Growth Scare

Stonks now stink. I just saw that on Reddit.

Not all corrections involve people fleeing in panic from an asset class en masse. Sometimes it is a violent rotational move that sees the water in the bathtub slosh from one side to another. So far, this is one of those times. But that could change quickly should bond yields get out of hand.

The light bulb has finally gone off over the heads of growth-crazed momentum traders - stocks can actually go down! I'll bet they didn't think that the price of copper would have such an outsized effect on their precious holdings. Investor preference is changing quickly in the face of rising expectations of a booming economy of the rapidly approaching post-pandemic future - as evidenced in the speculative fervor in the red metal. Concurrently, interest rate expectations have abruptly vaulted the word 'inflation' to the front of investors' minds, a space previously occupied by the words 'lower for longer'. Growth stocks, those with the highest pe multiples, are now under siege.

Apple, the most owned stock in the free world, is a perfect example. Not three weeks ago on the first $100Bn quarter in corporate history, the stock promptly reversed from an ATH (all time highs for you non-Redditers) and has since seen a correction of over 15%. I have always said that pe multiples are often ignored in favour of earnings when investors assess the merits of stocks. But pe ratios move far more rapidly and often due to forces that are exogenous to the company. Who knew that the prices of copper and Apple were inversely correlated? I suspect close readers of my blog had an inkling.

AAPL used to trade at 18-20X earnings, Lately it has been around 35X. It's still a great company, it just wasn't a great stock.

It gets tricky now. Fed Chairman Jerome Powell is testifying before Congress over the next two days and will likely stay on message - that the Fed is unfazed by the temporary nature of inflation and is unlikely to relent on their pledge to supply the market with unlimited liquidity. The 'goods' economy has been doing all the heavy lifting so far. Oil, Copper and Lumber prices are at lofty highs. That's all well and good for now, with a surplus in the labour market to fall back on to keep inflation at bay. But just look at what the most forward looking of indicators of the economy - the stock market - is saying. Labour is about to go 'bid'.

Airlines, Movie Theatres, Cruise Lines and Restaurants are all soaring. Investors aren't waiting for the BLS to validate a recovery in employment before placing their bets. Just the mention of the word "reopening" by Boris Johnson sent the shares of Easyjet soaring this morning. Shares of high-end restaurant chain, One Group Hospitality (STKS-below), has gone from the depths of near-bankruptcy last year, quintupling off the low. Soon hungry patrons will happily be ordering overpriced steaks and expensive wine. And their laid-off employees are getting their small black dresses and vests dry-cleaned as we speak.

ONE Hospitality Group

The second component to the inflationary surge, aided and abetted by the Fed and Congress, is shaping up in the labour market. A re-opening in the services segment will soon simultaneously combine with the second phase of economic stimulus to turbo-charge a massive snap-back in the labour market. If we have learned anything in the last 12 months, it is that people can adapt. The legions of laid-off restaurant workers have not just sat around collecting their government handouts. They are increasingly doing 'other things', like new careers, going back to school or just exiting the labour force. Are they all just patiently waiting by the phone? Sounds like a potential short-lived supply bottleneck to me. That can only lead to higher cost and potentially prices.

Inflation isn't a term that many younger players in the financial markets have any respect for. That probably comes from the long phase of low inflation, brought to us courtesy of technology and demographics. But now that the re-opening trade has taken over the mindset of investors, there is an old fashioned cost-push feel to the inflation that we have been seeing. And even if this is temporary, the generational low levels and emergency nature of the current rate structure doesn't jive with the narrative that is shaping up. The post-covid economy and its higher, "normal" rate structure is just around the corner.

The position taken by most reflects a muted response in the fixed income market - nobody is selling just yet. They are rotating - and fast! But I worry that expectations could run far ahead of the likely choppy restart of the economy. The rally in the 10 Yr yield from 1% to 1.5% is harmful only to the growth stocks - and not in a permanent way. But the next 100 bps is likely to scare the rest of the market, should it occur.

Copper prices are a perfect reflection of the rampant bullishness that accompanies the reopening trade. Metals prices have run up and and now well ahead of the actual improvement in demand from either a normal recovery in demand or any infrastructure spending from governments eager to 'stimulate' the economy. I have been a bull on the copper market since the lows last year. I have always said 'there isn't a lot of sub-$4 copper'. The problem is, now that we are above $4, and financial players are dominating the ownership of the CME contract, there is a potential overshoot in the short term. Seasonal factors argue for a March peak. It's time for taking profits.

The rally in the stock market is getting long in the tooth. And with the risk of a further surge in the 10 yr yield, the "copper top" to this recent rally may be close

Risk Model: 2/5 - Risk Off

We are getting a sell signal from my model just in time for the Fed discussions about the strength of the reopening economy. Anybody not worried about that, and its effect on bond yields just isn't paying attention. Powell better do a good job of hold the market's hand today.

The overbought market has been levitated by a seemingly benign rotation out of growth stocks into value and cyclical stocks. I got news for you, cyclicals are stocks too. Before I get more constructive on the broader market, I want to see a bit of profit-taking in the reopening trade.

The 3Mo VXV is trying to cross the signal line this morning as the tech wreck 2.0 is gaining steam. No market is immune to rising rates, and even the smallest move has begun to stress out the weak holders - Bitcoin, TSLA and even almighty AAPL are getting smoked. I recommend backing off the throttle here - even on the banks.