David Fuller and Eoin Treacy's
December - 131221
Eoin Treacy's view
Some of the topics discussed include: risk-off squeezing risk assets, Wall Street, ethereum breaks down, platinum/palladium ratio breaking out, European natural gas crisis intensifies, gold steady, Dollar firm,
Tapering on Deck-Stick with Defensive Quality in Factor Frenzy
Thanks to a subscriber for this report from Morgan Stanley (NYSE:MS) which may be of interest. Here is a section:
Tapering is tightening for markets, if not the economy. Due to the much greater than expected rise in inflation, the Fed is pivoting to a more aggressive removal of monetary accommodation. We believe this is warranted and supported by an administration that appears less focused on the stock market as a barometer of its success. Furthermore, tapering is different than in 2014 for 3 reasons: 1) the Fed is exiting QE twice as fast this time,2) asset prices are much richer today and 3) growth is decelerating rather than accelerating. This could be important for the economy, too, given how levered consumers are to stock prices today.
Eoin Treacy's view
The uptrend over the last 13 years has been liquidity fuelled. That’s been the abiding factor behind every correction and every recovery since the initial lows in late 2008. It is reasonable to expect the end of the latest quantitative easing program will have a similar effect on market prices as every other one.
When quantitative easing programs have ended, they coincided with medium-term corrections for Wall Street. That was true in 2010, 2012, 2015/16, and of quantitative tightening in 2018. The Nasdaq-100 has more than doubled since the pandemic low in 2020, so a lengthier pause and partial loss of momentum is a likely outcome from the removal of liquidity infusions.
Every time the market has pulled back by between 10% and 20%, the Federal Reserve has reversed course and begun to re-inject liquidity into the market. Has anything really changed? The dependency on liquidity to support valuations and the risk-seeking activities of a large proportion of companies has multiplied over the years.
The fact that bond yields are compressing ahead of the news of tapering suggests investors are seeking safe havens. That’s despite market expectations the Fed will raise rates up to seven times in the next three years.
Continued weakness in bitcoin and Ethereum breaking lower today is another sign that risk aversion is rising.
This 5-year p&f chart of the Nasdaq-100 helps to illustrate how consistent the trend has been. Each of the range has been above the last and each of the breakouts has been explosive.
The most recent breakout has been much less explosive, so even a mild reaction has brought the price back to test the upper side of the underlying range. The February-June range this year did dip back into the underlying congestion area for three days. Then it rebounded emphatically. We saw an impressive rebound last week from the region of the 200-day MA, that level needs to hold if the trend is to remain consistent.
There are three important potential sources of additional new liquidity that could support asset prices. These are the potential for the Biden administration to finally push through their multi-trillion spending package, the potential for China to intervene to support the property market by boosting stimulus in a big way and the scope for global stimulus to be boosted to combat the omicron variant. At present none of these are actively evolving so that is also fuelling risk-off activity.
Eoin's personal portfolio: shorts re-opened and added to
Eoin Treacy's view
One of the questions subscribers as most often is how to find details of my open traders. To make it easier I will simply repost the latest summary daily until there is a change.
My initial hedge shorts were quickly stopped out two weeks ago. With the Fed likely to accelerate their tapering this week, there is a rising sense of risk aversion in the market. I reopened my Nasdaq-100 short today at 16,126 for a March contract.
I also bought the Jan 21st 2022 Apple 175 put for $6.
I increased my platinum long on August 27th paying $1002 for another position. My existing platinum longs were purchased at $1072 and $885. I remain of the view that precious metals are still cheap and are to be bought on significant dips.
I also continue to hold my silver trading position, initiated at $23.7. I will buy more if the current reaction deepens.
I have been saying for months that I have purchase orders below the market in gold and silver. The first of these was triggered on August 9th. I was filled at $1702.3 including spread-bet dealing costs. My original positions were opened in Q4 2020 at $1879.2 and $1818.6. That reduces by average purchase price to $1800.
I still have additional bids in the market below prevailing prices in gold and silver and will leave them in place to take advantage of any possible additional volatility. These are leveraged trading positions rather than medium to long-term investments.
With baby steps trading one must have high conviction prices will recover and the patience to buy on weakness before eventually being proved right; hopefully.
Among my investments, my original position in the VanEck Vectors Gold Miners ETF was purchased on March 25th at $20.12. I bought another unit at $35.79 on December 1st. I continue to shop for opportunities in the gold sector.
My two investment positions in Rolls Royce were purchased at 154.75 and 105p respectively. I also took up the rights issue which has resulted in an average purchase price of 54.63p. Rolls Royce continues to form a first step above the Type-2 base formation.
Email of the day on carbon sequestration
Montreal company Carbicrete has developed a method for sequestering carbon in concrete, claiming its product captures more carbon than it emits. The technology cuts out the need for calcium-based cement, a key ingredient in traditional concrete that is responsible for around eight per cent of all global CO2 emissions. I thought you might be interested in this.
Eoin Treacy's view
Thank you for this informative email. There is a clear incentive for innovators to come up with ways to profit from the rising cost of carbon emissions. The COP26 agreement will create a global market for emissions and will broaden the number of companies subject to carbon restrictions. That is all aimed at creating a market for alternatives in much the same way that subsidies fostered the solar and wind sectors.
This article from electrek.co may be of interest to subscribers. Here is a section:
While a lot of the focus right now is on the Build Back Better Act being discussed in the Senate, the government passed another infrastructure bill earlier this year that already had significant investments for electric vehicles.
It included $7.5 billion for EV infrastructure and $7.5 billion to electrify public transport.
Today, the White House released what it calls the “Biden-Harris Electric Vehicle Charging Action Plan” to spend the former.
As of now, the actions are still mainly about creating a framework to distribute the money – most of which will be for states to spend.
But the overall goal is to take the number of EV charging stations in the US from 100,000 to 500,000.
In short, the government is now talking to EV charging stakeholders to best understand their needs and make sure that the money will be cycled through the US to not only deploy the stations, but also build them here.
Companies like ChargePoint, Blink Charging and Bloom Energy should benefit from the US governments bounty. However, none are revenue positive at present. They are very dependent on flows from both the government and investors to remain afloat until electric vehicle market saturation reaches a point to justify their investments.
I’m reminded of the adage “there is many a slip between the cup and the lip”. The threat of liquidity being retracted currently outweighs the promise of growth.
European Gas (ASX:EPG), Power Surge to Record on Russia-Ukraine Tension
This article from Bloomberg may be of interest to subscribers. Here is a section:
European gas and power prices closed at a record high as heightened tension between Russia and Ukraine threatened to further crimp supply, increasing the risk the energy crunch will persist into next winter.
The West is hardening its stance against Russia. New German Chancellor Olaf Scholz said he will “do everything” to prevent Russia from using the controversial Nord Stream 2 pipeline to cripple flows through Ukraine, while Belarus’s leader reiterated threats to halt supplies if the West presses on with sanctions in a dispute over migrants.
The risks for Europe are mounting with gas stockpiles dropping to record lows for this time of the year and no end to the crisis in sight. Inventories are only 63% full, a level more typical for mid-January, which leaves little in reserve in case of colder weather in the coming months. If stocks fall too low, it’ll be harder to refill them in time for next winter.
Eoin Treacy's view
The market has become accustomed to risks to the economy from an oil shock but Europe is currently going through a gas shock. The price is already multiples of where it peaked ahead of the credit crisis and closed at a new high today.
Oil is a transportation fuel so when it spikes higher it acts as tax on consumption. There is a well understood relationship between surging oil prices and threats to economic growth.
Natural Gas is a vital commodity for electricity generation, home heating, cooking, fertiliser, and carbon dioxide production. We’ve never seen this kind of move in European prices, it’s adding pressure to the European economy and boosting inflationary pressures along the way. Meanwhile, the ECB is inhibited from raising rates because of the pressure on the economy.
Gold in Euro continues to hold the breakout from an almost yearlong range and a sustained move below €1540 would be required to question currently scope for additional upside.
The Chart Seminar 2022
Eoin Treacy's view
With global vaccination rates rising, the prospect of anti-COVID pills on the horizon and the promise of travel restrictions being dropped, it is time to start thinking about venues for The Chart Seminar in 2022. Please drop sarah@fullertreacymoney.com a line if you would be interested in attending an event next year, as well as your preferred location. At present the two locations with greatest demand are London and Dubai.