Intelligence Briefing Takeaway — 2.4.23

Some weeks just suck. Mark “Chopper in Chief” Zuckerberg shared with his C-Suite Silicon Valley peers the 2023 playbook. To paraphrase in parody, “About those11,000 layoffs? They were only the appetizer course. Given how I now identify, as Chopper in Chief, things are set to change. We’re going for flat bellies – we’re nixing the fat that was once referred to internally as ‘middle management.’” To quote Chopper’s actual words, Meta will be “removing some layers of middle management” so remaining workers “can get more stuff done.” His postscript: He’ll be buying back $40 billion in stock. In response, the stock price tacked on a neat 25% in the last five trading days.

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QI PORTFOLIO STANCE

Politics will, once again, rise to the fore and set the economy’s course. Pre-pandemic, credit was already compromised. Rather than be capable of going at it alone as the Fed did post-GFC, a combined monetary and fiscal response was required but misallocated too universally, inducing an inflation shock. The under-appreciated risk of the debt limit, budget resolution, and removal of direct fiscal support in a post-GOP House of Representatives reality should act as anchors on long-maturity Treasury yields. A continued flattening bias underlies the building stresses on household finances as the global and U.S. economies enter recession. Deteriorating demographics & plummeting household formation add to the risk that Fed overtightening elongates and deepens the downturn as Powell tries to kill the Fed Put.

QI QUICK QUILL CALLS

Labor and consumer survey data flag a steepening yield curve prompting QI to deduce short-term yields have likely peaked. There’s relative value dipping into long positions in short-duration bonds. It positions the holder well for the more visible evidence of an imminent unemployment shock. [11/29/22]
• The bear market we have predicting Q4 2021 is here and only mid-innings at best. The recession we have been predicting since Q1 is increasingly accepted. Maximize cash. Politics could catch anyone flat-footed, but not likely in a divided congress; a defensive path is the most prudent. Relative value plays are below. [9/23/2022]
• Overweight domestic Utilities within U.S. equity portfolios and underweight companies and sectors with high international exposure, namely Technology, Materials, and Consumer Staples. The U.S. Dollar is likely to stay stronger for longer. [9/19/2022]
• Reinforcing our avoid Consumer Discretionary call with shorting the most discretionary of the durable spending sub-sector, namely recreational boats, recreational vehicles, and autos. [8/31/2022]
• Within equities exposure, Long Telecom Services & short Travel & Leisure. Given the widespread acceptance of recession among households, with upper income in the lead, it’s appropriate to be long the former and short the latter. [8/30/2022]
• Automation, Robotics, & AI are poised to continue thriving in America as high labor costs, on-shoring, and near-shoring gain momentum. While QI still advocates maximum cash positions at this time, we believe these subsectors will outperform on a relative basis. [7/26/2022]
• 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. Several highly liquid ETFs likely make good shorting opportunities. [7/26/2022]
• With recession in the books, we reference the duration of the last two occurrences of 2s/10s yield curve inversions — the 9-month stretch in 1999-2000 and the 7 months in 2006. Because deflation in shelter will filter through with a lag, short inflation breakevens. (i.e., long TLT, short TIPS) [5/3/22 updated 7/6/22]
• As the Fed tightens, already anemic liquidity gets tighter and asset price volatility rises. The VIX looks increasingly inexpensive. Look to build VIX entry points when stocks are in blind rally mode. [4/5/22]
• Macro fundamentals suggest downside for the auto sector. Auto Retailers in particular, who’ve reaped huge gains are likely to see those go into reverse. [3/24/22]
• 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.

ON QI'S RADAR

• Be mindful of rampant corporate credit creation in a higher cost environment. More credit spread widening is likely on offer.
• Chinese stimulus of new will not be as it was in prior rescues and bailouts; be wary of going ‘all in’ until we see proof the economy has reopened
• Desalinization will be one of the biggest domestic and global plays into the next decade to go long opportunistically