Jobs Report Misses Expectations
After a strong showing on the ADP jobs report, analysts were excited about the official Nonfarms payroll report coming out today that would show another month of 200,000+ job gains. The March report showed a gain of 98,000 jobs and downward revisions for both January and February, putting into question the overall strength of the economy. Even wage growth missed estimates, which continues to show the average American is getting poorer as consumer prices outpace wage gains. Shortly after the Atlanta Fed GDPNow projections halved their first quarter GDP estimates from 1.2% to 0.6%. Ouch!
Not to worry, the analysts were quick to come up with reasons why the jobs report was a miss and in response, the stock market barely moved in early trading hours. What the stock market is telling investors is that it will go up on good news and do nothing on bad news. On Friday, the Nonfarms payroll report missed expectations, first quarter GDP estimates were cut in half, there was a terrorist attack and a missile strike – stocks went up. Market complacency is not a good sign, but it makes investors feel secure for the time being.
Fed Thinks Markets Are Overvalued
The minutes from the last FOMC meeting were released which showed signs that the Fed is considering winding down its massive stockpile of bonds that it bought during the successive Quantitative Easing programs they ran. The initial reaction should be that if the Fed starts to wind down their bond portfolio by ceasing to purchase more bonds with the interest they are generating and start to sell their portfolio that it should cause 10-year Treasury yields to spike. And they did, for about 15 minutes after the report came out. Then yields fell and have continued to fall since. Digging into the report it says that some members of the Fed want to scale back the program in case they need to reinstate it during the next economic downturn.
The report went on to say that many members are concerned about the high valuations in domestic stocks, emerging markets, high-yield corporate bonds and commercial real estate. The stock market did finally fall on this news, but not that much. The Fed is trying to warn investors and their calls are going unanswered.
Bond Guru’s Say Yields Will Fall
Back in November, a couple bond gurus said the 10-year Treasury yield was going to rise to over 3% as we were now in a rising interest rate market. I was probably the only person who disagreed with that and made a point of saying that when the two biggest bond fund managers are calling for rates to go up, it is because they want to buy bonds at a discount. Four months later both Bill Gross and Jeffery Gundlach are now saying there is a good chance yields are heading to 2%.
I have been on record saying as they get to 2%, they are more likely to continue falling then go back up because GDP growth is falling and the CPI index should start to fall soon too. Yields are expressed by adding nominal GDP to the CPI, which is an estimated 0.6% plus CPI (currently at 1.7%, but should be falling to 1%), meaning yields should be near 2.3% and as the CPI index falls, yields should further fall.
Debt, Debt and More Debt!
Stocks are not the only thing that is high in this economic cycle; debt levels are very high. Student loan debt now stands at 1.3 trillion and comes with a 10% delinquency rate. There are 1.1 trillion of auto loans, of which 290 billion is subprime. You might not think that is a big deal, but it’s about the same size in dollar amount as the subprime housing loan market that kicked off the last recession. Then there is the commercial real estate sector which holds 2.6 trillion in debt, which is high when you consider there was only 800 billion in debt when the last commercial real estate crisis occurred.
Despite all this debt, the public believes interest rates are heading higher and the Fed believes the economy can handle it. Right… The NY Fed stated that total US household debt is expected to pass its 2008 peak sometime in 2017; the prior peak was 12.68 trillion. The good news is that most of that debt is isolated to student loans and cars, and most of it is held by older people. The same people who have all their money riding on the stock market going up.
Price-to-Sales Ratio Approaches Dot Com Bubble Levels
The price-to-sales ratio is the amount of money an investor pays for a unit of sales. The higher the ratio, the more an investor pays for a unit of sales. Currently, the market is trading at a 2.1x’s multiple. That may not sound high, but at the peak of the dot-com bubble, it was trading at a 2.3x’s multiple. One expert who crunched the numbers on this suggested that these multiples would be acceptable if real interest rates were at -2%.
Smart Money Goes Short
The “smart” money has turned bearish, as evident by the number of short futures contracts being taken out against the major stock indices. This comes at a time when margin debt rose to a record high. Margin debt is where investors borrow money out of their brokerage accounts to buy more stocks. Similar in concept to those who took out equity lines on their houses during the housing boom to buy more houses. With brokerage accounts, you can borrow up to 50% of your account value. Given the public buys most at the top and the least at the bottom, this probably won’t end well.
Volatility is About to Spike
Few people understand what volatility is and how it affects the market. In this week’s video, I am going to share with you what volatility is, how it has been suppressed since the election and what could happen to the stock market when volatility spikes. I will even share my research that suggests volatility could spike very soon. Be sure to tune in for that and this week’s chart pack.
Thursday night, going into Friday morning, everything was moving our way. Gold was up big, along with all the miners and the 10-year Treasury yield was falling towards the danger zone. The danger zone is about 2.3%, where if yields get much lower, a short squeeze will occur. This is exactly what I have been looking for!
Then late Friday morning, for no specific reason, the market drove interest rates back up out of the danger zone and anything defensive, such as gold, back down.
Shortly before close buyers stepped in and supported prices. Everything is still holding its trendline, but at this point, I must be mindful that if prices do not hold their trendline that I will need to sell our existing positions.
It just seems at this point that the “smart” money has not aligned itself with us. We are early to the party, but fortunately in a net positive position on the mining allocation on a NAV basis.
At this point, I am forced to remain in a holding pattern until the market decides if it’s going to support the defensives or not. Part of this is because gold is close to breaking a long-standing downward trendline, which if it did, would be very bullish for gold (and miners). My guess is there is not enough big money positioned to take advantage of that move, so they are not supporting it yet.
As I said, we are early to the party but not overly committed if the music does not start. Looking at how much prices started up today, does make me happy to see how quickly things can move in our favor if the trend gains further support.