Skip The Headlines

1629 words – a 4 minute read.

I enjoy going on TV not for the pub but for the work  – especially on a Friday. That’s because my TV prep notes can then serve as the baseline for my Friday Musings. That’s the case today after this morning’s appearance on BTV’s The Open show. Having to organize one’s thoughts in TV bite size style, at the end of a hectic, busy week with macro & micro data flying all over the place is a very useful exercise – one that speeds up my normal Friday process. Thus, these Musings comes direct from my prep notes.

Economic headlines has been uniformly negative: recession, recession, recession, fiscal, fiscal, fiscal woes, UST supply, supply, supply concerns, too strong growth, growth too strong, you name it. This has been bad for stocks given inflation and rate fears. Combined with normal poor seasonality (about to flip to best 3 months of the year) some significant technical damage has been done to stocks with bad breadth leaving only the Qs still above its 200 dmav. That’s the bad news.

Our advice: ignore the headlines; the good news is that the underlying data has been quite good. This is true from US growth and inflation to China growth and on to European manufacturing looking like a bottom to an ECB on hold & on to US earnings coming in BTE. Add in very negative risk asset sentiment & almost across the board oversold conditions and one can almost see the silver lining (YE rally – delayed not cancelled) amidst the storm clouds. Fintwit notes: the aggregate equity long/short ratio among US hedge funds is currently near 5-yr lows (ranking in the 2nd percentile all time) while Ren Mac highlights that: Consensus Inc bulls sits in the bottom decile for the first time in almost a year.

As we look into 2024 the surprise we are starting to consider is that inflation comes in lower than expected, faster than expected, in both the US and Europe. This in turn would ensure that the Fed and ECB are done raising rates, that “higher for longer” has been pretty fully priced in and that the USD has most likely peaked.

We note that 10 year real rates at 2.5% are historically high and seem unwilling to go higher, that the nominal 10 yr. UST rate around 5% likewise seems content with even a blowout, much BTE, Q3 US GDP figure of 4.9% unable to move the 10 yr. rate needle (flat on week at 4.85%). Odds of a Dec Fed hike, over 50% two weeks ago, are now less than 25%. The DXY peaked back on 10/4 at 107.2 and like the 10 yr. was not able to advance at all with the blowout growth number, DXY now at 106.6.

We remain focused on the Path to Stability and the $1T reward unlock we expect as stability returns. 

Our 4 signposts remain:

Continued US/EU disinflation – we are growing more confident in this view not less. We look for next week’s European CPI to come in with a 3% Y/Y handle as strong year ago CPI #s drop out. US core PCE data came in at a 2.6% Q3 annualized rate vs 4.8% in Q1. The S&P Global PMI pricing data released earlier this week was uber constructive. Here’s the $ quote: “The survey’s selling price gauge is now close to its pre- pandemic long-run average and consistent with headline inflation dropping close to the Fed’s 2% target in the coming months, something which looks likely to be achieved without output falling into contraction.” Remember that both the Fed and ECB don’t expect 2% type inflation until 2025. Positive surprise ahead?

Global Manufacturing Recovery – our 2nd signpost also had some good data recently with both China’s Manufacturing PMI and the US Manuf PMI coming in at 50 or better. US manufacturing demand conditions were the best since April; we expect the US ISM Manuf PMI to follow the S&P Global Manuf PMI and break back above 50. Our inventory shift from destocking to restocking thesis was very visible in the Q3 data. We also note that Europe’s manufacturing – by far the weakest of the Tri Polar World’s 3 main regions - looks to be bottoming with both IFO and ZEW survey expectations data showing some signs of life.

Earnings is our 3rd signpost – here the data is clearly positive with JPM noting today that with roughly 30% of the S&P reporting, EPS growth is running at + 12% Y/Y vs pre season consensus of +/- 1%. While much of this is Big Cap tech driven note that it is quite normal for one segment or another to drive earnings. We would also note that Big Tech sells at a PEG ratio around .8 vs S&P at 1.5x. Finally, we note that guidance into 2024 while muted is not being taken down from the 12% EPS growth that is current consensus.

Our 4th & final signpost is China growth – here too the news has been quite good with much BTE Q3 GDP leading many to raise their Q4, full yr. 2023 and 2024 GDP estimates to roughly 5% GDP growth this yr. and next. Fiscal policy is now being brought to bear as the Govt ensures that its local Govt debt problem, itself a function of the property problem, is contained by leveraging the central Govt balance sheet which has remained unconstrained.

Other areas of focus include: the USD and its NT direction as having a big impact on risk assets. With higher for longer now long in the tooth and pretty fully priced in (in our opinion) we see prospects for the USD to suffer as Europe bottoms and the Euro recovers a bit. Japan’s latest inflation data remains robust ( a good thing) leading to continued widening and eventual abandonment of YCC such that the 10 yr. JGB could approach 1% ( now .87%) , thereby supporting the Yen.

Already, major Japanese insurers are calling time on building their foreign holdings noting that hedged returns are no longer compelling vs local returns. Marc Chandler notes: “$ tell - the inability of the dollar to rally in the context of the heightened geopolitical tensions, the surge in long-term rates, the greater US two-year premium, and a series of stronger than expected real sector data is notable.”

This calls to mind growing concerns over US fiscal deficits and UST supply – demand risk which seems to be the latest woe du jour. Both are overblown in our view with fiscal spending running at about a 2% rate and 2024 UST issuance likely to be less burdensome that many expect. Here’s Chandler: “government spending recent peak was in Q4 22 at 5.3% annualized rate. It slowed to 4.8% in Q1 23 and 3.3% in Q2. It likely eased further in Q3 (maybe a little less than 2%) and set to slow further in Q4.” StoneX reports: “Huge $31 billion in corporate income tax collections last week! Corporate tax collections are now +4.5% for  the year. TGA balance rose by $78 bn in 3 weeks to almost a 2-year high.”

As we prepare to write our 2024 Outlook, the following set up is coming into view. Decent global growth with Europe bottoming in Q4 2023, China growing at 5% and US at 2% or so (versus Q4 consensus at .7% ann). Lower inflation, sooner,  is likely to be a positive surprise that leads to rates stabilizing & possibly falling both short and long term as the Fed and ECB go from maybe on hold to clearly on hold to likely to cut as the year progresses. The USD rolls over as growth and rate differentials shrink. The DM rate hike cycle gives way to an EM led rate cut cycle (note Chile just cut rates for the 3rd time).

We do worry about the technical damage done to global equities with ACWI, ACWX, S&P, EFA and EEM all below the 200Dmav. It has been a painful few months as we give back a good chunk of 1H performance. While a crash is possible and calls for such grow louder by the day, history, seasonality, earnings and our macro outlook all lean the other way. Thus, we remain constructive on risk and continue to see China equity as a VG risk – reward opportunity.

Another big weekend for Duke Football – after 3 natl TV games already this year with a total of roughly 15M viewers, Saturday’s Duke – Louisville game is considered the #2 game of the weekend. Either QB1 Riley Leonard will play or TPW Advisory summer intern & QB2, Henry Belin IV will lead the Blue Devils in a game that will set up the winner to be the lead dog for a chance to play FSU again in the ACC Championship. LETS GO DUKE!

Finally, being in the prognostication and investment business means accepting that one will be wrong on occasion – like a hitter in baseball or a QB in football, one is gonna strike out or throw a pick or make a bad investment… it comes with playing the game. As such I am pleased to share this fun pod where I discuss several of my biggest investment mistakes. Given my 35+ years in the biz, I had many to choose from.

I offer it in memory of Byron Wien, the long time Morgan Stanley and later Blackstone strategist who passed away this week. I mention Byron in the pod as giving me some of the best investment (and in particular, sell side strategist) advice ever. RIP Byron.

Enjoy the pod & my mea culpas; hopefully some will learn from my mistakes, much as I continue to try and reduce them. https://myworstinvestmentever.com/ep742-jay-pelosky-you-can-be-right-but-at-the-wrong-time/