The Killing Of An Awful Politician Highlights The Bull’s Unknowing Need For Biden To Win This November: The Action For May 21, 2022
The Times devotes considerable space to Iran’s leadership change as a result of the killing of its President in a helicopter crash, though it means nothing in the near-term to geopolitics or the markets. What it does do is highlight the stakes in the US presidential election for peace in the Middle East and prosperity in the US and Europe. Raisi came to power largely because of limited confidence in liberal reformers and that underconfidence is due to Trump’s scrapping of the nuclear weapons deal, so the continuation of hard-line conservatism will reflect the ongoing fear that Trumpian gamesmanship is here to stay. Only the re-election of Biden, as unedifying and dispiriting a proposition as that is, can offer the liberals in Iran some hope of turning Raisi’s killing into a positive development for the nation.
The bulls have a stake in a Biden victory too but rarely seem conscious of it. Should Biden win he’ll be positioned to push for a conciliatory policy that Iran gets closer to pumping oil at full capacity. Dampening oil prices is key to helping the consumer overcome higher for longer interest rates and thus is critical to corporate earnings. For now, however, the bulls are eyeing Trump tax cuts with more cupidity than sensibility, and the markets are set to rally further should Nvidia’s earnings come out strong tomorrow.
The bulls have control for the moment as several indicators reveal confidence in corporate earnings and the macro environment. These include:
Volatility Risk Premium: The VRP signals significant upside in the near term as the VIX has declined relative to actual volatility.
Liquidity Metrics: Measures of money flow across the globe are trending upwards lately, which helps equities.
S&P 500 Technicals: The top 40 in the S&P 500 look set to move the market higher.
Russell 2000 Technicals: Small stocks are breaking out and reflect surging confidence in economic growth.
Shanghai Composite Technicals: Chinese equities are trading well and that bodes well for the global economy.
MOVE Index Of Bond Volatility: Fixed income volatility is steady and implies modest inflation expectations and stable interest rates to come, potentially bullish for equities and the global economy.
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.
WTI Crude Prices: Oil and by extension gasoline is getting cheaper and that in itself helps consumers and the global economy.
Zinc Prices: Few commodities are as broadly important as zinc, and rising prices for zinc signal better than expected global demand, which is usually good for equities.
Aluminum Prices: Aluminium is a critical input for consumer and industrial goods and rising prices signal better than expected global demand, which is usually good for equities.
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.
Tin Prices: Tin is broadly used across goods and industry and rising prices typically signal better growth prospects.
Based on the action yesterday and overnight there are some risks the bulls need to climb over, including:
Quality Of Earnings Trend: Over the past few quarters the largest firms have generally experienced worsening credit terms, margins and inventories, signaling future profit stagnation or decline.
Geopolitical Issues: Developments around Eurasia are a clear negative for equities.
My current positions include 3M (MMM and its spinoff SOLV), Pfizer (PFE), a moderate position in UPRO and a similar position in SPXU, which nets out to a neutral position in equities.