Over the last few weeks we have received many questions asking how S&P 500 futures trading at night or early morning determine how the market will open. To help answer these questions and provide the calculation necessary to make sense of after hours trading we provide you with the following article. CLICK TO READ IT

April 9, 2020

Jobless Claims will be released at 8:30 this morning. The current estimate is for another 5 mm people to join the approximate 10mm of newly unemployed from the prior two weeks. Also of interest, PPI will be released today and CPI tomorrow. Both inflation figures are expected to be down by 0.3%, but like all other data, the results may stray far from expectations. Jerome Powell will speak at 10 am. We suspect he will remind us once again that the Fed will do whatever it takes to stimulate the economy and stabilize the markets.

OPEC will hold an emergency meeting at 10 am. The rumor is that they will announce an output reduction of up to 10 million barrels per day. Crude oil rose over 10% and stocks zoomed higher as the rumor circulated yesterday.

Stock and bond markets will be closed on Friday for Good Friday.

The Fed released its minutes from their March 2nd and March 15th emergency Fed meetings. We share a tweet from Wall Street Journal Fed reporter Nick Timiraos that sums up the Fed’s concerns- Wednesday’s FOMC minutes use the adverb “sharply” 18 times to describe changing economic and financial conditions. Some form of the word “deteriorate” and “severe” appears 14 and eight times, respectively.”

The VIX has steadily declined from over 75 to its current reading in the low 40s. While still very high, the reduced volatility is becoming more noticeable with daily and even hourly market gyrations having calmed down a bit.

We recently increased our exposure to gold and gold miners and bought a new position in STIP, a short term inflation-protected Treasury bond ETF. These additions are, in part, due to a growing concern we harbor that the Fed’s massive and unprecedented efforts to manage markets and minimize the economic impact of the virus will be inflationary when the economy normalizes. Because of this concern, we have been looking at commodity producers that may benefit from higher prices. In our opinion, it is still early to start buying but time to start making a shopping list. The graph below charts how various commodities have fared year to date.

April 8, 2020

Per the Mortgage Bankers Association (MBA), the percentage of mortgages not making payments (in forbearance) has risen from .25% to 2.66% as of April 1. Mark Zandi of Moody’s Analytics thinks that number could rise as high as 30%.

Moody’s recently published a list of B3 Negative and Lower (Junk or soon to be junk-rated) corporate debt ratings and it is now at its highest level. Currently, 311 companies are on the list, beating its prior peak of 291 companies from 2008 financial crisis.

Based on an FT article, dividend futures contracts imply that dividends will not return to 2019 levels until 2028. To put that into context, it only took three years for dividends to fully recover from the 2008 crisis, but nearly 20 years to get back to even after the Great Depression started.

As of Tuesday morning, Gold futures were trading about $25 above spot gold. In other words, gold purchased for settlement and delivery in the future is trading more than gold for current settlement and delivery. Such an anomaly has not occurred since 1979. This condition is very odd as banks, dealers, central banks, and investors can buy gold for spot settlement, sell the futures contract at the same time, and earn a rewarding risk-free return. The possible explanation is that physical gold is not available in enough size to obtain the risk free arbitrage.  If we learn more we will pass it on.

On a positive note, New York City has admitted less Corona Virus patients than they discharged for four straight days. Today’s Chart of the Day shows that many countries are experiencing a similar drop off in cases as they pass their peak. Tempering the good news, other big cities like Washington, Chicago, and Los Angeles are concerned that they are still ramping up to their peaks.

April 7, 2020

Stocks shot out of the gates on Sunday night, added to the gains throughout Monday and again through last night. Unlike the stock rallies of last week which were based on Saudi Arabia and Russia agreeing to production cuts, this one came with a deal looking less promising and oil trading lower. Bond yields are up slightly but not as much as one would have expected given the stock rally. Also of interest, the dollar was relatively flat and gold closed above $1700, reaching an eight year high.

The Fed created another new facility. This one offers financing to the banks and other investors that own the new small business loans (PPP) guaranteed by the SBA. This will enable the banks to borrow using the loans as collateral, which should allow them further liquidity to create new PPP loans. These loans are guaranteed by the SBA. At some point, the SBA will require a bailout as many of these loans will not be paid in full.  Fed Chair Powell will speak at 10 am on Thursday, presumably on a broad range of monetary policy and economic topics.

Rumors are circulating that a potential suspension or reduction of the long term capital gains tax is a possibility.

Since the market sell-off began in February, the S&P 500 has fallen nearly 900 points (through last Friday). The chart below shows that only 27% of the losses have occurred during the day trading hours, with 73% occurring during the futures overnight sessions. For most investors, the inability to manage risk during the more volatile overnight trading hours makes trading in this environment even more difficult.

The chart below shows that year to date, share prices of some of the nation’s largest department stores are down 65-75%. JC Penny (JCP) stock is trading at 27 cents a share and is on bankruptcy’s doorstep. It does not take a leap of faith to suspect that the others are not far behind if the shutdowns continue longer than are expected.

As we ponder the fate of these stores, there is an equally troubling problem to consider. Large department stores like the ones shown above are the cornerstones for malls. Through low interest rates, leverage, and insatiable investor demand for yield, shopping mall REIT’s like SPG, SKT, and TCO, developed what in hindsight may have been an excessive amount of mall square footage. Per Statista, the mall square footage per capita (23.5) in the U.S. is about 5x greater than the U.K., Italy, and Japan. The only two countries that come close to the U.S. are Canada (16.2) and Australia (11.8). Despite sharply discounted share prices, economically sensitive shopping mall REITs are leveraged and heavily reliant on shutdowns ending and a healthy consumer coming to the rescue. Needless to say, we urge extreme caution and be careful not to get fooled by double-digit dividend yields, as dividends will be reduced.

The calls for allowing the Fed the power to buy stocks got louder yesterday when Janet Yellen promoted the idea on CNBC. To wit:

“It would be a substantial change to allow the Federal Reserve to buy stock,” Yellen told CNBC’s Sara Eisen on “Squawk on the Street.” “I frankly don’t think it’s necessary at this point. I think intervention to support the credit markets is more important, but longer term it wouldn’t be a bad thing for Congress to reconsider the powers that the Fed has with respect to assets it can own.”


April 6, 2020

The employment report was much worse than expected as 701k jobs were lost and the unemployment rate rose to 4.4% from 3.9%.

Of the 701k  jobs lost, over half (417k) came from the restaurant industry. It is estimated that the industry employs over 15 million people, so unfortunately, Friday’s number may have just been the tip of the iceberg. The graph below puts the losses into context with prior recession experiences.

The data used for the Friday employment report was based on surveys up to March 12th. Bloomberg says that the early consensus for the April report, which will capture the rest of March and the full impact of the economic shutdown, is around -20mm with a 15% unemployment rate. As if that forecast was not bad enough, we need to factor in that many employees that still have jobs will have their hours and salaries reduced.

As we have mentioned, the value of the dollar can tell us a lot about the acuteness of the global dollar shortage. This past week the dollar index rose about 3% and with it concerns are rising about liquidity.

Crude oil rose sharply again on Friday as it appears Russia and Saudi Arabia are discussing production cuts. Assuming those two countries can agree, a deal may be contingent on some sort of reductions to U.S. supply. Given that the government does not control U.S. oil production, nor does the government own oil companies, this seems like a tall order. Further, many shale producers are independent and not owned by the majors. That said, given the dire situation, the big oil companies may be able to come to some agreement and appease Russian and Saudi requests.

Credit Suisse announced that its once-popular 3x leveraged inverse crude oil ETF (DWTIF), which was a victim of the sharp rally in oil the last few days, will be delisted as its value went to zero on Thursday. This ETF once had over $1 billion in assets. We suspect that the SEC will outlaw 3x leveraged ETFs as they cannot stand up to extreme volatility.  It would also not be surprising to see leveraged ETF’s also banned at some point.

Per The Numbers, the number one grossing movie on Thursday, March 19th was Disney’s Onward. It grossed $33,296. The Invisible Man came in second at $21,800. Since then, the situation has worsened. Total box office sales last week were only $5,179.

April 3, 2020

The number of new Jobless Claims for the past week was 6.6 million. To put that into perspective, the highest weekly claims number during the 2008 crisis was 665,000, and the total number of jobs lost during the crisis was about 9 million. Continuing claims from just last week and this week are now at 10 million.

Crude oil rose nearly 25% as China announced it would add oil to their reserves. Also helping the price are rumors that Russia and Saudi Arabia are discussing production cuts.

The Fed’s balance sheet for the week ending Wednesday increased by $586bn, which is about $30bn more than the entire QE2 operation which lasted about 8 months. Since March 4th it has risen by slightly over $1 trillion.

From April 1st through April 8th, the U.S. Treasury will issue $486 billion in new debt. Despite being only one week into April, that is half of the total for April 2019 and 75% of the issuance for all of April 2018. Stimulus spending and falling tax revenue have the potential to generate a $3-4 trillion deficit this year. There is no doubt that QE will be used to monetize this massive surge in debt.

The helpful table below from Bank America summarizes credit card spending by day and category. This is a good tool to help with stock/sector selection.

The following Tweet from David Schawel is very telling of the disillusion that many investors had going into this crisis. Over the last month, as shown below, the yield on Macy’s 4-year debt rose from 2.9% to 15%. David’s tweet and other messages of his imply that a 15% yield is too high. Instead, David should consider that the 2.9% yield that existed before the crisis was too low. Macy’s was slowly going out of business before the crisis hit. Their stock (M) fell from 52 in 2015 to 15 prior to the crisis, and it currently sits below 5. 15% is a fair yield for a company that has a good chance of filing for bankruptcy. Had Macy’s been properly priced at 8% or 10% before the crisis, the current yield would seem appropriate and may not be as shocking to most market participants.

Barbara Corcoran of CNBC’s Shark Tank was recently interviewed about the state of her small business investments. Of the over 70 small businesses/partnerships she is invested, she believes they have reduced staffing by 25-30%. More concerning, she stated that a majority of her investments will not survive. Further, all of her entrepreneurs are applying for Federal help and many of them are having trouble with the first step of the process, applying for help from the SBA. She did not seem optimistic Federal aid will help many of these companies.

April 2, 2020

The ADP Employment Report was lower by 27k jobs versus an estimated loss of 180k jobs. The report is clearly not capturing the bulk of the layoffs that have occurred over the last two weeks.

All economic data lags and some of it by up to a few months. Because of the delay, we and most other market participants are putting little stock in the current round economic data. In 2-3 weeks, corporations will begin posting Q1 results. The results will be mixed as January and February should have shown decent activity, especially for domestic companies. In most cases, we will look past the profits and losses and focus on forward guidance. Ideally, we would like to hear some optimism about a pickup of activity in Asia, as they are a month or two ahead of us in terms of dealing with the impact of the virus.

The table below shows the consensus of economist expectations for Friday’s March BLS Employment Report. Our model estimates a loss of 56k jobs. Because of current circumstances, we have no faith in our model’s predictive ability. For what its worth, Citi is predicting job losses of 10mm in the April report due out in early May. The worst monthly number during the Financial Crisis of 2008 was -800k jobs.

Financials, Real-Estate, and Utilities were the worst performing sectors yesterday as they are credit intensive industries, and despite the Fed’s efforts, there remains a lot of stress in the credit markets.

UK and European banks are canceling and/or deferring all dividends and buybacks, with some minor exceptions. Are the U.S. banks next?  While many smaller banks may take those necessary steps, we believe the larger banks will stop buybacks, if they haven’t already, but will try to keep dividends intact. European banks started the crisis in a much worse financial situation, so their actions may not reflect on the domestic banks. We also think that dividends signal financial health, and in times like today they care dearly about appearances. Also consider, the Fed will do whatever it takes to avoid bank failures.

April 1, 2020

Macy’s recently furloughed 125k workers, and The Gap and Kohl’s furloughed about 80k workers each. These actions are in line with similar measures from many large retailers. At 8 am this morning, ADP will release their employment report. There is no estimate at this time. Jobless Claims will follow on Thursday (est. 4mm vs. 3.28mm last week), and the BLS jobs report on Friday. Currently, we cannot find a BLS payrolls estimate, but we will share one if we do.

It is worth noting that when an employee is laid off, they receive COBRA insurance, but in most cases will have to pay the full health insurance premium and not just the co-pay. As if losing income is not bad enough, healthcare will be an additional financial burden on many households. These and other mounting financial problems for individuals is one reason we sold Visa (V) yesterday. Unless jobs are recovered quickly, or stimulus is increased rapidly, the discretionary and financial sectors will disproportionately suffer.

The Fed has been very aggressive in their purchases of mortgage-backed securities (MBS). Over the past week, the spread, or yield difference, between MBS and comparable maturity U.S. Treasuries has shrunk from 2% to just 0.67%, which puts current coupon MBS at or near the lowest spread ever. While this is undoubtedly welcome news for those looking to refinance or buy a new home, the fact of the matter is that in many cases, the individuals’ employment situation or outlook may likely preclude them from taking either action.

The graph below shows BBB-rated corporate yields on a nominal basis (green) as well as a spread to U.S. Treasuries (black). Note that nominal yields have only risen to the prior peak levels of the post-2008 era. The spread to Treasuries is higher, having eclipsed peaks over the past decade, but it is still well below the levels of 2008.  One possible takeaway is that corporate yields and spreads can increase a good amount more. That view, however, should be tempered by the fact that the Fed can actively buy corporate bonds, an action they were never able to do in the past.

March 31, 2020

Despite the strong rally, the daily volume on SPY, the popular S&P ETF, has been declining rapidly over the past few days. Weakening volume is a clue that buying power is exhausting.

Crude oil fell over 5% and broke below $20 a barrel for the first time in this selloff. The demand destruction has left many oil storage facilities full, resulting in oil being dumped onto the markets.

Nearly $200 billion of stock buybacks have been suspended over the last few weeks as companies shore up their cash balances. Despite lower share prices, we expect the number of buybacks to decrease sharply from the prior few years. Keep in mind buybacks were a big driver of the bull market.

Goldman Sachs revised their economic outlook as follows:

As we have been postulating, QE for stocks may be the next trick in the Fed’s hat. The new SPV partnership with the Treasury allows the Fed to buy corporate bonds and related ETFs and ,therefore, a mechanism that seems to get around the Federal Reserve Act regulating the Fed’s activities. As an aside, the Act prohibits purchasing corporate bonds and stocks. Frequently the Fed will leak policy ideas to gauge the market’s response. Might a recent article from CNBC- “Nothing is out of the question: What it would take for the Fed to start buying stocks” – be a leak from the Fed? Another angle to consider is that the Fed would prefer not to use SPV’s to buy equities, but may hang it out there to help support equity prices.

CNBC had an interesting article yesterday entitled- Mortgage bankers warn Fed mortgage purchases unbalanced market, forcing margin calls. Essentially, the article states that the massive mortgage purchases by the Fed created incredible volatility which crippled many mortgage bankers due to their rate hedges. Expect to see many unintended consequences from the Fed unprecedented activities.

The table below shows how severe the lack of liquidity has been in ETF space. All ETFs have a natural arbitrage mechanism that helps ensure the ETF trades very close to their respective net asset values (aggregate value of underlying securities). Any variance between the ETF and NAV is a risk-free profit arbitrage opportunity for any dealer able to transact in the underlying securities and the ETF. As shown, the variance at times has been exceptionally large, meaning dealers are forgoing outsized profits. Clearly liquidity is grossly lacking as the spreads below should never happened otherwise.

March 30, 2020

Late Friday afternoon, the Fed announced they would scale back QE next week from $125bn to $100bn a day. The market sold off sharply on the unexpected news. Our best guess at this point is the Fed is concerned that Treasury and Mortgage securities, often used as collateral for margin and derivative trades, is becoming scarce.

During the last week of quarter ends, portfolio managers tend to aggressively rebalance their portfolios back to their desired/mandated allocations. Due to the substantial change in asset prices over the past month, rebalancing actions will be much more impactful than normal. For example, if an investor started the year with a simple stock/bond portfolio comprised of 75% SPY and 25% IEF, the portfolio allocation would have changed to 68%/32% over the prior quarter. If the portfolio manager wishes to return to the original 75/25 allocation, they would have to buy about 7% of SPY and sell 7% of IEF. These investment flows tend to occur in the last week of the month, but in many instances are completed a day or two prior to the end of the month.

QE, zero interest rates, repo, and many, but not all, Fed liquidity programs rely on the member banks to re-offer the Fed’s liquidity to counterparties in need. The big question for the next few weeks is whether or not the banks will take the baton from the Fed, lend the money, and take on additional counterparty risk. Thus far, it appears the banks are taking a very conservative stance. To wit, on Friday morning, at the Fed’s repo window, banks only submitted and received a total of $6.75bn in overnight repo and had zero demand for a 3-month repo offering.

The stimulus bill has a provision allowing affected homeowners to postpone mortgage payments for up to a year. While that will help struggling individuals, the onus will be put on banks who will miss those payments. Further, in the case of securitized mortgages, banks, loan servicers, and the agencies (Fannie/Freddie) will be on the hook to make the missing payments to mortgage security holders.

Treasury Bill yields continue to fall deeper into negative territory. On Friday, the yields on both the 1 and 3 month T-bills were below -.20%.

As we have noted over the past few days, the volatility index (VIX) has not confirmed the recent rally. Typically the VIX will decline as the market rises and vice versa. The red trend line in the graph below shows the relationship well. Interestingly, and as shown with the orange dot, for the five days ended last Thursday the market was up nearly 15% and the VIX was about 5% higher. Based on the statistical relationship (r2=.5019), the VIX should have been down 25-50% or even more. The instance is an anomaly and likely signaling that either the VIX or the S&P are wrong.

The following Tweet caught our attention. We hope they are right but are skeptical as bear markets do not often end so quickly or with optimism.

March 27, 2020

Weekly Initial Jobless Claims were shocking, coming at 3.283 million new claims versus a 1.7 million estimate. The graph below shows the claims number is simply beyond compare versus any print over the last 50+ years. The number is roughly 2% of the entire civilian workforce. We suspect initial claims will continue to rise by the millions for the coming weeks, which in turn will cause continuing claims to skyrocket as well.

Today’s Chart of the Day shows that small firms do not have adequate cash buffers to survive an extended lockdown. 25% of all small businesses hold less than two weeks of cash, meaning a good number of them will have to borrow money if possible or take drastic financial and employment actions to stay in business. We remind you small business accounts for about two-thirds of new jobs in the U.S.

In a positive sign that global demand for dollars is weakening, the dollar index is now down to 99.54, about 3 points lower on the week. A weakening dollar points to less stress in foreign dollar funding markets.

Boeing (BA) is up 89% this week through Thursday. While dreams of instant riches are fueling sentiment that a bottom is in, and easy money to be made, it is worth reminding you that BA is still down 39% for the month.  Percentages can often tell a misleading story.

Per Yahoo Finance: “S&P has cut more than 280 long-term ratings so far this quarter, also on pace to be the most since the crisis, the data show. Of them, over 170 have come this month alone. Roughly 75 companies have been upgraded in 2020. Moody’s has downgraded more than 180 companies, including about 20 investment-grade firms and 160 junk-rated borrowers. Fitch Ratings has cut over 100 ratings against just 14 upgrades year-to-date.”   Currently, companies already rated junk are the ones predominately getting cut. That will probably change and include a large swath of investment-grade companies if a “V” shaped recovery doesn’t take hold quickly.

The following chart shows the 21% gain over the last three days is the second largest on record. During the Great Depression, there was a slew of massive gains, unfortunately, they were accompanied by a large number of sharp declines, of which both the gains and losses were all part of a bearish trend.

March 26, 2020

The Senate passed the COVID19 economic stimulus and bailout legislation unanimously. Upon passage of the bill by the house, expected Friday, both houses will adjourn until April 20th.

Despite another strong rally, the VIX volatility index gave up little ground. Essentially, there are still many investors clamoring to buy insurance via the options markets. Also helping the VIX maintain such historic levels is likely a lack of investors willing to write, or sell, put options to investors. Writing a put option has immense downside if the market continues to fall, but limited upside.

The Fed Funds futures curve is telling an interesting story. By December of 2020, Fed Funds futures contracts imply a 15% chance the Fed cuts rates by 25bps to below zero. Fast forward a year to December of 2021, and futures imply a 40% chance of a 25bp tightening from current levels. This forecast seems out of touch with the “V” shaped economic recovery that is expected to occur later this year after the virus runs its course. If the economy can recover quickly and the Fed does not remove stimulus, as the market is betting on, the consequence might be a spurt of inflation well above the 2% target.

Almost all financial derivatives are partially backed with collateral, typically consisting of U.S. Treasuries or cash. As volatility in the prices of derivatives increase, banks require more collateral. They are also likely to increase collateral requirements if they have credit concerns with a counterparty. The derivatives market in aggregate is over $600 trillion, but approximately $12 trillion when all trades are netted out. Bloomberg wrote an article entitled: We’re Looking at a System-Wide Margin Call, which helps put context to how the derivatives market is putting additional strains on the financial markets.

The impact of the virus on air travel is truly startling as revealed by Deutsche Bank’s Torsten Slok:  “The TSA counts number of passengers originating trips from US airports, i.e. No. of people who show their boarding pass to a TSA agent at TSA checkpoints. On a normal March day over 2M people travel by air in US. Yesterday number was 279,018″

Edmunds expects that March automobile sales will be down 35% from March of last year.

Jobless Claims will be released at 8:30. The consensus of economists expect an increase of 1 million people, other analysts think the number could be much higher. The higher water mark in the last recession was 665k.

March 25, 2020

On Monday night, with the equity markets limit up, the volatility index (VIX) fell from 60 to 52 as would be expected. However, when the cash markets opened Tuesday, the VIX rallied throughout the day and regained the entire loss from the night before.

The dollar index fell by 1%, and there was a slew of investment-grade bond issuance. Both are positive signs.

With the price of gasoline so low, Phillips 66 announced: “WE ARE NEARING MINIMUM CRUDE RATES IN MANY OF OUR REFINERIES TODAY.” In other words, refinery profit margins are approaching zero. As a result, they will have to limit the production of gas and other distillates going forward. In regards to future gas prices, will the reduced supply be enough to offset the significant decline in demand?

Invesco’s mortgage REIT (IVR) announced that they could not meet margin calls. The REIT fell 50% and now sits below $3 a share as compared to near $20 before the crisis started. There are rumors of other mortgage REIT failures as well.

Delta was cut to junk by S&P. We expect Delta will be the first of many new entrants into the junk sector. As we have written in the past (LINK), the implications of such a large number of downgrades to junk status are troublesome given the distinct bifurcation of junk and investment-grade investors. Also, bear in mind, the Fed’s new programs only apply to investment-grade paper.

The graph puts historical context to the stunning decline in GDP expectations. The graph below and others showing unemployment rate and jobless claims expectations come courtesy of Sebastian Sienkiewicz (@Amdalleq). Article Link

March 24, 2020

Early Monday morning, the Fed announced unlimited QE. To kick it off, they plan on buying $125 billion of Treasury and mortgage-backed securities (MBS) each day this week. At that pace, they will easily eclipse prior QE operations within two weeks. They also are adding a $300bn lending program for Main Street businesses and the Term Asset-Backed Loan Facility implemented during the financial crisis. Part of the allocation to mortgage-backed securities purchases will also be spent on commercial MBS. The Fed is also creating a special purpose vehicle (SPV) that allows the Fed to buy investment-grade corporate debt from the secondary markets. The SPV was funded with a $10 billion investment from the U.S. Treasury, and it appears that it can be leveraged up ten times, meaning they can buy $100 billion of corporate debt.  The facility can also purchase corporate bond ETF’s. This construct might be the “legal” structure allowing the Fed to circumvent the Federal Reserve Act and buy equities.

The market, which was limit down when the market opened Sunday night, popped higher on the news and then fell back to near the lows of the day. It did manage to rally off the lows, but political wrangling in Congress is certainly weighing on the market. Gold, on the other hand, was up $80, the largest one-day dollar gain in recent history. This morning the gains in stocks and gold continue. Stocks are currently limit up 5% and gold added another $85 to yesterday’s gains.

Last week it was rumored that the Fed, via their latest round of QE, was buying Mortgage-backed securities (MBS) with settlement dates of two days from the trade date. While two-day settle is normal in most bond markets, the MBS market works on a singular monthly settlement date in which almost all trades are settled. After hearing that rumor we assumed that a large mutual fund, REIT, or hedge fund was in trouble and the Fed was rescuing them with immediate cash settlement versus the entity having to wait until the April settlement date.  Yesterday, per Yahoo Finance, we found out there is at least one big bond fund that required a bailout from the Fed. While on the topic of problems in the fixed income markets, here is a great note from WolfStreet.Com on distress in the leveraged loan market.

As we watch the market concern based on fiscal stimulus from Congress, we are reminded how this played out in the Crisis of 2008. The graph below shows the market rallied when the Senate rejected the first version of the bailout bill and conversely sold off after the passing of the bill.

RBOB Gasoline futures on the CME exchange traded to near 40 cents a gallon yesterday. Retail prices should be falling sharply in the days ahead.


March 23, 2020

It is rumored that the size of the heavily debated fiscal stimulus may be $2 trillion or higher. The debate in Congress is being waged over support for corporations versus support for individuals.  Given the upward pressure this deficit would have on debt outstanding and ultimately interest rates, it is quite likely the Fed will also increase the size of QE.

Ohio reported that jobless claims jumped to 139k from 5k a week ago. To put that into perspective, jobless claims for the entire country were 281k last week and were running in the low 200s for months prior to that. Goldman posited that next week’s number could be 2.25 million. Based on Ohio, that number seems low.

Goldman Sachs revised their economic outlook as follows: we are now forecasting a -24% quarterly annualized growth pace (from -5% previously). A decline of this magnitude would be nearly two-and-a-half times the size of the largest quarterly decline in the history of the modern GDP.On the bright side, their forecast has a 22% recovery in the following two quarters.

Another day another new Fed program. The latest program, announced Friday morning, allows the Fed to help indirectly fund the municipal bond market:

“Through the Money Market Mutual Fund Liquidity Facility, or MMLF, the Federal Reserve Bank of Boston will now be able to make loans available to eligible financial institutions secured by certain high-quality assets purchased from single state and other tax-exempt municipal money market mutual funds.”

Funding to the municipal markets may become more direct in the days ahead. Per Bloomberg: (Bloomberg) “A Senate bill introduced Friday would allow the Federal Reserve to purchase municipal debt, in an effort to ease the economic strain of the coronavirus pandemic on state and local governments.”

We leave you with a bit of humor to lighten up your day.

March 20, 2020

Today is a quadruple witching day, meaning quarterly market index and stock futures, along with market index and stock options expire. Some investors will need to replace expiring positions or re-hedge existing positions and, in doing so, can produce more volatility than average.

Jobless Claims jumped to 281k from 211k. JPM now expects the unemployment rate to rise to 6.5%. While it’s tough to judge at this point, we fear that estimate may be undershooting the rapid deterioration in payrolls.

The Fed extended dollar swap lines to Australia, Brazil, Denmark, Korea, Mexico, Norway, New Zealand, Singapore, and Sweden. This is in addition to the swap lines just initiated with larger economies earlier in the week. This operation allows for countries to swap their domestic currency for U.S. dollars directly with the Fed. In doing so, the transaction occurs off the market and helps limit dollar appreciation.

In mid-February, the ten-year U.S. Treasury yield was 1.60%. By March 9th, as market concern grew over the economic impact of the virus the yield dropped to a low of .38%. Since then it has risen by nearly 1% in less than two weeks. The initial decline in yield was due to a flight to quality as investors sold risky assets and purchased safe Treasury bonds. Also pushing yield lower was rapidly increasing deflationary pressures as demand for goods and services cratered. At the lows in yield the Fed and the U.S. government rolled up their sleeves and got to work. The Fed dropped rates to zero and introduced a smorgasbord of liquidity programs, all of which are driven by the printing presses. The government has floated numerous proposals for bailouts and economic stimulus. From a ten-year investors horizon point of view one must consider the current deflationary impulse. They must also assess the inevitable massive supply of debt that must be issued and the eventual inflationary impulse when demand recovers. Assessing the tug of war between deflation today and inflation tomorrow will be a big task and, one that if played right, can prove very beneficial for investors of all asset classes. Stay tuned.

Day after day the Fed has introduced new liquidity plans, and day after day liquidity in the equity and credit markets has worsened. We believe the banks are deeply concerned with counterparty risk and not passing on Fed liquidity to those in need. Given the situation, the Fed must be seeking ways to get liquidity directly into the hands of those in need. The idea of the Fed buying corporate stocks and/or bonds is becoming more likely by the day. To that end, Former Fed Chairs Ben Bernanke and Janet Yellen publicly called for the Fed to ask Congress for the ability to buy corporate bonds. The corporate bond market is currently under significant stress, and while such a Fed operation would likely relieve some stress, it raises many questions about the Fed’s role in investing in corporations. The Bank of England and ECB already allow the purchase of corporate debt.

Ford suspended their dividend to bolster, or at least maintain, their cash balances. As respective dividend payment dates come near, we expect many companies that are being heavily impacted by the crisis to reduce or suspend dividend payments. Do not be fooled by high dividend yields.

REITs have gotten hit hard over the last few days. One of the reasons for the sharp sell-off is that UBS announced a mandatory redemption of two leveraged REIT ETFs. The redemption resulted in forced selling at a time when liquidity conditions in the equity markets were awful to begin with.

March 19, 2020

At 1:00 in the morning their time, the ECB  announced 750 billion euro of QE. Not to be outdone, the Fed followed up at 8:30 pm with yet another new program. This one will help ensure money market funds have enough liquidity to meet client demands. The timing of both actions is odd, to say the least, and points to the severity of the freeze up in the credit markets.

Across the credit risk spectrum, from risk-free Treasury bonds to risky corporate junk bonds, bond yields rose sharply as it is becoming evident that large and likely forced liquidations are occurring in all asset markets. Yesterday we sold two of our high-quality bond funds, tilting even further towards cash. Our rationale is that the yields are small, upside price potential limited, and the downside is substantial. Further, given our much reduced equity exposure, our need to hedge equity risk is minimal.

The 30-year U.S. Treasury bond hit a yield of 1.85% yesterday after trading below .50% on March 9th. The 2yr/10yr yield curve is now at 70 basis points. Just as stunning as the yield declines were a couple of weeks ago, these recent increases are equally remarkable. Undoubtedly, severe bond volatility may also be the reason that many suspect a large hedge fund(s) has blown up and is being liquidated. Cash is king as evidenced by the 3-month U.S. Treasury bill which traded with a negative yield yesterday.

The dollar soared yesterday to 101.38. The dollar index is now up over 6% since March 9th, the day yields hit their lows. 6% may not seem like a lot, but in the world of currencies that is a massive move. We will have more on the whats driving the dollar in a short article coming later today.

Detroit’s big three automakers have agreed to shut all U.S. factories.

JPM announced their quarterly GDP forecasts for the year as follows:

Per the FT, one of the U.K.s largest private pension funds, Universities Superannuation Scheme (USS), serving university and other higher education employees, has reported itself to the regulator after plunging stock markets triggered a breach of a critical funding measure. Trustees will now consider whether contributions from employers and hundreds of thousands of members need to increase. 

Expect to hear more news like this from U.S. pensions funds over the coming weeks.


March 18, 2020

The Fed continues to throw the kitchen sink at the credit markets. Yesterday morning they announced $1 trillion in additional overnight repo operations that will occur through the week and a new Commercial Paper Funding Facility (CPFF). The CPFF will allow the Fed to purchase commercial paper and asset-backed commercial paper directly from eligible companies. The Treasury is backing the Fed with $10 billion in credit protection against any losses the program encounters.  Later, at 6 pm that night, the Fed introduced the Primary Dealer Credit Facility (PDCF). This facility will offer repo funding backed by a wider range of asset classes, including commercial paper, municipal bonds, and a “broad range of equity securities.”  The rollout of this program hints at the likelihood that  one or more massive hedge funds is failing. The goal of the program would be to fund the hedge fund so they do not have to sell liquidate onto an already weak market.

Yesterday morning we asked dealers for bids on four high-grade municipal bonds. The dealers would not provide bids on three of the four bonds. The fourth bond came back with a bid, but it was about four points below what we believe is a fair price. This is an example of the freeze occurring in the credit markets.

Italy, Spain, and France are now banning short sales on certain stocks. If the U.S. stock market keeps declining, we expect this could be the next action to help stem losses and protect companies most affected by the virus. The SEC took similar action in 2008/09 with banking and financial stocks.

The flight to quality has fully taken hold in the dollar. The rally is the result of a surge in demand for dollars, as dollars are the world’s reserve currency and much needed around the world. A strong dollar will temporarily boost deflationary pressures. The Fed is currently engaged in a massive currency swap program with other countries. This allows for large currency swaps to occur without further driving up the dollar.

Lost in the overwhelming market and virus news is deteriorating relations with China. China announced they will expel all U.S. reporters for the Wall Street Journal, New York Times, and Washington Post. They are not allowed to work in Hong Kong either.

February Retail Sales fell by 0.5% versus an expectation of a 0.2% increase. It’s hard to know whether or not consumers were starting to hunker down in February as news of the virus spreading throughout Asia and into Europe occurred. Industrial Production was positive and better than expectations. Data, in general, will largely be ignored for the time being.

The U.S. government will postpone the April 15 tax-payment deadline giving Americans an extra 90 days to pay their 2019 income-tax bills.

March 17, 2020

Not only were double-digit losses very troubling yesterday, but of more concern was that the decline started immediately following the Fed’s commitment to providing unprecedented amounts of liquidity to markets. Throughout Monday, intra-day rallies were consistently sold, telling us there is still a steady supply of shares for sale overhead. This was evident in the VIX (volatility index) which peaked in the lower 80s yesterday, slightly surpassing levels last seen in the worst days of the Financial Crisis.

Interestingly the $1.5 trillion in repo offered by the Fed is mostly going unused. Yesterday, dealers only asked for $18.45bn of a possible $500 billion available. $78 billion and $41 billion of $1 trillion total was taken on Thursday and Friday of last week. This weak demand tells us banks are uncomfortable with counterparty/collateral risk if they were to reoffer the repo. As for using it to meet their own needs, they must not have enough collateral to post to the Fed. The circumstance points to troubles in the money markets, as is evident in LIBOR and commercial paper spreads to Treasuries.

Lost in Sunday night’s fireworks was a major change in banking regulations. The Fed abolished the fractional reserve system. Per their statement: “In light of the shift to an ample reserves regime, the Board has reduced reserve requirement ratios to zero percent effective on March 26, the beginning of the next reserve maintenance period. This action eliminates reserve requirements for thousands of depository institutions and will help to support lending to households and businesses.” 

Historically banks were required to hold a small percentage of every deposit to ensure they had enough cash in the event of a bank run. Banks then would loan out the remainder of the unreserved deposit and as a result the money supply increased, but it was limited as determined by the reserve requirements. This is what is called the fractional reserve system. Until last night, the supply of money that banks could create was limited by the Fed’s reserve requirement.

This was a significant change that was swept under the rug. As for immediate effects, it is meaningless as banks are already sitting on excess reserves with more coming from the Fed via QE. However, the supply of money is now unconstrained by the Fed. In the future, this can be very inflationary.

We finally got economic data reflecting the realities of the current economic situation. The March Empire Manufacturing Index, covering New York state, fell sharply to lows last seen in 2009.

Economic data will be incredibly hard to assess over the coming weeks as it will begin to incorporate the economic downturn. Surveys such as the regional Fed surveys, University of Michigan Consumer Sentiment, ISM, and PMI will be the first to show the downturn. The monthly jobs number, on the other hand, may take a month or even longer to reflect today’s events. For example, retail sales due out tomorrow are expected to rise 0.2%, and jobless claims are only supposed to increase marginally by 9k jobs.  Both of these statistics will be vastly different over the coming few months.

March 16, 2020

If last weeks Fed action was a bazooka, then Sunday night’s was a nuclear bomb. The Fed cut the Fed Funds rate to zero and committed to buy $500 billion of Treasury bonds and $200 billion of mortgage backed securities. The stunning and unprecedented move was clearly planned for just prior to the open of futures market trading at 6pm est. In lieu of this action the Fed canceled this week’s FOMC meeting.

Treasury yields are 15-20 basis points lower as rates across the Treasury curve head to zero. In fact, the 1-month T-Bill actually traded with a negative yield last night.  Stocks, commodities, and the dollar are falling sharply as the Fed sparked fears around the world due to the abruptness of their action. The question on every trader’s mind is who are they bailing out?  Gold is also falling, likely the result of margin calls and the need for liquidity.

Given the markets poor response to the Fed, we suspect the next course of action could be a suspension of trading for a week or two.

Sunday’s surprise follows Friday in which the Fed announced they would buy $37 billion in various Treasury maturities due to “temporary disruptions in the market for Treasury securities.” Per the press release, the purchases are not additional QE, but part of the planned $60 billion per month that has been occurring since last fall. The highly unusual announcement with predetermined sizes per specific maturity, was in hindsight a tip that the Fed is very concerned with credit markets freezing up.

The University of Michigan Consumer Sentiment survey fell from 101 to 95.9. Quite frankly we expected a bigger decline, but keep in mind the survey period started February 26th so many of the early results were before the market rout and virus related shutdowns.

We update a graph we showed two weeks ago. While the recent volatility seems unprecedented, the difference between the high and the low for each trading session has been extreme, but not as extreme as the financial crisis. Also note the extended duration of volatility during the 2008-09 bear market.

March 13, 2020

Last night we published our latest thoughts on markets and our portfolio management process for the days ahead. Click to read.

The Fed shot their bazooka yesterday. They (Fed Link) are offering three sets of $500 billion repo with terms of one to three months. The first $500 billion operation occurred yesterday with the other two coming today and Monday. Further they altered their current QE program to include longer maturities, TIPs, and mortgage-backed securities. The repo operations will increase the Fed’s balance sheet by $1.5 trillion or 38%. The suddenness and sheer size of the move reek of fear over falling stock prices and possibly a problem brewing in the credit markets. To put $1.5 trillion of repo in context, QE1 totaled $1.320 trillion, QE2 $557 billion, and QE3 was $1.570 trillion.

The graph below shows how $1.5 trillion (orange bars) stacks up against prior QE.

The market spiked on the announcement and then proceeded to give back all of the gains and then some. There is clearly heavy selling pressure that is more than offsetting the liquidity injection. However, the market is up over 5% last night, which puts it near yesterday’s post-Fed announcement spike level.

The European Central Bank (ECB) committed to providing an additional 125 billion euro of QE through the remainder of the year. However, they disappointed the markets buy not reducing rates.

Not helping matters is fighting within Congress. To wit, Mitch McConnell spoke to the differences between the parties- The Speaker and House Democrats chose to produce an ideological wish list that was not tailored closely to the circumstances. … Certainly, this is disappointing.”  As we have discussed, political jockeying in front of an election is a risk few are considering.  However, it is worth remembering that in 2008 Congress initially rejected TARP and the market fell 7%, then the bill quickly passed. That occurred within a month or so of a Presidential election.

PPI was down 0.6% versus expectations for producer prices to remain flat for the month. This is a result of plummeting commodity prices. As the lower price of oil filters into other areas of the economy, we should see CPI follow PPI lower.

Yesterday we discussed the coming volatility in inflation data and how hard it will be for the Fed to assess inflation. As an example, the price of jet fuel (graphed below) has been cut in half since the end of the year. At the same time, airlines are grappling with a significant drop in demand. In this case we should expect to see declines in airfare and some great deals. However, some airlines are facing massive losses and possibly bankruptcy if travel bans and weak demand continue. These airlines may cut the number of flights, increase pricing, and try to operate flights profitably, which might be inflationary. Similar examples hold in most industries.

March 12, 2020

The World Health Organization (WHO) officially declared Covid-19 a pandemic.

The Bank of England (BOE) cut rates from 0.75% to 0.25%, and the government followed with 30 billion pounds of fiscal stimulus.

JP Morgan expects the Fed to lower rates 100 basis points at next week’s FOMC meeting.

The Fed boosts the limit for overnight repo to 175bn.

The NCAA basketball tournament will be played without fans, and the NBA suspended its season.

Trump bans travel from Europe.

Headlines like those above and many others are taking their toll on global markets.

Boeing, Hilton, and other companies are aggressively drawing down lines of credit and in many cases on a precautionary basis. These lines of credit are pre-approved loans that often go untapped. Companies frequently pay for these credit lines to ensure they have access to liquidity when credit markets freeze up and/or they are struggling and cannot borrow at reasonable rates. As the lines are drawn down, banks must come up with liquidity to make the loans. Banks likely sold Treasuries to help free up cash, which may help explain why Treasuries sold off yesterday. This also helps explain why the Fed is increasing the size of repo operations and may likely reintroduce QE for bonds.

CPI inflation data came in as expected with a 0.1% monthly increase, which results in a 2.3% year over year change. Inflation data could be volatile over the coming months as inflationary supply line problems are met with deflationary weaker demand. The Fed will likely view any upticks in inflation as transitory, therefore it will not affect their policy decisions.

In Monday’s commentary, we mentioned the Fed was possibly in a bind if they try to provide stimulus via QE due to near zero interest rates. Yesterday morning, Danielle DiMartino Booth also raised the topic in a Bloomberg article entitled The Fed Can’t Let Bond Yields Fall To Zero. Needless to say, Fed stimulus via traditional QE and/or lower interest rates is not as easy as it was over the last decade.

Today’s Chart of the Day puts context towards the recent volatility in Treasury yields. Per the graph from James Bianco, the two-day price return on the 30 year Treasury bond was +8.50% for March 6th and 9th. That was the largest two-day return in the modern history of 30-year issuance. Amazingly, that was immediately followed by a record low two-day price return of -6.66%.


March 11, 2020

Yesterday’s rally started on rumors that the Bank of Japan (BOJ) is considering an expansion of their ETF purchases. The BOJ already owns over 75% of the Japanese ETF market, so their actions are not only limited but detrimental to pension funds and other investors which must hold equity investments.

U.S. markets were nearly 5% higher in part due to proposed fiscal stimulus and bailouts in numerous industries that are being signifcantly impacted by the virus. We believe the bounce was more technical in nature, but regardless, we should consider how stimulus might benefit the markets and the economy. The million dollar question is how much fiscal stimulus can Trump issue via executive order without Congressional approval? We doubt the Democrats will do Trump any favors with only months to go until the election. As such, any fiscal stimulus outside of direct Presidential actions will likely be limited to directly helping with the virus itself and not so much on economic consequences.

Lost in last weekend’s news was a downward revision to Japan’s Q4 GDP from -6.3% to -7.1%. The substantial decline is mainly due to a new sales tax put in place late last year. However, given their already fragile economy and reliance on foreign trade, the impact of the Corona Virus all but guarantees a negative first quarter GDP, which will put Japan in a recession.

The Bloomberg High Yield (Junk Bond) Energy Index rose sharply over the past two weeks to over 14%. To put that in context, it traded around 4% for much of 2017 and 2018, and between 5% and 8% for 2019. In 2008, the yield peaked at 18%. The price of crude oil is currently slightly below the lows of 2008.

As shown below, financial conditions have tightened considerably over the last two weeks, but the decline pales in comparison to 2008.



March 10, 2020

We start with a timely quote from Warren Buffet- “Only when the tide goes out do you discover who’s been swimming naked.” We suspect that over the coming weeks we will see some skinny dippers.

There is finally some good news regarding the virus. China and South Korea are both reporting that the situation appears to be improving. Hopefully, the news indicates that precautionary measures are slowing the spreading of the virus and maybe even that the virus is running its course. Some scientists believe that warmer weather will also help slow down the virus. That said, the impact is just beginning in the U.S. We expect school closing announcements and cancellations of all sorts to intensify over the coming weeks.

The Fed did not cut rates this morning as some suspected, but they did increase the size of their repo programs. The quantity offered in Overnight repos increased from $100B to $150B  and term repo from $20B to $45B. As we have witnessed over the past few months these actions are being used to fill short term liquidity gaps until QE (bills) and possibly new QE can make up for the slack.

Saudi Arabia’s decision to produce more oil introduced a new and complicated geopolitical problem into the investing equation. Essentially, the Saudi’s declared economic war against Iran, Russia, and U.S. shale. This situation can resolve itself quickly if Russia comes back to the negotiating table and agrees with OPEC on production cuts. However, many experts think its possible they hold their ground. In fact, Rosneft, Russia’s largest oil producer, plans on following the Saudi lead and increasing production. Like Saudi Arabia, Russia also produces cheap oil and can withstand lower prices better than most producers. The other wild card is Iran’s reaction. Iran was already in dire economic circumstances due to the U.S. imposed sanctions before the price of oil tumbled. $30 oil or less, will inevitably make their economic woes much worse.  Saudi actions also put severe pressure on highly leveraged U.S. shale producers of which many cannot profitably produce oil at current prices. As shown in Today’s Chart of the Day the banking sector, which has loaned energy companies considerable funds is also at risk.

The economic data front will be quiet this week except for inflation figures (CPI on Wednesday and PPI on Thursday). We will also pay close attention to Jobless Claims, which will be released on Thursday. The Fed is now entering its pre-FOMC meeting blackout period, meaning that Fed voting members are not allowed to speak publicly. That said, if the Fed takes action between now and then, Chairman Powell is likely to hold a press conference and/or release a statement.

The following is from Jim Bianco:

The all-time high was February 19th, 13 trading days ago.

(we are now) just a little more than 1% away from a media defined bear market (<20%)

Fastest for the S&P 500 from an all-time high to <20%


March 9, 2020

On Sunday, Saudi Arabia reversed course out of frustrations with Russia to agree upon oil production cuts. They came out Sunday and announced that they would increase production and flood the markets with oil. After falling 10% on Friday, crude oil is down an additional 23% to $32/barrel. The combination of lower oil prices and quickly rising virus concerns pushed stock futures to their limits. S&P futures have been down 5% (CME limit) for most of the night. Global markets are also down in similar fashion. Bond yields fell sharply as it appears inevitable the Fed will take action to calm global markets. The 30-year bond yield fell 35 bps to 0.86% and the 10-year note now sits at 0.43%. Fed Funds are pricing in a cut to 0.25% by the end of March and to the zero bound by June. We would not be surprised to see another emergency Fed action as early as this morning.

The BLS Employment report was stronger than expected at 273k, almost 100k more than consensus. The prior month was revised up by 50k. We caution once again, this number is not factoring in the impact of the virus.

As to be expected, inflation expectations are falling rapidly with Treasury yields. As of Friday, the 10-year breakeven inflation rate sits at 1.31%, down from 1.80% at the start of the year. This level is no doubt of concern to the Fed, which has been begging for more inflation for the last nine months.

As we consider the Fed’s options and, in particular, whether or not they will initiate more QE, plummeting Treasury yields enter into that equation. If the Fed were to buy Treasury bonds, it could add to the downward pressure on yields and make matters worse. The Fed could also buy mortgages, but again, as we discussed last Friday, such an action would translate into a run on longer maturity Treasury securities. Might the Fed try to buy some other asset class, perhaps stocks? Currently, they are not allowed to, but we have little doubt that if the market problems become grave enough Congress might grant them “emergency powers” that supersede the Federal Reserve Act. The wild card is the upcoming election and the Democrat’s willingness to help the President.

Boston Fed President Eric Rosengren was on the news wires yesterday and stated the following: “(The Fed) should consider widening the type of assets the Fed can buy.”

On Thursday we ran a poll on Twitter and 76% responded yes to Does the Fed introduce QE 5 this month? Reminder- QE4 with Bills is already occurring”  We bet that number would be close to 100% today.

An important note on credit ratings:

“What (credit) ratings describe isn’t the borrower’s ability to repay principal, but its ability to make interest payments and refinance principal.”– Howard Marks 7/2011

The ability to refinance principal, also known as rolling over debt, is dependent on two factors: interest rates and credit availability. When credit markets freeze up, interest rates rise, and liquidity in the credit markets declines. Under those conditions, companies have a hard time refinancing principal and while the respective companies expected financial situation might not change their credit rating might. Given that over 50% of corporate debt is perched at BBB, one downgrade from a junk bond rating, credit rating criteria are now more critical in the light of current market conditions than at any other time. For more on the situation in the corporate credit markets, we link our article The Corporate Maginot Line.  

The quote above finishes as follows: “So ultimately the security of capital providers stems not from the borrower, but from the continued willingness of other capital providers to roll debts in the future.”

The TED spread (Eurodollars less Treasury yields) is a measure of perceived credit risk in the credit markets. As shown below, the spread has recently gapped higher. While still at a relatively low level, a further widening of the spread could prove ugly for corporate bond issuers and investors and problematic for the stock market.

March 6, 2020

Led by the 30 year Treasury Bond, yields plummeted last night.  The 30-year yield fell over 25 basis points to a low of 1.30% before rising over the last few hours. The ten-year yield hit .70% and currently stands at .76%. It appears as if there may be a domestic credit problem brewing. The dollar is off a full point, which provides a clue that this event is not a flight to safety from foreigners. A second factor to consider is that banks, which are the largest holders of mortgages, are being forced to “buy duration” (longer-term bonds) in order to offset the declining duration of their mortgage books as mortgages refinance. The existing loans are funded, so banks must replace the mortgage assets as they prepay to prevent a mismatch between their liabilities and mortgage assets.

Jobless Claims show no impact from the virus. There were 216k new jobless claims last week, which is 3k less than the prior week. At 8:30 this morning the BLS will release the monthly employment report. Expectations are for a gain of 177k jobs and an unemployment rate of 3.6%.

There are six Fed speakers on the docket today. Last week every Fed speaker claimed the Fed would not cut rates unless the economic impact from the virus increased substantially. It turns out those claims were false. As such, be careful not to read much into their new words of wisdom.

Fed Funds are now priced for a 100% chance of 50 bps cut at the March 18th meeting. An additional 25bps is priced in for June, and by the fourth quarter the market implies the Fed will hit the zero bound.  As such, we cannot rule out an expansion of QE4 and repo as soon as the March 18th meeting.

“100 is the new 10.” Before the recent spate of volatility, a ten-point up or down move in the S&P 500 seemed standard. Today, the market is moving up and down by ten points in minutes and sometimes seconds. Since February 24, the average difference between the high and the low of the day is 106 points. In January and for all of 2019, the average was about 25 points. The important takeaway, given what is transpiring, is that having a process including stop losses and trading contingencies, bullish or bearish, is vitally important. The market can move away from you quickly; a process will help take the emotions out of critical decision making. Risk happens quickly, be prepared!

The graphs below put perspective on recent stock market volatility. The first graph shows the daily percentage difference between the high and low points on each trading day. The second graph shows the 5-day running average of the same data. As highlighted by the red dotted lines, bouts of volatility, as we have seen over the last week, have only occurred five other times since the 2008 financial crisis. Click to enlarge

March 5, 2020

***We are back up and operating as normal!! Thank you for your patience.

As shown in today’s Chart of the Day, based on the rationale for prior emergency rate cuts, the Fed must be very concerned about how the virus will impact the markets and the economy.

A few weeks ago we commented on the sharp decline in January auto sales in China. The combination of the Lunar New Year Holiday and the virus caused sales to drop over 20% that month. February, turned out much worse despite what is usually a bounce back month. As shown below car sales in China fell by 80% in February.

The Global Business Travel Association said the virus could cost the industry $47 billion a month, with more than half coming from airline ticket sales. To add to the impact from the virus, Bloomberg reports “The James Bond sequel “No Time to Die,” due for release next month, will be pushed back until November as Hollywood scrambles to cope with the global coronavirus outbreak.” Needless to say the costs of the virus are ramping up and will be felt in economic data in the coming weeks.

ADP reported that employment for February increased by 183k jobs versus 209k in the prior month. If you recall, last month’s print was originally 291k but was revised lower in yesterday’s report to 209k. Seasonal quirks were the culprit. The consensus of economist expectations for Friday’s BLS Labor report are currently at 177k new jobs and a 3.6% unemployment rate.

Repo offered by the Fed was in high demand for a second straight day. Yesterday $111 billion in bids were submitted and $100 billion accepted. Keep in mind that this recent heightened demand for repo comes as the Fed is winding down its repo operations.

OPEC, backed strongly by Saudi Arabia, is working to cut oil production by up to 1 million barrels per day. Russia is fighting this action as they are looking for more time to better judge the impact of the virus.

On the heels of Joe Biden’s comeback on Super Tuesday and diminished prospects for Bernie Sanders, health care stocks soared. The broad health care sector represented by XLV was up 5.76% and more impressively the health care sub index- managed health care rose over 12%. The index is solely comprised of United Health Care, Centene, Anthem, and Humana which were all up at least 10%.

March 4, 2020

The Fed cut rates by 50 basis points immediately following a conference call, which included Jerome Powell, Treasury Secretary Mnuchin, and other central bankers. While the cut was surprising, the Fed Funds futures market was fully priced for such a move. We remind you of an article we wrote last June, Investors are Grossly Underestimating the Fed. It showed how the Fed Funds futures markets tend to underestimate future Fed moves.  In the article we wrote- “If the Fed initiates rate cuts and if the data in the graphs prove prescient, then current estimates for a Fed Funds rate of 1.50% to 1.75% in the spring of 2020 may be well above what we ultimately see.”  We now enter Spring in a few weeks and Fed Funds are now between 1.00%-1.25% and are forecasted to fall another 25-50 basis points.  Currently, the market implies that Fed Funds will be .50% at yearend. Based on history, Fed Funds will likely be zero by then.

The Markets did not show much confidence over the Fed’s action. Almost immediately following the cut, the S&P 500 fell nearly 100 points and Gold soared by $40.  10-Year Treasury yields fell below 1% to an intraday low of 0.94%, setting another record low. The yield curve continues to steepen as the front end of the curve prices in aggressive easing by the Fed in the future. 30-year yields fell the least as investors are starting to show some inflationary concerns. The 2yr/10yr curve widened to 30 bps. Adding to inflationary concerns, OPEC is in talks to reduce supply.

In addition to the virus roiling the markets, the rising odds of a Bernie Sanders nomination was also being blamed. With Biden’s strong showing last night, the markets are breathing a sigh of relief. S&P futures are set to open up 60 points.

The Fed accepted $120 billion in repo versus demand for $178 billion. Both figures are a sharp uptick from the prior week in which the total amount bid and accepted was below $50 billion per day.

March 3, 2020

Expectations for a rate cut by the Fed are high. It is also widely expected that any Fed actions will be coordinated with the ECB, BOJ and possibly other central banks. A conference call of the G7 Central Bankers is scheduled for tomorrow. The Bank of Japan bought a record 101 billion yen of ETF’s yesterday and vowed to do all it can to help stabilize markets. The ECB stated the following: “We stand ready to take appropriate and targeted measures, as necessary and commensurate with the underlying risks.”

The hope for rate cuts from the Fed may keep the risk markets bid for the time being, but if hopes diminish, the markets may resort to selling off again, and the pressure on the Fed to react will grow. This is the tug of war as we mentioned last week.

The S&P soared yesterday by 136 points (4.6%) and is now about 50 points above its 200 day moving average. The dollar fell by half a percent yesterday and is at one month lows. After a sharp drop in yields overnight to new all time lows (1.04%), the Ten-year Treasury reversed course and closed at (1.15%).

Some important pieces of economic data will be released this week but it will be tough to evaluate, as we do not know to what degree the virus is impacting the data. Yesterday, ISM Manufacturing fell from 50.9 to 50.1. Based on the same data from China, this survey could fall sharply next month. ADP Employment will be released on Wednesday and the BLS jobs report on Friday. On Thursday the timeliest indicator of the labor market, Jobless Claims, will be reported.

There are a few Fed speakers scheduled to speak this week. We suspect they will have very similar scripts and will reveal little as to their latest thoughts on using policy to stem the impact of the virus.

March 2, 2020

The futures markets were extremely volatile last night. S&P futures opened down 75 points, rallied over 100 points, and fell back towards the lows. As of 7:15 am futures are down 30 points.  Gold is currently up nearly 40 points, erasing much of Friday’s loss, and Treasury yields have again fallen sharply. The 10-year yield is approaching 1%.

The Fed Funds Futures markets are now expecting a 50bps rate cut from the Fed. Based on pricing, the cut could come as early as this morning. The market is now priced for 100 bps by year end. We suspect the stock market will be very disappointed if the Fed does not take action shortly. If they do cut, we will likely see a relief rally, but then things will get interesting.

On Friday night, after markets were closed, China released horrendous PMI data. The manufacturing index fell from 50 to 35.7, well below expectations for 45. The services index fell to 28.9 from 54.1 last month. Both are record lows (inclusive of 2008). The decline was certainly expected, but not expected was the severity of the decline. Given China’s propensity to manage economic data, the true level for these indicators is likely even lower than what was reported.

The Fed’s preferred price index (PCE) rose 0.1% to 1.7% in January and now sits only 0.3% below the Fed’s inflation target. Hampered supply lines may put upward pressure on this number in the coming months. Rising inflation pressures may help explain why the Fed has not been in a hurry to heed the market’s call to cut interest rates. As a reminder, CPI (yoy) is now at 2.5% and has been steadily climbing over the last year.

Chicago PMI was stronger than expected at 49 versus a prior reading of 42.9. Consumer Sentiment also held up. Both results beg the question of when the surveys were conducted in relation to the virus news.

On Friday, Robert Kaplan, President of the Dallas Fed, and James Bullard of the St. Louis Fed repeated what we have consistently heard from other Fed members; a near term rate cut is not likely. However, Chairman Powell followed later in the day with the statement below. Now we are left to wonder whether the market will find solace in his statement. With the markets expecting imminent actions, are words enough, or will Mr. Powell and the Fed need to reduce rates and/or do more QE?

The ChiNext Index tracks 100 of the largest and most liquid stocks on the Shenzhen Stock Exchange in China. It is sort of an S&P 500 for the Chinese stock market as the index is well-diversified among many industries. Prior to the Corona outbreak and Chinese Lunar New year the index traded at 1993. On the first day of trading after the holiday and state-imposed trading suspension the index fell sharply to 1795. It currently stands at 2071, up 15% from the post-holiday lows and up 4% from before the break. Year to the date, the index is up over 20%. This confounding performance is a testimony to the massive liquidity being supplied to the market by China’s central bank (PBoC), as well as trading restrictions and newly instituted internet firewalls that likely make trading/selling difficult. Clearly, the Chinese government is trying to send a “stay calm and carry on” type message via stocks.

February 28, 2020

The graph below shows that the S&P 500 is now sitting just below its 200 day moving average. Over the past two years, this moving average has provided a backstop for the market. At times, as circled, the moving average arrested the downward price action. In late 2018, shown by the square,  it provided a range in which the market consolidated before breaking lower. Investors will be watching this level closely.

Fed Funds Futures are now pricing in a 70% chance of a rate cut at the March 18th FOMC meeting and a total of at least three, 25bps rate cuts by January. In just the last three days, the market has priced in one more 25 bps rate cut in the second half of the year.

Gold was down slightly yesterday but gold miners fell by over 5%. This is potentially a warning that margin calls are starting to force leveraged investors to liquidate holdings.

Despite declining slightly (-0.2%), Durable Goods orders were stronger than expectations (-1.2%) in February. If we strip out the volatile transportation sector, the data was more robust at +0.9%.  It’s likely the impact of the virus has yet to be felt in this data set. On the other hand, weekly Jobless Claims rose by 219k from 210k last week. While still a very small number of claims, the data is much more timely and reflective of current employment trends. Due to its weekly reporting this will continue to be a key data point to follow. Similarly, The University of Michigan Consumer Sentiment survey due out at 10 am this morning is timely and may begin to reflect concern by the consumer.

Japan closed all schools, including colleges, until at least spring (March 21st). We have little doubt this all but assures Japan a negative GDP print for the second quarter and, given their sharp 6.3% decline in first-quarter growth, will put them in a technical recession.


February 27, 2020

On Wednesday morning, the S&P 500 jumped over 75 points from its lows established at 4 am; however, by noon those gains started leaking and shortly after the market close, the market had given up the 75 points and then some. The culprit again seems to be the Corona Virus. After the close Microsoft joined a long and growing list of companies that are warning earnings will be hurt this quarter due to the virus.

The market seems to be in a tug of war between the virus and the Fed. As long as the virus keeps spreading, especially if it picks up speed in the U.S., and the Fed remains firm about not lowering rates, the virus will weigh on the market. This was a similar construct witnessed in the fourth quarter of 2018. At the time, the market fell nearly 20% because of the burgeoning trade war and the Fed’s refusal to back down from planned rate hikes and QT. Once the Fed said they would stop hiking rates and stop QT, the market soared. Replace the trade war with a virus, and late 2018 might be a good analog for the current situation. It is worth adding a caveat that the growing threat of a Bernie Sanders nomination is not a positive for the market. Super Tuesday, next week, will shine more light on his probability of winning the Democratic nomination.

Today’s Chart of the Day shows that over the last week there have been massive outflows (investor redemption) from HYG, the popular junk bond ETF. Because it is an ETF, an outflow means that banks and dealers are returning HYG stock to the ETF manager in exchange for the underlying securities. This could be a sign that dealers think the sell-off in equities has run its course and are using the underlying bonds to cover their short junk positions, which they used to hedge stock market exposure. It may also be because liquidity in HYG is much better than the underlying securities, which has created an arbitrage trade for the dealers, whereas they exchange what is rich and liquid (HYG) and receive what is cheap but illiquid (specific junk bonds). We follow this ETF closely as a proxy for the junk bond sector, which can become highly illiquid during volatile periods in the stock markets. Given the popularity and extremely rich pricing in the junk sector, HYG may provide an early warning that junk bonds are in trouble.

The following quote from Warren Buffet caught our attention yesterday: People, because they can make decisions every second in stocks, whereas they can’t with farms, they think an investment in stocks is different than an investment in a business or an investment in a farm or investment in an apartment house but it isn’t.”  His quote is another way of warning that valuations matter.

February 26, 2020

The S&P fell 95 points yesterday and the three-day selloff has now erased nearly three months of gains. Yesterday’s decline was worsened by the following headlines from the Center for Disease Control (CDC):

We must also consider that a vaccine may not come quickly. Per the NIH: a virus candidate could be ready in six weeks, but the first trials will take 3-4 months and then the second round another six months. Then it will take some time to produce and distribute it.

The markets are now beginning to discount the probability of a sustained economic impact from the virus.

Yesterday’s price action was interesting in part because the dollar and gold also fell sharply, however, bonds were still well bid with yields on 10’s and 30’s once again setting new all-time lows .

Stocks are now very oversold based on short term analysis and some indexes are closing in on their 200-day moving averages. The Dow Jones Industrial Average is sitting on its 200-day ma, while the S&P still has about 3% to go. The NASDAQ is still 9% above its 200-day ma.

In a speech Monday night, Cleveland Fed President Loretta Mester said: “I don’t have fear that we’ll be behind the curve” by not cutting rates again sooner.”

Yesterday, Vice Chair Clarida stated: But it’s too soon “to even speculate” about whether that (virus) will spur a material change in the outlook.

Every Fed speaker over the last few days has iterated a confident view about stable near term rate policy, which leads us to believe the Fed is no hurry to lower rates to counter any impact from the virus.

The amount of BBB-rated corporate bonds just eclipsed the $3 billion mark, and at the same time, the aggregate yield for these bonds is at all-time lows and the spread to Treasury bonds nears record lows. Corporate bond investors are chasing an increasing amount of risk and receiving far too little in return. During the last recession, BBB-rated corporate bonds traded as high as 8% over similar maturity Treasury yields. Assuming a 5 year duration and no movement in Treasury yields, a similar spread to Treasuries would result in a 32% loss for BBB bondholders today. That is a significant amount of risk for what in many cases is a sub-3% yield.


February 25, 2020

10-year and 30-year U.S. Treasury yields hit all-time record lows on Monday as yields fell sharply across the board. The 2/10s curve was flat on the day, but the 3mos/10s curve fell 10 basis points and is now inverted by 20 basis points. Credit spreads widened as investors sought safety.

Crude oil fell 4% on the day despite a slightly weaker dollar. Oil and other industrial commodities are pricing in a sharp manufacturing contraction over the coming months. Silver, which is a hybrid between a precious metal and industrial metal, was up on the day (+.48%) but not nearly as much as gold (.85%).

The S&P 500 fell 3.32% and the NASDAQ nearly 4%.  For the second day in a row, market leaders Apple and Microsoft declined more than the major indexes.  The S&P 500 is now flat for the year to date. The VIX (volatility index) rose 48% to 25.

At 10 am, the Conference Board will release Consumer Confidence. After a strong reading in January it will be very interesting to see if the Corona Virus is starting to weight on the positive consumer psyche. The consensus estimate is 132.5. Fed Vice Chairman Richard Clarida will speak this afternoon. Since he spoke last Thursday when he talked down the markets in regards to the Fed cutting rates over the next few months, the stock market has fallen sharply and the virus is spreading into Europe and hitting South Korea hard. His speech will provide a good indicator on whether the Fed may walk back recent statements about being firm with rates.

With Monday’s market strains, Fed Funds futures have ratcheted up the odds of rate hikes. Yesterday, the Fed Funds futures market reduced the implied Fed Funds rate by 8-10 basis points for June and beyond. As shown below, a full 25 bps rate cut is now priced into the June 10th meeting.

The Hong Kong dollar has been pegged to the U.S. dollar since the early 1980s. If the economic impact of the protests, Corona Virus, a weakened Chinese economy, and importantly the stronger U.S. dollar continue to harm Hong Kong’s economy, the central bank may be forced to break the peg as a means of stimulating the economy with a weaker currency. If that were to happen, there would be many consequences. The largest perhaps would be a massive movement from Hong Kong dollars into U.S. dollars. Such a currency flight would certainly benefit the U.S. dollar, U.S. Treasury market, and other U.S. assets to a lesser degree. On the other hand, the resulting stronger U.S. dollar would impede global growth and put more pressure on foreign borrowers of U.S. dollars, particularly in the emerging markets. A stronger dollar is also deflationary and tends to be negative for corporate earnings in aggregate.

February 24, 2020

***Please note the Dashboard has changed slightly. We moved the gauges to the top of the page and, in their place on the right side, added the rolling Twitter feeds of Michael Lebowitz and Lance Roberts.

The market fell sharply overnight following Friday’s losses based on growing concerns of the spreading and impact of the Corona Virus. Gold, bonds, and the dollar are soaring this morning.

Not helping matters on Friday was the Markit Flash PMI (49.6), which fell below 50 and now signals economic contraction.  The consensus estimate was 52.5. The Flash index is based on preliminary survey results and serves as a gauge for the final PMI reading due out in about two weeks. Interestingly, within the survey, the manufacturing sector was above 50, while services fell sharply from 53.3 to 49.4. Over the prior year, services led the way as manufacturing suffered due to the trade war with China. Total new orders fell below 50 for the first time in a decade. Markit claims that this new data is consistent with GDP growth of 0.6%. This index may be the first U.S. economic indicator feeling the impact of the Corona Virus.

China’s Passenger Car Association said automobile sales in the first 16 days of February were 4,909, which is only 8% of the auto sales that occurred in the same period last year. As the virus continues to negatively impact China’s economy, the effects will become more noticeable to U.S. companies. For example, in 2019, GM sold more cars to China than they did domestically. The graph below shows which industries are at the greatest risk if the virus continues to have a big impact on China’s manufacturing capabilities.

St. Louis Fed President James Bullard made the following comment on Friday- “Valuations look high but at this level of interest rates. I think we are OK for now.”  Bond yields are low for two reasons. First economic growth has been trending lower despite massive fiscal and monetary stimulus. Second, the Fed has removed a considerable supply of Treasury and Mortgage debt from the market, thus artificially reducing rates. The justification Bullard uses and is being used by many investors to justify sky-high valuations, makes little to no fundamental sense.

On Friday, James Bullard and Atlanta Fed President Raphael Bostic reiterated a common theme among the Fed speakers this past week- The Fed does not expect to do anything with rates in the near future. This may also be responsible for Friday’s negative price action.  We suspect they will act a lot quicker than they think if the stock market continues lower and the virus spreads as rapidly as it has been.


February 21, 2020

After trading slightly in the green by mid-morning, the stock market hit a tailspin around 11am with the S&P 500 falling nearly 40 points in less than a half-hour.  We have yet to see a good reason for the sudden and steep decline, so we provide you with a few of our guesses:

As has become the norm, the S&P 500 rallied back throughout the day and cut the losses in half. We take yesterday’s action as a reminder that the markets are technically very overbought and a correction can happen much quicker than expected.

The Philadelphia Fed Business Outlook Survey soared to 36.7 from 17, returning it to levels that were consistent prior to the China-U.S. trade war. The only downside in the report is a further decline in the employment index, as shown below.  This report and a handful of other employment readings continue to go against the data in the unemployment and jobless claims reports.

Jobless claims edged higher to 210k and the Leading Economic Indicators (LEI) jumped 0.8% versus expectations of +0.3. The gains in LEI were driven by the decline in unemployment claims, and strength in housing permits and consumer confidence.

Fed Vice Chairman Richard Clarida, in an interview yesterday, talked down the notion that the Fed would lower rates in the near future.  The Fed Funds futures markets are implying a full 25bps rate cut by late summer and a 50% chance of a cut by June.

The combination of falling Treasury yields and rising inflation has resulted in negative real yields across the entire Treasury curve (from Fed Funds to 30-year bonds). As shown below, this has only occurred one other time (2016) in at least the last 60 years. This provides yet another sign that yields are too low and the Fed is providing an excessive amount of stimulus.

CNBC had an interesting article out yesterday titled: A huge driver of stock prices got off to it’s worst start in 7 years, but that could change. The article points out that in January, corporations bought back their stock at the slowest pace since 2013. The author notes, however, February has seen an uptick. Record breaking amount of stock buybacks have been a large driver of higher stock prices over the last few years. As such, we need to follow this data closely to understand whether January was an anomaly or a sign that corporations are not able to continue at the prior pace. It is worth pointing out that debt has funded many buybacks and some companies are increasingly finding it difficult to keep borrowing without negative consequences to their credit ratings.


February 20, 2020

After two straight months where producer prices were soft, yesterday’s January PPI report showed a sharp increase in input prices for corporations. The monthly change was +0.5% versus a consensus estimate of +0.1%. The sharp jump in prices during January increases the year over year figure to 2.1%, above the Fed’s 2% inflation mandate. PPI excluding food and energy also showed sharp gains.  The increases may be partially the result of the Corona Virus and the negative impact on supply chains. In a growing number of instances, manufacturers seeking parts and products from Chinese producers must source more expensive alternatives to meet production needs. As the virus festers, we expect to see smaller companies lacking the ability to source alternatives for Chinese parts to reduce or suspend production and lay off employees. The jobless claims data would likely be the first economic data signaling such activity.

Yesterday, the Fed released the minutes from January’s meeting. As expected, the minutes showed a strong consensus that rates should be kept on hold until a significant change in the outlook occurred. The minutes also said that term repo operations would be “phased out after April.” Further, they said the Fed’s balance sheet was approaching “durably ample levels,” and that “such operations could be gradually scaled back and phased out.” Before thinking the meeting had a hawkish tilt, consider that there was more chatter about a standing repo facility. The facility would provide repo on demand at all times, allowing the Fed to eliminate scheduled and limited repo operations as they do today.

The Fed minutes are essentially modified minutes that allow the Fed to incorporate their latest thoughts into the public announcement. To that end, the Fed’s thinking on valuations may have changed over the last few weeks. Following the January meeting, Powell said “We do see asset valuations as being somewhat elevated.” The minutes released yesterday stated “(the) staff saw asset valuations had increased to elevated levels.”


February 19, 2020

This week is short on economic data but will feature plenty of Fed speakers. On the economic data front, we are most interested in Jobless Claims and Leading Economic Indicators, both are released on Thursday. Leading Indicators, which has historically been a strong barometer of the economy, is expected to rise 0.3% after declining four of the last five months. Jobless Claims continue to skirt near all-time lows and is expected to do the same this week, rising marginally to 211k.

About the slew of Fed members speaking this week, we are on the lookout for indications that the Fed is starting to shift towards the market’s expectations for two rate cuts in 2020. Prior to this week, Fed members have largely been on the same page with each other and the Chairman in being content with current policy and taking a wait and see approach toward future policy. We suspect the growing impact from the Corona Virus might push some of this week’s scheduled speakers to reduce their growth outlook and possibly take on a more dovish stance. If that is to occur, we would expect Neel Kashkari and Lael Brainard to lead the charge.

Macy’s (M) was downgraded to junk status affecting almost $5 billion in debt. The ratings action follows on the heels of $30 billion of Kraft Heinz (KHC) debt that was downgraded last week. The two instances are not necessarily the start of a trend, but we are very concerned by the record amount of BBB debt and the repercussions if a portion of it were to be downgraded. We touch on this concern in today’s Real Investment Advice article Digging for Value in a Pile of Manure which includes graphs and a link to an older article, The Corporate Maginot Line, that went deeper into the topic.

While the equity markets held up reasonably well yesterday despite the downgrade of revenue and earnings guidance from Apple, gold and bonds sense trouble. Gold rallied over 1% yesterday and now sits at a 7 year high despite a strong dollar as of late. Since the start of the year, the USD index is up over 3% and gold has risen over 5%. 30 year yields have dropped from 2.40% at the start of the year to just over 2% today.

February 18, 2020

Yesterday afternoon Apple cut revenue guidance due to virus related production delays and weak demand from China. We suspect that more companies will make similar changes to their earnings and revenue guidance in the coming weeks. Apple represents 5% of the S&P 500, 7.5% of the DJIA, and 11.5% of the NASDAQ.

The U.S. China trade war and a new sales tax caused Japan’s 4th quarter GDP to fall by 6.3% annualized, much worse than the expected 3.4% decline. The sharp reduction of growth was fueled by an 11.1% decline in consumer spending and a 14.1% fall in capital spending. It is now likely that slowing global growth coupled with the impact of the Corona Virus will result in a negative Q1 2020 report and put Japan in a recession. Japan’s GDP is currently at the same level as it was in the mid-1990s.

Retail Sales came in as expected at 0.3%. The only fly in the ointment was the control group, which was flat versus an expected gain of 0.3%. The control group is the sales classifications used for computing personal consumption within the GDP report. The New York Fed’s Nowcast estimate of Q1 GDP fell from 1.67% to 1.39% last week, and sits well below the 2.4% estimate from the Atlanta Fed.

In the last commentary we showed the wide and growing divergence between new jobs (JOLTS) and retail sales. Today, we share a similar graph comparing an equally wide divergence between the S&P 500 (with a four month lead) and new jobs. Either the stock market is very confident that new jobs will spike in the next four months or the liquidity from QE and repo have negated fundamental analysis. As we keep harping, liquidity is the driver of these markets, trumping negligible corporate earnings growth, slowing global growth, the Corona Virus, and a host of other geopolitical concerns. Recognizing the disconnect is important for risk management, but we must also respect the effect that excess liquidity and perceptions have on financial markets.


February 14, 2020

Retail Sales will be released at 8:30 this morning. The current consensus of economists is for an increase of 0.3% for both the main index and the core index, which excludes gas and autos. The graph below shows the strong correlation between the annual change in Job Openings (JOLTS data) and Retail Sales. The current divergence between these two factors portends a sharp decline in retail sales or a surge in job openings over the coming months.

Chinese automobile sales slumped 22% in January, which was the biggest decline in history in the month of January. The China Passenger Car Association warned that February could be even worse.  January auto sales in China tend to be weak due to the week-long Lunar New Year holiday. This year, the coincidence of the holiday with the virus made sales much worse. As we have been warning, the impact of the virus will be felt in the U.S. As an example, approximately over a third of GM sales in 2019 were to China. In addition to declining auto sales from all manufacturers to China, China also accounts for 25% of global auto production.

CPI showed inflation was tame and largely in line with expectations and prior month levels. The core reading rose .01% versus expectations of +.02% however, the year over year change was 2.5% versus expectations of 2.4% and 2.3% in the prior month.The Fed prefers inflation as measured by PCE which remains under their 2% bogey.

Jobless claims continue to hover at historic lows with an increase of only 205k in the latest week.

Yesterday afternoon the Fed announced they would further reduce the maximum size for 14-day term repo auctions from $30 to $25 billion throughout the remainder of February and then drop it another $5 billion to $20 billion for March. They also reduced the maximum size of overnight repo operations from $120 billion to $100 billion. Keep in mind the Fed is still buying $60 billion in Treasury bills a month, which should offset the decline in repo liquidity.

Stock and bond markets will be closed on Monday for the Presidents Day Holiday.

We leave you with some weekend reading. The CNBC article linked below summarizes a telling interview with Warren Buffet’s partner, Charlie Munger. Munger’s bearish outlook helps explain why their company, Berkshire Hathaway, is sitting on a growing stockpile of cash, currently valued at $128 billion.

Charlie Munger warns there are ‘lots of troubles coming’ because of ‘too much wretched excess’


February 13, 2020

In his second day of Congressional testimony, Chairman Powell said “low rates are not a choice anymore.” In other words, higher rates will do too much harm to the economy and therefore, the Fed must do whatever they can to ensure rates stay low. This explains the increased chatter from various Fed members about rate fixing. Rate fixing is when the Fed puts a cap on interest rates and has a permanent buy program in place to ensure rates do not exceed the cap. This was done as an emergency measure during and after WWII to control interest rates as debt soared to pay for war costs. Incidentally, the Fed just put out a research piece on these operations. The link is HERE.

Powell also provided the stock market a boost when he said the Fed would be willing to use QE “aggressively” if the economy hit a slump.

Today’s Chart of the Day is courtesy of Brett Freeze. His telling graph shows that private investment has dropped precipitously over the last few quarters and to the degree that has not been witnessed since the early 1970s. As shown, sharp declines, such as the current one, have occurred 13 times since 1951, excluding today’s instance. Of those, 10 or 76% have been a result of or attributed to a recession.

The graph below by Ernie Tedeschi shows that over the last six years the number of people entering the workforce has been trending higher while payroll growth has generally been trending lower. They have now converged, meaning that any continuation of these trends should result in higher unemployment rates. That is not necessarily a bad thing, but the Fed may interpret a higher rate as a reason to be more aggressive with monetary policy.

February 12, 2020

Regardless of strong investor sentiment and new record highs, there is mounting evidence of economic damage to the U.S. and global economy as forewarned by recent press announcements. Here are a few that caught our eye yesterday:

Hedge fund giant Ray Dalio seems to disagree. In Bloomberg, he stated: the market impact of the Corona Virus outbreak has been exaggerated.” With no vaccine and the virus still spreading, coupled with U.S. stock markets at all-time highs, that is a bold statement from Mr. Dalio. We remind you that in January 2018 Dalio said: “if you are holding cash, you’re going to feel pretty stupid.” He made that statement days before the market embarked on a nearly 20% decline.

Job Openings in yesterday’s JOLTS report were much weaker than expectations at 6.423 million versus consensus of 6.775 million and a prior reading of 6.80 million. Despite other strong BLS reports, this data continues to point to a slowing of employment. As shown below, the decline over the last few months has been the sharpest since the last recession. In fact, the last time it declined this much on a year over year basis was September of 2008.

In testimony to Congress yesterday, Chairman Powell raised concerns about “disruptions in China that spill over to the rest of the global economy.” He also reiterated that the Fed intends to replace repo operations with more permanent QE of T-Bills. In general, his prepared comments were as expected, but during the questioning from representatives, he acknowledged that markets are misinterpreting the Fed’s actions and implied that asset valuations are getting ahead of themselves.

President Trump was not amused and followed with the following Tweet- “When Jerome Powell started his testimony today, the Dow was up 125, & heading higher. As he spoke it drifted steadily downward, as usual, and is now at -15. Germany & other countries get paid to borrow money. We are more prime, but Fed Rate is too high, Dollar tough on exports.

February 11, 2020

The S&P 500 rose .75%% to close at a record high on Monday. Market are not discounting the potential for any negative effects from the Corona Virus. Either investors believe the economic impact will be small and limited in duration, or they believe the Fed and China will continue to pump the markets with liquidity. We believe it’s the latter driving the markets and, as such, this run can continue despite extremely overbought technical conditions. This condition is best exemplified with Chinese stock indexes, which have been gaining in recent days despite worsening conditions and growing economic consequences. The Shanghai Index, for instance, initially fell 12% in early February but has since risen daily and recovered about two-thirds of the losses.

Jerome Powell will testify to the House and Senate today and Wednesday in regard to the state of the economy and monetary policy. We suspect that Elizabeth Warren and possibly others will use the question and answer sessions to grill the Chairman on repo/QE with the intent of exposing the real reason(s) the Fed has redeployed crisis-era monetary policy. Powell will likely warn about slowing global growth due to the virus. Will he mention asset valuations which have become even more extreme since his last press conference?

JOLTS will be released at 10 am this morning. Given the strong jobs and claims data from the BLS we are curious to see if the pace of job openings in the report continues to increase as it has been. On Thursday the BLS will report on CPI and Jobless Claims. The most important number of the week may likely be Retail Sales on Friday. With the holiday season behind us, this data point provides our first opportunity to see if the last three months of gains were due to seasonal shopping. Given positive readings in consumer sentiment, consumer credit usage, and recent BLS employment data, we suspect Retail Sales will show continued growth in January. We do not expect to see any effect from the Corona Virus.

As if China’s economy did not have enough to contend with, inflation is becoming problematic. On Sunday, it was reported the CPI grew by 5.4%, the highest level in nearly ten years. Of greater concern for the government, the increase is being led by food prices, which grew over 20% from the prior year. Shortages of pork alone accounted for nearly 3% of the increase in inflation. The closing of large manufacturing centers and the reduced ability to provide goods and services will add to inflation in the coming months.

February 10, 2020

The BLS jobs report was strong with payrolls increasing by 225k, about 65k more than estimates. The unemployment rate rose from 3.5% to 3.6%, but that was in part due to a rise in the participation rate from 63.2 to 63.4, a 6 year high. As more workers reenter the workforce, the unemployment rate should rise, but it is generally considered a good signal that jobs are plentiful and new workers are confident in their job prospects.

The BLS revised payrolls from March 2018 to March 2019, lower by 514k. The biggest downward revisions came from the following industries: Private service producing, retail trade, professional and business services, and leisure and hospitality. Average weekly hours were revised higher by 0.1% and average hourly earnings by 5 cents.

The first economic data to show an impact from the Corona Virus was reported by Taiwan last Friday. Exports fell 7.6% versus expectations for a gain of 1%. China accounts for almost a third of all Taiwanese exports. We expect that more economic slowing will start being reported in China and other Asian countries’ economic data in the coming week or two. U.S. economic growth and corporate profits will be negatively affected; however, it is too early to assess how much. Today’s Chart of the Day shows that over 6% of S&P 500 revenue is generated from China and Hong Kong. While a relatively small number, some industries such as semiconductors, technology hardware, and consumer services have much more revenue at stake. Conversely, utilities, and telecommunication services have almost no exposure.

February 7, 2020

Jobless Claims slipped to 202k, showing no signs of labor weakness. On the other hand, the Challenger Job-Cut Report surged to 67,735, the highest since last February. While some of the increase is seasonal, This January’s reading is up 28% more than last January’s total. Once again we are left trying to decipher between government labor reports, which are generally in great shape and deteriorating reports from private entities.

In addition to the closely followed employment report due out at 8:30 this morning, the BLS will also release revisions to data from March of 2018 to March of 2019. Last August, the BLS said that they expect that today’s revisions would reduce payrolls over that one year period by 501k. While the revision is large, it is also old and therefore we suspect it will be largely ignored by the markets. The graph below, courtesy of Dr. Julia Coronado, provides context to the revisions as currently expected.

Our estimate for January jobs growth is  +256k, but seasonal adjustments and recent volatility in the data could cause this number to be larger or a lot smaller than our estimate. Bottom line, large or small number, be careful reading too much into this data point.

Yesterday, the Fed’s repo facility was met with $57.25bn in bids from dealers and banks but the Fed only accepted $30bn. This was the second time this week the Fed did not meet demand. Might the Fed be trying to wean banks off of the repo facility?

February 6, 2020

The ADP payrolls report was much better than expected, almost doubling estimates of 154k. The gain of 291k jobs was the highest 1 month increase since May of 2015. With the ADP report in hand, our model is forecasting a gain of 256k in Friday’s BLS jobs report. We caution the variance between the BLS and ADP reports has been significant in recent months. To this point, BLS payrolls only need to grow by 154k to bring the 3 month average of both indexes in line with each other. The consensus estimate is currently 158k.

The ISM Services index slightly beat consensus at 55.5, up from 55.0 last month. While seemingly a good number, the year over year trend points to a gradual slowing of the index. The graph below by Brett Freeze shows the longer term trends in the index.  Also of note, the employment sub-index weakened but is still expansionary

Today’s Chart of the Day, courtesy of Axios, shows that consumer confidence is greater for older people than younger people and to an extent not seen in at least 40 years. Axios attributes the anomaly to the different debt and asset profiles of the two generations. We add that the graph may also help partially explain the younger generation’s rising interest in socialism and populism. The following section is from the Axios link.

November’s consumer confidence report showed the largest gap between the confidence of consumers under 35 and those over 55 in the history of the Conference Board’s report.

What’s happening: That’s largely because older Americans have benefited much more from the current low interest rate environment and gains from the stock market, Nela Richardson, investment strategist at Edward Jones, tells Axios.

The bottom line: Richardson also points out that younger people are less willing to take on risk assets like equities and have missed out on much of the bull market, in part because of their albatross of student debt.

February 5, 2020

Stock markets around the world surged on Tuesday because of _________.  We struggle to name a fundamental rationale to fill in the blank. However, we remind you liquidity is king and that is trumping the Corona Virus and weak earnings. Starting last Sunday night, China has injected massive amounts of liquidity into their financial markets to help stabilize them. Some of this money is certainly finding its way to markets outside of China. Further, banks’ demand for repo from the Fed increased yesterday, and the Fed is meeting those needs, hence more liquidity. On Tuesday, the Fed provided $96.5 billion in repo, which is about $30 billion more than the average over the last two weeks.

On Friday, the BLS will release its monthly update on the labor market. The current consensus estimate calls for data to be largely in line with last month, as shown below.  With this morning’s release of ADP, we will run our labor model and provide a forecast on payroll growth tomorrow.

Also of interest today will be the ISM non-Manufacturing Index at 10 am. Thus far, the services sectors, along with personal consumption, have more than offset weakness in manufacturing.

The Baltic Dry Index, a measure of global shipping rates and an indicator of global trade, has fallen sharply since last September. It now sits slightly above its all-time low recorded in 2016. Yesterday, the Wall Street Journal published an article entitled Shipping Bellwether Hits All-Time Low, which discusses the index but points out that one of the sub-components of the index, the Capsize Index, is now below zero. Per the WSJ: “Capesize vessels move products such as iron ore and coal from mines in Latin America and Australia to Europe and China. The index tracking then plunged from minus 21 points to an all-time low of minus 102 on Monday, a Baltic Exchange spokesperson said.”  Clearly world trade is hurting due to the Corona Virus outbreak, but it is important to understand both the gravity of the decline as well as the fact that it started well before the Virus took hold.

Yesterday afternoon we published RIA PRO- Quick Take: The Great TSLA Hysteria of 2020, a short article providing some context to the surge in the price of Tesla’s stock.

February 4, 2020

Stock markets will open sharply higher this morning as the World Health Organization stated that the world is not in a pandemic. With the rally, the S&P 500 is approaching the top of the range that it has traded in since the original sell-off from record highs.

January’s ISM Manufacturing Survey was much better than expected. The reading hopefully signals that the weak Chicago manufacturing survey from last week was an anomaly due to Boeing. ISM is 50.9 and back into expansionary territory. The new orders sub-component rose sharply to the highest level in 6 months (52 vs. 46.8 last month). The big concern within this survey is employment which was improved but remained under 50. David Rosenberg pointed out that only 44% of the industries surveyed reported growth. The chart below shows the current wide divergence between ISM and the performance of the S&P 500. If this relationship is to normalize, then we might expect ISM to continue to rise or the S&P 500 to correct.





Last week the CBO released its deficit forecast for the next decade. They now expect deficits to average $1.3 trillion per year. To put that into context, the largest deficit during the financial crisis was $1.4 trillion. The CBO’s forecast equates to 4.6% of GDP, meaning that if growth is slower than 4.6% the ratio of debt to GDP will continue to rise. It is crucial to understand the CBO is not forecasting a recession over the next ten years. A recession could easily result in a year or two where the deficit is at least double the current annual forecast.  One of the big drivers of the higher deficit projection is due to retirement and health spending as a result of the aging baby boomers. Michael Peterson of the Peter G. Peterson foundation summed up our thoughts on the deficits nicely as follows: “It would be one thing if we were running up deficits to fund investments in the future, but that’s not what’s happening,” he said, adding that investments only accounted for “a tiny fraction” of the spending in the budget.”

February 3, 2020

The stock market sold off sharply on Friday despite strong earnings results from Amazon. The S&P 500 has reversed January’s gain and is now down slightly on the year. The 30 year Treasury bond settled slightly below 2% on Friday and is now closing in on 1.95% the record low from last August. Investors finally appear to be focused on the spreading of the Corona Virus and the growing reality that it will impede economic growth.

China’s financial markets finally opened after the Lunar New Year and the extension due to the virus. Despite a massive liquidity injection and rules prohibiting most stock sales, the CSI is down almost 8%.

The Fed Funds futures market rallied sharply on Friday and is now pricing in a 25bps rate cut by July and another 25bps by the end of the year.

The Chicago PMI Manufacturing Index fell sharply to 42.9 versus expectations of 48.9. The index has been below 50 (signaling economic contraction) for 7 straight months. Such a streak has only happened during recessions. One factor adding to the sharp decline is Boeing’s production suspension of the 737 Max. Further, Boeing’s headquarters are in Chicago. Interestingly, the much less followed Milwaukee PMI index is now above 50 and at its highest level since June. Looking ahead, surveys such as these will become tougher to assess as they could be greatly affected by the Corona Virus.

Consumer sentiment continues to rise. The University of Michigan index rose from 99.1 to 99.8. Hopefully, high sentiment continues to result in consumption and offsets manufacturing weakness.

January 31, 2020

Q4 GDP matched consensus estimates of +2.1%. There are, however, a few items that concern us. First, the price index rose by just 1.4% versus 1.8% last quarter and an estimate of +2.0%. In regards to longer-term economic growth prospects, companies are reducing investment. After a short surge following the corporate tax cuts, corporate investment (non-residential investment) has fallen for three straight quarters. The last time that occurred the economy was already in a recession. Lastly, 1.3% of the GDP increase was due to trade. In particular imports of foreign goods fell sharply by 11.6%. This was in part due to tariffs, but it also points to a slowing of domestic consumption. To wit, personal consumption expenditures only contributed 1.2% to GDP, as compared to a running rate of 1.85% for the last three years. Healthcare accounted for over a quarter of personal expenditures.

Jobless Claims came in at 216k, providing little confirmation to private labor reports showing weakening.

BMW is halting auto production in China. Airlines are reducing and/or suspending flights to and from China. Apple is trying to move production from China.   These corporate actions and many others like it will impair corporate earnings and reduce economic growth for not just China but for the world.

Tesla rose over 10% on Thursday and now has a market cap equal to GM, Ford, and Chrysler Fiat combined!

One of our investment themes for 2020 is to remain cognizant that the market risks greatly outweigh the rewards. This is based in part on equity valuations that are stretched to levels previously seen before major drawdowns and the record length of the current economic expansion. Just because the risks outweigh the rewards doesn’t mean we need to hide in investment shelters and wait for the storm. However, it does mean we must pay close attention to the known risks and try to think outside of the box and understand the potential unknown risks.  To that end, we share a great article from Morgan Housel: Risk Is What You Don’t See.

January 30, 2020

The Fed left rates unchanged as expected, but they did raise the IOER rate by 5 basis points. IOER is the interest rate the Fed pays banks to retain excess reserves. By hiking the rate they will marginally reduce liquidity in the overnight markets and in doing should push the Fed Funds rate higher towards the mid-range of the Fed’s target. Other than changing the date and some members’ names, only two words were changed from the prior December meeting statement. Both changes were of little consequence. The Fed also extended repo operations through April, as was expected.

Here are a few takeaways from Chairman Powell’s press conference:

Despite a rapid increase in Corona Virus infections, the U.S. stock market seems willing to discount the possibility of any economic slowdown. In China, they are not as sanguine. The Chinese government said “(the) impact of Corona virus on China’s economy could be significantly bigger than that of SARS outbreak.” A Chinese government economist quantified the statement by saying that Q1 growth may fall below 5%. In the latest reported quarter, GDP grew at 6%.  Today’s Chart of the Day compares the S&P 500 performance during prior virus outbreaks. If this outbreak could be “significantly” bigger than SARS, the market may want to reconsider its stance. They may also want to consider that China is a much bigger economic power than when SARS hit in 2003. China’s GDP is now over 15% of the world’s economy as opposed to 4% in 2003.

January 29, 2020

Economic data on Tuesday was mixed. The headline Durable Goods number was strong but predominately due to a massive increase in defense aircraft new orders. Excluding transportation and military orders, the data was decidedly weak as shown by Core Capital Goods, which were down 0.9%. Consumer sentiment surged higher, as did the Richmond Fed Manufacturing Index. This is the first strong reading in a manufacturing index and possibly indicative of a rebound in the sector.

After yesterday’s close Apple released a strong earnings report. Both revenues and earnings easily surpassed estimates. They also upped their estimates for both sales and earnings for the next quarter. The stock is trading up 1.8% after hours, which is giving the S&P a boost as well.

The 3 month/10 year Treasury yield curve inverted for the first time since October. The Fed expressed concern over yield curve inversions last fall and helped drive their decision to do QE in addition to repo operations. The question for the Fed as they meet today is will they act upon inverting curves again. It is very unlikely they announce anything today, however, they may mention it in their statement and put the markets on warning about future policy actions.

As you may recall, we added AGNC, NLY, and REM to our portfolios in mid-2019 in anticipation of a steeper yield curve. The yield curve did steepen and we benefited with solid price gains and double-digit dividends. We recently sold half of AGNC as its price was over-extended. We do not have immediate plans to sell the remaining holdings as they have been holding up well despite the curve flattening. We are paying close attention as further yield curve inversions will harm their bottom lines.

In just the last few days copper has fallen nearly ten percent in reaction to the Corona Virus. China is world’s largest consumer of copper. The price is dropping in anticipation of reduced demand and slowing global economic growth. The CRB index (a basket of commodities) and crude oil are also down about ten percent over the same time frame due to similar concerns.

The corporate junk bond ETF HYG saw an outflow of $1.4 billion on Friday, accounting for almost eight percent of the fund. While we are not overly concerned, it’s worth following as junk debt and equities tend to be highly correlated.

January 28, 2020

China’s financial markets will extend their Lunar New Years holiday vacation by three more days to February the 3rd due to the Corona Virus. Since the outbreak, the Chinese Yuan (offshore) has depreciated from 6.85 to 6.98 versus the U.S. Dollar. The decline has now erased all of the gains that came on the heels of the Phase One trade agreement. Even if the virus is eradicated shortly, it will put a temporary clamp on its growth rate. Given that China is the driver of marginal global GDP growth, how will its slowdown affect the rest of the world’s economy?

In addition to the virus, there will be a good amount of economic data this week plus the Fed’s FOMC policy meeting on Wednesday to drive the markets. Today at 8:30, Durable goods will be released followed by Consumer Confidence at 10 am. On Thursday, the BEA will release Q4 GDP. The current estimate is for an increase of 2.1%, which would be in line with the prior quarter. The Atlanta Fed’s GDPNow currently forecasts +1.8% growth. Friday will see the releases of Chicago PMI and the University of Michigan Consumer Sentiment report. We think it is too early for the effects of the Corona Virus to alter any of the data this week or likely data released over the next few weeks. However we might see the Fed comment on it, and there is a possibility some corporations may provide warnings in their quarterly corporate earnings reports. In particular, we will pay attention to Apple’s earnings call on Wednesday, as they are doubly affected due to the manufacturing and consumption of their products in China. China accounts for nearly 20% of Apple’s revenue.

The following was from this past weekend’s Barrons: “.. the Fed’s balance sheet has stopped expanding since the beginning of the year and actually contracted by some $25B in the week ended on Wednesday. .. It’s probably coincidental that the stock market has stumbled, but it bears watching.” 

We doubt its coincidental.

January 27, 2020

The S&P 500 is currently down 45 points on rising concerns over the rapidly spreading Corona Virus. This follows a 0.87% decline on Friday, the largest one-day loss in almost two months. While the virus is a growing concern and may potentially impact economic growth, we also believe an important reason for the selloff is the grossly overbought conditions and run away investor sentiment. As we have written, the market is well overdue for a correction, it was just looking for a reason.

This will be the busiest week in terms of earnings reports. Of note are the two stocks driving the market higher, Apple and Microsoft. Apple will release earnings on Wednesday afternoon and Microsoft on Thursday.

For the most part, retail stocks have reported weaker than expected earnings and many have issued poor earnings guidance. Amazon’s earnings on Friday will help us better assess if retail is slumping because more sales are going online to Amazon and others, or if the consumer is slowing down.  On a quarterly basis, real, inflation-adjusted, retail sales are negative. This is only the second time this has occurred since the recession a decade ago.

If it appears that the recent rally is an anomaly, your thoughts do not deceive you. The graph below shows that recent returns divided by annualized volatility (risk) have been running higher than at any time since the financial crisis. This standard calculation of return per unit of risk is technically called the Sharpe Ratio. The ratio has been sitting around 2.0 for most of January. To put that into context, the current reading is about 4 sigmas (standard deviations) from the norm, an event that should statistically occur in one day out of every 43 years. Since January first, there have been 5 daily readings that were greater than 4 sigmas!

January 24, 2020

The Chicago Fed National Activity Index fell to -0.35 from +0.41 last month. This index is a weighted average of 85 measures of economic activity. A negative level means economic activity is below trend. A reading of +/- 1 corresponds to one standard deviation. Accordingly, we are only about a third of a standard deviation below trend, which is not concerning. This index tends to fluctuate from month to month, so we do not read too much into monthly data points. However, a reading below -1 would cause us to take notice. Since the mid-1960s all seven recessions were preceded or accompanied by a sub -1 reading. There were only three times the index went below -1, and a recession did not occur.

The Conference Board’s Leading Economic Indicators (LEI) fell by 0.3% versus last month despite the contribution of the surging stock market. On a year over year basis, it is only up 0.1%, the lowest level in over ten years.

Today’s Chart of the Day shows that maybe there are limits to the benefits of QE, at least as far in its ability to manipulate interest rates. The chart compares the yield on German 10-year Bunds, the most liquid of euro bonds, to the size of the ECB’s balance sheet.  The data appears to slope upwards, denoting that larger balance sheets drive rates lower. The problem occurs when rates get near and through zero, the correlation of rates and balance sheet seems to disappear.

The graph below shows that the Fed’s balance sheet has declined slightly in January.  The decline is due to repo balances (overnight and term) declining more than QE (T-Bills in red) can make up for.

January 23, 2020

Per Fox Business News, Trump said, “we are going to be doing a middle class tax cut, a very big one.” “We will be announcing that over the next 90 days.” While a tax cut would spur GDP growth as the corporate tax cut did, we must consider that he would need the support of the House, which given the upcoming election, seems unlikely to help the President in any way.

The Bank of Canada, which was the only of the major central banks with a hawkish tilt, reversed course yesterday.  They expressed concern about their economy, which has slowed in recent months. While they didn’t lower rates, they did drop language about the current interest rate being appropriate. The Canadian economy is much smaller than the U.S. economy ($1.7 trillion vs. $21 trillion), but the economies are well correlated. Canada is America’s second largest trade partner right behind China and ahead of Mexico.

Bob Prince, CEO of Bridgewater, the world’s largest hedge fund, declared that the economic boom/bust cycle is over. Unfortunately, we think Mr. Prince is grossly underestimating the effects of massive and unprecedented monetary and fiscal stimulus that is being employed to keep the economy stable.

January 22, 2020

It will be a quiet week in regard to economic data and Fed speakers. Of interest will be Jobless Claims and Leading Economic Indicators (LEI) on Thursday. Voting members of the Fed will not speak publicly for the next week and a half as they just entered a blackout period preceding the January 29th FOMC meeting.

Last week we discussed the surge of Tesla’s stock price in the Daily Commentary and presented a Chart Book showing similar trading patterns that were witnessed at the tail end of the 1999 dot-com boom. Tesla is not the only stock today that seems to have caught the fever and is rising purely based on momentum and short covering. Beyond Meat (BYND) rose 18% yesterday and is now up 82% in just the first 20 days of January. While it’s tempting to “gamble” on these stocks, we must keep in mind their behavior is not indicative of a healthy market and, importantly may be sending a strong message about the future.

The CDC announced the first U.S. case of the Chinese coronavirus that has killed 6. This is certainly not something to panic over, but we do suggest paying attention to it as rapid spreading of the virus in China and/or the U.S. could certainly alter economic activity.

Commodities have performed poorly versus a traditional stock/bond portfolio since the Financial Crisis. Recently we have discussed the potential for a weaker dollar and with that the potential to increase our exposure to commodities. As the graph below shows, other asset managers are slowly following suit. Currently, as circled, the percentage of managers who are “overweight” commodities is approaching 10% and sits at an 8 year high. It’s too early to say the commodity rout is over, but it is an encouraging sign for the commodity sector.

January 21, 2020

In Friday’s JOLTS report, the BLS stated that job openings fell sharply. The chart below shows the concerning trend in the year over change in job openings.




Housing starts surged 16.9% led by multifamily (5+ units) starts, which were up nearly 75% versus last year. This huge print appears to be a seasonal quirk and we caution not to read too much into this singular data point.

President Donald Trump will nominate Judy Shelton and Christopher Waller to the Federal Reserve Board. Judy Shelton is an MMT advocate and has publicly called for interest rates to be brought down to zero. When her name first came up last summer, the Washington Post quoted her as follows: “(I) would lower rates as fast, as efficiently, and as expeditiously as possible.”  For a more in-depth discussion of Shelton and the Fed, we share a link to Shelton, The Fed, & The Realization of a Liquidity Trap, an article we published in July 2019.

The graph below shows that global central bank balances are now at a new all-time high after rising steadily since September. The Fed has certainly played a large role in the increase. Since September, the Fed’s balance sheet has grown from $3.76 trillion to $4.15 trillion.





Strange fact of the day from Eddy Elfenbein (@EddyElfenbein)

“S&P 500 closed above 3,300 for the first time ever. If you’re into numerology, the index first broke 330 in 1987, meaning 33 years ago, and it first broke 33 in 1954 which was 33 years before that. I don’t know what it means, but that’s a lot of 3s.”

January 17, 2020

S&P futures are pointing to another gain this morning on the heels of yesterday’s 27 point rise. Interestingly the S&P is up over 50 points on the week, and yet the VIX (volatility index) is flat. While the index is historically low at 12, it did fall below 10 before the surge in January of 2018 and the subsequent sharp decline that followed. That period feels similar in many ways to the current market run. Recent stability despite the rising market, tells us some investors are bracing for a correction.

Economic data was relatively strong yesterday. Jobless Claims fell back to 204k from last month’s 214k. The Philadelphia Fed Business Outlook Survey soared to 17 from a prior level of 0.3 and an estimate of 3.0. Retail Sales met expectations growing .3% last month and in line with the prior month. More impressive, the core retail sales, excluding gas and automobile sales, rose .5% as compared to a decline of .2% last month.

As we have been writing about for months, private surveys of the job market continue to show a weakening in the labor market, but most of the official government data from the BLS fail to confirm these reports. Tomorrow the BLS will release JOLTS containing information on job turnover. This indicator tends to lead claims and payrolls data slightly.

Alphabet Inc (Google) saw its market cap surpass $1 trillion yesterday, joining Apple ($1.38t) and Microsoft (1.27t) as the only U.S. companies with trillion-dollar market caps.


January 16, 2020

On Tuesday, the Wall Street Journal ran a story called Hedge Funds Could Make One Potential Fed Repo-Market Fix Hard to Stomach.

Beneath the header it says, “Federal Reserve officials are considering a new tool to ease stresses in the repo market.” Our takeaway is that while the Fed acknowledges the risks of too much leverage, they also understand the potential market stresses if leverage to hedge funds is reduced. As such the Fed is looking into making repo trades directly with hedge funds.  It seems like a Catch-22 to us.

Details of the Phase One Trade Agreement with China are not being released but we do know that existing tariffs on billions of dollars of Chinese exports are expected to remain in place until after the November election unless a Phase Two agreement is signed. The odds of a second agreement seem small as more complicated and controversial issues like IP and human rights are slated for that deal.

We have overused the words “overbought” and “overextended” over the last few weeks in efforts to try to describe current market sentiment.  Today’s Chart of the Day shows that equity analysts appear to be upgrading stocks on the basis of price gains and not fundamentals.

There have been a large number of Fed members speaking over the last few weeks of which none have linked asset prices with the Fed’s balance sheet. Yesterday, Dallas Fed President Robert Kaplan bucked the trend. The following headlines provide us some hope that the Fed is aware that their balance sheet actions are causing distortions in the asset markets.

January 15, 2020

Both headline (0.2%) and core (0.1%- ex food/energy) CPI came in 0.1% below expectations. The lukewarm inflation data provides further justification for the Fed to keep rates stable.

NFIB (small business survey) continued to trend lower but it still remains near the higher end of the range for this expansion. The graph and table below show the survey’s long term history as well as a breakdown of the ten survey questions asked of small business owners. The decline in job openings and plans to increase employment are concerning as they confirm labor data from other corporate and personal surveys. Small businesses account for over 50% of employment in the U.S.

The Fed announced a slight change to its term repo schedule for February. Each auction will be for $30 billion instead of the current $35 billion. On its own, this action should reduce its balance sheet by about $20 billion.

A subscriber asked us why we keep taking profits and reducing our position in Apple (AAPL). The simple answer is that AAPL is a great company, but its share price is growing well beyond the rate at which earnings and sales are growing. As such, not only is the price technically overextended but it is fundamentally overextended.  We recently wrote an analysis of Coca Cola, whose stock is in a similar situation (Gimme Shelter).

Over the last year, Apple’s earnings per share (EPS) grew by 0.33% while its stock price has risen by 86%. Further, the slight gain in EPS is not due to earnings growth but because the number of shares fell by 9%. Over the last three years, the stock is up 153% and its EPS grew by 46%, but only 21% adjusted for share buybacks.  Due to the surging stock price and relative mediocre earnings growth, Apple’s price to earnings (ttm) has risen from 12 on January 1, 2018, to 26 today. Its P/E sits well above any reading since the Financial Crisis. Simply, Apple’s share price is grossly overextended. We are holding on to a reduced position in Apple solely due to its price momentum. We understand the precarious nature of the recent price action and will sell it entirely when its price falls below our risk limit.

January 14, 2020

Yesterday, it was reported that the U.S. Treasury will lift the currency manipulator tag on China before the signing the Phase One trade deal on Wednesday. As we suspected, currency manipulation on China’s part was part of trade the deal. Since the deal was announced, the Chinese yuan has strengthened versus the dollar which helps increase U.S. exports as U.S. goods become cheaper for the Chinese.

Since the U.S. assassinated Qasem Soleimani on January 4th, asset prices have been volatile. The following bullet points quantify the change in price/yield since the night he was assassinated through yesterday’s close.

Tesla continues to surge, rising nearly ten pct on Monday. Its market cap now stands at $92 billion. To put that into context, the aggregate market cap of GM, Ford, and Chrysler is $111 billion.  Last month GM, Ford and Chrysler sold 640,000 vehicles, Tesla sold 19,000.

Today’s Chart of the Day shows that many S&P 500 companies are entering, or will soon begin, their earnings blackout period in which they can not buy back shares of their stock. Q4 earnings reporting kicks off this week in earnest as the big banks lead the way. Today, JPM, Citigroup, and Wells Fargo report Q4 earnings. Bank of America, Goldman Sachs, and a host of regional banks will follow them on Wednesday and through the remainder of the week. As shown on the graph, almost half of the S&P 500 companies will be unable to buy back shares from this Wednesday through month end due to self-imposed restrictions.

If you want to see when the stocks in your RIA Pro portfolio or our portfolios report earnings, click on the dividend tab to the right of the graph in the Portfolio page, select earnings, and sort as you wish.


January 13, 2020

December payrolls increased by 145k, 13k below the estimate of 158k. After last month’s surge in job growth, payrolls are back in line with the recent trend and ADP data. As such, we can confirm that last month’s gain of 256k jobs was an aberration largely due to seasonal adjustments. Weak earnings and average workweek data from Friday’s BLS report also confirm this. Average hourly earnings rose 0.1% monthly versus estimates of 0.3% and increased 2.9% year over year versus an estimate of 3.1%. The average workweek also fell short of the consensus estimate.

Next week a new round of inflation data (CPI and PPI) from the BLS will be released. Also of interest will the December Retail Sales data. Currently, expectations are for a 0.2% increase and 0.1% excluding auto sales. As we saw this past week, there will be a large number of Fed members speaking at various events. The next Fed meeting will be in two weeks on January 29th.

The graph below caught our attention. Based on CrossBorder Capital’s model, recent Fed repo and QE operations have resulted in the largest percentage change in liquidity since at least 1970. What’s mind-boggling about these actions is that the Fed has yet to rationally explain why they are supplying so much liquidity, especially since we are not in a recession.

January 10, 2020

In our quest to better appreciate the divergences in employment indicators and assess the health of the jobs market, jobless claims threw a curveball at us yesterday.  On the positive front, the BLS initial jobless claims number fell to 214k from 223k which reduced the four-week moving average back into the upper bound of its recent range. Of concern, as shown below, continued claims have been on the rise and now sit at levels last seen almost two years ago. The claims data tells us that workers are not getting laid off at a high rate, but those workers laid off are having more difficulty finding new jobs.

Today’s employment report will shed more light on the jobs market. Expectations are for payrolls to increase by 158k and the unemployment rate to stay at 3.5%. Our model predicts that payrolls will grow by 123k.

Fed Vice Chair Clarida stated, “the Fed will adjust details of repo operations as appropriate, though ongoing purchases may be needed at least through April.”  Since September, the Fed has added $424 billion to its balance sheet. $255 has been via repo operations and the remaining $169 is in Treasury Bills (QE). The Fed has committed to adding $60 bln per month in Bills to their balance sheet (QE) through April. Between today and late April/early May they will purchase about $240 billion in Bills which in theory will replace repo operations.  This is likely the math backing Clarida’s statement. The problem with that calculation is that if  repo is replaced by Bills (QE) then the Fed’s balance sheet will stay the same size for the next few months. Two questions come to mind with that prospect. First, is the funding issue that cropped up in September resolved or at least fixed enough so that the Fed does not need to increase its balance sheet? Second, will the stock market keep levitating if the Fed’s balance sheet stops growing?

A study from Deloitte (link) claims that “97% of CFOs say a downtown has either begun or will begin in 2020“.   This is somewhat confirmed in the latest quarterly Conference Board CEO Confidence Survey, which reported a weak bounce from Q3 2019. While the index is higher than the last quarter, the fourth quarter of 2019 is lower than any other quarter since the recession of 2008.

January 9, 2020

Yesterday, stocks took out the record highs which occurred prior to the Iranian assassination. Investors appear content that the skirmish with Iran is now in the rearview mirror. Two factors are supporting this view. First, it is widely believed that Iran purposely missed hitting the U.S. bases on Tuesday night. Second, Trump’s speech yesterday was very conciliatory and supportive of peace.  Fortunately, the situation has eased greatly, but we must be careful and not be too complacent, as it will not take much to strike up tensions again.

ADP reported that December payrolls increased by 202k, 45k more than estimates. The two month average, which evens out seasonal holiday quirks, is 134.5k, about 30k below the 2019 average.  Consensus expectations for Friday’s BLS Payrolls report are for a gain of 155k jobs, which would put the BLS two month average about 25k above the 2019 average. For what its worth, an increase of 100k would bring the two month average in line with the year to date average.  Our employment model based on ADP and the ASA temporary staffing index forecasts a 123k gain in payrolls for December.

Yesterday, we discussed using the rate of change over longer periods versus monthly changes to appreciate changing patterns better. Today’s Chart of the Day shows the sharp deterioration in the ADP report occurring in later 2018 and throughout 2019. It is worth adding the ADP job gains over the last 12 months are the lowest since 2010.

The repo situation is getting more interesting by the day. Yesterday, the NY Fed conducted an auction for $47 billion in overnight repo that was met with $120 billion in demand. This is a warning that the Fed is not meeting growing demand and repo rates may start rising again. Thus far rates have been stable.

The following quote from Lisa Shalett, CIO Morgan Stanley Wealth Management, caught our attention.

“This is a market looking through fundamental data, looking through corporate guidance and data points, looking through Fed guidance itself”… “It is a market that wants to go up in the short term. That is what makes it so profoundly dangerous.”



January 8, 2020

Another crazy night of trading is in the books. S&P futures fell over 40 points on Iranian missile attacks on two U.S. Army bases. After Trump tweeted “all is well” and reports that there were no casualties surfaced, the markets reversed course. Currently, futures are up 6 points. Bonds, gold and oil which were up significantly last night, gave back most of their gains.

The ISM Services Index rose to 55 from 53.9 as the service sectors continue to do well. Of concern, however, this data point is similar to Jobless Claims in that the absolute reading is relatively strong, but the rate of change is declining. The graph below, courtesy of Brett Freeze, shows that the decline on a year over year basis is approaching levels seen before the last two recessions. Using the rate of change over longer periods versus absolute comparisons over shorter periods can help spot trends that are not evident on the surface.

The last two daily Fed’s repo operations were oversubscribed with larger amounts being transacted than the prior few weeks. This bears watching to see if the Fed’s removal of the extra liquidity they provided over the turn of the year is starting to cause problems.

China appears to be dragging their feet to sign the Phase One trade agreement, which is scheduled for January 15th. It is unclear at this time if the activity in Iran/Iraq will provoke China to take a different stance.

We have been asked a few times about our thoughts on shorting Tesla (TSLA) stock. The answer is worth sharing with a broader audience.

The stock has doubled in price from 230 in early October to 470 today. This run-up is likely the result of a short squeeze driven by momentum traders. At today’s closing price, Tesla ($85bn) is worth more than Ford ($36bn), GM ($49bn), and BMW ($53bn) to name a few auto producers. In regards to shorting Tesla, our answer is a definitive NO! It certainly appears grossly overvalued but given market conditions and the rampant FOMO in certain stocks, the rally can continue. On the flip side, a large decline is also possible given its overextended technical and fundamental status.  Unless you have an iron stomach, this is one to follow from the sidelines.



January 7, 2020

Yesterday, the S&P 500 was down over 20 points in the morning on Iranian concerns yet rallied to close the day up 11 points. While fiery rhetoric continues from Iran and President Trump, the market seems to be discounting the odds of any significant military action. Since the assassination on Thursday, the S&P 500 is down less than 1%. Gold and Oil provided mixed messages on Monday. Oil fell over $2 a barrel from its highs to close down slightly while gold ended up over 1% on the day.

On the economic data front employment will take center stage. On Wednesday ADP will release their employment report, Jobless Claims will follow on Thursday, and the all-important BLS Labor Report will be released Friday. Last month there was a massive divergence between the ADP and the BLS reports. ADP reported a 67k increase in payrolls while BLS was well above expectations showing a gain of 266k. Seasonal adjustments due to Thanksgiving and Christmas likely played a big role in the large difference. We suspect the divergence will be normalized over the next month or two.  Also of interest this week will be today’s release of the ISM-Services Index and Factory Orders.

Last Saturday, Ben Bernanke gave a speech in which he discussed monetary policy and specifically how the tools used to fight the Financial Crisis might work in the next recession. In his opinion, the combination of QE, low rates, and forward guidance are effective to stymie a recession. He cautioned the Fed should not rule out the possibility of using negative interest rates in a recession, as is being done in Europe and Japan.

Of particular interest to us was the following: Monetary easing does work in part by increasing the propensity of investors and lenders to take risks.”

Bernanke is essentially saying that aggressive Fed policy works because it incentivizes those with capital to take risks. While true, he fails to recognize that much of the risk is in speculative financial assets and not in the real economy. As such, the markets boom while the productivity of the real economy suffers. Essentially he is arguing for a continuous feedback loop in which we sacrifice future economic growth for higher asset prices.

January 6, 2020

The ISM Manufacturing Index was weaker than expected at 47.2 versus the consensus estimate of 49, and a reading of 48.1 last month. All of the 60 estimates by leading economists predicted a higher number than the actual print. 47.2 is the lowest reading since June of 2009. Of concern, the employment sub-index slipped further from 46.6 to 45.1. The following table from ISM provides information and the current trends for each respective sub-index.








On Friday, the Fed released the minutes from their December 11th meeting. The minutes provided more color on the ongoing repo and QE programs. For starters, they finally acknowledged that QE could expand in scope and include purchasing longer-term assets. To wit: “the Federal Reserve could consider expanding the universe of securities purchased for reserve management purposes to include coupon-bearing Treasury securities with a short time to maturity.” A few Fed followers believe this QE instance is not QE because the Fed is buying short term Bills instead of longer term notes. Will this change their minds?

The Fed also alluded to transitioning away from repo operations starting in mid-January as QE will supply “a larger base of reserves.” The Fed didn’t say it, but they will likely have to do QE beyond April or they risk reducing liquidity in the markets.

Over the last few months, many investors bought stocks because history told them that they didn’t want to miss out on “easy” gains that accompany QE. Many of these “investors” are weak hands meaning they have little conviction and likely little threshold for losses. It is worth remembering this as any further escalation of the Iranian conflict has the potential to cause these investors to sell which could become problematic if it happens in a relatively short period.

January 3, 2020

Last night and this morning stocks gave up yesterday’s gains and then some on the assassination of Qasem Soleimani, head of the Iranian military wing Islamic Revolutionary Guards- Quds Force. Crude oil is up nearly 4% or $2.20 per barrel, ten year yields down 0.06%, and gold is $20 higher. Fear of retaliation and escalation will likely weigh on the stock market and keep a bid under oil, gold and bonds for the foreseeable future.

The S&P 500 rose sharply yesterday despite any news of consequence. The internals of yesterday’s move was odd, suggesting the rally was due to portfolio repositioning for the New Year. Likely, any positions that were sold in the prior few weeks for tax purposes, risk reduction, or window dressing were bought back yesterday. Small caps, large-cap value, and defensive sectors, in general, were lower despite the broader market surging nearly 1%. Four of the eleven S&P sectors were substantially lower. Over the next few days and weeks, we should learn if the move is one time in nature related to the New Year or if investors have a renewed hunger for growth and momentum stocks.

China started off the New Year with economic stimulus via a reduction in reserve requirements for banks. The action allows banks to hold fewer reserves per loan and therefore encourages banks to lend more.

Jobless Claims fell slightly from 224k to 222k. The four week moving average, however, continues to rise and now sits at a nearly two year high.

The ISM manufacturing survey will be released at 10 am this morning. Expectations are for the index to rise to 49 from 48.1. While an improvement, a reading below 50 signals economic contraction in the manufacturing sector. The lesser followed PMI Manufacturing Index continues to signal economic expansion, coming in at 52.4, versus expectations of 52.6. PMI is an outlier as many of the regional manufacturing surveys are pointing to contraction in the sector.

The Fed’s balance sheet should shrink in the coming weeks as the one-time year-end repo operations will roll off the books. In time, the decline should be reversed as the Fed is still expected to buy $60 billion of short term assets (QE) through April.

Today’s Chart of the Day removes the stock market from the Index of Leading Economic Indicators (LEI). As shown, the index, excluding stocks, just dipped below zero on a year over year basis. The last two times it fell below zero, a recession followed. Stocks are an important component of consumer and corporate confidence. As long as the market avoids a series downturn, the likelihood of a recession is reduced. We have little doubt that the Fed clearly understands this construct.


January 2, 2020

Buckle up, the stock market may see a big move today.  As shown below, since 1930, January 2nd has experienced the largest average absolute percentage price change of any day in the year.

On Tuesday, President Trump tweeted that Chairman Xi and he will sign Phase One of the China/U.S. trade agreement on January 15th. He also said that he would be traveling to China to kick off negotiations on Phase Two soon. As we have discussed, agreement on technology, IP, human rights and other important issues will be much more difficult than the relatively simple Phase One agreement which appears to be largely focused on agriculture and tariff relief. Regardless, we will monitor market reactions to any Tweets and statements from the administration and/or China as to the progress of the new discussions.

Consumer Confidence, as reported on Tuesday, dipped in November. Interestingly, the divergence between near term and future confidence continues to diverge. The present situation component rose and sits near recent highs, while the expectations index declined and is near three-year lows. With weak global growth and declining growth in the manufacturing sectors, the consumer remains the linchpin to economic growth.

In case you missed Monday’s Major Market Buy/Sell Review, we think it is worth highlighting our chart and commentary of the U.S. dollar. As we noted, the dollar appears to breaking lower from a rising two-year channel. Given the importance of the dollar on domestic and global economic activity and inflation, as well as the fact that price trends in the dollar tend to last for lengthy periods, we are assessing and preparing portfolios for the possibility of a prolonged dollar downtrend. In What We Are Not Being Told About The Trade Deal we wrote about the possibility that a weaker dollar is part of the U.S/China trade agreement. In the article, we touched on the correlation between the dollar and various asset classes.

December 31, 2019

The manufacturing industry continues to show weakness with the Chicago PMI report coming in at 48.9, which is above the consensus forecast of 48 and the previous reading was 46.3. Because it increased but stayed below 50, it entails that manufacturing is contracting but at less of a rate than the last reading.

After weeks of slowly melting up in what was expected to be a quiet week of trading, the S&P fell 18 points. Over the last two days, the VIX Volatility index has risen nearly 20%. Volume was very light so we caution not to read too much into yesterday’s decline and rise in volatility as they are likely the consequence of year-end maneuvers.

In the money markets, the night of December 31st is referred to as the “Turn.” This overnight period, starting in one year and ending in the next, is when banks square up their balance sheets to meet stringent year-end regulatory and capital requirements. The turn often sees huge swings in borrowing and lending rates. For instance, it is not uncommon to see Fed Funds and Repo rates collapse to near zero or soar well above normal levels. In fact, there have been years where both happen with the course of hours.

The graph below shows forward Fed Funds trading for this year’s turn. The Fed, through a massive supply of liquidity, seems to have managed an orderly turn. We do not anticipate problems today as the Fed is paying close attention and is willing and able to provide funds to alleviate any stress. CLICK TO ENLARGE

Just a reminder, the BLS will not release employment data on the first Friday of the month, as is customary. It is scheduled for next Friday on the 10th of January.

We wish you a happy and healthy 2020!

December 30, 2019

The low volume stock melt-up will likely continue this week. Of note, however, the VIX (volatility index) rose sharply on Friday and is up again this morning despite the market being slightly higher. It’s hard to tell if the activity is year end position squaring or investors hedging themselves early for potential downside in early 2020 when the Fed’s year-end liquidity programs are curtailed. Regardless, given the extreme overbought conditions and the seemingly steady rise throughout December, a pullback should be expected in January.

The China/U.S. trade deal boosted the price of oil as it hoped that relief of tensions helps resuscitate global trade and economic growth, both of which entail more energy usage. Crude is topping $62 a barrel this morning.

Economic data will be light this week, but of interest will be Chicago PMI on Tuesday and the ISM Manufacturing Index on Friday. Both data points will provide an update on the health of the struggling manufacturing sectors. Based on smaller regional indexes released over the last two weeks, the two indexes may remain below the crucial 50- economic contraction/expansion level.

December 27, 2019

Yesterday, the market closed sharply higher as the end of the year “melt up” continues. The main driver of that rally was the near 5% surge in Amazon (AMZN) on the back of stronger than expected online holiday sales. A couple of months ago we added AMZN to the Equity Portfolio and XLY to the ETF Portfolio in anticipation of this breakout in the stock, however, performance had been disappointing in both until yesterday.

With just three trading days left in the year, the S&P is now set to surpass the 29.6% full year return of 2013 at which point 2019 will be the best year in 22 years, since the 31% return posted in 1997. With the majority of humans out until after New Years, there is little impediment to the algos running the markets higher until the end of the decade.

While the media has continued to use the same strawman of trade optimism to justify the rally, the reality is whatever trade agreement there may actually be, it was priced in long ago. The reality is that the Fed’s $500 billion flush of liquidity into year end to meet short-term funding needs has been interpreted by the markets at “QE” and the rush to benchmark performance into year end is pushing equity allocations, and investor optimism, toward record highs. It is worth noting there could be “payback” after the beginning of the year when gains can be locked in with taxes deferred until 2021.

Speaking of optimism, and outright complacency, the difference (spread) between the high yield (junk debt) CDX index and U.S. Treasury yields has fallen back below 300 basis points. The index measures the cost of insuring high yield debt against default. This extremely low cost of insurance, especially this far into an economic expansion, reeks of complacency and a chase for extra yield as we are seeing in other asset markets.

While we are certainly enjoying the rally, just don’t forget “what goes up, eventually comes down.”


December 26, 2019

Stocks are set to open slightly higher, based in part on reports from MasterCard of strong online retail holiday sales.

Jobless Claims, released at 8:30 are expected to normalize after a two week spike. The consensus of economists expects an increase of 223k.

Complacency as measured by volatility is not solely confined to the equity markets (as measured by VIX) but, as shown below, is rearing its head in the FX markets. Despite ongoing BREXIT discussions and the possibility of negative consequences for Europe, one year historical volatility in the Euro/USD is at the lowest levels since its formation.

December 24, 2019

Stock markets will close at 1pm and the bond markets at 2:00 today for Christmas.

Durable Goods fell 2% versus an expectation of a gain of 1.5%. Excluding transportation the index was down 0.2%.  Despite home builder optimism at 20 year highs, new home sales were weaker than expected. Both data points can be volatile so we caution reading too much into the data.

On Thursday morning the BLS will report on jobless claims, a data series that we are paying close attention to.

With no market to follow this afternoon, we provide you with an interesting article from Bloomberg on the quality of jobs in the labor market. The article helps better explain why wage growth has been weak despite the unemployment rate at 50 year lows. The Jobs Market Isn’t as Healthy as It Seems.

We wish you a Merry Christmas and happy holidays. We will be back on Thursday.

December 23, 2019

China announced they would reduce tariffs on over 850 goods. Markets are up slightly on the news as it was already rumored that tariff relief on U.S. imports to China would be part of the Phase One deal.

The Fed’s balance sheet increased by $43 billion last week (Thursday to Thursday) which annualized, is growing at a pace of $2.2 trillion a year, or a 50%+ increase in the balance sheet.

Consumer spending matched expectations, growing at +0.4% monthly, while Personal Income surprised to the upside (0.5% versus 0.3% expected).

The New York Fed’s GDP Nowcast, a forecast of Q4 GDP growth, increased from +0.69% to 1.32%.

Today’s Chart of the Day shows one of the reasons for the stress in the overnight funding markets. Commercial banks have had to help fund the massive surge in Treasury debt issuance which in turn, forced them to allocate less of their funds toward other loan products such as repo. To put Treasury issuance in context, over the last 12 months the amount of publicly traded Treasury securities has grown by $1.64 trillion. That compares to an average annual issuance of $600 billion during 2018.

Barring the emergence of a large buyer of U.S. Treasuries, this crowding out effect should continue until the Fed can permanently add reserves to bank balance sheets. This is why many, ourselves included, believe that the Fed will eventually buy longer term Treasury notes and bonds to replace maturing repos and short term bill purchases (QE4).


December 20, 2019

The Philadelphia Fed Manufacturing Index was weaker than expected at +0.3% versus an estimate of +8.0 and prior reading of +10.4. Due to the timing of this survey, following the Phase One trade agreement, it is not reflective of the current mindset of those executives that were surveyed.  Any benefits from the agreement should become evident in the January round of manufacturing surveys.

The Leading Economic Indicators Index was up 0.1% year over year. Since 1970, every time the indicator fell below zero, a recession followed. The index would probably have been below if not for the rising stock market, which is a key input.

Weekly Jobless Claims fell to 234k from last months elevated 252k. Due to the volatility of the weekly number, economists prefer to focus on the four week moving average. The four week moving average low for the current economic expansion was recorded in April at 201.5k.  Currently the average sits at the upper end of the range of the last two years. On a historical basis, the number is very low, but it is rising.

Today’s Chart of the Day shows that prior to last three recessions, the four week moving average of Jobless Claims spiked higher a month or two prior to a significant decline in payroll growth. As shown the recent increase is barely noticeable, but given the deterioration in non-BLS employment data this bears watching closely as a leading indicator.

At 10am Personal Income and Spending data will be released. This data will provide a good reading on the health of the consumer. Expectations are for income to be flat and spending to be up 0.3%. This implies that credit is being used to fill the gap.

December 19, 2019

The market looks to open flat following the House’s impeachment vote, as it is widely believed it will fail in the Senate.

The November Cass Freight Shipments Index was down 3.3% year over year and now lower for 12 consecutive months in a row. This provides further confirmation of weak global economic activity.

Boston Fed President Eric Rosengren, during a speech on Tuesday, made a statement about asset prices that is worth sharing. He stated: “If you look at the last two recessions, they were not situations where inflation got out of control. They were situations where asset prices went way up and then came way down. So if your goal is to avoid recessions, I think we need to be pretty focused on asset prices not just inflation.

It is widely surmised by investors that the Fed has their back. This statement provides all the more evidence supporting that feeling. We would just ask the Fed to pay more attention to periods like today when asset prices “went way up”, and well beyond normal valuations.

We have written a lot about inflation and how we believe it is underestimated. In this vein, we just stumbled across the Chapwood Index.  Chapwood provides inflation data broken down by each major city and based on the top 500 items that people spend money on in those cities. Based on the index, inflation is running at approximately 10% a year. This figure is in line with ShadowStats which calculates inflation the way the BLS calculated it in 1980. Given, approximately 3% wage growth on average, this discrepancy further helps explain the need for ever increasing amounts of debt and the poor situation many retirees find themselves in today.  Click on the link above to find the inflation rate in your city.



December 18, 2019

Following two bad monthly prints, Industrial Production rose by 1.1%, slightly above expectations. The GM strike played a large role in the fluctuations over the last three months so we will pay closer attention to this data over the next few months for a better indication of the health of manufacturing. We suspect the trend should be slightly higher due to the Phase One trade agreement, however with Boeing (BA) cutting production of the 737, there may be downward pressure on activity. Capital Economics forecasts that if the Boeing production cut continues through the first quarter, Q1 GDP could be reduced by 0.5%.

The JOLTS labor data showed some improvement with job openings (7.267 million vs estimate of 7.018 million) increasing 3.3% monthly, however they are still down over 4% year over year. We continue to be befuddled by jobs data. Some data has been very strong while other data has been weak. JOLTS is produced by the BLS which in general has produced the more bullish jobs data.

The yield curve continues to steepen, with the 2yr/10yr curve now at+25 basis points. With the Fed on hold, keeping short rates stable, and economic data coming in better than expected we expect the curve will continue to have a steepening bias.

Crude oil broke above the $60 barrier yesterday, however it remains well within its 2019 range ($44-$68). As shown below, from the Major Markets Review published on Monday, oil has cleared the downtrend resistance line from the $75 highs in October of 2018.  The case for crude is getting more bullish, which has inflationary implications.


December 17, 2019

Economic data this coming week will be relatively light, but there are a few items worth following. At 10:00 this morning, JOLTs data will provide more detail on the health of the labor market. Job openings have been trending lower in recent months. Just prior at 9:15, Industrial Production data will be released. Of key interest today will be a 12:30 speech by NY Fed President John Williams. The NY Fed manages repo and QE operations, so any information he can provide on the overnight funding stresses and year end operations will be helpful. Jobless Claims and Leading Indicators will be announced on Thursday and Consumer Sentiment on Friday.

As shown below, the European manufacturing sector continues to fall further into recessionary territory. The Eurozone Manufacturing PMI, shown below, has been below 50 for 11 straight months. Within the data set we learned that manufacturers cut jobs to the greatest extent since 2012. Fortunately, Eurozone Services PMI was higher and above 50, helping offset manufacturing woes. Japan and Australia also reported a contraction with PMI manufacturing data readings below 50. We are waiting to see if the Phase One trade agreement will help improve executive outlooks of the manufacturing companies and thereby result in improvement in the sector over the coming months.


Today’s Chart of the Day shows the surge in the NASDAQ index, which occurred during the last few months of 1999. Most people attribute the massive gain to the final feverish pitch of the dot com bubble. We believe the real culprit was the Fed which added substantial amounts of repo liquidity to the banking sector due to concerns over Y2K and the potential for mass computer malfunctions. These repo funds designed as a buffer for the banking system worked their way to the financial markets. For more please read the following WSJ article from 1999- Federal Reserve Clears Loan Facility Linked To Y2K Computer Problems.

The graph below shows the 10x surge in repo funding during late 1999 and its quick removal shortly after the New Year. Note the recent surge, on the right side of the graph, dwarfs the 1999 experience and that is before an expected $500 billion spike in repo financing over the next week or two. Unlike 1999, we have our doubts as to how quickly the graph normalizes, as the Fed continues to underestimate the scope of the growing overnight funding issues. CLICK TO ENLARGE

To quote Yogi Berra “deja vu all over again.




December 16, 2019

The takeaway from the ongoing trade saga again is that Phase One appears to be finally agreed upon. As such, existing tariffs will remain in place and the new tariffs, expected to begin on December 15th, will be suspended. This seems to be predicated on China buying $40-50 billion of agriculture per year. As mentioned on Friday, the terms are not being announced, so we can only speculate as to what else might be included in the agreement. We have one opinion, that could greatly affect the asset markets, which we will share with you in a RIA Pro article coming shortly.

In case you are worried that the President will not be able to push the markets higher with daily trade related tweets now that Phase One appears to be done, he announced that negotiations on Phase Two with China will begin immediately.

Retail Sales were weaker than expectations coming in at 0.2% versus expectations for a 0.5% increase. More concerning, core retail sales (ex. autos and gas) were flat versus a +0.4% expectation.

We learned on Friday that for the first time since 2009, the number of people collecting unemployment insurance increased.

With Boris Johnson’s landslide victory in the UK elections it seems all but certain that Great Britain will leave the EU by January 31st. Terms remain to be negotiated, but based on the overwhelming support Johnson received, he has the backing of Parliament and the country to proceed.

December 13, 2019

Right after the stock market opened, President Trump tweeted the following: “Getting VERY close to a BIG DEAL with China. They want it, and so do we!”  And with that tweet stocks zoomed higher. The deal was confirmed later in the day, although it is being reported that no details will be released and there will be no signing ceremony. Rumors are China will buy up to $50 billion in agricultural goods in exchange for no increase in tariffs. The chart below shows that $50 billion is significantly more than China’s purchases of US agriculture over the last decade. CLICK TO ENLARGE

Long term bond yields rose sharply as a trade deal means further Fed stimulus is less likely as economic “uncertainty” will diminish. The yield curve steepened yesterday on the trade deal announcement and is further helped by the Fed’s new stance on inflation. Because the Fed is wanting for more inflation, the market  is pushing longer term yields higher, while short term yields remain tethered to the Fed’s Feds Funds Rate which is unlikely to rise or fall in the near term.

Lost in the trade news was weak economic data. Jobless Claims surged higher from 203k to 252k. It is worth reiterating that this data point is volatile and we should not make any presumptions based on one weekly reading. However, the increase is big enough to take notice, especially given signs of labor weakness in corporate and consumer surveys.

PPI, was weaker than expected, posting no change on a monthly basis and a 0.2% decline in the core (ex food and energy) reading of producer inflation. Retail Sales will be released at 8:30 this morning. The current estimate is for a gain of 0.5%, following last month’s 0.3% rise. This number is one of the key indicators used to assess the health of the consumer. As noted, personal consumption has largely offset weakness in other sectors of the economy. Consumption accounts for nearly 70% of GDP.

The Fed announced plans to provide an additional $365 billion of repo funding that will cover banks over year end. Typically year funding can be tight due to year end capital requirements. The Fed must concerned that this year end could be particularly troublesome.


December 12, 2019

Headline CPI came in one-tenth of a percent higher than expectations at +.3% monthly, and +2.1% year over year. Core CPI, excluding food and energy, was as expected at 2.1%. Given the Fed is taking a more pro-inflationary stance then what we have witnessed over the last few decades, this economic data point is less relevant than it had been. They will largely turn a blind eye to inflationary pressures that may arise, especially when inflation running below 2% as it is.

As expected the Fed left rates unchanged. They did make a few noteworthy changes that are worth mentioning. For one, the Fed removed the term “uncertainties” in regard to their outlook. Also of note 13 of the 17 Fed members predict no rate changes in 2020. Interestingly, the other four think the Fed will hike rates next year.

“We can sustain much lower levels of unemployment than had been thought and that’s a good thing because we don’t have to worry so much about inflation. The quote from Powell in his post meeting press conference provides further evidence that the Fed believes they can push on the economy harder without fear of employment causing inflation. Given that we are at 50 year lows in unemployment and inflation is scant tells us either unemployment isn’t as low as reported, or this time is different.  We doubt this time is different.

In general, Powell reiterated the minutes from the Fed meeting in stressing that the Fed is not concerned with the economic outlook. He also mentioned, that if needed, the Fed would purchase longer term Treasury securities making the current QE operation more permanent. The media avoided asking him tougher questions on the repo funding issues or QE4 operations and the questions they asked were largely swept under the rug by Powell.

The dollar was weaker while stocks, gold, and bond prices rose, telling us that the market interprets the press conference and meeting as dovish.

December 11, 2019

Zoltan Polzar, a well followed Fed and Banking analyst at Credit Suisse, is making headlines in regards to his thoughts on the Repo funding situation. He claims that reserves and regulatory constraints are “shaping up to be a severe binding constraint.” To paraphrase- The Fed’s repo and QE4 operations, as currently being administered, are papering over a much bigger problem. He thinks the Fed will be forced to do much more extensive QE before year end.

This morning we published our thoughts on the topic- When It Becomes Serious You Have To Lie – Update on the Repo Fiasco.

In part due to skyrocketing pork prices, food prices in China have risen 19.1% year over year. In addition to hurting consumers, inflation makes monetary stimulus harder for the Bank of China to administer as it is inflationary. From a trade perspective, consumer inflation will likely be one factor that pushes Chinese leaders to come to some sort of Phase One agreement. Not surprising, there were numerous press releases yesterday claiming that a delay of the December 15th tariffs is a strong possibility.

The Fed will report on monetary policy at 2pm, followed by Jerome Powell’s press conference at 2:30. Given the new attention to repo funding and QE, we will be on the look out for any changes to their daily repo/QE4 liquidity operations or proposals for how they might address the issues in the near future. We suspect the media will ask a lot of questions on this topic.

CPI will be released at 8:30 and the current estimate is for a 0.2% increase both in the core (ex food/energy) and the headline number.


December 10, 2019

The Bank of International Settlements (BIS) reported that the overnight repo problems of the last few months might stem from the reluctance of the four largest U.S. banks to lend to some of the largest hedge funds. The four banks are being forced to fund a massive surge in U.S. Treasury issuance and therefore reallocated funding from the hedge funds to the U.S. Treasury.  Per the Financial Times in Hedge Funds key in exacerbating repo market turmoil, says BIS: “High demand for secured (repo) funding from non-financial institutions, such as hedge funds heavily engaged in leveraging up relative value trades,” – was a key factor behind the chaos, said Claudio Borio, Head of the monetary and economic department at the BIS.

In the article, the BIS implies that the Fed is providing liquidity to banks so that banks, in turn, can provide the hedge funds funding to maintain their leverage. The Fed is worried that hedge funds will sell assets if liquidity is not available. Instead of forcing hedge funds to deal with a funding risk that they know about, they are effectively bailing them out from having to liquidate their holdings.

In addition to the Fed’s monetary policy meeting and press conference on Wednesday, UK elections on Thursday, and the 12/15 China tariff deadline, is a good amount of important economic data slated for release this week as follows:

Last week we were amazed by the large gap between the ADP and BLS labor reports. After  some research we discovered that weakness in small business jobs growth is the predominant cause. Because ADP services many small businesses they are quicker and more accurate in reporting changes to small business payrolls than the BLS. The divergence of data is also supported by the NFIB’s (Natl. Federation of Independent Business) employment measure which is also weakening. While the effect on the overall BLS jobs number is not big as it is for ADP, the BLS does show weakness in small businesses. From January to November, the year over year growth in hiring at small employers (1-19 employees) has shrunk from 1.2% to 0.1% while hiring growth at large employers (1000+) has grown from 1.8% to 2.1%. The concern with this finding is that smaller business are more sensitive to business cycles and quicker to react to changes than larger, more bureaucratic companies.


December 9, 2019

The BLS employment report exceeded all expectations, registering a gain of 266k new jobs. Of the 50+ economist estimates that comprise the consensus forecast, the highest one called for a gain of 210k new jobs. Also positive, the unemployment rate fell from 3.6% to 3.5%, although that is partially the result of the participation rate dropping from 63.3% to 63.2%. The GM strike resolution added the 41k jobs that were taken away in the prior month.

This will be a busy week. On Wednesday the Federal Reserve meets to discuss monetary policy. No changes to interest rates or the balance sheet are expected but their comments on growth and implications for policy should be informative. On Thursday, Great Britain will go to polls to elect a prime minister. The biggest market mover may be the December 15th deadline on tariffs. We suspect this week will be filled with many official and unofficial comments as well as plenty of rumors. While it appears that some sort of deal is likely to be agreed upon, there is also a decent likelihood that no deal is reached and the trade war escalates rapidly.  Buckle up it should be a fun week.

In numerous commentaries we have discussed the role that the Fed Balance sheet (QE/repo operations) plays in pushing asset prices higher. The following graph puts the current balance sheet expansion into context with the prior episodes of QE. It is truly stunning to consider that QE4 is on the same pace as QE1. QE1 occurred during a recession and with the financial system melting down. At the time major banks and financial companies were in danger of failing. We still have yet to hear a viable rationale for why QE4 was abruptly started. We will have more on this topic in an article coming out on Wednesday.   CLICK TO ENLARGE



Due to many requests, we have now added the ability to ADD CASH to the TRANSACTION BASED portfolio.


Click To Enlarge Image


December 6, 2019

China is supposedly waiving some tariffs on soybeans and pork. This is hopefully a step in the right direction towards a resolution before U.S. tariffs go into effect on December 15th.

Yesterday we discussed the sharp decline and weakening trend in payrolls as reported by ADP.  Jobless Claims bucked the trend and fell sharply from 218k to 203k. The Claims report is making it difficult to figure out the labor market. Private labor market indications such as ADP, NFIB, and various independent surveys point to a definitive weakening trend that the BLS has not picked up on to any large degree. However, it is worth noting that BLS data tends to lag by a few months so we may have to continue to wait for another month or even more to assess which data source is correct. We also remind you that BLS data is sharply revised up and down years after it is first reported. For example, in August the BLS announced that they will revise 2018 payrolls down by 501,000 jobs.

Today BLS jobs report will be released at 8:30. The current expectation is for a gain of 180k jobs and an unemployment rate of 3.6%. That compares to last months readings of 128k and 3.6% respectively. Keep in mind payroll growth was reduced last month by over 40k jobs due the GM strike which has since been resolved. The data report should include the GM jobs which will boost the number by over 40k jobs. The two month total gain will compensate for this and should be correct. Our labor model estimates much weaker growth of 110k jobs.

German Industrial Production fell 1.7% last month and now stands at -5.3% year over year. While some global manufacturing data has turned higher this is not a good sign for global trade.

As shown in Today’s Chart of the Day, the year over year change in both exports and imports is declining. The trade deficit declined from -$51.1 billion to -$47.2 billion as a result of imports declining more than exports.

December 5, 2019

The ADP Employment report was much weaker than expectations coming in at 67,000 versus an estimate of 156,000. That compares to the consensus estimate for the Friday BLS report of 180,000. Our model based on ADP and temporary hiring, estimates the BLS will report payrolls growth of 110,000. For what its worth our model has been within 25,000 of the BLS number on average for the last six months. Even if our estimate is low by 25,000, the jobs number will still be  disappointing. To reiterate a big theme of ours, economic growth has been largely supported by the consumer. Any weakness, or perceived weakness in job growth, is likely to spill over into consumption trends and could be problematic for economic growth. Today’s Chart of the Day provides perspective on the slower employment growth trend from the ADP report.

The ISM non-manufacturing survey also disappointed coming at 53.9 versus 54.7 last month and expectations of 54.5. The index is now at a ten year low after being at a 15 year high only 9 months ago. For a different perspective, the following graph, courtesy Brett Freeze, shows that the year over year change in this survey has fallen to levels seen during the prior two recessions.  CLICK TO ENLARGE

Despite the weak economic data stocks had a good day, fueled by rumors from an anonymous source that trade talks were progressing. The volatility over the past few days highlight how trade talks are a double edged sword for investors. We think it is important to not overly focus on press reports, government statements, and even rumors, but at the same time be aware that many traders and algorithms are keying on these statements and they can have a big impact on the markets.

December 4, 2019

Fox reported that the administration is planning on moving ahead with tariffs on December 15th. The combination of Trump’s admission that a deal may be postponed until after the election along with the December 15th tariffs caused the S&P 500 to fall by over 40 points. By the end of the day the losses were cut in half, closing the day at 3093.  To put the recent decline and current price level in context, the S&P closed at 2938 the night before Phase One of the trade deal was announced.

This morning an unnamed source said the trade talks were going well and with that, the S&P 500 is set to open 15 points higher. Rinse-wash-repeat…

Since last Friday, the VIX volatility index has increased from 11.50 to an intraday high of 17.50. It is approaching the range (18-25) where it has stalled and reversed numerous times over the past 9 months. We will watch VIX trading closely for signs that either the sell-off is abating or that it may break higher. A break above 25, especially if sustained, would be concerning.

The ADP jobs report will be released at 8:15am. The consensus is for an increase of 156k jobs which is about 25k higher than last month. Keep in mind however, last month was reduced by 42k due to the GM strike which has since been resolved. With this number in hand we will run our model and provide a prediction for Friday’s important BLS jobs report.

Following the weak ISM Manufacturing Survey on Monday, all eyes will be on the ISM Non-manufacturing Survey. Current estimates call for a small decline from 54.7 to 54.5. A sharper decline, getting the index closer to 50, would cause concern as ISM has a strong track record in signaling economic activity.



December 3, 2019

This morning the following headline hit the wire: TRUMP SAYS I HAVE NO DEADLINE ON CHINA DEAL AND IT MIGHT BE BETTER TO WAIT UNTIL AFTER NOVEMBER 2020 ELECTION. We will now wait and see what happens on December 15th, when the suspension of tariffs is scheduled to end.  The S&P 500 looks to open about 10 points on weaker on the news, following a 1% decline over the prior two sessions as such a result was becoming more likely.

The U.S. ISM manufacturing survey was disappointing on Monday, coming in at 48.1 versus expectations of 49.2 and a prior reading of 48.3. This follows the encouraging PMI manufacturing survey which rose last Wednesday and better manufacturing surveys from other nations. The employment component within the ISM report dropped further signaling the potential for weakness in Friday’s employment report. The new orders component has dropped and is now at its lowest level since June 2012.

China’s Caixin manufacturing survey rose above 50 and into economic expansionary territory (50.2 from 49.3), while the non-manufacturing survey is showing robust readings at 54.4 vs 52.8 last month.  Given China drives about a third of global GDP growth, this is an encouraging sign for a turnaround in weakening global growth. The only potential drawback is that the improvement of China’s economy allows the government to take a harder stance on trade which could re-introduce more tariff threats and/or actions.

Trump raised the prospect of steel tariffs on Argentina and Brazil. Last Tuesday Brazil signed an agreement with China allowing them to export  soy products to China. This is the first time they have been able to sell agricultural products to China in decades. Argentina signed a similar deal in September. These tariffs are likely a warning to those countries. China has been trying to diversify other products in addition to agriculture. Our friend Mike “Mish” Shedlock recently wrote about similar actions that China is taking in regards to the production of cell phones- China No Longer Needs U.S. Parts in its Phones.

The Fed is considering allowing inflation to run above its target of 2%. In an article released yesterday by the Financial Times, (LINK) the Fed’s review of monetary policy is likely to include a rule that allows them to overshoot their inflation target after a period of undershooting. As we mentioned after the last FOMC meeting, the Fed is making it abundantly clear they want more inflation and will not raise rates if inflation picks up. Bond yields rose on the news.


December 2, 2019

The ISM PMI manufacturing survey will be released at 10am this morning. Expectations are for the survey to remain in economic contraction territory (<50) but rise from 48.3 to 49.1. The ISM non-manufacturing (services) survey will be released on Wednesday. Also of note this week will be the ADP jobs report on Wednesday and the important BLS employment report on Friday.

Currently there is a near zero percent chance of a rate cut at the December Fed meeting and only a 25% chance of a 25bp cut by April.

In September, the 2yr/10yr Treasury yield curve went from -5bps to +27bps. Since then, it has flattened back to +15bps. We believe it can flatten further, but with the Fed currently doing QE and having reduced rates by 75bps, we think the market will be quick to price in further rate cuts if economic data weakens or the China/US trade deals falls apart. As such, we continue to think any inversion will be limited and that over the longer term the curve will steepen significantly.

The Atlanta Fed GDPNow forecast for Q4 GDP has risen sharply from 0.4% in mid-November to 1.7% as of last Wednesday due to the encouraging economic data released over the past week.


November 29, 2019

Economic data on Wednesday was better than expected but with some important caveats as follows:

President Trump signed the Hong Kong Bill of Rights and Democracy Act on Wednesday night. The Chinese quickly responded with strong rhetoric denouncing the bill which call trade talks into question. Despite Trump’s actions, the S&P 500 is only slated to open down 6 points. Trump had a week to discuss the bill with China so it is possible that any harm has been largely resolved. That said, we should not rule out that the signing will be a huge impediment to trade talks. For consideration- China knows how much Trump cares about the stock market and it therefore raises the possibility that they take actions when the markets are open and liquid today or even next week.

November 27, 2019

Dallas Fed President Robert Kaplan conveyed some noteworthy concerns about debt and leverage in an interview on CNBC. Here are a few quotes from the interview:

Kaplan’s discussion about BBB-rated bond downgrades is potentially a big problem, and one which we believe is greatly underappreciated. We raised the issue in May with our article The Corporate Maginot Line. To wit: “If 50% of BBB-rated bonds were to get downgraded, it would entail a shift of $1.30 trillion bonds to junk status. To put that into perspective, the entire junk market today is less than $1.25 trillion, and the subprime mortgage market that caused so many problems in 2008 peaked at $1.30 trillion.”

Consumer Confidence was slightly weaker than expectations at 125.5 vs 126.9. While the decline is not worrisome, of concern is that consumers continue to see worsening labor conditions. Per Econoday: “those saying jobs are “plentiful” decreased from 47.7 percent to 44.8 percent, while those claiming jobs are “hard to get” increased from 11.6 percent to 12.7 percent.” We suspect this slow, but steady deterioration in the two job survey questions will eventually result in higher jobless claims.

Due to the holiday on Thursday, Jobless Claims will be released this morning. The current expectation is for a decline from 227k to 218k. The 4-week moving average is 221k.

Durable Goods, due for release at 8:30, is expected to decline by 0.7%, following a 1.1% decline last month.

November 26, 2019

The Dallas Fed manufacturing index dropped from +4.5 to -2.4 and has turned negative for the time first time in three years. The regional index is a good barometer of the energy sector.  The last time it was negative, crude oil traded below $30 a barrel. As we discuss below, CCC bond yields are rising of which a good chunk of the increase is due to the energy sector.

Over the past 6 months yields on CCC-rated bonds have been rising while those of other junk rated bonds (B and BB) have been stable. Some in the media believe this divergence to be a signal of brewing corporate credit problems that will soon show up in B and BB rated debt. Over the last 6 months the yield spread, or difference, of CCC rated debt to U.S. Treasuries has increased by 2.63%. At the same time those spreads for BB and B rated debt slightly declined. Such a divergence may seem extreme, but when historical data comparing these spreads is examined, as you can see in Today’s Chart of the Day, the differential is not statistically significant.  The current intersection of CCC and B rated yields is represented by the orange dot. Based on the strong regression (R2=.85), B spreads would need to rise by 0.29% to normalize to the historical relationship. BB spreads would need to increase by 0.74%. Neither move would be overly concerning.

What is more interesting is divergence between the S&P 500 and CCC rated spreads as shown below. CLICK TO ENLARGE.

Of note on the economic calendar is Consumer Confidence at 10am, Durable Goods and Jobless Claims on Wednesday and Chicago PMI on Friday. The stock markets will be closed on Thursday and close early at 1pm on Friday.

November 25, 2019

Of Friday we published an Update to our RIA Pro article- UPDATE: To Buy Or Not To Buy- An Investors Guide To QE4 in which we discussed the possibility that QE4 could be modified or curtailed.

Based on the recent speeches of Jerome Powell and other Fed members, we sensed a growing concern for increased Federal and corporate debt levels along with higher stock valuations. Prior to Friday, there were only a few of us voicing such concerns. On Friday this changed, as CNN published The $4 trillion force propelling US stocks to record highs. The fact that such a broadly followed non-financial media outlet made this insinuation, linking QE to stock market prices, will certainly catch the Fed’s attention. As we posited in our updated article, the Fed may unexpectedly alter QE4 to the chagrin of the market.

The Consumer Sentiment index improved again and is back to the same levels of mid-summer. Expectations led the improvement in the index while the current conditions component was down.

Jerome Powell will speak at 7pm tonight. We are interested on his thoughts about QE and repo as well as the Fed’s newfound concern with downside economic risks as mentioned in Thursday’s Commentary.

November 22, 2019

Weekly jobless claims registered at 227k, 10k above estimates and at the same slightly elevated level as the upwardly revised number from last month. This is a historically small number of jobless claims, but it has been rising recently. While the number of new claims is small, what concerns us is the rate of change. The chart below shows that the year over year change in continued claims (new and old claims), turned positive for the first time in this economic expansion. Positive readings have preceded all prior recessions since at least 1970, but it’s not a full-proof indicator as there have  been a number of false signals.  CLICK TO ENLARGE

The Philadelphia Fed survey on manufacturing conditions rose in a possible sign that manufacturing in the Mid-Atlantic region is recovering.

Leading Economic Indicators rose 0.3% year over year, which is the slowest rate of growth in a decade. The last 5 times the index went from positive to negative growth on a year over year basis resulted in four recessions (2008, 2001, 1990, and 1981) and one false signal (1996). On a monthly the basis the indicator was negative for the third month in a row. Since the data was first calculated in 1959, three consecutive monthly declines occurred 11 times and 7 of those 11, were followed by a recession within 6 months. Needless to say, this indicator is flashing a warning sign.

There are a couple of leading indicators that are not widely followed which have caught our attention recently. The daily Baltic Dry Index, which measures dry bulk shipping costs, has fallen sharply since the beginning of the fourth quarter. The index was rising throughout the first three quarters of the year. Lower shipping costs are in part the result of weakened demand for shipping as global trade is weak. The pickup in the first few quarters was likely a function of inventory stocking to front run potential tariffs or other trade restriction.

The other indicator is the Citi Economic Surprise Index. This measure quantifies whether economic data is coming in better or worse than a consensus of Wall Street economists. During the third quarter the index rose sharply, meaning economists were underestimating the pace economic activity. However, over the last month or so, it has fallen back below zero, a sign that economic data is in general coming in weaker than expectations. For the last few weeks we have heard many in the media claim the Fed has successfully avoided a recession or economic slowdown. Might they have spoken a little too soon?

Per the South China Morning Post- “China Watching Donald Trump’s Response To US Hong Kong Bill As It Threatens To Become New Barrier To Trade Deal.”

November 21, 2019

According to Reuters, Phase One of the China/US trade deal is unlikely to be signed this year. The market sold off sharply on the news but regained more than half of the losses by the close. As discussed yesterday, the passing of the Hong Kong Human Rights and Democracy Act is probably making difficult negotiations even more trying. Indications are that the President will sign the act. As we are publishing this a rumor is circulating that China invited the U.S. to Beijing for trade talks.

On Wednesday afternoon, the Fed released the minutes from the October 30th FOMC meeting. Of note, the minutes stated “many Fed officials view downside risks as elevated.” This was clearly a departure from the language used in the FOMC statement as well as the words of Jerome Powell following the October meeting. In both instances, we were lead to believe that the balance of risks was even and in fact, downside risks had been reduced over the prior month or so.

We believe that the meeting between Powell and Trump was probably a heads up to Powell to let him know the China trade deal is running into problems. The change in the Fed’s tone gives them leeway to provide even more stimulus if need be.

Target and Lowes reported strong earnings on Wednesday. Contrary to Home Depot, Lowes increased their sales forecast for the coming quarters. Unlike Kohls and Home Depot, today’s earnings news paints a healthy picture of the consumer.


November 20, 2019

Home Depot (HD) traded 5.50% lower on a weak quarterly earnings report. While earnings exceeded expectations, sales and same store growth missed expectations. Further the company revised Q4 earnings lower.  Sales for HD are highly dependent on personal consumption. As such this provides a clue that all may not be well with the consumer. Contrary to this data, home builders seem to believe consumers are able and willing to buy. Housing building permits are now at 12 year highs. Kohls (KSS) also cut their outlook in another warning about the health of the consumer. KSS fell by almost 20% yesterday.

The equity markets were largely unaffected by the news from HD and KSS as QE and FOMO appear in charge for the time being.

According to the American Staffing Association, the Temporary Staffing Index has declined sharply throughout this year and now stands at its lowest level in ten years. Reductions in temp staffing tends to be a first step employers take to reduce costs when they anticipate a slowdown. This index, at times, is a leading indicator of changes in payrolls and the unemployment rate.

Yesterday, the Senate passed the Hong Kong Human Rights and Democracy Act by unanimous consent following the House which had already passed it by unanimous consent. Given the veto-proof majority, Trump will have to sign the deal, which supports the protestors. This could greatly complicate trade talks.

The Treasury announced that foreign holdings of U.S. Treasury securities declined by 1.2% in September. As we have discussed foreign accounts used to account for about a third of Treasury securities purchases, making debt sales easier. Today, they are net sellers and, at the same time, the supply of debt has risen sharply. You can read about this troubling situation in our article Who Is Funding Uncle Sam?

November 19, 2019

As the riots and protests escalate in Hong Kong, it worth reminding you Hong Kong is the world’s third largest financial center, only behind New York and London. The increasing possibility of major disruptions to the flow of funds in and out of Hong Kong will have an impact on global markets and trade. Another thing to consider with Hong Kong is that any U.S. support for Hong Kong is problematic for the Chinese. If the U.S. officially starts siding with Hong Kong and openly provides support to the protesters, we expect trade negotiations will suffer greatly with any trade talk failures likely resulting in increased tariffs. Not surprisingly, on Monday morning, after two days of a well publicized standoff at a University,  it was “leaked” that Chinese government officials are pessimistic about a trade deal. Further, they are considering postponing any discussions until the U.S. election occurs.

President Trump, Treasury Secretary Mnuchin, and Fed Chair Jerome Powell unexpectedly met on Monday morning. The timing is interesting given a potential breakdown in trade talks.

The economic data front this week will be quiet. Of note is Jobless Claims, Philly Fed Outlook, and leading indicators on Thursday, followed by the PMI composite FLASH and Consumer Sentiment on Friday. There are not many speaking engagements scheduled for Fed members.

Over the past week we have warned that the major equity indexes are at grossly overbought levels. As shown in Today’s Chart of the Day, the S&P 500 has now reached MACD (moving average convergence/divergence) levels that have been hit seven times since 2018. The correction from each prior instance was at least 5%. We are now at the 8th instance and the only question in our mind is not if but when. Last Tuesday we hedged a portion of our equity exposure against such a sell off. We may add to the position on further market strength.


Do to popular request we have added a TRANSACTION BASED portfolio (MyPortfolio New) which now allows you to enter a starting cash balance and buy and sell positions for tracking purposes (same as the RIAPro Portfolios)

The previous portfolios (MyPortfolio Snapshot) remains for a simpler portfolio tracking system along with the Watchlist.

We have also added a new feature which allows you to enter MULTIPLE BUY/SELL Orders at one time when managing your portfolios.

We have lot’s of other new features coming from backtesting to Guru Portfolios so stay tuned for more updates.

November 18, 2019

Not surprisingly Hong Kong’s GDP fell by 3.2% in the third quarter and they officially entered a recession. While much of the weakness is due to the protests and the toll it takes on consumption and tourism, the China-U.S. trade war is also weighing on economic activity.

Retail Sales were slightly better than expectations (0.3% versus 0.2%) but the closely followed core data which excludes autos and gas, was only up 0.1% versus expectations for +0.3%. This number is important to follow as strength in personal consumption has thus far outweighed weakening in the manufacturing sectors and slow global growth. Signs of weakening consumer demand, especially if accompanied by a pickup in job layoffs, will increase the odds of a recession greatly.

Industrial production fell by 0.8% and the capacity utilization rate fell to 76.7% both much worse than expected and a further indication the manufacturing sector is struggling. Despite the increase in the price of oil, import and export prices declined 0.5% and 0.1% respectively. On an annual basis import prices are down 3% and export prices down 2.2%.

After Friday’s spate of weak economic data the Atlanta Fed reduced their Q4 GDP forecast from 1% to 0.3% in-line with the New York Fed at 0.4%. Despite the bad news and lower growth trajectory the markets rallied to even greater overbought levels. Clearly QE is in the drivers site while little else seems to matter.


November 15, 2019

Jobless claims jumped from 211k to 225k. One higher than expected weekly number certainly does not make a trend, but this data point is worth paying attention to in the weeks ahead. Unlike CPI, PPI was stronger than expectations but like CPI the year over year rate excluding food and energy was lower than the prior month. Core (ex food/energy) CPI and PPI is relied upon heavily by the Fed for inflation guidance.

On Thursday’s Real Investment Show podcast, Lance Roberts and Michael Lebowitz talked about inflation and the ways in which the government consistently modifies inflation calculations to help keep inflation readings lower than the real rise in prices. In particular Shadow Stats was mentioned. Shadow Stats simply recalculates CPI using the same exact price data in the BLS reports, but uses the formulas that were used in 1980. As shown in Today’s Chart of the Day, CPI using Shadow Stats logic is now running at about 10% a year versus the current CPI run rate of 1.5-2%. While inflation is impossible to calculate to a single number for a large population with diverse needs and demographics, we believe an approximation of inflation lies between the two calculations shown.

Beyond the current gap between the two lines, what we find to be very interesting is the trends of the two calculations. CPI (red) has been flat to declining, while the Shadow Stats figure (blue) has been flat to inclining. We tend to agree with Shadow Stats that prices in aggregate are rising, which helps explain why so many Americans find themselves in debt and living pay check to pay check.

Jim Bianco, of Bianco Research, recently presented the graph below. As shown, Fed Funds have been trading about 5-10bps below the mid point of the Fed Funds target range. Prior to the recent funding problems and liquidity operations by the Fed, Fed Funds traded 5-10 above the mid point. Jim’s takeaway is that maybe the Fed has supplied too many reserves to the market. If he is correct, Fed Funds should continue to trade at an increasingly greater distance below the midpoint. Might there be another purpose for QE?  CLICK TO ENLARGE

November 14, 2019

CPI was higher than expected by .10% on a monthly and annual basis. The increase was largely due to rising oil prices. The annual change in CPI less food and energy fell by .10% versus last month. MBA mortgage applications were strong last week. This is not necessarily an indication of a stronger real-estate market, but most likely buyers rushing to lock in mortgage rates on fears they will increase further. Such activity is typical when rates rise after a period of low rates.

Japan’s GDP rose 0.2%, well below expectations for 0.8% growth and last quarters 1.8% growth. Germany narrowly avoided a recession as their GDP climbed 0.1% versus an expected 0.2% decline.

The key line from Chairman Powell’s Congressional testimony yesterday was the following as reported by Reuters- “Powell repeated in his testimony that the Fed was unlikely to use its remaining capacity to cut rates unless there is a “material reassessment of our outlook.” 

In addition, Powell upgraded the Fed’s economic forecast, as they believe the odds of any further slowdown are diminished. The takeaway is that rates will not be reduced further, barring a sharp downturn in economic activity.  Currently, a full 25 basis point rate cut is not priced in until the fourth quarter of 2020. There is less than a 50% chance the Fed cuts by April 2020. Based on his statements about inflation and Fed policy from the prior FOMC meeting, the odds of rate hike are slim.

On the topic of Federal Deficits, Powell warned that rising debt levels could impair the government’s ability to boost economic activity during a recession. He also mentioned, correctly, that high government debt levels restrain private investment which has a negative effect on productivity and by default economic growth. This is an important topic that we have written numerous articles on.

Neel Kashkari, quite possibly the most dovish Fed member on the board, was quoted as saying he is “feeling better about the economy.” This is a good indication that those members who voted for more rate cuts than the Fed delivered are starting to coalesce with the Fed view that they are done cutting rates for the time being. If this continues it will make Powell’s job of forming a consensus at the Fed much easier.

November 13, 2019

The NFIB (small business optimism index survey) rose to 102.4 from 101.8, but remains down from the 106.7 average in 2018. There was good news on the small business employment front as there was an increase in the number of those that responded that they are increasing hiring plans and compensation. Small businesses are the largest employers in the U.S.

As we have discussed in prior articles and commentaries, QE has sparked a buying frenzy.  A recent Bank of America survey of fund managers “finds investors have traded fears of recession for the FOMO (fear of missing out).“- Per CNBC.  The question we need to stay on top of is- will improved confidence in the stock market translate to an uptick in economic confidence and ultimately economic activity?

Keep an ear out for Jerome Powell’s testimony to Congress today and tomorrow for more clues about monetary policy and the overnight funding situation. Also on today’s agenda is CPI. Current expectations are for a +0.3% m/m change and a +1.7 y/y change.

The market got a slight boost yesterday afternoon on a new proposal by Donald Trump to cut the middle class tax rate to 15%. The odds of such a proposal passing the Democrat led House are near zero, but we suspect similar types of tax cuts will also be proposed by Democratic presidential nominees.

Interesting fact- The Dow Jones Industrial Average was unchanged yesterday. The last time the index registered a zero change was in May 2007.

November 12, 2019

Britain’s GDP grew by 0.3% for the third quarter, and at the slowest annualized pace in almost ten years. No doubt concerns over a hard BREXIT and trade weighed on economic activity for the quarter. The market expects a weak, but positive GDP reading from Japan on Wednesday and the possibility of Germany posting a second straight negative GDP, meaning they will be in a recession.

Today’s Chart of the Day compares China’s Hang Seng Stock Index to the S&P 500. The two indexes have tended to be well correlated on a daily basis, yet the S&P is in an uptrend while the Hang Seng is trending lower. Note the Hang Seng has been making lower highs and lower lows since peaking in April, while the S&P 500 has done the opposite.  On Monday, the Hang Seng was down nearly 3% while the S&P was only down .25%. Will the S&P 500 follow the Hang Seng in the days to come?

Fed Member Neel Kashkari speaks tonight and again on Wednesday. He has been one of the more outspoken doves, pushing for aggressive rate cuts. Given the Fed’s new wait and see approach for further rate cuts, as relayed by Chairman Powell at the last FOMC meeting, it will be telling to see if Kashkari moderates his stance. If he does appear less dovish, it would a good sign that Powell may have corralled Fed members into a more united front.

On Monday, Bloomberg released an Odd-Lots Podcast interview with Zoltan Pozsar of Credit Suisse. The interview is worth a listen as it provides great insight into the recent surge in repo funding costs and the new QE operation.


November 11, 2019

Consumer Sentiment was on top of expectations and at a similar level as last month. Of note, those voicing concern over the pending impeachment were “virtually non-existent” while a quarter of those surveyed said tariffs were a concern.

Since early September, 10-year Treasury yields have risen by nearly 50 basis points. As a result of longer term bonds rising while shorter term bonds remain somewhat anchored to the Fed Funds rate, the yield curve has steepened. Currently the 2yr/10yr curve is +26 basis points, over 30 basis points steeper from the slight curve inversion experienced in late August.

Economic data this week will be sparse but meaningful. On Wednesday and Thursday the BLS will release CPI and PPI respectively. The current expectation for CPI is for a 0.1% increase while PPI is expected to fall by 0.3%. Following last month’s weak Retail Sales, expectations remain poor with retail sales expected to fall by 0.4%.

Chairman Powell will testify to Congress on the state of monetary policy and economy on Wednesday. We suspect he will face a lot of questions on the repo situation and the new round of QE. Elizabeth Warren has accused banks of creating liquidity problems in an effort to push for a relaxation of regulatory and capital measures. She and others are likely to revisit this charge with Mr. Powell on Wednesday.

The markets will most likely be quiet today as the bond markets are closed for Veterans Day. For all those who served, we thank you.



As referenced in our weekly newsletter, here is the referenced report on QE-4:

Click The Image To Read

November 8, 2019

Jobless Claims fell slightly to 211k from 219k, showing no signs of increased layoffs. We remain in limbo as to whether the survey data alerting us to labor concerns from employers and employees is a leading indicator of the jobs market or simply a false signal. It is worth noting that the jobless claims and the monthly employment data from the BLS tend to lag other indicators by 2-3 months. Thus far it appears that companies are hiring less. The decision to fire people is harder as  skilled workers are hard to find in many industries.

As we have harped on, personal consumption is providing a strong ballast for economic growth. As such, we are on alert for signs that consumption is being impeded by economic concerns or a change in financial conditions. Consumer sentiment, released at 10am today, will help us further asses the mindset of the consumer.

Markets rallied on Thursday morning on talk that China and the U.S. agreed on tariff rollbacks as a precondition to signing the Phase One Trade Agreement. Later that day we learned that there is strong opposition to tariff reductions from Trump’s chief negotiators. The market gave up most of the morning gains as the trade soap opera continues!

The stock market will be open on Monday for Veterans day but the bond markets are closed.

November 7, 2019

Labor productivity fell for the first time in four years due in large part to rising labor costs. An underappreciated culprit in falling productivity levels is the massive amount of share buybacks occurring over the last five years, which has come at the expense of investment. Had corporations invested more into their future earnings power, they would currently be more efficient and better able to offset rising wages. This data is having a direct impact on corporate margins which have been weakening after hitting record levels over the prior few years.

In December 2018 we published DIY Market Forecast, in which we quantified the positive impact on stock returns from rising profits margins (shown below). If profit margins are indeed falling and revenues are relatively flat, the expansion of valuations, which are already at record highs, is the last leg holding stock prices up.  CLICK TO ENLARGE

We elaborate further on labor costs and profit margins in Today’s Chart of the Day, courtesy of John Hussman. His graph shows that profits margins are very well correlated to the ratio of labor costs to prices (GDP price deflator). As labor costs rise faster than general prices, corporate profit margins tend to decline. Simply, labor costs are rising faster than corporations ability to pass on higher prices to consumers.

Ray Dalio who manages the world’s largest hedge fund just released a short, but very important, piece about the current stance of monetary and fiscal policy and its consequences. We urge you to give it a read-  The World Has Gone Mad And The System Is Broken.

Confidence in Phase one of the trade deal appears to be waning.  The signing ceremony for the deal is now being delayed until December as deal terms and a venue/date are being negotiated. That said it appears that Trump is willing to phase out tariffs, which is a key sticking point for the Chinese.

November 6, 2019

In yesterday’s Chart of the Day we showed that there is currently a record number of short positions in VIX futures, attesting to the zealousness in which traders are piling into the stock market.  Today’s chart of the day, highlighting the put/call ratio provides more evidence. These charts, and other data we follow, provide a strong signal that a short term correction is overdue.

Yesterday, the Fed transacted $31 billion of overnight repo. The amount of daily repo being used by the banks has been declining recently. The reduced daily amounts are not necessarily a sign that the funding issues have been resolved, but likely due to the fact that new QE operations are increasingly replacing the overnight repo liquidity.

The trade deficit declined in September in part because of reduced trade with China. The U.S. exported more oil than it imported, representing the first surplus in this category since data was first collected over 40 years ago.

ISM-services beat expectations as the service sector continues to remain in economic expansion and, along with personal consumption, is more than offsetting the decline in manufacturing. The lesser followed PMI services index was also above 50, but, unlike the ISM survey, came in slightly below expectations. Within the report was an interesting comment from Chris Williamson, Markit Chief Business Economist-

“With inflows of new work drying up, firms are relying on previously-placed orders to sustain current output growth, meaning the rate of expansion could weaken further in coming months if demand doesn’t revive. Hence we’re seeing jobs being cut at an increased rate among surveyed companies, with employment falling for a second successive month and to a degree not seen since 2009. Such a weakening of the survey’s employment index will likely feed through to the official jobs numbers as we move toward the end of the year.”

JOLTs data is also pointing to a slowing in the labor markets. Per Econoday:

“Hiring has been keeping pace but job openings, in a possible warning sign of slowing for the labor market, have been on the decline. Job openings fell 3.8 percent in September to 7.024 million, which is the lowest total since March last year and is down 5.0 percent from September last year.

Hirings rose 0.8 percent in the month to 5.934 million and, compared to September last year, were up 4.7 percent. The spread between hirings and openings, at 1.090 million, is the narrowest since February last year.

In a further sign of slowing in the labor market, quits fell a sharp 2.9 percent in the month to 3.498 million which hints at less worker mobility and less pressure on wage growth.”


November 5, 2019

After the barrage of economic data last week we get a few more important figures this week. Today, ISM services sector will be released at 10:00 am. The services sector has offset manufacturing weakness thus far. Expectations are for a increase from 52.6 to 53.5. JOLTS (Job openings and labor turnover survey) will also be released at 10:00 am. We will look to see if recent weakening trends in employment surveys continue. If so, it is potentially an early signal to labor weakness not found in last Friday’s BLS report.  On Thursday, jobless claims and consumer credit will be released, followed by consumer sentiment on Friday.

With the Fed meeting conducted last week, voting Fed members are now allowed to speak to the public.  We look forward to hearing their views on future rate changes, QE, Repo, and the general state of the economy.

Rising equity markets are starting to have the old QE feel to them. Stocks have been rising steadily while volatility has fallen back to historically low levels. At the same time bonds and gold are losing some luster. Within the equity markets, the defensive sectors have taken a back seat to the small and mid cap indexes as well as the higher beta stocks. Today’s Chart of the Day shows that shorts on VIX (equity volatility) futures are at record levels, implying the investors are betting heavily on a rally. This and other indicators of extreme sentiment make us think a correction is due.

From an investment perspective this round of QE is playing out as prior QE episodes did. For more on this please read To Buy Or Not To Buy- An Investors Guide to QE.


November 4, 2019

Payrolls rose by 128,000 in October and the unemployment rate increased from 3.5 to 3.6%. After taking into account the GM strike which reduced payrolls by 42,000, the data was in line with prior months and close to our estimate of 156,000.  Hourly earnings and hours worked met expectations. The only concern within the report is that temporary help service jobs were negative for the first time in nearly three years. Frequently, business owners will stop hiring temp workers or let them go before making decisions on permanent employees. At times it can be a leading indicator.

ISM was weaker than expected at 48.3 but slightly better than last month’s reading. Interestingly, new export orders improved, however employment, new orders, and order backlogs remain at economic contraction levels. Of concern in this report is that the import index is now at its lowest level since 2008. The divergence between GDP and the important index is wide. Are imports being dragged down by the trade war and not a meaningful sign of the economy? Conversely, is the sharp decline in the import index a harbinger of weak GDP readings in the quarters ahead? The graph below shows the widening gap. CLICK TO ENLARGE

Despite the good employment data, the Atlanta Fed cut their Q4 GDP forecast to 1.1% from 1.5%. The revision is more in line with the NY Fed which currently forecasts 0.8% growth in the fourth quarter.

November 1, 2019

Chicago PMI was much weaker than expectations, coming in at 43.2 vs 47.1 last month. The range of estimates from 27 economists was 46.1-53. Today we will look for confirmation of further weakening in the manufacturing sectors when ISM is released at 10am. Expectations are 49.3, an increase from last months 47.8.

Also on the block today is the all important BLS labor report due out at 8:30am. The market is expecting a gain of 90k jobs which is 46k less than last month. The unemployment rate is also expected to uptick from 3.5% to 3.6%. The expected data is weaker than last month in part due to the GM strike which has since been resolved. According to Econoday, the strike reduced payrolls by 50k jobs.

Last week we compared Federal budget deficits to the net amount of debt held by foreigners. Our purpose in providing the data/graphs is to highlight the record funding demands currently being put upon domestic investors. We follow up today with an important point and chart that shows we underestimated the funding problem. Today’s Chart of the Day shows the stated Federal deficit versus the actual government funding needs. The black dotted line is the 3 year moving average which removes volatility to better highlight that the reported deficit has recently been undershooting the government’s true funding needs by $200-400 billion annually. As an example, the stated deficit for 2018 was $980 billion, however the increase in debt, or true funding need for the year was $1.2 trillion.

On the China/U.S. trade front we are getting mixed messages. On Wednesday night China said that they doubt a long term trade deal is possible while Trump is in office.  The next morning, Lawrence Kudlow declared that trade talks are “going smoothly.” With the election coming up in a year, we continue to believe that phase one of the deal is likely all that will be agreed upon. The risk to markets and the economy remains a flare up of tensions resulting in increased or expanded tariffs.

October 31, 2019

ADP came in at the consensus estimate of +125,000. Concernedly, job growth for small firms (1-19 employees) is only growing at .08%, far off the 1-2% growth rate of the last 8 years. Our forecast for the payrolls number on Friday is +156,000. It is worth noting however, that the GM strike will reduce an estimated 40-50k jobs, which when factored in moves our forecast closer to near 100,000 which is close to the consensus forecast of +90,000. Over the last 6 months, our model has missed estimates by 26k on an absolute basis and only 4k on an average basis.

GDP was slightly better than expected at +1.9% fully supported by the contribution of personal consumption expenditures of 1.93%. Simply, the consumer is keeping GDP afloat and that is why our focus is on personal consumption trends and data. Not surprising, business investment (non-residential) was down 3%, in part due to trade war anxieties as well as a focus on stock buybacks and dividends over investment.

As expected the Fed cut rates by 25 basis points to 1.50-1.75%. There were two Fed members that dissented on voting for the rate cut. As shown in the red lined version below, the only change of note is the removal of the phrase “act as appropriate” and new language describing what is motivating policy decisions. It appears they will be more dependent on incoming economic data over the coming months.

Chairman Powell, during his press conference, confirmed the view that the Fed is pausing and may be done with  rate cuts unless economic data weaken. In particular, jobless claims, payrolls, inflation expectations, and retail sales are key data points.  This new stance likely means that any economic data surprises will create market volatility.

The most important line of the press conference came when he addressed the possibility of raising rates. To wit: “I think we would need to see a really significant move up in inflation that’s persistent before we even consider raising rates to address inflation concerns.

Simply the Fed is not raising rates anytime soon.

Happy Halloween!!!

October 30, 2019

Today will be a busy day with the potential for economic data and/or the Fed to move markets.  ADP releases their employment report at 8:15 followed 15 minutes later by the BEA release of Q3 GDP. Expectations for GDP are for a 1.7% increase. Our focus will be on consumer spending with consensus expectations of +2.6% growth. While still a nice growth rate, the expectation is well below last quarters strong pace of +4.6%.

Later in the day at 2pm, the Fed will announce their policy stance followed by Jerome Powell’s press conference at 2:30. The market assigns a nearly 100% chance of a 25 basis point rate cut, and we agree that is the likely result. The bigger question relates to the Fed’s next move. For this, we should get guidance from the FOMC statement and the press conference. Given the Fed has lowered rates twice already, maybe three times after the meeting, and is now pumping the market with liquidity, we suspect they will ease off on projections for future rate cuts. Many Fed speakers, including Powell, have characterized the rate cuts as “mid cycle” and “insurance”, therefore if they continue to forecast more rate cuts it raises into question whether they are much more concerned about the economy than they should be if the economy were just hitting a mid-cycle speed bump. We suspect the media will think the meeting is more hawkish than expected.

As if that wasn’t enough, Apple will report earnings after the close.

Currently, the market is pricing in a 60% chance of another rate cut by the end of March 2020. We can follow changes in the March 2020 Fed Funds contract (current price – 98.54) to see how the market consensus changes following the meeting. Every .01 increase in the price represents a 4% increase in the odds of a cut. The opposite holds true for each .01 decline.

The Case-Shiller 20 city home price index fell last month for only the second time since 2012.

October 29, 2019

The market opened higher and rallied throughout the day. The S&P 500 closed at 3039, a record high. We are watching closely to see if this is a false breakout or if there is more upside to go. Based on prior QE one can easily argue there is another 5% or more upside, however economic and earnings fundamentals along with technical divergences leave us concerned. Regardless of fundamentals we remind you that liquidity is a powerful tool.

According to a survey conducted by the National Association of Business Managers (NABE) jobs gains fell to their lowest level since 2012. This is another survey pointing to weaker employment data. Keep in mind, other than slightly weaker growth in payrolls, we are not seeing weakness in jobless claims or the unemployment rate.  Friday’s employment report will be another chance to see if that remains true.

We are about halfway through earnings season and both operating and “as reported” earnings per share are down 3% as shown below. Comparison to the prior few quarters of double digit growth is difficult as earnings growth over the last year was boosted by reduced tax rates due to the changes to corporate tax laws. CLICK TO ENLARGE

The Chicago Fed National Activity Index was reported at -.45. The index has a strong correlation with GDP, which is not surprising as it is calculated with 85 measures of economic activity. Based on yesterday’s level, GDP should be at 2%. A reading of approximately -1.50 would correlate with zero GDP growth. The BEA will release Q3 GDP on Wednesday and the current expectation is for +1.7% growth.

There will be a heavy dose of economic data releases this week. Of the most importance will be the following:

October 28, 2019

The S&P 500 is trading higher by about 10 points which puts it in position to set an record high today.

Today’s Chart of the Day graphs the money supply, in particular the M1 -Money Stock. During episodes of QE the Fed did not print money to buy securities, instead they swapped bank reserves for the assets. This is why they pound the table and insist that they did not print money. However, what is left out of the story is that the newly created reserves are then used by the banks to create loans. Keep in mind that all debt is money as anyone who is owed money via a loan has a claim on dollars. The important takeaway, as we begin a new round of QE, is that QE does not create money but it does create the fodder to allow banks to print money. If you notice in the graph the slope of the line has just begun to increase from the prior pace.

As we have discussed personal consumption accounts for almost 70% of GDP. Therefore the odds of a recession in the coming months depends heavily on the state of consumption. We have stated concerns about various surveys and recession headlines but other than recent retail sales data, we have seen little hard evidence the consumer is slowing meaningfully. One area however that is catching our attention are rising credit problems, especially in the credit card and auto sectors. To wit, on Friday Moody’s said that sub-prime auto loans “are souring at the fastest rate since 2008, with more consumers than usual defaulting within the first few months of borrowing.” While subprime auto loans are a relatively small component of consumer lending it does tend to be a leading indicator of credit issues. Stay tuned.

The weekly GDP Nowcast, the New York Fed’s public GDP forecast now stands at +1.9% for the third quarter, reported on Wednesday, and +0.9% for the fourth quarter.

October 25, 2019

Phase one of the China/US trade deal largely rested on tariff relief and an increase of agricultural/hog purchases by China. Yesterday, China committed to purchasing $20 billion of agricultural products from the US. The good news is that the amount is almost double that which China has bought since the trade war started. The bad news is that it is actually slightly below the annual average which they bought from the US between 2014-2017. Needless to say, Phase one of the deal does little to advance trade between the countries.

Durable Goods Orders were weaker than expected, coming in at -1.1% versus consensus of -.7%. The ex-transportation and core numbers were also weaker than expectations. Jobless Claims continue to hum along showing no signs of labor weakness. The four week moving average dropped slightly to 215k.

Median Home Sale prices, shown below, have been declining despite lower interest rates. The Shiller 20 city home price index, while still rising, had dropped to its lowest growth rate in the last 5+ years. While lower mortgage rates have certainly boosted demand, these graphs show the marginal benefit of lower rates is much less than in years past. CLICK TO ENLARGE

October 24, 2019

Today’s Chart of the Day is probably one of the most important macro charts to understand, yet is so underappreciated. The chart highlights that net purchases of U.S. Treasury debt by foreign investors (central banks, governments, corporations, and citizens) have been negative over the last two years. This is occurring as deficits topple the $1 trillion mark. In other words, not only are trillion dollar deficits being entirely funded with domestic funds, but domestic funds must also absorb the foreign net selling. To better understand the implications of this new dynamic, we suggest reading an article we wrote in June titled Who is Funding Uncle Sam?

We believe the funding situation is one causes of the overnight funding issues and the sudden introduction of QE.

Speaking of which, the Fed announced that they will double the size of their overnight repo facility to $120 billion and two week term repos will increase from $30 to $45 billion.

There is a good amount of economic data coming out this morning. Of note is Durable Goods (expectation -.7%), Jobless Claims (+214k), and PMI (composite 50.9, manufacturing 50.5, and services 51.0).

WeWork, which was only a few days away from doing an IPO at a valuation of $47 billion a month ago, now says it would have run out cash next week had SoftBank not purchased it for only $8 billion. WeWork is a reminder that valuations in both the public and private markets are excessive, and in many case unjustifiable.

Later this morning we will release To Buy QE, or Not To Buy QE. The article provides a construct to help you think about the effect that QE 4 may have on asset prices. It uses quantitative measures to project returns based on prior QE, as well as qualitative commentary that points out the differences between today’s environment and those in the past.


October 23, 2019

The Fed conducted their third QE4 purchase yesterday and, like the two prior ones, it was met with huge demand from the major banks. The Fed bid for $7.5 billion of Treasury Bills and received offers to sell over $40bn, resulting in a nearly 6x over-subscription rate. The prior two operations were also over-subscribed by at least 5x, meaning that the banks are still hungry for reserves. Overnight repo continues to trade 10-20 basis points above where it should, which is also a warning that liquidity is lacking and/or a credit issue is looming.

Senator and Presidential Candidate Elizabeth Warren is asking Treasury Secretary Steven Mnuchin for more information on the recent overnight repo funding issues. Her concern appears to be that the banks created or magnified the problems in part to have regulations and capital limits lessened. Per Warren and CNBC- “These rules were designed to ensure that banks have enough cash on hand to meet their obligations in the event of another market crash,” Warren wrote in a letter dated Friday and released Tuesday. “Banks are reporting profits at record, levels, and it would be painfully ironic if unexplained chaos in a small corner of the banking market became an excuse to further loosen rules that protect the economy from these types of risks.”

This election could get interesting from a market perspective if other candidates start questioning what the Fed has done and what they are currently doing.

Poor earnings and earnings outlooks are pushing stocks lower this morning, in particular Texas Instruments (TXN), Caterpillar (CAT), and Chipotle (CMG). Boeing (BA) will report earnings this morning.

October 22, 2019

The administration continues to support the stock market with positive statements regarding trade talks with China. Yesterday morning Lawrence Kudlow told the media that there is a chance that the planned tariff hikes in December will get called off. The S&P 500 closed up 20 points to 3006, which is only 19 points below its all-time high set in July.

With BREXIT still up in the air, Today’s Chart of the Day provides a nice schematic with expected odds for all of the possibilities. Based on the illustration, the odds are clearly in favor of an orderly BREXIT.

CNBC ran an interesting article yesterday based on a letter that Goldman Sachs sent to clients. The article starts: “Corporate buybacks are “plummeting” as companies tighten their purse strings, and it could have a big impact on the market, Goldman Sachs warned.” There is no doubt that corporate buybacks have driven stock prices well beyond valuation norms. We have warned that at some point debt levels will preclude companies from continuing to buy back shares. Combine Goldman’s sentiment with a recent WSJ article accusing bond rating agencies for being lenient on heavily indebted corporate issuers and the tide on buybacks may be turning. The WSJ article is linked HERE.

Third quarter earnings will be a key driver of stocks over the next few weeks. To see what the calendar holds in store, click on the Research tab and then Dividends and Earnings. Then click on a date and below the calendar you will find a listing of companies reporting that day.


October 21, 2019

The BREXIT saga will most likely be extended until February 2020 as Parliament forced Boris Johnson to ask the EU for another deadline extension and the EU delivered. If Parliament cannot pass the deal Johnson struck with the EU over the coming days, a general election will be held.

Japanese and Korean import/export numbers were weak last night attesting to the poor shape of global trade.

Today’s Chart of the Day shows an interesting graph from Crescat Capital.  The difference between inflation (CPI) and inflation expectations has expanded to levels that have only been seen before or during recessions. If we are heading into a recession, we should expect CPI will fall and likely more than inflation expectations, as had happened the past three times the difference between the two was positive. It is important to caution however, inflation is the most underappreciated risk to the stock and bond markets. In an inflationary environment the Fed will need to raise rates and possibly reduce their balance sheet to stem inflation. Such monetary action would not bode well for risk assets that have risen appreciably on the back of ultra-easy Fed policy.

The following appeared in a WSJ article on Friday- “In an Oval Office meeting, there was consensus “the economy was really strong…and that what’s going to get him re-elected…,” said economist Stephen Moore.” The point is, and always has been, that a sitting President has much better reelection odds during a strong economy. We expect, Trump, like many prior Presidents, to do whatever is in his power to boost economic activity and push stocks higher. Whether he can do this or not is the million dollar question.

October 18, 2019

The weekly Jobless Claims data continue to show no signs of trouble in the labor market. The four week moving average increased slightly with new claims rising from 210k to 214k. We will not be concerned until the four week moving average markedly trends higher and new claims broach 250k. It is important to note that BLS employment data tends to be a lagging indicator.

There are five Fed members speaking tomorrow. Most important will be Vice Chair Richard Clarida at 11:30 am. Interestingly, he is speaking at a CFA conference entitled : Fixed Income Management 2019 Late Cycle Investing. Remember the Fed has characterized the recent rate cuts as “Mid-Cycle” adjustments/insurance.  In all 5 speeches close attention will be paid for clues as to the rate decision at the coming October 30th meeting and any more discussion of the overnight funding problems. This will be the last speech before the Fed’s self-imposed media blackout starts on Saturday and continues through the next Fed meeting.

The Wall Street Journal published an article this morning which basically makes the case for the Fed to cut rates by 25 basis points at the coming meeting and then put further rate cuts on hold. The Fed often uses the WSJ and in particular the author of the article, Nick Timiraos, to alert the market to what they are currently planning in regards to policy. The link to the article is HERE.

All eyes will be on the UK this weekend to see whether or not Parliament will accept the BREXIT terms that Johnson and the EU have agreed to.

China’s third quarter GDP fell to 6%, .2% below last quarter and .1% below expectations. The rate of growth is the lowest in over 20 years.


October 17, 2019

Based on news reports this morning it looks like the EU and UK have reached a BREXIT deal. It also appears that Boris Johnson, UK’s Prime Minister, may have enough support to get a BREXIT compromise through Parliament by Saturday. Saturday is a self-imposed deadline for the UK to reach internal agreement. Failing to reach agreement would likely lead to a vote of no confidence and make a BREXIT deal with the EU more difficult to reach before the October 31 deadline. Over the last five days the pound has risen sharply from 1.22 to 1.29 per USD in anticipation of a deal being reached.

The overnight repo markets are again showing some worrying signs. Yesterday, overnight borrowing rates traded 10-15bps higher than where they have been over the prior two weeks. Further, the Fed’s overnight repo operation was oversubscribed to ($80.35bn in bids versus an offering of only $75bn). Given the amount of temporary and permanent liquidity (QE) the Fed is supplying the system, the current increase may be tipping us off to a credit issue and not necessarily a liquidity issue as the Fed leads us to believe.

Retail Sales, a good barometer on personal consumption which accounts for nearly 70% of GDP, was well below consensus forecasts falling 0.3% versus an expected increase of 0.3%. The reading was below all of the 69 economist estimates. Core retail sales, less auto and gas, were flat versus expectations of +0.3% and a prior month gain of 0.4%. The market is clearly keying on incoming data such as Retail Sales for guidance on what the Fed may do. Prior to the data, Fed Funds futures were priced for about a 50/50 chance of a rate cut at the October 30 meeting. The odds rose to 80% after the Retail Sales data.

The Fed’s Beige Book which describes economic conditions across the Federal Reserve districts pointed to continued expansion in most areas. While it mentioned some layoffs in the manufacturing sector its overall assessment of the labor markets was strong.

October 16, 2019

The market surged yesterday on __________ (fill in the blank). It is pointless to search for catalysts or market moving headlines to fill in the blank. Equities opened with a panic bid on the basis of nothing and rallied throughout the day.

The price surge coincides with the first day of QE and that is as good a guess as any to explain yesterday’s rise. It was interesting that the defensive equity sectors, gold, and bonds that were market leaders, lagged yesterday. The price surge and sector rotation trade may be marking the beginning of a new risk-on trade higher as we saw during QE 1, 2, and 3. We will pay close attention to technical resistance levels to help confirm if this is the case so we can act appropriately.

If you are not satisfied with QE as the driver, here the biggest headlines, most of which are not market friendly:

JPM released earnings yesterday and the market focused on the solid overall income numbers yet glanced over disturbing credit news. To wit, Lisa Abromowicz of Bloomberg tweeted the following:

At JPMorgan, charge-offs surged 33% to $1.37 billion from $1.03 billion last year. I’m curious to hear how much this stemmed from either riskier loans or weakening consumer & corporate credit.”

In yesterday’s Chart of the Day we showed the growing divergence in yields within the junk bond sector. In particular, the lowest rated bonds, CCC, have increased in yield, while BB and B bonds have been relatively flat. In response to a subscriber asking us for more data on the topic, we expanded the graph and show it in today’s Chart of the Day. The graph includes the last two recessions as well as investment grade BBB bonds. A few points worth discussing:

It is too early to tell if the rising CCC yields is a harbinger of things to come or a technical gyration due to specific bonds such as WeWork and/or those of energy companies which make up a decent amount of the CCC sector.

October 15, 2019

There were no economic data releases or Fed speakers yesterday due to Columbus Day. Of importance this week will be the release of Retail Sales data on Wednesday and Jobless Claims on Thursday. In both reports we are looking to see if worrying signs in various labor and sentiment surveys is showing up in hard data.  There are also a number of Fed speakers throughout the week so we will be on guard for more clues about the new round of QE and what it might mean for interest rate policy at the coming October 30th meeting.

Having a few days to digest the trade news we have a few thoughts worth sharing. The supposed Phase 1 deal is a good sign as it means the two sides are amicable and willing to talk. It signals a de-escalation of trade tensions which should relieve some anxiety of corporations and consumers. On the margin it should help economic activity as the threat of more tariffs is reduced, at least temporarily.

The problem however, is that the agreement is very limited in scope and fails to touch on the bigger picture items like IP and geopolitics. These items will be much more difficult to negotiate and may cause a re-escalation in tensions between the two countries when they are addressed. Given the difficult nature of reaching future agreements and the election coming up in a year, we would not be surprised to see trade negotiations tabled and slowly faded out of the news, leaving the status as it is today.

Trade activity between the U.S. and China is certainly being depressed in part because of the trade war. China reported that exports to the U.S. fell 10.7% and imports of U.S. goods dropped 26.4%. The results, reported by Reuters, cover January through September.

The third quarter earnings calendar is starting to heat up. On Wednesday 39 companies will release earnings including Netflix, Johnson & Johnson, and IBM. For the complete list of companies reporting, mouse over the Research Tab and click on Dividends and Earnings. A calendar will pop up. When you click on a specific date, the listing of either earnings or dividends for that day will display below the calendar. The dates can also be found in the Portfolio section for stocks in your customized portfolios and in the RIA Pro portfolios. Click on Dividend to the right of the portfolio graph and then select Earnings. The companies are sorted by date.

October 14, 2019

Trump announced phase one of a trade deal with China on Friday afternoon. This morning we are waking up to news that China wants more discussions before signing phase 1. The market sold off Friday after the deal was announced and a little lower this morning as well. While progress is being made, investors are signaling that the deal is not that different from prior statements in which China said they would buy agriculture in exchange for tariff relief.

The Fed surprised the market on Friday and announced that they will start buying $60 billion of Treasury Bills monthly starting next Tuesday. The purchases will continue into the second quarter, meaning the Fed plans on purchasing at least $320 billion of assets. The Fed will also continue with temporary repo operations. The suddenness of the announcement leaves us wondering. Why the urgency to announce the action on Friday, when there is a Fed meeting in less than three weeks in which such an announcement would have been more appropriate? When answering the question, keep in mind that the temporary repo facilities are working well to alleviate the funding problems. Might there be another reason for this sudden change? We believe there is a credit issue with a bank or numerous banks, most likely European.

As Powell alluded to earlier in the week, this operation is not QE. As we discussed in QE By Any Other Name, if it walks like a duck and quacks like a duck it is a….. The stock market soared on the news, albeit it was already doing well based on the probability of a trade agreement with China. The yield curve steepened as shorter maturity Treasuries were flat to lower while longer securities rose in yield. The 3m/10yr curve was 8bps stepper on Friday.

On a year over year basis import and export prices both fell by 1.6%, despite the rise in oil prices in early September. Along with CPI and PPI, Friday’s Import and Export Prices report paints the same picture of deflationary impulses at work.


October 11, 2019

Stocks are trading sharply higher this morning as a trade deal seems likely to emerge from this week’s trade meetings. At 3:30 today, Donald Trump will meet with a leading trade negotiator from China and it appears a deal could be announced following the meeting. While the market is giddy about the prospects of putting the uncertainty of trade talks behind it, we believe the terms of the deal and importantly how it will treat past and future tariffs are important to assess before betting on the market beyond the next few days. Daniel Lacalle, a frequent guest on the Lance Roberts podcast, has an interesting take in CNBC on what to expect from a trade deal. The link is here – A US-China Trade Deal May Not Be The Catalyst The Market Is Expecting.

Further helping sentiment this morning is renewed hopes of a BREXIT agreement before the coming October 31st deadline.

CPI was slightly weaker than expected showing no change month over month and 1.7% inflation year over year. Jobless claims were strong at 210k and not revealing the labor weakness we have seen in other reports and surveys.

The following quote, as reported by Market News International, caught our attention yesterday: “although we can reduce interest rates further, the side effects of monetary policy are becoming more and more evident and more and more tangible” – European Central Bank (ECB) Vice President de Guindos

This quote follows similar comments by officials from the Bank of Japan (BOJ). Essentially they are finally figuring out that excessive monetary policy, including negative rates and QE, has its limits and more importantly, consequences. As far as consequences, little to no economic growth for almost a decade, along with the slow death of European and Japanese banking systems is finally catching their attention. We hope the Fed is paying attention.

The University of Michigan Consumer Sentiment report will released at 10am. Current expectations are for a slight decline from 93.2 to 92.

October 10, 2019

Following unexpectedly lower inflation in Tuesday’s PPI report, we get CPI today, the more important gauge of prices. Current expectations are .1% and .2% increases month over month and year over year respectively.

In yesterday’s JOLTs report, job openings fell from 7.217 million to 7.051 million. The number is still historically high but has been fading for a year as shown below. Hires and quits also fell, tipping off further signs of labor weakness. While the overall data in the report is healthy, the report lines up with the latest  BLS employment report and numerous employment sentiment surveys that give us concern. We will watch today’s weekly jobless claims data for further confirmation. Jobless claims are expected to come in at 219k, about 7k greater than the running four week average. CLICK TO ENLARGE

Trade talks with China start today so expect heightened volatility based on a deal/no deal or even just rumors and Tweets. Last night was extremely volatility as rumors were flying around that the Chinese delegation would leave talks a day early. The story was refuted by the administration. We still believe there is a better than 50/50 chance a trade-lite deal being announced. If so, we will focus on whether or not there any changes to tariffs. The potential market’s reaction is hard to gauge. A deal with reduced tariffs may pacify the market and ease concerns about slowing growth. However, a partial deal, may leave investors with concerns that little was accomplished and the possibility for more tariffs and other actions in the future.

The Fed released the minutes from their September 18th meeting. In general there was a lot of different views on the future path of monetary policy. Some members want to end rate reductions while others think more cuts are needed. The topic of using the balance sheet to help the overnight funding issues arose but, based on the minutes, was not discussed at length. Overall, the minutes did not shine much new light on monetary policy.

October 9, 2019

Yesterday afternoon Chairman Powell said the Fed will increase its purchases of short term Treasury bonds. Within this speech he went out of his way to claim that such actions do not constitute QE. In particular, he stated the following: “I want to emphasize that growth of our balance sheet for reserve management purposes should in no way be confused with the large-scale asset purchase programs that we deployed after the financial crisis.” He then stated: “In no sense is this QE.”  The Fed is trying to alleviate the overnight funding shortage via QE, but they want to do so without calling it QE. For more on this “sleight of hand” read our article published last week titled QE By Any Other Name.

Fed member, Neel Kashkari followed later in the day by saying “Fed policy makers now view Quantitative Easing (QE) as a tool in its tool kit.”

Shortly after Powell laid the ground work for a new round of “QE” the market started rallying. The gains were quickly given up as President Trump imposed visa bans on Chinese citizens involved in humans rights abuses. The market recovered some losses overnight on rumors that China would buy more soybeans from the U.S.  The bottom line is try to ignore the trade headlines. We suspect the market will continue to get whipsawed on headlines and tweets going into this week’s trade negotiations.

BREXIT negotiations are heating up with both sides publicly blaming each other for non-compromise on key issues. It is increasingly looking like the exit will be disorderly when the October 31st deal deadline comes. A no-deal exit will result in economic consternation in Europe and the UK. This comes at a time when Germany is likely already in a recession and other European nations are not far off. The economic effects will not be limited to the Euro region.

Producer Prices (PPI) surprised to the downside falling .3% versus expectations for a .1% increase. The year over year change also dropped to 2% from 2.3%. The market will pay closer attention to CPI tomorrow for confirmation. A lower CPI would provide the Fed with a better rationale to cut rates later this month.

October 8, 2019

As we noted in yesterday’s commentary and witnessed since then, the markets will be volatile as trade comments from the U.S. and China will be overly scrutinized for clues about the progress of this week’s talks. We urge you to resist trading on these comments as they are largely a public display meant to sway negotiations.  It is worth noting China appears adamant that IP and government subsidies are not on the table. These are the key items that Trump and Navarro have argued must be changed.

Trump understands that a trade “victory,” even if not a full deal, helps his reelection odds. We continue to believe there is a wide chasm between the two parties but we expect a deal, likely lacking in specifics and meaningful reform. If we are correct, will a “trade-lite” deal be enough for the markets and will it ease the worries of corporations that have been reducing output and investments?

There is not much economic data being released this week to take the markets mind off of trade. That said, the BLS will release PPI at 8:30 and CPI on Thursday. If the recent upticks in both data points continue, the Fed will find it more difficult to cut rates at the upcoming Fed meeting. The market is priced for a near 100% chance of a 25bps cut at the October 30th meeting.

The price of gold slipped 35 points over the last week. While gold was overbought and certainly technically due for a pullback, Zero Hedge leads us to believe that a lack of Chinese participation due to China’s week long Golden Week holiday also played a role. The following graph shows the performance of gold during Golden Week and in the week or two afterwards for the last 6 years. CLICK TO ENLARGE

October 7, 2019

Trade deal jitters are weighing on the market this morning. Last night China said they were reluctant to make a broader level deal. In particular they said they would not negotiate government subsidies and other bigger ticket items the U.S. wants included in a deal. Keep in mind, last week Trump and trade negotiator Peter Navarro made comments that they will only settle for a full deal, including the items China said are not negotiable at this time. This may seem grim but we caution, this may easily be negotiation tactics by both sides and not necessarily a breakdown of talks. The market will be volatile heading into the talks later this week.

The employment report was a mixed bag. Payrolls were slightly weaker than expectations, increasing by 136,000 in September versus a consensus estimate of 145,000 and a revised prior month of 168,000. On the positive side, the unemployment rate fell to 3.5% from 3.7%. Most concerning is that average hourly earnings were flat versus  a gain of .4% last month and estimates of +.3%.  The year over year change in hourly earnings fell to 2.9% from 3.3%. The BLS employment report tends to lag other labor data but the earnings data is another sign of cooling in the labor market.

The market popped higher on the employment data as it supports the notion of a weakening labor market which in turn provides the Fed more leeway to cut rates on October 30th. Further supporting the market on Friday were numerous headlines from Lawrence Kudlow and President Trump in relation to the possibility of a trade deal when China and the US meet Thursday and Friday.

The New York Fed announced they will continue “emergency” repo operations to November 4th including term repo options and overnight funding. As judged by the fact that the Fed’s balance sheet continue to rise, short term bank funding needs have not alleviated. Friday’s announcement makes it possible the Fed will announce some sort of permanent funding (QE) at the October 30th FOMC meeting. The date, November 4th, allows the short term, temporary measures to help banks get past month end balance sheet constraints and would give the Fed a few days to begin more permanent actions if they are announced on October 30th.

Jerome Powell will speak on Monday, Tuesday and Wednesday. The minutes from the prior Fed meeting will come out on Wednesday. In a speech on Friday, did not discuss the short term funding problems. He also didn’t provide much guidance as to his views on a rate cut. He did say the economy is “chugging along despite the headwinds it faces.”

October trading has been volatile thus far, with three of the four trading days having moves of greater than 1%.

October 4, 2019

The ISM- Service Sector Survey was weaker than expected at 52.6 versus 56.4. This is the lowest rate in three years and further confirms the weakness we are witnessing in the manufacturing surveys.

On Wednesday, the Conference Board CEO Confidence Survey reported that expectations of corporate executives for the next 6 months has fallen to levels last witnessed at the trough of the prior three recessions. On a year over year basis the confidence reading is the lowest since the late 1970’s. These two graphs can be found in today’s Chart of the Day.

Chairman Powell will speak at 2pm this afternoon. With Fed Funds futures back to pricing in a nearly 100% of a cut at the October 30th meeting it will be interesting to see if he goes along with the market or gives the market reason a for pause.

Jobless claims rose slightly to 219k, but have yet to reflect the employment concerns we have seen in consumer and corporate surveys. Today’s jobs report will shine more light on the employment picture. The table below, courtesy of Econoday, contains expectations for the 8:30 monthly employment report. CLICK TO ENLARGE.

October 3, 2019

Late yesterday afternoon, the U.S. announced they will put tariffs on European aircraft, agriculture, and other products.  The tariffs are effective on October 18th.

The ADP report showed a gain of 135k jobs in September which beat the consensus forecast of 125k. Last month’s report was revised lower by 48k from 195k to 147k. The average ADP jobs growth for the last 12 months is 177k, despite markedly slower growth recently. Today’s Chart of the Day shows that the six month average is hitting the lowest levels since the recovery from the Financial Crisis.

With ADP data in hand, our model estimates a gain of 162k jobs in Friday’s BLS employment report. Based on other employment data released over the last two weeks we believe there is a decent likelihood the number falls far short of our estimate and the streets estimate of 145k.

The S&P fell 1.74% yesterday which marked the first time the index had back to back declines of more than 1% this year.

While Europe has started back up QE and rumors abound about the Fed introducing a new round of QE, Japan is taking QE in a different direction. The BOJ announced they would trim their domestic bond purchases but boost buying of foreign bonds. This is partially due to the fact they own over 50% of Japan’s outstanding government bonds.

The BOJ has been much more aggressive with QE than Europe or the U.S. Currently the BOJ’s balance sheet stands at 102% of Japan’s annual GDP. That dwarfs the Fed’s balance sheet at 18% of GDP and the ECB’s at 39% of GDP.  Buying foreign bonds will provide a steady bid to U.S. Treasury bonds as they are the most abundant and liquid of sovereign bonds. Doing so would also be appreciated by President Trump and might curry them favor in any trade disputes. It should also help Japan’s exports as it will put pressure on the Yen.

Australia, feeling the effects of the slowdown in China and the trade war, cut their overnight interest rates to 0.75%, the lowest on record. Further, they said more rate cuts may be needed as well as other measures, which we assume means QE.

October 2, 2019

ISM Manufacturing fell to 47.8 and further into economic contraction. Today’s reading compares to 49.1 last month and expectations of 50. As we have been recently harping on, employment is showing signs of weakness across a few different indicators including ISM. The ISM Employment sub-component came in at 46.3 versus 47.4 last month.  Also of concern, as shown below, new export orders continue to decline and are now below any level since the 2008/09 recession. On the brighter side, the lesser followed PMI Manufacturing rose to 51.1 from 50.3, however, some of the commentary included weaker labor market signals.

The weak report immediately pushed the market lower and it slid throughout the day, with the S&P closing down 38 points to 2938. This weekend’s newsletter, “Trade Deal” Is Coming stated: “(S&P 500) support at the 50-dma, which coincides with the January 2018 top, but a break of that level will put the 200-dma into focus.”  The 50-dma is currently 2947, a level which has proven to be support and resistance since 2018. The 200-dma is over 100 points lower at 2835.

Today’s Chart of the Day by Teddy Vallee shows a huge divergence between the reliable relationship between ISM and annual changes in the S&P 500. if the relationship holds up and the stock market is right, ISM should rise to the upper 50s. If, however, the market is wrong the current 20% gains could quickly turn into double digit annual losses.

ISM in the Eurozone fell from 47 to 45.7 led by Germany 43.5 to 41.7. Italy, France and Spain were also lower with Italy and Spain in contraction, while France (50.1) barely clings to expansion.

October 1, 2019

We should gain more clarity on Fed policy this week as a host of Fed members speak. Most importantly, Vice Chair Richard Clarida will speak this morning and Chairman Powell on Friday afternoon. We expect the speakers to shine more light on the overnight funding market troubles and how the Fed may provide liquidity/stability to these markets in the future. As we noted last Friday, the street is increasingly thinking that a moderate amount of QE will be executed to provide a more permanent solution to the problem.

ISM and PMI manufacturing data will be released this morning followed by their respective service sector surveys on Thursday. ISM manufacturing fell into contraction last month with a reading of 49.1. The estimate for today’s number is 50.0. PMI was slightly above contraction levels at 50.3 last month and some improvement to 51.0 is expected today.

On Monday, the Chicago Fed Manufacturing Report came in at 47.4 versus expectations for 50.4. The internals of the report are troubling for future activity. Per Econoday- “New orders fell sharply in the September report, falling 7.6 points to 48.5 which points to generally weak activity for this report this time next month. Employment is deeply below breakeven 50 at 45.6 and near another 10-year low.”  This report provides another sign the employment picture may be worsening in the months ahead.

ADP will be released on Wednesday followed by the BLS September Jobs report on Friday. The current estimate is for a 145,000 increase in payrolls, which would be a 15k improvement from last month, however 36k below the average gains from the prior 12 months. We will provide our estimate once the ADP data is released.

Crude oil traded close to $54 yesterday, which is below the level it was trading at just prior to the attack on Saudi oil facilities. As such, traders are essentially pricing in near a zero chance that any retaliatory actions will be taken against Iran.

September 30, 2019

Early morning gains on Friday were erased when Trump threatened China with limits on U.S. investments into China. Per CNBC- “Trump administration officials are discussing ways to curb U.S. financial exposure in China, including a block of all American investment in the country, a person familiar with the talks told CNBC. Though the person cautioned that the discussion was still in early stages, such an action could send shockwaves throughout financial markets and involve the billions of dollars in investments tied to major indexes.”

Lost in the commotion of the US/China trade war is a brewing trade war between Japan and South Korea. Both countries are technology giants, supplying a significant number of parts and final products to the world. The conflict not only disrupts global supply chains, but any resulting tariffs will likely result in higher prices of technology products. For more on this please read the following article from Bloomberg: Japan-Korea Trade War IS Bigger Problem Than You May Think: S&P.

Last Friday we discussed Peloton and its poor IPO. The following comment from Peter Bookvar (@pboockvar) boils down the situation with Peloton, WeWork and other unicorn companies from a macro perspective:  “Valuation revaluations continue w/Peloton & Endeavor following WeWork, Uber, Lyft, etc. This is not an issue w/IPO market, this is a rethink on excessive multiples relative to earnings, or lack thereof. It’s a sea change at this stage of cycle.

Today is quarter end which means that funding pressures could be more volatile as banks are typically handcuffed from actively lending due to balance sheet constraints.

With the quarter ending today and GDP estimates for the third quarter firming up, the latest forecast of the Atlanta Fed is 2.10%, as shown below, and the New York Fed at 2.06%. CLICK TO ENLARGE

September 27, 2019

Two former Fed officials wrote a blog post recommending the Fed should increase its balance sheet by $250 billion over the next 6 months. That was followed later in the day by a CNBC article which quoted Morgan Stanley as saying they think the Fed will increase their balance sheet by $315 billion over the same period. In their respective opinions, the permanent balance sheet increases would alleviate the daily funding issues the Fed is grappling with now.  Permanent actions, as they prescribe, regardless of the spin that may be employed, is QE. Chairman Powell stated at the last Fed meeting that he would not employ monetary policy (QE/lower rates) to solve the funding shortage. We are guessing the odds are better than 50/50 that he will.

Peloton (PTON) was IPO’d and opened trading at $29 and then fell sharply throughout the day to close nearly 10% lower at 26.20 In the wake of evolving problems at WeWork, investors may be getting a little skeptical of “unicorn” companies with no profits.

The Euro continues to slide against the dollar. As shown below the euro is approaching a key long term line of resistance (green line). If it breaks through this line, the next stop could be the bottom of the channel as denoted in red. CLICK TO ENLARGE

Oil and gold are trading lower this morning as tensions in the middle east may be easing due to a partial cease fire agreement between Yemen and Saudi Arabia. Iran is thought to be behind many of the attacks on Saudi Arabia coming from Yemen.

September 26, 2019

A headline regarding trade perked the market up yesterday and seemed to put at ease the impeachment hearings that worried the market on Tuesday. – U.S PRESIDENT TRUMP SAYS A TRADE DEAL WITH CHINA COULD HAPPEN SOONER THAN YOU THINK.

Despite the Presidents trade optimism, the Chinese Yuan has been quietly depreciating against the dollar. With trade talks coming in mid-October, we want to see if the devaluation continues. If it does, it is not a good sign that a potential deal is in the making. China is using a weaker currency to offset tariffs to some degree. The graph below highlights the steady depreciation of the Yuan versus the dollar over the last two years. Note- a higher Yuan means more Yuan are need to buy a dollar, ergo a higher number represents a decreasing value. CLICK TO ENLARGE

The Fed increased the sizing of their daily overnight Repo operations to $100bn and 14 day term repos to $60bn.  The liquidity crunch is worsening not improving.

The dollar index soared yesterday and with it bonds, commodities, and gold sold off.

Weekly Jobless Claims will be released at 8:30. As we noted yesterday, the recent Consumer Confidence survey showed worrying signs about employment prospects. Going forward, Jobless Claims will be on our radar as we should expect to see increasing claims if an uptick in the unemployment rate is coming.

September 25, 2019

After a strong overnight session on Monday night in which the S&P reclaimed 3,000, the S&P fell 40 points from the high and closed down 25.  The action was similar to trading Sunday night into Monday. Every time the index gets above 3,000 sellers enter. The excuse for the sharp selling on Tuesday was the opening of House impeachment hearings on Donald Trump. We believe the real reason is the Consumer Confidence report.

Consumer Confidence fell sharply by 10 points. Certain details, however, are even worse. The consumer  is now worrying about employment as detailed by a surge in the percentage of those surveyed saying “jobs are not plentiful.” The increase was the largest in nearly 20 years. Worse, expectations for income fell by the greatest amount since 1991! As we have discussed, we are looking for signals that the consumer is reducing spending in light of the seemingly daily headlines focused on the potential for a recession. This is a first clue that consumer behaviors are changing. We want to see more survey data and hard economic data to further confirm.

The Richmond Fed index fell back into contraction at -9 versus a prior level of 1. Shipments and new orders, which had improved in the prior month, led the decline.

Despite the recently introduced liquidity accommodations provided by the Fed, there are emerging signs that the issues in the repo funding market is not over. Yesterday, the Fed conducted their first term repo auction and it was 2x oversubscribed. The first of three term repo auctions for $30 billion with a 14 day term drew the interest of $62 billion in bids. The Fed also auctioned off $75 billion of overnight repo. Despite over $100 billion of repo between the two auctions, repo rates traded at 2.10% in the morning, which is about 15-20 basis points above where it should be.

For a full write up of our take on the recent problems in the funding markets and what it means from a broader financial markets/banking perspective please read our latest on Real Investment Advice – Who Could Have Known : What the Repo Fiasco Entails.

September 24, 2019

On the heels of poor PMI data yesterday, ECB President Mario Draghi stated “Euro area growth momentum has slowed markedly, more than we had previously anticipated.”  As you may recall, the ECB cut rates and re-introduced QE two weeks ago. This public acknowledgement of continued economic contraction in much of the euro region, is likely a precursor to more monetary accommodation in the months ahead. Given the Fed’s recent comments about monetary policy, the growing divergence in policy between the E.U. and the U.S. will likely add downside pressure to the euro versus the dollar. Since hitting 1.60 eur/usd in 2008, the euro has been sliding lower, albeit with ebbs and flows. It currently sits at 1.10 which is about 5 cents off 15 year lows. A break below 1.05 would likely send it to the all-time lows set in 2001 (.84).

Currently the Fed Funds futures market is fully priced for a 25bps cut at the October 30th meeting and a second 25bps cut over the following 6 months.

U.S. PMI data was mixed yesterday. On the positive side, the manufacturing index rose to 51 and into expansionary territory. The composite index and the services index were below expectations, but above 50. Prior to this release, the service sectors were supporting flagging manufacturing growth. Of concern within this data set is the employment sub-index. For the first time in a decade it fell below 50.  Today’s Chart of Day shows this indicator compared to payrolls.

On the economic data front we will get Consumer Confidence and the Richmond Fed Manufacturing Index on Tuesday, New Home Sales on Wednesday and Durable Goods and Consumer Sentiment on Friday. There are a variety of Fed speakers throughout the week.

September 23, 2019

Starting next week the New York Fed will do $75 billion a day in overnight repo until October 10th, and will also conduct 3, 14 day, $30 billion term repos. The actions should help the Fed Funds and repo markets trade close to the Fed’s target rate. To clarify, the daily repos mature each day so the $75 billion does not culminate over time. However, once the three term repos are done, the Fed’s balance sheet will be $165 billion larger than before the repo problems first existed. Some are calling this QE (more permanent), but currently the liquidity injections are temporary.

U.S. PMI for manufacturing and services will released this morning. Expectations are for increases in both, with the manufacturing index rising back into expansionary territory (>50). German manufacturing continues to suffer as their PMI -manufacturing index hit a 7 year low of 41.4, which is 3.0 below the consensus estimate. German services are still in expansion.


With the scheduled meeting between Xi and Trump in mid-October, this is a potential warning that the odds of a deal are fading. Further hurting the chances of a deal, Trump has been saying he wants a “full deal” and not an “interim deal.” A partial deal, including some agriculture and reduction of tariffs is very possible, but we find it hard to believe that the two parties can resolve the complicated technological and spying issues. As shown in Today’s Chart of the Day, Goldman Sachs assigns a 40% chance of a deal being completed.

Boston Fed President Eric Rosengren made a very interesting comment as follows: WeWorks business model could send shockwaves across US commercial real estate, as the company is already the single biggest tenant in New York City, as well as Chicago, Denver and central London.” 

September 20, 2019

The Fed supplied $84 billion in repo funding yesterday. The increasing daily amount is a signal that the cash crunch is worsening. While we believe this current situation will alleviate itself over time, it will keep recurring as the Treasury will be issuing $150-200bn of new debt each month which will further drain cash and bank reserves. The Treasury issuance amounts are large but a key factor is the lack of foreign participation in the debt auctions. In years past, a third to half of the issuance would be bought by foreign buyers. Today, foreign buyers are actually net sellers of US Treasuries. For more on this relatively new development, please read an article we wrote in June entitled Who is Funding Uncle Sam.

Data was generally strong yesterday with unemployment claims and the Philadelphia Fed Business Outlook coming in stronger than expected. Leading economic indicators, however,  was flat versus +0.4% last month. The weak manufacturing data was behind the weakness. Bottom line from data and the Fed this week: A healthy consumer is offsetting weak business spending and slow global growth.

Three Fed members will speak today. While we expect them to tote the same message Powell delivered on Wednesday, we are on the lookout for any discussion of permanent policy actions to alleviate overnight funding pressures. This would involve QE or a change to capital requirements. QE would be a positive for the equity market.

September 19, 2019

The Fed cut rates by 25 basis points to bring the Fed Funds target range to 1.75-2.00%. Further they reduced the IOER rate by 30 basis to help alleviate pressure in the overnight markets. The vote to cut Fed Funds was 7-3. Two members voted for no rate cuts and one voted for a 50 basis point cut. We cannot recall a time, even in the midst of the financial crisis, when there was such a divergence of opinions of Fed members.
The Fed “dot plot” predicts no more rate cuts this year or next year with only a slight increase in rates in 2021. Through 2022, the lowest Fed fund rate estimate by all Fed members is 1.625% which equates to one 25 basis point rate cut. In other words, not one member expects a recession which would inevitably drive the rate down to zero. On the economic front they made little change to the July 31 statement. They re-stated that consumer spending was strong and the business investment and exports remains weak. Clearly, the trade situation is taking a toll on corporate spending.
In his press conference, Powell noted economic uncertainly due to trade policy which is weighing on growth but said the headwinds are offset with healthy household spending that is supportive of 2% economic growth. He is confident that inflation will rise to their 2% target and employment will remain strong.
In regards to the recent pressure on the repo markets, he believes there are “no implications for the economy or stance of monetary policy.” He puts blame for the volatility on tax date withdraws and the Treasury bond settlement. As we mentioned, these were both known well in advance and should not have been a big issue.  He stated “funding pressures have no implications for monetary policy.” We believe that statement could come back to haunt the Chairman.
We apologize for belaboring the overnight funding situation, but this obscure and not well followed market is one of the largest in the world and is very important to the functioning of all financial markets. Fed funds traded above the Fed’s target on Wednesday morning despite an $83 billion liquidity injection by the Fed. This is an extremely rare event outside of quarter and year ends. What we are learning is that, in aggregate, banks do not have excess reserves. This is not necessarily a concern as it was standing operating procedure prior to 2008. However, it does change the landscape that we have been used to since the financial crisis. We will have more on this in an upcoming article.

September 18, 2019

A subscriber emailed us, asking why she should be concerned about the surge in overnight repo rates. To help answer her question and better explain the importance of the overnight funding markets, please see the following RIA Pro article posted yesterday: Surging Repo Rates- Why Should I Care?

The overnight funding markets were again extremely volatile on Tuesday. Fed Funds traded well above target at 3%, while the overnight repo markets surged to nearly 10% on the open. Further fueling problems in the repo market, the Fed canceled a planned repo operation (designed to provide liquidity to the repo markets) due to technical difficulties. Later in the morning, the Fed fixed the problem and flooded the market with $53 billion in repo funding. The Fed will also offer $75 billion in repo funding this morning.  Yesterday’s repo operation was the first the Fed has conducted since the Financial Crisis. It was effective, bringing repo rates back to normal levels.
The graph shows the recent surge in the overnight repo rate. The only other recent extreme movement, outside of those this week, was at the end of the year in 2018. Such movement is somewhat typical at year ends as banks clamp down on their balance sheets. CLICK TO ENLARGE
At 2pm the FOMC meeting will conclude their meeting with a summary of the meeting, including any changes to the Fed Funds rate. Since Monday morning, the market has reduced the odds of a rate cut to about 50% from what appeared a near certainty last week.  It will be interesting to see if they mention the overnight markets and if so, do they characterize the problem as technical or as a bigger concern. We assume that even if there is a problem they will claim it to be a technical issue so they don’t alarm investors.  We will be very interested to see whether the Fed retains their easing bias or shifts to a neutral stance.

September 17, 2019

Yesterday afternoon, overnight borrowing costs for banks surged to 7%, well above the 2.25% Fed Funds rate. Typically the rate stays within 5-10 basis points of the Fed Funds rate. Larger variations are usually reserved for quarter and year ends when banks face balance sheet constraints. It is believed the settlement of new issue Treasury securities and the corporate tax date caused a funding shortage for banks. If that is the case, the situation should clear up in a day or two. Regardless of the cause, the condition points to a lack of liquidity in the banking sector. We will follow the situation closely as it may impact markets if it continues.

In addition to events surrounding Saudi Arabia and Iran, investors will heavily focus on the Fed. The Fed is scheduled to announce their rate decision at 2pm on Wednesday followed by a Jerome Powell press conference at 2:30. Prior to the Saudi news, the market was in consensus that the Fed would cut rates by 25bps. The recent CPI print and now spiking oil prices might allow the Fed to waver. Not only will the market paying attention to the rate decision but we think more attention will be on the direction of monetary policy going forward. Will they remove the easing bias and provide more two way guidance? As inferred by Fed Funds futures, investors still expect the Fed to cut rates by 50 bps after the expected 25 bps cut on Wednesday. As such, any change in bias would be surprising to the fixed income and equity markets.

The economic calendar is light this week. Thursday, however, should be interesting with the release of the Philadelphia Fed Business Outlook and Economic Leading Indicators. On Friday, Fed members will end their blackout with possible discussion of the Wednesday meeting and its announcements. Clearly, events in Saudi Arabia and Iran have the potential to trump all economic and Fed related market moves.

Our friend Danielle DiMartino Booth tweeted the following yesterday which helps explain why the S&P 500 sits near all-time highs and yet small and mid-cap indexes are well off recent highs.

“As per Howard Silverblatt  “Buybacks remain concentrated among the top 20 companies, accounting for 50.4% of total. Buybacks for the 12-month period ending in June 2019 were $797.0 billion – down from $823.2 billion in Q1 2019, but up 23.4% from the same period last year”

September 16, 2019

The drone/missile attacks on Saudi Arabian oil facilities shook up the markets as they resumed trading last night. Currently crude oil is up a little over $5 but has given up $2 from its overnight highs. Bonds and gold are bid, while equities are off about a half a percent. The market has two big considerations that it now must consider. First, will the attack lead to war with Iran and if so what are the implications for oil prices and the trade war with China, an ally of Iran. Beyond their relationship and oil trade, China’s new Silk Road goes through Iran, so they have a vested interest in Iran.  Second, with higher oil prices, will inflation concerns stop the Fed from cutting rates at Wednesday’s meeting and/or remove their easing bias going forward?

Oil futures for delivery in 2020 are up over $4 a barrel. While not as much as spot and October delivery, the market is voicing concern that the issues are not going away soon.

The good news on Friday was that retail sales for August rose 0.4% versus expectations of +.2%. However, a surge in auto sales accounted for the entire gain. We will keep an eye on auto sales to see if this is a trend or a short term rebound in what has been a longer term downward trend.  In what could be a sign that consumers are tightening their purses, retail sales for restaurants and bars continues to slip, with year over year growth at the lowest levels in a decade.  This series is well correlated to consumer sentiment and a decent leading indicator. Such consumer spending is relatively easy to cut back on and as such we would expect this industry to be a leading indicator of slowing consumption. Today’s Chart of the Day highlights the steep decline of restaurant and bar sales.

The University of Michigan Consumer Sentiment rose slightly to 92.0 from a 3 year low of 89.8. Given personal consumption is 70% of GDP, we will pay close attention to see if the trade war, “recession” talk in the media, and now potential war and higher oil prices are weighing on consumers. Thus far the surveys are not too concerning.

Longer term bond yields have risen sharply in September. Since the beginning of the month, 10yr US Treasuries yields are 41 basis points higher and 2yr yields are 30 basis points higher. Interestingly, short maturities like the three month T-bill have not budged. This is likely the technical correction we have been expecting and not based on a change in Fed posture. As witnessed by our purchase of IEF last week, we believe this is a buying opportunity.

September 13, 2019

In somewhat of a surprise move, the European Central Bank (ECB) cut rates by .10% to -.50% and re-introduced open-ended QE to the tune of 20bln Euros a month. The ECB had stopped QE for nine months prior to today. We say “surprise move” because many expected this move but few saw it coming as soon as it did.

The trade war soap opera failed to disappoint yesterday. A short while after the market opened the following headline came across the screens and the S&P rose nearly 20pts- *TRUMP ADVISERS CONSIDERING INTERIM CHINA DEAL TO DELAY TARIFFS. That was followed an hour later by Senior administration official tells CNBC that the White House is “absolutely not” considering an interim deal. The market gave up all of its gains on the retraction but rallied back to the prior highs, before fading towards the close.

CPI, like PPI the day prior, met expectations but when excluding food and energy was .10% higher than expectations. Retail Sales, due out at 8:30, is expected to come in at +.02% and +0.3% excluding autos and gas. The University of Michigan Consumer Sentiment Index is expected at 91.0, up slightly from the 3 year low of 89.8 registered last month.

Last night China said the pork and soybeans will be exempt from trade war tariffs. This is certainly a gesture to encourage further talks, but to be fair, China is concerned about internal strife due to higher food prices. Per the latest data from July, Chinese food prices rose 9.1% from a year ago, led by a surge in pork and fruit prices. Pork, a large component of the Chinese diet, has risen due to the outbreak of swine fever.

September 12, 2019

PPI met Wall Street’s expectations, however Core PPI (excluding food and energy) was a tenth of a percent higher than expectations. CPI will be released today. The Fed has called the recent dip in inflation transitory. PPI and CPI will show us if they are correct. If so, the Fed will have less of a reason to continue to lower rates.

Stocks rallied yesterday as it was disclosed that China reduced tariffs on a number of goods. This gesture was followed up last night when Trump pushed back the schedule on new tariffs from October 1st to the 15th. The market surged higher on Trumps tariff delay but has since given back most of the gains.

Wednesday morning started with a bang from the President as he tweeted the following: “The Federal Reserve should get our interest rates down to ZERO, or less, and we should then start to refinance our debt. INTEREST COST COULD BE BROUGHT WAY DOWN, while at the same time substantially lengthening the term. We have the great currency, power, and balance sheet…..” 

Essentially the President is advocating for the Fed to print money to lower government financing costs and enable larger debts. Based on what we have seen thus far in Europe and Japan, this may seem like a viable way to manage debt, but history warns us that such strategies always end poorly. It is also worth noting that European and Japanese banks are struggling mightily while U.S. banks are doing well. Debt formation has been a major cog of U.S. economic growth over the last two decades. Stripping the banks of profit motivations, as zero rates do, will cause major harm to the banks and further decrease the natural growth rate of the economy. Such actions would further promote speculation and harm savers. As we have written, savings drive innovation and productivity growth, the lifeline for sustainable economic growth.

September 11, 2019

Please take a moment today in remembrance of September 11, 2001.

***Due to technical difficulties we will not be able to publish The Sector Buy-Sell Review today. We hope to have it out tomorrow.

Small cap and value stocks are showing some signs of life versus larger cap and momentum stocks. IWN, the Russell 2k Value ETF is up 4% since Friday’s close, while the broader large-cap indexes like the S&P and NASDAQ are flat on the week. Momentum stocks, as shown in two charts in Today’s Chart of the Day, had their worst loss in at least a decade occur on Monday.  Our RIA Pro series Value your Wealth documents the gross under performance of value over the last decade. It is way too early to declare that value is back in vogue but the last few days certainly hint that something is afoot.

Yesterday, markets opened sharply lower but rallied toward the close and ended the day flat.  Trade rumors along with the firing of National Security Advisor John Bolton drove price action. As we have said over the last few weeks, volatility based on news events and Tweets is difficult, if not impossible to trade. It is best to position your portfolio in a manner that allows you a level of comfort whether the market is rising or declining. This too shall pass, but in the meantime trade appropriately.

JOLTS reported that the number of workers voluntarily leaving their jobs (quit rate) rose to an 18 year high. This is a good sign that workers are confident in their ability to find work. However, job openings fell to a five month low as it appears some firms are scaling back on their spending and investment plans. This mixed report signals overall health but points to growing weakness in recent months.

September 10, 2019

While there is not a lot of economic data this week, the data coming out is important for those trying to figure out the Fed’s next move(s). On Wednesday and Thursday, the BLS will release producer prices (PPI) and consumer prices (CPI) respectively. On Friday, we should gain a better feel for the state of the consumer. At 8:30am Retail Sales will be released and Consumer Sentiment will follow at 10am. You may want to read The Dreaded “R” Word. This RIA Pro article, from last Friday, discusses how the media playing up recession concerns can lead to a slowdown in economic activity. Sentiment and Retail Sales will provide us with information to better assess if the public is starting to tighten their purse strings.

The Fed will be quiet this week as they enter the communications blackout period prior to next Wednesday’s FOMC meeting. Expectations in the Fed Funds futures market is for a 25 bps rate cut.

Moody’s downgraded Ford (F) to junk status (Ba1) after the close yesterday. Ford has approximately $85 billion in debt outstanding that will be affected. Ford stock is only down 3.5% from yesterday’s close as the news was not a surprise.

Consumer borrowing rose last month at the fastest rate in two years. This should provide a boost to the retail sales data released on Friday.

September 9, 2019

The growth in payrolls fell short of market expectations and well as our model’s estimate. New jobs grew by only 130,00, but is actually weaker considering the census was responsible for adding 25,000 of the jobs. The rest of the employment report was more encouraging. The participation rate rose to 63.2% from 63% and hourly earnings beat expectations by .1%. Today’s Chart of the Day shows that year over year employment growth fell to 1.39%, the lowest growth rate since 2011.

Fed Chairman Powell’s speech on Friday seemed to mirror the Wall Street Journal article we discussed on Friday. The gist is that the consumer is in good shape and the Fed is not forecasting a recession. He did warn that trade uncertainty is weighing on business decisions and thus providing a headwind to economic activity. Finally, to make sure the markets know the Fed has its back, he stated “the Fed will act as appropriate to sustain the expansion.”

On Thursday night the People Bank of China (PBOC) reduced the required reserve ratio (RRR) in order to provide more liquidity to the banking system which in turn should benefit the economy. Essentially, they  increased the amount of loans that can be made per the amount of reserves. The action is not significant but it will, on the margin, stimulate growth. The problem China faces is that providing liquidity will weaken the yuan, draw the ire of President Trump, and further complicate trade talks. Given this dynamic, we do not think they will flood the system with liquidity unless trade talks fail.

September 6, 2019

Yesterday’s ADP labor report was stronger than expected, coming in at +195,000. Based on this data, our model expects today’s payrolls data to increase by 210,000, well above estimates of 160,000 as shown below, courtesy Econoday. CLICK TO ENLARGE.

Yesterday’s ISM non-manufacturing painted a healthy picture of the service sector. The index was 56.4 versus expectations of 54.0. The only concern within the report was that job creation fell three points. Interestingly, the lesser followed PMI non-manufacturing report fell to 50.7, standing just above contraction levels and at it lowest level in over three years.

The Fed has traditionally used reporters to help telegraph their thoughts and as a way to trial balloon future monetary policy actions. Yesterday, a well known Fed “mouth piece” at the Wall Street Journal, Nick Timiraos, provided us with what may likely be the Fed’s action plan for the coming FOMC meeting on September 18th.

As the title suggests, Fed Lines Up Another Quarter-Point Rate Hike, the Fed is heavily leaning towards cutting rates by 25 basis points in two weeks. Based on the article they are concerned about slowing manufacturing growth, recent downward revisions to employment data, and the inverted yield curve. While some expect the Fed to cut 50 basis points, the article states: “The idea of an aggressive half-point cut to battle the slowdown hasn’t gained much support inside the central bank, according to interviews with officials and their public speeches.” 

But….. with ISM Non-manufacturing stronger than expected, nice gains in ADP payrolls, and what appears to be an easing of trade war related tensions, the Fed’s reasons to cut are fading. 

Just a reminder that Fed Chairman Powell will speak today at 12:30.

September 5, 2019

The ADP labor report, which tends to be well correlated with the BLS employment report, will be released at 8:15. The current estimate is  for 150,000 new jobs and the estimate for Friday’s BLS report is for 160,000 new jobs. Our focus this morning will be on the ISM non-manufacturing report at 10am. As we mentioned yesterday, the service sector has held up well despite global economic slowing and a slump in domestic manufacturing. Signs that the service sector are weakening would be another reason to worry about a recession. The current estimate is 54.0, which is .3 better than last month’s level.

Since the beginning of August the S&P 500 has been range bound as shown below. The market closed yesterday right up against the resistance line (2940) which has contained 3 rallies.  Last night, after it was reported that trade talks with China are scheduled for October, the market convincingly broke the resistance line. If last night’s surge can hold the odds favor a run back to late July highs.  CLICK TO ENLARGE

Despite the equity market strength over the last week, utilities, gold and bonds have stayed close to recent highs.  Typically we expect to see a divergence between equities and these more defensive/hedging sectors. Markets are trying to tell us something, but the question is which market is it?

The following from Zero Hedge does a nice job of summarizing the plethora of Fed speakers and the Fed’s Beige book from yesterday:

Williams (Dovish): “Ready to act as appropriate”, July cut was right move, economy mixed (admitted consumer spending not a leading indicator), international news matters, low inflation biggest problem.

Kaplan (Dovish): “Monetary policy a potent force”, worried about yield curve inversion, economy mixed (factories weak due to trade, consumer strong), watching for “psychological effects” on consumers, “if you wait for consumer weakness, it might be too late.”

Kashkari (Dovish): Tariffs, “trade war are really concerning business”, job market not overheating, slower global growth will impact US, most concerned about inverted yield curve. Fed’s policy is “moderately contractionary.”

Bullard/Bowman (Looked Dovish): Took part in “Fed Listens” conference but made no comment on policy but then again when has Jim Bullard ever not been dovish.

Beige Book (Mixed): Moderate expansion but trade fears are mounting, but optimism remains, despite what Kashkari says: “although concerns regarding tariffs and trade policy uncertainty continued, the majority of businesses remained optimistic about the near-term outlook”

Evans (Dovish): Trade policy increases uncertainty and immigration restrictions lower trend growth to 1.5%, Auto industry especially challenged


September 4, 2019

Market News (MNI) reported yesterday that the ECB may buy €20-30 billion bonds per month in a new round of QE. This rumor has grown over the last few weeks and has weighed on the Euro versus the dollar. On Tuesday the euro/USD broke through what was considered strong support at 1.10, a level last seen in August of 2017. Likewise the U.S. dollar index stands at over 2+ year highs. It is highly likely Donald Trump and Steven Mnuchin will be more vocal about dollar strength and possibly hint at taking action if the trend continues.

The ISM Manufacturing index fell to 49.1 putting it into economic contraction territory.  The New orders sub-component fell below 50 to 47.2, new export orders dropped to 43.3, and employment was also below 50 at 47.4. We will look for confirmation of a weakening employment situation in Friday’s employment report. With the larger than expected drop in ISM, the Atlanta Fed’s GDPNow forecast fell from 2.3% to 1.7% for the third quarter.

Despite the shorter week there is a good amount of data on tap this week. On Thursday the markets will receive the ADP Employment report, Jobless Claims, and the ISM Non-Manufacturing Index. We are interested to see if the non-manufacturing sectors of the economy are continuing to hold up despite the pronounced drop in manufacturing. On Friday, the BLS employment report will be released.
Six Fed members will speak today, followed by Jerome Powell on Friday at 12:30.

September 3, 2019

On Sunday September 1, the latest round of tariffs went into effect and China responded shortly thereafter by adding tariffs on $75 billion of US goods. While trade rhetoric has improved over the last week, actions tell us the two parties are not as close to a deal as the markets would like to believe. Further evidence came on Labor day when it was revealed that China and the U.S. were having trouble setting a date to meet in September.
Sunday’s New York Times has a very interesting editorial that presents a case for tightening rates- LINK. William Cohan, the author, reviews many of the same troubling debt themes that we have harped on in numerous articles. Given these dynamics and the possibility of a debt crisis, he implores the Fed to “pop the debt bubble” via higher rates and QT. Cohan also urges Powell to stand up to Trump and not acquiesce to rate cuts. Unlike the Dudley editorial, discussed last week, which was largely politically motivated, this article articulates a solid rational for Powell to “stand up to Trump.” We will have more on the Dudley article tomorrow.

August 30, 2019

The market opened higher yesterday on reports that China wants a “calm trade resolution.” Adding to the euphoria are new rumors that Trump might delay the September 1st tariffs on China. These rumors and news stories might be true and the market may have more upside. We caution however, there have been periods where optimism and “done deals” propelled the market higher, only to see gains erased when things did not work out as expected. It is worth noting that CNN is reporting that two presidential aides conceded that Trump’s ” high level phone calls” with China over the past weekend did not occur.
We do not know how this drama will end, nor does anyone else. As such, focus on technical and fundamental indicators and try to ignore the day to day news and rumor mill.
ECB board member Klass Knot told the media yesterday that there is no need for the ECB to do more QE at the time. The markets had assumed more QE was coming in the next few months.
Treasury Secretary Steven Mnuchin said that the Treasury is considering issuing Ultra long bonds with maturities of 50 to 100 years. This should not be a surprise that the government wants to lock in historically low rates for such a long period. The only question is how would the addition of these bonds affect yields across the curve?
2nd quarter GDP was revised from 2.1% to 2.0% despite consumer spending being revised higher (4.7% from 4.3%). Surprisingly, Pending home sales fell 2.5% despite declining mortgage rates.
We wish you a great Labor Day weekend. See you on Tuesday.

August 29, 2019

For the first time in a while the Fed and/or China did not dictate the market’s direction yesterday. Given the volatility of the past few weeks and random nature of positive or negative news events, we welcome the break. As noted in yesterday’s portfolio commentary we took a little risk off the table yesterday by reducing our exposure to the financial sector. We are concerned that the fundamentals and technical situation are pointing to lower levels.

As shown below, the Chinese Yuan has risen (depreciated) from 6.87 per dollar to 7.16 per dollar over the past month. As the Yuan depreciates Chinese goods are cheaper to import into the U.S. and U.S. exports become more expensive in China. China has more control than most countries over their currency and as this chart makes clear, they are allowing the Yuan to cheapen against the dollar to limit the effect of tariffs. Last month alone Yuan depreciation effectively offset almost 5% of tariffs on every item traded with the U.S., not just those selected for tariffs.

This morning the yield of 30-year Italian bonds fell below the fed funds rate. This means the Fed is now in charge of the single highest interest rate in the developed world.” -Jim Bianco

August 28, 2019

The 2s/10s yield curve continues to invert, now standing at -5bps. We expect this trend to likely continue as the bond market forces the Fed towards a more dovish stance.

Tuesday’s Consumer Confidence report was a mixed bag. On a positive note, the present situation index rose to its highest level in nearly 20 years. While consumers are generally positive, they are less confident about the future. The expectations index fell to 107 from 112.4.  What we do not know is whether or not the surveys were conducted before or after the latest round of tariffs.  If they occurred before, did the trade actions impact consumer sentiment.

Bill Dudley, NY Fed President from 2009-2018, wrote a stunning editorial in Bloomberg yesterday. In the article he makes some controversial points. First, that by lowering interest rates the “Fed’s accommodation encourages the President to escalate trade war further, increasing the risk of a recession.” He further states “Officials could state explicitly that the central bank won’t bail out an administration that keeps making bad choices on trade policy, making it abundantly clear that Trump will own the consequences of his actions.”

He ends with the following statement which will certainly draw the ire of the President; There’s even an argument that the election itself falls within the Fed’s purview. After all, Trump’s reelection arguably presents a threat to the U.S. and global economy, to the Fed’s independence and its ability to achieve its employment and inflation objectives. If the goal of monetary policy is to achieve the best long-term economic outcome, then Fed officials should consider how their decisions will affect the political outcome in 2020.”

Bill Dudley appears concerned about the Fed’s independence and the viability of the institution but also with Trump winning re-election. Ironically, his article may push Trump to take actions against the Fed. Anything done to remove or displace Powell will be disruptive to markets.

August 27, 2019

What a difference a day makes! Markets glided higher late Sunday night and by yesterday’s close recovered almost half of Friday’s loses. What seemed like a trade-war disaster on Friday and over the weekend, now appears to be old news with investors.  It may appear calm for the time being, but the risks are still both large and two way. We generally think the markets are susceptible to further downside due to trade and technical factors, but we can’t rule out a surge higher due to some sort of agreement with China.

Despite stocks rising by over 1%, the VIX volatility index was up most of the day, a sign that investors were adding to their hedges.

The headline Durable Goods number was stronger than expected at 2.1% versus last months +1.9% increase and expectations for a 1.2% gain. The data is less favorable when aircraft and aircraft parts are removed. Excluding these volatile large volume orders, durable goods fell by .4% in July.

The economic calendar is light this week. Of note is consumer confidence today at 10am and on Friday, Chicago PMI and the University of Michigan Consumer Sentiment Survey. The only Fed speaker scheduled to speak is Mary Daly of the San Francisco Fed on Wednesday.

August 26, 2019

Stocks are opening higher after falling sharply last night on the futures open. It appears the culprit for the sharp rebound is communication between China and the US. Trump stated the following last night- “We’re going to start very shortly and negotiate and see what happens but I think we’re going to make a deal.”

Chairman Powell spoke at the Fed’s annual Jackson Hole symposium on Friday and said the economy was solid with a strong labor market and inflation moving towards its 2% target. He mentioned elevated risks to the Fed forecast and did not use “mid-cycle” terminology to as they did in the press conference following the July 31st FOMC meeting. In our opinion there was not much new in the speech, however there was an interesting change of language. Instead of describing the lower bound of interest rates (0%) as the “zero lower bound” they used “effective lower bound”. While it may not seem important, they essentially opened the door to negative rates if needed in the future.

A few other Fed speakers followed Powell on Friday afternoon and echoed the idea that Fed Funds are more or less at a good rate and not many more rate cuts are needed. Obviously this is a big point of contention with the President.

Between Powell’s speech and China’s retaliatory tariffs, Trump was irate on Friday.  The following from CNBC sums up the dynamic well:

Trump tweeted on Friday: “Our great American companies are hereby ordered to immediately start looking for an alternative to China, including bringing..your companies HOME and making your products in the USA.

“The threats always been out there but there’s been no need to provoke that,” said Art Hogan, chief market strategist at National Securities. “It’s almost like the administration was expecting the Fed to announce a rate cut at the Jackson hole meeting. And since Powell did not deliver, he went to defcon 5.”

Fun fact: According to Steve Liesman of CNBC, Trump has tweeted about the Fed on 20 of the 23 days in August.

On Friday after the market closed Trump upped tariffs on China- Per his tweet- ‘Starting on October 1st, the $250B of goods and products from China, currently being taxed at 25%, will be taxed at 30%  Additionally, the remaining $300B of goods and products from China, that was being taxed from September 1st at 10%, will now be taxed at 15%.’

For more on Trade and the Fed please read our weekly Newsletter- Powell Fails, Trump Rails & The Failure Of Negative Rates.

The U.S. dollar sold off on Friday as there is a growing concern the Trump will push the Treasury Department to weaken the dollar, which would effectively stimulate exports and boost prices if successful. As we discussed a few weeks ago, he is limited in his ability to stimulate the economy, so weakening the dollar may provide some economic relief. – The Prospects of a Weaker Dollar Policy 

August 23, 2019

UPDATE:  Rumor becomes reality- The following headlines just hit the wires:



Chairman Powell will speak at the Fed’s Jackson Hole symposium at 10am this morning. We expect that he will continue to describe policy as mid-cycle, meaning that the current series of rate cuts is limited. If we are correct, and Powell does not appear willing to cut rates significantly, the yield curve will likely continue to invert and with that recession warnings in the mainstream media will become more widespread. As we wrote in The Dog Whistle Heard Around the World, a change in the economic narrative can be a catalyst for economic decline.  The odds of a rate cut in September are 95%.

Rumors are heating up that China will unveil countermeasures to U.S. tariffs in the coming days. It’s hard to trade on this rumor but we offer caution as tariffs and retaliatory measures have not been good for the stock market.

Declines in the servicing and manufacturing sub components pushed the U.S. PMI below prior month readings and expectations. The manufacturing sector fell below 50 for the first time since September 2009. Until recently the service sector has held up despite weakness in manufacturing. This report and a few other recent data points show the sector’s resiliency may be waning.  The table of PMI data, courtesy Econoday, is shown below.

Lower interest rates are providing a little boost to the real estate market. On Wednesday, the Architecture Billings Index (ABI) increased to 50.1 from 49.1 from the prior month. There has also been a surge in refinancing with the MBA refinancing index jumping by 37% and 12% over the prior two weeks; however this week it was relatively flat at +0.4%. Interestingly, the MBA’s purchase index has not risen as impressively. The Freddie Mac primary mortgage market survey says the current rate on a 30-year conventional mortgage is 3.55%, down from nearly 5% late last year. While mortgage rates are declining, they are reaching a point where the yield will not fall as much as U.S. Treasury bonds due to the prepayment risk the lender assumes.

August 22, 2019

Australian PMI fell below 50 (49.5 versus 52.1 last month), likely a result of China slowing markedly. On the bright side, the Eurozone Composite PMI was 51.8 versus 51.5 last month. The manufacturing component remains well below 50 at 47. The service component of the index is still in expansionary mode. While the manufacturing data is below 50 it does appear to be stabilizing.

The estimate for the US PMI composite is 51.9, the manufacturing and service sub components are 50.2 and 52.3 respectively.

The BLS released preliminary employment revisions for 2018 and Q1 2019. As shown in Today’s Chart of the Day, 501,000 previously reported gains to payroll were lost to revisions. Three sectors, retail (-146k), professional/business services (-163k) and leisure/hospitality (-175k), accounted for most of the losses. The final results will not be released until February 2020.

The Fed’s July 31st FOMC meeting minutes were released yesterday. While a broad number of topics were covered, we believe the important consideration in the release was that the Fed is not sold on further rate cuts.  They reiterated the term “mid-cycle” adjustment, meaning one or two cuts but not prolonged action. In particular, the following quote caught our attention: “Participants generally judged that downside risks to the outlook for economic activity had diminished somewhat since their June meeting.” They also noted that lower inflationary readings earlier this year were “largely transitory.” Powell will speak on Friday and we suspect he will confirm the view from the minutes.


August 21, 2019

Today’s Chart of the Day shows the trade-weighted dollar index. While not as popular as the DXY Index, this index more accurately measures the true economic effect of the dollar’s strength and weakness versus other currencies. As shown, the index hit a new high yesterday, clearing 130. Dollar strength against the currencies of our trade partners weighs on corporate profitability, predominately exporters, and acts to lower inflation domestically.

Starting tonight in Asia and continuing through Europe and eventually the United States, PMI (Purchasing Manager Index) data will be released. As shown in the table below, PMI numbers for every major economy are worse today than in the months leading up to the global recession and financial crisis of 2008. CLICK TO ENLARGE

On Monday Trump floated the idea of a payroll tax cut. Yesterday he said that the administration is looking at a variety of tax cut possibilities. He also mentioned using an executive order to cut capital gains tax rates. It appears, based on his constant badgering of the Fed to cut rates and now the idea of tax cuts, Trump is trying to protect the economy and his reelection chances against the increasing odds of a recession. The problem he will face on the tax front is a democratically controlled House which is unlikely to pass legislation that increases the President’s odds of winning the election.

August 20, 2019

Germany has somewhat caved into calls to boost fiscal spending in order to reverse sluggish economic activity. While not yet committed, they announced plans for “measures as contingency for crisis” with the trigger and target focus of the stimulus being the job market. The German unemployment rate currently is 4.96% which is the lowest level since the early 1980’s. Germany’s GDP is only about a fifth the size of the US economy, so even if they do provide stimulus, the effect on the global economy will be much less than if China or the US were to boost fiscal stimulus.

Donald Trump has now gone beyond asking the Fed for rate cuts. In a Tweet yesterday he introduced QE:…..The Fed Rate, over a fairly short period of time, should be reduced by at least 100 basis points, with perhaps some quantitative easing as well. If that happened, our Economy would be even better, and the World Economy would be greatly and quickly enhanced-good for everyone!”

Economic data will be light this week. On Thursday PMI for the US and other major nations will be released. Global PMI slipped into contraction last month so markets will be focused on whether the trend worsened or not.

The two big ticket items for the week are the release of the July 31 FOMC meeting minutes on Wednesday, and the Fed’s Jackson Hole Symposium on Thursday and Friday. Jerome Powell and other Fed members are scheduled to speak and update us on the state of monetary policy.

August 19, 2019

Stocks are opening strong while bonds and gold are declining. These share moves are a reaction to what appears to be positive comments on trade over the weekend.

Over the past few days we have wondered why Fed members have been so quiet. On Friday we got our answer; Chairman Powell has ordered a media blackout for all voting members. Two of the more vocal, non-voting members Bullard and Kashkari are free to speak their mind and have done so on Thursday and Friday. The blackout story is HERE.

Consumer Sentiment came in at 7 months lows of 92.1 versus expectations 97.0 and a prior month reading of 98.4. Likely, the Fed’s rate cut and additional tariffs weakened confidence over the last two weeks. We need to see if weaker confidence translates into a reduction in economic activity.

On Friday, Sweden’s 20 year bond fell below zero and in doing so, joined Germany and Switzerland in having their entire spectrum of sovereign debt trade at negative yields. The total amount of negative yielding debt world-wide is now over $17 trillion. A year ago the total amount stood around $7 trillion.

The flattening and recently inverting yield curve has been a hot topic recently. There are many considerations for why the yield on longer term bonds is falling more than those of shorter term bonds. One not getting enough press is the US deficit funding situation. With the extension of the debt limit in late July, the US Treasury is now set to borrow over $800 billion by year end. A large portion of this issuance will come from shorter maturities including 2yr notes and the 1, 3, and 6 month Bill sectors. This daunting supply is playing a role in keeping shorter term bond yields higher and allowing for more flattening/inversion.

August 16, 2019

We fixed a technical problem with our new functionality that emails trade alerts in real time. Going forward, if you are signed up for email alerts, you should receive these alerts. To make sure you are signed up go to Settings (top right)- Profile- Daily Emails.

Yesterday’s economic data sure puts the Fed in quite a pickle. The inverting yield curve, declining equity markets and slowing growth abroad begs for them to cut rates. At the same CPI on Tuesday was higher than expected. On Thursday, the Philly Fed Business Outlook and Empire State Manufacturing Survey beat expectations handily. More importantly, Retail Sales came in at a strong +0.7% monthly growth, up from 0.4% last month. Excluding autos, the data was even stronger. Yields fell despite the better than expected data. This is a sign that bond investors are more focused on the future than the present.

With data like we have seen this week, the market will question the Fed’s ability to lower rates.  As a result the yield curve will likely further invert which may weigh on equity prices.

Harry Markopolos, the accountant that brought down Bernie Madoff, released a 170 page report on GE. In the report he claims GE’s accounting problems are much worse than previously disclosed. He believes they could amount to $38 billion in unreported losses. Currently GE bonds are rated BBB+. If the report is taken seriously by investors and the SEC, might GE become junk rated or even worse? GEs stock closed down 11% on the day.

August 15, 2019

The narrative driving yesterday’s 2.93% selloff in the S&P 500 is the first inversion of the 2s/10s yield curve since the financial crisis. The fact of the matter is that from an economic perspective, whether the curve is positively or negatively sloped by 5 or 10 basis points makes no difference. The economic damage done by a flat curve was done months ago as we have discussed in various articles. However, as we frequently see in human behavior, there is an imaginary line in the sand that when crossed, becomes headline material and a cause for action. Simply, humans crave answers and with the market down so much the collective media and social media sphere determined the yield curve is the problem.

We suspect that the stock market will continue to weaken and the yield curve will further invert until some Fed members become vocal about how they might re-steepen the yield curve.

To that end we saw an interesting statistic from Zero Hedge as follows:  “Of the ten yield curve inversions back to 1956, the S&P 500 topped out within approximately three months of the inversion more than half the time, or on six occasions – 1956, 1959, 1965, 1973, 1980, and 2000.”   The last instance in 2006 provided equity investors ample time to exit stocks. The curve first inverted in February of 2006 and the S&P 500 didn’t peak until October of 2007. In February we wrote the following article that may be worth re-reading- Yesterday’s Perfect Recession Warning May Be Failing You.

A lot of economic data will be released this morning. Jobless Claims, Philly Fed Outlook, Empire State Survey, and Retail Sales are due out at 8:30. Industrial Production figures will follow at 9:15. Investors will likely key on Retail Sales as the consumer makes up nearly 70% of economic activity. The Philly Fed and Empire reports will shine more light on how the trade war is affecting the behavior of business executives.



August 14, 2019

The China-Trade soap opera, that seemingly governs asset prices, surprised the markets once again. Trump delayed the start of the new 10% tariff. The stock market soared 1.5% as investors interpreted this as a sign that tempers are cooling. Bonds and gold, both of which had a strong bids over the prior days were weaker.

About 2/3rds of the stock gains were erased last night and bond yields are headed lower once again. The 2s/10s is now slightly inverted. We believe that an inverted yield curve scares the Fed and expect to hear Fed members becoming more accommodating to future rate cuts.

German GDP fell .1% for the second quarter. Given the third quarter data we have seen it appears increasingly likely that Germany will be in a recession shortly. Two consecutive negative quarters is the technical definition of recession.

Following PPI’s lower than expected print last week, CPI and CPI ex food and energy came in 0.1% higher than expectations. Import and Export prices will be released at 8:30 this morning.

There are no Fed members scheduled to speak this week but that does not preclude someone from doing a impromptu interview.

August 13, 2019

Last night the German ZEW economic expectations index  fell sharply to -44.1, well below expectations  of -28.0. The index now sits at the lowest level since 2011. This reading points to further deterioration in the German economy and sharply raises the odds that they are already or will be in a recession shortly. Reflecting the worsening economic situation, German sovereign yields continue to fall deeper into negative territory. The 2yr note stands at -0.87% and the 10yr Bund at -.61%.

U.S. bond yields fell sharply once again yesterday as investors seek the safety and relatively high yields of U.S. Treasury bonds. We use the description of “high yields” in comparison to Europe and Japan whose yields continue to fall further into negative territory. The 10yr Treasury note now yields 1.64% down almost a full percent from the beginning of the year. The 2s/10s curve flattened further yesterday and is down to 6 basis points. We suspect the curve will continue to flatten until the Fed takes on a more aggressive stance. It is possible an inverted curve could prompt the Fed to do just that.

Since the 10% tariff was enacted and the ensuing market decline, the odds of future rate cuts increased. So far the market expects that rate cuts will happen at regularly scheduled Fed meetings. In 2008 and other recessionary periods it was common for the Fed to intervene between scheduled meetings. While not likely, we are following the August Fed Funds futures contract for any sign that the market expects an intra-meeting rate cut. The next FOMC meeting is on September 18th, meaning there are no meetings in August. Accordingly, the August contract should trade on top of the Fed Funds effective rate which is about 2.15%, which it currently is. We will alert you if the situation changes. If you want to follow for yourself (LINK), track the August 2019 contract and look for any price above 97.90 (100-97.90 = 2.10%) as an indication that the odds of an August rate cut are appreciable.

August 12, 2019

On Friday, PPI came in as expected on a monthly and annual basis, however PPI excluding food and energy was .3% less than expectations on a monthly and annual basis. It was the first monthly decline in core PPI in nearly 3 years. CPI will be released on Tuesday.

We have seen some comments in the media warning that China may likely further devalue their currency to offset tariffs. China can certainly choose that path but it is important to recognize that as the Yuan weakens capital leaves the country. China’s banking and corporate sectors are highly leveraged. As such, a big enough outflow of capital could potentially create a liquidity crisis that would dwarf the tariff problem they are wrestling with.

China is walking a tightrope and is fully aware of the pros and cons of a weaker/stronger yuan. It is also important to understand that China does not have complete control over the Yuan’s value versus the dollar, therefore any depreciation or appreciation of the Yuan may not be their doing.

The economic data calendar starts the week light but picks up on Thursday. On the inflation indicator front, CPI will be released Tuesday and Import/Export Prices on Wednesday. Retail Sales will be released Thursday, along with Jobless Claims, Industrial Production and the Empire State Manufacturing Index (New York). Friday will see the release of Housing Starts and Consumer Sentiment.

August 9, 2019

We will get our first look at inflation data for July this morning. Producer prices (PPI) are expected to rise .2% and 1.7% monthly and annually respectively. CPI will be released on Tuesday.

In the latest trade barb, the U.S. is holding off on granting Huawei licenses due to China’s halt of agriculture purchases. The equity markets have traded lower on the news.

The UK posted a negative GDP number for the second quarter (-0.2%). The weakness is in part due to concerns over BREXIT as well as slowing growth in the Euro-zone, their largest trade partner in aggregate.

Risk markets exploded higher yesterday in what we believe is a technical bounce from short term oversold levels. As judged by declining Treasury yields and rising gold prices yesterday despite the sharp equity rally, there are still a lot of investors seeking safety. In this weekend’s newsletter we will discuss whether yesterday’s surge is sustainable.

On Wednesday, China said that they expect the 10% tariff to ultimately get raised to 25%. Today’s Chart of the Day shows how financial assets have performed since the 10% tariff and gives us a hint as to how a hike to 25% might further affect assets.


August 8, 2019

Many Fed members have spoken about avoiding a flat or inverted yield curve. Once again, St. Louis Fed President Bullard highlighted that the curve is one of the prime factors driving rate policy. To wit in reference to the yield curve: “I don’t think this has gotten any worse here.”

The reason the trepidation around a flat or inverted yield curve is that every inversion of the 2s/10s curve has led to a recession. In late May, the yield curve started getting more media attention as it flattened to 14 basis points. Fears where quickly calmed when the curve re-steepened shortly thereafter, rising to 28 basis points by mid-July. Since the Fed meeting, the curve has flattened once more, hitting 8 basis points yesterday morning.  While Bullard may claim it hasn’t gotten worse, it has. At this point it may only take another trade war comment/action from Trump or China to invert the curve.

Donald Trump was vocal about the Fed once again. Yesterday, via Twitter he stated: “Incompetence is a terrible thing to watch, especially when things could be taken care of sooo easily. We will WIN anyway,” “It would be much easier if the Fed understood, which they don’t, that we are competing against other countries, all of whom want to do well at our expense!” The word “incompetence” caught our attention.  This is the first time he has used that word to describe the Fed and it may just be his legal justification to demote or fire Chairman Powell that he is test driving in public.

In another sign of slowing global growth, crude oil is back to the lows of the fourth quarter 2018.

August 7, 2019

St. Louis Fed President Bullard, one of the more dovish Fed members, did not press as strongly as expected for more rate cuts in a speech yesterday. Like Powell’s press conference, he seems to prefer a wait and see approach. Here are a few quotes from his speech- You’re not in recession mode here, you’re in mid-cycle.” “I don’t think this has gotten any worse here” [referring to yield curve]. “There are a lot of good things going on in the economy.” Over the coming week or two we will hear more Fed speakers and hopefully get a better feel for their current thoughts on further rate cuts. Chicago Fed President Charles Evans speaks today.

Following the new 10% tariff on $300 billion of Chinese goods, we have seen a few estimates that put the average tariff on all Chinese imports at 4-6%.  Please see Today’s Chart of the Day for one estimate of total tariffs.

Escalation of the US-China trade war is causing some countries that are greatly affected to cut interest rates. Last night, for instance, Thailand, India and New Zealand cut rates. The Thai cut was unexpected while India’s and New Zealand’s cuts were larger than expected.


August 6, 2019

Yesterday morning, following China’s retaliatory actions, Donald Trump increased pressure on the Federal Reserve to cut rates more aggressively with an aim to weaken the dollar versus the Yuan. He Tweeted the following: China dropped the price of their currency to an almost a historic low. It’s called “currency manipulation.” Are you listening Federal Reserve? This is a major violation which will greatly weaken China over time!

He followed up the Tweet late yesterday by having the Treasury Department label China a currency manipulator. Stocks were down about 3% yesterday on China’s retaliation and fell another 2% after the close on the new announcement from China. Last night, China lowered their official currency fixing price back to 6.97 from 7.14. It is not clear whether China did this as a friendly gesture to deescalate the brewing currency war, or to address the increasing outflow of capital which could cripple their already over leveraged banking system. The S&P is now trading up half a percent.

Per the Treasruy-  “As a result of this determination (currency manipulator), Secretary Mnuchin will engage with the International Monetary Fund to eliminate the unfair competitive advantage created by China’s latest actions.” Said differently, the U.S. and other nations can now manipulate their currency versus the Chinese Yuan.

With the recent decline, the DJIA is now below the level it was in January 2018, when Donald Trump declared the first set of tariffs on China.

ISM non-manufacturing index showed some weakness coming in at 53.7 versus expectations of 55.5. To the contrary, the PMI non-manufacturing survey beat expectations.  The service sector has thus far held up much better than manufacturing and has offset weakness in the broader and global economy. If the service sector is indeed weakening the odds a recession increase markedly.

James Bullard- St. Louis Fed President, speaks this morning. He is one of the more dovish Fed members. We suspect he will argue for a 50bps rate cut in September. We are particularly interested to see if he mentions the prospect of an intra-meeting rate cut.


Our Dashboard format has changed. Scroll down to see Portfolio Alerts, RIA Pro Articles and Videos, and the Chart of the Day. The screen will now refresh every five minutes. Older commentaries and articles can be loaded by scrolling down to the bottom of each boxed section. 


August 5, 2019

China is retaliating against the new tariffs that Trump enacted on Thursday. Last night, China told its states to halt imports of U.S. agriculture. More troubling, and likely to irk Trump and his team, China let the Yuan depreciate by about 1.5% and importantly through 7 yuan per dollar. Both the market traded yuan and the official yuan (government fixed rate) rose from 6.97 to 7.10 per dollar. The 7 level was defended strongly by China’s government in the past.

Financial markets were shaken by the news. Equities are currently lower by 1.25-1.50%. Gold is up $11 and many commodities are trading sharply lower. The ten year U.S. Treasury note dropped 9bps in yield to 1.77%. Interestingly the U.S. dollar index is lower despite the yuan devaluation.

In Friday’s BLS employment report, payrolls grew 164,000 as expected, however last month’s print of 224k was revised lower to 193k. In total 41k job gains from prior months were lost due to data revisions. The unemployment rate is unchanged at 3.7%. Of note, average hourly earnings (monthly and annually) rose .01% versus last month’s figures as well against expectations.

On Friday, German 30 year Bunds fell to a negative yield and with that, Germany joined Switzerland with negative yields across the entire spectrum of their respective government debt.

The odds of a 25 bps September rate cut, which fell sharply after the FOMC meeting, have risen back to 100%. Further the market has priced in another full 25bps by the end of the year. If problems with China continue to ramp up we suspect that the market will not only increase the implied amount of future rate cuts, but price in the possibility of a cut before the next meeting in mid-September.


August 2, 2019

Yesterday, a 1% gain in the S&P turned into a nearly 1% loss within minutes on word from the President that more tariffs are being placed on China. On September 1st, a 10% tariff will be placed on the remaining $300 billion of goods and services that the US imports from China. The new tariffs are in addition to the 25% tariff on $250 billion of trade. We would not be surprised to see China depreciate their currency, the Yuan, against the dollar as a means of retaliation. Measures towards Hong Kong or Taiwan are also possible. Other notable market moves from yesterday include: Oil -7%, Gold +1.4%, and the ten year UST yield -12bps.

The BLS employment report will be released at 8:30 this morning. The table below, courtesy Econoday, has the consensus estimates.   CLICK TO ENLARGE

U.S. PMI came in slightly better than expectations at 50.4 and while it avoided falling into economic contraction territory it was the lowest reading since September of 2009. Employment fell for the first time since 2013, confirming labor weakness reported in the Chicago PMI from Wednesday.

US Manufacturing ISM was weak at 51.2 versus expectations for 51.9. Within the survey employment fell to a 3 year low. Given the recent set of surveys we suspect that jobless claims will begin to uptick in the weeks ahead. It may take a month or two before these effects show up in the monthly BLS employment report.


August 1, 2019

As expected the Fed cut rates by 25 bps and ended QT, two months prior to what they had said a few months ago. Two Fed members, George and Rosengren, voted against cutting rates. The Fed’s rationale for taking action are “implications of global developments” and “muted inflation pressures.” They left the door open to future cuts but Powell called this is a “mid cycle action”, implying today’s action is not one of many more to come. More directly he said- “Let me be clear, what I said was, it’s not the beginning of a long series of rate cuts.” The most important takeaway is that the press conference was not confidence inspiring. Valuations across many asset classes are extreme and in large part due to investors confidence in the Fed’s ability to support markets. 

Stocks and gold were weaker while the dollar soared, breaking out to two year highs. A stronger dollar is deflationary and will further aggravate the trade deficit and complicate trade talks.

President Trump was not happy with the Fed. To wit- “As usual, Powell let us down.”  We advise scrolling down and re-reading our July 2nd commentary for thoughts on Trump’s possible reaction to yesterday’s Fed meeting.

Currently, Fed Funds futures are only priced in for a 63% chance of a cut at the next meeting, where as it stood at 100% prior to yesterday.

Lost in the hoopla of the Fed meeting yesterday was the ADP employment report and the Chicago PMI.

ADP reported that the number of new jobs added in July was 156,000, in line with estimates. Based on ADP, our model is forecasting a gain of 175k new jobs in Friday’s BLS report. This compares to the current consensus estimate of +151k jobs. Last month our model performed poorly, underestimating the number by 93k jobs, however over the prior three months its average miss was only 12k jobs.

Chicago PMI fell into economic contraction territory at 44.4 (50.5 expectation), its lowest reading in almost five years and second lowest since the Financial Crisis. The employment and new orders sub-components both fell below 50, also signaling contraction. Eyes will be on today’s release of the National PMI  at 9:45 to see if it follows in Chicago’s footsteps.


July 31, 2019

Happy Fed Day!!  The Fed will release their FOMC monetary policy statement at 2pm and Jerome Powell’s prepared remarks and press conference will start around 2:30pm. We agree with the market consensus that the Fed will cut rates by 25bps. It is likely there will be one or two dissenters that will argue that rate cuts are not needed at this time. Investors will be focusing on any changes to the statement about future rate cuts. We presume Powell will also answer media questions that will further clarify the Fed stance over the next six months. Currently, the Fed Funds Futures market is priced for 35bps by year end and about 50bps by March of 2020.

On Monday there was an article from the Wall Street Journal and one from the Washington Post that seemed to raise doubts about the Fed’s messaging and the rationale for cutting rates.  Click on the following links to read the articles:  WSJ – The Confusing Federal Reserve and the Washington Post – With the economy on the line, the Fed prepares to take its biggest gamble in years.

Last week we questioned recent headlines by Chicago Fed President Charles Evans. In Federal Reserve Headlines: Fact or Fiction we reviewed his rationale for cutting rates and presented data to help our readers decide if a cut, based on his justification, was indeed warranted. As you consider the media spin on today’s meeting, this article may prove helpful.

We bring up the two articles and our most recent article because it is important to remember that the financial markets are now, more so than ever, being supported directly and indirectly by the Federal Reserve. Current instances of extreme valuations are based on TRUST in the Fed and a belief that Fed will do the right things. Any breach of trust could have a large effect on asset prices.



July 30, 2019

A few subscribers commented on yesterday’s commentary in which we brought up the sharply negative revision to corporate profits. To help them and all subscribers grasp the magnitude of the revision, we present the graph below which provides a before revision and after revision look at corporate profits. Corporate profits now stand below levels of March 2014. The data includes all private and public domestic companies. CLICK TO ENLARGE

Yesterday, the yield on Switzerland’s 50 year bond went negative. As such their entire yield curve now has negative yields.

The British pound has been declining since March when it appeared likely that Boris Johnson would become the new Prime Minister. Now that he is the Prime Minister and the October 31st deadline for a BREXIT deal with Europe is rapidly approaching, traders are increasingly betting that BREXIT will be hard, meaning no deal. Given Johnson’s tone and willingness to push for BREXIT, deal or no deal, we suspect the pound will continue to sell off. It currently stands at 1.2165 to the US dollar, down from 1.3150 in March.

Apple will release quarterly earnings after the close. The current consensus is for quarterly EPS of $2.10 as compared to $2.34 in the same quarter last year. More importantly, traders will be looking for guidance on China’s slowing economy and how trade talks are currently affecting the company’s profits.

July 29, 2019

Second quarter GDP was slightly stronger than expected at 2.1% growth versus expectations of 1.9%. The growth was driven by a 4.3% surge in consumer spending and the largest growth in government spending since the Financial Crisis. Working against consumer and government spending was an unexpected increase in the price index (GDP deflator) to 2.4% versus expectations of 2.0% and a decline in business investment by -0.6%. It was the first quarterly decline in business investment since Q1 of 2016. Also corporate profits were revised lower and importantly now point to zero profit growth over the last five years.

The combination of better than expected growth and what appears to be an uptick in inflation puts the justification for a rate cut at Wednesday’s Fed meeting into question. The Fed has largely leaned on lower inflation as a reason to cut rates. GDP prices along with the most recent CPI/PPI reports and inflation expectations are on the rise.

In addition to the Fed meeting and Jerome Powell press conference on Wednesday, there will be important economic data to follow. Of note the Chicago PMI and ADP labor report will be released on Wednesday, PMI Manufacturing Index on Thursday, and the jobs report on Friday. There will also be a large number of companies reporting earnings throughout the week.

July 26, 2019

The ECB did not cut rates at yesterday’s meeting but discussed the need to use greater amounts of monetary policy to prevent lower inflation. Many ECB watchers now believe the restarting of QE is a question of when not if. The ECB also introduced the potential for new asset types to be purchased. European bond yields fell on the dovish statement.

Strong earnings after yesterday’s close from GOOGL and INTC are pushing those shares and the market higher this morning. AMZN earnings fell short of expectations however guidance for next quarter was a little better than expected. In the premarket GOOGL is up over 8%, INTC 4% and AMZN is down a little more than 1%.

Second quarter GDP will be released at 8:30 this morning. Wall Street consensus is for 1.9% growth with a range of 1.6-2.2%. The Atlanta Fed GDPNow forecast is for +1.3%.

Another side effect of the Trade War with China along with slowing economic growth in China, is less Chinese direct investment into the US.  Per Business InsiderChinese FDI (foreign direct investment) peaked in 2016 at $46.5 billion — this has now fallen to $5.4 billion after Trump took office.”  Today’s chart of the day shows how cash buyers of real estate are declining. This is no doubt a direct result of fewer Chinese buyers/investors.

July 25, 2019

The ECB meets this morning with the market assigning a near 50% probability of a 10bps rate cut to their deposit rate which currently stands at -.40%. The Flash PMI readings out of Europe, and in particular Germany, are likely the latest bit of data pushing the ECB to take action.

The amount of negative yielding global debt reached a new high yesterday at $13.41 trillion as economic weakness in Europe and the possibility of even further negative rates at today’s ECB meeting is driving yields lower. To wit, German 20 year Bunds breached 0% matching a low from early July and French 10 year Oats fell below zero for the first time. We have also seen articles talking about bank customers that are now being offered negative rate loans. Not sure using the word “loan” is appropriate for a negative yield bond, but we will go with it for now.

Yesterday, U.S. Flash PMI composite registered at 51.6, an improvement over last month’s 50.6, however the manufacturing component fell from 50.1 to 50 and now sits on the cusp of contraction. This is the worst reading for manufacturing in ten years. Durable goods- new orders- released at 8:30 is expected to rebound +0.5% versus a prior decline of 1.3%. On the flip side core capital goods is expected to decline to +.02% from +.04%. GDP will be released tomorrow morning.

July 24, 2019

The stock market broke out of its summer doldrums yesterday with the S&P 500 rising 20 points on news that a US trade delegation is headed to China for talks.

Economic data out of Europe last night points to further economic contraction. The forward looking Flash PMI for the entire Eurozone fell to 46.4 versus last month’s 47.6. Germany appears the be the economic laggard in Europe with their PMI number contracting to 43.1 vs 45.0 and expectations of a slight increase to 45.3. This data makes policy action by the ECB at tomorrow’s meeting more likely.

Since Friday, when the New York Fed uncharacteristically walked backed the aggressively dovish comments of President John Williams from the day prior, the rate markets have reduced the odds of a 50bps rate cut to under 25%. Given the Fed is in blackout until the meeting and some future concerns have been lessened (Debt Cap/BREXIT) we believe the market will go into the meeting expecting 25bps. Consider that the markets are guided by expectations and if the Fed were to do nothing or cut 50 bps while the market is priced for 25bps of a cut, a spike in volatility (up or down) is probable.

The US dollar (US dollar index) has strengthened over the last month and now stands at one month highs and less than .75 cents from reaching 2 year highs. Continued strengthening will pose problems for the global economy as it essentially reduces liquidity for the worlds reserve currency. Typically emerging markets, which have significant amounts of dollar based debts, are most affected as their interest expenses and ultimate repayment of principal increase with the dollar.  A strong dollar puts pressure on China which could help with trade negotiations but it also makes U.S. goods in foreign markets more expensive, thus hurting U.S. exports. While there are pros and cons from a political perspective, it is likely that Trump and Treasury Secretary Mnuchin will talk down the dollar if the recent trend continues.

July 23, 2019

Congress and the administration have reached a deal to extend the debt cap limit for two more years, pushing it past the coming election. This news eliminates one of the Fed’s worries that justified cutting rates. The deal allows over $1.3 trillion in deficit spending over each of the next two years, which is a slight pickup in spending versus the current level. 100% of the nation’s debt is now being funded domestically, a stark difference from the past. As such we think you should read or re-read an article we wrote a month ago called Who Is Funding Uncle Sam?

In the article we wrote: “It is probable that, barring deflation or a notable stock market decline, higher interest rates will be required to attract marginal domestic investors to purchase U.S. Treasuries. It is also fair to say that the onus of buying more U.S. Treasuries that is falling on domestic investors will likely result in a higher savings rate which negatively effects consumption.” In hindsight, given the Fed’s recent behavior, we would add an expectation that the Federal Reserve will be forced to fund some of the deficit with QE.

This Thursday the ECB meets with rising expectations that they may cut rates or at a minimum raise the possibility at coming meetings. Such an action would clearly be a response to the Fed’s likely cut on the 31st and an attempt to push the euro lower against the dollar.


July 22, 2019

Economic data will be sparse this week except for Friday when the BEA is scheduled to release quarterly GDP data for the second quarter.

Corporate earnings will take center stage this week as approximately 30% of the S&P 500 and Dow 30 are scheduled to report. While earnings and revenues matter, we think forward looking guidance from management will carry more weight than normal. For a daily list of coming earnings and expectations we recommend following the NASDAQ earnings calendar.

On Friday the New York Times released the following statement from NY Fed President Williams: (the Fed wants to) “vaccinate the economy and protect it from the more insidious disease of too low inflation.”  This message and the comments we discussed in Friday’s commentary, come as the Fed enters their self-imposed media blackout period. The Fed appears panicked that the market did not expect the Fed to reduce rates by 50 basis points. The Fed’s urgency to cut rates and telegraph their intentions leave us concerned. As we have posited in the past- what do they know that we do not?

We end with a statistic from @oddstats:

The S&P 500 has now gone 34 straight sessions without a single -1% day, while returning +8.16%.

The last time the index went at least 34 days without a -1% day and was up at least that much?

January 29, 2018.

July 19, 2019

The Philadelphia Fed Business Outlook Survey) came in strong at 21.8 versus expectations of 4.5 and a prior month reading of 0.3. This index, which surveys manufacturing conditions in the Philadelphia Fed region provides a welcoming sign that economic growth may be on the upswing. Further, the four key components also showed sharp increases (employment, new orders, capital expenditures, and prices paid). We do caution, however, this index is very volatile and the strong reading may just be a rebound reflecting short term relief that the tariffs on Mexico, that Trump threatened June, never came to fruition.

Fed Vice Chair Clarida had some very dovish words in an impromptu FOX BusinessNews interview. In particular the following statement caught the market’s eye: “Research shows you can act preemptively when you can.” New York Fed President Williams echoed his comments earlier in the day: “It’s better to take preventative measures than to wait for disaster to unfold.

The takeaway is that the Fed will lower rates regardless of economic data if it thinks there may be problems in the future. This one statement appears to give the Fed carte blanche to act based on premonition instead of facts as has always been the case. It appears that a 50 basis point cut on July 31st is back on the table as the odds, based on Fed Funds futures, increased from 34% to over 70% yesterday.

July 18, 2019

Overnight Netflix (NFLX) is down over 11% on their second quarter earnings report. Earnings and revenues were largely in line with expectations but what is upsetting to investors is that the net number of subscribers only grew by 2.07 mm versus expectations of 5.06 mm. Management expects a pick up in the third quarter. Given the valuation of the stock and high growth rate the valuation implies, the market was likely to sell anything short of a great report. This holds true for other “high fliers” that are priced for near perfection.

A Bank of America survey of portfolio managers said that 1% of those surveyed expect inflation to be higher over the next 12 months. While debt, demographics, and productivity trends argue that inflation will be lower in the future, there is a potential for a short term, temporary spurt in inflation. Such a scenario would be problematic for the Fed and markets and therefore bears watching closely. If inflation upticks, the Fed will find it harder to lower rates or do QE. In fact, they may have to raise rates if inflation were to rise too much. At the same time interest rates would likely increase on longer term bonds which would put pressure on the economy, quite possibly forcing it into a recession.

Our forecast remains for lower inflation but we pay close attention when everyone is on one side of a trade.

Another interesting survey we recently saw said that 2% of professional investors expect value to outperform growth. Many investors are focused on the trend of the last five years and not the reality of the last 100 years. For more on Value versus Growth please read our four part series of RIA Pro articles called  Value your Growth.  Today’s Chart of the Day shows how value has consistently outperformed growth over ten year periods, except over the last five years.

Both surveys show investors are caught up in what is defined as Recency Bias. For more on Recency Bias please read Don’t be a Victim of Recency Bias.

The architectural billing index, a leading indicator of the commercial real estate market, is signaling trouble ahead. For more read the following article from CNBC:  Bad sign for commercial real estate: The architecture business is slowing down.


July 17, 2019

Retail Sales handily beat expectations yesterday, rising 0.4% versus expectations of +.01%. With 2 consecutive monthly gains of 0.4% and inflation data/expectations creeping higher, the case for Fed rate cuts continue to diminish. Per JP Morgan: “Since the June FOMC, the three most important monthly data reports—employment, CPI, and retail sales—have all come in quite strong…

We still think the Fed will cut 25 bps as they do not want to upset the markets or President Trump, but they will likely tone down expectations for additional cuts later this year and early next year. Currently the Fed Funds Futures market is still pricing in a 25% of a 50bps rate cut on July 31st. We suspect that will fall to near zero over the coming days.

Powell spoke in Paris yesterday and provided us with a clue on why the Fed is likely to cut rates despite a solid domestic case to do so. Per the WSJ: “Federal Reserve Chairman Jerome Powell highlighted the growing importance of global developments in monetary policy—a reflection of how slowing growth abroad could prompt the U.S. central bank to provide new stimulus despite steady labor markets and consumer spending.”  As we suspected it is likely that European central bankers are leaning on the Fed to cut rates and halt dollar appreciation. It is also probable they are also persuading the Fed to help Deutsche Bank which is showing many signs of a potential failure.


July 16, 2019

Earning season is underway. On Monday, Citigroup (C) was the first large company to announce earnings for the second quarter. Earnings and revenues slightly beat expectations. Citi’s competitors (JPM, GS, and WFC ) will announce earnings today, along with pharmaceutical JNJ.

For the next few weeks a slew of earnings announcements and forward looking guidance will set the trading tone. It is likely that reduced earnings and revenue guidance/expectations, which happened over the prior months, will allow many companies to meet or exceed guidance. While this may appear to be good news, we are on guard against negative forward looking guidance and cautionary statements from corporate CEO’s and CFO’s.

Yesterday’s Chart of the Day showed that CEO confidence for the remainder of the year is at or near recessionary levels. If a lack of confidence translates into a reduction in earnings guidance from companies, good earnings news may be offset with a deteriorating outlook.

Yesterday Blackrock said they expect S&P earnings growth to be negative for the first time since 2016.

Political posturing has begun as Congress addresses the Treasury departments need to extend the debt cap. On the current spending path, the Treasury will be unable to fund itself at some point in September. Nancy Pelosi has come out swinging, saying the Democrats will not approve any additional spending or a cap extension without a budget in place. Mnuchin, Secretary of Treasury, has responded calling for an extension first and then negotiation of a budget deal. As we have witnessed many times over the last decade, political games will be played as this is much more about posturing for voters than actual budget issues. As we get closer to September without a resolution it is more likely the markets, especially short term T-bill yields, will get more volatile.

July 15, 2019

Like CPI on Thursday, Friday’s PPI report came in higher than expectations. PPI was 0.1% higher than expectations while core (ex food and energy) was 0.2% higher on a year over year basis. Over the last month inflation expectations have begun to rise slightly. Currently the Fed’s 5yr- 5yr forward inflation expectations rate stands at 1.91% up from 1.77% in mid-June. Their 10-yr breakeven inflation rate has also risen by a similar amount. Over the past few months, many Fed members have mentioned lower inflation expectations as a key justification to lower rates. If inflation expectations keep rising, it could put a wrinkle in the Fed’s plans to cut rates. While we still think 25 basis points is a lock, they may pull back on plans to do more later in the year if inflationary pressures continue to rise.

China’s 2nd quarter GDP met expectations (as it always does) with a reading of +6.2%, as compared to 6.4% in the prior quarter. Still a high rate of annual economic growth but it has slowed to levels not seen in almost 30 years.

The economic calendar is relatively light this week, however one of the more important data points, Retail Sales, will be released on Tuesday. Later in the week earnings season will be begin in earnest. We will have more on specifics in upcoming commentaries.

July 12, 2019

CPI was slightly hotter than expected for June. Importantly, core CPI (excluding food and energy) rose 0.3% versus expectations of +0.2%. The higher reading pushed the year over year core CPI growth to 2.1%, which is above the Fed’s 2.0% inflation target. Also of note, jobless claims fell from 222,000 to 209,000. Producer prices (PPI) will be released today and expectations are for an increase of 0.1% and 0.2% excluding food and energy. The year over year number ex. food and energy is expected to be 2.2%.

Between CPI, jobless claims and last week’s employment data, it is becoming even more confounding why the Fed is so intent on lowering rates in later July.  Remember, the Fed has two mandates: stable inflation which they deem as 2% and a strong labor market. Given they are meeting their mandates, it is looking more likely that Powell and the Fed are bowing to political pressure both domestically from Trump, but also likely from other nations that are feeling the financial pain of a stronger dollar.

While Powell largely repeated himself yesterday in front of the Senate he did answer a question about corporate debt and the potential risks.  Per Powell- “DON’T SEE CORP. LEVERAGE RISING TO SYSTEMIC RISK LEVEL.”  Like his unusual comments about employment yesterday, we find this also curious at best and disingenuous at worst. Gross and net corporate leverage are at all times highs as is the ratio of corporate debt to GDP.

July 11, 2019

The following quote from Powell’s prepared remarks to Congress yesterday tells the whole story- “it appears that uncertainties around trade tensions and concerns about the strength of the global economy continues to weigh on the U.S. economic outlook.” Powell left little doubt that the Fed will cut rates on July 31st as he gave what appears to be the most dovish speech of the year (see Today’s Chart of the Day). It now seems like the Fed is hyper-focused on what could hurt the economy and willing to take action to insure against it.

At this point the only question is whether the Fed will cut 25 or 50 basis points on July 31st. Instead of focusing on the Fed’s baseline outlook – “economic growth to remain solid”, he instead seemed to be selling reasons to justify lower rates. In particular he mentioned:

  • Business investment growth “slowed notably”
  • Trade developments
  • Federal Debt Ceiling

Also of note, Powell said: “We’ve got no evidence to call this a hot labor market.”  Quite an odd statement considering the unemployment rate and jobless claims are at 50+ year lows.

This morning CPI comes out and expectations are for 0.0% monthly and a 1.6% increase on an annual basis. Excluding food and energy, the expectation is for a 0.2% increase monthly. Given Powell’s remarks about inflation, and knowing he had the CPI report prior to his testimony, we think it is possible that this report could be weaker than expectations.

August Fed Funds futures rose 7 basis points yesterday, implying that the market is once again putting odds on a 50bps rate cut at the July 31st Fed meeting. Those odds stand at 33%.

Powell will speak to the Senate today, so stay tuned for more information about monetary policy.


July 10, 2019

Chairman Powell will testify to the House on the current state of monetary policy at 10 am this morning. We will be on guard for any indication that the Fed is backing off on cutting rates at the coming July 31st meeting. The bonds markets are teetering between expectations for a 25 and 50 basis point cut. There is likely to be volatility in the markets during the Chairman’s initial speech and during the question and answer session. If Powell gives any inclination that the Fed may not cut at all, risk markets are surely to get hit. Given typical DC politics, we suspect some Democrats will try to stir the pot and ask Powell questions about Trump and Fed independence.  Tomorrow Powell testifies to the Senate.

After writing yesterday’s commentary about negative yielding sovereign bonds in Europe, we stumbled upon this interesting and quite honestly shocking Bloomberg article: Sub-Zero Yields Start Taking Hold in Europe’s Junk-Bond Market.  Per the article there are now 14 junk rated corporations in Europe whose bonds trade with a negative yield. Essentially, investors are paying (not being paid) to take on the high credit risk these companies offer. Quite frankly we struggle to wrap our head around this situation as it implies that  deflation will run rampant in Europe and/or that these 14 companies are risk free.

July 9, 2019

Over the weekend German investment bank Deutsche Bank (DB) announced plans to cut jobs and business lines in order to help the ailing bank avoid potential bankruptcy. Despite massive bailouts over the last decade the bank remains in dire circumstances. While DB’s market cap is relatively small at $16 billion, they are sitting on nearly $50 trillion of derivatives which is similar to much larger banks like JP Morgan and Citigroup. It is for this reason that a DB failure could have wide ranging effects on banks around the world. DB’s share price peaked in May of 2007 at $150. This morning it is trading at 7.34. Negative interest rates and flat yield curves have wreaked havoc on European banks leaving DB and many others in perilous state, despite the near decade long recovery and massive monetary stimulus.

Today’s Chart of the Day shows an index (average) of selected global sovereign bond yields. The index currently sits at the low yield levels of 2015/2016 and well below all other data going back to at least 1900. A primary driver of yields is expected inflation which in part is related to expected economic growth. While equity markets continue marching higher and imply solid economic growth, bonds markets are sternly warning the opposite. The chart below further highlights how low global yields are for a number of leading economies. Note that Japanese yields and some European yields are negative across their respective curves. It is also worth mentioning that there are now over $13 trillion of negative yielding bonds, surpassing the amount in 2016 and nearly double the amount that existed nine months ago.

Click to Enlarge.


July 8, 2019

The headline payrolls number (+224k) from Friday’s report was much stronger than our model expected (+128k) as well as Wall Street’s consensus (+165k). That said, other data within the report was not as favorable. For instance the unemployment rate ticked up from 3.6 to 3.7%, and hourly earnings and hours worked both came in 0.10% short of prior month readings and expectations.

Bonds, and in particular Fed Funds futures, sold off on the employment report as investors reduced the likelihood of a 50 basis point rate cut on July 31st. Currently the odds stand at 50/50 for a 50bps cut.

Economic data for the week is light with CPI on Thursday and PPI on Friday being the only important economic data of note.

Jerome Powell will speak on Tuesday at the Boston Fed and then testify on Wednesday and Thursday in front of the House and Senate respectively. The market will be listening closely for any indications of policy changes at the July 31st meeting, as well his opinions on Fed independence.

Second quarter earnings releases will start this week, however the following week will see a significant ramp in earnings releases led by the financials on July 16th and 17th.

July 5, 2019

In case you missed our update from Wednesday: “ADP was weaker than expected, coming in at 104,000 new jobs added in June. With this data, our model now expects payrolls to increase by 128,000 jobs as compared to the consensus at 160,000 jobs.

This morning the BLS will release the June employment report at 8:30. After an initial flurry of trading we expect the markets will be very quiet as many traders are on a prolonged July 4th vacation. The consensus number of new jobs has increased slightly to 165,000 since we wrote our commentary on Wednesday. Expectations for other significant jobs data is below. Click to Enlarge.

July 3, 2019

UPDATE: ADP was weaker than expected, coming in at 104,000 new jobs added in June. With this data, our model now expects payrolls to increase by 128,000 jobs as compared to the consensus at 160,000 jobs.

This morning ADP will release their monthly employment gauge. Expectations are for a rebound with the addition of 140,000 jobs. As a reminder ADP was very weak in May reporting only 27,400 new jobs. Based on the most recent ADP consensus forecast, our model forecasting for this coming Friday’s BLS labor report expects payrolls to rise by 160,000 jobs, well above last months 75,000 gain but 10,000 below the consensus forecast. We will update this commentary with a revised forecast after ADP releases their data at 8:15am.

Yesterday, Cleveland Fed President Loretta Mester stated that she does not see the need to lower rates unless more bad economic data emerges. Given she is one of the more dovish members of the Fed, her statement and others she made, should concern traders that an expected 50 basis point rate cut is not a done deal. While 25 basis points is very likely, better economic data may put that call into question.

Trump nominated Judy Shelton and Christopher Waller to the Federal Reserve Board. Shelton is far from a traditional Fed economist. She has admitted that the Fed does not have the ability, nor any central bank, to correctly manage the money supply. She is a hard money advocate as well, meaning money supply should be backed to or linked to gold or some other index or asset that essentially governs the supply of money. Also of note, she believes Fed Funds should be brought down to zero over the next year or two and the free market should set borrowing rates across the curve.

July 2, 2019

On Sunday and Monday, PMI was released for the US as well as most major economies. US PMI was 50.6, still in economic expansion mode and a fraction above last month’s reading. The majority of the rest of the world was not so lucky. Global PMI fell further into a contractionary reading of 49.4 vs 49.8 in the prior month. China, Japan, UK, Germany, Italy and a host of smaller countries are now below 50. Of note is Germany which dropped to 45. The ten year German Bund now stands at a record low of -0.36.

A quick note about our latest thoughts on the potential for Trump to fire/demote Chairman Powell-

The Chairman of the Federal Reserve is appointed by the President and approved by the Senate. Despite the selection of the Fed Chairman and board members, the Fed is independent and does not take orders from the President or Congress. It is this veil of Independence that is a key reason that monetary policy has not been abused as it has in other countries where government is directly involved in setting policy. If Trump were to fire or demote Powell, this veil could be weakened and the short and longer term consequences to the economy, inflation, and the dollar could be severe. This is why we have made a big deal in past commentaries about the potential for President Trump to fire Chairman Powell and will continue to do so.

To better understand the situation we spoke with a labor arbitrator to get his opinion on whether the President can fire Powell for “cause.” He thinks that the President certainly fire him, however differences in opinion on policy typically do not qualify for “just cause”, and he believes that such a decision could be easily overturned by the courts. Interestingly, he did say that based on his interpretation of the Federal Reserve Act, which governs the Fed and appointment of key Fed positions, the President can demote Powell with fewer complications. He thought it would be contested in some form but would have a greater chance of working.

Note that over the last few months the President only used the word “fire” when talking about what he wants to do with Powell. In the last week or so the word “demote” has been used. It is likely Trump’s advisors are on the same page as our arbitrator. We will continue to inform you as this beltway soap opera continues.


July 1, 2019

The continuation of trade talks with China sparked a rally in the equity markets over night.  Currently the S&P is up over 40 points. This weekend’s newsletter The “Art of the Deal” versus The “Art of the War” shares our current thoughts on what transpired over this past weekend between President Trump and Xi. Also presumably helping the market was Trump’s visit to North Korea and increased prospects for peace on the Korean peninsula.

Looking ahead on the economic front, the last BLS employment report before the Fed meets at the end of the month will be released this Friday. Also of importance this week, especially given last Friday’s sub-50 reading from the Chicago PMI report, will be the ISM and PMI manufacturing surveys released this morning. On Wednesday ADP will release their labor report which has a strong correlation with the BLS report due Friday.  Domestic markets will be closed on July 4th and barring any big surprises in the employment report market, we suspect it will be a dull trading day.


June 28, 2019

UPDATE: Chicago PMI printed at 49.7, signaling economic contraction. As noted below, this is likely to increase economic concerns at the Federal Reserve.

The string of bad Fed indexes and surveys continued yesterday as the Kansas City Fed Manufacturing Index fell to zero versus expectations of +3. As shown in the June 26th Chart of the Day, this index adds to the list of indexes/surveys that are perilously close to signaling economic contraction.

The Chicago PMI, a widely followed survey of purchasing managers, will be released at 9:45 this morning. Expectations are for an expansionary reading of 53.6. While not expected, a contractionary reading below 50 would almost certainly increase calls for the Fed to take action sooner rather than later. The index has steadily declined after piercing 64 in February.

Bitcoin has been on quite the roller coaster over the last week. On June 20th Bitcoin opened up at $9500. Six days later on June 26th it was 45% higher at 13,850. It then proceeded to fall below 11,000, but has gained some ground since as it stands at 11,850 this morning. To be honest we are not quite sure what to make of the extreme volatility in Bitcoin and other cryptocurrencies and have seen no evidence of related volatility in the major asset classes.

As discussed in prior commentaries, the G20 meeting will be conducted this weekend. While a China-US trade deal is not expected, the market will be on the lookout for signs that the two parties are making progress with the potential for an agreement later in 2019.

June 27, 2019

As the second quarter comes to an end asset managers are once again partaking in window dressing and portfolio rebalancing actions. Window dressing is when managers, who report their holdings monthly or quarterly, sell what hasn’t been working and buy what has recently traded well. These trades give their clients the appearance that their portfolios are well positioned for the current market dynamics. Rebalancing is when portfolio managers buy and sell their current holdings to bring them back in line with targeted allocations. For instance, the utility sector is up over 20% this year alone. Managers that have held XLU for the year will find that their allocation to the sector is 20% over their targeted goal. As such they may sell about 20% of XLU to bring it back to its target weighting. At the same time they are likely buying those sectors or stocks that trailed the market and have become underallocated in their model.

Both window dressing and rebalancing can cause strange move in individual stocks, sectors, and at times even asset classes as we may likely see with bonds and gold due to their recent surges. As an aside, unlike many managers, we rebalance when we believe an asset is at a price that warrants adding to or reducing. Other than tax related trades, we do not let the calendar dictate our portfolio management.

The US and China have reached another truce heading into the G20 meeting this weekend. As part of the truce the US will hold back on additional tariffs. This is likely a requirement of the Chinese if they were to hold talks this weekend. This is a positive step forward but it still appears there are a lot of differences, so while progress may be made this weekend, expectations for a deal are slim.


June 26, 2019

Consumer Confidence fell sharply from 134.1 to 121.5. Of concern was the jobs hard to get question. Per Econoday- “Jobs-hard-to-get in this report are closely tracked by forecasters as an early signal for the monthly employment report….Now this question, surging 4.6 percentage points to 16.4 percent, is signaling significant weakness for June’s employment report.”

Today’s Chart of the Day highlights the rapid decline in a host of regional and national surveys and outlooks. We have discussed individual survey and outlooks on numerous occasions over the past few weeks but this graph provides a more complete picture of seven of the most watched ones. As shown, the recent decline is sharp but does not necessarily portend a recession is imminent. As we saw in 2016, surveys based on expectations fell sharply, but hard data reflecting the actual decisions businesses make slowed but not to recessionary levels.

Hard economic data released this summer will be important to follow as we look for signs that the surveys accurately reflected the mood of corporations or that the corporations were concerned for a while but did not back up their concerns with actions.

The Trump-Powell saga continued yesterday as Powell responded to Trump’s latest barrage against the Fed Chair. In particular Powell stated that the “Fed is strictly nonpolitical and won’t make mistakes of integrity or character.” Further, “The Fed is insulated from short-term political pressures -what is often referred to as our ‘independence. Congress chose to insulate the Fed this way because it had seen the damage that often arises when policy bends to short-term political interests.” This may seem like nothing more than a political battle and media headline fodder, but if Trump were to take action against Powell the consequences on markets and the economy could be severe. For more on this read Market Implications for Removing Fed Chair Powell.


June 25, 2019

Last night we published Investors Are Grossly Underestimating The Fed on RIA Pro. The article provides evidence that the market, without fail, underestimates how much the Fed will raise or lower interest rates. While it appears the market is aggressive in pricing 3 rate cuts by year end, history argues they may not be pricing in enough? To read the article click the link below.

The Dallas Fed Manufacturing survey, like the Fed’s Philadelphia Business Outlook Survey and Empire State Survey, fell sharply from -5.3 to -12.1 (worse than the lowest analyst estimate) and is the lowest reading since June 2016. The Chicago Fed National Index was better than expected but is still in negative territory. The weakening of Fed surveys helps explain, in part, why the Fed has become more dovish over the last few weeks.

President Trump continues to publicly share his thoughts on Chairman Powell and the Federal Reserve’s policy stance. Specifically, yesterday in reference to the Fed he stated “Federal Reserve that doesn’t know what it is doing.” It is clear the dovish talk from Mario Draghi of the ECB coupled with no rate cut at the June 19th Fed meeting irritated the President. To wit: “Now they stick, like a stubborn child, when we need rates cuts, & easing, to make up for what other countries are doing against us. Blew it!” 

Currently this dissatisfaction may only be Beltway politics, however there are potentially wide ranging and underappreciated consequences if the President took the unprecedented action of firing or demoting the Fed Chair. We will discuss this topic and what firing or demoting Powell may mean for specific asset classes in our Real Investment Advice article to be published tomorrow.

June 24, 2019

This morning The Chicago Fed will release their National Activity Index and the Dallas Fed their Manufacturing Survey. With the latest round of surveys teetering on the verge on economic contraction we will pay close attention to these releases. As a reminder, last week the Philadelphia Fed Business Outlook Survey came in at +0.3 versus +16.6 the prior month and against expectations for an 11.0 increase. A reading below zero on this index points to contraction.

The highlight of the week might likely come tomorrow when Jerome Powell speaks for the first time since last week’s Fed meeting. This “conversation” with New York Times reporter Neil Irwin will provide Powell the opportunity to further stress his views on Fed policy. We suspect Irwin will ask Powell questions around Trump’s latest round of comments about demoting Powell. James Bullard, the only voting member that voted for a reduction of rates will speak tomorrow night. Over the weekend, non-voting member Neel Kashkari told the media that he would have voted for a 50bps rate cut if he was a voting member.

June 21, 2019

The market rallied to new highs yesterday on the assumption is set to lower rates sooner rather than later. But this should not be a surprise since market participants have been trained to “buy” any time the Fed mentions “accommodative policy.” However, it was probably best to remember that historically when the Fed STARTS reducing interest rates, a topic we are covering in this weekend’s newsletter, it has been in response to a financial crisis, recession, or both as shown in the chart below.

Click Image To Enlarge

The other important point to remember is that while the “bulls” rallied to the markets to all-time highs, they did so on the assumption the Fed has already agreed to cut rates. However, that is not actually the case. It is an easy matter to remove the word “patient” from the prepared statement, it is another thing to actually cut rates when there is very little of that particular policy tool available. More importantly, the Fed did not actually “say” they were looking to cut rates and the Fed’s own “dot plot” shows NO easing for 2019 and only one rate cut in 2020.

As traders and investors it is important for us to pay attention to what “IS” rather than what the market “THINKS.” The market has priced in a scenario that hasn’t occurred which leaves investors vulnerable to disappointment.

Oh, and pay attention to what is rallying the most — Bonds, Gold, and Defensive Positioning. Such market action doesn’t necessarily suggest the most optimistic of outcomes.




June 20, 2019

While the Fed did not lower rates yesterday as some suspected, Wall Street and the media now believe the Fed is on a path to cut rates on July 31st with one or two more cuts to follow later in 2019. Almost all asset classes rose yesterday on the heels of the Fed announcement except for the US dollar. The dollar fell appreciably yesterday and is falling again this morning. It is now down over 1% versus other leading currencies and importantly about 50 cents below its 200 day moving average.

The markets, along with intense pressure from President Trump, are creating a dilemma for the Fed: The economy is doing well, but everyone is clamoring for lower rates. There are a lot of uncertainties that could change that picture but the Fed isn’t convinced that things will get worse.

Here are a few takeaways from the FOMC meeting and Powell press conference:

  • The removal of the word patient in reference to looking at economic data tells us they are ready to act quickly if economic conditions decline appreciably.
  • It’s our objective to sustain the expansion,” – Powell
  •  The Fed wants to see if the cross currents about trade and global growth continue to weight on the outlook before acting, he says.
  • Powell says there wasn’t much support for a rate cut today, although Fed President Bullard voted for a 25 basis point rate cut.
  • The risks to the expansion are evolving.
  • Powell says he’s concerned about the shortfall in inflation. “We need to be really strong on 2% inflation,” he says. “We certainly don’t want to be seen as weak on inflation, and I don’t believe we are.”
  • Many FOMC members pointed to weak capital spending and business sentiment as arguing for a rate cut, Powell says.
  • The Fed “wants to see more” before cutting rates, Powell says.
  • The divisions within the Fed run deep judging from the central bank’s projections of future interest rate moves known as the “dot plot.” Nine Fed officials predict no rate cuts this year while eight forecast one or two reductions.
  • The Fed dot plot does show a quarter-point cut in 2020 owing to a subtle shift in voting patterns, with rates rising again in 2021 to the current target of 2.4%.
  • The expectation that rates will rise in 2021 would seem to suggest the Fed thinks the record 10-year-old expansion will continue for at least a few more years — a sign of confidence in the economy.
  • The Fed stuck close to forecasts that gross domestic product will expand 2.1% this year, 2% in 2020 and 1.8% in 2021.

The Fed’s decision is likely to rub President Trump the wrong way, especially on the heels of renewed ECB dovishness. Trump has been pushing hard for a rate cut for months and the president has repeatedly criticized Powell, with the White House even going so far as to research whether it could remove him. We would not be surprised if Trump were to make more direct threats and possibly even take action to remove Powell. We will have an article coming shortly on the implication on asset prices if Powell were removed.

Gold is up over $35 overnight on dollar weakness and reports that Iran shot down a US drone. Also playing a role is that gold clearly broke above its five year resistance line. While its likely gold will at some point retreat back to the line of resistance before moving higher, it is possible the weakening dollar, dovish Fed and ECB, and tensions in Iran cause it to continue to surge higher.

For More on the Fed See: Fed decision and Powell press conference: live blog and video



June 19, 2019

Today is Fed day and for the first time in a while there are a wide range of potential results.

1- The Fed could cut the Fed Funds rate by .25% as an “insurance” measure. This would likely cause risk assets to soar but it might also be worrisome to investors as it signals a heightened level of Fed concern for the economy.

2- Most likely the Fed leaves rates stable but introduces new language to their statement that conveys a rate cut is coming at the July 31st meeting and others in the future are increasingly probable. Depending on the degree of dovishness in the statement the markets will probably like such a message. Keep in mind the bond, stock and gold markets have rallied strongly over the last few weeks on hopes for such an outcome, so an initial sell-off should not be unexpected.

3- Lastly, and highly unlikely, is a hawkish tilt in which future rate cuts are discounted. While completely unexpected, we should remind ourselves that the stock market is within one percent of a record high, employment at 50 year lows, and prices are stable.

After the FOMC meeting results are announced, Chairman Powell will hold a press conference and further explain the Feds thinking.

The stock market soared yesterday as it was announced that Trump will me Xi at the G20 meeting and discuss trade. The renewal of high level talks brings hope that the conflict can be resolved without more tariffs and further disruptions to trade. Also helping the markets was Mario Draghi calling for more dovish policy in the Euro region. The markets appear to be betting the combination of trade agreements and aggressive central bank policy will arrest any chances of a global recession.

June 18, 2019

One of the primary reasons the Fed is considering cutting rates as early as tomorrow is that the global  economy is rapidly weakening. Last night the well followed German ZEW index of investor sentiment tumbled to -21.1 versus expectations of -5.6. German bund yields fell to an all-time low of -.30% (yes- negative).  The euro is also lower versus the dollar as markets are pricing in the potential for more ECB rate cuts or QE.

S&P futures are currently up $10 overnight and bond yields are lower. The 10-year US Treasury yield is down another 4 basis points to yield 2.05%. Interestingly, the 3 month T-bill is up 3 basis points this morning, a sign that a Fed cut tomorrow is not as likely in the markets eyes.

Yesterday, the Empire State Manufacturing Index fell sharply from +17.8 to -8.6, the largest one month drop in almost 20 years. The New York Fed produces  this survey based on the answers of approximately 200 manufacturing executives from the state of New York. While this is one report from one region, it does cover activity in June. Due to its timeliness we will keep an eye on out on upcoming manufacturing surveys to see if this an anomaly or reflective of a potential contraction in the manufacturing sectors of the economy. The Philadelphia Fed Survey will be released Thursday. It is likely the Fed already has its results as they ponder the path of future interest rate policy.

June 17, 2019

There are two main events this week which will be moving markets – The Fed meeting which starts tomorrow and the G-20 meeting where all eyes will be on the President for comments about the “trade war” with China.

We currently expect Fed policy to remain “unchanged” this week given the subjective odds of a June cut at only 10%. More importantly, while Goldman looks for a dovish tilt to the proceedings, the risk is it won’t be nearly enough to appease markets that have aggressively priced rate cuts in the fall.

Barring an unlikely surprise on the funds rate, we expect the market to focus on four key developments:

  1. the statement’s policy stance/balance of risks paragraph,
  2. the number of participants projecting cuts in the Summary of Economic Projections (SEP),
  3. the extent of dovish changes to the statement and economic forecasts, and
  4. the tone of Powell’s press conference.

The main reason why the Fed is poised to disappoint markets is simply that not enough has changed to warrant a clear signal of an upcoming cut. Indeed, “since the March SEP meeting, stock prices are higher, the unemployment rate fell to a 50-year low, consensus growth forecasts are unchanged, and the very tariffs on Mexico that prompted the latest calls for rate cuts have been taken off the table.” 

Not only that, but the economy continues to chug along largely as expected: outside of May payrolls, the growth data still look decent: Goldman’s Q2 GDP tracking estimate has rebounded to +1.6%, Atlanta Fed GDPNow is +2.1%, and the bank’s own tracker of private final demand is at an even healthier pace (+2.8%).

We expect nothing to come out of the G-20 meeting but as shown in our CHART OF THE DAY below, Bank of America’s Chief Investment Officer, Michael Harnett, laid out a 2-by-2 matrix summarizing the four possible scenarios that could result from the Fed’s announcement next week, and the G-20 meeting on June 28-29, where there is a chance (if minuscule) that Trump and Xi will announce the trade war ceasefire, although far more likely, will simple lead to further trade war escalation.

Of these 4 scenarios, two are most remarkable: the best/best and the worst/worst cases. The first one sees a Dovish Fed statementcoupled with a G-20 deal, which according to BofA will send the S&P > 3000, and the 10Y yield to 2.00%, while the worst possible outcome would be if there is a 1) a hawkish Fed surprise and 2) no Deal at the G-20which would send the S&P below 2,650, or potentially resulting in a 12% drop in the market, while slamming 10Y yields to 1.50% and helping gold rise above its 5 year breakout zone as the VIX surges.

June 14, 2019

Retail Sales for May will be released at 8:30 this morning. Expectations are for a 0.7% increase and 0.4% excluding autos and gas. Another indicator of the health of the consumer, the University of Michigan Consumer Sentiment Survey, will follow at 10:00 am. Economists expect a slight decline from 100 to 98.4.

Along with weak inflation and warning signs from the U.S. bond market, “a downward policy rate adjustment may be warranted soon” to help boost inflation expectations and help ease fears that have emerged in bond prices of a sharper-than-expected U.S. slowdown. -From a CNBC interview of Fed President James Bullard

This quote and other similar comments allude to the fact the some members of the Fed are expressing concern about inflation expectations. Regardless of the fact that expectations are well within longer term data trends, it is appearing more likely the Fed might use weak inflation expectations as a rationale for lowering rates.

Today’s Chart of the Day highlights the significant correlation (.759) between oil and inflation expectations.  The price of oil has fallen 15 percent since last October and inflation expectations declined .29 percent over the same period. If oil continues to trend lower, inflation expectations will likely follow and we suspect the market will ratchet up the odds of future rate cuts. Stay tuned!

June 13, 2019

Like PPI on Tuesday, Wednesday’s CPI report was a little weaker than expectations. CPI m/m and y/y were both 0.2% weaker than the prior month. While neither report is overly concerning, they both point to limited price pressures. The market may perceive the price data in the two reports is more evidence the Fed has the green light to ease, however we remind you that one of the Fed’s closely watched measures of inflation, CPI excluding food and energy, is running at 2.0 percent y/y which is exactly the Fed’s preferred rate of inflation.

Two oil tankers were attacked in the Strait of Hormuz and as a result the price of oil is up nearly 4 percent this morning, recouping much of yesterday’s decline. Given the potential uptick in tensions with Iran, we will watch the price of oil closely for clues as to whether or not the incidents represent an escalation between Iran and the U.S. and Saudi Arabia. Iran has denied responsibility.

A few subscribers have asked us why investors are so willing to buy U.S. Treasury securities with yields in the low 2 percents. Our immediate answer is that we, and apparently quite a few other investors, believe that yields can go much lower, thus producing price gains on the bonds, and ultimately returns greater than the stated yield. Another important reason is where else can you find sovereign debt from a highly rated country with a yield anywhere close to those in the U.S. A quick tour of some potential options include German 10yr notes at -0.25, Japanese 10yr notes at -0.12, and U.K. 10yr notes at +0.87. Needless to say, U.S. 10yr notes at 2.12 seem mouthwatering!

June 12, 2019

Yesterday’s PPI inflation report was slightly weaker than expected. The year over year (y/y) rate increased 1.8 percent versus expectations of a 2.0 percent increase. However, the core number, which excludes food and energy, met the consensus estimate with a 2.3 percent y/y rise. Today’s CPI report will shed more light on the inflation picture. The market expectation is for increases of 0.1 m/m and 1.9 y/y. Core CPI is expected to come in slightly higher at 0.2 m/m and 2.1 y/y

Today’s Chart of the Day shows an important inversion in a very short term maturity Treasury yield curve. While the market is intently focused on the 2yr/10yr curve and waiting for it to invert, our eyes are on the 3month/6month T-bill curve. Based on history, this curve is warning that a recession is imminent. Check back later today as we will have more on this in an RIA Pro article entitled Quick Take: The Treasury Bill Yield Curve Says A Recession Is Imminent. The article goes into detail of the importance of the curve  as well as provide support for Lance Robert’s  saying “Sell the first Fed cut and buy the last.”

June 11, 2019

Trump has threatened China with higher tariffs if President Xi Jinping does not meet with him at the coming G20 Summit (June 28/29). The market does not seem overly concerned, trading up  nearly half a percent in pre-market trading.

The members of the Federal Reserve just entered their self-imposed blackout period and are not allowed to speak publicly until after next Wednesday’s FOMC meeting.

Over the last two months we have increasingly heard quite a few Fed speakers bemoan the fact that inflation and inflation expectations are trending lower than their 2 percent target. Today at 8:30, the BLS will release the Producer Price Index (PPI) and follow it up on Wednesday with the Consumer Price Index (CPI). Both indexes are expected to come in at a +0.1 percent m/m increase, which is weaker than the prior month in both cases. If the data meets consensus, or is weaker, it likely further affirms the markets view that the Fed could ease as early as July 31st. Conversely, higher than consensus prints on the data may cause some second guessing.

One of the biggest risks to the bond and stock markets is that the market maybe wrong in that the Fed will not ease rates over the rest of the year. The graph below, courtesy Deutsche Bank, shows that such a scenario would certainly not be the first time the market was wrong about the Fed. In fact, based on the graph, we are putting some thoughts into how the market could be wrong- are they expecting too many rate cuts from the Fed, or not enough?      CLICK TO ENLARGE


June 10, 2019

On Friday the S&P 500 rallied over 1 percent capping off a strong 150 point rally for the week. Friday’s gain came on what appeared to be a dismal employment report which raises the likelihood that the Fed could cut interest rates as early as mid-June, but more likely in late July. We use the word “appeared” because we learned this weekend that trade/immigration issues with Mexico were resolved and tariffs on Mexico will not go into effect. We have no doubt that there were traders/banks in “the know” and the rally on Friday, and possibly Wednesday and Thursday, was in part driven by those with knowledge of the pending deal.

The market rally and deal with Mexico does little to change our longer term market thoughts. We had anticipated a “sellable rally” as noted in this week’s Newsletter and the prospects of Fed easing along with the Mexican pact likely sped that rally up. Economic growth for the current quarter is estimated to range from .5 to 1.5 percent. Most investors think the slowdown from prior quarters is trade related. While there is little doubt some of it is related to trade, we believe the bulk of the slowdown is natural.

The benefit of corporate tax cuts, hurricane/fire emergency spending and larger fiscal deficits have largely run their course. Without these spending benefits the economy should fall back to its natural run rate. According to the Fed, the natural rate of real economic growth is 1.90 percent for 2020 and it declines from there. Based on productivity growth, debt and demographics we believe the rate is closer to 1.5%. Either way, such economic growth rates do not jibe with equity valuations that portend significant earnings growth in the years ahead.


June 7, 2019

UPDATE: The BLS reported that 75,000 new jobs were created in May, 105,000 below the consensus estimate and 15,000 below the lowest estimate. The number was 2,000 more than the average of our  two estimates. Average hourly earnings and private payrolls also missed estimates. We must remember this is only one months worth of data and certainly doesn’t constitute a trend. That said, we will follow other employment indicators closely in the weeks ahead as it does help confirm other signs of a weakening economy.

At 8:30 am the BLS will release the monthly employment report for May. Today’s data will be watched closely for signs the slowing economy is hampering the jobs market. On Wednesday, we highlighted ADP’s employment survey and in particular the fact that it only increased by 27,000 jobs for the month of May. Not only was the report significantly below Wall Street estimates but it was also the lowest level of job growth in a decade.

Today’s Chart of the Day highlights the strong correlation between ADP and BLS data. The r-squared in the graph is .7558, meaning the correlation between ADP and the BLS data is statistically significant. Based on the regression line of data going back to 2002, we should expect payrolls to climb by a net of 34,000 jobs. We also regressed the data on a 3 month rolling basis which proved more statistically significant (r-squared = .86). The expected payrolls number based on that analysis is 113,000 jobs.

The consensus, as shown in the table below, is for a gain of 180,000 net new jobs. If either of our statistical estimates is in the ballpark, today’s data will likely further fuel the growing market mindset that the Fed will ease rates in the next few months.


June 6, 2019

As we updated yesterday, the ADP employment report registered a much lower than expected increase of 27,000 jobs. As shown below, this was the lowest number of monthly jobs added per the ADP Report since the last recession. CLICK TO ENLARGE

Wednesday’s release of the Fed Beige Book, a Fed report detailing economic activity in each Fed district, mentioned the word tariff  37 times, up from 19 in April and 18 in March.  This report will only further the Fed’s concerns that trade will put a damper on economic growth. If anything, it provides the Fed more ammo to lower rates.

The following quote is from Lakshman Achuthan, Economic Cycle Research Institute

“The received wisdom is mistaken on how recessions are made. They are not simply caused by shocks. They are caused by a window of vulnerability in the economic cycle where the cyclical drivers of the economy have weakened to the point where it’s susceptible to a negative shock. Within that window of vulnerability, virtually any reasonable shock becomes a recessionary shock. That’s how you get a recession.”

The quote above sums up the economic situation so well. The current economic expansion is vulnerable due to slowing global growth and the lack of stimulus that boosted economic activity over the prior two years. As Lakshman says the “window of vulnerability” is open. A negative shock could be related to the trade war, a stock market decline, Iran hostilities, BREXIT, or possibly something not on our radar at the moment. The bottom line is a recession is not guaranteed but the odds of having one in the next six months to one year is certainly higher than its been in a few years.

June 5, 2019

UPDATE: The ADP Employment Report came in at a lowly +27,000 jobs versus expectations of  +175,000 increase. If the Friday BLS employment report is similar, the Fed is much more likely to reduce rates as early as late July.

Fed Chair Powell spoke yesterday morning and seemed to further confirm Bullard’s dovish statements from the prior day. The following headlines caught our attention:  POWELL SAYS FED WILL `ACT AS APPROPRIATE’ TO SUSTAIN EXPANSION and POWELL SAYS ‘DOT-PLOT’ OF FED RATE FORECASTS HAS DISTRACTED ATTENTION FROM HOW FED WILL REACT TO UNEXPECTED EVENTS. Basically Powell is saying to ignore Fed forecasts for no rate hikes this year as they will lower rates if needed.

More interesting to us was the following quote from Powell: “Using monetary policy to push sufficiently hard on labor markets to lift inflation could pose risks of destabilizing excesses in financial markets or elsewhere.”  Powell clearly is concerned that longer term bond yields would rise with central bank induced inflation and could cause harm to the financial markets. In particular he is probably most concerned about the corporate bond market.

Vice Chair Richard Clarida also chimed in yesterday with the following: IN PAST EPISODES IN THE 1990S WE DID HAVE INSURANCE CUTS. Basically he is setting the stage for proactive rate cuts. Clarida is providing us with further confirmation that the Fed could cut rates within the next few months.

The stock market interpreted the comments as “we have your back” and rallied over 2%. In prior days we mentioned the market was oversold and technically due for a bounce. Is this the short term bounce we were looking for or will the Fed’s support help the market retake all-time highs?

This morning ADP will release their employment report at 8:15. Expectation is for a 175,000 increase as compared to 275,000 last month . We will have more on Friday’s employment report tomorrow.

June 4, 2019

St. Louis Fed President James Bullard gave us reason to suspect that the Fed is coming around to the market view that rate cuts are not that far off. The following headlines hit the wires yesterday: RATE CUT MAY BE WARRANTED SOON TO LIFT INFLATION and MARKETS TELLING FED CURRENT RATES ARE TOO HIGH.  With this trial balloon released by the Bullard and the Fed, the idea of rate cuts as early as July 31st, does not seem too far flung anymore.

PMI was revised lower yesterday from 50.6 to 50.5, the lowest level since September 2009. The Institute of Supply Management (ISM) Survey confirmed the weak PMI, coming in yesterday at 52.1 which is below consensus (53.0) and the prior month level (52.8). While PMI and ISM remain above 50, signaling economic expansion, any further decline could likely tip the indexes into economic contraction readings. On Wednesday both organizations will release their non-manufacturing (services) version of the index.

Here are some survey answers from ISM that confirm our concerns that trade talks and tariffs are affecting the actions of manufacturing executives:

  • “Ongoing tariffs [issue is] impacting costs and influencing supplier realignment on country of origin. Border issue is causing delays in imports from Mexico.” (Computer & Electronic Products)
  • “The threat of additional tariffs has forced a change in our supply chain strategy; we are shifting business from China to Mexico, which will not increase the number of U.S. jobs.” (Chemical Products)
  • “Newly increased tariffs on Chinese imports pose an issue on a number of chemicals and materials that are solely produced in China. We are expecting increases in raw materials starting June 1.” (Plastics & Rubber Products)

It is worth noting the following countries have PMI readings below 50: South Korea, Japan, Taiwan, Malaysia, Russia, Poland, Turkey, Czech Republic, Italy, Germany, and The UK. China stands just above 50 at 50.2.


June 3, 2019

We learned this past weekend that Steven Mnuchin convened a meeting of the Financial Stability Oversight Council to discuss the surge in corporate borrowing and the economic and market risks it now poses. Fed Chair Jerome Powell attended the meeting.

Today’s Chart of the Day shows the 3-month/10-year U.S Treasury yield curve. This curve is inverting in part due to longer term yields falling as they reflect increased chances of economic slowdown. While this occurs, the very short end of the maturity spectrum is static as yields are heavily dependent on the Fed Funds rate. Currently, expectations for a rate cut by the Federal Reserve in the next three months is low. When the market starts implying Fed rate cuts in the next three months, the 3m/10yr curve will flatten and then turn positive. Once this occurs the odds for a recession increase sharply.

May 31, 2019

In a surprising move last night, Donald Trump slapped Mexico with a 5 percent tariff on all goods and set in place a schedule to ratchet it up to 25% over the next four months. The new tariffs are not in retaliation for trade, but a punishment designed to get Mexico to halt illegal immigration into the U.S. The S&P 500 fell 25-30 points on the news and remains near the lows this morning. The dollar index is relatively flat, but the Mexican peso is down 3 percent versus the dollar, and bond yields have declined 5-6 percent.

Mexico is the United States third largest trade partner not far behind China and Canada. To put further context on the amount of trade between the U.S. and Mexico, the combined trade of Japan, Germany, and South Korea with the U.S. is less than that with Mexico. 

Corporate Profits, reported by the BEA yesterday, fell from +11.2 percent annual growth in the fourth quarter to 1.6 percent annual growth in the first quarter. As we have seen with earnings being reported from individual companies, the growth benefits of the tax reform bill have largely run their course. Profits will remain higher due to lower taxes, but we will no longer see profit growth due to the bill.

Also of concern yesterday, wholesale and retail inventories both increased above levels expected by economists. While the numbers will boost the second quarter GDP number, they are additive to already bloated inventories from the first quarter and provide another signal that business and consumer spending have slowed. At some point soon corporations will run down inventories and reverse the benefits to GDP we saw in Q1 and may see to a lesser degree in Q2.

Chicago PMI will be released today at 9:45. Last month it fell sharply but consensus forecasts have it rising a point from last month’s 52.6. Again, we are looking for confirmation of the national PMI report that the breakdown in trade talks is starting to affect the purchasing behaviors of large manufacturers. While not expected in today’s report, a reading under 50 points to economic contraction and could spook the stock market and boost the bond markets even more.

May 30, 2019

Yesterday the S&P 500 traded below key support (2800-2809) and the 200 day moving average (2776). A late day rally pushed it slightly above the 200 day moving average. For our latest technical analysis, read- Quick Take: Market Update 5/30/2019.

Making this recent market decline hard to decipher is that there does not appear to be an obvious reason for it. Yes, economic growth has been weaker than expected and trade talks with China are not going well, but those factors have been known since early May. The fact that bond yields have declined steadily through May lead us to believe the equity market is coming to grips with slowing economic growth. Over the last week, a few leading bank economists have downgraded their second quarter GDP forecast to the 0.7-1.5 percent range.

What Are Implied Fed Funds?

On numerous occasions, we have mentioned the importance of following the implied future Fed Funds Rate. We thought it might be helpful to explain better what this rate is.

The Fed Funds rate, set and managed by the Fed (known as the effective rate), has hovered around 2.40 percent since it was raised last December. Fed Funds futures (aka implied rate) trade on the Chicago Mercantile Exchange (CME). Its contract prices represent the respective rate that traders collectively believe Fed Funds will average for specific months in the future. For example, the October 2019 contract implies that the Fed Funds effective rate will average 2.21 percent for the month of October. Given the current Fed effective rate is 2.40, the market is implying a .19 percent rate cut (2.40-2.21) or a 76% (19/25) chance of a standard .25 percent rate cut by October.

When Fed and market expectations diverge widely a bout of volatility in the fixed income and equity markets should be expected as expectations for one or both parties tend to change rapidly. Currently, the Fed expects to keep rates steady for the remainder of the year, while the market thinks the Fed will cut by over .50% by next April. The graph below charts the divergence.    CLICK TO ENLARGE


May 29, 2019

The market is trading weaker overnight following a sharp 20 point decline yesterday afternoon. Of concern, from a technical perspective, is that the S&P is currently trading at 2790, below 2800, a key line of support. We are watching for a close below the 200 day moving average which is currently at 2776. A sustained breach below 2800 and 2776 favors a return to the low 2600’s, which served as support in late October and November of 2018.

Yesterday, the Dallas Fed Manufacturing Survey came in at -5.3 versus last month’s reading of 2.0 and a consensus forecast of 6.0. The expectations component led the survey into negative territory.  This latest manufacturing survey affirms the weakness we discussed  in the PMI report last week. Conversely, Consumer Confidence surged from 129.2 to 134.1. Consumers will ultimately pay the price for tariffs but it will take time for them to work through the economy and affect them. As such, strong levels of confidence, especially given stocks are near their all-time highs, is not surprising.

Once a year, Incrementum puts out a comprehensive report on Gold. Their PowerPoint presentation is full of graphs, data and commentary that is simply incomparable. If you are interested in gold we highly recommend the report. The link is as follows:


May 28, 2019

Last Thursday the PMI report pointed to weakness in the manufacturing sector, most likely the result of the breakdown in China-US trade talks. PMI is one of a handful of surveys that provide economists early clues of economic acceleration or deceleration. Most hard data takes 2 to 3 months or even longer in some cases to get reported, so these timely surveys are important to follow. This week we will look to see if other surveys are consistent with PMI. Conversely, we might find out that the report was an outlier.

Today at 10:30 the Dallas Fed Manufacturing Survey will be released. On Wednesday The Richmond Fed will release their Manufacturing Survey and on Friday the Chicago PMI Survey will be released.

The Atlanta Fed’s GDPNow forecast stands at 1.3 percent growth for the second quarter. This is inline with recent forecasts by the banks which are currently forecasting growth in a 1 to 1.75 percent range.


May 24, 2019

The market fell yesterday on concerns that the Fed minutes appeared to push back on the idea that rate cuts were coming in the next six months. Despite the seemingly hawkish stance of the Fed, Fed Funds futures contracts rallied and now imply a 95 percent chance of two rate cuts by January 2020.

Further harming investor sentiment are growing concerns over the trade war with China. In particular China’s General Secretary Xi Jinping ruled out the possibility of meeting with Trump at the coming G20 meeting.

Yields continue to fall with the 10-year Treasury bond reaching 2.31 percent, down nearly a full percent from the highs attained just last November. Crude oil fell by 5 percent on higher than expected supplies and is now 12% lower in just the last month.

PMI, released yesterday, provided our first look at how the US-China trade talks are affecting managers in the manufacturing and services industries. The composite level fell to 50.9 from 52.8. While still pointing to expansion of the economy, the composite is close to falling below 50 which would signal economic contraction.  Here are a few sobering comments from Econoday:

  • Key here is outright contraction, that is a sub-50 reading, for new orders. This is an unwelcome first since August 2009 and the last recession.
  • Growth in orders slowed as did hiring for this sample.
  • Overall confidence is now at a 7-year low with overall job growth at a 2-year low. The composite index, at 50.9, is at a 3-year low.

Have a great Memorial Day weekend!!

May 23, 2019

The Fed minutes (released yesterday) from their May 1, 2019 policy painted a more hawkish picture than we anticipated. In particular, the following statement about equity and debt markets seemed to come out of left field: “(Fed members) judged asset valuation pressures in equity and corporate debt markets to have increased significantly this year.”  Yes valuations have risen sharply as the equity market surged in 2019, but valuations just rebounded back to the same levels they have been at for the better part of the last two years. We are not sure what has changed in the way they assess valuations, but regardless, if the Fed truly believes valuations are high they are less likely to lower rates as doing so could further richen valuations.

The Fed also warned about the buildup of corporate debt and said the situation could amplify any financial market shocks. Like with excessive valuations, debt has been at record levels for a while, so it’s interesting to see that corporate debt has now become a topic du jour for the Fed.

In regards to inflation, the Fed said the recent dip in inflation is transitory and went on to list the same inflation gauges we discussed in Inflation: The Fed’s False Flag. If in fact the recent spate of slightly lower inflation readings are transitory, the Fed is less likely to lower rates. That said, they seem to be increasingly focused on inflation expectations and not inflation per se. To wit: “inflation expectations could become anchored at levels below those consistent with the committee’s symmetric 2 percent objective.”

We are a little surprised the Fed took a more hawkish than expected tone, and equally surprised the stock market did not immediately fret about the Fed’s messages. The market is opening decently lower this morning so maybe it took a while for investors to fully digest the Fed’s mixed messages.

Essentially, the Fed is in a wait and see mode.  Interest rate cuts, if any, appear to have been pushed out further on the horizon.

May 22, 2019

The Fed minutes from their May 1, 2019 policy meeting will be released at 2pm today. While they are called minutes, they are not minutes in the traditional sense. The transcripts are frequently updated and modified to further stress topics of interest that the market may not have appreciated three weeks prior when the Fed put out their original statement.  We will be on the lookout for more signs the Fed is uncomfortable that inflation is not high enough.

The shares of J.C. Penney, Kohls, and Nordstrom were down 7, 12, and 10 percent respectively yesterday on poor earnings and revenues. Given the weakness in retail sales and personal consumption along with higher credit card rates and rising oil prices we are not surprised by their poor performance. Target will release earnings this morning.

Equities are trading slightly weaker this morning on concerns that Trump will expand the list of Chinese technology companies that U.S. companies are restricted from doing business with. Clearly another sign that trade talks are not progressing well.

May 21, 2019

Small Cap and Mid Cap stocks have underperformed large cap stocks throughout the 20% post-Christmas surge. Please see Today’s Chart of the Day for a performance comparison of small-caps to large caps. We believe the unusual underperformance of small caps in a rising market is possibly due to two factors. 1- Large caps are heavily buying back stock and supporting their share prices while small caps are much less likely to be doing so. 2- Small cap earnings are more susceptible to weaker economic growth and investors are starting to rotate towards stable large caps in anticipation of slower growth. The first case is supported with data showing that buybacks for 2019 are already on pace for a record setting year. The second case is backed by bond yields which have steadily declined despite the stock market rising.

Last night Jerome Powell said the Fed is closely watching the sharp increase in corporate debt outstanding but thus far they do not view the situation as a threat similar to subprime in 2008. Corporate debt to GDP currently stands at a record high. Further over 40% of the debt is rated BBB and only one notch away from being downgraded to junk. We will have more on this topic tomorrow in a Real Investment Advice article entitled The Corporate Maginot Line.

Per Yahoo Finance: Powell said one key difference between 2008 and now is that the increase in business borrowing is not being fueled by a dramatic asset price bubble like the housing bubble of the past decade.  – We counter by saying the dramatic rise in business borrowing is fueling a stock bubble. A large amount of money borrowed has been used to buy back stocks and was not invested into R&D, employee development, or other investments that could generate future earnings growth and support the debt balances.

The Fed will never publicly acknowledge a financial problem for fear of fueling it. Beyond that, we also question whether they know a problem is truly brewing in the corporate debt markets.  This denial has a familiar tone to the words spoken by members of the Fed in 2005-2008.  To wit: “All that said, given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.” – Ben Bernanke May 2007

May 20, 2019

The economic calendar is light this week. Of interest, Vice Fed Chair Clarida will speak at 1pm today and Chair Jerome Powell at 7pm. We will be on the lookout for further discussions on inflation from the two Fed leaders.

The Fed has publicly ramped up talk in recent speeches about their desire to see more inflation. As we noted in Inflation: The Fed’s False Flag, inflation and inflation expectations have been range bound for the past few years. On Friday, the University of Michigan Consumer Sentiment Survey provided further evidence. Per Reuters: “The survey showed consumers expecting higher inflation over the next 12 months and five years. The survey’s five-year inflation expectations measure rose to 2.6% early this month from 2.3% in April.”

It is becoming more clear by the day that the Fed is looking for excuses to lower rates and inflation appears to be that reason.

The following Tweet by Donald Trump and headlines appearing this past weekend further stress increasing tensions between the US and Iran.

  • Tweet Donald Trump-  If Iran wants to fight, that will be the official end of Iran. Never threaten the United States again!
  • Iraqi Parliament To Vote On Bill That Would Ban US Military Troops From Iraq
  • Exxon Mobil Employees Begin Evacuating an Iraqi Oil Field Amid U.S.-Iran Tensions
  • U.S. Orders Partial Evacuation of Embassy in Baghdad

In a sign that these headlines have some validity, Crude oil continues to creep higher, despite a stronger US dollar. These actions and rhetoric might be posturing for renewed Iran nuclear weapon discussions, or they possibly are linked to US-China trade talks. Iran is a crucial link on the One Belt One Road (OBOR) Chinese initiative. Given the importance of oil in just about every aspect of the US economy, we advise paying close attention to the headlines coming out of the middle east and importantly the price of oil.

The map below shows the proposed route of OBOR and the important role that Iran plays in completing the path to make Chinese trade with Europe much cheaper and easier. Click to Enlarge

May 17, 2019

Stocks traded lower all night as it appears trade discussions are on the rocks again. As investors, it is important not to get caught up in the tweets and constant posturing between China and the US. There is little doubt that the stock market will remain volatile with large up swings, have we saw the last few days, and large declines as we saw in prior days.

Markets typically “price in” or “price out” certain future events. For instance, since January the market has “priced in” a high likelihood of a trade deal with China.  As we have seen over the last two weeks, the risk with having such surety is that if the deal were to fall apart, 2019 gains could largely be erased. Said differently, risk/reward is skewed against investors.

While the trade negotiations have certainly driven the market, expectations for Fed rate cuts have co-piloted the assent higher. The table below shows market implied expectations for the Fed Funds rate through January of 2020. Currently, the market is assigning a 32.6 percent chance of a rate cut by the end of July and is close to 100 percent certain of a cut by late January 2020. Like the China trade deal, we should be asking if those odds are reasonable and, if not, is the market pricing in too much or not enough. Frequently, large gains or losses come when what a market has priced in or out changes drastically.

May 16, 2019

Retail Sales for April declined by -0.2 percent versus expectations for a +0.2% increase. The less volatile sales data excluding food and energy also fell by -0.2 percent versus expectations of a +0.4 percent increase. On a two month basis, including last month’s 1.7 percent increase, retail sales appear strong. However, if we exclude March’s strong increase, Retail Sales have been flat or negative in four of the last five months.

With yesterday’s weak Retail Sales and Industrial Production data (-0.5 pct. vs +0.1 pct expectations), the Atlanta Fed’s GDPNow forecast for the second quarter GDP fell from 1.6% to 1.1%.

Yesterday, we mentioned that the Empire State Manufacturing Survey might provide an early glimpse of how manufacturers are reacting to new tariffs. We may have to wait another month as the bulk of the survey was completed before the new tariffs were levied. As explained by Econoday: “The 10th of this month was when additional tariffs were levied against $200 billion of Chinese imports and the 10th of this month was the date that the bulk of the month’s sample was completed though the sample remained open early this week.” The report was stronger than expected at 17.8 versus expectations of 9.0.

May 15, 2019

Retail Sales for April will be released at 8:30 this morning. Current expectations are for an increase of 0.2 percent and 0.4 excluding gas and automobiles. Of particular interest to us today will be the Empire State Manufacturing Survey. May’s report may provide us the first indication of how the manufacturing sector is responding to tariff hikes on China. Expectations are for a slight 1.0 point decline from last month’s level.

Renewed optimism over increased prospects of a trade deal helped the market recover about a third of Monday’s losses. The “Art of the Deal” and its associated maneuvers will no doubt create a lot of market volatility until a deal can be agreed upon or the process hits a dead end. We expect the market to key off of Trump’s tweets which are mainly optimistic, but also his actions which have not boded as well for a deal. We have taken portfolio measures to slightly reduce risk.  The potential downside of a no-deal is more substantial in our opinion than the upside of a deal. These actions and possibly others to come are detailed in the Dashboard-Portfolio Alerts as well as in the Portfolio section.

In today’s Chart of the Day we annotated a chart of S&P 500 activity for May. The graph shows a repetitive behavior in which the market moves higher for a day or two and then gaps lower on the following open. This odd behavior signals a market in which buyers stand at the ready to buy the dip (BTD). Thus far the BTD trade has not worked out well. At some point dip buyers will either be right and be generously rewarded or they will learn their lesson and start backing away from the trade. If the latter is the case, the market decline could pick up speed as fewer buyers will cushion market declines.

May 14, 2019

The US/China trade war heated up on Monday as China retaliated with not only tariffs but the threat to sell their holdings of US Treasury bonds. It is a growing possibility that this latest volley could lead to a currency war. Since May, the Chinese Yuan has been devalued by 2 percent versus the US dollar. We believe the US might take action to weaken the dollar, thus not allowing China to gain any advantage by weakening their currency.

Below are the two major headlines floating around the market this morning. We remain cautious and weary of statements from the US and Chinese governments.

  • US officials say a China trade deal isn’t close – Axios

UBER, the latest multi-billion dollar IPO was issued on Friday at a price of 45 per share. Typically new IPO’s of “hot” companies immediately trade to a double digit percent premium of its offering price. UBER, has done the opposite, falling on its first trading day and again yesterday. On Monday it closed at 37.10, down 18 percent from its offering price. The IPO craze of 2019 might have just witnessed an abrupt ending. While not a positive sign for the market in general, we must be patient and wait for the trade war headlines to simmer down before reading more into what the IPO market may be telling us.

Gold has had a strong correlation with the Chinese Yuan. We were concerned that a breakdown of negotiations would lead to a weaker Yuan and thus a lower gold price. Today’s Chart of the Day provides us hope that the relationship might be disengaging, meaning gold could strengthen despite a weaker yuan.

May 13, 2019

Update: That didn’t take long. The following headline was just released- CHINA SAYS TO RAISE TARIFFS ON 2493 U.S. GOODS TO 25%. S&P futures are now down 50 points.

Friday’s gain and then some were erased as the markets reopened last night. Currently S&P futures are down about 40 points. Trump’s threats of new tariffs coupled with warnings to China to not retaliate with tariffs are scaring global investors as the threat of a prolonged trade war increased.

Trade talks with China now enter what could become a longer and more volatile period. Trump will likely continue to pressure China with tariffs. Barring a steep market decline or sharp weakening of economic sentiment we believe he will be able to get away with such measures. China, can obviously retaliate with tariffs but it might be more effective to devalue their currency to help partially offset tariffs. Last night their currency, the Yuan, fell 1% against the dollar. China may also decide to use targeted tariffs on specific products or even companies. As we saw to a small degree a year ago, such actions would largely affect those that companies and laborers that work in areas that voted heavily for Trump in the last election.

On the data front, we look forward to Wednesday’s retail sales report for clues about how the consumer is holding up. Current expectations are for an increase of 0.3 percent. Weak auto sales will have a big effect on this number, so extra attention will be paid to the core (ex. autos) data.

May 10, 2019

This morning the market may have hit peak absurdity this morning because just hours after another round of US tariffs against China went into effect as some $200BN of Chinese imports saw tariffs hiked to 25% and Beijing vowed it would strike back, world stocks and US equity are only down slightly as the official narrative goes according to Reuters, “investors held out hopes for a trade deal between the United States and China” even as, as noted above, another round of U.S. tariffs on Chinese goods took effect.

Yesterday, it was this same holding out of “hope” that allowed the market to successfully test, and held, the 50-dma. Today, it will look to retest that level again at the open. It will be important the market holds support through the end of the day today. With the markets getting short-term oversold, there is an increasing probability of a rally next week so trading positions can be added.

Trump tweeted out this morning that:

“Tariffs will make our country much stronger.”

This is economically wrong and the surge in bankruptcies of American farmers should tell him that. The administration continues to chase a very dangerous policy which will likely spur the next recession sooner rather than later. (Be sure and read “Game Of Thrones” this weekend when I publish the newsletter.)

However, as we head into summer, the risk is to the downside for a more substantial correction as both earnings and economic growth continues to show weakness. While the long-term bull market trend remains intact currently, it is coming under attack and is at risk of losing ground as we head into 2020.

Portfolios should remain long-biased equities, but over the next several months it is going to be a traders market so positions will need to continue to hold tight stops and a process of regular profit taking will be key.

For today, we are doing nothing. We will wait and see how the market handles todays action and if support holds. We will evaluate what actions we need to take over the weekend and will update you on Monday.

Have a great weekend, and call your Mom.

May 9, 2019

Despite Tweets from Trump and Press Secretary Sarah Sanders on the likelihood of a trade deal, the market failed to ignite yesterday as we have come to expect over the past few months. It’s quite possible a shift is occurring in the way that investors and algorithms react to China trade statements. Are investors and traders just being conservative given the Friday deadline or is there a regime shift in the market regarding trade? Answering this question is a key to positioning and risk taking over the coming days and weeks.

Please see today’s Chart of the Day for more evidence that selling, thus far, has been driven by equity futures and VIX traders, and not traditional cash investors. Our concern is that said futures selling, if it continues, might cause cash investors like mom ‘n pop and larger institutional investors to get nervous and start selling, leading to a sharper slide akin to Q1 and Q4 of 2018.

PPI will be released this morning and CPI tomorrow morning. Given the Fed’s new found concern about inflation, these numbers will hold greater importance than normal. For more on the Fed and their use of inflation as a rationale to ease policy, read our latest Inflation: The Fed’s False Flag.

May 8, 2019

On Monday morning, with the S&P 500 down 50 points, gold and bonds were slightly higher but not as much as we expected given the bad trade news. By the end of the day gold was down slightly and bonds mustered a minor gain.  Yesterday the equity market fell 1.65 percent and gold and bonds finished higher but again not by as much as we would have expected.

The lack of buying in traditional safe haven securities signals to us that the recent decline might be relatively shallow and short term in nature. If gold and bonds start performing better we will be more inclined to believe the market has further to correct.

With the VIX closing at 20.35, the surge over the last two days was the fourth largest two-day advance in volatility since 2016. It is only exceeded by two dates in February of 2018 and one in October of 2018. Please look at the Chart of the Day from April 15th showing how net exposure to VIX futures was near a record short amount. Since we posted the graph it broke the record. This equity decline is in part being fueled by traders covering VIX shorts. This was evidenced by VIX futures volume which was far and away the highest since the decline in Q1 2018. This again leads us to the conclusion, at this point, that the decline is temporary. All bets are off, however, if a trade deal falls apart by Friday’s deadline.

May 7, 2019

On Monday the stock market spent most the day rallying back from deep overnight losses and closed with moderate losses (S&P -13). Shortly after the close, however, US Trade Representative Lighthizer, affirmed new tariffs which sent the market lower. Currently S&P futures are down 17 points.

Yesterday it was made obvious that the buy the dip/FOMO mentality trumps any properly constructed risk/reward type analysis. While we think a deal is likely, we also think a deal has largely been priced into the market. As such, the potential upside from a deal is limited while the downside of no deal, new tariffs, and other trade actions are large.

This will be a light week from an economic data perspective. At 10am the JOLTS report of labor turnover will be released. PPI and CPI are scheduled to be released on Thursday and Friday respectively. A few Fed members will be on the speaking circuit this week headlined by Jerome Powell on Thursday morning.

May 6, 2019

With Friday’s deadline for a China-US trade agreement, Trump raised the stakes threatening China with additional tariffs if a deal is not consummated. S&P 500 futures are trading about 50 points lower, however gold and bonds, typically sectors that investors flock to for safety, are not showing similar levels of concern. It is likely investors in those markets think this is a tactic designed to better the deal for the US.

We suspect this week will be filled with volatility, both up and down, as trade talks take center stage. The Chinese trade delegation is still planning on meeting with US representatives later this week, providing hope this incident is simply “the art of the deal” and not the death of a deal. While we remain optimistic that a trade deal will be completed, we remain cognizant of the all of the market surges over the last few months on rumors of a deal. Any failure to complete a deal could be very problematic for stock prices in the short run.

New York Fed President Williams released a paper on Friday which primarily focused on inflation running below its target. He clearly argues for lower interest rates to combat this “problem.” We have an article coming out on Wednesday which addresses inflation and how we believe it is being used as a “false flag” to justify future rate cuts.

The headline employment data was strong, however the breadth of the report had a lot to be desired. For instance the household survey reported a decline in jobs for the second month in a row. Hours worked, wages and the labor participation rate were also weaker than expected.

Lost in the flurry of economic data last Friday was the inventories report. Retail inventories fell 0.3 percent while wholesale inventories were flat versus expectations for a 0.3 percent increase. If you recall, first quarter GDP was strong in large part due to a build in inventories. As we discussed in our Quick Take: GDP a likely reduction in inventories, as we just got a whiff of, along with the sharp increase in Q1 oil prices will stunt 2Q GDP growth.

May 3, 2019

UPDATE: The employment report was strong showing a gain of 263k jobs. The unemployment rate fell to 3.6 percent however the decline was largely due to people leaving the workforce. This is evidenced by the participation rate which fell to 62.8 percent. Bottom line- a strong report that will make it hard for the Fed to lower rates.

The table below, courtesy of Econoday, shows expectations for the BLS employment report due at 8:30am.

U.S. auto sales continue to show weakness, falling 6.1 percent, to 16.4 million units a year. That is the lowest annualized sales rate since 2014.

Copper is referred to in the markets as Dr. Copper due to its ability to assess global economic activity. Because of its widespread use in industrial production and electronics its price is closely followed as a barometer of supply and demand.  Since mid-April the price of copper futures has declined about 10 percent with more than half of that occurring over the last two days. Might the doctor being trying to warn us?

After a self-imposed media blackout, Fed representatives will begin public speeches today. Of interest to us will be Vice-Chair Richard Clarida. He has recently highlighted concern about inflation not reaching the Fed’s 2 percent inflation target. If he pushes back on Powell’s comments about weak inflation being “transitory” we might see risk assets recover some of the post-FOMC decline.

Yesterday afternoon we released Part 2 of our Value Your Wealth series. Click the link below to read the article.

May 2, 2019

The market fell sharply and the dollar rallied after Chairman Powell’s press conference. It appears investors wanted to hear a more dovish tilt than Powell provided. In particular they focused on his use of the word “transitory” to describe a recent spate of weaker inflation. It appears they were hoping Powell would think that inflation running below the 2 percent goal was troublesome. Instead he characterized it as temporary.  We will focus on the next round of Fed speakers to see if the Fed is in unison with Powell, or if Powell is a lone wolf and the other members are more dovish and concerned about inflation.

Our expectations for the Fed’s policy statement turned out to be spot on. There were two material changes. They downgraded their characterization of inflation trends and cut the IOER rate by 0.05 to 2.35 percent. There was no perceivable change in the Fed’s neutral policy stance. The 5 basis point reduction to the IOER further incentivizes banks to lend to other banks. This should cause the effective Fed Funds rate to decline slightly going forward. If, however, the rate continues to rise it signals the increasing probability of a liquidity issue in the banking sector. We will follow this situation closely.

With a third of the quarter in hand, the Atlanta Fed (GDP Now) published their first estimate of second quarter GDP. Currently they are forecasting an increase of 1.2%, well below the market consensus of 2.5%. It is still early in the quarter so do not read too much into either forecast.

A good proxy for Friday’s employment, the ADP Survey, reported that 275k jobs were added in April, well above expectations of a 180k increase. Currently, expectations for the Friday employment report are for an increase of 180k with a range of 160k to 240k.

May 1, 2019

At 2pm the Federal Reserve will update their current policy thoughts via the FOMC statement and Jerome Powell press conference. We expect to see few changes in regards to the broad language the Fed uses to describe the economic environment, although we suspect they may reduce their outlook for inflation.

Essentially the Fed is on hold, and at this point, very likely not committing to raise or lower rates. More interestingly we will be on the lookout for any changes to the schedule for winding down QT (reducing their QE asset purchases) or changes to the IOER rate paid to banks. For more on this read Warning 3 in our most recent Technically Speaking: A Warning About Chasing This Bull Market. 

 “It is quite possible this situation will cause the Fed to stop QT before the scheduled September 30th end date. More importantly, it also raises the specter that QE, which injects liquidity into the banking system, is not as far off as we think. Watch the IOER/Fed Funds rate differential and the dollar for clues of further liquidity problems.”

On Tuesday President Trump was once again trying to persuade the Fed to lower rates. Per CNBC: Trump calls on Fed to cut rates by 1 percent and urges more quantitative easing.  As we have discussed the odds of Trump firing Powell are not zero as the market seems to believe and the consequences of such an action across all asset classes are immense.

April 30, 2019

Chinese manufacturing and non-manufacturing PMI surveys were both weaker than expected leading to questions on just how much China is willing to increase credit to boost growth. China represents over 30 percent of global GDP growth so stay tuned.

Google shares are currently trading down 8 percent on weaker than expected earnings, revenues and other financial and user metrics. Of particular interest from a broader economic perspective is a six percent decline in Google’s advertising revenue. Advertising spend and economic activity have a long and well established positive correlation. Simply advertisers spend more when the economy is growing dependably and consumers are more likely to respond positively to advertisements and vice versa when economic confidence fades. The sharp decline in advertising revenue from one of the largest media companies, follows on the heels of Q1 GDP which pointed to weakness in the consumer sector.

For more on Friday’s GDP report we published a Quick Take yesterday afternoon. Click the image below to read the article.

Yesterday the BEA released personal income and consumer spending data for March. Despite a strong jobs market, punctuated by record low jobless claims, personal incomes only rose 0.1 percent versus an expected increase of 0.4 percent. Despite weak income growth, consumer spending beat estimates by 0.2 percent, increasing 0.9 percent. It is likely this boost in spending was not discretionary, but due to the sharp rise in oil prices over the last quarter.

The combination of BEA data points provides a clue that while consumer spending has been weak, what marginal spending has occurred is increasingly coming on the back of credit usage. To support this we checked out the Fed’s weekly report on credit card and other revolving debt. This figure is running 4.3 percent higher than last year while wage growth is approximately 2.5 percent higher.  Such increases in credit usage growth above wage growth are not sustainable over longer time periods.

April 29, 2019

As we updated last Friday, GDP surprised to the upside with a 3.2 percent gain versus expectations of 2 percent. In this weekend’s newsletter – The Bull is Back… But Will it Stay?, we examine some of the drivers of first quarter growth to see how sustainable the quarterly boost in economic growth is. Later today we will add to the research with a Quick Take examining fuel prices and the role it played in boosting “reported” economic growth.

There are two big events on the calendar this week. On Wednesday, the Fed reports on the status of monetary policy via the FOMC Statement and a Jerome Powell led press conference. We expect a very similar statement as was released from the meeting that occurred six weeks ago. The strong GDP and employment data will make it difficult for the Fed to move to an easier posture. On Friday, the BLS will report on employment. We will provide market expectations for April’s labor report later in the week.

April 26, 2019

UPDATE: GDP beat all expectations coming at 3.2 percent. Despite the strong number, a look under the hood leaves a lot to be desired. The bulk of the gains were due to a surge in inventories and slower trade as imports fell. Consumer spending and business investment, historically accounting for over 70 percent of economic activity, slowed to a crawl.

This report leaves the Fed in a bind. It will be hard to take on the dovish stance that Trump is asking for. Last night Kudlow said the Fed was leaning towards a rate cut. Even if true, the odds of that are now greatly decreased.

Q1 GDP will be released at 8:30 this morning. Expectations are for a 1.60 percent increase, slightly lower than last quarter’s 2.00 percent growth rate. The long-run natural economic growth rate is currently around 2 percent. Barring additional fiscal and/or fresh monetary stimulus, this is the rate of growth that we should expect and use when modeling and evaluating investments over longer time frames.

Yesterday MMM fell nearly 13 percent due to poor earnings. We attribute their bad Q1 showing in part to weakening global economic growth and in part to U.S. dollar strength. Last night INTC also fell victim to both factors. INTC is currently expected to open down 8 percent.  Today’s Chart of the Day shows the strong relationship between revenues of S&P 500 companies and the U.S. dollar. If the relationship holds we should expect S&P 500 revenues to be flat or even negative over the coming two to three quarters.

The graph below (CLICK TO ENLARGE) shows that dollar strength, from a technical perspective, can continue. The red arrows denote three potential resistance levels to keep an eye on. The green line is the ratio of the S&P 500 to the U.S. dollar. Note the lower highs in the ratio as compared to higher highs in the S&P.

April 25, 2019

The U.S. dollar index has consistently appreciated versus other major currencies over the past month and now sits at two year highs. A stronger dollar has negative implications for corporate earnings. For instance, this morning global conglomerate MMM posted poor earnings including earnings and revenue misses. More importantly, MMM, shows how large domestic companies are affected by the continuing global economic slowdown.

Global weakness was also highlighted last night when South Korea posted a surprising decline in economic growth. GDP fell by 0.3pct marking the first decline since 2008. This data point along with their large trade presence in Asia provides clues that China continues to suffer despite their recent spate of positive economic data.

As a net importing country, a strong dollar is deflationary as prices of foreign goods should decline in dollar terms. The negative is that those imported goods are more attractive and take away sales from domestic companies. The stronger dollar is also a negative for emerging markets which borrow a lot dollars. As the dollar rises the cost of paying interest and principal increase. Many an emerging market crisis started with a stronger dollar.

We would not be surprised if the administration were to begin talking down the dollar in coming weeks.

April 24, 2019

The April 18th Chart of the Day showed how the amount of IPO’s for 2019 has already reached prior peaks, which coincidentally are also the market tops of 2001 and 2008. We are beginning to see similar activity in corporate buyouts. Today PG&E is trading 25% higher on rumors that Berkshire Hathaway will acquire them. More interestingly, Chevron’s bid for Anadarko was bested by Occidental this morning. Occidental is offering the company an extra 10 billion over Chevron’s bid. Anadarko’s shares are now trading near 75 a share, up from 65 yesterday and 45 before Chevron made the initial bid.

The S&P 500 rose 26 points to an all-time high yesterday because  __________. Fill in the blank, because honestly we do know the catalyst. It is clear that investors are willing to ignore a lot of economic data and other news as they are once again entrenched in a FOMO (fear of missing out) mentality. Investors are clearly encouraged by the Fed which loosened its stance on monetary policy. Once again the Fed flexed its muscles when the market stalled last year. The Fed Put is still alive!

Will higher stock prices and rising oil push the Fed toward a more hawkish stance?

April 23, 2019

The Chart of the Day shows the national average price for gasoline has risen 69 days in a row. The broad affects will be two fold.  The rising price of gasoline, crude oil, distillates and everything made out of oil will be rising in price. At the same time consumers and corporations will divert more of their budgets towards these products, thus spending less on other goods and services. To put this into context, gasoline RBOB futures have risen 65 percent since Christmas. On average that accounts for approximately an extra 25 dollars each time we fill our vehicles up with gas.

As mentioned yesterday, rising inflationary pressures against slow growth is a tough spot for the Fed. They will need to be vigilant against inflation while at the same time wanting to help the economy with lower rates. Further, Donald Trump will likely push the Fed to lower rates even more aggressively than he has in the past.

The markets have been drifting sideways on incredibly light volume. We are not sure what will break this period of investor malaise but quite often periods of tight consolidation, as we have, are followed by a volatility surge upwards or downwards. Given how close the market is to all time highs this could get very interesting in the days and weeks ahead.

April 22, 2019

Crude oil is trading up 2pct this morning and over 65 dollars per barrel on news that Trump will not extend export waivers to the 8 countries that were currently allowed to import Iranian oil. Five of the eight, China, Japan, South Korea, China and India will need to stop importing oil from Iran or deal with actions from the U.S. The remaining 3 have already halted imports from Iran.

Given the positive progression of trade discussions with China we expect them to follow suit. The others are also likely to adhere to the limits. We noted last week the strong relationship of oil and inflation. This action should strengthen the price of oil and put the Fed on further alert for higher inflation. As such, it will be harder for the Fed to take a dovish stance and the battle with the White House will likely increase in intensity.

Today the Chicago Fed National Activity index will be published at 8:30 and existing home sales at 10:00. The big economic data point will come Friday with the release of Q1 GDP. Current expectations are for a 2.0 percent increase (2.2 percent last quarter). Corporate earnings will also continue this week with the bigger tech companies on deck. Click HERE for a link to the earnings calendar courtesy Yahoo Finance.

April 19, 2019

The futures markets were closed last night and the stock and bond markets will be closed today for Good Friday. Since there is little to report on the markets/economics front we thought we would share graphs in this commentary and in our Chart of the Day concerning value versus growth investment styles.

When markets are priced at large valuations and the economic cycle appears to be nearing an end, investors should look to overweight companies with strong fundamentals and avoid high flying growth companies that make little to no profit. Simply said, favor value over growth. We will have a lot more on the topic in coming articles, but the two graphs we present today serve as a nice introduction to the current market state of the value versus growth.

April 18, 2019

UPDATE:  Retail sales were much stronger than expected (+1.6pct vs expectations of +0.8pct) but the gains came largely from gasoline sales and automobiles. We have warned about rising oil prices and we are now seeing them seep into economic data. Consumer spending represents nearly 70% of economic activity so proper analysis of this report is important. The question we will attempt to answer in the coming weeks and months is- does the March mark a trend of improving retail sales data to come or was it an anomaly to the recent 6 month trend. The following Tweet from David Rosenberg provides broader context to the report:

Strong March for retail sales but look at the entire first quarter. Down to +0.2% SAAR from 1% in Q4, 4.3% in Q3 and 6.1% in Q2. REAL sales in Q1 were -0.7% and followed -0.5% in Q4, first back to back contraction since the first half of 2009.

Over the last two weeks we have made mention of the extreme to which this market is overbought. You can track this condition on our Dashboard page with the Technical Measures Gauge on the right side. Yesterday, Sentiment Trader put out a chart that confirmed our measure as shown below. Bottom line- investors are more confident today than since 2010. The prior two peaks of this index preceded the drawdowns of Q1 and Q4 2018. Click to enlarge.

Despite what appears to be some degree of economic strengthening in China, data from Europe continues to languish. PMI surveys released last night point to a German recession on the horizon. PMI for the entire Eurozone is not as bad (still in expansionary territory) but it is closing in on the all-important 50 level. Last night it dropped to 51.3 down from 51.6. PMI has a high correlation with GDP. A reading in the  low 50’s, as we have for the entire eurozone, corresponds with economic growth of .1 to .2 percent.

April 17, 2019

China surprised investors with a better than expected GDP of 6.4pct vs consensus of 6.3pct. We caution that Chinese economic data is very suspect and the .10pct “beat” is likely being manufactured by the Chinese government to help trade talks continue. The fact of the matter is that GDP consistently matches consensus to the penny and which has always led us to question their data. Such a perfect record is unheard of in other developed nations. Given the stronger than expected GDP number along with a host of other strong economic data should we expect China to clamp down on credit growth?

On the political front, the Mueller report is expected to be released tomorrow. We doubt that there will be market implications but we keep it on our radar just in case.

Earnings continue to be released. Last night NFLX matched expectations and its stock is trading slightly higher. IBM on the other hand disappointed on revenues and is trading down about 3percent. A lot of regional banks report earnings today along with PepsiCo, Textron, Alcoa, and Kinder Morgan.

The markets will be closed Friday for Good Friday.

April 16, 2019

Chinese GDP and other economic data will make the headlines tonight. Expectations that recent increases in liquidity should help revive economic growth which was struggling. GDP is expected to come in at 6.3 percent. Expectations for GDP and the actual GDP report are almost always identical. Anything below 6.3 percent would likely be seen as a tactic towards trade negotiation with the U.S. In general, the talks appear to progressing.

Thus far banking earnings are mixed. JPM’s earnings and revenues were better than expected. Yesterday, GS and Citi reported weaker than expected revenues, with GS stock falling over 3 percent yesterday on the news. Trading revenues for both banks were weaker further hampering revenue.

This morning Bank of America fell in line with GS and C as they beat expectations for earnings but missed on revenue. Helping earnings per share was a 7% decline in the number of shares outstanding. Given the flatness to inversions in various yield curves we expect that margins should continue to decline over the coming quarters for the banking sector.




April 15, 2019

As shown below, President Trump went after the Federal Reserve once again this weekend with pressure to ease monetary policy. This may seem like lip service and “gentle” persuasion to some.  We believe that if the Fed resists the implications for Jerome Powell and Fed independence might be jeopardized. We will be writing more on this topic which is growing in importance over the coming weeks.

Goldman Sachs and Citigroup along with other financial companies announce their earnings today. Tomorrow topping the list is JNJ and NFLX. We will focus on the sales and earnings from companies versus expectations as we always do. This earnings season, however, we believe forward looking comments will hold more weight than normal as investors try to judge if the recent economic weakness is temporary or expected to be sustained for a longer period.

April 12, 2019

Despite the flattening yield curve, JPM reported better than expected earnings and revenues.

Chevron announced its intention to buy Anadarko for 65/share a premium of nearly 20% from yesterdays closing price.

China reported better than expected trade and credit creation data giving a boost to the equity markets.

What little of Powell’s speech to the Democrat Caucus being released, what little we have gotten is focused on Fed independence. This theme will likely become a bigger issue, especially if economic data or markets show weakness. CPI and PPI inflation data from earlier this week was slightly higher than expected but when food and energy are excluded, as the Fed prefers to do, the data do not point to increased inflationary pressure.

April 11, 2019

We expect to hear excerpts from Jerome Powell’s speech to the Democrats House Caucus meeting today or tomorrow. Speaking on behalf of the Fed today is Vice Chairman Clarida, and Governors Williams and Bullard.

The Fed minutes yesterday held few surprises. The tone was decidedly dovish but they are clearly not close to reducing interest rates as is being demanded by Trump, Kudlow and Stephen Moore. This battle between the Fed and the administration could heat up leading up to the next Fed meeting on May 1st.

At yesterday’s ECB meeting Chairman Mario Draghi essentially confirmed recent rumors that the ECB might buy stocks in the future. He was quoted as follows; “We’re ready to use all instruments. ALL instruments.”

Combine his quote with various quotes from Fed officials discussing using QE in the next crisis and we are left to ponder what do the central bankers know that we don’t. The obvious answer being that a recession is closer than the market thinks and because interest rates are already at or near historic lows globally, they have little in their traditional tool chest to combat a recession with.

April 10, 2019

Today will be chock full of action. The European Central Bank (ECB) met and decided to leave rates unchanged for the remainder of the year.  CPI will be released at 8:30, Fed minutes from the last meeting will be released at 2:00, and Jerome Powell will speak at the House Democratic Caucus.

We will focus on the Fed minutes, which are edited/revised after the fact. There is a likelihood that their tone will turn slightly more dovish, possibly inferring a rate hike later this year. The Fed is in a fight for their independence and can use this opportunity to make it appear that Trump and Company are having little affect on policy.

JOLTS (Jobs Openings and Labor Turnover Survey) released yesterday for February saw a sharp decline in job growth and job openings. Expectations were for 7.565mm job openings, instead the BLS reported the number at 7.087mm. The difference between openings and hires, at 1.391 million, narrowed by more than 400,000, pointing to less of an imbalance between the supply and demand for labor. This report should ease concerns of building wage inflation especially if similar trends emerge in other labor data.

April 9, 2019

Crude oil continues to gain ground and is now trading near 65/barrel. Traders are concerned that increasing tensions with Iran and fighting in Libya will hurt supply. As we showed last week, higher oil prices have a big affect on inflation. Will the Fed begin to take notice?

Markets are drifting this morning as traders await the FOMC minutes as well as a speech from Jerome Powell on Wednesday. Given Trump’s recent rhetoric around lower rates and QE, the Fed may use these two events to assert their independence and take on a slightly more hawkish tone. It is possible such a tone might involve leaning towards one or two more rate hikes in the coming year or two.

Over the course of this week the number of companies that cannot buy back their own stock will rise sharply. The graph below charts the percentage of S&P 500 companies in a buyback blackout period through May. Click to enlarge.

April 8, 2019

With little economic data due for release this week the focus will largely be on the Fed. Jerome Powell speaks Wednesday, Thursday and Friday. Further the FOMC minutes from the last meeting will be released Wednesday afternoon.

Earnings season kicks off this week with JPM and WFC on Friday. We have entered the earnings blackout period which will preclude many companies from buying back their own shares.

The following hit the wires on Friday: Trump says “I personally think the Fed should drop rates” because they are slowing down the economy and instead of “quantitative tightening it should actually now be quantitative easing”

The question is why QE if we are not in a financial crisis. In our opinion, here is why:

The natural rate of economic growth is about 1.5 percent or even less. In the absence of fiscal/monetary stimulus that is the rate of longer term growth that we should expect. The rate of growth has been higher under Trump in large part due to one time stimuli such as hurricane/disaster spending, tax cuts, and larger deficits. Those growth sources have run their course and have largely stopped contributing to growth. With a house run by the Democrats it is unlikely new fiscal stimulus will replace them. As such the only tool at the President’s disposal to goose short term growth is monetary policy. Given the election in less than 2 years, we suspect Trump will push the Fed to lower rates, bring back QE, and possibly take other measures to spark temporary growth. We caution that while he may or may not be successful, such strategies are laden with longer term consequences. Most important is that such a low interest rate environment discourages investment into innovation and thus causes the regulator of economic growth, productivity growth, to further decline. To read more on this we share an article from January- Productivity: What it is and Why it matters

April 5, 2019

President Trump nominated Herman Cain to the Federal Reserve Board yesterday. Cain is known for his hard-money philosophy. Trump has clearly pushed the Fed for easier money policies and Moore is living up to it. While we hope Cain holds to his prior views, we suspect he will fall into the dovish camp shortly.

The BLS employment report takes center stage today. The table below shows last months data as well as consensus expectations for today’s report. Last months payrolls gain of only 20,000 jobs was considered a fluke, attributable largely to bad winter weather on the east coast. Consensus for this month has payrolls back to an average running rate gain of 170,000. We are inclined to side with the market and expect a range of 150-200k. However,  we are concerned that another weak number may be signalling that slowing global growth and weakening domestic activity is having an effect on the labor market. Click the table to enlarge.

April 4, 2019

ADP, a good proxy for employment, grew by 129,00 jobs, a sharp decline from last month’s revised reading of 197,000. On Friday the BLS will release the official data. Current expectations are for an increase of 170,000 jobs and the unemployment rate unchanged at 3.8pct.

Crude oil, now trading near 62.50/barrel is up almost 40 pct year to date. While relatively fairly priced as compared to its price over the last few years, it is moving higher quickly. Annual changes in crude oil and inflation are well correlated as shown by the graph below. If crude continues to rise, inflation prospects will increase and put the Fed in a bind. Such inflationary pressure along with the possibility for increased wage inflation flies in the face of the Fed’s rate pause. If an inflationary impulse were to materialize  it could force the Fed to hike or even discuss rate hikes at the same time the economy is weakening and the President is “demanding” immediate rate cuts.

April 3, 2019

President Trump continues to voice his dissatisfaction at Fed Chairman Powell for raising interest rates despite the Fed recently backing off future rate hikes and halting QT. Yesterday’s WSJ article article: Trump to Fed Chairman Powell – I Guess I am Stuck with You is more evidence that Powell is under the gun. Based on Trump’s recent selection of Stephen Moore, to the Fed, and Moore’s statements about immediately wanting to cut rates by 0.50pct, we believe Powell will have to choose between his job (cutting rates) and Fed independence (staying put on rates). If you are wondering, we believe Trump can and might fire the Chairman. We wrote on this last October – Chairman Powell – You’re Fired.

The next question you might be thinking is what are the implications for the markets. That is the subject of an article we are working on. We will release it if such an event becomes more probable. At the speed things are moving that could be in a few weeks!

Quick note– We have had a few questions on why we discuss the Fed so much. The answer lies in the fact that the economy is increasingly driven by debt and asset prices and less so on inventory cycles as it has been. The Fed controls money supply, strong arms interest rates, and more recently concerns themselves with the stock market. For the time being they are a big factor that we must account for. This arrangement is unsustainable longer term, but for the time being we must acknowledge it and invest accordingly.

April 2, 2019

Positive economic sentiment is clearly the growing narrative driving the market. We seem to read more and more every day that investors feel the economic slowdown of the 4th quarter of 2018 and recent quarter are now in the rear view mirror. Global and domestic data has been mixed at best. As noted China’s recent round of survey data was positive which is certainly important, but as of yet there are no signs that Europe is reversing course.

On Friday the BLS will report on the employment situation. Close attention will be paid to see if last month’s  meager 20,000 increase in payrolls will be revised higher. Expectations are for a 170k increase in March which is on par with the longer term average for this expansion.

As shown previously on Chart of the Day, the percentage of companies in stock buyback blackout periods is rising sharply and will hit 50% by the end of the week. Might the market surge on Friday and yesterday be related to companies buying back stock before they enter their blackout period?

April 1, 2019

Update: Retail sales data for March was well below expectations at -.02pct, however the prior month was revised from 0.2 to 0.7pct, matching the difference between the March consensus and the actual number. The stock market is unfazed having barely budged since the data was released.

On Saturday night it was reported that China’s PMI survey surged back above 50, denoting that their manufacturing sector is back in expansion mode according to those surveyed.  Interestingly however, Germany another barometer for global manufacturing activity, saw its PMI drop deeper into economic contraction at 44.1, an 80 month low. Since December of 2017, Germany’s PMI has dropped steadily from a high of over 65. It is worth noting that their services survey has been relatively flat over this period. This divergence points much more to global economic weakness than German weakness. The graph below charts the stunning decline of German PMI. Click on the image to enlarge.

Also causing us to question China’s survey data was Japan, in which their much followed Tankan Survey, saw the sentiment of large manufacturers hit a 6 year low.

Today is a big day for economic data in the U.S. as well. At 8:30 Retail Sales will be released. Given that the consumer accounts for nearly 70pct of economic growth, we will pay close attention to see if the recent consumer pullback is sustained or showing signs of rebound. Expectations are for a 0.3pct increase as compared to 0.2pct last month. Later, at 9:45, PMI Manufacturing will be released with expectations of 52.5 vs 53 last month.

March 29, 2019

The market is looking to open stronger this morning as we roll into the last day of the quarter. We do offer caution as the last day of the quarter can be volatile as traders and investors buy and sell securities as their portfolios are reported to investors.  All eyes are on Britain today as Parliament votes on another BREXIT deal. This one has May offering to sacrifice her job in exchange for passage of the deal. Needless to say, this is a last ditch effort by May.

Chicago PMI Survey will be released at 10am today. This is the first of the major surveys that will help us gauge business activity in March. The prior reading was 64.7 which is historically high, so its likely to fall short. Consensus is 60.3.

March 28, 2019

Lance and Michael have written and discussed more about the Fed’s policy actions and the slope of the yield curve over the last few months than any other topic. A few days ago we presented you with an animated yield curve to help you better appreciate the gyrations of the curve. The Fed, with its abrupt U-turn in policy and the machinations of bond yields are screaming that growth is slowing quickly. This is not just an American story but one that is pervasive around the world. The amount of negative yielding bonds has doubled to over 10 trillion since September of last year. That bears repeating, there are now over $10 trillion of bonds that have a yield below zero! Equity investors should be asking themselves – are bond markets sending a false alarm or should I heed its siren song? As the saying goes, bond traders are usually right.

The currency markets are also starting to signal trouble. The dollar continues to slowly increase in value versus other currencies. Along with the message from the bond market, this is another sign that a “flight to quality” is upon us. The only question we have is when will the equity market take notice. With quarter end upon us, the market may likely stay put or even grind higher today and tomorrow. That said, all bets are off for early April. Keep in mind that many companies will be restricted from buying back their stock over the next few weeks due to earnings announcement. Corporations have been the largest buyer of stocks over the last two years. See today’s Chart of the Day.

March 27, 2019

The market is drifting lower this morning following yesterday’s rally. Of note, the Turkish Lira slid appreciably as overnight lending rates soared to over 700pct. The high rate was put in place by the government in order to prevent currency speculators (shorts) from weakening the currency. Turkey is trying to avoid a repeat of what happened to the Lira last summer.

The Consumer confidence data yesterday pointed to economic weakness. We follow this report closely as consumer spending accounts for nearly 70pct of GDP. The composite confidence number which had rebounded after the fourth quarter stock market, gave up most of those gains. The sharp decline this month, despite a relatively strong stock market is troubling.

The relationship between consumer confidence and stock prices has held strong since the mid-1990’s as shown below. While one month certainly does not make a trend, weakening confidence along with an inverting yield curve and concerning global economic data all point towards a coming slowdown in the U.S. economy. The relationship between economic activity, confidence and stock prices can create a potent circular dynamic in which stock prices fall, causing confidence to fall further, causing more economic weakness….and repeat. The first graph below shows the relationship of stocks and confidence.

Also within the consumer confidence report was information about the employment picture. This data also paints a concerning picture on the state of the labor market. See the second and third graphs below for more context.   Click on the images to enlarge

March 26, 2019

The GIF below shows the monthly shifts of the Treasury yield curve from January 2018 to the curve as of last Friday. A few things to note as you watch the gyrations over time:

  1. Watch the short maturities on the left side as they  rise throughout 2018 and now appeared anchored near 2.50pct.
  2. Led by the belly (3-7yrs), the curve becomes somewhat convex in the last few months.
  3. 30yr bonds start and end at the same levels.

The markets are opening stronger this morning on little news. Yesterday, the market was selling off but reversed course when Janet Yellen was quoted as saying: “Global Central Banks don’t have adequate crisis tools.” This continues a decent amount of Fed chatter in which they are essentially lobbying for extraordinary policy tools in the future. Prior to the last few months, and including the last five years or so, the Fed seemed more focused on reversing the policies of the post Financial Crisis era.

Fed Governor Quarles speaks Friday on the topic of Strategic approaches to the Fed’s balance sheet and communications. Sounds like another opportunity for the Fed to publicly discuss the use of QE, negative rates or other policy measures for the next recession/crisis.

March 25, 2019

Given that the possibility of a conviction of the President, his family, or key staff would have posed political problems and complicated the President’s agenda, it is surprising the market is not reacting more positively after the release of the Mueller Report.

Friday’s sharp decline on the heels of lower yields and yield curve flattening/inverting is telling us that the market is  beginning to worry that the sharp change in Fed policy tack, as announced Wednesday,  may be a tell that they think we are closer to a recession than commonly believed. It is worth highlighting that the 3month-10year yield curve inverted on Friday, marking its first inversion since the months preceding the Financial Crisis.

As we noted in Friday’s Ria Pro article Fearing Complacency, linked below, the financial markets (stocks, bonds and dollar) are trading as if market risks were benign. We beg to differ and think investors should take some risk off the table if they were uncomfortable with Friday’s decline.

March 22, 2019

The biggest story of the week that is not getting enough attention is the considerable drop in U.S. Treasury yields and the further flattening/inversion of  yield curves. Bond investors are showing considerable concern about economic growth and we believe its only a matter of time until the stock market catches up to these worries.

Consider the following table highlighting the large weekly and monthly moves in longer maturity yields, as well as the flattening of all curves, and the inversion of shorter curves.  Click to enlarge

March 21, 2019

Yesterday, the Fed stated that monthly amounts of QT will be reduced and ultimately halted by the end of the third quarter. They also lowered their Fed Funds rate expectations such that they do not expect to hike rates this year and expect only one hike next year. While, those results were widely expected, the tone in their statement is more dovish than expected. The Fed significantly tempered expectations about economic growth versus that from the last meeting in January. Fed speakers come out of the blackout period on Friday, so we look forward to any commentary from Fed Governors on their latest meeting.

What does the Fed know or who is pressuring the Fed to stop hiking rates and end QT?  More importantly, and not widely appreciated is that Fed expectations for long-range Fed Funds is now 2.6pct, having been lowered from 3.1pct. The long term neutral rate is 2.75pct. The Fed is implying they will keep rates below the neutral rate, thus the economy will need stimulus over the next two years.

Jerome Powell: “economic fundamentals remain strong and our outlook is positive” – This is what we call talking out of both sides of your mouth.


March 20, 2019

Update Fed: 



The Fed has taken another dovish step.

Trade rumors drove the market up and down yesterday. Decent morning gains were erased on news that China might “walk back” some trade prior trade offers. The market quickly rebounded as it was announced that Mnuchin and team will travel to Beijing for talks this week. The market ultimately closed flat and confusion around trade abounds.

The Fed will likely drive the market today. They announce any policy actions at 2pm and follow it up with a press conference by Jerome Powell. No one is expecting any change to interest rate policy, however, it is probable they will amend their QT schedule with a final date. This has been well telegraphed in advance so we are not anticipating large moves on such an action. The wild card is most probable during the press conference. Stay tuned.

March 19, 2019

The market drifted higher overnight on little news of note. The big story this week will be the Fed meeting that starts today and ends tomorrow at 2pm with a policy statement and Jerome Powell press conference. We see little coming from this meeting that could send the market in one direction or the other. That said, it is this kind of set up, when everyone thinks they know the result, that can cause violent moves up or down.

The BREXIT debate rages on between those favoring an extension of the deadline and those against delaying BREXIT any longer. There is no clear consensus expectation at this point. Those that own assets in British pounds or hold pounds should consider currency hedges as trading in the pound could get much more volatile.

The market is rising above resistance levels we showed last week and into a new batch of resistance. The difference between today and a week ago is that if the next set of resistance levels are cleared there is little standing in the way of record highs.

March 18, 2019

Despite news reports from the Chinese media claiming that trade talks have been pushed off until June, the market is little fazed. With little news over the weekend the market will begin to look forward to Wednesday’s Fed FOMC meeting. The market is not expecting any rate action, but will be on the lookout for more guidance around diminishing and ending QT. We believe they will slow the pace of buying and ultimately end it during the fourth quarter. Any other economic and policy guidance from the meeting or Chairman Powell’s press conference will be closely followed for additional hints as for the future course of monetary policy.

The economic calendar is slow this week and Fed Governors will be blacked out from speaking due to the meeting on Wednesday. We expect they will restart the speaking circuit on Friday.

Companies reporting earnings in early April will begin their stock buyback blackout periods soon. The first earnings reports tend to be heavily concentrated in the banking sector.

March 15, 2019

The S&P 500 looks to open 10-15 points higher despite any real news. As mentioned yesterday, today is quadruple witching day so market makers will have a greater influence today than on most days. Expect volatility, up and down.

At ten am the BLS will release the JOLTS report. Job openings have been on the rise for a decade. While the data is expected to ease to 7.2mm from 7.34mm, there is little that tells us the job market is slowing in any meaningful way. This report tends to lead employment so any trends lower in this number over the coming months will be noteworthy.  A consensus of economists expect industrial production to rebound today following a .6pct decline last month. Weakness in other countries industrial production data leaves us weary that the data may fall short today.

March 14, 2019

Update: As mentioned, Quadruple Witching day occurs tomorrow. Erik Lytikainen was kind enough to allow us to share his most recent model and its projections. Of note, S&P 500 and Crude Oil futures have options expiring tomorrow.

Based on Erik’s work the S&P could fall 45 points and crude oil over 2 dollars by tomorrow’s close. Erik’s model is based on the current price and the price need to achieve a neutral delta and gamma for the given options on the securities. Of the two Crude Oil is most interesting as Erik’s final price magnet has proven nearly perfect over the last six months. Click on the chart to enlarge it.


The China/US trade agreement is now being delayed. A scheduled meeting between XI and Trump will not happen in March and may not occur in April. The futures markets gave up overnight gains on the news.

In January we noted that credit creation surged in China. Credit data released for February were not nearly as impressive and lead us to believe that the one time surge was an effort to boost economic activity to advance trade talks. Economic data was little affected by the surge in credit as most Chinese economic data continues to be weak.

Tomorrow is a Quadruple Witching day, meaning that four sets of stocks options expire. The four include: stock index futures, stock index options, stock options and single stock options. Frequently, as we have shared with Erik Lytikainen’s reports, these day can be volatile. Given where the market sits, as discussed in the next paragraph, we suspect tomorrow could be a roller coaster kind of day.

As shown in the graph below, the S&P is pushing right into strong resistance. A move higher is likely bullish, but given the weakening macroeconomic outlook and political volatility (China trade, BREXIT, Mueller, etc. ) could also be a false breakout. The beige level below represents a Maginot line of sorts- stay long above it and be careful below it. We remind you that the market likes to extract the most pain possible at turning points. A 25-50 point run higher above the resistance line would get the shorts long, and the longs longer, setting up a painful point to turn lower.

March 13, 2019

Markets were quiet overnight despite the growing potential for economic turmoil in Britain. Parliament rejected a revised last minute BREXIT deal in an overwhelming defeat. 75 Tories from May’s own party voted against the deal. With the deadline for a deal approaching in two weeks, the options are limited. Today Parliament will vote on whether to leave the EU on March 29th with no deal (hard BREXIT) or agree to delay. While global markets seem unconvinced of a hard BREXIT, the possibility is growing. Over a year ago we wrote an article entitled Keep Calm and Carry On.  While a little dated it still provides valuable information for how BREXIT may resolve itself and what the potential pitfalls are.

CPI inflation numbers were weak yesterday providing the Fed more cover for their dovish tone. PPI, released today, is expected to be weak as well due to the stronger dollar of late. Durable goods, expected -0.6pct, will be released at 8:30 and should provide more insight into how the weak global economy is affecting the domestic economy. Lastly, the Atlanta Fed’s GDP forecast, as shown below, is only expecting first quarter GDP growth of +0.2%. Click to enlarge.


March 12, 2019

The British pound is trading sharply lower as the race for a BREXIT deal is coming down to the wire. The EU has made it more clear over the last few days that the deal they have on the table is the last deal they will offer. Without a deal, it may come down to a hard BREXIT, which could prove damaging to the entire region.

While the Fed has certainly taken a dovish tack based on weakening global and domestic growth, inflation has yet to materially turn down. Investors will look at today’s CPI report for more clues about inflation. Current expectations are for a 0.2 and 1.6 pct increase monthly and annually, respectively.

Bloomberg ran an interesting article yesterday on the Term Premium in US Treasury Notes. Their is a lot of debate on whether the premium, which has recently become a discount, foretells weak economic growth.

March 11, 2019

The BLS will release January retail sales at 8:30am. Given recent weakness in the consumer sector we will be monitoring it to see if the trend continued after the holiday season. Consensus is calling for no change, following December’s 1.2pct decline. Personal Consumption accounts for nearly 70pct of economic activity so any trends related to the consumer bear watching closely.

CPI and PPI follow up the report on Tuesday and Wednesday respectively. Strength in CPI and PPI could prove troublesome for dovish tone the Fed has recently taken on.  Jerome Powell will speak at 7pm tonight although little is expected as this is pre-recorded welcoming remarks for a conference.

Boeing shares are set to open lower by about 10pct on the impact of the Ethiopian Airlines crash.

Jerome Powell was on Sixty Minutes and said little new but it is worth watching-  https://www.cbsnews.com/video/federal-reserve-chairman-jerome-powell-the-60-minutes-interview/

March 8, 2019

Update: Only 20k new jobs were added in February, far below expectations of +178k. We caution, winter months tend to be volatile so do not to read too much into the report. Hourly earnings beat expectations by .10pct. The combination of weak new payrolls and stronger than expected wage growth puts the Fed in a pickle. Jerome Powell speaks at 10am, lets see if he comments on the report.

Weak Chinese exports (-17pct yoy) coupled with a supposed delay of the Mar-A-Lago Trade summit caused China’s markets to sell of significantly. US markets are also trading weaker but today’s direction will likely hinge on the employment report.

Good is bad and bad is good. That is our thought at least. A weak payrolls number allows the Fed to stick to ending QT and keep its dovish tone. If we get another strong employment print with gains in wages and hours the Fed may  be forced to take on a more hawkish tone. As precursor to today’s employment report we share the following recent employment data and the chart with today’s consensus expectations:

ADP +183k

JOLTS – Job cut announcements rose 45pct to 76,835, the highest monthly total in three years

Jobless claims- The 4 week moving average is 226k. Historically very low, but it has trended higher since October

March 7, 2019

Tomorrow the BLS will release employment data for February. The table below shows last month’s figures and the consensus expectations. Also of note Jerome Powell will speak at 10am tomorrow. A third strong employment report in a row will make it difficult for the Fed to continue to talk back 2019 rate hikes.


On December 19, 2018, less than three months ago, the Fed was set to raise rates 3 times in 2019 and Jerome Powell said QT was on “autopilot.” Since then, the Fed has signaled that QT will end soon and they have discussed using QE in the future on numerous occasions. Now, Governor Williams is adding negative interest rates to the list. Clearly, the Fed is deeply concerned about something!

March 6, 2019

Update: The Dow Jones Transportation Index has fallen 6 days in a row and is lagging the Dow and S&P 500. The following article from Zero Hedge provides some insight into what this might portend for the broader market. -Click to read the article.


Stocks are looking to open slightly weaker after lackluster trading yesterday and last night. The S&P is currently at the same levels as February 20th, attesting to the recent sideways action. Trade rumors have helped the market but it appears that we are at the point where a deal will be needed to budge it from its range. While it may seem obvious based on trading that a deal will be good for the market, we simply offer caution. “Buy the rumor, sell the fact.”  Our concern is that a deal with no teeth is reached or once a deal is reached, Nancy Pelosi immediately states that Congress will not approve the deal.

On Friday we get the BLS report on employment but today at 8:15 et, ADP will release their jobs report. This report tends to have good predictive power. The current ADP estimate is for a gain of 183k jobs as compared to 178k for the Friday report.

March 5, 2019

Markets were quiet last night with the only news of note coming from China. China lowered their 2019 GDP growth target to a range of 6.5-6pct. This compares to 2018s goal of 6.5pct. They also lowered various VAT (taxes) to help stimulate growth. Deal or no deal, China will be negatively impacted by Trumps trade stance. It is likely they will  stimulate economic activity using domestic means to help offset whatever they may lose in trade.

Yesterday, the market sharply reversed an overnight rally that was based on positive trade news. There was no news of consequence to justify the reversal. While the S&P 500 only closed down ten points, at one point in the day it was down over 50 points from the pre-market highs. As noted by Lance in last weekends newsletter, might the market be exhausting itself?

Of note, the S&P 500 futures (es) traded above 2814. As Brett Freeze has stated, this signifies a two month high is now officially in place. In the past this signal has helped confirm bear markets. For more, click on his latest Cartography Corner article below.

March 4, 2019

Not to sound like a broken record but the S&P 500 is looking to open about 10 points higher on news of the progression of US/China trade talks. Unlike prior rumors the news coming out over the weekend included specifics regarding trade in Natural Gas and Whiskey.

Economic data will be light this week, however the employment on Friday will be a huge focus. Currently expectations are for a gain of 178k jobs, down significantly from the 304k created in January. Fed speakers will not be as prominent over the next two weeks as the FOMC meeting is March 20th. We will have much more on this in two weeks but it is becoming more probable that a schedule to end QT will be announced at this meeting.

March 1, 2019

The market is up sharply on stronger than expected economic data from China. The Caixin PMI data report rose to 49.9 from 48.3. While still pointing to economic contraction it is not as weak as expected. The US markets strong reaction to this report and nonchalant response to a slew of weak data is telling. The market makers are trying to push markets higher. This is much easier to accomplish during the less liquid overnight session as we saw last night. One of the traits preceding the declines of the first and fourth quarters of 2018 were strong gains in the early part of the trading sessions erased by days end. We have witnessed some such activity recently but not enough to warrant too much concern. Will today be another instance?

Today, PMI and ISM will release their manufacturing Indexes for the US. Chicago PMI was strong yesterday, so we suspect this set of data will be in-line with or better than consensus.

February 28, 2019

Despite flooding the economy with new debt in January, China’s economy is still showing troubling signs. China’s Purchasing Managers Index- Manufacturing (PMI) fell to 49.2, below consensus of 49.5. A reading below 50 denotes economic contraction. The drop was led by the new export order sub component which shows deeper contraction at 45.2. China’s non-manufacturing PMI remains in expansion mode at 54.3, but has also been declining. In the past, China’s economy responded positively to impulses of new credit. This dynamic bears our attention as China has been the world’s drive of economic growth for the past decade.

US GDP will be released this morning. Annualized Real GDP is expected to be 2.1pct versus 3.4 pct last quarter. Please see our chart of the day to put today’s GDP into context with the past four years.

If you were on vacation since Thursday you will be happy to know you didn’t miss anything. Here are the daily closes of the S&P 500:

2792.34 Today

2793.90 Tuesday

2796.11 Monday

2792.67 Friday

February 27, 2019

Chairman Powell will speak again today in front of the House of Representatives. We suspect he will be grilled on policy and in particular disparaging comments he made about MMT yesterday . It is not likely market moving comments will come from this testimony.

Pending home sales will be released at 10am along with factory orders. Given the poor housing data yesterday we will pay attention to today’s data.

Between Michael Cohen’s testimony to Congress, India/Pakistan border hostilities and the Trump/Kim summit we are on the lookout for news that might move the market.

February 26, 2019

Update: Housing data released this morning was weak. Housing starts fell over 11 pct. to a rate that was 150,000 below expectations. It was the weakest showing since 2016.  Adding further insult to injury, the Case-Shiller Home Price Index was reported at +4.18 pct. While still a nice growth rate it is the lowest in nearly 7 years.

Tesla is off over 5% as the SEC asked a judge to hold Elon Musk in contempt of court for violating their settlement from last last year.

Catepillar and Home Depot, two large Dow Jones Industrial comapnies, are opening weaker this morning. CAT was downgraded to a rare “sell” from UBS, while HD’s earnings and revenue were reported to be weaker than expected.

Jerome Powell will speak today at 10:45 et. It seems as if the policy makers at the Fed are in agreement but Powell may shine light on a Fed that is split in regards to future direction of policy.

Interestingly yesterday’s rally on the trade agreement faltered with the markets closing marginally higher. If you recall we saw decent gains wiped out intraday in the periods leading to the October sell-off and the February 2018 declines. One day does not make a trend but certainly bears watching given the grossly overbought conditions. We ask you read our short article Cartography Corner Market Update published yesterday. This note from Brett Freeze is an alert that a trusty indicator of his is now signalling that we could very well be in a bear market.

February 25, 2019

The S&P 500 is opening stronger and China’s stock markets are surging on the delay of the March 1 trade deadline. The CSI 300, a broad index of Chinese stocks is up nearly 7pct this morning.

The market is also being helped by comments from Fed Governor Richard Clarida, who on Friday, mentioned how QE might be used differently in he future. While some perceive that as bullish, we simply ask you to consider why has the Fed made such a policy U-turn in two months and paid so much lip service to QE? We think there is more to the story than the market has figured out. Jerome Powell speaks on Tuesday and Wednesday and will hopefully shine more light on the Fed and their intentions.

President Trump tweeted the following this morning: “Oil prices getting too high. OPEC, please relax and take it easy. World cannot take a price hike – fragile!”  Crude oil is trading lower on the comment.

February 22, 2019

Trade talk optimism is back and markets look like they will recover yesterday’s losses. Of note today will be Kraft Heinz (KHZ). The stock closed yesterday at 48.18 after being as high as 90 in early 2017. After the close yesterday the company revised earnings lower and took a 15 billion dollar impairment. The stock is slated to open down 20 percent this morning.

Soft data, such as business surveys, tend to be good leading indicators of economic activity. Yesterday, on the heels of signs of economic contraction in Japan and Eurozone, two US “soft” indicators were mixed. The PMI composite was higher than expectations but the manufacturing component within the index was below consensus. Of much more concern was the Philadelphia Fed Business Outlook Survey which was reported well below expectations at -4.1 (consensus was +14.0). This survey points to economic contraction in the Philadelphia region. We should not read too much into a regional survey but this survey tends to be a good leading indicator. The Philly Fed was the first indicator to surge higher after President Trump was elected. Also of note, a key component of the survey, New Orders, now stands at lows not seen since 2016.

Today’s calendar is chock full of Fed speakers as follows:

8:15 AM Bostic

10:15 AM Williams and Daly

1:30 PM Quarles, Clarida, Bullard, and Harker

5:30 PM Williams

February 21, 2019

Last night there were numerous press releases and Tweets pointing towards agreement with China on a host of trade issues. The market rallied at first, but is currently trading lower. Given the state of China’s economy, is the market realizing that China does not have the ability to sign a major deal that would further harm their economic activity?

The Eurozone and Japanese PMI Manufacturing Indexes both fell below 50 and, as such, their respective economies are now considered to be in contraction. This latest data set lines up with a host of other economic data that also points to recession in both regions.

South Korean exports to China fell 14 pct for the first 20 days of February. The strong message coming from China’s trade partners is that China’s economic activity is slowing rapidly. The trade dispute is with the US, therefore trade activity with South Korea and Japan, as we mentioned yesterday, should be relatively stable. It is clearly not and the world economy is suffering as a result.

In the January 2019 FOMC minutes (released yesterday), the word “uncertain” was used 17 times. We have opined that the Fed appears to be out of sync with economic data and being led by the financial markets. Thus far the market trusts the Fed, but its likely the trust wears thin as “uncertain” can lead to panic.

February 20, 2019

Update: Per the FOMC minutes it does appear that QT will end this year. Here is the paragraph in the minutes alluding to the change. Click to enlarge.

Japanese exports to China fell by 17.4pct attesting to a continued weakening of Chinese economic growth. With Japan and Europe teetering on recession and economic growth being downgraded domestically, further slowing in China could push the global economy into a recession.

As part of negotiations with the US, China is being asked to keep their currency, the yuan, stable. This flies in the face of years of claims from Bush, Obama, Trump and much of the rest of the world, that China was manipulating their currency to favor trade in their goods. Now, according to sources, China is being asked to manipulate their currency so they do not offset tariffs or other trade agreements with a weaker currency.

The FOMC minutes from the January meeting will be released this afternoon. FOMC minutes are revised well after the meeting to reflect current thoughts. As such we look for more clarification of Mester’s comments about putting an end to QT.

Volume on the NYSE yesterday was the lowest since the day before Thanksgiving. Given the recent surge, bulls are becoming weary and possibly taking some profits. At the same time, bears are licking their wounds and appear scared to reset shorts. We suspect this market standstill could continue for a few days. Beware however, frequently lulls in trading that occur after a volatile period are met with a resurgence in volatility.  Use this rest bit to adjust your positioning for what will likely be larger moves up and/or down in the weeks ahead.

February 19, 2019

New Feature: We just added a heat map to our site. As shown below, the new tab shows a heat map that can be based on a number of different sectors or security types. You can also run the heat map for different time frames by clicking on the drop down box that is set to “Today’s.” If you click on Grid, you can sort the securities in the sector or index by a number of variations. This function also works for your personal portfolios and watchlist. Click on the picture to enlarge.

The market is opening weaker with little economic data on the calendar today. Of interest might be Fed Governor Loretta Mester who is scheduled to speak this morning. As we noted in the February 13th Quick Take, Mester made it clear that the Fed was discussing how and when to put an end to QT. Five Fed Governors speak on Friday to help us better understand the current Fed thinking. Also of note, the minutes of the January Fed meeting will be released tomorrow.

The horrendous retail sales report and other poor economic reports last week caused the Atlanta’s Fed GDP forecast to plummet as shown below. This was confirmed by the New York Fed’s GDP Nowcast which was reported at 1.08 pct Down from 2.17 pct.  Evidencing the unexpected nature of the weak data, the Citi Economic Surprise Index posted its biggest weekly drop since 2011. The index measures economic data as reported versus expectations for said data.  Click the Atlanta Fed GDPNow image to enlarge


February 15, 2019

Update: The Michigan sentiment number came in slightly better than expectations, reducing concern over yesterdays retail sales number. However, the following was part of the commentary released with the survey-  “Consumers’ long term inflation expectations fell to the lowest level recorded in the past half century

S&P futures are up over 15 points from the lows last night. You guessed it- China trade talks. The rebound occurred right after Steven Mnuchin tweeted the following : “Productive meetings with China’s Vice Premier Liu He and Amb. Lighthizer.”

We belabor the consistent rally’s off the same trade news because it increases the likelihood that any failure to produce a deal or a poor deal has the potential to shock the market. We remind you of an old Wall Street adage- buy the rumor – sell the fact.

This morning keep a close eye on the University of Michigan Consumer Sentiment Report. Retail sales, as noted yesterday, pointed to a marked slow down of consumer economic activity. While it was blamed on a host of one-time reasons, the Michigan report will help us understand if the excuses are real or consumers are really cutting back. On the back of weak data yesterday expectations for first quarter growth were revised sharply lower from 2.7 pct to 1.5 pct from the Atlanta Fed.

Reminder that Monday is Presidents Day and the markets will be closed.

February 14, 2019

Update: US advance retail sales unexpectedly fell 1.2% in December. It was the biggest drop monthly since 2009. Jobless claims advanced slightly versus an expected decline.

The S&P 500 is looking to open about 10 points higher on reports that the US/China trade deadline may be extended 60 days. The question on the top of our mind seemingly every morning is how many times can the market rally on the same news- positive trade talks? Apparently, many more than makes sense.

On the economic front PPI will be released at 8:30. Expectations are for a gain of 0.1pct monthly and a 2.1pct rate of growth annually. Jobless claims will also be released with the market looking to see the recent increase in claims due to the government shutdown erased. Lastly, retail sales, which was delayed due to the shutdown, is expected to show a .1pct gain.

We expect that the President will sign legislation to avoid another government shutdown. While already priced in, we would not be shocked if the market rallied once he inked his signature. Such is the nature of this rally over the last six weeks, and for the better part of the last 8 years.


February 13, 2019

Update:  Please see the Blogs tab for our article on Mester’s comments.

The market had a strong rally yesterday on what was credited to progress in US/China trade talks and an agreement to avoid another government shutdown. The strength of the rally was surprising and we suspected there was something more to it.

Last night we found out what it was. Fed Governor Loretta Mester from the Cleveland Fed, said the Fed plans to end balance sheet runoff at the coming meetings. We will publish a “Quick Take” short article on this surprising announcement later today.

This morning the BLS will release CPI which is expected to increase 0.1 pct for the month and 1.5 pct year over year. More importantly, based on the prior comments, Mester will speak at 8:50et. The market will seek more details of her comments from last night. Again, a deal to avoid a shutdown and US/China trade talks will be atop of things to watch for.


February 12, 2019

The market is looking to open up strong this morning on prospects of a government shutdown being averted. The “deal” on the table contains less than 2 billion in funding for the wall so the big question is will Trump sign it?

Also helping the market is positive movement on the China/US trade talks.

In regards to both of these, the last government shutdown went from December 22nd to January 25th.  Over that period the market surged. As such, it is not clear to us that averting a shutdown is meaningful for the market. As far as trade talks we have seen one false rumor after another purporting forward progress. While this may be the case, any deal will be most certain to hurt China’s economy. Given they are already witnessing a significant slowdown, will they sign such a deal? We believe there will be a deal, but given China’s economic situation we do not believe it will carry much weight.

The dollar is slightly higher this morning and on an eight session winning streak. For countries such as China which employ US dollar debt, a stronger dollar means more of their home currency is required to convert to dollars for interest and principal payments. Therefore a strong dollar is an added expense and economy killer to those countries dependent on the estimated 10+ trillion of foreign debt denominated in dollars.

February 11, 2019

The market stormed back from 1pct loses on Friday afternoon after San Francisco Fed Governor Daly claimed the Fed was debating using QE “on a regular basis” and not just for emergency policy as was clearly stated over the last five years. There are a host of Fed speakers throughout the week so keep an ear out for any further discussion about the benefits of QE as a “regular” policy tool.

On Thursday and Friday trade talks between Vice Premier Liu and US Trade Representative Robert Lighthizer will commence. Market direction later in the week will sway with statements alluding to progress of the talks.  This discussion may be the last face to face negotiations before the March 1st deadline set by Donald Trump so it is of added importance.

Other than inflation indicators CPI and PPI, released on Wednesday and Thursday respectively, there will be little economic data released. Earnings reports will also begin to slow this week as most companies have reported fourth quarter results.

February 8, 2019

Markets sold off yesterday on concerns that trade talks with China are not progressing as well as previously thought. That is the media’s narrative at least. The fact is that the market was very overbought, having rallied 17 pct in a little more than a month and was pushing up against the all important 200 day moving average. As we suspected, and witnessed by our recent portfolio actions, the market was due for a let down. The big question is are we just bouncing around to allow overbought conditions to moderate or has the downturn that started in October resumed?

These are key questions and we are looking for technical clues to help answer the question. For the time being we look at the 200 day MA as the top (2742) and the 50 day MA as a floor (2615). If either is broken it is quite likely the market will continue in that direction. We point out that the 100 day MA capped three buying spurts in October and November before the market fell in December to new lows. On Monday the 100 day MA was overtaken. Yesterday the market traded below it until the last few minutes where it closed 2 points above it. It is trading below this morning. A break below it today or in the coming days would be a sign that the 50 day MA is the level to watch.

February 7, 2019

Yesterday we published RIA Pro Economic Update, an economic outlook that reviews the worlds four largest economies. Our take- U.S. growth continues to hold up but that of China, Japan and Germany all appear to be weak, with parts of the Eurozone likely to enter recession in the coming months. In case you missed it, the link is below.

More signs of global slowing were revealed last night as the Bank of England (BOE) lowered their growth forecast from 1.7 pct to 1.2 pct and Italy’s forecasted GDP growth for 2019 was reduced further to a paltry 0.2%. In Asia, India cut their benchmark interest rate as an economic slowdown is felt on their shores. India and recent weakness in Australia are likely the affects of China slowing much more quickly than is understood by most media outlets.

Global growth matters. They represent about 40% of S&P earnings.

Chairman Powell spoke last night but had little to add to prior comments. Interestingly however, former Chair Janet Yellen spoke and said the following: “Both outcomes, a Fed hike or a cut, are possible.” We are not sure what to make of it but it does further strengthen our argument that the Fed may be trying to talk dovishly and walk hawkishly, or as we said “talk out of both sides of their mouth.”

February 6, 2019

German Industrial Orders not only fell for the 7th consecutive month, but reported the largest decline since 2012. Last week Italy report a negative fourth quarter GDP which, given it was also negative in the third quarter, puts Italy, the worlds 8th largest economy, officially in a recession. Germany, the worlds 4th largest economy, reports GDP on Friday February 14th. Expectations are for a slight increase. We expect a negative reading and with that Germany would join Italy in a recession. We are currently putting the finishing touches on a RIA Pro article that discusses economic activity in China, Germany and Japan to help get a better read on the domestic economy. We hope to have it out by tomorrow at the latest.

Reminder- Jerome Powell speaks at 7pm et tonight. If he speaks on monetary policy and the Fed’s recent about-face on future policy we will report on it tomorrow morning.

February 5, 2019

The markets drifted higher overnight as seemingly appears to be the recent trend. After an extremely volatile fourth quarter and early start to January, the equity markets appear to be undaunted by negative economic data and earnings. This recent activity has the look and feel of trading activity of the last three years. We caution however the issues that turned the market lower in the first and fourth quarters of 2018 are alive and well.

We are looking for this rally to halt somewhere between current levels and the much watched 200 day moving average. The moving average is currently at 2741 or about 15 points above current levels. It is likely the market will struggle to overtake the average on its first attempt and could retreat as conditions are greatly overbought and market breadth is not strong. In this scenario, we must be nimble and be willing to buy on a decent break above the moving average but not lose sight that it is very likely we have entered a longer term bear market. Trade short term – Invest long term. For traders, current levels represent a decent spot to reduce holdings or add a short position with a stop loss and possibly buy order above the 200 day moving average. Frequently, prices will rise 1-2 percent above a key technical level, trick the market and then reverse. Accordingly patience, tight stops, and close attention is warranted.

Chairman Powell will speak tomorrow night and we have some concern that he might walk back some of his market friendly statements following the Fed meeting last week.

February 4, 2019

Global markets are quiet this morning, in part because China just began its New Year holiday. News should be light from China as the holiday lasts a week.

At 10 am et factory orders will be released. We caution the data is for November so do not read too much into it. This week President Trump will present the State of the Union on Tuesday night and Jerome Powell will speak on Wednesday night. As far as markets go, any discussion by Trump on China and trade should elicit a market response. Once again with Powell we will look for clues on the new path of easier monetary policy.

February 1, 2019

The BLS reported this morning that 304,000 new jobs were added in January, nearly double the 170k expected. The caveat to the report was that last months 312k job gain was revised lower by 90k. That said the two month jobs gain is running strong and above trend.

The unemployment rate rose for a second month to 4.0 pct. This is largely a function of new entrants entering the work force and not the more traditional causes of higher unemployment. Average hourly earnings only rose .1pct versus expectations of .3pct. This is a little surprising given the strength in new jobs and the full employment rate.

The two month pick up in jobs growth is sure to worry the Fed which, as you know, as been backing away from the idea of raising rates.

Later this morning we will publish a second part to the Quick Take Fed meeting notes. With more time to think and discuss the abrupt pivot of the Fed we have more thoughts and questions to share with you.

January 31, 2019

Please note we published a Quick Take yesterday afternoon containing our thoughts on the Federal Reserve meeting and the ensuing press conference. The article is in the Blogs tab and can also be read by clicking the picture below.

Of particular interest to us yesterday was that the dovish pivot by the Chairman and the Fed as a whole was accompanied by a decline in long term interest rates. As of 7am et, the yield on the 10 year US Treasury Note has dropped from 2.73 to 2.66. Given relatively decent economic strength and a new policy stance that is more inflationary we would have expected rates to rise. Might bond traders be warning us that there is a reason for the quick Fed pivot?

Gold, as to be expected given the Feds new dovish stance, is trading well. It consolidated below 1300 for the better part of January but over the last few days surged to 1320. Overhead resistance is in the 1360-80 range, the highs of early 2018 and 2016. Look for 1300 as support and the aforementioned range as resistance.

January 30, 2019

UPDATE:  The Fed is clearly taking on a more dovish tack. The following quotes were taken from today’s statement:

“The FOMC will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate”

“The Committee is prepared to adjust any of the details for completing balance sheet normalization in light of economic and financial developments”

In addition they downgraded their assessment of economic growth to “solid” from “strong”. The market initially surged higher on the dovish statement. Chairman Powell will speak at 2:30et and may shed further light.

The following statement was also released which in our opinion makes QE4 a question of when not if.

“The Committee continues to view changes in the target range for the federal funds rate as its primary means of adjusting the stance of monetary policy. The Committee is prepared to adjust any of the details for completing balance sheet normalization in light of economic and financial developments. Moreover, the Committee would be prepared to use its full range of tools, including altering the size and composition of its balance sheet, if future economic conditions were to warrant a more accommodative monetary policy than can be achieved solely by reducing the federal funds rate.”

The market is looking to open higher on quiet overnight trading. Apple’s much anticipated earnings came in as expected, which should not be surprising given they updated guidance two weeks ago. Today, as we are now at the height of earnings announcements, we get a barrage of earnings reports including Tesla, Visa, McDonalds and Boeing.

Also of note today will be the ADP Employment Change which is currently estimated at +181,000. This number has reasonable correlation with the BLS jobs numbers released this Friday, so close attention will be paid. Last month ADP rose 271,000 which accurately predicted the strong rise in BLS payrolls (+312,000). Another strong payrolls print may be alarming to the Fed as strong job growth in such a tight labor market is all but certain to presage wage inflation.

Most important today will be the Fed’s monetary policy announcement and Powell’s press conference following the statement release. The market is looking, dare we say “hoping”, for further indications that rate hikes have indeed ceased and a reduction in the amount of balance sheet run-off is in the works. Anything short of these could lead to weakness in the markets. We will have more on the meeting and conference after they occur.

For what its worth, Powell has presided over 7 Fed meetings and the market has been down on the day in each one.

January 29, 2019

The rally off of the Christmas eve lows was driven in large part by very oversold technical conditions. With it however came two core narratives that may have helped elongate the surge. First was a shift in rhetoric and optimism from both China and the US that a trade deal was progressing nicely. Second, was rumblings of a shift in Fed policy away from further rate hikes and possibly a reduction in the amount of balance sheet reduction.

Almost a month later and the severe oversold condition has been transformed into an overbought condition. On the trade front we are increasingly growing concerned by the US actions against Huawei and its CFO. Applying pressure with criminal charges, as occurred yesterday, may be a leveraging position by the US, but the Chinese are not happy with it. Will this point of contention be resolved or is it a sign that negotiations are breaking down? The Fed meets today and Wednesday and then will release their policy statement followed by a press conference by Jerome Powell (2pm et 1/30). Will the Fed live up to the article in the WSJ that proclaimed they were done hiking rates and considering reducing the pace of QT? Maybe, but what if that article was not a leak from the Fed and they come out more hawkish than the market suspects?

These narratives are on thin ice. Time will tell if the market can now stand up on its own without narratives and technical support or if the poor fourth quarter was the opening salvo into a greater decline.

January 28, 2019

This week will be a busy week with the potential for numerous market moving events/announcements. At the top of the list are the following:

  • Trade talks with China will continue this week. Last night the Chinese yuan rose to a three month high, which is a positive signal. A stronger currency makes imports into China cheaper and exports to other countries more expensive. Therefore a stronger yuan, which is controlled by the government, is a sign they are negotiating in good faith.
  • The Federal Reserve meets on Tuesday and Wednesday in regards to monetary policy. We do not expect the Fed to raise or lower rates but are looking for firmer language about the future path of rate policy and QT.
  • The biggest technology companies will report fourth-quarter results throughout this week.
  • There will be a number of potentially key votes in the U.K. Parliament about Brexit.
  • Last but not least, will be the employment data to be released on Friday.

We will post more on these events as they occur.

January 25, 2019

Happy Friday!

Market is looking to open higher this morning after testing the 50-dma average for a third day in a row.

Interestingly, despite rumors of lack of progress on trade talks, the ongoing Government shutdown, and less than stellar earnings reports, the market has been saved repeatedly this week by late day appearances from Larry Kudlow talking up White House progress.

This morning, futures are pointing higher which looks to test the downtrend line from the 2018 market highs. A break, and close above that downtrend line will reverse the bearish trend from 2018.

(Click To Enlarge)

Top Overnight News

  • A Chinese delegation including deputy ministers will arrive in Washington on Monday to prepare for high-level trade talks led by Vice Premier Liu He, according to people briefed on the matter
  • Commerce Secretary Wilbur Ross said the U.S. and China are eager to end their trade war, but the outcome will hinge on whether Beijing will deepen economic reforms and further open up its markets. “We’re miles and miles from getting a resolution,” he said in an interview on CNBC on Thursday
  • U.K. Chancellor of the Exchequer Philip Hammond warned that leaving the European Union without a deal would betray voters who were promised a “more prosperous future” if they chose Brexit. EU ties itself in knots on Irish border amid Brexit tension
  • Senators began a new effort to end the 34-day partial government shutdown after blocking two rival spending bills. The White House signaled President Donald Trump was open to a plan to reopen agencies for three weeks, but at a price
  • The Greek parliament’s historic vote on the agreement with the Republic of Macedonia over the latter’s name, was pushed to Friday, with not enough time for all listed lawmakers to speak Thursday
  • Oil rose for a third day as a deepening crisis in Venezuela that threatens to complicate OPEC’s task of balancing world oil supplies outweighed a surprise jump in U.S. crude inventories
  • Bank of England Governor Mark Carney said threats of jail for bankers are just a bluff and the real weapon to improve behavior is hitting pay packets
  • U.K. Chancellor of the Exchequer Philip Hammond suggested he could quit the government in protest if the U.K. plunges out of the European Union with no-deal in nine weeks’ time
  • Benoit Coeure and Francois Villeroy de Galhau — two of the top contenders to become the next ECB president — said they don’t know if the institution will be able to raise interest rates this year

January 24, 2019

European economic growth continues to slow. Last night Germany, the world’s fourth largest economy, reported that their PMI manufacturing survey dropped below 50, signaling contraction. This was the first time it fell below 50 in almost five years. The ECB met this morning and said they would keep rates constant “through the summer of 2019” and also keep QE balances steady as they will reinvest all maturing proceeds. It is important to note that ECB borrowing rates are currently near zero. If a recession occurs, which is becoming more likely, what tools does the ECB have at their disposal?  Negative interest rates and more QE!

In the US we will get PMI (composite, manufacturing and services) at 9:45 et. This soft data survey will provide clues if we are following in the slow growth footsteps of Europe. Keep in mind some economic data is being withheld due to the government shutdown, so these soft data surveys are an important source for economic information.

January 23, 2019

UPDATE: Richmond Fed came in at -2. While slightly better than expectations, it points to economic contraction for the second straight month. This is the first time this has happened since 2016.

New Feature: We added a tab entitled Blogs which will house RIA Pro exclusive articles alongside articles regularly published on the Real Investment Advice site. Please refresh the screen if the tab does not appear at first.

Tuesday marked the first down day of greater than 1% on the S&p 500 since January 3rd. During the day the market slipped below the 50 day moving average but closed above it due to a late day rally on rumors that the budget impasse was resolved. As we have said numerous times in regards to market charging rumors- “Deja vu all over again” – Yogi Berra.

The market is looking to open slightly higher albeit with little news to propel it one way or the other. Keep an eye out on the Richmond Fed survey due at 10am et. Given the missing government data this will provide another clue as to whether the economy is hitting a soft spot. Current expectations point to an economic contraction reading of -6.

January 22, 2019

Following the IMF downgrade of global economic growth and China’s lowest GDP growth since 1990, Germany further confirmed that global growth is slowing in both the euro region and the world. Germany is the worlds third largest economy. Their widely followed ZEW index (survey – soft data), continued to point to a contraction of economic activity. While the overall index was slightly above expectations at -15 vs -18 (consensus) it still points to economic contraction. More concerning was a sharp drop in the current situation index which fell to levels last seen during the 2014 recession. Please see the Chart of the Day.

The US economic calendar is light this week with the headliners being the Richmond Fed Survey and Durable Goods. The market will likely take its cue from trade talks with China.

January 21, 2019

Cash US markets are closed for the Martin Luther King holiday. Futures are open on a partial schedule and showing a ten point decline in the S&P. Concerns about trade and the government shutdown appear to be the rationale.

The IMF revised their estimate of global GDP growth as follows:

  • Global GDP 2019 3.5 (3.7 Oct)
  • Germany 2019 1.3 (1.6)
  • USA 2018 *2.9  – 2019 2.5
  • China 2018 6.6  – 2019 6.2

January 18, 2019

UPDATE: Industrial Manufacturing a sub-component of the Industrial Production number was much higher than expected today. We warn you this is December data, whereas the regional surveys we have been worried about are for later December and January. This is a great example of lagged hard data and current soft data telling two different stories. Time will tell which is right.

Netflix beat their expected earnings per share but every other metric including the all important forward guidance was worse than expected. The stock is off of its lows but still down over 3% in the pre-market. Tesla reduced fourth quarter earnings guidance and announced plans to release 7pct of its workforce. The stock is down about 8% in the pre-market. Lastly, Foxconn, the largest producer of iPhones is also reducing its workforce by about 50,000 jobs. All three news events point to revenue shortfalls in the high flying tech sector. It is these stocks, that led the market higher.

Despite the poor earnings news the market continue to chug higher. The latest rationale for higher prices is supposed progress in the China-US trade talks. Our thoughts- In the words of baseball great Yogi Berra “Deja vu all over again.

Industrial production will be released at 9:15 and Consumer sentiment at 10:00 eastern time. Given the market’s current predisposition to rally regardless of news, it is not likely either data point will be of concern to the market.

The market continues to break through a wide swath of various resistance levels. While we continue to think a top is near, we are also respectful of the market and are considering tactical purchases if the market keeps showing strength. Our longer term outlook has not changed.

January 17, 2019

The markets have certainly calmed down this week from the frantic up and down trading we witnessed over the prior few months. We take a look at volatility in our latest RIA Pro article titled Has The Market Entered The Bears Den. In this article we highlight the ATR (average true range) or daily difference between the days high and low. This week it is averaging below 1 pct. You have to go back to December 3rd to find the last day where the range was below 1%. As a point of reference, the average ATR for the period ranging December through last week was 2.35pct.

On the economic data front we will get Housing Starts, Jobless Claims and The Philadlephia Fed Survey. Of interest will be the “Philly” Fed as we look for continued declines in the soft data (survey) indexes. The current estimate is 10.

Lance Roberts wrote a great piece describing and quantifying this recent change in soft data. The link is as follows- https://realinvestmentadvice.com/the-economy-is-slowing/

January 16, 2019

Stocks look to open flat this morning despite the BREXIT defeat, political turmoil in the U.K. and concerns that U.S. – China trade talks are stalling.

On the positive  side Bank of America reported earnings above expectations and China added reserves to their economy which should spur some economic activity. On a separate note, retail sales were slightly lower than expected at .1 pct versus expectations of a .2% increase.

Lower rates are helping housing activity as shown by the most recent MBA housing activity reports. The purchase index rose 9 pct last week following a 17pct increase the preceding week. Lower rates will help housing and autos.

January 15, 2019

Update: Further signs of economic weakness emerged this morning. The Producer Price Index (PPI) for December was -.2% m/m and 0% y/y, both were .2% less than consensus.  The Empire State Manufacturing Survey was 3.9 vs. estimates of 12. This survey confirms weakness that has been cropping up in other manufacturing surveys.

Update: JPM missed on earnings by a wide margin and barely missed on revenue. Like Citi, weak trading revenue (1.86bn vs estimate of 2.29bn) was a big source of the poor earnings.

JP Morgan, Wells Fargo and United Healthcare are on the earnings docket this morning. Citigroup stock was higher on Monday despite missing revenue estimates but they did beat earnings estimates due to a reduction in expenses. The stock was up over 4%, albeit still down about 25% from its October lows. Of note profits from equity and fixed income trading were weak. This theme should repeat itself all week due to the recent bout of volatility in the markets.

January 14, 2019

Weak import/export data from China and much lower than expected Eurozone industrial production is sending the markets lower in overnight trading. Further, heightened concerns of a failure of Prime Minister May to pass a BREXIT deal and the high likelihood of a PG&E bankruptcy are providing additional pressure. Lastly, the ongoing government shutdown isn’t doing the market any favors either.

Economic data this week is relatively light, however Retail Sales on Wednesday should provide a glimpse into the robustness of holiday sales from December. Earnings season is now upon us and the banks will lead off this week. Citi announced earnings this morning and most major banks will follow in the coming week. The full calendar can be found here: https://finance.yahoo.com/calendar/earnings?from=2019-01-13&to=2019-01-19&day=2019-01-15

January 11, 2019

Update: At the bottom of the Dashboard page, global economic data is reported. Today’s CPI report matched expectations and presented little reason to think inflation is brewing. CPI MM, SA (CPI – Month over month, seasonally adjusted) was down .1% from last month. This is one of the first pieces of so called hard data that will help us confirm if the weak survey data (soft data) that we have recently seen are valid. This is only one data point but does confirm some weakness.

Chairman Powell spoke yesterday and provided little in the way of guidance that we did not know. The only thing worth noting is that he seemed to imply that future balance sheet reductions were probable. This has been a topic he has been wishy-washy on over the past few weeks. In our opinion, this liquidity the Fed is withdrawing from the banking system and the market is a big reason stock prices have faltered in recent months.

Oil rose for a record 10th day in a row yesterday. Optimism over China-US trade talks, hope for Chinese economic stimulus and a weaker dollar are all partially responsible for the nearly 25% increase.  However, in context, oil is still down over 23 dollars, or about 33 pct. from its early October high and, like the S&P 500, is reaching an area of multiple resistance. It is likely that oil and the stock market will trade together in the coming weeks. As such it is likely the easy money has been made on the oversold rally and much caution should be applied from here.

January 10, 2019

Update: In our Active Trader section (under Market Data tab) you can see that the Retailers (Macy’s, Kohls, Gap, Target, and Nordstrom) are among the worst performing stocks today. Weaker than expected holiday sales guidance from Macy’s (M) is the culprit.

The market looks to open weaker this morning on concerns that there will be little in the way of progress in the China-US trade debate. Further, the President and Democrats are not making much headway on the Government shutdown. In all fairness, the market has risen almost 6% in this new year so a pullback should be expected, especially as we are reaching multiple points of technical resistance.

European economic data continues to be concerning. France showed a third month of declining industrial production, which follows on the heels of a large decline in German manufacturing. In Asia, China reported a sharp decline in producer prices, which further confirms their economy is weakening.

Chairman Powell will speak today and take questions at 12:45 et. The chairman’s message has fluctuated over the past few months. Today we will pay attention to see he tries to walk back his dovish and market friendly messages from late December.  Any divergence back to a hawkish tone would be problematic for the markets.

Yesterday a few subscribers asked why the % of S&P 500 that was overbought or oversold was zero. It is not a model error but in fact there were no stocks, based on our RSI formula, that were in either extreme. Today, as shown below and on the Overview tab, there are 4 pct. oversold and 1pct. overbought.

January 9, 2019

The market rally seems hinged on successful trade talks with China. While better trade relations with China will certainly help the economy we question whether the market is pumping the market up on this news and waiting to dump it once the news is released. As we have discussed the market is approaching a stiff line of technical resistance and severely oversold levels have moderated and in some cases are becoming overbought. We remain very cautious.

The FOMC will release the minutes from the December Fed meeting in which they raised rates 25 basis points. We will be on alert for anything that leads us to believe the Fed is taking a more dovish tack as Chairman Powell seemed to imply in his last speech. Better guidance on the Fed’s stance will be given Thursday when Chairman Powell speaks at the Economics Club in Washington DC.

January 8, 2019

The latest round of trade talks between China and the US end today and we suspect, as does the market, that there will be positive announcements.  Does this mean we will have a final trade deal and assuage market fears – highly unlikely. Nonetheless both parties have a  vested interest to produce a positive statement and calm down financial markets that are affecting both countries negatively.

We are on alert for the market to continue to run higher on any trade news, but as we often see in markets any news could mark the climax. There is an old adage that says buy the rumor sell the fact. That is our chief concern over the next few days.

The ISM non-manufacturing survey was weaker but provided a bit of good news as new orders were strong. Surveys such as this have been moderately weak in the US and pointing to economic contraction abroad. There is little data this week however corporate earnings for the fourth quarter will start being announced. This week is light with only 43 companies announcing, many of which are not well known. Next week, however, the number more than doubles as a lot of the major banks and a few other larger companies will report.

January 7, 2019

Update: Current thoughts from Lance and Mike :  https://www.youtube.com/watch?v=HUAjPsACazU

Fed Chairman Jerome Powell spoke last Friday morning and provided investors a late Christmas gift. He noted the Fed is paying attention to market and that monetary policy should be reflective of activity in the financial markets. This is somewhat of a departure from prior comments in which he seemed to minimize the importance of the recent market decline. More importantly he noted that QT, the act of reducing the Fed’s balance sheet, might be altered if financial conditions warrant. Curiously, only two weeks ago he said QT was on auto-pilot.  Clearly the Fed is much more concerned about the recent market drawdown then they were leading on to prior to his new comments. The question we will be focused on going forward is Powell just paying the markets lip service to placate the markets and the President or is he truly concerned? Powell will be speaking this Thursday and will hopefully provide us more clues.

Does Powell’s speech change our opinion on the market? NO

We still think the market has likely entered a bear market and rallies should be used to lighten positions. Our technical thoughts can be found in two current articles in the Articles section below – The New Year Starts with a Rally and Major Market Buy/Sell Review.


January 4, 2019

Update: As we suspected, expect the unexpected. 312k jobs were created in December, almost double that forecasted by a consensus of economists. The data blew away our high end estimate of 250k as well. Importantly, wages and hours worked both increased as follows: weekly hours 34.5 vs 34.4 and earnings .4 vs .2. Both data points are warnings to the Fed that wage pressures remain a concern. On the flip side, the unemployment rose from 3.7 to 3.9. The unemployment rate is considered a lagging indicator and over the last 7 recessions has predictably turned higher within months of a recession. While a change of .2 does not change the trend it is something that we will pay attention to.

Jerome Powell speaks at 10:30. Given the employment data it is likely he maintains his hawkish tone.

The BLS will release the December employment report at 8:30 am. Expectations can be seen in the table below.

The December report is an unusually tough month to forecast for a number of reasons. First a large majority of holiday spending and therefore temporary hiring occurs in December. In recent years economists have struggled to accurately forecast the changing patterns in the way consumers shop and what that means for jobs and sales. Second, the market has gotten mixed messages from other employment reports. ADP, which has a strong predictive track record, showed a large gain of 271k jobs which is 100k more than expected. Challenger reported that 43,844 jobs were lost in December, which, while lower than November, makes 2018 the highest number of jobs lost for the index in three years and second most since 2011. Lastly, the ISM manufacturing survey’s sub-index of employment was weak as noted by the ISM: “December employment for the PMI sample was the softest in 18 months with both production as well as overall optimism at 15-month lows.”

In our opinion payrolls could come in below 100k or as high as 250k. As we have noted in prior comments, employment is being watched closely by the Fed for signs that wages are rising. Keep an eye on hours worked and average hourly earnings for the best indicators of wages in this report.


January 3, 2019

Update: The ISM manufacturers survey dropped from 59.3 to 54.1. The last two times the survey dropped by over 5 points occurred during the recession of 2001 and 2008 as shown.

Shortly after the market closed on Wednesday, Apple (AAPL) shares fell 9% on guidance from the company that fourth quarter revenues would fall short of expectations. The blame is being squarely placed on a marked slowing of sales in China. Nearly 40% of US corporate profits come from abroad, so the warning from Apple should be taken seriously and not thought of as a one off event. Global manufacturing surveys are pointing to economic contraction in large swaths of the world as we have been reporting. Recent surveys from the Richmond, Dallas and Kansas City Federal Reserves point in a similar direction for the domestic economy. While surveys are an important barometer to follow, we are waiting to see “hard” data such as employment tomorrow, CPI and durable goods orders to see if the global economic cooling is working its way to America.

There was more action after the market closed as the currency markets went haywire. Around 6pm and in the period of just a few minutes, the Japanese Yen rallied over 3% versus the US dollar on no apparent news or event. The British pound and Australian dollar also saw large sharp moves. The dollar has since regained about half of its decline against the yen. While a 3% move may seem minor, it is a large move in the currency markets, especially considering there was no news event to accompany it. The currency markets are the most liquid markets in the world so volatility should be followed closely by investors of all types of assets. This activity might be a harbinger of impending volatility in other markets.

The graph below can be found by clicking on the dollar yen currency pair in the FX table below.

January 2, 2019

Update- PMI came in near expectations at 53.8 which, while still signalling economic expansion, points to a cooling of the economy. The following comment was released with the data: “This report as well as a run of regional data from Richmond, Kansas City and especially Dallas all point to trouble for December as the manufacturing sector appears to have ended a very strong year on a very soft note.”

The glimmer of hope the market provided in the last few trading days of 2018 appears to be dimming this morning. S&P futures are currently down 35, following stocks lower in Asia and Europe. The Chinese Caixin manufacturing survey, followed other Chinese surveys in economic contraction. Taiwan further confirmed economic weakness in Asia as two manufacturing indexes fell below 50, also into contraction mode. Maybe most concerning was the decline in growth of South Korean exports. The graph below charts global corporate earnings growth alongside South Korean exports. Needless to say SK exports have been an excellent predictor of earnings over the last decade plus.

In the US, PMI will release its US Manufacturing Index at 9:45 with consensus expecting a slight drop (53.9) from last months reading of 55. Tomorro, ISM will provide a second survey on the state of manufacturing expectations in the US. On Friday, the BLS will release the monthly employment reports. More details will follow on this most important report.

December 31, 2018

Update:  The Dallas Fed Manufacturing Index plunged to -5.1 from 17.6. This follows the Richmond and Kansas City Fed indexes showing similar sharp declines. This was the first negative reading in nearly 3 years and the largest decline in the 15 years they have compiled this index.

The market is once again looking to open up about 25 points higher as of 8am. The impetus appears to be a Tweet from Donald Trump saying that trade negotiations with China “are going very well.” Take any discussion of trade with a grain of salt as the market has been fooled numerous times into believing a trade pact was achievable.

Markets are open for a full day but we suspect that liquidity and volume will dry up after lunch time. We suggest any trading be made in the morning.

Of note, last night China released their Purchaser Managing Survey which dipped below 50 for the first time in three years. A reading below 50 means that a majority of those surveyed believes the economy is not expanding. Chinese auto sales were down a staggering 16% for the month of November, the worst reading in seven years.

US surveys are still well above 50 but we suspect they will gradually head towards 50 over the coming months as the global economic slowdown in China as well as Europe and Japan, takes its toll on the economy.

December 28, 2018

Volatility reigns!!   After being down more than 60 points the market surged in the final hours to close up over 20. Given light investor participation due to the holidays and the recent behavior of the market we expect the roller coaster to continue into the final days of the year.

Yesterday Consumer Confidence was released and showed a sharper than expected decline. We will stay on top of confidence numbers to see if the recent decline in the market is starting to effect consumer behaviors. The chart of the day shows how the consumer expectations and current conditions have proven to be a good recession indicator.The red line should start rising when expectations starts to decline.

This morning we will get our first glimpse of how purchasing managers are reacting to the market, Fed and government shutdown. Current expectations are 62.4, down from 66.4. This is one of the earliest data points showing economic activity in December.

December 27, 2018

Update: the following graph shows how large upward surges (5% or greater) are hallmarks of bear markets.

The market was up 5-6 percent yesterday in what can only be characterized as a severely oversold market. Volumes were weak on the surge in part due to the holiday season. Despite the run up, the market is technically still showing signs that the decade old bull market has ended. We will have more confidence in that statement once the month ends. In the meantime we should treat this a bear market bounce.

The S&P is looking to give up about 40 points on the open. Traders can consider taking short term speculative positions but with the discipline of stop losses in place. Longer term investors should take advantage of the bounces and reduce their exposure to the market.

On numerous occasions we have written that “volatility begets volatility.” We think that is every bit as true today, if not more so, then it was then. We would not be shocked if yesterday gains were erased entirely today or if the markets added a few percent to yesterday’s gains. Bear markets tend to be much more volatile than bull markets and for that reason hard to trade. Look back at a graph of 2008 and you will see large surges despite the trend which was decidedly downward.

December 26, 2018

Futures are looking promising at 8am with a gain of slightly over 10 points. The market is sitting on critical support, so not only would a bounce be welcome but expected. Following Treasury Secretary Steve Mnuchin’s blunder last weekend he is now on the hot seat. We are currently running a poll on Twitter to see who is more likely to get fired first; Steven Mnuchin or Jerome Powell.  With over 500 votes recorded Mnuchin has almost 80% of the votes. To vote please visit Michael Lebowitz’s Twitter account @michaellebowitz

December 24, 2018

The market traded higher overnight on reports that Treasury Secretary Mnuchin had conversations with the CEO’s of the largest banks. Apparently the purpose was to check on the banks liquidity given the government shutdown. We believe Mnuchin, under the urging of Donald Trump, is greatly concerned with the stock market and trying to get these banks to support the market. Actions like this are not new, in fact the beginning sell-off in 1929 was met with massive bank buying that boosted the market for a short period. Inevitably the market is bigger than anyone and it fell precipitously in the months and years that followed. We have little doubt that any rally Mnuchin can muster will be erased.

Rumors this weekend swirled that Trump might fire Jerome Powell. It has since been denied but we have little doubt this is a genuine concern. We will have more on the implications of such an action.

Despite rising almost 30 points overnight, the market is now down about 10 points. Markets will close at 1:30 et due to Christmas Eve.

December 21, 2018

As if the market is not grappling with enough news, we now find out that a government shutdown is looking more likely this afternoon. In the past, shutdowns have not been tough on markets and assuming this only lasts a short time we are not overly concerned. That said, disfunction in government is not something to be bullish about.

The market is greatly oversold and will likely bounce in the coming days. Traders can try to take advantage but we urge discipline and tight stops. Investors should use any bounce as an opportunity to reduce exposure if they are uncomfortable with their current level of risk.

Durable Goods orders disappointed coming in at 0.8 pct versus expectations of 1.4. The revision to Q3 GDP came in a tenth of a percent lower at 3.4.

December 20, 2018

Update: Bill Dudley of the NY Fed has come out in full support of Chairman Powell, adding more credence to his hawkish stance.  “TIGHTER FINANCIAL CONDITIONS PROBABLY A NECESSARY THING”

Basically the Fed does not care, at least not yet, about the market’s decline and will tolerate more before considering any action.

Update: The volatility index (VIX) is breaking out on this move lower. As shown volatility stayed in a contained range since October. Today’s move appears to be a breakout higher which signals trouble ahead.

Please read our thoughts on the Fed meeting in yesterday’s commentary. After more deliberation and reading other people thoughts we have come to the conclusion that the Fed is intent on rising rates and reducing their balance sheet further regardless of the stock market. In the words of billionaire investor David Tepper on CNBC – “The Fed Put is dead.”  Unlike David, we think the Fed will ride to the rescue of the market but it may not occur until the market drops significantly further. This is very different from the behavior of Jerome Powell’s three predecessors and will cause much anxiety.

Despite the seemingly hawkish Fed stance, the market may rally to close the year but we think the market will continue to trend lower and push the Fed. Ultimately the Fed will cave but it may not occur to a recession is all but imminent and the stock market is another 10-25% lower. As we have stated for the last few weeks, use rallies to reduce risk and please understand bear market rallies can be incredibly strong. Do not fall into the trap that these surges are the resurgence of the bull market until the technical situation improves. We will let you know if that were to happen.

If you have any economic/market questions please send them to us and we will answer them directly or if appropriate answer them in this forum for all to read.

December 19, 2018

FED UPDATE: In this press conference, Chairman Powell said balance sheet normalization (QT) is on auto-pilot. This tells us they are not even considering changing the amount of their balance sheet that rolls off each month. This is a big problem for the market that is so dependent on liquidity.

FED UPDATE: The following Fed statement from September as we showed yesterday is updated below. The orange text highlights any additional language.

“Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects judges that some further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective over the medium term. The committee judges that Risks to the economic outlook appear roughly balanced, but will continue to monitor global economic and financial developments and assess their implications for the economic outlook.

First they added the worded “some” to describe further gradual rate increases. This appears to be a first step in lowering expectations for future rate hikes.

Second and more importantly, the addition to the last sentence of the paragraph. They are telling us that slowing global growth and volatility in the financial markets will play a larger role in the way the Fed thinks about monetary policy going forward.

The statement as a whole is more dovish than the last one, but we are not so sure it as dovish as the market was hoping. Currently the market is 30 points off its highs. We will stay tuned for any telling comments from the press conference.

The S&P 500 is currently up about ten points as traders anxiously await the results of the Fed meeting at 2:00pm et and the ensuing press conference. Given that the S&P has dropped by almost 10% this month alone and technical readings are very oversold short term, we think the odds favor a surge higher this afternoon. That said, it could easily continue its recent downward trend if the Fed appears to show little concern for recent market moves. We will likely reduce equity positions today or over the coming days if a surge occurs.

We will post Fed updates later today based on the days events. Yesterday we published our thoughts on the Fed meeting in the Articles section. It’s worth a quick read before the meeting.

Italy appears to have a budget deal with the EU. That should provide a little strength to the euro and alleviate broader market fears in Europe.

If you have any economic/market questions please send them to us and we will answer them directly or if appropriate answer them in this forum for all to read.

December 18, 2018

The two-day Federal Reserve monetary policy meeting starts today with their statement, press conference and any changes to policy (Fed Funds) occurring tomorrow afternoon. Later this morning we will release an article with our thoughts on how a hawkish or dovish tone might affect the markets.

As is customary the Fed will adjust the prior statement from the September meeting with some edits. It is those slight changes in vocabulary and phrasing that will be studied carefully for clues on the Fed’s thinking. We believe possible changes to the second paragraph holds the most weight. The paragraph from September reads as follows:

“Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective over the medium term. Risks to the economic outlook appear roughly balanced.”

Any changes to the two bolded statements will likely be paramount to understanding if indeed the Fed is pivoting to a more dovish stance.

The entire statement from September can be read here – https://www.federalreserve.gov/newsevents/pressreleases/monetary20180926a.htm

December 17, 2018

Update: The National Association of Home Builders Housing Market Index was considerably weaker than expectations. The index now stands at 56, down 4 from last month and 12 from two months ago. This was the worst back-to-back change since 2001 and second worst on record.

The pre-Christmas week is usually quiet and tends to have an upward bias. This week, however, appears to be less predictable. The market is sitting at critical support, which if it breaks could result in another downswing of 4-5%. If support can hold there is plenty of ability to move higher an equal amount.

The Fed will meet Tuesday and Wednesday with a 25bps rate hike expected by the market. More importantly will be the tone of the FOMC minutes and importantly Chairman Powell’s press conference that afternoon. Given his speech two weeks ago, the market and ourselves are expecting a dovish tone. If this is the case the market may jump higher. We urge caution however and ask that you consider selling into a surge as it may be a good opportunity to reduce risk. We will provide commentary on the minutes and his press conference on Wednesday.

December 14, 2018

Update: The US dollar is up this morning and now stands at one year highs. A strong dollar has an adverse affect on foreign dollar borrowers as they must pay back principal and interest in more expensive dollars. A stronger dollar is another form of liquidity drainage.

The German Central Bank cut their 2018 GDP to 1.5 percent from 2 percent and next years forecast from 1.9 to 1.6. This is yet another sign that Europe is slowing quickly. The news out of China was not any better. Retail Sales grew at 8.1 percent, year over year, which is the slowest rate in fifteen years. Industrial Output also slowed considerably.

Economic growth is slowing as the Fed is removing dollar liquidity. The world runs on dollars. As dollars are removed from the system credit necessarily shrinks and typically foreign economies feel the pinch first.

Consider this- There is an increasing probability of a global recession and at the same time central bank rates in Europe and Japan are at zero and only 2.25% in the United States. There is little to no room to cut rates. This is a very important oft overlooked theme we will continue to harp on if it becomes more likely a recession is coming.

December 13, 2018

Update:  ECB CONFIRMS IT WILL HALT ITS ASSET-PURCHASE PROGRAM.  This headline from the European Central Bank is further confirmation that global liquidity will decline for the first time since the financial crisis. This first time confirmation is not an asset-friendly headline although markets are not reacting to it yet as it has been rumored for weeks.

From yesterday’s commentary  “Expect the roller coaster to continue and volatility to force the squeamish out of trading positions.”  And that is exactly what happened yet again on Wednesday. S&P futures rose from a low of 2629 at 4am in the morning to 2685 at 1:30pm. Following what seems like a daily script, it then fell about 35 points into the close for a small gain. When looking at a candle chart, the last three days have long tails and short bodies, meaning they have traded in wide ranges but closed very close to the open. Considering the market is exhibiting such strong signs of indecision, extra caution should be applied to short term trading positions. The market could easily rally to the top of the range as we suspect. On the same hand, a break lower could snowball to the downside. We strongly suggest tight stops on all short term trading.

On the data front we are looking towards today’s jobless claims to see if the recent uptick is a trend or just a short term anomaly. The market is expecting 228 k, down 3k from last week. More importantly retail sales will be released tomorrow. The Fed will closely inspect this number to help gauge the financial health of the consumer.

The following commentary from Peter Boockvar is very important to understand and is a primary reason why we think the trade war is a side show and the Fed and a global economic slowdown are the main acts that are driving stock prices lower.

“Let’s be clear- China lowering the tariff on US autos to 15% from 40% just puts the rate to where it was before July. And China buying more soybeans is what they were doing before they completely stopped. In other words, this is only optics so far.”

December 12, 2018

“Deja Vu all over again”- In the words of baseball great Yogi Berra, the market is opening higher on the same rumors that propelled it higher yesterday and many mornings before. A trade deal with China is looking more probable, Italy is making concession to ease its rift with the EU and Theresa May all of a sudden is much closer to a BREXIT deal that will pass Parliment.

Expect the roller coaster to continue and volatility to force the squeamish out of trading positions.

For those of you putting trust and faith in the Fed for your investment returns please consider the following:

December 11, 2018

The S&P is currently about 25 points stronger on news that China will reduce or eliminate tariffs of US automobiles. While this is a good sign of progression in China-US trade talks, we remind you the market is facing two other strong headwinds. First is slowing economic growth abroad and signs that domestic growth is starting to slow as well. Second is the Federal Reserve is removing 50 billion of liquidity from the markets every month. In our opinion trade matters but the other two headwinds are far more important.

Yesterday the market was extremely volatile. It pushed on and broke the lower end of the range we discussed in the Portfolio Alerts. We are concerned but waiting to reduce risk until the break occurs on a weekly basis and better confirms the market is heading lower. On Monday the S&P ended up 5 points but intraday came within two points of the closing lows from the beginning of the year.  The bounce and today’s current follow through may provide a push for more gains especially considering seasonal factors favor a rally into Christmas. The rally’s are tradeable, with tight stop losses, we view them ultimately as opportunities to reduce risk.

December 10, 2018

The stock market is opening slightly weaker on a plethora of concerning headlines including:

Japan sharply revised lower their recent GDP to -2.5 pct from -1.2pct. Other Japanese data was weaker as well

Prime Minister May continues to move forward on a BREXIT vote that appears doomed to fail

Weaker trade and inflation data from China

French protests continued over the weekend

Chief of Staff Kelly is resigning

Huawei ordeal continues to grow raising concerns about a US-China Trade deal

None of these are overly concerning on their own but the sheer number of negative events is likely to weigh on equity markets here and abroad. We suspect U.S. Treasury bonds will continue to perform well. Pay close attention to shorter 2 and 3 -yr yields for signs that the market thinks the Fed rate hikes come to an end after their planned December hike.

December 7, 2018

Update: The payrolls number was weak at 155K vs an expected 190K. Hourly earnings and hours worked were also weak, coming in a tenth of a percent below exceptions. The case is clearly building for a much more dovish tone when the Fed meets in three weeks.

Yesterdays rally from 60 point lows to closing nearly flat was sponsored by the following Wall Street Journal headline- Fed officials may signal a ‘wait-and-see’ approach following rate increase this month.  The bottom line is that the Fed is getting nervous about stock market conditions. This was evident in Powell’s and Clarida’s speeches last week,  (reviews of the speeches in the Articles section below) as well as media trial balloons hinting at pause that appeared in the days before their respective speeches.

The table below contains expectations for today’s Employment report. This will be the most closely watched economic data point for the month of December as it will help the market further consider the future path of the Fed.

December 6, 2018

Update: In the latest Cartography Corner (Articles and Videos section) Brett Freeze provided guidance on trading levels for the S&P 500. He wrote- Active traders can use 2818.00 as the upside pivot, whereby they maintain a long position above that level. Active traders can use 2691.25 as the downside pivot, whereby they maintain a flat or short position below it.

The high on Monday morning (2811) never breached the upside pivot. Since then it has collapsed to 2628 (currently). Following his advice would have thus far resulted in a 63 point gain and importantly helped avoid the bullish impulse to buy when the market looked strong on Monday morning.

We also remind you of the following quote from the same article- We want to stress the point that if the S&P futures close the month of December below 2742.72, the market is providing a strong signal that the nine-year-old bull market may likely be in jeopardy.


The market opened poorly last night on the following headline- *CANADA ARRESTED HUAWEI’S CFO AT REQUEST OF U.S. AUTHORITIES. More details are in the Portfolio Alerts to the right.

We will be paying very close attention to what incoming economic and financial data are telling us.” Fed Reserve Chairman Jerome Powell

At this stage of the interest rate cycle, I believe it will be especially important to monitor a wide range of data as we continually assess and calibrate whether the path for the policy rate is consistent with meeting our dual-mandate objectives on a sustained basis.” Vice Chairman Richard Clarida

The two quotes above, which we highlighted in our reviews of their most recent speeches, talk to Fed new “Data Dependency.” In other words, Fed policy and the question of raising rates further will be much more dependent on economic data in the days, weeks and months ahead. With that as a back drop there is a large amount of important economic data coming out today and tomorrow. The data schedule, expectations and actual data points can be found towards the bottom of the Dashboard page. We believe the following are the most important to follow in regards to clues about Fed policy:


  • ADP Employment- Good proxy for Friday’s BLS Employment report
  • Jobless Claims- It has ticked up in recent weeks and we are curious if this is a new trend.
  • PMI and ISM non-manufacturing surveys- Look for clues in regards to forward looking orders and prices


  • Employment- This is the most important piece of data for the month of November. In addition to the unemployment rate, hours worked and average hourly earnings are key data points the Fed is following. We caution that employment data for November can be volatile based on where Thanksgiving falls within the month and the number of ensuing holiday shopping days. The weather in November through March can also create odd hiring patterns.

December 5, 2018

Reminder: US markets are closed today.

The significant equity rally following Powell’s dovish speech and the “truce” with China were largely erased with yesterdays 800 point DJIA sell-off. The yield curve continues to flatten and warn that economic growth is slowing. Growth concerns are also showing up in the widening yield spread between investment grade corporate debt (LQD) and US Treasuries. As shown below the price of LQD is flat for the last month, while IEF is up about 4%. Said differently, the benefits of lower yields are not accruing to investment-grade corporations. We will post our monthly fixed income summary shortly which will go much further into yield and spread dynamics from the month of November.

December 4, 2018

Update- The yield curve flattening and stock market weakness are feeding off each other. Currently the 2s/10s curve is down to 10basis points and the 2s/5s curve is now inverted by 3 basis points.

It is often said that investors should follow the bond market, not the stock market for economic signals. Well, the bond market appears to be screaming that economic growth is slowing.  We have documented slowing growth abroad, and now there are increasingly more signs that a domestic slowdown is coming. For instance, Ford, following GM’s lead, announced significant layoffs yesterday. There is a slew of economic data scheduled for Thursday and Friday to lend credence, or not, to the machinations of the bond market. We remind you the market is closed tomorrow in honor of George Bush.

U.S. Treasury yields curves began to invert yesterday as longer yields fell and short term yields rose. Yield curve inversions tend to be a prescient, albeit early, warning of recession. The last inversion preceded the financial crisis. The 3yr/5yr curve is now inverted and the more widely followed 2yr/5yr is at zero. The most popular yield curve, 2yr/10yr, stands at a cycle low 14 basis points. Frequently, and as we are now seeing, shorter term curves invert first and tend to be a precursor for the longer curves.

December 3, 2018

Update-  David Rosenberg, whom we highly respect, penned the following article in which he disagrees with our recent take on Powell’s speech from last week.


The “deal” agreed upon this past weekend with China is more of an agreement, or even truce that ensure negotiations continue. While not the deal that the White House has been dangling in front of the markets, it does appear to offer hope and certainly averts an all out trade war for the time being. Essentially, China and the US will continue to negotiate for 3 more months with no new tariff actions. China also agreed to increase their purchases of US agricultural goods and some other commodities. Please see our Chart of the Day.

Stocks are flying out of the gate as the worst case scenario was averted. There is almost certainly some short covering occurring as there were plenty of investors with hedges that now need to be covered. Bonds are drifting higher in yield but remain well below the highs of two months ago.

There is lot of economic data this week, as shown, capped off with the much important employment report on Friday. Note that markets will close Wednesday in honor of the passing of George Bush.

November 30, 2018

Update- Add Canada to the list of global economic concerns. They just reported a .10 percent decline in GDP growth.

Global economic growth continues to show signs of marked slowing. Last night Italy joined Germany, Switzerland and Japan in posting a negative GDP growth number for the most recent quarter. Further, China’s PMI manufacturing survey registered a 50.0 which means it is on the brink of contraction according to that widely followed measure. We believe part of  the recent switch to a more dovish tone from the Fed emanates from the global economy. In most cases, the stronger dollar and higher US interest rates are making dollar denominated debt tougher to service and pay back which is adding to weakness abroad.

The G-20 meeting kicks of today. The big highlight will be dinner tomorrow night between Xi and Trump. We have no doubt the market will be chock full of rumors today which may result in significant volatility.

November 29, 2018

The market shot higher on comments from Fed Chairman Jerome Powell. Please see our review of his speech and that of his Vice Chair in the Latest Articles section below. The following line from the Powell review sums up the rationale behind the market’s euphoria:  He states that “interest rates are still low by historical standards” and “remain just below” what they would consider neutral for the economy. The phrasing “remain just below” is the key line from the speech as it was only a month ago, on October 3rd, when he said they were a “long way” from neutral. In no uncertain terms, this abrupt change in posture is a clear signal to the market that the Fed may be close to ending their hiking cycle.

This morning jobless claims came in at 234k versus estimates of 220k. While still a historically low number, it has risen over the past two months from a low of 202k. This is not yet a concern, but a trend that bears watching.

Also on the slate this morning  is the PCE price index. This inflation measure, and not CPI, is the Fed’s preferred indicator of inflation. The index came in at 2 percent yoy versus expectations of 2.1 percent yoy.

The bottom line from both reports is that employment is weakening slightly and inflationary pressures are subdued. Given the data dependency of the Fed, these reports support a more dovish tone from the Fed. Keep in mind these are only 2 reports and we must be careful not to read too much into them.

November 28, 2018

The market is once again opening strong on optimism a trade deal will be struck with China.

Fed Chairman Powell speaks today at noon at the Economic Club of New York. Like Clarida’s speech yesterday, we believe there is growing importance to deciphering Fed speeches for signs that the Fed is turning to a more dovish stance. Interestingly, Trump had more disparaging words about Powell last night and rumor has it that Treasury Secretary Mnuchin paid a personal visit to the Chairman to lobby for a more dovish posture. If Powell discusses monetary policy, as the market is expecting, we will provide a summary as we did yesterday with Clarida’s speech.

On Friday the G-20 will meet. While much will be discussed, the market will likely focus on China-US trade relations. There is a lot of “chatter” from Chinese President Jingping Xi and President Trump, much of which is posturing and bluffing ahead of negotiations. As we have seen the market looks very kindly upon rumors that a trade deal is nearing with China. Conversely, if it looks like a deal is not possible the market will decline. The rumors and associated volatility will make trading precarious until the meeting is over.

November 27, 2018

Update- Please see our latest RIA Pro article which reviews Clarida’s speech from this morning.

Over the next few weeks the Fed has the opportunity to back down from their hawkish narrative. As we have discussed, rumors are cropping up that come springtime, the Fed could halt rate hikes and/or balance sheet reduction. If this is the case, we are on the lookout for important clues from Vice Chairman Clarida, speaking this morning and from Chairman Powell tomorrow. Here are a few things that we are looking for:

  • A discussion of lower oil prices and how that may relieve inflationary pressures
  • Any signs of slowing economic growth in the US.
  • With Germany and Japan printing negative GDP in the last quarter, is there a broader concern slowing global growth will harm US growth.
  • Do they mention the recent decline in stock prices
  • China and trade war

Apple is trading down another 2% as the most recent round of tariff threats were aimed directly at Apple. The stock is currently trading around 171, down over 50 points from its October 3rd high.

November 26, 2018

After an ugly week where stocks could not seem to gain any ground, the markets are opening up strong. Led by optimism over a BREXIT deal and potential Italian budget compromise, European stocks are stronger. As mentioned last week, the rumor mill is reporting that the Fed may take a pause in their hiking of rates in the spring. This week Jerome Powell and a host of other Fed members will speak. These speeches are important to follow for signs that the rumors are true.

If the rumors are true a bullish and bearish case can easily be made. On the bearish side, we should consider what the Fed seeing that is so bad that they feel they have to halt rate increases? On the bullish side, Fed dovishness has been associated with strong gains. We will keep updating on this topic and provide our analysis as it is very important.

November 23, 2018

Wednesday’s gain on rumors that the Fed may be suspending their rate hike cycle do not seem to be believed by the markets. Stocks are looking to open down about ten which would erase Wednesday’s gains.

Crude oil is down sharply to 52/barrel as Saudi Arabia has claimed to increase production. While many economists will tell you that lower gas prices are good for the economy, they fail to discuss other economic implications. We will have more on this on Monday.

Europe is also struggling as recent manufacturing surveys point to economic weakness. Stocks will close at 1pm and bonds at 2pm today due to the Thanksgiving Holiday.

November 21, 2018

As noted in the Portfolio Commentary section, we did some tax loss harvesting yesterday as multiple positions were stopped out.

With the market extremely oversold on a short-term basis, and given the market is only open for one-half of the normal trading session, an oversold bounce is likely. However, with multiple “sell signals” in place the downside risk still outweighs the upside reward on a near-term basis.

As we wrap up the Thanksgiving holiday, we will move into the end of the year and all eyes will turn their focus to two things – the Fed and the economic data.

This morning, a “trial balloon” was floated, and futures are up, as Market News International reported that the Federal Reserve is starting to consider at least a pause to its gradual monetary tightening and could end its cycle of interest rate hikes as early as the spring, citing senior people at the Fed they didn’t identify.

While a Dec. rate hike is all but assured, the debate will become more lively beginning at the central bank’s March meeting and certainly by June. The issue, of course, remains a Jerome Powell who is intent on continuing to lift rates into 2019 and the Fed’s own dot plot suggests there will be at least 3 hikes in 2019. So, this “trial balloon” to stabilize the markets is likely just that and will provide an opportunity to reduce risk further in the weeks ahead.

It also suggests that for one or more Fed presidents to engage in such an ECB-esque trial balloon in defiance of Chairman Powell means disagreements within the FOMC over the future of monetary policy are beginning to boil over.

November 20, 2018

Quiet and calm as we expected for pre-Thanksgiving trading is not what the market is serving us. Target shares are looking to open nearly 10% lower on weaker than expected earnings and a downgrade of Q4 estimates. Target, following on the heels of Amazon, is clearly a strong warning that consumer spending is weakening. Recently, Target CEO Cornell said this is the “best consumer environment ever.” Either the environment is rapidly deteriorating or Cornell is out of touch with broader economic trends. We remind you that much of the fiscal stimulus driving economic growth is wearing off. The following graph helps illustrate this.

Treasury bond yields continue to grind lower with the ten-year now at 3.05 percent or about 20 basis points lower than its recent 3.25 high. Corporate bonds, both investment grade and junk, are rising in yield and therefore spread to US Treasuries. For more information about Corporate bond trends see our latest monthly commentary. A deeper dive into the junk bond sector can be found here – https://realinvestmentadvice.com/high-risk-in-high-yield/

November 19, 2018

This should be a quiet week due to the Thanksgiving holiday. We suspect that volatility will calm down this week but given the price action of the last month and the lack of liquidity we must be on guard for bigger moves. If you share our increasingly concerning outlook, as noted in the portfolio commentary, the next few days may provide outsized bounces allowing you to shed some risk.

Fed Governor John Williams speaks on three occasions today. We will focus on whether he believes the Fed will maintain their hawkish posture or the recent decline in oil and slowing growth abroad may alter their outlook.

Also of note Apple slashed production orders on iPhones, BREXIT negotiations remain elusive, and China trade talks appear to be growing more confrontational. The latter two have the ability to roil the global markets if they continue.

November 16, 2018

Markets look to open weaker this morning, giving back a good portion of yesterdays gains. One growing concern appears to be based on fears that terms for a “clean” BREXIT are diminished.  Following trading on the British pound provides indications of market sentiment revolving around BREXIT.

Also of note Nvidia (NVDA) is trading down along with the semi-conductor sector on poor earnings and a lower revenue outlook. Despite the market being higher by almost 1 percent yesterday, Walmart (WMT) traded lower on weaker revenues and concerns about future revenue growth. Such concerns aren’t limited to those two companies. Apple and Amazon offered similar warnings a few weeks ago. Corporations have the best real-time data on sales trends. Based on many fourth quarter forecasts we have increased concerns that the consumer may hamper economic growth. Personal consumption accounts for nearly 70 percent of GDP.

November 15, 2018

Bond yields have quietly declined over the past week. Currently the ten-year U.S. Treasury yield stands at 3.09, down from recent highs of 3.25 percent. The sharp decline in the price of oil is likely the culprit. Oil is a key component in many products and involved in the manufacturing and shipping of the products. Given the 30% decline of crude oil as highlighted in yesterdays commentary, the Fed’s inflationary concerns should be lessened. We need to keep an ear out for Fed speakers and any discussion of oil and inflation. Any signs that the Fed will adapt a more dovish stance should bode well for bonds.

November 14, 2018

Update-  SWN– Natural gas has risen significantly over the prior month on increasing signs of a cold winter. If you bought shares of SWN based on our article we recommend taking advantage of this opportunity and selling a fraction of your position. Today’s 10% gain in natural gas is likely based on short covering and not fundamental expectations, therefore natural gas and SWN will likely become extremely volatilite in the coming days.

On the economic calendar Fed Chairman Jerome Powell speaks at 5pm ET and CPI is released at 8:30et.  Consensus is for a year over year rate of 2.5 percent. Given the recent drop in the price of oil that will not be entirely picked up by this release, this number may be considered less important than it otherwise would have been.

Overnight, Germany and Japan both released negative quarterly GDP data, confirming that global growth is slowing. Please see the Chart of The Day.

Yesterday crude oil had it biggest daily loss (7.1%) in over three years. Since early October Crude oil has dropped over 35 percent, from 77/barrel to 55/barrel. Having broken through all pertinent moving averages and the two year trend line (orange), the range highlighted by the yellow bar (55-42.5) should provide support. Further the RSI now stands at its lowest level in decades, another sign we should see support soon, even if it is only temporary. From Bespoke Investments: This is the fastest that crude oil has gone from a 52-week high to a 52-week low (30 trading days) since at least 1984.

From a macroeconomic perspective oil is sending us a strong message about economic weakness in the global economy. Might the decline in oil also be signalling emerging weakness in the US economy?

November 13, 2018

Update: After rising 25 points this morning, the S&P is now red on the day. The half-life of China trade rumors is becoming markedly shorter and shorter.  Further concerning, oil is down 7% on the day.

In what appears to be a recurring theme, a “phone call” and renewed hopes for a trade deal with China occurred last night after a large market sell-off.  Not surprisingly overnight investors took the bait and the S&P is currently up about 15 points. Like the boy crying wolf, either a wolf in the form of a trade deal occurs or the market will simply ignore the false hope.

It is worth reminding you that the Fed is reducing their balance sheet at a rate of 50 billion a month. The current pace is the equivalent of raising interest rates by 6 basis points a month or nearly 20 basis points per quarter. The Fed is also increasing the Fed Funds rate by about 25 basis points a quarter. The takeaway is that the Fed is removing more liquidity from the markets than most investors realize. This will apply a constant source of downward pressure to the markets.

November 12, 2018

Stocks have been gyrating since futures opened up last night. Currently the S&P looks to open down about 8 points. The dollar remains strong on concerns over a failure for a BREXIT deal and the inability of Italy and the EU to come to an agreement on Italy’s budget. Couple those concerns with general weakness in Europe’s economy and the recipe for a stronger dollar versus the pound and the euro could continue.

Bond markets are closed for Veterans day but stocks will be open. We expect light volume although the lessened liquidity may drive volatility. There is little on the economic docket until Thursday when Retail Sales is released. Fed Chairman Jerome Powell will be speaking on Wednesday afternoon.

November 9, 2018

Stocks are looking to open weaker as the dollar resumed it assent. The move last night is based on weak China economic data. Also of note, crude oil  slipped below 60/barrel, having been above 75 less than a month ago. We believe that global growth is slowing at a rapid pace and having a big effect on the demand for oil. Over 40 percent of S&P 500 earnings come from abroad so signs of global weakness should be followed closely.

The FOMC left rates unchanged yesterday and for the most part left their statement intact from the prior meeting. While seemingly meaningless there are two important takeaways:

  1. The Fed and Chairman Powell appear to not be backing down from Trump’s direct statements to Mr. Powell about raising rates. This tells us Powell holds the independence of the Fed in a strong light.
  2. Despite a nearly 10% decline in stock prices, the Fed didn’t mention the market. Might we finally have a Fed that understands their congressional mandate is for stable prices and full employment? The so called third mandate of strong asset markets and the follow through wealth effect do not appear to be part of Powell’s agenda- at least not yet.

November 8, 2018

Yesterday’s stock market rally, on the heels of the election, was breathtaking, however we remain very concerned this is still a bounce within a lower trend. One hint is volume. Despite the bullish tone emanating from the media volume has weakened on each consecutive day of this rally. From a fundamental and market perspective we think the cons of a split house outweigh the positives. For instance trade tariffs and trade wars will still occur as those actions are primarily left to executive order. Trade agreements must be agreed upon by Congress. Fiscal stimulus in the form of further tax cuts is not going to happen. While an infrastructure bill is still possible it will probably come with concessions such as rescinding part of the corporate tax cut. Lastly, as we have already seen, expect the non-constructive political war of words to heat up.

At 2pm this afternoon the Fed will most likely keep the Fed Funds rate on hold. The market has expectations for a hike at the next meeting in December. While largely unexpected, a hike today would be a strong signal to the market that the Fed is concerned about inflationary pressures rising.


November 7, 2018

Stocks are surging and the dollar is weaker on the Democrats taking the house. At first blush it appears investors are cheering gridlock and its implications. As we discussed yesterday a split means “additional fiscal stimulus is less likely.” Our only guess at this point is the market now believes the Fed might take on a less hawkish tone. On the flip side, it was Trump’s pro-growth policies that drove the market higher over the last two years.

Currently, we are questioning the markets first reaction. Over the next few days we will have to see if the gains can hold and if they change the technical outlook to a more bullish one. Until then be very careful of a market head-fake, similar to what we saw on two years ago when the market was down significantly in the first Hours of Trump’s victory.


November 6, 2018

Vote for the man who promises least; he’ll be the least disappointing.” – Bernard Baruch

Update 2: Please see our election night Election Night Cheat Sheet in the Articles and Videos section.

Update 1: Crude oil is down by well over 1.50 today and off 16 from it highs in early October. Supply side sanctions on Iran are certainly playing a role in the drop, but we must also consider that demand might be lessening significantly given slowing global growth. While oils weakness is not a definitive sign US growth is slowing, it bears watching closely.

With two big events on the horizon we suspect the market will be relatively quiet today. Election results should start streaming in by 7pm et, but it could be a while before it is known which party controls the house and senate. Later today we will be putting out a cheat sheet with our expectations on the short and long term market implications of the various leadership options.

On Wednesday the FOMC begins their two day meeting. Currently the market is implying a 15 percent chance that the Fed raises rates. Consensus is for a rate hike in December, therefore a move on Thursday would come as a shock to the market. While the economic impact of a November rate hike, as compared to December is minimal, the messaging effect is massive. If that does indeed occur the stock market would likely trade lower, possibly significantly lower. We remind you though the chances of that occurring are small.


November 5, 2018

After trading lower throughout the night the market rallied back and looks to open flat to slightly higher. The election will take center stage with many traders trying to re-position before the results are announced Tuesday night. It is unclear to us how the results might affect the markets. We simply remind you that a Trump victory in 2016 was supposed to cost the markets dearly. It did for a few hours and has done nothing but go upwards since.


November 2, 2018

The market traded off after the close on lackluster forward guidance from Apple. Apple said it expects its midpoint revenue to be 91billion versus the prior estimate of 92.74billion. The sell-off did not last long as rumors circulated once again that a trade deal with China is possible in the weeks ahead. The S&P Futures were up about 25 at their highs before the employment number. Half of that gain has since eroded.

As shown below the jobs data for October were strong with 250k new jobs, rising participation rate and a bump up in the year over year hourly earnings. While cause for celebration this also means the Fed will likely not back down from future rate hikes. Of note, and we should pay close attention, the market is beginning to put 20% odds on a hike in November. Prior to today, implied market levels pointed to December as the next hike.


November 1, 2018

The market is looking to open up stronger again. Yesterdays gains were partially erased in the afternoon and interestingly small-caps stocks (IJR) ended the day flat to slightly lower. Might this be a sign the bounce is nearing its conclusion? We are looking to take action on market strength to reduce our exposure as noted in the portfolio commentary.

Challenger Job Cuts jumped this morning surged from 55k to 75k. The jump is largely blamed on Verizon and Sears. This is the second large monthly jump in a row. It bears watching to see if this is a trend or just one-off large cuts from specific employers.

Market bellwether Apple (AAPL) will release earnings after the close. The current expectation is for earnings of 2.79 per share. AAPL has held up much better in this recent downturn then its compatriots in FAANG (FB, AMZN, NFLX, and GOOG) making today’s release that much more interesting.


October 31, 2018

Happy Halloween!!

The S&P is looking to open up by about 25 points, following the impressive gains yesterday. As we have said in our technical updates the market is/was greatly oversold. We believe this is a time to exhibit some discipline and if you are looking to reduce risk, pinpoint those levels and take action. We think this rally could run to as high 2750 or even 2800. We will likely reduce risk further on market gains.

The ADP Jobs report this morning came in at 227,000 vs expectations of 189,000. The full economic calendar for the US and other major economies can be found on the Dashboard page beneath the currency rates. The current expectation for the Friday report is a gain of 190,000 jobs.

Below are a couple quotes that are worth consideration. For the record we agree with Kevin.

US stocks fell off a cliff after Oct 3. Today the 30 year Treasury yield closed at 3.364. On Oct 3 it closed at 3.336“. – Jeff Gundlach

Until the bond guys get worried and the bond lady sings, this correction isn’t over” -Kevin O’Leary


October 30, 2018

The S&P 500 was up overnight on renewed hopes for a China trade deal. While we have no doubts that Trump would love a trade victory before next week’s mid-term election, we believe both sides remain pretty far apart. Currently, the S&P 500 is up 8 points, but given the extreme volatility of the last few weeks, this could evaporate or multiply in minutes.

Europe’s GDP grew .02% (0.8% annualized) in the last quarter providing further evidence that the global economy is slowing.

October 29, 2018

Update: The market, after being up nearly 50 points, has completely erased the gains and is down over 35 points. The following graph provides a range where support should come in. If we fall through those levels the decline could intensify.

This will be a quiet week as far as economic data goes. On Thursday the PMI and ISM manufacturing indexes will be released. While survey’s and not actual data, they tend to be of the more forward looking data. On Friday the BLS will release the employment report.

Equities are opening up stronger this morning despite little news to warrant the jump. Conditions are oversold and corporations are ending their buyback blackout periods which should help demand on he margin. Please keep an eye on Portfolio Alerts for information on our latest actions and thoughts regards our portfolios.

October 26, 2018

Update 1: GDP came in at 3.5 vs 3.3 as expected. The graph below shows the two main culprits accounting for the  deceleration of growth from Q2 were related to trade and tariffs. Per Ernie Tedeschi “You can tell an easy tariffs story here: firms were pining to get inventory out the door in Q2 to beat the tariffs, now exports have decelerated but firms are building up inventory again, and a bit more hesitant to invest thanks to trade uncertainty.

The S&P has given up yesterday’s impressive rally on the heels of poor, after hours earnings data from Amazon (AMZN) and Google (GOOG).  Both companies announced larger than expected gains in earnings but disappointing revenue numbers. Revenue tends to be more indicative of a company’s future earnings potential as they represent true sales. Earnings can fluctuate based on a large number of factors such as recent changes in the tax code. Investors in AMZN and GOOG are clearly concerned as both stocks opened the after hours sessions down over 5%. For those that do not own either slowing sales should be noted. AMZN also lowered their Q4 guidance by 5-6%. Given their prominence in the retail sector, this may be an omen worth following in regards to holiday related retail sales.

While the media will certainly blame AMZN and GOOG for any sort of sell-off today, the truth of the matter, and as we have alluded, something is breaking. The next two important technical levels to watch for are the intra-day low (2532) and closing low (2581) of the first quarter. On the upside, a rally up to 2750 would present an opportune time to reduce risk.

Please see our Chart of the Day and commentary beneath it for guidance on what lies beneath the lows mentioned above.

October 25, 2018

The market is opening up stronger this morning after yesterday’s sell-off. Despite the 3% drop in the S&P and 4.6% fall in the NASDAQ the volatility index (VIX) is not surging as much as we would expect. Currently it stands at 25 as compared to nearly 50 during the January decline. While only one tool, we must remain cautious as this is telling us the market may not have exhausted itself to downside for this current wave.

Deutsche Bank (DB), a large German bank, continues to fall from grace. As shown below, its stock price stands at its lowest levels since it was listed on the NYSE.  While DB may only have a market cap equal to Twitter, it is a major counterparty to all large banks and, as such, has the ability to disrupt the global financial system. Think Lehman Brothers…


October 24, 2018

Update 1: Housing data and revisions to old data continue to weaken.

“Volatility begets volatility”

The famous Wall Street saying is very appropriate today. As the saying states, periods of volatility frequently induce greater levels of volatility. Increasing periods of heightened volatility are frequently a signal, like earthquake tremors, that a larger move is needed to relieve the pressure.

We have not seen any signs that this bout of volatility is ready to cool off. Yesterday, for example, a 60 point morning stumble was nearly fully recovered by 3pm and last night a 1% decline was reversed entirely by 8am. While the buy-the-dip is working in both instances the market is still moving lower net-net and further away from critical support.

Please read yesterday’s portfolio commentary and our article “Dissecting This Selloff” for our technical thoughts and trading actions regarding the equity markets.

The market may be simply consolidating but importantly it may be signalling that a topping process is in motion. If the latter, investors should be thinking about opportune times to reduce risk.


October 23, 2018

*We are aware of the problem of viewing the Dashboard page on some mobile devices and working to fix it as soon as possible. 

Update 1: 2690-2700 is proving to be temporary support for the market. We are working on a short article showing why this recent decline is different from that which occurred earlier in the year and what that may portend. It will be out this afternoon.

The S&P 500 has been bouncing off of 2755/2760 for the better of the last week. Last night it gave up that support,  and has traded poorly ever since. Stocks around the world are lower with China giving up its gains discussed yesterday.

This morning CAT and MMM announced disappointing earnings which is applying further pressure to the markets. These global conglomerates are feeling the pressure of slowing global growth and the stronger dollar. Both factors are likely to play a bigger role in large caps earnings and less so in the small caps.

We advise you to stay nimble. The lows of January/February are key technical levels that bulls do not want to see broken. The S&P is still about 150 points above them.

Today’s Chart of the Day may provide a little guidance as to which sectors may perform better when respective corporate buyback blackout periods end in the coming week or two.

October 22, 2018

Update 1- After a promising opening the market has reversed on concerns that Italy and the EU are coming to loggerheads over Italy’s budget deficit. Currently the S&P 500 is down 11 points and nearly 25 points off this morning’s highs.

Italy, the world’s third largest issuer of debt was downgraded late Friday afternoon to BAA3, equivalent to BBB-, and the last step before being downgraded to junk status. If they are relegated to junk status, many institutional fixed income managers will be forced to sell Italian bonds to adhere to their funds investment policies. As such, it is likely more sellers will emerge in the days and weeks to come as these funds try to sell on their terms versus being forced into the trade.

China’s stock markets are up 3-4% this morning on support from President Xi Jinping to support the economy. Year to date China stocks are down about 30%.

On the economic front it will be relatively quiet until later in the week when Durable Goods and Third Quarter GDP are released. The consensus GDP estimate is +3.3%.

October 19, 2018

Update 1:  Canada just reported inflation at -0.4% vs expected of +0.1% and retail sales of -0.1% vs +0.3% expectations.  Given the close economic relationship of Canada and the U.S. we need to keep a closer eye on Canada to see if these are one-off issues or if their economic is truly slowing.

Consider the following:  “the S&P 500 fell -1.42% yesterday, the 41st day of the year with a move of +/-1%, after only eight such days in 2017” – Deutsche Bank

While a good portion of those declines came in the first quarter we have certainly been adding to the list recently. The market through the better part of this year is clearly exhibiting different behaviors than in 2017 and prior years. This is one of a few things that alerts us to the fact that we might be in a topping pattern. For now it is technically a consolidation and we must treat it as such. If we break below the lows of the first quarter (2575) our concern will heighten significantly.

Existing home sales will be released at 10am et. We suspect it will continue to point to weakness in the interest rate sensitive housing sector.

On Friday morning we will formally launch RIA Pro. At this time your BETA membership will end and you will be asked to register and create a subscription. If you elect to do so, you may choose from the following plans (monthly and annual plans include a free 14-day trial period):

29.95 monthly

329.45 Annual (1-Month Free)

2999.00 / Lifetime (Only 100 available) *Please contact us for more information


The equity market roller coaster continues. Yesterday the S&P was down more than half a percent early, but sharply rallied back to close relatively flat. Today it is opening down 11 points. We expect to continue to see significant daily and intra-day volatility as the bulls and bears battle. For the rally to continue we would like to see the market set a series of higher-highs and higher-lows and ultimately take out all-time highs. Conversely, we are looking for a break below October 11th lows if the market is to continue lower.

Please note the chart of the day showing that China’s stock market has grossly under performed global equity indexes. While a telling indicator, keep in mind that their stock market is not nearly as big or important to the wealth of the people of China as the U.S. markets are to our population.

October 17, 2018

Update 1: more weak housing data was just released

The average 30 year mortgage rate is now 5.10% up about 1.50% from the lows of the last few years. The housing sector is rate sensitive and as such we have seen home-builders (XHB) down nearly 25% from the highs of early January. See “Chart of the Day” for a graph.  Housing also accounts for about 15-20% of economic growth.

On a weekly basis the Mortgage Bankers Association (MBA) releases mortgage data. The data below comes from this mornings report. While one week is not telling on its own, the trend in these numbers has been negative as you might expect given higher rates.

October 16, 2018

Equity futures are currently slated to open up 16 points which would erase yesterday’s loss. While volatility continues to be high, the daily ranges are shrinking which is hopefully a sign that the market is stabilizing. As long as the S&P does not break the lows of last week (2712) we continue to treat this as consolidation. For those that are uncomfortable with the volatility we suggest paring back positions on strength.

Retail sales were weak yesterday (0.1% versus 0.6% consensus) led lower by gasoline station sales and restaurant sales. We will keep an eye out to see if these are the effects of the hurricane which devastated parts of the Carolina’s or a general slowing of consumption.

October 15, 2018

Equity futures sold off aggressively overnight but have been slowly coming back. The S&P hit a low of 2735 before climbing back to its current level of 2760. There are a few concerns facing investors this morning including:

  • Disappearance of Jamal Khashoggi and what that might mean for Saudi-US relationships and oil prices
  • Concern over faltering Brexit discussions
  • Italy’s coming budget deadline and continued anti-Euro rhetoric
  • Trump brought up additional tariffs on China

Keep an eye on retail sales announced at 8:30


October 12, 2018

As we noted in yesterday’s Technical Update the market failed to hold support at the 200-dma. This opens up a real probability that the current decline is not over.

“The vertical red and green lines were very short-term buy/sell signals which show when price momentum is favorable for increasing or reducing equity-related risk. That signal is currently triggering a “sell” and suggests reducing risks in portfolios currently.

Given the short-term OVERSOLD condition of the market, we want to use rallies to rebalance risks in portfolios.”

Look for a rally over the next day or two to rebalance portfolio risk, execute stop losses (see portfolio commentary), and raise some cash.

Like we saw if February of this year, any rally from current levels will most likely fail and it will be where the market settles next that will determine whether this is a “buyable” bottom or not.

We must reiterate we are not suggesting blowing out of portfolios and moving to cash. What we are suggesting is that we are taking actions to:

  1. Manage our exposure levels,
  2. Readjusting trailing stop-loss levels; and
  3. Reducing risk and raising some cash until “the smoke clears.” 

October 11, 2018

Keep an eye on 2750 on S&P futures. If that level breaks the downside might open up.

  • CPI was tame coming in 0.1% below expectations. This might help alleviate pressures in the bond market and hopefully translate to some stabilization in the stock market.

Over the weekend we posed the question “Did something just break” in our newsletter (see article section in dashboard)  It appears it has. For the last week or longer we have discussed rising yields. The equity markets took notice earlier in the week as witnessed by the roller coaster in prices. On Wednesday, something broke, and equity markets were down 3-5%. There was little news, which is a sign this is more about macro type concerns over the Fed, debt and recent downward revisions in corporate earnings estimates. We must also remember that equity valuations stand at levels that have only been witnessed at the peak of the great depression and the tech bubble.

To officially say the market has topped we would like to see the market fall below the lows established in the January/February sell-off. That said, we urge caution and remind you that markets fall a lot quicker than they rise. Yesterday’s slump erased almost 3 months of gains.

PPI was tame yesterday. CPI is released in an hour. We reiterate, that any signs of stronger than expected inflation will be troubling for bonds and as we are now finally seeing troubling for stocks.

October 10, 2018

This headline sums up the market for the last week or so – “Global Stocks Spooked As US Treasury Yields Resume Their Ascent

Speaking of interest rates, mortgage rates just hit 5% up almost 1.50% from the lows of the last few days. It is important to keep an eye on weekly MBA mortgage data as shown below.

October 9, 2018

The roller coaster continue throughout the day. After being down nearly 20 points prior to the open, the market rallied back to positive territory shortly after the open. After spending three hours in the green it is once again headed lower. We urge caution as this behavior is akin to a topping pattern versus a market set to hit new all-time highs.

Yesterday’s roller coaster market in which it was down nearly 2/3rds of a percent before rallying back in the afternoon to close flat is followed up this morning with another dip. Currently the S&P 500 is down 17 in futures trading. The culprits are the same ones that we have repeatedly seen over the last few weeks; stronger dollar and higher yields globally.

Tomorrow PPI is released and on Thursday CPI will be released. While expectations are for 0.2% increases m/m for both inflation indicators, we harbor a concern that they come in stronger. Inflationary fears would likely cause yields to spike and put more pressure on the stock market.

October 8, 2018

Interest rates are the headline again. Yields around the world are rising and with them stocks falling. U.S. bonds are closed today for  Columbus Day, but yields in Italy rose another .20% on budget concerns. Chinese stocks also fell as the central bank was forced to add liquidity to markets. S&P futures are slated to open down 7 points.

The markets seem shaky as if something is getting ready to break. For more on this please read Lance Roberts excellent newsletter posted in the latest articles and video section below.

October 5, 2018

Employment data will be released by the BLS at 8.30ET. Of chief concern to us is a spike in payrolls or signs of strong wage growth. While both are positive they would likely result in higher bond yields, and as we have seen, the stock market is not happy with higher yields. The following are the current estimates for the jobs data:

October 4, 2018

As mentioned in yesterday’s note, bond yields domestically, and now globally, are waking the stock markets up. Fed Chairman Powell indicated that the Fed could “turn more aggressive when it comes to the extent of hikes or the pace of tightening.” Interestingly, Japanese 10yr notes rose past 0.15%. This was the level that prompted the Bank of Japan to take action in early August. They were silent last night.

We leave you with a question – might the central bankers be comfortable with higher interest rates?  If the answer is yes, how will that affect asset prices that are largely based on low rates, easy money and rampant leveraged speculation?

October 3, 2018

The 10-Year U.S. Treasury note has risen to 3.13% today which is the high water market since 2011. Yields across the curve are rising in unison.

A precursor to Friday’s employment data, ADP, reported 230,000 new payrolls boding well for Friday’s BLS report which is only expecting 180,000 new jobs.

October 2, 2018

Once again Italy is causing concern in the global markets.  Anti-Euro comments from a party official are causing yields to rise and European stocks to fall. US stocks have given up most of yesterdays gains, but we caution we have seen this movie before and suspect Italy’s problems will ignored for the time being. While that may serve investors today or tomorrow, continued unrest will cause contagion to all markets. Keep an eye on Italy!

October 1, 2018

Quick Reminder- Beginning in October the Fed will allow their portfolio to shrink at a rate of $50bn/month, an increase of $10bn from the prior quarter.

Equities are flying high this morning on the late night modified NAFTA deal including Canada. This morning two big manufacturing survey’s will be released (ISM/PMI) and after that the economic calendar will be quiet until Friday. On Friday, the BLS will release the September employment report. More details will follow later in the week.

August 29, 2018

Today’s Chart of the Day shows how volumes this week are nearly the lowest of the year. While the market may look strong, one must remain on guard as the gains are not backed by much activity.

Again, keep an eye on the Turkish lira which continues to slip lower. 7 lira to the dollar is considered to the level, that if sustained, will cause major economic troubles and banking concerns.

August 28, 2018

“Out of sight, out of mind” seems to be the approach the market is taking with Turkey. While we have seen little written on Turkey since their currency stabilized, the lira has recently been heading back towards levels last deemed as crisis conditions.

For the last two days the market has climbed higher on lackluster volume. The market is set to open slightly higher today with the S&P 500 likely eclipsing 2900.  While it may appear like the market wants to run higher we have been watching the VIX volatility index as it has nudged higher with the market. This is similar activity to what we saw in January before the market fell about 10%. We will keep our eyes on this and inform you if it continues.

August 27, 2018

We are expecting light volume in the markets this entire week as many investors will take the last week off before Labor Day. With little economic data on the calendar, all eyes will be on the political arena and emerging markets. The markets are opening strong this morning on continued strength on what was perceived as slightly more dovish comments from Chairman Powell.

August 24, 2018

The initial take from Chairman Powell’s speech is being perceived as slightly more dovish than prior statements. In particular he appears less concerned with inflation risks. Gold is up over $15/oz as the dollar is off about .60%. Stocks are higher and bond yields are flat.

Last night China’s central bank (PBOC) announced it would resume the use  of “counter-cyclical factors.”  More bluntly they will intervene actively in the currency markets when the yuan moves more than they would like. This is clearly a sign to Washington that they are willing to negotiate on trade issues. The yuan rallied from 6.90 to 6.83 versus the dollar on the news (graph below). This should be dollar negative on the margin and good for commodities and precious metals.

The caveat however, is that if 25% tariffs on 40% of China’s exports are implemented on September 5th as planned, the PBOC may be forced to let the yuan depreciate to help offset the tariff.

August 23, 2018

Tomorrow’s speech by Fed Chairman Jerome Powell has the potential to create fireworks in the markets. Trump has recently criticized him for taking liquidity away from the market. Powell, with no uncertainty thus far, has been intent on raising rates and draining liquidity via QT. Will Powell’s speech continue down the same path or will the President’s recent words change Powell’s stance?  If the former, expect the market will not be happy, conversely the latter would be cause for much celebration and new highs would be all but certain.

August 22, 2018

The market is opening slightly weaker on late day news of Michael Cohen’s plea deal and Paul Manafort’s guilty findings. Regardless of your politics, you should invest cautiously as political turmoil is not a positive bedfellow for asset prices.

The S&P 500 hit a slightly higher high yesterday. Technically we ask does that record signal a double top or a run much higher.  Time will tell…

August 21, 2018

Per Bloomberg (below) President Trump does not appear to like the Fed’s plans to continue raising rates. While history is strewn with President’s pressuring the Fed Chairman to make financial conditions easier, it is a noteworthy event. with Trump’s comments, Chairman Powell’s speech on Friday will be even more important. We will keep a close eye out for signs that he might fall in line with Trump’s expectations. If he takes the opposite tack, the markets could be in for a shock.

(Bloomberg) — President Donald Trump said he expected
Jerome Powell to be a cheap-money Fed chairman and lamented to
wealthy Republican donors at a Hamptons fundraiser on Friday
that his nominee instead raised interest rates, according to
three people present.

August 20,2018

We suspect the summer doldrums in the markets could continue through the first half of this week. On Thursday the Fed will convene at their annual Jackson Hole summit. In the past there are have been market moving comments made at this summit. Chairman Jerome Powell will speak on Friday and the market will be listening for any clues about the pace of future rate hikes and QT.

August 17, 2018

It is shaping up to be a quiet summer day. With Wall Street heading to the Hamptons as summer winds down, the next two weeks might be similar. That said China and Turkey could certainly upset vacation plans on a moments notice. The markets are opening up slightly lower and the Turkish Lira is weakening again. Consumer sentiment is the only relevant piece of economic data to be released today.

August 16, 2018

There is an old market saying “volatility begets volatility.” Lets see if the large loss yesterday and big gain today are precursors to greater volatility ahead or simply a one-off overreaction in a low-liquid  summer trading environment.

The market is opening up firmer this morning, recouping a good amount of yesterdays loss. The driving factor appears to be China’s willingness to send a trade envoy to the US to negotiate trade. Sound familiar?  This back and forth has gone on for months and we are reluctant to believe that trade will be resolved anytime soon. While the technical outlook remains bullish, we urge caution as the poor liquidity of summer coupled with potential headlines from China, Turkey and other emerging market nations raises the possibility of violent swings up and down.

August 15, 2018

Stock markets have weakened further this morning as dollar and emerging market concerns take the front and center. Are the stock markets finally relenting to dollar strength? If so will the Fed and/or the Administration try to talk the dollar back down?  These are important questions that you should keep asking yourself.

US Dollar strength is causing financial problems for the emerging markets and commodities. We suspect that if the trend continues, US equities will start to feel the brunt of a strong dollar as well. Dollar appreciation is a headwind for corporate profits on the aggregate. Further it weakens the trade deficit which might cause Trump to consider more tariffs. S&P futures are currently down 18 this morning on what appears to be weakness in China’s equity markets and another surge in the dollar. Currently the dollar stands at over 1 year highs.

August 14, 2018

With today’s 1.5% decline, Copper is down almost 20% since late May. While US economic growth appears healthy, Dr. Copper tells a different story about global growth.

Click here to read Lance’s latest weekly Technically Speaking article.

The economic data release front is also slow. That said, retail sales will be released tomorrow. Current expectation is for a .1% gain. Last month retail sales gained .5%.

Global markets recovered some of yesterday’s losses last night as the Turkish Lira rebounded. Light summer volume contributed to weak markets as traders continue to focus on Turkey and importantly the repercussions to other developed and emerging nations if they are to have more serious problems.

August 13, 2018

Last night the South African Rand depreciated over 10% versus the U.S. dollar but has regained much of those losses since that time. A strong dollar is painful for countries that borrow in dollars. Not only must borrowers pay interest, but importantly the amount of principal they owe on the loan is tied to the currency exchange rate.

August 12, 2018

Sunday Update-  The Turkish Lira opened up sharply lower, eclipsing 7 Lira per dollar. Much has been written about significant problems that occur when that level is eclipsed. BBVA (Spanish bank) and BNP (French bank) have a lot of exposure to Turkey. The bigger question is how much exposure do they have to Deutsche Bank. If the situation gets out of hand we must focus on the next set of dominoes.

August 10, 2018

Trukish President Erdogan is asking citizens again to take their dollars and euros and convert them to Liras. A visit to bank branches in Istanbul today indicated that the opposite is happening

Markets are opening weaker this morning as the Turkish currency crisis is worsening. Over the last few years Turkey used extremely low interest rates and printed money to aid economic growth. As a result of the central bank’s actions debt rose and the Lira depreciated. This was encouraged and supported by their President Erdogan.

The Lira has depreciated over 20% this week and its value has been halved versus the dollar since the beginning of the year. Turkey is not an isolated case. They have taken on a good amount of dollar denominated debt (30% of GDP) which is becoming very costly to repay due to the currency depreciation. Banks such as Spain’s BBVA and France’s BNP have a lot of this exposure on their books. For more on this please read Daniel LaCalle’s take.

August 9, 2018

On Wednesday we published Whatever it Takes .  The follow graph from the article is 10-year Japanese bond yields. As the yield rises past 0.10% the pressure on the Bank of japan increases.

PPI was weaker than expectations at 0% monthly and 3.3% year over year. Bond yields have dropped initially on the release.

Producer Prices (PPI) will be released shortly. Expectations are for an increase of .3% monthly and 3.4% year over year. The market will watch this and CPI (tomorrow) for any signs that inflation is creeping up into the economy. Expect bond volatility if the number is significantly larger or smaller than expectations.