A Chill Weekend

So Friday was a good day for the portfolio. Stayed long stocks and short bonds and had a huge move in our direction.

I put some puts right on the close Friday just to hedge against that pesky Iran/Israel rumor that I’d seen going around. Puts are still fairly cheap.

Right after I bought those puts Bloomberg put out a push notification about how people are starting to hedge.

By the time Bloomberg starts writing about how people are buying hedges it’s time to cash in the hedges…

Rates Expectations

The Fed’s dot plot and the SOFT futures curve more or less exactly matched on Friday, pricing in ~2.5 cuts this year. As far as I remember the market has been consistently out-doving the Fed’s projections all the way back to the first hike in March 2022.

I think this is just a health development, and I don’t see any real need for it to bring markets down. If anything, it tells us that some “irrational exuberance” might be leaving or have left the markets.

More interestingly for equities is how the yield curve continues to price in “higher for longer” on the long end of the curve.

This is just something to continue to watch. I remain bearish bonds, but provided we don’t get a resurgence in inflation the yield curve can go up and up on the long end and that can be bullish stocks.

So with that said, let’s revisit…

Inflation

First things first the chart looks pretty good. We don’t see much evidence of an inflation resurgence and the number has come down a lot.

it’s still elevated from the Fed’s target of 2%. They have continued to reiterate that 2% is their target, but I suspect that they wouldn’t mind seeing inflation hold here for a while.

It’s spikes that they would be worried about.

On that note, let’s check in on oil…

Oil Prices

If you’re the Fed this is a much scarier chart. I’ve seen a few people calling for an oil price breakout to ATHs. Oil peaked in the $120s in June 2008, and a return to an inflation adjusted ATH would see oil above $170.

I think structurally the worldwide oil market is much more robust than it was in 2008. Production is less concentrated in the top producers. But I’m far from an expert.

You know what could make oil reach ATH? War with Iran.

Still I think it’s important to zoom out and appreciate that we are nowhere near levels (especially inflation adjusted) that would lead to structurally higher inflation.

Based just purely on my instincts and the article headlines I see, if anything, I’d want to be short oil here. In fact, on Monday I will consider putting a short on.

The bear case for oil is as follows:

1. It’s run up to the point where lots of people are talking about it and writing pieces on it, which indicates people are positioned long.

2. War in the middle east is scary but it’s not directly affecting oil production anywhere.

3. Sanctions with Russia just don’t seem to be having any serious impact on their ability to get oil to market.

The bull case is available for your perusal on any major online publication. Maybe you can see what I’m getting at here.

The Baron Portfolio

This is a meme that made the rounds in my friend group of traders a while back. I love it. The term “moisturized” has become a phrase I use regularly in my trading life to mean that I’m happy and relaxed with how I’m currently positioned.

You can see the natural evolution to this meme which is from Dune. It’s also my profile picture for a reason.

I’m feeling moisturized, sitting here betting mostly on things to get better with one notable exception:

• Stocks up

• Crypto up

• Gold up

• Bonds down

• Oil down

I think the US’ fiscal problem is the looming gorilla. A few guys in my circle are talking about yield curve control and debt monetization in the next few years. I think we are on a path to that as well, I’m just not sure how fast it will happen. Whether it happens fast or slow, I think we have a good risk/reward set up with bonds (even after last week).

I’m feeling good and will consider some Oil shorts and SPY calls on Monday.

Enjoy the weekend.

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Please also always remember... none of this is financial advice. I’m not a professional. I quite literally don’t know what I’m doing.