Market Jitters And The Consumer Price Index (CPI)

The Consumer Price Index (CPI) readings have become a top topic as of late and have directly impacted market movements and overall sentiment. These CPI reports are becoming more significant as these readings are used to identify periods of inflation. More robust the CPI readings will translate into a stronger influence on the Federal Reserve’s monetary policies. The Federal Reserve is reaching an inflection point where they will need to curtail their stimulative easy monetary as inflation, unemployment, and overall economy continue to improve. As a result, their long-term monetary policy of low-interest rates and bond purchases will inevitably need to pivot to a scenario of higher rates to tame inflation. As a result, investors can expect increased volatility as these critically important CPI reports continue to be released through the remainder of 2021. Additionally, any notion of higher rates may spur investors to reduce exposure to equities.

CPI Market Jitters

Recent CPI readings have spooked the markets as these serve as a harbinger for the inevitable rise in interest rates. As investors grapple with the prospect of downstream rate increases, pockets of vulnerabilities throughout the market have been exposed. The overall markets have been on a blistering bull run since the November 2020 presidential election cycle. The overall markets as assessed by any historical measure have reached stretched valuations with record risk appetite. As real inflation enters the fray, these frothy markets will come under pressure and possibly derail this raging bull market. Moreover, the prospect of rising rates may introduce some systemic risk in the process. The confluence of rising rates, a hot housing market, and robust CPI readings may translate into real inflation rates that exceed the Federal Reserve’s target inflation zone. If these real inflation excursions drag on, these higher rates will be in the fold. Continue reading "Market Jitters And The Consumer Price Index (CPI)"

Financials - Stress Tests Easily Pass

Federal Reserve, CPI and Prospective Rate Increases

A string of robust Consumer Price Index (CPI) readings spooked the markets as a harbinger for the inevitable rise in interest rates. Furthermore, Federal Reserve commentary also induced volatility in the markets when Jerome Powell spoke in early June. As investors grapple with the prospect of downstream rate increases, pockets of vulnerabilities throughout the market have been exposed. The overall markets have been on a blistering bull run since the November 2020 presidential election cycle. Year-to-date, the S&P is up over 16%, while all valuation metrics are misaligned with any historical comparator with heavily stretched valuations and record risk appetite. As real inflation enters the fray, these frothy markets will come under pressure and possibly derail this raging bull market. Although rising rates may introduce some systemic risk, the financial cohort is poised to go higher. The confluence of rising rates, post-pandemic economic rebound, financially strong balance sheets, a robust housing market, and the easy passage of annual stress tests will be tailwinds for the big banks.

2021 Financial Stress Tests

The recent stress tests were easily passed and indicated that the biggest U.S. banks could easily withstand a severe recession. In addition, all 23 institutions in the 2021 exam remained “well above” minimum required capital levels during a hypothetical economic downturn.

The central bank said that the scenario included a “severe global recession” that hits commercial real estate and corporate debt holders and peaks at 10.8% unemployment and a 55% drop in the stock market. While the industry would post $474 billion in losses, the Fed said that loss-cushioning capital would still be more than double the minimum required levels. Continue reading "Financials - Stress Tests Easily Pass"

Do Valuations Matter Anymore?

Over the first half of 2021, the overall markets have had breathtaking moves of appreciation. The major indices are in unprecedented territory breaking through all-time high after all-time in what seems to be daily. The broader market has been in a blistering bull market for over a year straight, only accelerating since the November 2020 election cycle and really taking off into July 2021. Thus far in 2021, the S&P 500 is up over 16% and recently posted a seven consecutive positive day winning streak. The S&P 500 is up nearly 5% in the two weeks covering the Q2/Q3 junction, with its most recent run of seven consecutive days being the best winning streak since August of 2020. The other major indices, such as the Nasdaq and Dow Jones, are showing similar patterns as measured via QQQ and DIA, respectively. These markets are unrelenting and beg the question, do valuations even matter anymore?

Stocks are overbought and at extreme valuations, as measured by any historical metric (P/E ratio, Shiller P/E ratio, Buffet Indicator, Put/Call Ratio, and percentage of stocks above their 200-day moving average) or technical metric (Bollinger Bands and Relative Strength Index - RSI). Valuations are stretched across the board, with the major averages at all-time highs and far away above pre-pandemic highs.

Financial Experts Issue Market Crash Harbinger

Major influencers across the financial spectrum such as Michael Burry, Jeremy Grantham, Leon Cooperman, Stanley Druckenmiller, Jeffrey Gundlach, Kevin O'Leary, Gary Shilling, and Robert Kiyosaki are all bracing for a market crash. Collectively, they are all concerned about the rampant speculation and extreme valuations fueled by government stimulus programs.

Michael Burry stated that the markets are in the "greatest speculative bubble of all time in all things,” and speculation is happening across assets before the "mother of all crashes."

Jeremy Grantham stated that the market is Continue reading "Do Valuations Matter Anymore?"

Meme Stocks And Breaking Down Short Squeezes

Meme stocks and Reddit’s Wall Street Bets have been behind some massive, short squeezes thus far in 2021. GameStop (GME) and AMC Entertainment (AMC) have been the most notable battleground stocks between hedge fund managers and retail traders. Hedge fund managers that have short positions on a stock profit when the stock declines. On the other hand, retail traders identify heavily shorted stocks and buy the stock with the intention to short squeeze these hedge funds and cause a dramatic rise in the stock price. Although this tug-a-war has worked for GME and AMC in the short term, deploying this tactic can be dangerous. These short squeezes result in astronomical stock appreciation, extreme valuation distortion, and liquidity issues, as trading can be halted when trading abnormalities are triggered. Here, I’ll break down the anatomy of a short position and the mechanics behind a short squeeze.

What’s A Short Position?

Short positions are taken by those who believe the company is overvalued and take the position that the stock will decline in value over the near term. Essentially, this is betting that the stock will decline and when the stock falls, the short position is profitable. Short positions are taken by borrowing shares and then selling the shares in the hope to subsequently buy back the shares at a lower price to capture the spread. For example, shares are borrowed and sold at $100, and over the near term, the shares fall to $75. Once these shares fall as expected, the short seller can then buy these shares back at $75 and return the borrowed shares while netting $25 per share in the process. Continue reading "Meme Stocks And Breaking Down Short Squeezes"