December 2022 Update for Vailshire’s Separately Managed Account Clients

Greetings!

I hope each of you had a wonderful Thanksgiving, surrounded by those you love.

I drove my family 1,000 miles (each way) to celebrate with extended family and friends in Minnesota… which was really fun and relaxing. Our 19-year old minivan notched another epic road trip onto its belt!

(Graph: The S&P 500 rose above its 200-day moving average for the first time since April 2022.)

Current Market Conditions

Jerome Powell gave a speech on November 30th at the Brookings Institute and the markets LOVED what they heard.

Ironically, he didn’t say much of anything new…

  • Inflation is still running hot, which is hurting Americans across the board. But it has probably peaked.
  • The US economy is still quite hot, as evidenced by the extremely low unemployment numbers.
  • The Federal Reserve will likely raise the federal funds rate higher than originally anticipated and hold it there for a long while.
  • If all goes to plan, inflation will subside throughout 2023 and the economy will experience a “softish landing.”

Upon hearing this, the US dollar proceeded to smash through its 200-day moving average (MA) for the first time since mid-June 2021; the S&P 500 went vertical and re-took its 200-day MA for the first time since April 2022 (see above graph); and the 2 Year Treasury yield dropped precipitously from approximately 4.5% to 4.236% (where it currently stands).

The reaction of the dollar and the 2 Year Treasury are the most important indicators to consider, in my opinion. They are telling us, in effect, that the end of the current rate hike cycle by the Federal Reserve is likely nearing completion.

In fact, unless inflation data comes in much higher than anticipated over the coming weeks, then the expected December rate hike of 50 bps may be the Fed’s last. The 2 Year Treasury yield often acts as a ceiling for how high the federal funds rate can go before something relevant breaks in the financial system. If Jerome Powell and Co. defy this upper boundary, we may see systemic calamity sooner than later!

Historically, when the Fed takes a break and pauses its rate hike cycle, risk assets “catch a bid” and rocket higher for a season. Whether this market move higher lasts a few weeks or several months (if at all) is anybody’s guess, but the surge potential should not be ignored.

The bad news is that I view this anticipated move higher in risk assets as a proverbial “eye of the storm.” That is, the deeply inverted yield curve and myriad other economic indicators strongly suggest that a recessionary bear market still awaits us in the not-too-distant future. More on this in future email updates…

For now, we will look on the bright side and diligently follow Vailshire’s proprietary long-term trading system, which is tilting bullish on several risk assets for the first time in a great while. Ideally, we will experience some nice gains as market optimism gradually returns for a period of time before we need to get defensive again.

Strategies for Vailshire’s Separately Managed Accounts

All Vailshire portfolios have added a collection of capital efficient stocks and select ETFs which are currently showing favorable, bullish momentum. Interest-earning cash positions continue to be some of our largest positions, but have diminished over the past month as we increased positions in select equities and funds.

For Vailshire’s Conservative, long-only accounts, we currently hold 15 select stocks and exchange-traded funds in bullish formation. In addition, we are maintaining an outsized cash position until additional assets on our watch list turn bullish.

Our Moderate and Aggressive portfolios also hold the above-mentioned long positions, a sizable chunk of interest-earning cash, and one remaining short position. Before the end of today’s market close, the S&P 500 confirmed a new bullish trend (for now), so we closed our prior short position and added a new bullish position to capture upside gains.

As always, the ultimate goal of Vailshire’s long-term trading system is to profit over the long-term, whether markets are moving higher or moving lower. The markets have essentially been moving sideways since June 2022, limiting our performance, so I would welcome any lasting directionality at this point!

Depending on your financial objectives and individual account investment privileges, Vailshire’s Aggressive and Moderate separately managed accounts (SMAs) are currently allocated in the following manner (% base positions):

  • 45% LONG select stocks and ETFs
  • 7-10% double SHORT NASDAQ ETF
  • 10-15% double LONG S&P 500 ETF
  • 30-38% cash (earning interest at IB)

Vailshire’s Conservative SMAs have limited (long-only) trading privileges and are currently allocated in the following manner (% base positions):

  • 45% LONG select stocks and ETFs
  • 55% cash (earning interest at IB)

Given the trading and investing limitations of our Conservative accounts, I am not able to actively hedge these portfolios.

If you are a Vailshire Client, feel free to log into your Vailshire-managed account(s) at Interactive Brokers and see how your own portfolios are positioned. (It’s a good idea to log into your accounts at least quarterly, just to make sure your settings and demographics are up to date.)

**Important note: For those “Conservative” clients who wish to be more aggressively hedged against anticipated declines in the equities markets, you will need to log into your Vailshire account(s) at Interactive Brokers and apply for trading privileges in “leveraged or complex exchange traded products.” If you need help with this, please let me know and I will re-send instructions from Interactive Brokers to your email. Also, if you decide to move forward with this account change, please let me know so I can begin hedging your account on your behalf.

Vailshire in the News!

In early November 2022, I was again honored to be the featured guest on the Contrarian Dude podcast. This one was entitled, “‘GOOD NEWS IS BAD NEWS’ Why the Fed Crashed Markets.”

I also enjoyed speaking a couple of times at the first annual Pacific Bitcoin conference, hosted by Swan Bitcoin! Here is a link to our Cafe Bitcoin Macrostrategy panel discussion, with some of my good friends in the Bitcoin space: Greg Foss, Lawrence Lepard, James Lavish, and more!

Please enjoy the content and let me know what you think.

Conclusion

While the majority of economic indicators portend to rough times ahead in 2023, the markets appear to be entering a near-term “Fed pause” rally, which may have room to run over the coming weeks and months.

Whether this rally is sustainable or not is somewhat irrelevant to Vailshire’s long-term trading system, which will allow us to quickly pivot bullish or bearish, as price momentum indicates. Either way, we will be positioned to profit across our portfolios once the market decides on a convincing direction.

I am honored to have you on board with me at Vailshire and am working hard to preserve and grow our capital in market-beating ways over the years and decades.

Living well and investing wisely with you,

Jeff Ross, MD, MBA