Market Brief — Thursday 9/20/18

Who is buying stocks at their all-time highs? Corporations. Margin debt growth has dramatically slowed due to higher interest rates. Retail and foreign fund flows have also slowed significantly. Corporations continue to repurchase their stock to allow their executives to cash in on their lucrative stock options. When the last marginal buyers are corporations, investors should consider how they are going to sell when corporations stop buying their shares back.

Treasury yields continued higher this morning as the number of initial jobless claims hit their lowest level since 1969. Yields then quickly fell as existing home sales remained flat for August, while as prices and inventory levels rose. Clearly higher interest rates are affecting home sales.

Every morning at 5 a.m. PST someone has been selling Treasury bonds to drive yields higher. It is unknown who is doing this or why, but there isn’t typically any economic data released at this time to cause yields to rise. Today’s reopening of a prior 10-year Treasury TIPS auction saw a very strong foreign demand, despite continued claims foreigners are no longer interested in holding U.S. debt.

Monday’s 2-year Treasury Note auction has a huge $19 billion of Fed-held bonds maturing. Tuesday’s 5-year Treasury Note auction also has a huge $19 billion of Fed-held bonds maturing. Not to be outdone, Thursday’s 7-year Treasury Note auction has a huge $19 billion of Fed-held bonds maturing. As bonds roll off the Fed’s balance sheet, liquidity will be drained from the financial system. This liquidity drain doesn’t include the 0.25% expected increase in the Federal Funds rate that will be announced at the press conference following the FOMC meeting next week.

Keep in mind, as the Fed unwinds and tightens monetary policy, Treasury yields should fall. Perhaps the recent rise in yields was to coerce short-sellers into selling more bonds to the smart money.

Both the S&P 500 and DJIA set new all-time highs today ahead of tomorrow’s quadruple witching day, where options and other speculative securities expire, along with a change in the sectors weightings for the S&P 500. Look for the markets to ‘gap’ down and volatility to increase tomorrow.

Ten-year Treasury yields were flat and 30-year Treasury yields fell. Knowing tomorrow is quadruple witching day, it is possible speculators were forced to short Treasury bonds lower to profit on their expiring options contracts.

Physical gold made a week attempt at trying to touch its overhead 50-day moving average but didn’t. The gold miners keep finding buyers, but sellers remain aggressive at keeping prices from rising.

Agricultural commodities started seeing increased volume, which caused prices to rise. Buyers have been coming in at the dips for over a year now, and this recent three-month consolidation near the all-time lows is an indication that sellers may be exhausted and unable to drive prices lower. Given the agricultural commodity, super-cycle is near, prices should start moving higher soon.

The growth rate M2 Money Supply fell back to 3.90% this week and remains 0.20% above the fifth quintile for the money supply. When the growth rate of the money supply falls below 3.70%, the economy has an extremely high probability of entering a recession, or worse, depression. As the Fed continues to unwind its balance sheet, the growth rate of the money supply should continue decelerating.

The Fed’s balance sheet fell this week by $2 billion. Next week the Fed is scheduled to unwind $57 billion across three auctions. It is unknown how much of it will be reinvested, but to stay on schedule for September, $33 billion needs to be unwound. Starting in October, the Fed will increase its unwind to $50 billion per month.