Coiled Spring Capital Macro Report Jan 2nd, 2023

Happy New Year and welcome to 2023! We wish you and your families a prosperous and fulfilling new year and we thank you for being part of our family.

Our goal is to help our subscribers make better decisions with their money, by navigating the very complicated waters of the global markets. Nobody gets it right all of the time, but we think our analysis is as good as any publication out there for determining big inflections in various instruments.

To recap some of our biggest calls:

*We got tactically bullish on the market near the Jun lows, not only buying the indexes but also offering a number of individual stock ideas that returned +20-50%. We sold our long position into the Aug highs and turned bearish on the indexes.

*We got tactically bullish post the Oct CPI print and our DeMark signals. We closed out our bullish positioning in early Dec and got bearish into the end of the year.

*We called the peak in oil in March.

*We called the peak in rates in Oct.

*We called the rollover in the $USD.

All of these calls were carefully dissected in our reports and delivered to members with ample time to react and profit from them. Our process is much more complicated then blindly following the DeMark sell signals, but they are the basis for us identifying major turning points. We take a weight of the evidence of approach and review hundreds of proprietary metrics that enhance the probability of a signal's efficacy. We have found that our calls are way ahead of anyone else in the markets and executed with incredible precision.

Our research is designed for the occasional investor/trader and the active/professional trader. It should serve as a perfect complement for any investing /trading activity and is affordable even for novice investors/traders.

2022 was quite an ugly year for most US indexes:

*Dow -8.8%; SPX -19.4%; Nasdaq -33.1%. These were the worst drops in all 3 indexes since 2008. Bonds (TLT) also got crushed, which is not typical when the equity markets are struggling.

And so much for the Dec melt up rally that some high-profile prognosticators were calling for...

What about the Santa Claus rally that never came? But 2 days left and still has a fighting chance (recall the Santa Claus rally is the last 5 days of the trading year and first 2 days of the new year).

Last week we wrote, the market may just chop around for the final week of the year and that it did.

It is statistically important for Santa to show up and also the 1st 5 days of the new year have merit.

From Barrons:

Recall what we wrote about in Oct and Nov, that the 3rd year of a presidential cycle tends to be positive. Here are the statistics from 1933 to 2015.

But this is a limited series and cannot be solely relied upon, only something we need to be mindful of when considering the set up for next year.

We have been quite public about our opinion of the macro-economic picture and have been bearish since January. But our fundamental view is just an opinion, and we remain agnostic to market direction. This year will most likely be another very trick year for all participants.

Earnings estimates for '23 still appear too high. This is something we've been discussing since March of last year. They have since retrenched ~7% since the peak but is that enough? Our first inclination is no, but this really depends on the depth of any recession, which seems like an inevitability at this point.

Recessions tend to see average earnings degradation to the tune of 20-40% and thus implies we have a long way to go.

Bloomberg is pricing in an 80% probability of a recession in '23 and expects it to hit around Sept. They do expect the recession to be shallow where consumption growth will remain positive throughout the downturn. This makes sense if you think about current consumption trends which have not let up. This is also being expressed through very high inflation, most recently in the services sector.

The good news is that inflation in aggregate is coming down. The CPI peaked at 9% and has since declined to 7.1%. This is still historically high and keeps the FOMC on track to continue its rate campaign.

We also called the peak of inflation to occur sometime over the summer, and that it did.

The terminal interest rate is now closer to 5% and will occur in Jun according to the Fed Fund Futures. Some of the Fed members are actually on record for above 5%. But you have to wonder if this is just to keep liquidity conditions tight, i.e. the stock market. Inflation is coming down and while employment is still growing, we have started to see larger companies make job cuts. We expect that to continue into 2023, thus giving the Fed their desired outcome of higher unemployment and lower inflation.

The 3 biggest questions for the stock market this year in our opinion are:

*When does the Fed actually start cutting rates?

*How deep is any recession? Meaning has the Fed overtightened and created too much damage to the main street economy, or have they really engineered a pseudo-soft landing?

*When do EPS numbers cuts occur and are they deep enough to warrant a fundamental bottom?

Of course, there are multiple factors that come into play that can drive each of the answers to the above. We will continue to update our thoughts on each of these and more macro-economic considerations in future reports.

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