Oselote
The Direxion Daily S&P 500® Bull 2X Shares (NYSEARCA:SPUU) is designed to track the returns of the S&P 500 (SPY) and multiply its daily returns by a factor of 2x. Expense ratios aren’t too bad, and considering the borrowing costs that would come with taking margin, it seems an attractive way to make a levered bet on markets. We think the time is becoming right. While calling the end of the market gulley is impossible, factors related to European and Chinese recessions favour the large US wallets served by SPY companies. US markets are preferable to international exposures right now.
SPUU Considerations
The SPUU considerations are the same as that of the general market. When will rate hiking stop, and will a technical recession, or anything alarming like it, actually happen?
US corporates have been performing sideways for the past couple of quarters, and while there is a clear hit to the capital markets which were wrongfooted by the new rate regime, including capital market-oriented businesses like advisory, businesses continue to perform in line with previous quarters, albeit with growth tapering substantially. A key thing in earnings calls these days are ‘extended sales cycles’, where apparently timing for deal closes have shifted right, but are still happening.
CEOs are very good at painting a rosy picture, but the results themselves often support this claim, as growth is usually still there, even in profits. Real wages continue to fall, and wage inflation is not the problem. The wage-price spiral hasn’t happened, and the Fed’s insistence of continuing rate hikes, and perhaps all these bank CEOs coming out of the woodwork to only now sound the recession alarm, are all ways to keep employees from getting cute and asking for raises.
Much of the commodity inflation too has reversed. Steel prices are below pre-COVID levels, and lots of other basic materials are at square one. The only exception is oil, which is directly impacted by geopolitics and the weaponisation of oil prices in a period where Cold War era hostilities have resurfaced. Rents and housing have come down too. Indeed, all these are reasons why CPI has apparently peaked.
Bottom Line
When will we reach peak rates? At the first coming of either a recession in the US that forces a Fed pivot, or severe enough recessions in other countries where inflation dissipates, and wage-price effects are outside of swinging range of alarming levels of perpetual inflation.
This is key, the misfortunes of Europe, and the relief from the demand pedal of China too, both soften the landing for the US, and would require less rate hikes to achieve reduced inflation, perhaps less than what would cause a US recession.
US wallet share is the vast majority of SPY companies. The fortunes of Europe can impact them, but the direct and indirect effects on the incomes aren’t that much, especially as the dollar has already outpaced the Euro and compressed that share due to FX effects alone. The US is capable of doing well while Europe does badly. As for China, wallet share is also not too high, and China hasn’t done worse than it is now for a long while. With the dollar remaining strong since Europe can’t solve productivity issues with monetary policy, and with recessions abroad causing reduced cost push pressures, America has a huge edge as it remains the best positioned economy in the West, besides maybe Norway and others with major oil reserves, or energy independence. This is probably not being recognised by markets.
Another thing that helps defend against inflation is that there are labor shortages everywhere except in tech. While tech accounts for an outsized part of the markets, it accounts for a very small portion of the labor market. There can be mass tech layoffs with no big hit to consumer staples, and other low-to-medium risk industries in terms of income elasticity.
We think that while gravity is growing in markets, the US is standing on Europe right now, and China has tumbled off the pile, as the economic war with Russia extends.
SPUU has pretty low expense ratios for a portfolio that requires a fair deal of management. 0.63% isn’t bad at all, and for investors that don’t have access to a margin account, or want to pay borrowing costs, SPUU could be a good way to aggressively call the bottom. Of course, the 2x factor magnifies risks both ways. Nonetheless, with the US structurally well positioned, and able to benefit from the more fragile platforms of other economies, they can probably outlast Europe who’ll fall into a recession first. A China reopening, which has started now, may put some upward pressure on some basic materials, and harden the landing for the US, but the Chinese reopening is still uncertain, and dependent on solid, centrally planned execution, which is not guaranteed. The market has been trading sideways for more than 2 years, a bottom should be in soon.
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