Category: zerohedge

On Friday, something remarkable happened: after 12 months of relentless, raving optimism (and one day after JPM’s chief quant preacher Marko Kolanovic appeared on CNBC and urged everyone to BTFD) the most bullish bank on Wall Street, JPMorgan (whose year-end S&P price target of 4,400 is the highest on Wall Street) finally eased back on its “balls to the wall” euphoria and while it did not turn bearish per se, JPM’s chief equity strategist Dubravko Lakos-Bujas joined his other notably bearish sellside peers at Deutsche Bank and Morgan Stanley, and said that “easy equity gains for the broad market are likely behind us” and as a result JPMorgan’s “bullish conviction is now lower.”

As the second phase of global reopening gets confirmed by a pickup in mobility and pent-up demand, we expect yields to retrace higher thereby constraining the equity multiple with S&P 500 entering a period of consolidation. On March 8th, we argued the risk-reward for the Growth trade had tactically improved after the February Momentum crash and Growth derisking. Since then Growth has strongly outperformed, but mainly defensive/bond-proxy Growth, making this segment again vulnerable to rates.

Well, just a few hours later, the bank with the second highest S&P target – Goldman – also capitulated, with the bank’s chief strategist David Kostin writing that recent discussions he has had with clients “have focused on peaking US GDP growth and the capital gains tax hikes proposed by President Biden.”

It gets worse: as Kostin warns, “Investors buying S&P 500 as growth peaked have typically realized negative short-term returns and weak 12-month returns, consistent with the 3% upside to our year-end target of 4300.” 

In short, this is as good as it gets – for the economy – and it’s all sideways from here (at best) until the end of the year.  And just in case that was not enough, Kostin then warns that “S&P 500 returns have also been weak ahead of past capital gains tax hikes.” The good news “selling was short lived and reversed afterward” although this time the selling may not be so short-lived as Goldman estimates $1+ trillion in unrealized capital gains for the wealthiest US households.”

Here are some more details from the latest Kostin note:

During the past two months, the incoming questions from portfolio managers changed weekly and spanned the macro horizon: interest rates, inflation, corporate tax rates, profit margins, falling volatility, low return dispersion, and money flow. Never a dull moment and at 4180, the S&P 500 index trades nearly at its all-time high, up 10% since the start of the year.

More importantly, it is just 4% from Goldman’s year-end target of 4,300. Anyway, back to Kostin and his client conversations:

This week, attention shifted again. First, we received many inquiries about sector and style rotations and peaking economic growth. Second, questions abounded about the impact the potential capital gains tax rate hike could have on stock prices. Our answers: Domestic growth is peaking and forward equity returns are likely to be modest with a 3% gain in the S&P 500 to our year-end 2021 target of 4300. And historical experience suggests equity selling later this year ahead of a possible capital gains tax hike will be short-lived and reversed in subsequent quarters.

So yeah, bearish. Meanwhile…

US economic growth is peaking. Goldman Sachs economists expect US GDP growth will peak in 2Q 2021 at an annualized rate of 10.5%. Although GDP growth will remain both above trend and above consensus forecasts through the next few quarters, the pace of growth will peak within the next few weeks as the tailwinds from fiscal stimulus and economic reopening begin to fade.

Furthermore, as Kostin shows in the next chart, equities often struggle when a strong rate of economic growth first begins to slow. Picking up on what Michael Wilson said last week, the Goldman strategist writes that during the last 40 years, “investors buying the S&P 500 when the ISM Manufacturing index registered above 60 –typically coinciding with peak growth –have experienced a median return of -1% during the subsequent month and a paltry +3% return during the subsequent year.”

Why does this matter? Because the most recent ISM reading was 64.7 – i.e., the highest in almost 40 years, and while Goldman’s S&P 500 year-end target reflects a 4% total return from the current level, including dividends, Kostin explicitly reminded readers that the bank’s mid-year 2021 target remains 4100. Translation: stocks are set to drop from here over the coming 2-3 months… precisely what Deutsche Bank warned about two weeks ago.

To be sure, Goldman can’t spook its clients and go bearish cold turkey, so instead it said that it expects “equity prices will continue to rise as growth slows during the second half of this year. Equities generally appreciate when the rate of economic growth slows as long as growth remains positive, albeit at a slower pace. Although US growth is peaking, the growth rate should remain strong. In addition, the global economy is still accelerating and will not peak until 3Q 2021.”

This, of course, is drivel: when even Goldman says the selling is coming, the only question is when does the frontrunning of said selling begin since clients will certainly not be waiting until the last possible moment to dump exposure. And speaking of that, even Goldman admits that rising cap gains taxes are hardly bullish:

The Taxman Cometh, Part II. During the past month, investors have been focused on the Biden administration’s proposed corporate tax reform and the impact on specific stocks. This week, attention shifted to the forthcoming proposal to raise the capital gains tax rate. Long-term capital gains and qualified dividends are currently taxed at a maximum rate of 20%, along with a separate 3.8% tax on investment income. Press reports reveal that Biden will propose taxing both of these as ordinary income for filers with more than $1 million in annual income. This would roughly double the tax rate on capital gains and dividend income from 23.8% to 43.4%. Our economists expect a more modest increase, potentially around 28%.

Past capital gains tax hikes have been associated with declines in equity prices and in household equity allocations. Also, high-momentum “winners” that had delivered the largest gains to investors ahead of the rate hike have usually lagged. Tech and Consumer Discretionary sectors have been the largest sources of capital gains within the US equity market during the last 3, 5, and 10 years.

Unsurprisingly, the wealthiest 1% were the biggest net sellers of equities across US households around the last capital gains rate hike in 2013. During the three months prior to the hike, the wealthiest households sold 1% of their starting equity assets, which would equate to around $120 billion of selling in current terms.

And here, some ominous stats: using Federal Reserve data, Goldman estimates the wealthiest households now hold $1 to $1.5 trillion in unrealized equity capital gains. This equates to 3% of total US equity market cap and roughly 30% of average monthly S&P 500 trading volume.

However, as noted above, Kostin writes that the trend of net equity selling and falling stock prices around capital gains rate changes has usually been short-lived and reversed during subsequent quarters, to wit:

In 2013, although the wealthiest households sold 1% of their assets prior to the rate hike, they bought 4% of starting equity assets in the quarter after the change and therefore only temporarily reduced their equity exposures in order to realize gains at the lower rate. Total household equity allocations demonstrated a similar pattern around the two preceding capital gains tax hikes.

Eventually, once the tax-selling is over, Goldman expects an eventual increase in household equity allocations funded, in part, by a continued rotation away from cash since “US households represent the single largest owner of the US equity market, at 35%, and currently have cash allocations close to the 30-year average despite cash yields being substantially below average.” Households accounted for 40% of the $1 trillion of total inflows into US money market funds during 1H 2020 ($410 billion) and around 70% of the $180 billion of outflows since then ($120 billion).

Finally, Goldman estimates that additional household selling of money market funds could exceed $200 billion and that a meaningful amount of that cash will represent equity demand. The bank also forecast net equity buying by households to total $350 billion in 2021 and be driven by the wealthiest 1%. The top 1% – which accounts for 53% of household equity ownership – has bought $2 trillion of shares during the past 30 years vs. $800 billion of net selling by the bottom 99%.

Assuming Goldman is right, this is great news for the top 1%… it’s just further testament however that the record class, wealth and income divide between the haves (the 1%) and the have nots (everyone else) is about to get even greater.

The US Supreme Court, which hasn’t issued a major gun-rights decision in over a decade, has agreed to review a New York case to decide whether the government must allow most residents to carry a handgun in public.

The appeal is from a New York gun-rights group and two individuals who say the state is violating their 2nd Amendment rights by only issuing concealed-carry licenses to those who can show a special need for protection, according to Bloomberg. The state has restricted carry rights since the 19th century.

This case is likely to pave the way to the Supreme Court declaring a constitutional right to concealed public carry, overriding many state and local restrictions on the ability to bear concealed arms in public. https://t.co/SDD4adTFhx

— Mark Joseph Stern (@mjs_DC) April 26, 2021

The case, which the court will consider during the nine-month term beginning in October, will put the Justices in the middle of a heated debate between gun control advocates and gun rights groups who are hoping that the three justices appointed by former President Donald Trump (who have consistently ruled against conservative interests) will stand behind the Second Amendment.

Concealed carry advocates believe that public gun possession is an issue of self-defense against criminals, as well as an issue of individual freedom. Opponents say that more guns equal more crime.

New York is one of eight states — along with California, Massachusetts, New Jersey, Maryland, Rhode Island, Delaware and Hawaii — that the National Rifle Association says prevent most people from getting a carry license. Illinois and the District of Columbia also had sharp restrictions before their laws were invalidated in court.

The restrictions have created a split among federal appeals courts, a dynamic that often prompts the Supreme Court to intervene. The high court has never said whether the Second Amendment applies outside the home. -Bloomberg

In its appeal, the New York State Rifle & Pistol Association along with residents Robert Nash and Brandon Koch, have asked the high court to settle the matter.

“There is no Second Amendment issue more pressing than whether the fundamental, individual right to self-defense is confined to the home,” the group argued in its filing. “A minority of jurisdictions seem determined to control the very people and rights that the Second Amendment promises ‘shall not be infringed.”

The Supreme Court hasn’t issued a gun-rights ruling since 2010, when it ruled that the Second Amendment applies to states and cities, along with the federal government and District of Columbia. In 2008, the Court ruled that people have a constitutional right to keep a handgun at home in order to defend themselves.

The state of New York urged the Supreme Court to reject the appeal, arguing that the New York law “has existed in the same essential form since 1913 and descends from a long Anglo-American tradition of regulating the carrying of firearms in public,” according to Attorney General Letitia James.

Copper futures hit their highest levels in ten years on Monday as several factors, including supply concerns, a weaker dollar, the Biden administration’s plan to improve infrastructure, growth in renewable energy, and China’s increasing demand, continue to fuel expectations of higher demand for the industrial metal.

The dollar continues to edge lower Monday amid speculation Federal Reserve Chairman Jerome Powell will not announce tapering at this week’s meeting, fueling higher copper prices. 

Meanwhile, traders are concerned about supply due to a strike in Chile. 

“We are in for a good run higher as we are having supply issues. Chilean port workers threatening to strike, which is a short-term issue, but will cause some trouble for shipments into China in an already tight concentrate market,” commodities broker Anna Stablum of Marex Spectron told Reuters. 

“We are seeing some concerns about supply cuts in China due to environmental pressures,” Stablum added.

The resilience of copper prices suggests industrial use for copper in China continues. 

The push for a massive infrastructure overhaul in the US has provided support for copper. The Biden administration proposed infrastructure investments of hundreds of billions of dollars to fuel growth in renewable energy. 

When it comes to renewable energy, copper plays a huge role in renewable energy technology, given its conductivity characteristics. 

On top of renewables, a shift towards a digital economy and rising demand for electronics to support the remote work lifestyle adds additional support to copper prices. 

“Technology, semiconductors, data centers, and cellular towers all require significant copper usage,” Rob Haworth, senior investment strategist at US Bank Wealth Management, told MarketWatch. 

Meanwhile, “we have not seen an investment in new copper supply over the past few years, which means users have been competing for the relatively scarce supplies of copper, leaving price as the arbiter of who receives this supply,” Haworth said. “Mine development is a long-term activity, leaving us with a tight market for some time.”

Goldman Sachs recently called “copper the new oil.” 

… and it appears central banks have finally succeeded in unleashing inflation. The Fed continues to downplay soaring commodity prices as “transitory.” 

If copper is right, it will get messy pic.twitter.com/SD3OrUfyAD

— zerohedge (@zerohedge) February 21, 2021

The price of copper, lumber, soybeans, corn are all up double digits on a year-to-date basis. 

Authored by Matt Margolis via PJMedia.com,

For many months now, Dr. Anthony Fauci has advocated that people remain masked outdoors to help prevent the spread of COVID-19.

“When you are indoors, make sure you have a mask. When you’re outdoors, keep the mask on,” he said back in August, though he acknowledged that being outdoors was significantly safer than being indoors.

Now, Fauci is saying that he believes the Centers for Disease Control and Prevention (CDC) will provide updated guidance on wearing face masks outdoors, and says it’s “common sense” to reconsider the guidance.

I call it science, but I’ll take it.

Fauci also concedes that the risk of contracting COVID-19 while engaged in outdoor activities is “minuscule.”

“What I believe you’re going to be hearing, what the country is going to be hearing soon, is updated guidelines from the CDC,” Fauci said on ABC’s This Week.

“The CDC is a science-based organization. They don’t want to make any guidelines unless they look at the data and the data backs it up.”

“But when you look around at the common sense situation, the risk is really low, especially if you’re vaccinated,” he added.

You think? Why did it take so long to figure this out?

Dr. Fauci’s credibility has taken some severe hits, particularly in recent weeks. When Texas Governor Greg Abbott axed the state’s mask mandate and other COVID-related restrictions on businesses and people, Dr. Anthony Fauci called it “risky” and “potentially dangerous.” But no surge happened. Earlier this month Fauci struggled to explain how Texas defied his own predictions during an appearance on MSNBC, arguing at the time that there might be a “lag.” Three weeks later, there’s still no surge in cases in Texas.

Fauci also defended the “pause” in the rollout of the Johnson & Johnson vaccine, even though you’re more likely to die from general anesthesia than you are to get severe blood clots from the Johnson & Johnson vaccine.

Buckle up for an extremely busy week dotted with a flood of tech earnings, central banks galore and a the latest US GDP and CPI prints.

The Federal Reserve (Weds) and the Bank of Japan (Thurs) are both making their latest policy announcements with the former the obvious focal point for the week, even if the outcome will likely be uneventful (unlike the June meeting when the Fed is likely to hint at tapering for the first time). On top of that, there are an array of earnings releases, including 180 companies in the S&P 500. Tesla today might be one of the more headline grabbing ones but to be honest there are plenty of them. Meanwhile President Biden will give his first speech to a joint session of Congress (Weds) and finally, there are some important data releases, including the first look at Q1 GDP for the US (Thurs) and the Euro Area (Fri).

The biggest scheduled event on this week’s calendar for markets will be Wednesday’s Federal Reserve meeting and Chair Powell’s subsequent press conference. In their preview, Deutsche Bank economists write that this meeting should largely serve as a status check of the economic recovery relative to the substantial forecast upgrades that the FOMC unveiled at their March meeting. And in the press conference, they expect Powell will likely continue his subtle shift in tone in a more optimistic direction. Nevertheless, given the remaining gaps in the labor market and the focus on seeing actual rather than forecasted progress, April is too soon for the return of taper talk, and they expect those discussions to heat up during the summer instead.

As Bloomberg’s Laura Cooper writes, while waiting for that “substantial further progress”, Chair Powell is likely to affirm patience and take upbeat data in stride. Market watchers are becoming less convinced, with 45% of economists anticipating a 4Q tapering. No wonder when strong economic data is likely to extend, led by an anticipated 6.9% 1Q GDP print on Thursday and President Biden’s push for infrastructure mid-week. That recovery optimism has bolstered S&P 500 earnings expectations, with massive beats so far and ~30% of the index reporting this week. As we said two weeks ago, guidance will matter more than profit surprises with heightened focus on inflation, resulting margin compression and re-opening impacts given optimism baked in to valuations. Bellwether tech firms take the spotlight with Tesla announcing today, setting up for bouts of market volatility.

The other major central bank deciding on rates is the Bank of Japan (tomorrow), when it will also be releasing its quarterly Outlook Report. The BoJ is likely to retain its current policy stance next week, having only just fine-tuned their framework after the policy assessment last month. For the Outlook Report, the expectation is that it will raise the overseas growth projections, but the main focus will be on the new figures for FY2023, where our economist is looking for a real GDP growth forecast of 1.2% and

The Covid pandemic will also remain in the spotlight as the number of global cases rose at their fastest weekly pace yet last week. India has seen fresh record cases over the weekend with around 350k new daily positive tests and a million over 3 days. There have been reports that’s various models are predicting this could hit over 500k per day this week which will gain huge headlines. While Indian case loads are so high there will be concerns about the unevenness of the global recovery and the ability of variants to escape. So this is undoubtedly a big story.

In the political sphere, this week will see President Biden give his first speech to a joint session of Congress on Wednesday. We’re expecting a number of measures to be discussed, including the American Families Plan, which is expected to include fresh proposals on childcare and education. This sits alongside the American Jobs Plan, that Biden has already unveiled, where he proposed investing over $2tn in infrastructure and other priorities, to be financed through higher corporate taxes.

Commodity watchers will also be focusing on the OPEC+ meeting this Wednesday and with Iran talks progressing, there are obvious catalysts for oil volatility this week.

The current earnings season moves into full flow this week, as 180 companies in the S&P 500 report, along with a further 113 from the STOXX 600. Among the highlights include Tesla today, then tomorrow, we’ll hear from Microsoft, Alphabet, Visa, Novartis, Eli Lilly, Texas Instruments, UPS, Amgen, Starbucks, Raytheon Technologies, General Electric, HSBC, 3M and UBS. Wednesday then brings Apple, Facebook, Qualcomm, Boeing, Sanofi, GlaxoSmithKline, Santander, Ford, Lloyds Banking Group and Sony. On Thursday, releases include Amazon, Mastercard, Comcast, Merck, Thermo Fisher Scientific, McDonald’s, Bristol Myers Squibb, Royal Dutch Shell, Caterpillar, Total, American Tower, Twitter, NatWest Group and Samsung Electronics. Finally on Friday, there’s Exxon Mobil, Chevron, AbbVie, Charter Communications, AstraZeneca, BNP Paribas and Barclays.

Finally, there are also a few highlights among this week’s data releases, with the initial estimates of Q1 GDP coming out for numerous countries, including the US, the Euro Area, Germany, France and Italy. It’ll also be worth watching out for the weekly initial jobless claims data from the US, as that’s one of the most timely indicators we get, and has fallen to a post-pandemic low this last week, so it’ll be interesting to see if that decline is sustained.

Day-by-day calendar of events, courtesy of Deutsche Bank

Monday April 26

• Data: Germany April Ifo business climate indicator, US preliminary March durable goods orders, nondefence capital goods orders ex air, April Dallas Fed manufacturing activity
• Earnings: Tesla

Tuesday April 27

• Data: Italy April consumer confidence index, US February FHFA house price index, April Conference Board consumer confidence, Richmond Fed manufacturing index
• Central Banks: Bank of Japan monetary policy decision
• Earnings: Microsoft, Alphabet, Visa, Novartis, Eli Lilly, Texas Instruments, UPS, Amgen, Starbucks, Raytheon Technologies, General Electric, HSBC, 3M, UBS

Wednesday April 28

• Data: Japan March retail sales, Germany May GfK consumer confidence, France April consumer confidence, US preliminary March wholesale inventories
• Central Banks: Federal Reserve monetary policy decision
• Earnings: Apple, Facebook, Qualcomm, Boeing, Sanofi, GlaxoSmithKline, Santander, Ford, Lloyds Banking Group, Sony
• Politics: Joe Biden addresses joint session of Congress

Thursday April 29

• Data: Germany April unemployment change, preliminary April CPI, Euro Area March M3 money supply, final April consumer confidence, US weekly initial jobless claims, advance Q1 GDP, personal consumption, core PCE, March pending home sales
• Central Banks: ECB’s Schnabel does Twitter Q&A and ECB’s Centeno speaks
• Earnings: Amazon, Mastercard, Comcast, Merck, Thermo Fisher Scientific, McDonald’s, Bristol Myers Squibb, Royal Dutch Shell, Caterpillar, Total, American Tower, Twitter, NatWest Group, Samsung Electronics

Friday April 30

• Data: Japan March jobless rate, preliminary March industrial production, final March manufacturing PMI, China April non-manufacturing PMI, manufacturing PMI, composite PMI, preliminary Q1 GDP readings from Euro Area, Germany, France and Italy, preliminary April CPI from Euro Area, France and Italy, Euro Area March unemployment rate, Canada February GDP, US Q1 employment cost index, March personal income, personal spending, April MNI Chicago PMI, final April University of Michigan consumer sentiment index
• Central Banks: ECB’s Holzmann and Fed Vice Chair Quarles speak
• Earnings: Exxon Mobil, Chevron, AbbVie, Charter Communications, AstraZeneca, BNP Paribas, Barclays

* * *

Finally, looking at just the US, Goldman writes that the key economic data releases this week are the durable goods report on Monday, Q1 GDP release on Thursday, and PCE inflation and the employment cost index on Friday. The April FOMC meeting is this week, with the release of the statement at 2:00 PM ET on Wednesday, followed by Chair Powell’s press conference at 2:30 PM. There are no other major speaking engagements from Fed officials this week, reflecting the FOMC blackout period.

Monday, April 26

• 08:30 AM Durable goods orders, March preliminary (GS +2.0%, consensus +2.5%, last -1.2%); Durable goods orders ex-transportation, March preliminary (GS +2.1%, consensus +1.6%, last -0.9%); Core capital goods orders, March preliminary (GS +2.1%, consensus +1.8%, last -0.9%); Core capital goods shipments, March preliminary (GS +2.1%, consensus +1.5%, last -1.1%): We estimate durable goods orders rose 2.0% in the preliminary March report, reflecting mixed net orders for commercial aircraft. We estimate a 2.1% rebound in both core capital goods orders and core capital goods shipments, reflecting continued industrial-sector resilience, the rebound in business equipment production, and improvement following the February Texas storms.
• 10:30 AM Dallas Fed manufacturing index, April (consensus 30.0, last 28.9)

Tuesday, April 27

• 09:00 AM FHFA house price index, February (consensus +1.0%, last +1.0%)
• 09:00 AM S&P/Case-Shiller 20-city home price index, February (GS +1.1%, consensus +1.10%, last +1.20%); We estimate the S&P/Case-Shiller 20-city home price index rose by 1.1% in February, following a 1.20% increase in January.
• 10:00 AM Conference Board consumer confidence, April (GS 113.5 consensus 112.0, last 109.7): We estimate that the Conference Board consumer confidence index increased by 3.8pt to 113.5 in April. Our forecast reflects stronger signals from other consumer confidence measures.
• 10:00 AM Richmond Fed manufacturing index, April (consensus +22, last +17)

Wednesday, April 28

• 08:30 AM Advance goods trade balance, March (GS -$88.5bn, consensus -$87.7bn, last -$88.0bn): We estimate that the goods trade deficit increased by $0.5bn to $88.5bn in March compared to the final February report, reflecting increased imports.
• 08:30 AM Wholesale inventories, March preliminary (consensus +0.5%, last +0.6%): Retail inventories, March (consensus -0.3%, last flat)
• 02:00 PM FOMC statement, April 27-28 meeting: As discussed in our FOMC preview, we expect that the April FOMC meeting will be uneventful. The pace of recovery has accelerated since the FOMC last met in March, and we expect the April FOMC statement to feature a more upbeat description of recent economic activity. However, we think it is clearly too soon for the FOMC to hint at tapering with core inflation low, the unemployment rate at 6%, and broader slack higher still. We continue to expect the FOMC to start hinting at tapering in the second half of this year and to begin tapering in early 2022.

Thursday, April 29

• 08:30 AM GDP, Q1 advance (GS +7.5%, consensus +6.9%, last +4.3%); Personal consumption, Q1 advance (GS +10.7%, consensus +10.3%, last +2.3%): We estimate GDP growth accelerated to +7.5% annualized in the advance reading for Q1, following +4.3% in Q4. Our forecast reflects very strong growth in consumption driven by the reopening and the stimulus (+10.7% annualized) that embeds a sizeable increase in virus-sensitive services categories in March. We expect another large rise in residential investment (+25%) and double digit gains in business capex categories. We expect a sizeable drag on GDP growth from inventories (-2.3pp qoq ar) and net trade (-1.0pp) reflecting the late quarter surge in goods spending, and we will hone our estimates based on the advance economic indicators report on Wednesday.
• 08:30 AM Initial jobless claims, week ended April 24 (GS 560k, consensus 550k, last 547k); Continuing jobless claims, week ended April 17 (consensus 3,590k, last 3,674k): We estimate initial jobless claims increased to 560k in the week ended April 24.
• 10:00 AM Pending home sales, March (GS +6.0%, consensus +4.0%, last -10.6%): We estimate that pending home sales rebounded by 6.0% in March.

Friday, April 30

• 08:30 AM Employment cost index, Q1 (GS +0.6%, consensus +0.7%, prior +0.7%): We estimate that the employment cost index rose 0.6% in Q1 (qoq sa), which would lower the year-on-year rate by two tenths to +2.3%. Labor market slack remains somewhat elevated despite the sharp declines in recent quarters, and we believe this exerted downward pressure on annual wage increases in some industries. Our wage tracker has also edged down on a composition adjusted basis.
• 08:30 AM Personal income, March (GS +20.3%, consensus +20.0%, last -7.1%): Personal spending, March (GS +4.3% consensus +4.2%, last -1.0%); PCE price index, March (GS +0.50%, consensus +0.5%, last +0.23%); Core PCE price index, March (GS +0.34%, consensus +0.3, last +0.09%); PCE price index (yoy), March (GS +2.33%, consensus +2.3%, last +1.55%); Core PCE price index (yoy), March (GS +1.86%, consensus +1.8%, last +1.41%): Based on details in the PPI, CPI, and import price reports, we forecast that the core PCE price index rose by 0.34% month-over-month in March, corresponding to a 1.86% increase from a year earlier. Additionally, we expect that the headline PCE price index increased by 0.50% in March, corresponding to a 2.33% increase from a year earlier. We expect a +20.3%, increase in personal income and a 4.3% increase in personal spending in March.
• 09:45 AM Chicago PMI, April (GS 65.5, consensus 64.2, last 66.3): We estimate that the Chicago PMI declined by 0.8pt to 65.5 in April, reflecting mean reversion after a surge in the previous month but a continued boost from the supplier deliveries component and strong fundamentals
• 10:00 AM University of Michigan consumer sentiment, March Final (GS 88.2, consensus 87.5, last 86.5): We expect the University of Michigan consumer sentiment index to increase by 1.7pt to 88.2, reflecting further improvement in other consumer sentiment measures.

Source: Deutsche Bank, BofA, Goldman Sachs

We’ve been documenting Cathie Wood’s adventures in active management over at ARK Invest for the better part of the last year and a half now.

What started as a look into how the law of large numbers and Wood’s popularity presented numerous pitfalls back in December 2020 has now become something of a financial world soap opera, with many observers watching ARK funds extremely closely as the NASDAQ teeters on the brink of a fever pitch and Tesla hits a patch of rocky road in China.

Most recently, we’ve written about Wood for several reasons: the first is that she was backed by Bill Hwang, who was at the helm of the massive Archegos Capital blowup that singlehandedly pasted numerous equities to the tune of more than 50% each, while also doling out a multi-billion dollar loss to Credit Suisse and other counterparties caught “holding the hot potato”. The link drew obvious comparisons, although we’re certain Wood isn’t employing the insane leverage that catalyzed Hwang’s blowup.

The second is because the launch of her newest actively managed “Space Exploration ETF” has included some curious names. For example, it owns names like John Deere, which many find curious, while excluding space exploration pure plays like Maxar. 

does anybody know Cathie Wood or her analysts?

could you please ask her why $MAXR not in her Space ETF $ARKX — it’s the only pure play with free cash flow

— Special Situations (@rosemontseneca) April 21, 2021

But something else is going on that has piqued our curiosity as of late. Wood’s actively managed style seems to be drifting further away from risk-adverse and closer to just “risk”. Sure, we have pointed out in the past Wood’s propensity to sell large, liquid tech names like Microsoft in favor of buying speculative early stage names like Workhorse and Vuzix. 

And now people are also pointing out that ARK’s funds have been taking sizeable stakes in other ARK funds. ARK’s Space Exploration ETF now owns 7.2% of ARK’s 3D printing ETF, for example.

$ARKX ARK “Space Exploration” ETF now owns 7.2% of the ARK 3D Printing ETF. Has anyone been able to tease a reason out of these clowns as to why they are supposedly doing this? pic.twitter.com/L642wrkR4M

— Keubiko (@Keubiko) April 23, 2021

Additionally, Wood has also already amassed a several hundred million dollar position in the newly listed Coinbase IPO, which is down almost 20% from its $350 reference price when it listed. Despite your take on crypto, it’s tough to deny that piling into a sizeable equity position based mostly on super-volatile cryptocurrencies is a risk adverse strategy. 

And this has caused many on FinTwit to think about the feedback loop that is slowly determining whether or not ARK funds see success. This diagram appeared over the weekend, and shows exactly how – should inflows into ARK funds slow or reverse – their intrinsic value could collapse.

At some point if inflows stop or reverse, these stocks that have been walked up far past their intrinsic value could collapse as no buyers are willing to step in and buy them at their inflated valuations. We saw some of that in March, as many arkg names had dramatic collapses.

— Andreas Hansen (@aadhansen) April 25, 2021

Not unlike the Allied Capitals of the world, ARK looks more and more like a BDC marking its own book up as the cycle continues to feed off itself. The further along the cycle gets, the easier it becomes for a pin to prick the entire bubble. 

The question then turns to how much further ARK wants to “push it” and – not unlike the overall market which is seeing record levels of margin debt…

The market is at all time highs while margin debt has increased by record levels.

This is a lurking disaster. pic.twitter.com/TMMD8InvH8

— Nate Anderson (@ClarityToast) April 24, 2021

…how big the bloodbath could wind up being if the stock market decides to buck the Fed and simply decide “enough is enough”, before puking up all of the malinvestment that has taken place over the last decade.

But for now – maybe for one more day, one more week, or maybe even another month, Cathie Wood’s ARK forges forward.

By Larry McDonald of The Bear Traps Report

Crypto down! Silver up?

We think a growing forward trend is a combination of pressure on crypto currencies, particularly Bitcoin (Ethereum has software applications that work and becoming more popular so isn’t just a one trick pony like Bitcoin) with some of that flowing into precious metals, particularly silver.

Why? If in fact there has been crypto currency substitution for precious metals to some non quantifiable and therefore non verifiable extent, then that certainly allows for reverse substitution on a crypto drawdown in a similar scale. There have been three 70% crashes in crypto. As Aristotle said in his Metaphysics, “If it happened before, it can happen again.”

So surely if something has happened three times, it can happen a fourth time. If crypto represents a flight from fiat currency, then a move out of crypto should lead into the ultimate non fiat currency: gold (and gold’s playmate, silver).

Remember! Gold and silver are not substitutes for fiat currencies. Fiat currencies are substitutes for gold and silver. As readers know, we like precious metals and we like copper. Palladium made a new high the other day. Between deficit spending, upcoming yield  curve control, opening up of the economy, and the U.S. infrastructure spend, inflation havens should work, to gold and silver’s benefit.

Furthermore, because of electric vehicle and solar panel production growth, silver has additional demand drivers that should push it to new recovery highs. So, now we see an additional reason to play long precious metals: a potential kick in the pants for Bitcoin.

SLV Silver is breaking out to the upside. SLV broke above the 50 day moving average on 163% average volume on Wednesday…

After peaking in early June (shortly before gold peak), the ratio of Newmont to gold is breaking out to the upside. Gold miner outperformance is a sign of a healthy precious metal bull market.

After February’s surprise (weather-impacted) tumble, Durable Goods Orders were expected to rebound strongly in preliminary March data but they were disappointed. Against expectations of a sturdy 2.3% MoM jump, Durable Goods Orders rose just 0.5% MoM (orders were revised up modestly to -0.9% for Feb. from -1.2%)…

Source: Bloomberg

Due to base effects, Durable Goods Orders surged 25.6% YoY, the biggest jump since 2014 (big Boeing orders).

Core capital goods orders, a category that excludes aircraft and military hardware and is seen as a barometer of business investment, rose just 0.9% (almost half the expected 1.7% jump) after a revised 0.8% decline.

Authored by Lance Roberts via RealInvestmentAdvice.com,

When there is a discussion of low future returns due to valuations, what gets missed is that such requires a bear market.

Let me explain.

In “Do You Feel Lucky,” Michael Lebowitz compiled a series of valuation metrics and their correlation to future returns. To wit:

“The average of the 10-year expected returns from the four gauges is -0.75%. When the Fed backs off, whether by its design or due to inflation, slower economic growth, or massive debt overhead, rich valuations will matter.”

The mistake many investors make is assuming that such means every year, over the next decade, returns will be near zero. As we will discuss, it is not every year, but one or two awful years, impacting the whole.

Fun With Math

The vital point to understand is that over the long-term investing period, “value” and “returns” are both inextricably linked and opposed. As shown above, forward return expectations are lower than the long-term average given current valuation levels.

Let’s review what “low forward returns” does and does not mean before looking at different valuation measures.

• It does NOT mean the stock market will have annual rates of return of sub-3% each year over the next 10-years.

• It DOES mean the stock market will have stellar gains in some years, a big crash somewhere in between, or several smaller ones, and the average return over the decade will be low. 

“This is shown in the table and chart below which compares a 7% annual return (as often promised) to a series of positive returns with a loss, or two, along the way. (Note: the annual average return without the crashes is 7% annually also.)”

“From current valuation levels, two-percent forward rates of return are a real possibility. As shown, all it takes is a correction, or crash, along the way to make it a reality.”

Such isn’t a prediction; it is just statistical probability and simple math.

Most importantly, as stated above, none of these factors or measures mean the markets will produce single-digit rates of return each year for the next decade. The reality is there will be some strong return years during that period. Unfortunately, the bulk of those years will get spent making up previous losses. 

That is the nature of investing in the markets. It is just part of the full-market cycle.

Why A 50% Correction Is Required

One of the essential issues overhanging the market is simply that of valuations. As Goldman Sachs pointed out recently, the market is pushing the 89% percentile or higher in 6 out of 7 valuation metrics.

So, just how big of a correction would be required to revert valuations to long-term means? Michael Lebowitz recently did some analysis for RIA PRO:

“Since 1877 there are 1654 monthly measurements of Cyclically Adjusted Price -to- Earnings (CAPE 10). Of these 82, only about 5%, have been the same or greater than current CAPE levels (30.5). Other than a few instances over the last two years and two others which occurred in 1929, the rest occurred during the late 1990’s tech boom. The graph below charts the percentage of time the market has traded at various ranges of CAPE levels.”

Given that valuations are at 30.5x earnings and that profit growth tracks closely with economic growth, a reversion in valuations would entail a decline in asset prices from current levels to somewhere between 1350 and 1650 on the S&P (See table below). From the recent market highs, such would entail a 54% to 44% decline, respectively. (To learn how to use the table below to create your own S&P 500 forecast, give RIA Pro a 14-day free trial run.)

Such also corresponds with the currently elevated “Price to Revenue” levels, which are now higher than at any point in previous market history. Given the longer-term norm is 1.0, a reversion as seen in 2000 and 2008, each required a price decline of 50% or more.

As expected, 10-year forward returns are below zero historically when the price-to-sales ratio is at 2x. There has never been a previous period with the ratio climbing to near 3x.

What Would A Mean Reversion Entail?

The chart below uses Fibonacci retracement measurements as potential reversion levels. It is worth pointing out markets are currently pushing 2-standard deviations above the 50-week moving average. As noted, markets trend above the 50-week moving average during bull markets. Bear markets trend below that average.

Importantly, corrections during bull markets can temporarily break below that average but quickly rise back above it. Such is why March of 2020 was a “correction” and not a “bear market,” as price trends did not change.

Using those Fibonacci retracement levels:

• A 23.6% correction would pull markets back to roughly 3100, leaving the current bull market intact.

• The 38.2% retracement level would start retesting the March 2020 lows. Such will begin pushing the early boundaries of a “bear market” if prices do not recover quickly. 

• A bear market will be well entrenched at the 50% retracement level. Valuation levels will approach more reasonable levels of “fair value,” and sentiment will turn negative.

• At a 61.8% retracement level, it will erase a majority of the last decades bull market. While many will suggest such a retracement is unlikely, history suggests such is indeed possible.

• If the 74.6% retracement level gets reached, there will not be many investors left in the market. However, valuations will have reverted to historically cheap levels, which have been the foundation for long-term secular bull markets to begin.

It’s Not Impossible

Such a level certainly seems unthinkable, but as Shawn Langlois previous penned:

“I recognize the notion of a two-thirds market loss seems preposterous. Then again, so did similar projections before the 2000-2002 and 2007-09 collapses.”

While the current belief is that such declines are no longer a possibility due to Central Bank interventions, we had two 50% declines just since the turn of the century. The cause was different, but the result was the same.

The next major market decline will get fueled by the massive levels of corporate debt, underfunded pensions, and record “margin debt,” and the lack of “market liquidity.”

What Will Cause It?

The real problem with discussing corrections is three-fold:

1. It is has been so long since we have had a bear market, many investors have forgotten what happens, and more importantly, how they reacted previously.

2. The majority of mainstream media advice gets written by individuals who don’t manage money for a living, have no substantial investment capital at risk, and have never actually been through a bear market. 

3. Given the extremely long market expansion, many investors have genuinely come to believe “this time is different.”

 What will cause the next bear market?

I do not have a clue. Nor does anyone else.

Numerous catalysts could pressure such a downturn in the equity markets:

• An exogenous geopolitical event

• A credit-related event (most likely)

• Failure of a major financial institution

• Recession

• Falling profits and earnings

• An inflationary or deflationary spike

• A loss of confidence by corporations that contracts share buybacks

The Cycle Is Always The Same

Whatever the event is, which is currently unexpected and unanticipated, the decline in asset prices will initiate a “chain reaction.”

• Investors will begin to panic as asset prices drop, curtailing economic activity and further pressuring economic growth.

• The pressure on asset prices and weaker economic growth, which impairs corporate earnings, shifts corporate views from “share repurchases” to “liquidity preservation.” Such removes critical support of asset prices.

• As asset prices decline further and economic growth deteriorates, credit defaults begin triggering a near $5 Trillion corporate bond market problem.

• The bond market decline will pressure asset prices lower, which triggers an aging demographic who fears the loss of pension benefits, sparks the $6 trillion pension problem. 

• As the market continues to cascade lower at this point, the Fed is monetizing nearly 100% of all debt issuance and has to resort to even more drastic measures to stem selling and defaults. 

• Those actions lead to a further loss of confidence and pressure markets further. 

The Federal Reserve can not fix this problem, and the next “bear market” will NOT be like that last.

It will be worse.

Low Future Returns Only Require One

Over the next decade, it is unlikely that a 50-61.8% correction will happen without a credit-related event occurring. The question becomes the limits of the Fed’s ability to continue to “bailout” banks and markets once again.

Maybe they can, but I am not sure I want to ride the markets down trying to find out.

The point here is that it only takes one “mean reverting” event over the next decade to lower your annualized returns close to zero. Such does not bode well for retirement plans banking on 6-8% annualized returns or more.

As noted, over the next decade, there will be some terrific “bull market” years to increase portfolio valuations. However, one essential truth is indisputable, irrefutable, and undeniable: “mean reversions” are the only constant in the financial markets over time.

The problem is that the next “mean reverting” event will remove most, if not all, of the gains investors have made over the last five years. Possibly, even more.

Still don’t think it can happen?

“Stock prices have reached what looks like a permanently high plateau. I do not feel there will be soon if ever a 50 or 60 point break from present levels, such as they have predicted. I expect to see the stock market a good deal higher within a few months.” – Dr. Irving Fisher, Economist at Yale University 1929

The company that has repurchased more stock than any other corporation in the history of the world, Apple, buying back a whopping $67BN in 2019 alone, appears to be preparing to unleash another tidal wave of stock buybacks which explains why it is busy engaging in virtue signaling diversions this morning, when three years after its initial pledge to invest in the US, it recommitted this morning to plunking billions more into the US over the next five years, and now expects to spend $430BN by 2026, a 20% increase compared to its initial estimate.

The iPhone maker – which was quick to note that it is the largest taxpayer in the US and has paid almost $45 billion in domestic corporate income taxes over the past five years alone, or about 20% of how much stocks it repurchased – will create 20,000 new jobs in innovative fields like silicon engineering and 5G technology across the country – or roughly how many part-time jobs each new Amazon warehouse creates – and fund a new campus in North Carolina, the company said in a statement Monday.

“At this moment of recovery and rebuilding, Apple is doubling down on our commitment to U.S. innovation and manufacturing with a generational investment reaching communities across all 50 states,” said Chief Executive Officer Tim Cook.

“Apple today announced an acceleration of its US investments, with plans to make new contributions of more than $430 billion and add 20,000 new jobs across the country over the next five years. Over the past three years, Apple’s contributions in the US have significantly outpaced the company’s original five-year goal of $350 billion set in 2018. Apple is now raising its level of commitment by 20 percent over the next five years, supporting American innovation and driving economic benefits in every state. This includes tens of billions of dollars for next-generation silicon development and 5G innovation across nine US states.”

In the past three years, Apple’s investments have outpaced its original five-year goal of $350 billion in investments set in 2018 although it wasn’t clear just how much it has actually invested, with the bulk of this capital likely spent on the company’s new UFO-like headquarters.

As part of its expansion, Apple plans to invest more than $1 billion in North Carolina to build a new campus and engineering hub in the Research Triangle area. The investment will create at least 3,000 new jobs in machine learning, artificial intelligence, software engineering, and other advanced fields.

According to the release, Apple supports more than 2.7 million jobs across the country through direct employment, spending with US suppliers and manufacturers, and developer jobs in the thriving iOS app economy.