IICS: XLB

2022-08-09

Salmon Jumping: Materials

Materials is a target rich environment if you buy into the deflation thesis or want to hedge it. Energy is the top pick, but some of these stocks are boring sleepers that aren't heavily traded. That makes for illiquid options, but also sometimes underpriced options. Some of the options in the materials sector are dirt cheap if you assume deflation. I skipped any chart that didn't look toppy, but the top-10 are almost all ugly. Newmont is included, even though I have calls, because it could be cut in half in a deflationary panic. Note that I expect Newmont would outperform most commodities stocks in this scenario. Purple line on IFF is a regression line for the whole chart. Individual targets after the jump.

2022-07-11

Sector Check-Up

Healthcare (XLV) is the only clearly bullish pattern. Maybe XLU too. Tech sectors (XLY, XLC, XLK) are ugly, but hold potential. Value sectors (XLF, XLRE, XLP, XLI) look like they're rolling over. Materials and energy (XLB, XLE) both rolling over, but they are not required for a bullish move in the broader market. At this point, a rally requires their weakness.

2021-12-08

Inflation Bu Hao, Very Bu Hao

If you want to know why I'm bruised, but as excited to be shorting as I was a month ago, I give you exhibit A. If you want to know why I think inflation can wreck stocks fast, here is the real earnings yield on stocks and the 46 percent bear market from 1973 to 1974 and the bear market low of 1982 and the fact that today's earning yield is lower. Now you know why ARKK holdings have been annihilated. Stocks with no or low earnings, with a lot of hype about back-loaded growth get traded like a 30-year treasury bond. The whole market is devaluing in real terms and investors are still bidding prices up on an inverted assumption about the direction of prices under higher inflation. I can't imagine a better setup with reality and assumptions so completely divorced.

Bloomberg: BofA Says S&P 500 Real Earnings Yield is Lowest Since Harry Truman Was President

The S&P 500 Index currently has a real earnings yield of -2.9%, meaning that without continued growth in company results, investors would lose 2.9% when adjusted for inflation, the strategists led by Savita Subramanian wrote in a note on Wednesday. “Last time the real earnings yield was this negative was 1947.”
In each of the previous four times that real earnings yield was negative, a bear market was the result, according to the strategists, who advised investors to seek refuge in inflation havens, such as energy, financials and real estate. Expectations that inflation will moderate from 6.2% to 2.5% over the next 12 months may prove too optimistic, as that would imply the sharpest drop in four decades, they said.

I don't think any of those will prove to be safe havens, at least not initially. Natural gas and producers are an exception because it can be uncorrelated. I do think enegy will greatly outperform, but energy stocks may also fall in price in a bear market. I'm increasingly biased towards holding futures on the commodities. I could be wrong about energy stocks, I'm not pounding the table there, but I would be surprised if energy stocks went up in a bear market. (I'm also still leaning to the first wave of a possibly decade-long churning bear market to come via deflationary forces.) Actual physical real estate may hold up and REITs may outperform relative to stocks. Financials could get wrecked if the Fed loses control and inflation is higher for longer, and long-term rates rise too quickly as a result. Maybe I'm wrong about financials because in relative terms it looks undervalued compared to the S&P 500 Index, but as a bear, that only makes me think the losses in tech are going to be insane.