UNLOCKED: 'Growth Stocks More Vulnerable From Here' Goldman Sachs
Housekeeping: Sunday’s Founder’s Class will be 3 p.m. ET. We will be going over the most recent Bloomberg report as well as Dalio’s new Bridgewater powerpoint. There are copies for reference in this report.
Zoom Link Here. Founders use usual password please. See you tomorrow!
Market Summary: weekly recap
Technicals: active trading levels
Podcasts: GoldFix and Bitcoin
Charts: related markets
Calendar: next week
1. Market Summary
The growth stocks are not only expensive on an absolute basis, but they're also sensitive to higher rates. And at the margin, they're also sensitive to specific regulatory and taxation risks. So maybe a bit less US equity where you have a concentration on growth stocks” Christian Mueller-Glissmann, Goldman Sachs NOVEMBER 10, 2020
Friday The S&P ended down 2% and Small Caps down 3% on the week.
This was Nasdaq's worst week since Feb 2021.
For context, this is the worst start to a year for the Nasdaq 100 since 2000.
Portfolio Rebalancing Time
This week started the “rebalancing” chatter for investors. Advisors are meeting with clients post holiday now. Advisors are telling them it is time to sell some of this and buy some of that. It happens every year this time. It is also probably good advice. The timing...not so much.
Text from a family member this week:
Hi Vincent. I don't know what Commodities did but stocks did well. I just spoke to a Vanguard advisor. Wants to set me up in an account that allows him to rebalance quarterly on his own volition. Then simply send a message informing me. Is that usual?
The Nasdaq is basically unchanged from September 2021. The S&P is up some. The Dow is also up. It feels like big tech grabs all the headlines, but it is also grabbing all the selling. Does this performance match your favorite Financial news network’s stories?
The S&P is Up Some…
The Dow is Doing Fine…
But The Nasdaq is actually down…
What is going on? Frankly, we think the big boys have been positioning themselves for this the past 4 months. That doesn’t mean rebalancing is a bad idea. It means it is possibly a good idea now. But it was definitely a better one 4 months ago. But why is it happening now?
2021 Was Different
Last year was different. Different in that it was like past years, but it was on steroids. Investors always have worries, and usually have gains. Last year Investors had big worries with big gains.
Stocks posted major all time highs even while pandemic concerns remained at the forefront. Now, people have time to think. And they are turning risk averse. Last week may have been a warning shot.
What Triggers Selling Now
With stocks at these enriched levels and the Fed on a mission to control inflation; most people following the “sell-a-little-of-this” re-balancing advice will likely be taking the sell leg first. If they move in herd-like fashion, the next few months could be painful for people who did not do this 4 months ago.
If the advice takes hold we could see a large selloff in Nasdaq and S&P 500 stocks. This is not a prediction. But it is a risk. A whole generation is long stocks. A whole generation is retiring. That same generation is now meeting with advisors to re-balance portfolios for 2022 and possibly pay a big tax bill.
If enough people take this advice and move in herd fashion, you could see a big dip the next few weeks.
Peter Garnry, Saxo Bank’s head of equity strategy says:
“Many retail investors have arguably too high exposure to speculative growth equities and thus they have high interest rate exposure without knowing it,”
“As we have said for a year now, it is wise to begin balancing the portfolio blending growth with more low equity duration assets and especially those with supposedly inflation hedging capabilities.”
Finance publications are out there collectively recommending readers sell tech, buy value, and buy commodities. The needs and concerns of their clients are three-fold.
First, mature investors want to preserve gains in their winning tech stocks. Second, they want to increase income. Third, now that inflation is a buzzword, they want to make sure to hedge against that risk.
Like their parents who lived through the great depression of the 1930s, the baby boom generation remembers the 1970s inflation pain very well. They will respond to the risk. They have been triggered.
Therefore, taken collectively the impetus is now to sell big tech, buy value stocks, and buy natural resource companies for a generation of investors. And, as you can see from last week’s action, it is already happening. Whether this is a trend or an aberration we do not know. If last week was the beginning of a trend, it could last at least until 2021 tax bills are paid.
Again. This is not a prediction. But if it happens, those are the most likely drivers behind it.
The Rise of Duration as an Equity Risk Metric
A relatively new theme out there is the “duration” one. Duration is a common bond term used to compare present value of money to future value. Duration loosely describes investment holding time.
Generally speaking: the longer the duration, the more sensitivity to interest rate moves. The shorter the duration, the less sensitive to that. Longer duration is seen as more risk and more potential reward. Shorter duration is generally the opposite.
Christian Mueller-Glissmann, Head of Asset Allocation Research
GOLDMAN SACHS on this concept:
And growth stocks are quite expensive relative to the rest of the market, and
they've also become much more long duration. So what hat means is essentially investors are paying for cash flows that are further out in the future. Source
Usually, to hedge equity risk, investors turn to Bonds for safety. But, with Bond returns hovering at almost zero interest rates, the concept of using Bonds as a hedge against equity risk is falling out of favor. Advisors are directing clients to looking for “safer” stocks to roll into as a result. This also ties nicely with the desire for more current income as many baby boomers are thinking.
Goldman’s analyst goes on:
So moving closer to the zero lower bound (in bond yields), equities get more attractive from a yield point of view, but they're also getting more risky. And we find this is particularly the case in the US because there you had particularly a strong concentration in leadership by growth stocks, and that makes them more vulnerable from here if you do get volatility in rates.
He’s implicitly saying: Stocks are overvalued but bonds are as well. Therefore we want you to buy less overvalued (undervalued?) stocks that have solid dividends. Get out of your tech stocks.
Duration in stocks is a relatively new thing. Generally speaking, growth and tech stocks are perceived as longer duration. Value stocks, whatever that actually means these days, are seen as short duration.
Longer duration stocks are exposed to substantial discount-rate risk (i.e., changes in yield), whereas low-duration stocks are primarily exposed to cash flow1 risk. Low-duration stocks are also high-value, high-profitability, low-investment and low-risk stocks.
What it all really means: The higher PE and price to growth ratio a stock has, the further it has to fall. If rates go up, these stocks will get hurt the worst. The hint is to purcahse low PE stocks with good dividends. If bonds go down, these cash cows will not be hurt as badly. Also: you get a nice dividend and lower volatility.
Zerohedge noted Friday this is already happening:
Investors appear to be starting the year with an aversion to long duration stocks and instead are leaning into Value stocks with closer ties to an economic recovery. Growth stocks fell to a key technical level this week relative to Value stocks.- Source
What they are saying is growth stocks are overvalued to future earnings potential if interest rates start to rise. They are advising to put your money in stocks that are less growth-oriented. Those companies have shorter duration risk. Buy Marlboro, sell Apple. Buy Dow stocks, Sell Nasdaq and so on.
Nasdaq was by far the week's worst performer as The Dow clung to unchanged on the year. ( 1)
Energy and Financials outperformed this week (2 and 3)
Tech and Healthcare lagged.
The S&P Airlines Index rose over 7% this week - its best week since early November (4)
FAAMG+T Stocks (which represent 25%+ of the S&P 500 market cap) were a mess this week.
Nasdaq Biotech Index is on track to close 5.8% lower in its worst weekly drop since March 2020, breaking below key support back to Dec 2020...
From Sentimentrader on Nasdaq stocks:
"After Wednesday's post-FOMC selloff, more than 38% of stocks trading on the Nasdaq are now down 50% from their 52-week highs. Only 13% of days since 1999 have seen more stocks cut in half."
Zerohedge also notes rather frighteningly: “When at least 35% of stocks are down by half, the Nasdaq Composite has been down by an average of 47% (!) from its 3-year high."
Cryptos were ugly this week to start 2022, with Ethereum the worst performer.
Bitcoin broke down to a $40,000 handle Friday, its lowest since late September 2021.
Bitcoin Open Interest wanes along with price post the ETF parade…
Notably The US session is dominating the selling pressure on cryptos, perhaps suggesting this is more related to mega-cap tech liquidation
Commodity markets were very mixed with crude surging while precious metals and copper were sold.
WTI rallied up to $80 this week, erasing all concerns over Omicron impacting demand and any short-term gain from Biden's plan to cut gas prices.
The dollar ended the week only marginally higher, oddly giving the week's gains back today after the 'hawkish' jobs data.
GoldFix Friday WatchList
Complete Watchlist Here
pink in the red…
2. Precious Recap
Between the shorter and disappointing allocations to Gold and Silver this year, The Fed taking a very hawkish stance, and what we believe is headwinds from the problems in Turkey stemming from their own need for US dollars; we thought it appropriate a straight reading of research be in order. This week Bloomberg’s Commodity report came out and it features Gold, Oil, and concerns about deflationary momentum.
We believe that Oil may have a very whippy year ahead of it. Gold, on the other hand will likely rally. Last week may have been disappointing for short term trading, but the market frankly is looking very healthy given the way bonds and the dollar are acting. So our own biases aside, Gold is not going away. The real issue is, what will catalyze it higher? That is what for now seems to be elusive. We have an idea, but need to see some other developments over the next month or so.
Here are a couple highlights from the report which along with Ray Dalio’s Bridgewater presentation will be the topics for Sunday’s Founders class.
Lower Crude, Higher Gold Likely in 2022.
The problem with commodities for 2022 is some normal reversion may seem extreme. Crude oil at the top of our 2021 scorecard vs. gold on the bottom is the pair we see as most subject to trading places. The roughly 20% 10-year decline in the price of crude to Dec. 22 vs. closer to a 30% gain in spot gold indicates the enduring trends, which we expect to return in 2022. Our bias toward the metals is underpinned by about a 70% decline in the Bloomberg Energy Subindex Total Return over the same period.
2021 Crude Oil Peak May Mirror 2014.
It's not that profound to expect enduring bear markets to continue, particularly after a price bounce. Crude oil and natural gas have the primary rules of commodities -- the higher-price cure and unfavorable demand vs. supply -- working against them.
Our graphic depicts the potential for a significant divergent-weakness peak in West Texas Intermediate vs. the moribund price of natural gas. The last time gas peaked above $6 per MMBtu was 2014; WTI's last gasp above $100 a barrel. Crude oil appears to have topped around $80 in 2021 as gas revisited the same level.
Gold May Shine in 2022
Gold's $1,700 Support vs. Copper's $10,000 Resistance and 2022. A primary question for 2022 might be what stops gold from regaining the upper hand vs. most commodities, and our bias is for enduring trends (notably since the financial crisis) to prevail, which favors precious metals more than industrial and the metals sector over broad commodities.
Has Gold Stopped Outperforming Copper? Gold and copper are about their same prices at the end of 2021 as they were 10 years ago, but the precious metal has outperformed for reasons that appear more enduring in 2022. In 2011, China cut its reserve requirement ratio (RRR) for the first time in the current trajectory, and did it again in 2021. The downward trend in the RRR indicates China in decline and is typically a bad sign for commodity prices, notably industrial metals. Our graphic shows copper possibly reaching a ceiling around $10,000 a ton, and gold a floor at about $1,700 an ounce.
You can download the full PDF report view it on your device at the Scribd location HERE.
3. New Report
4. Technical Analysis
GoldFix Note: Do not attempt to use price levels without symbol explanations or out of context. Moor sends 2 reports daily on each commodity he covers. The attached are non-actionable summaries.
TECHNICALLY BASED MARKET ANALYSIS AND ACTIONABLE TRADING SUGGESTIONS Moor Analytics produces technically based market analysis and actionable trading suggestions. These are sent to clients twice daily, pre-open and post close, and range from intra-day to multi-week trading suggestions. www.mooranalytics.com
5. GoldFix and Bitcoin Podcasts
With macro mark -ups. Which mean nothing except to balance the author’s own point of view. With one conclusion: Gold did pretty damn well given the dollar strength and net disinvestment on the year.
10 Year Yields
Charts by GoldFix using TradingView.com
Some of the upcoming week’s key data releases and market events
MONDAY, JAN. 10
10 am Wholesale inventories (revision) Nov. -- 1.5%
TUESDAY, JAN. 11
6 am NFIB small-business index Dec. -- 98.4
WEDNESDAY, JAN. 12
8:30 am Consumer price index Dec. -- 0.8%
8:30 am Core CPI Dec. -- 0.5%
2 pm Federal budget Dec. -$144 billion 2 pm Beige book
THURSDAY, JAN. 13
8:30 am Initial jobless claims (regular state program) Jan. 8 -- n/a
8:30 am Continuing jobless claims (regular state program) Jan. 1 -- n/a
8:30 am Producer price index Dec. -- 0.8%
FRIDAY, JAN. 14
8:30 am Retail sales Dec. -- 0.3%
8:30 am Retail sales excluding autos Dec. -- 0.3%
8:30 am Import price index Dec. -- 0.7%
9:15 am Industrial production Dec. -- 0.5%
9:15 am Capacity utilization Dec. -- 76.8%
10 am UMich consumer sentiment index (preliminary) Jan. -- 70.6
10 am Business inventories Dec. -- 1.2%
Main Source: MarketWatch
Disclaimer: Nobody is telling you to do anything here. Anybody who tells you to do something without first intimately knowing your personal situation is irresponsible at best and manipulative at worst. Worse, anyone who acts on other people’s opinions without first doing an inventory of their own situation shouldn’t be surprised if they lose money.
The flipside is, shorter duration also are much more cash flow sensitive and usually operate on tighter margins in mature businesses. They are operationally safe, have little growth expecations, but are susceptible to innovation disruptions.