The Heart of Hurricane Season

Whether its a real hurricane (Harvey, Irma), military (North Korea), political (Swamp vs Citizen) or stock market (Fed vs equity valuations) you can’t deny the number of trigger points that could cause a slide in the stock market. Not to mention that the coming weeks are historically weak seasonality periods for the stock markets.

Since my last update there isn’t much to report in terms of the stock market price action. Many of the sub-sectors are showing topping activity (retail, energy, industrials, insurance, financials) which will eventually trickle up to the broader S&P 500 and DOW indices. We ended the week on a nervous note with hurricane IRMA approaching Florida so we will have to wait until early next week to assess the damage.


Fun Fact of the Week (Elliott Wave International)

At $4.75 in stocks for every $1 in a money market fund, the latest extreme shows that the public’s preference for equities is now an order of magnitude stronger than it was in 2000 and 2007. Notice the ratio never declined below the 1:1 ratio of the 1987 extreme. Perhaps, this is due to less yield in the bond market over the last 30 years. The only place to “make money” has been in the stock market – especially since the early 2000s when the Fed lowered interest rates to 1% in the aftermath of the tech bubble.

Mutual fund investors shun cash for shares.


Economic & Central Banking Snippets

  • Who has ongoing trade activities with North Korea?

Who is North Korea trading with?


  • The Swiss economy grew 0.3% year on year in the second quarter, coming in well below estimates of 1.1% growth.
  • Thanks to central banks suppressing the cost of borrowing via quantitative easing, companies have feasted on cheap credit, using the proceeds to help fund share buybacks or higher dividends. The leveraged buyout and cash merger boom also reflect the fact that debt finance is cheaper than that of equity, as seen in the chart. We also see how the rise in debt — via the blue line — has accelerated since 2010, providing a tailwind for share prices. As investors survey US equity benchmarks in record territory, and many companies and sectors sport lofty valuations, the question is whether the high degree of leverage on balance sheets will prove this bull run’s Achilles heel. (FT)

When debt finance is cheaper than equity finance.


  • Growth in total auto sales may have peaked in 2016. A leading indicator of a slower economy? Keep in mind, ultra-low interest rates have fueled auto loans with low monthly payments. The Fed’s current policy of rising interest rates can impact this sector directly. (WSJ)

U.S. auto sales


  • For the first time since 2011, spending on office space construction has not grown from the previous year. (WSJ)

Total private construction spending


Hurricane Harvey and Houston (Morgan Stanley)

  • Greater Houston accounts for 3.5% of the nation’s housing starts, 2.6% of retail sales, and 2.8% of GDP.
  • The 10,062 square mile area of Houston MSA is home to 6.5 million people, who make up 2.1% of national employment.
  • In terms of its effect on GDP, the timing of Hurricane Harvey is key. We have over a full month left in the third quarter, which means the economic effects of Harvey may be fairly neutral on 3Q as a whole, but the lagged effects of rebuilding homes and replacing motor vehicles can last longer, providing a lift to GDP in 4Q and beyond.
  • Jobless claims will be the earliest data to show the impact of Hurricane Harvey. In the wake of Hurricane Katrina there was a sizable and prolonged impact on initial claims. The peak effect occurred three weeks after the storm hit when Katrina-related filings alone totaled more than 100,000.

Estimated inflation-adjusted damage in $ billions


Politics! Politics! Politics!

  • North Korea has apparently successfully tested a hydrogen bomb. The test follows Pyongyang’s claim that it had completed the miniaturization of a hydrogen bomb capable of being fitted to an intercontinental ballistic missile. Here is a graphic of nuclear tests since 1945.

North Korea conducted its 6th Nuclear Test


  • British Prime Minister Theresa May is set to approve a Brexit bill of up to 50 billion pounds (roughly $64 billion) after the Conservative Party conference in October in an effort to start trade talks with the European Union. Under this plan, Britain would pay between 7-17 billion pounds a year to Brussels for three years after Brexit.
  • North Korea set a goal in April of increasing its oil reserves to 1 million tons in anticipation of additional international sanctions. More than 90% of North Korea’s petroleum imports come from China. (FT)
  • The secessionist coalition government of Catalonia (a province of Spain) could introduce legislation approving the legal framework to hold an independence referendum on October 1. Prime Minister Mariano Rajoy’s government says it has prepared measures to stop the vote taking place, whatever the Catalans might try. (Bloomberg)


Chart Time!

S&P 500 (SPY)
S&P 500 (SPY)


10 Year Treasury Yields - TNX
10 Year Treasury Yields – TNX


Market Snippets

  • Top of the market enthusiasm? Lilium, a German start-up with Silicon Valleyscale ambitions to develop a 5-passenger “flying taxi”, has raised a second, $90 million round of financing from top tech investors, making it one of the best-funded electric aircraft projects to date.
  • Bitcoin’s price fell 11% after China’s central bank announced initial coin offerings were illegal and requested an immediate halt to all fundraising activity, Bloomberg reported on September 4th. Though the bank’s directive made no mention of cryptocurrencies such as bitcoin, it did prohibit financing and trading platforms from doing conversions of digital tokens into yuan.
  • Apparently, start-ups are “ditching venture capitalists and raising millions of dollars in minutes by issuing digital tokens in what have become known as initial coin offerings.” Offerings have raised $2 billion, mostly since April. And Bloomberg says the process for “issuing digital tokens that have similar properties as financial securities…is about to become easier.” The easy way becomes the obvious way. In this case, all a person has to do is push a button to literally create money. What could go wrong? (Elliott Wave International)
  • According to TD Ameritrade, retail investors went into September with the most bullish sentiment in years. Institutional investors often view this level of retail exuberance as a significant red flag for the market.

Investor Movement Index August 2017


  • Toyland in trouble! Hasbro, Inc., Mattel, Inc. and JAKKS Pacific, Inc. each plunged on Wednesday on news that Toys R Us hired restructuring lawyers to help address about $400 million in debt and potentially file for bankruptcy
  • Federal law-enforcement authorities in New York are investigating whether Uber Technologies used software to interfere illegally with its competitors, according to people familiar with the investigation, adding to legal pressures facing the embattled ride-hailing company and its new chief executive. (FT)


International Snippets

  • Lego said it would lay off 8% of its staff and revamp its business after reporting its first fall in sales in more than a decade on Tuesday. The Danish toymaker announced a 5% decline in mid-year revenue a month after abruptly removing its CEO. Lego said it could not promise a return to growth in the next two years, a jolting acknowledgement for a group widely admired for embracing the digital era and tying up lucrative franchises from Harry Potter to Minecraft.
  • China has reached its 2020 solar power target three years ahead of schedule, and renewable energy groups have urged Europe to show similar ambitions. But solar power still satisfies only 1% of China’s energy demand, while coal continues to reign supreme in the country’s energy mix. (STRATFOR)

Paul McCarthy

Mr. McCarthy is the President and founder of Kisco Capital.