QI PORTFOLIO STANCE

Despite a well-orchestrated, coordinated global central bank shift to an easing stance, a recession is imminent, if not already here, and far from being priced into equities. In 2024, the U.S. economy was propped up by the lagging effects of $7.2 trillion in federal spending despite declining government revenue, a good portion of which went straight into the hands of consumers. This level of stimulus ceased to continue this Fall with COVID spending ending and the arresting of the fraud-ridden ERC. At the margin, fresh stimulus is highly unlikely until after the 2024 election at best. Even then, ‘helicopter money’ will only be legislated back into law if both a Congress with a spending appetite and a cooperating Executive branch are elected. Powell remains committed to maintaining QT to ensure inflation is dead and restore price discovery. This will continue to expose and eliminate dodgy debt within corporations and the real estate sector. The credit and labor cycles have begun their downturn. Portfolios should be defensively positioned and ready to capitalize on idiosyncratic shorting opportunities as they materialize.  Apart from Treasuries, longer-term risk exposure should be minimized. [12/15/2023]

Intelligence Briefing Takeaway — 12.28.24

The next time you read a Saturday Intelligence Briefing, the year will end with the number ‘5.’ You would agree that the digits at the end of the day’s date change with an increasingly hurried rush as time goes by. And while 2024 is no exception – it went by in the same wink of an eye -- the year will not be missed. If there’s one word that best embodies the year we leave behind on Tuesday at the stroke of midnight, it’s “hubris.”

In a recent podcast I filmed, I was asked to debate a raging bull. Proud as a peacock, he peddled platitudes conflated with data. A multitasker, he also belittled my perma-position as trite. No stranger to this type, data demonstrating that private payrolls had begun to contract in the spring was met with a defense that the stock market felt otherwise. Cited in response was the “productivity miracle” that sets the United States apart from the rest of the world. The Bank for International Settlements curiously concurred: “After rising during the pandemic, productivity growth has recently fallen back to or below pre-pandemic trends. The strong performance of the United States has been the notable exception.” Plaguing the rest of the world is “weak investment, aging, and trade fragmentation.”

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QI QUICK QUILL CALLS

• Use Equity rallies as selling opportunities, minimize your equity holdings to your appropriate risk tolerance and time horizon and maximize your short positioning. Initial bullish reaction to companies’ cost-cutting efforts will eventually give way to recession trumping cost cuts. Until increased deficit spending that injects cash directly into household bank accounts revives demand-driven inflation, don’t fight the Fed. Cuts are being priced in too aggressively. Even then, rallies after the initial cut have historically been short-lived. Markets take an average of 16 months to bottom after the first Fed rate cut. More risk-tolerant investors should use rallies to build prudent short positions. [12/9/2023] Saturday Intelligence Briefing — The Quest for Good Deflation
• Short Travel & Leisure within Consumer Discretionary – Government injection of cash into the Platinum-card class through the Employee Retention Credit has hit a brick wall. Beginning with the Q4 Earnings season, we expect this industry will disappoint to the downside.  QQ Service Spillover Risks [12/5/2023]
• Short Transports – Stocks in the freight sector have largely priced in the resurgence in homebuilding and the lagged effect of green federal spending. As the economic slowdown manifests in the headline data the sector will be sold further. The Weekly Quill —Craning for Cranes . [Weekly Quill, 5/17/2023] updated view here 8/1/2023]
• Short High-CRE exposed Banks – Shorting a basket of small-to-mid-cap banks with high exposure to Commercial Real Estate makes much sense to QI. Rates are rising, which is good for net interest margins, but CRE defaults are just starting. [7/26/2022]
• Short Autos. Macro fundamentals suggest downside for the auto sector. Auto Retailers, in particular, who’ve reaped huge gains are likely to swing to losses as evidenced in collapsing dealer sentiment. [3/24/22]
• Short/Sell Commercial Real Estate. With record low cap rates pushing 2%, half of 2007's prior record, if you own anything in CRE, even Industrial, sell and sell now. A more accessible proxy to this trade is shorting a REIT ETF. Multifamily & Industrial are QI’s preference though Lodging will come under pressure in 2024
• Long Credit Default Swap Indexes - Credit is only beginning to tighten. Sentiment indicators from both credit managers & high-income earners, pockets that have a front-row seat to the lagged effects of Fed policy, challenge the ‘soft landing’ narrative. A more accessible proxy to this trade is shorting a high-yield ETF. [7/31/2023]
• QQ Clock Ticking on Tight Credit Spreads  The Magnificent Inversion continues to confound the Street. While an initial rate cut is typically accompanied by steepening into positivity, Powell’s intention to continue QT has prolonged an inversion driven by conflicted monetary policy. We look for this grind of continued steepening and re-inversion to continue and expect the biggest moves in yields to be on the shorter end. [12/7/2023]
• Bull Steepener in Treasuries. The Great Flattening we first forecasted in June 2021 has run its course. We see the yield curve's slope facing steepening pressure as recession pressures down rates. We expect the biggest moves in yields to be on the shorter end.  [3/20/2023]
• Overweight the U.S. Dollar. As the recession spreads globally and Powell maintains relatively high rates, more brittle foreign economies will crack. The U.S. Dollar will likely stay stronger for longer as the world realizes a pivot is not a raised Fed Put strike. [9/19/2022]
• Short Inflation Breakevens. As recession manifests, we reference the duration of the last two occurrences of 2s/10s yield curve inversions — the nine months in 1999-2000 and the seven months in 2006. Because deflation will filter through with a lag, short inflation breakevens. (i.e., long TLT, short TIPS) [5/3/22 updated 7/6/22]