Thursday , October 21 2021
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Joseph Y. Calhoun III

Articles by Joseph Y. Calhoun III

Weekly Market Pulse: Perception vs Reality

4 days ago

It was the best of times, it was the worst of times…
Charles Dickens, A Tale of Two Cities
Some see the cup as half empty. Some see the cup as half full. I see the cup as too large.
George Carlin
The quote from Dickens above is one that just about everyone knows even if they don’t know where it comes from or haven’t read the book. But, as the ellipsis at the end indicates, there is quite a bit more to the line than the part everyone remembers.
It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we

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Weekly Market Pulse: Inflation Scare?

10 days ago

Bonds sold off again last week with the yield on the 10 year Treasury closing over 1.6% for the first time since early June. The yield is now down just 16 basis points from the high of 1.76% set on March 30. But this rise in rates is at least a little different than the fall that preceded it. When nominal rates fell from April through July, real rates fell right along with them. The nominal bond yield fell by 63 basis points and the 10 year TIPS yield fell by 57. That means that the drop was driven by a change in real growth expectations not a change in inflation expectations. But the rebound has not been as uniform, as the nominal rate has risen by 47 basis points while the real rate has only climbed by 27. So, this rise has been driven more by rising inflation expectations than rising

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Weekly Market Pulse: Zooming Out

17 days ago

How often do you check your brokerage account? There is a famous economics paper from 1997, written by some of the giants in behavioral finance (Thaler, Kahnemann, Tversky & Schwartz), that tested what is known as myopic loss aversion. What they found was that investors who check their performance less frequently are more willing to take risk and experience higher returns. Investors who check their results frequently take less risk and perform worse. And that makes a lot of sense if you think about it. If you check the stock market every day, the odds of seeing a negative result are fairly high. There are more up days than down but the difference isn’t that great, say 53% up and 47% down. If you back out to monthly you see positive returns 63% of the time, quarterly 69% and yearly 74%. The

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Weekly Market Pulse: Not So Evergrande

24 days ago

US stocks sold off last Monday due to fears over the potential – likely – failure of China Evergrande, a real estate developer that has suddenly discovered the perils of leverage. Well, that and the perils of being in an industry not currently favored by Xi Jinping. He has declared that houses are for living in, not speculating on, and ordered the state-controlled banks to lend accordingly. Evergrande is known as a real estate developer and it certainly is, but it is also a sprawling company with investments in multiple industries including, of course, an electric car company. Cutting off its financing isn’t just going to affect the Chinese real estate market. And real estate accounts for roughly 70% of household net worth in China so everyone in the country is going to take a hit. But is

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Weekly Market Pulse: Time For A Taper Tantrum?

September 20, 2021

The Fed meets this week and is widely expected to say that it is talking about maybe reducing bond purchases sometime later this year or maybe next year or at least, someday. Jerome Powell will hold a press conference at which he’ll tell us that markets have nothing to worry about because even if they taper QE, interest rates aren’t going up for a long, long time. That statement might have more credibility if the Fed had been right about just about anything over the last decade. But they haven’t, and we are left to wonder how exactly Jerome Powell will be wrong this time. Will the economy slow so quickly that he can’t even credibly start tapering? Or will the economy re-accelerate to such a degree that he has no choice but to stomp on the brakes? I’m not sure but I think there are reasons

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Weekly Market Pulse: I Have Questions

September 13, 2021

The wise man is one who knows what he does not know.
– Lao Tzu or Socrates or neither
It ain’t what you don’t know that gets you in trouble. It’s what you know for sure that just ain’t so.
– Mark Twain or Josh Billings or Artemus Ward or none of the above
Stocks are at all-time highs, credit spreads are as narrow as they’ve ever been, and someone just paid $24 million for some cartoons of apes:

LONDON, Sept 9 (Reuters) – A set of 107 non-fungible tokens (NFTs) representing images of cartoon apes sold for $24.4 million in an online sale at Sotheby’s auction house on Thursday, as the market for the niche crypto asset continues to heat up.
The images were part of the “Bored Ape Yacht Club” collection of NFTs – a set of 10,000 computer-generated cartoon apes, made by the U.S.-based

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Weekly Market Pulse: Windshield Investing

September 7, 2021

The economic slowdown we’ve been writing about for months officially arrived last Friday in the form of a particularly weak employment report. The number of new jobs created last month – or at least the WAG the BLS makes at such things on a monthly basis – was a mere 235,000 or roughly a cool half-million less than expected by economists who insist on trying to guess this random number on a monthly basis. There was hand wringing and pearl clutching all over the financial media as economic gurus tried to figure out what it all meant. Is the recovery over? Is this as good as it gets? Will this affect the timetable for the Fed’s tapering of QE? Will this affect the spending and taxing bill the current administration is trying to push through Congress? Oh, whatever does it all mean????

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Weekly Market Pulse: The Illusion of Control

August 29, 2021

Jerome Powell delivered his long anticipated speech at Jackson Hole last week. Well actually, I have no idea if he was actually in Jackson Hole since the speech was delivered electronically, another victim of the delta variant. The virus itself rated barely a mention in Mr. Powell’s remarks and I think that is probably as it should be. There has been some economic impact from the recent virus surge but nothing like previous versions. COVID may not be over, but we are learning to live with it as we probably will for some time to come. As for Mr. Powell’s speech I’d rate it as pretty boring based on my soporific reaction to it. Powell is an attorney and he proved it last Friday.
The market reaction to the speech was fairly muted but with a decidedly bullish tilt as most things are these

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Weekly Market Pulse: All or Nothing Investing

August 23, 2021

This week marks a change in our economic environment or at least our perception of it. Last year, post-COVID onset, we characterized the environment as one marked by a falling dollar and improving growth. To be exact, that is the environment the markets reflected; interest rates were rising, the yield curve was steepening and the dollar was falling. That changed somewhat at the beginning of the year when the dollar stopped falling and we shifted to a neutral dollar stance. Then, in the spring, interest rates peaked and started to fall and we shifted our view again, to one of falling growth and a neutral dollar. After the action in the dollar last week, I think we have to now shift our view once again. We now characterize the current environment as one of a rising dollar and falling growth.

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Weekly Market Pulse: Happy Anniversary!

August 16, 2021

Today is the 50th anniversary of the “Nixon shock”, the day President Richard Nixon closed the gold window and ended the post-WWII Bretton Woods currency agreement. That agreement, largely a product of John Maynard Keynes, pegged the dollar to gold and most other currencies to the dollar. It wasn’t a true gold standard as only other countries that were party to the agreement could demand gold in exchange for their dollars, but it was at least a standard of some kind. Nixon didn’t intend to end Bretton Woods altogether but rather anticipated a negotiation that would result in some devaluation of the buck. A very tall future Fed Chairman named Paul Volcker, at Treasury at the time, did indeed try to negotiate a devaluation but it was never implemented. And since that day, the dollar and most

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Weekly Market Pulse: What Is Today’s New Normal?

August 9, 2021

Remember “The New Normal”? Back in 2009, Bill Gross, the old bond king before Gundlach came along, penned a market commentary called “On the Course to a New Normal” which he said would be:
“a period of time in which economies grow very slowly as opposed to growing like weeds, the way children do; in which profits are relatively static; in which the government plays a significant role in terms of deficits and reregulation and control of the economy; in which the consumer stops shopping until he drops and begins, as they do in Japan (to be a little ghoulish), starts saving to the grave.”
If you remember reading Bill Gross commentaries over the years you know the piece was his typical mess of weird metaphors and obscure references that really amounted to nothing more than his usual talking of

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Weekly Market Pulse: Trading Places

August 2, 2021

They’re out there panicking right now. I can feel it. They’re out there. They’re panicking. Look at them.
– Eddie Murphy as Billy Ray Valentine in Trading Places
I thought of that scene the other day when a good friend in the investment business told me that investors today are panicking into the market rather than out as they were last spring. I have to say, I find it hard to disagree with him but I think there are specific parts of the market where panic is more obvious than others. For instance, 10-year TIPS yields are trading at all-time lows. While I often describe real rates as an indication of real growth expectations, TIPS yields also represent demand for inflation protection. Right now, investors are willing to accept a negative yield of 1.15% just to have protection from

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Weekly Market Pulse: Buy The Dip, If You Can

July 26, 2021

If you were waiting for a correction in stock prices to put some money to work, you got your chance last week. The Dow Jones Industrial Average was down nearly 1000 points at the low Monday and closed down 725, a loss of a little over 2%. The S&P 500 did a little better but closed down 1.5%. It looked like the beginning of a beautiful correction, one for which we were way overdue. The reason everyone gave for the selloff was fear of the Delta variant, of which new cases and hospitalizations have been rising rapidly, especially in places where vaccine take-up has been weak. If that was indeed the case, the surge was apparently vanquished by Tuesday morning or at least fear of it. Stocks took off Tuesday on the news that building permits fell 5.1% in June and never looked back. The market

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Weekly Market Pulse: As Clear As Mud

July 19, 2021

Is there anyone left out there who doesn’t know the rate of economic growth is slowing? The 10-year Treasury yield has fallen 45 basis points since peaking in mid-March. 10-year TIPS yields have fallen by the same amount and now reside below -1% again. Copper prices peaked a little later (early May), fell 16% at the recent low, and are still down nearly 12% from the highs. Crude oil has recently joined in, falling 7% from its recent high. Energy stocks are in a full-blown correction, down 13% from the high set in June. Transportation stocks are also down more than 10%  and materials stocks are close to correction territory too. Small-cap stocks (Russell 2000) have been treading water since early February and are down about 8% from their high. So, yes, the markets – people – seem well aware

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Weekly Market Pulse: Is It Time To Panic Yet?

July 12, 2021

Until last week you hadn’t heard much about the bond market rally. I told you we were probably near a rally way back in early April when the 10-year was yielding around 1.7%. And I told you in mid-April that the 10-year yield could fall all the way back to the 1.2 to 1.3% range. The bond rally since April has been of the stealth variety, the financial press and market strategists dismissing every tick down in rates as nothing. It was a lonely trade to put on and yes, I think it was a trade, not the beginning of a bigger move. Heck, I expected a rally and still had a hard time benefitting from it. I did extend the duration of our bond portfolio in the spring but I didn’t go out and load up on the really long maturities that did the best as rates fell. Part of the reason for that is our

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Weekly Market Pulse: Contrasts & Contradictions

July 6, 2021

Six months ago, the US was still reporting 226K new cases of COVID a day, a rate that would peak in the first half of January at over 300k. Daily deaths also peaked in those first two weeks of the new year at over 4000. The economy was still struggling to recover, most restaurants surviving on takeout traffic, and no one was even talking about going back to the office. The S&P 500 was nearly 600 points lower and the 10-year Treasury was yielding less than 1%. The 2-year note was about half its current level. Gold was still near $2000 and crude oil was trading for less than $50/barrel. We have come a long way in a short time.
As we mark the halfway point of the year with the traditional 4th fireworks, hot dogs, and apple pie, the economy is in full recovery mode and asset prices are

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Weekly Market Pulse: 1984

June 28, 2021

Freedom is the freedom to say that two plus two make four. If that is granted, all else follows.
George Orwell, 1984
I have said many times and believe deeply that our job as investors is not to predict the future but merely to interpret the present as accurately as we can. I’ve also said and believe deeply that doing so isn’t nearly as easy as it sounds. We have numerous cognitive biases working against us, way too many to name here. I probably have a cognitive bias that affects my ability to recognize cognitive bias. Our political beliefs – our tribal loyalties – affect our ability to see things clearly. Our hopes and dreams and of course our fears all affect our view of the past, present, and future. For those of us who write about markets regularly, there is the issue of our past

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Weekly Market Pulse: Never Mind

June 21, 2021

I thought of Gilda Radner this past week. Actually, I thought of a character she created on the original Saturday Night Live, Emily Litella, who was a regular on the Weekend Update segment. She’d start to rant about something topical, getting it completely wrong at which point Jane Curtin or Chevy Chase would explain it to her and she’d respond. “Oh. Well. That’s completely different. Never mind.” (For those of you too young to remember Gilda, here’s a link. Radner was a rare talent taken from us too soon by ovarian cancer.) There is no better description of the market moves that happen in the week of a Fed meeting. There’s almost always an initial market move based on a knee-jerk interpretation (or misunderstanding) of the Fed’s statement or Jerome Powell’s press conference performance.

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Weekly Market Pulse: Who’s The Boss?

June 14, 2021

I told you last week that there were strange things going on in the labor market but I had no idea how much of an understatement that really was. Much of last week’s economic focus was on the inflation report but I think the JOLTS report may turn out to be more significant. Inflation was indeed pretty hot year over year but that wasn’t unexpected. It wasn’t all about base effects either, as our Jeff Snider pointed out. The bond market reaction to the CPI report was not as expected though and that gives us reason to believe that, for once, the Fed is going to get something right. This “inflation” is probably of the transitory variety, mostly a consequence of the supply shock nature of the last recession. There are still things to worry about on the inflation front but sustaining current

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Weekly Market Pulse: Looking For Workers In All The Wrong Places

June 7, 2021

We got another disappointing employment report last week. Well, that’s what everyone said anyway, that the complete WAG by the BLS that the US economy added 559,000 jobs in May was below expectations and disappointing. I suppose it is a tad disappointing but I find it hard to lament the fact that a half-million Americans found jobs last month. There are strange things going on in the labor market right now and I don’t think anyone really knows what will happen over the next few months. For a while, there was this expectation of a boom as everyone went back to work and play but that seems to have faded with the reality of this recovery from the biggest supply shock in history. Everyone seems to still be thinking of this as the standard recession and recovery cycle just like all the others

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Weekly Market Pulse: The Market Did What??!!

April 19, 2021

One of the most common complaints I hear about the markets is that they are “divorced from reality”, that they aren’t acting as the current economic data would seem to dictate. I’ve been in this business for 30 years and I think I first heard that in year one. Or maybe even before I decided to lose my mind and start managing other people’s money. Because, of course, it has always been this way. Economic data represents the past while markets look to the future. And that future is not necessarily the one you believe will unfold but one that millions of people form through their buy and sell decisions. You can no more predict what those millions of people are thinking than you can the winner of the next Super Bowl. Well, actually predicting the Super Bowl the last couple of decades has been

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Weekly Market Pulse: Nothing To See Here. No, Really. Nothing.

April 12, 2021

The answer to the question, “What should I do to my portfolio today (this week, this month)? is almost always nothing. Humans, and especially portfolio managers, have a hard time believing that doing nothing is the right response….to anything…or nothing. We are programmed to believe that success comes from doing things, not not doing things. And so, often we look at markets on a day-to-day or week-to-week basis and think something of significance happened and we ought to respond to it. Most people, according to this recent article in Nature, “consistently consider changes that add components over those that subtract them — a tendency that has broad implications for everyday decision-making.”. That is certainly obvious in most of the investor portfolios I’ve reviewed over the years which

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Weekly Market Pulse: Perception is Reality

March 29, 2021

It is said that there are two types of people in this world. Those who see the glass as half full and those who see it as half empty. On Wall Street, we call them bulls and bears. A bull can see an economic report and perceive it in a way that seems wholly illogical, misguided, and downright stupid to a bear. And vice versa for the bears who see every report as a harbinger of doom. What’s really strange about this is that, at times, they are both right, bull and bear. They just see things from a different perspective. They perceive the world through different lenses, and in doing so, create their own realities. The problem, of course, is that the lens we each use, is distorted by our experiences, our knowledge, our preconceived notions, emotions, and, of course, self-interest. None of us

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Weekly Market Pulse: The More Things Change, The More The Song Remains The Same

March 15, 2021

Markets continue to move based on the expectation of a post-virus boom. At least that is the dominant narrative right now. The economy, boosted by another round of stimulus, will surge once the virus is under control and things return to normal. President Biden last week offered his version of optimism by saying that families would be able to gather for a July 4th celebration, but only in small groups for backyard barbecues. I’m guessing that the President doesn’t get out on his own much, because if he did he’d know that offering that as some kind of aspiration sounds pretty silly to most of the country. I’ve got news for the Biden administration; the barbecue has already started.
But whether the party is truly started or not, markets are trending toward higher economic growth and

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Weekly Market Pulse: How High Can Rates Go?

March 8, 2021

I’ve been getting that question a lot these days. How high can rates go? It is asked in a way that seems to imply that the answer is obvious – not much. Why? The answer is almost always the same; the Fed can’t and won’t let rates go up. If they did, it would kill the economy and raise the interest cost of the government. They can’t let that happen so they’ll implement yield curve control and keep long-term rates from rising. The Fed is believed so powerful that their mere promise to buy bonds to cap yields would stop the selling by any and all other bond owners.
I suppose that is possible but I have my doubts as to whether the Fed would even attempt to control the yield curve as they have in the past (during WW2 and for six years after the war, most recently). The holders of Treasuries

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Weekly Market Pulse – The Message Of The Market

March 1, 2021

I was told many years ago when I started in this business that it wasn’t my job to predict the future. Our job as investors is to properly and accurately interpret the present. I was also told that wasn’t as easy as it sounded and the current consensus about the state of the world was probably, almost certainly, almost always, wrong. Last week I thought about that as I listened to guest after guest, talking head after talking head tell me that the bond market was selling off on inflation fears. Or that the dreaded bond vigilantes had finally made a comeback, Treasuries going wanting at the 7 year auction as the House of Representatives prepared to pass President Biden’s $1.9 trillion COVID relief (mostly) bill.
It was a neat narrative that explained so much. Bonds were selling off, stocks

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Weekly Market Pulse – Real Rates Finally Make A Move

February 22, 2021

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

February 15, 2021

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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