MAXIN GLOBAL FUND - USD is a Long / Short Directional hedge Fund incorporated in Luxembourg. It started trading on February,22 2022 and replaces MAXIN ADVISORS' MODEL PORTFOLIO which has been trading since January 1st 2014. At MAXIN ADVISORS, we manage FULLY TRANSPARENTLY and publish the transactions on a DAILY basis and the details of the portfolio on a WEEKLY basis.
Don’t Fight the Bullish DNA of US Investors
American Investors have always had a bullish bias, a “can-do” risk taking attitude and an ever-optimistic prism that has made America what it is today, with all its successes but also all its dangers.
“Making money” is central to its culture, “Billionaires” are the society role model and “Making it Big” is at the core of the American dream. And indeed, In a society that provides almost no safety net and where employees can be fired by e-mail with no prior notice, individuals are understandably polarised on making their savings grow and the only way to do so is the stock market..
It is this bullish bias that leads America to be prone to excesses more often than any other Nation and it also led to major crises as excesses on one side naturally correct themselves through excesses on the other side.
The behaviour of equity markets in the first month of 2023 is a perfect example of that process where the bullish momentum builds upon itself, flying in the face of the underlying economic and corporate trends.
Granted, the Economic data released this week was cheering, with the Q4 GDP coming in at a higher than expected 2.9 % growth rate, but still declining from the 3.2 % rate of the previous quarter. Inflation has been coming down as well, as would have been expected considering the base effect and the decline in energy prices, with the PCE declaring to 3.9 % from 4.7 % of the third quarter.
The logical, but short sighted, conclusion is rightly that the FED will slow the pace of its monetary tightening, something that we had been predicting for several weeks now.
At the same time, the underlying economic and corporate earnings trends are worrying.
Consumption growth is declining faster than expected and industrial production is clearly in contraction already.
On the earnings front, whether it is mainline consumer goods companies or technology companies, net profits have been declining sharply ( – 5 to – 6 % on average ), banks are increasing their provisions for bad loans, the guidance from CEO is undoubtedly negative and the generalisation of massive layoffs is the most tangible sign that corporate America and the technology sector in particular is experiencing its worst downturn in at least 15 years.
So does it all justify equities rising 8 to 9 % in January ?
Rising stock prices combined with declining earnings mean that valuations are actually expanding even if the main indexes have already fallen 15 to 20 %
As a matter of illustration, Intel’s Q4 sales decline of 40% reflects demand weakness across its core Client and Datacenter segments. With net profits collapsing from USD 18 Billion in 2021 to USD 3.2 billion in 2022, management has no choice but to focus on generating massive cost savings and, it will probably take the next 4 to 5 years for the company to reach the 2021 profitability again. With the stock having fallen already 61 % since its 2021 peak, one could assume that the bad news is already priced in. But with the company trading at 39x next year’s earnings and little worth in profits in sight, the case could be made that the shares are still highly overvalued.
The fact of the matter is that the bullish bias of investors lead them to bet on the fact that we have seen the worst and they are looking over the valley.
This is where dangers are …
We are in the sweet macro economic spot where inflation has started to decline but economic contraction has not yet materialised, and this time lag is pushing investors to bid-up asset price in the hope that we are turning the corner.
Unfortunately, if history is any guide, downturns do not last just one quarter or even one year, especially when inflation and interest rates have surged at the fastest rate in 4 decades.
Real estate prices is starting to decline sharply, US households are falling behind on car payments at a higher rate than in 2009, Government are fighting to balance their budgets and may be forced to raise taxes and Central Banks are busy unwinding the stock of bonds accumulated over a decade of quantitative easing, all trends that do no bode well for the rest of the year.
As we detailed in our roadmaps for 2023, we have not yet seen the true bottom of the bear phase that started in 2022 and we see it happening in the 3rd quarter of the year, when the economies will have truly decelerated and corporations are still seeing revenues and profits declining.
The coming valuation compression will take the indexes much lower.before we see any cyclical rally develop.
In the mean time, there is no point in fighting the Bullish ADN of US investors …
It will end by itself once everybody will have turned bullish, either now, or most likely in March/April.
We have clearly articulated our views that we could see two scenarios ahead, one where equity markets fall right now to re-test the 3’800 / 3600 levels before staging another rally toward 4100 / 4300 in Q2 2023, and one where the markets could rise directly to those levels.
In both cases, what comes afterwards is a very negative downdraft destined to finally restore value..
Today, saw the main indexes tentatively breaking out of their downtrends.
Being disciplined investors, we have covered most of our US index shorts positions as well as some large positions such as Microsoft. We also closed most of our profitable short positions in the US, but we also increased our short exposure to TESLA and to NVIDIA and added to our long volatility positions.
However, the jury is still out on whether this is a sustainable break out to the upside or just a fake breakout, and the next trading sessions will tell us more.
We have significant economic data coming out on Friday, so everything is possible…
We stand ready to re-instate our short positions at the press of a button..
When it comes to Europe, equity indexes are highly overbought, and some overhyped sectors such luxury stocks are making a secular top. Their Q4 earnings show a significant deceleration of their business and we have probably seen the best of their profit growth.
Crypto currencies are also topping out, the US dollar is near a turning point, Precious metals are ready to roll over and bonds could go either way, torn between inflation numbers, monetary policies and decelerating growth.
Next week will see the FED January meeting and expressing its views on the future course of monetary policy, and the ECB raising rates to 3 %
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