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Signs of life in Europe

November 7, 2022

This is a promising chart and the chart for UK shares is also looking more promising. We have a big something new in the UK with our new golden boy prime minister. Has anyone ever got the job with a more impressive CV and still only 42 so almost half the age of the veteran in charge of the US? It is exciting in a way even though so far Rishi has shown none of the charisma of Boris. What he has done is risen to every challenge he has ever had and passed with flying colours. I mean head boy at Winchester; that is awesome from the off and we don’t even know what miracles he was performing when he was a toddler, a youngster and so on. Being his parents must have been and be an amazing experience. Like my youngest daughter who only failed to get felicitations once (it is awarded to the best pupil in the class every term) in her whole time at the Lycée. Most children are glad to get it once, like my other two and now Rishi is just 10 years older than my youngest daughter and he is prime minister.

What could be happening in Europe generally and Germany specifically to trigger a possible turnaround I am not sure but Europe is interesting because it has been in the doldrums for so long and maybe the whole inflation, rising interest rates, Ukraine war situation is finally going to wake this sleeping beauty out of its slumber.

The rally came after the US jobs data showing more jobs were created than was expected. This could be read as bad news for the stock market because it puts upward pressure on inflation and interest rates. It could also be seen positively as its suggests great underlying strength in the economy. The Fed can take risks with interest rates because even if they slam on the brakes a little too hard the economy may wobble a bit but it will not be out for the count. Unemployment also rose despite the job creation which could be a cooling mechanism.

The strength of the economy makes sense because we live in a prosperous world. If anyone time travelled here from the 1950s which were thought off as a time of growing prosperity they would be stunned at the wealth they would see not everywhere but all over the place.

As it happens I am a time traveller from that distant past, and I can tell you that prime minister MacMillan’s famous comment, “you’ve never had it so good’, made in 1957 needs to be multiplied by 10 to describe how many people live now. People are so blasé; they have no idea. I don’t suppose SuperMac did either. Somebody probably told him housewives had things like dishwashers and vacuum cleaners and once they had explained to him what these things were and maybe even that a housewife and a housekeeper were different because the housekeeper got paid whereas the housewife did the same job and slept with her boss all for free, he concluded that they had never had it so good.

This is what we are waiting for.

“The [jobs] report was bad as far as what the potential implications would be for Fed policy, but it wasn’t as bad as the market was concerned about. We definitely are seeing some early signs of pricing pressure coming down,” said Tom Plumb, portfolio manager at Plumb Balanced Fund in Madison, Wisconsin.

Even though the Fed would not talk about a pivot or anything like that, I think the market is expecting them to remain data dependent and in the next six months you’re going to see significant cracks in the pricing pressure,” Plumb said.

Tom Plumb, Plumb Balanced Fund, 4 November 2022

This is an interesting quote because it is like the flip side of my Coppock Analysis. I am expecting a Coppock buy signal for US shares in March, which is within a six month time horizon. Tom Plumb is expecting a pivot by the Fed away from tighter US money also within the next six months. This could be just the trigger the stock market needs.

It makes sense. The US and global economies have been hit by an incredible rise in interest rates, the equivalent of a monetary slamming on of the breaks. It hurts, I know because quite apart from soaring energy bills my mortgage servicing costs have exploded. We are not yet talking about adding a nought to my monthly costs but it is heading that way. I am sure there must be many families across the developed world who cannot take much more of this, which means something has got to give and at some point the stock market is going to bet, just as Plumb suggests in his quote above, that it is going to be red hot inflation which is going to start to cool.

This can trigger a powerful virtuous circle. Falling inflation means lower interest rates which triggers rising production so the supply of goods increases which alleviates shortages and becomes a powerful factor in bringing price pressures down even further. Instead of regular doses of bad news investors start getting regular doses of good news and the whole investment merry go round starts again.

The stock market is a discounting mechanism. It reacts to what the combined wisdom of investors think is going to happen in the future. In bear markets horizons shorten, rather like condemned prisoners on death row; in bull markets horizons lengthen and the imagination soars into the distant future which is what can drive valuations on growth shares so high.

This means you can add that whole process to the regular good news on inflation once we get it and you start to see why in bull markets shares can rise so far for so long. And so far, since the end of the Second World War, every bull market has stunned observers by how strong it has been with spectacular rises in the 1980s, 1990s,a tricky time between 2000 and 2009 when we suffered two ferocious bear markets and then a spectacular rise from 2009 to 2021 and now the latest fierce sell-off.

Strategy

As I am sure subscribers have realised Quentinvest is overwhelmingly about US shares. I don’t see that changing. The US stock market is more exciting than any other world stock market by a factor of 10 or more. There is no need nor much point in bothering with any other market and with services like IG buying US shares is as easy or easier than buying UK shares.

My interest in what is happening to European shares is more as a pointer to what might happen in the US although I will keep an open mind. If Europe or the UK takes off I will be interested.

There is not much to get excited about at the moment if OGIG is anything to go by. And just to note, both Apple and Tesla are teetering on the brink as I write. If these two break down that is going to be dramatic and they look scary.

Ask me for my best guess and I would say Tesla is going to halve from here and Apple, if it breaks, is going to look terrifying too. We would then have all the mega caps in free fall which is going to put huge pressure on the Nasdaq 100 and on investors generally as a wave of wealth destruction cascades through the system

If there are any weak links out there this is going to test them to destruction.

Look what has been happening to Amazon shares since they broke down from a massive top area.

Breakdowns from top areas in ongoing bear markets are important phenomena. Investors need to tread very carefully. This bear market is not over yet.

It is interesting to note that on my new scoring system by which Shopify scored two both apple and Tesla score zero.

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