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Weekly rollup | Oct 10-16 2022

Stocks Mentioned: Teekay Corp (TK)

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October 12 2022

Be it refiners or producers, oil companies are un-investable in this environment. Oil itself is too volatile to short, so best to just avoid the whole space while it cracks. The end of an energy bubble is no different than the end of any other bubble. There will be wild, wild swings in both directions but the trend will be firmly lower.

Then and now

Sell Teekay Corp (TK)

Stop loss hit. Yes, it's just normal market volatility. But this year has taught me to honor stop losses and not second guess them. Re-entering a trade I like is emotionally really, really easy. I'd rather get out and re-enter 2-3 times than just buy and hold without a stop. Another set of 75 bps rate hikes is expected on Nov 2nd. That's a certainty if the September CPI print tomorrow comes in hot. I like Teekay Corp, but as with other stocks I like, I'll just stay away for now.

October 13 2022

I'm seeing a lot of commentary on Twitter and from other newsletter writers saying that everybody is bearish so it's time to get bullish.

Case in point: A trader I respect pointed to this tweet and the comments as a contrarian indicator.

"Since 1936, the November-to-January time frame is one of the seasonally strongest periods for the S&P 500, posting an average three-month performance gain of 4.5%."

— Jill Hill, senior equity strategist @ BofA" (Source)

Everybody likes to think they are better than average, that they are smarter than the crowd. That they should zig when others zag. Buy when there is blood in the streets, even if it is your own. It's fun to go against the crowd, face the odds, and emerge bloody but victorious. Fun to watch in the movie theatre, that is. Not in real life.

Yet, that temptation exists. Not all stocks are making new lows. Some spurious statistics says Nov-Jan is a seasonally strong period for stocks. Bitcoin volatility has bottomed and there's going to be a band squeeze breakout to the upside, making it the perfect time to get in close to the very bottom. March 2020 was a buying opportunity in hindsight. So is October 2022, right?

Most definitely not!

In March 2020, the Fed unleashed a wave of liquidity. Their balance sheet increased by >70% in 3 months, and continued to march higher until early 2022. Other central bankers followed the Fed, nay, put the Fed to shame by printing even more money. Asset prices rose because the denominator, which is fiat currency, kept falling in value. Now that the Fed is tightening, other central bankers are forced to do more of the same. Sane ones are tightening, insane ones are implementing yield curve control and adopting a hyperinflationary stance. If you live in a country which is teetering towards the latter, asset prices may initially outpace the depreciation of the currency, making it worthwhile to be long risk assets. But that's a game that has to be played with caution, since the next step will be capital controls, which will trap your money in the third world currency and force you to take the devaluation hit.

When the Fed tightens, the world tightens. As long as the Fed is tightening, there is no role for contrarian thinking. Period. Short covering rallies or relief rallies are treacherous precisely because people feel smart buying into them and rationalizing their decisions with sentiment or spurious statistics. Remember, 75 bps in Nov and 50 bps in Dec. Powell wants to lower wages, cause unemployment, destroy people's high savings from pandemic unemployment benefits and capital gains. He has unemphatically said home prices are too high. Other Fed governors have voiced their support for lowering asset prices too. This is a Fed in agreement about a strong dollar, anti-inflation policy. The arsonist has changed costume and now mans the fire truck.

The S&P 500 is down 24.5% year-to-date while the Nasdaq is down 33.5% year-to-date. But the Wilshire 5000, which is a broader measure of stock market performance, is down only 26.1%. If large-cap is getting hammered, shouldn't small cap get hammered more? Maybe this means bottom.

This is what makes contrarianism dangerous. It's easy to argue both sides. None of the arguments get to the main reason stocks go up and down - liquidity. Right now, the Fed is draining liquidity and has no plans of stopping. If they stop, or even pause, it'll be time to buy garbage and prepare for hyperinflation. They know this, which is why they won't stop now. Better to take down other fiat currencies and take a hatchet to asset prices, even if it means recession, than to go down in history as the central banker who let hyperinflation happen on his watch.

The Fed is going to keep tightening until something breaks. There will be a time to get back to full risk-on mode, maybe as soon as year end. But these are all guesses. The reasonable thing to do right now is respect the downtrend and let the price action be your guide.

Exponential moves don't correct by going sideways for long.

The Bureau of Labor Statistics released its Consumer Price Index (CPI) for September early Thursday, which showed prices rose 8.2% over the prior year and 0.4% over the prior month. Excluding food and energy, the core consumer price index, rose 6.6% from a year ago, marking the highest level since 1982.

October 16 2022

Nearly 4 months later, bitcoin volatility has absolutely collapsed. Usually, an asset that's left for dead continues to hug the bottom and do nothing as traders lose interest, and that may well be the case with bitcoin too. The setup looks interesting on the long side from a trading perspective. Current price (~$19.1k) is 8% above the 6/18 liquidation low. A stop at that low, in expectation of a mini-rally to $23.6k presents a 1:3 risk/reward trade. I like trades where I can set close stops, but I'm not going to trade bitcoin this way. If we do get a band squeeze breakout, it's going to run for a really, really long time. I'm happy to miss out on the first leg of the move and just wait for a perfect entry. What does that look like? Something similar to 2020, when Raoul Pal was one of the few folks pounding the table on bitcoin. I don't endorse trading that way, but that was the perfect setup and the key part is that it was after the Fed started printing unlimited money that bitcoin really took off. You didn't have to buy the very bottom or trade it.

Let the Fed finish hiking. Even if the bottom is in, it doesn't matter. If you buy an asset that can 20x, you will never capture the whole move. Don't be afraid of missing out.

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