Chart of the 30Yr Treasury Yield

Saving for a Sunny Day

Another coronavirus bill passed the Senate early Friday morning which includes more aid for consumers and small businesses to get through the next few months. Where is all this cash going? In the chart below, you can see that the US personal savings rate has jumped sharply as consumers stay at home and build cash as states run their economies in slow gear. As the U.S. economy re-opens and the snow melts, there should be a sharp increase in the economy (hopefully) in the first half of this year.

The S&P seems to be taking the unusually high savings rate into consideration as these monies will be deployed into the economy like a bat out of hell. Everyone I know can’t wait to spend money and return to their pre-corona life. The technicals look to be reflecting this pent-up demand as the trend channel below held nicely until the breakdown in the last week of January.

However, this breakdown could not push through the January 4th low and created a double bottom which we can now use as a critical support level at 3652. The rebound has put the S&P back in the trend channel so we can track this pattern and use the double bottom level as critical support.

A recovering economy means the long-end of the yield curve will rise in anticipation of increased economic growth, rising inflation expectations or both. We are seeing this now as evidenced by the 30Yr bond breaking resistance this week at 1.9% – this means 2.15% is likely the next stop. That would put the spread between 2Yr & 30Yr interest rates just over 200bps which is normal in expansionary periods.

The yield curve will be much more in the news in the coming year as the Fed has turned up its nose at the risk of inflation (lower for longer) and now we have Congress dumping trillions into the economy. Inflation may come sooner than expected as consumers unleash all those dollars sitting in their savings accounts just waiting for that sunny day after this pandemic has passed.

Chart(s) of the Week!

The Reddit-fueled frenzy in stocks such as GameStop and AMC Entertainment is prompting calls for regulators to reconsider something called payment for order flow. This type of relationship makes it possible for the U.S. brokerage industry to advertise zero-commission trades. No longer needing to pay a commission on trades and empowered by easy-to-use trading apps like Robinhood, individual investors poured into stocks and options at record levels last year.

“If you’re not paying, you’re the product.” It’s been the rallying cry against social media and now it is being applied to commission-free trading. According to data compiled by The Block, Robinhood took in nearly $700 million in payments from high-frequency trading firms that pay for “order flow” or execute trades for the online brokerages which means users may not always receive the best prices. This is a controversial and crucial part of the business model of trading apps, and as more retail investors learn about it, the pressure to change increases.

The simmering debate over payment for order flow boiled over last week after some brokerages restricted trading in GameStop, sparking heated speculation that the curbs were imposed at the behest of giant trading firms that handle those brokers’ order flow.

“Payment for order flow, at the end of the day, is legalized bribery that appears to incentivize brokers to violate rules,” said Dennis Kelleher, president of Better Markets, an advocacy group that lobbies for tighter financial regulations. (WSJ/FT/Investopedia)

Economic & Central Banking Snippets 

  • The unemployment rate fell by 0.4% to 6.3% in January, while nonfarm payrolls changed little (+49,000) according to the U.S. Bureau of Labor Statistics. The labor market continued to reflect the impact of the coronavirus pandemic and efforts to contain it. In January, notable job gains in professional and business services and in both public and private education were offset by losses in leisure and hospitality, in retail trade, in health care, and in transportation and warehousing. (BLS)
  • The number of workers seeking unemployment benefits fell for the third straight week, a sign that layoffs have started to ease following an increase in early January. Initial jobless claims were reported on Thursday and fell to 779K (830k expected) from last week’s downwardly-revised 812K.
  • The Bank of England cut its forecast for U.K. economic growth this year, saying measures to suppress contagious new variants of the coronavirus will keep a lid on activity until an expected vaccine-driven rebound gets under way in the spring. The BOE in its latest set of forecasts said it expects the U.K. economy to grow around 5% this year, compared with a November forecast of a little over 7%.

Macro Snippets

  • The price of Ethereum, the second-largest cryptocurrency behind Bitcoin, continues to rise ahead of the launch of futures for it by CME Group. The new contracts will make their debut on February 8 and be cash-settled based on the CME CF Ether-Dollar Reference Rate. The digital coin hit an all-time high price above $1,500 this week according to CoinMarketCap. (Investopedia)
  • Ford plans to invest $29 billion in electric and self-driving vehicles through 2025. The automaker announced mixed earnings this week and revealed it is cutting F-150 pickup truck production due to a global semiconductor chip shortage which is expected to slash Ford Motor’s vehicle output by up to 20% in Q1. (WSJ)
  • A total of 33.8 million doses have been administered in the U.S. so far, according to the CDC, and 6.4 million have received two doses and been fully vaccinated. According to Bloomberg, the pace has increased to about 1.34 million doses a day. (Investopedia)
  • Peloton sales and subscriptions more than doubled in the latest quarter despite long shipping delays. The company will be investing over $100 million in air freight and expedited ocean freight over the next six months to speed up delivery times.
  • Home prices have skyrocketed during the pandemic. Demand is boosted by low interest rates and a need for more space during lockdowns and working from home. This coupled with soaring prices for building materials like lumber and low inventory, has made this housing market the hottest in years. Properties are said to be “equity rich” when the combined estimated amount of loans secured by them were 50% or less of their estimated market value. This figure has risen from 28.3% in Q3 2020 and 26.7% in Q4 2019, according to ATTOM Data Solutions.
  • Oil prices and stocks continue to climb after the OPEC+ chose to maintain planned output cuts. The Energy Information Administration (EIA) also boosted sentiment when it said U.S. crude oil stockpiles fell to 475.7 million barrels last week, the lowest level since March.
  • Investigators at the SEC are looking at social media/message board posts for signs that fraud and manipulation drove up prices in certain stocks like GME last week, according to Bloomberg. There are reports of institutional investors making hundreds of millions amid the mania, some market players like short seller Muddy Waters Capital have suggested that it was actually hedge funds targeting other hedge funds, rather than just retail investor activity, which led to the short squeezes. (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.