June 30, 2023
By Steve Blumenthal
“Most people get interested when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well.”
Warren Buffett
Almost 60% of the stocks in the NASDAQ have negative earnings per share over the last 12 months. Stunning actually. You can’t buy what is popular and do well.” We’ll take a deep dive into various valuation metrics next week. Stay tuned.
Grab your coffee and find your favorite chair. As you are well aware, the Russian situation is concerning. I often get a look at Ian Bremmer’s geopolitical work. When it hits my inbox, I stop whatever I’m doing and I read it. The same goes for Dr. Philippa “Pippa” Malmgren. I love her writing style. She brings simple sensemaking to the complex. Below, you’ll find a short Ted Talk presentation from Ian and an interesting take on the Russia situation from Pippa. Could the whole “coup” have been a theatrical production?
Here are the sections in this week’s On My Radar:
- Big Question – Who Runs The World
- The Spy, The Chef, The Actor: Russian Theater
- Random Tweets
- Trade Signals: High Yield and Small Cap Market Sell Signals
- Personal Note: Vacation
(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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Big Question – Who Runs The World, Ian Bremmer on Ted Talks
Ian Arthur Bremmer is an American political scientist, author, and entrepreneur who focuses on global political risk. He is the founder and president of Eurasia Group, a political risk research and consulting firm. He is also a founder of GZERO Media, a digital media firm.
Stop what you are doing… Here are fifteen minutes – worth the watch!
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The Spy, The Chef, The Actor: Russian Theater
Here’s a different take on events in Russia. Could the whole “coup” have been a theatrical production? There is a school of thought that Putin, a long-time spy (Siloviki), and his former chef, Prigozhin, orchestrated this coup and the reversal. One ex-CIA analyst says it’s a classic false flag. But was it? Why did The Chef and his Wagner Group march into Rostov-on-Don, then nearly to Moscow, and then reverse? Did Prigozhin really “cut a deal” with The President of Belarus, Lukashenko, whose family had left Belarus at midnight for Bodrum on the day of the coup attempt making sure the transponders were off as they passed over Russia? One theory is that it was one way for Russia to exit its position in Ukraine while saving face. Another is that Wagner is now 100 miles closer to Ukraine than before. The Telegraph reports that the Russian FSB, the Silovoki, who are Putin’s power base, threatened the Wagner family members and that that was enough to assure that Prigozhin would head back south and leave Moscow alone. Another is that Putin, the spy, had given the order for Prigozhin’s assassination. In anticipation of this, the Chef, Prigozhin, effectively took the entire Russian Army hostage. Or did Putin and Lukashenko cook up a deal for the chef that means Putin has just effectively annexed Belarus and put his private army in charge there? Kremlinology has always been notoriously difficult, even for the most experienced Kremlin watchers. The joke is that the actor in Ukraine, President Zelensky, and his Ukrainian compatriots are so intrigued that there has been a run on popcorn. But, we have not seen the end of this play yet. We are all now sitting in the Proscenium Arch of history.
Another view is that Prigozhin correctly anticipates that Russia is now at risk of breaking up into smaller parts. The area he knows best is exactly where he was, in Rostov, where the crowd chanted his same. This notion gets a firestorm of reaction on social media. But, this is what happened when the Soviet Union fell. I have argued for some time that The Soviet Union was effectively appropriated by the Russian intelligence services and reconfigured. So the Soviet Union didn’t actually fall. It just fell into new management. That group is now being challenged, so the risk of a real breakup of what we now call Russia is much higher than before. If, for a moment, we accept that there is a risk, then it makes sense that Prigozhin wants to be King of a new country. Imagine if that new country has nukes. Understand that Voronezh has nukes in a factory known as “375 Facility “C.” What could someone like that do with even one nuclear weapon? Maybe he could not launch it, but the fissile material has value. Such a weapon has value, both for the purposes of negotiation and on the open market.
Remember that the CIA has been openly promoting “walk-ins,” meaning extending an open invitation to any Russians for amnesty and safe haven. If anything happens to Prigozhin, the US may be even more flooded with requests to change sides. Russian military leaders used to have direct contact with their American counterparts. They know who they can trust.
Former CIA Director Gen David Petraeus suggests that The Chef “lost his nerve” and saved himself but lost control of The Wagner Group. He now needs to avoid being on high floors of tall buildings or risk the standard Putin exit, defenestration according to Petraeus, meaning The Chef is toast. I am not so sure.
The real issue for NATO and the G7 now has nothing to do with who is up or down here but rather with what is loose. Putin’s favorite props are nukes. If President Putin was mad before, he’s bound to be madder now. So far, we’ve been lucky or blessed that the Russian military has not executed the order for him. He can’t launch without the military.
(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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Random Tweets
The Top 15:
We looked at “The Top 10” last week:
Commercial Real Estate:
Anticipate an opportunity in distressed commercial real estate debt over the next several years. Look for experienced private credit investors with experience in this space.
Mortgage Rates:
Recession watch. This is from Liz Ann Sonders at Charles Schwab:
Sector flows:
Money is flowing into technology, driving all of the YTD performance. Health Care, Consumer Goods, Utilities, and Telecom have positive flows and are up between 1% to 4%. Money is flowing out of the other major sectors (sellers), and performance is negative. Energy is the weakest sector.
And some fun:
(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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Trade Signals: High Yield and Small Cap Market Sell Signals
“Extreme patience combined with extreme decisiveness. You may call that our investment process. Yes, it’s that simple.”
– Charlie Munger
Market Commentary June 28, 2023:
High Yield and Small Cap Market Sell Signals:
- An important relationship exists between the small-cap stock market and the high-yield bond market. The performance of these two markets serves as a leading indicator for the broader economy.
- I often write that the “High Yield Market is the Canary in The Coal Mine.” You’ll see in the following chart that the Small Cap stocks are pretty good too. But first, why?
- It is based on several factors:
- Economic growth expectations: Small-cap companies, by definition, are smaller and often have a higher dependency on the overall health and performance of the domestic economy. When economic growth prospects are favorable, small-cap stocks have the potential to outperform their larger counterparts, reflecting investors’ expectations of increased business activity and opportunities for these companies.
- Similarly, the high-yield bond market, which comprises lower-rated corporate debt, is sensitive to economic conditions. As the economy strengthens, business is better, and the creditworthiness of these issuers may improve, reducing the risk of default and increasing investor demand for high-yield bonds. The opposite happens when the economy weakens.
- Financing and borrowing conditions: The performance of small-cap stocks and the high-yield bond market are susceptible to financing and borrowing conditions. In an expanding economy, credit is more readily available, and borrowing costs are relatively low. This impacts smaller companies, which rely on external financing for their growth and expansion. Similarly, issuers of high-yield bonds can use favorable borrowing conditions to raise capital to finance their operations.
- Therefore, the performance of small-cap stocks and the high-yield bond market is susceptible to the availability and cost of credit, providing insights into the state of the overall economy.
- We can monitor the price trend in these markets to get an early read—both the high-yield market and the small-cap market signal caution.
Given we are nearing 12 months since the yield curve first inverted, now is the time to be on high alert.
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Personal Note: Vacation
The Nerf football. Remember those? Great fun. I hope this note finds you sitting on a beach somewhere with the people you love most and a Nerf football by your side-playing catch with your children. Some time off is in the immediate future. Susan and I will be heading to Cape May for a few days next week. Toes in the sand. Needed.
A quick soccer update. Coach Sue is in San Diego. The top teams from their respective leagues from across the country are there for the ECNL playoffs. The top eight in each age group advance to the quarter-finals in Richmond, Va., on July 14. Susan’s club sent four teams to San Diego. The sixteen and seventeen-year-old girl’s teams were sent home yesterday. But the fourteen and twelve-year-old teams advanced to today’s round. Think of it as the top sixteen teams in the country. The winning teams today advance to the national quarter-finals in Richmond.
I’ve been enjoying the game updates. Today is our wedding anniversary, and Susan is taking a red-eye home tonight. We’ll celebrate together tomorrow. First things first, go get them W’s Penn Fusion! Living vicariously through Susan, I’m on the edge of my seat and can’t wait to get today’s call.
The vacation is off to a great start!
Stonewall North Course – Adin, Rob, Steve and Mike
Hope this note finds you happy and well with vacation plans in your immediate future.
Wait! This just in. The fourteen-year-old team won in a penalty kick shootout and advanced. The twelve-year-olds lost 3-2. A lot of emotion in both directions.
Happy 4’th of July. Enjoy the fireworks,
Steve
Stephen B. Blumenthal
Executive Chairman & CIO
CMG Capital Management Group, Inc.
Private Wealth Client Website – www.cmgprivatewealth.com
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