Macro Update: Conditions Continue to Improve -- And -- More on Capacity Constraints, etc...

Once playing, click the icon in the lower right corner for full screen. Focus should occur after a few seconds; if not, click the wheel to the left of the YouTube icon to adjust:

Quote and Charts of the Day: The Mere Mention

The mere mention by a Fed governor of what Fed Chair Powell refused to mention during Wednesday's press conference has sent stocks into a minor tizzy this morning, the dollar into serious rally mode, and yet, and fascinatingly, hardly anything in the bond market.

Morning Note: Many Are Learning the Wrong Lessons, I Fear!

In yesterday's video commentary I mentioned the lack of capacity buildout in the oil space. Chevron and Exxon both reported Q1 earnings this morning; Chevron said it reduced its spend on large development projects, which resulted in a notably higher-than-anticipated cash flow number. While analysts had expected Exxon to announce a sizable capex cut, the company reported no change. However, it did announce that excess cash flow going forward will be used to pay down debt (i.e., less going forward to go toward expanding capacity).

Updated Technical Analyses (video)

Once playing, click the icon in the lower right corner for full screen. Focus should occur after a few seconds; if not, click the wheel to the left of the YouTube icon to adjust:

Morning Note: Not Quite Mass Euphoria -- And -- Be the Skeptic

The investor sentiment story for quite awhile now has been one of virtual mass euphoria, which isn't a stretch if you focus on the individual investor and investment advisor surveys. Our own "fear/greed barometer" last scored a -50: While not the -100 that would indeed be "mass euphoria", it's definitely lopsided toward the bull side of the boat.

Chart of the Day -- And -- Additional Evidence/Trends Supporting Our 'Longer-Term' Inflation Thesis

Yesterday I suggested that the setup for today (Fed meeting wrap up) was volatility.

With the Dow down 162 points, and the SP500 down 0.08% and the Nasdaq Comp off by 0.28% -- well..... volatility? While equities did jump around a bit as Powell spoke, not so much, at least not in stocks...

This Week's Message: Bond Market No Help

"This makes no sense!" is a common refrain coming from our clients who've been around a few stock market blocks in their day.

Morning Note: It's HOW we think that matters...

Keeping this morning's note quick (our weekly "main message" coming later today), I'll update yesterday's charts of the day (although I'll use Nasdaq futures this time to catch the pre-market action) to give you a feel of how traders are positioning ahead of today's Fed policy announcement.

Charts of the Day: Will he? -- And -- The Setup is for Volatility

Judging by the action in bonds, tech stocks and to some extent the dollar this morning, traders are thinking that Fed chief J. Powell may indeed acknowledge rising inflation risk during tomorrow's press conference, or that there's at least enough risk that he will to place some bets, or to take some chips off the table.

Morning Note: Lots priced in -- And -- The incentives/results of cheap, easy credit...

As we suggested they would be, earnings beats have been stellar -- and while I seldom watch financial news networks these days, I can only imagine the running of the bulls on the likes of CNBC.

Morning Note: The long-run can indeed mean the long-run...

In this weekend's video commentary I made mention of a highly respected economist who (among others) categorically disagrees with our present inflation thesis.

Per his commentary this morning, another respected thinker in the space (economist Peter Boockvar), actually sympathizes with our side of that debate; particularly where it relates to the impact of interest rates:

Quote of the Day: Hmm...

Well, not that this necessarily supports our structural (longer-term) rising inflation thesis. But, then again, wages are sticky (i.e., not easy to reduce once they're set).

From today's Wall Street Journal:   emphasis mine...

Restaurants Serve Up Signing Bonuses, Higher Pay to Win Back Workers: With job openings above pre-pandemic levels, eateries from McDonald’s to Wolfgang Puck’s Spago are battling for new hires

"Some restaurant owners have said they are having to pass along some of the wage increases to customers in the form of higher prices, as other costs rise at the same time. Consumer prices for fast food in March grew 6.5% compared with last year, the biggest year-over-year increase since at least 1998, Labor Department data show."

Macro Update And My Views on Present Inflation Risk (video)

Once playing, click the icon in the lower right corner for full screen. Focus should occur after a few seconds; if not, click the wheel to the left of the YouTube icon to adjust:

Quotes of the Day: Beware the happy (or sad) theorist, and yourself...

It's so interesting reading the deeper analyses of the strategists and economists whose work I respect.

It just occurred to me as I read the most recent deep dive of a firm that typically leaves few stones unturned, that they're somewhat subtly, and I suspect unwittingly, tipping their hand in terms of what I can only describe as their innate bias.

Morning Note: Words to heed, indeed...

Keeping this morning's note quick, as today is the day we do our deep macro dive, and this week's update will be fairly robust. We'll get into the weeds of what's driving our present inflation thesis.

Stocks had somewhat of a rough go of it yesterday as Washington floated the idea of raising capital gains tax rates on the highest earners. As you've noticed, financial markets (and, not to mention, the highest earners) hold more than a little political sway, as even some Democrats are expressing some concern. So, while, unequivocally, the current Administration's platform demands higher taxes, I don't suspect it'll be all that easy to get across the finish line...

Quotes and Chart of the Day: Takes Me Back

Man! Reading this morning's WSJ article "Robinhood, Three Friends and the Fortune That Got Away" so takes me back to the late 90s!

Morning Note: More Present-Day Fascinations -- And -- Don't Be A "Blockhead!"

In this week's main message I mentioned "the fascinating developments all around us", referring to the high level of stocks (compared to pre-pandemic prices), the likes of GameStop and the euphoria (in some circles) over cryptocurrencies. 

This Week's Message: Our Near-Term Concerns, Our Long-Term Likes -- And -- What Good Poker Players and Good Investors Have In Common

I've mentioned several times herein of late that, presently, the bull market in equities is more about stimulus than it is fundamentals. A relationship/correlation that makes for a precarious overall setup, from a couple of perspectives:

Morning Note: Inflation's Here -- And -- Beware the Uber-Confident Expert

Like I keep saying, the hot debate (in my geeky world) is whether the inflation that we're seeing (vs what's showing up [or not showing up] in CPI) is cyclical (short-term) or structural (long-term).

Morning Note: The Main Lesson of History

You could argue that Asian equities' (Japan in particular) weakness overnight had something to do with Japan moving back into a state of (covid) emergency -- it wasn't announced until this morning, but it was rumored during the session. You could also surmise that, after a nice run of late, markets are simply taking a breather.

Europe's taking a beating this morning on no apparent news, although Russia has amassed a hundred thousand troops along the Ukrainian border...hmm...

Morning Note: Beware Your "Status Quo Bias"

As you've no doubt noticed, seldom do we do bitcoin herein, and when we do it's generally pointing to the crypto space (while it's to be taken seriously) as yet another indication of the bubbly characteristic(s) of present-day financial markets.

Chart of the Day: Lumber Bubble!

In today's video I mentioned the rising cost of lumber. I'm thinking this would be a good one to chart for you as well.

Here's a one-year look:

Yep, that's ~$340 a year ago, and $1,295/thousand board feet as I type!

While we can debate whether or not there's a bubble in housing, there's no debating the bubble in lumber!

Macro Update: Macro Conditions Continue to Look Up (video)

Once playing, click the icon in the lower right corner for full screen. Focus should occur after a few seconds; if not, click the wheel to the left of the YouTube icon to adjust:

Morning Note: Please Pass the Cake

Another short and sweet note this morning; our weekly macro update to follow a bit later today.

Bloomberg's "Macro Man" Cameron Crise pretty much says all one needs to say about the healthiness of present-day market action ("FOMC" being the Fed):

Morning Note: "Abnormal Is Normal"

To get a feel for how confused markets are these days, consider this morning:

Retail sales, two important regional manufacturing surveys, and jobless claims were released and, suffice to say, retail sales and manufacturing knocked it out of the park. Initial jobless claims even, while still an ominous 576k, were a net positive -- as expectations were for 700k. The financial space (BofA, Citi, Wells and Blackrock) saw a slew of earnings releases that all destroyed expectations...

This Week's Message: Thinking Outside the Crowd

In the portfolio management world the term "short volatility" means essentially positioning in a manner that benefits from a low-volatility/rising asset price environment. 

A portfolio that is "short volatility" typically enjoys extended periods of nice, incrementally (barring the occasional hiccup) positive returns, with periodic bouts of large surprise shocks that tend to wipe out literally years of those nice, incremental gains... A simple buy and hold stock portfolio would, technically-speaking, be your classic example...

A “long volatility” hedging strategy, in contrast, is one where small ongoing costs are incurred, with periodic bouts of large surprise shocks, when outsized gains on the hedge are realized. I.e., it’s akin to paying insurance premiums in order to mitigate huge losses during those surprise shocks.

Our busy graph below (translation to follow) plots the past 60 years of action in the S&P 500 Index. The red arrows illustrate the number of years' worth of gains the 4 major bear markets of the era ultimately took back. The green arrows (in the 73/74 and the '00-'03/'07-'09 episodes) denote how many years it took to sustainably recapture the pre-bear market all time high. 

Note: The recovery from last year's selloff was too quick to allow me to squeeze in a green arrow, and of course it may yet be premature to label the recapture "sustainable."

'73/74 bear market: Drawdown, -48%. Years of gains lost, 11.5. Years to recapture prior peak, 10.6.

'00-'03 bear market: Drawdown, -51%. Years of gains lost, 5.4. Years to recapture prior peak, 12.9.

'07-'09 bear market: Drawdown, -57%. Years of gains lost, 12.4. Years to recapture prior peak, 5.5.

'20 bear market: Drawdown, -35%. Years of gains lost, 3.4 years. Years Months to recapture prior peak, 6.

Observations: The historically-brief periods separating the 3 most recent major (-30+%) declines speak to the herculean efforts of the powers that be. I.e., efforts that, intentions notwithstanding, served to arrest what would've otherwise turned out to be true market clearing (healthy) events. 

In not allowing the markets to purge all of the excesses of prior expansions, subsequent expansions forever begin in somewhat (albeit subtly) constrained fashion, requiring what amounts to the Fed maintaining easy monetary conditions in virtual perpetuity (read forever inflating bubbles)...

Thus, presently, low interest rates notwithstanding, equity market valuations remain at all-time highs and the debt concerns we've expressed ad nauseam herein have only been exacerbated (in terms of degree) exponentially! 

I.e., last year's selloff accomplished zero by way of healthy market clearing.

Hence, our inclusion of non-correlated (to U.S. stocks) asset classes into our core portfolio mix, increasing our global equities exposures, and our active "pure" hedging of major downside risk via options. 

Listening to an interview Monday evening with economist Jens Nordvig; he made the ultimate point with regard to the present macro setup, and, I'll add, what has U.S. equity market valuations remaining, for the time being, at all time highs:   

emphasis mine...

"It's just very hard to find historical examples of a cycle that looks like this one. We can obviously go back to the previous big pandemics and think about how they played out, but the policy responses were totally different."

"...certainly on the stimulus front in the U.S.. We're just talking about totally unprecedented numbers. Even the numbers we've already achieved are unprecedented, at least all the way back to the second world war. And we're already talking about the next round. We're just getting the last round signed and we're already on to the next one."

If you're new to our firm, say, within the past 2 years, it would be entirely understanding for you to surmise that we are inherently risk-averse. If, on the other hand, like most of you (clients), you've been with us throughout a market cycle or two, you know that there's nothing inherent about our presently cautious approach to U.S equities. 

In fact, during what was, at the time, the most volatile year of the longest bull market in history, 2018, we maintained our bullish posture throughout. It wasn't until late-summer 2019 that our assessment changed -- due to general conditions at the time -- and we became "cautious" with the regard to the risk/reward setup for the U.S. equity market.

Here's a 5-year graph of the S&P 500; the green box captures January 1, 2018 to August 2019, the yellow box captures everything since:

Note my notations -- pointing out our bent throughout the two periods. 

To get a feel for why we remained sanguine (maintaining the bullish posture we adopted back in early 2009) during the depths of the near-20% selloff in Q4 of 2018, here are a few snippets from our weekly message on 12/21 of that year:

"We are forever in search of the signs and signals that say "warning! Recession ahead!" As, typically, bear markets are things of recessions.

So how do we do that? We do that by testing the data that matter against the periods that led up to past recessions. And as we perform that function here today, the character of the data on balance (per our proprietary macro index) does not yet signal recession, and remains notably more positive than it was during the whopping 2011 correction, and slightly better than the 12+% draw down of early 2016, yet somewhat worse than conditions during the 2015 correction."

"Here's a small sampling of the data we track (shaded areas are recessions, I circled the areas around the 2011 correction and the back-to-back corrections of 2015 and 2016). I of course cherry-picked examples that emphasize my point, and those that most folks are familiar with and/or can relate to:"

Click here if you'd like to view the data points referenced...

"As you no doubt noted in the above, as it relates to the featured charts, present conditions do not remotely resemble recessions past, or even the 2011 and 2016 market corrections."

"History suggests that this -- a correction amid an ongoing economic expansion -- is the stuff strong rallies are made of."

Now let's fast forward to our September 1, 2019 blog post to get a feel for the state of general conditions a mere 9 months later:

"As we've been discussing and illustrating herein, we see real under-the-surface cracks forming in the macro economic setup. All the while there's this popular (in some circles) narrative that those of us expressing such concerns run the risk of talking the economy into recession.

Hmm... well, sure, sentiment is huge when it comes to the economy, but I can think nothing more dangerous/irresponsible for an investor or money manager to do than to pretend everything's perfectly okay, when clearly it isn't. We must see things as they are, and act accordingly.

Speaking of "seeing things as they are", here's our charting of some of the data points that currently weigh on the Economic and Financial Stress subindexes within our proprietary macro index -- which just came in below zero (heightened recession risk) for the 5th consecutive week:"

Click here to view the charts referenced... 

Okay, so skimming through past commentaries it occurs to me that I could do this all day, so I won't. Suffice to say that the evidence was sufficient to demand that -- after remaining unwaveringly bullish for the 10 previous years -- we begin hedging portfolios as of late-August 2019... Then, by December of that year, and incrementally since, we've been managing, via sector and asset class shifts, to a position mix that has us less correlated to the U.S. equity market, while taking advantage of the money printing and interest rate suppression that the powers that be are aggressively resorting to in order to keep modern history's most ominous debt bubble afloat for as long as humanly possible. 

Currently, that overall target mix consists of 18% cash and short-term fixed income securities, 24% currencies and commodities, 19% developed market foreign equities, 10% emerging market equities and 29% U.S. equities (bias toward materials, energy, green energy, financials and industrials).

Now, back to that last graph above...

Here we'll fold in the aggregated earnings per share (orange) for the S&P 500 Index. Note how it was topping out as our macro assessment instructed us to begin hedging, and how it has literally plunged since:

Well, I suppose we could say that we were prescient in our analysis. But, then again, unforeseen COVID showed up...

Well, sure -- prescience and COVID notwithstanding -- but look at the blue line (the S&P itself)... It literally screamed higher, while what would be the definition of the underlying fundamentals (corporate earnings) screamed epic bear market ahead!

So, how unusual is it to see stocks "scream higher", for any extended period of time, while earnings are epically rolling over?

Let's take a 30-year look:

Answer: Very!

For good measure, and to further illustrate how unusual the present setup is (in terms of the price action in stocks), let's fold in the recessions that occurred during those 30 years:

Of course what's happening here is the stock market discounting an absolute explosion upward in corporate earnings going forward — literally back to pre-covid levels... 

That's a very tall order that, in my opinion, is simply not doable without steady, ongoing fiscal injections that, per the Nordvig quote above, are already beyond virtually anything we've ever seen...

Therefore, make no mistake -- given the enormity of present-day asset (and debt) bubbles -- steady, ongoing fiscal injections we are indeed going to see. 

The question for us, on our clients' behalf, is, do we chase what everyone else seems so comfortable -- we presume based on the prospects for perpetual stimulus -- chasing? Or do we think deeper and catch the areas that are more fundamentally (positively) impacted by dollar debasement and interest rate suppression, while combing the world for other relative value plays?

We do the latter of course...

To expand on our recent charting of U.S. vs foreign equities (speaking of “combing the world”) let's break down their respective performances in thirds over the past 30 years.

Here's 4/1991 to 4/2001:

Here's 4/2001 to 4/2011:

Here's 4/2011 to today:

Well, clearly, everybody's presently betting on the white line!

But if you think outside the crowd and simply plot the relative performance trends and how the leadership has tended to flip roughly every ten years, barring any other considerations (and there are of course many), history says it's time to pare back your bets on the white* and add some serious color* to your portfolio.

*White being U.S. equities, orange being Europe, yellow being developed markets (Europe, Far East, Australasia), blue being emerging markets.

I.e., the above, and other considerations, has us feeling very good about our present 50% of equities target to those colored lines.

With regard to commodities, here's from last week's macro update:

"...with regard to the opportunities in the commodities' space, aside from the obvious, consider the relative performance setup that's developed over the past 10 years.

I.e., while U.S. major equity averages are stretching epically into all time high territory, commodities and miners are just now breaking out of a decade-long downtrend:"

Thanks for reading!

Marty

Morning Note: The Curse and The Key

Keeping this morning's note brief; this week's important main message to follow a little later today.

Earnings reporting season is underway, and 3 of the big banks' (Goldman, JPM and Wells) were out this morning. Ironically, while all 3 blew away expectations, only Goldman is, at this point, in serious rally mode. JPM is actually trading lower...

Morning Note: Beware your predictions...

While inflation (CPI) came in a bit hotter, month-on-month, than economists expected, based on the reaction (lack thereof) in rates (actually dropped a bit), the street feared worse. 

Morning Note: The Fed Strives to Weaken the Dollar, And for "Good" Reason

Things I suspect will heat up as we move into the week... Q1 earnings reports will of course garner much attention, however, CPI, retail sales, regional manufacturing surveys and fresh housing data will be keenly focused on as well. 

Positioning Technical Updates (video)

Once playing, click the icon in the lower right corner for full screen. Focus should occur after a few seconds; if not, click the wheel to the left of the YouTube icon to adjust:

Macro Update: Asset Bubbles Abound, However...

While our macro index's overall score didn't budge this week (remaining at +18.37), the number of positive inputs did rise to 45% of the total, negatives also rose, to 27%, neutral inputs declined to 28%.

Morning Note: "The Game is About Preservation of Capital"

With all due respect to any conspiracy theorists out there, it's been my all-too-often observation/opinion that conspiracy theories are, again, all-too-often, about outcomes that simply don't comport with the theorist's preconceived notions.

Once Again, Privatizing Gains While Socializing Losses

Once again, in little more than a decade, the powers that be have facilitated the privatization of gains (subprime corporate debt buyers made great hay while the makin was good), and the socialization of losses (stuck the taxpayer with the garbage when the risk came home to roost). 

So, think of the wife as the taxpayer, think of the husband as the Fed, think of the bottles as all of the insolvent debt that the Fed effectively removed from the hedge fund and private equity firms' portfolios -- and placed onto the taxpayer's -- and think of the cream as all of the stimulus:

Morning Note: One Thing That Never Changes

Yesterday I pointed to the dangerous level of giddiness presently displayed among the investment advisor crowd. Well, this morning the AAII's weekly individual investor sentiment survey results were posted, and, well, investors are not heading my advice (I subtitled yesterday's post "Never Party With Investment Advisors").

This Week's Message: Levered Blow-Ups are Seldom One-Offs, Naked Swimmers -- And -- Never Party With Investment Advisors!

In our portfolio call this morning, Nick and I found ourselves discussing the recent plunge of ViacomCBS stock as a result of the imploding of a ridiculously leveraged (read greedy) hedge fund (Archegos), which ostensibly threatened the solvency of more than one of the global financial institutions that provided the leverage. Credit Suisse, for example, will bleed a few $billion, while, not to mention, its head of risk management lost her job over the debacle.

Morning Note: Risk/Reward Setups -- And -- When We Crowd Together

Like I keep saying, there are too many similarities between today and the early 2000s to sit back and accept the "it's different this time" mantra coming from Wall Street.

Now, indeed, perhaps it is (different this time), but even the present-day arguments in that regard are eerie echoes of the tech-inspired mantra of the late-90s.

Fiddling around with graphs this morning, something's jumping out at me...

Quote of the Day: Two Sides of the Borrowing/Spending Coin

In Friday's video I mentioned how stimulus checks over the past year have coincided with spikes in auto sales.

Well, per economist Dave Rosenberg, there are two sides to that aggressive-stimulus/get-people-borrowing-and-spending coin:

Morning Note: A Lot of Positive Priced In

In last Friday's macro video I pointed to the huge spike in the purple line below:

Morning Note: Robin Hood feeling some pressure...

In Friday's video macro update I suggested that the negative correlation (of late) between stocks (tech in particular) and higher interest rates might -- in light of Friday's big jobs number -- be put to the test this week.

Quote of the Day: The Problems With Easy Solutions

While discussing markets, economies and general setups with the board of an institutional client last week, I was presented the ever-pressing question asked of those of us who've managed a few market rodeos in our day, “roughly when do you expect the market to roll over?”

Macro Update (video)

Presenting this week's macro update via video... I touch on what has our index pointing up, on the details of this morning's jobs report, on our overall thesis and on how we're expressing it in our core allocation...

Big 8-point jump in our macro index this week!

Here are the details:

IF VIEWING FROM YOUR MOBILE PHONE, CLICK "VIEW WEB VERSION" AT THE BOTTOM OF YOUR SCREEN.

Once playing, click the icon in the lower right corner for full screen. Focus should occur after a few seconds; if not, click the wheel to the left of the YouTube icon to adjust:

Quote of the Day: "excesses are never permanent" -- and -- "resolve and discipline always win out"

From economist Dave Rosenberg's morning note:

"The one thing us old-timers can rely on is that history shows that (i) there are no new eras, (ii), anything that can’t last forever will not, (iii) excesses are never permanent and (iv) resolve and discipline always win out over the extreme emotions of fear and greed. Paste that to your wall." 

Yeah, I'm an old-timer...

Morning Note: Don't Be Fooled By All the Fun! Unless of course you love risk...

So, let's get yesterday's news out of the way...

Proposed: $2.25 trillion on infrastructure over 8 years, with another $1 trillion trailer to come.