Breaking Even And The Week Ahead
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When I was about five years old, my brother, father, and I went sledding. We did so at the Board of Education’s property in Towson, Maryland. It’s a long, sloped stretch known as “The Hill.” People drive from all over Baltimore County, Maryland (and beyond) to sled here. Even 35+ years later, it’s still the busiest local snow attraction we know.
Now, my little memory starts in 1986 or 1987. I recall looking down the hill from that top. I watched my brother and father on separate sleds. They both went far and fast.
My father crashed full-bore into the drainage systems at the bottom of the hill. He didn’t get up for a while. Then, I watched as my then-teenage brother helped him up. My dad was limping and had an arm around my brother’s shoulders. That image is the only memory from sledding that afternoon.
But there’s more. My father had promised to take us that evening to a restaurant called the Corner Stable after we went sledding. I have a flash memory of sitting in the booth with my father.
He was sore, writhing, as the restaurant’s red lights stretched across the room. We had dinner, and then my father went to the hospital. He’d torn his anterior cruciate ligament (ACL) in his knee. He still took us to the restaurant, though. So, it’s fair to say that’s been my “high bar” for fatherhood.
Fast forward to Saturday. I hadn’t been on that hill for 37 years, but it was time to return with my daughter.
The hill’s not any safer. At the bottom of the hill, two bumps and odd, tight slopes make it easy to snap an ankle when trying to stop one’s momentum. During my first time down with her, we spun backward, hit the first bump, and dropped hard on my lower back. I was slow to get back up.
Walking up the hill, I told her the story about her grandfather. A woman nearby overheard me talking and asked when his accident happened, thinking it was recent. “Sometime in 1986 or 87,” I said. “We still went to the Corner Stable afterward.”
Well, that restaurant’s name was the magic word. My daughter asked if we could go there for lunch after at least eight or nine more times on the next trip down the hill. How could I turn that down? With that now on the schedule, I did everything possible to avoid repeating history. We walked away unscathed and drove to the restaurant.
She wanted to play Keno. But she couldn’t understand how I could bet $2 and only “win” $1 in the game when she looked at the payouts.
“Aren’t you losing money if you bet $2 and only win $1?” she asked. I explained how the word "win" can get twisted, and the real probability of winning an actual prize. It turned into a long conversation about probabilities and lessons on mathematics.
The most logical pursuit of payoffs and odds of Keno is playing just two numbers with a 1:16 odds of winning at 10 to 1. This is a breakdown of the prizes based on the number of “spots” played.
These are the odds of winning or breaking even. The odds on the back of the sheet tell you you’re a winner when, in reality, your odds include breaking even. If you bet $1 on a 4-number game and get two numbers, you “win” $1. But you didn’t win, you simply broke even.
So, I explained to Amelia that “breaking even” is not a win. We talked about those odds, why they mattered, and the difference between winning and “getting your money back.” That was that.
It was a simple Saturday, but one I'll never forget. Now, on to the markets.
The Week Ahead
It was an interesting week for the markets.
If you’re an investor and not a member of my service, I’m not sure what to tell you. We played this very well again—with inflows and outflows—and warned that Monday’s morning pop was just a head-fake. More importantly, we knew why.
On Monday, the Washington Post got everyone excited again. A report—which President-Elect Trump challenged—said that the incoming administration was considering a policy that only target import taxes on strategically important sectors. Markets rallied on Monday morning. Then, once the media got wind of Trump’s rebuke, they sold off, and they continued to do so for the rest of the week. This is a reminder that the purpose of the market is to sell.
On Friday, for example (after the news of Russian energy sanctions), traders pumped oil production stocks in the premarket hours, then sold to willing buyers trying to ride prices higher. I continue to implore traders and investors to stop trying to trade headlines, and to understand that sellers want you to buy.
Monday was a sell-the-news day, and Friday was the same. What will next week bring? Let's take a look.
Monday, Jan. 13, 2025
- Event: Treasury Budget
Are we solvent as a nation? The last time we got a Treasury budget, we learned that the U.S. budget deficit expanded by $367 billion in November. What is going on in this country?
Tuesday, Jan. 14, 2025
- Event: The Producer Price Index report
Inflation numbers are rising, and expectations keep pushing out rate cuts until later this year.
Once again, China matters on the PPI side. We want to focus on raw materials if the world’s second-largest economy engages in any QE later this year. China’s monetary policies have a causal relationship with the global economy and materials/commodity prices.
The reason is pretty simple. It’s a global manufacturing powerhouse. Stimulus will spur economic activity that requires real production of products. In the U.S., when the Fed engages in QE, it benefits banks.
Wednesday, Jan. 15, 2025
- Event: The December Consumer Price Index arrives as earnings reports emerge from JPMorgan Chase (JPM), Wells Fargo (WFC), BlackRock (BLK), Citigroup (C), and Goldman Sachs (GS).
Here come the banks, the companies that seemingly never lose.
They’re getting their hefty investment banking fees and looking forward to a robust period of M&A activity. The trading income looks solid. With Trump coming into office, the expectation is deregulation across the industry and plenty of capital for deal flow that will see more community banks get gobbled up.
But, in the short-term, watch the Direxion Daily Financial Bear X ETF (FAZ). Some weakness has built since our signals went negative in mid-December. This sector is desperately trying to reverse in the face of rising interest rates.
Meanwhile, the inflation situation is a serious problem. Janet Yellen has left the financial conditions in chaos, and we haven’t seen robust stimulus from China yet (that would drive up materials costs). Oil markets are tighter due to harsher sanctions on Russia.
Markets have now kicked the net rate cut forecast out to late in the second quarter.
Thursday, Jan. 16, 2025
Bank of America’s bond holdings make the institution look insolvent. There are well over $100 billion in “unrealized losses” on paper because their bonds have slumped in value while interest rates have climbed.
But, so long as they’re holding their bonds to maturity and allowing them to roll off at a 6% to 8% rate, they won’t implode. Bank of America is too big to fail.
Friday, Jan. 17, 2025
- Event: Schlumberger Limited (SLB) Earnings
This is the front of the oil supply chain. With interest rates rising, China in trouble, and other unknowns, what’s the outlook for oil and gas production?
I'm unsure the Trump administration will reverse the decision by the Treasury Department to hit Russia with new sanctions, as I assume there was some consulting on the matter before Friday’s announcement.
Oil prices shot up on Friday morning following the announcement before falling hard. We’re still long midstream companies. We anticipate that U.S. production will continue rising in the years ahead, and all that oil has to go somewhere.
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