“Everything’s Alright” Stock Market (And Sentiment Results)…

I echoed that everything is going to be alright on Tuesday evening (after the 4% correction) on CNBC Street Signs (Asia) with Will Koulouris. Thanks to Will, Gabrielle See and Celestine Francis for having me on.

Here were my show notes ahead of the segment:

Put it in perspective: We haven’t even reversed last week’s gains in the market. We’re nowhere near June lows. Wait a day or so to settle, then pounce selectively.

– The good news is “peak narrative” holds as the June report was the highest print. The bad news is the upside miss cements a third 75bps hike next week (which was already expected). Key will be November and December: 50 then 50 or 50 then 25?

– Rents, food (+11.4% yoy) and healthcare account for increase in CPI.

– Consumers got some relief from a (-10.6% mom) decline in gasoline prices.

– WSJ Nick Timiraos put out trial balloon for 100bps hike in September (which took odds up to 47% in the afternoon session). UNLIKELY.

The market will trade heavy for a day or two until participants can refocus on fundamentals/earnings of businesses – which are holding up nicely despite a challenging environment. 2023 S&P Estimates are still ~$243.73.

5 year inflation breakevens are down from 3.59% in March to 2.62%. The Fed is more focused on expectations than actual inflation because it effects behavior.

Key Is Positioning/Sentiment (BofA Survey Fund Manager Released This Week)

Managers were already positioned for the worse case. They got it. Now who’s left to sell? Pain trade is UP (looking out a few months).

– Highest expectations for Recession since April 2020 and March 2009 (bottom was in in both cases).

– Lowest Percent of Managers taking higher than normal risk.

– Lowest Percent of Managers “Overweight Equities” in history (-52%). Lower than 2020 Pandemic and GFC in 2008.

– Growth Expectations near all-time low. 72% expect weaker economy next year.

– Allocations to cash highest since 2001 (6.1%). Higher than GFC and Pandemic Lows.

– Relative to the past 10 years, investors are long cash, defensives and energy, while being underweight equities, the euro zone, emerging markets and cyclicals.

– The most crowded trades are long US dollar, long oil and commodities, long ESG assets, short US Treasuries, long growth stocks and long cash.

Take the other side. Looking a few months out, the pain trade is up. The market will start to discount gridlock after November elections: No new taxes/policy change = bullish.

Contrarian Trades (Watch The Smart Money, Not The Emotional Knee Jerk)

– If you can step in at extremes when volatility and fear are high (and be patient in the short term), you will make outsized returns over time.

– Short USD: Commercial Hedgers (green line at bottom) are aggressively short (as was the case before peaks in 2020, 2017, 2015, 2013, 2009, 2006).

– Long US Treasuries 10 year note: Commercial Hedgers (green line at bottom) aggressively long (as was the case before the rally in bonds in 2018, 2014, 2011, 2009)

– Long S&P Futures: Commercial Hedgers (green line at bottom) are aggressively long (as was the case before the rally in equities in 2020, 2016, 2011, 2009)

Expedia (EXPE): TSA air travel passthrough numbers higher than 2019 for 5 days so far this month. Expedia CEO on CNBC US, “Business Travel is Back.” People are underestimating the pent-up demand to re-establish business/client relationships (as we saw in leisure over the summer). EXPE trades at 11.5x 2023 Est. with 34.8% earnings growth. Expect to initiate in coming days.

MSCI Emerging Markets (EEM) / Alibaba (BABA): Wait to see weakness in the USD then load up on Emerging Markets/Highest Quality Chinese Equities with a 1-3 year view. We are long Alibaba. Covid (Zero) is temporary. Business moat is permanent. Cloud will triple by 2025. BABA has 36% share. Numerous shot term catalysts: Audit clearance, Stock Connect (dual-listing) ~$30B new buyer demand from Mainland China, continued massive stimulus, Ant Financial.

Lennar (LEN): Wait to see strength in Treasuries then load up on US homebuilders (starter homes) with a 1-3 year view. We will be buying LEN (no position yet. 72M millennials average age 31 need small starter homes (undersupplied by 3.8M units). Trades at 5x 2023 EPS Est.

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Has Inflation Peaked? Just Follow The Trends…

Consumer

Producers (Leading Indicator):

If you don’t understand all of the data above, you need only listen to one of the best sell side strategists in the business – Jim Paulsen of Leuthold – laying out the exact case we have been making since the June lows.

On a final note for auto-suppliers, a core part of our (CPS) thesis is playing out:

The second catalyst – Credit Markets (refinancing) however are still relatively closed. We’ll see if that improves somewhat after next week’s Fed meeting and presser.

Now For The Short-Term Outlook

Retail Sentiment has picked up a bit this week:

CNN Fear and Greed:

National Association of Active Investment Managers Equity Exposure:

Author and/or clients may have beneficial holdings in any or all investments mentioned above.