Mechelany Advisors' WEEKLY REVIEW is a new format that combines a Weekly Review of the main events of the week, a review of the charts of the main indices and asset classes and the Weekly Updates on Mechelany Advisors' MODEL PORTFOLIO
Equity markets are making new all-time highs, powered by a global economic recovery, the roll-out of vaccination, and declining unemployment.
This is all good… as is the political stabilisation of the USA and the resumption of talks between America and its main rival China.
Indeed, when looking at the world’s economy with a bird’s eye view, global economic momentum is strong and unemployment is declining again, despite blips here and there.
Granted, the recovery will not be smooth and a third wave of the deadly virus is forcing most of Europe to resort to lockdowns again, but momentum is there and normalisation will gradually take place over 2021, especially in the second half of the year.
Asset prices are elevated and keep on rising powered by Central Bank policies that are becoming more and more criticised for their inflationary impact in the long run.
US FED President Jerome Powell re-iterated this week his commitment to zero interest rates and bond buying program despite tangible signs that cost-pushed inflation is back into the system.
Jerome Powell is taking a Paul Volcker stance in reverse.
To trigger economic momentum and job growth again, his ultra-accommodative policies are flooding the economy with liquidity at a time where momentum is already there. His focus is to create jobs but he is also taking the risk that his Reversed Paul Volcker Stance will have the same consequences as Paul Volcker’s fight against inflation in 1982, but in the opposite way.
He will stoke inflationary pressures and they will be extremely hard to fight once they have been unleashed in a sustainable way.
More and more, the Fed’s stance is being criticised for targeting the wrong objectives.
The 2020 drastic job losses were not caused by inadequate monetary policies. They came from an unexpected virus that devastated entire industries and changed the way we all live and work.
No amount of monetary policy will restore the confidence of individual in travelling, holidaying or going out to entertainment places or restaurants. Only health and prevention measures will do that, and even that will not bring the habits of taking planes likes buses or going out to bars and restaurants…
Moreover, the FED’s ultra accommodative policy has zero impact on investments and borrowing demand. At these levels, the cost of money has become irrelevant and the US economy is mired in a textbook liquidity trap.
The only thing it does is making the rich richer and the poor poorer by lifting asset classes to bubble levels… The FED is clearly betting on the wealth effect to re-ignite consumption while keeping the cost of America’s humongous debt pile low.
But these short term objectives that are creating further social fracturing in America are sawing the seeds of a much more devastating outcome later on, debt-deflation, when asset market will finally turn under the weight of their own overvaluation.
In December 2020, we warned investors that ALL asset classes had become too expensive save for cash.
Indeed since then, the US bond market has just experienced the worst and sharpest bear market of the past four decades with 30 year bonds losing 22 % in value over the past 6 months, and no amount of bond buying by the FED could prevent that sharp fall in bond prices.
Bond investors do not buy the Fed’s policy and the loss of confidence will end up having dramatic consequences. The US Treasury is already finding to difficult to re-finance itself and the upcoming 7-year tenor issuance next week looks fragile.
When inflation finally runs out of control, something we expect to take place in the coming 12 months, corporate bonds will also crash.
In equity markets, rising yields are pulling the rug under the rationale for hyper inflated valuations by increasing the discount rate at which future earnings can be priced.
More fundamentally, the sharp – more than 100 % – rise in US yields since March 2020 is already taking its toll on corporate earnings through debt servicing costs, and on consumption through higher mortgage servicing costs.
America cannot continue handing out helicopter money forever and the Biden Administration is already laying out plans to raise taxes on corporations and the minute number of ultra wealthy Americans that have seen their wealth multiply over the past year whilst millions of Americans became jobless.
The Fed’s policies have biased consequences and focus on the short term rather than the long term. They are feeding an asset bubble that will have devastating consequences economically and socially. The Fed is playing with fire and knows it. It believes the it will be handle the consequences when they arise but, if history is any guide, it will again be behind the curve and will not prevent the consequences of the perfect storm that it is currently fuelling.
The FED’s mandate that excludes asset inflation and creates inequalities will ultimately come into question.
What we are saying in a nutshell is that we have entered a new era…
One where rates will keep climbing in the long term – short term they are topping out -.
Long-term Inflation trends have already turned, and interest rates as well.
A sharp bear market in equities will start in the coming 12 months.
US tech stocks have already turned the corner. Oil stocks and financials have been on a roar and miners and cyclicals are enjoying a great ride.
But the law of finances – risk vs reward, expected returns vs safe returns – are still valid and the Brontosaurus investor will finally get the signal in his brain that the best of all worlds have been more than discounted in current valuations.
We expect equities to make new highs into April before a MAJOR CORRECTION unfolds in the second quarter of the year.
THIS IS A TIME TO REDUCE RISKS ON PORTFOLIOS , NOT TO CHASE THIS ELEVENTH HOUR RALLY.
Weekly Monitors 20 Mar 2021
Equity markets ae losing momentum and Thursday saw a sharp drawdown in US tech stocks.
Chinese markets were also down last week as the Government is normalising monetary policies and regulating “platform” companies, the Chinese terminology for big tech stocks.
Contrary to the US that has allowed big tech companies become threats to their own nations, China intends to keep their activities and hold over populations under control, and wee have carefully avoided investing in this sector for some months now.
European markets are hitting important resistance and the third wave of COVID lockdowns does not bode well for their stock markets.
Bond yields climbed again last week with the US seeing the first signs of a stabilisation.
There again, there are signs that the commodity complex is taking a breather. Oil fell sharply after hitting 65$ and Copper is marking a pause after its spectacular ascent since March 2020, even if other in industrial metals are still on the rise. Gold and precious metals have rebounded strongly and may have put in a significant bottom.
Charts of the Week
US 30-Year Treasuries
At 2.50 % US 30 year bonds are hitting their long term moving average and are ripe for a correction from here.
The US currency is forming an important base for a new rally in the coming months. The downtrend has been broken and the bottom at 90 might be re-tested but should constitute a major low point.
The same is visible with the EUR.
GOLD, SILVER and COPPER
Gold is consolidating after the all time high recorded in January 2021. The consolidation is over and a new challenge of the all-time high is in the cards for Q2 2021.
Silver is laying the ground for a massive break out above 30.
Copper is nearing a massive resistance level at 450
Oil has failed to break its long term downtrend and should correct from here
The Nasdaq fell sharply in March and is testing the lower boundary of its uptrend channel. The worrying part is the divergence of the Nasdaq at a time where the Dow Jones Industrial made new highs and the SP500 is trying to do the same.
Europe Eurostoxx Index
European shares are testing their previous high, a significant resistance.
Japan Nikkei 225
The Nikkei is attempting to make new highs but a reversal form here would indicate. a double top and the end of the bull phase. Extremely overbought.
China CSI 300 Index
The sharp correction in Chinese domestic shares was mainly due to the tech sector and the traditional speculative stocks. Longer term, see lower chart, Chinese equities may have reached and intermediary top and a consolidation at current levels is likely.
China HSCEI Index
It has been our thesis all along that Hong Kong Listed Chinese stocks would be the best performing market in 2021, as China fully integrate Hong Kong economically and financially after its political clamp down. The HSCEI broke out decisively of its bear channel in January and is currently consolidating. But as can be seen form the lower chart, the HSCEI is about to break out of its long term consolidation triangle, ready for a major re-rating.
A few US Tech stocks
TESLA is done ! despite Mrs. Cathy Wood trying to talk her book and coming with a 3000 target price for Tesla, the meteoric rise of TESLA is over and the 25 % rise in Volkswagen shares is testifying of the fact that investors are finally realising that the automobile industry is gearing up to take on TELSA’s leadership in EVs.
Game over for AMD ! the failed break to an all time high and sharply lower close last week means that the maker of video game chips may have seen the best of its run. The downside is considerable.
Check AAPL’s next earnings ! A significant top is in place and the uptrend is broken. Apple closed the week below 120. Fasten your seat belts ….
AMAZON is rolling over ! A significant top is in place and the consolidation triangle is broken. A clear break below 3000 will send the giant online retailer sharply lower
Searching for a Top with GOOGL ! A significant top is in in the making after a typical vertical acceleration. Watch this space.
Mechelany Advisors’ MODEL PORTFOLIO
Mechelany Advisors’ MODEL PORTFOLIO has been running in a fully transparent way since January 1st 2014. Its Purpose is to implement the conclusions of our research analytical process in a portfolio managed using institutional liquidity, diversification, risk management and asset allocation processes. In our TRANSACTION UPDATES we keep our reader informed in real time of the transactions in our MODEL PORTFOLIO
With most equity indexes recording negative performances last week, our MODEL Portfolio rose by 0.78 % and its outperformance since the beginning of the year exceeds 20 % when compared to the world indexes.
On a cumulative basis, our MODEL PORTFOLIO is now delivering 283 % performance over 87 months and a +20.35 % compound average, for beating the Nasdaq’s +17.22 %, the SP500 +10.90 % and the MSCI World Index’s 7.45 %.
Last week, our MODEL PORTFOLIO was helped by our commodities positioning, our Japanese and Hong Kong stocks and our Short US technology positions.
It was held back by our early positioning in US bonds, our long US equities and Chinese domestic shares and our short position in Cryptocurrencies.
Over the week, we increased our US tech short positions and sold almost all of our European stocks.
we also increased our shorts in Oil and Copper.
Mechelany Advisors’ CHINA DEEP VALUE PORTFOLIO
Mechelany Advisors'CHINA DEEP VALUE PORTFOLIO was launched on Jan 1, 2021 to capitalise on what Mechelany Advisors' sees as a MAJOR SECULAR ENTRY POINT in some of China's corporate giants. The portfolio is structured to generate 8 % gross dividend yield per annum and benefit from a unique potential for long term capital appreciation due to the exceptional value these stocks offer at the moment.
Our CHINA DEEP VALUE PORTFOLIO outperformed all equity markets again this week, including Chinese indexes. It rose 1.08 % for a + 14.41 % performance Year to Date
EXANE certificates on the CHINA DEEP VALUE PORTFOLIO
The two certificates delivered in line with their respective leverage, delivering +2.05 % and +1 .64 % respectively. It is clearly not too late to invest in these certificates.
Mechelany Advisors’ US TECH SHORT PORTFOLIO
Mechelany Advisors US TECH SHORT PORTFOLIO was launched on February 23rd 2021 to capitalise on the major bear market that we see unfolding in the US technology mega-caps in the next two years. It consistes of 8 stocks that are equal-weighted in the portfolio.
A negative week for US tech means a positive week for our US TECH short Portfolio, with is now up +2.41 % since launch one month ago.
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