S&P 500 Vs 30Yr Treasury Yields

Summertime Convergence

The stock market continues to grind higher as we approach the Fall months and the Presidential election. The push higher over the last several weeks is signaling a sharp rebound in the economy which may be wishful thinking. Several companies claim to be close to a vaccine for COVID-19 but my understanding is that confirming a vaccine works can take years. Until we get one or two more quarters of data on the recovery, there will be some guesswork as to modeling the value proposition in equities.

The chart below shows the Price/Earnings ratio based on expected earnings which shows equities approaching valuations not seen since the tech bubble. If the economy does sharply recover then this ratio will come down but that also means stocks are priced for perfection.

Forward P/E of the S&P 500.

In the shorter term, the chart below will be something to watch. As the relationship between the interest rates and the S&P have diverged significantly over the last several weeks. However, 30Yr interest rates rose this week in a sign that this relationship will align but this could play out in more than one way. Interest rates could continue to rise and align with a rising stock market. Or, the two could meet in the middle with stocks falling as interest rates push higher. In either case, the relationship will converge again which means that one or both instruments is about to make a big move.

SPX Vs. 30Yr. Treasury yields by Kisco Capital.

Chart of the Week!

Chart of U.S. Bankruptcies - 10Yr. High

Economic & Central Banking Snippets 

  • Industrial production rose in July by 3% m/o/m as re-openings increased economic activity. The manufacturing component in particular was up by 3.4% m/o/m which was driven primarily by the reopening of auto plants.
  • July core retail sales rose 1.4% m/o/m, above the estimate of up .8% and June was revised up by 4 tenths to a gain of 6%. This follows a 10.4% increase in May after the 12.4% drop in April. (Block Report)
  • Initial jobless claims totaled 963k which was 137k less than expected and down from 1.19mm as reported last week. Also, continuing claims trended lower to 15.49mm vs 16.09mm in the week prior. However, the extended benefits claims has expired so there is no way to tell if the drop means people found a job or became ineligible under this program.
  • The June reading of the Labor Department’s Job Openings and Labor Turnover Survey (JOLTS) showed substantially less jobs were added in June than the department’s nonfarm payrolls report. Why it matters: JOLTS is a more comprehensive analysis of the labor market than the more popular and timely monthly jobs report. JOLTS counts jobs for the entire month, rather than just the period near the 12th day of the month, meaning it picks up new hiring and separations in the second half of the month. (WSJ)
JOLTS quits.
  • The July Producer Price Index (PPI) jumped .6% m/o/m, double the estimate while the core was up by .5%, well more than the forecast of up .1%. The headline rise is the most since October 2018 with a 5.3% increase in energy prices leading the way. Prices also rose for machinery and vehicle wholesaling, auto and auto parts retailing, legal services and machinery and equipment parts/supplies. Airline prices on the other hand fell by 7%. (Boock Report)

Macro Snippets

  • The U.K. government added France, the Netherlands, Monaco, Malta, Turks & Caicos and Aruba to its COVID-19 quarantine list this week. Travelers returning from these countries must self-isolate for 14 days. France recorded 2,669 new coronavirus infections on Thursday. (Investopedia)
  • Fannie and Freddie just made it more expensive to refinance a mortgage as they’ve added a 50 bps fee of the loan amount which will be paid by the lender but of course passed onto the consumer. It’s only to help the profitability of FNM and FRE which remain government stewards. (FT)
  • Plant-based meat maker Impossible Foods has raised another $200 million in a Series G funding round. This brings the total investment raised by the company to nearly $1.5 billion. The latest round reportedly valued the company at $4 billion. (Investopedia)
  • 38% of U.S. CEOs expect to reduce their workforce in the next 12 months. CEO confidence improved marginally in the third quarter, but they remain pessimistic about current and future conditions, according to the latest survey from The Conference Board. In the next year, 37% say they will trim their budgets by 10% or more, and more than a third do not foresee increasing employees’ average wages. Nearly 50% say they will increase wages by less than 3%. (Investopedia)
  • Lyft and Uber are both threatening to halt service in California if the recent ruling forcing them to treat drivers as employees is not overturned. The preliminary injunction is set to go into effect in a week, and both firms are appealing it. Along with DoorDash, Instacart, and Postmates, they are also hoping residents vote for Proposition 22 in November, which would override the AB5 bill and define app-based transportation and delivery drivers as independent contractors. (Investopedia)
  • Aluminium can maker Ball Corporation secured the lowest-ever borrowing costs for a US junk-rated company on Monday, as income-starved investors shrugged off lingering concerns over Covid-19 in their pursuit of higher yields. Ball raised $1.3bn through a 10-year bond, paying an annual coupon of 2.875%, according to people familiar with the terms. It was the lowest borrowing cost clinched in the junk debt market for a 10-year bond, according to financial data provider Refinitiv. (FT)
Chart of yield on U.S. corporate junk bonds.
  • So far this year, U.S.-listed biotech companies have raised roughly $9.4 billion in initial public offerings, already beating the $6.5 billion raised in all of 2018, the biggest year on record, according to Dealogic data going back to 1995. Many investors who have spent years analyzing and buying shares of biotech companies say the market’s enthusiasm for health-care companies might be overdone, particularly for companies that appear to be rising on bets that testing for Covid-19 vaccines will be successful. (WSJ)
Biotech IPOs 2020.

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

Paul J. McCarthy Headshot.


Paul J. McCarthy, III

President – Kisco Capital

Paul McCarthy

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