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Inflation & Recession: Strategic and Tactical Reads

It’s probably safe to say that most people who play in any capacity in the markets right now, regardless of discipline, are feeling unsure. That’s why cash levels are so high. Treasuries and money market accounts are a go-to.

While at the same time, equity markets are resilient. Bond volatility is moderating, while liquidity is getting soaked up. Precious metals may be in for a breather right in time for everyone to lose temporary faith in the dollar. Could be more downside in oil and copper.

But not much. Oil has been consolidating in a tight range for what feels like forever, but $65-$70 should serve as a new long-term base for some time with plenty of macro-factors as tailwinds. Copper danced along $4.20 and appears to be correcting in time around that number. Everyone sees and understands what’s going on in copper, but it sure doesn’t feel like real capital gets it yet. The banks and trading houses will force a change of perspective for everyone as supply/demand fundamentals begin to grind the price higher for the “greening” of the world.

We’ve got the rest of Spring and the Summer for economic activity to surprise to the upside in the US, just like Q1. I think the positive animal spirits of consumers are going to catch a lot of investors sideways. Between low unemployment, the wealth-effect on a continued equities rally (after a pause), and the amplification of credit card usage, the US consumer is just going to want to enjoy the Summer with a sense of normalcy. That normalcy will translate to surprising economic strength through the Summer and into the Fall, despite all the leading indicators showing recession is baked in but not sharing when.

I surmise the end of Q3 or Q4 is when the consumer retrenches. And if that ends up being the case, forget about Santa’s rally. It feels like the Fed has reached it’s last increase to the critical 5% rate. Now it will sit on that to let the lag continue to wend its way through the economy. My guess is that the recession rears its head in the Winter.

However, since we only identify recessions after the fact, I suspect the Fed will sit on its hands to stimulate the economy via it’s usual methods until sometime in Q2 of 2024. Banks’ asset quality reserve the right to interfere with timelines. If West Texas crude is north of $90/barrel and copper north of $4.5/lb. then the Fed will be pulled in both directions. The pending elections will ensure that monetary stimuli are chosen over inflation abatement, as behind closed doors, one has to believe that “they” know inflation will not be curtailed but instead wash over the world in rolling waves for the rest of the decade.

That cat’s out of the bag. Actually, it’s more like a boxer trying to wrangle a chicken in a pen. Central bankers and politicians may nab it at some point, but not before a whole lot more price pain in commodities which should co-lead US Dollar repudiation as a reserve asset. Geo-politics will take care of the rest.

So 2024 brings potential recession and definite US elections. While the banks bring their exposure to CRE and an incomprehensible lack of cognizance around rates sensitivity to their credit portfolios. Should make for some spicy times that long-term, large capital probably won’t have the tactical agility to operate effectively in. This will present a constant stream of opportunities for prepared traders.

I thought the environment we’ve been in since inflation took off was going to happen after 2008. Many did, hence gold’s run after the GFC. Even though I wasn’t even born when the 70’s inflation kicked off and was only a toddler when it was finally snuffed out, I’ve been preparing for this investment environment that the world currently finds itself in.

In order for long-term capital to outperform during the rest of this decade, I think strategic hedging via tactical trading and exposure to less traditional asset classes will be critical. Despite their tough year in 2023, CTAs should continue to be a top performer through the 2020s.

All capital has to independently quantify what that looks like for portfolio construction. Basically, if a portfolio manager is sitting on long equity positions where basis and dividends say to hold and if their long RE holdings or other real assets that must be held during inflation were purchased with low WACCs, then it will be critical to allocate capital to volatility strategies where the asymmetric returns offset paper losses of the long-term holdings.

This mindset will not take hold en masse by nearly enough asset managers, but those that do take this approach will probably see their AUM thrive while others are bleeding.

The volatility has to be embraced, not forsaken, as it is a critical component in understanding capital flows.

So what does that mean for portfolio construction? Hold equity in high-quality, cash-flowing businesses with resilient brands and position at opportune times. No shit, right? Save yourself some time using YCharts visualizations of valuation-ratios. Between the financials and the trend(s) of of EV/EBITDA, P/S, P/B, P/FCF, etc., one can save a ton of time on due diligence. One could have picked up some CLX and CRM several months ago right before 40% and 60% runs, respectively.

Novo Nordisk and Eli Lilly look like no-brainer long-term holdings and the hard/soft cycle of P&C insurance continues to present good opportunities, especially with rates stabilizing.

I like productive land or land with high optionality over buildings, but obviously buildings provide more consistent cash flows. The yield in multi-family will persist as supply/demand fundamentals in housing virtually guarantee it as long as the cost of capital was or is reasonable.

The recent action in precious metals has a hint of USD repudiation behind it. It just has that musk. Can’t explain it. Can’t quantify it. Just a feeling. But it looks and feels like precious metals time may have finally arrived. Riding shotgun will be crypto assets. Whether one believes it or not, the progress and development in Ethereum-based projects appear to be leading ETH to a potential seat at the table of reserves. Impossible to see how the protocol’s adoption rate develops, but between freedom of choice and potential ease of commerce, I can see how ETH’s price goes significantly higher from its relatively recent low of $1000/coin with the network effect already in place.

And of course…commodities. I think copper is the easy play here to have meaningful exposure. Between futures, trading houses, and large miners, there’s plenty of high-liquidity options that will allow one to capitalize on copper’s potential price rise.

The world is only at the early phases of inflation and electrification. It doesn’t feel like enough capital believes copper prices can move meaningfully higher. And that may be the case. Maybe copper just peaceably stays between $3 to $5/lb. for the next several years, but I don’t see it. The supply/demand fundamentals certainly don’t say it.

I like to rationalize copper’s potential against oil’s price action. In just the last 3 years alone, we’ve seen crude oil go from a negative price, where one was paid to take the most critical commodity on the planet off of the hands of others, to a high of $130/barrel. Everyone, everywhere uses oil and look at that volatility.

And yet somehow copper won’t be able to double? Or copper couldn’t move 50% higher from it’s high of $5/lb.? To me, these price moves seem very plausible. Very feasible. Exposure to this asset class appears poised to continue its outperformance in the coming years.

I contend that electrification and the build-out of infrastructure across the US will be how Main Street gets bailed out during the next crisis. Taxpayer dollars will be used to develop projects around these two key areas in order to provide critical jobs to large swaths of the population at a time when jobs may be hard to come by. Demand for copper should be even more inelastic and at higher prices. Then economics plus greed should take care of the rest in copper.

Elections. World war. Dollar repudiation. Inflation. Societal strife. Lagging and inconsistent monetary policy. Embrace volatility or potentially watch your return-profile lag this decade.

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

Posted on March 1, 2022 by Margin Rich

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:

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.

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

Options Markets Muting Signals:

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.

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

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

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.

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…

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

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

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 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

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

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.

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

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.

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.

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

Posted on July 7, 2021 by Margin Rich

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.

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.

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.

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.

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

Posted on November 18, 2018 by Margin Rich

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.

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.

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.

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

Posted on April 17, 2016 by Margin Rich

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…

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.

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:

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:

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.

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.