Don't be a hero
Seasonality and uncertainties are lurking.
Was Jeff Bezos a hero with his accomplishment this week? I mean, he risked his life, didn’t he? I canvassed family, friends and colleagues about this very question. Surprisingly, to me, about 80% said no—“publicity stunt,” “bored billionaire,” “Branson already did it,” “he owns the Washington Post,” “I was more interested in the shape of the spacecraft,” etc. How about Neil Armstrong? 100% replied, “Yes!” Meanwhile, back here on terra firma, “It’s wet underfoot,” Cornerstone Macro says. This caught my eye, what with my new obsession—expanding my 2020 deck Shangri-La project into our backyard. A forest with a gulch (discovered that the hard way), moss-covered plants, stones and trees throughout. I shall fence it in and create pathways lined with branches, stones and “plant furniture.’’ Cornerstone notes copper has been soggy for weeks. Interest rates, small-cap stocks, grains, banks, gold and silver, too. Lumber is all wet, as is oil. Bitcoin is drenched. It sees April 5’s 4,020 on the S&P 500 as support as the market enters typically tough late-summer seasonality amid uncertainty on which way inflation, growth, Covid and bond yields may go.
Don’t be a hero. I read this from three different sources in the space of an hour on Monday. Valuations are rich by historical standards, and the VIX and put/call ratios signal complacency—worrisome given individual investors are expecting a real return near 13% this year, according to Natixis. Empirical Research attributes about two-thirds of the market’s return over the last 12 months to flows, a much higher share than normal, fed by passive and algorithmic strategies (target-date funds, robo-advisors, etc.). S&P earnings and economic fundamentals remain strong but off the boil. Q2’s estimated 77% increase in earnings-per-share should moderate to a respective 26% and 18% the next two quarters, Goldman Sachs says. This week’s disappointments on jobless claims, housing permits and Markit’s first take on July manufacturing and services (more below) further fanned “peak growth” fears. Churn in the market, with headline gains masking weaker internals, argues for near-term caution, although cyclical value looks oversold and attractive on a longer-term basis, especially if long yields have put in their lows. The VIX fear gauge hit 25 during Monday’s sell-off before retail investors once again bought the dip. A break above 27 could be a sign that equities are entering the “tails” of the risk curve, where downward moves can be self-reinforcing. Renaissance Macro figures a 10% correction is unlikely, but a 5% drawdown is possible/probable in the weeks ahead given the weakness of high versus low beta. Meanwhile, we can chew on the S&P at a new high as I write.
With almost all western governments and central banks printing money ad nauseam “to stop financial markets from imploding, … the system arguably becomes more, not less, fragile,” Gavekal Research says. An analogy might be passengers who crowd on one side of a boat, feeling safety in numbers. When things start to go bad, they can go bad fast. With inflation running hot, a lot of the liquidity being created by all the ultra-dovishness is being siphoned off into the real economy, leaving less to fund financial assets. A Fed hyper-focused on keeping asset prices inflated has pushed household net worth as a percentage of disposable income to 765%, versus 650% before the housing bubble burst and 615% ahead of the dot-com implosion. Hmm. Wolfe Research thinks this will keep supporting consumer confidence … until the MMT bubble bursts! A problem for another day. Underlying economic fundamentals, even if they’re decelerating, look supportive into 2022. My survey responses were indeed spirited and absolutely not along party lines. But one of the more even-tempered in the group looked up the definition of hero: “A person who is admired or idolized for courage, outstanding achievements or noble qualities.” You know, back in the ’80s, the great Tina Turner insisted, “We don’t need another hero.” She was also wrong in suggesting, “What’s love got to do with it?” IMO.
- A better second half for housing Bottlenecks are easing, with lumber prices normalizing, 30-year mortgage rates potentially flirting again with 3% and inventories on the rise—June existing sales increased for the first time in five months as a modest increase in supply brought in new buyers. June starts also climbed above consensus and were up 29% year-over-year. The median home price hit a new high and permits slipped, though they’re still nearly 20% above year-ago levels.
- Delta! Delta! Delta! Headlines remind how many got it wrong a year ago when markets waffled after their initial Covid rally. As a fun exercise, Strategas Research revisited early July 2010 headlines when the market began to bottom from its first meaningful correction post-financial crisis and couldn’t find a positive story in sight. The S&P went on to return 15% that year.
- This is how tax cuts pay for themselves With Q1’s muscular economy pumping out higher profits, U.S. corporations paid $91.5 billion in income taxes, the most since Q4 2014, three years before the Trump tax cuts. Because of more robust growth, the Congressional Budget Office said it expects deficits to plummet to $789 billion in fiscal 2023 from an estimated $3 trillion in the current fiscal year. (These estimates don’t include nearly $5 trillion in new spending being sought by the Dems.)
- Second-derivative anxieties A slowdown in services activity caused July's preliminary Markit Composite Index to dip to a 4-month low, and in the latest week, initial jobless claims jumped to a 4-week high. Both added to growth concerns as the Delta variant rapidly spreads and supply shortages remain stubborn. However, seasonal and other statistical distortions appeared to be factors in the rise in claims, which were concentrated in auto-making states where chip shortages are disrupting production. Continuing benefits fell to a 16-month low.
- Rents, the latest inflation worry After plummeting during the pandemic, rents are soaring, climbing at a 6.6% pace in May, according to market monitor CoreLogic. Rents have an enormous 40% weight in the core CPI and almost 20% in the core PCE.
- What does the bond market know that we don’t? After rising to levels consistent with the Fed’s core PCE target in May and June, the 5-year/5-year forward TIPS breakeven inflation rate has been declining, dipping to a low of 2.12% during Monday’s bond rally—nearly two-tenths of of a point below the lower bound of the Fed’s target range.
Legit Delta worries Deutsche Bank says an estimated 92% of adults in England have Covid-19 antibodies, either from vaccines or infections. With social gathering limits now completely lifted, the next few weeks should tell us a lot about how the global response to the pandemic may evolve. If England struggles, we’re in for a long winter. But if cases plateau and hospitals aren’t overwhelmed, the developed world may move on quicker than the Delta-focused market currently expects.
On his own dime The space shuttles stopped flying 10 years ago, and NASA spent the next 10 on the Space Launch System that will take astronauts to the moon again once it’s done. It’s running five years late and billions over budget, with a rocket that costs $2 billion to launch and can’t be reused. Blue Origin is self-funded by Bezos, with reusable rockets and spacecraft.
Try these if happy hour discussions turn to rocket ships and astronauts Bank of America shares that space tourism rocket launches emit 100 times more carbon dioxide per passenger than flights; the Hubble telescope uses approximately the same amount of energy as a hair dryer; and there are more astronauts in the world than master fragrance perfumers.