Making Hay Monday - Guest Edition
Thank you, Christopher Wood!
Charts of the Week
The money flowing into U.S Treasurys (USTs), despite that they are on the cusp of producing negative returns for an unprecedented three years in a row, is atypical. Generally, investors, especially those of a retail persuasion, flee asset classes that have been performing poorly. While the above image is undoubtedly influenced by the trillions flowing into T-bills and other short-term USTs, the inflow into the long-duration Treasury Bond Exchange Traded Fund (TLT) has also been extremely strong. If USTs fail to respond to serious financial market stress, like a plunge in stock prices, that would be a powerful warning that they are losing their safe-haven status. Their inability to hold the brief price spurt they received last week due to the terrible events in Israel is not encouraging. Despite this, I continue to think that, should USTs surge to a yield of 6%, triggering a nasty stock market correction, a dramatic bond market rally is likely to ensue. Unfortunately, I don’t expect it to stick. My long view of USTs is that they will remain in a structural bear market, largely due to a torrent of supply and a paucity of buyers.
Those who opine on the oil market frequently rave about how impressive it is that U.S. crude production has remained strong despite a cliff-dive by the number of active drilling rigs. What is almost never discussed is the equally deep contraction in the number of Drilled, Uncompleted (the “DU” in “DUC”) wells. During the Covid crash, when the futures price for oil went negative, oil and gas producers understandably stopped drilling for new reserves. This accentuated a trend that had started even prior to the pandemic, creating an enormous backlog of wells that were partially completed. Since then, DUCs have been drawn down drastically. They are currently at such a low level that it’s hard to see them falling materially from here. In other words, producers need to “drill, baby, drill”. However, that’s not what’s happening, as drilling activity remains depressed. With even the prolific Permain showing increasing signs of plateauing, this is another reason oil prices are likely to surprise on the upside — again — next year
“Continued deceleration in spending indicates an increasingly cautious consumer.” -Jane Fraser, Citigroup CEO, Friday, October 13th
“Consumer sentiment is eroding rapidly, and after a brief surge is back in territory that usually signals a recession. The U.S. consumer is not feeling all that resilient anymore.” -David Rosenberg, October 16th
Haymaker’s Introduction
What a difference a mini-rally makes! Less than two weeks ago, stocks were threatening to break critical trend lines, and bonds were enduring daily gut-punches. With the latter, there was no “threatening”: critical support levels were decisively violated (higher in yields, lower in price). Both stocks and bonds were deeply oversold and we were moving into the typical October rally time. It was the perfect set-up for a snappy bounce by equities and fixed-income.
And that’s exactly what happened.
Consequently, the hand-wringing on CNBC has been replaced by high-fiving among its cast of prolific opinion purveyors. In fact, despite all of the meta-threats out there right now — not the least of which are the twin wars in Ukraine and Israel, as well as the undeniable stress in the U.S. government bond market — almost every professional investor in the financial media seems bullish, at least near-term. This is generally even true of the podcasts I’ve listened to lately, despite that many of those experts realize how precarious financial and economic conditions are presently.
It seems to me that there is a pervasive fear of missing the usual October liftoff. That’s totally understandable, considering the historical pattern. Yet, it’s fair to note it’s a month that often includes a selling climax. This, in turn, has set the stage for the subsequent powerful snapback.
While stocks had experienced a mild retracement since the July peak, it was hard to view that as any kind of capitulation. Even with long-term Treasury bonds, where the sell-off was far more severe, investor activity has been heavily skewed to the buy-, not sell-, side.
This week’s Guest edition of our Making Hay Monday features one of my many regular weekly reads, Greed and Fear. As you will see, it’s written by Jefferies’ Chris Wood. Chris’ writings and thought process consistently convey that quality which is so uncommon among Wall Street strategists: common sense.