Friday , October 22 2021
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Michael Lebowitz

Michael Lebowitz

Co-Founder 720 Global. Strategic Expertise: Macro-Econ, Asset Alloc, Valuation, Risk Mgt.

Articles by Michael Lebowitz

Viking Analytics: Weekly Gamma Band Update 10/18/2021

3 days ago

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We share the Weekly Gamma Bands Update by Viking Analytics. The report uses options gamma to help you better manage risk and your equity allocations.
Gamma Band Update
The S&P 500 (SPX) had a strong rally last Thursday and Friday to close the week above our calculated gamma flip level. The gamma band model began the week with a 100% allocation to SPX.  The gamma flip level can be viewed as having served as resistance; once it was broken, the market moved meaningfully higher,.
The Gamma Band model[1] is a simplified trend following model that is designed to show the effectiveness of tracking various “gamma” levels. This can be viewed conceptually as a risk management tool. When the daily price closes below Gamma Flip level (currently near 4,415), the model will reduce

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What Causes “Transitory” Inflation to Become “Persistent”?

9 days ago

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What Causes “Transitory” Inflation to Become “Persistent”?

You are the CEO of Acme Widget Factory. Among your many duties is overseeing production and profit margins related to your core product, widgets. Competition in your industry is stiff, with over a half dozen widget producers.

The pandemic and recovery are throwing the widget industry for quite a loop. In the spring of 2020, there was no demand for widgets. You laid-off employees and limited production while focusing on survival. During the summer of 2020, fiscal stimulus was percolating through the economy, and demand soared. It continues at a robust pace.

Acme’s future is brighter, but as CEO, you face a new set of problems. Your factories are running at full force, as are your competitors, but demand

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Viking Analytics: Weekly Gamma Band Update 10/11/2021

10 days ago

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We share the Weekly Gamma Bands Update by Viking Analytics. The report uses options gamma to help you better manage risk and your equity allocations.
Gamma Band Update
The S&P 500 (SPX) had a strong rally last Thursday and closed the week just under our calculated gamma flip level. This Friday, we have the October monthly option expiration in stocks, which has seen volatility and a pullback in and around this day over the last several months.  The gamma band model began the week with an allocation of 30% to SPX and 70% cash.   
The Gamma Band model[1] is a simplified trend following model that is designed to show the effectiveness of tracking various “gamma” levels. This can conceptually be viewed as a risk along with other tools. When the daily price closes below Gamma

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Technical Value Scorecard Report – Week Ending 10-08-21

14 days ago

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Relative Value Graphs

The S&P 500 is about 1% higher versus last Friday, as the selloffs from earlier in the week were bought vigorously over the previous two days. Energy continues to lead the way, beating the S&P by nearly 1%. Other cyclical sectors outperformed as well, including Industrials, materials, and financials. Transportations stocks were the odd sector out as higher energy prices and poor earnings from FedEx held the sector back.The third graph shows the strong excess returns in energy (XLE) and broad relative weakness in most other sectors over the last 35 trading days.Energy and financials are overbought but still have some room to run, as we noted last week. Crude oil is close to breaking above $80 a barrel. On a technical basis, there is little above $80

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Bonds: Hold ‘Em, Fold’ Em, Walk Away, or Run?

16 days ago

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Bonds: Hold ‘Em, Fold’ Em, Walk Away, or Run?

“You got to know when to hold ’emKnow when to fold ’emKnow when to walk awayAnd know when to run”  Kenny Rogers- The Gambler

So how do we know when to hold or fold ’em bonds?

If you ask bond traders, you are likely to get many different answers. Some will say it depends on future inflation rates. Over the last ten years, the Fed has become a popular response. Economic growth rates, demographics, and the dollar are also likely replies.

According to our Twitter followers, over half think the Fed is the most significant determinant of bond yields.

In this article, we explore a few essential factors that tend to dictate bond yields. We aim to assess whether the recent increase in yields is a buying opportunity or

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Technical Value Scorecard Report – Week Ending 10-01-21

20 days ago

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Relative Value Graphs

Yesterday’s generals, the FAANG stocks, are leading the way lower. Only two sectors had negative excess returns versus the S&P 500 last week. They were technology giving up 1.39% and healthcare losing 0.22% to the S&P, respectively.Value/cyclical stocks outperformed on a relative basis. The energy sector led the way, up 2.3%, while the S&P gave up 3.3%. Among the other relative outperformers were industrials, financials, and transportation. While early, the market is signaling a rotation to a reflationary bias. The third graph below shows our inflationary index has picked up about 7% on the deflationary index over the last few weeks. The rotation is not confirmed, as the bond market’s 5-year implied inflation rate is stable at 2.50%.As far as

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China Plays The Long Game While The U.S. Blows Bubbles

23 days ago

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China Plays The Long Game While The U.S. Blows Bubbles

China is taking multiple actions to boost productivity and sustainably strengthen its economy. If successful, China’s efforts come at the expense of the U.S. and other western nations that are not as willing to stress the benefits of productivity.

We abhor communism in part because of its economic shortfalls and restrictions on basic human rights and freedoms. However, communist rule has a benefit. In China’s case, the government can take actions without broad government approval, regardless of what its people think. Today, it is using its authoritarian power to better the economy and raise collective prosperity. Some of the productive actions they are taking are much more difficult for democracies to accomplish.

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Technical Value Scorecard Report For The Week of 9-24-21

27 days ago

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Relative Value Graphs

The third graph below highlights the recent strength of inflationary sectors versus weakness in defensive sectors against the S&P 500. This is not surprising given the emergence of risk-on sentiment after the FOMC meeting Wednesday.The first graph shows that most inflationary sectors strengthened versus the market, except for materials which remains very oversold on a relative basis.The factor/index chart similarly reflects the risk-on sentiment, with small-caps, mid-caps, momentum, and international all gaining ground versus the S&P 500. Emerging markets were left out of the rally due to the situation in China. Meanwhile, the FAANG heavy NASDAQ 100 weakened versus the S&P 500.The over-arching theme this week was a return to risk-on sentiment as

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When Will “Transitory Inflation” Overstay Its Welcome?

September 22, 2021

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There has been much talk of “transitory inflation”, but the evidence is starting to suggest the term may overstay its welcome.

The Fed chose the word “transitory” to describe this instance of rising prices because of its imprecision. Transitory can denote hours, months, or decades. Using transitory versus a specific period provides the Fed freedom to be wrong but be grammatically correct.

While the Fed uses ambiguous words, Mr. Market may have more defined expectations. If investors grow impatient with the Fed’s transitory, bond markets may react. In such a case, how will the Fed respond to “enduring” or “lasting” inflation coupled with higher yields? If they are already tapering, will such conditions push them to speed up their pace?

Conversely, recent data shows

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Evergrande- Why Most Analysis Is Dead In The Water

September 20, 2021

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Evergrande- Why Most Analysis Is Dead In The Water

There is a lot more to the failure of China’s Evergrande company than meets the eye. For the last year, China has been taking steps to curb speculation and promote economic productivity.

At $16 billion, (China’s GDP) is no longer that far from that of the U.S. ($22 billion) and nearly three times Japan, the world’s third-largest economy. What China does and how they do it matters a lot, not just to China but for the global economy. To help keep you better informed, we share a must-read commentary of the situation from @INArteCarloDoss. Please give him a follow on Twitter for powerful analysis on China and macroeconomic/market topics worldwide.

The following is from a series of Twitter postings, so please ignore the

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Technical Value Scorecard Report For The Week of 9-17-21

September 17, 2021

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Relative Value Graphs

This week’s results are interesting as the divergences between growth/low beta and value/cyclical sectors are not as evident as over the last few months.Transports are the most overbought sector, albeit not at a very high score. Energy has moved up as well. That said, materials and industrials, two other sectors affiliated with cyclical sectors, are the most oversold sectors.   Energy stocks had a great week, beating the S&P by over 3.5%. Over the last four weeks, it has been the best performing sector with an excess return of 7.42%.Most factors/indexes remain oversold, with small and mid-cap stocks the most oversold. Inflation, worker shortages, and higher wages have a more significant adverse effect on these companies than many larger S&P 500

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Should Investors “BTFD” The Crucial 50-DMA?

September 15, 2021

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Should investors “BTFD” with the market near the 50-day moving average (DMA)? As we wrote yesterday, the 50-dma has been a great level to buy the dip. Odds favor that to be the case this time, but will it? The S&P 500 50-DMA is currently at 4429 about 14 points below where it closed yesterday.

Chinese economic data continues to weaken. Last night Retail Sales, Industrial Production, and Property Investment all fell short of expectations and prior month readings. Once again, markets are brushing off more signs troubling signs from the world’s second largest economy. To wit, crude oil continues higher, up another $1 this morning and almost $10 from recent lows in mid-August.

What To Watch Today

Economy

7:00 a.m. ET MBA Mortgage Applications, week

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The Fed Speaks Loudly And Carries a Feather

September 15, 2021

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The Fed Speaks Loudly And Carries a Feather

 “Speak softly and carry a big stick” President Theodore Roosevelt on foreign policy.

In other words, let your actions, not your words set the tone.

It appears the Fed may be taking the opposite tack. Many Fed members are vocal about tapering soon, but there is reason to believe the Fed will not back their words with action.

Might the Fed be speaking loudly and carrying a feather?  

Expectations for the Fed to turn “hawkish” and announce a tapering schedule at the next meeting or two are high. A recent Wall Street Journal article hints at an announcement at the September 2021 meeting and tapering in November. The solid economic recovery, coupled with gains in employment and a higher than the target inflation rate,

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November Taper- Trial Balloon or Reality?

September 13, 2021

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Equities are clawing back Friday’s losses despite weekend rumors that corporate and capital gains taxes may rise under a new Biden proposal. Further, the market appears to be brushing off concerns that a taper timeline aiming for November seems more like reality than a trial balloon. Comments from various Fed speakers early this week will shed more light on any potential change to policy. Crude oil is trading back over $70 a barrel as tropical storm Nicholas threatens already battered gulf coast oil/gas production facilities.

What To Watch Today

Economy

2:00 p.m. ET: Monthly budget statement, August (-$175.0 billion expected, -$200.00 billion during prior month)Earnings

Post-market

Oracle (ORCL) is expected to report adjusted earnings of 97 cents a

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Technical Value Scorecard Report For The Week of 9-10-21

September 10, 2021

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Relative Value Graphs

The third graph below shows the general weakness of all sectors versus the S&P 500. Given the market has been led by only a few stocks (FAANG stocks), the result is not surprising.The first graph shows that almost all sectors weakened on the week versus the market. The scatter plot confirms the broad-based relative weakness across sectors. Only two sectors (technology and real estate) are overbought and not meaningfully so. At the same time, a third of the sectors have given up 4% or more over the last 20 days to the S&P 500.The factor/index chart shows a similar pattern with everything but the FAANG heavy NASDAQ beating the S&P 500.The loud message being sent frm this analysis is the breadth of the market is very weak. This tool provides further

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BLS’ Housing Inflation Measure is Hypothetical Bull****

September 8, 2021

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There is a problem with the BLS’ housing inflation measure; it’s hypothetical “Bull****.”

The Case, Shiller 20-city House Price Index, is up 19.1% year over year. The only period with a somewhat comparable increase was in 2005 when it rose 14.9%.

Per Apartment List’s August update: Since January 2021, the national median rent has increased by a staggering 13.8 percent.

With a 30% contribution to CPI, Shelter prices are prone to boost CPI higher in the months ahead.

It seems like a logical conclusion, but is it?

The answer has tremendous implications for investors. If inflation continues to rise from elevated levels, the Fed will be under increasing internal and external pressure to taper QE and raise interest rates. For a market “all ginned up” on Fed

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Technical Value Scorecard Report For The Week of 9-03-21

September 3, 2021

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Relative Value Graphs

Real estate was the clear winner this past week, beating the S&P by 3.4%. Comparing last week’s relative score to this week, XLRE was the only sector with a meaningful change. The other conservative sectors that were performing well in prior weeks have fallen back. Over the last ten days staples, utilities and healthcare have given up about 2% to the S&P 500.The scatter plot comparing the RIA Pro technical score to each sector’s 20-day excess return shows a very weak correlation. As we note in the past, this is a function of quick rotations between sectors and few dependable trends. Emerging and developed international markets improved on the week, but remain oversold. The value versus growth trade is the most oversold factor. This is a function of

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Valuations Are Extreme Even With Rose Tinted Glasses

September 1, 2021

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Valuations Are Extreme Even With Rose Tinted Glasses

Many investors claim that comparing current valuations to the nifty fifties, roaring twenties, or the go-go nineties is for the birds. New technologies, aggressive monetary policy, and other factors make this time different, so they say.

Their bullish logic: the past is not the same as the present. Therefore, never mind current valuation extremes.

The graphs below provide just a few of the many indicators showing equities are historically expensive.

One of Warren Buffett’s favorite indicators, market cap to GDP, is well above any reading since 1950. 

Price to sales, a reliable measure of a company’s ability to profit, sits over 50% above its level in the late 1990s. Forward return expectations are abysmal.

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Technical Value Scorecard Report For The Week of 8-27-21

August 27, 2021

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Commentary

The first set of relative value graphs tell a couple of important stories. First, the inflationary sectors are not the most oversold or the furthest to the right anymore. They are slowly moving into the middle of the pack. Second, the breadth of the market is poor. There are only 3 sectors overbought versus the market (S&P 500). The relative score on the utility sector fell sharply from decently overbought to fair value. It was the second worst-performing sector last week behind staples.The top three performing sectors were those benefiting from higher yields and inflation- energy, transportation, and financials. The third graph below compares sector relative performance over a series of time frames. Over the last 240 trading days energy (XLE) is up 23%,

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Jackson Hole & Powell: To Taper or Not to Taper QE

August 27, 2021

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At 10 am, Jerome Powell will hopefully shine some light on whether or not the Fed will commence tapering QE in the next few months. Atlanta Fed President Bostic added to the taper pressure this morning by saying he would like to start tapering in October, assuming the job situation continues to improve. Markets are recovering about half of yesterday’s losses in pre-market trading. Peleton (PTON) is slipping 8% in early trading on the back of weak sales, a 20% price reduction on its bike, and a disappointing revenue outlook.

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What to watch today

Economy

8:30 a.m. ET: Advanced goods trade balance, July (-$90.9 billion expected, -$91.2 billion in June)8:30 a.m. ET: Wholesale

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What a Miami Stripper and Fiscal Elephant Have in Common

August 25, 2021

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What a Miami Stripper and Fiscal Elephant Have In Common

“Banks have conditioned us to trust them, and what have we got from that?” – Mark Baum (Steve Carell)- The Big Short.

In his book and movie, The Big Short, Michael Lewis tells the story of a few intelligent and courageous investors that saw what no one else wanted to see. Instead of turning a blind eye to absurdity, they did their homework. What they quickly found was many subprime loans were likely to default. These investors were laughed at by Wall Street’s “best and brightest” simply for betting on an obvious truth.

Myopia and fat profits clouded the ability of many investment professionals to see the housing bubble. Worse, well-educated PhDs at the Fed, charged with preventing financial instability, had

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Bulls Charge Toward Jackson Hole

August 23, 2021

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European Manufacturing Indexes were generally weaker than expected but it didn’t take the wind out of the sails of the U.S. Equity markets. They look to continue Friday’s gains, up a quarter to half a percent this morning. After dipping below $62 on Friday, oil is back up to $64 in early trading.

On Friday we published the table below for subscribers of RIA Pro. It accompanied other graphs and commentary on the technical situation of the 12 S&P 500 sectors as well as major indexes and factors. The graph below, from the report, shows Utilities (XLU) have the highest RIA Pro technical score and the most momentum.

Dallas Fed President Robert Kaplan, a strong proponent of tapering in the coming months, put the markets on alert that taper may not be as inevitable as many

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WWBD? What Would Bob Farrell Do? Part II

August 18, 2021

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WWBD?  What Would Bob Farrell Do? Part II
In Part 1 of What Would Bob Farrell Do? we reviewed the first five of Bob Farrell’s legendary rules of investing. We now continue with rules six through ten.
Rule #6: Fear and greed are stronger than long-term resolve.
This rule extends rule #5- the public buys the most at the top and the least at the bottom. Our investment rules and inherent conservatism often yield to the yearning to make more money at market tops. Similarly, fear at market bottoms frequently inhibits our ability to buy assets at cheap levels.
To counteract our emotions and maintain resolve, we should have a plan for different scenarios. If we can fight our feelings at market tops and adhere to risk management plans, we will have cash on hand to take advantage of

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Wretched Retail Sales

August 18, 2021

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Equity futures are trading flat this morning after giving up half a percent yesterday. The dollar is slightly higher overnight after its strong performance yesterday. At 2 pm ET, the Fed will release its minutes from the July FOMC meeting. Investors will be looking for indications of the Fed’s willingness to begin tapering QE.

Chairman Powell, speaking to educators, had little to say about the future path of monetary policy. It looks like we will have to wait for next week’s Jackson Hole conference to see if he agrees with many Fed members that taper is in the cards for this fall. The following headline is the only clue he left us:

THE FED IS IN THE PROCESS OF PUTTING AWAY ALL OF ITS TOOLS THAT WERE BUILT FOR TRUE CRISES.Retail Sales can be a misleading data point as

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WWBD? What Would Bob Farrell Do?

August 11, 2021

WWBD?  What Would Bob Farrell Do?
The ten commandments are biblical rules and ethical standards forming the foundation of Judaism and Christianity.
Bob Farrell, Wall Street legend, created his own set of commandments. His guidelines provide a foundation to help investors reap and retain market rewards by better understanding the risks.
Disobeying his rules carries no legal or moral punishment but can be harmful to your wealth.
Bob has over 50 years of experience and excellent mastery of psychological factors which drive markets. He is supposedly the first to use the now-common word “sentiment” to help describe market psychology.
For those of you who believe in Bob’s rule #3, “there are no new eras,” we present Bob Farrell’s ten timeless rules on investing. We wish the best of luck for the

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AMC Foolishness Comes At A Dear Cost

August 4, 2021

AMC Foolishness Comes At A Dear Cost

“For one thing, in a world of free money, there’s almost no penalty for being a numbskull. And no reward for prudence. You run your business at a loss? No problem. Just borrow whatever you need.”  –Bill Bonner

In Undermining Capitalism with Unreal Values and Crass Distortion we discuss how recent extreme monetary policy measure undermine capitalism. The article highlights how yield hungry speculators are piling into junk-rated debt despite the fact they all but guaranteed to lose purchasing power.
Our gripe goes well beyond the mispricing of financial markets. Its more insidious. Warped market values reduce the productive output of the economy, and therefore impair wealth and income equality. Misallocated capital is inflating the value of meme

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Just How Transitory is Inflation?

July 28, 2021

Just How Transitory Is Inflation?
Would you buy a five year CD paying 5%?
We would be shocked if anyone answers “no.” On a relative basis, versus other fixed-income options, a 5% FDIC guaranteed CD is a no-brainer. However, to properly evaluate the CD or any investment, we need to factor in inflation expectations. If inflation for the next five years is 10%, the no-brainer CD will be a bust. 
The pandemic is easing, and the winds of recovery are roaring at the economy’s back. Pent-up demand and the remnants of stimulus are driving robust economic growth. At the same time, the ability to produce and deliver goods remains greatly hampered. The result is inflation, the likes of which have not been seen in over a decade.  
Making inflation forecasting even harder is considering how past and

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Undermining Capitalism with Unreal Values and Crass Distortion

July 14, 2021

Undermining Capitalism with Unreal Values and Crass Distortion
“Compared to What,” a classic jazz tune written in 1966, became famous in 1969 by Les McCann and Eddie Harris at the Montreux Jazz Festival. Over 200 artists made covers of the song. The song (LINK) is a protest about Vietnam, crime, and economic and social inequality.
Fifty years later, there is no Vietnam war to protest, but social and economic inequality is again front-page news.
After casually listening to the song, one line “Unreal values, Crass distortion” hit us over the head.  The quote would have been perfect for several articles we have written to describe the economy and markets.
Alas, those words also accurately describe the Fed’s role in redefining “capitalism,” the topic of this article. 
Don’t Blame Capitalism

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The Backward K and Coming Earnings Surprises

July 7, 2021

The Backward K and Coming Earnings Surprises
The broad economic shutdowns and psychological impacts of the pandemic, along with massive doses of fiscal stimulus doled out directly to consumers greatly altered consumer and business spending habits.
As we approach the second-quarter earnings season, we are likely to see a good number of surprises, especially on a year-over-year basis. In the second quarter of 2020, some companies were struggling to keep the lights on.  Others were having trouble producing products fast enough to keep up with insatiable demand.
As our friend Peter Atwater correctly predicted in early 2020, the pandemic and its recovery would affect the economy in a K-shaped fashion. Essentially, there will be winners and losers.
With the pandemic abating and economic and

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The Lifeline of Markets – Liquidity Defined

June 30, 2021

The Lifeline of Markets- Liquidity Defined
We recently read an analogy in which the author compares the current state of asset prices to an airplane flying at 50,000 feet. Unfortunately, we cannot find the article and provide a link. The gist is market valuations are flying at an abnormally high altitude. While our market plane cannot sustain such heights in the long run, there is little reason to suspect it will fall from the sky either.
Many investors are writing on the current state of extreme equity and bond valuations. Surprisingly, there is little research focusing on what keeps valuations at such levels. Liquidity is our asset bubble’s lift and worth closely examining to better assess the markets’ potential flight path.
Market Liquidity
In the investment world, liquidity refers to

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