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4,450 Friday – S&P 500 Finishes the Week Strong

Up and up and up she goes

From 2,300 to 4,450 in less than two years is up exactly 50% and, according to our 5% Rule™, that means we're almost certain to see a 20% (of the run) correction in the near future, which would be 430 points, which would be back to 4,000.  BUT first, we might get a 430-point overshoot – and that's what makes things exciting!  

There is no metric that seems to worry traders these days.  The Shiller (or CAPE) P/E Ratio, which shows inflation-adjusted earnings over the past 10 years (read "Irrational Exuberance" for more details) is just off the all-time high of 45 at 38.75 and, while you may think that's nowhere near 45, that was in late 1999 – when the markets were truly insane.  The previous record before that was 30 – on Black Tuesday – just before the entire global economy collapsed in 1929.

So why WON'T we collapse?  Mainly because this market is being artificially supported by the Government through Stimulus  and Bailouts and the Federal Reserve through Bond Purchases, Low Rates and Bailouts.  Because the Fed has set rates artificially low and inflation is high, savers are penalized for putting their money into the banks or bonds (which the Fed are buying) and we just had a massive housing collapse 13 years ago so people are still nervous there and, since that collapse, the S&P has pretty much gone straight up from 666 to 4,456 this morning – that's 569% in 13 years!  

Debt Ceiling Kicks in, Treasury General Account Plunges: Let's See How  Close to Zero it Gets Before Congress Ends this Farce | Wolf StreetThat means the only limitation to the market rally is the Fed and the Government's limits on spending.  The Fed effectively has none while the Government has a "Debt Ceiling" – which is pretty much a joke but still manages to be a "crisis" every year or so.  

This is a $20Tn economy that's $32Tn in debt at the end of this year.  That's like having a $100,000 net worth and being $150,000 in debt because the GDP is not income, the Government's "income" is only $3.5Tn per year from tariffs and taxes and such and even that leaves us $2.5Tn in debt this year and at least $500Bn in debt on the average year (which we haven't had in a long time, obviously).   

Even IF we were not running a massive annual deficit – how do we ever pay off $30Tn in debt with $3.5Tn in revenues?  The interest on $30Tn, even at 2% per year, is $600Bn so rates going up to the historically normal 4.5% would cost us $1.35Tn per year – another $750Bn that would have to come from somewhere. 

So the Fed isn't just keeping rates low to help the market.  If they did let rates normalize, the Government would either have to raise taxes by 20% or cut spending by 20% (and again, we're running a massive defict, not break-even) and neither one of those things is likely to happen so the Fed really has no choice but to pretend rates need to be near 0% to keep our Government from collapsing.  

In order to keep the rates below market, the Fed has to also pretend people want to buy our overpriced (via low interest) bonds and they do that by buying most of the bonds the Government sells every month and their Member Banks take most of the rest, steering a huge amount of the people's retirement savings into a bond market that is on the verge of collapsing.  What could possibly go wrong?  

As you can see in 2001 and 2008, low rates don't keep you from having a recession but lower rates can get you out of one but what do you do when your rates are already at 1.5% and usually the Fed drops a good 2% to boost the economy?  Are we going to PAY the Government to borrow our money?  That's what's happening in Japan, where short-term notes are negative and the 10-year pays just 0.026% – essentially zero with a rounding error.  In the Netherlands it does, in fact, cost you 0.336% annual interest to lend the Government your money for 10 years – so you get back 3.36% less than you started with.  

You pay Germany 0.44% annually to hold your money, 0.102% to France and 0.118% to Belgium.  Italy pays you 0.578% because their economy, like the UK (0.6%) is pretty scary but not as scary as the US, where our Government has to pay 1.35% to borrow your money – even with the Fed pumping $80Bn per month into bonds at any price.  However, Kansas City Fed President, Esther George, said the Central Bank has made enough progress toward its objectives of boosting growth and employment to end its $120 billion in monthly purchases of Treasury and mortgage securities

“With the recovery under way, a transition from extraordinary monetary policy accommodation to more neutral settings must follow,” Ms. George said in a speech to the National Association for Business Economics on Wednesday. “Today’s tight economy…certainly does not call for a tight monetary policy, but it does signal that the time has come to dial back the settings.”

Overheat GIFs | TenorThe side effect of keeping rates too low is Inflation and Germany is a country that is terrified of inflation – as that's what pretty much led to World War II.  Our Fed is getting worried about it too and that's my worry about the economy, both domestically and globally – we can't keep this stuff up forever – something has to give and you can see the rivits beginning to pop off the economic engine as it's massively overheating.  

In a separate interview, Dallas Fed President Robert Kaplan argued that the central bank should begin reducing the pace of asset purchases by October. “As long as the economy progresses as I expect, we will meet the…criteria at the September meeting,” he said. He said he would support announcing then that the Fed would therefore begin reducing purchases the following month.

Of course, they are just testing the markets – to see what kind of reaction they get to the concept of withdrawing support for low rates but, even if they do, it's likely to be a "taper" from $120Bn a month to $110Bn/month – not some cold-turkey removal of support and they'll slap it right back on if the economy falters again.  

So the wildcard is not likely to be the Fed, who well know the dire conserquences of rasing the interest rate to a client that can't even make the current payments without constantly refinancing.  As the old saying goes: "When you owe the Bank a Million Dollars – YOU are in trouble but, when you owe the bank $32Tn – the BANK is in trouble!"  

Have a great weekend, 

- Phil


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  1. Good Morning.

  2. Britney Spears’ father agrees to step down as conservator

  3. Hi Phil:  Happy Friday!  Wondering if you feel we need an adjustment to the 75/90 BCS on MU?  Thanks

  4. Good morning!  

    August has been very quiet and not a lot of motion overall.  We crossed 400 on April 1st, so up 10% in 4 months but volume goes lower and lower.

    Date Open High Low Close* Adj Close** Volume
    Aug 13, 2021 445.59 445.85 445.07 445.50 445.50 11,922,660
    Aug 12, 2021 443.62 445.26 442.66 445.11 445.11 38,909,400
    Aug 11, 2021 443.82 443.88 442.62 443.78 443.78 43,992,200
    Aug 10, 2021 442.61 443.44 441.88 442.68 442.68 43,282,600
    Aug 09, 2021 442.46 442.80 441.31 442.13 442.13 41,222,600
    Aug 06, 2021 442.10 442.94 441.80 442.49 442.49 46,864,100
    Aug 05, 2021 440.22 441.85 439.88 441.76 441.76 38,969,700
    Aug 04, 2021 439.78 441.12 438.73 438.98 438.98 46,732,200
    Aug 03, 2021 438.44 441.28 436.10 441.15 441.15 58,053,900
    Aug 02, 2021 440.34 440.93 437.21 437.59 437.59 58,783,300
    Jul 30, 2021 437.91 440.06 437.77 438.51 438.51 68,890,600

    MU/Hicket – I think they adjustment may be taking everything off the table.  MU was down with the whole Semi sector and should stay in that channel but it's a downtrending channel and the Chinese port issue will spread and get much worse and all manufacturing is in trouble. 

  5. Quiet/Phil – I've seen it too…3 weeks now for the Nasdaq and Russell in light volume in ~3% trading range.  It feels like a spring coiling, and down seems like the obvious direction, but this market knows how to go higher too.  Whichever, it feels like a significant move is coming soon.

  6. That's what I'm nervous about!

    The problem with low-volume rallies is you don't have buyers there if a selling wave hits and things can correct very quickly. 

    And then there's this:

    • University of Michigan August Consumer Sentiment 70.2 vs. 81.4 consensus and 81.2 prior.
    • The "stunning loss of confidence" in the first half of August spread across income, age, and education subgroups and observed across all regions, according to Richard Curtin, Surveys of Consumers chief economist.
    • Current Economic Conditions: 77.9 vs. 84.5 prior.
    • Index of Consumer Expectations: 65.2 vs. 85.0 expected and 79.0 prior.
    • Inflation Expectations: 4.6% vs. 4.7%.
    • The spread of the coronavirus Delta variant is likely the cause. "There is little doubt that the pandemic's resurgence due to the Delta variant has been met with a mixture of reason and emotion," Curtin said
    • The sentiment dropped in all aspects of the economy, Curtain said "from personal finances to prospects for the economy, including inflation and unemployment."
    • U.S. stocks waver after a closely watched consumer sentiment gauge dropped to its lowest level since 2011 as the Delta variant pushes up the number of COVID-19 cases in the U.S.
    • The University of Michigan August Consumer Sentiment Index fell to 70.2 from 81.2, a dramatic shortfall from the 81.4 consensus, and showed that the increased pessimism cut across income, age, and education subgroups as well as all regions of the country.
    • The Nasdaq is roughly flat after rising as much as  0.2% earlier in the session. The S&P 500 rises 0.1%; the Dow, also up 0.1%, had risen as much as 0.3% early in the session.
    • Bonds rise, pushing the 10-year Treasury yield down 5 basis points to 1.31%.
    • "Consumer sentiment is stumbling" with the rise of the Delta variant, said Navy Federal Credit Union corporate economist Robert Frick in an email to SA.
    • "However, so far, it looks as if the kind of shutdowns and layoffs we all suffered from in previous COVID-19 waves will not occur, as reflected in data such as layoffs and consumer spending," he added. "But the Delta wave is an unknown, and just as with inflation expectations, uncertainty shakes confidence but is unlikely to shake spending."
    • Notable movers include Disney (+2.4%), after subscribers exceeded forecasts and parks returned to profitability in fiscal Q3, and Tesla (-0.6%), which hopes to start producing cars in its Berlin Gigafactory in October if it can get regulators' approval.
    • Crude oil falls 0.6% to $68.65; gold perks up 1.5% to $1,778.50 per ounces. The U.S. dollar index drops 0.5% to 92.55.
    • With the lower Treasury yields, Financials (XLF -0.7%) fall the most of the S&P 500's 11 industry sectors, followed by Energy (XLE -0.7%). Still, eight of the sectors are trading in the green, with Consumer Staples (XLP +0.7%) and Utilities (XLU +0.5%) showing the strongest performance.
    • In trading overseas, the Stoxx Europe 600 ends the session up 0.2% for the day and +1.3% for the week; the FTSE 100 rose 0.4% on Friday, closing out a 1.3% gain for the week; Germany's DAX increased 0.3% on the day and 1.4% for the week
    • Gold futures are catching a bid in reaction to a deterioration in consumer optimism caused by the pandemic's resurgence, +1.4% to a session-high $1,776.60/oz. (XAUUSD:CUR), although the metal is still set for a slight decline for the week based on the most-active contract.
    • The University of Michigan said the preliminary reading of its Consumer Sentiment Index plummeted to 70.2, a wide miss compared with consensus estimates and well below last month's 81.2 reading.
    • The 13.5% change from July would rank as one of the largest-ever declines in the index, exceeded in the 21st century only by the economy's COVID-19 shutdown in April 2020 (-19.4%) and at the depths of the Great Recession in October 2008 (-18.1%).
    • September silver (XAGUSD:CUR) shows an even stronger reaction, +2.8% to $23.78/oz., but the metal has lost nearly 4% for the week.
    • Gold and silver started the week with sharp losses, with gold briefly dropping below $1,700/oz.

    • Purchases of economy tickets for international flights from the United States fell 13% in July compared to June. U.S. domestic flight sales are also down 4.6%, according to the Airlines Reporting Corporation.
    • US consumers bought fewer tickets to nearly all regions, including Latin America, Europe, the Middle East, Africa, Asia, Australia, and Mexico.
    • Canada was the largest gainer for July sales of economy tickets with 113% more seats sold than in the prior month after the country recently reopened its borders to vaccinated Americans.
    • The average ticket price for a domestic flight now stands at $302, up 1.7% from last month.
    • U.S. airline stocks are down today following the news: (JETS -0.5%), (DAL -0.5%), (UAL -0.1%), (AAL -1.3%), (LUV -0.5%), (SAVE -1.3%), (JBLU -0.4%), (HA -1.1%), (ALK -0.6%)
    • The United States is considering a target of 2050 for airlines to fly with 100% renewable jet fuel.
    • Wheaton Precious Metals (WPM +3.5%) rallies despite posting mixed Q2 results, as the company raised its dividend for the fourth quarter in a row.
    • Q2 production jumped 32% to 194.1K gold equiv. oz., including a 1.7% increase to 90,290 oz. attributable gold, an 84% jump in silver output to 6.72M oz.
    • Wheaton says it is on track to achieve its guidance of 720K-780K gold equiv. oz. for the year, comprised of 370K-400K oz. of gold, 22.5M-24M oz. of silver, and 40K-45K gold equiv. oz. of other metals.
    • The company's average realized gold equiv. price rose 24% and the number of gold equiv. oz. sold increased 7%.
    • Q2 operating cash flow surged 43% Y/Y to $216M and revenue rose 33% to a record-high $330M.
    • Shares are also swept up in today's rally in precious metals prices.
    • A new report from China said that Apple's (NASDAQ:AAPL) iPhone sales in the country bounced back in July, an upbeat sign for the company in what is one of its most important sales regions.
    • According to the China Academy of Information and Communications Technology, iPhone sales in China averaged 2.8 million units a week in July, a 75% increase over the same month a year ago, and a complete reversal from the 15% year-over-year sales decline that took place in June. J.P. Morgan analyst Samik Chatterjee said in a research note that the data from China bodes well for Apple (AAPL), and the entire mobile phone industry, which he said grew shipments by 12% between June and July.
    • "The industry overall showed strong trends as well," Chatterjee said. "The comparison of the trends between Apple and industry volumes indicates that Apple continues to gain share."
    • China maintains a strong presence in Apple's overall business scheme. When Apple (AAPL) reported fiscal third-quarter results in late July, it said China accounted for $14.8 billion of the company's $81.4 billion in total sales for the period.
    • On Friday, an Apple executive told the Wall Street Journal that the company is strongly supportive of iPhone users' privacy following plans to start scanning U.S. iPhones for images of child abuse and pornography.
    • Fedex (FDX +0.6%updates its peak surcharges and fees for U.S. express and ground services and ground international.
    • "We are entering another holiday peak season during which we expect continued high demand for capacity and increased operating costs across our network," said FedEx, as the COVID-19 delta variant is expected to keep delivery demand high.
    • Customers can expect to pay an additional $5.95 per package for express or ground services from Oct 4, 2021 to Jan 16, 2022. Ground economy surcharges will run from $1.50 to $3.00 per package.
    • FedEx, along with UPS (UPS +0.2%) and the USPS, implemented holiday surcharges on big box retailers last year during this time.
    • The announcement comes 2 days after the USPS proposed raising rates temporarily for the holiday season.

  7. Man VIAC is just so unloved. It's my one uncovered position with 16 2023 $30 calls. Looking for the happy pop!

  8. I'm just dumbfounded at the lack of reaction to that Consumer Sentiment Report.  The RUT is down but the other indexes are flat.   Traders refuse to believe the virus can affect the market.  

  9. Have a great weekend folks!

    - Phil

  10. I just noticed I never submitted that last comment….

  11. AEAC seems to be the vehicle where this is going to happen:

    May 7 (Reuters) – Top U.S. mall owner Simon Property Group Inc (SPG.N) and Authentic Brands Group LLC have agreed to buy Eddie Bauer, adding the outdoor gear and apparel retailer to a brand marquee housing Aéropostale, Forever 21 and Brooks Brothers.

    Authentic and SPARC Group LLC, a venture backed by brand manager Authentic and Simon, are buying Eddie Bauer from a unit of Golden Gate Capital 12 years after the private equity firm acquired the outdoor lifestyle gear maker out of bankruptcy.

    Might be worth a flyer as AEAC is only $289M at $9.65.