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Monday 21st February 2022
Hi Friend,
TSE Monday Morning Markets ...
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| | The Saturday Economist Monday Morning Markets ...
This is our Monday Morning Markets Update for the 21st of February 2022. Equity markets slipped last week. Shanghai rallied slightly, world stocks drifted.
Central bankers are taking away the punch bowl. Bond yields are on the rise. Once the Fed stops buying, ten year rates will really rise. Soon the move, by Easter perhaps, to 2.50 in the U.S. and 2.00 in the UK.
Over over valuation index hit 4.7% in the week. A 7% adjustment in the US a possibility. 9% adjustment the requirement in tech. 4% the test of Nasdaq. 3% the adjustment in Europe. Shanghai and Hang Seng offer value.
Facebook has been punished enough. FB makes the move into our "Contrarian Calls" fund. We add, Alibaba, Tencent and Paypal with Square on the waiting Block for now.
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 1.5%. Overvaluation 4.7% ... Our global equity index basket closed down 1.5% this week. China looked on, as world stocks slipped lower. U.S. markets were down 1.7%. European stocks were down 1.8%. Nikkei and Hang Seng were down just over 2%.
Shanghai the best performer in the world block, trading slightly up in the week, still over sold in our world rankings.
Our overvaluation rating closed at 4.7%. A near 7% correction would be required to return US markets to fair value, 10% for the Dow, just 4% for Nasdaq. 3% 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 enter 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 and bond yields. Central bankers are raising discount rates. Slower growth 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 1.94 ...
US ten year bond yields closed lower 6 basis points in the week at 1.94. Tapering set to terminate in March this year. We said, we expect bond yields to test the 2.00 level 'ere too long. So it proved. Pause for breath last week, the key indicator trades at 1.93 this morning. A return to 2.00 soon, 2.50 the forecast for Easter.
UK ten year gilts closed down 10 basis points to close at 1.39 last week. Trading at 1.40 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. 1.60 the next level of resistance. We now expect ten year gilt rates to test 2.00 by Easter.
In Japan rates moved lower. In Europe, composite rates reversed last week's 9 point move. 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? Bring it on!
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| | Exchange Rates ... Sterling Steady $1.36 ...
Sterling closed steady against the dollar at $1.36 and up against the Euro at €1.20. The Euro held against the Dollar at $1.14.
The Fed will move on rates in March, Some now expect a 50 basis point rise to end the party. JP Morgan now calls nine rate hikes to hit 2.25% by March 2023. Dollar bulls unimpressed. The Greenback trades at $1.36 this morning.
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. With our Friday Forward Guidance, we are ready to call 1.50 base rates in the U.S. and the U.K. by 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 down -2.5% ...
Our Empires of the Cloud Fund was down 2.5% this week. Facebook punished once again down 6.1%. Microsoft and Google down 2.5%. Apple and Amazon were relatively unscathed.
Our valuation index suggests a 9% 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 $8.7 trillion and an average PE of 28.7 still suggests a period of consolidation should follow. Further short term weakness possible, as markets adjust to higher rates in March.
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 22% over reach. FB oversold, Apple and Microsoft still a tad 10% expensive.
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| | Dynasties in the Cloud down -2.3% ...
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 2.3% in the week.
Tencent the leader down just 1.1%. Weibo the laggard down 3.5%. The downsides appear limited. Strong rallies a real possibility. The average PE is 20.6 compared to the Empires of the Fund average of 28.7.
We consider the fund to be oversold into 2022. Gains in the year ahead are expected to out perform with little downside. 17% the low level gain, 46% gain the average expectation. The high term upside is now 74% 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 6.7% ... Our Crypto Wallet was up 6.7% this week. Bitcoin slipped below the $40,000 dollar level to close at $39,613.
Bitcoin trades at $38,500 this morning. Ripple, Dogecoin and Litecoin were beaten down last week. Ethereum the hold out, down just 1.2%. The charts look ominous for Crypto.
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 lower ... $92.66 ...
Oil
prices Brent Crude closed slightly lower at $92.26 last week. Trading at $93.81 this morning, Energy prices fluctuate as tensions mount over Ukraine. Monday Mornings always brighter for bulls at the moment. Our position is unchanged.
Talk of $100 dollar oil seems farfetched. Fundamentals will rule to push prices lower. The US oil rig count hit 520 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, unheeded.
$85.00 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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© 2022 John Ashcroft, Economics, Strategy and Financial Markets, experience worth sharing.
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