Hello traders and investors, welcome to another addition of the Magnelibra markets newsletter audio cast. We entitled today’s post “US Govt 10Y 200bp Undervalued.” So we decided to take a look at the current technical picture and incorporate a little artform into our analytics to see if we can extrapolate a potential 2024 level. What seems to stand out is that the recent blow off top in the US govt debt as it ran up to 5% in the long end playing catch up to the Federal Funds rate, is OVER! It is clear Ackman had an axe to grind with someone and vocally expressed this across multiple interviews, well he won. Now it looks like whomever he carted out feet first has blown out and the real move in the US bond market is beginning.
We are bond arbitrage experts and have traded billions of dollars of US securities over our career and we have witnessed the Federal Reserve make policy moves that make no sense whatsoever and this usually leads to gross misallocations across many assets. If its one thing we learned post 2009 and the TARP bailout during the GFC, it is this, the US Treasury is not beholden to the Federal Reserve, it is the other way around, the servant doesn’t dictate policy to the captain of the house. In regards to the US Dollar and US Treasury Bonds and Notes it is the Treasury that tells the FRB what to do. This is why Janet Yellen is in the position that she is in. There is no doubt she told Jay Powell, enough is enough, the game is up! Thus the Dovish sea change at last weeks bombshell meeting.
So Magnelibra Market subscribers we are going to make the bold prediction that by this time next year, the US government 10Y will be yielding 2%, Mortgage Rates will be back at 3.5% and CPI is going to be right below the FRBs 2% mandate. Many don’t believe this to be the case, but we looked at the technical picture which we believe will see a move almost as drastic as the rate hikes themselves. The fundamental picture will prove even more compelling because it is in our base case that the US economy will see a dramatic slowdown next year. This slowdown will be fueled by increased unemployment and higher refinance rates out of major corporate debt refinance structures. Higher rates will hinder balance sheets and pricing power will not be there to keep margins wide. The consumer will boycott spending outside necessities and real estate will start to see supply hit the market. Furthermore, history has shown that the onset of Federal Reserve rate cuts will lead to equities to be sold as liquidity for cash becomes paramount.
So don’t take all this the wrong way, we still believe equities and the economy can stay elevated at least through the end of January or so but then reality will set in.
Here is our channel that we will be following for next year and the parameters are set on the high side for the US 10Y is 4.50% with the low end down at 0.50%. Yes we know it sounds crazy but if it was 2020 all over again, you would have never thought you would be getting 5.4% TBill rates by 2023 and yet here we are.
Another thing we want to point out is that the US Treasury cannot and will not pay $1T in interest payments, the FRB will have to restart QE and bond buying again, we expect their balance sheet to be right back to $9T by the end of 2024.
Ok so what about today Magnelibra, where to things stand, well its full on bull buy mode till otherwise noted. Let’s take a look at some technical charts for some of the markets we follow and a few equities that we think you should be eyeballing. First up lets look at the SP500 Futures, where the 4800 first resistance has been reached, this same area put the post covid advance to a dead halt. A failure here would make some sense but we would need a close below 4700 to confirm. For now the trend channel is wide and significantly favors the upside:
Same thing goes for the Nasdaq Futures we are seeing of they can get to the 17450 target area and the top of this trend channel by year end, currently they are at 17035 area so some 400 points away, which is nothing in Nasdaq terms:
The Russell2k futures offer the most compelling upside right now because they are the furthest away from all time highs, so a lot of catching up to do but our target for March 2024 remains 2600, nearly 600 points higher than current levels:
Ok now lets move to 2 equities that have caught our attention Netflix and JPM Chase.
We know Netflix has had a massive run since the lows in mid 2022 and our longer term trend line comes in at about $575 for next year so we are getting close to that magnet level as Netflix is at $495. As far as JPM Chase, the stock has been on an absolute tear, and why not they are the behemoth that will swallow all, its well above our midline at $155 and the stock is pushing the $170 area its up 22% in 7 weeks and they say Bitcoin is volatile!
Ok that is it for the technical chart’s lets move to the Subscriber Settlement prices for today we corrected the Nat Gas from yesterday as well so we included Monday’s settles as well:
No changes to the Magnelibra Futures Model Tracker:
As far as the MEGA8s, they continue to hit new market cap highs led by META which is on fire. We will not hedge this group here unless we see a trade back below 16800 in the Nasdaq index. The MEGA8 will continue to benefit from the economies of scale here, this investment thesis has not changed. A few have capitulated and diversified out, but this group is still very much in vogue, and if China shunning Iphones doesn’t knock Apple down, nothing will at this point, will the group hit $13 Trillion in market cap by year end? Its possible:
Alright we hope you enjoyed this edition of the Magnelibra Markets Newsletter. We did our first audio cast today and we will continue to do the Audio casts of our newsletter to broaden the tastes of our audience. We like listening to commentary and many of our subscribers most likely do as well. We will reference all the charts in the Audio Cast but will be commenting and reading our letters verbatim. Its a little different element and one day we will just do an actual video podcast for viewing not just listening. Ok please like share and subscribe if you can to support our work, the cost of what we do cannot be measured accurately but has worth that we feel is inherent to each and everyone of our subscribers. Our goal is to educate you with our experience and hope that you can formulate your own ideas and methodologies. Our goal is to convey what we see and see if it drives you to dig deeper as to what you see. Alright that’s all for now, till next time, stay safe, cheers.
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