hackles so I suspect stops have been pulled up pretty tightly which can exacerbate a move to the downside.

On the monthly chart above, since the bottom of that negative-price move in April 2020, hi-to-lo oil is up 1000% in 15 months.  It’s up 350% using closing prices, and hell, it’s up 135% since November.

We did get a 15% correction starting in March that began a little consolidation period from which oil has recently broken out.

WTIC-False-Breakout-Weekly-7-7-2021.png

I suspect that June breakout drew in a bit of newer capital that failed to position earlier and could be chasing in addition to pyramiding by existing position holders.  Feels like a false breakout from that wedge.  Commodities across the complex have all been taking breaks, but not the King of Commodities.  Consolidation yes, but no true breaks.

I’m of the persuasion that a commodity super bull has legitimately begun.  But that thesis ran so white hot with nary a breather, that now it’s time for the granddaddy of the commodity complex to kick up its legs for a minute.  Any multitude of ways to go short.

One of the methods I like is Puts on the XLE.  Vast liquidity with excess positioning will allow for a potent ROI on a well-timed swing.

XLE-Good-Bottoming-Point-7-7-2021.png

That horizontal yellow line on the weekly XLE chart also represents another good confluence of moving averages, bands, volume@price, etc.  Use any spread methodology desired within the options complex, but $45 looks like as good a point as any for a possible bottom and a consolidation to begin.

As usual, I’m handicapping here.  This is a personal bet just for me and no others using my own proprietary methodologies that have consistently given me an edge.  Risk management is always the key to a successful trade.  I use a mix of technicals, fundamentals, and anecdotals that all get swirled around the noggin until the organic computer kicks out a trade suggestion just for me.  Then I write about it on a site nobody reads anyways to help me flesh out and think about the theses a bit more.

If you’re somehow reading this content, it’s not a trade or investment recommendation.  I’m just thinking out loud.

Commodities and stocks have just been on a tear in 2021.  Performance as such for both the S&P 500 and BCOM has occurred a handful of other times in financial history.  It tended not to bode too well for commodities over the next couple of months.  Observe the following chart  from SentimenTrader.

BCOM-Performance-After-It-SP-500-Kick-Ass-Through-Day-122-of-a-Year-July-2021.png

Sample size not withstanding, with oil and natty combined being the largest component of the BCOM, a short thesis just might profit.

Another Bounce or Not

Hmmmm.  What to do in a market like this?

For your long portfolios, my advice would be to sit tight.  The odds are strong that we’re in a multi-week bounce before another little shakeout.

SPX Thru 2018 Holidays (Nov. 2018)

I’d suggest getting long after the next move downward.  Market behavior suggests a rally into 2019.  It could be the start of the final leg of the melt-up as “late-cycle” keeps getting bandied about out there.  Over the past few years, the drill seems to be a quick move down followed by the exhaustion-bounce followed by another move downward before regaining the up-trend (weekly charts).

For the contrarians, it’s hard not to look at China and energy as two obvious areas for medium-term plays.  If you play in the markets at all, I don’t need to throw up charts to illustrate the performance of both sectors of late.  Tencent and JD could be easy moneymakers.  And the energy toll roads can provide a nice yield along with cap. gains on an oil bounce over the ensuing months.

EPD has the infrastructure footprint and financial efficiencies that begs for yield-starved investors who’ve been waiting for a better opportunity for entry.  However, the company’s price remains quite steady in the $20 to $30 range.

Oil’s price action looks exhaustive.  Fundamentals appear to bear out an inexplicable magnitude of this sell-off.  If institutional traders on the wrong side are able to quickly offload positions, then there may be enough support by energy bulls to resume an up-trend without extreme volatility.  I remind energy traders of what we saw in H2 of 2016.

I liked the Starbucks story, but it quickly got white-hot before I could position with my long portfolios.

SBUX Retrace (Nov. 2018)

Based on the trajectory over the last several weeks, it wouldn’t surprise me to see a retrace down to the $56 – $58 range.  That’s a good spot to get positioned if you’ve been eyeballing this world-class caffeinator.

In the quasi-cash-equivalent area, muni-CEFs have presented recent value with their widened NAV discounts.  The discounts have come off a few points as investors have taken advantage of the historically free money and positioned accordingly.  The big question mark is interest rates.

Does the Fed raise rates next month?  If so, that could renew selling action in muni-CEFs and widen discounts again.

Interest rate tape reading has rates looking a little toppy.  Not like they’re going to topple over as we know the Fed will raise rates which will force support.  But still, I like interest rate-sensitive funds here to drive a little yield for a bit in place of sitting on excess cash.

          IIM Current NAV Discount (Nov. 2018)

          JPS Current NAV Discount (Nov. 2018)

Remember, these aren’t long-term investments.  We’re talking about using them as cash-equivalents, but their volatility makes them decidedly un-cash-equivalent.  We’re speculating on additional points on your money earned relatively conservatively.  Mind your stops.  Protection first.

Evaluating Markets Not Called Stocks

In my last financial post, I stated that I thought the market would move sideways for approximately 7 weeks before a catalyst would present itself to drive the market higher going into the beginning of the summer. So far, so good. Yes, the market is up about 1.5% but it appears to be the start of a sideways consolidation as the market exhales some energy.

I suspect we see a little downside move over the next week or two, as part of the sideways action, followed by a move back up to current levels about 3 maybe 4 weeks from now. By then, that catalyst should present itself for the resumption of the trend back up to new highs. Will my hot streak continue? If past is prologue…

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Right now, I want to talk about the US dollar and its potential effects on various commodities. Specifically, we want to watch oil, precious metals, and the grains.

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It’s easy to observe the stiff support at $94 and I think this time is no different. I suspect we get a slight bounce of about $4 up to about $98. This is in line with previous bounces off of $94 during this 15-month consolidation. There are plenty of analysts out there who think the USD bull will renew to move a lot higher. The thesis of the trade being a fear-based allocation in light of a pessimistic international outlook to various economies and the worthless, respective monetary policies currently employed by central banks.

I disagree. When the big one hits, the real correction across all markets, the USD will at first be a bastion of relative strength but that sentiment will be temporary. The problem with the thesis that we are in the early phases of a USD bull is that it runs counter to the other widely held thesis that the next financial crisis will be co-focused around an international collapse in confidence in the USD. That’s a discussion for a future post.

I believe the momentum has shifted for commodities. I suspect the worm has turned in the precious metals complex. Corn, wheat, and soybeans are potentially at the beginning of a spike. Oil has been unstoppable, but that DOHA meeting of the controlling powers will have a heavy influence on trading behaviors. It’s not inconceivable that the USD and commodities could run in the same direction but that belies decade’s worth of a consistently negatively correlated relationship.

Specifically, I’m referring to short-term action. Months not years. But let’s look at multi-year charts for gold and the grains, of which I’ll use my typical go-to trading medium of JJG.

Gold:

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What goes up generally comes down. Gold has held strong with a sideways move off the hard spike higher to start the year, but with the pending move in the USD, I think we’ll finally see the correction that many have been calling for. You can see that around $1,140 represents a stiff area of support. I suspect that could be gold’s next destination over the next several weeks or months, however that still represents a higher-low leaving a new uptrend intact. If one were inclined to trade, that’s $100 of movement to design a short-term, multi-month play as it moves lower and then begins a recovery. One pattern to watch, if you believe in such hokum, is the little head & shoulders that has formed since February. Will the break of the right shoulder-base be a catalyst?

Grains:

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I have had a lot of luck trading this grains ETF. Some of my biggest returns in the shortest amount of time have come from scalping the market for a nice rip on these multi-month grain rallies. Sentiment, professional hedging, and seasonality point towards the potential of another run. More importantly though, price action agrees. It looks like a based-low was established to start the year and last week represented a possible higher low. The price action was especially promising to end the week. Position accordingly.

But if the USD is about to bounce, won’t that hurt commodities? Even agriculturals? Not necessarily. Oil will very likely be affected but again the speculator positioning by huge players could potentially cause another squeeze as much as the DOHA meeting could negatively affect prices. Gold sentiment was stretched anyways. But the grains don’t always run counter to the dollar. In fact correlations between the USD and grains do not share an easily deciphered message. Grains can and do run in lockstep with the dollar at times. Have a look below.

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In two of the last 3 rallies, the grains (blue-dotted) ran concurrent with the USD. Even though the USD is potentially beginning a bounce, so could be the grains.

As stocks continue their consolidation, the USD should be the dominant theme in the markets as it moves upward over the next several weeks. Watch associated commodities. If you’re feeling really brave, try trading the other currencies with a rising USD as your foundation for analyses. Good luck out there.

Oil & Economics – All Q, No A

Almost nobody saw the crash in oil coming. A handful of savvy investors and analysts shared this thesis but were largely ignored. For all intents and purposes, “nobody” foresaw the action in oil which is the essence of the dumb crowd missing it again. Not inferring that I am not an occasional member of that dumb crowd, just commenting on the oil industry.

When oil prices dropped, the instant message that was and continues to be bellowed across the financial landscape is that the drop would provide a pseudo-tax cut for the great unwashed in the form of lower gasoline prices. Along this line of thought is that the commoners will spread this saved gas money throughout the economy in various outlets. This should in turn support GDP levels, which is of course fallacious. Through Q3 of 2014, the US is annualizing 5% GDP growth. WHOOOOO! Gonna get some cold cuts based on that level of growth!

The problem with the thesis that lower gasoline prices should support or maybe even boost GDP levels discounts two very important factors to the economy. Number one, nobody can predict the level of the money saved from lower gasoline prices that will go into personal savings. Number two and more importantly, the importance of the oil industry to national employment and economic growth has been totally discounted by far too many educated parties. Just look at how important the oil industry has been to America’s employment recovery.

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(chart courtesy of Prof. Mark Perry)

Now add in North Dakota and it’s growth in employment thanks to the Bakken. Last month the Joint Economic Committee provided an update courtesy of the BLS. Since February of 2010, the national low point in private sector employment, North Dakota added 102,500 private sector jobs. A vast majority of those went to petroleum related companies, making the “US Employment Minus Texas” numbers look even worse. Maybe you’re one of those thinking in your head with a Patrick the starfish voice, “Yeah, but a percentage of that job growth for Texas and N. Dakota is dedicated to non-oil like teaching, retailing, food services, etc.” Sure there’s growth in those areas too but an overwhelming majority of the growth has come in industries like mining, logging, transportation, utilities, and construction; where the pay has been significantly higher on average than in the non-oil industries. An argument could even be made that a high percentage of the growth in non-petroleum based jobs was simply derivative growth from the petroleum industry.

Well what’s the point? There are a couple of points, actually. Talking to one’s self consistently is a strong precursor to madness, so at least I’ve got that going for me…which is nice. Seriously though, one of my points is where does the job growth come from in America now that the oil patch growth and development has fallen off of a cliff? Amazon DC part-timers? Wal-Mart part-timers? McDonald’s part-timers? Maybe I’m failing to notice a forest through some trees here but I’m having a hard time seeing the downward trend in unemployment continue its happy descent into “full employment.” And for the 1 plus 1 crowd, if there’s less people employed then there’s less people to buy things. Maybe there will be enough growth across all the other non-oil and gas industries, but that chart up above sure says a lot about placing too much faith in that thesis.

The second point, which may be even more relevant, is where will the growth in US corporate capital expenditures now occur? It’s very late in this business cycle coming out of the Great Recession and capex output is still relatively weak compared to previous cycle recoveries at the same stage. Capex has been essentially carried by energy. Let’s look at some facts regarding US capex and the oil industry. Energy(primarily oil and gas) accounts for approximately a third of all capex in the S&P 500. That means it’s virtually irreplaceable. Need a visual? No problem.

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(chart courtesy of Zero Hedge via Deutsche Bank and the Bureau of Economic Analysis)

So if I’m understanding the basic tenets of the TV economists’ argument, US GDP will be just fine despite the oil industry tightening their belts because American consumers will use all that money they saved at the gas pumps at their favorite retailer, service provider, or online. BOOM! Problem solved.

I just can’t reconcile that thesis with the facts as they are presented via the press releases of major oil companies. ConocoPhillips has already announced it’s slashing its capex budget by 20% for 2015, which means $3 billion less than 2014. Suncor, Canada’s largest company by revenue, is slashing it’s capex budget by $1 billion dollars for 2015 while also cutting operating expenses by up to $800 million in addition to a 1,000 person reduction in the workforce. Conoco did not announce layoffs in their presser regarding capex but you can be sure there will be layoffs there and across the board. We have yet to hear from the two giant US elephants of petroleum energy, Exxon and Chevron. Analysts are essentially expecting an average decrease of 25% in investment spending by energy companies.

This subject has been covered extensively at Zero Hedge. You can obtain additional details and their always-optimistic opinion right here and here. There are some blog and finance news snobs out there who look down their nose at Zero Hedge, but the fact of the matter is they do a good job credibly covering a wide swath of financial, economic, and geopolitical news; and literally everybody reads it. None the less, for you financy snobs that need a Wall St. bank’s take on capex, here’s a September 26th, 2014 report courtesy of UBS with impeccably timed commentary on capex. Here’s a couple of gems from their Equity Strategy team: 1. “Capex rising thesis still intact”, and 2. “…business fixed investment is forecasted by UBS economists to rise by 6.2% in 2014 and 7.8% in 2015.”

Let’s just see how the timing of that report’s issue coincides with the fall in the price of West Texas Intermediate Crude.

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Does 7.8% growth in 2015 capex sound credible now? Well done UBS Wealth Management. Positive guidance on capex right before capex is about to be gutted via a 50% slide in the oil price. Let’s do some basic, rough arithmetic based on the Deutsche Bank chart up above. Thirty-two percent of $685 billion is $220 billion. Twenty-five percent of $220 billion is $55 billion. So approximately $55 billion of what was to be potentially spent in 2015 is going to be eliminated and yet employment or GDP should be unaffected as the economy is recovering in the US. That’ll be what gets sold by the main stream media.

Oil and gas notwithstanding, the capital expenditure reports coming out of the Federal Reserve branches were laughable. It’s all IT spending. Go read the December 3rd, 2014 Beige Book to see for yourself. Here’s an exercise for those who refuse to read the sleep-inducing report. Click that Beige Book link and search(hit ctrl-F) the document for “capital expenditure” and simply read the surrounding text. It’s mostly IT. I’m pretty sure that network upgrades and addressing cyber security concerns aren’t going to carry the US economy in conjunction with consumer spending, but we’ll have to wait for 2015 to play out.

The bottom line is that 2015 is going to be a most interesting year for the US economy and the rest of the world for that matter, too. Just look at the volatility we’ve already seen across currencies, central banking behaviors, geopolitics, etc. I’m still seeing plenty of rosy projections for the US economy, coming off that 5% read, and maybe I just need somebody to crack me in the head to help me see the data in a better light.