January 19, 2022

We are a week away from the Fed’s first meeting of the year, and as it stands, they will be contemplating a 10-year yield that has gone from 1.45% to 1.90% since they last met (a month ago!).

And that has translated into a sliding stock market:  Rates up, lower valuations on the high growth (especially no EPS) stocks.

The Nasdaq index, full of the much-loved “companies of the future,” is down 8% to open the year.

The question is, what would make the Fed balk on the guidance it’s given to exit emergency policies?

It’s a question that markets have been conditioned to ask.  After all, we’ve seen an about-face more than once from the Fed, in the years emerging from the financial crisis.  Lower stocks has equated to a Fed response (a lifeline). 

Consider this:  They began rate liftoff in December of 2015, with the guidance of four rate hikes through 2016 — only to pause, and return back to damage control just a month after the first hike.  

Will it happen this time?  The short answer is, no.

As we discussed yesterday, the policy error from the Fed emerging from the financial crisis, was acting too soon.  The policy error now, is acting too late, too slow

We can see the difference in these two environments through the sector performance in this recent decline in stocks.  In a sea of red (from the sector level), financials and energy are green on the year.  Energy is up, as a result of undersupply in a hot economy with hot demand.  And financials are up, as a supplier of credit, winning from a hot economy and prospects of more profitable lending.   Bottom line, post-financial crisis is not an analog for post-pandemic. 

Of course, an easy differentiator is the $5 trillion in new, excess liquidity added to the system over the past two years.  That has slowly turned the tide in what has been a long bear market in commodities, into a young secular bull market in commodities.  

With that, let’s revisit this chart we’ve looked at many times in my Pro Perspectives notes … the commodities/stocks ratio.

As you can see, commodities are coming out of a roughly 12-year period of significant underperformance, relative to stocks.  In fact, commodities haven’t been this cheap, relative to stocks, in 50 years.

January 13, 2022

The SCOTUS decision on the Biden vaccine mandate for the private sector was a huge hurdle cleared today.  This should bolster an already tight employment situation. 

And with that, we may see the upward pressure on wages pickup.  The wage reset has already happened at the low end.  The higher earners are next, and are well positioned to command higher wages.  

Hotter wage growth will only add fuel to the inflation fire.

With this, the inflation situation and (consequently) the interest rate outlook haven’t been a good formula for the high multiple tech stocks. 

On that front, let’s take a look at a victim of this environment, and a potential destabilizing force to keep an eye on for markets:  Cathie Wood’s infamous ARK ETFs. 

As you likely know, she has been a financial media darling (likely thanks to a well compensated PR agency), as a leading investor in the “companies of the future.” Just a year ago, she had amassed more than $60 billion in ETF assets. It’s since been cut in half.

As the tide is going out on the growth trade, people are realizing that the structure of an ETF isn’t a fit for a private equity-like investment process.

What does that mean? The ARK ETFs give intraday liquidity to investors investing in long-term structural themes. It’s a mismatch. And that can create forced buying when things are going higher (over inflating some of these tech stocks, as we’ve seen), and forced selling when things aren’t working (which can spiral to the downside).

We’re seeing the latter. As you can see in the chart below (the orange line), some of the excess from the “companies of the future” has been rapidly unwinding. And as you can also see, it may be a bad influence on the “money of the future.”

January 11, 2022

Stocks continued the big bounce today into technical support. 

Let’s take an updated look at the S&P 500 chart …

So, we had a 5.5% decline in this benchmark index to start the year, and now we have a sharp bounce of nearly 3% from this big technical trendline, which comes in from the election day lows of November 2020 (an important marker).

We heard from Jay Powell today, in his renomination hearings before the Senate.  He did nothing to change the expectations on the Fed’s guidance on the rate path.  Whether it be three or four hikes this year, we’ve just finished a year with around 10% nominal growth and over 5% inflation.  

The coming year may be more of the same, and yet we have a market and Fed posturing and speculating over how close to 1% the Fed Funds rate might be by year end.  That dynamic only adds fuel to the inflation and growth fire.  

On that note, we’ve been watching three key spots that should be on the move with this policy outlook:  bonds (down), gold (up) and the dollar (down). 

Gold was up 1.25% today, making another run at this 1830-50 level.  If that level gives way, the move in gold should accelerate.  As you can see in the chart, we would get a breakout from this big corrective trend that comes down from the August 2020 all-time highs.     

On a related note (dollar down, commodities up), the dollar looks vulnerable to a breakdown technically …


We kick off fourth quarter earnings this week.  We’ll hear from the big banks on Friday: JP Morgan, Citi and Wells Fargo.  

Bank of America and Goldman Sachs earnings will come early next week.

Last year, across the broad market, the table was set for positive earnings surprises, against a backdrop of deliberately dialed down expectations.  And those low expectations were against a low base of 2020, pandemic/lockdown numbers.  

With that, we’ve had positive earnings surprises throughout the first three quarters of 2021.  The expectation is for 21% earnings growth for Q4, which would give us four consecutive quarters of 20%+ earnings growth and 40% earnings growth on the year.  

That said, of the nearly 100 S&P 500 companies that have issued guidance for Q4, 60% are negative.  That’s straight from the corporate America playbook: Using the cover of the Omicron news from late November to lower expectations, to position themselves to manufacture positive earning surprises OR withhold some earnings power for next quarter. 

So, in addition to the changing interest rate cycle, could the slide in stocks to open the year have something to do with weaker Q4 earnings?  Maybe. 

On that note, let’s take a look at the big technical support hit today …

In the chart above, the S&P 500 hit this big trendline that comes in from election day.  This rise in stocks, of course, has everything to do with an agenda that entailed even more massive fiscal spending programs — AND a central bank that remained in an ultra-easy stance.  

Indeed, we’ve since had another $1.9 trillion spend passed in late January of last year, plus a $1.2 trillion infrastructure package later in 2021.  

Now we have a Fed that has flipped the script, and the additional bazooka agenda-driven fiscal package has been blocked — and we get a test of this big trendline.   

The good news:  The line held today, and stocks bounced aggressively (about 100 S&P points) into the close.  

As you can see in the chart below, we have a similar line in the Nasdaq, dating back to the election.  This breached but closed back above the line today.

With the above in mind, we should expect the banks to continue putting up big numbers to kick off the earnings season later this week.  That will be fuel for stocks.   

Remember, the banks set aside a war chest of loan loss reserves early in the pandemic, and they have been moving those reserves to the bottom line since, at their discretion.  As an example, both Citi and JP Morgan have another $5 billion to release, to bring their loan loss reserves back in line with pre-pandemic levels.  That’s $5 billion (each) that will be turned into earnings.

June 13,  5:00 pm EST

Yesterday we talked about the plunge in oil prices and the importance of holding above the big $50 level.  And oil gets a big bounce back today on the Iranian attack of two oil tankers in the Middle East.

Iran has made threats, in the past, to choke off global oil supply in the narrow strait (Hormuz) that about 30% of the world’s crude oil passes through.  Today’s attack follows an attack on Saudi tankers last month. So Iran is posturing to deliver on threats of disrupting global oil supply.

This all stems, of course, from Trump’s efforts to bring Iranian oil exports to zero (sanctions that were upgraded back in April) — to get them back to the negotiating table on weapons of mass destruction.

Without getting into speculation of where this will end, let’s just take a look at gold, which has gotten a renewed “fear of the unknown” bid this month.  A conflict with Iran would fall into that category.  In an interview yesterday, the great macro trader Paul Tudor Jones called gold his favorite trade over the next 12-24 months (for a number of reasons).   He said if it breaks $1,400, it will quickly push to $1,700. 

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June 12,  5:00 pm EST

Remember, last week we talked about why $50 is a very important level for oil.

A recent Dallas Fed survey has the breakeven level for shale producers at $50.  In other words, the shale industry needs oil prices above $50 to produce profitably.

If the shale industry becomes unprofitable, that becomes a problem. As we found in 2016, when oil prices crashed, the shale industry became vulnerable.  Defaults started lining up in the industry, which made banks vulnerable.  When banks are vulnerable, credit tends to tighten and the financial system can quickly become unstable.

Now, as we know, the price of oil bounced from that $50 area last week, but we’re getting another test today.  Oil was the mover of the day — down close to 4%, and back under $51.

This, I suspect, will play a very important role in the Fed decision next week.

Despite the fact that expectations point to a rate cut in July, we’ve discussed the pressures building that might lead the Fed to move next week (which would be a big surprise for markets). Oil plays into that scenario.

Stocks and crude oil have been two clear influences on Fed policy over the past few years.  The latter weighs on inflation.  While the Fed claims to ignore the influence of food and energy in their inflation measure, they have a history of acting when oil moves sharply.  On that note, oil is down 22% over the past year.  And, again, we’re testing an important level that can have spillover effects into the economy.  That’s why a sharp decline in oil prices tends to influence stocks.  That’s why the charts of stocks and oil have tracked so closely …



So, we’ve had a nice bounce in stocks over the past week or so.  We had the same for crude.  But now crude is back testing the lows of this decline.

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June 11,  5:00 pm EST

Yesterday we talked about the surgical manipulation Trump is (seemingly) attempting to perform, to force the Fed’s hand on a rate cut — and therefore, to optimize the economy heading into the election.

At this stage, the harder he is on China, the lower stocks go, which puts more pressure on the Fed to cut rates.  But as the Fed has now signaled it’s prepared to act, stocks have risen, which makes it less likely that the Fed will act.

With that, yesterday, I surmised that Trump might ramp up the rhetoric as we near the June 19th Fed meeting, to keep a lid on the bounce in stocks.

On that note, Trump had some very firm comments on China trade this morning, implying he’s not willing to give any ground.  He says “we’re going to either do a great deal with China or we’re not doing a deal at all.”  He gets his demands, or no deal.  Again, as we discussed yesterday, he’s in the driver’s seat.  And he said as much today:  “It’s me right now that’s holding up the deal.”

Stocks have given some back today, after a six day rally from the lows of this recent correction.  And we get this chart going into the close…



As you can see, the S&P 500 put in a big technical reversal signal — a bearish outside day.  The last signal like this we observed was on May 1, which resulted in a 7.6% correction.  Perhaps we have a signal here of some softness in stocks to come, until we get to the June 19 Fed meeting.

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June 10,  5:00 pm EST

Last week we had signals from the Fed Chair that they were prepared to cut rates if needed.

That’s all the market needed to hear to fuel a bounce back in stocks.  And that bounce accelerated when the weak jobs numbers report hit on Friday.

This is the “bad news is good news” dynamic.  Souring economic data gives more impetus for the Fed to move.  And expectations for lower rates are fuel for stocks.

So, the market is now pricing in an 80% chance of a rate cut at their Julymeeting. But I suspect that’s not soon enough.

If stocks continue the strong recovery, on the expectation of rate cuts coming down the pike, the likelihood of the Fed actually delivering on rate cuts diminishes greatly.  To put it simply, the better stocks do, the less likely it is that the Fed will cut.  The stock market matters.

Remember, this overhang of concern in markets is less about what’sactually happening in the economy, and more about what might happen (i.e. the prospects that the U.S. economy and global economy may deteriorate IF the stalemate with China continues indefinitely).

I suspect that Trump wants and needs a move from the Fed at their Junemeeting, which is just seven business days away.  The G20 meeting comes later this month (June 29-30) where Trump and Xi are expected to have a sit-down to discuss the trade deal.  With a rate cut under his belt, Trump might feel more compelled to claim victory on the China trade talks and do the deal, giving himself enough runway into the 2020 elections to have a booming stock market and booming economy.

With the above in mind, it makes since for Trump to ramp up the trade rhetoric (and any other threatening rhetoric) ahead of that June Fed meeting (keeping pressure on stocks), in attempt to force the Fed’s hand, sooner rather than later.

This would explain why he called into CNBC this morning.  Reminding everyone of his hardline stance on China (his indifference on hammering them with tariffs indefinitely), is perhaps his way of trying to tame the stock market recovery.  It may sound like a crazy theory (Trump leveraging a monumental trade deal to manipulate Fed policy, in effort to surgically optimize the economic outcome going into the election), but I think it’s happening.  And he’s doing it because he can.  He’s in the driver’s seat.  He has the leverage and he is pulling the levers.

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June 7,  5:00 pm EST

We had the jobs report this morning. As we discussed on Wednesday, the weak ADP report was telegraphing a “below expectations” government jobs report.

Indeed, that’s what we got this morning.

And, while a bad job number is typically seen as bad news for stocks, in a world where the Fed has been on the hot seat to deliver a rate cut, it increases the likelihood of that happening. A rate cut is fuel for stocks, and with that, stocks continued the very strong bounceback, closing near the highs of the week.

What problems would a rate cut solve? It would mostly improve sentiment. A yield curve inversion has been spooking markets now for a while (as it has a record of predicting recessions). Perhaps contrary to what some may think, a rate cut by the Fed should steepen the yield curve. It would not only lower the front end of the curve (shorter term rates), but likely increase longer term rates by improving sentiment (i.e. higher long-term rates on the optimism that the Fed isn’t going to kill the economy through overly-tight monetary policy).

Now, while stocks have continued with a very persistent march higher this week, gold has also marched higher, and the dollar has fallen, and rates have remained near dead lows. What’s going on?

Is it the threat of tariffs hitting Mexico on Monday? I don’t think so. Stocks have well recovered and surpassed the levels prior to Trump’s tweet that threatened Mexico.

There may be something bigger happening.

A couple of weeks ago, we looked at this technical reversal signal in the dollar (chart below) and talked about the prospects of the trade war with China ending in a grand and coordinated currency agreement. The dollar has since been on the move (lower).

What do I mean by a currency agreement? There are a lot of similarities between the U.S/China standoff and that of U.S. and Japan in the 1980s. That was ended with the “Plaza Accord” — an agreement between the U.S., Japan, Germany, England and France. The Plaza Accord was a plan to balance global trade, through a 50% depreciation of the dollar (vs. the yen and d-mark).

As I said a couple of weeks ago, we may wake up one day and find a similar agreement has been made between the U.S. and major global trading partners (which may include China, or not). It might be a deal between the U.S. and China to “revalue” the yuan (i.e. strengthen it). Or it may exclude China (just G3 economies). With the behavior in markets the past few days, it smells like something is cooking.

June 6,  5:00 pm EST

Stocks continue to bounce back today, driven by the signalling from global central banks that they will act, if economic activity deteriorates.

First we heard from Jerome Powell on Tuesday, the Fed Chair.  He opened a prepared speech by saying they would “act as appropriate to sustain the economic expansion.”  Today we heard from the second most powerful central banker in the world, ECB President Mario Draghi. He echoed the sentiment of the Fed, acknowledging the global trade war risks, and said they were prepared to act, if needed.

What does “acting” mean?  It would mean cutting rates by the Fed.  It would mean restarting QE at the ECB.

For now, it’s all an effort to verbally massage market sentiment.  And it’s working, at least for the moment.

Add to this, we had some positive news on U.S./Mexico negotiations.

With that, let’s look at some key charts …

First, here’s a look at the S&P 500 …



We’ve had an 8% decline in stocks from the April 30 highs.  And now we the break of the downtrend on the rebound of the past few days. And we’re back above the 200-day moving average (the purple line).

What about oil?  As we discussed, the magic number in oil is $50.  That’s the breakeven point for the shale industry, below which, they can not profitably produce. 

After sniffing toward that $50 level yesterday, we had a big bounce today — almost 6% higher than yesterday’s low.

And finally, here’s a look at interest rates. This has been the most concerning market, as it has completely come unhinged from the current economic conditions — pricing in the worst case scenario for geopolitical tensions. But rates are showing some life today.  

For technicians, as you can see in the charts above, we’ve traded into the 61.8% Fibonacci retracement in both oil and rates.
With technical support holding in these key markets, combined with the break of the downtrend in stocks, the worst of the market pain may be behind us (i.e. a recovery underway).

If you haven’t signed up for my Billionaire’s Portfolio, don’t delay … we’ve just had another big exit in our portfolio, and we’ve replaced it with the favorite stock of the most revered investor in corporate America — it’s a stock with double potential.

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