Beware risk assets

The data and price action last week reinforce my conviction that Wall Street risk assets are now in a classic Catch-22, heads I win/tails you lose scenario – by Matein Khalid

The strong economic growth data we saw in February and spike in inflation metrics mean more Fed tightening than implied by the 5.4% terminal Fed funds rate and 3% five year breakeven TIPS. This is bad news for risk assets.

The tails you lose scenario is that the Fed monetary sledgehammer triggers a recession, as the inverted yield curve, resurgent King Dollar, embryonic crude oil price crash and the St. Louis Fed GDP model suggests is now happening in real time. This means a fall in corporate profits and a crash in risk assets. My call? The equity risk premium, like Shakira’s hips, never lies, as I have warned ad infinitum over the past month.

“It is no coincidence that the S&P 500 has lost 5% in January and violated its 50 day moving average trendline even as the yield on the 10-year Uncle Sam note has spiked from 3.35% to 3.95%”

The end game to this unfolding macro tragedy is Ursa Maxima, which is sadly not a Nissan sedan. It is no coincidence that the S&P 500 has lost 5% in January and violated its 50 day moving average trendline even as the yield on the 10-year Uncle Sam note has spiked from 3.35% to 3.95%. Yikes! The 200 day MA landmine is only 30 index points below Friday’s 3970 close. This is the line of death and if it goes, God save the King and God save the bulls.

I am no fundamentalist fanatic in life and the markets as all my close friends can attest. Yet the valuation of the index, despite its 5% fall in Feb, is still a funda shocker at 17.6X forward earnings. The wolf is not at the door but in the bedroom and Little Red Riding Hood will be served for dinner tonight, as Goldilocks was in the past month’s jobs, PMI, consumer sentiment, retail sales and PCE data.

If you still want to buy structured notes on Tesla and Amazons, you need to grasp what Freud said about death wishes and apply for a job as a Kamikaze pilot now that Imperial Japan rearms once again.

The irony of the October/Jan index rally was that it was spawned by multiple expansion, lower UST yields and a fall in consensus corporate EPS estimates. These three pillars that anchored Mr. Market’s sugar daddy rally are now as dead and gone as Nineveh, Noricum and Nalanda.

Thanks to Uncle Joe, it has been a great time to be a fundamentalist with an AK47 and a whip to beat anti-Taliban women in Afghanistan since August 2021 but it is no longer a good time to be a fundamentalist value investor on Wall Street. Caveat emptor!

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