Latest Commentary

December 3, 2021

Are Value Stocks in Vogue?

The Finviz heat map below shows there is a clear divide between the winners and losers. The winners in green, are companies and sectors that have been lagging the market. Many of these companies are considered value stocks, due to their relatively low valuations. Many of the companies in red are stocks that have done very well this year. In many cases, they are trading at or near record-high valuations. The last few days have been a rare instance of outperformance by the value sectors. It’s way too early to call it a trend but it is worth following closely.

, Commentary 12/3/2021

Five Stocks To Buy If Santa Comes to Town – New Weekly Report

Five Stocks for Friday uses stock screens to give readers five stocks that we expect to outperform if a particular investment theme plays out in the future. Investment themes may be relevant to the current or expected market, industry and/or economic trends. Check out our inaugural picks.

, Commentary 12/3/2021

First Impressions can be Deceiving

Stocks initially rose on the employment data as the weak jobs print might mean the Fed would step down from recent hawkish tones. St. Louis Fed President Bullard, quickly put an end to such wishful thinking and took the wind out of the sails of the stock market.  He said the Fed could consider raising rates before they finish tapering. Almost all investors were under the impression the Fed would finish tapering before raising rates. Such implies no rate hikes until July unless the Fed speeds up its taper schedule. The May Fed Funds Futures Contract now implies a 65% chance the Fed tightens before June. The market is betting that Bullard is on to something.

The BLS Employment Report- Good or Bad?

CNBC says “Job Growth Disappoints“. CNN Money writes “The U.S. economy added 210,000 jobs in November, far fewer than expected.” The headline number, +210k new jobs, is well off expectations for a gain of 545k jobs, thereby justifying the concerning headlines. However, the underlying employment data was robust. The unemployment rate fell from 4.5% to 4.2%. Maybe the most crucial data point persuading the Fed’s assessment of the labor markets is the labor participation rate which rose .2% to 61.8%. Chairman Powell repeatedly uses the low participation rate as an excuse to remove monetary accommodation at a very slow pace. Might the pick-up in labor participation further support his recent hawkish tone regarding combatting inflation? The market is reacting positively to the report, signaling it thinks weak job growth will impede the Fed from speeding up the pace of tapering at the December FOMC meeting.

Our graph below shows that professional and business services accounted for nearly half of the job gains. Curiously, retail lost 20k jobs in November, which is one of the biggest shopping periods. We suspect the seasonal adjustments and Covid-related anomalies make reporting an accurate number difficult for that sector.

, Commentary 12/3/2021

Technical Value Scorecard

, Commentary 12/3/2021

More Risk and Reward When Volatility is Elevated

The graph below shows that the risk/reward equation for the S&P 500 becomes much more skewed when the VIX is between 31 and 100. The VIX has been hovering near 30 recently. The green shaded area shows that S&P 500 returns tend to follow a relatively normal distribution curve with a skew toward positive returns. The black bars highlight the non-normal distribution of returns when the VIX is elevated. During such periods, returns tend to be better than average but the risk of a 10-20% drawdown is also much higher than when the VIX is below 31.

, Commentary 12/3/2021

Stranded Containerships

The graph below courtesy of Zero Hedge and Goldman Sachs shows the amount of stranded containership tonnage at U.S. ports is abating. Per Goldman Sachs: “While the amount of stranded tonnage is still historically elevated, a further decline in congestion could boost supply and ease inflation pressures for consumer goods and manufactured products in early- or mid-2022”. It is also worth noting that as we pass the holiday season the demand for many goods will lessen appreciably which should further relieve pressure at the ports.

, Commentary 12/3/2021

December 2, 2021

OPEC is Threatening to Curtail Planned Output Increases

Oil prices opened the day 5% weaker as OPEC decided to go ahead with a planned output hike of 400k barrels for January. The news was a bit of a disappointment as there were expectations they might curtail the increase to 200k or even less. Oil prices came storming back, however, as OPEC said they may revisit the potential to reduce their planned output increases at the January 4th meeting.

Cartography Corner

, Commentary 12/2/2021

Do you Feel Lucky?

The tweet and graph below show the bullish percent index on the S&P 500 has dipped below 50%. The last six times that occurred it proved to be a good buying opportunity. However, as shown, the first dip below 50% on the graph was a false signal. Do you feel lucky? The index is a measure of breadth that simply counts the percentage of stocks with a point & figure buy signal.

, Commentary 12/2/2021

Is There More Selling To Be Done?

, Commentary 12/2/2021

Is TLT Ready to Run?

In yesterday’s commentary, we note that heavy short interest in Treasury note futures could propel bond prices higher (yields lower) if those with shorts are forced to cover their positions. The graph below provides a little technical context for what might cause them to do so. As shown, the price of TLT (20 year UST ETF) has bumped up against $152 numerous times since July. Each time it was repelled but to increasingly higher lows. If bonds can break through the current wedge pattern, the 2020 highs may be in sight. Many technical traders’ that are short bonds are likely watching how this plays out closely.

, Commentary 12/2/2021

Will Inflation Heat Up More?

The first graph below shows the inverse correlation between rental vacancy rates and owners’ equivalent rent. Not surprisingly, a lower vacancy rental rate tends to result in higher rental prices. With the Fed seemingly getting more serious about inflation, rental prices and owners’ equivalent rent (OER), which account for nearly a third of CPI, become very important data points to follow more closely.

Rental vacancy rates are back to 30+ year lows which is pushing rents higher. Adding to the pressure on rents and ultimately CPI is surging home prices. The second graph, courtesy of Fannie Mae, shows their model based on home prices predicts a big jump in OER in 2022. Per the article: “On a year-over-year basis, house price gains historically lead to changes in the CPI shelter cost measures by about 5 quarters.” Home prices started spiking in September of 2020, about 5 quarters ago. If CPI continues higher, the Fed is more apt to remove liquidity quicker. As we discuss in Is a Stock Market Crash Like 2000 Possible, liquidity via QE and zero rates are the lifeline of excessive stock valuations.

, Commentary 12/2/2021

, Commentary 12/2/2021


December 1, 2021

National Manufacturing Surveys

The PMI manufacturing survey was weaker than expectations at 58.3 versus 59.1. Per the report- “November PMITM data from IHS Markit signaled the second-weakest rise in production recorded over the past 14 months as producers reported further near-record supply delays and a slowing of new order inflows to the softest so far this year. Jobs growth also waned amid difficulties filling vacancies.” Further- While average selling price inflation eased as firms sought to win customers, the rate of input cost inflation hit a new high, hinting at a squeeze on margins.”

The ISM survey came in at expectations of 61.1. While below levels from earlier this year, the survey remains near 20-year highs. The much-followed prices paid index fell slightly. Supply line disruptions remain a big problem. Over half of the respondents report slower delivery times. The normal range is 10-20%. The table below annotated by Zero Hedge shows six of the ten ISM components were lower this month.

, Commentary 12/1/2021

Is the Sell-Off Over?

, Commentary 12/1/2021

Have Oil Prices and Energy Stocks Bottomed?

The chart below provides fodder for oil bulls and bears. The price of oil tends to rally strongly following periods when the OVX (oil volatility index) is above 65. Currently, the index is at 75. While the reading entails oil may rise in price once volatility declines, we must consider the volatility index can stay elevated resulting in further declines. For example, the index was above 65 from October 2008 to March 2009. In 2020, the index was above 65 from early March until late May. Currently, the index is only on its third day above 65. Bulls are waiting on a sub-65 reading and bears are hoping volatility remains elevated. We do caution, the index can fall slightly below 65 for a day or two before rising back above 65. In such prior cases, the price of oil continued lower.

The second graph below compares the price of the popular energy sector ETF, XLE, to the OVX index. As shown, like oil prices, XLE tends to do well once the index falls back below 65. However, XLE bucked the trend in 2020 as it rose when the index was above 65 and fell once it dropped back below 65.

, Commentary 12/1/2021

, Commentary 12/1/2021

Everyone Hates Bonds- Is That Bullish?

Per Reuters, the net bearish bets on U.S. Treasury ten-year note futures is now the largest since February 2020. In January and February 2020, bond prices were rising and yields falling as the economy was slowing and the Fed had begun cutting rates late in 2019. The advent of Covid in early March sent bond prices soaring, fueled in part by traders forced to cover their short bets. Today, like then, net shorts are extreme and some traders are starting to buy to cover their shorts as the new Covid variant and hawkish tones from Powell pressure stocks. History may not repeat itself, but it often rhymes.

Cyber Monday Disappoints

According to Adobe Analytics, sales for Cyber Monday were disappointing. Online sales for last Monday totaled $10.7 billion, a 1.4% decline from last year. While it is the first decline for Cyber Monday, one must factor that last year’s data was an anomaly due to Covid and consumers’ reluctance to go to stores. To wit, foot traffic is up 48% versus last year, but it is still down 28% from pre-pandemic years. Personal consumption accounts for approximately two-thirds of GDP. As such, holiday spending is an important component of growth. This year we must be careful reading too much into retail sales data. Inflation and shortages of many goods are resulting in timing and spending behaviors that are not comparable to years prior.

November 30, 2021

Consumer Confidence Continues to Weaken

The Conference Boards Consumer Confidence Index fell to 109.5, down from 111.6. Both the present situation index and the expectations index were lower. Driving consumers’ moods are concerns about rising prices and income prospects.

, Commentary 11/30/2021

The Chicago PMI, a precursor to national manufacturing surveys, fell more than expected to 61.8 from 68.4. After hitting a high of 75 in April, the index has been trending lower. The slowing of new orders and employment were partially responsible for this month’s decline. The ISM and PMI manufacturing surveys will be released tomorrow. Both are expected to show slight increases from last month.

Sounding The Inflation Alarms

Chairman Powell was vocal about inflation and is finally backing off using the word “transitory” to describe it. Per his testimony to the Senate: “time to retire the term”transitory” regarding inflation.” He followed, “the risk of persistently higher inflation has increased. We will use our tools to make sure higher inflation does not become entrenched.”  The inflation comments are an upgrade to his recent descriptions of inflation. However,  he countered the discussion by mentioning the weak labor participation rate and covid related factors affecting economic growth. On balance, his statement was a little more hawkish than usual.

End In Sight?

, Commentary 11/30/2021

Powell is Warning About Omicron

Chairman Powell spoke late on Monday. While his economic assessment was generally in line with other recent speeches, he did offer pause about the new Omicron variant.

The recent rise in COVID-19 cases and the emergence of the Omicron variant pose downside risks to employment and economic activity and increased uncertainty for inflation. Greater concerns about the virus could reduce people’s willingness to work in person, which would slow progress in the labor market and intensify supply-chain disruptions.

Buckle Up – The Debt Ceiling is Upon us Again

The last debt ceiling debate ended with an extension to mid-December. December starts tomorrow, and the debt ceiling headlines are starting back up. For instance, Bloomberg reports that Congress needs to pass a stopgap funding bill to keep the government open beyond this week. The graph below, courtesy of Zero Hedge, shows that Treasury Bills maturing in mid and late December are now trading about 4bps higher than where they should. Such a kink in the curve is due to investors requiring a premium to take the risk that principal payments on maturing bills are delayed.

, Commentary 11/30/2021

A Bull Market For the Ages

The chart below, courtesy of Fidelity, shows all of the cyclical bull markets since 1920. The rally starting in 1932, following the crash of 1929 and subsequent 89% drawdown, is the only rally that is steeper than the current post-March 2020 rally.

, Commentary 11/30/2021

November 29, 2021

Twitter Rollercoaster

Twitter’s stock jumped almost 10% at the market open on news that CEO Jack Dorsey will be stepping down. The gains were short-lived as shown in the graph below. Twitter has become a large social media brand but its stock price is basically flat since IPO’ing in 2013. After the initial rush of enthusiasm, it appears investors are concerned that promoting a long-time Twitter veteran (current CTO – Parag Agrawal) to replace Dorsey will not result in the types of changes investors are asking for.

, Commentary 11/29/2021

Omicron Variant Shakes Wall Street

, Commentary 11/29/2021

What’s Wrong with Foreign Stocks?

The graph below compares two widely followed foreign stock ETFs and the S&P 500, from the beginning of the Covid outbreak through today. EEM holds emerging market stocks, and EFA developed market stocks. As shown, all three ETFs performed similarly during the decline in early 2020 and the recovery afterward. However, starting in the spring of 2021, the foreign market ETFs peaked while the S&P 500 continued to new highs. Over the last nine months emerging markets (EEM)s have given up about 25% of their post-Covid gains, while developed markets (EFA) have essentially flatlined. The following factors help account for some of the U.S. equity outperformance:

  • Since June 2021, the USD index is up about 8%.
  • The economic recovery in the U.S. has been stronger than in most nations.
  • The Fed is slightly more hawkish than other central banks.
  • China’s economic activity has slowed significantly, weighing heavily on many emerging markets.

, Commentary 11/29/2021

Gamma Band Update

, Commentary 11/29/2021

The Week Ahead

The week’s significant events will be the ADP employment report on Wednesday and the BLS report on Friday. Currently, the forecast is for a gain of 550k jobs in the November BLS jobs report. Investors are likely to focus on the labor participation rate as Fed Chairman Powell claims the lower rate is a sign of labor weakness. The current estimate is for the participation rate to uptick 0.1% to 61.7%.

Investors will also watch the ISM manufacturing and services surveys on Wednesday and Friday, respectively. Current indications are that both numbers will remain at their current levels. We will follow the price gauges in both surveys closely.

The next Fed meeting will be in two weeks on the 15th of December. Assuming the new covid variant does not become problematic for global economic activity, we might see some Fed members encouraging a faster tapering pace in speeches and comments this week. Voting Fed members go into their self-imposed media blackout period next week, so this week may be their last chance to speak up publically before the meeting.

November 26, 2021

**The equity markets will close at 1 pm ET today

Green in a Sea of Red

The Finviz heat map below shows many stocks are down 2-3% on the day, but there are a few bucking the trend. In most cases, the green on the map is in businesses that benefit from the lockdowns. In addition to the obvious winners in the healthcare industry, are Verizon, NetFlix, and Clorox. Moderna and Pfizer are up significantly. The restaurant and travel business are faring the worst. In the upper right corner, notice losses approaching 10% for Marriot, Las Vegas Sands, and

, Commentary 11/26/2021

Technical Value Scorecard

, Commentary 11/26/2021

B.1.1.529 Variant is Roiling Markets

Stocks are declining worldwide due to a new variant of covid detected in South Africa. Per CNBC:

“South African scientist Tulio de Oliveira said in a media briefing held by the South Africa Department of Health on Thursday that the variant contains a “unique constellation” of more than 30 mutations to the spike protein, the component of the virus that binds to cells. This is significantly more than those of the delta variant.

Many of these mutations are linked to increased antibody resistance, which may affect how the virus behaves with regard to vaccines, treatments and transmissibility, health officials have said.”

The bond market is assuming the new strain will force the Fed into a more dovish policy stance. 2-year yields are down 12 bps this morning, essentially taking out half of a 25bps Fed rate hike over the next two years.

Many traders are out for the holiday, so liquidity will be poor and trading may likely be volatile.

The Dollar is on Fire

The dollar rose in light trading on Wednesday. The impetus behind the dollar continues to be economic data that the market believes will push the Fed to become more hawkish. It is worth noting many corporate and sovereign borrowers that borrow in dollars for use in their home country are exposed to currency risk. Essentially, a stronger dollar increases their net borrowing costs as they have to convert to dollars at a higher rate to pay interest and principal. As such, a strong dollar tightens liquidity for the rest of the world and will inhibit global economic growth if the dollar continues upwards. The graph below shows the dollar index is up over 7% year to date.

, Commentary 11/26/2021

Defining “Prolonged” and “Substantially Exceeds”

The Fed recently informally updated its price stability policy. Under the new inflation averaging regime, they will allow inflation to run higher than 2% for short periods, to compensate for periods when it was below average. The graph below shows the three-year average inflation rate is now 2.7%. Further, the annual inflation rate is 6.2%. Fed members are increasingly getting nervous that inflation is running hot for a prolonged period and the current rate substantially exceeds the Fed’s target on both a short-term and longer-term averaging basis. We expect to see various Fed members discussing their thoughts on how to adjust monetary policy to better manage inflation.

, Commentary 11/26/2021

November 24, 2021

**The stock and bond markets will be closed tomorrow. Trading volumes should be light this afternoon.

The Team at RIAPro wishes you and yours a very happy Thanksgiving holiday.

, Commentary 11/24/2021

A Plethora of Economic Data

Jobless Claims fell to 199k in the latest week, marking a low going back to November 1969. Keep in mind that the population is 65% larger today than in 1969, so today’s number is off the charts on a population-adjusted basis. This is yet another piece of data that affirms the labor market is robust. Having an inflation problem and strong labor market is more evidence the Fed needs to speed up tapering QE and start contemplating rate hikes.

Durable Goods fell 0.5% versus expectations for a 0.3% gain and a prior month reading of -0.4%. Excluding transportation, the number was positive at 0.5%. Accounting for the difference is the auto sector, which struggles to produce cars due to the chip shortage.

Wholesale inventories rose 2.2% versus 1.4% last month. This is a positive sign that supply line problems and shortages are abating. However, Retail Inventories only increased by 0.1% versus falling 0.2% last month. Either retailers are not fully stocking up on goods to help justify higher prices, or trucking problems are making it difficult to deliver goods. It is likely a combination of both factors.

Are Junk Bonds Sending Us A Warning?

The graph below shows the strong correlation between JNK and the S&P 500. JNK is a popular junk bond ETF. JNK just hit lows going back to July, while the S&P is nearly 10% above its July levels. JNK is also back to its 200dma, something the S&P hasn’t done since it broke through the 200dma in June 2020. Higher yields for junk bond issuers can lead to financial hardship and bankruptcy in some cases as they tend to be overleveraged. Are inflation and the possibility of the Fed raising rates finally concerning JNK investors? Maybe the better question is, is the recent price action of JNK foreshadowing problems for the equity markets?

, Commentary 11/24/2021

More Details on the SPR Oil Release

Of the 50 million barrels being released from the Strategic Petroleum Reserve, 32 million will be under the exchange program.  Companies that successfully bid to receive oil under the program must pay it back and with interest, so to speak. The winning bidders can take delivery starting December 16th from one of four sites. They will then have to return the oil plus a premium in the future. Each site has a different premium and date range requirement regarding the return of the oil. For example, Bryan Mound will offer 10 million barrels. The oil has three return dates, with the first starting January 2023. If the oil is returned at that time, the winning bidder must return an additional 3.9% of oil. The premium increases to 5.3% and 8.6% if they choose the second or third delivery dates, respectively. In the short run, the release will add supply to the market but reduce it starting in July of 2022.

The graph below, courtesy of Bianco Research, provides context for the size of the SPR and recent withdrawals from the reserves.

, Commentary 11/24/2021

November 23, 2021

Is A Jerome Powell Second Term A Bad Thing For Markets?

, Commentary 11/23/2021

The War on Oil Prices

President Biden is ordering the Department of Energy to release 50 million barrels of oil from the Strategic Petroleum Reserve. The action is in unison with China, India, Japan, Korea, and the U.K. Per the announcement:

“The President stands ready to take additional action, if needed, and is prepared to use his full authorities working in coordination with the rest of the world to maintain adequate supply as we exit the pandemic.”

What’s Wrong With Gold?

A reader asked us why gold fell over $40 an ounce on Monday. While some media outlets ascribe it to Powell’s nomination, the real answer lies in the two charts below. The first chart, from our article The Fed’s Ever Growing Footprint, shows the strong correlation between the price of gold and real interest rates (nominal interest rates less the implied inflation rate). Gold prices often rise when real rates fall and vice versa. The second graph, courtesy of Zero Hedge, shows real rates (green) have risen about 20bps (from -1.20% to -1.00%) from midday Friday through Monday. The sharp increase is due to the 10-year break-even inflation rate (red) falling and bond yields rising.

, Commentary 11/23/2021

, Commentary 11/23/2021

Will Bond Bears Be Proven Wrong, Again?

Short interest in bond futures is currently at or near record highs. Given the inflation outlook and the Fed’s lethargic response to combatting inflation, shorting bonds may seem like a nice trade. It may be, but context is valuable in this case. The graph below from Jim Bianco shows that professional forecasters have been consistently wrong in predicting the path of bond yields since 2002. Those short bond futures better hope this time is different.

, Commentary 11/23/2021

Reminiscent of 1999

We stumbled upon the table below highlighting market performance by sector in the months leading to the Tech crash in 2000. It looks awfully familiar to the poor breadth of the last few days of trading.

, Commentary 11/23/2021