What’s new
Administrative topics and an introduction
Well folks, it was a bloody week on the markets. We may not be whole, but we’re still here and ready to hit the tape on Monday. It is really interesting to be a market participant with some understanding that things do, in fact, go in the opposite direction of what you’d hope for (i.e. stocks going down). It seems that the influx of retail investors are missing that understanding and feeling a bit perplexed. In this edition, I hope to clear the air on what’s happened this week with all this bond talk and the newest developments on the economic data side.
P.S. no edition next weekend! I am taking a one edition break to refocus and re-center myself.
Let’s get into some stories.
Did you miss the last edition? No worries! Get it right here and catch up on the madness.
Fundamentals
Where did the markets end last week?
U.S. Indices 5 Day Performance
Dow Jones: -1.70%
S&P 500: -2.41%
NASDAQ: -4.90%
Asia and Europe 5 Day Performance
Nikkei 225: -3.47%
Hang Seng: -5.43%
FTSE 100: -1.92%
DAX: -1.48%
Rates, Spot Prices, and ‘Good to Knows’
Market Madness Portfolio: -4.22%
CBOE Volatility Index (VIX): 27.95
US 10 YR: 1.415%
Crude OIL: $61.53
Spot Gold: $1,732.53
TEDRATE: 0.14
LIBOR (3 month): 0.19050%
U.S. Dollar Index: 90.929
EUR/USD: $1.207
Pound/USD: $1.393
USD/JPY: 106.550 JPY
USD/CNY: 6.473 CNY
Weekly update
An article by Christopher
Financial markets
Well, it was a big risk-off week in the markets both in the U.S. and abroad. There’s been a lot of chatter surfacing about rising U.S. yields being to blame. However, many a time, folks are forgetting what a yield curve is supposed to look like during an economic recovery / growth period: ding, ding, ding… upward sloping!
Yields rising are a traditional indicator of economic growth and/or rising inflation. There still remain few indicators pointing to out-of-hand inflation, so it’s logical to result to economic growth as the impetus. Of course, not all industries are going to like or be a beneficiary from a higher rate environment, but we’re not in a high-rate environment (1.5% is not a high rate, historically speaking). In a Saturday note, Walt at the Heisenberg Report reiterated Goldman’s current outlook on rates, which they feel are not at a level to disrupt equity valuations (which should help cool the jets of those fearing doomsday is around the corner). The other helpful reminder noted was that with bond moves, it is not always the size of the move, but how rapid these moves happen.
Last week, we touched on the idea that the debt issuance rush has reached even the riskiest parts of the market. Companies traditionally barred from issuing debt at such low rates are now able to, since we’re practically on the floor, borrow large amounts of capital for very low cost. This would not be a problem for a stable, well-functioning corporate, but the same is not true of companies that are traditionally considered “high-yield” borrowers. High yield debt offers, you guessed it, a higher yield to compensate investors for the higher level of risk they’re taking by investing in that company. Rising rates should help to bar some of these risky borrowers from tapping into large capital with no plan for structured repayment… see chapter 11 bankruptcy filings following the inability for these risky borrowers to repay and investors getting stuck holding the bag.
Elsewhere, we saw the reddit brigade come back, pumping their favorites, including GME and AMC. Robinhood made it clear this time that the exchanges that placed the restrictions, not RH. I don’t think the reddit mafia cares, they’re still out for blood.
Finally, even our buddy Jay Powell could not curb the pessimists who ruled the market this past week. Tech continued to sell off this week, as we saw large outflows from Cathie Wood’s famous ARKK ETF as well as a large selloff in Tesla stock.
Bonus Reads:
Historic Gains in Small Stocks Highlight Investor Exuberance via WSJ
In Bond Tantrum, Markets Argue For Their Own Extinction via Heisenberg Report
Yields ‘Emphatically Not’ High Enough To Threaten Stock Valuations: Goldman via Heisenberg Report
Economic data and stimulus
Back to our friend Jerome Powell, he spoke before Congress this week, updating our lawmakers on the status of the economy and expectations ahead. He outlined clearly that the Fed is going to remain firm on near-zero rates and asset purchases until the economy sees further recovery.
“I think Powell was trying to make a very clear case that the Fed is committed to achieving a complete recovery,” said Michelle Meyer, head of U.S. economics at Bank of America. “While the news has been positive on that front when you look at the drop in virus cases and you look at some of the recent economic data, the Fed is certainly not ready to pivot on its policy stance.” (excerpted from WSJ article)
He can’t simply wave a magic wand and tell the yield curve where to go. The Fed simply sets one yield price, the Fed Funds Rate, and the rest is dictated by supply and demand (buyers and sellers) in the market. The short of the story is that investors are never happy. Investors sold on news early on in the pandemic that yields would go negative, and now they are selling on news that yields are rising. I don’t even pretend to be an expert on the bond market; it is a complex beast. But what I have noticed is that if it is not one thing (10 YR yield, inflation, breakevens, 2-10 spreads, etc.), it is another (interest rate on excess reverses (IOER), or the IOER - 2 YR spread, etc.). Some of the buzz, like we mentioned earlier, is coming from either inflation fears or misunderstandings regarding what a traditional growing economy yield curve looks like.
Elsewhere, we had a host of new economic data to chew on this week. New weekly jobless claims dropped to a local low, but remained elevated as far as the pandemic is concerned (730K versus 840K estimate). A lot of this, some experts are saying, can be attributed to the shutdowns seen across some states due to the inclement weather, something we will have to wait for next Thursday on for the adjustment.
Additionally, both personal income and spending rose in the month of January (10% and 2.4%, respectively). Again, on the surface this looks good, but is almost entirely propped up by the previous stimulus package with $600 personal checks to individuals. We’re likely to see another boost to personal income as the next round of checks hit the printer, and even longer of a wait until we see self-supported personal income growth. But with any good print of economic data comes the wildly optimistic:
But households also stashed much of the money: Household savings totaled $3.9 trillion last month, up from $1.4 trillion last February.
“The levels are off the charts,” Joseph Brusuelas, chief economist at RSM US LLP, said of the cash reserves. “You’re going to see the fuel for a pretty big consumer-led boom this year, which will spill into next.” He expects the economy to grow 6.5% or more this year. (excerpted from WSJ article)
I’m full well rooting for a major economic boom, but you’ve got to give me more than one or two non-consecutive improvements to economic data.
A final note should be on global trade, which has seen a nice rebound in the wake of unwinding restrictions and improved vaccinations. When compared to the GFC, global trade has quickly resumed pre-pandemic levels.
Some of that is to say that there are still fine systems in the underlying economy that just got muddied up with the pandemic and its restrictions. This is a piece of data that I put some promise in when looking forward to more generalized economic recovery toward year end 2021 and H1 2022.
Read more here, here, here, here, here, here, here, and here.
Quick Takes
To fill in the gaps
FDA votes in favor of JNJ’s single-shot vaccine. (via Barron’s)
Robinhood in talks to settle FINRA probe. (via WSJ)
House passes $1.9 Trillion stimulus package, onto the Senate. (via CNBC)
Retail traders pumped GME once again. (via WSJ (1) and WSJ (2))
The Saudi foreign policy nightmare for the U.S. (via WSJ)
I guess deregulation in Texas electricity market was not so good after all. (via WSJ)
Charlie Munger throws heat this week. (via WSJ, CNBC, and Twitter)
SPACs are fragile, as displayed with the Lucid deal this week. (via CNBC)
Yellen takes aim at BTC. (via CNBC)
Tesla tumbles, turning negative on the year. (via CNBC)
General Banter
What’s on the minds of our editors and writers
There was an interesting overlap spotted this week between this quote:
"Munger on SPACs: "The investment banking profession will sell shit as long as shit can be sold."" / Twitter
and this clip from Margin Call:
Reader’s Corner
A place for suggestions for readers like you
The reader might enjoy “The Laws of Trading: A Trader's Guide to Better Decision-Making for Everyone” by Agustin Lebron
No sponsors, just picked this up myself and found it to be an interesting and insightful read.
Well done. You’ve made it through the madness. I’ve worked hard to ensure that you leave this page having learned something, and I hope that it benefits you in your daily adventure. Thank you again for checking in.
Do you like what you have read? If you know of anyone missing Market Madness, save them the trouble, and share it with them!
Check out Behind the Madness for all the cool links and sign ups I used to have at the bottom of the weekly edition. Updated weekly!
Check out A Series of Financial Musings for informative threads related to all kinds of financial learning points, novel retentions, and commentary on research papers.
Continue the conversation with me on Bookshlf, “a dedicated space to help people organize, curate and discover the content they love, no matter where it's from. A place to save it for yourself, or share it with communities who will love it, too.”