Note to Readers: In several of our public notes to our broader Community here and here again, we expressed our thinking that being a new Bear near the lows for the S&P 500 at 3636 was perhaps a bit late. In fact, this extreme bearish positioning near the lows is probably the reason the markets are squeezing higher today.
In our October Investment Strategy report released to our friends this weekend, we thoroughly discussed a range of topics from the S&P 500, the Fixed Income TLT (ETF), our view that Inflation has peaked, and Alibaba remaining range bound until 20th Party of Congress.
One tactical idea that we shared is that is already materializing is that we believed Semis were primed for a 7-10% bounce. The market seems to want to price in all of the benefits or all of the fear in just several trading days. Because my investment strategy is based on the intermediate-term, this pulls forward a lot of the gains that I was expecting later on.
That said - So far, so good. Our Community is off to a good start in the 4th Quarter, and we hope to help you inside. Best of luck to our friends as always.
October Investment Strategy - Monthly Slide Deck (Published on Oct. 1st)
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In our emails, we will provide the following coverage points:
Brief Snapshot of U.S. & China markets and valuation
Our Analyst Team’s Chart in Focus
U.S. & China Upcoming Economic Calendar Snapshot
Notable Chart from Media Outlets
Fear & Greed IndexRecap
I hope you find this newsletter to be insightful and enjoyable! - Larry and Team
As the dollar continues to get stronger, there is more and more talk of an orchestrated attempt by world governments to intervene and weaken the dollar. Essentially a Plaza Accord 2.0.
Japan recently spend a record $19.7 billion in September in an effort to prop up the Yen. As of writing, the Yen is now at the level where the Japanese government first intervened last week.
At some point, we could either see a joint effort to bring down the value of the dollar or see the Fed receive international pressure to stop hiking.
Macro Chart In Focus
Analyst Team Note:
MUST READ
Everyone’s been freaking about Credit Suisse, and while CS is a shit bank filled with controversies, we need to not overreact. Here are some thoughts.
You’ve probably seen so many people talk about CDS or credit default swaps. Per Investopedia, CDS is a derivative that serves as a form of insurance against default of an underlying borrower or debt. You can read more about it here.
Recently, the cost of insurance against a Credit Suisse default has skyrocketed, leading to many saying that CS could default soon. This is flawed logic.
First of all, the chart above shows CS’s CDS term structure. Longer insurance terms cost more than shorter terms. Make sense right?
As you can see, CS CDS for 1y terms are still substantially lower than the 5y term. The entire structure has moved up. If the 1y CDS were to move higher than the 5y CDS, THEN we could start talking about the market pricing imminent default. But that’s not the case.
Second of all, there’s been a tweet floating around from a notable finance YouTuber insinuating that CS’s CDS is near 2008 highs, which might mean a 2008 repeat. We don’t find this to be true.
Above is a chart of investment bank 5Y CDS from 2007 to present. That white line is the 5Y CDS for Credit Suisse. As you can see, even though the CDS is elevated, it’s nowhere near the 2008 highs of other notable banks.
Third of all, you also have to consider the fact that we now have a precedent. For the most part, whether we like it or now, governments WILL bail out banks in the event of imminent collapse. This might be another reason why Credit Suisse’s CDS term structure isn’t pricing any imminent default.
Lastly, we have to remember that CDS are used for risk management and speculation. If you’re running a desk or managing a portfolio, you need to hedge risk, and one of those tools is CDS. At the end of the day, the CDS is a financial derivative that can be used to speculate on defaults and credit quality.
We feel that there’s been too much fear mongering on Twitter and financial media. As some pointed out on Twitter, General Motors 1y CDS is almost identical to CS’ 1y CDS. Is GM also imminently going to default?
Be careful out there and be sure to always do your own research.
To read more about the Credit Suisse fiasco, I found this article from FT to be incredibly insightful.
A gauge of U.S. manufacturing activity fell to a two-year low and missed median estimates as indicators point towards softening demand. The index for new orders also fell for the third time in four months. However, it’s not all just doom and gloom.
Per S&P Global Market Intelligence, “While the strong dollar is curbing exports, a beneficial effect from the greenback’s strength is being seen via lower import costs. With supply chain delays also easing substantially again in September and shipping costs falling, upwards pressure on firms’ costs has moderated sharply, which will feed through to lower goods prices to consumers.”
Chart That Caught Our Eye
Analyst Team Note:
The MOVE index is a measure of volatility in U.S. Treasury yields. You can think of it like the VIX index but for bonds.
This year bond liquidity has been atrocious, leading to higher volatility.
Peter Tchir from Academy Securities described it best, “The bond market is in disarray, and we are paying the price for distorting yields and liquidity with unnecessary QE!QE is the ‘nuclear’ option and yet has been treated like a peashooter.”
