Bulls “Rush In” With More Stimulus On The Way 03-12-21
In this issue of "Bulls ‘Rush In’ With More Stimulus On The Way 03-12-21."
Market Review And Update
Speculation Alive And Well
Yes, Rising Rates Will Matter
Portfolio Positioning
#MacroView: Yellen’s "Go Big" MMT Plan May Disappoint
Sector & Market…
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Catch Up On What You Missed Last Week
Market Review & Update
Over the last several weeks, we have repeatedly discussed the “money flow” sell signal that suggested “weakness” in prices. Such was a point we reiterated in last weekend’s newsletter:
“Currently, the money flows remain positive, but ‘sell signals’ are firmly intact. Such suggests downward pressure on prices currently. We do expect that market will likely muster a short-term oversold rally next week. However, the risk of a continued correction in March is likely if money flows deteriorate further.”
Well, the markets did indeed rally as Congress passed the mammoth $1.9 Trillion “pork fest” stimulus package. While this bill is nowhere close to being “reformative,” as touted by the Democrats, it does inject a lot of capital into the economic system. Given that the Federal Reserve will have to monetize the bill’s entirety, it is not surprising the markets get a lift.
In our recent 3-Minutes On Markets & Money video, we discussed the triggering of the short-term “buy signal.”
The good news is the rally took the S&P back to all-time highs reducing concerns about a more significant decline in the near term. However, with money flows still trending negatively, we may see some recent advance consolidation next week. Such is consistent with the previous breakouts we have seen over the last several months where money flows were trending negatively.
Unfortunately, as shown, the money flow signals do not distinguish between consolidations and corrections. Such makes risk management a crucial part of the portfolio management process.
A Brief Dichotomy
While the short-term indicators are undoubtedly positive, suggesting more upside near-term, the longer-term index remains on a confirmed sell signal. Such indicates that downward pressures may continue to limit upside now.
Such was the point made last week, which is worth reiterating:
“The dichotomy between the daily and weekly charts suggests we may well see a rally in the short-term, but another correction following. The last time we had the current setup with our indicators was in September and October of 2020, which provided two 10% corrections before the consolidation process was over.”
Chart updated through Friday
Currently, that seems to be the likely scenario. With valuations still extended, the recent correction didn’t reduce speculative fervor. Furthermore, prices remain well deviated above long-term means, particularly in the small and mid-cap space.
While more stimulus will likely support prices over the next few weeks, the threat of rising inflation and interest rates could undermine growth expectations. As we will discuss in our positioning update below, we did increase our exposures this week. However, we also continue to suggest some caution for now.
Speculation Still Alive And Well
My colleague Doug Kass made a critical observation this week:
“In my decades of investing experience, I have not seen such mindless and uninformed speculation as I have witnessed recently. Indeed, in nominal dollar terms (and led by retail traders, see chart below) it is far in excess of the dot.com boom.”
He is correct. The interesting thing about this chart is that it explains the astronomical surge in “small-cap” stocks recently, which is far above any logical expectation of future earnings and economic growth. The reality is that retail traders have been speculating in very low-priced stocks where they can buy more shares versus large traders, who buy higher-priced shares with more liquidity. Such shows up in the deviation of the volume traded.
There is no fundamental basis to support the chart below. Small-cap “value,” of which I would argue there is little value considering valuations are at historical extremes, is currently trading at near 4-standard deviations of the 1-year moving average. Such is a level never seen before and one not likely to resolve well.
As Doug notes:
“The Bible says (Proverbs 16:18) that ‘pride goes before destruction, a haughty spirit before a fall.’ Even William Shakespeare warned that ‘dreams are the children of an idle brain, begot of nothing but vain fantasy.’
Adopting a YOLO mentality (“you only live once”), speculation begot initially by analphabetic retail traders with little historical market perspective, and even less micro (individual company) knowledge. Using Robinhood and other commission free platforms and ‘Reddit’ as their investment research and communities, such is now spreading and is morphing into an institutional experience and phenomenon.
Of course, I need to remind you of that vital point from John Maynard Keynes:
“The markets can remain irrational longer than you can remain solvent.”
A Boat Load Of Cash, No Place To Spend It
One of the reasons the market can certainly continue to “remain irrational” is from the “mountain of cash” in money market accounts.
Following the pandemic, corporations drew down credit lines and hoarded cash due to economic uncertainty. Now, with expectations of recovery, corporations are once again beginning to deploy that cash.
The bad news is they are using those funds for share repurchases. While not necessarily bad, it is the “least best” use of the company’s cash. Instead of expanding production, increasing sales, acquiring competitors, or making capital investments, the money gets used for a one-time boost to earnings on a per-share basis.
I previously discussed how nearly 100% of the net purchases of stock were from corporate buybacks. Share buybacks ARE NOT a return of capital to shareholders. To wit:
“Yes, share purchases can be good for current shareholders if the stock price rises, but the real beneficiaries of share purchases are insiders where changes in compensation structures have become heavily dependent on stock-based compensation. Insiders regularly liquidate shares ‘given’ to them as part of their overall compensation structure to convert them into actual wealth.
‘Corporate executives give several reasons for stock buybacks but none of them has close to the explanatory power of this simple truth: Stock-based instruments make up the majority of their pay and in the short-term buybacks drive up stock prices.’ – Financial Times
The SEC confirmed the same:
‘SEC research found that many corporate executives sell significant amounts of their own shares after their companies announce stock buybacks, Yahoo Finance reports.'”
While this certainly will support higher asset prices in the short-term, it will widen the “wealth gap” long-term.
Yes, Rising Rates Will Matter
“What does it mean for equities if rates and yields do indeed go higher? Fortunately, to the surprise of many, stocks historically do very well when rates increase. Since 1996, stocks gained all 11 times we saw higher rates” – LPL Research, 2018
That was a quote from my article in May of 2018. Expect over the next several weeks to hear a regurgitation of that idea as the media encourages individuals to chase asset prices higher. However, as I noted then:
“The point is that in the short-term the economy and the markets (due to the current momentum) can DEFY the laws of financial gravity as interest rates begin to rise. However, as rates continue to rise they ultimately act as a ‘brake’ on economic activity.”
Notably, the claim that higher rates lead to higher stock prices falls into the category of “timing is everything.” As shown below, just a few short months after LPL’s comments that higher rates don’t matter, the stock market fell by 20% between October and December.
However, that was not an isolated case. Throughout history, increases in interest rates negatively impact equity prices. It is just the function of “time” until “something breaks.”
While the markets and economy may seem to perform okay as rates rise initially, the eventual negative impact leads to losses in investment capital.
Please pay attention to interest rates; they are likely telling you a lot more than you think.
Portfolio Update
Last week we concluded our missive stating:
“As discussed previously, ‘risk happens fast.’
It is essential not to react emotionally to a sell-off. Instead, fall back on your investment discipline and strategy. Importantly, keep your portfolio management process as simplistic as possible.
Trim Winning Positions back to their original portfolio weightings. (ie. Take profits)
Sell Those Positions That Aren’t Working. If they don’t rally with the market during a bounce, they will decline more when the market sells off again.
Move Trailing Stop Losses Up to new levels.
Review Your Portfolio Allocation Relative To Your Risk Tolerance. If you have an aggressive allocation to equities at this point of the market cycle, you may want to try and recall how you felt during 2008. Raise cash levels and increase fixed income accordingly to reduce relative market exposure.”
While this may indeed turn out to be a buying opportunity in the short-term, mainly if the Government passes the next “stimulus bill,” cleaning up your portfolios allows you to adjust to the markets next advance.
Fortunately, that is what happened this week as the passage of the “stimulus bill” sparked “bullish spirits.” As noted, we reviewed our portfolios and increased exposure to fundamentally strong stocks we are holding long-term. We also added to some of our beaten-up “momentum” names.
We are still slightly overweight cash but very short on duration in our bond portfolios for now. Such puts us a little more exposed to “risk” than we like, but the market is not giving us many options for now.
However, we will continue to follow our investment process for now and manage risk accordingly.
The MacroView
If you need help or have questions, we are always glad to help.Just email me.
See You Next Week
By Lance Roberts, CIO
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It was Jan. 11, 2024 when software giant Microsoft (MSFT) briefly passed Apple (AAPL) as the most valuable company in the world.
Microsoft's stock closed 0.5% higher, giving it a market valuation of $2.859 trillion.
It rose as much as 2% during the session and the company was briefly worth $2.903 trillion. Apple closed 0.3% lower, giving the company a market capitalization of $2.886 trillion.
"It was inevitable that Microsoft would overtake Apple since Microsoft is growing faster and has more to benefit from the generative AI revolution," D.A. Davidson analyst Gil Luria said at the time, according to Reuters.
The two tech titans have jostled for top spot over the years and Microsoft was ahead at last check, with a market cap of $3.085 trillion, compared with Apple's value of $2.684 trillion.
Analysts noted that Apple had been dealing with weakening demand, including for the iPhone, the company’s main source of revenue.
Demand in China, a major market, has slumped as the country's economy makes a slow recovery from the pandemic and competition from Huawei.
Sales in China of Apple's iPhone fell by 24% in the first six weeks of 2024 compared with a year earlier, according to research firm Counterpoint, as the company contended with stiff competition from a resurgent Huawei "while getting squeezed in the middle on aggressive pricing from the likes of OPPO, vivo and Xiaomi," said senior Analyst Mengmeng Zhang.
“Although the iPhone 15 is a great device, it has no significant upgrades from the previous version, so consumers feel fine holding on to the older-generation iPhones for now," he said.
A man scrolling through Netflix on an Apple iPad Pro. Photo by Phil Barker/Future Publishing via Getty Images.
Counterpoint said that the first six weeks of 2023 saw abnormally high numbers with significant unit sales being deferred from December 2022 due to production issues.
Apple is planning to open its eighth store in Shanghai – and its 47th across China – on March 21.
The company also plans to expand its research centre in Shanghai to support all of its product lines and open a new lab in southern tech hub Shenzhen later this year, according to the South China Morning Post.
Meanwhile, over in Europe, Apple announced changes to comply with the European Union's Digital Markets Act (DMA), which went into effect last week, Reuters reported on March 12.
Beginning this spring, software developers operating in Europe will be able to distribute apps to EU customers directly from their own websites instead of through the App Store.
"To reflect the DMA’s changes, users in the EU can install apps from alternative app marketplaces in iOS 17.4 and later," Apple said on its website, referring to the software platform that runs iPhones and iPads.
"Users will be able to download an alternative marketplace app from the marketplace developer’s website," the company said.
Apple has also said it will appeal a $2 billion EU antitrust fine for thwarting competition from Spotify (SPOT) and other music streaming rivals via restrictions on the App Store.
The company's shares have suffered amid all this upheaval, but some analysts still see good things in Apple's future.
Bank of America Securities confirmed its positive stance on Apple, maintaining a buy rating with a steady price target of $225, according to Investing.com.
The firm's analysis highlighted Apple's pricing strategy evolution since the introduction of the first iPhone in 2007, with initial prices set at $499 for the 4GB model and $599 for the 8GB model.
BofA said that Apple has consistently launched new iPhone models, including the Pro/Pro Max versions, to target the premium market.
Analyst says Apple selloff 'overdone'
Concurrently, prices for previous models are typically reduced by about $100 with each new release.
This strategy, coupled with installment plans from Apple and carriers, has contributed to the iPhone's installed base reaching a record 1.2 billion in 2023, the firm said.
Apple has effectively shifted its sales mix toward higher-value units despite experiencing slower unit sales, BofA said.
This trend is expected to persist and could help mitigate potential unit sales weaknesses, particularly in China.
BofA also noted Apple's dominance in the high-end market, maintaining a market share of over 90% in the $1,000 and above price band for the past three years.
The firm also cited the anticipation of a multi-year iPhone cycle propelled by next-generation AI technology, robust services growth, and the potential for margin expansion.
On Monday, Evercore ISI analysts said they believed that the sell-off in the iPhone maker’s shares may be “overdone.”
The firm said that investors' growing preference for AI-focused stocks like Nvidia (NVDA) has led to a reallocation of funds away from Apple.
In addition, Evercore said concerns over weakening demand in China, where Apple may be losing market share in the smartphone segment, have affected investor sentiment.
And then ongoing regulatory issues continue to have an impact on investor confidence in the world's second-biggest company.
“We think the sell-off is rather overdone, while we suspect there is strong valuation support at current levels to down 10%, there are three distinct drivers that could unlock upside on the stock from here – a) Cap allocation, b) AI inferencing, and c) Risk-off/defensive shift," the firm said in a research note.
Major typhoid fever surveillance study in sub-Saharan Africa indicates need for the introduction of typhoid conjugate vaccines in endemic countries
There is a high burden of typhoid fever in sub-Saharan African countries, according to a new study published today in The Lancet Global Health. This high…
There is a high burden of typhoid fever in sub-Saharan African countries, according to a new study published today in The Lancet Global Health. This high burden combined with the threat of typhoid strains resistant to antibiotic treatment calls for stronger prevention strategies, including the use and implementation of typhoid conjugate vaccines (TCVs) in endemic settings along with improvements in access to safe water, sanitation, and hygiene.
Credit: IVI
There is a high burden of typhoid fever in sub-Saharan African countries, according to a new study published today in The Lancet Global Health. This high burden combined with the threat of typhoid strains resistant to antibiotic treatment calls for stronger prevention strategies, including the use and implementation of typhoid conjugate vaccines (TCVs) in endemic settings along with improvements in access to safe water, sanitation, and hygiene.
The findings from this 4-year study, the Severe Typhoid in Africa (SETA) program, offers new typhoid fever burden estimates from six countries: Burkina Faso, Democratic Republic of the Congo (DRC), Ethiopia, Ghana, Madagascar, and Nigeria, with four countries recording more than 100 cases for every 100,000 person-years of observation, which is considered a high burden. The highest incidence of typhoid was found in DRC with 315 cases per 100,000 people while children between 2-14 years of age were shown to be at highest risk across all 25 study sites.
There are an estimated 12.5 to 16.3 million cases of typhoid every year with 140,000 deaths. However, with generic symptoms such as fever, fatigue, and abdominal pain, and the need for blood culture sampling to make a definitive diagnosis, it is difficult for governments to capture the true burden of typhoid in their countries.
“Our goal through SETA was to address these gaps in typhoid disease burden data,” said lead author Dr. Florian Marks, Deputy Director General of the International Vaccine Institute (IVI). “Our estimates indicate that introduction of TCV in endemic settings would go to lengths in protecting communities, especially school-aged children, against this potentially deadly—but preventable—disease.”
In addition to disease incidence, this study also showed that the emergence of antimicrobial resistance (AMR) in Salmonella Typhi, the bacteria that causes typhoid fever, has led to more reliance beyond the traditional first line of antibiotic treatment. If left untreated, severe cases of the disease can lead to intestinal perforation and even death. This suggests that prevention through vaccination may play a critical role in not only protecting against typhoid fever but reducing the spread of drug-resistant strains of the bacteria.
There are two TCVs prequalified by the World Health Organization (WHO) and available through Gavi, the Vaccine Alliance. In February 2024, IVI and SK bioscience announced that a third TCV, SKYTyphoid™, also achieved WHO PQ, paving the way for public procurement and increasing the global supply.
Alongside the SETA disease burden study, IVI has been working with colleagues in three African countries to show the real-world impact of TCV vaccination. These studies include a cluster-randomized trial in Agogo, Ghana and two effectiveness studies following mass vaccination in Kisantu, DRC and Imerintsiatosika, Madagascar.
Dr. Birkneh Tilahun Tadesse, Associate Director General at IVI and Head of the Real-World Evidence Department, explains, “Through these vaccine effectiveness studies, we aim to show the full public health value of TCV in settings that are directly impacted by a high burden of typhoid fever.” He adds, “Our final objective of course is to eliminate typhoid or to at least reduce the burden to low incidence levels, and that’s what we are attempting in Fiji with an island-wide vaccination campaign.”
As more countries in typhoid endemic countries, namely in sub-Saharan Africa and South Asia, consider TCV in national immunization programs, these data will help inform evidence-based policy decisions around typhoid prevention and control.
###
About the International Vaccine Institute (IVI)
The International Vaccine Institute (IVI) is a non-profit international organization established in 1997 at the initiative of the United Nations Development Programme with a mission to discover, develop, and deliver safe, effective, and affordable vaccines for global health.
IVI’s current portfolio includes vaccines at all stages of pre-clinical and clinical development for infectious diseases that disproportionately affect low- and middle-income countries, such as cholera, typhoid, chikungunya, shigella, salmonella, schistosomiasis, hepatitis E, HPV, COVID-19, and more. IVI developed the world’s first low-cost oral cholera vaccine, pre-qualified by the World Health Organization (WHO) and developed a new-generation typhoid conjugate vaccine that is recently pre-qualified by WHO.
IVI is headquartered in Seoul, Republic of Korea with a Europe Regional Office in Sweden, a Country Office in Austria, and Collaborating Centers in Ghana, Ethiopia, and Madagascar. 39 countries and the WHO are members of IVI, and the governments of the Republic of Korea, Sweden, India, Finland, and Thailand provide state funding. For more information, please visit https://www.ivi.int.
Incidence of typhoid fever in Burkina Faso, Democratic Republic of the Congo, Ethiopia, Ghana, Madagascar, and Nigeria (the Severe Typhoid in Africa programme): a population-based study
We’ve added 60% to national debt since 2018. Germany - a country with major economic woes - added ‘just’ 32%.
Maybe it will never matter. Maybe MMT is real. Maybe we just cancel or inflate it out. Maybe career real estate borrowers or career politicians aren’t the answer.
I have no idea. Only time will tell. But it’s going to be fascinating to watch it play out.
He is right: it will be fascinating, and the latest budget deficit data simply confirmed that the day of reckoning will come very soon, certainly sooner than the two years that One River's Eric Peters predicted this weekend for the coming "US debt sustainability crisis."
According to the US Treasury, in February, the US collected $271 billion in various tax receipts, and spent $567 billion, more than double what it collected.
The two charts below show the divergence in US tax receipts which have flatlined (on a trailing 6M basis) since the covid pandemic in 2020 (with occasional stimmy-driven surges)...
... and spending which is about 50% higher compared to where it was in 2020.
The end result is that in February, the budget deficit rose to $296.3 billion, up 12.9% from a year prior, and the second highest February deficit on record.
And the punchline: on a cumulative basis, the budget deficit in fiscal 2024 which began on October 1, 2023 is now $828 billion, the second largest cumulative deficit through February on record, surpassed only by the peak covid year of 2021.
But wait there's more: because in a world where the US is spending more than twice what it is collecting, the endgame is clear: debt collapse, and while it won't be tomorrow, or the week after, it is coming... and it's also why the US is now selling $1 trillion in debt every 100 days just to keep operating (and absorbing all those millions of illegal immigrants who will keep voting democrat to preserve the socialist system of the US, so beloved by the Soros clan).
... having already surpassed total US defense spending and soon to surpass total health spending and, finally all social security spending, the largest spending category of all, which means that US debt will now rise exponentially higher until the inevitable moment when the US dollar loses its reserve status and it all comes crashing down.
We conclude with another observation by CNBC's Brian Sullivan, who quotes an email by a DC strategist...
.. which lays out the proposed Biden budget as follows:
The budget deficit will growth another $16 TRILLION over next 10 years. Thats *with* the proposed massive tax hikes.
Without them the deficit will grow $19 trillion.
That's why you will hear the "deficit is being reduced by $3 trillion" over the decade.
No family budget or business could exist with this kind of math.
Of course, in the long run, neither can the US... and since neither party will ever cut the spending which everyone by now is so addicted to, the best anyone can do is start planning for the endgame.
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