Mechelany Advisors’ WEEKLY REVIEW
28 November 2020
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
Global equity markets had yet another bumper week with both bullishness and investments at record highs. The US Dow Jones Industrial broke 30’000 for the first time in its history, the Japanese NIKKEI is making all-time highs after all-time highs, the MSCI World Index made a new all-time high last week and the Korean KOSPI Index is hovering at an all-time high.
Optimism and Fear of Missing Out are driving masses of savings into elevated equity markets and the phenomenal speculation in TESLA is yet another sign that the people who are throwing money at the market today don’t have a clue about valuations, economic performances, macro-economic environment etc.
Global Stock markets have become a huge casino where investors are gambling that another idiot will bail them out of their position at a higher price. Millenniums are setting the trends on RobinHood and Reddit social platform and it reminds us furiously of the days when your taxi driver or hair dresser had the ultimate tip for you : Buying AKAMAI in 1999..
It is true that equity market are supposed to be a discounting mechanism for the future but that in fact should apply to the entire financial markets. Unfortunately today, it is quite the opposite message that other segments of the markets are sending. Bonds are not excited about the macro-economic prospects, the US dollar is actually extremely bearish about the political and public finances situation of the USA and Gold’s fall last week smacks of deflationary, not inflationary fears.
The parabolic rise of crypto-currencies that we correctly predicted a few months back is also another sign that speculation is massive and that investors do not trust the future that much.
Never, in 36 years at managing money, have we seen such a disconnect between the behaviour of equities and the reality of the underlying economies.
Main Street is reeling from a year of COVID and lockdowns with massive unemployment now becoming a major long term impediment to future growth. Entire economic sectors are being devastated and millions of jobs lost forever. These people are consumers by essence and their loss of revenues will take a heavy toll on consumption in countries like the US, the UK, France or Italy.
In 2020, Government finances around the world have deteriorated at a pace that has never been seen in peace time history. But all of them will have to levy taxes at some point in the future to re-balance public finances if we are to avoid hy per-inflation.
Corporate and household debt have never exploded as fast in history as they have done in 2020. And we have today the most dangerous combination of exploding debt loads and artificially kept low interest rates.
Central Banks have been accumulating assets on their balance sheets to the tune of 35 % of the world’s GDP with Central banks such as the Bank of Japan buying stocks as well as bonds. One day, these institutions will have to SELL their holdings, or at least stop buying more, withdrawing a massive chunk of demand for those assets.
For years now they have distorted the world financial markets in the hope of restoring growth and employment and they have actually failed, engaging themselves in a dangerous global Ponzi scheme as printing money to buy assets amounts to exactly that with no one to buy their holdings after them ultimately.
In another indication that these policies are ineffective, last week’s rise to record highs of equity indexes was matched with a resumption of job cuts in the US with initial claims shooting back up to 778’000, way above expectations of economists.
Finally, investors are more bullish and more invested than ever…
And this has always been a negative sign for markets going forward…
Just another positive week for global equities and commodities as the rally of everything continues.
Stocks and commodities are rallying around the world despite a worsening pandemic. If the past 2 years has shown anything, it is that traders and investors will continuously charge from one extreme to another, pushing the boundaries of what was traditionally considered “extreme”.
Last week, the stock market rally coincided with VIX dipping below 20 on the intraday for the first time since the pandemic began, testifying of global bullishness.
Agricultural commodities continue to surge, with the Bloomberg Agriculture Index’s 14 week RSI at its highest level in years, an indication that a top is near in this space.
As we predicted, agricultural commodities have been on a historic rally, with sentiment in several commodities at once-in-a-decade levels. Soybeans RSI is at 79. The last time this occurred was in the 2007-2008 commodities bull market.
Copper is surging along with other commodities while safe haven assets like gold and silver slumped. The copper to gold ratio jumped to yet another extreme, indicating that a top in equities is near if history is any guide.
In equities, the AIM Model of sentiment surveys is showing extreme optimism for the first time in more than 9 months. The gap between “Smart” Money and “Dumb” Money is again at the extremes that prevailed just before the February 2020 crash.
Small speculators are not being deterred. Even after what were likely catastrophic losses over the past few weeks, since most of the options activity was concentrated in the large tech stocks that have suffered large losses, retail volume for 10 contracts or fewer increased its speculative tilt last week. They spent 48% of all their volume buying call options to open, a naked bet on rising prices.
The hype in TESLA is another example of the speculative nature of the market at the moment. In exactly the way the inclusion of YAHOO in the index in 1999 marked the peak in the stock markets then and led to the same type of extremes in behaviour, last week’s 17 % rise in the price of TESLA brought its valuation to half a trillion US dollars and made Elon Musk richer than Bill Gates.
Indeed the announcement that it would be included in the SP500 led to frenzy buying but both the SP500 and investors are loading up on a stock that they are paying 7 x more expensively than they would have a year ago…
On a more global basis …
Vietnam Industrial Output Growth at 9-Month High. Vietnam’s industrial production rose by 9.2 percent year-on-year in November of 2020, accelerating from a 5.4 percent gain a month earlier.
India GDP Shrunk Less than Expected in Q3. The Indian economy shrank 7.5% yoy in Q3 2020, less than expectations of an 8.8% drop, amid easing of lockdown restrictions from June.
The US dollar index lost 0.2% to 91.8 on Friday, the lowest on a closing basis since April 29th, leaving the door open for deeper retracements as a vulnerable job market raised speculation over further monetary easing or additional government stimulus. Jobless claims came in higher than expected amid a worsening coronavirus pandemic and new lockdowns across the country. At the same time, dollar’s diminishing safe-haven status in the light of developments toward a coronavirus vaccine and reduced uncertainty in US politics leaves room for further downside momentum. On the week, the dollar fell 0.6%, the second consecutive weekly decline and pushing the yearly loss to nearly 5%.
Gold Falls the Most in 2 Months. Gold dropped 1.3% to $1,787 an ounce on Friday, remaining close to levels not seen since early-July, and lost 4.5% on the week, the biggest weekly decline since late-September. Silver was also on a downfall while Palladium and Platinum held comparatively well.
Oil recorder and 8% Gain on the Week. WTI crude futures went down 0.4% to $45.5 a barrel on Friday, but booked an 8% gain for the week, its fourth consecutive weekly gain supported by hopes that a coronavirus vaccine will boost consumption in 2021. COVID has devastated Shale oil and given the hand back to OPEC in setting the supply side of the equation.
What to expect next week …
All eyes will turn to US Fed Chair Powell’s testimony before Congress next week, as well as the US jobs report due Friday, which will probably point to a further slowdown in the labor market recovery.
Elsewhere, GDP data for Brazil, Australia, Turkey and Canada will be in the spotlight as well as worldwide manufacturing and services PMI surveys and monetary policy action by the RBA and RBI. Other releases include trade figures for the US and Canada, factory orders for the US and Germany, industrial output and retail sales for Japan and South Korea.
Our Model Portfolio was hammered last week by the 17 % rise in TESLA, a company where we have a significant short position. Most US tech stocks rose and our short US indexes ETF’s also contributed to the negative performance.
In the commodity space, we were a bit too early in building our positions in Gold and Silver but took advantage of the fall to average down. Platinum and Oil contributed positively to our portfolio’s performance.
Our European segment is negative while in the US Epizyme is recovering fast.
Our Chinese portfolio was globally positive but held back by our hedge. Key performers where in the insurance and banking sectors and the Chinese Automobile Association revised its forecasts upwards for 2021 with a growth of sales expected to reach 15 % Year -on-year.
We did well to take our profits on Bitcoins and did the same partially with Ethereums where we reduced our exposure.
Overall, we are still running at at +18 % performance per annum as we reach the end of our seventh year of management
Model Portfolio 28 November 2020
WEEKLY TECHNICAL REVIEW
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