(CRYSTAL BALL GAZING INTO 2024 & REMEMBERING EVENTS IN 2023)

December 20, 2023

Hello everyone,

I wrote recently how most analysts expect the market to continue its rally into 2024.   One bank has already raised its stock market forecast for 2024 and is now saying that the S&P500 will rise 8% to 5,100 by year-end.  That bank is Goldman Sachs.  But it turns out that Goldman is not even the most bullish.  Oppenheimer Asset Management chief investment strategist John Stoltzfus has argued that stocks can rally more than 10% to 5,200 next year.   His thesis centers around earnings and revenue, which he expects will continue to grow during what he calls a “year of transition” for stocks as the Fed loosens up on interest rates.

We all know that markets don’t move up in a straight line and setbacks are always likely.  Those investors with patience and perseverance should see gains over the intermediate and long term. 

So, let’s look back on the year that was.

In February, the Chinese spy balloon episode threatened a dangerous escalation in trade and military tension between the world’s two largest economies.  By the spring, the collapse of a series of regional American banks, and the demise of Credit Suisse, seemed to have ushered in a tough era of monetary policy – where climbing interest rates were unleashing havoc in the most indebted parts of the conventional and shadow banking systems.  At the halfway point in 2023, there was warranted panic over the state of China’s indebted local government authorities and housing sector – that it would require a decisive fiscal response from Beijing’s Communist Party.

As we have witnessed, Beijing has muddled through with piecemeal responses to stimulate its sluggish economy; Europe hasn’t suffered a mass exodus of its industrial base to the US; and the financial system weathered the tremors from the Silicon Valley Bank collapse while withstanding further monetary tightening. 

Let’s be optimistic and look at some of the other economic developments worth celebrating at the end of this year.

The US and the UK may get a soft landing in 2024.  Consumer prices in the UK have been stubbornly high, but it is finally coming into line.

What is particularly notable is the still-modest number of people who have been made unemployed over the past year.  In the UK and the US, higher interest rates are not forcing companies to lay off workers, but instead withdraw the record number of vacancies they had been posting since 2022.  This has created a more benign environment where the sharpest edge of monetary policy is hitting unfilled jobs rather than existing ones.

David Zervox at Jefferies argues that these conditions will be enough to lead central banks into “victory cuts” to borrowing costs next year.

Another reason for quiet celebration that is often overlooked is the state of the world’s emerging markets.  No debt crisis has arisen in any of the economies—countries such as Brazil, South Africa. Mexico and India have learned from past errors and have built up war chests of foreign reserves to protect themselves from acute debtor distress.

Countries like Peru, Chile, and Romania are among those that began raising interest rates at the first sign of inflation – far ahead of their richer Western counterparts.  So, no emerging market debt crisis is to be seen.

The Bank of Japan will likely end seven years of negative interest rates at the start of 2024 with minimal market disruption – a move that seemed unthinkable a few years ago.

Holiday fever and festive cheer are now gripping most of us.  Here’s to a great 2024.

Cheers,

Jacquie

(SUMMARY OF JOHN’S DECEMBER 13, 2023 WEBINAR)

December 15, 2023

Hello everyone,

Title:  The Fed Wins

Performance:

2023 year to date:  +78.86%

Since inception +676.05%

Average annualized return:  +52.00% for 15 years

Trailing one-year return:  75.38%

Positions:

90% long, 10% short, 0% cash.

Risk on

(NLY) 12/$15-$16 call spread. 10%

(BRK/B) 12 $320-$330 call spread 10%

(GOOGL) 12 $110-$120 call spread 10%

(CAT) 12 $220 - $230 call spread 10%

Risk off

No positions 0%

Total Aggregate Position = 40.00%

Method to my Madness

The Fed is done raising interest rates.  Markets are now discounting the first rate cut which could be as early as March, but more likely June 2024.

All interest rate plays reacted positively to the news – bonds, REITS, precious metals, and financials.

The year-end rally is on, but what happens in January?

All economic data is globally slowing.

Oil prices and commodities are now trading as one, selling off on a slowing economy.

The tech bull market is back and will continue for years.

Time to go aggressively long on stocks and bonds.

Commodities and industrials are a second-half play.

The Global Economy - Shrinking

Non-farm payrolls come in soft in November at 199,000.  The headline unemployment rate fell to 3.7%, near a 50-year low.

US GDP revised up to a blistering 5.2%.

S&P Global Services PMI comes in flat at 50.8, but still above the boom/bust level.  It’s the 11^th consecutive month over 50 in expansion territory.

Fed’s favorite inflation gauge rises a modest 0.2%, and 3.5% on a YOY basis, a new cycle low.

ISM Services came in at 52.7 versus an estimated 52.4.  No recession here, nor a super-heated economy.  Another Fed-friendly number.

China moves to further stimulate the economy after many failed efforts.  This time through reduced reserve requirements.

Stocks – Buy Back Boom

The year-end rally started on October 26, happened in November, now losing momentum.

Santa came early this year, clearly confusing Thanksgiving with Christmas.

70% of corporate profits went into stock buybacks this year.

Alaska Air Buys Hawaiian for $1.9 billion in a big overpay.  (ALK) dropped 15% on the news.

Uber entered the S&P500 on December 18, taking the stock up 10% on the news.

IBM announces New Quantum Computing Chip.

Snowflake delivers a big beat, taking the stock up 10% in hours.

Berkshire Hathaway fails to fall on Munger's death.

Bonds – Blowout Top

Panic buying drives Treasury yields to 4.13%, down nearly a full percentage point in little more than a month on weakening economic data.

US Government to finance million-dollar mortgages, through its Fannie Mae and Freddie Mac finance agencies.

Fed to Cut interest rates as early as March or so says the futures market, which gives this a 40% probability.

Crown Castle International catches activist bid from Elliot Management

Junk bond ETFs (JNK) and (HYG) are holding up extremely well with an 8.74% yield and an 18-month high.

Buy (TLT) on dips.

Foreign Currencies – Massive Yen Reversal

Massive short cover hits Japanese yen, taking it up 10% in days.

The prospect of falling US interest rates adds fuel to the fire.

Buy (FXY) on dips.

Bank of Japan eases grip on bond yields, ending its unlimited buying operation to keep interest rates down.

Japan is the last country to allow rates to rise.

Expect the Japanese yen to take off like a rocket.

The collapse of dollar is a 2024 story.

Energy and Commodities- New Lows

Exploding sales of EVs are ringing the bell for Oil, leading forecasters to speed up their projections for when global oil will peak, as public subsidies and improved technology help consumers overcome the sometimes-eye-popping sticker prices for battery-powered cars.

Oil crashes from $96 down to $68 in less than six months, as fears of a global economic slowdown continue.

US Gasoline prices hit a three-year low on recession fears and replacement concerns by EVs.

Energy stocks are tracking the downside tic for tic, pulling down all other commodities.

There is a BUY setting up here when the global economy reaccelerates on a lower interest rates world.  Watch (XOM) and (OXY).

Warm weather is capping rallies in natural gas (UNG).

Precious Metals – A New 10-year bull market

Gold hits a new all-time high – another falling interest rate play.

Sharp drop in interest is very positive for gold.

Investors are picking up gold as a hedge for 2024 volatility.

Gold headed for $3,000 by 2025.

Silver is the better play with a higher beta.

Russia and China are also stockpiling gold to sidestep international sanctions.

Real Estate – The Bull is Back

Refi demand rockets, as interest rates plunge to four-month lows.

The rate for the popular 30-year mortgage fell back toward 7% after hitting 8% earlier this fall.

Applications to refinance a home loan index increased 14% from the previous week and were 10% higher than the same week one year ago.

Zombie Malls are a new term you should get used to. People are just not coming back to work.

It’s very bad in San Francisco where tech discovered the wonders of cost-cutting, taking the office vacancy rate up to 35%.

Pending home sales collapse, dropping to the lowest level since the National Association of Realtors began tracking them in 2001.

Tight supply and still-strong demand have kept pressure on home prices, which only continue to hit new highs.  S&P Case Shiller hits new highs – 3.9% higher in September.

Trade Sheet

Stocks – buy any dips.

Bonds – buy dips.

Commodities – buy dips.

Currencies – sell dollar rallies, buy currencies.

Precious metals – buy dips.

Energy – buy dips.

Volatility – buy at $12.

Real Estate – buy dips.

Next Strategy Webinar:  January 10 from Silicon Valley

Here is a copy of the November Jacquie’s Post zoom meeting.  Enjoy!

https://www.madhedgefundtrader.com/meeting-replay-november-2023/

Cheers,

Jacquie

(A WEAK U.S. DOLLAR CREATES RIPPLE EFFECTS ACROSS THE WORLD)

December 11, 2023

Hello everyone,

Economic Calendar for the week ahead.

Monday December 11, 2023

Australia Consumer Confidence change

Previous:  2.6%

Time: 6.30 pm ET

Tuesday, December 12, 2023

US Core Inflation Rate

Previous: 4.0%

Time: 8:30 am ET

Wednesday, December 13, 2023

US Interest Rate Decision

Previous: 5.5%

Time: 2:00 pm ET

Thursday December 14, 2023

ECB Interest Rate Decision

Previous: 4.5%

Time 8:15 am ET

Friday December 15, 2023

EA Manufacturing PMI

Previous: 44.2

Time: 4:00 am ET

A weak U.S. dollar has ramifications for investors across the world.

The dollar index measures the US dollar’s value against a basket of six key currencies: the euro, the Japanese yen, the pound sterling, the Canadian dollar, the Swedish krona, and the Swiss franc.

The dollar normally rises when the US Federal Reserve raises interest rates (which it has been doing over the past 18 months) as overseas investors flock to US bonds because of the higher yields that they offer.  Now the greenback is overvalued.  The US dollar could still rise for the next few months, but by this time next year, it will be lower than where it is now.

As the US dollar is the world’s reserve currency, it is important for a lot of financial products.

So, if it weakens, how does it affect these products?   

Commodities

Assets that are denominated in US dollars should do well if the dollar weakens. In other words, if the denominator gets smaller, the price goes higher.   A weak US dollar makes dollar-denominated assets cheaper to buy with other currencies.

This should make commodities attractive:  all the main raw materials are priced in US dollars, except for cocoa, which is priced in sterling.  You could play this through a broad commodity exchange-traded fund (ETF) such as the Wisdom-Tree Enhanced Commodity ETF.

Within commodities, gold is likely to be the biggest winner – it hit a record high of over $2,100 last week, at which point it had climbed 16% in the space of two months.

Gold is benefiting from several different trends:  US dollar weakness, central banks buying bullion, expectations that real interest rates will fall, and geopolitical turmoil.  If an investor expects the US dollar to weaken then gold is a good asset in which to take a position.

Consider the iShares Physical Gold exchange-traded commodity (ETC) or the Invesco Physical Gold ETC.

Emerging Markets

Historically, when the dollar has been strong, the stock markets of emerging countries have performed worse than developed markets.  These periods occurred between 1995 and 2000, and 2012 and 2015.

By contrast, emerging market equities performed well between 2003 and 2007, 2009 and 2012, and 2017 and 2018 – periods when the dollar was weak.

The reason is that many developing nations borrow in US dollars, so weakness in their currency relative to the dollar means it’s more expensive to afford the interest on that debt and to repay their loans.

The opposite is also true; if the dollar is weak relative to their currency, it is cheaper for them to borrow and service their debts.

You could consider a cheap index-tracking fund to take advantage of this, such as the iShares Core MSCI EM IMI ETF or the Fidelity Index Emerging Markets fund.

How does a weak dollar influence the movement of stocks?

When the dollar is weakening it tends to mean that global economic growth and, consequently, risk appetite are strong.  This can be positive for equities.

A weaker dollar means that it’s cheaper for non-US companies with US supply chains to import goods.  It also means that US exporters’ goods and services are cheaper for overseas customers to buy.

But a weaker dollar can also have a negative impact on companies that sell a lot of goods and services to Americans because those US earnings become worth less when converted back to their base currency. 

If you own shares in an ETF that tracks the performance of America’s S&P 500, a weak dollar relative to the pound, for example, will affect your returns.

In the long term, these peaks and troughs tend to even out.  In the past five years, the Vanguard S&P500 ETF is up 81.5% in US dollar terms and has gained 83.3% in sterling terms.

(HARVESTING RETURNS FROM COMMODITIES IN 2024)

December 6, 2023

Hello everyone,

In 2024 and 2025, the commodities area that will be a gold mine for investors will be precious metals.

I have been calling for you all to keep scaling into positions in precious metals for the entire year.  2024 will see the metals power up from their present position.  And J.P. Morgan agrees.

The firm expects gold prices to hit a targeted peak of $2,300 an ounce.

Why will gold rocket next year?

J.P. Morgan believes slowing U.S. GDP growth will solidify expectations that the Federal Reserve will slash rates to head off a recession, with a cutting cycle equal to 100 basis points in the second half of 2024 pushing gold prices to new nominal highs.

Gold is vulnerable to a retreat toward the $1900 in the coming months, and if this comes to pass, it will set investors up to position themselves for the midyear rally.

Silver will also get a boost.  It will push above $30 per ounce on the rate-cutting cycle, according to J.P. Morgan. 

We could see a 6% return from precious metals by the end of 2024.

The global economy is expected to slow, but according to J.P. Morgan, it will avoid a recession from 2024 to 2025, which makes it difficult to give a decisive overarching call as to whether commodities as a whole will be bullish or bearish.  The bank goes on to say that commodities are unlikely to benefit from inflation next year with core inflation expected to fall to 2.9%.

The price of a barrel of oil is expected to rise according to J.P. Morgan and they see $90 as a target for Brent Crude.

Natural Gas prices on the New York Mercantile Exchange are also forecast to increase according to J.P. Morgan.  There will be solid demand growth, though the narrative won’t materialize until the second half of 2024.

J.P. Morgan forecasts the BCOM Energy Index will decline in the first two quarters of next year but deliver an 8% return in the third quarter and ultimately finish out the year with a 10% return.

If we turn our focus to agricultural commodities, we find that the bank has a bullish outlook on sugar with more modest gains across grains, oil seeds, and the cotton market throughout 2024.  J.P. Morgan states that the BCOM Agriculture and Livestock Index is forecast to deliver peak returns of 8% in the second and third quarters before declining to 5% at year-end. 

Cheers,

Jacquie