Latest Commentary

April 12, 2021

St. Louis Fed President Bullard made an interesting comment today as follows: Fed’s Bullard Says 75% Vaccinations Would Allow for Taper Debate. For now, we will treat this as a one-off statement and not necessarily representative of other Fed members. However, If we hear similar rhetoric from other Fed members, the equity markets will pay closer attention to vaccination data and likely fret as they rise.

Market Weaken With Extreme Exuberance

, Commentary 4/12/2021

Gamma Band Update is published

, Commentary 4/12/2021

This will be an important week for economic data with CPI at 8:30 am ET tomorrow, Fed Chair Powell speaking on Wednesday, and Retail Sales due out on Thursday. Also on the radar will be the University of Michigan Consumer survey on Friday and, in particular, its inflation gauges. With PPI rising well above expectations last Friday, investors will be looking for confirmation in other inflation indicators. More important, will be any indications pointing to whether this bout of inflation is transitory or longer-lasting.

Q1 corporate earnings start this week in earnest. The banks will lead the way with JPM and GS releasing earnings on Wednesday, followed by many other big banks on Thursday. We are expecting strong reports from the large banks as they are likely to significantly reduce loan loss reserves. Further, the steeper yield curve should have increased margins, and the active trading environment bolstered trading revenue.

In the upcoming Q1 earnings reports, investors are likely to focus on rising input inflation costs and how companies will try to maintain or boost profit margins. Our friend Eric Cinnamond at Palm Valley Capital wrote an interesting article on the topic (LINK) that is worth reading. Here are few noteworthy passages:

Recent quarterly results and commentary of the businesses on our 300-name possible buy list support my anecdotal observations. With declining inventories and rising costs, companies have been reducing promotions to protect gross margins and receive full price on their limited supply.

Another business we follow, Big Lots (BIG), also reported fewer promotions, stating, “As our inventory levels were sold through, we were able to navigate through the holiday period with fewer promotions than last year. This reduction in markdowns significantly mitigated the pressure felt from increased spot freight rates and higher supply chain charges we incurred.”

Nike (NKE) discussed how supply chain shortages are negatively impacting sales, saying, “Starting in late December, container shortages and West Coast port congestion began to increase the transit times of inventory supply by more than three weeks. The result was a lack of available supply, delayed shipments to wholesale partners and lower-than-expected quarterly revenue growth.” Management also commented on its improved gross margins, partially contributing them to “higher full-price product margins.”

April 10, 2021

Victor Adair’s Trading Desk Notes

, Commentary 4/09/2021

April 9, 2021

Chairman Powell will appear on 60 Minutes Sunday night. We presume he will talk up the economic recovery, pledge to keep the stimulus coming, and try to allay any fears of sustained inflation.

Producer Prices (PPI) surprised to the upside, rising 1% in March and 4.2% on a year over year basis. Expectations were for a gain of half a percent and +3.8% year over year. The 4.2% increase is the largest since 2011. We remind you, year over year analysis involves a comparison to March of 2020 when the economy wash shut down. Core PPI, excluding food and energy, rose .6% versus expectations of a .2% gain. CPI will be released next Tuesday. It will be interesting to see how much of the increase in input prices (PPI) corporations are able to pass on to consumers. The current estimate for CPI is +.5% and +2.5% on a monthly and annual basis respectively.

The Technical Value Scorecard is published.

, Commentary 4/09/2021

The graph below, courtesy of the Daily Shot, shows that 42% of stimulus checks are being saved and 34% are being used to pay down debt. While this bodes well for personal finances and helps explain the reduction in credit card balances, the stimulus is not stimulating the economy as much as politicians desired.

, Commentary 4/09/2021

On April 29th the BEA will release the first-quarter GDP. The graph below shows the Atlanta Fed estimates growth will come in around 6%, while the consensus of economists is closer to 4%. The recent bump up in the Atlanta Fed forecast is primarily due to increased government spending forecasts and the robust housing market.

, Commentary 4/09/2021

The chart below, courtesy of Macrocharts, shows that large gold outflows from the GLD ETF, as recently experienced, are typically followed by decent rallies. As shown 660k metric tons of gold were removed from the ETF in recent weeks, the second-largest withdrawal in the history of the ETF.  We added a 2.5% position of gold via IAU three days ago in both the Equity and Sector models. Our internal money flow models are turning bullish, signaling the recent downtrend may be ending. The second graph shows that when RSI and MACD are extremely oversold (vertical gold lines), gold tends to rally. Further, gold bounced off its support trend line (ascending purple line) and formed a double bottom. The double bottom and trend support line provides us two relatively low-risk areas to establish stop-loss limits. If gold continues to show signs of a trend reversal we may add another 2.5% bringing the total to 5%.

, Commentary 4/09/2021, Commentary 4/09/2021

April 8, 2021

As of late February, investors had borrowed a record $814 billion against their portfolios… up 49% from one year earlier, the fastest annual increase since 2007… Before that, the last time investor borrowings had grown so rapidly was… in 1999.”Investors Big and Small Are Driving Stock Gains With Borrowed Dollars. -WSJ

The economic recovery will face some challenges in the months ahead. One of them is that Federal/state actions allowing renters and mortgagees to skip payments and making evictions illegal will shortly end. As this occurs, those the did not make payments will have less money to spend for general consumption as they will have to pay rent/mortgage payments or face eviction. To this end, the Texas Supreme Court is allowing the emergency forbearance order to expire and will not enforce federal orders to stop evictions. For more, NPR wrote the following article: Texas Courts Open Eviction Floodgates: “We Just Stepped Off A Cliff.”

Despite the blockbuster jobs report last week, Initial Jobless Claims continue to make very slow progress lower. This past week 744k new people filed for claims versus 728k the prior week. The number of federal and state continuing claims continues to hover around 18mm, the same level it has been stuck at for the last four months.

Consolidation Before Correction

, Commentary 4/08/2021

Yesterday’s Fed minutes from the March FOMC meeting were as expected for the most part. Below are a few noteworthy sections:

  • “Participants noted that it would likely be some time until substantial further progress toward the Committee’s maximum-employment and price-stability goals would be realized and that, consistent with the Committee’s outcome-based guidance, asset purchases would continue at least at the current pace until then.”
  • Per CNBC -” Though inflation shows up 64 times in the minutes, Fed officials indicated little concern that it might become a problem anytime soon. One notion in the minutes said that inflation forecasts were right around where FOMC members expected.”
  • Disorderly conditions in the Treasury markets or a persistent rise in yields that could jeopardize progress toward the Committee’s goals were seen as cause for concern”

After the minutes were released, Lael Brainard essentially defined “Disorderly Conditions”: “I would be concerned to see disorderly conditions, like we saw Feb. 25.”  On February 25th, the ten-year UST yield increased 13 basis points which represents a 2.73 standard deviation move.  The graph below shows the daily standard deviation of changes in ten-year UST yields over the last ten years. A change of 2.73 or greater has occurred 41 times in the last ten years. In other words, the bar is set pretty low for the Fed to potentially take action to limit yields rising.

, Commentary 4/08/2021

April 7, 2021

Per the headline below, some of the supply line-related problems are improving. Any inflationary pressures due to these temporary problems should abate with continued normalization.


The graphs below show the MBA’s Purchase and Refi Indexes as compared to mortgage rates. We are watching them closely to see how higher mortgage rates affect both indexes and therefore the economy. In the first graph, showing the Purchase index versus the mortgage index, the index has not fallen significantly despite rates rising by about .60%. The correlation between home purchases and rates will likely be low for the time being due to the limited supply of houses on the market and rates that are still well below the 4.25% average for 2018/2019.  The Refi index, on the other hand, is much more sensitive to the change in rates. The Refi index is back to pre-COVID levels despite rates that are still .50% lower. New home purchases play a large role in economic activity and job growth. Refi activity is also economically important as it allows existing homeowners to reduce their mortgage payments, allowing them to spend more.

, Commentary 4/07/2021 , Commentary 4/07/2021


Long Term Market Outlook

, Commentary 4/07/2021

Most economic data is reported on a year over year basis to help minimize seasonal effects. Data coming out over the next few weeks, for March of 2021, will be compared to March of 2020 when the economy was paralyzed. The graph below of credit card spending shows how the so-called “base effect” warps annual change (year over year) reporting. As shown, credit card spending is up an astonishing 64% versus a year ago. However, compared to more normal economic periods it is actually down 3.2%.

, Commentary 4/07/2021

The two graphs below tell a similar story- Investors rooting for more inflation better be careful about what they wish for. The first graph, courtesy of Brett Freeze, shows that valuations have historically declined as the volatility of CPI increases. The second graph, from the Daily Shot, highlights that lower valuations are associated with higher levels of CPI.  The current CAPE is 35. As shown in the second chart, the maximum CAPE for any historical CPI reading greater than 3% is in the low 20s. A decline from 35 to 20, assuming no change in earnings, entails an approximate 40% price decline.

, Commentary 4/07/2021, Commentary 4/07/2021

April 6, 2021

The Job Openings and Labor Turnover (JOLTs) report from the BLS pointed to more good news on the labor front. Per the report, the number of job openings rose by 286k to 7.37m, back above where it was before the pandemic. At the peak a year ago, there were 4.60 unemployed workers for every job opening. That ratio has shrunk significantly to 1.40 but it still has room to fall as it was below 1.00 for much of 2019.

The Best Surprise is No Suprise

, Commentary 4/06/2021

The chart below shows ten-year UST yields (white) and Fed funds (yellow) since 1986. Overlayed on the chart is the regression line as well as one and two standard deviations from the line. As circled, each time the yields hit the +2 standard deviation line, yields quickly reversed lower. Currently, the line comes in slightly north of 2%, about .25-35 bps higher than today’s level. The only difference between today and the past is Fed Funds. In the past, the Fed increased Fed funds multiple times before 2 standard deviations were reached. Today, the Fed is nowhere close to raising Fed Funds. If yields break above the 2 standard deviation line, not only would it be unprecedented, but it may cause the Fed to consider options such as Operation Twist, to stem further yield increases. For more on Operation Twist- Its Time To Do The Twist Again.

, Commentary 4/06/2021

Last week we discussed how the hedge fund Archegos used total return swaps and shared collateral to amass significant leverage in the equity markets. A reader asked us to better explain what total return equity swaps are, so here it goes: A total return swap (TRS) is a swap agreement (derivative) allowing one party to receive a payment based on a set rate, usually, LIBOR, while the other party receives payment based on a fixed or variable rate. With an equity TRS, the transaction typically involves the bank receiving LIBOR plus a fee, while the hedge fund/investor receives the total return (price and dividend) on a stock, a basket of stocks, or an index.  The benefit for the investor is they only need to put up collateral to back the trade and can therefore create leverage. Second, because they do not hold the stocks directly, they can avoid regulatory ownership rules.  In the case of Archego, they used the same collateral with 7 different banks, meaning they could employ 7x the leverage normally gained on TRS.  If you want to learn more, the WSJ has an excellent description of TRS including more color on how Archego used the swaps- LINK.

It is likely Archego is not the only fund to back TRS with shared collateral. As we saw with stocks used in Archego’s TRS, like VIAC and DISC, upward and downward volatility can be amplified due to the extreme leverage.

April 5, 2021

***We are having a data issue this morning on numerous pages. Please bear with us as we fix the problem.

Treasury Secretary Janet Yellen is pushing for a minimum global corporate tax rate. On the heels of Biden’s plans to retract Trump’s corporate tax rate cut, Yellen would like to see similar measures taken abroad. It appears she is concerned that higher taxes on U.S. corporations will impede their global competitiveness and incentivize companies to offshore operations. Per her speech:

“Together we can use a global minimum tax to make sure the global economy thrives based on a more level playing field in the taxation of multinational corporations and spurs innovation, growth, and prosperity,”

Today’s ISM Services survey, similar to last week’s manufacturing survey, was much stronger than expected, coming in at a record 63.7. The prices paid sub-component is now the highest since 2008.

Why We Increased Exposure To Risk

, Commentary 4/05/2021

Gamma Band Update is published

, Commentary 4/05/2021

This week should be relatively quiet on the economic front. Likely garnering the most attention will be PPI on Friday. Surveys and expectations continue to point to a surge in inflation, but PPI and CPI have yet to show the same. It is worth noting that PPI is for March, thus year-over-year data will show an uptick due to strong deflationary conditions last March. The current expectation for PPI yoy is +2.5%. The Fed’s minutes from the last FOMC meeting three weeks ago will be released on Wednesday.

In our ongoing quest to gauge inflation expectations, we present a new graph. The chart below shows the relatively strong correlation between the Australian dollar and U.S. 5-year inflation breakevens. The correlation is tight because Australia is a large commodities producer/exporter and almost all of their trade occurs in U.S. dollars. As such, the value of their currency is closely tied to inflation expectations. Since January 1, 2021, the AUD is unchanged while implied inflation is up by nearly .50%. Either the correlation may be temporarily breaking down, the AUD is signaling a weaker dollar, or the AUD is warning that U.S. bond traders may be pricing in too much inflation.

, Commentary 4/05/2021

April 4, 2021

Trading Desk Notes – By Victor Adair

, Commentary 4/02/2021

April 2, 2021

Markets are closed today for the Good Friday holiday!

The Technical Value Scorecard Report is published

, Commentary 4/02/2021

The BLS Employment Report was stronger than expected at 916k versus 468k last month. The unemployment rate fell to 6% from 6.2%. Average hourly earnings fell, likely because many new hires are in the service industry which tends to be low-paying jobs. The sector accounting for the most jobs gained was the leisure and hospitality sectors with a pick up of 280k jobs. A summary of the report is below.

, Commentary 4/02/2021

April 1, 2021

With today’s equity market rally, the VIX (volatility index) has fallen back to pre-COVID crisis levels. The dotted line shows the current sub-18 reading is fairly typical for the two years preceding the pandemic.

, Commentary 4/01/2021

The ISM Manufacturing Survey came in at 64.7, the highest level since 1983! The Prices Paid sub-component rose further to 86 from an already high 82.10. The prices paid reading is in rarified territory. Since 1950, it has only been above 90 for a total of 18 months. Two of those months were in 2008, the remaining data all occurred before 1980.

Cartography Corner is published

, Commentary 4/01/2021

How To Invest In The Strongest Month Of The Year

, Commentary 4/01/2021

Weekly Jobless Claims rose by 61k to 719k. Through March 13th, there are still 18.2 million people receiving state or federal jobless aid. The volatility of the workforce in regards to the number of people being hired and fired is tremendous. Consider, the market is expecting the BLS to report that, in aggregate, 625k jobs were added last month. During the same month, almost 3mm people lost their jobs according to weekly jobless claims data.

The bond markets will close at noon ET today and the equity and bond markets will be closed tomorrow for the Good Friday holiday. Despite, market schedules, the BLS employment report will still be released tomorrow. Current estimates point to strong job growth in March, as shown below.

, Commentary 4/01/2021

Welcome to April. The graph below, courtesy of Bank of America, shows that since 1928, the month of April has the second-best average monthly return (+1.37%), and posts positive returns nearly two-thirds of the time. Only December, at 74%, has a better win-loss percentage.

, Commentary 4/01/2021

The graph below, courtesy of the Visual Capitalist, shows the problem the Fed faces as interest rates fall too much. The green dots show that household spending increase as interest rates decline. This occurs in falling rate environments as less interest earned on savings makes saving not as desirable. Further lower borrowing costs incentivize people and corporations to borrow and spend. However, the benefits of lower rates start reversing when the 10-year UST yield falls below 4%. The Fed tries to steer economic activity by manipulating interest rates. While their intent is to enhance economic activity with lower rates, they may have pushed rates too low and their actions are actually having the opposite effect. This is known as the Paradox of Thrift.

, Commentary 4/01/2021