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Two Reasons To Sell TSLA







Video Transcript


Hello everyone and welcome to beat the market. In the next ten minutes or so I'm going to talk about our investment strategy for the week ahead, with my views on the sectors, and the stocks that will be in our macro regime switching portfolio.


Last week equities rallied while bonds sold off.



This is our growth optimism regime. The reason this happened is that US economic data was strong, and the senate passed another stop-gap spending bill so that the

reckless government spending can continue for now.

If you don't believe me, take a look at the amount of bills being auctioned by the treasury at the minute.



We're at peak Covid levels of issuance even though rates are highest in the front end.


Higher rates were good for the dollar, and commodities also rallied. As with last week however international equities lagged the US, and this week it was more serious as they were actually down one and a half percent. My interpretation of this is that the combination of tighter money and the disruption of global shipping is a problem for many companies around the globe.


The question then is whether the US optimism will pull the world up, or more tightening will start to hit the US.


We've had a consistent period of liquidity easing recently.



When this is over, we'd expect it to be followed by a period of liquidity tightening or growth optimism, as was the case in April last year. The fact that there was clear economic news that caused rates to sell off this week looks like a signal to me. Even after a big sell off in rates last week, Fed funds futures are still pricing 5 cuts in 2024, which is two more than the Fed promised.


Also, we had the second consecutive bad 20y auction this week. This suggests investors are not attracted to rates at these level just yet. Let's look at this in more detail.


The big increase in bill issuance shows that the treasury is reluctant to issue long term debt at these levels of rates. However, coupon bond issuance is still running significantly higher than pre-covid levels.



Who is buying them?


It isn't individuals. Individuals primarily buy bills from the government, in quantities that are tightly correlated to the interest rate.



Even here though they are only taking down 3% of the total.


It also isn't central banks.



The Fed has stopped buying at auctions with the end of QE, while foreign investors have been taking a reduced share of issuance to diversify their holdings away from the US.


There has been a general trend for asset managers to replace dealers at auctions over the last 10 years, which has accelerated sharply recently. Nevertheless, dealers remain the buyers of last resort for the treasury, and in the recent auctions, they have had to buy more.



What this means is that the long end hasn't yet reached a price that is tempting buyers back, so in the absence of weak data, I think it should continue to sell off.


In global equities we continue to see Japanese equities outperfrom while Korean equities lag.



The Taiwanese election appears to have had a relatively market friendly outcome. China was was able to point to pro-China candidates capturing a majority of the vote, and the new president-elect expressed a preference to maintain the status quo rather than pushing for independence. The main reason why Taiwanese stocks outperformed however was a strong outlook from TSM.


Chinese stocks meanwhile continue to be a disaster. Real estate and consumer discretionary stocks were the worst performing sectors in 2023, and that has continued in 2024. Now it seems that they are dragging everything else

down as well. Premier Li Qiang tried to convince the audience at Davos that China is a great investment. The market doesn't seem to believe him though. On Wednesday on the forum I speculated that the market didn't believe the GDP

number that he announced early. On reflection though, the real concern for the market might be that the Chinese leadership just doesn't understand that they need to take drastic action.


After leading the market on lower rates last week, technology led the way on higher rates this week.




This was much more like what we saw in 2023, with technology being the only sector in the green on a beta adjusted basis. As you might expect the defensive sectors were laggards in a growth optimism week. However, we also had energy among the laggards, which is suprising since oil went up. It looks like what happened is that oil rallied on Wednesday when stocks were having a rough time, and then the energy stocks just held station with oil in the second half of the week.


I'd say that the oil stocks ought to bounce back, but looking at XOM in particular the technical picture is not favourable.



After closing below 100 last week, XOM failed to break back above that critical level and finished down 3%. This opens the door to a move down to 80 potentially.


The stock I highlighted last week in SLB did manage to bounce back and put in a hammer formation, so I'm still constructive there.


Last week I thought small caps would outperform industrials. As it turned out both were little changed, with higher rates hurting IWM just a little more.


Next week I think that consumer discretionary stocks will underperform while consumer staples will bounce back. XLY did surprisingly well considering how far rates sold off last week as it is the most sensitive sector to rates. I think rates continue higher so XLY can move sharply lower. Technically, XLY looks like it is missing a 5th wave lower of the current short term down trend. XLP is least sensitive to higher rates, and has arguably completed a sideways consolidation to the bottom of its bull trend channel.


At the industry level it was mostly about semiconductors.



In general though we're looking at a continuation of recent themes, with clean energy stocks at the bottom and homebuilders still in the top ten. If I'm right about

rates continuing higher next week then I'd be surprised if homebuilders will stay at the top. After an extremely rapid rise in the past few weeks, I think they are in for some significant volatility.


I'm also still negative on airlines in the short term, with DAL in particular continuing to look weak.


VIX had a significant reaction to the sell-off in equities last week, and finished higher on the week.



This suggests to me that there is more nervousness than you might think with equities at all time highs.


The MOVE index similarly rallied to start the week, but ended up slightly lower on the week.



This means that the rates market is relatively happy for rates to go higher, presumably as it is driven by growth rather than inflation.


Next let's talk about our macro regime switching portfolio.


Last week our signal was to buy stocks, and this proved to be correct. Our portfolio managed a 2% gain, beating out the 0.2% gain of its benchmark. We're now up 3.7% on the year compared to 1.5% for the benchmark. As with last week, our exposure to technology was the main driver of returns while Tesla was a laggard.



FCX was the worst performing stock despite another rally from copper, so something

seems amiss there too.


This week our signal is to advance to cash and collect 10bps. TSLA, URI and FCX all report earnings this week so it is a timely signal to avoid earnings risk, though the reason for the signal is that the model thinks higher rates will be bad for stocks.


If we look at the beta to IEF of the stocks we currently hold, we see that TTD, PLTR and TEAM are most vulnerable to higher rates.



NVDA on the other hand is probably the least concerned. I can certainly see a

case for continuing to ride momentum in NVDA, but we'll respect the model as it stands for now and get out, and maybe look to incorporate something like that in the future.


So this resolves our problem with losing money in TSLA for this week at least, but I have a better plan for that as well. As you may recall, the model has both a momentum component, looking to buy stocks that will do particularly well if the market rallies, and also a positioning component, trying to avoid crowded stocks.


In the case of TSLA, our positioning model not only says that it is not crowded, but actually says that positioning is short. If the market is short a stock then it is possible that it outperforms on a short squeeze, but in a normal up week for equities it should underperform. Conceptually then it makes sense to exclude stocks with short positioning from our portfolio, and in the backtest this did improve performance slightly. Indeed last week this new version of the model would have kicked out TSLA

in favour of RCL, which was up over 4%. Going forward then I'll be running this modified version of our model.


Okay so to summarize, we're moving to cash in our macro regime switching portfolio this week having had a strong start to the year. In the sectors I like selling XLY to fund XLP. I think DAL has short term downside and that SLB will outperform XOM.





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I have begun selling. Its gonna take some time. I am not on margin, but I did buy some Friday with unsettled funds, so those holdings will wait till Wednesday. But moving the ship now.


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Looks like a good decision on your part. Interestingly URI is up just as much as TSLA is down so the earnings risk would have cancelled out for us. In general I think its better to avoid earnings when this sort of volatility can happen though.

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