We are here. The unofficial start to summer (for you druids out there, I know we aren't to the equinox yet) is here. People had to sports tourneys, to the lake, to the golf course, to the barbeque. The discussion turns to friends, family, and ... the economy

Surely there will be talk among people about sports or the weather. I doubt many will talk about religion (but maybe they should). However, the bbq conversation will surely turn to how work is going as well as the cost of food or gasoline etc

Arthur Okun came up with the idea in the 1970s when the misery was quite high. It measures the combination of unemployment & inflation - the two things people care about the most. It is in blue on the chart today

We can see how the misery has tracked since the GFC. Each rectangle is a different administration. Under Obama, misery was high because of unemployment and the jobless recovery

Under Trump, misery ran very low until Covid, and then spiked to very high levels. It is presumably this move in misery and the subsequent recession that cost him a second term. No president has gotten a 2nd term when there is a recession within 2 yrs of the election

Under Biden, misery has been running high because of inflation. It has been falling of late which one might think would have people more optimistic. However, it isn't

The white line on the chart is the Real Clear Politics Country is on the Wrong Track measure. High is bad. The first thing that stands out to me is that this number is always greater than 50%. Half the country is never happy

The second thing that stands out is that as misery moves higher, this measure moves higher. As misery moves lower, this measure moves lower, perhaps begrudgingly so. It took years of low misery index for the measure to come down under Trump. It was more responsive under Obama

The interesting thing to me on this is the far right of the graph. Even as the misery index is moving lower, with unemployment still very low while prices are falling, the measure of Wrong Track is moving higher. People are still not happy

Perhaps this is because CPI is less high but the price level is permanently higher. It simply costs a lot more to live than it did a few years ago. I went to Dollar General yesterday. Nothing in the store was even close to a dollar

Perhaps it is the debt ceiling discussion. Perhaps there is just general malaise but right now 2/3 of the country see us as being on the Wrong Track. That would clearly include members of the Presidents own party as well

Over the next 18 months, we will be in election season. More and more names are thrown into the hat. The discussion about who will do the right job starts this weekend. Remember, no president has won re-election if there is a recession within 2 yrs. The President needs a soft landing

Most importantly, take a minute this weekend to celebrate those who have given their lives so we can enjoy freedom, bbqs and the start of summer. Have a Happy Memorial Day

Stay Vigilant

#markets #investing #economy #misery #stayvigilant

This week I am trying to think through what the impact could be with any meaningful change in the 10 year yield as a result of a hiccup in the debt ceiling debate or even a resolution

This naturally had me think about housing and the mortgage market, something I haven't focused on in my writing in some time. In the northern parts of the US, we are approaching the end of the real selling season now with summer about to begin

There has been some optimism as the NAHB realtor survey has ticked higher for a few months, leading some to think the housing market has bottomed. Housing leads new orders, which leads profits and employment

If housing has bottomed, that would be good for the entire economy and therefore for the markets as well. However, it isn't entirely clear that the NAHB number is telling the full story

The chart today looks at the 30 year mortgage rate, back above 7%, vs. the NAHB number (inverted). Not surprisingly there is a relationship here and the cost of a mortgage tends to lead which should make sense to all

When we approached that 7% mortgage last year, I recall the negative sentiment in the mkt. We can also see the realtor sentiment plummeted at that time. However, this time, the sentiment among mkt players & realtors is getting a lot better in spite of 7% mortgages

Should it? If we look at the new homes sales & existing homes sales, the reality does not match the sentiment. Existing home sales has moved lower the last 2 months & is near Covid lows

Yes new homes sales have ticked higher since last fall but the level of new home sales is only at pre-Covid levels. These were fine but not spectacular. Also, new homes are only about 10-12% of total sales

Inventory is still low. We see this in the data & I see it anecdotally as realtors are sending me multiple cards trying to get me to list my house

However, the spread of the 30 year mortgage to 10yr yields at 3.36% is all-time highs. This is a function of tight credit at banks & Fed QT, neither of which are stopping. Layer in that 10yr yields themselves are moving higher & it is hard to see mortgages move a lot lower

Housing requires a domino effect. Young families move from condo to house. Others buy a bigger house to meet growth. At some point you need retirees to sell & move out of state etc

However, people locked into 3-4% mortgages are NOT moving regardless of the demographic cycle. Buying a new house at double the mortgage rate is not an attractive option now. So perhaps sentiment has improved but activity will not

Housing is critically important to the economy & therefore the mkts. However, we need either higher incomes or lower mortgages to truly see a sustained benefit to housing. I am watching the 10yr & the spread to mortgages to see when this happens

Stay Vigilant

#markets #investing #economy #housing #stayvigilant

Yesterday we discussed the divergence between the 10yr yield & SPX Index. I mentioned that the thing that ties them together is the cost of capital. Today I want to show that a little more directly

The chart today shows the Moody's Corporate Baa yld vs. the S&P 500 earnings yld. You can see they directionally move together though there has been a spread

In fact, the S&P 500 earnings yld has been below the Corp Baa yield since Sept of last year. This may not sound like much but that is the first time since the rallies in early 2009 it had happened

You see we have gone through different regimes of investor preferences. For all of the 90s, stocks were preferred for the growth. This got to be a bubble, as we know in hindsight, but one could see even at that time as the earnings yld got to almost a 5% discount to credit

That is a large premium investors were paying for stocks over bonds. The subsequent 8 years or so saw this premium steadily erode away & then the spread stayed around par going into the GFC

Immediately post GFC, stocks caught a premium again as this asset recovered more quickly, but then from the rest of 2009 thru 2012/13, credit gained the upper hand. At one point credit had a 3% discount to equities, showing the strong investor preference

This preference was for cash flow over growth, it was for the return of capital vs. the return on capital. It was also indicative that many had been burned in the GFC and therefore saw beta in a different mkt

The demand for credit led to not only more ETFs being developed, but the rapid growth of markets like the private credit mkt which works hand in hand with private equity

This credit premium subsided but has hovered around 1% from 2014 to 2022. Toward the end of last year, it collapsed to 0% and then equities regained the upper hand

I will leave it for y'all to decide where this is going. There are long periods of investor preference at play. Is this recent move toward equities the beginning of a multi-year trend favoring growth over cash flow? Or is it a blip ala early 2009?

Where we sit now, the SPX earnings yield is 0.56% lower than Baa yield. If this moves back to par, it is 1.8x turns of P/E. That is about 400 points on SPX so not nothing

My concern is the end of the debt ceiling debate leads to extensive Treasury issuance. This will be soaked up by fixed income investors but lead to higher credit yields. Allocators will switch beta into credit over equities. This means equity gets crowded out & multiples contract

One might argue that this is the positive outcome to the debt ceiling issue. There are uglier outcomes as well. Either way, there is fincl plumbing at work here & nothing nefarious. It is simply the flow of capital

Let me know in the comments your thought on the trend of equity vs. credit. Is AI the catalyst to favor growth over cash flow? Or is this just a blip on the radar?

Stay Vigilant

#markets #investing #stocks #credit #stayvigilant

We are approaching the deadline. You know the one I am referring to. No, not the 'drop dead date' upon which we can't agree whether it is June 1, June 2, June 15 or some other date.

The deadline I am referring to is the unofficial start of summer - Memorial Day. After this date, schools start to finish, bbq's start, travel sports accelerate & family vacations begin

This is the time when portfolio managers move closer to their benchmarks so that they have less tracking risk on the books and can feel more comfortable taking time away

No one wants to get the call from the office about a big move in the mkt or in a position forcing you to stand beyond the right field fence on a dusty field in Iowa so you can hear what they are saying. Trust me, I have done it

This applies to long only and to hedge fund investors alike. Bigger positions get reduced. Divergences begin to narrow. Perhaps we see some mean reversion kick in instead of the momentum that permeates the mkts due to the passive influence

One of the divergences that stand out in my mind is that between the SPX and the 10yr yield (inverted in today's chart). For the past 18 months, these have moved pretty much in lock-step. Any divergence has been closed. The bond mkt has usually led

The bond mkt again seems to be leading. 10yr yields have moved back up to 3.74% from the lows around 3.3% hit in April. The bond mkt may be feeling either 1. the debt ceiling issue will cause some wobbles or 2. it will be solved & heavy issuance will start

Either way seems to point to some higher yields. Higher yields means a higher cost of capital for equities. A higher cost of capital means a higher earnings yield or a lower multiple. It probably means lower earnings too but lets not go there yet

There are those that will point to goods deflation. Others want to point to lower house prices. However, services inflation is NOT falling as fast as people think. Inflation, as least that JayPo cares about, may be stickier than we think. Higher for longer may be the narrative

My bet is this divergence closes. Of course, it could happen with higher stocks and lower yields. It could also happen with lower stocks. We will see what PMs choose ahead of the deadline, you know, the Memorial Day deadline

Stay Vigilant

#markets #investing #stocks #bonds #deadline #stayvigilant

As you can tell from my posts this week I have been pre-occupied with family and not focusing on the daily events in the market. I logged in today to see the market higher on the hopes of a debt-ceiling deal

Also see the NAHB number was up and there was huge call buying yesterday, probably from people sitting in cash that are starting to feel the FOMO. Emotions are a real driver of financial decisions after all

I took a quick look at three things to give me a sense of whether there was a reason to go along with the crowd or not. I wanted to compare stocks to bonds, to the economy and to other risky assets

In the top chart today, I compare the graph of the 10 year Treasury yield with the SPX forward earnings yield. There is a relationship here for obvious cost of capital reasons but you can see it has disconnected this year

The earnings yield is more than 1% from where the 10 year suggests which equates to about 4 turns of P/E on the market. Stocks see better growth ahead but the bond mkt sees that has higher for longer and no cuts. This can coincide but the stock mkt was counting on cuts before

The middle chart looks at the SPX vs. the fundamental stock indicator popularized by Ed Yardeni. It combines jobless claims, CRB Raw Industrials Index and Consumer Confidence into an index of the economy that covers jobs, prices and sentiment

The economic measures are plumbing new lows while stocks are looking to break out. One must say that stocks are looking thru the bad news and seeing a soft landing ahead. Investors are looking to add risk to the books in spite of the economy, climbing the wall of worry

The last chart compares two risky asset selections - Nasdaq and Ethereum. Both are disruptive technologies, both rely on available and cheap capital, and both are preferred by traders and investors when sentiment is percolating

However, we see NDX hitting new highs while Ethereum is lagging. The sentiment is not bubbling up in crypto the way it is in AI stocks. Totally fair if investors feel AI is more disruptive but it goes to show the narrow focus of this rally

Risk sentiment in stocks, particularly tech stocks, is really starting to bubble up. Perhaps we are on the verge of a new breakout with no bad news ahead of us. Fed on hold, debt ceiling solved, and economy in a soft landing

Perhaps we are betting against a lot of other metrics that should have more than a casual relationship with what we are willing to pay for something

Stay Vigilant

#markets #investing #stocks #bonds #cryptocurrency #economy #stayvigilant

For those who grew up in the 80s, they will remember the TV show "The Jeffersons". The theme song was called "Movin' On Up" and this song became a meme for whenever someone had good things happening to them. We would say they were movin' on up like George Jefferson

I thought of this yesterday as we moved my son into an apartment. It is a brand new building in a redeveloped urban neighborhood full of young professionals. It looks like it will be a great place to live

I also thought of this when Reem Azhari, PhD shared a picture of the S&P 500 over time that hung in the room of her son, and my former student, Adam. Adam was taken from us too soon, but he left an indelible mark on all who met or interacted with him

Adam looked at the picture of the long-term (100 years) S&P 500 with different market or world events on it. I have tried to recreate that here by looking at the logarithmic chart since the late 1920's

I have added the regression + 1&2 standard deviations to show you when the index has moved to an extreme on the upside or downside. Finally I have labelled certain key events

The first thing we see is that this chart is movin on up like George Jefferson over the long term. This is why asset allocators and financial advisors favor a heavy allocation to equities for those with a long time horizon

The second thing you see is that major events do cause the market to move to extreme lows. We can see the Great Depression and World War II taking us down 2 standard deviations. We didn't get this oversold again until the OPEC-led inflation of the 70s. We got there again during the Financial crisis

Other events like the debt ceiling dramas or Covid barely register as a blip on this long-term view. Nor does the 2022 sell-off. We do see that the most overbought we ever got was the late 1920s and then the tech bubble in 2000. We didn't get there in 2021 even

One can also notice that if you enter into the market when it is 1 s.d. cheap or more, you can earn great returns. However, if you enter in when it is 1 s.d. expensive, it can take many years to break even again.

We got to these levels in the late 1930s and in 2007. It took 5-10 years to breakeven. We also got there in 2021. If you entered the market at that time, will it take 5 years or more to breakeven?

Stepping back and looking at the big picture can give us all perspective on how we should be thinking about things and approaching life. This is what parents try to impart to their children. I am glad Reem shared that picture with me to remind me of this

Stay Vigilant

#markets #investing #stocks #longterminvesting #stayvigilant

Sending out a second chart today to take the place of tomorrow morning as it is time to hit the open road in a big ole U-Haul truck. I am sure I won't be the only U-Haul on the road as it is that time of the year with people coming home from college & heading to new apartments

We go through these same cycles in the markets as well. People start to move around the 'furniture' in their own portfolios, maybe setting up ahead of a catalyst, or more likely preparing a portfolio for a summer where they would prefer to do little to it with short staffs

We can see this rotation happen in the markets using the RRG graph on Bloomberg. It is then a function of which assets we want to look at and what we want to use as our benchmark

I have used my 'Macro' list which includes all global asset classes. I am comparing it to 3 month cash because that is always a choice as well, especially since it is earning 5%

The places we want to focus on in this graph are the upper left and the lower right. The upper left, or improving category, are those assets that have been lagging the overall market, but where we are seeing some relative price performance suggesting they are playing catch-up

The primary asset I see in this category is the Brazilian ETF. Brazilian rates 10 year rates are 11.6% but expected to come lower this year. Brazil was ahead of the game hiking due to inflation & is ahead coming out. This should be supportive of equities

One index that was in this category but fell recently was the most short basket. We have seen quite a bit of short covering the past 6 weeks but over the last 1 or 2, shorts are being added to again. Something to watch

In the lower right, we have the weakening category. This is the area of the market that has been the leadership of the market, but where we are seeing chips being taken off the table. This is important especially if these areas have been carrying your portfolio

The primary focus in this quadrant is the rest of world stocks - Europe, Asia, China, EM, MSCI ACWI. I find this interesting because if we think there is going to be a dollar sell-off due to the debt ceiling debacle, these are the place that should benefit. However, we are seeing the opposite price action

This rotation, or moving, is important to be aware of in portfolio management. You don't want to over stay your welcome with assets that have worked. It doesn't mean you need to churn, but top-slicing some names and coming back closer to benchmark can save precious basis points

The moving I am doing is far less exciting. However, there is also risk management. That means if you are behind a U-Haul truck and you are complaining it is going too slowly, be patient. It might be me

Until we speak again ...

Stay Vigilant

#markets #investing #tacticalassetallocation #rotation #stayvigilant

If today's chart(s) seem to be a bit all over the place, it maybe because I am in the process of moving my son out of the house & to another state. To say the house is in a state of flux is an understatement

Anyone who has moved knows the scene, boxes everywhere & no one quite sure exactly where something is. It's quite the mixed bag of sentiment and stuff, for lack of a better word

I felt the same way when going through my email to see if anything really stood out to write about. I thought about taking a look at oil today on the back of Biden saying they will re-fill some of the SPR. However, the price action there suggests a bit of a non-event

There was more negative news on Chinese economic growth over night too, but I have written about that. There are more debt ceiling headlines but I have covered that a couple times & expect to even more

So I thought I would give you a collection of charts I found in my 'Other' folder on Outlook. I always get to these but they are a lower priority. However, while not on the same exact subject, I think they tell a bit of a story

Upper left is US consumer credit card loans. You can see that these are at an all-time high & rising. I know we all use our credit card for the miles & perks, however, in the data we also see delinquencies moving higher, share of accounts making the minimum payment going higher & charge-off rates going higher. This is no beuno

In the upper right is a look at US companies. Bankruptcy filings have been historically low courtesy of govt cash. However, these are starting to move higher & are averaging more like 2020 numbers now. Again, not a panic, but not a good trend

The bottom left shows the value of private equity & venture capital deals worldwide. I have spoken about the flow of credit to small biz but this is another avenue of credit. March wasn't bad but April fell off a cliff.

Finally in the lower left we see the number & size of funding round sin PE/VC. I have had quite a few calls with founders of late. I know the mkt for raising capital is getting tougher. It hasn't dried up completely but it is a buyers mkt right now, a far cry from before the FOMC started hiking

If I add into this the broken M&A deals with Activision, First Horizon & Horizon Therapuetics & the deal calendar is not looking too good. What does this mean for our friends in NYC & SF where layoffs are already happening?

So, a bit all over the place today. Things are scattered. Not exactly sure which box to dig into to find exactly what I am looking for. However, stepping back, & trying to see if the trend is moving in the right direction or the wrong direction, I struggle to be upbeat

I hope the move this week goes a little better than this data has gone. Change can be a very good thing if it is handled well. If problems are not anticipated, it can get pretty frustrating, pretty quickly

Stay Vigilant

#markets #investing #economy #stayvigilant

I wake up to the top stories of the day today and the top two stories are about the debt-ceiling talks. The first is that stocks are rallying on optimism around the talks. The second is that weekend staff discussions were constructive w/ more talks Tuesday

It is not entirely clear when the 'drop-dead date' quite is with Sec Yellen saying June 1 but others saying later. The Treasury General Account has $143bb according to Bbg but only $88bb according to some stories

The Treasury also gets an influx of cash from quarterly tax payments on June 15 so it isn't entirely clear where the deadline is. What is clear is that we will probably get pretty close to it before any agreement is hammered out

Neither side has an incentive to be seen to cave too early in these discussions so I think it is safe to think it gets worse before better. recall I have shown charts 2wks ago that showed the stress in short-term rates mkts & credit default swaps sees a lot more risk this time

However, there may be other trends going on that we should also beware of. We shouldn't just look at short-term dollar moves & think the debt ceiling is the only game

The dollar has a tendency to trend for long periods of time with some cyclical noise around those trends. When the dollar is trending weaker it is typically because investors see more oppty to invest outside the US on a relative basis. See the left side of the chart from 2000-2008

Since the Fincl Crisis, money has sought the safety of the US vis a vis the rest of world whether considering emerging mkts or other developed mkts. I show the performance of EEM or EFA relative to SPY. The dollar has trended stronger & US stocks have dusted rest of world stocks

Are we seeing a trend change here? Since last year the dollar has weakened a bit in a cyclical sense but this hasn't yet change the trend. Importantly, to me, we are not seeing a meaningful up tick in performance of rest of world stocks vs. the US

If we are seeing a trend change in the dollar, I would think this would be corroborated with a stronger narrative around the oppty in EM yet the stories of late are the fizzling of China growth or the risks still inherent in Taiwan

We have seen European stocks get off to a faster start than the US this year but the stories in the mkt taking us higher right now are more about AI & certain US names & less about the consumer, retail or travel names driving Europe higher

It feels like the next 2-4 weeks are going to be more about this US macro story and less about the inflation/Fed narrative or the better than expected earnings story. These can be frustrating times for equity investors

Best to ask if the trend is changing or if this is just noise in the bigger scheme of things. Best to ... Stay Vigilant

#markets #investing #dollar #stayvigilant

The new Stay Vigilant is out!

Would love to hear your thoughts as I discuss which narrative will win out - falling inflation or falling growth

Stay Vigilant

#markets #investing #stayvigilant