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Testy Tuesday – S&P 4,400, Nasdaq 15,000 Revisited

US National Debt Passes $28 Trillion, +$4.7 Trillion in 13 Months. General  Treasury Account Down by $480 Billion in 2 Months, $620 Billion to Go |  Wolf StreetGovernment shut-down (again)?  

The Senate Republicans blocked a bill last night to fund the Government and raise our borrowing limit (you can't have one without the other as we're already running a $3.2Tn deficit this year).  It is now just days before the Government runs out of money and the GOP is determined to bring this Government down one way or the other and insurrection didn't work so maybe bankruptcy will do the trick?  

Senate Democrats sought to pass a House-approved stopgap measure that funds the government through Dec. 3, 2021, and suspends the debt limit through Dec. 16, 2022. They are racing to send the legislation to President Biden’s desk before the government’s current funding expires at 12:01 a.m. Oct. 1st which, rumor has it, is Friday.  

Treasury Secretary Janet Yellen has notified lawmakers that the government may be unable to keep paying its bills on time as early as next month if Congress doesn’t authorize additional borrowing.  “Social Security checks, Medicare benefits, veteran’s benefits, small business, all this and more are now on the chopping block because Senate Republicans are playing games with the full faith and credit of the United States,” Senate Majority Leader Chuck Schumer (D., N.Y.) said. 

A vote to raise the debt limit doesn’t authorize new spending, instead essentially allowing the Treasury Department to raise money to pay for expenses the government has already authorized. About two-thirds of federal spending is automatic on programs such as Medicare, Medicaid and Social Security, while the other third is discretionary and annually approved by Congress.  A default on the debt could have catastrophic financial consequences, and the pressure on both parties to resolve the issue will likely grow as Congress nears the deadline. 

How big is America's public debt? | World Economic ForumCLEARLY from these charts, our debt is completely out of control but simply shutting down the Government is not the solution, is it?  In fact, it's about the worst thing you can do as the threat of default increases the rate at which we are able to borrow new money (people get nervous when it looks like you can't pay) and that sends current bond rates spiking and devalued exisiting bonds – a double hit on investors and savers.  

Now we are all very excited by the 6% GDP growth that is forecast for 2021 but that's 6% of $19.5Tn or $1.17Tn, which is a lot of money but, when you have to go $3.2Tn in debt to get $1.17Tn in growth – it's not quite as impressive, is it?  

So next year we'll be $30.2Tn in debt with a $20.7Tn economy but a $1Tn spending bill and a $3.5Tn infrastructure bill would put us another $1.35Tn in debt (the $3.5Tn is over 10 years) on top of our usual $1Tn so we're up to $32.55Tn at the end of next year IF ALL GOES WELL and MAYBE the economy is at $21.7Tn and that means we would, in fact, 150% of our GDP in debt (IF all goes well).  

That's why the 30-year notes have plunged 5% in the past two weeks – even though the Fed put off their tightening.  At this point, the Fed has no choice but to raise rates (sending bond values lower) because, if they don't, they will appear to be ineffective if rates keep rising DESPITE their target.  The Fed is nothing more than a confidence game – God forbid people realize how powerless they are to actually control the economy and we're all screwed!  

September has clearly been a road to nowhere for the market and, rather than say it again, I'll just cut and paste my comments from last month in:  "Toppy Tuesday (Again) – S&P 500 Tests 4,500 (Again)": 

An endless series of low-volume rallies is not enough to get you over a major level on the S&P 500 so, once again, we are being rejected at the 4,500 level.  On the surface, things look good with a projected $1.8Tn in earnings for the S&P 500 and that's up 28% from $1.4Tn in 2019 but our Government (money borrowed by you and I on their behalf) has spent over $10Tn so our Corporate Masters could make that extra $400Bn – which will be the ANNUAL interest on what we borrowed at 4% (which will be more profits for the banks).

This is like playing Monopoly when the Banker is cheating – there's no way you can win….  Meanwhile, in 2019, the S&P 500 was topping out at 3,000 so 4,500 is 50% higher than we were, not 28%, which would be 3,750.  So, EVEN IF there were no stimulus and this were an honest 28% increase in earnings – we are still 20% too high at 4,500.  This is not sustainable – especially if the Government isn't going to throw in another few Trillion Dollars to keep things humming next year.  

This was the chart on August 24th:

And here is the chart today:

As you can see, it took the S&P 4 years to get from 2,000 to 3,000 (up 50%) and that 1,000 point rally had two 500-point pullbacks along the way.  This is our first attempt at 4,500, less than 2 years after crossing 3,000 and that's a 1,500-point rally and the pullback we'll be looking for is 3,750 at some point, which is only down 16.66% – so not too big a deal if it happens (and we hold it).

Again, I'm a bit skeptical because of all the stimulus but stimulus there is so 4,500 we have – for the moment.  Now it's up to the Fed and the Government to decide how much they want to spend to keep Corporate America making this kind of money (while not taxing them) at the expense of the American people.  In situations like this – you know better than to expect our Government to be there for the people….

Of course we cashed out at the top – so we don't care.  We're just sitting back and watching the fun for now.  On October 13th we get earnings from JPM, BLK, PGR and UAL and Thursday, the 14th, it's Bankapalooza for earnings and the season begins in earnest the week of the 18th but that's about 3 weeks away so, for now, we stay focused on the data and, as I predicted yesterday based on the Fed Speaking Schedule, we would turn down this morning (aleady started) and there's no one to put a floor in until Williams speaks Wednesday at 5pm.  

Perhaps the Democrats and Republicans can resolve their differences and pass a spending bill by then to restore confidence…  Perhaps…  

Speaking of confidence, Dallas Fed President, Robert Kaplan and Boston Fed President, Eric Rosengren are resigning over the trading scandal, though both are claiming other issues.  As I noted yesterday, Kaplan is a major dove on the Fed while Rosengren is a centrist – it will be interesting to see who replaces them.  

Cartoon: Pandemic inflation - Powell River PeakMeanwhile Powell is going to speak to the Senate Banking Committee this morning about inflation and, so far, "transitory" inflation looks like it's going to be around for quite a while – so we'll see what he has to say for himself.  

“Inflation is elevated and will likely remain so in coming months before moderating,” Powell will say. “As the economy continues to reopen and spending rebounds, we are seeing upward pressure on prices, particularly due to supply bottlenecks in some sectors. These effects have been larger and longer lasting than anticipated, but they will abate, and as they do, inflation is expected to drop back toward our longer-run 2 percent goal.”

The remarks are part of mandated testimony Powell must give to Congress regarding the Fed’s economic response to the Covid-19 pandemic. He will speak Thursday to the House Financial Services Committee.

 


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  1. Good Morning.



  2. Record July jump in US home prices, sidelining more buyers



  3. Japan to lift all coronavirus emergency steps nationwide




  4. Good morning!

    Ugly, ugly at the open – but certainly not unexpected.  

    Even oil is pulling back a bit.  

       

    Europe is down around the 2.5% Rule so we'll see what happens at 11 but we have another 1% to fall if we catch up with them.

      

    U.S. government bond yields rose amid inflation concerns and stocks fell at the opening as investors rotated out of interest-rate sensitive technology stocks.

    Treasury Secretary Janet Yellen is set to testify with Fed Chairman Jerome Powell before lawmakers on Tuesday.21 min ago 5 min read

    Senate Republicans blocked a Democratic bill that would both fund the government and raise the country’s borrowing limit, escalating a political showdown over the government’s finances just days before it runs out of money.136 6 min read

    Consumer Confidence dropped considerably:

    Federal Reserve Chairman Jerome Powell will have to tell Congress that inflation will remain higher than expected for longer. This will probably make true what some investors have been saying for some time, that inflation is here to stay. How long longer means Powell continues to push on the labor market figures and post COVID recovery.

    Nevertheless, the Fed Chairman sticks to his outgoing argument that prices will remain high due to the COVID recovery. Powell assumes that the reopening of supply bottlenecks arises, which makes consumer prices rise. The consumer confidence determined by the Conference Board falls to 109.3 after the index in the previous month still 115.2 had amounted.

    However, if inflation gets out of control, the Fed will use its tools to get inflation back to a level that is consistent with the goals.

    Experts now say that the Fed is trapped and the tools to catch inflation are running out. Powell now admits for the first time that inflation remains higher than expected for longer. But he sticks to his point that everything is just transitory. Should the Fed Chairman be wrong again, inflation could soon reach the levels seen in the 1970s.

    Consumer Confidence Drops in September, Remains High

    Consumer Confidence fell from 115.2 in August to 109.3 in September. Expectations had been for a reading of 114.4.

    Lynn Franco, Senior Director of Economic Indicators at The Conference Board, attributed the decline to the spread of the Delta variant as well as “concerns about the state of the economy and short-term growth prospect."

    Franco also said that while short-term inflation expectations eased, so-called "purchase intents", which is consumers indicating they plan to make a purchase in the future, fell for homes, cars and major appliances. This combination, less concern about inflation couple with fewer buyers for big-ticket items indicates that what economists call the price elasticity of demand remains intact, signaling that an inflationary spiral is unlikely.



  5. KRBN?


  6. @biodieselchris – KRBN landed in the 9/27 afterhours post




  7. KRBN/BDC – We have them in the Future is Now Portfolio.

    From what I'm learning, this thing could be $100 in a couple of years.  

    Europe closing at the lows.  

    STP Value Change Today: $30,063

    LTP Value Change Today: $-6,522

    Now that's a good day for us!  


  8.      

    /RB fading fast.



  9. KRBN at $100 — accumulating now.


  10. I use it to "offset" my SPH! ;)


  11. Hello PSW!

    FYI….The GOP can try to distance itself from debt, but here’s the reality: Since 1960, D presidents have added a net 5 pps to the debt-to-GDP ratio. R presidents added 10x that.


  12. Elizabeth Warren Just called Powell a “Dangerous Man” and said he would oppose his re-nomination. 




  13. The sputtering volume on SPY and DIA is very odd. Wonder if there are computer glitches of some sort


  14. keeping an eye on KO for an entry when it bases


  15. Does anyone think they wont raise the debt ceiling by the deadline :

    JPMorgan Chase & Co has begun preparing for the possibility of the United States hitting its debt limit, Chief Executive Jamie Dimon told Reuters on Tuesday, adding he nevertheless expected policymakers to find a solution to avoid that “potentially catastrophic” event.

    The country’s largest lender has begun scenario-planning for how a potential U.S. credit default would affect the repo and money markets, client contracts, its capital ratios, and how ratings agencies would react, Dimon said in an interview.


  16. Volume/Snow – There are no buyers and people aren't panicked enough to sell at market.  

    KO/Stock – Interesting as I see no particular reason for the 10% drop.  I guess it was post-dividend (9/14).

    $45 was the right price in 2018/19 but they are actually making 10% more this year ($9.7Bn) and last year they made $7.7Bn and I love companies that can ride out a storm.  $52.50 is $231Bn so 23x is fairly valued – not a huge sale.  We could sweeten it with options but I'd rather wait and see where they stop falling.  KO is still in our Butterfly Portfolio and I missed adjusting it in our last review and now it cost us but not too much as the longs are down too for the roll.  Our target was $55 in Jan:

    KO Long Call 2022 21-JAN 45.00 CALL [KO @ $52.48 $-1.13] 15 5/28/2020 (115) $9,300 $6.20 $1.65 $2.87     $7.85 - $2,475 26.6% $11,775
    KO Short Call 2022 21-JAN 55.00 CALL [KO @ $52.48 $-1.13] -15 5/28/2020 (115) $-3,525 $2.35 $-1.38     $0.97 $-0.30 $2,070 58.7% $-1,455
    KO Short Call 2022 21-JAN 57.50 CALL [KO @ $52.48 $-1.13] -10 8/20/2021 (115) $-2,000 $2.00 $-1.58     $0.42 $-0.13 $1,580 79.0% $-420

    So the most we were going to get out of it was net $10 and the Jan $45 calls are now $7.85 so $1.15 below max but the short puts were sold for $2 and they are going worthless – so it balances out.  

    In the Butterfly Portfolio, with 2024s now out, we should sell the 15 KO Jan $45 calls for $7.85 ($11,775) and buy 25 of the 2024 $45 ($9.60)/55 ($4.55) bull call spreads for $5.05 ($12,675) and we can sell 10 of the 2024 $45 puts for $4.35 ($4,350) so it's net $3,450 off the table (leaving us below net $0 if the short Jan calls go worthless) and we're left with a $25,000 spread that's $18,750 in the money which we can sell against for another 2.3 years.

    Does anyone think/Stock – Well I didn't think the President would cause an insurrection and, aside from not being punished, a year later he's still trying to overturn the election and is STILL considered the party's leader.  I didn't think that can happen so I'm sure not going to say I don't think the GOP would let the economy implode to score political points.  

    Opinion | Why weren't officials at the Capitol more prepared for this  insurrection? - The Washington Post

    https://www.rollingstone.com/politics/politics-news/jan-6-trump-republicans-1211749/

    Trump’s pressure on the Department of Justice, in particular, was relentless. He reportedly plotted to elevate a staunch loyalist, and fellow election conspiracy theorist, Jeffrey Bossert Clark, to the post of attorney general. Newly uncovered documents show how Clark had endeared himself to Trump by circulating a draft letter in December that would have demanded the Georgia legislature “immediately call a special session” to consider overturning Trump’s narrow loss there, citing unspecified “irregularities.” (Trump reportedly backed down from installing Clark only in the face of a threat of mass resignations at DOJ.) On December 27th, according to notes recently uncovered by the House Oversight Committee, Trump himself pushed top DOJ officials to “just say that the election was corrupt” and “leave the rest to me.” 

    In light of these fresh details, the January 6th insurgency — whipped to motion by Trump’s orders to “fight like hell” against the certification of the Electoral College results — appears to have been the serious, last-ditch act of a would-be tyrant to hold on to power. Yet even as the context of the coup attempt has become clearer, the moral clarity of Republicans in Washington about the blame for January 6th has become increasingly cloudy.

    In real time, GOP leaders had blamed Trump for the day’s violence. “The president bears responsibility for Wednesday’s attack by mob rioters,” House minority leader Kevin McCarthy said on January 13th. Mitch McConnell, then Senate majority leader, was even more direct, insisting Trump was “practically and morally responsible” for provoking the siege on the Capitol by people who “believed they were acting on the wishes and instructions of their president.” 

    For a brief moment, it appeared as if Trump — deprived of his Twitter megaphone and exiled to Mar a Lago — might have lost his stranglehold on the Republican Party. But as the weeks and months passed — and Trump not only prevailed against impeachment (again) but steadily reasserted himself as the GOP’s one true king — most Republicans cowered. 

    Still, scenario-planning is what JPM is paid to do.  It's like when the army has war games for China taking over Taiwan and the US and Japan defending the island and the next day it's in the papers saying "US Japan Prepare to Defend Taiwan Against Chinese Invasion" – things get blown out of proportion.  



  17. They called Roubini "Doctor Doom" in 2007 but then everything he warned us about happened in 2008:


  18. Fundamental Failures




  19. Attempted bounce has failed – does not bode well for tomorrow but we're right on script for the week.

       

    That Russell rally sure was fun yesterday, wasn't it?  

     


  20. Good morning, everyone. Here is the link to today's webinar…

    https://attendee.gotowebinar.com/register/9183174309769908752