the independent economic & investment research here is focused on the medium-long term as compound interest naturally works, and a clear focus that’ll never change!

Nonetheless, there is also a dedicated section for ‘Special Situations’ where actionable short-term, tactical, trading setups or cheap hedges (risk management) will be outlined occasionally when the ebbs and flows of the financial markets offer it to us, and my research finds them. Naturally, these are tailored for the more active investor and/or speculator/trader.

Special situations can arise from any corner of the financial markets: any asset class, sub-asset class and any geography, simply put, the world is our oyster!

Report structure:

📊 Identifying the asset and mechanism

📊 Show me the evidence, research and rationale Mav

📊 Summary and final thoughts

👍 Bonus: year-end price target

Delivery is in typical Maverick fashion, via data and charts that say 10,000 words!

📊 Identifying the asset and mechanism 📊

On this occasion, it is time for that shiny Gold from the commodities world that has been making many headlines in the last 2-3 years. Among other factors, due to the:

👉 unexpected and very high inflation

👉 very solid central banks demand

👉 Russia-Ukraine war in Europe which nobody foresaw, and also one that it could still last until today + Israel-Gaza conflict & other geopolitical risks / uncertainty

We identified the asset, what about the mechanism through which we have a special situation on it these days? That is via its seasonality pattern!

Specifically:

• a long seasonal pattern in Gold (XAU/USD) starting tomorrow: from March 31st to April 13th (indirect alternatives: long calls options or long gold miners)

• what is the win rate over a full decade? 100% win rate as it worked beautifully every single year. Goes without saying, this is very rare, especially for a decade

• What about the generated returns? Average return 2.79% which is great given it is just 2 weeks

📊 Show me the evidence, research and rationale Mav 📊

As always, in an evidence-based Maverick-esque fashion, this is what the data says:

More rationale on top: seasonal patterns are primarily based on historical data, though it is important to research and understand why Gold has been consistently moving higher during this exact time window every single year for the last decade. We have a few key recurring fundamental factors that very likely contribute to this move around early April:

👉 Tax-related portfolio adjustments in the U.S.

👉 Gold buying ahead of Akshaya Tritiya in India

👉 Institutional repositioning after the end of Q1

What is one can say not favorable is that the starting point now is when Gold is at all-time highs, though on the other side:

• high starting point like now happened before also, and an extra +2.79% would not be considered a big move which needs a big catalyst for the next 2 weeks

• the media are running headlines with the all-time highs, especially as Gold crossed for the 1st time the magic round number of +$3,000

From a technical analysis (TA) point of view:

• Gold keeps doing what it does best via the black boxes in the chart denoting: consolidate, break up, consolidate, break up … lately broke up nicely again …

• also the 21-day moving average (blue dotted) continues to support

📊 Summary and final thoughts 📊

A seasonal setup with a 100% win rate over a full decade is very rare, hence it certainly is worth a closer look. Of course, no strategy is without risk, and past performance is never a guarantee of future results. However, for traders who systematically follow seasonal opportunities, this one deserves the spotlight.

To summarise it all, there you the bullet points:

💰 Gold (XAU/USD) = long decade seasonal pattern (indirect alternatives: long calls options or long gold miners)

📅 Period = March 31st - April 13th

📈 Win Rate (last 10 years) = 100%

💰 Average Return = +2.79%

Will we have it 11/11 this year as well, or this very interesting pattern will break? This will definitely be one to watch for the next 2 weeks! As always, special situations are all about improving the probability to be right, and how that fits ones style, risk tolerance, risk capacity and overall portfolio.

👍 Bonus: year-end price target 👍

Breaking away from the very short-term seasonality pattern, what about the overall outlook for 2025? Via Goldman Sachs: "We raise our end-2025 forecast to $3,300/toz (vs. $3,100) and our forecast range to $3,250-3,520, reflecting upside surprises in ETF inflows and in continued strong central bank gold demand."

Research is NOT behind a paywall and NO pesky ads here unlike most other places!

Did you enjoy this new format for one key insight? If yes, what would be appreciated?

Just sharing this around with like-minded people, and hitting the 🔄 & ❤️ buttons! That will boost bringing in way more independent economic & investment research!

Like this, the big positive externalities become the name of the game! Thank you!

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Have a great weekend and next week! And never forget, keep compounding: family, friends, community, capital, knowledge, research and mindset!

Mav 👋 🤝

“Compound interest is both the ultimate and biggest natural hedge!” Maverick Equity Research

the S&P 500 reached the record 5,000 level in February which is a remarkable feat!

Maverick Equity Research also reached the 5,000 milestone with the newest 432 readers, and is now read across 132 countries & 50 US states! When I started out, I said to myself it’s impossible to reach such a broad audience via just pure research, meaning not paying for marketing: Twitter, Google search, doing Podcasts, big names and influencers in the industry, hence so glad I was wrong! Word of mouth = my way!

Welcome to Part II of Investing in Bonds/Credit/Cash in the current environment.

In case you missed Part I where I did set up the stage & answered how did we get here:

✍️ My name is Bond, Yield Bond! The Return of Yield! Getting Paid to Chill ... (Part I)

Today’s research structure is below & designed to have a natural flow to answer the big question: ‘Why Investing in Bonds Nowadays - Why Now?’

📊 Because They Pay

📊 Bonds Big Bear Market Shall be Over

📊 FED Interest Rates Outlook = Convexity for Bonds

📊 Sentiment, Flows & Positioning

📊 Valuation: Stocks vs Bonds, Bonds vs Stocks

📊 Buffett: ‘T-Bill & Chill’

📊 Asset Allocation

📊 Asset Location

📊 The Hedging Properties of Bonds

Before beginning, a note: the timing to make a business in the real world just like in investing is important. Though realistically, NOBODY can time things perfectly because nobody has a crystal ball, though with solid work and good research one can improve his or her odds materially. The idea is to be directionally right and not perfectly precise, and that by improving the risk/return dynamic, liquidity, opportunity costs & optionality features. In our context, I see 2024 as a time to rethink bonds/fixed income as an attractive risk/return opportunity for investment portfolios.

Why investing in bonds nowadays - ‘Why Now?’

📊 Because They Pay

The reluctance to invest in bonds made sense when they weren't paying much in return, but things have changed & bonds look more appealing. In fact, investors can now be singing a slightly different version of Sabrina’s song Boys (Summertime Love) as in the following Maverick version "Bonds, bonds, bonds, I’m looking for a good time. Bonds, bonds, bonds, I’m ready for your love …" . US yields - 1y 2y 3y 5y 10y 30y since 1985:

3-month: 5.39%, 6-month: 5.32%, 1-year: 4.95%, 2-year: 4.58%, 3-year: 4.36%, 5-year: 4.23%, 10-year: 4.26%, 20-year 4.55%, 30-year: 4.43% as of February 21st 2024:

‘When was the last time one could earn almost 5%+ via a 1-Year riskless treasury bill?’

👉 2007 as the Global Financial Crisis was starting

Bonds pay also in real terms, let’s look at the 10-year:

👉 if in October 2023 we could have locked in a 2.5% real yield, now it is ~2% which is still great (10-year breakeven inflation rate in blue, 10-year treasury yield in red)

👉 given that the CBO (Congressional Budget Office) sees the US potential GDP growth at ~1.8%, locking in an above ~2% real yield is a good signal of a good valuation

Nowadays you do not need any special private banking / wealth management privileged account or so, you can buy bonds via your broker. Hence, below for you a great overview with whom pays what in the world of bonds, cash, credit.

• Certificates of Deposit (CDs)

• US treasuries (regular and zeros)

• Agency/GSE bonds

• Corporate bonds (investment grade)

• Municipal bonds

Yields are very decent: plenty of 5-7%+ yielding opportunities via investment grade corporates … and one can push it even to 8-9% for equity like returns:

📊 Bonds Big Bear Market Shall be Over

Treasuries recorded the greatest bear market of all time in 2022-2023

👉 check the historical returns in the column with the recovery 1-year from trough

👉 just like with stocks, after big heavy bear markets the returns are very good in the following 12-36 months - contrarian time!

👉 Hype, mania, exuberance are the enemies of investing, unless one uses that to his or her advantage to protect gains via hedging very cheaply. The saying is true: ‘hedge when you CAN, not when you MUST’, otherwise too late and/or expensive.

The historical steep bond sell-off via both nominal & real drawdowns

📊 FED Interest Rates Outlook = Convexity for Bonds

First of all, why we had the biggest bond bear market ever? Because high interest rates via the fastest FED hiking cycle in 4 decades (modern history) & that after a historical record low period of both the level of interest rates & length of time

Second of all, a key question, what is the rationale for FED cutting rates in general?

• Rate cuts normally begin once the Federal Reserve has confirmation that the economy has slowed down and inflationary pressures have subsided

How long until the FED cuts rates? = the magic big question for investors here!

• On average it takes 8 months from the last FED hike to start cutting rates

• Last FED hike was in July 2023, hence about 6 months ago

When are financial markets pricing the 1st FED cut? It used to be quite certain it will be March 2024 (exactly 8 month after the last FED hike), though lately the probability got way smaller

👉 in my ✍️ The State of the US Economy in 45 Charts, Edition #2 report I showed how on the 15th of January the probability was 81%

👉 January 27th dropped to 46%, and as of February 18th just an 11% probability

Hence the 1st rate cut got postponed (given a very strong job market that I mentioned many times), though note how rate cuts are still to be expected, about 100 b.p. looking forward at the next 12 months

What is the pattern of FED cuts once it starts?

• once the FED starts easing, deep cuts quite often come swiftly

For historical context, looking back at past interest rate cuts we can see how quickly these easing cycles played out … especially those in the 1970s and 1980s.

Complementary view for gauging when do long yields peak - the 10-year treasury yield (green) and the FED funds target rate (dotted blue):

👉 the grey shaded area points to around the FED stops hiking rates, hence we can say that long yields defined here as the 10-year treasury has peaked

👉 hence, long duration quality bonds is what I am liking here

As well, the US 10-year yield, its 20-year mean, with +/- 1 & 2 standard deviations:

• just recently the 10-year almost reached the +2 SD above its 20-year mean which

• historically signalled a top and preceded falling yields which result in a huge surge in bond prices as yields plummet towards the mean

• 4.26% now, that’s above +1 SD & heading to its 2.91% mean as a base case scenario

The Risk to Reward Ratio for treasuries is very favorable these days - this looked like a dinosaur nowhere to be found in the ZIRP ‘Zero Interest Rate Policy’ times:

👉 Upside & Downside for treasuries via sensitivity to various levels of rising/falling yields ... let that sink in and bring the sink: as you do that, watch the asymmetry that one can get for rates falling vs rates increasing … duration has traditionally benefited from falling interest rate environments … I like that …

👉 for example, should rates fall 150 bp (1.5%) in 2024, a 26% return is in the cards

Complementary, Upside & Downside view for a 1% fall/rise rates, and this time besides the 10 & 30-year treasuries, also the ‘AGG’ ETF which is a basket of investment grade bonds comprised of treasuries, corporate, MBS, ABS & munis.

And now, US treasuries average total returns by duration from the final FED hike over the last 7 hiking cycles since 1981:

👉 the longer the maturity (the higher the duration), the higher the returns

👉 for example 15-year plus treasuries with a 36% return 23 months after the final hike + check also the other maturities that are not bad at all given essentially risk free

Expanding the universe with German and UK bonds (bunds & gilts):

👉 if yields fall by 50 bp (0.5%), the total return for US, German and UK bonds are around 8%, 6% and 8% respectively over the next 12 months

👉 if yields fall by 100 bp (1%), the total return for US, German and UK bonds are around 12%, 10% and 12% respectively over the next 12 months

👉 if unchanged, 4%, 2% and 4% while roughly flat if rates rise 50 bp (0.5%), and negative 3%, 6% and 4% should rates rise by 100 bp (1%) which is quite unlikely

In plain English, we have way more upside than downside, or positive asymmetry!

Note also how well US Bonds performed in 2008 when Lehman went bankrupt and the GFC was on-going (complementary note: only 3 times in almost a century when Stocks & Bonds combined had combined negative returns: 1931, 1969 & 2022)

📊 Sentiment, Flows & Positioning

How is the investor sentiment looking like?

👉 all time high net long from JPM’s active clients side

Historically, flows/allocation into bonds pick up around the end of a hiking cycle:

Surveys, declared conviction & sentiment are one thing, want to see that backed up by some serious financial flows into bonds with long maturities? Just ask Tom Cruise in the 1996 Jerry Maguire movie:

Flows and drawdown of the TLT ETF (long-term gov bonds 20-year+ maturities):

👉 record financial inflows: more price drops, the more the inflows keep coming …

👉 $22 billion in 2023 alone, which ranks in the 2nd place ETF inflows, only VOO (S&P 500) attracting more flows

What do fund managers SAY globally?

👉 Big conviction for lower long-term rates in 2024

What do fund managers DO globally?

👉 they are overweight in bonds for the first time since the Global Financial Crisis which climaxed in 2009, at which point fixed income was outperforming ...

👉 now, they are following the logic of mean reversion and loading up with bonds after 18 months of historically terrible performance

📊 Valuation: Stocks vs Bonds, Bonds vs Stocks

Treasuries are the most attractive they've been relative to U.S. stocks since 2002 via the 10-year Treasury yield / S&P 500 earnings yield:

• via the metric: 10-year treasury yield / S&P500 earnings yield

• note how close we are to the +1 standard deviation as rising yields have kept increasing the relative attractiveness of bonds

Yield bearing assets offer attractive risk-adjusted yields relative to stocks

• yields distribution since 1996: S&P 500 materially below the median while both treasuries (10-year & 3-month) and Investment Grade (IG) way above the median

Stocks relative to cash are their most expensive since the 2001 dot-com bubble when comparing the yield on 3-month T-bills (cash) to the dividend yield on the S&P 500

Goldman’s own measure of the equity risk premium (ERP), or how expensive stocks are to bonds also makes the S&P 500 look its most expensive in over 20 years:

Complementary via the ERP Equity Risk Premium (blue) & Stock-Bond ratio (yellow), stocks most rich to bonds they’ve been since 2002:

Complementary also via the IG (Investment Grade) yields vs S&P500 earnings yield, IG yields above S&P 500 yields which via the lens of relative risk-adjusted returns looks very good for IG bonds.

Bringing back here also the FED’s action via this chart which outlines the path of stocks vs bonds when the FED pivoted and started to cut interest rates:

👉 mostly, the stock/bond ratio is going lower when that happens and the rationale is classic: lower rates = good for bonds value while given that lower rates happen usually with weak or negative GDP growth, it is bad for stock’s earnings and sentiment

👉 therefore, if one thinks about allocations between stocks and bonds awaiting for the FED to cut interest rates, historical probabilities tell us: underweight stocks, overweight bonds

📊 Buffett: ‘T-Bill & Chill’

Does Warren Buffett like treasuries? Sure, buys every Monday! Berkshire Hathaway cash position could make it to rename it as ‘Berkshire cash STASHaway’":

👉 cash at an all time record of $157 billions, doing the ‘T-bill & Chill’ strategy

👉 note also how it went down during the 2007-2009 GFC (Global Financial Crisis) as Buffett was buying quality businesses for dirt cheap prices

👉 if by chance we get a recession (well, reminder: sooner or later it will happen, it is called the business cycle), what do you think Buffett will do? Same thing again … !

I call this the ‘T-bill & Chill’ or ‘T-bill & Wait’ strategy hunting for opportunities that always come along sooner or later … + a hedge in the same time = in bad times, FED cuts interest rates which makes bond prices go UP)

Berkshire 10Q from Q3 2023 also for for clarity:

And it’s not just Buffett, but Corporate America also:

👉 cash held by corporations is at an all-time high, way above pre-covi baseline

👉 treasurers in corporations basically locked in low interests with long duration on the debt/borrowing side, and are earning juicy yields on their cash right now

📊 Asset Allocation

How do bonds & stocks allocations perform in a portfolio? 1901-2022 range of returns for various mixes of Global Stocks & Bonds, both average returns + top & bottom 5%

👉 100% bonds portfolio = 4.7% CAGR

👉 60% stocks, 40% bonds portfolio = 7.1% CAGR

👉 100% stocks portfolio = 8.1% CAGR

Take-away:

👉 adding bonds in a portfolio reduces volatility & drawdowns while the return sacrificed does not have to be big

👉 bonds provide decent correlation benefits and act as a recession hedge to stocks

👉 for maximising returns, equities for the win medium-long term - short term volatility needs to be stomached, if not able, more bonds given that nowadays they pay

Cash (short-tern government bonds) = way less volatile than stocks over a 1-year horizon, but stocks outperforming over 20-year horizons & at times by wide margins ...

The same message, great chart assuming cash returns 5% & international equities 8.5%

👉 stocks outperform cash meaningfully over time: +22% after 5 years, +63% after 10

👉 that happens because they are cash flow producers and carry the equity risk premium (ERP) due to the downside risk & volatility, hence investors have to be compensated for stomaching short term issues, it’s that simple

📊 Asset Location

Asset location is a key yet vastly overlooked aspect in constructing great efficient investment portfolio. If you had formal training and/or experience this is not new, but I’ve seen even plenty experienced people not putting enough time into it, ignoring until later when it has to be considered before investing.

Asset location is not about the geographical asset allocation of your investments, but it is about the type of tax account you will use for any given investment. It depends on the jurisdiction (check yours), but in general we have 3 types of accounts:

• Taxable Account - that is your brokerage account

• Tax Free Accounts - for example ROTH in USA, or TFSA in Canada

• Tax Deferred Accounts - for example IRA in USA, or RSP/LIRA in Canada

The general implication for our investing in bonds research is:

• bonds pay coupons, hence are considered income, hence taxed as income … but not in all cases e.g. consider your bonds allocation for what kind of account it is suited best BEFORE investing per se … you might pay NO TAX at all on bonds …

• know the tax code and make your asset allocations in general as efficient as possible … keep compounding in the best fashion possible …

📊 The Hedging Properties of Bonds

Perfect time now to consider the hedging properties of bonds in a stocks portfolio! FAQ also answered with this occasion + 'show me a graph on hedging, something ... many talk, talking is easy and cheap' There you go, Maverick chart that says 10,000 words!

👉 TLT (long dated US government bonds) / SPY ... see the 2020 pandemic green parabolic bonds run relative to stocks ...

Going back further in times besides the 2020 pandemic:

👉 the 2007-2009 Global Financial Crisis and

👉 2012 European Sovereign Debt Crisis

= Similar hedging properties of bonds activated: reducing drawdown, helping folks not go crazy, stick to the plan and keep compounding,. Stocks shall beat bonds on any given medium-long term because stocks = cash flow, bonds = debt aka promise to pay, though bonds can be good nowadays as they pay given the high(er) interest rates… .

We can also see the useful and key stocks & bonds correlation across time:

👉 the longer-term negative return correlation relationship is what makes banks a portfolio diversifier, hence the 60/40 (stocks/bonds) popular portfolio

👉 bond exposure has a role in reducing portfolio volatility while producing income

👉 2022 correlation was positive as both stocks & bonds suffered, but as we pointed out above, this is an outlier case as only 3 times in almost a century when Stocks & Bonds combined had combined negative returns: 1931, 1969 & 2022

A key question now: are financial flows picking up these days into bonds? Yes, and with record flood of cash has poured into the both ends of the Treasury yield curve:

How comes allocations/flows are record on both the short & long maturities?

As shown above via the matrix chart depicting ‘Upside & Downside for treasuries via sensitivity to various levels of rising/falling yields’:

👉 short term bonds pay now decently and in case interest rates drop (normalise), via a total return basis (coupon payment and price return) it would still be positive

👉 long term bonds would benefit a lot via a total return basis given the biggest losers in this era of Federal Reserve hawkishness, hence to bounce back as a slowdown and/or recession would ignite the bond-safety trade

In other words, investors are looking to park cash and seize the highest interest payments in more than 2 decades via the short dated treasuries, and/or on the potential juicy returns from a rally in the long dated treasuries once interest rates peak and headed lower. The long dated bonds look good especially for the scenario where we will have a slowdown in overall economic activity and/or a recession. Hence, Soft landing or Hard landing of the US economy? No problem, can keep compounding!

Alternatively, while stocks for the medium-long term are the winners, for a while and/or with some parts of the portfolio, cash/bonds are a nice way nowadays to:

• keep compounding & even potentially get equity-like returns, meaning good very good risk/return money to be made + lower volatility + the potential convexity +

• diversification in a potential recession & ability to buy when many need to sell stocks, meaning an often unknown effect: the ability to rebalance generated profits/liquidity into cheaper and cheaper equities which improves materially the compounding years after

• optionality to wait to deploy it when cheap opportunities in equities along, and they always come, just note that PATIENCE is a virtue!

And all the above into 1 meme:

👉 Cash/Bonds/Credit = no FOMO (Fear of Missing Out), no YOLO (You Only Live Once), but = JOMO 😉 (Joy of Missing Out)

Research is NOT behind a paywall and NO pesky ads here unlike most other places!

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Also some of you asked how can one support my work which is really kind of you 🤗. Therefore, it would highly appreciated if you would support the ‘Maverick-esque’ ongoing & future research. Some of you asked if they can donate via CashApp, but I cannot open an account from Europe. A donation/tip can be done via the following:

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Thank you and have a great day!

Mav 👋 🤝

guess this time from where I wrote this 1st part research piece on Investing in Bonds?

Drum rolls … from a place where I did not find Inflation but Deflation:

• from the Prague to Budapest RegioJet comfy train for 22.9 EUR

• from Vienna to Budapest it costs around 16-18 EUR depending when booked

• 3 great cakes, 2 coffees and tea = all for 2 EUR (bottled water and coffee is free & unlimited, one can also serve a good salad or hot meal for a great 2-4 eur price)

What does this have to do with investing besides inflation? It is about finding value when seen not available or very hard to find, specifically value investing. “All intelligent investing is value investing, acquiring more than you are paying for.” Charlie Munger

Funny enough, I did not know myself about this specific train until 2 years ago. Told this to friends & the common feedback ‘can’t be’ or ‘thanks man, that’s deep value’ or ‘thank you for bringing the real world ‘Alpha’ factor’ 🤝! Now you know also! 😉

Travelling by train in Europe is something I like to do a lot and also recommend. The route across the Alps from Vienna to Zurich is one of the best ones I ever took, and while that it’s not gonna be 20-30 EUR, it is fully worth it especially in the winter time.

Back now to research, investing, economics, finance and … business!

Maverick Equity Research is focused naturally on equities, however these days we have a ‘Special Situations’ case because since a while and unlike before, Bonds pay!

Now whenever there is a new trend or innovative development in investing, plenty of ‘hot takes’ like ‘THIS is the best investment out there’ start coming to town like a big cult.

In my research, I strive for 3 key pillars: independence, integrity and objectivity. Hence, I can already say: there is no ‘best investment’ out there that fits all investors and traders. That’s because we all have different needs, time horizons, risk capacity & tolerance, income vs total return, follow-up strategy (DCA/lump sump, hedging etc), tax, liquidity needs on a timeline, retail, professional or institutional investor etc.

Therefore, a 2-part series via a balanced take on Investing in Bonds/Credit/Cash in the current environment. There are good and many opportunities for the investors looking at ‘Fixed Income’ for the years ahead, especially via the risk/return lens.

I have been tweeting quite some about bonds since Q3-Q4 2023 as bonds were paying more and more, below for warmup, a few selected tweets:

Today’s research structure below & designed to have a natural flow:

📊 Setting Up The Stage - How Did We Get Here? - this edition -

📊 Why Investing in Bonds Nowadays - ‘Why Now?’ - next edition -

📊 Setting Up The Stage - How Did We Get Here?

There used to be a time when interest rates were very low? How low? Well, like rock bottom for more than a decade after the 2007-2009 Global Financial Crisis (GFC). Before anything, notice how the trend of lower rates has been going on for decades.

US yields - 1y 2y 3y 5y 10y 30y since 1985:

As investors have a short memory, let’s recall the prevailing consensus we had once rates hit rock bottom: we will have rates very low for a very long time and likely replicating the ‘Japanification’ with low/negatives rates for more than 2 decades.

The world of finance got so disrupted that after the 2007-2009 GFC we did reach the peak of $18 trillion worth of negative-yielding debt in 2020.

In terms of number of bonds, we reached a whooping number of 4,500 bonds trading with negative yields. While now in 2023, negative-yielding bonds are not to be found.

The 2020 pandemic came where huge monetary & fiscal stimulus along with supply chain constraints (among others) brought inflation, and created a recipe for the latest fastest interest rates hiking cycles in 4 decades.

These are the FED (green) and the ECB (blue) policy rates since 2004 - the FED funds rate is higher even than in the 2007-2009 period while the ECB a bit lower:

Below how the FED (green) and the ECB (blue) balance sheets expanded big time (absolute values above and the 1y rolling % change since 2004):

👉 once a first big unprecedented spike once Lehman brothers imploded in 2008

👉 twice once the 2020 pandemic came to town

👉 currently both balance sheets shrinking towards normalisation

So, after more than a decade where (too) many mocked central banks for not being able to ‘get it up’ i.e. inflation, from deflation worries we switched fast to ketchup inflation since 2021, and we have been all witnessing it since then. Hence, central banks had to act strong & fast in order to cool it off which is happening as we speak.

Before moving on, how high are US yields relative to the 2007-2009 GFC (last cycle)? With longer maturities about the same, and with shorter maturities even higher!

So now we can ask ourselves, how did banks react in terms of paying depositors? What about Money Market Funds (MMFs) returns offered? 2022 below shows:

👉 how banks (blue) ‘naturally’ are quite ‘lazy’ paying depositors more and more

👉 while Money Market Funds MMFs (orange) paying decently, not much below the FED Funds Rate (green)

Banks are eager for cheap funding via retail deposits that are seen as ‘sticky’, and from there keeping the spread by investing themselves in riskless treasuries or giving loans. Nonetheless, MMFs are efficient & also an incentive to pay customers as they can optimize for fees on their Assets Under Management (AUM), high AUM = high fees.

Complementary MMFs assets and Banks Deposits with the 1st FED hike: divergence! For a while it worked for banks, but then investors & households said nahhh, yield me!

Therefore, $672 billion parabolic flows during this FED hiking cycle as of Q1 2023. Fastest hiking rates cycle in 4 decades, also makes for the fastest inflows into MMFs:

Mid 2023, further confirmation - huge inflows for MMFs, huge banks deposit outflows:

👉 MMFs: +750 billion on course for record year while

👉 US bank deposits: -578 billion deposit outflows

Just like a salary, returns offered to investors matter and they react via allocations. As of the latest data available (Q3 2023), some key notes:

👉 MMFs total financial assets with record highs above $6.1 trillions

👉 the higher the rates driven by FED hiking rates (green), the higher MMFs assets

From MMF total financial assets, let’s isolate if retail MMFs also reacted:

👉 yes, big time … also at record highs above $1.7 trillion

👉 note also below the price change % rolling 1-year: record high growth

Hence the answer to ‘How do Money Market Funds pay investors in relation to FED and interest rates?’ is quite easy and this time via an even longer time series:

👉 the higher the interest rates, the more Money Market Funds pay and both corporate and retail MMFs react … as banks pay less and experience outflows

👉 once the FED starts cutting, Money Market Funds experience outflows as they pay less & less … but until then, as of today they pay decent … especially via a risk-return basis and if one already compounds nicely …

Now that we covered both Bank Deposits and Money Market Funds, a very common question I get and hear often is, ‘what’s really the difference between them?’ And that in terms of not just how much they pay, but like structurally as a product offering. I also realised in time even experienced professionals are not very clear on the differences.

Table below offers a great overview, while for an investor one to take-away would be: investing in a MMF with US treasuries inside, one would get both a higher rate of return and also a safer form of investing relative to deposits above the FDIC limit. In essence, that is risk free US treasuries vs deposits of a single bank’s creditworthiness.

Hence, should not be a surprise MMFs collect financial assets at record levels!

After progressing from the simple bank deposits everybody knows to Money Market Funds, next to be tackled will be bonds which come in 4 main flavours:

👉 Treasury bills aka ‘T-bills’, notes ‘T-notes’ and treasury bonds aka ‘T-bonds’

👉 Agency bonds issued by U.S. government agencies or Government-Sponsored Entities (GSEs)

👉 Municipal bonds aka ‘munis’

👉 Corporate bonds: investment grade (IG) and high-yield non-investment grade (HY)

The good thing with bonds is that nowadays are accessible way easier by investors, unlike before when it was very expensive, very high minimum investment value (ranging from 100,000 to 200,000 USD/EUR), and mostly a market that could be accessed only via banks, mutual funds, wealth management & private banking (especially from Europe). Now with a good broker, it can be easily done and with lower transaction fees also by retail/private investor also. One can also just buy them via ETFs or directly from the government auctions. Plenty of choices!

All in all, ‘Cash Is Not Trash’ anymore, cash pays so Bob is saying ‘Bring On Bonds’!

Goodbye Negative-Yielding Bonds & Hello Decade-High Bond Yields!

From TINA (There Is No Alternative) to TARA (There is A Reasonable Alternative) or BAAAA (Bonds Are Again An Alternative)!

Part 1 done as preamble for Investing in Bonds/Credit/Cash:

📊 Setting Up The Stage - How Did We Get Here?

Part 2 coming next will cover the nuts & bolts:

📊 Why Investing in Bonds Nowadays - ‘Why Now?’

Stay tuned … loads of practical investment insights delivered via sleek charts as always!

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here we go with another Special Situation, and this time covering the mighty and popular Nasdaq-100 Index (NDX). As for an investable ETF, I chose the liquid QQQ. Hence, naturally this coverage is targeted to growth/tech/large cap investors & traders. Even if all set, passive or so, I think it’s an interesting educational case to introspect.

Before the thesis, this report is NOT behind a paywall & there are no pesky ads here. It would only be highly appreciated you just spreading the word around to interested people. Questions, feedback are welcome. Enjoy it!

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Nasdaq-100 report structure:

📊 Nasdaq-100 (QQQ) Dynamics

📊 Thesis: Valuation Disconnected via its Cost of Capital = Discount Rate

📊 Action: Hedge, Sell, Trim, Short Sell, Collar

📊 Nasdaq-100 (QQQ) Dynamics

I’ll approach this progressively so that everybody is on board on this one. First of all, let’s see how the Nasdaq-100 (QQQ) did in 2023 along with the S&P 500 (SPY) and the Dow Jones (DIA): QQQ with a big 21.64% return in 2023 & outperforming by a big margin the other 2 main indices.

For an even broader perspective, US indices 2023 performance shown in this order: Nasdaq 100 (NDX) > S&P 500 (SPX) > S&P Midcap 400 MID > Russel 2000 (RTY) > Russell Microcap (RMICRO). In short, from Megacaps > to Microcaps: Nasdaq 100 (NDX) leading by a big margin … quite an outlier one can say …

Nasdaq vs. Russell 2000 relative return (monthly): sharp outperformance of long duration Tech vs. US domestic cyclicals

3 complementary key notes for curiosity & introspection:

• looking inside QQQ at the individual names performance in 2023 via 2 angles: Price return % and holdings weight (Nasdaq-100 is a modified capitalization-weighted index): the big & popular names driving a lot of the 21.64% performance in 2023: AAPL, MSFT, AMZN, NVDA, META, GOOG, TSLA:

Key question now: is the 21.64% return in 2023 concentrated? Yes, namely 16.17% is driven by just 7 names: AAPL, MSFT, NVDA, META, AMZN, GOOG = that is 77% (16.17/21.64) of the entire performance!

• let’s see also how it looks unweighted via the 2023 return % & above 52-week low %: weighting does matter quite some

• return correlation between the components of the Nasdaq-100 and S&P 500: steadily declining for a while now, further highlighting how the performance of $QQQ & $SPY truly comes down to just a few names rallying hard …

📊 Thesis: Valuation Disconnected via its Cost of Capital = Discount Rate

You might ask yourself now already: how can one easily know or calculate the cost of capital of the entire Nasdaq-100 index to make any inference? Well, bottom-up taking all 101 holdings and doing one by one calculations to come up with a single figure is possible but very consuming and subject to a wide margin of error. Alternatively, Goldman Sachs has a nice approach for a proxy which I like and have been using.

Namely, below we can see QQQ total return & the change in valued for a theoretical company with $1 of cash flow 10-years from now discounted by the HYG yield (high yield corporate bonds) as a good proxy for how changes in the cost of capital have affected the value of growth stocks (QQQ):

Interpretation:

• Nasdaq-100 has materially outperformed its normal relationship with HY bonds (high yield corporate bonds) bonds by a major 12%

• why or how, possible rationale? Nasdaq-100 seems have pre-priced FED cutting interest rates that is not yet priced into high yield bonds - most of the times, the bond market is smarter than the equity market the saying goes

• note how the relationship was remarkably stable from January 2022 to Jan 2023, but the Nasdaq-100 has recently dislocated

• we have a gap now & if by chance you are a Formula 1 fan as well, you will like this analogy: Ayrton Senna is famous for saying: ‘If you no longer go for a gap that exists, you no longer a racing driver‘

Secondly, we can see also the disconnect between the Nasdaq & the US 10-year real yield (inverted in the chart): gap is big if anybody asks me …

Complementary & lastly to sink this one in: since 2020 below we have the inverse relationship between the tech sector & spreads with Tech (orange), High Yield spreads (blue), Investment Grade spreads (white):

• during the Covid crash: spreads spiked massively, tech fell of strongly

• after as spreads contracted, tech gained materially along with the overall recovery

• see the most recent 2023 move which is the thesis: both investment grade and high yields spread increased, yet tech did not fall but increase materially 21.64%

📊 Action: Hedge, Sell, Trim, Short Sell, Collar

Given the above, what possibilities are on the table? Many for many use cases & views:

1. Sell QQQ if already invested - nobody got hurt ever booking a profit - one can always get back in, the markets will always open …

2. Trim QQQ: book some profits, remain long with the rest … hard to say QQQ will do bad 3-5-10-20 years down the road given the shown companies inside

3. Short Sell QQQ via SQQQ: not my style, but if capacity & risk management

4. Collaring QQQ via options: selling Calls & buying Puts (short calls, long puts)

5. My favourite 1: hedge QQQ buying Puts (long puts) to protect the gains, or if no position, long puts should gain in value if QQQ drops from here

6. My favourite 2: staying invested with a twist via JEPQ (JPMorgan Nasdaq Equity Premium Income ETF): actively managed & seeks to deliver a big portion of the returns associated with the Nasdaq 100 Index with less volatility. That is like QQQ, but with downside protection & seeking to deliver a monthly income stream from associated option premiums and stock dividends.

JEPQ 2023 performance & dividend yield:

Lastly for high conviction via high return & risk, below 2023 performance of 3 leveraged ETFs that play QQQ, 1 short & 2 long: -3x short (QQ3S), 3x long (QQL3) and 5x long QQQ (QQQ5):

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Maverick Equity Research

Disclaimer: information on this site should not in any case or form be considered financial, business, tax or legal advice, but independent research done by an independent investment researcher and investor for informational & educational public discussions only

Maverick Equity Research is about medium-long term investing with a business owner mindset, and future coverage to be found in the ‘Full Equity Research’ section.

Nonetheless, occasionally Special Situations arise via sentiment, valuations, likely catalysts for interesting risk & return setups, cheap hedging to protect gains & more. My research indicates now that we have a very interesting case with Nvidia’s (NVDA).

With this occasion, I would emphasise the Maverick Valuation section where I do a lot of scatterplots - this as you will see below is one clear example of a use case that can be derived out of those scatterplots besides the other complementary analytics.

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Nvidia (NVDA) downside risk report structure:

📊 Nvidia - Ecosystem & AI Parabolic Run

📊 Price & Valuation - Relative Analysis

📊 Wall Street coverage - No Bears Left

📊 Action: Hedge, Sell, Short Sell

📊 Nvidia - Ecosystem & AI Parabolic Run

First of all, Nvidia is a great business with many applications and infrastructure across many industries and one can even say an AI hardware leader down the road. Additionally, Elon Musk has recently reportedly acquired thousands of Nvidia GPUs.

Below you can see Nvidia’s ecosystem of Customers, Competitors & Suppliers via a great supply chain analysis visual. Overall, a big business with a wide moat in a great secular sector, hence a name that very likely will be here 10-20-30 years down the road.

Semiconductors in general have been a top sector lately given AI advancements like the ChatGPT breakthrough, and the overall combo of high demand & supply issues.

Corporate America is Talking About AI like no other time. It was always there since many decades actually, but lately the increase is from 50% more to a doubling relative to the recent past. AI definitely made big leaps recently & it will have various applications across many industries, though the value creation pockets are uncertain and some will get overcooked within the AI hype …

Not just corporates, but people googling AI also went off the charts: namely, bitcoin & Meta(Verse) are peanuts as AI is about to even peak the bitcoin record levels:

We also find a parabolic rise in AI mentions during the latest earnings calls:

• NVDA: 75 times

• Overall mentions: +85% YoY

BofA also just added the ‘AI’ theme to its legendary chart depicting the history of asset bubbles … for now I think they were too nice including just NVDA & MSFT:

AI talks, market reacts: strip out the biggest seven FAANG stocks, which include Nvidia and the other big tech, and the S&P 500 is down for the year:

Now guess what is the most crowded trade out there? Simple: Big Tech!

And now also one meme via Shrub Ceiling as I did tweet him that I will feature him … because we like having fun also:

📊 Price & Valuation - Relative Analysis

Thinking about value creation, a sector occasionally becomes hot or very hot. Hence, NVDA likely just ran too fast & too soon driven by the recent ‘AI’ exuberance & consequent parabolic run. Precisely, since October 2022 the stock more than doubled for a 157% gain. Big bull runs in a small cap stock should not raise many eyebrows, but Nvidia was already a mega cap & the recent run equates to a whooping $490bn gain since just the recent Oct 2022 lows for a current $770bn market cap.

Interesting also to place NVDA in the context of the overall market & sector/peers. For that I did plot Nvidia, the 2 SOXX & SMH Semiconductors ETFs and the S&P 500: we clearly see how NVDA is such a big outlier via this parabolic run.

Next: Berkshire (BRK), Tesla (TSLA), price & valuation scatterplots to place Nvidia in proper contexts & visualise what’s really going on because charts say 1,000 words:

• 1st: Nvidia & Buffett’s Berkshire empire, NVDA > BRK ?

• 2nd Nvidia & Tesla juggernaut, NVDA > TSLA ?

• 3rd Nvidia inside the market via the S&P 500

• 4th given that the S&P 500 has 11 very different sectors, we will further get closer to Nvidia’s techie nature via the Nasdaq 100 components

• 5th inside Nvidia’s 35 peers via the SOXX Semiconductors ETF

1) Nvidia & Buffett’s Berkshire empire: NVDA > BRK ?

To start, a comparison that will raise some eyebrows: Nvidia & Berkshire (BRK-B).

• Nvidia’s value crossed Berkshire’s: $774bn vs $727bn. Not the 1st time, but the 2nd after in Q4 2021 Nvidia reached all time highs of $834bn vs Berkshire $631bn

• recall the above info, Nvidia recent run equates to a whooping $490bn gain since just the recent Oct 2022 lows for a current $774bn market cap

• $490bn market cap gain equates to 67% of the entire Berkshire market capitalisation … Let that sink in!

• Not an apples-apples comparison, but a question of market pricing & value creation: Nvidia a great business, but better than a compounder for almost 60 years led by legendary investors Warren Buffett & Charlie Munger?

Following the 2021 all-time high, Nvidia dropped hugely -66.34% in October 2022. It also had 2 bigger than 50% in drawdowns in 2018 & 2019 as well. Berkshire naturally way more stable, hence with way less drawdowns.

2) Nvidia & Tesla juggernaut, NVDA > TSLA ?

• Nvidia’s value crossed Tesla’s by a wide margin recently: $775bn vs $570bn

• recall the above info, Nvidia recent run equates to a whooping $490bn gain since just the recent Oct 2022 lows for a current $775bn market cap - $490bn gain equates to 86% of the entire Tesla market capitalisation!

Let that sink in & bring the sink!

This also reminds me when Tesla (TSLA) was 2x the market capitalisation of BRK, hence quite an easy Tesla sell signal to me. Nov 2022 post & chart:

3) How does Nvidia (NVDA) look inside the S&P 500?

2023 Winners & Rebounders from their 52-week low: NVDA outlier with a 114% gain in 2023 and a massive 190% rebound from the 52-week low

S&P 500 - Sales/Revenue aka ‘Top-line’ view: P/S multiple & Revenue growth (next year estimates). Interpretation: Forward P/S multiple the stock is trading at for the given level of estimated Sales growth - NVDA a major outlier with a 25.8x P/S multiple for 11.39% Sales growth

Profitability aka ‘Bottom-line’ view: P/E multiple & Earnings/EPS growth (next year estimates). Interpretation: Forward P/E multiple the stock is trading at for the given level of estimated Earnings/EPS growth - NVDA priced at a 69x forward P/E multiple with a 36% growth in EPS estimates (if it materialises) backs it up to an extent

A great complementary chart view now: S&P 500 components with 2023 total return & the percentile of each stock’s forward PE ratio vs their 10-year history: NVDA is a big outlier also via this view relative to the market & itself: currently the most expensive it has ever been on a forward earnings basis in 10 years with a 114% gain in 2023 alone! Let that sink in!

Free Cash flow aka ‘cash’ view: P/FCF multiple & FCF/Share (last twelve months). Interpretation: P/FCF multiple the stock is trading at for the given level of FCF/Share - NVDA outlier also here via a 203x P/FCF multiple for 1.54 FCF/share

4) How does Nvidia (NVDA) look inside the techie ecosystem Nasdaq 100?

2023 Winners & Rebounders from their 52-week low: NVDA a big outlier in both returns in 2023 and rebound magnitude from the 52-week low: a 114% gain in 2023 with a massive 190% rebound from the 52-week low

Sales/Revenue aka ‘Top-line’ view: NVDA a big outlier … NVDA a major outlier with a 25.8x P/S multiple for 11.39% Sales growth

Profitability aka ‘Bottom-line’ view: NVDA not cheap either via this view: NVDA priced at a 69x forward P/E multiple with a 36% growth in EPS estimates (if it materialises) backs it up to an extent

Nasdaq-100 components with 2023 total return & the percentile of each stock’s forward PE ratio vs their 10-year history: NVDA a big outlier also within its techie ecosystem & itself: currently the most expensive it has ever been on a forward earnings basis in 10 years with a 114% gain in 2023 alone! Let that sink in!

Free Cash flow aka ‘cash’ view: NVDA on top here also after the only hot LULU

5) And, how does Nvidia (NVDA) look relative to it’s peers via SOXX ETF?

2023 Winners & Rebounders from their 52-week low: NVDA a major outlier in both returns in 2023 and rebound magnitude from the 52-week low: a 114% gain in 2023 with a massive 190% rebound from the 52-week low

Sales/Revenue aka ‘Top-line’ view: NVDA a big outlier among peers … NVDA a major outlier with a 25.8x P/S multiple for 11.39% Sales growth

Profitability aka ‘Bottom-line’ view: NVDA priced at a 69x forward P/E multiple with a 36% growth in EPS estimates (if it materialises) backs it up to an extent

SOXX components with 2023 total return & the percentile of each stock’s forward PE ratio vs their 10-year history: NVDA a big outlier also relative to peers/competition & itself: currently the most expensive it has ever been on a forward earnings basis in 10 years with a 114% gain in 2023 alone! Let that sink in!

How about current Nvidia and industry average P/E? Industry average 24.5x while NVDA at 167x = off the charts via own historical (percentile 100%) & industry average

PEG ratio relative to industry? NVDA with a PEG ratio of 5.00 compared to the semiconductor industry's PEG ratio of 3.02 + via CapitalIQ multiples overview:

Back to SOXX with the Free Cash flow aka ‘cash’ view: NVDA a major outlier trading at a 203x P/FCF multiple for 1.54 FCF/share

📊 Wall Street coverage - No Bears Left

Wall Street coverage: until last week, we had only one Wall Street house that still had a Sell rating. Now we have 0 analysts out of the 49 covering Nvidia with a Sell after also HSBC gave up and now has a Buy rating as they doubled their price target to Street high of $355 vs $308 now.

Overall 5 year Wall Street price targets overview is also interesting to see:

From Wall Street to Nvidia insiders, what have they been doing in the last 12 months with the stock? Only sold …

📊 Action: Hedge, Sell, Short Sell

Let’s start with a funny meme which requires no comment:

All right, so what’s the key question? AI exuberant narrative, ChatGPT launch, sentiment & more = fair for such a big jump in Nvidia? To me not, it’s way too much for the stock in such a short time. Other than that, Nvidia a great business. Stock can disconnect from the business at times, and this is one of those cases.

Hence, 3 options: short sell, sell & book a profit, hedge to protect the gains

1. Short selling: in 2023, bulls are winning clearly & it will be very interesting to see how this evolves from here given that big short bets starting to come now: the ratio of long-short single stock ETF trading - most bearish bets on NVDA & ARKK:

I am not a big fan shorting given that it is a very hard business, kudos to whom is good: 1) unlimited downside, limited upside as markets can stay way longer irrational than one can stay solvent, can be right, yet bankrupt by the time right 2) time consuming & costly research 3) just keeping the position rolling can be & get costly 4) opportunity cost of capital by being long just a basic dividend stock or S&P 500, or bonds which pay now both short & long term ones. I very rarely short, except when obvious like Beyond Meat (BYND) which was beyond clear (pun intended).

2. Selling or Trimming

This one does not deserve much explanation, selling or trimming a big run is a luxury scenario, and simply put a scenario in which nobody ever got hurt booking a profit. Markets will always open, one can always get back in.

3. Hedging, my favourite:

When one has a 30-40-80-100+% gain, paying 3-15% for insurance to protect gains can get very decent - one can do that via options, namely buying puts / Long Puts.

Note: selling/trimming likely creates a tax event, while long puts might even help taxes wise depending on the investor’s portfolio & jurisdiction . It is always good to compare pros & cons, which also tells us why there is no one size fits all ‘solution’.

Choosing the option to hedge: here time and volatility is of essence, one can look at the options chains & decide for which strike price, premium and option expiry to choose from. Nobody can say which one is ‘the best’, it will depend from investor to investor, current equity position, time & cost preference etc. Great thing here is that NVDA has a rich/deep options market that goes up to December 2025:

To wrap it up, my thesis here is downside risk after a great recent run while on the long term Nvidia is a great business and should do well across many business cycles. Though short term:

• a lot is baked in into the price/valuation - years of great revenue growth, free cash flow & market share gain seems like a given

• let’s not forget the potential black swan via the current geopolitical issue between China & Taiwan - recall the above supply chain analysis & the inter-dependency between Nvidia & Taiwan Semiconductor (TSMC). Recall also Buffett did sell TSMC recently despite saying how good the business is (video):

• overall, there is no margin of safety here and that is not value investing in my book no matter how good things look right now!

3 final notes on trade execution:

• Short Selling can work from here, but not my way

• Booking a profit by selling or trimming: if too early now & Nvidia keeps running, it would be a good signal for the market & economic recovery overall & one can always jump in back into … markets will always open

• hedging cheap is my preferred way when it can be done relatively cheap and after big & fast parabolic runs, cheap hedges show up

Did you find this Special Situation interesting? Would be great to hear your feedback! What would help a lot from your side? Very easy, just spread the word around & share this with people that might also be interested into this coverage. Twitter post can be found here. Thank you!

Share Maverick Equity Research

Feel free to reach out to me personally here or via Twitter @Maverick_Equity.

Have a great day!

Maverick Equity Research

Disclaimer: information on this site should not in any case or form be considered financial, business, tax or legal advice, but independent research done by an independent investment researcher and investor for informational & educational public discussions only

First of all, I wish you a great 2023 with accomplishments on all sides!

It is January, time to refresh, restart and a great time for a forward looking perspective. Specifically, January is a key month for asset allocations and related money flows dynamics that come with each start of the new year.

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First of all, where do we stand? 2022 review in one chart: S&P 500 SPY down -19.41% while bonds down as well but not all equal: TLT (20-year+) pain with -31.24% AGG (US IG: treasuries, corporate, MBS, ABS, municipalities) just -12.93% while SHV (1-year/less maturities) even with 2022 ramping inflation & interest rates a remarkable positive +0.89%

In January each year new money is allocated across asset classes, big portfolios are rebalanced, new IRA & 401k contributions are coming to town. Therefore, January is the biggest market structure dynamic.

Specifically:

• 22bps of new money (not including money leaving bonds/cash) comes into the market every January which is about $62 billion of new money!

• January inflows are more than the other 11 months of the year combined!

A 1st key question: is there dry powder cash sitting on the sidelines? Yes! Actually, it has been the money flow winner in 2022! Does any of that Cash come back into and go into stocks & bonds? It should: inflation is burning cash in stealth mode and reduces purchasing power … time value of money 101.

Now a 2nd key question, where does the new money go in January? Chart from Ben Snider via Goldman Sachs is very important. This would be different than we are used to. New money goes into the laggards and this is what everyone is asking today. Factor seasonality in January since 1980 with the median & average returns: valuation (low vs high), Growth (high vs low) & Size (small vs large) to be watched as favorites:

Now first, let’s check the S&P 500 2022 Sector laggards. XLC Communications, XLK Technology and XLRE Real Estate were the top laggards in 2022, a year when XLE Energy lead by far and together with XLU Utilities were the only 2 positive sectors:

Let’s go even more granular from the Sector level to the single S&P 500 laggards. The S&P 500 ended the year a bit below 20% but note the top laggards in terms of overall contribution: more than half (-10.06% / 1,006 basis points) was due to just 7 Big Tech stocks: Tesla, Meta/Facebook, Apple, Microsoft, Nvidia, Amazon and Google.

And now let’s see below both winners and laggards via a price scatterplot view with the Return % YTD '&' Above 52-week Low % with the overall note: 135 stocks ended the year positive, 365 negative with 198 of those having a return of -20% or more. 121 stocks had a return worse than -30% (~24% of the index). 26 stocks had a return worse than -50% (~5% of the index).

Time to look now at 2023 flows in the 11 Sectors from the S&P 500: XLE Energy the leader in 2022, now with the biggest negative flows. XLC Communications the top laggard in 2022, now Top 3 with 307m inflows. XLI with the biggest inflows after in 2022 a laggard as well. Overall, mostly positive flows coming to town.

Performance wise we are already seeing that in the 1st week of 2023: XLC Communication Services (2022 laggard) leading with +5% the S&P 500 sectors and just XLV Health Care close to nothing down:

How did bonds, specifically non-investment (‘junk bonds’) do in the new year flows wise? Biggest weekly inflow since 2020 for the iShares Junk Bonds ETF (HYG):

Zooming out to global stocks, they gained $1.8tn in market cap for a good start in 2023:

Going more granular, S&P 500 heatmap to see the latest action into single names:

Goldman’s US Financial Conditions Index (GS US FCI) recorded a big easing last Friday after positive economic data came out and helps a lot the start in 2023. Outside of the November CPI day, Friday's FCI easing was the largest since April of 2020. Essentially, the market sees a slowdown in FED’s pace or rate hikes in 2023+.

For a complementary view, let’s plot now the GS US FCI & the FED funds rate: after the FED hiked interest rates in one of the most aggressive ways in recent history, financial conditions have continued to loosen indicating that the market believes ‘peak FED’ is priced in and we are going looser from here, sooner or later:

After hard data, now let’s also look at Seasonality: positive Seasonals to start 2023 as a preview of the start of the year.

S&P 500 January - isolated - seasonality: that's the pattern ...

Last but not least, let’s note also that Stock Buybacks are back in town in 2023: repurchase Blackout window ends on 1/27/23. GS Corporate buyback desk models $1TN worth of executions for 2022, for the best year on record (2021 was $992bn). This gets us to ~$4 Billion during each of the 252 trading days.

Key variable to watch in 2023 S&P 500 valuation wise? Real Rates!

• P/E (forward) closely tracks the path of real rates 10-year real US treasuries

• higher real rates lead to lower P/E multiples & conversely lower real rates lead to higher P/E multiples

This was shown again exactly now in 2023 on Friday the 6th of January: S&P 500 UP, 10-year real US treasuries DOWN. Interest rates, interest rates, interest rates … .

I hope you enjoyed this publication. What would help a lot from your side? Easy, just spread the word around & share this with people that might also be interested.

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Have a great start in 2023!

Maverick Equity Research

welcome to the 1st post in the Trading Ideas & Special Situations section. Maverick Equity Research is about medium-long term investing, though occasionally interesting situations arise in the market which you might find interesting: be it for tactical short-term trading, hedging to protect gains, complementary confirmation to your views, or simply an interesting insight & research to have a look into.

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So here we go, the Trading idea / Special Situation in short: semiconductors $SOXX getting too hot & too ahead - time to Sell, Trim or Hedge

For this, the assessment was done via:

1. Financial Conditions

2. FED’s less aggressive rate hiking path

3. Relative strength & performance VS the S&P 500 and Nasdaq

4. S&P 500 bouncing at the ceiling level

5. Short Sellers & Bears coming

6. Technical Analysis resistance

Rationale for the thesis:

1. Goldman Sachs US Financial Conditions Index: to start, the 15-day change in the (GS US FCI) we just had equates to one of the bigger ones in 2022

Now it’s a good time to catch for parts of the stock market that ran ahead not just with it but way more & above - for that when the GS US FCI Year-over-Year is plotted with the SOXX ETF 126-days rolling % daily returns, this is what we get: SOXX getting hot & running ahead above this latest optimism & easing in the US financial conditions. Source GS GMD.

2. FED’s less aggressive rate hiking path: the easing above in the GS FSI has in the background the latest encouraging inflation data. In this respect, below we can see the ‘Before’ & ‘After’ FED hike path. 'Before' & 'After' the CPI data: until recently market was all about 'higher for longer', while now way less ... rather getting closer to the 'neutral rate'. Funny how fast things can move, isn't it?

3. Relative strength & performance VS the S&P 500 and Nasdaq: now let’s also see SOXX with the SPY (S&P 500) & QQQ (Nasdaq): SPY & QQQ with the relief rally, but SOXX getting hot in November recording more than double & triple the returns in the SPY & QQQ respectively

The same trio SOXX SPY & QQQ with a relative % performance:

Now if one does not own SOXX, but individual semiconductors, things get even more interesting via the SOXX scatterplot: 1 month % price change & % holdings weight. In the green circle I did highlight here the semis which had returns between 15% to 35% in just one single month: overcooked? returns front-loaded?

Complementary, SOXX ETF holdings and contribution to the 1-month returns: NVDA, AVGO, KLAC, AMD, AMAT, ASML & TSM are rocking the boat heavily:

4. S&P 500 level, a ceiling as well? Let’s also note that the current 3,942 level is very close to the 4,000 level that was twice surpassed briefly last week, but could not hold above, hence seen as a ‘ceiling’. Round numbers & psychology, we like it or not, matter in markets and are a battleground threshold for the bulls & bears, especially on the short term. Hence, this also is a pressure point for SOXX / Semiconductors to keep rallying from here after such a nice run

5. Bears & Short Sellers coming in strong? SOXS ETF (3X short Semiconductors) recorded +$500M inflows on high volume last week. Pocket of the market looking aiming to gain by shorting after this very good recent rally (via @cfromhertz):

6. Last but not least, let’s also have a look at SOXX via the Technical Analysis lens:

• price (blue) should it meet & kiss the 200-day moving average (red), it would mean that is a ceiling/stop level short term wise given a resistance level

• the downward dotted trend line (black & 4 red circles) as a closer resistance level

• RSI also hovering lately around the upper oversold level, which supports the overall view that we had a very good rally lately, though it might have been too fast & strong:

Trade Execution:

• Sell or trim SOXX ETF

• Sell or trim top holdings from the SOXX ETF that ran ahead too fast & strong

• Hedge to protect gains via options Long Puts or other instruments

To wrap it up, 3 final notes on trade execution:

• should one sell too early now & semis would keep running, it would be a good signal for the market & economic recovery overall & one can always jump in back into the semis train … market will always open

• hedging cheap is my preferred way when it can be done relatively cheap 

• my thesis here is downside risk after a great recent run - Medium-Long term Semiconductors should do well along economic recoveries

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Maverick Equity Research

P.S. in case you missed my S&P 500 deep dive which includes my Ceiling & Floor levels going into year end and related rationale, you can read it via this link:

P.S. in case you missed my Value Stock Screener in Europe has some interesting findings in the context of the energy crisis and the war, you can read it via this link:

Disclaimer: information on this site should not in any case be considered financial, business, tax or legal advice, but instead independent research