The Market Radar


We anticipate monitor and comment on market-moving global economic and geopolitical issues.  No dark side brooding, no wanting the world to end, no political rants.  Traders, investors, policymakers, or market observers can’t afford to ignore us.  In one word, perspicacity.

An educated citizenry is a vital requisite for our survival as a free people– Thomas Jefferson

By seeking and blundering, we learn. – Johann Wolfgang von Goethe

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Happy Birthday, America!

In Congress, July 4, 1776.

The unanimous Declaration of the thirteen united States of America, When in the Course of human events, it becomes necessary for one people to dissolve the political bands which have connected them with another, and to assume among the powers of the earth, the separate and equal station to which the Laws of Nature and of Nature’s God entitle them, a decent respect to the opinions of mankind requires that they should declare the causes which impel them to the separation. – Declaration of Independence

 

 

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The Mathematics Of Weight Loss

Fascinating Tedx Talks vid by Ruben Meerman, The Surfing Scientistespecially for those planning to drop a few after the fireworks.

Chemical Formula For Human Fat

C55H104O6

Where does the fat go after you lose it?   Listen up.

Well worth the 20 minutes of your time.  Might just change or even save your life.

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Markets Have Jumped The Shark

Jump The Shark

The beginning of the end. Something is said to have “jumped the shark” when it has reached its peak and begun a downhill slide to mediocrity or oblivion. It’s said to have been coined by Jon Hein, who has a web site, jumptheshark.com, and now a book detailing examples, especially as applied to TV shows. It supposedly refers to an episode of the TV show “Happy Days” in which Fonzie jumps over a shark on water skis, which Hein believes was the point at which the series had lost its touch and was beginning to grasp at straws. – Urban Dictionary

Welcome to the Twilight Zone.    Nothing seems real anymore — not the economy, not the markets, not the politics — and it is increasingly difficult to distinguish the difference between what is and what isn’t.  It truly feels the economy, markets, and the U.S. political system are in a period of suspended animation.

S&P500 to 4,000 On Money Supply Expansion 

Larry Lindsey,  the former director of the National Economic Council, under President Bush #43, came out on CNBC this morning making a market call of an S&P500 at 4,000, based solely on the expansion of the money supply via the Fed balance sheet.

LL_Money Supply

Click here to view the interview

Here’s a snippet,

“…I just did some math on what is happening to the money supply…when you have a rapid expansion of the Fed’s balance sheet that the main effect is on asset prices….so I simply do the extrapolation…of what might be expected to happen in stock prices.” – Lawrence Lindsey

The great Kelly Evans then jumps in putting a date on the 4,000 S&P target at year-end 2021.

There you have it, folks, a forecast of the creation of more than $7 trillion of wealth over the next 18 months based, not on productivity gains, innovation, nor economic growth, but by keeping the digital printing press running.

Can it really be that easy, folks?

Whether the wealth is real at the end of 2021 will depend on the purchasing power of the dollar, which we suspect will be lower than most currently expect.

Sounds like the market gurus are grasping at straws.

The New Henry Kauffman?

Lindsey’s call hearkens back to the days of Solomon Brothers’ economist and market guru, Henry Kaufman, using his money supply forecasts to predict interest rates,

The job of restraining money supply growth ”will be more difficult and involve a greater degree of monetary restraint and adverse development for interest rates than is now envisioned by the authorities,” Mr. Kaufman said. – NY Times,  July 23, 1982

Nothing but Happy Days ahead as long as we keep the press that prints the digital money rolling.  Just remember, folks, it was when the Fonz “jumped the shark” that ended Happy Days.

M2 Money Supply Growth

Does the following chart of the monthly year-on-year growth of the M2 money supply look normal, stable, or sustainable?   That, folks, is what Larry Lindsey and many of today’s “market gurus” and talking heads are using to rationalize the rally in risk assets.

Money Supply

What Is Money?

Fair enough. But economists can’t even agree on what defines money, how it should be measured, and what should be included in the monetary aggregates.  Should brokerage accounts, for example, where you can lever up on gold ETFS and still write checks on the account be considered part of the money supply?

During my graduate school days when monetarism was in crisis as the relationship between the money supply figures and GDP started to unravel, the Fed even toyed, or at least, researched the possibility of including equity mutual funds in the money supply figures.

Why This QE Is Different From The Past

The increase of the money supply via the Fed, rather than bank credit expansion,  though more stable, is potentially much more inflationary.  During the Great Financial Crisis (GFC) and, shortly thereafter, the financial system was impaired and credit — which also creates money — was contracting and the Fed moved quickly to offset the shrinkage of endogenous money.

No credit crunch during the COVID crisis, however,  as the Fed has backstopped, or announced to the world it would, almost anything and everything.  Credit is flowing just about as freely as the Mississippi River during storm season.

By the way, the CEO of a major restaurant chain called for the US government to backstop all restaurants’ rent payments on CNBC today.  Just wow, and how do you think that would be financed?  Unfunded pension plans are most likely next and it won’t stop there.

My good friend, Joe Calhoun’s  new piece, Here Come The Corona Capitalists. is a must-read for anyone  wanting to understand the feeding frenzy currently taking place at the public trough and what is to come.  Warning.  Prepare to be disgusted.

We are so far down this rabbit hole there is no returning.

Donut Shop Analogy

The Fed is adding more liquidity into the system at a zero percent IOER largely by removing financial assets from the same system and replacing them with reserves or cash equivalent balances.  These reserves can then be used to create additional credit or even more money.  We won’t get into it here but why would banks keep excess reserves that now earn zero or close to zero percent on their balance sheets?

The Fed is also indirectly financing the USG’s budget deficits, which include direct cash grant payments to American households.  No doubt much of this is needed and the right thing to do, in our opinion, but we can think of better ways to do it.   The timing and necessity of speed probably left no better alternatives.

If the next government doesn’t embark on a series of strong structural reforms, then we are really…you know, rhymes with shucks.

The Local Donut Shop And Financial Asset Inflation

Imagine your local donut shop, which is very busy on Saturday mornings with lines running around the block.   The donut shop serves only chocolate and maple donuts.   The chocolate donuts represent financial assets and the maple represent real goods and services.

The people in line, many of which already own several chocolate donuts, have certain preferences for chocolate versus maple donuts.

Before opening, a Brinks Truck pulls up and buys up half the chocolate donuts in the shop and those held by the customers standing line.  In addition, they hand out an additional $100 to everyone standing in the line that can only be spent in the donut shop.

Take a guess at what’s going to happen to the price of chocolate donuts when the shop opens?

The Fed, the Brinks Truck, has created a demand and supply shock for chocolate donuts or financial assets.  A positive demand shock by handing out cash and injecting more liquidity through its purchases.  A negative supply shock by removing chocolate donuts or financial assets from the donut shop and those of the customers in line.

All good until the price of maple donuts begins to rise, especially if some are imported from Canada with a now weaker currency,  as the mandate of Brinks company is to maintain a stable price and production of maple donuts.

A crude analogy, which we wouldn’t try to defend in front of a dissertation committee but it paints a pretty good picture of what, we believe, is driving asset markets.  This new supply-side economics has been going on for years but now it’s overdosing on steroids.

The End Game 

We don’t how this all ends but imagine the owners of the donut shop, which employs most of the customers in line and has made a killing but is now very dependent on the Brinks Truck showing up every Saturday morning.  The owners have used the easy money policy of Brinks to help finance a very lavish lifestyle and have borrowed money to expand production.

The Brinks company sees the price of maple donuts rising.  Can they now pull back and stop showing up on Saturday morning without collapsing the donut shop?   We don’t think so.

Infinite money demand or the notion velocity remaining an asymptotic function approaching zero is not a forever game. The risk is increasing it’s closer to the ninth inning than the first.  What is truly alarming is that monetary policy is such a black box that nobody knows, including Jerome Powell and the rest of the monetary authorities.

Gold, baby.

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More Companies Jumping On Facebook Boycott Train

Advertisements for hundreds of brands are due to disappear from Facebook and Instagram on Wednesday, as a wide-ranging ad boycott against the world’s largest social media company is taking effect.

Last week, the Anti-Defamation League along with several civil rights groups had launched the campaign “Stop Hate for Profit”, asking advertisers to pause their spending on Facebook and Instagram in the month of July in protest of the company’s lackluster response to hate speech and other defamatory content across its platforms.  – Statista

Facebook

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“Capitalism Is Dead”

This sorta sounds familiar.

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Canadian Home Buyers In Bidding Wars

About that deflation……….

Lauren Haw, CEO of Zoocasa, speaks with Financial Post’s Larysa Harapyn about the state of the housing market across the country.

To read this story and more: https://business.financialpost.com/
Subscribe to watch more Financial Post videos:
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The CK-35: How NOT to Build a Portfolio

By Carol K.

On Monday, June 29th, I sold six holdings from my CK-35 portfolio. For the uninitiated, the CK -35 was a “paper” portfolio (not real money), of individual stocks selected by me, at the urging of GMM head honcho, Gregor Samsa.

CK_Jun30

Personal Portfolio

After a rough start managing my personal portfolio around 2013, I’ve dramatically turned my performance around by devoting the necessary time and effort to learning as much as I can about investing, portfolio management, and the importance of having a disciplined system. I have learned one must clearly define the goals for the portfolio.

First, is define your time horizon. Are you a long term buy-and-hold investor or a short-term trader looking to hop in and out of stocks or ETFs and perhaps scalping few dollars along the way?

Second, is your primary goal capital appreciation (growth), dividend income, or a combination of the two?  I believe a mix of pure growth stocks coupled with select high-quality dividend-paying stocks offers a less volatile, more stable, and sustainable portfolio for the average self-directed investor (SDI).

I plan to address the significance and my preferences in-depth in a future article, as it is a cornerstone of my evolving investment philosophy.

The CK-35:  A Flawed Project

First, a little background on the creation of the CK-35 portfolio.

As a trader his entire career, I finally convinced Gregor that one could make lots of money picking individual stocks with a longer-term buy and hold strategy.  Moreover, it is much less work and aggravation than whipping and driving in the market on a daily basis, especially after the machines are now dominating trading.

After a few exchanges, he convinced me to select my current top stock picks, and after a long debate, we settled on thirty-five stocks as the optimal number of holdings.  We came up with the idea of the CK-35 and then put together the hypothetical portfolio based on some of the top holdings from my portfolio and watchlist of stocks, which I maintain to add at appropriate valuation levels.

Though CK-35 has significantly outperformed the S&P500 for the year, why isn’t this group of high-quality stocks not up more YTD at what appears to the tail end of a roaring 11-year bull market?

There are several reasons.

First, I didn’t take seriously or plan for what Gregor repeatedly tried to warn us all in his January 31st post about some new flu out of Wuhan, China. He speculated it could quickly become a global pandemic, causing both a major supply and demand shock to the global economy.  In hindsight, he was spot-on in his call on what would later become known as the COVID-19 global pandemic.

Gregor also strongly urged all of us to sell our riskier holdings (stocks) and hide out in cash and gold until the anticipated market upheaval had passed.  Dismissing his warning on the pandemic as part of his seemingly (to me, at the time) “perma-bear nature” was one of my first mistakes.

The economic and political consequences of COVID-19, which led to shuttering much of the U.S. and global economy, coupled with my stubborn refusal to take the warnings seriously, hurt the performance of the CK-35 portfolio.

More importantly, however,  the nature of how the CK-35 hypothetical portfolio was constructed does not reflect my investing philosophy or practice.  I would never, for example, buy full positions all at once to create a new portfolio.

I learned the painful lesson long ago that valuation does matter. Part of my due diligence and selection process for stocks is determining what constitutes fair value for a company’s stock.

There are a plethora of finance textbooks devoted to the topic of valuation and won’t go into the myriad of valuation metrics and algorithms.  Nevertheless, I rely primarily on trusted analysts or publications that I have found to have good track records and have helped me make money over the years.

Morningstar Analysis

I generally use Morningstar’s Fair Value price as a baseline, as the firm’s analysts tend to be more conservative in arriving at a fair value stock price.

In the spirit of Benjamin Graham and Warran Buffett, I also look for a valuation cushion in determining a stock’s fair value. My decision to start or add to a position always takes into account the Margin of Safety (MOS) at a given entry price.  Buying high-quality stocks with a reasonable margin of safety assuredly generates better portfolio returns over the long-term.   To reiterate valuation matters and purchasing stocks near or below fair value with a margin of safety is essential to a portfolio’s long term success.

The way the CK-35 portfolio was constructed ignored all of the above.  All the positions were hypothetically purchased in full, with equal weights, at the year-end 2019 closing price.  Most of the stocks were trading at or near all-time highs.

The market continued to rise until February 19th until the traders began to internalize the economic fallout of COVID-19, then sold off fast and furious, setting a record for the deepest sell-off in the shortest timeframe.

Having a well-defined selection system coupled with the patience and discipline to see it through are hallmarks of the most successful stock pickers and investors.

High-Quality Stocks

Nevertheless, there are some stocks, which almost always seem to trade at a premium to their fair value price.  Most are high-quality names, which rarely experience the outside or extreme drawdowns, as was the case for many in the February 19th to March 23rd  30 percent plus market sell-off and the 2018 Nightmare Before Christmas mini bear market.

In these stocks, I don’t have a problem paying a premium and keeping some dry powder to deploy the cash and pick them up on the rare pullback during market sell-offs.

Remaining Cautious – Pandemic And Politics

Most states are now at some level of economic reopening, with several, including Florida and Texas, now backtracking as their COVID cases spike.

I anticipate extreme volatility through the summer and fall months. I suspect the Q3 earnings reports will come in weaker than expected as more of the uncertainty and economic fallout of the COVID crisis is realized in the bottom line of publicly traded companies.

Moreover, the markets will have to come to terms with the likely outcome November general election, which results in Biden victory and the Democrats taking back the Senate.

There is also heightened political risk of a contested election, a low probability/high impact event given the current polls, however.

A Democratic sweep of both houses of Congress and the White House will result in higher corporate and capital gains taxes in 2021.

Candidate Joe Biden has unequivocally stated, if elected, he will seek to raise the corporate tax rate from 21% to 28%, which is not good, to say the least,  for U.S. based companies.  He is also on record in favor of making the capital gains tax similar to personal income tax rates.

The market seems to be betting on the Republicans holding the Senate, which can block the Biden tax plan. Still, as we move closer to the election day, I suspect volatility will pick up, and some significant tax selling to take place in the late Q3 and into Q4.

Sectors

Nevertheless, I believe the technology and healthcare sector will outperform throughout the rest of the year as many companies will continue to thrive regardless of any economic fallout brought about by the pandemic or politics.    I am less comfortable with the financials, industrials, materials, and consumer discretionary sectors, with a few notable exceptions.

Again, I want to thank Gregor and the staff at Global Macro Monitor for providing me this platform to share my ideas and help self-directed investors, such as myself, to achieve their financial goals by focusing on high quality, long term equity investments.

While we plan to shutter the CK-35 hypothetical portfolio, I hope you will stick with me as I plan to write a series of posts sharing some of my favorite stock ideas along with my equity selection process from start to finish.  In all things from constructing a screen to identify stocks for a more in-depth research dig, and my due diligence algorithm for constructing a watchlist of vetted stocks and ETFs to purchase attractively valued shares.

The information in this post represents our own personal opinions and are not investment recommendations.  We may or may not hold positions or other interests in securities mentioned in the post or have acted upon what has been written.  

All information posted is believed to be reliable and has been obtained from public sources believed to be reliable. We make no representation as to the accuracy or completeness of such information.

 

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Empire State Building & The Future Of Office Buildings

Good view.  Watch this space, it could be the next big negative catalyst for the financial sector and economy.


New York City’s famed Empire State Building symbolizes the challenges many commercial spaces face as the U.S. tries to reopen and get back to business. Subscribe:
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A Colossal Failure Of Presidential Leadership

You probably already know we are not a big fan of President Trump here at GMM, not because we are Democrats or Republicans, liberal or conservative, but it is our vehement disgust over his incompetence.  Of course, the COVID pandemic is not his fault but he is fully responsible for the country’s abject and relative failure to contain and control it.

The data speak in the following charts.  What is stunning about the latest upsurge is that it excludes the crisis in New York city that dominated the numbers in the first wave.  There. Is. No Excuse!

Face Masks As A Political Symbol

Nothing so absurdly sums up more the President’s incompetence and gross negligence, which has caused tens of thousands of undue deaths and protraction of the health and economic crisis, than his mixed messaging and politicizing something so simple as wearing a face mask.  Maybe not so mixed.

Mr. Bender: You’ve commented on Biden’s mask a few times, and a couple of reporters who wear masks. Do you view that as a protest of you? Do you feel like people wear masks to show their disapproval of you?

Mr. Trump: It could be, yeah. It could be. But it could also be they feel better about it. I mean, I’m okay with it. Look, I’m okay with it. But the mask is a double-edged sword and I see it. People come in, they’re talking through the mask for hours. They probably don’t clean them after, you know, they get a little cocky, right? Then they take the mask, they put their finger on the mask, and they take them off, and then they start touching their eyes and touching their nose and their mouth. And then they don’t know how they caught it.  — WSJ Transcript Of President Trump’s Interview, June 18th

Un-freaking-believable!  The President of the United States, folks.

 

Covid_1_June29

Covid_2_June29

The above data are normalized and take into account population size so no bullshit that the U.S. has a larger population or is testing more (look at death curve).

Heavy Political Cost

The American people are onto the President’s bungling of the crisis.  A president that shows strong and decisive bipartisan leadership during a crisis usually skyrockets in popularity.  I read somewhere, but couldn’t document it, that President Clinton was kind of disappointed he was never able to exhibit his true leadership skills because the country was never tested with a major crisis under his watch.

President Trump’s dithering, politicizing almost all aspects of the crisis, and flip-flopping are now extracting a huge political toll not only on his prospects for re-election but the Republican hold on the Senate.

Politics_June29

Iowa Senate Seat Now In-Play

This was a real shocker as we clicked it on today.  Senator Joni Ernst was favored with an almost 70 percent probability to retain her Senate seat a little more than one month ago. Today, the market is pricing it at 50 percent probability.

The Democrats could be looking at a filibuster-proof Senate majority,  holding close to 60 Senate seats on January 1, 2021.  Stunning.

Politics_2_June29

 

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Biggest Losers In Social Media Ad Boycott

Great chart from Statista on which companies are at risk of getting hammered by social media ad boycotts.  GMM’s Coach C has been all over us about this one, and early,  selling and flagging the companies that will be hurt.

 

FB_Boycott

NYT_Boycott

boycott of advertisers on social media is gaining momentum, and Facebook is the primary target. Marketers are expressing unease with how it handles misinformation and hate speech, including its permissive approach to problematic posts by President Trump.

Who’s doing what. The boycotts have followed a call by the advocacy group Stop Hate for Profit, which is keeping a running list of participating companies. Over the weekend, Starbucks and Diageo said they would pause advertising on all social media platforms. They’re among the biggest spenders on Facebook ads: Starbucks spent $95 million and Diageo $23 spent million on the platform last year. Other companies have boycotted Facebook specifically, including Honda America, Levi Strauss and Patagonia.

Who’s next? Procter & Gamble, the world’s largest advertiser, said it wouldn’t rule out a pause on Facebook ads. (Its big rival, Unilever, is stopping ads on Facebook, Instagram and Twitter through the end of the year.) Big ad agencies generally take their orders from clients, but they also have leeway to steer spending to certain platforms over others. – NY Times, Dealbook

NYT_Boycott_2

More commentary by Statista,

Starbucks became the latest company to hit the pause button on social media advertising on Sunday, joining an ever-growing list of major brands that pulled their ads from social networks, and Facebook in particular, in an attempt to push for stronger action against hate speech on the part of social media companies.

“We will pause advertising on all social media platforms while we continue discussions internally, with our media partners and with civil rights organizations in the effort to stop the spread of hate speech,” Starbucks wrote in its official announcement of its decision, which puts the coffee chain alongside companies such as Coca-Cola, Unilever, Verizon, Patagonia and Levi’s, to name just a few. As opposed to the other companies mentioned above, Starbucks hasn’t officially joined the “Stop Hate for Profit” initiative, which singles out Facebook for its inaction against hate speech especially during the recent protests for racial justice in America.

While several companies have paused social media advertising altogether, Facebook is currently taking the brunt of the boycott, as it is seen as the epitome of what is wrong with social media these days. As our chart shows, the company’s ad revenue amounted to nearly $70 billion last year, dwarfing the ad sales of its social media competitors. – Statista

 

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