“Orderly” Pivot? (TWTW – Feb 7-11, 2022)

“Orderly” Pivot – Well … Markets are continuing to adapt, as it were, respectively reflect the aggregate of all participants views, positioning, and “bets”. THIS – the present time – is a period of adjustment, palpable anxiety, and at times seemingly frantic activity. Volatility has been, and likely will remain a) elevated, and b) itself fairly volatile around these elevated levels.

Evidently, the great “repricing” exercise looks to have some way to go, and possibly a meaningful amount of 2022 will be spent watching exactly how that plays out. Hopefully … it remains “orderly” …

So amazing though, to see what happens in terms of some of the price moves lately, be they on the Meta side after earnings, promptly dropping $250 Billion (oohps) of marketcap, or on the flipside of that, Enphase this past week rallying 20% or so at the open on Wednesday (pulling back toward +11% or so by around 10 am) on account of great financial results. WOW. Course not everything moves that way … BUT if you’re on the wrong side of some of these moves, you quickly have deep wounds or regrets to sooth.

That got me thinking about what I was observing close to a year ago, when upon restarting ETFinsight related commentary (Click HERE! for the perspective I was sharing back in March 2021: Memo from the ETF frontlines). The key takeaway – which looks to have proven out – A regime change in markets was underway. THAT change is continuing to play out (see above for illustration purposes…), and as it stands, is probably needing the benefit of seeing exactly how far the FED goes and how that inflation campaign plays out, but possibly even more importantly how the balance sheet unwinding exercise impacts markets, particularly from a liquidity perspective. As noted, let’s hope it remains “orderly”, because that sure isn’t a given. It also means, imo, that one has to be particularly careful to avoid missteps, and overreactions … only seeking to take advantage of overreactions when they present an opportunity you were looking to participate in in the first place.

From that “Launch” Memo, if you will:

Past performance – is no guarantee, or indication of future performance … or some disclaimer to that effect. You’ve all seen it before, and well, it’s true, we can never vouch for what future performance might turn out to be.  That simply throws one into situations that give everyone a bad name and cause potentially bad blood, respectively lands one into litigation with clients. Who needs any of that.

Humour me though … when I suggest the following to you: How about while it is certainly no guarantee of future returns, it could in fact be a meaningful marker of what you might well want to pay attention to. Plus, well, when we consider “momentum” based strategies … isn’t the underlying principle that what has momentum (aka has been shown to work …) might continue to move in the direction it is already headed in until … well it stops. ERGO – I pay attention to past performance for what could be “signals” or “markers”.

THAT – by the way, I believe has played out … as I was last spring (April 14, 2021) suggesting:

I suggested a regime change in markets was underway. I still believe that to be the case, and it is still ongoing. Like anything in markets, nothing ever goes – or should – in linear fashion (see materials last month – XBM-4.03%). But if you catch the broader themes/shifts, at least, you aren’t left behind.

Key takeway: I could see then (Mar / Apr 2021) that a regime change was underway … and that remains the case. When will the process be complete? 2022 should take us a long way toward completion (reopening, policy normalization; valuations / fundamentals repricing etc). Just a thought 🙂

Disney – Decent pop on better than expected results (unlike the prior quarter report). And now – further upside on the reopening unleashing pent-up demand for parks, travel etc, all the while company’s Disney+ continue to gain ground. As you recall, Disney has been a rather poor performer recently => click HERE! 

Brookfield Asset Management – The company reported excellent results, and musings from the company’s CEO Bruce Flatt about the possibility of creating a Brookfield Asset Management “Light” that would be separate some of the hard assets currently in the existing BAM from it, with that “new” Asset light BAM able to pay a significant dividend got the market excited on Thursday, as the stock popped 7-8% initially. It subsequently gave back some ground, BUT has gotten people focussed on the Discount to NAV, which arguably provides both an opportunity if/when that new BAM gets created, or otherwise in the meantime, a buffer against difficult market conditions.

7.5% inflation – So the January inflation number in the US, at 7.5% was, well, bad, and refocussed the market’s attention onto what the FED does next, which resulted in the latter part of this past week being more challenging than the first part of it. The odds of the FED going 50 bps in March have apparently risen quite a bit, AND, to boot, the FED’s James Bullard expressed hawkish views, suggesting rates had to rise by 100bps by July (which … well, the market didn’t enjoy very much … => click HERE!

2% – the 10 Year US T-bond yield as a result moved through 2%, a level not seen since 2019. The critical issue at this juncture is the fear the FED is behind the curve, which … well, it might inverse the yield curve, typically a good barometer of recession risk … The risks on that front – clearly rising… Policy mistake isn’t out of the realm of possibility, particularly as the FED is far from being able to control the script at this moment imo.

Political Crisis – Truckers, Convoys, here there and everywhere, including in Paris France. In Ottawa, meantime, the PM seems to be lacking the ability to pivot away from the word vaccination, which seems to be the only thing he goes back to time and again. Canadians are losing whatever patience with him they might have had. AND that – in my view – pathetic display of lack of leadership playing out in the House of Commons, is what Canadians got to foot the bill – $610 Million … last September. Not all is well in the state of Denm … of Canada. BUT – Canadians, WE will get through this. Just need leaders finally stepping up to the plate on that one. You guys aren’t there just to make yourselves look good in the House, and score points on your opponents. Surprise – WE, the people, actually expect you guys to lead, and work for us. NOT divide, stigmatize, and bully. This, at the moment – is NOT going well. Trade is being paralyzed, with Billions of trade effectively lost.

Sunlife – Like Manulife, beat expectations when reporting results this past week, BUT the stock reacted poorly, as COVID-19 related claims presumably still are concerning to investors.

Ukraine – Putin has the West where he likes it, possibly, seeking to hardball NATO and its members over Ukraine, all the while, cashing in nicely of oil prices not seen in years.

Gold stocks Friday … Friday was a strong day for Gold stocks (see XGD up 5.93% on the day). This, likely tied into a Ukraine situation that hasn’t yet been deflected, and with everyone concerned that Russia might move on the Ukraine in coming days

Horizons ETFs launches – Carbon Futures ETF => click HERE!

Brompton Group ETFs – latest Webinar, navigating volatility in 2022 with Laura Lau – CIO => click HERE!

Anyways, with that, this past week’s action:

Sectors:

  • Tug of war between Technology on the one side, and Energy, Materials, and Financials ongoing, with the latter categories winning …
  • NASDAQ was again hit this past week …

 

Thematics:

  • Travel benefiting from “reopening” backdrop as many jurisdictions, including in Canada look like we’re moving toward “endemic” status. Thank God for that. And you all know the pent-up feeling we can all relate to…
  • Elsewhere, Thematic still challenged by same dynamics as sectors, namely longer duration segments challenged in terms of PV of future expected cash flows/profits etc. This will keep going for a while, presumably through 2022, and should present both trading opportunities, as well as opportunities to enter specific themes you plan on holding onto for the long term, respectively as part of the growth component of your clients’ portfolios.

 

Factors:

  • The Canadian market looks well positioned in the context of current macro dynamics
  • At that, specific factors in Canada are also favorably positioned, arguably, notably Minimum volatility, possibly, but also value, including “fundamental indexing”, as well as the not to be forgotten “dividend” segment, where rising dividends can offset, or help deal with rising inflation …

YTD:

Sectors:

  • See clear ongoing strength/ pivot toward new “leadership”, namely Energy, Materials, and Financials. All of these fit the narrative of providing attributes fit to deal with the inflation spike we are in the midst of.

Thematics:

  • Clear from the above, and performance since early November, that the narrative regarding market participants appetite for all things “thematic” is currently undergoing a general “rethink” … and more importantly, being repriced as well. Given no one truly has the exclusive on valuations … there should be as noted, trading opportunities galore in the category, and the waters will likely only settle in H2, 2022 at the earliest (imo).

Factors:

  • Value, Fundamental, (and yes quality) as well as dividends matter (a lot imo at this juncture)
  • beyond these, important to keep an eye on whether Min / Low Vol category working for your clients as they should, otherwise they (and you) won’t be happy (after all they are meant to provide a smoother rollercoaster ride … and if they don’t … well, people that don’t like rides in the first place … aren’t going to be understanding. That, was the case in 2020, resulting in outflows for the category.

Have a great week-end 🙂