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, Commentary 12/10/2021- SimpleVisor Live

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We are replacing the running Commentary with Daily Market Commentary. Daily Market Commentary provides the same market-related information you are accustomed to, as well as more technical guidance and a preview of what to watch for in the day ahead. Here is today’s Commentary.

, Commentary 12/10/2021- SimpleVisor Live

December 9, 2021

**Due to technical difficulties, there will be no 3 Minutes on Markets today.

Jobless Claims at 50-year Lows

Initial Jobless Claims fell to 184k this past week, hitting its lowest level since 1969. In 1969, the U.S. population was 203 million. Today it’s 332 million. If you adjust for the population increase, jobless claims are well beyond the prior record low of the late 60s.

Between last Friday’s employment report, JOLTs data, and initial claims, the Fed will likely continue to shift toward inflation-biased policy. Such logic entails the Fed will be more aggressive in reducing QE. Asset prices and the current high-risk tolerance among many investors are largely supported by the Fed’s liquidity. While markets may ignore the circumstances for a while, we mustn’t forget the Fed regime is changing. We think the change in monetary policy will be an important theme driving investment results in 2022. Stay tuned!

How Big Is Apple?

Apple’s stock is up over 10% in the last five trading days. In the last month, its market cap increased $400 billion and is now approaching $3 trillion. To put that in context consider the $400 billion gain in market cap over just the last month is more than the total market cap of the world’s 20th largest company, Walmart ($380 billion). The two bar charts below compare Apple versus the total size of the top ten nations ranked by their respective aggregate stock market capitalization and nominal GDP. As shown, Apple is bigger than all but six nations in terms of stock market size and is bigger than the GDP of all but seven nations.

, Commentary 12/9/2021

 Home Equity

The graph below from Home Equity Insights, by Core Logic, sheds more light on recent home equity gains which directly boosts the amount of credit available to consumers via mortgage refinancing. Core Logic estimates homeowners with mortgages saw their equity increase by $2.9 trillion over the past year, an increase of nearly 30%. The map below breaks down the average equity gains by state. The amount of credit card debt has recently picked up back to normal levels. Further, savings rates have fallen to pre-Covid levels. While both of those data points argue that consumers do not have much money beyond their paychecks to spend, the sharp increase in home equity is a potential source to fund new spending. Assuming house prices stay stable or increase, we should expect consumers to tap equity to finance consumption and lessen the burden of inflation.

, Commentary 12/9/2021

December 8, 2021

Jobs Aplenty

The BLS JOLTs report once again confirmed there is a severe shortage of labor. JOLTs data lags the employment report by a month, but it shows there are 11.033 million job openings, 400k more than last month. This data along with recent productivity and labor costs adds to the mounting evidence that corporate profit margins will come under pressure in the coming month. Simply, job seekers and current employees have more bargaining power today than in decades.

The first table below puts context to how outsized the current number of job openings are versus the last 20 years. The second table breaks down the number of job openings by industry.

, Commentary 12/8/2021

, Commentary 12/8/2021

Apple’s Nightmare Before Christmas

Nikkei Asia published Apple’s Nightmare Before Christmas this morning, detailing how chip shortages and energy restrictions are cutting down on Apple’s ability to produce iPhones. Despite the bad news, it is not denting investor enthusiasm. Apple’s stock price has been on a tear recently, rising 22% since early October. Our equity model holds a 3.75% position in Apple.

“Due to limited components and chips, it made no sense to work overtime on holidays and give extra pay for front-line workers,” a supply chain manager involved told Nikkei Asia. “That has never happened before. The Chinese golden holiday in the past was always the most hustling time when all of the assemblers were gearing up for production.”

After launching the iPhone 13 range and new iPads in September, Apple is falling millions of units short of its production goals and missing out on billions of dollars of revenue. In many countries, it is now too late for consumers to buy some Apple products in time to give as holiday gifts.

, Commentary 12/8/2021

Is The Short Term Rally Here To Stay?

, Commentary 12/8/2021

Consumer Credit is Finally Slowing Down

Consumer Credit rose by $16.9 billion in October almost half of an expected $30 billion increase. It also marks a sharp slowdown from September’s $27.8 billion growth. As stimulus checks were wound down, consumers started relying more on credit card debt and mortgage refinancings to meet their needs and compensate for inflation. One month does not make a trend, but this new data point along with weak consumer spending data for Black Friday and Cyber Monday argues consumer activity may be slowing.

U.S. Multiple Expansion vs. The World

The graph below, courtesy of Top-Down Charts, shows that since the Financial Crisis the CAPE P/E ratio has expanded 3x in the United States versus staying relatively flat in developed and emerging foreign markets. One reason to partially explain the outperformance is that the U.S. equity indexes are more highly dominated by higher growth tech companies which tend to command higher P/E’s. That said, when it comes to paying the piper and valuations normalize in the U.S., foreign markets may offer a little protection.

, Commentary 12/8/2021

December 7, 2021

Profit Margin Pressures Are Coming

Unit labor costs rose 9.6%, year over year, in part due to productivity, which fell 5.2% over the same period. Hourly compensation rose 3.9%. While wage growth is higher than average, it is well below the rate of inflation. The decline in productivity is the largest since 1960. Surging labor costs and falling productivity is a recipe for profit margin compression for many corporations. Given margins are at historically high levels, a decline should not be a surprise.

Easy Money- “Buying The 50”

The graph below shows how the S&P 500 (SPY) has repeatedly bounced off its 50dma in 2021. The black bars quantify the 20-day returns from each trading day SPY was below its 50 dma. As we show, buying below the 50 dma and holding for 20 days has been easy money. On December 1st, as circled, SPY fell below its 50 dma. It has since rebounded 3.5% from that day. “Buying the 50” is a great trade and may continue to work well, however, there will come a time SPY breaks below the 50 dma and fails to recover quickly. That could be a signal the market environment is turning.

, Commentary 12/7/2021

Market Rebound Continues

, Commentary 12/7/2021

What is Volatility Telling Us?

The black line below charts the difference between implied volatility (VIX) and realized volatility. We use this measure to help us quantify how risk tolerances are changing for the market in aggregate. The difference between implied and realized volatility is frequently above zero, so we prefer to key on the variance around its trend line to assess. When implied volatility spikes above the trend line, it signals that investors are becoming more risk-averse as they bid up options. This is what happened last week as the difference rose to 8-month highs. The large difference has since come down but remains elevated. Also of note, the trend for the differential is gently rising, meaning investor risk-averseness is slowly increasing with the market. Given high valuations and the Fed pivot, the upward trend makes sense.

, Commentary 12/7/2021

Bonds vs. Stocks

Based on the hoopla surrounding the bullish stock market one would think bonds would have been a bad place to be invested. Contrary to popular opinion, long-duration Treasury bonds (TLT) have kept up with the S&P 500 since April. The graph below shows the price ratio between TLT and SPY. The recent increase in the price of TLT and the decline of SPY have brought the ratio back to April’s levels.

, Commentary 12/7/2021

December 6, 2021

The Fed Pivots

As is quite common, the Fed likes to signal changes in policy via the media. Today, the Wall Street Journal published an article entitled, High Inflation, Falling Unemployment Prompted Powell’s Fed Pivot. The article confirms some of Chairman Powell’s testimony to Congress from last week. The bottom line per the article: “Officials are making plans to accelerate the process at their policy meeting next week, ending it by March instead.” The article clearly articulates that inflation, not employment, is now the Fed’s primary concern. While the Fed thinks high inflation rates will come down next year, they “can’t act as though we’re sure of that.” The Fed often gets economic data prior to their release. Is it possible this Friday’s CPI report is concerning?

Time For Value?

, Commentary 12/6/2021

The Communications Sector (XLC) is Struggling

In last Friday’s Relative Value Scorecard report for RIAPro subscribers, we noted the communications sector is performing incredibly poorly on a relative basis versus the S&P 500. To wit: “The standout on the relative charts is the incredibly oversold condition of the communications sector. Its score is -12.41 out of a possible -13.5.”  While a bounce versus the market is likely we caution the sector is very top-heavy. As such, over half of its weighting is in three stocks- FB, GOOG, and NFLX. The fortunes of those companies, especially FB and GOOG are likely to drive the sector. The graph below, courtesy of Charles Schwab, further highlights how poorly the communications sector is trading. Every member of the sector is below its respective 50dma and 81% are below their 200dma (not shown).

, Commentary 12/6/2021

The Week Ahead

There are not many relevant economic data releases but what data is coming out is important to better assess what the Fed may do at their FOMC meeting next week. Wednesday’s JOLTs report is expected to show the number of job openings continues at or near record-high levels, meaning the labor market is robust. Job Quits, another indicator of the jobs market is also supposed to be high, signaling employee confidence in their ability to quit and find a better or higher-paying job.  On Friday the BLS will report on CPI. After last month’s shocking 6.2% print, economists are expecting another bump higher to 6.8%. Such a number will put further pressure on Powell and the Fed to speed up the taper process and start thinking about the timing of interest rate hikes.

On Wednesday and Thursday, the Treasury will auction 10 and 30-year bonds respectively. Typically the auctions can weigh on bond prices in the days prior. The Fed will enter its self-imposed media blackout window this week with the FOMC meeting next Wednesday.



December 3, 2021

Are Value Stocks in Vogue?

The Finviz heat map below shows there is a clear divide between the winners and losers. The winners in green, are companies and sectors that have been lagging the market. Many of these companies are considered value stocks, due to their relatively low valuations. Many of the companies in red are stocks that have done very well this year. In many cases, they are trading at or near record-high valuations. The last few days have been a rare instance of outperformance by the value sectors. It’s way too early to call it a trend but it is worth following closely.

, Commentary 12/3/2021

Five Stocks To Buy If Santa Comes to Town – New Weekly Report

Five Stocks for Friday uses stock screens to give readers five stocks that we expect to outperform if a particular investment theme plays out in the future. Investment themes may be relevant to the current or expected market, industry and/or economic trends. Check out our inaugural picks.

, Commentary 12/3/2021

First Impressions can be Deceiving

Stocks initially rose on the employment data as the weak jobs print might mean the Fed would step down from recent hawkish tones. St. Louis Fed President Bullard, quickly put an end to such wishful thinking and took the wind out of the sails of the stock market.  He said the Fed could consider raising rates before they finish tapering. Almost all investors were under the impression the Fed would finish tapering before raising rates. Such implies no rate hikes until July unless the Fed speeds up its taper schedule. The May Fed Funds Futures Contract now implies a 65% chance the Fed tightens before June. The market is betting that Bullard is on to something.

The BLS Employment Report- Good or Bad?

CNBC says “Job Growth Disappoints“. CNN Money writes “The U.S. economy added 210,000 jobs in November, far fewer than expected.” The headline number, +210k new jobs, is well off expectations for a gain of 545k jobs, thereby justifying the concerning headlines. However, the underlying employment data was robust. The unemployment rate fell from 4.5% to 4.2%. Maybe the most crucial data point persuading the Fed’s assessment of the labor markets is the labor participation rate which rose .2% to 61.8%. Chairman Powell repeatedly uses the low participation rate as an excuse to remove monetary accommodation at a very slow pace. Might the pick-up in labor participation further support his recent hawkish tone regarding combatting inflation? The market is reacting positively to the report, signaling it thinks weak job growth will impede the Fed from speeding up the pace of tapering at the December FOMC meeting.

Our graph below shows that professional and business services accounted for nearly half of the job gains. Curiously, retail lost 20k jobs in November, which is one of the biggest shopping periods. We suspect the seasonal adjustments and Covid-related anomalies make reporting an accurate number difficult for that sector.

, Commentary 12/3/2021

Technical Value Scorecard

, Commentary 12/3/2021

More Risk and Reward When Volatility is Elevated

The graph below shows that the risk/reward equation for the S&P 500 becomes much more skewed when the VIX is between 31 and 100. The VIX has been hovering near 30 recently. The green shaded area shows that S&P 500 returns tend to follow a relatively normal distribution curve with a skew toward positive returns. The black bars highlight the non-normal distribution of returns when the VIX is elevated. During such periods, returns tend to be better than average but the risk of a 10-20% drawdown is also much higher than when the VIX is below 31.

, Commentary 12/3/2021

Stranded Containerships

The graph below courtesy of Zero Hedge and Goldman Sachs shows the amount of stranded containership tonnage at U.S. ports is abating. Per Goldman Sachs: “While the amount of stranded tonnage is still historically elevated, a further decline in congestion could boost supply and ease inflation pressures for consumer goods and manufactured products in early- or mid-2022”. It is also worth noting that as we pass the holiday season the demand for many goods will lessen appreciably which should further relieve pressure at the ports.

, Commentary 12/3/2021

December 2, 2021

OPEC is Threatening to Curtail Planned Output Increases

Oil prices opened the day 5% weaker as OPEC decided to go ahead with a planned output hike of 400k barrels for January. The news was a bit of a disappointment as there were expectations they might curtail the increase to 200k or even less. Oil prices came storming back, however, as OPEC said they may revisit the potential to reduce their planned output increases at the January 4th meeting.

Cartography Corner

, Commentary 12/2/2021

Do you Feel Lucky?

The tweet and graph below show the bullish percent index on the S&P 500 has dipped below 50%. The last six times that occurred it proved to be a good buying opportunity. However, as shown, the first dip below 50% on the graph was a false signal. Do you feel lucky? The index is a measure of breadth that simply counts the percentage of stocks with a point & figure buy signal.

, Commentary 12/2/2021

Is There More Selling To Be Done?

, Commentary 12/2/2021

Is TLT Ready to Run?

In yesterday’s commentary, we note that heavy short interest in Treasury note futures could propel bond prices higher (yields lower) if those with shorts are forced to cover their positions. The graph below provides a little technical context for what might cause them to do so. As shown, the price of TLT (20 year UST ETF) has bumped up against $152 numerous times since July. Each time it was repelled but to increasingly higher lows. If bonds can break through the current wedge pattern, the 2020 highs may be in sight. Many technical traders’ that are short bonds are likely watching how this plays out closely.

, Commentary 12/2/2021

Will Inflation Heat Up More?

The first graph below shows the inverse correlation between rental vacancy rates and owners’ equivalent rent. Not surprisingly, a lower vacancy rental rate tends to result in higher rental prices. With the Fed seemingly getting more serious about inflation, rental prices and owners’ equivalent rent (OER), which account for nearly a third of CPI, become very important data points to follow more closely.

Rental vacancy rates are back to 30+ year lows which is pushing rents higher. Adding to the pressure on rents and ultimately CPI is surging home prices. The second graph, courtesy of Fannie Mae, shows their model based on home prices predicts a big jump in OER in 2022. Per the article: “On a year-over-year basis, house price gains historically lead to changes in the CPI shelter cost measures by about 5 quarters.” Home prices started spiking in September of 2020, about 5 quarters ago. If CPI continues higher, the Fed is more apt to remove liquidity quicker. As we discuss in Is a Stock Market Crash Like 2000 Possible, liquidity via QE and zero rates are the lifeline of excessive stock valuations.

, Commentary 12/2/2021

, Commentary 12/2/2021


December 1, 2021

National Manufacturing Surveys

The PMI manufacturing survey was weaker than expectations at 58.3 versus 59.1. Per the report- “November PMITM data from IHS Markit signaled the second-weakest rise in production recorded over the past 14 months as producers reported further near-record supply delays and a slowing of new order inflows to the softest so far this year. Jobs growth also waned amid difficulties filling vacancies.” Further- While average selling price inflation eased as firms sought to win customers, the rate of input cost inflation hit a new high, hinting at a squeeze on margins.”

The ISM survey came in at expectations of 61.1. While below levels from earlier this year, the survey remains near 20-year highs. The much-followed prices paid index fell slightly. Supply line disruptions remain a big problem. Over half of the respondents report slower delivery times. The normal range is 10-20%. The table below annotated by Zero Hedge shows six of the ten ISM components were lower this month.

, Commentary 12/1/2021

Is the Sell-Off Over?

, Commentary 12/1/2021

Have Oil Prices and Energy Stocks Bottomed?

The chart below provides fodder for oil bulls and bears. The price of oil tends to rally strongly following periods when the OVX (oil volatility index) is above 65. Currently, the index is at 75. While the reading entails oil may rise in price once volatility declines, we must consider the volatility index can stay elevated resulting in further declines. For example, the index was above 65 from October 2008 to March 2009. In 2020, the index was above 65 from early March until late May. Currently, the index is only on its third day above 65. Bulls are waiting on a sub-65 reading and bears are hoping volatility remains elevated. We do caution, the index can fall slightly below 65 for a day or two before rising back above 65. In such prior cases, the price of oil continued lower.

The second graph below compares the price of the popular energy sector ETF, XLE, to the OVX index. As shown, like oil prices, XLE tends to do well once the index falls back below 65. However, XLE bucked the trend in 2020 as it rose when the index was above 65 and fell once it dropped back below 65.

, Commentary 12/1/2021

, Commentary 12/1/2021

Everyone Hates Bonds- Is That Bullish?

Per Reuters, the net bearish bets on U.S. Treasury ten-year note futures is now the largest since February 2020. In January and February 2020, bond prices were rising and yields falling as the economy was slowing and the Fed had begun cutting rates late in 2019. The advent of Covid in early March sent bond prices soaring, fueled in part by traders forced to cover their short bets. Today, like then, net shorts are extreme and some traders are starting to buy to cover their shorts as the new Covid variant and hawkish tones from Powell pressure stocks. History may not repeat itself, but it often rhymes.

Cyber Monday Disappoints

According to Adobe Analytics, sales for Cyber Monday were disappointing. Online sales for last Monday totaled $10.7 billion, a 1.4% decline from last year. While it is the first decline for Cyber Monday, one must factor that last year’s data was an anomaly due to Covid and consumers’ reluctance to go to stores. To wit, foot traffic is up 48% versus last year, but it is still down 28% from pre-pandemic years. Personal consumption accounts for approximately two-thirds of GDP. As such, holiday spending is an important component of growth. This year we must be careful reading too much into retail sales data. Inflation and shortages of many goods are resulting in timing and spending behaviors that are not comparable to years prior.