Thursday, October 28, 2021

This Week's Message: Highlights

Once again, we'll devote this week's main message to the highlights from the past week's key messaging:


"...suffice to say that firms will push through costs if they can; if their customers have the will and the wherewithal to pay. And, yes, in that event inflation continues to rise. Speaking for the US CB (central bank), interest rate hikes are going to come as gingerly as you can imagine. For, if indeed they hiked to the degree present conditions would historically dictate, well, make no mistake, financial markets would utterly crack. And as we've pointed out herein ad nauseam, that's the Fed's focus these days! 

Here's a bullet point from our own list of reasons we see structural inflation going forward:

"The Fed's fear of bursting present asset and debt bubbles were it to implement traditional inflation-fighting measures -- thus willing to fall notably behind the inflation curve well into the foreseeable future. In fact, I personally place better than 50/50 odds that if indeed a long-term trend of rising inflation emerges, that the Fed will revert to yield curve control (buying up the price (down the yield) of longer-term treasuries) to control lending rates that, were they allowed to rise, would themselves produce a headwind to rising inflation.""


"...speaking of cumulative advance decline lines, here's our chart for the Nasdaq Comp (A/D line in bottom panel):

Not a good look!!

Now, with tech presently occupying 27% of the S&P 500's overall weighting (something we haven't seen since the late 90s), well.... just another thing to keep an eye on..."


"In this morning's note I suggested that a "regime" change may be in the offing. It's always interesting to track style relationships over a few market cycles.

Here's a look at the late-90s. The white line represents the S&P 500 Growth Index, the blue the S&P 500 Value Index:

Here's from the late-90s (tech boom) peak to the residential real estate boom peak:

Here's from the real estate boom peak to current:


 Also Monday

"Market regime shifts can be tough when they occur. Our view is that we're likely at the cusp of a major one (disinflation to inflation, growth to value, etc):

"Those most adept at profiting from a particular market are often least likely to notice when the game is over, and probably the least psychologically prepared to profit from the successor market."

"...the market has even crueler twists. It’s not sufficient that a player figure out when the game has changed. When a market shifts, it usually requires the investor to adopt a psychological stance anathema to the precepts upon which he built his earlier success."

 --Leon Levy"

Last Friday

"The opening sentence from this week's release of the Fed's Beige Book* echoes the story we've been telling of late. That is, recession risk remains low, but growth is slowing:

"Economic activity grew at a modest to moderate rate, according to the majority of Federal Reserve Districts. Several Districts noted, however, that the pace of growth slowed this period, constrained by supply chain disruptions, labor shortages, and uncertainty around the Delta variant of COVID-19."

That's a setup that has the term "stagflation" (rising inflation amid a stagnating economy) finding its way into a few narratives. We won't go there just yet, but, sure, it's a risk...

These two graphs, for the moment, argue that risk:

The Atlanta Fed GDP Nowcast ("GDPNow forecasting model provides a "nowcast" of the official estimate prior to its release by estimating GDP growth using a methodology similar to the one used by the U.S. Bureau of Economic Analysis):"

Consumer Price Index:

Last Thursday

"The following blurb from BCA Research yesterday comports to a virtual T with our go-forward macro thesis related to equities and, per the last sentence (although for add'l reasons), the dollar -- and, thus, with our present on balance positioning:

" growth momentum is set to rotate from the US to the rest of the world. This will raise the earnings prospects and thereby prices of ex-US equities, which will reduce the relative appeal of US equities. Second, the tech sector – which alone accounts for over a quarter of the S&P 500 market cap – likely needs to generate strong gains for the US bourse to outperform. However, interest-rate sensitive tech stocks are vulnerable as bond yields climb higher.
Together, these two observations suggest that, Euro Area bourses will benefit from an improvement in the region’s relative growth differential vis-à-vis the US and outsized weighting of financials and industrials, which will benefit as interest rates move higher. A deterioration in the appeal of US equities would in turn be a headwind for the greenback.""

Also last Thursday

"Like I said yesterday, the setup for inflation, and, nearly by default, commodities, is resoundingly bullish well into the foreseeable future. I also said that as investors embrace that sentiment, related markets will get ahead of themselves and correct, at times "violently."

While this morning's selloff across the resource complex is anything but violent, and while there are a number of headline drivers to credit, a breather right about now would make sense, and, frankly, would be welcome.

Recall in Sunday's video the charting we did of our base metals ETF. I pointed out that nothing goes parabolic without ultimately giving some, sometimes a lot, back before resuming its uptrend (assuming it's going to). 

Here again is that chart we worked on together:

Now let's zero in on the past 5 trading days:

While a 3.6% 5-day move is nothing to freak out over in a position that's up 70+% since we added it last year, it nevertheless hints of the potential volatility I pointed to yesterday."

Thanks for reading!

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