The Week in Review: April 18 – April 24

Uneven Return to Normal
Last week, we surpassed 200 million vaccine doses administered in the U.S. I will freely admit that I had my doubts that we would achieve 100 million doses in 100 days, as President Joe Biden had promised, even though we had 400 million doses of vaccines ordered. But Biden has announced that 200 million doses have been administered in only 92 days. That’s great news, and the prior administration should get some credit; however, so long as people continue to get vaccinated and the economy continues to reopen, that’s all that matters.

Europe seems to have stabilized from its earlier vaccine troubles. However, infection news from Asia is still disturbing, with India reporting 300,000 infections in one day last week.

Collectively, this news creates conflicting and uneven messaging. If this continues, it may impact our recovery and stall our economy, which could result in much angst and volatility in the markets.

Waiting for the Next Big Thing
Domestically, the market sputtered last week, as President Biden proposed hikes in the capital gains tax rate and Republicans offered a $568 billion counterproposal to the huge, $2 trillion infrastructure plan. I have written before about unforced policy errors that could impact the markets and the recovery. In my opinion, the Keystone XL pipeline shutdown was one such error, and the bungling of vaccinations (which thankfully hasn’t happened) would be another. Imposing higher taxes could also be problematic. Markets and investors simply do not like higher taxes, and the proposed tax hike will have negative implications for markets if it comes to fruition.

The overgrown infrastructure plan has met resistance as expected. Markets are convinced that the $2 trillion plan will move through Congress mostly unaltered, and this has been priced in, but this wouldn’t be the first time the market has gotten ahead of itself. I would keep an eye on this. If this unravels, we could have trouble.

Existing home sales for March disappointed, coming in at 6.01 million instead of the projected 6.19 million. (Still, the market continues to be red hot.) Lockdown darling Netflix took a hit, with subscriber growth slowing and cancellations picking up as people spend less time streaming and more time outside.

Canary in a Coal Mine?
Remember the song by The Police from 1980? “First to fall over when the atmosphere is less than perfect. Your sensibilities are shaken by the slightest defect.”

Every time we do a postmortem on why the market stumbles or goes into correction territory, we find the one or two glaring warnings of things to come. Please humor me as I discuss some potential “canaries in the coal mine” that may tell us markets are about to teach us yet another lesson.

Like the miners who carried canaries into the mines as an early warning against carbon dioxide and other toxic gases, I am confident there will be some market event(s) that should have told it was high time to cash in our winnings, rebalance or reposition for the rough patch that lay ahead. These would be events similar to the Bear Stearns collapse and sale for $2/share to J.P. Morgan in March 2008 or watching bubble poster child buying Super Bowl advertising. What will be the defining moment when we all collectively say, “Yup, should have seen that coming a mile away?” For your consideration, I offer not one but two possibilities: Dogecoin and the European Super League.

Dogecoin debuted last week and was briefly worth more than $50 billion. That’s more than Ford. You know, the company that makes the cars and trucks a large portion of America drives. You might even have one in the driveway. How much Dogecoin do you have jingling in your pocket? To be fair, I’m not a fan of cryptocurrencies as a substitute for real currencies run by government and central banks. If crypto moves in a significant way to become an alternative and infringe on actual state-run currencies, it will likely be crushed quickly. All you need to see is how the U.S. government outlawed holding gold during the Great Depression so it could manipulate the currency. Perhaps it might be fine not as currency but as an instrument of speculation?

The European Soccer League collapse is even easier to understand. In an insanely greedy undertaking, where money is made hand over fist (or in soccer’s case, hand over foot), some of the greediest decided to get greedier. The fans and players rebelled, forcing the venture to collapse.

Coming this Week

  • The Federal Reserve will meet Tuesday and Wednesday. No one is expecting any change to the Fed’s current stance.
  • First quarter GDP is expected on Thursday. Estimates range from a 6% to 8% annual rate, which would validate the data we’ve been seeing. Anything below that range should cause concern.
  • We will see more earnings this week. We’ll also get Consumer Confidence and Consumer Sentiment on Tuesday and Friday, respectively. And don’t overlook Personal Consumption Expenditure, which will be released Friday.
  • And of course, on Thursday we’ll get initial weekly unemployment claims, which dropped again last week from 586,000 to 547,000. That’s great news, and we need to continue on that path as the economy fires up.

Have a great week!

The Week in Review: April 11 – 17

Nice Start to Earnings Season Pushses Markets to New Highs

Markets continue to grind higher as the economy reopens, hospitalizations and deaths plummet, vaccinations become more widespread and unemployment claims drop. Simultaneously, economic data seems to keep getting stronger and earnings appear to be good. U.S. consumers used their stimulus checks to boost retail sales to their highest levels in almost a year.

What can go wrong, you ask? I think the better question is: What can go right? Recently we’ve had easy money from the Federal Reserve, a government unencumbered by the burdens of fiscal discipline, an economy that will finally reopen, solid and improving data, etc. Somehow, to me, all this feels ephemeral, like we’re about to wake up from a very pleasant dream only to find ourselves in a mess. I have preached before that unprecedented borrowing and spending by the government, plus an over-accommodating, weakened Fed and the potential of increased taxes, does not appear as a recipe for success. However, I’ve been surprised by how markets have shrugged off concerns and continued their upward march.

I am confident about one thing: When the market decides to care (and it certainly will), its move will be violent and swift. You need only to look back at last year when the market didn’t care about coronavirus and focused solely on the China trade deal. Seemingly overnight, the market got nervous about the virus’s impact on global supply chains and it only took a month for it all to come crashing down.

Speaking of China, their first quarter 2021 GDP growth came in at 18.3% compared to a year earlier. They also saw retail sales increase by 34.2% in March, so it appears they’ve shaken off any coronavirus-related economic hangover. It seems that China is back on track on its mission to become the world’s No. 1 economy.

Home Sweet Home

Be it a humble shack or a sprawling mansion, there’s no place like home. Housing has boomed since the onset of the pandemic. People wanted out of crowded, locked down cities and away from crime and riots. But while suburbia seemed idyllic, there was a problem: the lack of available housing, both new and existing. Just like with everything else, demand surged and supply dried up. Cost of building materials shot through the roof (pardon the pun).

In my opinion, people are getting desperate and making some unorthodox buying decisions, such as foregoing inspections or buying homes virtually. U.S. home prices grew 11.2% year over year in January 2021, and there doesn’t seem to be an end in sight. I urge buyers toward caution; I have seen this before and – despite all the reasons why it’s different this time – the result will be the same. Greed and oversupply will take over and at some point, people will not continue to pay ever-increasing prices.

Vaccines, Infrastructure and Inflation

OK, there’s not really any logical connection between these three things, but I wanted to cover them just the same.

First up: The Johnson & Johnson vaccine. Distribution was halted because a few (six) of the recipients developed rare blood clots and one person died. The market didn’t even flinch at the halt, and that’s the beauty of having multiple vaccines available (unlike Europe, which bet the house on the AstraZeneca vaccine). I don’t think a delay as Johnson & Johnson reviews and tweaks its vaccine for safety will have a material impact on our reopening. The economy is opening back up and Johnson & Johnson’s stumble will be a non-event to the broader market.

Second, everyone wants infrastructure – until you start defining what it really is and isn’t. Right now, the Biden administration needs to do some selling to get more people on board in my opinion. Individual parts of the bill have found broad support, but other parts leave people confused and frustrated.

Finally, inflation. The March inflation number came in at 2.6% year over year, largely on the back of gas prices, which were up 9.1%. The national average for regular unleaded (I almost feel like that’s a cuss phrase – “regular unleaded!”) is closing in on $3/gallon. Add the surge in retail sales mentioned above and housing costs exploding, and it’s hard for me to buy into the “inflation is under control” argument. As I said before, things are good at the moment, but it’s really hard to see what else can go right to move us upward from here. The market can – and will – find ways to prove us wrong.

Coming this Week:

  • After really strong earnings from banks this past week, we can expect more strength given the overall weak levels year over year from the pandemic. This week we will see earnings from the likes of vaccine providers Johnson & Johnson and Pfizer, as well as lockdown darling Netflix and Bank of America Corp.
  • We need to see initial unemployment claims continue to drop. Last week’s showing of 576,000 was the lowest since the early days of the pandemic.
    Mortgage applications plus existing and new home sales will be released in the latter half of the week. The data will highlight the health of the housing market.
  • We’ll see leading indicators and the PMI composite on Thursday and Friday, giving us a glimpse into inflationary pressures.

Have a great week!

The Week in Review: April 4 – 10

Blowout jobs number on Good Friday lights the fuse
Despite markets being closed on April 2 in celebration of Good Friday, we still got the Bureau of Labor Statistics (BLS) employment situation for March 2021. Expectations for the “jobs report” were for +675,000 new jobs in March, which would have been impressive on its own accord. However, the actual number came in well past that at 916,000 The unemployment rate also dropped from 6.2% to 6.0%, which is really good news!

Markets went off on Monday after waiting out the long Easter weekend. The S&P 500 set new records, which in my view is always better than the Dow given its broader representative nature. I doubt it was the stimulus that caused this explosion to nearly 4,100 on the S&P 500. A little over a year ago, I remember having conversations with people who thought the S&P 500 would drop below 2,000. (It bottomed out at 2,237.40 on March 23, 2020.) My thinking is that the market feels the Federal Reserve will continue to keep rates low for as long as it can to get unemployment back to pre-pandemic levels.

There has been a lot of talk about the stimulus, but that bill’s impact is not likely even close to being felt and isn’t influencing hiring. In my opinion, the real reason for the stellar employment number is the continued reopening of America thanks to vaccinations. Nearly one-third of Americans have been vaccinated, states are lifting restrictions, deaths from infections are way down, spring has sprung and consumers are confident. That’s my take on why jobs are growing. Businesses are cranking up and markets love all that easy credit out there.

The challenge now is not to flood the engine. Too much liquidity could be bad, and the markets may sense that already. For now, everything seems to be in balance. However, when Federal Reserve Chairman Jerome Powell Fed won’t raise rates until at least 2023 while others say we may see a hike next year, the odds of a policy misstep grow when money starts flying around. One indicator suggests the market could be overheating. Recent data from Wall Street’s self-regulatory arm, the Financial Industry Regulatory Authority (FINRA), showed that investors borrowed record sums of money to buy stocks. Run-ups in margin debt can contribute to bubbles and subsequent declines could amplify losses, as last week’s Archegos saga demonstrated.

California Dreamin’
Great news from California! (No, seriously, I mean it this time.) It appears that the state is trying to reopen fully by mid-June. That’s only two months from now and comes after over a year of lockdowns, much economic pain and the likely recall election of Governor Gavin Newsom. It is indeed a powerful testament to the vaccine distribution efforts being made at the state level. The distribution got off to a rocky start in December and January, but momentum has been building since the vaccines began arriving in late January. Without the vaccines, talk of full reopening would likely not be possible.

History will judge whether California, New York, Florida or Texas were successful in their approaches to dealing with the pandemic. But this announcement from California is huge and could be one of the final hurdles to fully reopening our economy and moving forward.

Have I got a great deal for you!
Treasury Secretary Janet Yellen began floating the idea last week that other countries should raise their corporate rates, just as the Biden administration is proposing to raise U.S. corporate tax rates from 21% to as much as 28%. It sounds noble and magnanimous on the surface, but in reality, it would likely be a self-started dumpster fire. In my opinion, it’s the kind of policy mistake on par with forgetting to put the oil plug back on before adding new oil to your car.

From my point of view, a proposal like this, if enacted, is the surest way to blow up our economy. At 21%, we are just below the average for developed countries, which is 21.5%. But at 28%, only three developed European countries would be higher — Portugal, Germany and France. Lower corporate taxes attract corporations, so jobs flow from higher-taxed countries to lower ones. That’s the core fixature of globalization. Now we want countries to “volunteer” to become less competitive? Two words come to mind here: “Bad idea.”

The proposal is confusing and illogical to me. I thought the current administration was pro-globalization and against the “America First” agenda of the prior administration. My concern is that this will disadvantage us competitively, and other countries will cheat and hurt our economy to benefit their own.

Coming this week
CPI will shed light today on whether we see inflationary signs yet.
The Housing Market Index and Housing Starts and Permits will be released on Thursday and Friday, respectively.
Consumer Sentiment should be a bright spot on Friday.
This week’s other major drivers will include the discussion surrounding the infrastructure bill and the tax bill proposals intended to pay for the infrastructure bill.

Have a great week!

The Week in Review: March 28 – April 3

Another Multi-trillion Dollar Deal?
President Joe Biden announced his new infrastructure plan last week, which is expected to clock in at $2.25 trillion. The proposal is on the heels of last month’s $1.9 trillion stimulus package. In his first 2+ months of presidency, Joe Biden is proposing spending nearly $4 trillion. Think about that for a second: $4 trillion!

My very earnest hope is that this money ends up making our roads, bridges, airports, seaports and rail depots safer, better and more competitive. But my realistic self tells me that this bill – just like the stimulus plan – will likely be a misguided hodgepodge of extraneous funding for pet projects and political favorites.

I’m not saying the country doesn’t need infrastructure spending; one short road trip confirms our roads and bridges are a mess. My question: I already see construction everywhere on our highways, so what additional projects do they need? Airports are dated, sloppy and shabby, but I always see construction when I’m in an airport, so what else? I keep going back to our debt level and the potential for that debt to slow down future economic growth. If the money is spent wisely, it would be an investment for the future of our country. But if it isn’t, we are simply rearranging the deck chairs on the Titanic.
About 65% of our country’s infrastructure is privately owned, with 30% owned by states. That leaves just 5% owned by the federal government. Where, exactly, is all this money going to go? Private firms? No, they use the capital markets. States? No again, they use their own tax-gathering options, like sales and real estate taxes. Will we build the Hoover Dam higher, or will this be just another way to spread money to pet projects?

The other shoe to drop pretty soon (and this is one ugly pair of shoes, in my opinion) is the discussion of taxes to pay for all the debt. Capital gains, higher corporate tax rates and higher taxes on individuals will negatively impact the market and economy. We need to see how this all plays out; sometimes, the best option is to leave things be, see how they go and inject aid judiciously. Hyper liquidity, limited supplies, high levels of debt, increased taxes and an economy that is set to reopen fully may be too severe a shock and potentially lead to much higher inflation. This could be a toxic brew unlike anything I have seen in my entire time in the investment business. Forewarned is forearmed.

More Hedge Fund Drama falls on Deaf Ears while the 10-year tells us Time might be running out
Last week we found out there was a huge margin call on positions held by Archegos Capital, creating a scramble on the part of large banks worldwide to cover them as Archegos was forced to sell.

Archegos held large and leveraged bets in U.S. media stocks ViacomCBS and Discovery and a few Chinese internet ADRs such as Baidu, Tencent and Vipshop. Some of the positions were held via total return swaps, a type of derivative that allows investors to take big, leveraged stakes without disclosing those positions publicly. In other words, they were a secret.

These bets started to go south after ViacomCBS’ $3 billion stock offering through Morgan Stanley and JPMorgan fell apart. It triggered a domino effect where prime brokers rushed to exit the positions on Archegos’ behalf and resulted in a massive margin call, where brokerages demand that an investor deposit additional money or securities into the account when a position falls sharply in value. Brokerages usually sell the securities in block trades, often at a discount to the current share price, in an attempt to recover losses.

Billions were lost as shares were shed. However, the markets didn’t seem to notice as the S&P 500 rose over 4,000 for the first time. That’s alarming! Nomura and Credit Swiss lost nearly $9 billion. This may be an anomaly, but it could also be a wake-up call. After the GameStop nonsense, we may be seeing a disregard for risk – and that seldom ends well.

Nothing like clear Sinai to get the global economy to breathe easierOK, it was a bad pun, but the unblocking of the Suez Canal was important and needed to be done quickly. The obstruction of the canal – a major artery for goods and raw materials (especially oil) from the Middle East and Asia to Europe – for a prolonged period would have been devastating to a region already struggling and falling behind as a result of the coronavirus. The good news is the Ever Given was dislodged and commerce has reopened. However, the incident highlighted the fragility of global supply chains and the need for better infrastructure. (It all comes back to the same things, doesn’t it?)

Coming this Week:
  • The market is back to work after the long Easter weekend. Data will be sparse this week. The biggest scheduled news is the release of the minutes from the last meeting of the Federal Reserve’s Federal Open Market Committee (FOMC). Any insights into the mindset of Federal Reserve members will be of interest, and the minutes will be examined closely to see just how united they may be on the Fed’s current stance on rates.
  • Last Friday, the March employment situation blew past expectations; consensus called for an increase of 625,000 jobs, and the actual number was 916,000.Expectations are that initial weekly claims will continue to fall. We’ll see if that encouraging trend continues on Thursday.

Have a great week!