Green Fever

A new pandemic is threatening to bump COVID 19 as the top news story of the year. Climate change commentary has now reached a fever pitch in the media. Infected by the news, investors are chasing their favourite stock plays with a vengeance. Green Fever has once again broken out on Wall Street.

World Leaders now participating in the COP2020 are each desperately trying to outdo each other with the size of their green agendas (I'll show you mine...). A climate policy arms-race has broken out replacing past vague promises of temperature controls targets. Caps on fossil fuel production, carbon taxes, subsidized electrification, methane curbs, and all manner of climate virtue-signaling moral suasion techniques are being employed in the battle. The question for investors is: How do I make money from it?

Apparently, you just buy Tesla and sit back.

Tesla Inc.

Even Elon Musk is surprised by the latest move in his stock, going so far as to deny the existence of a Hertz contract and downplaying its effect on the economics of his company. Never one to shy away from hyping his company - remember "funding secured" - he is suddenly disparaging the latest parabolic move. Although TSLA, the well-shorted bête noire of long-term patient investors, is gaining credibility for execution and financial performance, it remains massively overvalued. But it's the poster child for this market, reflecting the hypnotizing power over the progressives amongst the investment crowd of messianic futurists like Musk.

Too much money chasing too few things indeed! There is a relative scarcity of investment vehicles that are direct beneficiaries of the 'green future' that is inexorably advancing with every election, proxy vote, and climate conference. Last week, I mused that Elon Musk's net worth exceeded the market cap of Exxon and probably should. This week he talked about gifting some TSLA to fund the UN's hunger program. It would appear now that even he's a willing seller.

This whole situation smacks of past manias, all of which ended in tears. Opportunists like the start-up EV players are claiming the high ground, promoting their greenwashed goods. IPOs in the electric car space are sporting instant market caps rivaling incumbents like Ford and Volkswagen. Amazon-backed Rivian is just the latest over-hyped entrant. People are gleefully rushing to have their pockets picked by companies long on promise and short on results.

Remember Y2K? It came and went without a major hiccup because it was widely telegraphed. Unfortunately, the Internet Bubble that surrounded the hype did not end well. Narratives often take on a life of their own in advance of the actual event. But in that case, many fortunes were won and lost. Ultimately we got through it but it was a wild ride at the time.

In its noblest sense, the purpose of capitalism is to allocate scarce resources to their highest and best use. To that end, it seems the investment community is actually doing its job quite well. Fear and greed are at work, as always. The fear of being seen as being complicit in the climate crisis is driving divestment of fossil fuel stocks just as surely as greed is at play in the preposterously overvalued EV space. The market is working perfectly. Unfortunately, valuation is - pardon the pun - a plug variable when a faddish investment theme dominates the market narrative.

We are getting dangerously used to the word 'trillion' being bantered around lately. Whether it be the Fed's balance sheet, a policy initiative by the Democrats, or a Bro-Dude Billionaire, it's just a sign of the times.

Green Deal with it, I guess.

Risk Model: 3/5 - Risk On

Yeah risk on ... but just barely. The recent sharp run-up in the market averages, purportedly on the back of better than expected earnings, has generated an overbought condition that is disquietingly similar to last August. But with no negative catalysts in sight, it remains stubbornly elevated.

RSI and AAII Bull/Bear ratio readings are suddenly bearish after a brief positive set of readings. Volatility readings have quickly dropped to comfortable levels, but can be notoriously choppy during the Fall. The 200dma and the Copper/Gold ratio are close to reversing course and flashing sell signals. Cu/Au in particular is acting schizophrenically since the short squeeze on the copper market began in September. I don't trust it now that we have seen a pronounced deceleration in global growth since Q2.

The hype surrounding the use of copper for green energy is filtering into the speculative side of the market just as China is tamping down its economy in advance of the Winter Olympics in order to cleanse pollution. The weakening steel market over there is already signaling a major drop in industrial production forecasts. And with their property sector is still reeling from the Evergrande fall-out, I remain hesitant to blow the all-clear on a globally coordinated economic rebound just yet.

The flattening yield curve is also notable for its implicit lack of support for a cyclical rebound. Perversely, this is responsible for the complacent upward bias to the market recently. If anybody can jive a 1.5% ten year with the current ramp-up in inflation, a Fed QE exit, and a $1.5 Trn spending package from U.S Congress please call me right away.

It would seem that TINA has her spiked heel firmly on the neck of the Bears yet again.