Consensus Lawnmower (2019 edition)

Almost everything investors believed just a few months ago has been cut down:

  • EM & China were among the best places to invest.
  • The Fed was “friendly” and the Dollar would continue to weaken.
  • Equity & Rates Volatility would stay low because the Fed removed tail risks.
  • Commodities were going to make a comeback.

Feels like a long time ago, but these views were widely accepted until very recently.

In Mr. Market’s twisted Yogi Berra irony, 2019 has already been a tale of two halves, except we’re not even halfway yet.

Rolling waves of pain:

  • U.S. Financials & Banks fell sharply in March, and bottomed.
  • U.S. Healthcare & Biotech fell sharply in April, and bottomed.
  • The Dollar has rallied sharply, cutting through every consensus EMFX trade.
  • Like last year, the Dollar is moving in waves. First against the weak current account countries (ended a month ago), then Asia (largely over I believe, and wrote about last week), now migrating to a few select final pockets. Wherever the carry books are still holed up, that’s where the Dollar has unfinished business.
  • Asian Stock markets fell sharply in May, in some of the heaviest selling waves in history. Some markets broke selling records, far greater than even the panic in 2008. I’ve documented this extensively on Twitter and prior blog posts. Yet this week, momentum has been quietly stabilizing.
  • As EM tries to stabilize, U.S. markets continue to decline and look for a bottom. Yesterday, the main EM ETFs were up while U.S. indexes were down almost 1%. U.S. Tech in particular is starting to fall faster than most other areas.
  • U.S. Semiconductors, which rallied 50% from the December lows and triggered historic extremes in late April, have given up more than half their gains and become “ground-zero for trade war risk”. Quietly, they closed up yesterday even as the rest of U.S. Tech was down nearly 1%.
  • Even the U.S. defensive sectors are dropping sharply. Over the last two days, they lost nearly 3% (roughly 2-3x what broad markets fell). When Bears take out the defensives, they are running out of targets (everything else has been eradicated). This happened in December too.

True bottoms are made when the Bears successfully take down all the last pockets of strength. Sellers have relentlessly and systematically purged the haves for nearly two months. Everywhere we look, the haves have turned to have nots: there’s no one left overweight EM, China, Semis, EMFX, or any cyclicals of any kind. Defensives are heavily favored. Bonds are in a panic spike.

Meanwhile, Chinese stocks are quietly stabilizing directly above the support targets I’ve been tracking for several weeks.

Is it possible that China is forming a base ahead of the U.S.? It’s an extremely contrarian scenario. It also happened three years ago in 2016:

History doesn’t have to repeat exactly, but it wouldn’t be the first time EM & China were sold to the bone, only to bottom ahead of the U.S. and lead the recovery.

The destruction of consensus trades came in waves of selling. It works the other way around too. If sentiment is approaching rock bottom, the recovery will also come in waves:

Here is a candidate for the first wave: a key Asian market, stuck in the middle of the trade war, with heavy exposure to the Tech & Semiconductor industry — representing a massive 50% of its stock market capitalization. Essentially this market is uninvestable in the current environment. All of this psychological damage, for a simple gap fill and base on the 200dma.

We’ve already documented the historic outflows from China and everywhere else in EM. So for posterity, here is the wave of selling that just went through the same market from the prior chart (Taiwan):

No one can say with 100% certainty if the bear case is now fully priced in. What we do know is, many highly-exposed markets — most now deemed uninvestable by the same folks who were pounding the bull case just a month ago — have been deleted from investor menus, have stopped falling on bad news, and are now rising even as U.S. markets continue to search for a bottom.

Over the last month, the market wrote a story gradually, as prices came down. Now another story is quietly being told, for those that are listening. A story that will likely carry bullish implications far into the future.

Thanks for reading!

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Some notes on Stock sentiment

Last week produced a list of “Bullish” news so extensive, I don’t recall seeing anything quite like it in many years. I’m writing a list to organize my thoughts with the goal of revisiting everything later on. Perhaps there is something to be learned here. Only time will tell.

To me, it looks like sentiment is completely euphoric and speculation is rampant. While this kind of excess can sometimes keep going and get even more extreme, one thing is clear: we’ve come a long way from the dark days of December.

  • Major Wall Street banks are “telling clients to be ready for a sudden rip higher in the market.” The banks “highlighted the possibility of a rapid, surprise jump in the stock market known as a ‘melt-up,’ driven by investors looking to get in on a positive momentum shift.” (CNBC, May 1). The banks recommend playing the melt-up with call options, “the best risk-adjusted way to add beta”.
  • Several Wall Street strategists increased their S&P target prices simultaneously this week. The most stunning move was a strategist who had the second lowest target, jumped overnight to having the second highest target.
  • Tech “Unicorns” are flooding the market with a huge number of IPOs. The unicorns have incinerated billions of Dollars of private equity money over the last decade, operating in low barrier-to-entry markets with little chance of ever making money. Many unicorns even say this in their prospectus, telling investors they may never turn a profit.
  • Beyond Meat, a company that makes plant-based meat substitutes started trading this week, its stock rose +163% on the first day of trading, making it the best-performing IPO since the financial crisis.
  • The SoftBank Vision Fund, perhaps the biggest private equity fee-generating bagholder scheme of all time, is “considering audacious fundraising plans, including a public offering of its $100 billion investment fund and the launch of a second fund of at least that size, as it looks to seize on an exploding startup scene”. Audacious may not be the best word to describe this plot.
  • Louis Dreyfus, a family-controlled company that has been private for 168 years, is suddenly holding talks with potential investors to sell equity stakes.
  • Almost every major financial media source/website published a “DON’T Sell in May” article this week.
  • Berkshire Hathaway revealed it has finally bought stock in Amazon. Warren Buffett himself regretted publicly years ago that he “missed” the opportunity to buy shares early in the company’s history. All of a sudden the most traditional, disciplined value investor in history has capitulated and bought into the most consensus growth story of this investment era. The decision was likely influenced by his lieutenants, who have been moving towards tech investing in recent years.
  • On May 6 (today) the CME will launch Micro E-Mini futures for the S&P, Nasdaq, Dow and Russell indexes, offering a product for small retail traders to access index futures. Historically, the launch of new futures products have coincided with some major turning points in markets. The most recent case was Bitcoin futures, which started trading December 2017 just five days before the cryptocurrency topped and fell -84%. Other examples include Uranium futures in May 2007, almost the exact day of the top, after which prices fell -88%. Gold futures debuted December 1974 less than 0.80% from the final top, after which Gold fell -44% over the next 2 years.
  • Businessweek magazine just put Microsoft’s CEO on the cover, displayed as a heavenly figure surrounded by clouds, captioned “The Miracle of Microsoft” and proclaiming “The greatest tech company of the 1990s is back!”. Previously, the last stock featured on the cover of BW was Boeing on February 19 2018 (“Up. Way Up. How Boeing seized the sky”), after which the stock spent ten months plunging five different times.