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Wkly Round-Up Thru 7/26/19 “Mirror Mirror on the Wall”

Hey folks, I hope you are enjoying the summer heat…it seems to be a hot everywhere; –including in the US markets….

This week’s Market Sound-Bites:

• Barons made a great observation in this weekend’s edition that stated this economy should be called “The Constanza Recovery”….in an old Seinfeld TV Episode, George Constanza recognized that everything he did was wrong and if he would just do the opposite, things would work out nicely…and this would also essentially explain the Financial Crisis since the Great Financial Crisis…so, instead of letting banks fail, we bail them out; instead of trying to balance the budget, we run mega deficits; and instead of letting the money supply shrink, we slash rates to nearly zero and quintuple the size of the US Balance Sheet…and now it looks like we will cut rates even lower as markets are near all-time highs – hence the term, The Constanza Recovery…the current market forecast is for a 25 bps rate cut next at the conclusion of the next week’s FOMC 2-day meeting…or, like looking into a mirror where everything is reversed this is the current market we live in….

• With interest rates forecasted going lower we saw this past week the Q2 GDP coming in at a better than forecasted 2.1% growth, which followed a Q1 GDP reading of 3.1%…and making up almost 70% of the GDP number is consumer spending, which is showing a great degree of resiliency and growth in the consumer pocket book coming in around 2.9% annually…and this is on the heels of Retail Sales growth of over 6.1% annually…and many analysts also expect the FEDs to announce an early end to their Quantitative Tightening of the US Balance Sheet…

• We are also seeing US Bond Yields being pulled lower by the ridiculously low rates or shall I say, negative rates all across Europe…this forces money to flow over to the US markets driving the USD higher while lowering our interest rates…there are currently over $14 Trillion in negative yielding rates worldwide….this does show how upside down the financial markets have become…as we’re seeing Globally Central Banks race to the bottom with interest rate cuts and monetary stimulus….and one thing we do know about the markets, that over time, every action will generate an equal and opposite reaction; -and we’ve yet to see just what will come around the corner for us; whether that is 1 year out or perhaps even more….I believe the Central Banks will always overplay their hands and the markets will react accordingly longer term; –short term more stimulus should boost assets across all sectors…there is an old Yiddish Proverb that says; “You Plan and God Laughs”….I guess in this case it seems most appropriate…

• There was also talk of Trump taking action in the markets to reduce the strength of the USD…ever since Nixon took the USD off the Gold Standard in 1971 we’ve seen the USD loose value due to massive overspending by US Politicians and significant US Deficits…but in today’s Global markets, the US is outperforming and with that performance, we are seeing a much stronger USD….Trump can go into the markets and sell USD against a basket of other currencies which would weaken the USD….this would not be unprecedented as it has been done in the past and it would not surprise me to see this sometime in the future depending upon the actions the FEDs take with US interest rates…one only needs to study the permanent deflationary environment in Japan for several decades to see that a very strong Yen helped aggravate that deflationary spiral…

• And speaking of lower interest rates it appears that this coming September the ECB signaled more monetary stimulus via even lower interest rates and perhaps increasing its bond buying programs to include Corp Bonds…all across Europe their Bond market is mostly upside down passing Japan as the world’s #1 issuer of negative yielding interest rates…we are even seeing 50 year Bonds issued in Switzerland and Denmark that have a negative yield…really amazing! This continues to lure more capital over to US markets which in turn strengthens the USD while pushing our Treasury interest rates even lower…

• Thus far Q2 Earnings are a mixed bag, but still coming in better than forecasted, but the bar is also very low…thus far, 44% of the S&P Companies have reported and 77% have beat EPS while 61% have beat top line revenue numbers…the EPS beat rate is above the 5-Year average of 72%…but, assuming earnings continue to come in at this pace, we are on track to see a 2.6% decline in aggregate YoY which would give us the second Qtr. of below zero earnings putting us into an Earnings recession, similar to the opening half of 2016…so far the best performing sector is Health Care where earnings are up 4.8% with Materials sector coming in at the bottom being down 19% YoY….

Enjoy this Weekly Round-Up;

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