Peak Dread?

On July 15th we sent out a “mid-month note” highlighting some of the potential positives that in our mind at least are being discounted, ignored, or underreported. This makes sense, though, the first half of 2022 has been as brutal as it gets for investors or savers, especially those who are new to the markets (10-12 years) and who have been spoiled by an accommodating Fed and a mostly benign investing backdrop. Also, the news this year has hardly been inspiring or much less enlightening. War, mass shootings, and Covid resurgences combined with depressing trips to the gas pump and grocery store have sent the global psyche into a funk. You may be thinking what do school shootings or China Covid lockdowns have to do with the price of Amazon or wheat futures contracts?  

We respond that, despite the tremendous reliance on algorithms and electronic trading these. days, the markets are still a varied collection of psychological states. And right now, that is  rather dark – too dark in our opinion. We would lay some of that blame on social media and the  24/7 in-your-face news feeds that rely on negative clickbait to fuel their growth (but that’s a  whole other dissertation we will avoid for now). We aren’t trying to imply that the bad news out. there isn’t accurate or worthy of pause – it most certainly is. The point we are laboriously  making is that the sentiment, backed up by the data below, is not currently representative of the macro surroundings.  

For those of you who skipped the mid-month missive (how dare you) here is a quick recap:  Many bullish inputs are being ignored/discounted by the markets. They include. declining inflation, lower valuations, robust job markets >4% unemployment, still low historical  rates, and, as we detail below-just negative sentiment. Now, let’s not interpret this as. us turning perma-pollyannish and ignoring the messy world we live in. There are plenty of trap  doors ready to use to bash any bullish tones in an instant. But how many of these doors are already priced in?  

Maybe all this helps explain the 7% rise in the SP-500 since July 15th and the small reflation of commodities, which have been slammed in recent weeks on demand fears. Of course, all this news still pales in importance to the change in tone of the world’s central banks that as we all. know, have taken a 180-turn toward a tightening stance (ex-Japan of course). The globe is  sucking up liquidity in what are the very early innings of the unwinding of the largest financial experiment in world history (so far the Fed has only drained $250 billion from its $9 trillion balance sheet). So, there’s that element to deal with at every corner. However, as we detail below, there are signposts that the hard-charging raising campaign may be tapering off….some. 

We touched on some sentiment above but wanted to drill down a little deeper on the subject as we feel it is the number one reason for the 7% rise in equities since our mid-month note. 

We can say without any hesitation that FOMO (fear of missing out) is a real thing and can drive investors, traders, and managers to new levels of despair. We speak from experience. unfortunately.  

The AAII Bull Ratio 20-week Moving Average printed under 35 for the first time in over  30 years.  

Small Trader Put Buying reached its second highest level in the past 22 years. Trading in inverse (bearish) ETFs eclipsed trading in bullish ETFs by the widest margin  since the financial crisis.  

We saw a single stretch of 7 days where 5 of those days recorded declines in more than  90% of all stocks, which has never once happened before (according to data going back to the 1920s).  

The most recent BofA FMS showed a new all-time survey low in global growth optimism and a 14-year high in profit pessimism (worst since Lehman blows up).  

The BofA Bull and Bear Indicator reached the rare score of 0 (2.0 is the traditional. contrarian Buy signal).  

All 21 of’s risk-on/risk-off composite index inputs signaled “risk off” for just the sixth time in history.  

These bullet points would suggest that a lot of people gave up at the lows and are now on the  sidelines for the 8.1% rally in July. The same could be said for the institutional side that shows  risk aversion in a big way as shown by the graph below. So, if you are in the camp that the  market’s job is to frustrate the maximum amount of people the most amount of time, (which we  certainly are), then a sharp rally in assets makes a ton of sense right now.  

Which goes back to the narrative observation that bearish news flow has psychological side effects that morph into monetary losses – assuming the economics are truly a quantifiable outcome based on surplus and scarcity and human nature is consistently emotional and scattered.  The stage for volatility is permanently set. At times like these emotions seem to have gotten the  better of us while the economic portion remains inconsistent.

Bitcoin Update:

“Crypto retail demand is improving, and the intense phase of deleveraging  appears to be over” – JP Morgan 7/21/2022  

This quote, if indeed accurate, melds nicely with our earlier note that the intense selling and  seemingly daily bad news stemming from the sector, most notably the 3AC, Genesis, and Babel  insolvency woes that has sent tremors across the industry recently.. These events resulted in  large amounts of forced selling which helped drive down the price of Bitcoin to $19,000 and sent  the numerous amounts of alt-coins down to multi-month lows.  

Also this month it was revealed that Tesla has sold 75% of the $1.5 billion Bitcoin position they  bought in Q1 of 2021. The company netted $936 million from sales, which appears to be a slight  loss. This news was immediately viewed as a negative for Bitcoin, but we take a different view.  For one, what if the reason Tesla sold their Bitcoin was simply to add cash to their balance sheet  

as expenses have risen dramatically for them and other car makers who are dealing with higher  energy costs, commodity costs, and continued supply chain slowdowns? Second, the fact that  Tesla already sold that much Bitcoin during the last quarter while the entire sector was  hemorrhaging and experiencing its 2008-like moment is further testament that the sector thus far  has withstood some serious body blows and yet that it has now seen a variety of issues rally 12  % off their lows is the kind of behavior associated with market lows.  

We aren’t standing on top of a hill and proclaiming the end of the crypto winter. But we aren’t  discounting it either. There may well be some more cockroaches as the theory goes in regard to  3AC and more so Genesis. The fact that crypto was promoting 18% yields for stacking coins  and that it has only produced a few isolated blow-ups has us keeping one eye open on the  lookout another spate of ugly news from that notion.  

But even if more ugly stories do emerge, we view this purge as a healthy re-set to further  legitimize the space and allow it to grow in a more organic fashion rather than through some  forced ideas that carry tremendous leverage and risk.  

One interesting item we came across this month. The crypto carnage, to no one’s surprise, has  wreaked havoc in the mining community. Crypto Quant reports that more than 14,000 bitcoins  have been sold by miners in recent weeks which has equated to nearly $300 million. Miners are  selling their Bitcoin and are doing so to cover ongoing expenses. The hash rate is a term used to  describe the computing power of all miners in the bitcoin network, and it is down 15% in the last month. That is ultimately a good thing for the large-scale miners who can afford to weather the downturns. However, in the short term, the mining stocks have been crushed. Mara– 63%, Hut 72%, Stronghold Digital -83% all off from 2022 highs.  

With all the negative news surrounding crypto these days, we were extra impressed with the earnings report out of Silvergate Capital. Silvergate is a bank holding company that provides banking products and services. It is also heavily involved in cryptocurrency and in January announced that it was paying $182 million for Facebook’s Diem Coin and intellectual assets. It also plans to launch its own stable coin before 2022 concludes. 


Silvergate beat estimates by $0.28, which were record profits. They recorded no provisions for loan losses and digital currency customers grew by 1,585 by June 30th, compared to 1,224 one year ago.  

Their book value, however, did fall by nearly $4.00 to $38.86. That is about the only flea we. could find in this report. Again, was extra impressive seeing just how dire the crypto news is. flow has been this summer. The stock remains 57% off its all-time highs set in November  2021.  

There is a camp that believes we won’t see a meaningful turn in cryptocurrency until the Fed or  ECB reverses course and begins to add liquidity to the system. That is wishful thinking in ours. opinion given inflation and the never-ending supply chain setbacks. But some are pointing to the. the burgeoning sovereign debt crisis in Europe and the ongoing real estate debacle in China as. potential catalysts for this reversal. This month the PBOC said they have “sufficient” policy  room and tools to tackle “unexpected new challenges” 

Does anyone care to guess what that new challenge is? Hint: take a look at the Krane Shares Trust  ETF (symbol: KHYB) for some clues.  

All this being said, if the fate of the crypto world is reliant on some derivative of a global debt crisis, then you just may not be doing it right.  

Earnings season is in full bloom. We just concluded the most pivotal week last week in which we heard from Apple, Google, Meta, Qualcomm, and Intel, to name a few. Overall, at least as. concerning what was feared, the numbers have come in “ok” to “decent” – hardly inspiring. figures, we know. But considering the severe negative undertones that were prevalent heading into the reports, “ok” will have to suffice for a passing grade in 2022. Amazon and Apple were. the clear winners of the “super week” Everyone were expecting Amazon to miss estimates after hearing relentless stories of how the consumer is slowing coupled with warnings from Walmart. and Target. They beat on EPS, revenue, and operating income. AWS came in at +33% off a $79  billion run rate – also putting a lot of fears to rest.  

If the consumers are slowing, they aren’t skipping the Apple store. It was another solid quarter from the best-run retailer on earth. iPhone revenue came in at $40.7 billion versus the $38.3  billion estimates and $39.6 billion of one year ago.  

Services revenue of $19.6 billion against $17.5 billion one year ago. This is an area that some. analysts expect to grow into a trillion-dollar division in the coming years.  

The big banks launched the “season”, and they were mostly well received aside from JP Morgan.  Wells Fargo, Citibank, and Bank of America all saw their stocks rise after their earnings came. out and even JP Morgan bounced back from the drubbing it took; it now rests above the levels of the release. Goldman Sachs (no surprise) turned in the best quarter of the financial set and was. rewarded with a 14.7% rise from the 2022 lows. 


The industrials also came in with mixed results and for the most part, saw their stocks decline in nature. JB Hunt, Haliburton, Alcoa, United Rentals, CSX, Tractor Supply, Danaher, Nucor, and  Knight-Swift all beat their estimates and saw their stocks rise 5%+. While Landstar Systems,  Freeport-McMoRan, Cleveland Cliffs, and GATX all missed their numbers and were subsequently punished.  

Snap has been the disaster du jour so far this year. It warned of lower ad revenue on May 24th and then reported another pretty awful quarter on July 21st. The stock is now down a stunning  87% from all-time highs and is a stark reminder that even as stocks go to levels that seem incredibly low – they can always go lower. Snap shares lost 37% of their value on July 22nd alone.  

It was odd to see Snap blame ad revenue for their woeful quarter considering both Omnicom and  Interpublic just days earlier were cautiously optimistic about the advertising business on their conference calls. Google also provided upbeat commentary regarding online advertising. It does seem odd that we pay so much attention to a second-tier social media company and equate it to a  big macro drawdown. But that is also a derivative of programmed trading that so dominates the markets now.  

Twitter reported an awful quarter as well. We won’t waste any time on it due to the buyout/legal battle/bot controversy, etc. It will be very interesting to see how this all plays out with Elon  Musk – but we’ll be watching from the cheap seats. The trial begins on October 17th.  

Earning season is proving to be very wonky. And that shouldn’t surprise anyone. With all the fast-moving variables and built-in excuses (inflation, staffing) the range of beats and misses will continue to widen in the next few weeks when the smaller cap companies begin to report.  

Keeping with earnings. 68% of the S&P-500 companies that reported have beaten Wall Street estimates. This is better than most had expected but is well below the 1-year average of 81%, 5- year average of 77%, and the 10-year average of 72%.  

As of the end of July: 280 of the S&P-500 companies that have reported, 52% of them have beaten projections by over 1.0 standard deviation. 65% of the companies that have reported have beaten revenue estimates, which is also below the 1-year estimates of 78% and 5-year estimates of 69%. On average, companies are reporting revenues 1.3% higher than expected.  

These statistics, when put up against the current bleak macro backdrop, actually appear pretty respectable and much healthier than most would have speculated. However, the market is a  forward-looking mechanism. And the commentary surrounding guidance is tepid at best.  

Although we would argue that if you are running a company right now, there has never been a  better time/set of excuses to lower expectations, to try to pull off the classic “under promise –  over deliver” Q3, and to look like a hero to shareholders. 

The current earnings season is just another confusing input in a large set of revolving factors,  mostly macro, that aren’t going away anytime soon. Hey, it’s not supposed to be easy…and it. isn’t. But there are ways to navigate all these landmines.


Looking forward and other Market Commentary:

August is often characterized by light volume, small ranges, and skeleton staff as everyone tries to squeeze in the last few days at the beach before the kids head back to school. This August may follow that script seeing that. folks are a bit shell-shocked and depressed with the markets that are 2022. It’s a lot more fun to stare at the waves than at your 401k statement right now.  

News wise though, we can’t stare at the waves too long. Despite the big boys already. ported their earnings there are still a host of big names and some smaller-caps companies that we are anxious to hear from: They include Airbnb, Expedia, PayPal, Block, Safe Bulkers,  Snowflake, Palo Alto Networks, Coupang, and Beyond Meat – to name only a few.  

Economically speaking, the uber all-important CPI release comes out on the 10th, the PPI on the  11th, and the July jobs report on the 5th. We aren’t breaking any news by saying the Fed will be. looking at these numbers very closely as they don’t meet again until September 21st.  

Speaking of the Fed and the world’s central bankers, those who thought they could sit on the. sand and ignore the bankers for a month are ….sadly mistaken. The Jackson Hole summit will. be held August 25-27th and is widely watched for any clues into future monetary. policy. That has only intensified in 2022 seeing that central bank policy is the number. one input for all financial decisions and by far the biggest catalyst for market moves. So, don’t get too cozy under that umbrella, or if you do, at least make sure your phone is fully charged.  

We have spilled some ink on these pages lamenting how the biotech, more specifically, the small-cap biotechs, have continually shown good relative strength while also being somewhat recession-proof. They are speculative by nature which helps when the “risk on” crowd starts to show themselves. Attempting to sort through the winners and losers of small caps biotechs is a tough business. Some are very good at it despite the occasional landmines one is. sure to step on.  

For our style, we are more inclined to use an ETF basket to garner exposure. It mitigates the disaster exposure to a failed drug trial and trades in a much more predictable fashion. Our  preferred ETF is the small-cap SPDR (symbol: XBI).  

It’s a key sector to watch just to gauge the level of risk investors are willing to accept and just. how confident they are about the markets. A Rorschach test proxy, if you will.  

Chairman Powell and the merry Fed raised rates by 0.75 basis points on the 27th – as was. expected. The commentary, as always now, was much more important and has a much more mmarket-movingimpact. So, with that, Chairman Powell mentioned some economic slowing and a  tightening consumer and said that the Fed would rely on economic data going forward. He also reiterated that the quantitative tightening program will continue.  

“We are now at levels broadly in line with our estimates of neutral interest rates, and after  front-loading our hiking cycle until now we will be much more data dependent going forward’’  – Chairman Powell, 7/27


Nothing surprising in any of that. But, markets, mainly equities, got excited over the. commentary because Powell stated the economy may slow enough (think Walmart and Best Buy. warnings this month) that there wouldn’t be the need for another large hike. 

This is considered (somewhat) dovish and is construed by the markets that Chairman Powell is. aware of a softening economy and is not hell-bent on raising rates regardless. As he has. somewhat alluded to in the past. Also, that is now 150bps of tightening within 90 days and  225bps this year by the Fed and it appears they are no longer behind the curve. So, some fee that the big hammer has been dropped, and from here on out it will be more tactical and uber data dependent.  

But, and there’s always a but. Chairman Powell was very adamant about taking down inflati. and even mentioned lower-income families unable to afford the same groceries they could a year ago. and how unacceptable it is. So, as much as bullish market participants want to believe we are now on pause or dovish; there is no doubt another spike in commodities and CPI, PPI, and PCE  readings will push that narrative aside and bring back the sledgehammer.  

“We’re going to do everything we can to avoid a recession, but we are committed to bringing. inflation down, and we are going to do what we need to do. We are a long way away. achieving an economy that is back at 2% inflation. And that’s where we need to get to.” – Neel  Kashkari, Minneapolis Fed President, 7/29 

In conclusion, there was something for everyone on July 27th. Dovish tint for sure, but with a dash of inflation fear that will supersede all. One noteworthy development: it is starting to appear that  Mr. Powell is gaining more respect amongst market participants and institutional investors.  Maybe that is partly reflected in the ongoing dollar strength. Regardless, the more respect he garners the less violent reactions we will see from his decisions.  

Also, the Fed Funds are now at a neutral rate, which is what the Fed wanted. So you can check. the the the the box as well.  

CME Fed Funds Futures are now pricing in an 80% chance for a 50bps hike in September, and ere’s only a 53% chance that we will only see another 3 rate hikes in 2022. 

The Eurodollar futures and Fed Fund Futures are both pricing in rate cuts in 2023. Adding to the. dovish tone initiated after the Powell press conference.  

That’s a good thing for the markets and was reflected in the 1.5% rise in the SP-500 in the 2.5  days preceding the meeting. Bond yields are now well back below the 3% bogey and are flirting. with 2.5% on the 10-year yield.  

OPEC will hold another meeting on August 3rd and will determine whether or not to change the  September output. It’s a shame we are still so reliant on OPEC these days, but with inflation in. the crosshairs and energy being the biggest input, we unfortunately are still beholden to them meetings. 


Headlines are starting to trickle in with layoff announcements. Netflix, Shopify, Coinbase,  Oracle, and Google are freezing hiring (after hiring 10k new employees in Q2), and Facebook is cutting some jobs literally saying, “we don’t need you here anymore”.  

That is just a sampling from the local tech world. But as much as you never want to hear that people are losing their jobs, we have to wonder if these companies are using the wonky current economic environment as an excuse to trim some fat; they probably would secretly admit that. they weren’t thrilled about hiring but had to stick with the “growth by any means” that mantra. investors have clamored for.  

Also, the job market remains firm, and unemployment is still at 4% (ish). There is a big. difference between a Google programmer and a Delta bag handler in regard to availability, but the overriding point here is we have never entered a recession with the unemployment rate this low – ever. Also, we have never not entered a recession when the Fed begins to aggressively raise rates.  

So, kids, take those Econ 101 textbooks and market history almanacs straight to the virtual trash cans on the bottom right of your screens. This isn’t your grandpa’s market or economy anymore and it never will be again. Adapt and adjust.  

Finally, Amazon made an interesting acquisition this month, paying $3.9 billion for One Medical  Group. The San Francisco-based medical clinic that promotes technology as a way to expedite care and lessen the need for physical visits had 180 offices in 25 regions (mostly western US) but was never profitable and reported a $250 million dollar loss last quarter.  

It’s obvious that Amazon (and others) want to disrupt the $320 billion health care industry. Mark Cuban’s attempt to lower prescription drug costs via his venture is another good example.  

If there was ever an industry that needed disruption, it’s healthcare. One out of five Americans is satisfied with his or her current healthcare.  

It’s complicated, expensive, and seemingly changes constantly without your consent. The  pricing isn’t competitive and inflationary for sure; (when’s the last time your premiums dropped? Never?) In today’s ultra-tech culture, it sure seems antiquated to sit in a waiting room and fill out. the same 11-page questionnaire you did 8-days ago, then wait for 45-minutes to see an overworked. doctor for 7-minutes to get some antibiotics for your earache. (Yes, we concede a surgery or  serious illness diagnosis doesn’t lend itself to telehealth, but eliminating/simplifying standard  visits would free up space and time for those with serious ailments)  

Teladoc has made a noble attempt to change this and is the frontrunner in telehealth, although the stock has been absolutely blistered in 2022, it has gained traction during the lockdowns of the. pandemic and is slowly changing the way we view doctor visits. One Medical is/was on the same path. But both are woefully unprofitable. 


Maybe it’s time for the ultra-deep pocketed players like Amazon, Apple (iWatch with health. data), and even Google (23 and Me) to throw their spare billions at this industry and finally create an efficient (cheaper?) way to solve our national nightmare with a 20% approval rating.  

There are data privacy concerns, there always are, but haven’t we conceded that that ship has? already sailed (do you scroll Instagram)? Imagine having some of the brightest minds with unlimited budgets working full-time on converting our healthcare system into an efficient well-oiled machine.  

We are rooting for Amazon and Apple and Mark Cuban. The pandemic unfortunately has shone. a spotlight on how dark and archaic our healthcare system is.  

If we can disrupt taxis and grocery shopping, there’s no reason we can’t at least improve the way we mend our bodies and lower the exorbitant drug and visitation costs.