[Market Madness] Edition 0109
All Time Highs
Another whopper of a week
Administrative topics and a general market recap
Well folks, another interesting week this week. Markets here in the states mostly ended the week with gains while Asia and Europe sold off this week. Likely fueling the rally here in the states is the continuing record setting behavior within the NASDAQ but also the S&P 500 recovering above pre-COVID 19 highs, a sign of a major bull market recovery. Many market experts are still very weary about these sudden rises in prices and suggest a reliance on longer-term economic trends to guide the way.
Commodities gained back some of the losses met in the prior week, but given the hot stock prices, investors chose more risk-on strategies than the safer golds/silvers and U.S. treasuries. Crude oil is still holding in the low $40’s range as well as the market at large continues to figure out this sector’s recovery path.
This week was another big week of political power struggles, and likely will continue with this trend into the November election. With that might come increases to volatility, so be warned.
Here are some general themes that we will cover off on in this edition:
Macroeconomics (financial markets versus traditional economic data)
Financial Markets (equities reaching a new impasse)
Gold (with the help of Mr. Buffett)
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In the meantime, if you are interested in my thought process throughout the week as I collect news and ideas for the Sunday publication, please check out my Walling page where I brainstorm and mind-map each week’s edition!
Fundamentals
Where did the markets end last week?
U.S. Indices 5 Day Performance
Dow Jones: -0.56%
S&P 500: +0.40%
NASDAQ: +2.01%
Asia and Europe 5 Day Performance
Nikkei 225: -1.59%
Hang Seng: -1.74%
FTSE 100: -2.79%
DAX: -1.26%
Rates, Spot Prices, and ‘Good to Knows’
U.S. Dollar Index: 93.20
US 10 YR: 0.635%
Crude OIL: $42.28
Spot Gold: $1,938.53
Market Madness Portfolio: +12.27%YTD
TEDRATE: 0.18
LIBOR (3 month): 0.256%
COVID 19 Global Cases: 23,462,707 (updated Aug. 23, 2020)
Equities meet a new impasse
New highs
This week, we saw the S&P 500 make its first new record close since before the pandemic, completely wiping out all market losses incurred during the sell off of months past. A recovery make in the indices this quickly and still amid the ongoing challenges put forth by the pandemic is astounding to say the least. Many have also been quick to call on this ‘new bull market’ as some are still wondering if we’ve really tested the bottom yet (inferring the March selloff might not have been the true bottom).
Same old worries
Optimists cite better than expected corporate earnings reports as well as strengthening economic data as validation backing the recent rise to the top. And in most cases, they’re not entirely wrong. Both existing home sales and new housing starts were up in the mid 20% range in July. On the other side of the coin, new jobless claims crept back up over 1 million this past week, suggesting that the turmoil in the labor market is still unraveling. The biggest challenge associated with parsing through the labor market figures is finding the difference between which claims are temporary losses of employment and which are jobless claims where that job will not come back into the economy.
Put another way, since many of these jobless claims are associated with business closures due to the virus, how many of these jobs will be permanently lost once recovery is fully completed? That is the magic question here because companies are going to grow to a point where they’re unable to furlough workers due to the cost burden of the associated worker benefits. We’re looking at a current unemployment figure of over 10.2% (as of July’s BLS labor report). Many are remaining hopeful that with increased recovery efforts, that number will continue to drastically decline, meaning that the unemployment was largely a temporary issue. The outlook becomes gravely worse if those workers do not have a job to go back to once recovery settles.
Having this forward looking ‘what-if’ perspective has investors worried. What we continue to see however, is the increase of risk seeking as a response to economic fear. Investors are unsettled about the economic future because of its high degree of uncertainty even still, yet investors continue pumping asset prices in the markets to all-time highs.
We don’t know how this will all end up playing out, but some big time experts suggest a mental preparation for any kind of outcome is the best recipe in being able to deal with whatever punch comes next.
Gold, gold, gold
It shouldn’t be much a surprise that we’ve seen such a rise in the price of gold recently, given the risk aversion activity and the hedging capabilities that gold provides to a portfolio (particularly because the 60/40 portfolio has died as treasury rates approach zero). As the prices continue to rise, everyone seems to want a piece of the action. What is the problem then? Getting it out of the ground.
“Gold is among the rarest metals in the earth’s crust and much of the easier-to-get ore has already been mined. What is left is harder to find and more expensive to extract, miners say.” (excerpted from WSJ article)
The mining companies benefitting from the latest price boom have been using the additional funds to pay down debt from prior mining projects and increasing dividend payouts to shareholders. What they have not done is provide funding or plans toward future mining projects. As the article suggests, what is left to be extracted from mines is much more challenging to get out of the ground and that is the majority of the risk associated with these large scale mining projects. Finances in mining are good until there is a risk of being unable to get the product out of the ground. For more ore-rich mines, it is much more cost efficient for the mining company to extract the ore when compared to a lower quality ore mine.
“The fundamental problem for gold miners is that there simply isn’t that much to unearth. All the gold ever mined can fit into a 69-foot cube, according to the World Gold Council. At around 0.005 parts per million, gold’s presence in the Earth’s crust is tiny compared with that copper, at over 50 parts, or iron, at more than 50,000. Some miners and geologists argue the metal is nowhere near to running out as a minable commodity. Gold may be harder to mine, but technology can bring costs down and allow access to new mineral-rich places, such as the ocean floor, they say.” (excerpted from WSJ article)
Following the trend of atypical happenings here in 2020, Warren Buffett and his firm Berkshire Hathaway have backed one of the largest gold mining companies., Barrick Gold Corporation. This is considered atypical because in the past, Buffett has said he’s never been interested in investing in gold or metals.
Buffett and, by extension, his portfolio managers within Berkshire Hathaway have historically been able to tune in to the pulse of the market and a large investment in gold mining would suggest, at least to me, that the safe haven in gold is likely to continue holding an important role in the months to come.
Quick Takes
To fill in the gaps
COVID 19 data handling back in the hands of the CDC. (via WSJ)
Target Q2 profits soar 80%. (via CNBC)
Apple self-isolates itself in the $2 Trillion market capitalization club. (via WSJ)
What went wrong with testing for COVID 19 here in the states? (via WSJ)
USPS to hold off changes to service until after election following pressure from congressional leaders and a general fear over lost/missing votes. (via WSJ)
Donnie can’t take the haters on Twitter anymore. (via CNBC)
True normalcy may still be years away. (via CNBC)
Airbnb files confidential IPO paperwork. (via CNBC)
Alaska’s arctic refuge at risk from new oil drilling policy. (via WSJ)
Walmart woes are COVID 19 stimulus checks run dry. (via CNBC)
Robinhood’s value surpasses $11 billion after latest round of funding. (via FT)
"Sixth Street Partners amasses one of the largest private-capital funds." (via WSJ)
General Banter
What’s on my mind
As I attended my own virtual graduation on Saturday, I know many recent grads are feeling the same dismay of this year being so different and difficult from a celebratory perspective. Just know you’re not alone.
Reader’s Corner
A place for suggestions
The reader might be interested in watching this very detailed yet simplistic narrative on how the economic machine works, narrated by Ray Dalio. Grab that video here.
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Behind the Madness
You’ve made it through the madness. I’ve worked really hard to ensure that you leave this page having learned something, and I hope that benefits you in your daily adventure. Thank you again for checking in.
Publishing Schedule: every Sunday
In the meantime, if you are interested in my thought process throughout the week as I collect news and ideas for the Sunday publication, please check out my Walling page where I brainstorm and mind-map each week’s edition!
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