Connections and Corrections

By Jeff Kelly on August 2, 2024

Everyone has a past. Some parts we are proud of and others…well you know. Each year we get the book pictured below from Colorado Academy where our daughters went to school.

It has stories about retiring faculty, information about things going on at the school and information about each graduating class. It’s easy to see which parents were a pain in the butt when their kids were in school because they are still sending full page essays about little Johnny’s accomplishments even after he graduated 15 years ago. But I like reading about the kids I knew, all now adults with kids of their own.

The connection to that place and those people took up over 20 years of my life. I enjoy knowing how things are going even though there is no day-to-day involvement. The connection’s still there. I still want them all to succeed.

I think those connections to the past are important today. I believe remembering the past, how it was not how we want it to have been, is critically important. So many of our problems today stem from memories that are at best faulty and at worst corrupt.

This is particularly true with markets. They don’t grow to the sky. Knowing that eventually we fail to make new highs and the fall from these levels is swift. The old saying applies “risk happens slowly, then all at once”. We have been discussing a correction for a few weeks. Now it’s here. It’s not the end of the bull market but with the markets so extended, its going to cause some pain. Knowing the past and how these things play out it’s much too early to buy, but it’s probably not too late to sell when a rally develops.

Some stocks may have already put in a low. We will be looking for those. Some still have significant downside. Bonds now look very attractive.

The non-farm payrolls reported this morning added to concerns about a slowing economy. There were several factors in this report that will change next month. Many are listed below.

• NFP = +114K = missing consensus at 175K and -65K M/M vs negative revised June estimates
• Private Payrolls = +97K = 17-month low.  Ex-Healthcare, Private Payrolls were just +40K!
• Revision = yet another negative revision with the June estimate revised -27K to 179K
• Unemployment Rate = +20bps to +4.3%
• AHE = -20bps deceleration to +3.6% Y/Y
• Implied Industrial Activity:  Aggregate manufacturing hours implies moderate sequential weakness in the reported July Industrial Production data.

Source: BLS, Hedgeye, 08/02/2024

*The Asterisks*

• Hurricane Beryl related distortions were likely to serve as a drag was expected.  
• Indeed, Employees Out Due to Weather increased significantly, spiking to +436K.
• Employees on Temporary Layoff increased +246K M/M.  As a percentage of the labor force, those on Temporary Layoff increased +0.15% to 0.63%.  In other words, of the 20 bps increase in unemployment, implied weather impacts accounted for 15bps of that.
• The mix associated with those workers would have some distortive impact on hours worked and AHE growth … which then flows through to aggregate hours worked and aggregate wage income estimates   

Source: BLS, Hedgeye, 08/02/2024

On the other side of that discrete weakness, there was:

• Full-Time Employment = +448K M/M, reversing off the massive decline reported last month
• Prime-Age Employment-to-Population Ratio = +10 bps to 80.9% = marking/matching the highest level since 2001
• Implied Income Growth:  Inclusive of any weather drag, implied aggregate wage income decelerated only modestly, suggesting nominal income growth/consumption capacity of ~+4.5% Y/Y.
• Median weeks of Unemployment = -0.5 wks M/M, improved sequentially and year-over-year.

Source: BLS, Hedgeye, 08/02/2024

Temporary layoffs higher.

Probably some more weakness coming in the next couple of months.

The bright side of this is we will get multiple rate cuts from the Federal Reserve. Likely they have waited too long but they are never good with timing. We’ve also noted many times over the past few months that when the rate-cutting cycle begins, markets fall. They always have.

We expect the weakness to last through September and then we will look forward to a good 4^th quarter.

The markets are also troubled by the geopolitical situation. Any sign that this is stabilizing will lead to a rally. It is interesting that oil is not rallying when there are such large concerns in the middle east. Maybe this is a precursor to better news. We will keep you posted.

CHARTS FROM THE WEEK PAST

• ISM Headline = -1.7 pts to 46.8 = 8-month low, 4^th consecutive month in contraction with 20 of the last 21 months being sub-50
• New Orders = -1.9 pts to 47.4 = 4^th straight month of contraction
• Employment = -5.9 pts to 43.4 = 50-month low (lowest since June 2020)
• Prices = +0.8 pts to 52.9 (given the expedited roll-over across the broader commodity complex the last few weeks, Prices trends will likely follow suit next month)

A great pictorial representation of how the Quads cycle.

And here’s how fast and hard the market took these numbers Thursday.

The recessionary trade was in full effect today following weak ISM data. Cyclicals underperformed Defensives by 429bps, one of the worst days in the last 16+ years. The only other comparable days were during the March 2020 Covid Crash and 2008 GFC.

Why has the market sold off a bit?

Earnings are good.  In the S&P 500 earnings are up 11.33% and sales are up 4.90%. Quarter over quarter.

But when we look at the surprise rate, it’s well below prior quarters.

Couple this with uninspiring guidance, currency fluctuations and geopolitical tensions and you get a sell-off.

ALSO, it’s the lowest year over year growth rate since 2022.

And the market is much higher.

The percentage of Nasdaq 100 stocks more than 10% off their highs has jumped above 60%.

This is a big test – during healthy bull markets, moves above this level are “spikey.” If it doesn’t come back down relatively quickly, it can get ugly.

A good look at why financials have a tougher time leading the market.

Pre the financial crisis they traded at 1.2 to 3.5 times book value. Now they seldom get above two and many trade below 1. Cheap is in the eye of the buyer.

Financials rode a wave of deregulation from the 1980s to 2008.

They totally screwed it up and now valuations are lower. They will likely stay lower.

Credit card delinquencies are edging higher.

Look how high they were regularly between 2002-2007.

Construction of high voltage transmission lines has slowed to a trickle.

The growth load is doubling almost annually. Shouldn’t we be doing more?

Nvidia had the largest single day increase of any stock ever on Wednesday.

Can you say daily options flow?

Quite a pop in business equipment spending in 2Q2024 … annualized growth rate of +11.6% was strongest since 1Q2022.

The U.S. treasury 2-10 yield curve is steeping.

This is what happens as the Fed eases, and we approach a potential recession.

Goldman Sachs says it’s all good but there are some cracks showing in the markets.

Valuation is stretched by almost any measure.

Commercial mortgage-backed securities and Commercial Real estate Collateralized loan obligations are being modified more than ever before.

This is a sign of the stress in commercial real estate.

Personal Savings rate is now well below 2019 and all periods after 2008.

Treasury bills as a percentage of treasury debt is high but not as high as in the 1970s or early 2000s.

Fixed investments now go to intellectual property and equipment.

Very little goes to structures.

High-tech’s share of capital spending has never been higher.

Yearly highs are seldom made in July and August.

December and January are the most common.

Factory investments are almost double their historical peak.

This is a very good thing.

As a major consumer of avocados and guacamole I like this trend.

The respective pay ratio here seems wacky.

I think Rocky should be making 20X of what Macron takes home.

One person never, ever misses grifting the public.

WEEKEND HOMEWORK

Our Iran Policy has been a failure. A good discussion.

Can AI predict breast cancer 5 years out? Maybe.

Getting Bubbly​

Is this 1997 or 1999? This blog looks at whether the market is in an AI-generated bubble.

We should all find our why!

I believe fulfillment is a right and not a privilege. We are all entitled to wake up in the morning inspired to go to work, feel safe when we’re there and return home fulfilled at the end of the day. Achieving that fulfillment starts with understanding exactly WHY we do what we do. 
 
As Start With Why has spread around the world, countless readers have asked me the same question: How can I apply Start With Why to my career, team, company or nonprofit? Along with two of my colleagues, Peter Docker and David Mead, I created this hands-on, step-by-step guide to help you find your WHY.

With detailed exercises, illustrations, and action steps for every stage of the process, Find Your Why can help you address many important concerns, including:
 
* What if my WHY sounds just like my competitor’s?
* Can I have more than one WHY?
* If my work doesn’t match my WHY, what should I do?
* What if my team can’t agree on our WHY?
 
Whether you’ve just started your first job, are leading a team, or are CEO of your own company, the exercises in this book will help guide you on a path to long-term success and fulfillment, for both you and your colleagues. 
 
A big weekend ahead. Lots of work, working out and walking. I’ll probably watch a little of the Olympics as well. Our kids will start to visit in 14 days!!! Yahoo. Louise arrives in about 3 weeks. We can’t wait. I must get outside this weekend as well. I have been terribly behind on my outdoor activities this week. This weekend needs a lot of catch up. I hope you have a terrific one. Make sure to call an old friend. You will be glad you did!