Category Archives: Silver Rounds

DNY59The major market averages rebounded during the first half of yesterday’s trading day on a better-than-expected GDP report for the second quarter, but the rally fizzled in the afternoon when technology stocks resumed their downtrend. The relentless selling in the sector that started the day after the Consumer Price Index (CPI) report for June was released on July 11 is probably closer to its end than just beginning. The sector was simply overbought, as the euphoria over the benefits of artificial intelligence (AI) reached a fever pitch, and the sector needed to revert to the mean. FinvizCoincidentally, investors were also looking for a good reason to broaden the bull market rally beyond technology, which came in the form of an extremely favorable inflation report, affirming the Fed will likely begin easing policy no later than September. That opened the floodgates to the ongoing rotation. The Magnificent 7 technology stocks and many other names in the sector that have been riding the AI wave were clearly exhibiting extreme valuations, but that is not the definition of a bubble, as many disgruntled bears are trying to claim. Nor is the correction in the sector a bubble bursting. Valuation is a horrible timing tool for markets, sectors, and stocks, as all can remain overvalued or undervalued for extended periods of time. To form a bubble, you need excesses in the economy and markets beyond the valuation of one sector, but they don’t exist. BloombergThe economy proved its resilience once again by growing 2.8% in the second quarter, according to the initial estimate by the Bureau of Economic Analysis. That was well ahead of the consensus expectation for 2% growth, but it is important to note that inventory building contributed 0.8% to the overall number. Still, when we exclude inventories, government spending, and trade, which results in “core” growth, the number was a healthy 2.6%. Most importantly, consumer spending rose 2.3% and was the largest contributor to growth. Despite some signs of fatigue, the consumer is alive and well. BloombergThe GDP price index (inflation) increased at a 2.3% annual rate during the quarter, which should comfort the Fed as it embarks on an easing cycle, because it can ease for all the right reasons. The most important one is that the rate of inflation is gracefully falling to its target of 2% at a much faster rate than the Fed forecasted in its more recent Summary of Economic Projections. The soft landing taking place is the primary reason that the correction in the technology sector is probably nearing its end. I surmised last week that we would see a 10% decline in the Nasdaq 100 (QQQ), which would bring the index down to approximately $450 before we found support. That support would coincide with the Relative Strength Index (top of chart) falling from an extremely overbought 80-plus into oversold territory below 30. Yesterday, the index closed at $458, and the RSI fell to 33. Stockcharts While I think we are close, I am not inclined to load the boat on the largest technology names, and there is no guarantee we don’t see this index fall to a more deeply oversold level that tests the 200-day moving average at $425, although I see that as a low probability. Still, these companies need to grow earnings into what are still expensive stock prices, which means we probably see churn between here and their 52-week highs in the weeks and months ahead. Meanwhile, the rest of the market continues to narrow the performance gap, which has been my expectation all year long. This improvement in breadth is a sign of strength, reinforcing the foundation of the bull market. The Russell 2000 index (IWM) has nearly closed the gap with the Nasdaq 100 on a year-to-date basis. Portfolios that have been well diversified across market caps and sectors should be enjoying outsized gains as this rotation takes place. Stockcharts Continue reading →

J Studios/DigitalVision via Getty ImagesBy Chris Turner Does Donald Trump really want a weaker dollar? Q: Why is the issue of weak dollar policy back in the headlines now? A: Bloomberg Businessweek published an interview with Donald Trump on 16 July. His opening gambit focused on problems in the US manufacturing sector and the ‘big currency problem’ that the US faces today. He singled out USD/JPY and USD/CNY, focusing on the unfair competitive advantage that a company like Komatsu has over Caterpillar. These comments and his choice of JD Vance as running mate point to the focus on key mid-western swing states – with a heavy manufacturing presence – in the run-up to November. Q: What does a weak dollar policy actually mean? A: The US Treasury (i.e. the politicians) is in charge of FX policy and can express its views on the dollar through key G7 & G20 Communiques. Over the years, the language in those has settled on the need for flexible exchange rates which reflect underlying fundamentals and the need to avoid competitive devaluations. US Treasury Secretaries can be asked their views on dollar/dollar policy and were Donald Trump to win in November, the choice of any potential Treasury Secretary will be important for markets. So you might have, for instance, Jamie Dimon, who’s unlikely to seek a weaker dollar, versus Robert Lighthizer who’s seen as very protectionist and who could pursue a weaker dollar policy. Q: What other tools does the US Treasury have to impact FX markets? A: In theory, the US Treasury could intervene to sell dollars and buy unlimited FX, but that seems very unlikely. More in focus will be the use of UST’s semi-annual FX report to label China a currency manipulator and threaten/extend tariffs should China weaken its currency any further. That is what UST did in August 2019 when China gave into market pressure and allowed USD/CNY to trade higher. The chart below shows that the manipulator tag did not make much difference to FX markets, although likely created more space for US tariffs. USD/JPY is different. Tokyo wants a lower USD/JPY and is currently intervening to achieve it. The US will not be seeking particular tariffs for Tokyo over its FX rate/policy. But USD/JPY will probably be at the forefront of any adjustment were the weak dollar policy theme to gain traction. USD/CNY versus the broad dollar trend Source: Refinitiv, ING The macro context is key Q: Should we distinguish between Donald Trump wanting a stronger CNY/JPY and wanting a broadly weaker dollar? A: Yes. Mr Trump’s focus is on the competitive advantages enjoyed by China and Japan from weak currencies. During his last Presidency, he avoided going near a weak dollar policy. Assuming he has sensible people at the US Treasury, the risk of a weak dollar policy destabilising US Treasuries, driving borrowing costs up and equities lower, would likely discourage the UST from actively pushing for such an FX policy. Q: Will US Treasury FX policy make much of a difference anyway? A: The macro context will be key. Were Mr Trump to win the Presidency and Congress and then extend tax cuts while broadly raising protectionism to a new level, then this would be a dollar-positive policy mix. And the ongoing threats against the alleged undervalued renminbi (while still present) would not have much impact on the FX market. Should the economy weaken for whatever reason, the pressure to seek more stimulus through a weaker dollar will grow. In reality, a newly-elected Trump cannot try to suppress China (= less CNY demand), create four years of unprecedented US prosperity (= stronger USD), and really expect USD/CNY to trade lower. Q: If UST did try to push a weak dollar policy, how far could the dollar fall? A: We have models that try to gauge ‘risk premia’ in pairs like EUR/USD. For example, how far could EUR/USD trade away from levels suggested by short-dated rate spreads, yield curves and global equity markets – inputs which normally work quite well in determining short-term pricing. Our chart below shows that over the last 10 years, EUR/USD has traded +/- 5-6% around its short-term fair value, which could be a way to isolate/evaluate the impact of any weak dollar policy from the UST. EUR/USD deviation from Financial Fair Value Source: ING Content Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user’s means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more Original Post Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks. Continue reading →

The US economy grew at a faster than expected pace in the second quarter.The Bureau of Economic Analysis’s advance estimate of first quarter US gross domestic product (GDP) showed the economy grew at an annualized pace of 2.8% during the period, well above the 2% growth expected by economists surveyed by Bloomberg. The reading came in higher than first quarter GDP, which was revised down to 1.4%.Meanwhile, the “core” Personal Consumption Expenditures index, which excludes the volatile food and energy categories, grew by 2.9% in the first quarter, above estimates of 2.7% but significantly lower than 3.7% gain in the prior quarter.The data’s release comes as investors try to gauge when the Federal Reserve will start cutting interest rates and if the central bank can achieve a soft landing, where inflation comes down to its 2% target without a significant economic downturn.Entering Thursday, markets had priced in a 100% chance the Fed would cut rates by the end of its September meeting.”The data today will reinforce the notion that the Fed has the benefit of time,” Renaissance Macro head of economic research Neil Dutta wrote in a note following Thursday’s release. “In the Fed’s mind, there is no need to rush with private domestic demand growing at a solid pace over the second quarter. July remains a set up meeting for September.”Soccer Football – FIFA World Cup Qatar 2022 – Group B – Iran v United States – Al Thumama Stadium, Doha, Qatar – November 29, 2022 Fans display a United States flag in the stands before the match REUTERS/Fabrizio Bensch (REUTERS / Reuters)Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.Click here for in-depth analysis of the latest stock market news and events moving stock pricesRead the latest financial and business news from Yahoo Finance Continue reading →

(Bloomberg) — The assumptions that have driven this year’s global financial markets are being rapidly rethought.Most Read from BloombergIn bond and currency markets, investors are racing to redeploy money amid mounting doubt over the outlook for the US economy, which has led to speculation that the Federal Reserve may need to cut interest rates faster or deeper than planned. Helping to drive the shift: A weakening American consumer, which is showing up in a rash of disappointing corporate earnings.At the same time, stockholders have suddenly grown skeptical that technology companies’ massive investments in artificial intelligence will pay off any time soon. As a result, investors have been frantically dumping shares of big winners such as Nvidia Corp. and Broadcom Inc.Copper and other industrial metals are also reversing a recent run-up, with China’s slowdown playing a role in their decline along with the worries over the US and tech.“It does seem that an unwinding has begun of popular trades that brought valuations to stupid levels,” Louis-Vincent Gave, chief executive officer of Gavekal Research, wrote in a note to clients Thursday.At Apollo Global Management, chief economist Torsten Slok told clients on Thursday that “if the economy starts slowing down, the speed of the slowdown becomes essential. A faster slowdown would have negative implications for earnings and increase the probability of a selloff in stock markets and credit markets.”Here’s a look at some of the notable market moves and the underlying assumptions that have changed:Government BondsIn the bond market, this bleaker global growth outlook is bolstering wagers on rate cuts. Investors are snapping up short-dated securities amid concern monetary policy is proving too tight, acting before borrowing costs come down.At one point on Thursday, the yield on the two-year US Treasury note traded just 12 basis points above the 10-year — the closest the market has come to ending an inversion in place since the middle of 2022, and a far cry from a spread of more than 50 basis points a month ago.While the chances of rate cut by the Fed at next week’s meeting look very slim, the market is now pricing in deeper cuts later this year.Traders see about 30 basis points of easing by September, suggesting about a 20% chance of a supersized cut. More than 70 basis points of cuts are seen through 2024, seven basis points more than on Wednesday.The repricing is also bolstering the yen, one of the biggest victims of tighter monetary policy in the US over the past two years. The Japanese currency has rallied around 6% from a low touched earlier this month, by far the biggest advance across the Group-of-10 peers.Investors have liked to borrow in the low-yielding yen to fund investments in higher yielders such as Mexico’s peso or the Australian and New Zealand dollars, but now reckon change is underway with the gap between the Bank of Japan’s benchmark and its counterparts set to narrow.Stock marketsUS and European equity markets have been driven this year by a consensus that inflation was coming under control, allowing the Fed to ease monetary policy later in the year and thus avoid a recession.By mid-May, the Stoxx Europe 600 Index was sitting at a record, giving investors a 12% return to date in 2024. The S&P 500 set a record as recently as July 16, with tech leading the charge.Now many investors are taking the view that the Fed is falling behind the curve — not only is inflation quieting, but the economy is weakening too much. China is already easing monetary policy amid a slump in the world’s Number 2 economy.Hence the predictions from some market watchers that the Fed could indeed act as soon as next week to lower borrowing costs or be forced to do more later if policymakers wait.Almost a third of S&P 500 companies have reported second-quarter results so far, and the spotlight is increasingly on the sales figures, where the slowdown in economic growth is starting to become visible. Only 43% of companies have managed to beat revenue expectations, which would be the lowest reading in five years, according to data compiled by Bloomberg Intelligence.And that AI frenzy no longer looks so positive. Investors were taken aback this week how much Google parent Alphabet Inc. is spending on the technology, with little to show for it yet in terms of revenue.The Nasdaq 100 Index has sunk almost 8% from its July 10 record, wiping $2.3 trillion off the market value of companies in the benchmark. The index is still up 13% this year, and an investor survey by Bank of America Corp. this month showed that positioning in the so-called Magnificent Seven was the most crowded trade since exposure to growth stocks in October 2020.“Valuations of mega-cap tech were increasingly impossible to justify with anything but the most heroic forecast for future growth, earnings and monetary policy,” said James Athey, portfolio manager at Marlborough Group. “It’s inevitable that these kinds of extremes cannot persist.”MetalsMounting pessimism about demand and the tech industry is also infecting the metals market.Copper fell below the $9,000-a-ton threshold for the first time since early April and is down by about a fifth since reaching a record in mid-May.What’s changed there is investors who previously bought the metal on concerns of tightening supply and higher usage in data centers and other areas are shifting to fretting about rising inventories and weak conditions in the Chinese spot market.Tin and Aluminum have also fallen.What Bloomberg’s Strategists are Saying…“In the perennial tussle between fear and greed, the former has seized the upper hand as a raft of consensus positions have suffered losses this week. It all represents a collective trip to the pain cave, one of those periodic episodes when positioning is just about the only fundamental that matters as investment risk gets reduced across the board.”— Cameron Crise, macro strategistSee MLIV for more–With assistance from Sagarika Jaisinghani, Constantine Courcoulas and Mark Burton.Most Read from Bloomberg Businessweek©2024 Bloomberg L.P. Continue reading →

Balefire9/iStock via Getty ImagesGold is now in vogue among investors and mainstream financial media. The metal has captured much attention as it recently surged to a new all-time high of $2,488. It is trading at about $2,400 as of this writing, up 18% YTD. And it has gained 47% since bottoming at 1628 in October 2022. I have read many commentaries in financial media citing strong central bank buying as a key reason for gold’s surge and as a signal for more gains ahead. However, these developments made me skeptical. In my view, none of the articles considered central bank buying in the proper context. More specifically: How much have central banks bought relative to the total gold tradable market cap? How much have they bought relative to total trading volume? How useful has their buy/sell behavior been as an indicator of gold’s current and future price trend? In other words, are the central banks “smart money,” as many would have us believe? Answers to these questions took considerable research and calculations. Publicly available data are inconsistent. The data I mined (pun intended) surprised me. I had to check the numbers several times. Surprisingly, the best data I could find shows the thesis of central bank gold buying as a reason for the rally is in doubt, if not outright wrong. There is even evidence that central bank gold buying has served as a good contrarian indicator. Central Bank Gold Buying – The Numbers Do Not Explain the Rally Let’s begin with a look at central bank gold net purchases as a percentage of total tradable market cap. The table below depicts key metrics gleaned from the World Gold Council website, which I believe is the most authoritative publicly available source. Worldwide central banks added a net 2,229 tonnes, or 71,663,910 ounces to their gold reserves during 2022-2023 and the first five months of 2024. As an aside, Bullion Vault data shows a much lower number for net purchases, by about 50%. Therefore, the net purchase metrics below may be overstated. Author, World Gold Council, Kitco The data show that over the past two and a half year buying spree, central banks accumulated $172.293B, or 2.99% of the total tradable gold market cap of $5 trillion. It is hard to see how this would move the price needle much, especially given bank purchases were spread out over two and a half years. Another gauge is total net purchases relative to the total gold market. The chart below shows the distribution of all gold assets in the world. The total is approximately $12 trillion according to the World Gold Council. The central bank share of the total is about 17%. Their buying during the period equals 1.2% of the entire gold market. In terms of their own reserves, banks tacked on 7.4% of their total of approximately $2 trillion (at year-end 2022). That means the banks added about 3% per year to their total reserves during the past 29 months. Again, this is not a spectacular number when placed in this context. World Gold Council Central Bank Gold Buying Relative to World Market Liquidity Next, let’s look at central bank buying versus total trading volume. If central banks were buying large sums relative to what is available on major trading exchanges, it would drive up prices. The table below shows the relevant metrics. Author, World Gold Council, Tradegoldtrading.com During the last 29 months, central banks accumulated gold at an average of about $61B per year. That compares with annual average trading volume (using 2023 data of $162.63B per day) of about $46,512B or $46.5 trillion. Hence, central banks purchased only 0.13% of total annual liquidity. Another way to look at it is that during an average 12-months of one of the most aggressive buying sprees ever, central banks bought a little more than one-third of the daily world gold trading volume. These numbers surprised me. After more digging, I found the chart below. It shows gold is the second most liquid asset – behind the S&P 500 and ahead of the highly liquid U.S. T-bill market. It supports the idea that central bank buying has less impact on the market than we expect. World Gold Council Indeed, the World Gold Council states: The size of the market allows it to absorb large purchases and sales from both institutional investors and central banks without resulting in price distortions. And in stark contrast to many financial markets, gold’s liquidity has not dried up, even during times of financial stress, making it a much less volatile asset.” This further supports the idea that central bank transactions have less much impact on gold’s price than most financial media suggest. Central Banks Are Not Smart Money Now let’s turn to the question of whether one should follow central bank buying and selling to inform investment decisions. Many gold pundits frequently tell us that central banks are “smart money.” Yet, once again, the data tell a different story. The chart below shows the total world central bank net gold purchases versus the year-end gold price since 2002. Author, SD Bullion, World Gold Council Here are takeaways regarding how central banks fared with their buying and selling decisions: From 2002 through 2008, central banks were consistent net sellers of gold while the metal more than doubled from $343 to $865. Central banks proved to be a good contrarian indicator of gold’s direction. Furthermore, their selling failed to deter gold’s strong advance. In 2009, banks loaded up and added a net of 676 tonnes. Gold increased to $1,104 by year-end. Central banks were smart money. From 2010 through 2012, central banks added a cumulative 987 tonnes while gold went to $1,664 for a gain of $471. Central banks were smart money. From 2013 to 2015, the banks added a whopping 1,636 tonnes. They accelerated purchases at the top during 2015, adding 913 tonnes. Yet, gold dropped that year from $1,199 to $1,062. Central banks were a good contrarian indicator. Gold declined despite strong central bank buying. After gold bottomed in 2015, central banks had less enthusiasm, adding less than average, or 104 tonnes in 2016. Yet, by the end of 2017 gold advanced to $1,296. The banks added 523 tonnes that year, helping to fuel the advance. Yet gold was flat again in 2018 and ended the year at $1,282. Banks were not smart money. Central banks added 1,475 tonnes during 2018-2020, while gold went to $1,878 for a gain of 45%. This could have been a causative factor for the gains. The banks were smart money. From 2021 – May 2024 central banks added a whopping 2,679 tonnes. During that time, gold rallied to its current level of about $2,400. However, as shown above, the purchase volume represented a small percentage of the market. The banks were smart money. In the seven sub-periods we examined, central banks proved to be smart money in four cases. They were not smart money in three cases. in fact, the latter included a seven-year period and a three-year period when they were a contrarian indicator. Out of the twenty-two and half years examined, the central banks were on the correct side of the market for 12 years, neutral during one and wrong during 10. That is a little better than a coin flip, but hardly smart money. Further, the data suggests their buy and sell decisions had negligible or at least inconsistent effect on gold’s price. Astonishment and Problems Admittedly, I was astonished by these findings. I had to check my numbers several times. Almost everything I have read over many years supports the belief about central banks’ strong influence on the gold market. There is one exception. I credited Robert Prechter’s Socionomic Theory of Finance in the comments section of one of my earlier articles. Prechter called out central bank actions in the early 2000s as a contrarian indicator. How can it be that central banks have a negligible impact on the gold market? The data above might be wrong. It is very possible central banks have bought much more gold than they have admitted to. Most believe that Russia and China have not been honest with their reporting. To be sure, Bullion Vault noted: Many analysts believe China’s national gold bullion holdings are larger than the reported total, perhaps twice the size if you compare the country’s visible private-sector demand against its gold mining output and bullion imports. The excess supply must have gone somewhere, and the People’s Bank has in the past kept the changes in its gold holdings a secret, suddenly announcing huge increases in its gold reserves in 2009 and 2015.” Another possibility is that options and futures traders sometimes manipulate the market. There are prominent gold experts who fervently believe this. However, gold is a vote of no confidence for fiat currencies. Its success undermines the goals of central banks who want stable currencies. Therefore, if anything, central banks would be inclined to depress gold’s price rather than fuel its advance. It is also possible that I am missing something in my analysis. There are many smart readers on SA, so I welcome your insights! Why I Own Gold: An Effective Component of an All-Weather Portfolio Regardless of the actual numbers, I don’t own gold because central banks are accumulating it. Those who follow me know I utilize an all-weather portfolio approach. Gold is a core holding, with a 15% allocation in my portfolio. I have owned it for more than a decade and will continue to hold it for the long run. Previous SA articles, including my all-weather portfolio articles, provide more details. For those who want the highlights, here is a recap: Solid long-term returns. Since 2000 gold has returned 8.7% per year, outperforming the S&P 500’s return of 7.4%, per VanEck. Since 1971, after Nixon devalued the dollar, gold has returned 8.3% per year. Excellent portfolio diversification. Since January 2000, gold’s correlation is 0.046 and 0.447 with U.S. equities and Global Treasuries ex-US respectively, according to the World Gold Council’s calculator. An Ibbotson study regarding the benefits of precious metals diversification stated: “Based on the forward looking resampled efficient frontiers, asset allocations that include precious metals have better risk-adjusted performance (as measured by Sharpe ratio) than asset allocations without the precious metals. Investors can potentially improve the reward-to-risk ratio in conservative, moderate, and aggressive asset allocations by including precious metals with allocations of 7.1%, 12.5%, and 15.7%, respectively. These results suggest that including precious metals in an asset allocation may increase expected returns and reduce portfolio risk.” An effective currency and debt hedge. Over the past 30 years, the correlation between the U.S. dollar and gold was -0.65. Another study found a high correlation of 0.93 between gold and U.S. debt from 1982-2010. The Financial Times interviewed Alan Greenspan in 2014. They asked, “Do you think that gold is currently a good investment?” Greenspan replied: Yes, remember what we are looking at. Gold is a currency. It is still, by all evidence, a premier currency. No fiat currency, including the dollar, can match it.” Long-term prospects. In 2022 with gold at $1940, I presented why gold could reach $5,000 in three to six years. I cited the monetary stock as a factor that could justify a much higher gold price. I also showed the Dow to Gold ratio, another sentiment measure that favored gold for the longer-term. What Really Drives the Price of Gold – Sentiment A final comment before wrapping up. For those who haven’t read it, I discussed the fallacies of using fundamentals to explain or predict gold’s price movements in Where is Gold Going? Watch Sentiment, Not Fundamentals. The data here on Fed gold buying further supports this thesis. As a result, I will continue to watch sentiment via the Commitment of Traders (COT) report and Elliott Wave Theory. Conclusion Central bank gold buying doesn’t appear to be as impactful nor relevant as many believe. But there are other very good reasons to own gold as part of a well-diversified portfolio. But it has experienced long periods of stagnation and at times can be volatile. As such, patience is required. I look forward to your comments. Continue reading →

LilliDayIt’s a human shortcoming to favor simple explanations for the business cycle. The notion that reliability and timeliness can be forged in one indicator endures, but recent history has hammered this approach, reminds a new commentary from Axios. “Recession indicators don’t work like they used to,” the news site reports. “Many of them have been tripped, yet no big downturn has materialized. The quirks of the pandemic business cycle – driven by a rolling series of disruptions to supply and demand – are the likely culprit.” Among the indicators that have failed to provide timely signals of an approaching recession: the yield curve, the Leading Economic Index, and temporary help employment, which Axios notes “was big tell” in the past but has stumbled recently. It’s tempting to blame the after-effects of the pandemic for the false signals. To be fair, much has changed for the business cycle since covid upended the usual routine, and it would be naive to minimize this factor. But it’s also fair to observe that no one business-cycle indicator has ever been flawless. That’s always been true, and always will be. Forecasting, as the saying goes, is hard, especially about the future. Fortunately, there are techniques to minimize the noise, maximize the signal and boost the timeliness and reliability of recession analytics. It starts with a basic premise that’s been documented for decades in empirical analytics: combining modeling analytics enhances results. Regular readers of CapitalSpectator.com know that your editor is a big fan of ensemble methodologies for estimating real-time recession risk. As I wrote in 2016, “we should be wary of relying on market signals alone for estimating recession risk.” Eight years later, the same principle applies, and for a good reason: it works. Or, to be more accurate, it fails less often than the usual suspects. Granted, it’s impossible to develop a genuinely flawless methodology. Indeed, there’s a crucial tradeoff that must be recognized in recession analytics: timeliness vs. reliability. The two are in conflict with one another. Although there’s no one perfect answer for calibrating this relationship in modeling, ignoring this hard fact by relying on one, even a handful of indicators, is asking for trouble. In fact, one could argue that building a multi-factor recession model is more relevant and practical than ever. All the more reason that this core principle has long informed the methodology of weekly updates of The US Business Cycle Risk Report (now in its 10th year), a sister publication of CapitalSpectator.com. At a high level, the main focus is carefully curating a diversified set of indicators to estimate the current state of the economy. Using that foundation, a near-term forecast is updated weekly. The key principle: the estimates reflect a wide variety of indicators and models. The reasoning: it’s never clear which indicator or model will fail in real time–and, yes, something’s always failing. It’s the aviation equivalent of recognizing that if you’re flying across the Pacific, it’s well-advised not to rely on one engine. On that basis, the current state of the economy continues to favor expansion, based on the main indicator that aggregates a variety of signaling for The US Business Cycle Risk Report. In the current issue of the newsletter, the probability that an NBER-defined recession has started or is imminent is roughly 9%. Using a multi-factor set of proprietary business-cycle indicators to forecast the near-term outlook suggests that economic activity is stabilizing through August, albeit at a slow/sluggish pace. Note: the tipping points that separate expansion from recession for the indexes in the chart below are 50% (ETI) and 0% (EMI). Why limit the forward estimates to a month or two? Because looking out much further is guessing. It’s deeply flawed/naive to assume that it’s possible to model how the complexity of the US economy will involve much beyond the very near future. Indeed, the only thing more deeply flawed than relying on one indicator in recession analysis is forecasting six-month, a year, or longer. Original Post Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors. Continue reading →

Alphabet (GOOG, GOOGL) stock slipped more than 4% on Wednesday as investors kept a close on the company’s increased AI spending while disappointing YouTube advertising revenue was also a pain point for investors after the Google parent’s latest quarterly release.Yahoo Finance’s Dan Howley reports: Google parent Alphabet (GOOG, GOOGL) reported its fiscal second quarter earnings after the bell on Tuesday, beating analysts’ estimates on the top and bottom lines as its cloud businesses continue to pick up steam, topping the $1 billion mark for operating profit for the first time.For the quarter, the company saw earnings per share of $1.89 on revenue of $84.7 billion. Analysts were anticipating earnings per share of $1.85 on revenue of $84.3 billion, according to data compiled by Bloomberg. That’s a jump from the same period last year of 31% and 14%, respectively, when the company reported earnings per share of $1.44 on revenue of $74.6 billion.Advertising revenue topped $64.6 billion versus analysts’ expectations of $64.5 billion, and up from $58.1 billion last year. YouTube ad revenue, however, fell short, with the segment bringing in $8.66 billion versus expectations of $8.95 billion.Google saw cloud revenue of $10.35 billion and operating income of $1.17 billion. That’s better than analyst expectations of $10.1 billion and operating income of $982.2 million and higher than the $8 billion in revenue and $395 million in operating income the company reported in Q2 2023.Alphabet shares are up 30% year to date. Shares of rivals Microsoft (MSFT) and Amazon (AMZN) are up 18% and 22% year to date, respectively. All three companies are pouring money into building out their generative AI capabilities, spending lavishly on data centers capable of powering the AI models they offer via their cloud service platforms.In the second quarter, Alphabet reported spending $2.2 billion building AI models across its DeepMind and Google Research organizations. That’s up from $1.1 billion in Q2 2023. When exactly AI starts to generate revenue for Google’s Cloud business, let alone its ad segment, is still up in the air.“It is still too early to count on AI benefits as most [companies] remain in pilot mode, and material AI [revenue] is more likely a 2025-26 event,” Jefferies analyst Brent Thill wrote in a recent client note ahead of Alphabet’s earnings announcement. Continue reading →

By Indradip GhoshBENGALURU (Reuters) – The Federal Reserve will cut interest rates just twice this year, in September and December, as resilient U.S. consumer demand warrants a cautious approach despite easing inflation, according to a growing majority of economists in a Reuters poll.Declining price pressures over the past few months and recent signs of labor market weakness gave several members of the policy-setting Federal Open Market Committee (FOMC) “greater confidence” inflation will return to the U.S. central bank’s 2% goal without a significant economic slowdown.Markets grabbed that opportunity to price in two to three rate reductions this year, lifting stocks by around 2% and pushing down yields on the 10-year Treasury note by more than 25 basis points this month. But economists have held on to expectations for just two cuts for the last four months, and are more convinced now.Stronger-than-expected retail sales in June suggest consumer spending remains resilient and, along with a consensus view from the poll that the jobless rate won’t rise much from the current 4.1%, argues for patience.While all 100 economists in the July 17-23 Reuters poll said the Fed will keep rates unchanged on July 31, more than 80% – 82 of 100 – forecast the first 25-basis-point cut would come in September, pushing the federal funds rate to the 5.00%-5.25% range. That was a stronger majority compared to the nearly two-thirds who said so last month.While 15 expected the first rate reduction to happen in November or December, only three said the Fed would wait until next year.”We expect a 25-basis-point reduction in the target range at the September and December FOMC meetings, barring a meaningful upside surprise in the inflation data,” wrote Jonathan Pingle, chief U.S. economist at UBS.”We suspect unexpectedly quite weak employment data would be needed to create the urgency to lower rates more than that this year.”Nearly three-quarters of economists – 73 of 100 – predicted two 25-basis-point cuts this year, more than the roughly 60% who took that view in the June survey. Seventy of the economists in the latest poll said the cuts would happen in September and December.While 16 expected one or no cut this year, 11 predicted more than two. Among 21 primary dealers polled, nearly 60%, or 12, expected the Fed to reduce rates twice in 2024.Much of the outlook will hinge on key data releases this week, including a reading of second-quarter gross domestic product (GDP) and personal consumption expenditures (PCE) price index data for June.While the U.S. economy is expected to have expanded at an annualized rate of 2.0% last quarter, faster than the 1.4% in the first quarter, PCE inflation – which the Fed targets at 2% – is expected to have declined only slightly to an annual 2.5% in June from 2.6% in May, a separate Reuters survey predicted.None of the measures of inflation – the consumer price index (CPI), core CPI, PCE and core PCE – were expected to reach 2% until at least 2026, according to median forecasts in the latest poll.Just over half of economists – 17 of 30 – said inflation for the rest of the year was more likely to be higher than what they forecasted rather than lower.”Inflation has been very difficult to forecast this year and has behaved unpredictably. Rents, for example, have been far more persistent than anyone expected,” said Chris Low, chief economist at FHN Financial.”As long as we have moderate growth, the Fed can be patient,” he said.The Fed will cut rates once in each quarter through 2025, taking the federal funds rate to the 3.75%-4.00% range by the end of 2025, according to median forecasts in the survey.The U.S. economy was forecast to expand 2.3% this year, faster than what Fed officials currently see as the non-inflationary growth rate of 1.8%. It will grow 1.7% and 2.0% in 2025 and 2026, respectively, according to the poll.(Other stories from the Reuters global economic poll)(Reporting by Indradip Ghosh; Polling by Milounee Purohit, Vijayalakshmi Srinivasan and Mumal Rathore; Editing by Ross Finley and Paul Simao) Continue reading →

(Bloomberg) — Chinese stocks suffered their biggest decline in six months as a lack of major policy support following the Third Plenum reinforced bearish sentiment.Most Read from BloombergThe onshore benchmark CSI 300 Index closed 2.1% lower, following a 0.7% drop in the previous session. The declines have now erased gains seen last week, when signs of purchases by the “national team” of state funds amid the twice-a-decade political gathering propped up equity gauges.The steep losses are likely to be a taste of what may come without state support in a market that has lost momentum amid China’s economic troubles and geopolitical risks. Investors had looked to the Third Plenum for a clearer policy roadmap to end the property crisis and revive consumption, but the details released so far have fallen short of expectations.The equity decline “may be driven by fading national team support that propped up CSI 300 during the Plenum,” said Bloomberg Intelligence strategist Marvin Chen.Combined turnover in eight exchange-traded funds known to be favored by the national team was lower than the past year’s daily average on Tuesday, suggesting that state funds likely remained on the sidelines for the day. The aggregate turnover in the cohort was 9.5 billion yuan, compared to nearly 40 billion yuan on Friday.Read: China National Team ETFs Saw Record Inflows Amid Plenum (1)China increased support for the economy with surprise interest-rate cuts Monday, but analysts say the impact will likely be limited to meaningfully bolster the economy. Data earlier this month showed China’s growth unexpectedly slowed to the worst pace in five quarters as consumer spending faltered.“Investors tend to wait until there is a clear improvement,” said Steven Leung, executive director at UOB Kay Hian Hong Kong. “There has been no negative news in the market these two days, just investors believe such 10-basis point cut is not enough to trigger a turnaround in sentiment.”In Hong Kong, the Hang Seng China Enterprises Index fell 1%.–With assistance from Winnie Hsu and April Ma.(Updates with additional comment, ETF turnover data.)Most Read from Bloomberg Businessweek©2024 Bloomberg L.P. Continue reading →

cemagraphicsS&P 500 (SPX) investors were rattled in the trading week ending Friday, 19 July 2024. The index dropped two percent to close the week at 5,505.00. That decline was triggered by the Biden-Harris administration’s announcement on Wednesday, 17 July 2024 that it was planning to expand its anti-free trade restrictions against China. The new sanctions would negatively affect U.S. advanced computer chip manufacturers, as well as Japanese and Dutch chipmakers that do large volumes of business with China. The announcement sent the stock prices of U.S. chipmakers plunging, as the tech-heavy Nasdaq 100 index experienced its worst day since 2022, going on to lose 4.3% by the end of the week. The third-largest company in the S&P 500, AI chipmaker Nvidia (NVDA), lost $244 billion (8.75%) of its total value from the previous week as it dropped to a market capitalization of $2.9 trillion. Coincidentally, the size of that loss is about $1 billion less than the entire market cap of Advanced Micro Devices (AMD) after it shrank by 16.5% from its previous week’s market valuation. The dividend futures-based model’s alternative future chart shows what appears to be a new Lévy flight event, in which investors have shifted their investment time horizon from the current quarter of 2024-Q3 to the more distant future quarter of 2025-Q2, which may coincide with the timing of when the new export rules may take effect. Trading during the week showed little sign of any impact from the Saturday, 13 July 2024 assassination attempt against former U.S. President Donald Trump. The change in stock prices for the S&P 500 on Monday, 15 July 2024 fell well below the threshold of a 2% change from the previous trading day’s close that would qualify as interesting. With corporate earnings season getting underway, it’s quite possible that the random onset of new information it provides may soon prompt investors to shift their focus back to the current quarter. Or not. It depends on what new information comes out in the weeks ahead. Speaking of which, here are the week’s market-moving headlines. Monday, 15 July 2024 Signs and portents for the U.S. economy: Fed officials say U.S. inflation is heading lower to their 2% target: Bigger trouble, stimulus, bailouts developing in China: Nasdaq, S&P, Dow end higher on first trading day since assassination attempt on Trump Tuesday, 16 July 2024 Signs and portents for the U.S. economy: IMF says Fed officials shouldn’t rush to cut U.S. short term interest rates: Bigger stimulus, bailouts developing in China: BOJ, JapanGov officials secretly involved in propping up Japan’s currency, letting failing businesses finally go under: Possible growth signs developing in Eurozone: Dow jumps more than 700 points on UnitedHealth boost; rotation into small-caps continue Wednesday, 17 July 2024 Signs and portents for the U.S. economy: Fed officials “optimistic” inflation will drop to their 2% target, thinking about cutting rates: Bigger trouble, stimulus developing in China: Global chip sell-off slams Nasdaq, which notches worst day since 2022; Dow tops 41K Thursday, 18 July 2024 Signs and portents for the U.S. economy: Fed officials say they’re not okay yet with inflation, pitch new way for banks to tap into bailout money: Bigger trouble, stimulus developing in China: BOJ officials seeking ways to keep stimulus alive: ECB officials choose to sit on hands, will think about cutting rates later: Nasdaq, S&P slip, Dow sheds 500 points as tech rotation intensifies; Netflix in focus Friday, 19 July 2024 Signs and portents for the U.S. economy: Fed officials looking forward to getting inconclusive data: Bigger trouble, stimulus developing in China: BOJ officials to hold rates steady despite inflation pressure: ECB officials thinking about cutting Eurozone interest rates after passing on cuts this month: Wall Street posts worst week in three months; focus turns to upcoming earnings deluge The CME Group’s FedWatch Tool forecast is mostly unchanged this week. It continues to anticipate the Fed will hold the Federal Funds Rate steady in a target range of 5.25-5.50% until 18 September (2024-Q3), at which time, the Fed is expected to start a series of 0.25% rate cuts that will occur at 6- to-12-week intervals at least into mid-2025. The Atlanta Fed’s GDPNow tool’s forecast of the annualized real GDP growth rate during 2024-Q2 continued rising to +2.7% from the +2.0% growth projected a week earlier. When the BEA’s official first estimate of GDP in 2024-Q2 is released near the near of July 2024, the GDPNow tool will shift to start forecasting 2024-Q3’s real GDP growth rate. Original Post Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors. Continue reading →

(Reuters) – U.S. stock index futures climbed on Monday as investors assessed the chances of a win by candidate Donald Trump in the November elections after President Joe Biden opted out of the race.Biden announced he was exiting the race on Sunday, and endorsed Vice President Kamala Harris for the Democratic ticket.Megacap stocks were up premarket, with Meta Platforms, Alphabet and Apple up between 0.5% and 0.8%, boosting the Nasdaq and S&P 500 futures.At 4:17 a.m. ET, Dow e-minis were up 54 points, or 0.13%, S&P 500 e-minis were up 18 points, or 0.32%, and Nasdaq 100 e-minis were up 102.5 points, or 0.52%.Shares of Trump-linked stocks such as Trump Media & Technology Group and software firm Phunware rose 2.8% and 1.4%, respectively.Most U.S. Treasury yields, including the 10-year one, were down as Biden ended his reelection campaign after pressure from fellow Democrats who lost faith in his mental acuity and ability to beat Trump.Biden’s exit from the presidential race could prompt investors to unwind trades betting that a Republican victory would increase U.S. fiscal and inflationary pressures, while some analysts said markets could benefit from an increased chance of divided government under the next administration.”Donald Trump is still the solid favorite to win the presidential election, but betting markets suggest he has a slightly lower probability of beating Harris rather than Biden,” said Paul Ashworth, chief North America economist at Capital Economics.”Harris will have a real chance to sell herself to the American public in the second presidential debate, currently scheduled for Sept. 10, although the Trump campaign could withdraw, not wanting to go toe-to-toe with the ex-attorney.”Investors are bracing for high volatility this week, with a deluge of quarterly earnings on deck, including from two of the so-called Magnificent Seven – Google parent Alphabet and Tesla – to gauge the sustainability of the recent run-up in the top-tier high-momentum stocks.Focus will also be on major data throughout the week including Personal Consumption Expenditures (PCE) price index data – the Federal Reserve’s preferred inflation gauge, durable goods and second-quarter GDP for clues on the U.S. central bank’s monetary policy trajectory.Traders have broadly priced in a 25-basis-point rate cut by September and two cuts by the year-end, as per LSEG and CME’s FedWatch data.Both the Nasdaq and the S&P 500 logged their steepest weekly declines since mid-April, with investors rotating out of expensive tech stocks to underperforming areas in the market, helping the small-cap Russell 2000 index post its second straight weekly gain.Among other single movers, Nvidia rose 1.3% after Reuters reported the AI chip leader is working on a version of its new flagship AI chips for the China market that would be compatible with current U.S. export controls.Shares of Bank of America lost 1.5% after Berkshire Hathaway sold about 33.9 million shares of the lender for around $1.48 billion over multiple transactions last week.(Reporting by Shubham Batra and Ankika Biswas in Bengaluru; Editing by Sherry Jacob-Phillips) Continue reading →

EC_HallexEquities have pulled back this week as rising realized and implied volatility have increased implied correlations. On July 12, the 1-month implied correlation index reached historic lows. Since then, the implied correlations have risen sharply but are still low by historical standards and are likely to rise more as we move through earnings season, and implied volatility levels rise as we move into the Presidential election. The equity market stretched itself too thin in too many places, and it didn’t take much for the trends to snap. Realized volatility fell too low, and it took a little movement in the equity market to cause this all to start to unwind. Volatility Rising As noted back on June 27, realized volatility levels were relatively low, and the ability for the S&P 500 (SP500) to continue to see small gains over a protracted period seemed unlikely. 30-day realized volatility hit a low of 6.97 on July 9 and 7.01 on July 12. The rule of 16 suggested that the S&P 500 could not rise more than 0.44 bps per day or risk realized volatility starting to climb. That was working fine, but that was right around the realized volatility bottomed because a nearly 4% rally between June 28 and July 16 started pushing realized volatility higher. Bloomberg The rise in realized volatility became a bigger problem when implied volatility also started rising, with one-month at-the-money implied volatility rising from around 10.10 to 12.5 from July 12 to July 18. This type of movement in implied volatility, at a time when the volatility dispersion trade was in full force, doesn’t work particularly well. Bloomberg Implied Correlations Rising Implied correlations increase when the implied volatility for single stocks and the S&P 500 rises simultaneously, which has been happening for the last few days. Bloomberg The issue is that next week’s earnings season is in full view, with Alphabet (GOOG) (GOOGL) and Tesla (TSLA) reporting results. Once those companies report results, implied volatility for those stocks will crash, as they always do post results. This means that even if implied volatility in the S&P 500 index comes down, implied correlations may not, because falling implied volatility in stocks and the S&P 500 index means implied volatility is becoming more correlated. The stock market is in a tough spot currently because when implied correlations start to rise, it typically follows an equity market that is moving lower, which is precisely what is happening now. Bloomberg Problems The same event happened last year, and it led to the index declining by around 10%. Now, this year is different, with a new set of problems. The biggest concern is that the S&P 500 trades at a much higher valuation. In July 2023, the S&P 500 peaked at 19 times 2024 earnings estimates; this year, it is trading at 20.0 times 2025 earnings estimates. So stocks are pricier on a 1-year forward basis. Bloomberg Additionally, it is an election year, and we typically see higher implied volatility overall in an election year. This year’s S&P VIX Index (VIX) has been tracking lower than the presidential election years, starting in 1996 and continuing through 2020, excluding 2008. That has changed some with the recent move higher, but seasonally, it would suggest that implied volatility is likely to move higher between now and the election. Bloomberg This probably means that over the coming months, we will likely see realized and implied volatility continue to move higher, pushing implied correlations higher, which will most likely send the S&P 500 lower. Because mechanically, that is how this trade typically works. It appears to be another instance of flying too close to the sun; now, as the wings melt, gravity seems poised to take over. Continue reading →