With little over thirty-six days left in the fiscal year 2022, it is critical that investors remember that bear markets do not last forever. Alas, neither do bull markets. And while the Jim Cramer’s of the world want to remind you that “there is always a bull market somewhere,” the reality is that there are also bear markets out there all of the time as well.
Home Stretch of 2022
As I enter the “home stretch” for calendar 2022, I can only recall one time in the past forty years that markets had a serious decline in December, and that was in 2018. Mind you, a Christmas Eve emergency meeting between Fed Chairman Powell and Treasury Secretary Mnuchin quickly remedied the Grinch-like behavior resulting in a Santa Claus rally that carried right through to new highs by the end of February 2019.
The Fed’s posture in 2018-2019 was accommodative, and their love affair with the asymmetrical wealth effect of rising equity prices was free of the impairment brought on by a 9% inflation rate so “conditions” in December 2018 were starkly distant from the conditions I face in 2022 (and beyond).
The Fed will “re-allocate” aggressively between now and year-end, and that combined with the historically high short interest should (operative word) propel stocks to higher levels by New Year’s Day.
As the portfolio manager horses gallop their way down the final few furlongs of 2022, they are not nearly as deeply underweight equities as they were in late September (when I turned on a dime and went bullish), but they are still underweight and need to deploy larger than normal cash positions before the auditors record their final holdings for 2022.
You see, they cannot have an abnormally high cash position and still charge 2% management fees without severe client pushback, so they will “re-allocate” aggressively between now and year-end, and that combined with the historically high short interest should (operative word) propel stocks to higher levels by New Year’s Day.
The month of December ranks number three in performance for two of the three major averages (Dow and S&P at number three with NASDAQ as number two), with small-cap issues outperforming the blue-chips starting around mid-month due largely to the cessation of tax-loss selling and rebalancing. There were some shaky weeks, such as in 2008 and in 1987, but since 1950, stocks have enjoyed fifty-three winning Decembers versus eighteen losers for a 74.6%-win ratio.
With that in mind, my positioning should be bullish stocks, and has been since late September, begging the question, “What could go wrong?”.
What Could Go Wrong?
The troublesome idiosyncrasy of the current profile for equities lies in the behavior of the sub-groups — as in Dow Jones Industrials — which have very few tech stocks and which are massively outperforming the S&P and the NASDAQ with the health care stocks taking on leadership roles.
That is exactly how one positions portfolios if one looks for more bear market action in 2023, which means that the defensive sectors get pumped while the heroes of the last bull get dumped.
My point is this: I think there are going to be a great many of the players exiting the markets before year-end for fear that the “Q1 Crash” narrative plays out, so when matched up against the “performance chasers,” it may just be that the net effect is a flat December and that the bulk of the gains actually was made in the first two months of Q4.
That in itself is where my contrarian nature starts to rebel because every single market pundit that I hear or read is positive for the seasonality trade but negative due to expected earnings markdowns in Q1/2023.
I cannot figure out whether it is a reverberating echo — a feedback loop — that keeps circling back to the accepted narrative or whether it represents the “collective wisdom” of market participants and one that I should actually heed rather than dismiss as “adolescent idolatry” because the kiddies that run the billion-dollar funds love to hide in the anonymity of consensus investing while old geezers like me absolutely revel in isolationism. (BTW, neither is optimum behavior.)
Make no mistake; swimming against the tide is not always the easiest nor the smartest strategy, with tech stocks and crypto being generational favorites amongst the younger crowd but toxic waste for those that are older.
As timing is everything in the world in which we trade, there was a time to listen to the kiddies, and there was a time to send them into a corner wearing dunce caps so as to cast judgment on the investment acumen on a generational basis has devolved into a name-calling mug’s game and one which I prefer to avoid.
My point is this: I think there are going to be a great many of the players exiting the markets before year-end for fear that the “Q1 Crash” narrative plays out, so when matched up against the “performance chasers,” it may just be that the net effect is a flat December and that the bulk of the gains actually was made in the first two months of Q4.
The Junior Sector
I only speak of the broad equity markets because against the backdrop of a hostile Fed and decelerating global growth, it is hard to imagine people suddenly going stark bullish on commodities, led as always by gold and silver, which is precisely what is required to light a fire under the junior resource sector, a space where I, unfortunately (due to a gambling addiction) have a large portion of my investable capital.
As I have written on countless occasions, if I woke up tomorrow from a twenty-two-year coma and scanned all news headlines related to geopolitical, fiscal, and monetary events over that time period, I would have expected gold to be priced at US$30,000 an ounce with silver at US$600. I would also have the Canadian dollar trading at US$0.10 while its citizens combat a 75% inflation rate.
However, through the machinations of the Federal Reserve and the U.S. Treasury, the legions of desk traders under contract to the National Security Services have been assigned to maintain U.S. dollar hegemony, sparing no expense and taking no prisoners.
To be sure, they have done a superb job while their bosses have been able to print astonishing amounts of phony money through unbridled DEBT creation and, until 2022, enjoyed a disinflationary, Goldilocks Nirvana where literally everything moved into “bubble” territory — except of course — the two metals that over the past five-thousand years represented safe haven, sound money status, gold, and silver.
Gold put in a triple-bottom in Q4 at between US$1,618 and US$1,622, after which it responded to the collapse in the U.S. dollar index from 114.76 to 105.26 within a three-week period in November.
After testing the highs of the rebound near US$1,792, it is now working off the mid-month overbought condition by pulling back to test the 100-DMA around US$1,720, then closing out the week at US$1,754.
The MACD indicator is threatening to flip into a bearish crossover, but it did that very briefly back in October without derailing the advance, so I am placing minimal emphasis on the MACD unless we break the 100-DMA with RSI reversing back into a downtrend; neither of which I see as being “in-the-cards.”
As for the juniors, could there be a more pitiable sector in which to throw away your savings than in the junior gold miner space?
Since the 2008 Great Financial Bailout, there have been two serious rallies in the miners — the first off the major bottom in gold prices in late 2015 and lasting until August 2016 and the second being of the Fed-induced major bottom in “everything” after the Covid Crash of March 2020, with that advance, also ending in August.
Other than that, the junior gold space (GDXJ:US), shown above when priced against the gold price, is trading at levels it last saw in Q1/2016 when gold was under US$1,200. There are dozens of other studies depicting the extreme levels of undervaluation for both senior and junior gold equities but nowhere is it more shocking than in the juniors.
Gambling Versus Speculation
My area of specialization (and passion) has always been the explorers and developers, where the terms “gambling” and “speculation” are often misplaced. This was explained to me a great many years ago after being unfairly accused of being a fan of the “ponies.”
Having grown up in the town of Malton, I used to sell newspapers (including The Daily Racing Forum (“DRF”) at Woodbine at 6:00 am to owners, breeders, and trainers, all of whom showed up coffees-in-hands to give me my US$0.25 gratuity for keeping their papers warm.
One time, I was reading the DRF when a lady in a Saint John Ambulance nurse’s outfit scolded me for being a “sinner” because, in her words, “gambling” was the “devil’s playground.”
Overhearing this exchange, one of the trainers (who turned out to be two-time Queen’s Plate winner Jerry Lavigne) walked over and pointed to the DRF in my lap and said, “Kid, don’t listen to that old biddy. As long as you’re following the numbers in that rag (the DRF) and watching the heats, you are not “gamblin’. You’re handicappin’, which is another word for speculatin’ .“
Junior mining companies, including the explorers, if researched properly, are not to be considered “gambling” because of the immense reporting requirements levied upon the management teams.
Years later, I read the now-famous words of a famous Wall Street speculator that said this: “Gambling” is a venture without calculation; “speculation” is a venture with calculation.”
Walking up to the ticket window at Woodbine and placing a bet on Malarctic Nag because you like the color of the jockey’s tights would not be classified as “handicapping” nor “speculating” because there was no calculation. It was a random selection based on no prior history of performance. If, by contrast, you watched how it ran beautifully in the slop and it was raining that day, those tender hooves would not be affected thanks to the moisture, and it would be a reasonable speculation because there was calculation involved in that decision.
Junior mining companies, including the explorers, if researched properly, are not to be considered “gambling” because of the immense reporting requirements levied upon the management teams. In prior times, due diligence involved buying the penny mining “expert” a drink at the local watering hole for his next “hot tip” and then loading up because you had it “on good information” that they were about to make a discovery.
That, my friends, is gambling. Poring over page after page of geochemical and geophysical surveys, many of which are found on sedar.com and date back fifteen years while under different ownership, after speaking with contacts that have decades of experience in a particular region or with a particular type of geology and then putting the data into a cause-effect format is actually a very sophisticated yet rudimentary form of calculation. It is like looking at the Daily Racing Form at the “heats.”
Like everything else in life, if you put in the hours, you usually have success, and in the world of junior exploration and development, you can have all of the inputs called correctly, and you can assemble all of the data properly, but if the two goddesses of the junior mining universe — Mother Nature and Lady Luck — refuse to bless you, then you are either waiting a long time (at best) or kissing your money goodbye (at worst).
As we hurtle down the home stretch of what has been a very difficult year, the bulls are calling for 4,400 whilst the bears see 3,000, and with both now screaming their cases with decibel levels resembling a 747 at takeoff, it might be a good idea to minimize expectations moving into 2023
The investing world has finally entered an era of non-interference by central bankers and sovereign treasury departments, not so much out of choice but more out of necessity, because they know that accelerating inflation rates around the globe are forcing civil unrest.
Knowing that the elitists that control 90% of the world’s wealth only thrive when they have an obedient populace chasing the clearly-crafted dream of untold riches, status, and social media popularity and recognition.
When the lure of such achievement is finally and summarily dismissed by a generational metamorphosis of expectations, it becomes the personal nightmare of the privileged classes because the tools they have used since 1910’s Jekyll Island event (resulting in the creation of the Federal Reserve in 1913) have been rendered obsolete in 2022 by the arrival of a 9% inflation monster and a bear market in stocks.
For the return of Mother Nature’s blessing to the junior miners, the new and very much younger generation of speculators must be repelled by technology and crypto and enticed by physical ownership of hard assets. Once physical gold and silver become accepted by the Millennial and Gen-X crowd, then the offshoots, such as the junior producers, developers, and explorers, will rise like the Phoenix and take their rightful places at the head of the Table of Outsized Returns.
With my portfolio suffering from the apathy surrounding some very well-positioned (and well-financed) junior mining companies, I have allocated some 15% to the double-leveraged SPY ETF trading under the symbol of UPR:US where purchases in late-September/early October have me ahead 20.75%, hanging on to that gain for dear life in order to either add to my metals or re-allocate to the volatility trade (UVXY:US) which is down from its yearly high of US$26.22 to the unfathomable level of US$7.66 before closing the week at US$7.75.
As we hurtle down the home stretch of what has been a very difficult year, the bulls are calling for 4,400 whilst the bears see 3,000, and with both now screaming their cases with decibel levels resembling a 747 at takeoff, it might be a good idea to minimize expectations moving into 2023 because the truly contrarian viewpoint is to expect nothing but sideways action until mid-January.
Would that it could be so . . .
Michael Ballanger Disclaimer:
This letter makes no guarantee or warranty on the accuracy or completeness of the data provided. Nothing contained herein is intended or shall be deemed to be investment advice, implied or otherwise. This letter represents my views and replicates trades that I am making but nothing more than that. Always consult your registered advisor to assist you with your investments. I accept no liability for any loss arising from the use of the data contained on this letter. Options and junior mining stocks contain a high level of risk that may result in the loss of part or all invested capital and therefore are suitable for experienced and professional investors and traders only. One should be familiar with the risks involved in junior mining and options trading and we recommend consulting a financial adviser if you feel you do not understand the risks involved.
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