Back to Work
Posted on Sunday, August 29th, 2021
Our son’s first week living away from us at college is in the books. He did really well. For those of you that don’t know our son he is the quiet one. He is very sensitive and shy but deeply cares about others and is quite reserved. Before he left he asked for my best advice when going to college. I told him to be himself and get out and meet people. So, being the good son that he is, on the way to breakfast the very first morning of classes he found himself standing next to a young man in the crosswalk. He said hello and asked him how he was doing. The young man’s reply, “I’m soooo hung over.” Welcome to college.
We got through the Jackson Hole meeting as the market found Mr. Powell’s remarks to be quite dovish. The sand pile continues to build with additional grains of sand to be found in the upcoming debt ceiling negotiations in Congress, August payrolls, Federal Reserve Taper Talk and the Delta variant. Remember, it isn’t about the grains of sand so much as it is about liquidity and investors positioning. Stability breeds instability. This steady climb foreshadows a fragility shock. Our caution signs are on yellow. There are several large strategy types on the street and the most important may be vol control. These investors strategy is to sell volatility. Every time the market goes down – the price of volatility rises. They then sell vol as prices are high which sends the price of vol down and helps put a floor under stock prices. A stable market gives them the confidence to impart their strategy. Some would say it is like picking up pennies in front of a steamroller. At some point the vol control group is going to be wrong. Spectacularly wrong. That is when the sand pile collapses. Stability breeds instability.
We made good money on Friday. We say that not to brag but as a trading signal –a wakeup call if you will. All summer long we have had days where we make really good money and then the next day we give it all back. We have been overweight energy and financials. The energy sector was up over 7% on Friday. It’s biggest gain since May. The energy sector, in particular, has been a bit of a hot mess all summer. If, tomorrow, we hold those gains then something has changed. The hot mess of energy and the entire “back to work” trade may be resolving itself higher. Helping energy along was the rise in inflation indicator – PCE – which rose to its highest level since 1983. We do not think inflation is transitory. The bigger question may be, Can the economy keep growing to avoid stagflation?
We warned that the summer would be like a rollercoaster and it has been for most stocks. Is the “back to work” trade coming back to life? We think it may very well be and Monday will go a long way to telling us if we need to be taking more risk and where to take that risk. Things are changing. Most have been looking for a selloff. We may get a melt up in “back to work” stocks first.
I think we aspire less to foresee the future and more to be a great contingency planner… you can respond very fast to what’s happening because you thought through all the possibilities, – Lloyd Blankfein
A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill
To learn more about us and Blackthorn Asset Management LLC visit our website at www.BlackthornAsset.com .
Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor.