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One Eyed Deer - 18th October 2023

War footing?


Geopolitical activity is never easy to trade, and we certainly don’t feel as if we are adding value attempting to tell other people how to trade it.


Friday’s action was certainly a response to the idea that anything could happen once the 24 hour deadline to evacuate was up. VIX up, metals up, equity markets down. Those were not surprising moves. If the situation remains as is in the next few days these moves will reverse somewhat.


Regardless of the outcomes in various theaters, the size of the global debt burden (US debt now $100,000 per citizen!) is not reducing, and neither is the cost of funding it. Bond and credit markets remain extremely tenuous and unrealised losses remain generationally enormous.


Case in point is Bank of America, their (unrealised) losses on the ‘Hold to Maturity’ treasuries has exploded in the last two quarters from $5b to $131b! Tangible common equity is $189b.



Is the Gold price action a strong rejection of the low?


Well, given the political environment, not really. A lot of energy has been spent, and the price is right in the middle of a three year range.


We have liked gold and gold miners for quite a while and have lightened up (as noted previously) over the last week or so as one of the best charts I have seen during my career begins to look a little compromised.


When faced with new information I will always be open to the idea of changing my mind. Persistent strong rates are going to dull gold’s allure. If bond markets remain weak, then rates will print nominally ever higher and simply make it harder and harder to be overweight metals.


I would still hold insurance-level amounts, but we have been extremely overweight.

 

Where will the big money flow?

I keep returning to the bond markets as the most probable venue for the biggest dislocations. The possible capitulation of the global bond and credit markets will be in the size of nations.


What would such a capitulation look like?

Technically, the TLT chart could be in the midst of capitulation right now. The first chart below indicates a clear, almost vertical move downward with accompanying explosion in volume.

 


The orange overlay is the Fed balance sheet. Consider the size of the collapse so far in the value of the bonds, compared to the token reduction in the balance sheet. This market capitulates when it realises the Fed can’t do anything even if it wanted to. Imagine the downforce on those bond valuations if the Fed BS were to shrink to a paltry $5T.


The issue with calling this a capitulatory bottom, however, shows up in the next chart. TLT again with my old favourite MACD indicator.



MACD hasn’t long turned down, and to call it a real buy, would need to look more like my finger-painted artwork added on the end in orange.


Keep in mind, too, the record TLT bought call position that is picking this very bottom along with you should you go there. I think we will be sizing up some 70 strike puts to sell as the fund pukes into the mid 70s.


High debt load shorts.


Speaking of selling, we have been looking around at stocks that have gorged themselves on debt at insanely low rates, that won’t be able to roll said debt when it matures. Let’s say hello to Harley Davidson (HOG).


HOG has $5.5B of net debt. HOG claims in its accounts an annual interest expense on that debt of $31M (and has for seven years running). That is a very comfortable rate of 0.56%. HOG has had average annual net income for the last seven years of $508M.


You see where I’m going with this?


The realistic cost of funding that debt is now $300M. Roast pork, anyone? 



HOG has flirted with bankruptcy in previous consumer downturns, all WITHOUT the burden of funding costs. This time around I’m afraid a visit to the woodshed is waiting.


The stock sits on an enormous technical level with earnings released on October 26. I doubt they will admit openly to what lies ahead, but it will be interesting if their debt portfolio starts to show signs of debt service lifting off that magical $31M mark. Short here with a target of $10-$0.



Trade/Position Summary


One-eyed deer: Gold/Silver ratio (sell) @85 and still one of our biggest positions.

Runner up: Short HOG.

Honourable mentions: Continue to fade index strength. Sell TLT puts into any puke.



Wrapping up.


The foundation of our market dynamic will be the same for the near term. We are unwinding four decades of monetary malpractice.


Zombie corporations will implode, pension funds will need to reset, short squeezes will be immense, most participants in most markets, be they bulls OR bears, will suffer pain.


That is the definition of a bear market..bring the most pain to the most people.


For this week though, consider looking through politics and into the void of unrollable debt, and the cliff that is its imminent maturity.


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