Biden Protects The Caribou But Car Owners May Hurt His Re-Election And The Bull Market Simultaneously: The Action For Thursday, September 7, 2023
Biden’s poker game with the global oil industry has yielded only unusually strong gasoline bills as the driving season ends, driving traders to distraction as they puzzle over whether the consumer is resurging or just the opposite. Stagflation is the worst outcome and that’s just what higher oil prices portend, sending the bulls to take profits this morning and wait to buy the dip. The S&P 500 likely falls over the near term, but I expect the market to reverse course and rise by next week as underlying bullish sentiment remains strong. Biden hypocrisy on oil means US can’t go it alone, but just muddle though as polarization inexorably grows. And muddling through suits the bulls who want to believe in an American island of prosperity backed by gridlock and a consumer who won’t stop spending even as gas prices rise along with everything else.
The bears have control for the moment as the gas price narrative and several other indicators reveal pessimism on consumption and the macro environment. These include:
S&P 500 Technicals: The top 40 in the S&P 500 look set to move the market lower.
Shanghai Composite Technicals: Chinese equities are trading poorly and that bodes ill for the global economy.
Short-Term Treasury Rates: Short rates are rising, a portent of higher inflation and/or Fed rate hikes, potentially bearish for equities.
Developed Market FOREX / $US: The dollar is getting stronger against most major currencies (€, ¥ and Renmimbi) and that’s usually bad for global growth.
Emerging Market FOREX / $US: Nations like India, South Korea, the Philippines and Mexico are getting weaker against the dollar, and that’s bad for global growth since many key imports are priced in $.
WTI Crude Prices: Oil and by extension gasoline is getting more expensive and that in itself hurts consumers and the global economy.
Copper Prices: Copper makes the energy transition happen but is also a barometer of global growth, and falling prices signal growth may be worse than expected.
Liquidity Metrics: Measures of money flow across the globe are trending downwards lately, which hurts equities.
But bullish exuberance is highly likely to return as the action yesterday and overnight show that volatility remains subdued, along with several other bullish factors, including:
Volatility Risk Premium: The VRP signals significant upside in the near term as the VIX has declined relative to actual volatility.
EPS Estimates: In the last week Wall Street analysts raised profit forecasts for many firms in the S&P 500.
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.
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.