Market Minutes from the Boardroom

November 2021

Contributors: Colby McFadden, Justin Singletary, and Patrick Morehead

Things aren't always how they appear...

“Things are not always what they seem; the first appearance deceives many; the intelligence of a few perceives what has been carefully hidden.”

Phaedrus

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The Phaedrus, written by Plato is a dialogue between Socrates and Phaedrus discussing Love and whether it is a source of madness or divine power.  The story takes a few fun twists and turns that involve a Charioteer and a heavenly Olympian procession and eventually leads to a discussion between Socrates and Phaedrus about “rhetoric”.

Phaedrus argued, in the art of rhetoric, persuasion trumps truth.  Socrates challenged this argument by demonstrating the harmful influences of speaking without knowing the truth.

It’s a great story, you can catch the reader's digest version HERE.

The story of Phaedrus and how persuasion of the media can trump the truth comes to mind as we watch the current media frenzy around subjects like inflation, rising interest rates, high debt levels threatening the strength of the U.S. Dollar, the potential for a stock market or real estate market crash, and of course the illusionary vast riches being chased in crypto-assets and arcane investments like NFT’s and the metaverse.

But where is the truth in all of this, and what is just rhetoric?

In the spirit of Phaedrus, in this month's edition of From The Boardroom, we are going to let the charts do most of the talking as they have us thinking “things are not always as they may seem to be”.

Let’s get in our chariot and start our journey with where we ended our last From The BoardRoom, with the U.S. Dollar.

You may recall we shared this chart of the U.S. Dollar.

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Since then, the U.S. Dollar has broken above the noted red resistance level and currently looks like it is creating a base before its next move.

As you may see below, moving forward holding above the dotted and solid green lines is likely the first sign to watch over the next few weeks.  A break below those support areas would put what currently looks like a pattern of strength for the U.S. Dollar in question.

For now, the pattern looks constructive for further U.S. Dollar strength. Fundamentally, this would fit with the old adage of “don't always believe what you read” as I know many of you may be hearing a lot of rhetoric and fear-mongering about the fate of the U.S. Dollar.  Time will tell, but for now, these charts don’t seem to support the doomsday dollar storyline so many subscription writers are touting as a clever bait and click tactic.

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Since then, the U.S. Dollar has broken above the noted red resistance level and currently looks like it is creating a base before its next move.

The U.S. Dollar is the tail that wags the global liquidity dog.  A weaker dollar tends to help the earnings of multinational enterprises as well as emerging markets while also keeping the global finance wheels lubed and cranking smoothly via carry trades on currencies.  A stronger dollar tends to create headwinds for multiple market participants.

It’s also important to note a few fundamental timing items as well when it pertains to The Dollar.  With the Chinese real estate markets looking like they may have caught a version of financial Covid, we should expect additional Dollar demand as various Chinese entities may need to hoard dollars on their balance sheets as well as settle certain debts in dollars.  Add on top of that, the recent announcements of various Covid related lockdowns in Europe and the U.S. Dollar is looking like the tallest midget amongst the global currencies.

This is worth monitoring because too much dollar strength too fast can cause many risk markets to throw a fit and correct lower or worse - trade in a lethargic sideways pattern that muddles around like stagflation for an extended period of time.

Knowing what to look for in advance can help you optimize and adjust certain parts of your portfolio and possibly help you profit from time periods when changes in the U.S. Dollar cause a shift in market behavior.

Curious about how you may be able to profit from currency trends click here to start a conversation.

Stay tuned as we will make sure to update you on what happens next.  Until then, let’s move on to another marketplace where things don’t seem to be as they appear by listening to the rhetoric in the financial media. Interest Rates!

Interest Rates - Rising? Really?

What have you heard about the direction of interest rates? That they are headed higher?
Along with inflation? Right?

Well, as they say, sometimes a picture says a thousand words.  Here is a recent chart of the U.S. 10yr. Treasury Yield over the past 12 months.  Our long-time readers and followers will note that for many months our prognosis for interest rates (10yr) is that they will trade in a range between 1% and 1.75% until we have more information about the true health of the U.S. economy. Something we most likely won't have until all the water that is still moving around in global markets from Covid disruptions subsides, which is most likely going to be mid-2022.

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Only time will tell, but we do find it interesting how the market's rhetoric is so leaned in one direction and focused on rising rates when the charts don’t seem to support that storyline (doesn't mean they won't in the future).

Bottom line, rate-sensitive investments like treasury bonds, mortgage bonds, and certain sectors of real estate still look to have support from the interest rate market and may represent a fair risk-reward for growth and income to the right investor even though the rhetoric about rising rates would make you question that thought.

As an example here is a chart of one of our model holdings we think is worth watching the next few weeks, an ETF that attempts to track the price performance of the 20yr Treasury Bond market.  As a reminder, an asset like this should rise when interest rates decline and vice versa.

If you're interested in learning about more of our models please subscribe to be invited to our client and VIP events.

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We also feel it’s important to point out that in the midst of the recent media hype about higher interest rates that the yield curve has actually been flattening, which is a sign that the bond market is signaling it’s belief in a slower economy in six months which seems to be contrary to what other risk markets like the stock market seem to be pricing in.  The next move in rates will be important to watch as it will most likely give us a view of what cards the markets are holding and how investors can play the next hand over a longer period of time.

Now, let’s talk about the asset category that gets all the attention and glory.

The Equity Market

What a year it has been for equities since the Covid bottom.  In our last edition of From The Boardroom, we shared this chart and warned that markets were threatening their upward trend.

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Since that last view, the market has continued to play it’s version of “Fakey Breaky My Heart” after a headfake breakdown and reversal to rally back into a long term trend channel to set up what looks like a parabolic move to the upside.  The equity market truly looks like it wants to frustrate the maximum number of players with all this whipsawing of trend lines.  Here is an updated view.

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For any equity investors that may be new to investing, or for equity investors that are in the “Red Zone” aka may need some of your invested capital for a life change in the next 5-7 years, it’s important to keep in mind the big picture of where equity markets are relative to many metrics.  Here is a longer-term view we have been sharing for many years now.

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From this 10 year view of the SPX you can start to see how the last year has been a move that would fit the “parabolic” nature of an ending wave.  For those of you that have followed our past market cycle events, you will recognize our notations and wave counts, based on the evidence the market has presented to us we still believe the Covid bottom marked the end of Wave 4 that traded sideways for 2 years (that's what wave 4’s do) and the beginning of Wave 5 is underway and appears to be extending.  This is an important distinction because extending waves can have a tendency to snap back to the starting origin really quickly.  Not sure what we mean by waves?  Head over to Pretzel Charts to learn more: Investment Waves.  Jason and Pretzelcharts is a good friend we have worked with for over 12 years now and he does amazing work on a donations basis only!

Here is a bonus chart from our friends at www.mcm-ct.com which shows how the SPX is nearing the top of a 100-year trend channel.  How cool is that?  How often in life do you get to say you were invested during one of the greatest market touches in the past 100 years?

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Bottomline:  When it comes to the equity portion of a portfolio, focus on optimizing, not managing.  Also it would behove most investors to supplement diversification with a focus on correlation and making sure your diversification includes assets that don’t correlate with equities.  Lastly, don't be shy about taking profits and building up cash reserves.  Also, if you have an old 401(k) at a previous employer don’t leave it behind, markets move too fast to leave a good man behind, get it rolled over to an IRA so you can maximize your investment opportunities in the future.

As you may begin to see through the charts of these three major influencing asset classes that some markets seem to have taken Phaedrus’s argument about persuasion trumping truth to heart.  According to the charts, the next few months look to be very interesting and telling as it appears some new opportunities and trends are developing.

Let’s wrap things up with a conversation about the hot topic of the month - INFLATION.

Hearing a lot about inflation?  Hard not to considering it’s been advertised everywhere.

All this inflation talk has us thinking things like “Don't just protect your portfolio from inflation.  Profit from inflation!” So we thought we would share with you what we are watching as possible opportunities within the inflation story.

Gold - The go-to inflation asset preferred by 4 out of 5 Boomers 🙂

Gold represented by GLD looks as if it is finally going to make a decision.  The asset loved by Boomer inflation hounds looks poised to move lower or higher very soon.  Get ready as the break out of this pattern should be a big tell on whether investors should be buyers or sellers of the shiny metal over the next few months.

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We often joke that if you want to profit from inflation then invest in the companies that are screwing you through inflation.  Like food and energy companies.

Here is a chart of the Energy sector to keep on your radar.

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And Natural Gas, don't those electric gadgets and vehicles need energy?

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And to help offset the extra money we are spending on food here is one for Agriculture. Sidenote: If you are curious to know more about the bull market in Ag Tech take a look at our Ag Tech resource page.

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Also, keep in mind potential investors with the right risk metrics looking to benefit from times of inflation may also want to consider doing some research on non-liquid or private alternatives.  These noncorrelated sectors can provide exposure to alternative assets like apartments, senior housing, or essential food establishments to name just a few.  Patrick, our resident alternatives expert can give you more guidance if you are curious about how to add noncorrelating alternatives to your portfolio.

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Until next time take care and have a wonderful Thanksgiving!

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