Last week, I updated the analysis on the break above the 200-dma, which changed the market’s complexion.
“If the markets can break above the 200-dma, and maintain that level, it would suggest the bull market is back in play.”
Then, in our Tuesday follow up, we discussed how the markets had pushed to more extreme overbought conditions and the importance of the market to hold the 200-dma on a subsequent correction.
“That correction came swiftly on Thursday. The surge in COVID-19 cases in the U.S. undermined the “V-Shaped” economic recovery meme. As we noted, the market had rallied into overhead resistance, and the correction found support at the 200-dma.”
As we saw in April and May after the initial surge off the March 23rd lows, the market has once again begun to consolidate its gains to work off the short-term overbought extension. With Friday’s sell-off, we can update our risk/reward range, which has turned more positive in the short-term.
-2.9% to the 200-dma vs. +4.9% to recent highs. Positive
-5.7% to the 50-dma vs. +9.1%% to all-time highs. Positive
-11.2% to previous consolidation lows vs. +9.1% to all-time highs. Negative
-15.2% to March bounce peak vs. +9.1% to all-time highs. Negative
However, the market reversal on Friday from a strong opening to a weak close, is a good reminder of just how volatile markets can be. Despite the technical backdrop becoming more bullish short-term, we hedge our portfolios against just this type of risk.
From Bubble, To Bust, To Bubble
In January and February of this year, we wrote articles discussing why we were taking profits from our portfolios and reducing overall portfolio risk. In“This Is Nuts,” we stated:
“When you sit down with your portfolio management team, and the first comment made is ‘this is nuts,’ it’s probably time to think about your overall portfolio risk. On Friday, that was how the investment committee both started and ended – ‘this is nuts.’
We discussed the overbought, extended, and complacent market over the last couple of weeks. Still, on Friday, I tweeted out a couple of charts that illustrated the excess.”
Our portfolio management meeting Friday morning started with “This is nuts.”
Importantly, I want to direct your attention to the Nasdaq, which is where portfolio managers have been stuffing cash.
There are several things to note about the chart above:
Every time, and it is only a function of time, the Nasdaq gets extremely extended above the 2-year moving average, it reverts to, or beyond, that average.
The MACD is more extremely extended currently than in the past 25-years.
The current deviation above the 2-year moving average matches the extension seen in February before the collapse.
On the S&P 500, there are warning signs as well. As shown below, the number of stocks on “bullish buy signals” has reached an extreme weekly. Historically, such extremes have preceded short-term corrections and bear markets.
Also, as noted last week, the number of S&P 500 stocks trading above their 50-dma has peaked and started to turn lower. Such has always been a precursor to a short-term correction or worse.
At the moment, the over-riding investment belief is that markets can’t decline because of the Fed. However, all it will take is an unexpected, exogenous event to trigger selling and quick correction of 10-15% due to the current lack of liquidity in the market.
What could such an event be? I have no clue. The market has already factored that in a second wave of the Virus. However, one thing no one is currently expecting is for states to shut down commerce once again. I don’t think that will happen either, but you get my point.
Again, this is why we maintain our hedges.
The Problem With Two-Year Forecasts
As markets get overly bullish, extended, and exuberant, Wall Street tends to come up with new ways to “sucker,” I mean “rationalize,” investors into taking on additional risk.
One thing I had hoped for in 2018-2019 is that we would get a correction large enough to revert some of the excessive valuation levels which existed. Such would provide higher future rates of return over the next decade, allowing investors to reach their investment goals.
Instead, through the Fed’s actions, the correction was halted, and the “clearing process” was not allowed to occur. The outcome has been even higher levels of corporate leverage, and valuations remain grossly elevated on many different levels.
So, how does Wall Street justify “buying stocks” in the current environment of recessionary economic growth, high unemployment, and collapsing earnings? Easy, you just tell uneducated investors to use earnings estimates 2-years in the future.
“Yes, stocks are expensive based on current earnings, but cheaper using earnings in 2022.” – Wall Street
Faulty Analysis Leads To Faulty Outcomes
There are significant problems with this analysis. The first is that even based on 24-month estimates, stocks are still historically expensive.
Secondly, Wall Street is terrible at estimating forward earnings. Historically, forward estimates are about 33% too high before they are ratcheted sharply lower. So, even if you assume the stock prices don’t move over the next two years, as future estimates are lowered, valuations will rise further.
Using Wall Street logic, if you were buying stocks in 2018 using 2020 estimates, you grossly overpaid for value and wound up paying the price.
Lastly, think about the stupidity of the statement for a moment.
You are paying for earnings two years into the future. Such means that you will have NO appreciation in the price for two years to maintain the “valuation” of what you paid today. Furthermore, every year going forward will have to have higher earnings estimates than current just to maintain the same valuation.
Such is why valuations are so important. By overpaying for assets today, and locking in earnings 24-months into the future, you have guaranteed yourself a long-term period of low returns.
Do you now understand why Buffett is sitting on $137 billion in cash?
A Bearish Pattern Remains
In the short-term, however, the technical backdrop of the market keeps the bulls in control. The market had gotten overheated, but the correction over last week successfully retested the 200-dma.
However, on a monthly basis, there is still a more “bearish” pattern in the works. The broadening range of highs and lows, known as a “broadening” or “megaphone” pattern, is characterized by two diverging trend lines. As noted by Investopedia:
“Broadening formations occur when a market is experiencing heightened disagreement among investors over the appropriate price of a security over a short period. Buyers become increasingly willing to buy at higher prices, while sellers always find more motivation to take profits. This creates a series of higher interim peaks in price and lower interim lows. When connecting these highs and lows, the trend lines form a widening pattern that looks like a megaphone or reverse symmetrical triangle.
The price may reflect the random disagreement between investors, or it may indicate a more fundamental factor. These formations are relatively rare during normal market conditions over the long-term since most markets tend to trend in one direction or another over time. For example, the S&P 500 has consistently moved higher over the long-term. Therefore the formations are more common when market participants have begun to process a series of unsettling news topics. Geopolitical conflict or a change of direction in Fed policy, or especially a combination of the two, are likely to coincide with such formations.”
The Technical Chart
You can understand why there is a disagreement among investors given the current backdrop of a recessionary economy and a bullish stock market driven by the Fed. The ongoing “broadening formation,” which is typical of longer-term market tops, is coupled with a negative divergence in the Relative Strength Index.
Given this is a “monthly” chart, such doesn’t mean the market will crash tomorrow, if even at all. However, it is one of those warning signs which continue to suggest a bit of caution in portfolios is likely advisable.
Portfolio Positioning Update
With our portfolios almost fully allocated towards equity risk in the short-term, we remain incredibly uncomfortable. As noted on Tuesday:
“From a purely technical perspective, the bulls remain in control for now. Fundamentally speaking. However, we remain ‘bears.’ We also realize that with the Federal Reserve intravenously feeding liquidity into the markets, we need to participate. As we stated last week:
“As a portfolio manager, we buy ‘opportunity’ because we have to. If we don’t, we suffer career risk, plain and simple. However, you don’t have to. If you are indeed a long-term investor, you have to question the risk undertaken to achieve further returns in the market currently.”
As noted, fundamentals will eventually matter. We just don’t know when that will ultimately be the case. However, there are more than enough signs to know we are likely close to a peak:
Wall Street firms using 2-year forward “operating (or B.S.)” earnings to justify valuations.
Investors are chasing bankrupt companies.
Companies rampantly issuing debt to shore up liquidity
A complete lack of market liquidity.
Investor over-confidence
Retail investor exuberance.
Overly estimated future earnings growth.
You get the idea.”
As I stated, we are participating, but it doesn’t mean we have to like it. We just have to respect the market for what is.
We continue to hedge our equity exposure with fixed income, dollar, and gold investments. While such hedging does reduce the participation of our equity portfolio short-term, it has mitigated the risk of sudden and unexpected sell-offs.
We are very confident we are not in a “no risk” market currently.
The MacroView
If you need help or have questions, we are always glad to help. Just email me.
See You Next Week
By Lance Roberts, CIO
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There's an important change coming that may force users to change their behavior.
While inflation has already ruined many people's plans for a summer trip cross-country, the impact of rising prices may soon hit some people where it'll really hurt.
Cannabis, and many of its related products, has so far largely escaped the kind of double-digit increases seen in many food products such as chicken to avocados — one analytics firm even reported that the price of marijuana flowers, edibles and vaping products fell by a respective 16.7%, 11.8% and 12.4% between January 2021 and 2022.
But for interconnected reasons having to do with everything from lack of available materials to supply chain disruption, prices for most things have been rising steadily and at a rate unseen in 40 years.
Even if the main item hasn't increased in price, rising costs for packaging material has left almost no industry unaffected.
Between June 2021 and 2022, the consumer price index rose by 9.1%.
Has Inflation Finally Come For People's Weed?
And, as the latest report from cannabis industry and accounting firm GreenGrowth CPAs shows, inflation may have finally started coming for the cannabis industry.
Amid rising cost of labor and materials necessary to make ready-to-consume cannabis, one in every four retailers that produce it reported that they have either raised or plan to raise prices by more than 10% in the next year.
"The COVID-19 pandemic had a comparatively limited impact on cannabis operators," reads the report. "According to last year’s data set, the top two reported issues, supply chain and difficulty hiring, affected nearly all sectors in 2021. [...] In addition, the most common issue impacting operators today are supply challenges."
Shutterstock
The survey examined over 700 companies in states where either recreational or medical marijuana use is legal. These include both start-ups and large multi-state operators.
While 70% of operators said they would try to absorb rising costs instead of raising prices, 30% plan to raise prices preemptively to prevent losses.
Pointing the Finger
The study's respondents split over who to blame for rising inflation, with 40% citing Biden administration policies, and 30% citing carryover effects from Trump administration policies.
Other reasons cited by operators include supply chains, conflicts with countries like Russia and China and impact from petroleum companies' way of doing business.
Nationwide numbers rarely tell the whole picture since cannabis use and production are currently illegal at a federal level. But even with rising prices, demand has been strong both during the COVID-19 outbreak and after. Some online delivery services in California reported a 500% rise in sales since the start of quarantine.
"After two years marked by crisis and uncertainty following a global pandemic, financial operators in cannabis find themselves navigating a list of new complications and business obstacles," reads the report. "But it isn't all bad news. Many operators benefited from a surge of demand and used this new windfall to enact ambitious growth plans."
Globally, sex workers have been left to fend for themselves during the pandemic with little to no support from the government.
(AP Photo/Bikas Das)
During the pandemic, business shifted from in person to work-from-home, which quickly became the new normal. However, it left many workers high and dry, especially those with less “socially acceptable” occupations.
Research shows that globally, sex workers have been left behind and in most cases excluded from government economic support initiatives and social policies. There needs to be an intersectional approach to global COVID-19 recovery that considers everyone’s lived realities. We propose policy recommendations that treat sex work as decent work and that centre around the lived experiences and rights of those in the profession.
Sex work and the pandemic
The United Nations Population Fund (UNFPA) recently reported that apart from income-loss, the pandemic has increased pre-existing inequalities for sex workers.
In a survey conducted in Eastern and Southern Africa, the UNFPA found that during the pandemic, 49 per cent of sex workers experienced police violence (including sexual violence) while 36 per cent reported arbitrary arrests. The same survey reported that more than 50 per cent of respondents experienced food and housing crises.
In the Asia Pacific, sex workers reported having limited access to contraceptives and lubricants along with reduced access to harm reduction resources. Lockdowns also disrupted STI or HIV testing services, limiting sex workers’ access to necessary healthcare.
Sex workers stand in a largely shut-down red light area in Bangkok, Thailand on March 26, 2020.(AP Photo/Gemunu Amarasinghe)
Government vs. community response
Globally, sex workers have been left to fend for themselves during the pandemic with little to no support from the government. But communities themselves have been rallying.
Elene Lam, founder of Butterfly, an Asian migrant sex organization in Canada, talks about the resilience of sex wokers during the pandemic.
Organizations in the United Kingdom, Germany, India and Spain have also set up emergency support funds. And some sex worker organizations have developed community-specific resources for providing services both in person and online during the pandemic.
Global recovery needs to include sex workers
The International Labour Organization’s “Decent Work Agenda” emphasizes productive employment and decent working conditions as being the driving force behind poverty reduction.
Sociologist Cecilia Benoit explains that sex work often becomes a “livelihood strategy” in the face of income and employment instability. She says that like other personal service workers, sex workers also should be able to practice without any interference or violence.
As pandemic restrictions disappear, it is crucial to ensure that everyone involved in sex work is protected under the law and has access to accountability measures.
A volunteer helps out at Zanzibar strip club during a low-barrier vaccination clinic for sex workers in Toronto in June 2021.THE CANADIAN PRESS/Frank Gunn
Recommendations
As feminist researchers, we propose that sex work be brought under the broader agenda of decent work so that the people offering services are protected.
Governments need to have a legal mandate for preventing sexual exploitation.
Law enforcement staff need to be trained in better responding to the needs of sex workers. To intervene in and address situations of abuse or violence is critical to ensure workplace safety and harm reduction.
Awareness and educational campaigns need to focus on destigmatizing sex work.
Policy-makers need to incorporate intersectionality as a working principle in identifying and responding to the different axes of oppression and marginalization impacting LGBTQ+ and racialized sex workers.
Engagement with sex workers and human rights organizations need to happen when designing aid support to ensure that an inclusive pathway for recovery is created.
Globally, there needs to be a steady commitment towards destigmatizing sex workers and their services.
Despite the gradual waning of pandemic restrictions, sex workers continue to face the dual insecurity of social discrimination and loss of income support. Many are still finding it difficult to stay afloat and sustain themselves.
Societally, we need to recognize that sex workers have agency and deserve the same respect, dignity and aid as any other person selling their labour.
The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.
OU researchers award two NSF pandemic prediction and prevention projects
Two groups of researchers at the University of Oklahoma have each received nearly $1 million grants from the National Science Foundation as part of its…
Two groups of researchers at the University of Oklahoma have each received nearly $1 million grants from the National Science Foundation as part of its Predictive Intelligence for Pandemic Prevention initiative, which focuses on fundamental research and capabilities needed to tackle grand challenges in infectious disease pandemics through prediction and prevention.
Credit: Photo provided by the University of Oklahoma.
Two groups of researchers at the University of Oklahoma have each received nearly $1 million grants from the National Science Foundation as part of its Predictive Intelligence for Pandemic Prevention initiative, which focuses on fundamental research and capabilities needed to tackle grand challenges in infectious disease pandemics through prediction and prevention.
To date, researchers from 20 institutions nationwide were selected to receive an NSF PIPP Award. OU is the only university to receive two grants to the same institution.
“The next pandemic isn’t a question of ‘if,’ but ‘when,’” said OU Vice President for Research and Partnerships Tomás Díaz de la Rubia. “Research at the University of Oklahoma is going to help society be better prepared and responsive to future health challenges.”
Next-Generation Surveillance
David Ebert, Ph.D., professor of computer science and electrical and computer engineering in the Gallogly College of Engineering, is the principal investigator on one of the projects, which explores new ways of sharing, integrating and analyzing data using new and traditional data sources. Ebert is also the director of the Data Institute for Societal Challenges at OU, which applies OU expertise in data science, artificial intelligence, machine learning and data-enabled research to solving societal challenges.
While emerging pathogens can circulate among wild or domestic animals before crossing over to humans, the delayed response to the COVID-19 pandemic has highlighted the need for new early detection methods, more effective data management, and integration and information sharing between officials in both public and animal health.
Ebert’s team, composed of experts in data science, computer engineering, public health, veterinary sciences, microbiology and other areas, will look to examine data from multiple sources, such as veterinarians, agriculture, wastewater, health departments, and outpatient and inpatient clinics, to potentially build algorithms to detect the spread of signals from one source to another. The team will develop a comprehensive animal and public health surveillance, planning and response roadmap that can be tailored to the unique needs of communities.
“Integrating and developing new sources of data with existing data sources combined with new tools for detection, localization and response planning using a One Health approach could enable local and state public health partners to respond more quickly and effectively to reduce illness and death,” Ebert said. “This planning grant will develop proof-of-concept techniques and systems in partnership with local, state and regional public health officials and create a multistate partner network and design for a center to prevent the next pandemic.”
The Centers for Disease Control and Prevention describes One Health as an approach that bridges the interconnections between people, animals, plants and their shared environment to achieve optimal health outcomes.
Co-principal investigators on the project include Michael Wimberly, Ph.D., professor in the College of Atmospheric and Geographic Sciences; Jason Vogel, Ph.D., director of the Oklahoma Water Survey and professor in the Gallogly College of Engineering School of Civil Engineering and Environmental Science; Thirumalai Venkatesan, director of the Center for Quantum Research and Technology in the Dodge Family College of Arts and Sciences; and Aaron Wendelboe, Ph.D., professor in the Hudson College of Public Health at the OU Health Sciences Center.
Predicting and Preventing the Next Avian Influenza Pandemic
Several countries have experienced deadly outbreaks of avian influenza, commonly known as bird flu, that have resulted in the loss of billions of poultry, thousands of wild waterfowl and hundreds of humans. Researchers at the University of Oklahoma are taking a unique approach to predicting and preventing the next avian influenza pandemic.
Xiangming Xiao, Ph.D., professor in the Department of Microbiology and Plant Biology and director of the Center for Earth Observation and Modeling in the Dodge Family College of Arts and Sciences, is leading a project to assemble a multi-institutional team that will explore pathways for establishing an International Center for Avian Influenza Pandemic Prediction and Prevention.
The goal of the project is to incorporate and understand the status and major challenges of data, models and decision support tools for preventing pandemics. Researchers hope to identify future possible research and pathways that will help to strengthen and improve the capability and capacity to predict and prevent avian influenza pandemics.
“This grant is a milestone in our long-term effort for interdisciplinary and convergent research in the areas of One Health (human-animal-environment health) and big data science,” Xiao said. “This is an international project with geographical coverage from North America, Europe and Asia; thus, it will enable OU faculty and students to develop greater ability, capability, capacity and leaderships in prediction and prevention of global avian influenza pandemic.”
Other researchers on Xiao’s project include co-principal investigators A. Townsend Peterson, Ph.D., professor at the University of Kansas; Diann Prosser, Ph.D., research wildlife ecologist for the U.S. Geological Survey; and Richard Webby, Ph.D., director of the World Health Organization Collaborating Centre for Studies on the Ecology of Influenza in Animals and Birds with St. Jude Children’s Research Hospital. Wayne Marcus Getz, professor at the University of California, Berkeley, is also assisting on the project.
The National Science Foundation grant for Ebert’s research is set to end Jan. 31, 2024, while Xiao’s grant will end Dec. 31, 2023.
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