Nikkei Rising Fast
Musk on CNBC quotes "The Princess Bride"
It seems as if the equity bears all around are being left in the dust. Magnelibra knows that the underlying fundamentals are still dealing with the uncertainty of a major contraction…as well as a massive inversion in the US yield curves which seems to be reasserting itself as the equity markets have trudged higher. Nevertheless and despite knowing what inverted curves tell us, the paradigm shift seems to have occurred and global investors are putting excess cash and converting risk capital toward high quality AI driven MegaCaps as well as overseas in the Nikkei. Take a look a the chart and you will see that the Nikkei has broken out nicely here and with some vigorous follow through:
This move has taken out the 2021 and 2022 highs and the run up within our upward trend channel continues. Now fundamentally we know Japan has seen some decent foreign investment flows as reported by the WSJ and for now this move looks like a healthy breakout. As always we have to watch the levels for confirmation of continuation of said trend. For now in the Nikkei we will continue to be bullish as long as the market can stay above 30k!
We also know another important thing, that is global central bank balance sheets bottomed months ago, in fact we believe the equities bottomed at just about the same time, go figure! Anyway long time Magnelibra readers know that all that essentially matters for risk assets is the global central bank expansion.
Now don’t think for one minute the US congress and senate won’t pass legislation on the debt ceiling. They will and when they do, we know the monetary spigots will be open once again and we believe a lot of this equity expansion is because both the fiscal side as well as monetary side will see expansion sooner rather than later and the billionaire class has themselves well positioned now to reap those asset expansion multipliers, known as levered fractional reserve QE. We will continue to make the call that the FRB balance sheet will be north of $10T by December of next year.
What we aren’t so sure of is the short rate level, although the 4% area seems to be sticking in the 2 Year sector, so perhaps that is a good proxy for things to come. We suspect that Powell and company will remain on hold here for a bit and that once the economic numbers continue to deteriorate, perhaps around Q3 time frame then maybe the rate cut scenario will make the rounds.
For now, we do not like the US yield curves and we suspect we will see them back up a bit further as the 10s/Fed Funds was on its lows near 176 May 4th but the 10Y has been hit over the last 2 weeks and now that spread is 146bp and we suspect this may continue. The 10Y yields did bottom at an important level at 3.26% and now 3.65% is key, if we breach that level, then 3.90% comes into play and this should continue the flattening trend.
The bond market continued this trend today as the US Govt 2Y was the weak link on the day +8.5bp. To note the 30Y Cash basis was strong today, are we going to see a bounce tomorrow???
So now that we are tracking the MEGACAPs and this trend has been firmly established its good to see more data from those that we follow and we saw this tweet today. We won’t disagree with this content but it does point some interesting facts out:
Then we saw this headline on Zerohedge:
Cohen is right on the front that AI will eliminate a lot of labor costs it seems and Goldman had this chart outlining the massive expansion in profit margins:
So we know corporate profits will benefit here from the AI movement leading to layoffs, but one thing that did come to mind is and what always seem to be the case throughout time, is that perhaps one of these laid off individuals will come up with the next big idea and perhaps this will lead to new companies, new innovations and that is our take on the coming layoffs. Maybe this AI initial effect will have profound effects on individuals in the order that they may take it upon themselves to invent something great, at least that is our take on this.
As far as the overall equity markets, they were well bid across the board in the June Futures contracts, the Nasdaq gained +160.25 points to 13643.50, the SP500 was +48.50 to 4171.50 and the Russell2k was the star performer on the day +40.10 to 1781.00, which was up 2.30%! Small Caps had a good day today, but the writing is on the wall, the trend is the megacaps!
So let’s look at the MegaCap Tracker for today which in 7 days is +4.04%. We continue to favor these megacaps and selling SPY calls against it as a hedge:
Finally we leave you with a link to the CNBC, Elon Musk interview. We honestly enjoy Mr. Musk’s delivery and demeanor, he just wings it, he speaks the truth and that is what makes him so formidable. This is a must watch and he covers a lot of subjects, and he even threw out an analogy from one of our favorite movies, “The Princess Bride!”
Musk was asked if he worries that his tweets are costing his companies money. He responds by paraphrasing a quote from the Princess Bride:
“Offer me money. Offer me power. I don't care.” Elon Musk 2023
This is a #mustwatch interview for all my readers, this is how you answer when you speak the truth, when you don’t worry about money and when your single goal seems to be to blaze a path that others can follow! Here is a YouTube link with the Full Interview, Musk on CNBC 5/16/2023
Till next time…
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