DAILY DIARY
That's Just ... Nifty
I think I am on to something with regard to "The Nifty Seven" and "The Great Divide."
The Nasdaq (QQQ) looks like it is now down $9 from the day's high and the S&P (SPY) is nearly down $6 from its high.
Thanks for reading my Diary to day and enjoy the evening.
Be safe.
The Market 'Lowdown'
Both the Nasdaq and the S&P Indexes are at the day's lows.
The Nifty Seven Market
* It's the New 'Nifty Fifty' Market
Apropos to my opener, The Great Divide -- there were over 500 new lows on the Nasdaq composite today, even though the Nasdaq made a new high in the morning.
This hasn't occurred in over 20 months.
Remember the "Nifty Fifty" market in the early 1970s?
Today we have the "Nifty Seven" market. (FAANG+M (that's Microsoft (MSFT) )+N (That's Nvidia (NVDA) ).
My Shorting Zone Radar Is Flashing
Both (GS) and (MS) are moving back into my shorting zone.
But, given my belief that value/financials may catch up (absolutely and relative to growth) - I have been steadily adding to (C) and initiated a (JPM) purchase on Friday - I will give the stocks a wider berth before entering the dark side.
Just How Very Weak Is the Auction? Boockvar Tells Us
From Peter Boockvar:
After the weak 2 yr auction, the 5 yr note auction was as well. The yield of 1.319% was priced 1 bp above the when issued. The bid to cover of 2.34 was below the one year average of 2.38. And, dealers were left with the most amount of a 5 yr auction since February at 27%.
In response, the 5 yr yield is at the high of the day at 1.30% and that too is the highest since late February 2020. For perspective, the 5 yr inflation breakeven is at 2.99%, down 4.5 bps today. The 10 yr yield is also at the high of the day at 1.61%.
5 yr Yield
5 yr INFLATION BREAKEVEN
A Historical Perspective
Getting back toThe Great Divide opener ...
In the beginning of the Bear Market (that started in the mid to late 1960s), secondary growth peaked in the second half of 1968 and the generals started down in late 1969.
And there there was the dot.com boom in the late 1990s.
May Internet Capital Group continue to rest in peace.
Tweet of the Day (Part Trois)
Nasdaq Red
The extreme market bifurcation highlighted in this morning's opening missive might finally be in the early stage of being unwound now.
Auction Action
The two year U.S. note auction was weak.
The bid to cover was much below the average and dealers were left with 37% of the auction (above the average).
Resultingly, the two year yield is +6 bps from Friday (to 58 bps) and at the day's high.
As you can see in Peter Boockvar's graph above, the two year yield started the year at only 12 basis points.
Boockvar on the Data
Peter Boockvar on the data:
Existing home sales in October totaled 6.34mm, 140k more than expected and up a touch from the 6.29mm print in September. As this is measuring closings, assume most contracts were signed in the summer. Inventories remained lean at 2.4 months, the same pace seen in September. In turn, the median home price was up 13.1% y/o/y.
First time buyers are the most impacted by the aggressive price gains and the growing presence of cash buyers. First time buyers made up 29% of purchases vs 28% in September, 29% in August and vs 32% one year ago. All cash buyers are now 24% vs 19% one year ago and the 'Investor' category jumped to 17% from 13% last month and vs 14% last October. We'll soon see where these figures go now that Zillow is out of this business and to what extent the voracious demand for yield brings in more institutional buyers to fill its place. Either way, it's a tougher time for first time buyers and single family landlords are only further growing its presence. It is also why rental price increases are so aggressive too as people shift to renting rather than buying. The NAR actually spins this last point the opposite way, "Inflationary pressures, such as fast rising rents and increasing consumer prices, may have some prospective buyers seeking the protection of a fixed, consistent mortgage payment." 'May' is the key word here as they still have to save up for a down payment.
Bottom line, of all housing numbers, this one is the most dated because it's 2-4 months ago that many of these contracts were signed. That said, the housing market is hot but there are signs of moderation in that buyers are getting more price sensitive. Certainly younger buyers are and maybe Zillow is the 1st sign that institutional ones are as well.
EXISTING HOME SALES
MONTHS' SUPPLY
MEDIAN HOME PRICE y/o/y
Breadth Update
Market breadth at 11 a.m.
November Surprise
It is surprising to me that the stock market is now celebrating rate hikes, a jump in interest rates and a faster taper.
A Cannabis Sales Update
Heads Up on JNJ
A heads up.
Johnson & Johnson (JNJ) is ex-dividend $1.06/share today.
Powell Renominated
Break in!
Jerome Powell has been renominated as Fed chairman.
The initial response in the futures is positive. .
To me, banks are the greatest beneficiary of the president's decision.
I initiated a JPMorgan Chase (JPM) purchase on Friday at around $160/share -- along with a current holding of Citigroup (C) .
The Great Market Divide
* As the generals (FAANG+M+N) material outperform the soldiers
* The market internals are deteriorating
Rarely in my investment career have I seen such a bifurcated market in which a handful of stocks (FAANG + Microsoft M(SFT) + Nvidia N(VDA) -- let's call them the Generals -- are so materially outperforming the average stock (the soldiers):
The market's internals are awful:
As noted by The Divine Ms. M, the differential in performance between value and growth on Friday (and all week) was particularly conspicuous:
The ratio of tech to the S&P 500 Index is now at the highest ratio since 2000:
While other stocks are shunned, the ratio of consumer stocks to the S&P Index is at its lowest level since 2000:
There have been several influences that have resulted in this migration from the average stock (and value) and into a small cadre of growth stocks:
* Continuing spread of COVID (particularly in Europe) and ensuing lockdowns (Austria and Germany), which have served to put a damper on the 10-year U.S. note yield.
* President Biden's weak approval ratings and difficulty in delivering his fiscal agenda also puts pressure on bond yields.
* Higher inflation for longer and continued weakness in the Chinese property market are seen, ultimately, as growth-reducing factors, which also favors growth over value.
But now, even the soldiers within the Nasdaq are faltering as investors are hiding out in FAANG +M +N, as there is a lot of pain under the hood (even in the Nasdaq):
- There were over 400 new lows on the Nasdaq late last week. In the last five years Nasdaq new lows have never touched 4 without crossing 800 within two months.
- The last two times we saw 400 new Nasdaq lows (since 2015), the Nasdaq dropped by 20% and 36%, respectively.
- Since March 2021, the (QQQJ) (NexGen100 ETF), which is basically the next 100 NASD stocks after the top 100 ( (QQQ) ), has underperformed by over 20% relative to the 100 largest NASD stocks.
- Just before the September-October 8% drawdown, the Nasdaq was 14.2% above its 200-day moving average, Friday it closed at 15.1% above.
- At the first quarter's highs, over 89% of the New Work Stock Exchange stocks traded above their 200-day moving average; today, only 52% are above the moving average.
- New 52-week lows on the NYSE hit their highest level since March 2020 last week.
- Credit (high yield), small-caps and even Ark Innovation ETF (ARKK) (can't rally) are materially underperforming the few mega-tech capitalizations, both relatively and absolutely.
Bottom Line
Historically, the multiplying divergences discussed in this morning's opening missive have been market-unfriendly.
But there is nothing "normal" about today's market, which is fed by a virtuous cycle of continued fund flows into a handful of favored and anointed stocks.
The Book of Boockvar
My good buddy Peter Bookvar, chief investment officer with Bleakley Advisory Group, takes a look at inflation in Germany and domestically:
On the website of the German Bundesbank it says with respect to monetary policy, "Stable money is a precious public good. It protects savers and income earners from the erosion of wealth while promoting growth and employment. The primary objective of monetary policy in the euro area is therefore to ensure price stability." Today the Bundesbank released its monthly report and said German inflation in 2021 will come in just under 6% but will ease somewhat in 2022 as the VAT cut recycles out of the y/o/y calculation. They do though estimate that inflation will remain above 3% for "a longer period of time. For the core rate, values well over 2% are conceivable." What they also expect to come in the context of this higher inflation is "Macroeconomic conditions also point to stronger wage increases for collective bargaining agreements to be renewed in the near future." I guess this is outgoing Bundesbank president Jens Weidmann's parting message to Christine Lagarde and the ECB that inflation will not be so temporary.
As for the US, the y/o/y rates of inflation will likely peak out in February 2022 as the comparisons get tougher thereafter and hopefully the supply shortages begin to ease after the holidays, but I still expect a multi year period of time where inflation is at least 3%. While not the 6-7% we will see in coming months, it of course is a level well above where it was pre Covid and certainly much higher than the current level of interest rates. It also is a rate that will force the Fed's hands, whoever is leading it, to tighten monetary policy.
Many months ago I included a chart of the REAL 10 yr rate relative to a one month read of CPI rather than using the TIPS market for a measurement. My friend Brien Lundin who writes the Gold Newsletter provided an updated chart in his Friday letter and I'm going to post it here for reference to the 1970's and the level of REAL rates back then. You can see the similarity from this interest rate inflation adjusted perspective.
On inflation and currency debasement, this is what John Maynard Keynes said way back when, "By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some."
Shifting to overseas data, South Korea said exports in the 1st 20 days of November rose by 27.6% y/o/y. They were helped by both chip and big ship exports. Imports were higher by 42%. Taiwan's exports rose by 14.6% y/o/y in October, though below the estimate of up 23%. If only they can make enough semi's but they also saw strength in chemical exports and basic metals. These two countries have begun vital cogs in global economic activity because of the need for many of their products and raw materials, especially semi's from both countries and container ships out of South Korea.
More FibroGen Intel to Consider
Biotech is not my area of expertise, so I am trying to throw out as much data as possible on FibroGen (FGEN) in order for subscribers to evaluate the merits of this particular speculative, biotech investment.
I don't want to suggest by all the FGEN information transmitted in my Diary that FGEN is anything more than an interesting small-cap speculation play that I have weighted appropriately.
That said, here is some favorable data from MayoClinic.doc for the use of Roxadustat in Myelodysplastic syndrome (MDS) -- no death and no thrombosis.
Tweet of the Day (Part Deux)
Danielle on Bankruptcy Filings, Panic Buying, Container Costs
From Danielle DiMartino Booth:
- Bankruptcy filings for companies with at least $50 million in debt hit three in the week ended November 12 vs. nearly 15 seen in June 2020; though the Fed's credit backstop limited creative destruction, corroded supply chains are pressuring firms that survived the pandemic
- An average of Future Inventories from regional Fed surveys suggests that panic buying by firms has subsided; the same message, which harms future GDP math, can be seen in the tightening of the 5s/30s curve corroborated by a decline in Google "Supply Chain" searches
- Per Freightos, container costs from China to the US's East and West Coasts have finally begun to turn; should the downward trend continue, prices may begin to fall back down to Earth for consumers as well as for businesses struggling to manage elevated input costs