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Kolanovic Says Time To “Reduce Tech” Just As Hedge Funds Finally Cover Their Nasdaq Puts

Kolanovic Says Time To "Reduce Tech" Just As Hedge Funds Finally Cover Their Nasdaq Puts

For the past three months, JPMorgan’s head quant…

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Kolanovic Says Time To "Reduce Tech" Just As Hedge Funds Finally Cover Their Nasdaq Puts

For the past three months, JPMorgan's head quant Marko Kolanovic has been on a crusade to convince markets that the impact of the delta variant has been drastically overblown (see June 30: "JPM's Kolanovic: The Delta Variant Does Not Pose A Risk For Markets", July 19 "JPM's Kolanovic: Stop Freaking Out About The Delta Case Spike" and August 12 "JPMorgan Says Delta Cases About To Turn Lower As Kolanovic Calls The Bottom For Yields And Cyclicals"). And while he may have been early, he was eventually right, and as we noted recently new US cases, mostly of the delta variant, have turned decisively lower.

As such, it will not come as much of a surprise that in his latest note, Kolanovic - who has been one of the most steadfast bulls on Wall Street in recent years - picks up where he left off, and writes that he retains "a pro-risk allocation on strong global growth as the world continues to recover from the pandemic, accommodative policy, and continuing earnings surprises."

While reopening of the global economy was delayed by the delta variant wave, it was not derailed in Kolanovic's view. As for the delta wave which caused so much consternation - arguably as a result of relentless media scare propaganda - the JPM quant writes that it has "likely peaked and is receding in the US and globally, given Rt is falling and below one in ~90% of US states, infections are dropping in 40 states and global cases are falling for the past 2 weeks allowing the pandemic recovery to resume."

As delta subsides further - unless of course it is replaced by the "far scarier" mu variant, whose ascent will be used to meet a specific political agenda - and as inflation persists due to supply frictions from reopening and accomodative monetary policy, JPMorgan expects "the reflation/reopening trade to resume its outperformance and believe that bond yields and cyclicals likely bottomed early last month", an identical call he made one month ago when Kolanovic also said the bottom for yields and cyclicals is in.

We believe cyclicals have bottomed for the year and would be cautious on COVID lockdown beneficiaries and bond proxies. Given our assumption of higher bond yields, we recommend reducing equity duration by reducing Tech and increasing cyclicals.

In other words, it is Kolanovic's view that investors should cut exposure to the widely outperforming tech sector, while raising stakes in economically sensitive companies like energy - something they clearly did today.

His bigger picture view is hardly surprising - it is the same one he has pitched for much of the past years, BTFD and if there is not D just B.

In Equities, we stay bullish as the risks are well-flagged and in some cases overdone, with signs that the Delta variant wave is rolling over and that the China slowdown can be countered with a timely policy pivot. We believe cyclicals have bottomed for the year and would be cautious on COVID lockdown beneficiaries and bond proxies. Given our assumption of higher bond yields, we recommend reducing equity duration by reducing Tech and increasing cyclicals.

While it remains to be seen if Kolanovic's repeated attempts to time the market's inflation point will be correct this time, at least one market segment - hedge funds - seem to completely disagree with a key part of the Croat's call: after 28 straight weeks - the longest stretch since the global financial crisis - hedge funds are no longer net short the Nasdaq.

As Bloomberg wrote earlier today, "the streak broke last week as the 100-member index clocked its 40th record for the year. Hedge funds’ push to buy about 7,000 futures contracts was nothing to write home about, but it tipped the positioning scale to net long for the first time since late February."

Kolanovic also advised adding to stocks in Japan and emerging markets, saying he has "preference for cyclicals/value via an OW in EM, Japan and Europe vs. the US, and we increase our OWs in EM and Japan this month given their recent underperformance and an anticipated boost in Japan from a political regime change." I.e., hopes that the transition of PM Suga will lead to another fiscal (or monetary) bomb in Japan which will lead to a continued surge in Japanese stocks.

Tyler Durden Mon, 09/13/2021 - 18:00

Economics

3 Stocks to Buy for Swing Trades Into the 2022 Taper Cycle

Yesterday was a wilder day than expected on Wall Street. The Federal Reserve completed their two-day meeting, then Fed Chair Jerome Powell delivered the…

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Yesterday was a wilder day than expected on Wall Street. The Federal Reserve completed their two-day meeting, then Fed Chair Jerome Powell delivered the verdict.

The note itself was exactly as I thought it would be, bearing no surprises; the Fed didn’t stray from what they said previously, nor did they commit to any official start to the taper process. The indices closed off their highs, but it was still a strong day for stocks. Within this mini correction, there’s opportunity to find stocks to buy from support zones.

Yesterday’s question and answer session was where the real fireworks happened for the Fed. Chair Powell offered more specifics, enough to guesstimate a taper schedule: my bet is that they will announce the taper during their next meeting. I also can estimate that they will be relatively aggressive in dialing back purchases, probably to the tune of  $15 billion per month. I derived these numbers from what the comment regarding ending the taper by middle of 2022. The current purchase rate is $120 billion, so you can do the math.

Here are 3 stocks to buy for swing trades into the 2022 taper cycle:

  • ContextLogic (NASDAQ:WISH)
  • Rocket Mortgage (NYSE:RKT)
  • Qualcomm (NASDAQ:QCOM)

The effect of these developments on stocks is minimal. Wall Street prices things months in advance and the idea of an upcoming taper has been on the table for a long while already. Now we have tangible guesstimates to guide us. Overall, stocks will be fine. Apple (NASDAQ:AAPL) is not going to suffer a crash in sales because the Fed is going to buy $15bn worth of bonds per month. This is still a friendly Fed. And if the economy falters like 2018 I am confident they bring back the medication.

Stocks to Buy: ContextLogic (WISH)

Stocks to Buy: ContextLogic (WISH) Stock Chart Showing BaseSource: Charts by TradingView

Catching falling knives is always tricky, but doing so in a bullish market is twice as treacherous. If a stock can’t find footing in a good market, investors should be worried. Such is the case with WISH stock, which recently set a new all time low.

ContextLogic started public life strong, but quickly fell apart in February. Since then, WISH has lost more than 80% of its value. But the losses are at stark odds with its financial metrics.

According to its income statement, the company is growing aggressively, more than doubling their revenues since 2017. The company is not yet profitable, but that’s normal for an aggressive company; growth doesn’t happen while pinching pennies. Amazon (NASDAQ:AMZN) taught us this lesson, though the bears were very slow to learn.

For this simple reason, WISH stock makes a great speculative long-term bet for a recovery. The bulls tried to make a stand in June, with WISH stock experiencing a 90% rally in two days. This lasted for about a month and then the disaster resumed. July brought out sellers in droves and prices couldn’t even hold the floor from June. The support that was near $8 per share now becomes resistnce.

This descending lower-high trend is nearing zero. The company has to make a decision in the next few months. There isn’t much room below, so either delist or recover.

This is a U.S. based company, so there should be enough transparency to trust it. But someone might know something that would explain this rapid descent.

A bit earlier I used the term “speculative” on purpose. Therefore bullish bets on WISH should be small and finite. This is not a stock in which I would average down. Investors should establish the risk amount and stick with it until it becomes unbearable.

So far, this falling knife has earned the machete label.

Rocket Mortgage (RKT)

Stocks to Buy: Rocket Mortgage (RKT) Stock Chart Showing BaseSource: Charts by TradingView

Our second pick today has had an equally hard time on Wall Street. It too started out of the gate running fast with a 90% rally. However it quickly gave up the gains to spend months consolidating below $24 per share. Earlier this year RKT stock went bonkers alongside the Reddit stock mania. In March Rocket Mortgage rallied 110% in a week, but that’s as good as it was going to get.

Rocket stock is now 60% below that highwater mark. However unlike WISH stock, this one has held a constant floor since May. The bulls have been able to stay above $16 per share, and this is their third effort at defending it. My assumption is that it will hold one more time before mounting a recovery rally.

The financial statements for this company are fantastic on paper. That raises all kinds of questions for me, mainly, “am I missing something?” On the flip side, this is where the opportunity lies. My thesis is that Wall Street needs more time to fully grasp the health of this company.

Total revenues are now four times bigger than they were in 2017. Moreover, it has a positive net income of $400 million per year. I will feel much better about its financial health when it swings to positive cash flow from its own operations. Meanwhile, it also has a low price-to-sales.

Rocket Mortgage is not a new company but it’s new to being public. Investors may just need more time to buy it in the proverbial and literal sense.

If my thesis of a $16 floor is correct, then this is the opportunity to get in on the bottom floor. You could use option strategies to be bullish and leave room for error.

Qualcomm (QCOM)

Stocks to Buy: Qualcomm (QCOM) Stock Chart Showing BaseSource: Charts by TradingView

Our third ticker today is an old tech dog that’s been around long enough to have survived the dot com bubble. In fact QCOM stock has just corrected harshly, but it’s still 35% above its 2000 high. More short-term perspective shows that current price is in recession territory. Wall Street describes that as being down 20% overall.

The reaction to the earnings report was a jubilee that only lasted a couple of days. The sellers stepped in and QCOM dropped 14% from the July high. It has now fallen into a support zone that has served as the base for the last four rallies.

My thesis today is that the support zone will hold one more time and Qualcomm will have a potential rally coming in the next two months. But this is not an all-in situation because this bottom may turn out to be a process rather than a sharp point in time.

The fundamentals are as solid as they come. Even as a mature company, management has grown sales more than 40% in four years. Net income ballooned three times over. The company nets more than $9 billion per year and that is bankable.

Statistically this is a cheap company with a 16.5 price-to-earnings ratio. Its price-to-sales is half of that of Apple.

Any which way you look at it, Qualcomm stock has value. Buying it now as an investment is not likely to be a major financial debacle. However, the stock markets are at their all-time highs and we’re going into a tapering session. Investors should leave room for error in all of their investment strategies. Moderation will be key.

On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Nicolas Chahine is the managing director of SellSpreads.com.

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Economics

Where Do Monetarists Think PCE Price Level Is Going To?

From an email from Tim Congdon, at the International Institute for Monetary Research (9/20): I suggest that a more plausible figure for end-year PCE annual…

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From an email from Tim Congdon, at the International Institute for Monetary Research (9/20):

I suggest that a more plausible figure for end-year PCE annual inflation is between 5½% and 6%. (The consumer price index – up by 4.5% in the first seven months of 2021 – may finish the year with a rise somewhere in the 6½% – 7½% area.)

The conclusion is based on the following reasoning:

In the background here is the huge overhang of excess money balances. In the year to mid-May 2021 the M3 measure of broad money increased by 35%. The evidence over many decades is that – in the medium term – the growth rates of money, broadly-defined, and nominal gross domestic product are similar. So – unless that 35% number is now followed by a big contraction in the quantity of money – the US economy will continue to be affected by two conditions, specifically,

• ‘too much money chasing too few assets’, and
• ‘too much money chasing too few goods and services’.

Of course the two conditions are interrelated and also interact with each other. Our research emphasized last year that rapid money growth was likely to boost asset prices first, and that has been right. (Incidentally, to attribute the behaviour of the prices of US tech stocks to bottlenecks and supply shortages would be daft. Does one have to say these things?)

What’s the implied path of the PCE deflator, relative to nowcasts and forecasts? See Figure 1, where I’ve used the mid-point of Congdon’s forecast (5.75% December y/y), shown as the red square.

Figure 1: Personal Consumption Expenditure deflator (black), Congdon midpoint forecast (red square), Cleveland Fed nowcast as of 9/23 (sky blue +), Survey of Professional Forecasters August median forecast (green line), FOMC 9/22 projections (blue square). Source: BEA, Cleveland Fed, Philadelphia Fed/SPF, Federal Reserve, and author’s calculations.

The FOMC median forecast is surprisingly similar to the Survey of Professional Forecasters’ median forecast from the preceding month (mid-August). The FOMC members then still perceive a deceleration in inflation in the last half of 2021.

Congdon’s forecast looks plausible given the August PCE deflator nowcast (and even more using the September). However, it’s far outside of the range projected by the FOMC, as shown in Figure 2, which includes the high/low inflation forecasts.

Figure 2: Personal Consumption Expenditure deflator (black), Congdon midpoint forecast (red square), Cleveland Fed nowcast as of 9/23 (sky blue +), FOMC 9/22 projections (blue square), high and low forecasts (dark blue +). Source: BEA, Cleveland Fed, Federal Reserve, and author’s calculations.

In other words, the monetarist view (if I can use Congdon’s view as a proxy) differs from both a mixed bag of mainly mainstream economists (proxied by the Survey of Professional Forecasters) and policymakers (the FOMC).

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Precious Metals

These Factors ‘Could Drive Gold and Silver Prices Much Higher’

Source: Crescat Capital for Streetwise Reports   09/22/2021

In a Sept. 10, 2021 Crescat Capital broadcast from the Precious Metals Summit in…

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Source: Crescat Capital for Streetwise Reports   09/22/2021

In a Sept. 10, 2021 Crescat Capital broadcast from the Precious Metals Summit in Beaver Creek, the firm's Portfolio Manager, Tavi Costa, and its Chief Investment Officer, Kevin Smith, talked about the current macroeconomic environment and highlighted the opportunity in gold and silver mining equities.

Portfolio Manager, Tavi Costa, noted that his funds firm, Crescat Capital, believes we are in a secular bull market for gold and silver and because we are now amid a pullback, the time is right to be taking advantage of stocks in the space over time. He showed a slide of silver's weekly candles and noted that the precious metal looks technically sound for taking advantage of.

"Cryptocurrency is getting a lot of attention these days, but Crescat Capital likes precious metals."

Looking forward, Costa added, "I think there are a lot of fundamentals behind what could drive gold and silver prices much higher and perhaps really benefit the explorers and a lot of the companies we have in our portfolio," he added.

Costa purported that we could be on the cusp of a new phase of mergers and acquisitions given the high level of liquidity among the mining majors. They have generated free cash flow at a pace never seen before and have lots of net cash available.

"I truly believe that tangible assets continue to be something very important for investors to own in their portfolios," Costa said.The portfolio manager said platinum is also at a good entry point and showed a slide of the metal's quarterly candles.

"Gold, we believe, has intrinsic value."

Also in the broadcast, he presented three slides depicting how various economic metrics are trending. The first metric was the Taylor Rule to the Fed funds rate Spread, and it showed that the spread today is the largest it has been since about 1975. Costa said the spread indicates interest rates should be at around 6 percent, but obviously they are not.

"It's a good reminder of how trapped the Federal Reserve is," he added.

Second, the cost of ride sharing with Uber and Lyft increased 92 percent between January 2018 and July 2021, Costa said. However, the intercity transportation component of the Consumer Price Index (CPI) that takes into account taxi, Uber and Lyft fares is up only 5 percent during the same period.

"This is example of how the CPI is massively understated in regards to the real inflation in the system," added Costa.

Third, the Duke survey of chief financial officers showed that internal company optimism about wages and sales is at a record high.

"The cost of living rising started to create a demand for higher wages and salaries, and we're seeing this in a lot of fronts," Costa said.

Next, Kevin Smith briefly summarized today's economic macroenvironment and with that as the backdrop today, what parts of the market Crescat Capital favors.

Smith reiterated that inflation is rising, growth is slowing and the stock market is in a bubble. Real interest rates are negative, and money printing continues. Deficits are the highest they have ever been.

Thus, cryptocurrency is getting a lot of attention these days, Smith said, but Crescat Capital likes precious metals.

"Cryptocurrencies, they're faith-based currencies," he said. "Gold, we believe, has intrinsic value, and the junior mining industry has been through essentially a 10-year bear market."

Read more about the companies Quinton Hennigh, Crescat's Geologic and Technical Director, discusses in part two of the Sept. 10 briefing.

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Streetwise Reports Disclosures:

1) This is contributed content from Crescat Capital compiled by Doresa Banning for Streetwise Reports LLC. Doresa Banning provides services to Streetwise Reports as an independent contractor. She or members of her household own securities of the following companies mentioned in the article: None. She or members of her household are paid by the following companies mentioned in this article: None. Her company has a financial relationship with the following companies referred to in this article: None.

2) The information provided above is for informational purposes only and is not a recommendation to buy or sell any security.

3) The article does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer. This article is not a solicitation for investment. Streetwise Reports does not render general or specific investment advice and the information on Streetwise Reports should not be considered a recommendation to buy or sell any security. Streetwise Reports does not endorse or recommend the business, products, services or securities of any company mentioned on Streetwise Reports.

4) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in any securities mentioned. Directors, officers, employees or members of their immediate families are prohibited from making purchases and/or sales of those securities in the open market or otherwise from the time of the decision to publish an article until three business days after the publication of the article. The foregoing prohibition does not apply to articles that in substance only restate previously published company releases. 

Important Crescat Disclosures Provided by Crescat Capital 

Please read Crescat’s important disclosures.

Nothing herein should be construed as personalized investment advice or a recommendation that you buy, sell, or hold any security or other investment or that you pursue any investment style or strategy.

Case studies are included for informational purposes only and are provided as a general overview of Crescat’s general investment process, and not as indicative of any investment experience. There is no guarantee that the case studies discussed here are completely representative of Crescat’s strategies or of the entirety of its investments.

Crescat has compiled its research in good faith and while it uses reasonable efforts to include accurate and up-to-date information, it is provided on an “as is” basis with no warranties of any kind. Crescat does not warrant that the information on this site is accurate, reliable, up to date or correct. In no event will Crescat be responsible or liable for the correctness of any such research or for any damage or lost opportunities resulting from use of its data.

You should assume that as of the publication date, Crescat has a position in the securities discussed and therefore stands to realize significant gains in the event the price of security moves. Following the publication date, Crescat intends to continue transacting in the securities, and may be long, short, or neutral at any time.

 

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