Making Hay Monday – August 12th, 2024
Making Hay Monday
High-level macro-market insights, actionable economic forecasts, and plenty of friendly candor to give you a fighting chance in the day’s financial fray.
Charts of the Week
Rosenberg, BWD
If you are curious why the yen experienced such an explosive rally recently, roiling financial markets around the world, please check out the above chart from the prolific team at Rosenberg Research. While we had previously run similar visuals on the yen’s detested status, it became even more so at the end of July, right before it was lifted by an epic short squeeze. The Haymaker team suspects this tells only part of the story about how off-sides the world was with regard to the yen. Speculative positioning essentially only picks up a small slice of those that have bet against Japan’s currency. An immensely larger de facto short position was the trillions borrowed in yen to invest in higher-returning non-Japanese securities.
The destination for those borrowings included U.S. mega-cap tech stocks like Microsoft, Apple, and, of course, Nvidia. This process involved Japanese households, corporations and financial institutions. Myriad foreign entities were also effectively short the yen, apparently including Berkshire Hathaway. It is impossible to know how much of this has been unwound, but our belief is that there is more to go. However, we do believe the weakest players have been flushed out of their shorts (after taking it in the shorts). If we’re right, the tremendous volatility in the yen and Japanese stocks should subside. This should also dial back some of the pressure on global financial markets.
Rothman, Cornerstone Analytics
There is a pervasive belief that as goes China’s demand for oil, so goes the world. Yet, per the energy experts at Cornerstone Macro, the correlation (known in geek-speak as the R²) between Chinese and global oil demand is a microscopic 2.9%. Basically, statistically speaking, there is almost no linkage. July looks to be another example of that with global oil demand surging by around 2.5 million barrels/day versus July 2023, despite China’s on-going economic troubles.
Evergreen Compatibility Survey
“One of the things about a classic bubble is you do see smaller players fade before big ones start to suffer.” -Rob Arnott, founder and chairman of the board of Research Affiliates which has over $28 billion in client assets under management
A Good Recession For Financial Stocks?
Champions
There’s something weird going on in the financial markets these days. Appropriately, that pertains to the financial stocks themselves. Even as investors worldwide have gone into risk-off mode, the long-neglected financial sector has broken out to a new multi-year high, as you can see in the first chart below. This displays the five-year price history for the XLF, the leading financial sector ETF.
Bloomberg – Past performance is no guarantee of future results.
More impressively, it has achieved an all-time high (ATH), per the following image. Closely study that visual and you will notice a strong buy signal was produced in early 2021 when it broke above the pre-Global Financial Crisis peak, making a new ATH in the process. As you can further see, that was a profitable buy point. From there, it ran up about 30% in short order. Then in early 2022, however, it hit a wall… or, more accurately, a ceiling — one that it would trade below for the next two years.
Bloomberg – Past performance is no guarantee of future results.
It’s not hard to come up with reasons why financial stocks — like banks, insurance companies, brokers, and exchanges — have been out of favor. For one thing, tech shares have stolen the show during that time frame and, in reality, for the past decade…
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IMPORTANT DISCLOSURES
This material has been distributed solely for informational and educational purposes only and is not a solicitation or an offer to buy any security or to participate in any trading strategy. All material presented is compiled from sources believed to be reliable, but accuracy, adequacy, or completeness cannot be guaranteed, and David Hay makes no representation as to its accuracy, adequacy, or completeness.
The information herein is based on David Hay’s beliefs, as well as certain assumptions regarding future events based on information available to David Hay on a formal and informal basis as of the date of this publication. The material may include projections or other forward-looking statements regarding future events, targets or expectations. Past performance is no guarantee of future results. There is no guarantee that any opinions, forecasts, projections, risk assumptions, or commentary discussed herein will be realized or that an investment strategy will be successful. Actual experience may not reflect all of these opinions, forecasts, projections, risk assumptions, or commentary.
David Hay shall have no responsibility for: (i) determining that any opinion, forecast, projection, risk assumption, or commentary discussed herein is suitable for any particular reader; (ii) monitoring whether any opinion, forecast, projection, risk assumption, or commentary discussed herein continues to be suitable for any reader; or (iii) tailoring any opinion, forecast, projection, risk assumption, or commentary discussed herein to any particular reader’s investment objectives, guidelines, or restrictions. Receipt of this material does not, by itself, imply that David Hay has an advisory agreement, oral or otherwise, with any reader.
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Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this material, will be profitable, equal any corresponding indicated performance level(s), or be suitable for your portfolio. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and other sources may be required to make informed investment decisions based on your individual investment objectives and suitability specifications. All expressions of opinions are subject to change without notice. Investors should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed in this presentation.
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