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Hale Stewart

Hale Stewart

F. Hale Stewart, JD, LL.M, is a fifth generation attorney with ten years of experience. He has a Masters in domestic and international taxation (Thomas Jefferson, magna cum laude). He focuses his practice on transitional tax and legal planning.

Articles by Hale Stewart

What’s Up With the Asset Backed and Commercial Paper Market?

January 3, 2018

Above are three charts for the short-term asset backed market.  Over the last month, we’ve seen increased spreads.  The overnight market (top chart) is a bit higher.  But the 30-day spread (middle chart) and 90-day spread (bottom chart) have both spiked pretty sharply.  

We’re also seeing increased spreads in the short-term commercial paper market.

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Commodities and Inflation

January 3, 2018

Above is a group of charts that track the major commodity ETFs.  There are two groups of prices that could cause inflation to move higher.1.) Energy prices (second from the left, second row from the top): oil obviously plays into this (upper left hand corner), but so does the price of gas (left chart on the very bottom).2.) Industrial metals (upper right-hand corner) and copper (third from the top left):  The industrial metals ETF largely tracks copper, which is in the middle of a rally.  But other industrial metals are also increasing, such as palladium.Is this enough to spur prices higher?  Probably now.  Energy prices only account for about 7% of the overall CPI calculation.  Food prices are responsible for approximatley 13% of CPI, and those are all decreasing.

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The Oil Chart is Setting Up Very Bullishly To Start the Year

January 2, 2018

Oil is looking very bullish right now.

On the daily chart (top chart), prices are in a multi-month uptrend.  They recently consolidated gains in a triangle pattern and are now at a 1-year high.  The moving averages are setting up in a bullish manner: they’re all increasing, the shorter EMAs are above the longer EMAs and prices are above the EMAs.  The MACD has plenty up upside potential at current levels.

The weekly chart (bottom chart) is also very bullish.  Prices consolidated around the 200-week EMA and have since moved higher.  The MACD is also rising and has plenty of upside room. 

When a security sets up in bullishly in several time frames, the odds of a bullish advance increase.  

This is one of the charts I recently said was key to 2018.

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John Hinderaker and Steven Hayward Are Actually Becoming More Economically Incompetent With Age

December 27, 2017

First of all, let’s all remember that Powerline has the worst record when it comes to discussing economics.  As I pointed out several years ago, they spent an entire year getting literally everything wrong. 

So, they’re now at it again over the latest changes to the tax code from the Republicans in Congress.  There’s just one problem: there is actually little correlation between tax rates and growth.  "But the economy grew after the Reagan tax cuts!" you respond.  Actually, cutting interest rates (again, econ 101 here) had a little more to do with that than you think.  And then there’s this:

This chart that shows the highest marginal tax rate (in blue, left scale) and the Y/Y percentage change in GDP growth (in red, right scale).  Notice that the red peaks are in fact higher

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Why Would Anybody Invest When Capacity Utilization is This Low?

December 21, 2017

A central selling point of the tax bill is that it will encourage investment.  But that assumes that high tax rates were the primary reason why business wasn’t investing.  Instead, the data says business investment is weak because the U.S. has a ton of spare capacity.

First, let’s look total capacity utilization:

It has peaked at lower levels in each of the last three expansions.

Let’s break the data down into durable and non-durable CU:

Both categories of production have ample spare capacity, with non-durable production having greater capacity.

Finally, let’s look at crude, intermediate and final stages of production:

All three have plenty of spare capacity to bring online if needed.  

So, will we see a huge wave of investment as a result

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Monday Morning Bond Market Round-Up

December 18, 2017

The Baa-10-year treasury spread (top chart) is at a 10-year low.  This is a leading indicator.  The AAA-10-year spread (bottom chart) is also a 10-year low.  This chart shows that the market is still searching for yield.

After spiking earlier this year, CCC yields (top chart) have come in 45 basis points.  This was a potential problem sign as this section of the bond market is the first to widen when trouble emerges.  But the problem never cascaded out into the BBB market.

The 30-day asset-backed commercial paper spread (top chart) that I wrote about on Friday has come back in.    But it’s still in the middle of a short-term uptrend as is the 90-day market (bottom chart).

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The Long-End of the Curve Isn’t Predicting Booming Growth

December 14, 2017

The chart above plots 10 years of the 10-year CMT (left scale) and the Y/Y percentage change in GPD (right scale).  Notice the following general trends:

1.) The 10-year has moved lower since the recession.  In the second quarter of 2009, the 10-year came close to 4%.  It is currently in the 2.3-2.4 range. 

2.) In absolute terms, the 10-year yield increased more than 100 basis points between the summer and fall of 2017, rising from 1.37% to 2.6%.  Traders called this the "Trump trade."  They believed that Trump would increase fiscal spending (largely on infrastructure) and lower taxes.  The combination would increase growth and inflation, hence the sell-off in the long-end of the bond market.  Since the election, yields have trended lower, incating the "Trump trade" is losing

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The Ugly Picture of US Wage Growth

December 13, 2017

The chart above shows the Y/Y percentage change in the average hourly earnings of nonsupervisory employees.  We can break this data down into two sections.  Due to higher inflation and stronger unions, the pace of growth was far stronger before the 1980s.

We see a different dynamic at work during the first three post-1982 expansions.  Wages decline coming out of the recesssion, falling to ~2% Y/Y percentage growth rate.  They then climb during the second half of the expansion, peaking ~4% Y/Y percentage growth rate.  This probably explains why the Fed remains thoroughly convinced that the Phillip’s Curve is still in play: they’re assuing the past is prologue, and with good reason.

However, this expansion we see a different growth dynamic at work.  As before, the Y/Y

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Monday Morning Bond Market Round-Up

December 11, 2017

The Corporate Curve is Also Compressing

The top chart shows the 1-3 year corporate market, which is now near it’s highest level for the year.  The 3-5 year sector (second from the top) is also rising but is below its yearly high.  The 15+ year sector of the market (second from the bottom) is declining.  As a result, the corporate yield curve is also compressing (bottom chart).
Treasury Market ETFs Show the Treasury Curve Compression

Charts of the treasury market ETFs show why the yield curve is compressing.  The short end of the market is selling off (top chart) the belly of the curve is flat (middle chart) and the long-end of the curve is rallying (bottom chart).  As a result:

The yield curve flattens.

Job Growth is Strong Enough to Support Another Hike

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Mid-Week Bond Market Round-Up

December 7, 2017

Declining Inflation Expectations 

The University of Michigan’s long-run inflation expectations (top chart) and the 10-year CMT-10 year TIPS rate (bottom) chart are both declining.  The University of Michigan’s estimate has always been a bit high; it was 3-3.5% in 2012-2014 and has moved lower to 2.5%.  The bond market measure is lower but probably more accurate.  Either way, both have moved lower by about 50-65 basis points in the last 3-4 years, which has important ramifications for Fed policymakers. 

Yield Curve Flattening

Since the beginning of the year, the curve has definitely flattened, with most of the movement coming in the short-end of the curve.

Your New Richmond Fed Presidebt

A video introduction of the new Richmond Fed President.

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ISM Reports Show Broad Economic Strength: Latest Nowcasts are Strong

December 5, 2017

The latest ISM reports are out and both show broad strenght.  The new orders and production component of the manufacturing report were very strong (up +.6 to 64 and +2.9 to 63.9, respectively).  The anecdotal comments were very bullish:

The service sector numbers were also strong: production +.9 to 62.2.  New orders were off marginally: -.2 to 62.8.  The comments were a bit weaker:

They highlight several areas of concern: Obamacare uncertainty, a somewhat flat oil sector and hurriance issues still hurting some industries.

     Both of these indciate strong future GDP growth, which we also see in the latest Nowcasts from the Atlanta and NY Fed:

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Monday Morning Bond Market Round-Up

December 3, 2017

The short-end of the corporate market has risen from 1.91% at the beginning of September to 2.34%.  That’s a pretty sharp move for shorter-dated debt.

The 3-5 year section of the corporate market has risne from 2.36%-2.76%.  But current levels are still below previous interest rate highs.

The AAA-10-year spread (top chart) and the BBB-10 year spread (bottom chart) are still very tight.

The JNK ETF is consolidating in a triangle pattern

The IEFs (7-10 year treasuries) are trading right around the 200-day EMA.

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A Solid GDP Report

November 30, 2017

The BEA released their latest estimate of 3Q GDP, which had
a 2.3% Y/Y headline number percentage change. 
The following table shows that gains were broad:

The pace of Y/Y growth is increasing: 

The following charts highlight several important aspects of
the report:

Equipment investment (top chart) and, more specifically,
industrial equipment investment (bottom chart) have increased for four and six
quarters, respectively.

However, residential investment may be topping:

The top chart shows total residential investment while the
bottom chart is residential construction. 
Both have recently stalled.

continue to spend at a consistent pace:

The top chart shows total PCEs, which have printed between

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Mid-Week Bond Market Round-Up

November 29, 2017

Yellen’s Congressional Testimony:
Even with a step-up in growth of economic activity and a stronger labor market, inflation has continued to run below the 2 percent rate that the Federal Open Market Committee (FOMC) judges most consistent with our congressional mandate to foster both maximum employment and price stability. Increases in gasoline prices in the aftermath of the hurricanes temporarily pushed up measures of overall consumer price inflation, but inflation for items other than food and energy has remained surprisingly subdued. The total price index for personal consumption expenditures increased 1.6 percent over the 12 months ending in September, while the core price index, which excludes energy and food prices, rose just 1.3 percent over the same period, about 1/2 percentage

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New Home Sales Were Broadly Higher

November 28, 2017

When I first saw that new home sales increased, I naturally thought that a post-hurricane bump occurred.  But the increase was far broader:

The South region — which includes Texas and Florida — did increase; it rose 1.3%.  But notice the incredibly large increases in the NE — which rose 30.2% — and the Midwest — which was up 17.9%.

The top chart shows the NE region, which has increased 2 consecutive months and currently stands at a 5-year high.  The Midwest number is still within recently reported numbers. 

     While homes are expensive, mortgage rates are still fairly low:

This was a very encouraging report.

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Monday Morning Credit Market Round Up

November 27, 2017

From October 23 to November 15, the CCC yields widened out nearly 100 basis points, rising from 10.19% to 11.09%.  The BBBs also increased, but not by the same magnitude.  They rose 11 basis points between October 23 and mid-November.  The Baa’s saw no increase, meaning the problems in the junk bond market were contained.

The St. Louis Financial Stress Index — which is similar to the Kansas City number but is issued weekly instead of monthly — is showing very little stress

The 90-day commercial paper treasury bill spread has widened a bit, rising o 19 basis points.  But it was higher a year ago.  This bears watching but is not concerning yet.  

In contrast, the short-term asset-backed market has maintained its current short-term spread (top

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