Oil Intervention Won’t Help
Given the buzz today is on Biden’s plan to release oil from the strategic petroleum reserves to lower prices on energy costs, it may be a good time to review my higher oil call.
My intermarket analysis is how I time inflection points in major asset classes. This ratio of CRB:SPX helped me spy the outlier move in stocks over hard assets (think: paper over things) before it reversed leading into my THINGS OVER PAPER mantra to clients in July 2020.
In a nutshell, my call was that yields would stop going down and bonds would stop going up – this was August 2020. Since then, bonds have had their worst showing in 40 yrs.
Since then, I have only grown more confident in my HIGHER YIELDS, HIGHER COMMODITIES call – including but not limited to calling for crude oil to hit $130 from March 2021 when trading $65 and repeatedly last Fall 2021 – with a given price target of $130 hitting by March 2022. We hit $130 crude on March 8th.
Again, this CRB:SPX ratio highlights my theme visually of THINGS OVER PAPER over the past 18 months now, but it also graphically represents where I can see Oil price moving… $160 by May/June and $260 probably around the mid-term elections in November of this year or early 2023.
Yes, there will be violent swings, especially in light of the intervention by the White House to tap down prices at the pump ahead of the mid-term elections, but I contend:
- Historically, SPR releases have been temporary at best in suppressing oil prices and then are quickly followed by higher prices as the market prices in supply destruction.
- Putin has committed to halting energy contracts in EU unless paid in rubles – not dollars or euros – and the requirement for EU countries to open up ruble accounts in Russian banks effective April 1st ensures a continued energy crisis in the Eurozone. Oil + Gas are the new currencies that are desperate to be accumulated.
- Fed tightening supports higher yields which supports inflation expectations and vice versa. Fiscal stimulus is inflationary. Supply chain disruption is inflationary. Wars are inflationary. Oil is THE PLAY on INFLATION HEDGE, as written to clients March 2021.
And speaking of inflation… CPI is April 12th which will be hot as it will reflect that $130 crude oil print earlier this month. So I expect a further pulling higher of yields, which would also be bearish bond proxies such as Nasdaq equities.
In fact, historically, stocks have gained an average of 7.5% annually – adjusted for inflation.
When inflation is above 7.3%, like we have been since JAN 2022 when we hit 7.5% – confirming the trend in FEB with 7.9% print – stocks have lost more than 11% annually adjusted for inflation.
So if Nasdaq underperformance is my baseline call – which it has been since 1st of the year, despite this historic bear-market bounce – I contend value will continue to outperform, and OIL + GAS as the INFLATION HEDGE will continue to move higher until either War in Europe is resolved or a financial crisis is triggered because of it, whichever comes first.
Inflation, Tightening, Earnings and Valuations
High commodity prices are impacting consumer sentiment and spending, and corporate margins, but an earnings downgrade cycle hasn’t been priced in, yet.
Higher commodities drives inflation expectations which drives bond yields higher weigh on company valuations. We’ve seen high P/E firms retrace considerably. Is the cycle done? I don’t think so.
Expected Fed hikes may not be priced in as the 10 year sits under 2.5% but in reality should be minimum of 100 basis points higher around 3.5%. Getting there will continue to tighten financial conditions and remove liquidity.
As a reminder: QE suppresses volatility; QT triggers it.
- Bonds: I’m expecting bonds to move slightly higher next week or two before CPI print April 12th, which should trigger my next financed put spread for TLT with $124 price target for May/June. This will be my 5th swing bearish play on bonds since September 2021 using this advanced option tactic – all four of the prior trades worked out extremely well (from 300% to 13,000%).
- VIX: Already long since Tuesday with the April 20 bull risk reversal up 2000% and May call spread waiting for the real volatility to emerge not this one-day-wonder.
- Nasdaq: I am bearish equities again since yesterday, expecting some snaking action around the 200D while the 10yr digests the recent anticipated spike back to 2.21 support before reversing higher into 2.55.
- Speculative Growth: I am bearish tech as they continue to be in protracted downtrends – from dash-to-trash meme plays to IPOs/ARKK/WFH/EV/SPAKs, etc – with #STR (short-the-rip) still in play.
- Precious Metals: I am still bullish gold, silver, miners since GLD $174 quarterly breakout – even while I am also predicting a firm/rising USD with rising real rates.
- China: I am bearish USDCNH and US-listed Chinese stocks within KWEB – as I have been for a solid year including FXI, EEM.
- Europe: I am bearish EURUSD since 1.19 and with it EZU, EWG.
- Japan: I am bullish USDJPY as it grinds higher into the “Kuroda Line” at 125.84 and will be quite bearish equities if it breaks through.
- THINGS OVER PAPER: Every play is still working – from agriculture and fertilizers to steel, copper, uranium, and lots of oil and gas plays in between. We even have a smattering of healthcare and select financials in there – basically all cyclicals/value represented in company proxies with hard assets.
What is clear is that AAPL, AMZN, GOOGL, MSFT, NVDA, TSLA are holding up the market indices. So market bulls better hope their earnings don’t disappoint like FB + NFLX did last quarter.
I think mega-cap tech will disappoint, as my GAAPSPX chart intonates.
Either way, I look forward to trading it either way with clients in my Live Trading Room!