In this week’s Dirty Dozen [CHART PACK] we look at DM yields, draining liquidity, the credit cycle, embedded expectations, oil going to $500bbl, and semi inventories, plus more… 

1. DM yields are on the up and up with Bund yields turning positive for the first time since early 2019. 

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2. It’s not so much the level but the rate-of-change through which rates impact the rest of the market. Fast-rising rates feed into widening credit spreads and tighter liquidity, which then spurs risk-off and even tighter liquidity, etc… The current liquidity backdrop is not a good one risk asset. 

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3. There’s a cyclicality to all of this because monetary policy and the risk cycle are part and parcel of the business cycle. Here are ISM manufacturing and HY credit spreads (inverted). Our leading ISM indicators point to a continued deceleration in US growth, which implies a continued widening in spreads. 

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4. We’ve been seeing quite a bit of recession chatter lately. And while it’s possible the Fed gets too aggressive in their attempt to reign in inflation by killing demand, we’re still a LONG way off from there. 

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5. Bridgewater recently put out a report titled The Archetypical Equity Cycle and Anatomy of A Bear Market where they discuss the big shifts in the macro-environment. 

“…Four major forces account for a substantial portion of what drives equity returns: changes in discounted growth, discounted inflation, discount rates, and risk premiums. The equity market and nearly all markets have relatively stable betas to these four force and their returns reasonably track the beta-weighted sum of these forces. Up until recently, prices tracked macro conditions closely.  

In recent months, the fundamental macro pressures have leveled off while equity  prices have continued to gradually rise.”

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6. In another report (link here) BW points out how the market is “discounting a smooth transition to low inflation with a minimal rise in short-term interest rates”… They lay out why they think this is wrong (success of MP3, improved consumer balance sheets, recirculation of liquidity, etc…). 

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7. The recently retired HF manager Russell Clark wrote about the turn in relative trend between semis and energy producers, recently (link here). He notes “The chart suggests markets are beginning to price in the reduced investment into oil and gas industries, and the potential excess capacity in semiconductor industries.”

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8. Speaking of excess capacity in semis, here are two charts showing growing inventories in large semi-end markets (h/t @GavinSBaker). We’re secular semi-bulls due to the structural acceleration in demand. But… there will still be inventory swings along the way and this is something to track.

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9. Market veteran Martin Pring shared this chart of oil the other day. He wrote: “Oil breaks 2008-21 down trendline which should enable an oscillator secular buy signal. Using 2020 low offers an improbably upside objective of $500. The green arrow suggests a more attainable but still shocking $250.” 

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10. While $500 and even $250bbl seems ridiculous to many, the market needs to be looked at on a relative basis. And with commodities, a good basis of comparison is gold. Below are the ounces of gold one needs to buy 100 barrels of oil (via @McClellanOsc). Oil is still at the very low end of its historical range. 

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11. The CAPEX cycle is driving the trend and due to ill-thought-out ESG policies and myopic group-think, we’re not even near the beginning of the end of this cycle. This chart via Rystad Energy shows that Global discoveries for 2021 were the lowest in decades… 

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12. Tidewater, Inc. (TDW) should be on your radar. The company owns and operates one of the largest OSV fleets in the world. As Brent crude continues to rise, offshore drilling will come back online along with the need to service those platforms. The company has a clean balance sheet with just over $5mn in net debt with lots of insiders buying recently. The chart recently broke out from a 12-month rectangle. 

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