September 30, 2022
By Steve Blumenthal
“Bull markets are born on pessimism, grow on skepticism, mature on optimism and die in euphoria.”
– Sir John Templeton
Grab a stiff drink and feign a smile; the technicals are not looking so good. The S&P is headed for a third straight quarterly loss, its first back-to-back-to-back string since the trifecta that concluded on March 31, 2009. The S&P 500 Index is down approximately 24% year-to-date. The Bloomberg bond index is down 16% YTD. The popular investment-grade corporate bond ETF “LQD” is down 22% YTD. It’s the worst year on record for bonds, dating back to the 1970s. But this is news you already know.
Markets sold off hard in June 2022, with the S&P 500 Index bottoming at 3,636. The market rallied into August, peaking at 4,325. Today —the last day of September—the index is tested and could not hold the June low. The S&P 500 Index closed at 3,586.
It’s a guess as to what happens next, but with a madman in Russia tactically positioning to justify the use of nuclear weapons, an energy crisis in Europe (globally), inverted yield curves, and central bankers slamming on the inflation breaks most everywhere (except the mini pivot in the UK this week) it would be naive to believe we are on the path to a soft landing. Not a dove in sight. QT is different than QE.
The break lower brings the 3,000 to 3,200 range into play. You’ll see in the Trade Signals section below, investor pessimism is extreme, and the sheer size of short positions in the S&P 500 Index futures market suggests a coiled spring that may lead to a quick bounce. It’d be welcomed, yet it’s likely to be short-lived, as the Fed is raising rates and accelerating its balance sheet reduction by $100 billion per month (starting September 2022). Hard landing ahead.
There is a life cycle to markets, and it looks like this:
We are well past euphoria and on our way toward pessimism.
I remember sitting in a room filled with brokers at the Union League in Philadelphia in 1985. I worked for Merrill Lynch at the time, and my manager ordered me to attend the event. Back then, you’d have mutual fund companies knocking on the doors at wirehouse firms, and my manager wanted to make sure the Philadelphia office had a good showing. Young guys were forced to go. Begrudgingly, I convinced myself that at least the food would be excellent.
That afternoon, I took my seat alongside hundreds of investment professionals, and to my surprise, the great Sir John Templeton took the stage. My mood immediately changed. Sir John shared with the room his greatest piece of advice.
Years later, my wife, Susan, asked me what I felt were the most important things she should know about investing. I told her there were many, and then shared my top two. The most important piece of advice I learned came that day at the Union League in 1985. Sir John said, “The secret to my success is that I buy when everyone else is selling, and I sell when everyone else is buying.” He added, it will be something that sounds so easy, but very few of you will be able to do it.” Years later, I reflect on how hard it is to go against popular wisdom. Perhaps it’s the fear of being wrong that holds many people back. I remember my father instructing me to sell a stock “When it gets back to even.” He didn’t want to take a loss. Stocks don’t always get back to even. The second thing I told Susan is to you need to learn how money compounds. Think of it as the magic of compound interest. It can be miraculous when it works in your favor, and merciless when you lose too much. And it is in the losing part where investors fail most.
“What do you mean?” she asked.
I said, “Imagine you lose 50% of what you have; how much do you need to get back to even?”
“50%,” she answered.
“Imagine you have $100,000, and you are down 50%. How much do you have?” I asked
“$50,000.”
“How much do you need to get back to $100,000?” Oh, she answered.
A lightbulb went off in her head, and she said, “You have to tell everyone about that!”
I call it “The Merciless Mathematics of Loss.” You need a 100% return to overcome a 50% decline. You need 150% to overcome a 60% decline. A whopping 233% to overcome a 70% decline. Channel your inner Sir John and try your best to keep your declines to 20% or less.
Year-to-date performance through today on select popular stocks:
- AAPL -22%
- TSLA -32%
- MSFT -29%
- GOOG -32%
- AMZN -32%
- ADBE -50%
- NVDA -59%
- META -59%
- NFLX -60%
- SQ -65%
- SNAP -78%
- SHOP -80%
- ZM -59%
- SPY -24%
- QQQ -32%
It’s time to settle in. I’m not sure about you, but I find myself fairly addicted to Twitter. Not a good thing, my Susan reminds me. What I like about it is the ability to follow people I respect and admire. There is a lot of misinformation on Twitter, so I try to read with an open but questioning mind. My good friend Peter Boockvar was on CNBC this morning. Thanks to Twitter, I caught his interview. Did you ever hear of LDIs? That stands for Liability Driven Investments. Get ready to say, “You’ve got to be kidding me.” It’s happening again… Peter explains.
I have a new section this week, which I’m calling “Random Tweets.” They’re in no particular order. Just stuff I’m keeping On My Radar.
(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).
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Peter Boockvar on CNBC Talking about LDIs
Good friend Peter Boockvar, Bleakley Financial’s Chief Investment Officer, joined CNBC’s Squawk Box to weigh in on the U.K.’s move to cut taxes despite high inflation. Following is a short summary followed by a link to the short interview.
From Peter: We learned about a new term, LDI, a liability-driven investment where UK pension funds borrowed money and leveraged themselves to buy more gilts in order to meet their pension liabilities in the future. And that was really the tremor that the UK gilts market fell to over the past couple of weeks. As prices fell, yields rose, and a lot of these pension funds got margin calls that had to post more collateral, and that is why the Bank of England stepped in.
But you have to wonder how many other exotic products we never heard about are lurking out there that we’re going to soon hear about (bold emphasis mine).
CNBC’s Becky Quick: Yeah, I think that’s what concerns me the most is just the idea that it’s always leveraged in some way, shape, or form. When things move quickly, when markets move quickly, those dislocations can break things. That’s what we saw there. We’ve been asking people about the potential for that here and Roger Altman this morning, so no, no, things are operating fine here. Loretta Mester, the Cleveland Fed President, said that yesterday as well. We don’t see any problems here. It’s just if you have issues like the British pound moving so drastically, you have to wonder what else could be potentially leveraged to that what else could be potentially leveraged guilds?
Peter Boockvar: When you get such a dramatic rise in interest rates in a very compressed period of time, we’re going to hear more stories like this. And it doesn’t necessarily have to be an exotic product. I mean, just take a small business that borrowed floating rates. They certainly did not anticipate such a dramatic increase in their interest expense. But now, at the same time, maybe the revenue growth is slowing because the economy is no longer growing. Well, they’re gonna have a potential cash crunch. So while that’s not going to necessarily make headlines, in terms of LDI, that’s going to be just another sort of collateral impact from this, what I call a rate shock. In terms of the velocity of the increase…
Check out the interview at the link below…
This is what Peter is speaking to… leveraged wrapped in a fancy package called LDI. A liability-driven investment.
you can sign up here.
Random Tweets
Very little risk appetite:
Putin in March 2014:
Referring to the 1985 meeting at the Plaza Hotel to rein in the dollar (SB Here – I believe such a day is coming):
Who dun it?
Dollar-wreaking bomb?
News out this morning of the Fed’s favorite inflation indicator:
I find myself in agreement with Hussman:
Mortgage Rates:
Higher interest rates impact the bond market:
Follow me on Twitter, where I do my best to highlight what I feel is most important… @SBlumenthalCMG
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Trade Signals: No Surprise, Things Are Breaking
Market Commentary
September 29, 2022
S&P 500 Index — 3,640
Notable this week:
Yesterday, the BOE (The Bank of England) intervened to ease the pension fund panic, and U.S. stocks rallied on the news. Today, the S&P 500 Index reversed gears declining sharply by more than 2%. The NASDAQ declined 2.88%.
In a speech today, St Louis Fed President Bullard said, “We now understand we cannot avoid additional rate hikes coming in the next few months as better than anticipated Q2 core PCE and consumption figures make the case for further hikes.” He added, “It’s certainly true that some players in global financial markets didn’t realize they were taking risks with their strategies, or they downplayed the risks… I’d encourage them all to review their strategies in the current situation.” About as direct as a central banker can get.
If you missed it, take a look at last week’s OMR titled: Additional Large Increases Ahead – Pieces Will Move, Something Will Break. You can find it here.
The loan positive is that investor sentiment is nearing levels of extreme pessimism reached in February 2020 (Covid Crash), September 2011, and November 2008. The near-record level of speculative short-positions in S&P 500 Index Futures supports this extreme. Conditions are ripe for a short-covering rally. My two cents is if it presents, it will be short-lived—sell and/or hedge the rallies. Don’t buy the dips. Not yet anyway. While there is no way to know for sure, 3,000 to 3,200 looks probable. It is at that point, equity market valuation will be “fairly priced.” Markets grow slowly and come unglued quickly (margin calls, few buyers). That’s when the opportunity is best. It may be nearer than we think.
The Dashboard of Indicators follows next. Red arrows remain across the dashboard.
Not a recommendation for you to buy or sell any security. For information purposes only. Please talk with your advisor about needs, goals, time horizons, and risk tolerances.
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Personal Note: Ian
I hope this note today finds you and your family safe and well.
Susan and I have been watching the storm closely, as we are sure you have been. With family and many friends in the area, we are concerned. We send our love and prayers to all affected by the storm.
Look for the post on Spotify, Twitter @SBlumenthalCMG, and LinkedIn.
Wishing you and your family the very best!
Steve
Stephen B. Blumenthal
Executive Chairman & CIO
CMG Capital Management Group, Inc.
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Forbes Book – On My Radar, Navigating Stock Market Cycles. Stephen Blumenthal gives investors a game plan and the advice they need to develop a risk-minded and opportunity-based investment approach. It is about how to grow and defend your wealth. You can learn more here.
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.
Follow Steve on Twitter @SBlumenthalCMG and LinkedIn.
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