Choice and America

By Jeff Kelly on August 23, 2024

“When the know-nothings get control…I should prefer emigrating to some country where they make no pretense of loving liberty-to Russia, for instance, where despotism can be taken pure and without the base alloy of hypocrisy.”

– Abraham Lincoln, August 24, 1855

We live in an era that’s marked by its political division. This summer we have seen two political conventions presenting different visions for the country’s future.

In my view what we need isn’t defined by party as much as by outlook. We need more optimism and less antagonism. More building and less belittling. More listening and less pontificating. More confidence and less resentment. Less being told only I can do it, more working together to get it done.

The strength of America is the strength of Americans. It’s not the strength of politicians or political conventions. It is the way neighbors treat each other. It’s how we talk to our friends and yes even how we communicate with our enemies. Respect and manners aren’t old-fashioned. They are what our parents taught us. They are what makes society function. They are what we teach our children. Too often today, we take the route not just of critique and criticism but of dehumanization and disparagement.

Someday this will end. We’ll move back to more humility and more humanity. It can be sooner and safer or further out and much more violent.  We get to choose. When we cast our votes this fall, we are taking a step on the path to a choice. I hope we choose wisely.

The market action for the week has been positive with some unusual activity thrown in for good measure. Today the long-awaited speech by Fed Chairman Jerome Powell from the Jackson Hole conference gave the market reasons to rally. He said it was time to lower rates. This led to an extension of an already occurring rally. The composition of the rally, however, was different. We saw some positive movement in the usual suspects, tech stocks, but the real winner on the day was the small cap equities. The IWM, Russell 2000 ETF, was up 3.06% as I write while the Nasdaq 100, ETF QQQ was up .76%. The level of this performance differential is extreme. It will be interesting to see if today marks a change in relative performance for small caps. They have lagged larger cap stocks for many years. If anything like today’s move continues the next move for equities could see the most popular names in technology go sideways as the small caps catch up.

The other market moving news was the yield curve beginning to normalize. We all heard about the inverted yield curve, where short rates are higher than long term rates. Today the two-year treasury bond has a yield of 3.94% and 30-year bonds are at 4.12%. This is a move in the right direction for yields. If the Fed does cut rates at their September meeting, we should see this move accelerate. The 2-year /10-year spread is still slightly inverted with the 10-year yield at 3.81%.

The normalization of these rates does come with a downside. It signals the economy is likely to slow. We don’t see any recession currently, but the data is moderating as the summer comes to an end. The slowing of the economy is what allows the Fed to ease rates.

Next week brings a lot of data as we get to the Labor Day holiday.

We see the end of summer bringing a tougher environment for stocks as well. The calendar through mid-October does not favor higher prices. Can it be different this time? Of course, but given all the factors at play that doesn’t seem like a good bet.

CHARTS FROM THE WEEK PAST

US new bankruptcy filings hit 6,276 in Q2 2024, the highest level since Q2 2017.

The number of companies declaring bankruptcy has doubled in just 2 years.Chapter 7 filings, also known as liquidation bankruptcies, reached a whopping 3,151 in Q2, the most since the most since the 2020 Pandemic. Chapter 11 cases hit 2,462 last quarter, exceeding every other quarter over the last 10 years. Furthermore, Chapter 13 and other bankruptcies rose to 469 and 194, respectively. Bankruptcies have been rising at a pace seen during major economic downturns. Is a soft-landing still attainable?

Ports of Los Angeles and Long Beach (which account for ~1/3 of all U.S. container imports) had their third-strongest month ever in July (slightly below all-time high in May 2021).

There might be a lot of “cash on the sidelines” in terms of total money market fund assets, but relative to the size of the equity market, the firepower just isn’t what it used to be … and in fact, cash as a % of S&P 500 market cap has been trending lower for the past year.

More homes are having price drops than anytime over the past 4 years.

The market may see odds of a recession increasing.

We don’t. Just a slowdown. Chill and enjoy the end of summer.

The Chicago Fed survey doesn’t look so good.

Global freight container rates rolling over again … still much more elevated for routes including Shanghai.

Significant plunge in 6-month outlook component in August Philly Fed Index.

U.S. home prices moved up by 0.2% month/month in July per Redfin smallest increase since January 2023; and on a year/year basis, prices rose by 6.8%, a deceleration from 7.3% in June and lowest annual increase since January.

Bank of America says the S&P normalized p/e suggests only 2% annual returns over the next decade.

If you told me in 2014 the S&P 500 would be over 5600 in 2024, I would have called you an idiot. Yet here we are.

About 59,000 home-purchase agreements were canceled in July, which equals 15.8% of homes that went under contract that month … highest percentage of any July on record per Redfin.

The high yield bond index shows very little fear and is supportive of the rally in equities.

Gasoline prices are lower and poised to take out lows from early in 2024.

Oil down over 18% since March.

It looks likely to take a run towards the year low around 67.00 per barrel. Great news for consumers and inflation.

Markets reactions to the growth data in August was the largest in quite some time.

Central banks be hoarders…of gold!!!

China has moved from last to first in this group of car exporters.

Most aggressive rolling 2-week easing in Goldman Sachs U.S. Financial Conditions Index since last November.

August S&P Global U.S. Manufacturing PMI down to 48 vs. 49.5 est. & 49.6 prior; Services up to 55.2 vs. 54 est. & 55 prior; Composite at 54.1 vs. 53.2 est. & 55 prior.

Short interest on SPY and QQQ are at low levels.

This makes the indexes vulnerable to sharp declines.

Cyclicals have outperformed defensives around the globe for quite some time.

However, we may be seeing the start of a change.

The consensus for earnings per share growth is high in the 4^th quarter and 1^st quarter of 2025.

U.S. Bankruptcy cases continue to rise.

This is unusual given the economic strength.

The largest causes of death in America are tied directly to a poor diet and lack of exercise.

The gold bars are unfunded entitlements as a percentage of GDP in Europe.

Small investors bought the latest market decline.

WEEKEND HOMEWORK

I’m a huge West Wing fan. This is a fun read if you are too.

Step back inside the world of President Jed Bartlet’s Oval Office with Fitzgerald and McCormack as they reunite the West Wing cast and crew in a lively and colorful “backstage pass” to the timeless series. This intimate, in-depth reflection reveals how The West Wing was conceived, and spotlights the army of people it took to produce it, the lifelong friendships it forged, and the service it inspired. 
 
From cast member origin stories to the collective cathartic farewell on the show’s final night of filming, What’s Next will delight readers with on-set and off-camera anecdotes that even West Wing superfans have never heard. Meanwhile, a deeper analysis of the show’s legacy through American culture, service, government, and civic life underscores how the series envisaged an American politics of decency and honor, creating an aspirational White House beyond the bounds of fictional television. 
 
What’s Next revisits beloved episodes with fresh, untold commentary; compiles poignant and hilarious stories from the show’s production; highlights initiatives supported by the cast, crew, and creators; and makes a powerful case for competent, empathetic leadership, hope, and optimism for whatever lies ahead.

Just an FYI, if you don’t like it in the good old USA, Russia wants you!!!!

Source: TASS, 08/19/2024

​Letter to a Young Songwriter​

“Quantity has a quality all of its own.” Eight insights into the creative act, with lessons for all of us.

The weekend before Louise comes next Thursday night. WOO Hoo!!!! Lots to do. Sandra beginning the clean cycle. It goes like this: she cleans Mav the pup destroys, rinse and repeat. We are just a little excited. Lots of chores for the weekend. Also got to get the workouts done and get outside. The weather should be great. Optimism dominates my mind. I can’t let it go. You shouldn’t either. Make it a great weekend, the rest of our lives are yet to be written. We can change the story. Make that call, hug that kid. Be the change you want to see. Let’s Go.