Wall Street’s Freaky Season, Trading Updates, China’s Disappointing Data


crash of the stock exchanges

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Listen to the podcast below or on the go via Apple Podcasts or Spotify.

Rob Isbitts and Matthew Tuttle discuss China’s disappointing economic data (3:50), and a key level in long-term resistance on 10 year U.S. Treasury yield (8:20). Market timing (24:30) trading updates, portfolio offense and defense (30:00).

Transcript

Rob Isbitts: This is Seeking Alpha’s Investing Experts Podcast. I’m Rob Isbitts, the Seeking Alpha contributor under the profile, Sungarden Investment Publishing, which I founded after I sold my Investment Advisory Practice in 2020, following 27 years in those trenches.

My friend, Matthew Tuttle of Tuttle Capital Management, a fellow Seeking Alpha contributor, and a highly experienced trader and ETF innovator is with me again. We have both been professional investors since the 1990s. We have the bruises to prove it. We’ve made plenty of mistakes, but we’ve also learned from them and we have survived and that has made us investing myth busters who speak truth to hype, the hype that surrounds us all. So we hope you can learn from our experience by listening to this podcast, and following us on Seeking Alpha.

So, Matthew Tuttle, how are you doing today?

Matthew Tuttle: Doing great, and love that intro.

RI: There are couple of things here. Alright. We’re going to race through a bunch of mini-topics here. But let’s start with this one.

I remember growing up as a young Wall Streeter, and the month of August really not a whole lot happened. And you wait till the end of Labor Day and that was it. Now, maybe it was because I grew up in the northeast, like you did. But I don’t know, for whatever reason, maybe it’s because school starts sooner, especially down here in south. Yeah, I mean, they’re like already going back to school. I don’t know, but maybe this translates to Wall Street because it seems to me like there’s a lot of stuff either going on or hinting like they’re about to go on. And here we are. It’s only the 15th of August when we’re recording this.

MT: Hey, Rob. Can I let you in on a secret?

RI: Yes.

MT: People like to take vacation in August.

RI: But what I’m saying is that August is not like it used to be. Stuff happens in August and all you have to do is go back, not too long ago, to what we’re going to get again next week, which is Jackson Hole.

So, it just seems to me markets are starting to squirrel around a little bit more than they normally do until after Labor Day. It’s almost like the autumn jitters are coming a little bit early. That is my impression.

MT: So, I mean, certainly, there’s stuff going on. And premarket, you’re sitting here looking at things saying, alright, this is going to be interesting. But when you look at 5 minute charts, like I do, it’s pretty much – well, once you get past the first 30 minutes or so, it’s like watching paint dry.

RI: Right.

MT: Yeah, there’s news. Again, we’re recording this, what, on Tuesday. Last night you had news out of Japan. You had news out of China, that impacted our markets at the open. And now if you look at a 5 minute chart of the (SPY), the (QQQ)s, or the (IWM), I mean, it’s a flat line on an EKG at the moment.

RI: Got it. Got it. So, what you’re saying is, sort of, first in last out. Right? The first hour to last hour, everything else in between, if you’re a golfer, enjoy the greenery. Right?

MT: Yeah, exactly.

RI: Okay. Yep. Yep. I think that’s a good point. So here’s a headline I woke up to today. Speaking of what you were just talking about with Japan and China. It is almost like this is the part of the year where all the stuff that is being put on the table, all the little news items that are coming out, may not matter as much now as they might next month, and the month after, and the month after that, because this tends to be the freaky season for Wall Street.

So here’s a headline. Stock futures fall Tuesday as disappointing China data dampens sentiment. So, there was disappointing data out of China, a surprise rate cut from the Central Bank. Who knows what information is real and not real coming out of there?

China has obviously a lot of issues that are cropping up, some of them financial, some of them social, and their industrial production missed expectations, their retail sales grew less than expected.

And I don’t know, what’s your take on China? Again, we’re both technicians at heart, so we’re probably going to ultimately let the pricing patterns and the risk reward guide us.

But are these just headlines, or is there really a change in terms of China relations with the U.S., there’s a lot of talk of, especially with all the things that have been passed in this country that everybody is kind of going into their own corner, and it’s going to be less of a global commerce marketplace, which ultimately is going to matter to the stock market even if it doesn’t now. What are your thoughts?

MT: Yeah. So yes, no, yes, yes and no. So, yeah, it was funny Cramer put out a tweet this morning saying, oh, the weakness in the market has nothing to do with China. It’s because Trump got his 4th indictment, which is…

RI: Yeah. I saw that too.

MT: Yeah, which is stupid. Maybe after the first indictment, but after four, market doesn’t care. Market’s looking at China. China is always going to be important because we sell them a ton of our stuff. And it’s always going to be weird because we never know what numbers we see out of them are real. We never know what numbers we see out of them are fake. And you never really know what’s going on. And it happens while we’re asleep. So you wake up to China news, and the market’s going to be impacted.

Also when this news came out, one of the things I always want to make sure I’m cognizant of is the macro backdrop. And if you look at interest rates lately, oil prices, the dollar, gold, those are telling you something. Not 100% sure yet what they’re telling you.

But you’ve got rates that are — if they’re not at the highs of the year, they’re pretty close. You’ve got oil prices that if they’re not at the highs of the year, pretty close. You’ve got the dollar screaming. You’ve got gold going down, and you’ve got markets sitting at or below key support levels.

But on the other hand, you’ve got the Fed may be slowing down. You’ve got inflation numbers looking like they’re easing, maybe we’re going to get a rate cut at some point in our lifetime. And all the economic numbers are signaling a soft landing. So what’s going on?

And if the bond market is telling me something, I listen. And what the bond market seems to be telling me is inflation has not gone, and Fed is not done. So this is an environment already where you wanted to be cautious. So any “bad news” is probably going to be sold, and that’s what we saw today.

RI: Yeah. You just led me into couple other things that I think are absolute priority. To me, the number of the week is 4.30%. Okay? That is long-term resistance on the 10 year U.S. Treasury yield. That is a very key level, and it’s a key level for a number of reasons, not just because we haven’t seen rates this long, I should say this high, in a long time. But when it had breached that level the last two times, it was 2007 and it was early 2000, I believe.

And so that level is often associated at least it was the last two times with a peak in the stock market and you can only imagine why because it’s one thing if you are an investor that can lock in 4.5%, 5% rates here at the lower end of the curve. It’s another if you can stretch way out. Maybe the Fed will eventually cut rates, but when they do and if they do it next year, just for the record, I believe all of this soft landing stuff is complete BS.

MT: Yeah. I do too, and I think interest rates are telling you the exact same thing. Certainly the economic numbers are pointing that way, but I’m listening to the bond market, and I don’t believe the numbers at this moment.

RI: Yeah. And that’s why I say 4.30% is a key level. We’ve gotten close to there couple of times. And look, I can make a case that as we say know, 4.3% will get to 5.3%. And 5.3% will get to 6.8%. I have wrote this up in a Seeking Alpha article a while back. I’m sure I’ll write another strategy piece soon, kind of refreshing people’s memory. Okay? There is some really, I would say, interesting if you’re like us and you can profit from rising stock market, falling stock market, rising yields, falling yields, it doesn’t matter.

We kind of take that go anywhere approach and whether it’s ETFs, options, et cetera, we’ll talk about that later, with our positions. But like to me, this could be the game changer of the autumn and probably the winter. All you need is for long-term rates to — and I’m not talking about going to 4.31%, 4.32%, and then peeling back.

Okay. That’s a fake out breakout. But if you get decidedly through that 4.3% level, I think some blank is going to hit the fan and it’s going to affect a lot of markets at the same time that, to finish the China conversation and kind of put a button on that, they may be exporting deflation, but what does it matter with all of the debt that we have to, we the U.S. has to go and start to pay back. Those interest costs are going up, up, up, up.

MT: Yeah. And I’m not as worried about that as you are, but only because I think if something like that happens, then something breaks. And I don’t think they can afford to let something break. So, I think if we start getting near that level and really start breaking that 4.3%, I think you’re going to see some sort of intervention like you saw in the UK when they realized, oh, wow, we’re going to wipe out all of our pension funds, we need to intervene in the marketplace.

And I think you’ll see something like that. Now that’s not going to be a quick knee jerk thing. So there could be some painful moments before that happens. But I cannot imagine they allow rates to get that much higher.

RI: Well, you, my friend, are ascribing a lot more, a lot higher probability that the powers that be the central banks, et cetera, actually can control this whenever they want. I disagree with that because I saw what happened in 2008 and it was funny. I just wrote a -I referred several outfits, I just wrote a piece this morning kind of reacting to, Michael Burry, who is the guy that Christian Bale portrayed the character in The Big Short.

MT: Right. The guy who called 50 out of the last 1 market crashes. Yep.

RI: Yeah. For sure. Well, oh yeah, hey who among us, right? But interesting that he has taken effectively an entirely net short position. This one got lot more news. I don’t want to spend too much time talking about him. But I do want to talk about this, okay, because I think, look, inflation is part of this.

One of the things that I pulled off of Twitter, actually from Jeffrey Kleintop, very good strategist over at the Schwab. If you look at inflation, remember we’re in uncharted territory unless you go back to the 70s, when it comes to inflation. Okay.

And when I talk about bond rates lifting off above 4.3% for 10 year. it’s the same thing as saying that inflation is going to reaccelerate. And I believe that inflation has a history of reaccelerating because I’m looking at it right in front of me on this chart from Kleintop. So, I encourage people to go and check that out. What happened in the 70s was, you had this huge run up in CPI, to over 8%. It came down into, it looks like about the 3% level, very similar now. I mean, it is tracing out almost identical. Where to go from there? Nah, it went to like 14%.

I’m not saying it’s going to go to 14%. I just think that that reinflation is a much bigger risk than most people are accounting for because I’ve seen it for 30 years. People think the worst is over, they relax. And then, they get proverbially hit upside the head.

MT: Yeah. And there, I would agree with you. I’m watching oil. And oil prices are pretty close to the highs of the year. I mean, it’s getting killed today, but today is a risk-off day, it could come right back. And oil flows into everything. If we start seeing oil get up near a $100 a barrel, there’s no way inflation doesn’t spike back up.

RI: Yep. That’s right. That’s right. It would also create another political mess because – and politicians start blaming each other for high oil prices, when in fact I think you and I both know, it’s the market. It’s market forces. It’s not what they do in Washington to a great extent, unless there’s some really over policy. And I know that they’ve been drained half of the strategic reserve, but…

MT: They do need some help trading for the strategic reserve. Yeah. I may be available if I get a call, but – yeah, somebody needs to help him there.

RI: So let’s take a look at some other issues here before we get to our trays and things like that. So, something else I read, this was posted by – hold on, pronouncing this correctly, Holger Zschaepitz. And he says,

the scary math behind the world’s safest assets: Washington has laid the seeds of a crisis that Wall Street can no longer ignore. Around three-quarters of the Treasuries need be rolled over within 5 years.

And so, I guess the graph they have here is just too late to refi. Over 40% of all Treasury get is due to mature in less than a year. And then another looks like 30% in 1 to 5 years.

In other words, the government debt that we talk about, I remember this used to be like, don’t worry about it, but I got like, pension funds. You’ve got a bunch of people retiring in 10 years, 20 years, 30 years and you match liabilities to assets and all that good stuff.

Well, when it comes to the government, most of the money that they owe, they owe it, like, soon. And that in itself with Treasury auctions not really being that popular lately, which is what’s causing some of the rates to go up, again supply demand, if you’re putting out rates, you’re putting out whatever 2-Year bonds or 1-Year bonds, or 6 months T-Bills and you’re the U.S. government. I mean you have to sell them to somebody.

And unless the Fed’s going to come back in and be the buyer of last resort again, which judging by your earlier comments, maybe you think they will and I don’t, what do you make of this?

I mean, you can’t deny that there are a lot of ticking time-bombs that seem to be running out of fuse before they blow up, and there may just be too many places to try to stop bubbles from popping. That’s the thing to me.

And by the way, you used the word worry before Matthew. I’m not worried. I’m excited because you and I both know how to make money, whatever happens. I just would like to see something happen other than paint dry scenario that that you described earlier.

MT: Well, yeah. I for, whatever weird reason, like playing the short side and have an easier time playing the short side than I do the long side. So, yeah, so I’m excited as well.

I see there are a lot of potential landmines. Some of them will probably go off. I am a bit more of a skeptic/conspiracy theorist maybe, than you are. I believe, for a lot of stuff the fix is in. And they’ll figure out some way around some of this stuff. They’re not — if a hole, this is like holes in a dam, they’re not going to be able to plug everything. But I think if it’s only 1 or 2 holes, they’ll probably figure out a way to plug it. Again, it’s not an overnight thing. So, you’re probably going to see some turmoil.

I think the easy money has been made this year. I think at the beginning of the year, the short commercial real estate, short regional bank trade followed by the long anything mega cap growth trade was probably the easy money. Hopefully there’ll be some easy money trades going forward. I mean, I’m not — unfortunately not seeing anything, which is part of the, this is about as boring as watching paint dry.

But it just seems to me like, if you ever day trade, which I do quite a bit, there are some days where there’s a potential trade at 9:30. And if you miss it, or you don’t size it right, that’s the last trade you see for the rest of the day. And right now, I’ve got that sense if that’s a possibility this year. I hope that’s wrong because that’ll make the rest of this year very boring, but we’ll see.

RI: Well, sounds to me like you should take your own advice from about 10 minutes ago and you should take the next few weeks off. You said, people go on vacation in August. Why are you home?

MT: Yeah. I mean, my kids are all in their twenties, and I like to work, so.

RI: Same. Oh, boy. We spent a lot of time on the road this summer. I am — there is no place like home. Dorothy was right. So, one of the thing I just want to, you’ll kind of slip in here and then we’ll talk about, kind of what we’re actually doing with our money.

So the other part of that, I let off with something that it was — apparently there was somebody on closing bell yesterday, one of the parade of money managers, I’m sure. So, here is the quote, okay? And this is talking about, some of the issues, market down a couple of days and China issues, Japan issues, et cetera.

The quote is, this is healthy. That’s what they said on closing bell. This is not the sign of a teetering market, which I think it is. This is a bit of consolidation, and it’s a place where you can really start to think about adding. We don’t like to try to time the market. It never works, noting that August and September is seasonally weak. So your reaction to that?

MT: That’s, yeah, I mean, of course, that’s what a buy and hold guy tells to his clients to keep them from getting mad at him when they’re losing money. And it’s more of the typical Wall Street bull that people are fed. Oh, don’t worry. It’ll come back. Oh, yeah. I know you’re down 10%, mister client, but this is actually a good thing because now we can get all those stocks cheaper. Or don’t worry. It’ll come back. You just have to wait 15 years like the NASDAQ in 2000. Not a problem.

So that’s why you shouldn’t be watching that stuff. And instead, you should be listening to podcasts, like ours, maybe.

RI: And there’s, this is why if you listen to what I say at the beginning, and we mean it, we are myth busters, and Matthew Tuttle was just talking about one of many, very popular myths on Wall Street. And this whole thing about, oh don’t try to time the market, okay?

So one of the things that used to drive me nuts back in my advisory days is when firms would come to you and say, well, we don’t time the market. Okay, so how do you manage the money? Well, once a quarter we do this and that, and we rebalance, and all that stuff. I said, so you’ve decided that the quarter-end is the best timing for this? Well, no, no, no. That’s not timing. Well, it blanking is. It’s just a mechanical version of it.

To me, every decision is timing. There’s nothing wrong with timing and a lot of timing decisions are about risk management, not about trying to make the most that you can. But I think because Wall Street is still an equity culture, I think it’s going to be fascinating Matthew in next year to see, like I’ve been saying, the bond market is much more interesting than the stock market right now for a lot of reasons which we’ll talk about I’m sure on future conversations here.

But you now have this equity culture which is not quite alert to the fact that equities could really suck for a period of years, while the bond market may actually offer a relatively smoother ride, in addition to the ability to take what is now more gyrating tendencies among interest rates and make money that way too. But it’s not the stock market. And as you said before, you tend to believe the bond market.

The bond market is, let’s say, notoriously sharper than the equity market. And I think more investors in the Seeking Alpha community and elsewhere should start to learn more about how they can do that. And I’m not talking about buying bonds, clipping the coupons, and holding. I’m talking about active bond management.

MT: Yeah. So a lot there, but I think the most important thing you were talking about is the whole idea of timing the market. And what Wall Street does is they don’t time the market.

They rebalance based on the calendar, which is stupid. The calendar doesn’t care whether you’re buying more bonds, or you’re buying more stock. It’s going to do what it’s going to do.

And they tell you your portfolio should be based on your age, which is also stupid. The market doesn’t care. Last year, the market didn’t care that you were young and aggressive. You still lost money. And this year, the market doesn’t care that you’re old and have to be conservative. It went up.

And when they tell you, hey you can’t time the market, I agree. No one can go in and say, hey, I think it’s going to be up tomorrow. Who knows? What you can do is put the odds in your favor.

And you and I have spoken about this. I firmly believe that the market is like cards, whether that’s Texas hold ’em, Blackjack, whatever. There is a difference between holding pocket aces and holding a 2 and a 7 unsuited. When you hold pocket aces, the odds of you winning, and you’re not going to win them all, but the odds of you winning in that situation are pretty high. When you have a 2-7 unsuited, the odds of you winning are extremely low, and that’s typically a time you walk away.

And you know by looking at the market, right now I would look at this market and think, like, you know what, this is like 5-7 suited. I mean, maybe I get lucky and the flop comes out. There’s a 4 and a 6 in there, but chances are, this is a hand I should probably walk away from.

RI: As much as I appreciate the poker analogy, you — and you probably just really helped a lot of people make that analogy, you totally lost me. So off audio here, you can explain more of that to me, or I’ll listen to it five times, after this goes, and I’ll figure out – or I’ll ask my son…

MT: Basically, what I’m saying is, you’ve got a hand that you’re likely to lose. You could get lucky and win it. Because you’ve got a market that really could go either way. We could –like, yesterday was a big rally. Today we’re retracing it all. But it could go any which way from here. And so I would say this is not an easy market by any way, shape, or form. It’s a market where there’s a really good chance you’re going to lose, but you never know. I would be cautious and so that’s the analogy.

RI: Understood. Thank you. And all of non-card playing nation thanks you. I keep something called the ROR Score, reward, opportunity and risk. I mentioned it little bit in Seeking Alpha, but the bottom line is, if you take $100 and I do this, I update this once a week, if you take a $100, you ask yourself, how much of that $100 should be invested on offense, which typically means equities, although the equities could be hedged.

And how much of it should be on defense, and defense these days usually means T-Bills although there’s other ways to play defense, including the inverse, the short side. And right now the ROR score is at 20, which means that my very simple 2 ETF portfolio is 20% in (DIA) 80% in (BIL). That 20% in the Dow.

I could use the S&P, but I’m not because even the S&P looks more dangerous than the Dow at this moment, go back and forth depending on conditions. And the T-Bill could be a little further out, except if you go further out, most of this year and most of last year, I mean, even the 2-Year treasury, I think 2, 3 year treasuries, I think they’re looking at like their 3rd losing year in a row coming up.

So even that is taking on risk, you don’t need to. It’s the basic concept of offense and defense. That ROR score currently at 20, and I change it every Thursday, but at 20, that’s reflecting the idea that, yeah, there’s always a chance that there can be some good things happening and the score can always lift. But right now, 20 is kind of telling you, yeah, there’s more risk than reward.

What’s your equivalent to that? And what are you doing? Last week, you, and I saw this in the show notes, because they just posted the last one today. The last pod we did this morning, and one of the headlines was, all in T-Bills. That was you last week. Still?

MT: Still. So I’m trading around intraday based on what’s going on. So earlier in the day, we were short regional banks, we were short some REITs. Luckily last night on some of the Discover Financial (DFS) news, I got short. I wish I got short a lot more at Discover, because the CEO left and I’m already hypersensitive on anything financial. So doing some of that, trying to go into every day with as much dry powder as possible. I did come into today with a couple of longs.

We bought Alcoa (AA) and we bought Fremont. Ended up getting stopped ahead of those right away, which is why I like coming into every day with as much dry powder as possible.

RI: Exactly. Exactly. So, the only other thing I’ll say about my positioning, inverse ETFs exist for bonds, (TBF), which is one that I own right now, and maybe we’ll increase in size, especially if we get that breakthrough and it sticks. TBF simply takes 20 to 30 year treasuries and it shorts them.

Well, that’s pretty good thing to own if rates are going up, up, up. (TBX), is a lot less liquid, but it targets, let’s say, a more familiar area of the curve 7 to 10 year treasuries And so those two are, I think, of interest. Also If rates are going to float higher, and I was just talking about long-term rates, but short-term rates have obviously been floating higher. And there are a couple there. The one I own personally is (TFLO), which is Treasury floaters out to 3 years.

So it’s all treasury. I’m not going beyond treasury. There is another one, I think also on iShares, and the symbol is (FLOT), there it’s mostly non-treasures getting AA, A, even BBB. I have no interest in it, but for the folks who want a little bit more yield and don’t mind a credit risk the way I do, that’s another one to look at.

RI: Thanks for listening to the Investing Experts Podcast. Nothing on this podcast should be taken as investment advice of any sort. At times, myself, Rob Isbitts and my co-pilot here, Matthew Tuttle, or any of the guests we may have on, may own positions in the securities mentioned. You can follow me on Seeking Alpha under the profile name Sungarden Investment Publishing. Matthew Tuttle’s Seeking Alpha profile name is Tuttle Capital Management.

We also invite you to join the thousands of people who follow the Investing Experts Podcast on Seeking Alpha, where you’ll find full transcripts for all episodes. To take advantage fully of Seeking Alpha, become a premium subscriber. See you next time.





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