Connect with us


BlackRock makes policy U-turn with synthetic S&P 500 ETF launch

BlackRock makes policy U-turn with synthetic S&P 500 ETF launch



BlackRock has launched a synthetically replicated S&P 500 ETF in a significant policy U-turn that sees the asset management titan lend credibility to an ETF replication structure it previously eschewed, often vocally.

BlackRock makes policy U-turn with synthetic S&P 500 ETF launch

BlackRock has launched its first synthetically replicated equity ETF after years of shunning the fund structure.

Synthetic ETFs provide exposure to their reference index not by physically holding the underlying index securities but by entering into a swap agreement with a counterparty, usually an investment bank, to receive the performance of the index.

The popularity of the synthetic structure declined sharply following the global financial crisis due to concerns over counterparty and liquidity risks – a 2011 survey conducted by Morningstar found that 90% of respondents indicated they were “somewhat” or “very” concerned about synthetic ETFs.

Some of these concerns were arguably whipped up by ETF issuers whose product line-ups comprised solely or mostly physically replicated products (many of which, incidentally, were at the time lending out portfolio securities and keeping much of the proceeds for themselves) and by traditional fund managers who saw it as an opportunity to attempt to taint the ETF industry.

BlackRock was noted for its championing of physical ETF replication. In 2011 its then Head of iShares in Europe, Joseph Linhares, told the FT that, “ETFs started out as transparent, liquid, simple, vehicles but some have gone to opacity. We need to get back to full transparency across all the range of ETF products.” Larry Fink, the firm’s co-founder and CEO, regularly told investors and commentators that swap-based ETFs lacked transparency and risked damaging the industry.

As a result of all this, many issuers, such as Lyxor and Deutsche Bank, among others, converted swathes of synthetic ETFs to physical replication. This was despite the swap-based structure delivering many noteworthy advantages and ignoring the fact that these products were often over collateralized, in some cases with higher quality collateral than the constituents of the target index, and/or had multiple swap counterparties.

In recent years, however, the tide of criticism against synthetic ETFs has waned as investors have become reacquainted with the benefits of the structure’s inherent tax advantages in certain circumstances.

Most notably, non-US investors are required to pay a 15% withholding tax on income received from dividends. As synthetic ETFs do not actually own the underlying securities and owing to the way the swap arrangements are configured, investors choosing the synthetic structure are not liable for this tax, leading to immediate performance enhancement.

According to market analysis by Invesco, which offers a mix of physical and synthetic products, the firm’s synthetically replicated S&P 500, MSCI USA, and MSCI World UCITS ETFs have each outperformed the average of their largest physical competitors by 0.24%, 0.31%, and 0.12% respectively over the 12 months to the end of August 2020.

When looking over the past three years, these figures climb to 0.71%, 0.64%, and 0.18%, underscoring the long-term relative outperformance potential of some synthetic products.

Another advantage of synthetic ETFs is that they typically offer a lower tracking error compared to their physically replicated counterparts, although this benefit is most pronounced when the fund targets illiquid stocks such as emerging market equities.

The low tracking error offered by synthetic products was brought into focus during the Covid-19 market crisis with tracking errors for physical MSCI World ETFs doubling to 0.10% between 31 January and 30 April 2020. In contrast, synthetic ETFs generally maintained their lower volatility relative to the market throughout this period.

These advantages have contributed to synthetic ETFs gaining a greater market share in certain asset class segments in recent years. The $10.7bn Invesco S&P 500 UCITS ETF (SPXS LN), for example, has attracted over $2.4bn in net inflows over the past year compared to net outflows of $1.4bn for the $38.3bn iShares Core S&P 500 UCITS ETF (CSPX LN) over the same period.

In performing its volte-face, BlackRock will no doubt argue that the ETF industry and the wider financial infrastructure have become structurally more sound in the ensuing years and that levels of transparency and disclosure have improved while ETF investors have become more sophisticated. To be fair, much of this is probably true. Nonetheless, it demonstrates that commercial considerations – namely a company’s bottom line – will always influence an argument, as indeed it did back in 2011 and 2012.

The fund

The iShares S&P 500 Swap UCITS ETF has listed on the London Stock Exchange in pound sterling (I500 LN), on Xetra in euros (I500 GY), and on Euronext Amsterdam in US dollars (I500 NA).

JP Morgan and Citi will act as swap counterparties with more investment banks expected to enter the fold in the future.

The ETF’s collateral will consist solely of non-dividend paying S&P 500 equities, helping to allay any concerns that the structure might be unsuitable in the event of a default by a swap counterparty.

It comes to market with $100 million in assets under management and matches the 0.07% expense ratio offered by BlackRock’s physically backed S&P 500 ETF.

The post BlackRock makes policy U-turn with synthetic S&P 500 ETF launch first appeared on ETF Strategy.

Read More

Continue Reading


Trending Penny Stocks to Buy Now? 5 to Watch This Week

Which trending penny stocks are on your watchlist right now?
The post Trending Penny Stocks to Buy Now? 5 to Watch This Week appeared first on Penny Stocks to Buy, Picks, News and Information |




5 Trending Penny Stocks to Add to Your Watchlist Right Now 

After a volatile and exciting week of trading penny stocks, investors show bullish sentiment in the stock market. Last week, we witnessed record highs with the S&P 500 and Bitcoin, both illustrating just how much positivity there is in the stock market right now. 

But, we are also experiencing an unprecedented level of volatility that has led to large intraday swings in both directions. You’ve also got external factors like extremely bullish buying spikes moves in small-cap stocks like newly-dubbed “Trump Stock,” Digital World Acquisition Corp. (NASDAQ:DWAC). This 1,000+% move last week ultimately woke up the broader small-cap space and we saw countless penny stocks surging into the close of the week. Looking ahead we can monitor what else is going on in the world to understand where the opportunity might be heading into the final week of October. 

For example, after Bitcoin hit a record high of over $67000 on platforms like Robinhood, we witnessed many crypto and blockchain penny stocks climb substantially in value. This is a more obvious example and a perfect display of cause and effect.

Read more: 6 Best Penny Stocks To Watch As Bitcoin Price Hits All-Time High

With penny stocks, we tend to see speculation play a more prominent role than with blue chips. This is due to their low price, high volatility, and willingness to shift in price. But, this means that investors need to stay as up-to-date as possible on everything going on with the stocks they’re interested in. 

In addition to looking at company-specific news, traders need to understand what is occurring in the industry at large. All of this will provide traders with a solid backbone on which they can invest. Considering all of this, let’s take a look at five trending penny stocks to add to your watchlist right now. 

Trending Penny Stocks To Buy [or avoid] 

  1. Kosmos Energy Ltd. (NYSE: KOS)
  2. Cyclerion Therapeutics Inc. (NASDAQ: CYCN)
  3. Gaotu Techedu Inc. (NYSE: GOTU)
  4. Color Star Technology Co., Ltd. (NASDAQ:CSCW)
  5. Inpixon (NASDAQ:INPX)

Kosmos Energy Ltd. (NYSE: KOS)

Kosmos Energy Ltd. is an oil and gas company focused on deepwater exploration. The company actively searches along the Atlantic Margins in places like offshore Ghana, Equatorial Guinea, and the U.S. Gulf of Mexico. Kosmos also owns a gas development offshore property in Mauritania and Senegal. In addition to all of this, Kosmos has a proven basin exploration program that is currently operational.

[Read More] Penny Stocks To Buy Today? 3 To Watch After Trump Media DWAC Jumps

On October 13th, the company acquired an additional 18% interest in the Jubilee field and an additional 11% interest in the TEN fields in Ghana from Occidental Petroleum. The total purchase price of the other interests was $550 million. These acquired assets significantly enhance Kosmos’ five-year plan. The company expects these additional Ghana interests to generate about $1 billion of incremental free cash flow by the end of 2026.

“This is a compelling transaction for Kosmos that accelerates our strategic delivery and is expected to provide long-term sustainable cash flow from fields where we have a deep understanding of the value and future upside.”

CEO and Chairman of Kosmos, Andrew G. Inglis

Since this announcement was made, KOS stock has gone up substantially in the market. Its volume is also higher than its average over the past few trading days. Keeping this in mind, will KOS be on your list of penny stocks to watch?

Cyclerion Therapeutics Inc. (NASDAQ: CYCN)

Cyclerion Therapeutics Inc. is a biotech penny stock that has been climbing in several recent trading sessions. This company creates medicines for serious central nervous system diseases. Cyclerion is involved in the discovery, development, and commercialization of these products. One of its products is CY6463 which is in Phase 2 trials to treat mitochondrial encephalomyopathy, stroke-like episodes, and more.

[Read More] 4 Hot Penny Stocks To Watch After The 1,282% HX Stock Rally

On September 22nd, the company announced a publication demonstrating that the administration of a small molecule soluble guanylate cyclase simulator was effective. It reduced markers associated with neuroinflammation in multiple preclinical models. Neuroinflammation is a big part of various diseases such as Alzheimer’s and other neurodegenerative disorders.

“A body of preclinical and clinical data supports the development of CY6463 and CY3018, our brain-penetrant sGC stimulators, and administration of CY6463 has been shown to result in positive clinical effects on multiple measures of brain neurophysiology.”

Study Author and Head of Translational Medicine at Cylerion, Chris Winrow

In the past few days, CYCN’s volume has been almost four times its market average. This is a clear indicator of its trending nature and how popular CYCN stock is right now. With this in mind, will CYCN make your list of penny stocks to watch?


Gaotu Techedu Inc. (NYSE: GOTU)

Gaotu Techedu Inc. is one of several Chinese educational stocks moving in the last week or so. For some context, Gaotu offers K-12 after-school tutoring services in the country. These K-12 services include math, English, chemistry, biology, Chinese, and more. It also provides foreign language courses, professional courses, English test prep services, and qualification exams.

On September 21st, the company released its second-quarter financial results for 2021. During this period, its revenue increased by 35.3% year over year to a total of RMB2,232.3 million. Its gross billings went up 12.2% year over year to RMB2,694.7 million as well. In addition to all of this, Gaotu’s paid course enrollments totaled 4.1% higher year over year.

“We say that 2014 is Gaotu’s first attempt as a startup, and 2016 is our second start, then we can also say that 2021 is our third start. We should always keep the goal of education in mind, always firmly believe that education is a noble profession. It’s undeniable that we have boundless faith in the bright future of the Chinese education industry.”

The CEO, Founder, and Chairman of Gaotu, Larry Xiangdong Chen

Over the past week, we’ve seen several days with GOTU stock moving up in the double-digit percentage points. With this to note, is GOTU on your penny stock watchlist right now?


Color Star Technology Co., Ltd (NASDAQ:CSCW)

Tech penny stocks have certainly been something that traders are zeroing in on this quarter. The broader sector, as a whole, is strongly rebounding into year-end. Everything from information technology to entertainment has benefited. In the case of Color Star Technology, its entertainment-focused model continues attracting attention in the stock market.

Read more: Best Penny Stocks To Buy Now? 3 To Watch At The End Of October

Most recently, a focus on artificial intelligence and its involvement in tech is what Color Star is working on. In particular, it’s building a metaverse project that encompasses everything from virtual reality entertainment like concerts and an active platform for non-fungible tokens (NFTs) related to simulation scenes. There are also layers to the metaverse project, including shopping. Via the company’s Color Star app, users can access entertainment, social networking, virtual gaming, and even interact with celebrities virtually with their avatars in the metaverse.

With immersive experiences becoming a more significant point of interest since the pandemic, companies like Color Star are working on blending online life with offline reality leveraging entertainment as the pathway to do so.

trending penny stocks to buy avoid this week Color Star Technologies CSCW stock chart


Sticking with the focus on augmented and virtual reality stocks, Inpixon has gained some interest over the weekend. The company specializes in its Indoor Intelligence platform. It has effectively been used for mapping, positioning, and helping create smart & secure environments. While its location awareness technology has helped extend its reach in government-related settings, a recent development could have given a boost when it comes to civilian applications.

Last week Inpixon announced a new initiative along with Ostendo Technology, Inc., a company developing quantum photonics and micro-display technologies. In addition to a current Strategic Collaboration and Cross-Marketing Agreement, the two companies will provide the City of Miami Beach’s Washington Avenue Business Improvement District with an augmented-reality-enabled mobile ‘ExperienceApp.’

This app also supports the integrated use of Ostendo’s AR smart glasses for an initial period of two years. According to Nadir Ali, CEO of Inpixon, “Inpixon’s ExperienceApp will be built on our CXApp mobile app platform and will incorporate mapping, positioning, analytics, and AR to deliver an exceptional user experience that is productive, intelligent, easy to use, and will be viewed through Ostendo AR smart glasses.”

With a surge of post-market action on Friday, it will be interesting to see how INPX stock begins the upcoming week.

trending penny stocks to buy avoid this week Inpixon INPX stock chart

Can Penny Stocks Continue to Climb This Year?

Although there is a lot of momentum in the stock market, investors need to choose wisely to have the best chance at making money with penny stocks. And, with this momentum, investors should also understand the root cause and how to use that to their advantage. 

[Read More] Top Penny Stocks to Buy Next Month? Check These 3 Out For Your List

Considering that several factors are impacting blue chips and penny stocks right now, it’s best to break it down individually and focus on one area of the market at a time. Considering this, do you think that penny stocks can continue to climb this year?

The post Trending Penny Stocks to Buy Now? 5 to Watch This Week appeared first on Penny Stocks to Buy, Picks, News and Information |

Read More

Continue Reading


At the Edge of Chaos: Market Breadth Breakout Signals Returning Uptrend as Options Market Remains Doubtful of Rally

Something’s got to give in the markets. And it may not take long before the next long term trend becomes apparent. The most reliable market indicator since 2016, the New York Stock Exchange Advance Decline line (NYAD), see below for full details, exploded



Something's got to give in the markets. And it may not take long before the next long term trend becomes apparent.

The most reliable market indicator since 2016, the New York Stock Exchange Advance Decline line (NYAD), see below for full details, exploded to a new all time high on 10/20/21, and did not fall apart by week's end. This is signaling that for now, against all odds, despite the Fed's confirmation that the QE tapering is coming, the uptrend for stocks is back.

More interesting, as I will detail below, is the fact that even though stocks have broken out, options players remain very skeptical of the gains and bond traders are expecting the Fed's actions to slow the economy.

MELA Test Straight Ahead

The likelihood of a major move in the MELA system, where the markets (M), the economy (E), people's life decisions (L) and the algos interact (A), is approaching.

I know this sounds a bit confusing. But here's what seems to be happening. As I've noted here before, the bond market is torn between the sellers, who are afraid of inflation, and the buyers, who are betting that when the Fed tapers the economy will tumble.

Lately, the sellers have been in control of the bond market, as evidenced by the rising yield on the U.S. Ten Year note (TNX). This rise in market interest rates has put a damper on the stock market, which in true MELA fashion, has put a bit of crimp on the economy, especially areas such as home buying, as people have become cautious and slowed down their purchases. All of which has been amplified by the algos and created a choppy trading range for stocks.

Until Friday, that is, when Fed Chairman Powell noted that it was "time to taper," and TNX rolled over after running into intermediate-term resistance near the 1.7% yield area as the buyers came in.

So now we have an interesting setup. With less than a week before November, the month in which the Fed has signaled it will start its taper, bond traders are betting that the Fed's actions will hurt the economy while stock traders are betting that the bull trend in stocks has returned.

How is this possible?

Remember that the stock market is the centerpiece of MELA since it is the source of wealth for a large number of people via their 401 (k) plans and other stock trading related venues. In other words when the 401 (k) does well, as in periods when stocks rise, people feel wealthy and buy things.

And what do stocks like best? They love lower interest rates. All of which means that if the Fed tapers and things slow down, stock traders are betting that the Fed will likely have to restart QE.

In other words, it's all about the Fed and how the bond and stock markets respond because it will all play out in MELA.

It's time to buckle up.

"The edge of chaos is a transition space between order and disorder that is hypothesized to exist within a wide variety of systems. This transition zone is a region of bounded instability that engenders a constant dynamic interplay between order and disorder." Complexity Labs

I own shares in APP as of this writing. For detailed option strategies and stock picks chose a FREE trial to Joe Duarte in the Money Click here. You can also check out my latest video which expands on these strategies here.

Why Astra Zeneca's Monoclonal COVID Antibody Gamble May Pay Off

Shares of pharmaceutical giant Astra Zeneca (AZN) have been under quiet accumulation of late and recently scored a price breakout.

The breakout is interesting for sure, mostly because AZN's COVID vaccine has been associated with rare but serious complications. At the same time, other COVID vaccines have also been associated with complications. All of which means that even though the vaccines have been useful against the pandemic, there is clearly a treatment niche that needs filling in the fight against the virus.

Certainly, AZN has a top notch research team, which is why it's no surprise that they have developed a new and very promising monoclonal antibody to treat COVID infections which may fill that niche. Of course, at first glance they seem to be getting to the party a bit late given that Eli Lilly (LLY) and Regeneron (REGN) already have very successful COVID antibodies on the market.

But here is what could be the game changer; AZN's antibody may be useful as a preventive treatment for COVID, meaning that it is a potential vaccine-like product, although not likely a replacement. At least that's what the studies suggest, and what the company is trying to convince the FDA and global health agency approval committees of.

Put another way; AZN may have an alternative or an adjunct to COVID vaccines which would not likely replace vaccines but would give physicians another treatment option based on well accepted clinical situations such as patients at high risk of vaccine reactions. In addition, the AZN antibody can be administered on an outpatient basis, reducing costs and keeping hospital beds open for emergencies.

Moreover, the stock is also attractive based on the fact that AZN has several blockbuster drugs that have been flying under the radar of late such as its diabetes treatment Forxiga and several key anti-cancer drugs which are fueling year over year sales gains above 30% and an earnings growth rate of 20%.

Technically, AZN has cleared long term resistance above $61, where it may consolidate in the short term as traders wait for approval news on the antibody. But the stock is in an excellent setup for sure as Accumulation Distribution (ADI) has flattened out which suggests that short sellers are exhausted while On Balance Volume (OBV) has been moving higher, confirming that buyers have been using recent price dips to move into the stock.

I own shares in AZN as of this writing. For detailed option strategies and stock picks chose a FREE trial to Joe Duarte in the Money Click here.

Options Traders Just Don't Trust this Market

In what may be a bullish contrarian sign, put volume continues to outshine call volume at key strike prices on the SPY options. What's most interesting is that even as the market's breadth (see below) has improved, option traders remain skittish and continue to buy puts just below the most current market price.

Of course, the precise nature of this development suggests that algos are hedging their bets. And while market maker algos hedge their bets based on order flow, CTA algos (quant funds) make bets on technical analysis based support and resistance levels.

It's not clear whether what we're seeing is the market makers or the CTAs. If it's the CTAs the odds may favor a rally if the market breakout continues as they will have to cover their shorts further. If the market maker algos are hedging, though, it could mean that the order flows are bearish and that this rally could be short lived.

To get the latest up to date information on options trading, check out "Options Trading for Dummies", now in its 4th Edition – Available Now!

# 1 New Release on Options Trading

Market Breadth Finally Breaks Out

After a nearly five month trading range the stock market's breadth finally broke out with the New York Stock Advance Decline line (NYAD) moving above recent and multiply times tested resistance level. Thus, until proven otherwise the uptrend has been re-established.

The S & P 500 (SPX) is hovering near its all time highs and trading above 4500 as well as its 20,50, 100, and 200 day moving averages with good confirmation from Accumulation Distribution (ADI) and On Balance Volume (OBV).

The Nasdaq 100 index (NDX) did not fare as well as SPX as it did not deliver an all time high and ended last week on a much weaker note.

Meanwhile the S & P Small Cap 600 index (SML) is knocking on the door of a potential breakout, but still remains somewhat further away from its all time highs than NDX and SPX.

Good news! I've made my NYAD-Complexity, Chaos chart (featured on my YD5 videos) and a few other favorites public. You can find them here.

Joe Duarte

In The Money Options

Joe Duarte is a former money manager, an active trader and a widely recognized independent stock market analyst since 1987. He is author of eight investment books, including the best selling Trading Options for Dummies, rated a TOP Options Book for 2018 by - now in its third edition, The Everything Investing in your 20s and 30s and six other trading books.

Meanwhile, the U.S. Ten Year note yield (TNX) is trading in a The Everything Investing in your 20s & 30s at Amazon and The Everything Investing in your 20s & 30s at Barnes and Noble.

A Washington Post Color of Money Book of the Month is now available.

To receive Joe's exclusive stock, option, and ETF recommendations, in your mailbox every week visit

Read More

Continue Reading


Weekly Market Pulse: Inflation Scare!

The S&P 500 and Dow Jones Industrial stock averages made new all time highs last week as bonds sold off, the 10 year Treasury note yield briefly breaking above 1.7% before a pretty good sized rally Friday brought the yield back to 1.65%. And thus…



The S&P 500 and Dow Jones Industrial stock averages made new all time highs last week as bonds sold off, the 10 year Treasury note yield briefly breaking above 1.7% before a pretty good sized rally Friday brought the yield back to 1.65%. And thus we’re right back where we were at the end of March when the 10 year yield hit its high for the year. Or are we? Well, yes, the 10 year is back where it was but that doesn’t mean everything else is and, as you’ve probably guessed, they aren’t. In the early part of this year, the 10 year yield was rising as anticipation built for a surge in post vaccination economic growth. The 10 year yield rose about 85 basis points from the beginning of the year to the peak in late March. 10 year TIPS yields, meanwhile, were also rising, a little more than 50 basis points. There was agreement between the two that growth expectations were improving, inflation expectations rising a bit more than real growth expectations. The 10 year Treasury ended March right about where it was last Thursday, 1.7%. But there is considerably less agreement between the two markets now with the 10 year TIPS yield still 35 basis points lower (more negative) than the March peak.

So, no, things are not back where they were. The recent rise in nominal bond yields is much more about inflation fears than growth hopes. Markets provide us with a wealth of information that allows us, to some degree, to get inside the heads of investors. The changes in the bond markets recently show that investors have a very specific and nuanced view about the economy. They are certainly concerned about inflation and doing what people do when they are scared – trying to protect themselves. TIPS have been very popular of late for exactly that reason, as the inflation narrative gets louder and louder. But what is interesting is that, in a way, investors are taking the Fed at its word, that the inflation is transitory. The 5 year breakeven inflation rate hit 2.91% last week while the 10 year rose to 2.64%. But the 5 year, 5 year forward rate (5 year inflation expectations starting 5 years hence), has fallen over the last week to 2.37%. Investors think inflation will average nearly 3% over the next 5 years but less than 2.4% over the following 5. So investors do see inflation as transitory even if their definition of the term seems quite a bit different than the Fed’s.

Another big difference between now and March is the steepness of the yield curve. The 2 year note yield has been on a steep rise of late, up 140% since the beginning of September, with most of that coming in October. The 2 year rate roughly doubled in the early part of the year too but the absolute change was small because rates started so low. The recent change in the 2 year has been more rapid than the 10 and is being driven by expectations for Fed policy changes. The 10/2 curve was 1.58% at the end of March but just 1.18% today. The short term trend is still toward steeper but the climb has stalled a bit:

I interpret these changes in the obvious way. Nominal growth expectations are rising with most of the recent change focused on inflation but with some pickup in real growth expectations too. In addition, investors do not seem willing to believe yet that inflation is a long term problem. Given the high profile of the inflation narrative and the lack of much concrete evidence of a growth pickup, these changes seem perfectly rational and reasonable. I think it is important to note too that these changes in inflation expectations are small but also rapid. The 10 year breakeven rate is up about 65 basis points this year but over half of that has happened in the last month. The same is true for the 5 year breakeven rate. As for the change in real growth expectations I’d just say that it isn’t very impressive regardless of the rate of change. Unfortunately, that makes sense too since, as I discussed last week, we haven’t done anything to change the trajectory of either workforce or productivity growth. My long term expectation for growth hasn’t changed much since the first few months of COVID. We came into it with growth averaging roughly 2.2% over the previous decade. After adding a lot of debt to that economy during the pandemic my assumption is that, when things finally settle out from the virus and the response to it, economic growth will be lower. How much? I don’t know of any way to quantify that.

But that long term expectation is just that, long term. It doesn’t say anything about growth over the near term, the next 6 to 12 months. We’ll get a report on Q3 GDP next week and all indications are that it will be a pretty big fall off from the first half of the year. But anyone who’s been paying the slightest bit of attention knows that so it really won’t matter. Investors will be focused on the current quarter and the one after that. Will there be a reacceleration in growth as the delta variant fades? Will businesses be able to get goods for Christmas or will America get a lump of coal in its stocking? Or are we out of coal too? I don’t know but I do think we need to be careful about getting too negative about, at least, the immediate future. Inflation expectations can change rapidly while growth expectations take more time so TIPS and nominal yields are often on different songs, even if in the same hymnal.

I don’t generally put much emphasis on the PMIs or regional Fed surveys. They are basically sentiment surveys and rely on people’s anecdotal observations which, as we know, can be skewed for a whole host of reasons. But they can be interesting at turning points, inflection points, where sentiment does have a bearing on actions and ultimately the economy. While I don’t think we’re near a negative inflection point, the Philly Fed survey and the Markit PMIs do seem to point to a more positive near term outlook. The Philly Fed survey itself was down considerably from September but it is still higher than 3 months ago and the details hint at a near term pickup. The new orders index rose to 30.8 from 15.9, employment to 30.7 from 26.3. They also asked a special question about capital spending plans that showed expectations for increased spending in 5 of 6 categories for next year:

Of course, those expectations could change dramatically if Q4 turns out to be a bust but it is, for now, a positive indication for future growth.

The Markit PMIs also offered some near term optimism as the overall measure rose to 57.3 from 55 in September. That’s the best in 3 months with a sharp rise in service sector activity and a 3rd consecutive month of slowing in manufacturing activity (which is still at a high level). New orders in services rose at the fastest pace in 3 months. Job creation was the highest since June although companies still report having a hard time finding workers. All of this is perfectly consistent with the expectations for a growth resurgence post delta. Will those expectations be met? I don’t know obviously but if these expectations start to be met, we should see a response in the bond market with better balance between TIPS and nominal bonds.

There was also some potentially good news in the Census Bureau’s weekly household pulse survey which showed a big drop in people reporting not working.

Again, I don’t think we should put a lot of emphasis on these surveys. I’m always more interested in what people are doing rather than what they say they’re doing and especially what they say they intend to do. But these seem to be more significant changes than we’d normally see month to month.

We’re going through a bit of an inflation scare right now and we can see the changes in markets. They are fairly small changes though and they can, probably will, change again in coming weeks. Growth and inflation expectations are always changing as new information enters the market. Millions of investors speculate about how the future will look and their bets on that future move markets as new consensus expectations emerge. And the market changes that come from these new expectations also affect the economy in an ongoing feedback loop that changes expectations and markets again in a never ending search for equilibrium. The ebb and flow of the markets and the economy are intertwined, one influencing the other to produce the best prediction of the future we’ll ever get. Just don’t get too attached to that future because it can – and often does – change quickly.


The economic environment is unchanged.

The trend in the nominal 10 year rate is obviously up

But we’re interested mostly in real growth expectations and TIPS yields are not in an uptrend yet:

The dollar remains in a short term uptrend but we are at a pretty obvious resistance point. In addition, the futures market shows a pretty strong preference by speculators for the long side of the dollar trade. So the short term trend may be running into some trouble and with real rates still flailing at low levels, I think that makes a lot of sense. The real long term trend of the dollar is no trend at all, still stuck in the middle of a 10% trading range that has prevailed for now 7 years:



Despite my comments above about the Philly Fed survey and the Markit PMIs (not shown here), the economic data wasn’t that encouraging last week. Industrial production was down for the second straight month but there were a lot of caveats. Hurricane Ida is alleged to have taken 0.6% off the total and the auto industry is still flagging due to the chip shortage. Mining output (shale) was down, shocking exactly no one except maybe Joe Biden. On a more positive note, IP rose at a 4.3% annual rate in Q3, the fifth consecutive quarterly gain over 4%.

The Housing Market Index rose in September with single family especially strong. But the news on the new home front otherwise was not that great with starts and permits both down. Existing home sales did have a big rise but that was probably driven by rising mortgage rates.


A lot of data releases next week with GDP the highlight for most observers. The more important items will be the CFNAI to get an idea of how much we’ve slowed overall, durable goods orders and especially core capital goods orders, personal income and consumption and consumer sentiment.



We were reminded last week that US markets are still under the spell of speculators when a SPAC announced a deal with an entity associated with Donald Trump. Digital World Acquisition Corp. rose from $10 to, at one point, over $170 in two days of trading last week before settling the week up a mere 9 fold to $94.20. SPACs are Special Purpose Acquisition Corps or more commonly blank check companies. The fact that these companies with no business plan beyond a vague notion to purchase an operating company are so popular, is an indication by itself, of the speculative nature of these markets. But when a blank check company with no business plan acquires a shell company that consists of a powerpoint presentation and the stock has to come down to be up 9 fold in a couple of days, well, I think we’ve entered something beyond speculation. This is the post-modern economy where value is socially determined, reality is anything but objective, “where there are no hard distinctions between what is real and and what is unreal, nor between what is true and what is false”. It is an absurd world where the value of Donald Trump’s future social media empire is determined through the interactions of speculators on existing social media.

Back in the real world, stocks were up last week with the US continuing to outperform. Growth had a good week and the value/growth debate YTD now amounts to a draw. China rebounded last week as Evergrande made an interest payment and you may see a rebound in Chinese markets as people get comfortable with the heavier hand of the communist party. I’m going to have to miss that if it happens as I am decidedly not comfortable with China. There are other places in Asia that look a lot more attractive in my opinion, Japan prominent among them.



Real estate has recovered quickly and led last week but financials continue to perform well too. Healthcare had a good week after lagging recently.

With stocks near or at all time highs, it is easy to assume that means something about future economic growth. But stocks move based on expectations about future EPS growth which isn’t even close to the same thing. Last week’s move up in stock prices was more likely a consequence of the death of the corporate tax hike as the Biden economic plan continues to get pared down to something more manageable. The economy just isn’t the focus of stock investors right now but that could change if growth doesn’t pick up soon from the big Q3 slowdown. There is little evidence of that yet beyond the surveys I mentioned above so we won’t guess at the outcome. If real rates join nominal rates and start to rise more decisively, that will be a sign that we can be more optimistic. But we aren’t there yet.

Joe Calhoun



Read More

Continue Reading