Morning Note

Lots of ink being spilled (that's old school talk) of late in celebration over the S&P 500 hitting a new all time high... Well, alas, if we peek a bit below the headlines, we discover a somewhat less-celebratory reality.

One of the first places -- alongside determining if the recent ascent has been earnings-driven or multiple-(meaning the price in the price/earnings multiple)-driven, and interpreting the signal -- I go is to the underlying breadth readings... Which, at current, are nothing to celebrate.

Today is a prime example... As I type the S&P 500 is up 0.42% while 326 (60+%) of its members are actually in the red on the session... The Nasdaq is up over 1% while 54% of its members are trading lower.

Bigger picture, while, again, the S&P 500 sports a new record, literally 462 (92.4%) are actually trading somewhere below (notably below in many cases) their 52-week highs.

My point being, this is not the kind of action that has us feeling confident that the worst for now is over.

Now, all that said, I do maintain that, in the near-term, an end to the Iran conflict would very likely bring animal spirits -- and market breadth along with them -- roaring back to the market.

Speaking of animal spirits, this morning's release of the widely followed University of Michigan US Consumer Sentiment Survey showed its lowest print on record!  

Here's your morning rundown on the latest Middle East developments, etc.*

Morning Note

As I seem to repeat almost daily, economic and political reality virtually demand that the present dynamics around world oil supply find resolution in the not too distant future.

The key word there being "world."  

While, as it is often expressed by US officials, the US is significantly energy independent -- well, actually, what officials tend to say is that we are "entirely energy independent" -- in reality, believe it or not, we are not a net-exporter of crude oil, we actually import more than we export -- to the tune of 2.2 million barrels a day last year in fact... Put correctly, the US is indeed a net exporter of energy products (nat gas, refined products, etc. combined), but, under present circumstances, the crude oil distinction is worth acknowledging.

Where "world oil supply" is key is that, make no mistake -- while, again, we are anything but immune -- the rest of the world's net-importers (while they may not be facing the immediate political risk the US Admin presently is) have to be fearing the pinch even more so... I.e., we expect to see other nations step in, and step up, their participation in the negotiation process -- a la South Korea this morning:

Morning Note

While, ultimately, we need to be thinking about, and be guided by, the longer-term global macro setup, along the way we have to take the near-term into account as well -- and, if only at the margin, adjust accordingly… Particularly when near-term dynamics could ultimately morph into something consequential for the long-term global macro setup.

We’ve maintained from the get-go that the economic, and, thus, the political ramifications of a protracted Iran war are too dangerous for the powers that be to accept… Which doesn’t mean of course that it can’t happen, it just means that the political incentives and constraints make it a resoundingly undesirable affair.

Hence, among others (see below), this telling headline from this morning:

“Despite high levels of mistrust on both sides, mediators and people familiar with the talks say the two sides have been engaging in ideas that could point to compromise around core issues like Iran's nuclear program - MS Now Reporter.”

Here's your morning rundown*:

Morning Note

After opening in the green, US major equity averages have turned marginally south as I type (8am PDT), with all but 2 sectors trading lower -- materials, industrials, healthcare and utilities notably so.

The headline risk of course remains Iran, with them not yet confirming a willingness to resume negotiations in Pakistan tomorrow... Fed Chair nominee Warsh is also getting the attendant Capital Hill grilling this morning, which -- to the extent he suggests he'd be tough on inflation -- I suspect could add to today's volatility as well... Gold, which is trading mostly as an interest-rate-sensitive asset of late, is getting hammered this morning.

Per the below, despite feeling it a bit this morning (given the sector, regional and precious metal pain thus far), our overall allocation is durably positioned for times like these.

Here's your morning rundown*:

Morning Note

Our main current conditions message over the weekend was the following:

“…should geopolitical conditions improve -- political incentives virtually demand that they do -- heading into the back half of the year, it makes sense -- heavy volatility (and inflation risk) notwithstanding -- to remain on-balance constructive on the economy, and on risk assets for the time being.”

Fluid, Frustrating, Yet We Remain Fundamentally Constructive

Per the below, general conditions continue to deteriorate at the margin... Nevertheless, we remain constructive on markets, particularly if the geopolitical setup continues to improve.

I mentioned yesterday that we weren't taking the latest positive tone/headlines for granted, and that "this is an extremely fluid situation, subject to change on a dime."  Which, per the following, has been frustratingly borne out since yesterday's note:

Important Morning Note

Markets are celebrating Iran's announcement that the Strait of Hormuz is now fully open during the ceasefire... While the US, however, has stated that its blockade will continue as negotiations move forward.

We came into the year positioned for geopolitical tensions (tariffs included) abating -- and fiscal oomph appearing -- as the mid-term election approaches... In the meantime, the Iranian conflict of course has called the geopolitical element of our thesis notably into question, which in turns threatens the fiscal element... It's been estimated that, for example, higher gasoline prices will effectively absorb the record tax refunds that are now beginning to flow into consumer pockets.