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Good Morning!
It has been quite a week across the markets. From CPI printing lower resulting in one of the biggest moves in Nasdaq and rates in a year, to one of the largest crypto exchanges going under and stopping withdrawals, absolutely crashing crypto currencies and tokens by 25-75% in 48 hours. Make sure to take some time this weekend to relax and enjoy the smaller things in life and be grateful for what we have. On that note, let’s dive in.
Inflation moderated in October, according to the Consumer Price Index print this month. Annual inflation is 7.7%, down from September's 8.2%. The so-called core rate that excludes the volatile food and energy sectors is up 6.3%, just a hair below the prior month's 6.6%, which was the highest since August 1982. Economists expected on average, an 8% headline rate and 6.5% core rate.
We also got PPI data that came in lower than expected further, possibly indicating that inflation is likely cooling. PPI reflects wholesale inflation by measuring how prices paid to producers for goods and services develop.
Three weeks ago, on Twitter, when we got the article leak in the Wall Street Journal that we would see a slowdown in pace of hikes, I mentioned that this could potentially be a local bottom for now and a high on long end yields. For now this seems to be the case. It is possible that this CPI and PPI print has marked a local bottom in the market. If we get another good print like this CPI in December, we definitely will see another 5-10% move up in risk assets (NDQ, SPX etc). If this print was an anomaly we will see a significant pullback in markets and this will just be another bear market rally.
Several fed speakers have started leaning more dovish in their speeches this week. Fed Vice Chair Brainard said the time was soon coming for central banks to start moderating the size of interest-rate increases, while making sure people don't confuse it for pausing.
Fed Governor Christopher Waller suggested that last week's CPI was only part of the bigger picture and other data points would have to be taken into consideration before drawing any conclusions (PPI, PCE, NFP). He did indicate that the Fed would consider slowing rate hikes, but that it is not imminent.
Unfortunately, the Fed and Powell have made it very clear that they need to see a few sets of lower trending data points for them to even think about slowing down. I believe that we will see a 50 bps hike in December, unless Non-Farm payrolls come in very strong, instead of a 75bp hike. Of course if we see labor data weaken I believe the Fed will look to slow its pace of hikes as it has to manage its dual mandate of inflation and employment.
For now, Fed's job is far from over. Inflation remains far from the Fed's 2% goal, which means Americans should prepare for the Fed to keep raising its short-term benchmark fed funds rate into next year.
The results of the 2022 midterms can largely be characterized by Democratic outperformance up and down the ballot, compared to initial Republican favored projections. On average, since World War II, the party holding the White House has lost 26 House seats and four Senate seats.
Democrats defied initial polling projections and historical political gravity this past week to keep control of the Senate in a crucial win for the Democratic party. It came down to a dead heat Nevada electorate with coverage networks projecting Democratic Senator Catherine Cortez Masto victorious on Saturday night, pushing Democrats to hold at least 50 guaranteed seats to retain control and majority in the chamber. Cortez Masto’s win was followed by fellow Democratic incumbent Mark Kelly’s projected win in Arizona and a flipped seat by Democrat John Fetterman in Pennsylvania. In Georgia, the race between Democrat Raphael Warnock and Republican Herschel Walker is set for a runoff on Dec. 6, as neither candidate was able to garner 50% of the vote. Democrats could thereby gain an additional seat supplementary to Vice President Kamala Harris’s tie-breaking vote.
Control in the House of Representatives remains unsecured by either party, although Republicans are leading with 212 seats won of the 218 needed for a majority, versus the Democrats 206 seats won. GOP control of the House would reasonably prevent any sweeping legislative agenda from Biden in the near-term, contributing to policy gridlock considered favorable in the eyes of investors and markets. Looking ahead, Donald Trump is poised to return into the spotlight this week with an announcement of his 2024 bid for the White House.
Oil has been on a downward trajectory since June as:
Below, we analyze the recent flow and likely impact on prices.
Labor shortages have been one of the biggest obstacles for increasing production. As the chart shows, employment increases always lag the increases in price, exhibiting the stickiness in increasing production.
Enforcing this, the number of drilled, but uncompleted, oil and gas wells (DUCs) rose for the first time in more than two years. This happens to be the longest streak ever on record according to the EIA. Cost inflation isn't helping companies with well completions.
Gasoline inventories are well below their seasonal average, approaching the lows for the last 10 years. Seasonally, we expect stocks to build in recent weeks, which should relieve some pressure at the pump.
The typical flow of gasoline from Europe to the US has been stagnant in recent weeks, which isn’t helping the situation.
The EU sanctions on Russian crude oil and products come into effect in early December and February respectively.
Janet Yellen stated that the US wouldn’t directly stop anyone from buying Russian oil, however, the sanctions aim at logistics by disallowing insurance, ship and finances to be used from the West.
Combining the fleets of Russia, China and India allow sufficient infrastructure to move almost all of Russia’s oil.
The real question remains whether lack of insurance would cause the demand for Russian oil to drop. This scenario would mean that a significant amount of Oil would be taken off the market.
China has always been the marginal consumer of oil and products. Reopening China would boost demand across the barrel.
China has finally amended its Covid Zero policy, by reducing quarantine time. According to flight schedules, domestic flights are set to increase by more than 60% over the next month, assuming these aren’t cancelled.
It has been a long week for BTC, ETH, and the rest of the crypto market, as they have been pulled down amidst the FTX drama. BTC has dropped below the $17,800-$25,000 range it has been consolidating in since June, hitting lows of $15,500. ETH, however, has had slight alpha on BTC throughout this five-month consolidation period. From June’s low of $900 to August’s high of $2,000 (+125%), ETH outperformed Bitcoin’s move from $17,500 to $25,000 percentage-wise. Since BTC has made a new local low of $15,500 this past week, ETH still remains about 40% above its June’s low, hovering in the $1,200-$1,300 range. This is a sign of relative strength for ETH.
A break below $1,100 can send us to test June lows and likely lower. A break above $1,350 on ETH can send us to the $1,500-$1,600 range. The Producer Price Index report is being released on Nov. 15th. It is possible that positive words can act as a catalyst to propel ETH higher in the short term after this recent pullback. Market liquidity is still low, so if we test the $1,500 range, I think we’ll head lower shortly after, as the last test of $1,600 was a rejection of the head and shoulders breakdown level. This is identified on the chart by the rejection of the diagonal white line.
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Rejection of the $18,000 level sends us lower to $12,000-$15,000. A break above this same level and we can see a move back to $20,000 in the short term. If we see a move to $20,000, it’s more likely we head lower. I am bullish long term and bearish in the short/mid-term due to the recent market uncertainty, fear, and illiquidity. Macro-wise we are likely close to the cycle bottom. Since the $20,000 multi-month support level has been broken, the next level of support is around $12,000. This zone is a previous breakout level from 2020 which is likely to be tested.
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SPY/SPX has had a positive reaction to CPI numbers and has moved up from recent lows of SPY $350 to test September highs around $400. This is a promising reaction from equities. I foresee a move to $420 from here. Rejection of the $400-420 level can send us to new lows around 2020 support levels of $340. However, if we clear $420 and get positive FOMC numbers, we can potentially test early-2022 levels around SPY $440-460 into the new year.
In reaction to CPI coming in under expectations, bond prices across the yield curve experienced a substantial rally on Thursday, with 25-35 basis point declines in yields intraday. Yields move inversely to bond prices. Yields were above 4% towards the end of October for the first time since 2008 as a result of the Fed’s tightening monetary policy. 10yr yields have been rising, which means investor demand for riskier assets like equities and crypto is high.
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One of the poor overall weeks for NFTs, with many collections getting hit heavily due to many macro-economic factors. The first obvious contributor is the ongoing recession, with the biggest catalyst this week being the FTX collapse. Major capitulation took place on the Bored Ape Yacht Club floor price, which went sub 50ETH for the first time since Fall 2021. Overall the BAYC floor is down from 80ETH exactly 30 days ago, marking almost a 40% decrease in ETH value. Punks on the other hand remain strong with floor price stable at 64ETH.Many use Bored Apes and Punks as the NFT sentiment index, indicating the ongoing fears coming from the overall crypto space.
The NFT giant Yuga Labs has announced yet another strategic acquisition of the creative projects10KTF and WENEW. The main goal of this acquisition that Yuga shared is enhancing the metaverse experience that the company is building for users through “creative storytelling and immersive experiences” that the two newly acquired projects practiced throughout their existence.
Nike has just announced a launch of their brand new NFT marketplace. SWOOSH. The company has yet to provide exact guidance and information regarding this project, but at this moment users know that the company is building a virtual marketplace to collect Nike virtual creations. The product is set to launch on November 18th according to the Nike website page.
Just as Odysseus had to pass through and resist the alluring temptation of the Sirens on his journey home, this newsletter will serve as a guide to investors and institutions to help navigate Sirens in the market by delivering key weekly news coupled with our contrarian views.
I will also share knowledge on the best trading platforms, wallets and sources. The web provides us with an infinite amount of knowledge; the sad truth is not all of it is real. Always investigate and research before making big decisions.
Remember :
As shown by the previous week’s events, the Crypto and NFT space can be as risky as it is alluring. However, there are a few steps any user should be taking to maximize their security, and minimize their risk.
Centralized exchanges (CEXs) are the on-ramp from fiat to crypto-currency, and following the FTX collapse, there is some uncertainty as to what platforms to use. At this moment in time the best options include Binance, which is the largest CEX in the world, as well as Coinbase and Gemini, both of which have a history of being strongly regulated in the United States.
In order to maintain optimal security, users should also download a 2FA (Two factor authentication) app and connect it to their CEX, just in case your password is ever compromised.
That being said, your CEX should only be used as an on-ramp. All crypto currency being held should be moved to and stored in a decentralized wallet. Metamask is the most popular interactive decentralized wallet, but when it comes to storing crypto safely, the best bet is to utilize a cold (offline) wallet such as Ledger or Trezor. In this format you as a user are solely responsible for your investment, thus the age old saying “not your keys, not your coins”.
Furthermore, when buying a cold wallet such as a Ledger always use the company's home website. Never order off of Amazon or any other secondary service as the technology being shipped could be tampered with.
Lastly, your decentralized wallet will come with a “seed phrase” which is (usually) a twelve word phrase consisting of random words that will act as a login and/or backup phrase to access your account. It is imperative to write down your seed phrase legibly, and store it somewhere safe. Do not record your seed phrase in your phone or computer, as a hack could leave you exposed.
Crypto in itself is a volatile environment, more so than a traditional trading ecosystem, and navigating this type of environment can be taxing on one’s mental health. One of the best things you can do in times like these is EDUCATE YOURSELF. If you are playing in this market without basic knowledge of the technology or the fundamentals, I challenge you to start asking questions. Expanding your network to surround yourself with people who can answer those questions.
There is a never ending wealth of knowledge to be discovered in crypto, and the best way to learn is from people already familiar with these concepts. When you can understand the underlying meaning of your investment, your mind is less likely to cause you to make irrational decisions based on misunderstanding.
Crypto’s success is directly reliant on the community’s faith in its cause, and our ability to effectively relay that confidence to others so that they too can understand the use case of crypto and why it is so important so that we can avoid situations like this past week in the future.
In light of recent events in the crypto market, it is imperative to remind people how critical it is to maintain healthy habits to establish a steady foundation for your mind’s protection from a market ripe with anxiety and uncertainty.
A point of struggle can be learning when to take a step back. When things take a turn for the worst, our instincts tell us to fight harder. Though this drive can make a positive impact it can also lead us to make financial decisions quickly and without sufficient research. Making these choices in a state of emotional turmoil can cause HUGE losses that take a toll on our mental health. When things go sour, breathe and take a step back. There is no further harm in coming back to it later. Acknowledge that in this market losses may happen, how we deal with a loss from that point forward can dictate our careers.
Every week I’ll share some strategies and a challenge to help you keep your body and mind healthy. Remember that your brain is as strong as your body. We can’t deprive ourselves from the tools necessary to nurture success.
Take a walk and get some sun. Many of us are cooped up in our homes in front of our computers. We forgot to take the time to get outside and soak up some Vitamin D. Some benefits of moderate sunlight exposure are:
This is one of my favorite side dishes to make for Thanksgiving or Christmas, or for any meat based dinner. It's simple and easy to make and doesn’t require a lot of work.
Steps :
Pair this with a 2014 Evinco Winery DAO Cabernet Sauvignon, to cut through the richness of all the food. Get your 2 free bottles by minting: https://www.evinco.wine/
In my 10+ years I have seen a lot of disasters and frauds in the financial markets. I have been through Lehman Brothers, every Euro Crisis you can think of, Trade War, MtGox in crypto, the Covid Pandemic, and recently, the capitulations of 3AC crypto fund and other CeFi companies. These essentially sent crypto assets down almost 75-80% across the board. Almost all of them made sense and I was able to catch them all.
The FTX fraud has got to be one of the few that most people could not catch, as SBF was one of the prominent faces of the crypto market worldwide. The repercussions of this will be felt for a long time, whether it comes to sentiment, regulations or even liquidity in the market. With FTX gone, the order books and liquidity across are extremely fragmented making trading a challenge. In any short term opportunities, risk/reward has become challenging.
In my experience, when all hope is lost, it can be the best time to buy for the long term; the buyer of blood as they say. When the streets are bloody is when you buy, or in the wise words of our favorite wizard:
“Happiness can be found even in the darkest times if one only remembers to turn on the light”
If you bought the Covid, Great financial crisis and several other significant events, whether in traditional markets or in crypto, they were almost always a “buy” opportunity. Crypto will also come back some day, maybe sooner than later given the improvement in the macro environment.
I personally think the Macro bottom is in given CPI print, PPI , and several Fed governors making the rounds giving guidance that pace of hikes will be reduced. Now a black swan is definitely possible or a fake out in these prints but I think the rate hikes lag is slowly starting to come into the economy and we should see inflation trending lower over next few months as labor potentially weakens giving the Fed more buffer to slow down to eventually pausing hikes over the next 6-8 months.
It is quite possible that this current stock move is a function of people trying to front run the pivot like we had in June and that the fed steps on the pedal and emphasizes that they will be just as aggressive as they have been and any thought of even slowing down a pace is immature. It is always a good idea to buy downside crash protection with out of the money Puts in such situations to protect your portfolio. Whether macro bottom is in, or if this is a bear market rally and that only we will know within next 2 months of further FOMC conferences with Powell speaking and CPI and more data prints. I do believe if unemployment starts getting above 5% it will definitely put the Fed in a position to slow down aggressively.
I will be posting my portfolio allocation and weighting changes weekly to show you how I am positioning myself with a 3 month to 1 year outlook.
Crypto: 20%
NFTs: 5%
Stablecoins: 50%
Private Equity: 15%
Stocks: 15%
I am a big believer in web3 and decentralization, so I have a higher weighting to NFT’s and Crypto, especially given the recent underperformance I have increased weighting there.
I have focused my crypto allocation primarily on majors, with some additional tokens to get more alpha. My major allocations are to Ethereum, Polygon and Chainlink. In addition, I have increased my allocation to DyDx, as I believe with FTX going down more people will see the potential of decentralization. DyDx is run by a DAO which reduces the potential for a scam, but there is ALWAYS the possibility of anything happening, which is why I keep the allocation at a lower risk.
I believe using NFTs as a technology will be huge in the next 5 years, either in its current state or in some form of evolved state. Read the next Weekly Wizdom for details on what NFTs I'm invested in.
I increased my growth stock exposure with a lot of EV companies like $PLUG and $BLDP. I will dig in deeper into these for the next newsletter. I bought DISNEY as well over every dip including call options.
I have a large options portfolio for stocks. This includes several January QQQ, Disney, SPX call options I bought 1-2 weeks ago. I have been taking profits on these positions, but I do believe we should hit 300 on QQQ by year end. I have bought crash protection on my portfolio with 275 strike puts on QQQ for December and January just in case we see a major downturn.
I have a diversified private equity portfolio that ranges from NFT infrastructure companies, to Oatmeal distribution, to electric vehicles. The best return potential at the moment is Oats Overnight, a subscription oatmeal business that has been absolutely crushing it.
Retail sales on November 16th will also be an important economic metric to watch out for. The current estimate is 0.9% MoM. We have Fed Williams speaking as well on the 16th and Housing index at 10 am EST. We will see Initial jobless claims data and housing starts data at 8:30 am EST on November 17th.
Join me on spaces at 2pm EST (16 November 2022) on my Twitter
Join me next week as I go into greater detail about NFTs, stocks, security and FOMC.
Disclaimer : Wizard of Soho LLC and Weekly Wizdom publish financial information based on research and opinion. We are not investment advisors and we do not provide personalized, individualized, or tailored investment advice, nor do we provide legal advice or information. The publisher does not guarantee the accuracy of the information provided on this page. All statements and expressions present are based on the opinion and research of the author or paid advertiser. No opinion, directly or indirectly, is an offer or solicitation to buy or sell the securities or financial instruments mentioned. As news is ever-changing, the opinions included should not be taken as specific advice on the merits of any investment decision. Investors should pursue their own investigation and review of publicly available information to make decisions regarding the prospects of any company discussed. Any projections, market outlooks or estimates herein are forward-looking statements, and are inherently unreliable. They are based on assumptions and should not be construed to be indicative of actual events that will occur. Contrarily, other events that were not taken into account may occur and may significantly affect the returns or performance of the securities discussed herein. The information provided is based on matters as they exist on the date of preparation and do not consider future dates. As a result, the publisher undertakes no obligation to correct, update or revise the material in this document or to otherwise provide any additional information .The publisher, its affiliates, and clients may currently or foreseeably have long or short positions in the securities of the companies mentioned herein. They may therefore profit from fluctuations in the trading price of the securities. There is, however, no guarantee that such persons will maintain these positions. Neither the publisher nor any of its affiliates accept any liability for any direct or consequential loss arising from any use of the information contained herein. By using the site, or any affiliated social media account, you are giving your consent and agreeing to this disclaimer and our terms of use. Unauthorized reproduction of this newsletter or its contents by photocopy, facsimile or any other means is illegal and punishable by law.
