Welcome to this weeks rendition of State of the Markets with Seth Golden and Wayne Nelson. Please click the following link to review the video that runs 1.10hr in duration. Feel free to utilize the outline below for ease of navigation and future reference.

  • Brief introduction to the markets and what is effecting markets in the latest downtrend channel.
  • Bond yields have reached levels not seen since 2017. German bund has reached new all-time high prices and all-time low yield.
  • U.S. yield curve inversion
  • Central banks have influenced the long end of the bond yield curve creating an anomalistic pricing elasticity of depressed yields.
  • Fear from what the bond market might be telling market participants is driving the fear trade, lower equity prices.
  • The majority of the long-end yield curve is below the Fed Funds Rate (FFR).
  • Role of shadow banking lending. (0-14 minutes in)
  • Trade feud remains key concern and serves to curtail capital expenditures and business spending.
  • Next week’s economic releases can serve to solidify market downtrend or reverse it. (14-20 minutes in)
  • Breadth of the market has weakened with few stocks above their 50-DMA.
  • Put/call ratio has risen to 1.41 recently
  • Only about 31% of S&P 500 stocks are above their 50-DMA, but oversold conditions usually find about 20% of stocks above their 50-DMA.
  • Most economic metrics are holding strong despite fears surrounding trade.
  • Trade deal is unlikely, but a trade truce is probable over the next couple of months. (19-35 minutes in)
  • Interest rate sensitive sectors of the economy have improved with rates moving lower over the last 6 months.
  • Jeffrey Gundlach says bond yields may have temporarily bottomed.
  • Pending Home sales fell 2% YoY, but have been up-trending in 2019.
  • Lawrence Yun, NAR chief economist, said the sales dip has yet to account for some of the more favorable trends toward homeownership, such as lower mortgage rates. “Though the latest monthly figure shows a mild decline in contract signings, mortgage applications and consumer confidence have been steadily rising,” he said. “It’s inevitable for sales to turn higher in a few months.”
  • Japanification is likely to take hold in Europe as the Eurozone economy lacks scalable consumerism.
  • Investor sentiment has waned below historic averages. Money market and bond fund flows have outperformed equity fund flows YTD.
  • Fund managers continue to underperform the market.
  • Volatility continues to buck the downdraft in equities. Hedging activity has been light, but SPY short volumes have been at multi-year highs. (36-48 minutes in)
  • The dollar has become a headwind for sales growth: in the past year (thru 1Q19), the dollar appreciated by 8%; this accounts for about a 4 percentage point decline in growth in corporate sales growth. For the current quarter (2Q19), the dollar is pacing 6% yoy appreciation. The dollar weakened from the end of 2016 to early-2018 (a tailwind to growth) With half of corporate sales coming from abroad, even a small 4% appreciation in the dollar could cut 2 percentage points off sales growth this year.
  • As oil goes, the market goes over time! (49-59 minutes in)
  • Discussion on article from CNBC that suggests corporates are sellers of stocks. This demands context and discovery.
  • In reality, however, 90% of the growth in earnings in the S&P over the past 9 years has come from better profits, not a net reduction in shares. Better profits have driven growth, not “financial engineering.”
  • That has been true over the past 17 years, during which the net change in corporate shares has accounted for just 4% of EPS growth (from JPM).
  • McDonald states that 50% of debt issuance over the past decade has been used to buy back stock.
  • As shown in JPM chart, capital return is always predominantly funded by operating cash flow and excess cash rather than debt-funded, which peaked at ~34% in 2017 before declining recently to ~14%.

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