15 Jan SOME THOUGHTS
For many years I titled these remarks “Early Morning Commentary,” a commentary as to how I view of the socio economic and geopolitical issues facing the markets and the economy. I am flattered by the constant attention I have received, attention from brokers, clients and the media alike.
Today my remarks will be a commentary about my view of today’s incredible environment. It is not meant to be a political dissertation but an observation.
In my view struggling with strife is not new in America. Much can be debated about the events of the last 10 days and thoughtful people can arrive at different conclusions. Regardless unlawful entry into the Capitol is a traumatic event that has unsettled many. Ironically, this had been a unifying event—as a large majority of Americans—regardless of party affiliation agrees this was unacceptable.
One of the most cherished characteristics of this country is our right to free speech, peaceful protest, legal pursuit of justice and the right to pursue any religion one chooses.
Even the most ardent atheist or agnostic have a faith. Some place their faith in God, others money and wealth, others politics or social issues and climate concerns.
COVID has complicated everything via social isolation. With fear and less interaction, along with unlimited media voices and messages, human nature dictates that our intake is based upon what fuels our previously held viewpoints…aka confirmation bias.
Choosing to form our own realities contributes to living in an echo chamber feeding ourselves what fuels our emotional fires while avoiding other views.
What does the above have to do with markets? Everything. When I entered the industry 35 years ago, I was schooled by several legendary and iconic behavioral economists. The first factoid I learned was JP Morgan’s most influential board member was a clinical psychologist. Markets are people and people move markets. If we are able to obtain an idea as to how people will respond to an event we can narrow the possibilities of the potential outcome.
One of the first books I was required to read was George Soro’s book The Alchemy of Finance. A basic treatise of the book was combining phycological inputs and quantitative analysis for such will increase the probability of discovering trends before such become known. An analogy he used was separating the wheat from the chafe.
Many times, I have commented about the risks in the bond market as many are extremely complacent that yields will not rise. The asset management firm DoubleLine perhaps placed today’s complacency into proper perspective as it demonstrated the amount of yield earned for each unit of duration (duration is a measure of bond’s sensitivity to a given move in interest rates) is at a record low of 0.1968 shattering last year’s record low of 0.3467.
It will not take much of a move in interest rates to wipe out any gains generated by the bond’s coupon. In fact, the five-day 20 basis points move that has occurred in the 10-year US Treasury has already generated a significant total return loss for most investment grade bonds.
Ultimately these losses will be manifested into the highly valued equities as the bond market dictates equity direction not vice versa as some believe today.
I commenced today’s remarks about the events of the last 10 days and how social media has created an echo chamber to support one’s confirmation bias. Ultimately the natural law of economics will return.
The largest technology companies have recorded about six years of revenue growth in 10 months, the result of the shutdowns. Interest rates were driven to lows that no one thought could ever exist. Popular participation and speculation in the largest capitalized equities as measured by margin debt and call option purchases are at all-time highs.
Many in government are convinced stimulus has no downside and such could be added without recourse.
A violent transition commenced on or about November 9 when Pfizer received approval for its vaccine. Again, quoting DoubleLine, Doubleline believes the “Fab 6” [FB, AAPL, NFLX, AMZN, GOOG, MSFT] are on the verge of “rolling over,” a roll over that will greatly impact the performance of the indexes and passive investing.
The beneficiary of this “roll over” could be companies that make things or have hard assets as the difference in valuations between intangible and tangible assets is in the fourth standard deviation…aka another extreme event.
The future is never known. It is often written “the most obvious conclusions are those that are ignored.”
Enough of the diatribe, commenting on yesterday’s market action, equities were mixed. Energy and financials rose, technology declined. Treasuries sold off on further stimulus proposals as did the dollar. The yield curve furthered steepened, partially the result of FRB Chair’s remark that he will not raise rates unless the Committee sees “troubling signs of inflation.” Oil gained another 2%.
Last night the foreign markets were down. London was down 0.89%, Paris down 1.17% and Frankfurt down 0.99%. China was up 0.01%, Japan down 0.62% and Hang Seng up 0.27%.
The Dow should open moderately lower as Biden’s much anticipated $1.9 trillion stimulus plan comes under scrutiny. Some believe it is not big enough, others say it is too big while others are drawing the obvious conclusion that regardless of size taxes will be going higher which will impact growth.
JP Morgan commenced earnings season with profits that exceeded expectations. At this juncture little attention is being focused on the release.
The 10-year is up 2/32 to yield 1.12%. The dollar is nominally stronger and crude nominally weaker.