Email of the day on beneficiaries from a recession:
Comment of the Day

July 13 2022

Commentary by Eoin Treacy

Email of the day on beneficiaries from a recession:

Your daily talks, now focusing on the probability of a recession, are as always full of interest. I never miss them, or if I have to, I at least read the Comments of the Day.

I've been struggling to decide on some "investments" that could profit from the recession scenario, and which could remain there for the medium term, without my having to watch them every day for sudden reversals. Any suggestions? Shorting a commodity ETF?  Shorting the US banking sector? I'm sure you have other ideas.

Eoin Treacy's view

Thank you for this long-term patronage and this question which may be of interest the other subscribers. The phrases “buy and forget” and “shorting” don’t normally go together. Shorting necessarily means leverage. You can’t walk away from a leveraged position because they can go against you in a hurry.

The alternative would be to buy long-dated out of the money put options on expensive shares. Puts on Apple, for example, are very inexpensive. Apple January 20th 2023 $100 puts trade for $2. That’s almost the same price as at-the-money puts today so downside protection is very cheap in high flying shares.

Long-dated bond would also benefit. With US CPI topping 9% today, that is going to sound insane. However, the reality is the Federal Reserve will keep raising rates until they get the numbers they want. When that happens, bonds are going to look like value and even now, 30-year yields are holding around 3.2%.
Dividend Aristocrats/Autonomies are defensive so they tend to peak last, experience deep pullbacks and bounce back first. Historically, yields of around 3% are where value investors jump in with both feet. That suggests it is too early just yet to aggressively buy, but the sector is certainly getting more interesting.

The big question is whether the peak for bond yields is already close by. If we remain in a permanently low interest rate environment, dividend growers will be highly attractive to long-term investors, particularly in the early stages of a recovery.  

Stocks steadied today following the inflation print. The logic is the Fed is more likely to take a leaf out of Canada’s book and will front load hikes; possibly raising rates by 100 basis points next week. That shock therapy is expected to sharply hit demand, accelerate the peak in inflation and bring forward the time when they will cut rates.

It’s another example of the market’s willingness to look through problems which has been the defining mentality of the buy-the-dip instinct for the entire bull market. With the primary Wall Street indices testing their respective 1000-day MAs this is a natural area where some bargain hunting will begin. I am unwilling to reverse my short positions until I see the outcome of the impending earnings season. Let’s not forget that margin compression and falling profits have not been seen yet.

Gold got down to test the $1700 area today and rebounded as the Euro bounced from the psychological $1 level. It also appears to be pricing in the conclusion front loading of interest rate hikes will produce a sufficiently large shock to prompt a swift reversal. Nevertheless, it was unable to hold the highs of the day so significant upside follow through will be required to signal more than a short-term low.  

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