Sunday, October 15, 2023

Monthly market commentary October 2023

Last month, we discussed among others how important the BRICS meeting in South Africa had been. More recently, I was reflecting about the importance of the BRICS meeting in contrast to the just completed UN General Assembly meeting in New York City, where when the Green/Communist German Chancellor Olaf Scholz addressed the assembly, hardly anyone turned up. Even Bloomberg, which tends to be pro-Elites and pro-WEF, carried for an article the headline: World Disappointed by the UN Now Looks Elsewhere for Answers. Indeed, many countries are starting to look elsewhere to do something about them. According to Bloomberg, “The UN, once the central forum for trying to solve geopolitical disputes, is increasingly on the sidelines of the new global politics, unable to keep up with the array of shocks, crises and coups that seem to be fracturing the world.”

I believe that whereas a long time ago, the UN, which is mostly a western dominated organization, was in a position to solve geopolitical problems because of its economic and military supremacy, currently it has lost its influence because of the economic and political rise of the emerging world.

This is particularly visible in Africa, where one domino is falling after another. Pepe Escobar recently noted, that, “Like dominos, African states are one by one falling outside the shackles of neocolonialism. Chad, Guinea, Mali, Burkina Faso, Niger, and now Gabon, are saying 'non' to France's longtime domination of African financial, political, economic, and security affairs.”

Concerning Niger, Escobar notes that, “The case of Niger is even more complex. France exploits uranium and high-purity petrol as well as other types of mineral wealth. And the Americans are on site, operating three bases in Niger with up to 4,000 military personnel. The key strategic node in their ‘Empire of Bases’ is the drone facility in Agadez, known as Niger Air Base 201, the second-largest in Africa after Djibouti.” [The American Drone base at Agadez has an excellent strategic location being just south of Libya.]

The complexity of fully decolonizing African countries is evident but we also need to briefly address the question about investment opportunities in resource-rich African countries. While I do not see any urgency to purchase African resource stocks, we find in Africa not only depressed stock markets but also that mining stock around the world (including in Africa) have become inexpensive following their lengthy bear markets and recent sell-off.

Having said that, I also need to emphasize that African stock markets just like most markets around the world are nowhere near as depressed as they were in 2009 and 2020. Similarly, gold mining companies are depressed when compared to their highs in 2006/2007 and in 2020 but hardly so when compared to their lows in 2015 and 2019. The reason I am bringing up resource companies in Africa, is that, as I have already discussed last month, Real Assets are likely to begin to outperform Financial Assets. This especially, once growth expectations vanish because of a recession. In this respect, let me add that Bloomberg stated in a column entitled “Growing Recession Fears Weigh on Consumer Confidence” that “Souring confidence across the board paints a bleak picture for spending ahead, indicating dwindling momentum for economic growth.”

The other day, the stock of Oracle broke down by 12% in one day. [It is down 16% in two weeks.] Oracle’s sharp breakdown in just one day is far from unique. More and more stocks (NFLX, AMZN, just to mention two) seem to be breaking down abruptly from strong uptrends, and a large number of stocks seem to have become vulnerable including Apple (AAPL), and are about to break down below important support levels.

A subtitle in the August monthly report read: Money will likely shift out of FAANG and related Stocks into Financials, Energy, Value and Foreign Stocks. I still maintain this stance, whereby I need to admit that even among some energy, financials, value stocks and emerging markets, there have been some breakdowns, which are disconcerting.

An important point about Breakdowns to consider is the following: does the breakdown occur after an extended uptrend or does the breakdown occur following a well-established downtrend. If the breakdown appears after an extended uptrend, it may signal a major change in the trend from up to down. If on the other hand the breakdown happens within an already established downtrend it may (but not always) signal an approaching major low or a panic low. Let me provide a concrete example. The long-term US Treasury ETF (TLT) has more recently been gapping down after a lengthy downtrend. [In technical jargon we may be dealing with either a “continuation” or an “exhaustion gap.”]

Looking at the chart of the long-term Treasury ETF would suggest that we are well along in a downtrend and, given the support that exists around 80, which dates back to 2014, a major low should shortly approach. A major low is also overdue because Treasuries are becoming deeply oversold from both a long-term and short-term perspective. Now, compare this market condition with the charts of Nvidia, Oracle and Apple, and you will see a striking difference in the position of these stocks within the market cycle compared to US Treasuries. Whereas US Treasuries are clearly oversold and far along in a downtrend, NVDA, ORCL, and AAPL (and most FAANG related stocks) may be oversold in the very short-term but certainly not so in the long-term.

Equally, most emerging markets including Hong Kong and China have recently broken down after some lengthy downtrends. Amidst extremely bad investors’ sentiment, both markets are likely to shortly reach major lows.

Equally, I would argue that the recent breakdown in mining stocks could lead to a major low in this sector from which a powerful rebound could occur. At the same time that bonds, precious metals and emerging markets are grossly oversold, the US dollar seems to have become overbought.

But for now, the US stock market looks like a strapless bra; most of investors are wondering what is holding it up while others are waiting for it to drop so they can grab the opportunity with both hands.