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Monday 28th February 2022
Hi Friend,
TSE Monday Morning Markets ...
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This is our Monday Morning Markets Update for the 28th of February 2022. Russian tanks moved into Ukraine. Sanctions were imposed on the Putin and the Russian Regime.
In Moscow, the central bank hiked rates to 20%. The ruble dropped 30% against the Dollar. Russian equity markets crashed. BP dumped shares in Rosneft. NATO provided strong support for the Zelensky government. Germany pledged to send more than helmets to Kiev. The Berlin committed to boost military spending to 2% of GDP. Putin had succeeded were Trump had markedly failed.
Faced with greater resistance in Ukraine and greater "Aggression by NATO" the Russian President placed his country's nuclear forces on "high alert". Putin has long avowed he would use nuclear weapons, if the motherland was threatened, "What use is the planet without Russia" he would say. The Iron Curtain with gas leaks returns to international diplomacy. The "MAD" era is back "Mutually Assured Destruction" on offer, if diplomacy fails.
"Buy when the tanks are rolling into the abyss", the contrarian call. Here is our weekly update, our thoughts are with the people of Ukraine and peace lovers everywhere.
Top line, "Cash is Trash, (Jamie Dimon), Bonds are Garbage ( Bill Gross), Equities Are Overvalued (Everyman), Bitcoin is worthless (Jamie Dimon), Most NFTs are junk (John Hargrave)" ... When it comes to understanding market moves, "Any explanation is better than none" (Nietzsche). Be careful out there ...
"To understand the markets, you have to understand the economics".
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| | Markets down 1.8%. Overvaluation 2.9% ... Our global equity index basket closed down 1.8% this week. It could have been worse. Markets were marked lower as Russia moved on Ukraine. By the end of the week, U.S stocks were up slightly despite the DOW setback.
In Europe, the FTSE closed 30 basis points. French and German stocks were down by around 3%
In China, the Hang Seng was slammed. Shanghai much less so. The Nikkei was off almost 2.5%.
Our overvaluation rating closed at 2.9%. A near 8% correction would be required to return US markets to fair value, 10% for the Dow, just 5% for Nasdaq. 1% the correction required in Europe. A little more now required for the FTSE following a strong run on banks, metals and oil.
China and Hong Kong, offer best value. German stocks are in the buy zone. No real concerns about a "Super Bubble" setback. Trade "Dynasties for Empires" remains the play.
Easy money over the past year, now more difficult to find. Markets are adjusting to rising base rates, bond yields and tensions in Eastern Europe. Central bankers are raising discount rates. Putin is raising the bar with a nuclear threat. Slower growth and higher inflation in prospect, not a great cocktail for equity prices. Higher discount rates will be absorbed into prices, as long as earning forecasts hold. Great for contrarians and our "Contrarian Calls" fund.
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| | Bond Market Sentinel ... US Ten Year Yield 1.98 ...
US ten year bond yields closed up 4 basis points in the week at 1.98. Tapering set to terminate in March this year. We said, we expect bond yields to test the 2.00 level 'ere too long. The key indicator trades at 1.92 this morning. A return to 2.00 soon, 2.50 the forecast for Easter.
UK ten year gilts closed up 7 basis points to close at 1.46 last week. Trading at 1.46 this morning. The Bank of England is expected to raise rates by a further 25 basis points in March. Some super hawks expect a 50 point move. A return to 1.50 soon. We now expect ten year gilt rates to test 2.00 by Easter.
In Japan rates moved lower. In Europe, moved higher. Bloomberg reports the stock of negative yield bonds, around the world, has fallen to $5 trillion dollars from $18 trillion at peak at the end of 2020. An end to negative rates? Goldman expects EU base rates to rise to 0.25 by the end of the year.
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| | Exchange Rates ... Sterling Down $1.33 ...
Dollar strength on flight to safety this week. Sterling closed down against the dollar at $1.33 from $1.36 and down against the Euro at €1.19 from €1.20. The Euro was down against the Dollar at $1.13 from $1.24.
Last week's moves look over played. Sterling trades at $1.34 against the Dollar and €1.20 against the Euro this morning. The Euro is drifting against the Dollar. The Euro move difficult to call this week.
We expect Sterling to average £1.35 through the year. Against the Euro, we model €1.18 with a slight uplift in the Euro Dollar rate to $1.15. This on the assumption the ECB will yield to peer group pressure and begin to raise rates towards the end of the year.
["One of the nice things about being a currency forecaster, is that expectations of you are very low. Moderate success is a great surprise". Professor Avinash Persaud].
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| | Empires of the Cloud up 1.6% ...
Our Empires of the Cloud Fund was up 1.6% this week. Apple pushed lower down 1.5%. Amazon held. Microsoft, Google and Facebook were up 3%.
Our valuation index suggests an 11% over reach. Facebook with a PE of 15 and a forward price of $466 is looking like a strong candidate for our "Contrarians Call" fund.
A combined market cap of $8.8 trillion and an average PE of 29.1 still suggests a period of consolidation could follow. Further short term weakness possible, as markets adjust to higher rates in March. Apple remains the bedrock of the Berkshire Hathaway fund.
Analysts remain bullish on our Empires of the Cloud Fund. The bulls anticipate a 10% to 30% gain for the fund over the next twelve months. Super bulls foresee a near 60% gain. Really? What's not to like? Amazon trades with a PE of 47 and a 23% over reach. Facebook oversold, Apple and Microsoft still a tad 10% expensive.
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| | Dynasties in the Cloud down -7.3% ...
In China we track, our "Dynasties of the Cloud" fund. We follow the fortunes of Alibaba, Baidu, Tencent, Weibo and Xiaomi. The fund was down by 7.3% in the week.
Tencent the leader down 9.5%, followed by Alibaba and Xiaomi down 9%. Baidu the laggard down 2.9%. The downsides appear limited we said last week! Ouch! Strong rallies a real possibility. The average PE is 19.5 compared to the Empires of the Fund average of 29.1.
We consider the fund to be oversold into 2022. Gains in the year ahead are expected to out perform with some downside. 20% the low level gain, 45% gain the average expectation. The high term upside is now 75% but you may have to wait a bit! Some great picks in "Dynasties" for our "Contrarian Calls" fund.
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| | Crypto Wallet down 2.4% ... Our Crypto Wallet was down 2.4% this week. Bitcoin slipped lower to test the $39,000 dollar level. Trading at $38,000 this morning, the Big Apes will have their work cut out this week. $30,000 beckons, $35,000 the belay.
Dogecoin down almost 10%. Ripple and Litecoin slipped lower. Ethereum moved higher.
Our crypto wallet, the "Traders Dream Pack", always promises to be an investors nightmare. It won't get much better this year.
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| | Oil Brent Crude higher ... $96.32 ...
Oil
prices Brent Crude closed higher last week at $96.32. The Russian incursion into Ukraine pushed prices to $105 dollars at one stage, before easing back below $100 dollars at close.
Trading at $102.59 this morning, Goldman Sachs raised the one month forecast to $115 dollars from $95 dollars. Their short term forecast is a trading range of £$110 - $120. "Demand Destruction" the necessary condition for large scale OPEC intervention.
Talk of $100 dollar oil "seemed" farfetched. Fundamentals should rule to push prices lower. The US oil rig count hit 522 last week, up from 480 at end of year. Should be 900 at this price, according to our long run model. The Yanks are coming, they just seem to be taking their time. OPEC will enjoy the higher price levels, as long as demand compression is contained. Biden's call for more, largely unheeded although some stock release has taken place.
$95.00 may be the range in the first quarter. $75- $80 Brent Crude through 2022 is our benchmark call. Tad optimistic? Perhaps.
"Volatility remains in price levels, exacerbated by geopolitical supply side complications." Yep we really do say that! Prices above $90 won't help the inflation challenge but inflation pressures ease radically in the second half of the year even at current levels.
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| | That's all for this week's Monday Morning Markets, have a great week ahead.
John
To understand the markets, you have to understand the economics
Friday Forward Guidance, The Saturday Economist, Monday Morning Markets.
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