EQT Corp Finished Up 49.1% Last Week

The largest natural gas producer in the United States had a remarkable week in the middle of market turmoil.

For the week, with the S&P 500 Index (SPY) down 9.5%, EQT Corp (EQT) rose 49.1% for the week.

Natural gas (UNG) prices also rose 9.4% for the week.

Meanwhile, oil prices (USO) declined 23.1% for the week.

Bigger picture, price action is telling us that major inflection points are at hand. Best of luck to all.

Volatility Is Above 2008 High Levels As Dow Jones Industrial Average Has 2nd Worst Percentage Decline

Volatility Index Sets New Highs

This is just a short post to document something remarkable.

Volatility is actually above 2008’s high levels.

With the Dow Jones Industrial Average (DIA) posting is second worst percentage decline ever, and a cluster of recent days on the worst performing days list, perhaps the jump in volatility amid the COVID-19 pandemic should not be a surpise.

Adding to the narrative, the S&P 500 Index (SPY) posted its third worst percentage decline day ever.

Ultimately, volatility is opportunity, and this elevated volatility will not be around forever. Thus, I think market participants should be making their shopping lists for what to own on the long side.

The Signal Event Is Potentially Here

I originally wrote this Monday morning, February 24th, before the market opened here, however, I want to post here for archives.

The Signal Event Is Potentially Here

Feb. 24, 2020 7:08 AM ET|2 comments |About: SPDR S&P 500 Trust ETF (SPY), Includes: AAPLAMZNBACBAC.PABAC.PBBAC.PCBAC.PEBAC.PKBAC.PLBAC.PMBML.PGBML.PHBML.PJBML.PLBRK.ABRK.BCC.PKC.PSCMCSACPRJCVXDISFBGOOGGOOGLHDINTCJNJJPMJPM.PCJPM.PDJPM.PFJPM.PGJPM.PHKOMAMRKMSFTOPEPPGQQQTTBBTBCUNHVZXOM

Summary

  • I have been waiting for a long time for a set of events to end the virtuous melt-up, fueled by passive and ETF fund flows.
  • Coronavirus could be the black swan that causes a reversal of these fund flows.
  • Non-correlated equities with low index representation stand to benefit disproportionately.

Introduction

We are potentially on the verge of an historic capital rotation from growth to value, sparked by black swan catalysts that nobody envisioned a short time ago.

Building on this narrative, on February 6th, 2018, I wrote one of my most popular articles published on Seeking Alpha titled, “Be Prepared For A Crash – Part II“, and in the article, I specifically investigated the lack of price discovery in the markets, as passive, ETF, and dividend growth fund flows were largely price insensitive and valuation insensitive in their endless buying.

Today, that virtuous, seemingly never ending cycle has the potential to work in reverse fashion.  In Steven Bregman’s words, all that was needed was a signal event to jump start a golden age for active investors, and we may have one transpiring in real time. 

The Signal Event Could Be Happening Right Now

In a September 21st, 2017 article I authored for members of The Contrarian, titled, “Investment Philosophy – A Golden Age For Active Investors Awaits“, I pontificated on how there was very little price discovery in the market.

To illustrate this point, I referenced several quotes from Steven Bregman, president and co-founder of Horizon Kinectics, who presented at James Grant’s October 4th, 2016 Investment Conference.

Here is the first set of quotes I referenced:

“A golden age of active investment management awaits only one signal event, Steven Bregman, president and co-founder of Horizon Kinetics, told the Grant’s conference-comers on Oct. 4. A collapse of the index/ETF bubble is that intervening disaster. To hear Bregman tell it, no crash would be so well-deserved

He called the exchange-traded fund excrescence the world’s biggest bubble.

“It has distorted clearing prices in every sort of financial asset in every corner of the globe…,” asserted Bregman. “[I]t has created a massive systemic risk to which everyone who believes they are well diversified in the conventional sense are now exposed.”

I could not agree more with the statement quoted above, and these price distortions have increased at an exponential rate from 2017-2019, and early into 2020, as crowded trades have become more crowded.

Conversely, the “Have Not” equities have been shunned to an even further degree, creating the most bifurcated market that I have seen in my 25 plus years actively investing and speculating.

A Historic Capital Rotation Is On The Horizon

Once passive, ETF, and index fund flows reverse, the disproportionately beneficiary equities, think the leading market capitalization index favorites, are going to be the equities that are hurt most by the reversal of fund flows.  Conversely, out-of-favor equities that have been shunned, will actually benefit, as long/short funds reduce gross market exposure, and net buying, at least net relative buying will head to these equities.

On this note, here are the 25 largest components of the SPDR S&P 500 Index ETF (SPY), which have all been buoyed by never ending passive fund flows.

  1. Microsoft (MSFT) – 5.0% weighting
  2. Apple (AAPL) – 4.8% weighting
  3. Amazon (AMZN) – 3.2% weighting
  4. Facebook (FB) – 1.8% weighting
  5. Alphabet Inc. Class A (GOOGL) – 1.6 % weighting
  6. Alphabet Inc. Class C (GOOG) – 1.6% weighting
  7. Berkshire Hathaway Inc. Class B (BRK.B) – 1.6% weighting
  8. JPMorgan Chase & Co. (JPM) – 1.5% weighting
  9. Johnson & Johnson (JNJ) – 1.4% weighting
  10. Visa Inc. Class A (C) – 1.3% weighting
  11. Procter & Gamble Company (PG) – 1.1% weighting
  12. Mastercard Incorporated Class A (MA) – 1.1% weighting
  13. UnitedHealth Group Incorporated (UNH) – 1.0% weighting
  14. Intel Corporation (INTC) – 1.0% weighting
  15. Bank of America Corp (BAC) – 1.0% weighting
  16. AT&T Inc. (T) – 1.0% weighting
  17. Home Depot Inc. (HD) – 1.0% weighting
  18. Exxon Mobil Corporation (XOM) – 0.9% weighting
  19. Walt Disney Company (DIS) – 0,9% weighting
  20. Verizon Communications Inc. (VZ) – 0.9% weighting
  21. Coca-Cola Company (KO) – 0.8% weighting
  22. Merck & Co. Inc. (MRK) – 0.8% weighting
  23. Comcast Corporation Class A (CMCSA) – 0.7% weighting
  24. Chevron Corporation (CVX) – 0.7% weighting
  25. PepsiCo Inc. (PEP) – 0.7% weighting

Personally, I think the top weighted companies on this list, which dominate the S&P 500 Index, and the Invesco QQQ Trust ETF (QQQ), have a chance to sell-off dramatically, if a true capital rotation takes hold from growth to value.

Given the current extended levels of growth versus value, there is a ripe opportunity for an epic price reversal.

Looking at the above, look how steep the price reversal was in 2000-2002, with the growth to value relationship reversing on a dime, and moving straight in the other direction.

Could the same thing happen today?

Yes, is my unequivocal answer, partly because the in-favor investment strategies and trades, think passive, ETF, and dividend growth fund flows, are even more popular today on a relative basis than they were in the late 1990’s, as almost every registered investment advisor in the U.S. has shifted to some form of passive indexing.

Wrapping up, coming from a value investment background, I have seen many of my peers ground to dust, and legendary value investors essentially take their ball and go home. Personally, I have more significant scars from this time frame than any other.

The collective price action and collective investor response is very reminiscent of Julian Robertson closing his Tiger Funds near the exact peak of the 1990-2000 bubble, an investment landscape that had seen Warren Buffett routinely criticized. Of course, this was followed by a massive reversion-to-the-mean trade from 2000-2002, and really 2000-2007, where value investing handily outperformed.

Building on this narrative, during 2000-2002, the S&P 500 Index lost roughly 50% from peak-to-trough, while many value stocks, including REITs, like Realty Income (O), which was loathed at the time, but loved today after roughly two decades of out-performance, surged higher, even with the broader market struggling mightily.

With that last thought in mind, consider what investments are loathed, and loved, today.

In closing, for the value investors that are left today, the odds seem insurmountable, however, the opportunities, particularly on a relative basis, are as big as they have ever been.

To get an idea of how I am positioning for this opportunity, since we are past there, in my opinion, I am offering a 20% discount to membership (I am extending this through February) to “The Contrarian” (past members can also direct message me for a special rate), the lowest price point since the founding members price, where we have a live documented history dating back to late 2015..

Additionally, I am offering a limited time 40% discount for the first 5 new members, repeating a successful promotion from earlier this month (I expect these slots, some of which I view as a stepping stone to “The Contrarian”, to fill up fast as they have done previously) to a host of research options, including a lower price point. To get this offer, go here, and enter coupon code “february 2020” without the quotes.

Reach out with any questions via direct message.

Via my research services, or another avenue, please do your due diligence, and take advantage of what I believe is a historic inflection point,

WTK

P.S. Resilience is perhaps the most important ingredient to be successful in life, and in the markets. Keep that in mind right now.

Disclosure: I am/we are long BAC, C, xom, and short AAPL via put options and spy in a long/short portfolio.

Additional disclosure: Every investor’s situation is different. Positions can change at any time without warning. Please do your own due diligence and consult with your financial advisor, if you have one, before making any investment decisions. The author is not acting in an investment adviser capacity. The author’s opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

How Low Can U.S. Interest Rates Go?

As coronavirus fears spread, potentially triggering the signal event that ends the seemingly never ending, passive fueled price insensitive and valuation insensitive buying binge, how low can U.S. long-term interest rates go?

U.S. longer-term interest rates seem to already be pricing in a worst case, low growth, low inflation environment forever scenario.

Said another way, maybe the market is not prepared for a different investment landscape developing.

Everything Is A Function Of Interest Rates

We have clearly followed the path of the classic bubble that GMO laid out in 2008 for the S&P 500 Index ($SPX), (SPY), which is shown below.

The timeline has been slightly different, I call it an extended classic bubble, the slower ride to the final destination. Regardless of the course, we are here now.

The key question is where do we go from here, and the answer, from my perspective, is all a function of interest rates, particularly longer-term sovereign interest rates. With the yield curve close to inverting again, and two Fed Funds rates cuts priced in right now as of this writing (February 21st, 2020) through the December 2020 FOMC meeting, a lot of pessimism is priced in.

Additionally, sovereign interest rates are so low, the question needs to be asked, “How much could they go down in the next recession?”

Last, but not least, what if a recession is averted, or we experience a mild recession, similar to what happened in the midst of the 2000-2002 bear market. On this note, the current investment landscape reminds me an awful lot of late 1999/early 2000, with the moonshot blow-off in Tesla ($TSLA), and the greater concentration in the top-five S&P 500 names ($SPY), which are Apple ($AAPL), Microsoft ($MSFT), Alphabet ($GOOGL), ($GOOG), Amazon ($AMZN), and Facebook ($FB) than in late 1999/early 2000.

We all know how that story ended, however, almost all market participants have forgotten that 2000-2002 time frame, hyper-focused on a fear of a reprisal of 2007-2009, which has led us to where we are today.

And where is that, you may ask?

The answer is that we are on the cusp of a historical capital rotation. Stay tuned.

Quality Over All

Earlier today, a public article I posted about Antero Resources (AR) was published on Seeking Alpha. You can find it under this title & link, “Antero Resources Is A Generational Buy: Dispelling The Myth Of Antero As A High-Cost Producer“. While writing this article, and spending a lot of time researching commodity equities, and more specifically energy equities the past 5 years, really the past 7 years, that has snowballed to an almost obsession now, due to the inherent undervaluations, I have slowly worked to the conclusion that most market participants have become over obsessed with quality and/or perceived quality.

What do I mean by this?

In the case of Antero, almost all long/short fund managers I know, are long Cabot Oil & Gas, and short Antero. The relentless price action in favor of this trade, has essentially eradicated valuation sensitive and price sensitive money out the door.

Building on this narrative, the Darwinian survival funnel of the markets, has led almost all investors to the same securities the past decade, a ending place where quality and dividends are praised above all, and the perceived quality, and sustainability of dividend growth, and/or yield is worshiped.

The end result of this process is a bubble that is bigger than the late 1990’s bubble, more pervasive, and more driven by longer-term sovereign interest rates than anything else.

Wilshire 5000 Version

Looking back to 2018, GMO laid out a path for a classic bubble for the S&P 500 Index (SPY), and we are there, as the following graphic illustrates.

Looking at the above, once we peak, and roll-over, the path is frightening, something many market participants have some how forgotten following 2007-2009, and 2000-2002.

Really, though, it is worse than that, as yield-oriented investors have been pushed out the risk curve, and the perceived quality equities, namely the dividend payers, have become essentially the longest duration bonds.

I wrote about this with my Procter & Gamble (PG) public article, titled, “Procter & Gamble Is Historically Overpriced.”

Jumping straight to the punch line, what happens when almost all market participants embrace quality, perceived quality, and are piled into essentially the longest duration assets, chasing yield, when longer-term interest rates rise?

Who is prepared for this?

Will this lead to the historic bifurcation between the “Have’s” and the “Have Not’s” being closed?

My vote is a resounding yes!

Who Would Buy A Ten-Year Treasury At A -0.71% Annual Interest Rate?

There is a bond bubble of epic proportions today. Nothing illustrates this bubble better than the German bond market, where the 10-Year German Treasury Yield is -0.71% annually.

Look at the above chart again, and think about the consequences. Who would buy a 10-Year Treasury, resigning themselves to an almost 3/4 percent nominal loss annually, which is amplified when measured in real terms?

We will revisit this question later in this post.

Building on the narrative above, there is over $16 trillion in negative yielding debt today, with negative yielding debt surpassing its previous 2016 high levels, so clearly there are a number of market participants who are currently willing to buy this negative yielding debt. From my perspective, these are mostly traders, who are flipping the bonds to the next buyer (a classic symptom of a bubble), and forced investors who are required to match the duration of their assets to their liabilities (think pension plans).

Looking at past bubbles, the irrationality of price insensitive buyers is prevailing right now in the bond market, however this is a temporary phenomena, something that will dissipate when the bubble dissipates.

In the U.S., 10-Year Treasury Yields are not below their 2016 lows, at least as of this writing, however, 30-Year Treasury Yields have made new lows.

This has caused the iShares 20+ Year Bond ETF (TLT) to make new record highs, both on an adjusted, and un-adjusted basis.

As long-term interest rates cascade lower, and yield curves invert, central banks are ratcheting down their short-term interest rate expectations. On this note, look at the Fed Funds Futures Curve one month ago (in red in the chart below) versus today’s expectations (in blue in the chart below).

Short-term market projected interest rates are forecasting a steeper path downwards, mirroring the fall in longer-term interest rates, however this is happening as inflation readings, particularly the Median CPI (shown in yellow below), are at the highs of the current economic expansion in the U.S, and as the Citigroup Economic Surprise Index turns higher.

In summary, what happens when the Fed, and central banks ease into a cyclical upturn with bond prices at record highs?

We are about to find out, and if you have ridden this bond bubble, or have ridden some of the investments that have benefited from the bond bubble, specifically REITs (VNQ), (IYR), utilities (XLU), and the perceived higher quality investments, think stocks like Coca-Cola (KO), McDonald’s (MCD), and Procter & Gamble (PG), which have all levitated higher as interest rates have ratcheted lower, you should be thinking about your exit points, in my opinion.

Closing Thoughts – An Epic Bond Bubble With Sentiment At Extremes

The bond market is at the tail-end of a blow-off bubble, from my vantage point. Sentiment is extremely stretched today, rising to exceed previous highs, which is shown below with this chart from June of this year.

Image

Since June of 2019, daily sentiment readings have risen further, and bond bullishness regularly has exceeded the 2008 /2009 highs.

This bond bubble, is one of a series of bubbles today, which I noted in a recent article as follows:

“Respectfully, there are bubbles everywhere. Specifically in:

  1. Confidence in central banks.
  2. In bonds, with record bond ETF inflows near all-time price highs at the end of an almost 40 year bull market.
  3. In yield-oriented Investments as central banks have pushed investors out the risk curve.
  4. In growth stocks, which are the longest duration assets.
  5. In passive investments, which are price insensitive buyers.”

Wrapping up, and circling back to the earlier question in the article, specifically, “who is buying these negative yielding bonds today”, the answer is primarily speculators, and like past manias, those left holding the “hot potato” are going to get burned.

For a look at a different research approach, I am offering a 20% discount to membership to “The Contrarian” (past members can also direct message me for a special rate), the lowest price point since the founding members price, where we have a live documented history dating back to late 2015, including an updated valuation and price target list for over 103 targeted companies, including several companies that offer upside appreciation potential that rivals the best opportunities of late 2008/early 2009, in my opinion.

Additionally, I am offering a limited time 50% discount for research services on this site. To get this offer, go here, and enter coupon code “august”.

Reach out with any questions.

Via my research services, or another avenue, please do your due diligence, and take advantage of what I believe is a historic inflection point,

WTK

P.S. Resilience, which I have written about, and not getting caught in the herd today (trades are more crowded today than in 1999 or 2007 from my perspective) is paramount for the investment landscape ahead, in my opinion.

Disclosure: I short tlt via put options.

Additional disclosure: Every investor’s situation is different. Positions can change at any time without warning. Please do your own due diligence and consult with your financial advisor, if you have one, before making any investment decisions. The author is not acting in an investment adviser capacity. The author’s opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

TLT – Have We Finally Topped?

After rising for 24 of the past 33 weeks, and 12 of the past 16 weeks, the iShares 20+Year Treasury Bond ETF (TLT) made a new all-time, intraday high, before closing lower on Friday during the past week (and actually closing lower by a fraction for the week).

Bigger picture, TLT has been on a remarkable run, rising concurrently with the broader U.S. stock market (SPY), as inflation expectations have been in free fall.

Is this rise in the bond market overdone?

Yes, is the unequivocal answer, as there has been an amazing deterioration in both business confidence, and investor confidence.

Closing Thoughts – What Happens If Economic Data Turns Up

With four interest rates cuts priced into the fed fund futures market, including the growing probability of a 50 basis point cut at the July FOMC meeting, what happens if economic data strengthens, and both business confidence and investor confidence improve?

In this scenario, the bond market may have already priced in a future that is different from what actually happens, and this could be the trigger for a capital rotation bigger than the one that occurred from 2000-2002.

For a look at a different research approach, I am offering a 20% discount to membership to “The Contrarian“, the lowest price point since the founding members price, where we have a live documented history dating back to late 2015, including an updated valuation and price target list for over 103 targeted companies, including several companies that offer upside appreciation potential that rivals the best opportunities of late 2008/early 2009, in my opinion.

Additionally, I am offering a limited time 50% discount to a host of research options through this site, including a lower price point option.   To get this offer, go here, and enter coupon code “june 22”.

Reach out with any questions via direct message (for members here, I have a couple articles that I will post later this weekend).

Via my research services, or another avenue, please do your due diligence, and take advantage of what I believe is a historic inflection point,

WTK

P.S. Heading out to Costco (COST) with family/kids, and then some errands, so if you sign up or message, I will get back to you later this afternoon/evening.

The Opportunity Keeps Getting Better

Summary

  • Investors are crowded into the same investment strategies, sectors, and individual equities, prodded & encouraged by central banks since the GFC.
  • Almost all investors are positioned for the same outcome, which is either an eventual recession, or the lower for longer narrative prevailing.
  • These anticipated certainties are why there are so many historic price dislocations today.

At the height of the prevailing bearishness in December of 2018, I was very bullish, writing privately for members of my research services, and publicly with articles such as, “Is Everyone Bearish“, and “2019 Is Going To Be A Banner Year For Value Equities“, which were both published on December 21st, 2018.

Looking back, this bullish stance was partially correct thus far, with the S&P 500 Index, as measured by the SPDR S&P 500 ETF (SPY), up 17.8% year-to-date in 2019 through April 29th, 2019, and targeted undervalued equities, like Chesapeake Energy (CHK), up 40% YTD in 2019, even after its recent pullback.

However, my bigger picture investment thesis, which has focused on the equities that are unloved, under-owned, and out-of-favor, articulated in articles like this one, “Everyone Owns The Same Stocks“, and with “Economic Growth Has Already Bottomed“, has only partially been embraced, as almost all investors expect either a recession over the next 2 years, or a continuation of the “lower for longer” narrative that currently has a python grip around the financial markets.

The surprise first quarter 2019 U.S. GDP reading of 3.2%, which came in far above consensus expectations, and the recent stronger economic data out of China, have done little to change the prevailing sentiment.

Put simply, almost everyone remains skeptical that any cyclical upturn in global growth expectations will have any staying power.

This sentiment, and the tendency of market participants to embrace what is working, has caused some historic price dislocations, such as the relative performance of commodities versus the S&P 500 Index.

Look at that chart above!

If you thought commodities were undervalued in the late 1990’s, the dislocation since 2011 has resulted in 100-year relative valuation levels being tested.

In summary, if you, like me, wish you could go back a decade ago in time(members of The Contrarian can read this last link), similar to Disneys’ (DIS) new Avenger’s movie, and buy the disruptive growth businesses like Amazon (AMZN), Apple (AAPL), Alphabet (GOOGL), Netflix (NFLX), even Microsoft (MSFT), and reap compounding returns that turned out to be hard to believe, I think a similar sized opportunity exists today. 

This time, from my perspective, the opportunity is in economically sensitive equities, some of which own tier 1, irreplaceable assets.

Sign Up For A Limited Opportunity

I am very excited about the year ahead, and I want to recruit as many members to my investment research services as possible.

To provide incentive, I have enabled a 20% price discount on memberships to The Contrarian, (founding members still have a lower price, but this is the lowest price offered in a long time) where we have a live history that actually captured the past significant inflection point in 2016.

I am also offering a very well received more traditional research newslettera stepping stone to The Contrarian, featuring direct email reports, with an introductory price of $250 for the first 10 subscribers that use the coupon code “half off”, which is 50% off the current annual rate, which will rise at the end of 2019. For access to that, sign up here.

Wrapping up, looking forward, instead of looking in the rear view mirror, is very important in life, and in the investment markets.

Disclosure: I am/we are long CHK, positions in the contrarian portfolios, and short spy as a market hedge.

Additional disclosure: Every investor’s situation is different. Positions can change at any time without warning. Please do your own due diligence and consult with your financial advisor, if you have one, before making any investment decisions. The author is not acting in an investment adviser capacity. The author’s opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.