Postcards: The Year in Review... and the Week Ahead

It was a very important lesson for me on the fly this year - as my initial prediction for the S&P 500 didn't come close. But sentiment shifted in March - and we're now ready to take advantage.                                                                                                                                                                                                                                                                                                                                                                                                                 Forwarded this email? [Subscribe here]() for more [Postcards: The Year in Review... and the Week Ahead]( It was a very important lesson for me on the fly this year - as my initial prediction for the S&P 500 didn't come close. But sentiment shifted in March - and we're now ready to take advantage. [Garrett {NAME}]( Dec 30   [READ IN APP](   Dear Fellow Expat: I compiled a portfolio of mean reversion stocks at the start of 2023. I sold calls on most of them by using covered calls out for a few months. My top pick, Skywest (SKYW), finished the year up 217%. But readers only walked away with about an 18% gain. Lesson learned. I won’t do that again… at least when our Equity Strength Signals are positive. SKYW took off like a jet (fitting since it’s an airline company). Meanwhile, my prediction for the S&P 500 - initially around 3,450, didn’t come close. A few critical things happened… and I changed my outlook by March 2023. Primarily, the markets started 2023 with a flurry of central bank interventions. We noted in March that the proverbial bottom for the market was last October 2022. In addition to various pivots by central banks - particularly the Federal Reserve and the Bank of England in October 2022, the markets received multiple jolts from the People’s Bank of China with its COVID-19 reopening and a batch of support from the Bank of Japan in December 2022. [Our Equity Strength Signals]( turned positive on January 3, and the S&P 500 SPDR ETF (SPY) rocketed from 380 to 416 in just five weeks. At the time, we had a frenzy around Artificial Intelligence as well - with the start of the run for the Magnificent Seven - the massive cap stocks that represent a huge percentage of the S&P 500 index… and are very crowded stocks because managers buy them to attempt to replicate their benchmarks. As you can see in the chart below, the buying was ferocious for these names - and it never slowed down. The S&P 500 won’t drop when the biggest weights on the index are getting bid up so aggressively. Once again, liquidity is a big part of that bidding. Source: Syz Group, Bloomberg, Edward Jones Then, in mid-February, we had “the blackout. “ The markets began selling off on a February 2 top, but we were flying blind without updates from the Commitment of Traders report for several weeks. Over in London, the company that tracks the data - ION - [was beaten up in a ransomware attack](. We officially had a negative Equity Signal hit on March 7 - nine days before the bottom hit on the back of the regional banking crisis. As I noted, we only know why the signals go negative a week after it happens. On March 7, zero mainstream headlines warned about a collapse in U.S. banks. But a week later, it was the only story on the financial news outlets. At that point, the Fed intervened again - and while no one on CNBC wanted to say the word “Bailout,” the massive amount of capital support to the banking system provided another jolt of confidence. Once again, central banks pumped. And on June 1, we had yet another intervention from the People’s Bank of China. Unsurprisingly, another two-month surge took us to overbought levels by the end of July. Our signals were Green for the duration of that rally. And then - once again - the bleeding started. What followed in late August to October was another seasonal selloff and reminder of America’s refinancing crisis on the horizon. With the 10-year bond yield accelerating to 5% and China's dramatic selling of UST, the market found its bottom on the back of Bill Ackman’s call to cover at 5%. By late October, [the Republic Risk Letter noted]( the markets were plunging into oversold territory - with the Relative Strength Index for the S&P 500 SPDR ETF (SPY) under 30 and the Money Flow Index dipped to about 20. We've seen dramatic short squeezes the last three times that the SPY fell to those levels. Since late October, we’ve seen ample support from the Fed, ongoing support from the Chinese government, rounds of easing from the Bank of Japan, and more liquidity driving this market into a frenzy that lasted eight more weeks. In addition, we saw the single largest wave of insider buying in October since the previous year’s bottom. There it is… October 19… bidding was strong through the following week. Insider buying is a TERRIFIC contrarian signal. Revisiting So, why was my initial prediction so off? [As Michael Howell noted recently,]( the liquidity cycle bottomed shortly before my estimate for 2023. Since October 2022, his liquidity measurement has increased by a whopping $5.3 trillion, with central banks providing about $1.1 trillion. Next year, Cross Border Capital expects global liquidity to increase by $14.8 trillion. While I expect two selloffs north of 8%, I can’t help but notice the relationship between our Equity Signals and the ample support announced by central banks. Do the math. As I’ve said - the Federal Reserve has two options. They can let asset prices crash or price out an entire generation of Americans from owning assets like houses and possibly even stocks. They seem content to choose inflation over a crash right now. Inflation will probably come back unless this pivot from the Fed in December was a warning signal of something hideous coming for the economy. It’s going to be another choppy year. This whole whacky system goes until it breaks. We have consistently called tops and bottoms since we first went live in late 2021. We’re getting ready to attack this market with a new list of names for our Republic Risk Letter subscribers and a deeper guide for our Founding Members. [Upgrade to paid]( Top Posts of the Year Look at some of the most popular posts in the Florida Republic’s first year. - [Welcome to the Jill Biden National Marble Run and Hiking Trail… Brought to You by Pfizer and JPMorgan Chase]( - [Cornering the Frozen Orange Juice Market]( - [A Religious Revival Aboard Southwest Flight 2578]( - [Five Investment Themes I Can’t Wait to Buy in 2024]( - [1993 - The Nominee Who Made Wall Street Bailouts Permanent While Pocketing $125 Million]( - [Buffett for 80 Cents on the Dollar (Happy Birthday, Amelia)]( The Week Ahead Given the critical data that arrives this week, this market can come out of the gate fast. Don’t take your eyes off the screen; this should be a VERY busy week. Monday, January 1, 2023 Event: New Year’s Day… New Year’s Resolutions. Everyone Exercise Republic Speak: I will lose 20 pounds by my 43rd birthday in April. Enough of this. In addition, my very aggressive New Year’s Resolution is no alcohol until February 21, 2025. That’s 10,000 hours from January 1, 2023. I have a company to build, a book to write, and many other goals. I don’t need it. Tuesday, January 2, 2023 Event: Macau Gambling Revenues Republic Speak: Is Las Vegas closed? It feels like analysts don’t talk about what’s happening in Sin City anymore when we talk about gambling revenues. I guess that’s the post-COVID reality. Macau matters because it’s the biggest gambling center in the world (until, of course - Dubai decides it wants some of that sweet, sweet Western gambling money). Macau was reportedly very busy during Christmas and the days around it, even though it’s not a major holiday there. We’ll be paying VERY close attention to Las Vegas Sands (LVS), which was just placed at the top of Deutsche Bank’s version of a conviction list for the year ahead. Wednesday, January 3, 2023 Event: The Fed Minutes from December Arrive Republic Speak: The December minutes were bad news in January 2022 and helped kickstart a rally in January 2023. What can we expect next week? We just witnessed one of the biggest policy shifts from the Fed and its expectations in the last 15 years, and markets are still in overbought territory. I don’t think we are done with 10-year interest rates just yet - as they will likely rebound. The U.S. government has to refinance trillions next year - and we’re now seeing one-day auctions for U.S. bills that surpass the GDPs of entire countries. The MACD is now starting to tremble on the S&P 500 SPDR ETF (SPY), so remain cautious and alert. The question is no longer “How High” for the Fed - but How Long must rates be elevated? Inflation is still high… but the Fed doesn’t care. Thursday, January 4, 2023 Event: Goldman Sachs hosts its annual Energy Conference. We’ll get updates from companies like Plug Power (PLUG), EOG Resources (EOG), and SolarEdge Technologies (SEDG). Republic Speak: Alternative energy stocks found a short-term bottom in December and saw some sizable gains from the Equity Strength Signal change in early November. Garbage stocks love to squeeze, but SEDG is off 67% in the last year. Out of any names in the alternative energy space, we still like Brookfield Renewable (BEPC), but there will be bumps along the way. Friday, January 5, 2023 Event: The December Jobs Report Republic Speak: And here we go again? How many new government jobs were created? How many second jobs are Americans taking to scrape by? Has the Fed been able to stop wage inflation? All of these repetitive questions and more start at 8:30 am on Friday. What’s Next? As I’ll explain tomorrow, the Fed’s policies created another explosion in bad policy from 1993 - putting companies like BlackRock, Vanguard, and State Street to have more than $7 trillion in ETF assets - total assets dwarfing that figure. This is our last article in the series, and I’m sad it’s over. [I hope these pieces have been informative and helped you understand why everything is so broken in our economy.]( On Monday, we’ll release the Mean Reversion portfolio in the evening, and on Tuesday, we’ll discuss how to trade it for our Founding Members. Remember, the price of the Republic Risk Letter is going higher in the months ahead, so lock in your forever price with this letter by becoming a Founding Member. [Upgrade to paid]( Stay positive, Garrett {NAME} Secretary of Defense You're currently a free subscriber to [Postcards from the Florida Republic](. For the full experience, [upgrade your subscription.]( [Upgrade to paid](   [Like]( [Comment]( [Restack](   © 2023 Garrett {NAME} 548 Market Street PMB 72296, San Francisco, CA 94104 [Unsubscribe]() [Get the app]( writing]()