Checking in on the Small Caps

I said, “Watch the Russell.” Here’s an update. [The Rude Awakening] September 12, 2023 [WEBSITE]( | [UNSUBSCRIBE]( Checking in on the Small Caps - In the August 31st Rude, I said to watch the Russell 2000. - Small companies couldn’t refinance their debt, so the rate hikes would hit them first. - The Russell 2000 may be heading down. [We just had the biggest – and most drastic – operational change in our company’s history.]( I believe it will have profound effects on our editors and readers alike. I’m urging you to listen to a short memo from our VP of Publishing. He explains why, after 20 years, this decision was 100% necessary… […and why this “fix” could have a significant impact on your personal wealth.]( [Click Here To Learn More]( [Sean Ring] SEAN RING Good morning from a cooly temperate Northern Italy. The leaves are turning, and this morning’s temperature is only 20C (68F). It’s simply perfect for this time of year. While myriad political shenanigans are going on, I thought I’d turn my attention to the stock market. That’s where positions are moving around, and it seems folks are getting a bit bearish. In this edition of the Rude, I’ll remind you why I said, “Watch the Russell.” I’ll also update you, show you how investors are positioning themselves, and what this may mean for the future. Why We’re Watching the Russell I’ll review quickly [what I wrote on August 31st]( via bullet points. - Societe Generale’s research team noticed corporate net interest costs as a percentage of post-tax profits were at their lowest in 60 years. That’s not supposed to happen when you’re hiking rates like Jay Powell was. [Rude] - Double-checking their work, SocGen confirmed corporate net interest payments collapsed despite the quickly and steeply hiked rates. [Rude] - SocGen theorized large companies with access to the debt capital markets played the inverted yield curve in reverse. That is, they borrowed long (cheaply) and lent short to the money markets (at a much higher rate), creating a profit. [RUDE] - So, the largest US companies (the S&P 150, as we’ll call them) are immune to interest rate hikes. The remaining 1,350 of the S&P 1,500 are not. [RUDE] - Therefore, we need to watch the small caps (the Russell 2000) for the first signs of a downturn. [RUDE] All the above images are courtesy of [Zero Hedge](. [Your Credit Card: Declined?]( [James Altucher]( Take a moment and picture this scenario: The line at the gas pump is getting longer as you insert your credit card for the second time. You decide to head in and ask the cashier what’s going on. There’s a long line inside. The woman in front of you looks frustrated. Everyone does. “There’s nothing I can do. You’re declined,” the cashier says to the man at the front of the line. It’s not just you. Everyone is declined. Something doesn’t seem right. A sinking feeling sets in as you realize something has gone terribly wrong. [Click here now for an urgent new prediction from a former advisor to the CIA and Pentagon.]( [Click Here To Learn More]( What’s Happening Right Now Before I get into the IWM (Russell 2000 ETF) chart itself, this popped up on The Chart Report: [RUDE] Credit: [The Chart Report]( The X axis is in years, and the Y axis is in percentage. Right now, the Russell is in the midst of a two-year collapse versus the SPX. If anything, this looks to continue, though you can argue this may be the bottom. Either way, the Russell looks weak for now. How Investors Are Positioning Themselves Liz Ann Sonders then posted this: [RUDE] Credit: [The Chart Report]( Speculators are shorting the Russell 2000. This is what happened in February, the last time speculators were this short: [Rude] Then, the Russell fell from 198 to 170. From the current price of 184, that would imply a fall to 157. We haven’t seen that level since the Covid collapse and recovery. My guess is that we’d get to 162, the two-year low, before either recovering or collapsing further. What’s Next Here’s the current weekly IWM chart: [Rude] It’s not terrible, to be sure. Nor is there any sign of imminent collapse. Here’s the daily IWM chart: [Rude] Here, we can see a head and shoulders pattern fully formed, but that doesn’t guarantee a further down move. However, if the IWM price moves below the 200-day moving average (the red line) and the 50-day moving average (the blue line) follows it, we’ll see a big move down. Right now, the MA lines are reasonably flat, so it’d be no surprise if they rolled over. Albert Edwards, SocGen’s guru, [wrote the following]( In fact, contrary to what the mega-cap valuations suggest, smaller companies remain the beating heart of the US economy – maybe, the SocGen bear notes snarkily if correctly, "the mega-caps are more like vampires sucking the lifeblood out of other companies." To summarize, while the top 10% of companies are benefiting from higher rates in the form of cash interest income greater than debt interest expense, at the same time, the lights are going out all over the US smaller-cap corporate sector. Unlike their far bigger peers, "they weren’t able to lock into long-term loans at almost zero interest rates and pile it high in the money markets at variable rates." Ultimately, Edwards concludes, "the pain for US small- and mid-cap companies will trigger the recession most economists are now giving up on, and hey, guess what? I think we’ll soon find out that even the large- and mega-cap stocks might not be immune to the indirect recessionary impact of higher interest rates after all.” What I’m worried about are the bankruptcies. In August, [commercial Chapter 11 filings increased 54%]( over last year. Total filings were up 18%. And those aren’t big companies declaring. Wrap Up No, it’s not time to panic. But reviewing what’s going on in the small caps is good. The Russell 2000 is the canary in the stock market coal mine. We’ll continue to watch. Have a great day! All the best, [Sean Ring] Sean Ring Editor, Rude Awakening X (formerly Twitter): [@seaniechaos]( In Case You Missed It… Mailbag: Monday Morning QB Edition [Sean Ring] SEAN RING Good morning from La Bella Asti! I hope you had a wonderful and restful weekend. After vegging out on Saturday, Pam, Micah, and I traveled to Turin's Gran Balon antique market. There were so many cool items there. We picked up a new hallway table and a few maps of the Italian regions. It was a lovely day. Good friend and Head of Paradigm’s Business Development, Dustin Weisbecker, sent me the mailbag. And wow, was there some dissent! Honestly, I don’t get much of that. But it’s important to air both sides of a debate. So, I hope you have fun with this edition of the Rude. These readers aren’t covering me in glory, that’s for sure! Hating the Frogs From "The Morning Reckoning" on 9-7-23: [The Frightening Fall of the F*cking French]( Apparently, Paradigm Press condones Francophobia. This is not the first time I’ve seen it, either. An apology to your French clients is in order. If you don't like France, French people, or Francophones, please keep it to yourselves. Duane S. Duane, Duane, Duane… A phobia is a fear of something. I assure you no one has feared the French since Napoleon sat on the throne. But I know that’s not what you mean. On this side of the world, everyone “hates the French.” No, not the French people. That’s why I took my family to Chamonix, Nice, St. Paul de Vence, Menton, and Paris this year. We all love French food, cuisine, and language. But we, and I mean the Anglosphere and the rest of Europe, utterly loathe French politics, politicians, and their machinations. Oddly enough, it mirrors the same hatred the rest of the world feels for America, but not Americans. It’s an important distinction. To wit, France just beat New Zealand in the opening game of the Rugby World Cup, which France is hosting this year. Here is the correspondence with Aussie Trav: [The rude awakening] Everyone has two favorite teams: their home country and whoever’s playing France. C’est la vie! But more to your point: Aussie Trav and I attended London Business School with a Frenchman named Philippe, who’s genuinely one of the world’s most extraordinary people. I remember that on the night of our first exam, Philippe closed a major M&A deal as his wife went into labor. He got an A+ on the exam. His legendary status was assured. Philippe pulled me up on this very article. Here’s what he had to say: “Wow, Sean, that was honest and below the waist from A to Z 🙄 - You are right about how controlling the currency means controlling people's lives, though. In fact, as a son of Uncle Sam, you know full well the full weight USD has had on emerging market economies (not just those using Franc CFA) in the last 80 years or so! The mote that is in thy brother's eye….” This is what I wrote back: Absolutely true! It’s a shame BRICS didn’t offer an alternative at their conference last month. Unfortunately, the EU backed the US neocons against Russia. It’ll cost the EU its currency, whose share of world trade has collapsed. And we parted as friends. It’s crucial to remember that the only people who set Paris on fire are Parisians! I merely called the subordination of Africa via the CFA franc the way I see it: a staggering hypocrisy for those who shout, “Liberté, Egailité, Fraternité” at the top of their lungs. [[CHART] Could Inflation Hit 20%+ In 2023?]( [Click here to learn more]( Take a close look at this scary chart pictured here… What you see is the money supply in America… And as you can see, the number of dollars in circulation has exploded in the last few years. In fact, more than 80% of all dollars to ever exist have been printed since just 2020 alone! Which is why some say inflation could soon explode even higher than it is now, to 20% or more. And if you’re at or near retirement age you must take action now to protect yourself… otherwise you risk losing everything. [Simply click here now to see how to survive America’s deadly inflation crisis](. [Click Here To Learn More]( It’s Biden For Me! I am interested in your opinions on financial issues. Some are very helpful. But that doesn’t make up for the right-wing screeds. I support President Biden. You don’t, and I respect your right to vote as you see fit. I draw the line at pro-Trump propaganda, whether from Orban, Carlson, Fox News, or you. He was happy to ignore the invasion of the Capitol by people who brought a noose to murder his VP, hunted the Speaker, and desecrated the building. It’s a wonder that more people didn’t die that day. I am a descendant of people who served the U.S. from the Revolution to Korea. I have voted for candidates who won and candidates who lost. In every other case, those who lost went to court if there were actual legal issues. And then, if the Supreme Court ruled against them, they congratulated the winner, attended the inauguration in a show of national unity, and went on with their lives. Believe it or not, there are other things that are as or more important than the markets. Not supporting those who seek to overthrow our democracy is at the top of my list. Goodbye. Edna B. Edna, I’m genuinely sorry to see you go. Especially over Biden. Geez. You may find this crazy, Edna, but working in London in banking for ten years exposes a person to every kind of person in the world. London is the center of finance for the world, not New York. NYC is just the biggest equity marketplace… or was before the Chinese took over. Gay. Straight. European, African, Asian, South American. North American. Married. Single. Polysexual (before it was cool). I’m for the legalization of drugs (except, specifically, crystal meth, cocaine, and heroin). Read Ayelet Waldman’s A Really Good Day if you’d like to find out why. I’m pro-gay state marriage because of the [immorality of inheritance laws](. However, I don’t think churches should ever have to perform those marriage rites. The only reason why I’d be considered right-wing today is because the Left lost its damn collective mind. I just have a few questions for you, though, if you’re still here by any chance: - How can you consider Carlson’s interview with Orban propaganda? Just because he conducted it at all, or because Orban openly stated he thinks Trump can solve the Russia issue? - If those who “invaded” the Capitol “desecrated” the building, why did they [walk between the velvet ropes]( - If it’s a wonder that more people didn’t die that day, have you reflected on why Ashli Babbit had to die at all? As for the loser going to court for legitimate issues and then just accepting the judgment, I have no idea what you’re talking about. Here are [twelve minutes of Democrats denying election results](. Cartographically Challenged I just received another of your relentless Rude Awakening sales teasers. But this one borders on the idiotic! You cite rolling blackouts in some parts of the USA. And warn of blackouts perhaps coming to my area - Helsinki. For your information: Helsinki is the Capital of the Republic of Finland!! Finland is in Northern Europe! OK? The sordid business of peddling financial newsletters just showed another low! Not the first one, not the last one, for sure. Shame on you. Hans B. Hans, I know your intention wasn’t to make me laugh, but you did. I’ve said to many friends the most dangerous people on Earth are AWOPs (Americans WithOut Passports). Unfortunately, computers are only as geographically informed as their programmers, so I will take this up with management. But before you shame me for selling you my excellent colleagues’ newsletters - the Rude is gratis, as you know - let me tell you something. I work with the finest men and women in this business. Perhaps you’ve heard the oft-quoted statistic that it takes, on average, seven visits to a store before a person decides to make a purchase. You’re pelted with “sales teasers” because we’re opening our store to you… And deciding if you’d like to buy something will take a while. Let me ask you this: If I had the solution to your problem and didn’t sell it to you, would you like me more? Of course not! It’s not fair to you. And it’s certainly my job to alleviate your problem in any way I can. So the Rude, while free of charge, carries ads that we hope you’ll find to alleviate whatever issue you may have. Don’t understand macroeconomics and want to profit from it? Try Jim Rickards’ Strategic Intelligence with Dan Amoss’ great picks. Want to learn about options and how to make money with little capital outlay? Alan Knuckman and Dave Gonigam are your men. Need a hedge fund manager to hold your hand through the investing process? Then try Jim Rickards’ Banker, Zach Scheidt. Do you love tech but have yet to catch the right wave? Then Ray Blanco will help you out. But if you still want to eliminate our “sordid” ads, you can write again to Dustin Weisbecker at feedback@rudeawakening.info and tell him to take you off the promotions list. However, let’s employ Frederic Bastiat’s seen and unseen method before you do. The seen will be a clearer inbox. The unseen will be a missed opportunity. It’s up to you. Wrap Up That was a long Rude for a Monday. Thanks for sticking with me until the end. All the best, [Sean Ring] Sean Ring Editor, Rude Awakening X (formerly Twitter): [@seaniechaos]( P.S. I can’t believe 9/11 was twenty-two years ago. Let’s say a little prayer for those who lost their lives that day… and their families and friends. [Paradigm]( ☰ ⊗ [ARCHIVE]( [ABOUT]( [Contact Us]( © 2023 Paradigm Press, LLC. 808 Saint Paul Street, Baltimore MD 21202. By submitting your email address, you consent to Paradigm Press, LLC. delivering daily email issues and advertisements. 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