“Liquidity” and “volatility” are constantly thrown around by the financial media and Wall Street as if everyone fully understands them and their importance. These terms are vital, but regrettably, not many investment professionals take the time to help investors fully appreciate them.Mea culpa! We also use the terms extensively in our writings and podcasts, yet we fail to impress upon our followers their importance.With volatility spiking and the Fed removing liquidity, we think it is an excellent time to discuss the two terms and their dependency on each other. We hope this broader understanding of volatility and liquidity may help you better appreciate risk conditions.Liquidity“Fed Pumps $70.2 Billion in Short-Term Liquidity Into Markets.” – WSJ December 2019“Is this a Liquidity CrisisRead More »
Articles by Michael Lebowitz
We ended Liquidity Crisis in the Marking- Japan’s Role in Financial Stability- Part 1 with the following quote regarding inflation from BOJ Governor Haruhiko Kuroda: “The BoJ should persistently continue with the current aggressive money easing toward achieving the price stability target of 2% in a stable manner.”While many central bankers are anxiously waging war against inflation, the Japanese are egging it on. Over the last few weeks, the BOJ has offered to buy as many 10-year notes at 0.25% as the market will offer them. In central bank parlance, we call that unlimited QE. While the BOJ caps bond yields with “aggressive” QE, they are doing so at the expense of the yen.Carry TradeIn Part 1, we discussed how Japanese citizens and pension plans invested abroad to earn higher yields. TheyRead More »
Starting today and continuing every Monday we will publish a technical review of indexes, sectors, and individual stocks.The reports and many others can be found under Commentary > Blog.Click HERE to read today’s piece.Read More »
Liquidity Crisis in the Making- Japan’s Role in Financial StabilityLiquidity Crisis in the Making is part one of a two-part article. Part 1 sheds light on the Bank of Japan and its three-decade attempt at a soft landing following the bursting of massive asset bubbles.In propping up Japan’s economy and financial markets, they indirectly provided liquidity to the world’s financial markets. While the liquidity was well received by investors, certain events, as we discuss in Part 2, leave us concerned the BOJ could unleash a liquidity vacuum felt around the world. Part 1- Liquidity Crisis in the Making Over the last three decades, the Bank of Japan (BOJ) has employed the world’s easiest monetary policy. Initially, the motivation for the bank was to soften the blow resulting from the poppingRead More »
Does a risk-free bond with a seven percent yield interest you? If so, read more about the red-headed stepchild of the bond world that is finally attracting investors. Series I Bonds (I-bonds) are bonds issued directly to the public by the Department of Treasury. Unlike most other bonds, I-bonds pay a coupon that adjusts for inflation. Not surprisingly, with inflation surpassing 8%, we receive quite a few questions on I-bonds. As such, this article provides more information on I-bonds to help you compare them versus TIPS and other types of bonds.How Can I get a 10% bond?I-bonds currently have a yield ranging from 7.12% to 10.85%, depending on when the bond was bought. The graph below shows the current annualized yield (orange) based on the purchase date on the x-axis.The coupon of an I-bondRead More »
The Federal Reserve, bond markets, and economic cycles have been dancing in a well-choreographed fashion for the last 30 years.This age-old dancing trio, the Fed, yield curve, and economy have a new dance partner. After patiently watching from the sidelines, inflation is flashing her moves. The once predictable partners are falling out of rhythm. With inflation running at four times the Fed’s 2% objective, the Fed is anxious to reign it in. However, the bond market and economy warn the Fed to be careful. Will inflation lure the Fed to ignore the economy and markets in its quest to tame inflation? In this piece, we explore the dance trio and inflation. The goal is to appreciate better how the Fed may conduct monetary policy in the months ahead. Will they aggressively hike interest ratesRead More »
Financial sanctions weighing on Russia are sending up red flags around the globe. The seizing of Russian foreign reserves and eliminating access to SWIFT is leading Russia and other countries to reassess the role of dollars in global trade. Today, there are likely quite a few central bankers and heads of Treasury asking themselves- Dollars, Gold, or Rubles?This article explores the problem vexing Russia and her trade partners. We explore how sanctions and the threat of sanctions may force some countries to contemplate weaning off the world’s reserve currency.Reserve Currency StatusThe rule of law, economic and military might, and the most liquid capital markets are the principal reasons the dollar is the preferred currency for most global trade, as shown below. Because of its status andRead More »
Inflation is running hot, and the Fed is projecting seven rate increases this year alone. As if that is not concerning enough for bond investors, the Fed hints at draining liquidity via balance sheet reduction, i.e., Quantitative Tightening (QT).At Jerome Powell’s post-March 16, 2022, FOMC press conference, he stated: “it’s clearly time to raise interest rates and begin the balance sheet shrinkage.” Based on further comments, Powell wants to start normalizing the Fed’s balance sheet and drain liquidity as early as May.Since March of 2020, the Fed has bought about $3.5 trillion in U.S Treasury securities and $1.5 trillion in mortgage debt. The gush of liquidity from the Fed’s QE program helped the U.S. Treasury run massive pandemic-related deficits. Buying over half of the Treasury’s debtRead More »
Investors are in the middle of a brief diversion from the Russian invasion and market volatility. Starting last Thursday, March 17th, investors’ debates turned from stocks, oil prices, bond yields, and gold to March Madness predictions. Particularly, bragging about how well their predictions for the 67 March Madness basketball games will hold up. For the next couple of weeks, discussions about how far Saint Peters can advance or is this finally Gonzaga’s year will take precedence over guessing about what the Fed might do next.For college basketball fans, this is March Madness. The widespread popularity of the NCAA March Madness tournament is not just about the games, the schools, and the players. It’s all about March Madness predictions and brackets. Brackets refer to the pools that manyRead More »
Higher energy prices worrying you? Be afraid because Congress is coming to the rescue. Legislators are introducing a new bill called the “Big Oil Windfall Profits Tax Act.” The bill’s objective is to reduce the price of oil. The bill pans to tax the windfall profits of large energy companies at a 50% rate. They define windfall profits as profits above and beyond those in the year before Covid. The proceeds from the tax would be returned to consumers earning less than $75k through direct payments.If Congresses goal is to inflate oil prices further and generate more inflation in the process, the bill, as currently written, is right on track. This article walks through the proposed legislation to better understand why it is grossly flawed. As we will discuss, the bill will not only generateRead More »
While higher gas prices may be welcome news to the oil industry, the rest of us should be concerned as it is a glaring recession warning. Over the last 40 years, higher gas prices have been linked to economic stagnation and recession.
The Ford F-150 is the most popular car in America, per Edmunds. It gets on average about 21 miles to the gallon. The U.S. Department of Transportation claims Americans drive 13,500 miles a year. According to AAA, the average price for regular gas was $2.76 a year ago. Today the average is $4.17. The average U.S. consumer spent $1,774 on gasoline a year ago. At current prices, the average consumer is spending nearly $1,000 more.
The current spike in oil and gas prices is primarily due to two factors. The elephant in the room is Russia and its invasionRead More »
The Federal Reserve and federal government have showered massive liquidity on the economy and markets to combat the pandemic. Their medicine worked. Economic activity rebounded quickly. Stocks and other assets soared in price, and in many cases, valuations now mirror those from 1999 and 1929. Fiscal spending is normalizing quickly, and the Fed is warning investors they are ready to remove stimulus. Such a reversal of monetary and fiscal liquidity does not guarantee a reversal of asset prices, but it means the odds of a bear market increase. As such, it’s time to start thinking about bear market strategies.
Bear vs. Bull Market Strategies
Investors spend most of their time playing offense in bull markets. In other words, they select the best asset classes, assets, sectors, andRead More »
Over the past decade, historically low bond yields have converted many bond investors into bond traders. Bond traders strategically buy and sell bonds to generate price gains. A bond coupon, a primary reason many investors buy bonds, is nothing more than a bonus for traders.
Trading bonds is ages old and was typically dominated by institutional investors. Recently, however, the historically low yield environment and the liquidity and ease of trading ETFs make bond trading more commonplace among retail investors.
With the ten-year U.S. Treasury note yield eclipsing 2%, some bond traders think we are approaching another peak in yields. We know 2% seems low, but bond yields have trended lower for the last 30 years. Within the trend, each local peak in yield was followed by lowerRead More »
Over the last few years, investors have bid up prices of some stocks to historical valuations. Many of these investors are speculating on price and have little appreciation of underlying fundamentals. Microsoft’s historic stock valuation in the late 90s can teach us valuable lessons about the difference between speculating and adhering to a fundamental framework.
Today we see Tesla (TSLA) shareholders, as an example, believing they are getting in on the rookie year of the next 18-year-old Hank Aaron. Given what they believe is massive upside, they harbor little concern about today’s prices or valuations. For those investors blind to valuations and playing the hot hand, we wish you luck. But, for the rest of you, we look back at a young Microsoft (MSFT), the Babe Ruth of the equityRead More »
Proctor & Gamble (PG) is a conservative and highly regarded consumer staples company with a 180-year track record. The company produces many globally admired consumer brands, some of which we share below.
Does being a great company with financially conservative values make PG a value stock? It is tempting to answer yes, as most large-cap value stock funds hold a sizeable stake in PG.
PG trades at key valuation ratios (P/E, P/B, and P/S) greater than the S&P 500. PG’s annualized revenue and earnings growth rates are 3.7% and 4.3%, respectively, over the last five years. Over the same period, the S&P 500 Index has grown revenue and earnings at more than double PG’s rate.
Per the gurus of value, Benjamin Graham and David Dodd, a stock should have good prospects and low valuationsRead More »
A week before the January 26th Fed policy meeting we asked Instability or Inflation, Which Will The Fed Choose?
Liquidity is the lifeline of markets, and the Fed, directly and indirectly, manages its flow via QE and zero rates. With inflation raging, the pandemic subsiding, and economic activity normalizing, the Fed is keen to start reducing liquidity via higher interest rates and reductions in its balance sheet. The purpose of normalizing monetary policy is to bring inflation down. However, the removal of said liquidity could prove problematic for stock prices, especially if done more aggressively than expected.
Per the article:
“The Fed is making it clear they want to reduce inflation. They are also telling us they will ensure financial stability. Sounds like a good plan, butRead More »
Over the past two years, investors have had to balance fear and greed amidst market, economic, and political unpredictability. Since 2020, the divergence between asset price performance and fundamentals has never been starker. As a reminder, stock prices were surging higher in the spring and summer of 2020 despite double-digit unemployment and closures of large economic segments. It was not easy to be bullish with news like the New York Times front-page below.
The stock market bottomed the week the headline above was published. Since then, the S&P 500 has more than doubled. Those investors who could silence their fear and focus on technical signals and fiscal and monetary stimulus prospered.
Simultaneous feelings of fear and greed were overwhelming and detrimental to many investorsRead More »
Over the past few weeks, Fed speakers are bemoaning inflation and voiced their wishes to squash it. They frequently mention how effective their monetary toolbox is in managing inflation.
There lies a massive contradiction between words and actions within these numerous speeches and media appearances. If the Fed is so intent on fighting inflation, why are they still stimulating the economy and markets with crisis levels of QE? Why is the Fed Funds rate still pinned at zero percent?
Within this ambiguity comes an abundance of risk for investors. If the Fed walks the walk and fights inflation vigorously, markets appear ill-prepared for a sharp decline in liquidity and resulting market instability. Conversely, the Fed may be just talking the talk and hoping inflation starts abatingRead More »
Stocks are priced for perfection. Bonds trade at historically low yields despite 7% inflation. What could go wrong?
As fiscal and monetary support for the economy and markets wane, valuation extremes are in the crosshairs. While the setup for 2022 is not looking as friendly as 2021, we must realize the environment can change quickly.
For more on the macroeconomic drivers supporting this forecast, please read Part 1 of our 2022 Investment Outlook – Tailwinds Shift To Headwinds.
2022 Investment Outlook for Stocks
As shown below, as we have highlighted in many articles, valuations are at or near record levels. While nothing limits valuations from rising further, we must consider a reversion to the mean in many cases can result in losses of greater than 40%.Read More »
The first part of our 2022 outlook looks through the front windshield and contrasts 2021s tailwinds with 2022s growing headwinds. While no one knows what 2022 holds in store for investors, our concern is that it should not foster the same optimism as 2021. The economic and financial environments are shifting rapidly making the 2022 outlook much more difficult than this past year.
Part 2 of the 2022 outlook, coming out next week, will cover our thoughts on the stock and bond markets.
“The more extended the advance, and the higher valuations become, the more stable and promising the investment can appear to be, when judged through the rearview mirror.” John Hussman
It’s All About Growth
Before looking forward, it’s worth explaining how economists assess economic activity.Read More »
MMT, or Modern Monetary Theory, offers a new monetary “logic” that allows the government to spend without concern for debts and deficits. Does MMT seem too good to be true or does MMT’s fatal flaws render it troublesome?
On the heels of unprecedented spending and unmanageable deficits, MMT is gaining popularity. Its acceptance is not surprising as its principles justify reckless fiscal behavior. MMT advocates are loud in their support for unlimited spending and mock the thought of “too much debt.” We often fail to hear them highlight the critical governor in their theory designed to limit inflation.
The current bout of inflation exposes MMT’s fatal flaw.
What is MMT
“Free healthcare and higher education, jobs for everyone, living wages and all sorts of otherRead More »
The Fed’s liquidity fire hose supported the massive government fiscal response to Covid. Through unprecedented asset purchases, the Fed provided enough liquidity to allow the U.S. Treasury to increase its debt burden grossly at historically low yields. Its actions bolstered asset markets and weighed on the dollar in the process.
The Fed is starting to reduce liquidity, and global markets are beginning to stir. The dollar, for one, is on the rise, and with it comes underappreciated consequences.
Most investors know dollar appreciation makes imports cheaper for the U.S. and more expensive for other nations. As such, the dollar affects which countries gain or lose competitive advantages in global trade.
Lesser appreciated, the U.S. dollar is not just America’s currencyRead More »
“Do you have faith the “new era” of Fed-managed markets can continue to levitate stocks well above historical norms?” –Is A Stock Market Crash Like 2000 Possible?
Most investors have no idea that the most considerable risk to their portfolio occurs if the Fed cannot continue to be a market magician. The next market crash will likely be the result of a Fed error. Do you have an investment playbook in case such an event unfolds?
In the article, we write: “Assuming the regression holds, and history has favorable odds of that occurring, we should expect the S&P 500 to fall to 2650 in the next two years.” That is the potential risk facing investors if the Fed fails to provide enough market liquidity.
If you worry about the Fed’s ability to keep stocks elevated and theRead More »
Is A Stock Market Crash Like 2000 Possible?
“Say say two thousand zero zero party over, oops, out of timeSo tonight I’m gonna party like it’s nineteen ninety-nine” -Prince 1999
Prince wrote the song “1999” in 1982, 18 years before the clock ran out on the 20th century and possibly the greatest stock market run in American history.
In 1999, equity valuations stood at unprecedented peaks, even dwarfing those of 1929. At the time, investors were euphoric as if the rally were eternal. Newbies were killing it, and veterans were cleaning up like never before. Some stocks were rising 10, 20, and even 30% or more in a day. Companies adding dot com to their name or discussing new internet technology saw huge pops in their share prices. Investors bought the narrative withRead More »
Relative Value Graphs
Most sectors and factors/indexes remain oversold versus the S&P 500. As we noted last week, the analysis continues to pick up on the market’s bad breadth. Of note, communications are grossly oversold and are due for a bounce on a relative basis versus the index.Financials beat the S&P 500 by over 2.5% last week, bringing its score from moderately oversold to fair value. Powell’s renomination, and the likely continuation of bank-friendly monetary policy, seem to be driving the outperformance. Energy beat the S&P 500 by over 5%, but its score only modestly improved to fair value. Why did financials improve so much but not energy? The technical analysis in this study uses multiple periods. Accordingly, while the past week of price activity matters, theRead More »
The S&P 500 (SPX) reached all-time highs again on Friday, and the gamma flip level at the end of the week rose to 4,650. As long as we remain above this level, this model will maintain a 100% allocation to SPX. Monthly option expiration days are shown below by the vertical dashed lines.
The Gamma Band model 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, the model will reduce exposure to avoid price volatility and sell-off risk. If the market closes below what we call the “lower gamma level” (currently near 4,460), the model will reduce the SPX allocation to zero.
The main premise of this model
Relative Value Graphs
On Thursday, the S&P 500 was up .40%, yet every sector was lower except technology. Such was not just a one-day anomaly. The breadth of the market has been poor for a couple of weeks. The third graph below shows that over the last ten days, technology is the only sector to outperform the S&P 500.The top graph shows most sectors have negative/oversold scores. Financials, communications, and healthcare are the most oversold sectors. Technology with a score nearing 75% is moving into strongly overbought territory. As discussed below, its absolute score of 80% argues it is due for consolidation at best and more likely a period of underperformance.The inflationary sectors tended to give up ground. As a result, our inflation-deflation index is againRead More »
“Increased borrowing must be matched by increased ability to repay. Otherwise, we aren’t expanding the economy – we’re merely puffing it up.” – Henry Alexander of Morgan Guaranty Trust
The original Potemkin Village dates to the late 1700s. At that time, Russian Governor Grigory Aleksandrovich Potemkin constructed facades to hide the poor condition of his town from Empress Catherine II.
Since then, Potemkin Village represents a false construct, physical or narrative, created to hide the actual situation.
As the pandemic ravaged the economy, the Federal Reserve, White House, and Congress went to work and built a Potemkin economy around the ailing economy.
As a result, the curb appeal of today’s economic recovery is beautiful. However, when our clients’ wealth is atRead More »
Shares of Rivian (RIVN), the newest entrant into the electric vehicle market, are soaring. Rivian closed Thursday with a market cap of $100 billion. Not bad, considering GM is at $89 billion and Ford is $78 billion. Despite lagging in market cap, Ford benefits as it owns 12% of Rivian. Amazon has a 20% stake in the company and expects to own at least 10,000 Rivian trucks for deliveries next year.
What To Watch Today
10:00 a.m. ET: JOLTS Job Openings, September (10.300 million expected, 10.439 million in August)10:00 a.m. ET: University of Michigan Sentiment, November preliminary (72.5 expected, 71.7 in October)Earnings
Before market open: Warby Parker (WRBY) to report adjusted losses of 57 cents on revenue of $537.43 millionAre SemiconductorRead More »
Relative Value Graphs
The consumer discretionary sector lost 2.9% versus the S&P 500 after beating it by a similar amount in the prior week. As a result, its relative score fell quickly from grossly overbought to near fair value.Communications and utilities remain the most relatively oversold sectors, but their respective scores improved this week. After underperforming other inflationary stocks for a month or even longer, materials had a good week, beating the S&P 500 by nearly 3%.In a trend reversal from the prior few weeks, the S&P underperformed almost all sectors.Emerging markets and value (versus growth) had a good week, following very oversold readings. Interestingly emerging markets beat the S&P by 2.86%, yet developed foreign markets lost 0.07% to the S&P 500.TheRead More »