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Investors Brace Themselves for a Flood of Earnings & Fed

Volatility is picking up as investors brace themselves for a flood of earnings announcements this week and the Fed meeting next week. The VIX volatility…

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This article was originally published by Real Investment Advice

Volatility is picking up as investors brace themselves for a flood of earnings announcements this week and the Fed meeting next week. The VIX volatility index closed up 5.60% on Tuesday even though the S&P was up 0.15%.

Facebook (FB) fell 5% on Tuesday despite better than expected earnings. Dragging on the stock is weaker than expected revenues and reduced expectations for Q4 revenues. The political scrutiny on FB is also not doing shareholders any favors.

FB is down over 20% since September and is close is flirting with the 200-dma. It is currently repeating its price action from March, where it found support and rallied to all-time highs. However, investors may want to be more cautious about the stock for now until price action improves.


What To Watch Today

Economy

  • 7:00 a.m. ET: MBA Mortgage Applications, week ended Oct. 22 (-6.3% during prior week) 
  • 8:30 a.m. ET: Advance Goods Trade Balance, September (-$88.3 billion expected, -$87.6 billion in August)
  • 8:30 a.m. ET: Wholesale Inventories, month-over-month, September preliminary (1.0% expected, 1.2% in August)
  • 8:30 a.m. ET: Durable Goods Orders, September preliminary (-1.1% expected, 1.8% in August)
  • 8:30 a.m. ET: Durable Goods Orders, excluding transportation, September preliminary (0.4% expected, 0.3% in August)
  • 8:30 a.m. ET: Non-defense Capital Goods Orders, excluding aircraft, September preliminary (0.5% expected, 0.6% in August)
  • 8:30 a.m. ET: Non-defense Capital Goods Orders, excluding aircraft, September preliminary (0.5% expected, 0.8% in August)

Earnings

Pre-market

  • 6:00 a.m. ET: Hilton Worldwide Holdings (HLT) to report adjusted earnings of 78 cents per share on revenue of $1.7 billion
  • 6:55 a.m. ET: The Coca-Cola Company (KO) to report adjusted earnings of 58 cents per share on revenue of $9.72 billion
  • 7:00 a.m. ET: CME Group (CME) to report adjusted earnings of $1.56 per share on revenue of $1.15 billion
  • 7:00 a.m. ET: McDonald’s (MCD) to report adjusted earnings of $2.46 per share on revenue of $6.03 billion 
  • 7:00 a.m. ET: Bristol-Myers Squibb (BMYto report adjusted earnings of $1.92 per share on revenue of $11.55 billion
  • 7:00 a.m. ET: Kraft Heinz (KHC) to report adjusted earnings of 58 cents per share on revenue of $6.07 billion
  • 7:30 a.m. ET: Boeing (BA) to report adjusted losses of 17 cents per share on revenue of $16.49 billion
  • 7:30 a.m. ET: General Motors (GMto report adjusted earnings of $1.00 per share on revenue of $26.45 billion

Post-market

  • 4:00 p.m. ET: Align Technology (ALGN) to report adjusted earnings of $2.60 per share on revenue of $977.67 million
  • 4:05 p.m. ET: Ford (F) to report adjusted earnings of 27 cents per share on revenue of $31.56 billion
  • 4:05 p.m. ET: eBay (EBAYto report adjusted earnings of 89 cents per share on revenue of $2.46 billion
  • 4:10 p.m. ET: ServiceNow (NOWto report adjusted earnings of $1.39 per share on revenue of $1.48 billion
  • 4:15 p.m. ET: United Rentals (URIto report adjusted earnings of $6.73 per share on revenue of $2.59 billion
  • 4:20 p.m. ET: Xilinx (XLNXto report adjusted earnings of 91 cents per share on revenue of $891.69 million
  • 4:30 p.m. ET: O’Reilly Automotive (ORLY) to report adjusted earnings of $7.18 per share on revenue of $3.30 billion 

Courtesy of Yahoo

Waste Management (WM) Earnings

WM third-quarter GAAP EPS is short of the consensus at $1.28 versus an expected $1.33. Revenue of $4.7B (+21% YoY) topped expectations of $4.55B, driven by volume growth and increased yield. Management raised guidance for FY21 revenue growth to 17%-17.5% from 15.5%-16% previously. The new guidance is above the consensus of 16% YoY. Accelerating cost inflation was mentioned as a headwind, but the company remains on track to meet its full-year targets according to the CEO. The stock was down .86% yesterday following the release. We hold a 1% position in the Equity Model.

Below is the technical overview from RIAPRO.NET

Raytheon Technologies (RTX) Earnings

RTX third-quarter GAAP EPS of $0.93, is just above the consensus of $0.91. Revenue of $16.2B (+8.1% YoY) came in short of expectations of $16.36B. Guidance for FY21 revenue is now $64.5B from a prior range of $64.4B-$65.4B. This is slightly below the consensus of $65.2B. Guidance for FY21 adjusted EPS is now $4.10-$4.20 from $3.85-$4.00 previously; the consensus is $4.06. Management commented that a rebound in air travel was the impetus for raising earnings guidance. Despite the upbeat guidance, the stock traded 2.15% lower yesterday due to gloomy forecasts from its competitor, Lockheed Martin (LMT). We hold a 1.5% position in the Equity Model.

Seasonality Still In Play

Seasonality is still playing as stocks continue their upward advance. As we noted previously, with the Fed announcing “taper” next week, inflation running hotter than expected, and stocks back to more extreme overbought conditions, the upside is likely limited near term. Some risk management is likely wise.

More Tesla

Yesterday we noted that Tesla’s market cap increased by approximately $100 billion. To put the gain in context, consider yesterday’s increase in market cap is worth about 1.5x the total value of Ford and about half of the entire domestic auto industry. Also interesting, Elon Musk added nearly $30 billion of personal wealth yesterday. He is now supposedly worth more than Exxon.

The graph below shows Tesla is valued at 42% of the entire auto industry despite having a very small fraction of total sales/revenue. Ford and GM recently reported annual sales of $137 and $139 billion respectively. Tesla’s latest report shows $46 billion in sales. Simply, the market is betting heavily that TSLA will be the dominant leader in auto sales over the next five to ten years. Anything short of 50% market share will likely be a disappointment for shareholders. If you do not buy into the prospects we offer caution. Tesla is one of the hottest stocks in the market, so selling or shorting the company may be painful in the short run.

Consumers Are Fretting

The Langer Consumer Comfort Index is a high-frequency confidence index. While lesser followed than the University of Michigan survey or the Conference Board’s consumer survey, it provides another data set to assess consumer attitudes. Given personal consumption traditionally accounts for two-thirds of economic growth, this measure is essential to follow.

In its most recent October 21st report, Langer notes: “Consumer sentiment continued down this week, dropping to nearly a seven-month low as Americans’ assessments of their personal finances and the buying climate extended their largest declines since early in the coronavirus pandemic.”

At 49.7, the Index is well above its March 2020 lows of 35 but a ways off its pre-pandemic highs near 70. For context, the Langer Index looks similar to the Conference Board Survey, sitting between post-pandemic highs and lows. On the other hand, the University of Michigan Sentiment Index is now at its lowest level since the pandemic and the lowest level in ten years. The importance of consumer confidence is not just economic. As their graph below shows, there is a strong correlation between the changes in stocks prices and consumers’ sentiment. Recently, stocks have soared despite weakening confidence.

The post Investors Brace Themselves for a Flood of Earnings & Fed appeared first on RIA.



Economics

“Black Friday” Plunges As Covid Variant Rattles Markets

In this 11-26-21 issue of "Black Friday" Plunges As Market Rattled By Covid Variant

"Black Friday" As Market Plunges
Time To Buy Oil
Yes, Interest Rates…

In this 11-26-21 issue of “Black Friday” Plunges As Market Rattled By Covid Variant

  • “Black Friday” As Market Plunges
  • Time To Buy Oil
  • Yes, Interest Rates Will Matter
  • Portfolio Positioning
  • Sector & Market Analysis
  • 401k Plan Manager

Follow Us On: Twitter, Facebook, Linked-In, Sound Cloud, Seeking Alpha


Is It Time To Get Help With Your Investing Strategy?

Whether it is complete financial, insurance, and estate planning, to a risk-managed portfolio management strategy to grow and protect your savings, whatever your needs are, we are here to help.

Schedule your “FREE” portfolio review today.


“Black Friday” As Market Plunges

Last week, we discussed the weakness of the underlying market as “FOMO” had returned to the market.

“The only concern we have is the lack of breadth as of late. As shown, the number of stocks above the 50-dma turned sharply lower this week. Furthermore, they are well below levels when markets typically make new highs. The same goes for the number of stocks trading above their 200-dma’s.”

Chart updated through Friday.

S&P 500 technical update

Over the last couple of weeks, the market has been warning to the risk of a downturn, all that was needed was a catalyst to change sentiment.

That occurred as news of a new “Covid” variant broke, stocks marked “Black Friday” by plunging firmly through the 20-dma and support at recent lows. Notably, that downside break broke the consolidation pattern (blue box in the chart below) that began in early November. While there is some minor support around 4550, critical support lies at the 50-dma at 4527. That support level also corresponds to the September peak.

With mutual fund distributions running through the first two weeks of December, there is additional downside pressure on stocks near term. However, our “money flow sell” signal is firmly intact and confirmed by the MACD signal. Such suggests we continue to maintain slightly higher levels of cash.

S&P 500 money flow signal RIAPRO

Notably, the market is getting oversold near-term, with the money-flow signal depressed. Such suggests that any further weakness will provide a short-term trading opportunity. As discussed last week, the statistical odds are high that we will see a “Santa Rally” as most professional managers will position for year-end reporting.

Just remember, nothing is guaranteed. We can only make educated guesses.

Will The Fed Slow Their Roll

While “Black Friday” usually marks the beginning of the retail shopping season, the question is whether the new “variant,” which is flaring concerns of additional lock-downs, will reverse the current economic recovery. As Barron’s notes, it will be worth watching the Fed closely.

“Fixed-income markets are signaling that the Federal Reserve will have to increase interest rates sooner than expected, which could put a dent in the stock market.

The yield on the 2-year Treasury note has gone from 0.5% in early November to 0.64% as of Wednesday. The move suggests that investors expect the Fed to raise interest rates to combat inflation that remains higher than expected because of soaring consumer demand and supply chains that are struggling to match demand.

Indeed, minutes released Wednesday from the Fed’s meeting earlier this month show that members of the central bank are prepared to increase rates sooner than previously anticipated if inflation remains high.”

Of course, this was before “Black Friday” sent yields plunging 10% lower in a single day. Suddenly, the bond market is starting to question the sanity of hiking rates in the face of an ongoing pandemic.

Bonds technical update

While many pundits have suggested higher interest rates won’t matter to stocks, as we will discuss momentarily, they do matter and often matter a lot.

The surge in the new variant gives the Fed an excuse to hold off tightening monetary policy even though inflationary pressures continue to mount. But, what is most important to the Fed is the illusion of “market stability.”

What “Black Friday’s” plunge showed was that despite the Fed’s best efforts, “instability” is the most significant risk to the market and you.

More on this in a moment.




Time To Buy Oil?

Once a quarter, I review the Commitment Of Traders report to see where speculators place their bets on bonds, the dollar, volatility, the Euro, and oil. In October’s update, I looked at oil prices that were then pushing higher as speculators were sharply increasing their net-long positioning on crude oil.

We suggested then that the current extreme overbought, extended, and deviated positioning in crude will likely lead to a rather sharp correction. (The boxes denote previous periods of exceptional deviations from long-term trends.)

Oil Rates Dollar, Traders Are Pushing Oil, Rates & The Dollar. Are They Right?

The dollar rally was the most crucial key to a view of potentially weaker oil prices. Given that commodities are globally priced in U.S. dollars, the strengthening of the dollar would reduce oil demand. To wit:

The one thing that always trips the market is what no one is paying attention to. For me, that risk lies with the US Dollar. As noted previously, everyone expects the dollar to continue to decline, and the falling dollar has been the tailwind for the emerging market, commodity, and equity ‘risk-on trade.” – June 2021

Portfolio, Rates, S&P 500, energy, yield

Since then, as expected, the dollar rally is beginning to weigh on commodity prices, and oil in particular.

oil dollar technical chart.

While the dollar could certainly rally further heading into year-end, oil prices are becoming much more attractive from a trading perspective. The recent correction did violate the 50-dma, which will act as short-term resistance. However, prices are beginning to reach more attractive oversold levels.

There are also reasons to believe higher oil prices are coming.


https://bit.ly/2Tqetau

Higher Oil Prices Coming

The Biden administration released oil from the “Strategic Petroleum Reserve,” attempting to lower oil prices. He also tasked the DOJ to “investigate oil companies for potential price gouging.” These actions are thinly veiled attempts to regain favor with voters but will not lower oil prices.

Oil prices are NOT SET by producers. Instead, speculators and hedgers set oil prices on the NYMEX. Think about it this way:

  • If oil companies are setting prices to “reap profits,” why did oil prices go below ZERO in 2020?
  • Furthermore, would producers need to “hedge” current production against future delivery?

There are two drivers reflecting positioning by speculators and hedgers:

  1. The expected supply and demand for oil; and,
  2. The value of the dollar.

The more critical problem comes from the Administrations’ attack on production over “climate change” policies. As noted in Crude Investing: Energy Stocks & ESG (kailashconcepts.com):

This isn’t rocket science.  Look at the sharply lagging rig response to the rise in energy prices post the Covid crash. This is an anomaly. 

According to history, there should be ~1,300 rigs in operation today based on current oil prices. With only ~480 rigs running today, oil’s prospects may be bright over the long haul.”

Portfolio, Rates, S&P 500, energy, yield

With output at such low levels, OPEC+ refusing to increase production, and “inefficient clean energy” increasing demand on “dirty energy,” higher future prices are likely.

If the economy falls into a tailspin, oil prices will fall along with demand, so nothing is assured. However, the ongoing decline in CapEx in the industry suggests production will continue to contract, leaving it well short of future demand.

Portfolio, Rates, S&P 500, energy, yield
Chart courtesy of Kailash Concepts

That is the perfect environment for higher prices.


In Case You Missed It


Higher Interest Rates Will Lead To Market Volatility

Did “Black Friday’s” plunge send a warning about rates? Last week, we discussed that it isn’t a question of if, but only one of when.

I showed the correlation between interest rates and the markets. With the sharp drop in rates, it is worth reminding you of the analysis. It is all about “instability.”

The chart below is the monthly “real,” inflation-adjusted return of the S&P 500 index compared to interest rates. The data is from Dr. Robert Shiller, and I noted corresponding peaks and troughs in prices and rates.

interest rates vs S&P 500

To try and understand the relationship between stock and bond returns over time, I took the data from the chart and broke it down into 46 periods over the last 121-years. What jumps is the high degree of non-correlation between 1900 and 2000. As one would expect, in most instances, if rates fell, stock prices rose. However, the opposite also was true.

Interest rate changes vs S&P 500

Rates Matter

Notably, since 2000, rates and stocks rose and fell together. So bonds remain a “haven” against market volatility.

As such, In the short term, the markets (due to the current momentum) can DEFY the laws of financial gravity as interest rates rise. However, as interest rates increase, they act as a “brake” on economic activity. Such is because higher rates NEGATIVELY impact a highly levered economy:

  • Rates increases debt servicing requirements reducing future productive investment.
  • Housing slows. People buy payments, not houses.
  • Higher borrowing costs lead to lower profit margins.
  • The massive derivatives and credit markets get negatively impacted.
  • Variable rate interest payments on credit cards and home equity lines of credit increase, reducing consumption.
  • Rising defaults on debt service will negatively impact banks which are still not as well capitalized as most believe.
  • Many corporate share buyback plans and dividend payments are done through the use of cheap debt.
  • Corporate capital expenditures are dependent on low borrowing costs.
  • The deficit/GDP ratio will soar as borrowing costs rise sharply.

Critically, for investors, one of the main drivers of assets prices over the last few years was the rationalization that “low rates justified high valuations.”

Either low-interest rates are bullish, or high rates are bullish. Unfortunately, they can’t be both.

What “Black Friday’s” plunge showed was the correlation between rates and equity prices remains. Such is due to market participants’ “risk-on” psychology. However, that correlation cuts both ways. When something changes investor sentiment, the “risk-off” trade (bonds) is where money flows.

The correlation between interest rates and equities suggests that bonds will remain a haven against risk if something breaks given exceptionally high market valuations. The market’s plunge on “Black Friday” was likely a “shot across the bow.”

It might just be worth evaluating your bond allocation heading into 2022.



Portfolio Update

We made no substantive changes to portfolio allocations this past week given due to the holidays. Generally, the week of Thanksgiving is a poor indicator of market sentiment given the “inmates are running the asylum.”

Therefore, despite the market swinging around a good bit this past week, we will re-evaluate our positioning and holdings when institutional traders return to their desks next week.

However, as a reminder:

“Over the last two weeks, we took profits in overbought and extended equities. We also shortened our bond duration by trimming our longer-duration holdings. Such actions rebalanced portfolio risk short-term. In addition, we run a 60/40 allocation model for our clients; such left us slightly underweight equities and bonds and overweight cash.”

Portfolio allocation model.

Despite the sell-off on Friday, the bullish bias remains strong. We also remain in the “seasonally strong” period of the year, and the seemingly endless supply of money continues to flood into equities.

However, as discussed most of this week, mutual fund distributions will begin in earnest and continue through the second week of December. Such suggests we could see some additional volatility and potential weakness in the market as those distributions get made.

Critically, any correction will provide a decent entry point for the year-end “Santa Claus” rally and the first week of January, which tend to be strong. Therefore, we will try and take advantage of that.

While Friday’s plunge likely shocked you out of your “tryptophan-induced” coma, I hope you had a Happy Thanksgiving.


Market & Sector Analysis

Analysis & Stock Screens Exclusively For RIAPro Members

Discover All You Are Missing At RIAPRO.NET

Come find out what our RIAPRO.NET subscribers are reading right now! Risk-Free For 30-Day Trial.

  • Sector & Market Analysis
  • Technical Gauge
  • Fear/Greed Positioning Gauge
  • Sector Rotation Analysis (Risk/Reward Ranges)
  • Stock Screens (Growth, Value, Technical)
  • Client Portfolio Updates
  • Live 401k Plan Manager

See you next week.

By Lance Roberts, CIO

The post “Black Friday” Plunges As Covid Variant Rattles Markets appeared first on RIA.

















Author: Lance Roberts

Continue Reading

Economics

“Black Friday” Plunge As Market Rattled By Covid Variant

In this 11-26-21 issue of "Black Friday" Plunge As Market Rattled By Covid Variant

"Black Friday" As Market Plunges
Time To Buy Oil
Yes, Interest Rates…

In this 11-26-21 issue of “Black Friday” Plunge As Market Rattled By Covid Variant

  • “Black Friday” As Market Plunges
  • Time To Buy Oil
  • Yes, Interest Rates Will Matter
  • Portfolio Positioning
  • Sector & Market Analysis
  • 401k Plan Manager

Follow Us On: Twitter, Facebook, Linked-In, Sound Cloud, Seeking Alpha


Is It Time To Get Help With Your Investing Strategy?

Whether it is complete financial, insurance, and estate planning, to a risk-managed portfolio management strategy to grow and protect your savings, whatever your needs are, we are here to help.

Schedule your “FREE” portfolio review today.


“Black Friday” As Market Plunges

Last week, we discussed the weakness of the underlying market as “FOMO” had returned to the market.

“The only concern we have is the lack of breadth as of late. As shown, the number of stocks above the 50-dma turned sharply lower this week. Furthermore, they are well below levels when markets typically make new highs. The same goes for the number of stocks trading above their 200-dma’s.”

Chart updated through Friday.

S&P 500 technical update

Over the last couple of weeks, the market has been warning to the risk of a downturn, all that was needed was a catalyst to change sentiment.

That occurred as news of a new “Covid” variant broke, stocks marked “Black Friday” by plunging firmly through the 20-dma and support at recent lows. Notably, that downside break broke the consolidation pattern (blue box in the chart below) that began in early November. While there is some minor support around 4550, critical support lies at the 50-dma at 4527. That support level also corresponds to the September peak.

With mutual fund distributions running through the first two weeks of December, there is additional downside pressure on stocks near term. However, our “money flow sell” signal is firmly intact and confirmed by the MACD signal. Such suggests we continue to maintain slightly higher levels of cash.

S&P 500 money flow signal RIAPRO

Notably, the market is getting oversold near-term, with the money-flow signal depressed. Such suggests that any further weakness will provide a short-term trading opportunity. As discussed last week, the statistical odds are high that we will see a “Santa Rally” as most professional managers will position for year-end reporting.

Just remember, nothing is guaranteed. We can only make educated guesses.

Will The Fed Slow Their Roll

While “Black Friday” usually marks the beginning of the retail shopping season, the question is whether the new “variant,” which is flaring concerns of additional lock-downs, will reverse the current economic recovery. As Barron’s notes, it will be worth watching the Fed closely.

“Fixed-income markets are signaling that the Federal Reserve will have to increase interest rates sooner than expected, which could put a dent in the stock market.

The yield on the 2-year Treasury note has gone from 0.5% in early November to 0.64% as of Wednesday. The move suggests that investors expect the Fed to raise interest rates to combat inflation that remains higher than expected because of soaring consumer demand and supply chains that are struggling to match demand.

Indeed, minutes released Wednesday from the Fed’s meeting earlier this month show that members of the central bank are prepared to increase rates sooner than previously anticipated if inflation remains high.”

Of course, this was before “Black Friday” sent yields plunging 10% lower in a single day. Suddenly, the bond market is starting to question the sanity of hiking rates in the face of an ongoing pandemic.

Bonds technical update

While many pundits have suggested higher interest rates won’t matter to stocks, as we will discuss momentarily, they do matter and often matter a lot.

The surge in the new variant gives the Fed an excuse to hold off tightening monetary policy even though inflationary pressures continue to mount. But, what is most important to the Fed is the illusion of “market stability.”

What “Black Friday’s” plunge showed was that despite the Fed’s best efforts, “instability” is the most significant risk to the market and you.

More on this in a moment.




Time To Buy Oil?

Once a quarter, I review the Commitment Of Traders report to see where speculators place their bets on bonds, the dollar, volatility, the Euro, and oil. In October’s update, I looked at oil prices that were then pushing higher as speculators were sharply increasing their net-long positioning on crude oil.

We suggested then that the current extreme overbought, extended, and deviated positioning in crude will likely lead to a rather sharp correction. (The boxes denote previous periods of exceptional deviations from long-term trends.)

Oil Rates Dollar, Traders Are Pushing Oil, Rates & The Dollar. Are They Right?

The dollar rally was the most crucial key to a view of potentially weaker oil prices. Given that commodities are globally priced in U.S. dollars, the strengthening of the dollar would reduce oil demand. To wit:

The one thing that always trips the market is what no one is paying attention to. For me, that risk lies with the US Dollar. As noted previously, everyone expects the dollar to continue to decline, and the falling dollar has been the tailwind for the emerging market, commodity, and equity ‘risk-on trade.” – June 2021

Portfolio, Rates, S&P 500, energy, yield

Since then, as expected, the dollar rally is beginning to weigh on commodity prices, and oil in particular.

oil dollar technical chart.

While the dollar could certainly rally further heading into year-end, oil prices are becoming much more attractive from a trading perspective. The recent correction did violate the 50-dma, which will act as short-term resistance. However, prices are beginning to reach more attractive oversold levels.

There are also reasons to believe higher oil prices are coming.



Higher Oil Prices Coming

The Biden administration released oil from the “Strategic Petroleum Reserve,” attempting to lower oil prices. He also tasked the DOJ to “investigate oil companies for potential price gouging.” These actions are thinly veiled attempts to regain favor with voters but will not lower oil prices.

Oil prices are NOT SET by producers. Instead, speculators and hedgers set oil prices on the NYMEX. Think about it this way:

  • If oil companies are setting prices to “reap profits,” why did oil prices go below ZERO in 2020?
  • Furthermore, would producers need to “hedge” current production against future delivery?

There are two drivers reflecting positioning by speculators and hedgers:

  1. The expected supply and demand for oil; and,
  2. The value of the dollar.

The more critical problem comes from the Administrations’ attack on production over “climate change” policies. As noted in Crude Investing: Energy Stocks & ESG (kailashconcepts.com):

This isn’t rocket science.  Look at the sharply lagging rig response to the rise in energy prices post the Covid crash. This is an anomaly. 

According to history, there should be ~1,300 rigs in operation today based on current oil prices. With only ~480 rigs running today, oil’s prospects may be bright over the long haul.”

Portfolio, Rates, S&P 500, energy, yield

With output at such low levels, OPEC+ refusing to increase production, and “inefficient clean energy” increasing demand on “dirty energy,” higher future prices are likely.

If the economy falls into a tailspin, oil prices will fall along with demand, so nothing is assured. However, the ongoing decline in CapEx in the industry suggests production will continue to contract, leaving it well short of future demand.

Portfolio, Rates, S&P 500, energy, yield
Chart courtesy of Kailash Concepts

That is the perfect environment for higher prices.


In Case You Missed It


Higher Interest Rates Will Lead To Market Volatility

Did “Black Friday’s” plunge send a warning about rates? Last week, we discussed that it isn’t a question of if, but only one of when.

I showed the correlation between interest rates and the markets. With the sharp drop in rates, it is worth reminding you of the analysis. It is all about “instability.”

The chart below is the monthly “real,” inflation-adjusted return of the S&P 500 index compared to interest rates. The data is from Dr. Robert Shiller, and I noted corresponding peaks and troughs in prices and rates.

interest rates vs S&P 500

To try and understand the relationship between stock and bond returns over time, I took the data from the chart and broke it down into 46 periods over the last 121-years. What jumps is the high degree of non-correlation between 1900 and 2000. As one would expect, in most instances, if rates fell, stock prices rose. However, the opposite also was true.

Interest rate changes vs S&P 500

Rates Matter

Notably, since 2000, rates and stocks rose and fell together. So bonds remain a “haven” against market volatility.

As such, In the short term, the markets (due to the current momentum) can DEFY the laws of financial gravity as interest rates rise. However, as interest rates increase, they act as a “brake” on economic activity. Such is because higher rates NEGATIVELY impact a highly levered economy:

  • Rates increases debt servicing requirements reducing future productive investment.
  • Housing slows. People buy payments, not houses.
  • Higher borrowing costs lead to lower profit margins.
  • The massive derivatives and credit markets get negatively impacted.
  • Variable rate interest payments on credit cards and home equity lines of credit increase, reducing consumption.
  • Rising defaults on debt service will negatively impact banks which are still not as well capitalized as most believe.
  • Many corporate share buyback plans and dividend payments are done through the use of cheap debt.
  • Corporate capital expenditures are dependent on low borrowing costs.
  • The deficit/GDP ratio will soar as borrowing costs rise sharply.

Critically, for investors, one of the main drivers of assets prices over the last few years was the rationalization that “low rates justified high valuations.”

Either low-interest rates are bullish, or high rates are bullish. Unfortunately, they can’t be both.

What “Black Friday’s” plunge showed was the correlation between rates and equity prices remains. Such is due to market participants’ “risk-on” psychology. However, that correlation cuts both ways. When something changes investor sentiment, the “risk-off” trade (bonds) is where money flows.

The correlation between interest rates and equities suggests that bonds will remain a haven against risk if something breaks given exceptionally high market valuations. The market’s plunge on “Black Friday” was likely a “shot across the bow.”

It might just be worth evaluating your bond allocation heading into 2022.



Portfolio Update

We made no substantive changes to portfolio allocations this past week given due to the holidays. Generally, the week of Thanksgiving is a poor indicator of market sentiment given the “inmates are running the asylum.”

Therefore, despite the market swinging around a good bit this past week, we will re-evaluate our positioning and holdings when institutional traders return to their desks next week.

However, as a reminder:

“Over the last two weeks, we took profits in overbought and extended equities. We also shortened our bond duration by trimming our longer-duration holdings. Such actions rebalanced portfolio risk short-term. In addition, we run a 60/40 allocation model for our clients; such left us slightly underweight equities and bonds and overweight cash.”

Portfolio allocation model.

Despite the sell-off on Friday, the bullish bias remains strong. We also remain in the “seasonally strong” period of the year, and the seemingly endless supply of money continues to flood into equities.

However, as discussed most of this week, mutual fund distributions will begin in earnest and continue through the second week of December. Such suggests we could see some additional volatility and potential weakness in the market as those distributions get made.

Critically, any correction will provide a decent entry point for the year-end “Santa Claus” rally and the first week of January, which tend to be strong. Therefore, we will try and take advantage of that.

While Friday’s plunge likely shocked you out of your “tryptophan-induced” coma, I hope you had a Happy Thanksgiving.

See you next week.

By Lance Roberts, CIO


Market & Sector Analysis

Analysis & Stock Screens Exclusively For RIAPro Members


S&P 500 Tear Sheet

SP500 Tear Sheet

Performance Analysis

Market Sector Relative Performance

Technical Composite

The technical overbought/sold gauge comprises several price indicators (RSI, Williams %R, etc.), measured using “weekly” closing price data. Readings above “80” are considered overbought, and below “20” are oversold. The current reading is 65.83 out of a possible 100.

Technical gauge RIAPRO

Portfolio Positioning “Fear / Greed” Gauge

Our “Fear/Greed” gauge is how individual and professional investors are “positioning” themselves in the market based on their equity exposure. From a contrarian position, the higher the allocation to equities, to more likely the market is closer to a correction than not. The gauge uses weekly closing data.

NOTE: The Fear/Greed Index measures risk from 0-100. It is a rarity that it reaches levels above 90. The current reading is 80.55 out of a possible 100.

Fear Greed Gauge

Sector Model Analysis & Risk Ranges

How To Read This Table

  • The table compares each sector and market to the S&P 500 index on relative performance.
  • “MA XVER” is determined by whether the short-term weekly moving average crosses positively or negatively with the long-term weekly moving average.
  • The risk range is a function of the month-end closing price and the “beta” of the sector or market. (Ranges reset on the 1st of each month)
  • Table shows the price deviation above and below the weekly moving averages.
Risk Range Report

Weekly Stock Screens

Currently, there are four different stock screens for you to review. The first is S&P 500 based companies with a “Growth” focus, the second is a “Value” screen on the entire universe of stocks, and the last are stocks that are “Technically” strong and breaking above their respective 50-dma.

We have provided the yield of each security and a Piotroski Score ranking to help you find fundamentally strong companies on each screen. (For more on the Piotroski Score – read this report.)

S&P 500 Growth Screen

Market index growth screen

Low P/B, High-Value Score, High Dividend Screen

dividend growth screen

Fundamental Growth Screen

fundamental growth screen

Aggressive Growth Strategy

aggressive growth screen

Portfolio / Client Update

This past week, we took no substantive actions in portfolios. Such is because Thanksgiving week usually trades on very light volume.

“Given the more exceeding levels of FOMO in the market currently, we remain weighted towards equity risk. Therefore, from a portfolio management standpoint, we must continue to press for portfolio returns for clients. However, don’t mistake that as a disregard for the underlying risk.

Over the last two weeks, we took profits in overbought and extended equities (F, NVDA, AMD). We also shortened our bond duration by trimming our longer-duration holdings. Such actions rebalanced portfolio risk short-term. In addition, we run a 60/40 allocation model for our clients; such left us slightly underweight equities and bonds and overweight cash.

Santa Claus Rally, Santa Claus Rally Is Coming, But Will Markets Correct First?

The best opportunity to increase equity would come from a correction in early December as mutual funds distribute their annual gains. Such would provide a better entry point for the year-end “Santa Claus Rally.”

As we move closer to the end of the year, I will review our annual performance in both primary models and discuss what we expect as we head into 2022. With the Fed on course to taper their balance sheet, and the market forecasting 3-rate hikes, next year will likely be an entirely different “ball game.”

Portfolio Changes

There were no changes this past week.

As always, our short-term concern remains the protection of your portfolio. Accordingly, we remain focused on the differentials between underlying fundamentals and market over-valuations.

Lance Roberts, CIO

Have a great week!

The post “Black Friday” Plunge As Market Rattled By Covid Variant appeared first on RIA.

















Author: Lance Roberts

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Economics

The Only Road to Riches

Here is the latest issue of The Journal of Investing Wisdom, where I share insightful stuff on investing I am reading and thinking about. Let’s get started….

Here is the latest issue of The Journal of Investing Wisdom, where I share insightful stuff on investing I am reading and thinking about. Let’s get started.

A Thought

You or me are not the market. Earning the long-term returns of the market, of the past or the future, is not in our control. Managing our risks and avoiding ruin, mostly is.

“Rationality is avoidance of systemic ruin,” Nassim Taleb writes.

Peter Bernstein writes in his brilliant book Against the Gods –

Survival is the only road to riches. Let me say that again: Survival is the only road to riches. You should try to maximize return only if losses would not threaten your survival and if you have a compelling future need for the extra gains you might earn.

Trying to avoid the ruin the stock market system enforces upon people who disregard its workings is rational.

Believing that you can beat the system at it, by playing the game mindlessly, isn’t.


A Super Text

Value investing requires a great deal of hard work, unusually strict discipline, and a long-term investment horizon. Few are willing and able to devote sufficient time and effort to become value investors, and only a fraction of those have the proper mindset to succeed.

Like most eighth- grade algebra students, some investors memorize a few formulas or rules and superficially appear competent but do not really understand what they are doing. To achieve long-term success over many financial market and economic cycles, observing a few rules is not enough.

Too many things change too quickly in the investment world for that approach to succeed. It is necessary instead to understand the rationale behind the rules in order to appreciate why they work when they do and don’t when they don’t. Value investing is not a concept that can be learned and applied gradually over time. It is either absorbed and adopted at once, or it is never truly learned.

Value investing is simple to understand but difficult to implement. Value investors are not super-sophisticated analytical wizards who create and apply intricate computer models to find attractive opportunities or assess underlying value.

The hard part is discipline, patience, and judgment. Investors need discipline to avoid the many unattractive pitches that are thrown, patience to wait for the right pitch, and judgment to know when it is time to swing.

~ Seth Klarman, Margin of Safety


An Article

The Winds of Change – Howard Marks

The latest memo from Howard Marks is a must read. He discusses the current investment environment, changing nature of business, inflation and the outlook for the traditional workplace, among other topics. Here’s a passage –

Today, unlike in the 1950s and ’60s, everything seems to change every day. It’s particularly hard to think of a company or industry that won’t either be a disrupter or be disrupted (or both) in the years ahead. Anyone who believes all the firms on today’s list of leading growth companies will still be there in five or ten years has a good chance of being proved wrong.

For investors, this means there’s a new world order. Words like “stable,” “defensive” and “moat” will be less relevant in the future. Much of investing will require more technological expertise than it did in the past. And investments made on the assumptions that tomorrow will look like yesterday must be subject to vastly increased scrutiny.


An Illustration


A Quote

After spending many years in Wall Street and after making and losing millions of dollars, I want to tell you this: It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight!

~ Jesse Lauriston Livermore

A Question

Look at your investment portfolio. Is there a part of it that gives you sleepless nights? If yes, what are you doing with it? Why haven’t you cut it off?


That’s about it from me for today.

If you liked this post, please share with others on WhatsApp, Twitter, LinkedIn. Or just email them the link to this post.

If you are seeing this newsletter for the first time, you may subscribe here.

Stay safe.

Regards, Vishal

The post The Only Road to Riches appeared first on Safal Niveshak.

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