Market Analysis

Straight Talk #3

Another week another Fed save as Jay Powell’s 60 minute interview aborted the market weakness from the week before resuming in a weekly market gap up which was further fueled by yet another conveniently timed false hope vaccine headline. Markets remain a Fed chase operation as the Fed’s balance sheet has now exceeded $7 trillion, an 87% increase since the summer interim lows of 2019.

Yet markets, the Nasdaq tech monolith aside, have yet again rejected at the previous technical resistance zone as the larger market has so far failed to reach the April highs. Reality is markets have played a range ping pong for the better part of the last month making little progress but seeing valuations again reach the higher end of the range at 140% market cap to GDP as now close to 39M people have lost their jobs in the past 2 months while American billionaires have gained $430B in wealth in the same time frame.

Not only do the technical divergences keep mounting the wealth inequality curve keeps exploding to ever more extremes.

When will any of this matter? To some it won’t and it doesn’t matter, as retail in particular keeps chasing the free money liquidity equation into a highly priced market with a 23 forward multiple while for others the risks keep mounting and the sustainability of the rally remains highly questionable.

Two old market adages come to mind: Markets can remain irrational for longer than one can remain solvent (trying to fade it) and don’t fight the Fed. All these things were said in January and February 2020 right before the crash as well, yet had little predictive meaning about the future.

So the battle for control continues and investors have to weigh the risk/reward between chasing a hight valued market in face of a still disastrous global economic backdrop.

Yes, the economy and growth will bounce back, but to what level? Already companies are announcing layoff by the thousands seemingly every day. The latest being IBM, Nissan, Roll Royce, even the Trump resort in Miami, and of course bankruptcies are starting to dominate the headlines, Friday’s announcement of Hertz filing for bankruptcy being the latest example and surely not the last.

There is no V shape. High unemployment will remain with this economy for a long time no matter how much the Fed prints. No earnings growth in 2019, a very possible -20% earnings decline for aggregate 2020 and yes, a bounce from a lower base of earnings in 2021, but soon you are looking at an aggregate of 3 years with no earnings growth and suddenly are looking at an economy $30 trillion in debt, a Fed with a balance sheet of $10 trillion dollars with no vision or hope of ever raising rates again with unemployment still north of 10%.

And that’s the rationale for paying a 23 forward multiple on markets at 140% market cap to GDP, a figure that is likely to rise even if markets would remain at currently levels as GDP is declining.

Not an attractive investment environment, but people feel the need, the need for Fed speed.

Markets remain oblivious to risk as the equity put/call ratio is back to the lows of February before the crisis hit right at a time when markets are repeating a historic technical script entirely consistent with the 2000 and 2008 bear markets and right at a time when the political rhetoric between China and the US is increasing during a highly contentious political election year.

And for Wall Street the outcome of this election may have consequences. The presumed Democratic nominee Joe Biden is talking about repealing the recent corporate tax cut, raising taxes for Americans earning more than $400,000 per year and for Amazon to pay its taxes.

Not to mention companies already streamlining their operations and work at home or offsite looking to extend well into 2021 for many companies.
Not to mention a shift in supply chains and changing consumer behaviors.

All changes with potential profound impacts not only on the long term employment picture but also on commercial real estate, the culture all unfolding as states and countries are working to reopen their economies in not an uniformly aligned matter, but rather with different approaches and attitudes. All assumptions will be put to the test in the months to come.

We are discussing a lot of these things in depth in our third extended Memorial Weekend edition of Straight Talk including answering some of the questions you have sent to us.

Please join Guy Adami, Dan Nathan and I for the latest episode of Straight Talk:

Note: Following the recording of this Zoom session we noted some Zoom audio issues for Dan and I while Guy’s audio is just fine. We apologize for any distractions and we’ll make sure the next episode won’t have these issues.

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22 replies »

  1. Great stuff guys. I hard to believe the US market is now a ‘managed’ market. When China ‘manages’ their markets, we call it Communism/Fascism. When the US does it, it’s called “providing market stability”. This whole thing is a house of cards, just waiting for a destructive wind. Hyperinflation is inevitable.

  2. Super Podcast gentlemen! A question though – with the central banks continued goosing of their respective economies, isn’t the only way back to “normalcy” is a complete reset, or as markets are concerned, a recession or maybe depression? It seems that is the direction we are headed.

    My point is that the Fed started with an ‘experiment” back on 2008-2009 (or that’s what I remember being told, “it’s an experiment into uncharted waters”), but the experiment, while appearing to work at first, actually created a monster that has become so big over the years that it has to be fed or killed. Killing it may “refresh” the system. Like what Guy said, forest fires are horrific, but they are needed to get rid of the non productive foliage (dead sage, trees, and other dead plant life), so new growth can renew the environment. I understand what you say that people don’t want the pain, but pain is no longer an option, There will be pain (it’s started already, just talk to the unemployed). The monster has become a mountain of debt that will eat the world economy – unless it is either paid down through increased taxes or other policy measures. Negative interest rates is a nonstarter, but they may be tried in the US.

    I think one of the goals of your gentlemen’s podcasts is to start noodling around ideas for potential ideas of solving this dilemma. Maybe not, but it would be a great platform to start! Guy says the central banks can’t stop. Everything is to intertwined and catastrophe will follow. I agree, but central banks may not have any choice but to slow down or even stop. With so much liquidity and valuations so high, a crash will come (or it has started) and at some point, the grown-ups in the room will have to come up with another idea than simply throwing money at the problem. At that point, different ideas will have to be taken into consideration, Raising taxes on only the rich? Partial write-down of debt on the Fed’s balance sheet? A little of both? The answer will either come through leadership and ingenuity, or violently whether through massive decimation of markets that the central banks cannot save or simply anarchy.

    Ok, I’ll get off my soapbox now, but hopefully anyone that reads this will start thinking about solutions for the betterment of all as opposed to the few.

  3. Sven needs new glasses or perhaps he’s just delusional in his own words! “Yet markets, the Nasdaq tech monolith aside, have yet again rejected at the previous technical resistance zone as the larger market has so far failed to reach the April highs”.

    W-H-A-T?!

    S&P had a April high of 2,954.86 on 04/29. Fast forward to now near end of May, S&P just touched 2,980.29 on 05/20!

    So explain to the listening audience Sven, how on earth has the market failed to “reach the April highs”? Get your facts straight first should you wish to earn more subscribers on this ho-hum channel of yours….

  4. Looks like the fed would like to see the SP500 go up to 3000, 3050, 3110, 3150, 3080, and perhaps even higher before elections in November 2020, yet not sure why exactly (optics are horrific) but does it matter? With Biden leading by 11 points, it will be a great time to sell in October. Note that Biden just stated to CNBC last week that he wants the business tax back up to 28%, he wants wealthy to pay ordinary income taxes on capital gains (so 20% to 37% tax rate change), he want to basically punish the Wall Street, and he said he would do it immediately without regard to where the recession stands. So I suspect it could all falls apart by Fall of 2020, once it becomes obvious that Biden is going to beat President Tweety. Not sure how I feel about that as President Tweety gave me a huge tax break, although President Biden might give me early retimement with all the free stuff MMT stuff that is promised…hmmm

    On a side note, I completely understand why people and business owners who lost everything are opening trading accounts to gamble on Wall Street. As at this point, the markets seem to be the only game in town as running a small business or working as a wage slave seems idiotic compared to 10% annual market gains. I feel stupid owning my own company right now, and plan to liquidate over the next few years as being a productive business owner is a lot of stress and work, and owning assets that magically move up 10% a year seems like early retirement to me. I bet I am not the only one thinking about being a lot less productive and just playing the rigged market system instead. Goverment has your back once you become a top 1% asset owner. As the top 1% live off stocks, the bottom 99% debt/wage slaves are forced to do the actual work in order to eat, have shelter, and some trivial healthcare if they can stay employed long enough. Remember, some things are more important to living, so get back to work 99ers as the top 1% demands it! Best to move into the top 1% and do nothing productive, as the fed protects the top 1% at all costs.

  5. Sven,

    Any chance you could discuss the money flow into the markets next pod cast? For example, “someone” is moving the markets up consistently during future hours, is this a wink, wink between Blackrock and the Fed’s unlimited money printing to stabilize stocks without the Fed “directly” buying stock ETFs? With company buybacks at the 50% levels, “someone” is filling in a huge void. I would have guessed that retail who were down 35% at one point would be selling at near break evens, and I find it suspect that $1000 Robinhood accounts are moving the market up trillions. The math doesn’t seem to work. Most likely Sweden and South Korea are buying billions of global stocks, moving up American markets as you can basically overlay all the global market indexes and they match, no matter how each economy is fairing. Is this a verbal agreement between our fed and other central banks? Why is it so difficult to track who or what is buying the futures? Data already exists on how Americans are spending their $1,200 government checks, to the point of knowing that the 3rd most popular option is putting it into the markets. Technicals are good to a point, yet anyone who figures out the money flow into the market will know when this current rally ends…if ever. Having Goldman and Bank of America change from “Sell Everything” to “Buy Everything” last month seems suspect that they “know” something the rest of us do not, that “somehow” the goverments of the world are stabilizing markets. Question is when do they stop as at some point it will cause the 90% who own a few crumbs at best to revolt. SP 500 at 3400, 3800, 4000? If I was the fed, I’d be more worried about SP500 at 4000 end of year than back to 2400, and I suspect they are already worried that they moved the markets back up too quickly, as now they need to keep it stable by November 2020 to keep from looking too political. Good luck with controlling the animal spirits, or shall we call it animal desperation as the stock market remains the only guaranteed game in town to survive what is coming. Be it either continued Wall Street MMT or enhanced future Main Street MMT, there can be only one…and we shall find out which one wins by November 2020. IMHO, each tick up in the markets by November 2020 in the fantasy world, while Main Street suffering increases daily in the real world, increases the odd of the populace choosing Main Street MMT by painting the House, Senate, and Executive branch blue, which would be the absolute worst case scenario for Wall Street. Note that 95% of voters do NOT have a seven figure trading account producing six figures of “income” a year taxed at only 20%, and they will not find SP500 at 4000 very amusing as they struggle to survive…

  6. Loved the 3rd episode: But why doesn’t someone address that the FED is actually buying equities. Put another way if they were actively buying equity ETF’s and chose not to divulge it due to the potential backlash….would the market know or for that matter investors know?

  7. Does fundamentals and macro really matter when all central banks are pumping money into buying bonds and junk bonds? I don’t know why all you three were discussing what should happen and how things are unrealistic. Who are we to say its unrealistic. As long as fiat money can be printed and it can be put to work, don’t fight the wave..we all need to learn to surf whether its a 20 foot wave or 2 foot wave.

  8. Sven,

    Enjoy your career, with a fed centrally planned market, why would there be any need for market analysis of any type? Why would anyone pay for any analysis? If the market only goes up, and can only go down by 20% for a couple of weeks at best, there is no need for anyone but HF AI computers on Wall Street.

    That said, why would anyone send their kids to college? Why not just give your kids $1 million each, and they will have a fed guaranteed income of $75,000 to $125,000 per year until the end of time. Why waste 4-10 years of precious youth, then become a wage slave to corporate America, when a Magic Money Tree call “The Markets” is ripe for anyone who eats its forbidden fruit?

    Sure it could all end, but it could take decades or even generations as revolutions do not occur overnight. There is no right or wrong, just “IS”. And so IS it possible that we all need to re-adjust our lifestyle, logic, and morals to fit the reality of a monetary GOD who controls our universal reality?

    Look Sven, with the futures on the Russell up 2% at this moment, a triple long RUT $1,000,000 fund would be up $60,000 just over this weekend. So make an entire family’s income over the holiday weekend by worshiping our omnipotent monetary GOD, YES PLEASE! Why would you send your kids to college to make $75,000 a year, taxed at ordinary income of 36% (24% fed plus 12.4% SS/Med) vs 15% capital gains tax rate via “The Market”? Do you want your kids to be “ordinary” taxed wage and college debt slaves forever? As a reminder, I can send you a “What Would Jeremy Do” bracelet, as he is our lord and savior now. And as with any religion, you should never attempt to overthink or moralize what is being preached, simply have faith or you could end up in “financial hell”…

  9. Hard though it may be, we bears must accept that the market is determined to barrel on higher. There is no real rationale for this and plenty of fundmentals that contradict, but it IS going up so play accordingly.

    Sooner or later there will be an accounting, it could be days, weeks or months away; odds are: the later, the more violent (but it’s already set up to be fairly epic). Meanwhile it is unwise to bet that markets will go down.

  10. Bulls won the battle but President Tweety is doing his best to crash the markets and lose the war. China news conference annouced for Friday = 1% drop in markets in 20 minutes! Wonder if Tweety shorted before announcing negative news today? It’s a bird, it’s a plane, no it’s President Tweety!!!

  11. Powell Says Fed Policies ‘Absolutely’ Don’t Add to Inequality

    https://www.bloomberg.com/news/articles/2020-05-29/powell-says-fed-policies-absolutely-don-t-add-to-inequality?srnd=premium

    If I posted a screen pic of how much I made today in about 20 minutes when it became obvious that the trade deal was still intact after the President’s live announcements, the middle class would revolt as Powell policies are creating inequality via the stock markets on a daily basis. Best that the middle class does not understand that those with huge trading accounts and other financial assets can make their entire year’s salary in 20 minutes or less! I feel kind of guilty to be honest.

  12. Sven – I know politics and markets do not always mix well, yet you discuss how the markets might react to a blue sweep in the Senate, House, and Executive branch come November? How far will earnings drop, 20% at least if tax rates go back to 28%, correct? Will we have a financial transaction tax, which will throw the HF traders and algos for a loop. Will capital gains taxes increase? Will like kind exchanges go away? Will basis step up be eliminated? Top 1% are in for a nasty surprise if November if the Forbes recent polling is any indication of what happens in 5 short months:

    https://www.forbes.com/sites/andrewsolender/2020/05/31/bidens-lead-over-trump-grows-by-8-points-since-march-poll-finds/#707ab1323260

    Note that 65% approve of mail in ballots. I know there are more important things than living, yet how many old people are going to go vote IF the current president gets his wish and does not allow mail voting? And seeing that a majoriy of elderly are conservative, not sure how this helps the current President as the young have a 1000% less chance of dying than an 80 year old due to coronavirus. At this point, the election is a bigger market black swan than the virus, yet very few research articles about such a high probability event.

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