RealPolitik Is Staying Alive And The Bulls Are Putting On Their Dancing Shoes: The Action For November 30, 2023

Despite the evocative news of Kissinger’s death and the desultory news out of Israel, the Times still sees fit to include a laughable piece on the discord between users of iOS and Android phones on this morning’s front page, marking the continuation of unedifying realpolitik and culture in the post-Pandemic world. And this manifests in the current rally on Wall Street, based on jejune hopes for winter rate cut by the Fed and nonchalance about absurd valuations for megatechs. The consequences of such market silliness is a return to the October 2023 lows and eventually the 2022 lows too, but for now the S&P 500 likely rises over the near term onto a new yearly high.

The bulls have control for the moment as several indicators reveal confidence in corporate earnings and the macro environment. These include:

  • S&P 500 Technicals: The top 40 in the S&P 500 look set to move the market higher.

  • Inflation Expectations: Investors expect lower inflation over the coming years, implying lower interest rates to come, potentially bullish for equities.

  • Short-Term Treasury Rates: Short rates are falling, a sign of moderate inflation and a dovish Fed, potentially bullish for equities.

  • Long-Term Treasury Rates: Long rates are falling and that will improve the attractiveness of equities while boosting the housing and auto industries to the benefit of economic growth.

  • High Yield Credit Spreads: The cost of borrowing is falling for lower-rated firms compared to their AAA siblings, a confident signal of an improving economy.

  • BTP-Bund Spread Of Italian & German Bonds: Italian default risk and a corresponding crisis for the Euro are muted, which is critical for European stability and is good for global growth.

  • Developed Market FOREX / $US: The dollar is getting weaker against most major currencies (€, ¥ and Renmimbi) and that’s good for global growth.

  • Copper Prices: Copper makes the energy transition happen but is also a barometer of global growth, and rising prices signal growth may be better than expected.

  • Economic Data: The latest economic data regarding inflation is better than expected, a positive sign for equities

  • Liquidity Metrics: Measures of money flow across the globe are trending upwards lately, which helps equities.

Based on the action yesterday and overnight there are just a few risks the bulls need to climb over, including:

  • Shanghai Composite Technicals: Chinese equities are trading poorly and that bodes ill for the global economy.

  • Geopolitical Issues: Developments around the Middle East are a clear negative for equities.

My current positions reflect my intermediate-term bullish forecast, and include 3M (MMM), Pfizer (PFE), and a large position in UPRO that is largely hedged by an offsetting position in SPXU, which nets out to a long position in equities.

Warmth Is Wealth