Melt-Up? Melt-Down?

Despite the backdrop of a growing risk to global trade and growth, the S&P 500 refused to breakdown this week. Clearly, the severity of the coronavirus in China increased this week and more trouble is surely ahead for China’s trade partners. So, what is holding up this market?

Fed Holdings
Fed Balance Sheet

The graph above shows the securities held on the Fed’s balance sheet – the green line is Treasuries and the yellow line represents mortgage backed securities. The green line shows that the Fed has been buying again to prop up short-term lending operations (REPO) that has acted as another version of quantitative easing. This additional liquidity eventually makes its way back to risk assets like stocks and junk bonds. However, the Fed announced this week that they are trying to ramp-down this “temporary” program in the coming weeks as I think they now know they are directly influencing stocks to push higher unabated.

This is not a new phenomena. In 1998, the Fed provided stimulus after the Russian default crisis which in turn caused the NASDAQ to double in 1999. However, this market has been a slow-burn higher as the Fed has been pulling the liquidity levers since the 2009 low.

SPX: S&P 500 Index

The Chart of the S&P 500 above illustrates a significant trend-line that started at the 2009 low. We have been bumping along its underside the last two weeks which means the S&P 500 could give up the ghost and begin a correction. Alternatively, a breakout above the trend-line could mean a push towards 4,000 later this year as shown by the 261.8% extension. In either case, there are many technical signals that the uptrend has weakened significantly so a breakout would have to wipe out all the negative divergences but at least we have a guideline if it happens.

The best barometer of risk over the last few weeks has been the bond market where Treasury yields remain stubbornly low. A close on the 30Yr below 2% would be a warning signal to the stock market.

U.S. Treasury Yields.

Chart of the Week!

How couples Met!

Economic & Central Banking Snippets 

  • The spread of the Coronavirus is crimping companies’ ability to forecast sales which impacts economic forecasts around the world. The European Union maintained its outlook for subdued but stable growth through 2021 of 1.2%, but warned that the coronavirus could derail that forecast. “The baseline assumption is that the outbreak peaks in the first quarter, with relatively limited global spillovers. The longer it lasts, however, the higher the likelihood of knock-on effects on economic sentiment and global financing conditions,” the European Commission said in its forecast. (Investopedia)
  • China’s consumer price index (CPI), rose 5.4% year-over-year (YOY) in January, the National Bureau of Statistics said Monday. The increase was up from 4.5% for December. Food prices grew 20.6% YOY last month, up from 17.4% in December, while non-food prices gained 1.6%, 0.3% higher than in December. (Investopedia)
  • Household debt increased by more than $600 billion last year, topping $14 trillion for the first time, and marking the largest one-year jump since 2007, new data from the New York Fed shows. The growth was driven mainly by a large increase in mortgage debt balances, which rose by $433 billion.
  • Manufacturing in the euro area ended 2019 with the deepest slump in almost four years, with industrial production dropping 2.1% in December from a year earlier. The dismal numbers came in the period ahead of the COVID-19 outbreak, which means a quick turnaround is unlikely. (Bloomberg)
  • U.S. inflation remains subdued. A key gauge of consumer prices—which excludes volatile food and energy components—climbed 2.3% from a year earlier in January, led by rising costs for housing and medical services. (WSJ)

Macro Snippets

  • The US Treasury’s 30-year bond auction this week sold at a record low yield of 2.061% Thursday, down from the previous record of 2.170% in October, BMO Capital Markets data shows. (CMT)
  • Honda Motor Co. said Friday it will postpone the restart of its plants in Wuhan, the epicenter of China’s coronavirus outbreak, by a week at the request of local authorities. (Japan Times)
  • Alibaba Group said the coronavirus outbreak that has locked down residents across China is hampering the online-retail giant and may result in slowed growth as employees stay home from work and packages go undelivered. (WSJ)
  • Tesla is facing fresh regulatory scrutiny over its finances as it looks to raise more than $2 billion from a stock sale to help bolster its balance sheet. The Securities and Exchange Commission issued Tesla Inc. a subpoena in early December seeking information regarding certain financial data and contracts, which include its regular financing arrangements, the electric-car maker said Thursday. (WSJ)
  • Despite more and more record highs for U.S. equities, fixed income has seen the majority of the inflows from investors since 2019. According to Lipper, which tracks fund flows, $382 billion has flowed into bonds since the start of 2019, while $191 billion has flowed out of equity funds. That suggests that there is a lot of money on the sidelines, and large investors may be taking risk off the table.
  • Dish executives have told some on Wall Street that the company has held talks with Google and Amazon about building a new wireless carrier. (NY Post)
  • Amazon CEO Jeff Bezos has sold over $4 billion in stock over the past week, according to regulatory filings. After barely selling stock over the past decade, the world’s richest person has been unloading shares at a record pace of late. (Investopedia)
  • Tesla Inc is recalling 15,000 Model X SUVs because of a potential issue that can lead to a loss of power steering assist that could make steering harder and increase the risk of a crash according to the National Highway Traffic Safety Administration (NHTSA).
  • McClatchy, the third-largest newspaper publisher in the U.S. by circulation, says it has filed for chapter 11 bankruptcy. (WSJ)
  • Chinese electronics manufacturer, Huawei Technologies and two of its subsidiaries have been charged with racketeering and conspiracy to steal trade secrets by federal prosecutors. The indictments allege that Huawei stole intellectual property from six U.S. tech companies, and made efforts to circumvent U.S. sanctions on Iran and North Korea. (Investopedia)

That is all for now and thank you for being a subscriber!


Paul J. McCarthy, III

President – Kisco Capital

Paul McCarthy

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