Naughty & Nice

As we ended 2023, the jury was out on the U.S. economic soft landing. The Fed had mused about relaxing policy rates, but the debate raged. Your inveterate sage, still basking in the glow from the 'call' for a "Dimon Bottom" in October, was growing optimistic but short-term cautious as we entered the year.

So began a year of fighting the index tape. I was not inclined to buy a market that was being held together by seven stocks while the Fed dithered about when to cut. I'm used to broad markets with sustained periods of economic thematic rotation. It's how I learned the market back in the early '80s. I have news for you, Deck: rock bands that play instruments live, and broad markets are gone.

This year's market has been a case of too much money, having chased too few stocks - hence the Mag 7 dominance that still persists. The hoped-for 'breadth rotation' has remained elusive but is hopefully double bottoming. Until we get closer to the point of economic traction following the recent monetary stimulus. Stay tuned for that call in the new year.

But let's recap the good and bad from the year just past.

January - "Banks, Thanks"

I did vote in favour of the soft landing scenario, betting that a consumer balance sheet was in good shape and immune to the rate shock owing to locked-in mortgage rates. While perma-bears continued to warn us off, I bought risk assets, especially financials. I also accepted the notion that the secular bull that started in 2013 had resumed after the cyclical bear caused by the Covid episode ended. I also dumped on Tesla and lauded NVDA with mixed results.

February - "To Nvidia and Beyond"

My favourite blog title of the year. The best call of the month was for an economic soft landing and inflation bottoming above the Fed's hope cast of a 2% level. I was bulled-up on copper at $3.75/lb just before it rallied to $5+. A good move that didn't last long but was profitable.

March - "Sell the News", April "Cu Later"

The sell-off that was long in coming finally shaped up as investors chased a rally into month-end. It was an easy call as long-term rates had failed to drop as PE multiples raced higher. Add to that was the threat of a resurgent Donald Trump, and markets nose-dived into April. The contrarian in me loved pointing out the Economist magazine cover dissing copper just before a 30% rally!

May - June "Late Stage"

I spent most of the months of May and June railing against the narrowness of the market. I was in a sell-in-May and go-away mood. It wasn't a bad call in broad market terms. The equal-weighted market went sideways for most of the summer, but the MAG 7 raged on. The Copper trade was frothy, and I was looking to take profits at the slightest hint of weakness and did. I called for an NVDA top - a bit early but ultimately correct as it lost its leadership mid-year. Basically, I cashed out and stopped watching the market for a couple of months. I got stopped on my Tesla short as the FSD-hyped rally swamped the deteriorating fundamentals.

September - October "Crowded Trades"

Although the markets were making new highs on a rotation to interest sensitives, I fought the tape again. The concept of a soft landing was at odds with the 300 basis points of easing baked into the U.S. 10-year markets. I called them "highly vulnerable' at a 3.85% yield. Not a bad call at today's 4.60% level! I reasoned that the potential for an inflation expectation rebound would accompany the resurgence of Trump-o-comics should he win. Bingo! I also posited a rotation to global markets would emerge from the monetary easing by global central bankers. The jury is still out on that.

November - "Vox Populi, Vox Dei"

Although nauseating, the risk-on response to a resounding Trump victory was predictable. I argued not to fight this feeling as the madness of crowds was at work. However, that didn't remove my scepticism as I argued for caution following the outsized post-election rally. "Protection this cheap rarely lasts long." This was good advice, as the sharp sell-off in December and the VIX spike proved.

December "Sell on News"

After arguing for deploying some risk to India as a diversifier, I turned negative on the U.S. market. Despite AI partially writing the post last week, the "sell on news" advice contained in the "Risk Model' section was my own thinking - try doing that with an AI plug-in! It shows how far we need to go to have a robot that can out-think a grumpy old man with some experience.

Final Thoughts

My calls for the last 15 months were mostly spot on, especially in the bond market. I went long in October of last year, bought Financials in February, and traded the copper market well. I called the bond trade 'crowded' in September just before a 75 basis point back-up. I went with the flow for a short-term trade after the Trump victory rally and then turned bearish just before the reversal last week.

My bad call this year was incessantly railing against the Mag 7. Although decrying the narrow market was a popular opinion, it was also a drag on performance at the Index level. As I showed last week, the AI boom is real, and the sector's profits were surprisingly strong, validating their moves. I did, however, make up for it with the specific Copper, Air Canada and 'Banks Thanks' calls that all produced market-beating returns.

What a year it was! And more surprises are in store for us as we head into 2025. If you will indulge me, I hope to continue yelling at clouds for a few more years. If not, I can just send the email reminder to myself each week. As many of you know, I'm equally my best audience and harshest critic.

Cheers and Merry Christmas,

Bob.