It's Not The News...

1750 words – a 4 minute read.

It’s not the news but the reaction to the news investors want to pay attention to. It’s the best way to quickly tell how much of said news is already in the price of forward looking, discounting machine markets. We have utilized this process from inception and raise it today because of the multiple opportunities we have had in just the past week to put it into action.

Let’s use this Musings to detail several examples as they also fit into themes, portfolio strategies and asset allocation decisions we have made over the past months & quarters. We wrote: Listen to Stox, Not Vox  almost 2 months ago and see this Musings as a follow on or companion piece.

The week’s first example stems from Pres. Biden’s decision to impose swinging tariffs on Chinese green energy exports with 100% tariffs on China EVs being the headliner. Given that Climate is one of the five areas we focus on in our Global Risk Nexus (GRN) work every month we are well up to speed here. 

The portfolio strategy implications are also well in focus through our TPW 20 thematic model portfolio with holds LIT, the Global Lithium & Battery Tech ETF, as a proxy for this space. One would think that such news, notwithstanding that some rumors have been floating since the twin Yellen, Blinken visits to China a few weeks back, one would think this news would blow a hole in LIT and associated investments.

Well, one would be wrong as LIT actually closed UP on the day the tariffs were formally announced (down 3% on day leaked); more broadly is up roughly 2% over the past week which includes a little front running rumor action plus a day or two to note China doesn’t really export any EVs to the US and so this is more political theatre than an EV death blow. Marc Chandler: “The Biden administration estimates that the various tariffs announced yesterday would impact around $18 bln of imports. Last year, the US imported almost $450 bln of goods from China, and total goods imports were around $3.1 trillion.”

It does give us a sense though of how beaten down the clean energy space is and it is indeed beaten down with LIT off 27% over the past yr. and down 52% from its ATH set in Nov 2021. The reaction to the news tells us that much is in the price; the totality of 100% tariffs suggests the news can’t get much worse.

Europe provides our 2nd example; namely, French Pres. Macron’s comments expressing willingness to see a French bank take over by a non-French bank. He noted it in the context of the need for Europe to expand its financial capacity such that it can compete in today’s Tri Polar World with China and America. Today’s follow up includes a Bloomberg interview with Europe’s Banking Authority head, a Spaniard, who noted how well Spanish bank M&A has gone while echoing Macron’s comments.

Long standing Musings readers & regular Bloomberg TV viewers know we have been bullish EU banks for years and have had many discussions with BTV host Jon Ferro on this very subject. EUFN is our preferred proxy and it has been a winner, up 16% YTD and up 10% over the past month, outperforming both EU equity more broadly and XLF as well. Fun fact: On a key measure of profitability, return on equity, the continent’s 20 largest banks overtook U.S. counterparts last year for the first time in more than a decade, Deutsche Bank analysts say.

Here the reaction has been more muted with EUFN up 1% since Macron’s comments, suggesting that some good news is indeed already in the price. The key is how it reinforces what seems to be a bright future – given how cheap EU banks are, the improving CRE situation, impending ECB rate cuts and the reviving EU economy. Fun opinion: Reflecting their improved health, European banks could spend almost as much as 120 billion euros, or nearly $130 billion, on dividends and share buybacks this year, according to Bank of America analysts. Yeah, think we will hold onto our EUFN.

The third example is good old reefer, aka cannabis, another TPW 20 core holding; one that has been in the news this week as President Biden confirmed plans to reclassify cannabis from Schedule One (the heroin category) to Schedule Three (Tylenol with codeine). Cannabis is another holding that has had quite the up & down path, up 38% YTD, up 7% over the past month but off 80% from its ATH.

MSOS, our preferred holding, spiked initially when the Govt noted its reclassification plans a few weeks back and came right back after realizing there is many a slip twxit cup & lip, especially when one is buzzed. This week it bounced 10% on the news but then gave it all back suggesting some of that good news is already in the price. What’s not in the price is what this means on a go forward basis for the companies that are actually involved in the cannabis rollout across America and globally. “So shake loose the eye shades & burn up the lambs bread, session rockin yeah” … shout out to anyone who can tell us the band and song that lyric comes from.

The fourth and final example of our title lesson is a 2nd news flash from China. This one is RE related & makes clear that the Chinese Govt has had enough of residential real estate woes dragging down consumer confidence and threatening growth.  The Govt has decided to provide direct funding to local Govts and banks to buy up existing homes both completed and uncompleted in an effort to put a floor under the RE problem (no pun intended). 

Here's Trivium with the details: “These drastic measures show that the central government is no longer willing to tolerate the slumping property market. More policy support will be forthcoming if this latest package fails to arrest the price slide. 

On Friday, the central bank (PBoC) announced new financial incentives for people to buy homes, most notably by: Scrapping the mortgage rate floor for both new and second-hand homes nationally; Cutting the minimum down payment ratio for first-home buyers from 20% to 15% and for second-hand homes from 30% to 25% – the lowest rates since mortgages were introduced in 1992. Funding will be extended to 21 providers, including policy banks, state-owned commercial lenders and joint-stock banks, at a rate of 1.75%, she said. The loans, designed to have a one-year term, will be allowed to roll over four times.”

The action can’t come soon enough as Marc Chandler notes: “New and used house prices fell last month (month-over-month for the 11th and 12th consecutive month respectively) and at an accelerated pace. Residential property sales and property investment continue to slump.” 

This is huge news and Chinese assets are reacting accordingly with RE developer stocks up double digits over the past few days. Our focus has been on our 2 tech stack divide thesis and thus KWEB (up 25% over the past month, 19% YTD vs MCHI up 21% and 16% and the US QQQs up 5% and 10%) which got its own good news this week with solid Chinese Internet company earnings replete with share buybacks and dividend announcements. We note consensus double digit China EPS growth for 2024 & 2025. JPM notes: “China valuations probably have another 10-15% upside before closing the discount to historical, from current 10.0x towards cca 11.5x forward P/E.”

The RE action is good news for stocks and commodities. Commodities are where today’s reaction is most visible. We see it in our Global Multi Asset (GMA) model with four commodity positions up over 3% today including COPX which has been a true rock star over the past few months (up 40% P3Ms, 10% P1M as a short squeeze grips the physical copper market). In the near term the news flow might extend these positions a bit. 

Longer term, we share the views espoused by former GS commodity guru Jeff Currie, now at Carlyle, who calls copper the new oil & recently stated the long copper trade is the best investment idea he has seen in his 30+ yr. career with 50% upside from here. Closing in on 40 yrs. in the biz ourselves we would put it right up there.

It strikes us that those focusing on geo politics as a worry or a risk for risk assets have got it backwards; geopolitics is actually a boon for those, like us, that view the world in a Tri Polar, thematic fashion and thus are exposed to the three regions and to the themes that cut across and among them. Themes like the fusing of the digital & physical worlds through electric power or the Speed gap between blazing compute speed and eon like mining speed or the “pick & shovel” plays are just a few examples. GS: “Our Equity Analysts Forecast That US Power Consumption Growth Will Outpace GDP Growth Through 2030 for the First Time in Three Decades.” 

We have stated how rich we find the current global cross asset opportunity set and continue to see things playing out in our blue sky, global macro fashion over the 2023 -2027 period. The analogies to our preferred time period – the 2nd half of the 1990s in the US - keep coming fast and furious with Fidelity’s Timmer just the latest noting how well the current bull equity market is tracking the 1994-95 move.

We go back to our 2024 Outlook published last November, where we introduced our 4 4 24 global macro surprises including: lower inflation, sooner than expected (speed bump in US, on track in Europe); better than expected productivity (on track); return to stability (VIX at 12, MOVE at 91, VVIX, volatility of volatility, just made an 8 yr. low) and early cycle not late (double digit EPS forecast for 2024 & 25 in US, China and Japan).

We remain pleased with our Equity OW including our triple OW in EM equity, our double weight in Commodities and our massive UW in FI. We note this week’s US CPI data and bond rate fall; viewing both through the prism of our USD rollover thesis which notes the Euro up 4 weeks in a row.

Enjoy those new ATHs & for those special few, KWEB’s 52 week high (still a triple away from ATHs)!

TGIF!