July 26, 2024
By Steve Blumenthal
“I changed my mind. The Fed needs to cut rates now.”
– Bill Dudley, former New York Fed President, Source: Bloomberg
After an initial bounce Thursday morning, the equity markets reversed course late afternoon. The S&P 500 declined 0.51%, and the Nasdaq dropped 0.93%. That followed Wednesday’s S&P 500 decline of 2.3%. It’s the worst day since December 2022. Tech and the Fab 7 were hit even harder.
My friend Peter Boockvar is more on top of the market and economic activity than almost anyone I know. He writes a daily letter (sometimes as many as three per day), and on Thursday, he wrote about Wednesday’s sell-off:
“Yesterday didn’t come out of nowhere.
1) A few weeks ago, we had the S&P 500 that was nearing 15% above its 200-day moving average, highly stretched and mentioned here.
2) The bullishness has been excessive as seen in the Citi Panic/Euphoria index, Investors Intelligence and AAII.
3) All year, there has been a fragile underpinning due to the extreme narrowness of the rally.
4) We have growing global growth concerns.
5) Now we finally have investors asking tough questions about whether all this AI spend will be worth the investment in terms of returns.
6) Lastly, we can throw in the yen rally, where carry trades are getting unwound. (SB here: Essentially, money is borrowed in a country where interest rates are low and then invested in a currency where the interest rates are higher––. Ii.e. borrow in Japanese Yen and invest in higher- yielding U.S. government debt. You can learn about what a carry trade is here.)
“Updating the Investors Intelligence survey, as of Friday and thus not capturing yesterday, saw the Bull/Bear spread nearing 50 with Bulls at 64.2 and Bears falling to just 14.9. I’ve said before that anything above 40 is extreme.
“As we know, the Federal Reserve’s decision to consider inflation transitory was an epic failure. Now that inflation has moderated, especially on the goods side, it is not a sign of victory for the average person. To visualize the reason why so many consumers feel so stretched, I’ve charted the CPI index over the past 20 years and drew a trend line. The picture tells the story.”
CPI Index
Source: Bloomberg, Boockvar – The Broock Report
Bill Dudley didn’t mince words in his statement on Wednesday. “The facts have changed, so I’ve changed my mind,” he said. “The Fed should cut, preferably at next week’s policy-making meeting… although it may already be too late to fend off a recession by cutting rates, dawdling now unnecessarily increases the risk.”
We’ve talked about high valuations, high investor concentration, and near-record-high investor optimism for some time. The above shouldn’t come as a surprise to regular readers. I have no idea as to when the markets might revert back to fair valuations, but I believe it is likely.
Grab your coffee and find your favorite chair. I had the pleasure of speaking with Adam Rozencwajg recently and recorded the call. Adam is a money manager focused on the energy sector. He spoke about the bullish case for oil, natural gas, small modular nuclear, and uranium. I thoroughly enjoyed the discussion and remain bullish on the energy space in general. You’ll find a full link to watch it below. (Please note that regulations require investors to be accredited––generally, a net worth of $1 million or more––to invest in certain energy investments, so we require a brief registration acknowledging such.)
On My Radar:
- Energy Discussion – Steve Blumenthal and Adam Rozencwajg
- Top Ten – History Suggests Not Chasing Highflyers
- Random Tweets
- Personal Note: Denver, Golf, and Venture Capital
- Trade Signals: July 25, 2024
See Important Disclosures at the bottom of this page. Reminder: This is not a recommendation to buy or sell any security. My views may change at any time. The information is for discussion purposes only.
Energy Discussion – Steve Blumenthal and Adam Rozencwajg
Mr. Rozencwajg has 18 years of investment experience and is a CFA charter holder. He is currently the Managing Partner of Goehring & Rozencwajg, Natural Resource Investors. Between 2007 and 2015, Adam worked exclusively on the Global Natural Resources Fund at Chilton Investment Company. In 2006 and 2007, he worked in the Investment Banking department at Lehman Brothers. He and his partner managed $5 billion at Chilton.
Grab your earbuds, plug in, and I hope you enjoy the conversation. Click on the red ‘WATCH NOW.’ After watching, please reach out to me if you have any comments.
This is not a recommendation to buy or sell any security. It is for educational discussion purposes only. Opinions are subject to change. Consult your advisor.
Please see the important disclosures in the disclosures section below.
Top Ten – History Suggests Not Chasing Highflyers
History Suggests Not Chasing Highflyers, Source: Global Macro Perspectives
Not a recommendation to buy or sell any security. For discussion purposes only. Current viewpoints are subject to change.
Random Tweets
Net Interest Payments are bad now and expected to be far worse by 2028––”… highest level in over two centuries.”
The Great Reset is a very real issue:
Recessions occur months after the Treasury yield first inverts. They begin when the yield curve starts to normalize, and long-term rates are higher than short-term rates. That is happening now. The lights are still on!
Source: Bloomberg
“The gold standard of recession indicators is issuing a clear warning. While the yield curve is starting to un-invert significantly, it still has a long way to go. Currently, 76% of all Treasury yield spreads are negative. It’s worth noting that the shift from widespread inversions to a steeper curve typically happens very abruptly. We expect the same phenomenon to occur this time around.” Source of quote and chart: @TaviCosta
I “like” and “retweet” posts I find interesting. I enjoy X because I can easily follow people I like to keep On My Radar.
You can follow me on X (formerly Twitter) @SBlumenthalCMG.
You can also listen to my podcasts on Spotify, and find me on LinkedIn.
Not a recommendation to buy or sell any security. For discussion purposes only. Current viewpoints are subject to change.
Personal Note: Denver, Golf, and Venture Capital
I’m writing to you today from Denver, Colorado. I’m here for a due diligence meeting, a networking coffee with a good friend, and golf with my son Matthew. We were invited to play Colorado Golf Club and loved it! Our host runs a private equity fund. A kind thank you to Tyler and Michael.
One of the fun aspects of my investment approach is visiting potential new investment opportunities. If you’ve ever watched Shark Tank, the early meetings are a bit like that. There are three things we look for when assessing a company:
- Is there an edge in technology?
- Is there good management (and other lead VC investors around the team)?
- Is the size of the market the company is seeking to disrupt large enough that if they capture a piece of it, the return may be excellent?
A hat tip to my mentor and friend, Mark Finn, for his sage advice. We all want to read as many research reports on a company as possible, but Mark taught me that there are three key things to know––most everything else is noise. I believe this is accurate. Thank you for the wisdom, Mark.
When assessing, we look for what we think will bring a 10x return in five to ten years. There’s the chance it could be a zero or a big win. We think about these companies as wealth creators, and when it comes to sizing, we look for the likelihood that if we put 1% or 2% of your wealth in any one company, even if it’s a zero, then we are down just 1% or 2% that year on that investment. We believe investors can find CORE investments that yield in the high single-digits to mid-double-digits area that sit high in the capital stack (first lien, senior secure). CORE is the stay-rich side of the investment strategy; EXPLORE is the aggressive risk-on opportunities––a.k.a. the fun stuff. Diversification in both buckets is important, as risk is present in all things. There are no guarantees.
When scouting for new opportunities, I spend much of my time networking with trusted sources, and this week is about that. I hosted a dozen people at Stonewall for two days of golf: a top VC investor in AI and deep technology, another in biotech and pharma, and another in oil and gas and real estate, along with several clients. It really is fun to learn from and about all of them. In the end, just a few investments make the lineup. No new ideas came up this week, but the goal is to network, build trust, and enjoy time together with people you enjoy working with. Great fun indeed.
Hope you have fun plans in your immediate future.
With kind regards,
Steve
“Extreme patience combined with extreme decisiveness. You may call that our investment process. Yes, it’s that simple.”
– Charlie Munger
Notable this week:
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Stephen B. Blumenthal
Executive Chairman & CIO
CMG Capital Management Group, Inc.
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Stephen Blumenthal founded CMG Capital Management Group in 1992 and serves today as its Executive Chairman and CIO. Steve authors a free weekly e-letter entitled, “On My Radar.” Steve shares his views on macroeconomic research, valuations, portfolio construction, asset allocation and risk management.
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This document is prepared by CMG Capital Management Group, Inc. (“CMG”) and is circulated for informational and educational purposes only. There is no consideration given to the specific investment needs, objectives, or tolerances of any of the recipients. Additionally, CMG’s actual investment positions may, and often will, vary from its conclusions discussed herein based on any number of factors, such as client investment restrictions, portfolio rebalancing, and transaction costs, among others. Recipients should consult their own advisors, including tax advisors, before making any investment decision. This material is for informational and educational purposes only and is not an offer to sell or the solicitation of an offer to buy the securities or other instruments mentioned. This material does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual investors which are necessary considerations before making any investment decision. Investors should consider whether any advice or recommendation in this research is suitable for their particular circumstances and, where appropriate, seek professional advice, including legal, tax, accounting, investment, or other advice. The views expressed herein are solely those of Steve Blumenthal as of the date of this report and are subject to change without notice.
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“The blue line in the lower section shows how much the orange line is above or below the long-term trend line. It is currently in the “Overvalued” zone. Lastly, the data boxes at the bottom of the chart display the annualized gains based on each zone (Overvalued, Fairly Valued – blue line in the middle zone, or Undervalued).”Please take note of the following text:
“The blue line in the lower section shows how much the orange line is above or below the long-term trend line. It is currently in the “Overvalued” zone. Lastly, the data boxes at the bottom of the chart display the annualized gains based on each zone (Overvalued, Fairly Valued – blue line in the middle zone, or Undervalued).”