Marketplace Roundtable – 2022 Mid Year, Part 1

~ by Tim Murphy, Marketplace Success Manager

Hi everyone – we’re back with a mid-year roundtable series from our Marketplace contributors. As I’m sure you and your portfolio are well aware, it’s been quite the first six months of the year. As I write this the S&P 500 is down 20%+ YTD and the Nasdaq is down 30%+ YTD.

We thought now would be a good time to give you insight from our top contributors as to what they’re communicating to their subscribers and for them to share one idea they think may provide some alpha for the remainder of the year. They were given the following questions:

1. What are your major takeaways of your area of coverage so far this year? What are you looking for and expecting for the rest of 2022?

2. What’s one favorite idea for the rest of 2022, and what’s the story?

Today we have responses from those covering Macro and Quantitative/Technical Analysis. Over the next week we will have coverage on Value Stocks, Commodities, Dividends/Income/REITs, Tech/Crypto, and Biotech/Healthcare.

Enjoy reading! Links to author profile and service are included. All services have either a two-week free trial or a limited one-month money back guarantee.

*Note for non-Premium readers: As some of you may not be Premium subscribers, if the author provides a link to an article we have included a dollar symbol ‘($)’ to indicate it is behind the paywall. Blog posts are not paywalled and articles from this account, SA Marketplace, are not paywalled either.

Macro

Michael Roat of Tri-Macro Research: I think the US CPI will prove more responsive and potentially easier to bring to target price stability without derailing GDP growth in the United States compared to other economies. The problem is collateral damage mainly regarding asset prices rather than the underlying economy. Excess demand-pull inflation is not a problem for many economies besides the US. Most of the global inflation is cost-push-driven by weak currencies, high commodity, input and import cost pressures.

Japan is committed to continued easing. Europe should be in my opinion despite recent ECB rhetoric which hasn’t led to much euro appreciation signaling market doubt as to the likeliness or effectiveness. China must lower rates promptly as the Chinese economy is at risk of a 1990’s style Japan housing crash alongside long-term growth concerns. Current account deficit emerging market central banks are in a policy bind facing a difficult trade-off between nominal growth and employment vs. inflationary pressures.

IDEA: My top idea for the rest of 2022 is shorting emerging market equities through EUM – the ProShares Short MSCI Emerging Markets ETF.

Inflation rates are high in emerging markets and currency depreciation in foreign exchange markets is associated with this relatively higher emerging market inflation rate. A weak currency increases import cost pressures which current account deficit economies (net importers) are most affected by.

To defend the currency and prevent capital outflows an emerging market central bank would raise rates in order to protect their relative yield advantage from other central banks such as the Fed tightening. This disincentivizes selling pressure in the currency due to it being higher yielding, lowers import costs and cools demand in the economy all exerting downward pressure on inflation. The issue is the trade-off between nominal GDP growth, employment and asset prices against inflation or how much pain an EM central bank is willing to endure in order to keep the CPI in check and the FX rate stable.

Disclosure: Long call option position on EUM.

ANG Traders of Away From The Herd: Since the federal government’s DEFICIT = the private Sector’s SURPLUS, a lower government deficit means a lower private sector surplus. As of mid-June 2021, the government had spent $5,647B, and collected $3,647B in various taxes. This resulted in $2,132B being left behind in private sector bank accounts. That is why the market was higher at that point last year.

As of mid-June 2022, the government has spent $5,088B, which is only a little less than last year, BUT it has taxed back a record $4,371B, which left only $717B in private savings. This is the reason for the current market pullback, but since that represents a return to the pre-pandemic deficit level, we do not see a total collapse like is widely feared. We will not be seeing new highs over the next several months, but if the deficit is maintained at the current level, we could see new highs in Q4.

IDEA: Buy ARKK below $50.

Disclosure: We own ARKK and have written (are short) put options on ARKK.

The Macro Teller of Macro Trading Factory: As mentioned in this article ($), we started the year with four building blocks: Energy, Materials (Commodities/Miners/Precious Metals/Agriculture), China, Healthcare/Biotech. The first two have performed well YTD, unlike the last two that are still suffering from a negative sentiment as well as regulatory burden.

We were cautious during 1H and this has served us very well with the two portfolios featured on Macro Trading Factory outperforming $SPY by 20%+ YTD. Looking at risks that are still very much in play – high inflation, tightening monetary policy, rising rates/yields, slower economic growth, Russia-Ukraine war, supply-chain disruptions, food protectionism, energy crisis/gasoline prices – it’s likely that we would remain defensive in 2H, certainly until the midterm elections that may deliver a blow to the current administration, pushing the probability for a recession higher.

IDEA: Europe is heading into a recession. US growth is slowing rapidly. Emerging Markets in LatAm a/o Africa seem vulnerable to the “tightening mode” across the globe. Asia isn’t only the most immune continent, but the one benefiting the most from Western sanctions on Russia. India and China have increased (cheap) Russian oil exports and according to the World Bank’s most recent update they’re among the countries that are projected to grow the most in 2022 (7.5%, 4.3%) & 2023 (7.1%, 5.2%).

Unlike the US, China has already been hit with Q2 likely to see economic contraction before the country moves back on track. When China re-opens completely (there are still all sorts of COVID lockdowns/restrictions) and with the Chinese authorities keep backing off from the regulatory crackdown on US-listed Chinese companies, China’s economy is set to grow again, just when most everybody else starts to contract. How to make the most out of it? Direxion Daily CSI China Internet Index Bull 2x Shares ETF (CWEB).

Disclosure: Long CWEB

Chris Lau of DIY Value Investing: By the end of 2021, high-risk, high-potential technology and growth stocks no longer offered good enough risk-adjusted returns. They continued to trade at lower highs at the start of the year. The do-it-yourself investor could not ignore negative macroeconomic headwinds, from war, inflation, plunging demand, supply chain disruption, and volatile stock markets.

We focused exclusively on the 30-year Treasury bond yield (TLT) in February 2021. It’s approaching a multi-year low. It will eventually attract buyers. This is despite the Federal Reserve starting quantitative tightening. DIY expects having above average cash will protect investors from further stock losses. Energy will provide investors a hedge against inflation for the rest of 2022.

IDEA: The 10-year Treasury (IEF) is a favorite for the rest of 2022. Markets will accelerate their demand for U.S. debt and the US dollar. Investors could get a return of between 10% – 15% from this ETF.

Disclosure: None

Trading Places Research of Long View Capital: My No. 1 takeaway so far is the huge split between the macro data and sentiment. The mood is sour, but the data tell a very different story. The economy is too hot. The Fed is tightening into a strong economy, but with two-sided risk.

Growth/Inflationary Risk: Surging services demand/inflation, more housing inflation baked in, food and energy prices largely outside of the Fed’s control, private balance sheets are in great shape, an extremely tight labor market, infrastructure bill about to see spending come on line.

Recession/Deflationary Risk: Food, energy and housing crowd out everything else in low income households; possible durables bullwhip; housing market slowing quickly, and the wealth effect wanes; same with equity and crypto prices; an investment boom meets rising cost of capital; sentiment is just awful.

The path is there for a soft landing, but it’s very narrow. Good news is bad news. Bad news is also bad news. OK news is good news.

IDEA: There is a ton of uncertainty headed into the second half of 2022, as much as I can remember. One thing that’s not uncertain is that a $655 billion infrastructure law passed, and signs of that spending will begin showing up in H2 this year. State and local governments also had a $423 billion surplus during the pandemic, and many states have their own infrastructure spending.

Our Infrastructure Portfolio has names in construction, engineering, materials and equipment, but the construction group is the most undervalued. Public infrastructure investment has been lacking for 2 decades. These companies largely missed out on the 2016-2021 bull market. My favorite is Granite Construction (GVA). They are a regional US transportation infrastructure construction company, and they also make some of their own materials. Most state budgets begin in July, so the sector should have some good visibility into the large contracts coming downhill in the Q3 reporting cycle.

Disclosure: Long GVA

Fear & Greed Trader of The Savvy Investor: A very volatile situation with rallies in a bear market backdrop. In terms of ideas, on the long side is anything “Energy” related as it’s the only sector that remains in a bullish trend. On the short side – using Inverse ETFs to score gains in this market scene.

Disclosure: Long UNG.

Technical & Quant Analysis

JD Henning of Value & Momentum Breakouts: The two strongest market topping signals on November 17th and January 13th from the Momentum Gauges® have kept me in a defensive position heavily in cash and almost exclusively in bear funds for the last 30 weeks. June 10th just gave us the third major topping signal of the year and the strongest negative signal since January. See my article here ($).

These signals have forecasted every major downturn including the correction brought on by the Fed’s first quantitative tightening in 2018. I expect strong similarities between 2018 /2022 to dominate market conditions into 2023. The major exception this time is that the Fed is fighting 40-year high levels of inflation and may not revert to easing as quickly as 2018. I plan to follow the signals for larger gains in the active ETF portfolio +31.8% YTD until signals alert to major changes.

IDEA: A strong current selection is DRV (3x Direxion Daily Real Estate Bear fund) up +39.9% for June. Housing demand is starting to slow dramatically with 30-year mortgage rates accelerating to above 6% at the fastest pace since the 2008 financial crisis. As long as the Fed continues aggressively hiking rates in order to combat record inflation levels, the homebuyer affordability mortgage index will continue to decline.

Currently the affordability index is near the lowest levels since 2008 and yet we have not yet seen a commensurate reaction in real estate market prices that may show up in the second half of 2022. Much of this mortgage rate pressure is reflected in record increases in consumer credit levels as economic conditions worsen. Without a major change in current monetary and fiscal policies, real estate is on track for some of the largest market declines in more than a decade.

Disclosure: Long DRV

Yuval Taylor of The Stock Evaluator: I’ve been pleasantly surprised by how resilient my portfolio has been through this downturn: I’m beating the S&P 500 by 40% YTD, and that’s coming off a return of 73% in 2021. I attribute a lot of that to investing in the right industries at the right time. I’ve been largely avoiding technology stocks for over a year now, while they were a staple of my portfolio in prior years, and the proportion of healthcare stocks in my portfolio is also far lower than it used to be. Instead, I’ve been investing primarily in financials, materials, and energy, including a large number of Canadian companies. As always, I’ve been concentrating on small, low-volume, low-beta, stable companies. As for the rest of the year, I try not to prognosticate. My system will automatically adapt to whatever comes down the pike. I keep my expectations to a minimum.

IDEA: Hammond Power Solutions (TSE: HPS.A; OTC: OTC:HMDPF). This company ranks close to No. 1 on every single ranking system I use, from both data providers I use. It’s a nice, boring, safe investment: It’s small but not too small, undervalued, stable, resilient, growing fast but not too fast, in an industry with strong momentum. It has terrific financials, strong estimates, and, best of all, is flying totally under the radar, despite having a market cap of $140 million, sales of $340 million (both in USD), and a yield of 2.65%.

Disclosure: I have about 5% of my portfolio invested in OTC:HMDPF.