Stonk Market

HedgEye Cartoon - The End is Near

The stonk market put in a short-term top in mid February and has been pulling back for the last three weeks. The rationale has been that inflation and higher interest rates will kill the rally in stocks. However, stocks also like growth and consensus is that a burst of GDP is on the horizon.

I would like to point out that interest rates typically rise with stocks and that most technical analysts look for this relationship as an economy expands. If we look at the chart below, the S&P 500 was poised to give back all the gains from the first half of February. The breach of the 61.8% FIB, which typically signals a 100% retracement, was a fake-out and pulled in many sellers as evidenced by the unusually large volume on Thursday/Friday. The last two green bars show the magnitude of the reversal – sellers below 3772 ended up chasing the market higher Friday afternoon. A rough end to the week for bears.

Most market pundits blamed Fed Chair Powell and his online interview with the Wall Street Journal this week for the volatility in stocks. The yield curve jumped 10bps during this interview as he “disappointed” with his commentary. But if you look at the chart of the 10Yr Treasury bond below, interest rates have been rising steadily since last July. So, this interview is coincidental with this last push higher in rates. There is also a high level of short-interest (traders betting on lower bond prices) that developed these past two weeks so I think lower yields are on tap as these trades get unwound and oversold conditions get worked off. If this all happens next week, stocks should be on good footing to confirm a bottom on Friday.

Chart of the Week!

In 2020, the United States imported $11.1 trillion worth of goods and services while exporting $8.5 trillion. Below is a breakdown of the various categories by industry.

Exports of Goods & Services by

Economic & Central Banking Snippets 

  • Non-farm payrolls grew in February by 379k which was better than expectations of +200k. The biggest jobs losers over the past year were the biggest gainers in February. Restaurants and bars, though down 2 million jobs from a year earlier, added 286,000 jobs. Recreational outlets, hotels and medical offices, which are together still down by 1.4 million, added 97,000 jobs. (WSJ/Boockvar)
Change in Payroll February 2021
  • The February ISM manufacturing index rose to 60.8 from 58.7 which was better than anticipated. ISM said “Manufacturing performed well for the 9th straight month, with demand, consumption and inputs registering strong growth compared to January. Labor market difficulties continue to restrict manufacturing and will remain a headwind to production growth until employment levels and factory operations can return to normalcy across the supply chain.”
ISM Purchasers Feb 2021
  • THe ISM Services survey cooled in February but still indicated growth among restaurants, builders, retailers and other service industries. Similar to manufacturers, service-providers are running up against supply-chain difficulties, which is increasing delivery times and pushing prices higher. “Production-capacity constraints, material shortages and challenges in logistics and human resources are impacting the supply chain,” said Anthony Nieves, who oversees the ISM services survey. (WSJ)

Macro Snippets

  • Fixing the production shortage plaguing the chip industry will take a lot of time and money. Even new domestic chip fabrication plants breaking ground this year won’t be fully operational for years. The shortage for certain industries such as autos will be with us for some time.
Semiconductor Spending
  • Gap: The clothing retailer said consumers are eager to buy the kinds of apparel and predict a rebound in sales in the second half 2021.
  • Millions of tenants are falling further behind as they await federal Covid-19 assistance. Many states are still determining how to distribute money they have received from the Treasury Department to help an estimated 13 million renters. Meanwhile, Congress will appropriate another $20 billion in rental assistance. (WSJ)
  • Smith & Wesson: The gunmaker shipped 500,000 handguns and more than 100,000 rifles in the quarter to Jan. 31, more than double the year-ago period.
  • Fund managers are bulking up on junk bonds, corporate loans and equity-linked bonds while selling safer assets such as government debt, mortgage-backed securities and investment-grade corporate bonds. The chart below shows that the re-packaging of junk debt into CLOs (Collateralized Loan Obligations) is making a comeback in 2021.
Sales of CLOs 2021
  • Broadcom: The semiconductor and software company generated about $3 billion in free cash flow in the latest period and ended the quarter with about $7.62 billion in cash.
  • Disney is closing 60 stores in North America due to changing consumer behavior. The company is operating 300 Disney Stores worldwide and is now focused on improving its online shopping experience. (Investopedia)
  • Google said it will not track individuals’ online behavior once it phases out third-party cookies, in order to protect user privacy. Since the search platform accounts for a large chunk of digital ad spending, its refusal to enable sophisticated ad targeting comes as a blow to advertisers. The company will use “privacy preserving APIs” instead, which will track groups of users with similar interests. (Investopedia)
  • Microsoft is taking us a step closer to living out our sci-fi dreams by unveiling a new mixed reality meeting platform powered by Azure. Microsoft Mesh allows people in different physical locations to share a holographic world and collaborate. They will initially appear as avatars and over time use 3D capture technology to project themselves as their “most lifelike, photorealistic selves.” (Investopedia)

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

Paul J. McCarthy


Paul J. McCarthy, III

President – Kisco Capital

Paul McCarthy

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