The Pre-Santa Rally Pep Talk

It could be a rough end to the year

Last week the Fed announced an increase to the Fed Funds Rate. I covered that here:

CPI slows, the Fed slows its pace

In the piece I called out Forbes for their article about the Santa Rally. Their math is preposterous. I've seen authors attribute the rally to an assortment of factors. Everything from holiday spending, year-end bonuses, increased pay rates leading to increased 401k contributions, portfolio rebalancing for pension funds and “feeling more joyous about the next year". While all these factors might have a slight influence, the bigger influences will be the money supply, margin debt, and the positioning of the big banks.

The final money supply report of the year drops December 27th but I'm going to go out on a limb here and say it is going to be very close to the past 12. The money supply has been frozen since Thanksgiving of ‘21 and Powell has no inclination to change that now.

Money supply, margin stats, yield curve

This means the idea of a Santa Rally is going to be far-fetched. If a rally does come to wall street, it will be very short lived.

We are seeing this reality become exposed in the housing data that came out today.

Charlie Bilello @charliebilello

US Building Permits hit a 29-month low in November, down 22% year-over-year. Tends to be a leading indicator for the economy, recessionary signals continue to build. Charting via @ycharts

Do you think it is any coincidence that building permits peaked a month after the money supply went flat? Or that builder confidence has been down for 12 straight months?

Charlie Bilello @charliebilello

The US Housing Market Index (measure of homebuilder confidence) fell for the 12th consecutive month to its lowest level since April 2020. Before April 2020 (which was a short-lived decline during the pandemic shutdowns), this is the lowest since June 2012. Charting via @ycharts

While I think that the broader market is setup for lower lows, I do see some bright spots. I'm still a big believer in offshore oil. With the central banks battle against inflation, this will cause some oil demand destruction. Short-term moves in oil are based on the demand side of the equation but long-term moves will be dictated by supply and supply is not in a position to satiate the demand that is coming.

I also see value in coal.

Javier Blas @JavierBlas

Global coal demand has risen to a record high in 2022, surpassing the 8-billion-tonnes level for the first time, according to a new @IEA report. The IEA now forecasts fresh coal consumption records for 2023 and again for 2025 | #EenergyCrisis #CoalTwitter

iea.orgExecutive summary – Coal 2022 – Analysis - IEACoal 2022 - Analysis and key findings. A report by the International Energy Agency.

Lastly, I want to mention this article from Trader's Notes:

For Investors, Cash is Not Trash, and More

This idea originated with David over at LiveBetterNow.

Give me the YINN and the YANG: Why I am betting against both long and short Chinese leveraged ETF garbage

I've now dipped my toes in the water with a small TQQQ/SQQQ position. A word of caution, do not set “market" orders when opening a position like this. Use limit orders instead and slowly bump them up to get the best fill price. These option contracts are much more thinly traded and can be somewhat of a shock if you've never traded options before.

For further consideration, I've been consumed by the amount of quality content I've been reading at “Meaning in History”. Mark's latest piece covers a lot of the politics surrounding the Fed, the wall street banks, Powell, and Desantis. A lot is derived from Tom Luongo's Theory of Everything.

Luongo Takes A Victory Lap