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Gene Inger's Daily Briefing - for January 3, 2023

Chinese water torture - is how I've sometimes described the bifurcated mess of a market in 2022; which in my view was year 2 of a 'Bear Market'; not year 1 as some pundits or analysts contend.


That's rather important to consider as many expect year 3; which is extremely unusual except for Depression, World War, or other calamity. I believe we've had calamaties, interrupted by the expected interim 'Bull Market' off the Covid lows from March of 2020; and that ran out-of-steam, masked by distribution in 2021, which was actually the pinnacle of the buybacks and insider selling that really is never adequately explained (as many CEO's promoted their stock for the purpose of additional compensation and then so they could sell chunks?).


Of course we cant say that the two years of decline ('troops' then Generals all eventually piling into the trenches and getting pounded into near-oblivion) will be all we get; as in some stocks it's still ongoing; might see some sales (may be for gains not just losses) pushed into early 2023; and then reprieve. But of course that's the debate as ongoing. I suspect 'Bear' is long-in-the-tooth; but it is conceivable things will struggle awhile more as Fed excessively perseveres in tight monetary policies; essentially opposite their too-low-for-too long 2021 policies that we railed against ponce the Nation stabilizes later in pandemic.


My inclination tends to be better 'pause' sooner than later; but it requires not just milder tone (or 'pass' at next FOMC on hikes), or Chinese economic signs of progress that they actually increasingly talk of; not thwarted by big Covid. It is Vice Premier Wang who said it's a 'new era' of Covid policy and economics.


Realize many variables are out there; and more predictions for 2023 than the number of pundits we even knew existed. Here, we'll try to assess the flow; as we did in calling the 'actual' bubble bursting in 2021; the tough 2022; including calling for rallies off the June and October lows (a debatable 'erratic' complex bottom for S&P); and the prospect that S&P .. even now.. hovers nearly at the same ~3800 level we'd sort of traded around for months. Tension on the tape.



In-sum: you know the variables; and I won't dwell on them this weekend as a New Year's celebration approaches. For me there is also gratitude; this year was year two in a row of challenging health issues; Covid severe in 2021 and triple heart procedures; and then this Thursday's fortunately minimal personal impact from being rear-ended while fully stopped in-front of a nearby mall. I'm ok after a couple CT scans in the ER. (And I already had enough in 2022.)


(It was such a hard impact that it pushed my car into the one ahead; 3 ladies as well as a baby. The driver that hit us had no license (figures in Florida). So I deal with it; but once again thankful to be fairly resilient in the ordeal(s). (I'm not indestructible; it fortunately just seems that way haha.)


2023 is going to be a better year if we can avoid a direct conflict with Russia; sidestep China's latest massive Covid outbreak again; tame the Fed zealotry; and realize that 'high PE's are seen twice' at the highs... and at the lows too.


New Year's Eve (final 2022) MarketCast

Bottom-line: how bad must things have to get to motivate the Fed pivoting a bit ? May not be as severe as a majority of analysts persist thinking; although I understand their frustration as the 2022 year ends with Wall St. performance bonuses pummeled almost as much as the markets.


Mega-caps (which they mostly own hence their despair) were rotten to their core; but it's actually the 2nd not first year of serious downside 'trending'. So that's underlying my suspicion of something different for 2023; providing we're able to extricate Russia from Ukraine; prevent waves of new Covid variant of course (from ravaging the West, as well as China, which has no handle on it); and if the Fed finds a path to recognize they are hurting those they proclaim a lot about helping. Inflation will decline, but some of it has been baked-in.


Lastly as I mentioned gratitude for having endured a difficult year for health; in the markets (even though warning of many of these problems advising lighter holdings gee..almost for two years now); and now with a moderate accident, I also was to express gratitude to you, our members, for sticking aboard during these challenging financial and personal times. The X-ray technician the other evening briefly chatted about investments and asked me why I don't retire; as it seems sort of time. My response was; well, the brain scan was fine (nothing showed, thus still an air-head haha)... and I think my market work keeps me a bit on-top of things, compels me to focus not just on myself; and I think we've helped a bit, especially since just at the onset of Covid and since.


Hopefully so, and will do so again in 2023; and I am clearly not so negative in regards to how the year will go, especially as opponents to stabilization in the world ought to also know what happens if they persist on destructive paths.


Enjoy the celebration; as I give thanks that I'm simply able to welcome 2023, and expect myself and the market to be even more resilient in the new year.


Cheers!


Prior highlights follow:

Passive investing - did more than sour sentiment this year. It clearly allowed the Fed to 'think' things were more robust than they were; and also a big-cap concentration among money managers allowing an illusion of 2021 strength, which is the year the 'broad' market broke (including pandemic theme stocks); small stocks and SPAC's got creamed, and concentration into 2022 mega-cap stocks, masking the devastation we've been speaking of for nearly two years.


This has analysts (partially correctly) talking about volatile unpredictable early behavior in 2022. They generally ponder if it's going to be like January 2009, or more seasonally typical. Much of that depends on ... China not the Fed. It's likely a volatile environment; with more managers focused on fixed-income; at the same time they are unsure about tactical approaches to investing.



In a sense a contrarian becomes more optimistic; not more pessimistic. Sure, I was (and am) concerned about waves of Covid; but tempered that by noting it shouldn't vary much from what Hong Kong or Ukrainian expats experienced. It's hard at times; but my inclination has been 'against negativity'; for seasonal biases to kick-in after aggressive drops; and definitely not pressing downside trying to milk more out of bearishly trending stocks, at least pending rebound. I have actually opined a bit earlier that 'if' you were short; harvesting gains on the downside was appropriate; but staying negative is only fine; up to a point.


So sure, the question is have we gone far enough South that we start going in a Northerly direction, without much recognition. Well we got stabilization today and a bit more. The longer-term outcome is unclear for now; though an active approach will be necessary to avoiding being blindsided by dividend cuts or earnings misses among the bigger stocks; while realizing there are too many shorts around and it's illogical not to oppose the 'near-universal negativity' as all they are doing is exposing themselves to the rebound, or even more. Let's see what the New Year brings for openers; likely 'not' instant huge downturn.


Smaller stocks generally have gone through the wringer already. So for those able to muddle through with a reasonably solvent structure, absent need for significant dilution or similar; it's probably a scenario of bifurcation departing a good bit from how the past year evolved.


Of course everyone (including us) remains favorable towards Energy or Oil in particular (although from lower levels); while Semiconductors remain a best example of expensive stocks that came down a lot; but could erode more for a bit. Semi equipment (or quality control testing); or military specialty stocks, in a sense will move differently as the world moves to Silicon Carbide wafers.


I'll explore more about all this next year; since there's little shifting this week in terms of 'developments', although one or two 'sprinkled bets' for survival or for new direction success, are behaving well, while one or two head for oblivion. I think such stocks (especially where it relates to Gov'ment business or 'space') will move in 2023 based mostly on their unique fundamental developments or failures. It's going to be a challenging year for those that need to raise capital. For those that are short of funds, they might have trouble until 2024-2025 and that is too long for those looking for success especially in technology areas.



In-sum: history does rhyme but not exactly repeat. Next year (if we're right as to already having had back-to-back negative years of 2021 and 2022 when all this is viewed beyond the prism of half a dozen mega-cap S&P components) is unlikely to be as 'dead' as some contend; and even if relatively stressful it's likely to be a neutral or up year; but in selected areas.


It's hard to get enthused about Banks (because of unknown involvement in crypto); the Enterprise or Fintech areas; but there will be some successes in both areas. Semiconductors should remain defensive; but declines concluding in some shifting to Silicon Carbide; but the suppliers will do better for awhile; because the major 'fabs' must spend to gear-up for SiC before revenue flows from a lot of industrial product areas; not simply EV's. And as far as EV's, we have been bearish on Tesla for a couple years (more than cut in half); so why get excited about remaining downside. Rather, while we can't say it meanders lower after rebounding; it's almost irrelevant as past harvesting time. We are more interested in what's coming along.. including next week at CES Vegas.


Chart patterns are mixed; many stocks inconclusive near-term as everyone is seemingly on the same page of uncertainty or negativity headed into what the majority sees as 2023's 'recession'. We have leaned towards an internal S&P 'erratic and complex' bottom comprising the June and October lows.


However we are not at all drawing too many conclusions about how it impacts 2023, since simply rebounding some of the heavily capitalization components of S&P can extend this 'overdue' year-end rally for now; regardless of what's in the market's future in Q1 of 2023. If anything the caution meant too many on the short-side, and just imagine what happens 'if' the war ends; 'if' China's emergence becomes 'real', and if Covid doesnt worsen 'much'.



All 11 S&P sectors were higher Thursday; in a move that should have started Wednesday, but but blindsided by fear of new 'exported' Covid variants from China to Milan. This morning Italy confirmed 'all' of the 50% positive fliers that deplaned in Milan had Covid 'Omicron'. That was relief that allowed a typical year-end rally that was stymied by yesterday's new threat, to resume a bit.


We were concerned (and still are for humanity not just markets) yesterday but made I think an interesting observation. That was the hundreds of thousands of 'Ukrainian evacuees' in Poland, Germany and the United States, having not presented with complicated Covid variants for which there's no understanding or treatment. Well that was the point of Russia's Sputnik vaccine's similarity to China's Sinovac; and today's 'Omicron positivity only' report is probably what the market needed to kick-back and allow the seasonally normal rebound.



Bottom-line: Thursday looked like a fairly typical seasonal rebound; but also a rebound a bit overdue based on seasonal norms. Hard to say how much more 'immediate-term'; but while the rally is too-little too late for performance rated money managers (impacts their bonuses); it's really coming from oversold as we look at the most beaten-up mega-cap stocks.


Because of that it's still bifurcated; and makes the S&P look more neutral; not as oversold at extremes (daily or weekly) as some stocks are. It varies from group-to-group (for-instance long-term some big banks look more like head-and-shoulder tops than bottoms some analysts contend; perspective varies).




Stay safe,
 
Gene

Gene Inger


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