Sunday , February 28 2021
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Joseph Y. Calhoun III

Articles by Joseph Y. Calhoun III

Weekly Market Pulse – Real Rates Finally Make A Move

7 days ago

Last week was only four days due to the President’s day holiday but it was eventful. The big news of the week was the spike in interest rates, which according to the press reports I read, “came out of nowhere”. In other words, the writers couldn’t find an obvious cause for a 14-basis point rise in the 10-year Treasury note yield so they just chalked it up to mystery. Of course, anyone who’s been paying attention knows that rates have been rising for almost a year – and quite steadily since the beginning of August – so how this last 14 basis points qualifies as a surprise I’m not sure.
What was an actual surprise was mostly missed by the market commentators – the rise in real rates. The 10-year TIPS yield closed the week at -80 basis points which says very little good about the US economy.

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Weekly Market Pulse – February 15, 2021

13 days ago

This is a holiday-shortened week in the US but there is some important data on tap.
Retail sales are expected to show a month-to-month rise for the first time since September. Year-over-year numbers remain pretty subdued and likely will until life returns to something resembling normal.
Producer prices will likely rise but inflation continues its benign ways. It is likely we’ll see prices surge on a year-over-year basis later in the spring, but that will just be a base effect from when prices were falling at the onset of the virus last year.
Industrial production has been in a steady uptrend since hitting bottom last April and this report will probably show more of the same. In fact, if I had to pick a report that might provide a positive surprise, it is this one. The production side of

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Conventional Wisdom Is Nothing of The Sort

January 18, 2021

If you had known in October all that would transpire over the next 2 ½ months, how would you have positioned your portfolio? The conventional wisdom before the election was that a Biden win would be negative for stocks because he has promised to raise taxes and specifically corporate taxes. In 2016, conventional wisdom was that a Trump victory would be bad for stocks because of his protectionism. In both cases, conventional wisdom turned out to be nothing of the sort.
After the November election, attention shifted to the Senate, where control would be determined by two runoff elections in Georgia. The consensus view was that a divided government would be the best outcome, a Republican Senate to contain the worst impulses of a Biden administration.  Now that piece of “wisdom” has also

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Tactical Update: Long-Term Trends

December 24, 2020

Note: There are a lot of charts in this post. That doesn’t mean that we are technicians. We use charts because we are primarily interested in trends, especially long-term, big-picture trends. And charts are the easiest way to present that information. In general, you will want your tactical adjustments to respect the long-term trend. There are times when it makes sense to position for a reversal but only at extremes.

S&P 500
The trend here is pretty obvious, although there was certainly reason to think it might be changing back in March. A couple of things to notice here. Volatility has increased considerably since 2018 and that can be seen as a loss of momentum. Or maybe a loss of the consistency that prevailed from 2012 to 2018. Another observation is that the current price is

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Winning The Beauty Contest

December 14, 2020

One of the hardest things to understand as an investor is that markets sometimes – often – don’t line up with economic reality. Markets rarely reflect current economic conditions and at times they seem to discount a future that seems highly unlikely at best, and delusional at worst. That seems to be the case today, as stocks sit near all-time highs and the economic recovery falters in the face of the renewed virus outbreak (or whatever cause you want to assign). But it isn’t just stocks that seem to be discounting a better economic future.
We spend a lot of time watching the bond market as it often seems the wisest of the market crowds. The outlook from bonds has improved recently, although most of the rise in nominal rates is just a reflection of higher inflation expectations. Since

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Tesla Isn’t A Car Company

December 2, 2020

We have the luxury, the honor, of speaking to a lot of individual investors here at Alhambra. Whether they are clients or future clients (optimism is my default condition), the most common view of stocks is that they are overvalued and a fall – a large fall – is inevitable. And there is no stock that embodies that view more than Elon Musk’s Tesla Incorporated. It was once known as Tesla Motors but Musk changed the name in early 2017. There may never have been a more successful rebranding in the history of the world.
At the time of the change the stock traded for about $50 and it was expensive for a car company. Today it trades for $585 and it is not, as I have been told repeatedly by every Tesla bull I’ve encountered, an automobile company. Now, the rebranding did take some time, the stock

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Tactical Update: Uncertainty Abounds

October 13, 2020

This seems an opportune time to review the difference between Strategy and Tactics.
Strategy and tactics are how we achieve our goals and objectives. In our specific case, the goals and objectives are financial in nature. Strategy is the path we will take to get from where we are today to where we want to be tomorrow; it is the big picture plan. In investing strategy is your asset allocation target, how you will allocate your resources across various asset classes to achieve the returns you need to meet your goals. Tactics are specifically and tangibly how we implement the strategy.
Strategy and tactics are often described and differentiated as long term and short term but that isn’t really accurate. The choices we must make on how to fulfill our strategic asset allocation – which

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Monthly Macro Monitor – September 2020

September 28, 2020

The economic data over the last month continued to improve but the breadth of improvement has narrowed. Additionally, while most of the economic data series are still improving, the rate of change, as Jeff pointed out recently, has slowed. I guess that isn’t that surprising as the initial phase of the recovery comes to an end. 2nd quarter was a giant downdraft and 3rd quarter saw an initial rapid climb out the giant hole dug by the shutdowns (an own goal of epic proportions in my mind, but I try not to get into politics on our work site so that’s all I’ll say). But even after that initial acceleration out of deep recession, we remain well below where we were when all this started. A slowing of the recovery is okay and expected; a complete truncation is not.
When all this started is an

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Uh Oh, The Dollar Has Caught A Bid

September 23, 2020

Anyone who follows Alhambra knows that we keep an eye on the dollar. It is a very important part of our process of identifying the economic environment. A rising dollar, when combined with a falling rate of growth, can be a lethal combination. That was the situation in March and of course during the financial crisis of 2008. So the recent rally is something that has got our attention. For now, though, we don’t see any significant stresses in the system that would produce that kind of liquidity driven event.
The dollar has been in a short term downtrend since the spike and peak in the heart of the COVID panic back in March. The vast majority of that decline was compressed in a roughly 2 1/2 month period starting in mid-May and ending in early August. But that decline has done nothing to

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Monthly Market Monitor – August 2020

September 7, 2020

Many of the weak dollar trends I noted in June’s update have moderated – even as the dollar has weakened further. US stocks surged over the last month, with growth indices leaving their value counterparts in the dust…again. About the only exception on the equity side was China, which outperformed for much the same reason as US growth – technology stocks. Generally, we expect foreign stocks to outperform in a weak dollar environment but so far any outperformance has been underwhelming. Just one more oddity in this oddest of stock markets.
In January of this year, when stocks were surging to new highs, I wrote that stocks had entered the “silly season”. Oh, if only I had known how wrong that was. I am always loath to use the term bubble because we can’t know the future and today’s asset

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Monthly Macro Monitor – August 2020

August 20, 2020

One of the advantages we enjoy here at Alhambra is the opportunity to interact with a lot of investors. We talk to hundreds of individual investors on a monthly basis, giving us a front-row seat to everyone’s fear and greed. Economic data tells us about the past, which isn’t particularly useful for investors focused on the future. Sentiment, though, is what moves markets and markets are what shape the future economy. If you’re looking at economic data to try and figure out what the market will do, you’re doing it backward. You should instead look to markets to figure out what the economy will do.
The most common comment I’ve heard over the last couple of months is: “The stock market makes no sense. Why are stocks soaring when the economy is so bad?” Well, I’ve got news for you. The stock

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A Tactical Update: Whither Goest The Dollar

July 27, 2020

Our Fortress strategic asset allocation includes 5 distinct asset classes:

The Fortress allocation has historically produced better risk-adjusted returns than the traditional 60% stocks/40% bonds allocation.

The bond allocation is varied to adjust the risk of the portfolio. A Fortress allocation with 20% bonds has produced a higher return with lower standard deviation (volatility) than the 60/40 portfolio. In a world where bond yields are at or near all-time lows, we think that ought to be of interest to investors.
Our approach has lagged in performance over the last 10 years, which isn’t surprising since our portfolios put an emphasis on preserving purchasing power. In a world of low inflation – deflation in some areas – it isn’t surprising that holding gold and commodities in your

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Monthly Market Monitor – July 2020

July 6, 2020

Most Long-Term Trends Have Not Changed
A lot has changed over the last 4 months since the COVID virus started to impact the global economy. Asia was infected first with China at ground zero. Their economy succumbed first with a large part of the country shut down to a degree that can only be accomplished in an authoritarian regime. The rest of Asia responded to the initial outbreak better than the Chinese (and most everywhere else we now know) and generally mitigated the health effects, if not the economic ones. China opened back up first and the rest of Asia has followed suit. Economic recovery in China, appears at least, to be accelerating. The rest of Asia is also recovering but the depth of the downturn was not as great and so neither is the recovery pace.
Europe got it next with

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Monthly Macro Monitor – June 2020

June 17, 2020

The stock market has recovered most of its losses from the March COVID-19 induced sell-off and the enthusiasm with which stocks are being bought – and sold but mostly bought – could lead one to believe that the crisis is over, that the economy has completely or nearly completely recovered. Unfortunately, other markets do not support that notion nor does the available economic data. Of course, markets look forward and there is the possibility that stock market buyers are privy to knowledge about the future that bond traders are not. Sure.
There is no doubt that economic activity is recovering from its worst levels. We can see that in numerous official and anecdotal reports. Because the official economic data is so delayed, investors have turned to new, non-traditional, and more timely

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We Have Reached The Silly Phase of the Bull Market

June 11, 2020

Have we entered a new bull market? Was the 35% pullback in the S&P 500 in March the fastest bear market in history? Or is this just a continuation of the bull market that started in 2009, interrupted by a rather large correction? Bull markets and bear markets are about behavior, about the human emotions of fear and greed. While we got a brief bout of fear in March, greed has since overwhelmed all sense, common and otherwise. What we’re seeing in the casino…er, market….today is not beginning of a bull market behavior.
What has been going on in markets over the last two months is the most glorious episode of human greed I’ve seen since 1999. I know there will be plenty who pooh-pooh that comparison but the speculative trading and the ignorance of those doing it is exactly the same. There are

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Beware of Accepted Wisdom

May 26, 2020

Most everyone has heard of the Chinese proverb – or curse – that wishes one to live in “interesting times”. You’ve probably also heard that in Chinese the word “crisis” is composed of two symbols, one that denotes “danger” and another that means “opportunity”. Well we certainly live in interesting times and there is indeed a crisis. We won’t know if it was an opportunity until sometime in the future but if the stock market is any indication there are certainly a lot of folks who see it that way.
In the last two months 36 million people have filed for unemployment benefits and the official unemployment rate has risen from 3.5% to 14.7%. Retail sales were down nearly 17% from March to April and 21.6% year over year. Open Table recently estimated that one quarter of US restaurants will go

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Market vs Economy: A Time Mismatch

May 18, 2020

“Intelligence is the ability to adapt to change.”
Stephen Hawking
The economic news over the last month has been as awful as anyone alive has ever seen. Unemployment has risen from 3.5% to 14.7% since February with nearly 15 million Americans filing for jobless benefits in the last month alone. The CFNAI hit its third-worst reading ever and that was for March so a new record is likely (interestingly, the worst reading ever was in 1974; the 70s really were pretty awful). Factory orders, Industrial production, and durable goods orders all declined by double-digit percentages. Exports and imports both fell as global trade imploded. Retail sales fell 16% and the savings rate rose to over 13%.
In the midst of this economic carnage, the S&P 500 fell….0.3% (not including today, when vaccine

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Do We Need A “New” Capitalism?

April 30, 2020

Everyone, or at least all the right-thinking people, believes that capitalism needs to be reformed. Elizabeth Warren calls her version Accountable Capitalism. Marco Rubio dusted off an 1891 speech by Pope Leo to advocate what he calls Common Good Capitalism. Both are attempts to correct what these lawyers see as flaws in the current incarnation of economic organization that is sneeringly referred to as Shareholder Capitalism. Milton Friedman apparently infected several generations of capitalists with an insatiable greed by informing them that they should run their companies for the sole benefit of owners. You know, the people who actually provide the capital that gives capitalism its name.
Warren’s new version of capitalism is one where putting capital at risk entitles you to nothing more

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OPEC + Reality

April 21, 2020

Two weeks ago, OPEC+ and the US came to a deal to cut crude oil production. President Trump hailed the deal, saying it would save “hundreds of thousands” of oil patch jobs. The Texas Railroad Commission meets today to “consider” a cut in oil production in the Lone Star state. Meanwhile, the market has made all this high-level negotiating irrelevant, crashing into negative territory on Monday as the May crude oil futures contract settled at $-37.63.
Yes, that is a negative sign in front of the 37. It closed last Friday at $17.95 so the loss Monday was over $55/barrel, a percentage loss of over 300%. That is, as you might guess, a record loss for a single day. Well, actually it is a record loss for any period of time because crude oil, to my knowledge, has never traded at a negative price.

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The Dichotomy of Market Sentiment

April 6, 2020

It doesn’t take much effort to find bearish sentiment about stocks or the economy right now. CNN’s Fear & Greed Index, an amalgam of seven discrete market sentiment indicators, is still in the “Extreme Fear” zone. Generally, market bottoms are associated with extreme fear while tops are associated with extreme greed. And it generally works; the gauge was pegged in the “Extreme Greed” zone at the beginning of this year.
As I said a couple of weeks ago, if this was a “normal” market I’d be buying with both hands. Sentiment this negative is rare and almost always a buy signal. It is the nature of bear markets, however, that they are rarely “normal”. All bear markets throw up things that are “different this time” that makes an investor pause over the buy button. In that sense, this bear market

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A Marathon, Not A Sprint

March 30, 2020

Stocks rose last week, a breathtaking, nearly 20% run off the recent lows before a pullback Friday trimmed the gain for the week to about 11%. That was certainly helpful but investors would be well-advised not to get too excited. This is what bear market rallies look like. They come out of nowhere, they run much further than anyone thinks they should and, more than anything, they engender hope; hope that the bear is finally over, that policymakers have finally pulled the right lever to right the ailing economy. False dawns are the norm, not the exception.
In the last two bear markets, there were numerous, breathtaking stock market rallies that ultimately proved to be nothing more than selling opportunities before new lows. In the 2001 – 2002 bear market, there were three rallies of more

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Regime Change

March 23, 2020

Stocks took another beating last week as the scope of the coronavirus shutdown started to sink in. The S&P 500 was down 15% last week with most of that coming on Monday after the Fed’s emergency rate cuts. Our accounts performed much better than that, but were still down on the week as corporate and municipal bonds continued to get marked down. Municipals recovered slightly at the end of the week as the Fed announced they would be buying highly-rated bonds with maturities up to a year.
The bill being considered in Congress right now would authorize the Fed to purchase corporate debt as well, but as of now, the bill is still being negotiated and there is considerable uncertainty about what its final makeup will look like. We are at a pivotal moment and dependent on the politicians at this

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A Week We’ll Never Forget

March 16, 2020

Last week was one of the worst weeks in the history of the US stock market. Thursday’s plunge was the worst one-day loss other than the crash of 1987. Friday’s recovery was stunning as well but big rallies are typical of bear markets and that is, unfortunately, where we now find ourselves.
Obviously, the selling was about the coronavirus and our response to it. But there was much more going on in the shadows that exacerbated the selling across multiple asset classes. The deleveraging across markets was extreme and apparently forced.
There were rumors all week of so-called “risk parity” fund being the culprit, but it doesn’t matter what name you put on it. Leveraged funds were being forced by markets and their brokers to reduce risk. There were very large sell orders forced into a falling

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Is this the Beginning of a Recession?

March 10, 2020

As I sit here Monday evening with the Dow having closed down 2000 points and the 10-year Treasury yield around 0.5%, the title of this update seems utterly ridiculous. With the new coronavirus still spreading and a collapse in oil prices threatening the entire shale oil industry, recession is now the expected outcome. Most observers seem to question only the potential length and depth of the coming downturn.
The case of recession does seem to be one of those open and shut, slam dunk versions we don’t get very often in markets. The economic data has certainly deteriorated over the last year – although that was true before the arrival of the virus. In some respects, more recent economic data had actually improved somewhat. But with the actions being taken to combat the spread of the virus –

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Monthly Macro Monitor: Market Indicators Review

October 29, 2019

Is the recession scare over? Can we all come out from under our desks now?
The market based economic indicators I follow have improved since my last update two months ago. The 10-year Treasury rate has moved 40 basis points off its low. Real interest rates have moved up as well but not quite as much. The difference is reflected in slightly higher inflation expectations.
The yield curve has also steepened as the 10-year Treasury yield rose faster than the 2-year. This is not the type of steepening we normally expect to see just prior to recession by the way. That would be if the 2-year yield was falling faster than the 10-year. On the other hand, the change here is not large even if it is in the right direction.
As you’ll see below, some of our other market indicators are also pointing to

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Monthly Macro Monitor: Market Indicators Review

August 29, 2019

This is a companion piece to last week’s Monthly Macro report found here.
The Treasury market continues to price in lower nominal and real growth. The stress, the urgency, I see in some of these markets is certainly concerning and consistent with what we have seen in the past at the onset of recession. The move in Treasuries is by some measures, as extreme as the fall of 2008 when we were in a full blown panic. That to me, is evidence that this move is overly emotional since the economic conditions today are nowhere near as severe as that time. As Jeff and I have both pointed out, the next recession is unlikely to look like the last one. The banking system, at least in the US, is in much better shape than 2008; bank failures are probably not on the next recession agenda. If we’re right

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Monthly Macro Monitor: Does Anyone Not Know About The Yield Curve?

August 21, 2019

The yield curve’s inverted! The yield curve’s inverted! That was the news I awoke to last Wednesday on CNBC as the 10 year Treasury note yield dipped below the 2 year yield for the first time since 2007. That’s the sign everyone has been waiting for, the definitive recession signal that says get out while the getting is good. And that’s exactly what investors did all day long, the Dow ultimately surrendering 800 points on the day. I don’t remember anyone on CNBC mentioning it – although surely they must have – but by the end of the day the curve actually ended up back in positive territory, the inversion lasting less than a day. So, never mind. Maybe.
Of course, the 10/2 curve is only a small slice of the yield curve and other parts have been inverted for some time. Indeed the Fed’s

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Big Picture: Long-Term Trends In Markets

January 1, 1970

The investment industry is always focused on the short-term, an attempt I think to justify fees through activity. A recent example is the breathless reporting about a short term shift toward value stocks. Value has underperformed for so long that everyone is hyper-focused on finding the inflection point so every wiggle in that direction is hailed as the turning point.

The Last Time the Market Acted This Way, Value Stocks Gained 30 Percent

Institutional Investor, September 23, 2019

Value Stocks Had Been Left For Dead. Their Revival Could Be the Real Deal.

Barron’s, September 17, 2019
Here’s what they’re talking about. This is a chart showing the ratio of the S&P 500 Value ETF (IVE) to the S&P 500 Growth ETF (IVW). When the price is rising, value is outperforming:

Time to shift your

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