The chart below compares the spread (yield difference with treasuries) of the Merrill Lynch High-Yield Master Index to the S&P 500. The vertical axis for the Merrill Lynch spread is reversed to show falling spreads as rising (a positive). High-yield spreads and stock prices tend to move in lock-step, but tops and bottoms in spreads tend to lead tops and bottoms in stocks. The recent rally in the S&P 500 has not been confirmed by the performance in high-yield bonds. High yield bonds hit a lower low in September and their rally has now only brought spreads back to the level … [Read more...]
A Day of Reckoning is Coming
Sorry to be dramatic, but it is true. There is a huge disconnect between what the Federal Reserve is saying it is going to do with short-term interest rates and what the bond market has priced in. The chart below from Bloomberg compares the path of interest rates based on Fed funds futures contracts and the median estimate of rates from the Fed’s policy setting committee. Based on the Fed’s latest projections, short-term interest rates are expected to be at 1.375% by the end of next year and 2.625% by the end of 2017. Sixteen out of the 17 FOMC participants project interest rates of … [Read more...]
Biggest Stock Market Rally in Almost Four Years
The S&P capped its biggest 8-day percentage gain in almost four years yesterday—rising more than 7%. The catalyst for yesterday’s gains was the minutes of the latest Federal Reserve meeting. Investors decided the meeting minutes were dovish (they weren’t, they were neutral at best) and bid up shares in a fast and furious late day rally. … [Read more...]
Wall Street does it Again
We have written on this blog in the past that the monthly jobs report is very likely the most overrated economic statistic known to man. The labor department tries to estimate the change in the number of employed Americans each month on a base of over 140 million. The margin of error relative to the change in the number of jobs each month is huge. The initial estimate is often wrong and gets revised numerous times. The whole exercise is absurd. And to magnify the stupidity, Wall Street tries to forecast the number and then overreacts to any figure that is better or worse than consensus … [Read more...]
The Thing about Bubbles
The thing about asset bubbles is you never know what will cause them to pop or when they will pop. Valuations can tell you there is a bubble, but as a timing signal, valuations are not at all useful. The Biotech bubble has been one of the biggest in the market. So big in fact, that even Fed Chair Janet Yellen identified Biotech stocks as an area of concern over a year ago. The bubble only got bigger following her comments. Along with the fab five (Facebook, Google, Amazon, Netflix, and Apple) biotech stocks had been some of the best performers in the market. That was, until July. … [Read more...]
The 4 Most Dangerous Words in Investing
This time is different or so says Adam Parker, Morgan Stanley’s Chief U.S. Equity Strategist in missive earlier this week. What is different? Here is Mr. Parker in his own words. “People have been saying corporate margins are too high for years. Our judgment is that most of these metrics are irrelevant for making any market-based assessment in time frames less than a decade, if at all." Think again about Black Friday being smaller than Amazon Prime Day. This is a great example of how the new economy is taking over the old and how historical relationships between economic factors and … [Read more...]
Did Yellen Save the Stock Market?
Janet Yellen gave a speech yesterday at UMass Amherst titled Inflation Dynamics and Monetary Policy. Yellen was a bit more hawkish on monetary policy than she was during the press conference following the Fed’s latest meeting. The market is taking Yellen’s more hawkish tone as a sign that the global economy may not lead the U.S. into a depression after all. Good is good for asset prices again? Hallelujah to that. Or was it this report, by a JP Morgan derivatives analyst who became a rock star in the minds of many on Wall Street for his prescient calls on the market over the last month? The … [Read more...]
Navigating a Hostile Market
Despite the correction in stock prices over the summer and the general choppiness in the market since, the more speculative oriented NASDAQ continues to outrun more investor friendly shares. We represent the investor-friendly market here by the dividend achievers index (companies with a record of paying and increasing dividends). The market is saying that a bird in the hand is no longer worth two in the bush. Investors are instead putting a premium on the prospect of there being two birds in the bush a decade or more in the future. Is that a strategy you want to partake in? Then we … [Read more...]
Wall Street vs. Main Street: Who’s on your side?
Will they or won’t they is the question weighing on the minds of many investors this week? In question is a Fed rate hike. Economists and strategists are divided. Financial markets say the odds are against a rate hike tomorrow. If it is a question of if the economic data, higher rates are clearly justified. Even by the Fed’s own low standards, the economic data justifies a step away from emergency monetary policy. Unemployment is at the Fed’s target and while headline inflation is temporarily subdued due to falling oil prices and a strong dollar, the underlying trend of inflation remains … [Read more...]
As Goes General Motors, so goes the Nation
As goes General Motors, so goes the nation was a phrase from years ago that spoke to how much impact General Motors business had on the U.S. economy. While GM doesn’t have the same influence that it once did in the U.S. economy, auto sales still play a big role in economic cycles. That is true for the U.S. economy as well as for the global economy. Today, the more appropriate phrase might be as goes Chinese auto sales, so goes the global economy. China is now the world’s largest auto market with annual passenger sales topping 20 million units. China is also the world’s second largest … [Read more...]
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