Miracles and Light

By Jeff Kelly on December 8, 2023

Miracles and holidays go together. I had a little personal miracle this week. I had cataract surgery on my right eye. It’s amazing to have a very minor procedure and see your vision improve almost instantly to how it was 20 years ago. What an amazing gift.

I have so many gifts. Gifts were given to me by my family, my brothers, my mom, and dad. By those who I don’t know that fought for our country and our way of life. Gifts of sacrifice, vision, and courage. Gifts of hope and promise for better days for me than what they had.

In this season of light, it’s worth a bit of time to ponder all that’s come our way. America is a miracle. It’s a 247-year experiment in self-governance. Can it still be an experiment after 247 years? Yes. It’s never been done before.

Truth is America as we know it is at risk. We’ve seen in other parts of the world what teaching of hate over many generations has produced. We’ve seen cheering over the rape and pillage of peaceful settlements. We’ve seen terrorists so proud of their destruction they call home while committing these very acts.

We have “leaders” who call for violence here in America daily. Maybe another miracle of this holiday season is the rise of hope. Hope for a better year, hope for a stronger people, hope for tolerance of other views, and hope for leadership with the ability to stand up to tactics of fear and intimidation. These leaders are out there. It’s our job to give them a chance.

Baring a big move at days end, equity markets are closing the week close to flat. Treasury bond market will close higher even after a decline today. Like so many times over the past year any surge in the cacophony of noise around “AI” overwhelms the continued degrading of fundamental economic news. At some point we will see either an improvement in the data or the markets will react to a weakening economic picture.

While there is much to be concerned about in the economic picture, it’s not being reflected in equity prices. It is encouraging to see some groups starting to see better performance after trailing the market for much of the year. We’ve seen financials start to perform better as an example. They have made it back to the price levels seen at the breakdown caused by the collapse of Silicon Valley Bank. It would be a major plus if they could regain levels not seen since last March.

Utilities and even Real Estate Investment trusts are also seeing some positive moves. Another area with some traction is small caps. This week while much of the market traded sideways, small caps moved higher. The chart below shows the small cap ETF, IWM. The white line shows last Friday’s close. Nothing enormous or earth shattering but different. Small caps have been underperforming since November of 2021.   

Next week brings a big batch of economic data including CPI and PPI. We also have several high-profile companies reporting earnings. No rest for the markets yet.

We’d still expect some modest pullback next week through Christmas. However, it is shaping up to be a good close to 2023.

CHARTS FROM THE WEEK PAST

Most market participants are anxiously awaiting a rate cut from the Federal reserve but markets do better when the Fed holds rates steady.

Crazy right?

Oil down 27% since the middle of September.

October change in consumer credit down to $5.13 billion vs. $8.5 billion est. & $12.23 billion in prior month … revolving credit up by $2.9 billion; nonrevolving credit up by $2.3 billion.

After today’s payroll data, note that payrolls don’t have to go negative for the economy to be in recession (payrolls were positive in first month of GFC recession); also, negative payroll growth doesn’t necessarily equal recession (see right after recessions ended in ’02 & ’09).

Regional Banks have made it back to the scene of the crime, the breakdown after Silicon Valley Bank weekend.

If they can push higher from here it argues well for the entire market.

Big banks in the same spot.

Only 24% of the S&P 500 are within 10% of their all-time highs.

Well below historical averages.

Delinquencies on credit card payment are rising across all age groups.

We have so financialized gold via futures, options, ETFs and other such derivatives, that it has been turned into another fiat currency. 

“I assumed the Goldman Financial Condition Index was merely an index level. I just learned the index is actually the equivalent of fed funds basis points (bps). So, November’s record easing of financial conditions was the equivalent of 90 bps of Fed cuts. Or rounding it works out to the financial market’s November rally doing “the work of the Fed” to the tune of four 25 bps cuts in the month of November. Are we sure this is not going to stimulate inflation????”

Source Jim Bianco

Used equipment inventories and pricing are good indicators of demand for new equipment.

Not looking good here.

ISM new orders and backlog pushing lower.

According to Goldman Sachs, their proxy for long-short hedge funds had one of the worst two-day performances in the past decade:

Equal weight financials poking above the previous high.

Put options cost at 6-year low.

Protection against a market decline is very cheap yet no one is buying. What could go wrong?

None of the charts below suggests the economy is in trouble.

Nonfarm Productivity grew nicely in the 3rd quarter.

Largest contribution to the S&P 500 performance by the top 10 weights ever.

2nd place goes to 2007.

And it’s not just the S&P 500, institutions massively overweight these stocks.

Chapter 11 bankruptcies have gone parabolic.

Inverted yield curves offer a very long lead on the VIX.

This argues for a higher VIX in the months ahead.

Real Gross Domestic Income hasn’t moved much.

Couldn’t agree more.

WEEKEND HOMEWORK

A good book, whatever your politics.

In the aftermath of the 2020 presidential election, Donald Trump and many around him, including certain other elected Republican officials, intentionally breached their oath to the Constitution: they ignored the rulings of dozens of courts, plotted to overturn a lawful election, and provoked a violent attack on our Capitol.   Liz Cheney, one of the few Republican officials to take a stand against these efforts, witnessed the attack first-hand, and then helped lead the Congressional Select Committee investigation into how it happened. In Oath and Honor, she tells the story of this perilous moment in our history, those who helped Trump spread the stolen election lie, those whose actions preserved our constitutional framework, and the risks we still face.

Great podcast about gene therapy, navigating the FDA process and hope.

COLOSSUS | Art of Investing |Jeff Marrazzo – Compounding For A Cure

Time to make sure all that holiday shopping is done. Take some time to help those less fortunate. And make sure you get some exercise. There’s lots of cookies, candy, and assorted libations to add calories to our lives. Hug a loved one, call a friend. Be careful at those holiday parties. Take a moment to reflect, be grateful and have A GREAT weekend.