November 15, 2024
What You Need to Know Today:
Stocks and bonds are really expensive now
I understand why no one wants to get off the rally bus. Last week’s gains pushed the Standard & Poor’s 500’s total return for 2024 above 20% again. The index jumped 1.7% on Thursday, putting in its 39th record close of the year. Both stocks and Treasuries are headed for a fifth straight month of gains. But anyone expecting the S&P 500 to build on its year-to-date gain should consider that Wall Street’s own strategists already see the upside exhausted.
So much for that job market slowdown in May
Employers added 272,000 jobs in May, the Bureau of Labor Statistics reported this morning. That number was well above the 185,000n projected by economists and even higher above the 175,000 in the April report. The financial markets were disappointed with the news since it pushed out the schedule for an initial interest rate cut from the Federal Reserve.A cut a the July 31 Fed meting has now been priced out by the market. The Standard & Poor’s 500 fell 0.14% today and the NASDAQ Composite dropped 0.23%
Imagine that! In two days of speculative fever a lot of people lost a lot of money on GameStop–and a few made out like bandits.
GameStop (GME) stock fell as much as 17% in early trading Friday, June 7, after the video game retailer reported quarterly results that missed analyst estimates and announced a stock sale. The came just hours before a highly anticipated livestream from “Roaring Kitty,” an alias used in the past by bullish retail investor Keith Gill. Yesterday GameStock shares had soared 47% on Thursday after “Roaring Kitty” scheduled a YouTube livestream for noon ET on Friday.
And now they tell us: A day before the jobs report the BLS tells us that the employment numbers have been wrong
The Federal Reserve has been telling us over and over again that it’d decision on cutting interest rates depends on the data. Among other things, the Fed wants to see a steady slowdown in the employment market reflected in the data before it cuts interest rates. But what if the data have been wrong? For months? Today in its regular Quarterly Cent of Employment and Wages the Bureau of Labor Statistics raised just that possibility.
Special Report: Trade War! Trade War!! What stocks to sell; what positions to trim (first 4 sells including AAPL)
This Special Report; Trade War! Trade War! gives you my recommendations for what to sell, where to take profits, and where to trim as seen through the lens of a likely global trade war. Here are my choices with my first 3 sells
Slump in factory ISM raises question of how slow is too slow
Be careful what you wish for. Financial markets have been hoping to see signs of a slowing U.S. economy that would let the Federal Reserve begin to cut interest rates. But after the Institute for Supply Management’s (ISM) manufacturing gauge fell 0.5 point to 48.7 in May, the weakest in three months, in data released on Monday, investors have begun to worry if this much of a slowdown is a good thing.
Special Report: 10 Great Growth Stocks that Are Getting Greater–today my 8th pick BYD
GREATER Growth Stock Pick #8: BYD (BYDDF). I know; I know. What’s a Chinese stock doing on this list? It’s here because BYD, not Tesla (TSLA) is the big growth story in electric vehicles and not just for this month–but for years. And because I can see two catalysts that are about to power this stock higher. Morningstar calculates that BYD is 20% undervalued right now. Because this is a China stock we’ll need to take a deep look at valuation later in this post. But first, the growth story.
Live Market Report (20 minute delay)
When will the Treasury run out of money to pay U.S. obligations? Right now Wall Street’s thinking early June
Bloomberg pulled together this list of when big Wall Street names are expecting the Treasury to run out of money and for the U.S. to default on its obligations. Wall Street calls this the X-date.
The financial markets, especially the short-term Treasury market, will take a knock even if there is a debt ceiling deal that avoids a U.S. default
If or when there is a debt ceiling deal, the Treasury Department will need to go on a selling binge to replenish its cash supplies. Ari Bergmann, the founder of Pneso Advisors, told Bloomberg that he estimates the Treaury’s cash needs at more than $1 trillion by the end of the third quarter. The deluge of supply as the Treasury rushed to sell bills, notes, and bonds would, he warns, the supply burst would drain liquidity from the banking sector, raise short-term funding rates, and tighten the liquidity just as the U.S. economy is on the edge of recession. Bloomberg reports that Bank of America estimates the wave of supply from Treasury Department sales would have the same economic impact as a quarter-point interest-rate hike.
Another day of posturing on the debt ceiling crisis
Remember yesterday when both President Joe Biden and House Speaker Kevin McCarthy sounded so reassuringly optimistic that a deal would get struck on raising the debt ceiling before the U.S. defaulted on its obligations? Today, not so much as McCarthy’s negotiators walked out of talks with White House officials.
Watch My New YouTube Video: Quick Pick Alphabet
Today’s Quick Pick is Alphabet (Nasdaq: GOOG), better known as Google. Morningstar calculates Google is trading at a 24% discount right now. Recently, the 50-day moving average moved above the 200-day moving average, showing momentum in the stock. There’s a perception that the stock had been unfairly pounded by AI hysteria because people believed Google wasn’t keeping up with Microsoft and its search business would suffer. Google did, however, come out with its own chatbot products and maintained some relatively slow growth. While ad revenue was down about 1% in the first quarter, total revenue was up about 2.6% year over year. The slowdown in the economy as a whole gave the impression that Google’s ads were slipping. I mentioned in yesterday’s video, we’re seeing a lot of Hedge Fund managers adding to their Google positions in the first quarter. I own the stock in my long-term portfolio and will likely add to my position. In the next year or two the stock will likely make up the difference between the current price of 120 and the Morningstar fair value of 154. You could consider this a value play.
Please Watch My New YouTube Video: Value Over Growth
Today’s topic is Value Over Growth. Hedge funds reported their first-quarter portfolio changes to the SEC and we’re starting to see those reports. Hedge Funds are a good indication of where institutional money is going and what their thinking is. These reports show that hedge fund managers are starting to move to value over growth. There are outliers but hedge fund managers like Steve Cohen at Point72 and Nelson Peltz from Trian Management were exiting or cutting their growth stocks and adding to their positions in value stocks like Google (Alphabet NASDAQ: GOOGL) and GE (NYSE: GE). Paul Singer at Elliott Investment Management exited both of his high-yield ETFs and reduced his exposure to Valaris (NYSE: VAL) an ocean drilling company. I saw other managers starting to reduce their exposure to energy and drilling companies as well. Going into the second quarter, after taking profits from first-quarter rallies, the pattern looks like institutions will be looking more closely at stocks that haven’t had big run-ups and could be considered to be value stocks (Alphabet?) vs putting new money into growth stocks.
Special Report: My 5 Favorite Shorts for This Market–Short #4 Retail stocks using a Put Option on the XLY ETF (1 more Short Pick to come)
Investors and the market indexes remain convinced that the economy will dodge a recession, even if only narrowly. Retail companies, however, aren’t nearly so sure. In the last two days, both Home Depot (HD) and Target (TGT) have cut guidance for the quarter(s) ahead. Consumers, they say, are hesitant to take a trip down the aisle devoted t discretionary goods such as furniture and apparel. With the New York Federal Reserve reporting that consumers look increasingly stretched on their credit card balances, I don’t see that reluctance ending soon. So even if the economy as a whole dodges a recession, I think the shares of companies in the consumer discretionary sector are likely to report their own sector-specific recession or the next quarter or two.
Today Target echoes yesterday’s caution from Home Depot on consumer spending
Target (TGT) easily beat Wall Street earnings projections for the company’s fiscal first quarter with a report yesterday May 16 after the close with a report of $2.05 a share. Analysts were looking for $1.80 a share. Earnings were down, however, 6.2% year-over-year. But like Home Depot yesterday, Target warned that consumers are hesitant to make discretionary purchases.
Lithium Americas gets Interior Department go ahead for Thacker Pass, Nevada, lithium mine
One of the last remaining barriers to Lithium Americas’ (LAC) Thacker Pass lithium mine project in Nevada fell yesterday.
Retail sales grow in April–but not by as much as expected; Home Depot cuts guidance
U.S. retail sales increased in April by 0.4% from March levels. Retail sales figures for March were revised upwards to show a 0.7% decrease. Economists surveyed by Dow Jones had expected a 0.8% increase for the month. (I would note that retail sales numbers are not adjusted for inflation, so real, that is, inflation-adjusted, retail sales for April were essentially flat since the all-items Consumer Price Index rose 0.4% in April.) Still, the increase in nominal retail sales was the first in three months after the 0.7% drop in March and February. Today’s report does re-enforce one troubling trend in consumer spending.
Consumer credit showing signs of stress
The typical pattern is for households to run up credit card balances for holiday shopping and then for consumers to pay down credit card balances in the first quarter. That’s what happens in a healthy economy where consumers are living within their means and aren’t seeing family budgets stretched by high inflation. But that isn’t what happened in the first quarter of 2023. For the first time in 20 years, consumers added to their debt loads in the first quarter rather than paying down some of their fourth-quarter spending.
Special Report: My 5 Favorite Shorts for This Market–Short #3 Go Long Gold to short this market, of course, but gold miners or gold itself (2 more Short Picks to come)
Want to short this market and a world full of risk? The choice is gold, of course. And the only question is whether to use the precious metal itself or shares of a gold miner. Here’s the basic case for gold now. The trend is extremely positive for gold under almost all scenarios. Which is why I’m making gold my #3 Short Pick in my Special Report: My 5 Favorite Shorts for This Market
Watch My New YouTube Video: Trend of the Week Credit Squeeze
This week’s Trend of the Week is Credit Squeeze. SLOOS (Senior Loan Officer Opinion Survey), a Fed survey, asks bank lending officers what they’re seeing in the credit market for commercial industrial loans. In the most recent survey, 46% of these officers report that their banks are making it harder to get loans. This is a textbook example of Hyman Minsky’s credit cycle. After a period of booming lending, the credit cycle returns to a period of tightening credit, often coinciding with eye-opening events like the Silicon Valley Bank failure, and a slowing down of the economy overall. The SLOOS report also showed a 56% drop in demand for commercial loans in the first quarter–an indicator that companies are aware that loans are harder to come by. Companies are having real trouble raising capital which is resulting in merger and/or acquisition deals for early-stage companies and employee layoffs as CEOs and CFOs attempt to hoard cash. The signs are that the Fed is taking notice of this contraction in the credit market and is starting to factor it into rate hike decisions. The Fed may decide it doesn’t need as many interest rate increases as it originally thought if the supply of credit is shrinking quiickly.
Is China’s growth rate falling already?
Tuesday’s release of new economic data from China for April is expected to show rapid year-over-year growth as China’s economy recovers from its Covid-19 shutdown. For example, economists surveyed by Bloomberg expect industrial output to jumped 10.8% in April year-over-year. That would be much stronger than March’s 3.9% year-over-year growth rate. But the month-to-month growth rate is likely to show a much different picture. Economists at Goldman Sachs. for example, project that industrial production declined 1.3% in April from March
Saturday Night Quarterback says, For the week ahead expect…
If you believe in the gods of the financial marketplace, it looks like they’ve arranged things so that investors and traders have the maximum opportunity to worry about the dangers of a U.S. default.
I’m actually somewhat more optimistic today, Saturday, May 13, than I was on Friday that Congress will pass a debt ceiling bill before the United States goes into default.. The decision to postpone talks between President Joe Biden and congressional leaders scheduled for Friday to next week actually strikes me as good news. It’s a sign that the staffs of the two sides are talking in an attempt to brainstorm a solution. And staffers are more likely than the politician themselves to come up with a pragmatic, cynical, short-term solution. I think we’re still in for two or three weeks of on-the-brink news and market volatility, but I think the odds are good that a short-term solution will emerge before we’re too far into June.
The “solution” will amount to kicking the problem down the road
Bad news on consumer sentiment on inflation, recession
It’s only a survey of consumer sentiment so it’s not very important to the financial markets, right? Wrong. The University of Michigan survey of consumer sentiment for May illustrates perfectly the trap that the Federal Reserve is caught in right now.
The regional banking crisis isn’t over–it’s just getting more selective (maybe)
Shares of California regional bank PacWest (PACW) closed down another 22.7% today, May 11 after the bank disclosed it lost 9.5% of deposits last week. That took down many regional banking peers. For example, Zions Bancorporation (ZION) finished the day down 4.51% and Comerica (CMA) was lower by 6.76%. The SDPR S&P Regional Banking ETF (KRE) was down 2.48%.
But not all regional banks fell.
Watch My New YouTube Video: Quick Pick Albemarle
Today’s Quick Pick is Albemarle Corporation (NYSE: ALB), a lithium producer. Lithium demand continues to rise with electric vehicles and rechargeable batteries finding expanding and new markets. Lithium producers have had a difficult time meeting demand–and projections say the demand gap is going to expand– and the price of Lithium has shot up. However, Sociedad Quimica y Minera de Chile (NYSE: SQM), and Albemarle Corporation (NYSE: ALB), two Chilean lithium producers, took a hit recently due to political risks. Chile’s president, Gabriel Boric announced a plan on April 22 to nationalize the country’s lithium resources, sending the lithium stocks plunging. However, investors may have overlooked some key points in the announcement: the country will honor existing leases (SQM’s leases expire in 2030, and Albemarle’s leases expire in 2043) and this plan still has to be passed by the Chilean legislature. Recent votes have favored the right in Chile and Boric’s party may not have the votes (or inclination) in the current legislature to pass this proposal. A right-wing government would likely be unhappy with the idea of nationalizing a previously private sector. (Chile’s lithium resources already belong to the state with these companies holding time-limited production leases.) Right now, with Albemarle’s longer lease and changing Chilean politics, this is a good time to get in on Albemarle and its expanding lithium production from mines in Australia and the United States. (Only 30% of its revenue comes from Chile.)
The problem with Goldilocks (if you’re an investor or trader)
The Producer Price Index rose 0.25% in April from March and at a 2.3% rate year-over-year, the Bureau of Labor Statistics reported today, May 11. This index measures prices at the wholesale level–changes at that level eventually show up in the prices that consumers pay so they’re an indicator of the direction of future consumer inflation. Economists surveyed by Bloomberg had expected producer prices to rise 0.3% in April on a monthly basis and 2.5% on a yearly basis. In March, producer prices slipped 0.5% on a monthly basis and rose 2.7% on a yearly basis. The annual 2.5% rate is the lowest annual increase in producer inflation in more than two years. So in these numbers, we’ve got clear evidence that inflation is falling. But, also this morning, initial claims for unemployment for the week ending May 6 rose 22,000 to a seasonally adjusted 264,000 claims. That was above expectations from economists surveyed by Reuters for 245,000 initial claims for unemployment. The number of workers filing new claims for unemployment hit a 1-1/2-year high.
Please Watch My New YouTube Video: Lots of Volatility But It’s Not Tradeable
Today’s topic is Lots of Volatility – But It’s Not Tradeable. The market has not been responding as expected to recent events. On Friday, May 5, a combination of a chaotic market, a banking crisis, and job numbers that were much higher than expected, resulted in a completely unexpected market reaction. On previous behavior, these higher job numbers would have led to a conclusion that the Fed would continue to raise rates. Stocks would have tumbled. But Friday this time, we got a big rally in the news in the report. The market is vacillating between belief in a recession with banks failing, and belief in a strong job market where the Fed continues to raise rates. That’s created a scenario of wild swings, driven more, I’d argue, by where prices have been recently than by any trend in the news. You can see this in the VIX. The “fear index” rise as banks struggled but the jobs report said that it was alright to bid bank stocks (and the market in general) higher on the day even if the regional banking crisis is a long way from over. I’d prefer to trade volatility when “all” it requires is getting the direction of the news correct. Bu,t the current market requires getting both the trend in th news and the markrt’s reaction to that trend right in order to make a profit. That’s harder than I’d like and it seems prudent to wait for more predictable (and tradeable) volatility.
April CPI inflation report doesn’t settle anything about Fed rates or rate cuts
CPI inflation ticked lower in April with the all-items (headline) inflation rate nudging down to a year-over-year 4.9%. The core rate, which excludes food and energy prices, also slipped lower to a year-over-year 5.5% from a 5.6% rate in March. On a month-to-month basis all-items inflation rose by 0.4% in April from March after a 0.1% gain in March. The core rate rose 0.4% in April after rising 0.4% in March. If you were looking to have this morning’s inflation report settle the argument on when the Federal Reserve would pause its interest rate hikes, this report didn’t deliver. The most likely Fed reaction to this data would be a pause at the June 14 meeting that left the Fed’s benchmark short-term interest rate at the current 5% to 5.25% range. The CME Fed Watch Tool, which tracks prices in the Fed Funds Futures market, calculates that market participants believe that the Fed will hold rates steady at that meeting. Odds are 93.9% on the Fed Watch Tool in favor of no change in rates at the June 14 meeting. I can see the logic of that.
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