Lucky
Posted on Sunday, February 12th, 2023
We went out to dinner in mid-town Atlanta this week. While that might not seem like a big deal to you, in 15 years, it is probably our 2nd time out in the big city. Mom was in town and my daughter had a big week at work, so we went out to celebrate. As we sat deliberating the menu, I realized how lucky I am. I was sitting at this wonderful restaurant with the three most important women in my life. Three generations of smart, beautiful women. I’m one lucky guy.
We have always believed that the bond market is a leading indicator for the stock market. Changes in the bond market tend to precede and forecast changes in the stock market. Or as we see it – the bond market is like the stock market’s smarter, older brother. Changes in the bond market reflect changes in interest rates, inflation expectations, and overall economic conditions, all of which have a significant impact on the stock market. When interest rates rise, for example, it becomes more expensive for companies to borrow money, which can negatively impact their earnings and stock prices. This week we saw a bit of a dislocation in the bond/stock market relationship. The bond market is not buying what the stock market is selling. Corporate bonds and high yields have begun to struggle and diverge from the northern trajectory of the stock market. When the bond market diverges with the stock market, we go with the bond market.
We spent the week going through a mountain of research. We were inundated with a plethora of soaring asset prices followed by a sharp fall and a subsequent rebound. Lumber – Used Cars – Eggs – Orange Juice. The whole world during COVID was doing the same thing at the same time. Government after government also did the same thing – shove money into people’s hands. There is too much money in the system and the Federal Reserve needs to get it out. Inflation is going to come in waves. This is just wave #1. It will take years to normalize policy. Next week is a big week as inflation data is coming out and we have an options expiration at the end of the week. This week will go a long way to determining the direction for the rest of the quarter.
The pain trade might be lower now. The positioning that pushed markets higher at the dawn of 2023 has now flipped. CTA’s and systemic strategies are now long. Shorts have covered, and retail has bought in. If the market were to turn down the CTA’s and systematic strategies would all flip on a dime and begin to chase markets lower. If we head higher, it should be more controlled. The pain trade is lower. There are concerns in the market that Adani Group (until November it was the largest company in India) has liquidity issues. Another company fighting those rumors is Credit Suisse – the 2nd largest bank in Switzerland. Interest rates are rising. That is like the tide going out. We might be about to find out that some have been swimming naked.
“Short term volatility is greatest at turning points and diminishes as a trend becomes established.”– George Soros
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.