Wednesday, May 25, 2022

Morning Note: No Surprises Right Here

The equity market has been buffeted of late by headwinds that, given the present state of inflation and overall slowing general conditions, should come as no surprise to anybody. That is, companies are having to state it like it is, with regard to their go forward prospects.

Dick's Sporting Goods this morning being the latest.
Here's Bespoke Investment Group:   emphasis mine...
"In the US this morning, another retailer reported surprisingly strong results with Dick’s Sporting Goods (DKS) as adjusted EPS beat by 15% on comp sales down 8.4% YoY versus –10.8% YoY expected; top line was 3% higher than estimated. The bad news was guidance: full year adjusted EPS guide was cut 16% at the midpoint. Given the fiscal Q1 beat, that implies 26% lower adjusted EPS than previously forecast. Full year comp sales guidance was also slashed from down 4%-flat to a range between down 8% and down 2% (analysts had expected a 2.2% drop)."

This -- slowing general conditions in particular -- keeps up and the Fed's resolve in fighting inflation will indeed be put to the test. 

Mortgage purchase apps (flat) and durable goods (rising but at a slowing pace) released this morning were on-balance uninspiring, and, therefore, noninflationary per se...

One of this year's main themes has been the positive correlation between bonds and stocks (both down!). Well, that's been changing of late, suggesting a potential sentiment shift that focuses on weakening general conditions as opposed to rising inflation.

S&P 500 white, TLT (long treasury bond ETF) yellow:

Yep, the Fed definitely has its work cut out for it!

Oh, and by the way, this divergence has potential implications for all of those auto rebalancing funds that rest on, for example, all of those 401(k) investment menus. In that they're set to automatically rebalance to a preset stock/bond allocation at, say, monthly or quarterly intervals, there's potentially rising buying pressure on stocks in the offing, as these funds are likely overweight bonds/underweight stocks, relative to their targets. Which supports our notion that perhaps a counter-trend bounce is in the offing... Unless of course it's overwhelmed by heavy selling pressure from other players... 

Neither would surprise us at this point...

Asian equities were mixed overnight, with 8 of the 16 markets we track closing lower.

Europe's mostly green so far this morning, with 15 of the 19 bourses we follow trading up as I type.

US stocks are generally higher to start the day: Dow up 44 points (0.14%), SP500 up 0.22%, SP500 Equal Weight up 0.36%, Nasdaq 100 up 0.35%, Nasdaq Comp up 0.38%, Russell 2000 up 0.88%.

The VIX sits at 29.47, up 0.07%.

Oil futures are up 0.84%, gold's down 0.91%, silver's down 0.64%, copper futures are down 0.76% and the ag complex (DBA) is down 0.88%.

The 10-year treasury is up (yield down) and the dollar is up 0.41%.

Among our 38 core positions (excluding cash and short-term bond ETF), 19 -- led by energy stocks, Dutch Bros, Disney, emerging market bonds and carbon credits -- are in the green so far this morning. The losers are being led lower by Albemarle, Sweden equities, gold, miners stocks and ag futures.

Among the traits consistent among history's best traders, I'd have to place patience near the top in terms of importance.

Jesse Livermore (July 26, 1877 – November 28, 1940) , in his prime, may have been the best of them all, certainly my favorite:
"Without faith in his own judgment no man can go very far in this game. That is about all I have learned—to study general conditions, to take a position and stick to it. I can wait without a twinge of impatience. I can see a setback without being shaken, knowing that it is only temporary.
I have been short one hundred thousand shares and I have seen a big rally coming. I have figured—and figured correctly—that such a rally as I felt was inevitable, and even wholesome, would make a difference of one million dollars in my paper profits. And I nevertheless have stood pat and seen half my paper profit wiped out, without once considering the advisability of covering my shorts to put them out again on the rally. I knew that if I did I might lose my position and with it the certainty of a big killing. It is the big swing that makes the big money for you."

Have a great day!


  1. Nicely said! "It is the big swing that makes the big money for you." This might only be temporary. The risk is still there. The only way to minimize the risk is by diversifying and hedging. The War in Ukraine is not yet over and the risk of the war to prolong without a time table is very high. Market doesn't like the uncertainty.

  2. Long treasury bond yield is getting interesting as the Fed increases interest rates. Jerome Powell is no Paul Volcker. I don't necessary agree with Paul Volcker's approach in 1980-1982. Market didn't ready rebound until 1983. Given the fact that Powell has more tools to use compared to the early '80, Powell may steer a soft landing that will eventually save the economy from a recession. Time will tell and we will see.

    1. Yes, interesting, in many respects. With regard to treasuries and the Fed, declining treasury yields actually reflect a weakening of general conditions. And, ironically, as the Fed continues to hike you may actually see yields continue to move lower, that is if the data continues to come in soft. I.e., tightening monetary policy would exacerbate the softening.

      In terms of Volcker and Powell, actually, despite having more tools, Powell's hands are substantially tied compared to Volcker's. Volcker was raising interest rates at a time when debt in the system was historically low. Meaning, he could hike interest rates without worrying about popping a massive debt bubble. That's virtually the opposite situation Powell faces. Volcker's actions were clearly meant to cause a recession, as that was viewed as necessary to finally kill what was devastating inflation at the time. The stock market was very low on his priority list. In fact, a falling market serves to help tighten financial conditions and bring down inflation...

      At the end of the day, Powell in all likelihood can't have it both ways. He'll ultimately have to make a choice... If indeed the Fed is going to land inflation anywhere near their 2% target, they're going to have to tighten to the point where markets crack and recession hits... If he once again pivots in favor of markets, it'll have to occur amid a notably slowing inflation rate of change (but not remotely reflecting an ultimate 2%) offering him an excuse to ease off the pedal.

      He'll have to say that -- directionally -- inflation's coming down, so they're pausing the tightening... If the economy is reeling at that time, they could even begin loosening policy, in which case the equity market may rally back, bringing back animal spirits, and, all of a sudden, the combination of fresh liquidity and rising asset prices will quickly exacerbate inflationary pressures all over again...

      Lastly, recessions, while painful, are ultimately an important part of the economic cycle. They are where excesses are purged, criminals are caught (think Madoff, Sanford, Enron, the Savings and Loan crisis, on and on... they all got exposed during recessions)... and the balance sheets of solvent institutions become lean and efficient...

      While our base case at the moment is no recession on the near-term horizon, in the grander scheme of things, it wouldn't necessarily be a bad thing should one occur... And keep in mind, our base case is ever evolving... In July of 2019 our assessment was similar to today's, but by late August our position changed -- at that point recession probabilities got to the point where we had to begin actively hedging our portfolios -- which turned out to be a beautiful thing 6 months later...

      I sure do appreciate your depth of thought on all of this Sam!

  3. Wow! Much appreciated for your explanation. These are great educational facts with in-depth insights.