Latest Commentary

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.