January 19, 2021

8:10 am ET

Corporate executives, those with the most knowledge of the workings of their respective companies, are not as optimistic about their company’s stock valuations as one would expect given the excessive sentiment exhibited by investors.

, Commentary 1/19/2021

7:45 am ET

Gamma Band Update is Published

, Commentary 1/19/2021

7:10 am ET

With employment, inflation, and retail sales data for December already released, the pace of economic data for the remainder of the month will slow. Of interest, this week will be weekly initial jobless claims and an assortment of housing data on Thursday.

The Fed is entering their self-imposed media blackout period for voting members in anticipation of the FOMC meeting next Wednesday. Non-voting members are allowed to speak publically, but their opinions tend to carry less weight in the markets.

The corporate earnings calendar will pick up in earnest this week, with banks and transportation companies predominately on the calendar.

This past weekend, Neil Irwin of the New York Times published an interesting article. He provides a better appreciation of the potential inflationary impacts based on how consumers might react to the vaccine, large stimulus, and high savings rates.

Is Inflation About To Take Off?  That’s The Wrong Question.


Everyone Is In The Pool – More Buyers Needed

New Momentum Growth Stock Screen Included

, Commentary 1/15/2021

January 15, 2021

**Markets will be closed on Monday for Martin Luther King’s birthday.

11:00 am ET

The quote of the day comes from Danielle DiMartino Booth in regards to the Fed tapering QE.

“I think investors are getting a little ahead of themselves, anticipating the Fed beginning to tighten when they are not even thinking about thinking of taking such measures.”

10:20 am ET

The Technical Value Scorecard is published.

, Commentary 1/15/2021

9:10 am ET

Retail Sales and PPI came out at 8:30 as shown below. Retail Sales were much weaker than expected for a second month. Most noteworthy, the control group which feeds about 30% of GDP, was down -1.9% and last month’s figures were revised lower from -.5% to -1.1%. PPI was a mixed bag, but like CPI, is not showing concerning signs of inflation. PPI excluding food and energy fell from 1.4% to 1.2% on a year over year basis but was up .4% on a monthly basis versus .1% last month.

, Commentary 1/15/2021

The graph below courtesy of Bespoke is very interesting. Per their tweet- “Third largest decline in Non-Store (Online) sales in the last 20+ years? During a pandemic when people are staying at home?”

, Commentary 1/15/2021

7:30 am ET

Last night, Joe Biden released details of his $1.9 trillion stimulus program. A summary, courtesy of CRFB, is shown below. Of note, the stimulus will release about a third of the money in the next few months and delay the rest of the stimulus toward the latter half of the year. This should help even out economic growth through 2021.

, Commentary 1/15/2021

7:15 am ET

We start the day with an interesting Bloomberg article which was focused on a survey conducted by the ECB. The survey asked 72 European non-financial companies the following question- “Focusing on your own business/sector, how would you assess the overall long-term effects of the Covid-19 pandemic on the following?” Based on the results below, it appears, in aggregate, they expect to be suffering from the pandemic well into the future. From a profit perspective, they are counting on enhanced productivity to offset lower prices and sales. Employment and wages may suffer as a result of a weaker business climate. Reduced sales and potentially higher input costs are a distinct possibility in the U.S. as well. As such, we presume many U.S. companies will try to boost margins in a similar fashion. Such a paradigm does not bode well for labor.

, Commentary 1/15/2021

January 14, 2021

3:25 pm ET

For the most part, Jerome Powell continues to shy away from putting a timeline on when the tapering of QE purchases might begin. Today he said: “The Fed will communicate exit early and clearly when it is time.” That said, he did acknowledge the economy could be back to the pre-COVID peak “fairly soon“, which could imply the Fed might be tapering “fairly soon.”

12:45 pm ET

Yesterday we shared the absurdity of Door Dash’s (DASH) valuation. Today we share another. With a market cap of $110 billion, Airbnb now has a market cap higher than the 6 largest hotel chains combined– Marriott, Hilton, InterContentintal, Hyatt, Wyndham, & Choice).

11:30 am ET

New Report-  Real-Time Commentary Heat Maps

We recently found a series of charts in FINVIZ that help visualize valuations of S&P 500 companies and the current behavior of Wall Street analysts and investors. Instead of cluttering up the commentary space on RIA Pro, we thought you would better appreciate the charts and can share them more easily in an article format. Click on the heat map below to access the graphs.

, Commentary 1/14/2021

10:05 am ET

Will Joe Biden’s Fiscal Policies Float?

, Commentary 1/14/2021

10:00 am ET

Initial Weekly Jobless Claims were much higher than expected at +965k versus +784k last week. Of note, covered employment was reduced by 4.4m. These are jobs being permanently reduced. We do not know if this was a seasonal adjustment or year-end issue but if it’s real, it points to a weak jobs report next month.

6:45 am ET

After two strong Treasury Auctions of 10 and 30-year bonds on Tuesday and Wednesday, which helped push long-term yields lower by 10bps, Biden upset the trend with word that his new stimulus plan will be around $2 trillion. That is much more than the $800bn to $1.3tn range which was widely expected. The 10yr UST yield backed up to 1.11% overnight from 1.07% yesterday afternoon.  Stocks rose overnight on the news but have since given up their gains and look to open flat.


January 13, 2021

1:40 pm ET

Just when you think things can’t get crazier, Door Dash (DASH) is up another 6% today making it nearly 50% for the year to date. More startling, it now has the same market cap as FedEx (FDX).

1:15 pm ET

Yesterday’s 10-year UST auction and today’s 30-year auction were met with strong demand. As a result, the 10-year is down over 10bps from yesterday’s pre-auction high. It’s too early to know if bond yields peaked, but the strong demand for the auctions shows significant demand at current levels. This affirms what we have been watching with money flows as well.

1:00 pm ET

It appears the meteoric rise in cryptocurrency prices is on the central bankers’ radar. Reuters put out the following article this morning, ECB’s Largard calls for regulating Bitcoin’s “funny business”, in which ECB President Largard calls for regulations. Her concern appears to be money laundering but their regulatory authority will surely intensify if crypto continues to impinge on sovereign currencies. As we wrote two years ago in Salt, Wampum, Benjamins – Is Bitcoin Next? :

If BTC continues to gain in popularity there is little doubt in our opinion the government will seek control or at a minimum the personal data from the transactions. In fact the SEC has recently opined on the matter claiming that “tokens” such as BTC can be deemed securities and may need to be formally registered. This is just a first step but given the potential threat, we envision government will impose a way to remove the secrecy BTC offers, allowing taxation and legal supervision to occur.”

10:45 am ET

Are We In A New Bull Market?

, Commentary 1/13/2021

9:25 am ET

CPI was slightly higher than last month, meeting expectations for a 0.4% monthly increase. The Fed tends to rely on CPI excluding Food and Energy, as they consider price changes in those goods transitory. CPI ex-food and energy was underwhelming with the monthly rate at +.1% below last month’s +.2%. Year over year it was +1.7% versus +1.6% last month. There is little in this report that warns of pending inflation. All eyes to Friday’s PPI report.

8:05 am ET

As shown below, courtesy FINVIZ, the price of grains has risen sharply over the last few months. As a result, many producers of food products using grains or those relying on grains have stumbled. Kelloggs (K) for instance is down nearly 20% and sits much closer to its March lows versus its recent July highs.  The price action of GIS, CAG, and HRL among others, looks similar to K (shown below). When the “reflation” trade ends these will likely be good purchases but we warn that might be a while longer.

, Commentary 1/13/2021

, Commentary 1/13/2021

7:10 am ET

CPI will be released at 8:30 am. The current expectation is for monthly inflation to uptick to .4% from .2% last month.  Year over year inflation is also expected to increase from 1.6% to 1.7%.

Fed members, Brainard, Bullard, and Vice Chair Clarida will speak today. Over the last couple of days, a few Fed members have mentioned the possibility of tapering QE by year’s end. We will closely follow upcoming Fed speeches to see if this becomes a more common theme. Here are a few examples:

  • Fed’s Kaplan: If Economy Goes As He Expects, We Should Be Having An Earnest Discussion About QE Taper Later This Year
  • Fed”s Evans: Fed could taper in late-2021 or early 2022 if the economy is better.
  • Bloomberg- Fed officials said that more fiscal support and vaccines could lead to a strong economic recovery in the second half, setting the stage for a discussion of tapering

January 12, 2021

1:45 pm ET

The graph below compares 10-year implied inflation rates (blue) to 10-year UST yields (red). The difference between the two is called the real yield. As shown, implied inflation has risen about 50bps more than UST yields over the last 7 months, therefore real yields have fallen. Fed purchases of TIPs drive the implied interest rate up and purchases of nominal USTs drive nominal yields down. In a normal market, without interference by the Fed, nominal yields would trade higher than inflation expectations. With Treasury debt levels at historical extremes, the Fed cannot tolerate UST yields over 2% as this graph implies. Expect this divergence to continue and likely widen if the Fed has their way.

, Commentary 1/12/2021

1:00 pm ET

Over the last month or so, we have shown a good number of sentiment measures at extremes (including the one from first thing this morning), and in some cases at levels never been seen before. The table below, courtesy of  Crescat Capital, shows that a multitude of valuations measures also sit at record highs. The market can keep chugging higher but it worth reminding yourself that sentiment and valuations are in rarefied air.

, Commentary 1/12/2021

10:15 am ET

Welcome to the USSA.

, Commentary 1/12/2021

7:40 am ET

The NFIB small business optimism index took a hit falling 5.5 points to 95.9. Of the ten survey components respondents were asked about, nine were lower than the prior month. From an inflation perspective, the NFIB writes: “The net percent of owners raising average selling prices decreased 2 points to a net 16% (seasonally adjusted). Price hikes were the most frequent in retail (30% higher, 6% lower) and wholesale (26% higher, 13% lower). A net 22% are planning price hikes (seasonally adjusted).” This report jibes with other data pointing to no current inflation but the anticipation of inflation in the future.

Key findings from the NFIB are as follows:


  • The percent of owners thinking it’s a good time to expand decreased 4 points to 8%.
  • Sales expectations over the next three months declined 14 points to a net negative 4%.
  • Earnings trends over the past three months declined 7 points to a net negative 14% reporting higher earnings.

Small businesses account for over 60% of employment in America. This survey provides important data on the state of small business and what that may mean for inflation and employment trends.


7:00 am ET

The fourth-quarter earnings season kicks off this week with a handful of companies reporting earnings. Of note will be Delta Airlines and Blackrock on Thursday followed by a few large banks on Friday – JPM, Citi, and WellsFargo.

, Commentary 1/12/2021

The following chart, courtesy of Citi, was making the rounds on Twitter yesterday. It shows that market sentiment is literally off the charts!

, Commentary 1/12/2021

January 11, 2021

1:45 pm ET

Per BofA- Bitcoin “blows the door off prior bubbles.”  On the topic of bubbles, Tesla is up over 200% in less than two months. The only news of note was two Wall Street analyst reports which both set a price target lower than the current price.
, Commentary 1/11/2021

1:30 pm ET

Weekly Gamma Band Update

, Commentary 1/11/2021

Does Market Excuberence Match Reality?

, Commentary 1/11/2021

7:10 am ET

The week ahead will be important as the BLS releases consumer and producer price data for December. The reports will provide some evidence as to whether higher inflation expectations are playing out in the economy. CPI, due out on Wednesday, is expected to rise at a year over year rate of 1.2%, the same as November. PPI, being reported on Friday, is also expected to be flat versus November at 1.4% annually. Also on Friday, the University of Michigan will release its consumer sentiment survey which has an inflation subcomponent. Retail Sales will also be released on Friday.

Fed members have an active speech schedule this week. Of note will be Fed Chair Powell on Thursday afternoon and Vice Chair Clarida on Wednesday.

It could be another volatile week for bond yields. The Treasury will conduct its 10-year auction on Tuesday and 30-year auction on Wednesday. Both auctions may exert further downward pressure on bond prices. Biden’s stimulus plan is expected to be released later in the week. Bond investors will pay attention to the size and composition of spending, as well as any details on potential tax increases.  Initial rumors of a spending package “in the trillions” pushed yields higher Friday afternoon.

January 9, 2021

Trading Desk Notes for January 9, 2021. -by Victor Adair

(Good comments on why we sold IAU and GDX yesterday.)

, Commentary 1/08/2021

January 8, 2021

1:00 pm ET

Earlier this week we showed the dollar on a long-term scale to show that the recent sell-off is well within historical norms. Today we share 10 year UST yields. As shown, yields have certainly risen over the last few months, but remain well below all instances on the graph going back to 1970. Simply, the recent increase is meaningless on a historical basis.

The problem however is that as the economy has become more dependent on debt and lower interest rates to service the debt, the threshold for economic pain due to higher rates has increased markedly. We find it highly unlikely that the 10-year yield could get back to even 2% without economic weakness and problems in the financial markets.

, Commentary 1/08/2021

11:35 am ET

Fed Vice Chair Clarida put to rest the notion that the Fed might taper QE purchases this year, saying “can be quite some time before we think about tapering” & “my economic outlook is consistent with us keeping the current pace of purchases throughout the rest of this year.” He does expect an uptick in inflation in the months ahead but also believes it’s transitory. He also stated that he is not concerned with the 10-year Treasury yield above 1%.

10:00 am ET

The graph below, courtesy of Goldman Sachs, shows a large gap between actual volatility (light blue) and implied volatility (dark blue) which is what investors are pricing into options contracts. Will implied volatility fall back to the teens, where it was for the large majority of the post GFC era, or are VIX futures correct in implying a significant level of volatility lies ahead? It is worth noting that the surge in call option activity is providing a bid to the VIX and possibly distorting the historical relationship.

, Commentary 1/08/2021

9:30 am ET

The Technical Value Scorecard is published.

, Commentary 1/08/2021

9:00 am ET

Like the ADP report on Wednesday, the BLS employment report was weaker as the economy lost, in aggregate, 140k jobs. On a positive note, hourly earnings increased sharply. As we warned last month, December’s data has large seasonal adjustments which are likely greatly flawed due to irregular hiring patterns for the holidays. For example, earnings were probably higher solely because traditional brick and mortar retail and restaurants, which tend to pay low wages, did not staff up like prior years. To that end, food services and drinking establishments lost 372k jobs.

, Commentary 1/08/2021

7:15 am ET

The consensus estimate for today’s BLS payrolls report (8:30 am ET) is +65k, with a wide range of projections (-50k to +302k). If the consensus is accurate, this will be the sixth month of decelerating payroll growth and the first increase in the unemployment rate since April.
, Commentary 1/08/2021

January 7, 2021

1:30 pm ET

The graph below, courtesy of Arbor, compares 2yr and 10yr implied inflation levels. As they highlight with the dotted lines, a peak in inflation expectations occurred the last 7 times short term inflation expectations (2yr) equaled or rose above long term expectations (10yr). The chart argues that inflation expectations should decline rapidly in the near future or this time is different and inflation is truly taking hold.
, Commentary 1/07/2021

10:10 am ET

Grantham’s Correct: It IS A Market Bubble 

, Commentary 1/07/2021

Jeremy Grantham’s article, Waiting for the Last Dance, can be found HERE.

10:00 am ET

The following headline just hit the wires: “FED’S HARKER: COULD DISRUPT MARKETS IF WE TAPERED TOO SOON.” It’s clear from that comment the Fed knows QE is driving markets and the situation is hemming them into policies driven by markets, not economics.

Initial Jobless Claims last week were 787k versus 790k the prior week. Claims continue to stay at a stubbornly high level despite economic recovery. Just to reiterate prior comments, nearly 800k people were laid off just last week alone. Prior to the recent experience, the number had never been above 700k since at least 1967.

7:00 am ET

With a Democrat-led Congress and with it, projections for even greater deficit spending, the following WSJ editorial –Welcome to the Era of Non-Stop Stimulus is worth considering. The prospect of trillion-dollar deficits well into the future is high and with it comes benefits and consequences. In the short run, government spending drives the economy/ reduces recessionary impacts, but in the long run, it detracts from economic growth. Further, the Fed is all but forced to stay very active to help ensure the interest rate on the debt stays at very low levels. This is the macro trap facing our fiscal and monetary leaders. The graph below the quote from the editorial shows deficit spending has far outpaced the tax revenue, which in part highlights that the rate of spending is unsustainable without consistent help from the Fed.

But with President-elect Joe Biden now making it clear that the recent $900 billion stimulus will “at best only be a down payment” and the now $3.3 trillion of total stimulus spending “is just the beginning,” it sounds like America is headed into a program of permanent stimulus.

, Commentary 1/07/2021

January 6, 2021

2:25 pm ET

The Fed minutes from their December meeting were largely as expected. They continue to worry about “considerable” risks to the economy due to COVID and have no intention of slowing up QE in the near term. That said they seem to be a little more comfortable with the longer-term outlook.  “The recent sharp resurgence in the pandemic suggested that the near-term risks had risen, while the recent favorable developments regarding vaccines pointed to some reduction in the downside risks over the medium term.”  The Fed is also showing some concern with rising long term interest rates- “a couple of participants indicated that they were open to weighting purchases of Treasury securities toward longer maturities.”

11:30 am ET

The table and graph below provide guidance on how 12 month forward P/E ratios for the S&P 500 and its sectors, compared to their respective averages of the last 20 years.

, Commentary 1/06/2021

10:15 am ET

Bond yields are rising sharply this morning on concerns that a Democrat-led Congress will further increase fiscal spending, resulting in even more debt issuance. As shown below TLT, an ETF proxy for 20 year UST, was tightly wound and reaching the pinnacle of a pennant pattern. This morning it clearly broke lower out of the pattern. Fed minutes from their December meeting will be released this afternoon. While unlikely, it will be interesting to see if there are any concerns about rising interest rates.

, Commentary 1/06/2021

9:15 am ET

Will Dem’s Put The Fed in a Box?

, Commentary 1/06/2021

8:20 am ET

The ADP labor report showed a loss of 123k jobs in December versus expectations for a gain 130k of jobs and a prior addition of 307k jobs. The correlation between ADP and Friday’s BLS employment report has been historically strong, but over the last 9 months, it has weakened considerably. As such we must be careful not to read too much into today’s report.

7:25 am ET

The markets, with the exception of bond yields, are relatively calm following what appears to be a Democrat sweep in Georgia. 10-year U.S. Treasury yields are up 6.5 basis points last night to 1.02% as the market presumes more stimulus is likely with full Democrat control of Congress. Stocks are flat and the dollar is slightly lower.

Crude oil and the energy sector (XLE) were both up nearly 5% yesterday. XLE now sits at about 15% above its 50 dma and 200 dma. It is not quite at 2 standard deviations above each moving average so there is some more room to keep running.

Last night a subscriber asked us, per our commentary yesterday on the ISM prices index, how well correlated the index is to manufacturers’ input prices. As shown below, the correlation was relatively strong before 2017 but has tailed off over the last few years. We will pay close attention to next week’s PPI data to see if the survey truly reflects rising prices or just a “feeling” that prices are rising like in 2018. We remind you this survey simply asks the respondents to make a comparison versus last month and not to quantify the degree of change. The other factor to consider is whether or not price changes are due to temporary supply line constraints or more sustainable inflationary forces.

, Commentary 1/06/2021

January 5, 2021

12:45 pm ET

Perspective Matters!

The graph below is a monthly graph of the U.S. dollar since 1990. As shown, the dollar is declining but it is well within its 30-year range. Reports saying the dollar is crashing are not apparent by looking at the chart.

, Commentary 1/05/2021

10:05 am ET

The ISM Manufacturing Index rose nicely to 60.7 from 57.5 last month and 56.7 as expected. On the positive side, the employment sub-index rose back above 50 denoting an expansion of hiring. The fly in the ointment in the report is the Prices Paid sub-index rose sharply to 77.6 from 65. If manufacturers can not pass on higher production costs, profit margins will decline. If they can, we should see increases in CPI and other consumer inflation gauges.

9:50 am ET

Crude Oil is rocketing higher by nearly 4% and approaching $50 a barrel after Russia is ending its push for an increase in production for February. Per Investing.com – “Newswires reported that Russia’s deputy prime minister Alexander Novak had agreed to ‘roll over’ the current level of production for another month, in view of an expected shortfall in demand from key economies due to the resurgence of the Covid-19 virus and spreading lockdown measures to contain it.”

9:40 am ET

The Risk of Markets Trading at Historic Extremes is published.

, Commentary 1/05/2021

8:15 am ET

It appears Atlanta Fed President Raphael Bostic floated a trial balloon by raising the prospect that the Fed could taper, or reduce its pace of QE purchases. Per Reuters:

  • “I am hopeful that in fairly short order we can start to recalibrate,” the $120 billion in U.S. Treasury and mortgage-backed securities that the U.S. central bank is currently buying each month, Bostic said in an interview with Reuters.
  • The Federal Reserve could begin to trim its monthly asset purchases this year if distribution of coronavirus vaccines boosts the economy as expected, Atlanta Fed President Raphael Bostic said on Monday in what amounted to a bullish outlook for the coming months.

7:35 am ET

Reading through market conjecture about why equities sold off yesterday, it appears some are blaming today’s Georgia Senate runoff. The thought is that a blue sweep would give the Democrats full control of Congress thus allowing for greater fiscal spending, which can be inflationary. To that end, 10-year implied inflation expectations hit 2% yesterday, a two-year high, and the materials and energy sector, as shown below courtesy of Finviz, rose despite large drops in the other sectors. Materials and energy stocks, and in particular producers of raw materials, should outperform in an inflationary environment.

While some inflation and a short-term economic surge may benefit stocks, the flip side is that more inflation will force the Fed to take their foot off the monetary pedal by reducing QE or even raising rates. The market has run well ahead of fundamentals, leaving QE and excessive monetary policy as key drivers of asset prices. As such the market will be increasingly sensitive to changes in monetary policy.

, Commentary 1/05/2021

January 4, 2021

3:00 pm ET

As we noted last week, it is typical at year ends to see window dressing trades and tax-related buying and selling. Some of these trades tend to be reversed in the new year. We believe that helps explain today’s sell-off. However, a newly announced 6-week national COVID-related lockdown in England and jockeying ahead of the Georgia Senate runoff election are also playing roles.

12:40 pm ET

In a speech this morning, Chicago Fed President Evans downplayed the market’s inflation forecasts. The following headlines make it clear he thinks the Fed still has a lot of work to do in order to get inflation up to its goal:

  • “will take years to achieve average 2% inflation goal”
  • “important for the Fed to get inflation moving higher with momentum”
  • “Fed likely to continue with bond-buying for some time”
  • “monetary policy will be accommodative for a long time”

11:35 am ET

The chart below plots 2020 price returns for the most popular exchange-traded commodities. The data is in strong opposition to deflationary data from the BLS Producer Price – Commodities Sub-Index (PPI), which is actually down .4% for the year through November. Excluding gold, as it not used heavily in the production of goods, the average change in commodity prices shown below is  +12.6%. Energy products, excluding Natural Gas, were the only commodities lower on the year.

, Commentary 1/04/2021

10:40 am ET

The Weekly Gamma Band Update Report is published.

, Commentary 1/04/2021

9:15 am ET

Is Upside Start a Set-up for Classic Rug Pull?  Three Minutes on Markets & Money is published.

, Commentary 1/04/2021

7:15 am ET

Cartography Corner January 2021 is published.

, Commentary 1/04/2021

In this first week of the new year, ADP and the BLS will update the employment picture. ADP releases their employment index on Wednesday. Current expectations are for the addition of 170k jobs, following 307k in November, 404k in October, and 754k in September. Following last month’s weaker than expected reading, the BLS Employment report on Friday is forecast to show a gain of only 112k jobs in December. The unemployment rate is expected to tick up by .1% to 6.8%. As shown below, 22 million jobs were lost in March and April of which 12.3 million were recovered. The road back to full employment will be lengthy if payrolls only grow by 100-200k a month.

, Commentary 1/04/2021

January 1, 2021

Happy new year!!

So Far, The Bulls Are Disappointed in Santa,

, Commentary 12/31/2020

What You Missed This Past Week On RIA

, Commentary 12/31/2020

December 31, 2020

The team at RIA Pro wishes you and yours a very happy and healthy new year. We look forward to navigating markets and sharing our insights in 2021.

10:15 am ET

The Technical Value Scorecard is published.

, Commentary 12/31/2020

7:20 am ET

The next big risk event will be the January 5th run-off Senate election in Georgia. While the Republicans are expected to win and hold the Senate, a surprise victory by both Democrats could supercharge the equity markets and push yields higher as the prospects for a much larger stimulus deal in the months to come increases significantly.

If you are looking for things to worry about, the following survey provides a list of possible events that concern investors in the year ahead.

, Commentary 12/31/2020



December 30, 2020

12:00 pm ET

This morning we published Plus ça change: A French Lesson in Monetary Debauchery which tells the story of monetary and fiscal failures that led to the French revolution. While there are many similarities to the current situation there are also important differences. “This story is not a forecast but a simple reminder of what has repeatedly happened in the past.”

, Commentary 12/30/2020

11:20 am ET

Keep an eye on bonds. In particular, the price of TLT has been consolidating with slowly rising bottoms and surging money flows over the last two weeks. A breakout in TLT (falling rates) might be the surprise no one is expecting in January. We would like to see TLT (156.75) trade above its 20 dma (157.10) and 50 dma (157.92), before betting on a bounce higher.

, Commentary 12/30/2020

10:00 am ET

It appears the ECB is finally showing some concern about a stronger euro versus the dollar. Per Ollie Rehn, Governor of the Bank of Finland-ECB Is Monitoring Euro Exchange Rate Very Closely.” A stronger euro is deflationary which poses problems for the region which already has a deflation problem and employs negative rates. We suspect that the eurozone will not tolerate much more dollar weakness.

7:30 am ET

Yesterday we ran across the following Bloomberg article – Treasury Market’s Inflation Gauge Nears 2%, Highest Since 2018. We ask, does the inflation gauge still have credence?

The Fed closely monitors and bases monetary policy on inflation expectations as measured by the TIPs market. This gauge used by the Fed and investors is becoming a questionable forecasting tool as the Fed now owns over 20% of the TIPs market. Due to massive QE, their outsized demand for TIPs over the last 6 months has pushed inflation expectations higher than that which would have been the case without their interference. The Fed can own up to 70% of any security, meaning they have plenty of room to buy more TIPs and further distort inflation expectations.

The graph below compares 5 year implied inflation data with actual CPI data occurring 5 years from that point. As shown implied inflation expectations have been a reliable gauge for the last four years. Unfortunately, the value of this important data point will lessen as the Fed, not the market, increasingly dictates inflation expectations.

, Commentary 12/30/2020

December 29, 2020

11:40 am ET

The chart and commentary below from Siblis Research serve as yet another reminder that valuations, in many cases, are at or near record levels.

, Commentary 12/29/2020

10:30 am ET

Next Tuesday Georgia will conduct run-off elections for both Senate seats. Given that a Democrat sweep can tip the Senate in the Democrat’s favor, this election has big implications. The polls below, courtesy 538,  show that both Republicans have slight leads in the most recent poll. However, based on their prior two polls, conducted before Christmas, the polls have fluctuated back and forth. From an economic/investing perspective, a Democrat sweep will likely mean more stimulus, but potentially higher taxes for the wealthy. It also makes a roll-back of the corporate tax cut of 2018 more likely.

, Commentary 12/29/2020

10:15 am ET

Case Shiller’s 20 city home price index for October was up an annualized 7.95%, beating expectations by 1%, and showing the sharpest one-month increase in over 5 years.

8:10 am ET

The price of cryptocurrency Ripple fell below 20 cents last night, down nearly 70% over the month of December. The sharp decline is based on an SEC allegation that Ripple is a security. Ripple is not Bitcoin, but this action and the proposed legislation to regulate stablecoins raises our concern that regulatory actions can cause severe drawdowns in cryptocurrency space, including Bitcoin.

It is worth noting, as we consider potential potholes, Ripple is centralized (ie. controlled by an entity) and Bitcoin is decentralized (not controlled by anyone).

7:50 am ET

Top 10 Buys And Sells

From TPA Research (Click on RIAPro+ today to add TPA Research to your subscription.) 

, Commentary 12/29/2020

7:30 am ET

The low volume equity melt-up continued overnight with further gains of half a percent. Yesterday’s nearly 1% gains were impressive, but there are some concerning factors under the hood. For one, the VIX and bond prices both ended higher on the day. Advancing NYSE stocks only beat out declining stocks by 53.5% to 44.5%. We would have expected a much larger margin/better breadth. Lastly, the Russell 2000, which has been leading the market over the past few weeks, fell by .37%. That being said, we are careful not to read too much into this week’s trading due to light volumes and year-end related trading pressures.

December 28, 2020

12:00 pm ET

One of our primary concerns of investing in cryptocurrency is the governments’ ability to regulate or even abolish it if the government deems it detracts from their ability to control monetary issuance and therefore manage the economy via their own currencies. To that end, a bill was introduced that would heavily regulate stable coins. Unlike the more popular bitcoin and other cryptocurrencies, stablecoins peg their market value to an external index such as the dollar or a commodity. This new bill would require stablecoin issuers to become banks with the approval of the Federal Reserve and FDIC.

10:10 am ET

Gamma Band Update is published

, Commentary 12/28/2020

10:00 am ET

Per Troy Bombardia @bullmarketsco – “Something to watch out for in 2021: Margin Debt soared 50% in the past 8 months. In the past 30+ years, such investor euphoria happened exactly twice:

  • March 2000
  • June 2007
  • Now

, Commentary 12/28/2020

On Sunday, the WSJ published an article on Margin that is worth reading- Investors Double Down on Stocks Pushing Margin Debt to Record High.


7:40 am ET

Equities are opening up strong this morning as President Trump signed off on the $900 bn stimulus deal including $600 checks to individuals. This morning the House will vote on Trump’s request for an increased $2,000 for each qualifying individual. Bonds are weaker and the dollar is flat. Gold was up over $25 last night but gave back most of those gains. Conversely, crude oil opened up down 2% and is now up over 1%.

7:25 am ET

This will be another quiet week for economic data. On Monday and Wednesday, we get our first look at December’s manufacturing surveys, as the Dallas Fed and Chicago PMI report data respectively. Both are expected to show declines but stay above 50, denoting expansion. Jobless Claims on Thursday are expected to uptick slightly from 803k to 815k. Markets will be closed on Friday for New Years Day.

December 25, 2020 – Merry Christmas


, Commentary 12/24/2020

December 24, 2020

11:25 am ET

Freddie Mac reported 30 year and 15 year mortgage rates hit new record lows this week. As shown in the graph below, a conforming 30 year mortgage is now 2.66%, almost 1% lower than the lows set in 2012. In case you are wondering why mortgage rates are declining while longer-term Treasury yields are rising, the answer lies in the duration of a mortgage. Due to significant refi and purchase activity, the duration of a mortgage is now below five years. As such mortgages are priced off of 3 and 5 year Treasuries bonds which have seen stable to declining yields over the last month.

, Commentary 12/24/2020

9:30 am ET

The Technical Value Scorecard is published.

, Commentary 12/24/2020

7:20 am ET

Yesterday we showed how household income has risen sharply during the pandemic due to the Cares Act. Last night we stumbled upon the graph below, courtesy of @ernietedeschi, giving a much more detailed breakdown of the factors driving the increase in household incomes. Per Ernie, the average citizen has gained $5,439 of extra income due to government stimulus. This compares to what would have been a decline of $4,074 without said benefits.

, Commentary 12/24/2020

Equity markets close at 1 pm and the bond market at 2 pm today.

December 23, 2020

10:00 am ET

Three Minutes on Markets & Money

, Commentary 12/23/2020

9:50 am ET

The graph below shows Disposable Income surged on the original Cares Act and has now retreated to the prior running rate. The $2.2 trln increase in income was solely due to the $2.4 trln increase in government transfer payments (benefits to citizens). It should be no surprise with incomes back to normal and most Cares Act related spending used, the recovery is faltering. While the new stimulus bill will boost incomes and provide a spark for short term growth, it should be recognized that the natural organic rate of economic growth is low.

, Commentary 12/23/2020

8:45 am ET

Initial Jobless Claims fell from 892k to 803k. Over 20 million people are receiving Federal and/or State unemployment aid. About two-thirds of those people will lose aid on December 26th if the lastest stimulus act is not finalized. That is a primary reason Congress is rushing the legislation.

Personal Income fell 1.1% versus expectations of a .3% decline, and a decline of .6% last month. Personal Consumption (spending) fell 0.4%. Bottom line is that fiscal stimulus is wearing off quickly. The new stimulus bill will boost income and spending but only on a temporary basis.

7:00 am ET

On a few recent occasions, we have warned that the dollar is very oversold technically as well as from a sentiment perspective. To wit:

“Let’s start with the dollar.  The dollar is so extremely oversold, with a very large net-short position against it, that any event which causes a flight to safety is going to lead to a sharp counter-trend rotation in the dollar. While there is not a tremendous move in the dollar to the upside, the ramifications of that move would ripple through the current “reflation bets” of emerging markets, international, energy, and commodity stocks.” -12/15/2020 Portfolio Trading Diary

The table shows why a dollar rally could prove problematic for the S&P 500, crude oil, and their related stocks. As circled below, crude oil and the S&P 500 are running at relatively strong negative correlations to the dollar. Over long periods (bottom line) little to no correlation exists between these pairs. If the dollar reverses course and the negative correlation holds, crude oil and the S&P will surely decline. A dollar rally might also spell trouble for Gold, which also has a strong negative correlation, albeit near historical averages. If the dollar turns upward in a meaningful way, the port in the storm could be U.S. Treasury bonds, as there is no correlation to speak of between Treasury yields and the dollar.

, Commentary 12/23/2020

December 22, 2020

12:15 am ET

Top 10 Buys And Sells

From TPA Research (Click on RIAPro+ today to add TPA Research to your subscription.) 

, Commentary 12/22/2020

10:40 am ET

Per Marketwatch: “The index of consumer confidence fell to 88.6 this month from a revised 92.9 in November, the Conference Board said Tuesday. Economists polled by MarketWatch had forecast confidence would rise to 96.7 in December. The index had hit 101.4 in October.”   Given personal consumption is over 60% of GDP, this latest confidence survey, and its recent trend, serve as a warning that the recovery is in jeopardy. The survey was taken before the latest round of stimulus, so we will see if confidence, and hopefully spending, improve in the next round of surveys.

10:30 am ET

Three Minutes on Markets & Money

, Commentary 12/22/2020

9:20 am ET

Gamma Band Update is Published

, Commentary 12/22/2020

8:30 am ET

With another round of stimulus checks to households on the way, we were curious to see how many of our Twitter followers think that checks to the public become the norm. As shown almost three-quarters of those that replied think they will become a new fiscal tool for fighting economic slowing.

, Commentary 12/22/2020

7:30 am ET

Corporate yields rose marginally on Monday despite the stimulus bill which takes away the Fed’s ability to buy corporate bonds without new Congressional approval.

As shown below courtesy of Goldman Sachs, Investment Grade bonds now yield a paltry 1.80%. At the same time, their duration has soared to nearly 9 years. In combination, the two figures point to a significant increase in the amount of risk in the corporate bond markets. Duration measures the change in price for a given change in yield. If yields were to rise from 1.8% to 3.8%, bond prices in aggregate would fall approximately 18%. That compares to an approximate 13% decline in 2018 for a similar 2% increase in yields. Investors are clearly putting a lot of faith in the Fed to ensure yields don’t rise significantly. At the same time, they are betting against the Fed being able to deliver meaningful inflation which would push yields higher.

Doublethink- Doublethink is a process of indoctrination whereby the subject is expected to accept a clearly false statement as the truth, or to simultaneously accept two mutually contradictory beliefs as correct, often in contravention to one’s own memories or sense of reality.

, Commentary 12/22/2020

December 21, 2020

12:15 pm ET

The graph below shows economic activity has overtaken pre-COVID levels in China, while the U.S. and Europe have not only failed to regain lost economic activity but are losing momentum over the last few months. The combination of waning stimulus, stricter lockdown rules, and a much slower organic economic growth rate are the primary culprits driving the divergence.

, Commentary 12/21/2020

9:45 am ET

3 Minutes on Markets & Money

, Commentary 12/21/2020

7:30 am ET

The passage of a $900 billion stimulus bill appears to be a buy the rumor/ sell the event trade. Most U.S. equity indexes are down sharply but have recovered somewhat since last night’s lows. The S&P for instance is down 1.6% but about over 1% higher from the lows. The dollar and bonds are rallying, precious metals are flat, and crude oil is down over 3%. Also weighing on the market is a new more potent strain of COVID breaking out in England. Bear in mind, as discussed below, TESLA related rebalancing is also responsible for some of this morning’s volatility.

While $900 billion was widely expected the market appears to be concerned with some restrictions that the bill puts on the Fed. Per Zero Hedge: “But the Fed wouldn’t be able to replicate programs identical to the ones it started in March at the beginning of the pandemic without the approval of Congress; in short if the Fed is to restart any of the 4 emergency 13(3) programs and lending programs that are set to expire on Dec 31 (shown in red below), it will have to get Congressional approval. These four programs are the market corporate credit facility, the secondary market corporate credit facility, the Main Street lending program and the municipal credit facility.”

The Fed will not be able to buy corporate bonds without Congressional approval. Without the Fed backstop, and with spreads and absolute yields sitting at or near record lows, we expect corporate yields to increase.

7:15 am ET

Starting today, Tesla (TSLA) is a member of the S&P 500. Tesla represents about 1.5% of the index and is the 7th largest contributor (behind Google and in front of Berkshire Hathaway). We suspect the index will see some volatility today as a result of index rebalancing by many investors and funds. The inclusion of Tesla pushes valuation measures on the index higher due to the extreme valuations of Tesla. Tesla has a P/E north of 1300, versus 37 for the S&P.

After the market closed on Friday, the Fed announced it will once again allow banks to resume stock buybacks. JPMorgan immediately announced $30 billion of share repurchases. One must ask why the Fed continues to pump in massive amounts of reserves to the banking system via QE and at the same essentially admitting the banks have excessive levels of capital.

This week’s economic calendar is light. Of note will be Personal Income and Spending on Wednesday, and Jobless Claims on Thursday. Given the holiday, there are not many Fed members scheduled to speak.

December 19, 2020

Trading Desk Notes for December 18, 2020 – by Victor Adair

, Commentary 12/18/2020

Latest 3-Minutes On Markets And Money

(Note: We produce 3-minute Videos Mon-Thursday. To be notified immediately click here.)

, Commentary 12/18/2020

December 18, 2020

4:15 pm ET

Tesla’s price action was crazy in the last few minutes of trading before becoming an S&P 500 member.

, Commentary 12/18/2020

2:20 pm ET

Much ado has been made about extremely low put/call ratios. While it is a concern as it highlights extreme sentiment, it is also worth noting that the ratio can stay low for a while. As shown below, the ratio was actually lower than current levels for a few years preceding the tech bust of 2000.

, Commentary 12/18/2020

11:30 am ET

The price of crude oil continues to rise on a seemingly daily basis and is quickly approaching $50. Despite the steady gains energy stocks (XLE) have begun to lag. As shown in the graph on the right, the ratio of XLE to crude oil has fallen by nearly 10% in the past 6 trading days. The graph on the left shows the price of XLE and crude. Note that the last two significant increases in crude oil were preceded by strength in XLE. XLE might be ahead of the curve and signaling future weakness in oil prices. That said, energy stocks are up well over 50% since early November and grossly overbought on all technical readings. As such, a consolidation or decline should not be surprising despite improving fundamentals.

, Commentary 12/18/2020 , Commentary 12/18/2020

9:15 am ET

The Technical Value Scorecard is published.

, Commentary 12/18/2020

Stimulus negotiations are ongoing with a deal probable over the next few days. It is worth noting, that funding for the government lapses at midnight, and, as such, about 12 million people will lose their federal unemployment benefits in the coming week if a deal is not struck by Christmas.

Today is a quadruple witching day as a slew of stock and futures options expire. Per Goldman Sachs, almost 50% of all S&P options expire today. Goldman is not expecting fireworks as a good percentage of the options are well in the money.


December 17, 2020

10:50 am ET

A few weeks ago we shared the chart on the left which shows that when most investors expect a steepening yield, local highs in longer-term bond yields occur. We continue with the same yield curve expectations graph, but instead, compare it to gold prices over the last few years.  As shown, when a large majority of investors think the yield curve will steepen, gold tends to show local weakness. Following two of the three prior peaks in expectations, gold prices surged. As we think about the yield curve, we must remember the Fed will only tolerate so much yield curve steepening, as higher long term interest rates are damaging to the economy. Might we once again be on the precipice of lower yields and higher gold prices?

, Commentary 12/17/2020 , Commentary 12/17/2020


8:40 am ET

Initial Jobless Claims rose 32k from last week to 885k, versus an expectation for a sizeable decline to 806k. The Philadelphia Fed Manufacturing Index also points to employment problems as the employment subindex fell from 27.2 to 8.5. The overall index also fell sharply from 26.3 to 11.1. Expectations were for a decline to 20. Housing Starts and Building Permits were both stronger than expected as record-low mortgage rates continue to drive the housing markets.

6:45 am ET

The U.S. dollar is opening up considerably weaker this morning at $89.80 and precariously sitting on an important support line in a wedge pattern. The next level of key support should be the lows of the first few months of 2018 at $88.50. A break below those levels could portend serious weakness for the dollar and renewed inflationary pressures. The flip side of the argument is that the same pattern of 2017/2018 is playing out again and the dollar will break higher.

, Commentary 12/17/2020

The consensus estimate for today’s Initial Jobless Claims (8:30 am ET) has been lowered to 806k versus last week’s reading of 853k.

While stocks traded in a narrow range yesterday, bond yields were volatile. The 30-year Treasury bond opened Wednesday morning 7 basis points higher than Tuesday’s close. It then spent most of the session declining back to flat on the day. Upon Jerome Powell’s statement that the Fed has no plans to expand their purchases of long term bonds, yields rose back to the day’s highs. The spike higher did not last long and was met with an equal decline in yields. This trading activity is noteworthy as there seems to be a big buyer of bonds on every dip. Whether it is enough to reverse the recent trend higher in yields, however, has yet to be seen.

December 16, 2020

3:15 pm ET

Jerome Powell’s Press Conference Notes:

  • Per the Fed’s new economic projections, they expect unemployment to fall to 5% at end of next year and 4% by the end of 2022. The current rate is 6.7% and the pre-COVID level was 3.5%.
  • Half of the Fed members still see downside risks to their 2% inflation goal.
  • Powell links the maturity of bonds they purchase via QE with economic performance. If the economic recovery falters and the Fed thinks it needs “stronger accommodation” the Fed may likely shift purchases to longer-term bonds versus shorter-term bonds. Currently, he seems content with the distribution of maturities in their purchases. This statement explains the sell-off in bonds this afternoon.
  • Powell strongly supports and welcomes fiscal support.
  • High-frequency data shows the recent surge in COVID cases is slowing economic activity.
  • He is hopeful that the vaccine will help the economy run “strongly” in the second half of 2021.

2:10 pm ET

The only statement change of note in the FOMC minutes was the following in regards to sustaining the Fed’s $120 bn QE pace- “until substantial further progress has been made toward the Committee’s maximum employment and price stability goals.” Prior to today, the statement based QE operations on credit market functioning and financial stability. Needless to say, QE will be with us for a long time. The red-lined statement is below. Click to enlarge.

, Commentary 12/16/2020

9:15 am ET

Per Politico- “Congressional negotiators are on the brink of a coronavirus rescue package that would include a second round of direct payments, but would likely leave out state and local funding and a liability shield, according to multiple sources involved with and briefed on talks.

This helps explain why stocks are maintaining their bid and bonds are trading weaker following the Retail Sales data.

9:05 am ET

Retail Sales were much weaker than expected as shown in the table below. With a consistent weakening theme emerging throughout the economy and higher interest rates, will the Fed discuss shifting more QE purchases to longer-term notes and bonds? Shifting purchases away from the Bill sector would also alleviate downward yield pressure on Treasury Bills as discussed in the comment below.

, Commentary 12/16/2020

7:30 am ET

Chris Whalen, author of the Institutional Risk Analyst, put out an important article entitled Wag the Fed: Will the TGA Force Rates Negative. The gist of the article is that the Treasury pre-funded COVID relief efforts and end up borrowing more money than it spent. The Treasury now finds itself with a severely bloated account at the Fed (TGA) as shown below. The nearly $1.6 trillion cash balance should fall over time but will “remain well above historical norms.” Chris fears that if a sizeable stimulus bill can’t be agreed upon, the Treasury will reduce debt issuance and use the excess cash to fund expenditures. As a result of less debt issuance, primarily in the T-bill sectors, Fed Funds and short term rates could go negative.

, Commentary 12/16/2020

In such a scenario, the Fed in its goal to manage Fed Funds within its 0-.25% target, would need to reduce QE to offset the Treasury’s reduced supply. This bizarre situation illustrates the fact that once the FOMC turned to the dark side by embracing QE, it essentially lost control of monetary policy. More than ever before, the Treasury is the fiscal policy dog and the Federal Reserve System is the increasingly superfluous tail.

It will be interesting to hear Jerome Powell’s response if he is asked about this problem at his 2:30 pm press conference.


December 15, 2020

2:20 pm ET

Stocks took a turn higher on stimulus optimism from Mitch McConnell. Per McConnell We’re not leaving here without a covid package. It’s not going to happen. .. no matter how long it takes, we’ll be here

1:53 pm ET

Top 10 Buys And Sells

From TPA Research (Click on RIAPro+ today to add TPA Research to your subscription.) 

, Commentary 12/15/2020

11:20 am ET

It appears the best shot for passing a stimulus bill is a “lite” version of the $910bn bill that was in play last week. Currently, a $750bn spending bill is on the table with spending on more difficult aspects being put off until after the inauguration. Of the most noteworthy items are stimulus checks to individuals. It is likely a bill will contain more small business support, a continuation of unemployment programs, and possibly an extension of student loan forbearance and the housing eviction ban.

The market feels like it wants to run on a deal announcement but will a watered-down deal pass muster?

8:20 am ET

In the most recent December Oil Market Report, the International Energy Agency (IEA) downgraded its 2021 oil demand forecast by 170k barrels per day, in large part (80%) due to jet fuel and kerosene. Essentially the agency believes it will take longer than the market expects for the vaccines to bring normality to daily lives.

The understandable euphoria around the start of vaccination programmes partly explains higher (oil) prices but it will be several months before we reach a critical mass of vaccinated, economically active people and thus see an impact on oil demand. In the meantime, the end of year holiday season will soon be upon us with the risk of another surge in Covid-19 cases and the possibility of yet more confinement measures

7:30 am ET

With the December Federal Reserve Monetary Policy meeting kicking off today, an update on Fed Funds futures is worthwhile. Currently, the front contract, December 2020, trades at .08%, and the monthly contracts out through October of 2021 sit at the same level. Beginning in late 2021 the rate increase ever so slightly. By July 2022, the rate is .10% and about .14% by year end 2022. Essentially, the market is saying there will be no rate hikes in 2021 and an approximate 33% chance of a 25bps hike by the end of 2022. These prices can change rapidly, but for now, it appears the Fed has made it clear to traders they have no intent on raising rates anytime soon. As we will likely hear tomorrow, the odds a reduction in QE amounts in the near future are also very slim.

The chart below shows why a renewal of the stimulus CARES Act is so important. Per Liz Anne Sonders (Charles Schwab) -“When CARES Act protections run out, many landlords will have no choice but to evict some tenants

, Commentary 12/15/2020

December 14, 2020

2:30 pm ET

The surge of housing prices in the suburbs is being partially offset with sharp declines in urban housing activity. The graph below shows rents in Manhattan have fallen by nearly a third and are now back to levels from ten years ago.

, Commentary 12/14/2020

12:20 pm ET

A few subscribers have asked us for more information on SPACs. As such, we share the following short video from the Financial Times.


10:30 am ET

The Weekly Gamma Band Update is published.

, Commentary 12/14/2020

10:10 am ET

As shown below, the Euro (versus the USD) has been in a downtrend for 12 years. Since 2008, the upper end of the trend is defined with a series of lower highs. Currently, the Euro is bumping up against a significant resistance trend line (gold line). If it can breach resistance and 1.25 to the dollar (red line), the prior high from 2018, significant dollar weakness may lie ahead. That said, the dollar is grossly oversold and bearish sentiment is extreme, so at least in the short run, we suspect resistance will hold.

, Commentary 12/14/2020

8:00 am ET

19 IPO’s have doubled on their first trading day in 2020. There were a total of 25 IPO’s that did that from 2010-2019!!

Per the graph below, courtesy of Bloomberg, over 80% of IPOs issued this year have negative earnings. Despite questionable fundamentals, opening day trading returns on IPOs this year are the highest in 20 years. Bottom line: investors are chasing hope and promise with no regard for risk. The riskiest of assets have been the best performers as of late- IPO’s, SPACs, and zombies.

, Commentary 12/14/2020

7:15 am ET

This week’s significant economic data will include Retail Sales on Wednesday, and Initial Jobless Claims Thursday. After a relative paltry gain of 0.3% last month, November Retail Sales are expected to decline by 0.3%. The forecast for Jobless Claims is also concerning, showing a further rise after last week’s large gap higher.

The Fed will meet Tuesday and Wednesday, with the FOMC statement of monetary policy and Powell press conference at 2:00 pm and 2:30 pm respectively. It is possible the Fed downgrades the current status of economic activity and possibly their 2021 growth forecast. The wild card will be whether the Fed discusses additional QE and/or other forms of monetary stimulus to counteract the slowing recovery and lack of additional fiscal stimulus.

December 12, 2020

The Trading Desk Notes by Victor Adair

, Commentary 12/11/2020

December 11, 2020

2:30 pm ET

The Value Seeker Report (VMC) is published!

“Construction aggregates form the backbone of much of the infrastructure making up today’s world. Headquartered in Alabama, Vulcan Materials Company (VMC) is the leading producer of construction aggregates in North America, primarily dealing in crushed stone, gravel, and sand.”

12:30 pm ET

As shown in the Energy Information Administration (EIA) table below, this past week saw a sizeable build of oil inventories, predominately due to imported oil. Regardless of this recent trend, the price of crude oil continues to grind higher. In a nutshell, demand is not keeping pace with the increasing stocks of oil. We suspect the price of crude oil has limited upside unless demand picks up meaningfully.  Inventories are still down versus 2019 levels, but on a longer-term basis, they are running decently higher than average. Per the EIA’s weekly report:

  • “At 503.2 million barrels, U.S. crude oil inventories are about 11% above the five year average for this time of year.”
  • “Total motor gasoline inventories increased by 4.2 million barrels last week and are about 5% above the five year average for this time of year.”
  • “Distillate fuel inventories increased by 5.2 million barrels last week and are about 11% above the five year average for this time of year.”
  • Propane/propylene inventories decreased by 4.1 million barrels last week and are about 4% above the five year average for this time of year.”

, Commentary 12/11/2020

10:30 am ET

University of Michigan Consumer sentiment rose but inflation expectations, both near term and long term, fell. With CPI, PPI, and now the Michigan consumer survey pointing to price stagnation, it may only be a matter of time before the inflationary stock market rotation comes to an end.

10:00 am ET

The Technical Value Scorecard is published.

, Commentary 12/11/2020

9:30 am ET

PPI, like CPI, shows no signs of inflation pressures. Core PPI was +0.1%, matching consensus. Year over year the Producer Prices are only growing +.08%.

7:30 am ET

The chart below, courtesy of Bull Markets, shows that the ratio of insider buying versus insider selling is at or near record lows. Per the report- “There were only 8 other historical cases in which the S&P 500 Insider Buy/Sell ratio was this low. The S&P 500’s forward returns over the next 2-6 months were poor and usually faced pullbacks/corrections.”  Lastly- “Corporate insiders are incredibly good at trading their own stocks. They know their companies’ situation better than outsiders do, and thus can profit from this information-advantage. Corporate insiders have a consistent track record of buying their stocks near market bottoms and selling their stocks near market tops.

, Commentary 12/11/2020

The yield on Portugal’s ten-year Notes and Australia’s Treasury Bills turned negative this past week, pushing the amount of global negative-yielding debt above $18 trillion, a new record. The increasing yield spread between most developed sovereign debt and U.S. Treasuries has the potential to create a surge in demand for U.S. Treasuries on any sign of economic weakness and/or the emergence of a stronger dollar trend. For foreign buyers of assets denominated in the dollar, a weaker dollar reduces their returns and can partially or fully negate the benefit of the higher yield. The opposite holds true when the dollar is stronger versus the investor’s home currency.

December 10, 2020

12:15 pm ET

In the latest sign of market exuberance, DoorDash (DASH) went public on Wednesday at $102 per share and closed the day at $188, leaving it with a market cap of approximately $60 billion. Today, Airbnb (ABNB) IPO’d at $68 and the stock is indicated to open later today at $145.  With a potential market cap of over $100 billion, Airbnb is now the world’s largest online travel company.

, Commentary 12/10/2020

9:05 am ET

CPI was slightly higher than expected, increasing 0.2% last month versus 0.0% the prior month, and expectations for a .01% increase. Year over year CPI and CPI excluding food and energy were both unchanged at 1.2% and 1.6% respectively. Unlike what the equity markets seem to be pricing in, there are few signs of actual inflation. That said, official inflation data tends to lag, so we must also keep an eye on alternative price data.

Due to our large trade deficit with China, it is worth noting that China’s most recent CPI report was -0.5%, the first time it turned negative in over 10 years.

The charts below, courtesy of Brett Freeze, show that year over year inflation, broken down between commodities and services, is not showing an inflationary push.

, Commentary 12/10/2020

9:00 am ET

Initial Jobless Claims rose sharply to 853k from 712k, and well above expectations of 724k. The increase brings the weekly number of newly unemployed back to levels from mid-September. The non-seasonally adjusted number was also much higher at 947k versus 718k last week. Of concern, continuing claims increased from 5.53k to 5.76k. The upward trend may continue in the coming weeks due to new COVID lockdowns.

8:00 am ET

As expected, the ECB increased the size of its Pandemic Emergency Purchase Program (PEPP), aka QE, by 500 billion euros through March of 2022. They will also re-purchase maturing bonds through 2023, effectively keeping the size of the program intact for three years. Even with the increase, ECB asset purchases are still only running at about a quarter of the pace of the Fed. The initial reaction in the currency market is a strengthening of the euro versus the dollar.

7:30 am ET

The table below shows the consensus expectations for the CPI report due out at 8:30. Jobless Claims, also out at 8:30, are expected to rise from 712k last week to 724k.

, Commentary 12/10/2020

December 9, 2020

12:00 pm ET

With 300-year low yields for bonds and zero returns on cash, investors have no choice but to chase stocks. That is the popular justification at least.  The graph below shows that is exactly what investors are doing. Equity allocations amongst four major investor groups are nearly the highest ever, while allocations to bonds and cash are at the lower end of historical allocations. While the narrative’s logic makes sense at first blush, investors would be wise to consider current valuations and the expected returns for equities.

In today’s article, Half Truths are Half Lies By Definition, we explore the common misconception that lower interest rates are necessarily good for stock prices.

“As such, the expected returns per unit of risk greatly favor bonds, even bonds with near-zero yields. Bonds may be rich, but stocks are richer.”

, Commentary 12/9/2020

11:15 am ET

The BLS JOLTs data reiterated the slowing progress of job gains as we saw in the monthly payrolls report. There are now 4.2 million unemployed workers than there are job openings.  The reports also shows that hiring has slowed dramatically since June and is now lower than before COVID lockdowns occurred. This is a tough situation given the huge amount of jobs that need to be filled to get unemployment back to pre-COVID levels.

Per the BLS: “The number of job openings was little changed at 6.7 million on the last business day of October, the U.S. Bureau of Labor Statistics reported today. Hires were little changed at 5.8 million while total separations increased to 5.1 million. Within separations, the quits rate was unchanged at 2.2 percent while the layoffs and discharges rate increased to 1.2 percent.

9:15 am ET

The U.S. Treasury will auction $38 billion of 10 year notes this afternoon and $24 billion of 30 year bonds tomorrow. Both auctions are $3 billion shy of last month’s record-sized auctions. Yields are higher this morning as banks/dealers that bid in the auctions frequently short notes and bonds to hedge what they will buy in the auction. The weaker the end-user demand the more hedging is required.

7:00 am ET

Yesterday’s exuberance was sponsored by the Russell 2000 small-cap index. The index rose 1.5%, over 1% more than the larger cap S&P, Dow, and NASDAQ indexes. The graphs below show the Russell index (IWM) is now 2.5 standard deviations and 31% above its 200-day ma. Notable, the difference between the upper and lower Bollinger Bands (2.5) is now 50%. As you can see it is common for the index to hit the upper band and ultimately retreat to the lower band. The index can certainly go higher, but the risk is palatable at current levels.

, Commentary 12/9/2020

, Commentary 12/9/2020

December 8, 2020

1:45 pm ET

In yesterday’s commentary, we presented a few facts on Tesla’s valuation and shared some views on what needs to occur to justify current valuations. Of them were 1) Tesla becomes the world’s dominant automaker 2) Other automakers, including upstarts, can not create viable electric vehicle competition. This morning we saw the following headline- “In the year 2026 will be the last product start on a combustion engine platform,” Michael Jost told the Handelsblatt automotive summit conference at Volkswagen’s headquarters in Wolfsburg, Germany, NBC News reported.  Either Volkswagen fails miserably in the EV market or Tesla has real competition. Many other automakers are also aiming to reduce combustion engine production in the coming years.

12:45 pm ET

The chart below, courtesy of Sven Henrich @northmantrader, shows the Russell 2000 is now in unchartered bullish territory. On a monthly basis, the Index is 3% above two standard deviations, an occurrence that has not happened since at least 2000. At the same time, the Percentage Price Oscillator (PPO) is also at a 20 year+ high. Similar to the MACD, the PPO is a momentum oscillator that measures the difference between two moving averages as a percentage of the larger moving average. The CPCE indicator, at the bottom, is the put/call ratio, showing that investors are buying calls at nearly three times the rate as puts.  To quote Sven- “We have nothing to fear but the lack of fear. And maybe gravity.

, Commentary 12/8/2020

10:05 am ET

The chart below, courtesy Otavio Costa, shows investment-grade corporate bonds now provide a lower yield than inflation expectations. A few things worth considering:

  • Current yields do not factor in potential losses due to credit events. As such actual yields will be lower than advertised.
  • Assuming inflation expectations are correct or underestimate inflation, investors holding investment-grade bonds will lose purchasing power with their “investments.”
  • Lower spreads typically occur when investors are comfortable with the economic outlook. Today we are in a recession and all but guaranteed to have slower economic growth over the next ten years.
  • Notice the exact opposite behavior between the current instance and that of the Financial Crisis in 2008. For what it’s worth, the anomaly is today’s instance, not the 2008 experience.

, Commentary 12/8/2020

8:20 am ET

Technically Speaking: Margin Debt Confirms Market Exuberance is published!

7:15 am ET

Strategas recently polled 54 fixed income analysts about their yield forecast for 2021. Only 4 of the 54 analysts believe that the 10-year UST yield can get above 1.50%. Like most of these analysts, we believe yields will stay very low as the Fed has little choice but to keep them low if they are to keep the economy humming. That said, we are well aware of Bob Farrell’s rule #9 “When all the experts and forecasts agree — something else is going to happen.”

, Commentary 12/8/2020


December 7, 2020

3:30 pm ET

Canceling student debt as a “stimulus” of sorts has been raised over the last few weeks. Recently, the CRFB wrote a great article showing that canceling student debt is far less effective than other forms of stimulus. To wit:

  • Student debt cancellation will increase cash flow by only $90 billion per year, at a cost of $1.5 trillion.
  • Student debt cancellation is poorly targeted to those most likely to spend, given that nearly three-quarters of repayments would come from the top 40 percent of earners.
  • Forgiving the full $1.5 trillion in loans will likely boost economic output during the current downturn by between $115 and $360 billion, a multiplier of 0.08x to 0.23x.
  • Partial loan forgiveness would cost less than total forgiveness but also offer a smaller economic boost. We don’t expect a significant improvement in the multiplier.
  • Simply extending the current executive action to defer loan repayments and cancel interest would achieve much of the economic benefit of loan cancellation at only a very small fraction of the cost.

There are a number of benefits and costs associated with canceling student debt. But as a stimulus measure, its “bang for the buck” is far lower than many alternatives under consideration or the COVID relief already enacted.

, Commentary 12/7/2020

12:47 pm ET

Top 10 Buys And Sells

From TPA Research (Click on RIAPro+ today to add TPA Research to your subscription.) 

, Commentary 12/7/2020

10:00 am ET


Tesla’s (TSLA) stock has risen over 600% this year, including a surge over the last few weeks as it was announced Tesla will be joining the S&P 500. As shown below, Tesla now has a market cap equal to the next 6 largest automakers combined, yet it only has 1% of the market share of those automakers in aggregate. For Tesla to have a sales/market cap ratio equal to the average of the top 6, they would need to sell 39 million cars per year. To put that differently they would need to sell 60% of all cars sold in the world. At current valuations, Tesla shareholders are betting on the following:

  • Tesla becomes the world’s dominant automaker
  • Other automakers, including upstarts, can not create viable electric vehicle competition
  • Electric vehicles become a large majority of cars sold globally
  • The U.S. and/or other countries do not enforce monopoly laws

, Commentary 12/7/2020

Needless to say, buyer beware!

9:30 am ET

The Weekly Gamma Band Update is published.

, Commentary 12/7/2020

With inflation expectations on the rise, and stocks rising on a reflation narrative, the market will get to see if actual inflation is picking up this coming week. On Thursday, the BLS will release CPI and follow it up Friday with PPI. The current consensus estimate for CPI is +1.1% annually versus 1.2% last month. We will also keep an eye on the inflation expectations component of the University of Michigan survey on Friday, to see if consumers believe inflation is brewing. Other than inflation, the JOLT report due on Wednesday, and Initial Jobless Claims on Thursday, will help better assess the employment picture.

The graph below shows yet another market anomaly and the extreme technical levels many indexes are reaching.

, Commentary 12/7/2020


December 6, 2020

Victor Adair’s Trading Desk Notes – Week Of December 5th

, Commentary 12/4/2020

December 4, 2020

12:00 pm EST

The graph below, courtesy of Brett Freeze, helps explain why negative real rates dampen economic growth. The green shaded areas in the graph represent periods in which the yield on the 3 month Treasury Bills was below the expected inflation rate. In other words, anytime real rates are negative. As shown by the blue line, productivity growth tends to decline when real yields are negative and increase when positive. Currently, the implied rate of inflation is 1.86% and the 3-month Bill trades below .10%, meaning real yields are -1.76%. For more on the importance of productivity to economic growth, we share an article we wrote in January of 2019 – Productivity: What it is & Why it matters.

, Commentary 12/4/2020

10:05 am EST

The Technical Value Scorecard is published

, Commentary 12/4/2020

9:30 am EST

The Value Seeker Report (CSOD) is published

, Commentary 12/4/2020

“As the pandemic and associated lockdowns have temporarily transformed the economy, many companies have been forced to adapt to new challenges by managing employees remotely. Cornerstone OnDemand (CSOD) provides software-as-a-service (SaaS) to firms, which may help them through some of these challenges.”

9:10 am EST

The BLS jobs report showed a further deceleration in jobs growth with payrolls growing by only 245k versus expectations of 500k, and a revised lower 610k last month. The unemployment rate fell from 6.9% to 6.7% but largely due to a decline in the labor participation rate from 61.7% to 61.5%.  The labor force shrunk by 400k accounting for the drop.

The graph below, courtesy Evercore ISI, shows that at the current pace of job gains, employment will not get back to February levels for about four years. The current gap is approximately ten million jobs.

, Commentary 12/4/2020

The following are a few interesting facts:

  • 21.8% of employees teleworked in November, up from 21.2% in October
  • The household survey declined in November by 74k
  • The number of people out of work for more than 6 months increased by 385k to just under 4 million
  • The participation rate has been steady for the last 6 months at about 2% below the pre-COVID running rate


7:40 am EST

How Bipartisan Stimulus, McConnell Plans Stack Up: Side by Side

The article linked above from Bloomberg provides a nice summary comparing the two stimulus plans currently being debated by Congress. A deal will probably get done but any such deal will likely fall short Democrat lawmakers and Biden expectations. As such we should expect renewed stimulus discussions following the inauguration.


December 3, 2020

4:20 pm EST


That headline caused the market to give up decent gains and close flat on the day.

1:15 pm EST

The Bureau of Labor Statistics (BLS) seasonally adjusts monthly employment data to smooth it over time. In the retail trade sector, which is heavily influenced by holiday spending, they traditionally apply a negative multiplier to the number of retail jobs added in November and December and a positive multiplier to almost every other month. For instance, in 2019, payrolls in retail trade increased by 432k from October to November, however when seasonally adjusted it actually fell by 14k. In normal times these adjustments are easy for economists to factor into their forecasts.

This year will be very different. In the last two years the BLS reduced the actual number of retail of jobs by 2.8% or approximately 450k jobs. If economists use the same seasonal adjustment factor this year and a lower estimate for the number of jobs added than years past, they run the risk of underestimating retail employment. Seasonal adjustments hold true for all employment sectors. As such, we suspect the actual number of net jobs reported from the BLS and economists expectations could vary widely tomorrow.

, Commentary 12/3/2020

10:30 am EST

Below is yet another chart for our recent collection showing just how exuberant markets have gotten.

, Commentary 12/3/2020

8:50 am EST

Initial Jobless Claims fell nicely to 712k from 787k last week. Claims are now back to the same level as the beginning of November. Given typical hiring tendencies around Thanksgiving, Black Friday, and Christmas as compared to this year, we suspect seasonal adjustments to the data will flaw the output. Seasonal adjustments are also likely to have a big effect on tomorrow’s BLS employment data.

6:40 am EST
The graph below is yet another indicator showing the current state of extreme sentiment and fearlessness by investors. In the words of Peter Atwater- “At peaks in sentiment, it is less an abdication of risk management than it is the belief that there are no risks.
, Commentary 12/3/2020

December 2, 2020

3:00 pm EST

The graph and commentary from The Market Ear paint a grim picture of Black Friday spending. Credit Card spending, based on data from JPM Chase cards, shows a significant 8%+ reduction from the same period last year. While some decline is expected, the size of the decline is very surprising given that online spending (almost all credit based) increased 20% versus last year.

, Commentary 12/2/2020

2:10 pm EST

Gasoline demand has rebounded sharply from the March-April lows but still remains about 10% below where it was running pre-COVID. Clearly, a vaccine and return to more normal activity levels will boost demand further, but will the work-from-home trend result in a more permanent reduction in gasoline demand?

, Commentary 12/2/2020

12:20 pm EST

Analysts are expecting a 43% decline in international students enrolling in U.S. colleges this fall. Foreign students typically pay full tuition and room and board. Colleges, lacking this income, will have to rely on their endowments, donations, and will also likely be under pressure to raise prices. The graph below shows how the cost of education has easily outstripped CPI over the last 25 years

, Commentary 12/2/2020

8:30 am EST

The ADP jobs report fell well short of the +440k estimate, coming in at 307k. While still a very strong number, the weakening trend along with the bump up in jobless claims and weak ISM employment data is a reason for concern. The correlation between ADP and the BLS employment report, while traditionally strong, has been weak throughout this recovery. As such we must not read too much into ADP, however, we would not be shocked if this Friday’s BLS report is well below expectations given holiday seasonal adjustment factors and recent aforementioned labor trends.

7:25 am EST

A stimulus package is in the air again-

  • Bipartisan Senate group to unveil $908B stimulus compromise. Details fluid
  • BIDEN on stimulus: “Any package passed in lame-duck session is – at best – just a start”

CNN posted a nice summary of recent negotiations, their importance, and the roadblocks they potentially face. Below are two key paragraphs:

“There are only two weeks left on the legislative calendar. That doesn’t mean members couldn’t stay longer on Capitol Hill and try to sort out an agreement before Christmas. But, the only hope for a stimulus deal right now is to attach it to the spending bill that has a deadline of December 11.”
“Congress might be able to kick the can down the road for a few days, but at the end of the month, there is a massive cliff when the expiration of unemployment benefits, student loan payment deferrals and a federal eviction moratorium all run out.”

December 01, 2020

2:24 pm EST

From TPA Research (Click on RIAPro+ today to add TPA Research to your subscription.) 


Last month the S&P500 was up 10.75%. There are many analysts and pundits out with their own take on what that means for stocks going forward. Many analysts like Tony Dwyer of Cannacord believe we are in for a “choppy stretch ahead” and that “the ramp has become a little too extreme.” Sam Stoval of CFRA sees muted gains for December after a 10% gain in November.*

Many of TPA’s indicators in the Canaries in the Coalmine and Marketscope are also flashing extreme alerts, but historically the numbers tell a more nuanced tale of what to expect.

TPA looked at the past 70 years of monthly performance for the S&P500. Before November 2020, there were 12 times in which the S&P500 has registered gains of 10% or more. TPA looked that the performance for the next 1, 2, and 3 months after a +10% month to tease out any patterns. TPA then looked at all months since 1950 to compare the average performance to that following an up 10% month. The results are not overwhelming, but certain patterns do appear.


  • The month after the +10% month has an average performance of 0.60% and is positive 50% of the time.
  • The average performance of 0.60% for the month after the 12 occurrences of an +10% month is slightly less than the 0.70% performance for the entire sample of 836 months.
  • The month after a +10% occurrence is less likely (50%) to produce a positive performance than after a normal month in the 70 years (positive 60% of the time).
  • If you move out further away from the +10% month, however, the evidence for better than average performance increases. The average 3-month performance after a +10% month is +4.73%, while the normal average performance is just +2.11%.
  • In addition, the chance of positive performance for the 3 months after a +10% month is higher, 75% of the time, versus only 65% of the time for all 836 months.

Although these results are far from conclusive, TPA’s takeaway would be that there could be a short-term pullback due to extremes, but the chances are pretty good that 3 months from now the S&P500 will be higher.

, Commentary 12/01/2020

11:00 am EST

The ISM manufacturing survey was slightly weaker than expected at 57.5 versus expectations of 58 and a prior month reading of 59.3. While sliding, the index is still well into expansionary territory so the decline should not be overly concerning. The only real blot on the report was the employment sub-index which fell back into contraction at 48.4 vs. 53.2 last month. The PMI survey was unchanged from last month at 56.7.

10:00 am EST

December’s Cartography Corner is published.

, Commentary 12/01/2020

9:40 am EST

The Gamma Band Update is published.

, Commentary 12/01/2020

9:00 am EST

Is The “Narrative” Already Priced In?

, Commentary 12/01/2020

7:50 am EST

The chart below shows the 11.84% gain for the Dow Jones Industrial Average in November was the largest monthly gain since January of 1987. It was also the only time in at least 50 years in which the index was up over 10% in two months within the same year. The index has seen its fair share of losses and volatility as well this year. On a 6-month annualized basis, the recent instance has witnessed greater volatility than any time since late 1987 and early 1988.

, Commentary 12/01/2020

7:30 am EST

The graph below shows that short interest, as a percentage of market cap, is now well below anytime in at least the last 15 years. The reduction in short interest provides a boost to the market as those that were short have had to buy back stocks to cover their shorts. The flip side is that active traders that can trade from the short side now have plenty of room on their books to initiate short sales.

, Commentary 12/01/2020

November 30, 2020

2:30 pm EST

With Bitcoin hitting record highs we have gotten a few emails and calls asking our thoughts. In particular, one reader asked if GBTC is a good proxy for holding bitcoin? Without going into details of the trust, the primary problem with the ETF is that it trades at an enormous 100% premium ($18.83 vs $9.1) to the value of the bitcoin it holds. The premium could easily collapse to fair value and result in a 50%+ decline despite no movement in the price of bitcoin. Below the table please find our thoughts on Bitcoin.

, Commentary 11/30/2020

Salt, Wampum, Benjamins – Is Bitcoin Next? A Primer on Cryptocurrency

Bitcoin: Investment Or Speculation? Let’s Talk


12:15 pm EST

The two graphs below help explain why gold prices have been declining recently. The graph on the left shows the strong correlation between gold and real rates. Real rates are nominal Treasury yields less inflation expectations as implied from TIPs. The scale on real rates is inverted to highlight the correlation. Over the last 3 months, real rates have risen 22bps and gold has declined by almost $200.

The second graph shows the composition of the change in real rates since September. The 10yr real rate rose 22bps from -1.08% to .86%, almost entirely due to nominal 10yr yields rising 20 bps. Implied inflation expectations over the period fell 2 bps. If you think yields can keep rising without inflation expectations rising, real rates will increase and gold should continue to trade poorly. If bond traders start buying into the equity reflation trade, real rates may fall, or stabilize, as inflation expectations rise.

, Commentary 11/30/2020

10:15 am EST

The chart below, courtesy of John Hussman, compares today’s extreme level of market exuberance, using his indicator, to the last time the market reached such levels in 1999.

, Commentary 11/30/2020

9:20 am EST

3-Minutes on Markets & Money

, Commentary 11/30/2020

9:15 am EST

Top 10-Buys and Sells From TPA Research

, Commentary 11/30/2020

Click on RIAPro+ today to add TPA Research to start your subscription for just $20/month. 

7:45 am EST

The state of the economy, COVID lockdowns, and political wrangling over additional stimulus to consumers should weigh on holiday spending this year. Early Black Friday estimates show foot traffic at retailers was down over 50% while online shopping rose by over 20%. Again, typical seasonal spending patterns will sharply deviate from years past, so we must be careful reading too much into early spending data. The National Retail Federation forecasts a 3.6% increase in holiday sales versus last year. The map below, along with jobs data, and the fact that there will no stimulus given to consumers before the end of the year, makes such a rosy forecast hard to believe.

, Commentary 11/30/2020


7:15 am EST

Starting today, with the Chicago PMI and followed up tomorrow with ISM and PMI, the state of the manufacturing sector will be reported on. Chicago PMI and ISM are expected to slip slightly but stay well in expansion territory.  The ADP labor report is scheduled for Wednesday, followed by the all-important BLS payrolls report on Friday. ADP and the BLS are both expected to show net payroll growth of 450-500k jobs.

Jerome Powell is scheduled to speak at 10 am on both Tuesday and Wednesday, along with a host of Fed speakers throughout the week. It will be interesting to see if he, or other speakers, bring up Janet Yellen’s appointment as Secretary of Treasury and what that might mean for future Fed-Treasury working relations.

November 27, 2020

The Technical Value Scorecard is published.

, Commentary 11/27/2020

11:00 am EST

We stumbled upon the picture below showing prices of certain goods from 1938. We made the table below it to compare today’s prices and the ratio of prices to income. As shown, the ratio has increased substantially in all 6 instances, meaning goods are more expensive today on an income adjusted basis. Any wonder why consumer debt has exploded?

, Commentary 11/27/2020, Commentary 11/27/2020

7:30 am EST

Bloomberg recently published an article entitled America’s Zombie Companies Have Racked Up $1.4 Trillion Of Debt.  The article discusses how Zombie companies have grown substantially due to the COVID recession. They state that over 200 corporations of 3000 analyzed have recently joined the ranks of Zombies. “Even more stark, they’ve added almost $1 trillion of debt to their balance sheets in the span, bringing total obligations to $1.36 trillion. That’s more than double the roughly $500 billion zombie companies owed at the peak of the financial crisis.” Adding more debt to entice economic activity and stave off bankruptcy is part of the Fed and government playbook. What they repeatedly fail to understand from such policy is the unintended longer-term consequences. Per Bloomberg: policy makers may inadvertently be directing the flow of capital to unproductive firms, depressing employment and growth for years to come, according to economists.”  This is one reason we believe GDP growth will necessarily be slower in the coming economic expansion than it was in the last.

, Commentary 11/27/2020

***Reminder- The NYSE will close at 1 pm and the bond markets will close at 2 pm. With no economic data or Fed speakers, and many traders taking the day off, today’s trading sessions should be quiet.

November 25, 2020

3:30 pm EST

The FOMC minutes from the November 5th meeting were just released. While the minutes largely duplicate Chairman Powell’s press conference and many speeches by Fed members in the days following the meeting, there seems to be an emerging concern that massive amounts of liquidity might distort markets. The Fed would never tell us their actions have already distorted markets but equity valuations, credit spreads, and the housing market to name a few markets, have the tell-tale signs of Fed actions. To wit (per Zero Hedge):

  • Several participants noted the possibility that there may be limits to the amount of additional accommodation that could be provided through increases in the Federal Reserve’s asset holdings in light of the low level of longer-term yields, and they expressed concerns that a significant expansion in asset holdings could have unintended consequences.
  • A few participants expressed concern that maintaining the current pace of agency MBS purchases could contribute to potential valuation pressures in housing markets.

2:15 pm EST

Tesla will be joining the S&P 500 on December 21st as the 7th largest company in the index. Its stock price and valuation have gone well beyond what is justified using fundamental metrics of other car companies. With such an extreme valuation, a headwind facing shareholders going forward is competition. As shown below, the number of new electric vehicle (EV) launches in 2021 is expected to be 60, nearly double that of 2020, which was triple that of 2019. By market cap, Tesla is the world’s largest car company, but as measured by sales, they are dwarfed. Two important questions facing TSLA shareholders are 1) will EV command a large market share of all auto sales? & 2) can other car companies compete with TSLA?

, Commentary 11/25/2020

11:45 am EST

Even Jim Cramer agrees with us that this market is grossly overbought.

9:58 am EST

The following graphs show that most sectors and factor/indexes are grossly overbought (>80%). The S&P graph at the bottom right shows the index is now more overbought than any time since the rally began in March.

, Commentary 11/25/2020

8:58 am EST

Initial Jobless Claims rose again to 778k from 748k last week and 711k the week before that. Total claims, including Federal assistance, stand at 20.452 million, a slight uptick from last week. The 20.452 million total claims imply an approximate 13% unemployment rate.

In another market rarity, 91% of S&P 500 stocks are now trading above their respective 200 day moving averages. The last time this occurred was 6 years ago.

The graph below, courtesy of Brett Freeze, compares 6-month changes in the quantity, velocity, and total system liquidity to the movements of the U.S. dollar (inverse scale). When liquidity is rising, the dollar tends to fall and vice versa. Currently, we are witnessing the rate of liquidity change declining (green line). This will continue assuming the Fed and other central banks do not do more QE, but keep injecting the same amount or possibly less liquidity into the system. If this occurs, total system liquidity (TSL- green line) will continue to decline which should boost the dollar (gold line).

, Commentary 11/25/2020

November 24, 2020

4:35 pm EST

Dick’s Sporting Goods (DKS) reported quarterly earnings today before the market open. DKS reported quarterly revenue of $2.41B (+23% YoY), which beat analyst estimates by $180M. Further, the company reported GAAP EPS of $1.84, which beat estimates by $0.80. The strong quarterly results came on the back of surging e-commerce sales (+95% YoY). Despite reporting a great quarter, the stock closed modestly higher, up 0.3% on the day.

Our Value Seeker Report on DKS can be found here.

4:15 pm EST

Equity mutual funds are “all in” so to speak. The graph below shows total assets at a record high while liquid assets (cash) have fallen to levels last seen in 2013. Cash now accounts for only 2.2% of assets, nearly half of where they were 8 years ago.

, Commentary 11/24/2020

12:10 pm EST

Per The Market Ear, “abandon puts- put/call ratio needs no commenting.”

, Commentary 11/24/2020

10:40 am EST

Consumer Confidence fell from 101.4 to 96.1. The index remains well off the pre-COVID highs of 131. The University of Michigan Consumer Sentiment Index also shows a lack of consumer optimism about their economic prospects. Weak confidence does not appear to be slowing homebuyers. The Case Shiller Home Price Index (20 city composite) was up at an annualized rate of 6.6%, a further gain from +5.3% last month. This month’s increase was the largest in over 5 years. The pricing surge is in large part due to record-low mortgage rates, pent up demand from the spring months, and a record low 2.5 months of housing inventory (NAR).

8:26 am EST

The graph below shows three reliable measures of bond market inflation expectations. Despite the reflation trade in the equity markets occurring over the last few weeks, all three measures in the graph imply no such change in the inflation expectations of bond traders/investors.

, Commentary 11/24/2020

7:11 am EST

In a CNBC interview Janet Yellen, Treasury Secretary nominee, finally laid the groundwork for what we knew was eventually coming. “It would be a substantial change to give the Federal Reserve the ability 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.”

6:45 am EST

Typically at this time of year investors are eagerly anticipating Black Friday sales figures as they serve as an indication of the pace of holiday sales. This year will obviously be very different as a much larger percentage of sales will be online. The thrill and urgency of finding bargains in the early morning hours on Black Friday will be replaced with at-home online shopping at the buyer’s convenience. As such, we must be careful about interpreting and extrapolating early sales data.

November 23, 2020

4:18 pm EST

Top 10-Buys and Sells From TPA Research

, Commentary 11/23/2020

Click on RIAPro+ today to add TPA Research to your subscription for just $20/month. 

3:45 pm EST

Its official– President-elect Joe Biden plans to nominate former Federal Reserve Chair Janet Yellen to serve as his Treasury Secretary. This is a big deal as it will further strengthen the relationship between the Fed and the Treasury.

1:30 pm EST

Equity Market to Harvest Best November Since 1933

by CIO Larry Adam/Raymond James

• #4: Equity Market Harvesting New Post-COVID Highs | The equity market had a strong start to 2020 due to trade resolutions, but ever since the ~34% virus-induced decline, the S&P 500 has notched 11 new record highs and the strongest start to a bull market due to an improving macroeconomic backdrop, stronger than expected earnings, and positive vaccine developments. With supportive factors still in place, we maintain a positive outlook for equities over the next 12 months.

• #8: Seasonality Sweet as Apple Pie | The S&P 500 has rallied nearly 9.7% so far this month, more than 5x the index’s average November return over the last 30 years. In fact, at this juncture, the S&P 500 is having its best November since 1933! Seasonal trends should continue to support the equity market, since the November to April timeframe is historically the best 6-month period, with the S&P 500 posting an average return of 7.7% and being positive 83% of the time.

, Commentary 11/23/2020

10:50 am EST

The graph below shows that the Goldman Sachs Financial Conditions Index (GSFCI) is at its lowest level in at least 25 years, denoting ease in the ability to borrow. The shaded bars highlight periods where the GSFCI was weak, along with poor market breadth, high volatility, and toppy valuations. As shown, this condition can persist for a while but it’s not likely to end well for the S&P 500.

, Commentary 11/23/2020

9:30 am EST

New Post – Viking Analytics Gamma Band Update

, Commentary 11/23/2020

8:05 am EST

The chart below shows AAII Bullish Sentiment has recently surged to prior peaks. More interesting is that those investors claiming to be neutral, neither bullish nor bearish, are at levels typically seen when sentiment is decidedly bearish. This data set is just another quirk in a long line of anomalies we are witnessing in the markets.

, Commentary 11/23/2020

7:40 am EST

For the third Monday in a row, we wake up to a new COVID vaccine and the markets rallying in response. This week AstraZeneca released news that their vaccine is 70% effective.

Economic data will be light this week due to Thanksgiving. Today at 8:30 the Chicago Fed National Index, covering 85 indicators of economic activity, will be released. The consensus is 0.1, versus 0.27 last month, and a three month average of 1.33. This index likes others points to a stalling of the recovery. Durable Goods and the Fed Minutes from the last FOMC meeting will be released on Wednesday.

November 20, 2020

1:45 pm EST

New Post

Value Seeker Report (RTX)

“RTX has been on a wonderful run since the encouraging news broke on the vaccine front. After a 22% gain since the beginning of November, we believe the stock is slightly overvalued. Based on our forecasts, RTX has roughly 4% of downside remaining before reaching its intrinsic value.”


Nick Lane: The Value Seeker Report- Raytheon Technologies Corporation (NYSE: RTX)

12:30 pm EST

The graphic below shows that the two frontrunners in the betting markets for the next Secretary of Treasury are former Fed Chair Janet Yellen and Current Fed President Lael Brainard. It appears that the link between the Treasury and the Fed will only grow stronger in the years ahead.

, Commentary 11/20/2020

10:34 am EST

New Post

MacroView – A Vaccine and the NEW New Normal.
While $PFE and $MNRA announced potential vaccines, it won’t fix the damage caused by the lockdowns. While the #economy will recover, it will be a new normal that is weaker than the old “new normal.”

9:15 am EST

New Post

Technical Value Scorecard Report

  • On a relative basis versus the S&P 500, the reflation sectors (Materials, Industrials, Banks, Energy, and Transportation) remain the most overbought. Tech and traditional lower beta conservative sectors (Staples, Utilities, Healthcare, and Realestate) are slightly oversold versus the S&P. If you are looking to fade the reflation trade, Tech and Momentum are the most oversold indexes versus the S&P.
  • Utilities were the most overbought sector a few weeks ago. At the time we reduced our exposure to the sector and recommended doing the same. It has underperformed the S&P 500 by 5.35% over the last 20 days. XLU is not grossly oversold but bears closely watching to potentially add back positions. It is the only sector or index below its 20 day moving average.

Technical Value Scorecard Report For The Week of 11-20-20

Treasury Secretary Mnuchin is declining to extend most of the Fed’s emergency credit programs beyond December 31st, and he is asking the Federal Reserve to return all of the capital ($598 billion) allocated to unused CARES Act lending programs. While these programs are not being used extensively, this action will on the margin hurt the credit markets. In the words of Jeff Gundlach- “So the training wheels are coming off.

Initial Jobless Claims rose for the first time in four weeks to 742k, from 711K last week. We suspect the next two months of Jobless Claims and the next two BLS employment reports will be difficult to decipher as seasonal adjustments will not accurately account for the difference between normal seasonal hiring patterns and COVID related hiring. Clearly, many retail service industries will hire less this holiday season than in years past. That said, companies like Amazon and UPS will need to hire additional staff beyond what is average.

Expectations for a steeper yield curve have only been this high three other times in the last 15 years. As shown below, in all three instances, the yield curve flattened considerably shortly thereafter. Given that short term rates are stuck near-zero due to Fed policy, overwhelming investor expectations may be a warning that 10-year UST yields are about to decline sharply. One potential driver of a flatter yield curve is the Fed. To wit, MarketWatch published the following article yesterday- Bond traders talk up possibility of December Fed ‘twist’

, Commentary 11/20/2020


November 19, 2020

Housing starts were stronger than expected, growing at 4.9% versus expectations of 2.5%. These houses will take approximately 6-9 months to complete and come onto the market. In the summer of 2021, when they are ready for sale, it is possible they will have to compete with a newly-formed glut of existing houses. Higher house prices and the vaccine will incentivize current homeowners to sell. It is worth adding that there are a lot of baby boomers likely to downsize over the coming years. The recent surge in prices may pull forward that supply. Simply a shortage is likely to cause a glut tomorrow. For more on this topic please read our article- 3-Reasons Why There Really Is No Housing Shortage.

The graph below shows the “K-shaped” recovery in real estate. Single-family housing permits are soaring while multifamily permits are at 5-year lows.

, Commentary 11/19/2020

The graph and table below, courtesy of Ned Davis Research, show that the percent of “multi-cap” stocks trading above their 200 dma is extreme at 87.3%. The table below the graph shows that nearly 50% of the time when more than 61% of the stocks are above their respective 200 dma gains are limited. Not surprisingly, the largest gains occur when most stocks are below their 200 dma.

, Commentary 11/19/2020

After reading our recent comments about Fed members raising the prospects for a national digital currency, a subscriber asked us how big the aggregate cryptocurrency market is. The graph below shows it at approximately half a trillion, or about a quarter of the size of Apple. Bitcoin is about 60% of the total. Digital currencies have been hot recently. The second graph shows the price of Bitcoin is fastly approaching record highs.

, Commentary 11/19/2020

, Commentary 11/19/2020



November 18, 2020

Retail Sales were weaker than expected coming in at +0.3% vs. a +0.5% consensus. Last month was revised lower from +1.9% to +1.6%. The control group, used to calculate GDP, was weak at +0.1% and last month was revised lower from 1.5% to 1.0%. The bottom line, as we are seeing with other data, the sharp rebound in economic activity is plateauing.

Import and Export Prices showed some deflationary trends. Import prices fell 0.1% versus +0.2% last month. Year over year they are -1.0%. Export prices are fairing a little better on a monthly basis up 0.2%. However, they are down 1.6% year over year.

The bright spot yesterday was Industrial Production which came in at +1.1%, a healthy increase from last month’s -0.4% decline. The Capacity Utilization rate increased from 71.5% to 72.8%.

Chairman Powell spoke yesterday and made it clear that QE and other “emergency programs” are here for a long time. To wit, he said it is “Premature to even think about normalizing the size of the Fed Balance Sheet.” Powell claims that they will deal with government deficits when the crisis is over.

HomeBuilder Sentiment continues to soar and is now at record highs as shown below.

, Commentary 11/18/2020

In our article, The Fed’s Bazooka Is Broken Will Direct Lending Be Next? we discussed the process in which money comes into existence. To wit:

“With each additional loan, the money supply increases. If a bank does not lend, the money supply does not grow.

In the same way that banks create money, it can vanish. Money dies when a debt is paid off or when a default occurs.”

A key point of the article is QE is not money printing and therefore not inflationary. For inflation to occur the money supply must increase and this, under the current construct, requires banks to lend the reserves supplied by the Fed from QE. One of the reasons we are not overly concerned about inflation is because banks are not lending money. The graph below shows loans and leases, as a percentage of bank assets, continue to decline despite ever-increasing amounts of QE.

, Commentary 11/18/2020

November 17, 2020

Like last week’s Pfizer’s vaccine announcement, Moderna’s vaccine news boosted many stocks. However, the severe sector rotation trades and large divergences, as seen last Monday, were not nearly as distinct. The Dow Jones Industrial Average set a record high (+1.60%) and beat the NASDAQ by about 1%. Last Monday, many Tech stocks fell sharply, gold was off nearly $100, and bond yields rose. Yesterday tech stocks rallied and gold and bonds were largely unchanged. The Energy sector (XLE) was up over 6% on the day and is now up over 25% for the month to date.

Moderna’s vaccine is more practical as it can be stored in a refrigerator for 30 days compared to Pfizer’s which must be stored in a deep freezer. Transportation and storage play a significant role in terms of distribution and logistics, giving Moderna a major advantage and speeding up distribution considerably. Moderna’s vaccine was slightly more effective at 94.5% versus 90% for Pfizer’s.

While the vaccines will undoubtedly help the economy in the future, more and more states and local jurisdictions are locking down as COVID spreads rapidly. Markets in general and in particular the buying of economically sensitive, beaten-down stocks are clear sign investors are looking beyond what is shaping up to be a tough few months. With the S&P 500 now over 10% above levels from February, we must ask ourselves if the market is getting too far ahead of itself.

To that point, we ask you to consider a few factors that are not part of the bullish market narrative.

  • What if vaccines fail or the timeline is pushed out.
  • President Trump plans on enacting a series of hardline actions against China.
  • The brighter the vaccine promises the dimmer the hope for stimulus.
  • Economic growth post-COVID will be less than it was prior to COVID. As such, future earnings will also be reduced.
  • Equity valuations are higher than pre-COVID levels, which at the time were at or near records.

Retail Sales will be released at 8:30 followed by Industrial production at 9:15. Retail Sales are expected to increase by 0.4% and 0.5% excluding autos and gas. The control group, a large component of GDP, is also expected to rise by 0.4%. On Wednesday Housing Starts and Permits will be released followed Thursday by Existing Housing Starts. As we have seen over the last month, there will be a large number of Fed members speaking this week. Fiscal stimulus, monetary policy, economic activity, digital currency, and inflation are likely to be discussed.

November 16, 2020

PPI ex-food and energy was up 0.1% versus expectations of 0.2% and a prior reading of 0.4%. Like CPI the day prior, these key inflation data releases point to a weakening of the reflation trend. Bond yields took notice, with the ten year UST yield falling .12% since Wednesday. Gold was higher, as its price is well correlated to the level of real yields, as discussed in the commentary from last Thursday.

The University of Michigan Consumer Sentiment Survey fell from 81.8 to 77. Prior to COVID, it was running near 100, and at its trough, in the lower 70s. The bulk of the decline came from the Expectations index which fell from 79.2 to 71.3. The Current index was unchanged. Per UM, the resurgence of COVID cases and the election were responsible for the decline. We would add that declining stimulus is also starting to weigh on individuals.

In addition to discussing the economy and need for fiscal stimulus, quite a few Fed speakers have mentioned a digital currency alternative. To wit, The American Banker published the following a month ago- “The Federal Reserve is primarily interested in looking at a central bank digital currency that would improve the payment system, rather than one that would replace the physical dollar, said Chair Jerome Powell.” This past week he stated “There’s quite a lot of work yet to be done. The Fed is still considering a central bank digital currency (CBDC) but it’s in no rush”

Last week a few Fed members reiterated his thoughts on a digital currency. Last Friday for instance, NY Fed President Williams stated- “digital currencies are getting a lot of attention. These are issues front and center for the next few years.” Digital currencies have benefits such as ease of payments and crime enforcement, but they are not without fault. For one, digital currencies, without a physical alternative, make negative rates much more effective as the threat of withdraws from the banking system is greatly diminished. Digital currencies also allow the Fed to more easily print and distribute money directly to the people. While illegal today, it would be a powerful tool to generate inflation.


November 13, 2020

October’s CPI was weaker than expected, coming in at 0% versus expectations of a 0.2% increase in consumer prices. Excluding food and energy, the inflation rate was also flat. There has been a lot of data showing that the housing market is red hot and prices are rising. Interestingly, as shown below, the growth rate of shelter prices (purple), a component of CPI, continues to decline despite the recovery. Earlier this week China, reported that their CPI was 0.5%, below expectations, and the lowest in over three years.

, Commentary 11/13/2020

Initial Jobless Claims fell by 48k to 709k, the largest drop in five weeks. This is a good sign given the recent surge in COVID cases and new restrictions being put into place in many areas. We shall see if the improvement continues given the growing number of COVID restrictions being resurrected. While the trend remains favorable, we remind you that prior to recent data, the largest weekly claims number in the 2008/09 recession was 665k.

The graph below shows the daily changes in the ratio of Value (IVE) and Growth (IVW). As shown, Monday’s startling 9% outperformance of value was one for the record books. In over 5,000 trading days since the year 2000, there have only been 4 days with a greater outperformance. Three of the four occurred in early 2000 as the Tech Bubble popped and investors rotated from growth to value.

, Commentary 11/13/2020

The Wall Street Journal had an interesting article yesterday entitled What Biden’s Election Means for the Fed. The bulk of the article deals with the Fed’s current personnel and how that may change. Chief among those changes is the question of will Biden reappoint Powell when his term expires in a little more than a year. Biden will also have two and maybe three Federal Reserve seats to fill. The important takeaway, and one we strongly agree with, is as follows: “There is therefore little reason to expect monetary policy to change, no matter who joins the Fed’s board in the next year.”


November 12, 2020

Bloomberg’s Smart Money Flow Index is a measure of how “smart money” is positioning itself in the S&P 500. The logic behind the index is that smart investors tend to trade near the end of the day, while more emotional-based traders dominate activity in the first 30 minutes of the trading day. The index is calculated as follows: yesterday index level – the opening gain or loss + change in the last hour. As shown below, the Smart Index and the S&P were well correlated until late August. Since then, as highlighted by the red arrow, they have diverged sharply. Over the last ten years, the S&P 500 and the Smart Index have a strong correlation of .65. As such, we expect they will converge in time. The light blue circle shows they also diverged, albeit to a much lesser extent, in January and February as the smart money correctly sensed problems.

, Commentary 11/12/2020

The graph below compares 10 year UST yields versus 10 implied breakeven inflation rates. The current gap between the two is relatively wide but even wider, considering that UST yields are usually higher than the inflation rate, not lower. In other words, real rates are negative. If the economy is going to fully recover, we should expect the UST yield to gravitate to and above the inflation rate. If that were to happen, it would imply 10-year yields of approximately 1.50-2.00%. We do not think the odds of that occurring are high because such “high” rates would heavily weigh on the economy. It is more than likely the Fed continues to aggressively buy bonds to keep yields much lower than where they should be. The other way the gap potentially closes is if the market has inflation expectations wrong and the implied inflation rate falls. This scenario suggests the recovery falters.

, Commentary 11/12/2020

The graph above shows the two components used to calculate real yields. As shown above, the blue line (UST yield) has made recent progress toward closing the gap with inflation expectations, ie real rates are now less negative. The next graph shows the strong negative correlation between the level of real rates (blue line) and the price of gold. If real rates continue to rise and become less negative or even positive, we should expect the price of gold to suffer, and vice versa if real rates reverse the recent trend.

, Commentary 11/12/2020

November 11, 2020

The “end of pandemic trade” continued yesterday as the Dow added another 1% on to Monday’s gains while the NASDAQ fell by 1.75%. The S&P 500, with stocks representing both tech/momentum and value, fell slightly. Yields continued to rise while oil added 2.70%.

Data from yesterday’s JOLTS report indicates that there are two unemployed persons for every job opening in the U.S. That figure is down from 4.6 but still well above the .75-1.0 pace it was running at before March.
The graph below, courtesy of Indeed, is another “K-shaped” recovery graph. The country’s largest cities (>5 million) are witnessing the slowest recovery in job postings, while the smallest metro areas (<500k) are seeing job postings nearly back to pre-COVID levels.
, Commentary 11/11/2020

We often talk about stimulus and the enormous role it is playing in this economic recovery. Because of its role, an extension of the CARES Act to replace or extend the current stimulus is vital if the economy is to continue on its current trajectory. To that end, CNBC recently ran an article entitled More than 13 million people could lose their unemployment benefits at the end of December. The gist, as quoted from the article, is as follows: “The number of workers claiming these federal benefits make up more than half of the total 21.5 million people receiving unemployment benefits as of October. However, these CARES Act programs expire at the end of December 2020.”

It’s also worth reminding you that at the end of the year and during the first quarter of 2021, mortgage and student loan forbearance programs will end, forcing millions to make payments on loans or default. Per the MBABy stage, the 30-day delinquency rate decreased 33 basis points to 2.34 percent, the 60-day delinquency rate increased 138 basis points to 2.15 percent – the highest rate since the survey began in 1979 – and the 90-day delinquency bucket increased 279 basis points to 3.72 percent -the highest rate since the third quarter of 2010.” Further- “The FHA delinquency rate increased 596 basis points to 15.65 percent – the highest rate since the survey began in 1979. The VA delinquency rate increased by 340 basis points to 8.05 percent over the previous quarter, the highest rate since third quarter of 2009.”


November 10, 2020

In over 30 years of investment experience, I have never seen such a divergent day in the markets. The stock market heat map below shows the large number of bright reds and bright greens, representing gains or losses of 3%. The markets opened significantly higher on news that Pfizer and BioNTech have an effective vaccine. However, as the day went some stocks kept going up and others fell rapidly. The S&P closed up 41 points but that is over 100 points lower than the highs of the day. The Dow Jones ended up 3% while the NASDAQ was down 2%.

, Commentary 11/10/2020

It appears as if investors sold those stocks that outperformed over the past few months and bought the laggards. Banking, industrials, and oil stocks did particularly well while tech and communications fell sharply. Even within some sectors, there were huge divergences. For instance, in the communications sector, Netflix was down 8.6% while Disney was up by nearly 12%. It’s not just the divergences that caught our attention, but the size of the percentage moves up and down for many very liquid large-cap stocks.

The volatility was not just in the equity markets but also showed itself in many asset classes. Bonds and gold got hit hard, while oil and the dollar had strong days. At one point crude oil was up over 10% on the day. The VIX (volatility index) closed the day down slightly after being 10% lower earlier in the session.

Inflation data will be released later this week with CPI on Thursday and PPI on Friday. Other than those two figures it will be a quiet week for economic data. Jerome Powell is scheduled to speak on Thursday at 9:30 am. The blackout on speeches by Fed voting members is over so we suspect they will become active on the speaking circuit as they were before the blackout. As we saw prior to last week’s FOMC meeting, the bulk of their speeches will likely revolve around the need for more fiscal stimulus.

The combination of a resurgence in COVID cases and resulting stricter rules around dining, along with colder weather has put a halt to the recovery in the restaurant industry as shown below.

, Commentary 11/10/2020



November 9, 2020

Both Georgia Senate seats appear to be headed for a January 5th runoff election as neither candidate received more than 50% of the vote. This will leave the Senate in limbo for two months and, while not likely, leave the potential for a Democrat-led Senate if both Democrats can win the runoff elections. Bond yields and energy stocks were under pressure Friday as the possibility of a blue Senate came back to light. For what it’s worth the betting odds for a Democrat majority and a Trump victory are nearly equal at around 10%.

Various members of Congress are again bringing up a stimulus deal. Mitch McConnell does not appear overly enthused as he stated “the economic recovery should temper the size of an aid package.”

Per the BLS employment reports, aggregate job growth was slightly stronger than expected at +638K but below last months +672k. More promising, the unemployment rate fell sharply from 7.9% to 6.9%. A large portion of the gains are coming from the number of workers that the BLS deems as temporary layoffs. The number fell from 4.64mm to 3.21mm in the last month.

The graph below, courtesy of Brett Freeze, shows that employment in the service sector continues to greatly lag good producing sectors. This is not a surprise given COVID and the damage it has done to many industries that rely on person to person contact. The graph also serves as a reminder of our “K”- shaped recovery in which there are stark discrepancies in economic activity.

, Commentary 11/09/2020

It appears the virtual/remote workplace may be more than a temporary COVID-related measure. The graph below, from the Conference Board, shows that of 313 HR executives polled, 34% of them think that over 40% of their employees will be working from home one year after COVID subsides. This study has meaningful consequences for commercial real estate and some of the larger urban economies.

, Commentary 11/09/2020

Per Freddie Mac, the recent surge lower in yields pushed mortgage rates to 2.78%, a new record low.

November 6, 2020

As expected the Fed’s FOMC statement was largely unchanged from the prior meeting. The red-lined paragraph below shows the entirety of the changes. The only surprise was they did not include a sentence or two about election contingencies in case the final results are held up which could likely preclude the passage of more stimulus.

, Commentary 11/06/2020

The following are some bullet points regarding Powell’s press conference:

  • He voiced concern that the economic recovery is moderating. He stated that while this was expected, it raises the downside risks as moderation can turn into decline.
  • The Fed will maintain interest rates at zero and keep QE running hot until employment fully recovers and inflation hits 2% and appears to be heading higher.
  • He vowed to “put the tools back in the toolbox once the crisis is over.” Sounds reasonable, but keep in mind after the financial crisis QE didn’t end until 2014, and rates were held at zero for 7 years. When QE was introduced to the public Ben Bernanke said it was temporary and would be removed as quickly as it was employed. It has never been removed.
  • Powell would not comment on the state of the election.
  • He said the Fed is “not taking the gains in financial market functioning for granted.” His response alluded strongly that one of the goals of QE is to support asset prices.
  • If the idea is money-financed fiscal policy, then that is not something we would consider.” The problem with his statement is the Fed is already financing the Treasury, albeit indirectly.

Powell was asked if the Fed was in a liquidity trap as Christine Lagarde (President of the ECB) recently warned in the Financial Times. He sees no such threat and said “we do not doubt the power of the things we may do.”

On this topic, it’s worth sharing recent comments from Bill Dudley, ex-President of the New York Fed, from the WSJ- “No central bank wants to admit that it’s out of firepower. Unfortunately, the U.S. Federal Reserve is very near that point. “

The monthly BLS employment report will be released at 8:30 this morning. As shown below, the consensus estimate is for a net gain of 600k jobs and a reduction of the unemployment rate from 7.9% to 7.7%.  Initial Jobless Claims have been running at approximately 3.2 million jobs a month, so assuming the consensus proves accurate, the economy is adding new jobs at a rate of about 3.8 million jobs a month. As a comparison, in 2019, the average monthly initial claims were 945k and the number of new jobs averaged 168k per month. Accordingly, the economy is currently adding jobs at almost 3.5 times the normal rate. Keep in mind, layoffs are also occurring at 3-4 times the average. The abnormalities in hiring and layoffs make employment data very difficult to estimate.

, Commentary 11/06/2020


November 5, 2020

The impetus behind yesterday’s and last night’s additional stock gains appear to be based on the prospects for a divided Congress. It’s likely that the Republicans will hold on to a majority of the Senate and the House will stay with the Democrats. The obvious beneficiaries are the Healthcare and Technology sectors as it becomes less likely that that recent regulatory/policy challenges facing those industries come to fruition. Industrials and Materials lagged as the odds of a big infrastructure deal are compromised.

From a macro perspective, it is worth highlighting that the odds of a large stimulus bill probably took a hit yesterday. While we think Congress and the President will eventually agree on a deal, its timing and size are tough to handicap. The other risk facing investors is if the fight for the White House is contested in multiple states and an official decision is held up for weeks or possibly longer. The Bush-Gore decision, which only hinged on one state, was not settled until December 12th, over a month after the election.

Longer-term bond yields plummeted yesterday as the odds of larger stimulus and/or infrastructure bills are diminished. Markets are trading with a more deflationary narrative post-election. Volatility (VIX) fell sharply as it appears many investors removed hedges despite the uncertainty hanging over markets.

ADP reported that payrolls grew by 365k versus expectations for a gain of 600k. Last month ADP reported a gain of 735k.

The Fed will release their FOMC statement at 2 pm today and follow it up with Jerome Powell’s press conference at 2:30. Again we are not expecting much change, but we do expect the Fed to continue with their full-court press on Congress for additional stimulus. It will be interesting to see if Powell addresses what the Fed may or may not do if a delay in election results holds up additional stimulus.

November 4, 2020

As of this morning, the presidential election hinges on a few key states. Markets are very whippy with stocks rising. Of interest, the NASDAQ is up over 2%, S&P +.6%, and the Dow is nearly flat. More notable, long term bond yields are plummeting with the 10yr UST yield down roughly 10bps. Commodities are mixed with oil up over $1 and gold down about half a percent. Based on those moves we believe the markets are leaning toward a Trump victory. We caution, the election is still up in the air and asset prices will be extremely volatile.

ADP, a strong proxy for Friday’s employment report, will be released at 8:30. The current consensus estimate is for a net gain of 600k jobs. The estimate for the BLS report is also +600k jobs.

Over the last year, we have written a number of articles in which we quantify the historical underperformance of value stocks. Our analysis has been based on French/Fama data going back to 1938. The Financial Times has one-upped us in the graph below. They show that value stocks are now experiencing the most significant drawdown versus growth stocks in 200 years. Either the concept of buying what is cheap (value) is dead, or it is setting up for a period of incredible outperformance versus growth stocks.

, Commentary 11/04/2020

On Monday we published 3-Reasons Why There Really Is No Housing Shortage, which discusses the current state of the housing market. We stumbled upon the graph below which adds to the article. As shown it is as hard to get a mortgage today as it was in the aftermath of the Financial Crisis. The difficulty in getting mortgage credit, especially for lower-priced housing, weakens demand. Given the current supply/demand imbalance, any improvement in credit availability will increase demand and add more fuel to real estate prices. That said, and as mentioned in the article, it may take a while longer but elevated housing prices will incentivize potential sellers to come to market. It is also worth noting that many baby boomers are at or nearing retirement. A good many of these people will trade down to a smaller house/apartment in the coming years. Given a deficit in aggregate savings for this population group, many may be tempted to sell by the recent uptick in prices.

, Commentary 11/04/2020



November 3, 2020

This week, in addition to the election, investors will also contend with the Fed meeting/Powell press conference on Thursday and the BLS employment report on Friday. On top of that, 128 S&P 500 companies will report earnings. Regarding the Fed meeting, we suspect they will once again lean on Congress for more fiscal stimulus. The tone is likely to be more pressing this time as additional stimulus is already being delayed, and could be in further doubt depending on the election results or possibly the lack of a definitive outcome when they release their statement on Thursday.

The ISM Manufacturing Survey was much stronger than expected and now sits at a two year high. Even more encouraging, the employment sub-index, which has been below 50 since March finally rose above 50, denoting an expansion of employment. The graph below, courtesy of Zero Hedge, shows the historical and current relationship between the ISM index and the employment sub-component. There was an interesting comment from the report as follows:  “There is increased production due to stores stocking up for the second wave of COVID-19.

, Commentary 11/03/2020

As we prepare our portfolios for the election and post-election trading we share a graph from @macrocharts that offers caution. As shown, short open interest in VIX futures is near a record level. If the election turns out unfavorable in the market’s eyes, investors that are short the VIX may have to cover their trades en masse. In such a case, it would provide more fuel for a sell-off. This is just one of many factors that have led us to reduce risk until the election is over.

, Commentary 11/03/2020

We leave you with a graph showing how the S&P 500 did in the ten days following the last 5 presidential elections.

, Commentary 11/03/2020


November 2, 2020

As a follow on to our election comments from last Friday, bonds have traded poorly during recent equity sell-offs. This may be a signal that bond traders are concerned about the possibility of either a blue sweep or a Trump win but a Democrat majority in the Senate. Either outcome would likely produce vast amounts of stimulus. Per Tom Demarco from Fidelity- “Pelosi was out yesterday saying she would like to pass a massive COVID stimulus bill during the lame-duck session before Biden takes office.” She is putting the cart before the horse, but if she is correct bond traders have every right to be worried.

The Atlanta Fed put out their first estimate of Q4 GDP. They currently expect GDP growth of 2.2%. They overestimated Q3 GDP by 3.9%, which given the extreme data and unusual conditions, is much better than it appears.

The Fed made its emergency lending program for businesses & nonprofits available to more small firms. It’s lowering the minimum loan amount under its “Main Street” program to $100K from $250K. The change is due to the inability of Congress to approve more stimulus.

The graph below compares monetary velocity and GDP. Velocity measures the rate, or how often money is spent in the economy. As shown, GDP and velocity tend to be well correlated. With Thursday’s Q3 GDP data in hand, we see the GDP is well ahead of where one would expect given velocity. This tells us that stimulus funds were widely used by the recipients of the funds but then not recirculated. It hints that economic activity from the stimulus is one time in nature and not generating further activity, as is typical. If velocity stays weak, economic activity will curtail sharply unless more stimulus is not enacted.

, Commentary 11/02/2020

In Friday’s commentary, we discussed the Euro and how a breakout higher versus the dollar would heighten its deflationary problem. On Friday, the Eurozone recorded its 3rd consecutive monthly decline in consumer prices, as shown below. It’s clear that negative interest rates are not solving the deflationary problem but worse, they negatively affect their banks. As we consider potential ECB policy, especially in light of new COVID-related shutdowns, they can lower rates to even more negative rates and worsen banking problems or try to generate inflation in other ways. A weaker euro is one such way.

, Commentary 11/02/2020


October 30, 2020

GDP rose 33.1% in the third quarter, slightly above expectations. The recovery was led by personal consumption, which rose over 40%. The surge was widely expected given the massive stimulus, via generous unemployment benefits and outright checks, provided to many citizens. Looking forward, the stimulus has mostly been spent so without more aid, economic growth will be harder to come by. As we discuss below, the election outcome will provide better visibility on whether or not more stimulus is likely.

The recovery is encouraging, but the economy is still 5.2% below the peak in the fourth quarter of 2019. To put that in context, GDP was down 4% from its prior high at its trough.

The graph below shows a downward Euro/USD channel over the last 12 years. The Euro is currently bumping up against the upper resistance line. When this occurred in the past, the trend reversed. The odds are that will occur again, especially as Europe begins to reinstate lockdowns and enact stimulus plans to aid their citizens and businesses. However, if the Euro does break out higher against the dollar it could prove destabilizing to the Eurozone as it would induce further deflation. Such a move would also push the dollar lower with inflationary implications.

, Commentary 10/30/2020

With a weekend to think about the election and how the results may affect markets, we provide a few thoughts. Before progressing, it’s important to consider that the Cares Act, which fueled the recovery, is quickly waning. Without further aid, or “not enough” aid, economic growth is likely to slip backward and stocks are likely to follow. As such, our points below are largely predicated on the timing and amount of more stimulus.

  • A very tight election, with no decision and the prospect of a long period of counting votes and legal wrangling, is the worst potential outcome. Not only will it incite outcry from both parties, induce protests, but more troubling from an economic/market perspective, it will further stall an additional stimulus package.
  • A decisive and uncontested Biden win but Republican Senate may not be a good scenario either. Such an outcome will make additional stimulus difficult to pass. While a bill will ultimately pass under this scenario it may fall well short of expectations.
  • A Trump win but Democrat Senate will be a little more conducive to pass a bill.
  • A scenario where the President and the Senate are from the same party are the best-case scenarios for the market as stimulus will likely happen fast. A Democratic sweep is easiest as the bill will likely be bigger, but importantly the House is Democratic so there should be little infighting between the houses of Congress.

From a bond yield perspective, any combination that helps the passage of a bill would likely push yields higher due to the additional supply of debt needed to fund stimulus. A Democratic sweep could cause a sharp jump in yields. Conversely, a no outcome/contested election result, with slims odds of additional stimulus might cause yields to fall.

Having said all of that, we admit this election is hard to handicap and even harder to forecast how the markets will react. The election four years ago was a humbling experience for many market “experts” that feared the market would crater if Trump won.


October 29, 2020

Election jitters and European lockdowns (more below) pushed most risk assets significantly lower yesterday. The S&P was down 3.5%, Crude Oil down 5.6%, and Gold down 1.8%. Bonds struggled for minimal gains while the dollar and VIX soared. The VIX is now over 40, its highest point since mid-June. We should expect extreme volatility to continue through the week and early next week.  The next levels of support for the S&P 500 will be 3200 (mid-September lows) and the 200 dma (3130).

Economic concerns are rising in Europe as it sees a resurgence of COVID cases. To that end, Germany unveiled one month “partial lockdown” restrictions starting on November 2nd. The new rules put limitations on large events as well as the closing of restaurants and bars. There is also talk that France is considering a month-long lockdown. Like Germany, this one would not be as onerous as they saw in the spring.

A few months ago, we introduced the Chapwood inflation Index. The index compiled by a private sector firm seeks to calculate an alternative inflation rate to what the government reports. They describe it as “a true cost of living” for each metropolitan area. The chart below shows the respective inflation rate for the five largest cities for the first of 2020. To get more information on how they compile and calculate the data on 100 cities, visit them at the following LINK.

, Commentary 10/29/2020

Retired New York Fed President Bill Dudley wrote a startling editorial in Bloomberg Yesterday (LINK). The first paragraph was as follows:  No central bank wants to admit that it’s out of firepower. Unfortunately, the U.S. Federal Reserve is very near that point. This means America’s future prosperity depends more than ever on the government’s spending plans- something the President and Congress must recognize.” Dudley essentially argues that the Fed is limited in their ability to boost economic activity and worse that prior Fed actions have sapped future economic activity and asset returns. He heavily leans on the government to deficit spend. While we agree with his views on the Fed and their future ability to boost growth, he doesn’t explain the other trap, in that government spending is solely reliant on the Fed to buy the debt ensuring low-interest expenses.

October 28, 2020

Courtesy of Bloomberg: U.S. senators depart Washington for a break, making the logistics for passing a fiscal stimulus package before the election practically impossible”  As the benefits of prior fiscal stimulus fade, the need for additional stimulus to support the recovery will become more evident. While there is optimism for a post-election deal from both parties, we offer caution as the election results and the possibility of contested and/or delayed election results may incentivize one or both parties to hold off until after the inauguration.

Expect to find some coal in your stocking this Christmas. Per a Gallup poll, consumers plan to spend $805 this holiday season, down from $942 last year. They also highlight the October estimate of spending ran 10% higher than the November estimate over the past two years. Stay tuned for their next holiday poll to be released in late November.

, Commentary 10/28/2020

The tweet and graph below, courtesy @macrocharts, shows that hedge funds have the most exposure to commodity futures in at least the last 15 years. There are a few takeaways from the graph and messages the hedge funds are sending us as follows:

  • First, large positioning in one direction by hedge funds has not historically resulted in a decline in commodity prices.
  • Second, the S&P Commodity Index is based on an aggregate of all commodities and therefore not representative of each commodity or commodity type. For example, agricultural commodities are currently not showing massive long interest.
  • Third, the recent pick up in exposure may be partially the result of the hedge funds betting on Joe Biden and the prospects for a large infrastructure deal. A Trump win, or a Biden win but Republican Senate, could greatly limit an infrastructure deal.
  • Fourth, the hedge funds may be betting on or hedging for inflation. The Federal Reserve is serving up massive amounts of QE and the government is running unprecedented deficits. Many investors believe that is the recipe for inflation.

, Commentary 10/28/2020

October 27, 2020

As a result of yesterday’s sell-off, the S&P 500 broke through important technical support. As shown below, the S&P (3401) now sits below the 20 dma (3433) and its 50  dma (3408). It rallied late in the day to close just above the pre-COVID high (blue line) and the red support line starting at the March lows. The next levels of support are the dotted blue and orange lines and then the important 200 dma (3129). Last week we reduced equity and fixed income exposure in anticipation of volatility surrounding the election.

, Commentary 10/27/2020

The economic highlight this week will be Thursday’s third-quarter GDP report. The current consensus is for a gain of 31%. That compares to a 31.4% decline last quarter. While upon seeing the number the media may declare the economy has fully recovered, it is important to consider the optics of economic growth/decline as measured in percentage terms.  Math dictates that GDP, even with equal percentage gains and losses, would still be about 10% below where it stood after the first quarter. As an example, start at $100 and you instantly lose 50% bringing your balance to $50. From that point, it will take a 100% gain, not 50%, to get back to the original $100.

The Fed will be quiet after two weeks of a large number of speeches due to a self-imposed media blackout heading into the next FOMC meeting. Get some rest this week because next week will have plenty of potentially volatility inducing events.  The election is on Tuesday, followed by the Fed meeting on Wednesday and Thursday, and on Friday the BLS will release the employment report.

Yesterday we showed that cash as a percentage of equity mutual funds holdings is now at decade lows. While we attributed some of it to the bullishness of fund managers, we should note that low cash holdings are also due to the shift from active to passive strategies. Active investors tend to hold more cash as they sell when holdings get too expensive and hold cash for future opportunities. Passive investors, with no need to trade and good liquidity in large ETF’s/Funds, have little need for extra cash. From a market perspective, the reduction in aggregate cash holdings (more investable cash) helps further explain high valuations. The negative, as we wrote in The Markets Invisible Guardrails Are Missing, is market instability and volatility as active investors are now not enough of a force to buy or sell when the markets reach valuation extremes.

October 26, 2020

“The ships are 100% full. The containers are 100% full. You can’t get a container built. You can’t pick up a ship from the spot market. The whole container-shipping cycle is at absolutely full pulse,” exclaimed Jeremy Nixon, CEO of Ocean Network Express (ONE), the world’s sixth-largest container line. – Container Slots Sell Out, Risking Holiday ‘Shipageddon’. -Freightwaves.com

Despite a global recession and supply line issues, demand for housing and retail goods is fully absorbing the number of shipping containers. Looking ahead, economic recovery coupled with the upcoming holidays, could worsen shortages for certain goods and drive up prices for imported goods. Interestingly, as we showed last week, pricing for domestic trucking and railway services have yet to recover fully.

This will be a big week for earnings announcements as shown below.

, Commentary 10/26/2020





The Feds balance sheet has started rising again after stalling for a few months. In the latest weekly Fed balance sheet update, their balance sheet now sits at an all-time high. Last week total assets rose by $26bn from the prior week to $7.177 trillion. The Fed’s balance sheet now equals 37% of GDP. While high, it still pales in comparison to the ECB at 66% and the BOJ at 137%.

The graph below compares the Buffet Ratio, or the ratio of total equity market capitalization to GDP, for the U.S. and the nine largest economies. Italy was excluded as we were unable to find total market cap data. There are flaws in this type of calculation but it does show the degree to which US stocks are overvalued versus those of other leading nations.

, Commentary 10/26/2020

The graph below, courtesy of @fadingrallies, shows that equity mutual funds are sitting on record low levels of cash. While not shown in the graph, the cash liquidity percentage is the lowest it has been in decades. Said differently, mutual funds are all in on this equity rally. The white line shows that cash accounts for 2.17% of the $254.467 billion of equity fund holdings. In the event of mass redemptions by fundholders, the fund managers will have no option but to sell equities.

, Commentary 10/26/2020

October 23, 2020

For the first time in a while, Weekly Initial Jobless Claims painted an optimistic picture of the jobs market. New claims last week were 787k, almost 100k below estimates, and well below the mid to upper 800’s where it has stagnated over the last few months. Continuing claims (state and federal) are still very high at 23.1 million, but also declining. California reported this week after a two-week hiatus and its data was not nearly as bad as expected.

With about a quarter of S&P 500 companies having reported Q3 earnings, the results are much better than expected. Per CNBC, the average beat rate (actual less estimate) is 19% versus a historical average beat rate of closer to 3-5%.

Continuing on the “better than expected” theme, Existing Home Sales came in at a 6.54 million annualized rate versus 6 million last month. The year over year change in sales is now +20.9%. Further, the median home price is up 14.8% year on year. Record low mortgage rates, pent-up demand, limited supply (lowest since 1982), and an exodus from cities to the suburbs is having a huge effect on the housing markets. Existing home sales are now at 15-year highs, only elapsed by the 2005-2006 market which peaked at just above a 7 million sales rate.

In regards to record low mortgage rates comes the following: Freddie Mac today released the results of its Primary Mortgage Market Survey® (PMMS®), showing that the 30-year fixed-rate mortgage (FRM) averaged 2.80 percent, the lowest rate in our survey’s history which dates back to 1971.

The Citi Economic Surprise Index for the US and other major economies continues to decline from record highs. The index is not a measure of economic activity but a measure of the accuracy of economic forecasts versus actual economic data. The prior highs occurred as economists underestimated the pace of the recovery. Likewise, the index is retreating as they get a better grip on activity. A dip below zero, as may occur soon in the Eurozone and Japan, indicates that economists are overly optimistic in their economic outlooks.

, Commentary 10/23/2020



October 22, 2020

The graph below shows that gold has followed a stair-step pattern with a series of slightly downward sloped, multi-month periods followed by a run higher over the last three years. After a big surge this past summer, gold is again consolidating similarly. We are likely to add to our position in IAU and GDX when we are comfortable that gold is breaking out of the consolidation. Fundamentally, the weaker dollar, massive deficits, and aggressive Federal Reserve/Central Bankers provide further reason to add to our gold holdings.

, Commentary 10/22/2020

A topic that we haven’t written on recently but deserves attention is the yield curve. As we wrote in Profiting From A Steeper Yield Curve, before past recessions, the 2s/10s UST yield curve typically inverts marginally (10yr UST rates are lower than 2yr UST rates). Historically, it then steepens rapidly alongside a recession. After barely inverting in August 2019, the yield curve slowly steepened into the current recession. While the curve reacted as is normal in direction, it has not in steepness, in large part due to aggressive Fed purchases of Treasury bonds.

Over the last few weeks, the curve has begun steepening again. While we think the Fed will eventually keep a lid on higher long term yields, they may give them a little more room before acting. Given our economy is highly leveraged on existing debt and dependent on new debt for growth, it’s worth reviewing some of the pros and cons of a steeper yield curve.

A steeper yield curve is good for banks as it boosts their profit margins. However, higher long-term yields are bad for the housing markets, corporations, and the government. That said, interest rates for those borrowers, while higher over the last few months, are still extremely low. If the curve continues to steepen, higher interest costs will certainly weigh on economic activity. In addition to the banks, further steepening should benefit mortgage REITs such as AGNC and NLY. While more traditional REITs also benefit, we have a deep concern over potential credit losses. The concern is particularly true for office and retail REITs.

, Commentary 10/22/2020

While U.S. rates creep higher, the opposite is occurring around the world. The graph below shows the global amount of negative-yielding debt is approaching a new high, having nearly doubled over the last six months. In the prior section, we discussed the Fed as a backstop for higher yields. It’s also worth considering that foreign investors will increasingly find the widening differential between U.S. and foreign yields tempting. The big question for fixed income investors is what yield gets the Fed and foreign buyers to spring to action.

, Commentary 10/22/2020

As an aside, the price of gold and the amount of negative-yielding bonds has a strong correlation. As the number of negative-yielding bonds creeps higher the case for gold strengthens.

October 21, 2020

Stimulus discussions and rumors around those discussions, as well as, political gamesmanship, are contributing to sharp surges higher and declines lower. The combination of stimulus talks and the coming elections will keep volatility heightened for at least the next two weeks- buckle up!

The two graphs below tell an interesting story about the current state of the homebuilding industry. On Monday, the NAHB Home Builder Sentiment survey hit a record high, yet on Tuesday, Housing Starts graphed below rose slightly. Housing Starts have stalled for two months and the number of starts is still lower than in January. If builders are so optimistic, why are Starts not following suit?

The second graph compares lumber futures prices to the home builder ETF ITB. ITB sits at record highs and is up 20% year to date. Lumber, a key component in building homes, is well off recent highs and down for the year- another odd disconnect. Lumber prices and Housing Starts argue that home builders and investors may be getting a little ahead of themselves. Conversely maybe they think the strong recovery and insatiable demand for suburban housing will continue. One vital consideration in this story is interest rates, which have been rising as of late. Further increases will certainly put a damper on house sales, as well as home builder and investor expectations.

, Commentary 10/21/2020

, Commentary 10/21/2020

The graph below, courtesy of Jim Bianco, puts historical context toward the massive amount of COVID-related Federal stimulus. Current spending, as a percentage of GDP, dwarfs all prior recessions and is only bettered by expenditures for World War II.  As Congress works on another trillion or two of stimulus, keep this graph in mind as well the onus that such spending puts upon the Fed to keep rates at 250-year lows.

, Commentary 10/21/2020

While broad BLS employment data continues to improve, employment by small businesses is grossly lagging. The September Paychex/IHS Small Business Jobs Index is not only at least at a 15 year low, but lower than in March and also slightly lower than at the trough of the 2008/09 recession. Per the SBA, small business accounts for 49% of employment. This data set along with persistently high weekly initial jobless claims remind us that the employment recovery has a long way to go.


October 20, 2020

For the third straight week, there will be a lot of Fed members speaking. We suspect this week’s speakers will continue to bang the drums for more fiscal stimulus. Also providing market direction will be a heavy earnings calendar as highlighted yesterday. We do get a break from economic data this week. Initial Jobless Claims and Leading Economic Indicators, both set for release on Thursday morning, are the only important data releases this week.

The stimulus pendulum seemed to swing away from a deal on Monday, which upset the stock market. It is being reported that Nancy Pelosi has put a time limit on a package. If they cannot come to an agreement within 48 hours, she may walk away from the negotiating table. That said, we have seen both parties walk away from the table numerous times only to come right back.

Conoco Phillips (COP) made an offer to acquire Concho Resources (CXO) at a 15% premium to CXOs closing price. One of the benefits of owning the larger energy companies, like COP, in the current environment, is their ability to buy assets on the cheap. We suspect the other majors are looking at similar opportunities. In the short run takeover targets will benefit most from the activity. In the longer run, the larger companies buying discounted assets should benefit greatly.

Jerome Powell spoke yesterday and touched on digital currency. He said the Fed has a lot more work to do before deciding on whether to issue a digital currency. He also noted that a digital currency would not replace physical currency, but be a compliment to it. The two biggest benefits we see from a digital currency is one, it forces everyone to have 100% of their cash in a bank. If the Fed were to institute negative rates, depositors would not be able to pull their money from the banking system. Second, it allows the Feds and local law enforcement agencies to easier track spending, specifically illegal activities.


October 19, 2020

This will be a big earnings week as shown below courtesy Earnings Whispers.

, Commentary 10/19/2020

Retail Sales were much stronger than expectations at +1.9%, versus expectations of +.7% The gain was led by motor vehicles and parts along with clothing sales. In aggregate, they accounted for over 50% of the increase. The table below, courtesy of Brett Freeze, breaks down contributions by sector. The control group, after a negative reading last month, posted a strong 1.5% gain. The prior month was revised lower (-.4% from -.2%), but in aggregate the two readings will result in an upgrade to Q3 GDP forecasts.

, Commentary 10/19/2020

As we have continually noted in this K shaped recovery, good economic data is often met with weak data. Unlike Retail Sales, Industrial production was down 0.6% versus expectations for a 0.6% increase. As a result, Capacity Utilization remains one such weak reading.  The Fed defines Capacity Utilization as follows: “how much capacity is being used from the total available capacity to produce demanded finished products.”  Capacity Utilization sits at 71.5%. Since 1965, the reading was only lower during the 2008 recession (66.8%) and marginally lower for one month in the early 1980s (70.8%).

Despite having laggards such as Delta Airlines, Jet Blue, and Southwest Airlines, the Dow Jones Transportation Index is trading at all-time highs and nearly 10% above the February highs. Might the index be getting a little ahead of itself? That question was recently posed to us by a subscriber. The question is tough to answer. Helping boost the index are UPS and FDX, which represent about 25% of the price-weighted index. Both shippers are up well over 50% year to date as they benefit greatly from COVID-related lockdowns. On the other side of the ledger are the airlines. The bulk of the index, as represented by trucking and rail, tell us a truer story about the health of the transportation industry.  As such, recent inflation data provides some clues as to how they are doing. Prices for trucking freight, as shown below, have recovered but thus far have gained back only about half of the COVID-related decline. The data for Rail transportation is similar. If freight/rail transportation were doing as well as the index portends, prices for shipping services should be back to February levels. The Transportation index has done very well, but underneath the cover lies a story of the haves and have nots.

, Commentary 10/19/2020

October 16, 2020

September Retail Sales are expected to climb by 0.7% this morning versus a gain of 0.6% last month. As shown below, Arbor Research, using web browsing data, forecasts an 0.8% decline. Within the Retail Sales report will be control group sales data, which feeds personal consumption, the largest component of the GDP report. That is expected to increase by 0.2% versus a decline of 0.2% last month.

, Commentary 10/16/2020

Weekly Initial Jobless Claims showed 898k people joined the ranks of the unemployed. The number was decently higher than expectations of 825k and the highest weekly number since August. Also of concern, California did not report claims this week due to operational issues, so the actual number is likely worse than reported. The graph below charts weekly claims back to 1968. As shown by the red dotted line, representing current claims data, the number of newly unemployed is unprecedented. Claims have now surpassed the prior record (695k) for 30 consecutive weeks. This chart should serve as a caution for Fed Vice Chairman Clarida, who thinks the recession is over.

, Commentary 10/16/2020

For the most part, the largest banks reported better than expected earnings. Despite what some analysts perceive as good news, most of the banking stocks are trading lower. The reason is that investors are voicing concern that they beat expectations because the banks stopped adding to their loan loss reserves. Per Bloomberg, the five largest banks increased their reserves in the third quarter by $172 million. That compares to a nearly $28 billion addition in the second quarter. Banks are making a bet that the economy will recover in the next quarter or two and their loan loss reserves are already adequate. Based on the poor recent and longer-term performance, investors are not as confident. The banks are running the risk that the recovery falters and the government does not provide adequate stimulus. On the flip side, more stimulus is ultimately likely which may help support loan repayment and may prove the banks correct in their reserves.

The graph below shows that energy stocks continue to languish as they approach the March lows. At the same time, high yield energy bonds have recovered nicely. One can interpret the graph as energy stocks being cheap, however, with the Fed purchasing junk bonds, such analysis is invalid as they have distorted the bond market.

, Commentary 10/16/2020


October 15, 2020

PPI and PPI excluding Food and Energy were both 0.2% higher than expectations and each is up 0.4% monthly. The figures point to an uptick in raw materials and commodities prices and potentially some margin pressure on manufacturers.

Yesterday, Fed Vice Chair Richard Clarida made that the recession may already be over. “This recession was by far the deepest one in postwar history but it also may go into the record books as the briefest recession in U.S. history.”  While we would like to join in his optimism, the fact is that even with the rosiest of forecasts, GDP will not get back to pre-COVID levels this year and unemployment is still running historically high. Prior to Clarida’s comments, the IMF forecast that the global economy will lose $28 trillion of output over the next five years. Unfortunately, we think the IMF has a better-grounded assessment.

There appears to be an incredible amount of long-term value in the energy sector, but in the short term, trying to take advantage of the situation is painful. We have a position in CVX and look to add exposure to energy stocks when we are more comfortable that a longer-term bottom is in place. The following quote per Sentimentrader reminds how cheap the sector is getting: “If we net out the number of days in the past year when energy was the worst-performing minus best-performing sector, the spread is still extremely negative at more than -30 days. Going back to 1928, this is one of the widest spreads ever. The only time it got worse than this was in late 1982.”

Per data from Arbor Research, of companies larger than $300 million, almost 15% are classified as Zombies. This means they do not have enough in earnings (EBIT) to cover interest expense. For some of these companies, revenues and earnings will grow to cover the interest payments. A large majority, however, are heavily dependent on low rates and bond investors that continue to allow them to borrow new debt pay for the maturing debt plus ongoing operational needs.



October 14, 2020

The latest set of narratives driving the recent market rally, fiscal stimulus, and a Biden victory, might be misleading. It is becoming more apparent that the market is again in the grips of an options gamma squeeze. Essentially speculators are buying large amounts of short-dated call options, which forces dealers to buy the underlying stocks to hedge. This creates a circular buying spree. The surge is broken when options speculators sell and dealers must in turn sell stock to remove the hedges.  Strong evidence of this phenomena was provided on Monday when the VIX was up on the day despite the market trading much higher. Further evidence can be found in record gamma exposure and a near-record low put-call ratio.  The S&P 500 below shows how the squeeze ended in early September and the similarity in market structure to the past week or two.

, Commentary 10/14/2020

The graph below shows that most S&P sectors are now overextended, trading around two standard deviations from their respective 20 and 50-day moving averages. Three standard deviations tend to be a good place to prepare for a sell-off or at least a consolidation.

, Commentary 10/14/2020

The Consumer Price Index (CPI) met expectations rising .2% monthly and 1.4% yearly. The monthly data excluding food and energy, as the Fed prefers to assess it, was also up 0.2%.

A few weeks ago, we highlighted the tight correlation between Lumber, Tesla, Apple, and large-cap momentum stocks in general. Since then, Lumber futures have given up much of the gains, as shown below. Given the speculative nature we have seen in Lumber, it’s hard to assess whether the steep decline represents a sharp drop in demand or just the work of speculators. If it is a demand issue, this may be an early indicator that soaring new home sales may come back to earth.

, Commentary 10/14/2020


October 13, 2020

CPI, PPI, Jobless Claims, and Retail Sales are the most important economic data points this week. CPI will be released this morning at 8:30 with current expectations of +0.2% (mom) and +1.4% (yoy). PPI follows tomorrow (+.2% mom and yoy). Jobless Claims are on Thursday and Retail Sales Friday.

JPM and C announce earnings today with most of the larger banks following on Wednesday. Within the RIA Pro portfolios, JNJ will also announce earnings today and UNH on Wednesday.

Yesterday, the market was led higher by Apple, Amazon, and tech stocks in general, but unlike prior surges, the broader market followed suit with much fewer laggards than early September when it last hit record highs. The optimism is tempered with caution as markets are becoming overbought as the S&P is nearing 3 standard deviations (Bollinger Bands) above the 20-day moving average. Further, the VIX rose despite the large equity gains. This potentially serves as a sign that a gamma-squeeze is once again pulling stocks higher.

According to the Economist magazine, of the COVID stimulus checks, “less than half of the money was spent; a third was saved for a rainy day.” The chart below shows that savings and debt payments constituted over half of the funds’ usage of those making $30k or more. If the government seeks to make future stimulus checks more economically effective, they may use a different distribution method, such as debit cards with an expiration date, to force consumers to spend the funds. That said, savings and reduced debt loads promote future consumption.

, Commentary 10/13/2020

The Bank of England (BOE) appears ready to join Europe and Japan in initiating negative interest rates. After a few statements from BOE members alluding to negative rates, the BOE sent out the following information request: Letter to chief executive officers to request information about firms’ operational readiness to implement a zero or negative Bank Rate.”

October 12, 2020

The stimulus rollercoaster and confusion continued with the following Friday’s headlines:


For the last few trading days, the markets are behaving as if big stimulus and bailout deals are in the works. Given that McConnell has not been a participant in recent discussions, his new stance raises the odds of a deal getting done. The only question is can the two parties close the large gap in demands.

The breadth of the market has improved with the broader markets showing relative strength. For the past few months, the market was led higher by a select few stocks, mainly the large caps and, in particular, the FANMGs. Since March 1st, RSP (equal-weighted S&P 500) has underperformed the S&P 500 (market-cap-weighted) by nearly 6%. However, Since October 1st, RSP cut the differential as it beat the S&P by almost 3%. Similar story in value versus growth. Value (IVE) has beat growth (IVW) since October 1st, also by 3%.

The graph below, courtesy of Bloomberg, shows the stunning decline and slow recovery in ridership on New York City’s subway system.

, Commentary 10/12/2020

On Friday it was reported that Microsoft is considering letting all employees work from home permanently. COVID lockdowns are teaching companies how to effectively and cost-efficiently allow employees to work from home. Given the immense office space that is currently vacant and will likely become vacant in the future in New York and other cities, ridership on the subway and other transit systems may be permanently impaired. This is not just a concern about transit, but commercial real estate and a host of other services supporting offices and workers. The work-from-home trend, if it continues post-COVID, has major positive and negative implications for businesses. The K-shaped recovery continues to present winners and losers.



October 9, 2020

Initial Jobless Claims continue to linger in the same range (840k this week vs 849k last week). Continuing claims are falling but, as we have stated, it’s hard to know how much of the decline is because people are finding jobs and how much is due to the expiration of state benefits. It is worth noting that California has stopped processing new claims for two weeks due to operational issues. As such, the Claims number may likely increase when California comes back online.

The market seems to have lost interest in the utmost importance of more Federal stimulus/bailouts. Nancy Pelosi said she was not interested in President Trump’s piecemeal approach to stimulus. On the other side of the fence, Mitch Mcconnell said “a big portion of GOP senators think enough has been done on aid.” Despite their respective comments, the market kept rising. Luckily investors now seem to be enamored with the latest narrative, that of a Biden victory and even more government spending. We say this partially in jest, but in reality, these are narratives created to help explain why markets move. Narratives, true or false, can propel the market higher or lower as investors buy into them. However, narratives are frequently wrong and can be harmful to investors that give them too much credence.

As shown in the tweet and graph below, courtesy of Liz Ann Sonders, the Fed is very concerned about the jobs market and is very vocal about it. Without the benefits of prior stimulus declining and no certainty of future stimulus and/or bailouts, the job recovery is likely to stall and possibly even reverse course. Any wonder the Fed is leaning hard on Congress for another round of spending and bailouts?

, Commentary 10/09/2020

The stock market may be all that matters to Trump in the coming weeks. In a Bloomberg Article entitled The stock market may be too optimistic about stimulus chances, Julian Emanual head of equity trading and derivative strategy at BTIG was quoted as follows:

“Trump and his opponents know history- when the market has been higher in the 90 days prior to the election, the incumbent has won 85.7% of the time,” ’Emanuel said in a note. “Conversely, when the market is down in September and October cumulatively prior to an election (3,500) is the level to watch), the incumbent party has lost on 6 of 6 elections.”

October 8, 2020

The stimulus roller coaster continued yesterday when President Trump walked back his stance on no more fiscal stimulus before the election. He asked Congress for another round of PPP, a $25bn airline bailout, and a $1200 check per person. Given the excessive political jockeying ahead of the election, we have no realistic means of formulating accurate odds as to whether or not the Democrats and Republicans can agree on stimulus. Expect significant market volatility as the ebbs and flows of potential stimulus continues.

The following headline from Minneapolis Fed President Neel Kashkari reiterates many recent Fed comments and what appears to be a growing concern from Fed members that the economic recovery is at risk if Congress does not approve more stimulus. *KASHKARI SAYS VITAL THAT LAWMAKERS MOVE QUICKLY ON FISCAL AID

Per Bloomberg- The absence of a stimuluscould subtract roughly five percentage points from fourth-quarter GDP growth. The direct impact of no deal is large, but the indirect impact via a sentiment shock and consumer retrenchment could be more substantial

The following are a few takeaways from the FOMC minutes released yesterday from their September meeting:

  • There are a few mentions of concern over elevated asset prices. “participants were concerned about possible buildup of financial balances.” and “a couple participants indicated that highly accommodative financial market conditions could lead to excessive risk-taking.”
  • In general, the pace of economic, inflation, and labor recovery was to their liking but noticeably below pre-COVID levels. “the rate of real GDP growth and the pace of declines in the unemployment rate were faster over the second half of this year than in the July forecast, primarily reflecting recent better-than expected data.”
  • As we have noted, there is a lot of concern that Congress will not agree on enough fiscal stimulus to ensure the recovery continues. “In addition, most forecasters were assuming that an additional pandemic-related fiscal package would be approved this year, and noted that, absent a new package, growth could decelerate at a faster-than-expected pace in the fourth quarter.”
Over 40% of the S&P 500 stocks are still down more than 20% from their pre-COVID highs. This data point is yet another indicator of how narrow the market runup has been. The generals (FANMGS) are in charge, so careful attention should be paid to their trading activity.
, Commentary 10/08/2020
State governments continue to suffer as a result of increased spending and reduced tax revenue. The graph below shows that they have reduced their staffing to levels last seen 20 years ago. Unlike the recovery in national employment data, state employment is not showing any recovery.
, Commentary 10/08/2020

October 7, 2020


Yesterday’s headline put a likely end to stimulus talks and with it, the market fell sharply. The dollar and bonds rallied as the prospects for more debt issuance are reduced, at least in the next few months. The market appears to be trading on firmer ground this morning.

The JOLTS labor data was generally positive with the percentage of layoffs and separations declining. The number of job openings fell to 6.49 million, which is not far from pre-COVID levels, and well off the lows of March (5 million). The difference, however, is that today there are 12.5 million unemployed people trying to fill those 6.5 million jobs. In February there was more than one job opening per unemployed person. Two job seekers for every job opening is high, but it pales in comparison to the prior recession when the ratio was over six to one at its peak. The only problem in comparing the two periods is that many more people have quit looking for work this time than during the last recession, and, as such, are not included in the count of unemployed people.

Fed Chairman Powell spoke yesterday and, as he has done at every opportunity over the last few weeks, warned the President and Congress of “tragic” economic consequences if more stimulus is not forthcoming. He also said: “Monetary policy is not the first defense for financial stability.” Essentially he warns that the Fed backstop is limited in its ability to maintain a real economic recovery. Also of particular interest, he made it clear that negative rates are not a tool they are looking to use. This contradicts recent statements from other Fed members that have appeared more open to it.

Last week Germany reported more deflation than expected, and yesterday France lowered their Q4 GDP estimate to 0% growth. Both stats are euro negative/dollar positive as they increase the likelihood the ECB will take on more aggressive action to stimulate growth and inflation. Given the potential for no stimulus before the election and possibly not until the inauguration, the dollar should trade better versus the euro and other currencies.

The tweet and graph below from Michael Kantrowitz of Cornerstone Macro quantify what we and others have said about the unusual disconnect of the stock market and the economy. It turns out to be not only unusual, but unprecedented in at least the last 60 years.

, Commentary 10/07/2020

October 6, 2020

President Trump took to the twitter airwaves in force on Monday morning. After a few days of relative silence, the media and markets took it a sign that he is recovering. The stock market rallied on both his health and increasing chatter that a stimulus deal is still possible despite the Senate recess.  The only odd factor in yesterday’s rally was the VIX also rose by 1%.  Bond yields increased sharply as there are growing concerns that a Biden victory would equate to more stimulus, ergo more Treasury bond issuance.

This week is shaping up to be a quiet week for economic data. That said, the Labor Department will release the Jobs Opening and Labor Turnover Survey (JOLTS) which will provide more detail on the labor situation. The FOMC minutes from the last Fed meeting will be released on Wednesday afternoon. Not much new is expected from this release as the meeting itself proved non-eventful. As we saw last week there are a large number of Fed members scheduled to speak this week.

Q3 corporate earnings reports will begin trickling in this week. Delta, Carnival, Levi Strauss, and Dominoes are the only well-known companies reporting this week. The banks will truly lead off earnings season the following week. To see the upcoming earnings dates on your holdings or those in the RIA Pro portfolios, click on the Portfolio Tab, then Dividend/Earnings, and Upcoming Earnings. As shown below, in the equity portfolio JNJ will announce on October 13th, followed by UNH the next day.

, Commentary 10/06/2020

As shown below, courtesy of Zero Hedge, speculative short interest in 30 year Treasury Bond futures is now at a record high. As we discussed with the dollar yesterday, if these positions need to be aggressively covered, it could lead to a surge in Treasury prices and a decline in yields. It seems as if some of these traders are betting that 30-year yields potentially break above its 200-day moving average, which it is currently bumping right into.

, Commentary 10/06/2020



October 5, 2020

661,000 new jobs were added in September, below expectations for 859,000. However, August data was revised higher by 110,000 jobs. The unemployment rate fell to 7.9% from 8.4%. While seemingly good, the reason for the decline was largely due to a decline in the labor participation rate from 61.7% to 61.4%. Currently, there are 10.7 million fewer people employed versus a year ago. Net net, the BLS data is weaker than expected and continues to show that the recovery is slowing. That said, it may not be weak enough to push politicians back to the negotiating table for more stimulus talks.

The price of crude oil and ten-year implied inflation expectations have been well correlated for the last 10 years as shown below. If oil continues to show weakness, inflation expectations will likely follow. If so, what does that mean for market expectations for a V-shaped recovery? Likewise, will the Fed take notice and potentially get more aggressive with QE or possibly negative rates?

, Commentary 10/05/2020

8 SPACs conducted IPOs on Friday, raising a total of $3.25 billion. This year’s number of SPAC IPOs is already more than the total from the last two years combined. SPACs are special purpose acquisition companies, which collect investor funds today with the hope of acquiring assets in the future. Investors are essentially writing a blank check to an asset manager in hopes they can find value. As we noted a while back, these entities, in many cases, represent the epitome of speculation.

The graph below shows that short speculative positioning in USD futures is now the largest in at least the last ten years. When and how the shorts cover their positions is important. An event that would cause them to cover at the same time could result in a sharp dollar rally.  On the other hand, as witnessed in 2012 and 2017, the shorts may cover in a non-urgent manner without pushing the price higher.  The bottom line is that the dollar has been negatively correlated to risk assets.  As such, we must stay on guard as the shorts are potential fuel for a dollar surge.

, Commentary 10/05/2020

October 2, 2020

Stocks traded weaker overnight on news that President Trump and the First Lady have COVID. We will monitor his situation to see if there are any repercussions.

The Senate was dismissed until after the election, further dashing hopes of additional stimulus. That said, they can easily be called back to vote if the two parties can come to an agreement.

It turns out the market swings on Tuesday night and Wednesday (detailed in yesterday’s commentary) are not that abnormal compared to the trading activity of the last four weeks. Average True Range (ATR) is a simple average of the daily difference between the high and low of each trading day. As shown below, the ATR on the futures contract is currently 2.03%. While it pales in comparison to the experiences of March, April, and May, it is at the high end of the range for the last five years. This is not bullish or bearish commentary, but just a note of caution as a high ATR is often a function of illiquidity. We believe illiquidity is currently an issue and will remain one through the election and possibly through year-end, especially in the event of a contested election.

, Commentary 10/02/2020

Initial Jobless Claims registered a small decline to 837k but a big drop in continuing state claims, which are in part due to benefits expiring. Expectations for today’s BLS jobs report is as follows: Payrolls +894k (1.37mm prior), Unemployment Rate 8.2% (8.4%), and Participation Rate 61.8% (61.7%).

Continuing on the K-shaped recovery theme, the graph below, courtesy the Washington Post, shows the gross distortions in the recovery of jobs for the top 25% of wage earners as compared to the remaining 75%. The illustration also highlights the big difference in recovery for the four wages classes in this recession versus the prior three recessions.

, Commentary 10/02/2020

We have mentioned that equity valuations are on par or, in some cases, even higher than those seen during the late 1990s tech bubble. The graph shows yet another indicator of the market froth that is only comparable to instances from 20 years ago.

, Commentary 10/02/2020

October 1, 2020

ADP reported that job growth in September rose by 749k, beating expectations by 100k.

Steven Mnuchin put further doubt in the ability of Congress to agree on a stimulus deal. Per the Treasury Secretary- “If we can’t get a stimulus deal done before the election, we will come back and try to negotiate a deal after the election.” Later in the day, Mitch McConnell made similar disparaging comments. These comments may just be negotiating tactics so we must be careful to not rule out a deal in the next week.

U.S. stock markets have been extremely volatile since Tuesday’s close. From the 4 pm close through the Presidential debate,  S&P 500 futures rose by nearly 30 points. As the debate ended, it reversed sharply, erasing the 30 point gain plus falling an additional 35 points. From the lows at 2 am it recovered and rose nearly 100 points. A little after 2 pm the index gave up all the days gains but recovered and posted a 27 points gain from yesterday’s close.  This morning the index looks like it will open up 30 points. Yesterday was the last day of the quarter, which resulted in window dressing trades and added to the volatility. With yesterday’s gains, the S&P 500 index closed 6 points above both its 20 and 50-day moving averages. The technical picture is mixed. The bullish case is that the index is above both key moving averages but bearish because of the crossing of the moving averages.

Per Bloomberg: GERMAN INFLATION RATE FALLS TO -0.4%; EST. -0.1% (year over year). More signs of deflation in Europe will lead to more talk of QE and even lower negative interest rates. This should put pressure on the Euro and bolster the dollar.

As we recently wrote in The Fed’s Bazooka is Broken, the ability of central banks to generate inflation is dependent on the banking system’s ability and willingness to make loans. Per the article: The banks have enough excess reserves to make trillions of dollars in loans. However, the banks are on the hook for defaults and solvency issues arising from such loans. Banking margins are at historically tight levels, interest rates at record lows, and the unemployment rate is at levels rarely seen. To make matters worse the Fed is begging for inflation, which would raise future interest rates to detriment of bank profits. Should we expect banks to loan in such an environment?  Of course not.”  The graph below shows how aggressively banks have tightened lending standards, effectively negating the Fed’s inflationary stance. Until we see a change in bank behaviors and loan demand, or a new Fed program, as we allude to in the article, the threat of significant inflation is minimal.

, Commentary 10/01/2020

The K-shaped recovery continues to show stark contrasts between the winners and losers of the recovery. For example, as shown below, small businesses are not seeing any recovery in hiring. ADP affirmed the problem in yesterday’s report- “small businesses continued to show slower job growth.

, Commentary 10/01/2020

It is not just small business on the wrong side of the K. From the Air Transport Action Group; “Executive Director of the cross-industry Air Transport Action Group, Michael Gill said: “Air transport is in the midst of the deepest shock in its history. We expect a reduction of up to 4.8 million jobs in the sector by the end of the year and a massive hit to our ability to connect the world.”

September 30, 2020

The ADP labor report, typically a good proxy for the BLS report, is expected to rise by 650k, or about 225k more than last month. The BLS report has been running well ahead of ADP and is expected to beat out ADP again with expectations of a pick up of 900k jobs. There are a lot of moving parts, many of which are difficult to quantify, that did not exist before COVID to help explain the vast differences between the two reports. We know the labor market is improving, but it is very difficult to compare current employment statistics to pre COVID periods.

The Conference Board reported that its consumer sentiment index rose sharply to 101.8, up from 86.3. While encouraging, the index remains well below its 132.6 reading in February.

The House continues to negotiate additional fiscal stimulus, but the two sides appear further apart than they did late last week. Currently, the Democrats are offering a bill worth $2.4bn. It is believed the Republicans and the President are in the $1.5bn area. While $1bn is not necessarily a wide chasm, there are various components of the bill such as state and local funding in which they remain far apart. We still think it is likely a deal passes but time is running out as the election nears.

Boston Fed President Eric Rosengren mentioned that a credit crunch is “very likely” toward the end of the year if banks come under stress from Commercial real estate loans. The Financial Times recently published an article on securitized commercial loans (CMBS) in which the author makes a case that the number of troubled CMBS deals will increase rapidly. Essentially he argues that CMBS bonds have been able to pay enough interest and principal from special funds the bonds hold for maintenance purposes (FF&E accounts) to delay the underlying collateral from going into default. He fears FF&E funds are running out and as a result, some AAA-rated tranches are now dropping to BB.  “This process will now accelerate rapidly.”

The Bank of England may be the next central bank to introduce negative rates. Per Andrew Bailey, Governor of the BOE, “if we cut rates below zero, we would need to explain it very carefully to the public.”


September 29, 2020

There are quite a few Fed members on the speaking docket this week. On the economic front, the major industrial surveys will be released on Wednesday (Chicago PMI) and Thursday (PMI/ISM). Employment takes center stage with ADP on Wednesday and the BLS report on Friday. Politics will also be of importance with the first debate tonight at 9 pm and the likely re-upping of the Cares Act stimulus potentially coming at any time this week or next. Politics aside, the markets will probably do better with a strong Trump/weak Biden debate showing.

ECB President Christine Lagarde sounded the alarm against a stronger Euro and issued a warning about deflation. To wit: “A stronger euro is set to weigh on inflation.” With the Euro sitting at two-year highs, the ECB has likely seen enough euro strength for their liking. This is yet another reason the dollar may continue to break out and head higher versus the euro and other currencies in the coming weeks.

The markets surged yesterday with strong breadth. The VIX was the only fly in the ointment, which despite a 1.6% gain in the S&P 500, was up slightly on the day. With yesterday’s gains, the S&P is sitting at the 50-day moving average (3353) and only 20 points below the 20-day moving average (3373). Those averages may prove to be the only roadblocks on the way to new highs. We added exposure yesterday as the technical situation is improved. We remain cautious as we are very aware of the troubling economic and political environment. But, as they say, markets like to climb a wall of worry.

As shown below, equity volatility (VIX) remains more than two times higher than its recent record lows from 2019 and early 2020. At the same bond volatility (MOVE index) is at all-time lows as the Fed, via aggressive buying, has sharply reduced the daily trading range of U.S. Treasuries. Over the last ten trading days, the difference between the high and low closing yields for the ten-year UST was 2 basis points. Since 1962 the average ten-day difference is 22 basis points.

, Commentary 09/29/2020

Evercore, with the help of data from Redfin, shows an 18% jump in homebuyers’ preference to move out of urban areas, in just the last 6 months.

, Commentary 09/29/2020

September 28, 2020

The equity markets rallied on Friday and again overnight on news that Congress is coming to a bipartisan agreement on a $1.4 trillion expansion of the Cares Act. The possible agreement comes as a bit of a surprise given the election and political rancor. While good news from a market perspective, is it enough to boost the economy?

Investors outflows from the two popular junk bond ETFs HYG and JNK reached $3.7 billion this week, representing the largest outflow since March. The two ETFs have seen outflows for four weeks running. With yields and yield spreads near record lows, there is little upside tempting investors and substantial risks to be concerned about. Further, the Fed has been focusing QE on Treasuries and mortgages and not the corporate bond sectors.

The graph below, courtesy Zero Hedge, shows that over the course of the last month the market’s concerns for the election and, in particular, a contested election have escalated. Compare the gold line showing the VIX curve from late August to the current VIX curve (green line). A month ago, the high point on the VIX curve, or the point where the most volatility was being priced in, was October. VIX was lower in November. Today, the VIX curve shows that volatility increased over the last month, but importantly much more so for the November contract. November is now at a higher level than October.

, Commentary 09/28/2020

The graph below by Brett Freeze shows how the misallocation of debt toward unproductive ventures has fueled each economic expansion. The unfortunate part of this economic strategy is that the overhang of unproductive debt has made each economic expansion slower than the one prior to it.

, Commentary 09/28/2020

September 25, 2020

Initial Jobless Claims remain stuck, coming in slightly higher from last week at 870k.

For the third day in a row Chairman Powell pressed Congress for fiscal stimulus. To wit, the following Reuters headline: FED’S POWELL SAYS EVICTIONS, MORTGAGE DEFAULTS COULD INCREASE IN ‘NOT TOO DISTANT FUTURE’ WITHOUT FURTHER FISCAL ASSISTANCE TO FAMILIES

He also stated: Targeting Average 2% Inflation Will Give The Fed More Room to Lower Rates as Needed.” This is the first indication from any Fed member that negative rates are on the table. We are interested to see if this was a slip of the tongue or there is more to the comment.

Per Goldman Sachs- “We are lowering our Q4 GDP growth forecast from 6% to 3% due to Lack of Further Fiscal Support.”

Fed Vice Chairman Richard Clarida said the Fed will not consider raising interest rates until it actually achieves 2% inflation for at least a few months. While he is the Vice Chairman, he is contradicting recent comments from Chairman Powell and other Fed members who say the Fed will wait for a much longer overshoot of the inflation target before rate hikes are discussed.

The graph below shows that gold prices and real rates (10 year UST less the breakeven implied inflation rate) are very well correlated. If the reflation trade is fading and deflation again becomes a concern, real rates will rise unless Treasury yields fall. We do think yields can fall substantially but, for the time being, they appear grounded at current levels. Given this construct along with dollar strength, we reduced our gold and gold miner holdings on Wednesday. We still like gold in the long run, but in the short term, we are concerned that the recent trend changes in the dollar and real rates may put further pressure on gold.

, Commentary 09/25/2020

The K-shaped recovery is alive and well. The tweet and graph below, courtesy Joe Weisenthal of Bloomberg, shows that three measures of economic activity in New York are failing to recover.

, Commentary 09/25/2020

The graph below, courtesy of the Daily Shot, shows that small-cap stocks have not only taken on much more leverage than large caps but the amount of leverage has soared to record highs. Any sustained uptick in interest rates will likely spell trouble for many over-indebted small-cap companies. In such a circumstance they must deal with higher interest expenses along with reduced access to funds due to default risk. This is one of the main reasons we have stayed away from the small-cap sector recently.

, Commentary 09/25/2020

The graph below, courtesy Bianco Research, shows that the current drawdown is the deepest since the recovery took hold in March.

, Commentary 09/25/2020

September 24, 2020

The Russell 2k (IWM) closed two cents below its 200-day moving average. The small-cap index is the first of the major indexes to fall back to its 200-day moving average.

The House passed a bipartisan stopgap spending bill to fund the government through December 11, thus avoiding a pre-election shutdown. It was thought the Democrats might use the bill as leverage to delay or even prevent the nomination of a new supreme court justice.

Interactive Brokers (IBKR) sent the email below to its clients as follows: “implied volatilities indicate that the markets will be confronting elevated volatility both before and after the November 2020 election. IBKR shares that sentiment.” As a result, they are raising margins by 35% over the next month, starting September 28th. IBKR is a large futures and equity custodian. Their action will reduce the amount of leverage used in client accounts. We should probably expect other large custodians to take similar actions. Reduced leverage will undoubtedly force some investors to reduce their positions. The change will affect long and short positions but given the speculative nature of the markets, we suspect the net effect will be negative for risk assets. Click on the picture below to see the full note.

, Commentary 09/24/2020

Chairman Powell made the following interesting comment yesterday: “We have done basically all of the things that we can think of.”  While there is certainly more the Fed can do, this is the Fed’s way of saying the economy needs more fiscal stimulus before any additional monetary stimulus. This is not a bullish signal for a market that has been uplifted by the “Fed will do whatever it takes” narrative.

The Citi Economic Surprise Index, measuring the difference between economist economic forecasts versus actual data, has fallen recently but stands well above any level in the past. At 166, the index is almost 100 points lower over the last month but still well above the 20-year peak of 100. For context, the lows in March were around -150. Bottom line: economists have grossly underestimated the recovery. Like many other indicators, this one is not easily comparable to the past due to the unprecedented shutdowns and amounts of stimulus. We advise ignoring the media narrative touting this index as a sign all is well. It serves as a reminder that economists, like the rest of us, are struggling to forecast economic activity.

The UK is on the brink of instituting national lockdowns as the number of COVID cases increases sharply. Europe is experiencing a similar uptick in cases. The U.S. has seen a rise, but not to the same degree. A COVID comeback may prove beneficial for stocks like Zoom, Amazon, and Clorox but further impede recovery for the restaurant, airline, and travel industries.

September 23, 2020

The Chicago National Fed Index, derived from 85 national economic indicators, was much weaker than expected at .79 versus expectations of 1.88 and a prior reading of 2.54. The index is expressed in standard deviations from the average. As such, the current reading represents growth of almost one standard deviation above the average, albeit with a sharp slow down from the prior month.

The major indexes are perched between the 50-day and 200-day moving averages. If they can break above the 50-day, the market may very well run back to its highs. A drop below may portend that the recent decline is more than consolidation. While most market participants focus on the market cap S&P 500 and NDX, the equally weighted S&P 500, provides a barometer of the broader market. The graph below shows it is closer to its 200-day moving average than the other major indexes.

, Commentary 09/23/2020

The graph below of the VIX (volatility index) has yet to show that traders are concerned about the recent selloff. While VIX is historically high, options traders seem to collectively think the move is just a consolidation. Pay close attention to the VIX as it can tip us off if they are wrong.

, Commentary 09/23/2020

Over the last two months, the materials and industrials sectors have outperformed the market. Part of the narrative behind the trade is reflation. As we noted in last Friday’s technical scorecard, both sectors hit extreme levels of overbought. A correction or consolidation is in order. The bigger macro question, however, for the sectors and the economy and markets as a whole, is reflation possible without fiscal stimulus? Along with those two sectors, we recommend following the Commodity Research Bureau (CRB) index of commodity prices, which has a nearly identical trend as the two sectors. The index, shown below, is recently stalling.

, Commentary 09/23/2020

The chart below shows that despite improvement in the labor markets, Federal tax withholding has yet to reverse its slide.

, Commentary 09/23/2020


September 22, 2020

It will be a slow week for economic data but Fed speakers will keep the calendar busy. In particular, Chairman Powell is scheduled to speak at 10 am today, Wednesday, and Thursday. While groundbreaking policy changes are not to be expected, we are on guard for more clarification around inflation averaging and its implications for future monetary actions. The health of banks may also be addressed as the Fed will undergo a new round of financial stress tests on the banks.

In yesterday’s Major Market Buy Sell Review and prior ones, we have noted that the U.S. dollar index is technically oversold. As shown below, the price of the dollar is close to breaking out of the range (red box) that has contained the dollar for the last two months. A strong dollar is negative for commodities and precious metals as we witnessed yesterday. It’s also worth considering that equities have rallied on the back of the weaker dollar since April. Yesterday’s moves in the dollar and the S&P 500 were complete opposites of each other, as shown below the longer-term dollar graph.

, Commentary 09/22/2020

, Commentary 09/22/2020

On September 30th the government will shut down if a continuing resolution is not agreed upon by Congress. With the passing of Ruth Bader Ginsburg, the political atmosphere is even more hostile, if that’s possible. As a result, the bill to continue government operations, which was expected to pass, is now in doubt. We should also lower our expectations for additional stimulus.

Vanguard and Fidelity recently made noteworthy changes to their money market fund lineups. Both entities reorganized their Prime money market funds into existing traditional government money market funds. Vanguard’s prime funds totaled $125 billion and Fidelity’s $86 billion. Prime funds are high minimum investment products that invest in short-term, investment-grade corporate, and commercial loans. The funds were preferred by larger investors as they had higher returns than government money market funds. In the current environment with very low rates and tight spreads, the benefit to holders of Prime funds, especially after fees and expenses, was negligible. These funds were a key source of short term borrowing for corporations.

Last Friday, the University of Michigan released its sentiment survey, which contained mixed messages. The overall index shows an uptick in confidence to 78.9 versus 74.1. Inflation expectations were lower at 2.7 versus 3.1. Of greater concern, and shown below, expectations for future income continue to languish.

, Commentary 09/22/2020


September 21, 2020

On Friday, the NASDAQ 100 and S&P 500 closed below their respective 50-day moving averages. The Dow Jones is about 200 points above its 50-day moving average. Attesting to how overbought the markets were, it took a nearly 10% decline in the S&P 500, before the first significant level of technical support was broken.

We have recently been writing about the allure of value stocks as they have grossly underperformed growth stocks over the last few months as well as the last decade. This bout of recent history is an anomaly. Going back almost 100 years, value stocks have returned over 3% more annually than growth stocks. The million-dollar question is when will the trend favoring growth stocks reverse.

In our Technical Value Scorecard Report from last Friday, we shared the graph below showing how value has finally achieved overbought status versus growth using both our score and our normalized score. This is the first instance of outperformance since the recovery took hold in early April. While we are hopeful value can continue to outperform growth, we remain skeptical. The second chart below shows the 2020 trend of the ratio of value (IVE) versus growth (IVW). While the uptick has broken through resistance, we would like to see a continuation of the uptrend to get more optimistic. This trade has a lot of promise but we must also respect the decade-old trend until it has clearly changed.

, Commentary 09/21/2020

, Commentary 09/21/2020

When the Fed buys bonds (QE) they are not printing money per se. QE puts reserves in the banking system which then allows the banks to print money if they elect to make loans with the new reserves. Despite the central bankers’ goals, and intentions QE and forward guidance will not create inflation unless the banks lend. The graphs below show the Fed’s, ECB’s, and BOJ’s inflation estimates over time versus actual inflation. In almost all cases their estimates fall far short of reality. Should we expect that the Fed’s new inflation averaging policy to be any different?

, Commentary 09/21/2020

The graph below, courtesy of the New York Times, shows the amazing growth of SPAC public listings. Per Wikipedia, a SPAC is defined as follows: A special purpose acquisition company (SPAC), sometimes called blank-check company, is a shell company that has no operations but plans to go public with the intention of acquiring or merging with a company utilising the proceeds of the SPAC’s initial public offering (IPO). The sharp increase in SPACs is yet another sign of the intense speculative nature of investors in today’s financial markets.

, Commentary 09/21/2020




September 18, 2020

Initial Jobless Claims were higher than expectations but 33k less than last week’s figure. Continuing state claims continue to decline, however, not all of those people are getting new jobs. Some of the reduction is due to the expiration of claims benefits. The total number of people receiving jobless benefits, including Federal programs, rose by 100k to nearly 30 million.

The graph of the Dow Jones Industrial Average below shows that, despite the recent sell-off, the Dow has yet to break below material technical levels. First, it is currently sitting on the horizontal blue trend line marking the high in early June. The line also appears to be a minor neckline for a potential head and shoulders pattern. The 50-day moving average is the next level of support at 27431. Another 1000 or so points lower is the red parabola, which has served as good support since March. Lastly is the all-important 200-day moving average.

, Commentary 09/18/2020

Keeping interest rates low and stable is hard enough for the Fed with the heavy supply associated with $3 trillion-dollar deficits. Making the job even harder is that foreign nations are not buying U.S. Treasury bonds to the degree they had been. The tweet and graph below, courtesy of Lyn Alden, shows that foreign institutions now own, in aggregate, about 8% less of the total debt outstanding than they did at their peak in 2013.

, Commentary 09/18/2020

A few weeks ago we noted that Lumber was trading in line with the large-cap growth stocks driving the market higher. The graph below shows the strong correlation between Lumber, Apple, and Tesla. Prior to the last few months, lumber prices were a good economic indicator for the pace of construction and the real estate business.  Its recent price movement appears to be more a function of rampant speculation. The theme continues that the Feds effect on investors causes distortions to what were once good and reliable signals.

, Commentary 09/18/2020

Manhattan apartment sales are being devastated by COVID and the emerging de-urbanization trend. Per Statista, second-quarter apartment sales are down 52%, total sales (1,147) is the lowest number of sales on record, and the median selling price is down 18%. It is also widely reported that rents are down sharply as well. The upside to the troubles facing New York and other big cities is that suburban real estate sales are setting records. To that end comes the following quote from the National Association of Home Builders Chief Economist Robert Dietz- “lumber prices now up more than 170% since mid-April, adding more than $16k to price of typical new single-family home…suburban shift keeping builders busy.” His quote accompanied their latest homebuilder survey which now sits at record highs.


September 17, 2020

In yesterday’s Fed policy statement, its 2020 economic outlook was upgraded.  GDP is now forecast to shrink by -3.7% in 2020, up from -6.5% in June. They also reduced the unemployment rate forecast from 9.3% to 7.6%. The Fed changed its policy statement to fit around its new inflation averaging policy. Per the statement: “With inflation running persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer-term inflation expectations remain well-anchored at 2 percent. The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved.” The Fed will keep rates at zero and continue with QE at the current pace. In Powell’s press conference he mentioned a couple of times that the Fed would continue to buy $120 billion a month of Treasury bonds and mortgages. We are left to wonder if corporate and municipal bond-buying programs have ended.

The FOMC statement also contained economic projections through 2023. The consensus expectation of Fed members is for the Fed Funds rate to stay at zero through 2023. Unemployment spent most of 2019 below 4% and, and, even at that historically low rate, most Fed members conceded that the economy was not at maximum employment. Unless inflation ticks up well above 2.5-3%, the Fed will likely keep rates at zero well beyond 2023.

Retail Sales were weaker than expected at +0.6% versus expectations of 1% and a revised lower +0.9% last month. The Retail Sales control group was down by 0.2%. This subset of retail sales is a more precise method of gauging consumer spending and is used to calculate Personal Consumption Expenditures (PCE) for the GDP number. The positive spin on the data is that the fiscal cliff is, thus far, not having a more significant negative effect on the consumer.

, Commentary 09/17/2020

On Tuesday the Fed announced they are reopening the repo window with daily overnight repo and one-week repo auctions. The auctions are to be conducted through October 14th. There is no mention of a reason for the Fed’s sudden concern about liquidity. This new round of operations may be a prelude to further liquidity injections through the election period when the possibility for market volatility is heightened.

The Wall Street Journal recently published an article highlighting the enormous surge in stock options trading. The graph below, from the article, shows that the volume of trading in single stock options now exceeds volume for individual shares. Because of this unprecedented condition, Viking Analytics Gamma RIA Pro reports are important to follow. The weekly report identifies the market levels which are likely to induce buying or selling from dealers that must actively hedge options activity.

, Commentary 09/17/2020


September 16, 2020

Retail Sales will be released at 8:30 this morning, with expectations for a 1% increase. Along with labor conditions, this is the most important data we can follow to assess the recovery. We suspect, given credit card data, today’s number could be on the weak side of expectations. That said, economic data has been hard to predict due to the unprecedented conditions put upon the economy as well as the massive amount of fiscal stimulus.

A reminder, the Fed will release its latest monetary policy statement and Powell will follow it up with a press conference. Little is expected from the Fed meeting as it comes on the heels of Jackson Hole and relatively stable financial markets. Odds are the meeting may be a disappointment as its difficult for the Fed to make a case that they need to do more. That is unless they make significant changes to their economic/policy forecasts (“dot plots”). If they do weaken their projections for inflation, jobs, and/or economic growth, the market may take that as a signal that the Fed could become more accommodative.

Yesterday we presented a graph showing that the Fed now owns a sizeable share of the TIPs market. As we discussed, their sizeable activity is skewing TIP yields, and therefore, implied real (after inflation) yields. Gold has a strong correlation with real yields, as such, real yields help us gauge richness and cheapness of gold prices. The graph below shows the strong correlation between the two over the last decade. The orange dot highlights that at current real yields gold is fairly valued. However, we now must question whether real yields are accurate using TIPs pricing.

, Commentary 09/16/2020

The chart below showing the composition of debt by credit rating over the last 40 years is telling. Consider that since 1980, the amount of A or better-rated bonds has been relatively the same. Since 2000 the amount of investment-grade debt (BBB or better) has been relatively constant. The large contributor to debt outstanding over both periods has been largely junk-rated bonds.

, Commentary 09/16/2020

Using its proprietary Global Fund Manager Survey, Bank of America believes “long tech” (aka FANMG) is the most crowded trade in at least the last seven years.

, Commentary 09/16/2020

September 15, 2020

Of importance on the economic calendar, this week will be Retail Sales on Wednesday and Jobless Claims on Thursday. The Fed’s two-day FOMC meeting ends on Wednesday with the release its monetary policy statement at 2:00 pm followed by the Jerome Powell press conference at 2:30 pm et. Also of note this week will be Friday’s quadruple witching options expiration, whereby four sets of cash and futures options expire on the same day. The simultaneous set of expirations can lead to heightened market volatility leading up to and on the expiration day itself. Yesterday’s strong move may, in part, be related to the expirations.

Teddy Vallee, in his tweet below, shows the sharp increase in the Fed’s ownership of TIPs. Given that the Fed has purchased such a large percentage of the TIPs market in such a short time, is there value in following market-implied inflation expectations (derived from TIP pricing)?  The answer is yes, but its value is greatly diminished from years past. Unfortunately, there are few other indicators to help assess future inflation expectations. Equally problematic, and as we wrote in The Markets Are Sending Confounding Messages, the Fed is also eroding the value of market and economic signals they traditionally rely upon. To wit:

“Since inflation is, by definition, a monetary policy outcome, changes in market-based interest rates used to inform the Fed itself on the appropriateness of their policy stance. Today, however, the Fed thinks they are the wiser arbiter of the price of money. They override all market signals through quantitative easing (QE), among other extraordinary policy schemes.”

, Commentary 09/15/2020

The Baker Hughes worldwide (1,050) and U.S. rig count (250) are now at the lowest levels since at least 1975. Both counts are also less than half of their recent averages. The graph below, courtesy EIA, shows that consumption of energy products fell sharper than production during the COVID lockdowns. However, the recovery of consumption is expected to rebound quicker than supply. If this forecast holds, and rig counts remain at or near current levels, oil prices may finally have a tailwind to grow.

, Commentary 09/15/2020


September 14, 2020

The S&P 500 closed slightly higher, and in doing so, held above the 50-day moving average. The NASDAQ was not as lucky, falling .60% and below its 50-day moving average.  Oddly, the VIX was down nearly 10% despite the broader markets being relatively flat. With overnight gains in the futures markets, both indexes should trade comfortably above the 50-day.

The Federal Reserve meets this Tuesday and Wednesday to update their monetary policy stance. It is highly unlikely that the Fed will make any changes to its QE operations in terms of size, pace, or assets.  We do, however, suspect the Fed will focus its attention towards the growing headwinds to growth and recovery. In particular, they will likely highlight that fiscal stimulus is eroding quickly and without new legislation, the economic recovery could falter. Given the upcoming election and partisan politics, any warnings will likely fall on deaf ears in Washington.

CPI exceeded economists’ expectations for the third consecutive month, rising 0.4% monthly, and 1.3% annually in August. Used car prices were a significant driver of the gains as they rose 5.4%. 

In this past Friday’s Artete’s Observations, he points out that corporate executives, as judged by their personal financial decisions, may not be as optimistic about economic recovery as they would like us to believe. To wit:

US executives sold $6.7bn of stock in their own companies last month [August], cashing in on a record-breaking market rally with the biggest burst of selling in five years.”

“CEOs are normally optimistic about the companies they run. After all, that’s partly what they get paid to do. When they sell, then, it rarely bodes well for the stock. And, by the way, they know better than anyone else how the company is performing. This particular bout of selling meaningfully contradicts the market optimism at the end of the summer.”

The graph below, courtesy of the Pew Research Center, shows a rising trend of young adults living with their parents over the past two decades. Weak wage growth, housing inflation, and student debt are the predominant factors behind the disturbing trend. This age group is also the hardest hit from the COVID related shutdowns. As such, the percentage of young adults at home is now beyond that of the Great Depression.

, Commentary 09/14/2020

September 11, 2020

Bespoke Investments helped put the recent market decline into perspective as follows: This has been the worst five days for the S&P 500 where the index still closed above its 50-DMA since 1934.”  As of yesterday’s close, the index is still about 20 points above its 50-day moving average despite being off nearly 7% from recent record highs. Little technical damage has been done. This serves as evidence of just how extended the market was. However, with that in mind, a break of the 50-day moving average may portend further weakness.

The weekly Initial Jobless Claims Report showed 884k new claimants, which was identical to last week and above expectations of 828k. Continuing state claims increased by about 100k. The total number of people claiming benefits, including Federal, rose by nearly 400k. It appears the number of filers for Federal assistance rose by 90k last week on top of an increase of 140k the week prior. These are predominately self-employed people.

Monthly and annual PPI were 0.1% higher than expectations. Year over year PPI, excluding food and energy, rose 0.6%. While low, it is 0.3% more than expectations. The Fed tends to gauge inflation trends excluding food and energy prices. The good news with a higher PPI, is that pricing power is being restored to producers meaning, economic activity is normalizing.

As we noted earlier in the week, Softbank’s strategy is to buy call options, which in turn forces options dealers to buy the underlying stocks which Softbank owns. The graph below, courtesy SentimenTrader, shows that small retail traders are also getting in on the game. The graph also attests to the highly speculative nature of many retail investors that have developed over the last few months.

, Commentary 09/11/2020

The “K”-shaped recovery in real estate continues to roll on. While the residential property market in many suburbs is on fire, commercial real estate demand is crumbling, as shown below.

, Commentary 09/11/2020

One of our concerns, which we have raised over the last month, is the recovery appears to be stalling. Our thought is largely based on near real-time retail spending, consumer confidence, jobless claims, and other indicators. Most government economic data is often lagged by one or two months, making it challenging to see precise turning points. Unfortunately, as shown in the graph below, courtesy Bloomberg, our concern may also be global.

, Commentary 09/11/2020

September 10, 2020

As we have written over the last few weeks, gamma is an important factor in driving markets. On Tuesday, we introduced a new weekly RIA Pro report, from Viking Analytics, which shares important options gamma trading levels. In this week’s Weekly Gamma Band Update, they point out the S&P level of 3397.15 as being Gamma neutral. When the S&P is below that level, dealers are likely to be net sellers to hedge options positions and vice versa above it. As the index moves further away from the neutral level, the amount of hedge related buying or selling should increase. The neutral level at times can act as a magnet. For instance, yesterday the market sold off decently towards the close and ended at 3398 or on top of the gamma neutral level.

Jobless claims are expected to fall to 828k from 881k last week. Again, this data is not entirely comparable to the prior months due to last week’s change in the seasonal adjustment calculations. Producer Prices (PPI) are expected to rise by 0.2% monthly but fall 0.3% on a year over year basis. CPI, to be released on Friday, is expected to climb 0.3% monthly and 1.2% year over year.

The BLS JOLTs report provided interesting labor data as follows:

  • The number of unemployed persons per job opening fell from 3 to 2.5. The ratio was below 1.0 prior to COVID.
  • The number of job openings rose from 6mm to 6.62mm.
  • The only troubling piece of data in the report was that the number of hires fell from 7mm in June to 5.8mm in July. Essentially the pace of jobs recovery slowed in July, something confirmed in the ADP report but not the BLS employment report.

Over the last two and a half years, gold has rallied in a series of strong gains followed by triangular consolidations. Once again, after a price surge in July and early August, gold has been consolidating. Currently, the price of gold is sitting on its 50-day moving average as well as the support line of its recent consolidation. Its Williams %R is nearing oversold territory and its MACD is nearing a positive flip. If gold breaks higher, it could quickly elapse the prior record high near 2100, however, if it breaks below the pattern, the next level of strong support is 1700-1750, being the prior consolidation region and the 200-day moving average. We believe it will break higher and are positioned accordingly.

, Commentary 09/10/2020


September 9, 2020

The only economic data of consequence this week will be the key inflation figures (PPI on Thursday and CPI on Friday). The Fed will be quiet as voting Fed members are now in a public blackout period prior to the FOMC meeting scheduled for next Tuesday and Wednesday.

Crude oil has fallen sharply over the last week and now sits at two-month lows. It is also below a technically important weekly resistance line and its 50-week moving average. The circles in the weekly chart below highlight the number of times that crude oil bounced higher off of what was support in the low 40s. In early 2016, the support was breached, but the price ultimately had no trouble rising back above the line. Now that crude is below the support line, we shall see if the line acts as resistance or it bounces back as in 2016.

, Commentary 09/09/2020

The mystery behind the large percentage gains in the FANMGs, poor market breadth, and odd VIX behavior has been revealed. SoftBank disclosed they are sitting on multi-billion dollars of profits from options trades. The profits are the result of a self-orchestrated “gamma squeeze.” Essentially, as detailed in this telling Zero Hedge Report, Soft Bank and other hedge funds buy stocks and then buy short-dated call options on those stocks, which force dealers that hedge to buy the stocks. Their actions, along with those from copycat traders, creates a circular trading pattern that pushes these favorite stocks higher. To wit:

“These bizarre trends, where one or more players are furiously buying calls and pushing both the implied vol and gamma (in both single stocks and the broader market) ever higher while dealers were caught short gamma and were forced to chase stock prices to obscene levels, creating a feedback loop where the more calls were bought the higher the underlying stock price surged, leading to even more call buying and the paradox of a record high vix at an all time high in the S&P500 (in fact the last time we had observed such a confluence was the day the dot com bubble burst)…”

As we see, this strategy works both ways. To avoid getting squeezed, dealers may try to push some stock prices lower. We should expect extreme volatility, especially in the “market favorites” over the coming weeks as the battle between dealers and traders rages on.

September 8, 2020

Friday’s Employment report was strong, meeting expectations for about 1.4 million net new jobs and showing a sharp decline in the unemployment rate from 10.2% to 8.4%. While the report is very encouraging, there are two points worth considering. Permanent unemployment rose by about half a million people to 3.4 million. Second, nearly 300k of the new jobs are the result of temporary jobs created by the Census Bureau. Regardless, improvement in the labor market is beating all expectations from a few months ago.

From the Fed’s perspective, the employment data still gives them plenty of reason to keep providing excessive liquidity. Prior to Jackson Hole, the markets may have paused and asked if the jobs data implies the Fed is getting closer to ending QE or possibly raising rates. Since the new framework was announced, that should not be the case as unemployment can be too high but never too low.

On Friday, China’s Global Times reported that China may “gradually” reduce its holdings of U.S. Treasury bonds. Specifically, the article discusses a $200 billion decrease from approximately $1 trillion. Ballooning deficits and Trade war are cited as rationales. Normally this might be concerning, but with the Fed as active as they are, the prospect of the Fed absorbing $200 billion over a period of time is not daunting. Throughout March and April, the Fed added on average $277 billion in assets per week.  In fact, during the last two weeks of March, they added $1.143 trillion to their balance sheet, which is more than China’s total holdings. Bonds traded poorly on Friday in part because of the news.

The tweet and charts below, courtesy Liz Ann Sonders, show the strong relationship between implied volatility (traders’ expectations for volatility based on options pricing) and realized volatility based on what the market actually does.  Volatility has an inverse relationship with liquidity. When volatility is high, it is because there are gaps in the bid/offer market structure which, results in larger than normal price movements up and down. We recently wrote about this concept in Volatility Is More Than a Number, Its Everything. As Liz states, there may be more volatility to come.

, Commentary 09/08/2020

Last week we mentioned how government stimulus was waning and the importance of the Fiscal Cliff. The graph below puts this concern into context. Federal Outlays typically account for about 15-20% of GDP. Currently, they account for nearly half of GDP. If government spending declines faster than economic activity recovers, a resumption of the decline in economic activity will almost certainly occur.

, Commentary 09/08/2020

September 4, 2020

The consensus estimates for today’s BLS employment report are for the net creation of 1.4 million new jobs, unemployment falling from 10.2% to 9.8%, and a slight increase in the labor participation rate to 61.6%. The range of estimates remains extremely large. For instance, the increase is net payrolls is between 435k and 2mm, versus what is typically about 100k.

Initial Jobless Claims fell by 130k to 881k. The only problem is that it is not comparable to prior numbers. Starting this week, the BLS changed their computation methodology regarding seasonal adjustments. The non-seasonally adjusted number rose by 7k, likely meaning much of the drop in the headline number was due to their new math. Last week, the number of people using Federal assistance rose by 151k, 20k more than state claims dropped. As of August 15th the total number of persons claiming state and Federal benefits rose from 27mm to 29.2mm.

Over the last week, we saw some signs of life in value stocks. The relative outperformance of value over growth was noteworthy during yesterday’s selloff.  Yesterday, growth (IVW) was down 4.25% and value (IVE) was down 1.85%. We have been taking a more conservative tact recently by reducing exposure and positioning away from growth towards value. Accordingly, we will are paying close attention to see if the outperformance can continue.

Our World In Data, affiliated with the University of Oxford, compiles and shares interesting data on an array of topics. We recently stumbled upon an interesting report in which they show that the degree of economic sanctions put on various countries to stop the spread of COVID has little correlation with economic activity. To wit: “But among countries with available GDP data, we do not see any evidence of a trade-off between protecting people’s health and protecting the economy. Rather the relationship we see between the health and economic impacts of the pandemic goes in the opposite direction. As well as saving lives, countries controlling the outbreak effectively may have adopted the best economic strategy too.”  For example, Sweeden had few economic sanctions but it shows up on the graph right next to the United States.

, Commentary 09/04/2020

September 3, 2020

ADP, which has a strong historical correlation with the BLS employment report, was much weaker than expected. ADP reported that 428k jobs were added in August versus a 1 million estimate. ADP revised the July report higher by 45k jobs to 212k, but it still stands well short of the July BLS report of 1.76 million new jobs. ADP data, which comes directly from employers, raises the specter that Friday’s BLS report could be well below the estimate for 1.4 million new jobs. That said, the BLS uses surveys, not hard data, so all bets are off.

Apple (-2.10%), Tesla (-5.90%), and Lumber (-4.00%), the three recent media favorites, were hit yesterday and the market didn’t skip a beat. The Dow, S&P, and NASDAQ were all up over 1%. The VIX continues to rise and bond yields fall despite the strong equity gains. At least the breadth was a little better yesterday, with total market advancers accounting for almost two-thirds of all U.S. stocks. Another oddity from Wednesday worth noting, gold was down 1.50% as the dollar was strong, yet gold miners (GDX) posted a gain.

Another day and another valuation extreme was reached. Yesterday, as shown below, courtesy of Zero Hedge, the forward P/E on the S&P 500 traded at a record high, breaking the prior record from 1999.

, Commentary 09/03/2020

The Fed Funds futures market has fully bought into the Fed’s new policy framework, which essentially declares that interest rates will not rise for a long time. The furthest out Fed Funds contract, August 2023, is priced for a 25% chance of a rate reduction. Going forward, price fluctuation in the forward contracts will be almost entirely based on changing odds for a reduction of rates below the zero bound.

To put more context around Apple’s stock meteoric rise over the past six months, its market cap is now equal to the total market cap of the Russell 2000 Small Cap Index, as shown below. The stock is trading 65% above its 200-day moving average, an extreme last seen fifteen years ago.

, Commentary 09/03/2020

September 2, 2020

Yesterday saw yet another bad breadth day in the equity markets despite a strong move higher in the broad indexes. Including over 7,000 stocks in the NYSE, NASDAQ, and AMEX exchanges, 43% of issues were lower on the day. The heat map below shows large swaths of the S&P 500 were red despite the index being up .75%.

, Commentary 09/02/2020

Yesterday’s manufacturing surveys were mixed with ISM coming in slightly better than expectations and PMI on the weaker side. Both surveys are above 50, in expansionary mode, and thus signaling that managers of manufacturing facilities think the general direction of production is improving. The ISM Employment Index remains in contraction mode but improved from 44.3 to 46.4. New orders, a leading indicator, continue to rise sharply and is at the highest level in over 15 years. Again, this survey is not an absolute indicator of output, but simply a count of the number of managers that believe things are better this month than last month.

The term Fiscal Stimulus Cliff describes the declining amount of Federal stimulus flowing into the economy and the dampening it will likely have on economic activity. There is also a Legal Cliff that warrants our attention. To wit, yesterday, the Wall Street Journal wrote on the expiration and curtailment of various state moratoriums for retail tenant evictions. Many retail establishments have been able to stay afloat via reduced or even no lease payments over the last six months. That will begin to change as the landlords, many of which are leveraged and have interest payments of their own to make, will now be able to take action.

Tesla, continues to charge ahead. On Monday, the stock rose over 12%, seemingly because of the stock split. To put the gain into perspective, its market cap, on just Monday, increased by two times the market cap of Ford. The stock gave up some of those gains yesterday as they announced they would issue $5 billion worth of new stock. Interestingly, Tesla will issue new shares at the market on an ad hoc basis. Frequently, companies issue shares in a large block and often at a slight discount to the market price.

September 1, 2020

Today, the most widely followed manufacturing surveys, ISM and PMI, will be released. Both are expected to dip slightly but remain in expansionary mode. We will pay close attention to the ISM employment sub-index, which has not rebounded nearly as sharply as the entire index. On Wednesday, ADP will release its employment report to be followed on Friday by the BLS employment report. The consensus of forecasters expects ADP to show a pickup of 1 million jobs in August.

There are several Fed speakers throughout the week including, Mester, Kashkari, Brainard, Evans, and Bostic. We are on the lookout for more details about how the Fed will try to generate more inflation.

Fed Vice Chair Clarida spoke yesterday and stated the following about their new policy framework: “This change conveys our judgment that a low unemployment rate by itself, in the absence of evidence that price inflation is running or is likely to run persistently above mandate-consistent levels or pressing financial stability concerns, will not, under our new framework, be a sufficient trigger for policy action.”  – Essentially he tells us that even if we get back to record low unemployment, the Fed may still keep rates at zero, assuming inflation is weak. The framework argues that the rate hikes from 2015 to 2019 would never have occurred under the Fed’s new policy.

Bill Dudley, President of the New York Fed 2009-2018, had some alarming words about the marginal benefit of monetary operations in The Fed Lays Out New Goals, but Its Tools Could Be Lacking (WSJ). To wit:

  • “The Fed is never going to say the cupboard is bare because that’s alarming. But they’ve reached the area of very rapidly diminishing returns”
  • “The Fed is operating at the margins. That needs to be recognized. If it’s not recognized, there is a risk people are overinvested in what the Fed can do”

Last Friday, Japanese Prime Minister Shinzo Abe stepped down due for health reasons. Over the last 8 years, “Abenomics” or the three arrows of stimulus, have powered Japanese markets higher. The Nikkei has more than doubled over the period after trending downward for over 20 years.  While his efforts ended deflation and boosted asset prices, GDP shrunk over the 8 year period. From a market perspective, the concern is whether or not his predecessor will continue to stimulate markets to the same degree. Providing some comfort, BOJ Governor Kuroda is not expected to step down.

The VIX volatility index is now at a one month high and up about 25% over the last two weeks. The gains come despite the S&P 500 rising 7% over the same period. The red lines in the graph below show the last four instances when the correlation between the S&P 500 and VIX was positive.

, Commentary 09/01/2020

Warren Buffett’s favorite market valuation indicator, total market cap to GDP, is now more expensive than it was before the tech bubble crashing.

, Commentary 09/01/2020



August 31, 2020


  • Portfolios do not current reflect the stock split yet on AAPL and TSLA so valuations and performance are incorrect.
  • We are in the process of updating the coding for the adjustment.

Thank you for your patience.

One of the oddities of this economic recovery is the number of gross distortions in steadfast economic and market relationships. These uncommon divergences are occurring in large part due to the unprecedented nature of the economic crisis and the substantial fiscal and monetary stimulus being deployed to counteract it. The graph below, courtesy of Pervalle Global, shows how a historically strong relationship, lending standards on credit cards and retail sales, has completely broken down. 

, Commentary 08/31/2020

On a personal note, the credit line on my Capital One credit card was cut two weeks ago, despite a high credit score and a perfect record of paying the card in full monthly. I have come to learn on Friday that its not a reflection of my credit. Per Bloomberg : “Capital One Financial is cutting borrowing limits on credit cards, reining in its exposure as the U.S. reduces support for millions of unemployed Americans.”  Capital One is the 3rd largest credit card issuer in the U.S. Waning fiscal stimulus and reduced credit card limits from Capital One and other card issuers will surely be a drag on personal consumption in the months ahead.

The Capital One news helps us better understand why monetary velocity, as shown below, courtesy Brett Freeze, is falling rapidly. The charts approximate monetary velocity on a monthly basis. While the supply of money is rising due to QE operations, the velocity, or the rate at which money is circulating within the economy, is falling. QE will only drive inflation higher if the banks take the reserves the Fed gives them in exchange for bonds and lends the money. As the data shows that it is not occurring.

, Commentary 08/31/2020

On numerous occasions over the last month, we have discussed the weak breadth underlying the market despite the strong performance. The graph below highlights the recent bout of the relatively weak correlation between the market-cap-weighted S&P 500 and the equal-weighted version. This is just another way of showing how the top five to ten companies are driving the market higher, while many other stocks are not faring nearly as well.

, Commentary 08/31/2020

On CNBC, Cleveland Fed President Mester was quoted as follows: “I don’t feel right now that we are engendering an asset bubble. .. Yes, stock prices are elevated and you’re right to point that out.”  She is the second Fed President in as many days to acknowledge that valuations are “elevated.” Publically they will never voice too much concern over asset prices, but given these statements, we wonder if this is a bigger deal in internal Fed discussions related to monetary policy.



August 28, 2020

Second Quarter GDP was revised higher from -32.9% to -31.7%. Initial Jobless Claims were slightly higher than expectations at 1.006 million. Through August 8th, total jobless claims, including Federal beneficiaries, fell from 28mm to 27mm. As asked noted last week, is it falling because people are finding jobs or because people laid off in late February are exhausting claims. Likely a combination of both.

Jerome Powell led off the Jackson Hole conference by announcing the Fed has unanimously approved a new long-run policy framework statement. They are abandoning the prior policy, which relied on higher interest rates to fight inflation. The Fed has two Congressionally-chartered mandates: maximum employment and stable prices. Powell made it clear that employment will take precedent over price stability. To accomplish this goal, they will target an average inflation rate. Specifically, Powell said they would aim to average “2% over time.”

The Fed prefers PCE to gauge prices over CPI. If we assume the Fed wants PCE to average 2% over the last five years and the next 5 years, they will need to aim for a 2.6% target PCE rate. That equates to an approximate 3% CPI rate for the next five years.

The important takeaway is that the Fed’s focus is now on maximum employment. The dual mandate has become singular at the expense of price stability. Employment data, both weekly claims, and the monthly jobs reports will now become even more important gauges to assess monetary policy.

Click on the picture below for two paragraphs from Powell’s speech that are circular and raise a lot of questions. 

, Commentary 08/28/2020

On Wednesday, we published The First Trillion is Always the Hardest- Analyzing Apple Mania, which in part, discussed how expensive Apple’s (AAPL) stock has become. For a more in-depth perspective, we take the analysis a step further by comparing AAPL to another market darling Amazon (AMZN). At the end of 2018, both companies had similar market caps of approximately $700 billion. Today AAPL sits at $2.1 trillion which is about $500 billion more than AMZNs market cap. The amazing part of Apple’s outperformance is that over the one and half year period, AMZN has grown earnings and revenue significantly faster than AAPL. Additionally, AMZN benefits much more from COVID related shutdowns than AAPL. The simple analysis below by no means is implying that AMZN is cheap, but you certainly get a lot more for your money with AMZN than AAPL.

, Commentary 08/28/2020

Options trader Matt Thompson (@dynamicvol) noted the following:  “Spot $VIX now 12.4 points over 20d realized vol, near a record since 2004.”  Basically, the amount of expected volatility in the coming month is significantly more than what the market has witnessed over the last 20 days.

We leave you with a cartoon that seems appropriate for the Fed’s Jackson Hole conference this weekend.

, Commentary 08/28/2020


August 27, 2020

Yesterday was another odd day in the markets. The S&P 500 closed up over 1% despite more stocks being down than up. Further confounding, the volatility index (VIX) rose 5.60%. The tweet below from Sentimen Trader is yet another example of the extreme state of investor sentiment.

, Commentary 08/27/2020

Fed Chairman Powell opens up the Jackson Hole annual conference at 9:10 this morning with a keynote speech. It has been widely reported that he will deliver a “profoundly consequential” message in which he will increase the Fed’s inflation target. From what appears to have been leaked, the Fed, via average inflation targeting, will aim for 2.5% inflation, versus their current 2% target. Powell may surprise us with a new policy to generate more inflation, but we think it’s more likely the Fed’s plan will involve keeping rates at zero well after a durable recovery takes hold. Such a plan would also use guidance to stress their intentions to keep rates grounded going forward.

In addition to inflation and monetary policy discussions, we are curious to see if any Fed speakers make a note of high valuations in many asset markets. While we think it’s unlikely they would want to upset the markets with such talk, it was interesting that Richmond Fed President Tom Barkin stated: “There clearly is some risk as valuations get elevated.”

In our weekly Relative Value Reports (8/21 Report), we use 17 technical gauges to provide a score. The score helps us determine if an index or security is overbought or oversold versus its benchmark or on a standalone, absolute basis. The graphs below show that the S&P 500 is now more overbought using this assessment than only one other time in the last 20 years. This jibes with many other technical and sentiment indicators, some of which are components of this model. Extreme technical readings don’t necessarily mean a top is imminent. Still, it does mean we should be mindful of the potential for a reversal or, at the least, a period of consolidation.

, Commentary 08/27/2020

The graph below, courtesy Cornerstone Macro, shows that value stocks underperforming growth stocks is not just a U.S. story but one occurring globally.

, Commentary 08/27/2020


August 26, 2020

New Home Sales rose last month at a 13.9% pace, the largest growth rate since 2006. New Home Sales are now up 36% from a year ago. Toll Brothers reported that third-quarter net signed contracts were its highest ever for a third-quarter in both units and dollars. Two measures of house pricing data showed prices rose more than expected.

The Conference Board’s Consumer Confidence Index fell sharply from 92.6 to 84.8, well below expectations for a slight improvement. The reading is now back below levels from March and April. Consumer sentiment compared to housing data provides an interesting dichotomy. Consumer sentiment is weak, yet at the same time, some consumers are making large investments in real-estate. As we have suggested, the recovery is beneficial to some while hurting many others.

The graph below, courtesy JPM and The Market Ear, shows the net long position of euro futures contracts is at 3.5-year highs. The last time it was this stretched, June of 2018, the euro peaked and fell for almost two years. The extreme net long positioning, along with a high correlation of net positioning to price, is yet another reason we believe the dollar might rally from current levels.

, Commentary 08/26/2020

The Wall Street Journal had a very interesting article showing which stores and companies are winning and losing the battle to gain consumers during the pandemic. Not surprising, companies with great online infrastructure and full inventories of products most in demand are able to grow sales despite the poor economy. To that point, “Walmart, Amazon, Target, Home Depot, Lowe’s, and Costco accounted for 29.1% of all U.S. retail sales in the second quarter.” The gains came at the expense of small businesses and traditional brick and mortar stores that do not have a great online presence.


August 25, 2020

A slew of housing data will be released this morning, including the Case-Shiller House Price Index, FHFA House Price Index, and New Home Sales. As we saw last week with soaring existing home sales, we suspect this week’s data will also be strong as a lack of supply, record-low mortgage rates, and de-urbanization are driving a suburban housing boom.  Jobless Claims on Thursday will be of interest, as will Personal Income, Chicago PMI and Consumer Sentiment on Friday.

Investors are anxiously awaiting the Fed’s Jackson Hole conference on Thursday and Friday. Jerome Powell leads it off Thursday with a speech at 9 am. Will he be dovish enough appears to be the question that is likely to steer markets? The answer to this question may likely revolve around their willingness to get more aggressive in pushing for higher inflation. Various Fed members have voiced a desire to let inflation run hot. In Fed-speak they call this average inflation targeting. The term means that even though the targeted inflation rate is 2%, they might let it run at 3-4% for some time to offset prior periods of slower than 2% growth. PCE, the Fed’s preferred inflation index, has averaged 1.50% over the last decade. The last reading was +0.8%.

The graph below shows that corporate debt has soared over the last few months. Prior to COVID, the ratio of corporate debt to GDP stood at a record high, and slightly above levels that preceded the last three recessions. Most of the corporate debt being added today is for liquidity uses and not for Capex or other productive purposes. As such, corporations will emerge from the crisis with more debt and interest expense but no corresponding rise in income. This new debt will be a drain on future earnings and economic growth. Keep in mind the graph overstates the increase in the ratio as GDP, the denominator, will rebound sharply this quarter.

, Commentary 08/25/2020

The quote of the day is from Morgan Stanley- The equity market has traded soft under the surface of the headline indices, which are now being driven by just one stock—Apple.”

Investor greed and fear can be calculated and expressed in many different ways. Currently, many surveys and technical readings indicate near-record levels of optimism and greed. Per the graph below from SentimenTrader, the options market is “all greed no fear”! As their data shows, Gamma exposure, a measure of sentiment in the options market, has surpassed levels, which in the past resulted in sizable market downturns.

, Commentary 08/25/2020




August 24, 2020

Despite new record highs in the S&P and NASDAQ 100 only 6% and 2% respectively of the underlying components are at records. The weakness of breadth is becoming starker by the day. The Tweet below courtesy of The Bear Traps Report shows that two of the worst ten breadth days, using his measures, occurred last week.

, Commentary 08/24/2020

The “K” shaped recovery is alive and well, with some sectors doing well and others languishing. Residential housing, for instance, is a beneficiary of new motivations to move out of densely populated urban areas. On Friday, Existing Home Sales for July jumped 24.7% from June’s level, breaking a record for the largest single-month gain. Helping fuel sales is a lack of supply. The inventory of housing is still over 20% less than a year ago.  Per the National Association of Realtors (NAR)- “The housing market is well past the recovery phase and is now booming with higher home sales compared to the pre-pandemic days,” said Lawrence Yun, NAR’s chief economist. “With the sizable shift in remote work, current homeowners are looking for larger homes and this will lead to a secondary level of demand even into 2021.” 

We are paying close attention to the reflation trade. Since mid-March, when 5-year inflation expectations troughed at 0.14%, they have risen steadily to peak a week ago at 1.57%. Recently they have flatlined.  In last Friday’s Relative Value Report we stated- “Investors in Industrials and Transportations sectors are clearly betting on a continuation of the reflation trade. Recent weakness in oil and copper, as well as the daunting fiscal stimulus cliff, make us wary of the inflation trade. We reduced exposure to Transports and Industrials this week while adding to Realestate.”  Copper has historically been a good proxy for inflation and economic activity. Copper is often referred to as Dr. Copper for just that reason. The graph below shows that the price of copper has stagnated over the last month and is coming under pressure recently.

, Commentary 08/24/2020

The graph below shows COVID-related stimulus distributed by the government. While the current level of stimulus appears to be small but at $15 billion a week, it represents over 4% of GDP.

, Commentary 08/24/2020

The graph below shows how the number of small businesses opening back up recovered for a while but stagnated and, more recently, has begun to turn back down.

, Commentary 08/24/2020

August 21, 2020

Initial Unemployment Claims ticked back up to 1.106 million versus expectations of 963,000. Continuing Claims fell to 14.844 million from 15.480 million. The drop in continuing claims may be considered encouraging by the media, but there is a negative side they may not be considering. State unemployment claims are only paid for 6 months. As such, some of the people fired in February as COVID shutdowns began, are seeing benefits expire. The number of people in this group should expand in the coming weeks. Including federal and state assistance, the total number of people receiving jobless benefits is still over 28 million.

Tom DeMarco of Fidelity provides commentary about possible market reactions to next week’s Jackson Hole Fed meeting and the FOMC meeting on 9/16: “At this point the risk of a “sell-the-news” reaction seems quite possible as it will be difficult if not impossible for the Fed to generate a dovish surprise as the papers have been jammed with articles previewing the “radical” shift to an average inflation target with the topic discussed in myriad Fed speeches and papers and I expect more to come at Jackson Hole on Aug 27-28.”  Essentially Tom argues the market may stumble as it is challenging for the Fed to provide even more stimulus than what they are doing or talking about doing.

As the heated Presidential election draws closer, the chart below, courtesy Bank of America, is worth consideration. During Presidential election years, September and October tend to be weak, while June, July, and August have been the strongest. Currently, the volatility term structure (VIX) is pricing in anxiety around the election. The September contract is currently trading at 25.60, October jumps to 29, and December through April is relatively flat at 27.50’ish. In the same periods running up to the 2012 and 2016 elections, there was no discernible kink in the VIX curve as currently exists.

, Commentary 08/21/2020

The graph below shows the ratio of the S&P 500 value index to the growth index.  Growth has greatly outperformed this year and for the last several years. However, since July value has held its own versus growth, and may be providing early signs that the trend may be reversing. To be more confident in that thesis we would like to see the price ratio below break above the wedge pattern and the 50-day moving average. We have shifted slightly from growth to value over the last few weeks, including the purchases of XOM, CVX, T, and VIAC.

, Commentary 08/21/2020

August 20, 2020

The Fed released its minutes from the most recent July 29th FOMC meeting. The key takeaways are as follows:

  • The Fed is still very concerned about the sustainability of the recovery
  • Many members voiced concern about the costs and limitations of yield curve control in the current environment. It seems, based on the minutes, they may shy away from targeting or capping yields unless market conditions change.
  • They still believe there are significant financial stability risks, especially with small and medium-sized companies.

The dollar rallied strongly on the Fed minutes. Gold fell as real rates rose (were less negative). Bond yields rose as yield curve control (more active QE) is not as definitive as once thought. Stocks struggled as the message may not have been dovish enough for the markets. Like an addict, the market needs more stimulus, not just the same amount.

There seems to be growing chatter about a Congressional compromise on a “small” $500 billion stimulus deal that does not include another round of one-time checks or any municipal aid.

Apple hit a $2 trillion market cap yesterday, and The New York Times had an interesting article yesterday, putting the recent gains into context. They state:

“It took Apple 42 years to reach $1 trillion in value. It took it just two more years to get to $2 trillion.

Even more stunning: All of Apple’s second $1 trillion came in the past 21 weeks, while the global economy shrank faster than ever before in the coronavirus pandemic.”

Year to date, Apple’s revenue has increased by 2.2% while EBITDA is flat. Needless to say, the entire gain this year is based on multiple expansion. Its price to earnings ratio now stands at 36, double that seen at its March lows, and well outside of the 15-20 range it traded in for the last five years.

, Commentary 08/20/2020

The graph below shows the recent correlation between the S&P 500 and 5-year breakeven inflation expectations as measured by the TIPs market. Both indices have now fully recovered their losses from March. The relationship, while strong in the time frame shown, has not always been as well correlated. Before COVID, from March of 2018 to February of 2020, inflation expectations were generally declining while the stock market surged higher. Can inflation expectations continue to rise as the growth of fiscal spending flattens or even declines? If not, what does that portend for stocks? The following link from Ambrose Evans-Pritchard in The Telegraph provides a well-written discussion describing the combating forces of inflation and deflation to help you better assess the situation.

, Commentary 08/20/2020


August 19, 2020

During Walmart’s earnings announcement yesterday, the CFO offered a warning of sorts as he stated that government stimulus checks were mostly spent by July. The comment helps explain why retail spending data started to stagnate over the last month or so. The recovery has been fueled by federal and state stimulus, and, as such, assessing third and fourth quarter economic activity relies significantly on determining how much more the states and federal government will provide citizens.

The graph below compares the gross underperformance of gold miners (GDX) to gold over the last ten years. From late 2011 to early 2016, gold fell sharply while fell by even more. Since they both bottomed in January of 2016, GDX has risen 250% while gold is up nearly 100%.  Despite the marked outperformance, miners are still about 30% off the highs of 2011, while gold recently set a record high. If the price of gold continues to increase, miners will most likely continue to play catch up as they are leveraged both operationally and financially.

, Commentary 08/19/2020


A subscriber asked for an update on our article Tesla’s Moonshot, How High Can it Go? Since publishing the article on August 8th, Tesla’s market cap has risen 35% and is the largest automaker at nearly 1.5 times the market cap of Toyota, the second largest automaker. With the latest earnings update, Tesla has a price to sales ratio of 14, which dwarfs the industry ratio of .60. Despite accounting for less than 1.50% of global auto sales, Tesla’s market cap is about a third of the entire industry. To answer the question in our title- apparently much higher.

We end with a very well written report by James Montier in which he discusses the absurdity of markets. To wit: “Voltaire observed, “Doubt is not a pleasant condition, but certainty is absurd.” The U.S. stock market appears to be absurd.”

August 18, 2020

The economic docket will be slow this week. Of interest will be Housing Starts this morning and Jobless Claims on Thursday. The Fed will release its minutes from the July 29th FOMC meeting on Wednesday afternoon. Currently, there are no Fed speakers scheduled to speak this week. The Jackson Hole Fed conference is scheduled for the weekend of August 28th. Again, we will be on the lookout for any clues as to new or modified policies that may result from the meetings.

Over the weekend, Warren Buffett’s Berkshire Hathaway announced a $545 million stake in Barrick Gold (GOLD), a gold miner. While Buffet has been notably anti-gold for decades, the purchase does not come totally as a surprise. For one, his father was a gold bug and frequently preached the benefits of a gold-backed currency. Second, and probably the rationale for the purchase, miners are very cheap, and at current prices, they are profitable cash flow producing businesses. We should also put his new into context as it accounts for less than one percent of his total portfolio.

It is worth considering that if Buffett’s purchase gives a green light of sorts for traditional money managers to add gold exposure, it could provide a powerful lift to gold stocks as they are relatively small. Consider the two largest holdings of GDX are Newmont (NEM) and Barrick (GOLD), which in aggregate make up over 25% of the ETF. Their market caps are approximately $53 billion each.  If the market cap of the entire index is approximately $200 billion, it will not take much buying to push it significantly higher.

The chart below, courtesy Goehring & Rozencwajg, shows that commodities are the cheapest in at least 120 years as compared to the Dow Jones Industrial Average. With gains in productivity over time, we should expect the ratio to decline as it has done. However, as shown in the late 1970s and 1980s, inflation can reverse the ratio dramatically.

, Commentary 08/18/2020

Lastly, on the topic of commodities, Lumber has risen sharply, as shown below.

, Commentary 08/18/2020


August 17, 2020

Retail Sales fell short of expectations on Friday, coming in at +1.2% versus expectations of 1.9% growth and 8.3% growth last month. Given that stimulus is waning and consumer sentiment, as shown below, remains weak, the disappointment in consumption should not come unexpected. Looking forward, we will assess if the consumer recovery can continue with a smaller helping hand from Uncle Sam. It appears Congress will be on break through the month, so if there is any relief, it will likely have to come from executive orders.

, Commentary 08/17/2020

The Baker Hughes Rig Count fell by 4 rigs to 172, from 176 last week, and a nearly 700 running rate prior to the crisis. Again, despite the price of oil stabilizing in the low $40’s, oil companies appear loath to expand drilling operations. This period of lessened activity is based on expectations for a continuation of weak demand as well as expectations for lower oil prices in the future. Currently, Crude futures predict little price change over the coming year. The current contract (September) is at $42.23, with the September 2021 contract at $44.67.

Over the last decade, stock buybacks have been a popular way for corporate executives to boost earnings on a per share basis. While earnings are not affected in a buyback, the denominator, number of shares, in the earnings per share (EPS) formula is reduced, thus EPS rises. The record number of shares buybacks, especially for larger companies, has been one reason attributed to recent stock gains over the last five years. Another reason has been a reduction in the number of listed companies. The graph and commentary below, courtesy the Market Ear, shows that there are about half as many public companies today versus 1996.

, Commentary 08/17/2020

Tenants at Class C buildings paid 54% of rent by mid-month in June, but that percentage slipped to 37% in July. These renters are mainly blue-collar and heavily supported by fiscal stimulus. The decline in rents is likely the result of waning stimulus payments.

The graph below, courtesy Arbor Research, shows that investors have been rushing into inflation-protected bonds as inflation expectations have been rising.

, Commentary 08/17/2020

August 14, 2020

Initial Jobless Claims improved again and dropped below the 1 million per week pace. Initial Claims were 963k versus an estimate of 1.15mm. The aggregate of all people receiving Federal and state unemployment aid also fell nicely to 28.25 mm from 31.3 mm. The two-week trend is positive, but the sheer number of claims are still enormous compared to January and February levels.

Corporate spreads and yields are at or near record lows, which denotes extreme economic confidence by investors. The condition is not necessarily confidence in the corporations and their ability to generate earnings, but solely due to Fed purchases of corporate bonds. By default, many bond investors must ignore the significant risks facing the corporate bond market and participate. The New York Fed recently made note of the risks in their article- Implications of the COVID-19 Disruption for Corporate Leverage  – “Looking ahead, we find that a sizable share of U.S. corporations have interest expense greater than cash flow, raising concerns about the ability of those corporations to endure further liquidity shocks.”

To further stress the disconnect between yields and reality, Lisa Abramowicz from Bloomberg recently noted that “The lowest-rated US investment-grade bonds are trading as if they were Treasuries. Yields on BBB rated debt hit an all-time low of 2.21% on average last week, less than the yield on 3-month T-bills back in March 2019.”

The graph below shows that 30- year conforming mortgage rates have fallen below 3% to 2.88%, the lowest in the last decade. In fact, they are also the lowest since at least 1971, when the Fed started tracking mortgage rate data. As we will elaborate in an article next Wednesday, bond yields no longer provide financial, economic, or price information.

, Commentary 08/14/2020

As we have mentioned numerous times, consumer spending accounts for nearly 70% of economic activity. With that in mind, consumer sentiment and willingness to spend are always important gauges. The graph below shows that nearly 25% of households are worried to some degree about their jobs. The data does not bode well for spending, but as shown the last time the survey was at a similar level was toward the end of the 2008/09 recession when the economy was recovering in earnest and the jobless rate would fall for nearly a decade. The hope is the survey is at or near its peak and will turn lower soon.

, Commentary 08/14/2020

We leave you with a graph that shows how massive flows into passive investments, and by default, into market cap weighted indexes, has benefited larger companies much more than smaller ones. For more on this topic, please read our article Passive Fingerprints Are All Over This Crazy Market.

, Commentary 08/14/2020

August 13, 2020

The Treasury reported that the year to date fiscal budget hit a record of $2.8 trillion. Over the same period, the amount of Treasury debt outstanding has risen by nearly $4 trillion, half of which was purchased by the Federal Reserve. With still two months remaining in the fiscal year, the deficit is twice the prior record ($1.4trln) from 2009. Over the last decade, annual deficits have been running between $500bn and $1trln per year.

As stimulus wanes, we have a growing concern that the economic recovery stalls. The most widely followed economic data, emanating mainly from the government, tends to lag by one to two months. Using this data in such a volatile environment like today makes it tough to assess changes in recent trends. Alternative data, on the other hand, such as credit card spending and weekly Johnson Redbook Retail Sales, are much closer to real-time and can provide more clarity. Per the Bloomberg graph below, using alternative data, the economy in the U.S. and other major countries appears to have plateaued over the last month.

, Commentary 08/13/2020

Tesla followed in Apple’s footsteps and announced a 5 for 1 stock split. The stock rose 13% on the news.

CPI, like PPI on Tuesday, was hotter than expected at +0.6% monthly and +1.0% annually. Excluding food and energy, on an annual basis, CPI was up 1.6%, not far from the Fed’s 2% target. Typically, rising inflation puts pressure on bond yields, but given the Fed’s very active buying program, yields are unlikely to reflect the inflation situation.

Per Arbor Research, the percentage of listed companies classified as “zombies” is now at a 20 year high. The graph shows the strong correlation between the number of zombie companies and inflation-adjusted Treasury yields. Zombie companies are defined as those that pay more in interest than they earn. The relationship is not surprising, as lower rates allow weak and struggling companies to borrow and refinance debt at a lower cost and stay in business. In the case of Zombies, the debt, in many cases, is used to pay off old debt and not for productive investment that might grow earnings in the future.

, Commentary 08/13/2020

August 12, 2020

Bonds were under considerable pressure yesterday. It is partially attributable to this week’s Quarterly Refunding in which the Treasury is issuing $112 billion in aggregate of 3yr, 10yr, and 30yr notes and bonds. $48 billion of 3yr notes were auctioned yesterday, with $38 billion 10yr notes today, and $26 billion 30yr bonds tomorrow.  Frequently, banks and brokers, that will inevitably buy a measurable portion of the debt, sell bonds in advance of the auctions with the hope of buying them cheaper at auction.

PPI was stronger than expected at +.6% month over month versus -.2% last month. CPI, released at 8:30 today, is expected to 0.3% versus +0.6% last month.

Gold (-5.4%) and silver (-14.7%) got clobbered yesterday. The decline should not come totally unexpected given their recent breathtaking rallies of late. As we have noted over the last few weeks, both precious metals have become grossly overextended, and as such, we were expecting a pullback. In this week’s Major Market Buy Sell Review we stated the following:

  • Gold is extremely overbought and starting to push 4-standard deviations above the 200-dma. 
  • We suggest taking some profits for now and look for a pullback to increase our sizing. 

The graph below shows that prior to yesterday, silver was trading over 40% above the 50-day moving average. A feat last achieved 33 years ago. We are on the lookout for a good point to add back to our gold holdings.

, Commentary 08/12/2020

The “Market Generals” and other momentum stocks are not leading the charge upward as they were in prior months. The graph below shows that MTUM, a popular momentum ETF has underperformed the equal-weighted S&P 500 (RSP) by about 10% since mid-July. The top four holdings of MTUM, accounting for almost 25% of the index, are Apple, Amazon, Microsoft, Tesla. The factor/sector rotation can also be seen in the NASDAQ 100, which has underperformed RSP by a similar amount over the last month.

, Commentary 08/12/2020

Given the recent weakness in the “Generals” and gold and silver, along with some firming of the dollar, we are waiting to see if this is just a factor/sector rotation towards value-oriented sectors or a signal that risk assets, broadly speaking,  are about to come under pressure.

According to Bank of America, the words “optimistic” or “optimism” were mentioned on nearly 50% of corporate earnings calls. That is the largest percentage since late 2016, and prior to that, coming out of the financial crisis in 2009. Despite the seemingly optimistic outlooks, announced stock buybacks are near the lowest levels in a decade.

August 11, 2020

PPI and CPI inflation data will be released today and tomorrow, respectively. On a year over year basis PPI is expected to be flat at 0% while CPI higher at +0.8%. Forward inflation expectations, as measured by the difference between TIPs and nominal 5-year Treasury notes, is currently +1.50% and are back to January’s levels.  Friday will be active with Retail Sales, Industrial Production, and Consumer Sentiment on the docket. The early forecast for Retail Sales is a gain of 1.8%, well off the gains of the prior months (18% and 7%), but historically still a strong number.

Retail Sales are unchanged over the last 12 months, despite the global recession. The sole reason is the massive amount of stimulus provided by the Government via the Cares Act. To that point, President Trump, using an executive order, extended unemployment payments last weekend, albeit at $200 less than the prior amount. Trump also suspended the payroll tax. While both actions will help boost consumption, the big question is will the Democrats fight the legality of his actions? It is also worth noting that Goldman Sachs thinks the $400 weekly unemployment subsidy may only last a month or slightly longer. States are on the hook to pay $100 of the amount, which raises other concerns about payment. As an example, according to state Labor Department officials, Connecticut’s unemployment trust fund is headed for insolvency in the next 30 days. The additional $100 burden creates further problems for the state. This is a problem for many states.

Another issue with Federal stimulus is that PPP funds are exhausting quickly. Again, according to Goldman, via a survey of 10,000 small business owners, 84% of PPP loan recipients report that funding has been exhausted.

The Big Ten and PAC 12 athletic conferences are set to announce their plans for the upcoming college football seasons. It appears the options are delaying the start of the season or canceling it entirely. If they cancel, it may weigh on sentiment, especially if the other major conferences follow in their footsteps. If you recall, the suspension of the NBA was one of the events that seemed to tip the markets in early March.

New Additions to RIA Pro:

  • On the Dashboard tab, underneath the articles and videos, you will find the latest headline news.
  • On the Research tab, there is a new page that shows options pricing by expiry month.

August 10, 2020

The BLS Employment Report was better than expected at +1.76 million new jobs and unemployment fell to 10.2%. More good news, average hourly earnings rose 0.2% monthly and 4.8% year over year. Both were better than expected.

While the improvement is positive, we must maintain a proper historical perspective. Currently, the unemployment rate is the highest it has been since at least 1950, except for a few months in 1982.  Further, as compared to February, there are now an additional 2.8 million people classified as out of the labor force. Because of this they aren’t classified as “unemployed”. The additional 2.8 million people would add 2% to the unemployment rate, pushing it well above the levels of 1982.

The BLS uses a birth/death adjustment to its employment numbers. The adjustment adjust the payrolls data for estimates of net new business formation. Over the last three months, 881k jobs were added due to new net business formation. Even more confounding, according to the BLS, there is a net of +223,000 new leisure and hospitality jobs related to businesses formed since March. The fact of the matter is that many more businesses went bankrupt than were started over the last three months. That statement is even more true for the leisure and hospitality industry.

Gold is up over 20% since early June. The media is taking notice, and many talking heads are asking how far it can go. Answering the question is complicated as gold does not have earnings and cash flows like most other assets. There are however, many different ways to model gold prices which can result in vastly different forecasts. Frequently, investors, given the choice of owning gold along with or instead of stocks, will compare the price of gold to the stock market. The graphs below show that the ratio of gold to the S&P 500 has risen recently, but on a long term time frame, the ratio is still close to 50-year lows. When using this ratio, one must keep in mind the ratio can rise if gold falls, but the S&P 500 falls at a much greater rate. It can also rise if gold increases at a much faster rate than the stock market. Either way, the graph argues that gold has a reasonable chance of outperforming the S&P 500, especially if the Fed continues to print money at unprecedented levels.

, Commentary 08/10/2020

The Baker Hughes rig count fell to 176 the lowest since 2008. The graph below shows the decline has continued in recent weeks despite the recovery in economic activity and oil prices.

, Commentary 08/10/2020

August 7, 2020

We finally got a dose of good news in the weekly Initial Jobless Claims report. Initial Claims fell from 1.435 million to 1.186 million. On an unadjusted basis, the number of new claimants fell by a similar amount.

The all-important BLS Labor report is slated for release at 8:30 this morning. The consensus estimate is calling for a gain of 2 million jobs and an unemployment rate of 10%. At 3pm today, consumer credit will be released. It has fallen for three consecutive months but is expected to rise.

The Ten-year real rate (10yr yield less implied inflation rate) is now below -1%. The math behind the negative rate is worth discussing. As shown below, inflation expectations (green line) have risen steadily over the last few months but bond yields (red line) have remained stubbornly flat to declining. The net result is plummeting real rates (blue line). Most often, Treasury yields positively correlate with inflation rates. This time is very different as the Fed is buying massive quantities of U.S. Treasuries with the intent of not letting yields rise. The market implies investors will lose 1% annually in purchasing power if they own 10-year Treasuries. That is a tough selling point considering the Treasury will be looking to borrow $3-4 trillion this year and $2-3 trillion next year.

, Commentary 08/07/2020

The stunning graph below, courtesy of Bianco Research, shows that New York City subway ridership is running at about 20-25% of what was considered normal before COVID.

, Commentary 08/07/2020




August 6, 2020

ADP reported that July payrolls rose by 167k versus expectations for a gain of 1.2 million jobs. A weakening of the uptrend should not come as a surprise given unemployment claims are now increasing and despite some recovery, still at historically high levels. ADP further jibes with other recent indicators pointing to a stagnation of the recovery. Further, if you missed it yesterday, please read our commentary on the Cornell labor survey which also paints a weakening jobs picture.

Initial Jobless Claims, to be released at 8:30 this morning, is expected to increase slightly from 1.43mm to 1.44mm. The graph below shows the strong correlation between Jobless Claims and the Google Trends search for the phrase “unemployment benefits.” Recently, the Google trends search turned higher while Claims are only marginally higher. Will Jobless Claims follow searches higher?

, Commentary 08/06/2020

Strong manufacturing surveys of late have led to media to assume a manufacturing recovery is well in hand. While the survey results may be at traditionally high levels, we struggle with the media’s synopsis.  The survey questions ask manufacturing executives, in what general direction do they think specific aspects of business are trending. The available answers  are “better”, “same” or “worse.” The answer is binary without any quantification for changes in production. For instance, if I used to make 100 widgets a month, reduced it to 20 last month, and then upped production to 30 this month, my survey response would claim conditions are better than the previous month. In reality they are better, but still 70% short of preexisting production levels.

We are nearly 5 months into the economic crisis and slightly less than half of the respondents see either no improvement or a worsening of conditions. One would hope that if the recovery were strong, the index would be well above 80. In this case, the index points to expansion but marginal expansion at best, and in many cases, production levels are well below those before the crisis.

August 5, 2020

The ADP Employment report will be released at 8:15 this morning. The current estimate is for a gain of 1.89 million jobs. Investors will take cues from this report as it tends to have a strong correlation with the employment report.

While ADP and BLS Jobs data on Friday will likely be strong, Cornell, Jobs Quality Index, and riwi, released a coauthored survey which deduces that a second wave of layoffs and furloughs is underway. The survey was conducted during the last week of July and included individuals that were laid off and re-hired. In many respects, the survey measures the effectiveness of the PPP program. Of note, the following question with results: “Since being put back on the payroll by your previous employer have you?: Been laid off again 31%, Been told you could be laid off 26%, Neither 43%. 

The following summary points to a weakening trend in employment that will not be picked up in this week’s reports:   “Conversely, the new data supports earlier observations that increases in the number of private sector jobs and the decline in unemployment that began to surface in the May BLS Employment Situation Report, and similar employment gains in the June jobs report, were not reflective of workers being “re-employed”en masse — in the conventional sense that they were getting back to the business of actually working — but were rather being “re-payrolled,” in many instances in order to meet the loan forgiveness requirements of the PPP.”  They go on-  “The US is experiencing a second round of layoffs not otherwise showing up yet in the mainstream data, with 39% of re-payrolled, but not actually working, employees likely being at a high risk of losing paychecks.

San Francisco Federal Reserve President Daly made an interesting comment yesterday. She said: “have room to let the economy go well beyond what people think is the maximum level of employment.”  If you recall, a few Fed members have made similar comments about running inflation beyond their target. It appears both of the messages are the Fed’s way of expressing that they intend to keep the monetary pedal floored, will not raise rates for years, and aim to push employment and inflation well beyond its stated targets.

On a seasonal basis, August, September, and October tend to be weak months for equities.  Not surprisingly, the graph below shows that realized volatility also tends to increase during those three months.

, Commentary 08/05/2020

August 4, 2020

Nancy Pelosi said a $600 weekly Federal unemployment benefit is not negotiable. With that tough negotiating stance, we continue to wait on Congressional and Presidential agreement for an extension of federal unemployment benefits. In addition to extending legislation, we must also keep in mind that states are struggling to make good on their weekly unemployment benefit payments. It has been reported that many states may run out of funds as early as September. Secondly, most state programs have a six-month time limit. Those citizens that started collecting in March will reach expiration in September.

The most important economic data point week will be the employment report on Friday. Currently, the consensus expectation is for a gain of 2 million jobs, bringing the unemployment rate down to 10.5%. The range of estimates for payrolls spans from +350k to +2.5mm. We know that approximately 5.6 million people lost jobs during July based on weekly unemployment claims. The hard part is the estimate is how many new jobs were added in July. Making the task more difficult will be the fact that various parts of the country are opening up while other parts are stepping back their openings.

With last week’s Fed meeting in the rearview mirror, Fed members are free to speak again. This week there is at least one speaker a day on the docket. Still, we are on the lookout for discussions on yield curve control and Fed views on running inflation hotter than their 2% stated goal.

The image below, from Cornerstone Macro, helps explain why European equities have lagged the S&P 500 to such a large degree. Bottom line: Tech, Healthcare, and Communications account for nearly 50% of the S&P 500 versus only 20% of the MSCI Europe. On the flip side, MSCI Europe has a larger contribution from sectors that have been laggards.

, Commentary 08/04/2020

The collage of headlines shown below, courtesy Pinecone Macro Research, speaks to the intense dollar negativity in the media. Similar sentiment pervades social media. Quite frequently, when everyone is on one side of a trade, it serves a strong signal of a reversal.

, Commentary 08/04/2020

August 3, 2020

On Friday, the S&P 500 closed .79% higher, led predominately by Apple, Amazon, and Facebook. Apple was up over 10%, increasing its market cap by approximately $180 billion. To put $180 billion in context, Pepsi is the 32nd largest S&P company with a market cap of $190 billion and Abbot Labs is 33rd with a market cap of $178 billion.

Despite the strong efforts of Apple and a few other stocks, over half of the S&P 500 stocks closed lower. Two-thirds of the Dow 30 declined as well.  The heat map below shows a lot of red for a strong gain.

, Commentary 08/03/2020

The Atlanta Fed published their first estimate of Q3 GDP. They currently forecast, based on July’s data, an 11.9% increase in economic activity.

The Federal enhanced jobless benefits amounting to $2,400 monthly, on top of state jobless claims, expired on Friday. We believe a deal to extend the benefits will occur, but the amount will likely be reduced. The timing of an agreement will increasingly concern the market.

The picture below shows the world’s four major currencies and how they are all sitting on critical longer-term support or resistance. We believe the dollar will bounce off of support, which will translate to the other three currencies reversing their recent trends. If we are wrong, and the dollar breaks down further, the technical damage across the currency complex would accelerate the recent trends in all the currencies shown. While the U.S. may prefer a weaker dollar, as its good for trade and inflationary, the other countries pay the price. Stronger currencies result in deflationary pressures. Considering Europe and Japan have negative rates and are on the cusp of deflation, they can ill afford additional deflationary pressures.

, Commentary 08/03/2020

During a typical recession, business inventories get drawn down as business owners are slow to restock inventory that is sold. The graph below quantifies the inventory drawdown of the last two recessions and the current state of inventories. This monthly data point serves as a good indication of business owner sentiment. When confidence improves, inventory growth should exceed sales, and the decline will reverse. In the last two recessions, the trough in inventories did not occur until after the recession.

, Commentary 08/03/2020

One of our recent discussion points has been data inconsistencies in housing. Last week, for instance, we learned that pending homes sales were up 16.6% following a 44% increase in the month prior. At the same time, we stumbled upon the chart below showing that over 40% of renters are at risk of eviction. The divergences are confounding.

, Commentary 08/03/2020

July 31, 2020

Last night, Amazon blew the doors off of earnings. They earned $10.30 versus an estimate of $1.51. Revenues also easily beat expectations.  The company guided sales guidance up for Q3 from current estimates.

Google/Alphabet also beat on earnings and revenues versus estimates but posted a 2% decline in revenues due to a decline in ad revenue. The company committed to buying back $28 billion of its Class C shares.

Apple revenues were much better than estimates at $59.69 billion versus $52.30 billion. Earnings per share were also exceeded expectations at $2.58 versus $2.07. They surprised the market with an announcement of a 4 for 1 stock split. As a result of the split, Apple’s weighting in the Dow Jones Industrial Average (price-weighted index) will fall from 10.5% to 2.8% post-split.  There will be no effect on the S&P and NASDAQ as they are market cap weighted.

Initial Unemployment Claims rose for the second month in a row. New claims were 1.434 million up from 1.422 million. Continued claims increased by nearly one million to over 17 million.

GDP fell 32.9%, which was slightly better than expectations. A much weaker than expected GDP Price Index benefited the GDP number by about 3%. The Price Index fell 2.1%, versus expectations for a 1.1% increase. The decline in GDP was incomparable to anything witnessed in our lifetimes, as shown below.

, Commentary 07/31/2020

The Census Bureau began conducting a series of surveys to understand better how the COVID crisis is effecting households. The chart below shows how six of their weekly surveys have trended over the last 11 weeks. Catching our attention are the recent upticks in the “loss in employment income” and “expected loss in employment income” surveys. As noted above, unemployment claims are confirming this data.

The value in this data set, along with weekly credit card spending data, and Redbook retail sales, is that it is as close to real-time as we can get. More traditional measures of consumer financial activity are delayed by at least one month, and in some cases, by two to three months.

, Commentary 07/31/2020

On July 21st we presented the following: “To provide further context, consider that the 20-day volatility on Ten-year Treasury futures is now below 2%. The last time it was 2% or below was in the 1990s. The record low was recorded in April 1997 at 1.71%.”

We expand upon the lack of volatility in the fixed income markets with the graph below. It shows that over the last 85 trading days the daily trading range between 3-month Bills and 10-year notes was the lowest since 1977. Record low volatility periods tend to reverse abruptly. Whether that may be a big upwards or downward move is the question. Answering the question is difficult because the Federal Reserve, the largest buyer of U.S. Treasuries, is both price insensitive and is not concerned with taking losses.

, Commentary 07/31/2020

July 30, 2020

Yesterday’s Fed statement was nearly identical to prior statement from mid-June. They did add one line saying that economic recovery is very dependent on the course of the virus. Will the Fed be more or less aggressive based on new COVID cases this fall?  The Fed also extended dollar swap and repo lines for foreign central banks through March of 2021. The use of these lines has been steadily declining over the last month.

The baseline market expectation going into yesterday’s FOMC meeting was for Chairman Powell and the Fed to say that they will do whatever it can to support economic growth. That is exactly what they did. Unlike prior meetings, the market liked the status quo. Powell’s press conference was uneventful as the reporters seemed to ask the same questions as the last few meetings. Powell did not disclose anything new.

It is worth mentioning that the Fed tends to release new programs, policies, and concepts at their annual Jackson Hole Conference. This year’s conference, while online, will occur August 27-28th.

We mentioned the critical role that consumer confidence plays in the economy yesterday. We follow that up today with the graph below showing the strong correlation of jobs to confidence. This strong correlation is one reason we are heavily focused on the weekly Jobless Claims data to gauge how quickly the jobs market is recovering. The consensus estimate for today’s Initial Jobless Claims is 1.388mm down slightly from last week’s 1.416mm. Also on today’s docket is GDP. The current consensus of economists is -35%, but the range of estimates is enormous (-38.5% to -28.5%). The current forecast from the Atlanta Fed’s GDPNow is -32.1%.

, Commentary 07/30/2020

Visa, in its earnings report, provided more evidence that the recovery appears to be stalling. They said spending has plateaued over the final weeks of June. Powell made mention of this as well in his press conference.

Market mania has been on full display over the last few months. Wild price gyrations of bankrupt companies like Hertz and Chesapeake Energy were crazy. Trading in Kodak (KODK) over the last few days has been absurd. KODK, on the verge of bankruptcy, saw its shares soar on Tuesday when President Trump granted them a $765 million dollar loan to start producing drug ingredients. The market cap of the company prior to the loan was about $100 million. In the months leading up to the announcement, the stock traded between $1.50 and $3.00 per share. On Tuesday, it tripled from $2.62 to $8.06. Yesterday it opened at $18.50, hit a high of $53.37 and closed at  $33.20. In pre-market trading it is back above $40.

July 29, 2020

The Fed extended most of its emergency lending programs for the remainder of the year, many of which were set to expire at the end of September. Per the Fed: “The three-month extension will facilitate planning by potential facility participants and provide certainty that the facilities will continue to be available to help the economy recover from the COVID-19 pandemic.”

The Fed will release its FOMC monetary policy meeting statement at 2 pm, and Chairman Powell will follow it at 2:30 with a press conference.

Consumer Confidence slipped from 98.3 to 92.6, led by a sharp decline in the future expectations index. Last month the future expectations sub-index was 106.1 as compared to 91.5 this month. The present conditions sub-index rose from 86.7 to 94.2. Only 31% of those polled see business getting better within six months. Consumer Confidence, while tough to effectively measure, is an influential gauge of economic activity as personal consumption accounts for nearly 70% of GDP.

One the more timely investment-related questions that we grapple daily is – Is inflation on the uptick, or does deflation remain a strong possibility? To help with the matter, consider the thoughts of Lacy Hunt. Hunt, is not new to the deflationary camp. He has written for years on declining economic growth resulting from the burdens of unproductive debt and the negative effect that has on prices.

To wit: in the following paragraph from his Second Quarter Outlook he states the following:  “Four economic considerations suggest that years will pass before the economy returns to its prior cyclical 2019 peak performance. These four influences on future economic growth will mean that an extended period of low inflation or deflation will be concurrent with high unemployment rates and sub-par economic performance.”

To paraphrase, here are his four economic considerations are:

  • 90% of world economies are in a recession; thus no region or country can help offset economic contraction.
  • A major slump in world trade is occurring. This is certainly COVID related but also a function of recently enacted trade barriers.
  • The massive debt being employed to fight economic weakness is unproductive and will, therefore, weigh on future economic growth.
  • “2020 global per capita GDP is in the process of registering one of the largest yearly declines in the last century and a half and the largest decline since 1945. The lasting destruction of wealth and income will take time to repair.”

In regards to the causes of slow economic growth and its deflationary impact, his views are similar to ours. Where we possibly diverge is around the topic of monetary and fiscal policy. In particular, the Fed is now directly monetizing massive fiscal stimulus.  We are watching closely to see if the government and Fed’s combined actions are enough to drive inflation higher finally.


July 28, 2020

This week, 188 of the S&P 500 companies are set to report earnings. Thursday will be the most important day with market leaders Amazon, Apple, and Google scheduled to report after the close. The chart below shows the “most anticipated” releases this week.

, Commentary 07/28/2020

The Fed will meet today and Wednesday, with the FOMC statement release and Powell’s press conference scheduled for Wednesday at 2:00pm and 2:30pm, respectively. We do not expect any material changes in Fed policy. Still, we will be on the lookout for any discussions on yield curve control, higher inflation targets, and/or new strategies.

On the economic front, Consumer Confidence will come out today at 10am and the University of Michigan Consumer Sentiment Survey on Friday. Also of note will be GDP and Jobless Claims on Thursday and Chicago PMI and Personal Income and Outlays on Friday.

Heading into tomorrow’s FOMC meeting, it is worth checking what the Fed Funds Futures markets are pricing in for the future rate moves.  As you move forward on the monthly Fed Funds futures curve, expectations for a rate cut into negative territory slowly increase. By January of 2021, futures imply a 35% chance of a 25 bps cut. The odds continue to increase slowly throughout 2021 to a little over 50%.

One of the more notable recent trends has been the decline the U.S. dollar, which seems to be fostering upward moves in most asset classes.  To quantify this negative correlation, we created a risk index comprised of one-third each of 30-year UST, S&P 500, and Gold. As shown below (red dotted line) our asset index was recently the most negatively correlated versus the U.S. dollar as any time over the last five years. Of the three assets, the negative correlation is strongest with 30-year yields/USD at nearly two standard deviations from the norm.

, Commentary 07/28/2020

July 27, 2020

Gold is trading $40 higher in overnight trading, which at a new record high is besting its record from nearly ten years ago. The gains, in part, are due to the weaker dollar.

On Thursday, the BEA will release second-quarter GDP. The current estimate is -33%. Last Friday, JP Morgan released the following commentary- “We are lowering our 2Q real GDP growth forecast from -31.0% to -32.5% saar ahead of next Thursday’s [data]. We recently had been noting some downside risk to our forecast and we continue to see growth tracking below our prior estimate ..”  Their reduced forecast is not surprising given recent real-time credit card data is signaling that consumer spending appeared to have stalled in June.

In Volatility Is More Than A Number. It’s Everything  we stated: “volatility is an inverse gauge of liquidity, the foundation on which smooth-functioning markets and asset prices rest.” Volatility is currently sitting at 2-3x what was normal in 2019. As such, we know that underlying liquidity in the stock market is poor. Do not just take our word on it, just consider some of the rapid surges and declines that continue to occur months after the March fireworks.  For further consideration of liquidity, the illustration below from The Market Ear describes how options volumes have exploded during the recent surge in markets. Options trades are a direct bet on volatility and are actively hedged by brokers/dealers. This means that as markets move, hedgers must buy or sell regardless of market conditions to remain hedged. Now consider point 5 below- “given the fall in stock liquidity (TME pointed out earlier this week) options risks risk magnifying underlying moves purely as an effect of dealers hedging.Bottom Line: Liquidity is poor and therefore markets may experience abrupt moves up or down.

, Commentary 07/27/2020

Over the last few days we have discussed quirky housing data and trends related to COVID. As such, below is a short list of recent housing trends that will make housing data difficult to assess, especially compared to historic data.

  • Consumers are leaving urban rental apartments to buy suburban homes which will skew purchase/rental data
  • Reduced supply of suburban homes
  • Work from home allows greater location flexibility and in some cases, people will move to cheaper geographic locations
  • Baby Boomers may delay downsizing to apartments or senior living facilities
  • Wealthier consumers appear more driven to buy second “getaway” homes
  • Home offices, usable patio/outdoor space, and other home amenities will add value to houses
  • Despite record low mortgage rates, non-conforming mortgages remain hard to qualify for

July 24, 2020

At 1.416 million, Initial Jobless Claims rose by 109k from last week’s number. The good news is that continued states claims fell by over 1 million. However, the total number of persons claiming unemployment benefits (federal and state) only fell by 200,000 to 31.8 million, representing approximately 20% of the workforce.

The market hit a rough patch yesterday afternoon when the Quinnipiac poll showed Floridians favor Biden at 51% over Trump at 38%. Polls can be very misleading this far from the election, but they can steer politicians’ actions, especially those fighting for re-election. In this case, some Republican Senators, locked in tight races, may take a tougher line regarding stimulus and spending to separate from the President. If so, the next version of the CARES Act could be a little more challenging to negotiate and possibly have reduced spending.

Is value finally starting to wake up? Per a Tweet from Bespoke- “Russell 3000 Value outperforming Russell 3000 Growth by 4.31% over the last three sessions. Biggest 3 day outperformance for that measure of Value/Growth since May 31 of 2001 if it holds into the close.”

With yesterday’s $20 gain, gold sits within $40 of record highs, yet gold miners (XAU Index) are still more than 30% away from its 2011 record price. The graph below compares the ratio of XAU to gold. As shown, XAU has outperformed gold over the past few months but has grossly underperformed it over the last 12 years.

, Commentary 07/24/2020

German conglomerate Siemens will let many of its employees work from home two to three days a week permanently. Per Reuters, the policy applies to 140,000 employees at around 125 locations in 43 countries. Twitter and some other tech companies have made similar policy decisions. The implications for commercial real estate are massive if these companies are the leading edge of a full time or even partial work-from-home trend.

New and existing home sales have perked up recently, in part because COVID is making the land and space associated with houses more appealing than apartment buildings. We wrote about the recent robust housing data yesterday. Today we follow it up with the graph below showing the other side of the story. New York and Los Angeles are the nation’s two largest cities.

, Commentary 07/24/2020

July 23, 2020

With the market rising on hopes for another round of federal stimulus, Tom Demarco, Chief Market Strategist at Fidelity, succinctly laid out possible market risks from a new stimulus bill. Per Tom:  “The risk for the market is if the ultimate size of the finished product is less than $1.5T with little to no state aid, a cut in federal unemployment benefits, and a round of stimulus checks to fewer people than before.”

To one of his points, late yesterday afternoon, it was reported that the GOP is considering cutting federal unemployment benefits. Currently, the GOP is pushing for $400 per month, well below the current rate of $2400 per month, set to expire on July 31st.

Following three successive declines, existing home sales increased by 20.7%, the largest monthly gain since at least 1968 when records were first kept. Sales, on an annual basis, are still down 11.3%. June sales were bolstered by pent up demand, reduced supply, as well as demand to move from cities (apartment buildings) to the suburbs (houses).

After significantly lagging Gold’s gains since March, Silver is quickly catching up. Over the last five days, silver is up nearly 20%. It now stands at seven-year highs. Unlike Gold, which is within 3% of the 2011 record highs, Silver ($23.25/ounce) is still about half of its near $50 price from 2011. The graph below shows the ratio of Gold to Silver. After blowing out in March and April, the ratio is now in line with the trend of the last five years.

, Commentary 07/23/2020

Initial Jobless Claims, released at 8:30, are expected to be 1.308 million, similar to last week’s 1.300 million.

As we start considering the consequences of a Biden or Trump victory based on current polling, we must recognize that presidential polls can gyrate wildly. The graph below shows how quickly voter preferences changed leading into the last five elections.

, Commentary 07/23/2020

July 22, 2020

The U.S. dollar index fell sharply to 95.00 yesterday and stands close to its March 9th intra-day low (94.54). In only two weeks after the March low, the dollar stormed higher to peak at 104. The dollar, having since reversed the entire March surge, now stands at a critical juncture. If it breaks lower, there is little resistance until 88. However, if it bounces, as few expect, it may cause pain for the equity, energy, and precious metals markets. As if markets aren’t tricky enough these days, the possibility of a false breakout lower may catch investors/markets offsides.

The Chicago Fed National Activity Index for June gained further ground, however, June’s rate of growth was not nearly as robust as May’s, raising questions about the sustainability of economic resurgence. The Chicago Fed index is a weighted average of 85 economic indicators. In June 54 indicators made positive contributions and 31 were down.

Weekly Johnson Redbook retail sales continue to languish, also raising questions about the strength of the recovery. Keep in mind the index does not include on-line retailers who are gaining market share.

, Commentary 07/22/2020

On Monday, the S&P 500 posted one of its most quirky days. Per Stock Charts, the percentage of stocks up was -28.8%, stunning considering the index posted an .84% gain. The measure subtracts the number of declining stocks from those advancing and divides it by the total number of stocks.

The scatter plots below compares daily instances of the advance/decline percentage and percentage gain/loss in the S&P 500 (2010-current). The graph on the left contains all of the data, while the one on the right zooms into to days where the S&P 500 was up or down by 1% or less. The orange dots highlight Monday’s anomaly. We went back to 2010 to see just how odd the occurrence was. Since January 1, 2010, there have been 410 days in which the market rose .84% or more. In all of the other instances, the percentage of advances over decliners was positive and at least by +20%. The average was 74%.  We increased the number of potential anomalies by reducing the S&P gain threshold to +.50% or more, and there were only two other instances out of 700 eligible days. Based solely on this analysis, the S&P 500 should have been down .25% on Monday.

, Commentary 07/22/2020

The graph below shows that real yields, or the yield after inflation, has fallen to -0.79%. It essentially quantifies how much stimulus the Fed provides the markets and the economy.

, Commentary 07/22/2020

July 21, 2020

Monday was another oddly divergent day in the markets. The S&P (+.85%) and NASDAQ (2.88%) surged on the backs of the largest companies in those indices- Amazon (+7.93%) and Microsoft (+4.28%). Of the 11 S&P sectors, Consumer Discretionary, Technology, and Communication were up sharply, Health Care had a marginal gain, and the remaining seven sectors fell. 52% of S&P 500 stocks and 66% of the DJIA were lower on the day. The Dow Jones Industrial Average eked out a 0.03% gain and the Russell was lower.

This will be a slow week in terms of economic data, with Initial Jobless Claims on Thursday and the PMI Manufacturing Survey being the only two numbers of consequence.

Voting Fed members should be silent this week and early next week due to the Fed’s self-imposed media blackout heading into its July 28/29 meeting. Following Fed President Evan’s speech in which he laid the groundwork for running inflation higher than the Fed’s 2% goal, we will keep a close eye out for similar comments from non-voting Fed members. It’s quite possible, the Fed and/or Powell will comment on its inflation targets at next week’s meeting.

Yesterday we noted the historically tight range that Treasury yields are trading in. To provide further context, consider that the 20-day volatility on Ten-year Treasury futures is now below 2%. The last time it was 2% or below was in the 1990s. The record low was recorded in April 1997 at 1.71%.

As shown below used car prices are surging. Similar to supply trends in housing markets, there is a shortage of used cars for sale. Combine limited supply with a new sense of frugality opting for cheaper used cars by consumers. Further stoking the price gains is the various forms of federal stimulus. Per Scott Allen of Auto Land in Fort Worth, Texas- “I’ve seen a lot of down payments this month of exactly $1,200.” Quote courtesy Autoblog.

, Commentary 07/21/2020

This week and next week we will see a majority of companies issue their financial reports. The table below shows expected reports by date.

, Commentary 07/21/2020

July 20, 2020

The University of Michigan Consumer Sentiment Survey took a step backward, with both current and forward expectations declining. Expectations are now below levels from March and April. The graph below shows the strong correlation between changes in this survey and the S&P 500.

, Commentary 07/20/2020

Chicago Fed President Evans made some comments last Thursday about inflation that largely went under the market’s radar. He stated as follows:

  • Timing for the Fed taking its foot off of the pedal is simple… Need to get inflation to 2% or 2.5%
  • It would be good to see inflation above 2% for some period

Evans is pushing for the Fed to continue aggressive monetary policy until inflation runs hotter than the Fed’s 2% target. The direct mention of 2.5% inflation maybe the Fed’s way of testing the waters for an eventual increase in the Fed’s target. There was little reaction from the three markets that would typically react to such news: Treasury yields, implied inflation expectations, and precious metals.

Treasury yields continue to chop around with little volatility. The 10-year U.S. Treasury Note, for instance, except two weeks in June, has traded back and forth in a tight ten basis point range (0.70% to 0.60%). It currently stands at 0.62%. A break below the consolidation level would likely accompany downward pressure in risk markets.

As we look ahead to the Presidential election, we are paying attention to the implied volatility futures markets (VIX) to quantify market concerns. As a general rule, the higher the VIX, the more worried it is, and vice versa. For instance, VIX is currently around 27. While much lower than it was in March, it is still over two times what it was prior to the COVID crisis. For purposes of gauging the pricing of volatility around the coming election, it’s not the level of VIX in October/November, but how it compares to the month’s surrounding it.

We follow @vixcentral and use their web site to track the structure of the VIX curve. The first graph below is Friday’s VIX curve, and below that you will find the curve from July 18, 2016, the same period before the last election. Note in the 2016 graph, as circled, there was no discernible kink in the curve as there is today. We also looked at the same period prior to the 2012 and 2008 elections and did not find anything notable priced into October/November time frames.

Traders are more worried about this coming election than we have seen in the recent past. As you consider the potential implications of the election, both positive and negative, please consider that volatility is the opposite of liquidity. We will write more on this concept in a forthcoming article.

, Commentary 07/20/2020


, Commentary 07/20/2020

The tweet below from @macrocharts shows how sentiment for the NASDAQ has risen to nearly unprecedented levels over the last few weeks.

, Commentary 07/20/2020



July 17, 2020

Initial Jobless Claims continue to stagnate (1.30mm vs 1.310mm last week). Non-seasonally adjusted (NSA) jobless claims rose by over 100k from the prior week. As a result, the NSA Insured Unemployment rate rose from 11.3% to 11.9%. The total number of persons claiming unemployment benefits (federal and state) fell from 32.4mm to 32 million.

The Retail Sales report was more optimistic. Retail Sales grew by 7.5% versus expectations of a 5% rise. After last month’s 18.2% increase, June was the second-largest gain since the data has been tracked. The juxtaposition between the employment data and Retail Sales is the result of the massive stimulus employed by the government. To reiterate an important point, the extension of existing stimulus programs will be vital for economic recovery to continue.

On July 31st, the Pandemic Unemployment Compensation (PUC) will expire. PUC provides an additional $600 to weekly unemployment insurance benefits. The Minneapolis Fed just published a telling article on who is benefiting from PUC and the effects if it is not extended. While we expect Congress to extend the subsidy, the economic fallout will be harsh if they do not. Keep an eye on Congress to see if it is extended and if any other stimulus might accompany the extension.

The National Association of Home Builders (NAHB) Index of market conditions rose sharply and sits close to pre-COVID levels. While a good sign, we remind you of a graph we presented last week, which showed the supply of homes for sales is down by about 30%. Also benefiting new home sales, many of which are in suburban and rural areas, is what appears to be the beginnings of a de-urbanization trend.

One of the more unique factors driving this bull market is massive speculation in the options markets, and in particular, the use of out of the money calls to make low-priced, high potential reward bets on stocks.  A recent Bloomberg article noted that: “With the company’s (Amazon) shares up 66% this year, traders are bidding up the price of options that have it jumping another 50% in the next three months. Contracts betting on the online retailer to reach $4,600 by October were among the most-traded calls for that expiry month on Monday.” Record purchases of out of the money calls is yet another sign of the speculative fever gripping the risk markets. The article’s theme was summed up well by derivative specialist Chris Murphy who is quoted in the article as saying: “It’s all FOMO related.

Bloomberg had an interesting article yesterday detailing how Japanese investors sold a record $34 billion of foreign equities last week. The amount is six times greater than any previous week. The anomaly may be quarter-end related or specific to SoftBank’s sale of T-Mobile. If, however, it proves to be more than a one time event, this story bears following. The graph below, courtesy Bloomberg, shows how irregular the selling was.

, Commentary 07/17/2020

Rail traffic provides useful insight into economic activity. The table below shows the slump in rail traffic, by product, for the week ending July 11th and year to date. The graph below it shows the relatively strong correlation of rail traffic to GDP. The data in the graph is quarterly, so it only goes through the first quarter. For current reference, the latest monthly reading (through April) of rail traffic is down 17% versus last year.

, Commentary 07/17/2020

, Commentary 07/17/2020

July 16, 2020

After a slightly higher than expected CPI report on Tuesday, Import and Export prices also came in more than expected. Import prices rose 1.4% monthly versus +1.0% in the prior month and expectations of +1.1%. That marked the biggest gain in 8 years.  Export prices were also up 1.4% on a monthly basis.

The table below provides estimates for today’s Retail Sales report. Initial Jobless Claims are expected to be near 1.3 million. Again, continued claims will be watched closely.

, Commentary 07/16/2020

As we have noted over the last week, real-time spending data is starting to show signs of stalling. In that realm, Calculated Risk provides more evidence that consumers are struggling. To wit: The National Multifamily Housing Council (NMHC)’s Rent Payment Tracker found 87.6 percent of apartment households made a full or partial rent payment by July 13 in its survey of 11.4 million units of professionally managed apartment units across the country. More importantly, they note that figure marked a 2.5% decline in the share of households that paid rent versus the reading from June 13th. If the employment situation were truly improving, the percentage should be increasing. Further, the Census Bureau, in a late June survey, found that only 63% of Americans have “high confidence” in their ability to pay next month’s mortgage. 16% had “slight or no confidence” in their ability to pay. If additional unemployment benefits are not extended at the end of the month, the situation will worsen.

Per Bank of America, and as shown below, 77% of stocks in the S&P 500 have a higher dividend yield than the Ten-year U.S. Treasury note. With an annual yield of only 0.62%, Ten-year notes do not exactly provide a high hurdle for stocks.

, Commentary 07/16/2020

July 15, 2020

JP Morgan earnings and revenues surprised to the upside, largely due to Fixed Income trading revenue- thank you Fed. The blemish on its report is a $10.47 billion provision for credit losses, as compared to what was expected ($9.15 billion). Their loss reserve is based in part on an estimate of a 10.9% unemployment at year end and 7.7% by the end of 2021. That compares to the Federal Reserve’s estimates of 9.3% and 6.5%, respectively. JPM is now holding $17.8 billion of loan loss reserves for its $140 billion book of credit cards, which assumes approximately 13% losses on their credit card book. JPM’s net interest income (margin) continues to decline as yields hover at record lows. The quarterly margin is now 1.99%, down from 2.37%. The lower the margin, the less likely a bank is to make new loans. Given that debt drives economic growth, reduced lending profitability is problematic for future economic growth.

Wells Fargo’s (WFC) report was not as good as JPM’s. They reported their first quarterly loss since 2008 and sharply reduced their dividend to $.10 from $.51. Like JPM, they also saw a sizeable decline in the net interest margin from 2.58% to 2.25%. WFC is now down over 50% year to date and trading below its peak prior to the Financial Crisis in 2008.

Maybe the most concerning information from the announcements are their forward economic outlooks: From WFC- “Our view of the length and severity of the economic downturn has deteriorated considerably from the assumptions used last quarter.” JPM’s CFO echoed the sentiment saying they now expect a “much more protracted” recovery. Simply, the banking sector does not have the rosy “V”-shaped recovery outlook the stock market has priced in. As you think about their outlooks, consider that banks have the latest economic data via credit/debit card spending, loan repayments, new loan applications, and a host other real-time economic indicators.

Monthly and annual CPI both increased by 0.6% for June. The gains were driven by food and energy prices. Excluding food and energy, monthly CPI rose by 0.2%.

Nancy Pelosi provided hope that further stimulus is a possibility by saying she would delay recess for stimulus talks. She provided the market a shot in the arm, which was trading poorly before her statement.

Last week we discussed the irregular divergence between the Citi Surprise Economic Index and Ten-year U.S. Treasury Yields. Today we present another chart, showing how copper prices are diverging from Ten-year yields. Is inflation starting to take hold?  Treasury bond yields and implied inflation expectations are not signaling concern. The hardest part of trying to assess inflation is the Fed’s influence on yields and the dislocations they cause. Over the coming weeks we will look to earnings reports for warnings of rising input prices.

, Commentary 07/15/2020

July 14, 2020

CPI will be released at 8:30. As we previously noted, this will be a tough data point to handicap due to supply line bottlenecks and irregular demand patterns. The estimate is for a gain of 0.5%, month over month, and +1.2% on an annual basis. Retail Sales will be released on Thursday. Economists expect another big month, with a +5.3% monthly gain (+17.7% May). The report is for June, so retail sales benefited greatly from Federal and state stimulus, but not to the same degree as May. Barring any new or extended programs and stimulus funds stimulus dollars will wane significantly over the next few months to the detriment of Retail Sales. Jobless Claims, also released on Thursday, is expected to see 1.323 million newly unemployed, a slight increase from last week.

This week, Banks, Airlines, and Pharmaceuticals kick off second-quarter earnings reports. Over the following two weeks, 61% of S&P 500 companies will report. Many companies did not offer forward guidance last quarter. We will be interested to see if they continue to stay tight lipped or are more comfortable providing investors with insight into their sales and operations.

Tesla shares opened up sharply on Monday, at one point rising nearly 15% from Friday’s close. The gains quickly vanished and the stock closed down nearly 5% on the day. As goes Tesla, as goes the NASDAQ. The NASDAQ 100 (QQQ) traded in a 4% range from the daily high to its closing price. The S&P was up over 1% at noontime and finished lower by nearly 1%. The Dow eked out a slight gain.

Los Angeles and San Diego schools will not open in the fall. Further, California Governor Newsom ordered all bars to be closed and no indoor seating for restaurants. California has the worlds fifth largest GDP, right behind Germany.

Home prices and sales of newly built homes have held up well despite the COVID crisis. One reason, as shown below, is that the supply of homes for sale is down nearly 30% from last years level. The Real estate industry is also witnessing an exodus from urban living to the suburbs. The trend is resulting in healthy, above market bidding for houses in desired areas. The negative effect on urban prices has yet to be documented.

, Commentary 07/14/2020

July 13, 2020

The graph below shows the deteriorating breadth of the NASDAQ despite the index’s surge higher. This dynamic is yet another indicator that a handful of stocks are driving the major indexes higher, while many of the index constituents are underperforming.

, Commentary 07/13/2020

The year over year change in Producer Prices (PPI) fell for a third straight month. The CPI report will follow tomorrow. While PPI shows a deflationary impulse, the CRB commodities index and implied inflation expectations have been on the rise. Bond yields have been flat to declining, showing no concern about inflation. The tug of war between inflation and deflation will continue to rage as supply lines, both domestic and international, remain fractured. The demand side, in aggregate, is also far from normal. Some sectors have recovered nicely and others remain depressed. The odd supply/demand combinations are leading to inflation in some goods and deflation in others. Needless to say, arriving at one aggregate inflation number is difficult and misleading.

The Fed’s balance sheet shrank by $88 billion last week, marking a fourth consecutive weekly decline. While the Fed added assets last week, its repo lending shrank to zero and dollar swaps with other central banks declined further. The lessened need for repo and dollar swaps is a positive sign that domestic and international dollar liquidity is plentiful. That said, we may see a temporary increase in repo facilities this week as individual and corporate taxes are due on July 15th. These are the payments that were delayed from April. There are $179 billion in dollar swaps that will roll off the Fed’s books in the coming weeks and months. Once these mature, the Fed’s balance sheet will head upwards as they continue to increase their holdings of Treasury, mortgage, and corporate securities.
, Commentary 07/13/2020
For all those subscribers invested in the Cannabis space, Politico is reporting that Bernie Sanders is not having luck pushing Biden to add marijuana legalization to his platform. Per Politico Another flashpoint over marijuana ended similarly: Sanders’ team argued in private meetings that they should legalize cannabis, but that idea was rejected. One task force member described the disagreements over qualified immunity and pot as “huge battles,” and multiple people involved said the criminal justice panel presented some of the biggest challenges for compromise.

July 10, 2020

Initial Jobless Claims continue to decline slowly and remain at levels well above anything witnessed since the advent of unemployment insurance. The highest weekly total prior to this year was 692k. Last week 1.314 million people filed for insurance. Continued claims continue to drop but remain stubbornly high at 18 million. Most concerning within this report is that persons claiming benefits in all programs, Federal and state, rose from 31.5 million to 32.92 million. The data however, is two weeks old. This LINK contains the full set of data if you are interested.

The CBO released the latest Monthly Budget Deficit, which reports that the federal deficit for June was $863 billion. The current deficit for the fiscal year (October 1, 2019 – September 30, 2020) is already $2.7 trillion. In regards to June’s deficit, there have only been five annual deficits that have been greater. Four were in the years surrounding the financial crisis and the other was last year. The total annual deficit is already nearly two times the largest annual deficit from 2009 with three months remaining.

Yesterday we discussed the sharp decline in consumer credit. The graph below, courtesy Brett Freeze puts historical context to the drop.

, Commentary 07/10/2020

Yesterday, the NASDAQ was up by .92% while the Dow fell by 1.39%. It seems that such divergences have been occurring with increasing frequency.  As shown below, we analyzed historical data to see just how uncommon this is. To qualify as a daily divergence in the graph, one of the indexes needs to be up or down by more than half a percent. At the same time, the other index had to move in the opposite direction. For example, if the Dow was down .75% and the NASDAQ was higher on the day, that daily instance would qualify. The graph shows the number of such instances in rolling 50 day periods. Over the last 50 days, it has happened 11 times or more than 20% of the time. The last time there were 11 instances in a 50 day period was during the Financial Crisis. Before that in 2002.

, Commentary 07/10/2020

July 9, 2020

Initial Jobless Claims, for release at 8:30, are expected to fall from 1.427 million to 1.375 million. Like the previous few weeks, we will pay close attention to continued claims.

Total consumer credit declined by over $18 billion, marking the third monthly decline in a row.  Revolving credit, mainly credit cards, fell by $24 billion and has declined by over $100 billion in the last three months. Total revolving credit is now under $1 trillion, a level last seen in 2007. The decline in consumer credit is due to reduced spending, as well as individuals using stimulus money to pay down their cards.

Every Tuesday, Redbook Research Inc. publishes its proprietary Johnson Redbook Index. The index tracks retail sales on a weekly basis. We usually do not pay much attention to the index, but given the situation, it provides us with near real-time data on the health of consumers, which is about 2/3rds of GDP. More popular Retail Sales from the Census Bureau is monthly and lags by a few weeks.  As shown below, the level of activity in the Redbook survey is still well below the same week last year. More concerning, it is aligning with other high-frequency data and signaling a stagnation in the recovery.

, Commentary 07/09/2020

The Citigroup Economic Surprise Index measures how well economic analysts are forecasting economic data. When the index is high, it means the analysts are underestimating economic data and vice versa for low readings. As shown, the degree in which they have underestimated data is literally off the charts. This index tends to oscillate as analysts reformulate their forecasts. Given the volatility of economic data and highly unusual circumstances, the record level is not surprising. Also, notice that bond yields are well correlated to the index. This time however, bond yields are not reacting. The odd divergence is the result of the unprecedented economic environment, many unknowns regarding the virus, and importantly the Fed/QE. If historical correlations held up, Ten-year Treasury yields would increase by about 2%

, Commentary 07/09/2020

Piper Sandler conducted the poll below to gauge the spending habits of those currently receiving unemployment benefits. The obvious take away is that about half of those receiving unemployment would cut their spending if the additional $600 Federal unemployment benefit were eliminated. Currently, that is scheduled to happen at the end of July. What we find stunning in the survey, however, is that only 2% of the people surveyed expect to be back on the job at the end of the month.

, Commentary 07/09/2020

July 8, 2020

Atlanta Fed President Raphael Bostic voiced concern that the recent uptick in COVID cases is potentially slowing the recovery. In particular, he said the Fed is closely examining high-frequency data and seeing signs that businesses are “getting nervous again.” Further, “there are a couple of things that we are seeing and some of them are troubling and might suggest that the trajectory of this recovery is going to be a bit bumpier than it might otherwise.” His concerns are in line with recent credit card data (high-frequency), showing that spending growth has flattened.

The table below provides a big clue as to what is driving the S&P this year. First, the S&P 500 is market cap-weighted meaning as a company’s market cap increases relative to the market its weighting in the index increases and by default other company’s decline. The table is sorted by market cap deciles with the largest at the top. As you read down, from top to bottom, notice that the year to date returns (far right column) are largely ordered from highest to lowest. Also, note that the four fundamental ratios are also ordered mainly from most expensive to cheapest.

, Commentary 07/08/2020

The table has the earmarks of passive investors driving the market. As investors buy the index, they indirectly are buying more of the largest companies and less of the smaller companies. For example, for every $100 invested in the S&P 500, an investor buys $6 of MSFT but only .01 cents of Xerox. As the index rises, the larger companies become a higher percentage of the index and the smaller ones diminish in their contribution. The process repeats over and over again. The trade today is to chase the largest companies. Conversely, the appropriate strategy for a market sell off is to rotate to the smallest companies. The interesting aspect of the table is that large-cap value stocks (those at the bottom of the list) are trading at respectable valuations in aggregate but are being shunned, simply because they have a relatively smaller market cap.

Over the coming few weeks, second-quarter corporate earnings will be released. As such, we thought we would share a graph from J.P. Morgan comparing how the first quarter stacked up in terms of margins, share counts, revenues and earnings per share versus the past twenty years. Keep in mind, while the earnings data was awful for Q1 and will be for Q2, many companies will experience earnings growth in the third and fourth quarters, which will improve the annual numbers for 2020. Currently, analysts expect 2020 EPS to fall 23% versus 2019. As is typical, that estimate will likely be revised lower over the coming quarters.

, Commentary 07/08/2020

July 7, 2020

Jobless Claims on Thursday and PPI on Friday will be the two big economic data releases this week. There are a few Fed speakers on the docket, but we do not expect to hear anything new from them. Congress started a two week vacation, so news on potential stimulus renewals/extensions or new stimulus will likely be muted this week and next.  Second-quarter earnings announcements will commence this week but mainly for smaller, lesser known companies. They begin in earnest next week when the banks and airlines release their financials.
This week the U.S. Treasury will offer $29 billion Ten-year notes on Wednesday and $19 billion 30-year Bonds on Thursday. Frequently, in advance of these offerings, bond yields rise and then reverse course after the auction. Given the Fed’s involvement via QE, prior trends may not hold.
The ISM Services survey broke into expansionary mode, showing that service managers are optimistic that the economy is getting better. The only concern in the report, and as we saw in the manufacturing surveys last week, is that the employment sub-index is still in contraction mode, which signals further job cuts.
While most Universities are working on a mix of online and live classes, Harvard bucked the trend and announced yesterday that all classes would be held on line. Further, they will limit dormitory housing to 40% of students.
The SBA put out a list of all the businesses that received at least $150,000 under the PPP program. The chart below provides some context as to how much was borrowed by industry and average loan size.
, Commentary 07/07/2020
The graph below, courtesy of J.P. Morgan, tracks Chase consumer credit card spending. Consumer spending bottomed in early April and has been rising since. Over the last two weeks, however, the gains appear to stabilize. As we have mentioned, consumer stimulus, the largest driver of consumer spending, is waning.  Credit card data, as shown below, should provide us an early indication that further gains in consumption are in jeopardy. This assumes, of course, that additional stimulus is not approved by Congress.
, Commentary 07/07/2020

July 6, 2020

For the second month in a row the BLS employment data was much better than expected. The economy added 4.8 million jobs after adding 2.7 million last month. The unemployment rate fell to 11.1%.
Initial Jobless Claims, on the other hand, continue to paint a different picture. New claims remain stubborn at 1.427 million, a slight decline from 1.482 million last week. More troubling, continuing claims, or those that filed claims and have yet to be rehired, rose slightly to 19,290 million. The running rate before COVID was approximately 1.7 million, resulting in approximately 17.2 million unemployed.
On Friday, the U.S. Treasury bailed out trucking firm YRC Worldwide Inc with $700 million of funding. The government package required YRC to give up almost 30% of ownership to the government.
Per a CNBC article, Joe Biden told his donors that he would erase most of Trump’s tax cuts. The corporate tax cut signed in late 2017 reduced the corporate tax rate from 35% to 21%. Wall Street is in agreement that the legislation boosted S&P 500 earnings by at least 20%. If Biden is elected, and his plan passes through the Senate and House, which are two big ifs, S&P 500 EPS would likely decline by at least $25-$30 dollars.
Tesla, rallied 8% on Thursday based on better than expected deliveries. As shown below, its deliveries are in line with the prior four quarters and showing no growth over the last year. Regardless of fundamentals, Tesla now has the largest market cap ($222 billion) of all auto manufacturers. It is now almost $50 billion larger than Toyota, the previous largest manufacturer by market cap. To say Tesla is priced for perfection is an understatement.
, Commentary 07/06/2020

July 2, 2020

As we noted yesterday, Consumer confidence bounced in the latest report by the Conference Board. However, that bounce in confidence came from those in higher income classes who participated in the market surge from the Fed’s liquidity. For the vast majority of citizens, confidence slipped.
, Commentary 07/02/2020
We apologize, ADP was released yesterday, not today as we thought. The ADP jobs number showed an increase of 2.369 million jobs which was 1.1 million below expectations. However, ADP revised last month’s number from -2.76 million to +3.015 million. Considering ADP does not estimate and uses real payroll data, it is a bit confounding how they can have such a large revision.
ISM positively diverged from the Chicago PMI number on Tuesday. National manufacturing is now expanding, versus contracting in the Chicago data. Again, the critical point to consider is that while more companies are expanding versus contracting, these surveys do not quantify the degree of expansion. As we saw in Chicago, the employment sub-index in the national data also remains in contraction. The positive takeaway from the report is that it appears manufacturers are recovering.
The table below shows expectations and the prior month readings for today’s BLS employment report. Note the massive range in estimates. Initial Jobless Claims, also at 8:30, is expected to be 1.4 million for the week, versus 1.48 million last week.
, Commentary 07/02/2020
The Fed minutes from the June FOMC meeting were released. As we suspected, yield curve control (YCC- also know as Yield Curve Targeting YCT) is actively being discussed at the Fed. In fact, the first topic of the meeting was a “Discussion of Forward Guidance, Asset Purchases, and Yield Curve Caps or Targets (YCC/YCT).” The discussion ended with the following statement: “All participants agreed that it would be useful for the staff to conduct further analysis of the design and implementation of YCT policies as well as of their likely economic and financial effects.” As we discussed in The Next Iteration, What is Yield Curve Control, YCC will be used by the Fed, we believe it is just a question of when.
The Fed continues to maintain a realistic view of the economy, to wit: “Officials saw extraordinary uncertainty and considerable risks for the economy.” The statement further confirms the Fed has no intention of letting its foot off the monetary gas pedal and will use its full range of tools to support the economy.

July 1, 2020

With quarter-end in the rearview mirror, some of the window dressing trades from the prior week will likely be reversed over the next few days. In other words, investment managers that put on new positions before quarter-end to make their quarter-end investment statements look favorable to clients, may sell and buy back what they previously owned. Given the volatile quarter we just had, it is likely some added risk in recent days to show they were aggressively chasing the rebound, while others reduced risk to show concern. This dynamic makes it tough to handicap.

Jerome Powell and Steven Mnuchin testified to Congress yesterday. Of interest, Mnuchin said: “Treasury and the Fed have not yet figured out a way to help commercial real estate.”

United States Consumer Confidence was encouraging. It jumped to 98.1 versus a consensus forecast of 91.8.  It is still way off of January’s level of 131.6.

Despite increasing, Chicago PMI was disappointing, only rising to 36.6 versus 32.3 last month. While better than last month, it was well off of expectations of 45. Employment and new orders, which are good leading economic indicators, both contracted. The survey had a special question as follows: “What are your personnel plans for the rest of the year?” 55.8 of those surveyed said they were going to freeze new hires, 23.3% expect layoffs, and 18.6% plan to increase their workforce.  The graph below shows the recovery in the PMI survey has been much weaker than consumer related industry data points. This should not be surprising as much of the stimulus thus far is geared towards employment and consumption, not manufacturing. The broader ISM manufacturing survey, released at 10am, will help affirm the PMI report.

, Commentary 07/01/2020

On Monday, we wrote the following: “A second important factor driving consumer confidence and consumption are the benefits associated with Federal and state stimulus programs.” The graph below from the Hutchins Center quantifies and substantiates our concern. Per their forecasts, Federal and state stimulus will positively impact 2nd quarter GDP by 9.25%. That amount is projected to fall considerably to 4.55% in the 3rd quarter and .86% in the fourth quarter. By the 2nd quarter in 2021, they expect an economic drag with a negative fiscal impact of -5.35%.

, Commentary 07/01/2020

We also recently explained the ongoing debate among investors on whether the stock (amount of total QE) matters more or less than the flow (recent percentage change in QE). The following graph, courtesy of Strategas, shows that as the percentage change in QE stabilized in recent weeks, the market has followed its cue and consolidated.

, Commentary 07/01/2020


June 30, 2020

This week is short due to the Friday, July 4th holiday, however, it will be a busy one. Important manufacturing survey data will be released, including Chicago PMI today, and the PMI and ISM manufacturing surveys tomorrow. Keep in mind the surveys are misleading as the survey asks whether conditions are better this month as compared to last month. In almost all cases the answer is probably yes. The bigger question, which these surveys do not ascertain, is how much better.

Also, on Wednesday, ADP will release its employment report. Because of the holiday, the BLS will release the June employment report on Thursday, along with Initial Jobless Claims. Jerome Powell will speak at 12:30 this afternoon.

Late yesterday afternoon U.S. Commerce Secretary Wilbur Ross revoked Hong Kong’s special status. State Department Secretary Mike Pompeo tweeted: “If Beijing now treats Hong Kong as “One Country, One System,” so must we.”  The U.S. actions were likely in response to China passing a national security law for Hong Kong. Details are light, but it is believed the law further restrains Hong Kong’s autonomy.

Many large companies are suspending advertising campaigns on Facebook and other social media sites. These actions are likely temporary, but for investors of social media companies, they will reduce revenue and profits. In 2017 we wrote about how social media are really just advertising companies. To wit:

“With that example of how the automobile industry grew revenue from all of the aforementioned highlighted sources, we consider social media. 88%, 95%, and 90% of revenue from three of the largest social media/internet firms, Google, Facebook, and Twitter respectively comes from advertising (data sourced from their most current annual reports). Needless to say, when we think about social media’s “product”, it is not cutting edge technology as some claim, but instead they are simply a new breed of mad men, in a mature advertising industry.”

The Small Business Administration will stop approving PPP loans on Wednesday. More than $134 billion has not been used. As the Daily Shot points out below, this is a common theme.

, Commentary 06/30/2020

June 29, 2020

Concerns over the increasing number of COVID cases in Texas and Florida prompted their respective governors to walk back their reopening processes. Per CNN, California’s Governor is advising the county’s health department to reinstate its stay-home orders after it had a rise in COVID cases. The recent outbreak may also explain why the University of Michigan Consumer Sentiment Survey fell from 78.9 to 78.1. Given that personal consumption is about two-thirds of GDP, we will closely follow how consumers react to the surge in new cases.

A second important factor driving consumer confidence and consumption are the benefits associated with Federal and state stimulus programs. The first chart below, courtesy of Zero Hedge, shows that personal income has risen sharply over the last few months. Unfortunately, all of the increase is due to the $1200 stimulus checks and enhanced unemployment insurance benefits (transfer receipts). In fact, without the stimulus, personal income would be down sharply. The second graph shows the unprecedented extent to which unemployment benefits are supplementing lost wages. Given the large degree to which stimulus has supported personal consumption, we must be prepared for a situation in which any new rounds of stimulus are not large enough. More troubling would be the possibility of further stimulus getting caught up in election politics.

, Commentary 06/29/2020

, Commentary 06/29/2020

The June rally in the equity markets should really be called the Apple rally. Here is a tidbit from Philip Davis at www.philstockworld.com explaining:

AAPL is up 14% in June and the Nasdaq has gained 600 points or 6.3% so, essentially all of June’s gains so far have come from Apple’s $45 run and, in the Dow, each component $1 is worth about 8.5 Dow points (yes, it’s an idiotic index) so AAPL contributed 382 points to the Dow’s 400-point gain for the month.  That would be 95.5% of the gains…

The Wall Street Journal had an interesting article about the way Starbucks plans to adopt to COVID and post-COVID consumer trends. To wit:  “For their part, Starbucks is planning to build more locations in urban areas designed specifically for takeout and advance ordering. While these locations will have lower sales potential than a traditional cafe, the savings on labor and occupancy costs will be significant.”

June 26, 2020

Initial Jobless Claims continue to remain at high levels. The non-seasonal adjusted number of claims fell by a meager 6,000 people. Total continuing claims including Federal programs rose from 29.2 million to 30.5 million. More importantly, despite the reopening of the economy. unemployment claims have flattened out at levels higher than any previous point in history.

, Commentary 06/26/2020

The combination of Fed intervention and record debt issuance pushed trading volumes in investment grade corporate bonds to a record high as shown below.

, Commentary 06/26/2020

With the large increase in equity prices, many funds are likely over-allocated to equities and under-allocated to bonds. As such, large pension funds and other balanced funds will need to rebalance their portfolios at quarter-end. CNBC published There’s a wave of selling estimated to be in the billions that’s about to hit the stock market which discusses how this quarter’s imbalance could lead to a large trade out of equities and into bonds. Given the size of the potential trades and the desire to front-run the market, these trades are already being done and will continue throughout the month.

Calculated Risk put out an interesting article discussing how commercial real estate construction is struggling to recover. Specifically, the article mentions the AIA Architecture Billings Index which has stopped declining and is not recovering like other sectors. It currently sits below the trough of 2008. Given the overbuilding of commercial real estate over the past ten years in many areas and now the work from home movement, this sector will likely struggle.

While economic data bounced over the last month, this has simply been a function of going from extremely depressed levels to less depressed levels. This was seen yesterday in the Durable Goods report which showed a large bounce in the headline number but new orders remain substantially below 2019 levels.

, Commentary 06/26/2020

Lastly, one of the big risks to the market has been the potential for a “second wave” of the virus, which curtails the economic recovery. The surge in new cases is coming at a time when the “first wave” had not fully subsided as of yet pushing both Texas and Florida to “pause” their reopening plans. As JPM noted yesterday, there is already evidence that rising cases are stating to hit consumer spending again with restaurant bookings declining.

, Commentary 06/26/2020

With the inability to get activity back to normal levels, the risk of more business closures and job losses puts the hope of a “V-shaped” recovery at risk.

Lastly, we have avoided banks in our portfolios as zero interest rates, monetary interventions, and a weak consumer don’t lend to stronger profitability or stability of major banks. Yesterday, another hit came to the financial sector as the latest Fed “stress test” found potential threats to the financial system which resulted in both a capping of bank dividends and restricted stock buybacks for the sector. Given that stock buybacks have been a major source of producing Wall Street “EPS beats,” expect banks to continue to underperform the broader markets in the months ahead.

June 25, 2020

Initial Jobless Claims will be released at 8:30. The current estimate is for 1.38 million people to file initial claims. The chart below shows how the claims stimulus is monetarily incentivizing people to stay at home versus seeking employment. This odd dynamic makes it hard to truly assess the labor market until unemployment insurance reverts back to its old pay rate.

, Commentary 06/25/2020

The winds of trade war are starting to blow again. Earlier in the week Peter Navarro hinted at trouble with the China Trade deal. Now there is talk that Trump is considering $3.1 billion of new tariffs on exports from France, Germany, Spain, and the U.K.

Fitch downgraded Canada’s credit rating from AAA to AA+. The combination of weaker growth and more debt drove the action.

One of the factors making the current recession worse than prior recessions is that it is occurring simultaneously around the world. As shown below, the World Bank expects more than 90% of economies to be in a recession this year. The percentage dwarfs all prior recessions and is even greater than the Great Depression.

, Commentary 06/25/2020

The following graph plots forward estimates for the Dollar index versus the current value of the index. As shown, the dollar has mostly been above forecasts and is currently above future expectations. Interestingly, these bearish outlooks have not fallen over the last few months as the Fed’s balance sheet has surged in size and the Federal deficit is ballooning. We must keep in mind, dollar demand increases as foreigners borrow more dollar-denominated debt to fight the economics effects of COVID.

, Commentary 06/25/2020

The following Tweet and graph from Troy Bombardia is interesting.

, Commentary 06/25/2020

June 24, 2020

Texas Governor Greg Abbott said he might stop or slow down the state’s reopening plans if the contagion keeps expanding at what he calls an “unacceptable rate.” California is considering similar steps. New York City and other major east coast cities, on the other hand, are taking steps towards reopening. Reopening will like likely have fits and starts due to the size of the country and the different timing in which the virus hit each geographic area. The following graph shows how the recent outbreak in the Houston area has weighed on restaurant traffic.

, Commentary 06/24/2020

Over the last few weeks, one of the more notable oddities of the equity markets has been the daily performance divergences between the major indexes. In previous commentaries we made a note of the uncorrelated relationship between the Dow Jones Industrial Average and the NASDAQ. The Wall Street Journal picked up on this as well. They wrote:

A surge in big technology stocks has helped the Nasdaq Composite rally 12% in 2020, while the Dow Jones Industrial Average of blue-chip stocks is down 8.8%. The benchmark S&P 500 is hovering in between them, off 3.5%.

The Nasdaq’s advantage over the Dow and S&P 500 is the biggest since 1983. The gap between the S&P 500 and the Dow is the widest since 2002, when the Dow was ahead.

There has been a lot of debate about how much economic damage was caused by the economic shutdowns and what a second round of shutdowns might mean for the economy. Data out of Sweden and Denmark helps shed more light on the question. Sweden, which did not shut down, saw spending decline by about 25%. Neighbor, Denmark, which had a full shutdown, saw spending fall about 30%. While a small sample set, the government imposed shutdowns may not matter as much as what individuals do or do not do. As we learned, despite complete freedom to consume, the Swede’s, by and large, voluntarily shut themselves down. Click LINK for the whitepaper by the University of Copenhagen.

The following graphs show the yields on junked rated BB and CCC corporate bonds. As shown below, the recent spike in yields pales in comparison to the prior recessions of 2008 and 2001. The red lines show the current yield to compare to historical levels. Note that BB-rated securities are just about at all time record low yields despite a deep recession. CCC-rated bonds are not as overbought, but still well below where they should be given that we are in a recession and credit losses are picking up. The outperformance of BB versus CCC is likely due to the fact that the Fed is predominately buying BB-rated securities in its corporate bond QE program. Returns on junk rated debt are now heavily dependent on the Fed’s activities and not the underlying fundamentals of the corporations themselves. This is yet another massive market distortion caused by the Fed.

, Commentary 06/24/2020

On the topic, American Airlines is in the market with a secured junk bond offering. The company just increased the offering yield from 11% to 12% as demand was tepid. The offering gives us some hope that there are some instances within the junk-rated bond market where investors are still being paid to take risks.

June 23, 2020

Like the previous night, the overnight session witnessed a bout of volatility. After trending higher after the close, Peter Navarro said the trade deal with China is “off.” The markets plummeted on the news, with the S&P down almost 60 points from its highs.  Navarro quickly backtracked and said the comments were taken out of context. The market rebounded quickly and is set to open about 15 points higher.

This week is expected to be quiet on the Fed front with only two speakers. The Fed’s annual Jackson Hole retreat/meeting scheduled for late July will now be held virtually. In recent years, the Fed Chairman has used the event to announce new policies or discuss changes in their economic forecast. We suspect that yield curve control could be discussed at length at the meeting.

A few manufacturing surveys will be released this week and as always Initial Jobless Claims on Thursday. We continue to closely follow claims data as it has a strong correlation to employment, and in turn, greatly affects the Fed’s operations.  Next week’s BLS employment report will be a test for the V-shaped recovery camp. The consensus estimate is for a gain of 3.6 million jobs on top of the 2.5 million from May. The unexpectedly strong May report raised the bar for how quickly investors expect the labor force to be redeployed. Given optimistic expectations, any significant downside miss versus expectations will bring into question the trajectory of the recovery and the reliability of economic data during this period of economic turmoil.

There is a big debate among investors about the market benefits of QE. In particular, whether it is the stock or total amount of QE, or the flow, the weekly change in QE that drives the market. The graphs below show that while the stock of QE administered over the last few months has been massive, even when compared to 2008, the flow has slowed dramatically. In fact, as can be seen in both graphs the Fed’s balance sheet shrunk last week. The decline was primarily due to a reduction in repo operations and foreign currency swaps. This should be a one-time event but the growth in the stock and rate of flow will be minimal compared to the prior months.

, Commentary 06/23/2020, Commentary 06/23/2020

Shown below is a graph from J.P. Morgan in which they highlight that correlations amongst a wide variety of global assets have increased sharply to its highest level in at least the last 20 years. Correlations spiked briefly in 2008 as economies struggled (represented by the red line). At that time QE was introduced by the Fed, ECB and BOE and markets around the world benefited in unison from the liquidity. This crisis is seeing unprecedented monetary liquidity in terms of the amount of securities the banks are buying but also in terms of the number of different asset classes they are buying. One of the downsides to their actions is the benefits of diversification are diminished.

, Commentary 06/23/2020

June 22, 2020

Quadruple witching day proved to be volatile, especially around the time options were to expire. The market opened up higher, soared minutes before the options were set to expire, reversed the gain equally as fast, and then proceeded to fall for the remainder of the day. Stock futures fell sharply after the close but rebounded in Sunday night trading and recaptured most of the losses. The NASDAQ bucked the trend on Friday as investors again flocked to the “safety” of tech stocks.

The ring leader of the fad of buying junk companies provided us with yet another entertaining view of how “newbie” investors are deciding what stocks to buy. In the video linked below, David Portnoy literally pulls three Scrabble letters out of a bag and proceeds to buy 200k worth of the stock (RTX). Fortunately, or unfortunately, we hold RTX in our equity portfolios.

, Commentary 06/22/2020

The current Atlanta Fed GDP Now forecast for second quarter growth is -45.5%. While improving since early June, it is still well below the consensus forecast of -35%. One reason for the difference is that GDP Now uses only available data while most forecasts use actual data and estimates for unknown data. June should see continued improvement, which will push GDP Now higher over the coming weeks.

In a recent interview on Bloomberg, Kevin Warsh, former Fed member, criticized the Federal Reserve’s policy efforts. In particular he stated: ” They (Fed) seem to be incredible aggressive even as risk assets are at incredible highs.” He followed that with “I wish the same aggressiveness was being felt in the policies they are putting on Main Street.”

Like, Mr. Warsh, we believe the Fed is doing everything in its power to keep asset prices stable or even higher. The problem is that so little of their efforts will help the economy in the short run but are accompanied by negative economic and societal consequences in the long run. From a macro perspective, higher stock prices despite weakened long term economic growth do not bode well for investors in the future.

June 19, 2020

Initial Jobless Claims came in higher than expected at 1.51 mm versus 1.29mm expected, and 1.57mm last week. Of concern, continuing claims have been relatively flat for four weeks running. This number should be declining rapidly if the economy is to recover as quickly as many think it may. The chart below shows state and federal unemployment continuing claims.

, Commentary 06/19/2020

The Philadelphia Fed Business Outlook Survey showed great improvement from -43.1 to +27.5. Diffusion indexes like this survey do not report actual levels of activity but simply whether or not things were better or worse. Given the poor conditions in May and reopening in June, it is not surprising that there was an improvement in the outlooks of business managers’.

It is widely reported that U.S. shale producers will bring about 500K barrels per day back online by the end of June. The price of crude oil has consolidated in the $35-40 range over the past few weeks in what is hopefully a sign that the gross supply/demand imbalance that caused negative oil prices has corrected.

The graph below from the Man Institute shows the degree to which “garbage” stocks have outperformed the market during the most recent leg of the rally. They define garbage stocks as those having a credit default swap price of over 1000. In other words, these companies are solidly in junk-rated corporate debt territory.

, Commentary 06/19/2020

The graph below compares the strong recovery in Retail Sales versus the nascent recovery in Industrial Production. Retail sales are directly boosted by a variety of stimulus programs. On the other hand, Industrial Production has not benefited to nearly the same degree from fiscal stimulus. This divergence, in the words of @peter_atwater, is a “K-shaped” recovery. Basically, Peter argues there are the haves and the have nots of this recovery.

The biggest question facing the economy is can consumers continue to carry the weight as fiscal stimulus programs wane. If not, can the government pass another round of stimulus before the election?

, Commentary 06/19/2020

June 18, 2020

Initial Jobless Claims, released at 8:30 am, are expected to fall from 1.542 mm to 1.22 mm.

The following Tweet and graph from @renmacllc raise the question of whether the recovery in employment is starting to level off. The data in the graph is based on daily readings.

, Commentary 06/18/2020

Friday is Quadruple Options Expiration day, meaning that four sets of stock options expire, including futures options, index options, single stock options, and single stock futures options. This event, occurring four times a year (3rd Friday of March, June, September, and December) tends to result in increased volume and volatility as securities and options are bought and sold to replace expiring options, re-hedge positions, or to meet the needs of a contract expiring. This Friday will see a larger than normal number of options expiring, which could result in additional volatility.

Per the Mortgage Bankers Association (MBA) 8.55% of mortgages are in forbearance, equating to approximately 4.3 million households. The graph below shows the percent of loans in forbearance by the three mortgage types and the total. For consideration, would retail sales have been as strong if 4.3 million households made mortgage payments?


, Commentary 06/18/2020

It is not all gloom in housing. Also, according to the MBA, mortgage purchase applications hit an 11 year high. The data is seasonally adjusted so it is likely skewed as March and April activity got pushed to May and June.

The chart below from Moody’s shows its baseline, optimistic, and pessimistic expectations for global corporate default rates. Based on the fact that U.S. credit spreads are nearing record low levels, the market is clearly banking on a better than best case scenario. Keep in mind the Fed is buying corporate bonds so yield levels and spreads do not properly account for market default expectations.

, Commentary 06/18/2020

June 17, 2020

In testimony to the Senate, Chairman Powell largely reiterated the same overall message from last Wednesday’s FOMC meeting. While he is encouraged with signs of recovery, he said the economy would continue to struggle until a cure or vaccine is discovered. Facing some Senator’s concerns about the Fed’s burgeoning balance sheet, Powell said the Fed’s intention is not to monetize Federal debt. Whether that is their intent or not, the Fed’s balance sheet has grown by $2.95 trillion while the amount of federal debt outstanding has risen by $2.88 trillion since the new year. He also said the Fed is “some years away” from halting asset purchases.

Like unemployment, Retail Sales far exceeded the best expectations. On a monthly basis, retail sales rose 17.7%, almost double what economists expected. Retail sales are off 10% from the peak. Sales are greatly benefiting from the various forms of government stimulus. As those benefits wane, we will get a clearer reading of retail sales and other consumer spending data.

On Tuesday morning, the market rallied strongly on an infrastructure bill. While stimulus is frequently good for the markets, the chances of a major bill happening before the election is very low. For one, we must ask how likely is it that House Democrats pass a bill that would help Trump’s reelection chances. Equally important, we have heard more about deficit and spending concerns from some Republicans. Given the political climate and upcoming election, a big funding bill, barring a reemergence of crisis conditions, will be very difficult to pass.

The May monthly Treasury statement shows that federally withheld income tax receipts fell 33% from May of 2019. Given that withheld taxes are directly tied to paychecks, the massive gap between this data point and the May employment report raises a lot of questions.

According to a popular Bank of America survey, a record amount of professional money managers think the stock market is overvalued. While seemingly a bearish signal, markets are known to climb a wall of worry. It is worth noting that in the recent market decline, the survey never reached low levels, let alone the levels achieved at the end of the last two bear markets (2003 and 2009).

, Commentary 06/17/2020

June 16, 2020

The Fed announced they will start buying individual corporate bonds as part of their corporate bond-buying QE program. The specific bonds they intend to buy will be based on an index which will satisfy the Fed’s criteria. LINK to the press release. Before the announcement, the Fed was only buying corporate bond ETFs. The stock market took the statement as a positive, but it represents no change in strategy or in the amount they will buy in the corporate bond market.  The Fed just seems to have cleared an operational hurdle and will go ahead with their original intentions.

Yesterday was another roller coaster in the markets. The S&P 500 was down nearly 90 points or 3% in the overnight session. It came back throughout the morning and then took off on the Fed announcement. It closed up nearly 1% on the day and is up another 1% coming into this morning’s session. The culprit for the latest rally is a proposal from Trump for $1 trillion infrastructure spending.

Jerome Powell will speak today at 10 am and tomorrow at noon. Last week he came off as bearish about a swift economic recovery and did not commit to more stimulus. In times of economic crisis, which we are still in despite the market rebound, investors always want more. We have no doubt the Fed will do more if “needed.”

Retail Sales and Industrial Production will be released this morning and Jobless Claims on Thursday. Retail Sales are expected to rebound sharply, following a drop of 8.7% in March and 16.4% in April. The consensus of economists is calling for a +7.5% rebound in May. Like all economic data, Retail Sales has a massive range of estimates (+2.3% to +12.2%).

In one of the more bizarre events we have witnessed, Hertz will offer new equity. The proceeds will be used to pay back bondholders that are being defaulted upon. Despite the new funds, bondholders will still be owed money, which leaves the new and existing equity holders with little to no value. The bondholders are taking advantage of investors that have flocked to shares of bankrupt companies. In the SEC filing for the new shares, Hertz makes it clear that the offering is fraught with risk. To wit: “Consequently, there is a significant risk that the holders of our common stock, including purchasers in this offering, will receive no recovery under the Chapter 11 Cases and that our common stock will be worthless.”

Tesla’s stock recently surpassed $1000 per share and, in doing so, topped Toyota with the largest market cap in the industry, as shown below. To help assess whether its current price is fair or not, we can compare Tesla to Toyota. The bet on Tesla is a big bet on its abilities. For Tesla to justify its current valuation it would need to increase its car sales by nearly 30x. That is a tall order, especially considering that over the next year or two all of the major auto manufacturers will be selling electric vehicles and, in many cases, at more reasonable prices than Tesla.

, Commentary 06/16/2020

June 15, 2020

Friday was a volatile day. After the sharp loss on Thursday, the market opened up nearly 3%. It proceeded to give up the entire gain and fall slightly below the 200-day moving average. Toward the end of the day, it rallied again to close up 1.30%. This morning the market is weaker and trading below its 200-day moving average.

The June Preliminary University of Michigan Consumer Sentiment Survey was positive, coming in at 78.9 versus estimates of 75. It was 72.3 in the prior month. Current conditions and future expectations both rose nicely. While the data is encouraging, it comes with a disclaimer. Per Barrons: “The interesting thing to note is that the recent improvement in sentiment has a partisan skew. The improvement in sentiment as reported by the University of Michigan is being driven almost entirely by self-identified Republicans and independents.” The political divide may not be as much about politics but a result of the larger cities, which tend to have more democrats, getting hit harder by COVID and enduring longer shutdowns.

The New York Fed puts out the Weekly Economic Index (WEI), a real-time estimate of economic growth. After bottoming in late April, the index has slowly risen. Of concern, the latest reading fell slightly from -9.6% to -10%. While one weekly decline is not concerning, it does point to a slow and tenuous recovery, unlike what the market and most pundits seem to be expecting.

, Commentary 06/15/2020

As we have shown, economic data has been very volatile, at times misleading, and often data is at odds with other data. Such confusing economic data may remain with us for a few months as the economy levels off and begins to rebound. Given the unique situation, we are looking for signs that economic data is generally trending in the same direction and are careful not too read too much into one piece of data.

In its latest Quarterly Refunding projection, the U.S. Treasury estimated it will have a cash balance of approximately $800 billion at quarter-end, down significantly from its current $1.5 trillion surplus. A big reason for the massive surplus is the fact the Treasury is holding reserves for PPP loans and other CARES Act expenditures. In the case of the PPP loans, the Treasury will need to make the banks whole for loans that are forgiven or defaulted upon.

June 12, 2020

The media headlines explaining yesterday’s decline were as follows: COVID cases in states that re-opened early are surging, Jerome Powell was not optimistic about a strong economic rebound, and Trump’s poll numbers are slipping. Those are the narrative. The primary reason is that the market was technically grossly overbought. Going forward, it will be important assess whether the decline is part of a healthy correction/consolidation or a reversal. The S&P 500 broke slightly below the important 200-day moving average, but is trading above it this morning, and it is still well above the 50-day moving average. Where the market closes to end the week will be important as to our positioning going forward. We will have more on this topic in this weekend’s newsletter.

The yield on the 5-year U.S. Treasury note is just one basis point from its all-time low. With yields nearing record low levels, stock investors hedging with bonds have a problem. As long as the Fed steers away from a negative rate policy, Treasury yields will likely have a floor. Therefore, with limited price upside, the offsetting benefit of holding bonds is potentially much less than in years past.

The graph below shows the difference between current yields and the record lows achieved over the last few months. The table below the graph calculates the potential price gain if the bonds were to fall back to their respective record lows. As shown, other than 30 years bonds, there is little room to profit, unless the bond market begins to price in negative yields.

, Commentary 06/12/2020

Initial Jobless Claims met expectations for a decline of 1.542 million jobs. Continuing claims were higher than expectations and largely unchanged from the prior week. The bottom line from recent claims data is it seems like there is a lot of job churning as some people are getting laid off while others are getting re-hired. Producer Prices (PPI) were slightly higher than expectations at +0.4% versus 0.1%. Excluding food and energy, PPI met expectations at 0.1%. The Fed tends to rely on the data excluding food and energy as they tend to be volatile.

Not surprisingly, the Baker Hughes oil rig count and Crude oil are well correlated. With the price of crude back to near $40 a barrel, we are interested to see if rig counts start rising. If not, it may be that the financial damage to oil producers of the last few months will preclude a lot of wells from being put back online in the short run. If this is the case, reduced supply and increasing demand for oil would be a nice tailwind for the price of oil. Despite the strong rally in crude, it still about 30% below where it started the year.

, Commentary 06/12/2020

June 11, 2020

The Fed statement was very similar to what we have heard from numerous Fed speakers in that the Fed will do whatever it takes. The only statement of note is that the Fed will buy bonds “at least at the current pace” for now. This appears to be a floor they are putting under QE in regards to the amount of weekly purchases. Per Bloomberg- “In a related statement, the New York Fed specified that the pace of the increase would be about $80 billion a month for purchases of Treasuries and about $40 billion of mortgage-backed securities.” As we discussed yesterday, it is likely that massive Treasury supply and the inability of the market to absorb the bonds concerns the Fed.

The table below shows the new Fed economic and rate forecasts through 2022. Of note, they expect the unemployment rate to end 2020 between 9% and 10% and Fed Funds are expected to stay at zero through 2022. The Fed expects inflation to run below 2% for the period and GDP to recover back to 2019 levels by the end of 2022.

, Commentary 06/11/2020

Per Jerome Powell’s testimony:

  • Yield Curve Control (YCC), in which the Fed manages QE toward specific yield targets across the maturity spectrum of Treasuries, was discussed and will be in upcoming meetings, but they are not ready to act upon it yet. They also do not appear to have any interest in negative rates.
  • Powell doesn’t believe that the additional stimulus related debt being added to federal and corporate balance sheets will dampen future economic growth. This “logic” flies in the face of data from the last 40 years.
  • We’re not thinking about raising rates. We’re not even thinking about thinking about raising rates.”

May CPI fell 0.1% monthly and annually versus expectations of a 0% inflation rate for both. Core CPI (excluding volatile food and energy prices) was also down 0.1%. Food prices rose 0.7% for the month, the largest monthly gain since 1984. Lower energy prices offset the gain in food prices. This trend will reverse as recent increasing energy prices take a few months to show up in CPI data.

This was the first time since at least 1957, in which Core CPI fell for three straight months. Since 1957 there have been 761 monthly CPI reports. In only 12 of them, including the three most recent, have core CPI prices declined.

Starbucks announced weaker than expected earnings yesterday. In particular, we thought the following data was interesting: In China, 99% of their stores have opened but sales are still down 21% from a year ago. In the U.S., 91% have opened and sales are down 43%. As the economy continues to reopen and people feel comfortable going out, sales will rise. The question is how much will the recession hamper sales versus customers concern over the virus.

Tesla’s stock surpassed 1000 yesterday and is now up 235% on the year. Its market cap is almost three times larger than that of GM and Ford combined.

June 10, 2020

The key event today will be the Fed’s statement at 2pm and Jerome Powell’s press conference following at 2:30. We expect the Fed will keep promoting their aggressive policy actions and offer to do more if needed. We doubt they will give any indication that they are considering taking their foot off the gas pedal.

In yet another sign of bullish exuberance, the Put/Call ratio continues to fall to multi-year lows. As of Tuesday, the index stood at .37, a level last seen five years ago. The ratio measures the proportion of put options to call options purchased on each day.

, Commentary 06/10/2020

The market rotated back to its favorite sector yesterday as the NASDAQ crossed 10,000 for the first time. Yesterday the NASDAQ was up .29% while the Dow fell 1.09%. We are watching to see if the divergence is the beginning of a rotation back to larger cap and higher quality companies from poorer quality stocks that have recently been playing catch up. We noted in last Friday’s Sector Relative Value Report, that the tech sector (XLK) was moving towards deeply oversold territory versus the S&P.

On Friday June 5th, the Fed’s overnight repo program for Treasuries exceeded $100 billion for the first time since early March, as shown below. The recent uptick may be an early warning that the banks are struggling to absorb record amounts of Treasury debt issuance. Making the task harder is that the Fed is drastically slowing their purchases of Treasury securities. Fed Treasury bond purchases peaked in late March at $362 billion per week. Since then, it has declined to about $25 billion per week.  In May, the amount of Treasury debt outstanding rose by $759 billion, or $190 billion a week.

, Commentary 06/10/2020

If the Fed is concerned that banks and investors are struggling to buy the massive debt issuance at current rates, we should expect them to increase the amount of QE directed toward Treasuries. The topic may be mentioned by Powell today, but we suspect any changes will show up in their weekly QE guidance.

As we have discussed, the nationwide protests are largely propelled by racism and police misconduct. Still, they are also driven by economic dissatisfaction due to the growing divergence of wealth and poor. This should not be surprising given the wealth inequality gap is now the widest since the late 1920’s. Given that the latest crisis is substantially widening the gap even further, we should expect protests here and abroad to be a mainstay at least through the election. We recently read an article from Albert Edwards of SocGen in which he shows the recent protests in America are part of an increasing trend of global protests occurring over the last decade. His paragraph is below. (CLICK TO ENLARGE)

, Commentary 06/10/2020

S&P cut Japan’s sovereign A+ rating outlook from positive to stable. While not a rating cut per se, it does set the stage for S&P to reduce the rating soon. We will likely see more negative ratings moves on sovereigns, municipals, and corporations as debt levels have increased markedly against a backdrop of slower growth and decreased revenues.

June 9, 2020

Inflation data and the Fed take center stage this week. CPI will be released Wednesday, followed by PPI on Thursday. The consensus expectation for CPI is for 0% inflation on a monthly and annual basis.

Also of interest is the NFIB Small Business Optimism Index released this morning. After falling sharply in March and April, it improved in May. Given the importance of small businesses, this is another potential sign that a recovery has begun.

The Fed meets on Tuesday and Wednesday, followed up with the FOMC statement and Jerome Powell press conference at 2:00 and 2:30, respectively, Wednesday afternoon. In addition to updates on the state of monetary policy and the economy, we are looking for hints on whether yield curve control (YCC) may be the next iteration of QE. We will have more on YCC in an upcoming article. We are also on the lookout for any signs of taper, as the financial markets appear to be liquid and on a sound footing.

The ramp in equities has been increasingly led by a rotating set of stocks, many of which were the most beaten down in March. The action appears to be largely momentum based. In other words,  those stocks up the most in the previous days are likely to be attractive today. Caution is warranted as the list of “in” stocks changes quickly and without much reason. To  that point, Chesapeake Energy (CHK) rose 181% yesterday but is slated to open down 50% this morning as they are preparing to file for bankruptcy.

Robinhood is a rapidly growing broker designed for small retail investors. Robinhood is popular, in part, because it allows partial share trading and markets to younger investors. The graph below shows how their popularity accelerated at the market lows in March.

, Commentary 06/09/2020

Robinhood publishes daily data on which stocks its users are holding. On June 4th we downloaded their top ten holdings and found that those stocks in aggregate beat the S&P by about 15% since May 1st.  In the list are many companies hobbled by the recession such as Ford, American Airlines, Delta, Carnival Cruise Lines, and Norwegian Cruise Lines. While Robinhood users are small and not big enough to move markets, we do believe their mindset of chasing momentum, regardless of valuation, applies to a much larger population of investors. To wit, we saw a tweet from a well-known options trader as follows: “Between $AAL $DAL $UAL $SAVE $LUV the five Airlines have traded 1.3M calls today Then $CCL $NCLH $MGM another 588,000 calls Never seen this amount of activity, crazy

Speaking of excessive bullishness comes the following tweet and graph from @sentimentrader.

“This is stunning. At the peak of speculative fervor in February, small traders bought to open 7.5 million call contracts. This week, they bought 12.1 million. Watch what people do, not what they say. They’re full-bore bullish, on steroids.”

, Commentary 06/09/2020

The takeaway is that this bout of speculation can certainly continue, but be careful as excessive speculation is a hallmark of a market top, not the beginnings of a bull market.

June 8, 2020

The employment data on Friday was truly stunning. The BLS reported that 2.509 million jobs were added in May versus expectations for a 7.725 million decline. Considering a miss of 100,000 used to be considered significant, we do not know how to describe a miss of 10 million. March and April were revised lower by a combined 640k jobs. The unemployment rate fell from 14.7% to 13.3%.

Making the report even more confounding is that the data is at odds with initial jobless claims data from the BLS. Also leading us to question their findings is the following from AP and this LINK from the BLS.

Friday’s report made it clear the government continues to struggle with how it classifies millions of workers on temporary layoff. The Labor Department admitted that government household survey-takers mistakenly counted about 4.9 million temporarily laid-off people as employed.

The government doesn’t correct its survey results for fear of the appearance of political manipulation.

Had the mistake been corrected, the unemployment rate would have risen to 16.1 percent in May. But the corrected April figure would have been more than 19 percent, rather than 14.7 percent.

If you are interested in learning more about how difficult measuring employment is today, the following LINK from the BLS is worth a read.

Regardless of the accuracy of the data, the good news is that the labor market appears to be improving. We hope the rest of May’s economic data being released throughout June confirms the strong BLS report. In case you still crave more on employment, here is our take from this past weekend’s Newsletter.

The Wall Street Journal recently published the graph below which helps us better formulate our employment outlook for the next six months. Per the chart of small business employment expectations, small businesses expect to end the year with 75% of the employees they started the year with. In January, small businesses, defined as 49 employees or less, employed 33.1 million employees. If these companies get payrolls back to 75% of January’s level, it implies that over 8 million jobs will not return. The total workforce in January was about 151 million people. If we make the bold assumption that all other companies (more than 49 employees) return to peak employment levels and the survey in the graph is correct, we can expect an unemployment rate of 8.8% at yearend. That includes the 8 million from small businesses and the 3.5% unemployment rate from January.

, Commentary 06/08/2020Late on Friday it was reported April revolving credit for April fell -$55.7 billion, a record decline at -5.4% month over month. That follows a $29.7 billion decline in March. The combination of $1200 CARES Act checks and sharp spending declines are driving this unprecedented drop in revolving consumer debt, such as credit cards and home equity loans.

OPEC agreed to extend the current 9.7 million barrels per day cuts by one more month. All members appear to agree on the extension except Mexico.

June 5, 2020

Initial Jobless Claims were slightly worse than expectations at 1.87 million versus the consensus estimate of 1.79 million. Continuing claims increased by 649k to 21.48 million. Interestingly, the BLS added a new table, shown below, which shows that total claims, including state and Federal programs, are close to 30 million. 30 million unemployed should equate to an unemployment rate of 23%.

, Commentary 06/05/2020

With the BLS jobs number being released at 8:30 today, we shed a further thought on Wednesday’s surprising ADP number to help us better appreciate what may be reported this morning. ADP reported that 2.76 million jobs were lost based on data from mid-May when the survey was taken. During the same period in May, 5.133 million initial jobless claims were filed. The only explanation for the difference is that 2.3 million people found jobs in the first two weeks of May.

The updated estimate for this morning’s BLS report, with consideration for the ADP report, is for the workforce to shrink by 7.725 million jobs, bringing the unemployment rate to near 20%. Prior to the release of the ADP report, the consensus was for a loss of 8.663 million jobs. Clearly, the consensus of economists is not putting much faith in the ADP report.

The ECB increased its sovereign bond buying program by 600 billion euros. The increase allows them to buy up to 1.35 trillion by June 2021. They kept their main deposit rate unchanged at -.50%. The latest action shows the ECB doesn’t seem to care about the recent ruling by a German high court in which they said the ECB’s QE Program breached Germany’s constitution. We will wait to see if Germany responds to the ECB’s announcement.

As shown below, courtesy Bianco Research, small caps are now more overvalued than at any time in at least the last 25 years.

, Commentary 06/05/2020

June 4, 2020

The ADP report was much better than expected. For the month of May, ADP reports that 2.76 million jobs were lost. While a large number, it was well below estimates of 8.663 million. We are hopeful the report signals that the trough in job losses will occur over the next month or two, and job gains begin. ADP has a good historical correlation with the BLS report coming Friday, so fingers crossed that the BLS number is equally as strong.

On the heels of the ADP report, Mark Zandi Chief Economist at Moody’s, said “the good news is I think the recession is over, the COVID 19 recession is over, barring a second wave, a major second wave, or real serious policy errors.” While job growth and an end to the recession would certainly be welcome news, it could be many years before GDP gets back to its pre-COVID levels. Despite what appears to be positive quotes from Mr. Zandi h he projects unemployment will level off around 10%, unless there is more fiscal stimulus.

Since 1947, there have been 11 recessions, and only one of them, 1981-1982, saw the unemployment rate surpass 10%.  In February, the month prior to the COVID shutdowns, the unemployment rate was 3.5%, the lowest in nearly 50 years. For more context on historical unemployment rates see the graph below.

, Commentary 06/04/2020

It is being reported that the President and Mitch McConnell have started discussions about a new round of economic stimulus. Apparently, McConnell wants to keep the amount below $1 trillion with a focus on initiatives that encourage people to go back to work and consume. Consumption within the travel and leisure industry is being specifically mentioned. Given the riots and upcoming election, along with strong markets and moderating economic data, we believe passing a new round of stimulus through both houses of Congress will be significantly more complicated than the last round.

The graph below, courtesy Bloomberg, shows that the Barclays index of investment-grade corporate bonds is now close to the record low for yields.

, Commentary 06/04/2020

Illinois will be the first state to tap the Feds new Municipal Liquidity Facility. Per the FT, they will borrow $1.2 billion at a rate of 3.82%. The interest rate is lower than that in which they can borrow in the open market. The Fed has allotted $500 billion to lend to states and local municipalities.


June 3, 2020

On Monday, Amazon locked in record low borrowing costs with a $10 billion, multi-maturity debt offering. The issuance included 3 year, 5 year, 7 year, and 10 year maturities. The 3 year notes carry an interest rate of only 0.40%.

Bank of America and JP Morgan have tightened credit standards for new mortgages and refinancings. Yesterday, Wells Fargo said they would stop making loans to most independent car dealerships. While these actions are probably smart credit decisions, they will no doubt cause borrowers (mortgage or auto dealers) to seek higher rate loans or possibly falter. Tightening credit standards is another headwind to the recovery.

Corporate debt issuance has surpassed $1 trillion for the year, already matching the record annual pace of the last few years. Prior to the COVID crisis, the amount of corporate debt was rising faster than corporate earnings and GDP. The pace has accelerated under the crisis due to reduced economic activity and more debt.  If corporations use the borrowed money toward productive purposes, the borrowing is beneficial. If it is used for buybacks, dividends, or short term liquidity, the debt will hamper earnings and long term economic growth. As shown via the increasing trends below, debt has primarily been employed for non-productive purposes. If that were not the case, higher levels of debt would be more than offset with even higher profits and GDP and thus declining ratios.

, Commentary 06/03/2020

ADP, a reliable proxy for Friday’s job report, will be released at 8:30. The estimate is for a decline of 8.663 million jobs versus last month’s reading of 20.236 million. The range of estimates is extremely wide, ranging from -11mm to -3.3mm.

As shown below, non-commercial positioning of S&P 500 futures (mini contracts) shows that traders are as net short today as anytime since 2015. Despite the rally of the last two months, the net short position has not alleviated as is typical. During Q4 of 2015, the last time net shorts were at equivalent levels, the market rallied but sold off sharply later that year and early into 2016.

, Commentary 06/03/2020

June 2, 2020

The ISM manufacturing survey rose slightly from 41.5 in April to 43.7 in May. While still deeply in contraction territory, the increase from last month is a hopeful sign that April marked the economic bottom. On Wednesday, ADP will release its employment report, followed by Jobless Claims on Thursday and the BLS monthly employment report on Friday. The current estimate for Friday’s labor report is a loss of 7.725 million jobs bringing the unemployment rate to 19.8%.

As shown below, protests have occurred in over 140 cities and  almost every state. The demonstrations and looting will further hamper economic activity and may lead to a resurgence of COVID cases in many places that were seeing good progress in slowing the spread. Per Thomas Lee @fundstrat: Whatever ‘stay at home’ restrictions, limits on gathering size, etc., — these ended this weekend., … these large gatherings effectively cancelled all the efforts over the past 10 weeks to .. mitigate transmission. So, the next 2 weeks will be important to watch.

, Commentary 06/02/2020

China is taking actions that appear to signal that they are walking away from the trade agreement. Per Reuters – CHINA HAS ASKED MAJOR STATE FIRMS TO HALT PURCHASES OF SOYBEANS, PORK FROM U.S. AFTER U.S. ACTIONS ON HONG KONG

Now for a bit of Macroeconomics. Demographics play an important role in forecasting economic growth. Much has been written on the aging of the baby boomers and the effect that reduced spending and saving of this oversized generation will have on economic activity. We think the status of the Millennials deserves equal if not greater focus. They are quickly becoming the nation’s prime consumer and political leaders.

The graph below, dating back over 200 years, shows that economic growth per capita during the first 15 years of Millenials careers has been the slowest on record. Weak economic growth along with onerous debt levels, and relatively low wage growth will weigh heavily on the generations ability to consume. The generational changing of the guard, so to speak, should be taken into deep consideration when thinking about the long run growth potential of the nation.

, Commentary 06/02/2020

June 1, 2020

Personal income rose by 10.5%, while personal spending fell by 13.6%. As shown below, courtesy @ErnieTedeschi, the sharp and unexpected rise in income is due solely to unemployment benefits and the $1200 checks from the government. As a result of the large divergence in income and spending, the savings rate surged to 33%. To be honest, it is hard to make sense of the data and what it may mean for the state of the economy. All three data points were the largest increases or decreases on record.

, Commentary 06/01/2020

Jerome Powell made some interesting comments on Friday.

  • Negative rates interfere with bank credit intermediation” and “Not clear that negative rates are appropriate for the U.S.” – The Fed is holding off on negative rates as they hurt banking profit margins. As such, we do not expect the Fed to reduce the Fed Funds rate to below zero unless things get very dire. For what it’s worth, the Fed Funds futures market is still priced for a 50% chance of negative rates throughout most of 2021.
  • Forward guidance and QE are no longer standard tools” – As we learned after 2008, QE is here for good.
  • Fed’s Balance sheet can’t go to infinity” “Fed is not close to any limits on its balance sheet” -A lot more QE is possible but it’s not unlimited. The limit is inflation.

Powell did not mention yield curve control yesterday but, Cleveland President Mester added her support for it. Per Reuters: FED’S MESTER SAYS SHE VIEWS YIELD CURVE CONTROL IS A SUPPORT FOR FORWARD GUIDANCE IF FED WERE TO USE IT

The Atlanta Fed’s GDPNow forecasts that the second quarter’s economic growth (not annualized) will be -51.2% versus -40.4% on Thursday. Personal spending, noted above, was responsible for the downward revision to the prior forecast.

From the latest available data, ranging from May 20th to the 27th, the Treasury’s outstanding debt rose by $222 billion and the Fed’s balance sheet increased by $60. The net effect is a drain of $162 billion of liquidity from the markets. A continuation of the trend would raise our concerns over the sustainability of the current stock market rally and the tightening of corporate bond spreads.

At the start of the March sell-off, as shown below, the NASDAQ (QQQ) fell in line with the S&P 500 (SPY) and the Dow Jones (DJI). However, once the market began to recover in mid-March, the QQQs outperformed the other two indices by 10-15%. Over the past week, the QQQ’s have come under pressure relative to the broader market. The recent divergence is likely the result of investors rotating into stocks that are still beaten down from the QQQ leaders that rallied back to their prior record highs. Based on our relative value model, QQQ has returned to fair value versus the S&P 500, after having been overbought. Conversely DJI, which was nearly 1.5 standard deviations oversold a week ago, is closing in on fair value versus the S&P 500. As an aside, small-cap and mid-cap stocks are now grossly overbought relative to the S&P 500, having been in oversold territory for the last two months. Value has improved but still remains oversold versus growth.

, Commentary 06/01/2020

May 29, 2020

Initial Jobless Claims were slightly higher than expectations at 2.123 million, down from 2.446 million last week. Federal Unemployment Assistance rose by 1.192 million. There was some good news as well in the report. The number of insured unemployment claims fell by 3.86 million to 21.052 million. The decline means that some people who filed claims in the last two months have been rehired by their employer or found a new job. Georgia, one of the first states to reopen, saw the largest drop in weekly claims at -65,000.

First Quarter GDP was revised slightly higher to -5% from -4.8%. Of note, the price index was revised upwards to +1.4% from 1.3%.

We have been reading that retail traders, and in particular small investors using the brokerage service Robin Hood, are driving the market higher. To debunk the theory first consider, and as discussed yesterday, the market gains are mainly occurring during the nighttime futures sessions, where retail traders have little to no access. Second, retail traders are small by definition and pale in comparison to the institutional traders that move the markets.

While the stock market continues to grind higher and check off technical signals supporting a bullish thesis, the VIX is not confirming the move.  Since May 11th the VIX has risen marginally despite the S&P 500 gaining over 4%. We suppose there are a lot of leery investors and traders using options to hedge their increased equity exposure.

The 2yr/10yr U.S. Treasury yield has slowly widened to 50bps. We would have expected the curve to widen much more due to the uber-aggressive Fed operations and the longer term inflationary consequences of their actions. This time is different, however. The Fed is concerned that higher long term rates would be too large a burden on the government and corporations due to record debt levels. The market understands their fear, which is likely keeping longer term rates from going much higher and the yield curve from widening as it normally would. On the topic, we will be very interested to see if Jerome Powell brings up yield curve control in his speech this morning at 11am.


May 28, 2020

A pattern has been easy to spot over the last two days in which the market rallies at night and then sells off during the day session. This action has been somewhat consistent throughout the year. Per Bespoke, if you bought at the close and sold at the next days opening you would be up 19.7% this year versus losing 16.9% if bought at the open and sold the close. Holding for the full period would leave you down 6.1%.

As we have mentioned, the value of the Chinese yuan versus the U.S. dollar can serve as a barometer for the China-U.S. relationship. A weaker yuan is a sign that things are not going well. Not surprisingly, given the pressure China is applying to Hong Kong and the rhetoric being spewed between both leaders, the yuan has depreciated (higher price versus the dollar in the graph below). The yuan/USD depreciated to 7.17 yesterday, surpassing the prior high of last August and matching the weakest level since January 2008.

, Commentary 05/28/2020

New York Fed President Williams said the Fed is “thinking very hard” about targeting yields along the Treasury yield curve. This is not surprising given the massive amount of debt the Treasury will be issuing and, therefore the need to keep interest rates low.  We could see such an announcement as early as the next Fed meeting on June 10th.

As shown below, Commercial and Industrial loans (C&I) spiked by $367 billion in the last month as corporations aggressively drew down their credit lines to build liquidity.

, Commentary 05/28/2020

The figure above does not include corporate debt issuance, which also increased markedly over the last month. In fact, as shown below, per the Financial Times, U.S. companies have already borrowed near similar amounts this year versus the annual entire amounts of each of the last eight years. Before the crisis, corporate debt was already at a record high versus GDP. These new borrowings will be a further drain on earnings going forward and potentially negatively impact their respective credit ratings. Per a new S&P report-Downgrade Potential Rises to All-Time High” “The number of potential downgrades has widened to 1,287 as of April 28, from 860 in March and 649 in February.

, Commentary 05/28/2020

May 27, 2020

The S&P 500 was up over 1% yesterday despite three of its four largest stocks being lower (AAPL -.68%, MSFT -1.02%, and AMZN -.62%). The divergence can be interpreted as a bullish sign, in that the broader market is carrying more of the weight. It can also be seen in a bearish light as the market’s generals tend to lead. This was but one day of trading so do not read too much into its significance yet, but it is worth paying attention to.

One of the broadest measures of economic activity, the Chicago Fed National Activity Index, fell well below the consensus -3.5% expectation. For what it’s worth, a value below -0.70% has historically indicated the increasing likelihood of a recession. The index is comprised of 85 data points covering all relevant sectors of the economy.

, Commentary 05/27/2020

This week will be quiet in regards to economic data. Of importance will be Initial Jobless Claims on Thursday (expectation 2.05mm) and the revised Q1 GDP report also on Thursday. Jerome Powell will speak on Friday at 11am.

A few weeks ago, a German court ruled that parts of the ECB’s QE operations were illegal under German law and needed to be changed. The ECB responded yesterday by saying they would launch infringement procedures against Germany if they stop buying bonds. Further, they are working on contingency plans to carry out purchases of German bonds even if the Bundesbank were to quit the program. The euro rallied yesterday to 1.10/dollar, which is about 5 euros above the lowest levels since 2003. If the spat between the central banks escalates, the euro could fall sharply, resulting in appreciation of the dollar, which is what the Fed has been trying to prevent over the last two months.

The graph below charts the popular crude oil ETF (USO) versus the price of the front-month crude oil. As shown, USO and crude had a nearly perfect correlation when oil sold off from January through April. At the time, USO largely held the front-month futures contract as they do not physically store oil. Accordingly, a strong correlation between futures and USO should have been expected.

The ETFs structure became problematic when the price of the front-month contract fell in price much more than the rest of the oil complex. When the price of the front contract approached zero, the price of the ETF should have theoretically also fallen to near zero. Instead of an ETF failure, the manager opted to change the structure, electing to hold less of the front-month contract and more later maturity contracts. Management did save the ETF and their management fees going forward, but investors locked in losses as they did not partake in the recent recovery in the front-month contract as shown below. Currently, the ETF owns seven different contracts out to June 2021, with the front-month contract only representing 15% of the ETF.

, Commentary 05/27/2020

May 26, 2020

Hertz went bankrupt this past weekend. While widely expected, the event is unusual because the Fed, due to its holdings of junk ETFs HYG and JNK, is an indirect holder of HTZ debt and now a creditor in the bankruptcy process.

A sharp decline in the number of oil rigs has helped the price of crude oil surge. The latest data from Baker Hughes shows the North American rig count fell to 237, the lowest level since 2009. The current number of operating rigs is about one-third of the count at the beginning of the year.

Fed Vice Chairman Richard Clarida gave his inflation outlook in a recent speech. To wit: “While the COVID-19 shock is disrupting both aggregate demand and supply, the net effect, I believe, will be for aggregate demand to decline relative to aggregate supply, both in the near term and over the medium term. If so, this decrease will put downward pressure on core inflation.”  The important takeaway is that Clarida believes the inflationary tug of war will favor deflation over the “medium term.” His outlook, which is likely the same view as Powell and a large majority of the Fed, provides the Fed cover to continue QE and possibly negative rates. While we suspect they will tout deflation to justify their actions, keep an ear out for changes in the forecast by Clarida or other Fed members as any concerns of inflation could prevent the Fed from being as aggressive as they currently are.

The graph below shows that over the last 20 years, the correlation between forward earnings expectations and the S&P 500 has been very strong (.90). The relationship has fallen apart in the recent rally with the correlation over the last two months falling to -.90. Will the relationship correct with improved earnings forecasts or lower stock prices? To wit we wrote the following recently (LINK):

“As stated, over short-term periods, the stock market often detaches from underlying economic activity as investor psychology latches onto the belief “this time is different.” 

Unfortunately, it never is. 

While not as precise, a correlation between economic activity and the rise and fall of equity prices does remain. In 2000, and again in 2008, as economic growth declined, corporate earnings contracted by 54% and 88%, respectively. Such was despite calls of never-ending earnings growth before both previous contractions. “

, Commentary 05/26/2020

May 22, 2020

Initial Jobless Claims were slightly higher than expectations at 2.438 million. We are now over two months into the economic crisis, and the number of weekly new claims is still multiples of what is typically seen at the troughs of recessions. Continuing claims just elapsed 25 million.

In addition to the aforementioned data from the states, 2.22 million people filed for Federal Pandemic Unemployment Assistance (PUA- CARES Act) last week. The PUA is for those ineligible for state jobless claims programs. The right weekly initial claims number, adding the state and federal numbers together, is more like 4.6 million.

The recently released Fed minutes from their April meeting included the following statement:

A few participants also noted that the balance sheet could be used to reinforce the Committee’s forward guidance regarding the path of the federal funds rate through Federal Reserve purchases of Treasury securities on a scale necessary to keep Treasury yields at short- to medium-term maturities capped at specified levels for a period of time.” 

In other words, the Fed might enlarge its mandate to manage not only the Overnight Federal Funds Rate but also target yields of longer Treasury maturities. Japan is already capping interest rates, and the United States did it during and after WWII (1942-1950). One look at the 10-year U.S. Treasury yield makes one wonder if they have already started informally capping the yield at 0.75%.

, Commentary 05/22/2020

The Wall Street Journal reported (LINK) that about 15 million credit card accounts and 3 million auto loans did not get paid in April. The numbers will be larger in May. As these delinquencies age, they become default risks for the banks. Lack of solvency for millions will not just be the banks’ problem but a significant drag on the economy.

One of the questions we are frequently asked is how do the Fed’s QE operations support stock prices. To help answer the question, consider that in March, as shown below, foreigners (net) sold $387 billion of U.S. Treasury securities. At the same time, the U.S. Treasury debt outstanding rose by $242 billion. Had the Fed not bought Treasury securities via QE, domestic investors would have needed to buy the $629 billion worth of bonds from the foreigners and the Treasury. Those dollars would mostly have come from investors selling other investments, including stocks.

Further, the Treasury bonds would have required a higher interest rate to attract the funds. Instead, the Fed bought $1,570 billion of securities in March, more than covering the $629 billion shortfall. Not only did they cover the gap but they took an additional trillion of bonds from the market. As such, those investors that sold bonds to the Fed needed to reinvest in other markets. In some cases, that was the stock market.

, Commentary 05/22/2020


May 21, 2020

Crude oil rose 5% to $33.50 as President Trump issued a new round of sanctions on Iran and is “mulling” the seizure of Iranian oil tankers involved in trade with Venezuela.

The Treasury issued $20 billion of a 20 year bond. It was the first issuance of a 20 year bond since 1986.

Fed Chairman Powell will speak at 2:30 today. We do not expect to hear much new from him, given he testified to Congress on Tuesday and was interviewed by 60 Minutes on Sunday night.

Daily, the media and Wall Street try to diagnose why the market was up or down. Some days the explanations make sense. Other times it seems they are fishing for a rationale to explain price action.  Yesterday Tom DeMarco, from Fidelity, avoided providing his readers a rationale and spoke the truth:

Once again there is no good explanation behind the rally other than the same tired themes – reopening, positive linearity, drug/vaccine hopes, earnings rebound, stimulus, and super-cap tech.”

The market over the last few weeks is very reminiscent of 2019 when the U.S. and China were engaged in trade talks. Positive commentary, Tweets, and even specific words from the administration would trigger sharp moves higher and lower. At the time, the market had poor liquidity, which allowed algorithmic programs (algos) to easily move the markets with trades that keyed on various words from news feeds. Today’s markets seem very similar,  but the algos are focused heavily on words related to reopening and vaccines. While the markets may seem stable, poor liquidity coupled with an unprecedented economic environment will result in violent moves up or down. Given the many unknowns about the virus, we suggest you stay vigilant.

The chart below is a fascinating result of our changing habits due to COVID. Per Bespoke: “As of last Wednesday, for the first time the market cap of ZM actually surpassed the total market cap of those nine major airlines as shown in the chart below.”

, Commentary 05/21/2020


May 20, 2020

Monday’s explosive rally was led in large part by the announcement of positive vaccine test results from Moderna. Those hopes were tempered yesterday as the company said its vaccine trial is not working as well as expected. Making this odd sequence of events even fishier, Moderna raised $1.34 billion in a stock offering on Monday night. The offering was at $76 per share, $10 a share above where it closed on Friday. The stock fell over 10% yesterday to close at $71.67 after the bad news.

One of our biggest challenges going forward is correctly forecasting the tug of war between inflation and deflation. Currently, deflation is raging as demand dropped sharply and suppliers can not slow production fast enough. This was highlighted with oil prices when they went negative last month. While we have all seen some instances of higher prices, especially for food items and paper goods, inflation is not a story for today.

Tomorrow is a different story.  In fact, an interesting divergence has emerged between investors view of future inflation versus consumers. The chart below compares the sharp divergence in expectations from the University of Michigan 1 year inflation survey versus the implied inflation from the TIPS market. The current 2.16% gap is more than twice the average differential of the last three years.

, Commentary 05/20/2020

The graph below from job search agent Indeed provides some cause for optimism in the labor market. While the number of job postings is still well off the pace of a year ago, it has recently begun to trend higher. Over the past two weeks it improved from -39.3 to -37.2%.

, Commentary 05/20/2020

The equity put-call ratio indicator compares put volume to call volume. The ratio tends to be a good sentiment indicator. When the ratio is high, it signals that investors are bearish as they are buying more puts than calls. Puts are often used as a hedging tool. Conversely, when it is low investors are bullish. Extreme readings can be signs of a pending market reversal.

Currently, the ratio is very bullish.  Since 2004, the current level of .47 or less has only been met on 74 trading days or less than five times a year on average. The last time the ratio was below the current level is the standing record high set on 2/19/2020 when it hit .45. While very telling about the degree of bullish or bearish sentiment in the market, the ratio is not always a reliable indicator of an imminent change of direction, so take the current reading with a grain of salt.

, Commentary 05/20/2020

May 19, 2020

A “buying panic” on Monday morning resulted in a record opening tick reading with 2049 stocks on the NYSE opening with positive upticks. As shown, that is unprecedented in at least the last 20 years. The combination of Jerome Powell saying the Fed has a lot more room for monetary policy along with positive reports that Moderna has positive test results for a COVID vaccine drove the record opening.

, Commentary 05/19/2020

This week should be quiet on the economic data front. The Fed will be active with Jerome Powell speaking to Congress today at 10am, numerous Fed Presidents will speak throughout the week, and the Fed will release its minutes from the last FOMC meeting on Wednesday.

The June crude oil contract rose over 10% yesterday to $32.74 a barrel. The recent surge in price, especially the price action of the front month contracts has flattened the pricing curve. A few weeks ago, we talked about the unprecedented difference between the front contract and those 3-6 months out. That gap has completely filled with the front month contract standing only $1 less than the October contract.  To put context around the change in the curve, the January 2021 contract is unchanged from a month ago (4/17/2020), while the June 2020 contract is up over 50% over the same period. Fingers crossed, but it appears the storage problem has improved.

In a 60 Minutes interview on Sunday night, Jerome Powell mentioned that the Fed can still do a lot more monetary stimulus. Actually, the amount is unlimited except for one crucial regulator that could slow or even halt their actions. The Fed has three mandates, one of which is stable prices. In deflationary times, such as today, the mandate gives them plenty of cover to print money to boost inflation.

As shown below, the money supply is up over 25% in just the last two months.

, Commentary 05/19/2020

The economic environment is still overwhelmed by deflationary forces, and therefore, the Fed can print a lot of money. However, as the economy reopens, the combination of surging money supply and increased monetary velocity along with higher energy and food prices, could quickly push traditional measures of inflation higher. The Fed has mentioned on many occasions they prefer market-based inflation expectations to assess future inflation. The Five-year Breakeven Inflation rate (implied inflation from TIPS) has recovered from near zero to .84%, but it is still well below the 1.5-2.0% running rate of the prior years.  This indicator may be the most important signal that inflation is a concern for the Fed and they may have to curtail QE. The Five-year Breakeven Inflation rate can be followed daily on the St. Louis Federal Reserve FRED site



May 18, 2020

Stocks surged in overnight trading on comments from Jerome Powell on 60 Minutes in which he stated:

Powell to CBS: “There is no limit to what we can do under these emergency powers.”

CBS: “Where does the money come from?”

Powell: “We print it digitally.”

April Retail Sales were worse than expected at -16.4% versus the consensus estimate of -11.2%. More surprising, sales excluding gas and autos declined by a similar amount -16.2% versus forecasts of -7.6%. The only sector that saw an increase was non-store retailers like Amazon.

With the latest data, the Atlanta Fed lowered its GDP forecast for the second quarter to -42.8% from -34.8%. The estimate is based solely on released data. As such, it is probably overestimating the quarterly decline as economic activity will pick up as the economy reopens. Currently, the consensus of Wall Street economists ranges from -22% to -40%. These forecasts estimate activity for May and June.

Saber rattling with China continued on Friday. Per CNBC:

  • The Trump administration moved to block shipments of semiconductors to Huawei Technologies from global chip makers
  • The U.S. Commerce Department said it was amending an export rule to “strategically target Huawei’s acquisition of semiconductors that are the direct product of certain U.S. software and technology.”

Huawei is a leader in 5G technology and the world’s second largest smartphone maker. Huawei was a pawn in the first round of trade negotiations, so it’s not surprising to see this company once again in the spotlight. We would not be surprised to see the Chinese threaten companies like Apple or Intel.

Last week, the Fed bought $305 million of corporate bond ETF’s on its first foray into the secondary corporate bond market. They are approved to buy up to $750 billion. When the program was first announced the yield spreads between corporate bonds and Treasury bonds compressed meaningfully. Essentially, Wall Street bought at much lower prices to ultimately sold to the Fed at higher prices.

Over the last two weeks as Wall Street prepped for the Fed’s entrance, spreads have widened slightly. The graph below shows the ratios of the popular Investment Grade ETF (LQD) and High Yield ETF (HYG) to the 7-10 year UST ETF (IEF). In both cases, the corporate ETF’s outperformed after the program was announced in late March, but since mid-April have slightly underperformed.

, Commentary 05/18/2020

One of the more prominent trends of the past two months has been the strong performance of momentum stocks like the FANMGs (FB, AAPL, NFLX, MSFT, and GOOG) as compared to the weak performance of value stocks. The chart below shows that the divergence between the two has reached an extreme not seen in at least the last 15 years.

, Commentary 05/18/2020


May 15, 2020

Initial Jobless Claims were worse than expected at 2.981mm versus 2.5mm expected. Continuing claims surpassed 25 million, or 13% of the workforce.

More deflationary warnings came from the BLS in its Import and Export Prices report. The data measures the prices of nonmilitary goods and services traded between the U.S. and the rest of the world. The year over year change in imports and exports are -6.8% and -7.0% respectively.

Retails Sales, released at 8:30 this morning, is expected to fall by 11.2%. Prior to last month’s 8.2% decline, the largest monthly decline in the last 30 years plus was 2.92%.

The University of Michigan Consumer Sentiment report is expected to come in at 66, well off the recent February high of 100, but above the 57.7 low reached during the 2008/09 recession.

Despite the recovery of the major stock market indexes, the banking sector is not following. The graph below shows that the nation’s four largest banks, JP Morgan, Citi, Bank of America, and Wells Fargo, are all trading near the lows of March. Given that marginal growth in the economy is largely driven by debt and the ability of banks to issue new debt, this is a troubling sign for future economic growth.

, Commentary 05/15/2020

The next graph shows the price ratio of the banking sector ETF (XLF) t0 the S&P 500 (SPY). As shown, the ratio is back to the lowest levels of the Financial Crisis.

, Commentary 05/15/2020

As rates across the maturity curve compress towards the zero bounds, banks’ profit margins, aka net interest margin, are also compressing. Couple, reduced profit potential with surging delinquencies/defaults on consumer debt and the outlook is not great. As Europe and Japan can attest, negative rates are a big problem for banks. If the Fed Funds futures markets continue to imply negative rates, it should be tough for the banking sector to rebound meaningfully.

May 14, 2020

Producer Prices (PPI) were weaker than expected, declining 1.3% versus expectations for a .5% decline. The year over year rate is now -1.2%.

The consensus expectation for initial jobless claims, released at 8:30 am, is for an additional 2.5mm people to join the ranks of the unemployed. That is less than the 3.169mm from last week, but still almost 3x the largest weekly increase prior to this episode.

Fed Charmian Powell confirmed what other Fed Presidents have recently been saying about negative interest rates. To wit, he repeated a line from a prior FOMC meeting statement- “All participants judged that negative interest rates currently did not appear to be an attractive monetary policy tool in the United States.”  He did call for more fiscal spending, which indirectly entails more monetary stimulus (QE) to help ensure rates do not rise as the supply of debt in the market is increased.

GE fell 3.5% to a price last seen during the depths of the Financial crisis of 2008. At that time, investors were concerned that GE was a bankruptcy risk. That rumor is once again circulating.

For all of the fundamental reasons to be bearish the stock market, investor sentiment is providing a reason for some bullishness. Bearish US investor sentiment, at 52.6%, is the highest it has been since January 2013. The S&P 500 rose 30% that year. As they say, markets like to climb a wall of worry.

Speaking of a wall of worry, famed investor Stanley Drunkenmiller stated the following on Tuesday: “The risk-reward for stocks is as bad as I’ve seen.” Within hours of Drunkenmiller’s comment, CNBC reported: “Young investors pile into stocks, seeing ‘generational-buying moment’ instead of risk.”

The following article from Bloomberg, Tax-Averse Nashville Goes Where Few other Cash-Poor Cities Dare,  discusses the impact that COVID is having on Nashville’s finances and the tough decisions it is being forced to make. While the article is generally focused on the city of Nashville, it rings true for many states, counties, and cities throughout the United States. Given the dire situation these municipalities face and an election coming in months, we suspect a large second round of federal stimulus will ultimately be approved to help bailout out some of these entities. From the article:

“Congress has earmarked $150 billion for states and local governments — Nashville is slated to receive $122 million but the money must be spent on public health and can’t be used to fill budget holes.

State and local governments are in “uncharted territory” and will have to start making serious cuts if they don’t get more help, said Richard Auxier, a senior policy associate in the Urban-Brookings Tax Policy Center.”


May 13, 2020

The winds of a trade war with China are picking up. Yesterday, President Trump ordered that Federal retirement funds invested in Chinese equities should be liquidated. It will be interesting to see if China reacts as they are the second largest foreign holder of U.S. Treasury securities coming in at just above $1 trillion. The complete listing by country and one-year holdings history is found HERE. It is unclear how much in U.S. equities is held by the Chinese government and its citizens and corporations.

Adding to the pressure is legislation from Senator Ted Cruz that seeks to end reliance on China for rare earth metals. The bill is part of a larger push by Congress to reduce U.S. dependency on goods of national interest from China. Apple piled on yesterday when they announced they are working to shift “a significant portion of its production to India from China.”

April CPI fell 0.8%, reducing the year over year rate from 1.5% to 0.3%. Despite the broad based deflationary pressures, the BLS reported that the price for “food at home” aka groceries, rose by 2.6% in April, the largest increase in 45 years.

The degree or amount of monetary stimulus is often judged by real rates or the level of interest rates less the rate of inflation. With the sharp decline in CPI yesterday, real rates spiked higher, despite nominal rates falling over the last few months. For instance, the 10-year Treasury real rate in April was -.64%. With the latest CPI print, the real rate is now +.30%, a nearly 1% increase in real rates.  Many economists argue that current monetary policy, despite massive stimulus, has actually tightened. Higher real rates is likely what is driving Fed Funds future below zero.

, Commentary 05/13/2020

The problem of higher real rates is not lost on the President. On Twitter yesterday Trump stated: “As long as other countries are receiving the benefits of Negative Rates, the USA should also accept the “GIFT”. Big numbers!


In addition to Kashkari, a few other Fed speakers were out yesterday and discussed a need for fiscal responsibility when the crisis is over and limits on how much monetary stimulus can be used. Chairman Powell will speak today at 9 am, and we shall see if he continues on these same themes.

The market traded sharply lower in the last hour of trading yesterday on a report that Los Angeles is likely to extend the stay at home order for at least three more months.

The Treasury announced that April’s budget deficit was $737.9 billion. Since at least 1980, there was only one other deficit in the month of April, and that was $82 billion. April tends to be a surplus month due to tax revenue.

Speculative short positioning of the 30yr U.S. Treasury Bond futures contract hit a record level. This class of investors represent hedge funds, CTA’s and other institutions trading for profits and not as a hedging activity. Frequently, when speculative positioning in futures is extreme, the market will reverse its recent trend. The chart below makes the case for bond prices to rise and yields fall. We are watching the situation closely as we would like to add to our bond exposure.

, Commentary 05/13/2020


May 12, 2020

Saudi Arabia will reduce its oil production by 1 million barrels per day starting in June. It is unclear if other OPEC or non-OPEC nations will join them. Even with recent reductions, it is still believed supply is firmly outstripping weak demand, and with limited storage facilities, the pricing problems of April are likely to resurface. The June contract goes to settlement on May 19th, so pricing volatility will likely erupt later this week and early next week if that is, in fact, the case.

Per the Global Times: “China officials may consider invalidating Phase One of the trade deal and negotiating a new deal to tilt the scales more to the Chinese side.” The Trump administration countered by saying renegotiation of the deal is unlikely.

Chairman Powell will speak on Wednesday at 9am. The speech is not a planned appearance and its substance is unknown.

On the economic data front this week, inflation figures will be of the most importance. Currently, there is a significant lack of demand and, at the same numerous supply line problems. While we think the aggregate effect is deflationary, predicting CPI and PPI will be very difficult as there are certain products whose prices are rising rapidly, as many others fall. CPI, released at 8:30 this morning, is expected to decline -.8% month over month, bringing the annual number down to +.5%. A large part of the decline is due to oil prices. On the other hand, food prices are providing some upward pressure. The annual CPI excluding food and energy is expected to be +1.8%.

PPI, released on Wednesday, is also expected to decline. We expect PPI to show more deflationary tendencies than CPI as the prices are based on raw commodities, which have fallen sharply in price. The graph below courtesy of Thompson Reuters shows the 30%+ decline in the CRB index in 2020.

, Commentary 05/12/2020

The other interesting economic data release this week will be Retail Sales on Friday. The current expectation is for an 11.2% decline, following last month’s 8.7% drop. Personal consumption is nearly 70% of GDP, so this number weighs large in GDP forecasts.

The chart below shows each date the national debt eclipsed the rounded $1 trillion level. Note the top three bars are all from 2020 and the year is not even halfway over. There will likely be at least two more bars added to the graph before yearend.

, Commentary 05/12/2020

May 11, 2020

The BLS reported that 20.5 million jobs were lost in April, bringing the unemployment rate to 14.7%, the highest level since the Great Depression. The big question going forward is how many of these job losses will become permanent. The BLS commented on the topic: “The number of unemployed persons who reported being on temporary layoff increased about ten-fold to 18.1M in April. The number of permanent job losers increased by 544,000 to 2.0M.

The employment to population ratio fell by 8.7% to 51.3%, which is the lowest rate since at least 1948 when records were first kept by the BLS.

The U6 unemployment rate rose to 22.8% from 8.7%. The 14.1% increase in the U6, was much more than the 10.3% increase in the often quoted U3 rate. The U6 is those included in the U3, plus discouraged workers no longer seeking jobs and part-time workers seeking full-time employment.

The average hourly earnings data is skewed as the majority of those getting laid off are lower paid employees. The labor force participation rate fell to the same levels of 1973.

, Commentary 05/11/2020

To put some context around Friday’s jobs data, aggregate job losses from the last nine recessions, dating back to 1958, total 20.5 million jobs. Also, consider that two months ago we had the lowest unemployment rate in over 50 years and today we have the highest rate in over 80 years.

After the jobs report, the Atlanta Fed released its revised annualized GDP forecast as follows: “The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2020 is -34.9 percent on May 8, down from -17.6 percent on May 5. After this morning’s releases of the employment report by the U.S. Bureau of Labor Statistics and the wholesale trade report from the U.S. Census Bureau”  It is worth noting the number is scarier than it looks. For one, it is annualized. Secondly, it assumes that May and June will be like April. Odds are they should improve as the economy opens up.

These times are truly unprecedented indeed! Data covering quarterly earnings calls from large corporations shows the word “unprecedented” is being used to describe business conditions about 50% more often than during the Financial Crisis of 2008/09. As we wrote last week in Extraordinarily Uncertain Indeed, those in the media and on social media with predictions of a “V” shaped recovery and a prompt return to normal, are clearly not recognizing the unprecedented nature of what is occurring. While we certainly hope they are correct, we must also prepare for a wide range of potential outcomes. Managing wealth is not about hope, it is about properly assessing risk, especially in times like these.

, Commentary 05/11/2020

May 8, 2020

Initial Jobless Claims rose by 3.169 million last week down from 3.846 million in the prior week. Continuing claims are now 22.6 million, which is over three times the 6.6 million peak of the previous recession.

As shown below, in aggregate consumers paid down their credit cards at an unprecedented rate last month. There is $1.066 trillion of revolving consumer debt, so even though the net amount of the paydown is large, it is still a rather small percentage of the debt outstanding.

, Commentary 05/08/2020

December 2020 Fed Funds futures contracts and those further out in maturity, fell below zero yesterday. The market is implying the Fed reduces rates into negative territory by yearend and stays at or below zero until the spring of 2022.

Despite the eye-popping equity rally of the last month or so, investor sentiment remains extremely bearish. As shown below, those that characterize themselves as bearish are now at the highest level since 2013. The percentage of investors considering themselves bullish remains at the lows for the year, but, unlike bearish sentiment, is not quite at extreme levels. Taken on its own, this survey paints a bullish picture for the weeks ahead.

, Commentary 05/08/2020

The Turkish Lira has been depreciating rapidly versus the U.S. dollar over the last few weeks, pointing to an acute dollar shortage in Turkey. On Thursday, Turkey banned three large international banks from partaking in currency transactions in a bid to slow the depreciation. The Fed has yet to offer Turkey currency swap lines to help alleviate the situation. Likely, any relief from the Fed will be in coordination with some sort of political favor from Turkey. The graph below shows the long term depreciation of the Lira and the recent collapse. Turkey’s situation is just another example of a second order effect that is difficult to predict, but carries with it the potential to create meaningful economic and geopolitical impacts.

, Commentary 05/08/2020

May 7, 2020

The ADP report was slightly worse than expected, showing a loss of 20,236,000 jobs in April. Over six million of the losses came from small businesses that employ less than 50 people. Further data on job losses by industry and company size is found HERE. The million dollar question going forward is how many of these job losses become permanent.

Our model is forecasting a loss of 18,125,000 jobs in Friday’s jobs report.

Yesterday we highlighted that Treasury yields are backing up do to supply. A reader asked us if they may also be rising in sympathy with inflation concerns. The graph below shows that implied inflation expectations, calculated from nominal and inflation-protected Treasury yields, show no indication of a recent change in inflation expectations. Again, this move seems to be corporate and U.S. Treasury supply related.

, Commentary 05/07/2020

To wit, the U.S. Treasury announced that the amount of debt outstanding rose by $1 trillion last month to over $25 trillion outstanding. The Federal debt to GDP ratio shot higher to 117% from 106% at the end of 2019. Given the stimulus spending plans for the remainder of the year and the inevitable decline in GDP, this ratio will continue to higher.

Since April 20th, the front month Crude Oil futures contract traded as low as -$40 per barrel and recently has risen to over $25. As we have discussed, this massive price volatility of the front contract(s) are largely the result of excessive supply, weak demand, and a lack of storage facilities. Without sufficient storage, producers must dump oil on the market and accept whatever price can be had.

On April 22nd, we shared the first graph below to highlight the divergence between the front month contract and longer term contracts. It is updated as of May 6th to show that the spread remains wide but is back to more normal levels. The second graph below shows how the price of each monthly contract has changed since April 20th. All of the price improvement in the crude oil complex is occurring in the first three contracts. In fact, prices have declined slightly for months five and six over the period. If the storage problem is solved, the curve should remain relatively flat. If not, expect the front month contracts to fall victim again to extreme volatility. From an economic and investment perspective, we should primarily focus on the out month contracts for a truer economic price of oil.

, Commentary 05/07/2020

May 6, 2020

Upward pressure on Treasury bond yields in recent days is partially attributable to “rate locking” for expected corporate debt issuance. Banks and Broker/Dealers, on behalf of corporate issuers, will short U.S. Treasury securities to help lock in an interest rate for upcoming bond issuance. This week alone, we have seen Apple ($8.5bn), Amgen ($4bn), Starbucks ($3bn), Altria ($2bn), Schlumberger ($1.5bn), and Kraft Heinz ($1.35bn) come to market with large issuance. When the deals price and the hedges are lifted (shorts covered), bonds may see improvement, all else being equal.

In an interesting twist of events, Germany’s constitutional court in Karlsruhe, found that the EU overstepped its powers when it backed the legality of the ECB’s QE operations. The court is giving the ECB three months to change the rules of operation.

The most important data point of the week will be Friday’s BLS jobs report. The stunning consensus estimate for job losses and the unemployment rate, as well as the extremely wide band of estimates, are shown below. As a point of reference, the highest unemployment rate since 1948 was 10.8% in 1982, and the largest monthly drop in non-farm payrolls was 1.959 million, right after WWII. This morning’s ADP report is expected to show a 20 million decline in jobs last month, somewhat in line with expectations for Friday.

, Commentary 05/06/2020The good news is that the latest data from the TSA shows that air travel is slowly improving. The bad news is that air travel is still well below 90% of normal.

, Commentary 05/06/2020


May 5, 2020

President Trump is ratcheting up pressure on China as a result of the economic fallout from the virus. For now, they are just words, but outside of the Corona Virus and its economic impact, his words and possible actions may be the most critical geopolitical factors to follow. Per Fox Business Network- MNUCHIN SAYS HE EXPECTS CHINA TO MAKE GOOD ON ITS TRADE AGREEMENT WITH U.S., WILL BE VERY SIGNIFICANT CONSEQUENCES IF THEY DON’T.

Accordingly, we will closely watch the Chinese Yuan versus the dollar to see if the Chinese are depreciating their currency. If so, it means they are taking action to cheapen their exports and at the same time make the import of U.S. goods more expensive.  Currently, the yuan sits at 7.06 per dollar. It is widely believed part of the original trade agreement involves China keeping the yuan at 7 or lower. A move above 7.10-7.15 would be concerning.

, Commentary 05/05/2020

Much was made of the annual Berkshire Hathaway (BRK/A) annual meeting this past weekend. To summarize, Warren Buffet is very concerned about the markets and economy. Of particular note, he sold his entire holdings of U.S. airlines. BRK/A is sitting on at least $128 billion in cash. His actions are a clear indication that one of history’s most astute investors is not buying into the recent rally.

Employee withholding federal tax receipts were down 14.61% in April. That provides a rough indication of what this Friday’s employment report may look like.

The following LINK from TD Securities provides a comprehensive listing of all of the fiscal and monetary measures being taken by the G10 countries.

The biggest question for investors is when economy will open up and, once opened, how quickly will economic activity returns to normal. The graph below provides some guidance in that regard. Per Open Table reservation data, people had sharply cut back on eating out a week or so before mandated so by state lockdowns and closures. We suspect that regardless of state actions to open commerce, consumers will be slow to resume normal activities. This is undoubtedly due to a fear of catching the virus but also increasingly a result of reduced economic means.

, Commentary 05/05/2020

If you are an investor of REITs or considering buying into the REIT sector, the chart below provides some guidance as to how various real estate sectors are faring.

, Commentary 05/05/2020

May 4, 2020

The Fed will slow its balance sheet growth further in the coming week to $40 billion. Last week, the Fed’s balance sheet grew by $83 billion (Wednesday to Wednesday), continuing the trend downwards in recent weeks. In the week prior to last week, the balance sheet grew by $206 billion, which is also down significantly from the $557 billion growth for the week ending March 1. Make no mistake, they are still very aggressive, buying $5 billion per day, but it is now more comparable to prior QE.

, Commentary 05/04/2020

The Citi Economic Surprise Index fell to an all-time low. This index measures the divergence between the consensus of economists estimates for incoming economic data versus the data itself. A negative number, as it stands today, tells us that forecasts have been overly optimistic versus the actual economic conditions. In other words, economic data has been surprising to the downside. This index, like many other economic data points, is not as valuable as they were due to the inability to assess how rolling lockdowns throughout March affected economic activity. We suspect the accuracy of consensus forecasts will improve when April data is released throughout May.

Phil LeBeau of CNBC provided a first look at April economic data as follows: “April auto sales plunge 48% with April ‘20 sales rate was 8.6 Million units versus 16.52 million units last April according to the research firm AutoData

We recently read that regulations prohibit certain types of foods that are destined for restaurants to be sold in supermarkets. Like we have written about meat, pork, and poultry, the amount of food is not necessarily a problem, but the ability to get the food to our supermarkets is a big problem. A lot of food is being wasted due to numerous constraints.

According to Neilsen: In the past week, prices have risen for fresh meat by 8%, eggs by 31%, cheese by 11% and cow milk by 10% versus this time last year. The graph below from Neilsen provides an interesting perspective on how our dining habits have radically changed since Covid19. Follow @nielsen on Twitter for many other unique consumer statistics.

, Commentary 05/04/2020


May 1, 2020

Initial Jobless Claims rose by 3.839 million, down from 4.442 million last week, but still running at over five times the prior weekly record (1982 -680k). To put the data into a more modern context, the high point in the 2008/09 crisis was in March of 2009 at 661k.

The Personal Savings Rate surged to 13.1% from 8.4%. The predominant driver is a lack of consumption and therefore, “forced” savings. The rate is the highest since the early 1980s, however, at that time, there was incentive to save with interest rates over 10%.

The Fed expanded the scope and eligibility of its Main Street Lending Program (LINK) to include riskier firms with higher levels of debt. This program involves the Fed and Treasury lending up to $600 billion to small and medium-sized businesses. Like other Fed/Treasury programs, this one is set up as an SPV.  The Treasury puts up the initial funding for the vehicle and retains a small percentage of default risk. The Fed then leverages the Treasury’s funding up to ten times and retains the remainder of the risk.

J. Crew will file for bankruptcy this weekend. In its wings are bankruptcy rumors from fellow retailers, The Gap, Neiman Marcus, and JC Penny.

On Wednesday, we wrote about the inflation/deflation problem that is simultaneously resulting from the closure of meat processing plants. Today we further the discussion with two graphs showing the extreme divergence between retail beef prices (USDA) and Live Cattle prices on the Chicago Mercantile Exchange (CME). The first graph shows that Live Cattle futures are trading at ten year lows. At the same time, as shown in the second graph, wholesale beef prices spiked to ten plus year highs. High meat prices and reduced inventory should become very noticeable at your local butcher in the coming days and weeks. In theory, prices should converge as the supply of cattle will decline when processing plants re-open and some animals are culled. At the same time, demand will drop due to higher retail prices. However, like negative oil prices, who knows what this market oddity will bring us.

, Commentary 05/01/2020 , Commentary 05/01/2020

April 30, 2020

Yesterday’s FOMC statement (LINK) is essentially a pledge to keep the Fed Funds rate at zero, maintain QE to “support smooth market functioning“, and support/provide other stimulus as needed until the economy is back on track to achieve the Fed’s price and employment goals. Based on the fact that there were no dissenting votes, it appears the idea of cutting rates into negative territory was not seriously discussed. The Fed did not provide forward guidance as they typically do, but based on the following statement they are not on board the “V” shaped recovery bandwagon: The ongoing public health crisis will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term.

A few takeaways from Chairman Powell’s press conference:

  • SPV programs that buy corporate and municipal credit are unlimited in size.
  • He reiterated that they would use their tools “forcibly and confidently” until the U.S. is on the road to recovery.
  • He mentioned risks to the outlook that the Fed is keyed on. 1) The spreading of the virus, new outbreaks, and the development of vaccines and drugs. 2) Lasting damage to the productive capacity due to extended unemployment and small and medium-sized business failures. 3) “global dimension” – how global economic activity affects the U.S. economy.
  • We are going to see data for Q2 that’s worse than anything we’ve seen
  • He seems to believe that inflation is guided by inflation expectations. As long as inflation expectations remain anchored, he does not expect to see deflation.
  • We won’t run out of money.

First Quarter Real GDP was worse than expected at -4.8%. The slowdown was led by a sharper than expected 7.6% decline in consumer spending, the largest drop in 40 years. Consumer spending was only expected to fall by 1.5%. Bear in mind, the GDP report only captured a few weeks of the shutdowns, with over two-thirds of the reporting period having occurred during a relatively healthy economic environment. Interestingly, the price index was stable from last month at 1.3%.

GDP data will likely be revised significantly in the coming months and even years, as we have seen with prior recessions. Page 8 of the GDP report (LINK) provides the contribution of the components making up GDP. The graph below shows the breakdown by major sector groupings.

, Commentary 04/30/2020

Despite the GDP data, stocks surged on optimism from Gilead that its Remdesivir Corona Virus treatment showed positive results. Dr. Fauci also spoke with optimism-“what it has proven is that a drug can block this virus … This drug happens to be blocking an enzyme that the virus uses.

Jobless Claims will be released at 8:30 with expectations of 3.5 million new claims being filed. Chicago PMI will also be released with a consensus of 37.9 and wide range of estimates from 29.8 to 42. National PMI and ISM manufacturing surveys will follow on Friday. All of these corporate surveys, which used to provide economists dependable forward guidance, will be impossible to make sense of. Investors and economists will likely put little weight on their results.


April 29, 2020

GDP will be released at 8:30. The consensus expectation is for a decline of 3.7% ,with estimates ranging from 0 to -10%. The Fed will release the minutes from its FOMC meeting at 2:00 and follow up with Jerome Powell’s press conference at 2:30. Fed Funds futures are priced at 8bps, implying an 18% chance rates are cut into negative territory. The Fed Funds curve is flat through at least October 2021, meaning there are no additional expectations for further decreases or any increases for a long while.

As expected, Consumer Confidence fell sharply in April to 86.9, down from 120 in March. The drop was led by the present conditions sub-component, which fell from 164 to 76.4.

On CNBC’s Squawk Box Treasury Security Mnuchin stated “I would say that’s highly unlikely” in regards to the Fed buying stocks. We have little doubt this statement will prove false if the market tumbles back toward March lows.

In an optimistic sign of improvement in the credit markets, LIBOR spreads to Treasuries continue to compress. The current 3-month spread is 38.5bps down from nearly 100bps. LIBOR indicates the rate that banks can borrow from each other. The tighter the spreads, the better condition banks are in.

One of our concerns about the sustainability of the current equity rally is the two week divergence between junk bonds and stocks. When the Fed announced they will buy junk-rated debt, the popular junk ETF (HYG), spiked higher. However, since then, it has retraced all of the gains. Over the same period, the S&P 500 has continued to grind higher. The correlation between junk bonds and stocks tend to be strong over time, so this divergence bears watching closely.

The most common theme from earnings announcements this quarter has been the withdraw of 2020 forecasts and guidance. Making sense of Q1 earnings is already a difficult task, but trying to assess how the virus will impact certain companies in the coming quarters is now nearly impossible without the qualitative and quantitative input from corporate executives.

, Commentary 04/29/2020

Tesla’s valuation summed up in one picture-  (TTM Rev. = Trailing 12 months of revenue)

, Commentary 04/29/2020

April 28, 2020

This week will be important for corporate earnings. Some of the more important corporate earnings announcements by day are as follows:

  • Tuesday- Pfizer, Merck, 3M, Google, Caterpillar, and Pepsi
  • Wednesday- Boeing, Humana, Tesla, Facebook, Microsoft, and MasterCard
  • Thursday- American Airlines, Apple, Twitter, McDonalds, Amazon, Visa, and United
  • Friday- Exxon, Chevron, Clorox, and Honeywell

Given the record concentration of the five largest stocks in the S&P 500, all of which report this week, earnings may amplify volatility in the markets. Potentially further stoking volatility will be the Fed’s FOMC meeting statement and Powell’s press conference on Wednesday, along with GDP also being released on Wednesday.

, Commentary 04/28/2020

Diamond Offshore (DO), a large offshore oil driller, filed for bankruptcy protection over the weekend. Continental Resources (CLR), the largest shale producer in the Bakken region is shutting in most of its production. CLR was producing over 200k barrels per day. Headlines like these will likely become more common as many small to mid-size energy producers are unprofitable at current oil prices and saddled with tremendous debt loads. As we discussed last week, there will be a lot of assets for sale at deep discounts, and the larger energy companies with strong balance sheets, diversified products, and the ability to withstand sub $20 oil prices for a while will benefit.

Crude oil fell almost $4 a barrel or 23%. Continued fears about a lack of storage and overproduction continue to haunt the price.

GM will suspend dividends and cancel buybacks. Delta Airlines is suspending contributions to it pension fund. Boeing’s CEO said it would take “years” before they start paying dividends again. Headlines like these will be common themes going forward as companies take necessary action to preserve cash. It is worth considering that reinvested dividends and share buybacks were the key drivers of stock prices for the last decade.

Fox News said that a negative payroll tax is on the table. Negative interest rates, oil prices, and now possibly taxes. Economics is being turned on its head.

The Fed expanded its $500 billion municipal lending facility to include smaller cities and counties. Click this LINK for the press release.

April 27, 2020

The Fed will further reduce QE purchases this week to $10 billion per day, down from $15 billion last week.

On Tuesday and Wednesday, the Fed will conduct their regularly scheduled monetary policy meeting. The market is not expecting much in terms of additional actions. Still it is worth noting that ex-Fed President Kocherlakta penned an editorial urging the Fed to consider dropping rates into negative territory at this week’s meeting. The BLS employment number will not be out until next Friday, but the Fed will have a decent estimate of that much anticipated number and may opine on it.

Also, GDP will be released on Wednesday. The current estimate is for a 3.3% decline. Q1 has the potential to vary significantly from the estimate as various local and state lockdowns occurred at different times throughout March. We also have to consider that economic activity in February and March was boosted by corporate and consumer stockpiling.

One of last week’s themes in the daily commentary was the extraordinary oil price volatility resulting from the supply/demand imbalance. Today we shift focus to meat products that are facing an odd set of supply/demand imbalances. Per a Bloomberg article, “about a quarter of American pork production and 10% of beef output has now been shuttered.” The closures are due to employees and meat inspectors that have contracted the corona virus and the risks to other employees. The article states that 100 USDA inspectors have tested positive for the virus and at least one inspector has died. These inspectors travel from plant to plant and can quickly spread the virus. Since the processing plants are closing, the growing supply of animals is also becoming a problem. The article notes, “Minnesota farmers may have to kill 200,000 pigs in the next few weeks.” There also reports that 2 million chickens are being “depopulated” in Maryland and Delaware.

As a result of supply chain impediments, the prices of certain finished meat goods may rise sharply at grocery stores and restaurants while the prices of raw products in the futures market trade near the lows of the year. Essentially, there is downstream inflation for consumers of processed meat products and, at the same time, deflation for farmers selling the animals. You can track futures pricing for cattle, hogs, and a host of other commodities at Finviz.com.  Supply chains around the world are fracturing and resulting in imbalances that can be inflationary, deflationary, or both.

The graph below shows that the annualized number of new fracking operations in the Permian, Eagle Ford, and Bakken basins has fallen by about 75%. Today, the lack of demand is dwarfing the supply cuts, but as the economy recovers production cuts, coupled with increased demand should provide a substantial boost to the price of oil.

, Commentary 04/27/2020

Per Bloomberg News- “U.S. homeowners seeking to delay mortgage payments topped 3.4 million, up 17% from a week earlier, according to Black Knight. About 6.4% of mortgage borrowers have entered forbearance.”

April 24, 2020

Initial Jobless Claims rose by 4.427mm, bringing the total for the last five weeks to 26.5mm. The unprecedented nature of job losses is shown below.

, Commentary 04/24/2020

The ECB joined the Fed and will now purchase junk-rated corporate debt under certain conditions. Rumor has it the ECB will also accept junk-rated debt as collateral for loans to banks. The BOJ joined the party by removing limits on the amount they can buy under existing QE programs. Further, they will double their purchases of corporate debt.

Yesterday we added positions in Exxon (XOM), Chevron (CVX), and the SPDR Energy ETF (XLE) to our portfolios. We believed the companies offered significant value before the crisis and offer even more today despite the sell-off in oil. Based on our discounted cash flow model for XOM and CVX, we think that both stocks are about 25% undervalued. The model assumes very conservative earnings projections for the next three years and a low earnings growth rate thereafter. In addition to trading at a good discount, we think their strong balance sheets put these companies in a prime position to purchase sharply discounted energy assets in the months ahead. These stocks and the sector will be volatile for a while, but our intention is to add to these positions in the future and potentially hold them for a long time.

The graph below shows that the stimulus checks to individuals will have limited economic stimulative benefits. Over 50% of the funds will go towards savings or paying down debt. Typically a much higher portion would go towards expenditures and contribute to economic activity.

, Commentary 04/24/2020

Throughout the week we have written about the massive imbalance in the supply and demand for oil and how it is killing oil prices. Now we take a macroeconomic view and consider how weakened demand for oil might affect U.S. GDP. To quantify the relationship, we share two graphs below. The first one is a scatter plot, with each dot representing the annual intersection of the change in economic activity with the change in energy consumption (data since 1977). As shown, the relationship is statistically solid with an R-squared of .55. The next graph compares GDP to a forecast based on the regression analysis from the scatter plot. Again, it visually shows the strong relationship between the two factors.

, Commentary 04/24/2020, Commentary 04/24/2020

Based on the analysis above, if we assume total energy consumption will be down 25% for the entire year, then the estimated annual GDP should decline by 8.68% for 2020.

April 23, 2020

Jobless Claims will be released at 8:30. The current estimate is for 4.250mm new claims, a decline from 5.245mm last week. On Friday, the University of Michigan will release its revision to last week’s April Consumer Sentiment reading. Last week the index was 71.0 down from 89.1 in March and 97.2 in April of 2019. The current estimate is 68.0.

Per Lisa Abramowicz/Bloomberg- “Total hedge fund capital fell by $366 billion in Q1 to $2.96 trillion, falling below $3 trillion for the first time since 2016: HFR data. Investor outflows totaled about $33 billion in Q1, the 4th largest in industry history & the biggest quarterly outflow since 2009.”

Congress approved an additional $320bn allotment for PPP loans for small businesses. Given the backlog of requests, it is widely expected the funds will be exhausted by the weekend.

It is troubling to think about, but with the price of oil so low, we must consider the possibility of conflict in the Middle East as a way to help boost prices. To that end, President Trump tweeted the following: “I have instructed the United States Navy to shoot down and destroy any and all Iranian gunboats if they harass our ships at sea.” Iran followed up with a call to the U.S. to “remove forces from the region and end bullying.” Given the recent volatility in oil it is hard to pin the exchange of barbs for yesterday’s 21% gain in crude oil. Crude oil is up another 10% this morning to $15.30.

According to FactSet, Q1 S&P 500 profit margins are expected to decline to 9.4%, which is about 2% lower than the running rate of 2019. It is also the lowest level in over four years. Given the economic headwinds that will emerge after this crisis, we must now consider that lower profit margins may not be a crisis-related, one-off instance, but a trend. Supply lines have been damaged, and in some cases, those changes are permanent. We believe that many countries will become less dependent on China as the lowest-cost producer. Having witnessed economic vulnerabilities, they will likely mandate that a larger percentage of domestic production for goods deemed essential. Globalization improved margins in the past and de-globalization will deduct from margins in the future.

Second, given the unprecedented monetary and fiscal efforts of the central banks and governments, inflation is a distinct possibility in the future. Will corporations be able to pass on higher costs to consumers? The answer to the question is clouded by what will likely be a slow recovery in employment, wages, and hours worked. Add to the equation, more debt at the federal, municipal, corporate, and consumer level, which will further impede consumption.  These considerations will no doubt play a role in the way we assess stocks for our portfolios.

April 22, 2020

With the May crude oil contract now expired, June becomes the new front month contract. Unfortunately, June is following in May’s path. The June contract fell 36% to $12.90. Unlike Monday, where the energy complex, as a whole, held up much better than the front crude contract, yesterday’s bearish action was much more encompassing. Brent Crude Oil was down 22%, gasoline down 20%, and heating oil down 16%.  The commodity complex also got hit hard, as most metals, precious metals, meats, and grains were lower. As shown below, the Thompson Reuters CRB commodity index was down over 10% yesterday and has fallen 55% year to date. Over the last week, the ten-year breakeven implied inflation rate is 0.35% lower to 0.94%, in sympathy with commodity prices.

, Commentary 04/22/2020

Based on our discussion of oil spot and futures prices in yesterday’s commentary, we provide some  context to the historical spreads. The graph below compares the rolling front month contract (within 30 days of expiration) to the rolling 3 month and 6 month future contracts. The contracts that expire 3 and 6 months from today are priced about $20 more per barrel than the front contract. Typically they are within $5 of each other.

, Commentary 04/22/2020

The graph shows that at times the futures contracts trade above the current price of oil and other times below it. In futures trading parlance, the difference is called contango when the future price is higher than the current price and backwardation when the current price is higher than the futures prices. There is no question, given the current instance of severe contango (current prices < futures prices), that the demand and supply for oil are grossly misaligned.

USO, the largest crude oil ETF, with $2.6 billion of assets, has seen its shares fall precipitously with the price of oil. It has been estimated that the ETF owns approximately a quarter to a third of the open interest in June crude oil contracts. If the ETF were forced to unwind, as we have witnessed with other ETFs during bouts of severe volatility, the fund’s managers would likely have to sell those contracts, which would add further pressure to oil prices in the short run.

China experienced the virus and the shutdown months before the U.S. was stricken. As such, we can see how effectively China is “opening up.” The graph below tracks auto traffic congestion in Beijing. The general takeaway is that traffic is back to normal for the morning weekday commute, but the afternoon commute is not as congested. This is probably the result of people working less than a full day. Second, as highlighted in yellow and evident on the weekend days, there is no congestion outside of workers commuting to and from their jobs. Until there is a viable treatment or vaccine, we think similar patterns will play out in the U.S. and Europe. Workers will return to work if possible, but most people will avoid non-essential activities. Such behaviors bode poorly for travel, retail, food, and the entertainment industries. To that end, Bloomberg posted an article titled-“Wuhan’s 11 Million People Are Free to Dine Out. Yet They Aren’t.

, Commentary 04/22/2020

April 21, 2020

The Chicago Fed National Activity Index fell to -4.19, which is near the lows of 2008. The only difference is that in 2008 the index deteriorated for more than a year until it reached its trough. This time the decline took one month. The 85 economic indicators that comprise the index are computed as a standard deviation from the norm. A four standard deviation event, as it now registers, should occur once every 83 years!

Spot oil, oil for delivery in May, plummeted to an intra-day low of -$40 a barrel on Monday, yes negative! We thought the price action was so unbelievable that we provided a picture below of oil from 2:30pm, when it was trading at -$13.98.

, Commentary 04/21/2020

At the same time, next month’s oil contract, for settlement in late May and delivery in June, traded down 15% to $21.09 per barrel. This morning the June contract is down a further 20% to $16.40. We received many questions voicing confusion about which is the “real” price of oil. To help answer the questions, we share an article we presented last week which discussed the difference between the S&P 500 and S&P 500 futures –How To Use S&P 500 Futures to Indicate the Market Open.

As defined in the article, cash and carry is equally applicable to the oil market. The difference between today’s oil price and the price of oil in the future, is a function of the amount of time, borrowing costs, delivery costs, and, most importantly today, storage costs. The big difference between the S&P and oil is that holding the S&P benefits the holder with dividend income, whereas holding oil results in a storage cost. Currently, the lack of demand and overproduction of oil has filled up storage facilities. With no storage remaining, producers are now being forced to have to pay someone to take their oil.  You can find the price of the monthly crude oil futures at the CME. For more on the storage problem, Reuters had an informative piece out yesterday on the glut of oil stored at sea- LINK

Please note we have removed the Chart of the Day. Recently, we have been adding pertinent/timely charts to the Daily Dashboard and will continue to do so going forward. The Chart of the Day has been replaced with News about your portfolio holdings and alerts, which you can set for your portfolio holdings. The alerts, when triggered, will send you an email alert.

April 20, 2020

The Conference Board’s Leading Economic Indicators plummeted from -.2% in February to -6.7% in March. That was by far the largest decline in the index’s 60-year history. The biggest reason for the deterioration was the recent surge of initial jobless claims.

, Commentary 04/20/2020

The Fed continues to slow down the pace of QE. On Friday, they further reduced the daily pace of purchases to $15 bn, down from $30 bn in the prior week, and $75 bn at the peak. Even at $15bn per day, the pace of purchases is still larger than the peak pacing of QE1. Given the massive issuance expected by the Treasury, we will closely follow yields on longer duration Treasury bonds to see if these reductions have a negative effect on yields.

Per Barry Diller on CNBC– “At Expedia we spend $5B a year on advertising. We won’t spend $1B in advertising probably this year. You just rip that across everything. There you are.” Facebook, Google, and a host of other social media outfits are advertising companies. To wit, we wrote the following two years ago- “Facebook (FB) and Google (GOOG), two of the hottest tech stocks in the market, are simply advertising companies. Based on current financial reports, 95% and 88% of revenue from FB and GOOG respectively come from advertising. These companies and others like them are the new Mad Men.”  While there may be more eyes on the sites and users as everyone is bored at home, Diller makes it clear that profits from advertising for the social media sector could be cut significantly.

The graph below shows the ratio of the financial sector (XLF) to the S&P 500 (SPY).  XLF is grossly underperforming the market, and, the ratio is hitting new lows despite the broader markets run higher.  This underperformance is occurring despite the Fed providing the sector with massive liquidity and quite frankly generous handouts. During the last financial crisis, the ratio fell from .21 in 2007 to a low of .07 in March of 2009. It was at the ratio’s lowest point when the broad market finally bottomed and turned upward. The global economic model is massively dependent on growing debt levels and banks to issue and administer debt. This is what makes XLF a sector to watch to assess macroeconomic conditions.

, Commentary 04/20/2020

April 17, 2020

China’s Q1 GDP declined 6.8% year over year. Considering China was afflicted with the virus and related economic shutdowns throughout the quarter, the GDP official number is likely better than reality.

Jobless Claims rose by 5.245 million people through April 11th, bringing the four week total to over 22 million. The prior record for cumulative claims over a four week period was 2.6 million in 1982. All of the new jobs created since the last recession have now been erased.

The point in sharing horrific data and putting it in historical context is to help you understand that the structural damage being done, even if somewhat temporary, is unprecedented. Recovery in a “V” shaped fashion, as the media and Wall Street are hyping, is nice to think about, but is it really possible?

The following comes from frequent RIA author Mish Shedlock:

More than 1 million people – over a quarter of Michigan’s workforce – have filed for unemployment during the COVID-19 pandemic, the state’s top labor official said Monday.

Last week, Michigan reported more than 828,800 unemployment claims filed in the state from March 8 to April 4. Michigan’s pre-coronavirus record for new unemployment claims occurred during the Great Recession in January 2009, when there were 77,000 claims in a week.

Keep in mind that Michigan was hit hard during the 2008/09 recession as GM and Chrysler filed for bankruptcy and Ford was close.

Conoco is slashing North American output and further reducing capital spending. Per Reuters, “North American oil producers have so far announced 550k in production cuts for the year.”  That number will undoubtedly grow over the coming weeks. In the long run production cuts and reduced capital spending are bullish for oil prices. However, in the short run, the massive drop in demand is thwarting efforts to stabilize the balance between supply and demand and, ultimately prices.

On CNN, Los Angeles mayor Eric Garcetti said it is likely that he will not allow any concerts, sporting events, or anything where thousands of people gather, until 2021

The graph below shows Moody’s default rates on high yield corporate debt (junk) as well as a range of forecasts for default rates next year. Despite the Fed’s actions to help the sector, Moody’s believes that defaults will be on par with those of the last recession. The Fed’s corporate bond buying operations have driven spreads, that in most cases, are not commensurate with the risk. Buyer beware!!

, Commentary 04/17/2020

We are not sure how reliable data going back over 300 years is, but the graph below is stunning none the less.

, Commentary 04/17/2020

April 16, 2020

March Retail Sales fell 8.7% versus expectations for a 7.3% decline. The monthly decline is more than twice the worst monthly change during the 2008/09 recession (-4.0%).  This is even worse considering the full brunt of the shutdowns did not occur until the second and third week of March in many places.  The hardest hit sectors and their changes versus March 2019 are as follows:

  • Clothing/Accessories  -50.7%
  • Furniture  -24.6%
  • Department Stores  -23.9%
  • Restaurants/Bars -23%

On the positive side, grocery stores saw sales grew by 29.3% and non-store retailers registered a gain of 9.7%.

The Empire Manufacturing Survey (New York State) fell to -78.2, a stunning reading as it is more than double the lowest reading at the trough of the 2008 recession.

Today’s Chart of the Day highlights the strong correlation between inflation expectations and the price of oil. Note that in recent days the price of oil has fallen sharply while inflation expectations are still on the rise. If oil continues to trade near recent lows, there is a good chance that inflation expectations will decline and re-correlate with oil. This was another factor in our decision to temporarily sell our holdings of inflation protected bonds.

One of our recent points of discussion is the probability that the current liquidity crisis morphs into a solvency crisis. Per Atlanta Fed President Bostic via Reuters, we are not only one with this concern- “Bostic- BUSINESS CONTACTS TELLING HIM THAT MAY IS “LOOMING” AS A MONTH WHERE LIQUIDITY PROBLEMS COULD EVOLVE INTO SOLVENCY PROBLEMS.” 

In case you missed it, Lance and Michael explained the difference between liquidity and solvency in the Real Investment Show from April 9th. Click HERE to watch.

The graph below shows how the virus has impacted revenue for small businesses. Some of these businesses will qualify for PPP loans and hopefully weather the storm. Many others can not or will not apply for the loans. Small business accounts for about two-thirds of employment and consumer spending accounts for nearly 70% of GDP. As you consider media and Wall Street forecasts for a “V” shaped economic recovery and a swift return to normalcy once shutdowns are lifted, just consider the damage already done to individuals and small businesses. Currently, the PPP program is set to run out of funds with the next day or two. Negotiations in Congress are ongoing to increase funding for the program.

, Commentary 04/16/2020

April 15, 2020

Two weeks ago crude oil bottomed at just below $20 a barrel and then proceeded to climb nearly 50% to just shy of $30. The risk-on markets followed suit, especially those assets that were hardest hit in the prior few weeks. Oil prices, despite a huge reduction in production from OPEC, have now completely given up the entire gain of the last two weeks. Oil stocks which have risen in equally impressive fashion have thus far held onto their gains. The recent divergence between oil stocks and oil, as well as between oil and the risk markets in general bears paying attention to.

JP Morgan (JPM) released its Q1 earnings yesterday. Of note, they built loss reserves by $6.8bn in the prior quarter, which equates to $1.66 per share.  The amount of new reserves brings total reserves close to the $8.29bn that they now have provisioned for credit losses. This amount, which will surely grow, is just shy of their peak provisions from the financial crisis ($8.6bn). Building reserves brought their EPS down to 78 cents and well below the estimate. We expect all banks to aggressively build reserves in the first quarter and more in the second quarter. JPM released the table below showing various financial factors that greatly affect their financial statement. This table also provides us a glimpse of what is happening to the economy and the credit markets.

, Commentary 04/15/2020

Yesterday we sold our 5% holding of STIP. We originally bought the security because we thought future inflation rates, implied by inflation-protected securities, were too low, as shown below. Since then, implied inflation rates have risen sharply. We still harbor concerns that the monetary stimulus being supplied by the Fed is inflationary in the long run, but in the meantime, we think implied inflation is back to close to fair value. We also would not rule out another decline in expectations if the market falls again signaling weaker economic activity and another burst of deflationary pressures.

, Commentary 04/15/2020

Annie Lowery of The Atlantic published a stunning article entitled Millennials Don’t Stand a Chance. The article highlights how the economic downturn is impacting the millennial generation. She writes:  “In a new report, Data for Progress found that a staggering 52 percent of people under the age of 45 have lost a job, been put on leave, or had their hours reduced due to the pandemic, compared with 26 percent of people over the age of 45. Nearly half said that the cash payments the federal government is sending to lower- and middle-income individuals would cover just a week or two of expenses, compared with a third of older adults. This means skipped meals, scuppered start-ups, and lost homes. It means Great Depression–type precarity for prime-age workers in the richest country on earth.”

A link to her source for the article, Data For Progress, can be found in the article.  The link has stunning graphs showing how the impact of the virus is affecting different demographic groupings.

April 14, 2020

The mayor of Vancouver Canada projects that the city will lose nearly $200 million in tax revenue and claims it is “at risk of going bankrupt.” He stated that approximately one in four homeowners are unable to pay their property taxes. What Vancouver is experiencing is likely being felt by almost all municipalities in the U.S. and many other nations. We have little doubt that the national governments and central banks will add to their stimulus packages to help these municipalities/local governments avoid bankruptcy, but municipal spending on non-essential items will be sharply curtailed. As an example, from the Washington Post- Maryland Governor Larry Hogan “froze all non-coronavirus state spending after a new analysis shows the pandemic could reduce the state’s tax revenue by $2.8 billion over the next three months.”

First quarter earnings releases will start up in earnest this week, with the bulk of the reports coming from the banking and airline sectors. Today’s highlights will be JPM, Wells Fargo, United Airlines, and J&J. Bank earnings will be especially unpredictable as they are likely to add significantly to their loss reserves in advance of Q2 and Q3 credit losses. On the economic data front retail sales, will be released Wednesday and are currently expected to decline 7%. Like many March reports, this one will be tough to decipher and may vary widely from expectations.  Of interest will be the breakdown of sales across the various industries. Jobless Claims will be released Thursday, with an additional 5.5 million expected to join the ranks of the unemployed. If there is a silver lining, it is that if the expectations hold, it would be the second straight decline in the number of new unemployment filings.

President Trump is claiming that OPEC may come back to the negotiating table and further cut production to 20mm barrels a day from the just negotiated 9.7mm reduction. Also helping to stabilize the price of oil are discussions that many countries will soon fill their emergency oil reserves. Countering those actions, it is estimated that the demand destruction from the virus is possibly as high as 35mm barrels a day. Oil closed slightly lower yesterday as Trump’s claims, in addition to the deal agreed to on Sunday, still fall short in the market’s eyes of what is needed.

JP Morgan announced that new mortgage originations now require a FICO credit score higher than 700 and 20% down. At a time when banks are getting bailed out and the Fed is buying debt of junk-rated corporations, JP Morgan’s ratcheting up of credit on the public will not sit well. One of our concerns is that at some point, the inequality of the stimulus and bailouts will result in political angst and protests.

The graph below shows the stunning decline in the newly introduced New York Fed Weekly Economic Indicator. Index components are found in the fine print.

, Commentary 04/14/2020

April 13, 2020

The UK is the first large country to officially embrace MMT, even if only “temporary and short term.” The Bank of England (BOE) will print money to directly finance the government’s financing needs during the crisis on an as-needed basis. This move allows the government to use the BOE’s printing press to regulate the amount of debt issued. For instance, when the amount of debt issuance is determined too large for the market to digest in an orderly fashion, the BOE will supply the excess funds to the government. While such a plan may sound prudent, the consequence, if enough money is printed, will be a surge in inflation. The Fed and other central banks do not have the same ability to print money directly into the economy yet. They purchase assets from the market in exchange for reserves at banks. Those reserves can then be used to create money via new debt. This two-step process is not as effective, as it relies on the willingness of banks to increase their lending.

The Fed enhanced its corporate bond buying program to include newly downgraded junk-rated debt and junk-rated debt ETF’s. This enhancement doesn’t include individual bonds that were rated junk prior to March 20th, however, it indirectly includes all junk debt as they can buy junk-rated ETF’s. Click to enlarge the paragraph below from the Fed’s revised term sheet.

, Commentary 04/13/2020

The full press release can be found HERE with the term sheet for corporate debt towards the bottom. Treasury Secretary Mnuchin followed the press release with a subtle reminder that the Fed buying stocks is a possibility- “MNUCHIN SAYS NO TALKS RIGHT NOW ABOUT POTENTIAL TO HAVE FED BUY STOCKS.”

Jerome Powell spoke after Thursday’s Fed actions and stated, One thing I don’t worry about right now is inflation.” He is correct that deflation is the greater worry in the short run, but when the economy recovers, inflation will be a substantial risk unless the Fed is willing and able to reverse their crisis related actions quickly. To that end, we have some concern the Fed may not be quick enough to remove stimulus- Per Powell “Fed Will Only Pull Back Support When Economy Is Well On Its Way To Recovery.”

A stunning 6.6 million more Americans filed for unemployment claims last week, bringing continuing claims over the previous three weeks to nearly 22 million, or about 15% of the 151 million person workforce. CPI fell 0.4%, which is the first monthly decline in a decade.

As expected, OPEC finally agreed on a 9.7mm a day production cut. Crude oil is only 20 cents higher this morning after an extremely volatile last Thursday in which it spiked over 10% in the morning to $28.25 a barrel but then fell sharply to close the day at $23.54. Either the market thinks the cut is not enough given the massive decline in demand or that participating countries will not adhere to their commitments.

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

, Commentary 04/09/2020 extra

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.

, Commentary 04/09/2020

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.

, Commentary 04/08/2020

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.

, Commentary 04/07/2020

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.

, Commentary 04/07/2020

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.

, Commentary 04/06/2020

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.

, Commentary 04/03/2020

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.

, Commentary 04/03/2020

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.

, Commentary 04/02/2020

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.

, Commentary 04/01/2020

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:

  • Q1 GDP -9% (Q/Q annualized)
  • Q2 GDP -34% (Q/Q annualized)
  • 2020 GDP -6.2%
  • Unemployment 15% by mid-year

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.

, Commentary 03/31/2020

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.

, Commentary 03/30/2020

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.

, Commentary 03/30/2020

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.

, Commentary 03/27/2020

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.

, Commentary 03/27/2020

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

, Commentary 03/25/2020

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.

, Commentary 03/24/2020

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.

, Commentary 03/23/2020

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:

  • Q1 -4%
  • Q2 -14%
  • Q3 +8%
  • Q4 +4%

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.

, Commentary 03/16/2020

March 13, 2020

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

, Commentary 03/13/2020

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.

, Commentary 03/13/2020

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.

, Commentary 03/13/2020

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.

, Commentary 03/11/2020



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%

  • September/October 1929 = 42 days
  • August to October 1987 = 55 days
  • July to October 1990 = 87 days


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.

, Commentary 03/09/2020

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

, Commentary 03/06/2020

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?

, Commentary 03/02/2020

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.

, Commentary 02/28/2020

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.

, Commentary 02/25/2020

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.

, Commentary 02/24/2020

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:

  • The dollar index continued its daily assent higher and now sits at 2.5 year highs. The dollar is already up about 4% for the year. A stronger dollar tends to be a headwind for corporate earnings.
  • The Fed minutes on Wednesday and Vice Chair Clarida’s comments (see below) yesterday may have been a bit more hawkish than expected
  • The virus is beginning to spread rapidly in Japan, South Korea, and Iran, which should create further negative impacts to supply lines and global economic growth
  • Asset rotation: Gold and bonds continued to perform well and value/small caps outperformed while growth/large caps lagged. Apple and Microsoft, the leaders of this years advance, noticeably unperformed the market.

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.

, Commentary 02/21/2020

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.

, Commentary 02/21/2020

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.

, Commentary 02/18/2020


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.

, Commentary 02/14/2020

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.

, Commentary 02/13/2020

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:

  • China will not meet their purchase obligations of agriculture under the Phase one trade agreement
  • Apple sales in China could decline by up to 50%
  • Airbus sees no clear timeline to reopen the Tianjin final assembly plant
  • Singapore’s Tourism board expects a 25% decline in visitors in 2020.
  • Under Armour missed on sales and their outlook is weak. They partially blamed the Corona Virus outbreak.

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.

, Commentary 02/12/2020

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.

, Commentary 02/07/2020

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

, Commentary 02/06/2020Today’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.

  • The chart above shows the result of subtracting the monthly confidence score of respondents over 55 from those under 35.
  • Younger people have typically had higher confidence scores, but that has changed in recent years, the data show.

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.

  • “People at different ages are experiencing the economy differently,” she says.
  • “If you’re under 35 you’re looking more likely at student loan debt and really high home prices, even if interest rates are low. If you’re older, you’re probably not as affected by student loan debt, and you’re probably not negatively affected by high home prices, though you might have a huge gain from home equity.”

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.

  • “Whereas every other form of debt — from credit cards to mortgages — actually have this wealth effect that makes you want to invest more and be part of the economy, student loan debt makes young people more risk averse, and it makes them more risk averse precisely at the time you should be taking on more risk assets.”

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.

, Commentary 02/05/2020

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.

, Commentary 02/04/2020





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:

  • Jerome Powell mentioned the Fed is monitoring the spreading of the Corona Virus and related economic implications but seemed little phased at the prospect of slower economic growth due to the virus.
  • In regards to QE guidance, he stated: “We need reserves at all times to be no lower than they were in early September. I would say around $1.5 trillion… That will be the bottom end of the range.”  Currently, excess reserves sit just under $1.5 trillion.
  • Powell dodged Steve Liesman’s (CNBC) question about whether QE was driving stock market gains.
  • Powell was asked about inflation target averaging, whereby they would aim for a higher inflation rate after periods of lower inflation. Like the prior bullet point, he danced around the question and did not provide an answer.
  • The Fed believes global economic growth is rebounding as some uncertainties such as trade and BREXIT have been somewhat resolved.
  • He said that credit and stock asset valuations are “somewhat elevated” but not at extremes.  Based on many popular valuation techniques, “somewhat” must be a code word for “extremely.”

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!

, Commentary 01/27/2020

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.

, Commentary 01/24/2020

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.

, Commentary 01/22/2020

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.

, Commentary 01/21/2020




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.

, Commentary 01/21/2020





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.

, Commentary 01/15/2020

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.

  • S&P 500 +45
  • Crude Oil  -2.80
  • Gold -8.10
  • 10yr. Yield  +2.50

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.

, Commentary 01/13/2020

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.

, Commentary 01/10/2020

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.

, Commentary 01/08/2020The 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.

, Commentary 01/06/2020








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.