Investment thesis: With a tightening Fed, slowing economy, and weaker market, it's time to sell (NYSE:VALE).
I first wrote about VALE on February 16, in a story titled, "A Buy But With Two Important Caveats." Here was my conclusion:
The picture for Vale is mostly positive, making the stock a buy. But there are a few important caveats. First, the macroeconomic picture -- while positive -- is softening. Second, global interest rates are tightening. Right now they're not restrictive. But central banks have definitely turned hawkish which means they could tighten to the point of causing a recession. Assuming the current rally continues, I'd set a rising sell-stop just to be safe.
In mid-February, we were just starting to see the Fed ramp up the discussion about raising interest rates. And while the macroeconomic backdrop was softening, it was still mostly positive.
Now, the situation has turned more bearish.
First, the Fed is clearly in a rate-hiking mood:
Rates are targeted to be around 2% by the end of the year. We're also seeing a number of Fed presidents argue for at least one 50 basis point increase if not two. And Fed President Bullard has stated that a 75-basis point increase should be on the table.
This runs into a classic investment doctrine of "Don't fight the Fed."
And there are growing signs that the economy is slowing.
The above table is from my personal notes where I track the long-leading, leading, and coincidental indicators. The financial market numbers are now bearish. These are typically the first to turn about 12-24 months before a recession.
And as I noted in my weekly market wrap, commercial paper is tightening. This little-reported on market is one of the first to seize before a recession. The higher yields are an indication that is happening. And in the latest Meeting Minutes, the Fed commented that it is seeing intermittent credit market issues:
The developments in Ukraine sparked some liquidity strains across markets. Overnight interest rates were steady throughout the period, but there were some signs of pressures in term funding markets. High levels of reserves in the banking system and the backstop facilities in place—the new repurchase agreement facility for foreign and international monetary authorities (FIMA Repo Facility) and the standing repo facility (SRF), as well as the standing central bank liquidity swap lines and the discount window—likely supported market confidence regarding the availability of liquidity and helped contain funding pressures. Amid a rise in market volatility, trading liquidity declined across a number of sectors. In the Treasury market, market depth fell and the price impact of trades increased modestly in some sectors. Overall, however, volumes were typical, and markets continued to function in an orderly fashion.
Now, let's turn to the markets. First, the markets' internals have been declining, indicating an overall degradation of the broader averages.
While the XLB and VALE are still in the leading quadrant, the XLB is very soft, and VALE is now headed for the weakening quadrant.
The basic materials sector has dropped through resistance, as has ...
This sell recommendation is entirely about timing. The Fed is tightening, which is going to slow the economy. As a result, the basic materials sector and VALE stock, in particular, have sold off.
It's time to get out.
This article was written by
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.